-----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, Hx58YHiGAa2BmbIJnpXkE9AwLj2n36Fi6/Dw0dFyCa3BaeRz64O9/LgxyxnFiYy6 gC/7VjCkvxXWr0n8Nlv8Kg== 0000950116-97-000982.txt : 19970520 0000950116-97-000982.hdr.sgml : 19970520 ACCESSION NUMBER: 0000950116-97-000982 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENESIS HEALTH VENTURES INC /PA CENTRAL INDEX KEY: 0000874265 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 061132947 STATE OF INCORPORATION: PA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11666 FILM NUMBER: 97607745 BUSINESS ADDRESS: STREET 1: 148 W STATE ST STE 100 CITY: KENNETT SQUARE STATE: PA ZIP: 19348 BUSINESS PHONE: 6104446350 MAIL ADDRESS: STREET 1: 148 W STATE STREET CITY: KENNETT SQUARE STATE: PA ZIP: 19348 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________ Commission File Number: 1-11666 GENESIS HEALTH VENTURES, INC. (Exact name of registrant as specified in its charter) Pennsylvania 06-1132947 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 148 West State Street Kennett Square, Pennsylvania 19348 (Address, including zip code, of principal executive offices) (610) 444-6350 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES [ x ] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of May 9, 1997: 35,006,495 shares of common stock outstanding TABLE OF CONTENTS
Page ---- CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS..........................................1 Part I: FINANCIAL INFORMATION Item 1. Financial Statements.............................................................2 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................................8 Part II OTHER INFORMATION Item 1. Legal Proceedings...............................................................14 Item 2. Changes in Securities...........................................................14 Item 3. Defaults Upon Senior Securities.................................................14 Item 4 Submission of Matters to a Vote of Security Holders.............................14 Item 5. Other Information...............................................................14 Item 6 Exhibits and Reports on Form 8-K................................................14 SIGNATURES .......................................................................................16
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS Certain oral statements made by management from time to time and certain statements contained herein, including certain statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" such as statements concerning Medicaid and Medicare programs and the Company's ability to meet its liquidity needs and control costs; certain statements in Notes to Condensed Consolidated Financial Statements, such as certain Pro Forma Adjustments; and other statements contained herein regarding matters which are not historical facts are forward looking statements (as such term is defined in the Securities Act of 1933) and because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward looking statements. Factors that could cause actual results to differ materially include, but are not limited to those discussed below: 1. The Company's substantial indebtedness and significant debt service obligations. 2. The Company's ability to secure the capital and the related cost of such capital necessary to fund its future growth through acquisition and development, as well as internal growth. 3. Changes in the United States healthcare system, including changes in reimbursement levels under Medicaid and Medicare, and other changes in applicable government regulations that might affect the profitability of the Company. 4. The Company's continued ability to operate in a heavily regulated environment and to satisfy regulatory authorities, thereby avoiding a number of potentially adverse consequences, such as the imposition of fines, temporary suspension of admission of patients, restrictions on the ability to acquire new facilities, suspension or decertification from Medicaid or Medicare programs, and, in extreme cases, revocation of a facility's license or the closure of a facility, including as a result of unauthorized activities by employees. 5. The occurrence of changes in the mix of payment sources utilized by the Company's customers to pay for the Company's services. 6. The adoption of cost containment measures by private pay sources such as commercial insurers and managed care organizations, as well as efforts by governmental reimbursement sources to impose cost containment measures. 7. The level of competition in the Company's industry, including without limitation, increased competition from acute care hospitals, providers of assisted and independent living and providers of home health care and changes in the regulatory system, such as changes in certificate of need laws, in the states in which the Company operates or anticipates operating in the future that facilitate such competition. 8. The Company's ability to identify suitable acquisition candidates, to consummate or complete development projects, or to profitably operate or successfully integrate enterprises into the Company's other operations. These and other factors have been discussed in more detail in the Company's periodic reports including its Annual Report on Form 10K for the fiscal year ended September 30, 1996. 1 PART I: FINANCIAL INFORMATION Item 1. Financial Statements Genesis Health Ventures, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in thousands, except share data)
March 31, September 30, - ------------------------------------------------------------------------------------------------------------------ 1997 1996 ================================================================================================================== Assets (Unaudited) Current assets: Cash and equivalents $ 13,835 $ 12,763 Accounts receivable, net of allowance for doubtful accounts of $36,531 at March 31, 1997 and $11,131 at September 30, 1996 196,987 141,716 Cost report receivables 54,360 41,575 Inventory 24,866 17,051 Prepaid expenses and other current assets 30,092 19,616 - ----------------------------------------------------------------------------------------------------------------- Total current assets 320,140 232,721 - ----------------------------------------------------------------------------------------------------------------- Property, plant, and equipment 633,540 416,766 Accumulated depreciation (77,879) (65,837) - ----------------------------------------------------------------------------------------------------------------- 555,661 350,929 Notes receivable and other investments 104,729 92,574 Other long-term assets 33,083 24,595 Deferred tax assets 10,624 -- Goodwill and other intangibles, net 316,976 249,850 - ----------------------------------------------------------------------------------------------------------------- Total assets $ 1,341,213 $ 950,669 ================================================================================================================= Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued expenses $ 114,321 $ 73,084 Current installments of long-term debt 6,493 3,720 Income taxes payable 7,923 426 - ----------------------------------------------------------------------------------------------------------------- Total current liabilities 128,737 77,230 - ----------------------------------------------------------------------------------------------------------------- Long-term debt 618,564 338,933 Deferred income taxes -- 13,812 Deferred gain and other long-term liabilities 10,946 6,086 Shareholders' equity: Common stock, par $.02, authorized 60,000,000 shares, issued and outstanding 35,260,207 and 35,214,606 at March 31, 1997; 31,981,393 and 31,935,792 at September 30, 1996 699 640 Additional paid-in capital 455,322 411,472 Retained earnings 127,188 102,739 Treasury stock, at cost (243) (243) - ----------------------------------------------------------------------------------------------------------------- Total shareholders' equity 582,966 514,608 - ----------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,341,213 $ 950,669 =================================================================================================================
See accompanying notes to condensed consolidated financial statements 2 Genesis Health Ventures, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (in thousands, except share and per share data)
(Unaudited) Three months ended March 31, - ------------------------------------------------------------------------------------------------------------------ 1997 1996 ================================================================================================================== Net revenues: Basic healthcare services $ 136,825 $ 83,066 Specialty medical services 124,488 61,811 Management services and other, net 11,950 9,862 - ------------------------------------------------------------------------------------------------------------------- Total net revenues 273,263 154,739 - ------------------------------------------------------------------------------------------------------------------- Operating expenses: Salaries, wages and benefits 130,395 77,283 Other operating expenses 84,886 41,798 General corporate expense 9,907 6,262 Depreciation and amortization 10,620 6,087 Lease expense 7,244 4,068 Interest expense, net 8,960 6,939 - ------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 21,251 12,302 Income taxes 7,757 4,492 - ------------------------------------------------------------------------------------------------------------------- Net income $ $13,494 $ 7,810 =================================================================================================================== Per common share data: Primary: Net income $ 0.37 $ 0.31 Weighted average shares of common stock and equivalents 36,372,903 25,306,685 - ------------------------------------------------------------------------------------------------------------------- Fully diluted: Net income $ 0.37 $ 0.30 Weighted average shares of common stock and equivalents 36,374,693 28,797,732 ===================================================================================================================
See accompanying notes to condensed consolidated financial statements 3 Genesis Health Ventures, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (in thousands, except share and per share data)
(Unaudited) Six months ended March 31, - --------------------------------------------------------------------------------------------------------------- 1997 1996 =============================================================================================================== Net revenues: Basic healthcare services $ 270,917 $ 155,260 Specialty medical services 238,667 115,001 Management services and other, net 22,223 17,256 - --------------------------------------------------------------------------------------------------------------- Total net revenues 531,807 287,517 - --------------------------------------------------------------------------------------------------------------- Operating expenses: Salaries, wages and benefits 255,450 142,325 Other operating expenses 165,018 79,394 General corporate expense 19,529 11,101 Depreciation and amortization 20,101 11,235 Lease expense 14,182 7,861 Interest expense, net 18,155 12,979 Debenture conversion expense - 1,090 - --------------------------------------------------------------------------------------------------------------- Earnings before income taxes and extraordinary item 39,372 21,532 Income taxes 14,370 7,864 - --------------------------------------------------------------------------------------------------------------- Earnings before extraordinary item 25,002 13,668 Extraordinary item, net of tax (553) - - --------------------------------------------------------------------------------------------------------------- Net income $ 24,449 $ 13,668 =============================================================================================================== Per common share data: Primary: Earnings before extraordinary item $ 0.71 $ 0.55 Extraordinary item (0.02) - Net income $ 0.69 0.55 Weighted average shares of common stock and equivalents 35,285,093 24,730,819 - -------------------------------------------------------------------------------------------------------------- Fully diluted: Earnings before extraordinary item $ 0.70 $ 0.53 Extraordinary item (0.02) - Net income $ 0.68 0.53 Weighted average shares of common stock and equivalents 36,262,863 28,816,719 ==============================================================================================================
See accompanying notes to condensed consolidated financial statements 4 Genesis Health Ventures, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (in thousands)
(Unaudited) Six months ended March 31, 1997 1996 ======================================================================================================================= Cash flows from operating activities: Net income $ 24,449 $ 13,668 Adjustments to reconcile net income to net cash provided by operating activities: Charges (credits) included in operations not requiring funds: Provision for deferred taxes 3,592 1,966 Depreciation and amortization 20,101 11,235 Amortization of deferred gain (230) (230) Debenture conversion expense - 1,090 Extraordinary item 553 - Changes in assets and liabilities excluding the effects of acquisitions: Accounts receivable (27,363) (7,519) Cost reports receivable (5,907) (6,941) Inventory (5,236) (1,548) Prepaid expenses and other current assets (5,069) (10,932) Accounts payable and accrued expenses 6,983 5,355 Income taxes payable 6,522 1,508 - ----------------------------------------------------------------------------------------------------------------------- Total adjustments (6,054) (6,016) - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operations 18,395 7,652 - ----------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities Capital expenditures (33,778) (12,776) Payments for acquisitions, net of cash acquired (233,665) (93,316) Notes receivable and other investment and asset additions, net (11,025) (11,653) - ----------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (278,468) (117,745) - ----------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities Net borrowings under working capital revolving credit 140,783 107,200 Repayment of long term debt (1,955) (322) Proceeds from issuance of long-term debt 125,000 - Debt issuance costs (3,750) - Debenture conversion expense - (1,090) Common stock options exercised 1,067 1,716 - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 261,145 107,504 - ----------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and equivalents 1,072 (2,589) Cash and equivalents Beginning of period 12,763 10,387 End of period $ 13,835 $ 7,798 ======================================================================================================================= Supplemental disclosure of cash flow information: Interest paid $ 14,533 $ 11,876 Income taxes paid $ 6,873 $ 12,005 =======================================================================================================================
See accompanying notes to condensed consolidated financial statements 5 GENESIS HEATLH VENTURES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. General The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report for the fiscal year ended September 30, 1996. The information furnished is unaudited but reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial information for the periods shown. Such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of results expected for the full year. 2. Earnings Per Share Primary and fully-diluted earnings per share are based on the weighted average number of common shares outstanding and the dilutive effect of stock options, convertible debentures and other common stock equivalents. 3. Long-Term Debt In March 1997, the Company amended its credit facility to increase the revolving credit facility from $300,000,000 to $375,000,000 (the "Revolving Credit Facility"). In October 1996, the Company entered into an agreement with the lenders to increase the Revolving Credit Facility from $200,000,000 to $300,000,000 and the lease financing facility from $85,000,000 to $150,000,000 (the "Lease Financing Facility") and to release liens on accounts receivable, inventory and personal property. The Revolving Credit Facility bears interest at a floating rate equal, at the Company's option, to prime rate or LIBOR plus a margin up to 1.5%. The Lease Financing Facility bears interest at a floating rate equal, at the Company's option, to prime rate or LIBOR plus a margin up to 1.5%. In October 1996, the Company completed an offering of $125,000,000 9 1/4% Senior Subordinated Notes due 2006 (the "1996 Note Offering"). The Company used the net proceeds of approximately $121,250,000 together with borrowings under the Revolving Credit Facility, to pay the cash portion of the purchase price of the GMC Transaction (defined below), to repay certain debt assumed as a result of the GMC Transaction and to repurchase GMC (defined below) accounts receivable which were previously financed. 4. Pro Forma Financial Information Effective October 1, 1996, Geriatric & Medical Companies, Inc. ("GMC") merged with a wholly-owned subsidiary of Genesis (The "GMC Transaction"). Under the terms of the merger agreement, GMC shareholders received $5.75 per share in cash for each share of GMC stock. The total consideration paid, including assumed indebtedness of approximately $132,000,000, is approximately $223,000,000. The merger was financed in part with approximately $121,250,000 in net proceeds from the 1996 Note Offering. The remaining consideration was financed through borrowings under the Company's Revolving Credit Facility. The GMC Transaction added to Genesis 24 owned eldercare centers with approximately 3,300 beds. GMC also operated businesses which provided a number of ancillary healthcare services including ambulance services; respiratory therapy, infusion therapy and enteral therapy; distribution of durable medical equipment and home medical supplies; and information management services. In connection with the GMC Transaction, the Company has preliminarily recorded approximately $63,700,000 of goodwill, which is being amortized on a straight-line basis over lives ranging from 20 to 40 years, and approximately $25,300,000 of deferred tax assets available to reduce future income taxes, which are included net in deferred tax assets on the balance sheet. Management believes it is more likely than not that such deferred tax assets will be realized. 6 In July 1996, the Company acquired the outstanding stock of National Health Care Affiliates, Inc., Oak Hill Center, Inc., Derby Nursing Center Corporation, Eidos, Inc. and Versalink, Inc. (collectively, "National Health"). Prior to the closing of the stock acquisitions, an affiliate of a financial institution purchased nine of the eldercare centers for $67,700,000 and subsequently leased the centers to a subsidiary of Genesis under the Lease Financing Facility. The balance of the total consideration paid to National Health was funded with available cash of $51,800,000 and assumed indebtedness of $7,900,000. National Health added 16 eldercare centers in Florida, Virginia and Connecticut with approximately 2,200 beds to Genesis. National Health also provided enteral nutrition and rehabilitation therapy services to the eldercare centers which it owned and leased. In June 1996, the Company acquired the outstanding stock of NeighborCare Pharmacies, Inc. and its related entities (collectively, "NeighborCare"), a privately held institutional pharmacy, infusion therapy and retail professional pharmacy business based in Baltimore, Maryland. Total consideration was approximately $57,250,000, comprised of approximately $47,250,000 in cash and 312,744 shares of Genesis common stock. On November 30, 1995, the Company acquired McKerley Health Care Centers, Inc. and its related entities (collectively, "McKerley") for total consideration of approximately $68,700,000. The transaction (the "McKerley Transaction") also provided for up to an additional $6,000,000 of contingent consideration payable upon the achievement of certain financial objectives through October 1997, of which approximately $4,000,000 was paid in February 1997, and $2,000,000 of which remains contingent consideration. McKerley added 15 eldercare centers in New Hampshire and Vermont with a total of 1,535 beds to Genesis. McKerley also operated a home healthcare company. The acquisition was financed with borrowings under the Revolving Credit Facility and assumed indebtedness. The following unaudited proforma statement of operations information gives effect to the GMC, National Health, NeighborCare and McKerley transactions described above as though they had occurred at the beginning of the period presented, after giving effect to certain adjustments, including amortization of goodwill, additional depreciation expense, increased interest expense on debt related to the acquisitions and related income tax effects. The proforma financial information does not necessarily reflect results of operations that would have occurred had the acquisitions occurred at the beginning of the period presented. (In thousands, except per share data) Six Months Ended Pro Forma Statement of Operations Information: March 31, 1996 Total net revenues $ 473,086 Net income 20,857 Primary earnings per share $ 0.66 Fully diluted earnings per share $ 0.63 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Since the Company began operations in July 1985, it has focused its efforts on providing an expanding array of specialty medical and community-based services to the elderly. The delivery of these services was originally concentrated in the eldercare centers owned and leased by the Company, but now also includes managed eldercare centers, independent healthcare facilities, outpatient clinics and home health care. The Company generates revenues from three sources: basic healthcare services, specialty medical services and management services and other. The Company includes in basic healthcare services revenues all room and board charges for its eldercare customers at its owned and leased eldercare centers. Specialty medical services include all revenues from providing rehabilitation therapies, institutional pharmacy and medical supply services, community-based pharmacies, subacute care programs, home health care, physician services, and other specialized services. Management services and other include fees earned for management of eldercare centers, development of life care communities and revenues from the group purchasing, staff replacement and vending businesses, and transactional revenues. Certain Transactions Effective January 1, 1997, the Company entered into an agreement to provide management services for NewCourtland, Inc. ("NewCourtland"), a wholly owned subsidiary of The Presbyterian Foundation for Philadelphia (the "Presbyterian Foundation"), a non-profit organization. Under the terms of the agreement, Genesis will provide management services to eight eldercare centers with 1,844 beds located throughout the Delaware Valley. Effective October 1, 1996, Geriatric & Medical Companies, Inc. ("GMC") merged with a wholly-owned subsidiary of Genesis (The "GMC Transaction"). Under the terms of the merger agreement, GMC shareholders received $5.75 per share in cash for each share of GMC common stock. The total consideration paid, including assumed indebtedness of approximately $132,000,000, is approximately $223,000,000. The merger was financed in part with approximately $121,250,000 in net proceeds from an offering of 9 1/4% Senior Subordinated Notes issued in October 1996 (the "1996 Note Offering"). The remaining consideration was financed through borrowings under the Company's revolving credit facility (the "Revolving Credit Facility"). The