-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, rh17oLEIeY0jOmEoLrJB580RzlKdksi4rDHnpSpYNSrfXMlOb6EXNR+R6iQV2X/2 PSSmQiMcJQMjiMfV5JWxEw== 0000276477-94-000018.txt : 19940829 0000276477-94-000018.hdr.sgml : 19940829 ACCESSION NUMBER: 0000276477-94-000018 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 22 CONFORMED PERIOD OF REPORT: 19940531 FILED AS OF DATE: 19940817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HILLHAVEN CORP CENTRAL INDEX KEY: 0000276477 STANDARD INDUSTRIAL CLASSIFICATION: 8050 IRS NUMBER: 911459952 STATE OF INCORPORATION: NV FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10426 FILM NUMBER: 94544817 BUSINESS ADDRESS: STREET 1: 1148 BROADWAY PLZ CITY: TACOMA STATE: WA ZIP: 98402 BUSINESS PHONE: 2065724901 FORMER COMPANY: FORMER CONFORMED NAME: MERIT CORP DATE OF NAME CHANGE: 19600201 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (MARK ONE) [x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended May 31, 1994 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from ________ to ________ Commission file number 1-10426 THE HILLHAVEN CORPORATION (Exact name of registrant as specified in its charter) Nevada 91-1459952 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1148 Broadway Plaza Tacoma, WA 98402 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (206) 572-4901 ________________ Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, Par Value $0.75 per share New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange 7-3/4% Convertible Subordinated Debentures New York Stock Exchange ________________ Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] As of August 8, 1994, there were 27,174,778 shares of Common Stock, par value $0.75 per share, outstanding. The aggregate market value of the shares of Common Stock held by non-affiliates of the registrant on August 8, 1994, was approximately $339,401,272. For purposes of the foregoing calculation only, National Medical Enterprises, Inc. and all directors and executive officers of the registrant have been deemed affiliates. Portions of the definitive Proxy Statement for the registrant's Annual Meeting of Stockholders have been incorporated by reference into Part III of this Report. TABLE OF CONTENTS ANNUAL REPORT ON FORM 10-K 1994 THE HILLHAVEN CORPORATION AND SUBSIDIARIES
Page Part I Item 1. Business 1 Item 2. Properties 21 Item 3. Legal Proceedings 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 21 Item 6. Selected Financial Data 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 25 Item 8. Financial Statements and Supplementary Data 33 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 33 Part III Item 10. Directors and Executive Officers of the Registrant 33 Item 11. Executive Compensation 33 Item 12. Security Ownership of Certain Beneficial Owners and Management 33 Item 13. Certain Relationships and Related Transactions 33 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 34
PART I Item 1. Business General The Hillhaven Corporation, a Nevada corporation ("Hillhaven", the "Registrant" or the "Company"), operates nursing centers, pharmacies and retirement housing communities. Hillhaven was incorporated in May 1989 by National Medical Enterprises, Inc. (together with its subsidiaries, "NME") in anticipation of a spin-off by NME of substantially all of its domestic long term care operations in a dividend distribution of Hillhaven common stock to NME shareholders that was effected in January 1990 (the "Spin-off"). As part of the Spin-off, Hillhaven and NME entered into certain agreements which included the leasing of initially 115 nursing centers and four retirement housing communities adjacent thereto, the borrowing of certain sums of money and the managing of certain nursing centers located on NME hospital campuses. These relationships are discussed in more detail under "Certain Transactions" in the Proxy Statement for the Company's 1994 Annual Meeting of Stockholders. Based upon the number of beds in service and net operating revenues, Hillhaven is the second largest long term care provider in the United States and believes that it is one of the leading providers of Alzheimer's care. At May 31, 1994, the Company operated 288 nursing centers (of which 194 were owned, 78 were leased and 16 were managed for others) with 36,249 licensed beds. The nursing centers are located in 33 states and range in capacity from 42 to 692 beds. For the year ended May 31, 1994, average nursing center occupancy was 93.4%. Pharmacy operations are conducted through the Company's subsidiary, Medisave Pharmacies, Inc. ("Medisave"), which, as of May 31, 1994, consisted of 40 institutional pharmacies and 32 retail pharmacies located in 19 states. The Company also operates 19 retirement housing communities containing an aggregate of 2,622 apartment units located in 14 states. The Company provides a wide range of diversified health care services, including long term care and subacute medical and rehabilitation services, such as wound care, oncology treatment, brain injury care, stroke therapy and orthopedic therapy. Subacute medical and rehabilitation services are offered at all of the Company's nursing centers and are the fastest growing component of the Company's nursing center operations, constituting approximately 24.7% of nursing center net operating revenues in fiscal 1994, 19.4% in fiscal 1993 and 13.6% in fiscal 1992. Hillhaven believes that it is also one of the largest providers of physical, occupational and speech therapies in the United States. In addition, the Company currently provides long term care to residents of the Company's nursing centers with Alzheimer's disease through 61 Alzheimer's care units with 1,870 beds. The Company does not presently maintain designated beds for specialty care services, other than for Alzheimer's care, where the patients benefit from segregated facilities. The Company's experience has been that subacute medical and rehabilitation services, particularly rehabilitation, can be effectively and successfully integrated into its standard nursing center operations at the majority of its centers, in most cases with little physical reconfiguration of or modification to the facilities. Nursing center net operating revenues, comprised primarily of net patient revenues, accounted for 85.5% and 84.9% of Hillhaven's total net operating revenues for fiscal 1994 and 1993, respectively. In fiscal 1994, the Company derived 50.2% of its net patient revenues from Medicaid, 26.8% from private pay and other sources and 23.0% from Medicare. In fiscal 1993, the comparable figures were 54.8%, 26.8% and 18.4%, respectively. Pharmacy operations accounted for 12.2% and 13.1% of Hillhaven's total net operating revenues for fiscal 1994 and 1993, respectively. In fiscal 1994, institutional pharmacy operations constituted approximately 76% of Medisave's total net operating revenues, compared to 63% in fiscal 1993. Retirement housing operations represented 2.3% and 2.0% of Hillhaven's total net operating revenues for fiscal 1994 and 1993, respectively. Under segment reporting criteria, Hillhaven believes its only material business segment is "health care," which contributed substantially all of the Company's net operating revenues and substantially all of its operating profits for fiscal 1994. The Recapitalization Since the Spin-off, it has been management's intention to improve Hillhaven's balance sheet (in particular, its debt-to- equity ratio) and to gradually decrease the extent of the relationship between Hillhaven and NME. To this end, prior to September 1993, the Company had purchased all but 23 of the 115 nursing centers originally leased from NME, had restructured its leases relating to the NME-owned nursing centers to eliminate contingent rent provisions and to fix the purchase option prices, had repaid $96.8 million of the $145.9 million principal amount of notes issued by Hillhaven to NME at the time of the Spin-off, had issued $35 million of its 8-1/4% cumulative nonvoting Series C Preferred Stock (the "Series C Preferred Stock") to NME and used the proceeds to repay higher cost debt and had reduced the amount of obligations guaranteed by NME, for which the Company pays a guarantee fee, to $699.0 million at May 31, 1993. On September 2, 1993, Hillhaven substantially completed a recapitalization plan (the "Recapitalization") which improved its balance sheet, extended maturities of outstanding indebtedness, increased operating flexibility through the acquisition of previously leased facilities, fixed the interest rates on a portion of its previously floating rate indebtedness and also reduced the extent of the relationship between the Company and NME. Through the Recapitalization, the Company's relationship with NME was modified by (i) the purchase of the remaining 23 facilities leased from NME (the "Leased Facilities") for $111.8 million, (ii) the repayment of all existing debt to NME in the aggregate principal amount of $147.2 million, (iii) the release of NME guarantees on approximately $400 million of debt, (iv) the limitation of the annual fee payable to NME in connection with the maintenance of the remaining guarantees to 2% of the remaining amount guaranteed and (v) the amendment of existing agreements to eliminate obligations of NME to provide additional financing to the Company. The Recapitalization was financed through (i) the issuance to NME of $120 million of a newly created series of payable-in- kind preferred stock (the "Series D Preferred Stock"), (ii) the incurrence by First Healthcare Corporation, the Company's principal operating subsidiary ("FHC"), of a $175 million five- year term loan under a secured credit facility with a syndicate of banks (the "Bank Term Loan"), (iii) the issuance of $175 million of 10-1/8% Senior Subordinated Notes due 2001 (the "Offering"), (iv) the borrowing of $30 million under an accounts receivable-backed credit facility (the "Accounts Receivable Financing") and (v) the use of approximately $39 million of cash. The Recapitalization included a $100 million letter of credit facility to be used to provide credit enhancement for and replace NME guarantees on the Company's industrial revenue bonds, and an $85 million revolving bank line of credit. In February 1994, the letter of credit facility was reduced to $90 million. The availability of the revolving line of credit allows the Company to maintain lower cash balances and may facilitate repayments of higher-rate debt or provide cash for investment or other corporate purposes. Following the Recapitalization, NME has continued to be a substantial shareholder of the Company, but is no longer a lessor to or creditor of the Company. NME has continued as a guarantor of certain leases and a significantly reduced portion of the Company's debt. In the short term, the removal of NME as a guarantor of certain of the Company's indebtedness has caused the Company to incur debt at higher interest rates than may have been available previously. However, this cost has been balanced by the reduction of guarantee fees paid to NME and the replacement of $120 million of indebtedness with the Series D Preferred Stock. In addition, the Company has benefited by capping at 2% NME's guarantee fee, which otherwise would have escalated to 3%. New funds are anticipated to be obtained at rates which the Company believes will be lower than the rates which it would have otherwise obtained on financing provided by NME. The Recapitalization is discussed in more detail under "Certain Transactions" in the Proxy Statement for the Company's 1994 Annual Meeting of Stockholders. Industry Trends The Company believes that several industry trends will contribute to growth opportunities. These trends include an aging population, the increasing shift of patients from acute care and rehabilitation hospitals to nursing centers due to the nationwide emphasis on health care cost containment, the health care system reform proposals being considered by the federal and state governments and others, the growth in demand for long term care services and centers currently exceeding the growth in supply and the increasing complexity of and more burdensome operating standards for the delivery of pharmaceutical products and services to nursing centers and other institutions. Aging Population. People over the age of 65 are the primary users of long term care. Based on U.S. Census Bureau data, this segment of the population in the United States has grown from approximately 25 million in 1980 to approximately 31 million in 1990. This age group is expected to increase to approximately 35 million by the year 2000. The fastest growing segment of the United States population is the over-85 age group, which is expected to increase from approximately 3.4 million in 1991 to approximately 4.6 million in 2000. Advances in medical technology have increased life expectancies; as a result, an increasing number of elderly patients require a high level of care not historically available outside an acute care hospital. Earlier Hospital Discharge to Nursing Centers. Based on reports in health care industry journals, in recent years, average lengths of stay in hospitals have been decreasing, in part as a result of governmental and private pay sources attempting to control health care costs by adopting reimbursement strategies that encourage earlier discharge from hospitals. Many patients leaving hospitals require skilled nursing care and rehabilitation services of the type that the Company provides. Health Care System Reforms. In an effort to combat increasing health care costs, governmental entities and insurance companies are considering ways to contain costs, including adjusting Medicaid eligibility requirements and encouraging patients to obtain treatment from lower cost providers. The Company believes that, as a low cost provider of subacute medical and rehabilitation services, it is well-positioned to benefit from these reforms. Nursing Center Supply/Demand Imbalance. Based on reports in long term care industry journals, while demand for nursing center beds has increased in recent years, the supply has remained relatively unchanged. Construction and expansion of nursing centers is regulated in most states, and the ability to obtain financing for these activities in the past was adversely affected by lending limitations imposed by the financial institutions industry. Increasing Complexity of Institutional Pharmaceutical Requirements. The Company believes that the implementation of the Omnibus Budget Reconciliation Act of 1987 ("OBRA") in October 1990 has further increased the demand for the Company's pharmaceutical services. Nursing centers are responsible for complying with more stringent standards of care established by OBRA, which include planning, monitoring and reporting the progress of prescription drug therapy. Based on reports in long term care industry journals, nursing center administrators and directors of nursing now seek sophisticated and experienced pharmacies with trained consultant pharmacists and computerized documentation programs to help ensure regulatory compliance. Retail pharmacies, which generally lack the breadth of service and do not focus on the special requirements of nursing centers, are being replaced with institutional pharmacies that can more effectively serve this market. Business Strategy Operating Strategy The Company's operating strategy is designed to take advantage of several important industry trends, a number of which are favorable, and includes expanding higher revenue specialty care services, increasing private pay and Medicare census, maintaining high occupancy levels and expanding Medisave's institutional pharmacy operations. Expansion of Specialty Care Services. Hillhaven intends to continue to expand its specialty care programs and services. These services generally produce higher revenues than do routine nursing care services and serve to differentiate the Company's facilities from others in a given market. The Company intends to expand its subacute medical and rehabilitation services, which include wound care, oncology treatment, brain injury care, stroke therapy and orthopedic therapy. The expansion of these services is designed to increase private pay and Medicare revenues which are higher than reimbursement rates for traditional long term care services. Increasing Private Pay and Medicare Census. Hillhaven is also working to increase private pay and Medicare census by further developing and maintaining relationships with traditional referral sources and by entering into contracts with private insurance companies to provide subacute medical and rehabilitation services to their insureds. Increasing the number of managed care patients in the Company's nursing centers is an increasingly important component of the Company's marketing strategy. Hillhaven's subacute medical and rehabilitation services offer a less expensive alternative to hospital care for patients who need specialized nursing care but do not require many of the other services provided in an acute care hospital. As of May 31, 1994, the Company was operating under 139 such managed health care contracts. Maintaining High Occupancy Levels. The Company believes in maintaining high occupancy levels in existing facilities through (i) an enhanced emphasis on local marketing efforts in which nursing center employees are charged with actively marketing their services within the community, (ii) broadening the scope and character of services provided in each nursing center and (iii) favorable demographic trends. The Company believes that maintaining high occupancy levels enables it to realize greater economies of scale. In fiscal 1994, Hillhaven had an average occupancy in its ongoing nursing centers of 93.4%. However, certain facilities, particularly in the western states, have lower occupancy rates, and management's strategy is to increase occupancy levels in the nursing centers in these states. Expansion of Institutional Pharmacy Business. The Company is a leading provider of comprehensive pharmacy services to nursing centers and their patients. Medisave has a growth strategy which includes (i) continued penetration of existing markets, (ii) expansion into selected new markets and (iii) increasing infusion and enteral therapy revenues by targeting specific health care providers. Financial Strategy The Company's financial strategy is designed to increase the equity base of the Company over time and to provide flexibility to capitalize on attractive business opportunities. The key elements of this financial strategy include reducing or refinancing indebtedness, purchasing leased nursing centers and divesting nursing centers that do not perform satisfactorily. Reducing or Refinancing Indebtedness. The Company's plan to reduce or refinance indebtedness is designed to improve the Company's debt-to-equity ratio, reduce the overall interest rates on indebtedness (including guarantee fees) and extend the maturities and amortization of the Company's indebtedness. Purchasing Leased Nursing Centers. Since the Spin-off, Hillhaven has purchased 136 of the 239 nursing centers that were leased at that time. The acquisition of the Leased Facilities completed the Company's purchase of all of the 115 facilities previously leased from NME. The Company generally considers ownership of nursing centers preferable to leasing, both in the short term and in the long term, because it provides increased operating flexibility and the opportunity to benefit from future real estate appreciation. Conclusion of the Disposition Program. On December 5, 1991, Hillhaven announced a restructuring plan designed to improve its long-term financial strength and operating performance by disposing of underperforming nursing centers, restructuring facility leases with NME and selling $35 million of Series C Preferred Stock to NME in order to prepay indebtedness owed to NME. The plan involved the sale or sublease of 82 nursing centers, which disposition was intended to allow the Company to concentrate on markets and services that offer higher profits, as well as to realize reductions in overhead costs. As of November 30, 1993, the Company had completed the disposition of 50 of these nursing centers, as well as three retirement housing facilities which, prior to March 1, 1992, had been recorded as discontinued operations. During the second quarter of fiscal 1994, the Company reviewed its asset disposition program and, because of improvements in reimbursement rates and results of operations, decided not to pursue the sale of the remaining nursing homes and a retirement housing facility, but instead reinstated these facilities as ongoing operations. On December 31, 1993, the Company completed the sale of 13 additional nursing centers, nine of which had previously been held for disposition. Nursing Centers Hillhaven's nursing center operations provide skilled nursing, residential and rehabilitative care in 288 nursing centers in 33 states. At May 31, 1994, Hillhaven owned 194 and leased 78 nursing centers. These nursing centers had a total of 34,162 licensed beds, with individual nursing center capacities ranging from 42 to 692 beds. In addition, seven nursing centers are managed for partnerships or joint ventures in which Hillhaven has an equity interest and nine nursing centers are managed for NME and other third parties for management fees usually based upon a percentage of nursing center revenues. Hillhaven is a leading provider of rehabilitation services, including physical, occupational and speech therapies. Rehabilitation services are provided in all of the Company's nursing centers. The majority of patients in rehabilitation programs stay for eight weeks or less. Patients in rehabilitation programs generally provide for higher revenues than other nursing center patients because they use a higher level of ancillary services. In addition, management believes that Hillhaven is one of the leading providers of care for patients with Alzheimer's disease. At May 31, 1994, the Company offered treatment in approximately 1,870 beds in 61 nursing centers for patients suffering from Alzheimer's disease. Many of these patients reside in separate units within the nursing centers and are cared for by teams of professionals specializing in the unique problems experienced by Alzheimer's patients. Marketing The factors which affect consumers' selection of a nursing center vary from community to community and include competition and a provider's relationships with local referral sources. Competition creates the standards against which nursing centers in a given market are judged by various referral sources, which include physicians, hospital discharge planners, community organizations and families. Therefore, Hillhaven's marketing efforts are conducted at the local market level by the nursing center administrators, admissions coordinators and others. Nursing center personnel are assisted in carrying out their marketing strategies by regional marketing staffs. The Company's marketing efforts are directed toward improving the payor mix at the nursing centers by increasing the census of private pay patients, patients covered by managed care contracts and Medicare patients. To this end, the Company is working to educate the various referral sources about the value of Hillhaven's nursing centers as an attractive lower cost alternative to acute care and rehabilitation hospitals for subacute medical care and specialty services. Operations Each nursing center is managed by a state licensed administrator who is supported by other professional personnel, including a director of nursing, staff development professional (responsible for employee training), activities director, business office manager and, in general, physical, occupational and speech therapists. The directors of nursing are state licensed nurses who supervise nursing staffs which include registered nurses, licensed practical nurses and nursing assistants. Staff size and composition vary depending on the size and occupancy of each nursing center and on the level of care provided by the nursing center. The nursing centers contract with physicians who serve as medical directors and serve on quality assurance committees. The nursing centers are supported by regional staff in the areas of nursing, dietary and rehabilitation services, maintenance, human resources, marketing and financial services. In addition, corporate staff in Tacoma, Washington provide other services in the areas of marketing assistance, human resource management, state and federal reimbursement, state licensing and certification, legal, finance and accounting support. Financial control is maintained principally through fiscal and accounting policies established at the corporate level for use at the nursing centers. Quality of care is monitored and enhanced by quality assurance committees, regional quality assurance teams and family satisfaction surveys. The quality assurance committees oversee patient health care needs and resident and staff safety. Additionally, physicians serve on the quality assurance committees as medical directors and advise on health care policies and practices. Regional consultants visit each nursing center periodically to review practices and recommend improvements where necessary in the level of care provided and to assure compliance with requirements under applicable Medicare and Medicaid regulations. Surveys of residents' families are conducted from time to time in which the families are asked to rate various aspects of service and the physical condition of the nursing centers. These surveys are reviewed by nursing center administrators to help ensure quality care. Hillhaven provides training programs for nursing center administrators, managers, nurses and nursing assistants. These programs are designed to provide career opportunities for employees and to maintain high levels of quality patient care. Approximately 99% of the nursing centers are currently certified to receive benefits provided under Medicare and Medicaid programs. Medicare is a federal health insurance program primarily for the elderly. Medicaid is a joint federal/state program providing medical assistance to the indigent. A nursing center's qualification to participate in such programs depends upon many factors, including, among other things, accommodations, equipment, services, safety, personnel, physical environmental and adequate policies and procedures. Occupancy Level The following table sets forth for the periods indicated data with respect to numbers of owned or leased nursing centers operated by Hillhaven, numbers of beds and occupancy levels. (Data with respect to facilities managed by the Company for partnership and joint ventures in which the Company has an equity interest and for third parties are not included. See "Facilities.")
No. of Operating Nursing No. of Fiscal Year Centers Beds Average Ended May 31, At Year End At Year End Occupancy 1994 272 34,162 93.4% 1993 284 35,139 93.4 1992 334 41,089 91.6
Sources of Revenues Net patient care revenues are derived principally from Medicare and Medicaid programs and from private pay patients. Consistent with the nursing home industry generally, changes in the mix of Hillhaven's patient population among these three categories significantly affect the profitability of Hillhaven's operations. Although the level of cost reimbursement for Medicare patients generally produces the most revenue per patient day, profitability is reduced by the costs associated with the higher level of nursing care and other services required by such patients. The Company believes that private pay patients generally constitute the most profitable and Medicaid patients generally constitute the least profitable category. The table below sets forth certain data for the periods shown with respect to the payor mix of owned or leased nursing centers that were operated by Hillhaven. (Data with respect to facilities managed by the Company for partnerships and joint ventures in which the Company has an equity interest and for third parties are not included. See "Facilities.")
Fiscal Year Medicaid Private and Other Medicare Ended Patient Net Patient Net Patient Net May 31, Days Revenues Days Revenues Days Revenues 1994 66.6% 50.2% 23.4% 26.8% 10.0% 23.0% 1993 68.4 54.8 23.3 26.8 8.3 18.4 1992 68.9 57.3 24.6 28.2 6.5 14.5
Both governmental and private third-party payors have employed cost containment measures designed to limit payments made to health care providers such as the Company. Those measures include the adoption of initial and continuing recipient eligibility criteria which may limit payment for services, the adoption of coverage criteria which limit the services that will be reimbursed and the establishment of payment ceilings which set the maximum reimbursement that a provider may receive for services. Furthermore, government reimbursement programs are subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings and government funding restrictions, all of which may materially increase or decrease the rate of program payments to the Company for its services. There can be no assurance that payments under governmental and private third-party payor programs will remain at levels comparable to present levels or will be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. In addition, there can be no assurance that facilities owned, leased or managed by the Company, or the provision of services and supplies by the Company, will meet the requirements for participation in such programs. The Company could be adversely affected by the continuing efforts of governmental and private third-party payors to contain the amount of reimbursement for health care services. In an attempt to limit the federal budget deficit, there have been, and the Company expects that there will continue to be, a number of proposals to limit Medicare and Medicaid reimbursement for health care services. Medicare The Medicare Part A program provides reimbursement for extended care services furnished to Medicare beneficiaries who are admitted to skilled nursing centers after at least a three- day stay in an acute care hospital. Covered services include supervised nursing care, room and board, social services, physical and occupational therapies, pharmaceuticals, supplies and other necessary services provided by skilled nursing centers. Under the Medicare program, skilled nursing center reimbursement is based upon actual costs incurred as reported by each nursing center at the end of each annual reporting period. Revenues under this program are subject to audit and retroactive adjustment. Provisions for estimated third-party payor settlements are provided for in the period the related services are rendered and are adjusted as final settlements are determined. To date, these settlements have not resulted in material adjustments to earnings. Medicaid Medicaid is a state-administered program financed by state funds and matching federal funds. The program provides for medical assistance to the indigent and certain other eligible persons. Although administered under broad federal regulations, states are given flexibility to construct programs and payment methods consistent with their individual goals. These programs, therefore, differ from state to state in many respects. Federal law requires Medicaid programs to pay rates that are reasonable and adequate to meet the costs incurred by an efficiently and economically operated nursing center providing quality care and services in conformity with all applicable laws and regulations. However, despite these federal requirements, disagreements frequently arise between nursing centers and states regarding the adequacy of Medicaid payments. In addition, the Medicaid programs are subject to statutory and regulatory changes, administrative rulings, interpretations of policy by the state agencies and certain government funding limitations, all of which may materially increase or decrease the level of program payments to nursing centers operated by Hillhaven. Management believes that, at present, the payments under these programs are not sufficient on an overall basis to cover the costs of serving residents participating in these programs. Furthermore, OBRA mandates an increased emphasis on ensuring quality patient care, which has resulted in additional expenditures by nursing centers. There can be no assurance that the payments under these state programs will remain at levels comparable to current levels or, in the future, will be sufficient to cover the costs incurred in serving residents participating in such programs. Hillhaven provides to eligible individuals Medicaid-covered services consisting of nursing care, room and board and social services. In addition, states may at their option cover other services such as physical, occupational and speech therapies and pharmaceuticals. Private Payment and Medicare Patients Hillhaven seeks private payment and Medicare patients and has specific marketing and referral programs aimed at enhancing its private census. In particular, the Company has implemented a strategy to increase the number of managed care patients. Private payment patients typically have financial resources (including insurance coverage) to pay for their monthly services and therefore do not rely on Medicaid for support. Private payment billings are sent monthly, with any collection efforts handled primarily through the nursing centers. Patients either pay directly or funds are received from family members, insurance companies, health maintenance organizations or other private third-party payors. Competition Hillhaven's nursing centers compete on a local and regional basis with other long term care providers. Hillhaven's competitive position varies from nursing center to nursing center within the various communities served. Hillhaven believes that the quality care provided, reputation, location and physical appearance of its nursing centers and, in the case of private patients, the rates or charges for services are significant competitive factors. There is limited, if any, price competition with respect to Medicare and Medicaid patients, since revenues received for services provided to such patients are strictly controlled and based on fixed rates or cost reimbursement principles. The long term care industry is divided into a variety of competitive areas which market similar services. These competitors include nursing centers, hospitals, extended care centers, retirement housing facilities and communities, home health agencies and similar institutions. The industry includes government-owned, church-owned, secular not-for-profit and for- profit institutions. Facilities The following table lists, by state, the number of nursing centers operated by the Company for its own account as of May 31, 1994. Sixteen nursing centers, accounting for 2,087 beds, managed at that date for partnerships and joint ventures in which the Company has an equity interest and for others are not included in the table.
Leased From Licensed Third Number Beds Owned Parties Alabama (1) 3 447 3 -- Arizona 7 970 5 2 Arkansas 1 174 1 -- California 39 4,140 21 18 Colorado 7 935 2 5 Connecticut (1) 6 716 6 -- Florida (1) 10 1,291 8 2 Georgia (1) 3 370 3 -- Hawaii (1) 1 60 1 -- Idaho 9 903 7 2 Indiana (1) 9 1,323 3 6 Kentucky (1) 15 1,914 12 3 Maine (1) 11 880 11 -- Massachusetts (1) 36 4,055 33 3 Minnesota 1 159 1 -- Mississippi (1) 1 120 -- 1 Montana (1) 3 456 2 1 Nebraska (1) 1 157 -- 1 Nevada (1) 3 312 3 -- New Hampshire (1) 3 512 3 -- North Carolina (1) 29 3,241 20 9 Ohio (1) 11 1,546 7 4 Oklahoma (1) 1 126 1 -- Oregon (1) 4 468 2 2 Tennessee (1) 16 2,652 5 11 Utah 5 620 5 -- Vermont (1) 1 160 1 -- Virginia (1) 5 764 4 1 Washington (1) 13 1,530 10 3 Wisconsin (1) 14 2,710 10 4 Wyoming (1) 4 451 4 -- Number of nursing centers 272 194 78 Total number of licensed beds 34,162 24,242 9,920 (1) These states have Certificate of Need regulations. See "Business - Government Regulation."
In addition to its interests in nursing centers, as described above, as of May 31, 1994, Hillhaven had 50% interests in seven partnerships and joint ventures that own nursing centers managed by Hillhaven with an aggregate of 772 beds in five states. Hillhaven also manages nine nursing centers owned by NME and other third parties. These nursing centers are managed by Hillhaven for varying management fees. The aggregate net operating revenues received in connection with the management of these facilities was $5.7 million in fiscal 1994 and $5.5 million in fiscal 1993. Pharmacies Through Medisave, the Company provides institutional and retail pharmacy services. As of May 31, 1994, Medisave operated 40 institutional pharmacies and 32 retail pharmacies in 19 states. In fiscal 1994, Medisave's net operating revenues were $176.2 million, representing 12.2% of the Company's net operating revenues. Medisave's net operating revenues of $179.3 million accounted for 13.1% of Hillhaven's net operating revenues in fiscal 1993, compared to 12.0% in fiscal 1992. The institutional pharmacy division focuses on providing a full array of pharmacy services to approximately 400 nursing centers and specialized care centers. Institutional pharmacy sales encompass a wide variety of products including prescription medication, prosthetics, respiratory and infusion services and enteral therapies. In addition, Medisave provides a variety of pharmaceutical consulting services designed to assist nursing centers in program administration. The disposition of 50 nursing centers as part of the restructuring announced in December 1991 has not had a material adverse effect on the results of operations of the institutional pharmacy division. Institutional pharmacy operations accounted for approximately 76% of total pharmacy revenues and approximately 90% of Medisave's operating profits in fiscal 1994. In fiscal 1993, the comparable figures were 63% and 80%, respectively. Medisave's retail pharmacy operations consist of discount retail pharmacy and optical stores in leased facilities. In 1993 and 1994, the Company terminated leases of 36 retail outlets in Wal-Mart stores. The leases of the remaining 14 Wal-Mart outlets were terminated in the 1995 first quarter. The termination of these leases is not expected to have a material effect on pharmacy operating income. Retail operations accounted for approximately 24% of Medisave's total pharmacy revenues and approximately 10% of its operating profits in fiscal 1994. In fiscal 1993, the comparable figures were 37% and 20%, respectively. The following table lists by state the number of pharmacies operated by Medisave as of May 31, 1994.
State Number Arizona 1 California 12 Colorado 1 Florida 3 Idaho 1 Illinois 3 Kansas 6 Louisiana 4 Massachusetts 2 Mississippi 5 Missouri 1 Nevada 2 North Carolina 4 Ohio 2 Tennessee 3 Texas 15 Utah 1 Virginia 3 Wisconsin 3 Total 72
Retirement Housing Communities Hillhaven's retirement housing operations consist of 19 retirement housing communities. These centers include 2,622 apartment units and are located in 14 states. Of the total number of retirement housing centers, 14 are owned by Hillhaven, one is leased by Hillhaven and four are owned by partnerships in which Hillhaven has an equity interest. Retirement housing operations represented approximately 2.3%, 2.0% and 1.7% of Hillhaven's total net operating revenues for fiscal 1994, 1993 and 1992, respectively. Retirement housing communities serve more independent and self-sufficient residents than do the nursing centers. A retirement housing community consists of studio, one-bedroom and two-bedroom apartment units. Residents typically receive weekly housekeeping and linen service, local transportation, 24-hour emergency call system and daily food service. Residents are responsible for monthly fees which typically are paid by the resident or the resident's family members. Retirement housing operations do not presently qualify for reimbursement under Medicare, Medicaid or Veterans Administration health care programs because they do not offer the levels of care required under such programs. Monthly fees paid by residents are based upon the resident's apartment size, the number of meals the resident elects to purchase and the level of personal care required by the resident. The following table lists, by state, the number of retirement housing communities operated by the Company as of May 31, 1994.
Leased From Third State Number Owned(1) Parties Arizona 4 4 - California 1 1 - Colorado 1 1 - Florida 2 2 - Idaho 1 1 - Kansas 1 1 - Massachusetts 2 2 - Missouri 1 1 - New Hampshire 1 1 - Ohio 1 - 1 Oklahoma 1 1 - Oregon 1 1 - Utah 1 1 - Washington 1 1 - Totals 19 18 1 (1) Includes retirement housing communities owned by partnerships in which Hillhaven has a limited and/or general partnership interest that are managed by Hillhaven for such partnerships.
Government Regulation The federal government and all states in which the Company operates regulate various aspects of the Company's business. In particular, the development and operation of long term care facilities and retirement communities and the provision of health care services are subject to federal, state and local laws relating to the adequacy of medical care, distribution of pharmaceuticals, equipment, personnel, operating policies, fire prevention, rate-setting and compliance with building codes and environmental laws. Long term care facilities are subject to periodic inspection by governmental and other authorities to assure continued compliance with various standards, their continued licensing under state law, certification under the Medicare and Medicaid programs and continued participation in the Veterans Administration program. Retirement communities and their owners are subject to periodic inspection by governmental authorities to assure compliance with various standards including standards relating to the financial condition of the owners of such communities. The failure to obtain or renew any required regulatory approvals or licenses could adversely affect the Company's operations. Effective October 1, 1990, OBRA increased the enforcement powers of state and federal certification agencies. Additional sanctions were authorized to correct noncompliance with regulatory requirements, including fines, temporary suspension of admission of new patients to nursing centers and, in extreme circumstances, decertification from participation in the Medicare or Medicaid programs. Nursing centers managed and operated by Hillhaven are licensed either on an annual or bi-annual basis and certified annually for participation in Medicare and/or Medicaid by the respective states through various regulatory agencies which determine compliance with federal, state and local laws. These legal requirements relate to the quality of the nursing care provided, the qualifications of the administrative personnel and nursing staff, the adequacy of the physical plant and equipment and continuing compliance with the laws and regulations governing the operation of nursing centers. Hillhaven endeavors to comply with federal, state and local regulatory requirements for the maintenance and operation of its nursing centers. From time to time Hillhaven's nursing centers receive statements of deficiencies from regulatory agencies. In response, Hillhaven implements plans of correction with respect to these nursing centers to address the alleged deficiencies. Hillhaven believes that its nursing centers are in material compliance with all applicable regulations or laws. In certain circumstances, federal law mandates that conviction of certain abusive or fraudulent behavior with respect to one health care facility may subject other facilities under common control or ownership to disqualification for participation in Medicare and Medicaid programs. In addition, some state regulations provide that all facilities under common control or ownership within a state are subject to delicensure if any one or more of such facilities is delicensed. In addition to license requirements, many states in which Hillhaven operates have statutes that require a Certificate of Need to be obtained prior to the construction of a new nursing center, the addition of new beds or services or the incurring of certain capital expenditures. Certain states also require regulatory approval prior to certain changes in ownership of a nursing center. A total of eight states in which Hillhaven operates have eliminated their Certificate of Need programs and a number of other states are considering alternatives to their Certificate of Need programs. To the extent that Certificates of Need or other similar approvals are required for expansion of Company operations, either through facility acquisitions or expansion or provision of new services or other changes, such expansion could be adversely affected by the failure or inability to obtain the necessary approvals, changes in the standards applicable to such approvals or possible delays and expenses associated with obtaining such approvals. Pharmaceutical operations are subject to regulation by the various states in which the Company conducts its business as well as by the federal government. The Company's pharmacies are regulated under the Food, Drug and Cosmetic Act and the Prescription Drug Marketing Act, which are administered by the United States Food and Drug Administration. Under the Comprehensive Drug Abuse Prevention and Control Act of 1970, which is administered by the United States Drug Enforcement Administration ("DEA"), dispensers of controlled substances must register with the DEA, file reports of inventories and transactions and provide adequate security measures. Failure to comply with such requirements could result in civil or criminal penalties. The Company is also subject to federal and state laws which govern financial and other arrangements between health care providers. These laws often prohibit certain direct and indirect payments or fee-splitting arrangements between health care providers that are designed to induce or encourage the referral of patients to, or the recommendation of, a particular provider for medical products and services. Such laws include the anti- kickback provisions of the federal Medicare and Medicaid Patients and Program Protection Act of 1987. These provisions prohibit, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of Medicare and Medicaid patients. In addition, some states restrict certain business relationships between physicians and pharmacies, and many states prohibit business corporations from providing, or holding themselves out as a provider of, medical care. Possible sanctions for violation of any of these restrictions or prohibitions include loss of licensure or eligibility to participate in reimbursement programs as well as civil and criminal penalties. These laws vary from state to state and have seldom been interpreted by the courts or regulatory agencies. Insurance Coverage and Availability The Company has liability insurance policies providing insurance coverage which it believes to be adequate. There can be no assurance, however, that claims in excess of the Company's insurance coverage or claims not covered by the Company's coverage will not be asserted against the Company. In addition, the Company's insurance policies must be renewed annually. Although the Company has obtained various insurance coverages at a reasonable cost in the past, there can be no assurance that it will be able to do so in the future. Although the Company has had access to other insurance options, through May 31, 1994, substantially all of the professional and general liability risks of Hillhaven were insured by a company that is wholly-owned by NME because it offered more competitive rates. All matters arising after May 31, 1994 will be insured through the Company's newly formed captive insurance company, Cornerstone Insurance Company. Other Real Property The Company owns unimproved real property with a book value of approximately $11.4 million at May 31, 1994. Employees As of May 31, 1994, Hillhaven employed approximately 38,100 individuals, of whom approximately 25,600 full-time and 9,800 part-time employees work at Hillhaven's nursing centers, approximately 850 employees work at the corporate and regional offices, approximately 1,350 employees work in Hillhaven's pharmacy operations and approximately 500 employees work in the retirement housing communities. Among its professional staff, Hillhaven employs approximately 2,900 registered nurses, 4,800 licensed practical nurses and 2,600 licensed therapists. Hillhaven has 22 collective bargaining agreements covering approximately 4,500 employees. The Company believes that its relations with its employees are good. Executive Officers of the Registrant Set forth below are the names, ages, titles and present and past positions of the persons who are executive officers of Hillhaven. Name and Age Position and Experience Bruce L. Busby (50) Chief Executive Officer and Chairman of the Board. Mr. Busby has been a director and the Chief Executive Officer of the Company since April 1991 and Chairman of the Company since September 1993. Before joining the Company, Mr. Busby served NME as Chief Executive Officer and President of the Venture Development Group from April 1988 to March 1991, Chairman and Chief Executive Officer of the Long Term Care Group from August 1986 to March 1988 and President of the Retail Services Group from June 1986 to November 1987. Christopher J. Marker (51) President. Mr. Marker has been a director and the President of the Company since December 1989. He served as President of the Company's predecessor, an NME subsidiary, from April 1988 to January 1990. Prior to that, Mr. Marker was Executive Vice President of Westin Hotels and Resorts from January 1984 to March 1988. Name and Age Position and Experience Jeffrey M. McKain (43) Executive Vice President. Mr. McKain has served Hillhaven as Executive Vice President since January 1992 and as Senior Vice President from April 1991 to January 1992. He served as Senior Vice President, Operations of First Healthcare Corporation, a wholly-owned subsidiary of the Company, from April 1990 to April 1991 and as Vice President of Operations of FHC from January 1986 to March 1990. Robert F. Pacquer (49) Senior Vice President and Chief Financial Officer. Mr. Pacquer has served the Company as Senior Vice President and Chief Financial Officer since December 1989 and as Treasurer from that date to March 1992. He served as Senior Vice President and Chief Financial Officer of the Company's predecessor from October 1986 to January 1990. Richard P. Adcock (39) Senior Vice President, Secretary and General Counsel. Mr. Adcock has served the Company as Senior Vice President since December 1989 and as Vice President, Secretary and General Counsel since May 1989. He served as Vice President, Secretary and General Counsel of the Company's predecessor from May 1987 to January 1990. Kris Scoumperdis (50) Senior Vice President. Mr. Scoumperdis has served the Company as Senior Vice President since February 1991 and as Vice President from March 1990 to January 1991. Before joining the Company he served as Vice President, Human Resources of the Frank Russell Company, a pension asset consulting firm, from November 1988 to March 1990, and as Vice President, Human Resources and Support Services of Good Samaritan, Inc., a health care company, from November 1984 to October 1988. Name and Age Position and Experience Carl Napoli (56) Chief Executive Officer, President and Chief Operating Officer of Medisave. Mr. Napoli has served as Chief Executive Officer of Medisave Pharmacies, Inc. since July 19, 1994, as President and Chief Operating Officer since May 1992, and he previously served as Executive Vice President of Operations from September 1984 to May 1992. Edward L. Hiller (63) Vice President/Acquisitions of Medisave. Mr. Hiller has served as Vice President/Acquisitions of Medisave since July 19, 1994. Mr. Hiller served as Chief Executive Officer of Medisave Pharmacies, Inc. from April 1992 to July 19, 1994 and as President from July 1975 to March 1992. Robert K. Schneider (46) Vice President and Treasurer. Mr. Schneider has served as Vice President and Treasurer since April 1992 and as Vice President, Treasury from August 1990 to April 1992. Before joining Hillhaven, he served as a Vice President and Manager of Seafirst Bank from September 1985 to August 1990. Michael B. Weitz (44) Vice President of Finance. Mr. Weitz has served as Vice President of Finance and principal accounting officer since April 1992 and as Vice President, Finance from June 1991 to April 1992. From November 1990 to May 1991, he was a self-employed independent certified public accountant. From June 1989 to October 1990, he served as Vice President of Finance and Treasurer of Chemical Processors, Inc., an environmental company. Item 2. Properties The response to this item is included in Item 1. Item 3. Legal Proceedings There are no material legal proceedings pending to which the Registrant is a party, or to which any of its property is subject, nor is such litigation threatened, other than ordinary routine litigation which is incidental to its business. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended May 31, 1994. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters At May 31, 1994, there were approximately 8,700 holders of record of the Company's common stock. Approximately 33,300 additional stockholders held shares under beneficial ownership in nominee name or within clearing house positions of brokerage firms and banks. The Company's common stock has been listed and traded on the New York Stock Exchange since November 2, 1993 and was previously listed and traded on the American Stock Exchange under the symbol "HIL." The stock prices below are the high and low sales prices as reported on the composite tape as adjusted to reflect a one-for-five reverse stock split.
Fiscal 1994 Fiscal 1993 High Low High Low First quarter 18-3/4 14-3/8 13-3/4 10-5/8 Second quarter 20-5/16 14-11/16 16-7/8 10 Third quarter 21-3/8 17-7/8 21-7/8 12-13/16 Fourth quarter 22-7/8 18-1/2 17-1/2 13-1/8
The Company has not paid a common dividend and does not anticipate declaring a common dividend in the near future. Item 6. Selected Financial Data The following selected financial data have been derived from the Consolidated Financial Statements of The Hillhaven Corporation and its subsidiaries ("Hillhaven" or the "Company"). The data set forth below should be read in conjunction with the Consolidated Financial Statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" which follow. (Dollars in thousands, except share information)
4 Months 8 Months ended ended Years ended May 31, May 31, Jan. 31, 1994 1993 1992 1991 1990 1990 Income Statement Data: Net operating revenues $1,448,734 $1,362,830 $1,304,126 $1,241,973 $ 382,755 $ 734,542 Expenses: Operating and administrative 1,235,652 1,166,607 1,132,285 1,083,260 331,833 639,762 Interest 52,531 57,451 52,450 40,254 12,630 43,016 Depreciation and amortization 54,109 53,448 46,594 33,551 10,063 28,400 Rent 52,440 52,537 67,144 97,526 34,543 39,361 Guarantee fees 6,684 9,644 8,336 7,016 2,000 --- Restructuring (20,225) 5,769 92,529 --- --- --- Adjustment to carrying value of properties previously reported as discontinued operations --- --- 20,736 --- --- --- Net expenses 1,381,191 1,345,456 1,420,074 1,261,607 391,069 750,539 Interest income 13,635 16,006 12,820 17,013 6,309 8,704 Income (loss) from operations 81,178 33,380 (103,128) (2,621) (2,005) (7,293)
4 Months 8 Months ended ended Years ended May 31, May 31, Jan. 31, 1994 1993 1992 1991 1990 1990 Income tax (expense) benefit on income (loss) from operations (22,653) 7,367 (407) --- (225) 3,132 Reinstatement of discontinued operations --- --- 24,743 4,379 2,647 5,785 Extraordinary charge - early extinguishment of debt, net of income taxes (1,062) (565) --- --- --- --- Cumulative effect of change in accounting for income taxes --- (1,103) --- --- --- --- Net income (loss) $ 57,463 $ 39,079 $ (78,792) $ 1,758 $ 417 $ 1,624 Net income (loss) per common share - primary $2.02 $1.59 $(3.86) $.09 $.02 --- - fully diluted $1.71 --- --- --- --- --- Balance Sheet Data: Working capital $ 36,147 $ 77,870 $ 58,951 $ 77,867 $ 89,956 $ 44,382 Total assets 1,184,000 1,218,237 1,174,595 813,488 679,896 557,482 Long-term debt 577,951 818,248 833,779 442,233 336,836 250,184 Stockholders' equity 361,369 180,226 140,057 181,106 171,464 446,131
4 Months 8 Months ended ended Years ended May 31, May 31, Jan. 31, 1994 1993 1992 1991 1990 1990 Other Information (unaudited): Nursing Centers (at end of period) Number of nursing centers 272 284 334 342 343 343 Number of licensed beds 34,162 35,139 41,089 42,239 42,409 42,367 Average occupancy rate for the year 93.4% 93.4% 91.6% 90.6% 90.4% 90.8% Nursing centers managed for others 16 17 17 19 19 18 Pharmacy Outlets 72 83 126 113 116 122 Retirement Housing Communities 19 21 27 27 24 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands) The following material should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements of the Company and the related notes thereto. All references in this section to years are to fiscal years of the Company ended May 31 of such year. Significant Events In the 1994 second quarter, Hillhaven completed a recapitalization plan which improved its balance sheet and modified its relationship with National Medical Enterprises, Inc. (NME). A one-for-five reverse split of the Company's common stock was effected in the 1994 second quarter. Also in the second quarter, the Company completed its facility disposition program and recorded a $21,904 pretax restructuring credit. In 1994, Hillhaven realized earnings of $57,463, compared to $39,079 in 1993 and a net loss of $78,792 in 1992. The 1992 loss included a $90,000 pretax restructuring charge, as described below. The Recapitalization On September 2, 1993, Hillhaven substantially completed a recapitalization plan (the "Recapitalization") which improved the Company's balance sheet, extended the maturities of outstanding indebtedness, increased operating flexibility through the acquisition of leased facilities, fixed the interest rate on a portion of its previously floating rate indebtedness and also modified the relationship between Hillhaven and NME. The Company's relationship with NME was modified by (i) the purchase of the remaining 23 nursing centers leased from NME for $111,800, (ii) the repayment of all existing debt to NME in the aggregate principal amount of $147,202, (iii) the release of NME guarantees on approximately $400,000 of debt, (iv) the limitation of the annual fee payable to NME to 2% of the remaining amount guaranteed and (v) the amendment of existing agreements to eliminate obligations of NME to provide additional financing to the Company. The Recapitalization was financed through (i) the issuance to NME of $120,000 of payable-in-kind Series D Preferred Stock, (ii) the incurrence of a $175,000 five-year term loan under a secured credit facility with a syndicate of banks (the "Bank Term Loan"), (iii) the issuance of $175,000 of 10-1/8% Senior Subordinated Notes due 2001, (iv) borrowings of $30,000 under an accounts receivable-backed credit facility and (v) the use of approximately $39,000 of cash. Hillhaven refinanced third-party debt in the aggregate amount of $266,737 with proceeds from the Recapitalization. At May 31, 1994, the Bank Term Loan had a balance of $165,000 bearing interest at 6.1%. The Recapitalization included a $100,000 letter of credit facility to be used to provide credit enhancement for and replace NME guarantees on the Company's industrial revenue bonds, and an $85,000 revolving bank line of credit. In February 1994, the letter of credit facility was reduced to $90,000. The availability of the revolving line of credit allows the Company to maintain lower cash balances and may facilitate repayments of higher-rate debt or provide cash for investment or other corporate purposes. At May 31, 1994, letters of credit outstanding under the letter of credit facility totalled $69,418 and the revolving bank line of credit had an outstanding balance of $8,000. Conclusion of the Disposition Program On December 5, 1991, Hillhaven announced a restructuring plan designed to improve its long-term financial strength and operating performance by disposing of underperforming nursing centers, restructuring facility leases with NME and selling $35,000 of Series C Preferred Stock to NME in order to prepay indebtedness owed to NME. The plan involved the sale or sublease of 82 nursing centers, which disposition was intended to allow the Company to concentrate on markets and services that offer higher profits, as well as to realize reductions in overhead costs. A pretax restructuring charge of $90,000 was recorded in the 1992 second quarter ended November 30, 1991, which included provisions for estimated losses on the disposition of the 82 nursing centers, operating losses of these centers during an estimated two-year disposition period and other related costs. As of November 30, 1993, the Company had completed the disposition of 50 of these nursing centers, as well as three retirement housing facilities which, prior to March 1, 1992, had been recorded as discontinued operations. During the 1994 second quarter, the Company reviewed its asset disposition program. Because of improvements in reimbursement rates and results of operations, the Company decided not to pursue the sale of the remaining nursing centers and a retirement housing facility. In addition, several parcels of land which had been held for development have been reclassified to other noncurrent assets. Accrued loss reserves remaining at September 1, 1993 amounted to $54,550. Revenues and expenses related to the 32 nursing centers and other properties previously held for disposition have been reclassified to ongoing operations in the consolidated statements of operations for all periods presented. See Note 2 of Notes to Consolidated Financial Statements. Net assets of these facilities, less adjustments to asset carrying values and remaining accrued restructuring costs aggregating $32,646, have been reclassified from net assets held for disposition to appropriate balance sheet accounts. On December 31, 1993, the Company sold 13 nursing centers, nine of which had previously been held for disposition. The sale resulted in a gain of $5,102, which is included in net operating revenues. Results of Operations Net operating revenues were $1,448,734 in 1994, $1,362,830 in 1993 and $1,304,126 in 1992. Net operating revenues for 1993 and 1992 are not directly comparable because revenues and expenses of the 50 nursing centers disposed of in connection with the December 1991 restructuring have been excluded from results of operations for periods after November 1991. Operating income before property-related expenses (which are comprised of rent, depreciation and amortization, interest and guarantee fees) and restructuring items was $213,082 in 1994 (14.7% of net operating revenues), an increase of approximately 8.6% from $196,223 in 1993 (14.4% of net operating revenues), which in turn represented an increase of 14.2% from $171,841 in 1992 (13.2% of net operating revenues). Net income (loss) was $57,463, $39,079 and $(78,792) in 1994, 1993 and 1992, respectively. Net income for 1994 includes the $21,904 pretax restructuring credit. The net loss in 1992 was due largely to the $90,000 pretax restructuring charge. The following table identifies the Company's sources of net operating revenues.
Year ended May 31, 1994 1993 1992 Percentage of net operating revenues: Nursing Centers: Long term care 61.7% 66.3% 71.7% Subacute medical and rehabilitation 21.2 16.5 12.4 Other operating revenues 2.6 2.1 2.2 Total nursing centers 85.5 84.9 86.3 Pharmacies 12.2 13.1 12.0 Retirement Housing 2.3 2.0 1.7 Total 100.0% 100.0% 100.0% Net patient revenues per patient day: Long term care $84.59 $82.05 $76.13 Subacute medical and rehabilitation $240.87 $215.77 $189.50 Combined $101.38 $93.59 $83.51 Average number of beds available 34,760 35,356 35,865 Average occupancy 93.4% 93.4% 91.6%
Nursing center net operating revenues, comprised primarily of patient revenues, increased 7.1% in 1994 to $1,239,317 and 2.7% in 1993 to $1,156,766 from $1,126,094 in 1992. These increases were due to the increases in revenues per patient day, offset in part by the disposition of nursing centers. Patient revenues are affected by changes in Medicare and Medicaid reimbursement rates, private pay and other rates charged by Hillhaven, occupancy levels, the nature of services provided and the payor mix. Data for nursing center operations with respect to sources of net patient revenues and patient mix by payor type are set forth below. Included in private and other revenues are per diem amounts received from managed care contracts.
Net Patient Revenues Patient Census 1994 1993 1992 1994 1993 1992 Medicaid 50.2% 54.8% 57.3% 66.6% 68.4% 68.9% Private and other 26.8 26.8 28.2 23.4 23.3 24.6 Medicare 23.0 18.4 14.5 10.0 8.3 6.5
In 1994 and 1993, Hillhaven received rate increases from Medicare and Medicaid and increased its private pay rates. The Company is continuing its strategy of improving its quality mix of private pay and Medicare patients by expanding its subacute medical and rehabilitation programs and services. These higher revenue services include physical, occupational, speech and respiratory therapy and subacute care services, such as stroke therapy and wound care. The Company has increased the number of managed care contracts it maintains with insurance companies and other payors to provide subacute medical and rehabilitation care to their insureds, offering a less expensive alternative to acute care hospitals. The average daily number of managed care patients in Hillhaven's nursing centers, including long term care patients, was approximately 435 in 1994 compared to 211 in 1993 and 29 in 1992. Net operating revenues from pharmacy operations decreased to $176,178 in 1994 from $179,299 in 1993 and increased from $156,107 in 1992. Pharmacy operations produced operating income before property-related expenses of $25,366 in 1994 (14.4% of net operating revenues), an increase of approximately 8.3% from $23,419 (13.1% of net operating revenues) in 1993, which in turn represented an increase of approximately 5.0% from $22,307 (14.3% of net operating revenues) in 1992. The decrease in revenues in 1994 is the result of the disposition of 61 marginally performing retail outlets in 1994 and late 1993. Institutional revenues, accounting for approximately 76% of pharmacy net operating revenues in 1994, versus 63% in 1993 and 55% in 1992, increased by 17.9% and 31.9% to $133,988 and $113,676 in 1994 and 1993, respectively, from $86,189 in 1992. The growing contribution from institutional operations reflects the Company's increasing focus on the nursing center market, the disposition of retail outlets and continuing pricing pressure in the retail operations. The increase in institutional revenues is due to an increase in the number of nursing center beds serviced and higher sales volumes per bed. The increase in per bed sales reflects the Company's strategy of aggressively marketing higher margin ancillary products and services, such as respiratory and intravenous therapies and enteral and urological supplies. In 1993 and 1994, the Company terminated leases of 36 retail outlets in Wal-Mart stores. The leases of the remaining 14 Wal- Mart outlets were terminated in the 1995 first quarter. The termination of these leases is not expected to have a material effect on pharmacy operating income. Net operating revenues from retirement housing operations increased to $33,239 in 1994 from $26,765 in 1993 and $21,926 in 1992. These increases were primarily due to improvements in occupancy, which averaged 96.1% in 1994 compared to 92.0% in 1993 and 85.5% in 1992. Operating and administrative expenses of the Company's nursing centers increased by 7.1% in 1994 to $1,062,442 and by 1.3% in 1993 to $992,149 from $979,633 in 1992. These increases were attributable primarily to the expansion of subacute and medical rehabilitation services, offset in part by the disposition of nursing centers. Labor and related benefits, which represented approximately 77% of nursing center operating and administrative expenses in 1994, increased by 7.2% in 1994 to $820,065 and by 1.8% in 1993 to $765,276. These increases were the result of general wage rate increases, as well as an increase in the number of therapists and nurses in the Company's nursing centers to accommodate the increase in the number of medically complex patients. Increases in labor and benefit costs in 1994 and 1993 were mitigated by the reduced use of higher-cost contract nurses and favorable results of workers' compensation loss experience as actuarially computed. The increases in the non-labor components of operating and administrative expenses, including ancillary supplies, reflect the higher costs associated with caring for higher acuity patients. Combined interest and guarantee fee expense decreased by 11.7% to $59,215 in 1994 due to the refinancing of certain of the Company's indebtedness. See "The Recapitalization." Property- related costs in 1993 were impacted by the purchase of previously leased nursing centers, related increases in debt (discussed below) and the restructuring of the NME leases. As a result of the restructuring of the terms of the NME leases, these leases were recorded as capital leases beginning in December 1991. This increased both property and long-term debt by the aggregate fixed option price of $299,500. Primarily as a result of these transactions, total interest, depreciation and amortization and guarantee fees increased in 1993 by $13,163 and rent expense decreased in 1993 by $14,607. Interest income is earned from notes receivable and invested cash. Interest income decreased by 14.8% in 1994 to $13,635 due to lower balances of invested cash and notes receivable. Interest income increased by 24.9% to $16,006 in 1993 as a result of an increase of $36,338 in notes receivable arising from the sale of nursing centers. As a result of the refinancing of certain of the Company's industrial revenue bond issues, extraordinary charges of $1,062 and $565 (net of income taxes) were reported in 1994 and 1993, respectively, due to the write-off of previously capitalized financing costs. Effective June 1, 1992, Hillhaven adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Adoption of SFAS 109 resulted in a charge of $1,103 to the 1993 statement of operations. Including the impact of this charge, the effect of the adoption of SFAS 109 in 1993 was a reduction of net income tax expense and an increase in net income of $7,710 as compared to amounts that would have been reported under APB Opinion No. 11. See Note 7 of Notes to Consolidated Financial Statements. The Company has recorded net deferred tax assets of $18,023 at May 31, 1994, the realization of which is dependent upon future pretax earnings. Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114), establishes standards to determine in what circumstances a creditor should measure impairment based on either the present value of expected future cash flows related to the loan, the market price of the loan or the fair value of the underlying collateral. SFAS 114 relates to the Company's portfolio of notes receivable. The Company anticipates that the adoption of SFAS 114 on the required application date of June 1, 1995 will not have a material adverse impact on Hillhaven's financial position or results of operations. Cash Flows and Financial Condition Hillhaven believes that it will generate sufficient cash to fund operations and meet its debt and lease obligations for the current fiscal year. Cash provided by operations in 1994 totalled $73,526 compared to $65,459 in 1993 and $54,545 in 1992. These increases are due primarily to higher pretax earnings. Working capital at May 31, 1994 amounted to $36,147 compared to $77,870 and $58,951 at May 31, 1993 and 1992, respectively. The decrease in working capital in 1994 is due primarily to a decrease in cash and an increase in the current portion of long-term debt resulting from the Recapitalization. At May 31, 1994, Hillhaven had available $117,000 under short- and long-term revolving lines of credit which allows the Company to maintain lower levels of cash. Net cash used in investing activities amounted to $7,777 in 1994 compared to $901 in 1993 and $54,660 in 1992. In connection with the Recapitalization, the Company expended $14,816 for financing costs. On December 31, 1993, Hillhaven completed the sale of 13 nursing centers and received cash for the $15,594 aggregate sales price. In 1993, Hillhaven purchased 62 nursing centers previously leased from NME for an aggregate purchase price of $179,890. The purchase was financed with the proceeds from the sale of $74,750 of 7-3/4% Convertible Subordinated Debentures due 2002 (the "Debentures"), the assumption of underlying debt amounting to $4,825 and NME financing in the amount of $92,256, with the balance settled in cash. The Company also acquired seven previously leased nursing centers from third parties in 1993 for an aggregate purchase price of $26,791. These transactions were partially financed by the assumption of underlying debt and borrowings aggregating $15,095, with the balance settled in cash. During this same period, the Company disposed of 47 nursing centers and a retirement housing facility for an aggregate sales price of $59,355. Hillhaven provided financing for $36,338 of the total sales price and received cash for the balance. In 1992, the Company acquired 24 previously leased nursing centers, of which 20 were purchased from NME, for an aggregate purchase price of $108,951. These transactions were partially financed by the assumption of underlying debt and additional borrowings aggregating $76,212. In 1994, capital expenditures for routine replacements and refurbishment of facilities and capital additions amounted to $43,568 compared to $30,526 in 1993 and $30,597 in 1992. The increase in 1994 is due primarily to the expansion of certain nursing centers to accommodate the growth in subacute and medical rehabilitation programs. Capital expenditures of approximately $50,000 are budgeted for 1995, the majority of which are anticipated to be funded from cash flow from operations. Net cash used in financing activities totalled $89,364 in 1994, $37,331 in 1993 and $16,310 in 1992. See "The Recapitalization." In 1993, the Company sold the Debentures, the proceeds of which were used to purchase certain facilities leased from NME which had escalating rent provisions. In 1992, Hillhaven sold its 8-1/4% Series C Preferred Stock in the amount of $35,000 to NME to repay debt to NME bearing interest at 10%. The Company repaid an additional $61,800 owed to NME with the proceeds from its 1991 Performance Investment Plan. In April 1994, the Company replaced the financing for its accounts receivable-backed liquidity facility with a revolving bank line of credit and increased the facility from $30,000 to $40,000. At May 31, 1994, there were no borrowings outstanding under this credit facility. On February 28, 1994, NME exercised its warrants to purchase 6,000,000 shares of Hillhaven common stock. NME tendered shares of the Company's payable-in-kind Series D Preferred Stock in payment of the $63,300 purchase price. At May 31, 1994, NME owned approximately 32.7% of the Company's outstanding common stock. Legislative Action On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 ("OBRA-93") was enacted. OBRA-93 contains certain provisions which impact Hillhaven's Medicare reimbursement. For cost report periods beginning after October 1, 1993, a return on equity has been eliminated as a reimbursable item. For federal fiscal years 1994 and 1995, there will be no increases in the limits on reimbursable costs. The Company has and will continue to file for exceptions based on its costs to care for higher acuity patients. Hillhaven expects to offset much of these revenue reductions by containing operating cost increases and increasing the number of patients under managed care contracts. In addition, other provisions in OBRA-93 will benefit Hillhaven, such as the extension of the targeted jobs tax credit. Management believes that the provisions of OBRA-93, in the aggregate, will not have a material adverse impact on the future operations of the Company. On October 27, 1993, President Clinton submitted the American Health Security Act of 1993 (the "Health Security Act") to Congress for consideration. The Health Security Act, which is designed to guarantee health coverage to all United States citizens and legal residents and to create regional alliances to negotiate contracts with qualified health plans, is currently being studied by the relevant Congressional committees. At the same time, numerous other health care reform proposals have been introduced by members of the House of Representatives and the Senate. These proposals range from the formation of a single payor system to the creation of health plan purchasing cooperatives to pool the purchasing power of individuals and employees of small businesses, or the formation of purchasing groups to negotiate contracts with health plans and offer them to individuals. These proposals also differ on the treatment of long term care services. Health care reform legislation may or may not be enacted; whether or not any such effect will be beneficial or adverse to the Company cannot be determined at this time. Item 8. Financial Statements and Supplementary Data Financial Statements are contained on pages F-1 through F-29 of this report and are incorporated hereby by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Information concerning the directors of the Registrant is included on pages 2, 3 and 19 of the definitive Proxy Statement for the Registrant's 1994 Annual Meeting of Stockholders. The required information is hereby incorporated by reference. Similar information regarding executive officers of the Registrant is set forth in Item 1. Item 11. Executive Compensation The response to this item is included on pages 8 through 15 and 19 through 23 of the definitive Proxy Statement for the Registrant's 1994 Annual Meeting of Stockholders. The required information is hereby incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The response to this item is included on pages 4, 5 and 25 of the definitive Proxy Statement for the Registrant's 1994 Annual Meeting of Stockholders. The required information is hereby incorporated by reference. Item 13. Certain Relationships and Related Transactions The response to this item is included on pages 15 through 19 of the definitive Proxy Statement for the Registrant's 1993 Annual Meeting of Stockholders. The required information is hereby incorporated by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents filed as part of this report: 1. Financial Statements. Page Independent Auditors' Report F-1 Consolidated Balance Sheets -- F-2 As of May 31, 1994 and 1993 Consolidated Statements of Operations -- F-4 Years Ended May 31, 1994, 1993 and 1992 Consolidated Statements of Cash Flows -- F-6 Years Ended May 31, 1994, 1993 and 1992 Consolidated Statements of Changes in Stockholders' Equity -- Years Ended May 31, 1994, 1993 and 1992 F-8 Notes to Consolidated Financial Statements F-10 Quarterly Financial Summary F-28 2. Financial Statement Schedules. Schedule V Property and Equipment S-1 Schedule VI Accumulated Depreciation and S-5 Amortization of Property and Equipment Schedule VIII Valuation and Qualifying S-6 Accounts Schedule X Supplementary Income S-8 Statement Information All other schedules are omitted because they are not applicable or not required or because the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits Exhibit No. Item/Document (3) Articles of Incorporation and By-Laws 3.01 Amended and Restated Articles of Incorporation of Hillhaven (Incorporated by reference to Exhibit J to Exhibit 2 to the document referred to in Note 1 below) 3.02 Amended and Restated By-Laws of Hillhaven (4) Instruments Defining the Rights of Security Holders 4.01 Amended and Restated Articles of Incorporation of Hillhaven (See Exhibit 3.01) 4.02 Amended and Restated By-Laws of Hillhaven (See Exhibit 3.02) 4.03 Form of Common Stock Certificate of Hillhaven (Incorporated by reference to Exhibit 4.3 to the document referred to in Note 1 below) 4.04 Warrant and Registration Rights Agreement among Hillhaven, NME and Manufacturers Hanover Trust Company of California, dated as of January 31, 1990 (Incorporated by reference to Exhibit 4.4 to the document referred to in Note 1 below) 4.05 Rights Agreement between Hillhaven and Manufacturers Hanover Trust Company of California, dated as of January 31, 1990 (Incorporated by reference to Exhibit 4.6 to the document referred to Note 1 below) 4.06 Form of Rights Certificate (Incorporated by reference to Exhibit A to Exhibit 4.6 to the document referred to in Note 1 below) 4.07 Agreement concerning purchase by NME Properties Corp., of Series C Preferred Stock of Hillhaven and prepayment by First Healthcare Corporation of indebtedness to NME Properties Corp. dated at or prior to 11:59 p.m. on November 30, 1991 between NME, NME Properties Corp., Hillhaven and First Healthcare Corporation (Incorporated by reference to Exhibit 4(a) to the document referred to in Note 2 below) 4.08 Certificate of Designation, Preferences and Rights of Series C Preferred Stock of Hillhaven (Incorporated by reference to Exhibit 4(b) to the document referred to in Note 2 below) Exhibit No. Item/Document 4.09 Certificate of First Amendment to Certificate of Designation, Preferences and Rights of Series C Preferred Stock of The Hillhaven Corporation (Incorporated by reference to Exhibit 4(b) to the document referred to in Note 9 below) 4.10 Form of Indenture between Hillhaven and Bankers Trust Company, as Trustee with respect to the 7-3/4% Convertible Subordinated Debentures Due 2002 (Incorporated by reference to Exhibit 4.14 to the document referred to in Note 4 below) 4.11 Form of 7-3/4% Convertible Subordinated Debenture Due 2002 (Incorporated by reference to Exhibit 4.15 to the document referred to in Note 4 below) 4.12 Form of Indenture between Hillhaven and State Street Bank and Trust Company, as Trustee with respect to the 10-1/8% Senior Subordinated Notes due 2001 (Incorporated by reference to Exhibit 4.01 to the document referred to in Note 5 below) 4.13 Form of 10-1/8% Senior Subordinated Note due 2001 (Incorporated by reference to Exhibit 4.02 to the document referred to in Note 5 below) 4.14 Agreement Concerning Purchase by NME Properties Corp. and Certain Subsidiaries of Series D Preferred Stock of The Hillhaven Corporation, dated as of September 1, 1993 among Hillhaven, First Healthcare Corporation, NME, NME Properties Corp. and certain subsidiaries of NME Properties Corp. 4.15 Certificate of Designation, Preferences and Rights of Series D Preferred Stock of The Hillhaven Corporation (Incorporated by reference to Exhibit 4(a) to the document referred to in Note 9 below) 4.16 Certificate Concerning Reverse Stock Split of The Hillhaven Corporation (Incorporated by reference to Exhibit 4(c) to the document referred to in Note 9 below) 4.17 Credit Agreement dated as of September 2, 1993, between First Healthcare Corporation, as lender, and Hillhaven PIP Funding I, Inc., as borrower (Incorporated by reference to Exhibit 4.07 to the document referred to in Note 8 below) Exhibit No. Item/Document 4.18 The Hillhaven Corporation 1991 Performance Investment Plan (Incorporated by reference to Exhibit 10.24 to the document referred to in Note 1 below) 4.19 Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock (Incorporated by reference to Exhibit 4.03 to the document referred to in Note 8 below) 4.20 Form of Indenture between Hillhaven and Chemical Bank, as Trustee with respect to the Convertible Debentures due May 29, 1999 (Incorporated by reference to Exhibit 4.01 to the document referred to in Note 8 below) 4.21 Form of Convertible Debenture due May 29, 1999 (Incorporated by reference to Exhibit 4.02 to the document referred to in Note 8 below) (10) Material Contracts 10.01 Services Agreement between Hillhaven and NME, dated as of January 31, 1990 (Incorporated by reference to Exhibit 10.2 to the document referred to in Note 1 below) 10.02 Tax Sharing Agreement between Hillhaven and NME, dated as of January 31, 1990 (Incorporated by reference to Exhibit 10.3 to the document referred to in Note 1 below) 10.03 Government Programs Agreement between Hillhaven and NME, dated January 31, 1990 (Incorporated by reference to Exhibit 10.4 to the document referred to in Note 1 below) 10.04 Insurance Agreement between Hillhaven and NME, dated as of January 31, 1990 (Incorporated by reference to Exhibit 10.5 to the document referred to in Note 1 below) *10.05 Employee and Employee Benefits Agreement between Hillhaven and NME, dated as of January 31, 1990 (Incorporated by reference to Exhibit 10.6 to the document referred to in Note 1 below) *10.06 Resignation Agreement and General Release between Hillhaven and Richard K. Eamer, dated as of September 15, 1993 *10.07 Employment Agreement between Hillhaven and Leonard Cohen, dated as of January 31, 1990 (Incorporated by reference to Exhibit 10.21 to the document referred to in Note 1 below) Exhibit No. Item/Document *10.08 Amendment No. One to Employment Agreement between Hillhaven and Leonard Cohen, dated as of May 31, 1994 *10.09 Severance Agreement among Hillhaven, NME and Christopher J. Marker, dated as of January 31, 1990 (Incorporated by reference to Exhibit 10.23 to the document referred to in Note 1 below) *10.10 Severance Agreement between Hillhaven and Christopher J. Marker, dated as of May 24, 1994 *10.11 Form of Severance Agreement between Hillhaven and certain of its officers 10.12 Form of Indemnification Agreement between Hillhaven and certain of its executive officers (Incorporated by reference to Exhibit 4.8 to the document referred to in Note 1 below) *10.13 Hillhaven Directors' Stock Option Plan (Incorporated by reference to Exhibit 10.18 to the document referred to in Note 1 below) *10.14 The Hillhaven Corporation Board of Directors Retirement Plan *10.15 Hillhaven Deferred Savings Plan (Incorporated by reference to Exhibit 10.11 to the document referred to in Note 1 below) *10.16 Hillhaven 1990 Stock Incentive Plan (Incorporated by reference to Exhibit 10.12 to the document referred to in Note 1 below) *10.17 Hillhaven Annual Incentive Plan (Incorporated by reference to Exhibit 10.13 to the document referred to in Note 1 below) *10.18 Hillhaven Long Term Incentive Plan (Incorporated by reference to Exhibit 10.14 to the document referred to in Note 1 below) *10.19 Hillhaven Deferred Compensation Master Plan (Incorporated by reference to Exhibit 10.15 to the document referred to in Note 1 below) *10.20 Hillhaven Senior Management Deferred Compensation Plan (Incorporated by reference to Exhibit 10.16 to the document referred to in Note 1 below) Exhibit No. Item/Document *10.21 First Restatement of the Hillhaven Supplemental Executive Retirement Plan *10.22 Hillhaven Individual Retirement Annuity Plan (Incorporated by reference to Exhibit 10.19 to the document referred to in Note 1 below) 10.23 Form of Assignment and Assumption of Lease Agreement between Hillhaven and certain subsidiaries, on the one hand, and NME and certain subsidiaries on the other hand, together with the related Guaranty by Hillhaven, dated on or prior to January 31, 1990 (Incorporated by reference to Exhibit 10.7 to the document referred to in Note 1 below) 10.24 Form of Management Agreement between First Healthcare Corporation and certain NME subsidiaries, dated on or prior to January 31, 1990 (Incorporated by reference to Exhibit 10.10 to the document referred to in Note 1 below) 10.25 Reorganization and Distribution Agreement between Hillhaven and NME, dated as of January 8, 1990, as amended on January 30, 1990 (Incorporated by reference to Exhibit 2.01 to the document referred to in Note 1 below) 10.26 Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of January 31, 1990 (Incorporated by reference to Exhibit 10.8 to the document referred to in Note 1 below) 10.27 First Amendment to Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of October 30, 1990 10.28 First Amendment to Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of May 30, 1991 (Incorporated by reference to Exhibit 10.45 to the document referred to in Note 3 below) 10.29 Second Amendment to Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of October 2, 1991 (Incorporated by reference to Exhibit 10.46 to the document referred to in Note 3 below) Exhibit No. Item/Document 10.30 Third Amendment to Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of April 1, 1992 (Incorporated by reference to Exhibit 10.47 to the document referred to in Note 3 below) 10.31 Fourth Amendment to Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of November 12, 1992 (Incorporated by reference to Exhibit 10.13 to the document referred to in Note 6 below) 10.32 Fifth Amendment to Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of February 19, 1993 (Incorporated by reference to Exhibit 10.14 to the document referred to in Note 6 below) 10.33 Sixth Amendment to Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of May 28, 1993 (Incorporated by reference to Exhibit 10.15 to the document referred to in Note 6 below) 10.34 Seventh Amendment to Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of May 28, 1993 10.35 Eighth Amendment to Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of September 2, 1993 10.36 Amended and Restated Loan Agreement among Hillhaven, New Pond Village Associates and BayBank of Boston, N.A., dated as of August 25, 1989 and effective November 1, 1991 (Incorporated by reference to Exhibit 10.52 to the document referred to in Note 3 below) 10.37 Facility Purchase and Sale Agreements, each dated as of February 12, 1992, between First Healthcare Corporation and Zevco Enterprises, Inc. for the four nursing centers in Houston, Texas (Incorporated by reference to Exhibit 10.41 to the document referred to in Note 3 below) 10.38 Facility Agreement among First Healthcare Corporation and Certain Limited Partnerships, dated as of April 23, 1992 relating to the sale of 32 nursing centers (Incorporated by reference to Exhibit 10.42 to the document referred to in Note 3 below) Exhibit No. Item/Document 10.39 First Amendment to Facility Agreement among First Healthcare Corporation and Certain Limited Partnerships, dated as of July 31, 1992 relating to the sale of 32 nursing centers (Incorporated by reference to Exhibit 10.43 to the document referred to in Note 3 below) 10.40 Letter Agreement dated July 14, 1992, concerning acquisition by Hillhaven from NME of 26 nursing centers and two adjacent retirement housing communities (Incorporated by reference to Exhibit 10.49 to the document referred to in Note 3 below) 10.41 Letter Agreement dated August 4, 1992, between Hillhaven and NME, amending the July 14, 1992 letter agreement concerning acquisition by Hillhaven from NME of 26 nursing centers and two adjacent retirement communities (Incorporated by reference to Exhibit 10.50 to the document referred to in Note 3 below) 10.42 Letter Agreement dated October 14, 1992, between Hillhaven and NME, amending the July 14, 1992 letter concerning acquisition by Hillhaven from NME of 34 nursing centers and two adjacent retirement housing communities (Incorporated by reference to Exhibit 10.58 to the document referred to in Note 6 below) 10.43 Purchase and Sale Agreement and Escrow Instructions between First Healthcare Corporation and certain NME subsidiaries, dated as of November 4, 1992 relating to the acquisition of 24 nursing centers (Incorporated by reference to Exhibit 10.59 to the document referred to in Note 6 below) 10.44 Purchase and Sale Agreement and Escrow Instructions between First Healthcare Corporation and certain NME subsidiaries, dated as of February 1, 1993, relating to the acquisition of 17 nursing centers (Incorporated by reference to Exhibit 10.60 to the document referred to in Note 6 below) 10.45 Facility Purchase and Sale Agreement, each dated April 1, 1993, between First Healthcare Corporation and Zevco Enterprises, Inc., an Illinois corporation, relating to the sale of 13 nursing centers (Incorporated by reference to Exhibit 10.61 to the document referred to in Note 6 below) Exhibit No. Item/Document 10.46 Purchase and Sale Agreement and Escrow Instructions between First Healthcare Corporation and certain NME subsidiaries, dated as of May 20, 1993 relating to the acquisition of 11 nursing centers (Incorporated by reference to Exhibit 10.62 to the document referred to in Note 6 below) 10.47 Letter of Intent dated June 22, 1993 between Hillhaven and NME (Incorporated by reference to Exhibit 10.63 to the document referred to in Note 6 below) 10.48 Credit Agreement dated as of September 1, 1993 among First Healthcare Corporation, The Hillhaven Corporation, the Banks referred to therein, the LC Issuing Banks referred to therein, Morgan Guaranty Trust Company of New York, Chemical Bank and J. P. Morgan Delaware (Incorporated by reference to Exhibit B to the document referred to in Note 7 below) 10.49 Amendment No. 1 to Credit Agreement, dated as of October 12, 1993, among First Healthcare Corporation, The Hillhaven Corporation, the Banks referred to therein, the LC Issuing Banks referred to therein, Morgan Guaranty Trust Company of New York, Chemical Bank and J. P. Morgan Delaware 10.50 Amendment No. 2 to Credit Agreement, dated as of December 30, 1993, among First Healthcare Corporation, The Hillhaven Corporation, the Banks referred to therein, the LC Issuing Banks referred to therein, Morgan Guaranty Trust Company of New York, Chemical Bank and J. P. Morgan Delaware 10.51 Amendment No. 3 to Credit Agreement, dated as of May 27, 1994, among First Healthcare Corporation, The Hillhaven Corporation, the Banks referred to therein, the LC Issuing Banks referred to therein, Morgan Guaranty Trust Company of New York, Chemical Bank and J. P. Morgan Delaware 10.52 Agreement and Waiver, dated as of September 2, 1993, by and among Hillhaven, First Healthcare Corporation, NME and certain NME subsidiaries Exhibit No. Item/Document 10.53 Novation Agreement among Hillhaven Funding Corporation, Banque Indosuez, New York Branch, Banque Nationale de Paris, San Francisco Agency, Bank of America National Trust and Savings Association and Seattle-First National Bank, dated as of April 29, 1994 10.54 Amended and Restated Master Sale and Servicing Agreement among Hillhaven Funding Corporation, Hillhaven and certain Hillhaven subsidiaries, dated as of April 29, 1994 10.55 Amended and Restated Liquidity Agreement between Hillhaven Funding Corporation, Bank of America National Trust and Savings Association and Seattle-First National Bank dated as of April 29, 1994 (11) Computation of Per Share Earnings 11.01 Statement re: Computation of Per Share Earnings (21) Subsidiaries 21.01 Subsidiaries of the Registrant (23) Consent of Experts and Counsel 23.01 Consent of Independent Accountants, KPMG Peat Marwick LLP Note Reference Document 1. Quarterly Report on Form 10-Q for the quarter ended November 30, 1989, as amended. 2. Quarterly Report on Form 10-Q for the quarter ended November 30, 1991, as amended. 3. Annual Report on Form 10-K for the year ended May 31, 1992, as amended. 4. Registration Statement on Form S-1 (File No. 33-48755). 5. Registration Statement on Form S-3 (File No. 33-65718). 6. Annual Report on Form 10-K for the year ended May 31, 1993. 7. Current Report on Form 8-K dated September 2, 1993. 8. Registration Statement on Form S-3 (File No. 33-50833). 9. Quarterly Report on Form 10-Q for the quarter ended November 30, 1993. ___________________ * Management contracts and compensatory plans or arrangements required to be filed as an Exhibit to comply with Item 14(a)(3). (b) Reports filed on Form 8-K: None Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. THE HILLHAVEN CORPORATION By: /s/ Bruce L. Busby Bruce L. Busby Chief Executive Officer Date: August 17, 1994 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Bruce L. Busby Chief Executive August 17, 1994 Bruce L. Busby Officer, Chairman of the Board and Director /s/ Robert F. Pacquer Senior Vice President August 17, 1994 Robert F. Pacquer and Chief Financial Officer (principal financial officer) /s/ Michael B. Weitz Michael B. Weitz Vice President and August 17, 1994 Principal Accounting Officer /s/ Christopher J. Marker President and August 17, 1994 Christopher J. Marker Director /s/ Maris Andersons Director August 17, 1994 Maris Andersons /s/ Walter F. Beran Director August 17, 1994 Walter F. Beran /s/ Leonard Cohen Director August 17, 1994 Leonard Cohen /s/ Peter de Wetter Director August 17, 1994 Peter de Wetter /s/ Dinah Nemeroff Director August 17, 1994 Dinah Nemeroff /s/ Jack O. Vance Director August 17, 1994 Jack O. Vance Independent Auditors' Report The Board of Directors and Stockholders The Hillhaven Corporation: We have audited the accompanying consolidated balance sheets of The Hillhaven Corporation and subsidiaries (Hillhaven) as of May 31, 1994 and 1993, and the related consolidated statements of operations, cash flows and changes in stockholders' equity for each of the years in the three-year period ended May 31, 1994. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the index on page 34 of this annual report. These consolidated financial statements and financial statement schedules are the responsibility of the management of Hillhaven. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the financial position of The Hillhaven Corporation and subsidiaries as of May 31, 1994 and 1993 and the results of their operations and their cash flows for each of the years in the three-year period ended May 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Note 7 to the consolidated financial statements, effective June 1, 1992 the Company changed its method of providing for income taxes by adopting Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." KPMG PEAT MARWICK LLP Seattle, Washington July 8, 1994 Consolidated Balance Sheets (In thousands)
May 31, 1994 1993 Assets Current assets: Cash and cash equivalents $ 49,544 $ 73,159 Accounts and notes receivable, less allowance for doubtful accounts of $10,005 and $8,700 in 1994 and 1993 147,956 131,383 Inventories 20,202 21,527 Prepaid expenses and other current assets 34,527 29,078 Total current assets 252,229 255,147 Long-term notes receivable, less allowance for doubtful accounts of $14,608 and $11,386 in 1994 and 1993 84,944 112,506 Property and equipment, net 783,259 766,998 Net assets held for disposition --- 29,122 Intangible assets, net of accumulated amortization of $19,336 and $16,128 in 1994 and 1993 31,331 20,305 Other noncurrent assets, net 32,237 34,159 $1,184,000 $ 1,218,237 See accompanying Notes to Consolidated Financial Statements.
