-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FuoF5wd57dxKdaI+UkzyDaGYovgIzzx65GMUyOdbg1+b0AcdLA1eAebKWMI7jHWo cnt42mbh4IRDs3B2Amxdig== 0000865120-97-000004.txt : 19970326 0000865120-97-000004.hdr.sgml : 19970326 ACCESSION NUMBER: 0000865120-97-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: REGENCY HEALTH SERVICES INC CENTRAL INDEX KEY: 0000865120 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 330210226 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11144 FILM NUMBER: 97562145 BUSINESS ADDRESS: STREET 1: 2742 DOW AVENUE CITY: TUSTIN STATE: CA ZIP: 92680 BUSINESS PHONE: 7145444443 MAIL ADDRESS: STREET 1: 2742 DOW AVENUE CITY: TUSTIN STATE: CA ZIP: 92680 10-K 1 1996 ANNUAL REPORT ON FORM 10-K 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 For the fiscal year ended December 31, 1996. |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______ to ______ Commission file number: 1-11144 Regency Health Services, Inc. (Exact name of Registrant as specified in its charter) Delaware 33-0210226 (State of incorporation) (I.R.S. Employer Identification No.) 2742 Dow Avenue Tustin, California 92780 (Address of principal executive offices) Registrant's telephone number, including area code: (714) 544-4443 Securities registered pursuant to Section 12(b) of the Act: Title of Securities Name of Exchange on which Registered Common Stock, $.01 par value New York Stock Exchange Securities registered pursuant to section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [] Based on the closing price of $10 5/8 per share on February 28, 1997, the aggregate market value of the registrant's voting stock held by non-affiliates was $106,661,000. Solely for purposes of this computation, the registrant's directors and executive offers have been deemed to be affiliates. Such treatment is not intended to be, and should not be construed to be, an admission by the registrant or such directors and officers that any of such persons are "affiliates," as that term is defined under the Securities Act of 1934. The number of shares of common stock outstanding as of February 28, 1997 was 15,792,157. Documents Incorporated by Reference: Portions of Regency's 1996 Annual Report to Shareholders are incorporated by reference into Part II of this Form 10-K. Portions of Regency's Notice of Annual Meeting of Stockholders and Proxy Statement to be held May 8, 1997 are incorporated by reference into Part III of this Forms 10-K. TABLE OF CONTENTS PART I ITEM 1 BUSINESS 1 ITEM 2 PROPERTIES 16 ITEM 3 LEGAL PROCEEDINGS 17 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17 PART II ITEM 5 MARKET FOR REGENCY HEALTH SERVICES, INC. COMMON STOCK AND RELATED STOCKHOLDER MATTERS 18 ITEM 6 SELECTED FINANCIAL DATA 18 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 30 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 55 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF REGENCY HEALTH SERVICES, INC. 56 ITEM 11 EXECUTIVE COMPENSATION 56 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 56 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 56 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 57 SIGNATURES 64 PART I ITEM 1. BUSINESS General This Annual Report on Form 10-K of Regency Health Services, Inc. ("the Company" or "Regency") contains statements which constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Annual Report including, without limitation, under the headings General, Business Strategy, Business Units, Manner of Operation, Sources of Payment, Regulation, Competition and Tax Audits of the Section entitled "Business" and in Management's Discussion and Analysis of Financial Condition and Results of Operations. Such forward looking statements include the views, opinions and expectations of the Company, its officers and directors with respect to the matters there discussed, and as to the intent, belief and anticipation of such persons expressed in this Annual Report. Readers are cautioned that any such forward looking statements involve risks, uncertainties and factors that may impact on the actual results or activities of the Company. These risks and items are discussed below in greater detail in the portion of this Annual Report entitled "Factors Which May Affect the Company". Regency is a national provider of an array of healthcare services from acute rehabilitation to home health care. As of February 28, 1997, the Company delivered care from 116 Company operated inpatient facilities in five states. These facilities provide a spectrum of services including acute rehabilitation, neurological care, subacute treatment, basic and intermediate skilled nursing care, assisted living and ancillary services such as rehabilitation and pharmacy services. Additionally, the Company provides outpatient rehabilitation through 10 clinics. It also continues to expand its contract rehabilitation therapy, pharmacy and home health operations. As of February 28, 1997, the Company provided contract rehabilitation therapy services in 15 states to 63 affiliated and 116 non-affiliated facilities, pharmacy services in four states to 70 affiliated and 84 non-affiliated facilities and home health care services through 28 operating locations in California and Ohio. In order to meet the challenges of healthcare reform, industry consolidation and other changes, the Company plans to enhance the continuum of care it provides in defined markets to suit the needs of those markets. The Company believes adding various inpatient and outpatient services to the continuum, while expanding the availability of current services like subacute care, will attract managed care organizations seeking to build relationships with integrated delivery systems. The Company expects the more diverse services offered will provide "one stop" shopping for payors and will bring patients into the Company's delivery system sooner, often either immediately following or in lieu of invasive treatment. The Company also sees strategic joint operating relationships with tertiary care institutions, payors and physicians as enabling it to establish closer ties to the medical community. Regency was incorporated in Delaware in 1986 and grew rapidly through acquisitions. In April 1994, Regency merged with Care Enterprises, Inc. ("Care") in a stock transaction accounted for as a pooling of interests ("the Merger"). The Merger more than doubled the number of facilities and beds operated by the Company and made the Company a leading provider of long-term and specialty healthcare services in California. It established a presence for Regency in West Virginia, Ohio and New Mexico. Additionally, it provided a significant base for the expansion of both the ancillary services offered by Regency and the home health care services offered by Care. Following the Merger, management focused on integrating Regency and Care operations. This included instituting standardized systems, operating procedures and cost controls. The Company added several experienced senior officers. Others were replaced, along with a number of administrators at under-performing facilities. During 1995, the Company exchanged leasehold interests in three nursing facilities in New Mexico for leasehold interests in four nursing facilities in Ohio which were operated by another company; opened a newly constructed facility; and acquired SCRS & Communicology, Inc. ("SCRS"), a contract rehabilitation therapy company. In 1996, the Company disposed of 7 healthcare facilities in California. It also acquired 19 healthcare facilities in Tennessee and North Carolina; pharmacy 1 operations in California, Tennessee and North Carolina, and entered into a joint venture with a pharmacy in Ohio. To complete the roster of contract rehabilitation services provided by SCRS, the subsidiary acquired a respiratory therapy company. In early 1997, the Company acquired four acute rehabilitation hospitals, six neurological treatment centers and eleven outpatient rehabilitation clinics in California. Industry Overview Healthcare is one of the largest industries in the United States, representing total expenditures of approximately $884.0 billion or 13.9% of the 1993 gross domestic product, according to the Health Care Financing Administration ("HCFA"). This 1993 figure represents a 7.8% increase over 1992 expenditures of $820.0 billion recorded by HCFA. Historically, these increases have outpaced inflation. This is due, in part, to the increased availability and use of high-technology medicine and to the diverse medical needs of an aging population. The post-acute care industry encompasses a broad range of healthcare services, including basic and intermediate skilled nursing, assisted living, ambulatory businesses, subacute care, rehabilitation therapy including acute rehabilitation, home healthcare and pharmacy services provided to patients with medically complex needs who can be cared for outside of the acute care hospital environment. The Company's management believes that demand for these services will increase substantially during the next decade, primarily due to emphasis on healthcare cost containment and to the growing senior population. The senior population is growing at a faster rate than the overall population as a result of the baby boom and advances in medical technology that extend life. According to the United States Census Bureau ("the Census Bureau"), the number of individuals in the United States over 64 has grown from approximately 25.6 million in 1980, or approximately 11.3% of the population, to approximately 31.1 million in 1990, or approximately 12.5% of the population. Census Bureau projections indicate that the number of individuals in this age group is expected to increase to approximately 34.9 million, to approximately 12.7% of the population, by the year 2000. Additionally, individuals 85 years of age and older are one of the fastest growing segments of the population. The Census Bureau projects that the number of individuals in that age group will increase from approximately 3.0 million in 1990 to approximately 4.3 million by the year 2000. Cost containment procedures that encourage reduced lengths of stay in acute care hospitals are prevalent. In 1983, the federal government changed the reimbursement for acute care hospitals from a retrospective cost-based system to a prospective reimbursement system based upon rates established for diagnosis related groups ("DRGs"). Additionally, many private insurers limit acute care reimbursement to "reasonable and customary" charges while health maintenance organizations ("HMOs") and preferred-provider organizations ("PPOs") attempt to contain costs by negotiating reduced rates for acute care hospital services. These factors have resulted in reduced lengths of stay in acute care hospitals, with many patients being discharged to lower level facilities where their skilled needs can be met more cost-effectively. Accordingly, the Company believes that the healthcare industry will experience increased demand for post-acute care. The Company is well positioned to benefit from these developments due to its expanding capability to provide post-acute and subacute specialty services. Additionally, industry consolidation is expected to present the Company with opportunities for growth and expansion of its continuum of care. Although the Company believes that the demand for the services it provides will increase over the next decade, it anticipates competition to meet this demand. In addition, the regulatory framework in which healthcare providers will operate, including parameters for payment of services, is uncertain. Depending on the nature of such regulation, the healthcare industry may be subject to increased pressure to lower operating costs and may face more stringent requirements regarding reimbursement. 2 Business Strategy The Company's strategy is to enhance its position as an integrated delivery provider recognized for cost-effective, high-quality healthcare services in selected geographic areas. Implementation of this strategy means adding certain inpatient and outpatient services along with growing ancillary businesses based on the needs of the markets where it currently has operations, and involves certain risks. See "Factors Which May Affect Company". In addition, the Company plans to develop the information technology infrastructure necessary to support the cost-effective operation of this integrated delivery system. The fundamental elements of the Company's strategy include: o expanding the continuum of care and overall scope of services provided by the Company through such means as strategic alliances, diversifying services in inpatient facilities, increasing outpatient ambulatory business and growth of home healthcare services; o in-sourcing ancillary services such as pharmacy and rehabilitation services; o increasing the Company's marketing of ancillary services to third party facilities; o acquiring new businesses to complete the continuum in selected markets where the Company currently operates; o eengineering operating models and investment in information technology to reduce administrative and operating costs and develop an integrated delivery system. Management believes Regency has certain competitive strengths which support its strategy. Foremost among these is the Company's market position and experience operating long-term care facilities in California. The California market is characterized by a high degree of regulatory oversight and cost controls imposed by third party payors. With 64% of its revenues in this environment, the Company has considerable experience controlling operating costs while continuing to deliver high-quality healthcare. The Company believes it will be able to utilize this experience as a competitive advantage as it broadens the continuum of care offered to its patients in existing markets and expands its ancillary service businesses in new markets. The Company has reduced revenues from Medi-Cal from 32.3% of total revenues in 1995 to 21.7% (pro-forma for the acquisition of four acute rehabilitation hospitals, six neurological care centers and 10 outpatient clinics on January 1, 1997 and the disposition of six long term care facilities in 1996 and one on January 1, 1997) for 1996. Expanding the Continuum of Care. A significant component of Regency's growth strategy is expanding the continuum of care. By increasing its scope of services, the Company believes that it will attract additional managed care payors and other insurers as participants in its regional, integrated delivery systems. Given the current industry consolidation, the Company believes this strategy is necessary to establish a significant market position in the geographic areas it has targeted for expansion. Moreover, expanding the continuum of care should increase business for higher margin ancillary services and attract greater numbers of patients whose care is reimbursed by other than government sources. An important component of this strategy is supplementing current services offered by the Company. The Company intends to do so through strategic alliances or by developing new programs. A prime example of a strategic alliance to reinforce the continuum is the joint venture relationship the Company now enjoys with two acute medical centers in California. Subacute services also continue to grow. As of February 28, 1997, 46 of the Company's facilities had subacute programs in place, up from 42 at the end of 1995. Additionally, the Company intends to continue to emphasize the growth of its home health care division. The provision of home health care services complements the Company's facility-based services and substantially broadens the continuum of care which it is able to provide. Furthermore, the Company will emphasize the growth in outpatient services. The Company believes that its ability to package a broad array of services in this manner is attractive to managed care payors. 3 Another important industry factor prompting the Company to expand its continuum is the growing marketing penetration of managed care organizations both across the nation and in the regions where the Company operates. As managed care market share increases, it is important for healthcare providers like the Company to enter into managed care contracts in order to maintain and build their patient base. In determining which providers to contract with, payors consider, among other factors, quality of care, range of services, geographic coverage and the cost-effectiveness of the care. These payors control costs through stringent utilization review systems, increased use of discounted and capitated fee arrangements and, when appropriate, directing patients to lower acuity alternatives along the continuum of patient care. The Company believes that development of its integrated delivery system in selected regions gives it the scope of services, quality of care, geographic coverage and cost control that will enable it to compete more effectively for managed care contracts. As of January 1, 1997, the Company added 4 acute rehabilitation hospitals, 6 neurological care centers and 10 outpatient clinics to its roster of operations. With this, it formed a new division, Regency Rehabilitation and Specialty Services, to mark the significance of rehabilitation services in the strategic development of the continuum of care. To implement its strategy, the Company intends to: (i) continue to enhance the continuum of services it offers; (ii) develop market concentration for its continuum of inpatient, outpatient and home health services in targeted states and regions to parallel increasing payor consolidation; (iii) consider strategic alliances with managed care payors, hospital groups, physicians and other healthcare providers; (iv) explore acquisitions which could further expand the services provided by the Company; and (v) upgrade its management information systems to develop connections between systems and geographic locations which will assist in integrating financial and clinical data across all business lines in order to meet the future information needs the managed care environment will require. In-Sourcing Patient Services. Regency expects to continue to in-source such patient services as pharmacy and rehabilitation services. The Company's existing facilities provide a ready market and could generate additional growth for the Company's ancillary service businesses. The Company believes that continued in-sourcing of these services could enhance revenues and solidify its market position by broadening the base of potential patients from which it is able to draw and by creating stronger platforms from which it can offer additional services. Moreover, these types of services should enhance the Company's profitability by attracting greater numbers of patients who pay directly for services without the benefit of government assistance programs. Generally, the profitability of caring for these patients is higher than for patients under government assistance programs. Historically, the Company has realized higher profit margins on the ancillary services it is targeting for in-sourcing. The August 1996 acquisition of Managed Respiratory Care Services by SCRS enabled the Company to insource additional respiratory therapy rehabilitation that was previously furnished by non-affiliated providers. During 1996, the Company acquired Assist A Care pharmacy to expand the growth in the delivery of pharmacy services in California. The Company expects to complete development of a hub and satellite network for distribution within its California pharmacy operations during 1997. The acquisition of Executive Pharmacy provided for the in-sourcing of pharmacy services to the Company's facilities in Tennessee and North Carolina and expanded the Company's pharmacy services to non-affiliated facilities as well. In 1996, a strategic alliance was initiated with Vrable pharmacy to enable the Company to in-source pharmacy services in Ohio. The Company believes that continued expansion of the pharmacy network outside of California and to non-related facilities both in California and in other states will occur primarily through acquisitions. Marketing Ancillary Services. In addition to expanding the range of ancillary services provided directly to its patients, Regency intends to expand the marketing of its ancillary services to third party facilities. The development and marketing of ancillary services should enable the Company to serve greater numbers of higher revenue patients. Expansion of ancillary services marketed to non-affiliated facilities is an important component of the Company's goal to increase the quality of its payor mix. Moreover, management believes the 4 selective acquisition and marketing of ancillary services supports the continued growth of the Company in targeted market segments and locations and should produce synergies as the Company expands both the number of facilities it operates and the continuum of care it provides to its patients. Expanding Through Acquisition. Regency has grown primarily through the selective acquisition of new facilities and ancillary service providers. The Company expects to continue to grow principally through such acquisitions and the synergies these new facilities and ancillary services may provide. The Company intends to focus its acquisition and expansion efforts in those markets where the Company already has a presence that provide an attractive opportunity for the expansion, geographic and otherwise, of the continuum of care the Company offers to its patients. By such expansion, the Company intends to develop a significant market presence, which will enable it to better take advantage of the opportunities for synergies provided by new acquisitions and to enhance further the range of services provided to its patients. The Company will continue to assess the viability of expansion into other areas as economically attractive acquisitions become available. The Company actively seeks acquisition opportunities in the ordinary course of its business and is currently reviewing prospective acquisitions. Business Units The Company's business operations consist of four basic units: long-term care facilities including subacute specialty units, rehabilitation services, pharmacy services and home healthcare. Nursing Center Operations. As of February 28, 1997, 103 of the Company's healthcare facilities are licensed as skilled nursing facilities and provide skilled nursing care for patients who do not require more extensive treatment at an acute care hospital. Seven of these facilities and one additional facility are also approved by the California Department of Health Services to provide mental health services. The Company's skilled nursing facilities provide 24-hour nursing care, room and board, social services and activity programs, as well as special diets and other services that may be specified by a patient's physician. Patients at these facilities often have been discharged from acute care hospitals and require substantial medical attention. In some cases, the facilities also provide assisted living arrangements. In addition to skilled nursing facilities, the Company operates three facilities for the developmentally disabled, one of which is also licensed as a skilled nursing facility and is included above. The Company believes that its substantial California presence, together with the expansion of its continuum of services and greater market penetration for its ancillary services, will increase the Company's ability to obtain contracts and referrals from managed care companies. For the year ended December 31, 1996, approximately 5.1% of the Company's revenues were attributable to managed care; management expects this percentage to increase. As of February 28, 1997, 25 of the Company's skilled nursing facilities were accredited by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"), an independent organization that reviews facilities and accredits those that achieve certain standards for quality control and assurance. The Company has applied for accreditation at additional facilities. As of February 28, 1997, 46 of the Company's healthcare facilities included subacute specialty units which serve the needs of patients of all ages who have medically complex conditions which require ongoing nursing and medical supervision and access to specialized equipment and services, but do not require many of the other services provided by acute care hospitals. The Company increased the number of its facilities containing dedicated subacute units to 46 during 1996 from 42 at the end of 1995. The units provide such services as respiratory therapy, ventilator care, oncology services, infusion therapy, post-surgical wound management and care to patients with auto-immune deficiency syndrome (AIDS). In addition, as of February 28, 1997, the Company provided specialized services at three of its facilities to patients diagnosed with Alzheimer's disease. Based upon its experience within the industry and its knowledge of acute care hospital rates, as disclosed by such institutions, management believes that it is able to provide subacute care at rates 5 substantially below the rates typically charged by acute care hospitals for comparable services and still earn higher average revenues per patient day than it receives for basic nursing services. Rehabilitation Services. Ninety-six of the Company's skilled nursing facilities provide special rehabilitation services including physical, speech, occupational, and respiratory therapy. These ancillary services are administered by licensed therapists and rehabilitation aides. Currently, these services are provided by several contract therapy providers, including SCRS. The objective of these programs is to help patients achieve their highest level of functional independence. Rehabilitation services are instrumental in lowering the overall cost of care by reducing the length of a patient's stay and improving a patient's quality of life. Specialized management staff oversee these rehabilitation programs to ensure high-quality service delivery, program compliance and achievement of maximum outcomes for the patient. In August 1996, the Company's rehabilitation services subsidiary, SCRS, acquired Managed Respiratory Care Services, a respiratory therapy provider. Beyond the services it provides the Company, as of February 28, 1997, SCRS delivers rehabilitation services at 116 non-affiliated healthcare facilities in 14 states and to home healthcare patients under four contracts with non-affiliated healthcare providers. As of January 1, 1997, the Company added four acute rehabilitation hospitals, six neurological care centers and 10 outpatient clinics to the continuum of rehabilitation services it offers. The Company believes this enhancement increases its appeal to managed care payors seeking providers who are able to effectively manage the cost and quality of care delivered to their patients. Pharmacy Services. For the past six years, the Company has operated its own institutional pharmacy, First Class Pharmacy, Inc. In 1996, the Company acquired or opened four additional pharmacy operations to expand its service to Company-operated facilities and non-affiliated facilities in California, Ohio, Tennessee and North Carolina. As of December 31, 1996, the Company's pharmacy operations provided prescription services and basic pharmaceutical dispensing programs to 68 Company-operated facilities with approximately 7,257 licensed beds and to 84 non-affiliated facilities with approximately 7,428 licensed beds. In addition, the Company's pharmacy operations provide certain specialty services such as infusion therapy, enteral nutrition, and urological and ostomy supply programs. The Company has also developed certain specialty consulting and ancillary programs to help each facility comply with state and federal regulations. Additionally, the Company is pursuing development of an automated hub and satellite network of pharmacy operations within California to reduce the cost of supplying pharmacy services. Home Health Services. The Company provides home health care services in selected areas in California and Ohio through two operating divisions, Care Home Health and Care At Home. The Company has provided home health care services since 1983. Care Home Health primarily serves Medicare patients while Care At Home provides services to private pay, managed care and Medicaid patients. The services offered include skilled nursing, rehabilitation services, infusion therapy, ventilator care, care for patients with AIDS, and other specialty services. Manner of Operation Nursing Center Operations. Each healthcare facility operated by the Company is supervised by a licensed administrator who is responsible for all aspects of facility operations. A facility administrator typically oversees a director of nursing, a director of admissions and other department supervisors. The director of nursing supervises a staff of registered nurses, licensed practical nurses and nurses' aides. The director of admissions is responsible for developing local marketing strategies and programs. To supervise the medical management of patients, the Company also contracts with licensed physicians to act as medical directors at each facility. The Company's corporate staff provides support to facility administrators in, among other things, quality improvement, management 6 reporting, marketing, management training, legal services, human resources, risk management, reimbursement, data processing, cash management, and accounting. The Company has a professional services department which includes field consultants who represent the corporate philosophy to each professional discipline providing patient care. The department coordinates the development and implementation of corporate and administrative policies and procedures and authors most clinical manuals used in direct patient care. To ensure regulatory compliance and high-quality clinical services, the department is actively involved in location-specific and Company-wide quality improvement activities and education through interdisciplinary consulting services to all of the Company's operational areas. In 1996, the department introduced a continuous quality improvement program to the division that is designed to identify opportunities to improve quality before negative outcomes can occur. Contract Rehabilitation Therapy Operations. The Company's contract rehabilitation therapy operations are directed by the senior vice president of Rehabilitation and managed by two divisional executive vice presidents; one who oversees field operations, clinical services, corporate support, finance and a recruiting division known separately as Therapy International and one who oversees all sales, marketing and the PulsePoint Technologies information service. Field operations are controlled by divisional vice presidents who supervise state regional directors and a team of area clinical managers who typically oversee three to seven facilities each. Pharmacy Operations. The Company's pharmacy operations are managed by the senior vice president of Home Health and Pharmacy Operations, who is responsible for all aspects of home health and pharmacy operations. Each pharmacy is managed by either a general manager or pharmacy manager, who is a pharmacist, and supported by a business manager who oversees the billing department staff, a professional staff of consulting and dispensing pharmacists, nurses and dietitians, and a support staff of technicians and delivery personnel. The division corporate staff includes a regional controller, regional vice presidents of operations, a vice president of business development, a vice president of acquisitions, and a director of pharmacy support services who provide financial accounting, management oversight, new program implementation, acquisitions, marketing, sales support, new business assimilation, and other management support services to each pharmacy manager. Home Health Operations. The Company's home health operations are divided geographically into two regions, each managed by a regional vice president. The regional vice presidents report to the senior vice president of Home Health and Pharmacy Services and are supported by regional directors of quality improvement, consumer education, finance and Infusion. Each of the Medicare certified agencies is managed by a director of professional services. Sources of Payment The Company receives payment for healthcare services from (i) the federally assisted Medicaid program, (ii) the federal Medicare program, (iii) private sources, including HMOs and commercial insurance, and (iv) other sources, including special programs sponsored by local governments and the Veterans Administration. Because private and Medicare reimbursement rates historically have been higher than Medicaid reimbursement rates, the Company has targeted the private-pay market and has worked to make available Medicare-eligible services in its healthcare facilities. Changes in the mix of the Company's patient population between Medicaid and a combination of Medicare, private and other sources can significantly affect profitability. Governmental reimbursement programs are subject to change, which also can affect profitability. As of February 28, 1997, 102 of the Company's facilities are certified for participation in Medicaid. Medicaid is a medical assistance program for the indigent and is operated by state governments with financial assistance (approximately 50% of the funds available) from the federal government under a matching program. Medicaid is subject to federally imposed requirements. Medi-Cal, California's version of Medicaid, currently provides for reimbursement 7 at established daily rates, as determined by the California Department of Health Services, based on median costs of nursing facilities, classified by number of licensed beds and geographic location. Medi-Cal primarily pays for long-term custodial care for patients who qualify for welfare benefits. In Ohio and West Virginia Medicaid reimbursement is a prospective cost-based system with an adjustment factor to account for patient acuity. Medicaid reimbursement is primarily provided under a prospective cost-based system in Tennessee and in North Carolina is provided under a system that has both a cost reimbursement component, subject to limitations, as well as a prospective cost-based component. Twelve of the Company's home healthcare agencies are eligible to participate in the Medicare program and all of the Company's home healthcare agencies are eligible to participate in the Medicaid program. As of February 28, 1997, 96 of the Company's skilled nursing facilities are certified for participation in Medicare. Medicare is a health insurance program operated by the federal government for the aged and certain chronically disabled individuals. Medicare reimbursement rates for the Company's healthcare facilities are regulated by the federal government and generally utilize a cost-based reimbursement system, subject to geographic cost limits. Medicare pays both the allowed direct costs and allowed overhead costs related to services provided to patients covered by the Medicare program. Medicare specific rates are dependent upon the cost and volume of the services provided as calculated on the cost reports that each facility is required to submit annually to Medicare. Reimbursement from Medicare is subject to retrospective adjustment to reconcile payments made to a facility on an interim basis with subsequently determined allowable costs. Overpayments may be recovered directly from the facility at the time the adjustment is made or by reducing future payments to the facility or other facilities operated by the Company. The Company's cost of care for its Medicare patients sometimes exceeds regional reimbursement limits established by Medicare. The Company submits exception requests for its excess costs annually. Exception requests for all cost report periods through December 31, 1994 have been filed. The Company's final rates as approved by the Health Care Financing Administration ("HCFA") represent, on average, approximately 84% of the requested rates as submitted in the exception requests. During 1994, the Company recognized 50% of the 1994 estimated exception requests anticipated to be received, which represented revenues of approximately $1,550,000. Commencing January 1, 1995, the Company recognized 70% of the estimated exception requests anticipated to be received, which represented revenues of approximately $3,563,000 and $3,001,000 for 1996 and 1995, respectively. Amounts received in respect of exception requests relating to periods prior to December 31, 1994 will continue to be recorded on the cash basis. The Company believes that it will be able to recover its excess costs under any pending exception requests or under any exception requests that may be submitted in the future; however, there can be no assurance that it will be able to do so. The Company has a broad customer base. There are no customers or related groups of customers that account for a significant portion of the Company's revenue. The loss of a single customer or group of related customers would not have a material adverse effect on the operations of the Company taken as a whole. However, two non-affiliated healthcare providers represented 24% of SCRS total revenues during 1996. For a detail of revenue by business unit, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." Reimbursement rates for HMOs are negotiated by the Company and the organization. Charges for other private-pay patients are established by the Company from time to time and are determined by market conditions and costs. Veterans Administration contracts are generally at negotiated daily rates. The Company also receives reimbursement, generally at negotiated daily rates, pursuant to five contracts with county governments relating to certain of the Company's facilities which provide services to the mentally disordered. These contracts may be terminated by either party upon 60 days', or less, prior notice. 8 The following table sets forth the Company's percentage of net operating revenue provided by source of payor for the periods indicated: 1996 1995 1994 --------- --------- --------- Medicaid 40.6% 39.9% 42.7% Medicare 29.3 31.9 31.3 Private 11.6 13.6 15.2 Managed care 5.1 5.4 4.6 Other 13.4 9.2 6.2 ========= ========= ========= Total 100.0% 100.0% 100.0% ========= ========= =========
As of February 28, 1997, the Company had in effect agreements with nearly all major HMOs operating in California to provide skilled nursing care and ancillary services to patients at its facilities who are enrolled as members in the HMO. Payment by HMOs for services provided by the Company is based on negotiated contract rates that vary by HMO. Reimbursement is based upon the level of patient acuity, irrespective of the actual services provided. Thus, if a patient requires a greater level of healthcare services than that normally provided a patient of the agreed acuity level, the Company will not be reimbursed for such additional services. Contract Rehabilitation Therapy Services to Non-affiliates. Revenues from contract rehabilitation services to non-affiliates are generally received directly from the long-term care facility where the patient being treated resides, which in turn are paid by Medicare or other payors. These revenues are included in other sources of revenue. Revenue from contract rehabilitation therapy services provided to Regency operated facilities are included in the Medicaid, Medicare and private pay sources of revenues for Regency for each of the applicable facilities. Charges to non-affiliates, though not directly regulated, are effectively limited by regulatory reimbursement policies imposed on the long-term care facilities that receive these therapy services, as well as competitive market factors. Pharmacy Services to Non-affiliates. Revenue from the Company's pharmacy services are derived from the provision of such services to patients at long-term care facilities not operated by Regency and patients at Regency facilities billed directly to third-party payors. Regency enters into non-exclusive contracts with non-affiliated facilities, and personnel at such facilities submit prescriptions to Regency on behalf of patients at such facilities. Regency is in most cases paid directly by Medicare, Medicaid or private pay sources, and not by the long-term care facility. The amounts that can be charged for prescriptions are often limited by Medicaid regulations. Home Health Operations. Revenue from the Company's home health operations come from a variety of payors including the Medicare and Medicaid programs, commercial insurance, health maintenance organizations, private sources and special county/state programs. In January 1996, two of the Company's California home health agencies entered the HCFA "Prospective Pay" pilot program. This is a three year program under which reimbursement will be determined on an "episode" basis not on a fee for service (per visit) basis. An "episode" is defined as a 120 day period of home health benefit, inclusive of all necessary services (including ancillary services). Related Party Transactions. Medicare regulations that apply to transactions between related parties, such as Regency and its subsidiaries, are relevant to the amount of Medicare reimbursement that the Company is entitled to receive for contract rehabilitation therapy and pharmacy services that it provides to Regency operated facilities. These Medicare regulations generally require that, among other things, (i) the Company's rehabilitation therapy and pharmacy subsidiaries must each be a bona fide separate organization; (ii) a substantial part of the contract rehabilitation therapy services or pharmacy services, as the case may be, of the relevant subsidiary must be transacted with non-affiliated entities, and there is an open, competitive market for the relevant services; (iii) contract rehabilitation therapy services and pharmacy 9 services, as the case may be, are services that commonly are obtained by long-term care facilities from other organizations and are not a basic element of patient care ordinarily furnished directly to patients by such long-term care facilities; and (iv) the prices charged to the Company's long-term care facilities by its contract rehabilitation therapy operations subsidiary and pharmacy operations subsidiaries are in line with the charges for such services in the open market and no more than the prices charged by its contract rehabilitation therapy operations subsidiary and pharmacy operations subsidiaries under comparable circumstances to non-affiliated long-term care facilities. Regency believes that each of the foregoing requirements are presently being satisfied with respect to its contract rehabilitation therapy and pharmacy subsidiaries, and therefore, Regency believes it presently satisfies the requirements of these regulations. Consequently, it has claimed and received reimbursement under Medicare for contract rehabilitation therapy services (since the acquisition of SCRS in July 1995) and pharmacy services (beginning in January 1996) provided to patients in its own facilities at a higher rate than if it did not satisfy these requirements. If the Company is unable to satisfy these regulations, the reimbursement the Company receives for contract rehabilitation therapy and pharmacy services provided to its own facilities would be materially adversely affected. If, upon audit by relevant reimbursement agencies such agencies find that each of these regulations has not been satisfied, and if, after appeal, such findings are sustained, the Company could be required to refund some or all of the difference between its cost of providing these services and the higher amount actually received. While the Company believes that it has satisfied and will continue to satisfy these regulations, there can be no assurance that its position would prevail if contested by relevant reimbursement agencies. Marketing Recognizing the growing influence of managed care upon healthcare delivery, the Company's Marketing and Managed Care departments were combined in 1996. The integration of these areas allows a synergistic approach to marketing the Company's services to payors, providers and patients. Long-term strategies and Company-wide marketing programs are developed by the corporate Marketing & Managed Care staff. However, primary marketing responsibility rests with field personnel for each of the Company's business lines. The Company has developed various marketing and managed care training programs and manuals for use by staff who are involved in service delivery. Software programs, statistical data, and field interview responses aid in development of materials to support marketing efforts. Recognizing that healthcare decisions are made at the local level by physicians, case managers, discharge planners, family members and patients, the Company attempts to identify, develop and maintain relationships with the primary referral sources in each of the areas it serves. Marketing personnel also research, analyze and advise the Company concerning opportunities in each of its local market areas. From this, the Company's marketing staff seeks to develop programs to maximize occupancy and financial performance in each of the Company's facilities. Complementing these efforts, Managed Care staff identify and pursue opportunities to develop relationships with managed care providers. Quality Management The Company believes that an essential element of its business strategy is to focus on the quality of service provided. This depends in large measure on the existence of a trained and educated work force. The Company views quality management as a two-pronged system: Continuous Quality Improvement and Total Quality Management. In 1996, the Company introduced a Continuous Quality Improvement program into its long-term care operations. This program places the responsibility for quality improvement in the hands of those who most greatly impact quality - the facility staffs. It is a facility-based system of identifying opportunities to improve quality before negative events can occur. As system weaknesses are identified, they are resolved through a problem-solving procedure that is based on Total Quality Management. 10 With initial assistance from the Richard Rodgers Consulting Group, the Company has, since 1993, trained over 9,000 employees in the principles of Total Quality Management ("TQM"). In addition, certain executive and mid-level managers have been trained in the use of Statistical Process Control and data analysis in sound business decision-making. In implementing its TQM initiative, the Company did not create additional layers of bureaucracy, but instead developed and communicated to its employees the simple message that the Company's vision, mission and culture are dedicated to meeting and exceeding the expectations of its customers. Because the Company believes that quality planning is an important component of the strategic planning process and integral to the successful realization of its strategic objectives, TQM is results-oriented. At all levels of the Company, rewards are tied to specific agreed-upon result statements that directly support the Company's strategic objectives. Employee performance is evaluated based upon achievement of stated quantitative measures. In this way, the Company's focus is continually directed back to its strategic objectives. Regulation The healthcare industry is subject to extensive federal, state and local statutes and regulations. The regulations include licensure requirements, reimbursement rules and standards and levels of services of care. Changes in applicable laws and regulations or new interpretations of existing laws and regulations could have a material adverse effect on licensure of Company facilities, eligibility for participation in federal and state programs, permissible activities, costs of doing business, or the levels of reimbursement from governmental, private, and other sources. To date such changes have not had a material adverse effect on the Company's business. However, there can be no assurance that regulatory authorities will not adopt changes or interpretations that adversely affect the Company's business. Licensing. The Company's healthcare facilities and pharmacy services are subject to licensing requirements by state and local authorities. The Company's healthcare facilities are licensed by each state's licensing agency. In granting licenses, an agency considers, among other factors, the physical condition of the facility, the qualifications of the administrative and nursing staffs, the quality of care, and compliance with applicable statutes and regulations. The failure to maintain or renew any required regulatory approvals or licenses could prevent the Company from offering its existing services or from obtaining reimbursement. As of February 28, 1997, 96 of the Company's skilled nursing facilities are certified for participation in Medicare and 102 of the Company's facilities are certified for participation in Medicaid. Twelve of the home healthcare agencies operated by the Company are eligible to participate in the Medicare program and all of the Companies home healthcare agencies are eligible to participate in the Medicaid program. The Company, through its subsidiaries, holds licenses to operate long-term care facilities in California, West Virginia, Ohio, Tennessee and North Carolina. Ohio does not require that a new license be issued on a yearly basis. The Company, through its subsidiaries, participates in the Medicare and Medicaid programs in California, West Virginia, Ohio, Tennessee and North Carolina. Most states in which SCRS operates permit a corporation to provide rehabilitation services provided that the individual therapist is licensed. The Company's rehabilitation services at facilities not operated by the Company are offered under the individual license of Sherri L. Medina, the Company's Senior Vice President-Rehabilitation Services and through the licenses of individual therapists. In California and Indiana, services are provided either through Ms. Medina's professional corporation or through a professional corporation of another employee. The failure by Ms. Medina to maintain her individual license would prevent the Company from offering such services to other facilities until a replacement supervising officer were employed. 11 In certain states, statutes require that a state agency approve certain acquisitions, the addition of beds and services and certain capital expenditures. Such state approvals generally require implementation of the item being approved within a specified time period. The failure to obtain the state approval can result in the inability to make the acquisition, to add the service, to operate the facility or complete the addition or other change requested, and can result in the imposition of sanctions or adverse reimbursement action. The Omnibus Budget Reconciliation Act of 1987 ("OBRA") was implemented effective October 1, 1990. Among other things, OBRA eliminated the different certification standards for "skilled" and "intermediate care" nursing facilities under the Medicaid program in favor of a single "nursing facility" standard. OBRA also mandated an increase in the level of services nursing facilities must provide to participate in Medicare and Medicaid. This change, the cost of which was partially offset by reimbursement rate increases for Medicaid and an increase in the routine cost limits under Medicare, thus far has not had a significant impact on the Company. Effective July 1, 1995, new regulations under OBRA dealing with enforcement policies and procedures and a new survey process became operative. These regulations provide for a variety of penalties for noncompliance with other substantive regulations and minimum standards of care, including required preparation and submission of plans of correction, new patient admission moratoriums, denial of reimbursement, decertification of Medicare reimbursement eligibility, delicensing, forced facility shutdown and loss of provider status. While the Company believes that it is in substantial compliance with the current requirements of OBRA, it is unable to predict how the enforcement regulations will be implemented, or how future interpretations of current regulations or future regulations promulgated under OBRA may affect it. In addition, there can be no assurance that the Company's facilities and the provision of services and supplies by the Company now or in the future will initially meet or continue to meet the requirements for participation in Medicare or Medicaid programs. The Company and its healthcare facilities are subject to routine inspections, at any time, to monitor compliance with government regulations. Based on such inspections, the Company receives, from time to time in the ordinary course of its business, notices of failure to comply with various requirements. The Company endeavors to take prompt corrective action and, in most cases, the Company and the reviewing agency agree on remedial steps. The reviewing agency may take action against a facility, which can include the imposition of fines, recovery of Medicare payments paid with respect to deficient care, temporary suspension of admission of new patients to the facility, decertification from participation in the Medicare or Medicaid programs and, in extreme circumstances, revocation of the facility's license. In certain circumstances, failure of compliance at one facility may affect the ability of the Company to obtain or maintain licenses or approvals under Medicare and Medicaid programs at other Company facilities. Reimbursement. Governmental reimbursement programs are subject to statutory and regulatory changes, administrative rulings and interpretations, government funding restrictions, and retroactive reimbursement adjustments, all of which could materially increase or decrease the services covered or the rates paid to the Company for its services. There have been and the Company expects that there will continue to be, a number of proposals to limit governmental programs such as Medicare and Medicaid reimbursement for healthcare services. The Company cannot predict at this time whether any of these proposals will be adopted or, if adopted and implemented, what effect such proposals would have on the Company. There can be no assurance that payments under governmental programs will remain at levels comparable to present levels or will be sufficient to cover the cost allocable to patients eligible for reimbursement pursuant to such programs. In addition, governmental reimbursement programs require strict compliance with both patient eligibility and acuity requirements, and timely payment requests. The failure to adhere to these requirements is a basis for denial of reimbursement or for a required refund, with interest, of any sums paid by the program. In addition, the Company's cash flow could be adversely affected by periodic government program funding delays, shortfalls, or other difficulties, such as that which occurred in 1995 when the State of California failed to adopt a new 12 budget prior to the end of the 1994-1995 fiscal year and, as a result, Medi-Cal delayed reimbursement payments for several weeks. Medi-Cal also delayed payments and rate increases for several weeks in 1990 and 1991. Medi-Cal has on a number of recent occasions delayed payments and rate increases, including for several weeks in each of 1990, 1991 and 1995. The Company has mitigated the effects of such payment delays by monitoring the related activities of the California legislature, expediting billings through its electronic billing arrangement and agreeing with creditors to extend the due date for payables. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." There can be no assurance, however, that the Company will be able to mitigate the effects of any future funding delays. During 1996, the Company averaged approximately $8.1 million per month in cash receipts from the Medi-Cal program. Antifraud and Self-Referral Regulations. Various Federal and state laws regulate the relationship between providers of health care services and physicians or others able to refer medical services, including employment or service contracts, leases and investment relationships. These laws include the fraud and abuse provisions of the Medicare and Medicaid and similar state statutes (the "Fraud and Abuse Laws"), which prohibit the payment, receipt, solicitation or offering of any direct or indirect remuneration intended to induce the referral of Medicare and Medicaid patients or for the ordering or providing of Medicare or Medicaid covered services, items or equipment. Violations of these provisions may result in civil and criminal penalties and/or exclusion from participation in the Medicare and Medicaid programs and from state programs containing similar provisions relating to referrals of privately insured patients. The United States Department of Health and Human Services ("HHS") has interpreted these provisions broadly to include the payment of anything of value to influence the referral of Medicare or Medicaid business. HHS has issued regulations which set forth certain "safe harbors," representing business relationships and payments that can safely be undertaken without violation of the Fraud and Abuse Laws. In addition, certain Federal and state requirements generally prohibit certain providers from referring patients to certain types of entities in which such provider has an ownership or investment interest or with which such provider has a compensation arrangement, unless an exception is available. The Company considers all applicable laws in planning marketing activities and exercises care in an effort to structure its arrangements with health care providers to comply with these laws. However, because there is no procedure for obtaining advisory opinions from government officials, the Company is unable to provide assurances that all of its existing or future arrangements will withstand scrutiny under the Fraud and Abuse Laws, safe harbor regulations or other state or federal legislation or regulations, nor can it predict the effect of such rules and regulations on these arrangements in particular or on the Company's operations in general. The Company systematically reviews its operations on a periodic basis and has adopted policies intended to ensure that it complies with the Fraud and Abuse Laws and similar state statutes. Environmental Regulations. The Company's healthcare operations generate medical waste that must be disposed of in compliance with Federal, state and local environmental laws, rules and regulations. The Company's operations are also subject to compliance with various other environmental laws, rules and regulations. Such compliance does not, and the Company anticipates that such compliance will not, materially affect the Company's capital expenditures, earnings or competitive position. Competition The Company, and the healthcare industry in general, faces the challenge of continuing to provide quality patient care while contending with rising costs, strong competition for patients and a general reduction of reimbursement rates by both private and public payors. As both private and public payors reduce the scope of services which may be reimbursed and reduce reimbursement levels for covered services, national and state efforts to reform the healthcare system may further impact reimbursement rates. Changes in medical technology, existing and future legislation, regulations, contracting innovations and industry consolidation may require changes in the Company's facilities, equipment, personnel, rates and/or services in the future. 13 The Company competes with a variety of other providers of healthcare services, including other rehabilitation hospitals, other skilled nursing facilities, other home health providers, hospitals offering long-term care services and personal care or residential facilities. Competition has become more intense as alternatives for nursing and rehabilitation patients has increased. Many hospitals now have skilled nursing units and home health agencies. Community-based programs such as assisted living and congregate living centers also compete for residents with the Company's skilled nursing facilities and congregate living centers. With the movement from `institutional', skilled nursing facilities to residential living facilities and congregate living centers, maintaining occupancy rates becomes increasingly difficult. As of February 28, 1997, the Company operated 83 inpatient facilities (including 4 acute rehabilitation facilities and 6 neurological care centers) with 7,521 licensed beds in California. The Company estimates that there are approximately 1,300 free-standing long-term care facilities with approximately 125,000 licensed beds in California. The Company also operates 33 facilities with 3,943 beds in West Virginia, Ohio, Tennessee, and North Carolina. The Company's competitive position varies across statewide and local markets. Some of the significant factors relating to individuals' selection of the Company's healthcare facilities include quality of care, reputation, physical appearance, services offered, family preferences, benefit plan preferences and price. The Company's facilities and home health agencies operate in communities that are served by similar entities. Some competing facilities, home health agencies and pharmacies offer services not offered by the Company. Furthermore, competitors may benefit from greater financial resources, longer operating histories, charitable endowments, favorable tax status and other resources not available to the Company. There can be no assurance that the Company will not encounter increased competition in the future that would adversely affect the Company's results of operations. Contract therapy services, like those offered by SCRS, are provided by other rehabilitation service companies, many of whom are larger and have greater resources than the Company. In addition, many of SCRS's existing customers have begun to develop the capability of directly providing such services, rather than contracting with other providers for these services. The long term care pharmacy market is rapidly consolidating and this has resulted in numerous large institutional pharmacies. These pharmacies are larger and have greater resources than the Company. Employees As of February 28, 1997, the Company had approximately 16,170 full-time and part-time employees. Of these employees, approximately 12,080 were employed at its healthcare facilities, approximately 850 at its home health agencies, approximately 240 in its pharmacy operations, approximately 2,680 in rehabilitation services and approximately 320 at its regional administrative and corporate offices. Approximately 1,600 of the employees were covered by 12 collective bargaining agreements. The Company believes that it maintains productive relations with its employees in general and with the 12 collective bargaining units. The Company is subject to both federal and state minimum wage and wage and hour laws and maintains various employee benefit plans. Tax Audits A State of Ohio income tax audit for the years 1991 through 1994 is ongoing and a California Franchise Tax Board income tax audit for 1994 is pending. Although it is not possible to predict with certainty the outcomes of the audits, in the opinion of the Company, adequate provision for the matters under review has been made, and the results of the audits are not expected to have a material adverse effect on the Company's consolidated financial position. 14 Insurance The Company maintains general and professional liability insurance on a claims-made basis subject to a $100,000 per occurrence self-insured retention limited to an aggregate stop loss of $500,000. All-risk property insurance, including earthquake and flood, is carried for all Company operations. The Company self-insures its workers' compensation programs for its nursing facilities in California and Ohio, pharmacy operations, home health operations and its corporate office employees. For all other operations, the Company purchases insurance for this risk. The Company is required to maintain standby letters of credit with the state insurance departments for its self-insurance workers' compensation programs, which as of December 31, 1996 aggregated approximately $8.4 million. These letters of credit assure that benefits payable by the Company to its covered employees (which estimated benefits are reflected as liabilities on the Company's books and records) are paid when required. The Company has not defaulted in its workers' compensation benefit payment obligations since the Company began its self-insurance program in 1983. Factors Which May Affect Company The following important factors, among others, in the past have affected and in the future could affect, the financial results, business strategy, and business operations of healthcare providers including the Company, and could materially impact the various forward looking statements contained elsewhere in this Annual Report. Readers are cautioned to review such forward looking statements in the context of these factors. A number of these items are summarized as follows: Dependence on Reimbursement from Medicare and Medicaid. The Company's business is dependent upon its ability to obtain and maintain reimbursement from Medicare and Medicaid. These government-sponsored healthcare programs are highly regulated and are subject to budgetary and other constraints. In addition, these government programs have instituted cost-containment measures designed to limit payments made to healthcare providers. Furthermore, government reimbursement programs are subject to statutory and regulatory changes, administrative rulings and interpretations, determinations of intermediaries, government funding restrictions and retroactive reimbursement adjustments, all of which could materially increase or decrease the services covered by such programs, the rates paid to healthcare providers for their services, or the eligibility of providers to receive reimbursement. In addition, there can be no assurance that the Company's facilities and the provisions of services by the Company in the future will continue to meet the requirements for participation in Medicare or Medicaid programs as presently enacted or as they may be changed. Governmental Regulation. The long-term care industry is subject to extensive federal, state and local licensure and certification laws. Long-term care facilities and home health agencies are subject to annual and routine interim inspections to monitor compliance with governmental regulations. Certain laws establish minimum healthcare standards and provide for significant remedies for non-compliance including fines, refunds of prior payments, new patient admission moratoriums, federal or state monitoring of operations, and closure of facilities. The Company is also subject to federal and state laws that govern financial and other arrangements involving healthcare providers. These laws often prohibit certain direct and indirect payments or fee-splitting arrangements between healthcare 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. Possible sanctions for violations of any of these or similar restrictions or prohibitions, include loss of eligibility to participate in reimbursement programs, as well as civil and criminal penalties. Changes in interpretation or manner of enforcement of these laws or regulations could adversely affect the Company. Dependence on California. A substantial portion of the Company's billings are to the California Medicaid program, Medi-Cal. California has a less generous and 15 more heavily regulated healthcare reimbursement system that typically provides for lower reimbursement rates than do a majority of other states. And, California historically has enforced its regulations more strictly than most other jurisdictions. In addition, California has a higher applicable minimum wage and higher workers' compensation costs than most other states. The Company may be materially and adversely affected by the failure of Medi-Cal reimbursement rates to increase in proportion to cost increases, by any reduction in the levels of reimbursement, or by healthcare reform measures that substantially increase its operating costs. Further, there have been, and there are likely to continue to be, strong legislative pressures to avoid increases in Medi-Cal reimbursement levels and to impose reductions in such payments. Uncertainty of Litigation. The Company regularly is made a defendant in lawsuits by or on behalf of patients at one or more of its facilities or to whom healthcare services were provided seeking to recover for injuries sustained as a result of alleged errors and omissions. Often these suits also allege that the injuries resulted from intentional actions or omissions of healthcare personnel for whom the Company is asserted to have legal responsibility, and consequently seek awards of punitive damages. The Company also on a regular basis, is sued by persons claiming that their employment by the Company was improperly terminated, that they were denied employment or promotions because of their race, creed, religion, gender, ethnic origin or sexual orientation, or that they suffered sexual harassment or other tortuous conduct, which suits seek awards of compensatory, incidental and punitive damages. Although the Company maintains insurance for its professional errors and omissions, it is not insured for damages sustained as a result of intentional torts committed, for punitive damages or for awards of damages in wrongful termination cases. The Company's financial condition and results of operations could be adversely affected by a significant award for damages that is not covered by insurance. ITEM 2. PROPERTIES The following table sets forth information regarding the healthcare facilities owned or leased by the Company as of February 28, 1997:
Facilities Beds ----------------------------------------- ------------------------------------------ Owned Leased Managed Total Owned Leased Managed Total --------- --------- ------------ -------- --------- --------- ------------ --------- California 32 50 1 83 2,098 5,175 248 7,521 Ohio 4 4 -- 8 402 461 -- 863 North Carolina 1 10 -- 11 86 1,278 -- 1,364 Tennessee -- 8 -- 8 -- 1,097 -- 1,097 West Virginia 5 1 -- 6 554 65 -- 619 --------- --------- ------------ -------- --------- --------- ------------ --------- 42 73 1 116 3,140 8,076 248 11,464 ========= ========= ============ ======== ========= ========= ============ =========
Nine of the Company's healthcare facilities are encumbered by deeds of trusts or mortgages. The Company's home health subsidiaries, Home Health Services, Inc. and Americare Homecare, Inc. lease office space aggregating 51,549 square feet for its 28 home health locations in California and Ohio. The Company's pharmacy subsidiaries, First Class Pharmacy, Inc. and Assist- A-Care, Inc. lease approximately 51,934 square feet for its locations in California, North Carolina and Tennessee. The Company's rehabilitation subsidiary, South Coast Rehabilitation Services, Inc. leases an 8,035 square foot office in Aliso Viejo, California. 16 The Company leases office space aggregating 65,608 square feet for its corporate and regional offices in California and West Virginia. The Company also leases space for its outpatient clinics aggregating approximately 16,500 square feet in California. In the facilities that are leased, subleased, or managed, the Company's rights as lessee or sublessee could be subject to termination if the lessor or sublessor of a facility fails to pay its rent, taxes, loan obligations that are secured by the facility, if any, or other similar obligations. The Company has not experienced any such lease terminations, although there can be no assurance that the Company's rights to operate its leased or subleased facilities will not be so affected in the future. The Company's facilities are subject to various governmental zoning and use restrictions. One of the Company's facilities that provides services for the mentally disordered is currently operating pursuant to a deemed to be approved conditional use permit. In July 1992, the facility filed an application for a conditional use permit and is currently appealing the recent denial of said application. A mediator has been appointed to monitor this matter. Although there can be no assurance, the Company believes it will prevail with its appeal and that the conditional use permit will be renewed. ITEM 3. LEGAL PROCEEDINGS In 1995, a class action lawsuit, captioned Standish and Miriam Mallory and Claire Bauman vs. Regency Health Services, Inc., which had been filed against the Company in July 1994, was settled for $9,000,000. The Company's portion of this settlement, together with related legal fees and other costs, resulted in a pre-tax charge of $3,098,000, which is included in the consolidated statement of operations for the year ended December 31, 1995. Additionally, the Company is subject to claims and legal actions by patients and others in the ordinary course of business. The Company has insurance policies in varying amounts covering most of the outstanding lawsuits. If a judgment were awarded in excess of the insurance coverage, the burden would fall on the Company. The Company does not expect that the ultimate outcome of an unfavorable judgment in any of the pending legal matters would result in a material adverse effect on the Company's consolidated financial position or results of operations. However, there can be no assurances that an unfavorable judgment in future claims and legal actions would not have a material adverse effect on the Company's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded under the symbol "RHS" on the New York Stock Exchange. The quarterly price range of common stock for 1996 and 1995 are included on page 47 of the 1996 Regency Annual Report under the caption "Stock Market Information" and are incorporated herein by reference. At February 28, 1997, 15,792,157 shares of Company common stock were held of record by approximately 1,000 stockholders as reported by the Company's transfer agent. The Company has not declared or paid cash dividends on common stock since its inception, and does not currently plan to declare or pay any dividends in the foreseeable future. Covenants in a note agreement between the Company and its lenders limit the payment of cash dividends on Company common stock. Among such restrictions is a provision limiting the payment of dividends and other restricted payments, as defined, to no more than 50% of consolidated net income from and after January 1, 1996, on a cumulative basis, plus $5,000,000. ITEM 6. SELECTED FINANCIAL DATA On April 4, 1994, Regency and Care completed their merger ("Merger") accounted for as a pooling-of-interests. Consequently, the historical financial statements for periods prior to the Merger are restated as though the companies had been merged since inception. The calculation of income per share for each period presented prior to the Merger reflects the issuance of .71 of a share of Regency common stock for each share of common and common equivalent share of Care common stock. The following consolidated financial data as of and for the years ended December 31, 1996, 1995, 1994, 1993 and 1992, have been derived from the Company's audited Consolidated Financial Statements. The selected consolidated financial data set forth below should be read in conjunction with Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the Consolidated Financial Statements and the notes thereto included elsewhere in this Report.
Year Ended December 31, -------------------------------------------------------------- 1996 (2) 1995 (3) 1994 (4) 1993 1992 (5) -------- -------- -------- ---- -------- (in thousands except per share data) Net operating revenue (1).................... $558,050 $416,093 $377,336 $336,954 $295,340 Income (loss) before extraordinary item...... 6,399 4,454 (800) 11,790 10,419 Net income (loss)............................ 5,206 2,845 (800) 11,742 10,330 Income (loss) per common share before extraordinary item (fully diluted)........ .39 .27 (.05) .69 .76 Net income (loss) per common share (fully diluted).................................. .32 .17 (.05) .69 .75 Total assets................................. 353,576 338,942 250,896 242,300 164,403 Total long-term debt......................... 184,908 183,986 101,941 103,245 53,638 - ------ (1) In 1994, the Company changed its policy on recognizing revenue from exception requests filed with the Health Care Financing Administration ("HCFA"). Previously, no revenue was recognized until payment in respect of the exception request was actually received. In 1994, the Company began recognizing 50% of the estimated exception requests anticipated to be filed for the applicable period. In 1995 and 1996, the Company recognized 70% of the estimated exception requests anticipated to be received for the applicable period. 18 (2) In 1996, the Company redeemed all $48.9 million of its outstanding Convertible Subordinated Debentures resulting in an extraordinary loss on extinguishment of debt of $1,459,000 ($868,000 net of tax) and refinanced three of its Industrial Revenue Bond Issues (IRBs) with a principal balance of $7,560,000 resulting in an extraordinary loss of $546,000 ($325,000 net of tax). In addition, the Company recorded an $11,283,000 ($6,769,000 net of tax) charge, primarily related to severance, the write-off of property which will have no value under the Company's new operating model, allowances for certain notes and non-patient receivables and a reduction of the reserve for assets held for sale recorded in 1995. (3) In 1995, a class action lawsuit, which had been filed against the Company in July 1994, was settled for $9,000,000. The Company's portion of this settlement, together with related legal fees and other costs, resulted in a pre-tax charge of $3,098,000 ($1,921,000 net of tax), which is included in the consolidated statement of operations for the year ended December 31, 1995. In addition, the Company repaid its $30 million, 8.10% Senior Secured Notes resulting in costs and a prepayment penalty of $2,681,000 ($1,609,000 net of tax), classified as an extraordinary item and the Company recorded a $9,000,000 ($8,200,000 net of tax) charge, primarily related to the disposition of certain facilities (see Note 14 to the Company's Consolidated Financial Statements). (4) As required under the pooling-of-interests accounting method, all fees and expenses related to the Merger and restructuring of the combined companies were reflected in the Consolidated Statement of Operations of the Company for the year ended December 31, 1994, resulting in a pre-tax charge of $14,700,000 ($10,600,000 net of tax), including a reserve for losses associated with the disposal of duplicate facilities. Additionally, in 1994 the Company recorded a pre-tax charge of approximately $1,600,000 ($975,000 net of tax) related to the closure of a facility damaged by the Northridge, California earthquake in 1994. (5) During Care's reorganization period (prior to emergence from bankruptcy proceedings on December 31, 1990), Care established a reserve for losses on discontinuance of certain operations. These losses were originally included as part of an overall provision/(credit) for reorganization items. During the year ended December 31, 1992, the Company recognized pre-tax gains resulting from the reversal of reserves for losses on the discontinuance of certain operations of $461,000 and the reversal of reserves for expenses and fees resulting from Care's Chapter 11 proceedings of $75,000. Additionally, in 1992 the Company recognized a gain of $1,000,000 on the disposal of a nursing facility.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Overview of Strategic Plan The healthcare industry continues to change as the government, commercial payors and healthcare providers like the Company focus on rising healthcare costs. It is the Company's belief, as well as that of the government and commercial payors, that the most effective delivery system for reducing costs is a regionally oriented market based model within the context of the evolving managed care system. Presently, only 5.1% of the Company's revenues are generated from managed care payors, however, management and other members of the industry believe the Medicare system will be adopting a prospective pay system in the coming years for skilled nursing facilities. Furthermore, the Company believes more Medicare participants will be entering managed care plans as they typically offer more services at a fixed price. Considering the anticipated changes in the industry, the Company believes 19 that the most successful business strategy in the future will be to provide both payors and patients, collectively the customers, cost effective delivery of care with high customer satisfaction. This will mean significant changes in the current delivery system. The Company believes its future delivery system will need to have the following components: o Focus on customers through a fully integrated delivery system which will allow for "one-stop shopping". This means that the Company will need to provide multiple low cost services across the continuum of care in each of the regions in which it provides care. In the future, acquisitions will focus on completing the continuum of care within the Company's various regional markets. o Name recognition as customers must be convinced that the Company provides consistent service throughout the continuum of care. o Regionally focus to ensure that diverse services are available in each market and that those services are integrated rather than the traditional focus on separate business lines. o Focus on placing the patient in the most effective setting with the lowest cost while demonstrating positive outcomes from the delivery of medicine and care. Basically, the Company will strive to provide high quality service across the continuum of care at a low cost. o Focus on a low overhead cost structure. Reengineering to eliminate non-value added services and investments in information technology will be required in order to reduce costs and enable the Company to provide consistent, integrated, low cost services. The investment in information technology will also provide management critical information in a timely manner to effectively manage its business in the managed care environment. During 1996 the Company developed and began to implement its strategic plan to address these issues. In connection with this plan, the Company acquired four acute rehabilitation hospitals, ten outpatient rehabilitation clinics and six neurological treatment centers effective January 1, 1997. The purchase price was $43.0 million, made up of a cash payment of $36.3 million and notes payable totaling $6.7 million. This acquisition was one of many steps in the Company's plan to complete the continuum of care in its various regional markets. The Company has also hired two individuals with extensive experience in acquisitions to focus on the acquisition of home health agencies and outpatient clinics, primarily in our existing nursing operations markets to complete the continuum of care in those markets. During 1996, the Company recorded a restructuring and other non-recurring charge of $11.3 million primarily related to initiatives designed to reengineer the operating model through which the Company manages its business and lower its operating costs. Also included in the charge were amounts for consulting and other obligations for which there is no future benefit, reductions in the assets held for sale reserve established in 1995, additional reserves for notes and non-patient receivables and a charge for the impairment of other long-term assets. A major component of the reengineering, in terms of importance and cost, will involve integrating the Company's information systems to allow for the integrated delivery of patient care across all service lines within the continuum of care. The Company will therefore be making a significant investment in information technology over the next five years. This investment will result in cost savings in the future. The first phase of the investment in information technology will be investments in the infrastructure such as a communications network and servers combined with upgrades of the accounts payable software, the acquisition of Kronos time clocks and other transaction systems, which are expected to be completed during 1997. The second phase will be the integration of the various computer systems used by the different divisions of the Company to allow for a seamless transfer of patient care information across the entire continuum of care. The integration of the various systems is expected to begin during 1998. The Company incurs certain costs and operating inefficiencies in connection with acquisitions following such acquisition, relating to the integration of such facility's financial and administrative systems, physical plant and other aspects of its operations into those of the Company. In addition, the introduction of a substantial portion of the Company's contract rehabilitation therapy, pharmacy and other ancillary services to a new operation may take as long as 12 months to fully implement. There can be no assurance that each of the 20 service providers the Company may acquire will be profitable. In addition, there can be no assurance that new acquisitions that result in significant integration costs and inefficiencies will not adversely affect the Company's profitability. General In connection with the strategy and acquisitions discussed above, the Company has created the Regency Rehabilitation and Specialty Services Division which includes the Acute Rehabilitation Hospitals (and related outpatient clinics and neurological treatment centers), the Contract Rehabilitation Therapy Operations and future outpatient clinic acquisitions. The following table sets forth certain operating data for the Company on the dates indicated:
February 28, December 31, 1997 1996 1995 1994 Nursing center operations Facilities............................ 106 107 94 93 Licensed beds......................... 11,119 11,200 9,178 9,134 Subacute beds......................... 1,108 1,108 1,040 879 Subacute units........................ 46 46 42 35 Regency rehabilitation and specialty services division Acute rehabilitation operations Rehabilitation hospitals.............. 4 -- -- -- Neurological centers.................. 6 -- -- -- Licensed beds......................... 345 -- -- -- Outpatient clinics.................... 10 -- -- -- Contract rehabilitation therapy operations Non-affiliated facilities served...... 116 114 79 -- Regency operated facilities served.... 63 57 27 -- ======= ======= ======= ======= Total................................ 179 171 106 -- ======= ======= ======= ======= Pharmacy operations Non-affiliated facilities served....... 84 84 5 5 Regency operated facilities served..... 70 68 36 34 ======= ======= ======= ======= Total................................. 154 152 41 39 ======= ======= ======= ======= Home health agencies........................ 28 29 29 28
Nursing Center Operations The Company's nursing center operations derive net operating revenue from the performance of routine and ancillary services at the Company's facilities. Revenue from routine services is comprised of charges for room and board and basic nursing services for the care of patients, including those in the Company's subacute specialty units. Revenue from ancillary services is comprised of charges for rehabilitative services, subacute specialty services, and pharmaceutical products and services provided to patients at the Company's facilities. Nursing center operations derive most of its ancillary services revenue from Medicare- and HMO-eligible patients. The Company has classified revenue from nursing center operations as either basic nursing care revenue or subacute revenue. Basic nursing care revenue includes charges for room and board 21 for non-Medicare and non-HMO patients. Subacute revenue includes room and board and basic nursing services for Medicare and HMO patients and revenues from all ancillary services provided to patients at the Company's facilities. Effective July 1, 1994, the Company elected to dispose of two healthcare facilities due to excess capacity in certain markets caused by the Regency and Care merger (the "Merger") and to dispose of a residential facility operated by Care (the "Dispositions"). The Company established a $2.7 million reserve in 1994 related to these dispositions, which consisted of a write-down of the assets to estimated fair value, transaction costs, and a provision for anticipated operating losses to the time the transactions were completed. These facilities were disposed of in 1995 and the results of operations of these facilities since July 1, 1994 are not reflected in the operations of the Company. During 1995 the Company exchanged leasehold interests in three healthcare facilities with 360 beds in New Mexico for leasehold interests in four healthcare facilities with 461 beds in Ohio previously operated by another company. In 1995, the Company also opened a newly constructed facility and disposed of one additional facility. Effective December 31, 1995, the Company determined to dispose of 13 facilities located in California as part of its strategic plan of diversifying from California Medicaid. The results of operations of these facilities continue to be reflected in the Company's financial statements until each disposition is completed. During 1996 the Company disposed of six of these facilities. On January 1, 1997 the Company disposed of one additional facility. Effective February 1, 1996, the Company acquired 18 healthcare facilities with 2,375 beds in Tennessee and North Carolina, accounted for under the purchase method of accounting. Effective April 1, 1996, the Company acquired a healthcare facility with 64 nursing beds and 22 assisted living beds located in Lexington, North Carolina, accounted for under the purchase method of accounting. Ancillary Businesses Operations In July 1995, the Company acquired SCRS & Communicology, Inc. ("SCRS") accounted for under the purchase method of accounting. SCRS provides rehabilitation services to Company operated and third party healthcare facilities in 12 states in the West, Midwest, and Southeast. From July to December 1995, 79% of SCRS revenues were derived from providing services to non-affiliated healthcare providers. Two non-affiliated healthcare providers represented approximately 38% of SCRS total revenues from July to December 1995 and approximately 24% in 1996. In 1996, 70% of SCRS revenues were derived from providing services to non-affiliated healthcare providers. The Company's pharmacy operations provide prescription services and basic pharmaceutical dispensing programs to Company and third party healthcare facilities. During 1995, 55% of revenues from pharmacy operations were derived from providing services to non-affiliated healthcare providers and patients at Regency facilities billed directly to third-party payors. In January and February of 1996, the Company acquired three additional pharmacy operations accounted for under the purchase method of accounting. During 1996, 65% of the revenues of pharmacy operations were derived from providing services to non-affiliated healthcare providers and patients at Regency facilities billed directly to third party payors. The Company's home health operations provide skilled nursing, rehabilitation and other services in selected areas in California and Ohio. The Company has positioned its home healthcare capabilities to serve its facilities' home health needs. During January 1997, two of the home healthcare agencies were consolidated resulting in a reduction of one agency. 22 Results of Operations The following table sets forth the amounts of certain elements of net operating revenue and the percentage of total net operating revenue for the periods presented: Year ended December 31, 1996 1995 1994 ---------------------- --------------------- --------------------- (Dollars in thousands) Basic nursing care................. $285,819 51% $227,243 55% $216,623 58% Subacute........................... 169,664 31 134,601 32 129,663 34 ------------ -------- ----------- -------- ----------- -------- Total nursing center operations 455,483 82 361,844 87 346,286 92 Contract rehabilitation therapy operations to non-affiliates (1). 42,577 8 12,240 3 -- -- Pharmacy operations to 21,994 4 7,157 2 4,697 1 non-affiliates (2)............... Home healthcare operations......... 35,302 6 31,792 7 24,456 6 Interest........................... 2,694 -- 3,060 1 1,897 1 ============ ======== =========== ======== =========== ======== Total......................... $558,050 100% $416,093 100% $377,336 100% ============ ======== =========== ======== =========== ======== (1) Net of intercompany billings of $18,004,000 and $3,267,000 for the years ended December 31, 1996 and 1995, respectively. (2) Net of intercompany billings of $11,912,000, $5,971,000, and $5,107,000, for the years ended December 31, 1996, 1995 and 1994, respectively.
The following table sets forth certain operating data for the Company for the periods presented:
Year ended December 31, 1996 1995 1994 --------- -------- ---------- Patient Days by Payor: Medicare........................... 307,313 244,729 239,003 Private/Other...................... 760,992 678,310 708,477 Managed Care....................... 116,508 94,072 72,065 Medicaid........................... 2,476,530 1,905,571 1,926,451 ========= ========= ========== Total........................... 3,661,343 2,922,682 2,945,996 ========= ========= ========== Home Health Visits.................... 253,855 260,526 217,662 Home Health Hours (1)................. 448,717 395,871 -- Revenue Mix: Medicare........................... 29.3% 31.9% 31.3% Private/Other...................... 25.0% 22.8% 21.4% Managed Care....................... 5.1% 5.4% 4.6% Medicaid........................... 40.6% 39.9% 42.7% (1) Information not compiled in 1994.
23 The following table presents the percentage of net operating revenue represented by certain items reflected in the Company's Consolidated Statements of Operations for the periods indicated:
For the year ended December 31, 1996 1995 1994 ------ ------ ------ Net operating revenue.............................100.0% 100.0% 100.0% ------ ------ ------ Costs and expenses: Operating expenses............................. 81.2 80.7 81.6 Corporate general and administrative........... 4.4 4.8 5.1 Rent expense................................... 4.5 4.0 4.1 Depreciation and amortization.................. 2.7 2.4 2.5 Interest expense............................... 3.2 2.3 2.1 Merger and restructuring expenses.............. -- -- 3.9 Class action lawsuit settlement................ -- 0.8 -- Restructuring and other non-recurring charges.. 2.0 2.2 0.4 ------ ------ ------ Total costs and expenses....... 98.0 97.2 99.7 ====== ====== ====== Income before provision for income taxes and extraordinary item.......................... 2.0% 2.8% 0.3% ====== ====== ======
Fiscal Year Comparison 1996 to 1995 Net Operating Revenue The Company's net operating revenue for the fiscal year ended December 31, 1996 ("Fiscal 1996") was $558.1 million compared to $416.1 million for the fiscal year ended December 31, 1995 ("Fiscal 1995"), an increase of $142.0 million or 34.1%. Net operating revenue from nursing center operations increased $93.7 million or 25.9% to $455.5 million from $361.8 million primarily due to revenues of $78.8 million from the 1996 acquisition of 19 nursing facilities and an increase in same store revenues (including the impact of sold buildings) of $14.9 million. The increase in same store revenues (excluding sold buildings) was primarily due to an increase in patient days of 3.9% and an increase in average rates per patient day of 5.7%, on a same store basis. The increase in reimbursement rates per patient day of 5.7% was primarily due to providing services to higher acuity patients, an increase in the Medi-Cal reimbursement rates beginning in August 1996 and the Company recognizing revenues associated with the elimination of the Medicare Routine Cost Limit (RCL) inflationary freeze. The increase in services provided to higher acuity patients is demonstrated by the shift in payor mix on a same store basis from Medicaid (43.2% to 42.3%) and private and other (20.4% to 19.5%) to Medicare (30.1% to 31.1%) and managed care (6.2% to 7.0%). The Medi-Cal rate increases in August 1996 resulted in approximately $1.0 million in revenues. The revenue associated with the elimination of the RCL inflationary freeze totaled $1.5 million. Net operating revenue from contract rehabilitation therapy operations to non-affiliates increased $30.3 million or 247.8% in 1996 over 1995 primarily due to the operations of SCRS being included for the full year in 1996 versus a half year in 1995 and an increase in the number of non-affiliated facilities served to 114 in 1996 from 79 in 1995. Net operating revenue from pharmacy operations to non-affiliates and services to patients in the Company's facilities billed directly to third parties increased $14.8 million or 207.3% in 1996 over 1995, primarily due to the acquisitions of Assist-A-Care pharmacy in January 1996 and Executive Pharmacy in February 1996 (collectively, the "Pharmacy Acquisitions"). Net operating revenue from the pharmacy acquisitions was approximately $12.0 million in 1996. Net operating revenue from home healthcare operations grew $3.5 million or 11.0% in 1996 over 1995 primarily due to an increase in treatment hours from 395,871 in 1995 to 448,717 in 1996 and an increase in revenue per visit. 24 Costs and Expenses Total costs and expenses increased $142.7 million or 35.3% to $547.0 million (98.0% of net operating revenue) in 1996 from $404.3 million (97.2% of net operating revenue) in 1995. Operating expenses as a percentage of net operating revenue increased from 80.7% in 1995 to 81.2% in 1996. The increase resulted from the incurrence of increased labor costs in the nursing center operations while reimbursement rates per patient day for room and board charges remained relatively flat for the Medi-Cal and Medicare systems during the first and second quarters of 1996. In addition, the home health agencies participating in the Medicare Prospective Pay System pilot project beginning in 1996 did not adequately reduce costs at the outset of this program in the first quarter of 1996. The Company made the necessary cost reductions during the second and third quarters and realized the benefits of the Medi-Cal rate increases and the elimination of the RCL freeze discussed above in the third and fourth quarters. For the fourth quarter of 1996, operating costs as a percentage of revenue were 80.3%. Corporate general and administrative expense is the corporate overhead and regional costs related to the supervision of operations. The expense increased from $19.8 million in 1995 to $24.3 million in 1996 due primarily to the acquisition of 18 healthcare facilities effective February 1, 1996, the acquisition of one healthcare facility effective April 1, 1996 and the Pharmacy Acquisitions (collectively, the "1996 Acquisitions"). However, this expense decreased as a percentage of revenue from 4.8% in 1995 to 4.4% in 1996. The decrease as a percentage of revenue is attributed to achieving economies of scale through acquisition, the reduction of certain corporate office expenses and same store growth. Rent expense as a percentage of revenue increased from 4.0% in 1995 to 4.5% in 1996 primarily due to the assumption of lease obligations from the 1996 Acquisitions. Depreciation and amortization expense as a percentage of net operating revenue increased to 2.7% in 1996 from 2.4% in 1995 primarily due to goodwill amortization related to the purchase of SCRS in July 1995 and the 1996 Acquisitions. Interest expense increased as a percentage of net operating revenue to 3.2% in 1996 from 2.3% in 1995 primarily due to the Company issuing the 9 7/8% Senior Subordinated Notes (the "Senior Subordinated Notes") in October 1995 partially offset by the repayment of the 8.1% Senior Secured Notes in that month, as well as the issuance of the 12 (0)% Subordinated Notes in June 1996 partially offset by the repayment of the 6 (OMEGA)% Convertible Subordinated Debentures in July 1996. In Fiscal 1995, the Company settled its class action lawsuit resulting in a pre-tax charge of $3.1 million ($1.9 million net of taxes). As discussed above, the Company began the transition from development to the implementation of its strategic plan to achieve lower operating costs and offer an integrated delivery system during Fiscal 1996. Initiatives associated with the restructuring include: making a significant investment in information technology; integrating divisional operations within regional markets; consolidating and automating the pharmacy operations; reducing the administrative costs within the home healthcare operations; automating and streamlining certain functions within the nursing operations; and streamlining the corporate support structure. As a result of these initiatives, during the fourth quarter of 1996 the Company recorded a restructuring charge of $6.6 million ($4.0 million after tax). The Company also recorded non-recurring charges related to consulting fees owed for which there is no future benefit, the establishment of additional reserves for certain notes and non-patient receivables, the impairment of certain other long-term assets and a reduction of the assets held for sale reserve established in 1995 in an aggregate amount of $4.7 million ($2.8 million after tax). In Fiscal 1996, the Company recorded an extraordinary charge of $1.2 million, net of tax, resulting from the redemption of all $48.9 million of the outstanding Convertible Subordinated Debentures and the refinancing of the 25 Industrial Revenue Bond Issues (IRBs). The redemption of the Convertible Subordinated Debentures produced an extraordinary loss on extinguishment of debt of $868,000, net of tax, resulting from the write off of unamortized underwriting costs and the refinancing of the IRBs resulted in an extraordinary loss on extinguishment of debt of $325,000 net of tax, resulting from the write off of unamortized underwriting costs and a call premium paid. In Fiscal 1995, the Company repaid its $30.0 million Senior Secured Notes, resulting in costs and a prepayment penalty totaling $2.7 million ($1.6 million net of taxes), classified as an extraordinary item. Fiscal Year Comparison 1995 to 1994 Net Operating Revenue The Company's net operating revenue for Fiscal 1995 was $416.1 million compared to $377.3 million for the fiscal year ended December 31, 1994 ("Fiscal 1994"), an increase of $38.8 million or 10.3%. Net operating revenue from nursing operations increased $15.6 million or 4.5% due to increased levels of reimbursement and a shift in payor mix from Medicaid to Medicare and managed care, partially offset by a slight decrease in total patient days. The average increase in reimbursement rates for all payors was 5.3% and was primarily due to providing services to higher acuity patients. The Company experienced a 0.8% net decrease in total patient days in Fiscal 1995 from Fiscal 1994, consisting of a decrease of 20,880 and 30,167 from Medicaid and private and other sources, respectively, and an increase of 5,726 and 22,007 from Medicare and managed care, respectively. Net operating revenue from home health operations grew $7.3 million or 30.0% in Fiscal 1995 over Fiscal 1994, primarily reflecting additional patient visits. Pharmacy operations revenues increased $2.5 million or 52.4% in Fiscal 1995 over Fiscal 1994, primarily as a result of increased pharmacy services provided to patients serviced in the Company's facilities and billed directly to the appropriate payors and not the facility. Net operating revenue from contract rehabilitation therapy operations are a result of the purchase of SCRS in July 1995. Interest income increased $1.2 million in Fiscal 1995 over Fiscal 1994 due to investment of proceeds from the issuance of the Senior Subordinated Notes in an aggregate amount of $110.0 million in October 1995. Costs and Expenses Total costs and expenses for Fiscal 1995 increased $28.2 million, or 7.5%, to $404.3 million (97.2% of net operating revenue) from $376.1 million (99.7% of net operating revenue) for Fiscal 1994. This decrease in total costs and expenses as a percentage of revenues was primarily a result of the merger and restructuring expenses incurred in Fiscal 1994, partially offset by the class action lawsuit settlement and the additional disposition of assets charge recorded in Fiscal 1995. Excluding these non-recurring expenses, total costs and expenses increased to $392.2 million (94.3% of net operating revenue) in Fiscal 1995 from $359.9 million (95.4% of net operating revenue) in Fiscal 1994, primarily as a result of providing more services to patients. Operating expenses as a percentage of net operating revenue decreased to 80.7% for Fiscal 1995, from 81.6% for Fiscal 1994. This decline was primarily attributable to growth in the Company's higher margin businesses such as subacute care, contract rehabilitation therapy and pharmacy services in Fiscal 1995. Corporate general and administrative expense increased $0.4 million, or 2.2% from Fiscal 1994 to Fiscal 1995, while decreasing as a percentage of net operating revenue to 4.8% for Fiscal 1995, from 5.1% for Fiscal 1994. The decrease as a percentage of revenues was attributable to the Company's achieving 12 months of economies of scale in 1995 by eliminating duplicate costs after the Merger in 1994. 26 Interest expense as a percentage of net operating revenue increased to 2.3% in Fiscal 1995 from 2.1% in Fiscal 1994, primarily as a result of the issuance of the Senior Subordinated Notes in October 1995. As a result of the Merger, in Fiscal 1994, the Company accrued $14.7 million ($10.6 million net of taxes) of estimated fees and expenses related to the transaction as required under the pooling-of-interests accounting method. No comparable fees and expenses were incurred during Fiscal 1995. In Fiscal 1995, the Company settled its class action lawsuit resulting in a pre-tax charge of $3.1 million ($1.9 million net of taxes). In Fiscal 1995, the Company completed the disposition of previously identified facilities and determined to dispose of an additional 13 nursing facilities located in California, resulting in an additional pre-tax charge of $9.0 million ($8.2 million net of taxes). In Fiscal 1994, the Company incurred a loss of $1.6 million ($1.0 million net of taxes) resulting from closure of one facility which was substantially damaged in the January 1994 Northridge, California earthquake, and the abandonment of its leasehold interest. In Fiscal 1995, the Company repaid its $30.0 million Senior Secured Notes, resulting in costs and a prepayment penalty totaling $2.7 million ($1.6 million net of taxes), classified as an extraordinary item. Liquidity and Capital Resources Working capital at December 31, 1996 decreased $50.0 million to $67.2 million (including cash and cash equivalents of $22.9 million) from $117.2 million (including cash and cash equivalents of $104.2 million) at December 31, 1995. The decrease was primarily attributable to funding the 1996 Acquisitions (including funding of working capital), funding of a workers' compensation trust and the purchase of treasury stock. The Company established a revocable workers' compensation claims payment trust to pre-fund its workers' compensation obligations which was funded for Fiscal 1995 in March 1996 with approximately $10.6 million from available cash. The Company anticipates funding an additional $5 million to $6 million in March of 1997. During Fiscal 1996, the Company's receivables increased approximately $29.7 million primarily related to the 1996 Acquisitions and growth in ancillary businesses. The estimated third party settlements increased by $9.4 million partially due to recording revenue related to RCL exceptions and the elimination of the RCL inflationary freeze. As of December 31, 1996 and 1995, the Company had RCL exception request receivables totaling $8.1 million and $4.5 million, respectively. The Company's major requirements for liquidity relate to funding working capital, capital improvements, and debt service obligations. The Company must also provide funding to cover potential delays, temporary cessations or interruption in payments by third-party payors due to political or budgetary constraints. In addition, as part of its strategic plan, the Company anticipates investing approximately $40 million in information technology over the next five years. A significant portion of this investment will be financed through operating leases. Management believes that these liquidity needs can be met from available cash, internally generated funds and existing borrowing capacity under the NationsBank credit agreement (discussed below). The Company's healthcare facilities require capital improvements for renovations and improvements in physical appearance. Future capital improvements may be required as a result of routine regulatory inspections. In addition, the Company is and will continue to invest in improving its information systems. The Company's capital expenditures for the years ended December 31, 1996 and 1995 were approximately $12.6 million and $14.2 million, respectively. These capital expenditures have been financed through a combination of internally generated funds and debt. The Company expects to spend approximately an aggregate of $14.0 million for capital expenditures during 1997 to be financed through borrowings under the NationsBank credit agreement (discussed below) and funds generated from operations. 27 The Company has financed its acquisitions from a combination of borrowings and funds generated by operations. The Company expects to finance future acquisitions from a combination of existing cash, the NationsBank credit agreement (discussed below) and alternative sources such as real estate investment trusts. Depending on the numbers, size and timing of any such transactions, the Company may in the future require additional financing in order to continue to make acquisitions. During 1996, the Company purchased 862,000 shares of Company common stock at an average price of $9.56 per share. The transactions, accounted for using the cost method, reduced stockholders' equity by $8.3 million. On June 28, 1996 the Company issued 12(0)% Junior Subordinated Notes ("Junior Subordinated Notes") in an aggregate amount of $50 million. Interest on the Notes will be payable semi-annually on January 15 and July 15 of each year, commencing January 15, 1997. The Junior Subordinated Notes will mature on July 15, 2003, unless previously redeemed. Net proceeds received by the Company totaled approximately $48.4 million and funded the redemption of the Company's outstanding 6(OMEGA)% Convertible Subordinated Debentures due 2003 on July 29, 1996 (see Note 3 to the Consolidated Financial Statements). Effective September 30, 1996, the Company refinanced three of its Industrial Revenue Bond Issues (IRBs) with an aggregate outstanding principal balance of $7,560,000 with three new issues of tax exempt IRBs maturing through September 2012. One of the new issues bears interest at rates ranging from 4.2% to 6.0% based on the maturity dates of the individual bonds. The other two IRBs bear interest at a variable rate initially set at 4.0%, which is capped at 12.0% (see Note 3 to the Consolidated Financial Statements). The IRBs are now secured by irrevocable letters of credit rather than mortgages on the specific facilities. In Fiscal 1996, the Company recorded an extraordinary charge of $1.2 million resulting from the redemption of all $48.9 million of the outstanding Convertible Subordinated Debentures and the refinancing of the IRBs. The redemption of the Convertible Subordinated Debentures produced an extraordinary loss on extinguishment of debt of $868,000, net of tax, resulting from the write off of unamortized underwriting costs and the refinancing of the IRBs resulted in an extraordinary loss on extinguishment of debt of $325,000 net of tax, resulting from the write off of unamortized underwriting costs and a call premium paid. On December 28, 1995 the Company entered into a revolving credit loan agreement ("Credit Agreement") with NationsBank of Texas, N.A. as agent for a group of banks, which provided up to $50 million in a revolving line of credit and letters of credit. No borrowings were drawn on the Credit Agreement at December 31, 1995 and throughout 1996. On December 20, 1996, the Company increased the available financing to $100 million and revised certain terms and covenants through the Amended and Restated Credit Agreement ("Amended Credit Agreement"). Borrowings bear interest at either the Base Rate plus up to .50% or the Adjusted Eurodollar Rate plus .75% to 2.00%, depending on the Company's Consolidated Adjusted Leverage Ratio, all as defined in the Amended Credit Agreement. The Amended Credit Agreement has scheduled commitment reductions of $25 million each on January 2, 1999 and 2000 and expires on January 2, 2001. The Amended Credit Agreement is collateralized by accounts receivable, all of the common stock of each of the Company's subsidiaries and certain other current assets of the Company and its subsidiaries. The Amended Credit Agreement, among other things, (a) requires the Company to maintain certain financial ratios, and (b) restricts the Company's ability to incur debt and liens, make investments, pay dividends, purchase treasury stock, prepay or modify certain debt of the Company, liquidate or dispose of assets, merge with another corporation, and create or acquire subsidiaries. As of December 31, 1996, $16.2 million of standby letters of credit were issued in connection with the Company's self-insured workers' compensation programs and refinanced Industrial Revenue Bonds (discussed above) out of a total available of $35 million. On January 2, 1997 the Company borrowed $40 million under the Amended Credit Agreement principally to fund the acquisition of four acute rehabilitation hospitals, ten outpatient rehabilitation clinics and six neurological treatment centers for $36.3 million in cash and notes payable totaling $6.7 million. 28 In October 1995, the Company issued the Subordinated Notes in an aggregate amount of $110 million. Interest on the Subordinated Notes will be payable semi-annually commencing April 15, 1996. The Subordinated Notes mature on October 15, 2002, unless previously redeemed. The net proceeds to the Company were approximately $106.7 million, of which approximately $31.5 million were used to repay the principal and prepayment penalty on the 8.1% Senior Secured Notes and $47.4 million was used for acquisitions subsequent to December 31, 1995 (see Notes 3 and 13 to the Company's Consolidated Financial Statements). Seasonality The Company's income from operations before fixed charges generally fluctuates from quarter to quarter. The fluctuation is related to several factors: the timing of Medicaid rate increases, seasonal census cycles, and the number of calendar days in a given quarter. As a result, the Company's income from operations before fixed charges tends to be higher in its third and fourth quarters when compared to the first and second quarters. Impact of Inflation The healthcare industry is labor intensive. Wages and other labor costs are especially sensitive to inflation. Increases in wages and other labor costs as a result of inflation, or increases in federal or state minimum wages without a corresponding increase in Medicare and Medicaid reimbursement rates, could adversely impact the Company. Reimbursement The majority of the Company's net operating revenue is derived from services provided under the Medicare and Medicaid programs. Numerous proposals relating to healthcare reform have been or may be introduced in the United States Congress, state legislatures or by governmental agencies who regulate the Medicare and Medicaid programs. It is uncertain what reform will ultimately be enacted by the federal government, any state government or governmental agencies and therefore, the Company cannot predict at this time the impact on the Company of any proposed reforms. As discussed above, the Company provides contract rehabilitation and pharmacy services to both Regency operated and non-affiliated facilities. Under current Medicare regulations, reimbursement for these services provided to Medicare eligible patients in Regency facilities is based upon the related entity's cost to provide the services unless a significant portion of the related entity's revenues are derived from non-affiliated facilities. If a significant portion of the related entity's revenues are derived from non-affiliated facilities, Medicare will reimburse the facility's cost, which includes a profit paid to the related entity. During 1995 and prior years, the Company was reimbursed by Medicare based on its pharmacy operation costs on billings to Regency facilities, as it did not meet the significant portion criteria. After the acquisition of Assist-A-Care Pharmacy and Executive Pharmacy in 1996, the Company believes it meets the significant portion criteria and is recording a profit on billings for pharmacy services provided to Medicare eligible patients in Regency facilities. The Company believes it meets the significant portion criteria for its contract rehabilitation therapy operations provided by SCRS, and therefore has recorded a profit on billings to Regency facilities since the acquisition of SCRS. Medicare regulations do not define a "significant portion," therefore, the Company's and Medicare's interpretations could differ, which could result in retroactive adjustments related to the profit on billings to Regency facilities for pharmacy and contract rehabilitation services. In the federal budget deficit reduction bill, various reimbursement rules and regulations were adopted by the federal government that pertain to the Company. The changes to regulations promulgated under OBRA, some of which expand the remedies available to enforce regulations mandating minimum healthcare standards, may have an adverse effect on the Company's operations. The Company is unable to predict the particular effect on the Company until the manner in which these regulations are implemented becomes known. 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements and Supplementary Data Report of Independent Public Accountants.............................. 31 Consolidated Balance Sheets as of December 31, 1996 and 1995.......... 32 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994................................... 34 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994................................... 35 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994................................... 36 Notes to Consolidated Financial Statements............................ 38 30 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Regency Health Services, Inc.: We have audited the accompanying consolidated balance sheets of REGENCY HEALTH SERVICES, INC. (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the financial position of Regency Health Services, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Orange County, California February 14, 1997 ARTHUR ANDERSEN LLP 31 REGENCY HEALTH SERVICES, INC. CONSOLIDATED BALANCE SHEETS (In thousands) ASSETS
December 31, 1996 1995 ---- ---- CURRENT ASSETS: Cash and cash equivalents........................................... $ 22,875 $104,238 Restricted cash..................................................... 4,425 -- Accounts receivable, net of allowances of $4,723 and $3,757 at December 31, 1996 and 1995, respectively.......................... 80,949 51,203 Estimated third party settlements................................... 10,180 800 Notes and other receivables......................................... 1,355 2,182 Deferred income taxes............................................... 6,898 5,447 Assets held for sale................................................ 6,915 8,970 Other current assets................................................ 7,819 6,396 ------------ ------------ Total current assets........................................ 141,416 179,236 ------------ ------------ PROPERTY AND EQUIPMENT: Land................................................................ 21,207 21,249 Buildings and improvements.......................................... 100,120 96,396 Leasehold interests - other......................................... 17,640 17,556 Leasehold interests - related party................................. 1,989 2,075 Equipment........................................................... 38,054 24,610 ------------ ------------ 179,010 161,886 Less accumulated depreciation and amortization...................... (43,938) (34,679) ------------ ------------ Total property and equipment................................ 135,072 127,207 ------------ ------------ OTHER ASSETS: Mortgage notes receivable, net of allowances of $1,352 and $951 at December 31, 1996 and 1995, respectively......................... 1,014 5,163 Goodwill, net of accumulated amortization of $3,700 and $563 at December 31, 1996 and 1995, respectively......................... 53,753 13,621 Other assets, net of accumulated amortization of $3,736 and $2,206 at December 31, 1996 and 1995, respectively...................... 22,321 13,715 ------------ ------------ Total other assets.......................................... 77,088 32,499 ============ ============ $353,576 $338,942 ============ ============ The accompanying notes are an integral part of these consolidated statements.
32 REGENCY HEALTH SERVICES, INC. CONSOLIDATED BALANCE SHEETS (Continued) (In thousands, except par value) LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, 1996 1995 ---- ---- CURRENT LIABILITIES: Current portion of long-term debt................................... $ 2,418 $ 4,371 Accounts payable.................................................... 24,958 22,285 Accrued expenses.................................................... 8,290 5,946 Accrued compensation................................................ 26,253 18,051 Accrued workers' compensation....................................... 4,338 5,377 Deferred revenue.................................................... 2,407 1,743 Accrued interest.................................................... 5,578 4,231 ------------ ----------- Total current liabilities................................... 74,242 62,004 LONG-TERM DEBT, NET OF CURRENT PORTION................................. 182,490 179,615 OTHER LIABILITIES AND NONCURRENT RESERVES.............................. 10,878 8,988 DEFERRED INCOME TAXES.................................................. 5,018 7,946 ------------ ----------- Total liabilities........................................... 272,628 258,553 ------------ ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $.01 par value; authorized - 35,000 shares; 15,919 and 16,670 shares issued and outstanding at December 31, 1996 and 1995, respectively, net of 862 shares held in treasury in 1996.......................................................... 168 167 Additional paid-in capital.......................................... 52,031 56,679 Retained earnings................................................... 28,749 23,543 ------------ ----------- Total stockholders' equity.................................. 80,948 80,389 ============ =========== $353,576 $338,942 ============ =========== The accompanying notes are an integral part of these consolidated statements.
33 REGENCY HEALTH SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Year Ended December 31, 1996 1995 1994 ---- ---- ---- NET OPERATING REVENUE..................................... $558,050 $416,093 $377,336 ------------ ------------- ------------ COSTS AND EXPENSES: Operating expenses..................................... 453,131 335,849 307,807 Corporate general and administrative................... 24,292 19,811 19,392 Rent expense........................................... 24,956 16,767 15,555 Depreciation and amortization.......................... 15,317 10,122 9,295 Interest expense....................................... 18,060 9,676 7,844 Merger and restructuring expenses...................... -- -- 14,650 Class action lawsuit settlement........................ -- 3,098 -- Restructuring and other non-recurring charges.......... 11,283 9,000 1,600 ------------ ------------ ----------- Total costs and expenses............................ 547,039 404,323 376,143 ------------ ------------ ----------- INCOME BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM................................................... 11,011 11,770 1,193 PROVISION FOR INCOME TAXES................................ 4,612 7,316 1,993 ----------- ----------- ---------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 6,399 4,454 (800) EXTRAORDINARY ITEM - Loss on extinguishment of debt, net of applicable income taxes of $812 and $1,072 in 1996 and 1995, respectively..................................... (1,193) (1,609) -- ----------- ----------- ---------- NET INCOME (LOSS)......................................... $ 5,206 $ 2,845 $ (800) =========== =========== ========== INCOME (LOSS) PER SHARE: Income (loss) before extraordinary item................... $ .39 $ .27 $ (.05) Extraordinary item........................................ (.07) (.10) -- ------------ ------------ ----------- Net income (loss) per share............................... $ .32 $ .17 $ (.05) ============ ============ =========== Weighted average shares of common stock and equivalents... 16,476 16,654 16,545 ============ ============ =========== The accompanying notes are an integral part of these consolidated statements.
34 REGENCY HEALTH SERVICES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
Additional Common Stock Paid-In Retained Shares Amount Capital Earnings Total ------ ------ ---------- -------- ----- BALANCE, December 31, 1993................. 16,220 $162 $45,355 $21,498 $67,015 Exercise of stock options............... 95 1 475 -- 476 Conversion of Convertible Subordinated Debentures........................... 87 1 1,031 -- 1,032 Charge in lieu of income taxes (1994)... -- -- 2,636 -- 2,636 Retroactive charge in lieu of income taxes (1993)......................... -- -- 2,608 -- 2,608 Net loss................................ -- -- -- (800) (800) --------- --------- ----------- ----------- ----------- BALANCE, December 31, 1994................. 16,402 164 52,105 20,698 72,967 Exercise of stock options............... 211 2 1,254 -- 1,256 Exercise of share appreciation rights... 55 1 614 -- 615 Conversion of Convertible Subordinated Debentures........................... 2 -- 20 -- 20 Charge in lieu of income taxes.......... -- -- 2,686 -- 2,686 Net income.............................. -- -- -- 2,845 2,845 --------- --------- ----------- ----------- ----------- BALANCE, December 31, 1995................. 16,670 167 56,679 23,543 80,389 Exercise of stock options.............. 99 1 680 -- 681 Restricted Stock Distribution........... 12 -- 144 -- 144 Charge in lieu of income taxes.......... -- -- 2,814 -- 2,814 Repurchase of common stock ............. (862) -- (8,286) -- (8,286) Net income ............................. -- -- -- 5,206 5,206 --------- --------- ----------- ----------- ----------- BALANCE, December 31, 1996................. 15,919 $168 $52,031 $28,749 $80,948 ========= ========= =========== =========== =========== The accompanying notes are an integral part of these consolidated statements.
35 REGENCY HEALTH SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
1996 1995 1994 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).......................................... $ 5,206 $ 2,845 $ (800) ----------- ------------ ----------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary loss on extinguishment of debt............ 2,005 2,681 -- Depreciation and amortization........................... 15,317 10,122 9,295 Deferred income taxes and charge in lieu of taxes....... (1,317) 4,506 408 Restructuring and other non-recurring charges........... 9,749 9,000 6,052 Other, net.............................................. 122 649 (94) Change in cash from changes in assets and liabilities, excluding effects of acquisitions and dispositions: Accounts receivable................................... (28,537) 1,481 (4,640) Estimated third party settlements..................... (9,380) (3,569) 1,645 Other current assets.................................. (270) 6,748 (1,582) Current and other liabilities......................... 11,308 (4,003) 814 ----------- ------------ ----------- Net cash provided by operating activities............. 4,203 30,460 11,098 ----------- ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions............................................... (50,800) (13,225) -- Proceeds from disposition of facilities.................... 3,682 -- 2,239 Purchases of property and equipment........................ (12,575) (14,223) (12,576) Collection on mortgage notes receivable.................... 695 349 410 Changes in other assets, net............................... (1,623) (1,278) (2,585) ----------- ------------ ----------- Net cash used in investing activities................. (60,621) (28,377) (12,512) ----------- ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt................................. (62,598) (31,940) (2,705) Proceeds from issuance of long-term debt................... 56,143 107,162 2,996 Workers compensation trust funding......................... (10,637) -- -- Purchase of treasury stock................................. (8,286) -- -- Proceeds from exercise of options.......................... 433 1,256 476 ----------- ------------ ----------- Net cash provided by (used in) financing activities... (24,945) 76,478 767 ----------- ------------ ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... (81,363) 78,561 (647) CASH AND CASH EQUIVALENTS, beginning of period................ 104,238 25,677 26,324 ----------- ------------ ----------- CASH AND CASH EQUIVALENTS, end of period...................... $ 22,875 $104,238 $25,677 =========== ============ =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest..................... $ 16,713 $ 8,334 $ 6,788 =========== ============ =========== Cash paid during the year for income taxes................. $ 3,750 $ 2,152 $ 2,651 =========== ============ =========== The accompanying notes are an integral part of these consolidated statements.