GMC Transaction added to Genesis 24 owned eldercare centers with approximately 3,300 beds. GMC also operated businesses which provided a number of ancillary healthcare services including ambulance services; respiratory therapy, infusion therapy and enteral therapy; distribution of durable medical equipment and home medical supplies; and information management services. In July 1996, the Company acquired the outstanding stock of National Health Care Affiliates, Inc., Oak Hill Center, Inc., Derby Nursing Center Corporation, Eidos, Inc. and Versalink, Inc. (collectively, "National Health"). Prior to the closing of the stock acquisitions, an affiliate of a financial institution purchased nine of the eldercare centers for $67,700,000 and subsequently leased the centers to a subsidiary of Genesis under a $150,000,000 lease financing facility (the "Lease Financing Facility"). The balance of the total consideration paid to National Health was funded with available cash of $51,800,000 and assumed indebtedness of $7,900,000. National Health added 16 eldercare centers in Florida, Virginia and 8 Connecticut with approximately 2,200 beds to Genesis. National Health also provided enteral nutrition and rehabilitation therapy services to the eldercare centers which it owned and leased. In June 1996, the Company acquired the outstanding stock of NeighborCare Pharmacies, Inc. ("NeighborCare"), a privately held institutional pharmacy, infusion therapy and retail pharmacy business based in Baltimore, Maryland. Total consideration was approximately $57,250,000, comprised of approximately $47,250,000 in cash and 312,744 shares of Genesis common stock. On November 30, 1995, the Company acquired McKerley Health Care Centers, Inc. and its related entities (collectively, "McKerley") for total consideration of approximately $68,700,000. The transaction (the "McKerley Transaction") also provided for up to an additional $6,000,000 of contingent consideration payable upon the achievement of certain financial objectives through October 1997, of which approximately $4,000,000 was paid in February 1997, and $2,000,000 of which remains contingent consideration. McKerley added 15 eldercare centers in New Hampshire and Vermont with a total of 1,535 beds to Genesis. McKerley also operated a home healthcare company. The acquisition was financed with borrowings under the Revolving Credit Facility and assumed indebtedness. Results of Operations Three months ended March 31, 1997 compared to three months ended March 31, 1996. The Company's total net revenues for the quarter ended March 31, 1997 were $273,263,000 compared to $154,739,000 for the quarter ended March 31, 1996, an increase of $118,524,000 or 77%. Basic healthcare services increased $53,759,000 or 65% of which approximately $31,600,000 is attributed to the GMC Transaction, approximately $14,500,000 is attributed to the National Health transaction, and the remaining increase of approximately $7,700,000 is primarily due to providing care to higher acuity patients and to rate increases. Specialty medical services revenue increased $62,677,000 or 101% of which approximately $14,500,000 is attributed to the GMC Transaction, approximately $18,100,000 is due to the NeighborCare Pharmacies transaction, approximately $5,800,000 is attributed to the National Health transaction, and the remaining increase of approximately $24,300,000 is primarily due to other volume growth in the institutional pharmacy, medical supply and contract therapy divisions and increased acuity in the health centers division. Specialty medical services revenue per patient day in the health centers division increased 19% to $34.58 in the quarter ended March 31, 1997 compared to $29.04 in the quarter ended March 31, 1996 primarily due to treatment of higher acuity patients. Management services and other income increased $2,088,000 or 21%. This increase is primarily due to approximately $3,000,000 of other service related business acquired in GMC Transaction, approximately $750,000 earned in connection with the management agreement with the Presbyterian Foundation, offset by approximately $2,000,000 of other transactional revenues earned in the quarter ended March 31, 1996 which included the sale of non-core assets. The Company's operating expenses before depreciation, amortization, lease expense, and interest expense were $225,188,000 for the quarter ended March 31, 1997 compared to $125,343,000 for quarter ended March 31, 1996, an increase of $99,845,000 or 80%, of which approximately $74,300,000 is due to the impact of acquisitions and the remaining increase of approximately $25,500,000 is attributed to growth in the institutional pharmacy, medical supply and contract therapy divisions. Increased depreciation and amortization, and lease expense are primarily attributed to the GMC Transaction, the National Health transaction, and the NeighborCare transaction. Interest expense increased $2,021,000 or 29%. This increase was primarily due to additional borrowings used to finance recent acquisitions, including the 1996 Note Offering used to finance the GMC Transaction, offset by the repayment of debt associated with proceeds of $202,280,000 from the May 1996 equity offering, and offset by the conversion of 6% Convertible Senior Subordinated Debentures (the Debentures). 9 Six months ended March 31, 1997 compared to six months ended March 31, 1996. The Company's total net revenues for the six months ended March 31, 1997 were $531,807,000 compared to $287,517,000 for the six months ended March 31, 1996, an increase of $244,290,000 or 85%. Basic healthcare services increased $115,657,000 or 74% of which approximately $64,500,000 is attributed to the GMC Transaction, approximately $29,500,000 is attributed to the National Health transaction, approximately $9,900,000 is due primarily to the inclusion of the eldercare centers acquired in the McKerley Transaction for the full six months in 1997 versus four months in the prior year and the remaining increase of approximately $11,800,000 is due to providing care to higher acuity patients and to rate increases. Specialty medical services revenue increased $123,666,000 or 108% of which approximately $28,300,000 is attributed to the GMC Transaction, approximately $36,100,000 is due to the NeighborCare Pharmacies transaction, approximately $10,800,000 is attributed to the National Health transaction, approximately $1,500,000 is due to the inclusion of the eldercare centers acquired in the McKerley Transaction for the full six months in 1997 versus four months in the prior year, and the remaining increase of approximately $47,000,000 is primarily due to other volume growth in the institutional pharmacy, medical supply and contract therapy divisions and increased acuity in the health centers division. Specialty medical service revenue per patient day in the health centers division increased 10% to $31.49 in the six months ended March 31, 1997 compared to $28.51 in the six months ended March 31, 1996 primarily due to treatment of higher acuity patients. Management services and other income increased $4,967,000 or 29%. This increase is primarily due to approximately $6,000,000 of other service related business acquired in GMC Transaction, approximately $750,000 earned in connection with the Company management agreement with the Presbyterian Foundation, offset by approximately $2,000,000 of other transactional revenues earned in the quarter ended March 31, 1996 which included the sale of non-core assets. The Company's operating expenses before depreciation, amortization, lease expense, interest expense and excluding debenture conversion expense were $439,997,000 for the six months ended March 31, 1997 compared to $232,820,000 for six months ended March 31, 1996, an increase of $207,177,000 or 89%, of which approximately $156,500,000 is due to the impact of acquisitions and the remaining increase of approximately $50,700,000 is attributed to growth in the institutional pharmacy, medical supply and contract therapy divisions. Increased depreciation and amortization, and lease expense are primarily attributed to the GMC Transaction, the National Health transaction, the NeighborCare transaction and the McKerley Transaction. Interest expense increased $5,176,000 or 40%. This increase in interest expense was primarily due to additional borrowings used to finance recent acquisitions, including the 1996 Note Offering used to finance the GMC Transaction, offset by the repayment of debt associated with proceeds of $202,280,000 from the May 1996 equity offering, and offset by the conversion of 6% Convertible Senior Subordinated Debentures. In the quarter ended December 31, 1995 the Company converted approximately $33,500,000 of the Debentures due 2003. In connection with the early conversion of the Debentures, the Company paid approximately $1,090,000 representing the prepayment of interest to converting debenture holders. The non-recurring cash payment is presented as debenture conversion expense in the results of operations for the six months ended March 31, 1996. In connection with the early repayment of debt and the restructuring and amendment of the Revolving Credit Facility in the quarter ended December 31, 1996, the Company recorded an extraordinary item (net of tax) of approximately $553,000 to write off unamortized deferred financing fees. 10 Liquidity and Capital Resources Working capital increased to $191,403,000 at March 31, 1997 from $155,491,000 at September 30, 1996. Accounts receivable increased to $196,987,000 at March 31, 1997 from $141,716,000 at September 30, 1996. Approximately $34,800,000 of this increase relates to the GMC acquisition, while the remaining approximately $20,500,000 relates primarily to the continuing shift in business mix to specialty medical services including the acquisition of NeighborCare in fiscal 1996. The allowance for doubtful accounts increased approximately $25,400,000, primarily as a result of reserves provided in connection with the GMC Transaction. Days revenue in accounts receivable remained unchanged at 65 days during the quarter ended March 31, 1997 versus the quarter end December 31, 1996, (68 days excluding GMC). The Company's cash flow from operations for the six months ended March 31, 1997 provided cash of $18,395,000 compared to $7,652,000 for the six months ended March 31, 1996. The increase in positive cash flow from operations in the quarter ended March 31, 1997 versus the quarter ended December 31, 1996 is primarily attributed to increased earnings and improved collection of cost report receivables. Investing activities for the six months ended March 31, 1997 include approximately $33,800,000 of capital expenditures primarily related to betterments and expansion of eldercare centers, the purchase of additional corporate office space and investment in data processing hardware and software. In March 1997, the Company amended its credit facility to increase the Revolving Credit Facility from $300,000,000 to $375,000,000. In October 1996, the Company entered into an agreement with the lenders to increase the Revolving Credit Facility from $200,000,000 to $300,000,000 and the Lease Financing Facility from $85,000,000 to $150,000,000 and to release liens on accounts receivable, inventory and personal property. The Revolving Credit Facility bears interest at a floating rate equal, at the Company's option, to prime rate or LIBOR plus a margin up to 1.5%. The Lease Financing Facility bears interest at a floating rate equal, at the Company's option, to prime rate or LIBOR plus a margin up to 1.5%. In February 1997, the Company made a payment of approximately $4,000,000 for contingent consideration in connection with the McKerley Transaction. In January 1997, the Company acquired $2,500,000 of convertible preferred stock of Doctors Health System Inc., ("Doctors Health") an independent physician owned and controlled integrated delivery system and practice management company. The convertible preferred stock carries an 8% cumulative dividend and is convertible into common stock. To date, the Company has purchased $10,000,000 of Doctors Health convertible preferred stock that, if converted, would represent an approximate 10% ownership interest in Doctors Health. The Company is committed to purchase an additional $5,000,000 of convertible preferred stock upon Doctors Health's achievement of certain operational and financial benchmarks. Also, the Company is committed to lend Doctors Health up to $5,000,000 at 11%, of which approximately $3,325,000 has been loaned to date. In connection with the GMC Transaction, the Company has preliminarily recorded approximately $63,700,000 of goodwill, which is being amortized on a straight-line basis over lives ranging from 20 to 40 years, and approximately $25,300,000 of deferred tax assets available to reduce future income taxes, which are included net in deferred tax assets on the balance sheet. Management believes it is more likely than not that such deferred tax assets will be realized. In November 1996, the Company called for redemption the then outstanding Debentures at a redemption price equal to 104.2% of the principal amount. The Debenture holders had the option to tender Debentures at the redemption price or to convert the Debentures at a conversion price of $15.104 per share. All of the approximately $43,800,000 of remaining Debentures outstanding were converted to Common Stock in the quarter ended December 31, 1996. In the quarter ended December 31, 1995, the Company converted approximately $33,500,000 of Debentures. The conversions improved the Company's leverage and provides the Company with the ability to borrow under its revolving credit facilities at lower rates. 11 In October 1996, the Company completed the 1996 Note Offering. The Company used the net proceeds of approximately $121,250,000 together with borrowings under the Revolving Credit Facility, to pay the cash portion of the purchase price of the GMC Transaction, to repay certain debt assumed as a result of the GMC Transaction and to repurchase GMC accounts receivable which were previously financed. Certain of the Company's outstanding loans contain covenants which, without the prior consent of the lenders, limit certain activities of the Company. Such covenants contain limitations relating to the merger or consolidation of the Company and the Company's ability to secure indebtedness, make guarantees, grant security interests and declare dividends. In addition, the Company must maintain certain minimum levels of cash flow and debt service coverage, and must maintain certain ratios of liabilities to net worth. Under these loans, the Company is restricted from paying cash dividends on the Common Stock, unless certain conditions are met. The Company has not declared or paid any cash dividends on its Common Stock since its inception. Legislative and regulatory action has resulted in continuing change in the Medicare and Medicaid reimbursement programs which has adversely impacted the Company. The changes have limited, and are expected to continue to limit, payment increases under these programs. Also, the timing of payments made under the Medicare and Medicaid programs is subject to regulatory action and governmental budgetary constraints; in recent years, the time period between submission of claims and payment has increased. Implementation of the Company's strategy to expand specialty medical services to independent providers should reduce the impact of changes in the Medicare and Medicaid reimbursement programs on the Company as a whole. Within the statutory framework of the Medicare and Medicaid programs, there are substantial areas subject to administrative rulings and interpretations which may further affect payments made under those programs. Further, the federal and state governments may reduce the funds available under those programs in the future or require more stringent utilization and quality reviews of eldercare centers. The Company believes that its liquidity needs can be met by expected operating cash flow and availability of borrowings under its credit facilities. At May 9, 1997, approximately $335,000,000 was outstanding under the Revolving Credit Facility and Lease Financing Facility, and approximately $171,000,000 was available under the credit facilities after giving effect to approximately $19,000,000 in outstanding letters of credit issued under the credit facilities. Seasonality The Company's earnings generally fluctuate from quarter to quarter. This seasonality is related to a combination of factors which include the timing of Medicaid rate increases, seasonal census cycles and the number of calendar days in a given quarter. Impact of Inflation The healthcare industry is labor intensive. Wages and other labor costs are especially sensitive to inflation and marketplace labor shortages. To date, the Company has offset its increased operating costs by increasing charges for its services and expanding its services. Genesis has also implemented cost control measures to limit increases in operating costs and expenses but cannot predict its ability to control such operating cost increases in the future. 12 Earnings Per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). This statement simplifies the standards for computing earnings per share ("EPS") and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS and requires dual presentation of basic and diluted EPS on the face of the income statement of all entities with complex capital structures. SFAS 128 also requires a reconciliation of the numerator and denominator of the diluted EPS computation. Had SFAS 128 been adopted in the first quarter of fiscal 1997, basic and diluted EPS would have been computed for the three and six-months ended March 31, 1997 as follows (in thousands, except per share amounts):
Per Share Income Shares Amount (Three months ended March 31, 1997) Basic EPS Net Income $ 13,494 35,168 $0.38 Incremental shares from assumed exercise of dilutive stock options - 1,207 - ---------- ---------- ------- Diluted EPS Net Income $ 13,494 36,375 $0.37 ========== ========== ======= (Six months ended March 31, 1997) Basic EPS Income before extraordinary item $ 25,002 34,273 $0.73 Extraordinary item (553) (0.02) ---------- ---------- ------- Net Income $ 24,449 34,273 $0.71 Diluted EPS Effect of assumed conversion of debt 303 884 - Incremental shares from assumed exercise of dilutive stock options - 1,012 - ---------- ---------- ------- Net Income $ 24,752 36,169 0.68 Extraordinary item 553 0.02 ---------- ---------- ------- Net Income before extraordinary item $ 25,305 36,169 $0.70 ========== ========== =======
13 PART II: OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to Vote of Security Holders On March 6, 1997, the Company held its Annual Meeting of Shareholders (the "Annual Meeting"). Proxies were solicited for the Annual Meeting pursuant to Regulation 14 of the Securities Exchange Act of 1934. At the Annual Meeting the following matters were voted on: (i) Stephen E. Luongo and Michael R. Walker were elected to serve on the Board of Directors of the Company for three-year terms and until their respective successors are duly elected and qualified, each receiving 31,634,231 votes for their election and 235,454 against their election (with 3,031,178 broker non-votes and abstentions); and (ii) an amendment to the Company's 1985 Amended and Restated Employee Stock Option Plan increasing the number of shares which may be issued under the plan to 4,500,000 shares was approved by a vote of 29,004,964 for the amendment and 2,735,980 votes against the amendment (with 3,159,178 broker non-votes and abstentions). Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Number Description ------ ----------- 10.1 Amended and Restated Lease and Agreement dated as of October 7, 1996 between Mellon Financial Services Corporation #4, as Lessor, and Genesis Eldercare Properties, Inc., as lessee. 10.2 Second Amendment to Amended and Restated Participation Agreement dated March 7, 1997 among Genesis Eldercare Properties, Inc., as lessee, Mellon Financial Services Corporation #4, as lessor; various financial institutions as lenders and Mellon Bank N.A., a national banking association as Agent for Lessor and the Lenders. 14 10.3 Amendment No. 1 to Second Amended and Restated Credit Agreement, dated as of March 7, 1997 by and among Genesis Health Ventures, Inc. and certain subsidiaries as Borrowers and Mellon Bank N.A. Issuer of Letters of Credit, Mellon Bank N.A. as Administrator Agent and Co-Syndication Agent, Citibank, N.A. as Co-Syndication Agent, and other Co-Agents. 10.4 Employment Agreement by and between Michael R. Walker and Genesis Health Ventures, Inc., dated April 1, 1997 10.5 The Company's Amended and Restated Employee Stock Option Plan 11 Statement re computation of per share earnings 27 Financial Data Schedule (b) Reports on Form 8-K None 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereto duly authorized. GENESIS HEALTH VENTURES, INC. Date: May 14, 1997 /s/ George V. Hager, Jr. ------------------------------------------------- George V. Hager, Jr. Senior Vice President and Chief Financial Officer 16 EX-2 2 EXHIBIT 10.1 - -------------------------------------------------------------------------------- AMENDED AND RESTATED LEASE AND AGREEMENT Dated as of October 7, 1996 between MELLON FINANCIAL SERVICES CORPORATION #4, as Lessor, and GENESIS ELDERCARE PROPERTIES, INC., as Lessee - -------------------------------------------------------------------------------- ALL RIGHT, TITLE AND INTEREST OF LESSOR UNDER THIS LEASE AND AGREEMENT AND THE PROPERTY SUBJECT HERETO HAVE BEEN ASSIGNED TO AND ARE SUBJECT TO A SECURITY INTEREST IN FAVOR OF MELLON BANK, N.A., AGENT ("AGENT"), UNDER CERTAIN MORTGAGES, ASSIGNMENTS OF RENTS AND LEASES, SECURITY AGREEMENTS AND FIXTURE FILING STATEMENTS (AS SUCH AGREEMENTS AND INSTRUMENTS MAY BE AMENDED AND/OR SUPPLEMENTED TO THE EXTENT PERMITTED THEREBY), FOR THE BENEFIT OF THE LENDERS REFERRED TO IN SUCH SECURITY INSTRUMENTS. THIS LEASE AND AGREEMENT HAS BEEN EXECUTED IN SEVERAL COUNTERPARTS. TO THE EXTENT, IF ANY, THAT THIS LEASE AND AGREEMENT CONSTITUTES CHATTEL PAPER (AS SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION), NO SECURITY INTEREST IN THIS LEASE AND AGREEMENT MAY BE CREATED THROUGH THE TRANSFER OR POSSESSION OF ANY COUNTERPART HEREOF OTHER THAN THE "ORIGINAL EXECUTED COUNTERPART NO. 1", WHICH SHALL BE IDENTIFIED AS THE COUNTERPART CONTAINING THE RECEIPT THEREFOR EXECUTED BY AGENT ON OR FOLLOWING THE SIGNATURE PAGE THEREOF. SEE SECTION 21.20 FOR THE NATURE OF THIS TRANSACTION AND INTENTION 1 OF THE PARTIES. THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART NO. 1. 2