Consolidated Balance Sheets (In thousands, except share information)
May 31, 1994 1993 Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 43,427 $ 18,835 Accounts payable 63,929 61,423 Employee compensation and benefits 52,444 54,370 Other accrued liabilities 56,282 42,649 Total current liabilities 216,082 177,277 Debt payable to NME, a related company --- 147,160 Other long-term debt 577,951 671,088 Other long-term liabilities 28,598 42,486 Commitments and contingencies Stockholders' equity: Series C Preferred Stock, $0.15 par value; 35,000 shares authorized, issued and outstanding in 1994 and 1993(liquidation preference of $35,000) 5 5 Series D Preferred Stock, $0.15 par value; 300,000 shares authorized; 60,546 issued and outstanding (liquidation preference of $60,546) 9 --- Common stock, $0.75 par value; authorized 60,000,000 shares; 27,172,694 and 20,978,862 issued and outstanding in 1994 and 1993 20,380 15,734 Additional paid-in capital 330,472 208,157 Retained earnings (accumulated deficit) 13,714 (37,538) Unearned compensation (3,211) (6,132) Total stockholders' equity 361,369 180,226 $1,184,000 $ 1,218,237 See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements Of Operations (In thousands)
Years ended May 31, 1994 1993 1992 Net operating revenues $1,448,734 $ 1,362,830 $1,304,126 Expenses: Operating and administrative 1,235,652 1,166,607 1,132,285 Interest 52,531 57,451 52,450 Depreciation and amortization 54,109 53,448 46,594 Rent 52,440 52,537 67,144 Guarantee fees 6,684 9,644 8,336 Restructuring (20,225) 5,769 92,529 Adjustment to carrying value of properties previously reported as discontinued operations --- --- 20,736 Net expenses 1,381,191 1,345,456 1,420,074 Income (loss) from operations 67,543 17,374 (115,948) Interest income 13,635 16,006 12,820 Income (loss) before income taxes, reinstatement of discontinued operations, extraordinary charge and cumulative effect of accounting change 81,178 33,380 (103,128) Income tax (expense) benefit (22,653) 7,367 (407) Income (loss) before reinstatement of discontinued operations, extraordinary charge and cumulative effect of accounting change 58,525 40,747 (103,535) Reinstatement of discontinued operations --- --- 24,743 Income (loss) before extraordinary charge and cumulative effect of accounting change 58,525 40,747 (78,792) Extraordinary charge - early extinguishment of debt, net of income taxes (1,062) (565) --- Cumulative effect of change in accounting for income taxes --- (1,103) --- Net income (loss) $ 57,463 $ 39,079 $ (78,792) See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements Of Operations
Years ended May 31, 1994 1993 1992 Primary income (loss) per common share: Income (loss) from operations $2.06 $1.66 $(3.86) Extraordinary charge (.04) (.02) --- Cumulative effect of change in accounting for income taxes --- (.05) --- Net income (loss) per share $2.02 $1.59 $(3.86) Fully diluted income per common share: Income (loss) from operations $1.74 --- --- Extraordinary charge (.03) --- --- Net income per share $1.71 N/A N/A Weighted average common shares and equivalents outstanding: Primary 24,689,959 23,132,103 20,811,243 Fully diluted 33,064,288 N/A N/A See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements Of Cash Flows (In thousands)
Years ended May 31, 1994 1993 1992 Cash flows from operating activities: Net income (loss) $ 57,463 $ 39,079 $ (78,792) Adjustments to reconcile net income (loss) to net cash provided by operations: Restructuring charges (credits) (21,904) --- 90,000 Adjustment to carrying value of properties previously reported as discontinued operations --- --- 20,736 Reinstatement of discontinued operations --- --- (21,127) Cumulative effect of change in accounting for income taxes --- 1,103 --- Depreciation and amortization 54,109 53,448 46,594 Provision for losses on accounts and notes receivable 8,094 4,029 5,962 Gain on sales of property and equipment (9,224) (841) (1,762) Deferred income taxes 7,967 (13,734) (5,792) Amortization of unearned stock compensation 3,627 3,442 3,928 Changes in net assets of discontinued operations --- --- (2,544) Other charges and credits, net (9,584) (10,632) (749) Changes in operating assets and liabilities, net of acquisitions and dispositions: Accounts and notes receivable (21,440) (6,659) (7,642) Inventories 174 (628) (1,271) Prepaid expenses and other current assets (824) (2,984) 701 Accounts payable 2,494 (3,410) 914 Other accrued liabilities 2,574 3,246 5,389 Net cash provided by operating activities 73,526 65,459 54,545 See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements Of Cash Flows (In thousands)
Years ended May 31, 1994 1993 1992 Cash flows from investing activities: Purchases of property and equipment (43,568) (30,526) (30,597) Purchase of previously leased nursing centers (1,667) (14,444) (30,596) Proceeds from sales of property and equipment 15,877 22,330 7,686 Proceeds from collection of notes receivable 21,983 22,480 5,725 (Investments in) distributions from joint ventures and partnerships 2,048 4,092 (1,661) Increase in other assets (2,450) (4,833) (5,217) Net cash used in investing activities (7,777) (901) (54,660) Cash flows from financing activities: Net increase (decrease) in borrowings under revolving lines of credit 8,000 (13,000) (21,952) Proceeds from sale of preferred stock 63,399 --- 35,000 Preferred stock dividends (2,888) (2,888) (722) Proceeds from long-term debt 363,525 95,140 158,000 Payments of principal on long-term debt (506,590) (114,266) (183,572) Proceeds from exercise of stock options 587 246 301 Increase in intangible assets (15,127) (4,084) (1,884) Other, net (270) 1,521 (1,481) Net cash used in financing activities (89,364) (37,331) (16,310) Increase (decrease) in cash (23,615) 27,227 (16,425) Cash and cash equivalents at beginning of period 73,159 45,932 62,357 Cash and cash equivalents at end of period $ 49,544 $ 73,159 $ 45,932 See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements Of Changes In Stockholders' Equity (In thousands, except share information)
Years Ended May 31, 1994, 1993 and 1992 Retained Additional Earnings Unearned Preferred Common Paid-In (Accumulated Stock Stock Stock Capital Deficit) Compensation Balance, May 31, 1991 --- $ 15,590 $ 174,056 $ 2,175 $(10,715) Net loss --- --- --- (78,792) --- Issuance of preferred stock $ 5 --- 34,995 --- --- Restricted share awards, net of forfeitures --- 32 710 --- (742) Stock options exercised --- 41 218 --- --- Preferred stock dividends ($41.25 per share) --- --- (1,444) --- --- Amortization of unearned stock compensation --- --- --- --- 3,928 Balance, May 31, 1992 5 15,663 208,535 (76,617) (7,529) Net income --- --- --- 39,079 --- Restricted share awards, net of forfeitures --- 34 1,104 --- (1,138) Performance shares --- --- 907 --- (907) Stock options exercised --- 37 209 --- --- Preferred stock dividends ($82.50 per share) --- --- (2,888) --- --- Amortization of unearned stock compensation --- --- --- --- 3,442 Tax benefit associated with exercise of stock options --- --- 290 --- --- Balance, May 31, 1993 5 15,734 208,157 (37,538) (6,132) See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements Of Changes In Stockholders' Equity (In thousands, except share information)
Years Ended May 31, 1994, 1993 and 1992 Retained Additional Earnings Unearned Preferred Common Paid-In (Accumulated Stock Stock Stock Capital Deficit) Compensation Net income --- --- --- 57,463 --- Issuance of preferred stock 18 --- 119,982 --- --- Preferred stock tendered to exercise stock purchase warrants, net (10) 4,500 (4,490) --- --- Conversion of debentures --- 86 1,809 --- --- Restricted share awards, net of forfeitures --- (12) (188) --- 200 Performance shares --- --- 906 --- (906) Stock options exercised --- 73 514 --- --- Preferred stock dividends ($82.50 per share) --- --- (1,444) (1,444) --- Fractional shares repurchased --- (1) (17) --- --- Amortization of unearned stock compensation --- --- --- --- 3,627 Tax benefit associated with exercise of stock options --- --- 477 --- --- Preferred stock dividends- in-kind 1 --- 4,766 (4,767) --- Balance, May 31, 1994 $14 $ 20,380 $ 330,472 $ 13,714 $ (3,211) See accompanying Notes to Consolidated Financial Statements.
The Hillhaven Corporation And Subsidiaries Notes To Consolidated Financial Statements (Dollars in thousands, except per share amounts) 1. Significant Accounting Policies Basis of Presentation. The consolidated financial statements include the accounts of The Hillhaven Corporation and its wholly- owned subsidiaries ("Hillhaven" or the "Company"). Significant intercompany transactions and balances have been eliminated. The Company completed its facility disposition program in the quarter ended November 30, 1993 (Note 2). Revenues and expenses related to facilities remaining at the end of the disposition period have been reclassified to ongoing operations in the consolidated statements of operations for periods after December 1, 1991. In addition, certain other reclassifications of prior years' amounts have been made to conform to 1994 classifications. Net Operating Revenues. Revenues are recognized when services are provided and products are delivered. Net operating revenues consist primarily of patient care revenues which are reported at the net amounts realizable from residents, third-party payors and others for services provided. A provision for estimated uncollectible patient accounts and notes receivable is included in operating and administrative expenses and was $8,094, $4,029 and $5,962 for the years ended May 31, 1994, 1993 and 1992, respectively. Approximately 73%, 73% and 72% of net patient care revenues for the years ended May 31, 1994, 1993 and 1992, respectively, are from participation of the nursing centers in Medicare and Medicaid programs. Revenues under these programs are subject to audit and retroactive adjustment. Provisions for estimated third-party payor settlements are provided in the period the related services are rendered and are adjusted as final settlements are determined. Accounts receivable from Medicare and Medicaid amounted to $16,189 and $64,022, respectively, at May 31, 1994, and $15,520 and $63,006, respectively, at May 31, 1993. Net operating revenues also include revenues from pharmacy operations of $176,178, $179,299 and $156,107 for the years ended May 31, 1994, 1993 and 1992, respectively. Inventories. Inventories, which are stated at the lower of cost (first-in, first-out) or market, are comprised of the following:
May 31, 1994 1993 Pharmaceutical products $12,371 $13,023 Nursing center supplies 7,831 8,504 $20,202 $21,527
Property and Equipment. Owned land, buildings, leasehold improvements and equipment are stated at cost. Capitalized leases are stated at the lower of the present value of minimum lease payments or fair value at the inception of the lease. Depreciation and amortization are computed using the straight- line method over the useful lives of the assets, estimated as follows: buildings, 20-45 years; leasehold improvements and certain capitalized leases, over the lesser of the estimated useful life or the lease term; and equipment, 5-10 years. Fair Value of Financial Instruments. Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments", requires that Hillhaven disclose estimated fair values for its financial instruments. The estimated fair values have been determined by the Company using available market information and appropriate valuation methodologies. Because no market exists for a significant portion of Hillhaven's financial instruments, considerable judgment is necessarily required in interpreting the data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments. The fair value estimates for notes receivable (Note 3) and long-term debt (Note 6) are based on information available to the Company as of May 31, 1994. Intangible Assets. Costs incurred in obtaining long-term financing are amortized over the terms of the related indebtedness, primarily using the straight-line method. Costs related to the acquisition of leases are amortized using the straight-line method over the lease term. Hillhaven recorded extraordinary charges of $1,543 ($1,062 net of tax) and $743 ($565 net of tax) for the years ended May 31, 1994 and 1993, respectively, primarily in connection with the early retirement of industrial revenue bonds which were refinanced. Income (Loss) Per Share. Primary income (loss) per share is calculated by dividing net income (loss), after deducting dividends on preferred stock, by the weighted average number of common shares and equivalents outstanding for the period. Common stock equivalents are stock purchase warrants and employee stock options. Fully diluted income per share further assumes conversion of the Company's convertible debentures. Conversion of the debentures was not assumed for the 1993 calculation because the exercise prices of the debentures exceeded the market price at May 31, 1993. Common stock equivalents were not included in the 1992 calculation of loss per share as their effect was anti-dilutive. All share and per share data have been restated for a one-for-five reverse stock split effective November 1, 1993. Cash Equivalents. Highly liquid investments with maturities of three months or less at the date of acquisition are considered cash equivalents. Interest earned on these investments amounted to $1,027, $911 and $1,024 for the years ended May 31, 1994, 1993 and 1992, respectively. 2. Restructuring Plan On December 5, 1991, Hillhaven announced a restructuring plan designed to improve its long-term financial strength and operating performance. The plan included the disposition of 82 nursing centers over an estimated 24-month period. In the second quarter of fiscal 1992, the Company recorded a $90,000 pretax charge, comprised of $25,700 for the projected losses from operations of the 82 nursing centers during the disposition period and $64,300 for estimated losses from the dispositions. Also as part of the restructuring, Hillhaven exercised options to purchase nine nursing centers leased from National Medical Enterprises, Inc. (NME), modified terms of the remaining leases with NME and sold preferred stock to NME in the amount of $35,000, the proceeds of which were used to prepay debt owed to NME (Note 8). As of November 30, 1993, the Company had completed the disposition of 50 of these nursing centers, as well as three retirement housing facilities which, prior to March 1, 1992, had been recorded as discontinued operations. During the three months ended November 30, 1993, the Company reviewed its asset disposition program. Because of improvements in reimbursement rates and results of operations, the Company decided not to pursue the sales of the remaining nursing centers and a retirement housing facility. In addition, several parcels of land which had been held for development have been reclassified to other noncurrent assets. Assets related to the Company's restructuring program were as follows:
September 1, 1993 May 31, (Unaudited) 1993 Assets $ 85,183 $ 85,768 Restructuring reserve (54,550) (56,646) Net assets $ 30,633 $ 29,122
Accrued loss reserves remaining at the date of reinstatement were comprised of $17,668 for losses from operations and $36,882 for estimated future losses on sale. Pretax losses charged to the reserve were as follows:
Three months ended Year Six months ended August 31, ended May 31, 1993 May 31, 1992 (Unaudited) 1993 (Unaudited) Loss from operations $ 235 $ 5,418 $4,263 Loss on dispositions 1,861 41,010 3,790 $2,096 $46,428 $8,053
Revenues and expenses related to the 32 nursing centers and other properties previously held for disposition have been reclassified to ongoing operations in the consolidated statements of operations for all periods presented. Total revenues and expenses of these facilities were as follows:
Three months ended Year Six months ended August 31, ended May 31, 1993 May 31, 1992 (Unaudited) 1993 (Unaudited) Revenues $30,326 $114,758 $53,760 Expenses 28,647 108,989 51,231 Income from operations before income taxes $ 1,679 $ 5,769 $ 2,529
Net assets of these facilities as of September 1, 1993, less adjustments to asset carrying values and remaining accrued restructuring costs aggregating $32,646, have been reclassified from net assets held for disposition to appropriate balance sheet accounts. On December 31, 1993, Hillhaven completed the sale of 13 nursing centers for an aggregate sales price of $15,594. Nine of these nursing centers had previously been held for disposition. The sale resulted in a gain of $5,102, which is included in net operating revenues. 3. Notes Receivable Notes receivable consist primarily of notes originated upon the sale of nursing centers to third parties. Generally the notes receivable are secured by mortgages and deeds of trust on the properties sold. Notes receivable, net of the allowance for doubtful accounts, totalled $87,921 and $115,978 as of May 31, 1994 and 1993, respectively. The aggregate estimated fair value of notes receivable was $91,084 and $114,855 at May 31, 1994 and 1993, respectively. The fair value of performing notes is calculated by discounting the projected cash flows using estimated market discount rates that reflect the credit and interest rate risk inherent in the notes and using specific borrower information. Fair values for nonperforming notes (notes delinquent more than 90 days) and notes with no set maturity are determined based on individual circumstances and are valued net of specific reserves. 4. Investments In Unconsolidated Partnerships Hillhaven has ownership interests ranging from 35% to 50% in a number of unconsolidated general and limited partnerships. These investments are accounted for by the equity method and are included in other noncurrent assets. All of these partnerships own or lease real and personal property and operate nursing centers or retirement housing communities. Combined summarized unaudited financial information for these partnerships is as follows:
May 31, 1994 1993 Current assets $ 8,902 $ 7,935 Property and equipment 46,696 60,528 Total assets $55,598 $68,463 Current liabilities $ 6,999 $ 5,452 Long-term debt to unrelated parties 37,400 45,196 Long-term debt to Hillhaven 4,377 7,749 Partners' equity 6,822 10,066 Total liabilities and equity $55,598 $68,463
Years ended May 31, 1994 1993 1992 Net operating revenues $47,857 $54,314 $58,004 Net income 2,747 4,204 2,303 Recognized by Hillhaven: Equity in income 1,554 2,081 724 Interest income 367 697 952 Management fees 2,412 2,710 2,485
Hillhaven manages seven nursing centers and one retirement housing community for partnerships in which the Company has an equity interest. Management fees earned are usually based upon a percentage of revenues, ranging from 5% to 9%. 5. Property And Equipment Property and equipment at May 31 is comprised of the following:
1994 1993 Land $ 77,043 $ 71,297 Buildings 718,983 690,868 Leasehold improvements 17,208 18,433 Equipment 172,992 152,692 Construction in progress 14,376 6,919 1,000,602 940,209 Less accumulated depreciation and amortization (217,343) (173,211) Net property and equipment $ 783,259 $ 766,998
Property and equipment includes buildings acquired under capital leases of $1,997 at May 31, 1994. At May 31, 1993, capitalized lease assets were comprised of: land, $11,105; buildings, $119,056; and equipment, $7,236. Related accumulated depreciation and amortization amounted to $1,776 and $9,401 at May 31, 1994 and 1993, respectively. 6. Long-Term Debt The Recapitalization. In September 1993, Hillhaven completed a recapitalization plan (the "Recapitalization") which included the modification of the Company's relationship with NME (Note 8) to (i) purchase 23 nursing centers leased from NME for a purchase price of $111,800, (ii) repay all existing debt to NME in the aggregate principal amount of $147,202, (iii) release NME guarantees on approximately $400,000 of debt, (iv) limit the annual fee payable to NME to 2% of the remaining amount guaranteed and (v) amend existing agreements to eliminate obligations of NME to provide additional financing to the Company. The Recapitalization was financed through (i) the issuance to NME of $120,000 of payable-in-kind Series D Preferred Stock, (ii) the incurrence of a $175,000 term loan under a secured credit facility with a syndicate of banks, (iii) the issuance of $175,000 of 10-1/8% Senior Subordinated Notes due 2001, (iv) borrowings of $30,000 under an accounts receivable- backed credit facility and (v) the use of approximately $39,000 of cash. Long-term debt at May 31 is comprised of the following:
1994 1993 Debt under bank credit agreement (1) $ 113,527 $ --- Floating rate convertible debentures (2) 59,473 65,053 Industrial revenue bonds, payable in installments to 2016 (3) 124,895 140,794 Mortgage notes, payable monthly to 2027 (3) 50,369 47,016 Other notes, payable in installments to 2002 (3) 21,994 19,801 Capitalized lease obligations (Notes 8 and 9) 1,965 137,517 10-1/8% unsecured notes due 2001 174,405 --- 7-3/4% convertible debentures (4) 74,750 74,750 Secured term loans under mortgage pool financing facilities (Note 8) (5) --- 204,937 Debt payable to NME (Note 8) --- 147,215 621,378 837,083 Less current portion (43,427) (18,835) $ 577,951 $ 818,248 (1) In connection with the Recapitalization, Hillhaven entered into a credit agreement with a syndicate of banks. The credit agreement includes a $175,000 term loan facility, an $85,000 revolving credit facility and a $90,000 letter of credit facility (collectively, the "Facilities"). The letter of credit facility was obtained to provide credit enhancement for the Company's industrial revenue bonds. Borrowings under the credit agreement are secured by 85 nursing centers, certain accounts receivable and the stock of certain subsidiaries of the Company. The Facilities bear interest at either a base rate plus 3/4% to 1-5/8% or the London Interbank Offered Rate ("LIBOR") plus 1-3/4% to 2-5/8%, the spreads being dependent on the type of facility and leverage ratios. The Facilities will mature on September 1, 1998. Commitment fees are required on the unused portions of the revolving credit facility and letter of credit facility and are paid at a rate of 3/8% to 1/2% depending on leverage ratios. At May 31, 1994, $165,000 was outstanding under the term loan facility, including $59,473 as substituted debt for the PIP Debentures (discussed below), with interest payable at 6.1%. The term loan is subject to scheduled principal repayments. Borrowings under the revolving credit facility amounted to $8,000 at May 31, 1994, with interest payable at 6.6%. Letters of credit outstanding at May 31, 1994 under the letter of credit facility totalled $69,418. (2) Under Hillhaven's 1991 Performance Investment Plan, on May 29, 1992, the Company privately placed $65,053 of convertible debentures (the "PIP Debentures") to a wholly-owned, special purpose subsidiary. The subsidiary financed 95% of the purchase with three-year term loans from a syndicate of commercial banks and 5% from the sale to key employees of options to acquire the PIP Debentures. The bank loans were guaranteed by NME. In September 1993, Hillhaven refinanced the term loans using its term loan facility. Because the proceeds from the exercise of the options must be used by the Company to retire the debt underlying the PIP Debentures, these borrowings, together with the outstanding balance of the options, are classified as floating rate convertible debentures in the above table. The interest rate was 6.1% at May 31, 1994. Interest is not payable on the options. The PIP Debentures mature and the options terminate on May 29, 1999, and both the PIP Debentures and options are subject to mandatory redemption on that date or upon the occurrence of certain events. The options permit the holder to purchase PIP Debentures at 95% of their face value and to ultimately convert them into shares of common stock at an effective conversion price of $16.5375 per share. The options vest 25% per year beginning in December 1993, with accelerated vesting in certain events. The Company may repurchase the options at any time after May 29, 1997 by paying a redemption premium. As options are exercised, the Company's taxable income will be reduced by any excess of the fair market value of the common stock at the date of conversion over the principal amount of the PIP Debentures redeemed. (3) Mortgage notes, industrial revenue bonds and the majority of other notes are principally secured by Hillhaven's property and equipment. The industrial revenue bonds were issued by various governmental authorities to finance the construction or acquisition of nursing centers and retirement housing facilities. The use of escrowed funds of $6,156 and $8,990 at May 31, 1994 and 1993, respectively, is limited to specific facility capital improvements or payment of principal and interest on the bonds. These amounts are included in other noncurrent assets. Average interest rates for the mortgage notes, industrial revenue bonds and other notes at May 31, 1994 were 5.6%, 5.4% and 8.9%, respectively. (4) On November 4, 1992, the Company sold $74,750 of its 7-3/4% Convertible Subordinated Debentures (the "Debentures") due 2002. The Debentures are convertible into common stock at the option of the holder at any time prior to maturity at a conversion price of $16.795 per share. On or after November 1, 1995, the Company may redeem the Debentures, in whole or in part, at specified redemption prices. The Debentures are unsecured and subordinated to all other indebtedness of Hillhaven. (5) Hillhaven participated in two mortgage financing arrangements which were guaranteed by NME. Borrowings under these arrangements were repaid with proceeds from the Recapitalization.
Hillhaven participates in a $40,000 accounts receivable-backed credit facility whereby eligible Medicaid receivables of selected nursing centers are sold to a wholly-owned subsidiary of Hillhaven, formed specifically for the purpose of such transactions. The purchase of receivables by the subsidiary may be financed by a bank line of credit with interest payable at either LIBOR plus 3/4% or the lenders' cost of funds. At May 31, 1994, the subsidiary had total assets of approximately $65,378, which cannot be used to satisfy claims against Hillhaven or any of its subsidiaries. Certain loan agreements have, among other requirements, restrictions on cash dividends, investments and borrowings and require maintenance of specified operating ratios, levels of working capital and net worth. Management believes that Hillhaven is in compliance with all material covenants. There are no compensating balance requirements for any of the credit lines or borrowings. Future maturities of long-term debt are as follows:
Year ending May 31, 1995 $ 43,427 1996 49,163 1997 55,994 1998 33,852 1999 24,996 Later years 413,946 $621,378
The fair value of the Company's long-term borrowings at May 31, 1994 and 1993, excluding capitalized lease obligations, is estimated to be $638,751 and $702,317 based on quoted market prices or by discounting future cash flows at current rates offered to the Company for debt of comparable types and maturities. 7. Income Taxes Effective June 1, 1992, Hillhaven adopted Statement of Financial Accounting Standards No. 109 , "Accounting for Income Taxes" ("SFAS 109"). The implementation of SFAS 109 changes the Company's method of accounting for income taxes from the deferred method of APB Opinion No. 11 ("APB 11") to an asset and liability approach. Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Pursuant to the deferred method under APB 11, which was applied in fiscal 1992 and prior years, deferred income taxes were recognized for income and expense items that were reported in different years for financial reporting purposes and income tax purposes using the tax rate applicable for the year of the calculation. Under the deferred method, deferred taxes were not adjusted for subsequent changes in tax rates. Adoption of SFAS 109 resulted in a charge of $1,103 to the 1993 statement of operations as the cumulative effect of a change in accounting principle. Including the impact of this charge, the effect on the year ended May 31, 1993 of the adoption of SFAS 109 was a reduction of net income tax expense and an increase in net income of $7,710 as compared to amounts that would have been reported under APB 11. Income tax (expense) benefit on income (loss) from operations before income taxes, reinstatement of discontinued operations, extraordinary charge and cumulative effect of accounting change consists of the following amounts:
Years ended May 31, 1994 1993 1992 Current (expense) federal $(12,193) $(5,400) $(4,079) Current (expense) state (2,493) (967) (930) (14,686) (6,367) (5,009) Deferred (expense) benefit federal (7,338) 12,609 4,079 Deferred (expense) benefit state (629) 1,125 523 (7,967) 13,734 4,602 $(22,653) $ 7,367 $ (407)
An analysis of Hillhaven's effective income tax rate is as follows:
Years ended May 31, 1994 1993 1992 Statutory federal income tax rate 35% 34% 34% Income tax (expense) benefit at federal rate $ (28,412) $(11,349) $ 35,064 State income tax (expense) benefit net of federal income tax benefit (2,029) 104 (269) Employee stock compensation 491 255 (470) Nondeductible fees (21) (26) 151 Limitation on recognition of net operating loss --- --- (34,742) Nondeductible wages (968) (488) --- Valuation allowance adjustment 1,090 18,992 --- Targeted jobs tax credits utilized 6,780 --- --- Other 416 (121) (141) Income tax (expense) benefit on income (loss) from operations before reinstatement of discontinued operations, extraordinary charge and cumulative effect of accounting change $(22,653) $ 7,367 $ (407)
Under APB 11, deferred income tax (expense) benefits were created by timing differences in the recognition of revenues and expenses for tax and financial statement purposes. Deferred income tax (expense) benefit for the year ended May 31, 1992 was comprised of the following:
Excess of tax depreciation over book depreciation $ (883) Gain on sales of properties (128) State income tax expense (345) Compensation plans 847 Equity in partnership results of operations 423 Restructuring charge 28,212 Direct write-off method for doubtful accounts 998 Insurance liability 1,462 Vacation accruals 668 Limitation on recognition of net operating loss (26,961) Alternative minimum tax rate reduction 1,230 Other (921) Total deferred income tax benefit $ 4,602
The tax effects of temporary differences that give rise to significant portions of the federal and state deferred tax assets (liabilities) are comprised of the following:
Years ended May 31, 1994 1993 Depreciation $(16,847) $(24,912) Installment sales (1,691) (3,685) Other (3,551) (1,148) Gross deferred tax liabilities (22,089) (29,745) Capital leases 8,110 7,090 Deferred partnership revenue 1,960 2,662 Insurance reserves 9,573 8,033 Vacation accruals 5,691 4,955 Deferred gain 4,350 5,882 Bad debt reserves 8,788 7,093 Restructuring reserves --- 20,293 Targeted jobs tax credits 5,296 7,546 Alternative minimum tax credits 2,649 1,534 Other 4,972 3,014 Gross deferred tax assets 51,389 68,102 Less valuation allowance (11,277) (12,367) Deferred tax assets, net 40,112 55,735 Net deferred tax assets 18,023 25,990 Less amount included in other current assets (18,946) (15,762) Amount included in other noncurrent assets (liabilities) $ (923) $ 10,228
The decrease in the valuation allowance for deferred tax assets of $1,090 was attributable to taxable income earned in the year ended May 31, 1994 and, to a lesser extent, an increase in the estimate of future income to be earned. For the Company to realize its net deferred tax assets, it must continue to achieve future pretax earnings. Although the Company believes such pretax earnings will be achieved, a lack of earnings could result in an increased provision for income taxes. As of May 31, 1994, Hillhaven had $5,296 of targeted jobs tax credits which expire between May 31, 2006 and May 31, 2009. The Tax Reform Act of 1986 enacted an alternative minimum tax system for corporations. The alternative minimum tax is assessed at a rate of 20% on Hillhaven's alternative minimum taxable income. Alternative minimum taxable income is determined by making statutory adjustments to the Company's regular taxable income. For the years ended May 31, 1994 and 1993, utilization of regular tax credits was limited by alternative minimum tax expense of $11,043 and $5,400, respectively. For the years ended May 31, 1994, 1993 and 1992, regular income tax expense (before utilization of tax credits) exceeded the alternative minimum tax expense and resulted in the utilization of tax credits of $6,780, $915, and $123, respectively. 8. Transactions with NME Lending and Related Agreements. In connection with the spin-off from NME in January 1990 (the "Spin-off"), Hillhaven entered into certain financial arrangements with its former parent company. Hillhaven issued unsecured notes to NME in the aggregate amount of $145,859. The Company used the proceeds from the sale of both the 8-1/4% Series C Preferred Stock to NME and the PIP Debentures to repay $96,800 of these notes (Notes 2 and 6). As of May 31, 1993, one of the notes had been paid in full, and the outstanding indebtedness on the remaining note was $49,059. NME also provided mortgage financing to Hillhaven on certain nursing centers purchased by the Company from NME. At May 31, 1993, $98,156 was outstanding under these arrangements. In fiscal 1994, Hillhaven repaid all of the NME notes in the aggregate principal amount of $147,202 with proceeds from the Recapitalization. The Company also repaid debt which was guaranteed by NME in the aggregate amount of $266,737 (Note 6). Interest expense on NME notes totalled $3,696, $7,061 and $12,345 for the years ended May 31, 1994, 1993 and 1992. Guarantee Reimbursement Agreement. NME and Hillhaven entered into a guarantee reimbursement agreement providing for the payment by Hillhaven of a fee in consideration of NME's guarantee of certain Hillhaven obligations. At May 31, 1994 and 1993, an aggregate total of approximately $279,000 and $699,000, respectively, of long-term debt (Note 6), leases (Note 9) and contingent liabilities (Note 11) were subject to this agreement. In addition, NME guarantees $7,057 of Hillhaven debt and leases for which Hillhaven is not charged a guarantee fee. Insurance. Through May 31, 1994, substantially all of the professional and general liability risks of Hillhaven were insured by an insurance company which is owned by NME. Such insurance expense amounted to $7,627, $7,344 and $6,025 for the years ended May 31, 1994, 1993 and 1992, respectively. Beginning June 1, 1994, Hillhaven obtained separate coverage for its professional and general liability exposure. Leases. At the time of the Spin-off, Hillhaven leased 115 nursing centers from NME. During the three years ended May 31, 1993, the Company purchased 92 of the leased nursing centers for an aggregate purchase price of $346,900. At May 31, 1993, Hillhaven leased 23 nursing centers from NME which were recorded as capital leases at the aggregate purchase option price of $135,400. As part of the Recapitalization (Note 6), the Company purchased the remaining 23 nursing centers leased from NME for an aggregate purchase price of $111,800. Interest expense on the NME leases for the years ended May 31, 1994 and 1993 and the six months ended May 31, 1992 amounted to $3,401, $19,889 and $12,825, respectively. Rent expense on NME leases for the six months ended November 30, 1991 amounted to $15,117. Hillhaven is leasing certain nursing centers from Health Care Property Partners, a joint venture in which NME has a minority interest. Lease payments to this joint venture amounted to $9,923, $9,699 and $9,507 for the years ended May 31, 1994, 1993 and 1992, respectively. Equity Ownership. On November 30, 1991, NME purchased 35,000 shares of Hillhaven's 8-1/4% cumulative nonvoting Series C Preferred Stock. The proceeds, $35,000, were used to reduce notes payable to NME. NME is entitled to a cumulative dividend, payable quarterly, at the annual rate of 8-1/4% of the $35,000 liquidation value. The Series C Preferred Stock is redeemable at the option of the Company at any time, in whole or in part. In connection with the Recapitalization, Hillhaven issued to NME $120,000 of cumulative nonvoting payable-in-kind Series D Preferred Stock. On February 28, 1994, NME tendered shares of the Series D Preferred Stock in the amount of $63,300 in order to exercise its warrants to purchase 6,000,000 shares of Hillhaven common stock. NME is entitled to receive cumulative quarterly dividends on the Series D Preferred Stock at an annual rate of 6-1/2% of the liquidation value which, as of May 31, 1994, was $60,546. The dividends are payable in additional shares of Series D Preferred Stock, compounded annually, until September 1998, when the dividends will be paid in cash. The Company may, at its option, redeem the Series D Preferred Stock at any time, in whole or in part, subject to restrictions included in certain loan agreements. Management Agreement. Hillhaven provides management, consulting and advisory services in connection with the operation of seven nursing centers owned or leased by NME or its subsidiaries. In return for such services, Hillhaven receives a management fee and is reimbursed for certain costs and expenses. Hillhaven earned $2,543, $2,440 and $2,300 for such services during fiscal 1994, 1993 and 1992, respectively. Management fees receivable from NME amounted to $610 at May 31, 1994 and $545 at May 31, 1993. 9. Leases As of May 31, 1994, Hillhaven leases 122 nursing centers, 78 of which are operated by the Company. Most lease agreements cover periods from 10 to 20 years and contain renewal options of 5 to 40 years. Hillhaven's pharmacy outlets are leased under terms generally ranging from three to five years with three-year renewal options. Minimum lease payments under noncancelable leases and related sublease income are as follows:
Sublease Year ending May 31, Capital Operating Income 1995 $ 367 $ 38,570 $(12,047) 1996 369 33,954 (10,130) 1997 374 29,238 (7,732) 1998 378 26,963 (7,488) 1999 383 19,553 (5,819) Thereafter 1,034 61,615 (20,560) Total minimum lease payments (income) 2,905 $209,893 $(63,776) Less amount representing interest (940) Present value of net minimum lease payments 1,965 Less current portion (168) Long-term obligations $1,797
Rent expense under operating leases is as follows:
Years ended May 31, 1994 1993 1992 Rent expense $ 52,440 $ 52,537 $ 67,144 Sublease rental income (13,563) (10,390) (6,060) $ 38,877 $ 42,147 $ 61,084
10. Benefit Plans Hillhaven's 1990 Stock Incentive Plan (the "1990 Plan") provides for incentive stock option, nonqualified stock option, restricted stock, stock appreciation right and cash bonus awards to certain executive officers and other key employees of Hillhaven. Incentive stock options are granted at an exercise price equal to the fair market value of the shares on the date of grant, and nonqualified stock options are granted at an exercise price of not less than 50% of fair market value on the date of grant. Restricted shares are issued at no cost to the employee, and restrictions on such shares generally lapse over five years from the date of the award as long as the employee continues to be employed by Hillhaven. In addition, Hillhaven has replaced its long-term cash bonus plan with performance share awards ("Performance Shares") under the 1990 Plan. The Compensation Committee of the Board of Directors identified key management employees who are eligible to receive Performance Shares. Performance Shares represent potential rights to receive common stock based upon the Company achieving specified financial targets over a three-year period. Subject to the Compensation Committee's sole discretion to award all or any portion of the Performance Shares, participants may receive shares of common stock based upon actual performance in relation to the financial targets. The fair market value on the date of award of restricted shares and the excess of the fair market value of the Hillhaven shares on the date of grant of nonqualified stock options over the exercise price represents compensation which is deferred and charged to operations as the forfeiture restrictions lapse and as the nonqualified options vest. An estimate of the fair market value of Performance Shares expected to be awarded also represents compensation and is deferred and charged to operations over a three-year period. Unearned compensation is recorded as a deduction from stockholders' equity. No stock appreciation rights or cash bonuses have been awarded under the 1990 Plan. At May 31, 1994, there were 2,401,629 shares of common stock available under the 1990 Plan for future awards. Hillhaven also has a Directors' Stock Option Plan for directors who are not employees of Hillhaven and are not eligible to participate in the 1990 Plan. Nonstatutory options to purchase 2,000 shares of common stock are granted each year to each qualified director at the fair market value of the shares on the date of grant. Information regarding stock option plans follows:
1990 Directors' Stock Stock Incentive Option Plan Plan Shares under option: Outstanding at May 31, 1991 305,597 20,000 Granted --- 12,000 Exercised (52,345) (2,000) Canceled (4,350) --- Outstanding at May 31, 1992 248,902 30,000 Granted 101,647 10,000 Exercised (49,079) --- Canceled (1,542) (2,000) Outstanding at May 31, 1993 299,928 38,000 Granted 66,002 10,000 Exercised (95,785) (2,000) Canceled (6,532) (6,000) Outstanding at May 31, 1994 263,613 40,000 Average option price per share $9.85 $14.41 Options exercisable at May 31, 1994 204,625 30,000 Average price of options exercised: Year ended May 31, 1992 $5.00 $5.15 Year ended May 31, 1993 $5.02 --- Year ended May 31, 1994 $5.84 $13.75
Shares of common stock issued in the last three fiscal years in connection with employee and director compensation and benefit plans were 97,785 in 1994, 135,079 in 1993 and 134,345 in 1992. Restricted shares forfeited and retired in the last three fiscal years were 16,000 in 1994, 39,670 in 1993 and 37,915 in 1992. Hillhaven maintains defined contribution retirement plans covering substantially all full-time employees, whereby employee contributions to the plans are matched by Hillhaven up to certain limits. Defined contribution pension expense totalled $3,938, $4,556 and $3,812 for the years ended May 31, 1994, 1993 and 1992, respectively. Hillhaven also maintains supplemental retirement plans covering outside directors, executive officers and certain other management employees under which benefits are determined based primarily upon the participants' compensation and length of service to the Company. Expense under these plans amounted to $730, $262 and $393 for the years ended May 31, 1994, 1993 and 1992, respectively. Accrued benefits under the plans amounted to $2,518 and $1,829 at May 31, 1994 and 1993, respectively, and are included in other long-term liabilities. 11. Commitments And Contingencies Hillhaven is contingently liable at May 31, 1994 for $34,099 primarily as a guarantor of indebtedness of partnerships in which Hillhaven has an ownership interest (Note 4) or with which it has a management agreement. It is not practicable to estimate the fair value of these off-balance sheet obligations. NME has guaranteed $16,421 of these obligations for which Hillhaven has agreed to indemnify NME under the terms of the Guarantee Reimbursement Agreement (Note 8). The Company maintains insurance coverage for its workers compensation exposure. The estimated liability for retrospective workers compensation premiums (included in other accrued liabilities and other long-term liabilities) is based on actuarially projected estimates discounted at an 8.4% average rate to their present value, which amounted to $8,619 at May 31, 1994 and $16,805 at May 31, 1993. Hillhaven is subject to various claims and lawsuits in the ordinary course of business which are covered by insurance or adequately provided for in Hillhaven's financial statements. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on Hillhaven's financial condition. 12. Statements of Cash Flows Supplemental disclosures of cash flow information are as follows:
Years ended May 31, 1994 1993 1992 Cash paid for: Interest $ 44,966 $ 56,144 $ 53,454 Income taxes 10,925 7,250 5,678 Noncash investing and financing activities: Acquisition of previously leased nursing centers and pharmacies Long-term debt assumed and incurred 13,705 39,609 76,403 Adjustment to property and equipment and capital lease obligations 23,600 6,780 --- Notes received in connection with sales of nursing centers 3,340 36,338 16,304 Preferred stock issued to retire debt 56,601 --- --- Consolidation of previously unconsolidated investees and reinstatement of retirement housing operations Increase in assets 6,243 4,155 93,113 Increase in liabilities 6,292 4,942 66,367 Capitalization of leases --- --- 299,500 Preferred stock tendered for the purchase of common stock 63,300 --- --- Reclassification of property and equipment and intangible assets to/from assets held for disposition 52,537 --- 96,328
Quarterly Financial Summary (Unaudited)
Year ended May 31, 1994 Quarters First Second Third Fourth Net operating revenues (1) $354,814 $361,427 $363,973 $368,520 Income before extraordinary charge (2) $8,024 $25,812 $11,707 $12,982 Extraordinary charge --- (940) (73) (49) Net income $8,024 $24,872 $11,634 $12,933 Income per share - primary: (3) Income before extraordinary charge $.31 $.98 $.37 $.41 Extraordinary charge --- (.04) --- --- Net income $.31 $.94 $.37 $.41 Income per share - fully diluted: (3) Income before extraordinary charge $.28 $.77 $.33 $.37 Extraordinary charge --- (.03) --- --- Net income $.28 $.74 $.33 $.37
Year ended May 31, 1993 Quarters First Second Third Fourth Net operating revenues (1) $331,992 $342,681 $344,065 $344,092 Income before extraordinary charge and cumulative effect $8,803 $11,117 $9,432 $11,395 Extraordinary charge --- --- (565) --- Cumulative effect of accounting change (1,103) --- --- --- Net income $7,700 $11,117 $8,867 $11,395 Income per share - primary: (3) Income before extraordinary charge and cumulative effect $.37 $.46 $.36 $.47 Extraordinary charge --- --- (.02) --- Cumulative effect of accounting change (.05) --- --- --- Net income $.32 $.46 $.34 $.47 (1) Amounts for periods prior to September 1, 1993 have been restated to include the revenues of facilities previously held for disposition (Note 2). (2) Includes a $21,904 restructuring credit recorded in the 1994 second quarter (Note 2). (3) Adjusted to reflect a one-for-five reverse stock split effected in November 1993.
SCHEDULE V THE HILLHAVEN CORPORATION PROPERTY AND EQUIPMENT (Dollar amounts are expressed in thousands)
Classification Balance at Balance at beginning of Additions Sales and Other end of period at cost (1) retirements changes(2) period Year ended May 31, 1992 Land $ 32,161 $ 8,652 $ (2,316) $ 2,765 a $ 41,262 Buildings 345,612 102,731 (20,805) (2,774) a 424,764 Leasehold improvements 28,445 4,530 (833) (10,862) a 21,280 Equipment 128,810 24,057 (9,033) (19,922) a 123,912 Construction in progress 7,185 568 --- (1,466) b 6,287 Capitalized leases 5,515 299,500 --- (1,007) b 304,008 $547,728 $ 440,038 $ (32,987) $ (33,266) $ 921,513 Year ended May 31, 1993 Land $ 41,262 $ 2,749 $ (944) $ 17,125 c $ 60,192 Buildings 424,764 20,880 (8,960) 135,128 c 571,812 Leasehold improvements 21,280 3,016 (623) (5,240) c 18,433 Equipment 123,912 14,687 (4,524) 11,381 c 145,456 Construction in progress 6,287 719 --- (87) c 6,919 Capitalized leases 304,008 --- (6,311) (160,300) c 137,397 $921,513 $ 42,051 $ (21,362) $ (1,993) $ 940,209
SCHEDULE V THE HILLHAVEN CORPORATION PROPERTY AND EQUIPMENT (Dollar amounts are expressed in thousands)
Classification Balance at Balance at beginning of Additions Sales and Other end of period at cost (1) retirements changes(2) period Year ended May 31, 1994 Land $ 60,192 $ 2,459 $ (4,007) $ 18,399 d $ 77,043 Buildings 571,812 18,828 (25,505) 151,851 d 716,986 Leasehold improvements 18,433 1,914 (155) (2,984) d 17,208 Equipment 145,456 22,844 (15,096) 19,788 d 172,992 Construction in progress 6,919 7,296 --- 161 d 14,376 Capitalized leases 137,397 --- --- (135,400) d 1,997 $940,209 $ 53,341 $ (44,763) $ 51,815 $1,000,602
[FN] (1) 1992 additions include the purchase of 24 previously leased nursing centers and one retirement housing facility: land, $7,420; buildings, $95,088; and equipment, $7,397. Total consideration for the purchase included debt totaling $76,212. Additions also include the capitalization of 76 leases: land, $28,983; buildings, $251,031; and equipment, $19,486, as part of the restructuring transaction as described in Note 2 of Notes to Consolidated Financial Statements. (2) a. Reclassification to net assets held for disposition as part of restructuring transaction: land, $(8,473); buildings $(83,467); leasehold improvements, $(10,963); equipment, $(26,820); and construction in progress, $(261). The restructuring is described in Note 2 of Notes to Consolidated Financial Statements Reinstatement of discontinued operations: land, $11,309; building, $74,437; leasehold improvements, $127; and equipment, $5,818. Consolidation of previously unconsolidated investee: land, $1, building, $5,611; and equipment, $561. Adjustment to basis of retirement housing property: land $(24); building, $(1,315); and equipment, $(35). b. Reclassification to other property and equipment accounts. c. Purchase of nursing centers, previously recorded as capitalized leases: land $17,303; buildings $131,095; and equipment $11,902. Adjustment to building ($1,486) in connection with purchase of partnership interests. Reclassification to other property and equipment accounts. d. Purchase of 23 nursing centers and two retirement housing facilities previously recorded as capitalized leases: land, $11,105; buildings, $117,059; and equipment, $7,236. Discount on purchase of nursing centers, previously recorded as capitalized leases: land, $(197); buildings, $(22,880); and equipment, $(523). Reclassification of leasehold improvements to buildings in connection with the acquisition of previously leased nursing centers, $4,048. Consolidation of a previously unconsolidated investee: land, $989; buildings, $7,874; and equipment, $396. [FN] Effect of reinstatement of assets held for disposition: land, $6,876; buildings, $47,042; leasehold improvements, $1,061; equipment, $12,722; and construction in progress, $347. Reclassification to other property and equipment accounts. The annual provision for depreciation and amortization is computed using the straight-line method over the following useful lives: 20 to 45 years for buildings and improvements, 5 to 10 years for equipment and the lesser of the estimated useful life or the lease term for leasehold improvements and certain capital leases. SCHEDULE VI THE HILLHAVEN CORPORATION ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT (In thousands)
Additions Balance at charged to Balance at beginning of costs & Sales and Other end of Description period expenses retirements changes period Year ended (19,101) (1) May 31, 1992 $124,157 $ 41,485 $ (9,077) $ (1,737) (3) $135,727 Year ended (261) (2) May 31, 1993 $135,727 $ 48,030 $ (6,526) $ (3,759) (3) $173,211 Year ended May 31, 1994 $173,211 $ 48,356 $(20,055) $ 15,831 (3) $217,343 (1) Reclassification to net assets held for disposition as part of restructuring transaction. The restructuring is described in Note 2 of Notes to Consolidated Financial Statements $(25,181) Reinstatement of discontinued operations 6,254 Reclassification to buildings upon acquisition of previously leased nursing centers (185) Consolidation of previously unconsolidated investees 593 Reclassification to buildings upon transfer of property and equipment to a consolidated investee (582) $(19,101) (2) Reclassification to buildings upon acquisition of previously leased nursing centers. (3) Effect of reinstatement of assets held for disposition; $15,766.
SCHEDULE VIIITHE HILLHAVEN CORPORATION VALUATION AND QUALIFYING ACCOUNTS (In thousands)
Additions Balance at charged to Balance at beginning costs & end of Description of period expenses Deductions period Year ended May 31, 1992: Valuation accounts deducted from assets: Allowance for doubtful $ (5,370) (1) accounts and notes 18 (2) receivable $ 20,517 $ 5,962 478 (5) $21,605 Reserve for loss on discontinued operations $ 23,753 $ --- $(23,753) (3) $--- Reserve for loss on assets held for disposition $ --- $110,736 $ (7,662) (4) $103,074 Year ended May 31, 1993: Valuation accounts deducted from assets: Allowance for doubtful accounts and notes $ (5,686) (1) receivable $ 21,605 $ 4,029 138 (5) $20,086 Reserve for loss on assets held for disposition $103,074 $ --- $(46,428) (4) $56,646 Year ended May 31, 1994: Valuation accounts deducted from assets: Allowance for doubtful accounts and notes receivable $ 20,086 $ 8,094 $ (3,567) (1) $24,613 Reserve for loss on assets $ (2,096) (4) held for disposition $ 56,646 $ --- (54,550) (6) $---
[FN] (1) Write-off of accounts and notes receivable. (2) Effect of reinstatement of discontinued operations. (3) Elimination of loss reserve upon reinstatement of discontinued operations. (4) Operating losses related to nursing centers and retirement housing facilities held for disposition were charged to the reserve. See Note 2 of Notes to Consolidated Financial Statements. (5) Provision related to nursing centers and retirement housing facilities held for disposition was charged to the reserve for loss on assets held for disposition. (6) Elimination of loss reserve upon reinstatement of assets held for disposition. SCHEDULE X THE HILLHAVEN CORPORATION SUPPLEMENTARY INCOME STATEMENT INFORMATION (In thousands)
Charged to costs and expenses Year Ended May 31, 1994 1993 1992 Repairs and maintenance $13,753 $13,148 $ 12,491 Taxes, other than payroll and income taxes $16,644 $15,633 $ 17,359 Amortization of intangible assets and advertising costs are less than one percent of net operating revenues. There are no royalties.
