-----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, DlxXJtpsPvxXoAvQoQkL5FQId85ov7jU5N7KQkZwZ++OkpPOdCMzLdhiz31nb4lQ twDmK5FgtmJkps19MmR3vA== 0000950135-98-004815.txt : 19980817 0000950135-98-004815.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950135-98-004815 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARINER HEALTH GROUP INC CENTRAL INDEX KEY: 0000900304 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-NURSING & PERSONAL CARE FACILITIES [8050] IRS NUMBER: 061251310 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21512 FILM NUMBER: 98691411 BUSINESS ADDRESS: STREET 1: 1881 WORCESTER ROAD CITY: FRAMINGHAM STATE: MA ZIP: 01701 BUSINESS PHONE: 8607012000 MAIL ADDRESS: STREET 1: 1881 WORCESTER ROAD CITY: FRAMINGHAM STATE: MA ZIP: 01700 10-Q 1 FORM 10-Q 1 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO __________ COMMISSION FILE NUMBER 0-21512 MARINER HEALTH GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE NO. 06-1251310 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 1881 WORCESTER ROAD, FRAMINGHAM, MA 01701 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) (860) 701-2000 (TELEPHONE NUMBER, INCLUDING AREA CODE) 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 [ ] 1,000 Shares of Common Stock, par value $.01 per share, were outstanding at August 10, 1998 2 2 MARINER HEALTH GROUP, INC. FORM 10-Q - JUNE 30, 1998 INDEX PART I Financial Information PAGE ITEM 1. Financial Statements Consolidated Balance Sheets as of December 31, 1997 and June 30, 1998 3 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1997 and 1998 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1998 5 Notes to Consolidated Financial Statements 6-7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-13 PART II Other Information ITEM 2. Changes in Securities and Use of Proceeds 14 ITEM 5. Other Information 14 ITEM 6. Exhibits and Reports on Form 8-K 14 Exhibit Index 15 Signatures 16
3 3 MARINER HEALTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, 1997 AND JUNE 30, 1998 (UNAUDITED)
DECEMBER 31, JUNE 30, 1997 1998 ASSETS Current assets: Cash and cash equivalents $ 3,627 $ 5,081 Accounts receivable, less allowance for doubtful accounts of $16,046 and $15,069, respectively 154,162 163,250 Estimated settlements due from third-party payors 34,335 33,797 Prepaid expenses and other current assets 19,268 28,010 Deferred income tax benefit 8,560 9,014 ---------- ---------- Total current assets 219,952 239,152 Property, plant and equipment, net of accumulated depreciation of $62,109 and $67,330, respectively 415,948 418,397 Goodwill, net of accumulated amortization of $18,170 and $23,400, respectively 382,459 387,211 Intangible and other assets, net of accumulated amortization of $7,315 and $8,593, respectively 24,670 27,824 Restricted cash and cash equivalents 2,888 3,165 Deferred income tax benefit 29,852 18,435 ---------- ---------- Total assets $1,075,769 $1,094,184 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt and capital lease obligations $ 13,911 $ 13,314 Accounts payable 26,943 25,863 Accrued payroll 17,454 15,629 Accrued vacation 10,955 13,928 Other accrued expenses 44,874 19,161 Deferred income taxes 43 62 Other liabilities 3,519 3,760 ---------- ---------- Total current liabilities 117,699 91,717 Long-term debt and capital lease obligations 570,483 598,982 Deferred income taxes 17,307 17,933 Deferred gain 1,789 1,710 Other long-term liabilities 27,673 26,787 ---------- ---------- Total liabilities 734,951 737,129 Stockholders' equity Common stock, $.01 par value; 50,000,000 shares authorized; 29,447,614 issued and outstanding at December 31, 1997 and 29,588,495 shares issued and outstanding at June 30, 1998 295 296 Additional paid-in capital 317,216 318,315 Retained earnings 23,307 38,444 ---------- ---------- Total stockholders' equity 340,818 357,055 ---------- ---------- Total liabilities and stockholders' equity $1,075,769 $1,094,184 ========== ==========
See accompanying notes 4 4 MARINER HEALTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30, 1997 1998 1997 1998 ------------ ------------ ------------ ------------ Net patient service revenue $ 341,067 $ 382,481 $ 170,243 $ 187,076 Other revenue 7,848 15,039 4,259 8,068 ------------ ------------ ------------ ------------ Total operating revenue 348,915 397,520 174,502 195,144 ------------ ------------ ------------ ------------ Operating expenses: Facility operating costs 266,565 295,716 132,867 143,286 Corporate general and administrative 24,490 30,375 12,682 15,891 ------------ ------------ ------------ ------------ 291,055 326,091 145,549 159,177 ------------ ------------ ------------ ------------ Interest Income (207) (114) (74) (99) Interest Expense 18,108 24,439 8,785 12,149 Facility rent expense, net 2,176 2,281 1,064 1,137 Depreciation and amortization 13,107 16,091 6,561 8,180 ------------ ------------ ------------ ------------ Total operating expenses 324,239 368,788 161,885 180,544 ------------ ------------ ------------ ------------ Operating Income 24,676 28,732 12,617 14,600 Loss on disposal of assets -- 1,702 -- 1,702 Income before income taxes 24,676 27,030 12,617 12,898 Provision for income taxes 10,857 11,893 5,551 5,675 ------------ ------------ ------------ ------------ Net income $ 13,819 $ 15,137 $ 7,066 $ 7,223 ============ ============ ============ ============ Net income per share: diluted $ 0.47 $ 0.50 $ 0.24 $ 0.24 ------------ ------------ ------------ ------------ basic $ 0.48 $ 0.51 $ 0.24 $ 0.24 ------------ ------------ ------------ ------------ Weighted average number shares outstanding: diluted 29,356,754 30,535,780 29,523,338 30,632,296 basic 29,039,332 29,552,275 29,061,638 29,583,680
See accompanying notes 5 5 MARINER HEALTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 1997 1998 --------- -------- Cash flows from operating activities: Net income $ 13,819 $ 15,137 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 13,107 16,091 Provision for losses on accounts receivable 2,383 2,887 Amortization of deferred gain (83) (79) Amortization of deferred financing costs 324 655 Change in deferred income taxes 1,912 11,608 Loss on disposal of assets -- 1,702 Changes in operating assets and liabilities: Increase in accounts receivable (2,840) (11,975) Increase in estimated settlements from third parties (1,332) (1,462) (Increase) decrease in prepaid expenses and other current assets 736 (7,827) Decrease in accounts payable (6,241) (1,080) Decrease in accrued liabilities (7,988) (21,338) Increase (decrease) in other current liabilities (267) 670 --------- -------- Net cash provided by operating activities 13,530 4,989 Cash flows used in investing activities: Purchase of plant, property and equipment (16,123) (18,319) Cash payments related to acquisitions (9,530) (4,734) Proceeds from sale of fixed assets -- 1,280 Increase in restricted cash (46) (277) Increase in intangible and other assets (7,815) (5,353) --------- -------- Net cash used in investing activities (33,514) (27,403) Cash flows from financing activities: Drawings on line of credit borrowings 127,500 93,500 Repayments on line of credit (110,000) (68,500) Repayments of long term debt and capital lease obligations (2,988) (2,232) Proceeds from exercise of employee stock options 3,182 816 Shares issued under employee stock purchase plan 243 284 --------- -------- Net cash provided by financing activities 17,937 23,868 Increase (decrease) in cash and cash equivalents (2,047) 1,454 Cash and cash equivalents at beginning of period 4,616 3,627 --------- -------- Cash and cash equivalents at end of period $ 2,569 $ 5,081 ========= ======== Supplemental Data: Cash paid during the period for: Income taxes $ 8,942 $ 6,585 ========= ======== Interest $ 17,642 $ 26,787 ========= ======== Non-cash investing and financing activities: The Company entered into a three year note payable for $5,134,000 related to a 1997 rehabilitation company acquisition
See accompanying notes 6 6 MARINER HEALTH GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The consolidated financial statements as of and for the periods ended June 30, 1997 and 1998 are unaudited. All adjustments and accruals have been made which, in the opinion of management, are necessary for a fair presentation. Results of operations for the period ended June 30, 1998 are not necessarily indicative of those expected for any future period. 2. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and the rules and regulations of the Securities and Exchange Commission. These financial statements have been prepared with the assumption that users of the interim financial information have either read or have access to the Company's audited consolidated financial statements for the year ended December 31, 1997. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the Company's December 31, 1997 audited consolidated financial statements have been omitted from these unaudited interim consolidated financial statements. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such instructions rules and regulations. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these unaudited interim consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 1997. 3. The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computation for "income available to common stockholders" and other related disclosures required by SFAS 128:
THREE MONTHS ENDED June 30, 1997 June 30, 1998 (thousands) (thousands) ------------------------------------------------------------------------------- INCOME SHARES PER SHARE INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ------------------------------------------------------------------------------- Basic EPS: Income available to common shareholders $ 7,066 29,062 $ 0.24 7,223 29,584 $0.24 Effect of dilutive securities: Common stock equivalents 462 1,048 Diluted EPS: Income available to common stockholders and assumed conversions $ 7,066 29,523 $ 0.24 7,223 30,632 $0.24
SIX MONTHS ENDED June 30, 1997 June 30, 1998 (thousands) (thousands) ------------------------------------------------------------------------------ INCOME SHARES PER SHARE INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ------------------------------------------------------------------------------ Basic EPS: Income available to common shareholders $ 13,819 $ 29,039 $0.48 $ 15,137 29,552 $ 0.51 Effect of dilutive securities: Common stock equivalents 317 984 Diluted EPS: Income available to common stockholders and assumed conversions 13,819 $ 29,357 $0.47 $ 15,137 30,536 $ 0.50
Options to purchase 93,615 and 18,538 shares of common stock at a weighted average exercise price of $14.87 and $18.26 were outstanding during the three month periods ended June 30, 1997 and 1998, respectively, and options to purchase 304,749 and 480,488 shares of common stock at a weighted average exercise price of $12.18 and $16.33 were outstanding during the six month periods ended June 30, 1997 and 1998, respectively, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. 4. Subsequent events - On April 13, 1998, Mariner entered into an Agreement and Plan of Merger (the "Merger Agreement") with Paragon Health Network, Inc. ("Paragon") and Paragon Acquisition Sub, Inc. ("Sub") providing for the merger of Sub with and into Mariner (the "Merger"). On July 31, 1998 (the "Effective Time"), the Merger with Paragon and Sub was consummated. Pursuant to the Merger Agreement, each share of the common stock of Mariner ("Mariner Common Stock") issued and outstanding at the effective time of the Merger (other than treasury shares) was exchanged for one (1) share of common stock of Paragon ("Paragon Common Stock"). As a result of the Merger, Mariner became a wholly owned subsidiary of Paragon. 7 7 5. Impact of the Year 2000 Issue - The Company has made an initial review of issues related to the Year 2000 and does not expect that it will have a material impact on the Company's business, operations or financial condition. However, the Company could be adversely impacted by the Year 2000 issue if its key suppliers and other third parties do not address the issue successfully. The Company is addressing these risks in order to reduce the potential impact. Certain 1997 financial statement items have been reclassified to conform with current year presentation. RECENTLY ISSUED PRONOUNCEMENTS Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," was issued in June 1997. This statement establishes standards for reporting and displaying comprehensive income and its components in the financial statements. The Company adopted this standard in the first quarter of 1998. The adoption of this standard had no material impact on the Company's results of operations, financial position or cash flows. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was also issued in June 1997. This statement requires that public business enterprises report certain information about operating segments and related disclosures about products and services, geographic areas and major customers. SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" was issued in February 1998. This statement standardizes disclosure requirements for pension and other postretirement benefits, requires additional information on changes in benefit obligations and fair values of plan assets, and eliminates certain existing disclosure requirements. SFAS Nos. 131 and 132 become effective in the Company's fiscal year ending December 31, 1998. The adoption of these statements is not expected to have a material impact on the Company's results of operations, financial position or cash flows or produce any material changes in current disclosures. The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," in March 1998. This statement provides guidance as to whether certain internal-use software costs should be capitalized as a long-lived asset or expensed when incurred. SOP 98-1 becomes effective in the Company's fiscal year ending December 31, 1998, but may be adopted earlier. The Company is in the process of evaluating the requirements of SOP 98-1, but does not expect that it will materially affect its results of operations, financial position or cash flows. 8 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, including statements regarding, among other items, (i) the Company's future performance and operations (ii) anticipated trends in the Company's business and demographics; (iii) and Company's ability to control costs and maintain quality of care; (iv) the Company's ability to respond to changes in regulations;These forward-looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company's control. Actual results could differ materially from these forward-looking statements as a result of the factors described in the section entitled "Risk Factors" included in the Company's Annual Report on Form 10-K, as amended, with respect to the year ended December 31, 1997 including, among others (i) changes in the health care industry as a result of political, economic or regulatory influences including the implementation of the prospective payment system; (ii) changes in regulations governing the health care industry; (iii) changes in the competitive marketplace; (iv) dependence on reimbursement from third party payors; (v) expansion risk and impact on future operating results; (vi) the difficulty in integrating recent acquisitions; and (vii) the variability of quarterly operating results. Additionally, refer to the "Risk Factors" and "Management's Discussion and Analysis" sections detailed in Paragon Health Network, Inc.'s registration statement on form S-4 and the joint proxy/prospectus contained therein filed on June 19, 1998. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Report will in fact transpire. RESULTS OF OPERATIONS The following table sets forth certain consolidated financial data as percentages of total operating revenue for the three and six months ended June 30, 1997 and 1998 and the percentage changes in the dollar amounts of revenues and expenses for the three and six months ended June 30, 1998 as compared to the three and six months ended June 30, 1997.
PERCENTAGE PERCENTAGE INCREASE INCREASE SIX MONTHS ENDED SIX MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 JUNE 30 1997 1998 1997 1998 ------ ------ ------ ------ Revenues: Net patient service revenue 97.7% 96.2% 12.1% 97.6% 95.9% 9.9% Other revenue 2.3 3.8 91.6 2.4 4.1 89.4 ------------------- -------------------- Total operating revenue 100.0 100.0 13.9 100.0 100.0 11.8 Operating and administrative expenses: Facility operating costs 76.4 74.4 10.9 76.2 73.4 7.8 Corporate general and administrative 7.0 7.6 24.0 7.3 8.1 25.3 Interest expense 5.1 6.1 35.9 5.0 6.2 38.3 Facility rent expense, net 0.6 0.6 4.8 0.6 0.6 6.9 Depreciation and amortization 3.8 4.0 22.8 3.8 4.2 24.7 ------------------- -------------------- Total operating costs and administrative expense 92.9 92.8 13.5 92.9 92.5 11.5 Loss on disposal of assets -- 0.4 n/a -- 0.9 n/a Income before income tax 7.1 6.8 9.5 7.1 6.6 2.2 Income tax 3.1 3.0 9.5 3.1 2.9 2.2 Net Income 4.0% 3.8% 9.5% 4.0% 3.7% 2.2%
9 9 THREE MONTHS ENDED JUNE 30, 1997 AND 1998 REVENUE. Total operating revenue increased 11.8% from $174,502,000 during the three months ended June 30, 1997 to $195,144,000 during the three months ended June 30, 1998. Net patient service revenue increased by approximately $16,833,000, or 9.9%, from the second quarter of 1997 to the second quarter of 1998. Net patient service revenue is derived primarily from providing inpatient health care services to sub-acute patients, rehabilitation programs in skilled nursing facilities, outpatient rehabilitation services in freestanding clinics and other post-acute medical services. The increase was primarily the result of the inclusion in 1998 of revenue from three facilities acquired after June 30, 1997, opening of additional home health agencies, and increases in the number of rehabilitation contracts and increases in revenue per rehabilitation contract. The increase in revenue was partially offset by the sale of two facilities in the fourth quarter of 1997, two facilities in the second quarter of 1998 and the cancellation or non-renewal of contracts for certain rehabilitation programs. Other revenue increased approximately $3,809,000, or 89.4%, during the quarter ended June 30, 1998. This increase in revenue was primarily due to the Company's management activities related to subacute care units and facilities and consulting fees generated from services provided to certain rehabilitation clients. FACILITY OPERATING COSTS. Facility operating costs primarily consist of employee salaries, wages and benefits, food, ancillary supplies, pharmacy supplies and plant operations. Most clinical staff and rehabilitation therapists are paid an hourly wage. Various other types of operating expenses, including medical supplies, pharmacy supplies, nutritional support services and expenses associated with the provision of ancillary services, vary more directly with patient census as well as general rates of inflation. Facility operating costs increased 7.8% from $132,867,000 in the second quarter of 1997 to $143,286,000 in the second quarter of 1998. These increases were principally the result of adding new facilities, partially offset by the sale of two facilities in the fourth quarter of 1997 and two facilities in the quarter ended June 30, 1998 as well as cost reduction initiatives instituted during and after the second quarter of 1997. As a percentage of total operating revenue, these costs aggregated 76.2% and 73.4% for the three months ended June 30, 1997 and 1998, respectively. CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and administrative expenses include the expenses of the Company's corporate and regional offices, which provide marketing, financial and management services and certain expenses associated with managing subacute care units and facilities. These expenses increased 25.3% from $12,682,000 in the second quarter of 1997 to $15,891,000 in the second quarter of 1998. The increase was primarily attributable to investment in management information systems infrastructure and the addition of corporate personnel to support the increased number of facilities and businesses acquired during 1997. As a percentage of total revenue, these expenses were approximately equal to 7.3% and 8.1% for the three months ended June 30, 1997 and 1998, respectively. INTEREST EXPENSE. Interest expense increased 38.3% from $8,711,000 in the second quarter of 1997 to $12,050,000 in the second quarter of 1998. This increase was primarily the result of interest related to increased borrowings under the Credit Facility (as defined below) used to fund acquisitions and construction after the second quarter of 1997. RENT EXPENSE, NET. Rent expense increased 6.9% from $1,064,000 in the second quarter of 1997 to $1,137,000 in the second quarter of 1998. This expense was primarily comprised of rental payments on a facility leased under a sale/leaseback arrangement and facilities leased in connection with certain transactions. The increase was the result of revenue based incremental rent increases and increases in base rents. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased 24.7% from 10 10 $6,561,000 in the second quarter of 1997 to $8,180,000 in the second quarter of 1998. This increase was primarily attributable to the facilities and businesses acquired after the second quarter of 1997 and increased amortization of goodwill associated with these acquisitions. The increase was partially offset by disposals after June 30, 1997. SIX MONTHS ENDED JUNE 30, 1997 AND 1998 REVENUE. Total operating revenue increased 13.9% from $348,915,000 during the six months ended June 30, 1997 to $397,520,000 during the six months ended June 30, 1998. Net patient service revenue increased by approximately $41,414,000, or 12.1%, from the six months ended June 30, 1997 to the six months ended June 30, 1998. Net patient service revenue is derived primarily from providing inpatient health care services to sub-acute patients, rehabilitation programs in skilled nursing facilities, outpatient rehabilitation services in freestanding clinics and other post-acute medical services. The increase was primarily the result of the inclusion in 1998 of revenue from three facilities acquired after June 30, 1997, opening of additional home health agencies, and increases in the number of rehabilitation contracts and increases in revenue per rehabilitation contract. The increase in revenue was partially offset by the sale of two facilities in the fourth quarter of 1997, two facilities in the second quarter of 1998 and the cancellation or non-renewal of contracts for certain rehabilitation programs Other revenue increased approximately $7,191,000, or 91.6%, during the six months ended June 30, 1998. This increase in revenue was primarily due to the Company's management activities related to subacute care units and facilities and consulting fees generated from services provided to certain rehabilitation clients. FACILITY OPERATING COSTS. Facility operating costs primarily consist of employee salaries, wages and benefits, food, ancillary supplies, pharmacy supplies and plant operations. Most clinical staff and rehabilitation therapists are paid an hourly wage. Various other types of operating expenses, including medical supplies, pharmacy supplies, nutritional support services and expenses associated with the provision of ancillary services, vary more directly with patient census as well as general rates of inflation. Facility operating costs increased 10.9% from $266,565,000 in the first half of 1997 to $295,716,000 in the first half of 1998. These increases were principally the result of adding new facilities, partially offset by the sale of two facilities in the fourth quarter of 1997 and two facilities in the quarter ended June 30, 1998 as well as cost reduction initiatives instituted during and after the second quarter of 1997. As a percentage of total operating revenue, these costs aggregated 76.4% and 74.4% for the six months ended June 30, 1997 and 1998, respectively. CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and administrative expenses include the expenses of the Company's corporate and regional offices, which provide marketing, financial and management services and certain expenses associated with managing subacute care units and facilities. These expenses increased 24.0% from $24,490,000 in the six months ended June 30, 1997 to $30,375,000 in the six months ended June 30, 1998. The increase was primarily attributable to the investment in management information systems infrastructure and addition of corporate personnel to support the increased number of facilities and businesses acquired during 1997. As a percentage of total revenue, these expenses were approximately equal to 7.0% and 7.6% for the six months ended June 30, 1997 and 1998, respectively. INTEREST EXPENSE Interest expense increased 35.9% from $17,901,000 in the first half of 1997 to $24,325,000 in the first half of 1998. This increase was the result of interest related to increased borrowings under the Credit Facility (as defined below) used to fund acquisitions and construction after June 30, 1997. RENT EXPENSE, NET. Rent expense increased 4.8% from $2,176,000 in the six months ended June 30, 1997 to $2,281,000 in the six months ended June 30, 1998. This expense was primarily comprised of rental payments on a 11 11 facility leased under a sale/leaseback arrangement and facilities leased in connection with certain transactions. The increase was primarily the result of revenue based incremental rent increases and increases in base rents. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased 22.8% from $13,107,000 in the first half of 1997 to $16,091,000 in the first half of 1998. This increase was primarily attributable to the facilities and businesses acquired after June 30, 1997 and increased amortization of goodwill associated with these acquisitions. The increase was partially offset by disposals after June 30, 1997. PROVISION FOR INCOME TAX. The effective tax rate for the six months ended of 1997 and 1998 was 44%. The Company currently expects its effective tax rate will be approximately 44% in 1998, significantly above the statutory rate, primarily due to non-deductible amortization of goodwill from certain transactions. LIQUIDITY AND CAPITAL RESOURCES On April 13, 1998, Mariner entered into the Merger Agreement with Paragon Health Network, Inc. ("Paragon") and Paragon Acquisition Sub, Inc. ("Sub") providing for the merger of Sub with and into Mariner. On July 31, 1998 ("Effective Time"), the Merger with Paragon became effective and Paragon changed its name to Mariner Post-Acute Network, Inc. (as used herein Paragon refers to Mariner Post-Acute Network, Inc. subsequent to the Effective Time of the Merger). Pursuant to the Merger Agreement, each share of the common stock of Mariner ("Mariner Common Stock") issued and outstanding at the effective time of the Merger (other than treasury shares) was exchanged for one (1) share of common stock of Paragon ("Paragon Common Stock"). As a result of the Merger, Mariner became a wholly owned subsidiary of Paragon. Mariner has financed its operations, acquisitions and capital expenditures primarily from cash provided by operations and the proceeds from stock issuances, sales of debt securities and borrowings under its Credit Facility. As of June 30, 1998, working capital and cash and cash equivalents were $147,435,000 and $5,081,000, respectively. Mariner has a $460,000,000 senior secured revolving credit facility with a syndicate of banks (the "Credit Facility"). On October 3, 1997, the Company entered into an amendment to the Credit Facility to increase borrowing capacity to $325,000,000 from $250,000,000. As of January 2, 1998 the terms were amended to increase the size of the Credit Facility to $460,000,000, extend the maturity of the Credit Facility and reduce certain restrictions that the Credit Facility imposes on the operations of the business of the Company and its subsidiaries. Further, on July 14, 1998 the terms of the Credit Facility were further amended to allow for the Merger, permit the Credit Facility to remain outstanding following the Effective Time of the Merger and amend certain financial covenants, as described below. Under the amendment neither Paragon nor any of its subsidiaries (other than Mariner and its direct and indirect subsidiaries) guarantee or pledge any of their assets to secure obligations under the Credit Facility nor do the covenants in the Credit Facility bind Paragon and such of its subsidiaries. Mariner and its subsidiaries are obligated to continue to comply with covenants contained in the Credit Agreement without taking into account the revenues, expenses, net income, assets or liabilities of Paragon and its non-Mariner subsidiaries. Finally, certain of the terms of financial covenants have been amended to (i) allow Mariner to fund the repurchase of any of the Notes, as defined below, that could be sold to Mariner in connection with the change in control provisions of the Indenture (as defined below), (ii) subordinate any obligations of Mariner to repay loans by Paragon to the obligations of Mariner under the Credit Facility, (iii) restrict the payment of dividends and the transfer of assets by Mariner and its subsidiaries to Paragon or any non-Mariner subsidiaries, (iv) cause a Paragon bankruptcy to be an event of default under the Credit Facility, (v) add a cross-acceleration provision to Paragon's credit facility and Paragon's senior subordinated notes and (vi) shorten the expiration date of the Credit Facility from January 2, 2003 to no earlier than January 3, 2000. As of December 31, 1997 and June 30, 1998, principal balances outstanding under its Credit Facility were approximately $301,000,000 and $326,000,000, respectively, and letters of credit outstanding under this facility were approximately $6,715,000. As of June 30,1998, the Letters of Credit under the Credit Facility included $5,624,000 that related to workers' compensation insurance and $1,091,000 associated with debt and other agreements. Mariner has used, and intends to continue to use, borrowings under the Credit Facility to finance the acquisition and development of additional subacute care facilities and related businesses, and for general corporate purposes, including working capital. Mariner's obligations under the Credit Facility are collateralized by a pledge of the stock of its subsidiaries and are guaranteed by all of the Company's subsidiaries. In addition, the Credit Facility is collateralized by mortgages on certain inpatient facilities of the Company's, leasehold mortgages on certain inpatient facilities by the Company, and security interests in certain other properties and assets of the Company and its subsidiaries. The Credit Facility matures on January 3, 2000 and provides for prime or LIBOR-based interest rate options. The borrowing availability and rate of interest varies depending upon specified financial ratios. The Credit Facility also contains covenants which among other things, require the Company to maintain certain financial ratios and impose certain limitations or prohibitions on the Company with respect to the incurrence of indebtedness liens and capital leases; the payment of dividends on, and the redemption or repurchase of its capital stock; investments and acquisitions, including acquisitions of new facilities; the merger or consolidation of the Company with any person or entity and the disposition of any of the Company's properties or assets. On April 4, 1996, the Company sold $150,000,000 aggregate principal amount of its 9 1/2% Senior Subordinated Notes due 2006 (the "Notes"). The Notes mature on April 1, 2006. The Notes are unsecured senior subordinated obligations of Mariner and, as such, are subordinated in right of payment to all existing and future senior indebtedness of Mariner, including indebtedness under the Credit Facility. From the net proceeds of approximately $144,456,000 from the sale of the Notes, $131,000,000 was used to repay all outstanding indebtedness under the Credit Facility (including interest and certain other fees) and the remainder was used to pay a portion of the purchase price for the acquisition of seven skilled nursing facilities and one assisted living facility in 1996. The Notes contain certain covenants, including, among other things, covenants with respect to the following matters: (i) limitation on indebtedness; (ii) limitation on restricted payments; (iii) limitation on the incurrence of liens; (iv) restriction on the issuance of preferred stock of subsidiaries: (v) limitation on transactions with affiliates; (vi) limitation on sale of assets; (vii) limitation on other senior subordinated indebtedness; (viii) limitation on guarantees by subsidiaries; (ix) limitation on the creation of any restriction on the ability of the Company's subsidiaries to make distributions; and 12 12 (x) restriction on mergers, consolidations and the transfer of all or substantially all of the assets of the Company to another person. The Notes were issued under an Indenture dated as of April 4, 1996 by and among the Company and State Street Bank and Trust Company, as trustee (the "Indenture"). As a result of the Merger, the holders of the Notes (the "Bondholders") have the right to sell the Notes to Mariner. Such sale must be concluded within ninety (90) days following June 30, 1998 and will be at a price equal to 101% of the outstanding principal amount of any Notes that are put to Mariner. Pursuant to Paragon's obligations under the Merger Agreement, Paragon has arranged for Mariner a committed facility to cover the maximum amount of this contingent obligation, which is approximately $152 million. Accounts receivable (net of allowances) were $154,162,000 and $163,250,000 at December 31, 1997 and June 30, 1998, respectively. Estimated settlements due from third-party payors aggregated $34,335,000 and $33,797,000 at December 31, 1997 and June 30, 1998, respectively. The number of days sales in accounts receivable and estimated settlements due from third-party payors was approximately 82 days at December 31, 1997 and 92 days at June 30, 1998. The increase was primarily due to an increase in accounts receivable on certain rehabilitation contracts and delays in payments from the Company's fiscal intermediary. 1998 Dispositions. During the first half of 1998, the Company executed agreements to sell two nursing facilities. The total sales proceeds from the transactions were approximately $2,400,000. In 1997 these facilities generated aggregate net revenues of $8,670,000 and loss from continuing operations of $143,000. Through June 30, 1998, these facilities generated aggregate net revenues of $3,003,000 and loss from continuing operations of $308,000. In 1997 the Company recorded an impairment charge on long lived assets of approximately $4,882,000 in connection with these facilities. 1997 Facility Acquisitions. During 1997, the Company acquired four skilled nursing facilities with a total of 587 beds in the Baltimore metropolitan area for a total purchase price of approximately $37,000,000 (the "1997 Facility Acquisitions"). The Company borrowed approximately $37,000,000 under its Credit Facility to finance these acquisitions. Goodwill of $22,000,000 was recorded in connection with these acquisitions. Prism and Related Rehabilitation Transaction. In October 1997, the Company completed its merger with Prism Health Group, Inc. (the "Prism Merger"). All of the issued and outstanding shares of Prism capital stock were converted into the right to receive an aggregate of approximately $84,300,000 in cash. In connection with the Prism Merger the Company also repaid approximately $9,500,000 in assumed debt and paid expenses of approximately $700,000 prior to the closing. Goodwill of approximately $91,000,000 was recorded in connection with this transaction. The Company borrowed approximately $94,500,000 under its Credit Facility to finance the Prism Merger. In June, 1997, the Company also acquired another rehabilitation company for a total purchase price of approximately $15,403,000. The Company made an initial payment of $2,000,000 and in 1998 paid an additional $3,135,000. These amounts were funded under the Company's Credit Facility. In addition, the Company entered into a 3 year, 7% interest bearing note for $5,134,000. The Company also agreed to pay the remaining $5,134,000 in contingent consideration over the next three years provided certain financial targets were met. Goodwill of approximately $10,615,000 was recorded in connection with this acquisition. Joint Ventures. In 1997, the Company entered into three joint venture arrangements in connection with three of its facilities located in Maryland and North Carolina. The Company retained a 50% interest in two of the facilities and 60% in the third facility. The Company received a total of $5,349,000 of capital contributions from its joint venture partners and recognized a gain of approximately $1,659,000 from these transactions. Dispositions. In 1997, the Company executed agreements to sell two nursing facilities in non-strategic locations. Total sales proceeds were $4,890,000 and a net pretax loss of $4,579,000 was recorded. In 1997 these facilities generated aggregate net revenues of $6,849,000 and income from continuing operations of $550,000. From July 1, 1998 through August 10, 1998, the Company also borrowed approximately $23,000,000 under the Credit Facility, primarily to fund working capital and taxes related to contract payments in connection with the Merger. The Company's capital expenditures for the year ended December 31, 1997 and six months ended June 30, 1998 were approximately $37,173,000 and $18,319,000, respectively. The Company's capital expenditures in 1997 included approximately $6,000,000 for improvements to the Company's information systems. Through June 30, 1998, the Company has spent approximately $2,600,000 on information systems. The Company has 13 13 budgeted approximately $45,000,000 for capital expenditures during 1998. The Company's currently planned capital expenditures include approximately $9,000,000 for upgrading the Company's information systems, approximately $21,000,000 for expansion of existing facilities, as well as the costs of maintaining the Company's inpatient facilities and offices and approximately $12,000,000 for the completion of three new inpatient sites begun in 1997. Mariner believes that its future capital requirements will depend upon a number of factors, including cash generated from operations and the financing plans of its parent entity. Mariner believes it has sufficient liquidity to meet its capital requirements for the remainder of the current fiscal year. In the event Mariner requires additional capital during this time management expects to fund such requirement by drawing on its Credit Facility or by taking advantage of alternative arrangements it anticipates will be made available by its parent. The Company has made an initial review of issues related to the Year 2000 and does not expect that it will have a material impact on the Company's business, operations or financial condition. However, the Company could be adversely impacted by the Year 2000 issue if its key suppliers and other third parties do not address the issue successfully. The Company is addressing these risks in order to reduce the potential impact. 14 14 PART II OTHER INFORMATION ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS Pursuant to the Merger Agreement at the Effective Time of the Merger the certificate of incorporation and by-laws of Sub became those of Mariner. The certificate of incorporation and by-laws are filed herewith as Exhibits 3.1 and 3.2 and are incorporated herein by reference. The Rights Agreement between the Company and State Street Bank & Trust Company, as rights agent, regarding the Company's Series A Junior Participating Preferred Stock was amended on April 13, 1998 and July 31, 1998 (the "Amendments") in connection with the Company entering into the Merger Agreement with Paragon and Sub providing for the Merger. Under the Amendments the Expiration Date, as defined in the Rights Agreement, was amended to be the Effective Time of the Merger and neither Paragon nor Sub became an "Acquiring Person" or an "Adverse Person" and no "Triggering Event," "Stock Acquisition Date" or "Distribution Date" (as such terms as defined in the Rights Agreement) occurred as a result of the approval, execution or delivery of the Merger Agreement or the occurrence of any of the transactions related to the Merger. ITEM 5. - OTHER INFORMATION On April 13, 1998, Mariner entered into the Merger Agreement with Paragon and Sub providing for the merger of Sub with and into Mariner. On July 31, 1998, the Merger with Paragon was consummated. Pursuant to the Merger Agreement, each share of the common stock of Mariner ("Mariner Common Stock") issued and outstanding at the effective time of the Merger (other than treasury shares) was exchanged for one (1) share of common stock of Paragon ("Paragon Common Stock"). As a result of the Merger, Mariner became a wholly owned subsidiary of Paragon. ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The exhibits which are filed with this Report, or are incorporated by reference into this Report, are set forth on the Exhibit Index which appears on page 14 of this Report. (b) Reports on Form 8-K. NONE 15 15 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 3.1, 4.1 Certificate of Incorporation 3.2, 4.2 By-laws of the Company 4.3 Amendment No.2 to the RIGHTS AGREEMENT 10.1 Amendment No. 17 to the Credit Agreement dated as of July 14, 1998 by and among Mariner Health Group, Inc., PNC Bank, National Association and other banks party therto. 10.2 Amended and Restated Revolving Credit Agreement dated as of May 18, 1994, as amended, by and among Mariner Health Group, Inc., PNC Bank, National Association and other banks party therto. 27 Financial Data Schedule 16 16 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED DULY THERETO AUTHORIZED. MARINER HEALTH GROUP, INC. DATE: August 14, 1998 By: /s/ David N. Hansen --------------- ------------------- Vice President and Treasurer (Authorized officer and principal accounting and financial officer) EX-3.1 2 CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF PARAGON ACQUISITION SUB, INC. I, the undersigned, for the purposes of incorporating and organizing a corporation under the General Corporation Law of the State of Delaware, do execute this Certificate of Incorporation and do hereby certify as follows: FIRST. The name of the corporation is Paragon Acquisition Sub, Inc. SECOND. The address of the corporation's registered office in the State of Delaware is One Rodney Square, 10th Floor, Tenth and King Streets, in the City of Wilmington, County of New Castle, 19801. The name of its registered agent at such address is RL&F Service Corp. THIRD. The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH. The total number of shares of stock which the corporation shall have authority to issue is 3,000. All such shares are to be Common Stock, par value of $.01 per share, and are to be of one class. FIFTH. The incorporator of the corporation is Mark J. Gentile, whose mailing address is P.O. Box 551, Wilmington, DE 19899. SIXTH. Unless and except to the extent that the by-laws of the corporation shall so require, the election of directors of the corporation need not be by written ballot. SEVENTH. In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors of the corporation is expressly authorized to make, alter and repeal the by-laws of the corporation, subject to the power of the stockholders of the corporation to alter or repeal any by-law whether adopted by them or otherwise. EIGHTH. A director of the corporation shall not be liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended. Any amendment, modification or repeal of the foregoing sentence shall not adversely affect any right or protection of a director of the corporation hereunder in respect of any act or omission occurring prior to the time of such amendment, modification or repeal. - 1 - 2 NINTH. The corporation reserves the right at any time, and from time to time, to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by law; and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this article. TENTH. The powers of the incorporator are to terminate upon the filing of this Certificate of Incorporation with the Secretary of State of the State of Delaware. The name and mailing address of the person who is to serve as the sole initial director of the corporation until the first annual meeting of stockholders of the corporation, or until her successor is duly elected and qualified, is: Susan T. Whittle c/o Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 The undersigned incorporator hereby acknowledges that the foregoing certificate of incorporation is his act and deed on this the 13th day of April, 1998. ------------------------------------ Mark J. Gentile Incorporator - 2 - EX-3.2 3 BYLAWS 1 EXHIBIT 3.2 BYLAWS OF PARAGON ACQUISITION SUB, INC. (a Delaware corporation) 2
INDEX Page ---- ARTICLE 1 OFFICES....................................................................................1 ARTICLE 2 STOCKHOLDERS' MEETINGS.................................................................... 1 2.1 Places of Meetings................................................................. 1 2.2 Annual Meetings.................................................................... 1 2.3 Special Meetings................................................................... 2 2.4 Voting............................................................................. 2 2.5 Quorum............................................................................. 2 2.6 List of Stockholders............................................................... 3 2.7 Action Without Meeting............................................................. 3 ARTICLE 3 BOARD OF DIRECTORS........................................................................ 4 3.1 Powers............................................................................. 4 3.2 Number and Qualification........................................................... 4 3.3 Compensation....................................................................... 5 3.4 Meetings and Quorum................................................................ 6 3.5 Committees......................................................................... 7 3.6 Conference Telephone Meetings...................................................... 8 3.7 Action Without Meeting............................................................. 8 ARTICLE 4 OFFICERS.................................................................................. 8 4.1 Titles and Election................................................................ 8 4.2 Duties............................................................................. 9 (a) President..................................................................... 9 (b) Vice Presidents...............................................................10 (c) Secretary.....................................................................10 (d) Treasurer.....................................................................10 (e) Assistant Secretaries and Treasurers..........................................11 4.3 Delegation of Authority............................................................11 4.4 Compensation.......................................................................11 ARTICLE 5 RESIGNATIONS, VACANCIES AND REMOVALS......................................................12 5.1 Resignations.......................................................................12 5.2 Vacancies..........................................................................12 (a) Directors.....................................................................12 (b) Officers......................................................................12 5.3 Removals...........................................................................12 (a) Directors.....................................................................12 (b) Officers......................................................................13
3 ARTICLE 6 CAPITAL STOCK.............................................................................13 6.1 Certificates of Stock..............................................................13 6.2 Transfer of Stock..................................................................14 6.3 Record Dates.......................................................................14 6.4 Lost Certificates..................................................................15 ARTICLE 7 FISCAL YEAR, BANK DEPOSITS, CHECKS, ETC...................................................15 7.1 Fiscal Year........................................................................15 7.2 Bank Deposit, Checks, Etc..........................................................15 ARTICLE 8 BOOKS AND RECORDS.........................................................................16 8.1 Place of Keeping Books.............................................................16 8.2 Examination of Books...............................................................16 ARTICLE 9 NOTICES...................................................................................16 9.1 Requirements of Notice.............................................................16 9.2 Waivers............................................................................17 ARTICLE 10 SEAL .....................................................................................17 ARTICLE 11 POWERS OF ATTORNEY........................................................................17 ARTICLE 12 INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES......................................18 ARTICLE 13 AMENDMENTS................................................................................18