TABLE OF CONTENTS (Lease and Agreement) || Page ARTICLE I DEFINITIONS; LESSEE LIABILITY....................................... 1 ARTICLE II LEASE OF SITES; LEASE TERM......................................... 2 SECTION 2.1. Acceptance and Lease of Sites.............................................................. 2 SECTION 2.2. Acceptance Procedure....................................................................... 2 SECTION 2.3. Lease Term................................................................................. 3 SECTION 2.4. Lease Renewal.............................................................................. 3 ARTICLE III OTHER PROPERTY............................................... 4 ARTICLE IV RENT.................................................... 4 SECTION 4.1. Basic Rent................................................................................. 4 SECTION 4.2. Supplemental Rent.......................................................................... 4 SECTION 4.3. Method and Amount of Payment............................................................... 4 SECTION 4.4. Late Payment............................................................................... 5 SECTION 4.5. Net Lease; No Setoff; Etc.................................................................. 5 ARTICLE V UTILITY CHARGES.............................................. 7 ARTICLE VI RENEWAL OPTION; SALE, RETURN AND PURCHASE OPTIONS............................. 7 SECTION 6.1. Renewal Option............................................................................. 7 SECTION 6.2. Purchase Option............................................................................ 8 SECTION 6.3. Sale Option................................................................................ 8 SECTION 6.4. Conditions for Sale of the Sites........................................................... 9 SECTION 6.5. Early Termination.......................................................................... 12 SECTION 6.6. Exercise of Options; Failure to Elect...................................................... 13 SECTION 6.7. Return of Sites ........................................................................... 13 SECTION 6.8. Completion of Facilities................................................................... 14 SECTION 6.9. Failure of Lessee to Sell Sites............................................................ 14 ARTICLE VII CONDITION AND USE OF SITES......................................... 18 SECTION 7.1. Waivers.................................................................................... 18 ARTICLE VIII LIENS; EASEMENTS.............................................. 19 SECTION 8.1. Liens...................................................................................... 19 SECTION 8.2. No Lessor Consent or Liability............................................................. 19
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SECTION 8.3. Easements ................................................................................. 19 ARTICLE IX MAINTENANCE AND REPAIR; ALTERATIONS AND ADDITIONS......................................... 21 SECTION 9.1. Maintenance and Repair; Compliance With Law................................................ 21 SECTION 9.2. Alterations................................................................................ 22 SECTION 9.3. Title to Alterations....................................................................... 24 SECTION 9.4. Maintenance and Repair Reports............................................................. 25 SECTION 9.5. Permitted Contests......................................................................... 25 ARTICLE X USE.................................................... 26 ARTICLE XI INSURANCE................................................. 26 SECTION 11.1. Required Coverages........................................................................ 26 SECTION 11.2. Delivery of Insurance Certificates........................................................ 28 ARTICLE XII ASSIGNMENT AND SUBLEASING......................................... 29 SECTION 12.1. Assignment and Subletting................................................................. 29 SECTION 12.2. Sublease Subordination.................................................................... 31 ARTICLE XIII LOSS, DESTRUCTION, CONDEMNATION OR DAMAGE................................. 32 SECTION 13.1. Event of Loss; Condemnation or Casualty................................................... 32 SECTION 13.2. Application of Payments Relating to an Event of Loss.................................................................... 33 SECTION 13.3. Application of Certain Payments Relating to a Condemnation............................................................. 33 SECTION 13.4. Casualty.................................................................................. 33 SECTION 13.5. Other Dispositions........................................................................ 34 SECTION 13.6. Negotiations.............................................................................. 34 SECTION 13.7. No Rent Abatement......................................................................... 35 ARTICLE XIV NON-INTERFERENCE.............................................. 35 SECTION 14.1. Non-Interference.......................................................................... 35 SECTION 14.2. Certain Duties and Responsibilities of Lessor..................................................................... 35 ARTICLE XV INSPECTION AND REPORTS........................................... 36 SECTION 15.1. Inspection................................................................................ 36 SECTION 15.2. Reports................................................................................... 36 ARTICLE XVI OWNERSHIP, GRANT OF SECURITY INTEREST
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AND FURTHER ASSURANCES........................................... 36 SECTION 16.1. Grant of Security Interest................................................................ 36 SECTION 16.2. Attorney-in-Fact.......................................................................... 37 ARTICLE XVII LEASE EVENTS OF DEFAULT.......................................... 38 ARTICLE XVIII ENFORCEMENT................................................ 41 SECTION 18.1. Remedies.................................................................................. 41 SECTION 18.2. Proceeds of Sale; Deficiency.............................................................. 45 SECTION 18.3. Grant and Foreclosure on Lessee's Estate.................................................. 45 SECTION 18.4. Remedies Cumulative; No Waiver; Consents.................................................. 46 ARTICLE XIX RIGHT TO PERFORM FOR LESSEE........................................ 46 ARTICLE XX LESSOR LIENS................................................ 47 ARTICLE XXI MISCELLANEOUS............................................... 47 SECTION 21.2. Severability.............................................................................. 47 SECTION 21.3. Notices................................................................................... 48 SECTION 21.4. Amendment; Complete Agreements............................................................ 48 SECTION 21.5. Headings.................................................................................. 48 SECTION 21.6. Original Lease............................................................................ 48 SECTION 21.7. GOVERNING LAW............................................................................. 48 SECTION 21.8. Discharge of Lessee's Obligations by its Affiliates................................................................. 49 SECTION 21.9. Liability of Lessor Limited............................................................... 49 SECTION 21.10. Estoppel Certificates.................................................................... 49 SECTION 21.11. No Joint Venture......................................................................... 50 SECTION 21.12. No Accord and Satisfaction............................................................... 50 SECTION 21.13. No Merger................................................................................ 50 SECTION 21.14. Successor Lessor......................................................................... 51 SECTION 21.15. Survival................................................................................. 51 SECTION 21.16. Transfer of Sites to Lessee or any other Person..................................................................... 51 SECTION 21.17. Enforcement of Certain Warranties........................................................ 51 SECTION 21.18. Investment of Security Funds............................................................. 52 SECTION 21.19. Recording of Lease Supplements........................................................... 52 SECTION 21.20. Nature of Transaction.................................................................... 53 SCHEDULE I - Description of Initial Sites EXHIBIT A - Form of Lease Supplement and Memorandum of Lease and Agreement
3 || 4 Lease Agreement THIS AMENDED AND RESTATED LEASE AND AGREEMENT dated as of October 7, 1996 (as amended, supplemented, or otherwise modified from time to time, this "Lease"), is between MELLON FINANCIAL SERVICES CORPORATION #4, a Pennsylvania corporation, as Lessor and as mortgagee ("Lessor"), and GENESIS ELDERCARE PROPERTIES, INC., a Pennsylvania corporation and a wholly-owned subsidiary of Genesis, as Lessee and as mortgagor ("Lessee"). In consideration of the mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, hereby agree as follows: ARTICLE I DEFINITIONS; LESSEE LIABILITY This Lease is an amendment and restatement of an existing Lease and Agreement dated as of July 24, 1996 (the "Original Lease") and the existing Lease Supplements under such Lease and Agreement relating to the Sites identified on Schedule I hereof, which Lease Supplements shall continue to be in full force and effect hereunder. For all purposes hereof, the capitalized terms used herein and not otherwise defined shall have the meanings assigned thereto in Appendix 1 to that certain Amended and Restated Participation Agreement dated as of October 7, 1996, by and among Lessee, Lessor, the Lenders identified therein, and Mellon Bank, N.A., as Agent (the "Participation Agreement"). All obligations imposed on the "Lessee" in this Lease shall be the full recourse liability of Lessee and no obligation or liability of Lessee hereunder or under any other Operative Document shall be limited by reason of any provision of any Ground Lease restricting the liability of "Landlord" thereunder. This Lease refunds, refinances and replaces that certain Acquisition Credit Agreement, dated as of September 29, 1995, as amended, among Genesis Health Ventures, Inc. ("Genesis"), certain of its subsidiaries, Mellon Bank, N.A., ("Mellon") as Agent, Citibank, N.A. ("Citibank") as Co-Agent and the lenders named therein, which agreement supplemented that certain Amended and Restated Credit Agreement, dated as of September 29, 1995, as amended, among Genesis, certain of its subsidiaries, Mellon as Issuer of Letters of Credit, Mellon as agent and Citibank as co-Agent, which agreement refunded, refinanced and replaced that certain Credit Agreement, dated as of November 22, 1993, among Genesis, certain of its subsidiaries, Mellon as agent and the lenders named therein. The obligations hereunder are secured and superior in right of payment to the obligations under those certain Debentures issued pursuant to the 1993 Indenture (as hereinafter defined). This Lease (including all amendments and supplements hereto including, without limitation, any amendments Lease Agreement which may increase the amount of this facility) is a "Credit Facility" within the meaning of that certain Indenture, dated as of June 15, 1995, between Genesis and Delaware Trust Company as Trustee (the "1995 Indenture") and constitutes "Senior Indebtedness" within the meaning of that certain Indenture, dated as of November 30, 1993, between Genesis and First Fidelity Bank, N.A., Pennsylvania as Trustee (the "1993 Indenture"). From and after the execution and delivery of the 1996 Indenture and the issuance of the notes thereunder, this Lease (including all amendments and supplements hereto including, without limitation, any amendments which may increase the amount of this facility) will be a "Credit Facility" within the meaning of the 1996 Indenture. ARTICLE II LEASE OF SITES; LEASE TERM SECTION II.1. Acceptance and Lease of Sites. On each Site Acquisition Date, Lessor, subject to the satisfaction or waiver of the conditions set forth in Article III of the Participation Agreement, hereby agrees to accept delivery on such Site Acquisition Date of the portion of the Land Interests together with any Facilities thereon (or, with respect to the Non-Acquired Land Interests, the ground lease of such Non-Acquired Land Interest and the Facilities located on such Non-Acquired Land Interests) to be delivered on such Site Acquisition Date pursuant to the terms of the Participation Agreement and simultaneously to lease (or in the case of such Non-Acquired Land Interests, sublease) such portion of the Land Interests together with any Facilities thereon to Lessee hereunder, and Lessee, subject to the satisfaction or waiver of the conditions set forth in Article III of the Participation Agreement, hereby agrees, expressly for the direct benefit of Lessor, to lease commencing on such Site Acquisition Date from Lessor for the Lease Term, such portion of the Land Interests together with any Facilities thereon to be delivered on such Site Acquisition Date, and with respect to any Facilities constructed thereon pursuant to the Construction Agency Agreement, such Facilities automatically (without further act) commencing on expiration or termination of the Construction Period applicable to such Facilities. Lessee has heretofore accepted delivery and entered into a lease, pursuant to the Original Lease, with Lessor of the Sites known as the NHCA Sites. SECTION II.2. Acceptance Procedure. Lessor hereby authorizes a Responsible Officer of Lessee, to be designated by Lessee, as the authorized representative or representatives of Lessor to accept delivery of the portion of the Site(s) identified on the applicable Advance Request. Lessee hereby agrees 2 Lease Agreement that such acceptance of delivery by such authorized representative or representatives and the execution and delivery by Lessee as of each Site Acquisition Date, of a Lease Supplement in the form of Exhibit A hereto or in such other form as may be reasonably acceptable to the Agent and Lessor (in each case, appropriately completed) shall, without further act, constitute the irrevocable acceptance by Lessee of the Site(s) which are the subject thereof for all purposes of this Lease and the other Operative Documents on the terms set forth therein and herein. Any Facility constructed on an Undeveloped Site pursuant to the Construction Agency Agreement shall be deemed to be included in the Leasehold Estate as of the date of expiration or termination of the Construction Period applicable to such Facility. SECTION II.3. Lease Term. Unless earlier terminated, the term of this Lease shall consist of the Basic Term, commencing on and including July 24, 1996 and ending on the date (the "Basic Term Expiration Date") which is five years thereafter (i.e., July 24, 2001) and the Renewal Term, if exercised and effective (collectively, the "Lease Term"); provided, that with respect to the Developed Sites and the Undeveloped Sites (but only in respect of the Land Interest portion of such Undeveloped Sites, including any Non-Acquired Land Interest), the commencement of the Basic Term shall be the relevant Site Acquisition Date for each such Site (which, in the case of the NHCA Sites shall be July 24, 1996, as provided in Section 3.2(s) of the Participation Agreement); provided, further, that with respect to the Facility to be constructed on any Undeveloped Site, the commencement of the Basic Term shall be upon the expiration or termination of the Construction Period for such Undeveloped Site and the end of the Basic Term with respect to such Facility shall be upon the Basic Term Expiration Date. Any provision of this Lease or any other Operative Document to the contrary notwithstanding, Lessee acknowledges that Lessor's sole interest in the Non-Acquired Land Interests, if any, is as ground lessee, and Lessor is hereby subleasing such Non-Acquired Land Interests to Lessee; and Lessor and Lessee specifically agree that this Lease and the remedies available to Lessor for Lessee's default hereunder shall apply to the Non-Acquired Land Interests, notwithstanding that such Land Interests are not owned by Lessor, and Lessee shall pay as and when due all ground rent applicable to any Non-Acquired Land Interest and shall perform all obligations of the ground lessee under any Ground Lease accruing prior to the Lease Termination Date with respect to such Land Interest. SECTION II.4. Lease Renewal. Subject to the consent of Lessor and the 3 Lease Agreement Lenders pursuant to Section 2.10 of the Participation Agreement, Lessee may elect to renew this Lease for one five-year renewal term (the "Renewal Term") commencing upon the expiration of the Basic Term (the "Renewal Term Commencement Date") and ending on the date which is five years after the Renewal Term Commencement Date, as provided in Article VI and in the applicable Lease Supplement. ARTICLE III OTHER PROPERTY Lessee may from time to time own or hold under lease from Persons other than Lessor, furniture, trade fixtures and equipment located on or about the Sites that is not subject to this Lease. Lessor shall from time to time, upon the reasonable request, and at the cost and expense of Lessee, which request shall be accompanied by such supporting information and documents as Lessor may reasonably require, promptly acknowledge in writing to Lessee or other Persons that the particular items of furniture, trade fixtures and equipment in question are not part of the related Site and that, subject to the rights of Lessor under any other Operative Documents, Lessor does not own or have any other right or interest in or to such furniture, trade fixtures and equipment. ARTICLE IV RENT SECTION IV.1. Basic Rent. Lessee shall pay to Agent, for the benefit of Lessor and the Lenders, the amounts of Basic Rent during the Basic Term and, if applicable, the Renewal Term, determined in accordance with the definition of "Basic Rent" on each Payment Date. SECTION IV.2. Supplemental Rent. Lessee shall pay to Agent, for the benefit of Lessor, or to whomever shall be entitled thereto as expressly provided herein or in any other Operative Document (and Lessor hereby directs Lessee, on behalf of Lessor, to so pay such Agent or other Person), any and all Supplemental Rent promptly as the same shall become due and payable and, in the event of any failure on the part of Lessee to pay any Supplemental Rent, Lessor shall have all rights, powers and remedies provided for herein or by law or in equity or otherwise in the case of nonpayment of Basic Rent. Lessee hereby 4 Lease Agreement reaffirms its obligation to pay as Supplemental Rent (i) any and all Additional Costs, and (ii) any Transaction Costs not paid by Lessor, as further described in Section 9.9 of the Participation Agreement. SECTION IV.3. Method and Amount of Payment. As long as any obligations remain outstanding under the Loan Agreement, Basic Rent and Supplemental Rent shall be paid to Agent (or, in the case of Supplemental Rent, to such Person as may be entitled thereto) on the due date therefor at such place as Agent shall specify in writing to Lessee at least two (2) Business Days prior to the due date therefor. Agent, on behalf of Lessor, shall notify Lessee of the applicable LIBO Rate or Prime Rate, as applicable, promptly upon the determination thereof. Each payment of Rent shall be made by Lessee prior to 12:00 noon Philadelphia time (and payments made after such time shall be deemed to have been made on the next day) at the place of payment in funds consisting of lawful currency of the United States of America which (in the case of any amount payable to Lessor, Agent or any Lender) shall be immediately available on the scheduled date when such payment shall be due, unless the scheduled date shall not be a Business Day, in which case such payment shall be made on the next succeeding Business Day (unless the result of such extension would be to carry such payment into the next calendar month, in which event such payment shall be made on the next preceding Business Day). The provisions of the foregoing sentence of this Section 4.3 shall be applicable only to Basic Rent and to Supplemental Rent payable to, or on behalf of or for the account of, Lessor, any Lender, Agent and any other Indemnitee. Any amounts payable by Lessee to Lessor hereunder shall be payable in accordance with Section 9.16 of the Participation Agreement. SECTION IV.4. Late Payment. If any Basic Rent shall not be paid when due (not taking into account any applicable grace period), Lessee shall pay to Agent on behalf of Lessor and the Lenders, or if any Supplemental Rent payable to or on behalf or for the account of Lessor, any Lender, Agent or other Indemnitee is not paid when due (not taking into account any applicable grace period), Lessee shall pay to whomever shall be entitled thereto, in each case as Supplemental Rent, interest at the Overdue Rate (to the maximum extent permitted by law) on such overdue amount from and including the initial due date thereof (not taking into account any applicable grace period) to but excluding the Business Day of payment thereof at the Overdue Rate. SECTION IV.5. Net Lease; No Setoff; Etc. This Lease shall constitute a 5 Lease Agreement net lease and, notwithstanding any other provision of this Lease, it is intended that Basic Rent and Supplemental Rent shall be paid without counterclaim, setoff, deduction or defense of any kind and without abatement, suspension, deferment, diminution or reduction of any kind, and Lessee's obligation to pay all such amounts, throughout the Basic Term and the Renewal Term, if applicable, is absolute and unconditional. The obligations and liabilities of Lessee hereunder shall in no way be released, discharged or otherwise affected for any reason, including, without limitation, to the maximum extent permitted by law: (a) any defect in the condition, merchantability, design, construction, quality or fitness for use of any portion of the Sites, or any failure of the Sites to comply with all Applicable Laws and Regulations, including any inability to occupy or use the Sites by reason of such non-compliance; (b) any damage to, abandonment, loss, contamination of or Release from or destruction of or any requisition or taking of the Sites or any part thereof, including eviction; (c) any restriction, prevention or curtailment of or interference with any use of the Sites or any part thereof, including eviction; (d) any defect in title to or rights to the Sites or any Lien on such title or rights or on the Sites; (e) any change, waiver, extension, indulgence or other action or omission or breach in respect of any obligation or liability of or by Lessor, Agent or any Lender; (f) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceedings relating to Lessee, Lessor, Agent, any Lender or any other Person, or any action taken with respect to this Lease by any trustee or receiver of Lessee, Lessor, Agent, any Lender or any other Person, or by any court, in any such proceeding; (g) any claim that Lessee has or might have against any Person, including, without limitation, Lessor, or any Lender; (h) any failure on the part of Lessor to perform or comply with any of the terms of this Lease, any other Operative Document or of any other agreement whether or not related to the Overall Transaction; (i) any invalidity or unenforceability or disaffirmance against or by Lessee of this Lease or any provision hereof or any of the other Operative Documents or any provision of any thereof; (j) the impossibility of performance by Lessee, Lessor or both; (k) any action by any court, administrative agency or other Authority; any restriction, prevention or curtailment of or any interference with the construction on or any use of any Site or any part thereof; or (l) any other occurrence whatsoever, whether similar or dissimilar to the foregoing, whether or not Lessee shall have notice or knowledge of any of the foregoing. Except as specifically set forth in Section 6.5 or Article XIII of this Lease, this Lease shall be noncancellable by 6 Lease Agreement Lessee for any reason whatsoever, and Lessee, to the extent permitted by Applicable Laws and Regulations, waives all rights now or hereafter conferred by statute or otherwise to quit, terminate or surrender this Lease, or to any diminution, abatement or reduction of Rent payable by Lessee hereunder. If for any reason whatsoever this Lease shall be terminated in whole or in part by operation of law or otherwise, except as expressly provided in Section 