INDEX TO EXHIBITS Exhibit No. Item/Document (3) Articles of Incorporation and By-Laws 3.01 Amended and Restated Articles of Incorporation of Hillhaven (Incorporated by reference to Exhibit J to Exhibit 2 to the document referred to in Note 1 below) 3.02 Amended and Restated By-Laws of Hillhaven (4) Instruments Defining the Rights of Security Holders 4.01 Amended and Restated Articles of Incorporation of Hillhaven (See Exhibit 3.01) 4.02 Amended and Restated By-Laws of Hillhaven (See Exhibit 3.02) 4.03 Form of Common Stock Certificate of Hillhaven (Incorporated by reference to Exhibit 4.3 to the document referred to in Note 1 below) 4.04 Warrant and Registration Rights Agreement among Hillhaven, NME and Manufacturers Hanover Trust Company of California, dated as of January 31, 1990 (Incorporated by reference to Exhibit 4.4 to the document referred to in Note 1 below) 4.05 Rights Agreement between Hillhaven and Manufacturers Hanover Trust Company of California, dated as of January 31, 1990 (Incorporated by reference to Exhibit 4.6 to the document referred to Note 1 below) 4.06 Form of Rights Certificate (Incorporated by reference to Exhibit A to Exhibit 4.6 to the document referred to in Note 1 below) 4.07 Agreement concerning purchase by NME Properties Corp., of Series C Preferred Stock of Hillhaven and prepayment by First Healthcare Corporation of indebtedness to NME Properties Corp. dated at or prior to 11:59 p.m. on November 30, 1991 between NME, NME Properties Corp., Hillhaven and First Healthcare Corporation (Incorporated by reference to Exhibit 4(a) to the document referred to in Note 2 below) 4.08 Certificate of Designation, Preferences and Rights of Series C Preferred Stock of Hillhaven (Incorporated by reference to Exhibit 4(b) to the document referred to in Note 2 below) Exhibit No. Item/Document 4.09 Certificate of First Amendment to Certificate of Designation, Preferences and Rights of Series C Preferred Stock of The Hillhaven Corporation (Incorporated by reference to Exhibit 4(b) to the document referred to in Note 9 below) 4.10 Form of Indenture between Hillhaven and Bankers Trust Company, as Trustee with respect to the 7-3/4% Convertible Subordinated Debentures Due 2002 (Incorporated by reference to Exhibit 4.14 to the document referred to in Note 4 below) 4.11 Form of 7-3/4% Convertible Subordinated Debenture Due 2002 (Incorporated by reference to Exhibit 4.15 to the document referred to in Note 4 below) 4.12 Form of Indenture between Hillhaven and State Street Bank and Trust Company, as Trustee with respect to the 10-1/8% Senior Subordinated Notes due 2001 (Incorporated by reference to Exhibit 4.01 to the document referred to in Note 5 below) 4.13 Form of 10-1/8% Senior Subordinated Note due 2001 (Incorporated by reference to Exhibit 4.02 to the document referred to in Note 5 below) 4.14 Agreement Concerning Purchase by NME Properties Corp. and Certain Subsidiaries of Series D Preferred Stock of The Hillhaven Corporation, dated as of September 1, 1993 among Hillhaven, First Healthcare Corporation, NME, NME Properties Corp. and certain subsidiaries of NME Properties Corp. 4.15 Certificate of Designation, Preferences and Rights of Series D Preferred Stock of The Hillhaven Corporation (Incorporated by reference to Exhibit 4(a) to the document referred to in Note 9 below) 4.16 Certificate Concerning Reverse Stock Split of The Hillhaven Corporation (Incorporated by reference to Exhibit 4(c) to the document referred to in Note 9 below) 4.17 Credit Agreement dated as of September 2, 1993, between First Healthcare Corporation, as lender, and Hillhaven PIP Funding I, Inc., as borrower (Incorporated by reference to Exhibit 4.07 to the document referred to in Note 8 below) Exhibit No. Item/Document 4.18 The Hillhaven Corporation 1991 Performance Investment Plan (Incorporated by reference to Exhibit 10.24 to the document referred to in Note 1 below) 4.19 Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock (Incorporated by reference to Exhibit 4.03 to the document referred to in Note 8 below) 4.20 Form of Indenture between Hillhaven and Chemical Bank, as Trustee with respect to the Convertible Debentures due May 29, 1999 (Incorporated by reference to Exhibit 4.01 to the document referred to in Note 8 below) 4.21 Form of Convertible Debenture due May 29, 1999 (Incorporated by reference to Exhibit 4.02 to the document referred to in Note 8 below) (10) Material Contracts 10.01 Services Agreement between Hillhaven and NME, dated as of January 31, 1990 (Incorporated by reference to Exhibit 10.2 to the document referred to in Note 1 below) 10.02 Tax Sharing Agreement between Hillhaven and NME, dated as of January 31, 1990 (Incorporated by reference to Exhibit 10.3 to the document referred to in Note 1 below) 10.03 Government Programs Agreement between Hillhaven and NME, dated January 31, 1990 (Incorporated by reference to Exhibit 10.4 to the document referred to in Note 1 below) 10.04 Insurance Agreement between Hillhaven and NME, dated as of January 31, 1990 (Incorporated by reference to Exhibit 10.5 to the document referred to in Note 1 below) *10.05 Employee and Employee Benefits Agreement between Hillhaven and NME, dated as of January 31, 1990 (Incorporated by reference to Exhibit 10.6 to the document referred to in Note 1 below) *10.06 Resignation Agreement and General Release between Hillhaven and Richard K. Eamer, dated as of September 15, 1993 *10.07 Employment Agreement between Hillhaven and Leonard Cohen, dated as of January 31, 1990 (Incorporated by reference to Exhibit 10.21 to the document referred to in Note 1 below) Exhibit No. Item/Document *10.08 Amendment No. One to Employment Agreement between Hillhaven and Leonard Cohen, dated as of May 31, 1994 *10.09 Severance Agreement among Hillhaven, NME and Christopher J. Marker, dated as of January 31, 1990 (Incorporated by reference to Exhibit 10.23 to the document referred to in Note 1 below) *10.10 Severance Agreement between Hillhaven and Christopher J. Marker, dated as of May 24, 1994 *10.11 Form of Severance Agreement between Hillhaven and certain of its officers 10.12 Form of Indemnification Agreement between Hillhaven and certain of its executive officers (Incorporated by reference to Exhibit 4.8 to the document referred to in Note 1 below) *10.13 Hillhaven Directors' Stock Option Plan (Incorporated by reference to Exhibit 10.18 to the document referred to in Note 1 below) *10.14 The Hillhaven Corporation Board of Directors Retirement Plan *10.15 Hillhaven Deferred Savings Plan (Incorporated by reference to Exhibit 10.11 to the document referred to in Note 1 below) *10.16 Hillhaven 1990 Stock Incentive Plan (Incorporated by reference to Exhibit 10.12 to the document referred to in Note 1 below) *10.17 Hillhaven Annual Incentive Plan (Incorporated by reference to Exhibit 10.13 to the document referred to in Note 1 below) *10.18 Hillhaven Long Term Incentive Plan (Incorporated by reference to Exhibit 10.14 to the document referred to in Note 1 below) *10.19 Hillhaven Deferred Compensation Master Plan (Incorporated by reference to Exhibit 10.15 to the document referred to in Note 1 below) *10.20 Hillhaven Senior Management Deferred Compensation Plan (Incorporated by reference to Exhibit 10.16 to the document referred to in Note 1 below) Exhibit No. Item/Document *10.21 First Restatement of the Hillhaven Supplemental Executive Retirement Plan *10.22 Hillhaven Individual Retirement Annuity Plan (Incorporated by reference to Exhibit 10.19 to the document referred to in Note 1 below) 10.23 Form of Assignment and Assumption of Lease Agreement between Hillhaven and certain subsidiaries, on the one hand, and NME and certain subsidiaries on the other hand, together with the related Guaranty by Hillhaven, dated on or prior to January 31, 1990 (Incorporated by reference to Exhibit 10.7 to the document referred to in Note 1 below) 10.24 Form of Management Agreement between First Healthcare Corporation and certain NME subsidiaries, dated on or prior to January 31, 1990 (Incorporated by reference to Exhibit 10.10 to the document referred to in Note 1 below) 10.25 Reorganization and Distribution Agreement between Hillhaven and NME, dated as of January 8, 1990, as amended on January 30, 1990 (Incorporated by reference to Exhibit 2.01 to the document referred to in Note 1 below) 10.26 Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of January 31, 1990 (Incorporated by reference to Exhibit 10.8 to the document referred to in Note 1 below) 10.27 First Amendment to Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of October 30, 1990 10.28 First Amendment to Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of May 30, 1991 (Incorporated by reference to Exhibit 10.45 to the document referred to in Note 3 below) 10.29 Second Amendment to Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of October 2, 1991 (Incorporated by reference to Exhibit 10.46 to the document referred to in Note 3 below) Exhibit No. Item/Document 10.30 Third Amendment to Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of April 1, 1992 (Incorporated by reference to Exhibit 10.47 to the document referred to in Note 3 below) 10.31 Fourth Amendment to Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of November 12, 1992 (Incorporated by reference to Exhibit 10.13 to the document referred to in Note 6 below) 10.32 Fifth Amendment to Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of February 19, 1993 (Incorporated by reference to Exhibit 10.14 to the document referred to in Note 6 below) 10.33 Sixth Amendment to Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of May 28, 1993 (Incorporated by reference to Exhibit 10.15 to the document referred to in Note 6 below) 10.34 Seventh Amendment to Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of May 28, 1993 10.35 Eighth Amendment to Guarantee Reimbursement Agreement between Hillhaven and NME, dated as of September 2, 1993 10.36 Amended and Restated Loan Agreement among Hillhaven, New Pond Village Associates and BayBank of Boston, N.A., dated as of August 25, 1989 and effective November 1, 1991 (Incorporated by reference to Exhibit 10.52 to the document referred to in Note 3 below) 10.37 Facility Purchase and Sale Agreements, each dated as of February 12, 1992, between First Healthcare Corporation and Zevco Enterprises, Inc. for the four nursing centers in Houston, Texas (Incorporated by reference to Exhibit 10.41 to the document referred to in Note 3 below) 10.38 Facility Agreement among First Healthcare Corporation and Certain Limited Partnerships, dated as of April 23, 1992 relating to the sale of 32 nursing centers (Incorporated by reference to Exhibit 10.42 to the document referred to in Note 3 below) Exhibit No. Item/Document 10.39 First Amendment to Facility Agreement among First Healthcare Corporation and Certain Limited Partnerships, dated as of July 31, 1992 relating to the sale of 32 nursing centers (Incorporated by reference to Exhibit 10.43 to the document referred to in Note 3 below) 10.40 Letter Agreement dated July 14, 1992, concerning acquisition by Hillhaven from NME of 26 nursing centers and two adjacent retirement housing communities (Incorporated by reference to Exhibit 10.49 to the document referred to in Note 3 below) 10.41 Letter Agreement dated August 4, 1992, between Hillhaven and NME, amending the July 14, 1992 letter agreement concerning acquisition by Hillhaven from NME of 26 nursing centers and two adjacent retirement communities (Incorporated by reference to Exhibit 10.50 to the document referred to in Note 3 below) 10.42 Letter Agreement dated October 14, 1992, between Hillhaven and NME, amending the July 14, 1992 letter concerning acquisition by Hillhaven from NME of 34 nursing centers and two adjacent retirement housing communities (Incorporated by reference to Exhibit 10.58 to the document referred to in Note 6 below) 10.43 Purchase and Sale Agreement and Escrow Instructions between First Healthcare Corporation and certain NME subsidiaries, dated as of November 4, 1992 relating to the acquisition of 24 nursing centers (Incorporated by reference to Exhibit 10.59 to the document referred to in Note 6 below) 10.44 Purchase and Sale Agreement and Escrow Instructions between First Healthcare Corporation and certain NME subsidiaries, dated as of February 1, 1993, relating to the acquisition of 17 nursing centers (Incorporated by reference to Exhibit 10.60 to the document referred to in Note 6 below) 10.45 Facility Purchase and Sale Agreement, each dated April 1, 1993, between First Healthcare Corporation and Zevco Enterprises, Inc., an Illinois corporation, relating to the sale of 13 nursing centers (Incorporated by reference to Exhibit 10.61 to the document referred to in Note 6 below) Exhibit No. Item/Document 10.46 Purchase and Sale Agreement and Escrow Instructions between First Healthcare Corporation and certain NME subsidiaries, dated as of May 20, 1993 relating to the acquisition of 11 nursing centers (Incorporated by reference to Exhibit 10.62 to the document referred to in Note 6 below) 10.47 Letter of Intent dated June 22, 1993 between Hillhaven and NME (Incorporated by reference to Exhibit 10.63 to the document referred to in Note 6 below) 10.48 Credit Agreement dated as of September 1, 1993 among First Healthcare Corporation, The Hillhaven Corporation, the Banks referred to therein, the LC Issuing Banks referred to therein, Morgan Guaranty Trust Company of New York, Chemical Bank and J. P. Morgan Delaware (Incorporated by reference to Exhibit B to the document referred to in Note 7 below) 10.49 Amendment No. 1 to Credit Agreement, dated as of October 12, 1993, among First Healthcare Corporation, The Hillhaven Corporation, the Banks referred to therein, the LC Issuing Banks referred to therein, Morgan Guaranty Trust Company of New York, Chemical Bank and J. P. Morgan Delaware 10.50 Amendment No. 2 to Credit Agreement, dated as of December 30, 1993, among First Healthcare Corporation, The Hillhaven Corporation, the Banks referred to therein, the LC Issuing Banks referred to therein, Morgan Guaranty Trust Company of New York, Chemical Bank and J. P. Morgan Delaware 10.51 Amendment No. 3 to Credit Agreement, dated as of May 27, 1994, among First Healthcare Corporation, The Hillhaven Corporation, the Banks referred to therein, the LC Issuing Banks referred to therein, Morgan Guaranty Trust Company of New York, Chemical Bank and J. P. Morgan Delaware 10.52 Agreement and Waiver, dated as of September 2, 1993, by and among Hillhaven, First Healthcare Corporation, NME and certain NME subsidiaries Exhibit No. Item/Document 10.53 Novation Agreement among Hillhaven Funding Corporation, Banque Indosuez, New York Branch, Banque Nationale de Paris, San Francisco Agency, Bank of America National Trust and Savings Association and Seattle-First National Bank, dated as of April 29, 1994 10.54 Amended and Restated Master Sale and Servicing Agreement among Hillhaven Funding Corporation, Hillhaven and certain Hillhaven subsidiaries, dated as of April 29, 1994 10.55 Amended and Restated Liquidity Agreement between Hillhaven Funding Corporation, Bank of America National Trust and Savings Association and Seattle-First National Bank dated as of April 29, 1994 (11) Computation of Per Share Earnings 11.01 Statement re: Computation of Per Share Earnings (21) Subsidiaries 21.01 Subsidiaries of the Registrant (23) Consent of Experts and Counsel 23.01 Consent of Independent Accountants, KPMG Peat Marwick LLP Note Reference Document 1. Quarterly Report on Form 10-Q for the quarter ended November 30, 1989, as amended. 2. Quarterly Report on Form 10-Q for the quarter ended November 30, 1991, as amended. 3. Annual Report on Form 10-K for the year ended May 31, 1992, as amended. 4. Registration Statement on Form S-1 (File No. 33-48755). 5. Registration Statement on Form S-3 (File No. 33-65718). 6. Annual Report on Form 10-K for the year ended May 31, 1993. 7. Current Report on Form 8-K dated September 2, 1993. 8. Registration Statement on Form S-3 (File No. 33-50833). 9. Quarterly Report on Form 10-Q for the quarter ended November 30, 1993. ___________________ * Management contracts and compensatory plans or arrangements required to be filed as an Exhibit to comply with Item 14(a)(3). EX-3.02 2 Exhibit 3.02 THE HILLHAVEN CORPORATION a Nevada Corporation AMENDED AND RESTATED BY-LAWS As Amended and Restated Through November 30, 1993 ARTICLE I STOCKHOLDERS' MEETINGS Section 1.1. Place of Meetings. All meetings of the stockholders shall be held at the principal office of the Corporation in the State of Washington, or at any other place within or without the State of Nevada as may be designated for that purpose from time to time by the Board of Directors. Section 1.2. Annual Meetings. The annual meeting of the stockholders shall be held not later than 210 days after the close of the fiscal year, on the date and at the time set by the Board of Directors, at which time the stockholders shall elect directors, consider reports of the affairs of the Corporation, and transact such other business as may properly be brought before the meeting. Section 1.3 Special Meetings. Except as otherwise required by law, special meetings of stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption). Section 1.4. Notice of Meetings. 1.4.1. Notice of each meeting of stockholders, whether annual or special, shall be given at least 10 and not more than 60 days prior to the day thereof by the Secretary or any Assistant Secretary causing to be delivered or mailed to each stockholder of record entitled to vote at such meeting a written notice stating the time and place of the meeting and the purpose or purposes for which the meeting is called. Such notice shall be signed by the Chairman of the Board, the Vice Chairman of the Board, the President, the Secretary or any Assistant Secretary and shall be delivered or mailed postage prepaid to each stockholder at such stockholder's address as it appears on the stock books of the Corporation. If any stockholder has failed to supply an address, notice shall be deemed to have been given if mailed to the address of the principal office of the Corporation, or published at least once in a newspaper having general circulation in the county in which the principal office is located. 1.4.2. It shall not be necessary to give any notice of the adjournment of or the business to be transacted at an adjourned meeting other than by announcement at the meeting at which such adjournment is taken; provided that when a meeting is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. Section 1.5. Consent by Stockholders. Any action required or permitted to be taken by the stockholders of the Corporation must be effected at an annual or special meeting of stockholders of the Corporation, and no action required to be taken or that may be taken at any annual or special meeting of stockholders of the Corporation may be taken without a meeting except by the unanimous written consent of all stockholders entitled to vote on such action, and the power of stockholders to consent in writing to the taking of any action by less than unanimous consent of all such stockholders is specifically denied. Section 1.6. Quorum. 1.6.1. The presence in person or by proxy of the persons entitled to vote a majority of the voting stock at any meeting constitutes a quorum for the transaction of business. Particular shares of stock shall not be counted in determining the number of shares of stock represented or required for a quorum or in any vote at a meeting, if voting of such shares at the meeting has been enjoined or for any reason such shares cannot be lawfully voted at the meeting. 1.6.2. The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. 1.6.3. In the absence of a quorum, the holders of a majority of the shares of stock present in person or by proxy and entitled to vote may adjourn any meeting from time to time, but not for a period of more than 30 days at any one time, until a quorum shall attend. Section 1.7. Voting Rights. 1.7.1 Except as otherwise provided by law or by or pursuant to the Articles of Incorporation or any amendment thereto, every stockholder of record of the Corporation entitled to vote shall be entitled at each meeting of the stockholders to one vote for each share of stock standing in such stockholder's name on the books of the Corporation. Except as otherwise provided by law or by the Articles of Incorporation or any amendment thereto, or by these By-Laws, if a quorum is present, the vote of the holders of a majority of votes cast on a particular matter shall be binding upon all stockholders of the Corporation. 1.7.2. The Board of Directors may designate a day not more than 60 days prior to any meeting of the stockholders as the day as of which stockholders entitled to notice of and to vote at such meeting shall be determined. Section 1.8. Proxies. Every stockholder entitled to vote or to execute consents may do so either in person or by written proxy executed in accordance with the provisions of the Private Corporation Law of the State of Nevada and filed with the Secretary of the Corporation. Section 1.9. Manner of Conducting Meetings. To the extent not in conflict with the provisions of law relating thereto, the Articles of Incorporation or any amendment thereto, or these By-Laws, meetings shall be conducted pursuant to such rules as may be adopted by the chairman presiding at, or the holders of a majority of the shares of stock represented at, the meeting. Section 1.10. Business Brought Before Meetings. At any annual meeting of stockholders, only such business shall be conducted as shall have been brought before the meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who is entitled to vote with respect thereto and who complies with the notice procedures set forth in this Section 1.10. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered or mailed by first class United States mail, postage pre-paid, to the Secretary of the Corporation not less than 90 days in advance of the annual meeting. A stockholder's notice to the Secretary shall set forth as to each matter such stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the books of the Corporation, of the stockholder of the Corporation proposing such business, (iii) the class and number of shares of the capital stock of the Corporation that are beneficially owned by such stockholder and (iv) any material interest of such stockholder in such business. Notwithstanding anything in these By-Laws to the contrary, no business shall be brought before or conducted at an annual meeting except in accordance with the foregoing procedures. The officer of the Corporation or other person presiding over the annual meeting shall, if the facts so warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 1.10 and, if such person should so determine, such person shall so declare to the meeting and any such business so determined to be not properly brought before the meeting shall not be transacted. Except as otherwise provided in these By-Laws, at any special meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting by or at the direction of the Board of Directors. Section 1.11. Notice of Nominations. Nominations for the election of directors may be made by the Board of Directors or by any stockholder entitled to vote for the election of directors. A notice of the intent of a stockholder to make any such nomination shall be made in writing, delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the Corporation not less than 90 days in advance of the annual meeting or, in the event of a special meeting of stockholders for the election of directors, such notice shall be delivered or mailed to the Secretary of the Corporation not later than the close of business on the seventh day following the day on which notice of the meeting is first mailed to stockholders. Every such notice by a stockholder shall set forth (i) the name and address, as they appear on the books of the Corporation, of the stockholder of the Corporation who intends to make the nomination, (ii) the class and number of shares of the capital stock of the Corporation that are beneficially owned by such stockholder and a representation that the stockholder intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, (iii) a description of all arrangements or understandings among the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder, (iv) such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board of Directors, and (v) the consent of each nominee to serve as director of the Corporation if so elected. Any nomination not made in accordance with the foregoing procedure shall be disregarded. ARTICLE II DIRECTORS - MANAGEMENT Section 2.1. Powers. Subject to any limitation contained in the laws of the State of Nevada, the Articles of Incorporation or any amendment thereto, or these By-Laws, or as to action to be authorized or approved by the stockholders, all corporate powers shall be exercised by or under authority of, and the business and affairs of this Corporation shall be controlled by, the Board of Directors. Section 2.2. Number and Qualification. The number of directors which shall constitute the whole Board of Directors shall be not less than three nor more than 21, except in the case of any increase in the number of directors by reason of any provision entitling the holders of any one or more series or class of preferred stock of the Corporation, voting as a class, to elect additional directors in specified circumstances. The number of directors shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption). All directors shall be at least 18 years of age and at least a majority of them shall be citizens of the United States. Section 2.3. Classes of Directors and Term of Office. 2.3.1. The directors (exclusive of directors who may be elected by the holders of one or more classes or series of preferred stock) shall be divided into three classes, as nearly equal in number as possible. Except as provided in Article FIFTH of the Articles of Incorporation fixing the terms for the initial classified board, each class of directors shall be elected for a term of three years. In the event of vacancy, either by death, resignation, or removal of a director, or by reason of an increase in the number of directors, each replacement or new director shall serve for the balance of the term of the class of the director he or she succeeds or, in the event of an increase in the number of directors, of the class to which he or she is assigned. All directors elected for a term shall continue in office until the election and qualification of their respective successors, their death, their resignation in accordance with Section 2.6, their removal in accordance with Section 2.5, or if there has been a reduction in the number of directors and no successor is to be elected, until the end of the term. 2.3.2. Directors elected by holders of preferred stock of the Corporation voting as a class shall not be members of any of the foregoing classes and shall hold office until the next annual meeting of stockholders unless the terms of the series or class of preferred stock of the Corporation provides otherwise. Section 2.4. Election of Directors. 2.4.1. At each annual meeting of stockholders, the class of directors to be elected at the meeting shall be chosen by a plurality of the votes cast by the holders of shares entitled to vote in the election at the meeting, provided a quorum is present. The election of directors by the stockholders shall be by written ballot if directed by the chairman of the meeting or if the number of nominees exceeds the number of directors to be elected. 2.4.2. Any vacancy on the Board of Directors shall be filled by the affirmative vote of a majority of the remaining directors, or a sole remaining director, though less than a quorum. 2.4.3. If the holders of Preferred Stock voting as a class are entitled to elect directors, those directors shall be elected by a plurality of the votes cast by the holders of shares of preferred stock of the Corporation entitled to vote voting separately as a class. Section 2.5. Removal of Directors. Any director, other than a director elected by holders of preferred stock of the Corporation voting as a class, may be removed from office at any time but only upon the affirmative vote of the holders of at least 66-2/3% of the voting power of all of the then-outstanding shares of voting stock of the Corporation, voting together as a single class. Section 2.6. Resignations Any director of the Corporation may resign at any time either by oral tender of resignation at any meeting of the Board of Directors or by giving written notice thereof to the Chairman of the Board, the Vice Chairman of the Board, the President or the Secretary of the Corporation. Such resignation shall take effect at the time it specifies, and the acceptance of such resignation shall not be necessary to make it effective. Section 2.7. Place of Meetings. Meetings of the Board of Directors shall be held at the principal office of the Corporation or at such other place within or without the State of Nevada as may be designated for that purpose by the Board of Directors. Section 2.8. Meetings After Annual Stockholders' Meeting. The first meeting of the Board of Directors held after the annual stockholders' meeting shall be held at such time and place within or without the State of Nevada as shall be fixed by announcement of the Chairman of the Board, the Vice Chairman of the Board or the President of the Corporation given at the annual stockholders' meeting, and no other notice of such meeting shall be necessary, provided a majority of the whole Board shall be present. Alternatively, such meeting may be held at such time and place as shall be fixed pursuant to notice given under other provisions of these By-Laws. Section 2.9. Other Regular Meetings. 2.9.1. Regular meetings of the Board of Directors shall be held at such time and place within or without the State of Nevada as may be agreed upon from time to time by the Board. 2.9.2. No notice need be given of regular meetings, except that a written notice shall be given to each director of the resolution establishing specific meeting dates or regular meetings dates, which notice shall set forth the day of the month, the time, and the place of the meetings. Section 2.10. Special Meetings Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board, the Vice Chairman of the Board or the President of the Corporation or any two other directors, except that when the Board of Directors consists of one director, then the one director may call a special meeting. Notice of any such meeting shall be mailed to each director not later than three days before the day on which the meeting is to be held, or shall be sent to him or her by telegraph, or delivered personally or by telephone, not later than midnight of the day before the day of the meeting. Any meeting of the Board of Directors shall be a legal meeting, without any notice thereof having been given, if each director consents to the holding thereof or waives notice in the manner specified in Section 2.11. Except as otherwise provided in these By-Laws or as may be indicated in the notice thereof, any and all business may be transacted at any special meeting. Section 2.11. Waiver of Notice. Anything herein to the contrary notwithstanding, notice of any meeting of directors shall not be required as to any director who shall waive notice in writing (including telex, facsimile telephonic transmission, telegram, cablegram or radiogram) before or after such meeting, which waiver shall be filed with the Secretary of the Corporation. Attendance of a director at a meeting shall be deemed equivalent to a written waiver of notice of such meeting if such director's oral consent is entered in the minutes or such director takes part in the deliberations thereat without objection. Section 2.12. Notice of Adjournment. Notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place is fixed at the meeting adjourned. Section 2.13. Quorum. A majority of the number of directors as fixed by the Articles of Incorporation or any amendment thereto, or these By- Laws, shall be necessary to constitute a quorum for the transaction of business, and the action of a majority of the directors present at any meeting at which there is a quorum, when duly assembled, is valid as a corporate act; provided, that a minority of the directors, in the absence of a quorum, may adjourn from time to time or fill vacant directorships in accordance with Section 2.4 but may not transact any other business. When the Board of Directors consists of one or two directors, then the one or two directors, respectively, shall constitute a quorum. Section 2.14. Action by Unanimous Written Consent. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if all members of the Board shall individually or collectively consent in writing thereto. Such written consent shall be filed with the minutes of the proceedings of the Board and shall have the same force and effect as a unanimous vote of such directors. Section 2.15. Compensation. The directors may be paid their expenses of attendance at each meeting of the Board of Directors. Additionally, the Board of Directors may from time to time, in its discretion, pay to directors either or both a fixed sum for attendance at each meeting of the Board of Directors or a stated salary for services as a director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like reimbursement and compensation for attending committee meetings. Section 2.16. Transactions Involving Interests of Directors. In the absence of fraud, no contract or other transaction of the Corporation shall be affected or invalidated by the fact that any of the directors of the Corporation are in any way interested in, or connected with, any other party to, such contract or transaction, provided that such transaction satisfies the applicable provisions of the Private Corporation Law of the State of Nevada; and each and every person who may become a director of the Corporation is hereby relieved, to the extent permitted by law, from any liability that might otherwise exist from contracting in good faith with the Corporation for the benefit of himself or herself or any person in which he or she may be in any way interested or with which he or she may be in any way connected. Any director of the Corporation may vote and act upon any matter, contract or transaction between the Corporation and any other person without regard to the fact that he or she is also a stockholder, director or officer of, or has any interest in, such other person. ARTICLE III OFFICERS Section 3.1. Executive Officers. The executive officers of the Corporation shall be a Chief Executive Officer (who may be the Chairman of the Board, the Vice Chairman of the Board or the President), a Deputy Chief Executive Officer (who may be the Chairman of the Board, the Vice Chairman of the Board or the President), a President, one or more Executive Vice Presidents, one or more Senior Vice Presidents, a Secretary and a Treasurer. Any person may hold two or more offices. The executive officers of the Corporation shall be elected annually by the Board of Directors and shall hold office for one year or until their respective successors shall be elected and shall qualify. Section 3.2. Appointed Officers: Titles. 3.2.1. The Chief Executive Officer or a person designated by such officer, or the Secretary in the case of Assistant Secretaries or the Treasurer in the case of Assistant Treasurers, may appoint one or more Assistant Secretaries or one or more Assistant Treasurers, each of whom shall hold such title at the pleasure of the appointing officer, have such authority and perform such duties as are provided in these By-Laws, or as the Chief Executive Officer or other appointing officer may determine from time to time. Any person appointed under this Section 3.2.1 to serve in any of the foregoing positions shall be deemed by reason of such appointment or service in such capacity to be an "officer" of the corporation. 3.2.2. The Chief Executive Officer or a person designated by such officer may also appoint one or more vice presidents and one or more assistant vice presidents for each corporate staff function and a corporate controller and one or more assistant controllers. Each of such persons will hold such title at the pleasure of the Chief Executive Officer and have authority to act for and shall perform duties with respect to only the staff function for which the person is appointed. Any person appointed under this Section 3.2.2 to serve in any of the foregoing positions shall not be deemed by reason of such appointment or service in such capacity to be an "officer" of the Corporation. Section 3.3. Removal and Resignation. 3.3.1. Any officer may be removed, either with or without cause, by a majority of the directors at the time in office, at any regular or special meeting of the Board. Any appointed person may be removed from such position at any time by the person making such appointment or such person's successor. 3.3.2. Any officer may resign at any time, by giving written notice to the Board of Directors, the Chief Executive Officer, the Deputy Chief Executive Officer, the President or the Secretary of the Corporation. Any such resignation shall take effect at the date of the receipt of such notice, or at any later time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 3.4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these By-Laws for regular appointments to such office. Section 3.5. Chairman of the Board and Vice Chairman of the Board. The Chairman of the Board shall preside at all meetings of the Board of Directors and shall exercise and perform such other powers and duties as may be from time to time assigned to him or her by the Board of Directors or these By-Laws. The Vice Chairman of the Board shall, in the absence of the Chairman, preside at all meetings of the Board of Directors and shall exercise and perform such other powers and duties as may be from time to time assigned to him or her by the Board of Directors or these By-Laws. Section 3.6. Chief Executive Officer. The Chief Executive Officer shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and affairs of the Corporation. The Chief Executive Officer shall preside at all meetings of the stockholders and, in the absence of the Chairman of the Board and the Vice Chairman of the Board, at all meetings of the Board of Directors. The Chief Executive Officer shall be ex officio a member of the Executive Committee and shall have the general powers and duties of management usually vested in the office of chief executive officer of a corporation and such other powers and duties as may be prescribed by the Board of Directors or these By-Laws. Section 3.7. Deputy Chief Executive Officer. In the absence or disability of the Chief Executive Officer, the Deputy Chief Executive Officer shall perform all of the duties of the Chief Executive Officer and when so acting shall have all the powers and be subject to all the restrictions upon the Chief Executive Officer, including the power to sign all instruments and to take all actions which the Chief Executive Officer is authorized to perform by the Board of Directors or these By-Laws. The Deputy Chief Executive Officer shall have such other powers and duties as may be prescribed by the Chief Executive Officer or the Board of Directors or these By-Laws. Section 3.8. President. In the absence or disability of the Chief Executive Officer and Deputy Chief Executive Officer, the President shall perform all of the duties of the Chief Executive Officer and when so acting shall have all the powers and be subject to all the restrictions upon the Chief Executive Officer, including the power to sign all instruments and to take all actions which the Chief Executive Officer is authorized to perform by the Board of Directors or these By-Laws. The President shall have the general powers and duties usually vested in the office of president of a corporation and such other powers and duties as may be prescribed by the Chief Executive Officer, the Deputy Chief Executive Officer or the Board of Directors or these By-Laws. Section 3.9. Executive Vice President, Senior Vice President and Vice President. In the absence or disability of the Chief Executive Officer, the Deputy Chief Executive Officer and the President, an Executive Vice President or a Senior Vice President in the order of his or her rank and seniority shall perform all of the duties of the Chief Executive Officer, and when so acting shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer, including the power to sign all instruments and to take all actions which the Chief Executive Officer is authorized to perform by the Board of Directors or these By-Laws. The Executive Vice Presidents, Senior Vice Presidents and Vice Presidents shall have the general powers and duties usually vested in the office of a vice president of a corporation and each of them shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, the Executive Committee of the Board of Directors, the Chief Executive Officer or these By-Laws. Section 3.10. Secretary and Assistant Secretaries. 3.10.1. The Secretary shall (1) attend all meetings of the Board of Directors and all meetings of the stockholders; and (2) record and keep, or cause to be kept, all votes and the minutes of all proceedings in a book or books to be kept for that purpose at the principal office of the Corporation, or at such other place as the Board of Directors may from time to time determine, specifying therein (i) the time and place of holding, (ii) whether regular or special, and if special, how authorized, (iii) the notice thereof given, (iv) the names of those present at directors' meetings, (v) the number of shares of stock the holders of which are present or represented at stockholders' meetings, and (vi) the proceedings thereof; and (3) perform like duties for the Executive and other standing committees, when required. In addition, the Secretary shall keep or cause to be kept, at the principal office of the Corporation in the State of Nevada, those documents required to be kept thereat by Section 5.2 of these By-Laws and the applicable provisions of the Private Corporation Law of the State of Nevada. 3.10.2. The Secretary shall give, or cause to be given, notice of meetings of the stockholders and special meetings of the Board of Directors, and shall have such other powers and perform such other duties as may be prescribed by these By-Laws or by the Board of Directors or the Chief Executive Officer, the Deputy Chief Executive Officer or the President, under whose supervision he or she shall be. The Secretary shall keep in safe custody the seal of the Corporation and affix the same to any instrument requiring it, and when so affixed, it shall be attested by his or her signature or by the signature of the Treasurer or an Assistant Secretary. The Secretary is hereby authorized to issue certificates, to which the corporate seal may be affixed, attesting to the incumbency of officers of this Corporation or to action duly taken by the Board of Directors or any committee thereof or the stockholders. 3.10.3. The Assistant Secretaries, in the order of their seniority, shall in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary, and shall perform such other duties as the Chief Executive Officer, the Deputy Chief Executive Officer or the President or the Secretary shall prescribe. Section 3.11. Treasurer and Assistant Treasurers. 3.11.1. The Treasurer shall deposit all moneys and other valuables in the name, and to the credit, of the Corporation, with such depositories as may be ordered by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the Chief Executive Officer, the Deputy Chief Executive Officer or the President or directors, whenever they request it, and an account of all his or her transactions as Treasurer, and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by these By-Laws or by the Board of Directors or the Chief Executive Officer, the Deputy Chief Executive Officer or the President, under whose supervision he or she shall be. 3.11.2. The Assistant Treasurers, in the order of their seniority, shall in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer, and shall perform such other duties as the Chief Executive Officer, the Deputy Chief Executive Officer or the President or the Treasurer shall prescribe. Section 3.12. Additional Powers, Seniority and Substitution of Officers. In addition to the foregoing powers and duties specifically prescribed for the respective officers, the Board of Directors may from time to time by resolution (i) impose or confer upon any of the officers such additional duties and powers as the Board of Directors may see fit, (ii) determine the order of seniority among the officers, and/or (iii) except as otherwise provided above, provide that in the absence of any officer or officers, any other officer or officers shall substitute for and assume the duties, powers and authority of the absent officer or officers. Any such resolution may be final, subject only to further action by the Board of Directors, or the resolution may grant such discretion, as the Board of Directors deems appropriate, to the Chief Executive Officer (or in his or her absence the executive officer serving in his or her place) to impose or confer additional duties and powers, to determine the order of seniority among officers, and/or provide for substitution of officers as above described. Section 3.13. Compensation. The officers of the Corporation shall receive such compensation as shall be fixed from time to time by the Board of Directors. No officer shall be prohibited from receiving such salary by reason of the fact that such officer is also a director of the Corporation. Section 3.14. Transaction Involving Interest of Officer. In the absence of fraud, no contract or other transaction of the Corporation shall be affected or invalidated by the fact that any of the officers of the Corporation are in any way interested in, or connected with, any other party to such contract or transaction, or are themselves parties to such contract or transaction, provided that such transaction complies with the applicable provisions of the Private Corporation Law of the State of Nevada; and each and every person who is or may become an officer of the Corporation is hereby relieved, to the extent permitted by law, when acting in good faith, from any liability that might otherwise exist from contracting with the Corporation for the benefit of such officer or any person in which he or she may be in any way interested or with which he or she may be in any way connected. ARTICLE IV EXECUTIVE AND OTHER COMMITTEES Section 4.1. Standing. The Board of Directors shall appoint an Executive Committee, an Audit Committee and a Compensation Committee, consisting of such number of its members as it may designate, consistent with the laws of the State of Nevada, the Articles of Incorporation or any amendment thereto, or these By-Laws, including, if deemed desirable, alternate members who, in the order specified by the Board of Directors, may replace any absent or disqualified member at any meeting of the Committee. 4.1.1. The Executive Committee shall have and may exercise, when the Board is not in session, all of the powers of the Board of Directors in the management of the business and affairs of the Corporation, but the Executive Committee shall not have the power to fill vacancies on the Board, or to change the membership of or to fill vacancies in the Executive Committee or any other Committee of the Board, or to adopt, amend or repeal the By-Laws, or to declare dividends. 4.1.2. The Audit Committee shall select and engage on behalf of the Corporation, and fix the compensation of, a firm of certified public accountants whose duty it shall be to audit the books and accounts of the Corporation and its subsidiaries for the fiscal year in which they are appointed, and who shall report to such Committee. The Audit Committee shall confer with the auditors and shall determine, and from time to time shall report to the Board of Directors upon, the scope of the auditing of the books and accounts of the Corporation and its subsidiaries. The Audit Committee shall also be responsible for determining that the business practices and conduct of employees and other representatives of the Corporation and its subsidiaries comply with the policies and procedures of the Corporation. A majority of the members of the Audit Committee shall not be officers or employees of the Corporation or any of its subsidiaries. 4.1.3.1. The Compensation Committee shall establish a general compensation policy for the Corporation and shall have responsibility for the approval of increases in directors' fees and in salaries paid to officers and senior employees earning in excess of an annual salary to be determined by the Committee. The Compensation Committee also shall evaluate and make recommendations to the Board of Directors with respect to the adoption, substantive modification to or termination of any benefit plan of this Corporation, and with respect to employee benefit plans of the Corporation shall have such additional responsibilities as are described in Section 4.1.3.2 hereof. None of the members of the Compensation Committee shall be officers or employees of the Corporation or any of its subsidiaries. 4.1.3.2. To assist the Corporation in fulfilling its business goals the Board of Directors may from time to time establish or adopt those benefit plans, which it shall designate as constituting a Level 1 plan (which designation generally shall connote a compensatory plan in which participation is designed solely for directors or senior management employees, or involves stock of this Corporation, or is an incentive compensation plan that includes senior management) or as constituting a Level 2 plan (which designation generally shall connote a compensatory plan which is a savings plan or a corporate-wide capital accumulation plan in which participation is broader than senior management employees). The Board of Directors may modify or terminate any such plan; provided, however, the Compensation Committee is authorized to take action to adopt non-substantive amendments to any Level 1 or Level 2 plan as it deems necessary or appropriate, unless such plan involves the issuance of capital stock of the Corporation. The Chief Executive Officer, or his designee, may take any and all actions to establish or adopt any Level 3 plan (which would include medical plans, dental plans, insurance plans, welfare plans and other benefit plans and any other plan which is not a Level 1 or Level 2 plan) which he deems necessary or convenient to the management of the Corporation, or to modify or terminate such Level 3 plan, so long as such action is not primarily for the benefit of directors or senior management employees of the Corporation, either individually or collectively. Notwithstanding the foregoing, the Compensation Committee shall be responsible for the control and management of the operation and administration (which shall exclude ministerial activities) of the benefit plans of the Corporation, subject to the limitations of this Section. The Compensation Committee shall be responsible for the control and management of the operation and administration (which shall exclude ministerial activities) of those plans designated by the Board of Directors as Level 1 plans. The Compensation Committee's responsibilities with respect to the control and management of the operation and administration (which shall exclude ministerial activities) of those plans designated by the Board of Directors as Level 2 plans, shall be limited to the appointment of members of any committee as may be constituted as under such plans, and such periodic oversight as the Compensation Committee deems prudent under the circumstances then prevailing in order to evaluate the prudence of the continued appointment of such members. The Compensation Committee shall have no responsibility with respect to the control and management of the operation and administration of any Level 3 plan. Section 4.2. Other Committees. Subject to any limitations in the laws of the State of Nevada, the Articles of Incorporation or any amendment thereto, or these By-Laws as to action to be authorized or approved by the stockholders, or duties not delegable by the Board of Directors, any or all of the corporate powers may be exercised by or under authority of, and the business and affairs of this Corporation may be controlled by, such other committee or committees as may be appointed by the Board of Directors. The powers to be exercised by any such committee shall be designated by the Board of Directors. Section 4.3. Procedures. Subject to any limitations in the laws of the State of Nevada, the Articles of Incorporation or any amendment thereto, or these By-Laws regarding the conduct of business by the Board of Directors and its appointed committees, any committee created under this Article may use any procedures for conducting its business and exercising its powers, including but not limited to actions by the unanimous written consent of its members in the manner set forth in Section 2.14. A majority shall constitute a quorum unless the Committee consists of one or two directors, then the one or two directors, respectively, shall constitute a quorum. Notices of meetings may be in any reasonable manner and may be waived as for meetings of directors. ARTICLE V CORPORATE RECORDS AND REPORTS - INSPECTION Section 5.1. Records. The Corporation shall maintain adequate and correct accounts, books and records of its business and properties. All of such books, records and accounts shall be kept at its principal place of business in the State of Washington as fixed by the Board of Directors from time to time. Section 5.2. Articles, By-Laws and Stock Ledger. The Corporation shall maintain and keep the following documents at its principal place of business in the State of Nevada: (i) a certified copy of the Articles of Incorporation and all amendments thereto; (ii) a certified copy of the By-Laws and all amendments thereto; and (iii) a statement setting forth the following: "The Secretary of the Corporation, whose address is 1148 Broadway Plaza, Tacoma, Washington 98401-2264, is the custodian of the duplicate stock ledger of the Corporation." Section 5.3. Inspection. Any person who has been a stockholder of record for at least six months immediately preceding such stockholder's demand, or any person holding, or thereunto authorized in writing by the holders of, at least five percent of all of the Corporation's outstanding stock, upon at least five days' written demand, or any judgment creditor without prior demand, shall have the right to inspect in person or by agent or attorney, during usual business hours, the duplicate stock ledger of the Corporation and to make extracts therefrom; provided, however, that such inspection may be denied to any stockholder or other person upon his or her refusal to furnish to the Corporation an affidavit that such inspection is not desired for a purpose which is in the interest of a business or object other than the business of the Corporation and that he or she has not at any time sold or offered for sale any list of stockholders of any corporation or aided or abetted any person in procuring any such record of stockholders for any such purpose. Section 5.4. Checks, Drafts, Etc. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of, or payable to, the Corporation, shall be signed or endorsed by such person or persons, and in such manner as shall be determined from time to time by resolution of the Board of Directors. ARTICLE VI OTHER AUTHORIZATIONS Section 6.1. Execution of Contracts. The Board of Directors, except as these By-Laws otherwise provide, may authorize any officer or officers or agent or agents to enter into any contract or execute any instrument in the name of and on behalf of the Corporation. Such authority may be general, or confined to specific instances. Unless so authorized by the Board of Directors, no officer, agent or employee shall have any power or authority, except in the ordinary course of business, to bind the Corporation by any contract or engagement or to pledge its credit, or to render it liable for any purpose or in any amount. Section 6.2. Representation of Other Corporations. All stock of any other corporation, standing in the name of the Corporation, shall be voted, represented, and all rights incidental thereto exercised as directed by written consent or resolution of the Board of Directors expressly referring thereto. In general, such rights shall be delegated by the Board of Directors under express instructions from time to time as to each exercise thereof to the Chief Executive Officer, the Deputy Chief Executive Officer, the President, any Executive Vice President, any Senior Vice President, any Vice President, the Treasurer or the Secretary of this Corporation, or any other person expressly appointed by the Board of Directors. Such authority may be exercised by the designated officers in person, or by any other person authorized so to do by proxy, or power of attorney, duly executed by such officers. Section 6.3. Dividends. The Board of Directors may from time to time declare, and the Corporation may pay, dividends on its outstanding stock in the manner and on the terms and conditions provided by the laws of the State of Nevada, and the Articles of Incorporation or any amendment thereto, subject to any contractual restrictions to which the Corporation is then subject. ARTICLE VII CERTIFICATES FOR TRANSFER OF STOCK Section 7.1. Certificates for Stock. 7.1.1. Certificates for stock shall be of such form and device as the Board of Directors may designate and shall be numbered and registered as they are issued. Each shall state the name of the record holder of the stock represented thereby; its number and date of issuance; the number of shares of stock for which it is issued; the par value; a statement of the rights, privileges, preferences and restrictions, if any; a statement as to rights of redemption or conversion, if any; and a statement of liens or restrictions upon transfer or voting, if any, or, alternatively, a statement that certificates specifying such matters may be obtained from the Secretary of the Corporation. 7.1.2. Every certificate for stock must be signed by the Chief Executive Officer, the Deputy Chief Executive Officer or the President and the Secretary or an Assistant Secretary, or must be authenticated by facsimile signatures of the Chief Executive Officer, the Deputy Chief Executive Officer or the President and the Secretary or an Assistant Secretary. Before it becomes effective, every certificate for stock authenticated by a facsimile or a signature must be countersigned by a transfer agent or transfer clerk, and must be registered by an incorporated bank or trust company, either domestic or foreign, as registrar of transfers. 7.1.3. Even though an officer who signed, or whose facsimile signature has been written, printed or stamped on a certificate for stock ceases, by death, resignation or otherwise, to be an officer of the Corporation before the certificate is delivered by the Corporation, the certificate shall be as valid as though signed by a duly elected, qualified and authorized officer, if it is countersigned by the signature or facsimile signature of a transfer agent or transfer clerk and registered by an incorporated bank or trust company, as registrar of transfers. 7.1.4. Even though a person whose signature as, or on behalf of, the transfer agent or transfer clerk has been written, printed or stamped on a certificate for stock ceases, by death, resignation or otherwise, to be a person authorized to so sign such certificate before the certificate is delivered by the Corporation, the certificate shall be deemed countersigned by the signature of a transfer agent or transfer clerk for purposes of meeting the requirements of this section. Section 7.2. Transfer on the Books. Upon surrender to the Secretary of the Corporation or transfer agent of the Corporation of a certificate for stock duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 7.3. Lost or Destroyed Certificates. The Board of Directors may direct, or may authorize the Secretary of the Corporation to direct, a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate for stock so lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors or Secretary may in its or his or her discretion, and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his or her legal representative, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. Section 7.4. Transfer Agents and Registrars. The Board of Directors may appoint one or more transfer agents or transfer clerks, and one or more registrars, who may be the same person, and may be the Secretary of the Corporation, or an incorporated bank or trust company, either domestic or foreign, who shall be appointed at such times and places as the requirements of the Corporation may necessitate and the Board of Directors may designate. Section 7.5. Fixing Record Date for Dividends, Etc. The Board of Directors may fix a time, not exceeding 60 days preceding the date fixed for the payment of any dividend or distribution, or for the allotment of rights, or when any change or conversion or exchange of stock shall go into effect, as a record date for the determination of the stockholders entitled to receive any such dividend or distribution, or any such allotment of rights, or to exercise the rights with respect to any such change, conversion, or exchange of stock, and, in such case, only stockholders of record on the date so fixed shall be entitled to receive such dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares of stock on the books of the Corporation after any record date fixed as aforesaid. Section 7.6. Record Ownership. The Corporation shall be entitled to recognize the exclusive right of a person registered as such on the books of the Corporation as the owner of shares of the Corporation's stock to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not the Corporation shall have express or other notice thereof, except as otherwise provided by law. ARTICLE VIII AMENDMENTS TO BY-LAWS Section 8.1. By Stockholders. Except as otherwise required by the provisions of the Articles of Incorporation or any amendments thereto and subject to the right of the Board of Directors to adopt, amend or repeal by-laws as provided in Section 8.2, new or restated by-laws may be adopted, or these By-Laws may be repealed or amended, at the annual stockholders' meeting or at any other meeting of the stockholders called for that purpose, by a vote of stockholders entitled to exercise a majority of the voting power of the Corporation. Section 8.2. By Directors. Except as otherwise required by the provisions of the Articles of Incorporation and subject to the right of the stockholders to adopt, amend, or repeal by-laws as provided in Section 8.1, the Board of Directors may adopt, amend, or repeal any of these By-Laws by the affirmative vote of a majority of the directors present at any organizational, regular or special meeting of the Board of Directors. This power may not be delegated to any committee appointed in accordance with these By- Laws. Section 8.3. Record of Amendments. Whenever an amendment or a new By-Law is adopted, it shall be copied in the book of minutes with the original By-Laws, in the appropriate place. If any By-Law is repealed, the fact of repeal, with the date of the meeting at which the repeal was enacted, or written assent was filed, shall be stated in said book. ARTICLE IX INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 9.1. Indemnification for Expenses in Proceedings. Each person who was or is a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that such person, or a person of whom such person is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action or inaction in an official capacity or in any other capacity while serving as a director, officer, employee, fiduciary or agent, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by the laws of Nevada, as the same exist or may hereafter be amended, against all costs, charges, expenses, liabilities and losses (including attorneys' fees, judgments, fines, employee benefit plan excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director, officer, employee, fiduciary or agent and shall inure to the benefit of such person's heirs, executors and administrators; provided, however, that except as provided in Section 9.2, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors. The right to indemnification conferred in this Article IX shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if so required by the Private Corporation Law of the State of Nevada, the payment of such expenses incurred by a director or officer in such person's capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to any employee benefit plan) in advance of the final disposition of a proceeding shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section 9.1 or otherwise. The Corporation may, by action of the Board, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers. Section 9.2. Right to Bring Suit for Unpaid Claims. If a claim under Section 9.1 is not paid in full by the Corporation within thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the Corporation shall also pay the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has failed to meet a standard of conduct which makes it permissible under Nevada law for the Corporation to indemnify the claimant for the amount claimed. Neither the failure of the Corporation (including the Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is permissible in the circumstances because he or she has met such standard of conduct, nor an actual determination by the Corporation (including the Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such standard of conduct, shall be a defense to the action or create a presumption that the claimant has failed to meet such standard of conduct. Section 9.3. Advancement of Expenses. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article IX shall not be exclusive of any other right which any person may have or hereafter acquire under any provision of law, the Articles of Incorporation or any amendment thereto, or these By-Laws, or of any agreement or vote of stockholders or disinterested directors, or otherwise. Section 9.4. Indemnification Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee, fiduciary or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under Nevada law. Section 9.5. Indemnification Expenses of Witnesses. To the extent that any director, officer, employee, fiduciary or agent of the Corporation is by reason of such position, or a position with another entity at the request of the Corporation, a witness in any action, suit or proceeding, the Corporation shall indemnify such person against all costs and expenses actually and reasonably incurred by such person or on such person's behalf in connection therewith. Section 9.6. Indemnification Agreements. The Corporation may enter into agreements with any director, officer, employee, fiduciary or agent of the Corporation providing for indemnification to the full extent permitted by Nevada law. Section 9.7. Severability. If any provision of this Article IX shall for any reason be determined to be invalid, the remaining provisions hereof shall not be affected thereby but shall remain in full force and effect. Section 9.8. Federal Election Campaign Act. The rights provided by this Article IX shall be applicable to the officers (including without limitation the Chief Executive Officer, the Deputy Chief Executive Officer, the President, the Treasurer and any Assistant Treasurer) appointed from time to time by the Chief Executive Officer or the Treasurer of the Corporation or the designee of either of them to serve in the administration and management of any separate, segregated fund established for purposes of collecting and distributing voluntary employee political contributions to federal election campaigns pursuant to the Federal Election Campaign Act of 1971, as amended. ARTICLE X CORPORATE SEAL The Corporate Seal shall be circular in form and shall have inscribed thereon the name of the Corporation, and the date of its incorporation, and the word "Nevada". ARTICLE XI INTERPRETATION Reference in these By-Laws to any provision of the Private Corporation Law of the State of Nevada shall be deemed to include all amendments thereto and the effect of the construction and determination of validity thereof by the Nevada Supreme Court. EX-4.14 3 Exhibit 4.14 AGREEMENT CONCERNING PURCHASE BY NME PROPERTIES CORP. AND CERTAIN SUBSIDIARIES OF SERIES D PREFERRED STOCK OF THE HILLHAVEN CORPORATION This Agreement is made and dated as of September 1, 1993, among National Medical Enterprises, Inc., a Nevada corporation ("NME"), NME Properties Corp., a Tennessee corporation ("NMEP Corp."), NME Properties, Inc., a Delaware corporation ("NMEP Inc."), NME Properties West, Inc., a Delaware corporation ("NMEP West"), The Hillhaven Corporation, a Nevada corporation ("Hillhaven") and First Healthcare Corporation, a Delaware corporation ("First Healthcare"). NMEP Corp., NMEP Inc. and NMEP West are sometimes herein referred to collectively as the "NMEP Entities." RECITALS A. As part of the January, 1990 spinoff by NME to its shareholders of shares of Hillhaven, First Healthcare, a wholly- owned subsidiary of Hillhaven, delivered to NMEP Corp., a wholly- owned subsidiary of NME, a promissory note dated as of January 31, 1990, in the original principal amount of $127,300,000.00, which amount subsequently was adjusted (as reflected in the addendum thereto) to reflect the actual adjusted principal amount of $135,859,396.00. Such promissory note, as adjusted, and as amended by that certain First Amendment to Promissory Note, dated as of May 1, 1991, is referred to herein as the "FHC Promissory Note." As of the Closing Date (as defined in Section 3 herein), the outstanding balance of the FHC Promissory Note, including unpaid accrued interest thereon is $49,072,836.93. B. Pursuant to that certain Note Guarantee Agreement, dated as of January 31, 1990 (the "Note Guarantee Agreement"), Hillhaven has guarantied First Healthcare's obligations under the FHC Promissory Note. C. Pursuant to that certain letter agreement dated May 31, 1990, as amended by that certain Amendment No. One to Commitment Letter dated as of May 1, 1991, First Healthcare has borrowed from NMEP West the sum of $6,000,000.00, which loan is evidenced by a promissory note dated July 20, 1992, in favor of NMEP West, and is secured by a mortgage on the facility known as Clayton House (Facility No. 445) (the "Clayton House Note"). As of the Closing Date, the outstanding balance of the Clayton House Note, including unpaid accrued interest thereon, is $5,911,097.51. D. In connection with First Healthcare's purchase of Greenbriar Terrace (Facility No. 592), NMEP Corp. provided a loan to First Healthcare in the original sum of $1,452,626.42, evidenced by promissory note and secured by a mortgage against the real property (the "Greenbriar Note"). As of the Closing Date, the outstanding balance of the Greenbriar Note, including unpaid accrued interest thereon, is $969,110.79. E. In connection with First Healthcare's purchase of Birchwood Terrace (Facility No. 559), NMEP, Inc. provided a loan to First Healthcare in the original sum of $893,194.45, evidenced by a promissory note and secured by a mortgage against the real property (the "Birchwood Note"). As of the Closing Date, the outstanding balance of the Birchwood Note, including unpaid accrued interest thereon, is $647,522.06. F. On the terms and subject to the conditions set forth in this Agreement, NME Properties desires to purchase from Hillhaven, and Hillhaven desires to sell to the NMEP Entities, 120,000 shares of Hillhaven's Series D Preferred Stock (the "Series D Preferred"), which Series D Preferred shall have the rights and preferences specified in that certain Certificate of Designation, Preferences and Rights of Series D Preferred Stock of Hillhaven (the "Certificate of Designation"), a copy of which is attached hereto as Exhibit A, for consideration of $120,000,000.00. NOW, THEREFORE, in consideration of the foregoing Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: AGREEMENT 1. Purchase of Series D Preferred. The NMEP Entities hereby agrees to purchase from Hillhaven, and Hillhaven hereby agrees to sell to the NMEP Entities, on the Closing Date, 120,000 shares of Series D Preferred for a purchase price of $120,000,000.00 (the "Purchase Price"), payable as provided in Section 3 below. 2. Representations and Warranties. (a) In order to induce the NMEP Entities and NME to enter into this Agreement and to consummate the transactions contemplated hereby, Hillhaven hereby covenants, represents and warrants to the NMEP Entities and NME that: (i) Hillhaven is duly organized, validly existing and in good standing under the laws of the State of Nevada. (ii) Hillhaven has the corporate power, authority and legal right to make, deliver and perform its obligations under this Agreement and the Series D Preferred and has taken all corporate action to authorize the execution, delivery and performance of this Agreement and the Series D Preferred. No consent of any other person (including, without limitation, stockholders and creditors of Hillhaven), and no authorization of, notice to or other act by or in respect of Hillhaven by, any governmental authority, agency or instrumentality is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement or the Series D Preferred. This Agreement has been duly executed and delivered by Hillhaven, each certificate evidencing shares of Series D Preferred has been duly executed and delivered by Hillhaven and each of this Agreement and each share of Series D Preferred constitutes a legal, valid and binding obligation of Hillhaven enforceable against Hillhaven in accordance with its terms. (iii) The execution, delivery and performance by Hillhaven of this Agreement and the Series D Preferred will not violate any provision of any existing law or regulation applicable to Hillhaven or any of its significant subsidiaries or of any award, order or decree applicable to Hillhaven or any of its significant subsidiaries of any court, arbitrator or governmental authority, or of the Articles of Incorporation or Bylaws of Hillhaven, or of any security issued by Hillhaven or any material mortgage, indenture, lease, contract or other agreement or undertaking to which Hillhaven is a party or by which Hillhaven or any of its properties or assets may be bound, and will not result in, or require, the creation or imposition of any lien on any of its or their respective properties or revenues pursuant to the provisions of any such mortgage, indenture, contract, lease or other agreement. Without limiting the generality of the foregoing, no material mortgage, indenture, lease, contract or other agreement or undertaking to which Hillhaven is a party or by which Hillhaven or any of its properties or assets may be bound prohibits or restricts Hillhaven from executing, delivering or performing its obligations hereunder or under the Series D Preferred or from declaring or paying the dividends contemplated by the Certificate of Designation, except for the Guarantee Reimbursement Agreement dated as of January 30, 1990 between NME and Hillhaven (as amended, the "Guarantee Reimbursement Agreement"), the provisions of which that so prohibit or restrict the payment or declaration of the dividends contemplated by the Certificate of Designation are being waived by NME pursuant to this Agreement. (iv) No litigation, investigation or proceeding of or before any arbitrator or governmental authority is pending or, to the knowledge of Hillhaven, threatened by or against Hillhaven or any of its subsidiaries or any of its or their respective properties or revenues (a) with respect to this Agreement or the Series D Preferred or any of the transactions contemplated hereby or thereby, or (b) which, if adversely determined, would have a material adverse effect on Hillhaven's ability to perform its obligations under this Agreement or the Series D Preferred. (v) Neither Hillhaven nor any of its significant subsidiaries is in default in any material respect under or with respect to any material contract, agreement or other instrument to which it is a party or by which it or its assets is bound. Except as would not have a material adverse effect on the business, operations, properties or financial condition of Hillhaven and its subsidiaries taken as a whole or on the ability of Hillhaven to perform its obligations under this Agreement and the Series D Preferred, Hillhaven is not in default under any order, award or decree of any court, arbitrator, or other governmental authority binding upon or affecting it or by which any of its assets is bound or affected. Hillhaven is not subject to any order, award or decree which would materially adversely affect the ability of Hillhaven to perform its obligations under any other order, award or decree or under this Agreement or the Series D Preferred. (vi) Hillhaven's guaranty referred to in Recital B above remains in full force and effect and continues to be a legal, valid and binding obligation of Hillhaven enforceable against Hillhaven in accordance with its terms. (vii) The Series D Preferred has been duly authorized and issued by Hillhaven. The holders of the Series D Preferred shall be entitled to all of the benefits of the Series D Preferred as described in the Certificate of Designation. Upon Hillhaven's receipt of the Purchase Price and its issuance of the 120,000 shares of Series D Preferred, such 120,000 shares of Series D Preferred will be fully paid and non-assessable and will not have been issued or delivered in violation of, or subject to, any preemptive rights or other rights of any person to subscribe for or purchase the Series D Preferred. (b) In order to induce the NMEP Entities and NME to enter into this Agreement and to consummate the transactions contemplated hereby, First Healthcare hereby covenants, represents and warrants to each of the NMEP Entities and NME that: (i) First Healthcare is duly organized, validly existing and in good standing under the laws of the State of Delaware. (ii) First Healthcare has the corporate power, authority and legal right to make, deliver and perform its obligations under this Agreement and has taken all corporate action to authorize the execution, delivery and performance of this Agreement. No consent of any other person (including, without limitation, stockholders and creditors of First Healthcare), and no authorization of, notice to or other act by or in respect of First Healthcare by, any governmental authority, agency or instrumentality is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement. This Agreement has been duly executed and delivered by First Healthcare and this Agreement constitutes a legal, valid and binding obligation of First Healthcare enforceable against First Healthcare in accordance with its terms. (iii) The execution, delivery and performance by First Healthcare of this Agreement will not violate any provision of any existing law or regulation applicable to First Healthcare or any of its significant subsidiaries or of any award, order or decree applicable to First Healthcare or any of its significant subsidiaries of any court, arbitrator or governmental authority, or of the Articles of Incorporation or Bylaws of First Healthcare, or of any security issued by First Healthcare or any material mortgage, indenture, lease, contract or other agreement or undertaking to which First Healthcare is a party or by which First Healthcare or any of its properties or assets may be bound, and will not result in, or require, the creation or imposition of any lien on any of its or their respective properties or revenues pursuant to the provisions of any such mortgage, indenture, contract, lease or other agreement. (iv) No litigation, investigation or proceeding of or before any arbitrator or governmental authority is pending or, to the knowledge of First Healthcare, threatened by or against First Healthcare or any of its subsidiaries or any of its or their respective properties or revenues (a) with respect to this Agreement or any of the transactions contemplated hereby, or (b) which, if adversely determined, would have a material adverse effect on First Healthcare's ability to perform its obligations under this Agreement. (v) Neither First Healthcare nor any of its significant subsidiaries is in default in any material respect under or with respect to any material contract, agreement or other instrument to which it is a party or by which it or its assets is bound. Except as would not have a material adverse effect on the business, operations, properties or financial condition of First Healthcare and its subsidiaries taken as a whole or on the ability of First Healthcare to perform its obligations under this Agreement, First Healthcare is not in default under any order, award or decree of any court, arbitrator, or other governmental authority binding upon or affecting it or by which any of its assets is bound or affected. First Healthcare is not subject to any order, award or decree which would materially adversely affect the ability of First Healthcare to perform its obligations under this Agreement. (vi) Each of the FHC Promissory Note, the Clayton House Note, the Greenbriar Note, and the Birchwood Note remains in full force and effect and continues to be a legal, valid and binding obligation of First Healthcare, enforceable against First Healthcare in accordance with its terms. First Healthcare is current in the payment and performance of its obligations under, and has not assigned its interests in any of, the FHC Promissory Note, the Clayton House Note, the Greenbriar Note, and the Birchwood Note. (c) In order to induce Hillhaven and First Healthcare to enter into this Agreement and to consummate the transactions contemplated hereby, NME hereby covenants, represents and warrants to Hillhaven and First Healthcare that: (i) NME is duly organized, validly existing and in good standing under the laws of the State of Nevada. (ii) NME has the corporate power, authority and legal right to make, deliver and perform its obligations under this Agreement and has taken all corporate action to authorize the execution, delivery and performance of this Agreement. No consent of any other person (including, without limitation, stockholders and creditors of NME), and no authorization of, notice to or other act by or in respect of NME by, any governmental authority, agency or instrumentality is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement. This Agreement has been duly executed and delivered by NME and this Agreement constitutes a legal, valid and binding obligation of NME enforceable against NME in accordance with its terms. (iii) The execution, delivery and performance by NME of this Agreement will not violate any provision of any existing law or regulation applicable to NME or any of its significant subsidiaries or of any award, order or decree applicable to NME or any of its significant subsidiaries of any court, arbitrator or governmental authority, or of the Articles of Incorporation or Bylaws of NME, or of any security issued by NME or any material mortgage, indenture, lease, contract or other agreement or undertaking to which NME is a party or by which NME or any of its properties or assets may be bound, and will not result in, or require, the creation or imposition of any lien on any of its or their respective properties or revenues pursuant to the provisions of any such mortgage, indenture, contract, lease or other agreement. (iv) No litigation, investigation or proceeding of or before any arbitrator or governmental authority is pending or, to the knowledge of NME, threatened by or against NME or any of its subsidiaries or any of its or their respective properties or revenues (a) with respect to this Agreement or any of the transactions contemplated hereby, or (b) which, if adversely determined, would have a material adverse effect on NME's ability to perform its obligations under this Agreement. (v) Neither NME nor any of its significant subsidiaries is in default in any material respect under or with respect to any material contract, agreement or other instrument to which it is a party or by which it or its assets is bound. Except as would not have a material adverse effect on the business, operations, properties or financial condition of NME and its subsidiaries taken as a whole or on the ability of NME to perform its obligations under this Agreement, NME is not in default under any order, award or decree of any court, arbitrator, or other governmental authority binding upon or affecting it or by which any of its assets is bound or affected. NME is not subject to any order, award or decree which would materially adversely affect the ability of NME to perform its obligations under this Agreement. (d) In order to induce Hillhaven and First Healthcare to enter into this Agreement and to consummate the transactions contemplated hereby, each of NMEP Corp., NMEP Inc., and NMEP West hereby covenants, represents and warrants to Hillhaven and First Healthcare that: (i) It is duly organized, validly existing and in good standing under the laws of the state of incorporation of the corporation. (ii) It has the corporate power, authority and legal right to make, deliver and perform its obligations under this Agreement and has taken all corporate action to authorize the execution, delivery and performance of this Agreement. No consent of any other person (including, without limitation, stockholders and creditors of the corporation), and no authorization of, notice to or other act by or in respect of the corporation by, any governmental authority, agency or instrumentality is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement. This Agreement has been duly executed and delivered by the corporation and this Agreement constitutes a legal, valid and binding obligation of the corporation enforceable against the corporation in accordance with its terms. (iii) The execution, delivery and performance by the corporation of this Agreement will not violate any provision of any existing law or regulation applicable to the corporation or any of its significant subsidiaries or of any award, order or decree applicable to the corporation or any of its significant subsidiaries of any court, arbitrator or governmental authority, or of the Articles of Incorporation or Bylaws of the corporation, or of any security issued by the corporation or any material mortgage, indenture, lease, contract or other agreement or undertaking to which the corporation is a party or by which the corporation or any of its properties or assets may be bound, and will not result in, or require, the creation or imposition of any lien on any of its or their respective properties or revenues pursuant to the provisions of any such mortgage, indenture, contract, lease or other agreement. (iv) No litigation, investigation or proceeding of or before any arbitrator or governmental authority is pending or, to the knowledge of the corporation, threatened by or against the corporation or any of its subsidiaries or any of its or their respective properties or revenues (a) with respect to this Agreement or any of the transactions contemplated hereby, or (b) which, if adversely determined, would have a material adverse effect on its ability to perform its obligations under this Agreement. (v) Neither the corporation nor any of its significant subsidiaries is in default in any material respect under or with respect to any material contract, agreement or other instrument to which it is a party or by which it or its assets is bound. Except as would not have a material adverse effect on the business, operations, properties or financial condition of the corporation and its subsidiaries taken as a whole or on the ability of the corporation to perform its obligations under this Agreement, the corporation is not in default under any order, award or decree of any court, arbitrator, or other governmental authority binding upon or affecting it or by which any of its assets is bound or affected. The corporation is not subject to any order, award or decree which would materially adversely affect the ability of the corporation to perform its obligations under this Agreement. (vi) Except to the extent that the promissory notes have been pledged and assigned to Swiss Bank Corporation pursuant to that certain unrecorded Pledge and Security Agreement and Master Assignment of Mortgages dated as of May 28, 1993 (the "Pledge Agreement"), the NME Entities have not assigned their interests in the promissory notes described in the above Recitals. Upon release of the Pledge Agreement which shall occur upon Hillhaven's repayment of the THC Facilities Corp. loan evidenced by the Credit Agreement (as defined in the Pledge Agreement) on September 2, 1993, NMEP Corp. will be the holder of the FHC Promissory Note and the Greenbriar Note, NMEP West will be the holder of the Clayton House Note, and NMEP Inc. will be the holder of the Birchwood Note, free and clear of any liens or encumbrances. (vii) It is purchasing the Series D Preferred for investment purposes and not in connection with or with a view towards the distribution thereof. 