36 REGENCY HEALTH SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the year ended December 31, 1996: The Company acquired Assist-A-Care Pharmacy in San Diego, California and issued a promissory note in the amount of $2.6 million as part of the purchase price. The Company issued a promissory note in the amount of $2.2 million in connection with the acquisition of 18 healthcare facilities in Tennessee and North Carolina. The Company acquired Executive Pharmacy and issued a promissory note in the amount of $763,000. During the year ended December 31, 1995: $20,000 of the Company's Convertible Subordinated Debentures were converted into 1,616 shares of common stock. The Company issued a promissory note of $3,400,000 in connection with the acquisition of SCRS and Communicology, Inc. During the year ended December 31, 1994: $1,076,000 of the Company's Convertible Subordinated Debentures were converted into 86,946 shares of common stock. Unamortized debenture fees of $44,000 were offset against additional paid-in capital. The accompanying notes are an integral part of these consolidated statements. 37 REGENCY HEALTH SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. MERGER AND BASIS OF PRESENTATION On April 4, 1994, Regency Health Services, Inc. ("Regency" or the "Company") and Care Enterprises, Inc. ("Care") completed the merger (the "Merger"). Pursuant to the Agreement and Plan of Merger, dated as of December 20, 1993, as amended, Care Merger Sub, Inc., a wholly owned subsidiary of Regency, was merged with and into Care, and Care became a wholly owned subsidiary of Regency. Each share of common stock of Care was converted into 0.71 of a share of common stock of Regency. Approximately 9,400,000 shares of common stock were issued in this transaction. At the time of the Merger, Regency operated 43 healthcare facilities with 4,215 licensed beds and Care operated 51 healthcare facilities with 5,040 licensed beds. The Merger qualified as a pooling-of-interests transaction under generally accepted accounting principles. The pooling-of-interests method of accounting is intended to present as a single interest two or more common stockholder interests that were previously independent. The pooling-of-interests method of accounting assumes that the combining companies have been merged from inception. Consequently, the historical financial statements for periods prior to the consummation of the combination are restated as though the companies had been merged since inception. The calculation of income per share for 1994 presented reflects the issuance of .71 of a share of Regency Common Stock for each share of common and common equivalent share of Care Common Stock. The restated financial statements are adjusted to conform the accounting policies of the separate companies. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business As of December 31, 1996, the Company operated 107 healthcare facilities with 11,200 licensed beds that provide nursing, rehabilitative, subacute and other specialized medical services primarily in California and in Ohio, West Virginia, North Carolina and Tennessee. Through its wholly owned home health subsidiaries, the Company provides patients with technical medical support at home such as infusion therapy, ventilator care and respite services. The Company also provides ancillary services such as rehabilitation programs and pharmaceutical services at certain of its healthcare facilities as well as at non-affiliated facilities. Principles of Consolidation The consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents For financial reporting purposes, the Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. At December 31, 1996 and 1995, the Company held personal funds in trust for patients approximating $1,505,000 and $690,000, respectively, which are not reflected on the accompanying balance sheets. Restricted Cash Restricted cash of $4,425,000 at December 31, 1996 represents the portion of the cash in the Company's pre-funded workers' compensation claims payment trust expected to be paid during 1997. Accounts Receivable Accounts receivable are recorded at the net 38 realizable value expected to be received from federal and state assistance programs or from private sources including managed care organizations and third party insurers. Receivables from government agencies represent the only concentrated group of credit risk for the Company. Management does not believe that there are any credit risks associated with these government agencies other than possible funding delays. Non-government agency receivables consist of receivables from various payors that are subject to differing economic conditions and do not represent any concentrated credit risks to the Company. Furthermore, management continually monitors and adjusts its reserves and allowances associated with these receivables. Property and Equipment At the time of Care's emergence from bankruptcy on December 31, 1990, property and equipment owned by Care and certain leasehold interests were adjusted to current fair market value. All other property and equipment is recorded at cost. The assets are depreciated over their estimated useful lives using the straight-line method as follows: Buildings and improvements....................................... 7-40 years Leasehold interests and improvements............................. Life of leases Equipment........................................................ 5-10 years Betterments, renewals, and extraordinary repairs that extend the life of the asset are capitalized; other repairs and maintenance are expensed. The cost and accumulated depreciation applicable to assets retired are removed from the accounts and any gain or loss on disposition is recognized in income. Assets Held for Sale During 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The adoption of SFAS No. 121 did not have a material effect on the Company's financial statements. At December 31, 1995, assets held for sale represents the assets of 13 facilities which the Company determined to dispose of in 1995. At December 31, 1996, it represents the assets of the seven remaining facilities which the Company intends to dispose of during 1997 (see Note 14). Such amounts are carried at estimated fair value less selling costs. Goodwill The excess of the purchase price over the value of the net assets of the businesses acquired by the Company is amortized using the straight-line method over periods ranging from 15 to 22 years. The Company periodically evaluates the carrying value of goodwill in relation to the operating performance and future undiscounted cash flows of the underlying business to assess recoverability. Adjustments are made if the sum of expected future net cash flows is less than book value of goodwill and other depreciable or amortizable assets. Asset Impairment The carrying values of long-lived assets are reviewed if the facts and circumstances suggest that an item may be impaired. If this review indicates that a long-lived asset will not be recoverable, as determined based on the future undiscounted cash flows of the asset, the Company's carrying value of the long-lived asset is reduced to fair value. Other Long-Term Assets Costs incurred to obtain long-term financing are amortized using the effective interest method. Costs to initiate and implement subacute specialty units are amortized on a straight-line basis over 36 months. Deferred Revenue Deferred revenue consists of patient billings recorded in advance of services rendered. Workers' Compensation The Company maintains self-insurance programs for workers' compensation for its nursing facilities in California and Ohio, pharmacy operations, home health operations and its corporate office employees. For all other operations, the Company purchases insurance for this risk. The self-insurance liability under these programs is based on claims filed and actuarial estimates of claims incurred but not reported. Differences between the amounts accrued and subsequent settlements are recorded in operations in the year of settlement. 39 Net Operating Revenue Revenues are derived from the operation of healthcare facilities, which are subject to federal and state regulation. Approximately 69.9%, 71.8%, and 74.0%, percent of revenues were derived from services provided under federal (Medicare) and state (Medicaid) medical assistance programs for the years ended December 31, 1996, 1995 and 1994, respectively. Revenues from Medicaid are recorded at the prescribed contract rate. Revenues from Medicare are recorded based on an estimate of the Company's reimbursable cost. Limitations on Medicare and Medicaid reimbursement for healthcare services are continually proposed. Changes in applicable laws and regulations could have an adverse effect on the levels of reimbursement from governmental, private, and other sources. These revenues are based, in part, on cost reimbursement principles and are subject to audit. Provisions for estimated third-party payor settlements are provided in the period the related services are rendered. Differences between the amounts accrued and subsequent settlements are recorded in operations in the year of settlement. Additionally, the Company's cost of care for its Medicare patients sometimes exceeds regional reimbursement limits established by Medicare. The Company has submitted exception requests for 156 cost reports, covering all cost report periods through December 31, 1994. To date, final action has been taken by the Health Care Financing Administration ("HCFA") on 105 exception requests. The Company's final rates as approved by HCFA represent approximately 84% of the requested rates as submitted in the exception requests. During 1994, the Company recognized 50% of the 1994 estimated exception requests anticipated to be received, which represented revenues of approximately $1,550,000. Commencing January 1, 1995, the Company recognized 70% of the estimated exception requests anticipated to be received, which represents revenues of approximately $3,563,000 and $3,001,000 in 1996 and 1995, respectively. Management believes that the Company will be able to recover its excess costs under any pending exception requests or under any exception requests that may be submitted in the future, however there can be no assurance that it will be able to do so. Stock Based Compensation. Effective January 1, 1996, the Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock- Based Compensation." SFAS No. 123 requires the Company to disclose proforma net income and earnings per share as if the fair value based accounting method of SFAS No. 123 had been used to account for stock based compensation. These disclosures are included in Note 9. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Corporate General and Administrative Expenses During 1995, the Company changed its classification of general and administrative expenses. Previously, the Company classified all corporate overhead, regional costs related to the supervision of operations, the administrative costs at the Company's facilities, pharmacies, and home care operations as administrative and general expenses. The Company now classifies corporate overhead and the regional costs related to the supervision of operations as corporate general and administrative expenses. All other costs which relate to the daily operations have been classified as operating expenses for the periods presented. These costs in 1994 have been reclassified to conform to the 1996 and 1995 presentation. Financial Statement Presentation Estimated third party settlements classified in accounts receivable, other assets and other liabilities and non-current reserves in the 1995 financial statements have been reclassified to estimated third party settlements in current assets to conform to the 1996 presentation. Certain other amounts have been reclassified in the 1995 and 1994 financial statements to conform to the 1996 presentation. 40 3. LONG-TERM DEBT Long-term debt consists of the following (dollars in thousands): December 31,
1996 1995 ---- ---- Senior Subordinated Notes, interest at 9.875 percent, due October 2002. Interest is payable semi-annually on October 15 and April 15, commencing April 15, 1996; redeemable beginning October 15, 1999.................... $110,000 $110,000 Junior Subordinated Notes, interest at 12.25 percent, due July 2003, interest payable semi-annually on January 15 and July 15, commencing January 1997; redeemable beginning July 15, 2000....................................... 50,000 -- Industrial revenue bonds ("IRBs"), interest at rates from 4.0 to 8.25 percent, due through September 2012 in varying amounts................... 9,675 9,800 Note payable, collateralized by a deed of trust, interest at 8.75 percent; interest and principal payable monthly through September 2033............ 4,697 4,714 Note payable, secured, interest at 9.0 percent, interest and principal payable monthly, balance due November 2013............................... 4,276 4,308 Convertible Subordinated Debentures, interest at 6.5 percent, due March 2003, redeemed in 1996......................................................... -- 48,904 Note payable, interest at 6.0 percent. Interest payable quarterly commencing October 1, 1995; fully repaid in 1996.................................... -- 3,400 Other unsecured indebtedness, interest rates up to 13.0 percent, payable in varying installments through August 2017................................. 646 1,014 Other secured long-term debt, interest rates up to 10.25 percent, payable in varying installments through August 2014................................. 5,614 1,846 ------------ ------------- 184,908 183,986 Less current portion........................................................ 2,418 4,371 ------------ ------------- $182,490 $179,615 ============ =============
On June 28, 1996, the Company issued 12.25% Junior Subordinated Notes (the "Junior Subordinated Notes") in an aggregate amount of $50 million. The Junior Subordinated Notes will mature on July 15, 2003, unless previously redeemed. Net proceeds received by the Company totaled approximately $48.4 million and funded the redemption of the Company's outstanding 6.5% Convertible Subordinated Debentures due 2003 (the "Convertible Subordinated Debentures") on July 29, 1996. The Junior Subordinated Notes contain certain covenants, which are similar to the 9.875% Senior Subordinated Notes ("Subordinated Notes"), including limitations on the ability of the Company to, among other things, (a) incur additional indebtedness and issue redeemable preferred stock, (b) sell equity interests in subsidiaries, (c) make certain restricted payments (as defined), (d) create liens, and (e) engage in mergers, consolidations or transfers of substantially all of the assets of the Company to another party. Effective September 30, 1996, the Company refinanced three of its Industrial Revenue Bond Issues (IRBs) with an aggregate outstanding principal balance of $7,560,000 with three new issues of tax exempt IRBs maturing through September 2012. One of the new issues has a principal balance of $2,830,000 and bears interest at rates ranging from 4.2% to 6.0% based on the maturity dates of the individual bonds. The other two IRBs bear interest at a variable rate initially set at 4.0% which is capped at 12.0%. The refinancing resulted in an extraordinary loss on extinguishment of debt of $325,000, net of tax resulting from the write-off of unamortized underwriting costs and payment of a call premium. The IRBs are secured by irrevocable standby letters of credit issued against the Company's Amended Credit Agreement. On December 28, 1995 the Company entered into a revolving credit loan agreement ("Credit Agreement") with NationsBank of Texas, N.A. as agent for a group of banks, which provided up to $50 million in a revolving line of credit and letters of credit. No borrowings were drawn on the Credit Agreement at 41 December 31, 1995 and throughout 1996. On December 20, 1996, the Company increased the available financing to $100 million and revised certain terms and covenants through the Amended and Restated Credit Agreement ("Amended Credit Agreement"). Borrowings bear interest at either the Base Rate plus up to .50% or the Adjusted Eurodollar Rate plus .75% to 2.00%, depending on the Company's Consolidated Adjusted Leverage Ratio, all as defined in the Amended Credit Agreement. The Amended Credit Agreement has scheduled commitment reductions of $25 million each on January 2, 1999 and 2000 and expires on January 2, 2001. The Amended Credit Agreement is collateralized by accounts receivable, all of the common stock of each of the Company's subsidiaries and certain other current assets of the Company and its subsidiaries. The Amended Credit Agreement, among other things, (a) requires the Company to maintain certain financial ratios, and (b) restricts the Company's ability to incur debt and liens, make investments, pay dividends, purchase treasury stock, prepay or modify certain debt of the Company, liquidate or dispose of assets, merge with another corporation, and create or acquire subsidiaries. As of December 31, 1996, $16.2 million of standby letters of credit were issued in connection with the Company's self-insured workers' compensation programs and refinanced Industrial Revenue Bonds (discussed above) out of a total available of $35 million. On January 2, 1997 the Company borrowed $40 million under the Amended Credit Agreement. On October 12, 1995, the Company issued Subordinated Notes in an aggregate amount of $110 million. Net proceeds received by the Company totaled approximately $106.7 million of which approximately $31.5 million was used to repay the principal and a prepayment penalty on the Company's 8.10% Senior Secured Notes (which resulted in a loss on extinguishment of debt of approximately $1.6 million, net of tax) and $47.4 million was used for acquisitions in 1996 (see Note 13). The Subordinated Notes contain certain covenants, including limitations on the ability of the Company to, among other things, (a) incur additional indebtedness and issue preferred stock, (b) sell equity interests in subsidiaries, (c) make certain restricted payments (as defined), (d) create liens, and (e) engage in mergers, consolidations or the transfer of substantially all of the assets of the Company to another party. In March 1993, the Company issued $50,000,000 aggregate principal amount of its Convertible Subordinated Debentures resulting in net proceeds to the Company of approximately $47,800,000. During the years ended December 31, 1995 and 1994, $20,000 and $1,076,000 of the Convertible Subordinated Debentures were converted into 1,616 and 86,946 shares of common stock, respectively. On July 29, 1996, the Company completed the redemption of all $48.9 million of its outstanding Convertible Subordinated Debentures for cash at such amount from the proceeds of the Junior Subordinated Notes and available cash. The redemption reduces fully diluted shares by 3.9 million and produces an extraordinary loss on extinguishment of debt of $868,000, net of tax, resulting from the write-off of unamortized underwriting costs. Each of the mortgage notes and certain IRBs are secured by a first deed of trust on the related facility. Certain IRBs require the maintenance of debt service reserve funds and all of the IRBs contain affirmative and negative covenants. Principal maturities on long-term debt are as follows (in thousands): Year Ending December 31, 1997................................................................ $ 2,418 1998................................................................ 3,079 1999................................................................ 497 2000................................................................ 505 2001................................................................ 802 Thereafter.......................................................... 177,607 ---------- Total............................................................... $184,908 ==========
42 4. INCOME TAXES The Company and its subsidiaries file consolidated federal and state income tax returns and account for income taxes under the provisions of SFAS No. 109. As a result of the Care bankruptcy proceedings, a "change in ownership" occurred. Prior to the Merger, the Company had substantial net operating loss carryforwards for tax purposes ("Tax NOL") and income tax credit carryforwards. In March 1994, the Internal Revenue Service ("IRS") issued final regulations relative to Tax NOL utilization when a "change in ownership" occurs in bankruptcy proceedings. These regulations reduced the aggregate Tax NOL available to the Company but did not limit its annual use. As a result of the Merger, another "change in ownership" occurred and the Company's Tax NOL and credit carryforward utilization became subject to a combined annual limitation of approximately $7.9 million (on a pre-tax basis) in periods after the Merger. After considering the adjustments resulting from the IRS examination for the years 1987 through 1990, the Company has a federal Tax NOL of $2,929,000 and income tax credit carryforwards of $5,503,000 available for use at December 31, 1996. As a result of Fresh Start Reporting, the tax benefits realized from the pre-bankruptcy Tax NOL and income tax credit carryforwards are recorded as an increase in additional paid-in capital and are not recorded in the statement of operations. The provision for income taxes is as follows (in thousands):
1996 1995 1994 ---- ---- ---- Current provision: Federal........................... $4,950 $ 722 $ 597 State............................. 1,315 1,016 988 --------- -------- ---------- 6,265 1,738 1,585 Deferred provision: Federal........................... (3,797) 2,459 (1,971) State............................. (670) 433 (257) --------- -------- ---------- (4,467) 2,892 (2,228) Charge in lieu of income taxes....... 2,814 2,686 2,636 ========= ======== ========== $4,612 $7,316 $ 1,993 ========= ======== ==========
A reconciliation of the federal statutory income tax rate with the Company's effective tax rate follows:
1996 1995 1994 ---- ---- ---- Federal statutory rate...................... 34.0% 34.0% 34.0% State income taxes, net of federal benefit.. 6.0 6.0 6.0 Disposition of assets charges............... -- 19.6 -- Other non-deductible items.................. -- -- 21.4 Non-deductible merger related expenses...... -- -- 101.4 Goodwill amortization....................... 3.1 1.7 4.4 Other, net.................................. (1.2) 0.8 -- ====== ===== ===== 41.9% 62.1% 167.2% ===== ===== ======
43 Deferred income taxes arise from temporary differences in the recognition of certain expenses for financial and tax reporting purposes. The following is a summary of these differences and the tax effect of each (in thousands):
1996 1995 ---- ---- Deferred income tax assets: Allowance for doubtful accounts................. $ 1,057 $ 1,054 Net operating loss carryforward................. 996 3,789 Loss contingencies and legal settlements........ 416 734 Workers' compensation claims.................... 5,370 4,827 Covenant not to compete......................... 901 -- Disposition of assets charges................... 4,166 2,844 Accrued interest................................ -- 598 Other reserves.................................. 3,389 1,035 Credit carryforwards............................ 5,519 4,883 Other........................................... 243 613 Valuation allowance............................. (5,207) (10,100) --------- -------- Total deferred income tax assets................... 16,850 10,277 --------- -------- Deferred income tax liabilities: Depreciation.................................... (9,417) (9,109) Other........................................... (5,553) (3,667) --------- -------- Total deferred income tax liabilities.............. (14,970) (12,776) --------- -------- Net deferred income tax asset (liability).......... $ 1,880 $ (2,499) =========== ========
The valuation allowance primarily relates to the net operating loss and income tax credit carryforwards of the Company for periods prior to its emergence from bankruptcy. If and when such carryforwards are realized, the offset will be to additional paid-in capital not to the provision for income taxes. 5. DEFERRED RENT Several of the Company's facilities and a home health office are leased under long-term operating leases that specify scheduled rent increases over the lease terms. Deferred rent of approximately $986,000 and $932,000, at December 31, 1996 and 1995, respectively, has been established to recognize the difference between the rent expense paid and the straight-line recognition of minimum rental expense and is classified in other liabilities and noncurrent reserves. 6. COMMITMENTS AND CONTINGENCIES Letters of Credit The Company is contingently liable under letters of credit related to deposit requirements on its self-insured workers' compensation plans and the IRBs discussed in Note 3. State regulations require the maintenance of deposits at specified percentages of estimated future workers' compensation claim payments that can be satisfied through a combination of cash deposits, surety bonds and letters of credit. The total amount of letters of credit outstanding at December 31, 1996 and 1995, were $16,202,000 and $16,050,000, respectively. At December 31, 1995, the letters of credit were collateralized by cash. The cash collateral was subsequently released in connection with the Company's Credit Agreement discussed in Note 3. 44 Leases The Company leases certain facilities and offices under cancelable and noncancelable agreements expiring at various dates through 2047. The leases are generally triple-net leases and provide for the Company's payment of property taxes, insurance, and repairs. Certain leases contain renewal options and rent escalation clauses. Rent escalation clauses require either fixed increases or increases tied to the Consumer Price Index ("CPI"). Six leases include purchase options at fixed or market prices at various dates. Future minimum lease payments for operating leases at December 31, 1996 are as follows (in thousands): Year Ending December 31, 1997......................................... $ 24,402 1998......................................... 23,005 1999......................................... 22,358 2000......................................... 21,460 2001......................................... 20,127 Thereafter................................... 110,805 ========== $222,157 ==========
Guarantee of Leases The Company is contingently liable for certain operating leases assumed by the purchasers of the Company's leasehold interests in facilities. With the exception of a single facility re-entered on October 1, 1994, following the filing of bankruptcy by the Company's sublessee, which has been operated by the Company since November 1, 1994, the Company is not aware of any failure on the part of these purchasers to meet the terms of their obligations, and does not anticipate any expenditures to be incurred in connection with its guarantees. If a default were to occur, the Company generally would be able to assume operations of the facility and use the net revenues thereof to defray the Company's expenditures on these guarantees. The following is a schedule of future minimum lease payments at December 31, 1996 for the operating leases for which the Company is contingently liable (in thousands): Year Ending December 31, 1997......................................... $ 3,165 1998......................................... 1,125 1999......................................... 1,128 2000......................................... 1,136 2001......................................... 1,023 Thereafter................................... 4,617 ========= $12,194 =========
Litigation In 1995, a class action lawsuit, which had been filed against the Company in July 1994, was settled for $9,000,000. The Company's portion of this settlement, together with related legal fees and other costs, resulted in a pre-tax charge of $3,098,000, which is included in the consolidated statement of operations for the year ended December 31, 1995. The Company is subject to claims and legal actions by patients and others in the ordinary course of its business. The Company has insurance policies related to patient care claims and legal actions. In the event judgments were awarded for non-patient care legal actions or in excess of the insurance coverage for patient care legal actions, the burden would fall on the Company. The Company does not expect that the ultimate outcome of an unfavorable judgment in any pending legal matters would result in a material adverse effect on the Company's consolidated financial position or results of operations. 45 Employment Agreements At December 31, 1996, the Company had employment agreements with its president, and certain executive and senior vice presidents, which provide for annual base salaries in the aggregate of $1,212,000. The agreements expire at various dates through 1999. Insurance The Company maintains general and professional liability insurance on a claims made basis, subject to a $100,000 self-insurance retention. In addition, all-risk property insurance, including earthquake and flood, is maintained for all Company locations. The Company estimates its liability under the above described programs, including potential legal fees and settlement amounts, with respect to incurred but not reported claims on a monthly basis, based upon its historical experience. 7. RELATED PARTY TRANSACTIONS In February 1988, the Company entered into a 20-year lease with three five-year option periods for its Heritage (Torrance) facility that is owned by a former director of the Company. The lease provides for monthly payments, currently $35,000, which are adjusted annually based on the CPI. Lease expense for the years ended December 31, 1996, 1995 and 1994, was approximately $419,000, $415,000, and $409,000, respectively. In June 1990, the Company entered into a ten year lease with four five-year option periods for its Glendora facility that is directly owned by one former director and indirectly owned by another director. The lease provides for equal monthly payments for three years, after which the monthly payment is adjusted annually based on increases in the CPI. Lease expense for the years ended December 31, 1996, 1995 and 1994, was approximately $446,000, $437,000, and $420,000, respectively. The Company leases from Newport Harbor Investments Limited, Inc. ("Newport Harbor"), a corporation wholly-owned by a former director of the Company, two nursing facilities located in Beaumont and Riverside, California. The leases provide for monthly rent payments of $7,083 and $5,142, respectively, subject to periodic adjustments based on certain increases in the CPI or Medi-Cal reimbursement rates. The Riverside facility lease contains an option to purchase the facility for $675,000, subject to adjustment based on increases in the CPI from March 1992. In 1992, the Company paid Newport Harbor $120,000 as consideration for the extension of the purchase option on the Riverside facility for a five-year period. During 1996 the Company exercised the option and acquired the facility for approximately $700,000, net of the consideration already paid. Lease expense paid by the Company for the years ended December 31, 1996, 1995 and 1994, was approximately $133,000, $147,000 and $147,000, respectively. The Company had a 26% interest in a pharmacy partnership formed in April 1992, which provided products and services to several healthcare facilities operated by the Company. For the year ended December 31, 1994 these purchases totaled approximately $7,525,000. In August 1994, the Company sold its interest in the pharmacy partnership to the other partner. The Company received its net equity in the partnership plus $200,000 for goodwill. The total cash received by the Company was $2,239,000. 8. INCOME (LOSS) PER SHARE For the years ended December 31, 1996, 1995 and 1994, income (loss) per share was calculated based on the weighted average number of common and common equivalent shares outstanding during the periods of 16,476,000, 16,654,000, and 16,545,000, respectively. Fully diluted income (loss) per share for the years ended December 31, 1996, 1995 and 1994 is not presented because the effect of the assumed conversion of the Convertible Subordinated Debentures was anti-dilutive. 46 The 1994 income per share calculation does not include the shares reserved for issuance in connection with the Company's Share Appreciation Rights Plan, which provides for settlement of the rights in cash or stock. Through December 31, 1994, all Share Appreciation Rights that had been settled were settled for cash. During 1995, the Board of Directors settled all remaining outstanding rights and issued shares which are included in the weighted average share calculation for 1996 and 1995. (See Note 10.) 9. STOCK OPTIONS Pursuant to the Merger, Care became a wholly owned subsidiary of Regency. Stockholders of Care received 0.71 of a share of Regency common stock for each share of Care common stock outstanding. Pursuant to the Merger, Regency's stock option plan was amended to increase the number of shares of Regency common stock available for grant to 1,937,991 shares. This amount does not include the assumption of the Care stock option plan or share appreciation rights plan. The Company has a Director Stock Plan whereby each non-employee director of the Company receives on July 1 of each year 2,000 restricted shares of Company Common Stock and options to purchase an additional 6,000 shares of Company Common Stock. The period of restriction for each award of shares of restricted stock expires on the last to occur of: the end of the six month period following the grant date; participant's direct or indirect pecuniary ownership of shares not subject to restrictions for at least 12 months, provided that the restrictions shall lapse with respect to one restricted share granted for every two shares of unrestricted shares; and participants attendance at 75% of the scheduled board meetings during the 12 month period immediately preceding the grant date. Any shares which remain restricted when a director's service on the Company's Board terminates, will be forfeited. The stock options are granted at fair market value on the date of grant and the participants are entitled to exercise such options beginning six months and one day after grant and ending ten years after grant. During the years ended December 31, 1996, 1995 and 1994, the Company awarded 12,000, 14,000, and 12,000 shares of restricted stock, respectively, and during the year ended December 31, 1994, 6,000 shares of restricted stock were forfeited. At December 31, 1996 restrictions remained on 12,000 shares of stock. In January 1997, the period of restriction lapsed on 12,000 shares. The following is a summary of options granted pursuant to Regency's Employee and Director stock option plans (such amounts do not include restricted stock awards):
For the year ended December 31, 1996 1995 1994 -------------------------- --------------------------- ---------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Options outstanding at the beginning of the year.. 1,226,214 $11.94 1,773,436 $12.37 659,058 $5.63 Granted...... 911,000 10.34 262,641 11.42 1,461,015 15.08 Exercised.... (99,491) 4.28 (210,004) 5.90 (94,736) 5.27 Canceled..... (288,612) 13.28 (599,859) 15.11 (251,901) 13.28 =========== ====== ========= ======= ========= ====== Options outstanding at the end of the year......... 1,749,111 $11.32 1,226,214 $11.94 1,773,436 $12.37 =========== ======== ========= ====== ========= ====== Options Exercisable.. 493,008 527,284 701,563 =========== ========= =========
47 During 1996, 1995 and 1994, no compensation cost was recognized related to the above stock options. The following outlines the significant assumptions used to calculate the fair value information presented utilizing the Black-Scholes Single Option approach with ratable amortization.
1996 1995 ---- ---- Risk-free interest rate.................................... 5.90% 6.14% Expected life.............................................. 7.65 6.50 Expected volatility........................................ 41% 41% Expected dividends......................................... - - Weighted average grant date fair value of options granted.. $5.61 $5.95
A detail of the options outstanding and exercisable as of December 31, 1996 is presented below:
Options outstanding Options exercisable - -------------------------------------------------------------------------- ------------------------------ Weighted average Weighted Weighted remaining average average Range of exercise Number contractual exercise Number exercise prices outstanding life in years price exercisable price - ------------------- -------------- ---------------- ------------ ------------- ------------ $3.17 - $6.98 105,561 .84 $ 3.95 100,235 $ 3.94 9.15 - 10.75 821,112 8.83 10.04 86,796 10.15 11.00 - 12.88 389,000 8.72 11.69 71,250 11.68 15.00 - 15.38 433,438 7.34 15.22 234,727 15.21 - ------------------- ---------- ---- ------- ------- ------- $3.17 - $15.38 1,749,111 7.96 $11.32 493,008 $11.52 =============== ========== ==== ======= ======= =======
As the Company has adopted the disclosure requirement of SFAS No. 123, the following table shows pro-forma net income and earnings per share as if the fair value based accounting method had been used to account for stock-based compensation cost.
(in thousands, except earnings per share) 1996 1995 ---- ---- Net income as reported...................... $5,206 $2,845 Pro forma compensation expense.............. (774) (235) ====== ====== Pro forma net income........................ $4,432 $2,610 ====== ====== Pro forma earnings per share................ $.27 $.16 ====== ======
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. At December 31, 1996, 2,123,897 shares of common stock have been reserved for issuance under the Company's stock option plans. 10. SHARE APPRECIATION RIGHTS PLAN In January 1991, Care's Board of Directors adopted a Share Appreciation Rights Plan (the "SAR Plan"), which provided for the award of up to 710,000 units to certain key executives. The SAR Plan was amended by the Care Board of Directors and stockholders in May 1992, and assumed by Regency at the time of the Merger. The SAR Plan provides that upon award, 25% of the units vest on each of the first four anniversaries of the award date and vested units must be exercised before the fifth anniversary of the award. All outstanding units fully vested on January 1, 1995. Upon exercise, the awardee is entitled to receive the difference between the base value and the market value on the 48 date the units are exercised, in cash or stock, at the Company's option. During 1995, the Company discontinued the SAR Plan and settled all outstanding units for $1,628,000 cash and 55,310 shares. This resulted in a charge to income of $534,000 during 1995. The following is a summary of the SAR Plan (as adjusted by the Exchange Ratio due to the Merger): Year ended December 31, 1995 1994 ---- ---- Units outstanding at beginning of the year...... 236,430 236,430 Granted......................................... -- -- Settled......................................... (236,430) -- Canceled........................................ -- -- ============= =========== Units outstanding at end of the year............ -- 236,430 ============= =========== Units exercisable at end of the year............ -- 177,322 ============= =========== Unit price of outstanding units................. -- $1.41 ============= =========== Unit price of settled units..................... $1.41 -- ============= ===========
11. RETIREMENT SAVINGS PLAN Regency sponsors an employee retirement savings plan under Section 401(k) of the Internal Revenue Code. All employees who are regularly scheduled to work 20 hours or more per week, and complete 90 days of service are eligible to participate. Participants can contribute, on a pre-tax basis, up to 15% of their earnings to the plan (subject to certain limitations), for which the Company matched 15% of the first 3% of contributions made for persons with less than three years of service and 25% of the first 5% for all others. The Company's contributions are subject to a four-year vesting period. Matching contributions made by the Company for the years ended December 31, 1996, 1995 and 1994 were approximately $697,000, $471,000, and $279,000, respectively. 12. MERGER AND RESTRUCTURING EXPENSES All fees and expenses related to the Merger and to the consolidation and restructuring of the combining companies during the year ended December 31, 1994, were expensed as required under the pooling-of-interests accounting method. 49 The following is a summary of the merger and restructuring expenses, separated into cash and non-cash items (in thousands):
Cash Non-Cash Total ---- -------- ----- Severance..................................................... $ 4,394 $ -- $ 4,394 Management information, accounting, and operational integration................................ 2,373 -- 2,373 Investment banking fees....................................... 1,400 -- 1,400 Value of assets written off................................... -- 777 777 Legal fees.................................................... 612 -- 612 Mailing and printing costs.................................... 501 -- 501 Merger bonuses................................................ 500 -- 500 Accounting fees............................................... 440 -- 440 Former Care director and officer liability insurance.......... 550 -- 550 Miscellaneous................................................. 453 -- 453 ------- --------- -------- 11,223 777 12,000 ------- --------- -------- Duplicate facility disposals: Operating losses........................................... 581 -- 581 Value of assets written off................................ -- 1,569 1,569 Loss on disposals.......................................... 500 -- 500 ------- --------- -------- 1,081 1,569 2,650 ======== ========= ======== Total......................................................... $12,304 $2,346 $14,650 ======== ========= ========
As of December 31, 1994, the remaining accrual relating to merger and restructuring expenses was $4,452,000 including cash and non-cash items of $2,800,000 and $1,700,000, respectively. The remaining accrual consisted of a provision for duplicate facility disposals of $2.3 million, severance costs of $1.5 million, investment banking fees of $126,000, and other costs totaling $545,000. All remaining costs were utilized during 1995. (See Note 14.) 13. ACQUISITIONS Effective January 2, 1996, the Company completed the acquisition of the assets of Assist-A-Care, a pharmacy located in San Diego, California. The purchase price was $5.8 million, composed of $3.2 million cash and a $2.6 million note payable. Effective February 1, 1996, the Company acquired leasehold interests in 18 health care facilities in Tennessee and North Carolina with 2,375 beds from Liberty Healthcare Limited Partnership ("Liberty") through an asset purchase for $39.3 million cash and a note payable for $2.2 million. The Company also acquired Executive Pharmacy (consisting of one pharmacy in North Carolina and one in Tennessee) with a $763,000 note payable and an enteral feeding business for $1.5 million cash from businesses affiliated with Liberty. In addition, the Company paid $400,000 cash for the inventory of Liberty. A portion of the purchase was funded with notes payable, which may be reduced as a result of certain seller liabilities and audit adjustments. Escrow accounts established at the time of purchase were funded with $2.96 million for payment on the notes payable and are included in other assets on the accompanying consolidated balance sheet as of December 31, 1996. On April 1, 1996, the Company completed the acquisition of the assets of Buena Vista Nursing Center ("Buena Vista"), a health care facility with 64 skilled nursing beds and 22 assisted living beds, located in Lexington, North Carolina. The purchase price was $2.875 million, consisting of $2.675 million in cash and a $200,000 note payable. Payment of the note is dependent upon Buena Vista attaining certain financial targets. 50 On July 6, 1995, the Company acquired all of the stock of SCRS & Communicology, Inc. ("SCRS") for a total purchase price of $13.5 million, of which $3.4 million is represented by a promissory note which was paid in January 1996. SCRS provides contract rehabilitation services to Company operated and third party healthcare facilities. All acquisitions during 1995 and 1996 were accounted for under the purchase method of accounting The following unaudited pro forma condensed consolidated statements of earnings present the summarized consolidated results of operations of the Company after giving effect to the acquisitions of Liberty and Liberty-affiliated businesses for the years ended December 31, 1996 and 1995, as if such acquisitions had been consummated on January 1, 1995 (in thousands, except per share data):
Year ended December 31, ------------------- 1996 1995 ---- ---- (Unaudited) Net operating revenue............................... $564,856 $495,690 Total costs and expenses............................ 553,264 483,020 ------- -------- Income before provision for income taxes............ 11,592 12,670 Provision for income taxes.......................... 4,856 7,676 -------- -------- Net income before extraordinary item................ $ 6,736 $ 4,994 ======== ======== Income before extraordinary item per common share... $ 0.41 $ 0.30 ======== ========
The pro forma results are presented for informational purposes only and are not necessarily indicative of what results of operations actually would have been had such acquisitions been consummated at the beginning of such period or of future operations or results. The effect of the other acquisitions is immaterial. 14. RESTRUCTURING AND OTHER NON-RECURRING CHARGES During 1996 the Company developed a comprehensive strategic plan impacting all of its operating divisions. In connection with this strategic plan the Company has undertaken initiatives designed to reengineer the operating model through which it manages its business. This reengineering effort is focused on identifying and implementing the most effective and efficient model for managing the delivery of products and services to the Company's patients on a local market by market basis. The plan includes consolidating and automating the Pharmacy operations, consolidating the Home Health operations, automating and streamlining certain functions in the nursing center operations, and streamlining the corporate support structure. Through this process the Company identified approximately 350 non-direct patient care positions across all divisions, including the Corporate Office, which will be eliminated. Of the positions identified, approximately 30 were eliminated during 1996. The Company began the implementation phase of this plan during the fourth quarter of 1996. Additionally, the Company has identified the implementation of significant management information system (MIS) enhancements as a critical component of its overall strategic plan. Implementing these MIS initiatives will be an integral part of the realization of an effective and efficient management model, through which the Company can monitor its patients, from both a cost and a clinical perspective, seamlessly throughout the continuum of care and across all divisions of the Company. Furthermore, these MIS initiatives will provide management with complete patient information within each local market, which is vital in the managed care environment of today and in the future. This implementation is expected to continue during 1997 and into 1998. Several of the 51 Company's current management information systems will be replaced in connection with the MIS initiatives. The Company has also identified certain impaired property and equipment and intangible assets and future contractual obligations that will have no value to the Company under the new operating model due to obsolescence, consolidation of locations, and streamlining of processes. Accordingly, the Company has written off certain long-term assets and accrued certain obligations, including obligations related to leases. The Company has evaluated the reserve established in 1995 for the disposition of 13 facilities located in California discussed below and allowances established for certain notes and other non-patient receivables. Based on the actual sale of six of the 13 facilities, and the estimated sales prices for the remaining seven facilities, the Company has reduced the reserve for the disposition of 13 facilities as of December 31, 1996. Earnings before income taxes for the remaining seven facilities were $940,000, $765,000 and $316,000 for 1996, 1995 and 1994, respectively. In addition, an allowance was established for certain notes and non-patient receivables that arose in prior years, which were not collected as anticipated by the Company and certain long-term assets were written down to net realizable value. The following summarizes the impact of the above items on the Company's results of operations for 1996:
Non- Restructuring recurring Total ----------------- ------------- --------------- MIS and other property and equipment written off $2,057,000 $2,320,000 $ 4,377,000 Goodwill and other assets written off........... 2,300,000 1,255,000 3,555,000 Future lease and other obligations.............. 325,000 1,891,000 2,216,000 Severance (including $711,000 paid during 1996). 1,377,000 -- 1,377,000 Allowance for notes and other receivables....... -- 1,010,000 1,010,000 Reengineering costs incurred.................... 511,000 -- 511,000 Reduction of reserve for assets held for sale... -- (1,763,000) (1,763,000) ----------- ----------- ------------- $6,570,000 $4,713,000 $11,283,000 =========== =========== ============
In 1995, the Company determined to dispose of 13 facilities located in California. In addition, during 1995 the Company completed the disposition of duplicate facilities identified during 1994 as part of the merger and restructuring costs, the Simi Valley healthcare facility damaged in the Southern California (Northridge) earthquake and one other facility, and exchanged leasehold interests in three nursing centers in New Mexico for leasehold interest in four nursing centers in Ohio. These transactions resulted in a net charge of $9,000,000 during 1995. This charge was based upon management's best estimates of the amounts expected to be estimated fair value less selling costs. 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments at December 31, 1996 are as follows (in thousands):
Carrying Amount Fair Value -------- ---------- Cash and cash equivalents.................. $ 22,875 $ 22,875 ======== ======== Mortgage notes receivable.................. $ 1,937 $ 1,937 ======== ======== Long-term debt, including current portion.. $184,908 $190,139 ======== ========
52 The carrying amount approximates fair value for cash and cash equivalents because of the short maturity of these instruments. The fair value of mortgage notes receivable was estimated based on the present value of future cash flows using current rates the Company could obtain on notes with similar characteristics and maturities. The fair value for the Company's long-term debt was estimated based on the quoted market prices for the same or similar issues or on the present value of future cash flows using current rates the Company could obtain on debt with similar characteristics and maturities. 16. SUBSEQUENT EVENTS Effective January 1, 1997, the Company acquired four acute rehabilitation hospitals, eleven outpatient rehabilitation clinics and six neurological treatment centers from Horizon/CMS Healthcare Corporation ("CMS"). The purchase price was $43.0 million, made up of a cash payment of $36.3 million and notes payable totaling $6.7 million. 17. QUARTERLY FINANCIAL DATA (UNAUDITED):
Year Ended December 31, 1996 First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ----- (in thousands, except per share amounts) Net operating revenue.............. $129,963 $137,632 $144,103 $146,352 $558,050 ======== ======== ======== ======== ======== Income (loss) before extraordinary item............................ $2,737 $3,065 $3,641 $(3,044) $6,399 ======== ======== ======== ======== ======== Net income (loss).................. $2,737 $3,065 $2,448 $(3,044) $5,206 ======== ======== ======== ======== ======== Income (loss) per share - Primary: Income (loss) before extraordinary item........... $.16 $.19 $.22 $(.19) $.39 ======== ======== ======== ======== ======== Net income (loss)............... $.16 $.19 $.15 $(.19) $.32 ======== ======== ======== ======== ======== Income (loss) per share - Fully Diluted: Income (loss) before extraordinary item........... $.16 $.18 $.22 $(.19) $.39 ======== ======== ======== ======== ======== Net income (loss)............... $.16 $.18 $.15 $(.19) $.32 ======== ======== ======== ======== ========
Effective January 2, 1996, the Company completed the acquisition of the assets of Assist-A-Care, a pharmacy located in San Diego, California. The purchase price was $5.8 million, composed of $3.2 million in cash and a $2.6 million note payable. Effective February 1, 1996, the Company acquired leasehold interests in 18 health care facilities in Tennessee and North Carolina with 2,375 beds from Liberty Healthcare Limited Partnership ("Liberty") through an asset purchase for $39.3 million cash and a note payable for $2.2 million. The Company also acquired Executive Pharmacy (consisting of one pharmacy in North Carolina and one in Tennessee) with a $763,000 note payable and an enteral feeding business for $1.5 million cash from businesses affiliated with Liberty. In addition, the Company paid $400,000 cash for the inventory of Liberty. 53 On April 1, 1996, the Company completed the acquisition of the assets of Buena Vista Nursing Center in Lexington, North Carolina. The purchase price was $2.875 million, consisting of $2.675 million in cash and a note payable for $200,000. On July 29, 1996, the Company completed the redemption of all $48.9 million of its outstanding Convertible Subordinated Debentures for cash at such amount. The redemption reduces fully diluted shares by 3.9 million shares and results in an extraordinary loss on extinguishment of debt of $868,000, net of tax, resulting from the write-off of unamortized underwriting costs. Effective September 30, 1996, the Company refinanced three of its IRBs with an aggregate outstanding principal balance of $7,560,000 with three new issues of tax exempt IRBs. The refinancing resulted in an extraordinary loss on extinguishment of debt of $325,000, net of tax, resulting from the write-off of unamortized underwriting costs and a call premium paid. During the fourth quarter of 1996, the Company recorded an $11.3 million charge related to restructuring and other non-recurring items as discussed in Note 14.
Year Ended December 31, 1995 First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ----- (in thousands, except per share amounts) Net operating revenue.............. $97,548 $99,766 $107,492 $111,287 $416,093 ======= ======= ======== ======== ======== Income (loss) before extraordinary item............................ $3,087 $1,780 $4,042 $(4,455) $4,454 ======= ======= ======== ======== ======== Net income (loss).................. $3,087 $1,780 $4,042 $(6,064) $2,845 ======= ======= ======== ======== ======== Income (loss) per share - Primary: Income (loss) before extraordinary item........... $.19 $.11 $.24 $(.27) $.27 ======= ======= ======== ======== ======== Net income (loss)............... $.19 $.11 $.24 $(.36) $.17 ======= ======= ======== ======== ======== Income (loss) per share - Fully Diluted: Income (loss) before extraordinary item........... $.18 $.11 $.22 $(.27) $.27 ======= ======= ======== ======== ======== Net income (loss)............... $.18 $.11 $.22 $(.36) $.17 ======== ======= ======== ======== ========
Effective July 6, 1995, the Company acquired all of the stock of SCRS & Communicology, Inc. ("SCRS") for a total purchase price of $13.5 million, of which $3.4 million is represented by a promissory note which was paid in January 1996. The acquisition was accounted for under the purchase method of accounting. SCRS provides rehabilitation services to Company operated and third party healthcare facilities. 54 In May 1995, a class action lawsuit which had been filed against the Company in July 1994, was settled for $9,000,000. The Company's portion of this settlement, together with related legal fees and other costs, resulted in a pre-tax charge of $3,098,000, which is included in the consolidated statement of operations for the quarter ended June 30, 1995. In October 1995, the Company repaid its $30 million, 8.10% Senior Secured Notes resulting in costs and prepayment penalties of $2,681,000 ($1,609,000 net of tax), classified as an extraordinary item in the quarter ended December 31, 1995. In December 1995, the Company recorded a $9,000,000 charge, primarily related to the disposition of certain facilities (See Note 14). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 55 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this item for the Company's directors and executive officers will be contained in Regency's Notice of Annual Meeting of Stockholders and Proxy Statement, pursuant to Regulation 14A, to be filed with the Securities and Exchange Commission on or before April 14, 1997, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information required by this item will be contained in Regency's Notice of Annual Meeting of Stockholders and Proxy Statement, pursuant to Regulation 14A, to be filed with the Securities and Exchange Commission on or before April 14, 1997, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item will be contained in Regency's Notice of Annual Meeting of Stockholders and Proxy Statement, pursuant to Regulation 14A, to be filed with the Securities and Exchange Commission on or before April 14, 1997 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item will be contained in Regency's Notice of Annual Meeting of Stockholders and Proxy Statement, pursuant to Regulation 14A, to be filed with the Securities and Exchange Commission on or before April 14, 1997, and is incorporated herein by reference. 56 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following are filed as part of this Report. (a)(1) FINANCIAL STATEMENTS Report of Independent Public Accountants.......................... 31 Consolidated Balance Sheets as of December 31, 1996 and 1995...... 32 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994................................ 34 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994.......................... 35 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994................................ 36 Notes to Consolidated Financial Statements........................ 38 (a)(2) FINANCIAL STATEMENT SCHEDULES Schedule II - Valuation and Qualifying Accounts All other Financial Statement schedules have been omitted from this Item 14(a)(2) because they are not applicable or not required or because the information is included elsewhere in the financial statements or the notes thereto. (a)(3) EXHIBITS Number Description 3.1 Restated Certificate of Incorporation of the Company. (7) 3.2 Restated Bylaws of the Company, and Amendment thereto dated June 8, 1995 (11). 4.1 Restated Certificate of Incorporation and Restated Bylaws filed as Exhibits 3.1 and 3.2. (7)(11) 4.2 Specimen of Common Stock Certificate. (1) 4.3 Indenture, dated as of October 12, 1995, for 9-7/8% Senior Subordinated Notes due 2002, among Registrant, the Subsidiary Guarantors named therein and U.S. Trust Company of California, N.A., as Trustee. (originally filed as Exhibit number 4.4) (12) 4.4 Form of 9 7/8% Senior Subordinated Note due 2003 of Regency Health Services, Inc. (included in Exhibit 4.3) 4.5 Second Amended and Restated Registration Rights Agreement, dated as of January 31, 1994, among Regency Health Services, Inc., Care Enterprises, Inc. and the stockholders named therein. (originally filed as Exhibit number 4.7) (7) 57 4.6* Registrant's Long-Term Incentive Plan. (originally filed as Exhibit number 4.8) (4) 4.7* Amendment to Regency Health Services, Inc. Long-Term Incentive Plan. (originally filed as Exhibit number 4.9)(7) 4.8* Regency Health Services, Inc. Director Stock Plan. (originally filed as Exhibit number 4.10) (4) 4.9* Indenture, dated as of June 28, 1996, between Regency Health Services, Inc. As Issuer, the Guarantors named therein and U.S. Trust Company of California, N.A., as Trustee. (originally filed as Exhibit number 4.11) (16) 4.10* Form of 12-1/4% Subordinated Note due 2003 of Regency Health Services, Inc. (included in Exhibit 4.9). (originally filed as Exhibit number 4.12) (16) 10.1* Registrant's 401 (K) Employee Retirement Savings Plan. (originally filed as Exhibit number 10.1) (1) 10.2* Form of Indemnity Agreement between the Registrant and its Directors. (originally filed as Exhibit number 10.3) (1) 10.3 Master Contract for Non-Public, Non-Secretarian School Agency Services, dated September 16, 1991, between Regency High School and Long Beach Unified School District. (originally filed as Exhibit number 10.4) (1) 10.4 Mental Health Services Agreement for adolescent center for 1993, 1994 and 1995, between the County of Los Angeles, Department of Mental Health and Harbor View, formerly Harbor View Rehabilitation Center. (originally filed as Exhibit number 10.5) (2) 10.5 Building Loan Agreement, dated November 20, 1992, by and between Carmichael Convalescent Hospital and PFC Corporation. (originally filed as Exhibit number 10.6) (3) 10.6 Security Agreement, dated as of November 20, 1992, between Carmichael Convalescent Hospital and PFC Corporation. (originally filed as Exhibit number 10.7) (3) 10.7* Employment Agreement between Regency Health Services, Inc. and Richard K. Matros dated April 4, 1994. (originally filed as Exhibit number 10.10) (7) 10.8* Letter agreement between the Registrant and Cecil Mays (originally filed as Exhibit number 10.14) (9) 10.9* Employment agreement between Regency Health Services, Inc. and Stephen W. Carlton dated January 9, 1995. (originally filed as Exhibit number 10.17) (10) 10.10* Indemnification Agreement dated January 1, 1994, between the Company and Brad L. Kerby. (originally filed as Exhibit number 10.18) (10) 58 10.11 Stock Purchase Agreement dated as of July 5, 1995 among the Company, Sherri Medina, Jamison Ashby, Daniel Larson and Vivra Incorporated. (originally filed as Exhibit number 10.19) (11) 10.12 Promissory Note dated as of July 6, 1995 by the Company in favor of Vivra Incorporated. (originally filed as Exhibit number 10.20) (11) 10.13 Indemnification Escrow Agreement dated as of July 6, 1995 among the Company, Vivra Incorporated, SCRS & Communicology, Inc., of Ohio and Mellon Bank, N.A. (originally filed as Exhibit number 10.21) (11) 10.14 Form of Non-Competition and Non-Disclosure Agreement dated as of July 6, 1995 between the Company and each of Sherri Medina, Jamison Ashby and Daniel Larson. (originally filed as Exhibit number 10.22) (11) 10.15 Non-Competition and Non-Disclosure Agreement dated as of July 6, 1995 between the Company and Vivra Incorporated. (originally filed as Exhibit number 10.23) (11) 10.16 Inducement Agreement dated as of July 6, 1995 among the Company, Sherri Medina and SCRS & Communicology, Inc., of Ohio. (originally filed as Exhibit number 10.24) (11) 10.17 Management Services Agreement dated January 1, 1995 between SCRS & Communicology, Inc., of Ohio and SCRS & Communicology, Inc. (originally filed as Exhibit number 10.25) (11) 10.18* Employment Agreement dated as of July 6, 1995 between the Company and Sherri Medina. (originally filed as Exhibit number 10.26) (11) 10.19* Employment Agreement dated as of June 8, 1995 between the Company and David A. Grant. (originally filed as Exhibit number 10.27) (11) 10.20* Severance Agreement and Release of Claims dated as of March 31, 1995 between the Company and Brad L. Kerby. (originally filed as Exhibit number 10.29) (11) 10.21* Credit Agreement, dated as of December 28,1995, among Registrant, the financial institutions listed therein as Lenders, Nations Bank Capital Markets, Inc., as Arranger and NationsBank of Texas, N.A., as Agent. (originally filed as Exhibit number 10.31) (13) 10.22* Settlement Agreement and Release of All Claims dated as of October 18, 1995 between the Company and James R. Wodach (originally filed as Exhibit number 10.32) (14) 10.23* Employment Agreement dated as of December 15, 1995 between the Company and Bruce D. Broussard (originally filed as Exhibit number 10.33) (14) 10.24 Non-Qualified Stock Option Agreement between Regency Health Services, Inc. and Richard K. Matros dated January 2, 1996. 10.25 Non-Qualified Stock Option Agreement between Regency Health Services, Inc. and Bruce D. Broussard dated January 2, 1996. 59 10.26* Severance Letter Agreement dated as of February 22, 1996 between the Company and Barbara Garner (originally filed as Exhibit number 10.34) (14) 10.27 Purchase and Sale Agreement, dated as of January 12, 1996, between Registrant and Liberty Healthcare Limited Partnership and Liberty Assisted Living Centers Limited Partnership. (originally filed as Exhibit number 10.35)(15) 10.28 Stock Purchase and Sale Agreement dated February 1, 1996, between First Class Pharmacy, Inc., a wholly-owned subsidiary of the Registrant, and the owners of Common Stock of Executive Pharmacy Services, Inc. (originally filed as Exhibit number 10.36) (15) 10.29 Purchase and Sale Agreement - Fresno, dated as of November 19, 1996, between Regency Rehab Hospitals, Inc., a wholly- owned subsidiary of the Registrant and Continental Medical Systems, Inc. (originally filed as Exhibit number 2.1) (17) 10.30 Purchase and Sale Agreement - Kentfield, dated as of November 19, 1996 between Regency Rehab Hospitals, Inc., a wholly-owned subsidiary of the Registrant and Kentfield Hospital Corporation. (originally filed as Exhibit number 2.2) (17) 10.31 Stock Purchase and Sale Agreement - Rehabworks of California, dated as of November 19, 1996, between Regency Rehab Hospitals, Inc., a wholly-owned subsidiary of the Registrant and CMS Therapies, Inc. (originally filed as Exhibit number 2.3) (17) 10.32 Purchase and Sale Agreement - San Bernardino, dated as of November 19, 1996, between Regency Rehab Hospitals, Inc., a wholly-owned subsidiary of the Registrant and Continental Medical Systems, Inc. (originally filed as Exhibit number 2.4) (17) 10.33 Purchase and Sale Agreement - San Bernardino Real Estate, dated as of November 19, 1996, between Regency Rehab Properties, Inc., a wholly-owned subsidiary of the Registrant and Rehab Concepts Corp. (originally filed as Exhibit number 2.5) (17) 10.34 Purchase and Sale Agreement - San Diego, dated as of November 19, 1996, between Regency Rehab Hospitals, Inc., a wholly-owned subsidiary of the Registrant and San Diego Rehab Limited Partnership. (originally filed as Exhibit number 2.6) (17) 10.35 Purchase and Sale Agreement - San Diego Real Estate, dated as of November 19, 1996, between Regency Rehab Properties, Inc., a wholly-owned subsidiary of the Registrant and San Diego Health Associates Limited Partnership. (originally filed as Exhibit number 2.7) (17) 10.36 Purchase and Sale Agreement - Western Neurologic Residential Centers, dated as of November 10, 1996, between Regency Rehab Hospitals, Inc., a wholly-owned subsidiary of the Registrant and Western Neurologic Residential Centers. (originally filed as Exhibit number 2.8) (17) 60 10.37 First Amendment to Purchase and Sale Agreement - Western Neurologic Residential Centers, Dated as of November 19, 1996, between Regency Rehab Hospitals, Inc., a wholly- owned subsidiary of the Registrant and Western Neurologic Residential Centers. (originally filed as Exhibit number 2.9) (17) 10.38 Regional Office Agreement, dated November 19, 1996, between Regency Rehab Hospitals, Inc., a wholly-owned subsidiary of the Registrant and Continental Medical Systems, Inc. (originally filed as Exhibit number 2.10)(17) 10.39 Amended and Restated Credit Agreement dated as of December 20, 1996 among Regency Health Services, Inc., as borrower, the Lenders listed, Nationsbanc Capital Markets, Inc., as arranger, and Nationsbank of Texas, N.A., as agent. (originally filed as Exhibit number 2.11) (17) 10.40 Amendment and confirmation of Collateral Account Agreement, Company Pledge Agreement and Company Security Agreement. (originally filed as Exhibit number 2.12) (17) 10.41 Amendment and Confirmation of Subsidiary Guaranty, Subsidiary Pledge Agreement and Subsidiary Security Agreement. (originally filed as Exhibit number 2.13) (17) 10.42 Asset Purchase Agreement among Managed Respiratory Care Services, Inc. (MRCS), and Arizona corporation, Jean Mathews and Joe Salazar (the sole stockholders, directors and officers of MRCS) and SCRS & Communicology, Inc. of Ohio, a wholly owned subsidiary of the Registrant. 10.43 Financing Agreement by and between the City of Beckley, West Virginia and Beckley Health Care Corp. ("Beckley Financing Agreement"), a wholly owned subsidiary of the Registrant, dated as of September 1, 1996. 10.44 Indenture of Trust relating to $2,830,000 Nursing Facility Refunding Revenue Bonds, Series 1996 by and between The City of Beckley, West Virginia and One Valley Bank, National Association, as Trustee, dated as of September 1, 1996 issued in connection with the Beckley Financing Agreement. 10.45 Financing Agreement by and between the Board of Commissioners of the County of Perry, Ohio, by and on behalf of the County of Perry, Ohio and New Lexington Health Care Corp. ("New Lexington Financing Agreement"), a wholly owned subsidiary of the Registrant, dated as of September 1, 1996. 10.46 Indenture of Trust relating to $2,545,000 Nursing Facility Refunding Revenue Bonds, Series 1996 by and between County of Perry, Ohio and SunTrust Bank, Central Florida, National Association, as Trustee, dated as of September 1, 1996 issued in connection with the New Lexington Financing Agreement. 10.47 Financing Agreement by and between the County Commission of Harrison County by and on behalf of Harrison County, West Virginia and Salem Health Care Corp. ("Salem Financing Agreement"), a wholly owned subsidiary of the Registrant, dated as of September 1, 1996. 10.48 Indenture of Trust relating to $2,185,000 Nursing Facility Refunding Revenue Bonds, Series 1996 by and between the County Commission of Harrison County by and on behalf of Harrison County, West Virginia and One Valley Bank, National Association, as Trustee, dated as of September 1, 1996 issued in connection with the Salem Financing Agreement. 13 1996 Annual Report to Security Holders 21 List of Subsidiaries of the Registrant 61 23 Consent of Independent Public Accountants 27 Financial Data Schedule * Management or compensatory plan, contract or arrangement (1) Incorporated by reference to Regency Health Services, Inc.'s Registration Statement on Form S-1 (No. 33-45591). (2) Incorporated by reference to Regency Health Services, Inc.'s 1992 Annual Report on Form 10-K (File No. 1-11144). (3) Incorporated by reference to Regency Health Services, Inc.'s Registration Statement on Form S-1 (No. 33-53590). (4) Incorporated by reference to Regency Health Services, Inc.'s 1993 Proxy Statement dated December 10, 1993 (File No. 1-11144). (5) Incorporated by reference to Regency Health Services, Inc.'s 1993 Annual Report on Form 10-K (File No. 1-11144). (6) Incorporated by reference to Regency Health Services, Inc.'s Report on Form 10-Q for the Quarter Ended September 30, 1993 (File No. 1-11144). (7) Incorporated by reference to Regency Health Services, Inc.'s and Care Enterprises, Inc.'s Joint Proxy Statement dated March 7, 1994. (8) Incorporated by reference to Care Enterprises, Inc.'s 1993 Annual Report on Form 10-K (File No. 1-9310). (9) Incorporated by reference to Regency Health Services, Inc.'s Transition Report on Form 10-K (File No. 1-11144). (10) Incorporated by reference to Regency Health Services, Inc.'s 1994 Annual Report on Form 10-K (File No. 1-11144). (11) Incorporated by reference to Regency Health Services, Inc.'s Report on Form 10-Q for the Quarter Ended June 30, 1995 (File No. 1-11144). (12) Incorporated by reference to Regency Health Services, Inc.'s Report on Form 8-K dated August 24, 1995 (File No. 1-11144). (13) Incorporated by reference to Regency Health Services, Inc.'s Report on Form 8-K dated December 28, 1995 (File No. 1-11144). (14) Incorporated by reference to Regency Health Services, Inc.'s 1995 Annual Report on Form 10-K (File No. 1-11144). (15) Incorporated by reference to Regency Health Services, Inc.'s Report on Form 8-K dated February 15, 1996 (File No. 1-11144). (16) Incorporated by reference to Regency Health Services, Inc.'s Report on Form 10-Q for the Quarter Ended June 30, 1996 (File No. 1-11144). (17) Incorporated by reference to Regency Health Services, Inc.'s Report on Form 8-K dated January 15, 1997. (b) REPORTS ON FORM 8-K None. 62 SCHEDULE II REGENCY HEALTH SERVICES, INC. VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Balance Charged Charged at to to Balance Beginning Costs & Other at End Description of Period Expenses Accounts Deductions of Period - -------------------------- ------------ ---------- ----------- ------------ ----------- FOR THE YEAR ENDED DECEMBER 31, 1996 Allowance for doubtful accounts............. $3,757 $2,890 $410 (a) $2,334 $4,723 Allowance for mortgage loan losses.......... 951 689 -- 288 1,352 ------ ------ ----- ------ ------ $4,708 $3,579 $410 $2,622 $6,075 ====== ====== ===== ====== ====== FOR THE YEAR ENDED DECEMBER 31, 1995 Allowance for doubtful accounts............. $4,189 $1,922 $734 (b) $3,088 $3,757 Allowance for mortgage loan losses.......... 951 -- -- -- 951 ------ ------ ----- ------ ------ $5,140 $1,922 $734 $3,088 $4,708 ====== ====== ===== ====== ====== FOR THE YEAR ENDED DECEMBER 31, 1994 Allowance for doubtful accounts............. $2,970 $1,344 $687 (c) $ 812 $4,189 Allowance for mortgage loan losses.......... 1,664 -- -- 713 951 ------ ------ ---- ------ ------ $4,634 $1,344 $687 $1,525 $5,140 ====== ====== ==== ====== ====== (a) Includes (i) Executive Pharmacy acquired reserves and (ii) recoveries (b) Includes (i) the reclassification of accruals established in 1994 for receivables related to duplicate facility disposals, (ii) SCRS acquired reserves, and (iii) recoveries (c) Reclassification of reserve established against note received by Care
63 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGENCY HEALTH SERVICES, INC. Date: March 24, 1997 By /s/ Richard K. Matros --------------------- Richard K. Matros President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Name and Signature Title Date By /s/ Richard K. Matros President and Chief March 24, 1997 ----------------------------- Executive Officer(Principal Richard K. Matros executive officer) By /s/ Bruce D. Broussard Executive Vice President, March 24, 1997 ----------------------------- and Chief Financial Officer Bruce D. Broussard (Principal financial and accounting officer) By /s/ John W. Adams Chairman of the Board March 24, 1997 ----------------------------- of Directors John W. Adams By /s/ Gregory S. Anderson Director March 24, 1997 ----------------------------- Gregory S. Anderson By /s/ Tony Astorga Director March 24, 1997 ----------------------------- Tony Astorga By /s/ Robert G. Coo Director March 24, 1997 ----------------------------- Robert G. Coo By /s/ Richard K. Matros Director March 24, 1997 ----------------------------- Richard K. Matros By /s/ John F. Nickoll Director March 24, 1997 ----------------------------- John F. Nickoll By /s/ Arthur J. Pasmas Director March 24, 1997 ----------------------------- Arthur J. Pasmas 64 EX-10.24 2 NON-QUALIFIED STOCK OPTION AGREEMENT - R. MATROS Exhibit 10.24 REGENCY HEALTH SERVICES, INC. NON-QUALIFIED STOCK OPTION AGREEMENT This Option Agreement is made and entered into by and between REGENCY HEALTH SERVICES, INC., a Delaware corporation (the "Company") and Richard K. Matros ("Employee"), as of the 2nd day of January, 1996 (which date is hereinafter referred to as the "Date of Grant"). If Employee is presently or subsequently becomes employed by a subsidiary of the Company, the term "Company" shall be deemed to refer collectively to Regency Health Services, Inc. and the subsidiary or subsidiaries that employ the Employee. R E C I T A L S WHEREAS, the Company has adopted the Regency Health Services, Inc. Long-Term Incentive Plan (the "Plan") as an employee incentive to encourage key employees and the officers of the Company to remain in its employment and to enhance the ability of the Company to attract new employees whose services are considered unusually valuable by providing an opportunity to have a proprietary interest in the success of the Company; and WHEREAS, the Committee established pursuant to the Plan (the "Committee") believes that the granting of the Option herein described to Employee is consistent with the stated purposes for which the Plan was adopted; NOW, THEREFORE, in consideration of the mutual covenants and conditions hereinafter set forth and for other good and valuable consideration, the Company and Employee agree as follows: A G R E E M E N T 1. Grant of Option. The Company hereby grants to Employee the right and option (hereinafter referred to as the "Option") to purchase an aggregate of Three Hundred Thousand (300,000) shares (such number being subject to adjustment as provided in paragraph 10 hereof and Article 14 of the Plan) of the common stock of Regency Health Services, Inc. (the "Stock") on the terms and conditions herein set forth. This Option may be exercised in whole or in part and from time to time as hereinafter provided. 2. Purchase Price. The price at which Employee shall be entitled to purchase the Stock covered by the Option shall be Ten Dollars and No Cents ($10.00) per share. 3. Term of Option. The Option hereby granted shall be and remain in force and effect for a period of ten (10) years from the Date of Grant, through and including the normal close of business of the Company on January 2, 2006 ("Expiration Date"), subject to earlier termination as provided in paragraphs 7, 8 and 10 hereof. 4. Exercise of Option. The Option may be exercised by Employee in accordance with the vesting schedule set forth in Exhibit "A" hereto as to all or any part of the shares covered hereby by delivery to the Company of written notice of exercise and payment of the purchase price as provided in paragraphs 5 and 6 hereof. In the event of a public tender for all or any portion of the Stock of the Company or in the event that a proposal to merge, consolidate, or otherwise combine with another company is submitted for shareholder approval, the Committee may in its sole discretion declare the Option to be immediately exercisable even if the original date for the exercise of the Option, as set forth in the first paragraph of this paragraph 4, has not yet passed. 5. Method of Exercising Option. Subject to the terms and conditions of this Option Agreement, the Option may be exercised by timely delivery to the Company of written notice, which notice shall be effective on the date received by the Company (the "Effective Date"). The notice shall state Employee's election to exercise the Option, the number of shares in respect of which an election to exercise has been made, the method of payment elected (see paragraph 6 hereof), the exact name or names in which the shares will be registered, and the Social Security number of Employee. Such notice shall be signed by the Employee and shall be accompanied by payment of the purchase price of such shares. In the event the Option shall be exercised by a person or persons other than Employee pursuant to paragraph 8 hereof, such notice shall be signed by such other person or persons and shall be accompanied by proof acceptable to the Company of the legal right of such person or persons to exercise the Option. All shares delivered by the Company upon exercise of the Option as provided herein shall be fully paid and nonassessable upon delivery. 6. Method of Payment for Options. Payment for shares purchased upon exercise of the Option shall be made by the Participant by having the Company withhold Stock (to the extent that Stock is issued pursuant to the Award) having a Fair Market Value on the date of exercise equal to the total exercise price otherwise due to the company. 7. Termination of Employment. In the event that Employee terminates employment on account of retirement or for any other reason than for cause, then Employee may at any time within three (3) months next succeeding the effective date of termination of employment exercise the Option to the extent that Employee was entitled to exercise the Option at the date of termination, provided that in no event shall the Option, or any part thereof, be exercisable after the Expiration Date. If Employee is terminated for cause, the Option shall lapse at the time of such termination of employment. 8. Death of Employee. In the event of the death of Employee within a period during which the Option, or any part thereof, could have been exercised by Employee, including three (3) months after Normal Termination (the "Option Period"), the Option shall lapse unless it is exercised within the Option Period and in no event later than fifteen (15) months after the date of Employee's death by the Employee's legal representative or representatives or by the person or persons entitled to do so under Employee's last will and testament or if the Employee fails to make a testamentary disposition of such Option or shall die intestate, by the person or persons entitled to receive such Option under the applicable laws if of descent and distribution. An Option may be exercised following the death of the Employee only if the Option was exercisable by the Employee immediately prior to his death. In no event shall the Option, or any part thereof, be exercisable after the Expiration Date. The Committee shall have the right to require evidence satisfactory to it of the rights of any person or persons seeking to exercise the Option under this paragraph 8 to exercise the Option. 9. Nontransferability. The Option granted by this Option Agreement shall be exercisable only during the term of the Option provided in paragraph 3 hereof and, except as provided in paragraphs 7 and 8 above, only by Employee during his lifetime and while an Employee of the Company. The Option granted by this Option Agreement shall be subject to the restrictions on transfer as set forth in Section 13.5 of the Plan. 10. Adjustments in Number of Shares and Option Price. In the event a stock dividend is declared upon the Stock, the remaining shares of Stock then subject to this Option shall be increased proportionately without any change in the aggregate purchase price therefor. In the event the Stock shall be changed into or exchanged for a different number or class of shares of stock into which each outstanding share of Stock shall be so exchanged, all without any change in the aggregate purchase price for the shares then subject to the Option. Subject to any required action by the stockholders, if the Company shall be the surviving or resulting corporation in any merger or consolidation, the Option granted hereunder shall pertain to and apply to the securities or rights to which a holder of the number of shares of Stock subject to the Option would have been entitled; but a dissolution or liquidation of the Company, or a merger or consolidation in which the Company is not the surviving or resulting corporation, shall, in the sole discretion of the Committee: (a) Cause the Option outstanding hereunder to terminate as of the date specified by the Committee, except that the surviving or resulting corporation, in its absolute and uncontrolled discretion, may tender an option or options to purchase its shares or exercise such rights on terms and conditions, both as to the number of shares and rights, and otherwise which shall substantially preserve the rights and benefits of the Option then outstanding hereunder; or (b) The Committee may give Employee the right to exercise this Option prior to the occurrence of the event otherwise terminating the Option over such period as the Committee, in its sole and absolute discretion, shall determine. 11. Delivery of Shares. No shares of Stock shall be delivered upon exercise of the Option until (i) the purchase price shall have been paid in full in the manner herein provided; (ii) applicable taxes required to be withheld have been paid or withheld in full; (iii) approval of any governmental authority required in connection with the Option, or the issuance of shares thereunder, has been received by the Company; and (iv) if required by the Committee, Employee has delivered to the Committee an Investment Letter in form and content satisfactory to the Company as provided in paragraph 12 hereof. 12. Securities Act. The Company shall have the right, but not the obligation, to cause the shares of Stock issuable upon exercise of the Option to be registered under the appropriate rules and regulations of the Securities and Exchange Commission. The Company shall not be required to deliver any shares of Stock pursuant to the exercise of all or any part of the Option if, in the opinion of counsel for the Company, such issuance would violate the Securities Act of 1933 or any other applicable federal or state securities laws or regulations. The Committee may require that Employee, prior to the issuance of any such shares pursuant to exercise of the Option, sign and deliver to the Company a written statement ("Investment Letter") stating (i) that Employee is purchasing the shares for investment and not with a view to the sale or distribution thereof; (ii) that Employee will not sell any shares received upon exercise of the Option or any other shares of the Company that Employee may then own or thereafter acquire except either (a) through a broker on a national securities exchange or (b) with the prior written approval of the Company; and (iii) containing such other terms and conditions as counsel for the Company may reasonable require to assure compliance with the Securities Act of 1933 or other applicable federal or state securities laws and regulations. Such Investment Letter shall be in form and content acceptable to the Committee in its sole discretion. If shares of Stock or other securities issuable pursuant to the exercise of the Option have not been registered under the Securities Act of 1933 or other applicable federal or state securities laws or regulations, such shares shall bear a legend restricting the transferability thereof, such legend to be substantially in the following form: "The shares represented by this certificate have not been registered or qualified under federal or state securities laws. The shares may not be offered for sale, sold, pledged or otherwise disposed of unless so registered or qualified, unless an exemption exists or unless such disposition is not subject to the federal or state securities laws, and the availability of any exemption or the inapplicability of such securities laws must be established by an opinion of counsel, which opinion and counsel shall both be reasonably satisfactory to the Company." 13. Federal and State Taxes. Upon exercise of the Option, or any part thereof, the Employee may incur certain liabilities for federal, state or local taxes and the Company may be required by law to withhold such taxes for payment to taxing authorities. Upon determination by the Company of the amount of taxes required to be withheld, if any, with respect to the shares to be issued pursuant to the exercise of the Option, Employee shall pay all Federal, state and local tax withholding requirements by having the Company withhold Stock (to the extent that Stock is issued pursuant to the Award) having a Fair Market Value on the date that tax is to be determined equal to the tax otherwise required by the withheld. 14. Definitions; Copy of Plan. To the extent not specifically provided herein, all capitalized terms used in this Option Agreement shall have the same meanings ascribed to them in the Plan. By the execution of this Agreement, Employee acknowledges receipt of a copy of the Plan. 15. Administration. This Option Agreement shall at all times be subject to the terms and conditions of the Plan and the Plan shall in all respects be administered by the Committee in accordance with the terms of and as provided in the Plan. The Committee shall have the sole and complete discretion with respect to all matters reserved to it by the Plan and decisions of the majority of the Committee with respect thereto and to this Option Agreement shall be final and binding upon Employee and the Company. In the event of any conflict between the terms and conditions of this Option Agreement and the Plan, the provisions of the Plan shall control. 16. Continuation of Employment. This Option Agreement shall not be construed to confer upon Employee any right to continue in the employ of the Company and shall not limit the right of the Company, in its sole discretion, to terminate the employment of Employee at any time. 17. Obligations to Exercise. Employee shall have no obligation to exercise any option granted by this Agreement. 18. Governing Law. This Option Agreement shall be interpreted and administered under the laws of the State of Delaware. 19. Amendments. This Option Agreement may be amended only by a written agreement executed by the Company and Employee. The Company and Employee acknowledge that changes in federal tax laws enacted subsequent to the Date of Grant, and applicable to stock options, may provide for tax benefits to the Company or Employee. In any such event, the Company and Employee agree that this Option Agreement may be amended as necessary to secure for the Company and Employee any benefits that may result from such legislation. Any such amendment shall be made only upon the mutual consent of the parties, which consent (of either party) may be withheld for any reason. IN WITNESS WHEREOF, the Company has caused this Option Agreement to be duly executed by its officers thereunto duly authorized, and Employee has hereunto set his hand as of the day and year first above written. "COMPANY" "EMPLOYEE" REGENCY HEALTH SERVICES, INC. By:___________________________ _________________________ Bruce Broussard, Chief Richard K. Matros Financial Officer By:___________________________ David A. Grant, Secretary EXHIBIT "A" Amount Vested and Exercisable Vesting Date [Accretive, not cumulative] 1. 20,000.............................................January 2, 1997 2. 20,000.............................................January 2, 1998 3. 20,000.............................................January 2, 1999 4. 20,000.............................................January 2, 2000 5. 20,000.............................................January 2, 2001 6. 40,000.............................................January 2, 2002 7. 40,000.............................................January 2, 2003 8. 40,000.............................................January 2, 2004 9. 40,000.............................................January 2, 2005 10. 40,000.............................................July 2, 2005 Notwithstanding the foregoing, the amounts vested shall be subject to acceleration in accordance with the attached Addendum. Addendum to Exhibit A Non-Qualified Stock Option Dated January 2, 1996 Richard K. Matros 1. If actual "EVA" (as defined below) for calendar year 1996 equals or exceeds $205,181,000, the Option shall vest and be exercisable as to 43,333 shares on January 2, 1997, in lieu of the amount set forth on line 1 of Exhibit A. 2. If actual EVA for calendar year 1997 equals or exceeds $205,640,000, the Option shall vest and be exercisable as to 43,333 shares on January 2, 1998 in lieu of the amount set forth on line 2 of Exhibit A, but in addition to any Options which otherwise theretofore vested. 3. If actual EVA for calendar year 1998 equals or exceeds $205,765,000, the Option shall vest and be exercisable as to 43,333 shares on January 2, 1998 in lieu of the amount set forth on line 2 of Exhibit A, but in addition to any options which otherwise theretofore vested. 4. If the combined actual EVA for each of the three years 1996, 1997 and 1998, equals or exceeds $616,586,000, the Option shall vest and be exercisable as to 200,000 shares (inclusive of all shares which periodically vested) on January 2, 1999. 5. If combined actual EVA for each of years 1996, 1997 and 1998, equals or exceeds $616,745,000, the Option shall vest and be exercisable as to 250,000 shares (inclusive of all shares which previously vested) on January 2, 1999. 6. If combined actual EVA for each of the years 1996, 1997 and 1998 equals or exceeds $616,903,000, the Option shall vest and be exercisable as to all shares on January 2, 1999. Any acceleration of vesting shall be deemed to be pro rata as to all options which otherwise would vest from and after January 2, 2000. For example, if accelerated vesting occurs under paragraph 1 of this Addendum, the additional number of shares that will vest in each of installments 4 and 5 will be 16,667 in lieu of 20,000 [(20,000 - [43,333 - 20,000] (PI) 7)], and 36,667 in lieu of 40,000 for each of installments 6 through 10. If installments 1 and 2 were both accelerated, the number of shares that will vest in each of installments 4 and 5 would be 13,333 in lieu of 20,000 [(20,000 - [86,666 - 40,000] (PI) 7)] and will be 33,333 in lieu of 40,000 for installments 6 through 10. As used herein the term "EVA" shall mean an amount of money calculated in accordance with the following formula: EVA = (NOPAT - Capital Charges) + (Base Market Value of Equity) NOPAT = EBDITA - Cash Taxes - Routine Capital Expenditures - Interest Income EBDITA = Earnings before depreciation, interest, taxes, amortization and non-recurring charges Routine Capital Expenditures = Annual Average Beds X $350 per bed Capital Charges = After Tax Cost of Capital X Average Capital Employed Cash Taxes = Income taxes per GAAP + Taxes saved on Interest Expense - Taxes on Interest Income - Tax Loss Carry Forward + Taxes on Nonrecurring losses - Taxes on Non-recurring gains After Tax Cost of Capital = (Outstanding Debt/Capitalization X After tax debt costs) + (Market Value of Equity/Capitalization X Equity Cost of Capital) Average Capital Employed = Average of Capitalization Outstanding Debt = Long-Term Debt for borrowed money in accordance with GAAP - Convertible debentures - Cash Balances Capitalization = Market Value of Equity + Outstanding Debt After tax debt costs = Weighted Average of (Outstanding Debt X Interest Rate) X (1 - Marginal Tax Rate) Market Value of Equity = (No. of Fully Diluted Shares X $11.50 as at 12/31/96; $13.225 as at 12/31/97; and $15.21 at as 12/31/98)) Equity Cost of Capital = 15% Taxes Saved on Interest Expense = Marginal tax rate X interest expense Taxes on Interest Income = Marginal tax rate X interest income Base Market Value of Equity = No. of Fully Diluted Shares at 3/31/96 X $10 Any ambiguity or dispute in connection with calculation of EVA shall be determined in good faith by the Committee. EX-10.25 3 NON-QUALIFIED STOCK OPTION AGREEMENT- B. BROUSSARD Exhibit 10.25 REGENCY HEALTH SERVICES, INC. NON-QUALIFIED STOCK OPTION AGREEMENT This Option Agreement is made and entered into by and between REGENCY HEALTH SERVICES, INC., a Delaware corporation (the "Company") and Bruce Broussard ("Employee"), as of the 2nd day of January, 1996 (which date is hereinafter referred to as the "Date of Grant"). If Employee is presently or subsequently becomes employed by a subsidiary of the Company, the term "Company" shall be deemed to refer collectively to Regency Health Services, Inc. and the subsidiary or subsidiaries that employ the Employee. R E C I T A L S WHEREAS, the Company has adopted the Regency Health Services, Inc. Long-Term Incentive Plan (the "Plan") as an employee incentive to encourage key employees and the officers of the Company to remain in its employment and to enhance the ability of the Company to attract new employees whose services are considered unusually valuable by providing an opportunity to have a proprietary interest in the success of the Company; and WHEREAS, the Committee established pursuant to the Plan (the "Committee") believes that the granting of the Option herein described to Employee is consistent with the stated purposes for which the Plan was adopted; NOW, THEREFORE, in consideration of the mutual covenants and conditions hereinafter set forth and for other good and valuable consideration, the Company and Employee agree as follows: A G R E E M E N T 1. Grant of Option. The Company hereby grants to Employee the right and option (hereinafter referred to as the "Option") to purchase an aggregate of Two Hundred Fifty Thousand (250,000) shares (such number being subject to adjustment as provided in paragraph 10 hereof and Article 14 of the Plan) of the common stock of Regency Health Services, Inc. (the "Stock") on the terms and conditions herein set forth. This Option may be exercised in whole or in part and from time to time as hereinafter provided. 2. Purchase Price. The price at which Employee shall be entitled to purchase the Stock covered by the Option shall be Ten Dollars and No Cents ($10.00) per share. 3. Term of Option. The Option hereby granted shall be and remain in force and effect for a period of ten (10) years from the Date of Grant, through and including the normal close of business of the Company on January 2, 2006 ("Expiration Date"), subject to earlier termination as provided in paragraphs 7, 8 and 10 hereof. 4. Exercise of Option. The Option may be exercised by Employee in accordance with the vesting schedule set forth in Exhibit "A" hereto as to all or any part of the shares covered hereby by delivery to the Company of written notice of exercise and payment of the purchase price as provided in paragraphs 5 and 6 hereof. In the event of a public tender for all or any portion of the Stock of the Company or in the event that a proposal to merge, consolidate, or otherwise combine with another company is submitted for shareholder approval, the Committee may in its sole discretion declare the Option to be immediately exercisable even if the original date for the exercise of the Option, as set forth in the first paragraph of this paragraph 4, has not yet passed. 5. Method of Exercising Option. Subject to the terms and conditions of this Option Agreement, the Option may be exercised by timely delivery to the Company of written notice, which notice shall be effective on the date received by the Company (the "Effective Date"). The notice shall state Employee's election to exercise the Option, the number of shares in respect of which an election to exercise has been made, the method of payment elected (see paragraph 6 hereof), the exact name or names in which the shares will be registered, and the Social Security number of Employee. Such notice shall be signed by the Employee and shall be accompanied by payment of the purchase price of such shares. In the event the Option shall be exercised by a person or persons other than Employee pursuant to paragraph 8 hereof, such notice shall be signed by such other person or persons and shall be accompanied by proof acceptable to the Company of the legal right of such person or persons to exercise the Option. All shares delivered by the Company upon exercise of the Option as provided herein shall be fully paid and nonassessable upon delivery. 6. Method of Payment for Options. Payment for shares purchased upon exercise of the Option shall be made by the Participant by having the Company withhold Stock (to the extent that Stock is issued pursuant to the Award) having a Fair Market Value on the date of exercise equal to the total exercise price otherwise due to the company. 7. Termination of Employment. In the event that Employee terminates employment on account of retirement or for any other reason than for cause, then Employee may at any time within three (3) months next succeeding the effective date of termination of employment exercise the Option to the extent that Employee was entitled to exercise the Option at the date of termination, provided that in no event shall the Option, or any part thereof, be exercisable after the Expiration Date. If Employee is terminated for cause, the Option shall lapse at the time of such termination of employment. 8. Death of Employee. In the event of the death of Employee within a period during which the Option, or any part thereof, could have been exercised by Employee, including three (3) months after Normal Termination (the "Option Period"), the Option shall lapse unless it is exercised within the Option Period and in no event later than fifteen (15) months after the date of Employee's death by the Employee's legal representative or representatives or by the person or persons entitled to do so under Employee's last will and testament or if the Employee fails to make a testamentary disposition of such Option or shall die intestate, by the person or persons entitled to receive such Option under the applicable laws if of descent and distribution. An Option may be exercised following the death of the Employee only if the Option was exercisable by the Employee immediately prior to his death. In no event shall the Option, or any part thereof, be exercisable after the Expiration Date. The Committee shall have the right to require evidence satisfactory to it of the rights of any person or persons seeking to exercise the Option under this paragraph 8 to exercise the Option. 9. Nontransferability. The Option granted by this Option Agreement shall be exercisable only during the term of the Option provided in paragraph 3 hereof and, except as provided in paragraphs 7 and 8 above, only by Employee during his lifetime and while an Employee of the Company. The Option granted by this Option Agreement shall be subject to the restrictions on transfer as set forth in Section 13.5 of the Plan. 10. Adjustments in Number of Shares and Option Price. In the event a stock dividend is declared upon the Stock, the remaining shares of Stock then subject to this Option shall be increased proportionately without any change in the aggregate purchase price therefor. In the event the Stock shall be changed into or exchanged for a different number or class of shares of stock into which each outstanding share of Stock shall be so exchanged, all without any change in the aggregate purchase price for the shares then subject to the Option. Subject to any required action by the stockholders, if the Company shall be the surviving or resulting corporation in any merger or consolidation, the Option granted hereunder shall pertain to and apply to the securities or rights to which a holder of the number of shares of Stock subject to the Option would have been entitled; but a dissolution or liquidation of the Company, or a merger or consolidation in which the Company is not the surviving or resulting corporation, shall, in the sole discretion of the Committee: (a) Cause the Option outstanding hereunder to terminate as of the date specified by the Committee, except that the surviving or resulting corporation, in its absolute and uncontrolled discretion, may tender an option or options to purchase its shares or exercise such rights on terms and conditions, both as to the number of shares and rights, and otherwise which shall substantially preserve the rights and benefits of the Option then outstanding hereunder; or (b) The Committee may give Employee the right to exercise this Option prior to the occurrence of the event otherwise terminating the Option over such period as the Committee, in its sole and absolute discretion, shall determine. 11. Delivery of Shares. No shares of Stock shall be delivered upon exercise of the Option until (i) the purchase price shall have been paid in full in the manner herein provided; (ii) applicable taxes required to be withheld have been paid or withheld in full; (iii) approval of any governmental authority required in connection with the Option, or the issuance of shares thereunder, has been received by the Company; and (iv) if required by the Committee, Employee has delivered to the Committee an Investment Letter in form and content satisfactory to the Company as provided in paragraph 12 hereof. 12. Securities Act. The Company shall have the right, but not the obligation, to cause the shares of Stock issuable upon exercise of the Option to be registered under the appropriate rules and regulations of the Securities and Exchange Commission. The Company shall not be required to deliver any shares of Stock pursuant to the exercise of all or any part of the Option if, in the opinion of counsel for the Company, such issuance would violate the Securities Act of 1933 or any other applicable federal or state securities laws or regulations. The Committee may require that Employee, prior to the issuance of any such shares pursuant to exercise of the Option, sign and deliver to the Company a written statement ("Investment Letter") stating (i) that Employee is purchasing the shares for investment and not with a view to the sale or distribution thereof; (ii) that Employee will not sell any shares received upon exercise of the Option or any other shares of the Company that Employee may then own or thereafter acquire except either (a) through a broker on a national securities exchange or (b) with the prior written approval of the Company; and (iii) containing such other terms and conditions as counsel for the Company may reasonable require to assure compliance with the Securities Act of 1933 or other applicable federal or state securities laws and regulations. Such Investment Letter shall be in form and content acceptable to the Committee in its sole discretion. If shares of Stock or other securities issuable pursuant to the exercise of the Option have not been registered under the Securities Act of 1933 or other applicable federal or state securities laws or regulations, such shares shall bear a legend restricting the transferability thereof, such legend to be substantially in the following form: "The shares represented by this certificate have not been registered or qualified under federal or state securities laws. The shares may not be offered for sale, sold, pledged or otherwise disposed of unless so registered or qualified, unless an exemption exists or unless such disposition is not subject to the federal or state securities laws, and the availability of any exemption or the inapplicability of such securities laws must be established by an opinion of counsel, which opinion and counsel shall both be reasonably satisfactory to the Company." 13. Federal and State Taxes. Upon exercise of the Option, or any part thereof, the Employee may incur certain liabilities for federal, state or local taxes and the Company may be required by law to withhold such taxes for payment to taxing authorities. Upon determination by the Company of the amount of taxes required to be withheld, if any, with respect to the shares to be issued pursuant to the exercise of the Option, Employee shall pay all Federal, state and local tax withholding requirements by having the Company withhold Stock (to the extent that Stock is issued pursuant to the Award) having a Fair Market Value on the date that tax is to be determined equal to the tax otherwise required by the withheld. 14. Definitions; Copy of Plan. To the extent not specifically provided herein, all capitalized terms used in this Option Agreement shall have the same meanings ascribed to them in the Plan. By the execution of this Agreement, Employee acknowledges receipt of a copy of the Plan. 15. Administration. This Option Agreement shall at all times be subject to the terms and conditions of the Plan and the Plan shall in all respects be administered by the Committee in accordance with the terms of and as provided in the Plan. The Committee shall have the sole and complete discretion with respect to all matters reserved to it by the Plan and decisions of the majority of the Committee with respect thereto and to this Option Agreement shall be final and binding upon Employee and the Company. In the event of any conflict between the terms and conditions of this Option Agreement and the Plan, the provisions of the Plan shall control. 16. Continuation of Employment. This Option Agreement shall not be construed to confer upon Employee any right to continue in the employ of the Company and shall not limit the right of the Company, in its sole discretion, to terminate the employment of Employee at any time. 17. Obligations to Exercise. Employee shall have no obligation to exercise any option granted by this Agreement. 18. Governing Law. This Option Agreement shall be interpreted and administered under the laws of the State of Delaware. 19. Amendments. This Option Agreement may be amended only by a written agreement executed by the Company and Employee. The Company and Employee acknowledge that changes in federal tax laws enacted subsequent to the Date of Grant, and applicable to stock options, may provide for tax benefits to the Company or Employee. In any such event, the Company and Employee agree that this Option Agreement may be amended as necessary to secure for the Company and Employee any benefits that may result from such legislation. Any such amendment shall be made only upon the mutual consent of the parties, which consent (of either party) may be withheld for any reason. IN WITNESS WHEREOF, the Company has caused this Option Agreement to be duly executed by its officers thereunto duly authorized, and Employee has hereunto set his hand as of the day and year first above written. "COMPANY" "EMPLOYEE" REGENCY HEALTH SERVICES, INC. By:___________________________ _________________________ Richard K. Matros Chief Bruce Broussard Executive Officer By:___________________________ David A. Grant, Secretary EXHIBIT "A" Amount Vested and Exercisable Vesting Date [Accretive, not cumulative] 1. 20,000............................................January 2, 1997 2. 20,000............................................January 2, 1998 3. 20,000............................................January 2, 1999 4. 20,000............................................January 2, 2000 5. 20,000............................................January 2, 2001 6. 30,000............................................January 2, 2002 7. 30,000............................................January 2, 2003 8. 30,000............................................January 2, 2004 9. 30,000............................................January 2, 2005 10. 30,000............................................July 2, 2005 Notwithstanding the foregoing, the amounts vested shall be subject to acceleration in accordance with the attached Addendum. Addendum to Exhibit A Non-Qualified Stock Option Dated January 2, 1996 Bruce Broussard 1. If actual "EVA" (as defined below) for calendar year 1996 equals or exceeds $205,181,000, the Option shall vest and be exercisable as to 43,333 shares on January 2, 1997, in lieu of the amount set forth on line 1 of Exhibit A. 2. If actual EVA for calendar year 1997 equals or exceeds $205,640,000, the Option shall vest and be exercisable as to 43,333 shares on January 2, 1998 in lieu of the amount set forth on line 2 of Exhibit A, but in addition to any Options which otherwise theretofore vested. 3. If actual EVA for calendar year 1998 equals or exceeds $205,765,000, the Option shall vest and be exercisable as to 43,333 shares on January 2, 1998 in lieu of the amount set forth on line 2 of Exhibit A, but in addition to any options which otherwise theretofore vested. 4. If the combined actual EVA for each of the three years 1996, 1997 and 1998, equals or exceeds $616,586,000, the Option shall vest and be exercisable as to 200,000 shares (inclusive of all shares which periodically vested) on January 2, 1999. 5. If combined actual EVA for each of years 1996, 1997 and 1998, equals or exceeds $616,745,000, the Option shall vest and be exercisable as to 225,000 shares (inclusive of all shares which previously vested) on January 2, 1999. 