6.5 or Article XIII of this Lease, Lessee shall, unless prohibited by Applicable Laws and Regulations, nonetheless pay to Lessor (or, in the case of Supplemental Rent, to whomever shall be entitled thereto) an amount equal to each Rent payment at the time and in the manner that such payment would have become due and payable under the terms of this Lease if it had not been terminated in whole or in part, and in such case, so long as such payments are made and no Lease Event of Default shall have occurred and be continuing, Lessor will deem this Lease to have remained in effect. Each payment of Rent made by Lessee hereunder shall be final and, absent manifest error in the computation of the amount thereof, Lessee shall not seek or have any right to recover all or any part of such payment from Lessor, Agent or any party to any agreements related thereto for any reason whatsoever. Lessee assumes the sole responsibility for the condition, use, operation, maintenance, and management of the Sites and Lessor shall have no responsibility in respect thereof and shall have no liability for damage to the property of Lessee or any subtenant of Lessee on any account or for any reason whatsoever other than by reason of Lessor's willful misconduct or gross negligence or breach of any of its obligations under any Operative Document. ARTICLE V UTILITY CHARGES Lessee shall pay or cause to be paid all charges for electricity, power, gas, oil, water, telephone, sanitary sewer service and all other rents and utilities used in or on a Site during the Lease Term. Lessee shall be entitled to receive any credit or refund with respect to any utility charge paid by Lessee and the amount of any credit or refund received by Lessor on account of any utility charges paid by Lessee, net of the costs and expenses reasonably incurred by Lessor in obtaining such credit or refund, shall be promptly paid over to Lessee. All charges for utilities imposed with respect to a Site for a billing period during which this Lease expires or terminates (except pursuant to Section 6.2, in which case Lessee shall be solely responsible for all such charges) shall be adjusted and prorated on a daily basis between Lessor and 7 Lease Agreement Lessee, and each party shall pay or reimburse the other for each party's pro rata share thereof. ARTICLE VI RENEWAL OPTION; SALE, RETURN AND PURCHASE OPTIONS SECTION VI.1. Renewal Option. Subject to the consent of Lessor and the Lenders pursuant to Section 2.10 of the Participation Agreement, Lessee shall have the right, at its option, to request the Participants to renew all (but not less than all) of the Lease Supplements for the Renewal Term, commencing immediately following the expiration of the Basic Term. In order to exercise such option, Lessee shall give irrevocable written notice thereof to Lessor no earlier than fifteen (15) months and no later than twelve (12) months prior to the end of the Basic Term and no Lease Payment/Bankruptcy Default or Lease Event of Default shall have occurred and be continuing at the time of exercise and at the commencement of the Renewal Term. If the Renewal Term is applicable, Lessee shall continue to pay Rent, including Basic Rent (upon the terms agreed to by Lessee and the Participants for the Renewal Term), during the Renewal Term on each Payment Date occurring during the Renewal Term. All of the provisions of this Lease shall remain in effect during the Renewal Term. 8 Lease Agreement SECTION VI.2. Purchase Option. Lessee will have the right, at its option and upon ten (10) months prior written notice (which notice shall be irrevocable) to Lessor prior to expiration of the Lease Term, to purchase all (but not less than all) of the Sites then subject to the Lease Supplements at a price equal to the Purchase Option Exercise Amount (the "Purchase Option"). If Lessee shall have elected to purchase the Sites, Lessor shall, upon discharge of the Lien of the Mortgages pursuant to the provisions thereof, and the payment in full of an amount sufficient to retire the Notes and pay in full the Equity Amount, and the payment of all accrued but unpaid Rent and breakage fees, if any, plus all other amounts (including, without limitation, all Supplemental Rent), fees and expenses then due and payable, transfer by quitclaim deed (or quitclaim ground lease assignment) all of Lessor's right, title and interest in and to the Sites to Lessee or its designee, without recourse or warranty (except as to the absence of Lessor Liens), and re-assign to Lessee, as Construction Agent, any Construction Documents previously assigned by Lessee, as Construction Agent, to Lessor, against payment by Lessee of the Purchase Option Exercise Amount in immediately available funds. Lessee, at its option, may assign its right to exercise the Purchase Option by written notice thereof to Agent and Lessor; provided that (i) Lessee shall be bound by any exercise of the Purchase Option by the assignee, (ii) such assignee shall be bound by the provisions of this Article VI applicable to the Purchase Option, and (iii) no such assignment shall release Lessee from its obligations under this Article VI and, without limitation, Lessee shall remain primarily liable to Lessor for the payment of all amounts due under this Article VI in respect of the Purchase Option. SECTION VI.3. Sale Option. If no Lease Payment/Bankruptcy Default or Lease Event of Default shall have occurred and be continuing, then Lessee may cause all (but not less than all) of the Sites subject to the Lease Supplements to be sold on the last day of the Lease Term for cash to a purchaser or purchasers not affiliated in any way with Lessee (the "Sale Option"); provided that each Land Interest and the Facility thereon shall be sold to the same Person and all Land Interests and all Facilities thereon shall be sold to one or more Persons in the same transaction; and provided further that in connection with the sale of each Facility located on a Non-Acquired Land Interest, Lessee shall be obligated to sell the related Land Interest as well. In the event Lessee timely elects the Sale Option, on the last day of the Lease Term, Lessee will pay as Supplemental Rent to Lessor the amounts determined in accordance with Section 6.4(b) until the Lease Balance and all other amounts payable under 9 Lease Agreement the Operative Documents have been paid in full. SECTION VI.4. Conditions for Sale of the Sites. (a) In the event that the Sale Option is applicable, Lessee shall cause all (but not less than all) of the Sites to be sold in accordance with the procedures set forth in this Section 6.4. In order to exercise the Sale Option, Lessee shall give notice of its election of the Sale Option effective at the expiration of the Basic Term or Renewal Term, as the case may be, not later than ten (10) months prior to such expiration, which exercise shall be irrevocable, and any failure of Lessee to so elect the Sale Option shall be deemed an election of the Purchase Option pursuant to Section 6.2. Subject to the preceding sentence, during the period commencing on the date ten (10) months prior to the scheduled end of the Basic Term or the Renewal Term, as the case may be, Lessee, on behalf of Lessor, shall use best commercial efforts, as nonexclusive agent for Lessor, to obtain the highest cash bids for the purchase of the Sites and, in the event it receives any bid, Lessee shall, within five (5) Business Days after receipt thereof and at least twenty (20) Business Days prior to the Lease Termination Date, certify to Lessor and Agent in writing the amount and terms of such bid, and the name and address of the party or parties (who shall not be Lessee or any Affiliate of Lessee or any Person with whom Lessee has an understanding or arrangement regarding the future use of the Sites by Lessee or such Affiliate, but who may be Lessor or a Lender, any Affiliate thereof or any Person contacted by a Lender) submitting such bid. Lessee will keep Agent promptly informed of the material terms of any proposed bid. Lessee shall bear its own expenses and pay, as Supplemental Rent, the reasonable expenses of Lessor, Agent and each Lender in connection with any such bidding and sale process pursuant to this Section 6.4 including any recapture costs incurred under government-funded healthcare programs, as well as all costs and expenses incurred by any party (including a buyer or potential buyer) to place the Sites in the condition required by Section 9.1 and costs of repairs, Alterations or improvements desired by such buyer. (b) In the event that Lessee contemplates accepting any bid which, upon payment of all amounts under Section 6.4(b), shall result in any portion of the Lease Balance or any other amount due under the Operative Documents remaining outstanding (a "Loss Bid"), Lessee shall notify Agent and Lessor in writing (a "Loss Bid Notice") of such fact and the calculation thereof prior to accepting any such bid; and in the event of such bid, any Participant 10 Lease Agreement may submit a bid to Lessee not later than thirty (30) days after the date of such notice from Lessee. On or before the Lease Termination Date, so long as no Lease Event of Default or Lease Payment/Bankruptcy Default shall have occurred and be continuing, and subject to the release of the security interest with respect to the Sites under the Mortgages: (i) Lessee shall transfer all of Lessee's right, title and interest in the Sites, or cause the Sites to be transferred, to the bidder(s), if any, which shall have submitted the highest bid therefor at least twenty (20) (or, in the case of a Participant, any Affiliate thereof or Person contacted by a Participant, five (5)) Business Days prior to such Lease Termination Date, in the same manner and in the same condition and otherwise in accordance with all the terms of this Lease; (ii) subject to prior or concurrent payment by Lessee of all amounts due under clause (iii) of this sentence, Lessor shall exercise such rights as it has to cause the Sites to be released from the Lien of the Mortgages and shall, without recourse or warranty (except as to the absence of Lessor Liens), transfer by quitclaim deed Lessor's right, title and interest in and to the Sites for cash to such bidder(s); and (iii) Lessee shall simultaneously pay or cause to be paid to Lessor in immediately available funds an amount equal to the sum of (p) all unpaid Basic Rent due on or prior to the Lease Termination Date, and all Supplemental Rent due on or prior to such date and any other amounts due and payable by Lessee to Lessor, Agent and each Lender plus (q) the gross sale proceeds of the Sites sold by Lessor (the "Proceeds"); plus (r) the Applicable Percentage Amount. To the extent the sum of the Proceeds plus the Applicable Percentage Amount shall exceed the Lease Balance, upon receipt of the amounts described in clause (p) of the preceding sentence, Lessor shall apply the amount of Proceeds equal to such excess to the amount payable by Lessee under clause (r); provided, that to the extent that the Proceeds alone shall exceed the Lease Balance, upon receipt of the Proceeds and the amounts described in clause (p) of the preceding sentence, Lessor shall pay the amount of such excess to Lessee. For purposes of clause (q), with respect to the gross sales proceeds relating to the sale of the Non-Acquired Land Interests and the related Facilities, such gross proceeds shall be allocated between Lessee's interest in such Non-Acquired Land Interest (as the owner thereof) and Lessor's interest in such Non-Acquired Land Interest (as the ground lessee thereof) and in the Facility thereon based upon the respective Fair Market Sales Values of Lessee's interest in such Non-Acquired Land Interest and Lessor's interest in such Non-Acquired Land Interest and the Facility thereon as determined by an appraisal conducted, at Lessee's expense, by an appraiser of nationally recognized standing, selected 11 Lease Agreement and engaged by the Required Participants; provided, that the maximum portion of the gross sales proceeds allocated to any Non-Acquired Land Interest shall be Lessee's cost for such Non-Acquired Land Interest as set forth in the applicable Lease Supplement. The "Applicable Percentage Amount" shall be based upon the Applicable Percentage for the Lease Supplement applicable to such Site, and shall be determined in accordance with the definition thereof in Appendix 1 to the Participation Agreement. The "Applicable Percentage" for each Lease Supplement shall be determined on or about the date of acquisition by Lessor of the related Undeveloped Site or as soon thereafter as Lessor obtains sufficient information to make a determination for financial accounting purposes and shall be set forth in the Lease Supplement; provided that the maximum "Applicable Percentage Amount" will be determined as the greatest amount which would not cause the present value at the beginning of the Lease Term of the minimum lease payments (including, without limitation, such Applicable Percentage Amount), as determined in accordance with generally accepted accounting principles, to equal or exceed ninety percent (90%) of the Fair Market Sales Value, at the beginning of this Lease, of the applicable Site. The Applicable Percentage for any Lease Supplement shall in no event be less than eighty percent (80%). (c) If Lessee exercises the Sale Option and a Loss Bid Notice is to be provided pursuant to Section 6.4(b), then as a condition to Lessee's right to consummate the Sale Option pursuant to Sections 6.3 and 6.4, Lessee shall cause to be delivered to Lessor not later than five (5) Business Days prior to the Lease Termination Date, at Lessee's sole cost and expense, a report in form and substance reasonably satisfactory to the Agent and Lessor from an Appraiser selected by Lessee and reasonably acceptable to the Agent and Lessor (the "End of Term Report") to establish the reason for any impairment to the value of any of the Sites which are being sold for less than the Allocated Amount applicable to such Site. Without limiting the indemnities provided in the Operative Documents, on the Lease Termination Date, Lessee shall pay to Agent, on behalf of Lessor and the Lenders, an amount equal to the Shortfall Amount that the End of Term Report demonstrates was the result of any impairment to the value in any of the Sites due to: (i) the existence of any Hazardous Materials, Environmental Concern Materials or violations of Environmental Laws with respect to a Site occurring or 12 Lease Agreement discovered after the date such Site becomes subject to the Lease (regardless of the Person so discovering any of the foregoing), or (ii) any restoration or rebuilding carried out by Lessee or any failure of Lessee to complete any Alterations, restoration or rebuilding, or (iii) any easements or other actions described in clauses (i) through (viii) of Section 8.3, or (iv) the failure of Lessor to have good and marketable title to any Site free and clear of all Liens (including Permitted Liens (other than Lessor Liens)) and exceptions to title caused by the acts or omissions of Lessee or any Affiliate or Subtenant. As used herein, the term "Shortfall Amount" means the excess, if any, of (i) the Lease Balance over (ii) the sum of the Proceeds plus the Applicable Percentage Amount. SECTION VI.5. Early Termination. (a) Commencing July 24, 1998 and provided that no Lease Payment/Bankruptcy Default or Lease Event of Default shall have occurred and be continuing (or any such defaults are cured contemporaneously with the consummation of the purchase option under this Section 6.5(a)), Lessee shall have the option to purchase all (but not less than all) of the Sites on the next scheduled Payment Date for an amount equal to, without penalty, the Lease Balance plus all other amounts then due under the Lease and the other Operative Documents, including, without limitation, accrued but unpaid Rent and breakage fees, if any, plus all other amounts, fees and expenses then due and payable. (b) On any scheduled Payment Date on or prior to July 24, 1997, Lessee may, at its option, by giving at least ninety (90) days' advance written notice to Lessor, purchase all (but not less than all) of the Sites for an amount equal to the Lease Balance, accrued but unpaid Rent and breakage fees, if any, all other amounts, fees and expenses then due and payable plus a prepayment fee equal to 50 basis points of the Lease Balance. On any scheduled Payment Date after July 24, 1997, but prior to July 24, 1998, Lessee may, at its option, by giving at least ninety (90) days' advance written notice to Lessor, purchase all (but not less than all) of the Sites for an amount equal to the 13 Lease Agreement Lease Balance, accrued but unpaid Rent and breakage fees, if any, all other amounts, fees and expenses then due and payable, plus a prepayment fee equal to 25 basis points of the Lease Balance. SECTION VI.6. Exercise of Options; Failure to Elect. In order to exercise any of its purchase or sale options under this Lease (other than under Section 6.5), Lessee shall give irrevocable written notice to Lessor not less than twelve (12) months prior to the end of the Basic Term, that Lessee intends to exercise one of the options provided in this Article VI and specifying such option. If Lessee shall fail to deliver such written notice in the time required, Lessee shall be deemed to have elected to exercise the Purchase Option pursuant to Section 6.2. Lessee's election (or deemed election) of the Purchase Option will be irrevocable at the time it is made (or deemed made). If Lessee has elected the option to sell the Sites under Section 6.3, such option shall be automatically revoked and such election shall be deemed of no effect if, on or after the date Lessee elects such option, there exists or occurs a Lease Event of Default or Lease Payment/Bankruptcy Default or Lessee shall fail in any manner fully to comply with this Article VI, in which case Lessee shall be automatically deemed to have elected the Purchase Option pursuant to Section 6.2. SECTION VI.7. Return of Sites. Unless the Sites shall have been transferred to Lessee pursuant to Section 6.2 or 6.5, Lessee shall, on the Lease Termination Date, and at its own expense, transfer the Sites (together with the reports described in Section 9.4 relating thereto) to the independent purchaser thereof pursuant to Section 6.3, free and clear of all Liens other than Permitted Exceptions and Lessor Liens, in as good condition as they were on the Document Closing Date, ordinary wear and tear excepted, and in compliance with all Applicable Laws and Regulations and the other requirements of Article IX (and in any event without (x) any asbestos installed or maintained in any part of the Site, (y) any polychlorinated byphenyls (PCBs) in, on or used, stored or located at the Site, and (z) any other Hazardous Materials). Lessee shall cooperate with the independent purchaser of the Site in order to facilitate the ownership and operation by such purchaser of the Site after the Lease Termination Date, including providing all books, reports and records regarding the maintenance, repair and ownership of the Site and all data and technical information relating to the physical operation and maintenance of the Site, granting or assigning (to the extent permitted by law) all licenses necessary for the operation and maintenance of the Site and cooperating in seeking and 14 Lease Agreement obtaining all necessary Governmental Action. Lessee shall have also paid the total cost for the completion of all Alterations commenced prior to the Lease Termination Date. The obligation of Lessee under this Article VI regarding the Purchase Option shall survive the expiration or termination of this Lease, except if Lessee duly and timely exercises the Sale Option and performs its obligations under Sections 6.3 and 6.4, or Lessee duly and timely exercises its rights under Section 6.5 and performs its obligations thereunder. Unless Lessee shall have exercised or been deemed to have exercised its option to purchase the Sites, then after the date which is twelve (12) months prior to the Lease Termination Date, Lessor shall at Lessee's expense be entitled to perform such investigation, including obtaining reports of engineers and other experts as to the condition and state of repair and maintenance required by this Section 6.7 and as to the compliance with Environmental Laws of the Site, as it deems appropriate. Lessee, at its sole cost and expense, shall cause the repair or other remediation of any discrepancies between the actual condition of the Site and the condition required under the Lease, such repair or remediation to be completed not later than the expiration of this Lease. SECTION VI.8. Completion of Facilities. In the event that any Facility becomes subject to this Lease pursuant to Sections 2.1 and 2.2 prior to Completion thereof due to the termination of the Construction Period applicable thereto under Section 5.1 of the Construction Agency Agreement, Lessee (at its cost) shall diligently pursue construction of such Facility in accordance with the construction-related provisions of the Operative Documents (including those set forth in the provisions of Article III of the Participation Agreement, notwithstanding that the Participants shall not be obligated to make any Advances in respect of such construction) and shall cause the Completion of such Facility not later than the earlier to occur of (x) the date which is twelve (12) months after the Site Acquisition Date for the Site on which such Facility is being constructed and (y) the original expiration date of the Construction Period for such Facility, not taking into account the early termination of such Construction Period; provided that the dates described in clauses (x) and (y) for such Facility shall be subject to extension for Force Majeure delays not to exceed ninety (90) days in the aggregate. SECTION VI.9. Failure of Lessee to Sell Sites. If Lessee shall exercise the Sale Option and shall fail to arrange for the sale of all of the Sites on or 15 Lease Agreement before the Lease Termination Date in accordance with and subject to the provisions of Sections 6.4 and 6.6, then Lessee and Lessor hereby agree as follows: (a) On the Lease Termination Date, Lessee shall (i) pay to Agent (on behalf of the Participants) the Applicable Percentage Amount and (ii) Lessee will do both of the following: (1) at the option of Agent (on behalf of the Participants), either (x) cancel the sale of the Sites for which Lessee has arranged a sale (in which case, all Sites will constitute "unsold Sites" under this Section 6.9) or (y) sell the Sites for which Lessee has arranged a sale pursuant to the provisions of Sections 6.4 and 6.6; and (2) at the option of Agent (on behalf of the Participants), either (x) tender to Lessor possession of the unsold Sites or (y) continue to lease the unsold Sites during a holdover period (the "Holdover Period") and in the case of such holdover, Lessee shall continue to market, on a non-exclusive basis, the Sites for sale on behalf of Lessor in accordance with the provisions of the Lease. For each such Site, such Holdover Period shall expire on the earlier of (x) the sale of such Site and (y) the reduction of the Lease Balance to zero and the payment by Lessee of all Basic Rent, Supplemental Rent and all other amounts then due and payable under the Operative Documents, and (z) written notice by Agent, as Agent for the Lenders, of a date specified for the termination of such Holdover Period with respect to such Site. The Basic Rent payable by Lessee for the Sites during any Holdover Period shall be applied first to payment of the portion of Basic Rent set forth in clauses (i) and (ii) of the definition thereof, with any excess being applied to reduce such Lease Balance. Any Proceeds from the sale of any Sites during the Holdover Period will be applied to reduce the Lease Balance, with such application being allocated first to the Lenders in respect of the remaining amount of the