3. The Closing. On September 2, 1993 (the "Closing Date"), the parties hereto shall take the following actions: (a) NMEP Corp. shall deposit with Escrow cash or immediately available funds in the amount of $63,399,432.71, and shall give written instructions to Escrow to transfer said funds to First Healthcare's account at PNC Bank. (b) NMEP Corp. shall assign to Hillhaven its interest in the FHC Promissory Note, with an outstanding balance in the sum of $49,072,836.93; (c) NMEP Corp. shall assign to Hillhaven its interest in the Greenbriar Note, with an outstanding balance in the sum of $969,110.79; (d) NMEP West shall assign to Hillhaven its interest in the Clayton House Note, with an outstanding balance in the sum of $5,911,097.51; (e) NMEP Inc. shall assign to Hillhaven its interest in the Birchwood Note, with an outstanding balance in the sum of $647,522.06; (f) In consideration of (i) payment of the cash sum described in subparagraph (a) above, and (ii) the assignment to Hillhaven of the promissory notes described in subparagraphs (b), (c), (d) and (e) above, Hillhaven shall deliver to the NME Entities the following certificates representing a total of 120,000 shares of Series D Preferred: (i) Certificate representing 63,399 shares of Series D Preferred in the name of NME Properties Corp.; (ii) Certificate representing 50,042 shares of Series D Preferred in the name of NME Properties Corp.; (iii) Certificate representing 5911 shares of Series D Preferred in the name of NME Properties West, Inc.; and (iv) Certificate representing 648 shares of Series D Preferred in the name of NME Properties, Inc. 4. NME Waivers. NME hereby waives the provisions of Section 5(h) of that certain Guarantee Reimbursement Agreement to the extent that such provisions would prohibit Hillhaven from paying dividends on the Series D Preferred; provided, however, that such waiver shall be limited to Hillhaven being permitted to pay dividends only on the Series D Preferred (and on Series C Preferred for which a waiver was previously obtained) and not on any other series or class of stock of Hillhaven or any of its subsidiaries. 5. Survival of Certain Representations and Warranties and Covenants. Hillhaven's representations and warranties set forth in Section 2(a)(vii) shall survive the execution, delivery and performance of this Agreement. 6. Miscellaneous. (a) This Agreement may be executed in as many counterparts as may be deemed necessary or convenient, and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original but all such counterparts shall constitute one and the same agreement. (b) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. (c) No waiver or modification of any provision of this Agreement shall be (i) valid or enforceable unless it is in writing and has been executed by the party against whom such enforcement is sought, or (ii) construed as a waiver or modification of any other provision of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the day and year first above written. National Medical Enterprises, Inc., a Nevada corporation By: /s/ Maris Andersons Title: Executive Vice President NME Properties Corp., a Tennessee corporation By: /s/ Maris Andersons Title: Senior Vice President NME Properties, Inc., a Delaware corporation By: /s/ Maris Andersons Title: Senior Vice President NME Properties West, Inc., a Delaware corporation By: /s/ Maris Andersons Title: Senior Vice President The Hillhaven Corporation, a Nevada corporation By: /s/ Robert K. Schneider Title: Vice President & Treasurer First Healthcare Corporation, a Delaware corporation By: /s/ Robert K. Schneider Title: Vice President & Treasurer EX-10.06 4 Exhibit 10.06 RESIGNATION AGREEMENT AND GENERAL RELEASE This Resignation Agreement and General Release (the "Agreement") dated as of September 15, 1993, by and between The Hillhaven Corporation, a Nevada corporation (the "Corporation"), and Richard K. Eamer ("Mr. Eamer"). WITNESSETH: WHEREAS, Mr. Eamer is a member of the Board of Directors of the Corporation; and WHEREAS, Mr. Eamer and the Corporation entered into an Employment Agreement dated January 31, 1990 (the "Employment Agreement"); and WHEREAS, Mr. Eamer served as Chairman and, until April 1, 1991, as Chief Executive Office of the Corporation; and WHEREAS, the Employment Agreement contemplates that Mr. Eamer would remain employed by the Corporation until January 31, 1995; and WHEREAS, Mr. Eamer has decided to resign as a director and as Chairman of the Corporation, and resign from employment with the Corporation, effective as of the date hereof under the terms set forth herein; and WHEREAS, the terms of this Agreement are the product of mutual negotiation and compromise between Mr. Eamer and the Corporation; and WHEREAS, Mr. Eamer has been advised to consult with or seek advice from an attorney prior to execution of this Agreement and has in fact done so; and WHEREAS, Mr. Eamer has carefully considered other alternatives to executing this Agreement. NOW, THEREFORE, for and in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: Section 1. Resignation. Mr. Eamer hereby resigns as a director and as Chairman of the Corporation, and his employment pursuant to the Employment Agreement, effective of the date hereof. Section 2. Severance Pay. The Corporation will pay to Mr. Eamer the sum of Two Hundred Six Thousand Two Hundred Fifty and 00/100 Dollars ($206,250.00) as severance pay. The Corporation shall make the required withholding for taxes. Section 3. Annual Incentive Plan. Mr. Eamer shall not be eligible to participate in the Corporation's Annual Incentive Plan for any period after May 31, 1993, and Mr. Eamer shall not receive any further payment with respect to such Annual Incentive Plan. Section 4. Long Term Incentive Plan. Mr. Eamer shall not be eligible to participate in the Corporation's Long Term Incentive Plan for future cycles, and Mr. Eamer shall not receive any further payments with respect to such Long Term Incentive Plan. Section 5. Restricted Shares. Pursuant to Incentive Stock Award RS 90-000001 dated February 5, 1990, Mr. Eamer was granted 1,500,000 shares of restricted stock, the restrictions on which were to lapse as follows: February 5, 1991, 300,000 shares; February 5, 1992, 300,000 shares; February 5, 1993, 300,000 shares; February 5, 1994, 300,000 shares; and February 5, 1995, 300,000 shares. The restrictions on the 600,000 shares which would lapse on February 5, 1994 and February 5, 1995 shall now lapse on the date hereof; provided, however, that the parties shall execute an Amendment of Mr. Eamer's Incentive Stock Award evidencing such change in the restrictions. Section 6. Stock Optional Performance Shares. On July 15, 1992 and July 27, 1993, Mr. Eamer was granted stock options to acquire 19,250 and 12,550 shares, respectively, of the Corporation's common stock (the "Options"), and the Corporation's Compensation Committee declared Mr. Eamer eligible to receive 19,250 Performance Shares with respect to the three (3) year period ending May 31, 1995 and 12,550 Performance Shares with respect to the three (3) year period ending May 31, 1996 (the "Performance Shares"). Regardless of any contrary provisions in any instrument, certificate or document pertaining to the Options, Mr. Eamer shall have from the date hereof through the unexpired term thereof in which to exercise each particular option. Mr. Eamer hereby relinquishes all right, title and interest in and to the Performance Shares. Section 7. Hillhaven Capacity. The Corporation enters into this Agreement for the benefit of itself as well as its shareholders, partners, affiliates, subsidiaries, divisions, successors and assigns, and the present and/or former employees, officers, directors and agents thereof, both in their official and individual capacities. All references to the "Corporation" in this Agreement shall be deemed to include all the persons and entities previously referenced in this section. Section 8. Confidentiality; Cooperation With Legal Process. (a) Mr. Eamer acknowledges that he has held a sensitive management position with the Corporation and that, by virtue of having held such position, he has had access to and has learned the Corporation's and its subsidiaries' and affiliates' confidential and proprietary information and trade secrets pertaining to its operations, officers and directors. Mr. Eamer agrees that he shall keep all such information confidential and that he shall not disclose any such information to any other person, except as may be required by law. Without limiting the generality of the foregoing, Mr. Eamer agrees that he will not respond to or in any way participate in or contribute to any public discussion, notice or other publicity concerning or in any way related to propriety or confidential information concerning the Corporation, its subsidiaries, affiliates, operations, officers or directors, or any matters concerning his employment with the Corporation. (b) The parties agree that no provision of this Section 8 or any other provision of this Agreement shall be construed or interpreted in any way to limit, restrict or preclude either party hereto from cooperating with any governmental agency in the performance of its investigatory or other lawful duties or producing materials or giving testimony pursuant to a court proceeding. (c) The parties agree that they will keep the terms, amounts and facts of this Agreement completely confidential, and that they will not hereafter disclose any information concerning this Agreement to anyone except their respective attorneys or accountants, including, but not limited to, any past, present, or prospective employees of the Corporation or any of its parent, subsidiary or related companies or entities, except, in each case, as may be required by law, including, without limitation, filings with the Securities and Exchange Commission. (d) Mr. Eamer agrees that if he receives a subpoena or is otherwise required by law to provide information to a governmental entity or other person concerning the activities of the Corporation or his activities in connection with the Corporation's business, he will immediately notify the Corporation of subpoena or requirement and deliver to the Corporation a copy of such subpoena. Section 9. Release By Mr. Eamer. Mr. Eamer agrees that this Agreement settles any and all claims and disputes he has against the Corporation. Except as hereinafter provided, Mr. Eamer fully releases and forever discharges the Corporation from any and all known or unknown actions, causes of action, claims, debts, obligations, promises, contracts, liabilities, suits, complaints and all other matters whatsoever, in law or equity, which Mr. Eamer, his marital community, heirs, executors, administrators, successors and assigns may now have or hereafter can, shall or may have against the Corporation for, upon or by reason of any matter, cause or thing whatsoever including, but not limited to, any and all matters arising out of his employment by the Corporation and the cessation of said employment, and including, but not limited to, any alleged violation of Title VII of the Civil Rights Act of 1964, Section 1981 through 1988 of Title 42 of the United States Code, the Immigration Reform and Control Act of 1986, the Employee Retirement Income Security Act of 1974, the Americans with Disabilities Act, the Consolidated Omnibus Budget Reconciliation Act of 1985, the Vocational Rehabilitation Act of 1973, the Age Discrimination in Employment Act of 1967, the National Labor Relations Act, the Fair Labor Standards Act, the Occupational Safety and Health Act, the Securities Act of 1933, the Securities Exchange Act of 1934 and any other federal, state or local civil, labor, wage-hour, human rights or securities law, or any other alleged violation of any local, state or federal law, regulation or ordinance, and/or public policy, contract, tort or common law which he ever had, now has, may have or shall have as of the date of this Agreement. It is understood and agreed that this is a full and general release covering all unknown, undisclosed and unanticipated losses, wrongs, injuries, debts, claims or damages to Mr. Eamer which may have arisen, or may arise from any act or omission prior to the date of this Agreement. The Release in this Section shall not apply to the Corporation's performance of this Agreement. Notwithstanding the foregoing, nothing in the Release set forth in this Section 9 nor anything else in this Agreement shall be deemed to be a waiver or release by Mr. Eamer of any right that Mr. Eamer has or may have to claim indemnity for liabilities in connection with his activities as a director, officer or employee of the Corporation pursuant to any applicable statute, under any insurance policy, pursuant to the Articles of Incorporation or Bylaws of the Corporation or pursuant to any agreement of indemnification by and between the Corporation and Mr. Eamer. Section 10. Release By The Corporation. The Corporation fully releases and forever discharges Mr. Eamer, his marital community, heirs, executors, administrators, successors and assigns from any and all known or unknown actions, causes of action, claims, debts, obligations, promises, contracts, liabilities, suits, complaints and all other matters whatsoever, in law or equity, which the Corporation, its successors and assigns may now have or hereafter can, shall or may have against Mr. Eamer for, upon or by reason of any matter, cause or thing whatsoever including, but not limited to, any and all matters arising out of Mr. Eamer's employment by the Corporation and the cessation of said employment. It is understood and agreed that this is a full and general Release covering all unknown, undisclosed and unanticipated losses, wrongs, injuries, debts, claims or damages to the Corporation which may have arisen, or may arisen from any act or omission prior to the date of this Agreement. Section 11. Section 1542. It is understood and agreed that each of the releases set forth in Sections 9 and 10 is a full and general release covering all unknown, undisclosed and unanticipated losses, wrongs, injuries, debts, claims or damages to Mr. Eamer or the Corporation which may have arisen, or may arise from any act or omission prior to the date of execution of this Agreement including, but not limited to, all matters arising out of or related, directly or indirectly, to Mr. Eamer's employment, compensation, or resignation. Mr. Eamer and the Corporation each hereby waives any and all rights or benefits which he or it may now have, or in the future may have, under the terms of Section 1542 of the California Civil Code, which provides as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the Debtor. Section 12. Severability. Should any provision of this Agreement be declared illegal or unenforceable by any court of competent jurisdiction in any action or proceeding instituted by, on behalf or for the benefit of either party with respect to this Agreement, and such provision cannot be modified to be enforceable, such provision shall immediately become null and void and the parties shall renegotiate such provision in good faith, leaving the remainder of this Agreement in full force and effect. Section 13. Governing Law; Forum; Attorneys' Fees. This Agreement is to be governed by and construed in accordance with the substantive law of the State of California applicable to contracts made and to be performed therein, without giving effect to its conflicts of law provisions. In the event of the commencement of suit to enforce any of the terms or conditions in this Agreement, the prevailing party in such litigation shall be entitled to recover its attorney's fees and costs. Section 14. Construction. The parties acknowledge that this Agreement was the subject of negotiation and that both have participated in the drafting of the Agreement and thus it should not be construed against either party. Section 15. Non-Reliance; Entire Agreement. Mr. Eamer and the Corporation each represents and acknowledges that in executing this Agreement, he or it does not rely and has not relied upon any promise, representation or statement by the other party or by any of the other party's employees, agents, representatives or attorneys not set forth herein with regard to the subject matter, basis or effect of this Agreement. This Agreement represents the complete understanding of and between the parties. Section 16. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and upon their marital community, heirs, administrators, representatives, executors, successors and assigns. Section 17. Amendments. This Agreement may not be amended, modified or altered except in a writing signed by both parties which specifically references this Agreement. Section 18. Headings. The headings used herein are for convenience of reference only and shall not be used in interpreting this Agreement. Section 19. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. THEREFORE, the parties to this Resignation Agreement and General Release now voluntarily and knowingly execute this Resignation Agreement and General Release as of the date first set forth above. THE HILLHAVEN CORPORATION By: /s/ Bruce L. Busby Bruce L. Busby Chief Executive Officer /s/ Richard K. Eamer Richard K. Eamer The undersigned attorney acknowledges that he has reviewed this Resignation Agreement and General Release and has represented and advised Mr. Eamer in connection herewith. By: /s/ Melvin S. Spears Date: September 15, 1993 The undersigned attorney acknowledges that he has reviewed this Resignation Agreement and General Release and has represented and advised The Hillhaven Corporation in connection herewith. By: /s/ Richard P. Adcock Date: September 20, 1993 EX-10.08 5 Exhibit 10.08 AMENDMENT NO. ONE TO EMPLOYMENT AGREEMENT This Amendment No. One to Employment Agreement (the "Amendment") dated as of May 31, 1994, between The Hillhaven Corporation, a Nevada corporation (the "Company"), and Leonard Cohen ("Mr. Cohen"). WITNESSETH: WHEREAS, the Company and Mr. Cohen are parties to that certain Employment Agreement dated as of January 31, 1990 (the "Agreement"), pursuant to which the Company employed Mr. Cohen as its Vice Chairman and Deputy Chief Executive Officer; and WHEREAS, Mr. Cohen has previously voluntarily relinquished his position as Deputy Chief Executive Officer; and WHEREAS, Mr. Cohen's term as a director of the Company expires at the 1994 Annual Meeting of Shareholders of the Company, and Mr. Cohen has decided not to stand for reelection; and WHEREAS, Mr. Cohen and the Company have agreed to amend the Agreement pursuant to the terms and conditions set forth herein; NOW, THEREFORE, for and in consideration of the premises, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Amendment to Agreement. The Agreement is hereby amended in the following respects: A. Sections 1, 2 and 3(b)(iii) of the Agreement are hereby amended by deleting the phrase "Vice Chairman and Deputy Chief Executive Officer of the Company" wherever it appears in such sections and replacing it with the phrase "Vice Chairman and Deputy Chief Executive Officer of, or as a consultant to, the Company". B. The second sentence of Section 5(c) of the Agreement is hereby amended by deleting the phrase "from his office as Vice Chairman and Deputy Chief Executive Officer of the Company" and replacing it with the phrase "as Vice Chairman and Deputy Chief Executive Officer of, and as a consultant to, the Company,". C. Section 5(d) of the Agreement is hereby amended by deleting Subsection (C) in its entirety and replacing it with the following: "(C) any removal of Mr. Cohen as consultant to the Company, except in connection with termination of Mr. Cohen's employment for Cause, or". 2. Effect on Agreement. Except as expressly amended by this Amendment, all of the terms and conditions of the Agreement shall remain in full force and effect, including, without limitation, the provisions of Section 3(a) entitling Mr. Cohen to his salary through January 31, 1995. In addition, nothing contained herein shall restrict Mr. Cohen from receiving the final installment of 48,000 shares of the Company's Common Stock on February 5, 1995 pursuant to the terms of that certain Incentive Stock Award (Restricted Shares) dated as of February 5, 1990. 3. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of California. 4. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the date first set forth above. /s/ Leonard Cohen Leonard Cohen THE HILLHAVEN CORPORATION By: /s/ Bruce L. Busby Chairman and Chief Executive Officer EX-10.10 6 Exhibit 10.10 AGREEMENT This Agreement dated as of May 24, 1994 (this "Agreement"), between The Hillhaven Corporation, a Nevada corporation (the "Company"), and Christopher J. Marker (the "Executive"). WITNESSETH: WHEREAS, the Executive is currently employed by the Company or one of its subsidiaries as its President and Chief Operating Officer (the "Position"); and WHEREAS, the Executive has extensive management experience in long term care and the operation of the Company, and such experience is very important to the continued success of the Company, as well as to the orderly transition of the Company should a change in corporate control and ownership occur; and WHEREAS, changes in corporate control and ownership are common occurrences in the current business environment, which can be disruptive to a company's business and operations and detrimental to the best interests of its shareholders; and WHEREAS, the Company believes that it is in the best interests of the Company and its shareholders to enter into agreements with certain key officers, including the Executive, in order to ensure their retention and to promote their objectivity in reviewing proposed changes in control which may occur in the future. NOW, THEREFORE, the parties agree as follows: 1. Definitions. For purposes of this Agreement, the terms set forth in this Section shall have the following meanings: (a) a "Change in Control" of the Company shall be deemed to have occurred if: (i) any Person, alone or together with its Affiliates and Associates, is or becomes the beneficial owner directly or indirectly of securities of the Company representing 30% or more of the general voting power of the Company; (ii) during any period of two consecutive years during the term of this Agreement, individuals who at the beginning of such period constitute the Board of Directors of the Company cease for any reason other than death or disability to constitute at least a majority thereof; or (iii) any Person makes any filing under Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended, with respect to the Company. (b) "Person" shall mean an individual, firm, corporation or other entity or any successor to such entity, together with all Affiliates and Associates of such Person, but "Person" shall not include the Company, National Medical Enterprises, Inc. ("NME"), any subsidiary of the Company or NME, any Affiliate or Associate of NME, any employee benefit plan or employee stock plan of the Company, any subsidiary of the Company, NME or any subsidiary of NME, or any Person organized, appointed, established or holding Voting Stock by, for or pursuant to the terms of such a plan or any Person who acquires 20% or more of the general voting power of the Company in a transaction or series of transactions approved prior to such transaction or series of transactions by the Board of Directors of the Company. (c) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. (d) "Voting Stock" means shares of the Company's capital stock having general voting power, with "voting power" meaning the power under ordinary circumstances (and not merely upon the happening of a contingency) to vote in the election of directors. (e) "Cause" shall mean: the willful, substantial, continued and unjustified refusal of the Executive to perform the duties of his or her office to the extent of his or her ability to do so; any conduct on the part of the Executive which constitutes a breach of any statutory or common law duty of loyalty to the Company; any illegal or publicly immoral act by the Executive which materially and adversely affects the business of the Company; the physical or mental disability of the Executive as determined by the Board of Directors of the Company and resulting in his or her inability to perform his or her duties hereunder; or the death of the Executive. 2. Payments Upon Change in Control. (a) If a Change in Control of the Company occurs at any time and if at any time during the two-year period thereafter, the Company (i) terminates the Executive without Cause from the Position or from a comparable or higher position with the Company, (ii) assigns to the Executive responsibilities or title materially less than his or her responsibilities and title as of the date hereof, (iii) reduces his or her salary, (iv) reduces his or her fringe benefits other than in accordance with a reduction in fringe benefits applicable to substantially all employees of the Company, or (v) requires the Executive to relocate to any location beyond a 30-mile radius of his or her current principal place of employment, then in any such event, the Company shall pay the Executive a severance benefit in cash within 30 days after the occurrence of any such event in an amount equal to two years' base salary. (b) Whether or not any payment is made pursuant to Section 2(a), if a Change in Control of the Company occurs at any time and the Executive reasonably determines that any payment or distribution by the Company or any of its Affiliates or Associates to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any restricted stock, stock option, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exerciseability of any of the foregoing (individually and collectively, a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any successor provision thereto) by reason of being considered "contingent on a change in ownership or control" of the Company, within the meaning of Section 280G of the Code (or any successor provision thereto), or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the Company shall pay to the Executive an additional payment or payments (individually and collectively, a "Gross-Up Payment"). The Gross-Up Payment shall be in an amount such that, after payment by the Executive of all taxes required to be paid by the Executive with respect to the receipt thereof under the terms of any Federal, state or local government or taxing authority (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed with respect to the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. The Company shall pay the Gross-Up Payment to the Executive within 30 days of its receipt of written notice from the Executive that such Excise Tax has been paid or will be payable at any time in the future. 3. Assignment; Binding Effect. Neither this Agreement nor any rights or obligations hereunder may be assigned or pledged by the Executive. This Agreement and the rights and obligations of the parties hereunder shall be binding upon, and inure to the benefit of, the parties hereto, the heirs and legal representatives of the Executive and the successors and assigns of the Company. 4. No Right to Employment. Nothing herein shall confer upon the Executive any right to continue in the employ of the Company or a subsidiary thereof or shall interfere in any way with the right of the Company or any subsidiary to terminate such employment at any time. 5. Severability. Should any provision of this Agreement be declared illegal or unenforceable by any court of competent jurisdiction in any action or proceeding, and such provision cannot be modified to be enforceable, such provision shall immediately become null and void and the parties shall renegotiate such provision in good faith, leaving the remainder of this Agreement in full force and effect. 6. Notices. Any notice to be given hereunder shall be effective upon receipt, shall be in writing and shall be personally delivered or sent by registered or certified mail, postage prepaid to the following address or such other places as either party shall designate in writing: If to the Company: The Hillhaven Corporation 1148 Broadway Plaza Tacoma, Washington 98402 Attention: Chief Executive Officer with a copy to: The Hillhaven Corporation 1148 Broadway Plaza Tacoma, Washington 98402 Attention: General Counsel If to the Executive: Christopher J. Marker 3427 Evergreen Point Road Bellevue, Washington 98004 7. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington. 8. Attorneys' Fees; Etc. In the event that the Executive brings any suit, action or other legal proceeding to enforce any of the terms of this Agreement, and the Executive prevails in any such suit, action or proceeding, the Company shall reimburse the Executive for all costs and expenses, including reasonable attorneys' fees, incurred by or for the account of the Executive in connection with such suit, action or proceeding. The Company shall pay such amount within ten days after receipt of the Executive's demand therefor. 9. Headings. The headings and captions used in this Agreement are for convenience of reference only, and shall not in any way limit or affect the construction or interpretation of any provision of this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. THE HILLHAVEN CORPORATION By: /s/ Bruce L. Busby Its: Chief Executive Officer /s/ Christopher J. Marker Christopher J. Marker EX-10.11 7 Exhibit 10.11 AGREEMENT This Agreement dated as of ________________, 199____ (this "Agreement"), between The Hillhaven Corporation, a Nevada corporation (the "Company"), and ____________________________ (the "Executive"). WITNESSETH: WHEREAS, the Executive is currently employed by the Company or one of its subsidiaries as its ______________________________ (the "Position"); and WHEREAS, the Executive has extensive management experience in long term care and the operation of the Company, and such experience is very important to the continued success of the Company, as well as to the orderly transition of the Company should a change in corporate control and ownership occur; and WHEREAS, changes in corporate control and ownership are common occurrences in the current business environment, which can be disruptive to a company's business and operations and detrimental to the best interests of its shareholders; and WHEREAS, the Company believes that it is in the best interests of the Company and its shareholders to enter into agreements with certain key officers, including the Executive, in order to ensure their retention and to promote their objectivity in reviewing proposed changes in control which may occur in the future. NOW, THEREFORE, the parties agree as follows: 1. Definitions. For purposes of this Agreement, the terms set forth in this Section shall have the following meanings: (a) a "Change in Control" of the Company shall be deemed to have occurred if: (i) any Person, alone or together with its Affiliates and Associates, is or becomes the beneficial owner directly or indirectly of securities of the Company representing 30% or more of the general voting power of the Company; (ii) during any period of two consecutive years during the term of this Agreement, individuals who at the beginning of such period constitute the Board of Directors of the Company cease for any reason other than death or disability to constitute at least a majority thereof; or (iii) any Person makes any filing under Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended, with respect to the Company. (b) "Person" shall mean an individual, firm, corporation or other entity or any successor to such entity, together with all Affiliates and Associates of such Person, but "Person" shall not include the Company, National Medical Enterprises, Inc. ("NME"), any subsidiary of the Company or NME, any Affiliate or Associate of NME, any employee benefit plan or employee stock plan of the Company, any subsidiary of the Company, NME or any subsidiary of NME, or any Person organized, appointed, established or holding Voting Stock by, for or pursuant to the terms of such a plan or any Person who acquires 20% or more of the general voting power of the Company in a transaction or series of transactions approved prior to such transaction or series of transactions by the Board of Directors of the Company. (c) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. (d) "Voting Stock" means shares of the Company's capital stock having general voting power, with "voting power" meaning the power under ordinary circumstances (and not merely upon the happening of a contingency) to vote in the election of directors. (e) "Cause" shall mean: the willful, substantial, continued and unjustified refusal of the Executive to perform the duties of his or her office to the extent of his or her ability to do so; any conduct on the part of the Executive which constitutes a breach of any statutory or common law duty of loyalty to the Company; any illegal or publicly immoral act by the Executive which materially and adversely affects the business of the Company; the physical or mental disability of the Executive as determined by the Board of Directors of the Company and resulting in his or her inability to perform his or her duties hereunder; or the death of the Executive. 2. Payments Upon Change in Control. (a) If a Change in Control of the Company occurs at any time and if at any time during the [one/two]-year period thereafter, the Company (i) terminates the Executive without Cause from the Position or from a comparable or higher position with the Company, (ii) assigns to the Executive responsibilities or title materially less than his or her responsibilities and title as of the date hereof, (iii) reduces his or her salary, (iv) reduces his or her fringe benefits other than in accordance with a reduction in fringe benefits applicable to substantially all employees of the Company, or (v) requires the Executive to relocate to any location beyond a 30-mile radius of his or her current principal place of employment, then in any such event, the Company shall pay the Executive a severance benefit in cash within 30 days after the occurrence of any such event in an amount equal to two years' base salary. (b) Whether or not any payment is made pursuant to Section 2(a), if a Change in Control of the Company occurs at any time and the Executive reasonably determines that any payment or distribution by the Company or any of its Affiliates or Associates to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any restricted stock, stock option, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exerciseability of any of the foregoing (individually and collectively, a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any successor provision thereto) by reason of being considered "contingent on a change in ownership or control" of the Company, within the meaning of Section 280G of the Code (or any successor provision thereto), or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the Company shall pay to the Executive an additional payment or payments (individually and collectively, a "Gross-Up Payment"). The Gross-Up Payment shall be in an amount such that, after payment by the Executive of all taxes required to be paid by the Executive with respect to the receipt thereof under the terms of any Federal, state or local government or taxing authority (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed with respect to the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. The Company shall pay the Gross-Up Payment to the Executive within 30 days of its receipt of written notice from the Executive that such Excise Tax has been paid or will be payable at any time in the future. 3. Assignment; Binding Effect. Neither this Agreement nor any rights or obligations hereunder may be assigned or pledged by the Executive. This Agreement and the rights and obligations of the parties hereunder shall be binding upon, and inure to the benefit of, the parties hereto, the heirs and legal representatives of the Executive and the successors and assigns of the Company. 4. No Right to Employment. Nothing herein shall confer upon the Executive any right to continue in the employ of the Company or a subsidiary thereof or shall interfere in any way with the right of the Company or any subsidiary to terminate such employment at any time. 5. Severability. Should any provision of this Agreement be declared illegal or unenforceable by any court of competent jurisdiction in any action or proceeding, and such provision cannot be modified to be enforceable, such provision shall immediately become null and void and the parties shall renegotiate such provision in good faith, leaving the remainder of this Agreement in full force and effect. 6. Notices. Any notice to be given hereunder shall be effective upon receipt, shall be in writing and shall be personally delivered or sent by registered or certified mail, postage prepaid to the following address or such other places as either party shall designate in writing: If to the Company: The Hillhaven Corporation 1148 Broadway Plaza Tacoma, Washington 98402 Attention: Chief Executive Officer with a copy to: The Hillhaven Corporation 1148 Broadway Plaza Tacoma, Washington 98402 Attention: General Counsel If to the Executive: _______________________________ _______________________________ _______________________________ 7. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington. 8. Attorneys' Fees; Etc. In the event that the Executive brings any suit, action or other legal proceeding to enforce any of the terms of this Agreement, and the Executive prevails in any such suit, action or proceeding, the Company shall reimburse the Executive for all costs and expenses, including reasonable attorneys' fees, incurred by or for the account of the Executive in connection with such suit, action or proceeding. The Company shall pay such amount within ten days after receipt of the Executive's demand therefor. 9. Headings. The headings and captions used in this Agreement are for convenience of reference only, and shall not in any way limit or affect the construction or interpretation of any provision of this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. THE HILLHAVEN CORPORATION By: __________________________ Its: _________________________ ______________________________ (Type Executive's name here) EX-10.14 8 Exhibit 10.14 The Hillhaven Corporation Board of Directors Retirement Plan Effective January 1, 1994 Section 1 STATEMENT OF PURPOSE The Board of Directors Retirement Plan (the "Plan") of The Hillhaven Corporation has been adopted to attract, retain, motivate and provide financial security to members of the Board of Directors who are not employees of the Company (the "Participants"). Section 2 DEFINITIONS 2.1 Agreement. "Agreement" means a written agreement substantially in the form of Exhibit A between The Hillhaven Corporation and a Participant. 2.2 Annual Board Retainer. "Annual Board Retainer" means the total annual retainer paid to a Director by The Hillhaven Corporation for Service on The Hillhaven Corporation's Board of Directors, excluding any separate fees paid for meeting attendance or service on any committees of the Board of Directors. 2.3 Committee. "Committee" means the members of the Executive Committee of the Board of Directors of The Hillhaven Corporation who are employees of the Company. 2.4 Company. "Company" means The Hillhaven Corporation and its Subsidiaries. 2.5 Change of Control. "Change of Control" shall be deemed to have occurred if (a) any person as such term is used in Sections 13(c) and 14(d)(2) of the Securities and Exchange Act of 1934, or as amended, is or becomes the beneficial owner directly or indirectly of securities of The Hillhaven Corporation representing thirty percent or more of the combined voting power of The Hillhaven Corporation's then outstanding securities, or (b) during any two year period after January 1, 1994, individuals who at the beginning of such period constitute the Board of Directors of The Hillhaven Corporation cease for any reason other than death or disability to constitute a majority of the board; provided, however, that a Change of Control shall not be deemed to have occurred if National Medical Enterprises, Inc. ("NME") or any subsidiary of NME, becomes the beneficial owner of thirty percent or more of the general voting power of THC solely on account of NME's acquisition of shares of THC's Common Stock pursuant to its exercise of warrants under that certain Warrant and Registration Rights Agreement dated as of January 31, 1990 among NME, THC and Manufacturers Hanover Trust Company of California. 2.6 Director. A "Director" is any member of the Board of Directors of The Hillhaven Corporation who is not an employee of the Company and who enters into an Agreement to participate in this Plan. 2.7 Eligible Children. "Eligible Children" means all natural or adopted children of a Participant under the age of 21, including any child conceived prior to the death of a Participant. 2.8 Final Annual Board Retainer. "Final Annual Board Retainer" means the Annual Board Retainer being paid to a Director at the time of his or her Termination of Service on the Board of Directors of The Hillhaven Corporation. 2.9 Normal Retirement Age. "Normal Retirement Age" under this Plan is age 65. 2.10 Participant. "Participant" shall include any Director who is not an employee of The Hillhaven Corporation and who, with the permission of the Committee, enters into an Agreement to participate in the Plan. 2.11 Service. "Service" refers to service as a Director of The Hillhaven Corporation. 2.12 Subsidiary. A "Subsidiary" of the Company is any corporation, partnership, venture or other entity in which the Company owns 50% of the capital stock or otherwise has a controlling interest as determined by the Committee, in its sole and absolute discretion. 2.13 Surviving Spouse. "Surviving Spouse" means the person legally married to the Participant for at least one year prior to the Participant's death or Termination of Service. 2.14 Termination of Service. "Termination of Service" means the cessation of a Participant's service as a Director of The Hillhaven Corporation for any reason whatsoever, whether voluntarily or involuntarily. 2.15 Year. A "Year" is a period of twelve consecutive calendar months. 2.16 Year of Service. "Year of Service" means each complete year of Service as a Director of The Hillhaven Corporation. Years of Service shall be deemed to have begun as of the first day of the calendar month of service and to have ceased on the last day of the calendar month of service. Section 3 RETIREMENT BENEFITS 3.1 Retirement Benefit. (a) Upon the later of a Participant's Termination of Service or attainment of Normal Retirement Age, The Hillhaven Corporation agrees to pay to the Participant an annual Retirement Benefit for ten years in an amount equal to 50% of his or her Final Annual Board Retainer, subject to the limitation of Section 3.1(b) and the vesting of Section 3.2. (b) The Retirement Benefit shall not exceed $12,000 (50% of the Annual Board Retainer in 1993) increased by a compounded rate of six percent per year from 1994 to the year of the Participant's Termination of Service. 3.2 Vesting of Retirement Benefit. A Participant's interest in his Retirement Benefit shall, subject to Section 5.5, vest in accordance with the following schedule: Years of Service Vested Benefit Less than 5 0% 5 50% 6 60% 7 70% 8 80% 9 90% 10 100% All Years of Service as a Director shall count towards vesting credit. 3.3 Survivor Benefit (a) If a Participant who is receiving a Retirement Benefit dies, his or her Surviving Spouse or Eligible Children shall be entitled to receive (in accordance with Sections 3.4 and 3.5) the installments of the Participant's Retirement Benefit for the remainder of the ten year period. (b) If a Participant, who has a vested interest under Section 3.2, dies while serving as a Director of The Hillhaven Corporation, his or her Surviving Spouse or Eligible Children shall be entitled at the Participant's death to receive (in accordance with Sections 3.4 and 3.5) the installments of the Retirement Benefit which would have been payable to the Participant in accordance with Section 3.1 for a period of ten years. The limitation set forth in Section 3.1(b) will be based upon the date of the Participant's death. (c) If a Participant, who has a vested interest under Section 3.2, dies after Termination of Service but at death is not receiving any Retirement Benefits under this Plan, the Surviving Spouse or Eligible Children shall be entitled at Participant's death to receive (in accordance with Sections 3.4 and 3.5) the installments of the Retirement Benefit which would have been payable to the Participant if he or she had retired on the day before he or she died based on his or her vested interest under Section 3.2. The limitation set forth in Section 3.1(b) will be based upon the date of the Participant's death. 3.4 Form and Duration of Benefit Payment. Retirement Benefits shall be paid in equal monthly installments over a period of ten years. Surviving Spouse payments shall be paid in equal monthly installments over the remainder of the ten year period. Eligible Children benefit payments shall be paid monthly over the remainder of the ten year period, but not beyond the date when the youngest of the Eligible Children reaches age 21. 3.5 Recipients of Benefit Payments. If a Participant dies without a Surviving Spouse but is survived by any Eligible Children, then benefits will be paid to the Eligible Children or their legal guardian, if applicable. The total monthly benefit payment will be equal to the monthly benefit that a Surviving Spouse would have received, which will be paid in equal shares to each of the Eligible Children for the remainder of the ten year period or until the youngest of the Eligible Children attains age 21, whichever comes first. When any of the Eligible Children reaches age 21, his or her share will be reallocated equally to the remaining Eligible Children. If the Surviving Spouse dies after the death of the Participant but is survived by Eligible Children, the total monthly benefit previously paid to the Surviving Spouse will be paid in equal shares to each of the Eligible Children for the remainder of the ten year period or until the youngest of the Eligible Children attains age 21, whichever comes first. When any of the Eligible Children reaches age 21, his or her share will be reallocated equally to the remaining Eligible Children. 3.6 Change of Control. In the event of a Change of Control of The Hillhaven Corporation while this Plan remains in effect which results in a Participant's Termination of Service as a Director of The Hillhaven Corporation or a Participant's failure to be reelected as a Director of The Hillhaven Corporation when his or her term of office expires, (i) a Participant's Retirement Benefit hereunder will be fully vested in the Participant without regard to his or her Years of Service with The Hillhaven Corporation and (ii) notwithstanding any other provisions of this Plan, a Participant will be entitled to receive the full Normal Retirement Benefit commencing at age 65. Section 4 PAYMENT 4.1 Commencement of Payments. Payments under this Plan shall begin not later than the first day of the calendar month following the occurrence of an event which entitles a Participant (or his or her Surviving Spouse or Eligible Children) to payments under this Plan. 4.2 Withholding; Unemployment Taxes. To the extent required by the law in effect at the time payments are made, The Hillhaven Corporation shall report all payments hereunder and shall withhold therefrom any taxes required to be withheld by the Federal or any state or local government. 4.3 Recipients of Payments. All payments to be made by The Hillhaven Corporation under this Plan shall be made to the Participant during his or her lifetime. All subsequent payments under the Plan shall be made by The Hillhaven Corporation to the Participant's Surviving Spouse, Eligible Children or their guardian, if applicable. 4.4 No Other Benefits. The Hillhaven Corporation shall pay no benefits hereunder to the Participant, his or her Surviving Spouse or Eligible Children or their legal guardian, if applicable, by reason of Termination of Service or otherwise, except as specifically provided herein. Section 5 CONDITIONS RELATED TO BENEFITS 5.1 Administration of Plan. The Committee has been authorized to administer the Plan and to interpret, construe and apply its provisions in accordance with its terms. The Committee shall administer the Plan and shall establish, adopt or revise such rules and regulations as it may deem necessary or advisable for the administration of the Plan. All decisions of the Committee shall be by vote or written consent of the majority of its members and shall be final and binding. 5.2 No Right to Assets. Neither a Participant nor any other person shall acquire by reason of the plan any right in or title to any assets, funds or property of The Hillhaven Corporation and its subsidiaries whatsoever including, without limiting the generality of the foregoing, any specific funds or assets which The Hillhaven Corporation, in its sole discretion, may set aside in anticipation of a liability hereunder. No trust shall be created in accordance with or by the execution or adoption of this Plan or any Agreement with a Participant, and any benefits which become payable hereunder shall be paid from the general assets of The Hillhaven Corporation. A Participant shall have only an unsecured contractual right to the amounts, if any, payable hereunder. 5.3 No Tenure Rights. Nothing herein shall constitute a contract of continuing service or in any manner obligate The Hillhaven Corporation to continue the Service of a Director, or obligate a Director to continue in the Service of The Hillhaven Corporation, and nothing herein shall be construed as fixing or regulating the compensation paid to a Director. 5.4 Right to Terminate or Amend. Except during any two year period after any Change of Control of The Hillhaven Corporation, The Hillhaven Corporation reserves the sole right to terminate the Plan at any time and to terminate an Agreement with any Participant at any time. In the event of termination of the Plan or of a Participant's Agreement, a Participant shall be entitled only to the vested portion of his or her accrued benefits under Section 3 of the Plan as of the time of the termination of the Plan or his or her Agreement. Benefits will be paid in the amounts specified and will commence at the time specified in Section 3 as appropriate. The Hillhaven Corporation further reserves the right in its sole discretion to amend the Plan in any respect except that Plan benefits cannot be reduced during any two year period after any Change of Control of The Hillhaven Corporation. No amendment of the Plan (whether there has or has not been a Change of Control of The Hillhaven Corporation) that reduces the value of the benefit theretofore accrued and vested by the Participant shall be effective. 5.5 Eligibility. Eligibility to participate in the Plan is expressly conditional upon a Director's furnishing to The Hillhaven Corporation certain information and taking physical examinations and such other relevant action as may be reasonably requested by The Hillhaven Corporation. Any Participant who refuses to provide such information or to take such action shall not be enrolled as or shall thereupon cease to be a Participant under the Plan. Any Participant who commits suicide during the two year period beginning on the date of his or her Agreement, or who makes any material misstatement of information or non-disclosure of medical history, will not receive any benefits hereunder unless, in the sole discretion of the Committee, benefits in a reduced amount are awarded. 5.6 Offset. If at the time payments or installments of payments are to be made hereunder, any Participant or his or her Surviving Spouse or both are indebted to The Hillhaven Corporation or its Subsidiaries, then the payments remaining to be made to the Participant or his Surviving Spouse or both may, at the discretion of the Committee, be reduced by the amount of such indebtedness; provided, however, that an election by the Committee not to reduce any such payment or payments shall not constitute a waiver of any claim for such indebtedness. 5.7 Conditions Precedent. No Retirement Benefits will be payable hereunder to any Participant (i) whose Service with The Hillhaven Corporation is terminated because of willful misconduct or gross negligence in the performance of his or her duties or (ii) who within three years after Termination of Service becomes an employee, director or consultant to any third party engaged in any line of business in competition with the Company that accounts for more than ten percent of the gross revenues of the Company taken as a whole. Section 6 MISCELLANEOUS 6.1 Nonassignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferrable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferrable by operation of law in the event of a Participant's or any person's bankruptcy or insolvency. 6.2 Gender and Number. Wherever appropriate herein, the masculine may mean the feminine and the singular may mean the plural or vice versa. 6.3 Notice. Any notice required or permitted to be given to the Committee under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the principal office of The Hillhaven Corporation, directed to the attention of the Secretary of the Committee. Such notice shall be deemed given as of the date of delivery or, if it is made by mail, as of the date shown on the postmark or on the receipt for registration or certification. 6.4 Validity. In the event any provision of this Plan is held invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this Plan. 6.5 Applicable Law. This Plan shall be governed and construed in accordance with the laws of the State of Washington. 6.6 Successors in Interest. This Plan shall inure to the benefit of, and be binding upon, and be enforceable by, any corporate successor to The Hillhaven Corporation or successor to substantially all of the assets of The Hillhaven Corporation. 6.7 No Representation on Tax Matters. The Hillhaven Corporation makes no representation to Participants regarding current or future income tax ramifications of the Plan. Exhibit A THE HILLHAVEN CORPORATION BOARD OF DIRECTORS RETIREMENT PLAN AGREEMENT THIS AGREEMENT is made and entered into at Tacoma, Washington, as of the first day of January, 1994, by and between The Hillhaven Corporation (the "Company") and __________________________________ ("Director"). WHEREAS, THE HILLHAVEN CORPORATION has adopted a Board of Directors Retirement Plan (the "Plan"); and WHEREAS, since the Director presently serves as a member of the Board of Directors of The Hillhaven Corporation and is not an employee of the Company, the Director is eligible to participate in the Plan; and WHEREAS, the Plan requires that an agreement be entered into between The Hillhaven Corporation and Director setting out certain terms and benefits of the Plan as they apply to the Director; NOW, THEREFORE, The Hillhaven Corporation and the Director hereby agree as follows: 1. The Plan, a copy of which is attached, is hereby incorporated into and made a part of this Agreement as though set forth in full herein. The parties shall be bound by, and have the benefit of, each and every provision of the Plan, including but not limited to the non-assignability provisions of Section 6.1 of the Plan. 2. The Director was born on ____________________, 19_____, and his or her present service as a member of the Board of Directors of The Hillhaven Corporation began on ____________________, 19_____. 3. This Agreement shall inure to the benefit of, and be binding upon, The Hillhaven Corporation, its successors and assigns, and the Director and his or her surviving Spouse and Eligible Children. IN WITNESS WHEREOF, the parties hereto have signed and entered into this Agreement on and as of the date first above written. The Hillhaven Corporation By _________________________________________________________ Its _________________________________________________________ Director ____________________________________________________ EX-10.21 9 Exhibit 10.21 THE HILLHAVEN CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Adopted December 28, 1989 FIRST RESTATEMENT as of November 11, 1993 SECTION 1 - STATEMENT OF PURPOSE The Supplemental Executive Retirement Plan (the "Plan") has been adopted by The Hillhaven Corporation ("THC") to attract, retain, motivate and provide financial security to highly compensated management employees (the "Participants") who render valuable services to THC and its Subsidiaries. SECTION 2 - DEFINITIONS 2.1 ACQUISITION. "Acquisition" refers to a company of which substantially all of its assets or a majority of its capital stock are acquired by, or which is merged with or into, THC or a Subsidiary. 2.2 ACTUAL FINAL AVERAGE EARNINGS. "Actual Final Average Earnings" means the highest average monthly Earnings for any 60 consecutive months during the ten years, or actual employment period if less, preceding Termination of Employment. 2.3 AGREEMENT. "Agreement" means a written agreement substantially in the form of Exhibit A between THC and a Participant. 2.4 COMMITTEE. "Committee" means the Compensation Committee of the Board of Directors of THC. 2.5 CHANGE IN CONTROL. A "Change in Control" shall be deemed to have occurred when a Person, alone or together with its Affiliates and Associates, becomes the beneficial owner of 30% or more of the general voting power of THC; provided, however, that a Change of Control shall not be deemed to have occurred if National Medical Enterprises, Inc. ( NME ) or any subsidiary of NME, becomes the beneficial owner of 30% or more of the general voting power of THC solely on account of NME s acquisition of shares of THC s Common Stock pursuant to its exercise of warrants under that certain Warrant and Registration Rights Agreement dated as of January 31, 1990 among NME, THC and Manufacturers Hanover Trust Company of California. "Affiliate or Associate" shall have the respective meanings ascribed of such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934. "Person" for the purpose of this numbered paragraph of the Plan, means an individual, firm, corporation or other entity or any successor to such entity, but "Person" shall not include THC, any Subsidiary, any employee benefit plan or employee stock plan of THC or any Subsidiary, or any Person organized, appointed, established or holding Voting Stock by, for or pursuant to the terms of such a plan or any Person who acquires 20 percent or more of the general voting power of THC in a transaction or series of transactions approved prior to such transaction or series of transactions by the Board of Directors of THC. "Voting Stock" means shares of THC's capital stock having general voting power, with "voting power" meaning the power under ordinary circumstances (and not merely upon the happening of a contingency) to vote in the election of directors. 2.6 DATE OF EMPLOYMENT. "Date of Employment" means the date on which a person became an Employee of THC or a Subsidiary, or the date on which a person became an employee of NME or a subsidiary of NME prior to the divestiture of THC by NME. Where a person is an employee of an entity that is acquired by THC or a Subsidiary through an Acquisition, "Date of Employment" means the effective date of the Acquisition; provided, the Committee, in its sole discretion, may approve as a Date of Employment the date on which a person began to perform services for the acquired entity in a position comparable to one at THC which would have been eligible for participation in the Plan. 2.7 DATE OF ENROLLMENT. For purposes of determining benefits under the Plan, "Date of Enrollment" means the "Plan Entry Date" which is the date on which an Employee first becomes a Participant in the Plan, except that for any Employee who was a participant in the NME SERP prior to the divestiture of THC by NME, the "Plan Entry Date" related to former participation in the NME SERP shall be the "Plan Entry Date" for this Plan provided that any Employee who became a Participant in the NME SERP prior to June 1, 1985 shall be deemed to have a Date of Enrollment of the later of Date of Employment or June 1, 1984. 2.8 DISABILITY. "Disability" means any Termination of Employment during the life of a Participant and prior to Normal Retirement or Early Retirement by reason of a Participant's total and permanent disability, as determined by the Committee, in its sole and absolute discretion. A Participant, who makes application for and qualifies for disability benefits under THC's Group Long-Term Disability Plan or under any similar plan provided by THC or a Subsidiary, as now in effect or as hereinafter amended (the "LTD Plans"), shall usually qualify for Disability under this Plan, unless the Committee determines that the Participant is not totally and permanently disabled. A Participant who fails to qualify for disability benefits under the LTD Plans (whether or not the Participant makes application for disability benefits thereunder) shall not be deemed to be totally and permanently disabled under this Plan, unless the Committee otherwise determines, based upon the opinion of a qualified physician or medical clinic selected by the Committee to the effect that a condition of total and permanent disability exists. 2.9 EARLY RETIREMENT. "Early Retirement" means any Termination of Employment during the life of a Participant prior to Normal Retirement and after the Participant attains age 55 and has completed ten Years of Service or attains age 62 with no minimum Years of Service. 2.10 EARNINGS. "Earnings" means the base salary paid to a Participant by THC or a Subsidiary, excluding bonuses, car and other allowances and other cash and non-cash compensation. 2.11 ELIGIBLE CHILDREN. "Eligible Children" means all natural or adopted children of a Participant under the age of 21, including any child conceived prior to the death of a Participant. 2.12 EMPLOYEE. "Employee" means any person who regularly performs Services on a full-time basis (that is, works a minimum of 32 hours a week) for THC or a Subsidiary and receives a salary plus employee benefits normally made available to persons of similar status. 2.13 EMPLOYMENT OR SERVICE. "Employment" or "Service" means any continuous period during which an Employee is actively engaged in performing services for THC and its Subsidiaries plus the term of any leave of absence approved by the Committee plus any continuous period of service performed with NME or a subsidiary of NME immediately prior to the divestiture of THC by NME. 2.14 EXISTING RETIREMENT BENEFIT PLANS ADJUSTMENT FACTOR. "Existing Retirement Benefit Plans Adjustment Factor" means the assumed benefit the Participant would be eligible for under Social Security and all retirement plans of THC and its Subsidiaries whether or not he participates in such plans. This Factor will be used for calculating all benefits under the Plan and is a projection of the benefits payable under the Social Security regulations and retirement plans in effect June 1, 1984 and once established for a Participant will not thereafter be altered to reflect any reduction in benefits under Social Security or such retirement plans unless the Participant is transferred to different retirement plans or unless such company sponsored retirement plans are substantially altered in terms of benefit provided. The existing Retirement Benefit Plans Adjustment Factor is expressed as a percentage and is determined by specific formula as approved by the Committee. 2.15 FINAL AVERAGE EARNINGS. "Final Average Earnings" means the lesser of (i) Actual Final Average Earnings or (ii), if the Participant has completed at least 60 months of Service, Projected Final Average Earnings. 2.16 NORMAL RETIREMENT. "Normal Retirement" means any Termination of Employment during the life of a Participant on or after the date on which the Participant attains age 65. 2.17 PARTICIPANT. "Participant" means any Employee selected to participate in this Plan by the Committee, in its sole and absolute discretion. 2.18 PRIOR SERVICE CREDIT PERCENTAGE. "Prior Service Credit Percentage" means the percentage applied to a Participant's Years of Service with THC and its Subsidiaries (and NME and its subsidiaries prior to the divestiture of THC by NME) which is prior to his Date of Enrollment in the Plan, in accordance with the following formula: Years of Service Prior Service Credit After Date of Enrollment Percentage During 1st Year 25 During 2nd Year 35 During 3rd Year 45 During 4th Year 55 During 5th Year 75 After 5th Year 100 2.19 PROJECTED EARNINGS. "Projected Earnings" means the actual Earnings of an Employee on the Date of Enrollment plus an assumed increase of eight percent per annum. In the event of any Promotion subsequent to the Date of Enrollment, Projected Earnings shall mean actual earnings of an Employee on the effective date of the Promotion plus an assumed increase of eight percent per annum. 2.20 PROJECTED FINAL AVERAGE EARNINGS. "Projected Final Average Earnings" means the average of a Participant's Projected Earnings during the 60 months preceding Termination of Employment. 2.21 SUBSIDIARY. A "Subsidiary" of the Company is any corporation, partnership, venture or other entity in which the Company owns 50% of the capital stock or otherwise has a controlling interest as determined by the Committee, in its sole and absolute discretion. 2.22 SURVIVING SPOUSE. "Surviving Spouse" means the person legally married to a Participant for at least one year prior to the Participant's death or Termination of Employment. 2.23 TERMINATION OF EMPLOYMENT. "Termination of Employment" means the ceasing of the Participant's Employment for any reason whatsoever, whether voluntarily or involuntarily. 2.24 YEAR. A "Year" is a period of twelve consecutive calendar months. 2.25 YEAR OF SERVICE. "Year of Service" means each complete year (up to a maximum of 20) of continuous Service (up to age 65) as an Employee of THC and its Subsidiaries beginning with the Date of Employment with THC and its Subsidiaries or with NME and its subsidiaries immediately prior to the divestiture of THC by NME. Years of Service shall be deemed to have begun as of the first day of the calendar month of Employment and to have ceased on the last day of the calendar month of Employment. 2.26 PROMOTION. Promotion means an advancement in an employee s job title accompanied by a substantial increase in duties, responsibilities and salary. The Committee, in its sole discretion, may determine if a Promotion has occurred based upon all the facts and circumstances. SECTION 3 - RETIREMENT BENEFITS 3.1 NORMAL RETIREMENT BENEFIT. a. Upon a Participant's Normal Retirement, the Company agrees to pay to the Participant a monthly Normal Retirement Benefit for the Participant's lifetime which is determined in accordance with the Benefit Formula set forth below, adjusted by the Vesting Percentage in Section 3.3. Except as provided below, the amount of such monthly Normal Retirement Benefit will be determined by using the following formula: Z = A x [B1 + [B2 x C]] x [2.7% - D] x E Z = Normal Retirement Benefit A = Final Average Earnings B1 = Years of Service After Date of Enrollment B2 = Years of Service Prior to Date of Enrollment C = Prior Service Credit Percentage D = Existing Retirement Benefit Plans Adjustment Factor V = Vesting Percentage NOTE: B1 and B2 Years of Service combined cannot exceed 20 years. b. In the event of the death or Disability of a Participant at any age or the Normal or Early Retirement of a Participant after age 60, the Normal or Early Retirement Benefit will be determined on the basis of a Prior Service Credit Percentage of 100. c. If a Participant who is receiving a Normal Retirement Benefit dies, his Surviving Spouse or Eligible Children shall be entitled to receive (in accordance with Sections 3.5 and 3.6) 50% of the Participant's Normal Retirement Benefit. d. If a Participant who is eligible for Normal Retirement dies while an Employee of the Company after attaining age 65, his Surviving Spouse or Eligible Children shall be entitled to receive (in accordance with Sections 3.5 and 3.6) the installments of the Normal Retirement Benefit which would have been payable to the Surviving Spouse or Eligible Children in accordance with this Section 3.1 as if the Participant had retired on the day before he died. 3.2 EARLY RETIREMENT BENEFIT. a. Upon a Participant's Early Retirement, THC shall pay the Participant a monthly Early Retirement Benefit for the Participant's lifetime commencing on the first day of the calendar month following the date he attains age 65, calculated in accordance with Sections 3.1 and 3.3 with the following adjustments: (i) Only the Participant's actual Years of Service, adjusted appropriately for the Prior Service Credit Percentage, as of the date of Early Retirement shall be used. (ii) For purposes of determining the Actual Final Average Earnings and Projected Final Average Earnings, only the Participant's Earnings and Projected Earnings as of the date of Early Retirement shall be used. (iii) To arrive at the payments to commence at age 65 the amount calculated under paragraphs a(i) and a(ii) of this Section 3.2 will be reduced by .42% for each month Early Retirement commences before age 62. b. Upon the written request of the Participant prior to Termination of Employment, the Committee, in its sole and absolute discretion, may authorize payment of the Early Retirement Benefit at a date prior to the Participant's attainment of age 65; provided, however, that in such event the amount calculated under paragraphs a(i), a(ii) and a(iii) of this Section 3.2 shall be further reduced by .42% for each month that the date of the commencement of payment precedes the date on which the Participant will attain age 62. c. If a Participant dies after commencement of payment of his Early Retirement Benefit, the Surviving Spouse or Eligible Children shall be entitled to receive (in accordance with Sections 3.5 and 3.6) 50% of the Participant's Early Retirement Benefit. d. If a Participant dies after his Early Retirement but before benefits have commenced, or while on Disability, the Surviving Spouse or Eligible Children shall be entitled to receive (in accordance with Sections 3.5 and 3.6) 50% of the benefit that would have been payable on the date the Participant elected to have benefits commence. e. If a Participant dies after becoming eligible for Early Retirement but before taking Early Retirement or while on Disability, the Surviving Spouse or Eligible Children shall be entitled to receive (in accordance with Sections 3.5 and 3.6) 50% of the Participant's Early Retirement Benefit determined as if the Participant had retired on the day prior to his death with payments commencing on the first of the month following the Participant's death. The benefits payable to a Surviving Spouse or Eligible Children under this paragraph shall be no less than the benefits payable to a Surviving Spouse or Eligible Children under Section 3.4 as if the Participant had died immediately prior to age 55. 3.3 VESTING OF RETIREMENT BENEFIT. A Participant's interest in his Retirement Benefit shall, subject to Sections 5.5 and 5.7, vest in accordance with following schedule: Years of Service Vesting Less than 5 0% 5 but less than 6 25% 6 through 20 5% per year Notwithstanding the foregoing, a Participant who is at least 60 years old and who has completed at least 5 Years of Service will be fully vested, subject to Sections 5.5 and 5.7, in his Retirement Benefits. No Years of Service will be credited for Service after age 65 or for more than 20 years. 3.4 TERMINATION BENEFIT. Upon any Termination of Employment of the Participant before Normal Retirement or Early Retirement for reasons other than death or Disability, THC shall pay, commencing at age 65, to the Participant a Retirement Benefit calculated under Sections 3.1 and 3.3 but with the following adjustments: a. Only the Participant's actual Years of Service, adjusted appropriately for the Prior Service Credit Percentage, as of the date of Termination of Employment shall be used. b. For purposes of determining the Actual Final Average Earnings and the Projected Final Average Earnings, as used in Section 3.1, only the Participant's Earnings and Projected Earnings prior to the date of his Termination of Employment shall be used. c. (i) If a Participant dies after commencement of payment of his or her Retirement Benefit under this Section 3.4, the Surviving Spouse or Eligible Children shall be entitled at Participant's death to receive (in accordance with Sections 3.5 and 3.6) 50% of the Participant's Retirement Benefit. (ii) If a Participant, who has vested interest under Section 3.3, dies after Termination of Employment but at death is not receiving any Retirement Benefits under this Plan, the Surviving Spouse or Eligible Children shall be entitled to receive (in accordance with Sections 3.5 and 3.6) commencing on the date when the Participant would have attained age 65, 50% of the Retirement Benefit which would have been payable to the Participant at age 65. (iii) If a Participant, who has vested interest under Section 3.3, dies while still actively employed by THC or a Subsidiary or on Disability before he was eligible for Early Retirement, his Surviving Spouse or Eligible Children shall be entitled at the Participant's death to receive (in accordance with Sections 3.5 and 3.6) 50% of the Retirement Benefit calculated as if the Participant were age 55 and eligible for Early Retirement on the day before Participant's death; however, the combined reductions for Early Retirement and early payment shall not exceed 35.28% of the amount calculated under paragraphs a(i) and a(ii) of Section 3.2. d. To arrive at the payments to commence at age 65, the amount calculated under paragraphs a, b, c(i) and c(ii) of this section 3.4 will be reduced by the maximum percentage reduction for Early Retirement at age 55 (i.e., 35.28%). 3.5 DURATION OF BENEFIT PAYMENT. Normal and Early Retirement Benefit payments shall be for the life of the Participant. Surviving Spouse Benefit payments shall be for the Surviving Spouse's lifetime. All benefits payable to the Surviving Spouse are subject to actuarial reduction if Surviving Spouse is more than 3 years younger than the Participant. Eligible Children Benefit payments shall be made until the youngest of the Eligible Children reaches age 21. 3.6 RECIPIENTS OF BENEFIT PAYMENTS. If a Participant dies without a Surviving Spouse but is survived by any Eligible Children, then benefits will be paid to the Eligible Children or their legal guardian, if applicable. The total monthly benefit payable will be equal to the monthly benefit that a Surviving Spouse would have received without actuarial reduction. This benefit will be paid in equal shares to all Eligible Children until the youngest of the Eligible Children attains age 21. If the Surviving Spouse dies after the death of the Participant but is survived by Eligible Children, then the total monthly benefit previously paid to the Surviving Spouse will be paid in equal shares to all Eligible Children until the youngest of the Eligible Children attains age 21. When any of the Eligible Children reaches age 21, his share will be reallocated equally to the remaining Eligible Children. 3.7 DISABILITY. Any Participant who is under Disability upon reaching age 65 will be paid the Normal Retirement Benefit in accordance with Sections 3.1 and 3.3. Upon a Participant's Disability while an Employee of the Company, the Participant will continue to accrue Years of Service during his Disability until the earliest of: a. Recovery from Disability. b. His 65th birthday, or c. Death. If a Participant is receiving Disability payments, he shall not be entitled to receive an Early Retirement Benefit. For purposes of calculating the foregoing benefits, the Participant's Actual Final Average Earnings and Projected Final Average Earnings shall be determined using his Earnings and Projected Earnings up to the date of Disability. 3.8 CHANGE IN CONTROL. In the event of a Change in Control of THC while this Plan remains in effect or in the event that any Person makes any filing under Sections 13(d) or 14(d) of the Exchange Act with respect to the Company, (i) a Participant's Retirement Benefits hereunder (a) will be determined on the basis of receiving full Prior Service Credit under Sections 3.1 and 3.2 for all Years of Service prior to his Date of Enrollment and (b) will be fully vested in the Participant without regard to his Years of Service with THC and its Subsidiaries and (ii) notwithstanding any other provisions of the Plan, a Participant will be entitled to receive the Normal Retirement Benefit on or after age 60 with no reduction by virtue of paragraphs a(iii) and b of Section 3.2. SECTION 4 - PAYMENT 4.1 COMMENCEMENT OF PAYMENTS. Payments under this Plan shall begin not later than the first day of the calendar month following the occurrence of an event which entitles a Participant (or a Surviving Spouse or Eligible Children) to payments under this Plan. 4.2 WITHHOLDING; UNEMPLOYMENT TAXES. To the extent required by the law in effect at the time payments are made, THC shall withhold from payments made hereunder any taxes required to be withheld by the Federal or any state or local government. 4.3 RECIPIENTS OF PAYMENTS. All payments to be made by THC under the Plan shall be made to the Participant during his lifetime. All subsequent payments under the Plan shall be made by THC to the Participant's Surviving Spouse, Eligible Children or their legal guardian, if applicable. 4.4 NO OTHER BENEFITS. THC shall pay no benefits hereunder to the Participant, his Surviving Spouse, Eligible Children or their legal guardian, if applicable, by reason of Termination of Employment or otherwise, except as specifically provided herein. SECTION 5 - CONDITIONS RELATED TO BENEFITS 5.1 ADMINISTRATION OF PLAN. The Committee has been authorized to administer the Plan and to interpret, construe and apply its provisions in accordance with its terms. The Committee shall administer the Plan and shall establish, adopt or revise such rules and regulations as it may deem necessary or advisable for the administration of the Plan. All decisions of the Committee shall be by vote or written consent of the majority of its members and shall be final and binding. Members of the Committee shall not be eligible to participate in the Plan while serving as a member of the Committee. 5.2 NO RIGHT TO ASSETS. Neither a Participant nor any other person shall acquire by reason of the Plan any right in or title to any assets, funds or property of THC and its Subsidiaries whatsoever including, without limiting the generality of the foregoing, any specific funds or assets which THC, in its sole discretion, may set aside in anticipation of a liability hereunder. No trust shall be created in accordance with or by the execution or adoption of this Plan or any Agreement with a Participant, and any benefits which become payable hereunder shall be paid from the general assets of THC. A Participant shall have only an unsecured contractual right to the amounts, if any, payable hereunder. 5.3 NO EMPLOYMENT RIGHTS. Nothing herein shall constitute a contract of continuing employment or in any manner obligate THC and its Subsidiaries to continue the service of a Participant, or obligate a Participant to continue in the service of THC and its Subsidiaries, and nothing herein shall be construed as fixing or regulating the compensation paid to a Participant. 5.4 RIGHT TO TERMINATE OR AMEND. Except during any two year period after any Change in Control of THC, THC reserves the sole right to terminate the Plan at any time and to terminate an Agreement with any Participant at any time. In the event of termination of the Plan or of a Participant's Agreement, a Participant shall be entitled to only the vested portion of his or her accrued benefits under Section 3 of the Plan as of the time of the termination of the Plan or his Agreement. All further vesting and benefit accrual shall cease on the date of Plan or Agreement termination. Benefit payments would be in the amounts specified and would commence at the time specified in Section 3 as appropriate. THC further reserves the right in its sole discretion to amend the Plan in any respect except that Plan benefits cannot be reduced during any two year period after any Change in Control of THC. No amendment of the Plan (whether there has or has not been a Change in Control of THC) that reduces the value of the benefits theretofore accrued by and vested with respect to the Participant shall be effective. 5.5 ELIGIBILITY. Eligibility to participate in the Plan is expressly conditional upon an Employee's furnishing to THC certain information and taking physical examinations and such other relevant action as may be reasonably requested by THC. Any Employee Participant who refuses to provide such information or to take such action shall not be enrolled as or cease to be a Participant under the Plan. Any Participant who commits suicide during the two-year period beginning on the date of his or her Agreement, or who makes any material misstatement of information or non-disclosure of medical history, will not receive any benefits hereunder unless, in the sole discretion of the Committee, benefits in a reduced amount are awarded. 5.6 OFFSET. If at the time payments or installments of payments are to be made hereunder, any Participant or his or her Surviving Spouse or both are indebted to THC and its Subsidiaries, then the payments remaining to be made to the Participant or his Surviving Spouse or both may, at the discretion of the Committee, be reduced by the amount of such indebtedness; provided, however, that an election by the Committee not to reduce any such payment or payments shall not constitute a waiver of any claim for such indebtedness. 