6. If combined actual EVA for each of the years 1996, 1997 and 1998 equals or exceeds $616,903,000, the Option shall vest and be exercisable as to all shares on January 2, 1999. Any acceleration of vesting shall be deemed to be pro rata as to all options which otherwise would vest from and after January 2, 2000. For example, if accelerated vesting occurs under paragraph 1 of this Addendum, the additional number of shares that will vest in each of installments 4 and 5 will be 16,667 in lieu of 20,000 [(20,000 - [43,333 - 20,000] (PI) 7)], and 26,667 in lieu of 30,000 for each of installments 6 through 10. If installments 1 and 2 were both accelerated, the number of shares that will vest in each of installments 4 and 5 would be 13,333 in lieu of 20,000 [(20,000 - [86,666 - 40,000] (PI) 7)] and will be 23,333 in lieu of 30,000 for installments 6 through 10. As used herein the term "EVA" shall mean an amount of money calculated in accordance with the following formula: EVA = (NOPAT - Capital Charges) + (Base Market Value of Equity) NOPAT = EBDITA - Cash Taxes - Routine Capital Expenditures - Interest Income EBDITA = Earnings before depreciation, interest, taxes, amortization and non-recurring charges Routine Capital Expenditures = Annual Average Beds X $350 per bed Capital Charges = After Tax Cost of Capital X Average Capital Employed Cash Taxes = Income taxes per GAAP + Taxes saved on Interest Expense - Taxes on Interest Income - Tax Loss Carry Forward + Taxes on Nonrecurring losses - Taxes on Non-recurring gains After Tax Cost of Capital = (Outstanding Debt/Capitalization X After tax debt costs) + (Market Value of Equity/Capitalization X Equity Cost of Capital) Average Capital Employed = Average of Capitalization Outstanding Debt = Long-Term Debt for borrowed money in accordance with GAAP - Convertible debentures - Cash Balances Capitalization = Market Value of Equity + Outstanding Debt After tax debt costs = Weighted Average of (Outstanding Debt X Interest Rate) X (1 - Marginal Tax Rate) Market Value of Equity = (No. of Fully Diluted Shares X $11.50 as at 12/31/96; $13.225 as at 12/31/97; and $15.21 at as 12/31/98)) Equity Cost of Capital = 15% Taxes Saved on Interest Expense = Marginal tax rate X interest expense Taxes on Interest Income = Marginal tax rate X interest income Base Market Value of Equity = No. of Fully Diluted Shares at 3/31/96 X $10 Any ambiguity or dispute in connection with calculation of EVA shall be determined in good faith by the Committee. EX-10.42 4 ASSET PURCHASE AGREEMENT - MRCS Exhibit 10.42 ASSET PURCHASE AGREEMENT This ASSET PURCHASE AGREEMENT ("AGREEMENT") is made and entered into as of the date below stated, by, between and amongst MANAGED RESPIRATORY CARE SERVICES, INC. ("MRCS"), an Arizona corporation ("Seller") with principal offices at Phoenix, Arizona; JEAN MATHEWS ("Mathews"), and JOE SALAZAR ("Salazar"), each and all of whom are the sole stockholders, directors and officers of Seller (individually referred to by their last names, as indicated above, and collectively referred to as "Stockholders"); and SCRS & COMMUNICOLOGY, INC. OF OHIO, an Ohio corporation ("Buyer", or sometimes referred to as "SCRS-Ohio"), with principal offices at Laguna Hills, California. Whereas, Seller is in the business of providing or furnishing marketing, contract management and practice management services for and on behalf of respiratory care therapists or the employers of such therapists (the "Seller's Business"); and Whereas, the parties hereto desire that Seller shall sell to Buyer, and that Buyer shall purchase from Seller, all of the assets directly related to the operation of the Seller's Business (sometimes hereinafter referred to as the "Purchased Assets"), as more fully identified in this Agreement or in the exhibits or other schedules appended hereto, upon the terms and conditions hereinafter set forth; and Whereas, the Seller and Buyer have entered into a certain Letter of Intent, dated and made as of June 13, 1996, together with any amendments or supplements thereto, generally describing the proposed acquisition by Buyer of the Purchased Assets and Seller's Business, which Letter of Intent is to be and shall hereby be superseded by and upon timely execution of this Agreement; and Whereas, Mathews owns fifty-one percent (51%) of the issued and outstanding shares of stock of Seller, is a director and officer of Seller, is one of the persons responsible for origination and development of the Seller's Business, and is a full-time employee of Seller directing and planning the day-to-day activities of Seller's Business; and Whereas, Salazar owns forty-nine percent (49%) of the issued and outstanding shares of stock of Seller, is a director and officer of Seller, is one of the persons responsible for origination and development of the Seller's Business and is a full-time employee of Seller directing and planning the day-to-day activities of Seller's Business; Whereas, Stockholders (collectively or as individually named, as appropriate) participate in, and have executed, this Agreement primarily for the purpose of assuming and being personally and primarily bound, jointly and severally, by each, every and all of Seller's agreements, indemnities, representations and warranties contained herein, the same as though Stockholders, and each of them as specifically or collectively named, were a seller hereunder, and having made such agreements, indemnities, representations and warranties to Buyer, personally and directly with Seller to Buyer as obligations of a principal, and not as a surety (each Stockholder hereby conclusively acknowledging his or her direct, personal benefit hereunder); the parties, however, now herewith agreeing that this obligation of Stockholders is not intended to nor shall it create either directly or indirectly any new liability or obligation on the behalf of Stockholders as concerns or relates to any person or other entity not a party to this Agreement; in addition, Stockholders hereby join in and otherwise participate in this Agreement, and execute it individually as it relates to other contractual agreements they herewith make, referenced herein, which shall become effective upon execution and consummation of this Agreement; Now, Therefore, in consideration of the premises and mutual covenants and agreements herein contained, and for other good and valuable consideration (including the purchase price specified in Article Three, below), the sufficiency of which is hereby acknowledged, Seller, Stockholders (collectively or individually, to the extent as provided herein) and Buyer do mutually agree as follows: ARTICLE ONE. SALE AND PURCHASE OF ASSETS Section 1.1. Assets Sold and Purchased. Subject to and on the terms and conditions set forth herein, at the Closing (as defined in Section 4.1., which shall occur on the "Closing Date"), Seller shall sell, deliver, transfer and assign to Buyer free and clear of all liens, claims, charges, restrictions and encumbrances of every kind, nature and description (except only any as are expressly identified as such, set forth in Exhibit 2.1, and which Buyer, in connection therewith, shall have agreed to accept), and Buyer shall purchase for the consideration herein provided, all of the assets, properties and business of Seller of every kind, nature and description, wherever located, whether tangible or intangible, and whether or not fully depreciated or amortized, as the same shall exist as of the Closing Date (and excepting only such specifically identified assets as are to be retained by Seller pursuant to Section 1.2. hereof). Such assets to be purchased by Buyer, hereinafter sometimes referred to as the "Purchased Assets", are those specifically set forth in Exhibit 1.1., attached hereto, and which is intended and shall include all of those assets now and presently required for and used in the operation of Seller's Business, including existing or pending licenses, contracts and incomes from and after Closing Date, and expressly including the following: (a) All furniture, fixtures, equipment, and inventory owned by Seller; (b) All right, title and interest in and to the name "Managed Respiratory Care Services, Inc." and any registered copyright or service mark related thereto; (c) All intellectual property rights of Seller, and trade secrets including the Seller's client list; (d) All right, title and interest of Seller in, to and under each assignable license, contract, agreement, commercial document, memorandum, letter of intent, order or commitment, whether written or oral, in the name of or intended for the benefit of Seller and related to Seller's Business; (e) All accounts, licenses and prospective customer lists, files, correspondence and databases and any other information relating to the Purchased Assets, including without limitation, any prospects list (except for any of the foregoing which Seller requires to operate its business after the Closing or is required to retain in order to comply with any applicable law, as to which only copies thereof are to be conveyed hereunder (collectively, the "Purchased Asset Information"); and (f) All membership or other similar interests in "Phoenix Solutions, LLC", or any contracts regarding such entity. Section 1.2. Assets Retained by Seller. Seller shall not sell, deliver, transfer, assign or convey, and Buyer shall not purchase, the assets of Seller (if any) as are set forth in Exhibit 1.2 hereto. Such assets are hereinafter referred to as the "Retained Assets". Section 1.3. Instruments of Transfer. At Closing, Seller shall deliver to Buyer bills of sale, endorsements, assignments, and such other good and sufficient documents and instruments of transfer as shall be effective, in the opinion of Seller's counsel (see Section 4.2(f)(ix) of this Agreement), and acceptable to Buyer's counsel, to vest in Buyer good, marketable and indefeasible title to the Purchased Assets as contemplated hereby. Section 1.4. Further Assurances by Seller and Stockholders. Seller and Stockholders further agree that, at any time and from time to time after Closing, they will, upon the request of Buyer and at Seller's and Stockholder's sole expense, do, execute, acknowledge, and deliver, or will use their best efforts to cause to be done, executed, acknowledged or delivered, all such further acts, assignments, transfers, conveyances, or assurances as may be reasonably required in order to further transfer, assign, convey, assure and confirm to Buyer, or to aid and assist in the collection or reducing to possession by Buyer, of any of the Purchased Assets or to vest in Buyer good, marketable and indefeasible title to such Purchased Assets. Section 1.5. Assignment of Contracts, Rights, Etc. Anything contained in this Agreement to the contrary notwithstanding, this Agreement shall not constitute an agreement to assign any contract, license, lease, commitment, sales order, purchase order, or any claim or right of benefit arising thereunder or resulting therefrom, if an attempted assignment thereof, without the consent of a third party thereto (which third party is not a party to this Agreement) would constitute a breach thereof or in any way affect the rights of Buyer thereunder. In such event, Seller and Stockholders shall use their best efforts to obtain the consent of the third party to the assignment thereof to Buyer in all cases in which such consent is required for assignment or transfer. If such consent is not obtained, Seller and Stockholders agree to cooperate with Buyer in any reasonable arrangements designed to provide and assure to Buyer the benefits thereunder, including enforcement for the benefit of Buyer of any and all rights of Seller against the third party arising out of the cancellation undertaken or attempted by such third party or otherwise. Section 1.6. Access by Seller and Stockholders. For a period of three years after Closing or such longer period of time as may be necessary for Seller's or Stockholders' compliance with requirements of any taxing authorities, Buyer shall, during normal business hours, provide Seller, Stockholders and their authorized agents or representatives, with such access to the books and records of the Seller's Business, as are to be conveyed, transferred and assigned to Buyer in connection with the Purchased Assets, as the Seller and Stockholders may reasonably require. Such access shall be limited to the books and records of the Seller's Business prior to the Closing Date. Seller and Stockholders shall be entitled, at their own expense, to make extracts of copies of such books and records. Notwithstanding anything contained herein to the contrary, Buyer shall not be obligated to give Seller, Stockholders or any such agents or representatives, access to any material relating to any period subsequent to the Closing Date or developed by Buyer at its expense or for its benefit, including, without limitation, tax returns for any subsequent periods of time, provided, Buyer shall give reasonable access to Seller, as Seller may reasonably determine to be directly relevant, of such books and records developed and maintained by Buyer after Closing Date, and as necessary to verify the amount of any Earn-Out Payments to which Seller may become entitled, after Closing Date, under Section 3.4 (or related section, if applicable) of this Agreement. ARTICLE TWO. ASSUMPTION OF LIABILITIES Section 2.1. Liabilities Assumed. Buyer shall not assume any liabilities (or obligations) whatsoever of either Seller or Stockholders, whether in connection with Seller's Business or the Purchased Assets, except those specifically listed, identified and enumerated in Exhibit 2.1., attached hereto (the "Assumed Liabilities"). Section 2.2. Liabilities Retained. Seller agrees to retain all liabilities and obligations of Seller, pertaining to the Seller's Business and the Purchased Assets, except as specifically assumed by Buyer and as fully shown in Exhibit 2.1. (if any). Except as so shown, Seller shall remain fully obligated, and shall discharge all liabilities and obligations thereof (hereinafter collectively referred to as the "Liabilities)", including but not limited to the following: (a) All long-term liabilities of Seller, including the current portion thereof; (b) All liabilities for federal, state, provincial, local and foreign taxes relating to Seller's Business, whether arising prior to the Closing Date or thereafter, and related to the Seller's prior use, ownership or possession, or Seller's transfer, conveyance and assignment, of the Purchased Assets contemplated by this Agreement, including without limitation, property, franchise, gross receipts, sales, and income taxes of every kind and description; (c) All liabilities of Seller to its accounts, clients or customers, arising out of or connected with matters on or prior to the Closing Date; (d) All liabilities (including short term) of Seller of any nature whatsoever, based on events occurring before the Closing Date or services performed by Seller before the Closing Date, notwithstanding that the date on which the claim is first made known is after the Closing Date, including without limitation those liabilities pertaining to any employment relationship, or regulations or laws relating to health and safety of employees; regulations or laws relating to hazardous materials and pollution of the environment; (e) All liabilities of Seller with respect to any pending, threatened or unasserted litigation, claims, demands, investigations or proceedings relating to events on or before the Closing Date, or arising thereafter; (f) All liabilities of Seller with respect to or arising out of the transactions contemplated by this Agreement; (g) Any liability, the existence of which is a breach of any representation, warranty, or covenant of either Seller or Stockholders (whether collectively, or individually by name) under or within this Agreement; and (h) All liabilities of Seller with respect to all employee pay, salary, benefit and bonus plans based on events occurring or arising prior to the Closing Date, or arising thereafter. ARTICLE THREE. CONSIDERATION FOR PURCHASED ASSETS Section 3.1. Total Purchase Price to be Determined. Buyer, at Closing and from time to time thereafter as provided in this Agreement, shall pay Seller for the Purchased Assets a total money purchase price consisting of a "Minimum Purchase Price" (see Section 3.2), and "Earn-Out Payments", in an amount to be determined after Closing in accord with this Article Three. In no event shall the total of Minimum Purchase Price and Earn-Out Payments, regardless of when determined or payable, exceed the sum of $800,000.00. Section 3.2. Closing; "Minimum Purchase Price" due at Closing. On Closing Date, and if the transaction is then ready to be consummated to the reasonable satisfaction of each party, and in a manner consistent with the terms of this Agreement, and if Seller and Stockholders shall have performed prior to Closing all matters as required of them under this Agreement, and all conditions shall have been satisfied or otherwise waived by the party having the power to so waive, Buyer shall thereupon pay Seller the sum of $300,000.00, by cashier's check or money order payable to Seller's order, or wire transfer to Seller's designated account. This sum shall be the "minimum purchase price" to be paid by Buyer. Section 3.3. "Earn-Out Payments"; Definitions and Principles. The additional amount of the purchase price (over and above that payable under Section 3.2), if any, shall be known as the "Earn-Out Payments", as may be determined to be earned by Seller, and due and owing by Buyer, from time to time following Closing Date and during the "Earn-Out Period"(which begins the first day following the Closing Date and ends December 31, 1998), all pursuant to the provisions of this Section 3.3 and the formula in following Section 3.4. Earn-Out Payments shall be based on "After-Tax Profitability" ("ATP"), which for purposes of this Section 3.3 (and related sections) shall be determined in accord with the following: Gross Revenues (as defined for each of the accounting periods contained within the Earn-out Period) of that defined or described portion of Buyer's RT Division (as more fully qualified herein), less Cost of Sales, Overhead, General & Administrative Costs, Amortization, Interest, Depreciation, and Other Expenses, (in accord with generally accepted accounting principles, consistently applied) and less Taxes, for each of the respective accounting periods ("Years") during the Earn-Out Period. The result, so determined, subject to the definitions and determinations hereinafter provided, shall be After-Tax Profitability ("ATP"), upon which determination the amount of any Earn-Out Payment shall ultimately be further determined. As a general rule, for purposes of determining Earn-Out Payments under this (and related) sections of this Agreement, the parties intend that Buyer's RT Division shall include operations under and sales generated by those Purchased Assets as comprised the Seller's Business immediately prior to Closing Date, together with that such new and additional business as Buyer's RT Division, as initially constituted, shall develop with either existing accounts or third-parties unrelated to Buyer following Closing Date. Determination of Gross Revenues of Buyer's RT Division, for this purpose, shall not include any sales derived from the assets included within such division, if any, hereafter purchased from a third party seller. Further, unless included within Gross Revenue for a particular Year (by and under the definitions following), Gross Revenue of the Buyer's RT Division shall not include sales directly or indirectly related to Regency Health Services, Inc. (Buyer's parent corporation), or any subsidiaries thereof, or divisions of subsidiaries. The following definitions (or principles) shall be applied to determine ATP, which, following adjustments and subject to those provisions more fully stated in Section 3.4, shall yield the Earn-Out Payments to be determined during the Earn-Out Period: o Gross Revenue (Year One): the gross revenues of Buyer's RT Division, excluding sixty per cent (60%) of sales directly or related to Buyer's parent corporation, Regency Health Services, Inc., and subsidiaries or divisions owned by said parent corporation. o Gross Revenues (Year Two): the gross revenues of Buyer's RT Division, excluding sixty per cent (60%) of those sales directly or related to Buyer's parent corporation, Regency Health Services, Inc. and subsidiaries or divisions owned by said parent corporation arising during that period of time of Year Two as is within 12 months of the Closing Date (and excluding all such sales thereafter). o Gross Revenues (Year Three): the gross revenues of Buyer's RT Division, excluding those sales directly or related to Buyer's parent corporation, Regency Health Services, Inc. and subsidiaries or divisions owned by said parent corporation. o Cost of Sales: all expenses directly attributable to generation and support of gross revenues. o Overhead: all expenses indirectly attributable to generation and support of gross revenues. o General & Administrative Expenses: those expenses necessary to support the RT Division, and which cannot be directly or indirectly allocated to any portion of the gross revenue. o Depreciation, Interest, and Other Expenses: determinations to be made consistent with generally accepted accounting principles. o Taxes: all federal, state, local and other governmental taxes based on income and profit, determined to be applicable to the Buyer's RT Division, during the Earn-out Period, without regard to any surtax exemption. o Inter-company allocations of expenses: inter-company (or divisional) allocations shall be limited to those expenses which, because of cost and/or efficiency advantages, can be directly associated with the operation of Buyer's RT Division. Buyer will provide detailed explanation in support of the allocation. For purposes of applying and determining the Earn-Out Payments as may be due Seller from time to time, Buyer shall track and record ATP (as that term is specially defined in and for the purposes of this Section 3.3 and related sections hereof) of Buyer's RT Division (as limited in this Section 3.3) during three (3) consecutive accounting periods or calendar years, namely, 1996 (from and after Closing Date only, expressly excluding any period of calendar year 1996 prior to the Closing Date), 1997 and 1998 (such periods or years being collectively referred to as the "Earn-Out Period", each such year being individually referred to, in succession, as "Year One", "Year Two", and "Year Three"). If ATP for the Year in question, is equal to or greater than "ATP Target" as shown in Column 2 of table, Section 3.4, below, the Earn-Out Payment shall be deemed fully earned, due and payable. If ATP for the Year in question is less than "ATP Target" as shown in Column 2, table, Section 3.4, the Earn-Out Payment shall be reduced by a ratio of $3 for each $1 said ATP is less than the ATP Target, to be applied until the Earn-Out Payment for the Year reaches zero. Earn-Out Payments are not dependent upon Stockholders' continued employment by Buyer, nor upon the maintenance of such employment for any particular or minimum period of time. Section 3.4. Table of ATP Targets, Earn-Out Payments. When ATP equals or exceeds ATP Target, Earn-Out Payments ("EOP") shall be deemed fully earned by Seller, and become fully payable by Buyer in accord with the following table: Column 1 Column 2 Column 3 Year ATP Target EOP One (1996) $63,000.00 $25,000.00 Two (1997) $186,000.00 $175,000.00 Three (1998) $293,000.00 $300,000.00 In no event shall the cumulative total of the Earn-Out Payments, for the entire Earn-Out Period, exceed the sum of $500,000.00. If ATP does not equal or exceed ATP Target, in one or more Years, apply EOP reduction formula stated in Section 3.3. Section 3.5. Delivery of Buyer's RT Division Financial Statements. Within forty-five days after the end of each of the Years comprising the Earn-Out Period, Buyer shall have prepared and delivered to Seller internally-prepared and maintained balance sheet and income statements for such year for Buyer's RT Division (the "Financial Statements"), prepared in accordance with generally accepted accounting principles (GAAP), consistently applied, along with a statement in reasonable detail computing and showing Gross Revenue (as variously defined in Section 3.3, for the Year in question), along with a "Earn-Out Report", containing an identification of all other applied elements and items leading to a determination of ATP, with all necessary back up calculations and determinations. Section 3.6. Calculation of Earn-Out Payments; Dispute by Seller. (A) The contents of the Financial Statements and Earn-Out Report, as determining the Earn-Out Payment payable for that Year, in accord with Section 3.3 and Section 3.4, shall be binding upon the parties unless Seller gives written notice ("Earn-Out Report Dispute Notice") that Seller disputes the calculations therein, serving such Earn-Out Report Dispute Notice within twenty (20) days after the Financial Statements and Earn-Out Report have been transmitted to Seller. (B) If Seller delivers an Earn-Out Report Dispute Notice in accordance with Subsection 3.6(A), such notice shall set forth in reasonable detail the exclusions, calculations or determinations being disputed in good faith. If Buyer and Seller have not resolved the dispute within fifteen (15) days after Seller serves the Earn-Out Report Dispute Notice, the parties shall promptly submit the dispute to a nationally recognized, mutually-agreed, "Big Six" accounting firm or its successor (other than any such auditors used by Buyer within the previous three (3) years) with instructions to finally determine, by compilation or review, within thirty (30) days, Gross Revenue (as variously defined in Section 3.3, for the Year in question), along with such other necessary and appropriate determinations leading to ATP (as that term is specially defined in and for the purpose of Section 3.3, and related sections), of the Buyer's RT Division (as qualified in Section 3.3) and whether ATP, when compared to ATP Target, is sufficient to entitle Seller to an Earn-Out Payment (whether in full, per the table in Section 3.4, or reduced by the formula in Section 3.3). All expenses relating to such determination, including attorneys' fees, shall be borne equally by the parties. The accounting firm so selected shall by compilation or review set forth the exclusions, calculations and determinations, thereby establishing the Auditor's Earn-Out Report for the Year in question, and such Auditor's Earn-Out Report shall thereupon become binding upon and non-appealable by the parties. Section 3.7. Payments. (A). The Earn-Out Payments, if, when and to the extent deemed earned, shall be paid to Seller according to the following schedule: Year: EOP Due Date: 1996 March 15, 1997 1997 March 15, 1998 1998 March 15, 1999 (B). Except as provided in Subsection 3.6(A), any amount of Earn-Out Payments deemed earned, and due and owing from Buyer, but not paid in full within ten (10) days following the due date specified in Subsection 3.7(A), shall thereafter bear interest until paid, at ten percent (10%) per annum. (C). If the Auditor's Earn-Out Report determines that any additional amount of Earn-Out Payments are earned, and due and owing by Buyer, the Earn-Out Payment shall be paid to Seller within ten (10) days of the determination, and if not so paid, the amount of any unpaid Earn-Out Payments shall bear interest as provided in Subsection 3.7(B). Section 3.8. Continuation of Operations. Buyer represents and agrees as follows: (a) that all Purchased Assets, including all contracts, agreements, commitments and any renewals, modifications or amendments to same, will be retained in Buyer's RT Division during the Earn-Out Period (Buyer, however, shall not be in breach for any loss, diminishment, cancellation, termination or curtailment of any such Purchased Assets by the actions or activities of third parties, including the cancellation or termination of any contract or agreement by the other party thereto, nor shall Buyer be prevented, in good faith, from cancelling, terminating or curtailing one or more operations under any particular contract, agreement, commitment or any renewals by reason of such operations generating inadequate sales, margins or profits, in Buyer's sound business discretion); (b) that, unless otherwise provided for in (a) above, the operations of Seller's Business, as existed immediately prior to Closing Date, will be continued and developed in Buyer's RT Division (with the direction, efforts, full cooperation and assistance of Mathews and Salazar, during such time as they each may be employed by Buyer's RT Division following Closing Date, pursuant to other portions of this Agreement) during the Earn-Out Period; (c) that Buyer's RT Division will not merge with, and that the assets of the RT Division will not be sold to, or otherwise consolidate with any other division or entity, affiliated with Buyer or otherwise, during the Earn-Out Period (without Seller's written consent, which consent shall not be unreasonably refused if and in the event Buyer's proposed transfer, by sale or otherwise, of all or any Purchased Assets or the RT Division is to an entity, division or a third party which transferee shall have expressly agreed to assume the continuing responsibilities of Buyer under this Agreement, including the ongoing obligation of Buyer to determine and pay to Seller the Earn-Out Payments, and shall have further agreed to continue the operations of the Buyer's RT Division consistently and in substantially the same manner as Buyer shall have undertaken same following Closing Date); and (d) that until end of the Earn-Out Period, neither Buyer's parent corporation or other subsidiaries thereof will not establish or own a business directly competing with Buyer's RT Division, or any business that would compete with the Seller's Business as it existed immediately prior to the Closing Date (for purposes of this Section 3.8, "Competing Business" shall mean any business that engages in, and "Compete" shall mean the practice of, providing or furnishing marketing, contract management or practice management services for and on behalf of respiratory care therapists or employers of such therapists within the state of Arizona, provided Buyer shall not be precluded from acquiring the assets of any such Competing Business, to be operated as part of the RT Division); and (e) that Buyer will maintain adequate books and records during the Earn-Out Period and for two years thereafter in order to allow Seller to review the books and records during reasonable business hours. Section 3.9. Buyer's Default and Seller's Remedy. (A) Each of the following shall constitute an Event of Default with respect to Buyer's continued performance under this Article Three, when occurring or transpiring during the Earn-Out Period: (1) failure by Buyer to issue payment of any Earn-Out Payment (when such is deemed earned, due and owing under the Earn-Out Report) by the due date specified in Section 3.7, or within ten (10) days thereafter; (2) failure by Buyer to provide Financial Statements or the Earn-Out Report to Seller in a timely manner as required by Section 3.5; (3) the transfer, by sale or otherwise, of any of the Purchased Assets to any other entity or division other than Buyer's RT Division, without Seller's written consent, which consent shall not be unreasonably refused if and in the event Buyer's proposed transfer (by sale or otherwise) of all or any Purchased Assets is to an entity, division or a third party which transferee shall have expressly agreed to assume the continuing responsibilities of Buyer under this Agreement, including the determination and payment to Seller of any remaining Earn-Out Payments, when and as due, and shall have further agreed to continue the operations of the Buyer's RT Division consistently and in substantially the same manner as Buyer shall have undertaken same following Closing Date; (4) Buyer's discontinuance of the RT Division prior to the expiration of the Earn-Out Period (unless by transfer, by sale or otherwise, to which Seller shall have consented); (5) engagement by Buyer, or its parent corporation, in any Competing Business, or any business that would Compete with the business of Seller's Business as it existed prior to the Closing Date, and within any point in Arizona; or (6) any bankruptcy, reorganization, debt arrangement or other proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding, instituted by or against Buyer or a subsidiary of Buyer, if not dismissed within 90 days. (B) In the event one or more Events of Default have occurred, Buyer shall be in breach of this Agreement and Seller is then entitled to pursue all available remedies, including damages or specific performance, to which Seller may then be entitled under applicable law. ARTICLE FOUR. THE CLOSING Section 4.1. Date, Time and Place. Closing of the purchase and sale of all Purchased Assets, as contemplated herein, shall take place on August 9, 1996, at the hour of 11:00 A.M., local time, at the Buyer's offices at Laguna Hills, California, or such earlier date and hour as the parties may mutually agree upon, or such later date and hour, or at such other place, as the parties may mutually agree in writing. If Closing does not take place because of the actions or inactions of Seller, or if there is any material, adverse change to the Purchased Assets, or the Seller's Business generated thereby, as a result of any condition, occurrence or event predating the Closing, then and in such event, Buyer may, at Buyer's sole option, declare this Agreement null and void, no longer in effect and neither party shall have any further obligation or liability hereunder. If Closing does not take place solely because of the actions or inactions of Buyer, then and in such event Seller may, at Seller's sole option, declare this Agreement null and void, no longer in effect. Section 4.2. Conditions Precedent to Buyer's Obligations. The obligation of Buyer to perform in accordance with this Agreement is contingent upon, and subject to, satisfaction or waiver by Buyer of the following conditions by Seller and/or Stockholders (collectively or individually, as the case may be) at or prior to Closing, or compliance with the following conditions to Buyer's reasonable satisfaction: (a) Performance by Seller and Stockholders of all agreements and covenants to be performed by them at or prior to Closing; (b) Continued accuracy of the representations and warranties of Seller and Stockholders, as herein contained; (c) Absence of any pending or threatened legal action against Seller or Stockholders which, if successful, would prohibit or hinder consummation, or require substantial rescission of the transactions contemplated by this Agreement; (d) Absence of a material, adverse change in the financial condition, results of operations, assets (including the Purchased Assets) or business of Seller; (e) Continuation in full force and effect, without modification, of Seller's presently existing and material leases, contracts, licenses, permits and other similar contracts and rights; (f) Delivery of the following documents to Buyer or confirmation to Buyer of compliance with the following requirements at or before Closing, all of which shall be in form and of such substance acceptable to Buyer and its counsel: (i) Instruments of transfer required by Section 1.3 hereof; (ii) Releases (or copies thereof) of all liens, claims, charges, encumbrances, security interests and restrictions, if any, on the Purchased Assets necessary to provide Buyer with good, marketable and indefeasible title to each and all of the Purchased Assets at Closing (excepting only any such matters which Buyer has agreed to accept thereon and at such time, and as are specifically listed and shown as such in Exhibit 2.1); (iii) Consents and approvals of all third parties, if any, necessary for Seller and Stockholders to execute, deliver or perform this Agreement; (iv) Consents and approvals of all third parties having business relationships with seller, if consent to transactions of the nature herein contemplated is or may be required in order to prevent a material adverse change in such business relationship, such as cancellation of services or any software license by a customer; (v) Certified copies of corporate actions taken by Seller's Board of Directors, and Seller's Stockholders, authorizing the execution, delivery and performance of this agreement, and the filing of amendments to Seller's Articles of Incorporation, changing Seller's name to eliminate any and all reference, in any form, to "MANAGED RESPIRATORY CARE SERVICES, INC."; (vi) Articles of Amendment to the Articles of Incorporation of Seller, in form suitable for filing forthwith, changing its name to eliminate the words "MANAGED RESPIRATORY CARE SERVICES" (to be thereafter filed at Seller's expense, with the Arizona Corporation Commission, and proof thereof being furnished to Buyer's counsel not more than 15 days following Closing); (vii) Certificate of Good Standing and Status for Seller from the State of Arizona, dated no earlier than ten (10) days prior to the Closing Date; (viii) Certificate signed by one or more duly authorized officers of Seller, and Stockholders, dated the Closing Date, to the effect that the representations and warranties of Seller and Stockholders contained herein are true and correct as of the Closing Date, just as if such representations had been made thereat and on such date; (ix) Opinion of counsel for Seller and Stockholders, addressed to Buyer and dated the Closing Date, to the effect that the representations and warranties contained in Sections 5.1.1; 5.2.1; 5.2.2.; 5.2.3. clause (i) and (iv); and Subsection 5.4.2. (the third sentence) are true and correct subject, where appropriate, to the standard bankruptcy and equitable remedies exceptions and subject to such changes as are reasonably acceptable to Buyer's counsel; (x) UCC searches showing no liens, security interests, or claims against the Purchased Assets or Seller's Business being hereby acquired, brought current to the Closing Date by supplemental affidavits of Seller and Stockholders; and (xi) Satisfaction of all bank indebtedness required to consummate the transaction with delivery of pay-off letters or documents from the involved bank(s) or other lenders to be addressed to Seller. Section 4.3. Conditions Precedent to Seller's and Stockholder's Obligations. The obligation of Seller and Stockholders (collectively or individually, as applicable) to perform in accordance with this Agreement is contingent upon, and subject to, satisfaction of the following conditions by Buyer at or before Closing: (a) Performance by Buyer of all agreements and covenants to be performed by it at or prior to Closing; (b) Continued accuracy of the representations and warranties of Buyer, as herein contained; (c) Absence of any pending or threatened legal action against Buyer which, if successful, would prohibit or hinder consummation, or require substantial rescission of the transactions contemplated by this Agreement; (d) Delivery or tender of the following documents to Seller, at Closing, all of which shall be in form and of such substance acceptable to Seller and its counsel: (i) That portion of the purchase price as required by Section 3.2. hereof; (ii) Instruments by which Buyer assumes the Assumed Liabilities (if any); (iii) Certified copies of corporate actions taken by Buyer, and Buyer's shareholder, authorizing the transactions contemplated hereby; (iv) Certificate of good standing for Buyer dated no earlier than 10 days prior to the Closing Date; (v) Certificate signed by Buyer's President, dated the Closing Date, to the effect that the representations and warranties of Buyer contained herein are true and correct as of the Closing Date, just as if such representations and warranties had been made thereat; and (vi) Opinion of counsel for Buyer, addressed to Seller and Stockholders, dated the Closing Date, to the effect that the representations and warranties contained in Section 6.1. are true and correct, and that to the best of said counsel's knowledge, the representations and warranties contained in Subsections 6.2.2. and 6.2.3. are true and correct, subject, where appropriate, to the standard bankruptcy and equitable remedies exceptions and subject to such changes as are reasonably acceptable to Seller's counsel. Section 4.4. Non-fulfillment of Buyer's Conditions. The conditions contained in Section 4.2. hereof have been inserted for the exclusive benefit of Buyer. In case any material conditions shall not be fulfilled at or before Closing, Buyer may rescind this Agreement by notice to Seller and in such event, Buyer shall be released from all further obligation hereunder and, unless Buyer can show that the condition or conditions for the non-performance of which Buyer has rescinded this Agreement were reasonably capable of being performed or caused to be performed by Seller and/or Stockholders without undue delay or postponement of the Closing, then Seller and Stockholders shall also be released from all obligations hereunder; provided, that any of the said conditions may be waived in whole or in part by Buyer without prejudice to Buyer's right of rescission in the event of the non-fulfillment of any other condition or conditions. Section 4.5. Non-fulfillment of Seller's and Stockholder's Conditions. The conditions contained in Section 4.3. hereof have been inserted for the exclusive benefit of Seller and Stockholders. In case any material conditions shall not be fulfilled at or before Closing, Seller may rescind this Agreement by notice to Buyer and in such event, Seller and Stockholders shall be released from all further obligation hereunder and, unless Seller and Stockholders can show that the condition or conditions for the non-performance of which Seller and Stockholders have rescinded this Agreement were reasonably capable of being performed or caused to be performed by Buyer without undue delay or postponement of the Closing, then Buyer shall also be released from all obligations hereunder; provided, that any of the said conditions may be waived in whole or in part by Seller and Stockholders without prejudice to their right of recission in the event of the non-fulfillment of any other condition or conditions. ARTICLE FIVE. REPRESENTATIONS, WARRANTIES OF SELLER, STOCKHOLDERS Seller and Stockholders, jointly and severally, represent and warrant to Buyer that the following statements are true and correct to the best of their knowledge, respectively, as of the date hereof and that said statements will be true and correct to the best of their knowledge, respectively, as of the Closing Date (unless specific reference is made to only one of such dates or to some other date): Section 5.1. Corporate Status of Seller: 5.1.1. Organization, Good Standing and Power of Seller. Seller (i) is a corporation duly organized, validly existing and in good standing under the laws of Arizona and (ii) has full corporate power and authority to own, lease and operate its properties (including the Purchased Assets) and to carry on Seller's Business, as such business is presently being conducted, and to execute, deliver and perform this Agreement in all and every material respect. 5.1.2. Ownership of Seller. All of the issued and outstanding shares of the capital stock of Seller are owned by the Stockholders, all parties hereto, and that no persons not parties hereto have any right, warrant, or option to acquire (or to exercise the voting powers or rights represented by) any such shares. 5.1.3. Subsidiaries. Seller has no subsidiaries or affiliate companies. 5.1.4. Foreign Qualification. Seller is not qualified to transact business in any foreign jurisdiction. Section 5.2. Status of Agreements: 5.2.1. Authorization and Enforceability. All requisite corporate action to approve, execute, deliver and perform this Agreement, and each of the other agreements, instruments and other documents to be delivered in connection herewith, has been taken by the Seller's Directors and all Stockholders. This Agreement has been duly and validly executed and delivered by Seller and all Stockholders and constitutes the valid and binding obligation thereof, enforceable in accordance with its terms. All such other agreements, instruments and other documents to be executed and delivered by Seller or Stockholders will, when executed and delivered, constitute the valid and binding obligation of the Seller or Stockholders, enforceable in accordance with its terms. 5.2.2. Consents. Except as set forth on and fully identified in Disclosure Schedule 5.2.2., and as required or indicated by the provisions hereof, no authorization, approval, consent or order of, or registration, declaration or filing with, any court, governmental body or agency or other public or private body, entity or person is required in connection with the execution, delivery, or performance of this Agreement or any other agreement, instrument or document to be delivered by or on behalf of Seller or Stockholders in connection herewith. 5.2.3. Absence of Conflicts or Disruptions. Except as set forth on and fully identified in Disclosure Schedule 5.2.3., neither the execution, delivery or performance of this Agreement, or any other agreement, instrument or document to be executed and delivered by Seller or Stockholders in connection herewith, does or will violate or conflict with, result in a breach of or give rise to a right of acceleration or termination under (i) Seller's Articles of Incorporation or Bylaws; (ii) any lien, mortgage, security agreement or other encumbrances or restriction affecting Seller's Business or Purchased Assets; (iii) any commitment, contract, agreement, plan, arrangement, understanding, instrument, lease, or license to which Seller is a party or to which it is bound; or (iv) any order, arbitration, award, judgment, decree or similar restriction to which Seller is subject or by which it is bound. Such execution, delivery and performance will also not result in the imposition of any lien, mortgage, pledge, encumbrance, easement, claim, or other restriction or charge on Seller's Business, or the Purchased Assets, or impair any material business relationship which Seller has with any current customer, licensee, or other person, except as set forth in this Disclosure Schedule 5.2.3. Section 5.3. Status of Business: 5.3.1. Financial Statements Disclosure Schedule 5.3.1. consists of the following financial statements: Internally prepared balance sheet of Seller as of June 30, 1996, together with the related statement of income; All of such financial statements and information are true, correct and complete and have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with prior periods. The balance sheet referenced above, (the "Balance Sheet") presents fairly the financial condition of Seller, as at the date stated, and the statement of income presents fairly the results of operations for the period covered thereby, given the limited purpose for which those financial statements were prepared. 5.3.2. Absence of Undisclosed Liabilities. Seller does not have any knowledge of any liabilities other than (i) liabilities adequately reflected or reserved against in the Balance Sheet and which, in accordance with generally accepted accounting principles, should have been reflected therein, (ii) current liabilities incurred in the ordinary course of business since the date of such Balance Sheet, all of which are reflected in the journals and ledgers of Seller, and (iii) the liabilities set forth in Disclosure Schedule 5.3.2. 5.3.3. Absence of Certain Changes. Since the date of the Balance Sheet, Seller's Business has been operated only in the ordinary course, and, except as set forth in Disclosure Schedule 5.3.3., or otherwise reflected in the Balance Sheet or in other provisions of this Agreement, there has not been with respect to Seller, and as shall apply only to the Purchased Assets, being sold to Buyer hereunder: (a) Any change in its condition, financial or otherwise, assets, liabilities, business, earnings or prospects, except changes in the ordinary course of business or of which Buyer has knowledge, none of which individually or in the aggregate has been materially adverse; (b) Any damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting its properties, assets, business or prospects; (c) Any executory sales commitments in excess of its ability to produce or conduct operations at a profit; (d) Any general increase in the level or rate of sales or compensation of employees; (e) Any liability incurred or assumed, or any contract, agreement, arrangement, license or other commitment entered into or assumed by it or on its behalf, whether written or oral, involving more than $5,000.00 in each instance, except in the ordinary course of business; (f) Any loan or advance made to any officer, director, consultant, agent, employee or shareholder, or other loan or advance made otherwise than in the ordinary course of business; (g) Any change in its accounting methods or practices or any change in depreciation or amortization policies or rates theretofore adopted by it; (h) Any purchase or sale of assets in anticipation of this Agreement, or any purchase, lease, sale, abandonment or other disposition of assets otherwise than in the ordinary course of business; (i) Any acquisition of all or any substantial part of the stock or the business or operating assets of any other person, firm, association, corporation, limited liability company, or business organization except as disclosed to Buyer; (j). Any actual or threatened material adverse change in its revenue earnings, business, operations, condition, prospects or business relationships; (k) Any mortgage, pledge, lien, charge, security interest or other encumbrance against, any of its assets; (l) Any waiver of release of any rights, except for rights of insubstantial value; or (m) Any transfer or grant of any material rights under any leases, licenses, agreements, copyrights, trade names, or service marks. 5.3.4. Taxes. The books of account of Seller accurately reflect all known items of income and expense (including accruals) and all assets and liabilities of Seller in accordance with normal accrual accounting practices, subject to customary month-end, quarterly, or year-end adjustments, and customary audit adjustments. Except as listed in Disclosure Schedule 5.3.4., Seller has (i) filed all federal and local income tax, excise tax, sales tax, use tax, gross receipts tax, franchise tax, employment and payroll related tax, real and personal property tax, and all other tax returns which it is required to file with respect to Seller and which have become due, (ii) paid or accrued all taxes owed by Seller as well as all deficiencies or other assessments of tax interest or penalties, and (iii) provided for all taxes not yet payable by Seller. There are no claims pending against Seller for deficient or past due taxes of any nature, and Seller has no knowledge of any unassessed tax deficiency proposed or threatened against Seller. No audits of any tax return of Seller are currently in progress, and there are not in force any extensions of time with respect to the dates on which any tax return was or is due to be filed by Seller or any waivers or agreements for the extension of time for the assessment or payment of any tax. 5.3.5. Compliance with Laws. Except as set forth in Disclosure Schedule 5.3.5., Seller (i) is not in violation of any outstanding judgment, order, injunction, award or decree specifically relating to it; (ii) is not in violation of, in any material respect, any federal, state, provincial, local or foreign law, ordinance or regulation applicable to Seller's Business or the Purchased Assets, including without limitation environmental laws and occupational health and safety laws. 5.3.6. Litigation. Except as set forth in Disclosure Schedule 5.3.6., no claim, litigation, action, investigation, or proceeding is pending, or, to the knowledge of Seller or Stockholders, threatened, and no order, injunction or decree is outstanding, against or relating to Seller, Seller's Business or the Purchased Assets, and neither Seller nor Stockholders know or has a reasonable basis for knowing of any information which may result in any such claim, litigation, action, investigation or proceeding. 5.3.7. Materials and Supplies. Seller and Stockholders are not aware of any actual or potential shortage of materials or supplies from any source which might materially and adversely affect Seller's Business. 5.3.8. Lists of Properties, Contracts, Etc. Disclosure Schedule 5.3.8. contains a complete and accurate list and description of the following with respect to Seller's Business: (a) All real property leased from others; (b) All equipment, furniture, fixtures, vehicles, leasehold improvements, other personal property used in the conduct of Seller's Business with an original cost in excess of $1,000.00, or which are leased for others at an annual rental in excess of $500.00; (c) All licenses, franchises, permits, orders, authorizations, concessions, copyrights, trademarks, service marks, trade names, patents or other intellectual property items used in the conduct of Seller's Business; (d) All agreements for the purchase, sale or other disposition of goods, materials, equipment, supplies, capital assets, or services which cannot be terminated at any time on less than thirty (30) days notice without liability, which by their terms will not be fully performed on or before the Closing Date or which involve terms or quantities exceeding normal commitments in the ordinary course of business; (e) All instruments or agreements evidencing liens, financing arrangements or secured transactions for Seller's Business or any Purchased Asset; (f) All management, employment or agency agreements; (g) All agreements with directors, officers, or any Stockholders, or with the spouse or other relative of any such persons; (h) All agreements and instruments pursuant to which credit has or may be obtained or indebtedness for borrowed money has or may be incurred; (i) All guarantees of payment or performance by or on behalf of a third-party; (m) All other contracts, agreements, commitments or understandings entered into other than in the ordinary course of business and consistent with past practices; (n) The names and addresses of all current officers and directors, and current compensation rates or arrangements for each such person; and (o) The names and addresses of all persons, if any, now holding proxies, powers of attorney, or other like instruments and powers to act on behalf of Seller, and a summary of the terms thereof. True and complete copies of all written documentation pertaining to each of the foregoing, as disclosed on Disclosure Schedule 5.3.8., have been previously delivered to or made available for inspection by Buyer. 5.3.9. Compliance with Contracts and Commitments. With respect to the agreements, leases, licenses, commitments, instruments and undertakings, oral or written, to which Seller is a party or by which it is bound, (i) Seller has performed all of the obligations to be performed by it; (ii) Seller is not in any material respect in default under or in violation of any thereof; (iii) there is no basis for a valid claim of such a violation or default; and (iv) no event has occurred which, with notice or lapse of time or both, would constitute such a default. Neither Seller nor Stockholders are aware of any material default under or any material violation of any of the foregoing by any other party thereto. Section 5.4. Status and Quality of Assets: 5.4.1. Completeness. Except for the Retained Assets, included in the Purchased Assets are all those assets which are necessary in order to operate Seller's Business in the ordinary course as presently conducted. 5.4.2. Seller's Title. Except as set forth in Disclosure Schedule 5.4.2., Seller owns all of the Purchased Assets with good, absolute and marketable title thereto, free and clear of all liens, security interests, claims, charges, encumbrances and other restrictions or limitations affecting the ability to use or transfer such assets. All of the agreements, leases, licenses, instruments, commitments and undertakings to which Seller is a party or by which it is bound with respect to which Buyer is acquiring the rights of Seller pursuant hereto, are valid, in full force and effect and enforceable in accordance with their terms by Seller, as the case may be. Subject to the terms of this Agreement, the instruments of transfer required hereby to be executed and delivered by Seller to Buyer will, when so executed and delivered, effectively vest in Buyer good, marketable and indefeasible title to the Purchased Assets and the full rights of Seller to enforce the aforesaid agreements, leases, licenses, instruments, commitments and undertakings to which it is a party or by which it is bound in accordance with their terms. 5.4.3. Trademarks and Copyrights. Exhibit 1.1. includes, as a Purchased Asset, all trademarks, service marks, and copyrights and their registrations or applications, owned by Seller and used in association with Seller's Business and the Purchased Assets. 5.4.4. Patents. There are no patents or patent rights associated with the Purchased Assets. To the best of Seller's knowledge, there are no claims that the use of the Purchased Assets violates or infringes on the patent or patent right of any person. 5.4.5. Trade Secrets. Exhibit 1.1. includes a description of Seller' trade secrets associated with the Purchased Assets. Seller is the sole owner of each of these trade secrets, free and clear of any encumbrances, restrictions or legal or equitable claims of others. Seller has taken all reasonable security measures to protect the secrecy, confidentiality, and value of these trade secrets; and any of its employees and other persons who, either alone or in concert with others, developed, invented, discovered, derived, programmed or designed these secrets, or who have knowledge of or access to information relating to them, have been put on notice and, if appropriate, have entered into agreements that these secrets are proprietary to Seller and are not to be divulged or misused. Further, to the best knowledge of Seller, all of these trade secrets are presently valid and protectible and are not part of the public knowledge or literature; nor, to Seller's knowledge have they been used, divulged or appropriated for the benefit of any past or present employees or other persons, or to the detriment of Seller. Section 5.5. Miscellaneous: 5.5.1. Conflicts of Interest. Except as set forth in Disclosure Schedule 5.5.1., no officer, director or shareholder of Seller or any relative thereof, or any entity controlled by any of said persons (i) owns, directly or indirectly, any interest in, or is an employee or representative of or consultant to, any corporation, firm, limited liability company, association, or other business entity which is, or is engaged in business as, a competitor, lessor, lessee, customer, licensee, licensor, or supplier of Seller; or (ii) owns, directly or indirectly, in whole or any part, any tangible or intangible property which Seller is using or the use of which is necessary for the conduct of Seller's Business, or (iii) has any claim or cause of action whatsoever against Seller. 5.5.2. Brokers, Agents. Except as set forth in Disclosure Schedule 5.5.2., no broker, finder or other person or entity acting in similar capacity has participated on behalf of Seller or Stockholders in bringing about the transaction herein contemplated, rendered any services with respect thereto or been in any way involved therewith. 5.5.3. Accuracy and Completeness. No representation or warranty made by Seller or Stockholders in this Agreement, and no statement contained in any exhibit, certificate, disclosure schedule or other document delivered to Buyer pursuant hereto or in connection with the transaction contemplated hereby contains, or will contain, any untrue statement of a material fact, or omits, or will omit, to state a material fact necessary to make the statements contained therein, in light of the circumstances in which they are made, not misleading. 5.5.4 Survival. Seller and Stockholders acknowledge and agree that the representations and warranties of Seller and Stockholders contained in Article Five of this Agreement shall survive for a period of one (1) year after the Closing Date, except for those in Section 5.3.4, which shall survive for the longest period with respect to which any taxing authority can assess additional taxes (including any extensions thereof). Otherwise, any representations and warranties of Seller and Stockholders made within this Agreement shall survive for a period of three (3) years after Closing Date. No investigation or lack thereof by Buyer or any agents on behalf of Buyer shall be deemed to constitute or imply a waiver of any representation or warranty of Seller or Stockholders. ARTICLE SIX. REPRESENTATIONS, WARRANTIES OF BUYER Buyer represents and warrants to Seller and Stockholders that the following statements are true and correct to the best of its knowledge as of the date hereof and that said statements will be true and correct to the best of its knowledge as of the Closing Date (unless specific reference is made to only one of such dates or to some other date): Section 6.1. Corporate Status of Buyer: 6.1.1. Organization, Good Standing and Power of Buyer. Buyer (i) is a corporation duly organized, validly existing and in good standing under the laws of Ohio and (ii) has full corporate power and authority to own, lease and operate its properties, as and where such properties are now owned or leased and as such business is presently being conducted, and to execute, deliver and perform this Agreement in all and every respect. 6.1.2. Ownership of Buyer. All of the issued and outstanding shares of the capital stock of Buyer are owned by Regency Health Services, Inc. of Tustin, California. Section 6.2. Status of Agreements: 6.2.1. Authorization and Enforceability. All requisite corporate action to approve, execute, deliver and perform this Agreement, and each of the other agreements, instruments and other documents to be delivered in connection herewith, has been taken by the Buyer's Directors and (if required) by Buyer's shareholders. This Agreement has been duly and validly executed and delivered by Buyer and constitutes the valid and binding obligation thereof, enforceable in accordance with its terms. All such other agreements, instruments and other documents to be executed and delivered by or on behalf of Buyer will, when executed and delivered, constitute the valid and binding obligation of the party executing same, enforceable in accordance with its terms. 6.2.2. Consents. No authorization, approval, consent or order of, or registration, declaration or filing with, any court, governmental body or agency or other public or private body, entity or person is required in connection with the execution, delivery, or performance of this Agreement or any other agreement, instrument or document to be delivered by or on behalf of Buyer. 6.2.3. Absence of Conflicts. Neither the execution, delivery or performance of this Agreement, or any other agreement, instrument or document to be delivered by or on behalf of Buyer in connection herewith, does or will (i) conflict with or violate or result in any breach of any judgment, decree, order, statute, rule or regulation applicable to Buyer; (ii) conflict with, violate or result in breach of any agreement or instrument to which Buyer is a party or by which it is bound; or (iii) conflict with or violate any provision of the Articles of Incorporation or Bylaws of Buyer. Section 6.3. Miscellaneous: 6.3.1. Brokers, Agents. No broker, finder or other person or entity acting in similar capacity has participated on behalf of Buyer in bringing about the transaction herein contemplated, rendered any services with respect thereto or been in any way involved therewith. 6.3.2. Accuracy and Completeness. No representation or warranty made by Buyer in this Agreement, and no statement contained in any exhibit, certificate, disclosure schedule or other document delivered to Seller and/or Stockholders pursuant hereto or in connection with the transaction contemplated hereby contains, or will contain, any untrue statement of a material fact, or omits, or will omit, to state a material fact necessary to make the statements contained therein, in light of the circumstances in which they are made, not misleading. 6.3.3 Survival. Buyer acknowledges and agrees that the representations and warranties of Buyer contained in Article Six of this Agreement shall survive for a period of one (1) year after the Closing Date, otherwise, such representations and warranties as are made by Buyer in this Agreement shall survive for a period of three (3) years after Closing Date. No investigation or lack thereof by Seller or any agents on behalf of Seller shall be deemed to constitute or imply a waiver of any representation or warranty of Buyer. ARTICLE SEVEN. INTERIM OPERATIONS Section 7.1. Conduct of Business. Seller and Stockholders agree that from the date of this Agreement to and until Closing, except to the extent that Buyer may otherwise consent in writing, Seller has and will operate its business substantially as presently operated and only in the ordinary course and, consistent with such operations, will use its best efforts to preserve intact the present business organization and the relationships with persons having business dealings with it. Section 7.2. Access to Information; Confidentiality. From the date hereof until Closing, Seller shall make available to the accountants, attorneys and other representatives of Buyer for examination during normal business hours, upon reasonable request, all books, records and documents of Seller, whether or not related to Seller's Business, of every nature, kind and character. Buyer acknowledges that certain information about Seller's Business is non-public, confidential information. Buyer agrees that if the transactions contemplated by this Agreement are not consummated for any reason, Buyer will not disclose, use or permit the use of any non-public, confidential information that Seller has provided or will provide from time to time pursuant to its investigation. Buyer agrees that until the Closing Date, it and its representatives shall not disclose, use or permit the use of, any non-public confidential information that Seller has provided or will provide from time to time, except for purposes of evaluating Seller's Business and in moving towards completing the transactions contemplated hereby. Section 7.3. Notice to Buyer. Seller and Stockholders covenant and agree that they have not and will not prior to Closing engage in any transaction or commence any judicial or other proceeding under Title 11 of United States Code, or any other law for the relief or restructuring of any of Seller's indebtedness or affairs or for the reorganization of Seller's affairs, or for an arrangement or composition with seller's creditors, or any of them, without first notifying Buyer and allowing the opportunity, but never the obligation, to provide Seller such assistance, financial or otherwise, as may be appropriate, in the sole and absolute discretion of Buyer, to avoid any such proceeding or transaction; it being understood and agreed that the aforementioned notice to Buyer shall be in writing and delivered to Buyer not less than ten (10) days prior to Seller's entering into any such proceeding or contemplated transaction. ARTICLE EIGHT. INDEMNIFICATION Section 8.1. Indemnification by Seller and Stockholders. From and after the Closing Date, for a period of three (3) years thereafter, Seller and Stockholders shall indemnify, defend and hold harmless Buyer, its successors and assigns, from and against any and all claims, demands, liabilities, obligations, actions, suits, proceedings, losses, damages, costs, expenses, assessments, judgments, recoveries and deficiencies, including interest, penalties and reasonable attorneys; fees (including without limitation attorneys' fees incurred in investigating or in attempting to avoid the same or oppose the imposition thereof), of every kind and description, contingent or otherwise (the foregoing hereinafter collectively referred to as "Damages") against Buyer or the Purchased Assets, occasioned by, arising out of or resulting from any misrepresentation (and during the period of time for which a representation shall survive Closing Date), breach of warranty or covenant (and during the period of time for which a warranty or covenant shall survive, or be enforceable following, the Closing Date), or default or nonfulfillment of any agreement on the part of Seller under this Agreement, or any certificate, agreement, appendix, schedule or other instrument furnished to or to be furnished to Buyer pursuant to this Agreement. Buyer, with reasonable promptness, shall notify Seller and Stockholders of any claim against Buyer for Damages, and Seller and Stockholders shall have, at their election, the right to compromise or defend any such matter through counsel of their own choosing, any such compromise or defense to be at the expense of Seller and Stockholders. Buyer agrees, at the expense of Seller and Stockholders, to cooperate in the defense of any such claim for Damages. Seller and Stockholders shall take whatever action is necessary in the course of defending any claim to which the foregoing indemnification applies to avoid the imposition of any lien on Buyer's assets. If Seller and Stockholders fail to take such action after reasonable notice, Buyer may, in the settlement of any claim for such Damages, exercise the right of set-off against all or any sum of money then due, or to become due, to Seller (or its successors and assigns, if any) as Earn-Out Fees under Section 3.3, together with any other remedy or right which Buyer may then exercise against Seller or Stockholders (in their individual capacity, as parties to this Agreement) under this Section 8.1. Section 8.2. Indemnification by Buyer. From and after Closing Date, for a period of three years thereafter, Buyer shall indemnify, defend and hold harmless Seller, its successors and assigns, from and against any and all claims, demands, liabilities, obligations, actions, suits, proceedings, losses, damages, costs, expenses, assessments, judgments, recoveries and deficiencies, including interest, penalties and reasonable attorneys; fees (including without limitation attorneys' fees incurred in investigating or in attempting to avoid the same or oppose the imposition thereof), of every kind and description, contingent or otherwise (the foregoing hereinafter collectively referred to as "Damages") against Seller, occasioned by, arising out of or resulting from any misrepresentation (and during the period of time for which a representation shall survive Closing Date), breach of warranty or covenant (and during the period of time for which a warranty or covenant shall survive, or be enforceable following, Closing Date), or default or nonfulfillment of any agreement on the part of Buyer under this Agreement, whether in connection with the Assumed Liabilities or otherwise. Seller, with reasonable promptness, shall notify Buyer of any claim against Seller for Damages, and Buyer shall have, at its election, the right to compromise or defend any such matter through counsel of its own choosing, any such compromise or defense to be at the expense of Buyer. Seller agrees, at the expense of Buyer, to cooperate in the defense of any such claim for Damages. Buyer shall take whatever action is necessary in the course of defending any claim to which the foregoing indemnification applies to avoid the imposition of any lien on Seller's Retained Assets (or other assets). ARTICLE NINE. MISCELLANEOUS AGREEMENTS AND PROVISIONS. Section 9.1. Mathews and Salazar Employment Agreements. Mathews and Salazar, and each of them, agree to enter into at Closing an Employment Agreement with Buyer substantially in the form attached hereto as Exhibit 9.1. Section 9.2. Seller's Non-Compete and Termination Agreement. Seller agrees and represents to Buyer, with full understanding that Buyer is relying on this representation, that Seller is terminating "Seller's Business", and for a period of one year after the last to occur of the (i) completition of the Earn Out Period (see Article Three), or (ii) the termination of Stockholders' employment with Buyer (see Section 9.1, above), Seller, as to any point or place in any county in Arizona where Seller, prior to Closing Date, has conducted business under any completed contract, or negotiated any pending or proposed contract pertaining to Seller's Business, will not reenter that business, or any other similar business dealing with, related or pertaining to, directly or indirectly, respiratory therapy practice management or marketing on behalf of hospitals or health care providers or other identical, comparable or similar entities otherwise employing or obtaining the benefit of respiratory therapists, in which business Seller is now engaged, and that Seller is herewith divesting itself of its present corporate name and all of its service names. Seller is taking such action and making such representation in exchange for the consideration it is receiving from Buyer under the terms of this Agreement. Seller agrees that the agreements and representations made under this Section 9.2 are reasonable and necessary for the protection of Buyer in connection with acquisition of the Purchased Assets, and expressly acknowledges that such is an essential part of the benefit of the bargain for Buyer. Any breach of this Section 9.2 by Seller will cause irreparable injury to Buyer for which damages would be an inadequate remedy and that (in addition to and without limitation of any other rights Buyer may have and exert against Seller) Buyer shall have the right to issuance of an injunction by a court of competent jurisdiction, enjoining such breach upon notice and without bond. Notwithstanding any other provision of this Agreement, Seller may directly or indirectly do all or any of the following: (a) enforce any and all rights and remedies afforded Seller under this Agreement; (b) manage, collect, enforce and act as a lessor and otherwise realize upon all assets of Seller as are not sold to Buyer under this Agreement. Further, this provision shall not be construed as prohibiting Seller from entering into or otherwise keeping or maintaining any other business not listed in this Section 9.2., and not presently or formerly a part of "Seller's Business" within the meaning of this Agreement. Section 9.3. Publicity. All public announcements relating to this Agreement or the transactions contemplated hereby will be made only as determined by Buyer. Section 9.4. Expenses, etc. Buyer shall bear and pay all of the expenses incident to the transactions contemplated by this Agreement which are incurred by Buyer. Seller and Stockholders shall bear and pay all of the expenses incident to the transactions contemplated by this Agreement which are incurred by them. Section 9.5. Notices. All notices and other communications required by or in connection with this Agreement shall be in writing and be deemed given if delivered by hand, or mailed by certified U.S. mail, or transmitted by Federal Express United Parcel Service or similar nationwide overnight-priority courier service, to the intended, appropriate recipient at the following address (or such other address as the party shall specify by notice pursuant hereto): If to Buyer, to: Mr. Jamison J. Ashby, Chief Operating Officer SCRS & COMMUNICOLOGY, INC. OF OHIO 95 Argonaut, Suite 100 Laguna Hills, California 92656 with a copy to: David A. Grant, Esq., SVP & General Counsel REGENCY HEALTH SERVICES, INC. 2742 Dow Avenue Tustin, California 92680-7245 If to Seller, to: Ms. Jean Mathews, Director Mr. Joe Salazar, Director 3801 North 24th Street Phoenix, Arizona 85016 with a copy to: Kyle B. Hettinger, Esq. BROWN & BAIN, P.A. 2901 North Central Avenue Phoenix, Arizona 85012-2788 If to Stockholders, to: Ms. Jean Mathews 3801 North 24th Street Phoenix, Arizona 85016 Mr. Joe Salazar 3801 North 24th Street Phoenix, Arizona 85016 with a copy to: Kyle B. Hettinger, Esq. BROWN & BAIN, P.A. 2901 North Central Avenue Phoenix, Arizona 85012-2788 Section 9.6. Binding Effect. Except as may be otherwise provided herein, this Agreement and all provisions hereof shall be binding upon and inure to the benefit of the parties hereto, their respective heirs, personal representatives, successors, designatees, and assigns. Section 9.7. Disclosure Schedules and Exhibits. All disclosure schedules and exhibits referred to in this Agreement constitute an integral part of this Agreement as if fully rewritten herein. Section 9.8. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. Section 9.9. Governing Law. This Agreement and all disputes arising hereunder shall be construed in accordance with and governed by the laws of the State of California. Section 9.10. Severability. If any provision of this Agreement shall be held unenforceable, invalid or void to any extent and for any reason, such provision shall remain in force and effect to the maximum extent allowable, if any, and the enforceability or validity of the remaining provisions of this Agreement shall not be affected thereby. Section 9.11. Waivers. No waiver of any of the provisions of this Agreement shall be valid and enforceable unless such waiver is in writing and signed by the party to be charged therewith, and, unless otherwise stated therein, no such waiver shall constitute a waiver of any other provision hereof, or a continuing waiver. Section 9.12. Termination. This Agreement may be terminated by (i) Buyer if the conditions set forth in Section 4.2 hereof shall not have been met by Closing Date, and by Seller and Stockholders if the conditions set forth in Section 4.3. shall not have been met by Closing Date, and (ii) Buyer if any change shall have occurred or be threatened in the business, financial conditions, operations, results of operations, or prospects of Seller's Business which is or will be materially adverse, or if Buyer shall become aware of any presently existing facts which has or will have a material adverse effect on the business, financial condition, operations, results of operations, or prospects of Seller. Upon such termination, neither party shall have any further obligations under this Agreement. Section 9.13. Entire Agreement. This Agreement together with the agreements, instruments, and other documents to be delivered hereunder, constitute the entire understanding and agreements between the parties hereto and concerning the subject matter hereof. All negotiations between the parties hereto are merged into this Agreement, and there are no representations, warranties, covenants, understandings, or agreements, oral or otherwise, in relation thereto between the parties other than those incorporated herein and to be delivered hereunder. Except as otherwise expressly contemplated by this Agreement, nothing expressed or implied in this Agreement is intended or shall be construed so as to grant or confer on any person, firm or corporation, other than the parties hereto, any rights or privileges hereunder. No supplement, modification, or amendment of this Agreement shall be binding unless executed in writing by the parties wishing to be bound thereby. Section 9.14. Right of Setoff. If Buyer be required to pay at any time any obligation of Seller or all or any Stockholders arising out of or related to the transaction covered by this Agreement and the agreements provided for herein, which amount was not the obligation of Buyer, or should Buyer experience any loss or expense by reason of Seller's or Stockholders' breach (whether all and collectively or less than all of such Stockholders) of any provision of this Agreement and the agreements provided for herein, Buyer shall have the right of setoff against any money due Seller and/or Stockholders (whether collectively or individually) under the terms of any agreement or transaction between or amongst the parties, which right shall be in addition to the right of setoff as identified in Section 8.1., above. Section 9.15. Default and Remedies. In the event any party to this Agreement fails to perform any material act, duty or obligation which said party is bound to perform and is then due or owed to any other party hereto at any time after Closing Date and said party is thereupon in breach of this Agreement (including Section 3.9 hereof), then and in such event the party so aggrieved may send written notice to the party in breach, specifying the material act, duty or obligation due or owing, whereupon the party receiving such notice shall have fifteen (15) days to cure such breach by performance to the reasonable satisfaction of the party so aggrieved (if a longer or shorter period of time is expressly provided in any section, as to a specific act, duty or obligation, such other period of time shall control). In the absence of a timely cure after such notice, the party so aggrieved (without further notice) shall have the right to declare a default in the performance of this Agreement, and thereafter may seek any relief or remedy as may then be available to such party, not otherwise inconsistent with this Agreement, including damages arising out of such breach, or, if applicable, specific performance, compelling performance of the act, duty or obligation. Upon default, any party seeking relief, and substantially prevailing therein, shall have the right to seek and recover of the party in default, all costs of suit and reasonable attorneys' fees, in addition to any other relief as may be available. In Witness Whereof, the parties, personally and individually, or by and through their duly authorized officers or agents, do hereby enter into this Asset Purchase Agreement, intending to be bound by the provisions hereof, the dates recorded below, due authority being warranted, and understanding and agreeing that this instrument may be executed in two or more counterparts, each party having executed each counterpart in original or facsimile form, each and all such counterparts being one and the same instrument: Buyer: SCRS & COMMUNICOLOGY, INC. OF OHIO By: Date: Jamison J. Ashby, COO Seller: MANAGED RESPIRATORY CARE SERVICES, INC. By: Date: Jean Mathews, President Stockholders: Date: Jean Mathews Date: Joe Salazar EX-10.43 5 FINANCING AGREEMENT - BECKLEY Exhibit 10.43 FINANCING AGREEMENT between THE CITY OF BECKLEY, WEST VIRGINIA and BECKLEY HEALTH CARE CORP. Dated as of September 1, 1996 NOTE: THIS FINANCING AGREEMENT AND A PROMISSORY NOTE IN THE FORM AS DESCRIBED HEREIN HAVE BEEN ASSIGNED TO, AND ARE SUBJECT TO A SECURITY INTEREST IN FAVOR OF ONE VALLEY BANK, NATIONAL ASSOCIATION, AS TRUSTEE UNDER AN INDENTURE OF TRUST DATED AS OF SEPTEMBER 1, 1996, WITH THE COMMON COUNCIL OF THE CITY OF BECKLEY BY AND ON BEHALF OF CITY OF BECKLEY, WEST VIRGINIA, AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME. INFORMATION CONCERNING SUCH SECURITY INTEREST MAY BE OBTAINED FROM THE TRUSTEE AT ITS PRINCIPAL TRUST OFFICE IN CHARLESTON, WEST VIRGINIA. This FINANCING AGREEMENT, made as of the first day of October, 1996, between THE COMMON COUNCIL OF THE CITY OF BECKLEY BY AND ON BEHALF OF CITY OF BECKLEY, WEST VIRGINIA, a political subdivision of the State of West Virginia, (the "Issuer"), and BECKLEY HEALTH CARE CORP., a corporation duly organized under and validly existing by virtue of the laws of the State of West Virginia (the "Company"); W I T N E S S E T H : WHEREAS, the Issuer in a duly organized political subdivision of the State of West Virginia and is authorized by Chapter 13, Article 2C, Code of West Virginia of 1931, as amended (the "Act"), (a) to issue its revenue bonds for the purpose of providing funds (i) to pay the cost of acquiring, constructing, furnishing and equipping a commercial facility comprising a health care facility and (ii) to refund one or more series of revenue bonds previously issued pursuant to the Act to finance any such facility, in either case by lending the proceeds of such revenue bonds or otherwise making such proceeds available for such purposes to any person, firm or private corporation which will operate and maintain such facility in such a manner as shall effectuate the purposes of the Act and (b) to secure its revenue bonds by a trust agreement between the issuer and a corporate trustee including therein the pledge and assignment of revenues from any such loan to the payment of such revenue bonds; and WHEREAS, pursuant to such authorization and in order to further the purposes of the Act, the Issuer intends to issue and sell its Nursing Facility Refunding Revenue Bonds (Beckley Health Care Corp. Project), Series 1996 in the original principal amount of $2,830,000 (the "Bonds") and refund in full the outstanding principal amount of its $2,830,000 First Mortgage Refunding Revenue Bonds (Beckley Health Care Corp. Project) Series 1986 (the "Prior Bonds"), the proceeds of which were used to refund those certain City of Beckley First Mortgage Medical Facilities Revenue Bonds (Beckley Health Care Corp.), Series 1982, the proceeds of which were used to pay the cost of the acquisition, construction and equipping of a 120-bed skilled and intermediate care nursing home facility operated by the Company and situate within the City of Beckley, West Virginia (the "Facility"); and WHEREAS, by issuing the Bonds to refund the Prior Bonds, the Issuer and the Company expect to finance the Facility more economically and thereby to achieve interest cost savings; and WHEREAS, in return for the use of the proceeds of the sale of the Bonds by the Issuer to refund the Prior Bonds, the Company has agreed to repay the amounts so used on the terms and conditions hereinafter set forth; and WHEREAS, the Company has determined to issue its promissory note to the Issuer in the principal amount of the Bonds (the "Note") to evidence the Company's obligation to repay such amounts under the terms and conditions set forth herein; and WHEREAS, all things necessary to constitute the Note a valid and binding obligation and to constitute this Financing Agreement a valid and binding agreement securing the payments under the Note have been done and performed and the execution and delivery of the Note and this Financing Agreement, subject to the terms hereof, have in all respects been duly authorized; NOW, THEREFORE, for and in consideration of the premises and the mutual covenants hereinafter contained, the parties hereto covenant and agree as follows: ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION Section 1.1. Definitions. The following terms shall have the meaning set forth hereinafter. All other defined terms used but not defined herein shall have the same meaning as set forth elsewhere herein or in Article I of the Indenture unless the context clearly indicates to the contrary. "Agreement" or "Financing Agreement" shall mean this Financing Agreement, including any amendments hereto. "Financing Instruments" shall mean this Financing Agreement, the Indenture, the Note, the Escrow Agreement, the Reimbursement Agreement and the Bond Purchase Agreement. "Indenture" shall mean the Indenture of Trust dated as of the date hereof between the Issuer and the Trustee, as amended from time to time. "1954 Code" shall mean the Internal Revenue Code of 1954, as amended. "1982 Bonds" shall mean the revenue bonds issued by the Issuer under the Act in 1982 in order to pay the cost of the acquisition, construction and equipping of the Facility and refunded in full with the proceeds of the Prior Bonds. "Prime Rate" shall mean the rate per year announced from time to time by the Trustee, as its prime rate, with any change in the Prime Rate being effective as of the date such announced prime rate is changed. "Prior Bonds Trustee" shall mean One Valley Bank, National Association (formerly, Kanawha Valley Bank, N.A.), Charleston, West Virginia, as indenture trustee for the Prior Bonds. "Prior Indenture" shall mean the Trust Indenture dated as of July 1, 1986 between the Issuer and the Prior Bonds Trustee pursuant to which the Prior Bonds were issued and secured. "Regulations" shall mean the income tax regulations promulgated pursuant to the 1954 Code, as such applicable proposed, temporary or final regulations may be amended or supplemented from time to time. Section 1.2. Rules of Construction. Unless the context clearly indicates to the contrary, the following rules shall apply to the construction of this Financing Agreement: (a) Words importing the singular number shall include the plural number and vice versa. (b) Words importing the redemption or calling for redemption of Bonds shall not be deemed to refer to or connote the payment of Bonds at their stated maturity. (c) All references herein to particular articles or sections are references to articles or sections of this Financing Agreement unless otherwise indicated. (d) The headings and Table of Contents herein are solely for convenience of reference and shall not constitute a part of this Financing Agreement nor shall they affect its meaning, construction or effect. (e) Accounting terms not otherwise defined have the meaning assigned to them in accordance with generally accepted accounting principles. ARTICLE II REPRESENTATIONS Section 2.1. Representations by Issuer. The Issuer makes the following representations: (a) The Issuer is a political subdivision of the State of West Virginia and has the power to enter into the Financing Instruments to which it is a party and the transactions contemplated thereby and to perform its obligations thereunder, to issue the Bonds to refund the Prior Bonds, and to assign the Note to the Trustee. (b) By proper action in the form of resolutions adopted by The Common Council of the City of Beckley, West Virginia, the Issuer has duly authorized the execution and delivery of the Financing Instruments to which it is a party, and the Bonds, the performance of its obligations thereunder and the issuance of the Bonds and, simultaneously with the execution and delivery of this Financing Agreement, the Issuer has duly executed and delivered the Financing Instruments to which it is a party and issued and sold the Bonds. (c) To the best of its knowledge, the Issuer is not in default in the payment of the principal of or interest on any of its indebtedness for borrowed money and is not in default under any instrument under or subject to which any indebtedness for borrowed money has been incurred, and no event has occurred and is continuing under the provisions of any such instrument that with the lapse of time or the giving of notice, or both, would constitute an event of default thereunder; provided, however, that no representation is expressed concerning previously issued revenue bonds for private parties under the Act, the status of which have no adverse effect on the Issuer's power or authority to carry out the transactions contemplated by this Financing Agreement. (d) The Issuer is not (1) in violation of the Act or any existing law, rule or regulation applicable to it or (2) in default under any indenture, mortgage, deed of trust, lien, lease, contract, note, order, judgment, decree or other agreement, instrument or restriction of any kind to which any of its assets are subject; provided, however, that no representation is expressed concerning previously issued revenue bonds for private parties under the Act, the status of which have no adverse effect on the Issuer's power or authority to carry out the transactions contemplated by this Financing Agreement. The execution and delivery by the Issuer of the Financing Instruments to which it is a party and the Bonds and the compliance with the terms and conditions thereof will not conflict with or result in the breach of or constitute a default under any of the above described documents or other restrictions. (e) No further approval, consent or withholding of objection on the part of any regulatory body, federal, state or local, is required in connection with (1) the issuance and delivery of the Bonds by the Issuer, (2) the execution or delivery of or compliance by the Issuer with the terms and conditions of the Financing Instruments to which it is a party, or (3) the assignment and pledge by the Issuer pursuant to the Indenture of its rights under this Financing Agreement including the Note and the payments thereon by the Company, as security for payment of the principal of and interest on the Bonds. The consummation by the Issuer of the transactions set forth in the manner and under the terms and conditions as provided herein will comply with all applicable state, local or federal laws and any rules and regulations promulgated thereunder by any regulatory authority or agency. (f) No litigation, inquiry or investigation of any kind in or by any judicial or administrative court or agency is pending or, to its knowledge, threatened against the Issuer with respect to (1) the organization and existence of the Issuer, (2) its authority to execute or deliver the Financing Instruments to which it is a party, the Indenture or the Bonds or the assignment of the Note, (3) the validity or enforceability of any of such instruments or the transactions contemplated hereby or thereby, (4) the title of any officer of the Issuer who executed such instruments, or (5) any authority or proceedings related to the execution and delivery of such instruments on behalf of the Issuer. No such authority or proceedings have been repealed, revoked, rescinded or amended, and all are in full force and effect. (g) The Issuer hereby finds that the refunding of the Prior Bonds is advisable and will serve the purposes of the Act. (h) The issuance of the Prior Bonds was approved by the Issuer at a meeting duly called and held on July 22, 1986, notice of which meeting was published in a newspaper having general circulation in City of Beckley, West Virginia on July 8, 1986. Section 2.2. Representations by Company. The Company makes the following representations: (a) The Company is a corporation duly organized and validly existing under the laws of the State of West Virginia; has the power to enter into the Financing Instruments to which it is a party and the transactions contemplated thereunder; and by proper action has duly authorized the execution and delivery of such Financing Instruments and the Note and the performance of its obligations thereunder. (b) The Company is licensed by the appropriate West Virginia state and local authorities and is authorized to operate the Facility in the manner in which it is currently operated. (c) The Company is not in default in the payment of the principal of or interest on any of its indebtedness for borrowed money and is not in default under any instrument under and subject to which any indebtedness has been incurred, and no event has occurred and is continuing under the provisions of any such agreement that with the lapse of time or the giving of notice, or both, would constitute an event of default thereunder. (d) There is no litigation at law or in equity or any proceeding before any governmental agency involving the Company pending or, to the knowledge of the Company, threatened against the Company in which any liability of the Company is not adequately covered by insurance or for which adequate reserves are not provided or for which any judgment or order would have a material adverse effect upon the business or assets of the Company or affect its existence or authority to do business, the operation of the Facility, the validity of the Financing Instruments to which it is a party or the performance of its obligations thereunder. (e) The execution and delivery of the Financing Instruments to which it is a party, the performance by the Company of its obligations thereunder and the consummation of the transactions contemplated therein do not and will not conflict with, or constitute a breach or result in a violation of, the Company's articles of incorporation or bylaws, any agreement or other instrument to which the Company is a party or by which it is bound or any constitutional or statutory provision or order, rule, regulation, decree or ordinance of any court, government or governmental authority having jurisdiction over the Company or its property. (f) The Company has obtained all consents, approvals, authorizations and orders of any governmental or regulatory authority that are required to be obtained by the Company as a condition precedent to the issuance of the Bonds, the execution and delivery of the Financing Instruments to which it is a party and the performance by the Company of its obligations thereunder, or that are required for the operation of the Facility. (g) The Facility complies with all presently applicable ordinances and licensure and environmental protection laws, the noncompliance with which would have a material adverse effect on the business or operations of the Company conducted at the Facility. (h) To the best of its knowledge, interest paid or accrued on the 1982 Bonds was at all times exempt from federal income taxation under Section 103 of the 1954 Code. To the best of its knowledge, interest paid or accrued on the Prior Bonds was at all times excluded from the gross income of the owners thereof for purposes of federal income taxation. (i) The Company intends to continue to cause the Facility to be operated as a nursing home facility meeting all of the requirements of the Act for so long as the Bonds are outstanding. (j) To the best of its knowledge, at least 98% of the proceeds of the Prior Bonds, together with other available moneys, were applied to redeem the 1982 Bonds in full within 90 days of the date the Prior Bonds were issued. To the best of its knowledge, no more than 2% of the proceeds of the Prior Bonds were applied to pay their costs of issuance. ARTICLE III ISSUANCE OF THE BONDS AND USE OF PROCEEDS; EXECUTION AND DELIVERY OF THE NOTE Section 3.1. Agreement to Issue Bonds; Application of Bond Proceeds. The Issuer, concurrently with the execution and delivery of this Financing Agreement, will issue, sell and deliver the Bonds and will deposit the proceeds thereof with the Trustee. In accordance with the Indenture, the Trustee will deliver or will cause the Underwriter to deliver all of such proceeds to the Prior Bonds Trustee to be applied, together with other moneys provided by the Company, to defease and redeem the Prior Bonds in full and discharge the Prior Indenture. Section 3.2. Refunding by the Issuer. Upon the terms and conditions of this Financing Agreement and the Indenture, the Issuer agrees to use the proceeds of the sale of the Bonds to refund the Prior Bonds. Section 3.3. Execution and Delivery of the Note prior to or simultaneously with the issuance of the Bonds, to evidence its repayment obligations hereunder, the Company shall execute and deliver the Note in substantially the form of Exhibit A to the Issuer for assignment to the Trustee as security for the payment of the Bonds. Section 3.4. No Lien on or Security Interest in Facility. This Financing Agreement is not intended to create and does not create a lien on or security interest in any part of the Facility as security for the payment of amounts payable hereunder or under the Note. ARTICLE IV PAYMENTS ON THE NOTE Section 4.1. Amounts Payable. (a) The Company shall make all payments required by the Note as and when they become due and shall promptly pay all other amounts necessary to enable the Trustee to make the transfers required by Article IV of the Indenture. (b) The Company shall also pay, as and when the same become due: (1) To the Trustee, its reasonable fees for services rendered and for expenses reasonably incurred by it as Trustee under the Indenture, including the reasonable fees and disbursements of its counsel, the reasonable fees and expenses of other paying agents and all other amounts that the Company herein assumes or agrees to pay, including any cost or expense necessary to cancel and discharge the Indenture upon payment of the Bonds. (2) To the Issuer and its reasonable costs and expenses directly related to the Bonds and the Facility, including the reasonable fees and expenses of Bond Counsel and the Issuer's counsel (provided, however, that such amounts so paid to the Issuer shall not equal or exceed an amount which would cause the "yield" on the Note, this Financing Agreement or any other "acquired purpose obligation" to be "materially higher" than the "yield" on the Bonds, as such terms are defined in the Code). (3) Amounts described in Section 4.6. (4) All other amounts that the Company agrees to pay under the terms of this Financing Agreement and the Indenture. Section 4.2. Payments Assigned. The Company consents to the assignment made by the Indenture of the Note and of the rights of the Issuer under this Financing Agreement to the Trustee and agrees to pay to the Trustee all amounts payable by the Company pursuant to the Note and this Financing Agreement, except for payments made to the Issuer pursuant to Sections 4.1(b)(2) and 5.6. Section 4.3. Default in Payments. If the Company fails to make any payments required by the Note or this Financing Agreement when due, the Company shall pay to the Trustee interest thereon until paid at a rate equal to the highest rate on any Bonds then outstanding or, in case of the payment of any amounts not to be used to pay principal of or interest on Bonds, at a rate equal to the Prime Rate plus one percent per year. Section 4.4. Obligations of Company Unconditional. The obligation of the Company to make the payments on the Note and to observe and perform all other covenants, conditions and agreements hereunder shall be absolute and unconditional, irrespective of any rights of setoff, recoupment or counterclaim it might otherwise have against the Issuer, the Bank or the Trustee. Subject to the prepayment of the Note as provided therein, the Company shall not suspend or discontinue any payment on the Note or hereunder or fail to observe and perform any of its other covenants, conditions or agreements hereunder for any cause, including without limitation, any acts or circumstances that may constitute an eviction or constructive eviction, failure of consideration, failure of title to any part or all of the Facility or commercial frustration of purpose, or any damage to or destruction or condemnation of all or any part of the Facility, or any change in the tax or other laws of the United States of America, the State of West Virginia or any political subdivision of either, or any failure of the Issuer, the Bank or the Trustee to observe and perform any covenant, condition or agreement, whether express or implied, or any duty, liability or obligation arising out of or in connection with any Financing Instrument. The Company may, after giving to the Issuer and the Trustee 10 days' notice of its intention to do so, at its own expense and in its own name, or in the name of the Issuer if procedurally required, prosecute or defend any action or proceeding or take any other action involving third persons that the Company reasonably deems necessary to secure or protect any of its rights hereunder. In the event the Company takes any such action, the Issuer shall cooperate fully with the Company and shall take all necessary action to substitute the Company for the Issuer in such action or proceeding if the Company shall so request. Section 4.5. Advances by Issuer or Trustee. If the Company fails to make any payment or perform any act required of it hereunder, the Issuer or the Trustee, without prior notice or demand on the Company and without waiving or releasing any obligation or default, may (but shall be under no obligation to) make such payment or perform such act. All amounts so paid by the Issuer or the Trustee and all costs, fees and expenses so incurred shall be payable by the Company on demand as an additional obligation under the Note, together with interest thereon at the Prime Rate plus one percent per year until paid. Section 4.6. Rebate Requirement. (a) At its sole expense on behalf of the Issuer, the Company shall determine and pay to the United States the Rebate Amount, hereinafter defined, as and when due in accordance with the "rebate requirement" described in Section 148(f) of the Code and Regulations thereunder, including without limitation, Regulations Section 1.148-3. The Company shall retain records of all such determinations until six years after Payment of the Bonds. (b) Reference is made to Exhibit B hereto for additional details of the rebate requirement. Exhibit B may be amended or substituted without compliance with Article XI of the Indenture or Section 8.3 hereof and without any action of the Issuer upon the Company's delivery to the Trustee of the proposed amendment or substitution together with an opinion of Bond Counsel that compliance with this section and Exhibit B, as amended, will not adversely affect the exclusion of interest on the Bonds from gross income for federal income tax purposes. (c) Notwithstanding anything contained herein to the contrary, no such payment will be required if the Company receives and delivers to the Issuer and the Trustee an opinion of Bond Counsel that such payment is not required under the Code to prevent any Bonds from becoming "arbitrage bonds" within the meaning of Section 148 of the Code. (d) The Issuer shall not be liable to the Company by way of contribution, indemnification, counterclaim, set-off or otherwise for any payment made or expense incurred by the Company pursuant to this section or the Indenture. Section 4.7. Letter of Credit. The Company shall provide for the payment of amounts due under Section 4.1 (a) from Available Moneys, including, delivery to the Trustee on the date of initial authentication and delivery of the Bonds of a Letter of Credit in favor of the Trustee and for the benefit of the holders of the Bonds. The Company shall be entitled to provide a Substitute Letter of Credit under certain circumstances as provided in the Indenture. Any extension of the Letter of Credit shall be for a period of at least one year or, if less, the fifteenth day after the maturity date of the Bonds. ARTICLE V SPECIAL COVENANTS Section 5.1. Operation of Facility by the Company; No Warranty of Condition or Suitability by the Issuer. (a) The Company shall operate the Facility, or cause it to be operated, as a nursing home facility or other purposes contemplated by the Act. (b) The Issuer makes no warranty, either express or implied, as to the Facility or the condition thereof, or that the Facility has been or will be suitable for the purposes or needs of the Company. Section 5.2. Reference to Bonds Ineffective after Bonds Paid and Other Obligations Satisfied. Upon payment of the Bonds and upon payment of all obligations under this Financing Agreement and the Note, subject to Section 8.1, all references in this Financing Agreement to the Bonds, the Trustee and the Issuer shall be ineffective, and neither the Trustee, the holder of the Note, the Issuer nor the holders of any of the Bonds shall thereafter have any rights hereunder except as provided in Sections 4.1(b), 4.6 and 5.6. Section 5.3. Certificate as to No Default. The Company shall deliver to the Issuer and the Trustee within 120 days after the close of each of its Fiscal Years a certificate signed by the chief executive officer, the chief administrative officer or the chief financial officer of its corporate general partner stating that (a) (1) the Company is not in default under the Note or this Financing Agreement, and (2) the Company has no knowledge of any violation of any of the terms or provisions of the Note or this Financing Agreement or of the occurrence of any condition, event or act that, with or without notice or lapse of time or both, would constitute an event of default hereunder or thereunder, or (b) if it is in default, specifying the nature and period of default and what action the Company is taking or proposes to take with respect thereto. Section 5.4. [Reserved) Section 5.5. Tax Exemption. (a) Unless the Company shall deliver to the Trustee an opinion of Bond Counsel to the effect that such use, occupation or ownership will not adversely affect the exclusion of interest on the Bonds from gross income for federal income tax purposes, the Company shall not: (1) take any action or approve the Trustees taking any action or making any investment or use of the proceeds of the Bonds that would cause the Bonds to be "arbitrage bonds" within the meaning of Section 148 of the Code. (2) barring unforeseen circumstances, approve the use of the proceeds of any Bonds or any other funds other than in accordance with its "non-arbitrage" certificate with respect to such use given immediately prior to the delivery of the Bonds; (3) take or permit any action that would result in more than 5% of the proceeds of the 1982 Bonds, the Prior Bonds or the Bonds being used directly or indirectly to make or finance loans to any person who is not an "exempt person" within the meaning of Section 103(b)(3) of the 1954 Code or a "governmental unit" within the meaning of Section 141(c) of the Code or otherwise cause the 1982 Bonds, the Prior Bonds or the Bonds to be or become "consumer loan bonds" within the meaning of Section 103(o) of the 1954 Code. (4) permit any component of the Facility to be used or occupied by the United States of America or an agency or instrumentality thereof in any manner for compensation, including any entity with statutory authority to borrow from the United States of America in any case within the meaning of Section 149(b) of the Code, or in any way cause the Bonds to be "federally guaranteed" within the meaning of Section 103(h) of the 1954 Code or Section 149(b) of the Code. (5) permit the addition of any "principal user" of the Facility within the meaning of Section 103(b)(6) of the 1954 Code or Section 144(a) of the Code; or (6) take any other action that would adversely affect the exclusion of interest on the Bonds from gross income. (b) The Company shall not take or omit to take any action the taking or omission of which would result in any of the proceeds of the Bonds, within the meaning of Section 147(g) of the Code, being used to finance the costs of issuance of the Bonds. (c) The Company represents and warrants that (i) the original principal amount of the Prior Bonds, plus any amounts held as a sinking fund for payment of the principal of the 1982 Bonds, did not exceed the aggregate outstanding principal amount of the 1982 Bonds as determined on the date of issuance of the Prior Bonds, and (ii) the principal amount of the Bonds, plus any amounts held by the Prior Bonds Trustee as a sinking fund for payment of the principal of the Prior Bonds, do not exceed the outstanding principal amount of the Prior Bonds as determined on the date of issuance of the Bonds. (d) The Company represents and warrants that, within the meaning of Section 147(b) of the Code and comparable provisions of the 1954 Code, the "average maturity" of the Bonds does not exceed 120% of the remaining "average reasonably expected economic life" of the Facility, such "average maturity" and remaining "average reasonably expected economic life" being computed in the manner contemplated by Section 147(b) of the Code and comparable provisions of the 1954 Code. The Company further represents and warrants that the "average maturity" of the Bonds is less than the remaining "average maturity" of the Prior Bonds. (e) The Company represents, covenants and agrees that not more than 25% of the proceeds of the 1982 Bonds, the Prior Bonds or the Bonds have been or will be used to provide a facility the primary purpose of which is one of the following: retail food and beverage services, automobile sales or service, or the provision of recreation or entertainment. The Company further covenants and agrees that no part of the proceeds of the 1982 Bonds, the Prior Bonds or the Bonds have been or will be used to provide any of the following and that no part of the Facility will be used for any of the following purposes or activities: any airplane, skybox or other private luxury box, health club facility, facility used primarily for gambling, store the principal business of which is the sale of alcoholic beverages for consumption off premises, private or commercial golf course, country club, massage parlor, tennis club, skating facility (including roller skating, skateboard and/or ice skating), racquet sports facility (including any handball or racquetball court), hot tub facility, suntan facility, racetrack or residential real property for family units. (f) The Company represents, covenants and agrees that (i) substantially all (90% or more) of the proceeds of the 1982 Bonds (exclusive of such proceeds applied to redeem other 1982 Bonds) were used for the acquisition, construction, reconstruction or improvement of land or property of a character subject to the allowance for depreciation within the meaning of Section 103(b)(6) of the 1954 Code, (ii) less than 25% of the proceeds of the 1982 Bonds, the Prior Bonds or the Bonds have been or will be used directly or indirectly for the acquisition of land or an interest in land, including mineral reserves, and (iii) none of such proceeds were or will be used for the acquisition of land or an interest in land to be used for farming purposes. (g) The Company represents and warrants that except for the Prior Bonds and the Bonds, no bonds, notes or other obligations of any state, territorial possession or any political subdivision of the United States of America or any political subdivision of any of the foregoing or of the District of Columbia have been issued since April 30, 1968, and are now outstanding, the proceeds of which have been or are to be used primarily with respect to projects (i) the "principal user" of which is or will be the Company or any "related persons," as defined in Section 103(b)(6) of the 1954 Code or Section 144(a) of the Code and (ii) that are located within City of Beckley, West Virginia or are integrated facilities located outside of City of Beckley within one-half mile of the Facility. The Company further represents and warrants that (i) obligations have not been assumed, expenditures have not been made and outstanding obligations do not exist, including, without limitation, the leasing of equipment (pursuant to leases which do not qualify as "true" leases within the meaning of the Code), which would cause the "aggregate face amount" of the Bonds as computed under the provisions of Section 103(b)(6) of the 1954 Code or 144(a)(4) of the Code and the Regulations to exceed $10,000,000 and (ii) that, within three years after the date any of the 1982 Bonds or the Prior Bonds were issued, the Company did not make nor permit any user of the Facility to make any expenditure, assume any obligations or take or permit any other action to be taken which caused the "aggregate face amount" of any of the 1982 Bonds or the Prior Bonds as computed under the provisions of Section 103(b)(6) of the 1954 Code to exceed $10,000,000. (h) The Company represents and warrants that the Facility is located only at the place or places specified in the notice of public hearing published with respect to the Prior Bonds pursuant to Section 103(k)(2) of the 1954 Code and Section 147(f) of the Code. (i) The Company represents and warrants that neither the Company (including any "related person," within the meaning of Section 144(a)(3) of the Code) nor any other "principal user" of the Facility (including any related person), within the meaning of Section 144(a)(2) of the Code, is a principal user of any facility other than the Facility that is financed with (i) an "industrial development bond," within the meaning of Section 103(b) of the 1954 Code, (ii) a "qualified small issue bond," within the meaning of Section 144(a) of the Code, or (iii) any other "outstanding tax-exempt facility-related bonds," within the meaning of Section 144(a)(10) of the Code. The Company covenants and agrees that the aggregate authorized face amount of the bonds described in the preceding sentence (including the Bonds) which can be allocated to any "test period beneficiary" as such term is defined either in Section 103(b)(15)(D) of the 1954 Code or in Section 144(a)(10)(D) of the Code (including, but not limited to the Company) will not exceed $40,000,000. The Company further covenants and agrees that it will not permit the use of the Facility by any person (other than the Company or a "related person" within the meaning of Section 103(b)(6) of the 1954 Code or Section 144 of the Code) to whom any part of the 1982 Bonds, the Prior Bonds or the Bonds would be allocated pursuant to Section 103(b)(15) of the 1954 Code or Section 144(a)(10) of the Code, if the amount allocated, when increased as provided in Section 103(b)(15)(A) of the 1954 Code or Section 144(a)(10)(A) of the Code, would exceed $40,000,000. (j) The Company represents and warrants that none of the proceeds of the 1982 Bonds issued subsequent to 1983 were used to acquire any property or an interest therein (other than land or an interest in land) unless: (i) the first use of such property was pursuant to such acquisition; or (ii) "rehabilitation expenditures," within the meaning of Section 103(b)(17)(c) of the 1954 Code with respect to that part of such property constituting: (A) a building (and the equipment therefor), equalled or exceeded fifteen percent (15%) of that portion of the cost of acquiring such building (and the equipment therefor) that was financed with the proceeds of such 1982 Bonds; and (B) a facility other than a building, equalled or exceeded one hundred percent (100%) of that portion of the cost of acquiring such facility that was financed with the proceeds of such 1982 Bonds. (1) The Issuer covenants and agrees that, prior to the issuance of the Bonds, it shall duly elect to have the provisions of Section 103(b)(6)(D) of the 1954 Code and Section 144(a)(4) of the Code apply to such issue and such election shall be made in accordance with the applicable Regulations or procedures of the Internal Revenue Service. The Company covenants and agrees that it shall furnish to the Issuer whatever information is necessary for the Issuer to make such election and shall compile such supplemental statements and other information as required by the applicable Regulations and procedures of the Internal Revenue Service. (l) The Company will comply with, and make all filings required by, all effective rules, rulings or Regulations promulgated by the Department of the Treasury or the Internal Revenue Service, with respect to obligations issued under Section 103(b)(6) of the 1954 Code as a "small issue industrial development bond" the interest on which is exempt from federal income taxation or issued under Section 144(a) of the Code as a "qualified small issue bond" the interest on which is excludable from gross income for federal income tax purposes. (m) The Company represents and warrants that the Facility does not share common facilities (such as an enclosed mall, heating and cooling facilities or parking facilities) with any other part of the same building, other portions of an enclosed shopping mall or a strip of offices, stores or warehouses that were financed with tax-exempt small issue industrial development bonds under Section 103(b)(6) of the 1954 Code or qualified small issue bonds under Section 144(a) of the Code. (n) The Company represents and warrants that no rebate with respect to the Prior Bonds is payable to the United States pursuant to the provisions of Section 148 of the Code. (o) The Issuer will comply with the information reporting requirements of Section 149(e) of the Code with respect to the Bonds. (p) The Company represents and warrants that the information contained in the certificates or representations for the Company with respect to compliance with the requirements of Section 149(e) of the Code, including the information in Form 8038, is true and correct in all material respects. (q) The Company shall take all action necessary to ensure that interest on the Bonds, for federal income tax purposes, is not included in gross income of the owners thereof. Section 5.6. Indemnification. (a) The Company shall at all times protect, indemnify and save harmless the Issuer and the Trustee (collectively, the "Indemnitees") from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (hereinafter referred to as "Damages"), including without limitation (1) all amounts paid in settlement of any litigation commenced or threatened against the Indemnitees, if such settlement is effected with the written consent of the Company, (2) all expenses reasonably incurred in the investigation of, preparation for or defense of any litigation, proceeding or investigation of any nature whatsoever, commenced or threatened against the Company, the Facility or the Indemnitees, (3) any judgments, penalties, fines, damages, assessments, indemnities or contributions, and (4) the reasonable fees of attorneys, auditors, and consultants, provided that the Damages arise out of: (A) failure by the Company or its partners, employees or agents, to comply with the terms of this Financing Agreement or the Note, and any agreements, covenants, obligations, or prohibitions set forth therein; (B) any action, suit, claim or demand contesting or affecting the title of the Facility; (C) any breach by the Company of any representation or warranty set forth in this Financing Agreement or the Note, or any certificate delivered by the Company pursuant thereto, and any claim that any representation or warranty of the Company contains or contained any untrue or misleading statement of fact or omits or omitted to state any material facts necessary to make the statements made therein not misleading in light of the circumstances under which they were made; (D) any action, suit, claim, proceeding or investigation of a judicial, legislative, administrative or regulatory nature arising from or in connection with the ownership, operation, occupation or use of the Facility; or (E) any suit, action, administrative proceeding, enforcement action, or governmental or private action of any kind whatsoever commenced against the Company, the Facility or the Indemnitees that might adversely affect the validity, enforceability or tax-exempt status of the Bonds, this Financing Agreement or the Note, or the performance by the Company or any Indemnitee of any of their respective obligations thereunder; provided that such indemnity shall be effective only to the extent of any loss that may be sustained by the Indemnitees in excess of the proceeds net of any expenses of collection, received by them or from any insurance carried with respect to such loss and provided further that the benefits of this section shall not inure to any person other than the Indemnitees. (b) If any action, suit or proceeding is brought against the Indemnitees for any loss or damage for which the Company is required to provide indemnification under this section, the Company, upon request, shall at its expense resist and defend such action, suit or proceeding, or cause the same to be resisted and defended by counsel designated by the Company and approved by the Indemnitees, which approval shall not be unreasonably withheld, provided that such approval shall not be required in the case of defense by counsel designated by any insurance company undertaking such defense pursuant to any applicable policy of insurance. If an Indemnitee shall have reasonably concluded that there may be defenses available to it that are in conflict with those available to the Company or to other Indemnitees (in which case the Company shall not have the right to direct the defense of such action on behalf of such Indemnitee), such Indemnitee may engage separate counsel and the reasonable legal and other expenses incurred by such Indemnitee shall be borne by the Company. The obligations of the Company under this section shall survive any termination of this Agreement, including prepayment of the Note. (c) Nothing contained herein shall require the Company to indemnify the Issuer for any claim or liability resulting from its willful, wrongful acts or the Trustee for any claim or liability resulting from its negligence (under the standard of care set forth in Article IX of the Indenture) or its willful, wrongful acts. (d) All references in this section to the Issuer and the Trustee, including references to Indemnitees, shall include their members, commissioners, directors, officers, employees, representatives and agents. Section 5.7. Maintenance and Insurance of Facility. (a) The Company shall, at its own expense, keep the Facility in as reasonably safe condition as its operations shall permit and shall keep the Facility in good repair and operating condition, ordinary wear and tear excepted, making from time to time all necessary repairs, renewals and replacements. The Company shall comply, in all material respects, with all laws applicable to the Facility. (b) The Company shall, at its own expense, continuously maintain insurance in connection with the Facility and the Company's operations against such risks as are customarily insured against by organizations of the same general type, including without limitation insurance for property damage, liability for bodily injury, liability for property damage and workers' compensation. Section 5.8. Corporate Existence. The Company shall maintain its existence as a West Virginia corporation and shall not, without the prior consent of the Trustee, dissolve or otherwise dispose of all or substantially all of its assets, consolidate with or merge into another domestic partnership or corporation (i.e. a partnership or corporation created under the laws of the United States of America, one of the states thereof or the District of Columbia) or permit one or more other domestic partnerships or corporations to consolidate with or merge into it; provided, however, that with the prior written consent of the Bank, the Company may consolidate with or merge into another domestic partnership or corporation, or permit one or more domestic partnerships or corporations to consolidate with or merge into it, or sell or otherwise transfer to another domestic partnership or corporation all or substantially all of its assets and thereafter dissolve, or sell or assign all or substantially all of its assets to a governmental unit, if after giving effect to such consolidation, merger, transfer, sale or assignment the surviving, resulting or transferee partnership, corporation or governmental unit: (1) will not be in default under any covenant under this Financing Agreement; (2) if it is not the Company, has the power to assume and assumes in writing all of the obligations of the Company herein and in the Note; and (3) if it is not a West Virginia partnership or corporation or a political subdivision of the State of West Virginia, either qualifies to do business in West Virginia or files with the Trustee a consent to service of process reasonably acceptable to the Trustee. Section 5.9. Obligations Under the Indenture. The Company shall undertake all actions and carry out all responsibilities prescribed for it under the Indenture. ARTICLE VI EVENTS OF DEFAULT AND REMEDIES Section 6.1. Event of Default Defined. Each of the following events shall be an Event of Default: (a) Failure of the Company to make any payment on the Note when due and payable; (b) Failure of the Company to observe and perform any of its other covenants, conditions or agreements hereunder for a period of 30 days after notice specifying such failure and requesting that it be remedied, given by the Issuer or the Trustee to the Company; (c) (1) Failure of the Company to pay generally its debts as they become due, (2) commencement by the Company of a voluntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or similar law, (3) consent by the Company to the appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official for the Company or any substantial part of its property, or to the taking possession by any such official of any substantial part of the property of the Company, (4) making by the Company of any assignment for the benefit of creditors generally, or (5) taking of corporate action by the Company in furtherance of any of the foregoing; (d) The (1) entry of any decree or order for relief by a court having jurisdiction over the Company or its property in an involuntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or similar law, (2) appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator or similar official for the Company or any substantial part of its property, or (3) entry of any order for the termination or