Notes (i.e., that portion of the outstanding principal balance of the Notes in excess of the Applicable Percentage Amount), and second to the Equity Amount. If and when the Lease Balance shall be reduced to zero, (i) any further Proceeds from the 16 Lease Agreement sale of any remaining Sites shall be remitted to Lessee for its own account, (ii) at the request of either Lessor (or Agent on Lessor's behalf) or Lessee, Lessor will transfer to Lessee or its designee, and Lessee will accept or cause its designee to accept the transfer of, all remaining Sites by quitclaim deed, and Lessee shall pay or cause to be paid all costs and expenses (including, without limitation, reasonable attorneys' fees and expenses of counsel to the Participants) in connection with such transfer. Agent shall not make the elections under clause (1)(y) and clause (2)(x) above without receiving (x) the consent of the Lenders if after giving effect to such partial sale and payment by Lessee of the Applicable Percentage Amount, any portion of the principal of and accrued interest on the Notes will remain outstanding, and (y) the consent of the Lessor if after giving effect to such partial sale and payment by Lessee of the Applicable Percentage Amount, any portion of the Equity Amount or accrued Yield will remain outstanding. (b) On or after the Lease Termination Date, Agent, on behalf of Lessor and the Lenders, shall have the right, but not the obligation, to sell the Sites for such purchase price and upon such terms as Agent shall determine in its sole discretion. In the event that Agent shall so elect to sell the Sites, Agent shall notify each of Lessor, Lessee and the Lenders thereof, and each shall have the right to submit a bid and/or to cause any other Person to submit a bid to Agent not later than twenty (20) Business Days prior to the date Agent desires to sell the Sites (as set forth in the aforementioned notice thereof); provided, however, that Agent, on behalf of Lessor and the Lenders, shall have the right, in its sole discretion, from time to time, to defer such proposed sale date, in which event, the rights of Lessee, Lessor and each Lender to submit a bid and/or to cause any other Person to submit a bid to Agent shall be extended to the date that is twenty (20) Business Days prior to the revised proposed sale date. At no time shall Agent be obligated to accept any bid for the sale of the Sites (whether such bid was obtained by Lessee, Lessor, any Lender or otherwise) or to consummate any proposed sale. (c) At any time and from time to time on or after the Lease Termination Date, Agent, on behalf of Lessor and the Lenders, shall 17 Lease Agreement have the right to withdraw from the Sale Deposit (other than the portion thereof constituting the Applicable Percentage Amount) amounts to pay, or reimburse itself for the payment of, expenses of Lessor, Agent and each Participant in connection with any bidding and sale (or proposed sale, whether or not consummated) described in clause (b). In the event that there are insufficient funds remaining from the Sale Deposit to pay such expenses, Lessee shall pay such expenses from time to time upon demand. (d) Contemporaneously with the consummation of any sale of the Sites by Lessee or Agent pursuant to this Section 6.9, (i) Lessee will transfer all of Lessee's right, title and interest in the Sites to be transferred to the purchaser, (ii) subject to prior or concurrent payment by Lessee of all amounts due under clause (iii) of this sentence and receipt by Lessor of Proceeds from such sale, Lessor shall exercise such rights as it has to cause the Sites to be released from the Lien of the Mortgages and shall, without recourse or warranty (except as to the absence of Lessor Liens), transfer by quitclaim deed Lessor's right, title and interest in and to the Sites for cash to such purchaser; and (iii) Lessee shall simultaneously pay or cause to be paid to Agent, on behalf of Lessor and the Lenders, in immediately available funds an amount equal to all unpaid Basic Rent and all Supplement Rent due on or prior thereto and any other amounts due and payable by Lessee to Lessor, Agent and each Lender. Any Proceeds in excess of the sum of (x) the Lease Balance, plus (y) all unpaid Basic Rent and all Supplemental Rent due on or prior thereto and any other amounts due and payable by Lessee to Lessor, Agent and each Lender, shall be remitted to Lessee promptly after receipt. (e) Until a sale of the Sites by Lessee or Agent pursuant to this Section 6.9, Lessee shall be bound by all of the obligations and duties of Lessee under this Lease, notwithstanding the occurrence of the Lease Termination Date. (f) Lessor reserves all rights under this Lease and the other Operative Documents arising out of Lessee's breach of any provisions of this Lease (including Article VI), whether occurring prior to, on or after the Lease Termination Date, including Lessee's breach of any of 18 Lease Agreement its obligations under Sections 6.3 and 6.4, including the right to sue Lessee for damages. (g) To the greatest extent permitted by law, Lessee hereby unconditionally and irrevocably waives, and releases Lessor and Agent from, any right to require Lessor or Agent to sell the Sites at all or for any minimum purchase price or on any particular terms and conditions, Lessee hereby agreeing that if Lessee shall elect the Sale Option, its ability to sell the Sites on or prior to the Lease Termination Date and its right thereafter to submit a bid or to cause any other Person to submit a bid to Agent pursuant to Section 6.9(b) in the event Agent shall elect to sell the Sites, shall constitute full and complete protection of Lessee's interest hereunder. 19 Lease Agreement ARTICLE VII CONDITION AND USE OF SITES SECTION VII.1. Waivers. LESSEE ACKNOWLEDGES AND AGREES THAT, ALTHOUGH LESSOR WILL OWN AND HOLD TITLE TO THE SITES, LESSEE IS SOLELY RESPONSIBLE UNDER THE TERMS OF THE CONSTRUCTION AGENCY AGREEMENT FOR THE DESIGN, DEVELOPMENT, BUDGETING, CHANGE ORDERS AND CONSTRUCTION OF THE FACILITIES AND ANY ALTERATIONS. The Sites are let by Lessor "AS IS" in their present or then condition, as the case may be, subject to (a) any rights of any parties in possession thereof, (b) the state of the title thereto existing at the time Lessor acquired its interest in the Site, (c) any state of facts which an accurate survey or physical inspection might show (including any survey delivered on or prior to the Document Closing Date or the Completion Date), (d) all Applicable Laws and Regulations, and (e) any violations of Applicable Laws and Regulations which may exist at the commencement of the Lease Term. Lessee has examined the Site and (insofar as Lessor is concerned) has found the same to be satisfactory. NEITHER LESSOR, AGENT NOR ANY LENDER HAS MADE OR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, OR SHALL BE DEEMED TO HAVE ANY LIABILITY WHATSOEVER AS TO THE TITLE TO THE SITES OR TO THE VALUE, MERCHANTABILITY, HABITABILITY, CONDITION, OR FITNESS FOR USE OF THE SITES, OR ANY PART THEREOF, OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE SITES, OR ANY PART THEREOF, AND NEITHER LESSOR, AGENT NOR ANY LENDER SHALL BE LIABLE FOR ANY LATENT, HIDDEN, OR PATENT DEFECT THEREIN OR THE FAILURE OF THE SITES, OR ANY PART THEREOF, TO COMPLY WITH ANY APPLICABLE LAWS AND REGULATIONS, except that Lessor hereby represents and warrants that the Site is and shall be free of Lessor Liens. Lessee has been afforded full opportunity to inspect the Sites, is satisfied with the results of its inspections and is entering into this Lease solely on the basis of the results of its own inspections, and all risks incident to the matters discussed in the preceding sentence (other than Lessor Liens), as between Lessor, Agent and the Lenders, on the one hand, and Lessee, on the other, are to be borne by Lessee. The provisions of this Article VII have been negotiated, and, except to the extent otherwise expressly stated, the foregoing provisions are intended to be a complete exclusion and negation of any representations or warranties by any of Lessor, Agent or the Lenders, express or implied, with respect to the Sites (or any interest therein), that may arise pursuant to any law now or hereafter in effect or otherwise. 20 Lease Agreement ARTICLE VIII LIENS; EASEMENTS SECTION VIII.1. Liens. Lessee shall not directly or indirectly create, incur, assume or suffer to exist any Lien, defect, attachment, levy, title retention agreement or claim upon any Site or Alteration, or with respect to the Sites, any Basic Rent or Supplemental Rent, the title thereto, or any interest therein, including all Liens which arise out of the possession, use, occupancy or construction of the Sites or by reason of labor or materials furnished or claimed to have been furnished to Lessee, or any of its contractors or agents or by reason of the financing of any Alterations constructed by or for the benefit of Lessee and not financed by Lessor, except in all cases Permitted Liens. With respect to all Liens other than Permitted Liens, Lessee shall promptly, but not later than thirty (30) days (or, in the case of non-consensual Liens, sixty (60) days) after the filing thereof, at its own expense, take such action as may be necessary duly to discharge or eliminate or bond in a manner reasonably satisfactory to Lessor any such Lien if the same shall arise at any time. SECTION VIII.2. No Lessor Consent or Liability. Nothing contained in this Lease shall be construed as constituting the consent or request of the Lessor, expressed or implied, to or for the performance by any contractor, mechanic, laborer, materialman, supplier or vendor of any labor or services or for the furnishing of any materials for any construction, alteration, addition, repair or demolition of or to any Site or any part thereof. NOTICE IS HEREBY GIVEN THAT NEITHER LESSOR NOR ANY LENDER OR AGENT IS OR SHALL BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO LESSEE, OR TO ANYONE HOLDING A SITE OR ANY PART THEREOF THROUGH OR UNDER LESSEE, AND THAT NO MECHANIC'S OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LESSOR, AGENT OR ANY LENDER IN AND TO ANY SITE. SECTION VIII.3. Easements. Subject to Section 3.4 of the Construction Agency Agreement (which shall take precedence over these provisions during the Construction Period with respect to any Undeveloped Site) and notwithstanding the foregoing paragraph, at the request of Lessee, Lessor shall, from time to time during the Lease Term and upon at least thirty (30) days' prior written notice from Lessee, and receipt of the materials specified in the next succeeding sentence, consent to and join in any (i) grant of easements, 21 Lease Agreement licenses, rights of way, party wall rights and other rights in the nature of easements, with or without consideration, (ii) release or termination of easements, licenses, rights of way, party wall rights or other rights in the nature of easements which are for the benefit of a Site or any portion thereof, with or without consideration, (iii) dedication or transfer of portions of a Site, not improved with a building, for road, highway or other public purposes, with or without consideration, (iv) execution of petitions to have a Site or any portion thereof annexed to any municipal corporation or utility district, (v) execution of agreements for the use and maintenance of common areas, for reciprocal rights of parking, ingress and egress and amendments to any covenants and restrictions affecting a Site or any portion thereof, with or without consideration, (vi) request to any Authority for platting or subdivision or replatting or resubdivision approval with respect to a Site or any portion thereof or any parcel of land of which a Site or any portion thereof forms a part or a request for any variance from zoning, (vii) creation of a governmental special benefit district for public improvements and collection of special assessments in connection therewith, in lump sum or installments, and (viii) execution and delivery of any instrument appropriate to confirm or effect such grant, release, dedication, transfer request or such other matter, document or proceeding. Lessor's obligations pursuant to the preceding sentence shall be subject to the requirements that: (a) any such action shall be at the sole cost and expense of Lessee, and Lessee shall pay all reasonable out-of-pocket costs of Lessor, Agent and the Lenders in connection therewith (including, without limitation, the reasonable fees of attorneys (including allocated costs of internal counsel of Agent); (b) Lessee shall have delivered to Lessor a certificate of a Responsible Officer of Lessee stating that: (1) such action will not cause the Site or any portion thereof to fail to comply in any respect with the provisions of the Lease or any other Operative Documents and in any material respect with all Applicable Laws and Regulations (including, without limitation, all applicable zoning, planning, building and subdivision ordinances, all applicable restrictive covenants and all applicable architectural approval requirements); 22 Lease Agreement (2) all governmental consents or approvals required prior to such action have been obtained, and all filings required prior to such action have been made; (3) such action will not result in any material down-zoning of the Site or any portion thereof or a material reduction in the maximum density or development rights available to the Site under all Applicable Laws and Regulations; (4) this Lease and Lessee's obligations hereunder shall continue in full force and effect, without abatement, suspension, deferment, diminution, reduction, counterclaim, setoff, defense or deduction; (5) such action will not materially reduce the Fair Market Sales Value, utility, remaining economic useful life or residual value of the Site or Lessor's interest therein; and (6) such action will not impose or create any liability or obligation on Lessor; (c) all consideration received in connection with such action shall be paid to Lessee; and (d) no Lease Event of Default shall have occurred and be continuing. 23 Lease Agreement ARTICLE IX MAINTENANCE AND REPAIR; ALTERATIONS AND ADDITIONS 24 Lease Agreement SECTION IX.1. Maintenance and Repair; Compliance With Law. Lessee, at its own expense, shall at all times (a) maintain the Sites in good repair and condition, subject to ordinary wear and tear, and in safe repair and condition (all whether involving interior or exterior, structural or nonstructural, ordinary or extraordinary, and foreseen or unforeseen circumstances); (b) except to the extent Section 9.5 shall apply, maintain, manage and monitor the Sites in accordance with all Applicable Laws and Regulations, whether or not such maintenance requires structural modifications, noncompliance with which (i) would have a material adverse effect on Lessee's right to use the Sites or Lessee's business or financial condition, (ii) would cause any of the results enumerated in Section 9.5 hereof, (iii) would materially adversely affect the Fair Market Sales Value, utility, remaining economic useful life or residual value of the Sites, or (iv) would materially adversely affect Lessor's interest in the Sites; (c) comply with the standards imposed by any insurance policies required to be maintained hereunder which are in effect at any time with respect to the Sites or any part thereof; (d) maintain, manage and monitor the Sites in accordance with all applicable contracts, including service contracts and insurance contracts; (e) conduct maintenance and repair under the same programs and subject to the same standards as Lessee or its Affiliates shall maintain and repair other healthcare facilities owned, leased or operated by Lessee or its Affiliates; (f) cause the Sites to continue to have at all times the capacity and functional ability to be used for, on a continuing basis (subject to normal interruption in the ordinary course of business for maintenance, inspection and repair) and in commercial operation, the purposes for which it was specifically designed; (g) maintain appropriate and customary written environmental operations and maintenance plans (including, where appropriate for asbestos-containing materials) for the Sites; and (h) procure, maintain and comply in all material respects with all material licenses, permits, orders, approvals, consents and other authorizations required for the construction, use, maintenance and operation of the Sites and for the use, operation, maintenance, repair and restoration of the Facilities. Lessee waives any right that it may now have or hereafter acquire to (x) require Lessor to maintain, repair, replace, alter, remove or rebuild all or any part of the Sites or (y) make repairs at the expense of Lessor pursuant to any Applicable Laws and Regulations or other agreements. SECTION IX.2. Alterations. (a) At Lessee's own cost and expense, (i) Lessee shall make 25 Lease Agreement alterations, renovations, improvements and additions to any Site(s) or any part thereof and substitutions and replacements therefor (collectively, "Alterations") so long as such Alterations are (A) made to repair or maintain the Site(s) in the condition required by Section 9.1; (B) necessary in order for the Site(s) to be in compliance with Applicable Laws and Regulations; or (C) necessary or advisable to restore the Site(s) to their condition existing prior to a Casualty or Condemnation; and (ii) so long as no Lease Event of Default or Lease Payment/Bankruptcy Default has occurred and is continuing, Lessee may undertake Alterations on one or more Sites so long as such Alterations comply with Applicable Laws and Regulations and with Section 9.1 and subsection (b) of this Section 9.2. (b) The making of any Alterations must be in compliance with the following requirements; provided that in the case of any Alteration required by an emergency or by Applicable Laws and Regulations, Lessee shall (x) promptly notify Agent thereof, (y) not be bound by the provisions of clause (1) below and (z) effect such Alteration in a manner to avoid (or minimize if it is not possible to avoid) any violation of clause (5) below: (1) No such Alterations with a cost exceeding $500,000 (or, in the case of related Alterations at any one Site, with an aggregate cost exceeding $500,000) shall be made or undertaken except upon not less than thirty days' prior written approval of Agent, which approval shall not be unreasonably withheld. For any Alterations which are subject to this clause (1), if Agent, in its good faith judgment, believes that such Alterations may violate the provisions of clause (5) below, Agent (on behalf of the Participants) may engage an appraiser of nationally recognized standing, at Lessee's expense, to determine (by appraisal methods satisfactory to Agent) the projected Fair Market Sales Value of any Facility following the completion of Alterations relating thereto and may delay its approval until receipt of such appraisal. (2) Lessee shall not make any Alterations in violation of the terms of any restriction, easement, condition or covenant or other matter affecting title to the Site. (3) No Alterations shall be undertaken until Lessee shall have procured and paid for, so far as the same may be required from time to time, all permits and authorizations relating to such Alterations of 26 Lease Agreement all municipal and other Authorities having jurisdiction over the Site. Lessor, at Lessee's expense, shall join in the application for any such permit or authorization and execute and deliver any document in connection therewith, whenever such joinder is necessary or advisable. (4) The Alterations shall be expeditiously completed in a good and workmanlike manner and in compliance with all Applicable Laws and Regulations then in effect and the standards imposed by any insurance policies required to be maintained hereunder. (5) All Alterations shall, when completed, be of such a character as to not materially adversely affect the Fair Market Sales Value, utility, remaining economic useful life or residual value of the Site from its Fair Market Sales Value, utility, remaining economic useful life or residual value immediately prior to the making thereof or, in the case of Alterations being made by virtue of a Casualty or Condemnation, immediately prior to the occurrence of such Casualty or Condemnation. (6) Lessee shall have made adequate arrangements for payment of the cost of all Alterations when due so that the Site shall at all times be free of Liens for labor and materials supplied or claimed to have been supplied to the Site, other than Permitted Liens; provided, that Lessee shall have the right to contest the amount claimed by any such supplier of labor or materials in accordance with the applicable provisions of Section 9.5. SECTION IX.3. Title to Alterations. Title to Alterations shall without further act vest in Lessor and shall be deemed to constitute a part of the related Site and be subject to this Lease in the following cases: (a) such Alterations shall be in replacement of or in substitution for a portion of the Facilities and/or the Sites; (b) such Alterations shall be required to be made pursuant to the terms of Section 9.1 or 9.2(a)(i) hereof; or (c) such Alterations shall be Nonseverable. Lessee, at Lessor's request, shall execute and deliver any 27 Lease Agreement deeds, bills of sale, assignments or other documents of conveyance reasonably necessary to evidence the vesting of title in and to such Alterations to Lessor. If such Alterations are not within any of the categories set forth in clauses (a) through (c) of this Section 9.3, then title to such Alterations shall vest in Lessee and such Alterations shall not be deemed to be Alterations which are part of the Site. All Alterations to which Lessee shall have title may, so long as removal thereof shall not result in the violation of any Applicable Laws and Regulations and no Lease Event of Default or Lease Payment/Bankruptcy Default is continuing, be removed at any time by Lessee. Any such Alterations shall be removed by Lessee at its expense if Lessor shall so request prior to the return of the Site to Lessor or sale of the Site in accordance with the provisions of this Lease, and Lessee shall at its expense repair any damage to the Site caused by the removal of such Alterations. Lessor (or the purchaser of the applicable Site) may purchase from Lessee Alterations (if not already owned by Lessor) which Lessee notifies Lessor that Lessee intends to remove from the Site prior to the return of the Site to Lessor or sale of the Site, which purchase shall be at the Fair Market Sales Value of such Alterations. Title to any Lessee Alterations shall vest in Lessor (or the purchaser of the applicable Site) if not removed from the Site by Lessee prior to the return of the Site to Lessor or sale of the Site. SECTION IX.4. Maintenance and Repair Reports. Lessee shall keep maintenance and repair reports in sufficient detail, and as customary for owners of commercial real estate, to indicate the nature and date of major work done. Lessee shall prepare and maintain appropriate and customary written operations and maintenance plans (including, where appropriate for asbestos-containing materials) for the Sites. Such reports and plans shall be kept on file by Lessee at its offices during the Lease Term, and shall be made available to Lessor upon reasonable request. Lessee shall give notice to Lessor and Agent of any Condemnation or Casualty the cost to repair which is reasonably expected by Lessee to exceed $250,000, promptly after Lessee has knowledge thereof. SECTION IX.5. Permitted Contests. If, to the extent and for so long as (a) a test, challenge, appeal or proceeding for review of any Applicable Laws and Regulations or any Governmental Action relating to any Site or to the 28 Lease Agreement operation or maintenance of any Facility shall be prosecuted diligently and in good faith in appropriate proceedings by Lessee or (b) compliance with such Applicable Laws and Regulations or such Governmental Action shall have been excused or exempted by a valid nonconforming use permit, waiver, extension or forbearance, Lessee shall not be required to comply with such Applicable Laws and Regulations or such Governmental Action but only if and so long as any such test, challenge, appeal, proceeding or noncompliance shall not, in the reasonable opinion of Lessor, involve (A) any meaningful risk of (1) foreclosure, forfeiture or loss of a Site, (2) criminal liability being imposed on Lessor, Agent, any Lender or the Site or (3) the nonpayment of Rent or (B) any substantial danger of (1) the sale of, or the creation of any Lien (other than a Permitted Lien) on, any part of the Site, (2) material civil liability being imposed on Lessor, Agent, any Lender or the Site, (3) the extension of the ultimate imposition of such Applicable Laws and Regulations or such Governmental Action beyond the last day of the Lease Term, or (4) enjoinment of, or interference with, the use, possession or disposition of the Site in any material respect. Lessee shall provide Lessor with notice of any contest of the type described in clause (a) above in detail sufficient to enable Lessor to ascertain whether such contest may have an effect of the type described in clauses (b)(A) and (B) above. Lessor will not be required to join in any proceedings pursuant to this Section 9.5 unless a provision of any Applicable Laws and Regulations requires, or, in the good faith opinion of Lessee, it is helpful to Lessee that such proceedings be brought by or in the name of Lessor; and in that event Lessor will join in the proceedings or permit them or any part thereof to be brought in its name if and so long as no Lease Event of Default or Lease Payment/Bankruptcy Default is continuing and Lessee pays all related expenses. 