5.7 CONDITIONS PRECEDENT. No Retirement Benefits will be payable hereunder to any Participant (i) whose Employment with THC or a Subsidiary is terminated because of his willful misconduct or gross negligence in the performance of his duties or (ii) who within 3 years after Termination of Employment becomes an employee with or consultant to any third party engaged in any line of business in competition with THC and/or its subsidiaries (a) in a line of business in which the Participant has performed Services for THC and its Subsidiaries provided that a person who is also an employee of NME shall not be construed to be a third party engaged in competition with THC and/or its Subsidiaries or (b) that accounts for more than ten percent of the gross revenues of THC and its Subsidiaries taken as a whole. Notwithstanding the foregoing paragraph, the Committee, in its sole discretion, may approve the payment of Retirement Benefits to an Employee who would otherwise be ineligible under (ii) above if the Committee determines that is in THC s best interest to do so. SECTION 6 - MISCELLANEOUS 6.1 NONASSIGNABILITY. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance any provision hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any person's bankruptcy or insolvency. THC may assign this Plan to any Subsidiary which employs any Participant. 6.2 GENDER AND NUMBER. Wherever appropriate herein, the masculine may mean the feminine and the singular may mean the plural or vice versa. 6.3 NOTICE. Any notice required or permitted to be given to the Committee under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the principal office of THC, directed to the attention of the Secretary of the Committee. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or on the receipt for registration or certification. 6.4 VALIDITY. In the event any provision of this Plan is held invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this Plan. 6.5 APPLICABLE LAW. This Plan shall be governed and construed in accordance with the laws of the State of Washington. 6.6 SUCCESSORS IN INTEREST. This Plan shall inure to the benefit of, be binding upon, and be enforceable by, any corporate successor to THC or successor to substantially all of the assets of THC. 6.7 NO REPRESENTATION ON TAX MATTERS. THC makes no representation to Participants regarding current or future income tax ramifications of the Plan. 6.8 EFFECTIVE DATE. The Plan shall, upon adoption by the Board and approval of NME, become effective as of January 31, 1990, unless the Plan is previously terminated. EX-10.27 10 Exhibit 10.27 FIRST AMENDMENT TO GUARANTEE REIMBURSEMENT AGREEMENT This FIRST AMENDMENT TO GUARANTEE REIMBURSEMENT AGREEMENT (the "First Amendment") is being entered into as of October 30, 1990, between National Medical Enterprises, Inc., a Nevada corporation ("NME") and The Hillhaven Corporation, a Nevada corporation ("New Hillhaven"). RECITALS A. NME and Hillhaven have entered into that certain Guarantee Reimbursement Agreement, dated as of January 31, 1990 (the "Agreement"). B. Excluded from the reimbursement Obligations (as defined in the Agreement) of New Hillhaven under Section 1(a) of the Agreement are the Obligations set forth in Appendix B to the Agreement ("Appendix B"). C. The Obligation set forth as item 3 of Appendix B is the Obligation with respect to $6,200,000 aggregate principal amount of The Industrial Development Authority of the County of Yavapai Industrial Development Revenue Refunding Bonds (Kachina Pointe Project) Series 1988 (the "Bonds"). D. Hillhaven Properties, Ltd. ("Hillhaven Properties") desires to acquire the Kachina Pointe Project (the "Project"). In connection with its acquisition of the Project, Hillhaven Properties must assume the Obligations of the Kachina Pointe Limited Partnership (the "Partnership") under its Reimbursement Agreement, dated as of August 1, 1988, with Swiss Bank Corporation (the "Bank"). The reimbursement obligations of the Partnership to the Bank are guarantied by NME pursuant to a Guaranty Agreement, dated as of August 11, 1988 (the "Guaranty"). E. In order to induce the Bank to allow Hillhaven Properties to assume the obligations of the Partnership under the Reimbursement Agreement with the Bank, NME must affirm to the Bank that its Guaranty will remain effective with respect to Hillhaven Properties to the same extent that it is effective with respect to the Partnership, which affirmation is evidenced by that certain Affirmation of Guaranty, dated as of even date herewith, from NME to the Bank (the "Affirmation"). F. In order to induce NME to execute the Affirmation, New Hillhaven, which owns all of the issued and outstanding stock of Hillhaven Properties, has agreed to amend the Guarantee Reimbursement Agreement to delete item 3 from Appendix B. NOW, THEREFORE, in consideration of the foregoing Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: AGREEMENT 1. Amendment of Agreement. New Hillhaven and NME hereby agree to amend the Agreement by deleting item 3 from Appendix B to the Agreement. Appendix B to the Agreement is hereby amended by deleting in its entirety the following: "3. $6,200,000 aggregate principal amount of The Industrial Development Authority of the County of Yavapai Industrial Development Revenue Refunding Bonds (Kachina Pointe Project) Series 1988." 2. Obligations Includes Kachina Pointe Bonds. New Hillhaven and NME hereby agree that upon NME's execution and delivery of the above-referenced Affirmation, the Agreement shall be amended to include within the definition of Obligations for all purposes, including, without limitation, for purposes of Section 1, the Kachina Pointe Bond Obligations referred to in item 3 of Appendix B, which Obligations have been deleted from Appendix B pursuant to paragraph 1 of this First Amendment. 3. Full Force and Effect. Except as expressly amended hereby, the Agreement remains in full force and effect. 4. Counterparts. This First Amendment may be executed in several counterparts, each of which shall be deemed an original, but such counterparts shall together shall constitute but one and the same instrument. 5. Governing Law. This First Amendment shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed and delivered as of the day and year first above stated. The Hillhaven Corporation, a Nevada corporation By: /s/ Robert F. Pacquer Name: Robert F. Pacquer Title: Senior Vice President National Medical Enterprises, Inc., a Nevada corporation By: /s/ Marcus E. Powers Name: Marcus E. Powers Title: Senior Vice President EX-10.34 11 Exhibit 10.34 SEVENTH AMENDMENT TO GUARANTEE REIMBURSEMENT AGREEMENT THIS SEVENTH AMENDMENT TO GUARANTEE REIMBURSEMENT AGREEMENT (the "Amendment") is made and dated as of May 28, 1993, between National Medical Enterprises, Inc., a Nevada corporation ("NME") and The Hillhaven Corporation, a Nevada corporation ("Hillhaven"). RECITALS A. NME and Hillhaven are parties to that certain Guarantee Reimbursement Agreement, dated as of January 31, 1990 (as the same has been or may from time to time be amended, restated, renewed, replaced, modified or supplemented from time to time, the "Reimbursement Agreement"). B. Hillhaven has requested that NME enter into that certain Pledge and Security Agreement and Master Assignment of Mortgages, dated as of May 28, 1993 (the "Pledge Agreement"), pursuant to which NME is assigning certain promissory notes from Hillhaven to NME, and the mortgages securing such promissory notes, to Swiss Bank Corporation, as Collateral Agent, to secure NME's obligations under a guaranty of certain of Hillhaven's "Obligations" (as defined in the Reimbursement Agreement). C. In order to induce NME to enter into the Pledge Agreement, Hillhaven has agreed to amend the Reimbursement Agreement as set forth in this Agreement. NOW THEREFORE, in consideration of the foregoing Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: AGREEMENT 1. Section 1(a) of the Reimbursement Agreement hereby is amended and restated to read in its entirety as follows: (a) Reimbursement. New Hillhaven shall reimburse NME, promptly on demand, for all Obligations (including those Obligations set forth in Appendix B to the Reimbursement Agreement) paid by NME or its subsidiaries after the Distribution Date not theretofore reimbursed by New Hillhaven. Without limiting the generality of the foregoing, in the event that NME pledges or assigns collateral directly or indirectly to secure any Obligations or NME's obligations with respect thereto, under a guaranty or otherwise, the amount to be reimbursed by New Hillhaven to NME hereunder with respect to such Obligations shall be the greater of (x) the face value of any collateral applied to the satisfaction of the Obligations, and any other sums then outstanding with respect to such collateral, including accrued and unpaid interest thereon, and (y) the fair market value of any collateral, and any proceeds thereon, applied to the satisfacton of the Obligations (provided, however, that if the collateral is a note secured by a mortgage or deed of trust, the fair market value of such note shall not include the fair market value of the real property securing such note). Payments and notices shall be made or given, as the case may be, in accordance with the provisions of Sections 1(c), 3 and 9(b). 2. Reimbursement Agreement Remains in Effect. Except as expressly amended hereby, the Reimbursement Agreement shall remain in full force and effect. 3. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 4. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the day and year first above written. NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation By: /s/ Maris Andersons Title: Executive Vice President THE HILLHAVEN CORPORATION, a Nevada corporation By: /s/ Robert K. Schneider Title: Vice President & Treasurer EX-10.35 12 Exhibit 10.35 EIGHTH AMENDMENT TO GUARANTEE REIMBURSEMENT AGREEMENT This Eighth Amendment to Guarantee Reimbursement Agreement ("Amendment") dated as of September 2, 1993, is entered into by and between National Medical Enterprises, Inc., a Nevada corporation ("NME") and The Hillhaven Corporation, a Nevada corporation ("New Hillhaven"). RECITALS A. New Hillhaven and NME are parties to that certain Guarantee Reimbursement Agreement, dated as of January 31, 1990 (as the same has been or may be amended, restated, modified, supplemented, renewed or replaced from time to time, the "Reimbursement Agreement"), which provides, among other things, for the reimbursement by New Hillhaven of all Obligations (as defined in the Reimbursement Agreement) paid by NME. Unless otherwise defined herein, all capitalized terms used herein shall have the same meaning ascribed to such terms in the Reimbursement Agreement. B. New Hillhaven, NME, and certain subsidiaries of New Hillhaven and NME, have entered into that certain letter agreement dated June 22, 1993 (the "June 22 Letter"), which among other things, restructures certain relationships of the companies. Among the provisions contained in the June 22 Letter that are pertinent to this Reimbursement Agreement, are the following: (1) New Hillhaven will obtain financing consisting of (a) third party bank financing in the approximate amount of $400 million, and (b) public or private debt financing in the approximate amount of $175 million (collectively, the "Financing"), a portion of the proceeds of which Financing will be used to (i) repay certain Obligations currently guaranteed by NME, and (ii) cause NME and/or certain of its subsidiaries to be released from certain other Obligations currently guaranteed by NME and/or certain of its subsidiaries; (2) The annual guarantee fee payable by New Hillhaven under this Reimbursement Agreement in connection with the Obligations shall be limited to a maximum of 2% of the Obligations outstanding and the manner of calculating the fee charged on the Obligations outstanding shall be revised; and (3) NME and/or certain subsidiaries of NME shall assign to New Hillhaven's subsidiary, First Healthcare Corporation ("FHC"), and FHC shall assume the renewal and/or purchase options contained in the Assumed Leases (as that term is defined in the Reimbursement Agreement) that were not assigned to FHC on or before the Distribution Date for those facilities described in Exhibit 1 attached hereto and incorporated herein by this reference (the "Assumed Lease Options"), and those Assumed Lease Options shall be added to the Obligations covered by this Reimbursement Agreement, as more specifically provided herein. C. New Hillhaven and NME desire to amend the Reimbursement Agreement as set forth in this Agreement. NOW THEREFORE, in consideration of the foregoing Recitals and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree to amend, modify and supplement the Reimbursement Agreement as follows: AGREEMENT 1. Calculation of the Guarantee Fee After Completion of Financing. The provisions of Section 2(c) of the Reimbursement Agreement are hereby amended to provide that, commencing with the quarterly payment due for the fiscal quarter ending February 28, 1993, the guarantee fee for each quarter shall be the product of (i) the amount of the Obligations outstanding at the close of business on the last day of the preceding fiscal quarter multiplied by (ii) a fraction which is equal to the applicable fraction for the previous fiscal year multiplied by 1.2; provided, however, that at no time shall the fraction to be used in calculating the guarantee fee exceed 2%. Furthermore, notwithstanding the foregoing guaranty fee provisions, the principal amounts of the Obligations described in Exhibit 2 and Exhibit 3 attached hereto shall not be included as part of the Obligations for the purposes of calculating the guarantee fee in the foregoing sentence. Instead, in accordance with prior agreements, (x) New Hillhaven shall pay to NME a guarantee fee of 1% per annum on those Obligations described in Exhibit 2, and (y) no guarantee fee shall be charged on those Obligations described in Exhibit 3. 2. Proration of Guarantee Fee on Obligations Paid With Proceeds of Financing. Notwithstanding any provisions to the contrary, the guarantee fee paid with respect to those Obligations that are paid in full, or as to which NME's guaranty has been released, with proceeds of the Financing during the fiscal year ending May 31, 1994 shall be prorated to the date of payoff, based on the actual number of days elapsed until such Obligation is paid in full or such guaranty has been released. 3. Inclusion of the Assumed Lease Options as Obligations. The Assumed Lease Options are hereby added as, and shall be deemed to be, "Obligations" under (and as defined in) the Reimbursement Agreement, and all terms, covenants and conditions of the Reimbursement Agreement shall apply; provided, however, that the guarantee fee set forth in Paragraph 1 above shall be charged on the aggregate amount of the rents that will become due for the renewal period for any such Assumed Lease, commencing on the earlier of the date that FHC exercises or is required to exercise such Assumed Lease Option, as provided by the terms of the assignment of such Assumed Lease Option. 4. Inclusion of Certain Assumed Obligations. To the extent NME or any subsidiary or affiliate of NME remains primarily or contingently liable therefor, each of the Assumed Existing Debt and the Assumed Lease described in Exhibit 4 attached hereto is hereby added as, and shall be deemed to be, an "Obligation" under (and as defined in) the Reimbursement Agreement, and all terms, covenants and conditions of the Reimbursement Agreement, including payment of a guarantee fee as provided in Paragraph 1 above, shall apply to such Assumed Existing Debt and Assumed Lease. 5. Reaffirmation of Reimbursement Agreement. New Hillhaven reaffirms that the Reimbursement Agreement, as amended hereby, shall remain in full force and effect, and shall continue to be binding upon New Hillhaven. 6. Captions. The captions and headings used herein are for the convenience of reference and shall not be construed in any manner to limit or modify any of the terms hereof. 7. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of California. 8. Counterparts. This Amendment may be executed in counterparts, each of which shall be an original, but all of which together shall constitute but one and the same instrument. IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be duly executed on its behalf as of the date first set forth above. NATIONAL MEDICAL ENTERPRISES, INC. By: _________________________ Title: ______________________ THE HILLHAVEN CORPORATION By: _________________________ Title: ______________________ EXHIBIT 1 No. Facility Name 272 Hughes Springs Nursing Home Hughes Springs, Texas 273 Pinecrest Convalescent Home Daingerfield, Texas 274 Coastal Care Center Texas City, Texas 275 Great Southwest Convalescent Center Grand Prairie, Texas 292 Twin City Nursing Home Gas City, Indiana 298 Driftwood Convalescent Hospital Yuba City, California 299 Marysville Convalescent Hospital Marysville, California 305 University Nursing Center Upland, Indiana 880 Four States Nursing Home Texarkana, Texas 881 Southwest Senior Care Center Las Vegas, New Mexico 760 Ridgeview Nursing and Convalescent Center Wichita Falls, Texas 76392 860 Blue Hills Centre Kansas City, Missouri 849 Iliff Care Center Denver, Colorado 295 Whitehouse Country Manor Whitehouse, Ohio 184 Greystone Healthcare Center Blountville, Tennessee 183 Hillhaven Convalescent Center - Ripley Ripley, Tennessee 189 Fairpark Healthcare Center Maryville, Tennessee 179 Hillhaven Convalescent Center of Huntington Huntington, Tennessee 175 Hillhaven of Jefferson City Jefferson City, Tennessee 171 Hillhaven Convalescent Center Bolivar, Tennessee EXHIBIT 2 A ONE PERCENT GUARANTEE FEE IS PAYABLE ON OBLIGATIONS COVERING THE FOLLOWING FACILITIES: Facility 462: Queen Anne Care Center, WA Facility 158: Bellingham Care Center, Bellingham, WA Facility 461: Edmonds Care Center, Edmonds, WA Facility 825: Nansemond Convalescent Center, Suffolk, VA Facility 829: Holmes Convalescent Center, Virginia Beach, VA EXHIBIT 3 NO GUARANTEE FEE IS PAYABLE ON OBLIGATIONS COVERING THE FOLLOWING FACILITIES: Facility 525: Hillhaven Convalescent Hospital, Orange, CA Facility 781: Bashford East Health Care Center, Bashford, KY Facility 804: Hillhaven Convalescent Center and Nursing Home, Birmingham, AL Facility 824: Hillhaven Convalescent Center & Nursing Home, Mobile, AL Facility 160: First Hill Care Center, WA Facility 560: Franklin Woods Healthcare Center, OH Facility 570: Pickerington Health Care Center, OH Facility 822: Hillhaven Convalescent Center, Memphis, TN Facility 416: Park Place Hillhaven Convalescent Center, Great Falls, MT Facility 572: Canal Winchester, OH -- No guarantee fee shall be payable on the Assumed Lease. A guarantee shall be payable on the Assumed Existing Debt as provided in Paragraph 1 of the Amendment. EXHIBIT 4 ASSUMED OBLIGATIONS ASSUMED EXISTING DEBT Facility 572: Canal Winchester Loan Agreement, dated April 1, 1983, between County of Franklin and Aeon, Inc., with an outstanding principal balance as of September 2, 1993 of $1,955,000, secured by an Open-End Mortgage and Security Agreement dated April 1, 1983. Facility 416: Park Place All-Inclusive Promissory Note Secured by Mortgage, dated September 1, 1983, in favor of B.G.M. Enterprises, with an outstanding principal balance as of September 2, 1993 of $257,998.44. All-Inclusive Promissory Note Secured by Mortgage, dated September 1, 1983, in favor of B.G.M. Enterprises, with an outstanding principal balance as of September 2, 1993 of $1,357,016.39. ASSUMED LEASE Facility 572: Canal Winchester Lease and Sublease Agreement, dated October 10, 1985, between Aeon, Inc. and First Healthcare Corporation, and any amendments thereto. EX-10.49 13 Exhibit 10.49 AMENDMENT NO. 1 TO CREDIT AGREEMENT AMENDMENT dated as of October 12, 1993 to the Credit Agreement dated as of September 1, 1993 (the "Credit Agreement") among FIRST HEALTHCARE CORPORATION (the "Borrower"), THE HILLHAVEN CORPORATION (the "Guarantor"), the BANKS referred to in the Credit Agreement (the "Banks"), the LC ISSUING BANKS referred to in the Credit Agreement (the "LC Issuing Banks"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent"), CHEMICAL BANK, as Administrative Agent (the "Administrative Agent"), and J.P. MORGAN DELAWARE, as Collateral Agent (the "Collateral Agent"). W I T N E S S E T H: WHEREAS, in lieu of selling residential units at retirement housing facilities in Walpole, Massachusetts and Nashua, New Hampshire, the Guarantor or its Subsidiaries have heretofore issued, and wish to continue issuing, bonds to tenants in amounts related to the value of such residential units, which bonds are repayable upon termination of the tenants' respective tenancies; and the parties hereto wish to (i) amend Section 5.11 of the Credit Agreement to permit such bonds to continue to be issued and remain outstanding and (ii) amend Section 2.08 of the Credit Agreement to avoid mandatory prepayments of the Term Loans by reason of the issuance of such bonds; and WHEREAS, the compliance levels required by Sections 5.23 and 5.24 of the Credit Agreement were negotiated on the basis of pro forma figures assuming completion of the transactions consummated on the Closing Date; and the parties hereto desire to provide that calculations of certain amounts referred to in said covenants as of any time prior to the Closing Date will be calculated on the same pro forma basis; and WHEREAS, the initial $230,000,000 Minimum Compliance Level for Consolidated Tangible Net Worth specified in clause (i) of the definition of "Minimum Compliance Level" in Section 5.25 of the Credit Agreement was determined on a pro forma basis reflecting the issuance of the Series D Preferred Stock to be issued on the Closing Date; and the parties hereto wish to amend clause (iii) of said definition of Minimum Compliance Level to exclude such Series D Preferred Stock, so that it will not be reflected in the Minimum Compliance Level twice; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreement has the meaning assigned to such term in the Credit Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Credit Agreement shall from and after the date hereof refer to the Credit Agreement as amended hereby. SECTION 2. Amendment of Section 2.08. Section 2.08(c)(i)(B) is amended by inserting the words "and paragraph (n)" immediately after the words "paragraphs (a) through (l)". SECTION 3. Amendment of Section 5.11. Section 5.11 of the Credit Agreement is amended by deleting the word "and" at the end of paragraph (l), changing the period at the end of paragraph (m) to "; and", and adding the following new paragraph (n): (n) Debt evidenced by bonds issued by the Guarantor or any of its Subsidiaries to tenants of residential units at New Pond Village in Walpole, Massachusetts or The Greens at Hanover in Nashua, New Hampshire evidencing the obligation to repay at the end of their tenancies amounts paid by them at the beginning of their tenancies, provided that the aggregate outstanding principal amount of all such bonds (including any such bonds outstanding on the Closing Date and referred to in paragraph (b) above) does not exceed $45,000,000. SECTION 4. Compliance with Sections 5.23 and 5.24. For the purposes of the covenants in Sections 5.23 and 5.24 of the Credit Agreement: (i) if Consolidated Debt for Borrowed Money is to be determined as of any date prior to the Closing Date, it shall be determined on a pro forma basis as if all Debt that the Guarantor and its Subsidiaries repaid on the Closing Date had been repaid on June 1, 1993 and all Debt that the Guarantor and its Subsidiaries incurred on the Closing Date had been incurred on June 1, 1993; and (ii) if Consolidated Tangible Net Worth is to be determined as of any date prior to the Closing Date, it shall be determined on a pro forma basis as if the Series D Preferred Stock that the Guarantor issued on the Closing Date had been issued on June 1, 1993. The foregoing pro forma adjustments shall not be made for purposes of determining compliance with said covenants at any time on or after the Closing Date. SECTION 5. Amendment of Section 5.25. Section 5.25 of the Credit Agreement is amended by adding, at the end of clause (iii) of the definition of "Minimum Compliance Level", the phrase "(excluding Series D Preferred Stock issued on the Closing Date)". SECTION 6. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 7. Counterparts; Effectiveness. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Amendment shall become effective as of the date hereof when the Agent shall have received duly executed counterparts hereof signed by the Borrower, the Required Banks and the Agents (or, in the case of any party as to which an executed counterpart shall not have been received, the Agent shall have received telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party). IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written. FIRST HEALTHCARE CORPORATION By /s/ Robert K. Schneider Title: Vice President and Treasurer THE HILLHAVEN CORPORATION By /s/ Robert K. Schneider Title: Vice President and Treasurer BANKS Managing Agents: MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Diana H. Imhof Title: Associate CHEMICAL BANK By /s/ Robert L. Parker Title: Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By /s/ Brad W. DeSpain Title: Vice President THE BANK OF NEW YORK By /s/ Daniel L. Black Title: Senior Vice President and Manager THE CHASE MANHATTAN BANK, N.A. By /s/ Ruth I. Dreessen Title: Vice President CONTINENTAL BANK N.A. By /s/ David F. McLeese Title: Vice President THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY By /s/ Hiroshi Norizuki Title: Deputy General Manager NATIONSBANK OF TEXAS, N.A. By /s/ Pamela F. Randell Title: Vice President BANKS (cont'd) PNC BANK, NATIONAL ASSOCIATION By /s/ J. Gregory Seibly Title: Vice President SEATTLE-FIRST NATIONAL BANK By /s/ Michael J. Collum Title: Vice President SWISS BANK CORPORATION, SAN FRANCISCO BRANCH By /s/ David L. Parrot Title: Associate Director Merchant Banking By /s/ William B. Walzer Title: Associate Director Accounting THE TORONTO-DOMINION BANK By /s/ Bruce E. Gordon Title: Director Health Care Finance U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION By /s/ Erin M. Keyser Title: Vice President BANKS (cont'd) Co-Agents: BANK OF HAWAII By /s/ Robert S. Harrison Title: Vice President BANQUE NATIONALE DE PARIS By /s/ Deborah Y. Gohh Title: Vice President By /s/ Jennifer Cho Title: Vice President BHF-BANK By /s/ Sheldon J. Kleiman Title: Assistant Vice President By /s/ John P. Judge Title: Assistant Treasurer KREDIETBANK N.V. By /s/ Robert Snauffer Title: Vice President By /s/ Diane M. Grimmig Title: Vice President BANKS (cont'd) Lenders: DRESDNER BANK AG, LOS ANGELES AGENCY/ GRAND CAYMAN BRANCH By /s/ Bryan P. Read Title: Assistant Vice President By /s/ Sidney S. Jordan Title Vice President FIRST INTERSTATE BANK OF WASHINGTON, N.A. By /s/ Donald H. Ralston Title: Vice President FLEET BANK OF MASSACHUSETTS By /s/ Virginia Stolzenthaler Title: Vice President THE FUJI BANK, LIMITED, LOS ANGELES AGENCY By /s/ Yasuji Ikawa Title: Joint General Manager AGENTS MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By /s/ Diana H. Imhof Title: Associate CHEMICAL BANK, as Administrative Agent By /s/ Robert L. Parker Title: Vice President J.P. MORGAN DELAWARE, as Collateral Agent By /s/ Robert J. Henchey Title: Vice President EX-10.50 14 Exhibit 10.50 AMENDMENT NO. 2 TO CREDIT AGREEMENT AMENDMENT NO. 2 dated as of December 30, 1993 to the Credit Agreement dated as of September 1, 1993 (as amended by Amendment No. 1 thereto dated as of October 12, 1993, the "Credit Agreement") among FIRST HEALTHCARE CORPORATION (the "Borrower"), THE HILLHAVEN CORPORATION (the "Guarantor"), the BANKS referred to in the Credit Agreement (the "Banks"), the LC ISSUING BANKS referred to in the Credit Agreement (the "LC Issuing Banks"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent"), CHEMICAL BANK, as Administrative Agent (the "Administrative Agent"), and J.P. MORGAN DELAWARE, as Collateral Agent (the "Collateral Agent"). W I T N E S S E T H: WHEREAS, the Guarantor and the Borrower desire to amend the Credit Agreement to allow IRB Letters of Credit (as defined in the Credit Agreement) to be issued to backstop letters of credit that provide credit support for (i) industrial revenue bonds in an aggregate original principal amount of $6,925,000 that were issued with respect to the Meridian House retirement housing facility located in Lantana, Florida or (ii) any other industrial revenue bonds or similar instruments issued for the benefit of the Borrower, any of its Subsidiaries (as defined in the Credit Agreement) or any partnership in which the Borrower or one of its Subsidiaries is a general partner (or for which the Borrower is otherwise liable) that were outstanding on the Effective Date (as defined in the Credit Agreement) and that may hereafter be designated by the Borrower by written notice to the Banks, in each case subject to the limitation on the aggregate original face amount of IRB Letters of Credit that may be issued under the Credit Agreement; and WHEREAS, the parties hereto wish to amend the definition of "Designated IRB Debt" contained in the Credit Agreement, as well as Schedule IX to the Credit Agreement, to give effect to the foregoing; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreement has the meaning assigned to such term in the Credit Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Credit Agreement shall from and after the date hereof refer to the Credit Agreement as amended hereby. SECTION 2. Amendment of Section 1.01. Section 1.01 is amended by replacing the definition of "Designated IRB Debt" contained therein with the following: "Designated IRB Debt" means industrial revenue bonds or similar instruments issued for the benefit of the Borrower, any of its Subsidiaries or any partnership in which the Borrower or one of its Subsidiaries is a general partner (or for which the Borrower is otherwise liable) which are outstanding on the Effective Date and (x) identified in Schedule IX hereto or (y) designated by the Borrower by written notice to the Banks as "Designated IRB Debt" for all purposes hereunder. SECTION 3. Amendment of Schedule IX. Schedule IX is amended by adding the following industrial revenue bond issue as new "24." on such schedule, by changing the numbering of the subsequent industrial revenue bond issues accordingly and by changing the sums of the relevant figures accordingly: 24. 7138 Meridian House Bank Cal 6,925,000 SECTION 4. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 5. Counterparts; Effectiveness. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Amendment shall become effective as of the date hereof when the Agent shall have received duly executed counterparts hereof signed by the Borrower, the Required Banks and the Agents (or, in the case of any party as to which an executed counterpart shall not have been received, the Agent shall have received telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party). IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written. FIRST HEALTHCARE CORPORATION By /s/ Robert K. Schneider Vice President & Treasurer THE HILLHAVEN CORPORATION By /s/ Robert K. Schneider Vice President & Treasurer BANKS Managing Agents: MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Diana H. Imhof Title: Associate CHEMICAL BANK By /s/ Robert L. Parker Title: Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By /s/ Brad W. DeSpain Title: Vice President THE BANK OF NEW YORK By /s/ Lisa Y. Brown Title: Vice President THE CHASE MANHATTAN BANK, N.A. By /s/ Andris G. Kalnins Title: Managing Director CONTINENTAL BANK N.A. By /s/ Elizabeth M. Nolan Title: Vice President THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY By /s/ Yutaka Kamisawa Title: Deputy General Manager NATIONSBANK OF TEXAS, N.A. By /s/ Pamela F. Randell Title: Vice President PNC BANK, NATIONAL ASSOCIATION By /s/ J. Gregory Seilby Title: Vice President SEATTLE-FIRST NATIONAL BANK By /s/ Thomas P. Rook Title: Vice President SWISS BANK CORPORATION, SAN FRANCISCO BRANCH By /s/ David L. Parrot Title: Associate Director Merchant Banking By /s/ Colin T. Taylor Title: Director Merchant Banking THE TORONTO-DOMINION BANK By /s/ Sara A. Tirner Title: Attorney-in-Fact U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION By /s/ Erin Keyser Title: Vice President Co-Agents: BANK OF HAWAII By /s/ Peter S. Ho Title: Assistant Vice President BANQUE NATIONALE DE PARIS By /s/ Judith A. Dowling Title: Vice President By /s/ William LaHerran Title: Associate BHF-BANK By /s/ Robert Suehnholz Title: Senior Vice President By /s/ Linda Pace Title: Assistant Treasurer KREDIETBANK N.V. By /s/ Robert Snauffer Title: Vice President By /s/ Tod R. Angus Title: Vice President Lenders: DRESDNER BANK AG, LOS ANGELES AGENCY/ GRAND CAYMAN BRANCH By /s/ Jon M. Bland Title: Senior Vice President By /s/ Sidney S. Jordan Title Vice President FIRST INTERSTATE BANK OF WASHINGTON, N.A. By /s/ Donald H. Ralston Title: Vice President FLEET BANK OF MASSACHUSETTS By /s/ Ginger Stolzenthaler Title: Vice President THE FUJI BANK, LIMITED, LOS ANGELES AGENCY By /s/ Yasuji Ikawa Title: Joint General Manager THE INDUSTRIAL BANK OF JAPAN, LIMITED, LOS ANGELES AGENCY By /s/ Koji Okawa Title: Joint General Manager AGENTS MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By /s/ Diana H. Imhof Title: Associate CHEMICAL BANK, as Administrative Agent By /s/ Robert L. Parker Title: Vice President J.P. MORGAN DELAWARE, as Collateral Agent By /s/ Robert J. Henchey Title: Vice President EX-10.51 15 Exhibit 10.51 AMENDMENT NO. 3 TO CREDIT AGREEMENT AMENDMENT NO. 3 dated as of May 27, 1994 to the Credit Agreement dated as of September 1, 1993 (as heretofore amended, the "Credit Agreement") among FIRST HEALTHCARE CORPORATION (the "Borrower"), THE HILLHAVEN CORPORATION (the "Guarantor"), the BANKS referred to in the Credit Agreement (the "Banks"), the LC ISSUING BANKS referred to in the Credit Agreement (the "LC Issuing Banks"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent"), CHEMICAL BANK, as Administrative Agent (the "Administrative Agent"), and J.P. MORGAN DELAWARE, as Collateral Agent (the "Collateral Agent"). W I T N E S S E T H: WHEREAS, the parties hereto desire to amend the Credit Agreement (A) to permit the Guarantor and its Subsidiaries (i) to use a captive insurance company Subsidiary of the Guarantor to insure their professional and general liability exposure and (ii) to place their excess insurance and reinsurance with one or more insurers of equal or better quality as insurers having not less than an A.M. Best rating of "A" or "A- XI", and (B) to permit the Guarantor to use its captive insurance company Subsidiary to provide professional and general liability exposure insurance to others; WHEREAS, the Borrower wishes to finance the cost (approximately $1,800,000) of acquiring certain computer equipment for use in the Mortgaged Facilities through outside lenders which as a condition to such financing require that they obtain a first priority Lien on such equipment; WHEREAS, the outside lenders' Lien on such equipment will constitute a purchase money Lien permitted by Section 5.12(e) of the Credit Agreement, but for technical reasons may not constitute a "purchase money security interest" under the Uniform Commercial Code with respect to some or all of such equipment and therefore may be junior to the Collateral Agent's Lien on such equipment under the relevant Mortgages; and WHEREAS, the Guarantor has asked the Banks to permit the Collateral Agent to enter into an agreement with the outside lenders in order to ensure that they will obtain the first priority Lien on such equipment that they have required as a condition to financing the acquisition thereof; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreement has the meaning assigned to such term in the Credit Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Credit Agreement shall from and after the date hereof refer to the Credit Agreement as amended hereby. SECTION 2. Amendment of Section 5.04. Section 5.04 is amended by replacing clauses (ii) and (iii) thereof with the following: (ii) professional and general liability insurance (including products/completed operations liability coverage) in amounts not less than those listed in part B of Schedule X hereto and (iii) such other insurance coverage in such amounts and with respect to such risks as the Required Banks may reasonably request. The Guarantor and its Subsidiaries may use a captive insurance company Subsidiary of the Guarantor to insure their professional and general liability exposure, provided that excess insurance and reinsurance are carried in such amounts as are customary with owners of similar businesses, and said excess insurance and reinsurance are placed with companies having not less than an A.M. Best rating "A" or "A- XI" or with other insurers of equal or better quality. The foregoing shall not prohibit the Guarantor from maintaining insurance coverage with X.L. Insurance Company, Ltd., in amounts, and with deductibles, not exceeding those in effect on the Closing Date and covering such risks as are covered by X.L. Insurance Company, Ltd. under policies in effect on the Closing Date. SECTION 3. Permitted Lines of Business. The undersigned parties hereby waive the provisions of Section 5.08 of the Credit Agreement to the extent, if any, required to permit a captive insurance company Subsidiary of the Guarantor to insure the professional and general liability exposure of the Guarantor and its Subsidiaries and to provide such insurance to others. Except as expressly waived hereby, the provisions of Section 5.08 of the Credit Agreement shall remain in full force and effect. SECTION 4. Entry into Agreement to Subordinate by the Collateral Agent. In order to permit the Borrower to finance the cost (approximately $1,800,000) of acquiring certain computer equipment for use in the Mortgaged Facilities through outside lenders which as a condition to such financing require that they obtain a first priority Lien on such equipment, the Collateral Agent is authorized and directed, if requested to do so by the Borrower, to enter into an agreement with such lenders, in form and substance satisfactory to the Agent, for the purpose of subordinating the Collateral Agent's Lien on such equipment under the relevant Mortgages to the Lien of such lenders securing advances made to finance the cost of such equipment. SECTION 5. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 6. Counterparts; Effectiveness. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Amendment shall become effective as of the date hereof when the Agent shall have received duly executed counterparts hereof signed by the Borrower, Banks having at least 90% of the aggregate amount of the Credit Exposures (said 90% to be calculated net of any participating interests as to which such Banks are not permitted to vote pursuant to directions given in accordance with Section 10.06(b) of the Credit Agreement), the Agent and the Collateral Agent (or, in the case of any party as to which an executed counterpart shall not have been received, the Agent shall have received telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party). IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written. FIRST HEALTHCARE CORPORATION By /s/ Robert Schneider Vice President & Treasurer THE HILLHAVEN CORPORATION By /s/ Robert Schneider Vice President & Treasurer BANKS Managing Agents: MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Diana H. Imhof Title: Associate CHEMICAL BANK By /s/ Neil R. Boylan Title: Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By /s/ Brad DeSpain Title: Vice President THE BANK OF NEW YORK By /s/ Lisa Y. Brown Title: Vice President THE CHASE MANHATTAN BANK, N.A. By /s/ Michael K. Bayley Title: Vice President CONTINENTAL BANK N.A. By /s/ David F. McLeese Title: Vice President THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY By /s/ Yutaka Kamisawa Title: Deputy General Manager NATIONSBANK OF TEXAS, N.A. By /s/ Pamela Randell Levy Title: Senior Vice President PNC BANK, NATIONAL ASSOCIATION By /s/ J. Gregory Seibly Title: Vice President SEATTLE-FIRST NATIONAL BANK By /s/ Thomas P. Rook Title: Vice President SWISS BANK CORPORATION, SAN FRANCISCO BRANCH By /s/ David L. Parrot Title: Associate Director Merchant Banking By /s/ Hans-Ueli Surber Title: Executive Director Merchant Banking THE TORONTO-DOMINION BANK By /s/ Warren Finlay Title: Manager Credit U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION By /s/ Erin Keyser Title: Vice President Co-Agents: BANK OF HAWAII By /s/ Peter S. Ho Title: Assistant Vice President BANQUE NATIONALE DE PARIS By /s/ Deborah Y. Gohh Title: Vice President By /s/ Jennifer Cho Title: Vice President BHF-BANK By /s/ Evon Contos Title: Vice President By /s/ Peter J. Becker Title: Assistant Vice President KREDIETBANK N.V. By /s/ Robert Snauffer Title: Vice President Lenders: DRESDNER BANK AG, LOS ANGELES AGENCY/ GRAND CAYMAN BRANCH By /s/ Kenneth I. Bowman Title: Vice President By /s/ Jon M. Bland Title: Senior Vice President FIRST INTERSTATE BANK OF WASHINGTON, N.A. By /s/ Donald H. Ralston Title: Vice President FLEET BANK OF MASSACHUSETTS By /s/ Ginger Stolzenthaler Title: Vice President THE FUJI BANK, LIMITED, LOS ANGELES AGENCY By /s/ Yasuji Ikawa Title: Joint General Manager THE INDUSTRIAL BANK OF JAPAN, LIMITED, LOS ANGELES AGENCY By /s/ Toshinari Iyoda Title: Senior Vice President AGENTS MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By /s/ Diana H. Imhof Title: Associate J.P. MORGAN DELAWARE, as Collateral Agent By /s/ Robert J. Henchey Title: Vice President EX-10.52 16 Exhibit 10.52 AGREEMENT AND WAIVER This AGREEMENT AND WAIVER (this "Agreement") dated as of September ___, 1993, by and among National Medical Enterprises, Inc., a Nevada corporation ("NME"), the subsidiaries of NME which are signatories hereto, The Hillhaven Corporation, a Nevada corporation ("Hillhaven"), and First Healthcare Corporation, a Delaware corporation ("FHC"). WITNESSETH: WHEREAS, pursuant to that certain Revolving Credit and Term Loan Agreement dated as of January 31, 1990 between NME and Hillhaven, as amended by that certain First Amendment thereto dated as of November 12, 1992 (as amended, the "Revolving Credit Agreement"), NME agreed to make certain loans to Hillhaven through May 31, 1994 subject to the conditions set forth therein; and WHEREAS, pursuant to that certain Commitment Letter dated May 31, 1990, between NME and FHC, as amended by that certain Amendment No. One thereto dated as of May 1, 1991 (as amended, the "Commitment Letter"), NME agreed to make certain loans to FHC subject to the conditions set forth therein; and WHEREAS, pursuant to that certain Master Loan Agreement dated as of April 1, 1992 among the lenders parties thereto, NME, FHC and Hillhaven, as amended by that certain First Amendment thereto dated as of November 12, 1992 (as amended, the "Master Loan Agreement"), the lenders which were parties thereto agreed to finance up to 100% of the purchase price of the facilities referred to therein; and WHEREAS, pursuant to that certain Guaranty dated as of April 1, 1992 from Hillhaven in favor of the lenders listed thereon (the "Master Loan Agreement Guaranty"), Hillhaven guaranteed the obligations of FHC under the Master Loan Agreement; and WHEREAS, pursuant to that certain Master Loan Agreement for Purchase of Nine Facilities dated as of June 1, 1992 among the lenders parties thereto and FHC (the "Second Master Loan Agreement"), the lenders which were parties thereto agreed to finance up to 100% of the purchase price of the facilities referred to therein; and WHEREAS, pursuant to that certain Guaranty dated as of June 1, 1992 from Hillhaven in favor of the lenders listed thereon (the "Second Master Loan Agreement Guaranty"), Hillhaven guaranteed FHC's obligations under the Second Master Loan Agreement; and WHEREAS, pursuant to that certain Promissory Note dated January 31, 1990 (the "Promissory Note") by FHC in favor of NME Properties Corp., a Tennessee corporation (formerly known as The Hillhaven Corporation), FHC owes certain monies to NME Properties Corp.; and WHEREAS, pursuant to that certain Note Guarantee Agreement dated as of January 31, 1990 among Hillhaven, NME and the payees identified therein (the "Note Guarantee Agreement"), Hillhaven guaranteed FHC's obligations under the Promissory Note; and WHEREAS, Hillhaven is restructuring its relationship with NME to, inter alia, repay amounts owing to NME pursuant to the Master Loan Agreement, the Second Master Loan Agreement and the Promissory Note, and terminate NME's commitment to loan funds pursuant to the Revolving Credit Agreement and the Master Loan Agreement; and WHEREAS, in connection therewith the parties desire to eliminate NME's commitments under the Revolving Credit Agreement, and the Master Loan Agreement, and to terminate Hillhaven's obligations under the Master Loan Agreement Guaranty, Second Master Loan Agreement Guaranty and Note Guarantee Agreement; and WHEREAS, the aforesaid restructuring will be financed through (1) the issuance by Hillhaven to NME or its subsidiaries of $120 million of a newly created series of payable-in-kind preferred stock, (2) the incurrence by FHC of up to $360 million of indebtedness in the form of term loans, letters of credit and working capital loans under a secured credit facility with Morgan Guaranty Trust Company of New York and a syndicate of other lenders (the "Bank Financing"), (3) the sale by Hillhaven of senior subordinated notes in the approximate amount of $175 million (the "Notes"), (4) the extension of FHC's commercial paper program backed by certain of its (and certain of its subsidiaries') Medicaid accounts receivable and increase in permitted borrowings under such program from $30.0 million to $40.0 million and (5) the use of available cash; and WHEREAS, in connection with the Bank Financing, Hillhaven has transferred its bank accounts to FHC; and WHEREAS, pursuant to Sections 5(a), 5(b) and 5(i) of that certain Guarantee Reimbursement Agreement, as amended (as so amended, the "Guarantee Reimbursement Agreement"), Hillhaven agreed, inter alia, to certain covenants which may be violated as a result of the Bank Financing, the Notes and the transfer of bank accounts to FHC; NOW, THEREFORE, in consideration of the foregoing recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto intending to be legally bound, hereby agree as follows: 1. Termination of Obligations to Lend. NME's obligations to loan funds to Hillhaven under the Revolving Credit Agreement, the Master Loan Agreement, the Second Master Loan Agreement, the Promissory Note and the Commitment Letter shall terminate as of the date hereof. 2. Termination of Guarantees. Hillhaven's obligations under the Master Loan Agreement Guaranty, Second Master Loan Agreement Guaranty and Note Guarantee Agreement shall terminate as of the date hereof. 3. Waiver. NME hereby waives compliance with the following provisions of the Guarantee Reimbursement Agreement: (a) Sections 5(a) and 5(b) of the Guarantee Reimbursement Agreement are hereby waived to the extent necessary to permit (i) the transactions contemplated by the Bank Financing, including the placement of mortgages on facilities owned by FHC or its subsidiaries, the substitution of facilities as collateral and any subsequent addition of collateral, and (ii) the issuance of the Notes. (b) Section 5(i) of the Guarantee Reimbursement Agreement is hereby waived to the extent necessary to permit Hillhaven to transfer any or all of its bank accounts to FHC. 4. Costs. Each party shall bear its own cost and expenses in connection with the transactions contemplated in this Agreement. 5. Cooperation. The parties agree to execute and deliver such other documents and instruments and do all such other acts and things as may be reasonably required to give effect to the agreements contained in this Agreement. 6. Amendment. No amendment or modifications of this Agreement shall be effective unless in writing signed by the parties. 7. Governing Law. This Agreement shall be governed by and construed in accordance with California law. 8. Counterparts. This Agreement may be executed in counterparts, each of which shall be an original, but all of which together shall constitute but one and the same instrument. 9. No Further Waiver. The waivers set forth herein shall be effective only for the specific purposes for which given. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed on its behalf as of the date first set forth above. NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation By: /s/ Timothy Pullen Its: Vice President NME PROPERTIES CORP., a Tennessee corporation By: /s/ Timothy Pullen Its: Vice President NME PROPERTIES, INC., a Delaware corporation By: /s/ Timothy Pullen Its: Vice President NME PROPERTY HOLDING CO., INC., a Delaware corporation By: /s/ Timothy Pullen Its: Vice President NME PROPERTIES WEST, INC., a Delaware corporation By: /s/ Timothy Pullen Its: Vice President HAMMOND HOLIDAY HOME, INC., a Kansas corporation By: /s/ Timothy Pullen Its: Vice President SEDGWICK CONVALESCENT CENTER, INC., a Kansas corporation By: /s/ Timothy Pullen Its: Vice President NORTHWEST CONTINUUM CARE CENTER, INC., a Washington corporation By: /s/ Timothy Pullen Its: Vice President FLAGG INDUSTRIES, INC., a California corporation By: /s/ Timothy Pullen Its: Vice President GUARDIAN MEDICAL SERVICES, INC., a North Carolina corporation By: /s/ Timothy Pullen Its: Vice President NHE ARIZONA, INC., an Arizona corporation By: /s/ Timothy Pullen Its: Vice President LAKE HEALTH CARE FACILITIES, INC., a Delaware corporation By: /s/ Timothy Pullen Its: Vice President THE HILLHAVEN CORPORATION, a Nevada corporation By: /s/ Robert K. Schneider Its: Vice President & Treasurer FIRST HEALTHCARE CORPORATION a Delaware corporation By: /s/ Robert K. Schneider Its: Vice President & Treasurer EX-10.53 17 Exhibit 10.53 NOVATION AGREEMENT THIS NOVATION AGREEMENT (this "Agreement") is made as of April 29, 1994, among HILLHAVEN FUNDING CORPORATION (the "Issuer"), BANQUE INDOSUEZ, New York Branch ("Banque Indosuez"), BANQUE NATIONALE DE PARIS, San Francisco Agency ("Banque Nationale"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("Bank of America"), and SEATTLE-FIRST NATIONAL BANK ("Seafirst"). Collectively, Banque Indosuez and Banque Nationale shall be called the "Prior Banks", and Bank of America and Seafirst shall be called the "Successor Banks". The Issuer, the Prior Banks as "Banks," and Banque Indosuez as agent for the Banks ("Agent") have entered into a Liquidity Agreement dated as of July 1, 1990 and amended September 17, 1991 and November 23, 1992 (as so amended, the "Liquidity Agreement"). Pursuant to the Liquidity Agreement, the Issuer and Morgan Guaranty Trust Company of New York ("Morgan Guaranty"), as collateral agent (the "Collateral Agent") have entered into a Pledge and Security Agreement dated as of July 1, 1990 (the "Pledge Agreement"). The parties hereto wish to substitute the Successor Banks as "Banks" under the Liquidity Agreement in lieu of the Prior Banks, to substitute Bank of America as Agent under the Liquidity Agreement in lieu of Banque Indosuez, and to substitute Seafirst as Collateral Agent under the Liquidity Agreement and the Pledge Agreement in lieu of Morgan Guaranty. NOW, THEREFORE, the parties hereto agree on and as of the date hereof: 1. The Issuer represents and warrants to the Successor Banks that: the Liquidity Agreement is in full force and effect and has not been altered, modified, waived, amended or revoked; no Loans or Supported Notes (as those terms are defined in the Liquidity Agreement) or any other amounts under the Liquidity Agreement or the Pledge Agreement are outstanding; this Agreement constitutes the legal, valid and binding obligation of the Issuer, enforceable against it in accordance with the terms hereof; no consents or approvals, other than those herein contained, are necessary to the execution and delivery of this Agreement by the Issuer; no Collateral (as defined in the Pledge Agreement) is in the possession of Morgan Guaranty as Collateral Agent; the Issuer is not in default under the Liquidity Agreement or the Pledge Agreement; and to the best knowledge of the Issuer, Banque Indosuez is not in default under the Liquidity Agreement either in its capacity as Bank or in its capacity as Agent, Morgan Guaranty is not in default in its capacity as Collateral Agent, and Banque Nationale is not in default under the Liquidity Agreement. 2. The Prior Banks each represent and warrant to the Successor Banks that: the Liquidity Agreement is in full force and effect and has not been altered, modified, waived, amended or revoked; no Loans or any other amounts under the Liquidity Agreement or the Pledge Agreement are outstanding, and to the best of the Prior Banks' knowledge, no Supported Notes (as those terms are defined in the Liquidity Agreement), are outstanding; such Prior Bank is the legal and beneficial owner of the rights transferred hereunder, which are subject to no lien, charge or encumbrance whatsoever; this Agreement constitutes the legal, valid and binding obligation of such Prior Bank, enforceable against it in accordance with the terms hereof; no consents or approvals, other than those herein contained, are necessary to the execution and delivery of this Agreement by such Prior Bank; and to the best knowledge of the Prior Banks, the Issuer is not in default under the Liquidity Agreement or the Pledge Agreement and Morgan Guaranty is not in default in its capacity as Collateral Agent. 3. Morgan Guaranty represents and warrants to the Successor Banks that to the best of its knowledge and belief it has taken all necessary actions to release, terminate or assign its security interest in all Purchased Receivables (as defined in the Master Sales and Servicing Agreement dated as of July 1, 1990 among Hillhaven Funding Corporation, First Healthcare Corporation, Northwest Health Care, Inc., Pasatiempo Development Corp., The Hillhaven Corporation and certain wholly-owned subsidiaries of the Hillhaven Corporation, which may become parties thereto as provided therein (the "Sales Agreement")). Further, Morgan Guaranty (a) hereby releases and assigns to Seafirst, as successor Collateral Agent, any right, title or interest in any bank account (including without limitation the Collateral Account and the Collection Account (as defined in the Pledge Agreement) and all amounts, securities or investments deposited or held therein; (b) hereby releases and assigns to Seafirst, as successor Collateral Agent, any right title or interest in the Records (as defined in the Pledge Agreement); (c) hereby releases and assigns to Seafirst, as successor Collateral Agent, any right, title or interest in any and all Eligible Investments (as defined in the Sales Agreement); and (d) hereby releases and assigns to Seafirst, as successor Collateral Agent, all additions and accessions to, and all substitutions or replacements for, and all payments, proceeds, products, distributions (whether in money, securities or other property) and collections from or with respect to any and all of the foregoing. 4. Banque Indosuez represents to the Successor Banks that Banque Indosuez is not in default under the Liquidity Agreement either in its capacity as Bank or in its capacity as Agent. Banque Nationale represents to the Successor Banks that Banque Nationale is not in default under the Liquidity Agreement. 5. Banque Indosuez resigns as Agent under the Liquidity Agreement. As Banks under the Liquidity Agreement, Banque Indosuez and Banque Nationale each appoint Bank of America as successor Agent. Bank of America accepts this appointment, and the Issuer consents thereto. 6. Bank of America as successor Agent under the Liquidity Agreement removes Morgan Guaranty as Collateral Agent under the Pledge Agreement and appoints Seafirst Bank as successor Collateral Agent. Seafirst Bank accepts this appointment, and the Issuer consents thereto. 7. The Prior Banks each assign to the Successor Banks jointly and severally all rights of the Prior Banks in their capacity as Banks under the Liquidity Agreement. The Successor Banks accept such assignment and jointly and severally assume all obligations of the Prior Banks in their capacity as Banks under the Liquidity Agreement. 8. This Agreement constitutes a novation by which the Successor Banks are substituted for the Prior Banks as Banks under the Liquidity Agreement, Bank of America is substituted for Banque Indosuez as Agent under the Liquidity Agreement, and Seafirst is substituted for Morgan Guaranty as Collateral Agent under the Pledge Agreement. 9. The Prior Banks and the Successor Banks acknowledge that as of the date hereof, National Medical Enterprises, Inc. ("NME") will be released from its shortfall guaranty provided pursuant to the terms of that certain letter agreement dated July 1, 1990, from NME to Banque Indosuez. 10. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to the principles of conflict of laws. The undersigned hereby irrevocably consent to the non-exclusive jurisdiction of any New York State or federal court sitting in the City of New York over any suit, action or proceeding arising out of, or relating to, this Agreement and hereby irrevocably waive any objection to the venue of any such suit, action or proceeding as well as any objection with respect thereto of inconvenient forum. 11. Except as expressly modified herein, each of the Liquidity Agreement and Pledge Agreement shall remain in full force and effect, and such agreements are hereby ratified and confirmed in all respects. 12. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall as to such jurisdiction be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. To the extent permitted by applicable law, the parties waive any provision of law which renders any provision hereof prohibited or unenforceable in any respect. 13. This Agreement shall become effective on the date on which the Issuer shall have paid Banque Indosuez as agent for the Prior Banks in immediately available funds, the amount of $36,164.48 (together with, if applicable, interest at the rate of $150.00 for each day subsequent to April 29, 1994 and prior to closing under the Liquidity Agreement with the Successor Banks). The Issuer shall provide evidence satisfactory to the Successor Banks prior to the date of closing under the Liquidity Agreement that such amounts have been paid in full. 14. This Agreement may be executed in multiple counterparts, and by different parties on separate counterparts, each of which shall be an original, but all of which together shall constitute a single instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers thereunto duly authorized as of the date and year first above written. ISSUER: HILLHAVEN FUNDING CORPORATION, a Nevada Corporation By: /s/ Robert K. Schneider Its: Vice President & Treasurer PRIOR BANKS: BANQUE INDOSUEZ, New York Branch, in its capacity as Agent and as Bank By: /s/ Katherine B. Merle Its: First Vice President By: /s/ Padma S. Desai Its: Assistant Vice President BANQUE NATIONALE DE PARIS, San Francisco Agency, as Bank By: /s/ Deborah Y. Gohh Its: Vice President BANQUE NATIONALE DE PARIS, San Francisco Agency, as Bank By: /s/ Jennifer Y. Cho Its: Vice President PRIOR COLLATERAL AGENT: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as prior Collateral Agent By: /s/ Lloyd A. Baggs Its: Trust Officer SUCCESSOR BANKS: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as successor Agent under the Liquidity Agreement and as a Bank under the Liquidity Agreement By: /s/ Brad DeSpain Its: Vice President SEATTLE-FIRST NATIONAL BANK, as successor Collateral Agent under the Liquidity Agreement and the Pledge Agreement and as a Bank under the Liquidity Agreement By: /s/ Thomas P. Rook Its: Vice President EX-10.54 18 Exhibit 10.54 AMENDED AND RESTATED MASTER SALE AND SERVICING AGREEMENT among HILLHAVEN FUNDING CORPORATION, FIRST HEALTHCARE CORPORATION, NORTHWEST HEALTH CARE, INC., PASATIEMPO DEVELOPMENT CORP., THE HILLHAVEN CORPORATION and CERTAIN WHOLLY-OWNED SUBSIDIARIES OF THE HILLHAVEN CORPORATION WHICH MAY BECOME PARTIES HERETO AS PROVIDED HEREIN Dated as of April 29, 1994 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS 1 Section 1.1. Definitions 1 Section 1.2. Accounting Terms 14 ARTICLE II SALES OF RECEIVABLES 14 Section 2.1. Sales of Receivables 14 Section 2.2. Repurchase of Certain Purchased Receivables 17 Section 2.3. Termination 18 ARTICLE III REPRESENTATIONS AND WARRANTIES 18 Section 3.1. Representations and Warranties of the Seller 18 Section 3.2. Representations and Warranties of the Seller Relating to the Agreement and the Receivables 20 Section 3.3. Representation and Warranties of Hillhaven 21 Section 3.4. Representations and Warranties of Northwest 23 Section 3.5. Representations and Warranties of Pasatiempo 26 ARTICLE IV COVENANTS 28 Section 4.1. Covenants of the Seller 28 Section 4.2. Covenants of Hillhaven 32 Section 4.3. Covenants of Northwest 35 Section 4.4. Covenants of Pasatiempo 38 ARTICLE V ADMINISTRATION AND SERVICING OF RECEIVABLES 41 Section 5.1. General 41 Section 5.2. Servicer Compensation 42 Section 5.3. Expenses 42 Section 5.4. Repurchase by Servicers 42 Section 5.5. Master Servicer 43 Section 5.6. Notices to the Seller 43 ARTICLE VI ALLOCATION AND APPLICATION OF COLLECTIONS 44 Section 6.1. Establishment of Issuer Accounts; Investments 44 Section 6.2. Collections and Allocations 44 Section 6.3. Application of Collection Account and Collateral Account 44 Section 6.4. Purchase Money Note 47 Section 6.5. Daily Reports 47 Section 6.6. Adjustment Procedures 47 Section 6.7. Adjustments for Miscellaneous Credits and Erroneous Charges 49 ARTICLE VII CERTAIN MATTERS RELATING TO THE SELLER 50 Section 7.1. Merger or Consolidation of, or Assumption of the Obligations of, the Seller 50 ARTICLE VIII OTHER MATTERS RELATING TO SERVICING 50 Section 8.1. Liability of the Servicers and Master Servicer; Indemnification 50 Section 8.2. Merger or Consolidation of, or Assumption of the Obligations of, the Servicers or Master Servicer 50 Section 8.3. Servicers and Master Servicer Not To Resign 51 Section 8.4. Delegation of Duties 51 Section 8.5. Monitoring 51 Section 8.6. Confidentiality 52 ARTICLE IX SERVICING DEFAULTS 52 Section 9.1. Servicing Defaults 52 Section 9.2. Appointment of Successor Servicer or Successor Master Servicer 55 Section 9.3. Collection of Medicaid Payments by Servicers 56 ARTICLE X MATTERS RELATING TO THE ISSUER 57 Section 10.1. Recourse 57 Section 10.2. Inspection of Books and Records 57 ARTICLE XI INDEMNITY 57 Section 11.1. Indemnity 57 ARTICLE XII MISCELLANEOUS PROVISIONS 62 Section 12.1. Transfer Termination Date 62 Section 12.2. Termination of Agreement; Sale of Receivables 62 Section 12.3. Amendment 62 Section 12.4. Intention of the Parties 62 Section 12.5. Governing Law 62 Section 12.6. Notices 63 Section 12.7. Severability of Provisions 65 Section 12.8. Assignment 65 Section 12.9. Further Assurances 65 Section 12.10. No Waiver; Cumulative Remedies 65 Section 12.11. Counterparts 66 Section 12.12. Binding Effect; Benefit of Agreement 66 Section 12.13. Nonpetition Covenant 66 Section 12.14. Headings 66 Section 12.15. General Provision as to Payments 66 Section 12.16. Additional Parties Hereto 66 Section 12.17. Arbitration 67 Section 12.18. Replacement of Original Master Sale and Servicing Agreement 68 EXHIBITS A Northwest Agreement B Pasatiempo Agreement C Settlement Statement D Confirming Assignment E Northwest Confirming Assignment F Pasatiempo Confirming Assignment G Hillhaven Note H Purchase Money Note I Daily Report SCHEDULES I - Conditions Precedent to Closing Date II - Principal Place of Business, Location of Records, List of Facilities III - Excluded Facilities AMENDED AND RESTATED MASTER SALE AND SERVICING AGREEMENT THIS AMENDED AND RESTATED MASTER SALE AND SERVICING AGREEMENT (this "Agreement") is dated as of April 29, 1994, among HILLHAVEN FUNDING CORPORATION, a Nevada corporation and a wholly- owned subsidiary of The Hillhaven Corporation (the "Issuer"), THE HILLHAVEN CORPORATION, a Nevada corporation ("Hillhaven", or, in its capacity as such, the "Master Servicer"), FIRST HEALTHCARE CORPORATION, a Delaware corporation and a wholly-owned subsidiary of Hillhaven (the "Seller"), PASATIEMPO DEVELOPMENT CORP., a California corporation and a wholly-owned subsidiary of the Seller ("Pasatiempo" or, in its capacity as a servicer hereunder with respect to Pasatiempo Receivables, a "Servicer"), and NORTHWEST HEALTH CARE, INC., an Idaho corporation and a wholly- owned subsidiary of the Seller ("Northwest" or, in its capacity as a servicer hereunder with respect to Northwest Receivables, a "Servicer"; and, together with the Seller in its capacity as a Servicer with respect to Purchased Receivables originated by the Seller and Pasatiempo in its capacity as a Servicer with respect to Pasatiempo Receivables, collectively, the "Servicers"). In addition, as provided herein, certain wholly-owned subsidiaries of Hillhaven may become parties hereto. This Agreement amends and restates that certain Master Sale and Servicing Agreement dated as of July 1, 1990 among the Issuer, Hillhaven, the Seller, Pasatiempo and Northwest (as amended, the "Original Master Sale and Servicing Agreement"). The Original Master Sale and Servicing Agreement was amended by the First Amendment to Master Sale and Servicing Agreement dated as of June 1, 1991 among the Issuer, the Seller, Hillhaven, Pasatiempo, Northwest, and Banque Indosuez, New York Branch as the Agent and as a Bank, and by the Omnibus Second Amendment to Liquidity Agreement and Second Amendment to Master Sale and Servicing Agreement by and among the foregoing and by Banque Nationale de Paris, San Francisco Agency as a Bank, dated November 23, 1992. The parties hereto agree as follows: ARTICLE I DEFINITIONS Section 1.1. Definitions. All capitalized terms used herein undefined shall have the respective meanings set forth below: "Affiliate" shall have the meaning ascribed in the Liquidity Agreement. "Affiliates" shall have a correlative meaning. "Agency Receivable" shall mean, at any time, any Medicaid Receivable which is listed in the Seller's (or, in the case of Northwest Receivables or Pasatiempo Receivables, Northwest's or Pasatiempo's, as the case may be) computer records as an "Agency Receivable" and which was not originated at an Excluded Facility. "Amortization Event" shall mean any of the following events: (a) the Seller or Hillhaven shall fail (i) to make (or cause to be made) any payment or deposit on or before the date occurring five Business Days after the date when it is required to do so under the terms of this Agreement; or (ii) to observe or perform in any material respect any of its other covenants or agreements, set forth herein for a period of five Business Days (in the case of covenants contained in Section 2.2 or 6.7) or 30 days (in the case of other covenants and agreements herein) after there shall have been given, by registered or certified mail to the Seller or Hillhaven, as the case may be, by the Issuer or the Liquidity Agent Bank, a written notice specifying such failure and requiring it to be remedied; (b) the Receivables Information, any representation or warranty made (or deemed made) by the Seller, Northwest, Pasatiempo or Hillhaven or any information required to be given by the Seller, Northwest, Pasatiempo or Hillhaven to the Issuer or the Liquidity Agent Bank with respect to the Purchased Receivables as a whole proves to have been incorrect in any material respect with respect to the Purchased Receivables as a whole when made (or deemed made) or when delivered; (c) involuntary proceedings or an involuntary petition shall be commenced or filed against Hillhaven, Northwest, Pasatiempo or the Seller under any bankruptcy, insolvency or similar law or seeking dissolution or reorganization of Hillhaven, Northwest, Pasatiempo or the Seller or the appointment of a receiver, trustee, custodian or liquidator for Hillhaven, Northwest, Pasatiempo or the Seller or a substantial part of the property, assets or business of Hillhaven, Northwest, Pasatiempo or the Seller, or any writ, order, judgment, warrant of attachment, execution or similar process shall be issued or levied against a substantial part of the property, assets or business of Hillhaven, Northwest, Pasatiempo or the Seller and such proceeding or petition shall not be dismissed, or such writ, order, judgment, warrant or attachment, execution or similar process shall not be released, vacated or fully bonded (or an order to continue business under existing contracts obtained), within 21 days after commencement, filing or levy, as the case may be; (d) Hillhaven, Northwest, Pasatiempo or the Seller shall commence a voluntary case under any applicable Federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of Hillhaven, Northwest, Pasatiempo or the Seller or for any substantial part of any of their respective property, or make any general assignment for the benefit of creditors, or the failure by Hillhaven, Northwest, Pasatiempo or the Seller generally to pay its debts as such debts become due, or the taking of any action by Hillhaven, Northwest, Pasatiempo or the Seller in furtherance of any of the foregoing; (e) the Issuer is or becomes an "investment company" within the meaning of the Investment Company Act of 1940, as amended; or the Issuer or any of its Securities becomes subject to a registration requirement under any Applicable Securities Law; (f) a Servicing Default shall have occurred and be continuing; (g) an Event of Default under the Liquidity Agreement shall have occurred and be continuing; (h) Issuer Equity is at any time less than zero; or (i) the consolidated net worth (the sum of (A) the consolidated common stockholder's equity minus (B) to the extent included in determining such consolidated common stockholder's equity (i) goodwill and (ii) general intangibles) of Hillhaven and its consolidated subsidiaries as at the end of any fiscal quarter shall be less than $150,000,000 and such condition shall continue unremedied for a period of 30 days. "Applicable Securities Law" shall mean any of: (i) the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the Investment Company Act of 1940, as amended, (ii) all state securities and "blue sky" laws; or (iii) any other Requirement of Law imposed by the United States or any Governmental Authority thereof or therein pertaining to the distribution, investment, holding or disposition of securities. "Authorized Officer" shall mean (i) the President, any Vice President, the Secretary or the Treasurer of the Master Servicer or any Servicer, as the case may be, or (ii) any other person duly authorized by the Master Servicer or any Servicer, as the case may be, to perform any act or discharge any duty in connection with the execution, issuance, and delivery of this Agreement and the transactions contemplated hereby. "Balance" shall mean, at the time of reference with respect to any Receivable, the outstanding balance of such Receivable. "Business Day" shall mean any day other than a Saturday, a Sunday or a day on which banking institutions or trust companies in Seattle or Tacoma, Washington, Los Angeles, California or Pittsburgh, Pennsylvania are authorized or obligated by law, regulation or executive order to remain closed. "Closing Date" shall mean, with respect to matters arising under the Original Master Sale and Servicing Agreement, the date designated as such by the Seller thereunder and on which the conditions specified thereunder were satisfied, and with respect to matters arising on and after the date hereof, the date designated as such by the Seller pursuant to Section 2.1(b) by notice in writing to the Issuer, and on which the conditions specified in Schedule I are satisfied. "Code" shall mean the Internal Revenue Code of 1986, as amended, and any regulations (including, without limitation, temporary and proposed regulations) thereunder. "Collateral Account" shall have the meaning specified in Section 6.1. "Collateral Agent" shall mean Seattle-First National Bank or any successor Collateral Agent under the Pledge Agreement. "Collection Account" shall have the meaning specified in Section 6.1. "Collection Period" shall mean each calendar month during the term of this Agreement; provided, that, the initial Collection Period shall commence on the Closing Date and end on the last day of the calendar month immediately following the calendar month in which the Closing Date occurs. "Collections" shall mean, in each case regardless of the form of payment: (i) all payments in respect of Purchased Receivables; (ii) all payments of the Repurchase Price under Section 2.2 or 5.4; and (iii) all adjustments pursuant to Sections 6.6(i) and 6.7. "Confirming Assignment" shall have the meaning specified in Section 2.1(e). "Contractual Obligation" shall mean, as to any Person, any provision of any Security issued by such Person or of any agreement, instrument or undertaking of any kind to which such Person is a party or by which it or any of its property is bound. "Controlled Group" shall mean all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with Hillhaven, are treated as a single employer under Section 414(b) or 414(c) of the Code. "Credits Outstanding" shall mean, on any date, the aggregate principal amount of Liquidity Loans then outstanding. "Daily Facility Costs" shall mean, for each day, the aggregate of: (i) all interest expense of the Issuer accruing for such day with respect to all Liquidity Loans, plus (ii) all interest expense of the Issuer accruing for such day with respect to the Purchase Money Note and the Hillhaven Note, plus (iii) all liabilities of the Issuer for commitment, facility and other fees accruing for such day pursuant to the Liquidity Agreement, plus (iv) the sum of all amounts payable by the Issuer on (or accruing for) such day with respect to the transactions contemplated hereby and by the Liquidity Agreement and the Related Documents in respect of the following: (1) fees and expenses of the Collateral Agent, (2) legal, auditing, printing, reproduction and closing fees and expenses, (3) auditors', accountants' and attorneys' fees and expenses, (4) franchise, income and other taxes of the Issuer, (5) Servicing Fees, (6) without duplication, all other amounts (including, without limitation, fees, indemnities, expenses, prepayment premiums and compensation in respect of increased costs or capital adequacy) of any kind or description under the Liquidity Agreement or any Related Document and (7) any other administrative fees and expenses incurred by the Issuer not exceeding $50,000 for any one item of such administrative fees and expenses referred to in this subclause (7) and not exceeding $100,000 in the aggregate for each successive twelve-month period for all such items of administrative fees and expenses referred to in this subclause (7). "Daily Report" shall mean the report in the form attached as Exhibit I. "Date of Processing" shall mean, with respect to any Receivable, the Business Day on which such Receivable is first recorded by input in the respective Servicer's computerized customer record file (without regard to the effective date of such recordation). "Defaulted Receivable" shall mean each Purchased Receivable, other than an Ineligible Receivable, which the respective Servicer has written off as uncollectible in accordance with such Servicer's customary and usual servicing procedures for servicing Receivables comparable to the Purchased Receivables; provided, that, no Purchased Receivable which has been written off or compromised as permitted by Section 4.1(j), 4.3(j) or 4.4(j) (whether or not a payment in respect thereof is required under Section 6.7) shall be a Defaulted Receivable. Subject to the foregoing, a Receivable shall become a Defaulted Receivable on the date on which such Receivable is recorded as written off on the respective Servicer's computerized customer record file. "Discount Factor" shall mean 98.6%. "Dollars" and "$" mean lawful currency of the United States. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Excluded Facilities" shall mean those facilities of the Seller, Northwest or Pasatiempo at which are originated Agency Receivables with respect to which the Seller is unable to convey to the Issuer title that is free and clear of all Liens. The Excluded Facilities on the Execution Date are listed in Schedule III; subsequent to the Execution Date, "Excluded Facilities" shall mean those facilities listed in Schedule III, as amended, supplemented or modified from time to time in writing by notice from the Issuer to the Liquidity Agent Bank and the Collateral Agent. "Execution Date" shall mean April 29, 1994, the date this Agreement is executed and delivered by the parties hereto. "Governmental Authority" shall mean any nation or state or any political subdivision thereof and any person or entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including without limitation any court or tribunal. "Hillhaven Note" shall mean the subordinated promissory note of the Issuer to Hillhaven, in substantially the form of Exhibit G hereto, which Note shall evidence any advances made to the Issuer by Hillhaven. "Ineligible Receivable" shall mean any Receivable: (a) which is not denominated and payable solely (i) in Dollars, (ii) in the continental United States, and (iii) by an Obligor which is a United States Person; (b) which was not originated by the Seller (or, in the case of Northwest Receivables or Pasatiempo Receivables, by Northwest or by Pasatiempo, as the case may be) in compliance with all Requirements of Law and Contractual Obligations applicable to the Seller, Northwest or Pasatiempo, as the case may be, or to the respective Receivable; or was not properly entered into consistent with the Seller's (or, in the case of Northwest Receivables or Pasatiempo Receivables, Northwest's or Pasatiempo's, as the case may be) usual and customary credit policies, practices and procedures; (c) with respect to which any consent, license, approval or authorization of, or filing, registration or declaration with, any Governmental Authority or other Person required to be obtained, effected or given in connection with the creation of such Receivable or its transfer to the Issuer pursuant hereto (or in the case of Northwest Receivables or Pasatiempo Receivables, its transfer to the Seller pursuant to the Northwest Agreement or the Pasatiempo Agreement, as the case may be) or its pledge pursuant to the Pledge Agreement, has not been duly obtained, effected or given or is not irrevocable and in full force and effect; (d) as to which, at the time of the transfer of such Receivable to the Issuer, the Seller was not the sole owner thereof or did not have good and marketable title thereto free and clear of all Liens; (e) which is not the legal, valid and binding payment obligation of the Obligor thereon, enforceable against such Obligor in accordance with its terms; (f) which does not constitute either an "account" or a "general intangible" under and as defined in Article 9 of the UCC; (g) which at the time of its transfer to the Issuer had been (or subsequent thereto becomes) waived or modified in any respect except as permitted under this Agreement; (h) which is subject to any right of rescission, setoff, counterclaim or defense; (i) as to which the Seller (or, in the case of Northwest Receivables or Pasatiempo Receivables, any of the Seller, Pasatiempo or Northwest) has done anything, at the time of transfer (or subsequent thereto), to impair the rights of the Issuer (or of the Seller) except as permitted under this Agreement; (j) that is the subject of any material dispute as to whether the services which were the subject of the Purchased Receivables were properly rendered between the related Obligor and the Seller (or, in the case of Northwest Receivables or Pasatiempo Receivables, between the related Obligor and any of the Seller, Pasatiempo or Northwest); (k) becomes a Purchased Receivable following the Seller (or the respective Servicer or the Master Servicer) having determined that the related Obligor (i) is bankrupt or insolvent or (ii) is the Obligor on another Purchased Receivable which is a Defaulted Receivable; (l) is not an Agency Receivable; (m) as to which any of the applicable representations and warranties set forth in Section 3.2 hereof are not true and correct on and as of all times prior to the payment and satisfaction in full of such Receivable; or (n) which was originated by the Seller (or in the case of Northwest Receivables or Pasatiempo Receivables, any of the Seller, Pasatiempo or Northwest) as part of a Medicaid program in which the Seller, Northwest or Pasatiempo, as the case may be, shall have been disqualified by any Governmental Authority, or with respect to which any Governmental Authority shall have commenced a proceeding or given notice of its intent to commence a proceeding seeking such a disqualification, whether or not such program shall have been disqualified or proceeding commenced prior to or subsequent to origination of such Receivable; or which is defined as an Account Ineligible for Borrowing under the Borrowing Plan attached as Exhibit A to the Liquidity Agreement. "Issuer Accounts" shall have the meaning specified in Section 6.1. "Issuer Equity" shall mean on any date, in each case for the period beginning on the incorporation date of the Issuer and ending as of the close of business on such date: (A) the sum of (i) the aggregate cash received by the Issuer as the subscription price for its stock or as a contribution to capital plus (ii) the cumulative net income of the Issuer minus (B) the aggregate amount of Restricted Payments paid by the Issuer. "JCAHO" shall mean the Joint Commission on the Accreditation of Healthcare Organizations and any successor thereto. "Lien" shall mean any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever, including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing and the filing of any financing statement under the UCC or comparable law of any jurisdiction to evidence any of the foregoing. "Liquidity Agent Bank" shall mean Bank of America National Trust and Savings Association, or any successor Agent as defined in the Liquidity Agreement. "Liquidity Agreement" shall mean the Amended and Restated Liquidity Agreement, dated as of the date hereof, among the Issuer, the Liquidity Banks, the Liquidity Agent Bank, and the Collateral Agent as from time to time amended, supplemented or modified. "Liquidity Banks" shall mean the Banks as defined in the Liquidity Agreement. "Liquidity Facility Termination Date" shall mean, at any time, the then current Expiration Date as defined in the Liquidity Agreement. "Liquidity Loans" shall mean the loans made by the Liquidity Banks to the Issuer under the Liquidity Agreement. "Master Servicer" shall mean Hillhaven or any successor Master Servicer pursuant hereto. "Medicaid Receivable" shall mean any Receivable with respect to which the Obligor is a state Governmental Authority (or agent thereof) obligated to pay, pursuant to federal and state Medicaid program statutes and regulations, for services rendered to eligible beneficiaries thereunder and not in contra- vention of any statute or regulation applicable thereto. "Minimum Equity Percentage" shall mean, on any date on or after a Settlement Date but prior to the next succeeding Settlement Date, the percentage change (stated as a positive number) from Line 12 (Total Borrowing Base) to Line 8 (Total Assigned Accounts Outstanding, this certificate) of the Borrowing Base Certificate as presented to the Banks on the immediately preceding Settlement Date. "Minimum Issuer Equity" shall mean, on any date, the product of (i) the Credits Outstanding on such date multiplied by (ii) the Minimum Equity Percentage on such date, but in no event less than zero; provided, that on any date that there are Credits Outstanding, the Minimum Issuer Equity shall be at least $1,000,000. "Northwest Agreement" shall mean the amended and restated Agreement, dated the date hereof, between the Seller and Northwest, in substantially the form of Exhibit A hereto, as amended, supplemented or modified from time to time. "Northwest Confirming Assignment" shall have the meaning specified in Section 2.1(e). "Northwest Receivable" shall mean Northwest's patient accounts (and any and all rights to receive payments due or to become due thereon and any direct or indirect Proceeds thereof) sold to the Seller pursuant to the Northwest Agreement. "Novation Agreement" shall mean the Novation Agreement dated as of the date hereof by and among the Issuer, Banque Indosuez, New York Branch, Banque Nationale de Paris, San Francisco Agency, and the Liquidity Banks. "Obligor" shall mean with respect to any Receivable, the Person or Persons obligated to make payments with respect to such Receivable, including any guarantor thereof. "Officer's Certificate" shall mean, with respect to any Person, a certificate signed by a duly authorized officer of such Person. "Opinion of Counsel" shall mean a favorable written opinion of counsel, who, unless otherwise specified, may be counsel for, or an employee of, the Person providing the opinion and who shall be reasonably acceptable to the Liquidity Agent Bank. "Pasatiempo Agreement" shall mean the amended and restated Agreement, dated the date hereof, between the Seller and Pasatiempo, in substantially the form of Exhibit B hereto, as amended, supplemented or modified from time to time. "Pasatiempo Confirming Assignment" shall have the meaning specified in Section 2.1(e). "Pasatiempo Receivable" shall mean Pasatiempo's patient accounts (and any and all rights to receive payments due or to become due thereon and any direct or indirect Proceeds thereof) sold to the Seller pursuant to the Pasatiempo Agreement. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" shall mean any individual, estate, corporation, partnership, joint venture, association, joint stock company, trust (including any beneficiary thereof), unincorporated organization, or government or any agency or political subdivision thereof. "Plan" shall mean at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (i) maintained by a member of the Controlled Group for employees of a member of the Controlled Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Pledge Agreement" shall mean the Amended and Restated Pledge and Security Agreement, dated as of the date hereof, between the Issuer and the Collateral Agent, in the form of Exhibit C to the Liquidity Agreement, as from time to time amended, supplemented or modified. "Proceeds" shall have the meaning set forth in Section 9-306 of the UCC and shall include, without limitation, any and all proceeds of any applicable insurance, indemnity, warranty or guaranty, any and all payments (in any form whatsoever) made or due and payable from time to time in connection with the requisition, confiscation, condemnation, seizure or foreclosure by any governmental body, authority, bureau or agency (or any person acting under color of Governmental Authority), and all other amounts from time to time payable under or in connection with any of the Receivables, in each case wherever located or deposited. "Purchase Money Note" shall mean the unsecured short- term purchase money obligation of the Issuer, substantially in the form of Exhibit H hereto. "Purchase Price" shall mean, on any date, with respect to any Receivable, the product of its then outstanding Balance and the Discount Factor. "Purchased Receivable" shall mean any Agency Receivable (including, without limitation, any Re-eligible Receivable) purchased by the Issuer hereunder or under the Original Master Sale and Servicing Agreement. "Receivables" shall mean each of (i) the Seller's patient accounts, (ii) Northwest Receivables, (iii) Pasatiempo Receivables, (iv) any and all rights to receive payments due or to become due on any thereof, and (v) any direct or indirect Proceeds of any thereof. "Receivables Information" shall mean all information concerning the Purchased Receivables at any time or from time to time provided, either orally or in writing (including by microfilm or microfiche), by or on behalf of the Seller, Northwest or Pasatiempo or any of their respective affiliates to the Liquidity Agent Bank. "Records" shall mean all ledger sheets, files, records, documents, computer tapes and correspondence, whether presently existing or hereafter created pertaining to any Purchased Receivables. "Re-eligible Receivable" shall mean any Ineligible Receivable which, following repurchase thereof by the Seller, has ceased to be an Ineligible Receivable. "Reference Rate" shall mean, on any day, the rate of interest publicly announced by the Liquidity Agent Bank in Los Angeles, California, from time to time in its sole discretion as its Reference Rate, and may not be the lowest rate charged to its customers. Loans may be priced at, above or below the Reference Rate, which is merely a reference rate with respect to which effective rates of interest are calculated. "Regional Center" shall mean the center at which Records pertaining to the Purchased Receivables are maintained. As of the Execution Date, the Regional Center shall mean the center located at 1149 Market Street, Tacoma, Washington 98402 or any other center as shall subsequently be designated by the Seller in a written notice to the Liquidity Agent Bank, the Collateral Agent and the Issuer. "Regulatory Change" shall mean any change after the date hereof in any Requirement of Law or any interpretation, directive or request of or by any Governmental Authority - (whether or not having the force of law) or in the interpretation or administration of any or all thereof. "Related Documents" shall mean this Agreement, the Northwest Agreement, the Pasatiempo Agreement, the Liquidity Agreement, the Pledge Agreement, the Purchase Money Note, the Hillhaven Note, and the Novation Agreement, in each case, as from time to time amended, supplemented or modified. "Repurchase Price" shall mean, on any date, with respect to any Purchased Receivable, an amount equal to the then Balance of such Purchased Receivable. "Required Liquidity Banks" shall have the meaning set forth for Required Banks in the Liquidity Agreement. "Requirement of Law" for any Person shall mean the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation, judgment, injunction, order, decree or other determination of an arbitrator or Governmental Authority, in each case applicable to or binding upon such Person or to which such Person is subject. "Restricted Payment" shall have the meaning set forth in the Liquidity Agreement. "Security" shall have the meaning ascribed in Section 2(1) of the Securities Act of 1933, as amended. "Servicing Default" shall have the meaning specified in Section 9.1. "Servicing Fees" shall have the meaning specified in Section 5.2. "Settlement Date" shall mean the 23rd calendar day of each month during the term of this Agreement (commencing with the calendar month immediately following the end of the initial Collection Period) or, if any such day is not a Business Day, the next succeeding Business Day. "Settlement Statement" shall mean the monthly settlement statement in the form of Exhibit C to be delivered by the Master Servicer pursuant to Section 6.6. "Successor Master Servicer" shall have the meaning specified in Section 9.2(a) hereof. "Successor Servicer" shall have the meaning specified in Section 9.2(a) hereof. "Termination Notice" shall have the meaning specified in Section 9.1. "Transfer Termination Date" shall mean the earliest to occur of (i) the Business Day following the day on which an Amortization Event occurs; provided, that from and after the date that any Amortization Event is no longer continuing, the Transfer Termination Date shall be deemed not to have occurred, (ii) the 120th day prior to the Liquidity Facility Termination Date or (iii) the date of any termination pursuant to Section 2.3. "UCC" unless the context otherwise requires, shall mean the Uniform Commercial Code, as in effect in the relevant jurisdiction, as amended from time to time. "United States Person" means (i) in the case of a natural Person, a Person who is a citizen or permanent resident of, and whose permanent residence is in, the United States; and (ii) otherwise, a Person organized under the laws of, and whose principal place of business and the location of whose principal assets is located in, the United States. Section 1.2. Accounting Terms. As used herein and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in Section 1.1, and accounting terms partly defined in Section 1.1 to the extent not defined, shall have the respective meanings given to them under generally accepted accounting principles. ARTICLE II SALES OF RECEIVABLES Section 2.1. Sales of Receivables. (a) No Sale Prior to Closing Date. No sale of Agency Receivables shall occur hereunder prior to the Closing Date except such sales that have occurred in accordance with the Original Master Sales and Servicing Agreement. (b) Designation and Effectiveness of Closing Date. Following execution hereof, the Seller may send notice to the Issuer of a proposed Closing Date. If, on the proposed Closing Date, the conditions specified in Schedule I hereto have been satisfied, the Closing Date shall be deemed to have occurred on such proposed Closing Date for all purposes hereof and of the Related Documents. (c) On the Closing Date. The Seller does hereby sell, transfer, assign, set over and otherwise convey to the Issuer on the Closing Date (without any further action by the parties), without recourse (except as specifically provided herein), and the Issuer does hereby purchase from the Seller on the Closing Date, all right, title and interest of the Seller in, to and under its Agency Receivables existing at the Closing Date, together with all monies due or to become due and all amounts received with respect thereto and all Proceeds thereof, subject to the limitations and restrictions of Section 9.3 hereof. (d) After the Closing Date. On each Business Day after the Closing Date and prior to the Transfer Termination Date, the Seller shall, without any further action by itself or any other Person, sell, transfer, assign, set over and otherwise convey to the Issuer, and the Issuer, without further action by itself or any other Person, shall purchase from the Seller, all right, title and interest of the Seller in, to and under its Agency Receivables created (or acquired) subsequent to the last sale hereunder and in, to and under all of its Re-eligible Receivables which became Re-eligible Receivables subsequent to the last sale hereunder, together with all monies due or to become due and all amounts received with respect thereto and all Proceeds thereof, subject to the limitations and restrictions of Section 9.3 hereof. (e) General Provisions as to Transfers. (i) The Seller shall deliver to the Issuer on the Closing Date and on each Settlement Date a duly executed and appropriately completed Confirming Assignment (each, a "Confirming Assignment") in substantially the form of Exhibit D hereto; on the Closing Date and on each Settlement Date the Seller will deliver to the Issuer the duly executed and appropriately completed corresponding Northwest Confirming Assignments or Pasatiempo Confirming Assignments (each a "Northwest Confirming Assignment" or a "Pasatiempo Confirming Assignment," as the case may be), in substantially the forms of Exhibits E and F hereto, with respect to Northwest Receivables and Pasatiempo Receivables included in the Confirming Assignment then being delivered. Failure to deliver any such Confirming Assignment, Northwest Confirming Assignment or Pasatiempo Confirming Assignment shall not limit or otherwise affect the absolute conveyance of the Agency Receivables pursuant to Subsections (a) or (b) above, as the case may be. (ii) In connection with the initial sale hereunder, the Seller, Northwest and Pasatiempo each agrees to record and file, at its own expense, financing statements (and continuation statements with respect to such financing statements when applicable) with respect to all of its Agency Receivables (now in existence or hereafter created, acquired or arising) meeting all requirements of applicable law in such manner and in such jurisdictions as are necessary to provide notice of the sale and assignment of its respective Agency Receivables to the Issuer (or, in the case of Northwest and Pasatiempo, to the Seller), and to deliver a file-stamped copy of such financing statements or other evidence of such filing to the Issuer and the Liquidity Agent Bank on or prior to the Closing Date. (iii) In connection with each sale hereunder, the Seller further agrees, at its own expense: (x) on or prior to the date of such sale to indicate in its computer files (and, in the case of Northwest Receivables or Pasatiempo Receivables, to cause Northwest or Pasatiempo, as the case may be, to indicate in its computer files) that the Agency Receivables being sold or resold, as the case may be, on such date have been transferred to the Issuer pursuant to this Agreement, and (y) on a monthly basis, to generate a computer list identifying each of the Agency Receivables which has been sold or resold, as the case may be, and containing details as to the Obligors thereon and other relevant information which a prudent healthcare provider would maintain with respect to its patient accounts. The computer list(s) referred to in the preceding clause (y), shall be held in trust for the Issuer, the Liquidity Banks, the Collateral Agent and the Liquidity Agent Bank in separate containers (prominently marked to reflect the foregoing) and in safe places at the respective Regional Centers. The same shall be at all times open to inspection and audit by the Issuer, the Liquidity Agent Bank, the Liquidity Banks, the Collateral Agent and their respective representatives. During the continuance of an Amortization Event, all such list(s) shall, at the request of the Liquidity Agent Bank or the Collateral Agent be delivered to, or upon the direction of, the Liquidity Agent Bank or the Collateral Agent, as the case may be. (f) (i) Payment of Purchase Price. The Purchase Price payable by the Issuer for the Purchased Receivables on the Closing Date shall be payable by Federal funds. The aggregate Purchase Price payable on the Closing Date with respect to Agency Receivables sold to the Issuer on the Closing Date under Section 2.1(a) will be calculated on an estimated basis. On the first Settlement Date, any discrepancies between actual Balances and estimated Balances shall be adjusted as part of the regular adjustment process specified in Section 6.6. (ii) The Purchase Price payable by the Issuer for the Purchased Receivables being purchased on any Business Day after the Closing Date shall be paid to the Seller in cash (except to the extent the Purchase Money Note is used as permitted by Section 6.4). (g) No Transfer of Liability. No sale pursuant hereto shall constitute or is intended to result in a creation or an assumption by the Issuer of any liability or obligation including, without limitation, any obligation to any Obligors of the Seller, any Servicer or any other Person in connection with the Receivables, pursuant to any Contractual Obligation relating thereto or in any other manner whatsoever. Section 2.2. Repurchase of Certain Purchased Receivables. In the event that (i) any Purchased Receivable is or becomes at any time an Ineligible Receivable or (ii) there is a breach of any representation, warranty or covenant under Section 3.1, 3.2, 3.4, 3.5, 4.1, 4.3 or 4.4 with respect to any Purchased Receivable which breach would have a material adverse effect on the interests of the Issuer or the Liquidity Banks in such Purchased Receivable, then, if the foregoing is continuing on the first Settlement Date occurring at least 30 days after the earlier to occur of the discovery of any such event by the Seller or receipt by the Seller of written notice of any such event given by the Issuer, the Master Servicer, the Liquidity Agent Bank or the Collateral Agent, the Seller shall repurchase all such Purchased Receivables by depositing in the Collection Account in immediately available funds an amount equal to the Repurchase Price for such Receivables. Any such repurchased Receivables shall be treated as if paid in full in the Collection Period in which such obligation to repurchase arises. Such Repurchase Price shall be treated as a collection of the related Purchased Receivables in the Collection Period in which the obligation to repurchase such Receivables arose and shall be applied in accordance with Article VI. Upon each repurchase by the Seller of such a Purchased Receivable, the Issuer hereby appoints the respective Servicer to effect, automatically and without further action on the Issuer's part, the sale, transfer, assignment, set over and other conveyance to the Seller on behalf of the Issuer, without recourse, representation or warranty, of all the right, title and interest of the Issuer in and to such Purchased Receivable, all monies due or to become due with respect thereto, and all Proceeds thereof. The Issuer shall execute such documents and instruments of transfer or assignment and take such other actions as shall reasonably be requested by the Seller to effect the conveyance of such Purchased Receivable pursuant to this subsection. The obligation of the Seller to repurchase any such Purchased Receivable pursuant to this Section 2.2 shall survive the termination of this Agreement. The parties intend that this Section 2.2 not be applied to provide direct or indirect assurance to the Issuer against loss by reason of the bankruptcy or insolvency (or other credit condition) of, or default by the Obligor on, or the uncollectability of, any Purchased Receivable. Section 2.3. Termination. The Seller may, upon 30 days prior written notice to the Issuer and the Liquidity Agent Bank, terminate its right and obligation to sell Receivables to the Issuer hereunder. Upon the effectiveness of such termination, the provisions of this Agreement pertaining to purchases under Section 2.1(b) of the Seller's Receivables shall terminate. All other provisions hereof, including, without limitation, all other obligations of the Seller hereunder, shall remain in effect. ARTICLE III REPRESENTATIONS AND WARRANTIES Section 3.1. Representations and Warranties of the Seller. The Seller hereby represents and warrants to the Issuer as of the date hereof and as of each date on which any Receivables are sold hereunder that: (a) Organization, Good Standing and Due Qualification. The Seller is duly organized and validly existing in good standing under the laws of its state of incorporation, and has, in all material respects, full corporate power, authority and legal right to own its property and conduct its business as contemplated by the Related Documents and as such property is presently owned and such business is presently conducted, and to execute, deliver and perform its obligations under the Related Documents to which it is, or is to be, a party. The Seller is duly qualified to do business and is in good standing as a foreign corporation (or is exempt from such requirements) and has obtained all necessary licenses and approvals in each jurisdiction in which failure to so qualify or to obtain such licenses and approvals would have a material adverse effect on the Seller's ability to perform its obligations under the Related Documents to which it is, or is to be, a party. The Seller is a direct or indirect wholly owned subsidiary of Hillhaven. (b) Due Authorization. The execution and delivery of the Related Documents to which it is, or is to be, a party by the Seller and the consummation of the transactions provided for therein have been duly authorized by the Seller by all necessary corporate action on the part of the Seller. (c) No Conflict. Except as would not affect the validity or enforceability of any Related Document or the Agency Receivables, would not have a material adverse effect on the business, operations, assets or financial or other condition of the Seller or its ability to perform its obligations under the Related Documents and would not have a material adverse effect on the ownership or servicing of the Agency Receivables, the execution and delivery of the Related Documents to which it is, or is to be, a party, the performance of the transactions contemplated thereby and the fulfillment of the terms thereof, will not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under, any Contractual Obligation applicable to the Seller or any of its properties. (d) No Violation. Except as would not affect the validity or enforceability of any Related Document or the Agency Receivables, would not have a material adverse effect on the business, operations, assets or financial or other condition of the Seller or its ability to perform its obligations under the Related Documents and would not have a material adverse effect on the ownership or servicing of the Agency Receivables, the execution and delivery of the Related Documents to which it is, or is to be, a party, the performance thereof, the transactions contemplated hereby and thereby and the fulfillment of the terms thereof, will not conflict with or violate any Requirement of Law applicable to the Seller or any of its properties. (e) No Proceedings. There are no proceedings or investigations, to the best knowledge of the Seller, pending or threatened against the Seller, before any court, regulatory body, administrative agency, or other tribunal or Governmental Authority (i) asserting the invalidity of any Related Document or the Agency Receivables, (ii) seeking to prevent the consummation of any of the transactions contemplated by the Related Documents, (iii) seeking any determination or ruling that would materially and adversely affect the performance by the Seller of its obligations under the Related Documents, (iv) seeking any determination or ruling that would materially and adversely affect the validity or enforceability of any Related Document or the Agency Receivables, or (v) seeking to affect adversely the income tax attributes of the beneficial ownership interests in the Issuer under the United States federal, or any applicable state, income tax systems. (f) No Default. Except as would not affect the validity or enforceability of any Related Document or the Agency Receivables, would not have a material adverse effect on the business, operations, assets or financial and other condition of the Seller or its ability to perform its obligations under the Related Documents and would not have a material adverse effect on the ownership or servicing of the Agency Receivables, the Seller is not in breach or default of any Contractual Obligation, and is not in violation of any Requirement of Law, applicable to it or its properties. (g) Good Title. None of the Seller's Agency Receivables has been sold, assigned or pledged to any Person other than the Issuer. Immediately prior to their conveyance to the Issuer hereunder the Seller has good title thereto, free and clear of any Lien, and, as of each date Agency Receivables are sold hereunder, the Seller will have conveyed good title to such Agency Receivables to the Issuer free and clear of any Lien. (h) Sole Owner. Immediately prior to their conveyance to the Issuer hereunder the Seller is the sole owner of all right, title and interest in and to the Purchased Receivables. (i) Receivables Information. The Receivables Information does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements in the Receivables Information, in light of the circumstances in which they were made, not misleading. (j) Place of Business. The chief executive office of the Seller and location of the Records pertaining to its respective Receivables is the address listed for the Seller on Schedule II hereto. The representations and warranties set forth in this Section 3.1 shall survive each sale and assignment of Agency Receivables to the Issuer hereunder, and termination of the rights and obligations of the Seller as a Servicer pursuant to Section 9.1. Section 3.2. Representations and Warranties of the Seller Relating to the Agreement and the Receivables. The Seller hereby represents and warrants to the Issuer that as of each date on which any Agency Receivables are sold hereunder or were sold under the Original Master Sale and Servicing Agreement: (a) Validity. Each of this Agreement and the Confirming Assignment constitutes a legal, valid and binding obligation of the Seller enforceable against the Seller in accordance with its terms. (b) Eligibility. No Purchased Receivable is an Ineligible Receivable. (c) No Liens. Each Purchased Receivable has been conveyed to the Issuer free and clear of any Lien. (d) Consents. With respect to each Purchased Receivable, all consents, licenses, approvals or authorizations of or registrations or declarations with any Governmental Authority required to be obtained, effected or given by the Seller in connection with the conveyance of such Receivable to the Issuer have been duly obtained, effected or given and are in full force and effect. (e) Valid Transfer. This Agreement constitutes a valid sale, transfer and assignment to the Issuer of all right, title and interest in and to the Agency Receivables and the Proceeds thereof, subject to the limitations and restrictions of Section 9.3; or, if this Agreement is determined not to constitute a sale of such property, it constitutes a grant of a "security interest" in such property to the Issuer, which is enforceable against all Persons with respect to all Purchased Receivables and the Proceeds thereof. The Issuer has or will have, upon the filing of the financing statements described in Section 2.1, a first priority perfected ownership or security interest in all Purchased Receivables. (f) Compliance with Law. All applicable Requirements of Law with respect to the Purchased Receivables, including without limitation any pertaining to the transfer thereof hereunder (or, in the case of Northwest Receivables or Pasatiempo Receivables, hereunder or under the Northwest Agreement or the Pasatiempo Agreement), have been complied with in all material respects. The representations and warranties set forth in this Section 3.2 shall survive each sale and assignment of the Agency Receivables to the Issuer, and termination of the rights and obligations of the Seller as a Servicer pursuant to Section 9.1. Section 3.3. Representation and Warranties of Hillhaven. Hillhaven hereby represents and warrants to the Issuer that, as of the date hereof and as of each date on which Agency Receivables are sold hereunder or were sold under the Original Master Sale and Servicing Agreement: (a) Organization, Good Standing and Due Qualification. Hillhaven is duly organized and validly existing in good standing under the laws of its state of incorporation, and has, in all material respects, full corporate power, authority and legal right to own its property and conduct its business as contemplated by this Agreement and as such property is presently owned and such business is presently conducted, and to execute, deliver and perform its obligations under this Agreement. Hillhaven is duly qualified to do business and is in good standing as a foreign corporation (or is exempt from such requirements) and has obtained all necessary licenses and approvals in each jurisdiction in which failure to so qualify or to obtain such licenses and approvals would have a material adverse effect on Hillhaven's ability to perform its obligations under this Agreement. (b) Due Authorization. The execution and delivery of this Agreement by Hillhaven and the consummation of the transactions provided for in this Agreement have been duly authorized by Hillhaven by all necessary corporate action on the part of Hillhaven. (c) No Conflict. Except as would not affect the validity or enforceability of any Related Document or the Agency Receivables, would not have a material adverse effect on the business, operations, assets or financial or other condition of Hillhaven or on its ability to perform its obligations under this Agreement and would not have a material adverse effect on the ownership or servicing of the Agency Receivables, the execution and delivery of this Agreement, the performance of the transactions contemplated hereby and the fulfillment of the terms hereof, will not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under any Contractual Obligation applicable to Hillhaven or any of its properties. (d) No Violation. Except as would not affect the validity or enforceability of any Related Document or the Agency Receivables, would not have a material adverse effect on the business, operations, assets or financial or other condition of Hillhaven or its ability to perform its obligations under this Agreement and would not have a material adverse effect on the ownership or servicing of the Agency Receivables, the execution and delivery of this Agreement, the performance of the transactions contemplated hereby, and the fulfillment of the terms hereof, will not conflict with or violate any Requirement of Law applicable to Hillhaven or any of its properties. (e) No Proceedings. There are no proceedings or investigations, to the best knowledge of Hillhaven, pending or threatened against Hillhaven, before any court, regulatory body, administrative agency, or other tribunal or governmental instrumentality (i) asserting the invalidity of this Agreement, (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement, (iii) seeking any determination or ruling that would materially and adversely affect the performance by Hillhaven of its obligations under this Agreement or (iv) seeking any determination or ruling that would materially and adversely affect the validity or enforceability of this Agreement. (f) No Default. Except as would not have a material adverse effect on the business, operations, assets or financial or other condition of Hillhaven or its ability to perform its obligations under the Related Documents and would not have a material adverse effect on the ownership or servicing of the Agency Receivables or the validity or enforceability of the Related Documents or the Agency Receivables, Hillhaven is not in breach or default of any Contractual Obligation, and is not in violation of any Requirement of Law, applicable to it or its properties. The representations and warranties set forth in this Section 3.3 shall survive each sale and assignment of Agency Receivables to the Issuer hereunder, and termination of the rights and obligations of Hillhaven as Master Servicer pursuant to Section 9.1. Section 3.4. Representations and Warranties of Northwest. Northwest hereby represents and warrants to the Issuer as of the date hereof and as of each date on which any Northwest Receivables are sold hereunder or were sold under the Original Master Sale and Servicing Agreement that: (a) Organization, Good Standing and Due Qualification. Northwest is duly organized and validly existing in good standing under the laws of its state of incorporation, and has, in all material respects, full corporate power, authority and legal right to own its property and conduct its business as contemplated by the Related Documents to which it is, or is to be, a party and as such property is presently owned and such business is presently conducted, and to execute, deliver and perform its obligations under the Related Documents to which it is, or is to be, a party. Northwest is duly qualified to do business and is in good standing as a foreign corporation (or is exempt from such requirements) and has obtained all necessary licenses and approvals in each jurisdiction in which failure to so qualify or to obtain such licenses and approvals would have a material adverse effect on Northwest's ability to perform its obligations under the Related Documents to which it is, or is to be, a party. Northwest is a direct or indirect wholly-owned subsidiary of the Seller. (b) Due Authorization. The execution and delivery of the Related Documents to which it is, or is to be, a party by Northwest and the consummation of the transactions provided for in this Agreement have been duly authorized by Northwest by all necessary corporate action on the part of Northwest. (c) No Conflict. Except as would not affect the validity or enforceability of any Related Document or the Northwest Receivables, would not have a material adverse effect on the business, operations, assets or financial or other condition of Northwest or its ability to perform its obligations under the Related Documents and would not have a material adverse effect on the ownership or servicing of the Northwest Receivables, the execution and delivery of the Related Documents to which it is, or is to be, a party, the performance of the transactions contemplated thereby and the fulfillment of the terms thereof, will not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under, any Contractual Obligation applicable to Northwest or any of its properties. (d) No Violation. Except as would not affect the validity or enforceability of any Related Document or the Northwest Receivables, would not have a material adverse effect on the business, operations, assets or financial or other condition of Northwest or its ability to perform its obligations under the Related Documents and would not have a material adverse effect on the ownership or servicing of the Northwest Receivables, the execution and delivery of the Related Documents to which it is, or is to be, a party, the performance of the transactions contemplated by the Related Documents to which it is, or is to be, a party, and the fulfillment of the terms thereof, will not conflict with or violate any Requirement of Law applicable to Northwest or any of its properties. (e) No Proceedings. There are no proceedings or investigations, to the best knowledge of Northwest, pending or threatened against Northwest, before any court, regulatory body, administrative agency, or other tribunal or Governmental Authority (i) asserting the invalidity of any Related Document or the Northwest Receivables, (ii) seeking to prevent the consummation of any of the transactions contemplated by the Related Documents to which it is, or is to be, a party, (iii) seeking any determination or ruling that would materially and adversely affect the performance by Northwest of its obligations under the Related Documents to which it is, or is to be, a party, or (iv) seeking any determination or ruling that would materially and adversely affect the validity or enforceability of any Related Document or the Northwest Receivables. (f) No Default. Except as would not have a material adverse effect on the business, operations, assets or financial or other condition of Northwest or on its ability to perform its obligations under the Related Documents and would not have a material adverse effect on the ownership or servicing of the Northwest Receivables or the validity or enforceability of the Related Documents or the Northwest Receivables, Northwest is not in breach or default of any Contractual Obligations, and is not in violation of any Requirement of Law, applicable to it or its properties. (g) Good Title. None of Northwest's Agency Receivables has been sold, assigned or pledged to any Person other than the Seller and, pursuant hereto, the Issuer. Immediately prior to their conveyance to the Seller pursuant to the Northwest Agreement, Northwest has good title to all its Agency Receivables, free and clear of any Lien, and, as of each date Northwest Receivables are conveyed pursuant to the Northwest Agreement, Northwest will have conveyed good title to such Receivables to the Seller free and clear of any Lien. (h) Sole Owner. Immediately prior to their conveyance to the Seller pursuant to the Northwest Agreement, Northwest is the sole owner of all right, title and interest in and to Northwest's Agency Receivables. (i) Receivables Information. The Receivables Information does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements in the Receivables Information, in light of the circumstances in which they were made, not misleading. (j) Place of Business. The chief executive office of Northwest and location of the Records pertaining to its respective Receivables is the address listed for Northwest on Schedule II hereto. The representations and warranties set forth in this Section 3.4 shall survive each sale and assignment of Agency Receivables to the Issuer, and termination of the rights and obligations of Northwest as a Servicer pursuant to Section 9.1. Section 3.5. Representations and Warranties of Pasatiempo. Pasatiempo hereby represents and warrants to the Issuer as of the date hereof and as of each date on which any Pasatiempo Receivables are sold hereunder that: (a) Organization, Good Standing and Due Qualification. Pasatiempo is duly organized and validly existing in good standing under the laws of its state of incorporation, and has, in all material respects, full corporate power, authority and legal right to own its property and conduct its business as contemplated by the Related Documents to which it is, or is to be, a party and as such property is presently owned and such business is presently conducted, and to execute, deliver and perform its Obligations under the Related Documents to which it is, or is to be, a party. Pasatiempo is duly qualified to do business and is in good standing as a foreign corporation (or is exempt from such requirements) and has obtained all necessary licenses and approvals in each jurisdiction in which failure to so qualify or to obtain such licenses and approvals would have a material adverse effect on Pasatiempo's ability to perform its obligations under the Related Documents to which it is, or is to be, a party. Pasatiempo is a direct or indirect wholly-owned subsidiary of the Seller. (b) Due Authorization. The execution and delivery of the Related Documents to which it is, or is to be, a party by Pasatiempo and the consummation of the transactions provided for therein have been duly authorized by Pasatiempo by all necessary corporate action on the part of Pasatiempo. (c) No Conflict. Except as would not affect the validity or enforceability of any Related Document or the Pasatiempo Receivables, would not have a material adverse effect on the business, operations, assets or financial or other condition of Pasatiempo or its ability to perform its obligations under the Related Documents and would not have a material adverse effect on the ownership or servicing of the Pasatiempo Receivables, the execution and delivery of the Related Documents to which it is, or is to be, a party, the performance of the transactions contemplated thereby and the fulfillment of the terms thereof, will not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under, any Contractual Obligation applicable to Pasatiempo or any of its properties. (d) No Violation. Except as would not affect the validity or enforceability of any Related Document or the Pasatiempo Receivables, would not have a material adverse effect on the business, operations, assets or financial or other condition of Pasatiempo or its ability to perform its obligations under the Related Documents and would not have a material adverse effect on the ownership or servicing of the Pasatiempo Receivables, the execution and delivery of the Related Documents to which it is, or is to be, a party, the performance of the transactions contemplated by the Related Documents to which it is, or is to be, a party, and the fulfillment of the terms thereof, will not conflict with or violate any Requirement of Law applicable to Pasatiempo or any of its properties. (e) No Proceedings. There are no proceedings or investigations, to the best knowledge of Pasatiempo, pending or threatened against Pasatiempo, before any court, regulatory body, administrative agency, or other tribunal or Governmental Authority (i) asserting the invalidity of any Related Document or the Pasatiempo Receivables, (ii) seeking to prevent the consummation of any of the transactions contemplated by the Related Documents to which it is, or is to be, a party, (iii) seeking any determination or ruling that would materially and adversely affect the performance by Pasatiempo of its obligations under the Related Documents to which it is, or is to be, a party, or (iv) seeking any determination or ruling that would materially and adversely affect the validity or enforceability of any Related Document or the Pasatiempo Receivables. (f) No Default. Except as would not have a material adverse effect on the business, operations, assets or financial or other condition of Pasatiempo or its ability to perform its obligations under the Related Documents and would not have a material adverse effect on the ownership or servicing of the Pasatiempo Receivables or the validity or enforceability of the Related Documents or the Pasatiempo Receivables, is not in breach or default of any Contractual Obligation, and is not in violation of any Requirement of Law, applicable to it or its properties. (g) Good Title. None of Pasatiempo's Agency Receivables has been sold, assigned or pledged to any Person other than the Seller and, pursuant hereto, the Issuer. Immediately prior to their conveyance to the Seller pursuant to the Pasatiempo Agreement, Pasatiempo has good title to all its Agency Receivables, free and clear of any Lien, and, as of each date Pasatiempo Receivables are conveyed pursuant to the Pasatiempo Agreement, Pasatiempo will have conveyed good title to such Receivables to the Seller free and clear of any Lien. (h) Sole Owner. Immediately prior to their conveyance to the Seller pursuant to the Pasatiempo Agreement, Pasatiempo is the sole owner of all right, title and interest in and to Pasatiempo's Agency Receivables. (i) Receivables Information. The Receivables Information does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements in the Receivables Information, in light of the circumstances in which they were made, not misleading. (j) Place of Business. The chief executive office of Pasatiempo and location of the Records pertaining to its respective Receivables is the address listed for Pasatiempo on Schedule II hereto. The representations and warranties set forth in this Section 3.5 shall survive each sale and assignment of Agency Receivables to the Issuer, and termination of the rights and obligations of Pasatiempo as a Servicer pursuant to Section 9.1. ARTICLE IV COVENANTS Section 4.1. Covenants of the Seller. The Seller hereby covenants that: (a) Receivables Not To Be Evidenced by Instruments. The Seller will take no action to cause any Receivables to be evidenced by any instrument (as defined in the UCC). (b) No Liens. The Seller will not create, permit or suffer to exist, and will defend the Issuer's rights to Purchased Receivables against, and take such other actions as are necessary to remove, any Lien, claim or right in, to or on any Purchased Receivables, and will defend the right, title and interest of the Issuer in and to the Purchased Receivables against the claims and demands of all Persons whomsoever, other than the Liens created hereby and by the Pledge Agreement. (c) Status of Receivables. The Seller will comply in all material respects with all Contractual Obligations applicable to the Seller or to the Purchased Receivables or any part thereof. (d) Corporate Existence. The Seller will keep in full effect its existence, rights and franchises as a corporation under the laws of the state of its incorporation (unless it becomes organized under the laws of any other state or of the United States of America, in which case the Seller will keep in full effect its existence, rights and franchises under the laws of such other jurisdiction), will preserve and maintain its licenses, permits and other authorizations necessary for the conduct of its business and will obtain and preserve its qualification to do business in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of this Agreement, the Related Documents and each other instrument or agreement necessary or appropriate to the proper administration of this Agreement and the transactions contemplated hereby. (e) Indemnity. In any suit, proceeding or action brought by the Collateral Agent, the Liquidity Banks, the Liquidity Agent Bank or the Issuer for any sum owing with respect to a Purchased Receivable, the Seller will save, indemnify and keep the Collateral Agent, the Liquidity Banks, the Liquidity Agent Bank or the Issuer, as the case may be, harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction of liability whatsoever under such Purchased Receivable, arising out of a breach by the Seller of any obligation under such Purchased Receivable or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of a patient or provider or its successor from the Seller, and all such obligations of the Seller shall be and remain enforceable against and only against the Seller, and shall not be enforceable against the Collateral Agent, the Liquidity Banks, the Liquidity Agent Bank or the Issuer, as the case may be. The parties intend that this Subsection (e) not be applied to provide direct or indirect assurance to the Collateral Agent, the Liquidity Banks, the Liquidity Agent Bank or the Issuer, as the case may be, against loss by reason of the bankruptcy or insolvency (or other credit condition) of, or default by, the Obligor on, or the uncollectability of, any Purchased Receivable. (f) Compliance with Law. The Seller will comply, in all material respects, with all Requirements of Law applicable to it or to the Purchased Receivables or any part thereof. (g) Access and Information. Unless prohibited by applicable governmental regulations or any regulations of JCAHO, the Issuer, the Master Servicer, the Liquidity Agent Bank, the Liquidity Banks and their respective representatives shall at all times have full and free access during normal business hours to all the books, correspondence and records of the Seller insofar as they relate to the Purchased Receivables, and the Issuer, the Master Servicer, the Liquidity Agent Bank, the Liquidity Banks and their respective representatives may examine the same, take extracts therefrom and make photocopies thereof, and the Seller agrees to render to the Issuer, the Master Servicer, the Liquidity Agent Bank, the Liquidity Banks and their respective representatives, at the Seller's cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto; provided, however, that the Issuer, the Master Servicer, the Liquidity Agent Bank and the Liquidity Banks each acknowledges that in exercising its rights and privileges conferred in this Section 4.1(g) it or its representatives may, from time to time, obtain knowledge of information, practices, books, correspondence and records of a confidential nature and in which the Seller has a proprietary interest. The Issuer, the Master Servicer, the Liquidity Agent Bank and the Liquidity Banks each agrees that all such information, practices, books, correspondence and records so obtained by it are to be regarded as confidential information and that such information may be subject to laws, rules and regulations regarding patient confidentiality, and agrees that (i) it shall retain in confidence and shall use its best efforts to ensure that its representatives retain in confidence and will not disclose without the prior written consent of the Seller any or all of such information, practices, books, correspondence and records furnished to them and (ii) that it will not, and will use its best efforts to ensure that its representatives will not, make any use whatsoever (other than for the purposes contemplated by the Related Documents) of any of such information, practices, books, correspondence and records without the prior written consent of the Seller, unless such information is generally available to the public or is required by law to be disclosed. (h) Change of Location. The Seller will not, without providing 20 days notice to the Issuer, the Collateral Agent and the Liquidity Agent Bank and without filing such amendments to any previously filed financing statements as the Issuer, the Liquidity Agent Bank and the Collateral Agent may require, (i) change the location of its chief executive office or of any Regional Center or the location of the offices where the Records relating to the Receivables are kept or (ii) change its name, identity or corporate structure in any manner which would, could or might make any financing statement or continuation statement filed by the Seller in accordance herewith seriously misleading within the meaning of Section 9-402(7) of any applicable enactment of the UCC. (i) Payor Contracts. Subject to compliance with Section 4.1(j), the Seller may change the terms of the payor contracts and agreements relating to the Purchased Receivables (or any part thereof) or its policies and procedures with respect to the servicing thereof (including without limitation the amount and timing of finance charges, fees and write-offs) if such change would not, in the reasonable belief of the Seller and the Master Servicer, cause an Amortization Event to occur. (j) Nonimpairment of Purchased Receivables. Except as permitted by Section 6.7, the Seller will not take or omit to take any action, or permit any Servicer or the Master Servicer to take or omit to take any action, which action or omission would materially reduce or impair the rights of the Issuer or the Liquidity Banks with respect to any Purchased Receivable. Without limiting the generality of the foregoing, the Seller shall not take any of the following actions, or permit any Servicer or the Master Servicer to take any of the following actions: (i) rescind, cancel or modify any provision of any Purchased Receivable; (ii) waive any right with respect to any Purchased Receivable; or (iii) take or omit to take any action which might subject any Purchased Receivable to offset, counterclaim, deduction or defense. Notwithstanding the foregoing, the Seller may adjust or write-off the amount of any Purchased Receivable if such adjustment is determined by the Seller to be desirable and appropriate based on the same standards the Seller would apply had it not sold such Receivable hereunder but continued to hold such Receivable for its own account. (k) Obligations. The Seller will duly fulfill all obligations on its part to be fulfilled under or in connection with each Purchased Receivable and will do nothing to impair the rights of the Issuer therein except as otherwise expressly permitted in this Agreement. (l) Subordinated Debt. The Seller agrees that the indebtedness owing from the Issuer to the Seller under the Purchase Money Note shall be subordinated to the indebtedness owed to the Liquidity Banks in accordance with the terms of such Note in effect as of the date hereof. Section 4.2. Covenants of Hillhaven. Hillhaven hereby covenants that: (a) Financial Statements. (i) Hillhaven will assure that (A) its consolidated financial statements will reflect, by footnote or otherwise, the separate existence of the Issuer, the extent of its separate assets and the unavailability of those assets to satisfy claims of the creditors of Hillhaven or any Affiliate other than the Issuer (as well as the fact that the Purchased Receivables generated by Pasatiempo, Northwest and First Healthcare are owned by the Issuer and are unavailable to the creditors of Pasatiempo, Northwest and First Healthcare); and (B) any separate financial statements of the Seller, Northwest or Pasatiempo, reflect, by footnote or otherwise, the ownership of the Purchased Receivables by the Issuer. (ii) Hillhaven will deliver to the Issuer and the Liquidity Agent Bank: (A) as soon as available and in any event within 90 days after the end of each fiscal year of Hillhaven, a consolidated balance sheet of Hillhaven and its consolidated subsidiaries as at the end of such year and consolidated statements of income and cash flows of Hillhaven and its consolidated subsidiaries for such year, setting forth in each case in comparative form corresponding consolidated figures for the preceding fiscal year, certified by a firm of independent public accountants of nationally recognized standing; (B) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of Hillhaven, its unaudited consolidated balance sheet and the related unaudited statements of income and cash flows for such quarter, certified as to fairness of presentation, generally accepted accounting principles and consistency by the chief financial officer of Hillhaven; (C) simultaneously with the delivery of each set of financial statements referred to in clause (A) above, a statement of the chief financial officer of Hillhaven to the effect that nothing has come to his attention to cause him to believe that there existed on the date of such statements any Amortization Event or event or condition which, with the giving of notice or lapse of time or both, would become an Amortization Event; (D) forthwith upon the occurrence of any Amortization Event or event or condition which, with the giving of notice or lapse of time or both, would become an Amortization Event or upon becoming aware that any of the representations and warranties contained in Article III have ceased to be true and correct, a certificate of the president, any vice president or the chief financial officer or the chief accounting officer of Hillhaven setting forth the details thereof and the action which Hillhaven is taking or proposes to take with respect thereto; (E) if and when any member of the Controlled Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA, a copy of such notice; or (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any Plan, a copy of such notice; (F) from time to time such additional information regarding the financial position or business of Hillhaven and its subsidiaries as the Liquidity Agent Bank may reasonably request. (b) Lines of Business. Hillhaven will not, and will not permit any subsidiary to, enter into any new line of business (which is materially different from, or unrelated to, the lines of business respectively conducted by them) or change materially the nature of the business respectively conducted by them on the date hereof. (c) Performance of Obligations; Compliance with Law. Hillhaven will, and will cause each subsidiary to, comply in all material respects with their respective Contractual Obligations and with all applicable Requirements of Law. (d) Access and Information. Unless prohibited by applicable governmental regulations or any regulations of JCAHO, the Issuer, the Liquidity Agent Bank, the Liquidity Banks and their respective representatives shall at all times have full and free access during normal business hours to all the books, correspondence and records of Hillhaven insofar as they relate to Purchased Receivables, and the Issuer, the Liquidity Agent Bank, the Liquidity Banks and their respective representatives may examine the same, take extracts therefrom and make photocopies thereof, and Hillhaven agrees to render to the Issuer, the Liquidity Agent Bank, the Liquidity Banks and their respective representatives, at Hillhaven's cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto; provided, however, that the Issuer, the Liquidity Agent Bank and the Liquidity Banks each acknowledges that in exercising its respective rights and privileges conferred in this Section 4.2(d) it or its representatives may, from time to time, obtain knowledge of information, practices, books, correspondence and records of a confidential nature and in which Hillhaven has a proprietary interest. The Issuer, the Liquidity Agent Bank and the Liquidity Banks each agrees that all such information, practices, books, correspondence and records so obtained by it are to be regarded as confidential information and that such information may be subject to laws, rules and regulations regarding patient confidentiality, and agrees that (i) it shall retain in confidence and shall use its best efforts to ensure that its representatives retain in confidence and will not disclose without the prior written consent of Hillhaven any or all of such information, practices, books, correspondence and records furnished to them and (ii) that it will not, and will use its best efforts to ensure that its representatives will not, make any use whatsoever (other than for the purposes contemplated by the Related Documents) of any of such information, practices, books, correspondence and records without the prior written consent of Hillhaven, unless such information is generally available to the public or is required by law to be disclosed. (e) Corporate Formalities. Hillhaven will, and will cause its Affiliates to, comply with the provisions of Section 7.13(b) of the Liquidity Agreement (to the extent the same relate to Hillhaven and its Affiliates). (f) Subordinated Debt. Hillhaven agrees that the indebtedness owing from the Issuer to Hillhaven under the Hillhaven Note shall be subordinated to the indebtedness owed to the Liquidity Banks in accordance with the terms of such Note in effect as of the date hereof. Section 4.3. Covenants of Northwest. Northwest hereby covenants that: (a) Receivables Not to Be Evidenced by Instruments. Northwest will take no action to cause any Northwest Receivable to be evidenced by any instrument (as defined in the UCC). (b) No Liens. Northwest will not create, permit or suffer to exist, and will defend the Issuer's rights to its respective Purchased Receivables against, and take such other actions as are necessary to remove, any Lien, claim or right in, to or on any Purchased Receivables, and will defend the right, title and interest of the Issuer in and to the Purchased Receivables against the claims and demands of all Persons whomsoever, other than the Liens created hereby and by the Pledge Agreement. (c) Status of Receivables. Northwest shall comply in all material respects with all Contractual Obligations applicable to Northwest or the Northwest Receivables or any part thereof. (d) Corporate Existence. Northwest will keep in full effect its existence, rights and franchises as a corporation under the laws of the state of its incorporation (unless it becomes organized under the laws of any other state or of the United States of America, in which case Northwest will keep in full effect its existence, rights and franchises under the laws of such other jurisdiction), will preserve and maintain its licenses, permits and other authorizations necessary for the conduct of its business and will obtain and preserve its qualification to do business in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of this Agreement, the Related Documents and each other instrument or agreement necessary or appropriate to the proper administration of this Agreement and the transactions contemplated hereby. (e) Indemnity. In any suit, proceeding or action brought by the Collateral Agent, the Liquidity Agent Bank, the Liquidity Banks or the Issuer for any sum owing with respect to a Northwest Receivable, Northwest will save, indemnify and keep the Collateral Agent, the Liquidity Agent Bank, the Liquidity Banks or the Issuer, as the case may be, harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction of liability whatsoever under such Northwest Receivable, arising out of a breach by Northwest of any obligation under such Northwest Receivable or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of a patient or provider or its successor from Northwest, and all such obligations of Northwest shall be and remain enforceable against and only against Northwest, and shall not be enforceable against the Collateral Agent, the Liquidity Banks, the Liquidity Agent Bank or the Issuer, as the case may be. The parties intend that this Subsection (e) not be applied to provide direct or indirect assurance to the Collateral Agent, the, Liquidity Banks, the Liquidity Agent Bank or the Issuer, as the case may be, against loss by reason of the bankruptcy or insolvency (or other credit condition) of, or default by, the Obligor on, or the uncollectability of, any Purchased Receivable. (f) Compliance with Law. Northwest will comply, in all material respects, with all Requirements of Law applicable to it or to the Northwest Receivables or any part thereof. (g) Access and Information. Unless prohibited by applicable governmental regulations or any regulations of JCAHO, the Issuer, the Master Servicer, the Liquidity Agent Bank, the Liquidity Banks and their respective representatives shall at all times have full and free access during normal business hours to all the books, correspondence and records of Northwest insofar as they relate to Northwest Receivables, and the Issuer, the Master Servicer, the Liquidity Agent Bank, the Liquidity Banks and their respective representatives may examine the same, take extracts therefrom and make photocopies thereof, and Northwest agrees to render to the Issuer, the Master Servicer, the Liquidity Agent Bank, the Liquidity Banks and its representatives, at Northwest's cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto; provided, however, that the Issuer, the Master Servicer, the Liquidity Agent Bank and the Liquidity Banks each acknowledges that in exercising their respective rights and privileges conferred in this Section 4.3(g) it or its representatives may, from time to time, obtain knowledge of information, practices, books, correspondence and records of a confidential nature and in which Northwest has a proprietary interest. The Issuer, the Master Servicer, the Liquidity Agent Bank and the Liquidity Banks each agrees that all such information, practices, books, correspondence and records so obtained by it are to be regarded as confidential information and that such information may be subject to laws, rules and regulations regarding patient confidentiality, and agrees that (i) it shall retain in confidence and shall use its best efforts to ensure that its representatives retain in confidence and will not disclose without the prior written consent of Northwest any or all of such information, practices, books, correspondence and records furnished to them and (ii) that it will not, and will use its best efforts to ensure that its representatives will not, make any use whatsoever (other than for the purposes contemplated by the Related Documents) of any of such information, practices, books, correspondence and records without the prior written consent of Northwest, unless such information is generally available to the public or is required by law to be disclosed. (h) Change of Location. Northwest will not, without providing 20 days notice to the Issuer, the Collateral Agent and the Liquidity Agent Bank and without filing such amendments to any previously filed financing statements as the Issuer, the Liquidity Agent Bank, and the Collateral Agent may require, (i) change the location of its chief executive office or of any Regional Center or the location of the offices where the Records relating to the Northwest Receivables are kept or (ii) change its name, identity or corporate structure in any manner which would, could or might make any financing statement or continuation statement filed by Northwest in accordance herewith seriously misleading within the meaning of Section 9-402(7) of any applicable enactment of the UCC. (i) Payor Contracts. Subject to Section 4.3(j), Northwest may change the terms of the payor contracts and agreements relating to Northwest Receivables (or any part thereof) or its policies and procedures with respect to the servicing thereof (including without limitation the amount and timing of finance charges, fees and write-offs) if such change would not, in the reasonable belief of Northwest and the Master Servicer, cause an Amortization Event to occur. (j) Nonimpairment of Purchased Receivables. Except as permitted by Section 6.7, Northwest will not take or omit to take any action, or permit any Servicer or the Master Servicer to take or omit to take any action, which action or omission would materially reduce or impair the rights of the Issuer and the Liquidity Banks with respect to any Purchased Receivable. Without limiting the generality of the foregoing, Northwest shall not take any of the following actions, or permit any Servicer or the Master Servicer to take any of the following actions: (i) rescind, cancel or modify any provision of any Northwest Receivable; (ii) waive any right with respect to any Northwest Receivable; or (iii) take or omit to take any action which might subject any Northwest Receivable to offset, counterclaim, deduction or defense. Notwithstanding the foregoing, Northwest may adjust or write-off the amount of any Purchased Receivable if such adjustment is determined by Northwest to be desirable and appropriate based on the same standards Northwest would apply had it not sold such Receivable hereunder but continued to hold such Receivable for its own account. (k) Obligations. Northwest will duly fulfill all obligations on its part to be fulfilled under or in connection with each Northwest Receivable and will do nothing to impair the rights of the Issuer therein except as otherwise expressly permitted in this Agreement. Section 4.4. Covenants of Pasatiempo. Pasatiempo hereby covenants that: (a) Receivables Not To Be Evidenced by Instruments. Pasatiempo will take no action to cause any Pasatiempo Receivable to be evidenced by any instrument (as defined in the UCC). (b) No Liens. Pasatiempo will not create, permit or suffer to exist, and will defend the Issuer's rights to its respective Purchased Receivables against, and take such other actions as are necessary to remove, any Lien, claim or right in, to or on any Purchased Receivables, and will defend the right, title and interest of the Issuer in and to the Purchased Receivables against the claims and demands of all Persons whomsoever, other than the Liens created hereby and by the Pledge Agreement. (c) Status of Receivables. Pasatiempo shall comply in all material respects with all Contractual Obligations applicable to Pasatiempo or the Pasatiempo Receivables or any part thereof. (d) Corporate Existence. Pasatiempo will keep in full effect its existence, rights and franchises as a corporation under the laws of the state of its incorporation (unless it becomes organized under the laws of any other state or of the United States of America, in which case Pasatiempo will keep in full effect its existence, rights and franchises under the laws of such other jurisdiction), will preserve and maintain its licenses, permits and other authorizations necessary for the conduct of its business and will obtain and preserve its qualification to do business in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of this Agreement, the Related Documents and each other instrument or agreement necessary or appropriate to the proper administration of this Agreement and the transactions contemplated hereby. (e) Indemnity. In any suit, proceeding or action brought by the Collateral Agent, the Liquidity Agent Bank, the Liquidity Banks or the Issuer for any sum owing with respect to a Pasatiempo Receivable, Pasatiempo will save, indemnify and keep the Collateral Agent, the Liquidity Agent Bank or the Issuer, as the case may be, harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction of liability whatsoever under such Pasatiempo Receivable, arising out of a breach by Pasatiempo of any obligation under such Pasatiempo Receivable or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of a patient or provider or its successor from Pasatiempo, and all such obligations of Pasatiempo shall be and remain enforceable against and only against Pasatiempo, and shall not be enforceable against the Collateral Agent, the Liquidity Banks, the Liquidity Agent Bank or the Issuer, as the case may be. The parties intend this Subsection (e) not be applied to provide direct or indirect assurance to the Collateral Agent, the Liquidity Banks, the Liquidity Agent Bank or the Issuer, as the case may be, against loss by reason of the bankruptcy or insolvency (or other credit condition) of, or default by, the Obligor on, or the uncollectability of, any Purchased Receivable. (f) Compliance with Law. Pasatiempo will comply, in all material respects, with all Requirements of Law applicable to it or to the Pasatiempo Receivables or any part thereof. (g) Access and Information. Unless prohibited by applicable governmental regulations or any regulations of JCAHO, the Issuer, the Master Servicer, the Liquidity Agent Bank, the Liquidity Banks and their respective representatives shall at all times have full and free access during normal business hours to all the books, correspondence and records of Pasatiempo insofar as they relate to Pasatiempo Receivables, and the Issuer, the Master Servicer, the Liquidity Agent Bank, the Liquidity Banks and their respective representatives may examine the same, take extracts therefrom and make photocopies thereof, and Pasatiempo agrees to render to the Issuer, the Master Servicer, the Liquidity Agent Bank, the Liquidity Banks and their respective representatives, at Pasatiempo's cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto; provided, however, that the Issuer, the Master Servicer, the Liquidity Agent Bank and the Liquidity Banks each acknowledges that in exercising its rights and privileges conferred in this Section 4.4(g) it or its representatives may, from time to time, obtain knowledge of information, practices, books, correspondence and records of a confidential nature and in which Pasatiempo has a proprietary interest. The Issuer, the Master Servicer, the Liquidity Agent Bank and the Liquidity Banks each agrees that all such information, practices, books, correspondence and records so obtained by it are to be regarded as confidential information and that such information may be subject to laws, rules and regulations regarding patient confidentiality, and agrees that (i) it shall retain in confidence and shall use its best efforts to ensure that its representatives retain in confidence and will not disclose without the prior written consent of Pasatiempo any or all of such information, practices, books, correspondence and records furnished to them and (ii) that it will not, and will use its best efforts to ensure that its representatives will not, make any use whatsoever (other than for the purposes contemplated by the Related Documents) of any of such information, practices, books, correspondence and records without the prior written consent of Pasatiempo, unless such information is generally available to the public or is required by law to be disclosed. (h) Change of Location. Pasatiempo will not, without providing 20 days notice to the Issuer, the Collateral Agent and the Liquidity Agent Bank and without filing such amendments to any previously filed financing statements as the Issuer, the Liquidity Agent Bank, and the Collateral Agent may require, (i) change the location of its chief executive office or of any Regional Center or the location of the offices where the Records relating to the Pasatiempo Receivables are kept or (ii) change its name, identity or corporate structure in any manner which would, could or might make any financing statement or continuation statement filed by Pasatiempo in accordance herewith seriously misleading within the meaning of Section 9-402(7) of any applicable enactment of the UCC. (i) Payor Contracts. Subject to Section 4.4(j), Pasatiempo may change the terms of the payor contracts and agreements relating to Pasatiempo Receivables (or any part thereof) or its policies and procedures with respect to the servicing thereof (including without limitation the amount and timing of finance charges, fees and writeoffs) if such change would not, in the reasonable belief of Pasatiempo and the Master Servicer, cause an Amortization Event to occur. (j) Nonimpairment of Purchased Receivables. Except as permitted by Section 6.7, Pasatiempo will not take or omit to take any action, or permit any Servicer or the Master Servicer to take or omit to take any action, which action or omission would materially reduce or impair the rights of the Issuer and the Liquidity Banks with respect to any Purchased Receivable. Without limiting the generality of the foregoing, Pasatiempo shall not take any of the following actions, or permit any Servicer or the Master Servicer to take any of the following actions: (i) rescind, cancel or modify any provision of any Pasatiempo Receivable; (ii) waive any right with respect to any Pasatiempo Receivable; or (iii) take or omit to take any action which might subject any Pasatiempo Receivable to offset, counterclaim, deduction or defense. Notwithstanding the foregoing, Pasatiempo may adjust or write off the amount of any Purchased Receivable if such adjustment is determined by Pasatiempo to be desirable and appropriate based on the same standards Pasatiempo would apply had it not sold such Receivable hereunder but continued to hold such Receivable for its own account. (k) Obligations. Pasatiempo will duly fulfill all obligations on its part to be fulfilled under or in connection with each Pasatiempo Receivable and will do nothing to impair the rights of the Issuer therein except as otherwise expressly permitted in this Agreement. ARTICLE V ADMINISTRATION AND SERVICING OF RECEIVABLES Section 5.1. General. The Seller agrees to act as a Servicer under this Agreement with respect to the Purchased Receivables other than Northwest Receivables and Pasatiempo Receivables; Northwest agrees to act as a Servicer hereunder with respect to Northwest Receivables; Pasatiempo agrees to act as a Servicer hereunder with respect to Pasatiempo Receivables; Hillhaven agrees to act as Master Servicer hereunder; and the Issuer consents to the foregoing. Each Servicer shall service and administer its Purchased Receivables and shall collect payments due under its respective Purchased Receivables in accordance with its usual and customary servicing policies and procedures for servicing accounts comparable to such Purchased Receivables, and shall have full power and authority, acting alone or through any Person properly designated by it hereunder to do any and all things in connection with such servicing and administration which it may deem necessary or desirable. Each Servicer recognizes that the Master Servicer will be acting hereunder on the basis of information provided it by the respective Servicer; and each Servicer agrees to cooperate with the Master Servicer and, to the extent necessary, the other Servicers such that the Master Servicer's obligations hereunder may be fulfilled in a timely fashion. Section 5.2. Servicer Compensation. As compensation for its acting as Servicer hereunder, each Servicer shall be entitled to receive a Servicing Fee, payable monthly in arrears on each Settlement Date, of 1.0% per annum of the weighted average outstanding balance of the Purchased Receivables being serviced by such Servicer (collectively the "Servicing Fees"). Section 5.3. Expenses. Each Servicer and the Master Servicer, respectively, shall pay out of its own funds all expenses incurred in connection with the servicing activities hereunder including, without limitation, expenses related to enforcement of the Purchased Receivables and the expenses of a firm of public independent accountants and all other fees and expenses, including but not limited to the costs of filing UCC continuation statements and preparing any certificates required hereunder or under any Related Document. Section 5.4. Repurchase by Servicers. In the event there is any breach of any of the representations, warranties or covenants of any Servicer contained in this Agreement, then if such breach or failure has a material adverse effect on the interests of the Issuer or the Liquidity Banks in such Purchased Receivables and if such event is continuing on the first Settlement Date occurring at least 30 days after the earlier to occur of (a) the discovery of such event by such Servicer or (b) receipt by such Servicer of written notice of such event given by the Liquidity Agent Bank or the Issuer, such Servicer shall purchase all of its respective Purchased Receivables as to which such event relates. The Servicer shall purchase a Purchased Receivable by making a deposit into the Collection Account in immediately available funds in an amount equal to the Repurchase Price for such Receivable. Such Repurchase Price shall be treated as a Collection of the related Purchased Receivables and shall be applied in accordance with Article VI. Upon each such purchase by the Servicer, the Issuer shall automatically and without further action be deemed to sell, transfer, assign and set over, and otherwise convey to the Servicer, without recourse, representation or warranty, all right, title and interest of the Issuer in and to such Purchased Receivable, all monies due or to become due with respect thereto and all proceeds thereof. The Issuer shall execute such documents and instruments of transfer or assignment and take such other actions as shall be reasonably requested by the Servicer to effect the conveyance of any Purchased Receivable pursuant to this Section. The parties intend that this Section 5.4 not be applied to provide direct or indirect assurance to the Issuer against loss by reason of the bankruptcy or insolvency (or other credit condition) of, or default by, the related Obligor on, or the uncollectability of, any Purchased Receivable. The obligation to repurchase any such Purchased Receivable pursuant to this Section 5.4 shall survive the termination of this Agreement. Section 5.5. Master Servicer. (a) General. To the extent not inconsistent with Requirements of Law, the Master Servicer shall assist the Servicers in the performance of their respective duties under this Article. In addition, the Master Servicer shall assist the Issuer and the Liquidity Agent Bank in monitoring compliance by the Seller, Northwest and Pasatiempo (and of their respective Purchased Receivables) with the requirements of this Agreement. (b) Settlement Statement. The Master Servicer, on the basis of information provided by the Servicers, will deliver appropriately completed Settlement Statements as provided in Section 6.6. Section 5.6. Notices to the Seller. In the event that the Seller, Northwest or Pasatiempo, as the case may be, is no longer acting as a Servicer or Hillhaven is no longer acting as Master Servicer hereunder, any Successor Servicer or Successor Master Servicer appointed pursuant to Section 9.2 shall deliver or make available to the Seller, Northwest, Pasatiempo or Hillhaven, as the case may be, each certificate and report required to be prepared, forwarded or delivered thereafter pursuant to Sections 5.4 and 5.5. ARTICLE VI ALLOCATION AND APPLICATION OF COLLECTIONS Section 6.1. Establishment of Issuer Accounts; Investments. The Issuer shall, pursuant hereto and to the Pledge Agreement, establish and maintain at Pittsburgh National Bank, Pittsburgh, Pennsylvania in the joint names of the Issuer and the Collateral Agent two segregated deposit accounts (the "Collection Account" and the "Collateral Account" and, collectively, the "Issuer Accounts"). Under the Pledge Agreement, the Collateral Agent will appoint the Master Servicer to act as its non-exclusive agent in connection with any withdrawals or deposits from or to the Issuer Accounts required or permitted to be made by the Collateral Agent pursuant to the terms hereof or of the Pledge Agreement or as instructed in writing by the Collateral Agent from time to time. Section 6.2. Collections and Allocations. All collections shall be deposited (or caused to be deposited) by the respective Servicer in immediately available funds to the Collection Account within two Business Days of receipt thereof by such Servicer. Any Collections received by the Master Servicer shall be similarly so deposited. Pending such transfer, the respective Servicer or the Master Servicer, as the case may be, may deposit the same in a concentration account in which funds of Hillhaven and its subsidiaries may also be deposited; provided, that, each Servicer and the Master Servicer shall maintain records permitting a determination on a daily basis of the amount and location of all Collections which have been so deposited. In the event of the commencement of a bankruptcy, insolvency, reorganization or similar proceeding with respect to the Seller, Pasatiempo, Northwest or any Servicer or upon the receipt by the Seller, Pasatiempo, Northwest or any Servicer of notice from the Liquidity Agent Bank that an Event of Default under the Liquidity Agreement has occurred, then, immediately upon the occurrence of such event and thereafter, the Seller and the Servicers shall immediately remit (or cause to be remitted) all Collections on the Purchased Receivables directly to the Collateral Agent for deposit into the Collection Account, and in no event shall it thereafter commingle any such Collections with other funds or deposit any such collections thereafter into any account established, held or maintained by itself. Section 6.3. Application of Collection Account and Collateral Account. (a) Except during the continuation of an Amortization Event or following the occurrence of any event described in clause (ii) or (iii) of the definition of "Transfer Termination Date" (and subject to the other provisions of this Article VI), amounts on deposit in the Collection Account shall be applied on a daily basis in the following order: (i) First, to pay interest then due and payable or overdue on Liquidity Loans; (ii) Second, to repay principal of Liquidity Loans then due and payable; (iii) Third, to pay amounts described in clauses (iii) and (iv) of the definition of "Daily Facility Costs" which are then due and payable; (iv) Fourth, for deposit into the Collateral Account of an amount equal to all Daily Facility Costs (other than those described in clause (ii) of the definition of "Daily Facility Costs") which have accrued but are not payable on such day; (v) Fifth, to pay the Seller the Purchase Price of Purchased Receivables pursuant to Section 2.1(d) hereof; (vi) Sixth, to pay amounts described in clause (ii) of the definition of "Daily Facility Costs" which are then due and payable; (vii) Seventh, at the option of the Issuer, to the payment of principal of the Purchase Money Note (or, if there is no outstanding balance on the Purchase Money Note, to the payment of principal of the Hillhaven Note) or to the prepayment of Liquidity Loans that are then prepayable without premium or penalty (or in the case of Eurodollar Loans (as defined in the Liquidity Agreement) at the end of an Interest Period applicable thereto); provided, that, the Purchase Money Note and the Hillhaven Note may not be prepaid hereunder unless the conditions specified in Section 2.01(c) of the Liquidity Agreement are satisfied on the date of such prepayment; and (viii) Eighth, at the option of the Issuer to be (x) retained by the Issuer or (y) paid out by the Issuer as a Restricted Payment or (z) otherwise applied by the Issuer; provided that, in each case, all applicable Requirements of Law and Contractual Obligations are complied with. (b) Amounts on deposit in the Collateral Account shall be applied, together with any amounts being applied pursuant to subsection (a) above, to pay on the due date thereof the respective Daily Facility Costs with respect to which they were deposited in the Collateral Account. (c) The order of application of amounts to pay Daily Facility Costs pursuant to Subsection (a)(iii) and (b) shall be as follows: (i) First, to amounts described in clause (iii) of the definition of "Daily Facility Costs"; and (ii) Second, to amounts described in clause (iv) of the definition of "Daily Facility Costs" (in such order as the Issuer shall determine). (d) During the continuation of an Amortization Event or following the occurrence of any event described in clause (ii) or (iii) of the definition of "Transfer Termination Date", the order of application of amounts referred to in Subsection (a) above shall be as follows: (i) First, to pay interest then due and payable or overdue on Liquidity Loans; (ii) Second, to repay principal of Liquidity Loans then due and payable or overdue; (iii) Third, to be held as cash collateral to secure payment of amounts referred to in clauses (i) through (ii) hereof until all such amounts have been paid and satisfied in full; (iv) Fourth, to the payment of amounts described in clause (iii) of the definition of "Daily Facility Costs"; (v) Fifth, to the payment of the amounts described in clause (iv) of the definition of "Daily Facility Costs"; (vi) Sixth, to the prepayment in full of all Liquidity Loans which are then prepayable without premium or penalty, together with interest accrued thereon; (vii) Seventh, to the payment of interest and then principal of the Purchase Money Note; (viii) Eighth, to the payment of interest and then principal of the Hillhaven Note, and (ix) Ninth, the balance, if any, to be retained by the Issuer or as a court of competent jurisdiction shall otherwise direct. Section 6.4. Purchase Money Note (a) If, and to the extent that, the Issuer is unable on any Business Day to fund (from all sources available to it, including, without limitation, internally generated funds as well as external funding sources) the Purchase Price of Agency Receivables being sold under Section 2.1(d), the Issuer shall authorize appropriate notations to increase the amount of the Purchase Money Note. (b) The principal balance of the Purchase Money Note is subject to mandatory adjustment as provided in Section 6.6 and to prepayment as provided in Section 6.3. (c) The Issuer agrees that it will utilize all funding sources available to it (including without limitation, internally generated funds) such that the principal balance of the Purchase Money Note is (at least as frequently as each Settlement Date) the minimum possible. Section 6.5. Daily Reports. On each Date of Processing, each Servicer will determine (based on estimates) and report to the Master Servicer, for the preceding day, Collections with respect to such Servicer's respective Purchased Receivables and such Servicer's respective new Receivables; and the Master Servicer shall determine for the preceding day the aggregate Collections and aggregate new Purchased Receivables and shall determine for such day the Daily Facility Costs, and shall prepare a report (the "Daily Report") setting forth such information and such other information specified in Exhibit I. Section 6.6. Adjustment Procedures. On each Settlement Date, the Master Servicer shall determine the actual amount of Collections and the actual Balances of Purchased Receivables purchased during the preceding Collection Period (and, in the case of the initial Settlement Date, the actual Balances of Purchased Receivables purchased on the Closing Date) and shall prepare a statement (the "Settlement Statement") setting forth such actual amounts and the other calculations and information specified in the form of Settlement Statement attached as Exhibit C for the prior Collection Period. The Master Servicer shall complete such Settlement Statement and deliver it to the Issuer, the Liquidity Agent Bank and the Collateral Agent by 12:00 noon (City of Los Angeles time) on each Settlement Date. Each Settlement Statement may be transmitted by telecopy to the telecopy numbers specified in Section 12.6 and shall thereafter be promptly mailed to the Liquidity Agent Bank, the Collateral Agent, and the Issuer at the address for notices for each such party specified in Section 12.6 (and in the case of the Liquidity Agent Bank, to its Notice Office). To the extent the actual amounts specified in the Settlement Statement differ from the estimates calculated pursuant to Section 6.5 or as contemplated by Section 2.1(f), the following adjustments shall be made: (i) If and to the extent that the estimated Balance of new Purchased Receivables exceeds the actual Balance of new Purchased Receivables, the Issuer shall decrease the Balance of its