liquidation of the Company or its affairs; (e) Failure of the Company within 60 days after the commencement of any proceedings against it under the federal bankruptcy laws or other applicable federal or state bankruptcy, insolvency or similar law, to have such proceedings dismissed or stayed; (f) Abandonment of the Facility by the Company for a period in excess of thirty (30) days; or (g) An Event of Default under the Indenture. The foregoing provisions of subsection (b) are subject to the limitation that if by reason of force majeure the Company is unable in whole or in part to observe and perform any of its covenants, conditions or agreements hereunder, other than its obligations contained in Sections 4.1, 4.6, 4.7, 5.1, 5.5, 5.6 and 5.8, the Company shall not be deemed in default during the continuance of such inability. The term "force majeure" as used herein shall include without limitation acts of God; strikes, lockouts or other disturbances; acts of public enemies; orders of any kind of the government of the United States of America or the State of West Virginia or any political subdivision thereof or any of their departments, agencies or officials, or any civil or military authority; insurrections; riots; epidemics; landslides; lightning; earthquakes; fires; hurricanes; tornadoes; storms; floods; washouts; droughts; arrests; restraint of government and people; civil disturbances; explosions; breakage or accident to machinery, transmission pipes or canals; partial or entire failure of utilities; or any other cause or event not reasonably within the control of the Company. The Company shall remedy with all reasonable dispatch the cause or causes preventing the Company from carrying out its covenants, conditions and agreements, provided that the settlement of strikes, lockouts and other industrial disturbances shall be entirely within the discretion of the Company, and the Company shall not be required to make settlement of strikes, lockouts and other industrial disturbances by acceding to the demands of any opposing party when such course is in the judgment of the Company not in its best interests. Section 6.2. Remedies on Default. Whenever any Event of Default hereunder shall have occurred and is continuing, the Trustee as the assignee of the Issuer: (a) May, and at the written direction of the holders of not less than 25% in aggregate principal amount of Bonds then outstanding, shall declare all amounts payable as principal and interest on the Note to be immediately due and payable, whereupon the same shall become immediately due and payable, except that the Trustee shall not make such a declaration unless the Bank has either (1) consented to such declaration or (2) has failed to honor any proper drawing under the Letter of Credit. (b) Have access to and inspect, examine and copy the financial books, records and accounts of the Company pertaining to the Facility. (c) Take whatever action at law or in equity may appear necessary or desirable to collect the amounts then due and thereafter to become due or to enforce observance or performance of any covenant, condition or agreement of the Company under the Note or this Financing Agreement. Section 6.3. Application of Amounts Realized in Enforcement of Remedies. Any amounts collected pursuant to action taken under Section 6.2 hereof shall be applied in accordance with the provisions of the Indenture, or, if payment of the Bonds shall have been made, shall be applied according to the provisions of Section 8.06 of the Indenture. Section 6.4. No Remedy Exclusive. No remedy herein conferred upon or reserved to the Trustee is intended to be exclusive of any other remedy, and every remedy shall be cumulative and in addition to every other remedy herein or now or hereafter existing at law, in equity or by statute. No delay or omission to exercise any right or power accruing upon an Event of Default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right or power may be exercised from time to time and as often as may be deemed expedient. Section 6.5. Attorney Fees and Other Expenses. Upon an Event of Default, the Company on demand shall pay to the Issuer and the Trustee the reasonable fees and expenses of their attorneys and other reasonable fees and expenses incurred by any of them in the collection of payments under the Note or the enforcement of any other obligations of the Company. Section 6.6. No Additional Waiver Implied by One Waiver. If either party or its assignee waives a default by the other party under any covenant, condition or agreement herein, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other default hereunder. ARTICLE VII PREPAYMENT OF THE NOTE Section 7.1. Option To Prepay in Full. Subject to requirements under the Indenture for Available Moneys in certain instances, the Company may prepay in full the Note, without penalty or premium, and terminate this Financing Agreement prior to payment of the Bonds by (a) paying to the Trustee an amount of cash or U.S. Government Obligations that, together with existing investments in the Bond Fund, will comply with the requirements for the defeasance of the Bonds set forth in Article VII of the Indenture, and (b) by making arrangements satisfactory to the Trustee for giving any required notice of redemption. Section 7.2. Mandatory Payment. The Company shall prepay the Note in full or in part (a) upon the occurrence of a Determination of Taxability as defined in the Indenture, or (b) as otherwise provided in Section 3.01 of the Indenture. Section 7.3. Option To Prepay in Part. The Company may prepay the Note in part, and the Issuer agrees that the Trustee may accept such payments to be paid to the Trustee for deposit in the Bond Fund and used for redemption or, at the election of the Company, purchase of outstanding Bonds, in the manner and to the extent provided in the Indenture. The principal amount of each Bond so purchased, delivered or credited shall be appropriately credited by the Trustee against the obligation of the Company to make future payments on the Note. Section 7.4. Relation of Options to Indenture. The options granted to the Company in this Article may be exercised whether or not the Company is in default under this Financing Agreement, provided that any such default will not result in the nonfulfillment of any condition to the exercise of any such option. Section 7.5. Obligations After Payment of Note and Termination of Financing Agreement. Anything contained in this Article VII to the contrary notwithstanding, the obligations of the Company contained in Section 5.6 and the obligation of the Company to pay the costs and expenses of the Issuer and the Trustee shall continue after payment of the Note and termination of this Financing Agreement. ARTICLE X MISCELLANEOUS Section 8.1. Term of Financing Agreement; Amounts Remaining After Payment of the Bonds. This Financing Agreement shall be effective upon execution and delivery hereof, and subject to earlier termination upon prepayment in full of the Note and all other amounts required to be paid hereunder, including all amounts payable under the Indenture, shall expire at midnight on September 1, 2012, or if such payment of the Note has not been made on such date, when payment in full of the Note and all other amounts required to be paid hereunder shall have been made, except that, notwithstanding the foregoing, the obligation of the Company to indemnify and pay the costs and expenses of the Issuer and the Trustee shall survive the expiration of this Financing Agreement. Any amounts remaining after payment of the Bonds and payment of the fees and expenses of the Trustee and the Issuer in accordance with the Indenture shall be distributed as set forth in Section 4.07 of the Indenture. Section 8.2. Notices, etc. Unless otherwise provided herein, all demands, notices, approvals, consents, requests and other communications hereunder shall be in writing and shall be deemed to have been given when delivered in person or mailed by first class registered or certified mail, postage prepaid, addressed: (a) if to the Issuer, to City of Beckley, West Virginia, City Hall, 409 South Kanawha Street, Beckley, West Virginia 25801, Attention: Mayor of City of Beckley; (b) if to the Trustee, to One Valley Bank, National Association, P.O. Box 1793, Charleston, West Virginia 25326, Attention: Corporate Trust Department; (c) if to the Company, to Beckley Health Care Corp., 405 Stanaford Road, Beckley, West Virginia 25801; (d) if to the Underwriter, to Crews and Associates, Inc. 2000 Union National Plaza, 124 West Capitol, Little Rock, Arkansas 72201; (e) if to the Bank, to NationsBank of Texas, N.A, 901 Main Street, 13th Floor, Dallas, Texas 75202, Attention: Marie Lancanster; and A duplicate copy of each demand, notice, approval, consent, request or other communication given hereunder by either the Issuer or the Company to the other shall also be given to the Trustee and the Bank. The Company, the Issuer, the Trustee and the Bank may, by notice given hereunder, designate any further or different addresses to which subsequent demands, notices, approvals, consents, requests or other communications shall be sent or persons to whose attention the same shall be directed. Section 8.3. Amendments to financing Agreement and Note. Neither this Financing Agreement nor the Note shall be amended or supplemented and no substitution shall be made for the Note subsequent to the issuance of the Bonds and before payment of the Bonds, without the consent of the Trustee, given in accordance with Article XI of the Indenture. Section 8.4. Successors and Assigns. This Financing Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Without the prior written consent of the Issuer, the Trustee and the Bank, no assignment by the Company shall relieve the Company of its obligations hereunder. Section 8.5. Severability. If any provision of this Financing Agreement shall be held invalid by any court of competent jurisdiction, such holding shall not invalidate any other provision hereof. Section 8.6. Applicable Law. This Financing Agreement shall be governed by the applicable laws of the State of West Virginia. Section 8.7. Counterparts. This Financing Agreement may be executed in counterparts, each of which shall be an original and all of which, taken together, shall constitute but one and the same instrument; except that to the extent, that this Financing Agreement shall constitute personal property under the Uniform Commercial Code of West Virginia, no security interest in this Financing Agreement may be created or perfected through the transfer or possession of any counterpart of this Financing Agreement other than the original counterpart, which shall be the counterpart containing the receipt therefor executed by the Trustee following the signatures to this Financing Agreement. Section 8.8. Bank May Perform Company's Obligations. The Bank may perform or observe any covenant, condition or agreement of the Company hereunder and such performance or observance shall be treated in all respects as the act of the Company. Section 8.9. Entire Agreement. This Financing Agreement together with the Indenture and the Note constitute the entire agreement between the Issuer and the Company and supersede all prior agreements and understandings, both oral and written, between the Issuer and the Company with respect to the subject matter hereof. IN WITNESS WHEREOF, the Issuer has caused this Financing Agreement to be executed on its behalf and its seal to be affixed hereto and attested by the duly authorized Mayor of the City of Beckley, West Virginia, and the Company has caused this Financing Agreement to be executed in its name by the duly authorized officer, all as of the date first above written. THE CITY OF BECKLEY, WEST VIRGINIA (SEAL) By -------------------------------------------------------------- Mayor ATTEST: By Its BECKLEY HEALTH CARE CORP., a West Virginia corporation By Its ATTEST: By Its RECEIPT Receipt of the foregoing original counterpart of the Financing Agreement dated as of September 1, 1996, between the City of Beckley, West Virginia and Beckley Health Care Corp., is hereby acknowledged as of the 30th day of September, 1996. ONE VALLEY BANK, NATIONAL ASSOCIATION, as Trustee By Vice President The material exhibits to this document are as follows, and are available upon request: CONTINUING DISCLOSURE AGREEMENT executed and delivered by BECKLEY HEALTH CARE CORP., a West Virginia limited partnership, as the borrower and ONE VALLEY BANK, NATIONAL ASSOCIATION, in connection with the issuance of $2,830,000 City of Beckley, West Virginia First Mortgage Refunding Revenue Bonds, Series 1996 being issued pursuant to a Trust Indenture dated as of September 1, 1996, by and between the City of Beckley, West Virginia and One Valley Bank, National Association. Official Statement regarding exemption from taxation. TAX REGULATORY AGREEMENT AND NO ARBITRAGE CERTIFICATE by and among City of Beckley, West Virginia, Beckley Health Care Corp. and One Valley Bank, National Association, Charleston, West Virginia, as Trustee. EX-10.44 6 INDENTURE OF TRUST - BECKLEY Exhibit 10.44 INDENTURE OF TRUST relating to $2,830,000 Nursing Facility Refunding Revenue Bonds (Beckley Health Care Corp. Project), Series 1996 between THE CITY OF BECKLEY, WEST VIRGINIA and ONE VALLEY BANK, NATIONAL ASSOCIATION, as Trustee Dated as of September 1, 1996 INDENTURE OF TRUST INDENTURE OF TRUST dated as of September 1, 1996 (the "Indenture") between THE CITY OF BECKLEY, WEST VIRGINIA, a municipality and a political subdivision of the State of West Virginia (the "Issuer"), and ONE VALLEY BANK, NATIONAL ASSOCIATION, a national banking association organized, existing and authorized to accept and execute trusts of the character herein set out (in such capacity, together with any successor in such capacity, the "Trustee"), as trustee. WHEREAS, the Issuer is a duly organized political subdivision of the State of West Virginia and is authorized by Chapter 13, Article 2C, Code of West Virginia of 1931, as amended (the "Act"), (a) to issue its revenue bonds for the purpose of providing funds (i) to pay the cost of acquiring, constructing, furnishing and equipping a commercial facility comprising a health care facility and (ii) to refund one or more series of revenue bonds previously issued pursuant to the Act to finance any such facility, in either case by lending the proceeds of such revenue bonds or otherwise making such proceeds available for such purposes to any person, firm or private corporation which will operate and maintain such facility in such a manner as shall effectuate the purposes of the Act and (b) to secure its revenue bonds by a trust agreement between the issuer and a corporate trustee including therein the pledge and assignment of revenues from any such loan to the payment of such revenue bonds; and WHEREAS, at the request of Beckley Health Care Corp. (the "Company") and in order to further the purposes of the Act, the Issuer has determined to issue and sell its Nursing Facility Refunding Revenue Bonds (Beckley Health Care Corp. Project), Series 1996 in the original principal amount of $2,830,000 (the "Bonds") for the purpose of providing funds, together with other available funds, to refund in full the outstanding principal amount of its $2,830,000 First Mortgage Refunding Revenue Bonds (Beckley Health Care Corp. Project) Series 1986 (the "Prior Bonds"), the proceeds of which were used to refinance the costs of acquisition, construction and equipping of a 120-bed intermediate and skilled nursing facility, owned and operated by the Company, located at 405 Stanaford Road in the City of Beckley, West Virginia (the "Facility"); and WHEREAS, by issuing the Bonds to refund the Prior Bonds, the Issuer and the Company expect to finance the Facility more economically and thereby to achieve interest cost savings; and WHEREAS, the Issuer has undertaken to provide for the refunding of the Prior Bonds and the refinancing of the acquisition, construction and equipping of the Facility by making available the proceeds from the sale of the Bonds pursuant to the provisions of a Financing Agreement (the "Agreement") between the Issuer and the Company, dated as of even date herewith; and WHEREAS, the Agreement provides that the Issuer shall issue and sell the Bonds; and that the Company shall pay, or cause to be paid, pursuant to the Agreement, in addition to other moneys available for such purpose, an amount sufficient to pay the Bonds in full and related expenses; and WHEREAS, the Issuer wishes to provide in this Indenture for the issuance of its Bonds, and the Trustee is willing to accept the trusts provided for in this Indenture; and WHEREAS, the execution and delivery of the Bonds and of this Indenture and the issuance and sale of the Bonds have been duly authorized by a resolution duly adopted by the governing body of the Issuer and all things necessary to make the Bonds, when executed by the Issuer and authenticated by the Trustee (as hereinafter defined), valid and binding legal obligations of the Issuer and to make this Indenture a valid and binding agreement have been done; ACCORDINGLY, THE ISSUER AND THE TRUSTEE AGREE AS FOLLOWS FOR THE BENEFIT OF THE OTHER AND FOR THE BENEFIT OF THE HOLDERS OF THE BONDS ISSUED PURSUANT TO THIS INDENTURE (SUBJECT TO THE PROVISIONS OF SECTIONS 6.01 and 12.08): GRANTING CLAUSE To secure first, the payment of the Bonds, the Issuer assigns and pledges to the Trustee, and grants to the Trustee, a security interest in, all right, title and interest of the Issuer in and to (a) the Agreement, including any right to delivery of the Letter of Credit, the Receipts and Revenues of the Issuer from the Agreement (as hereinafter defined), any right to bring actions and proceedings under the Agreement or for the enforcement of the Agreement and any right to do all things that the Issuer is entitled to do under the Agreement, but excluding the Unassigned Rights (as hereinafter defined) and the right to enforce the Unassigned Rights, and (b) all moneys and securities held from time to time by the Trustee under this Indenture, first, for the equal and proportionate benefit of all holders of the Bonds without priority or distinction as to lien or otherwise of any Bonds over any other Bonds. ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION Section 1.01. Definitions. For all purposes of this Indenture, unless the context requires otherwise, the following terms shall have the following meanings: "Act" means Chapter 13, Article 2C, Code of West Virginia of 1931, as amended. "Additional Bonds" shall mean any Bonds authorized and issued pursuant to Section 2.09 of this Indenture. "Agreement" or "Financing Agreement" means the Financing Agreement, dated as of the date of this Indenture, between the Issuer and the Company, as such Agreement may be amended or supplemented from time to time in accordance with its terms. "Authorized Denominations" means with respect to all Bonds $5,000 and any multiple thereof. "Available Moneys" means moneys that (a) are continuously on deposit with the Trustee in trust for the benefit of the Bondholders in a separate and segregated account in which only Available Moneys are held and (b) are proceeds of either (i) the Bonds received contemporaneously with and directly from the issuance and sale of the Bonds, (ii) payments made by the Company (and, if the bonds are then rated by any national securities rating agency, at the time of the deposit of such payments and for a period of at least 366 days thereafter, no Bankruptcy Filing shall have occurred), (iii) a draw by the Trustee on the Letter of Credit, (iv) refunding bonds for which the Trustee has received a written opinion of Bankruptcy Counsel to the effect that payment of such moneys to the Bondholders would not constitute an avoidable preference under Section 547 of the United States Bankruptcy Code in the event the Company or the Issuer were to become a debtor under the United States Bankruptcy Code, provided that such opinion shall only be required if the Bonds are then rated by any national rating agency, or (v) income derived from the investment of the foregoing. "Bank" means the issuer of the Letter of Credit, initially NationsBank of Texas, N.A., and, upon the issuance and delivery of a Substitute Letter of Credit, shall mean the issuer of such Substitute Letter of Credit. "Bankruptcy Counsel" means any counsel nationally recognized in bankruptcy matters that is independent of the Company and the Issuer and is reasonably acceptable to the Trustee. "Bankruptcy Filing" means the filing of a petition by or against the Company or the Issuer in respect of the Company, any of its partners or the Issuer, as the case may be, as debtor under the United States Bankruptcy Code or similar bankruptcy or insolvency act. If the petition has been dismissed and the dismissal is final and not subject to appeal at the relevant time, the filing will not be considered to have occurred. "Beneficial Owner" shall have the meaning set forth in Section 2.05(c). "Bonds" means the bonds issued pursuant to this Indenture. "Bond Fund" means the fund by that name created by Section 4. 02. "Bond Purchase Agreement" means the Bond Purchase Agreement dated September ____, 1996, among the Company, the Issuer and the Underwriter, with respect to the sale of the Bonds. "Bond Year" means the one-year period beginning on the day after the expiration of the preceding Bond Year. The first Bond Year begins on the date of the delivery of the Bonds and ends on August 31, 1997. The first and the last Bond Year may be for periods of less than one year. "Business Day" means any day other than (a) a Saturday or Sunday, (b) a day on which commercial banks in New York, New York, or the city or cities in which the corporate trust office of the Trustee or the paying office of the Bank are authorized by law or executive order to close or (c) a day on which the New York Stock Exchange is closed. For purposes of this definition, "paying office of the Bank" means the Bank office responsible for making payments under any Letter of Credit, which initially shall be the office in Los Angeles, California. "Cede & Co." means Cede & Co., the nominee of DTC or any successor nominee of DTC with respect to the Bonds. "Code" means the Internal Revenue Code of 1986, as amended, the regulations (whether proposed, temporary or final) under that Code or the statutory predecessor of that Code, and any amendments of, or successor provisions to, the foregoing and any official rulings, announcements, notices, procedures and judicial determinations regarding any of the foregoing, all as and to the extent applicable. Unless otherwise indicated, reference to a Section of the Code means that Section of the Code, including such applicable regulations, rulings, announcements, notices, procedures and determinations pertinent to that Section of the Code. "Company" means Beckley Health Care Corp., a West Virginia corporation, or any successor or successors to the Company's obligations under the Agreement as permitted under Section 5.8 of the Agreement. "Company Representative" means a person at the time designated to act on behalf of the Company by a written instrument furnished to the Trustee containing the specimen signature of such person and signed on behalf of the Company by its President, its Vice President or the Chairman of its Board of Directors. The certificate may designate an alternate or alternates. "DTC" means The Depository Trust Company, a limited purpose company organized under the laws of the State of New York, and its successors and assigns. "DTC Participant" or "DTC Participants" means securities brokers and dealers, banks, trust companies and clearing corporations that have access to the DTC system. "Determination of Taxability" shall have the meaning set forth in Section 3.01(c). "Escrow Agreement" means the Escrow Deposit Agreement, dated as of the date of this Indenture, among the Issuer, the Company and the Prior Bonds Trustee, as Escrow Agent. "Event of Default" is defined in Section 8.01. "Event of Taxability" shall mean delivery to the Trustee of (a) an opinion of Bond Counsel or (b) a letter or notice from the Internal Revenue Service to a Bondholder, in either event to the effect that interest on any Bond is includable in gross income of the recipient thereof (other than a Bondholder that is a "substantial user" of the Facility or a "related person" within the meaning of Section 147(a) of the Code) for Federal income tax purposes. "Date" of an Event of Taxability shall mean the date of receipt by the Trustee of the material described in (a) or (b). "Facility" or "Project" means the 120-bed intermediate and skilled nursing and rehabilitation facility located at 405 Stanaford Road in the City of Beckley, West Virginia. "Indenture" means this Indenture of Trust, as it may be amended or supplemented from time to time in accordance with its terms. "Interest Payment Date" means the first day of each March and September, commencing March 1, 1997. "Issuer" means City of Beckley, West Virginia, a political subdivision of the State of West Virginia, and its successors and assigns. "Issuer Representative" means the Mayor of the City of Beckley or other person designated at the time to act on behalf of the Issuer by a written instrument furnished to the Trustee containing the specimen signature of such person and signed on behalf of the Issuer by the Mayor of the City of Beckley. "Letter of Credit" means an irrevocable letter of credit having the characteristics of a "credit" or "letter of credit" set forth in Section 5-103 of the Uniform Commercial Code of the State except that a letter of credit (a) may not be revocable and (b) may only be issued by (i) a national bank, (ii) any banking institution organized under the laws of any state, territory or the District of Columbia, the business of which is substantially confined to banking and is supervised by the state or territorial banking commission or similar officials or (iii) a branch or agency of a foreign bank, provided that the nature and extent of federal and/or state regulation and the supervision of the particular branch or agency is substantially equivalent to that applicable to federal or state chartered domestic banks doing business in the same jurisdiction. Initially, the term "Letter of Credit" shall mean the irrevocable letter of credit issued by the Bank to the Trustee, including any permitted supplements or amendments thereto and any renewals or extensions thereof, and, upon the expiration or termination of the Letter of Credit and the issuance and delivery of a Substitute Letter of Credit meeting the requirements set forth in this paragraph and in Section 5.03 hereof, "Letter of Credit" shall mean such Substitute Letter of Credit. "Note" shall mean the promissory note of the Company in the principal amount of $2,830,000, dated as of the date of the Bonds, in the form attached to the Agreement as Exhibit A, issued pursuant to the Agreement and delivered to the Issuer as consideration for the use of the proceeds of the Bonds to refund the Prior Bonds, and any amendment or supplement thereto or substitution therefor. "Opinion of Bond Counsel" means an Opinion of Counsel by nationally recognized bond counsel. "Opinion of Counsel" means a written opinion of counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Issuer, the Trustee or the Company. "Outstanding" when used with reference to Bonds, or "Bonds outstanding" means all Bonds that have been authenticated and delivered by the under this Indenture, except the following: (a) Bonds canceled or purchased by or delivered to the Trustee for cancellation pursuant to the provisions of this Indenture; (b) Bonds that have become due (at maturity or on redemption, acceleration or otherwise) and for the payment, including interest accrued to the due date, of which sufficient moneys are held by the Trustee; (c) Bonds deemed paid by Section 7.01; and (d) Bonds in lieu of which others have been authenticated under Section 2.05 (relating to registration and exchange of Bonds) or Section 2.06 (relating to mutilated, lost, stolen, destroyed or undelivered Bonds). "Owner," "owners," "Bondholder," "bondholder," "Holder," "holder" or words of similar import mean: (a) in the event that the book-entry system of evidence and transfer of ownership in the Bonds is employed pursuant to Section 2.05(c), Cede & Co., as nominee for DTC, or its nominee, and (b) in all other cases, the registered owner or owners of any Bond fully registered as shown on the register maintained by the Trustee. "Person" means (a) any individual, (b) any corporation, partnership, joint venture, association, joint-stock company, business trust or unincorporated organization, or grouping of any such entities, in each case formed or organized under the laws of the United States of America, any state thereof or the District of Columbia or (c) the United States of America or any state thereof, or any political subdivision of either thereof, or any agency, authority or other instrumentality of any of the foregoing. "Parent" means Regency Health Services, Inc., a Delaware Corporation, and owner of 100% of the stock of the Company. "Prior Bonds" means City of Beckley, West Virginia First Mortgage Refunding Revenue Bonds (Beckley Health Care Corp. Project), Series 1986, in the original principal amount of $2,830,000. "Prior Bonds Trustee" means One Valley Bank, National Association (formerly Kanawha Valley Bank, N.A.), Charleston, West Virginia, as indenture trustee for the Prior Bonds. "Rating Agency" means Moody's Investors Service, Inc., if such agency's ratings are in effect with respect to the Bonds, and Standard & Poor's Ratings Group, if such agency's ratings are in effect with respect to the Bonds, and their respective successors and assigns. If either such corporation ceases to act as a securities rating agency, the Company may, with the approval of the Bank, appoint any nationally recognized securities rating agency as a replacement. "Receipts and Revenues of the Issuer from the Agreement" means all moneys paid to the Issuer pursuant to Section 4.1 of the Agreement, and receipts of the Trustee credited under the provisions of this Indenture against such payments, including all moneys (other than moneys drawn to purchase Bonds pursuant to the terms hereof) received by the Trustee from a draw under the Letter of Credit. "Record Date" means the fifteenth day of the calendar month next preceding an Interest Payment Date. "Reimbursement Agreement" means the Credit Agreement among the Parent, the Lenders Identified therein, NationsBank Capital Markets, Inc. and the Bank pursuant to which the Letter of Credit is issued by the Bank and delivered to the Trustee, and any and all modifications, alterations, amendments and supplements thereto. "Responsible Officer" means, when used with respect to the Trustee, any officer within the Corporate Trust Division (or any successor group of the Trustee), including any vice president, assistant vice president, assistant secretary or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred at the Trustee's address set forth in Section 12.01 because of his knowledge of and familiarity with the particular subject. "State" means the State of West Virginia. "Substitute Letter of Credit" shall have the meaning set forth in Section 5.03. "Tax Regulatory Agreement" means the Tax Regulatory Agreement dated as of the date of the delivery of the Bonds among the Company, the Issuer and the Trustee, as the same may be amended or supplemented from time to time in accordance with its terms or with an opinion of Bond Counsel to the effect that such amendment will not have an adverse effect on the tax-exempt status of the Bonds under the Code. "Trustee" means the entity identified as such in the heading of this Indenture and such entity's successors under this Indenture, and any separate or co-trustee at the time serving as such under this Indenture. "Unassigned Rights" means the rights of the Issuer under Section 4.1(b)(2) (relating to fees and expenses) and Section 5.6 (relating to indemnification) of the Agreement and the rights of the Issuer to receive documentation and notices, to give or withhold consents in connection with the provisions of this Indenture or the Agreement and the right to enforce any of the foregoing. "Underwriter" means Crews and Associates, Inc. "U.S. Government Obligations" means (a) direct obligations of the United States for which its full faith and credit are pledged for the timely payment thereof, (b) obligations of a person controlled or supervised by and acting as an agency or instrumentality of the United States, the payment of which is unconditionally guaranteed as a full faith and credit obligation of the United States for the timely payment thereof or (c) securities or receipts evidencing ownership interests in obligations or specified portions (such as principal or interest) of obligations described in (a) or (b). All other terms used in this Indenture that are defined in Article I of the Agreement have the same meanings assigned them in the Agreement unless the context clearly requires otherwise. Section 1.02. Rules of Construction. Unless the context otherwise requires, (a) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles applied on a consistent basis; (b) references to Articles and Sections are to the Articles and Sections of this Indenture; (c) terms defined elsewhere in this Indenture shall have the meanings therein prescribed for them; (d) words of the masculine gender shall be deemed and construed to include correlative words of the feminine and neuter genders; (e) headings used in this Indenture are for convenience of reference only and shall not define or limit the provisions hereof; (f) each reference herein or in the Bonds to a percentage of Bonds required for notices, consents or for any other reason shall be deemed to refer to Bonds then outstanding; and (g) all references herein to time shall be Charleston, West Virginia time unless otherwise expressly stated. ARTICLE II THE BONDS Section 2.01. Issuance of Bonds; Form; Dating. (a) Authorization. The Issuer hereby authorizes and creates under this Indenture an issue of Bonds, entitled to the benefit, security and protection of this Indenture, to be designated "Nursing Facility Refunding Revenue Bonds (Beckley Health Care Corp. Project), Series 1996." The total principal amount of Bonds that may be issued and outstanding hereunder shall be $2,830,000, except as provided in Section 2.06 with respect to replacement of mutilated, lost, stolen, destroyed or undelivered Bonds and Section 2.09 with respect to Additional Bonds. The Bonds shall be issuable only as fully registered bonds without coupons in Authorized Denominations only, and in substantially the form of Exhibit A to this Indenture, with appropriate variations, omissions, insertions, notations, legends or endorsements required by law or usage or permitted or required by this Indenture. The Bonds may be in printed or typewritten form. No Bonds may be issued under the provisions of this Indenture except in accordance with this Article. The Bonds shall be payable in lawful money of the United States but only from the sources pledged to such purpose. The Bonds are limited obligations of the Issuer payable solely from the revenues and receipts derived from payments made by the Company on the Note or by the Bank under the Letter of Credit, which revenues and receipts and security have been pledged and assigned to the Trustee to secure payment of the Bonds in the manner and to the extent provided herein. NEITHER THE STATE OF WEST VIRGINIA, THE ISSUER, NOR ANY OTHER POLITICAL SUBDIVISION THEREOF SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF OR INTEREST ON THE BONDS OR OTHER COSTS INCIDENT THERETO EXCEPT FROM THE REVENUES, MONIES AND PROPERTY PLEDGED THEREFOR, AND NEITHER THE TAXING POWER NOR THE FULL FAITH AND CREDIT OF THE STATE OF WEST VIRGINIA, THE ISSUER, OR ANY OTHER POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR INTEREST ON THE BONDS OR OTHER COSTS INCIDENT THERETO. THE BONDS SHALL NEVER CONSTITUTE AN INDEBTEDNESS OF THE ISSUER WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY PROVISION AND SHALL NEVER CONSTITUTE OR GIVE RISE TO A PECUNIARY LIABILITY OF THE ISSUER. NEITHER SHALL THE BONDS NOR THE INTEREST THEREON BE A CHARGE AGAINST THE GENERAL CREDIT OR TAXING POWERS OF THE ISSUER. NO PRESENT OR FUTURE OFFICER, MEMBER, EMPLOYEE OR AGENT OF THE ISSUER SHALL BE PERSONALLY LIABLE ON THE BONDS; AND NO COVENANT, AGREEMENT OR OBLIGATION CONTAINED HEREIN SHALL BE DEEMED TO BE A COVENANT, AGREEMENT OR OBLIGATION OF ANY PRESENT OR FUTURE MEMBER, COMMISSIONER, OFFICER, EMPLOYEE OR AGENT OF THE ISSUER IN HIS INDIVIDUAL CAPACITY. (b) Details of Bonds. All Bonds shall be dated September 1, 1996 and delivery of the Bonds and shall mature, subject to prior redemption, on September 1, 2012. Interest on the Bonds shall be computed from the Interest Payment Date next preceding the date of authentication thereof, unless such authentication date (a) is prior to the first Interest Payment Date following the initial delivery of the Bonds, in which case interest shall be computed from such initial delivery date, (b) is after a Record Date and before the subsequent Interest Payment Date, in which case interest shall be computed from the subsequent Interest Payment Date, or (c) is an Interest Payment Date, in which case interest shall be computed from such authentication date; provided, that if interest on the Bonds is in default, Bonds shall bear interest from the last date to which interest has been paid. The principal of, redemption or purchase price and premium, if any, and interest on the Bonds shall be payable in lawful currency of the United States. The principal of and redemption or purchase price and premium, if any, on the Bonds shall be payable at the principal corporate trust office of the Trustee upon presentation and surrender of the Bonds. Payments of interest on the Bonds shall be mailed to the persons in whose names the Bonds are registered on the register of the Trustee at the close of business on the Record Date next preceding each Interest Payment Date; provided that, any Holder of a Bond or Bonds in an aggregate principal amount of not less than $500,000 may, by prior written instructions filed with the Trustee (which instructions shall remain in effect until revoked by subsequent written instructions), instruct that interest payments for any period be made by wire transfer to an account in the continental United States or other means acceptable to the Trustee. Bonds shall be numbered from 1 upward as determined by the Trustee and shall contain the designation "R." (c) Delivery. Upon the execution and delivery of this Indenture, the Issuer shall execute and deliver the Bonds to the Trustee and, upon receipt by the Trustee of the following, the Trustee shall authenticate the principal amount of Bonds specified in the Issuer's authorization and request, and the Trustee shall deliver the Bonds to the purchaser or purchasers as directed by the Issuer: (i) a copy of the resolution or resolutions of the Issuer authorizing the issuance of the Bonds, certified by the Recorder of the City of Beckley; (ii) original executed counterparts of the Agreement, this Indenture, the Escrow Agreement and the Tax Regulatory Agreement and a copy of the Reimbursement Agreement; (iii) confirmation that the Trustee has received the original, executed Letter of Credit from the Bank; (iv) an authorization and request from the Issuer to the Trustee to authenticate and deliver the Bonds in specified Authorized Denominations to the initial purchaser or purchasers upon payment to the Trustee, for the account of the Issuer, of the purchase price for such principal amount of Bonds; (v) an Opinion of Bond Counsel for the Bonds, addressed to the Trustee, or upon which the Trustee may rely, to the effect that the Bonds so specified have been validly authorized, executed and issued under the law of the State and this Indenture has been duly authorized, executed and delivered by the Issuer; (vi) an opinion of Counsel to the Bank addressed to the Trustee, or upon which the Trustee may rely, to the effect that the Letter of Credit is a binding and valid obligation of the Bank and is not subject to registration under the Securities Act of 1933, as amended; (vii) Internal Revenue Service Form 8038 completed by the Issuer with respect to the Bonds; and (viii) An Opinion of Counsel that (1) the Company is a corporation duly organized and validly existing under the laws of the State, and (2) the Agreement and the Note have been duly authorized, executed and delivered by the Company and are enforceable against the Company, subject to usual exceptions for matters relating to bankruptcy and equitable principles. (d) Disbursement. On the date of issuance of the Bonds, the Trustee shall disburse all of the proceeds derived from the issuance of the Bonds, together with sufficient equity money provided by the Company, to the Prior Bonds Trustee as Escrow Agent under the Escrow Agreement in order to provide for the defeasance in full of the Prior Bonds. All additional moneys should be deposited in the Bond Fund and shall be applied as set forth in Section 4.04. Section 2.02. Interest on the Bonds. The Bonds shall bear interest as herein provided from the date thereof until paid in full. The Bonds will be in the principal amounts, shall bear interest and shall mature on September 1 in the years as follows: Year Principal Interest (September 1) Amount Rate ------------- --------- ------ 1997 $ 20,000.00 4.200% 1998 25,000.00 4.400 1999 25,000.00 4.500 2000 25,000.00 4.600 2001 160,000.00 4.700 2002 170,000.00 4.800 2003 180,000.00 4,900 2004 195,000.00 5.000 2005 205,000.00 5.100 2006 215,000.00 5.200 2007 230,000.00 5.300 2012 1,380,000.00 5.750 Interest accrued on the Bonds shall be paid on each Interest Payment Date (or, if such day is not a Business Day, on the next succeeding Business Day), commencing on March 1, 1997. The amount of interest payable on any Interest Payment Date shall be computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, whichever may be applicable. Section 2.03. Execution and Authentication. The Bonds shall be signed on behalf of the Issuer with the manual or facsimile signature of the Mayor of the Issuer, and the seal of the Issuer shall be impressed or imprinted on the Bonds by facsimile or otherwise, and attested by the manual or facsimile signature of the Recorder of the Issuer. If any officer whose signature is on a Bond no longer holds that office at the time the Trustee authenticates the Bond, the Bond shall nevertheless be valid. Also, if a person signing a Bond is the proper officer on the actual date of execution, the Bond shall be valid even if that person is not the proper officer on the nominal date of action. A Bond shall not be valid for any purpose under this Indenture unless and until the Trustee manually signs the certificate of authentication on the Bond, and such signature shall be conclusive evidence that the Bond has been authenticated under this Indenture. Section 2.04. Bond Register. The Trustee shall keep a register of Bonds and of their transfer and exchange. Bonds not held under a book-entry system must be presented at the principal corporate trust operations office of the Trustee for registration, transfer and exchange, and Bonds may be presented at that office for payment. Section 2.05. Registration and Exchange of Bonds; Persons Treated as Owners; Book-Entry System. (a) Bonds may be transferred only on the register maintained by the Trustee. Upon surrender for transfer of any Bond to the Trustee, duly endorsed for transfer or accompanied by an assignment duly executed by the holder or the holder's attorney duly authorized in writing and in either case, with an appropriate guarantee of signature conforming to the requirements of Exhibit A hereto, the Trustee shall authenticate a new Bond or Bonds in an equal total principal amount and registered in the name of the transferee. Bonds may be exchanged for an equal total principal amount of Bonds of different Authorized Denominations. The Trustee shall authenticate and deliver Bonds that the Bondholder making the exchange is entitled to receive, bearing numbers not then outstanding. The Trustee shall not be required to transfer or exchange any Bond during the period beginning 15 days before the mailing of notice calling the Bond or any portion of the Bond for redemption and ending on the redemption date. Bonds subject to redemption may be transferred or exchanged only if the Trustee provides the new holder thereof with a copy of the notice of redemption. The holder of a Bond as shown on the register of the Trustee shall be the absolute owner of the Bond for all purposes, and payment of principal, interest or purchase price shall be made only to or upon the written order of such holder or the holder's legal representative; provided that interest shall be paid to the Person shown on the register as a holder of a Bond on the applicable Record Date. (b) The Trustee may require the payment by a Bondholder requesting exchange or registration of transfer of any tax or other governmental charge required to be paid in respect of the exchange or registration of transfer but shall not impose any other charge. (c) The Trustee may make appropriate arrangements for the Bonds (or any portion thereof) to be issued or held by means of a book-entry system administered by DTC with no physical distribution of Bonds made to the public (other than those Bonds, if any, not held under such book-entry system). References in this Section 2.05(c) to a Bond or the Bonds shall be construed to mean the Bond or the Bonds that are held under the book-entry system. In such event, one Bond of each maturity shall be issued to DTC and immobilized in its custody. A book-entry system shall be employed, evidencing ownership of the Bonds in Authorized Denominations, with transfers of beneficial ownership effected on the records of DTC and the DTC Participants pursuant to rules and procedures established by DTC. Each DTC Participant shall be credited in the records of DTC with the amount of such DTC Participant's interest in the Bonds. Beneficial ownership interests in the Bonds may be purchased by or through DTC Participants. The holders of these beneficial ownership interests are hereinafter referred to as the "Beneficial owners." The Beneficial Owners shall not receive Bonds representing their beneficial ownership interests. The ownership interests of each Beneficial Owner shall be recorded through the records of the DTC Participant from which such Beneficial Owner purchased its Bonds. Transfers of ownership interests in the Bonds shall be accomplished by book entries made by DTC and, in turn, by DTC Participants acting on behalf of Beneficial Owners. SO LONG AS CEDE & CO., AS NOMINEE FOR DTC, IS THE REGISTERED OWNER OF THE BONDS, THE TRUSTEE SHALL TREAT CEDE & CO. AS THE ONLY HOLDER OF THE BONDS FOR ALL PURPOSES UNDER THIS INDENTURE, INCLUDING RECEIPT OF ALL PRINCIPAL OF AND INTEREST ON THE BONDS, RECEIPT OF NOTICES, VOTING AND REQUESTING OR DIRECTING THE TRUSTEE TO TAKE OR NOT TO TAKE, OR CONSENTING TO, CERTAIN ACTIONS UNDER THIS INDENTURE. Payments of principal, interest and purchase price with respect to the Bonds, so long as DTC is the only owner of the Bonds, shall be paid by the Trustee directly to DTC or its nominee, Cede & Co. as provided in the Letter of Representation dated as of September 1, 1996 from the Issuer, the Company, the Trustee to DTC (the "Letter of Representation"). DTC shall remit such payments to DTC Participants, and such payments thereafter shall be paid by DTC Participants to the Beneficial owners. The Issuer, the Company, and the Trustee shall not be responsible or liable for payment by DTC or DTC Participants, for sending transaction statements or for maintaining, supervising or reviewing records maintained by DTC or DTC Participants. In the event that (1) DTC determines not to continue to act as securities depository for the Bonds or (2) the Company determines that the continuation of the book-entry system of evidence and transfer of ownership of the Bonds would adversely affect its interests or the interests of the Beneficial Owners of the Bonds, the Issuer shall, at the request of the Company, discontinue the book-entry system with DTC. If the Trustee fails to identify another qualified securities depository to replace DTC, the Trustee shall authenticate and deliver replacement Bonds in the form of fully registered Bonds to each Beneficial Owner. THE ISSUER, THE COMPANY AND THE TRUSTEE SHALL NOT HAVE ANY RESPONSIBILITY OR OBLIGATIONS TO ANY DTC PARTICIPANT OR ANY BENEFICIAL OWNER WITH RESPECT TO (i) THE BONDS; (ii) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC OR ANY DTC PARTICIPANT; (iii) THE PAYMENT BY DTC OR ANY DTC PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL OF AND INTEREST ON THE BONDS; (iv) THE DELIVERY OR TIMELINESS OF DELIVERY BY DTC OR ANY DTC PARTICIPANT OF ANY NOTICE DUE TO ANY BENEFICIAL OWNER THAT IS REQUIRED OR PERMITTED UNDER THE TERMS OF THIS INDENTURE TO BE GIVEN TO BENEFICIAL OWNERS; (v) THE SELECTION OF BENEFICIAL OWNERS TO RECEIVE PAYMENTS IN THE EVENT OF ANY PARTIAL REDEMPTION OF THE BONDS; OR (vi) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC, OR ITS NOMINEE, CEDE & CO., AS OWNER. In the event that a book-entry system of evidence and transfer of ownership of the Bonds is discontinued pursuant to the provisions of this Section, the Bonds shall be delivered solely as fully registered Bonds without coupons in the Authorized Denominations, shall be lettered "IR" and numbered separately from 1 upward, and shall be payable, executed, authenticated, registered, exchanged and canceled pursuant to the provisions hereof. (d) The Trustee shall not be limited to utilizing a book-entry system maintained by DTC but may enter into a custody agreement with any bank or trust company serving as custodian (which may be the Trustee serving in the capacity of custodian) to provide for a book-entry or similar method for the registration and registration of transfer of all or a portion of the Bonds. SO LONG AS A BOOK-ENTRY SYSTEM OF EVIDENCE OF TRANSFER OF OWNERSHIP OF ALL THE BONDS IS MAINTAINED IN ACCORDANCE HEREWITH, THE PROVISIONS OF THIS INDENTURE RELATING TO THE DELIVERY OF PHYSICAL BOND CERTIFICATES SHALL BE DEEMED INAPPLICABLE OR BE OTHERWISE SO CONSTRUED AS TO GIVE FULL EFFECT TO SUCH BOOK-ENTRY SYSTEM. Section 2.06. Mutilated, Lost, Stolen, Destroyed or Undelivered Bonds. (a) If any Bond is mutilated, lost, stolen or destroyed, the Trustee shall authenticate a new Bond of the same denomination for any mutilated, lost, stolen or destroyed Bond if there is delivered to the Trustee at its principal corporate trust operations office, (1) in the case of a mutilated Bond, such mutilated Bond and (2) in the case of any lost, stolen or destroyed Bond, evidence of such loss, theft or destruction reasonably satisfactory to the Issuer, Bank, Trustee and Company, together with an indemnity from the Bondholder, reasonably satisfactory to them. If the Bond has matured and if the evidence and indemnity described above have been provided by the Bondholder, instead of issuing a duplicate Bond, the Trustee, with the consent of the Company, shall pay the Bond without requiring surrender of the Bond and make such requirements as the Trustee deems fit for its protection, including a lost instrument bond. The Issuer, the Company and the Trustee may charge the Bondholder their reasonable fees and expenses in this connection. (b) Every new Bond issued pursuant to this Section 2.06 shall (i) constitute an additional contractual obligation of the Issuer regardless of whether, in the case of (a) above, the mutilated, lost, stolen or destroyed Bond, and (ii) be entitled to all of the benefits of this Indenture equally and proportionately with any and all other Bonds issued and outstanding hereunder. (c) All Bonds shall be held and owned on the express condition that the foregoing provisions of this Section 2.06 are exclusive with respect to the replacement or payment of mutilated, lost, stolen or destroyed Bonds and, to the extent permitted by law, and shall preclude any and all other rights and remedies with respect to the replacement or payment of negotiable instruments or other investment securities without their surrender, notwithstanding any law or statute to the contrary now existing or enacted hereafter. Section 2.07. Cancellation of Bonds. All Bonds paid, redeemed or purchased, either at or before maturity, shall be delivered to the Trustee when such payment, redemption or purchase is made, and except as otherwise provided herein shall be canceled. Whenever a Bond is delivered to the Trustee for cancellation (upon payment, redemption, defeasance or otherwise), or for transfer, exchange or replacement pursuant to Section 2.05 or 2.06, the Trustee shall safeguard such Bond for such period of time as may be required by governmental regulations and thereafter promptly cancel the Bond and prepare a certificate of destruction therefor. Section 2.08. Temporary Bonds. Until definitive Bonds are ready for delivery, the Issuer may execute and the Trustee shall authenticate temporary Bonds substantially in the form of the definitive Bonds, with appropriate variations. The Issuer shall, without unreasonable delay, prepare and the Trustee shall authenticate definitive Bonds in exchange for the temporary Bonds. Such exchange shall be made by the Trustee without charge to the Bondholders. Temporary Bonds shall not otherwise be eligible for transfer or exchange under Section 2.05. Section 2.09. Additional Bonds. (a) At any time while the Issuer is not in default under this Indenture and subject to the approval and execution of a supplemental Indenture making appropriate provisions therefor in accordance with Section 10.01 hereof and subject to receipt by the Trustee of the documents listed below, the Issuer may issue one or more series of Additional Bonds for the purpose of providing funds to be used, with any other available funds, for the purpose of (i) paying the cost of all improvements, restoration, repairing, rebuilding, rearranging and replacements of the Project or any part thereof by the Company pursuant to, or (ii) refunding all or part of any prior series of Bonds, or any combination of the above. Each series of Additional Bonds shall be issued pursuant to a supplement to this Indenture. Unless otherwise provided in a supplemental Indenture, all such Additional Bonds shall be in substantially the same form as the Bonds, but shall be of such denominations, bear such dates, bear interest at such rates, have such maturity dates, redemption dates and redemption premiums, contain an appropriate series designation, and be issued at such prices all as approved by Company. The Trustee shall authenticate and deliver such Additional Bonds, but only upon receipt of the following: (1) A certificate of the Issuer, signed by its President, that it is not in default under this Indenture. (2) A certificate of the Company, signed by a Company Representative approving the issuance and terms of such Additional Bonds and that it is not in default under the Agreement. (3) A certified copy of a resolution or resolutions of the Issuer authorizing a)the execution and delivery of the amendment to the Agreement referred to in subparagraph 4 of this Section 2.09, (b) the execution and delivery of the supplemental Indenture referred to in subparagraph 5 hereof, and (c) the issuance, award, execution and delivery of such Additional Bonds. (4) An original executed counterpart of an amendment to the Agreement providing, among other things, for increasing the amounts payable by the Company thereunder to include payment of principal of, premium, if any, and interest on such Additional Bonds. (5) An original executed counterpart of a supplemental Indenture providing for the issuance of such Additional Bonds. (6) Evidence of the consent of the Bank to the issuance of such Additional Bonds. (7) An opinion of Counsel that the amendment to the Agreement and a new promissory note each has been properly authorized, executed, and delivered by Company, that the supplemental Indenture has been properly authorized, executed, and delivered by the Issuer, and that such amendment to the Agreement, new promissory note, and supplemental Indenture (assuming in the case of the supplemental Indenture, proper authorization and execution and delivery thereof by the Trustee), are valid and binding and enforceable in accordance with their respective terms, except as same is affected by laws affecting creditors' rights and the enforcement thereof generally and except to the extent that the remedy of specific performance and other equitable remedies are always within the discretion of the Court, and that the amendment to the Agreement and the supplemental Indenture have been duly recorded in every necessary recording office and appropriate financing statements have been filed in all filing offices where such filing shall be necessary; (8) A written opinion of Nationally Recognized Bond Counsel that the issuance of such Additional Bonds has been duly authorized by the Issuer and will have no adverse effect upon the exemption from Federal income taxes of interest on the Bonds or any other then outstanding series of Additional Bonds. (9) A request and authorization by the Issuer, signed by its President, to the Trustee to authenticate and deliver such Additional Bonds upon payment to the Trustee for the account of the Issuer of a specified sum. (b) When the requirements of subsection A of this Section have been met to the reasonable satisfaction of the Trustee and when the Additional Bonds shall have been executed and authenticated in the manner required by this Indenture, the Trustee shall deliver such Additional Bonds but only upon payment to the Trustee of the purchase price of such Additional Bonds. (c) The proceeds of all Bonds issued under the provisions of this Section (other than refunding Bonds) shall be deposited with the Trustee in a special fund appropriately designated and held in trust for the purpose of paying the costs for which such Additional Bonds were issued to finance except that any accrued interest received on the sale of such Additional Bonds and any amount authorized for the payment of interest during any period of acquisition and construction and for a reasonable period thereafter shall be deposited to the credit of the Bond Fund (i.e., in the designated subaccount therein). The proceeds of all refunding Bonds issued under the provisions of this Section shall be deposited with the Trustee in a special escrow account pledged solely to the payment of the principal of, premium, if any, and interest on the refunded Bonds, except that the accrued interest received on the sale of such Additional Bonds may be deposited instead in the Bond Fund. ARTICLE III REDEMPTION AND PURCHASE Section 3.01. Redemption of Bonds. (a) Optional Redemption. The Bonds maturing September 1, 2007 and thereafter are subject to optional redemption in whole or in part at any time on any date on or after September 1, 2006 (less than all of the Bonds to be selected as designated by the Company) at the redemption prices (expressed as percentages of principal amount of Bonds to be redeemed) set forth in the following table plus accrued interest to the Redemption Date: Redemption Date Redemption Date September 1, 2006 through August 31, 2007 102.0% September 1, 2007 through August 31, 2008 101.0 September 1, 2008 and thereafter 100.0 NOTWITHSTANDING ANYTHING IN THIS INDENTURE TO THE CONTRARY, IN NO EVENT SHALL PROCEEDS OF THE LETTER OF CREDIT BE USED TO PAY THE REDEMPTION PRICE OF BONDS CALLED FOR REDEMPTION PURSUANT TO SECTION 3.01(a). (b) Mandatory Sinking Fund Redemption. (i) The Bonds maturing September 1, 2012 are subject to mandatory sinking fund redemption prior to their scheduled maturity, on September 1, 2008, and on each succeeding September 1 to and including September 1, 2012, or if any such date is not a Business Day, on the next succeeding Business Day, without premium, at a redemption price of the principal amount thereof with interest accrued to, but excluding, the redemption date, in the following principal amounts: Principal Year Amount 2008 $245,000 2009 260,000 2010 275,000 2011 290,000 2012 (Maturity) 310,000 (ii) At its option, to be exercised on or before the 45th day next preceding any such sinking fund redemption date, the Issuer, or the Company on behalf of the Issuer, may: (x) deliver to the Trustee for cancellation Bonds in any aggregate principal amount desired to be credited against the Issuer's sinking fund redemption obligations; or (y) instruct the Trustee, to credit against the Issuer's sinking fund redemption obligations any Bonds that prior to such date have been redeemed (otherwise than through the operation of the sinking fund) and canceled by the Trustee and not theretofore applied as a credit against any sinking fund redemption obligation. Each Bond so delivered or previously redeemed shall be credited by the Trustee at 100% of the principal amount thereof against the obligation of the Issuer on such sinking fund redemption dates. Any excess over such obligation shall be credited against future sinking fund redemption obligations in chronological order, and the principal amount of the Bonds to be redeemed by operation of the sinking fund shall be accordingly reduced. (c) Mandatory Redemption on Determination of Taxability. The Bonds are also subject to mandatory redemption at a redemption price equal to the principal amount thereof with interest to, but excluding, the redemption date in whole (or in part as provided below), without premium, on the first day of a month within 180 days after the Company receives written notice from a Bondholder or former Bondholder or the Trustee of a final determination by the Internal Revenue Service or a court of competent jurisdiction that the interest paid or to be paid on any Bond is or was includable in the gross income of the Bond's owner (other than an owner that is a "substantial user" of the Facility or a "related person" within the meaning of Section 147(a) of the Code) for federal income tax purposes (a "Determination of Taxability"), or if such date is not a Business Day, on the next succeeding Business Day. No such determination will be considered final unless the Bondholder or former Bondholder involved in the determination gives the Company, the Trustee and the Bank prompt written notice of the commencement of the proceedings resulting in the determination and offers the Company, subject to the Company's agreeing to pay all expenses of the proceeding and to indemnify the holder against all liabilities that might result from it, the opportunity to control the defense of the proceeding and either the Company does not agree within 30 days to pay the expenses, indemnify the holder and control the defense or the Company exhausts or chooses not to exhaust available procedures to contest or obtain review of the result of the proceedings. Fewer than all the Bonds may be redeemed if redemption of fewer than all would result in the interest payable on the Bonds remaining outstanding being not includable in the gross income for federal income tax purposes of any holder. If fewer than all Bonds are redeemed, the Trustee shall select the Bonds to be redeemed by lot as provided in Section 3.03 or by such other method acceptable to the Trustee as may be approved in an opinion of Bond Counsel. (d) Mandatory Redemption on Expiration or Termination of Letter of Credit Without Extension or Providing a Substitute Letter of Credit. The Bonds are subject to mandatory redemption, in whole without premium at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to, but not including, the redemption date, on the Interest Payment Date that next precedes by at least 14 days the stated expiration or termination date of the Letter of Credit or, if such Interest Payment Date is not a Business Day, on the next succeeding Business Day, unless by the 15th day prior to such Interest Payment Date the Company provides to the Trustee, and the Trustee has accepted, (1) evidence that such Letter of Credit has been extended or (2) a Substitute Letter of Credit to be effective on or prior to such Interest Payment Date. Section 3.02. Redemption Date. The redemption date of Bonds to be redeemed pursuant to the optional redemption provisions in Section 3.01(a) shall be a date permitted by such clauses and specified by the Company in the notice delivered pursuant to the preceding Section. The redemption date for mandatory redemptions shall be as specified in Section 3.01(b) through (d), as the case may be, or determined by the Trustee consistently with the provisions thereof. Section 3.03. Selection of Bonds To Be Redeemed. Except as otherwise provided in this Section 3.03, if fewer than all the Bonds are to be redeemed, the Trustee shall select the Bonds to be redeemed by lot or such other method as it deems in its sole discretion to be fair and appropriate. The Trustee shall treat each holder of Bonds as the owner of one Bond for purposes of selection for redemption and shall select Bonds for redemption by lot (1) from among the holders of less than $1,000,000 in aggregate principal amount, provided that if there are no such holders, or if, after selection from among such holders such selection has not resulted in redemption of a sufficient amount of Bonds, then (2) from among the holders of $1,000,000 or more in aggregate principal amount of Bonds. No portion of a Bond may be redeemed that would result in a Bond that is smaller than the then permitted minimum Authorized Denomination. For this purpose, the Trustee shall consider each Bond in a denomination larger than the minimum denomination permitted by the Bonds at the time to be separate Bonds each in the minimum denomination. Provisions of this Indenture that apply to Bonds called for redemption also apply to portions of Bonds called for redemption. Notwithstanding anything to the contrary in this Indenture, there shall be no redemption of less than all of the Bonds if there shall have occurred and be continuing an Event of Default. Section 3.04. Notice to Trustee; Notice of Redemption. (a) If the Company wishes that any Bonds be redeemed pursuant to the optional redemption provisions in Section 3.01(a) hereof, the Company shall notify the Trustee and the Bank in writing of the applicable provision, the redemption date, the principal amount of Bonds to be redeemed and other necessary particulars. The Company shall give such notices at least 40 days before the redemption date. (b) For Bonds being redeemed pursuant to Subsections (a) through (c) of Section 3.01, the Trustee shall prepare and send notice of each redemption to each Bondholder whose Bonds are being redeemed, the Company and the Bank by first-class mail at least 30 days but not more than 60 days before each redemption. If the Bonds are being held under a book-entry system administered by DTC and less than all of the Bonds are called for redemption, the Trustee shall prepare and send notice of such redemption to each such Beneficial owner at the time and in the manner provided in this Section 3.04(b). The notice shall identify the Bonds or portions thereof to be redeemed and shall state (i) the type of redemption and the redemption date, (ii) the redemption price, (iii) that the Bonds called for redemption must be surrendered to collect the redemption price, (iv) the address at which the Bonds must be surrendered, (v) that interest on the Bonds called for redemption ceases to accrue on the redemption date, (vi) the CUSIP number of the Bonds and (vii) any condition to the redemption. The procedure for redemption of Bonds pursuant to 3.01(d) shall be identical except that notice shall be sent at least 7 days before each redemption. With respect to any Bonds to be redeemed that have not been presented for redemption within 60 days after the redemption date, the Trustee, at the expense of the Company, shall prepare and the Trustee shall give a second notice of redemption to the holder of any such Bonds that have not been presented for redemption, by first-class mail, within 30 days of the end of such 60-day period. Failure by the Trustee to give any notice of redemption as to any particular Bonds will not affect the validity of the call for redemption of any Bonds in respect of which no such failure has occurred. Any notice mailed as provided in the Bonds will be conclusively presumed to have been given whether or not actually received by any holder. Section 3.05. Payment of Bonds Called for Redemption. Upon surrender to the Trustee, Bonds called for redemption shall be paid as provided in this Article at the redemption price provided for in this Article. On the date fixed for redemption, notice having been given in the manner and under the conditions hereinabove provided, the Bonds or portions thereof called for redemption shall be due and payable at the redemption price provided therefor, plus accrued interest to such date. On such redemption date, if moneys sufficient to pay the redemption price of the Bonds to be redeemed, plus accrued interest thereon to the date fixed for redemption, are held by the Trustee, interest on the Bonds called for redemption shall cease to accrue; such Bonds shall cease to be entitled to any benefits or security under this Indenture or to be deemed outstanding; and the holders of such Bonds shall have no rights in respect thereof except to receive payment of the redemption price thereof, plus accrued interest to the date of redemption. Section 3.06. Bonds Redeemed in Part. Upon surrender of a Bond redeemed in part, the Trustee shall authenticate for the holder a new Bond or Bonds equal in principal amount to the unredeemed portion of the Bond surrendered. ARTICLE IV PAYMENT OF BONDS AND CREATION OF FUNDS Section 4.01. Payment of Bonds. The Trustee shall make payments when due of principal of and interest on Bonds (including upon the redemption of the Bonds as described in Article III hereof): (a) first, from Available Moneys held by the Trustee in the Bond Fund; and (b) second, from moneys drawn by the Trustee under the Letter of Credit and deposited in the Bond Fund; (c) last, from any other moneys available to the Trustee. The proceeds of investments of any moneys in any of these categories may be used to the same extent as the moneys invested could be used. Section 4.02. Creation of Bond Fund. There is hereby created by the Issuer and ordered established with the Trustee a trust fund to be designated "City of Beckley, West Virginia/Beckley Health Care Corp.: Bond Fund." The money and securities in such fund shall be held in trust by the Trustee and applied as herein provided and, until such application, the money and securities in such Fund shall be subject to a lien and charge in favor of the Bondholders. Section 4.03. Payments into Bond Fund. There shall be deposited into the Bond Fund, as and when received: (a) all moneys received from a drawing under the Letter of Credit; (b) all payments specified in section 4.1 of the Agreement; and (c) all other moneys received by the Trustee under and pursuant to any of the provisions of the Agreement (other than Sections 4.1(b) and 5.6 thereof) that are required or that are accompanied by directions that such moneys are to be paid into the Bond Fund. To the extent that moneys described in (a), (b) or (c) above would not constitute Available Moneys at the time of such deposit, the Trustee shall create separate subaccounts in the Bond Fund in which moneys described in each of such (a), (b) and (c) above shall be held until such moneys constitute Available Moneys. The Trustee shall create a separate subaccount in the Bond Fund for, and shall not commingle moneys described in Section 4.01(a) with, any other moneys hereunder. So long as any of the Bonds issued hereunder are Outstanding the Issuer shall deposit, or cause to be paid to the Trustee for deposit in the Bond Fund for its account, sufficient sums from the amounts derived from the Agreement promptly to pay when due the principal of all Bonds (whether at maturity, upon redemption or acceleration or otherwise), interest on the Bonds and the purchase price of the Bonds as the same become due and payable, except that all payments shall be limited as provided in Section 2.01 and the Issuer makes no representation or warranty that the amount deposited will be adequate to make all payments when due. Section 4.04. Use of Moneys in Bond Fund. Except as provided in Section 4.06, moneys in the Bond Fund shall be used solely for the payment of the principal of and interest on the Bonds as the same shall become due and payable whether at maturity, upon redemption or otherwise and for the purchase price of the Bonds as the same shall become due, and the Trustee shall make such payment in accordance with the provisions of the Bonds and this Indenture; provided, however, that to the extent such principal, interest or purchase price is paid with proceeds of a drawing under the Letter of Credit and the Parent does not reimburse the Bank directly, the Trustee shall promptly reimburse the Bank from funds on deposit in the Bond Fund. Section 4.05. Custody of Bond Fund. The Bond Fund shall be held in the custody of the Trustee but in the name of the Issuer. The Issuer hereby authorizes and directs (a) the Trustee to withdraw sufficient funds from the Bond Fund to pay the principal of, interest on and the purchase price of the Bonds as the same become due and payable, and to withdraw from the Bond Fund funds sufficient to pay any other amounts payable therefrom as the same become due and payable; provided however, that to the extent such principal, interest or purchase price is paid with proceeds of a drawing under the Letter of Credit and the Parent does not reimburse the Bank directly, the Trustee shall promptly reimburse the Bank from funds on deposit in the Bond Fund other than proceeds from a drawing on the Letter of Credit. Section 4.06. Moneys To Be Held in Trust. All money that the Trustee shall have withdrawn from the Bond Fund or shall have received from any other source and set aside for the purpose of paying any of the Bonds hereby secured, either at the maturity thereof or call for redemption or for the purpose of paying any interest on the Bonds hereby secured, shall be held in trust by the Trustee for the respective Holders. Any money that is so set aside or transferred and that remains unclaimed by the Holders for the escheat period provided by State law shall be treated as abandoned property, and the Trustee shall report and remit this property according to the requirements of State law and thereafter the Holders shall look only to the appropriate State agency or official for payment and then only to the extent of the amounts so received, without any interest thereon, and the Trustee and the Issuer shall have no responsibility with respect to such money. Section 4.07. Payment to Company From Bond Fund. After payment in full of the principal of and interest on the outstanding Bonds, the fees, charges and expenses of the Issuer, the Trustee and the Bank (including without limitation the fees and expenses of their respective counsel) and all other amounts required to be paid hereunder, including payments of rebatable arbitrage, any amounts remaining in the Bond Fund shall be paid immediately to the Company. Section 4.08. Investment of Moneys. To the extent permitted by law, the Trustee shall invest and reinvest moneys held by it representing proceeds of drawings under the Letter of Credit and Available Moneys on deposit in the Bond Fund only in U.S. Government obligations (or in a mutual fund composed solely of U.S. Government Obligations) maturing at such times as such amounts will be needed for the purposes thereof. Unclaimed moneys held by the Trustee under Section 4.06 shall be held uninvested by the Trustee. The Trustee may make investments permitted by this Article through or from their own bond departments or the bond departments of any bank or trust company under common control with the Trustee. Investments shall be registered in the name of the Trustee, or its nominee and held by or under the control of the Trustee. The Trustee shall sell and reduce to cash a sufficient amount of investments whenever the cash held by them is insufficient. The Issuer represents that it will take no action that would cause moneys held by the Trustee in connection with the Bonds to be used in a manner that would cause the Bonds to be classified as "arbitrage bonds" within the meaning of Section 148 of the Code. ARTICLE V LETTER OF CREDIT Section 5.01. Requirements for Letter of Credit. In order to secure its obligations under the Agreement, pursuant to Section 4.7 of the Financing Agreement, the Company has agreed (a) upon the initial authentication and delivery of the Bonds, to deliver to the Trustee the Letter of Credit, issued by the Bank in favor of the Trustee and for the benefit of the holders of the Bonds; and (b) to ensure that so long as any Bonds remain outstanding, a Letter of Credit shall be in effect with respect to such Bonds with terms substantially conforming to those of the original Letter of Credit. Section 5.02. Draws on Letter of Credit; Extensions. (a) The Trustee shall make timely draws in accordance with the Letter of Credit such that timely payment under Section 4.01 is made without resort to the sources of payment described in Subsections (b) and (c) of Section 4.01. Such draws shall be in amounts equal to the total principal and interest due on redemption price, or purchase price payable with respect to, the Bonds, less the amounts (if any) available under Subsection (a) of Section 4.01. The Trustee shall make such draws in such a fashion as to be able to obtain by 3:15 p.m. and to make such payment when due in accordance with this Indenture and the Bonds. (b) In drawing on the Letter of Credit, the Trustee will be acting on behalf of the Bondholders by facilitating payment of the Bonds and not on behalf of the Issuer or Company and shall not be subject to the control of either. Proceeds of draws on the Letter of Credit shall be held in the Bond Fund. (c) The Trustee shall advise the Company and the Parent by telecopy or telex on the date of each draw on the Letter of Credit of the amount and date of such draw and of the reason for such draw. (d) For extensions of the term of the Letter of Credit, the Trustee shall, at the direction of a Company Representative, but only if required to evidence an extension of the term of the Letter of Credit, surrender the Letter of Credit to the Bank in exchange for a new Letter of Credit of the Bank or the Letter of Credit with notations thereon, as the Bank may so elect, conforming in all material respects to the Letter of Credit except that the expiration date shall be extended. Any such extension shall be for a period of at least one year or, if less, until the 15th day following the maturity date of the Bonds. Section 5.03. Substitute Letter of Credit. (a) At any time while a Letter of Credit is in effect with respect to the Bonds, upon at least 60 days' prior written notice to the Trustee, the Company may, provide for the delivery to the Trustee of a substitute Letter of Credit complying with the provisions of this Indenture (the "Substitute Letter of Credit"), which shall be effective upon acceptance by the Trustee. Any Substitute Letter of Credit shall have a stated expiration date of at least one year following the effective date thereof. (b) On or before the date of delivery of any Substitute Letter of Credit to the Trustee, as a condition to the acceptance by the Trustee of such Substitute Letter of Credit, the Company shall furnish to the Trustee: (i) An opinion of Counsel addressed to the Trustee to the effect that (A) the Substitute Letter of Credit is the valid and binding obligation of the issuer thereof enforceable against such issuer in accordance with its terms except insofar as its enforceability may be limited by any insolvency or similar proceedings applicable to the issuer or by proceedings affecting generally the rights of the issuer's creditors or by general equitable principles; (B) payments of principal, interest or purchase price on the Bonds from the proceeds of a draw on the Substitute Letter of Credit will not constitute avoidable preferences under any applicable bankruptcy, reorganization, insolvency or other similar laws; and (C) the Substitute Letter of Credit does not constitute a separate security requiring registration under any applicable federal or state securities laws. In the case of a Substitute Letter of Credit issued by a branch or agency of a foreign commercial bank, there shall also be delivered an opinion of Counsel from a firm licensed to practice law in the jurisdiction in which the head office of such bank is located, addressed to the Trustee, to the effect that the Substitute Letter of Credit is the valid and binding obligation of such bank, enforceable against such bank in accordance with its terms, subject to the limitations referred to in Section 5.03(b)(i)(A) above; (ii) written evidence that the issuer of the Substitute Letter of Credit meets the requirements for an issuer of a Letter of Credit as set forth in the definition of Letter of Credit; and (iii) an opinion of Bond Counsel addressed to the Trustee to the effect that the delivery and acceptance of such Substitute Letter of Credit is authorized under this Indenture and its delivery and acceptance will not adversely affect the exclusion from gross income of the interest on the Bonds for federal income tax purposes; The Trustee shall accept any such Substitute Letter of Credit only in accordance with the terms, and upon satisfaction of the conditions, contained in this Section and any other applicable provisions of this Indenture. (c) Not more than 60 days and not less than 15 days prior to the effective date of the Substitute Letter of Credit, the Trustee shall, in addition to the notice required by Section 12.01(b), send by registered or certified mail, to each holder of the Bonds, notice of the issuance of the Substitute Letter of Credit, which notice shall include (i) the identity of the issuer thereof and (ii) the date the Substitute Letter of Credit will be effective. Section 5.04. Enforcement of the Letter of Credit. The Trustee shall hold and maintain the Letter of Credit for the benefit of the Owners of the Bonds until the Letter of Credit terminates or expires in accordance with its terms. When the Letter of Credit terminates or expires in accordance with its terms, the Trustee shall immediately surrender it to the Bank. Except in the case of a redemption in part pursuant to Article III hereof or any other reduction in the principal amount of Bonds outstanding, the Trustee shall not request that the Bank reduce the amount of the Letter of Credit. If at any time, all Bonds shall cease to be outstanding, the Trustee shall surrender the Letter of Credit to the Bank in accordance with the terms thereof. If at any time the Bank fails to honor a draft presented under the Letter of Credit in conformity with the terms thereof, the Trustee shall give immediate telephonic notice thereof to the Company. ARTICLE VI COVENANTS Section 6.01. Payment of Bonds. The Issuer shall promptly pay, or cause to be paid, the principal of, whether at maturity, by acceleration, call for redemption, or otherwise, and purchase price and interest on the Bonds, to the Trustee for payment to the registered owners of the Bonds on the dates and in the manner provided herein authorizing the issuance thereof and in the Bonds, according to the true intent and meaning thereof, but subject to the limitations set forth in Section 2.01(a) hereof. Section 6.02. Covenants and Representations of Issuer. The Issuer shall observe and perform all covenants, conditions and agreements on its part contained in this Indenture, in every Bond executed, authenticated and delivered hereunder and in all of its proceedings pertaining thereto; provided, however, that the liability of the Issuer under any such covenant, condition or agreement for any breach or default by the Issuer thereof or thereunder shall be limited solely to the Receipts and Revenues of the Issuer from the Agreement. The Issuer represents that it is duly authorized under the Constitution and laws of the State, including particularly and without limitation the Act, to issue the Bonds authorized by this Indenture and to execute this Indenture, to assign the Financing Agreement and the Note and to pledge the Receipts and Revenues of the Issuer from the Agreement in the manner and to the extent herein set forth; that all action on its part with respect to the issuance of the Bonds and the execution and delivery of this Indenture duly and effectively has been taken; and that the Bonds in the hands of the owners thereof are and will be valid and enforceable limited obligations of the Issuer according to the terms thereof except as limited by bankruptcy and usual equity principles. Section 6.03. Further Assurances. The Issuer shall execute and deliver such supplemental indentures and such further instruments, and do such further acts, as the Trustee may reasonably require for the better assuring, assigning and confirming to the Trustee the amounts assigned under this Indenture for the payment of the Bonds. ARTICLE VII DISCHARGE OF INDENTURE Section 7.01. Bonds Deemed Paid; Discharge of Indenture. All Bonds shall be deemed paid for all purposes of this Indenture when (a) payment of the greater of the principal of and the maximum amount of interest that may become due on the Bonds to the due date of such principal and interest (whether at maturity, upon redemption, acceleration or otherwise) and the payment of the purchase price of any Bond either has been provided for by depositing with the Trustee (A) moneys sufficient to make such payment, which moneys must comply with the provisions of Section 4.01(b) or (c) and/or (B) noncallable U.S. Government Obligations maturing as to principal and interest in such amounts and at such times as will insure the availability of sufficient moneys to make such payment without regard to the reinvestment thereof, provided that (i) such U.S. Government Obligations must be purchased from Available Moneys and (ii) the Trustee shall have received written evidence from each Rating Agency, if any, rating the Bonds that as a result of such action, their rating on the Bonds will not be lowered or eliminated; and (b) all compensation and expenses of the Issuer and the Trustee (as well as the fees and expenses of their Counsel) pertaining to each Bond in respect of which such payment or deposit is made have been paid or provided for to the respective satisfaction of the Trustee. When a Bond is deemed paid, it shall no longer be secured by or entitled to the benefits of this Indenture, except for payment from moneys or U.S. Government Obligations under (a)(ii) above. Notwithstanding the foregoing, no deposit under (a)(ii) above made for the purpose of paying the redemption price of a Bond (as opposed to the final payment thereof upon maturity) will be deemed a payment of a Bond as aforesaid until (x) notice of redemption of the Bond is given in accordance with Article III or, if the Bond is not to be redeemed within the next 60 days, until the Company has given the Trustee, in form satisfactory to the Trustee, irrevocable instructions to notify, as soon as practicable, the holder of the Bond, in accordance with Article III, that the deposit required by (a)(ii) above has been made with the Trustee and that the Bond is deemed to be paid under this Article and stating the redemption date upon which moneys are to be available for the payment of the principal of the Bond or (y) the maturity of the Bond. Additionally, and while the deposit under clause (a)(ii) above made for the purpose of paying the final payment of a Bond upon its maturity will be deemed a payment of such Bond as aforesaid, the Trustee shall mail notice to the Owner of such Bond, as soon as practicable, stating that the deposit required by (a)(ii) above has been made with the Trustee and that the Bond is deemed to be paid under this. Article. When all Outstanding Bonds are deemed paid under the foregoing provisions of this Section and other sums due hereunder, under the Agreement are paid, the Trustee shall upon request acknowledge the discharge of the Issuer's obligations under this Indenture, obligations under Article II in respect of the transfer, exchange, registration, discharge from registration and replacement of Bonds, and obligations under Section 9.06 hereof with respect to the Trustee's compensation and indemnification, and the Trustee without further direction shall surrender the Letter of Credit to the Bank, in accordance with the terms of the Letter of Credit. Bonds delivered to the Trustee for payment shall be canceled by the Trustee pursuant to Section 2.07. A Company Representative shall direct the deposit, investment and use of the moneys and securities described in this Section such that no deposit will be made and no use made of any such deposit which would cause any Bonds to be treated as "arbitrage bonds" within the meaning of Section 148 of the Code. Before accepting or using any such deposit, the Trustee may request an opinion of Bond Counsel as to whether such use or acceptance would cause the Bonds to be so treated and that all conditions hereunder have been satisfied, and the Trustee may conclusively rely on such opinion with regard thereto. The Trustee may request a certificate of an independent certified public accountant to the effect that a deposit will be sufficient to defease the Bonds as provided in this Section 7.01. Section 7.02. Application of Trust Money. The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to the preceding Section and shall apply the deposited money and the money from the U.S. Government Obligations in accordance with this Indenture only to the payment of principal of, interest on, or purchase prince of, the Bonds. ARTICLE VIII DEFAULTS AND REMEDIES Section 8.01. Events of Default. Each of the following events shall be an Event of Default: (a) Default in the due and punctual payment of any interest on any Bond; (b) Default in the due and punctual payment of the principal of any Bond (whether at maturity, by acceleration or redemption, upon purchase or otherwise); (c) Subject to the provisions of Section 8.11, default in the observance or performance of any other of the covenants, conditions or agreements on the part of the Issuer under the Indenture or in the Bonds; (d) Receipt by the Trustee of notice from the Bank that an Event of Default has occurred under the Reimbursement Agreement accompanied by a demand by the Bank that the Trustee declare the Bonds to be immediately due and payable; or (e) The occurrence of an Event of Default under the Financing Agreement. Section 8.02. Acceleration and Duty to Draw on Letter of Credit. (a) Upon the occurrence of an Event of Default under Section 8.01(a), (b) or (d) hereof, the Trustee shall, by notice to the Issuer, the Holders, the Bank and the Company, declare the entire unpaid principal of and interest on the Bonds immediately due and payable and, thereupon, the entire unpaid principal of and interest on the Bonds shall forthwith become immediately due and payable. Upon the occurrence of any other Event of Default, the Trustee may and, if requested by the holders of 25% in aggregate principal amount of Bonds then Outstanding, shall, by notice to the Issuer, the Holders, the Bank and the Company, declare the entire unpaid principal of and interest on the Bonds immediately due and payable and, thereupon, the entire unpaid principal of and interest on the Bonds shall forthwith become due and payable; provided, however, that anything in this Article VIII to the contrary, so long as the Bank has honored all proper drawings under the Letter of Credit, without the prior written consent of the Bank, the Trustee shall not have the right to declare the principal of all Bonds and the interest accrued thereon to become immediately due and payable as a result of the occurrence.of an Event of Default under Section 8.01(c) or (e). Upon any such declaration the Issuer shall forthwith pay to the holders of the Bonds the entire unpaid principal of and accrued interest on the Bonds, but only from the revenues and receipts herein specifically pledged for such purpose. Upon the occurrence of an Event of Default specified in Section 8.01 and a declaration of acceleration hereunder, the Trustee as assignee of the Issuer shall immediately exercise its right under the Note and the Agreement to declare all installments on the Note to be immediately due and payable. In the event the Trustee fails to accelerate as required by this Section 8.02(a), the owners of a majority in aggregate principal amount of Bonds outstanding shall have the right to take such actions. (b) Upon the acceleration of the maturity of the Bonds, by declaration or otherwise, the Trustee shall immediately draw upon the Letter of Credit for the aggregate unpaid principal amount of the Bonds and all interest accrued thereon, which shall be applied immediately as set forth in Section 8.03. Upon such acceleration, interest on the Bonds shall cease to accrue as of the date of declaration of such acceleration. Section 8.03. Disposition of Amounts Drawn on Letter of Credit; Assignment of Rights to Contest. (a) All amounts drawn on the Letter of Credit by the Trustee in accordance with Section 8.02(b) shall be held by the Trustee in the Bond Fund (and invested in accordance with Section 4.08), shall be applied immediately to the payment of principal and interest accrued on the Bonds. (b) The Trustee hereby assigns to the Bank all its rights to contest or otherwise dispute in the Trustee's name, place and stead and at the Bank's sole election and cost any claim of preferential transfer made by a bankruptcy trustee, debtor-in-possession or other similar official with respect to any amount paid to the Trustee by or on behalf of the Company or the Issuer to be applied to principal of or interest on the Bonds, to the extent of payments made to the Trustee pursuant to a drawing under the Letter of Credit. The Trustee shall cooperate with and assist the Bank in any such contest or dispute as the Bank may reasonably request; provided, however, that the Bank shall reimburse the Trustee for its reasonable costs incurred in connection with providing such cooperation and assistance. The Trustee shall give the Bank prompt notice of any claim of preferential transfer of which the Trustee has knowledge. The foregoing assignment shall not be deemed to confer upon the Bank any right to contest or otherwise dispute any claim of preferential transfer with respect to any amount as to which there has been no drawing under the Letter of Credit. The assignment set forth above shall in no event be effective until the Bank shall have first furnished to the Trustee an agreement to indemnify the Trustee and the holders of the Bonds against any claim, liability or damage that they might suffer by reason of any such contest or dispute. Section 8.04. Other Remedies; Rights of Bondholders. Upon the occurrence of an Event of Default the Trustee, subject to the terms of this Indenture, may proceed to protect and enforce its rights and the rights of the Bondholders by mandamus or other suit, action or proceeding at law or in equity, including but not limited to an action for specific performance of any agreement herein contained or making a demand for payment from the Company and taking action pursuant to any other document to which the Trustee is a party. Upon the occurrence of an Event of Default, if requested to do so by the holders of 25% in aggregate principal amount of Bonds then outstanding and if indemnified as provided in Section 9.01(d), the Trustee, subject to the terms of this Indenture, shall exercise such one or more of the rights and powers conferred by this Article as the Trustee, upon being advised by counsel, shall deem most expedient in the interests of the Bondholders. No remedy conferred by this Indenture upon or reserved to the Trustee or to the Bondholders is intended to be exclusive of any other remedy, but each such remedy shall be cumulative and shall be in addition to any other remedy given to the Trustee or to the Bondholders hereunder or now or hereafter existing at law or in equity or by statute. No delay or omission to exercise any right or power accruing upon any default or Event of Default shall impair any such right or power or shall be construed to be a waiver of any such default or Event of Default or acquiescence therein, and every such right and power may be exercised from time to time and as often as may be deemed expedient. No waiver of any default or Event of Default hereunder, whether by the Trustee pursuant to Section 8.10 or by the Bondholders, shall extend to or shall affect any subsequent default or Event of Default or shall impair any rights or remedies consequent thereon. Section 8.05. Right of Bondholders To Direct Proceedings. Anything in this Indenture to the contrary notwithstanding, the holders of a majority in aggregate principal amount of Bonds then outstanding shall have the right, at any time, by an instrument or instruments in writing executed and delivered to the Trustee, to direct the method and place of conducting all proceedings to be taken in connection with the enforcement of the terms and conditions of this Indenture or for the appointment of a receiver or any other proceedings hereunder; provided, however, that such direction shall not be otherwise than in accordance with the provisions of law and of this Indenture. Section 8.06. Application of Moneys. All moneys received by the Trustee pursuant to any right given or action taken under the provisions of this Article shall, after payment of the cost and expenses of the proceedings resulting in the collection of such moneys and of the expenses, liabilities and advances incurred or made by the Trustee and the fees and expenses, if any, of the Issuer in carrying out this Indenture or the Agreement, be deposited in the Bond Fund; provided, however, that no proceeds from any draw on the Letter of Credit shall be used for any purpose other than payment of principal of and interest on the Bonds or purchase thereof. All moneys in the Bond Fund shall be applied as follows: (a) Unless the principal of all the Bonds shall have become of shall have been declared due and payable: First - To the payment to the persons entitled thereto of all installments of interest then due on the Bonds, in the order of the maturity of the installments of such interest and, if the amount available shall not be sufficient to pay in full any particular installment, then to the payment ratably, according to the amounts due on such installment, to the persons entitled thereto, without any discrimination or preference except as provided in Section 8.13 and as to any difference in the respective rates of interest specified in the Bonds; Second - To the payment to the persons entitled thereto of the unpaid principal of any of the Bonds which shall have become due (other than Bonds called for redemption for the payment of which moneys are held pursuant to the provisions of this Indenture), in the order of their due dates, with interest on such Bonds at the respective rates specified therein from the respective dates upon which they become due and, if the amount available shall not be sufficient to pay in full Bonds due on any particular date, together with such interest, then first to the payment of such interest ratably, according to the amount of such interest due on such date, and then to the amount of such principal, ratably, according to the amount of such principal due on such date, to the persons entitled thereto, without any discrimination or preference except as provided in Section 8.13 and as to any difference in the respective rates of interest specified in the Bonds; and Third - To the extent permitted by law, to the payment to the persons entitled thereto of the unpaid interest on overdue installments of interest ratably, according to the amounts of such interest due on such date, without any discrimination or preference except as provided in Section 8.13 and as to any difference in the respective rates of interest specified in the Bonds. (b) If the principal of all the Bonds shall have become due or shall have been declared due and payable, all such moneys shall be applied to the payment of the principal and interest then due and unpaid upon the Bonds, including to the extent permitted by law interest on overdue installments of interest, without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, or of any Bond over any other Bond, ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto, without any discrimination or privilege except as provided in Section 8.13. (c) If the principal of all the Bonds shall have been declared due and payable, and if such declaration shall thereafter have been rescinded and annulled under the provisions of this Article, then, subject to the provisions of subsection (b) of this Section in the event that the principal of all the Bonds shall later become due or be declared due and payable, the moneys shall be applied in accordance with the provisions of subsection (a) of this Section. (d) All amounts received by the Trustee from a draw upon the Letter of Credit shall be applied exclusively to the payment of principal of and interest on the Bonds. Whenever moneys are to be applied pursuant to the provisions of this section, such moneys shall be applied at such times and from time to time as the Trustee shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Trustee shall apply such moneys, it shall fix the date (which shall be an Interest Payment Date unless it shall deem another date more suitable) upon which such application is to be made. The Trustee shall give such notice as it may deem appropriate of the deposit with it of any such moneys and of the fixing of any such date, and shall not be required to make payment to the holder of any Bond until such Bond is presented to the Trustee for appropriate endorsement or for cancellation if fully paid. Whenever all principal of and interest on all Bonds have been paid under the provisions of this Section and all expenses and charges of the Trustee and the Issuer have been paid, and all obligations of the Company to the Bank pursuant to the Reimbursement Agreement have been paid in full the balance remaining in the Bond Fund shall be paid to the Company as provided in Section 4.07. Section 8.07. Remedies Vested in Trustee. All rights of action (including the right to file proof of claims) under this Indenture or under any of the Bonds may be enforced by the Trustee without the possession of any of the Bonds or the production thereof in any trial or other proceeding relating thereto and any such suit or proceeding instituted by the Trustee may be brought in its name as Trustee without the necessity of joining as plaintiffs or defendants any holders of the Bonds, and any recovery of judgment shall be for the equal benefit of the holders of the outstanding Bonds. Section 8.08. Limitations on Suits. Except to enforce the rights given under Sections 8.02(a), 8.05 and 8.12, no holder of any Bond shall have any right to institute any suit, action or proceeding in equity or at law for the enforcement of this Indenture or for the execution of any trust thereof or any other remedy hereunder, unless (a) a default has occurred of which the Trustee has been notified as provided in Section 9.05, or of which by such Section it is deemed to have notice, (b) such default shall have become an Event of Default and the holders of at least 25% in aggregate principal amount of Bonds then outstanding shall have made written request to the Trustee and shall have offered it reasonable opportunity either to proceed to exercise the powers hereinbefore granted or to institute such action, suit or proceeding in its own name, (c) such holders have offered to the Trustee indemnity as provided in Section 9.01(d), (d) the Trustee for 60 days after such notice shall fail or refuse to exercise the powers hereinbefore granted, or to institute such action, suit or proceeding in its own name or in the name of such holders, (e) no direction inconsistent with such request has been given to the Trustee during such 60 day period by the holders of a majority in aggregate principal amount of Bonds then outstanding, and (f) notice of such action, suit or proceeding is given to the Trustee; it being understood and intended that no one or more holders of the Bonds shall have any right in any manner whatsoever to affect, disturb or prejudice this Indenture by its, his or their action or to enforce any right hereunder except in the manner herein provided, and that all proceedings at law or in equity shall be instituted and maintained in the manner herein provided and for the equal benefit of the holders of all Bonds then outstanding. The notification, request and offer of indemnity set forth in the preceding paragraph, at the option of the Trustee, shall be conditions precedent to the execution of the powers and trusts in this Indenture and to any action or cause of action for the enforcement of this Indenture or for any other remedy hereunder. Section 8.09. Termination of Proceedings. In case the Trustee shall have proceeded to enforce any right under this Indenture by the appointment of a receiver, by entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason, or shall have been determined adversely, then.and in every such case the Issuer, the Company, the Bondholders and the Trustee shall be restored to their former positions and rights hereunder, and all rights, remedies and powers of the Trustee shall continue as if no such proceedings had been taken. Section 8.10. Waivers of Events of Default. The Trustee, with the written consent of the Bank, may waive any Event of Default hereunder and its consequences and rescind any declaration of maturity of principal of and interest on the Bonds and the Note, and shall do so with the consent of the Bank, upon the written request of the holders of (a) a majority in aggregate principal amount of Bonds then outstanding in respect of which default in the payment of principal and/or interest exists, or (b) a majority in aggregate principal amount of Bonds then outstanding in the case of any other default; provided, however, that: (1) there shall not be waived without the consent of the holders of all Bonds then outstanding: (A) any default in the payment of the principal of any outstanding Bonds when due (whether at maturity or by mandatory or optional redemption), or (B) any default in the payment when due of the interest on any such Bonds unless, prior to such waiver or rescission: (i) there shall have been paid or provided for all arrears of interest at the rate borne by the Bonds on overdue installments of principal, all arrears of payments of principal when due and all expenses of the Trustee in connection with such default, and (ii) in case of any such waiver or rescission, or in case of the discontinuance, abandonment or adverse determination of any proceeding taken by the Trustee on account of any such default, the Trustee and the Bondholders shall be restored to their respective former positions and rights hereunder; (2) no declaration of maturity under Section 8.02 made at the request of the holders of 25% in aggregate principal amount of Bonds then outstanding shall be rescinded unless requested by the holders of a majority in aggregate principal amount of Bonds then outstanding; and (3) unless the Trustee has received written evidence that the Letter of Credit is reinstated in full as to principal and interest, there shall be no waiver or rescission if the Letter of Credit shall have been drawn upon due to the occurrence of an Event of Default. No such waiver or rescission shall extend to any subsequent or other default, or impair any right consequent thereon. Section 8.11. Notice of Defaults; Opportunity of Company to Cure Defaults. Anything contained in this Indenture to the contrary notwithstanding, no default specified in Section 8.01(c) on the part of the Issuer shall constitute an Event of Default until (a) notice of such default shall be given (1) by the Trustee to the Issuer, the Bank and the Company or (2) by the holders of 25% in aggregate principal amount of Bonds then outstanding to the Trustee, the Issuer, the Bank and the Company, and (b) the Issuer and the Company shall have had 30 days after such notice to correct such default or cause such default to be corrected, and shall not have corrected such default or caused such default to be corrected within such period; provided, however, if any default specified in Section 8.01(c) shall be such that it cannot be corrected within such period, it shall not constitute an event of default if corrective action is instituted by the Issuer or the Company within such period and diligently pursued until such default is corrected; provided, further, that the period for corrective action shall not in any event extend more than 180 days after such notice to correct such default. With regard to any alleged default concerning which notice is given to the Company, the Company may, but is under no obligation to, perform any covenant, condition or agreement the nonperformance of which is alleged in such notice to constitute a default, in the name and stead of the Issuer with full power to do any and all things and acts to the same extent that the Issuer could do and perform any such things and acts with power of substitution. Section 8.12. Unconditional Right To Receive Principal and Interest. Nothing in this Indenture shall, however, affect or impair the right of any Bondholder to enforce, by action at law, payment of the principal or purchase price of or interest on any Bond at and after the maturity thereof, or on the date fixed for redemption or purchase or (subject to the provisions of Section 8.02) on the same being declared due prior to maturity as herein provided, or the obligation of the Issuer to pay the principal or purchase price of and interest on each of the Bonds issued hereunder to the respective holders thereof at the time, place, from the source and in the manner herein and in the Bonds expressed. Section 8.13. Bonds Outstanding. In the event the Bonds are held under a book entry system, the securities depositary shall provide the Trustee, upon request of the Trustee, the names, addresses and principal amount of the Beneficial Owners of the Bonds. Subject to the provisions of Section 8.14, such Beneficial Owners shall be treated in all respects as the holders of the Bonds for purposes of this Article, and the Trustee shall send notices to such Beneficial owners as required by this Article. Notwithstanding anything else in this Article to the contrary, Company Bonds shall not be deemed to be outstanding for purposes of this Article and the Company as holder thereof shall not be entitled to any rights or payments therefor pursuant to Sections 8.05, 8.06, 8.08 and 8.10. Section 8.14. Bank Deemed Holder. For all purposes of this Article VIII (other than receipt of payments), the Bank shall, so long as the Letter of Credit shall not have been dishonored (other than for a reason permitted by the Letter of Credit), be deemed the holder and registered owner of all Bonds. As such, the Bank may take all actions permitted by this Article VIII to be taken by the holders or Beneficial Owners of the Bonds, to the exclusion of the actual holders and Beneficial Owners of the Bonds; the purpose of this Section 8.14 being to permit the Bank to direct the taking of actions and enforcement of remedies permitted by this Article VIII so long as the Letter of Credit shall not have been dishonored (other than for a reason permitted by the Letter of Credit). ARTICLE IX TRUSTEE Section 9.01. Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise its rights and powers and use the same degree of care and skill in its exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (b) Except during the continuance of an Event of Default: (i) the Trustee need perform only those duties that are specifically set forth in this Indenture and no others and no implied covenants or obligations shall be read into this Indenture against the Trustee, and (ii) in the absence of bad faith, gross negligence or willful misconduct on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own grossly negligent action, its own grossly negligent failure to act or its own willful misconduct, except that: (i) this paragraph does not limit the effect of (b) above; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was grossly negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 8.05. (d) The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity reasonably satisfactory to it against any loss, liability or expense, but the Trustee may not require indemnity as a condition to declaring the principal of and interest on the Bonds to be due immediately under Section 8.02 or to drawing on the Letter of Credit or to taking action under the Letter of Credit. The Trustee shall not be required to give any bond or surety in respect of the execution of the trust created hereby or the powers granted hereunder. (e) The Trustee shall not be liable for interest on any cash held by it except as the Trustee may agree with the Company or with the Issuer with the consent of the Company. (f) The Trustee may conclusively rely on a Company Representative's certificate as to whether a Bankruptcy Filing has occurred. (g) The Trustee shall strictly comply with the terms of the Letter of Credit. (h) The Trustee shall maintain adequate records pertaining to the funds held by the Trustee, the investment thereof and the disbursement therefrom; notwithstanding anything to the contrary in this Indenture or the Agreement, the Trustee shall not be required to advance its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder. (i) Every provision of this Indenture that in any way relates to the Trustee is subject to all the foregoing paragraphs of this Section. (j) The Trustee shall in no event be responsible for ensuring that the rate of interest due and payable on the Bonds under this Indenture does not exceed the highest legal rate of interest permissible under federal or state law applicable thereto. Section 9.02. Rights of Trustee. (a) Subject to the foregoing Section, including, but not limited to, Sections 9.01(b)(ii) and 9.01(c), the Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. Any action taken by the Trustee pursuant to this Indenture upon the request or authority or consent of any person, who at the time of making such request or authority or consent is the owner of any Bond, shall be conclusive and binding upon all future owners of any Bond issued in replacement thereof. (b) Before the Trustee acts or refrains from acting, it may require a certificate of an appropriate officer or officers of the Issuer or the Company or an opinion of Counsel stating that (i) the person making such certificate or opinion has read such covenant or condition; (ii) the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (iii) in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (iv) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. The Trustee shall not be liable for any loss or damage or action it takes or omits to take in good faith in reliance on the certificate or opinion of Counsel. (c) The Trustee may execute any of the trusts or powers hereunder and perform any of its duties through agents, attorneys or employees or co-trustees and shall not be responsible for the misconduct or negligence of any agent, attorney, employee or co-trustee appointed with due care. Section 9.03. Individual Rights of Trustee, Etc. The Trustee in its individual or any other capacity may become the owner, custodian or pledgee of Bonds and may otherwise deal with the Issuer, the Bank or with the Company or its affiliates with the same rights it would have if it were not Trustee. Section 9.04. Trustee's Disclaimer. Subject to Sections 9.01(b) and 9.01(c): (a) the Trustee makes no representation as to the validity or adequacy of this Indenture or the Bonds, and it shall not be responsible for any statement in the Bonds or for the perfection of any lien created by this Indenture or otherwise as security for the Bonds; (b) the Trustee may construe any of the provisions of this Indenture insofar as same may appear to be ambiguous or inconsistent with any other provision hereof, and any construction of any such provisions hereof by Trustee in good faith shall be binding upon the Bondholders, the Issuer and the Company; (c) the Trustee shall not be responsible for the application of any of the proceeds of the Bonds or any other moneys deposited with it and paid out, withdrawn or transferred hereunder if such application, payment, withdrawal or transfer shall be made in accordance with the provisions of this Indenture; (d) the Trustee shall not be under any obligation to see to the recording or filing of this Indenture, the Agreement, any financing statements or any other instrument or otherwise to the giving to any person of notice of the provisions hereof or thereof; and (e) the Trustee shall not be under any obligation to effect or maintain insurance or to renew any policies of insurance or to inquire as to the sufficiency of any policies of insurance carried by the Company, or to report, or make or file claims or proof of loss for, any loss or damage insured against or that may occur, or, to keep itself informed or advised as to the payment of any taxes or assessments, or to require any such payment to be made. Section 9.05. Notice of Defaults. The Trustee shall not be required to take notice, or be deemed to have notice, of any default or Event of Default under this Indenture, other than an Event of Default under Section 8.01(a), (b) or (d), unless specifically notified in writing at such address as set forth in Section 12.01 hereof of such default or Event of Default by the holders of at least 25% in principal amount of the Bonds then Outstanding, by the Bank, by the Company. If an event occurs that with the giving of notice or lapse of time or both would be an Event of Default, and if the event is continuing and if the Trustee has actual notice or is deemed to have notice thereof as herein provided, the Trustee shall mail to each Bondholder and the Bank notice of the event upon such occurrence. Except in the case of a default in payment or purchase of any Bonds, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of Bondholders; provided that, in any event such notice shall not be withheld from the Bank. Section 9.06. Compensation and Indemnification of Trustee. For acting under this Indenture, the Trustee shall be entitled to compensation by the Company (which shall not be limited by any statute regulating the compensation of a trustee of an express trust) of reasonable fees for the Trustee's services and reimbursement of advances, counsel fees and other expenses reasonably and necessarily made or incurred by the Trustee in connection with its services under this indenture. The Trustee shall be indemnified by the Company for, and shall be held harmless against, any loss, liability or expense incurred without gross negligence, willful misconduct or bad faith on the Trustee's part, arising out of or in connection with the acceptance or administration of the trust created by this Indenture, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. To secure the payment or reimbursement to the Trustee provided for in this Section, the Trustee shall have a senior claim, to which the Bonds are made subordinate, on all money or property held or collected by the Trustee, except moneys held under Article VII or otherwise held in trust to pay principal of, interest on and purchase price of the Bonds, and except amounts drawn under the Letter of Credit and Available Moneys on deposit in the Bond Fund. Section 9.07. Eligibility of Trustee. Each of the initial Trustee and any successor Trustee at the time of its appointment shall: (i) be a corporation or national banking association duly organized under the laws of the United States of America or any state or territory thereof, doing business and having an office in such location as shall be approved by the Issuer, (ii) have a combined capital and surplus of at least $25,000,000 as set forth in its most recent published annual report of condition, and (iii) be authorized by law to perform all the duties imposed upon it by this Indenture. Section 9.08. Replacement of Trustee. The Trustee may resign and be discharged of the trust created by this Indenture by notifying the Issuer, the Bank and the Company; provided, however, that no such resignation shall become effective until the appointment of a successor trustee, as hereinafter provided. The holders of not less than a majority in principal amount of the Bonds may remove the Trustee by notifying the removed Trustee and may appoint a successor Trustee with the Issuer's, the Bank's and the Company's prior written consent; provided, however, that no such removal-shall become effective until the appointment of a successor trustee, as hereinafter provided. The Issuer may, in its sole discretion, and at the request of the Company shall, remove the Trustee, but in the case where such removal is requested by the Company, only after obtaining the prior written consent of the Bank. Upon the removal or replacement of the Trustee for any reason, the Issuer and the Company shall give written notice thereof to the Bank by first-class mail, postage prepaid. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Issuer, with the prior written consent of the Bank and the Company, shall, at the expense of the Company, use its best efforts to appoint promptly a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Issuer, the Bank and the Company. Immediately thereafter, the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee, the resignation or removal of the retiring Trustee shall then (but only then) become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall notify the holders of the Bonds of its acceptance of the trusts hereunder by first-class mail promptly following such acceptance. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Issuer, the Bank, the Company or the holders of a majority in principal amount of the Bonds may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 9.07, any Bondholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Section 9.09. Successor Trustee or Agent by Merger. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all its assets (or, in the case of a bank or trust company, its corporate trust assets) to, another corporation or national banking association, the resulting, surviving or transferee corporation or national banking association without any further act shall be the successor Trustee, provided that such corporation or national banking association shall otherwise be eligible to serve in such capacity under this Indenture. Section 9.10. Appointment of Co-Trustee. It is the purpose of this Indenture that there shall be no violation of any law of any jurisdiction (including particularly the law of the State) denying or restricting the right of banking corporations or associations to transact business as trustee in such jurisdiction. It is recognized that in case of litigation under this Indenture or the Agreement, and in particular in case of the enforcement thereof upon a default or an Event of Default, or in case the Trustee deems that by reason of any present or future law of any jurisdiction it may not exercise any of the powers, rights or remedies herein granted to the Trustee or hold title to the properties, in trust, as herein granted, or take any action which may be desirable or necessary in connection therewith, it may be necessary that the Trustee appoint an additional individual or institution as a separate or co-trustee. The following provisions of this Section are adapted to these ends. In the event that the Trustee appoints an additional individual or institution as a separate or co-trustee, each and every remedy, power, right, claim, demand, cause of action, immunity, estate, title, interest and lien expressed or intended by this Indenture to be exercised by or vested in or conveyed to the Trustee with respect thereto shall be exercisable by and vest in such separate or co-trustee but only to the extent necessary to enable such separate or co-trustee to exercise such powers, rights and remedies, and every covenant and obligation necessary to the exercise thereof by such separate or co-trustee shall run to and be enforceable by either of them; provided, however, that no co-trustee shall be liable by reason of any act or omission of any other such co-trustee. Should any instrument in writing from the Issuer be required by the separate or co-trustee so appointed by the Trustee for more fully and certainly vesting in and confirming to him or it such properties, rights, powers, trusts, duties and obligations, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Issuer. In case any separate or co-trustee or a successor to either shall die, become incapable of acting, resign or be removed, all the estates, properties, rights, powers, trusts, duties and obligations of such separate or co-trustee, so far as permitted by law, shall vest in and be exercised by the Trustee until the appointment of a new co-trustee or successor to such separate or co-trustee. ARTICLE X AMENDMENTS OF AND SUPPLEMENTS TO INDENTURE Section 10.01. Without Consent of Bondholders. The Issuer and the Trustee may amend or supplement this Indenture or the Bonds without prior notice to or consent of any Bondholder: (a) to cure any ambiguity, inconsistency or formal defect or omission; (b) to grant to the Trustee for the benefit of the Bondholders additional rights, remedies, powers or authority; (c) to subject to this Indenture additional collateral or to add other agreements of the Issuer; (d) to modify this Indenture or the Bonds to permit qualification under the Trust Indenture Act of 1939, as amended, or any similar federal statute at the time in effect; to permit the qualification of the Bonds for sale under the securities laws of any state of the United States; or to prevent the application of the Investment Company Act of 1940, as amended, to any of the transactions contemplated by, or any of the parties to this Indenture, the Agreement or the Bonds; (e) to provide for uncertificated Bonds or to make any change necessary to give effect to a custody agreement pursuant to Section 2.05(d); (f) to evidence the succession of a new Trustee or the appointment by the Trustee of a co-trustee; (g) to make any change to reflect any provision in the Code or the interpretations thereof by the Internal Revenue Service provided that such change does not materially adversely affect the rights of any Bondholder; (h) to make any change not materially adversely affecting any Bondholder's rights requested by the Rating Agency in order (i) to obtain a rating from the Rating Agency after the initial issuance of the Bonds if the Bonds are initially issued without a rating equivalent to the rating assigned to other securities supported by a Letter of Credit of the Bank or (ii) to maintain any rating on the Bonds; (i) to make any change not materially adversely affecting any Bondholder's rights to provide for or to implement the provisions of a Letter of Credit; (j) to make any change that does not materially adversely affect the rights of any Bondholder; (k) to add to this Indenture the obligation of the Trustee, the Issuer or the Company to disclose such information regarding the Bonds, the Facility, the Issuer, the Company or the Bank as shall be required or recommended to be disclosed in accordance with applicable regulations or guidelines established by, among others, the American Bankers Association Corporate Trust Committee; or (l) to provide for the issuance of Additional Bonds under Section 2.09. Section 10.02. With Consent of Bondholders. If an amendment of or supplement to this Indenture or the Bonds without any consent of Bondholders is not permitted by the preceding Section, the Issuer and the Trustee may enter into such amendment or supplement without prior notice to any Bondholders but with the consent of the holders of at least a majority in principal amount of the Bonds then outstanding. However, without the consent of all Bondholders affected, no amendment or supplement may (a) extend the maturity of the principal of, or interest on, any Bond, (b) reduce the principal amount of, or rate of interest on, any Bond or change the terms of any redemption, (c) effect a privilege or priority of any Bond or Bonds over any other Bond or Bonds (except as provided herein), (d) reduce the percentage of the principal amount of the Bonds required for consent to such amendment or supplement, (e) impair the exclusion from gross income for purposes of federal income taxation of interest on any Bond, (f) create a lien ranking prior to or on a parity with the lien of this Indenture on the property described in the Granting Clause of this Indenture or (g) deprive any Bondholder of the lien created by this Indenture on such property. In addition, if moneys or U.S. Government Obligations have been deposited or set aside with the Trustee pursuant to Article VII for the payment of Bonds and those Bonds shall not have in fact been actually paid in full, no amendment to the provisions of that Article shall be made without the consent of the holder of each of those Bonds affected. Section 10.03. Effect of Consents. After an amendment or supplement becomes effective, it shall bind every Bondholder unless it makes a change described in any of the lettered clauses of the preceding Section. In such case, the amendment or supplement shall bind each Bondholder who consented to it and each subsequent holder of a Bond or portion of a Bond evidencing the same debt as the consenting holder's Bond. Section 10.04. Notation on or Exchange of Bonds. If an amendment or supplement changes the terms of a Bond, the Trustee may request that the holder deliver the Bond to it. The Trustee may place an appropriate notation on the Bond regarding the changed terms and return it to the holder. Alternatively, if the Trustee, the Issuer and the Company determine, the Issuer in exchange for the Bond shall issue and the Trustee shall authenticate a new Bond that reflects the changed terms. In either event, the cost of placing such notation on the Bond(s) shall be borne by the Company. Section 10.05. Signing by Trustee of Amendments and Supplements. The Trustee shall sign any amendment or supplement to this Indenture or the Bonds authorized by this Article if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign it. In signing an amendment or supplement, the Trustee shall be entitled to receive and (subject to Section 9.01) shall be fully protected in relying on an Opinion of Counsel stating that such amendment or supplement is authorized by this Indenture and is duly authorized, executed and delivered and enforceable in accordance with its terms. Section 10.06. Company and Bank Consent Required. An amendment or supplement to this Indenture or the Bonds shall not become effective unless the Company and the Bank deliver to the Trustee their written consents to the amendment or supplement. Section 10.07. Notice to Bondholders. The Trustee shall cause notice of the execution of a supplemental indenture to be mailed promptly by first-class mail to each Bondholder at the holder's registered address. The notice shall state briefly the nature of the supplemental indenture and that copies thereof are on file with the Trustee for inspection by all Bondholders. Section 10.08. Opinion of Bond Counsel Required. An amendment or supplement to this Indenture shall not become effective unless the Trustee has received an opinion of Bond Counsel addressed to the Trustee, the Bank and the Company to the effect that the amendment or supplement will not impair the exclusion of interest on the Bonds from the gross income of the recipients thereof for purposes of federal income taxation. ARTICLE XI AMENDMENTS OF AND SUPPLEMENTS TO AGREEMENT Section 11.01. Without Consent of Bondholders. The Issuer, with the consent of the Company, may enter into, and the Trustee may consent to, any amendment of or supplement to the Agreement or the Note, without prior notice to or consent of any Bondholder, if the amendment or supplement is required (a) by the provisions of the Agreement or this Indenture, (b) to cure any ambiguity, inconsistency or formal defect or omission, (c) to identify more precisely the Facility, (d) in connection with any authorized amendment of or supplement to this Indenture, or (e) to make any change comparable to those described in Section 10.01. Section 11.02. With Consent of Bondholders. If an amendment of or supplement to the Agreement or the Note without any consent of Bondholders is not permitted by the foregoing Section, the Issuer may enter into, and the Trustee may consent to, such amendment or supplement without prior notice to any Bondholder but with the consent of the holders of at least a majority in principal amount of the Bonds then outstanding. However, without the consent of each Bondholder affected, no amendment or supplement may result in a change comparable to those described in the lettered clauses of Section 10.02. Section 11.03. Consent by Trustee to Amendments or Supplements. The Trustee shall consent to any amendment or supplement to the Agreement or the Note authorized by this Article if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, consent to such an amendment or supplement. In consenting to an amendment or supplement, the Trustee shall be entitled to receive and (subject to Section 9.01) shall be fully protected in relying on an opinion of Counsel stating that such amendment or supplement is authorized by this Indenture and has been duly authorized, executed and delivered and is enforceable in accordance with its terms. Section 11.04. Notice to Bondholders. The Trustee shall cause notice of the execution of an amendment or supplement to the Agreement or the Note to be mailed promptly by first-class mail to each Bondholder at the holder's registered address. The notice shall state briefly the nature of the amendment or supplement and that copies thereof are on file with the Trustee for inspection by all Bondholders. Section 11.05. Bank Consent Required. An amendment or supplement to the Agreement or the Note shall not become effective unless the Bank delivers to the Trustee their written consents to the amendment or supplement. ARTICLE XII MISCELLANEOUS Section 12.01. Notices. (a) Any notice, request, direction, designation, consent, acknowledgment, certification, appointment, waiver or other communication required or permitted by this Indenture or the Bonds must be in writing except as expressly provided otherwise in this Indenture or the Bonds. (b) Except as otherwise provided herein, any notice or other communication shall be sufficiently given and deemed given when delivered by hand or mailed by first-class mail, postage prepaid, addressed as follows or, if the communication may be given by telex or telecopy under the provisions of this Indenture, when telexed or telecopied to the following numbers: (1) if to the Issuer, to City of Beckley, West Virginia, City Hall, 409 South Kanawha Street, Beckley, West Virginia 25801, Attention: Mayor of City of Beckley; (2) if to the Trustee, to One Valley Bank, National Association, P.O. Box 1793, Charleston, West Virginia 25326, Attention: Corporate Trust Department; (3) if to the Company, to Beckley Health Care Corp., 405 Stanaford Road, Beckley, West Virginia 25801; (4) if to the Underwriter, to Crews and Associates, Inc. 2000 Union National Plaza, 124 West Capitol, Little Rock, Arkansas 72201; (5) if to the Bank, to NationsBank of Texas, N.A, 901 Main Street, 13th Floor, Dallas, Texas 75202, Attention: Marie Lancanster; and (6) if to the Parent, Regency Health Services, Inc. 2742 Dow Avenue, Tustin, California 96280, Attention: David Grant, Esquire. Any addressee may designate additional or different addresses or telex or telecopy numbers for purposes of this Section. Notwithstanding the provisions of this Section 12.01, any notice to the Trustee shall only be sufficient and deemed given when mailed to the Trustee at the address provided in this Section 12.01 by certified mail, return receipt requested, and received by the Trustee. The Beneficial Owner of $1,000,000 or more or Bonds may, by written notice to the Trustee, request that all notices given with respect to such Bonds be given to the registered owner thereof and to a second address provided in such written notice to the Trustee. Upon receipt of such notice described in the preceding sentence, the Trustee shall send all notices relating to the relevant Bonds to the registered owner and the second address so designated. Section 12.02. Bondholders' Consents. Any consent or other instrument required by this Indenture to be signed by Bondholders may be in any number of concurrent documents and may be signed by a Bondholder or by the holder's agent appointed in writing. Proof of the execution of such instrument or of the instrument appointing an agent and of the ownership of Bonds, if made in the following manner, shall be conclusive for any purposes of this Indenture with regard to any action taken by the Trustee under the instrument: (a) The fact and date of a person's signing an instrument may be proved by the certificate of any officer in any jurisdiction who by law has power to take acknowledgments within that jurisdiction that the person signing the writing acknowledged before the officer the execution of the writing, or by an affidavit of any witness to the signing. (b) The fact of ownership of Bonds, the amount or amounts, numbers and other identification of such Bonds and the date of holding shall be proved by the registration books kept pursuant to this Indenture. In determining whether the holders of the required principal amount of Bonds Outstanding have taken any action under this Indenture, Bonds owned by the Issuer, the Company or any partner or affiliate of either thereof shall be disregarded and deemed not to be Outstanding; provided, however, that Bank Bonds shall not be disregarded and shall be deemed to be outstanding for such purpose. In determining whether the Trustee shall be protected in relying on any such action, only Bonds that the Trustee knows to be so owned shall be disregarded. Section 12.03. Notices to Rating Agency. If applicable, the Trustee shall notify any Rating Agency rating the Bonds, in writing, of the occurrence of any of the following events prior to the occurrence thereof: (a) any change in the identity of the Trustee; (b) any amendment or modification of or change to this Indenture, the Agreement, the Reimbursement Agreement or the Letter of Credit; (c) the expiration or termination of the Letter of Credit, or any extension thereof; (d) the payment in full of the principal of and interest on the Bonds; and (e) the delivery of any written opinion of Bankruptcy Counsel required to be delivered under the terms of this Indenture. Section 12.04. Limitation of Rights. Nothing expressed or implied in this Indenture or the Bonds shall give any person other than the Trustee, the Issuer, the Bank, the Company and the Bondholders any right, remedy or claim under or with respect to this Indenture. Section 12.05. Severability. If any provision of this Indenture shall be determined to be unenforceable by a court of law, that shall not affect any other provision of this Indenture; provided, no holding or invalidity shall require the Trustee to make any payment from any source except those pledged hereunder. Section 12.06. Payments Due on Non-Business Days. If a payment date is not a Business Day at the place of payment, then payment shall be made at that place on the next succeeding Business Day, with the same force and effect as if made on the payment date, and, in the case of any such payment, no interest shall accrue for the intervening period. Section 12.07. Governing Law. This Indenture and the authority of the Issuer to issue the Bonds shall be governed by and construed in accordance with the laws of the State, but it is the intention of the Issuer that the situs of the trust created by this Indenture be in the state in which is located the corporate trust office of the Trustee from time to time acting under this Indenture. The word "Trustee" as used in the preceding sentence shall not be deemed to include any additional individual or institution appointed as a separate or co-trustee pursuant to Section 9.15 of this Indenture. It is the further intention of the Issuer that the Trustee administer said trust in the state in which it is located, from time to time, and that same be for all purposes hereunder, the situs of said trust. Section 12.08. No Liability. No provision, covenant or agreement contained in this Indenture or in the Bonds, or any obligation herein or therein imposed upon the Issuer, or the breach thereof, shall constitute or give rise to or impose upon the Issuer a pecuniary liability or a charge upon its general credit or taxing power. In making the agreements, provisions, and covenants set forth in this Indenture, the Issuer has not obligated itself except with respect to the Facility and the application of the revenues, income and all other property therefrom and the security therefor including the Letter of Credit, as hereinabove provided. No official or member of the Issuer shall be personally liable on the Indenture or the Bonds, nor shall the issuance of the Bonds be considered as misfeasance in office. Section 12.09. Counterparts. This Indenture may be signed in several counterparts, each of which shall be an original and all of which together shall constitute the same instrument. Section 12.10. References to the Bank. The Bank shall have no rights to enforce any provision of this Indenture during any period in which it is in default under the Letter of Credit. IN WITNESS WHEREOF, the Issuer has caused this Indenture to be executed in its name and on its behalf by the Mayor of the City of Beckley, West Virginia and its official seal to be impressed hereon and attested by the Recorder of the City of Beckley, West Virginia, and the Trustee, to evidence its acceptance of the trust hereby created, has caused this Indenture to be executed in its name and on its behalf by its duly authorized officers, all as of the day and year first above written. CITY OF BECKLEY, WEST VIRGINIA By: Mayor, City of Beckley [SEAL] ATTEST: Recorder, City of Beckley ONE VALLEY BANK, NATIONAL ASSOCIATION By: Its: [SEAL] ATTEST: By: Its: EX-10.45 7 FINANCING AGREEMENT - NEW LEXINGTON Exhibit 10.45 FINANCING AGREEMENT between THE BOARD OF COMMISSIONERS OF THE COUNTY OF PERRY, OHIO BY AND ON BEHALF OF THE COUNTY OF PERRY, OHIO and NEW LEXINGTON HEALTH CARE CORP. Dated as of September 1, 1996 NOTE: THIS FINANCING AGREEMENT AND A PROMISSORY NOTE IN THE FORM AS DESCRIBED HEREIN HAVE BEEN ASSIGNED TO, AND ARE SUBJECT TO A SECURITY INTEREST IN FAVOR OF SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION, AS TRUSTEE UNDER AN INDENTURE OF TRUST DATED AS OF SEPTEMBER 1, 1996, WITH THE BOARD OF COMMISSIONERS OF THE COUNTY OF PERRY, OHIO BY AND ON BEHALF OF THE COUNTY OF PERRY, OHIO, AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME. INFORMATION CONCERNING SUCH SECURITY INTEREST MAY BE OBTAINED FROM THE TRUSTEE AT ITS PRINCIPAL TRUST OFFICE IN CHARLESTON, WEST VIRGINIA. This FINANCING AGREEMENT, made as of the first day of October, 1996, between THE BOARD OF COMMISSIONERS OF THE COUNTY OF PERRY, OHIO BY AND ON BEHALF OF THE COUNTY OF PERRY, OHIO, a political subdivision of the State of Ohio, (the "Issuer"), and NEW LEXINGTON HEALTH CARE CORP., a corporation duly organized under and validly existing by virtue of the laws of the State of Went Virginia (the "Company"); W I T N E S S E T H : WHEREAS, Section 13 of Article VIII of the Ohio Constitution provides, among other things, for the passage of laws authorizing the State of Ohio (the "State"), its political subdivisions and their agencies or instrumentalities, and others, to acquire, construct, enlarge, improve or equip, and to sell or lease property, structures, equipment and facilities for industry, commerce, distribution and research and to make loans for such purposes and to issue bonds to provide monies therefor in order to create or preserve jobs and employment opportunities and improve the economic welfare of the people of the State; and WHEREAS, pursuant thereto, Chapter 165 of the Ohio Revised Code (the "Act") provides, among other things, for the issuance of revenue bonds of a city or county to provide funds to make loans to others to acquire, construct, reconstruct, enlarge, improve, furnish and equip real or personal property or both, or interests therein, to create or preserve jobs and employment opportunities and to improve the economic welfare of the people of the State, for the use of such property for industry, commerce, distribution or research; and WHEREAS, pursuant to such authorization, the County of Perry, Ohio, (the "Issuer") issued its First Mortgage Refunding Revenue Bonds (New Lexington Health Care Corp. Project), Series 1986 (the "Prior Bonds") in the original amount of $2,545,000 and used the proceeds to refund those certain County of Perry, Ohio Industrial Development Revenue Bonds (New Lexington Health Care Corp.), Series 1980, the proceeds of which were used to pay the cost of the acquisition, construction and equipping of a 100-bed skilled and intermediate care commercial nursing home facility operated by New Lexington Health Care Corp. (the "Company") and situate at 980 South Main Street, New Lexington, Perry County, Ohio (the "Project"); and WHEREAS, the Company has advised the Issuer that significant debt service savings would result in connection with the refinancing of the Prior Bonds; and WHEREAS, the Company has requested that the Issuer issue and sell its refunding revenue bonds in the principal amount of not to exceed $2,750,000 for the purpose of refunding the Prior Bonds; and WHEREAS, by issuing the Bonds to refund the Prior Bonds, the Issuer and the Company expect to finance the Facility more economically and thereby to achieve interest cost savings; and WHEREAS, in return for the use of the proceeds of the sale of the Bonds by the Issuer to refund the Prior Bonds, the Company has agreed to repay the amounts so used on the terms and conditions hereinafter set forth; and WHEREAS, the Company has determined to issue its promissory note to the Issuer in the principal amount of the Bonds (the "Note") to evidence the Company's obligation to repay such amounts under the terms and conditions set forth herein; and WHEREAS, all things necessary to constitute the Note a valid and binding obligation and to constitute this Financing Agreement a valid and binding agreement securing the payments under the Note have been done and performed and the execution and delivery of the Note and this Financing Agreement, subject to the terms hereof, have in all respects been duly authorized; NOW, THEREFORE, for and in consideration of the premises and the mutual covenants hereinafter contained, the parties hereto covenant and agree as follows: ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION Section 1.1. Definitions. The following terms shall have the meaning set forth hereinafter. All other defined terms used but not defined herein shall have the same meaning as set forth elsewhere herein or in Article I of the Indenture unless the context clearly indicates to the contrary. "Agreement" or "Financing Agreement" shall mean this Financing Agreement, including any amendments hereto. "Financing Instruments" shall mean this Financing Agreement, the Indenture, the Note, the Escrow Agreement, the Reimbursement Agreement, the Bond Purchase Agreement and the Remarketing Agreement. "Indenture" shall mean the Indenture of Trust dated as of the date hereof between the Issuer and the Trustee, as amended from time to time. "1954 Code" shall mean the Internal Revenue Code of 1954, as amended. "1980 Bonds" shall mean the revenue bonds issued by the Issuer under the Act in 1980 in order to pay the cost of the acquisition, construction and equipping of the Facility and refunded in full with the proceeds of the Prior Bonds. "Prime Rate" shall mean the rate per year announced from time to time by the Trustee, as its prime rate, with any change in the Prime Rate being effective as of the date such announced prime rate is changed. "Prior Bonds Trustee" shall mean SunTrust Bank, Central Florida, National Association, Orlando, Florida, as successor-in-interest to Mid-American National Bank & Trust Company, as indenture trustee for the Prior Bonds. "Prior Indenture" shall mean the Trust Indenture dated as of August 1, 1986 between the Issuer and the Prior Bonds Trustee pursuant to which the Prior Bonds were issued and secured. "Regulations" shall mean the income tax regulations promulgated pursuant to the 1954 Code, as such applicable proposed, temporary or final regulations may be amended or supplemented from time to time. Section 1.2. Rules of Construction. Unless the context clearly indicates to the contrary, the following rules shall apply to the construction of this Financing Agreement: (a) Words importing the singular number shall include the plural number and vice versa. (b) Words importing the redemption or calling for redemption of Bonds shall not be deemed to refer to or connote the payment of Bonds at their stated maturity. (c) All references herein to particular articles or sections are references to articles or sections of this Financing Agreement unless otherwise indicated. (d) The headings and Table of Contents herein are solely for convenience of reference and shall not constitute a part of this Financing Agreement nor shall they affect its meaning, construction or effect. (e) Accounting terms not otherwise defined have the meaning assigned to them in accordance with generally accepted accounting principles. ARTICLE II REPRESENTATIONS Section 2.1. Representations by Issuer. The Issuer makes the following representations: (a) The Issuer is a political subdivision of the State of Ohio and has the power to enter into the Financing Instruments to which it is a party and the transactions contemplated thereby and to perform its obligations thereunder, to issue the Bonds to refund the Prior Bonds, and to assign the Note to the Trustee. (b) By proper action in the form of resolutions adopted by The Board of Commissioners of the County of Perry, Ohio, the Issuer has duly authorized the execution and delivery of the Financing Instruments to which it is a party, and the Bonds, the performance of its obligations thereunder and the issuance of the Bonds and, simultaneously with the execution and delivery of this Financing Agreement, the Issuer has duly executed and delivered the Financing Instruments to which it is a party and issued and sold the Bonds. (c) To the best of its knowledge, the Issuer is not in default in the payment of the principal of or interest on any of its indebtedness for borrowed money and is not in default under any instrument under or subject to which any indebtedness for borrowed money has been incurred, and no event has occurred and is continuing under the provisions of any such instrument that with the lapse of time or the giving of notice, or both, would constitute an event of default thereunder; provided, however, that no representation is expressed concerning previously issued revenue bonds for private parties under the Act, the status of which have no adverse effect on the Issuer's power or authority to carry out the transactions contemplated by this Financing Agreement. (d) The Issuer is not (1) in violation of the Act or any existing law, rule or regulation applicable to it or (2) in default under any indenture, mortgage, deed of trust, lien, lease, contract, note, order, judgment, decree or other agreement, instrument or restriction of any kind to which any of its assets are subject; provided, however, that no representation is expressed concerning previously issued revenue bonds for private parties under the Act, the status of which have no adverse effect on the Issuer's power or authority to carry out the transactions contemplated by this Financing Agreement. The execution and delivery by the Issuer of the Financing Instruments to which it is a party and the Bonds and the compliance with the terms and conditions thereof will not conflict with or result in the breach of or constitute a default under any of the above described documents or other restrictions. (e) No further approval, consent or withholding of objection on the part of any regulatory body, federal, state or local, is required in connection with (1) the issuance and delivery of the Bonds by the Issuer, (2) the execution or delivery of or compliance by the Issuer with the terms and conditions of the Financing Instruments to which it is a party, or (3) the assignment and pledge by the Issuer pursuant to the Indenture of its rights under this Financing Agreement including the Note and the payments thereon by the Company, as security for payment of the principal of and interest on the Bonds. The consummation by the Issuer of the transactions set forth in the manner and under the terms and conditions as provided herein will comply with all applicable state, local or federal laws and any rules and regulations promulgated thereunder by any regulatory authority or agency. (f) No litigation, inquiry or investigation of any kind in or by any judicial or administrative court or agency is pending or, to its knowledge, threatened against the Issuer with respect to (1) the organization and existence of the Issuer, (2) its authority to execute or deliver the Financing Instruments to which it is a party, the Indenture or the Bonds or the assignment of the Note, (3) the validity or enforceability of any of such instruments or the transactions contemplated hereby or thereby, (4) the title of any officer of the Issuer who executed such instruments, or (5) any authority or proceedings related to the execution and delivery of such instruments on behalf of the Issuer. No such authority or proceedings have been repealed, revoked, rescinded or amended, and all are in full force and effect. (g) The Issuer hereby finds that the refunding of the Prior Bonds is advisable and will serve the purposes of the Act. (h) The issuance of the Prior Bonds was approved by the Issuer at a meeting duly called and held on August 21, 1986, notice of which meeting was published in a newspaper having general circulation in Perry County, Ohio on August 6, 1986. Section 2.2. Representations by Company. The Company makes the following representations: (a) The Company is a corporation duly organized and validly existing under the laws of the State of Ohio; has the power to enter into the Financing Instruments to which it is a party and the transactions contemplated thereunder; and by proper action has duly authorized the execution and delivery of such Financing Instruments and the Note and the performance of its obligations thereunder. (b) The Company is licensed by the appropriate Ohio state and local authorities and is authorized to operate the Facility in the manner in which it is currently operated. (c) The Company is not in default in the payment of the principal of or interest on any of its indebtedness for borrowed money and is not in default under any instrument under and subject to which any indebtedness has been incurred, and no event has occurred and is continuing under the provisions of any such agreement that with the lapse of time or the giving of notice, or both, would constitute an event of default thereunder. (d) There is no litigation at law or in equity or any proceeding before any governmental agency involving the Company pending or, to the knowledge of the Company, threatened against the Company in which any liability of the Company is not adequately covered by insurance or for which adequate reserves are not provided or for which any judgment or order would have a material adverse effect upon the business or assets of the Company or affect its existence or authority to do business, the operation of the Facility, the validity of the Financing Instruments to which it is a party or the performance of its obligations thereunder. (e) The execution and delivery of the Financing Instruments to which it is a party, the performance by the Company of its obligations thereunder and the consummation of the transactions contemplated therein do not and will not conflict with, or constitute a breach or result in a violation of, the Company's articles of incorporation or bylaws, any agreement or other instrument to which the Company is a party or by which it is bound or any constitutional or statutory provision or order, rule, regulation, decree or ordinance of any court, government or governmental authority having jurisdiction over the Company or its property. (f) The Company has obtained all consents, approvals, authorizations and orders of any governmental or regulatory authority that are required to be obtained by the Company as a condition precedent to the issuance of the Bonds, the execution and delivery of the Financing Instruments to which it is a party and the performance by the Company of its obligations thereunder, or that are required for the operation of the Facility. (g) The Facility complies with all presently applicable ordinances and licensure and environmental protection laws, the noncompliance with which would have a material adverse effect on the business or operations of the Company conducted at the Facility. (h) To the best of its knowledge, interest paid or accrued on the 1980 Bonds was at all times exempt from federal income taxation under Section 103 of the 1954 Code. To the best of its knowledge, interest paid or accrued on the Prior Bonds was at all times excluded from the gross income of the owners thereof for purposes of federal income taxation. (i) The Company intends to continue to cause the Facility to be operated as a nursing home facility meeting all of the requirements of the Act for so long as the Bonds are outstanding. (j) To the best of its knowledge, at least 98% of the proceeds of the Prior Bonds, together with other available moneys, were applied to redeem the 1980 Bonds in full within 90 days of the date the Prior Bonds were issued. To the best of its knowledge, no more than 2% of the proceeds of the Prior Bonds were applied to pay their costs of issuance. ARTICLE III ISSUANCE OF THE BONDS AND USE OF PROCEEDS; EXECUTION AND DELIVERY OF THE NOTE Section 3.1. Agreement to Issue Bonds; Application of Bond Proceeds. The Issuer, concurrently with the execution and delivery of this Financing Agreement, will issue, sell and deliver the Bonds and will deposit the proceeds thereof with the Trustee. In accordance with the Indenture, the Trustee will deliver or will cause the Underwriter to deliver all of such proceeds to the Prior Bonds Trustee to be applied, together with other moneys provided by the Company, to defease and redeem the Prior Bonds in full and discharge the Prior Indenture. Section 3.2. Refunding by the Issuer. Upon the terms and conditions of this Financing Agreement and the Indenture, the Issuer agrees to use the proceeds of the sale of the Bonds to refund the Prior Bonds. Section 3.3. Execution and Delivery of the Note prior to or simultaneously with the issuance of the Bonds, to evidence its repayment obligations hereunder, the Company shall execute and deliver the Note in substantially the form of Exhibit A to the Issuer for assignment to the Trustee as security for the payment of the Bonds. Section 3.4. No Lien on or Security Interest in Facility. This Financing Agreement is not intended to create and does not create a lien on or security interest in any part of the Facility as security for the payment of amounts payable hereunder or under the Note. ARTICLE IV PAYMENTS ON THE NOTE Section 4.1. Amounts Payable. (a) The Company shall make all payments required by the Note as and when they become due and shall promptly pay all other amounts necessary to enable the Trustee to make the transfers required by Article IV of the Indenture. (b) The Company shall also pay, as and when the same become due: (1) To the Trustee, its reasonable fees for services rendered and for expenses reasonably incurred by it as Trustee under the Indenture, including the reasonable fees and disbursements of its counsel, the reasonable fees and expenses of the Remarketing Agent and any other paying agents and all other amounts that the Company herein assumes or agrees to pay, including any cost or expense necessary to cancel and discharge the Indenture upon payment of the Bonds. (2) To the Issuer and its reasonable costs and expenses directly related to the Bonds and the Facility, including the reasonable fees and expenses of Bond Counsel and the Issuer's counsel (provided, however, that such amounts so paid to the Issuer shall not equal or exceed an amount which would cause the "yield" on the Note, this Financing Agreement or any other "acquired purpose obligation" to be "materially higher" than the "yield" on the Bonds, as such terms are defined in the Code). (3) Amounts described in Section 4.6. (4) All other amounts that the Company agrees to pay under the terms of this Financing Agreement and the Indenture. Section 4.2. Payments Assigned. The Company consents to the assignment made by the Indenture of the Note and of the rights of the Issuer under this Financing Agreement to the Trustee and agrees to pay to the Trustee all amounts payable by the Company pursuant to the Note and this Financing Agreement, except for payments made to the Issuer pursuant to Sections 4.1(b)(2) and 5.6. Section 4.3. Default in Payments. If the Company fails to make any payments required by the Note or this Financing Agreement when due, the Company shall pay to the Trustee interest thereon until paid at a rate equal to the highest rate on any Bonds then outstanding or, in case of the payment of any amounts not to be used to pay principal of or interest on Bonds, at a rate equal to the Prime Rate plus one percent per year. Section 4.4. Obligations of Company Unconditional. The obligation of the Company to make the payments on the Note and to observe and perform all other covenants, conditions and agreements hereunder shall be absolute and unconditional, irrespective of any rights of setoff, recoupment or counterclaim it might otherwise have against the Issuer, the Bank, the Remarketing Agent or the Trustee. Subject to the prepayment of the Note as provided therein, the Company shall not suspend or discontinue any payment on the Note or hereunder or fail to observe and perform any of its other covenants, conditions or agreements hereunder for any cause, including without limitation, any acts or circumstances that may constitute an eviction or constructive eviction, failure of consideration, failure of title to any part or all of the Facility or commercial frustration of purpose, or any damage to or destruction or condemnation of all or any part of the Facility, or any change in the tax or other laws of the United States of America, the State of Ohio or any political subdivision of either, or any failure of the Issuer, the Bank, the Remarketing Agent or the Trustee to observe and perform any covenant, condition or agreement, whether express or implied, or any duty, liability or obligation arising out of or in connection with any Financing Instrument. The Company may, after giving to the Issuer and the Trustee 10 days' notice of its intention to do so, at its own expense and in its own name, or in the name of the Issuer if procedurally required, prosecute or defend any action or proceeding or take any other action involving third persons that the Company reasonably deems necessary to secure or protect any of its rights hereunder. In the event the Company takes any such action, the Issuer shall cooperate fully with the Company and shall take all necessary action to substitute the Company for the Issuer in such action or proceeding if the Company shall so request. Section 4.5. Advances by Issuer or Trustee. If the Company fails to make any payment or perform any act required of it hereunder, the Issuer or the Trustee, without prior notice or demand on the Company and without waiving or releasing any obligation or default, may (but shall be under no obligation to) make such payment or perform such act. All amounts so paid by the Issuer or the Trustee and all costs, fees and expenses so incurred shall be payable by the Company on demand as an additional obligation under the Note, together with interest thereon at the Prime Rate plus one percent per year until paid. Section 4.6. Rebate Requirement. (a) At its sole expense on behalf of the Issuer, the Company shall determine and pay to the United States the Rebate Amount, hereinafter defined, as and when due in accordance with the "rebate requirement" described in Section 148(f) of the Code and Regulations thereunder, including without limitation, Regulations Section 1.148-3. The Company shall retain records of all such determinations until six years after Payment of the Bonds. (b) Reference is made to Exhibit B hereto for additional details of the rebate requirement. Exhibit B may be amended or substituted without compliance with Article XI of the Indenture or Section 8.3 hereof and without any action of the Issuer upon the Company's delivery to the Trustee of the proposed amendment or substitution together with an opinion of Bond Counsel that compliance with this section and Exhibit B, as amended, will not adversely affect the exclusion of interest on the Bonds from gross income for federal income tax purposes. (c) Notwithstanding anything contained herein to the contrary, no such payment will be required if the Company receives and delivers to the Issuer and the Trustee an opinion of Bond Counsel that such payment is not required under the Code to prevent any Bonds from becoming "arbitrage bonds" within the meaning of Section 148 of the Code. (d) The Issuer shall not be liable to the Company by way of contribution, indemnification, counterclaim, set-off or otherwise for any payment made or expense incurred by the Company pursuant to this section or the Indenture. Section 4.7. Letter of Credit. The Company shall provide for the payment of amounts due under Section 4.1 (a) from Available Moneys, including, delivery to the Trustee on the date of initial authentication and delivery of the Bonds of a Letter of Credit in favor of the Trustee and for the benefit of the holders of the Bonds. The Company shall be entitled to provide a Substitute Letter of Credit under certain circumstances as provided in the Indenture. Any extension of the Letter of Credit shall be for a period of at least one year or, if less, the fifteenth day after the maturity date of the Bonds. ARTICLE V SPECIAL COVENANTS Section 5.1. Operation of Facility by the Company; No Warranty of Condition or Suitability by the Issuer. (a) The Company shall operate the Facility, or cause it to be operated, as a nursing home facility or other purposes contemplated by the Act. (b) The Issuer makes no warranty, either express or implied, as to the Facility or the condition thereof, or that the Facility has been or will be suitable for the purposes or needs of the Company. Section 5.2. Reference to Bonds Ineffective after Bonds Paid and Other Obligations Satisfied. Upon payment of the Bonds and upon payment of all obligations under this Financing Agreement and the Note, subject to Section 8.1, all references in this Financing Agreement to the Bonds, the Trustee and the Issuer shall be ineffective, and neither the Trustee, the holder of the Note, the Issuer nor the holders of any of the Bonds shall thereafter have any rights hereunder except as provided in Sections 4.1(b), 4.6 and 5.6. Section 5.3. Certificate as to No Default. The Company shall deliver to the Issuer and the Trustee within 120 days after the close of each of its Fiscal Years a certificate signed by the chief executive officer, the chief administrative officer or the chief financial officer of its corporate general partner stating that (a) (1) the Company is not in default under the Note or this Financing Agreement, and (2) the Company has no knowledge of any violation of any of the terms or provisions of the Note or this Financing Agreement or of the occurrence of any condition, event or act that, with or without notice or lapse of time or both, would constitute an event of default hereunder or thereunder, or (b) if it is in default, specifying the nature and period of default and what action the Company is taking or proposes to take with respect thereto. Section 5.4. [Reserved) Section 5.5. Tax Exemption. (a) Unless the Company shall deliver to the Trustee an opinion of Bond Counsel to the effect that such use, occupation or ownership will not adversely affect the exclusion of interest on the Bonds from gross income for federal income tax purposes, the Company shall not: (1) take any action or approve the Trustees taking any action or making any investment or use of the proceeds of the Bonds that would cause the Bonds to be "arbitrage bonds" within the meaning of Section 148 of the Code. (2) barring unforeseen circumstances, approve the use of the proceeds of any Bonds or any other funds other than in accordance with its "non-arbitrage" certificate with respect to such use given immediately prior to the delivery of the Bonds; (3) take or permit any action that would result in more than 5% of the proceeds of the 1980 Bonds, the Prior Bonds or the Bonds being used directly or indirectly to make or finance loans to any person who is not an "exempt person" within the meaning of Section 103(b)(3) of the 1954 Code or a "governmental unit" within the meaning of Section 141(c) of the Code or otherwise cause the 1980 Bonds, the Prior Bonds or the Bonds to be or become "consumer loan bonds" within the meaning of Section 103(o) of the 1954 Code. (4) permit any component of the Facility to be used or occupied by the United States of America or an agency or instrumentality thereof in any manner for compensation, including any entity with statutory authority to borrow from the United States of America in any case within the meaning of Section 149(b) of the Code, or in any way cause the Bonds to be "federally guaranteed" within the meaning of Section 103(h) of the 1954 Code or Section 149(b) of the Code. (5) permit the addition of any "principal user" of the Facility within the meaning of Section 103(b)(6) of the 1954 Code or Section 144(a) of the Code; or (6) take any other action that would adversely affect the exclusion of interest on the Bonds from gross income. (b) The Company shall not take or omit to take any action the taking or omission of which would result in any of the proceeds of the Bonds, within the meaning of Section 147(g) of the Code, being used to finance the costs of issuance of the Bonds. (c) The Company represents and warrants that (i) the original principal amount of the Prior Bonds, plus any amounts held as a sinking fund for payment of the principal of the 1980 Bonds, did not exceed the aggregate outstanding principal amount of the 1980 Bonds as determined on the date of issuance of the Prior Bonds, and (ii) the principal amount of the Bonds, plus any amounts held by the Prior Bonds Trustee as a sinking fund for payment of the principal of the Prior Bonds, do not exceed the outstanding principal amount of the Prior Bonds as determined on the date of issuance of the Bonds. (d) The Company represents and warrants that, within the meaning of Section 147(b) of the Code and comparable provisions of the 1954 Code, the "average maturity" of the Bonds does not exceed 120% of the remaining "average reasonably expected economic life" of the Facility, such "average maturity" and remaining "average reasonably expected economic life" being computed in the manner contemplated by Section 147(b) of the Code and comparable provisions of the 1954 Code. The Company further represents and warrants that the "average maturity" of the Bonds is less than the remaining "average maturity" of the Prior Bonds. (e) The Company represents, covenants and agrees that not more than 25% of the proceeds of the 1980 Bonds, the Prior Bonds or the Bonds have been or will be used to provide a facility the primary purpose of which is one of the following: retail food and beverage services, automobile sales or service, or the provision of recreation or entertainment. The Company further covenants and agrees that no part of the proceeds of the 1980 Bonds, the Prior Bonds or the Bonds have been or will be used to provide any of the following and that no part of the Facility will be used for any of the following purposes or activities: any airplane, skybox or other private luxury box, health club facility, facility used primarily for gambling, store the principal business of which is the sale of alcoholic beverages for consumption off premises, private or commercial golf course, country club, massage parlor, tennis club, skating facility (including roller skating, skateboard and/or ice skating), racquet sports facility (including any handball or racquetball court), hot tub facility, suntan facility, racetrack or residential real property for family units. (f) The Company represents, covenants and agrees that (i) substantially all (90% or more) of the proceeds of the 1980 Bonds (exclusive of such proceeds applied to redeem other 1980 Bonds) were used for the acquisition, construction, reconstruction or improvement of land or property of a character subject to the allowance for depreciation within the meaning of Section 103(b)(6) of the 1954 Code, (ii) less than 25% of the proceeds of the 1980 Bonds, the Prior Bonds or the Bonds have been or will be used directly or indirectly for the acquisition of land or an interest in land, including mineral reserves, and (iii) none of such proceeds were or will be used for the acquisition of land or an interest in land to be used for farming purposes. (g) The Company represents and warrants that except for the Prior Bonds and the Bonds, no bonds, notes or other obligations of any state, territorial possession or any political subdivision of the United States of America or any political subdivision of any of the foregoing or of the District of Columbia have been issued since April 30, 1968, and are now outstanding, the proceeds of which have been or are to be used primarily with respect to projects (i) the "principal user" of which is or will be the Company or any "related persons," as defined in Section 103(b)(6) of the 1954 Code or Section 144(a) of the Code and (ii) that are located within Perry County, Ohio or are integrated facilities located outside of Perry County within one-half mile of the Facility. The Company further represents and warrants that (i) obligations have not been assumed, expenditures have not been made and outstanding obligations do not exist, including, without limitation, the leasing of equipment (pursuant to leases which do not qualify as "true" leases within the meaning of the Code), which would cause the "aggregate face amount" of the Bonds as computed under the provisions of Section 103(b)(6) of the 1954 Code or 144(a)(4) of the Code and the Regulations to exceed $10,000,000 and (ii) that, within three years after the date any of the 1980 Bonds or the Prior Bonds were issued, the Company did not make nor permit any user of the Facility to make any expenditure, assume any obligations or take or permit any other action to be taken which caused the "aggregate face amount" of any of the 1980 Bonds or the Prior Bonds as computed under the provisions of Section 103(b)(6) of the 1954 Code to exceed $10,000,000. (h) The Company represents and warrants that the Facility is located only at the place or places specified in the notice of public hearing published with respect to the Prior Bonds pursuant to Section 103(k)(2) of the 1954 Code and Section 147(f) of the Code. (i) The Company represents and warrants that neither the Company (including any "related person," within the meaning of Section 144(a)(3) of the Code) nor any other "principal user" of the Facility (including any related person), within the meaning of Section 144(a)(2) of the Code, is a principal user of any facility other than the Facility that is financed with (i) an "industrial development bond," within the meaning of Section 103(b) of the 1954 Code, (ii) a "qualified small issue bond," within the meaning of Section 144(a) of the Code, or (iii) any other "outstanding tax-exempt facility-related bonds," within the meaning of Section 144(a)(10) of the Code. The Company covenants and agrees that the aggregate authorized face amount of the bonds described in the preceding sentence (including the Bonds) which can be allocated to any "test period beneficiary" as such term is defined either in Section 103(b)(15)(D) of the 1954 Code or in Section 144(a)(10)(D) of the Code (including, but not limited to the Company) will not exceed $40,000,000. The Company further covenants and agrees that it will not permit the use of the Facility by any person (other than the Company or a "related person" within the meaning of Section 103(b)(6) of the 1954 Code or Section 144 of the Code) to whom any part of the 1980 Bonds, the Prior Bonds or the Bonds would be allocated pursuant to Section 103(b)(15) of the 1954 Code or Section 144(a)(10) of the Code, if the amount allocated, when increased as provided in Section 103(b)(15)(A) of the 1954 Code or Section 144(a)(10)(A) of the Code, would exceed $40,000,000. (j) The Company represents and warrants that none of the proceeds of the 1980 Bonds issued subsequent to 1983 were used to acquire any property or an interest therein (other than land or an interest in land) unless: (i) the first use of such property was pursuant to such acquisition; or (ii) "rehabilitation expenditures," within the meaning of Section 103(b)(17)(c) of the 1954 Code with respect to that part of such property constituting: (A) a building (and the equipment therefor), equalled or exceeded fifteen percent (15%) of that portion of the cost of acquiring such building (and the equipment therefor) that was financed with the proceeds of such 1980 Bonds; and (B) a facility other than a building, equalled or exceeded one hundred percent (100%) of that portion of the cost of acquiring such facility that was financed with the proceeds of such 1980 Bonds. (1) The Issuer covenants and agrees that, prior to the issuance of the Bonds, it shall duly elect to have the provisions of Section 103(b)(6)(D) of the 1954 Code and Section 144(a)(4) of the Code apply to such issue and such election shall be made in accordance with the applicable Regulations or procedures of the Internal Revenue Service. The Company covenants and agrees that it shall furnish to the Issuer whatever information is necessary for the Issuer to make such election and shall compile such supplemental statements and other information as required by the applicable Regulations and procedures of the Internal Revenue Service. (l) The Company will comply with, and make all filings required by, all effective rules, rulings or Regulations promulgated by the Department of the Treasury or the Internal Revenue Service, with respect to obligations issued under Section 103(b)(6) of the 1954 Code as a "small issue industrial development bond" the interest on which is exempt from federal income taxation or issued under Section 144(a) of the Code as a "qualified small issue bond" the interest on which is excludable from gross income for federal income tax purposes. (m) The Company represents and warrants that the Facility does not share common facilities (such as an enclosed mall, heating and cooling facilities or parking facilities) with any other part of the same building, other portions of an enclosed shopping mall or a strip of offices, stores or warehouses that were financed with tax-exempt small issue industrial development bonds under Section 103(b)(6) of the 1954 Code or qualified small issue bonds under Section 144(a) of the Code. (n) The Company represents and warrants that no rebate with respect to the Prior Bonds is payable to the United States pursuant to the provisions of Section 148 of the Code. (o) The Issuer will comply with the information reporting requirements of Section 149(e) of the Code with respect to the Bonds. (p) The Company represents and warrants that the information contained in the certificates or representations for the Company with respect to compliance with the requirements of Section 149(e) of the Code, including the information in Form 8038, is true and correct in all material respects. (q) The Company shall take all action necessary to ensure that interest on the Bonds, for federal income tax purposes, is not included in gross income of the owners thereof. Section 5.6. Indemnification. (a) The Company shall at all times protect, indemnify and save harmless the Issuer, the Trustee and the Remarketing Agent (collectively, the "Indemnitees") from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (hereinafter referred to as "Damages"), including without limitation (1) all amounts paid in settlement of any litigation commenced or threatened against the Indemnitees, if such settlement is effected with the written consent of the Company, (2) all expenses reasonably incurred in the investigation of, preparation for or defense of any litigation, proceeding or investigation of any nature whatsoever, commenced or threatened against the Company, the Facility or the Indemnitees, (3) any judgments, penalties, fines, damages, assessments, indemnities or contributions, and (4) the reasonable fees of attorneys, auditors, and consultants, provided that the Damages arise out of: (A) failure by the Company or its partners, employees or agents, to comply with the terms of this Financing Agreement or the Note, and any agreements, covenants, obligations, or prohibitions set forth therein; (B) any action, suit, claim or demand contesting or affecting the title of the Facility; (C) any breach by the Company of any representation or warranty set forth in this Financing Agreement or the Note, or any certificate delivered by the Company pursuant thereto, and any claim that any representation or warranty of the Company contains or contained any untrue or misleading statement of fact or omits or omitted to state any material facts necessary to make the statements made therein not misleading in light of the circumstances under which they were made; (D) any action, suit, claim, proceeding or investigation of a judicial, legislative, administrative or regulatory nature arising from or in connection with the ownership, operation, occupation or use of the Facility; or (E) any suit, action, administrative proceeding, enforcement action, or governmental or private action of any kind whatsoever commenced against the Company, the Facility or the Indemnitees that might adversely affect the validity, enforceability or tax-exempt status of the Bonds, this Financing Agreement or the Note, or the performance by the Company or any Indemnitee of any of their respective obligations thereunder; provided that such indemnity shall be effective only to the extent of any loss that may be sustained by the Indemnitees in excess of the proceeds net of any expenses of collection, received by them or from any insurance carried with respect to such loss and provided further that the benefits of this section shall not inure to any person other than the Indemnitees. (b) If any action, suit or proceeding is brought against the Indemnitees for any loss or damage for which the Company is required to provide indemnification under this section, the Company, upon request, shall at its expense resist and defend such action, suit or proceeding, or cause the same to be resisted and defended by counsel designated by the Company and approved by the Indemnitees, which approval shall not be unreasonably withheld, provided that such approval shall not be required in the case of defense by counsel designated by any insurance company undertaking such defense pursuant to any applicable policy of insurance. If an Indemnitee shall have reasonably concluded that there may be defenses available to it that are in conflict with those available to the Company or to other Indemnitees (in which case the Company shall not have the right to direct the defense of such action on behalf of such Indemnitee), such Indemnitee may engage separate counsel and the reasonable legal and other expenses incurred by such Indemnitee shall be borne by the Company. The obligations of the Company under this section shall survive any termination of this Agreement, including prepayment of the Note. (c) Nothing contained herein shall require the Company to indemnify the Issuer for any claim or liability resulting from its willful, wrongful acts or the Trustee or the Remarketing Agent for any claim or liability resulting from its negligence (under the standard of care set forth in Article IX of the Indenture) or its willful, wrongful acts. (d) All references in this section to the Issuer, the Trustee and the Remarketing Agent, including references to Indemnitees, shall include their members, commissioners, directors, officers, employees, representatives and agents. Section 5.7. Maintenance and Insurance of Facility. (a) The Company shall, at its own expense, keep the Facility in as reasonably safe condition as its operations shall permit and shall keep the Facility in good repair and operating condition, ordinary wear and tear excepted, making from time to time all necessary repairs, renewals and replacements. The Company shall comply, in all material respects, with all laws applicable to the Facility. (b) The Company shall, at its own expense, continuously maintain insurance in connection with the Facility and the Company's operations against such risks as are customarily insured against by organizations of the same general type, including without limitation insurance for property damage, liability for bodily injury, liability for property damage and workers' compensation. Section 5.8. Corporate Existence. The Company shall maintain its existence as an Ohio corporation and shall not, without the prior consent of the Trustee, dissolve or otherwise dispose of all or substantially all of its assets, consolidate with or merge into another domestic partnership or corporation (i.e. a partnership or corporation created under the laws of the United States of America, one of the states thereof or the District of Columbia) or permit one or more other domestic partnerships or corporations to consolidate with or merge into it; provided, however, that with the prior written consent of the Bank, the Company may consolidate with or merge into another domestic partnership or corporation, or permit one or more domestic partnerships or corporations to consolidate with or merge into it, or sell or otherwise transfer to another domestic partnership or corporation all or substantially all of its assets and thereafter dissolve, or sell or assign all or substantially all of its assets to a governmental unit, if after giving effect to such consolidation, merger, transfer, sale or assignment the surviving, resulting or transferee partnership, corporation or governmental unit: (1) will not be in default under any covenant under this Financing Agreement; (2) if it is not the Company, has the power to assume and assumes in writing all of the obligations of the Company herein and in the Note; and (3) if it is not an Ohio partnership or corporation or a political subdivision of the State of Ohio, either qualifies to do business in Ohio or files with the Trustee a consent to service of process reasonably acceptable to the Trustee. Section 5.9. Obligations Under the Indenture. The Company shall undertake all actions and carry out all responsibilities prescribed for it under the Indenture. ARTICLE VI EVENTS OF DEFAULT AND REMEDIES Section 6.1. Event of Default Defined. Each of the following events shall be an Event of Default: (a) Failure of the Company to make any payment on the Note when due and payable; (b) Failure of the Company to observe and perform any of its other covenants, conditions or agreements hereunder for a period of 30 days after notice specifying such failure and requesting that it be remedied, given by the Issuer or the Trustee to the Company; (c) (1) Failure of the Company to pay generally its debts as they become due, (2) commencement by the Company of a voluntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or similar law, (3) consent by the Company to the appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official for the Company or any substantial part of its property, or to the taking possession by any such official of any substantial part of the property of the Company, (4) making by the Company of any assignment for the benefit of creditors generally, or (5) taking of corporate action by the Company in furtherance of any of the foregoing; (d) The (1) entry of any decree or order for relief by a court having jurisdiction over the Company or its property in an involuntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or similar law, (2) appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator or similar official for the Company or any substantial part of its property, or (3) entry of any order for the termination or liquidation of the Company or its affairs; (e) Failure of the Company within 60 days after the commencement of any proceedings against it under the federal bankruptcy laws or other applicable federal or state bankruptcy, insolvency or similar law, to have such proceedings dismissed or stayed; (f) Abandonment of the Facility by the Company for a period in excess of thirty (30) days; or (g) An Event of Default under the Indenture. The foregoing provisions of subsection (b) are subject to the limitation that if by reason of force majeure the Company is unable in whole or in part to observe and perform any of its covenants, conditions or agreements hereunder, other than its obligations contained in Sections 4.1, 4.6, 4.7, 5.1, 5.5, 5.6 and 5.8, the Company shall not be deemed in default during the continuance of such inability. The term "force majeure" as used herein shall include without limitation acts of God; strikes, lockouts or other disturbances; acts of public enemies; orders of any kind of the government of the United States of America or the State of Ohio or any political subdivision thereof or any of their departments, agencies or officials, or any civil or military authority; insurrections; riots; epidemics; landslides; lightning; earthquakes; fires; hurricanes; tornadoes; storms; floods; washouts; droughts; arrests; restraint of government and people; civil disturbances; explosions; breakage or accident to machinery, transmission pipes or canals; partial or entire failure of utilities; or any other cause or event not reasonably within the control of the Company. The Company shall remedy with all reasonable dispatch the cause or causes preventing the Company from carrying out its covenants, conditions and agreements, provided that the settlement of strikes, lockouts and other industrial disturbances shall be entirely within the discretion of the Company, and the Company shall not be required to make settlement of strikes, lockouts and other industrial disturbances by acceding to the demands of any opposing party when such course is in the judgment of the Company not in its best interests. Section 6.2. Remedies on Default. Whenever any Event of Default hereunder shall have occurred and is continuing, the Trustee as the assignee of the Issuer: (a) May, and at the written direction of the holders of not less than 25% in aggregate principal amount of Bonds then outstanding, shall declare all amounts payable as principal and interest on the Note to be immediately due and payable, whereupon the same shall become immediately due and payable, except that the Trustee shall not make such a declaration unless the Bank has either (1) consented to such declaration or (2) has failed to honor any proper drawing under the Letter of Credit. (b) Have access to and inspect, examine and copy the financial books, records and accounts of the Company pertaining to the Facility. (c) Take whatever action at law or in equity may appear necessary or desirable to collect the amounts then due and thereafter to become due or to enforce observance or performance of any covenant, condition or agreement of the Company under the Note or this Financing Agreement. Section 6.3. Application of Amounts Realized in Enforcement of Remedies. Any amounts collected pursuant to action taken under Section 6.2 hereof shall be applied in accordance with the provisions of the Indenture, or, if payment of the Bonds shall have been made, shall be applied according to the provisions of Section 8.06 of the Indenture. Section 6.4. No Remedy Exclusive. No remedy herein conferred upon or reserved to the Trustee is intended to be exclusive of any other remedy, and every remedy shall be cumulative and in addition to every other remedy herein or now or hereafter existing at law, in equity or by statute. No delay or omission to exercise any right or power accruing upon an Event of Default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right or power may be exercised from time to time and as often as may be deemed expedient. Section 6.5. Attorney Fees and Other Expenses. Upon an Event of Default, the Company on demand shall pay to the Issuer and the Trustee the reasonable fees and expenses of their attorneys and other reasonable fees and expenses incurred by any of them in the collection of payments under the Note or the enforcement of any other obligations of the Company. Section 6.6. No Additional Waiver Implied by One Waiver. If either party or its assignee waives a default by the other party under any covenant, condition or agreement herein, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other default hereunder. ARTICLE VII PREPAYMENT OF THE NOTE Section 7.1. Option To Prepay in Full. Subject to requirements under the Indenture for Available Moneys in certain instances, the Company may prepay in full the Note, without penalty or premium, and terminate this Financing Agreement prior to payment of the Bonds by (a) paying to the Trustee an amount of cash or U.S. Government Obligations that, together with existing investments in the Bond Fund, will comply with the requirements for the defeasance of the Bonds set forth in Article VII of the Indenture, and (b) by making arrangements satisfactory to the Trustee for giving any required notice of redemption. Section 7.2. Mandatory Payment. The Company shall prepay the Note in full or in part (a) upon the occurrence of a Determination of Taxability as defined in the Indenture, or (b) as otherwise provided in Section 3.01 of the Indenture. Section 7.3. Option To Prepay in Part. The Company may prepay the Note in part, and the Issuer agrees that the Trustee may accept such payments to be paid to the Trustee for deposit in the Bond Fund and used for redemption or, at the election of the Company, purchase of outstanding Bonds, in the manner and to the extent provided in the Indenture. The principal amount of each Bond so purchased, delivered or credited shall be appropriately credited by the Trustee against the obligation of the Company to make future payments on the Note. Section 7.4. Relation of Options to Indenture. The options granted to the Company in this Article may be exercised whether or not the Company is in default under this Financing Agreement, provided that any such default will not result in the nonfulfillment of any condition to the exercise of any such option. Section 7.5. Obligations After Payment of Note and Termination of Financing Agreement. Anything contained in this Article VII to the contrary notwithstanding, the obligations of the Company contained in Section 5.6 and the obligation of the Company to pay the costs and expenses of the Issuer, the Trustee and the Remarketing Agent shall continue after payment of the Note and termination of this Financing Agreement. ARTICLE X MISCELLANEOUS Section 8.1. Term of Financing Agreement; Amounts Remaining After Payment of the Bonds. This Financing Agreement shall be effective upon execution and delivery hereof, and subject to earlier termination upon prepayment in full of the Note and all other amounts required to be paid hereunder, including all amounts payable under the Indenture, shall expire at midnight on September 1, 2010, or if such payment of the Note has not been made on such date, when payment in full of the Note and all other amounts required to be paid hereunder shall have been made, except that, notwithstanding the foregoing, the obligation of the Company to indemnify and pay the costs and expenses of the Issuer, the Remarketing Agent and the Trustee shall survive the expiration of this Financing Agreement. Any amounts remaining after payment of the Bonds and payment of the fees and expenses of the Trustee, the Remarketing Agent and the Issuer in accordance with the Indenture shall be distributed as set forth in Section 4.07 of the Indenture. Section 8.2. Notices, etc. Unless otherwise provided herein, all demands, notices, approvals, consents, requests and other communications hereunder shall be in writing and shall be deemed to have been given when delivered in person or mailed by first class registered or certified mail, postage prepaid, addressed: (a) if to the Issuer, to Perry County, Ohio, County Administration Building, 121 West Brown Street, New Lexington, Ohio 43764, Attention: President of the Board of County Commissioners of Perry County, Ohio; (b) if to the Trustee, to SunTrust Bank, Central Florida, National Association, Orlando, Florida, Attention: Corporate Trust Department; (c) if to the Company, to New Lexington Health Care Corp., 980 South Main Street, New Lexington, Ohio 26426; (d) if to the Underwriter or Remarketing Agent, to Crews and Associates, Inc. 2000 Union National Plaza, 124 West Capitol, Little Rock, Arkansas 72201; (e) if to the Bank, to NationsBank of Texas, N.A, 901 Main Street, 13th Floor, Dallas, Texas 75202, Attention: Marie Lancanster; and A duplicate copy of each demand, notice, approval, consent, request or other communication given hereunder by either the Issuer or the Company to the other shall also be given to the Trustee, the Bank and the Remarketing Agent. The Company, the Issuer, the Trustee, the Bank and the Remarketing Agent may, by notice given hereunder, designate any further or different addresses to which subsequent demands, notices, approvals, consents, requests or other communications shall be sent or persons to whose attention the same shall be directed. Section 8.3. Amendments to financing Agreement and Note. Neither this Financing Agreement nor the Note shall be amended or supplemented and no substitution shall be made for the Note subsequent to the issuance of the Bonds and before payment of the Bonds, without the consent of the Trustee, given in accordance with Article XI of the Indenture. Section 8.4. Successors and Assigns. This Financing Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Without the prior written consent of the Issuer, the Trustee and the Bank, no assignment by the Company shall relieve the Company of its obligations hereunder. Section 8.5. Severability. If any provision of this Financing Agreement shall be held invalid by any court of competent jurisdiction, such holding shall not invalidate any other provision hereof. Section 8.6. Applicable Law. This Financing Agreement shall be governed by the applicable laws of the State of Ohio. Section 8.7. Counterparts. This Financing Agreement may be executed in counterparts, each of which shall be an original and all of which, taken together, shall constitute but one and the same instrument; except that to the extent, that this Financing Agreement shall constitute personal property under the Uniform Commercial Code of Ohio, no security interest in this Financing Agreement may be created or perfected through the transfer or possession of any counterpart of this Financing Agreement other than the original counterpart, which shall be the counterpart containing the receipt therefor executed by the Trustee following the signatures to this Financing Agreement. Section 8.8. Bank May Perform Company's Obligations. The Bank may perform or observe any covenant, condition or agreement of the Company hereunder and such performance or observance shall be treated in all respects as the act of the Company. Section 8.9. Entire Agreement. This Financing Agreement together with the Indenture and the Note constitute the entire agreement between the Issuer and the Company and supersede all prior agreements and understandings, both oral and written, between the Issuer and the Company with respect to the subject matter hereof. IN WITNESS WHEREOF, the Issuer has caused this Financing Agreement to be executed on its behalf and its seal to be affixed hereto and attested by the duly authorized officers of The Board of Commissioners of the County of Perry, Ohio, and the Company has caused this Financing Agreement to be executed in its name by the duly authorized officer of its general partner, all as of the date first above written. THE BOARD OF COMMISSIONERS OF THE COUNTY OF PERRY, OHIO BY AND ON BEHALF OF PERRY COUNTY, (SEAL) OHIO By ----------------------------------------- President ATTEST: By Its NEW LEXINGTON HEALTH CARE CORP., an Ohio corporation By Its ATTEST: By Its RECEIPT Receipt of the foregoing original counterpart of the Financing Agreement dated as of September 1, 1996, between The Board of Commissioners of the County of Perry, Ohio by and on behalf of County of Perry, Ohio and New Lexington Health Care Corp., is hereby acknowledged as of the 30th day of September, 1996. SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION, as Trustee By Vice President The material exhibits to this document are as follows, and are available upon request: CONTINUING DISCLOSURE AGREEMENT executed and delivered by NEW LEXINGTON HEALTH CARE CORP., an Ohio limited partnership, as the borrower and SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION, in connection with the issuance of $2,545,000 County of Perry, Ohio First Mortgage Refunding Revenue Bonds, Series 1996 being issued pursuant to a Trust Indenture dated as of September 1, 1996, by and between the County of Perry, Ohio and SunTrust Bank, Central Florida, National Association. Official Statement regarding exemption from taxation. TAX REGULATORY AGREEMENT AND NO ARBITRAGE CERTIFICATE by and among County of Perry, Ohio, New Lexington Health Care Corp. and SunTrust Bank, Central Florida, National Association, Charleston, West Virginia as Trustee. EX-10.46 8 INDENTURE OF TRUST - NEW LEXINGTON Exhibit 10.46 INDENTURE OF TRUST relating to $2,545,000 Nursing Facility Refunding Revenue Bonds (New Lexington Health Care Corp. Project), Series 1996 between COUNTY OF PERRY, OHIO and SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION, as Trustee Dated as of September 1, 1996 INDENTURE OF TRUST INDENTURE OF TRUST dated as of September 1, 1996 (the "Indenture") between COUNTY OF PERRY, OHIO, a political subdivision of the State of Ohio (the "Issuer"), and SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION, a national banking association organized, existing and authorized to accept and execute trusts of the character herein set out (in such capacity, together with any successor in such capacity, the "Trustee"), as trustee. WHEREAS, Section 13 of Article VIII of the Ohio Constitution provides, among other things, for the passage of laws authorizing the State of Ohio (the "State"), its political subdivisions and their agencies or instrumentalities, and others, to acquire, construct, enlarge, improve or equip, and to sell or lease property, structures, equipment and facilities for industry, commerce, distribution and research and to make loans for such purposes and to issue bonds to provide monies therefor in order to create or preserve jobs and employment opportunities and improve the economic welfare of the people of the State; and WHEREAS, pursuant thereto, Chapter 165 of the Ohio Revised Code (the "Act") provides, among other things, for the issuance of revenue bonds of a city or county to provide funds to make loans to others to acquire, construct, reconstruct, enlarge, improve, furnish and equip real or personal property or both, or interests therein, to create or preserve jobs and employment opportunities and to improve the economic welfare of the people of the State, for the use of such property for industry, commerce, distribution or research; and WHEREAS, pursuant to such authorization, the County of Perry, Ohio, (the "Issuer") issued its First Mortgage Refunding Revenue Bonds (New Lexington Health Care Corp. Project), Series 1986 (the "Prior Bonds") in the original amount of $2,545,000 and used the proceeds to refund those certain County of Perry, Ohio Industrial Development Revenue Bonds (New Lexington Health Care Corp.), Series 1980, the proceeds of which were used to pay the cost of the acquisition, construction and equipping of a 100-bed skilled and intermediate care commercial nursing home facility operated by New Lexington Health Care Corp. (the "Company") and situate at 980 South Main Street, New Lexington, Perry County, Ohio (the "Project"); and WHEREAS, the Company has advised the Issuer that significant debt service savings would result in connection with the refinancing of the Prior Bonds; and WHEREAS, the Company has requested that the Issuer issue and sell its refunding revenue bonds in the principal amount of not to exceed $2,750,000 for the purpose of refunding the Prior Bonds; and WHEREAS, in order to more economically finance the Project, the Issuer has determined that the refunding of the Prior Bonds is desirable and will thereby implement the stated purposes of the Act. WHEREAS, the Issuer has undertaken to provide for the refunding of the Prior Bonds and the refinancing of the acquisition, construction and equipping of the Facility by making available the proceeds from the sale of its Nursing Facility Refunding Revenue Bonds (New Lexington Health Care Corp.), Series 1996, in the original principal amount of $2,545,000 (the" Bonds") pursuant to the provisions of a Financing Agreement (the "Agreement") between the Issuer and the Company, dated as of even date herewith; and WHEREAS, the Agreement provides that the Issuer shall issue and sell the Bonds; and that the Company shall pay, or cause to be paid, pursuant to the Agreement, in addition to other moneys available for such purpose, an amount sufficient to pay the Bonds in full and related expenses; and WHEREAS, the Issuer wishes to provide in this Indenture for the issuance of its Bonds, and the Trustee is willing to accept the trusts provided for in this Indenture; and WHEREAS, the execution and delivery of the Bonds and of this Indenture and the issuance and sale of the Bonds have been duly authorized by a resolution duly adopted by the governing body of the Issuer and all things necessary to make the Bonds, when executed by the Issuer and authenticated by the Trustee (as hereinafter defined), valid and binding legal obligations of the Issuer and to make this Indenture a valid and binding agreement have been done; ACCORDINGLY, THE ISSUER AND THE TRUSTEE AGREE AS FOLLOWS FOR THE BENEFIT OF THE OTHER AND FOR THE BENEFIT OF THE HOLDERS OF THE BONDS ISSUED PURSUANT TO THIS INDENTURE (SUBJECT TO THE PROVISIONS OF SECTIONS 6.01 and 12.08): GRANTING CLAUSE To secure first, the payment of the Bonds, the Issuer assigns and pledges to the Trustee, and grants to the Trustee, a security interest in, all right, title and interest of the Issuer in and to (a) the Agreement, including any right to delivery of the Letter of Credit, the Receipts and Revenues of the Issuer from the Agreement (as hereinafter defined), any right to bring actions and proceedings under the Agreement or for the enforcement of the Agreement and any right to do all things that the Issuer is entitled to do under the Agreement, but excluding the Unassigned Rights (as hereinafter defined) and the right to enforce the Unassigned Rights, and (b) all moneys and securities held from time to time by the Trustee under this Indenture, first, for the equal and proportionate benefit of all holders of the Bonds without priority or distinction as to lien or otherwise of any Bonds over any other Bonds. ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION Section 1.01. Definitions. For all purposes of this Indenture, unless the context requires otherwise, the following terms shall have the following meanings: "Act" means Article VIII, Section 13 of the Ohio Constitution and Chapter 165 of the Ohio Revised Code, as amended. "Additional Bonds" shall mean any Bonds authorized and issued pursuant to Section 2.09 of this Indenture. "Agreement" or "Financing Agreement" means the Financing Agreement, dated as of the date of this Indenture, between the Issuer and the Company, as such Agreement may be amended or supplemented from time to time in accordance with its terms. "Authorized Denominations" means with respect to all Bonds $5,000 and any multiple thereof. "Available Moneys" means moneys that (a) are continuously on deposit with the Trustee in trust for the benefit of the Bondholders in a separate and segregated account in which only Available Moneys are held and (b) are proceeds of either (i) the Bonds received contemporaneously with and directly from the issuance and sale of the Bonds, (ii) payments made by the Company (and, if the bonds are then rated by any national securities rating agency, at the time of the deposit of such payments and for a period of at least 366 days thereafter, no Bankruptcy Filing shall have occurred), (iii) a draw by the Trustee on the Letter of Credit, (iv) refunding bonds for which the Trustee has received a written opinion of Bankruptcy Counsel to the effect that payment of such moneys to the Bondholders would not constitute an avoidable preference under Section 547 of the United States Bankruptcy Code in the event the Company or the Issuer were to become a debtor under the United States Bankruptcy Code, provided that such opinion shall only be required if the Bonds are then rated by any national rating agency, or (v) income derived from the investment of the foregoing. "Bank" means the issuer of the Letter of Credit, initially NationsBank of Texas, N.A., and, upon the issuance and delivery of a Substitute Letter of Credit, shall mean the issuer of such Substitute Letter of Credit. "Bankruptcy Counsel" means any counsel nationally recognized in bankruptcy matters that is independent of the Company and the Issuer and is reasonably acceptable to the Trustee. "Bankruptcy Filing" means the filing of a petition by or against the Company or the Issuer in respect of the Company, any of its partners or the Issuer, as the case may be, as debtor under the United States Bankruptcy Code or similar bankruptcy or insolvency act. If the petition has been dismissed and the dismissal is final and not subject to appeal at the relevant time, the filing will not be considered to have occurred. "Beneficial Owner" shall have the meaning set forth in Section 2.05(c). "Bonds" means the bonds issued pursuant to this Indenture. "Bond Fund" means the fund by that name created by Section 4. 02. "Bond Purchase Agreement" means the Bond Purchase Agreement dated September ____, 1996, among the Company, the Issuer and the Underwriter, with respect to the sale of the Bonds. "Bond Year" means the one-year period beginning on the day after the expiration of the preceding Bond Year. The first Bond Year begins on the date of the delivery of the Bonds and ends on August 31, 1997. The first and the last Bond Year may be for periods of less than one year. "Business Day" means any day other than (a) a Saturday or Sunday, (b) a day on which commercial banks in New York, New York, or the city or cities in which the corporate trust office of the Trustee, the primary office of the Remarketing Agent or the paying office of the Bank are authorized by law or executive order to close or (c) a day on which the New York Stock Exchange is closed. For purposes of this definition, "paying office of the Bank" means the Bank office responsible for making payments under any Letter of Credit, which initially shall be the office in Los Angeles, California. "Cede & Co." means Cede & Co., the nominee of DTC or any successor nominee of DTC with respect to the Bonds. "Code" means the Internal Revenue Code of 1986, as amended, the regulations (whether proposed, temporary or final) under that Code or the statutory predecessor of that Code, and any amendments of, or successor provisions to, the foregoing and any official rulings, announcements, notices, procedures and judicial determinations regarding any of the foregoing, all as and to the extent applicable. Unless otherwise indicated, reference to a Section of the Code means that Section of the Code, including such applicable regulations, rulings, announcements, notices, procedures and determinations pertinent to that Section of the Code. "Company" means New Lexington Health Care Corp., a for-profit corporation duly organized under and validly existing by virtue of the laws of the State of Ohio, or any successor or successors to the Company's obligations under the Agreement as permitted under Section 5.8 of the Agreement. "Company Representative" means a person at the time designated to act on behalf of the Company by a written instrument furnished to the Trustee containing the specimen signature of such person and signed on behalf of the Company by its President, its Vice President or the Chairman of its Board of Directors. The certificate may designate an alternate or alternates. "Conversion Date" shall mean that Interest Payment Date, if any, upon which the interest rate on the Bonds converts from any given rate to a Weekly Rate, a One-year Rate, a Three-year Rate or a Fixed Rate, all as established in Section 3.09 of this Indenture. "Credit Modification" means, and shall be deemed to occur upon, the acceptance of a Substitute Letter of Credit by the Trustee if (a) as a result of such acceptance, the rating then assigned to the Bonds by any Rating Agency then rating the Bonds would be lowered or eliminated or (b) in the event the Bonds are not then rated, the issuer of such Substitute Letter of Credit has (i) senior debt or long-term bank deposits that are rated by a Rating Agency at a lower rating than the rating then assigned to the senior debt or long-term bank deposits of the Bank, or (ii) outstanding letters of credit or other similar instruments supporting debt obligations that are rated by a Rating Agency at a lower rating than the rating assigned to debt obligations supported with letters of credit or similar instruments issued by the Bank. "DTC" means The Depository Trust Company, a limited purpose company organized under the laws of the State of New York, and its successors and assigns. "DTC Participant" or "DTC Participants" means securities brokers and dealers, banks, trust companies and clearing corporations that have access to the DTC system. "Determination of Taxability" shall have the meaning set forth in Section 3.01(c). "Escrow Agreement" means the Escrow Deposit Agreement, dated as of the date of this Indenture, among the Issuer, the Company and the Prior Bonds Trustee, as Escrow Agent. "Event of Default" is defined in Section 8.01. "Event of Taxability" shall mean delivery to the Trustee of (a) an opinion of Bond Counsel or (b) a letter or notice from the Internal Revenue Service to a Bondholder, in either event to the effect that interest on any Bond is includable in gross income of the recipient thereof (other than a Bondholder that is a "substantial user" of the Facility or a "related person" within the meaning of Section 147(a) of the Code) for Federal income tax purposes. "Date" of an Event of Taxability shall mean the date of receipt by the Trustee of the material described in (a) or (b). "Facility" or "Project" means the 100-bed intermediate and skilled nursing and rehabilitation facility located at 980 South Main Street in Salem, New Lexington, Ohio. "Fixed Rate" means with respect to the Bonds the Fixed Rate established in accordance with Section 2.02. "Fixed Rate Period" means that period during which the Fixed Rate is in effect. "Indenture" means this Indenture of Trust, as it may be amended or supplemented from time to time in accordance with its terms. "Interest Payment Date" means the first day of each March and September, commencing March 1, 1997, provided, however, that while the Bonds bear interest at the Weekly Rate, the Interest Payment Date shall be the first Business Day of each calendar month commencing the first Business Day of the month subsequent to the Conversion Date. "Issuer" means County of Perry Ohio, a political subdivision of the State of West Virginia, acting by and through the Board of County Commissioners of the County of Perry, Ohio, and its successors and assigns. "Issuer Representative" means the President of the Board of County Commissions or the County of Perry, Ohio, or other person designated at the time to act on behalf of the Issuer by a written instrument furnished to the Trustee containing the specimen signature of such person and signed on behalf of the Issuer by the President of the Board of County Commissioners of the County of Perry, Ohio. "Letter of Credit" means an irrevocable letter of credit having the characteristics of a "credit" or "letter of credit" set forth in Section 5-103 of the Uniform Commercial Code of the State except that a letter of credit (a) may not be revocable and (b) may only be issued by (i) a national bank, (ii) any banking institution organized under the laws of any state, territory or the District of Columbia, the business of which is substantially confined to banking and is supervised by the state or territorial banking commission or similar officials or (iii) a branch or agency of a foreign bank, provided that the nature and extent of federal and/or state regulation and the supervision of the particular branch or agency is substantially equivalent to that applicable to federal or state chartered domestic banks doing business in the same jurisdiction. Initially, the term "Letter of Credit" shall mean the irrevocable letter of credit issued by the Bank to the Trustee, including any permitted supplements or amendments thereto and any renewals or extensions thereof, and, upon the expiration or termination of the Letter of Credit and the issuance and delivery of a Substitute Letter of Credit meeting the requirements set forth in this paragraph and in Section 5.03 hereof, "Letter of Credit" shall mean such Substitute Letter of Credit. "Mandatory Repurchase Date" means, with respect to any Bonds, the date on which such Bonds are required to be purchased pursuant to Section 3.07(a). "Maximum Rate" means the lesser of (a) the highest interest rate that may be borne by the Bonds under State law and (b) 12% per year. "Note" shall mean the promissory note of the Company in the principal amount of $2,545,000, dated as of the date of the Bonds, in the form attached to the Agreement as Exhibit A, issued pursuant to the Agreement and delivered to the Issuer as consideration for the use of the proceeds of the Bonds to refund the Prior Bonds, and any amendment or supplement thereto or substitution therefor. "Notice of Mandatory Repurchase" means that notice required to be prepared by the Trustee and given by the Trustee pursuant to Section 3.07. "One-year Rate" means with respect to the Bonds the variable rate established annually in accordance with Section 2.02. The Bonds shall initially bear a One-year Rate of _____%. "One-year Rate Period" means each period during which the One-year Rate is in effect. "Opinion of Bond Counsel" means an Opinion of Counsel by nationally recognized bond counsel. "Opinion of Counsel" means a written opinion of counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Issuer, the Trustee, the Remarketing Agent or the Company. "Optional Tender Date" shall have the meaning set forth in Section 3.07(b)(i). "Outstanding" when used with reference to Bonds, or "Bonds outstanding" means all Bonds that have been authenticated and delivered by the under this Indenture, except the following: (a) Bonds canceled or purchased by or delivered to the Trustee for cancellation pursuant to the provisions of this Indenture. Except as otherwise provided in Section 3.08, Bonds purchased by the Company pursuant to optional tender or mandatory repurchase under Section 3.07 will continue to be outstanding until the Company directs the Trustee to cancel them; (b) Bonds that have become due (at maturity or on redemption, acceleration or otherwise) and for the payment, including interest accrued to the due date, of which sufficient moneys are held by the Trustee; (c) Bonds deemed paid by Section 7.01; and (d) Bonds in lieu of which others have been authenticated under Section 2.05 (relating to registration and exchange of Bonds) or Section 2.06 (relating to mutilated, lost, stolen, destroyed or undelivered Bonds). "Owner," "owners," "Bondholder," "bondholder," "Holder," "holder" or words of similar import mean: (a) in the event that the book-entry system of evidence and transfer of ownership in the Bonds is employed pursuant to Section 2.05(c), Cede & Co., as nominee for DTC, or its nominee, and (b) in all other cases, the registered owner or owners of any Bond fully registered as shown on the register maintained by the Trustee. "Person" means (a) any individual, (b) any corporation, partnership, joint venture, association, joint-stock company, business trust or unincorporated organization, or grouping of any such entities, in each case formed or organized under the laws of the United States of America, any state thereof or the District of Columbia or (c) the United States of America or any state thereof, or any political subdivision of either thereof, or any agency, authority or other instrumentality of any of the foregoing. "Parent" means Regency Health Services, Inc., a Delaware Corporation, and owner of 100% of the stock of the Company. "Prior Bonds" means County of Perry, Ohio First Mortgage Refunding Revenue Bonds (New Lexington Health Care Corp. Project), Series 1986, in the original principal amount of $2,545,000. "Prior Bonds Trustee" means SunTrust Bank, Central Florida, National Association (successor-in-interest to Mid-American National Bank & Trust Company), as indenture trustee for the Prior Bonds. "Rating Agency" means Moody's Investors Service, Inc., if such agency's ratings are in effect with respect to the Bonds, and Standard & Poor's Ratings Group, if such agency's ratings are in effect with respect to the Bonds, and their respective successors and assigns. If either such corporation ceases to act as a securities rating agency, the Company may, with the approval of the Remarketing Agent and the Bank, appoint any nationally recognized securities rating agency as a replacement. "Receipts and Revenues of the Issuer from the Agreement" means all moneys paid to the Issuer pursuant to Section 4.1 of the Agreement, and receipts of the Trustee credited under the provisions of this Indenture against such payments, including all moneys (other than moneys drawn to purchase Bonds pursuant to the terms hereof) received by the Trustee from a draw under the Letter of Credit. "Record Date" means (i) while the Bonds bear interest at the Weekly Rate, the Trustee's close of business on the Business Day next preceding each Interest Payment Date; and (ii) while the Bonds bear interest at any other interest rate, the 15th day of the calendar month next preceding an Interest Payment Date. "Reimbursement Agreement" means the Credit Agreement among the Parent, the Lenders Identified therein, NationsBank Capital Markets, Inc. and the Bank pursuant to which the Letter of Credit is issued by the Bank and delivered to the Trustee, and any and all modifications, alterations, amendments and supplements thereto. "Remarketing Agent" means initially Crew and Associates, Inc., and any successor agent or agents appointed from time to time pursuant to Section 9.12. "Remarketing Agreement" means (a) initially the Remarketing and Interest Services Agreement among the Issuer, the Company and the Remarketing Agent dated as of September 1, 1996, and any and all modifications, alterations, amendments and supplements thereto and (b) any agreement between the Company, the Issuer and any successor remarketing agent appointed pursuant to Section 9.12. "Remarketing Proceeds" shall have the meaning set forth in Section 3.08(c). "Responsible Officer" means, when used with respect to the Trustee, any officer within the Corporate Trust Division (or any successor group of the Trustee), including any vice president, assistant vice president, assistant secretary or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred at the Trustee's address set forth in Section 12.01 because of his knowledge of and familiarity with the particular subject. "State" means the State of Ohio. "Substitute Letter of Credit" shall have the meaning set forth in Section 5.03. "Tax Regulatory Agreement" means the Tax Regulatory Agreement dated as of the date of the delivery of the Bonds among the Company, the Issuer and the Trustee, as the same may be amended or supplemented from time to time in accordance with its terms or with an opinion of Bond Counsel to the effect that such amendment will not have an adverse effect on the tax-exempt status of the Bonds under the Code. "Three-year Rate" means with respect to the Bonds the variable rate established every three-years in accordance with Section 2.02. "Three-year Rate Period" means each period during which a Three-year Rate is in effect. "Trustee" means the entity identified as such in the heading of this Indenture and such entity's successors under this Indenture, and any separate or co-trustee at the time serving as such under this Indenture. "Unassigned Rights" means the rights of the Issuer under Section 4.1(b)(2) (relating to fees and expenses) and Section 5.6 (relating to indemnification) of the Agreement and the rights of the Issuer to receive documentation and notices, to give or withhold consents in connection with the provisions of this Indenture or the Agreement and the right to enforce any of the foregoing. "Underwriter" means Crews and Associates, Inc. "U.S. Government Obligations" means (a) direct obligations of the United States for which its full faith and credit are pledged for the timely payment thereof, (b) obligations of a person controlled or supervised by and acting as an agency or instrumentality of the United States, the payment of which is unconditionally guaranteed as a full faith and credit obligation of the United States for the timely payment thereof or (c) securities or receipts evidencing ownership interests in obligations or specified portions (such as principal or interest) of obligations described in (a) or (b). "Weekly Rate" means with respect to the Bonds the variable interest rate on the Bonds established weekly in accordance with Section 2.02. "Weekly Rate Period" means each period during which a Weekly Rate is in effect. All other terms used in this Indenture that are defined in Article I of the Agreement have the same meanings assigned them in the Agreement unless the context clearly requires otherwise. Section 1.02. Rules of Construction. Unless the context otherwise requires, (a) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles applied on a consistent basis; (b) references to Articles and Sections are to the Articles and Sections of this Indenture; (c) terms defined elsewhere in this Indenture shall have the meanings therein prescribed for them; (d) words of the masculine gender shall be deemed and construed to include correlative words of the feminine and neuter genders; (e) headings used in this Indenture are for convenience of reference only and shall not define or limit the provisions hereof; (f) each reference herein or in the Bonds to a percentage of Bonds required for notices, consents or for any other reason shall be deemed to refer to Bonds then outstanding; and (g) all references herein to time shall be Charleston, West Virginia time unless otherwise expressly stated. ARTICLE II THE BONDS Section 2.01. Issuance of Bonds; Form; Dating. (a) Authorization. The Issuer hereby authorizes and creates under this Indenture an issue of Bonds, entitled to the benefit, security and protection of this Indenture, to be designated "Nursing Facility Refunding Revenue Bonds (New Lexington Health Care Corp. Project), Series 1996." The total principal amount of Bonds that may be issued and outstanding hereunder shall be $2,545,000, except as provided in Section 2.06 with respect to replacement of mutilated, lost, stolen, destroyed or undelivered Bonds and Section 2.09 with respect to Additional Bonds. The Bonds shall be issuable only as fully registered bonds without coupons in Authorized Denominations only, and in substantially the form of Exhibit A to this Indenture, with appropriate variations, omissions, insertions, notations, legends or endorsements required by law or usage or permitted or required by this Indenture. The Bonds may be in printed or typewritten form. No Bonds may be issued under the provisions of this Indenture except in accordance with this Article. The Bonds shall be payable in lawful money of the United States but only from the sources pledged to such purpose. The Bonds are limited obligations of the Issuer payable solely from the revenues and receipts derived from payments made by the Company on the Note or by the Bank under the Letter of Credit, which revenues and receipts and security have been pledged and assigned to the Trustee to secure payment of the Bonds in the manner and to the extent provided herein. NEITHER THE STATE OF OHIO, THE COUNTY OF PERRY, OHIO, THE BOARD OF COUNTY COMMISSIONERS OF THE COUNTY OF PERRY, OHIO, NOR ANY OTHER POLITICAL SUBDIVISION THEREOF SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF OR INTEREST ON THE BONDS OR OTHER COSTS INCIDENT THERETO EXCEPT FROM THE REVENUES, MONIES AND PROPERTY PLEDGED THEREFOR, AND NEITHER THE TAXING POWER NOR THE FULL FAITH AND CREDIT OF THE STATE OF OHIO, THE COUNTY OF PERRY, OHIO, THE BOARD OF COUNTY COMMISSIONERS OF THE COUNTY OF PERRY, OHIO, OR ANY OTHER POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR INTEREST ON THE BONDS OR OTHER COSTS INCIDENT THERETO. THE BONDS SHALL NEVER CONSTITUTE AN INDEBTEDNESS OF THE ISSUER WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY PROVISION AND SHALL NEVER CONSTITUTE OR GIVE RISE TO A PECUNIARY LIABILITY OF THE ISSUER. NEITHER SHALL THE BONDS NOR THE INTEREST THEREON BE A CHARGE AGAINST THE GENERAL CREDIT OR TAXING POWERS OF THE ISSUER. NO PRESENT OR FUTURE OFFICER, MEMBER, COMMISSIONER, EMPLOYEE OR AGENT OF THE ISSUER SHALL BE PERSONALLY LIABLE ON THE BONDS; AND NO COVENANT, AGREEMENT OR OBLIGATION CONTAINED HEREIN SHALL BE DEEMED TO BE A COVENANT, AGREEMENT OR OBLIGATION OF ANY PRESENT OR FUTURE MEMBER, COMMISSIONER, OFFICER, EMPLOYEE OR AGENT OF THE ISSUER IN HIS INDIVIDUAL CAPACITY. (b) Details of Bonds. All Bonds shall be dated September 1, 1996 and delivery of the Bonds and shall mature, subject to prior redemption, on September 1, 2010. Interest on the Bonds shall be computed from the Interest Payment Date next preceding the date of authentication thereof, unless such authentication date (a) is prior to the first Interest Payment Date following the initial delivery of the Bonds, in which case interest shall be computed from such initial delivery date, (b) is after a Record Date and before the subsequent Interest Payment Date, in which case interest shall be computed from the subsequent Interest Payment Date, or (c) is an Interest Payment Date, in which case interest shall be computed from such authentication date; provided, that if interest on the Bonds is in default, Bonds shall bear interest from the last date to which interest has been paid. The principal of, redemption or purchase price and premium, if any, and interest on the Bonds shall be payable in lawful currency of the United States. The principal of and redemption or purchase price and premium, if any, on the Bonds shall be payable at the principal corporate trust office of the Trustee upon presentation and surrender of the Bonds. Payments of interest on the Bonds shall be mailed to the persons in whose names the Bonds are registered on the register of the Trustee at the close of business on the Record Date next preceding each Interest Payment Date; provided that, any Holder of a Bond or Bonds in an aggregate principal amount of not less than $500,000 may, by prior written instructions filed with the Trustee (which instructions shall remain in effect until revoked by subsequent written instructions), instruct that interest payments for any period be made by wire transfer to an account in the continental United States or other means acceptable to the Trustee. Bonds shall be numbered from 1 upward as determined by the Trustee and shall contain the designation "R." (c) Delivery. Upon the execution and delivery of this Indenture, the Issuer shall execute and deliver the Bonds to the Trustee and, upon receipt by the Trustee of the following, the Trustee shall authenticate the principal amount of Bonds specified in the Issuer's authorization and request, and the Trustee shall deliver the Bonds to the purchaser or purchasers as directed by the Issuer: (i) a copy of the resolution or resolutions of the Issuer authorizing the issuance of the Bonds, certified by the County Auditor; (ii) original executed counterparts of the Agreement, this Indenture, the Escrow Agreement, the Remarketing Agreement and the Tax Regulatory Agreement and a copy of the Reimbursement Agreement; (iii) confirmation that the Trustee has received the original, executed Letter of Credit from the Bank; (iv) an authorization and request from the Issuer to the Trustee to authenticate and deliver the Bonds in specified Authorized Denominations to the initial purchaser or purchasers upon payment to the Trustee, for the account of the Issuer, of the purchase price for such principal amount of Bonds; (v) an Opinion of Bond Counsel for the Bonds, addressed to the Trustee, or upon which the Trustee may rely, to the effect that the Bonds so specified have been validly authorized, executed and issued under the law of the State and this Indenture has been duly authorized, executed and delivered by the Issuer; (vi) an opinion of Counsel to the Bank addressed to the Trustee, or upon which the Trustee may rely, to the effect that the Letter of Credit is a binding and valid obligation of the Bank and is not subject to registration under the Securities Act of 1933, as amended; (vii) Internal Revenue Service Form 8038 completed by the Issuer with respect to the Bonds; (viii) An Opinion of Counsel that (1) the Company is a corporation duly organized and validly existing under the laws of the State, and (2) the Agreement and the Note have been duly authorized, executed and delivered by the Company and are enforceable against the Company, subject to usual exceptions for matters relating to bankruptcy and equitable principles; and (ix) Appropriate evidence that the Remarketing Agent has accepted its obligations and duties described in this Indenture. (d) Disbursement. On the date of issuance of the Bonds, the Trustee shall disburse all of the proceeds derived from the issuance of the Bonds, together with sufficient equity money provided by the Company, to the Prior Bonds Trustee as Escrow Agent under the Escrow Agreement in order to provide for the defeasance in full of the Prior Bonds. All additional moneys should be deposited in the Bond Fund and shall be applied as set forth in Section 4.04. Section 2.02. Interest on the Bonds. The Bonds shall bear interest as herein provided from the date thereof until paid in full. The Bonds will initially bear interest at a One-year Rate of 4.00%. Interest accrued on the Bonds shall be paid on each Interest Payment Date (or, if such day is not a Business Day, on the next succeeding Business Day), commencing on March 1, 1997. Subsequent to a Conversion Date, the Bonds shall bear interest at the lowest rate determined by the Remarketing Agent on their date of issuance as necessary to sell all of the Bonds at par; provided that no interest rate on the Bonds shall exceed the Maximum Rate. The amount of interest payable on any Interest Payment Date shall be computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, whichever may be applicable. If, subsequent to any Conversion Date, the Bonds bear interest at the Weekly Rate, during each Weekly Rate Period the Bonds shall bear interest at the Weekly Rate, determined by the Remarketing Agent initially no later than the first day of each Weekly Rate Period and thereafter no later than Wednesday (or the next succeeding Business Day, if such Wednesday is not a Business Day) of each week during such Weekly Rate Period. The Weekly Rate shall be the minimum rate of interest that would cause the Bonds on the date such rate is determined to have a market value equal to the then outstanding principal amount, plus, if such sale would not be on an Interest Payment Date, accrued interest. Such rate shall be determined by the Remarketing Agent in its sole discretion based on prevailing market conditions. The determination of the Weekly Rates as provided in this Indenture shall be conclusive and binding on the Issuer, the Company, the Bank, the Trustee, the Remarketing Agent and the Bondholders. The calculation and verification of interest payable on the Bonds as provided in this Indenture shall be conclusive and binding on the Issuer, the Company, the Bank, the Trustee, the Remarketing Agent, and the Bondholders, absent manifest error. If the Remarketing Agent shall not have determined a Weekly Rate for any week, the Weekly Rate shall be the same as the Weekly Rate for the immediately preceding week. If for any reason, the Weekly Rate cannot be determined for any week as hereinbefore provided, the Weekly Rate for such week shall be a rate per annum equal to 100% of the rate published in the then most recent edition of The Bond Buyer for 30-day prime tax-exempt commercial paper or, if The Bond Buyer no longer publishes such information, such other publication or provider of such information as the Remarketing Agent may select. The first Weekly Rate determined for each Weekly Rate Period shall apply to the period commencing on the first day of such Weekly Rate Period and ending on the next succeeding Wednesday (or the next succeeding Business Day, if such Wednesday is not a Business Day). Thereafter, each Weekly Rate shall apply to the period commencing on Thursday (or if the date of determination is not a Wednesday, on the next following Business Day) and ending on the next succeeding date of determination, or if earlier, on the last day of the Weekly Rate Period. Promptly following the determination of each Weekly Rate, the Remarketing Agent shall give notice thereof to the Trustee. Upon the request of any Bondholder, the Remarketing Agent shall notify any such Bondholder of each change in the Weekly Rate by first class mail. The failure to give any such notice shall not affect,the change in the Weekly Rate. The Remarketing Agent shall notify the Trustee and the Company in writing (which may be in telecopy form) or by telephone promptly confirmed in writing by 4:00 p.m. on the last Wednesday of each month (or if such Wednesday is not a Business Day, on the next succeeding Business Day) of the Weekly Rate set for each week in such month, and the principal amount of Bonds bearing interest at the Weekly Rate during each week. Using the Weekly Rates supplied by the Remarketing Agent, the Trustee shall calculate the amount of interest payable on the Bonds. Section 2.03. Execution and Authentication. The Bonds shall be signed on behalf of the Issuer with the manual or facsimile signature of the members of the Board of Conuty Commissioners of the Issuer, and the seal of the Issuer shall be impressed or imprinted on the Bonds by facsimile or otherwise, and attested by the manual or facsimile signature of the County Auditor. If any officer whose signature is on a Bond no longer holds that office at the time the Trustee authenticates the Bond, the Bond shall nevertheless be valid. Also, if a person signing a Bond is the proper officer on the actual date of execution, the Bond shall be valid even if that person is not the proper officer on the nominal date of action. A Bond shall not be valid for any purpose under this Indenture unless and until the Trustee