29 Lease Agreement ARTICLE X USE Each Site shall be used, during its Construction Period, in a manner consistent with the Construction Agency Agreement, and thereafter, Lessee may use each Site as a health care facility and for related ancillary purposes, or in such other manner reasonably acceptable to Lessor and Agent in their sole discretion. Lessee shall not use any Site or any part thereof for any purpose or in any manner that would materially adversely affect the Fair Market Sales Value, utility, remaining useful life or residual value of the Site or that would create a materially increased risk of environmental liability or that would violate or conflict with, or constitute or result in a violation or default under (a) any Applicable Laws and Regulations whether now existing or hereafter in effect, foreseen or unforeseen, except to the extent permitted by Section 9.5, (b) any insurance policies required by Article XI, or (c) any Operative Document. Lessee shall pay, or cause to be paid, all charges and costs required in connection with the use of the Sites as contemplated by this Lease and the Construction Agency Agreement. Lessee shall not commit or permit any waste of the Sites or any part thereof. ARTICLE XI INSURANCE SECTION XI.1. Required Coverages. Lessee will keep insured all property of a character usually insured by corporations engaged in the same or similar business similarly situated against loss or damage of the kinds and in the amounts customarily insured against by such corporations, and carry such other insurance as is usually carried by such corporations, provided that in any event Lessee will maintain: (a) Commercial General Liability Insurance. Combined single limit insurance against claims for bodily injury, death or third-party property damage occurring on, in or about each Site (including adjoining streets and sidewalks) in an amount at least equal to $5,000,000 per person and $5,000,000 per occurrence (subject to a maximum deductible of $350,000 per occurrence) and $5,000,000 for property damage per occurrence, with a minimum general annual limit of $5,000,000 and a minimum of $15,000,000 excess of such coverage. (b) Property Insurance. Insurance against loss of damage 30 Lease Agreement covering each Site or any portion thereof by reason of any Peril (as defined below) in an amount (subject to such deductibles and/or self-insurance in such maximum amounts as is approved by Agent from time to time, such approval not to be unreasonably withheld) at least equal to such minimum amounts as are carried by corporations owning and/or operating healthcare facilities comparable to the Sites; provided, however, that at no time shall the amount of such coverage be less than replacement cost. (c) Workers' Compensation Insurance. Lessee shall, in the construction of the Facilities (including in connection with any Alterations thereof) and the operation of the Sites, comply with the applicable Workers' Compensation laws and protect Lessor, Agent and the Lenders against any liability under such laws. (d) Builder's Risk Insurance. During the construction of any Alteration, Lessee shall also maintain, for the benefit of Lessor, all-risk Builders' Risk Insurance in an amount equal to the greater of the replacement value of the applicable Facility and Alteration and the then outstanding Allocated Amount of the applicable Site. (e) Flood Insurance. For any Site located in a special flood hazard area (as defined in National Flood Insurance Reform Act), Lessee shall maintain flood insurance, for the benefit of Lessor, Agent and the Lenders, in an amount at least equal to the then outstanding Allocated Amount of the applicable Site. Prior to the date hereof and from time to time upon Lessor's request, Lessee shall deliver to Lessor evidence reasonably satisfactory to Lessor for each Site establishing whether such Site is located in a special flood hazard area. (f) Other Insurance. Such other insurance, including worker's compensation insurance, malpractice or professional liability insurance, automobile liability (if applicable) and business interruption insurance, in each case as is generally carried by owners of similar properties in such amounts and against such risks as are then customary for properties similar in use. Such insurance shall be written by reputable insurance companies that are financially sound and solvent and otherwise reasonably appropriate considering the amount and type of insurance being provided by such companies. Any insurance company selected by Lessee shall be rated in A.M. 31 Lease Agreement Best's Insurance Guide or any successor thereto (or if there be none, an organization having a similar national reputation) and shall have a general policyholder rating of "A-" (or comparable rating for a rating by an organization other than A.M. Best) and a financial rating of at least "X" (or comparable rating for a rating by an organization other than A.M. Best) or be otherwise acceptable to the Required Participants. In the case of liability insurance maintained by Lessee, it shall name Agent, together with Lessor, as additional insureds and, in the case of property insurance maintained by Lessee, it shall name Agent, together with Lessor, as mortgagees and loss payees. Each policy referred to in this Section 11.1 shall provide that: (i) it will not be cancelled, materially modified or its limits reduced, or allowed to lapse without renewal, except after not less than 30 days' prior written notice to Agent; (ii) the interests of Agent and Lessor shall not be invalidated by any act or negligence of or breach of warranty or representation by Lessee or any Person having an interest in a Site or the Facility thereon; (iii) such insurance is primary with respect to any other insurance carried by or available to Agent and Lessor; (iv) the insurer shall waive any right of subrogation, setoff, counterclaim, or other deduction, whether by attachment or otherwise, against Agent or Lessor; and (v) such policy shall contain a cross-liability clause providing for coverage of Agent and Lessor as if separate policies had been issued to each of them. Lessee will notify Agent promptly of any policy cancellation, reduction in policy limits, modification or amendment. The term "Peril" shall mean, collectively, fire, lightning, flood, windstorm, hail, explosion, riot and civil commotion, vandalism and malicious mischief, damage from aircraft, vehicles and smoke and all other perils covered by the "all risk endorsement" then in use in the Commonwealth of Pennsylvania. SECTION XI.2. Delivery of Insurance Certificates. On or before the Document Closing Date, Lessee shall deliver to Agent and Lessor certificates of insurance satisfactory to Agent and Lessor evidencing the existence of all insurance required to be maintained hereunder and setting forth the respective coverages, limits of liability, carrier, policy number and period of coverage. Thereafter, throughout the Lease Term, at the time each of Lessee's insurance policies is renewed (but in no event less frequently than once each year), Lessee shall deliver to Agent and Lessor certificates of insurance evidencing that all insurance required by Section 11.1 to be maintained by Lessee with respect to the Sites is in effect. 32 Lease Agreement ARTICLE XII ASSIGNMENT AND SUBLEASING SECTION XII.1. Assignment and Subletting. (a) Lessee may not assign, mortgage or pledge, in whole or in part, any of its right, title or interest in, to or under this Lease or any portion of the Sites to any Person (including an Affiliate of Lessee) at any time, and any such assignment, mortgage or pledge shall be void; provided, however, that without the consent of Lessor, Lessee may assign this Lease to a single-purpose, wholly-owned, direct or indirect Subsidiary of Genesis (the "Permitted Assignee") provided that the following conditions are met: (i) The Permitted Assignee must be incorporated under the laws of the State of Delaware or the Commonwealth of Pennsylvania; (ii) No Lease Event of Default or Lease Payment/Bankruptcy Default shall have occurred and be continuing; (iii) The Permitted Assignee shall, prior to or simultaneously with the assignment, enter into an assumption agreement, which agreement shall include all of the representations, warranties and covenants contained in this Lease; (iv) Genesis and its Material Subsidiaries shall, prior to or simultaneously with the assignment of the Lease deliver a reaffirmation of the Guaranties; and (v) Lessee shall deliver an opinion of counsel for the Permitted Assignee, reasonably acceptable to Lessor and Agent, dated as of the date of the assignment, stating that the Permitted Assignee has the legal capacity to perform and fulfill all of the obligations and liabilities contained in the Lease, and containing other matters as reasonably requested by Lessor and Agent. Lessee may not sublease, in whole or in part, any of its right, title or interest in, to or under this Lease or any portion of the Sites to any Person at any time, and any such sublease shall be void and of no force or effect; provided, however, that without the consent of Lessor, Lessee may sublease any 33 Lease Agreement Site to a wholly-owned direct or indirect Subsidiary of Genesis (any such permitted sublease is hereinafter referred to as a "Sublease"). Any such permitted sublessee under any Sublease described in this Section 12.1(a) shall hereinafter be referred to as a "Subtenant." Regardless of Lessor's consent, no subletting shall release Lessee of Lessee's obligation or alter the primary liability of Lessee to pay Rent hereunder (including, without limitation, Basic Rent and Supplemental Rent) and to perform all other obligations to be performed by Lessee hereunder. The acceptance of Rent by Lessor from any other Person shall not be deemed to be a waiver by Lessor of any provision hereof. Consent to one subletting of one Site shall not be deemed consent to any subsequent or further subletting of such Site or any other Site. Lessor may proceed directly against Lessee without the necessity of exhausting remedies against said successor. (b) Lessee hereby assigns to Lessor all of Lessee's right, title and interest in and to all Subleases entered into by Lessee in accordance with Section 12.1(a), now or hereafter in effect, including but not limited to all rents and other sums payable to Lessee under each such Sublease. Lessor shall have no obligation to perform, and Lessee shall not by reason of such assignment be relieved of its obligation to perform, any of Lessee's covenants or agreements under this Lease or covenants or agreements of Lessee, as sublessor, under any such Sublease; provided that, upon the termination of this Lease or upon termination of Lessee's right to possess the Site following a Lease Event of Default (the date of such termination shall be referred to herein as the "Turnover Date") the following shall apply: (A) if Lessee acquires ownership of the Site in accordance with the terms of this Lease or if Lessee's right to possess the Site has been terminated following a Lease Event of Default then, subject to the provisions of Article XVIII, Lessee shall continue to be liable for all obligations under the Subleases; or (B) if Lessee does not acquire ownership of the Site, (i) Lessee shall continue to be liable for any obligations under the Subleases accruing or arising prior to the Turnover Date and for any tenant improvement obligations arising or accruing prior to the later of (x) the Turnover Date and (y) the scheduled termination date of the Basic Term or the Renewal Term or the Extended Renewal Term, as applicable, and (ii) with respect to any Subleases not terminated in accordance with Section 12.2(b), Lessor (or any successor owner of the Site (the "Designated Owner")) shall assume and be liable for, subject to the limitations on the liability of 34 Lease Agreement the Designated Owner set forth in Section 12.2 and subject to the limitations on the liability of Lessee set forth in Article XVIII, Lessee's obligations under the Subleases other than those referred to in clause (i) above. Prior to the Turnover Date, Lessee shall have the right to collect and enjoy all rents and other sums of money payable under any Sublease and Lessee shall have the right to modify, extend, amend or terminate any or all of the Subleases (except that Lessee shall not have the right to amend or modify any Sublease, the effect of which would be to cause a Qualified Subtenant (defined below) to become a non-Qualified Subtenant, unless the modification also revises the language required in the Sublease pursuant to Section 12.2(a) hereof to be consistent with the language required by Section 12.2(c) hereof. SECTION XII.2. Sublease Subordination. (a) In the case of any proposed Sublease with a Subtenant, not less than thirty days prior to the consummation of such Sublease (or in the case of a Sublease to be entered into within ten days after the Document Closing Date, not later than the fifth day after the Document Closing Date), Lessee shall deliver to Lessor each of the following: (i) a certification of Lessee identifying the proposed Subtenant in question and confirming that such proposed Subtenant satisfies the requirements of Section 12.1(a) and Section 12.2(b), and (ii) a copy of the proposed Sublease. (b) In the case of any Sublease, following the Turnover Date the Designated Owner shall have the right to terminate such Sublease and the Subtenant's Sublease and right of possession thereunder or, in the alternative (at the Designated Owner's option), the Designated Owner may require the Subtenant under such Sublease to attorn to the Designated Owner; and in the case of such required attornment, the rights (including, without limitation, the right of possession) of such Subtenant under such Sublease shall not be disturbed or affected by the Designated Owner so long as no default by such Subtenant exists under the terms of such Sublease as would enable Lessee (as sublessor) to terminate such Sublease or would cause termination of such Sublease or would entitle Lessee (as sublessor) to dispossess the Subtenant under such Sublease. Each Sublease shall contain the following language: "The Tenant hereunder agrees that this Lease is subject and subordinate to the lease under which the Landlord hereunder occupies the Property (the "Overlease", with the landlord under the Overlease and its successors and 35 Lease Agreement assigns in interest to the Property or this Lease being hereinafter referred to as the "Overlandlord") and in the event of the termination of the Overlease or in the event the Overlandlord terminates the Landlord's right of possession under the Overlease (the date on which either such termination becomes effective being referred to herein as the "Turnover Date"), the Overlandlord shall have (i) the right to terminate this Lease and the Tenant's right of possession hereunder, or, in the alternative (at the Overlandlord's option), (ii) the right to require the Tenant hereunder to attorn to the Overlandlord; and in the case of such required attornment election, the Tenant hereunder will attorn to the Overlandlord and pay the Overlandlord all of the rents and other monies required to be paid by the Tenant hereunder, and perform all of the terms, covenants, conditions and obligations contained in this Lease, and this Lease shall continue as a direct lease between the Tenant hereunder and the Overlandlord upon all of the terms and conditions hereof except that in no event shall the Overlandlord have any obligation to perform any obligation of the Landlord hereunder with respect to obligations of the Landlord hereunder accruing prior to the Turnover Date and that any obligations of the Overlandlord (or any successor Overlandlord) hereunder arising after the Turnover Date shall be without recourse to Overlandlord (other than the interest of the Overlandlord in the property demised by this Lease)." ARTICLE XIII LOSS, DESTRUCTION, CONDEMNATION OR DAMAGE SECTION XIII.1. Event of Loss; Condemnation or Casualty. (a) If an Event of Loss shall occur, Lessee shall give Lessor and Agent prompt written notice of such occurrence and the date thereof and Lessee shall purchase the Site(s) affected thereby from Lessor on the next succeeding Payment Date after the date such Event of Loss shall have occurred at 36 Lease Agreement a purchase price equal to the sum of (A) the Allocated Amount, plus (B) all accrued but unpaid Rent, plus (C) all other sums due and payable by Lessee to Lessor, Agent or any Lender with respect to such affected Site(s) under any of the Operative Documents. (b) Upon payment in full of all amounts payable pursuant to Section 13.1(a) and the discharge of the Lien of the Mortgage pursuant to Section 6.3 thereof, (i) the Lease Term shall end with respect to the affected Site(s), (ii) the obligations of Lessee hereunder with respect to the affected Site(s) (other than any obligations expressed herein as surviving termination of this Lease) shall terminate as of the date of such payment. SECTION XIII.2. Application of Payments Relating to an Event of Loss. All Net Condemnation Proceeds and property insurance proceeds received at any time by Lessor, Lessee or Agent from any Authority or other Person with respect to any Event of Loss of one or more Sites shall be promptly remitted to Lessor and, in the event Lessee purchases the affected Site(s) pursuant to Section 13.1(a), be applied against the purchase price payable by Lessee pursuant to Section 13.1(a), and any such Net Condemnation Proceeds and property insurance proceeds remaining thereafter shall be paid over to, or retained by, Lessee, or as Lessee may direct. SECTION XIII.3. Application of Certain Payments Relating to a Condemnation. In case of a requisition for temporary use of all or a portion of any Site which is not an Event of Taking, this Lease shall remain in full force and effect, without any abatement or reduction of Rent, and the proceeds received from any Authority relating to a Condemnation for the affected Site shall be paid to Lessee, except that any portion of such proceeds that is awarded with respect to the time period after the expiration or termination of the Lease Term (unless Lessee shall have exercised an option to purchase the Sites and no Lease Payment/Bankruptcy Default or Lease Event of Default shall have occurred and be continuing) shall be paid to Lessor; provided, that if Lessee has paid the Lease Balance to Lessor, such proceeds (or the portion of such proceeds in excess of the portion thereof applied to payment of the Lease Balance) shall be paid over to Lessee. SECTION XIII.4. Casualty. Upon any Casualty with respect to a Site the cost of repair of which would exceed $250,000, Lessee shall give to Lessor written notice thereof. As soon as practicable after a Casualty, Lessee shall 37 Lease Agreement repair and rebuild the affected portions of the Site suffering such Casualty (or cause such affected portions to be repaired and rebuilt) to the condition required to be maintained by Section 9.1 hereof; provided, that the value and functional capability of such item as restored is at least equivalent to the value and functional capability of such item as in effect immediately prior to the occurrence of such Casualty. If any insurance proceeds received with respect to any Casualty shall be in excess of twenty-five percent (25%) of the Allocated Amount for the applicable Site, the insurance proceeds received with respect to such Casualty shall be paid over to or retained by Agent (on behalf of the Participants), to be distributed to Lessee upon completion of such repairs and rebuilding of the affected portions of the applicable Site in accordance with the conditions set forth in this Section 13.4; provided that in such event, at Lessee's request and expense, Agent and Lessee shall enter into an insurance escrow and disbursement agreement in form and substance reasonably satisfactory to Agent providing for the disbursement of proceeds (not more often than once per month and with each monthly disbursement being not less than $100,000) to Lessee or its contractor during the course of such repair and rebuilding upon conditions satisfactory to Agent in its reasonable judgment. SECTION XIII.5. Other Dispositions. Notwithstanding the foregoing provisions of this Article XIII, as long as a Lease Payment/Bankruptcy Default or Lease Event of Default shall have occurred and be continuing, any amount that would otherwise be payable to or for the account of, or that would otherwise be retained by, Lessee pursuant to this Article XIII shall be paid to Agent (or to Lessor after the Loan Agreement shall have been satisfied and discharged) as security for the obligations of Lessee under this Lease, shall be invested by Agent (or Lessor) in accordance with Section 21.18 in Permitted Investments and, if a Lease Event of Default is continuing, may be applied to the obligations of Lessee hereunder, and, at such time thereafter as no Lease Payment/Bankruptcy Default or Lease Event of Default shall be continuing, such amount and gain thereon shall be paid promptly to Lessee to the extent not previously applied in accordance with the terms of this Lease. SECTION XIII.6. Negotiations. In the event any part of a Site becomes subject to condemnation or requisition proceedings, Lessee shall give notice thereof to Lessor and Agent promptly after Lessee has knowledge thereof and, to the extent permitted by any Applicable Laws and Regulations, Lessee shall control the negotiations with the relevant Authority unless a Lease 38 Lease Agreement Payment/Bankruptcy Default or Lease Event of Default shall be continuing, in which case Lessor shall control such negotiations; provided that in any event Lessor may participate at Lessor's expense (or if a Lease Payment/Bankruptcy Default or Lease Event of Default shall be continuing, at Lessee's expense) in such negotiations; and provided in all cases, that no settlement will be made without Lessor's prior written consent, not to be unreasonably withheld. Lessee shall give to Lessor and Agent such information, and copies of such documents, which relate to such proceedings, or which relate to the settlement of amounts due