Purchased Receivables and decrease the outstanding principal balance of the Purchase Money Note by the amount of such excess multiplied by the Discount Factor; provided, that, if so decreasing the outstanding principal balance of the Purchase Money Note would reduce the outstanding principal balance of the Purchase Money Note below $0, the Seller shall pay to the Issuer, in immediately available funds, an amount equal to the amount by which the outstanding principal balance of the Purchase Money Note would otherwise be reduced below $0. (ii) If and to the extent that the actual Balance of new Purchased Receivables exceeds the estimated Balance of new Purchased Receivables, the Issuer shall increase the Balance of its Purchased Receivables and pay to the Seller, in immediately available funds, an amount equal to the amount of such excess multiplied by the Discount Factor or to the extent the Issuer is unable to fund (from all sources available to it, including without limitation internally generated funds as well as external funding sources) such payment, increase the outstanding principal balance of the Purchase Money Note by the amount of such excess multiplied by the Discount Factor. (iii) If and to the extent that the estimated amount of Collections exceeds the actual amount of Collections, the Issuer shall (A) increase the Balance of its Purchased Receivables by the amount of such excess multiplied by the Discount Factor, (B) decrease its gross revenues by 1.4% multiplied by the amount of such excess and (C) pay to the Seller, in immediately available funds, an amount equal to the amount of such excess, or to the extent the Issuer is unable to fund (from all sources available to it, including without limitation internally generated funds as well as external funding sources) such payment, increase the outstanding balance of the Purchase Money Note by the amount of such excess. (iv) If and to the extent that the actual amount of Collections exceeds the estimated amount of Collections, the Issuer shall (A) decrease the Balance of its Purchased Receivables by the amount of such excess multiplied by the Discount Factor, (B) increase its gross revenues, by 1.4% multiplied by the amount of such excess and (C) decrease the outstanding principal balance of the Purchase Money Note; provided, however, that if so decreasing the outstanding principal balance of the Purchase Money Note would reduce the outstanding principal balance thereof to less than $0, in lieu of decreasing the outstanding principal balance of the Purchase Money Note below $0 the Seller shall pay to the Issuer, in immediately available funds, an amount equal to the amount by which the outstanding principal balance of the Purchase Money Note otherwise would be reduced below $0. Section 6.7. Adjustments for Miscellaneous Credits and Erroneous Charges. (a) If during any Collection Period the respective Servicer or the Seller, as applicable, (i) adjusts the amount of any Receivable because of a rebate, refund or billing error to an Obligor, or (ii) discovers that a Receivable was created through an erroneous charge or (iii) otherwise compromises, adjusts, reduces, modifies or cancels any indebtedness evidenced by a Receivable without receiving cash therefor, the Servicer will deposit, or the Seller shall deposit, as applicable, cash into the Collection Account in an amount equal to such offset within two Business Days following such adjustment or discovery. Such offset shall be treated as a Collection of the related Receivables in the Collection Period in which the obligation to repurchase such Receivables arose and shall be applied in accordance with this Article VI. The obligation of the Servicer and the Seller to make such offsets shall survive the termination of this Agreement. Notwithstanding the foregoing, any adjustment or compromise permitted as described in the last sentences of Sections 4.1, 4.3 or 4.4 shall be made by the respective Servicer or Seller without any obligation to make any payment hereunder. (b) If any Purchased Receivable included in its outstanding Balance on the date of transfer thereof to the Issuer pursuant to Section 2.1 hereof any amounts which should have been written off by the Seller prior to the date of transfer thereof in accordance with the Seller's customary write-off procedures and practices, the Seller shall, within two Business days following discovery thereof by the Seller, deposit cash into the Collection Account in an amount equal to such amounts which so should have been written-off. Such deposit shall be treated as a Collection of the related Purchased Receivables in the Collection Period in which the obligations to make such deposit arose and shall be applied in accordance with this Article VI. ARTICLE VII CERTAIN MATTERS RELATING TO THE SELLER Section 7.1. Merger or Consolidation of, or Assumption of the Obligations of, the Seller. (a) Any corporation into which a Seller may be merged or consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Seller shall be a party, or any Person succeeding to the business of the Seller shall be the successor of the Seller hereunder (without relieving the Seller of its responsibilities hereunder if it survives such merger, conversion or consolidation) without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided, however, that, upon the request of the Issuer, the successor to the Seller shall execute an assumption agreement providing for the assumption by the successor to the Seller of the rights and obligations of the Seller hereunder in a form reasonably satisfactory to the Issuer; and provided further that (x) the surviving corporation shall be a direct or indirect wholly-owned subsidiary of Hillhaven and (y) the Liquidity Agent Bank shall have been notified of any such action. (b) The obligations of the Seller hereunder shall not be assignable nor shall any Person succeed to the obligations of the Seller hereunder except in each case in accordance with the provisions of Section 7.1(a). ARTICLE VIII OTHER MATTERS RELATING TO SERVICING Section 8.1. Liability of the Servicers and Master Servicer; Indemnification. Each Servicer and the Master Servicer, respectively, will indemnify the Issuer, its beneficial owners, the Liquidity Agent Bank, the Liquidity Banks and the Collateral Agent from and against any loss, liability, expense, damage or injury suffered or sustained arising from acts or omissions of such Servicer or the Master Servicer, as the case may be. The foregoing indemnity shall not be construed as to limit any rights (including without limitations rights to indemnity) which any such indemnified person shall be entitled under applicable law, rule, regulation or court decree, at equity or otherwise. Section 8.2. Merger or Consolidation of, or Assumption of the Obligations of, the Servicers or Master Servicer. Any corporation into which any Servicer or the Master Servicer may be merged or consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Servicer or the Master Servicer shall be a party, or any Person succeeding to the business of such Servicer or the Master Servicer shall be the successor of such Servicer or the Master Servicer, as the case may be, hereunder (without relieving such Servicer or the Master Servicer of its responsibilities hereunder if it survives such merger, conversion or consolidation), without the execution or filing of any paper; provided, however, that, upon the request of the Issuer, the successor to such Servicer or the Master Servicer, as the case may be, shall execute an assumption agreement providing for the assumption by the successor to such Servicer or the Master Servicer, as the case may be, of the rights and obligations of such Servicer or the Master Servicer hereunder in a form reasonably satisfactory to the Issuer; and provided further that (x) the surviving corporation shall be a direct or indirect wholly-owned subsidiary of Hillhaven and (y) the Liquidity Agent Bank shall have been notified of any such action. Section 8.3. Servicers and Master Servicer Not To Resign. No Servicer or the Master Servicer shall resign from the obligations and duties hereby imposed on it except upon determination that (i) the performance of its duties hereunder is no longer permissible under applicable Requirements of Law and (ii) there is no reasonable action which the Servicer or the Master Servicer could take to make the performance of its duties hereunder permissible under applicable law or regulation. Any such determination permitting the resignation of any Servicer or the Master Servicer shall be evidenced as to clause (i) above by an Opinion of Counsel to such effect delivered to the Issuer and the Liquidity Agent Bank. Section 8.4. Delegation of Duties. In the ordinary course of business, a Servicer or the Master Servicer may at any time delegate any of its duties hereunder to any Person who agrees to conduct such duties in accordance with the terms of this Agreement; provided, however (a) such delegation is not inconsistent with Section 9.3 and is otherwise in compliance with all applicable Requirements of Law; (b) such delegation shall not relieve the Servicer or the Master Servicer of its liability and responsibility with respect to such duties, and shall not constitute a resignation within the meaning of Section 8.3 hereof; and (c) the Servicer or the Master Servicer shall assign to the Issuer all of the Servicer's or Master Servicer's, as the case may be, rights under the agreement or agreements pursuant to which such delegation is made. Section 8.5. Monitoring. If the Issuer and the Liquidity Agent Bank do not elect to replace a Servicer or the Master Servicer with a Successor Servicer or Successor Master Servicer following the occurrence of a Servicing Default, to the extent permitted by law, the Issuer and the Liquidity Agent Bank shall have the right to appoint a firm of independent public accountants to maintain the servicing of Purchased Receivables and to furnish to the Issuer and the Liquidity Agent Bank such letters, certificates and reports as either shall reasonably request. The respective Servicer and the Master Servicer shall cooperate with such firm of independent public accountants. The fees and expenses of such firm of independent public accountants shall be paid for by the respective Servicer or the Master Servicer, as the case may be. Section 8.6. Confidentiality. Notwithstanding any provision of this Agreement to the contrary, including, without limitation, Sections 4.1(g), 4.2(d), 4.3(g), 4.4(g), 8.5, 9.1 and 10.2, in no event shall the Issuer, the Master Servicer, the Liquidity Agent Bank or any Liquidity Bank have access to any patient records required by any law, rule or regulation of any Governmental Authority, the JCAHO or any similar agency, or any other regulatory or professional organization to which the Master Servicer, the Seller, Pasatiempo or Northwest belongs or is subject, to be kept confidential; provided, however, that the Master Servicer, the Seller, Pasatiempo and Northwest shall each use its reasonable efforts to furnish, or cause to be furnished, information reasonably requested by the Issuer, Master Servicer, Liquidity Agent Bank or any Liquidity Bank, as the case may be, relating to the Purchased Receivables without violating any such law, rule or regulation. ARTICLE IX SERVICING DEFAULTS Section 9.1. Servicing Defaults. If any one of the following events (a "Servicing Default") shall occur and be continuing: (a) any failure by any Servicer or the Master Servicer to make any payment, transfer or deposit or any demand, report, statement or other certification (in any such case, of any kind whatsoever) to give instructions or notice to the Issuer or the Liquidity Agent Bank on or before the date occurring five Business Days after the date such payment, transfer, deposit or report, statement or other certification (in any such case, of any kind whatsoever) or such instruction or notice is required to be made or given, as the case may be, under the terms of this Agreement; (b) any Servicer or the Master Servicer shall assign its duties under this Agreement, except as permitted by Section 8.4; (c) failure on the part of any Servicer or the Master Servicer duly to observe or perform in any material respect any of its other respective covenants or agreements set forth in this Agreement, which continues unremedied for a period of 30 days after the earlier of (i) knowledge of such failure by any Servicer or the Master Servicer, as the case may be, or (ii) there shall have been given, by registered or certified mail, to any Servicer or the Master Servicer by the Issuer or the Liquidity Agent Bank a written notice specifying such failure and requiring that it be remedied; (d) any representation, warranty or certification made (or deemed made) by any Servicer or the Master Servicer in this Agreement or in any certificate delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made) or when delivered and such incorrectness is not remedied in all material respects within 30 days after the earlier of (i) knowledge of such failure by such Servicer or the Master Servicer, as the case may be, or (ii) there shall have been given, by registered or certified mail to such Servicer or the Master Servicer by the Issuer or the Liquidity Agent Bank, a written notice specifying such incorrectness and requiring that it be remedied; (e) the entry of a decree or order for relief by a court having jurisdiction in the premises in respect of any Servicer or the Master Servicer in an involuntary case under any applicable Federal or state bankruptcy, insolvency, or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator, or similar official of Hillhaven or any Seller or for any substantial part of any of their respective property, or ordering the winding up or liquidation of any Servicer or the Master Servicer and such order, decree or appointment remains unstayed and in effect for more than 60 days; (f) any Servicer or the Master Servicer shall commence a voluntary case under any applicable Federal or state bankruptcy, insolvency or similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of any Servicer or the Master Servicer or for any substantial part of any of their respective property, or make any general assignment for the benefit of creditors, or the failure by any Servicer or the Master Servicer generally to pay its debts as such debts become due, or the taking of any action by any Servicer or the Master Servicer in furtherance of any of the foregoing; then, so long as the Servicing Default shall not have been waived or remedied, either the Issuer or the Liquidity Agent Bank by written notice to the affected Servicer or the Master Servicer (a "Termination Notice"), may terminate all of the rights and obligations of such Servicer or of the Master Servicer, as the case may be, under this Agreement. Upon the occurrence of any such event, the affected Servicer or the Master Servicer, as the case may be, shall not be relieved from using its best efforts to perform its obligations in a timely manner in accordance with the terms of this Agreement and such Servicer or the Master Servicer, as the case may be, shall provide the Issuer and the Liquidity Agent Bank prompt notice of such failure or delay by it, together with a description of its efforts to so perform its obligations. Each Servicer or the Master Servicer, as the case may be, shall immediately notify the Issuer and the Liquidity Agent Bank in writing of any Servicing Default. After receipt by a Servicer or the Master Servicer, as the case may be, of such Termination Notice, and on the date that a Successor Servicer or Successor Master Servicer, as the case may be, shall have been appointed by the Issuer or the Liquidity Agent Bank pursuant to Section 9.2, all authority and power of such Servicer or Master Servicer, as the case may be, under this Agreement shall pass to and be vested in a Successor Servicer or Successor Master Servicer, as the case may be; and, without limitation, the Issuer is hereby authorized and empowered (upon the failure of the Servicer or Master Servicer, as the case may be, to cooperate) to execute and deliver, on behalf of such Servicer or Master Servicer, as the case may be, as attorney-in- fact or otherwise, all documents and other instrument or instruments, and to do and accomplish all other acts or things necessary or appropriate to effect the purposes of such transfer of servicing rights. The affected Servicer or Master Servicer, as the case may be, agrees to cooperate at its expense with the Issuer and such Successor Servicer or Successor Master Servicer, as the case may be, in effecting the termination of the responsibilities and rights of such Servicer or the Master Servicer, as the case may be, to conduct servicing hereunder, including, without limitation, the transfer to such Successor Servicer or Successor Master Servicer, as the case may be, of all authority of the affected Servicer or Master Servicer, as the case may be, to service the Purchased Receivables provided for under this Agreement, including, without limitation, all authority over all Collections which shall on the date of transfer be held by the affected Servicer or Master Servicer, as the case may be, for deposit, or which have been deposited by such Servicer or Master Servicer, as the case may be, in the Issuer Accounts, or which shall thereafter be received with respect to the Purchased Receivables and to assist the Successor Servicer or Successor Master Servicer. The affected Servicer or Master Servicer, as the case may be, shall promptly transfer its electronic records relating to the Purchased Receivables to the Successor Servicer or Successor Master Servicer in such electronic form as the Successor Servicer or Successor Master Servicer may reasonably request and shall promptly transfer to the Successor Servicer or Successor Master Servicer all other records, correspondence and documents necessary for the continued servicing of the Purchased Receivables in the manner and at such times as the Successor Servicer or Successor Master Servicer shall reasonably request. To the extent that compliance with this Section 9.1 shall require the affected Servicer or Master Servicer, as the case may be, to disclose to the Successor Servicer or Successor Master Servicer information of any kind which the affected Servicer or Master Servicer, as the case may be, reasonably deems to be confidential, the Successor Servicer or Successor Master Servicer shall be required to enter into such customary licensing and confidentiality agreements as the affected Servicer or Master Servicer, as the case may be, shall deem necessary to protect its interest. Section 9.2. Appointment of Successor Servicer or Successor Master Servicer. (a) On and after the receipt by a Servicer or Master Servicer, as the case may be, of a Termination Notice pursuant to Section 9.1, the affected Servicer or Master Servicer, as the case may be, shall continue to perform all servicing functions under this Agreement until the date specified in the Termination Notice or otherwise specified by the Issuer or the Liquidity Agent Bank, as the case may be, by notice to such Servicer or Master Servicer, as the case may be, or, if no such date is specified in such Termination Notice, or otherwise specified by the Issuer or the Liquidity Agent Bank, as the case may be, until a date mutually agreed upon by such Servicer or the Master Servicer, as the case may be, and the Issuer or the Liquidity Agent Bank, as the case may be. The Issuer and the Liquidity Agent Bank shall as promptly as possible after the giving of a Termination Notice appoint a successor Servicer (a "Successor Servicer") or successor Master Servicer (a "Successor Master Servicer"), as the case may be, and such Successor Servicer or Successor Master Servicer shall accept its appointment by a written assumption in a form acceptable to the Issuer and the Liquidity Bank. (b) Upon its appointment, the Successor Servicer or Successor Master Servicer shall be the successor in all respects to the respective Servicer or Master Servicer, as the case may be, with respect to servicing functions under this Agreement and shall be subject to all the responsibilities, duties and liabilities relating thereto placed on the respective Servicer or Master Servicer, as the case may be, by the terms and provisions hereof, and all references in this Agreement to the respective Servicer or Master Servicer, as the case may be, shall be deemed to refer to the Successor Servicer or Successor Master Servicer. Without limiting the foregoing, the Successor Servicer or Successor Master Servicer shall be deemed to make as to itself each of the representations set forth herein in Section 3.1 or 3.3, as the case may be. (c) The Successor Servicer or Successor Master Servicer shall be entitled to servicing compensation with respect to the Purchased Receivables sufficient to pay the Successor Servicer or Successor Master Servicer a reasonable fee (including the estimated costs of such servicing and a reasonable profit). Such servicing compensation shall be a reasonable fee determined by the Issuer in the following manner: (i) if it is commercially reasonable to obtain estimates or bids of five or more potential Servicers prepared to service the Purchased Receivables, a reasonable fee shall not exceed 15% in excess of the average of such bids or estimates; (ii) if it is commercially reasonable to obtain estimates or bids of only three or four potential Servicers prepared to service the Purchased Receivables, a reasonable fee shall not exceed 10% in excess of the average of such bids or estimates; (iii) if estimates or bids are obtained from only two potential Servicers prepared to service the Purchased Receivables, a reasonable fee shall not exceed 5% in excess of the average of such bids or estimates; and (iv) if an estimate or bid is received from only one potential Servicer prepared to service the Purchased Receivables, such estimate or bid shall be deemed a reasonable fee. In the event that such fee shall exceed the previous Servicing Fee, the outgoing Servicer shall be liable to, and shall make payment to, the Successor Servicer or the Successor Master Servicer, as the case may be, in the amount of such shortfall for each period during which such Successor Servicer or the Successor Master Servicer, as the case may be, is acting hereunder. Section 9.3. Collection of Medicaid Payments by Servicers. Notwithstanding any provision of any Related Document to the contrary, (a) all Medicaid payments which are made by an Obligor with respect to any Purchased Receivable shall be collected from such Obligor only by the Servicer which furnished the services for which such payments are made, except to the extent that an Obligor may be required to submit any such payments directly to a Person other than the Servicer pursuant to a court-ordered assignment which is valid, binding and enforceable under applicable federal and state Medicaid laws, rules and regulations; and no Related Document shall be construed to permit any other Person, in violation of applicable federal and state Medicaid laws, rules and regulations to collect or receive, or to be entitled to collect or receive, any such payments prior to the Servicer's receipt thereof, and (b) this Agreement and the Related Documents shall not effect, nor shall this be construed to effect, any assignment of Medicaid payments in contravention of applicable federal and state Medicaid laws, rules and regulations. Each party hereto consents to entry, after an Amortization Event has occurred and so long as it is continuing, of court orders requiring Obligors to submit such payments directly to the Collateral Agent for application in accordance with Section 6.3. ARTICLE X MATTERS RELATING TO THE ISSUER Section 10.1. Recourse. Except as otherwise expressly provided herein, the Issuer is purchasing and will purchase the Purchased Receivables without recourse to the Seller (or Northwest or Pasatiempo) or the respective Servicer or the Master Servicer and the Issuer shall bear all economic benefit and economic risk of loss inherent in owning the Purchased Receivables. The Issuer, as opposed to the Seller (or Northwest or Pasatiempo) or the Servicers, shall bear all losses arising out of any default of the Obligor with respect to any Purchased Receivable while such Purchased Receivable is owned by the Issuer. Section 10.2. Inspection of Books and Records. The Issuer shall have the right to review and inspect the Seller's and the Servicers' books and records as such books and records apply to the respective Purchased Receivables and to make copies and extracts therefrom and cause such books and records, as they relate to the respective Purchased Receivables, to be audited by a firm of independent public accountants selected by the Issuer. ARTICLE XI INDEMNITY Section 11.1. Indemnity. (a) By the Seller. The Seller agrees to indemnify the Issuer, the Liquidity Agent Bank, the Collateral Agent and the Liquidity Banks (the "Indemnified Parties") and each of them against any and all losses, liabilities, claims, damages, costs and expenses (including without limitation reasonable fees and expenses of counsel) imposed on, asserted against or suffered or incurred by any of them and which in any way arise out of or relate to: (i) any taxes which may be asserted or imposed at any time in respect of purchases and sales of any Purchased Receivable (or in connection with payments by the related Obligor thereunder); (ii) the lack of enforceable ownership and/or first perfected priority and general first Lien status against all Persons (including without limitation any bankruptcy trustee or similar Person) in favor of the Issuer in any Purchased Receivable or any direct or indirect proceeds thereof; (iii) any omission, misrepresentation or breach by the Seller hereunder or under, or in connection with, any of its respective Purchased Receivables or the transactions out of which it arose; (iv) any Purchased Receivable which is or becomes an Ineligible Receivable; (v) the inaccuracy in any material respect at each time made or deemed made of the Receivable Information or of any representation or warranty made by the Seller (or any of its Authorized Officers) under or in connection with or any Related Documents or in any information or report delivered by the Seller pursuant hereto or thereto; (vi) the failure by the Seller to comply with any applicable Requirement of Law or Contractual Obligation with respect to any of its respective Purchased Receivables; (vii) any dispute, claim, offset or defense of the Obligor to the payment of any of its respective Purchased Receivables (including, without limitation, a defense based on such Receivables not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms); (viii) any failure of the Seller to perform its duties or obligations in accordance with the provisions of this Agreement; (ix) any non-compliance by the Seller with the "bulk transfer" or analogous laws of any jurisdiction or jurisdictions; or (x) any Regulatory Change which (i) changes the method or basis of taxation of any amounts payable to the Issuer under this Agreement in respect of any Purchased Receivables (ii) is applicable to banks generally notwithstanding the financial condition of any particular bank and imposes or modifies any reserve, special deposit, deposit insurance or assessment, capital or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, the Liquidity Agent Bank or any Liquidity Bank or (iii) imposes any other condition affecting any Related Document (or any of such extensions of credit or liabilities). (b) By Northwest. Northwest agrees to indemnify the Indemnified Parties, and each of them, against any and all losses, liabilities, claims, damages, costs and expenses (including without limitation reasonable fees and expenses of counsel) imposed on, asserted against or suffered or incurred by any of them and which in any way arise out of or relate to: (i) any omission, misrepresentation or breach by Northwest hereunder or under, or in connection with, any Northwest Receivable or the transactions out of which it arose; (ii) the inaccuracy in any material respect at each time made or deemed made of the Receivable Information or of any representation or warranty made by Northwest (or any of its Authorized Officers) under or in connection with any Related Document or in any information or report delivered by Northwest pursuant thereto; (iii) the failure by Northwest to comply with any applicable Requirement of Law or Contractual Obligation with respect to any Northwest Receivable; (iv) any dispute, claim, offset or defense of the Obligor to the payment of any Northwest Receivable (including, without limitation, a defense based on such Receivable not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms); (v) any failure of Northwest to perform its duties or obligations in accordance with the provisions of this Agreement; or (vi) any non-compliance by Northwest in connection herewith or with the Northwest Agreement with the "bulk transfer" or analogous laws of any jurisdiction or jurisdictions. (c) By Pasatiempo. Pasatiempo agrees to indemnify the Indemnified Parties, and each of them, against any and all losses, liabilities, claims, damages, costs and expenses (including without limitation reasonable fees and expenses of counsel) imposed on, asserted against or suffered or incurred by any of them and which in any way arise out of or relate to: (i) any omission, misrepresentation or breach by Pasatiempo hereunder or under, or in connection with, any Pasatiempo Receivable or the transactions out of which it arose; (ii) the inaccuracy in any material respect at each time made or deemed made of the Receivable Information or of any representation or warranty made by Pasatiempo (or any of its Authorized Officers) under or in connection with any Related Document or in any information or report delivered by Pasatiempo pursuant thereto; (iii) the failure by Pasatiempo to comply with any applicable Requirement of Law or Contractual Obligation with respect to any Pasatiempo Receivable; (iv) any dispute, claim, offset or defense of the Obligor to the payment of any Pasatiempo Receivable (including, without limitation, a defense based on such Receivable not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms); (v) any failure of Pasatiempo to perform its duties or obligations in accordance with the provisions of this Agreement; or (vi) any noncompliance by Pasatiempo in connection herewith or with the Pasatiempo Agreement with the "bulk transfer" or analogous laws of any jurisdiction or jurisdictions. (d) Third-Party Claims. (i) Any Indemnified Party shall notify the Seller, Northwest or Pasatiempo (each, an "Indemnifying Party"), as the case may be, promptly after such Indemnified Party's receipt of notice, or such Indemnified Party otherwise becoming aware, of any third party claims with respect to which indemnification may be sought under this Section 11.1. Such notice shall be in writing and shall be delivered in accordance with the provisions of Section 12.6 hereof. If any such action is brought against any Indemnified Party and it notifies the Indemnifying Party of the commencement thereof, the Indemnifying Party shall promptly assume the defense thereof with counsel chosen by it and approved by the Indemnified Party (who shall not, except with the consent of the Indemnified Party, be counsel to the Indemnifying Party), so long as the Indemnified Party is reasonably satisfied with the Indemnifying Party's defense thereof and the Indemnified Party does not reasonably determine that the Indemnifying Party's participation in or assumption of the defense would be inappropriate due to actual differing interests between the Indemnified Party and the Indemnifying Party. Without limiting the generality of the foregoing, any one or more of the Indemnified Parties shall have the right to employ counsel in any such action, and the Indemnifying Party shall indemnify and hold harmless the Indemnified Party from and against any loss or liability by reason of such third party claim, including without limitation reasonable attorneys' fees and costs (including the costs of in-house counsel), except to the extent that the Indemnifying Party has assumed the defense thereof in accordance with this Section 11.1 and provided that the Indemnifying Party's liability for the fees and expenses of the Indemnified Party's counsel shall not extend to more than one separate firm of attorneys at any point in time for any Indemnified Party for any one claim or any one group of substantially similar or related separate claims arising out of the same allegations or circumstances. At such time as the Indemnified Party notifies the Indemnifying Party that (a) the Indemnified Party is not reasonably satisfied with such defense or counsel or (b) the Indemnified Party has reasonably determined that the Indemnifying Party's assumption of the defense has become inappropriate due to actual differing interests between the Indemnified Party and the Indemnifying Party, the Indemnified Party shall deliver notice to the Indemnifying Party in accordance with the provisions of Section 12.6 hereof, the Indemnified Party shall subsequently be entitled to assume the defense thereof with counsel chosen by it, and the Indemnifying Party shall indemnify and hold harmless the Indemnified Party in accordance with the terms hereof. (ii) In accordance with the provisions of Section 12.6, the Indemnified Party shall notify the Indemnifying Party, and the Indemnifying Party shall notify the Indemnified Party, of any bona fide offer of settlement of a third party claim, and neither the Indemnifying Party nor the Indemnified Party shall accept any such offer without the other's prior written consent, not to be unreasonably withheld, provided that the Indemnifying Party may effect a settlement of any pending or threatened proceeding covered by the indemnities contained in this paragraph if such settlement includes an unconditional release of the Indemnified Party from any and all liability on claims that are the subject matter of such proceeding. If a bona fide settlement offer is accepted by the Indemnifying Party and the Indemnified Party, the Indemnifying Party shall be liable for any loss or liability by reason of such settlement. (e) Indemnity Not to Provide Recourse. The parties intend that this Section 11.1 not be applied to provide direct or indirect assurance to any Indemnified Party against loss by reason of the bankruptcy or insolvency (or other credit condition) of, or default by, the related Obligor on, or the collectability of, any Purchased Receivable. ARTICLE XII MISCELLANEOUS PROVISIONS Section 12.1. Transfer Termination Date. The Issuer shall have no obligation to purchase Receivables on any date subsequent to the Transfer Termination Date. Section 12.2. Termination of Agreement; Sale of Receivables. This Agreement shall terminate on the date on which all Credits Outstanding and all amounts due hereunder and under the Related Documents shall have been paid in full. Notwithstanding any termination, all obligations under Sections 2.2 and 5.4 and under Articles VI, IX and XI shall survive. Section 12.3. Amendment. This Agreement may be amended only in a writing signed by the Servicers, the Seller, Northwest, Pasatiempo, the Master Servicer, the Issuer, the Liquidity Agent Bank and the Collateral Agent. Section 12.4. Intention of the Parties. It is the intention of the parties hereto that the transactions arising under this Agreement be treated as a present and absolute sale of the Purchased Receivables. The terms of this Agreement shall be construed to further this intention of the parties. In the event that such transactions are held by a court of competent jurisdiction not to constitute a sale, the parties hereto intend that such transactions constitute the grant of (and the parties hereto hereby grant and agree that, in such event, the applicable parties shall have, by the provisions of this Agreement, granted) a security interest in all of the Seller's (and Northwest's and Pasatiempo's) right, title and interest in and to the Purchased Receivables and the Proceeds thereof and that this Agreement constitute a security agreement under applicable law. Section 12.5. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF WASHINGTON, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS. THE PARTIES HERETO EACH IRREVOCABLY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF ANY WASHINGTON STATE OR FEDERAL COURT SITTING IN THE CITY OF SEATTLE, WASHINGTON, OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF, OR RELATING TO, THIS AGREEMENT, EACH HEREBY IRREVOCABLY WAIVING ANY OBJECTION TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING SO BROUGHT AS WELL AS ANY CLAIM OF INCONVENIENT FORUM. Section 12.6. Notices. All demands, notices and communications under this Agreement not otherwise permitted to be made by telecopy hereunder shall be in writing and shall be deemed to have been duly given if personally delivered at or mailed by registered mail, return receipt requested, In the case of: If to the Issuer: Hillhaven Funding Corporation 1148 Broadway Plaza Tacoma, WA 98401-2264 Attention: Vice President and Treasurer Telephone: (206) 756-4807 Telecopy: (206) 756-4890 and a copy to: The Hillhaven Corporation 1148 Broadway Plaza Tacoma, WA 98401-2264 Attention: General Counsel Telephone: (206) 756-4797 Telecopy: (206) 756-4845 If to the Seller: First Healthcare Corporation c/o The Hillhaven Corporation 1148 Broadway Plaza Tacoma, WA 98401-2264 Attention: General Counsel Telephone: (206) 756-4797 Telecopy: (206) 756-4845 If to Northwest: Northwest Health Care, Inc. c/o The Hillhaven Corporation 1148 Broadway Plaza Tacoma, WA 98401-2264 Attention: General Counsel Telephone: (206) 756-4797 Telecopy: (206) 756-4845 If to Pasatiempo: Pasatiempo Development Corp. c/o The Hillhaven Corporation 1148 Broadway Plaza Tacoma, WA 98401-2264 Attention: General Counsel Telephone: (206) 756-4797 Telecopy: (206) 756-4845 If to the Master Servicer: The Hillhaven Corporation 1148 Broadway Plaza Tacoma, WA 98401-2264 Attention: General Counsel Telephone: (206) 756-4797 Telecopy: (206) 756-4845 If to the Collateral Agent: Seattle First National Bank 701 Fifth Avenue, CSC 12 Seattle, WA 98101-1688 Attention: Thomas Rook Telephone: (206) 358-8004 Telecopy: (206) 358-3113 If to the Agent: Notice Office: Bank of America National Trust and Savings Association 555 South Flower Street 11th Floor, #5618 Los Angeles, CA 90071 Attention: Brad DeSpain Telephone: (213) 228-3262 Telecopy: (213) 228-2756 Payment Office: Bank of America National Trust and Savings Association 333 South Beaudry Avenue Los Angeles, CA 90017 Attention: Betsy Quinio Telex: BANKAMER SFO 34346 Telephone: (213) 345-6531 Telecopy: (213) 345-6550 Routing/ABA #: 1210-00358 Incoming Wire Acct. #: 12331-83980 If to a Liquidity Bank: at its address set forth in Schedule I to the Liquidity Agreement or, as to each party, at such other address as shall be designated by such party in a written notice to each other party. Section 12.7. Severability of Provisions. If any one or more of the covenants, agreements, provisions or terms of this Agreement shall for any reason whatsoever be held invalid, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provision or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement. Section 12.8. Assignment. Notwithstanding anything to the contrary contained herein, except as provided in Sections 8.2 and 9.2, this Agreement may not be assigned by any party without the prior consent of the Issuer and of the Liquidity Agent Bank. Section 12.9. Further Assurances. The Seller, Northwest, Pasatiempo, the Master Servicer and each Servicer agree to do and perform, from time to time, any and all acts and to execute any and all further instruments required or reasonably requested by the Issuer or the Liquidity Agent Bank to more fully effect the purposes of this Agreement, including, without limitation, the execution of any financing statements or continuation statements relating to the Purchased Receivables for filing under the provisions of the UCC of any applicable jurisdiction Section 12.10. No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Issuer, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exhaustive of any rights, remedies, powers and privileges provided by law. Section 12.11. Counterparts. This Agreement may be executed in two or more counterparts (and by different parties on separate counterparts), each of which shall be an original, but all of which together shall constitute one and the same instrument. Section 12.12. Binding Effect; Benefit of Agreement. Subject to Section 12.8, the provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. This Agreement shall also inure to the benefit of the Liquidity Agent Bank and the Collateral Agent which are hereby expressly declared to be third party beneficiaries hereof. Section 12.13. Nonpetition Covenant. Notwithstanding any prior termination of this Agreement, Hillhaven, Pasatiempo, Northwest, the Servicers, the Master Servicer and the Seller shall not, prior to the date which is one year and one day after the termination of this Agreement, acquiesce, petition or otherwise, directly or indirectly, invoke or cause the Issuer to invoke the process of any court of Governmental Authority for the purpose of commencing or sustaining a case against the Issuer under any Federal or state bankruptcy, insolvency or similar law or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Issuer or any substantial part of its property, or ordering the winding up or liquidation of the affairs of the Issuer. Section 12.14. Headings. The headings herein are for purpose of reference only and shall not otherwise affect the meaning or interpretation of any provision hereof. Section 12.15. General Provision as to Payments. Except as otherwise expressly provided herein, all payments hereunder (including without limitation all net settlements occurring in any Settlement Date) shall be made prior to 12:00 noon (City of Los Angeles Time) on the date specified therefor and in funds immediately available in the City of Los Angeles. Section 12.16. Additional Parties Hereto. (a) In the event that (x) one or more wholly-owned subsidiaries of Hillhaven, now owned or hereafter acquired, is primarily engaged in the same business as is conducted on the Execution Date by the Seller, Pasatiempo and Northwest or (y) Hillhaven reorganizes its corporate structure such that facilities generating Agency Receivables on the Execution Date (or acquired as contemplated by clause (x)) are owned by one or more additional wholly-owned subsidiaries of Hillhaven, the wholly-owned subsidiaries referred to in clauses (x) and (y) may, following 30-days advance written notice to and with the written consent of the Liquidity Agent Bank (which consent shall not be unreasonably withheld or delayed), become parties to this Agreement upon delivery to the Issuer and the Liquidity Agent Bank of: (i) a duly executed instrument in writing reasonably satisfactory to them, agreeing to become a party to this Agreement with the same effect as if named herein in a similar capacity (including, without limitation in their capacities as Servicers) as Northwest and Pasatiempo; (ii) a duly executed agreement with the Seller in substantially the form of the Northwest Agreement and the Pasatiempo Agreement; and (iii) documents relating to such subsidiary of the kind delivered by Northwest and Pasatiempo pursuant to clauses (a) through (d), (i) and (j) of Schedule I hereto. Upon the addition of any wholly-owned subsidiary of Hillhaven as a party hereto as contemplated by Subsection (a) above and without further act or documentation of any kind, the provisions of this Agreement and the Related Documents shall be deemed amended such that such subsidiary assumes obligations, and is entitled to rights, and the other provisions of this Agreement and the Related Documents (including, without limitation Article IX hereof) apply to the same extent as the same apply to, Northwest and Pasatiempo (including without limitation in their capacities as Servicers) on the Execution Date. (c) Without limiting the effect of Subsection (b) above, the parties hereto agree, that following the joinder of any additional parties hereto pursuant to this Section, upon the request of any of the parties hereto, to cause this Agreement to be amended (or, if so requested, amended and restated) to reflect in full text the effect of Subsection (b) above. Section 12.17. Arbitration. At the request of the Liquidity Agent Bank, acting on behalf of the Required Liquidity Banks, or the Issuer, Hillhaven, the Seller, or any Servicer, any controversy or claim between the Liquidity Banks, the Issuer, Hillhaven, the Seller, or any Servicer arising from or relating to this Agreement or any Related Document executed in connection with this Agreement or any Related Document or arising from any alleged tort shall be settled by arbitration in King County, Washington. The United States Arbitration Act will apply to the arbitration proceedings which will be administered by the American Arbitration Association under its commercial rules of arbitration, except that unless the amount of the claim(s) being arbitrated exceeds $5,000,000 there shall be only one arbitrator. Any controversy over whether an issue is arbitrable shall be determined by the arbitrator(s). Judgement upon the arbitration award may be entered in any court having jurisdiction. The institution and maintenance of any action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of either party, including plaintiff, to submit the controversy or claim to arbitration if such action for judicial relief is contested. For purposes of the application of the statute of limitations the filing of an arbitration as provided herein is the equivalent of filing a lawsuit and the arbitrator(s) will have the authority to decide whether any claim or controversy is barred by the statute of limitations, and if so, to dismiss the arbitration on that basis. The parties consent to the joinder in the arbitration proceedings of any party having an interest related to the claim or controversy being arbitrated. No provision of this Section shall limit the right of the Issuer, Hillhaven, the Seller, or any Servicer or the Liquidity Banks to exercise self-help remedies such as setoff, foreclosure or sale of any collateral, or obtaining any ancillary provisional or interim remedies from a court of competent jurisdiction before, after or during the pendency of any arbitration proceeding. The exercise of any such remedy does not waive the right of any party to request arbitration. Section 12.18. Replacement of Original Master Sale and Servicing Agreement. The Original Master Sale and Servicing Agreement shall be deemed amended and restated and superseded by this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers as of the day and year first above written. HILLHAVEN FUNDING CORPORATION By: /s/ Robert K. Schneider Title: Vice President & Treasurer FIRST HEALTHCARE CORPORATION By: /s/ Robert K. Schneider Title: Vice President & Treasurer NORTHWEST HEALTH CARE, INC. By: /s/ Robert K. Schneider Title: Vice President & Treasurer PASATIEMPO DEVELOPMENT CORP. By: /s/ Robert K. Schneider Title: Vice President & Treasurer THE HILLHAVEN CORPORATION By: /s/ Robert K. Schneider Title: Vice President & Treasurer EX-10.55 19 Exhibit 10.55 AMENDED AND RESTATED LIQUIDITY AGREEMENT among HILLHAVEN FUNDING CORPORATION, as the Issuer BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION and SEATTLE-FIRST NATIONAL BANK as the Banks and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION as Agent and SEATTLE-FIRST NATIONAL BANK as Collateral Agent Dated as of April 29, 1994 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS 1 ARTICLE II THE LOANS 6 Section 2.01 The Loans 6 Section 2.02 Notices of Borrowing for Loans 7 Section 2.03 Disbursement of Funds 7 Section 2.04 The Loan Notes 8 Section 2.05 Interest 8 Section 2.06 Interest Periods 9 Section 2.07 Conversions and Continuations 10 Section 2.08 Termination or Reduction of Commitment 10 Section 2.09 Extensions of Expiration Date 11 Section 2.10 Increased Costs; Reduced Return 11 Section 2.11 Taxes 12 Section 2.12 Compensation 14 Section 2.13 Expenses and Indemnification 14 Section 2.14 Market Unavailability 16 Section 2.15 Borrowing in Accordance With Percentage Interests 18 ARTICLE III OTHER CREDIT TERMS 18 Section 3.01 Fees 18 ARTICLE IV PAYMENTS 18 Section 4.01 Payments on Non-Business Days 18 Section 4.02 Prepayments 18 Section 4.03 Method and Place of Payment, Etc. 19 Section 4.04 Repayment of Loans 20 ARTICLE V CONDITIONS PRECEDENT 20 Section 5.01 Conditions to Effectiveness 20 Section 5.02 Representations and Warranties 24 Section 5.03 Conditions to Execution 24 ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE ISSUER 24 Section 6.01 Organization and Good Standing 24 Section 6.02 Power; Authorization; Enforceable 24 Obligation 24 Section 6.03 No Legal Bar 25 Section 6.04 No Litigation 25 Section 6.05 Investment Company Act 25 Section 6.06 No Default 25 Section 6.07 Perfection of Security Interest 26 ARTICLE VII COVENANTS OF THE ISSUER 26 Section 7.01 Information 26 Section 7.02 Activities 27 Section 7.03 Additional Stock 27 Section 7.04 Maintenance of Existence 27 Section 7.05 Maintenance of Properties 27 Section 7.06 Compliance with Laws 27 Section 7.07 Notice of Proceedings 28 Section 7.08 Use of Proceeds 28 Section 7.09 Limitation on Debt 28 Section 7.10 Negative Pledge 28 Section 7.11 Consolidations, Mergers, Acquisitions, and Sales of Assets 28 Section 7.12 Restricted Payments 29 Section 7.13 Corporate Existence 29 Section 7.14 Books and Records 32 Section 7.15 Reduction of Outstanding Debt 32 Section 7.16 Issuer Equity 32 Section 7.17 Borrowing Plan 32 Section 7.18 Post-Closing Legal Opinions 32 ARTICLE VIII EVENTS OF DEFAULT 33 Section 8.01 Events of Defaults 33 (a) Payments 33 (b) Representations 33 (c) Covenants 33 (d) Voluntary Bankruptcy Proceedings of the Issuer 33 (e) Involuntary Bankruptcy Proceedings Against the Issuer 34 (f) Judgments 34 (g) Obligations 34 (h) Related Documents 34 (i) Material Adverse Change 34 (j) Change in Laws 34 (k) Ownership 35 Section 8.02 Collection of Medicaid Payments by Servicers 35 ARTICLE IX MISCELLANEOUS 36 Section 9.01 Computations 36 Section 9.02 Exercise of Rights; Remedies Cumulative 36 Section 9.03 Amendment and Waiver 36 Section 9.04 Successors and Assigns 36 Section 9.05 Adjustments 38 Section 9.06 Notices; Requests; Demands 39 Section 9.07 Survival of Representations and Warranties 40 Section 9.08 Governing Law 41 Section 9.09 Counterparts 41 Section 9.10 Further Assurances 41 Section 9.11 Appointment of the Agents 41 (a) The Agent 41 (b) Appointment of the Collateral Agent 42 (c) Reliance 43 (d) Defaults 44 (e) Indemnification 44 (f) Rights as Banks 45 (g) No Representations 45 (h) Resignation of the Agent 46 Section 9.12 Descriptive Headings 47 Section 9.13 Notice 47 Section 9.14 Arbitration 47 Section 9.15 Replacement of Original Liquidity Agreement 48 EXHIBITS A Borrowing Plan B Borrowing Base Certificate C Form of Pledge and Security Agreement D Form of Notice of Borrowing for Revolving Loans E Form of Revolving Loan Note F Opinion of Richard P. Adcock (First Healthcare) G Opinion of Richard P. Adcock (Northwest) H Opinion of Richard P. Adcock (Pasatiempo) I Opinion of Richard P. Adcock (Hillhaven) J Opinion of Richard P. Adcock (Issuer) K Opinion of Brown and Wood L Opinion of Reed Smith Shaw & McClay M Novation Agreement N Opinion of Richard P. Adcock (Postclosing/First Healthcare) O Opinion of Richard P. Adcock (Postclosing/Northwest) P Opinion of Richard P. Adcock (Postclosing/Pasatiempo) Q Opinion of Richard P. Adcock (Postclosing/Issuer) R Depositary Agreement SCHEDULES I - List of Banks II - List of 1990 Financing Statements AMENDED AND RESTATED LIQUIDITY AGREEMENT THIS AMENDED AND RESTATED LIQUIDITY AGREEMENT is dated as of April 29, 1994 (this "Agreement"), among HILLHAVEN FUNDING CORPORATION, a Nevada corporation (the "Issuer"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BofA") and SEATTLE-FIRST NATIONAL BANK ("Seafirst") (collectively, the "Banks"), and BofA as agent for the Banks (in such capacity, the "Agent"). This Agreement amends and restates that certain Liquidity Agreement dated as of July 1, 1990 (as amended, the "Original Liquidity Agreement"), among the Issuer, the Banks listed on Schedule I thereto (collectively, the "Original Banks"), and Banque Indosuez, New York Branch, as Agent (the "Original Agent"). The Original Liquidity Agreement was amended by the First Amendment to Liquidity Agreement dated as of September 17, 1991, and the Omnibus Second Amendment to Liquidity Agreement and Second Amendment to Master Sale and Servicing Agreement, dated as of November 23, 1992. RECITALS A. The parties to the Original Liquidity Agreement desire that the Original Banks assign all of their right, title and interest under the Original Liquidity Agreement and certain related documents to Seafirst and BofA. B. The Issuer, Seafirst and BofA desire to make certain modifications to the terms and conditions of the Original Liquidity Agreement, including without limitation elimination of the commercial paper facility and addition of borrowing base requirements with respect to the Revolving Loans. C. The parties hereto wish to amend and restate the Original Liquidity Agreement on the terms and conditions set forth herein. The parties hereto agree as follows: ARTICLE I DEFINITIONS Unless otherwise specified, capitalized terms used herein undefined shall have the respective meanings specified in the Amended and Restated Master Sale and Servicing Agreement dated as of the date hereof (as from time to time amended, supplemented or modified, the "Sale and Servicing Agreement"), among the Issuer, First Healthcare Corporation, a Delaware corporation, Northwest Health Care, Inc., an Idaho corporation, Pasatiempo Development Corp., a California corporation, and The Hillhaven Corporation, a Nevada corporation. The following terms shall have the following meanings: "Adjusted LIBOR Rate" shall mean, with respect to any Interest Period, a rate per annum (rounded upwards, to the nearest 1/100 of 1%) equal to the quotient obtained by dividing (i) the applicable LIBOR Rate by (ii) a percentage equal to 100% minus the maximum stated rate of all reserve requirements (including, without limitation, any marginal, emergency, supplemental, special or other reserves) that would be applicable to any member of the Federal Reserve System during such Interest Period in respect of eurocurrency or eurodollar funding, lending or liabilities. "Affiliate" shall mean, with respect to a Person, any other Person which directly or indirectly controls, is controlled by or is under common control with such Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Agents" shall mean the Agent and the Collateral Agent. "Authorized Agent Officers" shall mean officers of the Agent authorized to give notices, requests, instructions, make demand and take other action on behalf of the Agent. "Available Commitment" shall mean, at any time, an amount equal to (i) the Commitment minus (ii) an amount equal to the aggregate principal amount of all Loans then outstanding. "Borrowing" shall mean the incurrence of Loans from the Banks on a given date pursuant to Section 2.01 or 2.02. "Borrowing Base" means, at any time, an amount equal to eighty percent (80%) of the Eligible Receivables. "Borrowing Plan" means the Seattle-First National Bank Customer Borrowing Plan Assigned Accounts Receivable substantially in the form of Exhibit A hereto. "Borrowing Base Certificate" means the Borrowing Base Certificate substantially in the form of Exhibit B hereto. "Closing Date" shall have the meaning specified in Section 5.01. "Collateral" shall mean the Collateral as defined under the Pledge Agreement. "Collateral Agent" shall mean Seafirst or any successor Collateral Agent under the Pledge Agreement. "Commitment" shall mean the obligation of the Banks to make Loans in a maximum aggregate principal amount equal to $40,000,000 at any time outstanding, as such amount may from time to time be adjusted pursuant to this Agreement. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee under capital leases, (v) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, and (vi) all Debt of others guaranteed by such Person. "Default" shall mean any event or condition which, with the giving of notice or lapse of time or both, would become an Event of Default. "Eligible Receivables" means (a) the face amount of Purchased Receivables which are (i) not outstanding for more than 90 days after the date of any invoice or bill therefor; (ii) not evidenced by chattel paper; (iii) not Defaulted Receivables or Ineligible Receivables; (iv) not affected by a breach of any representation, warranty or covenant under Section 3.1, 3.2, 3.4, 3.5, 4.1, 4.3 or 4.4 of the Sale and Servicing Agreement, which breach would have a material adverse effect on the interests of the Issuer or the Liquidity Banks in such Purchased Receivable; and (v) in compliance with the requirements for Accounts Eligible for Borrowing specified in the Borrowing Plan; less (b) all amounts which Obligors are or claim to be entitled to set off against, or used in reduction of, amounts otherwise due to the Issuer. "Eurodollar Business Day" shall mean any Business Day on which commercial banks in London are open for domestic and international business (including dealings in dollar deposits). "Eurodollar Loan" shall mean any Loan bearing interest at a rate determined by reference to the Adjusted LIBOR Rate in accordance with Article II. "Event of Default" shall have the meaning set forth in Section 8.01 hereof. "Expiration Date" shall mean March 31, 1997, unless such date is extended in which case it shall be the last day of any extension of such date pursuant to Section 2.09 hereof; provided, that, if the Commitment is earlier terminated pursuant to the provisions of this Agreement, the Expiration Date shall be the effective date of such termination. "Fed Funds Rate" shall mean, for any day, the Agent's effective borrowing rate to obtain overnight Federal funds for such day (or, if such day is not a Business Day, for the next preceding Business Day). "Hillhaven" shall mean The Hillhaven Corporation, a Nevada corporation, and its successors. "Indemnified Party" shall have the meaning specified in Section 2.13(c). "Independent Directors" shall mean the members of the board of directors who are not, and have not at any time been: (x) a director, officer, employee or shareholder of Hillhaven or any Affiliate thereof, or (y) a director, officer, employee or shareholder of any other Person or entity that, directly or indirectly, controls or is under common control with Hillhaven. "Ineligible Securities" shall mean securities which may not be underwritten or dealt in by member banks of the Federal Reserve System under Section 16 of the Banking Act of 1933 (12 U.S.C. Section 24, Seventh), as amended. "Interest Period" shall have the meaning specified in Section 2.06. "LIBOR Rate" shall mean, with respect to any Interest Period, the offered quotation to first-class banks in the London interbank eurodollar market by the Agent for Dollar deposits with maturities comparable to the Interest Period to be applicable to such Eurodollar Loan, determined as of the date which is two Eurodollar Business Days prior to the commencement of such Interest Period. "Liquidity Facility Commitment Fee" shall have the meaning specified in Section 3.01. "Loan Notes" shall mean the Revolving Loan Notes. "Loans" shall mean the Revolving Loans. "Notice of Borrowing" shall mean a notice to the Agent pursuant to Section 2.02. "Notice of Conversion" shall have the meaning specified in Section 2.07. "Notice of Termination" shall have the meaning specified in Section 8.01. "Notice Office" shall mean the office of the Agent at 555 South Flower Street, Los Angeles, California 90071, or such other office as the Agent may designate in writing to the Issuer. "Novation Agreement" shall have the meaning set forth in Section 5.01 hereof. "Payment Office" shall mean the office of the Agent at 333 South Beaudry Avenue, Dept. #5583, Los Angeles, California 90017, or such other office as the Agent may designate in writing to the Issuer. "Percentage" shall mean, with respect to each Bank, the respective percentage set forth opposite its name on Schedule I hereto. "Pledge Agreement" means the Amended and Restated Pledge and Security Agreement substantially in the form of Exhibit C hereto, as from time to time amended, supplemented or modified. "Reference Loan" shall mean any Loan bearing interest at a rate determined by reference to the Reference Rate in accordance with Article II hereof. "Reference Rate" shall mean the rate of interest publicly announced by the Agent in Los Angeles, California, from time to time in its sole discretion, as its Reference Rate, and may not be the lowest rate charged to its customers. Loans may be priced at, above or below the Reference Rate, which is merely a reference rate with respect to which effective rates of interest are calculated. In the event the Agent shall abolish or abandon the practice of establishing its Reference Rate, the Banks shall designate a comparable reference rate. "Required Banks" shall mean, at any time, the Banks holding Loans representing at least 66-2/3% of the Commitment. "Restricted Payment" shall have the meaning specified in Section 7.12. "Revolving Loan" shall mean a loan made by the Banks to the Issuer on a revolving basis (pursuant to a Notice of Borrowing delivered by the Issuer under Section 2.02(a)) in accordance with, and under the circumstances described in, Article II hereof. "Revolving Loan Note" shall have the meaning specified in Section 2.04(a); "Revolving Loan Notes" shall have a correlative meaning. "Subordinated Debt" shall mean indebtedness owing from the Issuer to Hillhaven under the Hillhaven Note, and indebtedness owing from the Issuer to First Healthcare under the Purchase Money Note. "Type" shall mean any type of Revolving Loan, whether a Reference Loan or a Eurodollar Loan. ARTICLE II THE LOANS Section 2.01 The Loans. (a) Subject to and upon the terms and conditions herein set forth, each Bank agrees, severally and not jointly, to make Revolving Loans to the Issuer at any time on or after the Closing Date and prior to the Expiration Date. Each Revolving Loan shall, at the option of the Issuer be either a Reference Loan or a Eurodollar Loan. All Revolving Loans made pursuant to a Borrowing shall be of one Type and no more than five Borrowings comprised of Eurodollar Loans shall be outstanding at any time. The Issuer may borrow, pay or prepay and reborrow Loans on or after the Closing Date in accordance with the provisions hereof. (b) The Banks shall not be obligated on any day to make any Loans to the Issuer if (after giving effect to the use of proceeds of such Loans, and all payments to be made in accordance with the Sale and Servicing Agreement on the date of such Loans) (i) the Available Commitment would not be greater than or equal to zero, or (ii) the aggregate principal amount of all Loans then outstanding would exceed the lesser of the Borrowing Base or the Commitment. No Bank shall be obligated on any day to make any Loan to the Issuer to the extent that the aggregate principal amount of such Bank's Loans outstanding at any time would exceed (after giving effect to such Loan and the use of proceeds thereof, and all other payments to be made in accordance with the Sale and Servicing Agreement on the date of such Loan) an amount equal to such Bank's Percentage multiplied by the aggregate amount of the Commitment. (c) The obligation of each Bank to make any Revolving Loan hereunder is subject at the time of the making thereof to the conditions that: (i) the conditions specified in Subsection (b) above being complied with; (ii) the Issuer shall not have voluntarily commenced any proceeding or filed any petition under any bankruptcy, insolvency or similar law seeking the dissolution, liquidation or reorganization of the Issuer and shall not have taken any action for the purpose of effectuating any of the foregoing; (iii) no involuntary proceedings or an involuntary petition shall have been commenced or filed against the Issuer by any Person under any bankruptcy, insolvency or similar law seeking the dissolution, liquidation or reorganization of the Issuer, and, if commenced or filed, such proceeding or petition shall not have been dismissed within 60 days after commencement or filing, as the case may be; (iv) immediately prior to and after giving effect to such Revolving Loan, there shall exist no Default or Event of Default; and (v) the representations and warranties of the Issuer herein shall be true and correct in all material respects as if made on such date. Section 2.02 Notices of Borrowing for Loans. Whenever the Issuer desires to borrow a Revolving Loan, the Issuer shall give the Agent, at the Notice Office, written notice or telephonic notice (confirmed promptly in writing in substantially the form of Exhibit D hereto (the "Notice of Borrowing")) of the Borrowing no later than (i) 9:00 a.m. (City of Los Angeles time) on the proposed borrowing date in the case of Reference Loans and (ii) 9:00 a.m. (City of Los Angeles time) on the third Eurodollar Business Day prior to the proposed borrowing date in the case of Eurodollar Loans. The Agent shall promptly (and in any event not later than 10:00 a.m. (City of Los Angeles time) on the date any Notice of Borrowing is given) give each Bank written notice or telephonic notice (confirmed promptly in writing) of each Notice of Borrowing. Each Notice of Borrowing with respect to a Revolving Loan shall specify: (1) the principal amount the Issuer desires to borrow hereunder and that such Borrowing is to be a Revolving Loan, (2) the date of Borrowing (which shall be a Business Day and, in the case of a Eurodollar Loan, a Eurodollar Business Day), (3) whether the requested Revolving Loan is to be initially maintained as a Reference Loan or a Eurodollar Loan and (4) if such Loan is to be maintained as a Eurodollar Loan, the initial Interest Period to be applicable thereto. Each Borrowing of Revolving Loans that are Eurodollar Loans shall be in an amount of at least $3,000,000 or, if greater, in an integral multiple of $1,000,000. Section 2.03 Disbursement of Funds. On the date specified in each Notice of Borrowing, each Bank will make available to the Agent for the account of the Issuer at the Payment Office, by 11:00 a.m. (City of Los Angeles time), its Percentage of the requested Loan in freely transferable Dollars and in immediately available funds of such Bank. The proceeds of such Loans will then be made available by the Agent in freely transferable Dollars and in immediately available funds to the Issuer by 12:00 noon (City of Los Angeles time). Section 2.04 The Loan Notes. (a) The Issuer's obligation to pay the principal of and interest on all the Revolving Loans made by each Bank shall be evidenced by a separate note in favor of such Bank (each, as from time to time amended, supplemented or modified, a "Revolving Loan Note") which shall (1) be dated the Closing Date (or in case any such Notes are issued subsequent to the Closing Date, such Notes shall be dated the date of such issuance); (2) be in the stated principal amount equal to such Bank's respective Percentage of the Commitment; (3) mature on the Expiration Date; (4) bear interest as provided in Section 2.05; (5) be payable to the order of such Bank; (6) be entitled to the benefits of this Agreement; and (7) be substantially in the form of Exhibit E to this Agreement with the blanks therein appropriately completed in conformity herewith. Each Bank shall note on its internal records each Revolving Loan made by it and payment thereon and conversion thereof and, prior to any transfer of its Revolving Loan Note, such Bank shall endorse the outstanding principal amount of its Revolving Loan Note on the reverse side thereof; provided, however, that failure to make such notation or endorsement shall not adversely affect such Bank's rights with respect to any Revolving Loan. (b) Although the Revolving Loan Notes shall be dated the Closing Date (or in case any such Notes are issued subsequent to the Closing Date, such Notes shall be dated the date of such issuance) interest in respect thereof shall be payable only for the periods during which Revolving Loans are outstanding thereunder. In addition, although the stated principal amount of each Bank's Revolving Loan Note shall be equal to such Bank's respective Percentage of the Commitment, such Bank's Revolving Loan Note shall be enforceable with respect to the Issuer's obligation to pay the principal thereof only to the extent of the unpaid principal amount of such Bank's Revolving Loans outstanding at the time such enforcement shall be sought. Section 2.05 Interest. (a) The Issuer agrees to pay interest in respect of the unpaid principal amount of each Reference Loan for each day during the period from the date the proceeds thereof are made available to the Issuer until maturity at a rate per annum equal to the Reference Rate for such day. (b) The Issuer agrees to pay interest in respect of the unpaid principal amount of each Eurodollar Loan for each day during the period from the date the proceeds thereof are made available to the Issuer until maturity at a rate per annum equal to the Adjusted LIBOR Rate for the applicable Interest Period(s) in effect for such Eurodollar Loan plus 0.75%. (c) The Issuer agrees to pay interest in respect of the unpaid principal amount of and interest on (to the extent permitted by applicable law) each Loan from the due date thereof until paid in full at a rate per annum equal to the Reference Rate plus 2%. (d) Accrued interest on Reference Loans shall be payable in arrears on the last day of each calendar quarter. Accrued interest in respect of the Eurodollar Loans shall be payable in arrears on the last day of each Interest Period therefor (and, in the case of Eurodollar Loans with an Interest Period greater than three months, at intervals of three months after the first day thereof). Accrued interest on any Loan shall also be payable in arrears on the date of any prepayment or conversion thereof (on the amount prepaid or converted), and at maturity and, after such maturity, on demand. (e) The Agent, upon determining the Adjusted LIBOR Rate or the Reference Rate for any day, shall promptly notify the Issuer and the Banks thereof by giving written notice or telephonic notice (promptly confirmed in writing). (f) The Agent's determination of the interest rate(s) from time to time applicable to the Loans shall be conclusive in the absence of manifest error. Section 2.06 Interest Periods. At the time the Issuer gives any Notice of Borrowing or Notice of Conversion with respect to Revolving Loans which are to be made, converted or continued as Eurodollar Loans, the Issuer shall have the right to elect, by giving the Agent written notice or telephonic notice (promptly confirmed in writing), the Interest Period applicable to such Eurodollar Loans. The term "Interest Period" shall mean, as to any Eurodollar Loan, the period commencing on the date of such Loan and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) of the month that is 1, 2, 3 or 6 months thereafter, as the Issuer may elect; provided, that: (i) if any Interest Period would expire on a day which is not a Eurodollar Business Day, such Interest Period shall be extended to the next succeeding Eurodollar Business Day unless such next succeeding Eurodollar Business Day would fall in the next calendar month, in which case, such Interest Period shall expire on the next preceding Eurodollar Business Day; and (ii) no Interest Period shall extend beyond the Expiration Date. If upon the expiration of any Interest Period for any Eurodollar Loan, the Issuer has failed to provide a Notice of Conversion or a notice specifying a new Interest Period to be applicable thereto as provided above, the Issuer shall be deemed to have elected to convert such Eurodollar Loan into a Reference Loan effective as of the expiration date of such current Interest Period. Section 2.07 Conversions and Continuations. Provided that no Event of Default has occurred and is continuing, the Issuer shall have the option, subject to the following provisions of this Section 2.07, (x) to convert on any Business Day (or Eurodollar Business Day in the case of a Conversion to, or continuation of, Eurodollar Loans) all or any part of the outstanding principal amount of Revolving Loans made pursuant to a single Borrowing from one Type of Revolving Loan into another Type and (y) to continue Eurodollar Loans for an additional designated Interest Period; provided, that, the outstanding principal amount of any Revolving Loan made pursuant to a single Borrowing being converted to a Eurodollar Loan pursuant to this Section 2.07 shall be at least $3,000,000. Each such conversion or continuation shall be made among the Banks in accordance with the Banks' respective Percentages of the Commitment and shall be effected by the Issuer giving written notice or telephonic notice (promptly confirmed in writing) not later than 9:00 a.m. (City of Los Angeles time) on the third Eurodollar Business Day prior to conversion or continuation (each a "Notice of Conversion") of each proposed conversion or continuation to the Agent at its Notice Office. The Agent shall promptly notify each Bank by telephone (confirmed promptly in writing) of each Notice of Conversion. Each Notice of Conversion shall be irrevocable and shall specify the Revolving Loans to be converted or continued, the Type of Loans to be converted into or continued and, if any Revolving Loans are to be converted into or continued as Eurodollar Loans, the Interest Period(s) to be applicable thereto. Section 2.08 Termination or Reduction of Commitment. The Issuer shall have the right, at any time and from time to time, to (i) terminate the Commitment in whole or (ii) permanently reduce in a minimum amount of $5,000,000 (or integral multiples of $1,000,000 in excess thereof) the Commitment, by giving at least five (5) Business Days' prior written notice to the Agent specifying the scheduled date of such termination or reduction and the amount of any permitted partial reduction, together with such fees and costs as may be necessary to compensate the Banks for any reasonably calculated loss, including any break-funding costs. The termination or reduction of the Commitment shall be effective on the scheduled date specified in the Issuer's notice. Notwithstanding the foregoing, the requested termination or reduction shall not be effective to the extent that, following such termination or reduction, the Available Commitment would not be greater than or equal to zero. Section 2.09 Extensions of Expiration Date. (a) Subject to subsection 2.09(b), the Commitment shall terminate on the Expiration Date. (b) No later than 120 days prior to March 31 of each year, and each subsequent anniversary thereof, the Issuer may notify the Agent of the Issuer's desire to extend the Expiration Date one additional year, whereupon the Agent shall promptly notify the Banks in writing or by telephone (promptly confirmed in writing) of such notice from the Issuer. Each Bank shall notify the Agent in writing of its decision with respect to the Issuer's request not later than 20 days after its receipt of notice from the Agent. If all Banks consent to the extension, the Agent shall so notify the Issuer in writing or by telephone (promptly confirmed in writing) no later than the next succeeding May 31 following receipt of the Issuer's request for such extension, whereupon the Expiration Date shall be extended for one additional year. Unless the Agent shall have so notified the Issuer by such date, the Issuer's request for such extension shall be deemed rejected. Section 2.10 Increased Costs; Reduced Return. (a) If, after the date hereof, the introduction of, or any change in, any law, rule or regulation, or in the interpretation or administration thereof (in any case, applicable to banks generally notwithstanding the financial condition of any particular bank) by any Governmental Authority charged with the interpretation or administration thereof, or compliance by any Bank with any request or directive applicable to banks generally notwithstanding the financial condition of any particular bank (whether or not having the force of law) of any such Governmental Authority, shall either (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against the Commitment or assets held by, or deposits in or for the account of, any Bank or (ii) impose on any Bank any other condition regarding this Agreement, the Commitment or its Loan Notes, and the result of any event referred to in clause (i) or (ii) of this subsection shall be to increase the cost to such Bank of maintaining the Commitment or issuing or maintaining its Loans (which increase in cost may be the result of such Bank's reasonable allocation of the aggregate of such cost increases resulting from such events), then, within ten days of demand of such Bank, the Issuer shall pay to such Bank all additional amounts which are necessary to compensate such Bank for such increased cost incurred by such Bank. All payments of increased cost pursuant to this subsection shall bear interest thereon if not paid within ten days of such notice until payment in full thereof at the rate provided in Section 2.05(c). A certificate as to such increased cost incurred by the Bank as a result of any event mentioned above and setting forth the additional amount or amounts to be paid to it hereunder and setting forth in reasonable detail the basis therefor and the method of calculation thereof shall be prepared in good faith and submitted by such Bank to the Issuer and shall be conclusive (absent manifest error) as to the amount thereof. In determining such amount, such Bank may use any reasonable averaging and attribution methods. (b) If, after the date hereof, the introduction of, or any change in, any law, rule or regulation, or in the interpretation or administration thereof (in any case, applicable to banks generally notwithstanding the financial condition of any particular bank) by any Governmental Authority charged with the interpretation or administration thereof, or compliance by any Bank with any request or directive (applicable to banks generally notwithstanding the financial condition of any particular bank) regarding capital adequacy of any such Governmental Authority, whether or not having the force of law (including, without limitation, any changes mandated by compliance with the "International Convergence of Capital Measurements and Capital Standards", dated July, 1988 (also known as the "Basel Accord")), has or would have the effect of reducing the rate of return on any Bank's capital as a consequence of its obligations hereunder to a level below that which such Bank could have achieved but for such introduction, change or compliance (taking into consideration such Bank's compliance requirements with respect to capital adequacy) by an amount deemed by such Bank to be material, then upon notice from such Bank, the Issuer shall pay, to such Bank, additional amounts which shall be sufficient to compensate such Bank for such reduced return. A certificate as to such reduced return incurred by such Bank as a result of any event described above and setting forth the additional amount or amounts to be paid to it hereunder and setting forth in reasonable detail the basis therefor and the method of calculation thereof shall be prepared in good faith and submitted by such Bank to the Issuer and shall be conclusive (absent manifest error) as to the amount thereof. In determining such amount, such Bank may use any reasonable averaging and attribution methods. Section 2.11 Taxes. (a) All payments made under this Agreement and the Loan Notes shall be made without set-off or counterclaim and free and clear of, and without deduction for or on account of, any present or future taxes, levies, imposts, duties, charges, fees, deductions, withholdings or restrictions or conditions of any nature whatsoever, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding income and franchise taxes (including, without limitation, branch taxes) (but excluding from such exclusion, in the case of any Bank not organized under the laws of the United States or any state thereof, United States withholding tax payable with respect to any such payments under laws, including, without limitation any statute, treaty, ruling, determination or regulation in effect on the date hereof) (all such non-excluded taxes being called "Taxes"). If any Taxes are required to be withheld from any amounts payable to any Bank hereunder, the amounts so payable to such Bank shall be increased to the extent necessary to yield to such Bank (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement. (b) The Issuer agrees to pay and to save each Bank harmless from all liability for, any present or future stamp, documentary and analogous taxes (including interest, penalties and fees), which may be payable in connection with this Agreement, the Borrowings hereunder, any Related Document or the issuance of the Loan Notes or any modification of any of the foregoing ("Other Taxes"). (c) The Issuer will indemnify each Bank for the full amount of Taxes and Other Taxes (including without limitation any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.11) paid by each Bank and any liability (including penalty, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be made 30 days following written demand. The Issuer's obligations under this Subsection (c) shall survive termination of this Agreement and repayment of the Loans. (d) Whenever any Taxes are required to be remitted to a taxing authority by the Issuer on behalf of any Bank, as promptly as possible thereafter the Issuer shall send to the Agent, for the account of such Bank, a certified copy of the original official receipt, if any, or other documentary evidence received by the Issuer showing payment thereof. If the Issuer fails to remit to the Agent for the account of any Bank the required receipts or other required documentary evidence, the Issuer shall indemnify the Agent and such Bank for any incremental taxes, interest or penalties that may become payable by the Agent or such Bank as a result of any such failure. (e) Each Bank, other than a Bank organized under the laws of the United States or any state thereof, agrees to provide the Issuer with appropriate executed copies of Internal Revenue Service Form 4224 (or, alternatively, Internal Revenue Service Form 1001, but only if the applicable treaty described in such Form provides for a complete exemption from Federal income tax withholding), or any successor or other forms or additional information in connection therewith reasonably requested by the Issuer, (A) on the Closing Date and (B) upon the occurrence of any event which would require the amendment or resubmission of any such form previously provided hereunder. If any Bank makes an assignment or sells a participation pursuant to Section 9.04 hereof, it shall furnish to the Issuer, with respect to the assignee or the purchaser of the participation, the applicable duly executed forms described in this Section 2.11(e). Section 2.12 Compensation. The Issuer shall compensate each Bank upon its written request (which request shall set forth, in reasonable detail, the basis for requesting such amounts), for all losses, expenses and liabilities (including, without limitation, any interest paid by such Bank to lenders of funds borrowed by it to make or carry its Eurodollar Loans, any fees paid by such Bank to terminate the deposits from which such funds were obtained and any reasonably calculated loss sustained by such Bank, including any break-funding costs, which such Bank may sustain: (i) if for any reason (other than a default by such Bank) a borrowing of (or conversion to) any Eurodollar Loan does not occur on a date specified therefor in a Notice of Borrowing or a Notice of Conversion (whether or not withdrawn), (ii) if any repayment, prepayment or conversion of any Eurodollar Loan occurs (pursuant to Article VIII or otherwise, except pursuant to Section 2.14 (as to which conversion no payment of compensation hereunder shall be applicable)) on a date which is not the last day of an Interest Period applicable thereto, (iii) if any prepayment of any Eurodollar Loan is not made on any date specified in a notice of prepayment given by the Issuer or (iv) as a consequence of any other failure by the Issuer to repay its Eurodollar Loans as and when required by the terms of this Agreement. These agreements and covenants made in this Section 2.12 shall survive the termination of this Agreement and payment of the Loan Notes. Section 2.13 Expenses and Indemnification. (a) The Issuer shall pay (i) subject to any agreement between the Issuer and the Agent with respect to the extent thereof, all reasonable out-of-pocket costs and expenses of the Agent, including reasonable fees and out-of-pocket expenses of its outside and in-house counsel, incurred in connection with the preparation, execution, delivery, amendment, modification and waiver of this Agreement, (ii) all out-of-pocket costs and expenses of the Agent, including the reasonable fees and out-of- pocket expenses of its outside and in-house counsel, incurred in connection with the enforcement of this Agreement and the other Related Documents, and (iii) all Receivables audit and monitoring costs of the Banks, which shall not exceed $10,000 annually. (b) The Issuer will (i) indemnify and hold harmless the Agent and each Bank and each