2 4 PARAGON ACQUISITION, INC. BYLAWS ARTICLE 1 OFFICES Paragon Acquisition Sub, Inc. (the "Corporation") shall at all times maintain a registered office in the State of Delaware and a registered agent at that address but may have other offices located in or outside of the State of Delaware as the Board of Directors may from time to time determine. ARTICLE 2 STOCKHOLDERS' MEETINGS 2.1 Places of Meetings. All meetings of stockholders shall be held at such place or places inside or outside of the State of Delaware as the Board of Directors may from time to time determine or as may be designated in the notice of meeting or waiver of notice thereof, subject to any provisions of the laws of the State of Delaware. 2.2 Annual Meetings. The annual meeting of stockholders for the election of directors and the transaction of such other business as may properly come before the meeting shall be held on such date and at such time as may be designated from time to time by the Board of Directors within four months after the end of each fiscal year of the Corporation. If the annual meeting is not held on the date designated, it may be held as soon thereafter as convenient and 5 shall be called the annual meeting. Written notice of the time and place of the annual meeting shall be given by mail to each stockholder entitled to vote thereat at his address as it appears on the records of the Corporation, not less than ten (10) nor more than sixty (60) days prior to the scheduled date thereof, unless such notice is waived as provided by Article 9 of these Bylaws. 2.3 Special Meetings. Special meetings of stockholders may be called at any time by the Board of Directors or the Chairman of the Board of Directors and shall be called by the President or Secretary or an Assistant Secretary at the written request of the holders of at least 50% of the total number of shares of stock then outstanding and entitled to vote stating the specific purpose or purposes thereof. Written notice of the time, place and specific purposes of such meeting shall be given by mail to each stockholder entitled to vote thereat at his address as it appears on the records of the Corporation, not less than ten (10) nor more than sixty (60) days prior to the scheduled date thereof, unless such notice is waived as provided in Article 9 of these Bylaws. 2.4 Voting. At all meetings of stockholders, each stockholder entitled to vote on the record date, as determined under Section 6.3 of these Bylaws or, if not so determined, as prescribed under the laws of the State of Delaware, shall be entitled to one vote for each share of stock standing of record in his name, subject to any restrictions or qualifications set forth in the Certificate of Incorporation or any amendment thereto. 2.5 Quorum. At any meeting of stockholders, a majority of the number of shares of stock outstanding and entitled to vote thereat, present in person or by proxy, shall constitute a quorum, but a smaller interest may adjourn any meeting from time to time, and the meeting may be held as adjourned without further notice, subject to such limitation as may be imposed under 2 6 the laws of the State of Delaware. When a quorum is present at any meeting, a majority of the number of shares of stock entitled to vote present thereat shall decide any question brought before such meeting unless the question is one upon which a different vote is required by express provision of the laws of the State of Delaware, the Certificate of Incorporation or these Bylaws, in which case such express provision shall govern. 2.6 List of Stockholders. At least ten (10) days before every meeting, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order and showing the address of and the number of shares registered in the name of each stockholder, shall be prepared by the Secretary or the transfer agent in charge of the stock ledger of the Corporation. Such list shall be open for examination by any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine such list or the books of the Corporation or to vote in person or by proxy at such meeting. 2.7 Action Without Meeting. Unless otherwise provided in the Certificate of Incorporation or any amendment thereto or by the laws of the State of Delaware, any action required by the laws of the State of Delaware to be taken at any annual or special meeting of stockholders, or any action which may otherwise be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if: (i) a 3 7 consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted; and (ii) prompt notice of the taking of such action by less than unanimous written consent is given to the other stockholders to the extent and in the manner required by the laws of the State of Delaware. ARTICLE 3 BOARD OF DIRECTORS 3.1 Powers. The business and affairs of the Corporation shall be carried on by or under the direction of the Board of Directors, which shall have all the powers authorized by the laws of the State of Delaware, subject to such limitations as may be provided by the Certificate of Incorporation or these Bylaws. 3.2 Number and Qualification. A Board of Directors shall be elected at each annual meeting of stockholders, each director so elected to serve until the election and qualifications of his successor or until his earlier resignation or removal as provided in these Bylaws. The initial number of directors shall be such as may be determined by the incorporator and thereafter the number of directors shall be not less than one (1) and not more than nine (9), the exact number within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the Board of Directors or by the affirmative vote of the holders of at least 80% of all outstanding shares of capital stock entitled to vote in the election of directors, 4 8 voting together as a single class, as provided in the Certificate of Incorporation. Each director shall serve for a term of one (1) year or until the election and qualification of his successor or until his earlier resignation or removal as provided in the Certificate of Incorporation or these Bylaws. Any employee of the Corporation or a subsidiary of the Corporation who serves on the Board of Directors shall be deemed to have tendered his resignation from the Board of Directors at the time such employee gives notice of termination of his employment with the Corporation or any subsidiary, as the case may be, or upon the termination of such employment for any reason, whichever occurs first; provided, however, that the Board of Directors, in its sole discretion, may decline to accept the resignation of the former employee from the Board of Directors if the former employee agrees to continue to serve on the Board of Directors notwithstanding the termination of his employment and if the Board of Directors determines that the continued service of the former employee on the Board of Directors is in the best interests of the Corporation and its stockholders. In case of an increase in the number of directors between elections by the stockholders, the additional directorships shall be considered vacancies and shall be filled in the manner prescribed in Article 5 of these Bylaws. Directors need not be stockholders, nor need they be residents of the State of Delaware. 3.3 Compensation. The Board of Directors, or a committee thereof, may from time to time by resolution authorize the payment of fees or other compensation to the directors for services as such to the Corporation, including, but not limited to, fees for attendance at all meetings of the Board of Directors or any committee thereof, and determine the amount of such fees and compensation. Directors shall in any event be paid their traveling expenses for attendance at all meetings of the Board or committee thereof. Nothing herein contained shall be 5 9 construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor in amounts authorized or otherwise approved from time to time by the Board or any committee thereof. 3.4 Meetings and Quorum. Meetings of the Board of Directors may be held either inside or outside of the State of Delaware. A quorum shall be one-half (1/2) of the then authorized number of directors, but not less than two (2) directors, provided, however, that if a Board of Directors consisting of one (1) director is authorized, then one (1) director shall constitute a quorum. The Board of Directors shall, at the close of each annual meeting of stockholders and without further notice other than these Bylaws, if a quorum of directors is then present or as soon thereafter as may be convenient, hold a regular meeting for the election of officers and the transaction of any other business. At such meeting they shall elect a President and a Secretary and such other officers as they deem proper, none of whom except the Chairman of the Board, if elected, need be members of the Board of Directors. The Board of Directors may from time to time provide for the holding of regular meetings with or without notice and may fix the times and places at which such meetings are to be held. Meetings other than regular meetings may be called at any time by the President or the Chairman of the Board of Directors and must be called by the President or the Secretary or an Assistant Secretary upon the request of any director. Notice of each meeting, other than a regular meeting (unless required by the Board of Directors), shall be given to each director by mailing the same to each director at his residence or business address at least two (2) days before the meeting or by delivering the same to him 6 10 personally or by telephone or telegraph at least one (1) day before the meeting unless, in case of exigency, the Chairman of the Board of Directors, the President or the Secretary shall prescribe a shorter notice to be given personally or by telephone, telegraph, cable or wireless to all or any one or more of the directors at their respective residences or places of business. Notice of any meeting shall state the time and place of such meeting, but need not state the purposes thereof unless otherwise required by the laws of the State of Delaware, the Certificate of Incorporation, the Bylaws or the Board of Directors. 3.5 Committees. The Board of Directors may, by resolution passed by a majority of the entire Board of Directors, provide for an Executive Committee of two or more directors and shall elect the members thereof to serve at the pleasure of the Board of Directors and may designate one of such members to act as chairman. The Board of Directors may at any time change the membership of the Executive Committee, fill vacancies in it, designate alternate members to replace any absent or disqualified members at any meeting of such committee, or dissolve it. During the intervals between the meetings of the Board of Directors, the Executive Committee shall possess and may exercise any or all of the powers of the Board of Directors in the management or direction of the business and affairs of the Corporation and under the Bylaws to the extent authorized by resolution adopted by a majority of the whole Board of Directors and to such limitations as may be imposed by the laws of the State of Delaware. The Executive Committee may determine its rules of procedure and the notice to be given of its meeting, and it may appoint such other committees and assistants as it shall from time to time deem necessary. A majority of the members of the Executive Committee shall constitute a quorum. 7 11 The Board of Directors may by resolution provide for such other committees as it deems desirable and may discontinue the same at its pleasure. Each such committee shall have the powers and perform such duties, not inconsistent with law, as may be assigned to it by the Board. 3.6 Conference Telephone Meetings. Any one or more members of the Board of Directors or any committee thereof may participate in a meeting by means of a conference telephone or similar communication equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. 3.7 Action Without Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. ARTICLE 4 OFFICERS 4.1 Titles and Election. The officers of the Corporation shall be the President and the Secretary all of whom shall initially be elected as soon as convenient by the Board of Directors and thereafter, in the absence of earlier resignations or removals, shall be elected at the first meeting of the Board of Directors following each annual meeting of stockholders. Each officer shall hold office at the pleasure of the Board of Directors except as may otherwise be approved 8 12 by the Board of Directors, or until his earlier resignation, removal under these Bylaws or other termination of his employment. Any person may hold more than one office if the duties can be consistently performed by the same person and to the extent permitted by the laws of the State of Delaware. The Board of Directors, in its discretion, may also at any time elect or appoint one or more Vice Presidents, a Chief Operating Officer and one or more Assistant Secretaries and such other officers as it may deem advisable, each of whom shall hold office at the pleasure of the Board of Directors, except as may otherwise be approved by the Board of Directors, or until his earlier resignation, removal or other termination of employment, and shall have such authority and shall perform such duties as may be prescribed or determined from time to time by the Board of Directors or in case of officers other than the Chairman of the Board, if not prescribed or determined by the Board of Directors, the President or the then senior executive officer may prescribe or determine. The Board of Directors may require any officer or other employee or agent to give bond for the faithful performance of his duties in such form and with such sureties as the Board may require. 4.2 Duties. Subject to such extension, limitations, and other provisions as the Board of Directors may from time to time prescribe or determine, the following officers shall have the following powers and duties: (a) President. The President shall exercise the powers and authority and perform all of the duties commonly incident to his office, shall preside at all meetings of the stockholders and of the Board of Directors if he is a director, and shall perform such other duties as the Board of Directors shall specify from time to time. The President or a Vice President, 9 13 unless some other person is thereunto specifically authorized by the Board of Directors, shall sign all certificates for shares, bonds, debentures, promissory notes, deeds and contracts of the Corporation. (b) Vice Presidents. The Vice President or Vice Presidents shall perform such duties as may be assigned to them from time to time by the Board of Directors or by the President if the Board of Directors does not do so. In the absence or disability of the President, the Vice Presidents in order of seniority may, unless otherwise determined by the Board of Directors, exercise the powers and perform the duties pertaining to the office of President, except that if one or more Vice Presidents has been elected or appointed, the person holding such office in order of seniority shall exercise the powers and perform the duties of the office of President. (c) Secretary. The Secretary or in his absence an Assistant Secretary shall keep the minutes of all meetings of stockholders and of the Board of Directors and any committee thereof, give and serve all notices, attend to such correspondence as may be assigned to him, keep in safe custody the seal of the Corporation, and affix such seal to all such instruments properly executed as may require it, shall perform all of the duties commonly incident to his office and shall have such other duties and powers as may be prescribed or determined from time to time by the Board of Directors or by the President if the Board of Directors does not do so. (d) Treasurer. The Treasurer or in his absence an Assistant Treasurer, subject to the order of the Board of Directors, shall have the care and custody of the monies, funds, securities, valuable papers and documents of the Corporation (other than his own bond, if any, which shall be in the custody of the President), and shall have, under the supervision of the 10 14 Board of Directors, all the powers and duties commonly incident to his office. He shall deposit all funds of the Corporation in such bank or banks, trust company or trust companies, or with such firm or firms doing a banking business as may be designated by the Board of Directors or by the President if the Board of Directors does not do so. He may endorse for deposit or collection all checks, notes, and similar instruments payable to the Corporation or to its order. He shall keep accurate books of account of the Corporation's transactions, which shall be the property of the Corporation, and together with all of the property of the Corporation in his possession, shall be subject at all times to the inspection and control of the Board of Directors. The Treasurer shall be subject in every way to the order of the Board of Directors, and shall render to the Board of Directors and/or the President of the Corporation, whenever they may require it, an account of all his transactions and of the financial condition of the Corporation. In addition to the foregoing, the Treasurer shall have such duties as may be prescribed or determined from time to time by the Board of Directors or by the President if the Board of Directors does not do so. (e) Assistant Secretaries and Treasurers. Assistants to the Secretaries and Treasurers may be appointed by the President or elected by the Board of Directors and shall perform such duties and have such powers as shall be delegated to them by the President or the Board of Directors. 4.3 Delegation of Authority. The Board of Directors may at any time delegate the powers and duties of any officer for the time being to any other officer, director or employee. 4.4 Compensation. The compensation of the officers of the Corporation shall be fixed by the Board of Directors or a committee thereof, and the fact that any officer is a director shall 11 15 not preclude him from receiving compensation or from voting upon the resolution providing the same. ARTICLE 5 RESIGNATIONS, VACANCIES AND REMOVALS 5.1 Resignations. Any director or officer may resign at any time by giving written notice thereof to the Board of Directors, the President or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time be not specified, upon receipt thereof; and unless otherwise specified therein, the acceptance of any resignation shall not be necessary to make it effective. 5.2 Vacancies. (a) Directors. Any vacancy in the Board of Directors caused by reason of death, incapacity, resignation, removal, increase in the authorized number of directors or otherwise, shall be filled by a majority of the directors then in office, though less than a quorum, or by the sole remaining director. Any director so filling such a vacancy shall serve until the next annual meeting of stockholders and the election and qualification of his successor or until his earlier resignation or removal as provided in the Certificate of Incorporation or these Bylaws. (b) Officers. The Board of Directors may at any time or from time to time fill any vacancy among the officers of the Corporation. 5.3 Removals. 12 16 (a) Directors. Except as may otherwise be provided by the General Corporation Law of Delaware, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. (b) Officers. Subject to the provisions of any validly existing agreement, the Board of Directors may at any meeting remove from office any officer, with or without cause, and may appoint a successor; provided that if action is to be taken to remove the President, the notice of meeting or waiver of notice thereof shall state that one of the purposes of the meeting is to consider and take action on his removal. ARTICLE 6 CAPITAL STOCK 6.1 Certificates of Stock. Every stockholder shall be entitled to a certificate or certificates for shares of the capital stock of the Corporation in such form as may be prescribed or authorized by the Board of Directors, duly numbered and setting forth the number and kind of shares represented thereby. Such certificates shall be signed by the Chairman of the Board, the President or a Vice President and by the Treasurer or an Assistant Treasurer or by the Secretary or an Assistant Secretary. Any or all of such signatures may be in facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate has ceased to be such officer, transfer agent or registrar before the certificate has been issued, such certificate may nevertheless be issued and delivered 13 17 by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. 6.2 Transfer of Stock. Shares of the capital stock of the Corporation shall be transferable only upon the books of the Corporation upon the surrender of the certificate or certificates properly assigned and endorsed for transfer. If the Corporation has a transfer agent or registrar acting on its behalf, the signature of any officer or representative thereof may be in facsimile. The Board of Directors may appoint a transfer agent and one or more co-transfer agents and a registrar and one or more co-registrars and may make or authorize such agents to make all such rules and regulations deemed expedient concerning the issue, transfer and registration of shares of stock. 6.3 Record Dates. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend, or to express consent to corporate action in writing without a meeting, or in order to make a determination of stockholders for any other proper purposes, the Corporation's stock transfer books shall not be closed, but a record date shall be set by the Board of Directors and, upon that date, the Corporation or its transfer agent shall take a record of the stockholders without actually closing the stock transfer books. Such record date shall not be more than sixty (60) days, nor less than ten (10) days, prior to the date on which the particular action requiring such determination of stockholders is to be taken. If no such record date is fixed by the Board, the record date shall be that prescribed by the laws of the State of Delaware. 14 18 A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 6.4 Lost Certificates. In case of loss or mutilation or destruction of a stock certificate, a duplicate certificate may be issued upon such terms as may be determined or authorized by the Board of Directors or the Executive Committee, or by the President if the Board of Directors or the Executive Committee does not do so. ARTICLE 7 FISCAL YEAR, BANK DEPOSITS, CHECKS, ETC. 7.1 Fiscal Year. The fiscal year of the Corporation shall be the calendar year, unless otherwise fixed by resolution of the Board of Directors. 7.2 Bank Deposit, Checks, Etc. The funds of the Corporation shall be deposited in the name of the Corporation or of any division thereof in such banks or trust companies in the United States or elsewhere as may be designated from time to time by the Board of Directors or the Executive Committee, or by such officer or officers as the Board of Directors or the Executive Committee may authorize to make such designations. All checks, drafts or other orders for the withdrawal of funds from any bank account shall be signed by such person or persons as may be designated from time to time by the Board of Directors or the Executive Committee. The signatures on checks, drafts or other orders for the withdrawal of funds may be in facsimile if authorized in the designation. 15 19 ARTICLE 8 BOOKS AND RECORDS 8.1 Place of Keeping Books. The books and records of the Corporation may be kept outside of the State of Delaware. 8.2 Examination of Books. Except as may otherwise be provided by the laws of the State of Delaware, the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the power to determine from time to time whether and to what extent and at what times and places and under what conditions any of the accounts, records and books of the Corporation are to be open to the inspection of any stockholder. No stockholder shall have any right to inspect any account or book or document of the Corporation except as prescribed by law or authorized by express resolution of the stockholders or of the Board of Directors. ARTICLE 9 NOTICES 9.1 Requirements of Notice. Whenever notice is required to be given by statute, the Certificate of Incorporation or these Bylaws, it shall not mean personal notice unless so specified, but such notice may be given in writing by depositing the same in a post office, letter box, or mail chute postage prepaid and addressed to the person to whom such notice is directed at 16 20 the address of such person on the records of the Corporation, and such notice shall be deemed given at the time when the same shall be thus mailed. 9.2 Waivers. Any stockholder, director or officer may, in writing or by telegram or cable, at any time waive any notice or other formality required by statute, the Certificate of Incorporation or these Bylaws. Such waiver of notice, whether given before or after any meeting or action, shall be deemed equivalent to notice. Presence of a stockholder either in person or by proxy at any meeting of stockholders and presence of any director at any meeting of the Board of Directors shall constitute a waiver of such notice as may be required by any statute, the Certificate of Incorporation or these Bylaws. ARTICLE 10 SEAL The corporate seal of the Corporation shall be in such form as the Board of Directors shall determine from time to time and may consist of a facsimile thereof or the word "SEAL" enclosed in parentheses. ARTICLE 11 POWERS OF ATTORNEY The Board of Directors or the Executive Committee may authorize one or more of the officers of the Corporation to execute powers of attorney delegating to named representatives or 17 21 agents power to represent or act on behalf of the Corporation, with or without power of substitution. In the absence of any action by the Board of Directors or the Executive Committee, any officer of the Corporation may execute, for and on behalf of the Corporation, waivers of notice of meetings of stockholders and proxies, or may vote shares directly, for such meetings of any company in which the Corporation may hold voting securities. ARTICLE 12 INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES The Corporation shall indemnify its directors, officers and employees to the extent provided in the Corporation's Certificate of Incorporation. ARTICLE 13 AMENDMENTS Except as provided otherwise by the laws of the State of Delaware, the Certificate of Incorporation or elsewhere in these Bylaws, these Bylaws may be amended or repealed either: (a) at any meeting of stockholders at which a quorum is present by vote of a majority of the number of shares of stock entitled to vote present in person or by proxy at such meeting; or 18 22 (b) at any meeting of the Board of Directors by a majority vote of the directors then in office; provided that the notice of such meeting of stockholders or directors or waiver of notice thereof contains a statement of the substance of the proposed amendment or repeal. 19 EX-4.3 4 AMEND #2 TO RIGHTS AGREEMENT 1 EXHIBIT 4.3 AMENDMENT NO. 2 TO RIGHTS AGREEMENT AMENDMENT NO. 2, dated as of July 31, 1998 (this "Amendment"), to the RIGHTS AGREEMENT, dated as of October 31, 1995, as amended (the "Rights Agreement") between MARINER HEALTH GROUP, INC., a Delaware corporation (the "Company"), and STATE STREET BANK AND TRUST COMPANY, as Rights Agent. All terms not otherwise defined herein shall have the meaning given such terms in the Rights Agreement. W I T N E S S E T H: WHEREAS, on October 31, 1995, the Board of Directors of the Company (the "Board") authorized the execution of the Rights Agreement pursuant to which certain rights to purchase one one-hundredth of a share of the Company's Series A Junior Participating Preferred Stock have been distributed; WHEREAS, on April 13, 1998, the Board authorized the execution of Amendment No. 1 to the Rights Agreement to render the Rights Agreement inapplicable to the merger of Paragon Acquisition Sub, Inc. ("Sub"), a Delaware corporation and a wholly-owned subsidiary of Paragon Health Network, Inc. ("Parent"), with and into the Company, with the Company surviving and continuing as a wholly-owned subsidiary of Paragon; WHEREAS, pursuant to Section 27 of the Rights Agreement, the Company may amend the Rights Agreement at any time prior to the Final Amendment Date (as defined therein) without the approval of any holders of certificates representing shares of Common Stock (as defined therein); and WHEREAS, on July __, 1998, the Board authorized the execution of this Amendment No. 2 to Rights Agreement pursuant to the terms of the Agreement and Plan of Merger (the "Merger Agreement"), dated as of April 13, 1998, among Parent, the Company and Sub. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: 1. Section 7(a) of the Rights Agreement shall be amended in its entirety to read as follows: (a) Subject to Section 7(e) hereof, the registered holder of any Rights Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein including, without limitation, the restrictions set forth in Section 9(c), Section 11(a)(iii) and Section 23(a) hereof) in whole or in part at any time after the Distribution Date upon surrender of the Rights Certificate, with the form of election to purchase set forth on the reverse side thereof and the certificate contained therein completed and duly executed, to the Rights Agent at the office of the Rights Agent designated for such purpose, together with payment of the aggregate Purchase Price with respect to the total number of one one-hundredths of a share of Preferred Stock (or other securities, cash or other assets, as the case may be) as to which such surrendered Rights are then exercisable, until immediately prior to the effective time of the merger contemplated by by the Agreement and Plan of Merger dated as of April 13, 1998 among Paragon Health Network, Inc., a Delaware corporation, the Company and Paragon Acquisition Sub, Inc. (the "Expiration Date"). 2 - 2 - 2. Parent and Sub are third party beneficiaries of this Amendment and the terms of this Amendment shall not be withdrawn, amended or otherwise modified without their written consent. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 3 - 3 - IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to the Rights Agreement to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. Attest: MARINER HEALTH GROUP, INC. By:---------------------------- By: /s/ Arthur W. Stratton Jr., M.D. Name: Name: Arthur W. Stratton, Jr., M.D. Title: Title: President and Chief Executive Officer Attest: STATE STREET BANK AND TRUST COMPANY By: David M. Elwood ----------------------------------- Name: David M. Elwood By: Jane Rivinius Title: Vice President - ------------------------------- Name: Jane Rivinius Title: Vice President EX-10.1 5 AMEND. # 17 TO CREDIT AGREEMENT AND WAIVER 1 EXHIBIT 10.1 AMENDMENT NO. 17 TO CREDIT AGREEMENT AND WAIVER THIS AMENDMENT NO. 17 TO CREDIT AGREEMENT (the "Amendment") dated as of July 14, 1998 by and among Mariner Health Group, Inc., a Delaware corporation (the "Borrower"), PNC Bank, National Association, CoreStates Bank, N.A., Creditanstalt AG (formerly known as Creditanstalt Bankverein), First Union National Bank (as successor by merger to First Union National Bank of North Carolina), Mellon Bank, N.A., Toronto Dominion (New York), Inc., Bankers Trust Company, Credit Lyonnais New York Branch, AmSouth Bank, Bank of Tokyo-Mitsubishi Trust Company, The Fuji Bank, Limited New York Branch, SunTrust Bank, Central Florida, N.A., Bank One Kentucky, NA, Fleet National Bank, Comerica Bank, The First National Bank of Chicago, The Industrial Bank of Japan, Limited, New York Branch, The Long-Term Credit Bank of Japan, Ltd. New York Branch and Riggs Bank N.A. (collectively, the "Banks"), and PNC Bank, National Association, in its capacity as agent for the Banks (the "Agent"). W I T N E S S E T H: WHEREAS, the parties hereto are parties to that certain Credit Agreement dated as of May 18, 1994, as amended (the "Credit Agreement"), pursuant to which the Banks provided a $460,000,000 revolving credit facility to the Borrower; WHEREAS, the Borrower, the Banks and the Agent desire to amend and restate the Credit Agreement as hereinafter provided, to allow for and in connection with the acquisition by Paragon Health Network, Inc. ("Paragon") of all of the issued and outstanding capital stock of the Borrower; WHEREAS, the Borrower is a party to that certain Agreement and Plan of Merger by and among the Borrower, Paragon and Paragon Acquisition Sub, Inc. ("Acquisition Sub"), dated April 13, 1998 (the "Merger Agreement"); WHEREAS, pursuant to the Merger Agreement, Acquisition Sub will merge with and into the Borrower, with the Borrower as the surviving corporation, as more fully described in the Merger Agreement (the "Paragon Acquisition"); WHEREAS, Section 9.01(m) of the Credit Agreement provides that it is an Event of Default if a Change of Ownership occurs; WHEREAS, the Paragon Acquisition would constitute a Change of Ownership; and WHEREAS, the Borrower has requested that the Banks and the Agent, effective upon consummation of the Paragon Acquisition, subject to the terms and conditions hereinafter provided, amend and restate the Credit Agreement. 2 NOW, THEREFORE, the parties hereto, in consideration of their mutual covenants and agreements hereinafter set forth and intending to be legally bound hereby, covenant and agree as follows: Definitions. Defined terms used herein unless otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement as amended by this Amendment. Amendment and Restatement of Credit Agreement and Related Matters. The parties hereto do hereby consent to the amendment and restatement of the recitals and Articles I through XI to the Credit Agreement as set forth on Exhibit 1 hereto, the amendment and restatement of Exhibits 8.03(d) [Compliance Certificate] and 2.05 [Revolving Credit Loan Request] to the Credit Agreement to read as set forth on the exhibits attached hereto bearing the same numerical reference as the original exhibits, and the addition of new Schedule 6.01 (cc) [Certain Affiliate Transactions] to the Credit Agreement in the form as set forth on the schedule attached hereto bearing the same name and numerical reference, with such amendments and restatements and the addition of such new schedule to the Credit Agreement to be automatically effective on the date of, and contemporaneously with, the consummation of the Paragon Acquisition, subject only to the satisfaction of the conditions set forth in Section 3 hereof. Conditions of Effectiveness of Amendment and Restatement of Credit Agreement and Related Matters. The effectiveness of the Amendment and Restatement of the Credit Agreement and the effectiveness of the other matters set forth in Section 2 hereof on the date of consummation of the Paragon Acquisition are expressly conditioned upon satisfaction of each of the following conditions precedent on the date of the consummation of the Paragon Acquisition: Paragon Acquisition Closing. The Borrower shall have delivered to the Agent for the benefit of the Banks copies of the executed Merger Agreement. The Merger Agreement and each of the other documents in connection with the closing under the Merger Agreement (together with the Merger Agreement, collectively, the "Paragon Documents") shall be a binding obligation of each party thereto. All conditions to closing under the Paragon Documents shall have been satisfied or waived by the requisite parties thereto. On or before September 30, 1998, the Paragon Acquisition shall have been consummated in accordance with the Paragon Documents. Borrower shall have delivered to the Agent for the benefit of the Banks true and correct copies of each document executed or delivered in connection with the closing of the Paragon Acquisition, including a copy of all material consents and approvals required for the consummation of the Paragon Acquisition and all consents and approvals required for the execution, delivery and performance of this Amendment. There shall have been no amendment to the Merger Agreement, other than such amendment as approved by the Agent prior to the execution thereof. All material consents, approvals, exemptions, orders or authorizations of, or registrations or filings with any Official Body or any other person as required by any Law or any agreement in connection with the execution, delivery and carrying out of the Merger Agreement -2- 3 shall be obtained or made. An Authorized Officer shall have delivered a duly executed certificate, certifying as to the items in this Section 3(a). Representations and Warranties; No Defaults. After giving effect to the consummation of the Paragon Acquisition, the representations and warranties of the Borrower contained in Article VI of the Credit Agreement shall be true and accurate on the date thereof with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which relate solely to an earlier date or time, which representations and warranties shall be true and correct on and as of the specific dates or times referred to therein), and the Borrower shall have performed and complied with all covenants and conditions under the Loan Documents and hereof; after giving effect to the consummation of the Paragon Acquisition, no Event of Default or Potential Default under the Credit Agreement and the other Loan Documents shall have occurred and be continuing or shall exist; and an Authorized Officer shall have delivered to the Agent a duly executed certificate as of the date of consummation of the Paragon Acquisition certifying as to the items in this Section 3(b). Organization, Authorization and Incumbency. There shall be delivered to the Agent for the benefit of each Bank a certificate, dated as of the date of the consummation of the Paragon Acquisition, after giving effect thereto, and signed by the Secretary or an Assistant Secretary of each Loan Party, certifying as appropriate as to: all action taken by such Loan Party in connection with this Amendment and the other Loan Documents; the names of the officer or officers authorized to sign this Amendment and the other documents executed and delivered in connection herewith and described in this Section 3 and the true signatures of such officer or officers and, in the case of the Borrower, specifying the Authorized Officers permitted to act on behalf of the Borrower for purposes of the Loan Documents and the true signatures of such officers, on which the Agent and each Bank may conclusively rely; and copies of its organizational documents, including its certificate of incorporation and bylaws if it is a corporation and its certificate of partnership and partnership agreement if it is a partnership, in each case as in effect on the date hereof, certified by the appropriate state official where such documents are filed in a state office together with certificates from the appropriate state officials as to the continued existence and good standing of each of the Loan Parties in each state where organized; provided that each of the Loan Parties other than Borrower may, in lieu of -3- 4 delivering copies of the foregoing organizational documents and good standing certificates, certify that the organizational documents and good standing certificates previously delivered by the Loan Parties to the Agent remain in effect and have not been amended. Opinions of Counsel. There shall be delivered to the Agent for the benefit of each Bank written opinions dated the date of the consummation of the Paragon Acquisition of Testa, Hurwitz & Thibeault, LLP, counsel for the Loan Parties, and of Powell, Goldstein, Frazer & Murphy LLP, counsel to Paragon, with such opinions to be in form and substance satisfactory to the Agent. Fees and Expenses. The Borrower shall pay or cause to be paid to the Agent for itself and for the account of the Banks to the extent not previously paid (i) the fees set forth in that certain agreement between the Borrower and the Agent regarding fees of the Agent, (ii) the fees (the "Amendment Fee") payable to each Bank with respect to the Paragon Acquisition, as set forth on Exhibit 2 hereto, and (iii) all other fees accrued through the date of consummation of the Paragon Acquisition and the costs and expenses of the Agent and the Banks including, without limitation, reasonable fees of the Agent's counsel in connection with this Amendment. Acknowledgment. Each of the Loan Parties, other than the Borrower, shall have executed the Confirmation of Guaranty in the form attached hereto as Exhibit 3 hereto. Legal Details; Counterparts. All legal details and proceedings in connection with the transactions contemplated by this Amendment shall be in form and substance satisfactory to the Agent, the Agent shall have received from the Borrower and the Required Banks an executed original of this Amendment and the Agent shall have received all such other counterpart originals or certified or other copies of such documents and proceedings in connection with such transactions, in form and substance satisfactory to the Agent. Projections. The Loan Parties shall have delivered to the Agent projections of the Borrower, Paragon and their respective Subsidiaries prepared on a combined pro forma basis for the two (2) fiscal years ending September 30, 1998 through September 30, 1999 in detail satisfactory to the Agent. Paragon Agreement. Paragon shall have duly executed and delivered to the Agent an Agreement, in the form of Exhibit 4 attached hereto dated the date of the consummation of the Paragon Acquisition. Outstanding Items. The Borrower covenants and agrees to undertake in good faith to complete as promptly as possible, all outstanding items required to be completed in connection with Amendments 7 through 16 of the Credit Agreement as set forth on the list of outstanding items dated June 19, 1998 (except for the opinions and memorandums of counsel subject to the waiver in the following sentence), the satisfaction of which it is expressly agreed has not been waived by the Banks. The Banks, by their execution of this Amendment, hereby -4- 5 waive, effective upon the date of consummation of the Paragon Acquisition in accordance with the terms of this Amendment, the requirement that the Borrower deliver the various outstanding opinions or memorandums of counsel regarding healthcare regulatory matters. Force and Effect. Except as expressly modified by this Amendment, the Credit Agreement and the other Loan Documents are hereby ratified and confirmed and shall remain in full force and effect after the date hereof. Governing Law. This Amendment shall be deemed to be a contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the internal laws of the Commonwealth of Pennsylvania without regard to its conflict of laws principles. Effective Date; Certification of the Borrower. This Amendment shall be dated as of and shall be binding, effective and enforceable upon the date of receipt by the Agent of duly executed original counterparts of this Amendment from the Borrower, the Agent and the Required Banks, and from and after such date this Amendment shall be binding upon the Borrower, each Bank and the Agent, and their respective successors and assigns permitted by the Credit Agreement. The Borrower by executing this Amendment, hereby certifies that this Amendment has been duly executed and that as of the date hereof no Event of Default or Potential Default exists under the Credit Agreement or the other Loan Documents. [INTENTIONALLY BLANK] -5- 6 [SIGNATURE PAGE 1 OF 20 TO AMENDMENT NO. 17] IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. MARINER HEALTH GROUP, INC. By:______________________________________ Name:____________________________________ Title:___________________________________ 7 [SIGNATURE PAGE 2 OF 20 TO AMENDMENT NO. 17] PNC BANK, NATIONAL ASSOCIATION, INDIVIDUALLY AND AS AGENT By:______________________________________ Name:____________________________________ Title:___________________________________ 8 [SIGNATURE PAGE 3 OF 20 TO AMENDMENT NO. 17] CORESTATES BANK, N.A. By:______________________________________ Name:____________________________________ Title:___________________________________ 9 [SIGNATURE PAGE 4 OF 20 TO AMENDMENT NO. 17] CREDITANSTALT AG By:______________________________________ Name:____________________________________ Title:___________________________________ By:______________________________________ Name:____________________________________ Title:___________________________________ 10 [SIGNATURE PAGE 5 OF 20 TO AMENDMENT NO. 17] FIRST UNION NATIONAL BANK By:______________________________________ Name:____________________________________ Title:___________________________________ 11 [SIGNATURE PAGE 6 OF 20 TO AMENDMENT NO. 17] MELLON BANK, N.A. By:______________________________________ Name:____________________________________ Title:___________________________________ 12 [SIGNATURE PAGE 7 OF 20 TO AMENDMENT NO. 17] TORONTO DOMINION (NEW YORK), INC. By:______________________________________ Name:____________________________________ Title:___________________________________ 13 [SIGNATURE PAGE 8 OF 20 TO AMENDMENT NO. 17] BANKERS TRUST COMPANY By:______________________________________ Name:____________________________________ Title:___________________________________ 14 [SIGNATURE PAGE 9 OF 20 TO AMENDMENT NO. 17] CREDIT LYONNAIS NEW YORK BRANCH By:______________________________________ Name:____________________________________ Title:___________________________________ 15 [SIGNATURE PAGE 10 OF 20 TO AMENDMENT NO. 17] AMSOUTH BANK By:______________________________________ Name:____________________________________ Title:___________________________________ 16 [SIGNATURE PAGE 11 OF 20 TO AMENDMENT NO. 17] BANK OF TOKYO-MITSUBISHI TRUST COMPANY By:______________________________________ Name:____________________________________ Title:___________________________________ 17 [SIGNATURE PAGE 12 OF 20 TO AMENDMENT NO. 17] THE FUJI BANK, LIMITED NEW YORK BRANCH By:______________________________________ Name:____________________________________ Title:___________________________________ 18 [SIGNATURE PAGE 13 OF 20 TO AMENDMENT NO. 17] SUNTRUST BANK, CENTRAL FLORIDA, N.A. By:______________________________________ Name:____________________________________ Title:___________________________________ 19 [SIGNATURE PAGE 14 OF 20 TO AMENDMENT NO. 17] BANK ONE, KENTUCKY, NA By:______________________________________ Name:____________________________________ Title:___________________________________ 20 [SIGNATURE PAGE 15 OF 20 TO AMENDMENT NO. 17] FLEET NATIONAL BANK By:______________________________________ Name:____________________________________ Title:___________________________________ 21 [SIGNATURE PAGE 16 OF 20 TO AMENDMENT NO. 17] COMERICA BANK By:______________________________________ Name:____________________________________ Title:___________________________________ 22 [SIGNATURE PAGE 17 OF 20 TO AMENDMENT NO. 17] THE FIRST NATIONAL BANK OF CHICAGO By:______________________________________ Name:____________________________________ Title:___________________________________ 23 [SIGNATURE PAGE 18 OF 20 TO AMENDMENT NO. 17] THE INDUSTRIAL BANK OF JAPAN, LIMITED, NEW YORK BRANCH By:______________________________________ Name:____________________________________ Title:___________________________________ 24 [SIGNATURE PAGE 19 OF 20 TO AMENDMENT NO. 17] THE LONG-TERM CREDIT BANK OF JAPAN, LTD. NEW YORK BRANCH By:______________________________________ Name:____________________________________ Title:___________________________________ 25 [SIGNATURE PAGE 20 OF 20 TO AMENDMENT NO. 17] RIGGS BANK N.A. By:______________________________________ Name:____________________________________ Title:___________________________________ 26 STATE OF GEORGIA COUNTY OF FULTON On the _____ day of ___________, 1998 personally appeared ______________, as the __________ President of SunTrust Bank, Central Florida, N.A., and before me executed the attached Amendment No. 17 dated as of _____________, 1998 to the Credit Agreement between Mariner Health Group, Inc., with SunTrust Bank, Central Florida, N.A., as Lender. IN WITNESS WHEREOF, I have hereunto set my hand and official seal, in the state and county aforesaid. ______________________________________________________________ Signature of Notary Public, State of__________________________ ______________________________________________________________ (Print, Type or Stamp Commissioned Name of Notary Public) Personally known __________; OR Produced Identification ______ Type of identification produced:______________________________ ______________________________________________________________ 27 EXHIBIT 2
Bank Fee ---- --- PNC Bank, National Association $22,500 Bankers Trust Company $16,250 Corestates Bank, N.A. $16,250 Credit Lyonnais New York Branch $16,250 Mellon Bank, N.A. $16,250 Toronto Dominion (New York), Inc. $16,250 AmSouth Bank $11,250 Bank of Tokyo-Mitsubishi Trust Company $11,250 Comerica Bank $11,250 The First National Bank of Chicago $11,250 First Union National Bank $11,250 Fleet National Bank $11,250 The Industrial Bank of Japan, Limited, $11,250 New York Branch Creditanstalt AG $10,000 Bank One, Kentucky, N.A. $ 7,500 The Fuji Bank, Limited New York Branch $ 7,500 The Long-Term Credit Bank of Japan, Ltd. $ 7,500 New York Branch Riggs Bank, N.A. $ 7,500 SunTrust Bank, Central Florida, N.A. $ 7,500
28 EXHIBIT 3 CONFIRMATION OF GUARANTY 29 EXHIBIT 4 AGREEMENT EX-10.2 6 CREDIT AGREEMENT 1 EXHIBIT 10.2 $460,000,000 REVOLVING CREDIT FACILITY CREDIT AGREEMENT by and among MARINER HEALTH GROUP, INC. and THE BANKS PARTY HERETO and PNC BANK, NATIONAL ASSOCIATION, as Agent Dated as of May 18, 1994, as amended 2 TABLE OF CONTENTS ARTICLE I - CERTAIN DEFINITIONS.................................................................................. 1 1.01 Certain Definitions................................................................................. 1 1.02 Construction........................................................................................ 27 1.03 Accounting Principles............................................................................... 28 ARTICLE II - REVOLVING CREDIT FACILITY........................................................................... 29 2.01 Revolving Credit Commitments; Limitation on Borrowings.............................................. 29 (a) Revolving Credit Commitments.................................................................. 29 Intentionally Omitted............................................................................. 29 (c) Limitation on Borrowings...................................................................... 29 2.02 Nature of Banks' Obligations With Respect to Revolving Credit Loans................................. 30 2.03 Commitment Fees..................................................................................... 30 2.04 Special Fee......................................................................................... 31 2.05 Revolving Credit Loan Requests...................................................................... 31 2.06 Making Revolving Credit Loans....................................................................... 32 2.07 Revolving Credit Note............................................................................... 32 2.08 Use of Proceeds..................................................................................... 32 2.09 Letter of Credit Subfacility........................................................................ 33 2.10 Voluntary Reduction of Revolving Credit Commitments................................................. 38 ARTICLE III - COLLATERAL......................................................................................... 38 3.01 Collateral.......................................................................................... 38 ARTICLE IV - INTEREST RATES...................................................................................... 38 4.01 Interest Rate Options............................................................................... 38 (a) Revolving Credit Interest Rate Options........................................................ 39 (b) Rate Quotations............................................................................... 40 4.02 Interest Periods.................................................................................... 40 4.03 Interest After Default.............................................................................. 41 4.04 Euro-Rate Unascertainable........................................................................... 41 4.05 Selection of Interest Rate Options.................................................................. 42 ARTICLE V - PAYMENTS............................................................................................. 43 5.01 Payments............................................................................................ 43 5.02 Pro Rata Treatment of Banks......................................................................... 43 5.03 Interest Payment Dates.............................................................................. 43 5.04 Voluntary Prepayments............................................................................... 43 5.05 Mandatory Prepayments............................................................................... 44 (a) Sale of Assets................................................................................ 44 (b) Application Among Interest Rate Options....................................................... 45 5.06 Additional Compensation in Certain Circumstances.................................................... 45 (a) Increased Costs or Reduced Return Resulting From Taxes, Reserves, Capital Adequacy Requirements, Expenses, Etc................................................................ 45 (b) Indemnity..................................................................................... 46 ARTICLE VI - REPRESENTATIONS AND WARRANTIES...................................................................... 47 6.01 Representations and Warranties - Effective On and After Date of This Agreement...................... 47 (a) Organization and Qualification................................................................ 47 (b) [Intentionally Omitted]....................................................................... 47 (c) Excluded Entities; Subsidiaries............................................................... 47 (d) Power and Authority........................................................................... 48