manually signs the certificate of authentication on the Bond, and such signature shall be conclusive evidence that the Bond has been authenticated under this Indenture. Section 2.04. Bond Register. The Trustee shall keep a register of Bonds and of their transfer and exchange. Bonds not held under a book-entry system must be presented at the principal corporate trust operations office of the Trustee for registration, transfer and exchange, and Bonds may be presented at that office for payment. Bonds not held under a book-entry system and optionally tendered by their holders must be delivered as specified in Section 3.07(b). Section 2.05. Registration and Exchange of Bonds; Persons Treated as Owners; Book-Entry System. (a) Bonds may be transferred only on the register maintained by the Trustee. Upon surrender for transfer of any Bond to the Trustee, duly endorsed for transfer or accompanied by an assignment duly executed by the holder or the holder's attorney duly authorized in writing and in either case, with an appropriate guarantee of signature conforming to the requirements of Exhibit A hereto, the Trustee shall authenticate a new Bond or Bonds in an equal total principal amount and registered in the name of the transferee. Bonds may be exchanged for an equal total principal amount of Bonds of different Authorized Denominations. The Trustee shall authenticate and deliver Bonds that the Bondholder making the exchange is entitled to receive, bearing numbers not then outstanding. Except in connection with the optional tender of Bonds pursuant to Section 3.07(b) and the delivery thereof pursuant to Section 3.08, the Trustee shall not be required to transfer or exchange any Bond during the period beginning 15 days before the mailing of notice calling the Bond or any portion of the Bond for redemption and ending on the redemption date. Bonds subject to redemption or mandatory repurchase may be transferred or exchanged only if the Trustee provides the new holder thereof with a copy of the notice of redemption or mandatory repurchase, as the case may be. The holder of a Bond as shown on the register of the Trustee shall be the absolute owner of the Bond for all purposes, and payment of principal, interest or purchase price shall be made only to or upon the written order of such holder or the holder's legal representative; provided that interest shall be paid to the Person shown on the register as a holder of a Bond on the applicable Record Date. (b) The Trustee may require the payment by a Bondholder requesting exchange or registration of transfer of any tax or other governmental charge required to be paid in respect of the exchange or registration of transfer but shall not impose any other charge. (c) The Trustee or the Remarketing Agent may make appropriate arrangements for the Bonds (or any portion thereof) to be issued or held by means of a book-entry system administered by DTC with no physical distribution of Bonds made to the public (other than those Bonds, if any, not held under such book-entry system). References in this Section 2.05(c) to a Bond or the Bonds shall be construed to mean the Bond or the Bonds that are held under the book-entry system. In such event, one Bond of each maturity shall be issued to DTC and immobilized in its custody. A book-entry system shall be employed, evidencing ownership of the Bonds in Authorized Denominations, with transfers of beneficial ownership effected on the records of DTC and the DTC Participants pursuant to rules and procedures established by DTC. Each DTC Participant shall be credited in the records of DTC with the amount of such DTC Participant's interest in the Bonds. Beneficial ownership interests in the Bonds may be purchased by or through DTC Participants. The holders of these beneficial ownership interests are hereinafter referred to as the "Beneficial owners." The Beneficial Owners shall not receive Bonds representing their beneficial ownership interests. The ownership interests of each Beneficial Owner shall be recorded through the records of the DTC Participant from which such Beneficial Owner purchased its Bonds. Transfers of ownership interests in the Bonds shall be accomplished by book entries made by DTC and, in turn, by DTC Participants acting on behalf of Beneficial Owners. SO LONG AS CEDE & CO., AS NOMINEE FOR DTC, IS THE REGISTERED OWNER OF THE BONDS, THE TRUSTEE SHALL TREAT CEDE & CO. AS THE ONLY HOLDER OF THE BONDS FOR ALL PURPOSES UNDER THIS INDENTURE, INCLUDING RECEIPT OF ALL PRINCIPAL OF AND INTEREST ON THE BONDS, RECEIPT OF NOTICES, VOTING AND REQUESTING OR DIRECTING THE TRUSTEE TO TAKE OR NOT TO TAKE, OR CONSENTING TO, CERTAIN ACTIONS UNDER THIS INDENTURE. Payments of principal, interest and purchase price with respect to the Bonds, so long as DTC is the only owner of the Bonds, shall be paid by the Trustee directly to DTC or its nominee, Cede & Co. as provided in the Letter of Representation dated as of September 1, 1996 from the Issuer, the Company, the Remarketing Agent, the Trustee to DTC (the "Letter of Representation"). DTC shall remit such payments to DTC Participants, and such payments thereafter shall be paid by DTC Participants to the Beneficial owners. The Issuer, the Company, and the Trustee shall not be responsible or liable for payment by DTC or DTC Participants, for sending transaction statements or for maintaining, supervising or reviewing records maintained by DTC or DTC Participants. In the event that (1) DTC determines not to continue to act as securities depository for the Bonds or (2) the Company or the Remarketing Agent determines that the continuation of the book-entry system of evidence and transfer of ownership of the Bonds would adversely affect its interests or the interests of the Beneficial Owners of the Bonds, the Issuer shall, at the request of the Company or the Remarketing Agent, discontinue the book-entry system with DTC. If the Remarketing Agent fails to identify another qualified securities depository to replace DTC, the Trustee shall authenticate and deliver replacement Bonds in the form of fully registered Bonds to each Beneficial Owner. THE ISSUER, THE COMPANY, THE REMARKETING AGENT, AND THE TRUSTEE SHALL NOT HAVE ANY RESPONSIBILITY OR OBLIGATIONS TO ANY DTC PARTICIPANT OR ANY BENEFICIAL OWNER WITH RESPECT TO (i) THE BONDS; (ii) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC OR ANY DTC PARTICIPANT; (iii) THE PAYMENT BY DTC OR ANY DTC PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL OF AND INTEREST ON THE BONDS; (iv) THE DELIVERY OR TIMELINESS OF DELIVERY BY DTC OR ANY DTC PARTICIPANT OF ANY NOTICE DUE TO ANY BENEFICIAL OWNER THAT IS REQUIRED OR PERMITTED UNDER THE TERMS OF THIS INDENTURE TO BE GIVEN TO BENEFICIAL OWNERS; (v) THE SELECTION OF BENEFICIAL OWNERS TO RECEIVE PAYMENTS IN THE EVENT OF ANY PARTIAL REDEMPTION OF THE BONDS; OR (vi) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC, OR ITS NOMINEE, CEDE & CO., AS OWNER. In the event that a book-entry system of evidence and transfer of ownership of the Bonds is discontinued pursuant to the provisions of this Section, the Bonds shall be delivered solely as fully registered Bonds without coupons in the Authorized Denominations, shall be lettered "IR" and numbered separately from 1 upward, and shall be payable, executed, authenticated, registered, exchanged and canceled pursuant to the provisions hereof. (d) The Remarketing Agent shall not be limited to utilizing a book-entry system maintained by DTC but may enter into a custody agreement with any bank or trust company serving as custodian (which may be the Trustee serving in the capacity of custodian) to provide for a book-entry or similar method for the registration and registration of transfer of all or a portion of the Bonds. SO LONG AS A BOOK-ENTRY SYSTEM OF EVIDENCE OF TRANSFER OF OWNERSHIP OF ALL THE BONDS IS MAINTAINED IN ACCORDANCE HEREWITH, THE PROVISIONS OF THIS INDENTURE RELATING TO THE DELIVERY OF PHYSICAL BOND CERTIFICATES SHALL BE DEEMED INAPPLICABLE OR BE OTHERWISE SO CONSTRUED AS TO GIVE FULL EFFECT TO SUCH BOOK-ENTRY SYSTEM. Section 2.06. Mutilated, Lost, Stolen, Destroyed or Undelivered Bonds. (a) If any Bond is mutilated, lost, stolen or destroyed, the Trustee shall authenticate a new Bond of the same denomination for any mutilated, lost, stolen or destroyed Bond if there is delivered to the Trustee at its principal corporate trust operations office, (1) in the case of a mutilated Bond, such mutilated Bond and (2) in the case of any lost, stolen or destroyed Bond, evidence of such loss, theft or destruction reasonably satisfactory to the Issuer, Bank, Trustee and Company, together with an indemnity from the Bondholder, reasonably satisfactory to them. If the Bond has matured and if the evidence and indemnity described above have been provided by the Bondholder, instead of issuing a duplicate Bond, the Trustee, with the consent of the Company, shall pay the Bond without requiring surrender of the Bond and make such requirements as the Trustee deems fit for its protection, including a lost instrument bond. The Issuer, the Company and the Trustee may charge the Bondholder their reasonable fees and expenses in this connection. (b) In the event that any Bond purchased pursuant to an optional tender or mandatory repurchase is not delivered by the holder thereof on the date such Bond is purchased, the Issuer shall execute (if necessary) and the Trustee shall authenticate and deliver a new Bond of like aggregate principal amount as the Bond purchased, which Bond shall, for all purposes of this Indenture, be deemed to evidence the same debt as the Bond purchased and shall be remarketed, delivered and registered in accordance with Section 3.08(d) hereof. If any Bond is purchased by the Trustee with Available Moneys provided by the Company and sufficient for such purchase, the Trustee, upon request of the Company, shall authenticate a new Bond in any Authorized Denomination specified by the Company, registered as the Company may direct and deliver it to the Company, or to its order, whether or not such Bond is ever delivered. If any Bond is purchased with funds obtained by a drawing on the Letter of Credit, the Trustee shall comply with the provisions of Section 3.08(d)(ii). (c) Every new Bond issued pursuant to this Section 2.06 shall (i) constitute an additional contractual obligation of the Issuer regardless of whether, in the case of (a) above, the mutilated, lost, stolen or destroyed Bond and, in the case of (b) above, the Bond purchased shall be enforceable at any time by anyone, and (ii) be entitled to all of the benefits of this Indenture equally and proportionately with any and all other Bonds issued and outstanding hereunder. (d) All Bonds shall be held and owned on the express condition that the foregoing provisions of this Section 2.06 are exclusive with respect to the replacement or payment of mutilated, lost, stolen or destroyed Bonds and the replacement of any Bond purchased pursuant to an optional tender or mandatory repurchase and, to the extent permitted by law, and shall preclude any and all other rights and remedies with respect to the replacement or payment of negotiable instruments or other investment securities without their surrender, notwithstanding any law or statute to the contrary now existing or enacted hereafter. Section 2.07. Cancellation of Bonds. All Bonds paid, redeemed or purchased, either at or before maturity, shall be delivered to the Trustee when such payment, redemption or purchase is made, and except as otherwise provided herein shall be canceled. Whenever a Bond is delivered to the Trustee for cancellation (upon payment, redemption, defeasance or otherwise), or for transfer, exchange or replacement pursuant to Section 2.05 or 2.06, the Trustee shall safeguard such Bond for such period of time as may be required by governmental regulations and thereafter promptly cancel the Bond and prepare a certificate of destruction therefor. Section 2.08. Temporary Bonds. Until definitive Bonds are ready for delivery, the Issuer may execute and the Trustee shall authenticate temporary Bonds substantially in the form of the definitive Bonds, with appropriate variations. The Issuer shall, without unreasonable delay, prepare and the Trustee shall authenticate definitive Bonds in exchange for the temporary Bonds. Such exchange shall be made by the Trustee without charge to the Bondholders. Temporary Bonds shall not otherwise be eligible for transfer or exchange under Section 2.05. Section 2.09. Additional Bonds. (a) At any time while the Issuer is not in default under this Indenture and subject to the approval and execution of a supplemental Indenture making appropriate provisions therefor in accordance with Section 10.01 hereof and subject to receipt by the Trustee of the documents listed below, the Issuer may issue one or more series of Additional Bonds for the purpose of providing funds to be used, with any other available funds, for the purpose of (i) paying the cost of all improvements, restoration, repairing, rebuilding, rearranging and replacements of the Project or any part thereof by the Company pursuant to, or (ii) refunding all or part of any prior series of Bonds, or any combination of the above. Each series of Additional Bonds shall be issued pursuant to a supplement to this Indenture. Unless otherwise provided in a supplemental Indenture, all such Additional Bonds shall be in substantially the same form as the Bonds, but shall be of such denominations, bear such dates, bear interest at such rates, have such maturity dates, redemption dates and redemption premiums, contain an appropriate series designation, and be issued at such prices all as approved by Company. The Trustee shall authenticate and deliver such Additional Bonds, but only upon receipt of the following: (1) A certificate of the Issuer, signed by its President, that it is not in default under this Indenture. (2) A certificate of the Company, signed by a Company Representative approving the issuance and terms of such Additional Bonds and that it is not in default under the Agreement. (3) A certified copy of a resolution or resolutions of the Issuer authorizing a)the execution and delivery of the amendment to the Agreement referred to in subparagraph 4 of this Section 2.09, (b) the execution and delivery of the supplemental Indenture referred to in subparagraph 5 hereof, and (c) the issuance, award, execution and delivery of such Additional Bonds. (4) An original executed counterpart of an amendment to the Agreement providing, among other things, for increasing the amounts payable by the Company thereunder to include payment of principal of, premium, if any, and interest on such Additional Bonds. (5) An original executed counterpart of a supplemental Indenture providing for the issuance of such Additional Bonds. (6) Evidence of the consent of the Bank to the issuance of such Additional Bonds. (7) An opinion of Counsel that the amendment to the Agreement and a new promissory note each has been properly authorized, executed, and delivered by Company, that the supplemental Indenture has been properly authorized, executed, and delivered by the Issuer, and that such amendment to the Agreement, new promissory note, and supplemental Indenture (assuming in the case of the supplemental Indenture, proper authorization and execution and delivery thereof by the Trustee), are valid and binding and enforceable in accordance with their respective terms, except as same is affected by laws affecting creditors' rights and the enforcement thereof generally and except to the extent that the remedy of specific performance and other equitable remedies are always within the discretion of the Court, and that the amendment to the Agreement and the supplemental Indenture have been duly recorded in every necessary recording office and appropriate financing statements have been filed in all filing offices where such filing shall be necessary; (8) A written opinion of Nationally Recognized Bond Counsel that the issuance of such Additional Bonds has been duly authorized by the Issuer and will have no adverse effect upon the exemption from Federal income taxes of interest on the Bonds or any other then outstanding series of Additional Bonds. (9) A request and authorization by the Issuer, signed by its President, to the Trustee to authenticate and deliver such Additional Bonds upon payment to the Trustee for the account of the Issuer of a specified sum. (b) When the requirements of subsection A of this Section have been met to the reasonable satisfaction of the Trustee and when the Additional Bonds shall have been executed and authenticated in the manner required by this Indenture, the Trustee shall deliver such Additional Bonds but only upon payment to the Trustee of the purchase price of such Additional Bonds. (c) The proceeds of all Bonds issued under the provisions of this Section (other than refunding Bonds) shall be deposited with the Trustee in a special fund appropriately designated and held in trust for the purpose of paying the costs for which such Additional Bonds were issued to finance except that any accrued interest received on the sale of such Additional Bonds and any amount authorized for the payment of interest during any period of acquisition and construction and for a reasonable period thereafter shall be deposited to the credit of the Bond Fund (i.e., in the designated subaccount therein). The proceeds of all refunding Bonds issued under the provisions of this Section shall be deposited with the Trustee in a special escrow account pledged solely to the payment of the principal of, premium, if any, and interest on the refunded Bonds, except that the accrued interest received on the sale of such Additional Bonds may be deposited instead in the Bond Fund. ARTICLE III REDEMPTION, PURCHASE AND REMARKETING Section 3.01. Redemption of Bonds. (a) Optional Redemption-Bonds in Weekly Rate Mode. While the Bonds bear interest at the Weekly Rate, the Bonds may be redeemed by the Issuer at the direction of the Company, in whole on any Business Day, or in part on any Interest Payment Date, or, if such Interest Payment Date is not a Business Day on the next succeeding Business Day, without premium, at the principal amount thereof with interest accrued to, but excluding, the redemption date; provided that any such redemption in part shall be in a minimum redemption amount of $100,000. (b) Optional Redemption-Bonds in One-year Rate Mode or Three-year Rate Mode. While the Bonds bear interest at either the One-year Rate or the Three-year Rate, the Bonds may be redeemed by the Issuer at the direction of the Company, in whole or in part on the final Interest Payment Date occurring during such One-year Rate Period or Three-year Rate Period, at a redemption price of par plus interest accrued to the date fixed for redemption. (c) Optional Redemption-Bonds in Fixed Rate Mode. While the Bonds bear interest at a Fixed Rate, the Bonds may be redeemed by the Issuer at the direction of the Company, in whole or in part at any time on and after the tenth anniversary date subsequent to the Conversion Date upon which the interest rate on the Bonds was converted to a Fixed Rate, at a redemption price of par plus interest accrued to the date fixed for redemption. NOTWITHSTANDING ANYTHING IN THIS INDENTURE TO THE CONTRARY, IN NO EVENT SHALL PROCEEDS OF THE LETTER OF CREDIT BE USED TO PAY THE REDEMPTION PRICE OF BONDS CALLED FOR REDEMPTION PURSUANT TO SECTIONS 3.01(a), 3.01(b) or 3.01(c). (d) Mandatory Sinking Fund Redemption. (i) The Bonds are subject to mandatory sinking fund redemption prior to their scheduled maturity, on September 1, 1997, and on each succeeding September 1 to and including September 1, 2010, or if any such date is not a Business Day, on the next succeeding Business Day, without premium, at a redemption price of the principal amount thereof with interest accrued to, but excluding, the redemption date, in the following principal amounts: Principal Year Amount 1997 $ 25,000 1998 25,000 1999 25,000 2000 50,000 2001 185,000 2002 205,000 2003 205,000 2004 225,000 2005 235,000 2006 245,000 2007 265,000 2008 275,000 2009 285,000 2010 (Maturity) 315,000 (ii) At its option, to be exercised on or before the 45th day next preceding any such sinking fund redemption date, the Issuer, or the Company on behalf of the Issuer, may: (x) deliver to the Trustee for cancellation Bonds in ny aggregate principal amount desired to be credited against the Issuer's sinking fund redemption obligations; or (y) instruct the Trustee, to credit against the Issuer's sinking fund redemption obligations any Bonds that prior to such date have been redeemed (otherwise than through the operation of the sinking fund) and canceled by the Trustee and not theretofore applied as a credit against any sinking fund redemption obligation. Each Bond so delivered or previously redeemed shall be credited by the Trustee at 100% of the principal amount thereof against the obligation of the Issuer on such sinking fund redemption dates. Any excess over such obligation shall be credited against future sinking fund redemption obligations in chronological order, and the principal amount of the Bonds to be redeemed by operation of the sinking fund shall be accordingly reduced. (e) Mandatory Redemption on Determination of Taxability. The Bonds are also subject to mandatory redemption at a redemption price equal to the principal amount thereof with interest to, but excluding, the redemption date in whole (or in part as provided below), without premium, on the first day of a month within 180 days after the Company receives written notice from a Bondholder or former Bondholder or the Trustee of a final determination by the Internal Revenue Service or a court of competent jurisdiction that the interest paid or to be paid on any Bond is or was includable in the gross income of the Bond's owner (other than an owner that is a "substantial user" of the Facility or a "related person" within the meaning of Section 147(a) of the Code) for federal income tax purposes (a "Determination of Taxability"), or if such date is not a Business Day, on the next succeeding Business Day. No such determination will be considered final unless the Bondholder or former Bondholder involved in the determination gives the Company, the Trustee, the Remarketing Agent and the Bank prompt written notice of the commencement of the proceedings resulting in the determination and offers the Company, subject to the Company's agreeing to pay all expenses of the proceeding and to indemnify the holder against all liabilities that might result from it, the opportunity to control the defense of the proceeding and either the Company does not agree within 30 days to pay the expenses, indemnify the holder and control the defense or the Company exhausts or chooses not to exhaust available procedures to contest or obtain review of the result of the proceedings. Fewer than all the Bonds may be redeemed if redemption of fewer than all would result in the interest payable on the Bonds remaining outstanding being not includable in the gross income for federal income tax purposes of any holder. If fewer than all Bonds are redeemed, the Remarketing Agent shall select the Bonds to be redeemed by lot as provided in Section 3.03 or by such other method acceptable to the Remarketing Agent as may be approved in an opinion of Bond Counsel. (f) Mandatory Redemption on Expiration or Termination of Letter of Credit Without Extension or Providing a Substitute Letter of Credit. The Bonds are subject to mandatory redemption, in whole without premium at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to, but not including, the redemption date, on the Interest Payment Date that next precedes by at least 14 days the stated expiration or termination date of the Letter of Credit or, if such Interest Payment Date is not a Business Day, on the next succeeding Business Day, unless by the 15th day prior to such Interest Payment Date the Company provides to the Trustee, and the Trustee has accepted, (1) evidence that such Letter of Credit has been extended or (2) a Substitute Letter of Credit to be effective on or prior to such Interest Payment Date. (g) Mandatory Redemption upon Failure of Remarketing Agent to Remarket Bonds. Bonds unable to be remarketed by the Remarketing Agent pursuant to Section 3.08 of this Indenture shall be subject to mandatory redemption at a redemption price equal to the principal amount thereof plus accrued and unpaid interest thereof to, but not including, the redemption date in the manner set forth in Section 3.08. Section 3.02. Redemption Date. The redemption date of Bonds to be redeemed pursuant to the optional redemption provisions in Section 3.01(a) through (c) shall be a date permitted by such clauses and specified by the Company in the notice delivered pursuant to the preceding Section. The redemption date for mandatory redemptions shall be as specified in Section 3.01(d) through (g), as the case may be, or determined by the Trustee consistently with the provisions thereof. Section 3.03. Selection of Bonds To Be Redeemed. Except as otherwise provided in this Section 3.03, if fewer than all the Bonds are to be redeemed, the Remarketing Agent shall select the Bonds to be redeemed by lot or such other method as it deems in its sole discretion to be fair and appropriate and shall notify the Trustee (which notice may be provided by telephone, immediately confirmed in writing by legible facsimile transmission, registered or certified mail, overnight express delivery, or other secure means), of the holders and denominations of Bonds to be redeemed. The Remarketing Agent shall make the selection from Bonds not previously called for redemption. In the event the Remarketing Agent fails to notify the Trustee of the Bonds to be redeemed on or before the 35th day prior to the redemption. day, the Trustee shall select Bonds for redemption from among the Outstanding Bonds as set forth below. The Trustee shall treat each holder of Bonds as the owner of one Bond for purposes of selection for redemption and shall select Bonds for redemption by lot (1) from among the holders of less than $1,000,000 in aggregate principal amount, provided that if there are no such holders, or if, after selection from among such holders such selection has not resulted in redemption of a sufficient amount of Bonds, then (2) from among the holders of $1,000,000 or more in aggregate principal amount of Bonds. In the event the Trustee selects Bonds for redemption, the Trustee shall, on or before the day on which notice of redemption is mailed to the holders, give telephonic notice to the Remarketing Agent of the Bonds selected for redemption and the name of the holder or holders thereof. No portion of a Bond may be redeemed that would result in a Bond that is smaller than the then permitted minimum Authorized Denomination. For this purpose, the Remarketing Agent or the Trustee shall consider each Bond in a denomination larger than the minimum denomination permitted by the Bonds at the time to be separate Bonds each in the minimum denomination. Provisions of this Indenture that apply to Bonds called for redemption also apply to portions of Bonds called for redemption. Notwithstanding anything to the contrary in this Indenture, there shall be no redemption of less than all of the Bonds if there shall have occurred and be continuing an Event of Default. Section 3.04. Notice to Trustee; Notice of Redemption. (a) If the Company wishes that any Bonds be redeemed pursuant to the optional redemption provisions in Section 3.01(a) through (c) hereof, the Company shall notify the Trustee, the Trustee, the Bank and the Remarketing Agent in writing of the applicable provision, the redemption date, the principal amount of Bonds to be redeemed and other necessary particulars. The Company shall give such notices at least 40 days before the redemption date. (b) For Bonds being redeemed pursuant to Subsections (a) through (e) of Section 3.01, the Trustee shall prepare and send notice of each redemption to each Bondholder whose Bonds are being redeemed, the Company, the Remarketing Agent and the Bank by first-class mail at least 30 days but not more than 60 days before each redemption. If the Bonds are being held under a book-entry system administered by DTC and less than all of the Bonds are called for redemption, the Remarketing Agent shall notify the Trustee of the names and addresses of the Beneficial Owners of the Bonds selected for redemption pursuant to Section 3.03, and the Trustee shall prepare and send notice of such redemption to each such Beneficial owner at the time and in the manner provided in this Section 3.04(b). The notice shall identify the Bonds or portions thereof to be redeemed and shall state (i) the type of redemption and the redemption date, (ii) the redemption price, (iii) that the Bonds called for redemption must be surrendered to collect the redemption price, (iv) the address at which the Bonds must be surrendered, (v) that interest on the Bonds called for redemption ceases to accrue on the redemption date, (vi) the CUSIP number of the Bonds and (vii) any condition to the redemption. The procedure for redemption of Bonds pursuant to 3.01(f) shall be identical except that notice shall be sent at least 7 days before each redemption. The procedure for redemption of Bonds pursuant to 3.01(g) shall be as set forth in Section 3.08 of this Indenture. With respect to any Bonds to be redeemed that have not been presented for redemption within 60 days after the redemption date, the Trustee, at the expense of the Company, shall prepare and the Trustee shall give a second notice of redemption to the holder of any such Bonds that have not been presented for redemption, by first-class mail, within 30 days of the end of such 60-day period. Failure by the Trustee to give any notice of redemption as to any particular Bonds will not affect the validity of the call for redemption of any Bonds in respect of which no such failure has occurred. Any notice mailed as provided in the Bonds will be conclusively presumed to have been given whether or not actually received by any holder. Section 3.05. Payment of Bonds Called for Redemption. Upon surrender to the Trustee, Bonds called for redemption shall be paid as provided in this Article at the redemption price provided for in this Article. On the date fixed for redemption, notice having been given in the manner and under the conditions hereinabove provided, the Bonds or portions thereof called for redemption shall be due and payable at the redemption price provided therefor, plus accrued interest to such date. On such redemption date, if moneys sufficient to pay the redemption price of the Bonds to be redeemed, plus accrued interest thereon to the date fixed for redemption, are held by the Trustee, interest on the Bonds called for redemption shall cease to accrue; such Bonds shall cease to be entitled to any benefits or security under this Indenture or to be deemed outstanding; and the holders of such Bonds shall have no rights in respect thereof except to receive payment of the redemption price thereof, plus accrued interest to the date of redemption. Section 3.06. Bonds Redeemed in Part. Upon surrender of a Bond redeemed in part, the Trustee shall authenticate for the holder a new Bond or Bonds equal in principal amount to the unredeemed portion of the Bond surrendered. Section 3.07. Other Redemption; Purchase of Bonds. (a) Mandatory Repurchase of Bonds; Notice. Except as provided in Section 3.07(e), Bonds are subject to mandatory repurchase as follows: (i) on the effective date of any Substitute Letter of Credit delivered pursuant to Section 5.03, if, but only if, such Substitute Letter of Credit will result in a Credit Modification, at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to but not including the date of purchase; and (ii) on any Interest Payment Date selected by the Company, or if such Interest Payment Date is not a Business Day, on the next succeeding Business Day, at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to but not including the date of purchase; provided that any such mandatory repurchase, except as provided in Section 9.12 hereof, shall be subject to the prior written consent of the Bank; and The Trustee shall prepare and send to the holders of Bonds subject to mandatory repurchase, and to the Remarketing Agent, the Bank and the Company, a Notice of Mandatory Repurchase at least 15 days but not more than 60 days before the Mandatory Repurchase Date. Any Notice of Mandatory Repurchase shall be given by first-class mail and shall be substantially in the form attached hereto as Exhibit B. With respect to any Bonds to be purchased that have not been presented for purchase within 60 days after the Mandatory Repurchase Date, the Trustee, at the expense of the Company, prepare and send a second notice of purchase to the holder of any such Bonds, by first-class mail, within 30 days of the end of such 60-day period. (b) Optional Tender of Bonds. (i) Except as provided in Section 3.07(e), while the Bonds bear interest at the Weekly Rate, the holder (or while the Bonds are held pursuant to a book-entry system, the Beneficial Owner) of any Bond may elect to tender such Bond (or portion thereof, provided that each of the portion to be purchased and the portion to be retained is in an Authorized Denomination) for purchase at a purchase price equal to 100% of the principal amount of such Bond (or portion thereof), plus accrued and unpaid interest thereon to but not including the date of purchase, on any Business Day (the "Optional Tender Date"), but only upon (A) receipt by the Remarketing Agent by not later than 11:00 a.m. at least seven calendar days or five Business Days, whichever may be earlier, but not more than 30 days, prior to such Optional Tender Date of telephonic (followed, if requested by the Remarketing Agent, by written or facsimile confirmation delivered to the Remarketing Agent no later than the close of business on the next succeeding Business Day) or other notice stating (x) the principal amount of the Bond (or portion thereof) to be tendered, (y) the Bond number or other identification satisfactory to the Remarketing Agent, and (z) the Optional Tender Date on which such Bond will be tendered; and (B) if the Bonds are not being held under a book-entry system, delivery of such Bond (with an appropriate instrument of transfer duly executed in blank) to the Trustee by 10:00 a.m. on such Optional Tender Date. (ii) Any notice of optional tender for purchase delivered pursuant to subpart (i) above shall be irrevocable and shall be binding on the holder giving or delivering such notice and on any transferee of such holder. (iii) Upon receipt by the Remarketing Agent of a notice of optional tender for purchase pursuant to subparagraph (i) above, the Remarketing Agent shall give prompt telephonic notice thereof to the Trustee. (c) Payment for Purchased Bonds. To the extent that sufficient moneys have been made available therefor to the Trustee by 3:30 p.m. on the purchase date pursuant to Sections 3.08 and 5.02, upon surrender to the Trustee of Bonds optionally tendered or called for mandatory repurchase as provided herein, the purchase price therefor (as provided in this Section) shall be paid in immediately available funds by the Trustee not later than the close of business on the purchase date. From and after the Mandatory Repurchase Date or Optional Tender Date, as applicable, or, if later, the date on which such moneys are made available to the Trustee, interest accruing on such Bonds shall cease to be payable to the prior holder thereof, such Bonds shall cease to be entitled to the benefits or security of this Indenture and to such extent the prior holder shall have recourse solely to the funds held by the Trustee for the purchase of such Bonds as provided in Section 4.06. (d) Bonds Purchased in Part. Upon surrender of a Bond purchased in part and receipt by the Trustee thereof, the Trustee shall authenticate and deliver to the surrendering holder a new Bond equal in principal amount to the unpurchased portion of the Bond surrendered. (e) Limitations on Tenders. (i) The holders shall not have the right or be required, as the case may be, to tender any Bond for purchase on an Optional Tender Date or a Mandatory Repurchase Date if on such date, following the occurrence of an Event of Default, the Trustee shall have declared the principal of and interest on the Bonds to be immediately due and payable pursuant to Section 8.02. (ii) Notwithstanding the provisions of Section 3.07(b), holders of Bonds called for redemption or mandatory repurchase shall not have the right (without the prior consent of the Remarketing Agent) to tender such Bonds for purchase on an Optional Tender Date if such Optional Tender Date will occur on or after the 10th day prior to the date fixed for redemption or mandatory repurchase. Notwithstanding the foregoing, holders of Bonds called for redemption shall not have the right in any event to tender such Bonds for purchase on an Optional Tender Date if such Optional Tender Date will occur on or after the second day prior to the date fixed for redemption. Section 3.08. Remarketing of Purchased Bonds. (a) Bonds To Be Remarketed. Bonds purchased pursuant to optional tender or mandatory repurchase shall be remarketed by the Remarketing Agent as provided in this Section except an follows: (i) Bonds purchased pursuant to an optional tender or a mandatory repurchase and as to which the Remarketing Agent has received a notice of redemption may be remarketed before the date fixed for redemption only if the purchaser receives prior to purchasing such Bond a notice that such Bond is subject to redemption on the date fixed for redemption, notwithstanding the fact that such notice of redemption may be sent to such purchaser after the time period mentioned in Section 3.04(b). (ii) The Remarketing Agent shall not be required to offer Bonds for sale under this Section (1) during the continuance of an Event of Default, (2) following receipt of notice from the Internal Revenue Service, a Bondholder or former Bondholder, the Company, the Trustee of an Event of Taxability or a Determination of Taxability or (3) as otherwise provided in the Remarketing Agreement. (iii) Bonds purchased pursuant to an optional tender and as to which the Remarketing Agent has received a Notice of Mandatory Repurchase may be remarketed before the Mandatory Repurchase Date only if the purchaser receives a copy of the Notice of Mandatory Repurchase prior to purchasing such Bond. (iv) When a Letter of Credit is in effect, the Remarketing Agent shall not knowingly remarket any Bonds to the Issuer or the Company or any partner or affiliate of either thereof pursuant to this Section 3.08 unless either (i) the entire purchase price is paid from Available Moneys or (ii) prior to such sale, the Trustee shall have received a written opinion of Bankruptcy Counsel to the effect that such purchase would not result in a preferential payment pursuant to the provisions of Section 547 of the Bankruptcy Code. (b) Remarketing Effort. Except as provided in (a) above or except to the extent the Company directs the Remarketing Agent not to do so, the Remarketing Agent shall use reasonable efforts to remarket on the purchase date all Bonds purchased pursuant to Section 3.07 and to the extent such purchased Bonds are not remarketed on the purchase date, shall notify the Trustee in the manner provided below. Bonds not remarketed shall be subject to mandatory redemption as provided in Section 3.01(g). As early as practicable but not later than 10:00 a.m. on each Business Day on which the Remarketing Agent is required to remarket Bonds pursuant to this Section 3.08, the Remarketing Agent shall (A) notify the Trustee by telephone, with such notice promptly confirmed in writing, of (i) the amount of Bonds that have been remarketed and which have not been remarketed, (ii) the amount of proceeds from such remarketing and the amount needed to redeem the Bonds which have not been remarketed, and (iii) the information to enable the Trustee to prepare new Bond certificates with respect to Bonds that were remarketed and (B) transfer to the Trustee the proceeds from such remarketing as provided in (c) below. The Trustee shall immediately notify the Company by telephone, with such notice promptly confirmed in writing, of the amount of such proceeds and the Trustee shall take action as set forth in Section 5.02(a). If the Trustee fails to receive such notice from the Remarketing Agent by 10:00 a.m., the Trustee shall immediately the Company of the principal amount of all Bonds to be remarketed and/or redeemed on such date and the Trustee shall take action as set forth in Section 5.02(a). (c) Remarketing Proceeds. To the extent the Remarketing Agent has remarketed Bonds and has received funds representing a payment for such Bonds (the "Remarketing Proceeds") from the purchasers thereof, the Remarketing Agent shall promptly, but in no event later than 10:30 a.m. forward the Remarketing Proceeds by wire transfer (or in such other manner as is acceptable to the Remarketing Agent and the Trustee) to the Trustee with notice. All such Remarketing Proceeds shall be deposited in a separate, segregated account of the Bond Fund for application in accordance with the provisions of Section 3.08 and Article IV hereof and, until so applied, shall be held in trust for the benefit of the holders tendering such Bonds for purchase. (d) Delivery of Purchased Bonds. Bonds purchased pursuant to Section 3.07 shall be delivered to the purchasers thereof upon receipt of payment therefor. Prior to such delivery the Trustee shall provide for registration of transfer to the Holders, as provided in a written notice from the Remarketing Agent; and Section 3.09. Authority for and Conditions to Conversion of Interest Rate. The interest rate borne on the Bonds shall be converted to an interest rate of in a different interest rate mode upon receipt by the Trustee, the Remarketing Agent, the Bank of a direction from the Issuer, given at the direction of the Company, specifying the date new interest rate mode shall be determined (which date shall not be less than five Business Days prior to the effective date thereof), the resulting interest rate mode (i.e., Weekly Rate, One-year Rate, Three-year Rate or Fixed Rate) and the effective date thereof (which shall be a Business Day not less than 45 days from the date the Company gives such direction). Such request and direction shall be accompanied by an opinion of counsel, which counsel shall be acceptable to the Trustee, addressed to the Trustee, the Company, the Bank and the Remarketing Agent, stating that such conversion is authorized or permitted by the Indenture, and that conversion to the new interest rate mode is in accordance with the provisions of the Indenture and will not adversely affect the exclusion from gross income for federal income tax purposes of interest on the Bonds. Conversion to a new interest rate mode shall not occur without such opinion. Upon the date stated in such directions as the date the new interest rate mode shall be determined, the Remarketing Agent shall determine the Weekly Rate, One-year Rate, Three-year Rate or Fixed Rate, which shall be the rate or rates which, if borne by the Bonds, would, based on prevailing financial market conditions, be the interest rate or rates necessary, but would not exceed the interest rate or rates necessary, to enable each maturity of the Bonds to be remarketed at 100% of the principal amount thereof. NOTWITHSTANDING ANYTHING IN THIS INDENTURE OR IN THE BONDS CONTRARY, IN THE EVENT THE INTEREST RATE ON THE BONDS IS CONVERTED TO A FIXED RATE, NO FURTHER CONVERSIONS WILL BE PERMITTED OR AUTHORIZED UNDER THIS INDENTURE. Section 3.10. Notice to Owners of Conversion to New Interest Rate Mode. The Trustee shall give notice to the Remarketing Agent and by first class mail, postage prepaid, to the Owners of Bonds not less than 30 days prior to the effective date of conversion to the new interest rate mode. Such notice shall state (i) that the interest rate on the Bonds will be converted to a new interest rate mode, (ii) whether the new interest rate mode is the Weekly Rate, One-year Rate, Three-year Rate or the Fixed Rate, (iii) the effective date of conversion to the new interest rate mode, (iv) the date the new interest rate mode is to be determined and the procedure for notifying Owners of the new interest rate mode, (v) the dates upon which interest on the Bonds will be payable after the effective date of the new interest rate mode, (vi) that after conversion to a Fixed Rate, if applicable the Owners of the Bonds will no longer have the right to deliver the Bonds to the Remarketing Agent for purchase, and (vii) that all Outstanding Bonds not purchased prior to the effective date will be purchased on the effective date of the new interest rate mode, except Bonds with respect to which the Owner has directed the Company not to purchase in accordance with Section _____ hereof. Section 3.11. Notification of Interest Rate; Replacement Bonds. Upon determining the interest rate to be borne under the new interest rate mode, the Remarketing Agent shall provide notice of such rate to the Trustee by telephone, with written confirmation in writing and the Trustee shall give notice by first class mail, postage prepaid to the owners of the Bonds which shall set forth such interest rate. In connection with the conversion of the interest rate to a Fixed Rate, the Trustee, at the direction of the Company shall deliver replacement Bonds bearing the Fixed Rate with deletion of such terms as are no longer applicable. Any such replacement Bonds shall be executed and authenticated as provided herein. In the event that definitive Bonds are not available for delivery, temporary replacement Bonds may be delivered as provided herein. Section 3.12. Certain Provisions of Bonds and Indenture Inapplicable After Conversion to Fixed Rate. The day after the effective date of conversion to the Fixed Rate, the Bonds shall no longer be subject to those provisions of the Indenture or the Bonds relating to computation of interest rate, remarketing of Bonds, optional tender of the Bonds, mandatory repurchase of the Bonds, or any provisions relating to the conversion of the interest rate on the Bonds. Additionally, following conversion to the Fixed Rate, all references herein to the Remarketing Agent shall be of no further effect. Section 3.13. Interest on Bonds After Conversion to Fixed Rate. Following conversion to a One-year Rate, a Three-year Rate, or a Fixed Rate, the Bonds shall bear interest at such interest rate, payable each March 1 and September 1, commencing on the first March 1 or September 1 following such conversion. The amount of interest payable on any Interest Payment Date shall be computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, whichever may be applicable. ARTICLE IV PAYMENT OF BONDS AND CREATION OF FUNDS Section 4.01. Payment of Bonds. The Trustee shall make payments when due of principal of and interest on Bonds (including upon the redemption of the Bonds as described in Article III hereof) and the purchase price of Bonds purchased pursuant to an optional tender or a mandatory repurchase: (a) first, (but only with respect to payments of purchase price) from the available proceeds of the remarketing of Bonds under Section 3.08, excluding any remarketing to the Issuer, the Company or affiliate of either thereof unless the proceeds thereof constitute Available Moneys; (b) second, from any other Available Moneys held by the Trustee in the Bond Fund; and (c) third, from moneys drawn by the Trustee under the Letter of Credit and deposited in the Bond Fund; (d) last, from any other moneys available to the Trustee. The proceeds of investments of any moneys in any of these categories may be used to the same extent as the moneys invested could be used. Section 4.02. Creation of Bond Fund. There is hereby created by the Issuer and ordered established with the Trustee a trust fund to be designated "County of Perry/New Lexington Health Care Corp.: Bond Fund." The money and securities in such fund shall be held in trust by the Trustee and applied as herein provided and, until such application, the money and securities in such Fund shall be subject to a lien and charge in favor of the Bondholders. Section 4.03. Payments into Bond Fund. There shall be deposited into the Bond Fund, as and when received: (a) all moneys received from a drawing under the Letter of Credit; (b) all payments specified in section 4.1 of the Agreement; and (c) all other moneys received by the Trustee under and pursuant to any of the provisions of the Agreement (other than Sections 4.1(b) and 5.6 thereof) that are required or that are accompanied by directions that such moneys are to be paid into the Bond Fund. To the extent that moneys described in (a), (b) or (c) above would not constitute Available Moneys at the time of such deposit, the Trustee shall create separate subaccounts in the Bond Fund in which moneys described in each of such (a), (b) and (c) above shall be held until such moneys constitute Available Moneys. The Trustee shall create a separate subaccount in the Bond Fund for, and shall not commingle moneys described in Section 4.01(a) with, any other moneys hereunder. So long as any of the Bonds issued hereunder are Outstanding the Issuer shall deposit, or cause to be paid to the Trustee for deposit in the Bond Fund for its account, sufficient sums from the amounts derived from the Agreement promptly to pay when due the principal of all Bonds (whether at maturity, upon redemption or acceleration or otherwise), interest on the Bonds and the purchase price of the Bonds as the same become due and payable, except that all payments shall be limited as provided in Section 2.01 and the Issuer makes no representation or warranty that the amount deposited will be adequate to make all payments when due. Section 4.04. Use of Moneys in Bond Fund. Except as provided in Section 4.06, moneys in the Bond Fund shall be used solely for the payment of the principal of and interest on the Bonds as the same shall become due and payable whether at maturity, upon redemption or otherwise and for the purchase price of the Bonds as the same shall become due, and the Trustee shall make such payment in accordance with the provisions of the Bonds and this Indenture; provided, however, that to the extent such principal, interest or purchase price is paid with proceeds of a drawing under the Letter of Credit and the Parent does not reimburse the Bank directly, the Trustee shall promptly reimburse the Bank from funds on deposit in the Bond Fund (other than Remarketing Proceeds or proceeds from a drawing on the Letter of Credit). Section 4.05. Custody of Bond Fund. The Bond Fund shall be held in the custody of the Trustee but in the name of the Issuer. The Issuer hereby authorizes and directs (a) the Trustee to withdraw sufficient funds from the Bond Fund to pay the principal of, interest on and the purchase price of the Bonds as the same become due and payable, and to withdraw from the Bond Fund funds sufficient to pay any other amounts payable therefrom as the same become due and payable; provided however, that to the extent such principal, interest or purchase price is paid with proceeds of a drawing under the Letter of Credit and the Parent does not reimburse the Bank directly, the Trustee shall promptly reimburse the Bank from funds on deposit in the Bond Fund other than Remarketing Proceeds to be paid to former holders or proceeds from a drawing on the Letter of Credit. Section 4.06. Moneys To Be Held in Trust. All money that the Trustee shall have withdrawn from the Bond Fund or shall have received from any other source and set aside for the purpose of paying any of the Bonds hereby secured, either at the maturity thereof or by purchase (other than as provided in Section 3.08 hereof) or call for redemption or for the purpose of paying any interest on the Bonds hereby secured, shall be held in trust by the Trustee for the respective Holders. Moneys received by the Remarketing Agent or Trustee from the sale of a Bond under Section 3.08 or from the purchase of any Bond shall be held segregated from other funds held by the Remarketing Agent or Trustee in trust for the benefit of the person from whom such Bond was purchased and shall not be invested while so held. Any money that is so set aside or transferred and that remains unclaimed by the Holders for the escheat period provided by State law shall be treated as abandoned property, and the Trustee shall report and remit this property according to the requirements of State law and thereafter the Holders shall look only to the appropriate State agency or official for payment and then only to the extent of the amounts so received, without any interest thereon, and the Trustee and the Issuer shall have no responsibility with respect to such money. Section 4.07. Payment to Company From Bond Fund. After payment in full of the principal of and interest on the outstanding Bonds, the fees, charges and expenses of the Issuer, the Trustee, the Remarketing Agent and the Bank (including without limitation the fees and expenses of their respective counsel) and all other amounts required to be paid hereunder, including payments of rebatable arbitrage, any amounts remaining in the Bond Fund shall be paid immediately to the Company. Section 4.08. Investment of Moneys. To the extent permitted by law, the Trustee shall invest and reinvest moneys held by it representing proceeds of drawings under the Letter of Credit and Available Moneys on deposit in the Bond Fund only in U.S. Government obligations (or in a mutual fund composed solely of U.S. Government Obligations) maturing at such times as such amounts will be needed for the purposes thereof. Unclaimed moneys held by the Trustee under Section 4.06 shall be held uninvested by the Trustee. The Trustee may make investments permitted by this Article through or from their own bond departments or the bond departments of any bank or trust company under common control with the Trustee. Investments shall be registered in the name of the Trustee, or its nominee and held by or under the control of the Trustee. The Trustee shall sell and reduce to cash a sufficient amount of investments whenever the cash held by them is insufficient. The Issuer represents that it will take no action that would cause moneys held by the Trustee in connection with the Bonds to be used in a manner that would cause the Bonds to be classified as "arbitrage bonds" within the meaning of Section 148 of the Code. ARTICLE V LETTER OF CREDIT Section 5.01. Requirements for Letter of Credit. In order to secure its obligations under the Agreement, pursuant to Section 4.7 of the Financing Agreement, the Company has agreed (a) upon the initial authentication and delivery of the Bonds, to deliver to the Trustee the Letter of Credit, issued by the Bank in favor of the Trustee and for the benefit of the holders of the Bonds; and (b) to ensure that so long as any Bonds remain outstanding, a Letter of Credit shall be in effect with respect to such Bonds with terms substantially conforming to those of the original Letter of Credit. Section 5.02. Draws on Letter of Credit; Extensions. (a) The Trustee shall make timely draws in accordance with the Letter of Credit such that timely payment under Section 4.01 is made without resort to the sources of payment described in Subsections (c) and (d) of Section 4.01. Such draws shall be in amounts equal to the total principal and interest due on redemption price, or purchase price payable with respect to, the Bonds, less the amounts (if any) available under Subsection (a) of Section 4.01. If any such draws are made on a Mandatory Repurchase Date in connection with the delivery of a Substitute Letter of Credit, such draws shall be made under the existing Letter of Credit and not on the Substitute Letter of Credit. The Trustee shall make such draws in such a fashion as to be able to obtain by 3:15 p.m. and to make such payment when due in accordance with this Indenture and the Bonds. (b) In drawing on the Letter of Credit, the Trustee will be acting on behalf of the Bondholders by facilitating payment of the Bonds and not on behalf of the Issuer or Company and shall not be subject to the control of either. Proceeds of draws on the Letter of Credit shall be held in the Bond Fund. (c) The Trustee shall advise the Company and the Parent by telecopy or telex on the date of each draw on the Letter of Credit of the amount and date of such draw and of the reason for such draw. (d) For extensions of the term of the Letter of Credit, the Trustee shall, at the direction of a Company Representative, but only if required to evidence an extension of the term of the Letter of Credit, surrender the Letter of Credit to the Bank in exchange for a new Letter of Credit of the Bank or the Letter of Credit with notations thereon, as the Bank may so elect, conforming in all material respects to the Letter of Credit except that the expiration date shall be extended. Any such extension shall be for a period of at least one year or, if less, until the 15th day following the maturity date of the Bonds. Section 5.03. Substitute Letter of Credit. (a) At any time while a Letter of Credit is in effect with respect to the Bonds, upon at least 60 days' prior written notice to the Trustee and the Remarketing Agent, the Company may, subject to the approval of the Remarketing Agent, provide for the delivery to the Trustee of a substitute Letter of Credit complying with the provisions of this Indenture (the "Substitute Letter of Credit"), which shall be effective upon acceptance by the Trustee. Any Substitute Letter of Credit shall have a stated expiration date of at least one year following the effective date thereof. (b) On or before the date of delivery of any Substitute Letter of Credit to the Trustee, as a condition to the acceptance by the Trustee of such Substitute Letter of Credit, the Company shall furnish to the Trustee: An opinion of Counsel addressed to the Trustee to the effect that (A) the Substitute Letter of Credit is the valid and binding obligation of the issuer thereof enforceable against such issuer in accordance with its terms except insofar as its enforceability may be limited by any insolvency or similar proceedings applicable to the issuer or by proceedings affecting generally the rights of the issuer's creditors or by general equitable principles; (B) payments of principal, interest or purchase price on the Bonds from the proceeds of a draw on the Substitute Letter of Credit will not constitute avoidable preferences under any applicable bankruptcy, reorganization, insolvency or other similar laws; and (C) the Substitute Letter of Credit does not constitute a separate security requiring registration under any applicable federal or state securities laws. In the case of a Substitute Letter of Credit issued by a branch or agency of a foreign commercial bank, there shall also be delivered an opinion of Counsel from a firm licensed to practice law in the jurisdiction in which the head office of such bank is located, addressed to the Trustee, to the effect that the Substitute Letter of Credit is the valid and binding obligation of such bank, enforceable against such bank in accordance with its terms, subject to the limitations referred to in Section 5.03(b)(i)(A) above; (ii) written evidence that the issuer of the Substitute Letter of Credit meets the requirements for an issuer of a Letter of Credit as set forth in the definition of Letter of Credit; (iii) an opinion of Bond Counsel addressed to the Trustee to the effect that the delivery and acceptance of such Substitute Letter of Credit is authorized under this Indenture and its delivery and acceptance will not adversely affect the exclusion from gross income of the interest on the Bonds for federal income tax purposes; (iv) written approval by the Remarketing Agent of the delivery of the Substitute Letter of Credit; and (v) a letter from each Rating Agency or, in the event the Bonds are not then rated, other written evidence satisfactory to the Trustee and the Remarketing Agent, stating whether or not the acceptance of the Substitute Letter of Credit will result in a Credit Modification. The Trustee shall accept any such Substitute Letter of Credit only in accordance with the terms, and upon satisfaction of the conditions, contained in this Section and any other applicable provisions of this Indenture. If acceptance of the Substitute Letter of Credit results in the occurrence of a Mandatory Repurchase Date, the Trustee shall not terminate or surrender the Letter of Credit until the Trustee shall have made such drawings thereunder, if any, as shall be required under the Indenture to provide for payment of the purchase price of the Bonds, and shall have received the proceeds of such drawing from the Bank. (c) Not more than 60 days and not less than 15 days prior to the effective date of the Substitute Letter of Credit, the Trustee shall, in addition to the notice required by Section 12.01(b), send by registered or certified mail, to each holder of the Bonds, notice of the issuance of the Substitute Letter of Credit, which notice shall include (i) the identity of the issuer thereof, (ii) the date the Substitute Letter of Credit will be effective, (iii) whether the Substitute Letter of Credit will result in a Credit Modification and (iv) if applicable, notice pursuant to Section 3.07 that the Bonds are subject to mandatory repurchase pursuant to Section 3.07. Section 5.04. Enforcement of the Letter of Credit. The Trustee shall hold and maintain the Letter of Credit for the benefit of the Owners of the Bonds until the Letter of Credit terminates or expires in accordance with its terms. When the Letter of Credit terminates or expires in accordance with its terms, the Trustee shall immediately surrender it to the Bank. Except in the case of a redemption in part pursuant to Article III hereof or any other reduction in the principal amount of Bonds outstanding, the Trustee shall not request that the Bank reduce the amount of the Letter of Credit. If at any time, all Bonds shall cease to be outstanding, the Trustee shall surrender the Letter of Credit to the Bank in accordance with the terms thereof. If at any time the Bank fails to honor a draft presented under the Letter of Credit in conformity with the terms thereof, the Trustee shall give immediate telephonic notice thereof to the Remarketing Agent and the Company. ARTICLE VI COVENANTS Section 6.01. Payment of Bonds. The Issuer shall promptly pay, or cause to be paid, the principal of, whether at maturity, by acceleration, call for redemption, or otherwise, and purchase price and interest on the Bonds, to the Trustee for payment to the registered owners of the Bonds on the dates and in the manner provided herein authorizing the issuance thereof and in the Bonds, according to the true intent and meaning thereof, but subject to the limitations set forth in Section 2.01(a) hereof. Section 6.02. Covenants and Representations of Issuer. The Issuer shall observe and perform all covenants, conditions and agreements on its part contained in this Indenture, in every Bond executed, authenticated and delivered hereunder and in all of its proceedings pertaining thereto; provided, however, that the liability of the Issuer under any such covenant, condition or agreement for any breach or default by the Issuer thereof or thereunder shall be limited solely to the Receipts and Revenues of the Issuer from the Agreement. The Issuer represents that it is duly authorized under the Constitution and laws of the State, including particularly and without limitation the Act, to issue the Bonds authorized by this Indenture and to execute this Indenture, to assign the Financing Agreement and the Note and to pledge the Receipts and Revenues of the Issuer from the Agreement in the manner and to the extent herein set forth; that all action on its part with respect to the issuance of the Bonds and the execution and delivery of this Indenture duly and effectively has been taken; and that the Bonds in the hands of the owners thereof are and will be valid and enforceable limited obligations of the Issuer according to the terms thereof except as limited by bankruptcy and usual equity principles. Section 6.03. Further Assurances. The Issuer shall execute and deliver such supplemental indentures and such further instruments, and do such further acts, as the Trustee may reasonably require for the better assuring, assigning and confirming to the Trustee the amounts assigned under this Indenture for the payment of the Bonds. ARTICLE VII DISCHARGE OF INDENTURE Section 7.01. Bonds Deemed Paid; Discharge of Indenture. All Bonds shall be deemed paid for all purposes of this Indenture when (a) payment of the greater of the principal of and the maximum amount of interest that may become due on the Bonds to the due date of such principal and interest (whether at maturity, upon redemption, acceleration or otherwise) and the payment of the purchase price of any Bond that may be optionally tendered by the owner either (i) has been made in accordance with the terms of Section 3.07(c) or (ii) has been provided for by depositing with the Trustee (A) moneys sufficient to make such payment, which moneys must comply with the provisions of Section 4.01(b) or (c) and/or (B) noncallable U.S. Government Obligations maturing as to principal and interest in such amounts and at such times as will insure the availability of sufficient moneys to make such payment without regard to the reinvestment thereof, provided that (i) such U.S. Government Obligations must be purchased from Available Moneys and (ii) the Trustee shall have received written evidence from each Rating Agency, if any, rating the Bonds that as a result of such action, their rating on the Bonds will not be lowered or eliminated; and (b) all compensation and expenses of the Issuer and the Trustee (as well as the fees and expenses of their Counsel) pertaining to each Bond in respect of which such payment or deposit is made have been paid or provided for to the respective satisfaction of the Trustee. When a Bond is deemed paid, it shall no longer be secured by or entitled to the benefits of this Indenture, except for payment from moneys or U.S. Government Obligations under (a)(ii) above and except that it may be optionally tendered if and as provided in Section 3.07(b) and it may be transferred, exchanged, registered, discharged from registration or replaced as provided in Article II. Notwithstanding the foregoing, no deposit under (a)(ii) above made for the purpose of paying the redemption price of a Bond (as opposed to the final payment thereof upon maturity) will be deemed a payment of a Bond as aforesaid until (x) notice of redemption of the Bond is given in accordance with Article III or, if the Bond is not to be redeemed within the next 60 days, until the Company has given the Trustee, in form satisfactory to the Trustee, irrevocable instructions to notify, as soon as practicable, the holder of the Bond, in accordance with Article III, that the deposit required by (a)(ii) above has been made with the Trustee and that the Bond is deemed to be paid under this Article and stating the redemption date upon which moneys are to be available for the payment of the principal of the Bond or (y) the maturity of the Bond. Additionally, and while the deposit under clause (a)(ii) above made for the purpose of paying the final payment of a Bond upon its maturity will be deemed a payment of such Bond as aforesaid, the Trustee shall mail notice to the Owner of such Bond, as soon as practicable, stating that the deposit required by (a)(ii) above has been made with the Trustee and that the Bond is deemed to be paid under this. Article. When all Outstanding Bonds are deemed paid under the foregoing provisions of this Section and other sums due hereunder, under the Agreement and the Remarketing Agreement are paid, the Trustee shall upon request acknowledge the discharge of the Issuer's obligations under this Indenture except for obligations relating to optional tender as provided in Section 3.07(b), obligations under Article II in respect of the transfer, exchange, registration, discharge from registration and replacement of Bonds, and obligations under Section 9.06 hereof with respect to the Trustee's compensation and indemnification, and the Trustee without further direction shall surrender the Letter of Credit to the Bank, in accordance with the terms of the Letter of Credit. Bonds delivered to the Trustee for payment shall be canceled by the Trustee pursuant to Section 2.07. A Company Representative shall direct the deposit, investment and use of the moneys and securities described in this Section such that no deposit will be made and no use made of any such deposit which would cause any Bonds to be treated as "arbitrage bonds" within the meaning of Section 148 of the Code. Before accepting or using any such deposit, the Trustee may request an opinion of Bond Counsel as to whether such use or acceptance would cause the Bonds to be so treated and that all conditions hereunder have been satisfied, and the Trustee may conclusively rely on such opinion with regard thereto. The Trustee may request a certificate of an independent certified public accountant to the effect that a deposit will be sufficient to defease the Bonds as provided in this Section 7.01. Upon receipt of any amount pursuant to this Article VII, the Trustee shall give written notice thereof, which notice shall include, without limitation, the amount of such deposit and any instructions given to the Trustee pursuant thereto, to the Remarketing Agent by first-class mail, postage prepaid. Section 7.02. Application of Trust Money. The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to the preceding Section and shall apply the deposited money and the money from the U.S. Government Obligations in accordance with this Indenture only to the payment of principal of, interest on, or purchase prince of, the Bonds. ARTICLE VIII DEFAULTS AND REMEDIES Section 8.01. Events of Default. Each of the following events shall be an Event of Default: (a) Default in the due and punctual payment of any interest on any Bond; (b) Default in the due and punctual payment of the principal of any Bond (whether at maturity, by acceleration or redemption, upon purchase or otherwise); (c) Subject to the provisions of Section 8.11, default in the observance or performance of any other of the covenants, conditions or agreements on the part of the Issuer under the Indenture or in the Bonds; (d) Receipt by the Trustee of notice from the Bank that an Event of Default has occurred under the Reimbursement Agreement accompanied by a demand by the Bank that the Trustee declare the Bonds to be immediately due and payable; or (e) The occurrence of an Event of Default under the Financing Agreement. Section 8.02. Acceleration and Duty to Draw on Letter of Credit. (a) Upon the occurrence of an Event of Default under Section 8.01(a), (b) or (d) hereof, the Trustee shall, by notice to the Issuer, the Holders, the Bank, the Remarketing Agent and the Company, declare the entire unpaid principal of and interest on the Bonds immediately due and payable and, thereupon, the entire unpaid principal of and interest on the Bonds shall forthwith become immediately due and payable. Upon the occurrence of any other Event of Default, the Trustee may and, if requested by the holders of 25% in aggregate principal amount of Bonds then Outstanding, shall, by notice to the Issuer, the Holders, the Bank, the Remarketing Agent and the Company, declare the entire unpaid principal of and interest on the Bonds immediately due and payable and, thereupon, the entire unpaid principal of and interest on the Bonds shall forthwith become due and payable; provided, however, that anything in this Article VIII to the contrary, so long as the Bank has honored all proper drawings under the Letter of Credit, without the prior written consent of the Bank, the Trustee shall not have the right to declare the principal of all Bonds and the interest accrued thereon to become immediately due and payable as a result of the occurrence.of an Event of Default under Section 8.01(c) or (e). Upon any such declaration the Issuer shall forthwith pay to the holders of the Bonds the entire unpaid principal of and accrued interest on the Bonds, but only from the revenues and receipts herein specifically pledged for such purpose. Upon the occurrence of an Event of Default specified in Section 8.01 and a declaration of acceleration hereunder, the Trustee as assignee of the Issuer shall immediately exercise its right under the Note and the Agreement to declare all installments on the Note to be immediately due and payable. In the event the Trustee fails to accelerate as required by this Section 8.02(a), the owners of a majority in aggregate principal amount of Bonds outstanding shall have the right to take such actions. (b) Upon the acceleration of the maturity of the Bonds, by declaration or otherwise, the Trustee shall immediately draw upon the Letter of Credit for the aggregate unpaid principal amount of the Bonds and all interest accrued thereon, which shall be applied immediately as set forth in Section 8.03. Upon such acceleration, interest on the Bonds shall cease to accrue as of the date of declaration of such acceleration. Section 8.03. Disposition of Amounts Drawn on Letter of Credit; Assignment of Rights to Contest. (a) All amounts drawn on the Letter of Credit by the Trustee in accordance with Section 8.02(b) shall be held by the Trustee in the Bond Fund (and invested in accordance with Section 4.08), shall be applied immediately to the payment of principal and interest accrued on the Bonds. (b) The Trustee hereby assigns to the Bank all its rights to contest or otherwise dispute in the Trustee's name, place and stead and at the Bank's sole election and cost any claim of preferential transfer made by a bankruptcy trustee, debtor-in-possession or other similar official with respect to any amount paid to the Trustee by or on behalf of the Company or the Issuer to be applied to principal of or interest on the Bonds, to the extent of payments made to the Trustee pursuant to a drawing under the Letter of Credit. The Trustee shall cooperate with and assist the Bank in any such contest or dispute as the Bank may reasonably request; provided, however, that the Bank shall reimburse the Trustee for its reasonable costs incurred in connection with providing such cooperation and assistance. The Trustee shall give the Bank prompt notice of any claim of preferential transfer of which the Trustee has knowledge. The foregoing assignment shall not be deemed to confer upon the Bank any right to contest or otherwise dispute any claim of preferential transfer with respect to any amount as to which there has been no drawing under the Letter of Credit. The assignment set forth above shall in no event be effective until the Bank shall have first furnished to the Trustee an agreement to indemnify the Trustee and the holders of the Bonds against any claim, liability or damage that they might suffer by reason of any such contest or dispute. Section 8.04. Other Remedies; Rights of Bondholders. Upon the occurrence of an Event of Default the Trustee, subject to the terms of this Indenture, may proceed to protect and enforce its rights and the rights of the Bondholders by mandamus or other suit, action or proceeding at law or in equity, including but not limited to an action for specific performance of any agreement herein contained or making a demand for payment from the Company and taking action pursuant to any other document to which the Trustee is a party. Upon the occurrence of an Event of Default, if requested to do so by the holders of 25% in aggregate principal amount of Bonds then outstanding and if indemnified as provided in Section 9.01(d), the Trustee, subject to the terms of this Indenture, shall exercise such one or more of the rights and powers conferred by this Article as the Trustee, upon being advised by counsel, shall deem most expedient in the interests of the Bondholders. No remedy conferred by this Indenture upon or reserved to the Trustee or to the Bondholders is intended to be exclusive of any other remedy, but each such remedy shall be cumulative and shall be in addition to any other remedy given to the Trustee or to the Bondholders hereunder or now or hereafter existing at law or in equity or by statute. No delay or omission to exercise any right or power accruing upon any default or Event of Default shall impair any such right or power or shall be construed to be a waiver of any such default or Event of Default or acquiescence therein, and every such right and power may be exercised from time to time and as often as may be deemed expedient. No waiver of any default or Event of Default hereunder, whether by the Trustee pursuant to Section 8.10 or by the Bondholders, shall extend to or shall affect any subsequent default or Event of Default or shall impair any rights or remedies consequent thereon. Section 8.05. Right of Bondholders To Direct Proceedings. Anything in this Indenture to the contrary notwithstanding, the holders of a majority in aggregate principal amount of Bonds then outstanding shall have the right, at any time, by an instrument or instruments in writing executed and delivered to the Trustee, to direct the method and place of conducting all proceedings to be taken in connection with the enforcement of the terms and conditions of this Indenture or for the appointment of a receiver or any other proceedings hereunder; provided, however, that such direction shall not be otherwise than in accordance with the provisions of law and of this Indenture. Section 8.06. Application of Moneys. All moneys received by the Trustee pursuant to any right given or action taken under the provisions of this Article shall, after payment of the cost and expenses of the proceedings resulting in the collection of such moneys and of the expenses, liabilities and advances incurred or made by the Trustee and the fees and expenses, if any, of the Issuer in carrying out this Indenture or the Agreement, be deposited in the Bond Fund; provided, however, that no proceeds from any draw on the Letter of Credit shall be used for any purpose other than payment of principal of and interest on the Bonds or purchase thereof. All moneys in the Bond Fund shall be applied as follows: (a) Unless the principal of all the Bonds shall have become of shall have been declared due and payable: First - To the payment to the persons entitled thereto of all installments of interest then due on the Bonds, in the order of the maturity of the installments of such interest and, if the amount available shall not be sufficient to pay in full any particular installment, then to the payment ratably, according to the amounts due on such installment, to the persons entitled thereto, without any discrimination or preference except as provided in Section 8.13 and as to any difference in the respective rates of interest specified in the Bonds; Second - To the payment to the persons entitled thereto of the unpaid principal of any of the Bonds which shall have become due (other than Bonds called for redemption for the payment of which moneys are held pursuant to the provisions of this Indenture), in the order of their due dates, with interest on such Bonds at the respective rates specified therein from the respective dates upon which they become due and, if the amount available shall not be sufficient to pay in full Bonds due on any particular date, together with such interest, then first to the payment of such interest ratably, according to the amount of such interest due on such date, and then to the amount of such principal, ratably, according to the amount of such principal due on such date, to the persons entitled thereto, without any discrimination or preference except as provided in Section 8.13 and as to any difference in the respective rates of interest specified in the Bonds; and Third - To the extent permitted by law, to the payment to the persons entitled thereto of the unpaid interest on overdue installments of interest ratably, according to the amounts of such interest due on such date, without any discrimination or preference except as provided in Section 8.13 and as to any difference in the respective rates of interest specified in the Bonds. (b) If the principal of all the Bonds shall have become due or shall have been declared due and payable, all such moneys shall be applied to the payment of the principal and interest then due and unpaid upon the Bonds, including to the extent permitted by law interest on overdue installments of interest, without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, or of any Bond over any other Bond, ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto, without any discrimination or privilege except as provided in Section 8.13. (c) If the principal of all the Bonds shall have been declared due and payable, and if such declaration shall thereafter have been rescinded and annulled under the provisions of this Article, then, subject to the provisions of subsection (b) of this Section in the event that the principal of all the Bonds shall later become due or be declared due and payable, the moneys shall be applied in accordance with the provisions of subsection (a) of this Section. (d) All amounts received by the Trustee from a draw upon the Letter of Credit shall be applied exclusively to the payment of principal of and interest on the Bonds. Whenever moneys are to be applied pursuant to the provisions of this section, such moneys shall be applied at such times and from time to time as the Trustee shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Trustee shall apply such moneys, it shall fix the date (which shall be an Interest Payment Date unless it shall deem another date more suitable) upon which such application is to be made. The Trustee shall give such notice as it may deem appropriate of the deposit with it of any such moneys and of the fixing of any such date, and shall not be required to make payment to the holder of any Bond until such Bond is presented to the Trustee for appropriate endorsement or for cancellation if fully paid. Whenever all principal of and interest on all Bonds have been paid under the provisions of this Section and all expenses and charges of the Trustee and the Issuer have been paid, and all obligations of the Company to the Bank pursuant to the Reimbursement Agreement have been paid in full the balance remaining in the Bond Fund shall be paid to the Company as provided in Section 4.07. Section 8.07. Remedies Vested in Trustee. All rights of action (including the right to file proof of claims) under this Indenture or under any of the Bonds may be enforced by the Trustee without the possession of any of the Bonds or the production thereof in any trial or other proceeding relating thereto and any such suit or proceeding instituted by the Trustee may be brought in its name as Trustee without the necessity of joining as plaintiffs or defendants any holders of the Bonds, and any recovery of judgment shall be for the equal benefit of the holders of the outstanding Bonds. Section 8.08. Limitations on Suits. Except to enforce the rights given under Sections 8.02(a), 8.05 and 8.12, no holder of any Bond shall have any right to institute any suit, action or proceeding in equity or at law for the enforcement of this Indenture or for the execution of any trust thereof or any other remedy hereunder, unless (a) a default has occurred of which the Trustee has been notified as provided in Section 9.05, or of which by such Section it is deemed to have notice, (b) such default shall have become an Event of Default and the holders of at least 25% in aggregate principal amount of Bonds then outstanding shall have made written request to the Trustee and shall have offered it reasonable opportunity either to proceed to exercise the powers hereinbefore granted or to institute such action, suit or proceeding in its own name, (c) such holders have offered to the Trustee indemnity as provided in Section 9.01(d), (d) the Trustee for 60 days after such notice shall fail or refuse to exercise the powers hereinbefore granted, or to institute such action, suit or proceeding in its own name or in the name of such holders, (e) no direction inconsistent with such request has been given to the Trustee during such 60 day period by the holders of a majority in aggregate principal amount of Bonds then outstanding, and (f) notice of such action, suit or proceeding is given to the Trustee; it being understood and intended that no one or more holders of the Bonds shall have any right in any manner whatsoever to affect, disturb or prejudice this Indenture by its, his or their action or to enforce any right hereunder except in the manner herein provided, and that all proceedings at law or in equity shall be instituted and maintained in the manner herein provided and for the equal benefit of the holders of all Bonds then outstanding. The notification, request and offer of indemnity set forth in the preceding paragraph, at the option of the Trustee, shall be conditions precedent to the execution of the powers and trusts in this Indenture and to any action or cause of action for the enforcement of this Indenture or for any other remedy hereunder. Section 8.09. Termination of Proceedings. In case the Trustee shall have proceeded to enforce any right under this Indenture by the appointment of a receiver, by entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason, or shall have been determined adversely, then.and in every such case the Issuer, the Company, the Bondholders and the Trustee shall be restored to their former positions and rights hereunder, and all rights, remedies and powers of the Trustee shall continue as if no such proceedings had been taken. Section 8.10. Waivers of Events of Default. The Trustee, with the written consent of the Bank, may waive any Event of Default hereunder and its consequences and rescind any declaration of maturity of principal of and interest on the Bonds and the Note, and shall do so with the consent of the Bank, upon the written request of the holders of (a) a majority in aggregate principal amount of Bonds then outstanding in respect of which default in the payment of principal and/or interest exists, or (b) a majority in aggregate principal amount of Bonds then outstanding in the case of any other default; provided, however, that: (1) there shall not be waived without the consent of the holders of all Bonds then outstanding: (A) any default in the payment of the principal of any outstanding Bonds when due (whether at maturity or by mandatory or optional redemption), or (B) any default in the payment when due of the interest on any such Bonds unless, prior to such waiver or rescission: (i) there shall have been paid or provided for all arrears of interest at the rate borne by the Bonds on overdue installments of principal, all arrears of payments of principal when due and all expenses of the Trustee in connection with such default, and (ii) in case of any such waiver or rescission, or in case of the discontinuance, abandonment or adverse determination of any proceeding taken by the Trustee on account of any such default, the Trustee and the Bondholders shall be restored to their respective former positions and rights hereunder; (2) no declaration of maturity under Section 8.02 made at the request of the holders of 25% in aggregate principal amount of Bonds then outstanding shall be rescinded unless requested by the holders of a majority in aggregate principal amount of Bonds then outstanding; and (3) unless the Trustee has received written evidence that the Letter of Credit is reinstated in full as to principal and interest, there shall be no waiver or rescission if the Letter of Credit shall have been drawn upon due to the occurrence of an Event of Default. No such waiver or rescission shall extend to any subsequent or other default, or impair any right consequent thereon. Section 8.11. Notice of Defaults; Opportunity of Company to Cure Defaults. Anything contained in this Indenture to the contrary notwithstanding, no default specified in Section 8.01(c) on the part of the Issuer shall constitute an Event of Default until (a) notice of such default shall be given (1) by the Trustee to the Issuer, the Bank and the Company or (2) by the holders of 25% in aggregate principal amount of Bonds then outstanding to the Trustee, the Issuer, the Bank and the Company, and (b) the Issuer and the Company shall have had 30 days after such notice to correct such default or cause such default to be corrected, and shall not have corrected such default or caused such default to be corrected within such period; provided, however, if any default specified in Section 8.01(c) shall be such that it cannot be corrected within such period, it shall not constitute an event of default if corrective action is instituted by the Issuer or the Company within such period and diligently pursued until such default is corrected; provided, further, that the period for corrective action shall not in any event extend more than 180 days after such notice to correct such default. With regard to any alleged default concerning which notice is given to the Company, the Company may, but is under no obligation to, perform any covenant, condition or agreement the nonperformance of which is alleged in such notice to constitute a default, in the name and stead of the Issuer with full power to do any and all things and acts to the same extent that the Issuer could do and perform any such things and acts with power of substitution. Section 8.12. Unconditional Right To Receive Principal and Interest. Nothing in this Indenture shall, however, affect or impair the right of any Bondholder to enforce, by action at law, payment of the principal or purchase price of or interest on any Bond at and after the maturity thereof, or on the date fixed for redemption or purchase or (subject to the provisions of Section 8.02) on the same being declared due prior to maturity as herein provided, or the obligation of the Issuer to pay the principal or purchase price of and interest on each of the Bonds issued hereunder to the respective holders thereof at the time, place, from the source and in the manner herein and in the Bonds expressed. Section 8.13. Bonds Outstanding. In the event the Bonds are held under a book entry system, the securities depositary shall provide the Trustee, upon request of the Trustee, the names, addresses and principal amount of the Beneficial Owners of the Bonds. Subject to the provisions of Section 8.14, such Beneficial Owners shall be treated in all respects as the holders of the Bonds for purposes of this Article, and the Trustee shall send notices to such Beneficial owners as required by this Article. Notwithstanding anything else in this Article to the contrary, Company Bonds shall not be deemed to be outstanding for purposes of this Article and the Company as holder thereof shall not be entitled to any rights or payments therefor pursuant to Sections 8.05, 8.06, 8.08 and 8.10. Section 8.14. Bank Deemed Holder. For all purposes of this Article VIII (other than receipt of payments), the Bank shall, so long as the Letter of Credit shall not have been dishonored (other than for a reason permitted by the Letter of Credit), be deemed the holder and registered owner of all Bonds. As such, the Bank may take all actions permitted by this Article VIII to be taken by the holders or Beneficial Owners of the Bonds, to the exclusion of the actual holders and Beneficial Owners of the Bonds; the purpose of this Section 8.14 being to permit the Bank to direct the taking of actions and enforcement of remedies permitted by this Article VIII so long as the Letter of Credit shall not have been dishonored (other than for a reason permitted by the Letter of Credit). ARTICLE IX TRUSTEE AND REMARKETING AGENT Section 9.01. Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise its rights and powers and use the same degree of care and skill in its exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (b) Except during the continuance of an Event of Default: (i) the Trustee need perform only those duties that are specifically set forth in this Indenture and no others and no implied covenants or obligations shall be read into this Indenture against the Trustee, and (ii) in the absence of bad faith, gross negligence or willful misconduct on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own grossly negligent action, its own grossly negligent failure to act or its own willful misconduct, except that: (i) this paragraph does not limit the effect of (b) above; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was grossly negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 8.05. (d) The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity reasonably satisfactory to it against any loss, liability or expense, but the Trustee may not require indemnity as a condition to declaring the principal of and interest on the Bonds to be due immediately under Section 8.02 or to drawing on the Letter of Credit or to taking action under the Letter of Credit. The Trustee shall not be required to give any bond or surety in respect of the execution of the trust created hereby or the powers granted hereunder. (e) The Trustee shall not be liable for interest on any cash held by it except as the Trustee may agree with the Company or with the Issuer with the consent of the Company. (f) The Trustee may conclusively rely on a Company Representative's certificate as to whether a Bankruptcy Filing has occurred. (g) The Trustee shall strictly comply with the terms of the Letter of Credit. (h) The Trustee shall maintain adequate records pertaining to the funds held by the Trustee, the investment thereof and the disbursement therefrom; notwithstanding anything to the contrary in this Indenture or the Agreement, the Trustee shall not be required to advance its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder. (i) Every provision of this Indenture that in any way relates to the Trustee is subject to all the foregoing paragraphs of this Section. (j) The Trustee shall in no event be responsible for ensuring that the rate of interest due and payable on the Bonds under this Indenture does not exceed the highest legal rate of interest permissible under federal or state law applicable thereto. Section 9.02. Rights of Trustee. (a) Subject to the foregoing Section, including, but not limited to, Sections 9.01(b)(ii) and 9.01(c), the Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. Any action taken by the Trustee pursuant to this Indenture upon the request or authority or consent of any person, who at the time of making such request or authority or consent is the owner of any Bond, shall be conclusive and binding upon all future owners of any Bond issued in replacement thereof. (b) Before the Trustee acts or refrains from acting, it may require a certificate of an appropriate officer or officers of the Issuer or the Company or an opinion of Counsel stating that (i) the person making such certificate or opinion has read such covenant or condition; (ii) the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (iii) in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (iv) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. The Trustee shall not be liable for any loss or damage or action it takes or omits to take in good faith in reliance on the certificate or opinion of Counsel. (c) The Trustee may execute any of the trusts or powers hereunder and perform any of its duties through agents, attorneys or employees or co-trustees and shall not be responsible for the misconduct or negligence of any agent, attorney, employee or co-trustee appointed with due care. Section 9.03. Individual Rights of Trustee, Etc. The Trustee in its individual or any other capacity may become the owner, custodian or pledgee of Bonds and may otherwise deal with the Issuer, the Bank or with the Company or its affiliates with the same rights it would have if it were not Trustee. Section 9.04. Trustee's Disclaimer. Subject to Sections 9.01(b) and 9.01(c): (a) the Trustee makes no representation as to the validity or adequacy of this Indenture or the Bonds, and it shall not be responsible for any statement in the Bonds or for the perfection of any lien created by this Indenture or otherwise as security for the Bonds; (b) the Trustee may construe any of the provisions of this Indenture insofar as same may appear to be ambiguous or inconsistent with any other provision hereof, and any construction of any such provisions hereof by Trustee in good faith shall be binding upon the Bondholders, the Issuer, the Company and the Remarketing Agent; (c) the Trustee shall not be responsible for the application of any of the proceeds of the Bonds or any other moneys deposited with it and paid out, withdrawn or transferred hereunder if such application, payment, withdrawal or transfer shall be made in accordance with the provisions of this Indenture; (d) the Trustee shall not be under any obligation to see to the recording or filing of this Indenture, the Agreement, any financing statements or any other instrument or otherwise to the giving to any person of notice of the provisions hereof or thereof; and (e) the Trustee shall not be under any obligation to effect or maintain insurance or to renew any policies of insurance or to inquire as to the sufficiency of any policies of insurance carried by the Company, or to report, or make or file claims or proof of loss for, any loss or damage insured against or that may occur, or, to keep itself informed or advised as to the payment of any taxes or assessments, or to require any such payment to be made. Section 9.05. Notice of Defaults. The Trustee shall not be required to take notice, or be deemed to have notice, of any default or Event of Default under this Indenture, other than an Event of Default under Section 8.01(a), (b) or (d), unless specifically notified in writing at such address as set forth in Section 12.01 hereof of such default or Event of Default by the holders of at least 25% in principal amount of the Bonds then Outstanding, by the Bank, by the Remarketing Agent or by the Company. If an event occurs that with the giving of notice or lapse of time or both would be an Event of Default, and if the event is continuing and if the Trustee has actual notice or is deemed to have notice thereof as herein provided, the Trustee shall mail to each Bondholder, the Remarketing Agent and the Bank notice of the event upon such occurrence. Except in the case of a default in payment or purchase of any Bonds, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of Bondholders; provided that, in any event such notice shall not be withheld from the Bank or the Remarketing Agent. Section 9.06. Compensation and Indemnification of Trustee. For acting under this Indenture, the Trustee shall be entitled to compensation by the Company (which shall not be limited by any statute regulating the compensation of a trustee of an express trust) of reasonable fees for the Trustee's services and reimbursement of advances, counsel fees and other expenses reasonably and necessarily made or incurred by the Trustee in connection with its services under this indenture. The Trustee shall be indemnified by the Company for, and shall be held harmless against, any loss, liability or expense incurred without gross negligence, willful misconduct or bad faith on the Trustee's part, arising out of or in connection with the acceptance or administration of the trust created by this Indenture, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. To secure the payment or reimbursement to the Trustee provided for in this Section, the Trustee shall have a senior claim, to which the Bonds are made subordinate, on all money or property held or collected by the Trustee, except moneys held under Article VII or otherwise held in trust to pay principal of, interest on and purchase price of the Bonds, and except amounts drawn under the Letter of Credit and Available Moneys on deposit in the Bond Fund. Section 9.07. Eligibility of Trustee. Each of the initial Trustee and any successor Trustee at the time of its appointment shall: (i) be a corporation or national banking association duly organized under the laws of the United States of America or any state or territory thereof, doing business and having an office in such location as shall be approved by the Issuer and the Remarketing Agent, (ii) have a combined capital and surplus of at least $25,000,000 as set forth in its most recent published annual report of condition, and (iii) be authorized by law to perform all the duties imposed upon it by this Indenture. Section 9.08. Replacement of Trustee. The Trustee may resign and be discharged of the trust created by this Indenture by notifying the Issuer, the Bank and the Company; provided, however, that no such resignation shall become effective until the appointment of a successor trustee, as hereinafter provided. The holders of not less than a majority in principal amount of the Bonds may remove the Trustee by notifying the removed Trustee and may appoint a successor Trustee with the Issuer's, the Bank's and the Company's prior written consent; provided, however, that no such removal-shall become effective until the appointment of a successor trustee, as hereinafter provided. The Issuer may, in its sole discretion, and at the request of the Company shall, remove the Trustee, but in the case where such removal is requested by the Company, only after obtaining the prior written consent of the Bank. Upon the removal or replacement of the Trustee for any reason, the Issuer and the Company shall give written notice thereof to the Remarketing Agent and the Bank by first-class mail, postage prepaid. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Issuer, with the prior written consent of the Bank and the Company, shall, at the expense of the Company, use its best efforts to appoint promptly a successor Trustee. Notice of such appointment shall be given by the Issuer to the Remarketing Agent in writing by first-class mail. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Issuer, the Bank, the Company and the Remarketing Agent. Immediately thereafter, the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee, the resignation or removal of the retiring Trustee shall then (but only then) become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall notify the holders of the Bonds of its acceptance of the trusts hereunder by first-class mail promptly following such acceptance. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Issuer, the Bank, the Company or the holders of a majority in principal amount of the Bonds may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 9.07, any Bondholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Section 9.09. Duties of Remarketing Agent. (a) The Remarketing Agent shall, in accordance with the Remarketing Agreement, determine the Weekly Rate on the Bonds and perform the other duties provided for to be done by it in Section 2.02, Section 3.08, Section 4.01 and Section 4.06. The Remarketing Agent may for its own account or as broker or agent for others deal in Bonds and may do anything any other Bondholder may do to the same extent as if the Remarketing Agent were not serving as such. The Remarketing Agent shall have no duty to act hereunder to the extent the Remarketing Agent is not required to perform its obligations under the Remarketing Agreement. (b) The Remarketing Agent may execute and perform any of its duties hereunder through agents, attorneys, employees or co-remarketing agents and shall not be responsible for the misconduct or negligence of any agent, attorney, employee or co-remarketing agent appointed with due care. Section 9.12. Eligibility of Remarketing Agent; Replacement. The Remarketing Agent shall be a member of the National Association of Securities Dealers, Inc. having excess net capital of at least $5,000,000 or, in the alternative, a national banking association having a combined capital stock, surplus and undivided profits of at least $50,000,000, and, if the Bonds are rated by a Rating Agency, the Remarketing Agent must be rated at least Baa3/P-3 or otherwise be acceptable to the Rating Agency. Crews and Associates, Inc. is hereby appointed as the initial Remarketing Agent and is herein referred to as the "Remarketing Agent." Any Remarketing Agent shall accept its appointment hereunder in writing. The Remarketing Agent may resign by notifying the Issuer, the Company, the Trustee and the Bank at least 45 days before the effective date of the resignation. The Issuer, at the direction of the Company but only with the Bank's prior written consent, which consent shall not be unreasonably withheld, shall, at any time remove the Remarketing Agent as the Issuer's designee for determining interest rates and appoint a successor by notifying the Remarketing Agent, the Bank and the Trustee at least 60 days prior to the effective date of such removal. Upon the resignation or removal of the Remarketing Agent, the Issuer, at the direction of the Company, but only with the prior written consent of the Bank, which consent shall not be unreasonably withheld, shall appoint a successor by notifying the Remarketing Agent, the Bank and the Trustee, if the Remarketing Agent resigns or is removed pursuant to the terms of this Indenture and, after 45 days in the case of resignation or 60 days in the case of removal, the Issuer at the direction of the Company, has failed to appoint a successor Remarketing Agent in accordance with the terms of this Section 9.12, the Company shall immediately give notice thereof to the Trustee and shall direct the Trustee to give notice to the holders of all Bonds of a mandatory repurchase of such bonds pursuant to Section 3.07(a)(ii) hereof. Such mandatory repurchase shall take place on the first Interest Payment Date to occur following such Notice of Mandatory Repurchase by the Trustee (of if such date is not a Business Day, on the next succeeding Business Day), unless such Mandatory Repurchase Date is a date less than 15 days after such Notice of Mandatory Repurchase is given, in which case such mandatory repurchase shall occur on the next succeeding Interest Payment Date (or, if such date is not a Business Day, on the next succeeding Business Day). Notwithstanding the foregoing, no such resignation or removal shall be effective until either (i) the successor Remarketing Agent has delivered an acceptance of its appointment to the Trustee or (ii) the Mandatory Repurchase Date described above. Section 9.10. [Reserved] Section 9.11. Successor Trustee or Agent by Merger. If the Trustee or the, Remarketing Agent consolidates with, merges or converts into, or transfers all or substantially all its assets (or, in the case of a bank or trust company, its corporate trust assets) to, another corporation or national banking association, the resulting, surviving or transferee corporation or national banking association without any further act shall be the successor Trustee, the Remarketing Agent, provided that such corporation or national banking association shall otherwise be eligible to serve in such capacity under this Indenture. Section 9.12. Appointment of Co-Trustee. It is the purpose of this Indenture that there shall be no violation of any law of any jurisdiction (including particularly the law of the State) denying or restricting the right of banking corporations or associations to transact business as trustee in such jurisdiction. It is recognized that in case of litigation under this Indenture or the Agreement, and in particular in case of the enforcement thereof upon a default or an Event of Default, or in case the Trustee deems that by reason of any present or future law of any jurisdiction it may not exercise any of the powers, rights or remedies herein granted to the Trustee or hold title to the properties, in trust, as herein granted, or take any action which may be desirable or necessary in connection therewith, it may be necessary that the Trustee appoint an additional individual or institution as a separate or co-trustee. The following provisions of this Section are adapted to these ends. In the event that the Trustee appoints an additional individual or institution as a separate or co-trustee, each and every remedy, power, right, claim, demand, cause of action, immunity, estate, title, interest and lien expressed or intended by this Indenture to be exercised by or vested in or conveyed to the Trustee with respect thereto shall be exercisable by and vest in such separate or co-trustee but only to the extent necessary to enable such separate or co-trustee to exercise such powers, rights and remedies, and every covenant and obligation necessary to the exercise thereof by such separate or co-trustee shall run to and be enforceable by either of them; provided, however, that no co-trustee shall be liable by reason of any act or omission of any other such co-trustee. Should any instrument in writing from the Issuer be required by the separate or co-trustee so appointed by the Trustee for more fully and certainly vesting in and confirming to him or it such properties, rights, powers, trusts, duties and obligations, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Issuer. In case any separate or co-trustee or a successor to either shall die, become incapable of acting, resign or be removed, all the estates, properties, rights, powers, trusts, duties and obligations of such separate or co-trustee, so far as permitted by law, shall vest in and be exercised by the Trustee until the appointment of a new co-trustee or successor to such separate or co-trustee. ARTICLE X AMENDMENTS OF AND SUPPLEMENTS TO INDENTURE Section 10.01. Without Consent of Bondholders. The Issuer and the Trustee may amend or supplement this Indenture or the Bonds without prior notice to or consent of any Bondholder: (a) to cure any ambiguity, inconsistency or formal defect or omission; (b) to grant to the Trustee for the benefit of the Bondholders additional rights, remedies, powers or authority; (c) to subject to this Indenture additional collateral or to add other agreements of the Issuer; (d) to modify this Indenture or the Bonds to permit qualification under the Trust Indenture Act of 1939, as amended, or any similar federal statute at the time in effect; to permit the qualification of the Bonds for sale under the securities laws of any state of the United States; or to prevent the application of the Investment Company Act of 1940, as amended, to any of the transactions contemplated by, or any of the parties to this Indenture, the Agreement or the Bonds; (e) to provide for uncertificated Bonds or to make any change necessary to give effect to a custody agreement pursuant to Section 2.05(d); (f) to evidence the succession of a new Trustee or the appointment by the Trustee of a co-trustee; (g) to make any change to reflect any provision in the Code or the interpretations thereof by the Internal Revenue Service provided that such change does not materially adversely affect the rights of any Bondholder; (h) to make any change not materially adversely affecting any Bondholder's rights requested by the Rating Agency in order (i) to obtain a rating from the Rating Agency after the initial issuance of the Bonds if the Bonds are initially issued without a rating equivalent to the rating assigned to other securities supported by a Letter of Credit of the Bank or (ii) to maintain any rating on the Bonds; (i) to make any change not materially adversely affecting any Bondholder's rights to provide for or to implement the provisions of a Letter of Credit; (j) to make any change to provide for or to implement the provisions of a Letter of Credit only if such Letter of Credit and the changes to this Indenture become effective on a Mandatory Repurchase Date; (k) to make any change to be effective on any Mandatory Repurchase Date provided that such change has been disclosed to all owners of Bonds who purchase on such date; (l) to make any change that does not materially adversely affect the rights of any Bondholder; (m) to add to this Indenture the obligation of the Trustee, the Issuer or the Company to disclose such information regarding the Bonds, the Facility, the Issuer, the Company or the Bank as shall be required or recommended to be disclosed in accordance with applicable regulations or guidelines established by, among others, the American Bankers Association Corporate Trust Committee; or (n) to provide for the issuance of Additional Bonds under Section 2.09. Section 10.02. With Consent of Bondholders. If an amendment of or supplement to this Indenture or the Bonds without any consent of Bondholders is not permitted by the preceding Section, the Issuer and the Trustee may enter into such amendment or supplement without prior notice to any Bondholders but with the consent of the holders of at least a majority in principal amount of the Bonds then outstanding. However, without the consent of all Bondholders affected, no amendment or supplement may (a) extend the maturity of the principal of, or interest on, any Bond, (b) reduce the principal amount of, or rate of interest on, any Bond or change the terms of any redemption, (c) effect a privilege or priority of any Bond or Bonds over any other Bond or Bonds (except as provided herein), (d) reduce the percentage of the principal amount of the Bonds required for consent to such amendment or supplement, (e) impair the exclusion from gross income for purposes of federal income taxation of interest on any Bond, (f) eliminate the holders' rights to optionally tender the Bonds, extend the due date for the purchase of Bonds optionally tendered by the holders thereof or reduce the purchase price of such Bonds, (g) create a lien ranking prior to or on a parity with the lien of this Indenture on the property described in the Granting Clause of this Indenture or (h) deprive any Bondholder of the lien created by this Indenture on such property. In addition, if moneys or U.S. Government Obligations have been deposited or set aside with the Trustee pursuant to Article VII for the payment of Bonds and those Bonds shall not have in fact been actually paid in full, no amendment to the provisions of that Article shall be made without the consent of the holder of each of those Bonds affected. Section 10.03. Effect of Consents. After an amendment or supplement becomes effective, it shall bind every Bondholder unless it makes a change described in any of the lettered clauses of the preceding Section. In such case, the amendment or supplement shall bind each Bondholder who consented to it and each subsequent holder of a Bond or portion of a Bond evidencing the same debt as the consenting holder's Bond. Section 10.04. Notation on or Exchange of Bonds. If an amendment or supplement changes the terms of a Bond, the Trustee may request that the holder deliver the Bond to it. The Trustee may place an appropriate notation on the Bond regarding the changed terms and return it to the holder. Alternatively, if the Trustee, the Issuer and the Company determine, the Issuer in exchange for the Bond shall issue and the Trustee shall authenticate a new Bond that reflects the changed terms. In either event, the cost of placing such notation on the Bond(s) shall be borne by the Company. Section 10.05. Signing by Trustee of Amendments and Supplements. The Trustee shall sign any amendment or supplement to this Indenture or the Bonds authorized by this Article if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign it. In signing an amendment or supplement, the Trustee shall be entitled to receive and (subject to Section 9.01) shall be fully protected in relying on an Opinion of Counsel stating that such amendment or supplement is authorized by this Indenture and is duly authorized, executed and delivered and enforceable in accordance with its terms. Section 10.06. Company, Bank and Remarketing Agent Consent Required. An amendment or supplement to this Indenture or the Bonds shall not become effective unless the Company, the Remarketing Agent (but only to the extent that such amendment affects the rights, duties or obligations of the Remarketing Agent hereunder) and the Bank deliver to the Trustee their written consents to the amendment or supplement. In any event, no amendment or supplement hereto shall become effective until the Remarketing Agent acknowledges receipt of a copy of such supplement or amendment. Section 10.07. Notice to Bondholders. The Trustee shall cause notice of the execution of a supplemental indenture to be mailed promptly by first-class mail to each Bondholder at the holder's registered address. The notice shall state briefly the nature of the supplemental indenture and that copies thereof are on file with the Trustee for inspection by all Bondholders. Section 10.08. Opinion of Bond Counsel Required. An amendment or supplement to this Indenture shall not become effective unless the Trustee has received an opinion of Bond Counsel addressed to the Trustee, the Bank, the Company and the Remarketing Agent to the effect that the amendment or supplement will not impair the exclusion of interest on the Bonds from the gross income of the recipients thereof for purposes of federal income taxation. ARTICLE XI AMENDMENTS OF AND SUPPLEMENTS TO AGREEMENT Section 11.01. Without Consent of Bondholders. The Issuer, with the consent of the Company, may enter into, and the Trustee may consent to, any amendment of or supplement to the Agreement or the Note, without prior notice to or consent of any Bondholder, if the amendment or supplement is required (a) by the provisions of the Agreement or this Indenture, (b) to cure any ambiguity, inconsistency or formal defect or omission, (c) to identify more precisely the Facility, (d) in connection with any authorized amendment of or supplement to this Indenture, or (e) to make any change comparable to those described in Section 10.01. Section 11.02. With Consent of Bondholders. If an amendment of or supplement to the Agreement or the Note without any consent of Bondholders is not permitted by the foregoing Section, the Issuer may enter into, and the Trustee may consent to, such amendment or supplement without prior notice to any Bondholder but with the consent of the holders of at least a majority in principal amount of the Bonds then outstanding. However, without the consent of each Bondholder affected, no amendment or supplement may result in a change comparable to those described in the lettered clauses of Section 10.02. Section 11.03. Consent by Trustee to Amendments or Supplements. The Trustee shall consent to any amendment or supplement to the Agreement or the Note authorized by this Article if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, consent to such an amendment or supplement. In consenting to an amendment or supplement, the Trustee shall be entitled to receive and (subject to Section 9.01) shall be fully protected in relying on an opinion of Counsel stating that such amendment or supplement is authorized by this Indenture and has been duly authorized, executed and delivered and is enforceable in accordance with its terms. Section 11.04. Notice to Bondholders. The Trustee shall cause notice of the execution of an amendment or supplement to the Agreement or the Note to be mailed promptly by first-class mail to each Bondholder at the holder's registered address. The notice shall state briefly the nature of the amendment or supplement and that copies thereof are on file with the Trustee for inspection by all Bondholders. Section 11.05. Bank and Remarketing Agent Consent Required. An amendment or supplement to the Agreement or the Note shall not become effective unless the Remarketing Agent (but only to the extent that such amendment or supplement affects the rights, duties or obligations of the Remarketing Agent hereunder or thereunder) and the Bank deliver to the Trustee their written consents to the amendment or supplement. In any event, no such amendment or supplement shall become effective until the Remarketing Agent acknowledges receipt of a copy of such amendment or supplement. ARTICLE XII MISCELLANEOUS Section 12.01. Notices. (a) Any notice, request, direction, designation, consent, acknowledgment, certification, appointment, waiver or other communication required or permitted by this Indenture or the Bonds must be in writing except as expressly provided otherwise in this Indenture or the Bonds. (b) Except as otherwise provided herein, any notice or other communication shall be sufficiently given and deemed given when delivered by hand or mailed by first-class mail, postage prepaid, addressed as follows or, if the communication may be given by telex or telecopy under the provisions of this Indenture, when telexed or telecopied to the following numbers: (1) if to the Issuer, to County of Perry, Ohio, 121 West Brown, New Lexington, Ohio 43764, Attention: President of the Board of County Commissioners; (2) if to the Trustee, to SunTrust Bank, Central Florida, National Association, 225 East Robinson, Suite 250, Orlando, Florida 32801, Attention: Corporate Trust Department; (3) if to the Company, to New Lexington Health Care Corp., 980 South Main Street, New Lexington, Ohio 43764; (4) if to the Underwriter or Remarketing Agent, to Crews and Associates, Inc. 2000 Union National Plaza, 124 West Capitol, Little Rock, Arkansas 72201; (5) if to the Bank, to NationsBank of Texas, N.A, 901 Main Street, 13th Floor, Dallas, Texas 75202, Attention: Marie Lancanster; and (6) if to the Parent, Regency Health Services, Inc. 2742 Dow Avenue, Tustin, California 96280, Attention: David Grant, Esquire. Any addressee may designate additional or different addresses or telex or telecopy numbers for purposes of this Section. Notwithstanding the provisions of this Section 12.01, any notice to the Trustee shall only be sufficient and deemed given when mailed to the Trustee at the address provided in this Section 12.01 by certified mail, return receipt requested, and received by the Trustee. A copy of any notice to any party given hereunder (with the exception of notices required for drawings under any Letter of Credit) shall be provided to the Remarketing Agent in the manner such notice is otherwise given. The Beneficial Owner of $1,000,000 or more or Bonds may, by written notice to the Trustee, request that all notices given with respect to such Bonds be given to the registered owner thereof and to a second address provided in such written notice to the Trustee. Upon receipt of such notice described in the preceding sentence, the Trustee shall send all notices relating to the relevant Bonds to the registered owner and the second address so designated. Section 12.02. Bondholders' Consents. Any consent or other instrument required by this Indenture to be signed by Bondholders may be in any number of concurrent documents and may be signed by a Bondholder or by the holder's agent appointed in writing. Proof of the execution of such instrument or of the instrument appointing an agent and of the ownership of Bonds, if made in the following manner, shall be conclusive for any purposes of this Indenture with regard to any action taken by the Trustee under the instrument: (a) The fact and date of a person's signing an instrument may be proved by the certificate of any officer in any jurisdiction who by law has power to take acknowledgments within that jurisdiction that the person signing the writing acknowledged before the officer the execution of the writing, or by an affidavit of any witness to the signing. (b) The fact of ownership of Bonds, the amount or amounts, numbers and other identification of such Bonds and the date of holding shall be proved by the registration books kept pursuant to this Indenture. In determining whether the holders of the required principal amount of Bonds Outstanding have taken any action under this Indenture, Bonds owned by the Issuer, the Company or any partner or affiliate of either thereof shall be disregarded and deemed not to be Outstanding; provided, however, that Bank Bonds shall not be disregarded and shall be deemed to be outstanding for such purpose. In determining whether the Trustee shall be protected in relying on any such action, only Bonds that the Trustee knows to be so owned shall be disregarded. Section 12.03. Notices to Rating Agency. If applicable, the Trustee shall notify any Rating Agency rating the Bonds, in writing, of the occurrence of any of the following events prior to the occurrence thereof: (a) any change in the identity of the Trustee or the Remarketing Agent; (b) any amendment or modification of or change to this Indenture, the Agreement, the Reimbursement Agreement or the Letter of Credit; (c) the expiration or termination of the Letter of Credit, or any extension thereof; (d) the payment in full of the principal of and interest on the Bonds; and (e) the delivery of any written opinion of Bankruptcy Counsel required to be delivered under the terms of this Indenture. Section 12.04. Limitation of Rights. Nothing expressed or implied in this Indenture or the Bonds shall give any person other than the Trustee, the Issuer, the Bank, the Company, the Remarketing Agent and the Bondholders any right, remedy or claim under or with respect to this Indenture. Section 12.05. Severability. If any provision of this Indenture shall be determined to be unenforceable by a court of law, that shall not affect any other provision of this Indenture; provided, no holding or invalidity shall require the Trustee to make any payment from any source except those pledged hereunder. Section 12.06. Payments Due on Non-Business Days. If a payment date is not a Business Day at the place of payment, then payment shall be made at that place on the next succeeding Business Day, with the same force and effect as if made on the payment date, and, in the case of any such payment, no interest shall accrue for the intervening period. Section 12.07. Governing Law. This Indenture and the authority of the Issuer to issue the Bonds shall be governed by and construed in accordance with the laws of the State, but it is the intention of the Issuer that the situs of the trust created by this Indenture be in the state in which is located the corporate trust office of the Trustee from time to time acting under this Indenture. The word "Trustee" as used in the preceding sentence shall not be deemed to include any additional individual or institution appointed as a separate or co-trustee pursuant to Section 9.15 of this Indenture. It is the further intention of the Issuer that the Trustee administer said trust in the state in which it is located, from time to time, and that same be for all purposes hereunder, the situs of said trust. Section 12.08. No Liability. No provision, covenant or agreement contained in this Indenture or in the Bonds, or any obligation herein or therein imposed upon the Issuer, or the breach thereof, shall constitute or give rise to or impose upon the Issuer a pecuniary liability or a charge upon its general credit or taxing power. In making the agreements, provisions, and covenants set forth in this Indenture, the Issuer has not obligated itself except with respect to the Facility and the application of the revenues, income and all other property therefrom and the security therefor including the Letter of Credit, as hereinabove provided. No official or member of the Issuer shall be personally liable on the Indenture or the Bonds, nor shall the issuance of the Bonds be considered as misfeasance in office. Section 12.09. Counterparts. This Indenture may be signed in several counterparts, each of which shall be an original and all of which together shall constitute the same instrument. Section 12.10. References to the Bank. The Bank shall have no rights to enforce any provision of this Indenture during any period in which it is in default under the Letter of Credit. IN WITNESS WHEREOF, the Issuer has caused this Indenture to be executed in its name and on its behalf by the President of the Board of County Commissioners of the County of Perry, Ohio and the Trustee, to evidence its acceptance of the trust hereby created, has caused this Indenture to be executed in its name and on its behalf by its duly authorized officers, all as of the day and year first above written. COUNTY OF PERRY, OHIO, acting by and through the Board of County Commissioners of the County of Perry, Ohio By: President By: Commissioner SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION By: Its: [SEAL] ATTEST: By: Its: EX-10.47 9 FINANCING AGREEMENT - SALEM Exhibit 10.47 FINANCING AGREEMENT between THE COUNTY COMMISSION OF HARRISON COUNTY BY AND ON BEHALF OF HARRISON COUNTY, WEST VIRGINIA and SALEM HEALTH CARE CORP. Dated as of September 1, 1996 NOTE: THIS FINANCING AGREEMENT AND A PROMISSORY NOTE IN THE FORM AS DESCRIBED HEREIN HAVE BEEN ASSIGNED TO, AND ARE SUBJECT TO A SECURITY INTEREST IN FAVOR OF ONE VALLEY BANK, NATIONAL ASSOCIATION, AS TRUSTEE UNDER AN INDENTURE OF TRUST DATED AS OF SEPTEMBER 1, 1996, WITH THE COUNTY COMMISSION OF HARRISON COUNTY BY AND ON BEHALF OF HARRISON COUNTY, WEST VIRGINIA, AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME. INFORMATION CONCERNING SUCH SECURITY INTEREST MAY BE OBTAINED FROM THE TRUSTEE AT ITS PRINCIPAL TRUST OFFICE IN CHARLESTON, WEST VIRGINIA. This FINANCING AGREEMENT, made as of the first day of October, 1996, between THE COUNTY COMMISSION OF HARRISON COUNTY BY AND ON BEHALF OF HARRISON COUNTY, WEST VIRGINIA, a political subdivision of the State of West Virginia, (the "Issuer"), and SALEM HEALTH CARE CORP., a corporation duly organized under and validly existing by virtue of the laws of the State of Went Virginia (the "Company"); W I T N E S S E T H : WHEREAS, the Issuer in a duly organized political subdivision of the State of West Virginia and is authorized by Chapter 13, Article 2C, Code of West Virginia of 1931, as amended (the "Act"), (a) to issue its revenue bonds for the purpose of providing funds (i) to pay the cost of acquiring, constructing, furnishing and equipping a commercial facility comprising a health care facility and (ii) to refund one or more series of revenue bonds previously issued pursuant to the Act to finance any such facility, in either case by lending the proceeds of such revenue bonds or otherwise making such proceeds available for such purposes to any person, firm or private corporation which will operate and maintain such facility in such a manner as shall effectuate the purposes of the Act and (b) to secure its revenue bonds by a trust agreement between the issuer and a corporate trustee including therein the pledge and assignment of revenues from any such loan to the payment of such revenue bonds; and WHEREAS, pursuant to such authorization and in order to further the purposes of the Act, the Issuer intends to issue and sell its Nursing Facility Refunding Revenue Bonds (Salem Health Care Corp. Project), Series 1996 in the original principal amount of $2,185,000 (the "Bonds") and refund in full the outstanding principal amount of its $2,670,000 First Mortgage Refunding Revenue Bonds (Salem Health Care Corp. Project) Series 1986 (the "Prior Bonds"), the proceeds of which were used to refinance the costs of acquisition, construction and equipping of a 120-bed intermediate and skilled nursing and rehabilitation facility, owned and operated by the Company, located at 146 Water Street, in Salem, Harrison County, West Virginia (the "Facility"); and WHEREAS, by issuing the Bonds to refund the Prior Bonds, the Issuer and the Company expect to finance the Facility more economically and thereby to achieve interest cost savings; and WHEREAS, in return for the use of the proceeds of the sale of the Bonds by the Issuer to refund the Prior Bonds, the Company has agreed to repay the amounts so used on the terms and conditions hereinafter set forth; and WHEREAS, the Company has determined to issue its promissory note to the Issuer in the principal amount of the Bonds (the "Note") to evidence the Company's obligation to repay such amounts under the terms and conditions set forth herein; and WHEREAS, all things necessary to constitute the Note a valid and binding obligation and to constitute this Financing Agreement a valid and binding agreement securing the payments under the Note have been done and performed and the execution and delivery of the Note and this Financing Agreement, subject to the terms hereof, have in all respects been duly authorized; NOW, THEREFORE, for and in consideration of the premises and the mutual covenants hereinafter contained, the parties hereto covenant and agree as follows: ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION Section 1.1. Definitions. The following terms shall have the meaning set forth hereinafter. All other defined terms used but not defined herein shall have the same meaning as set forth elsewhere herein or in Article I of the Indenture unless the context clearly indicates to the contrary. "Agreement" or "Financing Agreement" shall mean this Financing Agreement, including any amendments hereto. "Financing Instruments" shall mean this Financing Agreement, the Indenture, the Note, the Escrow Agreement, the Reimbursement Agreement, the Bond Purchase Agreement and the Remarketing Agreement. "Indenture" shall mean the Indenture of Trust dated as of the date hereof between the Issuer and the Trustee, as amended from time to time. "1954 Code" shall mean the Internal Revenue Code of 1954, as amended. "1980 Bonds" shall mean the revenue bonds issued by the Issuer under the Act in 1980 in order to finance or refinance the costs of the acquisition, construction and equipping of the Facility and refunded in full with the proceeds of the Prior Bonds. "Prime Rate" shall mean the rate per year announced from time to time by the Trustee, as its prime rate, with any change in the Prime Rate being effective as of the date such announced prime rate is changed. "Prior Bonds Trustee" shall mean United National Bank, Charleston, West Virginia, as indenture trustee for the Prior Bonds. "Prior Indenture" shall mean the Trust Indenture dated as of November 1, 1986 between the Issuer and the Prior Bonds Trustee pursuant to which the Prior Bonds were issued and secured. "Regulations" shall mean the income tax regulations promulgated pursuant to the 1954 Code, as such applicable proposed, temporary or final regulations may be amended or supplemented from time to time. Section 1.2. Rules of Construction. Unless the context clearly indicates to the contrary, the following rules shall apply to the construction of this Financing Agreement: (a) Words importing the singular number shall include the plural number and vice versa. (b) Words importing the redemption or calling for redemption of Bonds shall not be deemed to refer to or connote the payment of Bonds at their stated maturity. (c) All references herein to particular articles or sections are references to articles or sections of this Financing Agreement unless otherwise indicated. (d) The headings and Table of Contents herein are solely for convenience of reference and shall not constitute a part of this Financing Agreement nor shall they affect its meaning, construction or effect. (e) Accounting terms not otherwise defined have the meaning assigned to them in accordance with generally accepted accounting principles. ARTICLE II REPRESENTATIONS Section 2.1. Representations by Issuer. The Issuer makes the following representations: (a) The Issuer is a political subdivision of the State of West Virginia and has the power to enter into the Financing Instruments to which it is a party and the transactions contemplated thereby and to perform its obligations thereunder, to issue the Bonds to refund the Prior Bonds, and to assign the Note to the Trustee. (b) By proper action in the form of resolutions adopted by The County Commission of Harrison County, West Virginia, the Issuer has duly authorized the execution and delivery of the Financing Instruments to which it is a party, and the Bonds, the performance of its obligations thereunder and the issuance of the Bonds and, simultaneously with the execution and delivery of this Financing Agreement, the Issuer has duly executed and delivered the Financing Instruments to which it is a party and issued and sold the Bonds. (c) To the best of its knowledge, the Issuer is not in default in the payment of the principal of or interest on any of its indebtedness for borrowed money and is not in default under any instrument under or subject to which any indebtedness for borrowed money has been incurred, and no event has occurred and is continuing under the provisions of any such instrument that with the lapse of time or the giving of notice, or both, would constitute an event of default thereunder; provided, however, that no representation is expressed concerning previously issued revenue bonds for private parties under the Act, the status of which have no adverse effect on the Issuer's power or authority to carry out the transactions contemplated by this Financing Agreement. (d) The Issuer is not (1) in violation of the Act or any existing law, rule or regulation applicable to it or (2) in default under any indenture, mortgage, deed of trust, lien, lease, contract, note, order, judgment, decree or other agreement, instrument or restriction of any kind to which any of its assets are subject; provided, however, that no representation is expressed concerning previously issued revenue bonds for private parties under the Act, the status of which have no adverse effect on the Issuer's power or authority to carry out the transactions contemplated by this Financing Agreement. The execution and delivery by the Issuer of the Financing Instruments to which it is a party and the Bonds and the compliance with the terms and conditions thereof will not conflict with or result in the breach of or constitute a default under any of the above described documents or other restrictions. (e) No further approval, consent or withholding of objection on the part of any regulatory body, federal, state or local, is required in connection with (1) the issuance and delivery of the Bonds by the Issuer, (2) the execution or delivery of or compliance by the Issuer with the terms and conditions of the Financing Instruments to which it is a party, or (3) the assignment and pledge by the Issuer pursuant to the Indenture of its rights under this Financing Agreement including the Note and the payments thereon by the Company, as security for payment of the principal of and interest on the Bonds. The consummation by the Issuer of the transactions set forth in the manner and under the terms and conditions as provided herein will comply with all applicable state, local or federal laws and any rules and regulations promulgated thereunder by any regulatory authority or agency. (f) No litigation, inquiry or investigation of any kind in or by any judicial or administrative court or agency is pending or, to its knowledge, threatened against the Issuer with respect to (1) the organization and existence of the Issuer, (2) its authority to execute or deliver the Financing Instruments to which it is a party, the Indenture or the Bonds or the assignment of the Note, (3) the validity or enforceability of any of such instruments or the transactions contemplated hereby or thereby, (4) the title of any officer of the Issuer who executed such instruments, or (5) any authority or proceedings related to the execution and delivery of such instruments on behalf of the Issuer. No such authority or proceedings have been repealed, revoked, rescinded or amended, and all are in full force and effect. (g) The Issuer hereby finds that the refunding of the Prior Bonds is advisable and will serve the purposes of the Act. (h) The issuance of the Prior Bonds was approved by the Issuer at a meeting duly called and held on November 19, 1986, notice of which meeting was published in a newspaper having general circulation in Harrison County, West Virginia on November 5 and November 12, 1986. Section 2.2. Representations by Company. The Company makes the following representations: (a) The Company is a corporation duly organized and validly existing under the laws of the State of West Virginia; has the power to enter into the Financing Instruments to which it is a party and the transactions contemplated thereunder; and by proper action has duly authorized the execution and delivery of such Financing Instruments and the Note and the performance of its obligations thereunder. (b) The Company is licensed by the appropriate West Virginia state and local authorities and is authorized to operate the Facility in the manner in which it is currently operated. (c) The Company is not in default in the payment of the principal of or interest on any of its indebtedness for borrowed money and is not in default under any instrument under and subject to which any indebtedness has been incurred, and no event has occurred and is continuing under the provisions of any such agreement that with the lapse of time or the giving of notice, or both, would constitute an event of default thereunder. (d) There is no litigation at law or in equity or any proceeding before any governmental agency involving the Company pending or, to the knowledge of the Company, threatened against the Company in which any liability of the Company is not adequately covered by insurance or for which adequate reserves are not provided or for which any judgment or order would have a material adverse effect upon the business or assets of the Company or affect its existence or authority to do business, the operation of the Facility, the validity of the Financing Instruments to which it is a party or the performance of its obligations thereunder. (e) The execution and delivery of the Financing Instruments to which it is a party, the performance by the Company of its obligations thereunder and the consummation of the transactions contemplated therein do not and will not conflict with, or constitute a breach or result in a violation of, the Company's articles of incorporation or bylaws, any agreement or other instrument to which the Company is a party or by which it is bound or any constitutional or statutory provision or order, rule, regulation, decree or ordinance of any court, government or governmental authority having jurisdiction over the Company or its property. (f) The Company has obtained all consents, approvals, authorizations and orders of any governmental or regulatory authority that are required to be obtained by the Company as a condition precedent to the issuance of the Bonds, the execution and delivery of the Financing Instruments to which it is a party and the performance by the Company of its obligations thereunder, or that are required for the operation of the Facility. (g) The Facility complies with all presently applicable ordinances and licensure and environmental protection laws, the noncompliance with which would have a material adverse effect on the business or operations of the Company conducted at the Facility. (h) To the best of its knowledge, interest paid or accrued on the 1980 Bonds was at all times exempt from federal income taxation under Section 103 of the 1954 Code. To the best of its knowledge, interest paid or accrued on the Prior Bonds was at all times excluded from the gross income of the owners thereof for purposes of federal income taxation. (i) The Company intends to continue to cause the Facility to be operated as a nursing home facility meeting all of the requirements of the Act for so long as the Bonds are outstanding. (j) To the best of its knowledge, at least 98% of the proceeds of the Prior Bonds, together with other available moneys, were applied to redeem the 1980 Bonds in full within 90 days of the date the Prior Bonds were issued. To the best of its knowledge, no more than 2% of the proceeds of the Prior Bonds were applied to pay their costs of issuance. ARTICLE III ISSUANCE OF THE BONDS AND USE OF PROCEEDS; EXECUTION AND DELIVERY OF THE NOTE Section 3.1. Agreement to Issue Bonds; Application of Bond Proceeds. The Issuer, concurrently with the execution and delivery of this Financing Agreement, will issue, sell and deliver the Bonds and will deposit the proceeds thereof with the Trustee. In accordance with the Indenture, the Trustee will deliver or will cause the Underwriter to deliver all of such proceeds to the Prior Bonds Trustee to be applied, together with other moneys provided by the Company, to defease and redeem the Prior Bonds in full and discharge the Prior Indenture. Section 3.2. Refunding by the Issuer. Upon the terms and conditions of this Financing Agreement and the Indenture, the Issuer agrees to use the proceeds of the sale of the Bonds to refund the Prior Bonds. Section 3.3. Execution and Delivery of the Note prior to or simultaneously with the issuance of the Bonds, to evidence its repayment obligations hereunder, the Company shall execute and deliver the Note in substantially the form of Exhibit A to the Issuer for assignment to the Trustee as security for the payment of the Bonds. Section 3.4. No Lien on or Security Interest in Facility. This Financing Agreement is not intended to create and does not create a lien on or security interest in any part of the Facility as security for the payment of amounts payable hereunder or under the Note. ARTICLE IV PAYMENTS ON THE NOTE Section 4.1. Amounts Payable. (a) The Company shall make all payments required by the Note as and when they become due and shall promptly pay all other amounts necessary to enable the Trustee to make the transfers required by Article IV of the Indenture. (b) The Company shall also pay, as and when the same become due: (1) To the Trustee, its reasonable fees for services rendered and for expenses reasonably incurred by it as Trustee under the Indenture, including the reasonable fees and disbursements of its counsel, the reasonable fees and expenses of the Remarketing Agent and any other paying agents and all other amounts that the Company herein assumes or agrees to pay, including any cost or expense necessary to cancel and discharge the Indenture upon payment of the Bonds. (2) To the Issuer and its reasonable costs and expenses directly related to the Bonds and the Facility, including the reasonable fees and expenses of Bond Counsel and the Issuer's counsel (provided, however, that such amounts so paid to the Issuer shall not equal or exceed an amount which would cause the "yield" on the Note, this Financing Agreement or any other "acquired purpose obligation" to be "materially higher" than the "yield" on the Bonds, as such terms are defined in the Code). (3) Amounts described in Section 4.6. (4) All other amounts that the Company agrees to pay under the terms of this Financing Agreement and the Indenture. Section 4.2. Payments Assigned. The Company consents to the assignment made by the Indenture of the Note and of the rights of the Issuer under this Financing Agreement to the Trustee and agrees to pay to the Trustee all amounts payable by the Company pursuant to the Note and this Financing Agreement, except for payments made to the Issuer pursuant to Sections 4.1(b)(2) and 5.6. Section 4.3. Default in Payments. If the Company fails to make any payments required by the Note or this Financing Agreement when due, the Company shall pay to the Trustee interest thereon until paid at a rate equal to the highest rate on any Bonds then outstanding or, in case of the payment of any amounts not to be used to pay principal of or interest on Bonds, at a rate equal to the Prime Rate plus one percent per year. Section 4.4. Obligations of Company Unconditional. The obligation of the Company to make the payments on the Note and to observe and perform all other covenants, conditions and agreements hereunder shall be absolute and unconditional, irrespective of any rights of setoff, recoupment or counterclaim it might otherwise have against the Issuer, the Bank, the Remarketing Agent or the Trustee. Subject to the prepayment of the Note as provided therein, the Company shall not suspend or discontinue any payment on the Note or hereunder or fail to observe and perform any of its other covenants, conditions or agreements hereunder for any cause, including without limitation, any acts or circumstances that may constitute an eviction or constructive eviction, failure of consideration, failure of title to any part or all of the Facility or commercial frustration of purpose, or any damage to or destruction or condemnation of all or any part of the Facility, or any change in the tax or other laws of the United States of America, the State of West Virginia or any political subdivision of either, or any failure of the Issuer, the Bank, the Remarketing Agent or the Trustee to observe and perform any covenant, condition or agreement, whether express or implied, or any duty, liability or obligation arising out of or in connection with any Financing Instrument. The Company may, after giving to the Issuer and the Trustee 10 days' notice of its intention to do so, at its own expense and in its own name, or in the name of the Issuer if procedurally required, prosecute or defend any action or proceeding or take any other action involving third persons that the Company reasonably deems necessary to secure or protect any of its rights hereunder. In the event the Company takes any such action, the Issuer shall cooperate fully with the Company and shall take all necessary action to substitute the Company for the Issuer in such action or proceeding if the Company shall so request. Section 4.5. Advances by Issuer or Trustee. If the Company fails to make any payment or perform any act required of it hereunder, the Issuer or the Trustee, without prior notice or demand on the Company and without waiving or releasing any obligation or default, may (but shall be under no obligation to) make such payment or perform such act. All amounts so paid by the Issuer or the Trustee and all costs, fees and expenses so incurred shall be payable by the Company on demand as an additional obligation under the Note, together with interest thereon at the Prime Rate plus one percent per year until paid. Section 4.6. Rebate Requirement. (a) At its sole expense on behalf of the Issuer, the Company shall determine and pay to the United States the Rebate Amount, hereinafter defined, as and when due in accordance with the "rebate requirement" described in Section 148(f) of the Code and Regulations thereunder, including without limitation, Regulations Section 1.148-3. The Company shall retain records of all such determinations until six years after Payment of the Bonds. (b) Reference is made to Exhibit B hereto for additional details of the rebate requirement. Exhibit B may be amended or substituted without compliance with Article XI of the Indenture or Section 8.3 hereof and without any action of the Issuer upon the Company's delivery to the Trustee of the proposed amendment or substitution together with an opinion of Bond Counsel that compliance with this section and Exhibit B, as amended, will not adversely affect the exclusion of interest on the Bonds from gross income for federal income tax purposes. (c) Notwithstanding anything contained herein to the contrary, no such payment will be required if the Company receives and delivers to the Issuer and the Trustee an opinion of Bond Counsel that such payment is not required under the Code to prevent any Bonds from becoming "arbitrage bonds" within the meaning of Section 148 of the Code. (d) The Issuer shall not be liable to the Company by way of contribution, indemnification, counterclaim, set-off or otherwise for any payment made or expense incurred by the Company pursuant to this section or the Indenture. Section 4.7. Letter of Credit. The Company shall provide for the payment of amounts due under Section 4.1 (a) from Available Moneys, including, delivery to the Trustee on the date of initial authentication and delivery of the Bonds of a Letter of Credit in favor of the Trustee and for the benefit of the holders of the Bonds. The Company shall be entitled to provide a Substitute Letter of Credit under certain circumstances as provided in the Indenture. Any extension of the Letter of Credit shall be for a period of at least one year or, if less, the fifteenth day after the maturity date of the Bonds. ARTICLE V SPECIAL COVENANTS Section 5.1. Operation of Facility by the Company; No Warranty of Condition or Suitability by the Issuer. (a) The Company shall operate the Facility, or cause it to be operated, as a nursing home facility or other purposes contemplated by the Act. (b) The Issuer makes no warranty, either express or implied, as to the Facility or the condition thereof, or that the Facility has been or will be suitable for the purposes or needs of the Company. Section 5.2. Reference to Bonds Ineffective after Bonds Paid and Other Obligations Satisfied. Upon payment of the Bonds and upon payment of all obligations under this Financing Agreement and the Note, subject to Section 8.1, all references in this Financing Agreement to the Bonds, the Trustee and the Issuer shall be ineffective, and neither the Trustee, the holder of the Note, the Issuer nor the holders of any of the Bonds shall thereafter have any rights hereunder except as provided in Sections 4.1(b), 4.6 and 5.6. Section 5.3. Certificate as to No Default. The Company shall deliver to the Issuer and the Trustee within 120 days after the close of each of its Fiscal Years a certificate signed by the chief executive officer, the chief administrative officer or the chief financial officer of its corporate general partner stating that (a) (1) the Company is not in default under the Note or this Financing Agreement, and (2) the Company has no knowledge of any violation of any of the terms or provisions of the Note or this Financing Agreement or of the occurrence of any condition, event or act that, with or without notice or lapse of time or both, would constitute an event of default hereunder or thereunder, or (b) if it is in default, specifying the nature and period of default and what action the Company is taking or proposes to take with respect thereto. Section 5.4. [Reserved) Section 5.5. Tax Exemption. (a) Unless the Company shall deliver to the Trustee an opinion of Bond Counsel to the effect that such use, occupation or ownership will not adversely affect the exclusion of interest on the Bonds from gross income for federal income tax purposes, the Company shall not: (1) take any action or approve the Trustees taking any action or making any investment or use of the proceeds of the Bonds that would cause the Bonds to be "arbitrage bonds" within the meaning of Section 148 of the Code. (2) barring unforeseen circumstances, approve the use of the proceeds of any Bonds or any other funds other than in accordance with its "non-arbitrage" certificate with respect to such use given immediately prior to the delivery of the Bonds; (3) take or permit any action that would result in more than 5% of the proceeds of the 1980 Bonds, the Prior Bonds or the Bonds being used directly or indirectly to make or finance loans to any person who is not an "exempt person" within the meaning of Section 103(b)(3) of the 1954 Code or a "governmental unit" within the meaning of Section 141(c) of the Code or otherwise cause the 1980 Bonds, the Prior Bonds or the Bonds to be or become "consumer loan bonds" within the meaning of Section 103(o) of the 1954 Code. (4) permit any component of the Facility to be used or occupied by the United States of America or an agency or instrumentality thereof in any manner for compensation, including any entity with statutory authority to borrow from the United States of America in any case within the meaning of Section 149(b) of the Code, or in any way cause the Bonds to be "federally guaranteed" within the meaning of Section 103(h) of the 1954 Code or Section 149(b) of the Code. (5) permit the addition of any "principal user" of the Facility within the meaning of Section 103(b)(6) of the 1954 Code or Section 144(a) of the Code; or (6) take any other action that would adversely affect the exclusion of interest on the Bonds from gross income. (b) The Company shall not take or omit to take any action the taking or omission of which would result in any of the proceeds of the Bonds, within the meaning of Section 147(g) of the Code, being used to finance the costs of issuance of the Bonds. (c) The Company represents and warrants that (i) the original principal amount of the Prior Bonds, plus any amounts held as a sinking fund for payment of the principal of the 1980 Bonds, did not exceed the aggregate outstanding principal amount of the 1980 Bonds as determined on the date of issuance of the Prior Bonds, and (ii) the principal amount of the Bonds, plus any amounts held by the Prior Bonds Trustee as a sinking fund for payment of the principal of the Prior Bonds, do not exceed the outstanding principal amount of the Prior Bonds as determined on the date of issuance of the Bonds. (d) The Company represents and warrants that, within the meaning of Section 147(b) of the Code and comparable provisions of the 1954 Code, the "average maturity" of the Bonds does not exceed 120% of the remaining "average reasonably expected economic life" of the Facility, such "average maturity" and remaining "average reasonably expected economic life" being computed in the manner contemplated by Section 147(b) of the Code and comparable provisions of the 1954 Code. The Company further represents and warrants that the "average maturity" of the Bonds is less than the remaining "average maturity" of the Prior Bonds. (e) The Company represents, covenants and agrees that not more than 25% of the proceeds of the 1980 Bonds, the Prior Bonds or the Bonds have been or will be used to provide a facility the primary purpose of which is one of the following: retail food and beverage services, automobile sales or service, or the provision of recreation or entertainment. The Company further covenants and agrees that no part of the proceeds of the 1980 Bonds, the Prior Bonds or the Bonds have been or will be used to provide any of the following and that no part of the Facility will be used for any of the following purposes or activities: any airplane, skybox or other private luxury box, health club facility, facility used primarily for gambling, store the principal business of which is the sale of alcoholic beverages for consumption off premises, private or commercial golf course, country club, massage parlor, tennis club, skating facility (including roller skating, skateboard and/or ice skating), racquet sports facility (including any handball or racquetball court), hot tub facility, suntan facility, racetrack or residential real property for family units. (f) The Company represents, covenants and agrees that (i) substantially all (90% or more) of the proceeds of the 1980 Bonds (exclusive of such proceeds applied to redeem other 1980 Bonds) were used for the acquisition, construction, reconstruction or improvement of land or property of a character subject to the allowance for depreciation within the meaning of Section 103(b)(6) of the 1954 Code, (ii) less than 25% of the proceeds of the 1980 Bonds, the Prior Bonds or the Bonds have been or will be used directly or indirectly for the acquisition of land or an interest in land, including mineral reserves, and (iii) none of such proceeds were or will be used for the acquisition of land or an interest in land to be used for farming purposes. (g) The Company represents and warrants that except for the Prior Bonds and the Bonds, no bonds, notes or other obligations of any state, territorial possession or any political subdivision of the United States of America or any political subdivision of any of the foregoing or of the District of Columbia have been issued since April 30, 1968, and are now outstanding, the proceeds of which have been or are to be used primarily with respect to projects (i) the "principal user" of which is or will be the Company or any "related persons," as defined in Section 103(b)(6) of the 1954 Code or Section 144(a) of the Code and (ii) that are located within Harrison County, West Virginia or are integrated facilities located outside of Harrison County within one-half mile of the Facility. The Company further represents and warrants that (i) obligations have not been assumed, expenditures have not been made and outstanding obligations do not exist, including, without limitation, the leasing of equipment (pursuant to leases which do not qualify as "true" leases within the meaning of the Code), which would cause the "aggregate face amount" of the Bonds as computed under the provisions of Section 103(b)(6) of the 1954 Code or 144(a)(4) of the Code and the Regulations to exceed $10,000,000 and (ii) that, within three years after the date any of the 1980 Bonds or the Prior Bonds were issued, the Company did not make nor permit any user of the Facility to make any expenditure, assume any obligations or take or permit any other action to be taken which caused the "aggregate face amount" of any of the 1980 Bonds or the Prior Bonds as computed under the provisions of Section 103(b)(6) of the 1954 Code to exceed $10,000,000. (h) The Company represents and warrants that the Facility is located only at the place or places specified in the notice of public hearing published with respect to the Prior Bonds pursuant to Section 103(k)(2) of the 1954 Code and Section 147(f) of the Code. (i) The Company represents and warrants that neither the Company (including any "related person," within the meaning of Section 144(a)(3) of the Code) nor any other "principal user" of the Facility (including any related person), within the meaning of Section 144(a)(2) of the Code, is a principal user of any facility other than the Facility that is financed with (i) an "industrial development bond," within the meaning of Section 103(b) of the 1954 Code, (ii) a "qualified small issue bond," within the meaning of Section 144(a) of the Code, or (iii) any other "outstanding tax-exempt facility-related bonds," within the meaning of Section 144(a)(10) of the Code. The Company covenants and agrees that the aggregate authorized face amount of the bonds described in the preceding sentence (including the Bonds) which can be allocated to any "test period beneficiary" as such term is defined either in Section 103(b)(15)(D) of the 1954 Code or in Section 144(a)(10)(D) of the Code (including, but not limited to the Company) will not exceed $40,000,000. The Company further covenants and agrees that it will not permit the use of the Facility by any person (other than the Company or a "related person" within the meaning of Section 103(b)(6) of the 1954 Code or Section 144 of the Code) to whom any part of the 1980 Bonds, the Prior Bonds or the Bonds would be allocated pursuant to Section 103(b)(15) of the 1954 Code or Section 144(a)(10) of the Code, if the amount allocated, when increased as provided in Section 103(b)(15)(A) of the 1954 Code or Section 144(a)(10)(A) of the Code, would exceed $40,000,000. (j) The Company represents and warrants that none of the proceeds of the 1980 Bonds issued subsequent to 1983 were used to acquire any property or an interest therein (other than land or an interest in land) unless: (i) the first use of such property was pursuant to such acquisition; or (ii) "rehabilitation expenditures," within the meaning of Section 103(b)(17)(c) of the 1954 Code with respect to that part of such property constituting: (A) a building (and the equipment therefor), equalled or exceeded fifteen percent (15%) of that portion of the cost of acquiring such building (and the equipment therefor) that was financed with the proceeds of such 1980 Bonds; and (B) a facility other than a building, equalled or exceeded one hundred percent (100%) of that portion of the cost of acquiring such facility that was financed with the proceeds of such 1980 Bonds. (1) The Issuer covenants and agrees that, prior to the issuance of the Bonds, it shall duly elect to have the provisions of Section 103(b)(6)(D) of the 1954 Code and Section 144(a)(4) of the Code apply to such issue and such election shall be made in accordance with the applicable Regulations or procedures of the Internal Revenue Service. The Company covenants and agrees that it shall furnish to the Issuer whatever information is necessary for the Issuer to make such election and shall compile such supplemental statements and other information as required by the applicable Regulations and procedures of the Internal Revenue Service. (l) The Company will comply with, and make all filings required by, all effective rules, rulings or Regulations promulgated by the Department of the Treasury or the Internal Revenue Service, with respect to obligations issued under Section 103(b)(6) of the 1954 Code as a "small issue industrial development bond" the interest on which is exempt from federal income taxation or issued under Section 144(a) of the Code as a "qualified small issue bond" the interest on which is excludable from gross income for federal income tax purposes. (m) The Company represents and warrants that the Facility does not share common facilities (such as an enclosed mall, heating and cooling facilities or parking facilities) with any other part of the same building, other portions of an enclosed shopping mall or a strip of offices, stores or warehouses that were financed with tax-exempt small issue industrial development bonds under Section 103(b)(6) of the 1954 Code or qualified small issue bonds under Section 144(a) of the Code. (n) The Company represents and warrants that no rebate with respect to the Prior Bonds is payable to the United States pursuant to the provisions of Section 148 of the Code. (o) The Issuer will comply with the information reporting requirements of Section 149(e) of the Code with respect to the Bonds. (p) The Company represents and warrants that the information contained in the certificates or representations for the Company with respect to compliance with the requirements of Section 149(e) of the Code, including the information in Form 8038, is true and correct in all material respects. (q) The Company shall take all action necessary to ensure that interest on the Bonds, for federal income tax purposes, is not included in gross income of the owners thereof. Section 5.6. Indemnification. (a) The Company shall at all times protect, indemnify and save harmless the Issuer, the Trustee and the Remarketing Agent (collectively, the "Indemnitees") from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (hereinafter referred to as "Damages"), including without limitation (1) all amounts paid in settlement of any litigation commenced or threatened against the Indemnitees, if such settlement is effected with the written consent of the Company, (2) all expenses reasonably incurred in the investigation of, preparation for or defense of any litigation, proceeding or investigation of any nature whatsoever, commenced or threatened against the Company, the Facility or the Indemnitees, (3) any judgments, penalties, fines, damages, assessments, indemnities or contributions, and (4) the reasonable fees of attorneys, auditors, and consultants, provided that the Damages arise out of: (A) failure by the Company or its partners, employees or agents, to comply with the terms of this Financing Agreement or the Note, and any agreements, covenants, obligations, or prohibitions set forth therein; (B) any action, suit, claim or demand contesting or affecting the title of the Facility; (C) any breach by the Company of any representation or warranty set forth in this Financing Agreement or the Note, or any certificate delivered by the Company pursuant thereto, and any claim that any representation or warranty of the Company contains or contained any untrue or misleading statement of fact or omits or omitted to state any material facts necessary to make the statements made therein not misleading in light of the circumstances under which they were made; (D) any action, suit, claim, proceeding or investigation of a judicial, legislative, administrative or regulatory nature arising from or in connection with the ownership, operation, occupation or use of the Facility; or (E) any suit, action, administrative proceeding, enforcement action, or governmental or private action of any kind whatsoever commenced against the Company, the Facility or the Indemnitees that might adversely affect the validity, enforceability or tax-exempt status of the Bonds, this Financing Agreement or the Note, or the performance by the Company or any Indemnitee of any of their respective obligations thereunder; provided that such indemnity shall be effective only to the extent of any loss that may be sustained by the Indemnitees in excess of the proceeds net of any expenses of collection, received by them or from any insurance carried with respect to such loss and provided further that the benefits of this section shall not inure to any person other than the Indemnitees. (b) If any action, suit or proceeding is brought against the Indemnitees for any loss or damage for which the Company is required to provide indemnification under this section, the Company, upon request, shall at its expense resist and defend such action, suit or proceeding, or cause the same to be resisted and defended by counsel designated by the Company and approved by the Indemnitees, which approval shall not be unreasonably withheld, provided that such approval shall not be required in the case of defense by counsel designated by any insurance company undertaking such defense pursuant to any applicable policy of insurance. If an Indemnitee shall have reasonably concluded that there may be defenses available to it that are in conflict with those available to the Company or to other Indemnitees (in which case the Company shall not have the right to direct the defense of such action on behalf of such Indemnitee), such Indemnitee may engage separate counsel and the reasonable legal and other expenses incurred by such Indemnitee shall be borne by the Company. The obligations of the Company under this section shall survive any termination of this Agreement, including prepayment of the Note. (c) Nothing contained herein shall require the Company to indemnify the Issuer for any claim or liability resulting from its willful, wrongful acts or the Trustee or the Remarketing Agent for any claim or liability resulting from its negligence (under the standard of care set forth in Article IX of the Indenture) or its willful, wrongful acts. (d) All references in this section to the Issuer, the Trustee and the Remarketing Agent, including references to Indemnitees, shall include their members, commissioners, directors, officers, employees, representatives and agents. Section 5.7. Maintenance and Insurance of Facility. (a) The Company shall, at its own expense, keep the Facility in as reasonably safe condition as its operations shall permit and shall keep the Facility in good repair and operating condition, ordinary wear and tear excepted, making from time to time all necessary repairs, renewals and replacements. The Company shall comply, in all material respects, with all laws applicable to the Facility. (b) The Company shall, at its own expense, continuously maintain insurance in connection with the Facility and the Company's operations against such risks as are customarily insured against by organizations of the same general type, including without limitation insurance for property damage, liability for bodily injury, liability for property damage and workers' compensation. Section 5.8. Corporate Existence. The Company shall maintain its existence as a West Virginia corporation and shall not, without the prior consent of the Trustee, dissolve or otherwise dispose of all or substantially all of its assets, consolidate with or merge into another domestic partnership or corporation (i.e. a partnership or corporation created under the laws of the United States of America, one of the states thereof or the District of Columbia) or permit one or more other domestic partnerships or corporations to consolidate with or merge into it; provided, however, that with the prior written consent of the Bank, the Company may consolidate with or merge into another domestic partnership or corporation, or permit one or more domestic partnerships or corporations to consolidate with or merge into it, or sell or otherwise transfer to another domestic partnership or corporation all or substantially all of its assets and thereafter dissolve, or sell or assign all or substantially all of its assets to a governmental unit, if after giving effect to such consolidation, merger, transfer, sale or assignment the surviving, resulting or transferee partnership, corporation or governmental unit: (1) will not be in default under any covenant under this Financing Agreement; (2) if it is not the Company, has the power to assume and assumes in writing all of the obligations of the Company herein and in the Note; and (3) if it is not a West Virginia partnership or corporation or a political subdivision of the State of West Virginia, either qualifies to do business in West Virginia or files with the Trustee a consent to service of process reasonably acceptable to the Trustee. Section 5.9. Obligations Under the Indenture. The Company shall undertake all actions and carry out all responsibilities prescribed for it under the Indenture. ARTICLE VI EVENTS OF DEFAULT AND REMEDIES Section 6.1. Event of Default Defined. Each of the following events shall be an Event of Default: (a) Failure of the Company to make any payment on the Note when due and payable; (b) Failure of the Company to observe and perform any of its other covenants, conditions or agreements hereunder for a period of 30 days after notice specifying such failure and requesting that it be remedied, given by the Issuer or the Trustee to the Company; (c) (1) Failure of the Company to pay generally its debts as they become due, (2) commencement by the Company of a voluntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or similar law, (3) consent by the Company to the appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official for the Company or any substantial part of its property, or to the taking possession by any such official of any substantial part of the property of the Company, (4) making by the Company of any assignment for the benefit of creditors generally, or (5) taking of corporate action by the Company in furtherance of any of the foregoing; (d) The (1) entry of any decree or order for relief by a court having jurisdiction over the Company or its property in an involuntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or similar law, (2) appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator or similar official for the Company or any substantial part of its property, or (3) entry of any order for the termination or liquidation of the Company or its affairs; (e) Failure of the Company within 60 days after the commencement of any proceedings against it under the federal bankruptcy laws or other applicable federal or state bankruptcy, insolvency or similar law, to have such proceedings dismissed or stayed; (f) Abandonment of the Facility by the Company for a period in excess of thirty (30) days; or (g) An Event of Default under the Indenture. The foregoing provisions of subsection (b) are subject to the limitation that if by reason of force majeure the Company is unable in whole or in part to observe and perform any of its covenants, conditions or agreements hereunder, other than its obligations contained in Sections 4.1, 4.6, 4.7, 5.1, 5.5, 5.6 and 5.8, the Company shall not be deemed in default during the continuance of such inability. The term "force majeure" as used herein shall include without limitation acts of God; strikes, lockouts or other disturbances; acts of public enemies; orders of any kind of the government of the United States of America or the State of West Virginia or any political subdivision thereof or any of their departments, agencies or officials, or any civil or military authority; insurrections; riots; epidemics; landslides; lightning; earthquakes; fires; hurricanes; tornadoes; storms; floods; washouts; droughts; arrests; restraint of government and people; civil disturbances; explosions; breakage or accident to machinery, transmission pipes or canals; partial or entire failure of utilities; or any other cause or event not reasonably within the control of the Company. The Company shall remedy with all reasonable dispatch the cause or causes preventing the Company from carrying out its covenants, conditions and agreements, provided that the settlement of strikes, lockouts and other industrial disturbances shall be entirely within the discretion of the Company, and the Company shall not be required to make settlement of strikes, lockouts and other industrial disturbances by acceding to the demands of any opposing party when such course is in the judgment of the Company not in its best interests. Section 6.2. Remedies on Default. Whenever any Event of Default hereunder shall have occurred and is continuing, the Trustee as the assignee of the Issuer: (a) May, and at the written direction of the holders of not less than 25% in aggregate principal amount of Bonds then outstanding, shall declare all amounts payable as principal and interest on the Note to be immediately due and payable, whereupon the same shall become immediately due and payable, except that the Trustee shall not make such a declaration unless the Bank has either (1) consented to such declaration or (2) has failed to honor any proper drawing under the Letter of Credit. (b) Have access to and inspect, examine and copy the financial books, records and accounts of the Company pertaining to the Facility. (c) Take whatever action at law or in equity may appear necessary or desirable to collect the amounts then due and thereafter to become due or to enforce observance or performance of any covenant, condition or agreement of the Company under the Note or this Financing Agreement. Section 6.3. Application of Amounts Realized in Enforcement of Remedies. Any amounts collected pursuant to action taken under Section 6.2 hereof shall be applied in accordance with the provisions of the Indenture, or, if payment of the Bonds shall have been made, shall be applied according to the provisions of Section 8.06 of the Indenture. Section 6.4. No Remedy Exclusive. No remedy herein conferred upon or reserved to the Trustee is intended to be exclusive of any other remedy, and every remedy shall be cumulative and in addition to every other remedy herein or now or hereafter existing at law, in equity or by statute. No delay or omission to exercise any right or power accruing upon an Event of Default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right or power may be exercised from time to time and as often as may be deemed expedient. Section 6.5. Attorney Fees and Other Expenses. Upon an Event of Default, the Company on demand shall pay to the Issuer and the Trustee the reasonable fees and expenses of their attorneys and other reasonable fees and expenses incurred by any of them in the collection of payments under the Note or the enforcement of any other obligations of the Company. Section 6.6. No Additional Waiver Implied by One Waiver. If either party or its assignee waives a default by the other party under any covenant, condition or agreement herein, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other default hereunder. ARTICLE VII PREPAYMENT OF THE NOTE Section 7.1. Option To Prepay in Full. Subject to requirements under the Indenture for Available Moneys in certain instances, the Company may prepay in full the Note, without penalty or premium, and terminate this Financing Agreement prior to payment of the Bonds by (a) paying to the Trustee an amount of cash or U.S. Government Obligations that, together with existing investments in the Bond Fund, will comply with the requirements for the defeasance of the Bonds set forth in Article VII of the Indenture, and (b) by making arrangements satisfactory to the Trustee for giving any required notice of redemption. Section 7.2. Mandatory Payment. The Company shall prepay the Note in full or in part (a) upon the occurrence of a Determination of Taxability as defined in the Indenture, or (b) as otherwise provided in Section 3.01 of the Indenture. Section 7.3. Option To Prepay in Part. The Company may prepay the Note in part, and the Issuer agrees that the Trustee may accept such payments to be paid to the Trustee for deposit in the Bond Fund and used for redemption or, at the election of the Company, purchase of outstanding Bonds, in the manner and to the extent provided in the Indenture. The principal amount of each Bond so purchased, delivered or credited shall be appropriately credited by the Trustee against the obligation of the Company to make future payments on the Note. Section 7.4. Relation of Options to Indenture. The options granted to the Company in this Article may be exercised whether or not the Company is in default under this Financing Agreement, provided that any such default will not result in the nonfulfillment of any condition to the exercise of any such option. Section 7.5. Obligations After Payment of Note and Termination of Financing Agreement. Anything contained in this Article VII to the contrary notwithstanding, the obligations of the Company contained in Section 5.6 and the obligation of the Company to pay the costs and expenses of the Issuer, the Trustee and the Remarketing Agent shall continue after payment of the Note and termination of this Financing Agreement. ARTICLE X MISCELLANEOUS Section 8.1. Term of Financing Agreement; Amounts Remaining After Payment of the Bonds. This Financing Agreement shall be effective upon execution and delivery hereof, and subject to earlier termination upon prepayment in full of the Note and all other amounts required to be paid hereunder, including all amounts payable under the Indenture, shall expire at midnight on September 1, 2010, or if such payment of the Note has not been made on such date, when payment in full of the Note and all other amounts required to be paid hereunder shall have been made, except that, notwithstanding the foregoing, the obligation of the Company to indemnify and pay the costs and expenses of the Issuer, the Remarketing Agent and the Trustee shall survive the expiration of this Financing Agreement. Any amounts remaining after payment of the Bonds and payment of the fees and expenses of the Trustee, the Remarketing Agent and the Issuer in accordance with the Indenture shall be distributed as set forth in Section 4.07 of the Indenture. Section 8.2. Notices, etc. Unless otherwise provided herein, all demands, notices, approvals, consents, requests and other communications hereunder shall be in writing and shall be deemed to have been given when delivered in person or mailed by first class registered or certified mail, postage prepaid, addressed: (a) if to the Issuer, to Harrison County, West Virginia, Harrison County Courthouse, Clarksburg, West Virginia 26301, Attention: President of Harrison County Commission; (b) if to the Trustee, to One Valley Bank, National Association, P.O. Box 1793, Charleston, West Virginia 25326, Attention: Corporate Trust Department; (c) if to the Company, to Salem Health Care Corp., 146 Water Street, Salem, West Virginia 26426; (d) if to the Underwriter or Remarketing Agent, to Crews and Associates, Inc. 2000 Union National Plaza, 124 West Capitol, Little Rock, Arkansas 72201; (e) if to the Bank, to NationsBank of Texas, N.A, 901 Main Street, 13th Floor, Dallas, Texas 75202, Attention: Marie Lancanster; and A duplicate copy of each demand, notice, approval, consent, request or other communication given hereunder by either the Issuer or the Company to the other shall also be given to the Trustee, the Bank and the Remarketing Agent. The Company, the Issuer, the Trustee, the Bank and the Remarketing Agent may, by notice given hereunder, designate any further or different addresses to which subsequent demands, notices, approvals, consents, requests or other communications shall be sent or persons to whose attention the same shall be directed. Section 8.3. Amendments to financing Agreement and Note. Neither this Financing Agreement nor the Note shall be amended or supplemented and no substitution shall be made for the Note subsequent to the issuance of the Bonds and before payment of the Bonds, without the consent of the Trustee, given in accordance with Article XI of the Indenture. Section 8.4. Successors and Assigns. This Financing Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Without the prior written consent of the Issuer, the Trustee and the Bank, no assignment by the Company shall relieve the Company of its obligations hereunder. Section 8.5. Severability. If any provision of this Financing Agreement shall be held invalid by any court of competent jurisdiction, such holding shall not invalidate any other provision hereof. Section 8.6. Applicable Law. This Financing Agreement shall be governed by the applicable laws of the State of West Virginia. Section 8.7. Counterparts. This Financing Agreement may be executed in counterparts, each of which shall be an original and all of which, taken together, shall constitute but one and the same instrument; except that to the extent, that this Financing Agreement shall constitute personal property under the Uniform Commercial Code of West Virginia, no security interest in this Financing Agreement may be created or perfected through the transfer or possession of any counterpart of this Financing Agreement other than the original counterpart, which shall be the counterpart containing the receipt therefor executed by the Trustee following the signatures to this Financing Agreement. Section 8.8. Bank May Perform Company's Obligations. The Bank may perform or observe any covenant, condition or agreement of the Company hereunder and such performance or observance shall be treated in all respects as the act of the Company. Section 8.9. Entire Agreement. This Financing Agreement together with the Indenture and the Note constitute the entire agreement between the Issuer and the Company and supersede all prior agreements and understandings, both oral and written, between the Issuer and the Company with respect to the subject matter hereof. IN WITNESS WHEREOF, the Issuer has caused this Financing Agreement to be executed on its behalf and its seal to be affixed hereto and attested by the duly authorized officers of The County Commission of Harrison County, West Virginia, and the Company has caused this Financing Agreement to be executed in its name by the duly authorized officer of its general partner, all as of the date first above written. THE COUNTY COMMISSION OF HARRISON COUNTY BY AND ON BEHALF OF HARRISON COUNTY, WEST (SEAL) VIRGINIA By ----------------------------------------------- President ATTEST: By Its SALEM HEALTH CARE CORP., a West Virginia corporation By Its ATTEST: By Its RECEIPT Receipt of the foregoing original counterpart of the Financing Agreement dated as of September 1, 1996, between The County Commission of Harrison County by and on behalf of Harrison County, West Virginia and Salem Health Care Corp., is hereby acknowledged as of the 30th day of September, 1996. ONE VALLEY BANK, NATIONAL ASSOCIATION, as Trustee By Vice President The material exhibits to this document are as follows, and are available upon request: CONTINUING DISCLOSURE AGREEMENT executed and delivered by SALEM HEALTH CARE CORP., a West Virginia limited partnership, as the borrower and ONE VALLEY BANK, NATIONAL ASSOCIATION in connection with the issuance of $2,185,000 Harrison County, West Virginia First Mortgage Refunding Revenue Bonds, Series 1996 being issued pursuant to a Trust Indenture dated as of September 1, 1996, by and between the Harrison County, West Virginia and One Valley Bank, National Association. Official Statement regarding exemption from taxation. TAX REGULATORY AGREEMENT AND NO ARBITRAGE CERTIFICATE by and among Harrison County, West Virginia, Salem Health Care Corp. and One Valley Bank, National Association, Charleston, West Virginia, as Trustee. EX-10.48 10 INDENTURE OF TRUST - SALEM Exhibit 10.48 INDENTURE OF TRUST relating to $2,185,000 Nursing Facility Refunding Revenue Bonds (Salem Health Care Corp. Project), Series 1996 between THE COUNTY COMMISSION OF HARRISON COUNTY BY AND ON BEHALF OF HARRISON COUNTY, WEST VIRGINIA and ONE VALLEY BANK, NATIONAL ASSOCIATION, as Trustee Dated as of September 1, 1996 INDENTURE OF TRUST INDENTURE OF TRUST dated as of September 1, 1996 (the "Indenture") between THE COUNTY COMMISSION OF HARRISON COUNTY, by and on behalf of HARRISON COUNTY, WEST VIRGINIA, a political subdivision of the State of West Virginia (the "Issuer"), and ONE VALLEY BANK, NATIONAL ASSOCIATION, a national banking association organized, existing and authorized to accept and execute trusts of the character herein set out (in such capacity, together with any successor in such capacity, the "Trustee"), as trustee. WHEREAS, the Issuer is a duly organized political subdivision of the State of West Virginia and is authorized by Chapter 13, Article 2C, Code of West Virginia of 1931, as amended (the "Act"), (a) to issue its revenue bonds for the purpose of providing funds (i) to pay the cost of acquiring, constructing, furnishing and equipping a commercial facility comprising a health care facility and (ii) to refund one or more series of revenue bonds previously issued pursuant to the Act to finance any such facility, in either case by lending the proceeds of such revenue bonds or otherwise making such proceeds available for such purposes to any person, firm or private corporation which will operate and maintain such facility in such a manner as shall effectuate the purposes of the Act and (b) to secure its revenue bonds by a trust agreement between the issuer and a corporate trustee including therein the pledge and assignment of revenues from any such loan to the payment of such revenue bonds; and WHEREAS, at the request of Salem Health Care Corp. (the "Company") and in order to further the purposes of the Act, the Issuer has determined to issue and sell its Nursing Facility Refunding Revenue Bonds (Salem Health Care Corp. Project), Series 1996 in the original principal amount of $2,185,000 (the "Bonds") for the purpose of providing funds, together with other available funds, to refund in full the outstanding principal amount of its $2,670,000 First Mortgage Refunding Revenue Bonds (Salem Health Care Corp. Project) Series 1986 (the "Prior Bonds"), the proceeds of which were used to refinance the costs of acquisition, construction and equipping of a 120-bed intermediate and skilled nursing facility, owned and operated by the Company, located at 146 Water Street in Salem, Harrison County, West Virginia (the "Facility"); and WHEREAS, by issuing the Bonds to refund the Prior Bonds, the Issuer and the Company expect to finance the Facility more economically and thereby to achieve interest cost savings; and WHEREAS, the Issuer has undertaken to provide for the refunding of the Prior Bonds and the refinancing of the acquisition, construction and equipping of the Facility by making available the proceeds from the sale of the Bonds pursuant to the provisions of a Financing Agreement (the "Agreement") between the Issuer and the Company, dated as of even date herewith; and WHEREAS, the Agreement provides that the Issuer shall issue and sell the Bonds; and that the Company shall pay, or cause to be paid, pursuant to the Agreement, in addition to other moneys available for such purpose, an amount sufficient to pay the Bonds in full and related expenses; and WHEREAS, the Issuer wishes to provide in this Indenture for the issuance of its Bonds, and the Trustee is willing to accept the trusts provided for in this Indenture; and WHEREAS, the execution and delivery of the Bonds and of this Indenture and the issuance and sale of the Bonds have been duly authorized by a resolution duly adopted by the governing body of the Issuer and all things necessary to make the Bonds, when executed by the Issuer and authenticated by the Trustee (as hereinafter defined), valid and binding legal obligations of the Issuer and to make this Indenture a valid and binding agreement have been done; ACCORDINGLY, THE ISSUER AND THE TRUSTEE AGREE AS FOLLOWS FOR THE BENEFIT OF THE OTHER AND FOR THE BENEFIT OF THE HOLDERS OF THE BONDS ISSUED PURSUANT TO THIS INDENTURE (SUBJECT TO THE PROVISIONS OF SECTIONS 6.01 and 12.08): GRANTING CLAUSE To secure first, the payment of the Bonds, the Issuer assigns and pledges to the Trustee, and grants to the Trustee, a security interest in, all right, title and interest of the Issuer in and to (a) the Agreement, including any right to delivery of the Letter of Credit, the Receipts and Revenues of the Issuer from the Agreement (as hereinafter defined), any right to bring actions and proceedings under the Agreement or for the enforcement of the Agreement and any right to do all things that the Issuer is entitled to do under the Agreement, but excluding the Unassigned Rights (as hereinafter defined) and the right to enforce the Unassigned Rights, and (b) all moneys and securities held from time to time by the Trustee under this Indenture, first, for the equal and proportionate benefit of all holders of the Bonds without priority or distinction as to lien or otherwise of any Bonds over any other Bonds. ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION Section 1.01. Definitions. For all purposes of this Indenture, unless the context requires otherwise, the following terms shall have the following meanings: "Act" means Chapter 13, Article 2C, Code of West Virginia of 1931, as amended. "Additional Bonds" shall mean any Bonds authorized and issued pursuant to Section 2.09 of this Indenture. "Agreement" or "Financing Agreement" means the Financing Agreement, dated as of the date of this Indenture, between the Issuer and the Company, as such Agreement may be amended or supplemented from time to time in accordance with its terms. "Authorized Denominations" means with respect to all Bonds $5,000 and any multiple thereof. "Available Moneys" means moneys that (a) are continuously on deposit with the Trustee in trust for the benefit of the Bondholders in a separate and segregated account in which only Available Moneys are held and (b) are proceeds of either (i) the Bonds received contemporaneously with and directly from the issuance and sale of the Bonds, (ii) payments made by the Company (and, if the bonds are then rated by any national securities rating agency, at the time of the deposit of such payments and for a period of at least 366 days thereafter, no Bankruptcy Filing shall have occurred), (iii) a draw by the Trustee on the Letter of Credit, (iv) refunding bonds for which the Trustee has received a written opinion of Bankruptcy Counsel to the effect that payment of such moneys to the Bondholders would not constitute an avoidable preference under Section 547 of the United States Bankruptcy Code in the event the Company or the Issuer were to become a debtor under the United States Bankruptcy Code, provided that such opinion shall only be required if the Bonds are then rated by any national rating agency, or (v) income derived from the investment of the foregoing. "Bank" means the issuer of the Letter of Credit, initially NationsBank of Texas, N.A., and, upon the issuance and delivery of a Substitute Letter of Credit, shall mean the issuer of such Substitute Letter of Credit. "Bankruptcy Counsel" means any counsel nationally recognized in bankruptcy matters that is independent of the Company and the Issuer and is reasonably acceptable to the Trustee. "Bankruptcy Filing" means the filing of a petition by or against the Company or the Issuer in respect of the Company, any of its partners or the Issuer, as the case may be, as debtor under the United States Bankruptcy Code or similar bankruptcy or insolvency act. If the petition has been dismissed and the dismissal is final and not subject to appeal at the relevant time, the filing will not be considered to have occurred. "Beneficial Owner" shall have the meaning set forth in Section 2.05(c). "Bonds" means the bonds issued pursuant to this Indenture. "Bond Fund" means the fund by that name created by Section 4. 02. "Bond Purchase Agreement" means the Bond Purchase Agreement dated September 26, 1996, among the Company, the Issuer and the Underwriter, with respect to the sale of the Bonds. "Bond Year" means the one-year period beginning on the day after the expiration of the preceding Bond Year. The first Bond Year begins on the date of the delivery of the Bonds and ends on August 31, 1997. The first and the last Bond Year may be for periods of less than one year. "Business Day" means any day other than (a) a Saturday or Sunday, (b) a day on which commercial banks in New York, New York, or the city or cities in which the corporate trust office of the Trustee, the primary office of the Remarketing Agent or the paying office of the Bank are authorized by law or executive order to close or (c) a day on which the New York Stock Exchange is closed. For purposes of this definition, "paying office of the Bank" means the Bank office responsible for making payments under any Letter of Credit, which initially shall be the office in Los Angeles, California. "Cede & Co." means Cede & Co., the nominee of DTC or any successor nominee of DTC with respect to the Bonds. "Code" means the Internal Revenue Code of 1986, as amended, the regulations (whether proposed, temporary or final) under that Code or the statutory predecessor of that Code, and any amendments of, or successor provisions to, the foregoing and any official rulings, announcements, notices, procedures and judicial determinations regarding any of the foregoing, all as and to the extent applicable. Unless otherwise indicated, reference to a Section of the Code means that Section of the Code, including such applicable regulations, rulings, announcements, notices, procedures and determinations pertinent to that Section of the Code. "Company" means Salem Health Care Corp., a West Virginia corporation, or any successor or successors to the Company's obligations under the Agreement as permitted under Section 5.8 of the Agreement. "Company Representative" means a person at the time designated to act on behalf of the Company by a written instrument furnished to the Trustee containing the specimen signature of such person and signed on behalf of the Company by its President, its Vice President or the Chairman of its Board of Directors. The certificate may designate an alternate or alternates. "Conversion Date" shall mean that Interest Payment Date, if any, upon which the interest rate on the Bonds converts from any given rate to a Weekly Rate, a One-year Rate, a Three-year Rate or a Fixed Rate, all as established in Section 3.09 of this Indenture. "Credit Modification" means, and shall be deemed to occur upon, the acceptance of a Substitute Letter of Credit by the Trustee if (a) as a result of such acceptance, the rating then assigned to the Bonds by any Rating Agency then rating the Bonds would be lowered or eliminated or (b) in the event the Bonds are not then rated, the issuer of such Substitute Letter of Credit has (i) senior debt or long-term bank deposits that are rated by a Rating Agency at a lower rating than the rating then assigned to the senior debt or long-term bank deposits of the Bank, or (ii) outstanding letters of credit or other similar instruments supporting debt obligations that are rated by a Rating Agency at a lower rating than the rating assigned to debt obligations supported with letters of credit or similar instruments issued by the Bank. "DTC" means The Depository Trust Company, a limited purpose company organized under the laws of the State of New York, and its successors and assigns. "DTC Participant" or "DTC Participants" means securities brokers and dealers, banks, trust companies and clearing corporations that have access to the DTC system. "Determination of Taxability" shall have the meaning set forth in Section 3.01(c). "Escrow Agreement" means the Escrow Deposit Agreement, dated as of the date of this Indenture, among the Issuer, the Company and the Prior Bonds Trustee, as Escrow Agent. "Event of Default" is defined in Section 8.01. "Event of Taxability" shall mean delivery to the Trustee of (a) an opinion of Bond Counsel or (b) a letter or notice from the Internal Revenue Service to a Bondholder, in either event to the effect that interest on any Bond is includable in gross income of the recipient thereof (other than a Bondholder that is a "substantial user" of the Facility or a "related person" within the meaning of Section 147(a) of the Code) for Federal income tax purposes. "Date" of an Event of Taxability shall mean the date of receipt by the Trustee of the material described in (a) or (b). "Facility" or "Project" means the 128-bed intermediate and skilled nursing and rehabilitation facility located at 146 Water Street in Salem, Harrison County, West Virginia. "Fixed Rate" means with respect to the Bonds the Fixed Rate established in accordance with Section 2.02. "Fixed Rate Period" means that period during which the Fixed Rate is in effect. "Indenture" means this Indenture of Trust, as it may be amended or supplemented from time to time in accordance with its terms. "Interest Payment Date" means the first day of each March and September, commencing March 1, 1997, provided, however, that while the Bonds bear interest at the Weekly Rate, the Interest Payment Date shall be the first Business Day of each calendar month commencing the first Business Day of the month subsequent to the Conversion Date. "Issuer" means Harrison County, West Virginia, a political subdivision of the State of West Virginia, acting by and through the County Commission of Harrison County, West Virginia, and its successors and assigns. "Issuer Representative" means the President of the Harrison County Commission or other person designated at the time to act on behalf of the Issuer by a written instrument furnished to the Trustee containing the specimen signature of such person and signed on behalf of the Issuer by the President of the Harrison County Commission. "Letter of Credit" means an irrevocable letter of credit having the characteristics of a "credit" or "letter of credit" set forth in Section 5-103 of the Uniform Commercial Code of the State except that a letter of credit (a) may not be revocable and (b) may only be issued by (i) a national bank, (ii) any banking institution organized under the laws of any state, territory or the District of Columbia, the business of which is substantially confined to banking and is supervised by the state or territorial banking commission or similar officials or (iii) a branch or agency of a foreign bank, provided that the nature and extent of federal and/or state regulation and the supervision of the particular branch or agency is substantially equivalent to that applicable to federal or state chartered domestic banks doing business in the same jurisdiction. Initially, the term "Letter of Credit" shall mean the irrevocable letter of credit issued by the Bank to the Trustee, including any permitted supplements or amendments thereto and any renewals or extensions thereof, and, upon the expiration or termination of the Letter of Credit and the issuance and delivery of a Substitute Letter of Credit meeting the requirements set forth in this paragraph and in Section 5.03 hereof, "Letter of Credit" shall mean such Substitute Letter of Credit. "Mandatory Repurchase Date" means, with respect to any Bonds, the date on which such Bonds are required to be purchased pursuant to Section 3.07(a). "Maximum Rate" means the lesser of (a) the highest interest rate that may be borne by the Bonds under State law and (b) 12% per year. "Note" shall mean the promissory note of the Company in the principal amount of $2,185,000, dated as of the date of the Bonds, in the form attached to the Agreement as Exhibit A, issued pursuant to the Agreement and delivered to the Issuer as consideration for the use of the proceeds of the Bonds to refund the Prior Bonds, and any amendment or supplement thereto or substitution therefor. "Notice of Mandatory Repurchase" means that notice required to be prepared by the Trustee and given by the Trustee pursuant to Section 3.07. "One-year Rate" means with respect to the Bonds the variable rate established annually in accordance with Section 2.02. The Bonds shall initially bear a One-year Rate of 4.00%. "One-year Rate Period" means each period during which the One-year Rate is in effect. "Opinion of Bond Counsel" means an Opinion of Counsel by nationally recognized bond counsel. "Opinion of Counsel" means a written opinion of counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Issuer, the Trustee, the Remarketing Agent or the Company. "Optional Tender Date" shall have the meaning set forth in Section 3.07(b)(i). "Outstanding" when used with reference to Bonds, or "Bonds outstanding" means all Bonds that have been authenticated and delivered by the under this Indenture, except the following: (a) Bonds canceled or purchased by or delivered to the Trustee for cancellation pursuant to the provisions of this Indenture. Except as otherwise provided in Section 3.08, Bonds purchased by the Company pursuant to optional tender or mandatory repurchase under Section 3.07 will continue to be outstanding until the Company directs the Trustee to cancel them; (b) Bonds that have become due (at maturity or on redemption, acceleration or otherwise) and for the payment, including interest accrued to the due date, of which sufficient moneys are held by the Trustee; (c) Bonds deemed paid by Section 7.01; and (d) Bonds in lieu of which others have been authenticated under Section 2.05 (relating to registration and exchange of Bonds) or Section 2.06 (relating to mutilated, lost, stolen, destroyed or undelivered Bonds). "Owner," "owners," "Bondholder," "bondholder," "Holder," "holder" or words of similar import mean: (a) in the event that the book-entry system of evidence and transfer of ownership in the Bonds is employed pursuant to Section 2.05(c), Cede & Co., as nominee for DTC, or its nominee, and (b) in all other cases, the registered owner or owners of any Bond fully registered as shown on the register maintained by the Trustee. "Person" means (a) any individual, (b) any corporation, partnership, joint venture, association, joint-stock company, business trust or unincorporated organization, or grouping of any such entities, in each case formed or organized under the laws of the United States of America, any state thereof or the District of Columbia or (c) the United States of America or any state thereof, or any political subdivision of either thereof, or any agency, authority or other instrumentality of any of the foregoing. "Parent" means Regency Health Services, Inc., a Delaware Corporation, and owner of 100% of the stock of the Company. "Prior Bonds" means Harrison County, West Virginia First Mortgage Refunding Revenue Bonds (Salem Health Care Corp. Project), Series 1986, in the original principal amount of $2,670,000. "Prior Bonds Trustee" means United National Bank, Charleston, West Virginia, as indenture trustee for the Prior Bonds. "Rating Agency" means Moody's Investors Service, Inc., if such agency's ratings are in effect with respect to the Bonds, and Standard & Poor's Ratings Group, if such agency's ratings are in effect with respect to the Bonds, and their respective successors and assigns. If either such corporation ceases to act as a securities rating agency, the Company may, with the approval of the Remarketing Agent and the Bank, appoint any nationally recognized securities rating agency as a replacement. "Receipts and Revenues of the Issuer from the Agreement" means all moneys paid to the Issuer pursuant to Section 4.1 of the Agreement, and receipts of the Trustee credited under the provisions of this Indenture against such payments, including all moneys (other than moneys drawn to purchase Bonds pursuant to the terms hereof) received by the Trustee from a draw under the Letter of Credit. "Record Date" means (i) while the Bonds bear interest at the Weekly Rate, the Trustee's close of business on the Business Day next preceding each Interest Payment Date; and (ii) while the Bonds bear interest at any other interest rate, the 15th day of the calendar month next preceding an Interest Payment Date. "Reimbursement Agreement" means the Credit Agreement among the Parent, the Lenders Identified therein, NationsBank Capital Markets, Inc. and the Bank pursuant to which the Letter of Credit is issued by the Bank and delivered to the Trustee, and any and all modifications, alterations, amendments and supplements thereto. "Remarketing Agent" means initially Crew and Associates, Inc., and any successor agent or agents appointed from time to time pursuant to Section 9.12. "Remarketing Agreement" means (a) initially the Remarketing and Interest Services Agreement among the Issuer, the Company and the Remarketing Agent dated as of September 1, 1996, and any and all modifications, alterations, amendments and supplements thereto and (b) any agreement between the Company, the Issuer and any successor remarketing agent appointed pursuant to Section 9.12. "Remarketing Proceeds" shall have the meaning set forth in Section 3.08(c). "Responsible Officer" means, when used with respect to the Trustee, any officer within the Corporate Trust Division (or any successor group of the Trustee), including any vice president, assistant vice president, assistant secretary or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred at the Trustee's address set forth in Section 12.01 because of his knowledge of and familiarity with the particular subject. "State" means the State of West Virginia. "Substitute Letter of Credit" shall have the meaning set forth in Section 5.03. "Tax Regulatory Agreement" means the Tax Regulatory Agreement dated as of the date of the delivery of the Bonds among the Company, the Issuer and the Trustee, as the same may be amended or supplemented from time to time in accordance with its terms or with an opinion of Bond Counsel to the effect that such amendment will not have an adverse effect on the tax-exempt status of the Bonds under the Code. "Three-year Rate" means with respect to the Bonds the variable rate established every three-years in accordance with Section 2.02. "Three-year Rate Period" means each period during which a Three-year Rate is in effect. "Trustee" means the entity identified as such in the heading of this Indenture and such entity's successors under this Indenture, and any separate or co-trustee at the time serving as such under this Indenture. "Unassigned Rights" means the rights of the Issuer under Section 4.1(b)(2) (relating to fees and expenses) and Section 5.6 (relating to indemnification) of the Agreement and the rights of the Issuer to receive documentation and notices, to give or withhold consents in connection with the provisions of this Indenture or the Agreement and the right to enforce any of the foregoing. "Underwriter" means Crews and Associates, Inc. "U.S. Government Obligations" means (a) direct obligations of the United States for which its full faith and credit are pledged for the timely payment thereof, (b) obligations of a person controlled or supervised by and acting as an agency or instrumentality of the United States, the payment of which is unconditionally guaranteed as a full faith and credit obligation of the United States for the timely payment thereof or (c) securities or receipts evidencing ownership interests in obligations or specified portions (such as principal or interest) of obligations described in (a) or (b). "Weekly Rate" means with respect to the Bonds the variable interest rate on the Bonds established weekly in accordance with Section 2.02. "Weekly Rate Period" means each period during which a Weekly Rate is in effect. All other terms used in this Indenture that are defined in Article I of the Agreement have the same meanings assigned them in the Agreement unless the context clearly requires otherwise. Section 1.02. Rules of Construction. Unless the context otherwise requires, (a) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles applied on a consistent basis; (b) references to Articles and Sections are to the Articles and Sections of this Indenture; (c) terms defined elsewhere in this Indenture shall have the meanings therein prescribed for them; (d) words of the masculine gender shall be deemed and construed to include correlative words of the feminine and neuter genders; (e) headings used in this Indenture are for convenience of reference only and shall not define or limit the provisions hereof; (f) each reference herein or in the Bonds to a percentage of Bonds required for notices, consents or for any other reason shall be deemed to refer to Bonds then outstanding; and (g) all references herein to time shall be Charleston, West Virginia time unless otherwise expressly stated. ARTICLE II THE BONDS Section 2.01. Issuance of Bonds; Form; Dating. (a) Authorization. The Issuer hereby authorizes and creates under this Indenture an issue of Bonds, entitled to the benefit, security and protection of this Indenture, to be designated "Nursing Facility Refunding Revenue Bonds (Salem Health Care Corp. Project), Series 1996." The total principal amount of Bonds that may be issued and outstanding hereunder shall be $2,185,000, except as provided in Section 2.06 with respect to replacement of mutilated, lost, stolen, destroyed or undelivered Bonds and Section 2.09 with respect to Additional Bonds. The Bonds shall be issuable only as fully registered bonds without coupons in Authorized Denominations only, and in substantially the form of Exhibit A to this Indenture, with appropriate variations, omissions, insertions, notations, legends or endorsements required by law or usage or permitted or required by this Indenture. The Bonds may be in printed or typewritten form. No Bonds may be issued under the provisions of this Indenture except in accordance with this Article. The Bonds shall be payable in lawful money of the United States but only from the sources pledged to such purpose. The Bonds are limited obligations of the Issuer payable solely from the revenues and receipts derived from payments made by the Company on the Note or by the Bank under the Letter of Credit, which revenues and receipts and security have been pledged and assigned to the Trustee to secure payment of the Bonds in the manner and to the extent provided herein. NEITHER THE STATE OF WEST VIRGINIA, HARRISON COUNTY, WEST VIRGINIA, THE COUNTY COMMISSION OF HARRISON COUNTY, WEST VIRGINIA, NOR ANY OTHER POLITICAL SUBDIVISION THEREOF SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF OR INTEREST ON THE BONDS OR OTHER COSTS INCIDENT THERETO EXCEPT FROM THE REVENUES, MONIES AND PROPERTY PLEDGED THEREFOR, AND NEITHER THE TAXING POWER NOR THE FULL FAITH AND CREDIT OF THE STATE OF WEST VIRGINIA, HARRISON COUNTY, WEST VIRGINIA, THE COUNTY COMMISSION OF HARRISON COUNTY, WEST VIRGINIA, OR ANY OTHER POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR INTEREST ON THE BONDS OR OTHER COSTS INCIDENT THERETO. THE BONDS SHALL NEVER CONSTITUTE AN INDEBTEDNESS OF THE ISSUER WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY PROVISION AND SHALL NEVER CONSTITUTE OR GIVE RISE TO A PECUNIARY LIABILITY OF THE ISSUER. NEITHER SHALL THE BONDS NOR THE INTEREST THEREON BE A CHARGE AGAINST THE GENERAL CREDIT OR TAXING POWERS OF THE ISSUER. NO PRESENT OR FUTURE OFFICER, MEMBER, COMMISSIONER, EMPLOYEE OR AGENT OF THE ISSUER SHALL BE PERSONALLY LIABLE ON THE BONDS; AND NO COVENANT, AGREEMENT OR OBLIGATION CONTAINED HEREIN SHALL BE DEEMED TO BE A COVENANT, AGREEMENT OR OBLIGATION OF ANY PRESENT OR FUTURE MEMBER, COMMISSIONER, OFFICER, EMPLOYEE OR AGENT OF THE ISSUER IN HIS INDIVIDUAL CAPACITY. (b) Details of Bonds. All Bonds shall be dated September 1, 1996 and delivery of the Bonds and shall mature, subject to prior redemption, on September 1, 2010. Interest on the Bonds shall be computed from the Interest Payment Date next preceding the date of authentication thereof, unless such authentication date (a) is prior to the first Interest Payment Date following the initial delivery of the Bonds, in which case interest shall be computed from such initial delivery date, (b) is after a Record Date and before the subsequent Interest Payment Date, in which case interest shall be computed from the subsequent Interest Payment Date, or (c) is an Interest Payment Date, in which case interest shall be computed from such authentication date; provided, that if interest on the Bonds is in default, Bonds shall bear interest from the last date to which interest has been paid. The principal of, redemption or purchase price and premium, if any, and interest on the Bonds shall be payable in lawful currency of the United States. The principal of and redemption or purchase price and premium, if any, on the Bonds shall be payable at the principal corporate trust office of the Trustee upon presentation and surrender of the Bonds. Payments of interest on the Bonds shall be mailed to the persons in whose names the Bonds are registered on the register of the Trustee at the close of business on the Record Date next preceding each Interest Payment Date; provided that, any Holder of a Bond or Bonds in an aggregate principal amount of not less than $500,000 may, by prior written instructions filed with the Trustee (which instructions shall remain in effect until revoked by subsequent written instructions), instruct that interest payments for any period be made by wire transfer to an account in the continental United States or other means acceptable to the Trustee. Bonds shall be numbered from 1 upward as determined by the Trustee and shall contain the designation "R." (c) Delivery. Upon the execution and delivery of this Indenture, the Issuer shall execute and deliver the Bonds to the Trustee and, upon receipt by the Trustee of the following, the Trustee shall authenticate the principal amount of Bonds specified in the Issuer's authorization and request, and the Trustee shall deliver the Bonds to the purchaser or purchasers as directed by the Issuer: (i) a copy of the resolution or resolutions of the Issuer authorizing the issuance of the Bonds, certified by the Clerk of the Harrison County Commission; (ii) original executed counterparts of the Agreement, this Indenture, the Escrow Agreement, the Remarketing Agreement and the Tax Regulatory Agreement and a copy of the Reimbursement Agreement; (iii) confirmation that the Trustee has received the original, executed Letter of Credit from the Bank; (iv) an authorization and request from the Issuer to the Trustee to authenticate and deliver the Bonds in specified Authorized Denominations to the initial purchaser or purchasers upon payment to the Trustee, for the account of the Issuer, of the purchase price for such principal amount of Bonds; (v) an Opinion of Bond Counsel for the Bonds, addressed to the Trustee, or upon which the Trustee may rely, to the effect that the Bonds so specified have been validly authorized, executed and issued under the law of the State and this Indenture has been duly authorized, executed and delivered by the Issuer; (vi) an opinion of Counsel to the Bank addressed to the Trustee, or upon which the Trustee may rely, to the effect that the Letter of Credit is a binding and valid obligation of the Bank and is not subject to registration under the Securities Act of 1933, as amended; (vii) Internal Revenue Service Form 8038 completed by the Issuer with respect to the Bonds; (viii) An Opinion of Counsel that (1) the Company is a corporation duly organized and validly existing under the laws of the State, and (2) the Agreement and the Note have been duly authorized, executed and delivered by the Company and are enforceable against the Company, subject to usual exceptions for matters relating to bankruptcy and equitable principles; and (ix) Appropriate evidence that the Remarketing Agent has accepted its obligations and duties described in this Indenture. (d) Disbursement. On the date of issuance of the Bonds, the Trustee shall disburse all of the proceeds derived from the issuance of the Bonds, together with sufficient equity money provided by the Company, to the Prior Bonds Trustee as Escrow Agent under the Escrow Agreement in order to provide for the defeasance in full of the Prior Bonds. All additional moneys should be deposited in the Bond Fund and shall be applied as set forth in Section 4.04. Section 2.02. Interest on the Bonds. The Bonds shall bear interest as herein provided from the date thereof until paid in full. The Bonds will initially bear interest at a One-year Rate of 4.00%. Interest accrued on the Bonds shall be paid on each Interest Payment Date (or, if such day is not a Business Day, on the next succeeding Business Day), commencing on March 1, 1997. Subsequent to a Conversion Date, the Bonds shall bear interest at the lowest rate determined by the Remarketing Agent on their date of issuance as necessary to sell all of the Bonds at par; provided that no interest rate on the Bonds shall exceed the Maximum Rate. The amount of interest payable on any Interest Payment Date shall be computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, whichever may be applicable. If, subsequent to any Conversion Date, the Bonds bear interest at the Weekly Rate, during each Weekly Rate Period the Bonds shall bear interest at the Weekly Rate, determined by the Remarketing Agent initially no later than the first day of each Weekly Rate Period and thereafter no later than Wednesday (or the next succeeding Business Day, if such Wednesday is not a Business Day) of each week during such Weekly Rate Period. The Weekly Rate shall be the minimum rate of interest that would cause the Bonds on the date such rate is determined to have a market value equal to the then outstanding principal amount, plus, if such sale would not be on an Interest Payment Date, accrued interest. Such rate shall be determined by the Remarketing Agent in its sole discretion based on prevailing market conditions. The determination of the Weekly Rates as provided in this Indenture shall be conclusive and binding on the Issuer, the Company, the Bank, the Trustee, the Remarketing Agent and the Bondholders. The calculation and verification of interest payable on the Bonds as provided in this Indenture shall be conclusive and binding on the Issuer, the Company, the Bank, the Trustee, the Remarketing Agent, and the Bondholders, absent manifest error. If the Remarketing Agent shall not have determined a Weekly Rate for any week, the Weekly Rate shall be the same as the Weekly Rate for the immediately preceding week. If for any reason, the Weekly Rate cannot be determined for any week as hereinbefore provided, the Weekly Rate for such week shall be a rate per annum equal to 100% of the rate published in the then most recent edition of The Bond Buyer for 30-day prime tax-exempt commercial paper or, if The Bond Buyer no longer publishes such information, such other publication or provider of such information as the Remarketing Agent may select. The first Weekly Rate determined for each Weekly Rate Period shall apply to the period commencing on the first day of such Weekly Rate Period and ending on the next succeeding Wednesday (or the next succeeding Business Day, if such Wednesday is not a Business Day). Thereafter, each Weekly Rate shall apply to the period commencing on Thursday (or if the date of determination is not a Wednesday, on the next following Business Day) and ending on the next succeeding date of determination, or if earlier, on the last day of the Weekly Rate Period. Promptly following the determination of each Weekly Rate, the Remarketing Agent shall give notice thereof to the Trustee. Upon the request of any Bondholder, the Remarketing Agent shall notify any such Bondholder of each change in the Weekly Rate by first class mail. The failure to give any such notice shall not affect,the change in the Weekly Rate. The Remarketing Agent shall notify the Trustee and the Company in writing (which may be in telecopy form) or by telephone promptly confirmed in writing by 4:00 p.m. on the last Wednesday of each month (or if such Wednesday is not a Business Day, on the next succeeding Business Day) of the Weekly Rate set for each week in such month, and the principal amount of Bonds bearing interest at the Weekly Rate during each week. Using the Weekly Rates supplied by the Remarketing Agent, the Trustee shall calculate the amount of interest payable on the Bonds. Section 2.03. Execution and Authentication. The Bonds shall be signed on behalf of the Issuer with the manual or facsimile signature of the President of the Harrison County Commission, and the seal of the Issuer shall be impressed or imprinted on the Bonds by facsimile or otherwise, and attested by the manual or facsimile signature of the Clerk of the Harrison County Commission. If any officer whose signature is on a Bond no longer holds that office at the time the Trustee authenticates the Bond, the Bond shall nevertheless be valid. Also, if a person signing a Bond is the proper officer on the actual date of execution, the Bond shall be valid even if that person is not the proper officer on the nominal date of action. A Bond shall not be valid for any purpose under this Indenture unless and until the Trustee manually signs the certificate of authentication on the Bond, and such signature shall be conclusive evidence that the Bond has been authenticated under this Indenture. Section 2.04. Bond Register. The Trustee shall keep a register of Bonds and of their transfer and exchange. Bonds not held under a book-entry system must be presented at the principal corporate trust operations office of the Trustee for registration, transfer and exchange, and Bonds may be presented at that office for payment. Bonds not held under a book-entry system and optionally tendered by their holders must be delivered as specified in Section 3.07(b). Section 2.05. Registration and Exchange of Bonds; Persons Treated as Owners; Book-Entry System. (a) Bonds may be transferred only on the register maintained by the Trustee. Upon surrender for transfer of any Bond to the Trustee, duly endorsed for transfer or accompanied by an assignment duly executed by the holder or the holder's attorney duly authorized in writing and in either case, with an appropriate guarantee of signature conforming to the requirements of Exhibit A hereto, the Trustee shall authenticate a new Bond or Bonds in an equal total principal amount and registered in the name of the transferee. Bonds may be exchanged for an equal total principal amount of Bonds of different Authorized Denominations. The Trustee shall authenticate and deliver Bonds that the Bondholder making the exchange is entitled to receive, bearing numbers not then outstanding. Except in connection with the optional tender of Bonds pursuant to Section 3.07(b) and the delivery thereof pursuant to Section 3.08, the Trustee shall not be required to transfer or exchange any Bond during the period beginning 15 days before the mailing of notice calling the Bond or any portion of the Bond for redemption and ending on the redemption date. Bonds subject to redemption or mandatory repurchase may be transferred or exchanged only if the Trustee provides the new holder thereof with a copy of the notice of redemption or mandatory repurchase, as the case may be. The holder of a Bond as shown on the register of the Trustee shall be the absolute owner of the Bond for all purposes, and payment of principal, interest or purchase price shall be made only to or upon the written order of such holder or the holder's legal representative; provided that interest shall be paid to the Person shown on the register as a holder of a Bond on the applicable Record Date. (b) The Trustee may require the payment by a Bondholder requesting exchange or registration of transfer of any tax or other governmental charge required to be paid in respect of the exchange or registration of transfer but shall not impose any other charge. (c) The Trustee or the Remarketing Agent may make appropriate arrangements for the Bonds (or any portion thereof) to be issued or held by means of a book-entry system administered by DTC with no physical distribution of Bonds made to the public (other than those Bonds, if any, not held under such book-entry system). References in this Section 2.05(c) to a Bond or the Bonds shall be construed to mean the Bond or the Bonds that are held under the book-entry system. In such event, one Bond of each maturity shall be issued to DTC and immobilized in its custody. A book-entry system shall be employed, evidencing ownership of the Bonds in Authorized Denominations, with transfers of beneficial ownership effected on the records of DTC and the DTC Participants pursuant to rules and procedures established by DTC. Each DTC Participant shall be credited in the records of DTC with the amount of such DTC Participant's interest in the Bonds. Beneficial ownership interests in the Bonds may be purchased by or through DTC Participants. The holders of these beneficial ownership interests are hereinafter referred to as the "Beneficial owners." The Beneficial Owners shall not receive Bonds representing their beneficial ownership interests. The ownership interests of each Beneficial Owner shall be recorded through the records of the DTC Participant from which such Beneficial Owner purchased its Bonds. Transfers of ownership interests in the Bonds shall be accomplished by book entries made by DTC and, in turn, by DTC Participants acting on behalf of Beneficial Owners. SO LONG AS CEDE & CO., AS NOMINEE FOR DTC, IS THE REGISTERED OWNER OF THE BONDS, THE TRUSTEE SHALL TREAT CEDE & CO. AS THE ONLY HOLDER OF THE BONDS FOR ALL PURPOSES UNDER THIS INDENTURE, INCLUDING RECEIPT OF ALL PRINCIPAL OF AND INTEREST ON THE BONDS, RECEIPT OF NOTICES, VOTING AND REQUESTING OR DIRECTING THE TRUSTEE TO TAKE OR NOT TO TAKE, OR CONSENTING TO, CERTAIN ACTIONS UNDER THIS INDENTURE. Payments of principal, interest and purchase price with respect to the Bonds, so long as DTC is the only owner of the Bonds, shall be paid by the Trustee directly to DTC or its nominee, Cede & Co. as provided in the Letter of Representation dated as of September 1, 1996 from the Issuer, the Company, the Remarketing Agent, the Trustee to DTC (the "Letter of Representation"). DTC shall remit such payments to DTC Participants, and such payments thereafter shall be paid by DTC Participants to the Beneficial owners. The Issuer, the Company, and the Trustee shall not be responsible or liable for payment by DTC or DTC Participants, for sending transaction statements or for maintaining, supervising or reviewing records maintained by DTC or DTC Participants. In the event that (1) DTC determines not to continue to act as securities depository for the Bonds or (2) the Company or the Remarketing Agent determines that the continuation of the book-entry system of evidence and transfer of ownership of the Bonds would adversely affect its interests or the interests of the Beneficial Owners of the Bonds, the Issuer shall, at the request of the Company or the Remarketing Agent, discontinue the book-entry system with DTC. If the Remarketing Agent fails to identify another qualified securities depository to replace DTC, the Trustee shall authenticate and deliver replacement Bonds in the form of fully registered Bonds to each Beneficial Owner. THE ISSUER, THE COMPANY, THE REMARKETING AGENT, AND THE TRUSTEE SHALL NOT HAVE ANY RESPONSIBILITY OR OBLIGATIONS TO ANY DTC PARTICIPANT OR ANY BENEFICIAL OWNER WITH RESPECT TO (i) THE BONDS; (ii) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC OR ANY DTC PARTICIPANT; (iii) THE PAYMENT BY DTC OR ANY DTC PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL OF AND INTEREST ON THE BONDS; (iv) THE DELIVERY OR TIMELINESS OF DELIVERY BY DTC OR ANY DTC PARTICIPANT OF ANY NOTICE DUE TO ANY BENEFICIAL OWNER THAT IS REQUIRED OR PERMITTED UNDER THE TERMS OF THIS INDENTURE TO BE GIVEN TO BENEFICIAL OWNERS; (v) THE SELECTION OF BENEFICIAL OWNERS TO RECEIVE PAYMENTS IN THE EVENT OF ANY PARTIAL REDEMPTION OF THE BONDS; OR (vi) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC, OR ITS NOMINEE, CEDE & CO., AS OWNER. In the event that a book-entry system of evidence and transfer of ownership of the Bonds is discontinued pursuant to the provisions of this Section, the Bonds shall be delivered solely as fully registered Bonds without coupons in the Authorized Denominations, shall be lettered "IR" and numbered separately from 1 upward, and shall be payable, executed, authenticated, registered, exchanged and canceled pursuant to the provisions hereof. (d) The Remarketing Agent shall not be limited to utilizing a book-entry system maintained by DTC but may enter into a custody agreement with any bank or trust company serving as custodian (which may be the Trustee serving in the capacity of custodian) to provide for a book-entry or similar method for the registration and registration of transfer of all or a portion of the Bonds. SO LONG AS A BOOK-ENTRY SYSTEM OF EVIDENCE OF TRANSFER OF OWNERSHIP OF ALL THE BONDS IS MAINTAINED IN ACCORDANCE HEREWITH, THE PROVISIONS OF THIS INDENTURE RELATING TO THE DELIVERY OF PHYSICAL BOND CERTIFICATES SHALL BE DEEMED INAPPLICABLE OR BE OTHERWISE SO CONSTRUED AS TO GIVE FULL EFFECT TO SUCH BOOK-ENTRY SYSTEM. Section 2.06. Mutilated, Lost, Stolen, Destroyed or Undelivered Bonds. (a) If any Bond is mutilated, lost, stolen or destroyed, the Trustee shall authenticate a new Bond of the same denomination for any mutilated, lost, stolen or destroyed Bond if there is delivered to the Trustee at its principal corporate trust operations office, (1) in the case of a mutilated Bond, such mutilated Bond and (2) in the case of any lost, stolen or destroyed Bond, evidence of such loss, theft or destruction reasonably satisfactory to the Issuer, Bank, Trustee and Company, together with an indemnity from the Bondholder, reasonably satisfactory to them. If the Bond has matured and if the evidence and indemnity described above have been provided by the Bondholder, instead of issuing a duplicate Bond, the Trustee, with the consent of the Company, shall pay the Bond without requiring surrender of the Bond and make such requirements as the Trustee deems fit for its protection, including a lost instrument bond. The Issuer, the Company and the Trustee may charge the Bondholder their reasonable fees and expenses in this connection. (b) In the event that any Bond purchased pursuant to an optional tender or mandatory repurchase is not delivered by the holder thereof on the date such Bond is purchased, the Issuer shall execute (if necessary) and the Trustee shall authenticate and deliver a new Bond of like aggregate principal amount as the Bond purchased, which Bond shall, for all purposes of this Indenture, be deemed to evidence the same debt as the Bond purchased and shall be remarketed, delivered and registered in accordance with Section 3.08(d) hereof. If any Bond is purchased by the Trustee with Available Moneys provided by the Company and sufficient for such purchase, the Trustee, upon request of the Company, shall authenticate a new Bond in any Authorized Denomination specified by the Company, registered as the Company may direct and deliver it to the Company, or to its order, whether or not such Bond is ever delivered. If any Bond is purchased with funds obtained by a drawing on the Letter of Credit, the Trustee shall comply with the provisions of Section 3.08(d)(ii). (c) Every new Bond issued pursuant to this Section 2.06 shall (i) constitute an additional contractual obligation of the Issuer regardless of whether, in the case of (a) above, the mutilated, lost, stolen or destroyed Bond and, in the case of (b) above, the Bond purchased shall be enforceable at any time by anyone, and (ii) be entitled to all of the benefits of this Indenture equally and proportionately with any and all other Bonds issued and outstanding hereunder. (d) All Bonds shall be held and owned on the express condition that the foregoing provisions of this Section 2.06 are exclusive with respect to the replacement or payment of mutilated, lost, stolen or destroyed Bonds and the replacement of any Bond purchased pursuant to an optional tender or mandatory repurchase and, to the extent permitted by law, and shall preclude any and all other rights and remedies with respect to the replacement or payment of negotiable instruments or other investment securities without their surrender, notwithstanding any law or statute to the contrary now existing or enacted hereafter. Section 2.07. Cancellation of Bonds. All Bonds paid, redeemed or purchased, either at or before maturity, shall be delivered to the Trustee when such payment, redemption or purchase is made, and except as otherwise provided herein shall be canceled. Whenever a Bond is delivered to the Trustee for cancellation (upon payment, redemption, defeasance or otherwise), or for transfer, exchange or replacement pursuant to Section 2.05 or 2.06, the Trustee shall safeguard such Bond for such period of time as may be required by governmental regulations and thereafter promptly cancel the Bond and prepare a certificate of destruction therefor. Section 2.08. Temporary Bonds. Until definitive Bonds are ready for delivery, the Issuer may execute and the Trustee shall authenticate temporary Bonds substantially in the form of the definitive Bonds, with appropriate variations. The Issuer shall, without unreasonable delay, prepare and the Trustee shall authenticate definitive Bonds in exchange for the temporary Bonds. Such exchange shall be made by the Trustee without charge to the Bondholders. Temporary Bonds shall not otherwise be eligible for transfer or exchange under Section 2.05. Section 2.09. Additional Bonds. (a) At any time while the Issuer is not in default under this Indenture and subject to the approval and execution of a supplemental Indenture making appropriate provisions therefor in accordance with Section 10.01 hereof and subject to receipt by the Trustee of the documents listed below, the Issuer may issue one or more series of Additional Bonds for the purpose of providing funds to be used, with any other available funds, for the purpose of (i) paying the cost of all improvements, restoration, repairing, rebuilding, rearranging and replacements of the Project or any part thereof by the Company pursuant to, or (ii) refunding all or part of any prior series of Bonds, or any combination of the above. Each series of Additional Bonds shall be issued pursuant to a supplement to this Indenture. Unless otherwise provided in a supplemental Indenture, all such Additional Bonds shall be in substantially the same form as the Bonds, but shall be of such denominations, bear such dates, bear interest at such rates, have such maturity dates, redemption dates and redemption premiums, contain an appropriate series designation, and be issued at such prices all as approved by Company. The Trustee shall authenticate and deliver such Additional Bonds, but only upon receipt of the following: (1) A certificate of the Issuer, signed by its President, that it is not in default under this Indenture. (2) A certificate of the Company, signed by a Company Representative approving the issuance and terms of such Additional Bonds and that it is not in default under the Agreement. (3) A certified copy of a resolution or resolutions of the Issuer authorizing a)the execution and delivery of the amendment to the Agreement referred to in subparagraph 4 of this Section 2.09, (b) the execution and delivery of the supplemental Indenture referred to in subparagraph 5 hereof, and (c) the issuance, award, execution and delivery of such Additional Bonds. (4) An original executed counterpart of an amendment to the Agreement providing, among other things, for increasing the amounts payable by the Company thereunder to include payment of principal of, premium, if any, and interest on such Additional Bonds. (5) An original executed counterpart of a supplemental Indenture providing for the issuance of such Additional Bonds. (6) Evidence of the consent of the Bank to the issuance of such Additional Bonds. (7) An opinion of Counsel that the amendment to the Agreement and a new promissory note each has been properly authorized, executed, and delivered by Company, that the supplemental Indenture has been properly authorized, executed, and delivered by the Issuer, and that such amendment to the Agreement, new promissory note, and supplemental Indenture (assuming in the case of the supplemental Indenture, proper authorization and execution and delivery thereof by the Trustee), are valid and binding and enforceable in accordance with their respective terms, except as same is affected by laws affecting creditors' rights and the enforcement