director, officer, employee and affiliate thereof (each, an "Indemnified Party") from and against all losses, claims, damages, expenses or liabilities to which such Indemnified Party may become subject, insofar as such losses, claims, damages, expenses or liabilities (or action, suits or proceedings including any inquiry or investigation or claims in respect thereof) arise out of, in any way relate to, or result from the transactions contemplated by this Agreement or the Related Documents, including without limitation any failure of the Issuer to comply with any Medicaid laws or regulations, and (ii) reimburse each such Indemnified Party upon their demand, for any reasonable legal or other expenses incurred in connection with investigating, preparing to defend or defending any such loss, claim, damage, liability, action or claim; provided, however, that no Indemnified Party shall have the right to be so indemnified hereunder for its own (or, in the case of the Agent or any Bank, its director's, officer's, employee's or affiliate's) gross negligence, wilful misconduct or bad faith. (c) Third Party Claims. (i) Any Indemnified Party shall notify the Issuer (the "Indemnifying Party"), promptly after such Indemnified Party's receipt of notice, or such Indemnified Party otherwise becoming aware, of any third party claims with respect to which indemnification may be sought under this Section 2.13. Such notice shall be in writing and shall be delivered in accordance with the provisions of Section 9.06 hereof. If any such action is brought against any Indemnified Party and it notifies the Indemnifying Party of the commencement thereof, the Indemnifying Party shall promptly assume the defense thereof with counsel chosen by it and approved by the Indemnified Party (who shall not, except with the consent of the Indemnified Party, be counsel to the Indemnifying Party), so long as the Indemnified Party is reasonably satisfied with the Indemnifying Party's defense thereof and the Indemnified Party does not reasonably determine that the Indemnifying Party's participation in or assumption of the defense would be inappropriate due to actual differing interests between the Indemnified Party and the Indemnifying Party. Without limiting the generality of the foregoing, any one or more of the Indemnified Parties shall have the right to employ counsel in any such action, and the Indemnifying Party shall indemnify and hold harmless the Indemnified Party from and against any loss or liability by reason of such third party claim, including without limitation reasonable attorneys' fees and costs (including the costs of in-house counsel), except to the extent that the Indemnifying Party has assumed the defense thereof in accordance with this Section 2.13 and provided that the Indemnifying Party's liability for the fees and expenses of the Indemnified Party's counsel shall not extend to more than one separate firm of attorneys at any point in time for any Indemnified Party for any one claim or any one group of substantially similar or related separate claims arising out of the same allegations or circumstances. At such time as the Indemnified Party notifies the Indemnifying Party that (a) the Indemnified Party is not reasonably satisfied with such defense or counsel or (b) the Indemnified Party has reasonably determined that the Indemnifying Party's assumption of the defense has become inappropriate due to actual differing interests between the Indemnified Party and the Indemnifying Party, the Indemnified Party shall deliver notice to the Indemnifying Party in accordance with the provisions of Section 9.06 hereof, the Indemnified Party shall subsequently be entitled to assume the defense thereof with counsel chosen by it, and the Indemnifying Party shall indemnify and hold harmless the Indemnified Party in accordance with the terms hereof. (ii) In accordance with the provisions of Section 9.06, the Indemnified Party shall notify the Indemnifying Party, and the Indemnifying Party shall notify the Indemnified Party, of any bona fide offer of settlement of a third-party claim, and neither the Indemnifying Party nor the Indemnified Party shall accept any such offer without the other's prior written consent, not to be unreasonably withheld, provided that the Indemnifying Party may effect a settlement of any pending or threatened proceeding covered by the indemnities contained in this paragraph if such settlement includes an unconditional release of the Indemnified Party from any and all liability on claims that are the subject matter of such proceeding. If a bona fide settlement offer is accepted by the Indemnifying Party and the Indemnified Party, the Indemnifying Party shall be liable for any loss or liability by reason of such settlement. (d) All agreements and covenants made in this Section 2.13 shall survive the termination of this Agreement and the payment of the Loan Notes. Section 2.14 Market Unavailability. In the event that: (i) the Agent shall have determined on any date for determining the Adjusted LIBOR Rate for any Interest Period, that by reason of any changes arising after the date of this Agreement affecting the interbank Eurodollar market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of LIBOR Rate; or (ii) any Bank shall have determined at any time, that by reason of the introduction of (except as provided in Section 2.10(a) or (b)), or any change, since the date of this Agreement, in any law, governmental rule, regulation, guideline or order or any interpretation or administration thereof (in any case, applicable to banks generally notwithstanding the financial condition of any particular bank) by any Governmental Authority charged with the interpretation thereof, the Adjusted LIBOR Rate shall not represent the effective pricing to such Bank for funding or maintaining its affected Eurodollar Loans or its Commitment; or (iii) any Bank shall have determined at any time, that the making or continuance of any Eurodollar Loan has become unlawful by compliance by such Bank in good faith with any law, governmental rule, regulation, guideline or order or any interpretation or administration thereof by any Governmental Authority or official charged with the interpretation or administration thereof, or has become impracticable as a result of a contingency occurring after the date of this Agreement which materially and adversely affects the interbank Eurodollar market; then, and in any such event, the Agent (in the case of clause (i) above) or such Bank shall on such date give notice (by telephone confirmed in writing) to the Issuer and the Agent of such determination. Thereafter: (x) in the case of clause (ii) above, the Issuer shall either (A) pay such Bank, upon written demand therefor, such additional amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Bank in its discretion, reasonably exercised and in good faith, shall determine) as shall be required to cause such Bank to receive interest with respect to its affected Eurodollar Loan at a rate per annum equal to the effective pricing to such Bank to make or maintain such Eurodollar Loan plus the applicable rate per annum for such Eurodollar Loan set forth in Section 2.05(b) (in each case accompanied by a certificate as to additional amounts owed such Bank, showing the basis for the calculation thereof, submitted to the Issuer by such Bank which shall, absent manifest error, be final and conclusive and binding on all parties) or (B) upon at least one Business Day's written notice to the Agent, require the affected Bank to convert its affected Eurodollar Loan to a Reference Loan and pay the foregoing amounts only up to the date of such conversion; and (y) in the case of clauses (i) or (iii), the Issuer shall either (A) if the affected Eurodollar Loan(s) is proposed to be made pursuant to a Borrowing or a conversion, cancel said Borrowing or conversion by giving the Agent telephonic notice (promptly confirmed in writing) thereof on the same date that the Issuer was notified by the Agent or such Bank pursuant to this Section 2.14 or (B) if the affected Eurodollar Loan(s) is then outstanding, upon at least one Business Day's written notice to the Agent, require (without additional cost to the Issuer, including without limitation, pursuant to Section 2.12 hereof) the affected Bank to convert its affected Eurodollar Loan(s) to Reference Loan(s). Section 2.15 Borrowing in Accordance With Percentage Interests. All Loans under this Agreement shall be made by the Banks simultaneously and in such amount as necessary so that after giving effect thereto, to the extent possible, the outstanding Loans of each Bank shall bear the same proportion to all outstanding Loans of all Banks as such Bank's Percentage bears to 100%. It is understood that neither the Agent nor any Bank shall be responsible for any default by any other Bank in its obligations to make Loans hereunder and that each Bank shall be obligated to make the Loans provided to be made by it hereunder, regardless of the failure of any other Bank to fulfill its commitment hereunder. ARTICLE III OTHER CREDIT TERMS Section 3.01 Fees. A transaction fee of $100,000 per annum (the "Liquidity Facility Fee") shall be payable in advance to the Agent upon execution of this Agreement and on each anniversary thereafter. Upon receipt of such payments, the Agent shall promptly distribute to each Bank its share thereof in accordance with the Bank's respective Percentages of the Commitment. Upon any termination or permanent reduction by the Issuer of the Commitment in accordance with Section 2.08, the Agent shall refund the applicable pro rata portion of the Liquidity Facility Fee to the Issuer. ARTICLE IV PAYMENTS Section 4.01 Payments on Non-Business Days. Whenever any payment to be made hereunder or under any Loan Note shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and interest shall be payable on the amount owed at the applicable rate during such extension. Section 4.02 Prepayments. (a) Subject to Section 2.12, the Issuer shall have the right to prepay the Loans in whole or in part, without premium, on any Business Day (in the case of Reference Loans) or upon the expiration of the Interest Period (in the case of Eurodollar Loans) on the following terms and conditions: (i) in the case of Eurodollar Loans, the Issuer shall give the Agent at least three Eurodollar Business Days' prior written notice or telephonic notice (promptly confirmed in writing) of its intent to prepay Eurodollar Loans and the amount of such prepayment, which notice shall be irrevocable; (ii) in the case of Reference Loans, the Issuer shall give the Agent at least one Business Day's prior written notice or telephonic notice (promptly confirmed in writing) of its intent to prepay Reference Loans and the amount of such prepayment; and (iii) each prepayment (other than any described in subsection (b)) shall be in a principal amount of not less than $1,000,000 or equal to the then outstanding principal amount of the Loan or Loans being prepaid. The Agent shall promptly on the date any notice of prepayment is received by it give each Bank written or telephonic notice (promptly confirmed in writing) of such prepayment and of such Bank's proportionate share thereof. (b) The Issuer, the Agent and the Banks hereby each agree that whenever the Sale and Servicing Agreement provides for the application of funds to prepay or repay Loans, such funds shall be applied, first, to any outstanding Loans that are Reference Loans, second, to any Eurodollar Loans maturing on the date of such payment and, third, as a prepayment of other Eurodollar Loans in such order as the Issuer shall determine. The Issuer, the Banks and the Agent each agree that under the circumstances contemplated by the preceding sentence any notice of prepayment otherwise required hereby in order to apply such funds to prepay the Loans shall be deemed to have been properly given by the Issuer. Section 4.03 Method and Place of Payment, Etc. All payments by the Issuer under this Agreement and the Loan Notes owing to the Banks shall be sent to the Agent for the account of each Bank in accordance with the Bank's respective Percentages of the Commitment not later than 12:00 noon (City of Los Angeles time) on the date when due and shall be made in freely transferable Dollars and in immediately available funds at the Payment Office. All such payments shall be sent to each Bank not later than 2:00 p.m. (City of Los Angeles time) on the date of receipt and shall be made in freely transferable Dollars and in immediately available funds to the addresses set forth in Section 9.06 hereto. In the event the Agent does not forward any payments to the Banks at a time which would call for same day payment, the payment received by each Bank from the Agent shall include interest for the day or days such payment is not made (but excluding the day such amounts are returned by the Agent) at a rate per annum equal to the Fed Funds Rate, without reduction for any setoff or counterclaim of any nature whatsoever. In the event that any Bank does not forward any payment to the Agent at a time which would call for same day payment, the payment received by the Agent from such Bank shall include interest for the day or days such payment is not made (but excluding the day such amounts are returned by such Bank) at a rate per annum equal to the Fed Funds Rate, without reduction for any setoff or counterclaim whatsoever. Section 4.04 Repayment of Loans. The principal of the Loans shall mature (subject to earlier acceleration or prepayment) and the entire principal amount thereof shall become due and payable on the Expiration Date. ARTICLE V CONDITIONS PRECEDENT Section 5.01 Conditions to Effectiveness. This Agreement shall become effective on the date (the "Closing Date") which shall be the first day on which all of the following conditions have been satisfied or waived: (a) receipt by the Agent of executed and delivered counterpart copies of all Related Documents, which shall be in full force and effect; (b) receipt by the Agent for the account of each Bank of a duly executed Revolving Loan Note payable to the order of such Bank in the amount and as otherwise provided for in Article II; (c) no Default or no Event of Default shall have occurred and be continuing; (d) all representations and warranties of the Issuer contained in any Related Document or in any document, certificate or financial or other statement delivered in connection herewith shall be true and correct in all material respects on and as of the Closing Date; (e) receipt by the Agent of a certificate, dated the Closing Date and executed by an authorized signatory of the Issuer, stating that all of the conditions specified in Sections 5.01(c) and (d) are then satisfied; (f) receipt by the Agent of the following, in each case fully executed by all of the parties identified therein: (i) form UCC-1 financing statements covering the Collateral naming the Issuer as purchaser/secured party and the Collateral Agent as assignee and First Healthcare as seller/debtor in form to be filed in the State of Washington; (ii) form UCC-1 financing statements covering the Collateral naming First Healthcare as purchaser/secured party and the Issuer as assignee and Northwest Healthcare as seller/debtor in form to be filed in the State of Washington; (iii) form UCC-1 financing statements covering the Collateral naming First Healthcare as purchaser/secured party and the Issuer as assignee and Pasatiempo as seller/debtor in form to be filed in the State of Washington; (iv) form UCC-1 financing statements covering the Collateral and naming the Issuer as debtor and the Collateral Agent as secured party in form to be filed in the States of Washington and Nevada; (v) form UCC-3 change statements amending each UCC financing statement identified on Schedule II hereto amending each such financing statement to cover the Collateral and assigning each such financing statement from the secured party therein and the assignee of the secured party therein, if any, to the Collateral Agent; and (vi) form UCC-3 change statements terminating (A) each of the UCC financing statements identified on Schedule II hereto as local filings and (B) each of the UCC financing statements filed in the states identified as "excluded states" on Schedule II hereto. (g) receipt by the Agent and the Collateral Agent of certified copies of UCC searches from the State of Washington and for the Issuer, the State of Nevada, dated as of a recent date listing for each of Seller, the Issuer, First Healthcare, Pasatiempo and Northwest, all financing statements on file in such state that name any of such parties (or any predecessor of any of them) as debtor or assignor together with copies of all such listed financing statements; (h) receipt by the Agent of (x) certified copies of all corporate action taken by the Issuer to authorize the execution, delivery and performance of this Agreement and the Loan Notes, (y) certified charter and bylaws of the Issuer and a good standing certificate for the Issuer from its jurisdiction of incorporation and (z) such other corporate documents and certificates as the Agent may reasonably request; (i) receipt by the Agent of a certificate, dated the Closing Date, of a duly authorized officer of the Issuer as to the incumbency, and setting forth a specimen signature, of each of the persons (i) who has signed this Agreement on behalf of the Issuer, (ii) who will sign the Loan Notes on behalf of the Issuer, and (iii) who will, until replaced by other persons duly authorized for the purpose, act as the representatives of the Issuer for the purpose of signing notices, requests or other communications or documents in connection with this Agreement and the transactions contemplated hereby; (j) all fees payable pursuant hereto and due upon the execution hereof or on the Closing Date shall have been paid; (k) receipt by the Agents of evidence that the Collateral Account and the Collection Account shall have been established; (l) the fact that Seller's designation of a Closing Date shall have become effective under the Sale and Servicing Agreement; (m) all conditions precedent specified in Schedule I to the Sale and Servicing Agreement shall have been satisfied and receipt by the Agent of copies or originals of all documents described therein, as applicable; (n) receipt by the Agent of copies of all agreements, opinions, certificates and other documents referred to in the Related Documents and such other documents as the Agent may reasonably request; and (o) receipt by the Agent of the Borrowing Base Certificate executed by an Authorized Officer of the Issuer, calculating the Borrowing Base as of the end of the immediately preceding month. (p) receipt by the Agent of each of the following legal opinions, each addressed to the Agent, the Collateral Agent, and the Banks and satisfactory to the Agent in form and substance: (i) the Opinion of Richard P. Adcock, Esq., as counsel to First Healthcare, in substantially the form of Exhibit F hereto, and as to such other matters as the Agent may reasonably request; (ii) the Opinion of Richard P. Adcock, Esq., as counsel to Northwest in substantially the form of Exhibit G hereto, and as to such other matters as the Agent may reasonably request; (iii) the Opinion of Richard P. Adcock, Esq., as counsel to Pasatiempo, in substantially the form of Exhibit H hereto, and as to such other matters as the Agent may reasonably request; (iv) the Opinion of Richard P. Adcock, Esq., as counsel to Hillhaven, in substantially the form of Exhibit I hereto, and as to such other matters as the Agent may reasonably request; (v) the Opinion of Richard P. Adcock, Esq., as counsel to the Issuer, in substantially the form of Exhibit J hereto, and as to such other matters as the Agent may reasonably request; (vi) the Opinion of Brown and Wood, as counsel to Issuer, in substantially the form of Exhibit K hereto; and (vii) the Opinion of Reed Smith Shaw & McClay, as counsel to Issuer, in substantially the form of Exhibit L hereto. (q) receipt by the Agent of a novation agreement substantially in the form of Exhibit M hereto (the "Novation Agreement") and all other agreements, assignments, financing statement assignments, opinions, certificates and other documents as may be reasonably requested by the Agent to effectuate and evidence the assignment of all right, title and interest of the Original Agent and the Original Banks under the Original Liquidity Agreement and certain related documents to the Agent and the Collateral Agent; (r) receipt by the Agent of an audit of the Receivables, which shall be acceptable to the Banks in their sole discretion; (s) the representations and warranties of the Seller, Northwest, Pasatiempo and of Hillhaven contained in the Sale and Servicing Agreement shall be true and correct; (t) receipt by the Agent of a copy of the Seller's, Northwest's, Pasatiempo's and Hillhaven's corporate charters and all amendments thereto, certified as of a recent date by the Secretary of the Seller, Northwest, Pasatiempo and Hillhaven, respectively; (u) receipt by the Agent of certificates of recent date, issued by the Secretary of State of their respective states of incorporation, as to the legal existence and good standing of the Seller, Northwest, Pasatiempo and Hillhaven; (v) receipt by the Agent of duly certified copies of: the Seller's, Northwest's, Pasatiempo's and Hillhaven's bylaws and board of directors resolutions approving the execution, delivery and performance of the Related Documents to which each is, respectively, a party and the transactions contemplated thereby; and evidence of the authority and incumbency of specified officers of the Seller, Northwest, Pasatiempo and Hillhaven to execute the Liquidity Agreement and the Related Documents to which each is, respectively, a party; and (w) the Collateral Agent shall have entered into a depositary agreement in substantially the form of Exhibit R with Pittsburgh National Bank regarding the establishment and operation of the Collection and Collateral Accounts. Section 5.02 Representations and Warranties. At the date of each Borrowing and after giving effect thereto, all representations and warranties of the Issuer contained herein or in any Related Document or in any document, certificate or financial or other statement delivered in connection therewith and of the Seller and each Servicer contained in the Sale and Servicing Agreement or in any document, certificate or financial or other statement delivered in connection therewith, in each case shall be true and correct in all material respects with the same force and effect as though such representations and warranties had been made as of such date. Section 5.03 Conditions to Execution. Upon the execution hereof, the Issuer shall pay the Agent the Liquidity Facility Fee and the fees and disbursements of the Agent's and the Collateral Agent's counsel. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE ISSUER Section 6.01 Organization and Good Standing. The Issuer is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized, and has, in all material respects, full corporate power, authority and legal right to own its property as such property is currently owned and to conduct its business as contemplated by the Related Documents and as currently conducted, and to execute, deliver and perform its obligations under the Related Documents. The Issuer has no subsidiaries. Section 6.02 Power; Authorization; Enforceable Obligation. The Issuer has the power, authority and legal right to execute, deliver and perform the Related Documents to which it is, or is to be, a party, and to borrow hereunder and has taken all necessary action to authorize the Borrowings on the terms and conditions hereof and the execution, delivery and performance of the Related Documents. No consent, license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any Governmental Authority or other Person is required for the execution, delivery and performance by the Issuer of the Related Documents which has not been obtained, made, given or accomplished. The Related Documents to which it is, or is to be, a party have been duly executed and delivered by a duly authorized officer of the Issuer and each constitutes, legal, valid and binding obligations of the Issuer enforceable against the Issuer in accordance with their respective terms, except that the enforceability thereof may be subject to the effects of any applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights and to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Section 6.03 No Legal Bar. The execution, delivery and performance by the Issuer of the Related Documents to which it is, or is to be, a party, will not violate any provision of any Requirement of Law applicable to the Issuer or any of its Property, nor violate or constitute a default under any Contractual Obligation applicable to the Issuer or any of its property, and will not, except as otherwise provided herein or under any of the other Related Documents, result in, or require, the creation or imposition of any Lien on any of its property, assets or revenues pursuant to the provisions of any Contractual Obligation. Section 6.04 No Litigation. No litigation, investigation or administrative proceeding of or before any court, arbitrator or governmental authority is pending nor, to the Issuer's knowledge, threatened against the Issuer or any of its assets (a) with respect to the Related Documents or the Borrowings hereunder or (b) that would have a material adverse effect on the business, operations, assets or financial or other condition of the Issuer. Section 6.05 Investment Company Act. The Issuer is not, and will not become, as a result of the transactions contemplated by any Related Document, an "investment company" or a company controlled by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 6.06 No Default. Except as would not have a material adverse effect on the ownership or servicing of the Purchased Receivables and would not have a material adverse effect on the business, operations, assets or financial or other condition of the Issuer or on its ability to perform its obligations under the Related Documents to which it is, or is to be, a party, the Issuer is not in default under any Contractual Obligation or Requirement of Law applicable to it or any of its property; and no Event of Default or Default has occurred and is continuing nor will such a Default or Event of Default result from the entry by it into the Related Documents or the performance by it of any of its obligations under any or all thereof. Section 6.07 Perfection of Security Interest. The Collateral Agent has a continuing first and prior security interest in, and general first lien on, the Collateral. ARTICLE VII COVENANTS OF THE ISSUER Until all indebtedness hereunder shall have been paid in full and the Commitment has terminated, the Issuer agrees that: Section 7.01 Information. The Issuer will furnish to the Agent and each Bank: (i) as soon as available and in any event within 90 days after the end of each fiscal year of the Issuer, a copy of the annual report for such year of the Issuer, containing financial statements for such year certified without qualification as to fairness of presentation, generally accepted accounting principles and consistency by the chief financial officer of the Master Servicer; (ii) as soon as available and in any event within 60 days of the end of each fiscal quarter of the Issuer, an unaudited balance sheet of the Issuer and the related statement of income (but not cash flows), certified as to fairness of presentation, generally accepted accounting principles and consistency by the chief financial officer of the Master Servicer; (iii) simultaneously with the delivery of each set of financial statements under (i) above, a statement from the firm of independent public accountants which reported on such statements: (x) stating that nothing has come to their attention to cause them to believe that an Amortization Event (or event or condition which, with the giving of notice or lapse of time or both, would become an Amortization Event) has occurred and is continuing and (y) showing the calculations necessary to demonstrate that Issuer Equity was at least equal to Minimum Issuer Equity on the date of such financial statements; (iv) simultaneously with the delivery of each set of financial statements under (ii) above, a statement from the chief financial officer of the Master Servicer (x) stating that no Amortization Event has occurred and is continuing and (y) showing the calculations necessary to demonstrate that Issuer Equity was at least equal to or in excess of zero on the date of such financial statements; (v) as soon as possible and in any event within 5 days after the occurrence of an Event of Default or Default, a statement of an Authorized Officer setting forth the details thereof and the actions which the Issuer has taken and proposes to take with respect thereto; (vi) as soon as possible and in any event within 23 days after the end of each calendar month, the Borrowing Base Certificate evidencing the calculation of the Borrowing Base for the preceding month, such other information as may be required under the Borrowing Plan, and such information related thereto as may be reasonably requested by any Agent; and (vii) such other information (including without limitation copies of all reports and documents received by the Issuer pursuant to any Related Document) respecting the condition or operations, financial or otherwise, of the Issuer or respecting the Purchased Receivables and the Related Documents. Section 7.02 Activities. The Issuer will not engage directly or indirectly in any business or activity (whether or not pursued for gain or other pecuniary advantage) except as contemplated under the Related Documents. Section 7.03 Additional Stock. The Issuer will not issue any additional shares of capital stock of any class or issue warrants or grant any options on other similar rights with respect thereto. Section 7.04 Maintenance of Existence. Except as permitted by Section 7.11 hereof, the Issuer will preserve and maintain its corporate existence and all of its rights, privileges and franchises necessary or desirable in the normal conduct of its business, and will conduct its business in a regular manner. Section 7.05 Maintenance of Properties. The Issuer will keep all of its properties necessary, in the judgment of the Board of Directors of the Issuer, in its business in good working order and condition, ordinary wear and tear excepted, and will permit representatives of the Bank to inspect such properties, and to examine and make extracts from the books and records of the Issuer during normal business hours. Section 7.06 Compliance with Laws. The Issuer will comply in all respects with the requirements of all applicable Requirements of Law, such compliance to include, without limitation, paying all taxes, assessments and governmental charges imposed upon the Issuer or its properties. Section 7.07 Notice of Proceedings. The Issuer will promptly give notice in writing to the Agent and each Bank of all litigation, arbitration proceedings and regulatory proceedings affecting the Issuer or the property of the Issuer. Section 7.08 Use of Proceeds. No part of the proceeds of any Loan hereunder will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. If requested by the Agent, the Issuer will furnish to the Agent in connection with any Loan hereunder a statement in conformity with the requirements of Federal Reserve Form U-1 referred to in Regulation U. The Issuer shall not use any Loans to: (a) knowingly purchase Ineligible Securities from BA Securities, Inc. (the "Arranger") during any period in which the Arranger makes a market in such Ineligible Securities; or (b) knowingly purchase during the underwriting or placement period Ineligible Securities being underwritten or privately placed by the Arranger; or (c) make payments of principal or interest on Ineligible Securities underwritten or privately placed by the Arranger and issued by or for the benefit of the Issuer or any Affiliate of the Issuer. Section 7.09 Limitation on Debt. The Issuer will not create, assume or suffer to exist any Debt other than Subordinated Debt. Section 7.10 Negative Pledge. The Issuer will not create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except for Liens created by the Related Documents, nor shall the Issuer grant any negative pledge covenant covering its assets to any Person other than the Banks, except such negative pledge covenants described under that certain Credit Agreement dated as of September 1, 1993, among First Healthcare Corporation, The Hillhaven Corporation, the Banks referred to therein, the LC Issuing Banks referred to therein, Morgan Guaranty Trust Company of New York, as Agent, Chemical Bank, as Administrative Agent, and J.P. Morgan Delaware, as Collateral Agent. Section 7.11 Consolidations, Mergers, Acquisitions, and Sales of Assets. The Issuer will not (i) consolidate or merge with or into or acquire any other Person or (ii) sell, lease or otherwise transfer (by investment, assignment, contribution or otherwise) all or any substantial portion or its assets to any other Person. Section 7.12 Restricted Payments. The Issuer will not declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of any shares of any class of its capital stock, or return any capital to its shareholders as such, or purchase, redeem or otherwise acquire for value any shares of any class of its capital stock or any warrants, rights or options to acquire any such shares, now or hereafter outstanding (collectively, a "Restricted Payment"), unless after payment of such Restricted Payment: (i) Issuer Equity is equal to or in excess of zero; (ii) no Default or Event of Default has occurred and is continuing; and (iii) declaration and payment of such Restricted Payment is permitted under (and complies with) all applicable Requirements of Law. Section 7.13 Corporate Existence. (a) The Issuer will keep in full effect its existence, rights and franchises as a corporation under the laws of the state of its incorporation and will obtain and preserve its qualification to do business in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of the Related Documents and each other instrument or agreement necessary or appropriate to the proper administration thereof and the transactions contemplated thereby. (b) The Issuer shall observe the applicable legal requirements for the recognition of the Issuer as a legal entity separate and apart from Hillhaven, and its Affiliates, including, without limitation, as follows: (i) the Issuer shall maintain separate corporate records, books of account and financial statements (each of which shall be sufficiently full and complete to permit a determination of the Issuer's assets and liabilities and to permit a determination of the obligee's and the time for performance on each of the Issuer's obligations) from those of Hillhaven and its Affiliates; (ii) except as expressly permitted by the Sale and Servicing Agreement for Collections of Purchased Receivables prior to transfer thereof to the Collection Account (which transfer is to occur within two Business Days of receipt of such Collection by the applicable Servicer), the Issuer shall not commingle any of its assets or funds with those of Hillhaven or any of its Affiliates; (iii) the Issuer shall maintain records permitting a determination on a daily basis of the amount and location of any of its funds which are commingled as permitted under clause (ii); (iv) the Board of Directors of the Issuer shall be elected independently from the Board of Directors of Hillhaven and its Affiliates and shall at all times include at least two Independent Directors; (v) the Board of Directors and stockholders of the Issuer will hold all regular and special meetings appropriate to authorize corporate actions. Regular meetings of directors will be held at least annually. The Board of Directors may act from time to time through one or more committees of the Board in accordance with the Issuer's bylaws. Appropriate minutes of all meetings of the Issuer's Board of Directors (and committees thereof) and of the stockholders meetings will be kept by the Issuer; (vi) taking into account the services to be performed on the Issuer's behalf by the Servicers and the Master Servicer under the Sale and Servicing Agreement, the Issuer will have sufficient officers and employees to run its business and operations. At least one senior officer of the Issuer (who may also be a member of the Board of Directors of the Issuer) will not be a director, officer or employee of Hillhaven or any of its Affiliates; (vii) decisions with respect to the Issuer's business and daily operations will be independently made by the Issuer (although the officer making any particular decision may also be an officer or director of Hillhaven) and will not be dictated by Hillhaven or any of its Affiliates. Any permitted transactions between the Issuer and Hillhaven or any of its Affiliates (other than the purchase of Receivables pursuant to the Sale and Servicing Agreement) will receive prior approval of a majority of the Board of Directors including at least two Independent Directors of the Issuer; (viii) the Issuer will act solely in its own corporate name and through its own authorized officers and agents. Neither Hillhaven nor any of its Affiliates will be appointed agent of the Issuer, except as expressly contemplated by the Sale and Servicing Agreement; (ix) the Issuer will prepare instruments of assignment naming it as purchaser for all Purchased Receivables sold to it. In all cases, the data and records (including computer records) used by the Issuer or the Servicers in the collection and administration of Purchased Receivables will reflect the Issuer's ownership interest therein; (x) although the Issuer's directors, officers and employees (other than the Independent Directors) may also be employees of Hillhaven or any of its Affiliates and may participate in their employee benefit plans, such individuals will be required to account for efforts devoted to the Issuer's business and affairs and the Issuer will reimburse Hillhaven or any of its Affiliates for their services; (xi) the Issuer will be responsible for the payment of all expenses, indebtedness and other obligations incurred by it and will reimburse Hillhaven or any of its Affiliates for its organizational expenses; (xii) except as evidenced by the Hillhaven Note and the Purchase Money Note, neither Hillhaven nor any of its Affiliates will advance funds to the Issuer and other than capital contributions from Hillhaven, no Affiliate of Hillhaven will otherwise supply funds to, or guarantee debts of, the Issuer; (xiii) the Issuer will maintain a separate office which will be physically separate from space occupied by Hillhaven or any of its Affiliates (but may be separate space occupied solely by the Issuer at the offices of Hillhaven or any of its Affiliates) and will be identified as the Issuer's office so it can be identified by outsiders; (xiv) the Issuer shall not guarantee, or otherwise become liable with respect to, any obligation of Hillhaven or any of its Affiliates; (xv) the Issuer shall at all times hold itself out to the public under the Issuer's own name as a legal entity separate and distinct from Hillhaven and its Affiliates (the foregoing to include, but not be limited to, use of materially separate and distinct letterhead and telephone number(s)); and (xvi) any financial reports required of the Issuer (other than the reports required under Section 7.01(ii) hereof) will comply with generally accepted accounting principles and shall be issued separately from any reports prepared for Hillhaven and any of its Affiliates. Section 7.14 Books and Records. The Issuer shall keep proper books of record and account, in which full and correct entries shall be made of all its financial transactions and its assets and business in accordance with generally acceptable accounting principles, consistently applied, and, after reasonable advance notice shall permit the Agent and its representatives to inspect the same and make copies or extracts thereof. Section 7.15 Reduction of Outstanding Debt. To the extent practicable and not in violation of any express provisions of any Related Document, the Issuer will apply amounts on deposit in the Issuer Accounts to pay Daily Facility Costs and to repay or prepay Loans prior to borrowing funds hereunder. Section 7.16 Issuer Equity. The Issuer shall at all times maintain its Issuer Equity equal to or in excess of zero. Section 7.17 Borrowing Plan. The Issuer shall at all times comply with the terms of the Borrowing Plan. Section 7.18 Post-Closing Legal Opinions. The Issuer shall deliver to the Agent, within 60 days after Closing, the following legal opinions, each addressed to the Agent, the Collateral Agent, and the Banks and satisfactory to the Banks in form and substance: (i) the Opinion of Richard P. Adcock, Esq., as counsel to First Healthcare, in substantially the form of Exhibit N hereto; (ii) the Opinion of Richard P. Adcock, Esq., as counsel to Northwest in substantially the form of Exhibit O hereto; (iii) the Opinion of Richard P. Adcock, Esq., as counsel to Pasatiempo, in substantially the form of Exhibit P hereto; and (iv) the Opinion of Richard P. Adcock, Esq., as counsel to Issuer, in substantially the form of Exhibit Q hereto. ARTICLE VIII EVENTS OF DEFAULT Section 8.01 Events of Defaults. Upon the occurrence of any of the following events (each an "Event of Default"), and so long as such Event of Default shall continue unremedied: (a) Payments. Failure by the Issuer (x) to pay the principal of any Loan when and as due, or (y) to pay any interest on any Loan or any other amount due hereunder or under the Pledge Agreement within five Business Days after such amount becomes due; or (b) Representations. Any representation, warranty or statement made or deemed made by the Issuer in this Agreement or in any other Related Document shall prove to have been incorrect in any material respect on any date when made or deemed made and which incorrectness continues for a period of 30 days after the earlier of (i) receipt by the Issuer of notice thereof from the Agent or any Bank or (ii) knowledge of such failure by the Issuer; or (c) Covenants. Failure by the Issuer (x) to observe or perform any covenant or agreement contained in Sections 7.02, 7.03, 7.04, 7.08, 7.09, 7.10, 7.11, 7.12, 7.13, and 7.16 hereof in any material respect, or (y) to observe or perform any other covenant or agreement contained herein or in any Related Document in any material respect and the continuance of such failure for 30 days after the earlier of (i) receipt by the Issuer of notice thereof from the Agent or any Bank or (ii) knowledge of such failure by the Issuer; or (d) Voluntary Bankruptcy Proceedings of the Issuer. The Issuer shall become insolvent or generally fail to pay, or admit in writing its inability to pay, its debts as they become due, or shall voluntarily commence any proceeding or file any petition under any bankruptcy, insolvency or similar law or seeking dissolution or reorganization or the appointment of a receiver, trustee, custodian or liquidator for itself or a substantial portion of its property, assets or business or to effect a plan or other arrangement with its creditors, or shall file any answer admitting the jurisdiction of the court and the material allegations of an involuntary petition filed against it in any bankruptcy, insolvency or similar proceeding, or shall be adjudicated bankrupt, or shall make a general assignment for the benefit of creditors, or shall consent to, or acquiesce in the appointment of, a receiver, trustee, custodian or liquidator for itself or a substantial portion of its property, assets or business or (ii) action shall be taken by the Issuer for the purpose of effectuating any of the foregoing; or (e) Involuntary Bankruptcy Proceedings Against the Issuer. Involuntary proceedings or an involuntary petition shall be commenced or filed against the Issuer under any bankruptcy, insolvency or similar law or seeking dissolution or reorganization of the Issuer or the appointment of a receiver, trustee, custodian or liquidator for the Issuer or a substantial part of the property, assets or business of the Issuer, or any writ, order, judgment, warrant of attachment, execution or similar process shall be issued or levied against a substantial part of the property, assets or business of the Issuer and such proceeding or petition shall not be dismissed, or such writ, order, judgment, warrant of attachment, execution or similar process shall not be stayed, released, vacated or fully bonded, within 60 days after commencement, filing or levy, as the case may be; or (f) Judgments. Any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied in respect of an obligation (alleged or otherwise) of the Issuer in excess of $10,000 (not covered by insurance) against any of the property of the Issuer and such judgment, writ or similar process shall not be released, vacated or stayed or fully bonded within 30 days after its issue of levy; or (g) Obligations. Any default shall occur under any obligation of the Issuer with an outstanding principal of greater than $10,000 which shall immediately result in the acceleration of all amounts due and payable under such obligation; or (h) Related Documents. Any default shall have occurred and is continuing under any of the Related Documents (including without limitation the occurrence of any Amortization Event under the Sale and Servicing Agreement or any event or condition which, with the giving of notice or lapse of time or both, would become an Amortization Event); or (i) Material Adverse Change. Any material adverse change shall occur with respect to the business, operations, assets or financial or other condition of the Issuer, as determined in the reasonable discretion of each Bank as determined by the Required Banks; or (j) Change in Laws. There shall be any introduction of, or any change in, any law, rule or regulation, or in the interpretation or administration thereof by any Governmental Authority, charged with the interpretation or administration thereof that may result in any applicable material adverse change to the procedures affecting Medicaid or Medicare reimbursements or the assignment of proceeds thereof, as determined in the reasonable discretion of each Bank as determined by the Required Banks; or (k) Ownership. The present owners of the Issuer (or such owners, heirs, personal representatives or testamentary beneficiaries) shall cease to own or control 50% of the voting stock of the Issuer, or shall cease to control a majority of the board of directors of the Issuer. Upon the occurrence of any of the foregoing, and at any time during the unremedied continuance of any default, then the Agent (upon the direction of the Required Banks) may by sending to the Issuer and by delivering (in the manner specified for notices hereunder a written notice (a "Notice of Termination") signed by an Authorized Agent Officer, (i) declare the principal of and accrued interest in respect of the Loans to be, whereupon the same shall become, forthwith due and payable, (ii) declare the Commitment to make Revolving Loans terminated, whereupon the Commitment to make Revolving Loans shall terminate and any accrued fees or premiums with respect thereto shall forthwith become due and payable without any further notice of any kind, or (iii) direct the Collateral Agent to pursue remedies under the Pledge Agreement. Upon the occurrence of an Event of Default described in clauses (d) or (e) above, the Commitment to make Revolving Loans shall automatically terminate and the principal of and accrued interest on all Loans shall automatically become immediately due and payable without necessity of declaration or other action by the Agent. Section 8.02 Collection of Medicaid Payments by Servicers. Notwithstanding any provision of Article VIII of this Agreement or of the Related Documents to the contrary, all Medicaid payments which are made by an Obligor with respect to any Purchased Receivable shall be collected from such Obligor only by the Servicer which furnished the services for which such payments are made, except to the extent that an Obligor may be required to submit any such payments directly to a Person other than the Servicer pursuant to a court-ordered assignment which is valid, binding and enforceable under applicable federal and state Medicaid laws, rules and regulations; and neither this Agreement nor the Related Documents shall effect, nor be construed to effect, any assignment of Medicaid payments in contravention of applicable federal and state Medicaid laws, rules and regulations, nor shall this Agreement or the Related Documents be construed to permit any other Person to collect or receive, or to be entitled to collect or receive, any such payments prior to the Servicer's receipt thereof if such collection or receipt would violate applicable federal and state Medicaid laws, rules and regulations. ARTICLE IX MISCELLANEOUS Section 9.01 Computations. All computations of interest and fees hereunder and under the Loan Notes shall be made on the basis of a 365-day year, except for interest at the LIBOR Rate which shall be computed on the basis of the actual number of days elapsed over a year comprised of 360 days. Section 9.02 Exercise of Rights; Remedies Cumulative. No failure or delay on the part of the Issuer, the Agent or any Bank to exercise any right, power or privilege under this Agreement and no course of dealing between the Issuer, the Agent and any Bank shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the parties hereto would otherwise have pursuant to law or equity. No notice to or demand on any party in any case shall entitle such party to any other or further notice or demand in similar or other circumstances, or constitute a waiver of the right of the other party to any other or further action in any circumstances without notice or demand. Section 9.03 Amendment and Waiver. No provision of the Related Documents may be amended, waived, modified, supplemented, restated, discharged or terminated, without the consent of the Required Banks or all of the Banks, as applicable under Section 9.10. Section 9.04 Successors and Assigns. (a) This Agreement shall bind, and the benefits hereof shall inure to, the Issuer, the Agent and the Banks and their respective successors and assigns; provided that the Issuer may not transfer or assign any or all of its rights and obligations hereunder without the prior written consent of all Banks. (b) Each Bank may, subject to compliance with the further provisions of this subsection, at any time sell, assign or transfer (an "Assignment") all or any portions of its Loans or Loan Notes or Percentage of its Commitment in minimum amounts of $5,000,000 or of its right, title and interest thereon or thereto or in or to this Agreement to any other Person; provided, that such Bank, together with its Affiliates, shall continue at all times to hold beneficial interests in Notes having an aggregate principal amount of not less than an amount equal to (x) 20% (or such lesser percentage as may be approved by the Issuer and the Agents) multiplied by (y) such Bank's Percentage of the Commitment multiplied by (z) the principal amount of all Notes outstanding at the time of determination. The Agent shall maintain a copy of each Assignment delivered to it and a register (the "Register") for the recordation of the names and addresses of the Banks and the Commitment of, and principal amount of the Loans owing to, each Bank from time to time. The entries in the Register shall be prima facie evidence of the existence and amounts of the obligations of the Issuer therein recorded, and the Issuer, the Agent and the Banks may treat each Person whose name is recorded in the Register as the owner of the Loan recorded therein for all purposes of this Agreement. The Register shall be available for inspection and copying by the Issuer or any Bank at any reasonable time and from time to time upon reasonable prior notice. If such Assignment is to one or more financial institutions which assume the obligations of such Bank hereunder (a "Novation") (x) the assigning Bank shall be released from, and the assuming institution shall assume and become obligated in respect of, the assuming Bank's Percentage of the Commitment and its other obligations hereunder to the extent of such Novation and (y) the assuming institution shall be a party hereto (and shall constitute a Bank hereunder). The assuming institution in any Novation shall contemporaneously therewith deliver to the Agent the information to be included in Schedule I with respect to such institution. Following any Novation, the Issuer will execute and deliver new Loan Notes to the assigning Bank and the assuming institution in amounts equal to their respective Percentages (giving effect to the Novation) of the Commitment, and the Agent will send to the Issuer and each Bank an appropriately revised Schedule I. No Bank may effect any Assignment (whether or not constituting a Novation) without the prior written consent of the Issuer and the Agent (which consents may not be unreasonably withheld). In addition, no Bank may effect a Novation unless: (i) prior to the effective date of such Novation, the assuming institution executes and delivers to the Issuer and the Agent a written agreement satisfactory to the Issuer and the Agent to the effect that such Person agrees to be bound by the provisions of this Agreement and (ii) such Novation will not require the Issuer to register itself or any of its Securities under any Applicable Securities Law. (c) Each Bank may, without the consent of the Issuer or the Agent, grant participations in all or any part of the Loan Notes only in minimum amounts of $5,000,000 to one or more commercial banks, insurance companies or other financial institutions, pension funds or mutual funds; provided, that: (i) any such disposition shall not require the Issuer to register itself or any of its Securities under any Applicable Securities Laws; (ii) such Bank, together with its Affiliates, shall continue at all times to hold beneficial interests in Notes having an aggregate principal amount of not less than an amount equal to (x) 20% (or such lesser percentage as may be approved by the Issuer and the Agents) multiplied by (y) such Bank's Percentage of the Commitment multiplied by (z) the principal amount of all Notes outstanding at the time of determination; provided, that, in no event shall either the Agent's or the Collateral Agent's Percentage of the Commitment be less than 10%; (iii) the consent of the holder of any such participation, other than an Affiliate of such Bank, shall not be required with respect to whether such Bank shall take or omit to take any action hereunder, except action directly affecting the extension of the maturity of any portion of the principal amount of or interest on a Loan Note allocated to such participation or a reduction of the principal amount of or the rate of interest or fees payable on or with respect to the Loan Notes or an increase in the Commitment (but only if the amount of the Commitment allocated to such participant is increased); (iv) the holder of such participation shall not acquire any rights hereunder or under any Related Document; (v) such Bank's obligations under this Agreement to the other parties to this Agreement shall remain unchanged; (vi) such Bank shall remain solely responsible for the performance thereof; (vii) such Bank shall remain the holder of any obligation owing to it hereunder for all purposes of this Agreement; and (viii) the Issuer and the Agents shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. (d) Each Bank may furnish any information concerning the Issuer delivered by the Issuer to such Bank from time to time to assignees and participants (including prospective assignees and participants). (e) Nothing herein shall prohibit any Bank from pledging or assigning all or any portion of its Loans to any Federal Reserve Bank in accordance with applicable law. Section 9.05 Adjustments. If any Bank (a "Benefitted Bank") shall at any time receive any payment of all or part of its Loans, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by setoff, or otherwise), such that it has received aggregate payments or collateral on account of its Loans in a greater proportion than any such payment to or collateral received by any other Bank, if any, in respect of such other Bank's Loans which are then due and payable, or interest thereon, such Benefitted Bank shall purchase for cash from the other Banks a participating interest in such portion of each such other Bank's Loans, or shall provide such other Banks with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefitted Bank to share the excess payment or benefits of such collateral or proceeds ratably with each of the Banks; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefitted Bank, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest, and provided, further, that nothing in this Section 9.05 shall impair the right of any Bank to execute any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of the indebtedness of the Issuer, other than indebtedness under the Notes. The Issuer agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation was a direct creditor of the Issuer, in the amount of the participation. Section 9.06 Notices; Requests; Demands. Except where telephonic instructions or notices are authorized herein to be given, all notices, demands, instructions and other communications required or permitted to be given to or made upon any party hereto shall be in writing and shall be personally delivered or sent by registered, certified or express mail, postage prepaid, return receipt requested, or by confirmed telecopy or prepaid telegram (with messenger delivery specified in the case of a telegram) and shall be deemed to be given for purposes of this Agreement on the day that such writing is delivered or sent to the intended recipient thereof in accordance with the provisions of this Section 9.05. Unless otherwise specified in a notice sent or delivered in accordance with the foregoing provisions of this Section, notices, demands, instructions and other communications in writing shall be given to or made upon the respective parties hereto at their respective addresses (or to their respective telecopier numbers) indicated below, and, in the case of telephonic instructions or notices, by calling the telephone number or numbers indicated for such party below: If to the Issuer: Hillhaven Funding Corporation 1148 Broadway Plaza Tacoma, Washington 98401-2264 Attention: Vice President and Treasurer Telephone: (206) 756-4807 Telecopy: (206) 756-4890 with a copy to: The Hillhaven Corporation 1148 Broadway Plaza Tacoma, Washington 98401-2264 Attention: General Counsel Telephone: (206) 756-4797 Telecopy: (206) 756-4845 If to the Agent: Notice Office: Bank of America National Trust and Savings Association 555 South Flower Street 11th Floor, #5618 Los Angeles, CA 90071 Attention: Brad DeSpain Telex: BANKAMER SFO 34346 Telephone: (213) 228-3262 Telecopy: (213) 228-2756 Payment Office: Bank of America National Trust and Savings Association 333 South Beaudry Avenue Los Angeles, CA 90017 Attention: Betsy Quinio Telex: BANKAMER SFO 34346 Telephone: (213) 345-6531 Telecopy: (213) 345-6550 Routing/ABA #: 1210-00358 Incoming Wire Acct. #: 12331-83980 If to a Bank: at its address set forth in Schedule I hereto or, as to each party, at such other address as shall be designated by such party in a written notice to each other party. Section 9.07 Survival of Representations and Warranties. All representations and warranties contained in Article VI shall survive the execution and delivery of this Agreement and shall continue only so long as until such time as all indebtedness hereunder and under the Loan Notes shall have been paid in full or the Banks have any commitment hereunder. Section 9.08 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF WASHINGTON WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICT OF LAWS. THE ISSUER HEREBY IRREVOCABLY CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF ANY WASHINGTON STATE OR FEDERAL COURT SITTING IN THE CITY OF SEATTLE OVER ANY SUIT, ACTING OR PROCEEDING ARISING OUT OF, OR RELATING TO, THIS AGREEMENT AND THE LOAN NOTES AND HEREBY IRREVOCABLY WAIVES ANY OBJECTION TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING AS WELL AS ANY OBJECTION WITH RESPECT THERETO OF INCONVENIENT FORUM. Section 9.09 Counterparts. This Agreement may be executed in any number of copies, and by the different parties hereto on the same or separate counterparts, each of which shall be an original, but all of which shall constitute one and the same instrument. Section 9.10 Further Assurances. The Issuer agrees to do such further acts and things and to execute and deliver to the Agent such additional assignments, agreements, powers and instruments as the Agent may reasonably require or deem advisable to carry into effect the purposes of this Agreement or to better assure and confirm unto the Agent and the Banks their rights, powers and remedies hereunder. Section 9.11 Appointment of the Agents. (a) The Agent. Each Bank hereby irrevocably appoints the Agent as its agent hereunder, and, to the extent applicable, under each other Related Document and hereby authorizes the Agent to take such action on its behalf and to exercise such rights, remedies, powers and privileges hereunder or thereunder as are specifically authorized to be exercised by the Agent by the terms hereof or thereof, together with such rights, remedies, powers and privileges as are reasonably incidental thereto. The Agent may execute any of its duties hereunder and thereunder by or through agents or employees and, without limiting the foregoing, the Agent shall appoint and direct the Collateral Agent in accordance with the terms of this Agreement, the Pledge Agreement and the Related Documents. The relationship between the Agent and each Bank is that of agent and principal only, and nothing herein shall be deemed to constitute the Agent a trustee for any Bank or impose on the Agent any obligations other than those for which express provision is made herein or therein. Except as required by the specific terms of this Agreement or the other Related Documents, the Agent shall not have any duty to exercise any right, power, remedy or privilege granted to it hereby or thereby, or to take any affirmative action or exercise any discretion hereunder or thereunder, unless directed to do so by the Required Banks (or to the extent that this Agreement expressly requires, all of the Banks), and shall be fully protected in acting or refraining from acting pursuant to such directions which shall be binding upon the Banks, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against the Agent. The Agent shall not, without the prior approval of all of the Banks, increase the amount of the Commitment, reduce the principal amount of or interest on or fees payable with respect to a Loan Note or the rate of interest on a Loan Note, extend any date for payment of obligations hereunder or under any Related Document, extend the Expiration Date, amend or waive any Default or Event of Default hereunder or under any Related Document, or amend this Section 9.11. The Agent shall not, without the prior approval of the Required Banks, consent to any material departure by the Issuer from the terms hereof or of the Related Documents or amend, modify, supplement or terminate, or agree to any surrender of, any such agreement or instrument; provided, that the foregoing limitation on the authority of the Agent is for the benefit of the Banks and shall not impose any obligations on the Issuer to investigate or inquire into the authority of the Agent in any circumstances, and the Issuer shall be fully protected in carrying out any request, direction or instruction made or given to the Issuer by the Agent in the exercise of any right, power, remedy or privilege granted to the Agent hereby or by the terms of the other Related Documents, receiving or acting upon any consent or waiver granted to the Issuer hereunder or thereunder by the Agent, or entering into any amendment or modification of, or supplement to, this Agreement, or the other Related Documents, and the Issuer shall not be subject to the claims of any Bank by reason of the lack of authority of the Agent to take any such action nor shall the lack of authority on the part of the Agent in any circumstance give rise to any claim on the part of the Issuer against any Bank; and provided, however, 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 the other Related Documents or any applicable Requirement of Law. The Agent shall be fully justified in failing or refusing to take any action under this Agreement unless it shall first receive such advice or concurrence of the Required Banks (or all of the Banks, as applicable) or 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. (b) Appointment of the Collateral Agent. The Agent and the Issuer hereby irrevocably appoint Seafirst as the Collateral Agent hereunder and under the Pledge Agreement, and hereby authorize the Collateral Agent to take such action on the Agent's behalf and to exercise such rights, remedies, powers and privileges hereunder or thereunder as are specifically authorized to be exercised by the Collateral Agent by the terms hereof or thereof, together with such rights, remedies, powers and privileges as are reasonably incidental thereto. The Collateral Agent may execute any of its duties hereunder and thereunder by or through agents or employees. The relationship between the Agent and the Collateral Agent is that of principal and agent only, and nothing herein shall be deemed to constitute the Collateral Agent a trustee for any Person or impose on the Collateral Agent any obligations other than those for which express provision is made herein or therein. Except as required by the specific terms of this Agreement or the Pledge Agreement, the Collateral Agent shall not have any duty to exercise any right, power, remedy or privilege granted to it hereby or thereby, or to take any affirmative action or exercise any discretion hereunder or thereunder, unless directed to do so by the Agent in accordance with Section 11 of the Pledge Agreement (and shall be fully protected in acting or refraining from acting pursuant to such directions which shall be binding upon the Agent), and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against the Collateral Agent. The Collateral Agent shall not be required to take any action which exposes the Collateral Agent to personal liability or which is contrary to this Agreement, or the other Related Documents or any applicable Requirement of Law. The Collateral Agent shall be fully justified in failing or refusing to take any action under this Agreement unless it shall first receive such advice or concurrence of the Agent or it shall first be indemnified to its satisfaction by the Agent or 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. The Agent, the Banks and the Issuer hereby acknowledge and agree to the additional provisions respecting the Collateral Agent set forth in the Pledge Agreement. (c) Reliance. Neither the Agents nor any Bank, or any of its or their respective directors, officers, agents or employees, shall be liable to any Agent, any other Bank, or the Issuer, as the case may be, for any action taken or omitted to be taken by it or them hereunder, under the other Related Documents, or in connection herewith or therewith, except for its or their own gross negligence, wilful misconduct or bad faith; nor shall the Agents or any Bank be responsible to any Agent or any other Bank, as the case may be, for the validity, effectiveness, value, sufficiency or enforceability against the Issuer, or other parties thereto, of the Purchased Receivables, this Agreement, the Loan Notes, the Related Documents or any other document furnished pursuant hereto or thereto or in connection herewith or therewith. Without limiting the generality of the foregoing, the Agents: (i) may each consult with legal counsel (including counsel for the Issuer), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (ii) make no warranty or representation to any Bank and shall not be responsible to any Bank for any statements, warranties or representations made in or in connection with this Agreement, any other document furnished pursuant hereto or thereto or in connection herewith or therewith; (iii) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement, the Loan Notes, or any Related Document on the part of any party hereto or thereto or to inspect the property (including the books and records) of the Issuer; (iv) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, the Loan Notes, any Related Document or any other instrument or document furnished pursuant hereto or thereto; and (v) shall incur no liability under or in respect of this Agreement, any Related Document, or the Loan Notes by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram, telecopy or telex) or telephonic instruction (promptly confirmed in writing), or notices to the extent authorized herein or therein believed by it to be genuine and signed or sent by the proper party or parties. (d) Defaults. Neither the Agent nor the Collateral Agent shall be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless such Agent has received written notice from a Bank or the Issuer referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "Notice of Default." In the event that the Agent receives such a notice, the Agent shall promptly notify the Issuer (unless the Issuer shall have delivered such notice to the Agent) and then give notice thereof to the Banks (provided that the failure to notify the Issuer shall not impair any of the rights of the Agent and the Banks with respect to the events and circumstances specified in such notice). In the event that the Collateral Agent receives a notice, the Collateral Agent shall promptly notify the Agent. The Agent shall take such action with respect to such Default or Event of Default and shall be reasonably directed by the Required Banks; provided that unless and until the Agent shall have received such directions, the Agent and the Collateral Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as such Agent shall deem advisable in the best interests of the Banks. (e) Indemnification. Each Bank hereby agrees, in the ratio that such Bank's Percentage of the Commitment hereunder bears to the Commitment, to indemnify and hold harmless the Agent and the Collateral Agent, from and against any and all losses, liabilities (including liabilities or penalties), actions, suits, judgments, demands, damages, costs and expenses of any kind whatsoever (including, without limitation, fees and expenses of attorneys, accountants and experts) incurred or suffered by the Agent in its capacity as Agent or the Collateral Agent in its capacity as Collateral Agent as a result of any action taken or omitted to be taken by the Agent or the Collateral Agent in such capacity or otherwise incurred or suffered by, made upon, or assessed against the Agent or the Collateral Agent in such capacity; provided, that, no Bank shall be liable for any portion of any such losses, liabilities (including liabilities for penalties), actions, suits, judgments, demands, damages, costs or expenses resulting from or attributable to the gross negligence, wilful misconduct or bad faith on the part of the Agent or the Collateral Agent, as the case may be, or their respective officers, employees or agents. Without limiting the generality of the foregoing, each Bank hereby agrees, in the ratio aforesaid, to reimburse the Agent and the Collateral Agent promptly following its demand for any out-of-pocket expenses (including, without limitation, attorneys' fees and expenses) incurred on the Pledge Agreement by the Agent or the Collateral Agent hereunder and not promptly reimbursed to the Agent by the Issuer. Each Bank's obligations under this subsection shall survive the termination of this Agreement and the discharge of the Issuer's obligations hereunder. (f) Rights as Banks. Each Bank agrees that with respect to its obligation to lend under this Agreement, the Loans made by it and the Loan Notes issued to such Bank, the Agent and the Collateral Agent shall each have the same rights and powers hereunder as any other Bank or holder of a Loan Note and may exercise the same as though it were not performing the duties of Agent or Collateral Agent specified herein; and the terms "Banks," "Required Banks," "holders of Loan Notes," or any similar terms shall, unless the context clearly otherwise indicates, include the Agent and the Collateral Agent, and the Agent and the Collateral Agent may accept deposits from, lend money to, and generally engage in any kind of banking, trust or other business with the Issuer, Hillhaven, the Seller, Pasatiempo, Northwest or any of their Affiliates as if it were not performing the duties specified herein, and may accept fees and other considerations from the Issuer or any of their Affiliates for services in connection with this Agreement and otherwise without having to account for the same to any Bank. (g) No Representations. Each Bank expressly acknowledges that neither the Agent nor the Collateral Agent nor any of its or their officers, directors, employees, agents, attorneys in fact, or affiliates has made any representations or warranties to it and that no act by the Agent or the Collateral Agent hereinafter taken, including any review of the affairs of the Issuer, shall be deemed to constitute any representation or warranty by the Agent or the Collateral Agent to any Bank. Each Bank represents to the Agent and the Collateral Agent that it has, independently and without reliance upon the Agent, the Collateral Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Issuer, and made its own decision to make its Loans hereunder and enter into this Agreement. Each Bank also represents that it will, independently and without reliance upon the Agent, the Collateral Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Issuer. Except for notices, reports and other documents expressly required to be furnished to the Banks by the Agent hereunder, the Agent and the Collateral Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Issuer which may come into the possession of the Agent, the Collateral Agent or any of its officers, directors, employees, agents, attorneys in fact, or affiliates. The Agent and the Collateral Agent shall in no event be liable to any Bank on account of any materials prepared or provided by it. (h) Resignation of the Agent. The Agent may resign as Agent upon thirty (30) days' notice to the Banks and the Issuer and following the appointment of a successor agent in accordance with the provisions of this Section 9.11. If the Agent shall resign as Agent under this Agreement, then the Required Banks shall appoint from among the Banks willing to serve as Agent a successor agent for the Banks, which successor agent shall be approved by the Issuer (which approval shall not be unreasonably withheld), whereupon 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 such appointment and approval, 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, or any holders of the obligations owing hereunder. After any retiring Agent's resignation as Agent, the provisions of this Section 9.11 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. Section 9.12 Descriptive Headings. The descriptive headings of the various provisions of this Agreement are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. Section 9.13 Notice. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, TO EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. Section 9.14 Arbitration. At the request of the Agent, acting on behalf of the Required Banks, or the Issuer, any controversy or claim between the Banks and the Issuer, arising from or relating to this Agreement or any Related Document executed in connection with this Agreement or any Related Document or arising from any alleged tort shall be settled by arbitration in King County, Washington. The United States Arbitration Act will apply to the arbitration proceedings which will be administered by the American Arbitration Association under its commercial rules of arbitration, except that unless the amount of the claim(s) being arbitrated exceeds $5,000,000 there shall be only one arbitrator. Any controversy over whether an issue is arbitrable shall be determined by the arbitrator(s). Judgement upon the arbitration award may be entered in any court having jurisdiction. The institution and maintenance of any action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of either party, including plaintiff, to submit the controversy or claim to arbitration if such action for judicial relief is contested. For purposes of the application of the statute of limitations the filing of an arbitration as provided herein is the equivalent of filing a lawsuit and the arbitrator(s) will have the authority to decide whether any claim or controversy is barred by the statute of limitations, and if so, to dismiss the arbitration on that basis. The parties consent to the joinder in the arbitration proceedings of any party having an interest related to the claim or controversy being arbitrated. No provision of this Section shall limit the right of the Issuer or the Banks to exercise self-help remedies such as setoff, foreclosure or sale of any collateral, or obtaining any ancillary provisional or interim remedies from a court of competent jurisdiction before, after or during the pendency of any arbitration proceeding. The exercise of any such remedy does not waive the right of either party to request arbitration. Section 9.15 Replacement of Original Liquidity Agreement. The Original Liquidity Agreement shall be deemed amended and restated in full and superseded by this Agreement. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed and delivered as of the date first above written. HILLHAVEN FUNDING CORPORATION By: /s/ Robert K. Schneider Title: Vice President & Treasurer BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ Brad DeSpain Title: Vice President SEATTLE-FIRST NATIONAL BANK By: /s/ Thomas P. Rook Title: Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By: /s/ Brad DeSpain Title: Vice President SEATTLE-FIRST NATIONAL BANK, as Collateral Agent By: /s/ Thomas P. Rook Title: Vice President SCHEDULE 1 Bank Bank's Percentage Bank of America National Trust and 50% Savings Association 555 S. Flower Street Los Angeles, California 90071 Attention: Brad DeSpain Telephone: (213) 228-3262 Telecopy: (213) 228-2756 Seattle-First National Bank 50% 701 Fifth Avenue, INNATE 12 Seattle, Washington 98104 Attention: Thomas Rook Telephone: (206) 358-8004 Telecopy: (206) 358-3113 EX-11.01 20 Exhibit 11.01 THE HILLHAVEN CORPORATION Statement Re: Computation of Per Share Earnings (in thousands, except per share amounts)
Year Ended May 31, 1994 1993 1992 FOR PRIMARY EARNINGS PER SHARE Shares outstanding at beginning of period (1) 20,979 20,883 20,787 Shares issued upon exercise of stock options 49 27 24 Restricted share awards, net (4) 29 --- Shares issued upon conversion of debentures 29 --- --- Dilutive effect of outstanding stock options and contingent shares 209 191 --- Dilutive effect of warrants held by NME 3,428 2,002 --- Weighted average number of shares and share equivalents outstanding (2) 24,690 23,132 20,811 Income (loss) before extraordinary charge and cumulative effect of accounting change $ 58,525 $ 40,747 $(78,792) Adjustments related to proceeds from exercise of options and warrants under the "modified treasury stock" method --- 591 --- Preferred stock dividends (7,654) (2,888) (1,444) Adjusted income (loss) 50,871 38,450 (80,236) Extraordinary charge, net of income taxes (1,062) (565) --- Cumulative effect of change in accounting for income taxes --- (1,103) --- Net income (loss) as adjusted $ 49,809 $ 36,782 $(80,236) Primary earnings per share: Income (loss) before extraordinary charge and cumulative effect of accounting change $ 2.06 $ 1.66 $ (3.86) Extraordinary charge (.04) (.02) --- Cumulative effect of change in accounting for income taxes --- (.05) --- Income (loss) per share $ 2.02 $ 1.59 $ (3.86)
(Continued on next page) THE HILLHAVEN CORPORATION Statement Re: Computation of Per Share Earnings (in thousands, except per share amounts)
Year Ended May 31, 1994 1993 1992 FOR FULLY DILUTED EARNINGS PER SHARE Weighted average number of shares used in primary calculation 24,690 23,132 20,811 Additional dilutive effect of stock options and warrants (3) (4) 116 38 2,112 Assumed conversion of convertible debentures 8,258 6,470 32 Fully diluted weighted average number of shares (2) 33,064 29,640 22,955 Income (loss) before extraordinary charge and cumulative effect of accounting change, adjusted per primary calculation $ 50,871 $ 38,450 $(80,236) Adjustments for interest expense and related income taxes 6,816 7,056 1,132 Adjusted income (loss) used in fully diluted calculation 57,687 45,506 (79,104) Extraordinary charge, net of income taxes (1,062) (565) --- Cumulative effect of change in accounting for income taxes --- (1,103) --- Adjusted income used in fully diluted calculation $ 56,625 $ 43,838 $(79,104) Fully diluted earnings per share: Income (loss) before extraordinary charge and cumulative effect of accounting change $ 1.74 $ 1.54 $ (3.45) Extraordinary charge (.03) (.02) --- Cumulative effect of change in accounting for income taxes --- (.04) --- Income (loss) per share (5) $ 1.71 $ 1.48 $ (3.45)
[FN] (1) Share amounts have been adjusted for the effect of a one-for-five reverse stock split effective November 1, 1993. (2) All shares in these tables are weighted on the basis of the number of days the shares were outstanding or assumed to be outstanding during each period. (3) This calculation is submitted for 1992 in accordance with Regulation S-K item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. (4) This calculation is submitted for 1992 in accordance with Regulation S-K item 601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive result. (5) This calculation is submitted for 1992 and 1993 in accordance with Regulation S-K item 601(b)(11) although it is contrary to paragraph 37 of APB Opinion No. 15. EX-21.01 21 Exhibit 21.01 REGISTRANT'S SUBSIDIARIES The Hillhaven Corporation, a Nevada corporation First Healthcare Corporation, a Delaware corporation Hillhaven of Central Florida, Inc., a Delaware corporation Northwest Health Care, Inc., an Idaho corporation Pasatiempo Development Corp., a California corporation Professional Medical Enterprises, Inc., a Massachusetts corporation Hillhaven Home Care, Inc., a Delaware corporation CIC Risk Management Corporation, a Delaware corporation Hillhaven Properties, Ltd., an Oregon corporation Hillhaven Health Services Malaysia, Inc. Brim-Olive Grove, Inc., an Oregon corporation Fairview Living Centers, Inc., an Oregon corporation Twenty-Nine Hundred Corporation, a Florida corporation Ledgewood Health Care Corporation, a Massachusetts corporation* Cornerstone Insurance Company, a Cayman Islands corporation Brim of Massachusetts, Inc., a Massachusetts corporation Hillhaven Funding Corporation, a Nevada corporation Medisave Pharmacies, Inc., a Delaware corporation Medi-Save of Florida, Inc., a Delaware corporation Ricketts Drug, Incorporated, a Virginia corporation American X-Rays, Inc., a Louisiana corporation* Hillhaven PIP Funding I, Inc., a Delaware corporation Hillhaven Community Health Partnership, a Florida general partnership* Windsor Woods Nursing Home Partnership, a Washington general partnership St. George Nursing Home Limited Partnership, an Oregon limited partnership Bartlesville Nursing Home Partnership, an Oregon general partnership* Carrollwood Care Center, a Tennessee general partnership Foothill Nursing Company Partnership, a California general partnership* San Marcos Nursing Home Partnership, a California general partnership* Fox Hill Village Partnership, a Massachusetts general partnership* Starr Farm Partnership, a Vermont general partnership* New Pond Village Associates, a Massachusetts general partnership Tucson Retirement Center Limited Partnership, an Oregon limited partnership Castle Garden Retirement Center Limited Partnership, an Oregon limited partnership Lantana Partners, Ltd., a Florida limited partnership Woodhaven Partners, Ltd., a Florida limited partnership* Hillcrest Retirement Center, Ltd., an Oregon limited partnership Topeka Retirement Center, Ltd., a Kansas limited partnership Sandy Retirement Center Limited Partnership, an Oregon limited partnership Hillhaven - MSC Partnership, a California general partnership* Twenty-Nine Hundred Associates, a Florida limited partnership Medisave Pharmacies Partnership Medisave - CSSI Partnership * - Only fifty percent (50%) is owned by one of the Registrant's subsidiaries EX-23.01 22 Exhibit 23.01 INDEPENDENT AUDITORS' CONSENT The Board of Directors The Hillhaven Corporation: We consent to incorporation by reference in the Registration Statement (No. 33-35034) on Form S-8 of The Hillhaven Corporation of our report dated July 8, 1994 relating to the consolidated balance sheets of The Hillhaven Corporation and subsidiaries as of May 31, 1994 and 1993, and the related consolidated statements of operations, cash flows and changes in stockholders' equity for each of the years in the three-year period ended May 31, 1994, and all related schedules, which report appears in the May 31, 1994 Annual Report on Form 10-K of The Hillhaven Corporation. Our report refers to a change in the method of accounting for income taxes effective June 1, 1992. KPMG PEAT MARWICK LLP Seattle, Washington August 17, 1994 -----END PRIVACY-ENHANCED MESSAGE-----