under insurance policies required by Article XI, and are in the possession of Lessee, as are reasonably requested by Lessor or Agent. If the proceedings relate to an Event of Taking, Lessee shall act diligently in connection therewith. SECTION XIII.7. No Rent Abatement. Rent shall not abate hereunder by reason of any Casualty, any Event of Loss, any Event of Taking or any Condemnation of a Site, and Lessee shall continue to perform and fulfill all of Lessee's obligations, covenants and agreements hereunder notwithstanding such Casualty, Event of Loss, Event of Taking or Condemnation until the Lease Termination Date. ARTICLE XIV NON-INTERFERENCE SECTION XIV.1. Non-Interference. Lessor covenants that it will not interfere in Lessee's or any of its Subtenants' use of the Sites in accordance with this Lease during the Lease Term, so long as no Lease Event of Default has occurred and is continuing; it being agreed that Lessee's remedies for breach of the foregoing covenant shall be limited to a claim for damages or the commencement of proceedings to enjoin such breach. Such right is independent of and shall not affect Lessor's rights otherwise to initiate legal action to enforce the obligations of Lessee under this Lease. SECTION XIV.2. Certain Duties and Responsibilities of Lessor. Lessor undertakes to perform such duties and only such duties as are specifically set forth herein and in the other Operative Documents, and no implied covenants or obligations shall be read into this Lease against Lessor, and Lessor agrees that it shall not, nor shall it have a duty to, manage, control, use, sell, maintain, insure, register, lease, operate, modify, dispose of or otherwise deal with the Sites in any manner whatsoever, except as required by the terms of the Operative 39 Lease Agreement Documents and as otherwise provided herein; provided that during the continuance of a Lease Event of Default or a Lease Payment/Bankruptcy Default, Lessor shall have no obligation to Lessee to perform any such duties. ARTICLE XV INSPECTION AND REPORTS SECTION XV.1. Inspection. Upon five (5) Business Days prior notice to Lessee, each of Agent, Lessor, any Lender and their respective authorized representatives (the "Inspecting Parties") may inspect (a) any Site and (b) the books and records of Lessee relating directly and primarily to the Site and make copies and abstracts therefrom, but only after material related to matters other than the Site shall have been redacted therefrom. All such inspections shall be at the expense and risk of the Inspecting Parties, except that if a Lease Event of Default or Lease Payment/Bankruptcy Default has occurred and is continuing, Lessee shall reimburse the Inspecting Parties for the reasonable costs of such inspections and such inspection shall be at Lessee's risk. Lessee shall furnish to the Inspecting Parties statements accurate in all material respects regarding the condition and state of repair of the Sites, all at such times and as often as may be reasonably requested. No inspection shall unreasonably interfere with Lessee's operations or the operations of any other occupant of the Sites. None of the Inspecting Parties shall have any duty to make any such inspection or inquiry, and none of the Inspecting Parties shall incur any liability or obligation by reason of not making any such inspection or inquiry. None of the Inspecting Parties shall incur any liability or obligation by reason of making any such inspection or inquiry unless and to the extent, so long as no Lease Event of Default has occurred and is continuing at the time of inspection, such Inspecting Party causes damage to the Site or any property of Lessee or any other Person during the course of such inspection. SECTION XV.2. Reports. To the extent permissible under Applicable Laws and Regulations, Lessee shall prepare and file in timely fashion, or, where Lessor shall be required to file, Lessee shall prepare and make available to Lessor and Agent within a reasonable time prior to the date for filing and Lessor shall file, any reports with respect to the condition or operation of the Sites that shall be required to be filed with any Authority. 40 Lease Agreement ARTICLE XVI OWNERSHIP, GRANT OF SECURITY INTEREST AND FURTHER ASSURANCES SECTION XVI.1. Grant of Security Interest. Lessee hereby assigns, grants and pledges to Lessor for the benefit of Agent and the Lenders a security interest in and Lien against all of Lessee's right, title and interest, whether now or hereafter existing or acquired, in the Sites and proceeds therefrom, to secure the payment and performance of all obligations of Lessee now or hereafter existing under this Lease or any other Operative Document. Lessee shall, at its expense, do any further act and execute, acknowledge, deliver, file, register and record any further documents which Lessor or any Lender may reasonably request in order to protect Lessor's title to and their perfected Lien in the Sites, subject to no Liens other than Permitted Liens, and Lessor's rights and benefits under this Lease. Lessee shall promptly and duly execute and deliver to Lessor such documents and assurances and take such further actions as Lessor or any Lender may from time to time reasonably request in order to carry out more effectively the intent and purpose of this Lease and the other Operative Documents, to establish and protect the rights and remedies created or intended to be created in favor of Lessor hereunder and thereunder, and to establish, perfect and maintain the right, title and interest of Lessor in and to the Sites, subject to no Lien other than Permitted Liens, or of such financing statements or fixture filings or other documents with respect hereto as Lessor or any Lender may from time to time reasonably request, and Lessee agrees to execute and deliver promptly such of the foregoing financing statement and fixture filings or other documents as may require execution by Lessee. To the extent permitted by Applicable Laws and Regulations, Lessee hereby authorizes any such financing statement and fixture filings to be filed without the necessity of the signature of Lessee. Upon Lessee's request, Lessor shall at such time as all of the obligations of Lessee under this Lease or any other Operative Documents have been indefeasibly paid or performed in full (other than Lessee's contingent obligations, if any, under Article VII of the Participation Agreement) execute and deliver termination statements and other appropriate documentation reasonably requested by Lessee, all at Lessee's expense, to evidence Lessor's release of its Lien against the Sites. SECTION XVI.2. Attorney-in-Fact. Lessee hereby irrevocably appoints Agent as Lessee's attorney-in-fact, with full authority in the place and stead 41 Lease Agreement of Lessee and in the name of Lessee or otherwise, from time to time in Lessor's discretion, upon the occurrence and during the continuance of a Lease Event of Default, to take any action (including any action that Lessee is entitled to take) and to execute any instrument which Lessor may deem necessary or advisable to accomplish the purposes of this Lease (subject to any limitations set forth in the Operative Documents), including, without limitation: (a) to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for money due and to become due under or in connection with the Sites; (b) to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with the foregoing clause (a); (c) to file any claim or take any action or institute any proceedings which Lessor may deem to be necessary or advisable for the collection thereof or to enforce compliance with the terms and conditions of the Lease; and (d) to perform any affirmative obligations of Lessee hereunder. Lessee hereby acknowledges, consents and agrees that the power of attorney granted pursuant to this Section 16.2 is irrevocable and coupled with an interest. ARTICLE XVII LEASE EVENTS OF DEFAULT The occurrence of any one or more of the following events, whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body, shall constitute a "Lease Event of Default": (a) Lessee shall fail to make any payment (i) of any Supplemental Rent payable to Agent or any Participant or of Basic Rent when due and such failure shall continue for a period of five days, or (ii) of amounts payable pursuant to the exercise of the Sale Option, or amounts payable pursuant to Section 13.1, when due, or (iii) of Supplemental Rent payable to any Person other than Agent or a Participant and such failure under this clause (iii) shall 42 Lease Agreement continue for a period of five days after notice to Lessee from any Person of such failure; provided that Lessee shall not be entitled to any five-day grace or cure period under this clause (a) with respect to any payment of the Lease Balance under Section 6.2 or Section 6.5, or Proceeds or the Applicable Percentage Amount under Section 6.4(b) or Section 6.9(a); (b) Lessee or any Guarantor shall fail to make any payment of any other amount payable hereunder or under any of the other Operative Documents (other than the Construction Agency Agreement) and such failure shall continue for a period of five days after such amount first became due and payable (or in the case of any payment to any Person other than Agent or any Participant, such failure shall continue for a period of five days after notice to Lessee from any Person of such failure); (c) Lessee shall (i) fail to maintain insurance as required by Section 11.1, or (ii) default in the performance or observance of any term, covenant, condition or agreement on its part to be performed or observed under Section 5.2, 5.3, 5.4, 5.7 or 5.11 of the Participation Agreement; (d) any representation or warranty by Lessee or any Guarantor in any Operative Document or in any certificate or document (including any Advance Request) delivered to Lessor, Agent or any Lender pursuant to any Operative Document shall have been incorrect in any material respect when made and shall remain material when discovered and if curable shall continue for a period of 30 days; provided that if Lessee or such Guarantor shall commence such cure within said 30-day period and shall diligently be pursuing such cure, then said 30-day period shall be extended to 90 days; (e) Lessee or any Guarantor shall fail in any material respect timely to perform or observe any covenant, condition or agreement (not included in any other clause of this Article XVII) to be performed or observed by it hereunder or under any other Operative Document and such failure shall continue for a period of 30 days; provided that if Lessee or such Guarantor shall commence such cure within said 30-day period and shall diligently be pursuing such cure, then said 30-day period shall be extended to 90 days; (f) (i) Lessee or any Guarantor shall generally fail to pay, or admit in writing its inability to pay, its debts as they become due, or shall voluntarily commence any case or proceeding or file any petition under any 43 Lease Agreement bankruptcy, insolvency or similar law or seeking dissolution, liquidation or reorganization or the appointment of a receiver, trustee, custodian or liquidator for itself or a substantial portion of its property, assets or business or to effect a plan or other arrangement with its creditors, or shall file any answer admitting the jurisdiction of the court and the material allegations of any involuntary petition filed against it in any bankruptcy, insolvency or similar case or proceeding, or shall be adjudicated bankrupt, or shall make a general assignment for the benefit or creditors, or shall consent to, or acquiesce in the appointment of, a receiver, trustee, custodian or liquidator for itself or a substantial portion of its property, assets or business, or (ii) corporate action shall be taken by Lessee or any Guarantor for the purpose of effectuating any of the foregoing; (g) involuntary proceedings or an involuntary petition shall be commenced or filed against Lessee or any Guarantor under any bankruptcy, insolvency or similar law or seeking the dissolution, liquidation or reorganization of Lessee or the appointment of a receiver, trustee, custodian or liquidator for Lessee or any Guarantor or of a substantial part of the property, assets or business of Lessee or any Guarantor or, any writ, judgment, warrant of attachment, execution or similar process shall be issued or levied against a substantial part of the property, assets or business of Lessee or any Guarantor, and such proceedings or petition shall not be dismissed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded, within 30 days after commencement, filing or levy, as the case may be; (h) a final judgment or final judgments for the payment of money are entered by a court or courts of competent jurisdiction against Lessee or any Guarantor or any Subsidiary of any Guarantor, and such judgment or judgements remain undischarged, unbonded, unstayed or unsatisfied for a period (during which execution shall be effectively stayed) of 30 days; provided, that the aggregate of all such judgments exceeds $500,000; (i) Lessee or any Guarantor shall directly or indirectly contest the validity of any Operative Document in any manner in any court of competent jurisdiction or the Lien granted by this Lease or any Mortgage; (j) (A) an event of default shall occur in the payment when 44 Lease Agreement due (subject to any applicable grace period), whether by acceleration or otherwise, of any Indebtedness of Lessee or any Guarantor or any Subsidiary of any Guarantor that individually or in the aggregate exceeds $1,000,000 or (B) any other event of default shall occur with respect to any Indebtedness of Lessee or any Guarantor or any Subsidiary of any Guarantor that individually or in the aggregate exceeds $1,000,000; (k) Any one or more Pension-Related Events referred to in subsection (a)(ii), (b) or (e) of the definition of "Pension-Related Event" shall have occurred; or any one or more other Pension-Related Events shall have occurred and the Agent shall determine in good faith (which determination shall be conclusive) that such other Pension-Related Events, individually or in the aggregate, could have a Material Adverse Effect; (l) either of the Guaranties shall no longer be in full force and effect; or (m) an Event of Default (as defined in the Credit Agreement) shall occur under the Credit Agreement. ARTICLE XVIII ENFORCEMENT SECTION XVIII.1. Remedies. Upon the occurrence of a Lease Event of Default, at Lessor's option and without limiting Lessor in the exercise of any other right or remedy Lessor may have on account of such default (including, without limitation, the obligation of Lessee to purchase the Sites as set forth below), and without any further demand or notice, Lessor may cause the following to occur: (i) By notice to Lessee, Lessor may terminate Lessee's right to possession of the Sites. A notice given in connection with unlawful detainer proceedings specifying a time within which to cure a default shall terminate Lessee's right to possession if Lessee fails to cure the default within the time specified in the notice. (ii) Upon termination of Lessee's right to possession and without further demand or notice, Lessee shall surrender possession and vacate the Sites and deliver possession thereof, and Lessor may re-enter the Sites and remove any persons in possession thereof. 45 Lease Agreement (iii) Upon termination of Lessee's right to possession, this Lease shall terminate and Lessor may declare to be immediately due and payable, and Lessor shall be entitled to (x) recover from Lessee the following amounts and (y) take the following actions: (A) Lessee shall pay all accrued and unpaid Rent hereunder (including, without limitation, Basic Rent and Supplemental Rent) which had been earned at the time of termination; (B) Lessor may elect any of the following: (1) Lessor may demand, by written notice to the Lessee specifying a Payment Date (the "Final Rent Payment Date") not earlier than ten (10) days after the date of such notice, that Lessee pay to Lessor, and Lessee shall pay to Lessor, on the Final Rent Payment Date (in lieu of Basic Rent due after the Final Rent Payment Date), an amount equal to the sum of (A) the Lease Balance computed as of the Final Rent Payment Date, plus (B) all accrued and unpaid Rent due and unpaid to and including the Final Rent Payment Date, and upon payment of such amount, and the amount of all other sums due and payable by Lessee under this Lease and the other Operative Documents (and interest at the Overdue Rate on the amounts payable under this clause (B)(1) from the Final Rent Payment Date to the date of actual payment), Lessor shall transfer by quitclaim deed to Lessee all of Lessor's right, title and interest in and to the Sites without recourse or warranty, but free and clear of Lessor Liens; or (2) Lessor may sell its interest in the Sites, in which event Lessee shall pay to Lessor an amount equal to the excess, if any, of (x) all amounts due Lessor under clause (B)(1) above over (y) the net sale proceeds received by Lessor from the foregoing sale (provided, that in calculating such net sale proceeds, all 46 Lease Agreement expenses and taxes incurred by Lessor, Agent or any of the Lenders in connection with such sale, including, without limitation, legal fees, shall be deducted from such sales proceeds); (C) Any other amount necessary to compensate Lessor for all actual damages caused by Lessee's failure to perform Lessee's obligation under this Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, the costs and expenses (including without limitation, reasonable attorneys' fees, advertising costs and brokers' commissions) of recovering possession of the Sites, removing persons or property therefrom, placing the Sites in good order, condition, and repair, preparing and altering the Sites for reletting, and all other costs and expenses of reletting; and (D) Such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. (iv) Lessor may enforce the Lien given hereunder pursuant to Section 16.1 hereof, Section 11 of the Lease Supplements, the Uniform Commercial Code or any other law. (v) If Lessee has breached this Lease and abandoned the Site, this Lease shall continue in effect for so long as Lessor does not terminate Lessee's right to possession, and Lessor may enforce all of Lessor's rights and remedies under this Lease, including the right to recover the Rent hereunder (including, without limitation, Basic Rent and Supplemental Rent) as it becomes due under this Lease. Lessee's right to possession shall not be deemed to have been terminated by Lessor except pursuant to clause (i) above. The following do not constitute a termination of Lessee's right to possession: (A) Acts of maintenance or preservation or efforts to relet the Sites; (B) The appointment of a receiver upon the initiative of Lessor to protect Lessor's interest under this Lease; (C) Reasonable withholding of consent to an assignment or subletting, or terminating a subletting or assignment by Lessee. 47 Lease Agreement (vi) In the event that Lessor elects to continue this Lease in full force and effect, Lessor may enforce all its rights and remedies under this Lease, including, but not limited to, the right to recover Rent hereunder (including, without limitation, Basic Rent and Supplemental Rent) as it becomes due. During the continuance of a Lease Event of Default, Lessor may enter the Sites in accordance with applicable law without terminating this Lease and sublet all or any part of the Sites for Lessee's account to any Person, for such term (which may be a period beyond the remaining Lease Term), at such rents and on such other terms and conditions as are commercially reasonable. In the event of any such subletting, rents received by Lessor from such subletting shall be applied (i) first, to the payment of the reasonable costs incurred by Lessor in maintaining, preserving, altering and preparing the Sites for subletting and other costs of subletting, including, but not limited to, brokers' commissions and attorneys' fee; (ii) second, to the payment of Rent hereunder (including, without limitation, Basic Rent and Supplemental Rent) then due and payable; (iii) third, to the payment of future Rent hereunder (including, without limitation, Basic Rent and Supplemental Rent) as the same may become due and payable hereunder; (iv) fourth, to the payment of all other obligations of Lessee hereunder, and (v) fifth, the balance, if any, shall be paid to Lessee upon (but not before) expiration of the Lease Term. If the rents received by Lessor from such subletting, after application as provided above, are insufficient in any period to pay the Rent (including, without limitation, Basic Rent and Supplemental Rent) due and payable hereunder for such period, Lessee shall pay such deficiency to Lessor upon demand. Notwithstanding any such subletting for Lessee's account without termination, Lessor may at any time thereafter, by written notice to Lessee, elect to terminate this Lease by virtue of a previous Lease Event of Default. Upon (but not before) and during the continuance of a Lease Event of Default, if Lessee has abandoned the Sites, for so long as Lessor does not terminate Lessee's right to possession of the Sites, Lessor shall not unreasonably withhold its approval to a sublease of the Sites; provided, however, that Lessor's withholding of such consent shall not be deemed unreasonable upon the standard contained in Section 12.1. 