(i) 3 (e) Validity and Binding Effect................................................................... 48 (f) No Conflict................................................................................... 48 (g) Litigation.................................................................................... 48 (h) Title to Properties........................................................................... 49 (i) Financial Statements.......................................................................... 49 (j) Margin Stock.................................................................................. 50 (k) Full Disclosure............................................................................... 50 (l) Taxes......................................................................................... 50 (m) Consents and Approvals........................................................................ 50 (n) Compliance with Instruments................................................................... 51 (o) Patents, Trademarks, Copyrights, Etc.......................................................... 51 (p) Security Interests in the Collateral.......................................................... 51 (q) [Intentionally Omitted.]...................................................................... 52 (r) Status of the Pledged Collateral.............................................................. 52 (s) Insurance..................................................................................... 52 (t) Compliance with Laws.......................................................................... 52 (u) Material Contracts, Licenses, Permits and Approvals........................................... 52 (v) Investment Companies.......................................................................... 53 (w) Plans and Benefit Arrangements................................................................ 54 (x) Employment Matters............................................................................ 55 (y) Environmental Matters......................................................................... 55 (z) Senior Debt Status............................................................................ 56 (aa) Matters Regarding Leased Facilities and Certain Indebtedness of Subsidiaries................ 57 (bb) Mortgage and Leasehold Mortgage Liens........................................................ 58 6.02 Updates to Schedules................................................................................ 58 ARTICLE VII - CONDITIONS OF LENDING.............................................................................. 58 7.01 Each Additional Loan................................................................................ 58 ARTICLE VIII - COVENANTS......................................................................................... 59 8.01 Affirmative Covenants............................................................................... 59 (a) Preservation of Existence, Etc................................................................ 59 (b) Payment of Liabilities, Including Taxes, Etc.................................................. 59 (c) Maintenance of Insurance...................................................................... 59 (d) Maintenance of Properties and Leases.......................................................... 60 (e) Maintenance of Patents, Trademarks, Etc....................................................... 60 (f) Visitation Rights............................................................................. 60 (g) Keeping of Records and Books of Account....................................................... 60 (h) Plans and Benefit Arrangements................................................................ 60 (i) Compliance with Laws.......................................................................... 61 (j) Use of Proceeds............................................................................... 61 (k) [Intentionally Omitted.]...................................................................... 61 (l) Subordination of Intercompany Loans, Other Loans and Advances to the Borrower................. 61 (m) Approval of Financial Statements in Permitted Acquisitions; Notice of Permitted Acquisition................................................................................ 61 (n) Dissolution of Certain Subsidiaries........................................................... 63 (o) [Intentionally Omitted]....................................................................... 63 (p) Further Assurances............................................................................ 63 (q) Owned Facilities - Termination of Liens; Intercreditor Agreements............................. 63 (r) Leased Facilities - Termination of Liens; Intercreditor Agreements; Trustee Agreements........ 64 8.02 Negative Covenants.................................................................................. 65 (a) Indebtedness.................................................................................. 65 (b) Liens......................................................................................... 66
(ii) 4 (c) Guaranties.................................................................................... 66 (d) Loans and Investments......................................................................... 67 (e) Amounts Paid by the Borrower to Paragon; Dividends and Related Distributions.................. 68 (f) Liquidations, Mergers, Consolidations, Acquisitions........................................... 70 (g) Dispositions of Assets or Subsidiaries........................................................ 71 (h) Affiliate Transactions........................................................................ 72 (i) Subsidiary, Partnerships and Joint Ventures................................................... 72 (j) Continuation of or Change in Business......................................................... 73 (k) Plans and Benefit Arrangements................................................................ 73 (l) Fiscal Year................................................................................... 74 (m) Issuance of Stock............................................................................. 74 (n) [Intentionally Omitted.]...................................................................... 74 (o) [Intentionally Omitted.]...................................................................... 74 (p) Capital Expenditures and Leases............................................................... 74 (q) Minimum Fixed Charge Coverage Ratio........................................................... 74 (r) Maximum Leverage Ratio........................................................................ 75 (s) [Intentionally Omitted.]...................................................................... 75 (t) Minimum Net Worth............................................................................. 75 (u) Senior Indebtedness to Cash Flow From Operations Ratio........................................ 76 (v) Incurrence of Indebtedness Permitted By the Indenture......................................... 76 (w) [Intentionally Omitted.]...................................................................... 76 (x) Negative Pledges.............................................................................. 76 (y) Prohibition of Defeasance of Subordinated Notes............................................... 76 8.03 Reporting Requirements.............................................................................. 77 (a) [Intentionally Omitted.]...................................................................... 77 (b) Quarterly Financial Statements................................................................ 77 (c) Annual Financial Statements................................................................... 77 (d) Certificate of the Borrower................................................................... 77 (e) Notice of Default............................................................................. 78 (f) Notice of Litigation.......................................................................... 78 (g) Certain Events................................................................................ 78 (h) Budgets, Forecasts, Other Reports and Information............................................. 78 (i) Notices Regarding Plans and Benefit Arrangements.............................................. 79 (j) Notices with Respect to Indenture............................................................. 80 ARTICLE IX - DEFAULT............................................................................................. 81 9.01 Events of Default................................................................................... 81 9.02 Consequences of Event of Default.................................................................... 84 9.03 Notice of Sale...................................................................................... 86 ARTICLE X - THE AGENT............................................................................................ 87 10.01 Appointment........................................................................................ 87 10.02 Delegation of Duties............................................................................... 87 10.03 Nature of Duties; Independent Credit Investigation................................................. 87 10.04 Actions in Discretion of Agent; Instructions from the Banks........................................ 87 10.05 Reimbursement and Indemnification of Agent by the Borrower......................................... 88 10.06 Exculpatory Provisions............................................................................. 88 10.07 Reimbursement and Indemnification of Agent by Banks................................................ 89 10.08 Reliance by Agent.................................................................................. 89 10.09 Notice of Default.................................................................................. 90 10.10 Notices............................................................................................ 90 10.11 Banks in Their Individual Capacities............................................................... 90 10.12 Holders of Notes................................................................................... 90
(iii) 5 10.13 Equalization of Banks.............................................................................. 90 10.14 Successor Agent.................................................................................... 91 10.15 Agent's Fee........................................................................................ 91 10.16 Availability of Funds.............................................................................. 91 10.17 Calculations....................................................................................... 92 10.18 Beneficiaries...................................................................................... 92 10.19 Holding of Loan Documents.......................................................................... 92 ARTICLE XI - MISCELLANEOUS....................................................................................... 92 11.01 Modifications, Amendments or Waivers............................................................... 92 11.02 No Implied Waivers; Cumulative Remedies; Writing Required.......................................... 93 11.03 Reimbursement and Indemnification of Banks by the Borrower; Taxes.................................. 93 11.04 Holidays........................................................................................... 94 11.05 Funding by Branch, Subsidiary or Affiliate......................................................... 94 (a) Notional Funding.............................................................................. 94 (b) Actual Funding................................................................................ 94 11.06 Notices............................................................................................ 95 11.07 Severability....................................................................................... 95 11.08 Governing Law...................................................................................... 95 11.09 Prior Understanding................................................................................ 95 11.10 Duration; Survival................................................................................. 95 11.11 Successors and Assigns............................................................................. 96 11.12 Confidentiality.................................................................................... 97 11.13 Counterparts....................................................................................... 97 11.14 Agent's or Bank's Consent.......................................................................... 97 11.15 Exceptions......................................................................................... 97 11.16 Consent to Forum; Waiver of Jury Trial............................................................. 98 11.17 Tax Withholding Clause............................................................................. 98
(iv) 6 SCHEDULES SCHEDULE 1.01(P) PERMITTED LIENS SCHEDULE 1.01(R)(2) COMMITMENTS OF BANKS SCHEDULE 2.09(a) EXISTING LETTERS OF CREDIT; LOANS, INTEREST AND OTHER OBLIGATIONS UNDER PRIOR CREDIT AGREEMENT SCHEDULES 6.01(a) QUALIFICATIONS TO DO BUSINESS, SUBSIDIARIES AND and 6.01(c) EXCLUDED ENTITIES SCHEDULES 6.01(cc) CERTAIN AFFILIATE TRANSACTIONS SCHEDULE 6.01(u) MATERIAL CONTRACTS SCHEDULE 6.01(y) ENVIRONMENTAL DISCLOSURES SCHEDULE 6.01(z) CERTAIN DISCLOSURES REGARDING OTHER DEBT OF THE BORROWER SCHEDULE 6.01(aa) MATTERS REGARDING CERTAIN LEASED FACILITIES AND INDEBTEDNESS OF CERTAIN SUBSIDIARIES SCHEDULE 8.01(l) CERTAIN DISCLOSURES REGARDING SUBORDINATION OF INDEBTEDNESS SCHEDULE 8.02(a) PERMITTED INDEBTEDNESS SCHEDULE 8.02(c) CERTAIN GUARANTIES SCHEDULE 8.02(x) EXISTING NEGATIVE PLEDGE COVENANTS 7 EXHIBITS EXHIBIT 1.01(A) ASSIGNMENT AND ASSUMPTION AGREEMENT EXHIBIT 1.01(C) CONDITIONS FOR INCURRENCE OF CERTAIN LIENS AND CERTAIN INDEBTEDNESS EXHIBIT 1.01(G) GUARANTY AND SURETYSHIP AGREEMENT EXHIBITS 1.01(I)(1) INTERCREDITOR AGREEMENT - LEASED FACILITY (A) and (B) EXHIBITS 1.01(I)(2) INTERCREDITOR AGREEMENT - OWNED FACILITY (A) and (B) EXHIBIT 1.01(L) LEASEHOLD MORTGAGE EXHIBIT 1.01(M) MORTGAGE EXHIBIT 1.01(P)(1) PLEDGE AGREEMENT (Borrower) EXHIBIT 1.01(P)(2) PLEDGE AGREEMENT (Subsidiaries Pledging Stock) EXHIBIT 1.01(P)(3) PLEDGE AGREEMENT (Subsidiaries Pledging Partnership Interests) EXHIBIT 1.01(R) REVOLVING CREDIT NOTE EXHIBIT 1.01(S) SUBORDINATION AGREEMENT (Intercompany) EXHIBIT 1.01(T) TRUSTEE AGREEMENT EXHIBIT 2.05 REVOLVING CREDIT LOAN REQUEST EXHIBIT 8.01(l) TERMS OF CERTAIN SUBORDINATED INDEBTEDNESS EXHIBIT 8.01(m)(i) ACQUISITION APPROVAL CERTIFICATE EXHIBIT 8.01(m)(ii) ACQUISITION NOTICE CERTIFICATE EXHIBIT 8.03(d) COMPLIANCE CERTIFICATE 8 CREDIT AGREEMENT THIS CREDIT AGREEMENT is dated as of May 18, 1994, as amended and is made by and among MARINER HEALTH GROUP, INC., a Delaware corporation (the "Borrower"), the BANKS (as hereinafter defined), and PNC BANK, NATIONAL ASSOCIATION, in its capacity as agent for the Banks under this Agreement (hereinafter referred to in such capacity as the "Agent"). WITNESSETH: WHEREAS, the Borrower has requested the Banks to provide a revolving credit facility to the Borrower in an aggregate principal amount not to exceed $460,000,000; and WHEREAS, the Banks are willing to provide such credit upon the terms and conditions hereinafter set forth. NOW, THEREFORE, the parties hereto, in consideration of their mutual covenants and agreements hereinafter set forth and intending to be legally bound hereby, covenant and agree as follows: ARTICLE I CERTAIN DEFINITIONS 1.01 Certain Definitions. In addition to words and terms defined elsewhere in this Agreement, the following words and terms shall have the following meanings, respectively, unless the context hereof clearly requires otherwise: Acquisition Approval Certificate shall have the meaning set forth in Section 8.01(m)(i). Acquisition Income Reporting Period shall mean the period during which Borrower shall measure Consolidated Cash Flow from Operations pursuant to Section 8.01(m) for purposes of computing Borrower's leverage ratio and its other financial covenants on the date on which Borrower makes any Permitted Acquisition, which period shall be either: (1) the four fiscal quarters ending immediately before the date of such Permitted Acquisition (the "Immediately Preceding Four Quarters") if such Permitted Acquisition occurs after the Delivery Date for the financial statements of Borrower for such Immediately Preceding Four Quarters, or (2) the four fiscal quarters ending one quarter period prior to the end of the Immediately Preceding Four Quarters (the "Second Preceding Four Quarters") if such Permitted Acquisition occurs before the Delivery Date for the financial statements of Borrower for the Immediately Preceding Four Quarters. Acquisition Notice Certificate shall have the meaning given to such term in Section 8.01(m)(ii). 9 Acquisition Reporting Certification shall mean any Permitted Acquisition with respect to which Borrower delivers or is required to deliver either an Acquisition Notice Certificate or an Acquisition Approval Certificate pursuant to Section 8.01(m). Adjusted Consolidated Net Income shall mean for any period of determination an amount equal to the net income of the Borrower and its Subsidiaries for such period determined and consolidated in accordance with GAAP, plus such extraordinary nonrecurring charges as are approved by the Required Banks pursuant to Section 8.01(m), to the extent such expenses are deducted in computing such net income. Adjusted Net Income shall mean for any period of determination an amount equal to the net income (loss) of the Borrower and its Subsidiaries for such period determined and consolidated in accordance with GAAP; provided, however, that there shall not be included in such Adjusted Net Income any non-recurring items related to costs and expenses incurred in connection with acquisitions and dispositions of assets, merger transactions or other business combinations, any extraordinary gain or loss, the cumulative effect of a change in accounting principles and costs related to the discharge of legal judgments or settlement costs related to the settlement of a bona fide dispute between the Borrower or any of its Subsidiaries and any other Person. Affiliate as to any person shall mean any other person (i) which directly or indirectly controls, is controlled by, or is under common control with such person, (ii) which beneficially owns or holds 50% or more of any class of the voting stock of the Borrower, or (iii) 50% or more of the voting stock (or in the case of a person which is not an individual or a corporation, 50% or more of the equity interest) of which is beneficially owned or held, directly or indirectly, by the Borrower. Control, as used herein, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract or otherwise, including the power to elect a majority of the directors or trustees of a corporation or trust, as the case may be. Agent shall mean PNC Bank, National Association and its successors. Agent's Fee shall have the meaning assigned to that term in Section 10.15 hereof. Agreement shall mean this Credit Agreement as the same may be supplemented, amended, modified or restated from time to time including all schedules and exhibits hereto. Amendment No. 15 shall mean that certain Amendment No. 15 to Credit Agreement dated October 3, 1997 among Borrower, the Banks and Agent, together with schedules and exhibits thereto. Amendment No. 17 to Credit Agreement dated July 14, 1998 among Borrower, the Banks and Agent, together with schedules and exhibits thereto. -2- 10 Amendment No. 16 shall mean that certain Amendment No. 16 to Credit Agreement dated January 2, 1998 among Borrower, the Banks and Agent, together with schedules and exhibits thereto. Ansonia shall mean Mariner Health Care of Southern Connecticut, a corporation organized and existing under the laws of the State of Connecticut. Applicable Percentage Over Euro-Rate shall have the meaning assigned to such term in Section 4.01(a)(ii). Assignment and Assumption Agreement shall mean an Assignment and Assumption Agreement by and among a Purchasing Bank, the Transferor Bank and the Agent, as Agent and on behalf of the remaining Banks, substantially in the form of Exhibit 1.01(A) hereto. Authorized Officer shall mean with respect to each Loan Party those persons designated by written notice to the Agent from the Borrower, authorized to execute notices, reports and other documents required hereunder. The Borrower may amend such list of persons from time to time by giving written notice of such amendment to the Agent. Banks shall mean the financial institutions named on Schedule 1.01(R)(2) hereto and their respective successors and assigns as permitted hereunder, each of which is referred to herein as a Bank. Base Rate shall mean the greater of (i) the interest rate per annum announced from time to time by the Agent at its Principal Office as its then prime rate, which rate may not necessarily be the lowest rate then being charged commercial borrowers by the Agent, or (ii) the Federal Funds Effective Rate plus one-half percent (0.5%) per annum. Base Rate Option shall mean Loans subject to the Revolving Credit Base Rate Option. Benefit Arrangement shall mean at any time an "employee benefit plan," within the meaning of Section 3(3) of ERISA, which is neither a Plan or a Multiemployer Plan and which is maintained, sponsored or otherwise contributed to, by any member of the ERISA Group. Borrower shall mean Mariner Health Group, Inc., a corporation organized and existing under the laws of the State of Delaware. Borrowing Date shall mean, with respect to any Loan, the date for the making thereof or the renewal thereof or conversion thereof to the same or a different Interest Rate Option, which shall be a Business Day. Borrowing Tranche shall mean (i) with respect to the Revolving Credit Euro-Rate Portion of the Loans, Loans to which a Euro-Rate Option applies by reason of the selection of, conversion to or renewal of such Interest Rate Option on the same day and having -3- 11 the same Euro-Rate Interest Period, and (ii) with respect to the Revolving Credit Base Rate Portion of the Loans, Loans to which the Base Rate Option applies by reason of the selection of or conversion of such Interest Rate Option. Business Day shall mean (i) with respect to matters relating to the Euro-Rate Option, a day on which banks in the London interbank market are dealing in U.S. Dollar deposits and on which commercial banks are open for domestic and international business in Pittsburgh, Pennsylvania and New York, New York, and (ii) with respect to any other matter, a day on which commercial banks are open for business in Pittsburgh, Pennsylvania and New York, New York. Capital Stock shall mean any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants, rights or options to purchase any of the foregoing. Change in Ownership shall mean the occurrence of any of the following: (i) if, from and after the Seventeenth Amendment Effective Date, any person or group within the meaning of Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") excluding the Permitted Investors, shall at any time designate or obtain the right to designate a percentage (the "Third Party Board Percentage") equal to 25% or more of the members of the Board of Directors of Paragon unless at such time the percentage of the members of the Board of Directors of Paragon designated by the Permitted Investors is greater than the Third Party Board Percentage; (ii) any "person" or "group" (as such terms are defined above), excluding the Permitted Investors, shall at any time become, or obtain rights (whether by means of warrants, options or otherwise) to become, the "beneficial owner" (as defined in Rule 13(d) 3 and 13(d) 5 under the Exchange Act), directly or indirectly, of a percentage (the "Third Party Stock Percentage") equal to 33-1/3% or more of the Voting Stock of Paragon unless at such time the percentage of outstanding Voting Stock of Paragon beneficially owned by the Permitted Investors (determined on a fully diluted basis) is equal to or greater than the Third Party Stock Percentage, provided, that for the purposes of this clause (ii), Voting Stock that a Permitted Investor has the power to vote in its sole discretion pursuant to contract or proxy shall be deemed to be beneficially owned by such Permitted Investor and not by any other "person or "group"; (iii) a Specified Change of Control shall occur; or (iv) Paragon shall cease to own, directly or indirectly, one hundred percent (100%) of all Voting Stock of the Borrower. Class A Excluded Entities shall mean collectively those Excluded Entities which have not incurred any Restricted Indebtedness nor are subject to or bound by the terms of any agreement with respect to Restricted Indebtedness, and Class A Excluded Entity shall mean separately any Class A Excluded Entity. Closing Date shall mean May 18, 1994, which is the Business Day on which the first Loan was made. Collateral shall mean the Pledged Collateral, all of the collateral under the Mortgages and the Leasehold Mortgages and any other collateral security in which any of the -4- 12 Loan Parties may hereafter grant a security interest or other lien to the Agent for the benefit of the Banks as security for their obligations under the Loan Documents. Commitment shall mean as to any Bank its Revolving Credit Commitment, and Commitments shall mean the aggregate of the Revolving Credit Commitments of all of the Banks. Commitment Fee shall have the meaning assigned to that term in Section 2.03 hereof. Conditions for Incurrence of Certain Liens and Certain Indebtedness shall mean those conditions set forth on Exhibit 1.01(C). Consolidated Cash Flow from Operations for any period of determination shall mean the difference between the amounts determined under the following clauses (i) and (ii): (i) the sum of (X) the sum of Consolidated Net Income, depreciation, amortization, other non-cash charges to Consolidated Net Income, interest expense, and income tax expense of the Borrower and its Restricted Subsidiaries for such period determined in accordance with GAAP, plus (Y) the sum of the Consolidated Cash Flow from Operations Adjustment Amount for all Class A Excluded Entities, minus (ii) non-cash credits to net income of the Borrower and its Restricted Subsidiaries for such period determined in accordance with GAAP, subject to the adjustments described in this definition below. If the Loan Parties make a Permitted Acquisition and the Banks approve of the historical and pro forma financial statements of the business acquired in such Permitted Acquisition pursuant to Section 8.01(m) hereof, Consolidated Cash Flow from Operations shall be adjusted as set forth in paragraphs (A), (B) and (C) below. The adjustments in Paragraphs (A), (B) and (C) below shall apply to computations of the ratios in Sections 2.01, 2.03, 4.01(a), 8.02(f), 8.02(r) and 8.02(u) on the date of such Permitted Acquisition and at the end of each of the four fiscal quarters after such Permitted Acquisition. (The adjustments described in Paragraphs (A) and (B) below shall not apply to computations of such ratios made as of the end of the fiscal quarter immediately preceding the date of such Permitted Acquisition.) (A) Consolidated Cash Flow from Operations for periods prior to such Permitted Acquisition shall include (i) the sum of net income, depreciation, amortization, other non-cash charges to net income, interest expense and income tax expense of the acquired business, plus the adjustment, if any pursuant to clause (C) below, minus (ii) non-cash credits to net income of such business, in each case as determined in accordance with GAAP, (B) Extraordinary or nonrecurring expenses under GAAP incurred in connection with such Permitted Acquisition shall be excluded from the net income of the acquired business when computing Consolidated Cash Flow from Operations in the preceding sentence if the Required Banks have agreed to such exclusion pursuant to Section 8.01(m), and -5- 13 (C) To the extent, in the determination of net income of the acquired business utilized in clause (A) above, deductions were taken in respect of rental expense pursuant to operating leases in accordance with GAAP and following the consummation of a Permitted Acquisition the Borrower appropriately amends such leases so that, in accordance with GAAP, such rental expense pursuant to operating leases may properly be treated as rental expense pursuant to capital leases (and the Borrower treats such leases as capital leases for periods following the consummation by the Borrower of such Permitted Acquisition) then, such net income for purposes of clause (A) above shall be increased by the deductions taken in respect of rental expense pursuant to such operating leases during the period of determination. Consolidated Cash Flow from Operations Adjustment Amount shall mean, for each Class A Excluded Entity, for any period of determination, the amount equal to the product of (A) a percentage, as determined by the Agent in its reasonable discretion, multiplied by (B) the difference between (i) the sum of net income, depreciation, amortization, other non-cash charges to such net income, interest expense and income tax expense of such Class A Excluded Entity for such period, as determined in accordance with GAAP, minus (ii) non-cash credits to net income of such Class A Excluded Entity for such period, as determined in accordance with GAAP. In determining the applicable percentage under clause (A) above, the Agent shall review with the Borrower the constituent documents of each Excluded Entity, including without limitation, partnership agreements, shareholder agreements and other relevant documents which the Borrower agrees to provide as the Agent may reasonably request, and the Agent shall also review the equity ownership interests of the Loan Parties in each Excluded Entity and the actual cash flow available to be distributed to the Loan Parties from the operations of each Excluded Entity. Consolidated Net Income shall mean for any period of determination an amount equal to the net income of the Borrower and its Restricted Subsidiaries for such period determined in accordance with GAAP, but without regard to net income attributable to Excluded Entities, plus such extraordinary nonrecurring charges as approved by the Required Banks pursuant to Section 8.01(m), to the extent such expenses are deducted in computing such net income. Consolidated Net Worth shall mean as of any date of determination total stockholders' equity of the Borrower and its Subsidiaries as of such date determined and consolidated in accordance with GAAP. Control Investment Affiliate shall mean as to any Person, any other Person which (a) directly or indirectly, is in control of, is controlled by, or is under common control with, such Person and (b) is organized by such Person primarily for the purpose of making equity or debt investments in one or more companies. For purposes of this definition, "control" of a Person means the power, directly or indirectly, to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. Corporate Shares shall have the meaning assigned to that term in Section 6.01(c). -6- 14 Corporate Subsidiaries shall mean collectively the Subsidiaries of Borrower which are corporations, and Corporate Subsidiary shall mean individually any of them. Delivery Date shall mean the date which is the earlier of (i) the date on which the Borrower delivers its consolidated financial statements to the Agent and the Banks pursuant to Sections 8.03(b) and (c), or (ii) one Business Day following the date on which such financial statements are due to be delivered pursuant to such Sections. Dollar Dollars U.S. Dollars and the symbol $ shall mean lawful money of the United States of America. Drawing Date shall have the meaning assigned to that term in Section 2.09(d). Environmental Complaint shall mean any written complaint setting forth a cause of action for personal, property or natural resource damage or equitable relief, order, notice of violation, citation, request for information issued pursuant to any Environmental Laws by an Official Body, subpoena or other written notice of any type relating to, arising out of, or issued pursuant to any of the Environmental Laws or any Environmental Conditions, as the case may be, in each case with respect to any violation or alleged violation of Environmental Laws or release or threatened release of a Regulated Substance. Environmental Conditions shall mean any conditions of the environment, including, without limitation, the work place, the ocean, natural resources (including flora or fauna), soil, surface water, ground water, any actual or potential drinking water supply sources, substrata or the ambient air, relating to or arising out of, or caused by the use, handling, storage, treatment, recycling, generation, transportation, release, spilling, leaking, pumping, emptying, discharging, injecting, escaping, leaching, disposal, dumping, threatened release or other management or mismanagement of Regulated Substances resulting from the use of, or operations on, the Property. Environmental Laws shall mean all federal, state, local and foreign laws and regulations, including without limitation permits, licenses, authorizations, bonds, orders, judgments, consent decrees issued, or entered into, pursuant thereto, relating to pollution or protection of human health or the environment or employee safety in the work place or the operation of the activities of the Borrower and its Subsidiaries. ERISA shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended or supplemented from time to time, and any successor statute of similar import, and the rules and regulations thereunder, as from time to time in effect. ERISA Group shall mean, at any time, the Borrower and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control and all other entities which, together with the Borrower, are treated as a single employer under Section 414 of the Internal Revenue Code. -7- 15 Euro-Rate shall mean with respect to the Loans comprising any Borrowing Tranche to which the Euro-Rate Option applies for any Euro-Rate Interest Period, the interest rate per annum determined by the Agent by dividing (the resulting quotient rounded upward to the nearest 1/100 of 1% per annum) (i) the rate of interest determined by the Agent in accordance with its usual procedures (which determination shall be conclusive absent manifest error) to be the "offered" eurodollar rate as quoted by Exco-Noonan Incorporated (or appropriate successor or, if Exco-Noonan or its successor ceases to provide such quotes, a comparable replacement as determined by the Agent) as evidenced on Dow Jones Markets Service (formerly known as Telerate) display page 4756 (or such other display page on the Dow Jones Markets Service system as may replace Dow Jones Markets Service display page 4756), two (2) Business Days prior to the first day of such Euro-Rate Interest Period for an amount comparable to such Borrowing Tranche and having a borrowing date and maturity comparable to such Euro-Rate Interest Period by (ii) a number equal to 1.00 minus the Euro-Rate Reserve Percentage. The Euro-Rate may also be expressed by the following formula: Dow Jones Markets Service page 4756 as quoted by Exco-Noonan, Euro-Rate = (or appropriate successor) ----------------------------------- 1.00 - Euro-Rate Reserve Percentage The Euro-Rate shall be adjusted with respect to any Euro-Rate Option outstanding on the effective date of any change in the Euro-Rate Reserve Percentage as of such effective date. The Agent shall give prompt notice to the Borrower of the Euro-Rate as determined or adjusted in accordance herewith, which determination shall be conclusive absent manifest error. Euro-Rate Interest Period shall have the meaning assigned to that term in Section 4.02 hereof. Euro-Rate Option shall mean Loans subject to the Revolving Credit Euro-Rate Option. Euro-Rate Reserve Percentage shall mean the maximum percentage (expressed as a decimal rounded upward to the nearest 1/100 of 1%) as determined by the Agent (which determination shall be conclusive absent manifest error) which is in effect during any relevant period, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirements (including, without limitation, supplemental, marginal and emergency reserve requirements) with respect to eurocurrency funding (currently referred to as "Eurocurrency Liabilities") of a member bank in such System. Event of Default shall mean any of the Events of Default described in Section 9.01 of this Agreement. Excluded Entities shall mean (i) any partnership, corporation or limited liability company which is neither Paragon nor a Paragon Subsidiary nor a Subsidiary of any Loan Party and with respect to which a Loan Party has made a Restricted Investment permitted by Section 8.02(d)(iv), and (ii) any Unrestricted Subsidiary of the Borrower which the Borrower has designated as one of the Excluded Entities and with respect to which a Loan Party has made -8- 16 a Restricted Investment permitted by Section 8.02(d)(iv), and Excluded Entity shall mean separately any Excluded Entity. Existing Letters of Credit shall have the meaning given to such term in Section 2.09. Expiration Date shall mean, with respect to the Revolving Credit Commitment, January 3, 2000. Facility Purchase Option shall mean an option provided by a Lessor Lender or Owned Facility Lender in an Intercreditor Agreement giving the Agent or the Banks the right to purchase the Lessor Indebtedness or Owned Facility Indebtedness from such Lessor Lender or Owned Facility Lender upon certain events of default relating to such Indebtedness. Federal Funds Effective Rate for any day shall mean the rate per annum (based on a year of 360 days and actual days elapsed and rounded upward to the nearest 1/100 of 1%) announced by the Federal Reserve Bank of New York (or any successor) on such day as being the weighted average of the rates on overnight Federal funds transactions arranged by Federal funds brokers on the previous trading day, as computed and announced by such Federal Reserve Bank (or any successor) in substantially the same manner as such Federal Reserve Bank computes and announces the weighted average it refers to as the "Federal Funds Effective Rate" as of the date of this Agreement; provided, if such Federal Reserve Bank (or its successor) does not announce such rate on any day, the "Federal Funds Effective Rate" for such day shall be the Federal Funds Effective Rate for the last day of which such rate was announced. Fixed Charge Coverage Ratio shall mean, for any period of determination, the ratio of (a) the sum of Adjusted Consolidated Net Income, interest expense, depreciation, amortization, income tax expense and operating lease expense, for such period for the Borrower and its Subsidiaries, as determined and consolidated in accordance with GAAP, to (b) the sum of interest expense, operating lease expense, current maturities of long-term Indebtedness (other than current maturities of obligations in respect of capital leases), all dividends and distributions paid or for pro-forma calculation purposes, proposed to be paid, by the Borrower to Paragon pursuant to Section 8.02(e)(vi), all for such period for the Borrower and its Subsidiaries, as determined and consolidated in accordance with GAAP. GAAP shall mean generally accepted accounting principles as are in effect on the Closing Date, subject to the provisions of Section 1.03 hereof, and applied on a consistent basis (except for changes in application in which the Borrower's independent certified public accountants concur) both as to classification of items and amounts. Guaranty of any person shall mean any obligation of such person guaranteeing or in effect guaranteeing any liability or obligation of any other person in any manner, whether directly or indirectly, including, without limiting the generality of the foregoing, any agreement to indemnify or hold harmless any other person, any performance bond or other suretyship arrangement and any other form of assurance against loss, except -9- 17 endorsement of negotiable or other instruments for deposit or collection in the ordinary course of business. Guaranty Agreements shall mean collectively the Guaranty and Suretyship Agreements, in substantially the form attached hereto as Exhibit 1.01(G) executed and delivered by the Subsidiaries of Borrower except for Pinnacle Rehab of Gwinnette and Pinnacle's Kansas Joint Venture to the Agent for the benefit of the Banks, and Guaranty Agreement shall mean separately any Guaranty Agreement. Historical Statements shall have the meaning given to such term in Section 6.01(i)(i). Indebtedness shall mean as to any person at any time, any and all indebtedness, obligations or liabilities (whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, or joint or several) of such person for or in respect of: (i) borrowed money, including, without limitation the Subordinated Notes, (ii) amounts raised under or liabilities in respect of any note purchase or acceptance credit facility, (iii) reimbursement obligations under any letter of credit, currency swap agreement, interest rate swap, cap, collar or floor agreement or other interest rate protection agreement, (iv) any other transaction (including without limitation forward sale or purchase agreements, capitalized (not operating) leases required under GAAP to be disclosed as a liability on the Loan Party's balance sheet and conditional sales agreements) having the commercial effect of a borrowing of money entered into by such person to finance its operations or capital requirements (but not including the deferred portion of any Restricted Investment in an Excluded Entity if such amount is to be paid from available cash flow from operations of the Borrower and its Subsidiaries and also not including trade payables and accrued expenses incurred in the ordinary course of business which are not represented by a promissory note, instrument or other evidence of indebtedness and which are not more than ninety (90) days past due (unless such past due indebtedness is being disputed in good faith and an appropriate reserve has been established with respect to such indebtedness in accordance with GAAP)), provided that, for purposes of this clause (iv) the phrase "other evidence of indebtedness" shall not include any ordinary course evidence of trade accounts payable of the Borrower or any Subsidiary such as purchase orders or invoices, or (v) any Guaranty of Indebtedness for borrowed money. Indenture shall mean that certain Indenture dated April 4, 1996, between the Borrower and State Street Bank and Trust Company, as trustee, in respect of the Subordinated Notes, as the same may be amended, modified, supplemented or restated from time to time in accordance with this Agreement. Insolvency Proceedings shall mean, with respect to any Person, (a) a case, action or proceeding with respect to such Person (i) before any court or any other Official Body under any bankruptcy, insolvency, reorganization or other, similar Law now or hereafter in effect, or (ii) for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator, conservator (or similar official) of any Loan Party or otherwise relating to the liquidation, dissolution, winding-up or relief of such Person, or (b) any general assignment for -10- 18 the benefit of creditors, composition, marshaling of assets for creditors, or other, similar arrangement in respect of such Person's creditors generally or any substantial portion of its creditors; undertaken under any Law. Intercreditor Agreements shall mean collectively, as of any date of determination, each Intercreditor Agreement entered into between the Agent and a Lessor Lender, each Intercreditor Agreement entered into between the Agent and an Owned Facility Lender, each Intercreditor Agreement entered into as required by Section 8.02(d)(iv), and each other Intercreditor Agreement entered into between the Agent and any other Person, as required pursuant to this Agreement, and Intercreditor Agreement shall mean, individually, any of the Intercreditor Agreements. Interest Payment Date shall mean each date specified for the payment of interest in Section 5.03. Interest Rate Option shall mean the Revolving Credit Euro-Rate Option or Revolving Credit Base Rate Option. Internal Revenue Code shall mean the Internal Revenue Code of 1986, as the same may be amended or supplemented from time to time, and any successor statute of similar import, and the rules and regulations thereunder, as from time to time in effect. Labor Contracts shall have the meaning assigned to that term in Section 6.01(u). Law shall mean any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, opinion, release, ruling, order, injunction, writ, decree or award of any Official Body. Leased Facilities shall mean collectively all health care facilities leased by a Subsidiary of Borrower, as lessee, and Leased Facility shall mean any of the Leased Facilities, individually. Leasehold Mortgages shall mean collectively, as of any date of determination, each Leasehold Mortgage granted by a Subsidiary Lessee in favor of the Agent for the benefit of the Banks with respect to the Leased Facility leased by such Subsidiary Lessee, and Leasehold Mortgage shall mean individually any of the Leasehold Mortgages. Lessor shall mean with respect to a Leased Facility, the person which owns such facility and leases such facility to a Subsidiary Lessee. Lessor Indebtedness shall mean Indebtedness of a Lessor either secured by the assets of or related to the Leased Facility owned by such Lessor or which includes restrictive covenants or other provisions related or applicable to such Leased Facility. -11- 19 Lessor Lender shall mean, with respect to any Lessor Indebtedness, the obligee thereof. Letter of Credit shall have the meaning assigned to that term in Section 2.09. Letter of Credit Borrowing shall mean an extension of credit resulting from a drawing under any Letter of Credit which shall not have been reimbursed on the date when made and shall not have been converted into a Revolving Credit Loan under Section 2.09(d). Letter of Credit Fee shall have the meaning assigned to that term in Section 2.09. Letters of Credit Outstanding shall mean at any time the sum of (i) the aggregate undrawn face amount of outstanding Letters of Credit and (ii) the aggregate amount of all unpaid and outstanding Reimbursement Obligations. Lien shall mean any mortgage, deed of trust, pledge, lien, security interest, charge or other encumbrance or security arrangement of any nature whatsoever, whether voluntarily or involuntarily given, including but not limited to any conditional sale or title retention arrangement, and any assignment, deposit arrangement or capitalized lease intended as, or having the effect of, security and any filed financing statement or other notice of any of the foregoing (whether or not a lien or other encumbrance is created or exists at the time of the filing). Loan Documents shall mean this Agreement, the Notes, the Guaranty Agreements, the Pledge Agreements, the Mortgages, the Leasehold Mortgages, the Intercreditor Agreements, the Trustee Agreement, the Subordination Agreement (Intercompany), and any other instruments, certificates or documents delivered or contemplated to be delivered hereunder or thereunder or in connection herewith or therewith, as the same may have previously been or in the future be supplemented or amended from time to time in accordance herewith or therewith, and Loan Document shall mean any of the Loan Documents. Loan Parties shall mean the Borrower and its Subsidiaries, other than those Subsidiaries which are permitted Excluded Entities. Loan Request shall mean a request for Revolving Credit Loans made in accordance with Section 2.05 hereof or a request to select, convert to or renew a Euro-Rate Option in accordance with Section 4.02 hereof. Loans shall mean collectively and Loan shall mean separately all Revolving Credit Loans or any Revolving Credit Loan. Mariner Maryland shall mean Mariner Health Care of Baltimore, Inc., a corporation organized and existing under the laws of the Commonwealth of Massachusetts. -12- 20 Mariner Nashville shall mean Mariner Health Care of Nashville, Inc., a Delaware corporation, a Subsidiary of the Borrower and the successor by merger to Convalescent Services Inc., a Georgia corporation. Material Adverse Change shall mean any set of circumstances or events which (a) has or could reasonably be expected to have any material adverse effect whatsoever upon the validity or enforceability of this Agreement or any other Loan Document, (b) is or could reasonably be expected to be material and adverse to the business, properties, assets, financial condition, results of operations or prospects of the Borrower and its Subsidiaries taken as a whole, (c) impairs materially or could reasonably be expected to impair materially the ability of the Borrower or any of its Subsidiaries to duly and punctually pay or perform its Indebtedness, or (d) impairs materially or could reasonably be expected to impair materially the ability of the Agent or any of the Banks, to the extent permitted, to enforce their legal remedies pursuant to this Agreement or any other Loan Document. Material Subsidiary