thereof generally and except to the extent that the remedy of specific performance and other equitable remedies are always within the discretion of the Court, and that the amendment to the Agreement and the supplemental Indenture have been duly recorded in every necessary recording office and appropriate financing statements have been filed in all filing offices where such filing shall be necessary; (8) A written opinion of Nationally Recognized Bond Counsel that the issuance of such Additional Bonds has been duly authorized by the Issuer and will have no adverse effect upon the exemption from Federal income taxes of interest on the Bonds or any other then outstanding series of Additional Bonds. (9) A request and authorization by the Issuer, signed by its President, to the Trustee to authenticate and deliver such Additional Bonds upon payment to the Trustee for the account of the Issuer of a specified sum. (b) When the requirements of subsection A of this Section have been met to the reasonable satisfaction of the Trustee and when the Additional Bonds shall have been executed and authenticated in the manner required by this Indenture, the Trustee shall deliver such Additional Bonds but only upon payment to the Trustee of the purchase price of such Additional Bonds. (c) The proceeds of all Bonds issued under the provisions of this Section (other than refunding Bonds) shall be deposited with the Trustee in a special fund appropriately designated and held in trust for the purpose of paying the costs for which such Additional Bonds were issued to finance except that any accrued interest received on the sale of such Additional Bonds and any amount authorized for the payment of interest during any period of acquisition and construction and for a reasonable period thereafter shall be deposited to the credit of the Bond Fund (i.e., in the designated subaccount therein). The proceeds of all refunding Bonds issued under the provisions of this Section shall be deposited with the Trustee in a special escrow account pledged solely to the payment of the principal of, premium, if any, and interest on the refunded Bonds, except that the accrued interest received on the sale of such Additional Bonds may be deposited instead in the Bond Fund. ARTICLE III REDEMPTION, PURCHASE AND REMARKETING Section 3.01. Redemption of Bonds. (a) Optional Redemption-Bonds in Weekly Rate Mode. While the Bonds bear interest at the Weekly Rate, the Bonds may be redeemed by the Issuer at the direction of the Company, in whole on any Business Day, or in part on any Interest Payment Date, or, if such Interest Payment Date is not a Business Day on the next succeeding Business Day, without premium, at the principal amount thereof with interest accrued to, but excluding, the redemption date; provided that any such redemption in part shall be in a minimum redemption amount of $100,000. (b) Optional Redemption-Bonds in One-year Rate Mode or Three-year Rate Mode. While the Bonds bear interest at either the One-year Rate or the Three-year Rate, the Bonds may be redeemed by the Issuer at the direction of the Company, in whole or in part on the final Interest Payment Date occurring during such One-year Rate Period or Three-year Rate Period, at a redemption price of par plus interest accrued to the date fixed for redemption. (c) Optional Redemption-Bonds in Fixed Rate Mode. While the Bonds bear interest at a Fixed Rate, the Bonds may be redeemed by the Issuer at the direction of the Company, in whole or in part at any time on and after the tenth anniversary date subsequent to the Conversion Date upon which the interest rate on the Bonds was converted to a Fixed Rate, at a redemption price of par plus interest accrued to the date fixed for redemption. NOTWITHSTANDING ANYTHING IN THIS INDENTURE TO THE CONTRARY, IN NO EVENT SHALL PROCEEDS OF THE LETTER OF CREDIT BE USED TO PAY THE REDEMPTION PRICE OF BONDS CALLED FOR REDEMPTION PURSUANT TO SECTIONS 3.01(a), 3.01(b) or 3.01(c). (d) Mandatory Sinking Fund Redemption. (i) The Bonds are subject to mandatory sinking fund redemption prior to their scheduled maturity, on September 1, 1997, and on each succeeding September 1 to and including September 1, 2010, or if any such date is not a Business Day, on the next succeeding Business Day, without premium, at a redemption price of the principal amount thereof with interest accrued to, but excluding, the redemption date, in the following principal amounts: Principal Year Amount 1997 $110,000 1998 110,000 1999 120,000 2000 125,000 2001 135,000 2002 140,000 2003 150,000 2004 155,000 2005 165,000 2006 175,000 2007 185,000 2008 190,000 2009 205,000 2010 (Maturity) 220,000 (ii) At its option, to be exercised on or before the 45th day next preceding any such sinking fund redemption date, the Issuer, or the Company on behalf of the Issuer, may: (x) deliver to the Trustee for cancellation Bonds in any aggregate principal amount desired to be credited against the Issuer's sinking fund redemption obligations; or (y) instruct the Trustee, to credit against the Issuer's sinking fund redemption obligations any Bonds that prior to such date have been redeemed (otherwise than through the operation of the sinking fund) and canceled by the Trustee and not theretofore applied as a credit against any sinking fund redemption obligation. Each Bond so delivered or previously redeemed shall be credited by the Trustee at 100% of the principal amount thereof against the obligation of the Issuer on such sinking fund redemption dates. Any excess over such obligation shall be credited against future sinking fund redemption obligations in chronological order, and the principal amount of the Bonds to be redeemed by operation of the sinking fund shall be accordingly reduced. (e) Mandatory Redemption on Determination of Taxability. The Bonds are also subject to mandatory redemption at a redemption price equal to the principal amount thereof with interest to, but excluding, the redemption date in whole (or in part as provided below), without premium, on the first day of a month within 180 days after the Company receives written notice from a Bondholder or former Bondholder or the Trustee of a final determination by the Internal Revenue Service or a court of competent jurisdiction that the interest paid or to be paid on any Bond is or was includable in the gross income of the Bond's owner (other than an owner that is a "substantial user" of the Facility or a "related person" within the meaning of Section 147(a) of the Code) for federal income tax purposes (a "Determination of Taxability"), or if such date is not a Business Day, on the next succeeding Business Day. No such determination will be considered final unless the Bondholder or former Bondholder involved in the determination gives the Company, the Trustee, the Remarketing Agent and the Bank prompt written notice of the commencement of the proceedings resulting in the determination and offers the Company, subject to the Company's agreeing to pay all expenses of the proceeding and to indemnify the holder against all liabilities that might result from it, the opportunity to control the defense of the proceeding and either the Company does not agree within 30 days to pay the expenses, indemnify the holder and control the defense or the Company exhausts or chooses not to exhaust available procedures to contest or obtain review of the result of the proceedings. Fewer than all the Bonds may be redeemed if redemption of fewer than all would result in the interest payable on the Bonds remaining outstanding being not includable in the gross income for federal income tax purposes of any holder. If fewer than all Bonds are redeemed, the Remarketing Agent shall select the Bonds to be redeemed by lot as provided in Section 3.03 or by such other method acceptable to the Remarketing Agent as may be approved in an opinion of Bond Counsel. (f) Mandatory Redemption on Expiration or Termination of Letter of Credit Without Extension or Providing a Substitute Letter of Credit. The Bonds are subject to mandatory redemption, in whole without premium at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to, but not including, the redemption date, on the Interest Payment Date that next precedes by at least 14 days the stated expiration or termination date of the Letter of Credit or, if such Interest Payment Date is not a Business Day, on the next succeeding Business Day, unless by the 15th day prior to such Interest Payment Date the Company provides to the Trustee, and the Trustee has accepted, (1) evidence that such Letter of Credit has been extended or (2) a Substitute Letter of Credit to be effective on or prior to such Interest Payment Date. (g) Mandatory Redemption upon Failure of Remarketing Agent to Remarket Bonds. Bonds unable to be remarketed by the Remarketing Agent pursuant to Section 3.08 of this Indenture shall be subject to mandatory redemption at a redemption price equal to the principal amount thereof plus accrued and unpaid interest thereof to, but not including, the redemption date in the manner set forth in Section 3.08. Section 3.02. Redemption Date. The redemption date of Bonds to be redeemed pursuant to the optional redemption provisions in Section 3.01(a) through (c) shall be a date permitted by such clauses and specified by the Company in the notice delivered pursuant to the preceding Section. The redemption date for mandatory redemptions shall be as specified in Section 3.01(d) through (g), as the case may be, or determined by the Trustee consistently with the provisions thereof. Section 3.03. Selection of Bonds To Be Redeemed. Except as otherwise provided in this Section 3.03, if fewer than all the Bonds are to be redeemed, the Remarketing Agent shall select the Bonds to be redeemed by lot or such other method as it deems in its sole discretion to be fair and appropriate and shall notify the Trustee (which notice may be provided by telephone, immediately confirmed in writing by legible facsimile transmission, registered or certified mail, overnight express delivery, or other secure means), of the holders and denominations of Bonds to be redeemed. The Remarketing Agent shall make the selection from Bonds not previously called for redemption. In the event the Remarketing Agent fails to notify the Trustee of the Bonds to be redeemed on or before the 35th day prior to the redemption. day, the Trustee shall select Bonds for redemption from among the Outstanding Bonds as set forth below. The Trustee shall treat each holder of Bonds as the owner of one Bond for purposes of selection for redemption and shall select Bonds for redemption by lot (1) from among the holders of less than $1,000,000 in aggregate principal amount, provided that if there are no such holders, or if, after selection from among such holders such selection has not resulted in redemption of a sufficient amount of Bonds, then (2) from among the holders of $1,000,000 or more in aggregate principal amount of Bonds. In the event the Trustee selects Bonds for redemption, the Trustee shall, on or before the day on which notice of redemption is mailed to the holders, give telephonic notice to the Remarketing Agent of the Bonds selected for redemption and the name of the holder or holders thereof. No portion of a Bond may be redeemed that would result in a Bond that is smaller than the then permitted minimum Authorized Denomination. For this purpose, the Remarketing Agent or the Trustee shall consider each Bond in a denomination larger than the minimum denomination permitted by the Bonds at the time to be separate Bonds each in the minimum denomination. Provisions of this Indenture that apply to Bonds called for redemption also apply to portions of Bonds called for redemption. Notwithstanding anything to the contrary in this Indenture, there shall be no redemption of less than all of the Bonds if there shall have occurred and be continuing an Event of Default. Section 3.04. Notice to Trustee; Notice of Redemption. (a) If the Company wishes that any Bonds be redeemed pursuant to the optional redemption provisions in Section 3.01(a) through (c) hereof, the Company shall notify the Trustee, the Trustee, the Bank and the Remarketing Agent in writing of the applicable provision, the redemption date, the principal amount of Bonds to be redeemed and other necessary particulars. The Company shall give such notices at least 40 days before the redemption date. (b) For Bonds being redeemed pursuant to Subsections (a) through (e) of Section 3.01, the Trustee shall prepare and send notice of each redemption to each Bondholder whose Bonds are being redeemed, the Company, the Remarketing Agent and the Bank by first-class mail at least 30 days but not more than 60 days before each redemption. If the Bonds are being held under a book-entry system administered by DTC and less than all of the Bonds are called for redemption, the Remarketing Agent shall notify the Trustee of the names and addresses of the Beneficial Owners of the Bonds selected for redemption pursuant to Section 3.03, and the Trustee shall prepare and send notice of such redemption to each such Beneficial owner at the time and in the manner provided in this Section 3.04(b). The notice shall identify the Bonds or portions thereof to be redeemed and shall state (i) the type of redemption and the redemption date, (ii) the redemption price, (iii) that the Bonds called for redemption must be surrendered to collect the redemption price, (iv) the address at which the Bonds must be surrendered, (v) that interest on the Bonds called for redemption ceases to accrue on the redemption date, (vi) the CUSIP number of the Bonds and (vii) any condition to the redemption. The procedure for redemption of Bonds pursuant to 3.01(f) shall be identical except that notice shall be sent at least 7 days before each redemption. The procedure for redemption of Bonds pursuant to 3.01(g) shall be as set forth in Section 3.08 of this Indenture. With respect to any Bonds to be redeemed that have not been presented for redemption within 60 days after the redemption date, the Trustee, at the expense of the Company, shall prepare and the Trustee shall give a second notice of redemption to the holder of any such Bonds that have not been presented for redemption, by first-class mail, within 30 days of the end of such 60-day period. Failure by the Trustee to give any notice of redemption as to any particular Bonds will not affect the validity of the call for redemption of any Bonds in respect of which no such failure has occurred. Any notice mailed as provided in the Bonds will be conclusively presumed to have been given whether or not actually received by any holder. Section 3.05. Payment of Bonds Called for Redemption. Upon surrender to the Trustee, Bonds called for redemption shall be paid as provided in this Article at the redemption price provided for in this Article. On the date fixed for redemption, notice having been given in the manner and under the conditions hereinabove provided, the Bonds or portions thereof called for redemption shall be due and payable at the redemption price provided therefor, plus accrued interest to such date. On such redemption date, if moneys sufficient to pay the redemption price of the Bonds to be redeemed, plus accrued interest thereon to the date fixed for redemption, are held by the Trustee, interest on the Bonds called for redemption shall cease to accrue; such Bonds shall cease to be entitled to any benefits or security under this Indenture or to be deemed outstanding; and the holders of such Bonds shall have no rights in respect thereof except to receive payment of the redemption price thereof, plus accrued interest to the date of redemption. Section 3.06. Bonds Redeemed in Part. Upon surrender of a Bond redeemed in part, the Trustee shall authenticate for the holder a new Bond or Bonds equal in principal amount to the unredeemed portion of the Bond surrendered. Section 3.07. Other Redemption; Purchase of Bonds. (a) Mandatory Repurchase of Bonds; Notice. Except as provided in Section 3.07(e), Bonds are subject to mandatory repurchase as follows: (i) on the effective date of any Substitute Letter of Credit delivered pursuant to Section 5.03, if, but only if, such Substitute Letter of Credit will result in a Credit Modification, at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to but not including the date of purchase; and (ii) on any Interest Payment Date selected by the Company, or if such Interest Payment Date is not a Business Day, on the next succeeding Business Day, at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to but not including the date of purchase; provided that any such mandatory repurchase, except as provided in Section 9.12 hereof, shall be subject to the prior written consent of the Bank; and The Trustee shall prepare and send to the holders of Bonds subject to mandatory repurchase, and to the Remarketing Agent, the Bank and the Company, a Notice of Mandatory Repurchase at least 15 days but not more than 60 days before the Mandatory Repurchase Date. Any Notice of Mandatory Repurchase shall be given by first-class mail and shall be substantially in the form attached hereto as Exhibit B. With respect to any Bonds to be purchased that have not been presented for purchase within 60 days after the Mandatory Repurchase Date, the Trustee, at the expense of the Company, prepare and send a second notice of purchase to the holder of any such Bonds, by first-class mail, within 30 days of the end of such 60-day period. (b) Optional Tender of Bonds. (i) Except as provided in Section 3.07(e), while the Bonds bear interest at the Weekly Rate, the holder (or while the Bonds are held pursuant to a book-entry system, the Beneficial Owner) of any Bond may elect to tender such Bond (or portion thereof, provided that each of the portion to be purchased and the portion to be retained is in an Authorized Denomination) for purchase at a purchase price equal to 100% of the principal amount of such Bond (or portion thereof), plus accrued and unpaid interest thereon to but not including the date of purchase, on any Business Day (the "Optional Tender Date"), but only upon (A) receipt by the Remarketing Agent by not later than 11:00 a.m. at least seven calendar days or five Business Days, whichever may be earlier, but not more than 30 days, prior to such Optional Tender Date of telephonic (followed, if requested by the Remarketing Agent, by written or facsimile confirmation delivered to the Remarketing Agent no later than the close of business on the next succeeding Business Day) or other notice stating (x) the principal amount of the Bond (or portion thereof) to be tendered, (y) the Bond number or other identification satisfactory to the Remarketing Agent, and (z) the Optional Tender Date on which such Bond will be tendered; and (B) if the Bonds are not being held under a book-entry system, delivery of such Bond (with an appropriate instrument of transfer duly executed in blank) to the Trustee by 10:00 a.m. on such Optional Tender Date. (ii) Any notice of optional tender for purchase delivered pursuant to subpart (i) above shall be irrevocable and shall be binding on the holder giving or delivering such notice and on any transferee of such holder. (iii) Upon receipt by the Remarketing Agent of a notice of optional tender for purchase pursuant to subparagraph (i) above, the Remarketing Agent shall give prompt telephonic notice thereof to the Trustee. (c) Payment for Purchased Bonds. To the extent that sufficient moneys have been made available therefor to the Trustee by 3:30 p.m. on the purchase date pursuant to Sections 3.08 and 5.02, upon surrender to the Trustee of Bonds optionally tendered or called for mandatory repurchase as provided herein, the purchase price therefor (as provided in this Section) shall be paid in immediately available funds by the Trustee not later than the close of business on the purchase date. From and after the Mandatory Repurchase Date or Optional Tender Date, as applicable, or, if later, the date on which such moneys are made available to the Trustee, interest accruing on such Bonds shall cease to be payable to the prior holder thereof, such Bonds shall cease to be entitled to the benefits or security of this Indenture and to such extent the prior holder shall have recourse solely to the funds held by the Trustee for the purchase of such Bonds as provided in Section 4.06. (d) Bonds Purchased in Part. Upon surrender of a Bond purchased in part and receipt by the Trustee thereof, the Trustee shall authenticate and deliver to the surrendering holder a new Bond equal in principal amount to the unpurchased portion of the Bond surrendered. (e) Limitations on Tenders. (i) The holders shall not have the right or be required, as the case may be, to tender any Bond for purchase on an Optional Tender Date or a Mandatory Repurchase Date if on such date, following the occurrence of an Event of Default, the Trustee shall have declared the principal of and interest on the Bonds to be immediately due and payable pursuant to Section 8.02. (ii) Notwithstanding the provisions of Section 3.07(b), holders of Bonds called for redemption or mandatory repurchase shall not have the right (without the prior consent of the Remarketing Agent) to tender such Bonds for purchase on an Optional Tender Date if such Optional Tender Date will occur on or after the 10th day prior to the date fixed for redemption or mandatory repurchase. Notwithstanding the foregoing, holders of Bonds called for redemption shall not have the right in any event to tender such Bonds for purchase on an Optional Tender Date if such Optional Tender Date will occur on or after the second day prior to the date fixed for redemption. Section 3.08. Remarketing of Purchased Bonds. (a) Bonds To Be Remarketed. Bonds purchased pursuant to optional tender or mandatory repurchase shall be remarketed by the Remarketing Agent as provided in this Section except an follows: (i) Bonds purchased pursuant to an optional tender or a mandatory repurchase and as to which the Remarketing Agent has received a notice of redemption may be remarketed before the date fixed for redemption only if the purchaser receives prior to purchasing such Bond a notice that such Bond is subject to redemption on the date fixed for redemption, notwithstanding the fact that such notice of redemption may be sent to such purchaser after the time period mentioned in Section 3.04(b). (ii) The Remarketing Agent shall not be required to offer Bonds for sale under this Section (1) during the continuance of an Event of Default, (2) following receipt of notice from the Internal Revenue Service, a Bondholder or former Bondholder, the Company, the Trustee of an Event of Taxability or a Determination of Taxability or (3) as otherwise provided in the Remarketing Agreement. (iii) Bonds purchased pursuant to an optional tender and as to which the Remarketing Agent has received a Notice of Mandatory Repurchase may be remarketed before the Mandatory Repurchase Date only if the purchaser receives a copy of the Notice of Mandatory Repurchase prior to purchasing such Bond. (iv) When a Letter of Credit is in effect, the Remarketing Agent shall not knowingly remarket any Bonds to the Issuer or the Company or any partner or affiliate of either thereof pursuant to this Section 3.08 unless either (i) the entire purchase price is paid from Available Moneys or (ii) prior to such sale, the Trustee shall have received a written opinion of Bankruptcy Counsel to the effect that such purchase would not result in a preferential payment pursuant to the provisions of Section 547 of the Bankruptcy Code. (b) Remarketing Effort. Except as provided in (a) above or except to the extent the Company directs the Remarketing Agent not to do so, the Remarketing Agent shall use reasonable efforts to remarket on the purchase date all Bonds purchased pursuant to Section 3.07 and to the extent such purchased Bonds are not remarketed on the purchase date, shall notify the Trustee in the manner provided below. Bonds not remarketed shall be subject to mandatory redemption as provided in Section 3.01(g). As early as practicable but not later than 10:00 a.m. on each Business Day on which the Remarketing Agent is required to remarket Bonds pursuant to this Section 3.08, the Remarketing Agent shall (A) notify the Trustee by telephone, with such notice promptly confirmed in writing, of (i) the amount of Bonds that have been remarketed and which have not been remarketed, (ii) the amount of proceeds from such remarketing and the amount needed to redeem the Bonds which have not been remarketed, and (iii) the information to enable the Trustee to prepare new Bond certificates with respect to Bonds that were remarketed and (B) transfer to the Trustee the proceeds from such remarketing as provided in (c) below. The Trustee shall immediately notify the Company by telephone, with such notice promptly confirmed in writing, of the amount of such proceeds and the Trustee shall take action as set forth in Section 5.02(a). If the Trustee fails to receive such notice from the Remarketing Agent by 10:00 a.m., the Trustee shall immediately the Company of the principal amount of all Bonds to be remarketed and/or redeemed on such date and the Trustee shall take action as set forth in Section 5.02(a). (c) Remarketing Proceeds. To the extent the Remarketing Agent has remarketed Bonds and has received funds representing a payment for such Bonds (the "Remarketing Proceeds") from the purchasers thereof, the Remarketing Agent shall promptly, but in no event later than 10:30 a.m. forward the Remarketing Proceeds by wire transfer (or in such other manner as is acceptable to the Remarketing Agent and the Trustee) to the Trustee with notice. All such Remarketing Proceeds shall be deposited in a separate, segregated account of the Bond Fund for application in accordance with the provisions of Section 3.08 and Article IV hereof and, until so applied, shall be held in trust for the benefit of the holders tendering such Bonds for purchase. (d) Delivery of Purchased Bonds. Bonds purchased pursuant to Section 3.07 shall be delivered to the purchasers thereof upon receipt of payment therefor. Prior to such delivery the Trustee shall provide for registration of transfer to the Holders, as provided in a written notice from the Remarketing Agent; and Section 3.09. Authority for and Conditions to Conversion of Interest Rate. The interest rate borne on the Bonds shall be converted to an interest rate of in a different interest rate mode upon receipt by the Trustee, the Remarketing Agent, the Bank of a direction from the Issuer, given at the direction of the Company, specifying the date new interest rate mode shall be determined (which date shall not be less than five Business Days prior to the effective date thereof), the resulting interest rate mode (i.e., Weekly Rate, One-year Rate, Three-year Rate or Fixed Rate) and the effective date thereof (which shall be a Business Day not less than 45 days from the date the Authority gives such direction). Such request and direction shall be accompanied by an opinion of counsel, which counsel shall be acceptable to the Trustee, addressed to the Trustee, the Company, the Bank and the Remarketing Agent, stating that such conversion is authorized or permitted by the Indenture, and that conversion to the new interest rate mode is in accordance with the provisions of the Indenture and will not adversely affect the exclusion from gross income for federal income tax purposes of interest on the Bonds. Conversion to a new interest rate mode shall not occur without such opinion. Upon the date stated in such directions as the date the new interest rate mode shall be determined, the Remarketing Agent shall determine the Weekly Rate, One-year Rate, Three-year Rate or Fixed Rate, which shall be the rate or rates which, if borne by the Bonds, would, based on prevailing financial market conditions, be the interest rate or rates necessary, but would not exceed the interest rate or rates necessary, to enable each maturity of the Bonds to be remarketed at 100% of the principal amount thereof. NOTWITHSTANDING ANYTHING IN THIS INDENTURE OR IN THE BONDS CONTRARY, IN THE EVENT THE INTEREST RATE ON THE BONDS IS CONVERTED TO A FIXED RATE, NO FURTHER CONVERSIONS WILL BE PERMITTED OR AUTHORIZED UNDER THIS INDENTURE. Section 3.10. Notice to Owners of Conversion to New Interest Rate Mode. The Trustee shall give notice to the Remarketing Agent and by first class mail, postage prepaid, to the Owners of Bonds not less than 30 days prior to the effective date of conversion to the new interest rate mode. Such notice shall state (i) that the interest rate on the Bonds will be converted to a new interest rate mode, (ii) whether the new interest rate mode is the Weekly Rate, One-year Rate, Three-year Rate or the Fixed Rate, (iii) the effective date of conversion to the new interest rate mode, (iv) the date the new interest rate mode is to be determined and the procedure for notifying Owners of the new interest rate mode, (v) the dates upon which interest on the Bonds will be payable after the effective date of the new interest rate mode, (vi) that after conversion to a Fixed Rate, if applicable the Owners of the Bonds will no longer have the right to deliver the Bonds to the Remarketing Agent for purchase, and (vii) that all Outstanding Bonds not purchased prior to the effective date will be purchased on the effective date of the new interest rate mode, except Bonds with respect to which the Owner has directed the Company not to purchase in accordance herewith. Section 3.11. Notification of Interest Rate; Replacement Bonds. Upon determining the interest rate to be borne under the new interest rate mode, the Remarketing Agent shall provide notice of such rate to the Trustee by telephone, with written confirmation in writing and the Trustee shall give notice by first class mail, postage prepaid to the owners of the Bonds which shall set forth such interest rate. In connection with the conversion of the interest rate to a Fixed Rate, the Trustee, at the direction of the Company shall deliver replacement Bonds bearing the Fixed Rate with deletion of such terms as are no longer applicable. Any such replacement Bonds shall be executed and authenticated as provided herein. In the event that definitive Bonds are not available for delivery, temporary replacement Bonds may be delivered as provided herein. Section 3.12. Certain Provisions of Bonds and Indenture Inapplicable After Conversion to Fixed Rate. The day after the effective date of conversion to the Fixed Rate, the Bonds shall no longer be subject to those provisions of the Indenture or the Bonds relating to computation of interest rate, remarketing of Bonds, optional tender of the Bonds, mandatory repurchase of the Bonds, or any provisions relating to the conversion of the interest rate on the Bonds. Additionally, following conversion to the Fixed Rate, all references herein to the Remarketing Agent shall be of no further effect. Section 3.13. Interest on Bonds After Conversion to Fixed Rate. Following conversion to a One-year Rate, a Three-year Rate, or a Fixed Rate, the Bonds shall bear interest at such interest rate, payable each March 1 and September 1, commencing on the first March 1 or September 1 following such conversion. The amount of interest payable on any Interest Payment Date shall be computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, whichever may be applicable. ARTICLE IV PAYMENT OF BONDS AND CREATION OF FUNDS Section 4.01. Payment of Bonds. The Trustee shall make payments when due of principal of and interest on Bonds (including upon the redemption of the Bonds as described in Article III hereof) and the purchase price of Bonds purchased pursuant to an optional tender or a mandatory repurchase: (a) first, (but only with respect to payments of purchase price) from the available proceeds of the remarketing of Bonds under Section 3.08, excluding any remarketing to the Issuer, the Company or affiliate of either thereof unless the proceeds thereof constitute Available Moneys; (b) second, from any other Available Moneys held by the Trustee in the Bond Fund; and (c) third, from moneys drawn by the Trustee under the Letter of Credit and deposited in the Bond Fund; (d) last, from any other moneys available to the Trustee. The proceeds of investments of any moneys in any of these categories may be used to the same extent as the moneys invested could be used. Section 4.02. Creation of Bond Fund. There is hereby created by the Issuer and ordered established with the Trustee a trust fund to be designated "Harrison County, West Virginia/Salem Health Care Corp.: Bond Fund." The money and securities in such fund shall be held in trust by the Trustee and applied as herein provided and, until such application, the money and securities in such Fund shall be subject to a lien and charge in favor of the Bondholders. Section 4.03. Payments into Bond Fund. There shall be deposited into the Bond Fund, as and when received: (a) all moneys received from a drawing under the Letter of Credit; (b) all payments specified in section 4.1 of the Agreement; and (c) all other moneys received by the Trustee under and pursuant to any of the provisions of the Agreement (other than Sections 4.1(b) and 5.6 thereof) that are required or that are accompanied by directions that such moneys are to be paid into the Bond Fund. To the extent that moneys described in (a), (b) or (c) above would not constitute Available Moneys at the time of such deposit, the Trustee shall create separate subaccounts in the Bond Fund in which moneys described in each of such (a), (b) and (c) above shall be held until such moneys constitute Available Moneys. The Trustee shall create a separate subaccount in the Bond Fund for, and shall not commingle moneys described in Section 4.01(a) with, any other moneys hereunder. So long as any of the Bonds issued hereunder are Outstanding the Issuer shall deposit, or cause to be paid to the Trustee for deposit in the Bond Fund for its account, sufficient sums from the amounts derived from the Agreement promptly to pay when due the principal of all Bonds (whether at maturity, upon redemption or acceleration or otherwise), interest on the Bonds and the purchase price of the Bonds as the same become due and payable, except that all payments shall be limited as provided in Section 2.01 and the Issuer makes no representation or warranty that the amount deposited will be adequate to make all payments when due. Section 4.04. Use of Moneys in Bond Fund. Except as provided in Section 4.06, moneys in the Bond Fund shall be used solely for the payment of the principal of and interest on the Bonds as the same shall become due and payable whether at maturity, upon redemption or otherwise and for the purchase price of the Bonds as the same shall become due, and the Trustee shall make such payment in accordance with the provisions of the Bonds and this Indenture; provided, however, that to the extent such principal, interest or purchase price is paid with proceeds of a drawing under the Letter of Credit and the Parent does not reimburse the Bank directly, the Trustee shall promptly reimburse the Bank from funds on deposit in the Bond Fund (other than Remarketing Proceeds or proceeds from a drawing on the Letter of Credit). Section 4.05. Custody of Bond Fund. The Bond Fund shall be held in the custody of the Trustee but in the name of the Issuer. The Issuer hereby authorizes and directs (a) the Trustee to withdraw sufficient funds from the Bond Fund to pay the principal of, interest on and the purchase price of the Bonds as the same become due and payable, and to withdraw from the Bond Fund funds sufficient to pay any other amounts payable therefrom as the same become due and payable; provided however, that to the extent such principal, interest or purchase price is paid with proceeds of a drawing under the Letter of Credit and the Parent does not reimburse the Bank directly, the Trustee shall promptly reimburse the Bank from funds on deposit in the Bond Fund other than Remarketing Proceeds to be paid to former holders or proceeds from a drawing on the Letter of Credit. Section 4.06. Moneys To Be Held in Trust. All money that the Trustee shall have withdrawn from the Bond Fund or shall have received from any other source and set aside for the purpose of paying any of the Bonds hereby secured, either at the maturity thereof or by purchase (other than as provided in Section 3.08 hereof) or call for redemption or for the purpose of paying any interest on the Bonds hereby secured, shall be held in trust by the Trustee for the respective Holders. Moneys received by the Remarketing Agent or Trustee from the sale of a Bond under Section 3.08 or from the purchase of any Bond shall be held segregated from other funds held by the Remarketing Agent or Trustee in trust for the benefit of the person from whom such Bond was purchased and shall not be invested while so held. Any money that is so set aside or transferred and that remains unclaimed by the Holders for the escheat period provided by State law shall be treated as abandoned property, and the Trustee shall report and remit this property according to the requirements of State law and thereafter the Holders shall look only to the appropriate State agency or official for payment and then only to the extent of the amounts so received, without any interest thereon, and the Trustee and the Issuer shall have no responsibility with respect to such money. Section 4.07. Payment to Company From Bond Fund. After payment in full of the principal of and interest on the outstanding Bonds, the fees, charges and expenses of the Issuer, the Trustee, the Remarketing Agent and the Bank (including without limitation the fees and expenses of their respective counsel) and all other amounts required to be paid hereunder, including payments of rebatable arbitrage, any amounts remaining in the Bond Fund shall be paid immediately to the Company. Section 4.08. Investment of Moneys. To the extent permitted by law, the Trustee shall invest and reinvest moneys held by it representing proceeds of drawings under the Letter of Credit and Available Moneys on deposit in the Bond Fund only in U.S. Government obligations (or in a mutual fund composed solely of U.S. Government Obligations) maturing at such times as such amounts will be needed for the purposes thereof. Unclaimed moneys held by the Trustee under Section 4.06 shall be held uninvested by the Trustee. The Trustee may make investments permitted by this Article through or from their own bond departments or the bond departments of any bank or trust company under common control with the Trustee. Investments shall be registered in the name of the Trustee, or its nominee and held by or under the control of the Trustee. The Trustee shall sell and reduce to cash a sufficient amount of investments whenever the cash held by them is insufficient. The Issuer represents that it will take no action that would cause moneys held by the Trustee in connection with the Bonds to be used in a manner that would cause the Bonds to be classified as "arbitrage bonds" within the meaning of Section 148 of the Code. ARTICLE V LETTER OF CREDIT Section 5.01. Requirements for Letter of Credit. In order to secure its obligations under the Agreement, pursuant to Section 4.7 of the Financing Agreement, the Company has agreed (a) upon the initial authentication and delivery of the Bonds, to deliver to the Trustee the Letter of Credit, issued by the Bank in favor of the Trustee and for the benefit of the holders of the Bonds; and (b) to ensure that so long as any Bonds remain outstanding, a Letter of Credit shall be in effect with respect to such Bonds with terms substantially conforming to those of the original Letter of Credit. Section 5.02. Draws on Letter of Credit; Extensions. (a) The Trustee shall make timely draws in accordance with the Letter of Credit such that timely payment under Section 4.01 is made without resort to the sources of payment described in Subsections (c) and (d) of Section 4.01. Such draws shall be in amounts equal to the total principal and interest due on redemption price, or purchase price payable with respect to, the Bonds, less the amounts (if any) available under Subsection (a) of Section 4.01. If any such draws are made on a Mandatory Repurchase Date in connection with the delivery of a Substitute Letter of Credit, such draws shall be made under the existing Letter of Credit and not on the Substitute Letter of Credit. The Trustee shall make such draws in such a fashion as to be able to obtain by 3:15 p.m. and to make such payment when due in accordance with this Indenture and the Bonds. (b) In drawing on the Letter of Credit, the Trustee will be acting on behalf of the Bondholders by facilitating payment of the Bonds and not on behalf of the Issuer or Company and shall not be subject to the control of either. Proceeds of draws on the Letter of Credit shall be held in the Bond Fund. (c) The Trustee shall advise the Company and the Parent by telecopy or telex on the date of each draw on the Letter of Credit of the amount and date of such draw and of the reason for such draw. (d) For extensions of the term of the Letter of Credit, the Trustee shall, at the direction of a Company Representative, but only if required to evidence an extension of the term of the Letter of Credit, surrender the Letter of Credit to the Bank in exchange for a new Letter of Credit of the Bank or the Letter of Credit with notations thereon, as the Bank may so elect, conforming in all material respects to the Letter of Credit except that the expiration date shall be extended. Any such extension shall be for a period of at least one year or, if less, until the 15th day following the maturity date of the Bonds. Section 5.03. Substitute Letter of Credit. (a) At any time while a Letter of Credit is in effect with respect to the Bonds, upon at least 60 days' prior written notice to the Trustee and the Remarketing Agent, the Company may, subject to the approval of the Remarketing Agent, provide for the delivery to the Trustee of a substitute Letter of Credit complying with the provisions of this Indenture (the "Substitute Letter of Credit"), which shall be effective upon acceptance by the Trustee. Any Substitute Letter of Credit shall have a stated expiration date of at least one year following the effective date thereof. (b) On or before the date of delivery of any Substitute Letter of Credit to the Trustee, as a condition to the acceptance by the Trustee of such Substitute Letter of Credit, the Company shall furnish to the Trustee: An opinion of Counsel addressed to the Trustee to the effect that (A) the Substitute Letter of Credit is the valid and binding obligation of the issuer thereof enforceable against such issuer in accordance with its terms except insofar as its enforceability may be limited by any insolvency or similar proceedings applicable to the issuer or by proceedings affecting generally the rights of the issuer's creditors or by general equitable principles; (B) payments of principal, interest or purchase price on the Bonds from the proceeds of a draw on the Substitute Letter of Credit will not constitute avoidable preferences under any applicable bankruptcy, reorganization, insolvency or other similar laws; and (C) the Substitute Letter of Credit does not constitute a separate security requiring registration under any applicable federal or state securities laws. In the case of a Substitute Letter of Credit issued by a branch or agency of a foreign commercial bank, there shall also be delivered an opinion of Counsel from a firm licensed to practice law in the jurisdiction in which the head office of such bank is located, addressed to the Trustee, to the effect that the Substitute Letter of Credit is the valid and binding obligation of such bank, enforceable against such bank in accordance with its terms, subject to the limitations referred to in Section 5.03(b)(i)(A) above; (ii) written evidence that the issuer of the Substitute Letter of Credit meets the requirements for an issuer of a Letter of Credit as set forth in the definition of Letter of Credit; (iii) an opinion of Bond Counsel addressed to the Trustee to the effect that the delivery and acceptance of such Substitute Letter of Credit is authorized under this Indenture and its delivery and acceptance will not adversely affect the exclusion from gross income of the interest on the Bonds for federal income tax purposes; (iv) written approval by the Remarketing Agent of the delivery of the Substitute Letter of Credit; and (v) a letter from each Rating Agency or, in the event the Bonds are not then rated, other written evidence satisfactory to the Trustee and the Remarketing Agent, stating whether or not the acceptance of the Substitute Letter of Credit will result in a Credit Modification. The Trustee shall accept any such Substitute Letter of Credit only in accordance with the terms, and upon satisfaction of the conditions, contained in this Section and any other applicable provisions of this Indenture. If acceptance of the Substitute Letter of Credit results in the occurrence of a Mandatory Repurchase Date, the Trustee shall not terminate or surrender the Letter of Credit until the Trustee shall have made such drawings thereunder, if any, as shall be required under the Indenture to provide for payment of the purchase price of the Bonds, and shall have received the proceeds of such drawing from the Bank. (c) Not more than 60 days and not less than 15 days prior to the effective date of the Substitute Letter of Credit, the Trustee shall, in addition to the notice required by Section 12.01(b), send by registered or certified mail, to each holder of the Bonds, notice of the issuance of the Substitute Letter of Credit, which notice shall include (i) the identity of the issuer thereof, (ii) the date the Substitute Letter of Credit will be effective, (iii) whether the Substitute Letter of Credit will result in a Credit Modification and (iv) if applicable, notice pursuant to Section 3.07 that the Bonds are subject to mandatory repurchase pursuant to Section 3.07. Section 5.04. Enforcement of the Letter of Credit. The Trustee shall hold and maintain the Letter of Credit for the benefit of the Owners of the Bonds until the Letter of Credit terminates or expires in accordance with its terms. When the Letter of Credit terminates or expires in accordance with its terms, the Trustee shall immediately surrender it to the Bank. Except in the case of a redemption in part pursuant to Article III hereof or any other reduction in the principal amount of Bonds outstanding, the Trustee shall not request that the Bank reduce the amount of the Letter of Credit. If at any time, all Bonds shall cease to be outstanding, the Trustee shall surrender the Letter of Credit to the Bank in accordance with the terms thereof. If at any time the Bank fails to honor a draft presented under the Letter of Credit in conformity with the terms thereof, the Trustee shall give immediate telephonic notice thereof to the Remarketing Agent and the Company. ARTICLE VI COVENANTS Section 6.01. Payment of Bonds. The Issuer shall promptly pay, or cause to be paid, the principal of, whether at maturity, by acceleration, call for redemption, or otherwise, and purchase price and interest on the Bonds, to the Trustee for payment to the registered owners of the Bonds on the dates and in the manner provided herein authorizing the issuance thereof and in the Bonds, according to the true intent and meaning thereof, but subject to the limitations set forth in Section 2.01(a) hereof. Section 6.02. Covenants and Representations of Issuer. The Issuer shall observe and perform all covenants, conditions and agreements on its part contained in this Indenture, in every Bond executed, authenticated and delivered hereunder and in all of its proceedings pertaining thereto; provided, however, that the liability of the Issuer under any such covenant, condition or agreement for any breach or default by the Issuer thereof or thereunder shall be limited solely to the Receipts and Revenues of the Issuer from the Agreement. The Issuer represents that it is duly authorized under the Constitution and laws of the State, including particularly and without limitation the Act, to issue the Bonds authorized by this Indenture and to execute this Indenture, to assign the Financing Agreement and the Note and to pledge the Receipts and Revenues of the Issuer from the Agreement in the manner and to the extent herein set forth; that all action on its part with respect to the issuance of the Bonds and the execution and delivery of this Indenture duly and effectively has been taken; and that the Bonds in the hands of the owners thereof are and will be valid and enforceable limited obligations of the Issuer according to the terms thereof except as limited by bankruptcy and usual equity principles. Section 6.03. Further Assurances. The Issuer shall execute and deliver such supplemental indentures and such further instruments, and do such further acts, as the Trustee may reasonably require for the better assuring, assigning and confirming to the Trustee the amounts assigned under this Indenture for the payment of the Bonds. ARTICLE VII DISCHARGE OF INDENTURE Section 7.01. Bonds Deemed Paid; Discharge of Indenture. All Bonds shall be deemed paid for all purposes of this Indenture when (a) payment of the greater of the principal of and the maximum amount of interest that may become due on the Bonds to the due date of such principal and interest (whether at maturity, upon redemption, acceleration or otherwise) and the payment of the purchase price of any Bond that may be optionally tendered by the owner either (i) has been made in accordance with the terms of Section 3.07(c) or (ii) has been provided for by depositing with the Trustee (A) moneys sufficient to make such payment, which moneys must comply with the provisions of Section 4.01(b) or (c) and/or (B) noncallable U.S. Government Obligations maturing as to principal and interest in such amounts and at such times as will insure the availability of sufficient moneys to make such payment without regard to the reinvestment thereof, provided that (i) such U.S. Government Obligations must be purchased from Available Moneys and (ii) the Trustee shall have received written evidence from each Rating Agency, if any, rating the Bonds that as a result of such action, their rating on the Bonds will not be lowered or eliminated; and (b) all compensation and expenses of the Issuer and the Trustee (as well as the fees and expenses of their Counsel) pertaining to each Bond in respect of which such payment or deposit is made have been paid or provided for to the respective satisfaction of the Trustee. When a Bond is deemed paid, it shall no longer be secured by or entitled to the benefits of this Indenture, except for payment from moneys or U.S. Government Obligations under (a)(ii) above and except that it may be optionally tendered if and as provided in Section 3.07(b) and it may be transferred, exchanged, registered, discharged from registration or replaced as provided in Article II. Notwithstanding the foregoing, no deposit under (a)(ii) above made for the purpose of paying the redemption price of a Bond (as opposed to the final payment thereof upon maturity) will be deemed a payment of a Bond as aforesaid until (x) notice of redemption of the Bond is given in accordance with Article III or, if the Bond is not to be redeemed within the next 60 days, until the Company has given the Trustee, in form satisfactory to the Trustee, irrevocable instructions to notify, as soon as practicable, the holder of the Bond, in accordance with Article III, that the deposit required by (a)(ii) above has been made with the Trustee and that the Bond is deemed to be paid under this Article and stating the redemption date upon which moneys are to be available for the payment of the principal of the Bond or (y) the maturity of the Bond. Additionally, and while the deposit under clause (a)(ii) above made for the purpose of paying the final payment of a Bond upon its maturity will be deemed a payment of such Bond as aforesaid, the Trustee shall mail notice to the Owner of such Bond, as soon as practicable, stating that the deposit required by (a)(ii) above has been made with the Trustee and that the Bond is deemed to be paid under this. Article. When all Outstanding Bonds are deemed paid under the foregoing provisions of this Section and other sums due hereunder, under the Agreement and the Remarketing Agreement are paid, the Trustee shall upon request acknowledge the discharge of the Issuer's obligations under this Indenture except for obligations relating to optional tender as provided in Section 3.07(b), obligations under Article II in respect of the transfer, exchange, registration, discharge from registration and replacement of Bonds, and obligations under Section 9.06 hereof with respect to the Trustee's compensation and indemnification, and the Trustee without further direction shall surrender the Letter of Credit to the Bank, in accordance with the terms of the Letter of Credit. Bonds delivered to the Trustee for payment shall be canceled by the Trustee pursuant to Section 2.07. A Company Representative shall direct the deposit, investment and use of the moneys and securities described in this Section such that no deposit will be made and no use made of any such deposit which would cause any Bonds to be treated as "arbitrage bonds" within the meaning of Section 148 of the Code. Before accepting or using any such deposit, the Trustee may request an opinion of Bond Counsel as to whether such use or acceptance would cause the Bonds to be so treated and that all conditions hereunder have been satisfied, and the Trustee may conclusively rely on such opinion with regard thereto. The Trustee may request a certificate of an independent certified public accountant to the effect that a deposit will be sufficient to defease the Bonds as provided in this Section 7.01. Upon receipt of any amount pursuant to this Article VII, the Trustee shall give written notice thereof, which notice shall include, without limitation, the amount of such deposit and any instructions given to the Trustee pursuant thereto, to the Remarketing Agent by first-class mail, postage prepaid. Section 7.02. Application of Trust Money. The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to the preceding Section and shall apply the deposited money and the money from the U.S. Government Obligations in accordance with this Indenture only to the payment of principal of, interest on, or purchase prince of, the Bonds. ARTICLE VIII DEFAULTS AND REMEDIES Section 8.01. Events of Default. Each of the following events shall be an Event of Default: (a) Default in the due and punctual payment of any interest on any Bond; (b) Default in the due and punctual payment of the principal of any Bond (whether at maturity, by acceleration or redemption, upon purchase or otherwise); (c) Subject to the provisions of Section 8.11, default in the observance or performance of any other of the covenants, conditions or agreements on the part of the Issuer under the Indenture or in the Bonds; (d) Receipt by the Trustee of notice from the Bank that an Event of Default has occurred under the Reimbursement Agreement accompanied by a demand by the Bank that the Trustee declare the Bonds to be immediately due and payable; or (e) The occurrence of an Event of Default under the Financing Agreement. Section 8.02. Acceleration and Duty to Draw on Letter of Credit. (a) Upon the occurrence of an Event of Default under Section 8.01(a), (b) or (d) hereof, the Trustee shall, by notice to the Issuer, the Holders, the Bank, the Remarketing Agent and the Company, declare the entire unpaid principal of and interest on the Bonds immediately due and payable and, thereupon, the entire unpaid principal of and interest on the Bonds shall forthwith become immediately due and payable. Upon the occurrence of any other Event of Default, the Trustee may and, if requested by the holders of 25% in aggregate principal amount of Bonds then Outstanding, shall, by notice to the Issuer, the Holders, the Bank, the Remarketing Agent and the Company, declare the entire unpaid principal of and interest on the Bonds immediately due and payable and, thereupon, the entire unpaid principal of and interest on the Bonds shall forthwith become due and payable; provided, however, that anything in this Article VIII to the contrary, so long as the Bank has honored all proper drawings under the Letter of Credit, without the prior written consent of the Bank, the Trustee shall not have the right to declare the principal of all Bonds and the interest accrued thereon to become immediately due and payable as a result of the occurrence.of an Event of Default under Section 8.01(c) or (e). Upon any such declaration the Issuer shall forthwith pay to the holders of the Bonds the entire unpaid principal of and accrued interest on the Bonds, but only from the revenues and receipts herein specifically pledged for such purpose. Upon the occurrence of an Event of Default specified in Section 8.01 and a declaration of acceleration hereunder, the Trustee as assignee of the Issuer shall immediately exercise its right under the Note and the Agreement to declare all installments on the Note to be immediately due and payable. In the event the Trustee fails to accelerate as required by this Section 8.02(a), the owners of a majority in aggregate principal amount of Bonds outstanding shall have the right to take such actions. (b) Upon the acceleration of the maturity of the Bonds, by declaration or otherwise, the Trustee shall immediately draw upon the Letter of Credit for the aggregate unpaid principal amount of the Bonds and all interest accrued thereon, which shall be applied immediately as set forth in Section 8.03. Upon such acceleration, interest on the Bonds shall cease to accrue as of the date of declaration of such acceleration. Section 8.03. Disposition of Amounts Drawn on Letter of Credit; Assignment of Rights to Contest. (a) All amounts drawn on the Letter of Credit by the Trustee in accordance with Section 8.02(b) shall be held by the Trustee in the Bond Fund (and invested in accordance with Section 4.08), shall be applied immediately to the payment of principal and interest accrued on the Bonds. (b) The Trustee hereby assigns to the Bank all its rights to contest or otherwise dispute in the Trustee's name, place and stead and at the Bank's sole election and cost any claim of preferential transfer made by a bankruptcy trustee, debtor-in-possession or other similar official with respect to any amount paid to the Trustee by or on behalf of the Company or the Issuer to be applied to principal of or interest on the Bonds, to the extent of payments made to the Trustee pursuant to a drawing under the Letter of Credit. The Trustee shall cooperate with and assist the Bank in any such contest or dispute as the Bank may reasonably request; provided, however, that the Bank shall reimburse the Trustee for its reasonable costs incurred in connection with providing such cooperation and assistance. The Trustee shall give the Bank prompt notice of any claim of preferential transfer of which the Trustee has knowledge. The foregoing assignment shall not be deemed to confer upon the Bank any right to contest or otherwise dispute any claim of preferential transfer with respect to any amount as to which there has been no drawing under the Letter of Credit. The assignment set forth above shall in no event be effective until the Bank shall have first furnished to the Trustee an agreement to indemnify the Trustee and the holders of the Bonds against any claim, liability or damage that they might suffer by reason of any such contest or dispute. Section 8.04. Other Remedies; Rights of Bondholders. Upon the occurrence of an Event of Default the Trustee, subject to the terms of this Indenture, may proceed to protect and enforce its rights and the rights of the Bondholders by mandamus or other suit, action or proceeding at law or in equity, including but not limited to an action for specific performance of any agreement herein contained or making a demand for payment from the Company and taking action pursuant to any other document to which the Trustee is a party. Upon the occurrence of an Event of Default, if requested to do so by the holders of 25% in aggregate principal amount of Bonds then outstanding and if indemnified as provided in Section 9.01(d), the Trustee, subject to the terms of this Indenture, shall exercise such one or more of the rights and powers conferred by this Article as the Trustee, upon being advised by counsel, shall deem most expedient in the interests of the Bondholders. No remedy conferred by this Indenture upon or reserved to the Trustee or to the Bondholders is intended to be exclusive of any other remedy, but each such remedy shall be cumulative and shall be in addition to any other remedy given to the Trustee or to the Bondholders hereunder or now or hereafter existing at law or in equity or by statute. No delay or omission to exercise any right or power accruing upon any default or Event of Default shall impair any such right or power or shall be construed to be a waiver of any such default or Event of Default or acquiescence therein, and every such right and power may be exercised from time to time and as often as may be deemed expedient. No waiver of any default or Event of Default hereunder, whether by the Trustee pursuant to Section 8.10 or by the Bondholders, shall extend to or shall affect any subsequent default or Event of Default or shall impair any rights or remedies consequent thereon. Section 8.05. Right of Bondholders To Direct Proceedings. Anything in this Indenture to the contrary notwithstanding, the holders of a majority in aggregate principal amount of Bonds then outstanding shall have the right, at any time, by an instrument or instruments in writing executed and delivered to the Trustee, to direct the method and place of conducting all proceedings to be taken in connection with the enforcement of the terms and conditions of this Indenture or for the appointment of a receiver or any other proceedings hereunder; provided, however, that such direction shall not be otherwise than in accordance with the provisions of law and of this Indenture. Section 8.06. Application of Moneys. All moneys received by the Trustee pursuant to any right given or action taken under the provisions of this Article shall, after payment of the cost and expenses of the proceedings resulting in the collection of such moneys and of the expenses, liabilities and advances incurred or made by the Trustee and the fees and expenses, if any, of the Issuer in carrying out this Indenture or the Agreement, be deposited in the Bond Fund; provided, however, that no proceeds from any draw on the Letter of Credit shall be used for any purpose other than payment of principal of and interest on the Bonds or purchase thereof. All moneys in the Bond Fund shall be applied as follows: (a) Unless the principal of all the Bonds shall have become of shall have been declared due and payable: First - To the payment to the persons entitled thereto of all installments of interest then due on the Bonds, in the order of the maturity of the installments of such interest and, if the amount available shall not be sufficient to pay in full any particular installment, then to the payment ratably, according to the amounts due on such installment, to the persons entitled thereto, without any discrimination or preference except as provided in Section 8.13 and as to any difference in the respective rates of interest specified in the Bonds; Second - To the payment to the persons entitled thereto of the unpaid principal of any of the Bonds which shall have become due (other than Bonds called for redemption for the payment of which moneys are held pursuant to the provisions of this Indenture), in the order of their due dates, with interest on such Bonds at the respective rates specified therein from the respective dates upon which they become due and, if the amount available shall not be sufficient to pay in full Bonds due on any particular date, together with such interest, then first to the payment of such interest ratably, according to the amount of such interest due on such date, and then to the amount of such principal, ratably, according to the amount of such principal due on such date, to the persons entitled thereto, without any discrimination or preference except as provided in Section 8.13 and as to any difference in the respective rates of interest specified in the Bonds; and Third - To the extent permitted by law, to the payment to the persons entitled thereto of the unpaid interest on overdue installments of interest ratably, according to the amounts of such interest due on such date, without any discrimination or preference except as provided in Section 8.13 and as to any difference in the respective rates of interest specified in the Bonds. (b) If the principal of all the Bonds shall have become due or shall have been declared due and payable, all such moneys shall be applied to the payment of the principal and interest then due and unpaid upon the Bonds, including to the extent permitted by law interest on overdue installments of interest, without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, or of any Bond over any other Bond, ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto, without any discrimination or privilege except as provided in Section 8.13. (c) If the principal of all the Bonds shall have been declared due and payable, and if such declaration shall thereafter have been rescinded and annulled under the provisions of this Article, then, subject to the provisions of subsection (b) of this Section in the event that the principal of all the Bonds shall later become due or be declared due and payable, the moneys shall be applied in accordance with the provisions of subsection (a) of this Section. (d) All amounts received by the Trustee from a draw upon the Letter of Credit shall be applied exclusively to the payment of principal of and interest on the Bonds. Whenever moneys are to be applied pursuant to the provisions of this section, such moneys shall be applied at such times and from time to time as the Trustee shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Trustee shall apply such moneys, it shall fix the date (which shall be an Interest Payment Date unless it shall deem another date more suitable) upon which such application is to be made. The Trustee shall give such notice as it may deem appropriate of the deposit with it of any such moneys and of the fixing of any such date, and shall not be required to make payment to the holder of any Bond until such Bond is presented to the Trustee for appropriate endorsement or for cancellation if fully paid. Whenever all principal of and interest on all Bonds have been paid under the provisions of this Section and all expenses and charges of the Trustee and the Issuer have been paid, and all obligations of the Company to the Bank pursuant to the Reimbursement Agreement have been paid in full the balance remaining in the Bond Fund shall be paid to the Company as provided in Section 4.07. Section 8.07. Remedies Vested in Trustee. All rights of action (including the right to file proof of claims) under this Indenture or under any of the Bonds may be enforced by the Trustee without the possession of any of the Bonds or the production thereof in any trial or other proceeding relating thereto and any such suit or proceeding instituted by the Trustee may be brought in its name as Trustee without the necessity of joining as plaintiffs or defendants any holders of the Bonds, and any recovery of judgment shall be for the equal benefit of the holders of the outstanding Bonds. Section 8.08. Limitations on Suits. Except to enforce the rights given under Sections 8.02(a), 8.05 and 8.12, no holder of any Bond shall have any right to institute any suit, action or proceeding in equity or at law for the enforcement of this Indenture or for the execution of any trust thereof or any other remedy hereunder, unless (a) a default has occurred of which the Trustee has been notified as provided in Section 9.05, or of which by such Section it is deemed to have notice, (b) such default shall have become an Event of Default and the holders of at least 25% in aggregate principal amount of Bonds then outstanding shall have made written request to the Trustee and shall have offered it reasonable opportunity either to proceed to exercise the powers hereinbefore granted or to institute such action, suit or proceeding in its own name, (c) such holders have offered to the Trustee indemnity as provided in Section 9.01(d), (d) the Trustee for 60 days after such notice shall fail or refuse to exercise the powers hereinbefore granted, or to institute such action, suit or proceeding in its own name or in the name of such holders, (e) no direction inconsistent with such request has been given to the Trustee during such 60 day period by the holders of a majority in aggregate principal amount of Bonds then outstanding, and (f) notice of such action, suit or proceeding is given to the Trustee; it being understood and intended that no one or more holders of the Bonds shall have any right in any manner whatsoever to affect, disturb or prejudice this Indenture by its, his or their action or to enforce any right hereunder except in the manner herein provided, and that all proceedings at law or in equity shall be instituted and maintained in the manner herein provided and for the equal benefit of the holders of all Bonds then outstanding. The notification, request and offer of indemnity set forth in the preceding paragraph, at the option of the Trustee, shall be conditions precedent to the execution of the powers and trusts in this Indenture and to any action or cause of action for the enforcement of this Indenture or for any other remedy hereunder. Section 8.09. Termination of Proceedings. In case the Trustee shall have proceeded to enforce any right under this Indenture by the appointment of a receiver, by entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason, or shall have been determined adversely, then.and in every such case the Issuer, the Company, the Bondholders and the Trustee shall be restored to their former positions and rights hereunder, and all rights, remedies and powers of the Trustee shall continue as if no such proceedings had been taken. Section 8.10. Waivers of Events of Default. The Trustee, with the written consent of the Bank, may waive any Event of Default hereunder and its consequences and rescind any declaration of maturity of principal of and interest on the Bonds and the Note, and shall do so with the consent of the Bank, upon the written request of the holders of (a) a majority in aggregate principal amount of Bonds then outstanding in respect of which default in the payment of principal and/or interest exists, or (b) a majority in aggregate principal amount of Bonds then outstanding in the case of any other default; provided, however, that: (1) there shall not be waived without the consent of the holders of all Bonds then outstanding: (A) any default in the payment of the principal of any outstanding Bonds when due (whether at maturity or by mandatory or optional redemption), or (B) any default in the payment when due of the interest on any such Bonds unless, prior to such waiver or rescission: (i) there shall have been paid or provided for all arrears of interest at the rate borne by the Bonds on overdue installments of principal, all arrears of payments of principal when due and all expenses of the Trustee in connection with such default, and (ii) in case of any such waiver or rescission, or in case of the discontinuance, abandonment or adverse determination of any proceeding taken by the Trustee on account of any such default, the Trustee and the Bondholders shall be restored to their respective former positions and rights hereunder; (2) no declaration of maturity under Section 8.02 made at the request of the holders of 25% in aggregate principal amount of Bonds then outstanding shall be rescinded unless requested by the holders of a majority in aggregate principal amount of Bonds then outstanding; and (3) unless the Trustee has received written evidence that the Letter of Credit is reinstated in full as to principal and interest, there shall be no waiver or rescission if the Letter of Credit shall have been drawn upon due to the occurrence of an Event of Default. No such waiver or rescission shall extend to any subsequent or other default, or impair any right consequent thereon. Section 8.11. Notice of Defaults; Opportunity of Company to Cure Defaults. Anything contained in this Indenture to the contrary notwithstanding, no default specified in Section 8.01(c) on the part of the Issuer shall constitute an Event of Default until (a) notice of such default shall be given (1) by the Trustee to the Issuer, the Bank and the Company or (2) by the holders of 25% in aggregate principal amount of Bonds then outstanding to the Trustee, the Issuer, the Bank and the Company, and (b) the Issuer and the Company shall have had 30 days after such notice to correct such default or cause such default to be corrected, and shall not have corrected such default or caused such default to be corrected within such period; provided, however, if any default specified in Section 8.01(c) shall be such that it cannot be corrected within such period, it shall not constitute an event of default if corrective action is instituted by the Issuer or the Company within such period and diligently pursued until such default is corrected; provided, further, that the period for corrective action shall not in any event extend more than 180 days after such notice to correct such default. With regard to any alleged default concerning which notice is given to the Company, the Company may, but is under no obligation to, perform any covenant, condition or agreement the nonperformance of which is alleged in such notice to constitute a default, in the name and stead of the Issuer with full power to do any and all things and acts to the same extent that the Issuer could do and perform any such things and acts with power of substitution. Section 8.12. Unconditional Right To Receive Principal and Interest. Nothing in this Indenture shall, however, affect or impair the right of any Bondholder to enforce, by action at law, payment of the principal or purchase price of or interest on any Bond at and after the maturity thereof, or on the date fixed for redemption or purchase or (subject to the provisions of Section 8.02) on the same being declared due prior to maturity as herein provided, or the obligation of the Issuer to pay the principal or purchase price of and interest on each of the Bonds issued hereunder to the respective holders thereof at the time, place, from the source and in the manner herein and in the Bonds expressed. Section 8.13. Bonds Outstanding. In the event the Bonds are held under a book entry system, the securities depositary shall provide the Trustee, upon request of the Trustee, the names, addresses and principal amount of the Beneficial Owners of the Bonds. Subject to the provisions of Section 8.14, such Beneficial Owners shall be treated in all respects as the holders of the Bonds for purposes of this Article, and the Trustee shall send notices to such Beneficial owners as required by this Article. Notwithstanding anything else in this Article to the contrary, Company Bonds shall not be deemed to be outstanding for purposes of this Article and the Company as holder thereof shall not be entitled to any rights or payments therefor pursuant to Sections 8.05, 8.06, 8.08 and 8.10. Section 8.14. Bank Deemed Holder. For all purposes of this Article VIII (other than receipt of payments), the Bank shall, so long as the Letter of Credit shall not have been dishonored (other than for a reason permitted by the Letter of Credit), be deemed the holder and registered owner of all Bonds. As such, the Bank may take all actions permitted by this Article VIII to be taken by the holders or Beneficial Owners of the Bonds, to the exclusion of the actual holders and Beneficial Owners of the Bonds; the purpose of this Section 8.14 being to permit the Bank to direct the taking of actions and enforcement of remedies permitted by this Article VIII so long as the Letter of Credit shall not have been dishonored (other than for a reason permitted by the Letter of Credit). ARTICLE IX TRUSTEE AND REMARKETING AGENT Section 9.01. Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise its rights and powers and use the same degree of care and skill in its exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (b) Except during the continuance of an Event of Default: (i) the Trustee need perform only those duties that are specifically set forth in this Indenture and no others and no implied covenants or obligations shall be read into this Indenture against the Trustee, and (ii) in the absence of bad faith, gross negligence or willful misconduct on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own grossly negligent action, its own grossly negligent failure to act or its own willful misconduct, except that: (i) this paragraph does not limit the effect of (b) above; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was grossly negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 8.05. (d) The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity reasonably satisfactory to it against any loss, liability or expense, but the Trustee may not require indemnity as a condition to declaring the principal of and interest on the Bonds to be due immediately under Section 8.02 or to drawing on the Letter of Credit or to taking action under the Letter of Credit. The Trustee shall not be required to give any bond or surety in respect of the execution of the trust created hereby or the powers granted hereunder. (e) The Trustee shall not be liable for interest on any cash held by it except as the Trustee may agree with the Company or with the Issuer with the consent of the Company. (f) The Trustee may conclusively rely on a Company Representative's certificate as to whether a Bankruptcy Filing has occurred. (g) The Trustee shall strictly comply with the terms of the Letter of Credit. (h) The Trustee shall maintain adequate records pertaining to the funds held by the Trustee, the investment thereof and the disbursement therefrom; notwithstanding anything to the contrary in this Indenture or the Agreement, the Trustee shall not be required to advance its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder. (i) Every provision of this Indenture that in any way relates to the Trustee is subject to all the foregoing paragraphs of this Section. (j) The Trustee shall in no event be responsible for ensuring that the rate of interest due and payable on the Bonds under this Indenture does not exceed the highest legal rate of interest permissible under federal or state law applicable thereto. Section 9.02. Rights of Trustee. (a) Subject to the foregoing Section, including, but not limited to, Sections 9.01(b)(ii) and 9.01(c), the Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. Any action taken by the Trustee pursuant to this Indenture upon the request or authority or consent of any person, who at the time of making such request or authority or consent is the owner of any Bond, shall be conclusive and binding upon all future owners of any Bond issued in replacement thereof. (b) Before the Trustee acts or refrains from acting, it may require a certificate of an appropriate officer or officers of the Issuer or the Company or an opinion of Counsel stating that (i) the person making such certificate or opinion has read such covenant or condition; (ii) the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (iii) in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (iv) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. The Trustee shall not be liable for any loss or damage or action it takes or omits to take in good faith in reliance on the certificate or opinion of Counsel. (c) The Trustee may execute any of the trusts or powers hereunder and perform any of its duties through agents, attorneys or employees or co-trustees and shall not be responsible for the misconduct or negligence of any agent, attorney, employee or co-trustee appointed with due care. Section 9.03. Individual Rights of Trustee, Etc. The Trustee in its individual or any other capacity may become the owner, custodian or pledgee of Bonds and may otherwise deal with the Issuer, the Bank or with the Company or its affiliates with the same rights it would have if it were not Trustee. Section 9.04. Trustee's Disclaimer. Subject to Sections 9.01(b) and 9.01(c): (a) the Trustee makes no representation as to the validity or adequacy of this Indenture or the Bonds, and it shall not be responsible for any statement in the Bonds or for the perfection of any lien created by this Indenture or otherwise as security for the Bonds; (b) the Trustee may construe any of the provisions of this Indenture insofar as same may appear to be ambiguous or inconsistent with any other provision hereof, and any construction of any such provisions hereof by Trustee in good faith shall be binding upon the Bondholders, the Issuer, the Company and the Remarketing Agent; (c) the Trustee shall not be responsible for the application of any of the proceeds of the Bonds or any other moneys deposited with it and paid out, withdrawn or transferred hereunder if such application, payment, withdrawal or transfer shall be made in accordance with the provisions of this Indenture; (d) the Trustee shall not be under any obligation to see to the recording or filing of this Indenture, the Agreement, any financing statements or any other instrument or otherwise to the giving to any person of notice of the provisions hereof or thereof; and (e) the Trustee shall not be under any obligation to effect or maintain insurance or to renew any policies of insurance or to inquire as to the sufficiency of any policies of insurance carried by the Company, or to report, or make or file claims or proof of loss for, any loss or damage insured against or that may occur, or, to keep itself informed or advised as to the payment of any taxes or assessments, or to require any such payment to be made. Section 9.05. Notice of Defaults. The Trustee shall not be required to take notice, or be deemed to have notice, of any default or Event of Default under this Indenture, other than an Event of Default under Section 8.01(a), (b) or (d), unless specifically notified in writing at such address as set forth in Section 12.01 hereof of such default or Event of Default by the holders of at least 25% in principal amount of the Bonds then Outstanding, by the Bank, by the Remarketing Agent or by the Company. If an event occurs that with the giving of notice or lapse of time or both would be an Event of Default, and if the event is continuing and if the Trustee has actual notice or is deemed to have notice thereof as herein provided, the Trustee shall mail to each Bondholder, the Remarketing Agent and the Bank notice of the event upon such occurrence. Except in the case of a default in payment or purchase of any Bonds, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of Bondholders; provided that, in any event such notice shall not be withheld from the Bank or the Remarketing Agent. Section 9.06. Compensation and Indemnification of Trustee. For acting under this Indenture, the Trustee shall be entitled to compensation by the Company (which shall not be limited by any statute regulating the compensation of a trustee of an express trust) of reasonable fees for the Trustee's services and reimbursement of advances, counsel fees and other expenses reasonably and necessarily made or incurred by the Trustee in connection with its services under this indenture. The Trustee shall be indemnified by the Company for, and shall be held harmless against, any loss, liability or expense incurred without gross negligence, willful misconduct or bad faith on the Trustee's part, arising out of or in connection with the acceptance or administration of the trust created by this Indenture, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. To secure the payment or reimbursement to the Trustee provided for in this Section, the Trustee shall have a senior claim, to which the Bonds are made subordinate, on all money or property held or collected by the Trustee, except moneys held under Article VII or otherwise held in trust to pay principal of, interest on and purchase price of the Bonds, and except amounts drawn under the Letter of Credit and Available Moneys on deposit in the Bond Fund. Section 9.07. Eligibility of Trustee. Each of the initial Trustee and any successor Trustee at the time of its appointment shall: (i) be a corporation or national banking association duly organized under the laws of the United States of America or any state or territory thereof, doing business and having an office in such location as shall be approved by the Issuer and the Remarketing Agent, (ii) have a combined capital and surplus of at least $25,000,000 as set forth in its most recent published annual report of condition, and (iii) be authorized by law to perform all the duties imposed upon it by this Indenture. Section 9.08. Replacement of Trustee. The Trustee may resign and be discharged of the trust created by this Indenture by notifying the Issuer, the Bank and the Company; provided, however, that no such resignation shall become effective until the appointment of a successor trustee, as hereinafter provided. The holders of not less than a majority in principal amount of the Bonds may remove the Trustee by notifying the removed Trustee and may appoint a successor Trustee with the Issuer's, the Bank's and the Company's prior written consent; provided, however, that no such removal-shall become effective until the appointment of a successor trustee, as hereinafter provided. The Issuer may, in its sole discretion, and at the request of the Company shall, remove the Trustee, but in the case where such removal is requested by the Company, only after obtaining the prior written consent of the Bank. Upon the removal or replacement of the Trustee for any reason, the Issuer and the Company shall give written notice thereof to the Remarketing Agent and the Bank by first-class mail, postage prepaid. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Issuer, with the prior written consent of the Bank and the Company, shall, at the expense of the Company, use its best efforts to appoint promptly a successor Trustee. Notice of such appointment shall be given by the Issuer to the Remarketing Agent in writing by first-class mail. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Issuer, the Bank, the Company and the Remarketing Agent. Immediately thereafter, the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee, the resignation or removal of the retiring Trustee shall then (but only then) become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall notify the holders of the Bonds of its acceptance of the trusts hereunder by first-class mail promptly following such acceptance. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Issuer, the Bank, the Company or the holders of a majority in principal amount of the Bonds may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 9.07, any Bondholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Section 9.09. Duties of Remarketing Agent. (a) The Remarketing Agent shall, in accordance with the Remarketing Agreement, determine the Weekly Rate on the Bonds and perform the other duties provided for to be done by it in Section 2.02, Section 3.08, Section 4.01 and Section 4.06. The Remarketing Agent may for its own account or as broker or agent for others deal in Bonds and may do anything any other Bondholder may do to the same extent as if the Remarketing Agent were not serving as such. The Remarketing Agent shall have no duty to act hereunder to the extent the Remarketing Agent is not required to perform its obligations under the Remarketing Agreement. (b) The Remarketing Agent may execute and perform any of its duties hereunder through agents, attorneys, employees or co-remarketing agents and shall not be responsible for the misconduct or negligence of any agent, attorney, employee or co-remarketing agent appointed with due care. Section 9.12. Eligibility of Remarketing Agent; Replacement. The Remarketing Agent shall be a member of the National Association of Securities Dealers, Inc. having excess net capital of at least $5,000,000 or, in the alternative, a national banking association having a combined capital stock, surplus and undivided profits of at least $50,000,000, and, if the Bonds are rated by a Rating Agency, the Remarketing Agent must be rated at least Baa3/P-3 or otherwise be acceptable to the Rating Agency. Crews and Associates, Inc. is hereby appointed as the initial Remarketing Agent and is herein referred to as the "Remarketing Agent." Any Remarketing Agent shall accept its appointment hereunder in writing. The Remarketing Agent may resign by notifying the Issuer, the Company, the Trustee and the Bank at least 45 days before the effective date of the resignation. The Issuer, at the direction of the Company but only with the Bank's prior written consent, which consent shall not be unreasonably withheld, shall, at any time remove the Remarketing Agent as the Issuer's designee for determining interest rates and appoint a successor by notifying the Remarketing Agent, the Bank and the Trustee at least 60 days prior to the effective date of such removal. Upon the resignation or removal of the Remarketing Agent, the Issuer, at the direction of the Company, but only with the prior written consent of the Bank, which consent shall not be unreasonably withheld, shall appoint a successor by notifying the Remarketing Agent, the Bank and the Trustee, if the Remarketing Agent resigns or is removed pursuant to the terms of this Indenture and, after 45 days in the case of resignation or 60 days in the case of removal, the Issuer at the direction of the Company, has failed to appoint a successor Remarketing Agent in accordance with the terms of this Section 9.12, the Company shall immediately give notice thereof to the Trustee and shall direct the Trustee to give notice to the holders of all Bonds of a mandatory repurchase of such bonds pursuant to Section 3.07(a)(ii) hereof. Such mandatory repurchase shall take place on the first Interest Payment Date to occur following such Notice of Mandatory Repurchase by the Trustee (of if such date is not a Business Day, on the next succeeding Business Day), unless such Mandatory Repurchase Date is a date less than 15 days after such Notice of Mandatory Repurchase is given, in which case such mandatory repurchase shall occur on the next succeeding Interest Payment Date (or, if such date is not a Business Day, on the next succeeding Business Day). Notwithstanding the foregoing, no such resignation or removal shall be effective until either (i) the successor Remarketing Agent has delivered an acceptance of its appointment to the Trustee or (ii) the Mandatory Repurchase Date described above. Section 9.10. [Reserved] Section 9.11. Successor Trustee or Agent by Merger. If the Trustee or the, Remarketing Agent consolidates with, merges or converts into, or transfers all or substantially all its assets (or, in the case of a bank or trust company, its corporate trust assets) to, another corporation or national banking association, the resulting, surviving or transferee corporation or national banking association without any further act shall be the successor Trustee, the Remarketing Agent, provided that such corporation or national banking association shall otherwise be eligible to serve in such capacity under this Indenture. Section 9.12. Appointment of Co-Trustee. It is the purpose of this Indenture that there shall be no violation of any law of any jurisdiction (including particularly the law of the State) denying or restricting the right of banking corporations or associations to transact business as trustee in such jurisdiction. It is recognized that in case of litigation under this Indenture or the Agreement, and in particular in case of the enforcement thereof upon a default or an Event of Default, or in case the Trustee deems that by reason of any present or future law of any jurisdiction it may not exercise any of the powers, rights or remedies herein granted to the Trustee or hold title to the properties, in trust, as herein granted, or take any action which may be desirable or necessary in connection therewith, it may be necessary that the Trustee appoint an additional individual or institution as a separate or co-trustee. The following provisions of this Section are adapted to these ends. In the event that the Trustee appoints an additional individual or institution as a separate or co-trustee, each and every remedy, power, right, claim, demand, cause of action, immunity, estate, title, interest and lien expressed or intended by this Indenture to be exercised by or vested in or conveyed to the Trustee with respect thereto shall be exercisable by and vest in such separate or co-trustee but only to the extent necessary to enable such separate or co-trustee to exercise such powers, rights and remedies, and every covenant and obligation necessary to the exercise thereof by such separate or co-trustee shall run to and be enforceable by either of them; provided, however, that no co-trustee shall be liable by reason of any act or omission of any other such co-trustee. Should any instrument in writing from the Issuer be required by the separate or co-trustee so appointed by the Trustee for more fully and certainly vesting in and confirming to him or it such properties, rights, powers, trusts, duties and obligations, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Issuer. In case any separate or co-trustee or a successor to either shall die, become incapable of acting, resign or be removed, all the estates, properties, rights, powers, trusts, duties and obligations of such separate or co-trustee, so far as permitted by law, shall vest in and be exercised by the Trustee until the appointment of a new co-trustee or successor to such separate or co-trustee. ARTICLE X AMENDMENTS OF AND SUPPLEMENTS TO INDENTURE Section 10.01. Without Consent of Bondholders. The Issuer and the Trustee may amend or supplement this Indenture or the Bonds without prior notice to or consent of any Bondholder: (a) to cure any ambiguity, inconsistency or formal defect or omission; (b) to grant to the Trustee for the benefit of the Bondholders additional rights, remedies, powers or authority; (c) to subject to this Indenture additional collateral or to add other agreements of the Issuer; (d) to modify this Indenture or the Bonds to permit qualification under the Trust Indenture Act of 1939, as amended, or any similar federal statute at the time in effect; to permit the qualification of the Bonds for sale under the securities laws of any state of the United States; or to prevent the application of the Investment Company Act of 1940, as amended, to any of the transactions contemplated by, or any of the parties to this Indenture, the Agreement or the Bonds; (e) to provide for uncertificated Bonds or to make any change necessary to give effect to a custody agreement pursuant to Section 2.05(d); (f) to evidence the succession of a new Trustee or the appointment by the Trustee of a co-trustee; (g) to make any change to reflect any provision in the Code or the interpretations thereof by the Internal Revenue Service provided that such change does not materially adversely affect the rights of any Bondholder; (h) to make any change not materially adversely affecting any Bondholder's rights requested by the Rating Agency in order (i) to obtain a rating from the Rating Agency after the initial issuance of the Bonds if the Bonds are initially issued without a rating equivalent to the rating assigned to other securities supported by a Letter of Credit of the Bank or (ii) to maintain any rating on the Bonds; (i) to make any change not materially adversely affecting any Bondholder's rights to provide for or to implement the provisions of a Letter of Credit; (j) to make any change to provide for or to implement the provisions of a Letter of Credit only if such Letter of Credit and the changes to this Indenture become effective on a Mandatory Repurchase Date; (k) to make any change to be effective on any Mandatory Repurchase Date provided that such change has been disclosed to all owners of Bonds who purchase on such date; (l) to make any change that does not materially adversely affect the rights of any Bondholder; (m) to add to this Indenture the obligation of the Trustee, the Issuer or the Company to disclose such information regarding the Bonds, the Facility, the Issuer, the Company or the Bank as shall be required or recommended to be disclosed in accordance with applicable regulations or guidelines established by, among others, the American Bankers Association Corporate Trust Committee; or (n) to provide for the issuance of Additional Bonds under Section 2.09. Section 10.02. With Consent of Bondholders. If an amendment of or supplement to this Indenture or the Bonds without any consent of Bondholders is not permitted by the preceding Section, the Issuer and the Trustee may enter into such amendment or supplement without prior notice to any Bondholders but with the consent of the holders of at least a majority in principal amount of the Bonds then outstanding. However, without the consent of all Bondholders affected, no amendment or supplement may (a) extend the maturity of the principal of, or interest on, any Bond, (b) reduce the principal amount of, or rate of interest on, any Bond or change the terms of any redemption, (c) effect a privilege or priority of any Bond or Bonds over any other Bond or Bonds (except as provided herein), (d) reduce the percentage of the principal amount of the Bonds required for consent to such amendment or supplement, (e) impair the exclusion from gross income for purposes of federal income taxation of interest on any Bond, (f) eliminate the holders' rights to optionally tender the Bonds, extend the due date for the purchase of Bonds optionally tendered by the holders thereof or reduce the purchase price of such Bonds, (g) create a lien ranking prior to or on a parity with the lien of this Indenture on the property described in the Granting Clause of this Indenture or (h) deprive any Bondholder of the lien created by this Indenture on such property. In addition, if moneys or U.S. Government Obligations have been deposited or set aside with the Trustee pursuant to Article VII for the payment of Bonds and those Bonds shall not have in fact been actually paid in full, no amendment to the provisions of that Article shall be made without the consent of the holder of each of those Bonds affected. Section 10.03. Effect of Consents. After an amendment or supplement becomes effective, it shall bind every Bondholder unless it makes a change described in any of the lettered clauses of the preceding Section. In such case, the amendment or supplement shall bind each Bondholder who consented to it and each subsequent holder of a Bond or portion of a Bond evidencing the same debt as the consenting holder's Bond. Section 10.04. Notation on or Exchange of Bonds. If an amendment or supplement changes the terms of a Bond, the Trustee may request that the holder deliver the Bond to it. The Trustee may place an appropriate notation on the Bond regarding the changed terms and return it to the holder. Alternatively, if the Trustee, the Issuer and the Company determine, the Issuer in exchange for the Bond shall issue and the Trustee shall authenticate a new Bond that reflects the changed terms. In either event, the cost of placing such notation on the Bond(s) shall be borne by the Company. Section 10.05. Signing by Trustee of Amendments and Supplements. The Trustee shall sign any amendment or supplement to this Indenture or the Bonds authorized by this Article if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign it. In signing an amendment or supplement, the Trustee shall be entitled to receive and (subject to Section 9.01) shall be fully protected in relying on an Opinion of Counsel stating that such amendment or supplement is authorized by this Indenture and is duly authorized, executed and delivered and enforceable in accordance with its terms. Section 10.06. Company, Bank and Remarketing Agent Consent Required. An amendment or supplement to this Indenture or the Bonds shall not become effective unless the Company, the Remarketing Agent (but only to the extent that such amendment affects the rights, duties or obligations of the Remarketing Agent hereunder) and the Bank deliver to the Trustee their written consents to the amendment or supplement. In any event, no amendment or supplement hereto shall become effective until the Remarketing Agent acknowledges receipt of a copy of such supplement or amendment. Section 10.07. Notice to Bondholders. The Trustee shall cause notice of the execution of a supplemental indenture to be mailed promptly by first-class mail to each Bondholder at the holder's registered address. The notice shall state briefly the nature of the supplemental indenture and that copies thereof are on file with the Trustee for inspection by all Bondholders. Section 10.08. Opinion of Bond Counsel Required. An amendment or supplement to this Indenture shall not become effective unless the Trustee has received an opinion of Bond Counsel addressed to the Trustee, the Bank, the Company and the Remarketing Agent to the effect that the amendment or supplement will not impair the exclusion of interest on the Bonds from the gross income of the recipients thereof for purposes of federal income taxation. ARTICLE XI AMENDMENTS OF AND SUPPLEMENTS TO AGREEMENT Section 11.01. Without Consent of Bondholders. The Issuer, with the consent of the Company, may enter into, and the Trustee may consent to, any amendment of or supplement to the Agreement or the Note, without prior notice to or consent of any Bondholder, if the amendment or supplement is required (a) by the provisions of the Agreement or this Indenture, (b) to cure any ambiguity, inconsistency or formal defect or omission, (c) to identify more precisely the Facility, (d) in connection with any authorized amendment of or supplement to this Indenture, or (e) to make any change comparable to those described in Section 10.01. Section 11.02. With Consent of Bondholders. If an amendment of or supplement to the Agreement or the Note without any consent of Bondholders is not permitted by the foregoing Section, the Issuer may enter into, and the Trustee may consent to, such amendment or supplement without prior notice to any Bondholder but with the consent of the holders of at least a majority in principal amount of the Bonds then outstanding. However, without the consent of each Bondholder affected, no amendment or supplement may result in a change comparable to those described in the lettered clauses of Section 10.02. Section 11.03. Consent by Trustee to Amendments or Supplements. The Trustee shall consent to any amendment or supplement to the Agreement or the Note authorized by this Article if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, consent to such an amendment or supplement. In consenting to an amendment or supplement, the Trustee shall be entitled to receive and (subject to Section 9.01) shall be fully protected in relying on an opinion of Counsel stating that such amendment or supplement is authorized by this Indenture and has been duly authorized, executed and delivered and is enforceable in accordance with its terms. Section 11.04. Notice to Bondholders. The Trustee shall cause notice of the execution of an amendment or supplement to the Agreement or the Note to be mailed promptly by first-class mail to each Bondholder at the holder's registered address. The notice shall state briefly the nature of the amendment or supplement and that copies thereof are on file with the Trustee for inspection by all Bondholders. Section 11.05. Bank and Remarketing Agent Consent Required. An amendment or supplement to the Agreement or the Note shall not become effective unless the Remarketing Agent (but only to the extent that such amendment or supplement affects the rights, duties or obligations of the Remarketing Agent hereunder or thereunder) and the Bank deliver to the Trustee their written consents to the amendment or supplement. In any event, no such amendment or supplement shall become effective until the Remarketing Agent acknowledges receipt of a copy of such amendment or supplement. ARTICLE XII MISCELLANEOUS Section 12.01. Notices. (a) Any notice, request, direction, designation, consent, acknowledgment, certification, appointment, waiver or other communication required or permitted by this Indenture or the Bonds must be in writing except as expressly provided otherwise in this Indenture or the Bonds. (b) Except as otherwise provided herein, any notice or other communication shall be sufficiently given and deemed given when delivered by hand or mailed by first-class mail, postage prepaid, addressed as follows or, if the communication may be given by telex or telecopy under the provisions of this Indenture, when telexed or telecopied to the following numbers: (1) if to the Issuer, to Harrison County, West Virginia, Harrison County Courthouse, Clarksburg, West Virginia 26301, Attention: President of Harrison County Commission; (2) if to the Trustee, to One Valley Bank, National Association, P.O. Box 1793, Charleston, West Virginia 25326, Attention: Corporate Trust Department; (3) if to the Company, to Salem Health Care Corp., 146 Water Street, Salem, West Virginia 26426; (4) if to the Underwriter or Remarketing Agent, to Crews and Associates, Inc. 2000 Union National Plaza, 124 West Capitol, Little Rock, Arkansas 72201; (5) if to the Bank, to NationsBank of Texas, N.A, 901 Main Street, 13th Floor, Dallas, Texas 75202, Attention: Marie Lancanster; and (6) if to the Parent, Regency Health Services, Inc. 2742 Dow Avenue, Tustin, California 92780, Attention: David Grant, Esquire. Any addressee may designate additional or different addresses or telex or telecopy numbers for purposes of this Section. Notwithstanding the provisions of this Section 12.01, any notice to the Trustee shall only be sufficient and deemed given when mailed to the Trustee at the address provided in this Section 12.01 by certified mail, return receipt requested, and received by the Trustee. A copy of any notice to any party given hereunder (with the exception of notices required for drawings under any Letter of Credit) shall be provided to the Remarketing Agent in the manner such notice is otherwise given. The Beneficial Owner of $1,000,000 or more or Bonds may, by written notice to the Trustee, request that all notices given with respect to such Bonds be given to the registered owner thereof and to a second address provided in such written notice to the Trustee. Upon receipt of such notice described in the preceding sentence, the Trustee shall send all notices relating to the relevant Bonds to the registered owner and the second address so designated. Section 12.02. Bondholders' Consents. Any consent or other instrument required by this Indenture to be signed by Bondholders may be in any number of concurrent documents and may be signed by a Bondholder or by the holder's agent appointed in writing. Proof of the execution of such instrument or of the instrument appointing an agent and of the ownership of Bonds, if made in the following manner, shall be conclusive for any purposes of this Indenture with regard to any action taken by the Trustee under the instrument: (a) The fact and date of a person's signing an instrument may be proved by the certificate of any officer in any jurisdiction who by law has power to take acknowledgments within that jurisdiction that the person signing the writing acknowledged before the officer the execution of the writing, or by an affidavit of any witness to the signing. (b) The fact of ownership of Bonds, the amount or amounts, numbers and other identification of such Bonds and the date of holding shall be proved by the registration books kept pursuant to this Indenture. In determining whether the holders of the required principal amount of Bonds Outstanding have taken any action under this Indenture, Bonds owned by the Issuer, the Company or any partner or affiliate of either thereof shall be disregarded and deemed not to be Outstanding; provided, however, that Bank Bonds shall not be disregarded and shall be deemed to be outstanding for such purpose. In determining whether the Trustee shall be protected in relying on any such action, only Bonds that the Trustee knows to be so owned shall be disregarded. Section 12.03. Notices to Rating Agency. If applicable, the Trustee shall notify any Rating Agency rating the Bonds, in writing, of the occurrence of any of the following events prior to the occurrence thereof: (a) any change in the identity of the Trustee or the Remarketing Agent; (b) any amendment or modification of or change to this Indenture, the Agreement, the Reimbursement Agreement or the Letter of Credit; (c) the expiration or termination of the Letter of Credit, or any extension thereof; (d) the payment in full of the principal of and interest on the Bonds; and (e) the delivery of any written opinion of Bankruptcy Counsel required to be delivered under the terms of this Indenture. Section 12.04. Limitation of Rights. Nothing expressed or implied in this Indenture or the Bonds shall give any person other than the Trustee, the Issuer, the Bank, the Company, the Remarketing Agent and the Bondholders any right, remedy or claim under or with respect to this Indenture. Section 12.05. Severability. If any provision of this Indenture shall be determined to be unenforceable by a court of law, that shall not affect any other provision of this Indenture; provided, no holding or invalidity shall require the Trustee to make any payment from any source except those pledged hereunder. Section 12.06. Payments Due on Non-Business Days. If a payment date is not a Business Day at the place of payment, then payment shall be made at that place on the next succeeding Business Day, with the same force and effect as if made on the payment date, and, in the case of any such payment, no interest shall accrue for the intervening period. Section 12.07. Governing Law. This Indenture and the authority of the Issuer to issue the Bonds shall be governed by and construed in accordance with the laws of the State, but it is the intention of the Issuer that the situs of the trust created by this Indenture be in the state in which is located the corporate trust office of the Trustee from time to time acting under this Indenture. The word "Trustee" as used in the preceding sentence shall not be deemed to include any additional individual or institution appointed as a separate or co-trustee pursuant to Section 9.15 of this Indenture. It is the further intention of the Issuer that the Trustee administer said trust in the state in which it is located, from time to time, and that same be for all purposes hereunder, the situs of said trust. Section 12.08. No Liability. No provision, covenant or agreement contained in this Indenture or in the Bonds, or any obligation herein or therein imposed upon the Issuer, or the breach thereof, shall constitute or give rise to or impose upon the Issuer a pecuniary liability or a charge upon its general credit or taxing power. In making the agreements, provisions, and covenants set forth in this Indenture, the Issuer has not obligated itself except with respect to the Facility and the application of the revenues, income and all other property therefrom and the security therefor including the Letter of Credit, as hereinabove provided. No official or member of the Issuer shall be personally liable on the Indenture or the Bonds, nor shall the issuance of the Bonds be considered as misfeasance in office. Section 12.09. Counterparts. This Indenture may be signed in several counterparts, each of which shall be an original and all of which together shall constitute the same instrument. Section 12.10. References to the Bank. The Bank shall have no rights to enforce any provision of this Indenture during any period in which it is in default under the Letter of Credit. IN WITNESS WHEREOF, the Issuer has caused this Indenture to be executed in its name and on its behalf by the President of the County Commission of Harrison County, West Virginia and its official seal to be impressed hereon and attested by the Clerk of the County Commission of Harrison County, West Virginia, and the Trustee, to evidence its acceptance of the trust hereby created, has caused this Indenture to be executed in its name and on its behalf by its duly authorized officers, all as of the day and year first above written. HARRISON COUNTY, WEST VIRGINIA By: President, Harrison County Commission [SEAL] ATTEST: Clerk, Harrison County Commission ONE VALLEY BANK, NATIONAL ASSOCIATION By: Its: [SEAL] ATTEST: By: Its: EX-21 11 LISTING OF SUBSIDIARIES OF REGISTRANT Exhibit 21 LIST OF SUBSIDIARIES Americare Development Corp. - Inactive Corporation (Ohio) Americare Homecare, Inc. (Ohio) Care at Home Care Home Health Americare Midwest, Inc. (Ohio) Americare of West Virginia, Inc. (West Virginia) Beckley Health Care Corp. (West Virginia) Americare Pine Lodge Nursing & Rehabilitation Center Braswell Enterprises, Inc. (California) Claremont Care Center Laurel Park, A Center of Effective Living Olive Vista, A Center for Problems of Living Palomares Rehabilitation & Nursing Center St. Theresa Rehabilitation Center Sierra Vista BREL, Inc. (California) Brittany Rehabilitation Center, Inc. (California) Brittany Healthcare Center Care Development Corp. - Inactive Corporation (California) Care Enterprises, Inc. (Delaware) Americare Arlington Nursing & Rehabilitation Center Americare Homestead Nursing & Rehabilitation Center Autumnwood of Sylvania Brookhaven Convalescent Center Edison Health Care Glanzman-Colonial Nursing Center Care Finance, Inc. (California) Care Enterprises West (Utah) Anza Nursing & Rehabilitation Center Arizona Nursing Center Arroyo Vista Nursing Center Bayside Nursing & Rehabilitation Center Burlingame Nursing & Rehabilitation Center Calistoga Care Nursing & Rehabilitation Center Cedars Nursing & Rehabilitation Center Del Capri Terrace Nursing Center Escondido Nursing Center Garfield Nursing Center Gateway Nursing & Rehabilitation Center Hilltop Nursing & Rehabilitation Center Hollister Nursing Center Huntington Valley Nursing Center Intercommunity Nursing Center Kingsburg Nursing & Rehabilitation Center La Mariposa Nursing & Rehabilitation Center Lemon Grove Nursing Center Manteca Nursing & Rehabilitation Center Manzanita Nursing & Rehabilitation Center North Valley Nursing & Rehabilitation Center Park Central Nursing & Rehabilitation Center Petaluma Nursing & Rehabilitation Center Premier Rehabilitation & Nursing Center Quincy Nursing & Rehabilitation Center Santa Monica Nursing Center Sierra Nursing & Rehabilitation Center Sonoma Nursing & Rehabilitation Center Susanville Nursing & Rehabilitation Center Tri City Nursing & Rehabilitation Center Valley View Home Washington Manor Nursing & Rehabilitation Center Watsonville Care Center East Watsonville Care Center West Weed Nursing & Rehabilitation Center Willits Nursing & Rehabilitation Center Care Home Health Services (California) Care at Home Newport Beach San Diego San Leandro Sonoma Upland Care Home Health Newport Beach San Diego San Leandro San Marcos Sonoma Suisun City Upland Carmichael Rehabilitation Center (California) Carmichael Convalescent Hospital Casa de Vida Rehabilitation Center - Inactive Corporation (California) Circleville Health Care Corp. (Ohio) Americare Circleville Nursing & Rehabilitation Center Coalinga Rehabilitation Center (California) Coalinga Convalescent Center Covina Rehabilitation Center (California) Covina Rehabilitation Center Dunbar Health Care Corp. (West Virginia) Americare Dunbar Nursing & Rehabilitation Center Evergreen Rehabilitation Center (California) Evergreen Convalescent Center Fairfield Rehabilitation Center (California) Fairfield Health Care Center First Class Pharmacy, Inc. (California) Assist-a-Care Resource Home Infusion Pharmacy Resource Pharmacy Fullerton Rehabilitation Center (California) Fairway Convalescent Center Glendora Rehabilitation Center (California) Glendora Rehabilitation Center Glenville Health Care Corp. (West Virginia) Americare Glenville Nursing & Rehabilitation Center Grand Terrace Rehabilitation Center (California) Grand Terrace Convalescent Hospital Hallmark Health Services, Inc. (Delaware) Arbor Glen Health Care Center Brookwood Care Center Park Tustin Rehabilitation & Healthcare Playa del Rey Rehabilitation & Care Center Rose Villa Care Center Hampshire Insurance Company (Turks & Caicos) Harbor View Group Home, Inc. (California) Harbor View Group Home Harbor View Rehabilitation Center (California) Harbor View Hawthorne Rehabilitation Center (California) South Bay Child Care Center Healthcare Network (California) Heritage Rehabilitation Center (California) Heritage Rehabilitation Center Huntington Beach Convalescent Hospital (California) Huntington Beach Convalescent Hospital The Huntington Jackson Rehabilitation Center, Inc. (California) Kit Carson Convalescent Hospital Linda Mar Rehabilitation Center (California) Linda Mar Healthcare & Rehabilitation Center Marion Health Care Corp. (Ohio) Americare Marion Health Care Corp. Meadowbrook Rehabilitation Center (California) Meadowbrook Manor Meadowview Rehabilitation Center - Inactive Corporation (California) New Lexington Health Care Corp. (Ohio) Americare New Lexington Nursing & Rehabilitation Center Newport Beach Rehabilitation Center (California) Newport Rehabilitation Center North State Home Health Care, Inc. (California) North State Home Health Care, Inc. Oasis Mental Health Treatment Center, Inc. (California) Oasis Mental Health Treatment Center, Inc. Paradise Rehabilitation Center, Inc. (California) Heritage Paradise Paso Robles Rehabilitation Center (California) Paso Robles Convalescent Hospital Putnam Health Care Corp. (West Virginia) Americare Putnam Nursing & Rehabilitation Center Regency High School, Inc. (California) Regency High School Regency Rehab Hospitals, Inc. Regency Rehab Properties, Inc. Regency-North Carolina, Inc. (North Carolina) Buena Vista Nursing Center Cherry Oaks Nursing Center Country Forest Manor Countryside Villa of Duplin Crystal Coast Rehabilitation Center Greenfield Manor High Country Healthcare James A. Johnson Nursing Center Medical Park Nursing Center Mountainview Care Center Northwood Health Care Center Regency-Tennessee, Inc. (Tennessee) Brookhaven Health Care Center Decatur Health Care Hillside Manor Rehabilitation Center Huntsville Manor Rehabilitation Center Jackson Manor Nursing Home Lawrenceburg Manor Mountainview Healthcare & Rehabilitation Center Wariota Health Care Center RHS Management Corporation (California) Rose Rehabilitation Center - Inactive Corporation (California) Rosewood Rehabilitation Center, Inc. (California) Rosewood Terrace Rehabilitation & Living Center Salem Health Care Corp. (West Virginia) Americare Salem Nursing & Rehabilitation Center Sandia Vista Development Corp. - Inactive Corporation (New Mexico) Shandin Hills Rehabilitation Center (California) Shandin Hills Behavior Therapy Center SCRS & Communicology, Inc. of Ohio (Ohio) Stockton Rehabilitation Center, Inc. (California) Heritage of Stockton Sunset Villa Corp. - Inactive Corporation (New Mexico) Vista Knoll Rehabilitation Center, Inc. (California) Vista Knoll Specialized Care Facility Willowview Rehabilitation Center (California) Willowview Convalescent Hospital EX-23 12 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To Regency Health Services, Inc.: As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statements File Nos. 33-77732, 33-55930, 33-53554 and 333-7173. Orange County, California ARHTUR ANDERSEN LLP February 14, 1997 EX-27 13 FDS -- REGENCY HEALTH SERVICES 1996 ANNUAL REPORT
5 1,000 Year DEC-31-1996 DEC-31-1996 22,875 0 85,672 4,723 0 141,416 179,010 43,938 353,576 74,242 182,490 0 0 168 80,780 353,576 0 558,050 0 453,131 40,273 0 18,060 11,011 4,612 6,399 0 1,193 0 5,206 .32 .32
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