shall mean any Subsidiary the revenue or net income of which represented more than five percent (5%) of the Borrower's consolidated revenues or consolidated net income during the preceding four (4) fiscal quarters. Member Interests shall have the meaning assigned to that term in Section 6.01(c). month, with respect to a Euro-Rate Interest Period, shall mean the interval between the days in consecutive calendar months numerically corresponding to the first day of such Euro-Rate Interest Period. The last day of a calendar month shall be deemed to be such numerically corresponding day for such calendar month (i) if there is no such numerically corresponding day in such calendar month, or (ii) if the first day of such Euro-Rate Interest Period is the last Business Day of a calendar month. Mortgages shall mean collectively, as of any date of determination, the second lien Mortgages granted by a Subsidiary Owner in favor of the Agent for the benefit of the Banks with respect to the Owned Facility of such Subsidiary Owner, and Mortgage shall mean individually any of the Mortgages. Multiemployer Plan shall mean any employee benefit plan which is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA and to which the Borrower or any member of the ERISA Group is then making or accruing an obligation to make contributions or, within the preceding five Plan years, has made or had an obligation to make such contributions. Multiple Employer Plan shall mean a Plan which has two or more contributing sponsors (including the Borrower or any member of the ERISA Group) at least two of whom are not under common control, as such a plan is described in Sections 4063 and 4064 of ERISA. NBG shall mean NationsBank of Georgia, N.A. -13- 21 NBT shall mean NationsBank of Tennessee, N.A. Ninth Amendment Effective Date shall mean April 30, 1996, which shall be the effective date of the Amendment No. 9 to this Agreement. Non-Disturbance Agreements shall mean collectively, as of any date of determination, the non-disturbance agreements executed by a Lessor Lender and the applicable Subsidiary Lessee, each providing in part that the Lessor Lender shall recognize the rights of the Subsidiary Lessee which is lessee of the Leased Facility so financed by such Lessor Lender should such Lessor Lender foreclose upon such Leased Facility. Notes shall mean collectively the Revolving Credit Notes. Official Body shall mean any national, federal, state, local or other government or political subdivision thereof or any agency, authority, bureau, central bank, commission, department or instrumentality of any government or political subdivision thereof, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. Owned Facilities shall mean all health care facilities acquired by a Subsidiary of the Borrower (or the health care facilities which are owned by a person which is acquired by a Loan Party and such person thereby becomes a Subsidiary of the Borrower), which facilities (as of the date of acquisition by a Loan Party or the date the owner of such facility becomes a Subsidiary of the Borrower) have outstanding Indebtedness payable to a lender, other than Indebtedness payable to the Banks pursuant to the Loan Documents, and Owned Facility shall mean any Owned Facilities, individually. Owned Facility Indebtedness shall mean with respect to an Owned Facility, the Indebtedness of the Subsidiary Owner thereof payable to a lender other than the Banks under this Agreement, which Indebtedness is secured by the assets of such Owned Facility. Owned Facility Lender shall mean with respect to a Subsidiary Owner, the obligee of the Owned Facility Indebtedness payable by such Subsidiary Owner. Paragon shall mean Paragon Health Network, Inc., a corporation organized and existing under the laws of the State of Delaware, which on the effective date of the consummation of the Paragon Acquisition will change its name to Mariner Post-Acute Network, Inc. Paragon Acquisition shall mean the merger of Paragon Acquisition Sub with and into the Borrower, with the Borrower being the surviving corporation, whereupon the shareholders of the Borrower will receive shares of Paragon common stock in exchange for their outstanding shares of the Borrower's capital stock, and the Borrower will become a wholly-owned subsidiary of Paragon, all pursuant to the Paragon Merger Agreement. -14- 22 Paragon Acquisition Sub shall mean Paragon Acquisition Sub, Inc., a Delaware corporation and a wholly-owned Subsidiary of Paragon. Paragon Credit Agreement shall mean that certain Credit Agreement dated as of November 4, 1997, by and among Paragon, as borrower, the lenders party thereto as lenders, The Chase Manhattan Bank, as administrative agent, swing line lender and letter of credit bank, and NationsBank, N.A., as documentation agent, as the same may be amended, supplemented or restated from time to time. Paragon Merger Agreement shall mean the Agreement and Plan of Merger, dated as of April 13, 1998, among Paragon, Paragon Acquisition Sub and the Borrower, as amended, supplemented, restated or otherwise modified from time to time. Paragon Senior Subordinated Note Indenture shall mean that certain Indenture, dated November 4, 1997, with Paragon as issuer and IBJ Schroder Bank & Trust Company as trustee, with respect to the issuance by Paragon of its 9 1/2% Senior Subordinated Notes due 2007 and its 10 1/2% Senior Subordinated Discount Notes due 2007. Paragon Subsidiary shall mean any Subsidiary of Paragon other than the Borrower or any Subsidiary of the Borrower. Participation Advance shall mean, with respect to any Bank, such Bank's payment in respect of its participation in a Letter of Credit Borrowing according to its Ratable Share pursuant to Section 2.09(g). Partnership Interest shall have the meaning given to such term in Section 6.01(c). Partnership Subsidiaries shall mean collectively the Subsidiaries of Borrower which are general or limited partnerships and Partnership Subsidiary shall mean individually any of them. PBGC shall mean the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA or any successor. Permitted Acquisition shall mean any merger, consolidation or acquisition after the Closing Date described in and permitted under clause (iii) or (iv) of Section 8.02(f). Permitted Distribution Amount shall mean: (A) for any Subsidiary (the "Payor Subsidiary"), other than those Subsidiaries listed in (B) below, the permitted amount of distributions to be made by the Payor Subsidiary which shall equal the applicable amount so that the ratio of the following (x) to (y) shall be at least equal to or greater than 2.0 to 1.0: (x) the sum of (i) net income, plus (ii) to the extent deducted in determining net income for the applicable period of determination under the preceding clause (i), interest expense, income tax expense, depreciation, amortization, operating -15- 23 lease expense, and expense in respect of capital leases of the Payor Subsidiary, plus (iii) capital expenditures, all for the Payor Subsidiary, as determined in accordance with GAAP, for the four fiscal quarters of the Payor Subsidiary immediately preceding the date of the proposed distribution, to (y) the sum of (i) all payments of principal and other amounts due in respect of Indebtedness (without limitation, prepayment fees, penalties or other amounts) of the Payor Subsidiary during the fiscal quarter when the proposed distribution shall be made and the following three fiscal quarters, plus (ii) the sum of the amounts in respect of income tax expense, operating lease expense, expense in respect of capital leases, and capital expenditures under clauses (x)(ii) and (iii) above for the Payor Subsidiary for the four fiscal quarters immediately preceding the date of the proposed distribution, plus (iii) the aggregate amount of the proposed distribution by the Payor Subsidiary; and (B) for each of Alimar Physicians resources, LLC. Mariner Health of Forest Hills, LLC, Mariner Health of Bel Air, LLC, Medwin of Connecticut, LLC, Tampa Health Properties, LTD (Bay-to-Bay), Westbury Associates, New Hanover/Mariner Health, LLC (Wilmington), and Global Healthcare Center - Bethesda, LLC, the permitted amount of distributions to be made by each of them shall equal the amount permitted to be made in accordance with the distribution provisions of their respective joint venture agreement, limited liability company agreement, partnership agreement or similar agreement in effect on the Sixteenth Amendment Effective Date ( a copy of which has been delivered to the Agent), and no amendment shall be made to such provisions regarding distributions in such joint venture agreements, limited liability company agreements, partnership agreements or similar agreements following the Sixteenth Amendment Effective Date without the prior written approval of the Agent unless any distributions by such Subsidiary are permitted by the provisions of clause (A) above and distributions by such Subsidiary are otherwise in compliance with Section 8.02(e). Permitted General Intangibles shall mean licenses, permits, certificates or Medicare/Medicaid reimbursement contracts. Permitted Investments shall mean: (i) direct obligations of the United States of America or any agency or instrumentality thereof or obligations backed by the full faith and credit of the United States of America maturing in twelve months or less from the date of acquisition; (ii) commercial paper maturing in 180 days or less rated not lower than A-1 by Standard & Poor's Corporation or P-1 by Moody's Investors Service on the date of acquisition; (iii) demand deposits, time deposits or certificates of deposit maturing within one year in commercial banks whose obligations are rated A-1, A or the equivalent or better by Standard & Poor's Corporation or Moody's Investors Service on the date of acquisition; -16- 24 (iv) publicly traded debt securities or preferred stocks rated at least A or better by either Standard & Poor's Corporation or by Moody's Investors Service which in the aggregate do not have, at any time, a cost basis under GAAP in excess of $1,000,000; (v) common stocks, or mutual funds which invest in common stocks provided that (A) such stocks are of corporations organized and existing under the laws of the United States of America, (B) such stocks are traded publicly on a national securities exchange or the "over the counter market", (C) the Borrower or its Subsidiaries do not have a cost basis in excess of $15,000,000 in the aggregate in such stocks and mutual funds, (D) the Borrower or its Subsidiaries invest in such stocks or mutual funds using funds obtained from sources other than, directly or indirectly, proceeds of Loans hereunder and (E) the cost basis of the Borrower or its Subsidiaries in such stocks and mutual funds does not exceed at any time the amount of cash invested in investments described in clauses (i) through (iv) and (vi) of this definition of Permitted Investments; and (vi) investments in money market funds rated AA or AAm-G or higher by Standard & Poor's Corporation (or equivalent rating) whose net asset value remains a constant $1.00 per share. Permitted Investors shall mean Apollo Management L.P., a Delaware limited partnership and its Control Investment Affiliates. Permitted Leased Facility Liens shall mean, with respect to a Subsidiary Lessee, Liens, meeting all of the criteria specified below, solely on certain of the Permitted General Intangibles of such Subsidiary Lessee, granted in favor of the Lessor Lender providing financing to the Lessor which is the lessor of such Subsidiary Lessee's Leased Facility, and such Liens secure the Lessor Indebtedness provided by such Lessor Lender. Such Liens are permitted under this Agreement and shall be deemed to be "Permitted Leased Facility Liens" only if the following limitations are satisfied: (i) Such Liens must be terminated on or before the earlier of: (i) the maturity of the Lessor Indebtedness which such Liens secure (without giving effect to any extension of such maturity after the Sixteenth Amendment Effective Date , unless the extension of such maturity is otherwise permitted by and is in accordance with this Agreement) or (ii) any refinancing, replacement or substitution of such Lessor Indebtedness which such Lien secures; (ii) Such Subsidiary Lessee shall have granted to Agent perfected security interests in each of the assets of such Subsidiary Lessee encumbered by such Liens, and the Agent's security interests shall have priority over all other Liens on such assets, except that they shall be subordinate to the Liens in favor of the Lessor Lender unless the Lessor Lender is listed on Schedule 6.01(aa) hereto and such Schedule states that such Lessor Lender has refused to consent to the grant to Agent of such second Liens; (iii) The amount of Lessor Indebtedness secured by such Liens may not be increased after the date such Subsidiary Lessee becomes a Subsidiary of the -17- 25 Borrower, and any reductions in the amount of such Lessor Indebtedness after such date shall be permanent; and (iv) Any termination by such Lessor Lender of such Liens in an asset after the date such Subsidiary Lessee becomes a Subsidiary of the Borrower shall be permanent, and no Loan Party shall thereafter grant any new Lien on assets of any Loan Party in favor of such Lessor Lender. Permitted Liens shall mean: (i) Liens for taxes, assessments, or similar charges, incurred in the ordinary course of business and which are not yet due and payable; (ii) Pledges or deposits made in the ordinary course of business to secure payment of workers' compensation, or to participate in any fund in connection with workers' compensation, unemployment insurance, old-age pensions or other social security programs; (iii) Liens of mechanics, materialmen, warehousemen, carriers, or other like Liens, securing obligations incurred in the ordinary course of business that are not yet due and payable and Liens of landlords securing obligations to pay lease payments that are not yet due and payable or in default; (iv) Good faith pledges or deposits made in the ordinary course of business to secure performance of bids, tenders, progress or advance payments, contracts (other than for the repayment of borrowed money) or leases, not in excess of the aggregate amount due thereunder, or to secure statutory obligations, or surety, appeal, indemnity, performance or other similar bonds required in the ordinary course of business; (v) Encumbrances consisting of zoning restrictions, easements, reservations, rights of way or other restrictions on the use of real property, none of which materially impairs the use of such property as currently used or the value thereof, and none of which is violated in any material respect by existing or proposed structures or land use; (vi) Liens, security interests and mortgages in favor of the Agent for the benefit of the Banks; (vii) Liens in respect of capital leases as and to the extent permitted in Section 8.02(p) and Liens in respect of operating leases; (viii) Any Lien existing on the Sixteenth Amendment Effective Date and described on Schedule 1.01(P) hereto (excluding Permitted Leased Facility Liens and Permitted Owned Facility Liens which are addressed in clauses (xi) and (xii) below) provided that the principal amount secured thereby is not hereafter increased and no additional assets become subject to such Lien (other than through after-acquired property clauses in effect on the date hereof); -18- 26 (ix) Purchase Money Security Interests or other liens, provided that the aggregate amount of loans and deferred payments secured by such Purchase Money Security Interests or other liens shall not exceed $10,000,000 (excluding for the purpose of this computation any loans or deferred payments secured by Liens described on Schedule 1.01(P) hereto); (x) The following, (A) if the validity or amount thereof is being contested in good faith by appropriate and lawful proceedings diligently conducted so long as levy and execution thereon have been stayed and continue to be stayed or (B) if a final judgment is entered and such judgment is discharged within thirty (30) days of entry, and in either case they do not materially affect the Collateral or, in the aggregate, materially impair the ability of any Loan Party to perform its obligations hereunder or under the other Loan Documents: (1) Claims or Liens for taxes, assessments or charges due and payable and subject to interest or penalty, provided that such Loan Party maintains such reserves or other appropriate provisions as shall be required by GAAP and pays all such taxes, assessments or charges forthwith upon the commencement of proceedings to foreclose any such Lien; (2) Claims, Liens or encumbrances upon, and defects of title to, real or personal property other than a material portion of the Collateral, including any attachment of personal or real property or other legal process prior to adjudication of a dispute on the merits; or (3) Claims or Liens of mechanics, materialmen, warehousemen, carriers, or other statutory nonconsensual Liens; (xi) Permitted Leased Facility Liens existing as of the Sixteenth Amendment Effective Date which are described on Schedule 6.01(aa) as of such date, and, after the Sixteenth Amendment Effective Date, subject to the approval of the Required Banks (including without limitation satisfaction of all applicable conditions set forth on Exhibit 1.01(C)), additional Permitted Leased Facility Liens; (xii) Permitted Owned Facility Liens existing as of the Sixteenth Amendment Effective Date which are described on Schedule 6.01(aa) as of such date, and, after the Sixteenth Amendment Effective Date, subject to the approval of the Required Banks (including without limitation, satisfaction of all applicable conditions set forth on Exhibit 1.01(C)), additional Permitted Owned Facility Liens; and (xiii) With respect to an Unrestricted Subsidiary which is an Excluded Entity, Liens securing Indebtedness incurred by such Unrestricted Subsidiary, provided that the sole assets subject to such Lien are assets of such Unrestricted Subsidiary or assets of a person other than any Loan Party or other Unrestricted Subsidiary. Permitted Owned Facility Liens shall mean, with respect to a Subsidiary Owner, Liens, meeting all of the criteria specified below, on real and personal property of such -19- 27 Subsidiary Owner relating to the Owned Facility of such Subsidiary Owner, granted in favor of the Owned Facility Lender providing financing with respect to such Owned Facility, and such Liens secure the Owned Facility Indebtedness provided by such Owned Facility Lender. Such Liens are permitted under this Agreement and shall be deemed to be "Permitted Owned Facility Liens" only if the following limitations are satisfied: (i) Such Liens must be terminated on or before the earlier of: (i) the maturity of the Owned Facility Indebtedness which such Liens secure (without giving effect to any extension of such maturity after the Sixteenth Amendment Effective Date, unless the extension of such maturity is otherwise permitted by and is in accordance with this Agreement) or (ii) any refinancing, replacement or substitution of the Owned Facility Indebtedness which such Lien secures; (ii) The Subsidiary Owner shall have granted to Agent second priority mortgage liens and security interests in each of the assets which is encumbered by such Liens; (iii) The amount of Owned Facility Indebtedness secured by such Liens may not be increased after the earlier of the date such Owned Facility was acquired by a Loan Party or the person owning such facility becomes a Subsidiary of the Borrower and any reductions in the amount of such Owned Facility Indebtedness after such date shall be permanent; and (iv) Any termination by an Owned Facility Lender of such Liens in an asset after the earlier of the date such Owned Facility was acquired by a Loan Party or the person owning such facility becomes a Subsidiary of the Borrower shall be permanent and the Subsidiaries of Borrower may not thereafter grant any new Lien on assets of any Loan Party in favor of such Owned Facility Lender. Permitted Redemption Period shall have the meaning as set forth in Section 8.02(e). Permitted Subordinated Indebtedness shall mean Indebtedness of the Borrower in an amount and on terms and conditions (including provisions subordinating such Indebtedness to the Indebtedness and all other obligations of the Loan Parties to the Agent and the Banks under the Loan Documents) satisfactory to the Agent (whose approval will not be unreasonably withheld), designated by the Agent as "Permitted Subordinated Indebtedness" and which refinances, in whole or in part, the Subordinated Notes; provided however that, in addition to the approval of the Agent, the prior written approval of the Required Banks (which shall not be unreasonably withheld) shall be required for the Borrower to incur Indebtedness which refinances, in whole or in part, the Subordinated Notes, if and only if the terms of such new Indebtedness include any of the following: (x) a provision that amortizes any principal of such new Indebtedness prior to the Expiration Date, (y) a principal amount of such Indebtedness in excess of $151.5 million, or (z) any financial covenant which is more restrictive than any financial covenant contained in this Agreement. It is acknowledged and agreed that in accordance with Section 2.08 and the other provisions of this Agreement (including, without -20- 28 limitation the provisions of Sections 2.05 and 7.01), up to $25 million of proceeds of Loans may be used to purchase a portion of the Subordinated Notes. It is expressly agreed that in no event shall proceeds of Loans used to purchase Subordinated Notes be deemed to be "Permitted Subordinated Indebtedness". Person shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, joint venture, government or political subdivision or agency thereof, or any other entity. Pinnacle shall mean Pinnacle Care Corporation, a corporation organized and existing under the laws of the State of Delaware. Pinnacle Rehab of Gwinnette shall mean Pinnacle Rehab of Gwinnette, a general partnership formed and existing under the laws of the State of Georgia, with Pinnacle Rehabilitation of Georgia, Inc., a Georgia corporation, Maurice Jove and Howard Krone as its general partners. Pinnacle's Kansas Joint Venture shall mean Pinnacle's Kansas Joint Venture, a general partnership formed and existing under the laws of the State of Kansas, with Pinnacle Rehabilitation of Missouri, Inc., a Missouri corporation, and Jusker Corporation, a Kansas corporation as its general partners. Plan shall mean at any time an employee pension benefit plan (including a Multiple Employer Plan but not a Multiemployer Plan) which is covered by Title IV of ERISA or is subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained by any entity which was at such time a member of the ERISA Group for employees of any entity which was at such time a member of the ERISA Group. Pledge Agreements shall mean collectively the Pledge Agreements in substantially the form attached hereto as: (i) Exhibit 1.01(P)(1) executed and delivered by the Borrower to the Agent for the benefit of the Banks; (ii) Exhibit 1.01(P)(2) executed and delivered by any Subsidiary which owns any equity ownership interest in another Corporate Subsidiary to the Agent for the benefit of the Banks; (iii) Exhibit 1.01(P)(3) executed by any Subsidiary which owns any interest in a Partnership Subsidiary; and (iv) any other agreement pledging equity interests of a Subsidiary to the Agent for the benefit of the Banks, in form and substance satisfactory to the Agent, as any such Pledge Agreement may hereinafter be modified, amended, restated or replaced from time to time in form and substance satisfactory to the Agent, and Pledge Agreement shall mean separately any Pledge Agreement. Pledged Collateral shall have the meaning assigned to that term in the respective Pledge Agreements. PNC Bank shall mean PNC Bank, National Association, a national banking association, its successors and assigns. -21- 29 Potential Default shall mean any event or condition which with notice, passage of time or a determination by the Agent or the Required Banks, or any combination of the foregoing, would constitute an Event of Default. Principal Office shall mean the main banking office of the Agent, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707. Prior Credit Agreement shall mean that certain Credit Agreement dated as of October 6, 1993 among Borrower, certain of the Banks and PNC Bank, as Agent. Prior Security Interest shall mean a valid and enforceable perfected first priority security interest under the Uniform Commercial Code in the UCC Collateral which is subject only to Permitted Liens. Prohibited Transaction shall mean any prohibited transaction as defined in Section 4975 of the Internal Revenue Code or Section 406 of ERISA for which neither an individual nor a class exemption has been issued by the United States Department of Labor. Property shall mean all real property, both owned and leased, of the Loan Parties. Purchase Money Security Interest shall mean Liens upon tangible personal property securing loans to a Loan Party or deferred payments by a Loan Party for the purchase of such tangible personal property. Purchase Price shall mean, with respect to any Permitted Acquisition by the Loan Parties, the sum of (i) cash paid at closing, (ii) the amount of any deferred payments, which are not contingent on the financial performance of the business being acquired, (iii) the projected amount of any deferred payments which are contingent on the financial performance of the business being acquired following the acquisition, provided that it shall be assumed for purposes of such projection that the cash flow and other financial performance of the acquired business in each year after the acquisition date shall be the same as the financial performance of such business during the twelve (12) months preceding such date, (iv) the amount of any debt assumed or guaranteed by any Loan Party, (v) if the Loan Parties are acquiring stock of another person (whether by purchase, merger or otherwise) the amount of debt of such person outstanding after the acquisition, plus (vi) the value of any stock, securities or other consideration given by any of the Loan Parties in connection therewith. If the consideration to be paid in connection with a Permitted Acquisition includes deferred payments which are contingent on the financial performance of the acquired business after the acquisition, the Loan Parties shall compare the amount of deferred payments which the Loan Parties actually pay (or which become ascertainable if the Loan Parties can ascertain the amount of any deferred payments before paying them) with the amount which the Loan Parties projected they would pay pursuant to clause (iii) in the preceding sentence. The Purchase Price in connection with such acquisition shall be deemed to increase by the amount of such excess for purposes of determining the aggregate Purchase Price paid by the Loan Parties in connection with Permitted Acquisitions pursuant to Sections 8.02(f)(iii)(v) and 8.02(f)(iv)(x). -22- 30 Purchasing Bank shall mean a Bank which becomes a party to this Agreement by executing an Assignment and Assumption Agreement. Ratable Share shall mean the proportion that a Bank's Revolving Credit Commitment bears to the Revolving Credit Commitments of all of the Banks, respectively. Redemption Amount shall mean the amount, determined as of the last Business Day of each fiscal quarter of the Borrower for such fiscal quarter then ended, equal to the sum of the amounts determined under the following items (A) and (B): (A) the difference between (x) $150,000,000 (which is the aggregate original principal amount of the Subordinated Notes), minus (y) the sum of (i) the aggregate original principal amount of the Subordinated Notes outstanding as of the last day of such fiscal quarter, plus (ii) the aggregate original principal amount of Permitted Subordinated Indebtedness outstanding as of the last day of such fiscal quarter, plus (iii) the aggregate original principal amount of the Subordinated Notes purchased by the Borrower during such fiscal quarter with either the cash proceeds of common stock or other equity securities issued by the Borrower to Paragon during such fiscal quarter for such purpose or the cash proceeds of a loan by Paragon to the Borrower permitted by Section 8.02(a)(iv) during such fiscal quarter for such purpose; and (B) the aggregate amount of any distributions or dividends made by the Borrower to Paragon pursuant to Section 8.02(e)(vii) hereof during such fiscal quarter using proceeds of Loans. Regulated Substances shall mean any substance, including without limitation any solid, liquid, gaseous, thermal or thoriated material, refuse, garbage, wastes, chemicals, petroleum products or by-products, dust, scrap, PCB's, heavy metals, any substances defined as "hazardous substances," "pollutants," "pollution," "contaminant," "hazardous or toxic substances," "toxic wastes," "regulated substances," "industrial waste," "residual waste," "solid wastes," "municipal wastes," "infectious waste," "chemotherapeutic waste," "medical waste" or any related materials or substances as now or hereafter defined pursuant to any Environmental Laws, ordinances, rules or directives of any Official Body, the generation, manufacture, processing, distribution, treatment, storage, disposal, transport, recycling, reclamation, use, reuse or other management or mismanagement of which is regulated by the Environmental Laws. Regulation U shall mean Regulation U, T or X as promulgated by the Board of Governors of the Federal Reserve System, as amended from time to time. Reimbursement Obligations shall have the meaning assigned to such term in Section 2.09(d). Reportable Event means a reportable event described in Section 4043 of ERISA and regulations thereunder with respect to a Plan or Multiemployer Plan. Required Banks shall mean: (i) if there are no Loans outstanding, Banks whose Commitments aggregate at least 51% of the Commitments of all of the Banks, or (ii) if -23- 31 there are Loans outstanding, Banks whose Loans outstanding aggregate at least 51% of the total principal amount of the Loans outstanding hereunder. Restricted Indebtedness shall mean with respect to the Excluded Entities, Indebtedness secured by any Liens, other than Indebtedness not to exceed $250,000 in the aggregate for all Excluded Entities secured by Purchase Money Security Interests. Restricted Investments shall mean collectively the following with respect to the Excluded Entities: (i) investments or contributions by any of the Loan Parties directly or indirectly in or to the capital of or other payments to (except in connection with transactions for fair value in the ordinary course of business) an Excluded Entity, (ii) loans by any of the Loan Parties directly or indirectly to an Excluded Entity, (iii) guaranties by any of the Loan Parties directly or indirectly of the obligations of an Excluded Entity, or (iv) other obligations, contingent or otherwise, of any of the Loan Parties to or for the benefit of an Excluded Entity. If the nature of a Restricted Investment is tangible property then the amount of such Restricted Investment shall be determined by valuing such property at fair value in accordance with the past practice of the Loan Parties and such fair values shall be satisfactory to the Agent, in its sole discretion. Restricted Subsidiaries shall mean all Subsidiaries of the Borrower other than the Unrestricted Subsidiaries of the Borrower which as of the date of determination are Excluded Entities. Revolving Credit Base Rate Option shall have the meaning assigned to that term in Section 4.01(a)(i). Revolving Credit Base Rate Portion shall mean the portion of the Revolving Credit Loans bearing interest at any time under the Revolving Credit Base Rate Option. Revolving Credit Commitment shall mean as to any Bank at any time, the amount initially set forth opposite its name on Schedule 1.01(R)(2) hereto in the column labeled "Amount of Commitment for Revolving Credit Loans," and thereafter on Schedule I to the most recent Assignment and Assumption Agreement, as such amount shall be reduced from time to time pursuant to Sections 2.01 and 2.10 hereof, and Revolving Credit Commitments shall mean the aggregate Revolving Credit Commitments of all of the Banks. Revolving Credit Euro-Rate Option shall have the meaning assigned to that term in Section 4.01(a)(ii). Revolving Credit Euro-Rate Portion shall mean the portion of the Revolving Credit Loans bearing interest at any time under the Revolving Credit Euro-Rate Option. Revolving Credit Loan Request shall have the meaning set forth in Section 2.05. -24- 32 Revolving Credit Loans shall mean collectively and Revolving Credit Loan shall mean separately all Revolving Credit Loans or any Revolving Credit Loan made by the Banks or one of the Banks to the Borrower pursuant to Section 2.01 hereof. Revolving Credit Notes shall mean collectively all the Revolving Credit Notes of the Borrower in the form of Exhibit 1.01(R) hereto evidencing the Revolving Credit Loans together with all amendments, extensions, renewals, replacements, refinancings or refundings thereof in whole or in part and Revolving Credit Note shall mean separately any Revolving Credit Note. Revolving Facility Usage shall mean at any time the sum of the Revolving Credit Loans outstanding and the Letters of Credit Outstanding. Seventeenth Amendment Effective Date shall mean July 31, 1998. Sixteenth Amendment Effective Date shall mean January 2, 1998. Solvent shall mean, with respect to any person on a particular date, that on such date (i) the fair value of the property of such person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such person, (ii) the present fair saleable value of the assets of such person is not less than the amount that will be required to pay the probable liability of such person on its debts as they become absolute and matured, (iii) such person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (iv) such person does not intend to, and does not believe that it will, incur debts or liabilities beyond such person's ability to pay as such debts and liabilities mature, and (v) such person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such person's property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. Special Distributions shall mean as of any date of determination, the aggregate amount of all dividends or other distributions made by the Loan Parties and their Subsidiaries to Paragon from and after the Seventeenth Amendment Effective Date through such date of determination, as permitted by Section 8.02(e) clauses (iv), (vi) or (vii). Special Fee shall have the meaning set forth in Section 2.04. Specified Change of Control shall mean a "Change of Control" as defined in the Paragon Senior Subordinated Note Indenture, as in effect on the Seventeenth Amendment Effective Date, without regard to any amendments to such definition subsequent to such date. -25- 33 Subordinated Indebtedness Incurrence Date shall mean March 28, 1996, the date of issuance by the Borrower of the Subordinated Notes pursuant to and in accordance with the Indenture. Subordinated Notes shall mean the $150 million in original principal amount of Subordinated Notes due 2006 issued by the Borrower pursuant to the Indenture. It is acknowledged that prior to the Exchange Offer, the Subordinated Notes shall consist of the Series A Securities, and following the Exchange Offer, the Subordinated Notes shall consist of the Series B Securities and any Series A Securities which are not exchanged in the Exchange Offer, as such terms are defined in the Indenture. Subordination Agreement (Intercompany) shall mean that certain Subordination Agreement (Intercompany) in the form of Exhibit 1.01(S) hereto executed and delivered by each Loan Party to the Agent for the benefit of the Banks. Subsidiary of any person at any time shall mean (i) any corporation, limited liability company or trust of which more than 50% (by number of shares or number of votes) of the outstanding capital stock, member interests or shares of beneficial interest normally entitled to vote for the election of one or more directors or trustees (regardless of any contingency which does or may suspend or dilute the voting rights) is at such time owned directly or indirectly by such Person or one or more of such Person's Subsidiaries, or any partnership of which such Person is a general partner or of which more than 50% of the general or voting partnership interests is at the time directly or indirectly owned by such Person or one or more of such Person's Subsidiaries, and (ii) any corporation, trust, limited liability company, partnership or other entity which is controlled or capable of being controlled by such Person or one or more of such Person's Subsidiaries. Subsidiary Lessee shall mean each Subsidiary of Borrower which is the lessee of a Leased Facility. Subsidiary Owner shall mean, with respect to an Owned Facility, the Subsidiary of Borrower which is the owner thereof. Total Indebtedness shall mean as of any date of determination, without duplication, the total Indebtedness of the Borrower and its Subsidiaries. Transferor Bank shall mean the selling Bank pursuant to an Assignment and Assumption Agreement. Tri-State shall mean Tri-State Health Care, Inc., a West Virginia corporation, which is a Subsidiary of Pinnacle and the sole general partner of Seventeenth Street Partnership. Trustee Agreement shall mean, as of any date of determination, collectively (i) that certain Paying Agency Agreement executed by Mariner Nashville, PNC Bank and certain of the Lessors listed on Schedule 6.01(aa), in the form of Exhibit 1.01(T) -26- 34 providing for the payment by Mariner Nashville to PNC Bank, as trustee for Mariner Nashville and such Lessors, of monies due to such Lessors under the leases between such Lessors and Mariner Nashville, and the subsequent payment of such monies by PNC Bank to the Lessors; and (ii) in accordance with the requirements of this Agreement, each other similar agreement, in form and substance satisfactory to the Agent relating to certain Subsidiaries of the Borrower and certain Lessors. UCC Collateral shall mean the Pledged Collateral and that portion of the Collateral under the Mortgages and the Leasehold Mortgages which consists of personal property in which a security interest may be granted under the Uniform Commercial Code. Uniform Commercial Code shall have the meaning assigned to that term in Section 6.01(p). Unrestricted Subsidiary of any person at any time shall mean any corporation or limited liability company of which more than 50% but less than 80% (by number of shares or number of votes) of the outstanding capital stock or member interests normally entitled to vote for the election of one or more directors (regardless of any contingency which does or may suspend or dilute the voting rights) is at such time owned directly or indirectly by such Person or one or more of such Person's Subsidiaries, or any partnership of which such Person is a general partner or of which more than 50% but less than 80% of the general or voting partnership interests is at the time directly or indirectly owned by such Person or one or more of such Person's Subsidiaries. Voting Stock shall mean, with respect to any Person, any class or series of Capital Stock of such Person that is ordinarily entitled to vote in the election of directors thereof at a meeting of stockholders called for such purpose, without the occurrence of any additional event or contingency. 1.02 Construction. Unless the context of this Agreement otherwise clearly requires, references to the plural include the singular, the singular the plural and the part the whole, "or" has the inclusive meaning represented by the phrase "and/or," and "including" has the meaning represented by the phrase "including without limitation." References in this Agreement to "determination" of or by the Agent or the Banks shall be deemed to include good faith calculations by the Agent or the Banks (in the case of quantitative determinations) and good faith beliefs by the Agent or the Banks (in the case of qualitative determinations). Whenever the Agent or the Banks are granted the right herein to act in its or their sole discretion or to grant or withhold consent such right shall be exercised in good faith. The words "hereof," "herein," "hereunder" and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. The section and other headings contained in this Agreement and the Table of Contents preceding this Agreement are for reference purposes only and shall not control or affect the construction of this Agreement or the interpretation thereof in any respect. Section, subsection, schedule and exhibit references are to this Agreement unless otherwise specified. -27- 35 1.03 Accounting Principles. Except as otherwise provided in this Agreement, all computations and determinations as to accounting or financial matters and all financial statements to be delivered pursuant to this Agreement shall be made and prepared in accordance with GAAP (including principles of consolidation where appropriate), and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP. In the event of: (i) any dissolution or liquidation of any Subsidiary pursuant to Section 8.02(f) of this Agreement, (ii) any consolidation or merger of any Subsidiary with or into any person (other than the Borrower or another Subsidiary) pursuant to Section 8.02(f) of this Agreement, or (iii) the sale, transfer, lease or disposition of assets of the Borrower or any Subsidiary permitted pursuant to Section 8.02(g)(v) of this Agreement, then, in the case of any of the foregoing clauses (i), (ii) or (iii), any financial covenant to be calculated hereunder (including, without limitation, those set forth in Sections 2.01(c), 4.01, and 8.02(q) through 8.02(u), inclusive) shall be calculated for the period during which such sale, transfer, lease or other disposition occurs, excluding all financial items (for example and without limitation, all cash flow, revenues, expenses, and income) attributable to the assets sold, transferred, leased or otherwise disposed of. It is expressly agreed that for all periods ending after the consummation of the Paragon Acquisition, all cash expenses (other than expenses directly related to the Paragon Acquisition) paid by Paragon on behalf of or for the benefit of the Borrower or any Subsidiary of the Borrower and reimbursed by the Borrower pursuant to Section 8.02(e)(v) shall be treated as an expense of the Borrower or such Subsidiary of the Borrower (whether or not GAAP would require such amount to be included as an expense of the Borrower or such Subsidiary) for the purpose of determining "net income of the Borrower and its Subsidiaries in accordance with GAAP" under this Agreement in connection with the calculation of the applicable financial covenants under this Agreement (including without limitation in the determination of Adjusted Consolidated Net Income, Consolidated Cash Flow from Operations, Consolidated Net Income, the numerator of the Fixed Charge Coverage Ratio and the calculations set forth in Section 8.02(e)), it being the express intent of the Borrower, the Agent and the Banks that notwithstanding payment of expenses by Paragon on behalf of or for the benefit of the Borrower or Subsidiaries of the Borrower that consolidated net income of the Borrower and its Subsidiaries shall continue to be determined after the consummation of the Paragon Acquisition as if all expenses of the Borrower and its Subsidiaries are paid by them. ARTICLE II REVOLVING CREDIT FACILITY 2.01 Revolving Credit Commitments; Limitation on Borrowings. (a) Revolving Credit Commitments. Subject to the terms and conditions hereof and relying upon the representations and warranties herein set forth, each Bank severally agrees to make revolving credit loans (the "Revolving Credit Loans") to the Borrower at any time and from time to time on or after the date hereof to, but not including, the Expiration Date in an aggregate principal amount not to exceed at any one time such Bank's Revolving Credit Commitment minus such Bank's Ratable Share of the Letters of Credit Outstanding. Within such limits of time and amount and subject to the other provisions of this Agreement, the Borrower may borrow, repay and reborrow pursuant to this Section 2.01. In no event shall the -28- 36 aggregate of outstanding Revolving Credit Loans and Letters of Credit Outstanding as of any date exceed the Revolving Credit Commitments as of such date, and the entire outstanding principal amount of the Revolving Credit Loans shall be due and payable on the Expiration Date. (b) [INTENTIONALLY OMITTED] (c) Limitation on Borrowings. Notwithstanding the provisions of Sections 2.01(a) and 2.01(b) of this Agreement, the outstanding principal amount of Revolving Credit Loans to the Borrower shall not exceed at any time an amount such that after giving effect to such borrowings, the ratio of (i) Total Indebtedness to (ii) Consolidated Cash Flow from Operations exceeds: (A) 5.25 to 1.0 through and including September 30, 1998; (B) 5.00 to 1.0 from October 1, 1998 through and including September 30, 1999; (C) 4.75 to 1.0 from October 1, 1999 through and including September 30, 2000; and (D) 4.5 to 1.0 from October 1, 2000 and thereafter. For purposes of such ratio, the amount determined under clause (i) shall be as of the date of determination and the amount determined under clause (ii) shall be for the twelve-month period ending on the last day of the month which precedes such date of determination. Notwithstanding the provisions of this subsection (c), at no time shall the outstanding principal amount of proceeds of Revolving Credit Loans made to the Borrower which are used by the Borrower or any Subsidiary of the Borrower to, directly or indirectly, make an investment in or loan to Ansonia, exceed Two Million Dollars ($2,000,000). Notwithstanding the provisions of this subsection (c), at no time shall proceeds of Revolving Credit Loans be used by the Borrower or any Subsidiary of the Borrower to, directly or indirectly, make an investment in or loan to Pinnacle Rehab of Gwinnette or Pinancle's Kansas Joint Venture. 2.02 Nature of Banks' Obligations With Respect to Revolving Credit Loans. Each Bank shall be obligated to participate in each request for Revolving Credit Loans pursuant to Section 2.05 hereof in accordance with its Ratable Share. The aggregate of each Bank's Revolving Credit Loans outstanding hereunder to the Borrower at any time shall never exceed its Revolving Credit Commitment minus its Ratable Share of Letters of Credit Outstanding. The obligations of each Bank hereunder are several. The failure of any Bank to perform its obligations hereunder shall not affect the obligations of the Borrower to any other party nor shall any other party be liable for the failure of such Bank to perform its obligations hereunder. The Banks shall have no obligation to make Revolving Credit Loans hereunder on or after the Expiration Date. 2.03 Commitment Fees. Accruing from January 1, 1998 until the Expiration Date, the Borrower agrees to pay to the Agent for the account of each Bank, as consideration for such Bank's Revolving Credit Commitment hereunder, a commitment fee (the "Commitment Fee") equal to the applicable percentage set forth below based on the ratio of Total Indebtedness to Consolidated Cash Flow from Operations. -29- 37
Ratio of Total Indebtedness to Consolidated Commitment Fee Cash Flow From Operations (per annum) ------------------------------------- -------------- Greater than 5.0 to 1.0 .350% Greater than 4.5 to 1.0 but .300% less than or equal to 5.0 to 1.0 Greater than 4.0 to 1.0 but .275% less than or equal to 4.5 to 1.0 Greater than 3.5 to 1.0 but .250% less than or equal to 4.0 to 1.0 Greater than 3.0 to 1.0 .225% but less than or equal to 3.5 to 1.0 Greater than 2.5 to 1.0 .200% but less than or equal to 3.0 to 1.0 Less than or equal to 2.5 to 1.0 .150%
Such ratio shall be computed on the date of each Acquisition Requiring Certification as more fully set forth in the third sentence of Section 8.01(m)(i) or the second sentence of Section 8.01(m)(ii), as applicable, and any adjustment to the Commitment Fee attributable to such computation shall be effective on the date of such Acquisition Requiring Certification. If Borrower does not make any Acquisition Requiring Certification during any fiscal quarter, (1) such ratio shall also be computed as of the end of such fiscal quarter, with Consolidated Cash Flow from Operations computed for the four fiscal quarters then ended and Total Indebtedness computed as of the end of such fiscal quarter, and (2) any increase in the Commitment Fee attributable to a change in such ratio shall be effective as of the Delivery Date for the Borrower's consolidated financial statements for such quarter and (3) any decrease of the Commitment Fees attributable to a change in such ratio shall be effective as of the later of the Delivery Date for such financial statements and the date on which such financial statements are actually delivered to the Agent and the Banks. Commitment Fees shall be computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed on the average daily unborrowed amount of such Bank's Revolving Credit Commitment (less its Ratable Share of the Letters of Credit Outstanding) as the same may be constituted from time to time. All Commitment Fees shall be payable in arrears on the first Business Day of each April, July, October and January after the date hereof commencing on April 1, 1998 and on the Expiration Date or upon acceleration of maturity of the Notes. 2.04 Special Fee Accruing from the Seventeenth Amendment Effective Date until the Expiration Date, the Borrower agrees to pay to the Agent for the account of each Bank in accordance with the Ratable Share of each Bank, a fee (the "Special Fee") equal to the product of (x) the per annum rate of 1.50%, multiplied by (y) the lesser of $25 million or the applicable -30- 38 Redemption Amount. The Special Fee shall be computed as of the end of each fiscal quarter of the Borrower and shall be payable in arrears on the first Business Day of each April, July, October and January after the date hereof, commencing on October 1, 1998, and on the Expiration Date or upon acceleration of maturity of the Notes. 2.05 Revolving Credit Loan Requests. Except as otherwise provided herein, the Borrower may from time to time prior to the Expiration Date request the Banks to make Revolving Credit Loans, or renew or convert the Interest Rate Option applicable to existing Revolving Credit Loans, by the delivery to the Agent, not later than 10:00 A.M. Pittsburgh time (i) three (3) Business Days prior to the proposed Borrowing Date with respect to the making of Revolving Credit Loans to which the Revolving Euro-Rate Option applies or the conversion to or the renewal of the Euro-Rate Option for any Revolving Credit Loans; and (ii) on the Business Day which is the proposed Borrowing Date with respect to the making of a Revolving Credit Loan to which the Revolving Credit Base Rate Option applies or the last day of the preceding Euro-Rate Interest Period with respect to the conversion to the Revolving Credit Base Rate Option for any Revolving Credit Loan, of a duly completed request therefor substantially in the form of Exhibit 2.05 hereto or a request by telephone immediately confirmed in writing by letter, facsimile or telex in such form (each, a "Revolving Credit Loan Request"), it being understood that the Agent may rely in good faith on the authority of any person making such a telephonic request and purporting to be an Authorized Officer. Each Revolving Credit Loan Request shall be irrevocable and shall (i) specify the proposed Borrowing Date; (ii) specify the aggregate amount of the proposed Revolving Credit Loans comprising the Borrowing Tranche, which shall be in integral multiples of $500,000 and not less than $5,000,000 for Revolving Credit Loans to which the Revolving Credit Euro-Rate Option applies and not less than the lesser of $500,000 or the maximum amount available for Revolving Credit Loans to which the Revolving Credit Base Rate Option applies; (iii) specify whether the Revolving Euro-Rate Option or Base Rate Option shall apply to the proposed Revolving Credit Loans comprising the Borrowing Tranche; (iv) specify in the case of Revolving Credit Loans to which the Revolving Euro-Rate Option applies, an appropriate Euro-Rate Interest Period for the proposed Revolving Credit Loans comprising the Borrowing Tranche; (v) specify the use by the Borrower of the Loan proceeds; (vi) certify that no Event of Default or Potential Default has occurred and is continuing after giving effect to the proposed Revolving Credit Loan and without limiting the generality of this clause (vi), certify compliance with Section 2.01(c) of this Agreement; and (vii) in the event that the proceeds of the proposed Revolving Credit Loan will be used to acquire a new health care facility or other business, permitted to be acquired pursuant to this Agreement, certify, in detail satisfactory to the Agent, a calculation of the ratio specified in Section 2.01(c). 2.06 Making Revolving Credit Loans. The Agent shall, promptly after receipt by it of a Loan Request pursuant to Section 2.05, notify the Banks of its receipt of such Loan Request specifying: (i) the proposed Borrowing Date and the time and method of disbursement of such Revolving Credit Loan; (ii) the amount and type of such Revolving Credit Loan and the applicable Euro-Rate Interest Period (if any); and (iii) the apportionment among the Banks of the Revolving Credit Loans as determined by the Agent in accordance with Section 2.02 hereof. Each Bank shall remit the principal amount of each Revolving Credit Loan to the Agent such that the Agent is able to, and the Agent shall, to the extent the Banks have made funds available -31- 39 to it for such purpose, fund such Revolving Credit Loan to the Borrower in U.S. Dollars and immediately available funds at the Principal Office prior to 2:00 P.M. Pittsburgh time on the Borrowing Date, provided that if any Bank fails to remit such funds to the Agent in a timely manner the Agent may elect in its sole discretion to fund with its own funds the Revolving Credit Loan of such Bank on the Borrowing Date. 2.07 Revolving Credit Note. The obligation of the Borrower to repay the aggregate unpaid principal amount of the Revolving Credit Loans made to it by each Bank, together with interest thereon, shall be evidenced by a promissory note of the Borrower dated the Closing Date in substantially the form attached hereto as Exhibit 1.01(R) payable to the order of each Bank in a face amount equal to the Revolving Credit Commitment of such Bank. 2.08 Use of Proceeds. The proceeds of the Revolving Credit Loans shall be used for (a) the acquisition and development of health care related businesses and facilities and (b) general corporate purposes, which, among other things, may include working capital (including but not limited to the reimbursement of Paragon by the Borrower of ordinary course business expenses pursuant to Section 8.02(e)(v)) or intercompany loans to a Subsidiary of the Borrower provided the Borrower and such Subsidiary comply with Section 8.01(1) hereof, and (c) up to $25,000,000 may be used, in the aggregate, for the purchase of Subordinated Notes (so long as such purchase is otherwise in accordance with the provisions of Section 8.02(d)(vii) hereof) and the reimbursement of expenses of the Borrower paid by Paragon in connection with the Paragon Acquisition (so long as such reimbursement of expenses is otherwise in accordance with the provisions of Section 8.02(e)(vii) hereof). 2.09 Letter of Credit Subfacility. (a) Borrower may request the issuance of, on the terms and conditions hereinafter set forth, standby letters of credit (each a "Letter of Credit" and collectively, "Letters of Credit") by delivering to the Agent a completed application and agreement for letters of credit in such form as the Agent may specify from time to time by no later than 10:00 a.m., Pittsburgh time, at least three (3) Business Days, or such shorter period as may be agreed to by the Agent, in advance of the proposed date of issuance. Subject to the terms and conditions hereof and in reliance on the agreements of the other Banks set forth in this Section 2.09, the Agent will issue a Letter of Credit provided that each Letter of Credit shall (A) have a maximum maturity of twelve (12) months from the date of issuance, and (B) in no event expire later than ten (10) Business Days prior to the Expiration Date and providing that in no event shall (i) the Letters of Credit Outstanding exceed, at any one time, $30,000,000 or (ii) the Revolving Facility Usage exceed, at any one time, the Revolving Credit Commitments. Schedule 2.09(a) hereto lists letters of credit which PNC Bank issued for the accounts of certain of the Loan Parties prior to the date hereof pursuant to the Prior Credit Agreement and which shall remain outstanding after the Closing Date (the "Existing Letters of Credit"). Each Existing Letter of Credit shall be a Letter of Credit hereunder on and after the Closing Date and the provisions of this Section 2.09 shall apply to such Existing Letter of Credit. (Schedule 2.09(a) also lists all amounts of Loans, interest and expenses outstanding under the Prior Credit Agreement.) -32- 40 (b) The Borrower shall pay to the Agent for the ratable account of the Banks a fee (the "Letter of Credit Fee") equal to the applicable interest rate per annum then in effect for Revolving Credit Loans which are subject to the Euro-Rate Option less the Euro-Rate, which fee shall be computed on the daily average Letters of Credit Outstanding (computed on the basis of a year of 360 days and actual days elapsed) and shall be payable quarterly in arrears commencing with the first Business Day of each April, July, October and January following issuance of the first Letter of Credit and on the expiration date for the last Letter of Credit then outstanding, with such fees accruing through and including the expiration date for each Letter of Credit. The Borrower shall pay to the Agent for its own account a fronting fee equal to 1/8% per annum, which fee shall be computed on the daily average Letters of Credit Outstanding (computed on the basis of a year of 360 days and actual days elapsed) and shall be payable quarterly in arrears commencing with the first business day of each October, January, April and July following issuance of the first Letter of Credit and on the expiration date for the last Letter of Credit then outstanding. The Borrower shall also pay to the Agent the Agent's then in effect customary fees and administrative expenses payable with respect to Letters of Credit as the Agent may generally charge or incur from time to time in connection with the issuance, maintenance, modification (if any), assignment or transfer (if any), negotiation and administration of Letters of Credit. (c) Immediately upon the issuance of each Letter of Credit, each Bank shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Agent a participation in such Letter of Credit and each drawing thereunder in an amount equal to such Bank's Ratable Share of the maximum amount available to be drawn under such Letter of Credit and the amount of such drawing, respectively. (d) In the event of any request for a drawing under a Letter of Credit by the beneficiary or transferee thereof, the Agent will promptly notify the Borrower. Provided that it shall have received such notice, the Borrower shall reimburse (such obligation to reimburse the Agent shall sometimes be referred to as a "Reimbursement Obligation") the Agent prior to 11:00 a.m., Pittsburgh time on each date that an amount is paid by the Agent under any Letter of Credit (each such date, a "Drawing Date") in an amount equal to the amount so paid by the Agent. In the event the Borrower fails to reimburse the Agent for the full amount of any drawing under any Letter of Credit by 11:00 a.m., Pittsburgh time, on the Drawing Date, the Agent will promptly notify each Bank thereof, and the Borrower shall be deemed to have requested that Revolving Credit Loans be made by the Banks under the Base Rate Option to be disbursed on the Drawing Date under such Letter of Credit, subject to the amount of the unutilized portion of the Revolving Credit Commitment and subject to the conditions set forth in Section 7.1 [Each Additional Loan] other than any notice requirements. Any notice given by the Agent pursuant to this Section 2.09(d) may be oral if immediately confirmed in writing; provided that the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice. (e) Each Bank shall upon any notice pursuant to Section 2.09(d) make available to the Agent an amount in immediately available funds equal to its Ratable Share of the amount of the drawing, whereupon the participating Banks shall (subject to Section 2.09(f)) each -33- 41 be deemed to have made a Revolving Credit Loan under the Base Rate Option to the Borrower in that amount. If any Bank so notified fails to make available to the Agent for the account of the Agent the amount of such Bank's Ratable Share of such amount by no later than 2:00 p.m., Pittsburgh time on the Drawing Date, then interest shall accrue on such Bank's obligation to make such payment, from the Drawing Date to the date on which such Bank makes such payment at a rate per annum equal to the Federal Funds Effective Rate. The Agent will promptly give notice of the occurrence of the Drawing Date, but failure of the Agent to give any such notice on the Drawing Date or in sufficient time to enable any Bank to effect such payment on such date shall not relieve such Bank from its obligation under this Section 2.09(e). (f) With respect to any unreimbursed drawing that is not converted into Revolving Credit Loans under the Base Rate Option to the Borrower in whole or in part as contemplated by Section 2.09(d), because of the Borrower's failure to satisfy the conditions set forth in Section 7.1 [Each Additional Loan] other than any notice requirements or for any other reason, the Borrower shall be deemed to have incurred from the Agent a Letter of Credit Borrowing in the amount of such drawing. Such Letter of Credit Borrowing shall be due and payable on demand (together with interest) and shall bear interest at the rate per annum applicable to the Revolving Credit Loans under the Base Rate Option. Each Bank's payment to the Agent pursuant to Section 2.09(e) shall be deemed to be a payment in respect of its participation in such Letter of Credit Borrowing and shall constitute a Participation Advance from such Bank in satisfaction of its participation obligation under this Section 2.09. (g)(i) Upon (and only upon) receipt by the Agent for its account of immediately available funds from the Borrower (i) in reimbursement of any payment made by the Agent under the Letter of Credit with respect to which any Bank has made a Participation Advance to the Agent, or (ii) in payment of interest on such a payment made by the Agent under such a Letter of Credit, the Agent will pay to each Bank, in the same funds as those received by the Agent, the amount of such Bank's Ratable Share of such funds, except the Agent shall retain the amount of the Ratable Share of such funds of any Bank that did not make a Participation Advance in respect of such payment by Agent. (g)(ii) If the Agent is required at any time to return to any Loan Party, or to a trustee, receiver, liquidator, custodian, or any official in any Insolvency Proceeding, any portion of the payments made by any Loan Party to the Agent pursuant to Section 2.09(g)(i) in reimbursement of a payment made under the Letter of Credit or interest or fee thereon, each Bank shall, on demand of the Agent, forthwith return to the Agent the amount of its Ratable Share of any amounts so returned by the Agent plus interest thereon from the date such demand is made to the date such amounts are returned by such Bank to the Agent, at a rate per annum equal to the Federal Funds Effective Rate in effect from time to time. (h) Each Loan Party agrees to be bound by the terms of the Agent's application and agreement for letters of credit and the Agent's written regulations and customary practices relating to letters of credit, though such interpretation may be different from the such Loan Party's own. In the event of a conflict between such application or agreement and this Agreement, this Agreement shall govern. It is understood and agreed that, except in the case of -34- 42 gross negligence or willful misconduct, the Agent shall not be liable for any error, negligence and/or mistakes, whether of omission or commission, in following any Loan Party's instructions or those contained in the Letters of Credit or any modifications, amendments or supplements thereto. (i) In determining whether to honor any request for drawing under any Letter of Credit by the beneficiary thereof, the Agent shall be responsible only to determine that the documents and certificates required to be delivered under such Letter of Credit have been delivered and that they comply on their face with the requirements of such Letter of Credit. (j) Each Bank's obligation in accordance with this Agreement to make the Revolving Credit Loans or Participation Advances, as contemplated by Section 2.09, as a result of a drawing under a Letter of Credit, and the Obligations of the Borrower to reimburse the Agent upon a draw under a Letter of Credit, shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Section 2.09 under all circumstances, including the following circumstances: (i) any set-off, counterclaim, recoupment, defense or other right which such Bank may have against the Agent, the Borrower or any other Person for any reason whatsoever; (ii) the failure of any Loan Party or any other Person to comply, in connection with a Letter of Credit Borrowing, with the conditions set forth in Section 2.01 [Revolving Credit Commitments], 2.05 [Revolving Credit Loan Requests], 2.06 [Making Revolving Credit Loans] or 7.1 [Each Additional Loan] or as otherwise set forth in this Agreement for the making of a Revolving Credit Loan, it being acknowledged that such conditions are not required for the making of a Letter of Credit Borrowing and the obligation of the Banks to make Participation Advances under Section 2.09; (iii) any lack of validity or enforceability of any Letter of Credit; (iv) the existence of any claim, set-off, defense or other right which any Loan Party or any Bank may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such transferee may be acting), the Agent or any Bank or any other Person or, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between any Loan Party or Subsidiaries of a Loan Party and the beneficiary for which any Letter of Credit was procured); (v) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect even if the Agent has been notified thereof; -35- 43 (vi) payment by the Agent under any Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit; (vii) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of any Loan Party or Subsidiaries of a Loan Party; (viii) any breach of this Agreement or any other Loan Document by any party thereto; (ix) the occurrence or continuance of an Insolvency Proceeding with respect to any Loan Party; (x) the fact that an Event of Default or a Potential Default shall have occurred and be continuing; (xi) the fact that the Expiration Date shall have passed or this Agreement or the Commitments hereunder shall have been terminated; and (xii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. (k) In addition to amounts payable as provided in Section 10.05 [Reimbursement of Agent by Borrower, Etc.], the Borrower hereby agrees to protect, indemnify, pay and save harmless the Agent from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable fees, expenses and disbursements of counsel and allocated costs of internal counsel) which the Agent may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Letter of Credit, other than as a result of (A) the gross negligence or willful misconduct of the Agent as determined by a final judgment of a court of competent jurisdiction or (B) subject to the following clause (ii), the wrongful dishonor by the Agent of a proper demand for payment made under any Letter of Credit, or (ii) the failure of the Agent to honor a drawing under any such Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority (all such acts or omissions herein called "Governmental Acts"). (l) As between any Loan Party and the Agent, such Loan Party assumes all risks of the acts and omissions of, or misuse of the Letters of Credit by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, the Agent shall not be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for an issuance of any such Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged (even if the Agent shall have been notified thereof); (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits -36- 44 thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) the failure of the beneficiary of any such Letter of Credit, or any other party to which such Letter of Credit may be transferred, to comply fully with any conditions required in order to draw upon such Letter of Credit or any other claim of any Loan Party against any beneficiary of such Letter of Credit, or any such transferee, or any dispute between or among any Loan Party and any beneficiary of any Letter of Credit or any such transferee; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (viii) any consequences arising from causes beyond the control of the Agent, including any Governmental Acts, and none of the above shall affect or impair, or prevent the vesting of, any of the Agent's rights or powers hereunder. Nothing in the preceding sentence shall relieve the Agent from liability for the Agent's gross negligence or willful misconduct in connection with actions or omissions described in such clauses(i) through (viii) of such sentence. In furtherance and extension and not in limitation of the specific provisions set forth above, any action taken or omitted by the Agent under or in connection with the Letters of Credit issued by it or any documents and certificates delivered thereunder, if taken or omitted in good faith, shall not put the Agent under any resulting liability to the Borrower or any Bank. 2.10 Voluntary Reduction of Revolving Credit Commitments. The Borrower shall have the right at any time and from time to time upon not less than three (3) Business Days' prior written notice (which notice shall be irrevocable) to the Agent to terminate or to permanently and ratably reduce, in an aggregate amount of not less than $1,000,000 or an integral multiple thereof, the respective Revolving Credit Commitments without penalty or premium, except as hereinafter set forth. The Agent shall promptly advise each Bank of the date and amount of each such reduction. After each such reduction, the Commitment Fee shall be calculated upon the unused portion of the Revolving Credit Commitments as so reduced and the amount of reduction may not be reinstated. ARTICLE III COLLATERAL 3.01 Collateral. The Borrower shall execute and deliver the Pledge Agreement in the form of Exhibit 1.01(P)(1) pledging all of the stock, partnership interests or other ownership interests owned by the Borrower in each existing or hereafter formed or acquired Subsidiary and in each existing or hereafter formed or acquired Excluded Entity. Each of the Borrower's Restricted Subsidiaries (whether now existing or hereafter formed or acquired, including without limitation any Excluded Entity which becomes a Restricted Subsidiary, upon -37- 45 so becoming a Restricted Subsidiary) shall execute and deliver a Guaranty Agreement in the form of Exhibit 1.01(G). Each of the Borrower's Subsidiaries (whether now owned or hereafter acquired) owning stock, partnership interests or other ownership interests of each existing or hereafter formed or acquired Subsidiary or each existing or hereafter formed or acquired Excluded Entity shall execute a Pledge Agreement in the form of Exhibit 1.01(P)(2) or (3), as the case may be or other Pledge Agreement in form and substance satisfactory to the Agent. ARTICLE IV INTEREST RATES 4.01 Interest Rate Options. The Borrower shall pay interest in respect of the outstanding unpaid principal amount of the Loans as selected by it from the Base Rate Option or Euro-Rate Option set forth below applicable to the Loans (it being understood that, subject to the provisions of this Agreement, the Borrower may select different Interest Rate Options and different Euro-Rate Interest Periods to apply simultaneously to the Loans comprising different Borrowing Tranches and may convert to or renew one or more Interest Rate Options with respect to all or any portion of the Loans comprising any Borrowing Tranche; provided that there shall not be at any one time outstanding more than fourteen (14) Borrowing Tranches in the aggregate among all the Loans accruing interest at a Euro-Rate Option). The Agent's determination of a rate of interest and any change therein shall in the absence of manifest error be conclusive and binding upon all parties hereto. If at any time the designated rate applicable to any Loan made by any Bank exceeds such Bank's highest lawful rate, the rate of interest on such Bank's Loan shall be limited to such Bank's highest lawful rate. (a) Revolving Credit Interest Rate Options. The Borrower shall have the right to select from the following Interest Rate Options applicable to the Loans for the period commencing on January 1, 1998 and thereafter: (i) Revolving Credit Base Rate Option: A fluctuating rate per annum (computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed) equal to the Base Rate plus the applicable percentage set forth below, based upon the ratio of (a) Total Indebtedness, to (b) Consolidated Cash Flow from Operations, such interest rate to change automatically from time to time effective as of the effective date of each change in the Base Rate.
Ratio of Total Indebtedness to Consolidated Cash Flow from Applicable Operations Interest Rate --------------- ------------- Greater than 5.0 to 1.0 Base Rate plus 1/4% Less than or equal to 5.0 to 1.0 Base Rate
-38- 46 (ii) Revolving Credit Euro-Rate Option: A fluctuating rate per annum (computed on the basis of a year of 360 days and actual days elapsed) equal to the Euro-Rate plus the applicable percentage (such percentage is sometimes hereafter referred to as the "Applicable Percentage Over Euro-Rate") set forth below, based upon the ratio of (a) Total Indebtedness, to (b) Consolidated Cash Flow from Operations. (iii) The ratios pursuant to clauses (i) and (ii) above shall be computed on the date of each Acquisition Requiring Certification as more fully set forth in the third sentence of Section 8.01(m)(i) or the second sentence of Section 8.01(m)(ii), as applicable, and any interest rate adjustment attributable to such computation shall be effective on the date of such Acquisition Requiring Certification. If Borrower does not make any Acquisition Requiring Certification during any fiscal quarter, such ratio shall also be computed as of the end of such quarter with Consolidated Cash Flow from Operations computed for the four fiscal quarters then ended and Total Indebtedness computed as of the end of such fiscal quarter, but any interest adjustments attributable to a change in such ratio shall be effective (a) with respect to an increase of the applicable interest rate, as of the Delivery Date for the Borrower's consolidated financial statements for such quarter and (b) with respect to a decrease of the applicable interest rate, as of the later of the Delivery Date for such financial statements and the date on which such financial statements are actually delivered to the Agent and the Banks.
Ratio of Total Indebtedness to Consolidated Cash Flow from Operations Applicable Interest Rate --------------------------- ------------------------ Greater than 5.0 to 1.0 Euro-Rate plus 1.75% Greater than 4.5 to 1.0 but less than or equal to 5.0 to 1.0 Euro-Rate plus 1.50% Greater than 4.0 to 1.0 but less than or equal to 4.5 to 1.0 Euro-Rate plus 1.25% Greater than 3.5 to 1.0 but less than or equal to 4.0 to 1.0 Euro-Rate plus 1% Greater than 3.0 to 1.0 but less than or equal to 3.5 to 1.0 Euro-Rate plus .875% Greater than 2.5 to 1.0 but less than or equal to 3.0 to 1.0 Euro-Rate plus .625% Less than or equal to 2.5 to 1.0 Euro-Rate plus .500%
-39- 47 (b) Rate Quotations. The Borrower may call the Agent on or before the date on which a Loan Request is to be delivered to receive an indication of the rates then in effect, but it is acknowledged that such indication shall not be binding on the Agent or the Banks nor affect the rate of interest which thereafter is actually in effect when the election is made. 4.02 Interest Periods. At any time when the Borrower shall select, convert to or renew a Euro-Rate Option, the Borrower shall notify the Agent thereof at least three (3) Business Days prior to the effective date of such Euro-Rate Option by delivering a Loan Request. The notice shall specify an interest period during which such Interest Rate Option shall apply, such periods to be one, two, three or six months in the event of a Euro-Rate Option ("Euro-Rate Interest Period"), provided, that: (a) any Euro-Rate Interest Period which would otherwise end on a date which is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in the next calendar month, in which case such Euro-Rate Interest Period shall end on the next preceding Business Day; (b) any Euro-Rate Interest Period which begins on the last day of a calendar month for which there is no numerically corresponding day in the subsequent calendar month during which such Euro-Rate Interest Period is to end shall end on the last Business Day of such subsequent month; (c) the Revolving Credit Euro-Rate Portion for each Euro-Rate Interest Period shall be in integral multiples of $500,000 and not less than $5,000,000; (d) the Borrower shall not select, convert to or renew a Euro-Rate Interest Period for any portion of the Loans that would end after the Expiration Date; and (e) in the case of the renewal of a Euro-Rate Option at the end of a Euro-Rate Interest Period, the first day of the new Euro-Rate Interest Period shall be the last day of the preceding Euro-Rate Interest Period, without duplication in payment of interest for such day. 4.03 Interest After Default. To the extent permitted by Law, upon the occurrence and during the continuation of an Event of Default, any principal, interest, fee or other amount payable hereunder shall bear interest for each day thereafter until paid in full (before and after judgment) at a rate per annum which shall be equal to two hundred (200) basis -40- 48 points (2% per annum) above the rate of interest otherwise applicable with respect to such amount or two hundred (200) basis points (2% per annum) above the Base Rate if no rate of interest is otherwise applicable, but in no event in excess of the highest rate permitted under applicable law. The Borrower acknowledges that such increased interest rate reflects, among other things, the fact that such Loans or other amounts have become a substantially greater risk given their default status and that the Banks are entitled to additional compensation for such risk. If an Event of Default shall occur and be continuing, the Agent may in its discretion limit the Borrower to the Base Rate Option. 4.04 Euro-Rate Unascertainable. (a) If on any date on which a Euro-Rate would otherwise be determined, the Agent shall have determined (which determination shall be conclusive absent manifest error) that: (i) adequate and reasonable means do not exist for ascertaining such Euro-Rate, or (ii) a contingency has occurred which materially and adversely affects the London interbank market relating to the Euro-Rate, or (b) if at any time any Bank shall have determined (which determination shall be conclusive absent manifest error) that: (i) the making, maintenance or funding of any Loan to which a Euro-Rate Option applies has been made impracticable or unlawful by compliance by such Bank in good faith with any Law or any interpretation or application thereof by any Official Body or with any request or directive of any such Official Body (whether or not having the force of Law), or (ii) such Euro-Rate Option will not adequately and fairly reflect the cost to such Bank of the establishment or maintenance of any such Loan, or (iii) after making all reasonable efforts that deposits of the relevant amount in Dollars for the relevant Euro-Rate Interest Period for a Loan to which a Euro-Rate Option applies, respectively, are not available to such Bank with respect to a proposed Euro-Rate Loan in the London interbank market, in the case of any event specified in subsection (a) above, then the Agent shall promptly so notify the Banks and the Borrower thereof and in the case of an event specified in subsection (b) above, such Bank shall promptly so notify the Agent and endorse a certificate to such notice as to the specific circumstances of such notice and the Agent shall promptly send copies of such notice and certificate to the other Banks and the Borrower. Upon such date as shall be specified in such notice (which shall not be earlier than the date such notice is given) the obligation of (A) the Banks in the case of such notice given by the Agent or (B) such Bank in the case of such notice given by such Bank to allow the Borrower to select, convert to or renew a Euro-Rate Option shall be suspended until the Agent shall have later notified the Borrower or such Bank shall have later notified the Agent, of the Agent's or such -41- 49 Bank's, as the case may be, determination (which determination shall be conclusive absent manifest error) that the circumstances giving rise to such previous determination no longer exist. If at any time the Agent makes a determination under subsection (a) or (b) of this Section 4.04 and the Borrower has previously notified the Agent of its selection of, conversion to or renewal of a Euro-Rate Option and such Interest Rate Option has not yet gone into effect, such notification shall be deemed to provide for selection of, conversion to or renewal of the Base Rate Option otherwise available with respect to such Loans. If any Bank notifies the Agent of a determination under subsection (b) of this Section 4.04, the Borrower shall, subject to the Borrower's indemnification obligations under Section 5.06(b), as to any Loan of the Bank to which a Euro-Rate Option applies, on the date specified in such notice either convert such Loan to the Base Rate Option otherwise available with respect to such Loan or prepay such Loan in accordance with Section 5.04 hereof. Absent due notice from the Borrower of conversion or prepayment such Loan shall automatically be converted to the Base Rate Option otherwise available with respect to such Loan upon such specified date. 4.05 Selection of Interest Rate Options. If the Borrower fails to select a Euro-Rate Interest Period in accordance with the provisions of Section 4.02 in the case of renewal of the Revolving Credit Euro-Rate Portion, the Borrower shall be deemed to have converted such Loan or portion thereof to the Base Rate Option otherwise available with respect to such Loans, commencing upon the last day of that Euro-Rate Interest Period. If an Event of Default shall occur and be continuing, the Agent may in its discretion limit the Borrower to the Base Rate Option hereunder. ARTICLE V PAYMENTS 5.01 Payments. All payments and prepayments to be made in respect of principal, interest, Commitment Fees, Closing Fee, Letter of Credit Fees, Agent's Fee or other fees or amounts due from the Borrower hereunder shall be payable prior to 11:00 A.M. (Pittsburgh time) on the date when due without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Borrower, and without setoff, counterclaim or other deduction of any nature, and an action therefor shall immediately accrue. Such payments shall be made to the Agent at the Principal Office for the ratable accounts of the Banks with respect to the Loans in U.S. Dollars and in immediately available funds, and the Agent shall promptly distribute such amounts to the Banks in immediately available funds, provided that in the event payments are received by 11:00 A.M. (Pittsburgh time) by the Agent with respect to the Loans and such payments are not distributed to the Banks on the same day received by the Agent, the Agent shall pay the Banks the Federal Funds Effective Rate with respect to the amount of such payments for each day held by the Agent and not distributed to the Banks. The Agent's and each Bank's statement of account, ledger or other relevant record shall, in the absence of manifest error, be conclusive as the statement of the amount of principal of and interest on the Loans and other amounts owing under this Agreement and shall be deemed an "account stated." -42- 50 5.02 Pro Rata Treatment of Banks. Each borrowing, and each selection of, conversion to or renewal of any Interest Rate Option and each payment or prepayment by the Borrower with respect to principal, interest, Commitment Fees, Closing Fee, Letter of Credit Fees, or other fees or amounts due from the Borrower hereunder to the Banks with respect to the Loans, shall (except as provided in Section 4.04(b) [Euro-Rate Unascertainable], 5.04(b) [Voluntary Prepayments] or 5.06(a) [Additional Compensation in Certain Circumstances] hereof) be made in proportion to the Loans outstanding from each Bank and if no such Loans are then outstanding, in proportion to the Ratable Share of each Bank. 5.03 Interest Payment Dates. Interest on Loans to which the Base Rate Option applies shall be due and payable in arrears on the first Business Day of each April, July, October and January after the date hereof and on the Expiration Date or upon acceleration of the Notes. Interest on Loans to which a Euro-Rate Option applies shall be due and payable on the last day of each Euro-Rate Interest Period for those Loans, and if any such Euro-Rate Interest Period is longer than three months, also on the last day of every third month during such period. 5.04 Voluntary Prepayments. (a) The Borrower shall have the right at its option from time to time to prepay the Loans in whole or part without premium or penalty (except as provided in subsection (b) below or in Section 5.06 hereof): (i) at any time with respect to any Loan to which the Base Rate Option applies, (ii) on the last day of the applicable Euro-Rate Interest Period with respect to Loans to which a Euro-Rate Option applies, (iii) on the date specified in a notice by any Bank pursuant to Section 4.04(b) [Euro-Rate Unascertainable] hereof with respect to any Loan to which a Euro-Rate Option applies. Whenever the Borrower desires to prepay any part of the Loans, it shall provide a prepayment notice to the Agent at least one (1) Business Day prior to the date of prepayment of Loans setting forth the following information: (x) the date, which shall be a Business Day, on which the proposed prepayment is to be made; and (y) the total principal amount of such prepayment, which shall not be less than $5,000,000. All prepayment notices shall be irrevocable. The principal amount of the Loans for which a prepayment notice is given, together with interest on such principal amount except with respect to Loans to which the Base Rate Option applies, shall be due and payable on the date specified in such prepayment notice as the date on which the proposed prepayment is to be -43- 51 made. Unless otherwise specified by the Borrower with respect to prepayments of the Revolving Credit Euro-Rate Portion of the Loans permitted under (ii) or (iii) above, all prepayments shall be applied first to the Revolving Credit Base Rate Portion of such Loans, and then to the Revolving Credit Euro-Rate Portion of such Loans, subject to Section 5.06(b) hereof. (b) In the event any Bank gives notice under Section 4.04(b) [Euro-Rate Unascertainable] or Section 5.06(a) [Additional Compensation in Certain Circumstances] hereof, the Borrower shall have the right, with the consent of the Agent, which shall not be unreasonably withheld, to: (y) prepay the Loans of such Bank, in whole together with all interest accrued thereon and thereby permanently and irrevocably terminate the Revolving Credit Commitment of such Bank, or (z) replace such Bank, so long as, in the case of (y) or (z), such replacement or prepayment occurs within ninety (90) days after receipt of such Bank's notice under Section 4.04(b) or 5.06(a), provided the Borrower shall also pay to such Bank in the case of either the foregoing (y) or (z) at the time of such prepayment or replacement any amounts required under Section 5.06 and accrued Commitment Fees due on such amount and all other costs, fees and any amounts due to such Bank being prepaid or replaced. 5.05 Mandatory Prepayments. (a) Sale of Assets. Within five (5) Business Days of any sale of assets authorized by Section 8.02(g)(v) hereof, the Borrower shall make a mandatory prepayment of principal on the Revolving Credit Loans in the amount, if any, necessary to bring the Borrower into compliance with Section 8.02(r) [Maximum Leverage Ratio] after giving effect to such disposition. In addition to the foregoing mandatory prepayment provisions, in the event that any sale of assets will result in the Borrower or any Subsidiary receiving "Net Cash Proceeds" which would otherwise become "Excess Proceeds" (as each of those terms are defined in the Indenture), then at least sixty (60) days prior to the date any Net Cash Proceeds would become Excess Proceeds under the Indenture, the Borrower shall give written notice to the Agent thereof setting forth the amount of Net Cash Proceeds at issue. Upon the direction of the Agent with the consent of the Required Banks, the Borrower shall make a permanent payment of principal on the Revolving Credit Loans in the amount of said Net Cash Proceeds, and the Revolving Credit Commitment of each Bank shall be reduced by its Ratable Share of the principal payment made to such Bank from the Net Cash Proceeds. (b) Application Among Interest Rate Options. All prepayments required pursuant to this Section 5.05 shall first be applied among the Interest Rate Options to the principal amount of the Loans subject to a Base Rate Option, then to Loans subject to Euro-Rate Option. In accordance with Section 5.06(b), the Borrower shall indemnify the Banks for any loss or expense including loss of margin incurred with respect to any such prepayments applied against Loans subject to a Euro-Rate Option on any day other than the last day of the applicable Euro-Rate Interest Period. 5.06 Additional Compensation in Certain Circumstances. (a) Increased Costs or Reduced Return Resulting From Taxes, Reserves, Capital Adequacy Requirements, Expenses, Etc. If any Law, guideline or -44- 52 interpretation or any change in any Law, guideline or interpretation or application thereof by any Official Body charged with the interpretation or administration thereof or compliance with any request or directive (whether or not having the force of Law) of any central bank or other Official Body: (i) subjects any Bank to any tax or changes the basis of taxation with respect to this Agreement, the Notes, the Loans or payments by the Borrower of principal, interest, Commitment Fees, or other amounts due from the Borrower hereunder or under the Notes (except for taxes on the overall net income of such Bank), (ii) imposes, modifies or deems applicable any reserve, special deposit or similar requirement against credits or commitments to extend credit extended by, or assets (funded or contingent) of, deposits with or for the account of, or other acquisitions of funds by, any Bank, or (iii) imposes, modifies or deems applicable any capital adequacy or similar requirement (A) against assets (funded or contingent) of, or letters of credit, other credits or commitments to extend credit extended by, any Bank, or (B) otherwise applicable to the obligations of any Bank under this Agreement, and the result under any of the foregoing clauses (i), (ii) or (iii) is to increase the cost to, reduce the income receivable by, or impose any expense (including loss of margin) upon any Bank with respect to this Agreement, the Notes or the making, maintenance or funding of any part of the Loans (or, in the case of any capital adequacy or similar requirement, to have the effect of reducing the rate of return on any Bank's capital, taking into consideration such Bank's customary policies with respect to capital adequacy) by an amount which such Bank in its sole discretion deems to be material, such Bank shall from time to time notify the Borrower and the Agent of the amount determined in good faith (using any averaging and attribution methods employed in good faith) by such Bank (which determination shall be conclusive absent manifest error) to be necessary to compensate such Bank for such increase in cost, reduction of income or additional expense. Such notice shall set forth in reasonable detail the basis for such determination. Such amount shall be due and payable by the Borrower to such Bank ten (10) Business Days after such notice is given. (b) Indemnity. In addition to the compensation required by subsection (a) of this Section 5.06, the Borrower shall indemnify each Bank against all liabilities, losses or expenses (including loss of margin, any loss or expense incurred in liquidating or employing deposits from third parties and any loss or expense incurred in connection with funds acquired by a Bank to fund or maintain Loans subject to the Euro-Rate Option) which such Bank sustains or incurs as a consequence of any: (i) payment, prepayment, conversion or renewal of any Loan to which the Euro-Rate Option applies on a day other than the last day of the corresponding Euro-Rate Interest Period (whether or not such payment or prepayment is mandatory, voluntary or automatic and whether or not such payment or prepayment is then due), -45- 53 (ii) attempt by the Borrower to revoke (expressly, by later inconsistent notices or otherwise) in whole or part any notice relating to Loan Requests under Section 2.05 or Section 4.02 or prepayments under Section 5.04, or reductions of Revolving Credit Commitments under Section 2.10, or (iii) Event of Default by the Borrower in the performance or observance of any covenant or condition contained in this Agreement or any other Loan Document, including without limitation any failure of the Borrower to pay when due (by acceleration or otherwise) any principal, interest, Commitment Fee or any other amount due hereunder. If any Bank sustains or incurs any such loss or expense it shall from time to time notify the Borrower of the amount determined in good faith by such Bank (which determination shall be conclusive absent manifest error and may include such assumptions, allocations of costs and expenses and averaging or attribution methods as such Bank shall deem reasonable) to be necessary to indemnify such Bank for such loss or expense. Such notice shall set forth in reasonable detail the basis for such determination. Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of the applicable Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans, subject to the Euro-Rate Option provided for herein (excluding, however, the Applicable Percentage Over Euro-Rate included therein, if any) over (ii) the amount of interest (as reasonably determined by such Bank) which would have accrued to such Bank on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank Eurodollar market. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. Such amount shall be due and payable by the Borrower to such Bank ten (10) Business Days after such notice is given. ARTICLE VI REPRESENTATIONS AND WARRANTIES 6.01 Representations and Warranties - Effective On and After Date of This Agreement. The Borrower represents and warrants to the Agent and each of the Banks as follows: (a) Organization and Qualification. The Borrower, each Restricted Subsidiary of the Borrower and each Excluded Entity in which a Restricted Investment has been made are duly organized, validly existing and in good standing under the laws of their respective jurisdiction of organization; the Borrower, each Restricted Subsidiary of the Borrower and each Excluded Entity in which a Restricted Investment has been made have the power to own or lease their properties and to engage in the business they presently conduct or propose to conduct; and the Borrower and each Subsidiary of the Borrower are duly qualified as a foreign corporation, limited liability company or partnership and in good standing in each jurisdiction listed on -46- 54 Schedule 6.01(a) hereto and in all other jurisdictions where the property owned or leased by them or the nature of the business transacted by them or both makes such qualification necessary, except where the failure to so qualify would not have a material adverse effect on the Borrower or any Subsidiary. (b) [Intentionally Omitted.] (c) Excluded Entities; Subsidiaries. Schedule 6.01(c) attached hereto states (i) the name of each of the Borrower's Restricted Subsidiaries and each Excluded Entity in which a Restricted Investment has been made, (ii) in the case of each Corporate Subsidiary or Excluded Entity which is a corporation, its jurisdiction of incorporation, its authorized capital stock, the issued and outstanding shares (referred to herein as the "Corporate Shares") and the owners thereof, (iii) in the case of each Partnership Subsidiary or Excluded Entity which is a partnership, the jurisdiction in which it is organized, the type of organization (limited or general partnership) and the owners of its partnership interests (the "Partnership Interests"), and (iv) in the case of each Subsidiary or Excluded Entity which is a limited liability company, the jurisdiction in which it is organized, its authorized member interests, the issued and outstanding member interests (the "Member Interests") and the owners thereof. The Borrower and each Subsidiary have good and valid title to all of the Corporate Shares, Partnership Interests or Member Interests they purport to own, free and clear in each case of any Lien other than under the Loan Documents. All Corporate Shares, Partnership Interests and Member Interests have been validly issued. All Corporate Shares are fully paid and nonassessable. There are no options, warrants or other rights outstanding to purchase any Member Interests, Corporate Shares or Partnership Interests except as indicated on Schedule 6.01(c). (d) Power and Authority. Each Loan Party has full power to enter into, execute, delivery and carry out this Agreement, the other Loan Documents to which it is a party, to incur the Indebtedness contemplated by the Loan Documents and to perform its obligations under the Loan Documents to which it is a party and all such actions have been duly authorized by all necessary proceedings on its part. (e) Validity and Binding Effect. This Agreement has been duly executed and delivered by each Loan Party that is a party hereto, and each other Loan Document, when duly executed and delivered by each Loan Party which is a party thereto, will have been duly executed and delivered by such Loan Party. This Agreement and each other Loan Document delivered by the Loan Parties pursuant to the provisions hereof will constitute legal, valid and binding obligations of the Loan Parties thereto, enforceable against such Loan Party in accordance with their respective terms, except to the extent that (i) enforceability of any of the foregoing Loan Documents may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforceability of creditors' rights generally or limiting the right of specific performance or by general equitable principles and (ii) the exercise by the Banks of their rights with respect to the Collateral would be subject to the prior approval of health care regulatory authorities. -47- 55 (f) No Conflict. Neither the execution and delivery of this Agreement or the other Loan Documents by the Loan Parties nor the consummation of the transactions herein or therein contemplated or compliance with the terms and provisions hereof or thereof by them will conflict with, constitute a default under or result in any breach of (i) the terms and conditions of the certificate of incorporation, by-laws or other organizational documents of any Loan Party or (ii) of any Law or of any material agreement or instrument or order, writ, judgment, injunction or decree to which any Loan Party is a party or by which it is bound or to which it is subject, or result in the creation or enforcement of any Lien, charge or encumbrance whatsoever upon any property (now or hereafter acquired) of any Loan Party (other than Liens granted under the Loan Documents). (g) Litigation. Except as previously disclosed to the Agent in that certain letter dated January 2, 1996 by the Borrower, there are no actions, suits, proceedings or investigations pending or, to the knowledge of the Borrower, threatened against the Borrower or any Subsidiary of the Borrower at law or equity before any Official Body which individually or in the aggregate would constitute a Material Adverse Change. Neither the Borrower nor any Subsidiary of the Borrower is in violation of any order, writ, injunction or any decree of any Official Body which would constitute a Material Adverse Change. (h) Title to Properties. The Borrower and each Subsidiary of the Borrower have good and marketable title to or valid leasehold interest in all material properties, assets and other rights which they purport to own or lease or which are reflected as owned or leased on their respective books and records, free and clear of all Liens and encumbrances except Permitted Liens, and subject to the terms and conditions of the applicable leases. All material leases of real property are in full force and effect without the necessity for any consent which has not previously been obtained for the consummation of the transactions contemplated hereby. (i) Financial Statements. (i) Historical Statements. The Borrower has delivered to the Agent copies of its audited consolidated year-end financial statements for and as of the end of the fiscal years ended December 31, 1992, 1993, 1994, 1995, 1996, 1997 and the unaudited consolidated statements for 1998 for the fiscal quarter ending on March 31 , 1998 (collectively the "Historical Statements"). The Mariner Historical Statements were compiled from the books and records maintained by the Borrower's management, fairly present the consolidated financial condition of the Loan Parties (which were Loan Parties as of the date of the respective Mariner Historical Statements) as of their dates and the results of operations for the fiscal periods then ended and have been prepared in accordance with GAAP consistently applied, subject (in the case of the interim statements) to normal year-end audit adjustments. (ii) Accuracy of Financial Statements. Neither the Borrower nor any Subsidiary of Borrower has any liabilities, contingent or otherwise, or material forward or long-term commitments that are not disclosed in the Historical Statements or in the notes thereto or that are required to be disclosed under GAAP, and except as disclosed therein there are -48- 56 no unrealized or anticipated losses from any commitments of the Borrower or any Subsidiary which may cause a Material Adverse Change. Since December 31, 1997, no Material Adverse Change has occurred; provided, however, that with the written approval of the Required Banks, express disclosures to the Banks by the Borrower in the reports provided by the Borrower to the Banks, pursuant to Section 8.03 hereof, shall be deemed to be an update and an exception to the representation made in the foregoing portion of this sentence. (iii) Projections. The Borrower has delivered to the Agent financial projections of the Borrower, Paragon and their respective Subsidiaries prepared on a combined pro-forma basis for the two fiscal years ending September 30, 1998 and September 30, 1999 (the "Financial Projections") derived from various assumptions of the Borrower's management. The Financial Projections represent a reasonable range of possible results in light of the history of the business, present and forseeable conditions and the intentions of the management of the Borrower. The Financial Projections accurately reflect the liabilities of the Borrower and its Subsidiaries upon consummation of the transactions contemplated hereby as of the Seventeenth Amendment Effective Date. (j) Margin Stock. Neither the Borrower nor any Subsidiary engages or intends to engage principally, or as one of its important activities, in the business of extending credit for the purpose, immediately, incidentally or ultimately, of purchasing or carrying margin stock (within the meaning of Regulation U). No part of the proceeds of any Loan has been or will be used, immediately, incidentally or ultimately, to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock or to refund Indebtedness originally incurred for such purpose, or for any purpose which entails a violation of or which is inconsistent with the provisions of the regulations of the Board of Governors of the Federal Reserve System. (k) Full Disclosure. Neither this Agreement nor any other Loan Document contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein, in light of the circumstances under which they were made, not misleading considered as a whole; provided that any information provided after the date hereof shall be deemed to supersede any prior inconsistent information. There is no fact known to the Borrower or any Subsidiary which materially adversely affects the business, property, assets, financial condition, results of operations or prospects of the Borrower or any Material Subsidiary, which: (i) prior to or at the date hereof, has not been set forth in the Agreement or in the certificates, statements, agreements or other documents furnished in writing to the Agent and the Banks in connection with the transactions contemplated hereby or in the Borrower's public filings with the Securities and Exchange Commission, or (ii) following the date hereof and with the written approval of the Required Banks, has not been set forth in other documents furnished in writing to the Agent and the Banks. (l) Taxes. All material federal, state, local and other tax returns required to have been filed with respect to the Borrower or any Subsidiary have been filed and payment or adequate provision has been made for the payment of all taxes, fees, assessments and -49- 57 other governmental charges which have or may become due pursuant to said returns or to assessments received except to the extent that such taxes, fees, assessments and other charges are being contested in good faith by appropriate proceedings diligently conducted and for which such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made. As of the date hereof, there are no agreements or waivers extending the statutory period of limitations applicable to any federal income tax return of the Borrower or any Subsidiary for any period. (m) Consents and Approvals. No consent, approval, exemption, order or authorization of, or a registration or filing with any Official Body or any other person is required by any Law or any agreement in connection with the execution, delivery and carrying out of this Agreement, or the other Loan Documents by any Loan Party, all of which have been obtained or made; provided, however, that it is acknowledged that consent of health care regulatory authorities issuing any licenses or regulating any health care facilities may be required if the Agent on behalf of the Banks exercises the rights and remedies in respect of the Pledged Collateral and such exercise of remedies results in or constitutes an assignment of any health care license issued by a health care regulatory authority or constitutes a change of control with respect to the ownership of a health care facility. (n) Compliance With Instruments. Neither the Borrower nor any Subsidiary is in violation of (i) any term of its certificate of incorporation, by-laws, or other organizational documents or (ii) any material agreement or instrument to which it is a party or by which it or any of its properties may be subject or bound where such violation would constitute a Material Adverse Change. (o) Patents, Trademarks, Copyrights, Etc. The Borrower and each Subsidiary owns or possesses all the material patents, trademarks, service marks, trade names, copyrights and other intellectual property rights necessary to own and operate its properties and to carry on its business as presently conducted and planned to be conducted by the Borrower and each Subsidiary, without known conflict with the rights of others. (p) Security Interests in the Collateral. The Liens and security interests granted to the Agent for the benefit of the Banks pursuant to the Pledge Agreements, Mortgages and Leasehold Mortgages in the UCC Collateral constitute, and will continue to constitute, Prior Security Interests under the Uniform Commercial Code as in effect in each applicable jurisdiction (the "Uniform Commercial Code") or other applicable Law entitled to all the rights, benefits and priorities provided by the Uniform Commercial Code or such Law to the fullest extent permitted by applicable law, except that the security interests in the Collateral under the Mortgages and Leasehold Mortgages may be subordinated to the security interests granted to certain of the Lessor Lenders or Owned Facility Lenders, as indicated on Schedule 6.01 (aa). Upon the filing of financing statements relating to said security interests in each office and in each jurisdiction where required in order to perfect the security interests described above and taking possession of the stock certificates or certificates of ownership of member interests in a limited liability company, as the case may be, evidencing the Pledged Collateral which constitutes stock of a corporation or member interests of a limited liability company, as the case -50- 58 may be, all such action as is necessary or advisable to establish such rights of the Agent will have been taken, and there will be upon execution and delivery of the Pledge Agreements, Mortgages and Leasehold Mortgages, such filings, and such taking of possession no necessity for any further action in order to preserve, protect and continue such rights, except for maintaining possession of such certificates and filing continuation statements with respect to such financing statements within six (6) months prior to each five-year anniversary of the filing of such financing statements. Any expenses in connection with each such action have been or will be paid by the Borrower. It is acknowledged that the exercise by the Banks of their rights and remedies in respect of the Pledged Collateral which would result in or constitute any assignment of any license issued by a health care regulatory authority or any change of control with respect to a health care facility may be subject to the prior approval of such health care regulatory authorities. (q) [Intentionally Omitted.] (r) Status of the Pledged Collateral. All the shares of capital stock, partnership interests, or member interests in a limited liability company, as the case may be, included in the Pledged Collateral to be pledged pursuant to the Pledge Agreements are or will be upon issuance duly authorized and validly issued. All shares of capital stock included in the Pledged Collateral are or will be upon issuance fully paid and nonassessable. All of the Pledged Collateral is owned beneficially and of record by the pledgor free and clear of any Lien or restriction on transfer, except as otherwise provided in the Pledge Agreements and except as the right of the Banks to dispose of the Pledged Collateral may be limited by the Securities Act of 1933, as amended, and the regulations promulgated by the Securities and Exchange Commission thereunder and by applicable state securities laws. Except as otherwise disclosed to the Banks, in writing, there are no shareholder or other agreements or understandings with respect to the Pledged Collateral. (s) Insurance. The insurance policies and bonds to which the Borrower or any Subsidiary is a party provide adequate coverage from reputable and financially sound insurers in amounts sufficient to insure the assets and risks of the Borrower and its Subsidiaries in accordance with prudent business practice in the industry of the Borrower and its Subsidiaries, including self-insurance to the extent customary, and such policies and bonds are valid and in full force and effect. (t) Compliance with Laws. The Borrower and its Subsidiaries are in compliance in all material respects with all applicable Laws (other than Environmental Laws which are specifically addressed in subsection (y)) in all jurisdictions in which the Borrower or any Subsidiary is presently or will be doing business except where the failure to do so would not constitute a Material Adverse Change. (u) Material Contracts, Licenses, Permits and Approvals. (A) As of the date hereof, Schedule 6.01(u) hereto lists the following contracts relating to the business operations of the Borrower and its Subsidiaries: (i) all employee benefit plans, employment agreements where the compensation paid by the -51- 59 Borrower or any Subsidiary exceeds $250,000 in any fiscal year, collective bargaining agreements and labor contracts (the "Labor Contracts"), (ii) all written provider or similar agreements (the "Provider Agreements") pursuant to which the Borrower and its Subsidiaries have received or may claim any entitlement to receive reimbursement from or as a result of (1) Medicaid, Medicare or Blue Cross programs, or (2) any other public or private reimbursement programs where the payments received by the Borrower or any Subsidiary exceeded or are expected to exceed $6,000,000 in the current fiscal year, (iii) all leases of real property where the payments made by the Borrower or any Subsidiary in the current fiscal year exceed or are expected to exceed $250,000, (iv) any contract or series of contracts with the same person for the furnishing or purchase of machinery, equipment, goods or services, where the payments made by the Borrower or any Subsidiary exceeded or are expected to exceed $1,000,000 in the aggregate in the current fiscal year; (v) all management contracts pursuant to which the Borrower or a Subsidiary provides management services to any other person where the payments received or expected to be received by the Borrower or any Subsidiary exceed $500,000 in the current fiscal year; and (vi) all other material contracts filed as exhibits to any report filed by the Borrower with the SEC during the past twelve months. All contracts listed on Schedule 6.01(u) and any Provider Agreements which provide for annual payments in excess of $6,000,000 which are not listed on Schedule 6.01(u) are valid, binding and enforceable upon the Borrower or its Subsidiaries, as the case may be, and, to the best knowledge of the Borrower, each of the other parties thereto in accordance with their respective terms and there is no default thereunder, to the knowledge of the Borrower and of its Subsidiaries, with respect to parties other than the Borrower or any of its Subsidiaries. There are no patient care agreements with patients or any other person or organization which deviate in such a material respect from the standard patient care forms used by the Borrower or any of its Subsidiaries as to constitute a Material Adverse Change. (B) Except as set forth on Schedule 6.01(u), the Borrower and each of its Subsidiaries has all material accreditations, authorizations, approvals, certificates of need, consents, licenses, permits and qualifications (collectively, "Approvals") required (i) for them to construct, acquire, own, manage, lease and/or operate their facilities and services, (ii) for them to receive payment and reimbursement from any patient or third party payor, to the extent in the case of (i) and (ii) such Approvals are presently required. The Borrower and each of its Subsidiaries have all other material Approvals required for the lawful operation of their businesses. All material Approvals of the Borrower and each of its Subsidiaries are in full force and effect and have not been amended or otherwise modified (except for modifications which would not have a material adverse effect upon the Borrower or any Subsidiary) rescinded, revoked or assigned, and no notice has been received of any violation of applicable Laws or any refusal to renew any Approval which could reasonably be expected to cause any of such Approvals to be modified, rescinded or revoked (except for modifications, rescissions or revocations which would not have a material adverse effect upon the Borrower and its Subsidiaries taken as a whole). The continuation, validity and effectiveness of all such Approvals will in no way be adversely affected by the transactions contemplated by this Agreement. Neither the Borrower nor any of its Subsidiaries knows of any reason why any of them will not be able to maintain all material Approvals necessary or appropriate to construct, own, lease, manage and operate all of their facilities and to otherwise conduct their businesses as -52- 60 now conducted and presently proposed to be conducted. There are no deficiencies to the conditions for participation by the Borrower or any Subsidiary in any Medicare, Medicaid or other reimbursement programs which would preclude such participation. (v) Investment Companies; Public Utility Holding Company. The Borrower is not an "investment company" registered or required to be registered under the Investment Company Act of 1940 or under the "control" of an "investment company" as such terms are defined in the Investment Company Act of 1940 and shall not become such an "investment company" or under such "control." The Borrower is not a "holding company" nor a "subsidiary" or "affiliate" of any Person that is a "holding company" as those terms are defined in the Public Utility Holding Company Act of 1935. (w) Plans and Benefit Arrangements. (i) The Borrower and each member of the ERISA Group are in compliance in all material respects with any applicable provisions of ERISA with respect to all Benefit Arrangements, Plans and Multiemployer Plans. There has been no Prohibited Transaction with respect to any Benefit Arrangement or any Plan or, to the best knowledge of the Borrower, with respect to any Multiemployer Plan or Multiple Employer Plan, which could result in any material liability of the Borrower or any other member of the ERISA Group. The Borrower and all members of the ERISA Group have made when due any and all payments required to be made under any agreement relating to a Multiemployer Plan or a Multiple Employer Plan or any Law pertaining thereto. With respect to each Plan and Multiemployer Plan, the Borrower and each member of the ERISA Group (i) have fulfilled in all material respects their obligations under the minimum funding standards of ERISA, (ii) have not incurred any liability to the PBGC and (iii) have not had asserted against them any penalty for failure to fulfill the minimum funding requirements of ERISA. (ii) To the best of the Borrower's knowledge, each Multiemployer Plan and Multiple Employer Plan is able to pay benefits thereunder when due. (iii) Neither the Borrower nor any other member of the ERISA Group has instituted or intends to institute proceedings to terminate any Plan. (iv) No event requiring notice to the PBGC under Section 302(f)(4)(A) of ERISA has occurred or is reasonably expected to occur with respect to any Plan, and no amendment with respect to which security is required under Section 307 of ERISA has been made or is reasonably expected to be made to any Plan. (v) The aggregate actuarial present value of all benefit liabilities (whether or not vested) under each Plan, determined on a plan termination basis, as disclosed in, and as of the date of, the most recent actuarial report for such Plan, does not exceed the aggregate fair market value of the assets of such Plan by an amount in excess of $250,000. (vi) Neither the Borrower nor any other member of the ERISA Group has incurred or reasonably expects to incur any material withdrawal liability under ERISA -53- 61 to any Multiemployer Plan or Multiple Employer Plan. Neither the Borrower nor any other member of the ERISA Group has been notified by any Multiemployer Plan or Multiple Employer Plan that such Multiemployer Plan or Multiple Employer Plan has been terminated within the meaning of Title IV of ERISA and, to the best knowledge of the Borrower, no Multiemployer Plan or Multiple Employer Plan is reasonably expected to be reorganized or terminated, within the meaning of Title IV of ERISA. (vii) To the extent that any Benefit Arrangement is insured, the Borrower and all members of the ERISA Group have paid when due all premiums required to be paid for all periods. To the extent that any Benefit Arrangement is funded other than with insurance, the Borrower and all members of the ERISA Group have made when due all contributions required to be paid for all periods. (x) Employment Matters. The Borrower and each of its Subsidiaries are in compliance with the Labor Contracts and all applicable federal, state and local labor and employment Laws including, but not limited to, those related to equal employment opportunity and affirmative action, labor relations, minimum wage, overtime, child labor, medical insurance continuation, worker adjustment and relocation notices, immigration controls and worker and unemployment compensation, where the failure to comply would constitute a Material Adverse Change. There are no outstanding grievances, arbitration awards or appeals therefrom arising out of the Labor Contracts or current or threatened strikes, picketing, handbilling or other work stoppages or slowdowns at facilities of the Borrower or any of its Subsidiaries which in any case would constitute a Material Adverse Change. The Borrower has delivered to the Agent true and correct copies of each of the Labor Contracts in effect as of the date hereof. (y) Environmental Matters. Except as disclosed on Schedule 6.01(y) hereto: (i) Neither the Borrower nor any of its Subsidiaries has received any Environmental Complaint from any Official Body or private person alleging that the Borrower, any of its Subsidiaries or any prior or subsequent owner of the Property is a potentially responsible party under the Comprehensive Environmental Response, Cleanup and Liability Act ("CERCLA"), 42 U.S.C. Section 9601, et seq., or is potentially liable under the Solid Waste Disposal Act, as amended, ("SWDA") 42 U.S.C. Section 6901, et seq., or any comparable state or foreign law, statute or regulation of either CERCLA or SWDA and the Borrower has no reason to believe that such an Environmental Complaint might be received. There are no pending or, to the Borrower's knowledge, threatened Environmental Complaints relating to the Borrower, any of its Subsidiaries or, to the Borrower's knowledge, any prior or subsequent owner of the Property pertaining to, or arising out of, any Environmental Conditions which, individually or in the aggregate, if adversely determined could reasonably be expected to have a material adverse effect on the Borrower or any Subsidiary of the Borrower taken as a whole. (ii) Except for conditions, violations or failure which individually and in the aggregate are not reasonably likely to result in a Material Adverse Change, there are no circumstances at, on or, to the best of the Borrower's knowledge, under the -54- 62 Property that constitute a breach of or non-compliance with any of the Environmental Laws, and there are, to the best of the Borrower's knowledge, no past or present Environmental Conditions at, on or under the Property or, to the Borrower's knowledge, at, on or, to the best of the Borrower's knowledge, under adjacent property, that prevent compliance with the Environmental Laws at the Property. (iii) Neither the Property nor any structures, improvements, equipment, fixtures, activities or facilities thereon or thereunder contain or use Regulated Substances except in compliance in all material respects with Environmental Laws. There are no processes, facilities, operations, equipment or any other activities at, on or, to the best of the Borrower's knowledge, under the Property, or, to the Borrower's knowledge, at, on or under adjacent property, that currently result in the release or threatened release of Regulated Substances onto the Property, except to the extent that such releases or threatened releases are not a material breach of or otherwise not a material violation of the Environmental Laws, or are not likely to result in a Material Adverse Change. (iv) There are no above ground storage tanks, underground storage tanks, or underground piping associated with such tanks, used for the management of Regulated Substances at, on or under the Property that (a) do not have, to the extent required by applicable Environmental Laws, a full operational secondary containment system in place, and (b) are not otherwise in compliance in all material respects with all Environmental Laws. To Borrower's best knowledge, there are no abandoned underground storage tanks or underground piping associated with such tanks, previously used for the management of Regulated Substances at, on or under the Property that have not been either abandoned in place, or removed, in accordance with the Environmental Laws. (v) The Borrower and each of its Subsidiaries have all material permits, licenses, authorizations, plans and approvals necessary under the Environmental Laws for the conduct of the business of the Borrower and each such Subsidiary as presently conducted. The Borrower and each such Subsidiary have submitted all material notices, reports and other filings required by the Environmental Laws to be submitted to an Official Body which pertain to past and current operations on the Property. (vi) Except for violations which individually and in the aggregate are not likely to result in a Material Adverse Change, all present and, to the best knowledge of the Borrower, past on-site generation, storage, processing, treatment, recycling, reclamation or disposal of Regulated Substances at, on, or under the Property and, to the best knowledge of the Borrower, all off-site transportation, storage, processing, treatment, recycling, reclamation or disposal of Regulated Substances has been done in accordance with the Environmental Laws. (z) Senior Debt Status. The obligations of the Borrower under this Agreement and the Notes and the obligations of the Subsidiaries of Borrower under the Guaranties do rank and will rank at least pari passu in priority of payment with all other Indebtedness of the Borrower or such Subsidiaries, as the case may be, except Indebtedness of -55- 63 the Borrower or its Subsidiaries to the extent secured by Permitted Liens. The obligations of the Borrower under this Agreement and the Notes constitute "Designated Senior Indebtedness" as such term is defined in the Indenture. There is no Lien upon or with respect to any of the properties or income of the Borrower or any of its Subsidiaries which secures Indebtedness or other obligations of any person except for Permitted Liens. (aa) Matters Regarding Leased Facilities and Certain Indebtedness of Subsidiaries. (i) Indebtedness Related to Leased Facilities. Schedule 6.01(aa) describes each Leased Facility and with respect thereto: (1) the Subsidiary Lessee which is the lessee thereof; (2) the Lessor thereof; (3) the amount of Lessor Indebtedness secured by any assets of such Leased Facility; (4) the Lessor Lender which is the obligee under such Lessor Indebtedness; (5) any assets of the Subsidiary Lessee leasing such Leased Facility which relate to such facility in which such Subsidiary Lessee has granted Liens in favor of the Lessor (it is acknowledged that the Lessor has assigned such Liens to the Lessor Lender) or Lessor Lender and confirmation that such Liens are Permitted Leased Facility Liens and Permitted Liens; (6) the original maturity date of such Lessor Indebtedness, without giving effect to subsequent amendments unless permitted by this Agreement; (7) whether a Facility Purchase Option has been granted as part of an Intercreditor Agreement between the Agent and the Lessor Lender with respect to such Leased Facility; (8) whether the Lessor Lender and Lessor have consented to the grant by the Subsidiary Lessee of a Leasehold Mortgage, in favor of the Agent for the benefit of the Banks and Liens on the assets of such Subsidiary Lessee (such Liens to be second in priority to the Liens granted by such Subsidiary Lessee to such Lessor Lender in such assets if such Subsidiary granted Liens in such assets to such Lessor Lender) with respect to such Leased Facility; (9) whether the applicable Lessor Lender has agreed to release its liens in the assets of the applicable Subsidiary Lessee leasing such Leased Facility related to such facility; (10) whether the applicable Lessor Lender has entered into a Non-Disturbance Agreement; (11) whether the applicable Lessor Lender has entered into an Intercreditor Agreement with the Agent; and (12) whether the applicable Lessor Lender has entered into a Trustee Agreement with the Agent. (ii) Indebtedness Related to Subsidiary Owned Facilities. Schedule 6.01(aa) describes each Owned Facility and with respect thereto: (1) the Subsidiary Owner; (2) the amount of the Owned Facility Indebtedness, secured by any assets of such Owned Facility; (3) the Owned Facility Lender which is the obligee under such Owned Facility Indebtedness; (4) the assets of the Subsidiary Owner relating to such Owned Facility in which the Subsidiary Owner has granted Liens in favor of such Owned Facility Lender and confirmation that such Liens are Permitted Owned Facility Liens and Permitted Liens; (5) the original maturity date of such Owned Facility Indebtedness, without giving effect to subsequent amendments unless permitted by this Agreement; (6) whether a Facility Purchase Option has been granted as part of an Intercreditor Agreement between the Agent and the Owned Facility Lender with respect to such Owned Facility; (7) whether the Owned Facility Lender has consented to the grant by the Subsidiary Owner of a Mortgage, in favor of the Agent for the benefit of the Banks and Liens on the assets of such Subsidiary Owner (such Liens to be second -56- 64 in priority to the Liens granted by such Subsidiary Owner to such Owned Facility Lender in such assets if such Subsidiary Owner granted Liens in such assets to such Owned Facility Lender) with respect to such Owned Facility; and (8) whether the applicable Owned Facility Lender entered into an Intercreditor Agreement with Agent. (bb) Mortgage and Leasehold Mortgage Liens. The Liens granted to the Agent for the benefit of the Banks pursuant to the Mortgages and the Leasehold Mortgages constitute valid Liens under applicable law having priority over all other Liens except that if otherwise permitted by this Agreement they may be subordinate to Liens in favor of the Owned Facility Lenders and Lessor Lenders, as the case may be, and Schedule 6.01(aa) indicates if such Liens are subordinated. All such action as will be necessary or advisable to establish such Liens of the Agent and its priority as described in the preceding sentence will be taken at or prior to the time required for such purpose, and there will be as of the date of execution and delivery of the Mortgages and Leasehold Mortgages no necessity for any further action in order to protect, preserve and continue such Liens and such priority. (cc) Affiliate Transactions. Schedule 6.01(cc) hereto sets forth a true and complete list of all transactions between the Borrower or any Subsidiary of the Borrower and Paragon or any Affiliate of Paragon. 6.02 Updates to Schedules. Should any of the information or disclosures provided on any of the Schedules attached hereto (other than Schedules relating solely to representations and warranties made solely as of the date expressly specified therein, which representations and warranties shall be true and correct as of such specified date) become outdated or incorrect in any material respect, the Borrower shall promptly provide the Agent in writing with such revisions or updates to such Schedule as may be necessary or appropriate to update or correct the same; provided, however that no Schedule shall be deemed to have been amended, modified or superseded by any such correction or update that would disclose the occurrence of an event or condition which constitutes a Potential Default or Event of Default, nor shall any breach of warranty or representation resulting from the inaccuracy or incompleteness of any such Schedule be deemed to have been cured thereby, unless and until the Required Banks, in their sole and absolute discretion, shall have accepted in writing such revisions or updates to such Schedule. ARTICLE VII CONDITIONS OF LENDING The obligation of each Bank to make Loans and of the Agent to issue Letters of Credit hereunder is subject to the performance by the Borrower of its obligations to be performed hereunder at or prior to the making of any such Loans or issuance of such Letters of Credit and to the satisfaction of the following conditions: 7.01 Each Additional Loan. At the time of making any Loans or issuing any Letters of Credit other than the Loan made on the Closing Date hereunder and after giving effect to the proposed borrowings: the representations and warranties of the Borrower contained in Article VI hereof shall be true on and as of the date of such additional Loan with the same effect -57- 65 as though such representations and warranties had been made on and as of such date (except representations and warranties which expressly relate solely to an earlier date or time, which representations and warranties shall be true and correct on and as of the specific dates or times referred to therein) and the Borrower shall have performed and complied with all covenants and conditions hereof; no Event of Default or Potential Default shall have occurred and be continuing or shall exist; the making of the Loans or issuing of such Letters of Credit shall not contravene any Law applicable to the Borrower or any of the Banks; and the Borrower shall have delivered to the Agent a duly executed and completed Loan Request. ARTICLE VIII COVENANTS 8.01 Affirmative Covenants. The Borrower covenants and agrees that until payment in full of the Loans and interest thereon, satisfaction of all of the Borrower's other obligations hereunder and termination of the Revolving Credit Commitments, the Borrower shall comply at all times with the following affirmative covenants: (a) Preservation of Existence, Etc. The Borrower shall, and shall cause each of its Subsidiaries to, maintain its corporate existence and its qualification to do business as a foreign corporation and good standing in each jurisdiction in which its ownership or lease of property or the nature of its business makes such qualification necessary, except where the failure to be so qualified or in such good standing would not constitute a Material Adverse Change. (b) Payment of Liabilities, Including Taxes, Etc. The Borrower shall, and shall cause each of its Subsidiaries to, duly pay and discharge all liabilities to which it is subject or which are asserted against it, promptly as and when the same shall become due and payable, including all taxes, assessments and governmental charges upon it or any of its properties, assets, income or profits, prior to the date on which penalties attach thereto, except to the extent that such liabilities, including taxes, assessments or charges, are being contested in good faith and by appropriate and lawful proceedings diligently conducted and for which such reserve or other appropriate provisions, if any, as shall be required by GAAP shall have been made, but only to the extent that failure to discharge any such liabilities would not result in any additional liability which would adversely affect to a material extent the financial condition of the Borrower and its Subsidiaries taken as a whole and which would affect the Collateral. (c) Maintenance of Insurance. The Borrower shall, and shall cause each of its Subsidiaries to, insure its properties and assets against loss or damage by fire and such other insurable hazards as such assets are commonly insured (including fire, extended coverage, property damage, worker's compensation, public liability and business interruption insurance) and against other risks (including errors and omissions) in such amounts as similar properties and assets are insured by prudent companies in similar circumstances carrying on similar businesses, and with reputable and financially sound insurers, including self-insurance to the extent customary. At the request of the Agent, the Borrower shall deliver (x) on the Closing Date and annually thereafter an original certificate of insurance signed by the Borrower's independent -58- 66 insurance broker describing and certifying as to the existence of the insurance on the Collateral required to be maintained by this Agreement and the other Loan Documents and (y) from time to time a summary schedule indicating all insurance then in force with respect to the Borrower. The insurance requirements set forth herein may be satisfied through blanket insurance obtained and maintained by Paragon. (d) Maintenance of Properties and Leases. The Borrower shall, and shall cause each of its Subsidiaries to, maintain in good repair, working order and condition (ordinary wear and tear excepted) in accordance with the general practice of other businesses of similar character and size, all of those properties useful or necessary to its business, and from time to time, the Borrower will make or cause to be made all appropriate repairs, renewals or replacements thereof. (e) Maintenance of Patents, Trademarks, Etc. The Borrower shall, and shall cause each of its Subsidiaries to, maintain in full force and effect all patents, trademarks, trade names, copyrights, licenses, franchises, permits and other authorizations necessary for the ownership and operation of its properties and business if the failure so to maintain the same would constitute a Material Adverse Change. (f) Visitation Rights. The Borrower shall, and shall cause each of its Subsidiaries to, permit any of the officers or authorized employees or representatives of the Agent or any of the Banks to visit and inspect any of its properties and to examine and make excerpts from its books and records and discuss its business affairs, finances and accounts with its officers, all in such detail and at such times during normal business hours and as often as any of the Banks may reasonably request, provided that each Bank shall provide the Borrower and the Agent with reasonable notice prior to any visit or inspection. In the event any Bank desires to conduct an audit of the Borrower, such Bank shall make a reasonable effort to conduct such audit contemporaneously with any audit to be performed by the Agent. (g) Keeping of Records and Books of Account. The Borrower shall, and shall cause each of its Subsidiaries to, maintain and keep proper books of record and account which enable the Borrower and its Subsidiaries to issue financial statements in accordance with GAAP and as otherwise required by applicable Laws of any Official Body having jurisdiction over the Borrower or any of its Subsidiaries, and which accurately and fairly reflect the transactions and dispositions of assets of the Borrower or such Subsidiary. (h) Plans and Benefit Arrangements. The Borrower shall, and shall cause each member of the ERISA Group to, comply with ERISA, the Internal Revenue Code and other applicable Laws applicable to Plans and Benefit Arrangements except where such failure, alone or in conjunction with any other failure, would not result in a Material Adverse Change. Without limiting the generality of the foregoing, the Borrower shall cause all of its Plans and all Plans maintained by any member of the ERISA Group to be funded in accordance with the minimum funding requirements of ERISA and shall make, and cause each member of the ERISA Group to make, in a timely manner, all contributions due to Plans, Benefit Arrangements and Multiemployer Plans. -59- 67 (i) Compliance With Laws. The Borrower shall, and shall cause each of its Subsidiaries to, comply with all applicable Laws, including all Environmental Laws, in all respects provided that it shall not be deemed to be a violation of this Section 8.01(i) if any failure to comply with any Law would not result in fines, penalties, other similar liabilities or injunctive relief which in the aggregate would constitute a Material Adverse Change. Upon the reasonable request of the Required Banks, the Borrower shall deliver to the Agent and the Banks such opinions of counsel regarding the Loan Parties' compliance with the representations set forth in Sections 6.01(m) and 6.01(u)(B) hereof and other customary matters regarding the compliance of the Loan Parties with applicable healthcare regulatory Laws. (j) Use of Proceeds. The Borrower will use the proceeds of the Loans only for lawful purposes in accordance with Section 2.08 hereof as applicable and such uses shall not contravene any applicable Law or any other provision hereof. (k) [Intentionally Omitted.] (l) Subordination of Intercompany Loans, Other Loans and Advances to the Borrower. Except for Indebtedness described on Schedule 8.01(l), the Borrower shall cause any intercompany Indebtedness, and shall cause any other Indebtedness, loans or advances owed by any Loan Party to any other person (other than a Loan Party) to be subordinated to the Loan Parties' obligations under the Loan Documents on the terms set forth in Exhibit 8.01(l), with such revisions thereto as are reasonably satisfactory to the Agent. (m) Approval of Financial Statements in Permitted Acquisitions; Notice of Permitted Acquisition. (i) Approval of Financial Statements. The Borrower shall deliver to the Banks a certificate in the form of Exhibit 8.01(m)(i) hereof (the "Acquisition Approval Certificate") before making a Permitted Acquisition if they desire that the cash flow of the business to be acquired during periods prior to the acquisition shall be included when they compute Cash Flow from Operations under this Agreement. The Borrower shall attach to such Acquisition Approval Certificate copies of the historical financial statements of the business to be acquired including the annual and interim balance sheets and income statements for at least three (3) fiscal years prior to the Permitted Acquisition and pro forma statements which shall include a combined balance sheet as of the acquisition date and cash flow statements for the preceding year. The pro forma statements shall set forth: (1) Consolidated Cash Flow from Operations of the Loan Parties and the acquired business, adjusted in accordance with clause (A) of the definition of Consolidated Cash Flow from Operations, for the Acquisition Income Reporting Period in connection with such Permitted Acquisition, and (2) Total Indebtedness on the date of the Permitted Acquisition after giving effect to the acquisition and the Loans to be made on such date, and (3) the ratio of the amount in clause (2) to the amount in clause (1), which ratio shall not exceed (A) 5.25 to 1.0 through and including September 30, 1998; (B) 5.00 to 1.0 from October 1, 1998 through and including September 30, 1999; (C) 4.75 to 1.0 from October 1, 1999 through and including September 30, 2000; and (D) 4.5 to 1.0 from October 1, 2000 and thereafter. The Acquisition Approval Certificate shall confirm the accuracy of the -60- 68 foregoing computations and that, after giving effect to the Permitted Acquisition and the Loans made on the date thereof, no Event of Default shall exist and the Loan Parties shall be in compliance with all of their covenants hereunder, assuming, for purposes of Borrower's financial covenants, that all items of income, expense and cash flow are reported for the Acquisition Income Reporting Period and that all balance sheet items (such as Indebtedness) are measured on the date of such Permitted Acquisition. The Loan Parties may make the Permitted Acquisition prior to receiving the Required Banks' approval of Borrower's Acquisition Approval Certificate with respect thereto; provided that the Loan Parties may not, until they have received such approval, include the cash flow of the business to be acquired for periods prior to the acquisition in their net income when they compute Consolidated Cash Flow from Operations. The Banks shall use their best efforts to respond to the Borrower's request for approval of each Acquisition Approval Certificate within two (2) Business Days following the Banks' receipt of such certificate and shall not unreasonably withhold or delay such approval. The Borrower may request that extraordinary, nonrecurring expenses under GAAP incurred in connection with such Permitted Acquisition be excluded from the Consolidated Net Income of the Loan Parties and from the net income of the business to be acquired when they compute Consolidated Cash Flow from Operations pursuant to clause (1) above. Examples of such expenses include, without limitation, transaction costs, debt prepayments and similar charges, brokers' fees, attorneys' fees and accountants' fees. The foregoing expenses shall be excluded from net income in such computations of Consolidated Cash Flow from Operations if the Required Banks agree in writing to such request. (ii) Notice. The Borrower shall deliver to the Banks a notice in the form of Exhibit 8.01(m)(ii) (the "Acquisition Notice Certificate") at least two (2) Business Days before making any Permitted Acquisition except for: (1) a Permitted Acquisition described in Section 8.01(m)(i) with respect to which the Borrower is delivering an Acquisition Approval Certificate, or (2) a Permitted Acquisition if the Purchase Price in connection therewith is less than $2,500,000. The Acquisition Notice Certificate shall set forth the ratio of (1) Consolidated Cash Flow From Operations (excluding the cash flow of the acquired business) for the Acquisition Income Reporting Period in connection with such Permitted Acquisition, and (2) Total Indebtedness on the date of the Permitted Acquisition after giving effect to the acquisition and the Loans to be made on such date, which ratio shall not exceed (A) 5.25 to 1.0 through and including September 30, 1998; (B) 5.00 to 1.0 from October 1, 1998 through and including September 30, 1999; (C) 4.75 to 1.0 from October 1, 1999 through and including September 30, 2000; and (D) 4.5 to 1.0 from October 1, 2000 and thereafter. The Acquisition Notice Certificate also shall confirm that, after giving effect to the Permitted Acquisition and the Loans made on the date thereof, no Event of Default shall exist and the Loan Parties shall be in compliance with all of their covenants hereunder, assuming, for purposes of Borrower's financial covenants, that all items of income, expense and cash flow are reported for the Acquisition Income Reporting Period and that all balance sheet items (such as Indebtedness) are measured on the date of such Permitted Acquisition. (iii) Additional Information. With respect to any Acquisition Approval Certificate or Acquisition Notice Certificate, the Borrower shall provide to the Banks, -61- 69 as the Banks may reasonably request detailed calculations and information supporting the financial calculations therein and the financial statements attached thereto. (n) Dissolution of Certain Subsidiaries. Borrower shall cause Pinnacle Rehab of Gwinnette and Pinnacle's Kansas Joint Venture to be dissolved on or before December 31, 1998. Borrower shall not, directly or indirectly, make any capital contributions or other investments in, loans to, guarantees or other obligations on behalf of, or other payments, distributions or contributions to or for the benefit of, Pinnacle Rehab of Gwinnette or Pinnacle's Kansas Joint Venture on or after the Closing Date, except for payment of immaterial expenses on behalf of such entities relating to their dissolution. or dividend. [REVIEW STATUS] (o) [Intentionally Omitted]. (p) Further Assurances. Each Loan Party shall, from time to time, at its expense, faithfully preserve and protect the Agent's Lien on or perfected security interest in the Collateral as a continuing perfected Lien, subject only to Permitted Liens, and shall do such other acts and things as the Agent in its sole discretion may deem necessary or advisable from time to time in order to preserve, perfect and protect the Liens granted under the Loan Documents and to exercise and enforce its rights and remedies thereunder with respect to the Collateral. (q) Owned Facilities - Termination of Liens; Intercreditor Agreements. The Borrower shall: (i) Cause any Lien securing any Owned Facility Indebtedness to be terminated on or before the earlier of: the maturity of such Owned Facility Indebtedness (without giving effect to any extension of such maturity after the Sixteenth Amendment Effective Date, unless such extension of maturity is otherwise approved in accordance with this Agreement) or any refinancing, replacement or substitution of such Owned Facility Indebtedness, unless, in the case of a refinancing, such refinancing is otherwise approved in accordance with this Agreement; (ii) Not permit the amount of Owned Facility Indebtedness secured by Liens in favor of an Owned Facility Lender to exceed the amount of such Owned Facility Indebtedness existing on the Sixteenth Amendment Effective Date; (iii) Cause each Subsidiary Owner not to grant a Lien on any asset of such Subsidiary Owner if the Owned Facility Lender has previously terminated its Liens or has never obtained a Lien on such asset; and (iv) Cause each Owned Facility Lender and any other person which loans money to any Subsidiary Owner, or otherwise obtains a Lien in any of the assets of any Subsidiary Owner relating to any of the Owned Facilities (whether by assignment of the Owned Facility Indebtedness or otherwise), on the date of such loan or lien to execute and deliver to Agent an Intercreditor Agreement and Borrower shall deliver or cause to be delivered -62- 70 to Agent a true and correct copy of the original of each Intercreditor Agreement within one (1) Business Day after such agreement has been executed. The Borrower shall use its best efforts to obtain each Intercreditor Agreement in the form of Exhibit 1.01(I)(2)(A), and if the Borrower is not successful in obtaining such form of Intercreditor Agreement after using best efforts, then the Borrower shall use best efforts to obtain an Intercreditor Agreement in the form of Exhibit 1.01(I)(2)(B). If the Borrower is not successful, after using best efforts, in obtaining either such form of Intercreditor Agreement, then the Borrower shall negotiate such other Intercreditor Agreement as is reasonably satisfactory, in form and substance, to the Agent. (r) Leased Facilities - Termination of Liens; Intercreditor Agreements; Trustee Agreements. The Borrower shall: (i) Cause any Lien securing any Lessor Indebtedness to be terminated on or before the earlier of: (i) the maturity of such Lessor Indebtedness (without giving effect to any extension of such maturity after the Sixteenth Amendment Effective Date unless such extension of maturity is otherwise approved in accordance with this Agreement) or (ii) any refinancing, replacement or substitution of such Lessor Indebtedness unless, in the case of a refinancing, such refinancing is otherwise approved in accordance with this Agreement; (ii) Not permit the amount of Lessor Indebtedness secured by Liens in favor of the Lessor Lenders to exceed the amount of such Indebtedness existing on the Sixteenth Amendment Effective Date; and (iii) Cause each Subsidiary Lessee not to grant a Lien on any asset of such Subsidiary Lessee if the applicable Lessor or Lessor Lender has previously terminated its Liens or has never obtained a Lien on such asset; (iv) Deliver to the Agent for the benefit of the Banks an Intercreditor Agreement with respect each Lessor Lender and, if reasonably requested by the Agent, a Non-Disturbance Agreement. Each Non-Disturbance Agreement shall be satisfactory, in form and substance to the Agent. Borrower shall deliver or cause to be delivered to Agent a true and correct copy of each Non-Disturbance Agreement and the original of each Intercreditor Agreement within one (1) Business Day after such agreement has been executed pursuant to the preceding sentence. The Borrower shall use its best efforts to obtain each Intercreditor Agreement in the form of Exhibit 1.01(I)(1)(A), and if the Borrower is not successful in obtaining such form of Intercreditor Agreement after using best efforts, then the Borrower shall use best efforts to obtain an Intercreditor Agreement in the form of Exhibit 1.01(I)(1)(B). If the Borrower is not successful, after using best efforts, in obtaining either such form of Intercreditor Agreement, then the Borrower shall negotiate such other Intercreditor Agreement as is reasonably satisfactory, in form and substance, to the Agent; and (v) Cause if reasonably requested by the Agent, each Lessor listed on Schedule 6.01(aa) to execute and deliver to the Agent a Trustee Agreement; provided, however, that if, with respect to Leased Facilities leased by Loan Parties prior to the Sixteenth -63- 71 Amendment Effective Date, following the Sixteenth Amendment Effective Date the Loan Parties are otherwise in compliance with all requirements under this Agreement relating to Lessor Indebtedness, Leased Facilities and Permitted Leased Facility Liens, then no additional Trustee Agreements will be required with respect to such Leased Facilities so long as the lease of such facility continues following the Sixteenth Amendment Effective Date on terms and conditions identical to those approved by the Required Banks prior to the Sixteenth Amendment Effective Date. Each Trustee Agreement shall be satisfactory, in form and substance to the Agent. 8.02 Negative Covenants. The Borrower covenants and agrees that until payment in full of the Loans and interest thereon, satisfaction of all of the Borrower's other obligations hereunder and termination of the Revolving Credit Commitments, the Borrower shall comply with the following negative covenants: (a) Indebtedness. Subject to Section 8.02(v), the Borrower shall not, and shall not permit any of its Restricted Subsidiaries to, at any time create, incur, assume or suffer to exist any Indebtedness, except: (i) Indebtedness under the Loan Documents; (ii) Existing Indebtedness as of the Sixteenth Amendment Effective Date as set forth on Schedule 8.02(a) hereto (including, subject to the other provisions of this Agreement, any extensions or renewals thereof provided there is no increase in the amount thereof or other significant change in the terms thereof adverse to any Loan Party or to any Bank unless otherwise specified on Schedule 8.02(a)); provided further that the Owned Facility Indebtedness and Lessor Indebtedness are also subject to the covenants and limitations described in Sections 8.01(q) and (r) and any refinancing, extension or renewal of any Owned Facility Indebtedness or Lessor Indebtedness is also subject to satisfaction of the conditions set forth in Exhibit 1.01(C) hereto; (iii) Capitalized leases as and to the extent permitted under Section 8.02(p); (iv) Indebtedness which is subordinated in accordance with the provisions of Section 8.01(1); (v) Indebtedness secured by Purchase Money Security Interests in an aggregate amount for the Borrower and its Subsidiaries on a consolidated basis at any time not exceeding $10,000,000; (vi) Indebtedness of a Loan Party to the Borrower or to a wholly-owned Subsidiary of the Borrower; (vii) the Subordinated Notes, provided that neither the subordination provisions contained in the Indenture nor Section 1008 [Limitation on Indebtedness] of the Indenture shall be amended after the Subordinated Indebtedness Incurrence Date and provided further that the Indenture is not otherwise amended after the Subordinated -64- 72 Indebtedness Incurrence Date if the effect thereof would (i) accelerate the due date or increase the amount of any payment due from the Borrower thereunder, (ii) change the rate at which interest is charged thereunder, or (iii) impose material restrictions or obligations on the Borrower or the other Loan Parties which are not imposed thereunder on the Closing Date or add any term thereto which is less favorable in any material respect to the Loan Parties than the terms of the Indenture on the Subordinated Indebtedness Incurrence Date or which is more restrictive to any of the Loan Parties than the terms of the Credit Agreement; (viii) Guaranties which constitute Indebtedness as permitted pursuant to Section 8.02(c); (ix) Indebtedness not exceeding $500,000 of the Borrower to CoreStates Bank, N.A. in respect of an overnight unsecured overdraft facility at any time; (x) Owned Facility Indebtedness incurred after the Sixteenth Amendment Effective Date, if the principal amount of and other terms and conditions with respect to such Owned Facility Indebtedness are acceptable to the Required Banks, (including, without limitation, satisfaction of all conditions set forth on Exhibit 1.01(C)); provided, that all Owned Facility Indebtedness is subject to the covenants and limitations set forth in Section 8.01(q); and (xi) the Permitted Subordinated Indebtedness. (b) Liens. The Borrower shall not, and shall not permit any of the other Loan Parties or Unrestricted Subsidiary which is an Excluded Entity with respect to which Restricted Investments have been made as permitted pursuant to Section 8.02(d)(iv) to, at any time create, incur, assume or suffer to exist any Lien on any of its or their property or assets, tangible or intangible, now owned or hereafter acquired, or agree or become liable to do so, except Permitted Liens. (c) Guaranties. Except as described in Schedule 8.02(c), the Borrower shall not, and shall not permit any of the other Loan Parties to, at any time, directly or indirectly, become or be liable in respect of any Guaranty except: (i) Guaranties of any obligation or liability of another Loan Party that is permitted under the other provisions of this Agreement, (ii) Guaranties which are not required by GAAP to be disclosed in the Borrower's audited consolidated financial statements (including the footnotes thereto), (iii) Guaranties of Indebtedness incurred as part of a permitted Restricted Investment pursuant to Section 8.02(d)(iv), and (iv) Guaranties which are subordinated on terms reasonably acceptable to the Agent. (d) Loans and Investments. The Borrower shall not, and shall not permit any of the other Loan Parties, to, at any time make or suffer to remain outstanding any loan or advance to, or purchase, acquire or own any stock, bonds, notes or securities of, or any partnership interest (whether general or limited) in, or any other investment or interest in, or make any capital contribution to, any other person, or agree, become or remain liable to do any of the foregoing, except: -65- 73 (i) trade credit extended on usual and customary terms in the ordinary course of business; (ii) advances to employees to meet expenses incurred by such employees in the ordinary course of business; (iii) Permitted Investments; (iv) Restricted Investments ; provided that (i) the Excluded Entity in which the Restricted Investment is made is engaged in a business which is ancillary and related to the business of the Loan Parties; (ii) the Loan Party making a Restricted Investment is either a shareholder, member or partner of the Excluded Entity in which a Restricted Investment is made; (iii) the stock, equity interests in a limited liability company or partnership interests owned by a Loan Party in the Excluded Entity in which a Restricted Investment is made are pledged to the Agent on a first priority basis for the benefit of the Banks; (iv) to the extent that any Excluded Entity incurs Indebtedness payable to any person other than a Loan Party (the "Third Party Lender") in excess of $5,000,000, prior to incurring such Indebtedness, the Borrower shall cause the Third Party Lender to enter into an intercreditor agreement with the Agent on behalf of the Banks, in form and substance satisfactory to the Agent in its sole discretion with respect to the Indebtedness of such Excluded Entity payable to the Third Party Lender and any Indebtedness of such Excluded Entity payable to either the Banks or any Loan Party; (v) to the extent that any individual Restricted Investment exceeds $7,500,000 or any series of related Restricted Investments in the aggregate exceed $7,500,000 prior to making any such Restricted Investment, the Borrower shall have obtained the written approval of the Required Banks; and (vi) the sum of (x) the aggregate amount of Restricted Investments outstanding at any time, plus (y) the aggregate amount of Special Distributions made from and after the Seventeenth Amendment Effective Date, shall not exceed in the aggregate for the Borrower and the other Loan Parties Seventy-Five Million Dollars ($75,000,000); (v) loans, advances and investments in Restricted Subsidiaries; and (vi) loans and advances in the aggregate not to exceed $8,000,000 at any time outstanding to officers and senior management of the Loan Parties, so long as each such advance is on terms and conditions reasonably satisfactory to the Agent and so long as the Borrower gives five (5) Business Days' prior notice to the Agent of each loan or advance and the recipient of each loan or advance is reasonably satisfactory to the Agent. (vii) the purchase by the Borrower in whole or in part of an aggregate amount not to exceed $150,000,000 of the Subordinated Notes put to the Borrower under Section 1015 of the Indenture as a result of the "change of control" (as defined in the Indenture) resulting from the consummation of the Paragon Acquisition so long as after giving effect to each such purchase the Borrower is in pro-forma compliance with the financial covenants set forth in Sections 8.02(q) [Minimum Fixed Charge Coverage Ratio], 8.02(r) [Maximum Leverage Ratio], 8.02(t) [Minimum Net Worth] and 8.02(u) [Senior Indebtedness to Cash Flow from Operations Ratio], no Event of Default or Potential Default exists and is -66- 74 continuing, not more than $25,000,000 in the aggregate of proceeds of Loans shall have been used for purchases of Subordinated Notes from and after the Seventeenth Amendment Effective Date, and the Borrower demonstrates and certifies such pro-forma compliance and that no Event of Default or Potential Default exists and is continuing to the Agent, to the satisfaction of the Agent. [NOTE: QUARTERLY COMPLIANCE CERTIFICATE TO INCLUDE DETAIL OF REPURCHASES.] (e) Amounts Paid by the Borrower to Paragon; Dividends and Related Distributions. The Borrower shall not, and shall not permit any of its Subsidiaries to, make or pay, or agree to become or remain liable to make or pay, any dividend or other distribution of any nature (whether in cash, property, securities or otherwise) on account of or in respect of their respective shares of capital stock or partnership interests, as the case may be, or on account of the purchase, redemption, retirement or acquisition of their respective shares of capital stock (or warrants, options or rights therefor) or partnership interests, as the case may be, except (i) dividends or distributions in respect of a partnership interest or capital stock payable by any Subsidiary to the Borrower or any other Restricted Subsidiary, (ii) dividends payable by the Borrower solely in shares of capital stock of the Borrower, (iii) up to the Permitted Distribution Amount of distributions per year payable in the aggregate by any Subsidiary of the Borrower which is a limited liability company or partnership to non-Affiliate members of such limited liability company or non-Affiliate limited partners of such partnership, so long as after giving effect thereto no Event of Default or Potential Default has occurred and is continuing and so long as at least five (5) Business Days prior to the making of any such distribution the Borrower provides written notice to the Agent, together with a detailed calculation, certified by the Chief Financial Officer of Borrower, setting forth in detail the relevant Subsidiary's compliance with the ratio set forth in clause (A) of the definition of Permitted Distribution Amount or, as the case may be, such Subsidiary's compliance with clause (B) of the definition of Permitted Distribution Amount, in either case with respect to the proposed distribution as of the date of the making thereof, (iv) so long as no Event of Default or Potential Default exists and is continuing after giving effect thereto, a one-time dividend by the Borrower to Paragon payable on such date as the Borrower elects (so long as on the date of payment, but prior to such payment, the Borrower has delivered to the Agent a certification that after giving effect to such dividend or distribution no Event of Default or Potential Default exists and is continuing and that the Borrower is in compliance with the financial covenants set forth in Section 8.02(r) [Maximum Leverage Ratio] and Section 8.02(u) [Senior Indebtedness to Cash Flow from Operations Ratio]), in an amount not exceeding, as of the date of payment, the Adjusted Net Income of the Borrower and its Subsidiaries determined in accordance with GAAP for the most recent twelve fiscal calendar months prior to such date of payment; (v) amounts payable by the Borrower to Paragon as reimbursement of ordinary course business expenses of the Borrower paid by Paragon on behalf of the Borrower; (vi) other dividends or distributions payable by the Borrower to Paragon from time to time in an aggregate amount (including all dividends and distributions made or proposed to be made pursuant to this clause (vi) from and after the Seventeenth Amendment Effective Date through the proposed date of payment) not to exceed 50% of the Adjusted Net Income of the Borrower and its Subsidiaries determined in accordance with GAAP, for each fiscal quarter ending from and after the Seventeenth Amendment Effective Date through the last day of the fiscal quarter ended prior to the proposed date of payment of such dividend or distribution so long as after -67- 75 giving effect to each such dividend or distribution the Fixed Charge Coverage Ratio is equal to or greater than 2.25 to 1.0, the Borrower is in compliance with the financial covenants set forth in Sections 8.02(r) [Maximum Coverage Ratio], 8.02(t) [Minimum Net Worth] and 8.02(u) [Senior Indebtedness to Cash Flow from Operations Ratio], no Event of Default or Potential Default exists and is continuing, and prior to making each such permitted dividend or distribution pursuant to this clause (vi) the Borrower shall have certified and demonstrated, in writing, satisfactory to the Agent, pro-forma compliance with such financial covenants and that no Event of Default or Potential Default exists or is continuing; and (vii) dividends or distributions by the Borrower to Paragon not to exceed in the aggregate $25 million from and after the Seventeenth Amendment Effective Date to reimburse Paragon for costs and expenses incurred in connection with the Paragon Acquisition. For purposes of demonstrating compliance with the financial covenant set forth in Section 8.02(r), Total Indebtedness shall be calculated as of each date of determination (after giving effect to each purchase or redemption of the Borrower's stock) and Consolidated Cash Flow from Operations shall be calculated as of each date of determination (after giving effect to each purchase or redemption of the Borrower's stock) for the four fiscal quarters then ended. It is expressly agreed that, in accordance with Section 8.02(d)(iv), the aggregate amount of Restricted Investments outstanding at any time, plus the aggregate amount of Special Distributions made from and after the Seventeenth Amendment Effective Date, shall not exceed in the aggregate for the Borrower and the other Loan Parties Seventy-Five Million Dollars ($75,000,000). It is expressly agreed that notwithstanding the foregoing provision of this Section 8.02(e) at no time shall the Borrower make a dividend or distribution to Paragon otherwise permitted by Section 8.02(e)(vi) or (vii) above if after giving effect to such dividend or distribution the aggregate Commitments would exceed the aggregate outstanding Loans as of the time of such proposed dividend or distribution by less than Twenty Five Million Dollars ($25,000,000). (f) Liquidations, Mergers, Consolidations, Acquisitions. The Borrower shall not, and shall not permit any of the other Loan Parties to, dissolve, liquidate or wind-up its affairs, or become a party to any merger or consolidation, or acquire by purchase, lease or otherwise all or substantially all of the assets or capital stock of any other person, provided that: (i) any wholly owned Subsidiary of the Borrower may consolidate or merge into the Borrower (so long as the Borrower is the survivor) or any other wholly owned Subsidiary of the Borrower; -68- 76 (ii) a Subsidiary of the Borrower that is not a Material Subsidiary may be dissolved, liquidated or wound up provided that from the date of this Agreement through the Expiration Date, the total assets of the non-Material Subsidiaries which so dissolve, liquidate or wind up shall not exceed $25,000,000 in the aggregate; (iii) the Borrower or a Restricted Subsidiary of the Borrower may acquire all of the capital stock of another corporation so long as (u) the Purchase Price for such acquisition shall not exceed $100,000,000, (v) the aggregate Purchase Price for such acquisition together with all previous acquisitions permitted under clauses (iii) and (iv) of this Section 8.02(f) shall not exceed $200,000,000 in any fiscal year of Borrower, (v) such acquired corporation, simultaneous with the acquisition thereof by a Loan Party, executes and delivers to the Agent for the benefit of the Banks a Guaranty Agreement and a Pledge Agreement substantially in the form of Exhibits 1.01(G) and 1.01(P), respectively, and also delivers to the Agent such opinions of counsel and other documents in connection therewith as the Agent may reasonably request, (w) all of the issued and outstanding capital stock of such acquired corporation owned by a Loan Party is pledged to the Agent for the benefit of the Banks pursuant to a Pledge Agreement substantially in the form of Exhibit 1.01(P) hereto, (x) after giving effect to such proposed acquisition, no Event of Default shall have occurred and be continuing, (y) after giving effect to such proposed acquisition (and without limiting the generality of the preceding clause (iii)(x)), the Borrower is in compliance with the Leverage Ratio set forth in Section 8.02(r) and the Borrower demonstrates such compliance pursuant to Section 8.01(m) (if Section 8.01(m) requires such demonstration of compliance), and (z) in the case of a merger involving the Borrower, the Borrower shall be the survivor of such merger, and in the case of a merger involving any Restricted Subsidiary the survivor of such merger shall be either such Restricted Subsidiary or a Person which, effective upon consummation of such merger shall have become a Restricted Subsidiary of the Borrower, shall have joined this Agreement and the other Loan Documents as a Loan Party (including , without limitation, execution and delivery of a Guaranty Agreement substantially in the form of Exhibit 1.01(G)), shall have delivered such opinions of counsel and other documents as the Agent may reasonably request and whose equity interests shall have been pledged to the Agent for the benefit of the Banks on a first priority perfected basis pursuant to a Pledge Agreement; (iv) the Borrower or any Restricted Subsidiary may merge or consolidate with, or acquire all or substantially all of the assets of another person so long as (w) the Purchase Price for such acquisition, merger or consolidation shall not exceed $100,000,000, (x) the aggregate Purchase Price for such acquisition together with all previous acquisitions permitted under clauses (iii) and (iv) of this Section 8.02(f) shall not exceed $200,000,000 in any fiscal year of Borrower, (y) after giving effect to such proposed acquisition, merger or consolidation the Borrower or a Restricted Subsidiary of the Borrower is the survivor entity and no Event of Default shall have occurred and be continuing, and (z) after giving effect to such proposed acquisition, merger or consolidation, the Borrower is in compliance with the Leverage Ratio set forth in Section 8.02(r) and the Borrower demonstrates such compliance pursuant to Section 8.01(m) (if Section 8.01(m) requires such demonstration of compliance); and -69- 77 (v) the Borrower may consummate the Paragon Acquisition, without regard for any of the dollar imitations set forth in Section 8.02(f)(iv) hereof and without counting against any dollar limitations contained in such Section. For purposes of the preceding clauses (iii)(z) and (iv)(z), the Leverage Ratio set forth in Section 8.02(r) shall be calculated as follows: (i) Total Indebtedness shall be determined as of the date of the proposed acquisition, after giving effect thereto, and (ii) Consolidated Cash Flow from Operations shall be calculated for the twelve-month period ending on the last day of the fiscal quarter of the Borrower which precedes such date of acquisition. (g) Dispositions of Assets or Subsidiaries. The Borrower shall not, and shall not permit any of the other Loan Parties to, sell, convey, assign, lease, abandon or otherwise transfer or dispose of, voluntarily or involuntarily, any of its properties or assets, tangible or intangible (including but not limited to sale, assignment, discount or other disposition of accounts, contract rights, chattel paper, equipment or general intangibles with or without recourse or of capital stock, shares of beneficial interest or partnership interests of a Subsidiary of the Borrower), except: (i) any sale, transfer or lease of assets in the ordinary course of business which are no longer necessary or required in, or which are not material to, the conduct of the Borrower's or such Subsidiary's business; (ii) any sale, transfer or lease of assets by any wholly-owned Loan Party to the Borrower or any other wholly owned Loan Party (or by the Borrower to a wholly owned Loan Party); (iii) any sale, transfer or lease of assets in the ordinary course of business which are replaced by substitute assets acquired or leased within the parameters of Section 8.02(p) provided such substitute assets are subject to the Banks' Prior Security Interest; (iv) any sale or transfer of assets which are obsolete or no longer used or useful in the business of the Borrower or its Subsidiaries; provided that such sales, transfers or dispositions shall not exceed, in any fiscal year, $1 million in the aggregate for the Borrower and its Subsidiaries; (v) any sale, transfer or lease of assets, other than those specifically excepted pursuant to clauses (i) through (iv) above, which is approved by the Required Banks so long as (x) the proceeds of such sale, transfer or lease are applied as a mandatory prepayment of the Loans to the extent required by the provisions of Section 5.05 of this Agreement, (y) after giving effect to such proposed disposition, no Event of Default shall have occurred and be continuing, and (z) after giving effect to such proposed disposition (and without limiting the generality of the foregoing clause (y)), the Borrower is in compliance (and, with respect to sales, transfers or leases of assets of Subsidiaries which are not Material Subsidiaries, which sales, transfers or leases individually or in the aggregate exceed $35 million for the period from October 1, 1997 through and including the Expiration Date, the Borrower demonstrates such compliance to the Agent in detail reasonably satisfactory to the Agent) with -70- 78 the leverage ratio set forth in Section 8.02(r). For purposes of this Section 8.02(g)(v), the leverage ratio set forth in Section 8.02(r) shall be calculated as follows: (i) Indebtedness of the Borrower and its Subsidiaries shall be determined as of the date of the proposed disposition, after giving effect thereto, and (ii) Consolidated Cash Flow from Operations shall be calculated for the twelve-month period ending on the last day of the fiscal quarter of the Borrower which precedes such date of disposition but shall exclude therefrom all amounts attributable to the assets which are sold, transferred or leased; or (vi) any Special Distribution permitted under Section 8.02(e) hereof or any other dividend or distribution permitted under Section 8.02 (e)(v) hereof. (h) Affiliate Transactions. The Borrower shall not, and shall not permit any of its Subsidiaries to, enter into or carry out any transaction with any Affiliate (including, without limitation, purchasing property or services from or selling property or services) unless such transaction is entered into in the ordinary course of business upon terms and conditions that are no less favorable to the Borrower or such Subsidiary than those that would be available in comparable transactions in arms-length dealings with unrelated third parties or unless such transaction is not otherwise prohibited by this Agreement. (i) Subsidiary, Partnerships and Joint Ventures. The Borrower shall not, and shall not permit any Subsidiary to, own or create directly or indirectly any Subsidiaries other than those listed in Schedule 6.01(c); provided, however, that the Borrower or a Restricted Subsidiary may acquire a Subsidiary pursuant to Section 8.02(f) or form a new Subsidiary so long as (A) if such Subsidiary is a Restricted Subsidiary it executes and delivers to the Agent for the benefit of the Banks a Guaranty Agreement substantially in the form of Exhibit 1.01(G), and also delivers to the Agent such opinions of counsel and other documents as the Agent may reasonably request; and (B) all of the issued and outstanding capital stock or other equity interests of such Subsidiary owned by a Loan Party are pledged to the Agent for the benefit of the Banks, such pledge to be a first priority perfected pledge pursuant to a Pledge Agreement. If Borrower is forming a new Subsidiary (as opposed to acquiring a Subsidiary) the obligations set forth in clauses (A) and (B) of the preceding sentence shall arise only at such time as such new Subsidiary either commences construction of a health care facility or related health care business, acquires a health care facility or makes another acquisition permitted under this Agreement or has a net book value, as determined under GAAP, of at least $250,000. Except for investments permitted under Section 8.02(d)(iv), neither the Borrower nor any Subsidiary shall become or agree to become a general or limited partner in any general or limited partnership or a joint venturer in any joint venture. (j) Continuation of or Change in Business. The Borrower shall not, and shall not permit any Subsidiary to, engage in any business other than (i) its existing business, substantially as conducted and operated as of the Closing Date and (ii) related health care businesses. (k) Plans and Benefit Arrangements. The Borrower shall not, and shall not permit any of its Subsidiaries to: -71- 79 (i) fail to satisfy the minimum funding requirements of ERISA and the Internal Revenue Code with respect to any Plan; (ii) request a minimum funding waiver from the Internal Revenue Service with respect to any Plan; (iii) engage in a Prohibited Transaction with any Plan, Benefit Arrangement or Multiemployer Plan which, alone or in conjunction with any other circumstances or set of circumstances resulting in liability under ERISA, would constitute a Material Adverse Change; (iv) permit the aggregate actuarial present value of all benefit liabilities (whether or not vested) under each Plan, determined on a plan termination basis, as disclosed in the most recent actuarial report completed with respect to such Plan, to exceed, as of any actuarial valuation date, the fair market value of the assets of such Plan by an amount in excess of $250,000; (v) fail to make when due any contribution to any Multiemployer Plan that the Borrower or any member of the ERISA Group may be required to make under any agreement relating to such Multiemployer Plan, or any Law pertaining thereto; (vi) withdraw (completely or partially) from any Multiemployer Plan or withdraw (or be deemed under Section 4062(e) of ERISA to withdraw) from any Multiple Employer Plan, where any such withdrawal is likely to result in a material liability of Borrower or any member of the ERISA Group; (vii) terminate, or institute proceedings to terminate, any Plan, where such termination is likely to result in a material liability to the Borrower or any member of the ERISA Group; (viii) make any amendment to any Plan with respect to which security is required under Section 307 of ERISA; or (ix) fail to give any and all notices and make all disclosures and governmental filings required under ERISA or the Internal Revenue Code, where such failure is likely to result in a Material Adverse Change. (l) Fiscal Year. The Borrower shall not permit any of its Subsidiaries to, change its fiscal year from the twelve-month period beginning October 1 and ending September 30. (m) Issuance of Stock. The Borrower shall not permit any of its Subsidiaries to issue any additional shares of capital stock, partnership interests or member interests in a limited liability company or any options, warrants or other rights in respect thereof; provided, however, that an Unrestricted Subsidiary which is an Excluded Entity may issue additional capital stock, partnership interests or member interests in a limited liability company -72- 80 so long as all such capital stock, partnership interests or member interests in a limited liability company which are owned, beneficially, of record, or otherwise, by any Loan Party are pledged to the Banks as a first priority perfected pledge pursuant to a Pledge Agreement, and provided further that any Restricted Subsidiary may issue additional capital stock, partnership interests or member interests in a limited liability company so long as such capital stock, partnership interests or member interests in a limited liability company are pledged to the Banks as a first priority perfected pledge pursuant to a Pledge Agreement. (n) [Intentionally Omitted.] (o) [Intentionally Omitted.] (p) Capital Expenditures and Leases. The Borrower shall not, and shall not permit any of its Subsidiaries to make any payments on account of the purchase of any assets which if purchased would constitute fixed assets or on account of the lease of any assets which if leased would constitute a capital lease, in the aggregate exceeding (i) $82,000,000 during the fiscal year of January 1, 1997 through December 31, 1997; and (ii) $75,000,000 in each fiscal year thereafter, and all such purchases of fixed assets or payments pursuant to such capital leases shall be made under usual and customary terms and in the ordinary course of business. (q) Minimum Fixed Charge Coverage Ratio. The Borrower shall not at any time permit the ratio of (x) the sum of Adjusted Consolidated Net Income, interest expense, depreciation, amortization, income tax expense and operating lease expense to (y) the sum of its interest expense, operating lease expense and current maturities of long-term Indebtedness (other than current maturities of obligations in respect of capital leases) in each case determined and consolidated in accordance with GAAP to be less than 2.00 to 1.0. Such ratio shall be calculated as of the end of each fiscal quarter. Calculations as of the end of each fiscal quarter shall be for the four fiscal quarters then ended. (r) Maximum Leverage Ratio. The Borrower shall not at any time permit the ratio of Total Indebtedness to Consolidated Cash Flow from Operations to exceed (A) 5.25 to 1.0 from October 1, 1997 through and including September 30, 1998; (B) 5.0 to 1.0 from October 1, 1998 through and including September 30, 1999; (C) 4.75 to 1.0 from October 1, 1999 through and including September 30, 2000; and (D) 4.5 to 1.0 from October 1, 2000 and thereafter. For purposes of this Section 8.02(r), Total Indebtedness shall be calculated as of each date of determination and Consolidated Cash Flow from Operations shall be calculated as of each date of determination for the four fiscal quarters then ended. (s) [Intentionally Omitted.] (t) Minimum Net Worth. The Borrower shall not at any time permit Consolidated Net Worth to be less than the amount under the following clause (A) reduced by the amount under the following clause (B). -73- 81 (A) The sum of (i) the consolidated net worth of the Borrower and its Subsidiaries (as mutually agreed to by the Borrower and the Agent but not less than $310 million) determined as of the last day of the fiscal quarter during which the Paragon Acquisition is consummated, reduced by $10 million , plus (ii) fifty percent (50%) of Adjusted Consolidated Net Income of the Borrower and its Subsidiaries for each fiscal quarter in which net income was earned (as opposed to a net loss) during the period from the "Measurement Date" (as hereinafter defined) through (and including) the date of determination, plus (iii) one hundred percent (100%) of all increases in capital stock and additional paid-in capital from issuances for cash of equity securities and other equity capital investments on or after the Measurement Date, plus (iv) one hundred percent (100%) of all increases in capital stock and additional paid-in capital from issuances of equity securities in connection with the acquisition of a Subsidiary on or after the Measurement Date (so long as the fair market value at the time of acquisition of the Subsidiary so acquired is at least equal to the value of the capital stock or other equity securities so issued, reduced by (B) The sum of (i) the amount of any dividend or other distribution actually paid by the Borrower to Paragon on or after the Measurement Date pursuant to Section 8.02(e)(iv), plus (ii) the amount of any dividend or other distribution actually paid by the Borrower to Paragon on or after the Measurement Date pursuant to Section 8.02(e)(vii) in respect of costs or expenses incurred by Paragon in connection with the Paragon Acquisition to the extent that the reimbursed item is not deducted as an expense in the determination of Adjusted Consolidated Net Income of the Borrower and its Subsidiaries. For purposes of this Section 8.02(t), "Measurement Date" shall mean the first day of the fiscal quarter following the fiscal quarter during which the consummation of the Paragon Acquisition occurs. (u) Senior Indebtedness to Cash Flow From Operations Ratio. The Borrower shall not at any time permit the ratio of (i) Total Indebtedness, other than the outstanding principal amount of the Subordinated Notes (and other than the outstanding principal amount of any Permitted Subordinated Indebtedness which refinances or is used to purchase Subordinated Notes) and other than the outstanding principal amount of Indebtedness permitted pursuant to Section 8.02(a)(iv), to (ii) Consolidated Cash Flow from Operations to exceed 4.0 to 1.0. For purposes of this Section 8.02(u), Total Indebtedness, the outstanding principal amount of the Subordinated Notes (and the outstanding principal amount of any Permitted Subordinated Indebtedness issued or incurred to purchase or refinance the Subordinated Notes) and the outstanding principal amount of Indebtedness permitted pursuant to Section 8.02(a)(iv) shall be calculated as of each date of determination and Consolidated Cash Flow from Operations shall be calculated as of each date of determination for the four fiscal quarters then ended. (v) Incurrence of Indebtedness Permitted by the Indenture. So long as any Indebtedness or other obligations (monetary or otherwise) are outstanding under the Indenture the Borrower shall not, and shall not permit any of its Subsidiaries to, at any time -74- 82 create, incur, assume or suffer to exist any Indebtedness unless the incurrence thereof complies with the provisions of Section 1008. [Limitation on Indebtedness] of the Indenture as in effect on the Ninth Amendment Effective Date without giving any effect to any grace period under the Indenture or waiver under the Indenture of any default of such covenant. (w) [Intentionally Omitted.] (x) Negative Pledges. Except as set forth on Schedule 8.02(x), Borrower shall not and shall not permit any of its Subsidiaries to enter into any agreement with any person which prohibits the Loan Parties from granting Liens to the Agent or the Banks. (y) Prohibition of Defeasance of Subordinated Notes. The Borrower shall not and shall not permit any of its Subsidiaries to make any payments to the trustee under the Indenture or to any holders of Subordinated Notes in payment of the defeasance or covenant defeasance of the Subordinated Notes pursuant to Section 402 or 403 of the Indenture or any similar provision in any supplement to the Indenture. Nothing in this subsection (y) shall prohibit the purchase by the Borrower of Subordinated Notes pursuant to Section 8.02(d)(vi) or the refinancing of the Subordinated Notes with Permitted Subordinated Indebtedness. 8.03 Reporting Requirements. The Borrower covenants and agrees that until payment in full of the Loans and interest thereon, satisfaction of all of the Borrower's other obligations hereunder and termination of the Revolving Credit Commitments, the Borrower will furnish or cause to be furnished to the Agent and each of the Banks: (a) [Intentionally Omitted.] (b) Quarterly Financial Statements. As soon as available and in any event within forty-five (45) calendar days after the end of each fiscal quarter in each fiscal year, financial statements of the Borrower, consisting of a consolidated balance sheet as of the end of such fiscal quarter and related consolidated statements of income, retained earnings and cash flows for the fiscal quarter then ended and the fiscal year through that date, all in reasonable detail and certified by the Chief Executive Officer, President or Chief Financial Official of the Borrower as having been prepared in accordance with GAAP, consistently applied (subject to normal year-end audit adjustments), and setting forth in comparative form the respective financial statements for the corresponding date and period in the previous fiscal year. (c) Annual Financial Statements. As soon as available and in any event within ninety (90) days after the end of each fiscal year of the Borrower, financial statements of the Borrower consisting of a consolidated balance sheet as of the end of such fiscal year, and related consolidated statements of income, retained earnings and cash flows for the fiscal year then ended, all in reasonable detail and setting forth in comparative form the financial statements as of the end of and for the preceding fiscal year, and certified by independent certified public accountants of nationally recognized standing satisfactory to the Agent. The certificate or report of accountants shall be free of qualifications (other than any consistency qualification that may result from a change in the method used to prepare the financial statements as to which such accountants concur) and shall not include a statement which indicates the -75- 83 occurrence or existence of any event, condition or contingency which would materially impair the prospect of payment or performance of any covenant, agreement or duty of the Borrower or any of its Subsidiaries under any of the Loan Documents, together with a letter of such accountants substantially to the effect that, based upon their ordinary and customary examination of the affairs of the Borrower and its Subsidiaries, performed in connection with the preparation of such consolidated financial statements, and in accordance with generally accepted auditing standards, they are not aware of the existence of any condition or event which constitutes an Event of Default or Potential Default or, if they are aware of such condition or event, stating the nature thereof. (d) Certificate of the Borrower. Concurrent with the financial statements of the Borrower furnished to the Agent and to the Banks pursuant to Sections 8.03(b) and 8.03(c) hereof, a certificate of the Borrower signed by its Chief Executive Officer, President, Chief Financial Officer or Vice President and Treasurer or Vice President and Controller, in the form of Exhibit 8.03(d) hereto, to the effect that, except as described pursuant to Section 8.03(e) below, (i) the representations and warranties of the Borrower contained in Article VI hereof are true on and as of the date of such certificate with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which expressly relate solely to an earlier date or time) and the Borrower has performed and complied with all covenants and conditions hereof, (ii) no Event of Default or Potential Default exists and is continuing on the date of such certificate, (iii) containing calculations in sufficient detail to demonstrate compliance as of the date of the financial statements with all financial covenants contained in Section 8.02 hereof and with the covenant contained in Section 1008 [Limitation on Indebtedness] of the Indenture and (iv) setting forth a list of payments summarized by category only made by the Borrower to Paragon as reimbursement of ordinary course business expenses paid by Paragon on behalf of the Borrower during the period applicable to such certificate. (e) Notice of Default. Promptly after any officer of the Borrower has learned of the occurrence of an Event of Default or Potential Default, a certificate signed by the Chief Executive Officer, President or Chief Financial Officer of the Borrower or by Vice President and Treasurer or Vice President and Controller of the Borrower, setting forth the details of such Event of Default or Potential Default and the action which the Borrower proposes to take with respect thereto. (f) Notice of Litigation. Promptly after the commencement thereof, notice of all actions, suits, proceedings or investigations before or by any Official Body or any other person against the Borrower which relate to the Collateral, involve a claim or series of related claims in excess of $1,000,000 or which if adversely determined would constitute a Material Adverse Change. (g) Certain Events. Written notice to the Agent (and upon the Agent's receipt of such notice, the Agent shall provide a copy thereof to each Bank) at least thirty (30) calendar days prior thereto, with respect to any proposed sale or transfer of assets pursuant to Section 8.02(g)(iii) or (iv). -76- 84 (h) Budgets, Forecasts, Other Reports and Information. Promptly upon their becoming available to the Borrower: (i) the annual budget of the Borrower, to be supplied not later than November 1, 1998 with respect to the fiscal year ended September 30, 1999 and thereafter not later than the commencement of the fiscal year to which such budget relates, (ii) any reports including management letters submitted to the Borrower by independent accountants in connection with any annual, interim or special audit, (iii) any reports, notices or proxy statements generally distributed by the Borrower to its stockholders on a date no later than the date supplied to the stockholders, (iv) regular or periodic reports, including Forms 10-K, 10-Q and 8-K, registration statements and prospectuses, filed by the Borrower with the Securities and Exchange Commission, (v) a copy of any material order in any proceeding to which the Borrower or any of its Subsidiaries is a party issued by any Official Body, (vi) regular, periodic utilization reports including in detail reasonably satisfactory to the Agent for the period of such reports the patient census, the number of occupied beds, the payment source (Medicare, Medicaid, private pay or otherwise) for each patient, (vii) such other reports and information as the Banks may from time to time reasonably request. The Borrower shall also notify the Banks promptly of the enactment or adoption of any Law which may result in a Material Adverse Change with respect to the Borrower after the Borrower becomes aware or should reasonably have become aware thereof, and (viii) annual reports in detail satisfactory to the Agent setting forth the real property owned, leased or managed by the Borrower or any Subsidiary, to be supplied not later than December 31, 1998 with respect to the fiscal year ended September 30, 1998 and thereafter not later than ninety (90) days after the commencement of the fiscal year to which any of the foregoing may be applicable. (i) Notices Regarding Plans and Benefit Arrangements. (i) Promptly upon becoming aware of the occurrence thereof, notice (including the nature of the event and, when known, any action taken or threatened by the Internal Revenue Service or the PBGC with respect thereto) of: (A) any Reportable Event with respect to the Borrower or any member of the ERISA Group (regardless of whether the obligation to report said Reportable Event to the PBGC has been waived), -77- 85 (B) any Prohibited Transaction which could be subject the Borrower or any member of the ERISA Group to a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Internal Revenue Code in connection with any Plan, Benefit Arrangement or any trust created thereunder, (C) any assertion of material withdrawal liability with respect to any Multiemployer Plan, (D) any partial or complete withdrawal from a Multiemployer Plan by the Borrower or any member of the ERISA Group under Title IV of ERISA (or assertion thereof), where such withdrawal is likely to result in material withdrawal liability, (E) any cessation of operations (by the Borrower or any member of the ERISA Group) at a facility in the circumstances described in Section 4063(e) of ERISA, (F) withdrawal by the Borrower or any member of the ERISA Group from a Multiple Employer Plan, (G) a failure by the Borrower or any member of the ERISA Group to make a payment to a Plan required to avoid imposition of a lien under Section 302(f) of ERISA, (H) the adoption of an amendment to a Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA, or (I) any change in the actuarial assumptions or funding methods used for any Plan, where the effect of such change is to materially increase or materially reduce the unfunded benefit liability or obligation to make periodic contributions. (ii) Promptly after receipt thereof, copies of (a) all notices received by the Borrower or any member of the ERISA Group of the PBGC's intent to terminate any Plan administered or maintained by the Borrower or any member of the ERISA Group, or to have a trustee appointed to administer any such Plan; and (b) at the request of the Agent or any Bank each annual report (IRS Form 5500 series) and all accompanying schedules, the most recent actuarial reports, the most recent financial information concerning the financial status of each Plan administered or maintained by the Borrower or any member of the ERISA Group, and schedules showing the amounts contributed to each such Plan by or on behalf of the Borrower or any member of the ERISA Group in which any of their personnel participate or from which such personnel may derive a benefit, and each Schedule B (Actuarial Information) to the annual report filed by the Borrower or any member of the ERISA Group with the Internal Revenue Service with respect to each such Plan. -78- 86 (iii) Promptly upon the filing thereof, copies of Form 5310, or any successor or equivalent form to Form 5310, filed with the PBGC in connection with the termination of any Plan. (j) Notices With Respect to Indenture. Written notice to the Agent (and upon the Agent's receipt of each such notice, the Agent shall provide a copy thereof to each Bank): (i) immediately upon the occurrence of a "Default" or an "Event of Default," as such terms are defined in the Indenture; (ii) immediately upon a "Change of Control," as such term is defined in the Indenture; (iii) immediately upon receipt of a "notice of acceleration" from either the trustee for the Subordinated Notes or the holders of the Subordinated Notes pursuant to Section 502 of the Indenture or any similar provision in any supplement to the Indenture; (iv) simultaneous with the sending thereof, all notices required to be sent to the trustee or the holders of the Subordinated Notes under the Indenture; and (v) immediately upon the receipt thereof, all notices received from the trustee under the Indenture. ARTICLE IX DEFAULT 9.01 Events of Default. An Event of Default shall mean the occurrence or existence of any one or more of the following events or conditions (whatever the reason therefor and whether voluntary, involuntary or effected by operation of Law): (a) The Borrower shall fail to pay any principal of any Loan (including scheduled or mandatory prepayments or the payment due at maturity) or shall fail to pay any interest on any Loan or any other amount owing hereunder or under the other Loan Documents after such principal or within three (3) Business Days after such interest or other amount becomes due in accordance with the terms hereof or thereof; (b) Any representation or warranty made at any time by the Borrower herein or by the Borrower or any of its Subsidiaries in any other Loan Document, or in any certificate, other instrument or statement furnished pursuant to the provisions hereof or thereof, shall prove to have been false or misleading in any material respect as of the time it was made or furnished regardless of whether such representation or warranty was qualified as to Borrower's knowledge or best knowledge; (c) The Borrower shall default in the observance or performance of any covenant contained in Section 8.01(f) or Section 8.02 hereof; -79- 87 (d) The Borrower or any of its Subsidiaries shall default in the observance or performance of any other covenant, condition or provision hereof or of any other Loan Document and such default shall continue unremedied for a period of thirty (30) Business Days after any officer of the Borrower or any Subsidiary becomes aware of the occurrence thereof (such grace period to be applicable only in the event such default can be remedied by corrective action of the Borrower or such Subsidiary as determined by the Agent in its sole discretion); (e) A default or event of default shall occur at any time under the terms of any other agreement involving borrowed money or the extension of credit or any other Indebtedness under which the Borrower or any of its Subsidiaries may be obligated as borrower or guarantor in excess of $10,000,000 in aggregate principal amount, and such breach, default or event of default consists of the failure to pay (beyond any period of grace permitted with respect thereto, whether waived or not) any indebtedness when due (whether at stated maturity, by acceleration or otherwise) or if such breach or default permits or causes the acceleration of any indebtedness (whether or not such right shall have been waived) or the termination of any commitment to lend; (f) Any final judgments or orders for the payment of money in excess of $1,000,000 in the aggregate (not paid or fully covered by insurance) shall be entered against the Borrower or any of its Subsidiaries by a court having jurisdiction in the premises which judgment is not discharged, vacated, bonded or stayed pending appeal within a period of thirty (30) days from the date of entry; (g) Any of the Loan Documents shall cease to be legal, valid and binding agreements enforceable against the party executing the same or such party's successors and assigns (as permitted under the Loan Documents) in accordance with the respective terms thereof or shall in any way be terminated (except in accordance with its terms) or shall in any way be challenged or contested or cease to give or provide the respective Liens, security interests, rights, titles, interests, remedies, powers or privileges intended to be created thereby; (h) The Collateral or any other of the Borrower's or any of its Subsidiaries' assets are attached, seized, levied upon or subject to a writ or distress warrant; or such come within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors and the same is not cured within thirty (30) days thereafter; (i) A notice of lien or assessment in excess of $1,000,000 is filed of record with respect to all or any part of the Borrower's or any of its Subsidiaries' assets by the United States, or any department, agency or instrumentality thereof, or by any state, county, municipal or other governmental agency, including, without limitation, the Pension Benefit Guaranty Corporation, or if any taxes or debts owing at any time or times hereafter to any one of these becomes payable and the same is not paid within thirty (30) days after the same becomes payable unless the same is being contested in good faith in accordance with Section 8.01(b); (j) The Borrower or any of its Material Subsidiaries ceases to be solvent or admits in writing its inability to pay its debts as they mature; -80- 88 (k) Any of the following occurs: The Agent determines in good faith that the amount of Borrower's liability is likely to exceed 10% of its Consolidated Net Worth upon the occurrence of (i), (ii), (iii) or (iv) below: (i) any Reportable Event constitutes grounds for the termination of any Plan by the PBGC or the appointment of a trustee to administer or liquidate any Plan, shall have occurred and be continuing; (ii) proceedings shall have been instituted or other action taken to terminate any Plan or a termination notice shall have been filed with respect to any Plan; (iii) a trustee shall be appointed to administer or liquidate any Plan; or (iv) the PBGC shall give notice of its intent to institute proceedings to terminate any Plan or Plans or to appoint a trustee to administer or liquidate any Plan; or, with respect to any of the events specified in (v), (vi), (vii), (viii) or (ix) below, the Agent determines in good faith that any such occurrence could be reasonably likely to materially and adversely affect the total enterprise represented by the Borrower and the other members of the ERISA Group; (v) the Borrower or any member of the ERISA Group shall fail to make any contributions when due to a Plan or a Multiemployer Plan; (vi) the Borrower or any member of the ERISA Group shall make any amendment to a Plan with respect to which security is required under Section 307 of ERISA; (vii) the Borrower or any member of the ERISA Group shall withdraw completely or partially from a Multiemployer Plan; (viii) the Borrower or any member of the ERISA Group shall withdraw (or shall be deemed under Section 4062(e) of ERISA to withdraw) from a Multiple Employer Plan; or (ix) any applicable Law is adopted, changed or interpreted by any Official Body with respect to or otherwise affecting one or more Plans, Multiemployer Plans or Benefit Arrangements; (l) The Borrower ceases to conduct its business as contemplated or the Borrower or any of its Material Subsidiaries is enjoined, restrained or in any way prevented by court order from conducting all or any material part of its business and such injunction, restraint or other preventative order is not dismissed within thirty (30) days after the entry thereof; (m) A Change of Ownership occurs; (n) An event of default shall occur at any time under the terms of the Paragon Credit Agreement which causes the acceleration of any indebtedness thereunder, or an event of default shall occur at any time under the terms of the Paragon Senior Subordinated Note Indenture which causes the acceleration of any indebtedness thereunder; (o) A proceeding shall have been instituted in a court having jurisdiction in the premises seeking a decree or order for relief in respect of Paragon, the Borrower or any Subsidiary of the Borrower in an involuntary case under any applicable bankruptcy, insolvency, reorganization or other similar law now or hereafter in effect, or a receiver, liquidator, assignee, custodian, trustee, sequestrator, conservator (or similar official) of Paragon, the Borrower, or any Subsidiary of the Borrower for any substantial part of its property, or for the winding-up or liquidation of its affairs, and such proceeding shall remain undismissed or unstayed and in effect for a period of sixty (60) consecutive days or such court shall enter a decree or order granting any of the relief sought in such proceeding; or -81- 89 (p) Paragon, the Borrower, or any Subsidiary of the Borrower shall commence a voluntary case under any applicable bankruptcy, insolvency, reorganization or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator, conservator (or other similar official) of itself or for any substantial part of its property or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any action in furtherance of any of the foregoing. 9.02 Consequences of Event of Default (a) If an Event of Default specified under subsections (a) through (n) of Section 9.01 hereof shall occur and be continuing, the Banks shall be under no further obligation to make Loans hereunder and the Agent upon the request of the Required Banks, shall (i) by written notice to the Borrower, declare the unpaid principal amount of the Notes then outstanding and all interest accrued thereon, any unpaid fees and all other Indebtedness of the Borrower to the Banks hereunder and thereunder to be forthwith due and payable, and the same shall thereupon become and be immediately due and payable to the Agent for the benefit of each Bank without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, and (ii) require the Borrower to, and the Borrower shall thereupon, deposit in a non-interest bearing account with the Agent, as cash collateral for its obligations under the Loan Documents, an amount equal to the maximum amount currently or at any time thereafter available to be drawn on all outstanding Letters of Credit, and the Borrower hereby pledges to the Agent and the Banks, and grants to the Agent and the Banks a security interest in, all such cash as security for such obligations. Upon the curing of all existing Events of Default to the satisfaction of the Required Banks, the Agent shall return such cash collateral to the Borrower; and (b) If an Event of Default specified under subsections (o) or (p) of Section 9.01 hereof shall occur, the Banks shall be under no further obligations to make Loans hereunder and the unpaid principal amount of the Notes then outstanding and all interest accrued thereon, any unpaid fees and all other Indebtedness of the Borrower to the Banks hereunder and thereunder shall be immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived; and (c) If an Event of Default shall occur and be continuing, any Bank to whom any obligation is owed by any Loan Party hereunder or under any other Loan Document or any participant of such Bank which has agreed in writing to be bound by the provisions of Section 10.13 hereof and any branch, subsidiary or affiliate of such Bank or participant anywhere in the world shall have the right, in addition to all other rights and remedies available to it, without notice to such Loan party, to set-off against and apply to the then unpaid balance of all the Loans and all other obligations of such Loan party hereunder or under any other Loan Document any debt owing to, and any other funds held in any manner for the account of, such Loan Party by such Bank or participant or by such branch, subsidiary or affiliate, including, without limitation, all funds in all deposit accounts (whether time or demand, general or special, -82- 90 provisionally credited or finally credited, or otherwise) now or hereafter maintained by such Loan Party for its own account (but not including funds held in custodian or trust accounts) with such Bank or participant or such branch, subsidiary or affiliate. Such right shall exist whether or not any Bank or the Agent shall have made any demand under this Agreement or any other Loan Document, whether or not such debt owing to or funds held for the account of such Loan Party is or are matured or unmatured and regardless of the existence or adequacy of any Collateral, Guaranty or any other security, right or remedy available to any Bank or the Agent; and (d) If an Event of Default shall occur and be continuing, and whether or not the Agent shall have accelerated the maturity of Loans of the Borrower pursuant to any of the foregoing provisions of this Section 9.02, the Agent or any Bank, if owed any amount with respect to the Notes, may proceed to protect and enforce its rights by suit in equity, action at law and/or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Agreement or the Notes, including as permitted by applicable Law the obtaining of the ex parte appointment of a receiver, and, if such amount shall have become due, by declaration or otherwise, proceed to enforce the payment thereof or any other legal or equitable right of the agent or such Bank; and (e) From and after the date on which the Agent has taken any action pursuant to this Section 9.02 and until all obligations of the Loan Parties have been paid in full, any and all proceeds received by the Agent from any sale or other disposition of the Collateral, or any part thereof, or the exercise of any other remedy by the Agent, shall be applied as follows: (i) first, to reimburse the Agent and the Banks for reasonable out-of-pocket costs, expenses and disbursements, including without limitation reasonable attorneys' fees and legal expenses, incurred by the Agent or the Banks in connection with realizing on the Collateral or collection of any obligations of the Loan Parties under any of the Loan Documents, including advances made by the Banks or any one of them or the Agent for the reasonable maintenance, preservation, protection or enforcement of, or realization upon, the Collateral, including without limitation, advances for taxes, insurance, repairs and the like and reasonable expenses incurred to sell or otherwise realize on, or prepare for sale or other realization on, any of the Collateral; (ii) second, to the repayment of all Indebtedness then due and unpaid of the Loan Parties to the Banks incurred under this Agreement or any of the Loan Documents, whether of principal, interest, fees, expenses or otherwise, in such manner as the Agent may reasonably determine in its discretion and with respect to principal, interest, and fees, shall be made in proportion to the Ratable Share of each Bank; and (iii) the balance, if any, as required by Law. (f) In addition to all of the rights and remedies contained in this Agreement or in any of the other Loan Documents, the Agent shall have all of the rights and remedies with respect to the Collateral of a secured party under the Uniform Commercial Code or other applicable Law, all of which rights and remedies shall be cumulative and non-exclusive, to the extent permitted by Law. The Agent may, and upon the request of the Required Banks -83- 91 shall, exercise all post-default rights granted to the Agent and the Banks under the Loan Documents or applicable Law. (g) Following the occurrence and continuance of an Event of Default, the Borrower, at its cost and expense (including the cost and expense of obtaining any of the following referenced consents, approvals, etc.) will promptly execute and deliver or cause the execution and delivery of all applications, certificates, instruments, registration statements, and all other documents and papers the Agent may request in connection with the obtaining of any consent, approval, registration, qualification, permit, license, accreditation, or authorization of any other Official Body or other person necessary or appropriate for the effective exercise of any rights hereunder or under the other Loan Documents. Without limiting the generality of the foregoing, the Borrower agrees that in the event the Agent on behalf of the Banks shall exercise its rights, hereunder or pursuant to the other Loan Documents, to sell, transfer, or otherwise dispose of, or vote, consent, operate, or take any other action in connection with any of the Collateral, the Borrower shall execute and deliver (or cause to be executed and delivered) all applications, certificates, assignments, and other documents that the Agent requests to facilitate such actions and shall otherwise promptly, fully, and diligently cooperate with the Agent and any other necessary persons in making any application for the prior consent or approval of any Official Body or any other person to the exercise by the Agent on behalf of the Banks of any of such rights relating to all or any of the Collateral. Furthermore, because the Borrower agrees that the remedies at law, of the Agent on behalf of the Banks, for failure of the Borrower to comply with the provisions of Section 8.01(f) and of this Section 9.02(g) would be inadequate and that any such failure would not be adequately compensable in damages, the Borrower agrees that the covenants of Sections 8.01(f) and 9.02(g) may be specifically enforced. (h) Upon the occurrence and continuance of an Event of Default, the Agent may request, without limiting the rights and remedies of the Agent on behalf of the Banks otherwise provided hereunder and under the other Loan Documents, that the Borrower do any of the following: (i) give the Agent on behalf of the Banks specific assignments of the accounts receivable of the Borrower and each Subsidiary after such accounts receivable come into existence, and schedules of such accounts receivable, the form and content of such assignment and schedules to be satisfactory to the Agent, (ii) immediately notify the Agent if any of such accounts receivable arise out of contracts with the U.S. Government or any department, agency or instrumentality thereof, and execute any instruments and take any steps required by the Agent in order that all moneys due and to become due under such contract shall be assigned (to the extent permitted by law) to the Agent on behalf of the Banks and notice thereof given to the government under the Federal Assignment of Claims Act, if applicable, or any other applicable law or regulation; and in order to better secure the Agent on behalf of the Banks, in relation to such accounts receivable, and (iii) to the extent permitted by Law, enter into such lockbox agreements and establish such lockbox accounts as the Agent may require, with the local banks in areas in which the Borrower and its Subsidiaries may be operating (in such cases, all local lockbox accounts shall be depository transfer accounts entitled "In trust for PNC Bank, National Association, as Agent") which shall have agreed in writing to the Agent's requirements for the handling of such accounts and the transfer of account funds to the Agent on behalf of the Banks, all at the Borrower's sole expense, and shall direct all payments from Medicare, Medicaid, Blue -84- 92 Cross and Blue Shield, private payors, health maintenance organizations, all commercial payors and all other payors due to the Borrower or any Subsidiary, to such lockbox accounts. 9.03 Notice of Sale. Any notice required to be given by the Agent of a sale, lease, or other disposition of the Collateral or any other intended action by the Agent, if given ten (10) days prior to such proposed action, shall constitute commercially reasonable and fair notice thereof to the relevant Loan Party. ARTICLE X THE AGENT 10.01 Appointment. Each Bank hereby irrevocably designates, appoints and authorizes PNC Bank to act as Agent for such Bank under this Agreement to execute and deliver or accept on behalf of each of the Banks the other Loan Documents. Each Bank hereby irrevocably authorizes, and each holder of any Note by the acceptance of a Note shall be deemed irrevocably to authorize, the Agent to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and any other instruments and agreements referred to herein, and to exercise such powers and to perform such duties hereunder as are specifically delegated to or required of the Agent by the terms hereof, together with such powers as are reasonably incidental thereto. PNC Bank agrees to act as the Agent on behalf of the Banks to the extent provided in this Agreement. 10.02 Delegation of Duties. The Agent may perform any of its duties hereunder by or through agents or employees (provided such delegation does not constitute a relinquishment of its duties as Agent) and, subject to Sections 10.05 and 10.06 hereof, shall be entitled to engage and pay for the advice or services of any attorneys, accountants or other experts concerning all matters pertaining to its duties hereunder and to rely upon any advice so obtained. 10.03 Nature of Duties; Independent Credit Investigation. The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and no implied covenants, functions, responsibilities, duties, obligations, or liabilities shall be read into this Agreement or otherwise exist. The duties of the Agent shall be mechanical and administrative in nature; the Agent shall not have by reason of this Agreement a fiduciary or trust relationship in respect of any Bank; and nothing in this Agreement, expressed or implied, is intended to or shall be so construed as to impose upon the Agent any obligation in respect of this Agreement except as expressly set forth herein. Each Bank expressly acknowledges (i) that the Agent has not made any representations or warranties to it and that no act by the Agent hereafter taken, including any review of the affairs of the Loan Parties, shall be deemed to constitute any representation or warranty by the Agent to any Bank; (ii) that it has made and will continue to make, without reliance upon the Agent, its own independent investigation of the financial condition and affairs and its own appraisal of the creditworthiness of the Loan Parties is connection with this Agreement and the making and continuance of the Loans hereunder; and (iii) except as expressly provided herein, that the Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Bank with any credit or other information with respect thereto, -85- 93 whether coming into its possession before the making of any Loan or at any time or times thereafter. 10.04 Actions in Discretion of Agent; Instructions From the Banks. The Agent agrees, upon the written request of the Required Banks, to take or refrain from taking any action of the type specified as being within the Agent's rights, powers or discretion herein, provided that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement or any other Loan Document or applicable Law. In the absence of a request by the Required Banks, the Agent shall have authority, in its sole discretion, to take or not to take any such action, unless this Agreement specifically requires the consent of the Required Banks or all of the Banks. Any action taken or failure to act pursuant to such instructions or discretion shall be binding on the Banks, subject to Section 10.06 hereof. Subject to the provisions of Section 10.06, no Bank shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting hereunder in accordance with the instructions of the Required Banks, or in the absence of such instructions, in the absolute discretion of the Agent so long as the Agent is otherwise authorized to act within its rights and powers as provided in this Agreement. 10.05 Reimbursement and Indemnification of Agent by the Borrower. The Borrower unconditionally agrees to pay or reimburse the Agent and save the Agent harmless against (a) liability for the payment of all reasonable out-of-pocket costs, expenses and disbursements, including but not limited to reasonable fees and expenses of counsel, appraisers and environmental consultants, incurred by the Agent (i) in connection with the development, negotiation, preparation, execution, performance by a Loan Party or an Excluded Entity and interpretation of this Agreement and the other Loan Documents, (ii) relating to any requested amendments, waivers or consents pursuant to the provisions hereof, (iii) in connection with the enforcement of this Agreement or any other Loan Document or collection of amounts due hereunder or thereunder or the proof and allowability of any claim arising under this Agreement or any other Loan Document, whether in bankruptcy or receivership proceedings or otherwise, and (iv) in any workout, restructuring or in connection with the protection, preservation, exercise or enforcement of any of the terms hereof or of any rights hereunder or under any other Loan Document or in connection with any foreclosure, collection or bankruptcy proceedings, and (b) all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent, in its capacity as such, in any way relating to or arising out of this Agreement or any other Loan Documents or any action taken or omitted by the Agent hereunder or thereunder, provided that the Borrower shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements if the same results from the Agent's gross negligence or willful misconduct, or if the Borrower was not given notice of the subject claim and the opportunity to participate in the defense thereof, at its expense, or if the same results from a compromise or settlement agreement entered into without the consent of the Borrower. In addition, upon the occurrence of an Event of Default, the Borrower agrees to reimburse and pay all reasonable out-of-pocket expenses of the Agent's regular employees and agents engaged periodically to perform audits of the Borrower's books, records and business properties. -86- 94 10.06 Exculpatory Provisions. Neither the Agent nor any of its directors, officers, employees, agents, attorneys or affiliates shall (a) be liable to any Bank for any action taken or omitted to be taken by it or them hereunder, or in connection herewith including without limitation pursuant to any Loan Document, unless caused by its or their own gross negligence or willful misconduct, (b) be responsible in any manner to any of the Banks for the effectiveness, enforceability, genuineness, validity or the due execution of this Agreement or any other Loan Documents or for any recital, representation, warranty, document, certificate, report or statement herein or made or furnished under or in connection with this Agreement or any other Loan Documents, unless caused by its or their own gross negligence or willful misconduct, or (c) be under any obligation to any of the Banks to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions hereof or thereof on the part of the Loan Parties or any Excluded Entity, or the financial condition of the Loan Parties or any Excluded Entity, or the existence or possible existence of any Event of Default or Potential Default, unless caused by its or their own gross negligence or willful misconduct. Neither the Agent nor any Bank nor any of their respective directors, officers, employees, agents, attorneys or affiliates shall be liable to the Loan Parties or any Excluded Entity for consequential damages resulting from any breach of contract, tort or other wrong in connection with the negotiation, documentation, administration or collection of the Loans or any of the Loan Documents. 10.07 Reimbursement and Indemnification of Agent by Banks. Each Bank agrees to reimburse and indemnify the Agent (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so) in proportion to its Ratable Share from and against all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent, in its capacity as such, in any way relating to or arising out of this Agreement or any other Loan Documents or any action taken or omitted by the Agent hereunder or thereunder, provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (a) if the same results from the Agent's gross negligence or willful misconduct, or (b) if such Bank was not given notice of the subject claim and the opportunity to participate in the defense thereof, at its expense, or (c) if the same results from a compromise and settlement agreement entered into without the consent of such Bank. In addition, each Bank agrees promptly to reimburse the Agent (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so) in proportion to its Ratable Share for all amounts due and payable by the Borrower to the Agent in connection with the Agent's periodic audit of the Borrower's books, records and business properties. In the event the Banks reimburse or indemnify the Agent pursuant to this Section 10.07 and subsequent thereto the Agent is reimbursed or indemnified by the Borrower with respect to the same matter for which indemnification or reimbursement was previously made by the Banks, the Agent will promptly refund to the Banks, in accordance with each Bank's Ratable Share, the duplicative amount. 10.08 Reliance by Agent. The Agent shall be entitled to rely upon any writing, telegram, telex or teletype message, resolution, notice, consent, certificate, letter, cablegram, statement, order or other document or conversation by telephone or otherwise believed by it to be genuine and correct and to have been signed, sent or made by the proper person or persons, and -87- 95 upon the advice and opinions of counsel and other professional advisers selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action hereunder unless it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. 10.09 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Potential Default or Event of Default unless the Agent has received written notice from a Bank or the Borrower referring to this Agreement, describing such Potential Default or Event of Default and stating that such notice is a "notice of default." 10.10 Notices. The Agent shall promptly send to each Bank a copy of all notices received from any Loan Party pursuant to the provisions of this Agreement or the other Loan Documents promptly upon receipt thereof. The Agent shall promptly notify the Borrower and the other Banks of each change in the Base Rate and the effective date thereof. 10.11 Banks in Their Individual Capacities. With respect to its Revolving Credit Commitments and the Revolving Credit Loans made by it, the Agent shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not the Agent, and the term "Banks" shall, unless the context otherwise indicates, include the Agent in its individual capacity. PNC Bank and its affiliates and each of the Banks and their respective affiliates may, without liability to account, except as prohibited herein, make Loans to, accept deposits from, discount drafts for, act as trustee under indentures of, and generally engage in any kind of banking or trust business with, the Borrower and its affiliates, in the case of the Agent, as though it were not acting as Agent hereunder and in the case of each Bank, as though such Bank were not a Bank hereunder. 10.12 Holders of Notes. The Agent may deem and treat any payee of any Note as the owner thereof for all purposes hereof unless and until written notice of the assignment or transfer thereof shall have been filed with the Agent. Any request, authority or consent of any person who at the time of making such request or giving such authority or consent is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee of such Note or of any Note or Notes issued in exchange therefor. 10.13 Equalization of Banks. The Banks and the holders of any participations in any Notes agree among themselves that, with respect to all amounts received by any Bank or any such holder for application on any obligation hereunder or under any Note or under any such participation, whether received by voluntary payment, by realization upon security, by the exercise of the right of set-off or banker's lien, by counterclaim or by any other non-pro rata source, equitable adjustment will be made in the manner stated in the following sentence so that, in effect, all such excess amounts will be shared ratably among the Banks and such holders in proportion to their interests in payments under the Notes, except as otherwise provided in Sections [4.04(b), 5.04(b) or 5.06(a)] hereof. The Banks or any such holder receiving any such amount shall purchase for cash from each of the other Banks an interest in such Bank's Loans in such amount as shall result in a ratable participation by the Banks and each such holder in the aggregate unpaid amount under the Notes, provided that if all or any portion of such excess -88- 96 amount is thereafter recovered from the Bank or the holder making such purchase, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, together with interest or other amounts, if any, required by law (including court order) to be paid by the Bank or the holder making such purchase. 10.14 Successor Agent. The Agent (i) may resign as Agent, or (ii) shall resign if such resignation is requested by the Required Banks, in the case of either (i) or (ii) upon not less than thirty (30) days' prior written notice to the Borrower and the Banks. If the Agent shall resign under this Agreement, then either (a) the Required Banks shall appoint from among the Banks a successor Agent for the Banks, or (b) if a successor agent shall not be so appointed and approved within the thirty (30) day period following the Agent's notice to the Banks of its resignation, then the Agent shall appoint, with the consent of the Borrower, such consent not to be unreasonably withheld, a successor agent who shall serve as Agent until such time as the Required Banks appoint a successor agent. Upon its appointment pursuant to either clause (a) or (b) above, such successor agent shall succeed to the rights, powers and duties of the agent and the term "Agent" shall mean such successor agent, effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement. After the resignation of any Agent hereunder, the provisions of this Article X shall inure to the benefit of such former Agent and such former Agent shall not by reason of such resignation be deemed to be released from liability for any actions taken or not taken by it while it was an Agent under this Agreement. 10.15 Agent's Fee. The Borrower shall pay to the Agent a non refundable, annual fee (the "Agent's Fee") as set forth in the agreement dated September 8, 1997 between the Borrower and the Agent, such fee to be payable in the manner and on the dates set forth in such letter agreement. 10.16 Availability of Funds. Unless the Agent shall have been notified by a Bank prior to the date upon which a Loan is to be made that such Bank does not intend to make available to the Agent such Bank's portion of such Loan, the Agent may assume that such Bank has made or will make such proceeds available to the Agent on such date and the Agent may, in reliance upon such assumption (but shall not be required to), make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Agent by such Bank, the Agent shall be entitled to recover such amount on demand from such Bank (or, if such Bank fails to pay such amount forthwith upon such demand from the Borrower) together with interest thereon, in respect of each day during the period commencing on the date such amount was made available to the Borrower and ending on the date the Agent recovers such amount, at a rate per annum equal to the Federal Funds Effective Rate in respect of the Loan. 10.17 Calculations. In the absence of gross negligence or willful misconduct, the Agent shall not be liable for any error in computing the amount payable to any Bank whether in respect of the Loans, fees or any other amounts due to the Banks under this Agreement. In the event an error in computing any amount payable to any Bank is made, the Agent, the Borrower and each affected Bank shall, forthwith upon discovery of such error, make such adjustments as -89- 97 shall be required to correct such error, and any compensation therefor will be calculated at the Federal Funds Effective Rate. 10.18 Beneficiaries. Except as expressly provided herein, the provisions of this Article X are solely for the benefit of the Agent and the Banks, and the Borrower shall not have any rights to rely on or enforce any of the provisions hereof. In performing its functions and duties under this Agreement, the Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for the Borrower. 10.19 Holding of Loan Documents. Agent agrees that all original Loan Documents retained by it shall be retained for the benefit of the Banks, and Agent shall make available copies of such documents retained by it upon the reasonable request of any of the Banks. ARTICLE XI MISCELLANEOUS 11.01 Modifications, Amendments or Waivers. With the written consent of the Required Banks, the Agent, acting on behalf of all the Banks, and the Borrower or the other applicable Loan Party may from time to time enter into written agreements amending or changing any provision of this Agreement or any other Loan Document or the rights of the Banks or the Borrower or such Loan Party hereunder or thereunder, or may grant written waivers or consents to a departure from the due performance of the obligations of the Borrower or such Loan Party hereunder or thereunder. Any such agreement, waiver or consent made with such written consent shall be effective to bind all the Banks; provided that, without the written consent of all the Banks, no such agreement, waiver or consent may be made which will: (a) Reduce the amount of the Commitment Fee or any other fees payable to any Bank hereunder, or amend Sections 5.02 [Pro Rata Treatment of Banks], 10.06 [Exculpatory Provisions] and 10.13 [Equalization of Banks] hereof; (b) Whether or not any Loans are outstanding, extend the time for payment of principal or interest of any Loan, or reduce the principal amount of or the rate of interest borne by any Loan, or otherwise affect the terms of payment of the principal of or interest of any Loan; (c) Except for sales of assets permitted by Section 8.02(g), release any Collateral or other security, if any, for the Borrower's obligations hereunder; (d) Release or terminate any Guaranty Agreement of any Loan party; (e) Amend Sections 2.01(c), 4.01(a), 8.02(r), or 11.01, change the definitions or the method of computing the ratios contained within such foregoing sections, change the definition of Required Banks, or change any requirement providing for the Banks or the Required Banks to authorize the taking of any action hereunder; or -90- 98 (f) Extend the Expiration Date or increase the amount of the Revolving Credit Commitment of any Bank hereunder. 11.02 No Implied Waivers; Cumulative Remedies; Writing Required. No course of dealing and no delay or failure of the Agent or any Bank in exercising any right, power, remedy or privilege under this Agreement or any other Loan Document shall affect any other or future exercise thereof or operate as a waiver thereof; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power, remedy or privilege preclude any further exercise thereof or of any other right, power, remedy or privilege. The rights and remedies of the Agent and the Banks under this Agreement and any other Loan Documents are cumulative and not exclusive of any rights or remedies which they would otherwise have. Any waiver, permit, consent or approval of any kind or character on the part of any Bank of any breach or default under this Agreement or any such waiver of any provision or condition of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. 11.03 Reimbursement and Indemnification of Banks by the Borrower; Taxes. The Borrower agrees unconditionally upon demand to pay or reimburse to each Bank (other than the Agent, as to which the Borrower's obligations are set forth in Section 9.05) and to save such Bank harmless against (i) liability for the payment of all reasonable out-of-pocket costs, expenses and disbursements (including reasonable fees and expenses of counsel for each Bank except with respect to (a) and (b) below), incurred by such Bank (a) in connection with the interpretation of this Agreement, and other instruments and documents to be delivered hereunder, (b) relating to any requested amendments, waivers or consents pursuant to the provisions hereof, (c) in connection with the enforcement of this Agreement or any other Loan Document, or collection of amounts due hereunder or thereunder or the proof and allowability of any claim arising under this Agreement or any other Loan Document, whether in bankruptcy or receivership proceedings or otherwise, and (d) in any workout, restructuring or in connection with the protection, preservation, exercise or enforcement of any of the terms hereof or of any rights hereunder or under any other Loan Document or in connection with any foreclosure, collection or bankruptcy proceedings, or (ii) all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against such Bank, in its capacity as such, in any way relating to or arising out of this Agreement or any other Loan Documents or any action taken or omitted by such Bank hereunder or thereunder, provided that the Borrower shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (A) if the same results from such Bank's gross negligence or willful misconduct, or (B) if the Borrower was not given notice of the subject claim and the opportunity to participate in the defense thereof, at its expense, or (C) if the same results from a compromise or settlement agreement entered into without the consent of the Borrower. The Banks will attempt to minimize the fees and expenses of legal counsel for the Banks which are subject to reimbursement by the Borrower hereunder by considering the usage of one law firm to represent the Banks and the Agent if appropriate under the circumstances. The Borrower agrees unconditionally to pay all stamp, document, transfer, recording or filing taxes or fees and similar impositions now or hereafter determined by the Agent or any Bank to be payable in connection -91- 99 with this Agreement or any other Loan Document, and the Borrower agrees unconditionally to save the Agent and the Banks harmless from and against any and all present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any such taxes, fees or impositions. 11.04 Holidays. Whenever any payment or action to be made or taken hereunder shall be stated to be due on a day which is not a Business Day, such payment or action shall be made or taken on the next following Business Day (except as provided in Section 4.02(a) with respect to Euro-Rate Interest Periods), and such extension of time shall be included in computing interest or fees, if any, in connection with such payment or action. 11.05 Funding by Branch, Subsidiary or Affiliate. (a) Notional Funding. Each Bank shall have the right from time to time, without notice to the Borrower, to deem any branch, subsidiary or affiliate (which for the purposes of this Section 11.05 shall mean any corporation or association which is directly or indirectly controlled by or is under direct or indirect common control with any corporation or association which directly or indirectly controls such Bank) of such Bank to have made, maintained or funded any Loan to which the Euro-Rate Option applies at any time, provided that immediately following (on the assumption that a payment were then due from the Borrower to such other office) and as a result of such change the Borrower would not be under any greater financial obligation pursuant to Section 5.06 hereof than it would have been in the absence of such change. Notional funding offices may be selected by each Bank without regard to the Bank's actual methods of making, maintaining or funding the Loans or any sources of funding actually used by or available to such Bank. (b) Actual Funding. Each Bank shall have the right from time to time to make or maintain any Loan by arranging for a branch, subsidiary or affiliate of such Bank to make or maintain such Loan subject to the last sentence of this Section 11.05(b). If any Bank causes a branch, subsidiary or affiliate to make or maintain any part of the Loans hereunder, all terms and conditions of this Agreement shall, except where the context clearly requires otherwise, be applicable to such part of the Loans to the same extent as if such Loans were made or maintained by such Banks but in no event shall any Bank's use of such a branch, subsidiary or affiliate to make or maintain any part of the Loans hereunder cause such Bank or such branch, subsidiary or affiliate to incur any cost or expenses payable by the Borrower hereunder or require the Borrower to pay any other compensation to any Bank (including, without limitation, any expenses incurred or payable pursuant to Section 5.06 hereof) which would otherwise not be incurred. 11.06 Notices. All notices, requests, demands, directions and other communications (collectively "notices") given to or made upon any party hereto under the provisions of this Agreement shall be by telephone or in writing (including telex or facsimile communication) unless otherwise expressly permitted hereunder and shall be delivered or sent by telex or facsimile to the respective parties at the addresses and numbers set forth under their respective names on the signature pages hereof or in accordance with any subsequent unrevoked -92- 100 written direction from any party to the others. All notices shall, except as otherwise expressly herein provided, be effective (a) in the case of telex or facsimile, when received, (b) in the case of hand-delivered notice, when hand delivered, (c) in the case of telephone, when telephoned, provided, however, that in order to be effective, telephonic notices must be confirmed in writing no later than the next day by letter, facsimile or telex, (d) if given by mail, four (4) days after such communication is deposited in the mails with first class postage prepaid, return receipt requested, and (e) if given by any other means (including by air courier), when delivered; provided, that notices to the Agent shall not be effective until received. Any Bank giving any notice to the Borrower shall simultaneously send a copy thereof to the Agent, and the Agent shall promptly notify the other Banks of the receipt by it of any such notice. 11.07 Severability. The provisions of this Agreement are intended to be severable. If any provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the validity or enforceability thereof in any other jurisdiction or the remaining provisions hereof in any jurisdiction. 11.08 Governing Law. This Agreement shall be deemed to be a contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania without regard to its conflict of laws principles. 11.09 Prior Understanding. This Agreement supersedes all prior understandings and agreements, whether written or oral, between the parties hereto and thereto relating to the transactions provided for herein and therein, including any prior confidentiality agreements and commitments. 11.10 Duration; Survival. All representations and warranties of the Borrower contained herein or made in connection herewith shall survive the making of Loans and shall not be waived by the execution and delivery of this Agreement, any investigation by the Agent or the Banks, the making of Loans, or payment in full of the Loans. All covenants and agreements of the Borrower contained in Sections 8.01, 8.02 and 8.03 herein shall continue in full force and effect from and after the date hereof so long as the Borrower may borrow hereunder and until termination of the Revolving Credit Commitments and payment in full of the Loans. All covenants and agreements of the Borrower contained herein relating to the payment of principal, interest, premiums, additional compensation or expenses and indemnification, including those set forth in the Notes, Article V and Sections 10.05, 10.07 and 11.03 hereof, shall survive payment in full of the Loans and termination of the Revolving Credit Commitments. 11.11 Successors and Assigns. (i) This Agreement shall be binding upon and shall inure to the benefit of the Banks, the Agent, the Borrower and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights and obligations hereunder or any interest herein. Each Bank may, at its own cost, make assignments of or sell participations in all or any -93- 101 part of its Revolving Credit Commitment and the Loans made by it to one or more banks or other entities, subject in the case of assignments prior to the occurrence of an Event of Default to the consent of the Borrower and the Agent with respect to any assignee, such consent not to be unreasonably withheld, and provided that assignments may not be made in amounts less than $1,000,000. It is expressly agreed that upon and after the occurrence and during the continuation of an Event of Default the consent of the Agent shall be required, however the consent of the Borrower shall not be required for a Bank to make an assignment of all or any part of its Revolving Credit Commitment. In order for a Bank, at any time to sell a participation in all or any part of its Revolving Credit Commitment, the consent of the Agent shall be required, however the consent of the Borrower shall not be required. In the case of an assignment, upon receipt by the Agent of the Assignment and Assumption Agreement and payment to the Agent of a fee in the amount of $3,500, the assignee shall have, to the extent of such assignment (unless otherwise provided therein), the same rights, benefits and obligations as it would have if it had been a signatory Bank hereunder, the Commitments in Section 2.01 shall be adjusted accordingly, and upon surrender of any Note subject to such assignment, the Borrower shall execute and deliver a new Note to the assignee in an amount equal to the amount of the Revolving Credit Commitment or Loan assumed by it and a new Revolving Credit Note to the assigning Bank in an amount equal to the Revolving Credit Commitment or Loan retained by it hereunder. In the case of a participation, the participant shall only have the rights specified in Section 9.02(c) (the participant's rights against such Bank in respect of such participation to be those set forth in the agreement executed by such Bank in favor of the participant relating thereto and not to include any voting rights except with respect to changes of the type referenced in clauses (a), (b), or (c) under Section 11.01 hereof), all of such Bank's obligations under this Agreement or any other Loan Document shall remain unchanged and all amounts payable by any Loan party hereunder or thereunder shall be determined as if such Bank had not sold such participation. Each Bank may furnish any publicly available information concerning any Loan Party and any other information concerning any Loan Party in the possession of such Bank from time to time to assignees and participants (including prospective assignees or participants) provided such assignees and participants agree to be bound by the provisions of Section 11.12 hereof. (ii) Notwithstanding any other provision in this Agreement, any Bank may at any time pledge or grant a security interest in all or any portion of its rights under this Agreement, its Note and the other Loan Documents to any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR Section 203.14 without notice to or consent of the Borrower or the Agent. No such pledge or grant of a security interest shall release the transferor Bank of its obligations hereunder or under any other Loan Document. 11.12 Confidentiality. The Agent and the Banks each agree to keep confidential all information obtained from any Loan party which is nonpublic and confidential or proprietary in nature (including any information any Loan Party specifically designates as confidential), except as provided below, and to use such information only in connection with their respective capacities under this Agreement and for the purposes contemplated hereby. The Agent and the Banks shall be permitted to disclose such information (i) to outside legal counsel, accountants and other professional advisors who need to know such information in connection with the -94- 102 administration and enforcement of this Agreement, subject to agreement of such persons to maintain the confidentiality, (ii) assignees and participants as contemplated by Section 11.11, (iii) to the extent requested by any bank regulatory authority or, with notice to the Borrower, as otherwise required by applicable Law or by any subpoena or similar legal process, or in connection with any investigation or proceeding arising out of the transactions contemplated by this Agreement, (iv) if it becomes publicly available other than as a result of a breach of this Agreement or becomes available from a source not subject to confidentiality restrictions, or (v) the Borrower shall have consented to such disclosure. 11.13 Counterparts. This Agreement may be executed by different parties hereto on any number of separate counterparts, each of which, when so executed and delivered, shall be an original, and all such counterparts shall together constitute one and the same instrument. 11.14 Agent's or Bank's Consent. Whenever the Agent's or any Bank's consent is required to be obtained under this Agreement or any of the other Loan Documents as a condition to any action, inaction, condition or event, the Agent and each Bank shall be authorized to give or withhold such consent in its sole and absolute discretion and to condition its consent upon the giving of additional collateral, the payment of money or any other matter. 11.15 Exceptions. The representations, warranties and covenants contained herein shall be independent of each other and no exception to any representation, warranty or covenant shall be deemed to be an exception to any other representation, warranty or covenant contained herein unless expressly provided, nor shall any such exceptions be deemed to permit any action or omission that would be in contravention of applicable Law. 11.16 Consent to Forum; Waiver of Jury Trial. The Borrower hereby irrevocably consents to the nonexclusive jurisdiction of the Court of Common Pleas of Allegheny County and the United States District Court for the Western District of Pennsylvania, and waives personal service of any and all process upon it and consents that all such service of process be made by certified or registered mail directed to the Borrower at the addresses provided for in Section 11.06 hereof and service so made shall be deemed to be completed upon actual receipt thereof. The Borrower waives any objection to jurisdiction and venue of any action instituted against it as provided herein and agrees not to assert any defense based on lack of jurisdiction or venue. The Borrower, the Agent and the Banks hereby waive trial by jury in any action, suit, proceeding or counterclaim of any kind arising out of or related to this Agreement, any other Loan Document or the Collateral to the full extent permitted by Law. 11.17 Tax Withholding Clause. At least five (5) Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Bank, each Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to each of the Borrower and the Agent two (2) duly completed copies of (i) Internal Revenue Service Form W-9, 4224 or 1001, or other applicable form prescribed by the Internal Revenue Service, certifying in either case that such Bank is entitled to receive payments under this Agreement and the other Loan Documents without deduction or withholding of any United States federal income taxes, or is subject to such tax at a reduced rate under an applicable tax -95- 103 treaty, or (ii) Form W-8 or other applicable form or a certificate of the Bank indicating that no such exemption or reduced rate is allowable with respect to such payments. Each Bank which so delivers a Form W-8, W-9, 4224 or 1001 further undertakes to deliver to each of the Borrower and the Agent two (2) additional copies of such form (or a successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrower or the Agent, either certifying that such Bank is entitled to receive payments under this Agreement and the other Loan Documents without deduction or withholding of any United States federal income taxes or is subject to such tax at a reduced rate under an applicable tax treaty or stating that no such exemption or reduced rate is allowable. The Agent shall be entitled to withhold United States federal income taxes at the full withholding rate unless the Bank establishes an exemption or at the applicable reduced rate as established pursuant to the above provisions. -96- 104 EXHIBIT 1 AMENDED AND RESTATED RECITALS AND ARTICLES I THROUGH XI OF THE REVOLVING CREDIT AGREEMENT (Cover Page, table of contents and first paragraph are also attached for convenience) EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS DATED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 6-Mos Dec-31-1998 Jun-30-1998 5,081 0 178,319 15,069 0 239,152 485,727 67,330 1,094,184 91,717 0 0 0 296 356,759 1,094,184 0 397,520 0 326,091 1,702 2,887 24,325 27,030 11,893 15,137 0 0 0 15,137 0.51 0.50
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