48 Lease Agreement (vii) Lessor may exercise any other right or remedy that may be available to it under Applicable Laws and Regulations or in equity, or proceed by appropriate court action (legal or equitable) to enforce the terms or to recover damages for the breach hereof. Separate suits may be brought to collect any such damages for any Rent Installment Period(s), and such suits shall not in any manner prejudice Lessor's right to collect any such damages for any subsequent Rent Installment Period(s), or Lessor may defer any such suit until after the expiration of the Basic Term or any Renewal Term, in which event such suit shall be deemed not to have accrued until the expiration of the Basic Term, or such Renewal Term; or (viii) Lessor may retain and apply against Lessor's damages all sums which Lessor would, absent such Lease Event of Default, be required to pay to, or turn over to, Lessee pursuant to the terms of this Lease. (ix) Lessor may exercise the remedies described in Section 11 of the Lease Supplement. In addition to the foregoing, Lessee acknowledges that (i) pursuant to the Collateral Agency Agreement and the Security Agreement, the Joint Stock Collateral constitutes additional security for the payment and performance of Lessee's obligations under this Lease and the other Operative Documents, and (ii) the Guaranty and Agreement of Suretyship Regarding Obligations Lessee and Affiliates, as it may be amended from time to time, which constitutes one of the Guaranties shall constitute further additional security for, among other things, the payment and performance of Lessee's obligations under this Lease and the other Operative Documents. SECTION XVIII.2. Proceeds of Sale; Deficiency. All payments received and amounts held or realized by Lessor at any time when a Lease Event of Default shall have occurred and be continuing and after the Lease Balance shall have been accelerated pursuant to Article XVIII as well as all payments or amounts then held or thereafter received by Lessor, except for rents received by Lessor from subletting pursuant to Section 18.1(vi) and the proceeds of sale pursuant to Section 11 of the Lease Supplements, shall be distributed forthwith upon receipt by Lessor in the following order of priority: first: so much of such payments or amounts as shall be required to reimburse Lessor for any tax (other than any 49 Lease Agreement income tax payable on Basic Rent or interest and on fees and other compensation of Lessor), expense or other amount owed to Lessor in connection with the collection or distribution of such payments or amounts to the extent not previously reimbursed by Lessee (including, without limitation, the expenses of any sale, taking or other proceeding, expenses in connection with realizing on any of the Sites, reasonable attorneys' fees and expenses (including the allocated costs of internal counsel), court costs and any other reasonable expenditures incurred or reasonable expenditures or advances made by Lessor in the protection, exercise or enforcement of any right, power or remedy upon such Lease Event of Default whether pursuant to Article XVII or otherwise) shall be so applied by Lessor; second: so much of such payments or amounts except those specified in clause third below, which under the terms of this Lease and the other Operative Documents have accrued shall be so applied; third: so much of such payments or amounts remaining as shall be required to pay Agent (on behalf of the Participants) in full the aggregate unpaid Lease Balance and all Basic Rent (including, to the extent permitted by applicable law, interest on interest) shall be so applied (to be distributed by Agent pursuant to Section 3.3 of the Loan Agreement); and fourth: so much of such payments or amounts as shall remain shall be distributed to Lessee. SECTION XVIII.3. Grant and Foreclosure on Lessee's Estate. Each Lease Supplement shall contain a provision by which Lessee grants to a trustee, in trust, with power of sale, or grants a mortgage lien to Lessor in, all of Lessee's right, title and interest in and to the Sites subject to each such Lease Supplement and, upon the occurrence of a Lease Event of Default, granting Lessor the power and authority, after fulfillment of certain conditions, to cause the trustee to sell, or foreclose its mortgage lien against, the Sites. SECTION XVIII.4. Remedies Cumulative; No Waiver; Consents. To the extent permitted by, and subject to the mandatory requirements of, Applicable Laws and Regulations, each and every right, power and remedy herein specifically given to Lessor or otherwise in this Lease shall be cumulative and shall be in addition to every other right, power and remedy herein specifically given or now or hereafter existing at law, in equity or by statute, and each and every right, power and remedy whether specifically herein 50 Lease Agreement given or otherwise existing may be exercised from time to time and as often and in such order as may be deemed expedient by Lessor, and the exercise or the beginning of the exercise of any power or remedy shall not be construed to be a waiver of the right to exercise at the same time or thereafter any right, power or remedy. No delay or omission by Lessor in the exercise of any right, power or remedy or in the pursuit of any remedy shall impair any such right, power or remedy or be construed to be a waiver of any default on the part of Lessee or be an acquiescence therein. Lessor's consent to any request made by Lessee shall not be deemed to constitute or preclude the necessity for obtaining Lessor's consent, in the future, to all similar requests. No express or implied waiver by Lessor of any Lease Event of Default shall in any way be, or be construed to be, a waiver of any future or subsequent Lease Default or Lease Event of Default. To the extent permitted by Applicable Laws and Regulations, Lessee hereby waives any rights now or hereafter conferred by statute or otherwise that may require Lessor (i) to provide any notice to Lessee, or (ii) to sell, lease or otherwise use the Site or part thereof in mitigation of Lessor's damages, or (iii) to take any other action, upon the occurrence of a Lease Event of Default, or that may otherwise limit or modify any of Lessor's rights or remedies under this Article XVIII. ARTICLE XIX RIGHT TO PERFORM FOR LESSEE If Lessee shall fail to perform or comply with any of its agreements contained herein, Lessor may, but shall not be obligated to, on five Business Days' prior notice to Lessee (except in the event of an emergency, in which case only one Business Day's prior notice shall be required), perform or comply with such agreement, and Lessor shall not thereby be deemed to have waived any default caused by such failure, and the amount of such payment and the amount of the expenses of Lessor (including reasonable attorneys' fees and expenses) incurred in connection with such payment or the performance of or compliance with such agreement, as the case may be, together with interest thereon at the Overdue Rate, shall be deemed Supplemental Rent, payable by Lessee to Lessor upon demand; provided that in the case of an emergency Lessee shall permit Lessor so to perform or comply on less than one Business Day's notice unless Lessee has a good faith reason not to permit Lessor to do so. 51 Lease Agreement ARTICLE XX LESSOR LIENS In the event that Lessor shall be obligated to remove any Lessor Liens from the Sites and shall fail to do so, Lessee shall have a claim against Lessor for such failure, but shall not have any right of offset. ARTICLE XXI MISCELLANEOUS SECTION XXI.1. Binding Effect; Successors and Assigns; Survival. The terms and provisions of this Lease, and the respective rights and obligations hereunder of Lessor, Lessee, Agent and the Lenders shall be binding upon them and their respective successors, legal representatives and assigns (including, in the case of Lessor, any Person to whom Lessor may transfer the Sites or any interest therein in accordance with the provisions of the Operative Documents), and inure to their benefit and the benefit of their respective permitted successors, legal representatives and assigns. SECTION XXI.2. Severability. Any provision of this Lease that shall be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction, and Lessee shall remain liable to perform its obligations hereunder except to the extent of such unenforceability. To the extent permitted by Applicable Laws and Regulations, Lessee hereby waives any provision of law that renders any provision hereof prohibited or unenforceable in any respect. SECTION XXI.3. Notices. Unless otherwise specified herein, all notices, requests, demands or other communications to or upon the respective parties hereto shall be in writing and shall be delivered and shall be deemed to have been given in accordance with Section 9.3 of the Participation Agreement. SECTION XXI.4. Amendment; Complete Agreements. Neither this Lease nor any of the terms hereof may be terminated, amended, supplemented, waived or modified orally, but only by an instrument in writing signed by the party 52 Lease Agreement against which the enforcement of the termination, amendment, supplement, waiver or modification shall be sought. This Lease, together with the other Operative Documents, is intended by the parties as a final expression of their agreement and as a complete and exclusive statement of the terms thereof, all negotiations, considerations and representations between the parties having been incorporated herein and therein. No course of prior dealings between the parties or their officers, employees, agents or Affiliates shall be relevant or admissible to supplement, explain, or vary any of the terms of this Lease or any other Operative Document. Acceptance of, or acquiescence in, a course of performance rendered under this or any prior agreement between the parties or their Affiliates shall not be relevant or admissible to determine the meaning of any of the terms of this Lease or any other Operative Document. No representations, undertakings, or agreements have been made or relied upon in the making of this Lease other than those specifically set forth in the Operative Documents. SECTION XXI.5. Headings. The Table of Contents and headings of the various Articles and Sections of this Lease are for convenience of reference only and shall not modify, define or limit any of the terms or provisions hereof. SECTION XXI.6. Original Lease. The single executed original of this Lease containing the receipt of Lessor therefor on or following the signature page thereof shall be the "original executed counterpart" of this Lease. To the extent that this Lease constitutes chattel paper, as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction, no security interest in this Lease may be created through the transfer or possession of any counterpart other than the "original executed counterpart". SECTION XXI.7. GOVERNING LAW. THIS LEASE HAS BEEN DELIVERED IN, AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, EXCEPT AS TO MATTERS RELATING TO THE CREATION, PERFECTION AND ENFORCEMENT OF LIENS AND SECURITY INTERESTS AND THE EXERCISE OF REMEDIES WITH RESPECT THERETO, WHICH SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE IN WHICH THE APPLICABLE SITE IS LOCATED. SECTION XXI.8. Discharge of Lessee's Obligations by its Affiliates. Lessor agrees that performance of any of Lessee's obligations hereunder by one 53 Lease Agreement or more of its Affiliates or one or more sublessees of the Site or any part thereof shall constitute performance by Lessee of such obligations to the same extent and with the same effect hereunder as if such obligations were performed by Lessee, but no such performance shall excuse Lessee from any obligation not performed by it or on its behalf under the Operative Documents. SECTION XXI.9. Liability of Lessor Limited. The parties hereto agree that Lessor shall have no personal liability whatsoever to Lessee or its respective successors and assigns for any Claim based on or in respect of this Lease or any of the other Operative Documents or arising in any way from the transactions contemplated hereby or thereby; provided, however, that Lessor shall be liable in its individual capacity for (i) Lessor Liens required to be removed by Lessor under Section 6.2(a) of the Participation Agreement and (ii) its own willful misconduct or gross negligence. It is understood and agreed that, except as provided in the preceding proviso: (i) Lessor shall have no personal liability under any of the Operative Documents; (ii) all obligations of Lessor to Lessee are solely nonrecourse obligations, recourse being limited to its interest in the Sites and the Operative Documents (excluding Excluded Amounts); and (iii) all such personal liability of Lessor is expressly waived and released as a condition of, and as consideration for, the execution and delivery of the Operative Documents by Lessor. SECTION XXI.10. Estoppel Certificates. Each party hereto agrees that at any time and from time to time during the Lease Term, it will promptly, but in no event later than thirty (30) days after request by the other party hereto, execute, acknowledge and deliver to such other party or to any prospective purchaser (if such prospective purchaser has signed a commitment letter or letter of intent to purchase the Sites or any part thereof or to purchase any Note), assignee or mortgagee or third party designated by such other party, a certificate stating (a) that this Lease is unmodified and in force and effect (or if there have been modifications, that this Lease is in force and effect as modified, and identifying the modification agreements); (b) the date to which Basic Rent has been paid; (c) in the case of an estoppel certificate to be given by Lessee, whether or not there is any existing default by Lessee in the payment of Basic Rent or any other sum of money hereunder, and whether or not there is any other existing Lease Default or Lease Event of Default with respect to which a notice of default has been served, and, if there is any such default, 54 Lease Agreement specifying the nature and extent thereof; (d) in the case of an estoppel certificate to be given by Lessee, whether or not, to the knowledge of Lessee after due inquiry and investigation, there are any purported setoffs, defenses or counterclaims against enforcement of the obligations to be performed hereunder existing in favor of Lessee; and (e) other items that may be reasonably requested; provided that no such certificate may be requested unless the requesting party has a good faith reason for such request. In addition, Lessee, promptly, but in no event later than thirty days after request by any other party hereto, shall obtain and deliver to such other party or to any prospective purchaser (if such prospective purchaser has signed a commitment letter or letter of intent to purchase the Site or any part thereof or to purchase any Note), assignee, mortgagee or third party designated by such other party, an estoppel certificate from each Subtenant under each Sublease containing such items as reasonably requested by the party requesting the same; provided that no such certificate may be requested unless the requesting party has a good faith reason for such request. SECTION XXI.11. No Joint Venture. Any intention to create a joint venture or partnership relation between Lessor and Lessee is hereby expressly disclaimed. SECTION XXI.12. No Accord and Satisfaction. The acceptance by Lessor of any sums from Lessee (whether as Basic Rent or otherwise) in amounts which are less than the amounts due and payable by Lessee hereunder is not intended, nor shall be construed, to constitute an accord and satisfaction of any dispute between Lessor and Lessee regarding sums due and payable by Lessee hereunder, unless the Required Participants specifically deem it as such in writing. SECTION XXI.13. No Merger. In no event shall the Leasehold Estate of Lessee hereunder, or the rights and interests of the holder of any Notes secured by a Lien in this Lease, merge with any interests, estates or rights of Lessor in or to the Site, it being understood that such Leasehold Estate of Lessee hereunder, and the rights and interests of the holder of any Notes secured by a Lien in this Lease, shall be deemed to be separate and distinct from Lessor's interests, estates and rights in or to the Site, notwithstanding that any such interests, estates or rights shall at any time or times be held by or vested in the same Person. SECTION XXI.14. Successor Lessor. Lessee agrees that, in the case of any transfer of the Sites to a successor Lessor in accordance with the 55 Lease Agreement provisions of Section 6.2 of the Participation Agreement from time to time, such successor Lessor shall, upon written notice by such successor Lessor to Lessee, succeed to all the rights, powers and title of Lessor hereunder and shall be deemed to be Lessor for all purposes hereof and without in any way altering the terms of this Lease or Lessee's obligations hereunder. Such transfer to a successor Lessor shall not exhaust the right to any further transfer to another successor Lessor pursuant to said Section 6.2, but such right may be exercised repeatedly as long as this Lease shall be in effect. SECTION XXI.15. Survival. The obligations of Lessee to be performed under this Lease prior to the Lease Termination Date and the obligations of Lessee pursuant to Sections 4.1, 4.2, 4.4, 4.5, Article XVIII and Section 21.1 shall survive the expiration or termination of this Lease. The extension of any applicable statute of limitations by Lessor, Agent, Lessee or any other Indemnitee shall not affect such survival. SECTION XXI.16. Transfer of Sites to Lessee or any other Person. Whenever pursuant to any provision of this Lease Lessor is required to transfer the Sites to Lessee or to any other Person, such transfer shall be made at Lessee's expense (including, without limitation, all costs of conveyance, applicable transfer taxes and recording fees without regard to local custom) by the quitclaim transfer of all of Lessor's right, title and interest in and to the Sites on an "as is, where is, with all faults" basis free and clear of all Lessor Liens, but subject to the Lien of the Loan Agreement if and to the extent it may then attach, and otherwise without recourse, representation or warranty of any kind, and together with the due assumption by Lessee (or such third party) of, and due release of Lessor from, all obligations relating to the Sites or the Operative Documents. Any provision in this Lease or other Operative Document to the contrary notwithstanding, Lessor shall not be obligated to make any such transfer until Lessor has received all Rent and other amounts due and owing hereunder. SECTION XXI.17. Enforcement of Certain Warranties. (a) Unless a Lease Event of Default shall have occurred and be continuing, Lessor authorizes Lessee (directly or through agents), at Lessee's expense, to assert, during the Lease Term, all of Lessor's rights (if any) under any applicable warranty and any other claim that Lessee or Lessor may have under the warranties provided to Lessor in connection with the purchase, of the Sites and Lessor agrees to cooperate, at Lessee's expense, with Lessee and its agents 56 Lease Agreement in asserting such rights. Any amount recovered by Lessee under any such warranties shall be paid to Lessee. (b) Notwithstanding the foregoing provisions of this Section 21.17, so long as a Lease Event of Default or Lease Payment/Bankruptcy Default shall have occurred and be continuing, any amount that would otherwise be retained by Lessee pursuant to Section 21.17(a) shall be paid to Lessor as security for the obligations of Lessee under this Lease, shall be invested by Lessor in accordance with Section 21.18 in Permitted Investments and, if a Lease Event of Default is continuing, may be applied to the obligations of Lessee hereunder, and, at such time thereafter as no Lease Event of Default or Lease Payment/Bankruptcy Default shall be continuing, such amount and gain thereon shall be paid promptly to Lessee to the extent not previously applied in accordance with the terms of this Lease. SECTION XXI.18. Investment of Security Funds. Any amounts not payable to Lessee and paid to or retained by Lessor pursuant to any provision hereof solely because a Lease Event of Default or Lease Payment/Bankruptcy Default shall have occurred and be continuing or because Lessee shall not have performed in full its obligations under Article XIII shall be held by Lessor as security for the obligations of Lessee under this Lease and the other Operative Documents. At such time as no Lease Event of Default or Lease Payment/Bankruptcy Default, or failure to perform shall be continuing, such amounts, net of any amounts previously applied to Lessee's obligations hereunder or under any other Operative Documents, shall be paid to Lessee. Any such amounts which are held pending payment to Lessee or application hereunder shall be invested by Lessor (or Agent) as directed from time to time in writing by Lessee (provided, however, if a Lease Event of Default has occurred and is continuing it will be directed by Lessor), and at the expense and risk of Lessee, in Permitted Investments. Any gain (including interest received) realized as the result of any such investment (net of any fees, commissions and other expenses, if any, incurred in connection with such investment) shall be applied from time to time in the same manner as the principal invested. Lessee will promptly pay to Lessor on demand, the amount of any loss realized as the result of any such investment (together with any fees, commissions and other expenses, if any, incurred in connection with such investment), such amount to be held, paid and applied in the same manner as other amounts subject to this Section 21.18. 57 Lease Agreement SECTION XXI.19. Recording of Lease Supplements. Concurrently with the execution and delivery of this Lease and concurrently with the execution and delivery of each Lease Supplement, Lessor and Lessee shall execute, acknowledge and cause to be recorded each such Lease Supplement in the official records of each County where the Site(s) that are the subject of this Lease or such Lease Supplement are located. Notwithstanding the execution, delivery and recording of any such Lease Supplement, the terms, covenants and conditions of this Lease shall control. SECTION XXI.20. Nature of Transaction. (a) It is the intent of the parties hereto that: (i) the transaction contemplated hereby constitutes an operating lease from Lessor to Lessee for purposes of Lessee's financial reporting, (ii) the transaction contemplated hereby preserves ownership in the Sites to Lessee for purposes of Federal and state tax and bankruptcy purposes, (iii) Lessee, pursuant to the Lease, grants a security interest or lien, as the case may be, in the Sites and the other Collateral to Lessor, (iv) for purposes of Federal and state tax and bankruptcy purposes, the payment by Lessee of the portions of Basic Rent described in clauses (i) and (ii) of the definition thereof shall be treated as payments of interest, and the payment by Lessee of the portions of Basic Rent described in clause (iii) of the definition thereof and any other amounts in respect of the Lease Balance shall be treated as repayments of principal, and (v) the Mortgage and Assignment of Lease create a lien and security interest in the Sites, subject to certain limited exceptions. Nevertheless, Lessee acknowledges and agrees that none of Lessor, Agent or any Lender has provided or will provide tax, accounting or legal advice to Lessee regarding the Overall Transaction or made any representations or warranties concerning the tax, accounting or legal characteristics of the Operative Documents and that Lessee has obtained and relied upon such tax, accounting and legal advice concerning the Operative Documents as it deems appropriate. (b) Specifically, without limiting the generality of subsection (a) of this Section 21.20, but understanding that the parties' characterization is not the sole determinant of the issue, the parties hereto intend and agree that with respect to the nature of the transactions evidenced by this Lease in the context of the exercise of remedies under the Operative Documents, relating to and arising out of any insolvency or receivership proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statute of the United States of America or any State or Commonwealth thereof 58 Lease Agreement affecting Lessee, Lessor or any Lender or any enforcement or collection actions, the transactions evidenced by the Operative Documents are loans made by the Lenders as unrelated third party lenders to Lessee secured by the Sites. 59 Lease Agreement IN WITNESS WHEREOF, the undersigned have each caused this Lease to be duly executed and delivered by their respective officers thereunto duly authorized as of the day and year first above written. MELLON FINANCIAL SERVICES CORPORATION #4, as Lessor By:_______________________________ Name Printed: Robert C. Carpenter Title: Assistant Vice President Address: One Mellon Bank Center Rm 151-4444 Pittsburgh, PA 15258-0001 Attention: Leasing Group GENESIS ELDERCARE PROPERTIES, INC., as Lessee By:_____________________________ Name Printed: _________________ Title: ________________________ Address: 148 West State Street Kennett Square, PA 19348 Attn: George V. Hager, Jr. 60 Lease Agreement RECEIPT FOR COUNTERPART NO. 1 MELLON BANK, N.A., as Agent By:________________________________ Name Printed: Carol Paige Title: Vice President 61 Lease Agreement STATE OF PENNSYLVANIA ) ) SS.: COUNTY OF ______________ ) The foregoing Lease Agreement was acknowledged before me, the undersigned Notary Public, in the County of _______________, State of Pennsylvania, this ____ day of October, 1996, by Carol Paige, as Vice President of MELLON BANK, N.A., a national banking association, on behalf of the such national banking association. [Notarial Seal] _________________________ Notary Public My commission expires:________________ 62 Lease Agreement STATE OF PENNSYLVANIA ) ) SS.: COUNTY OF ________ ) The foregoing Lease Agreement was acknowledged before me, the undersigned Notary Public, in the County of ______, State of Pennsylvania, this ____ day of October, 1996, by ___________________, as _________ of GENESIS ELDERCARE PROPERTIES, INC., a Pennsylvania corporation, on behalf of the corporation. [Notarial Seal] _________________________ Notary Public My commission expires: _____________________ 63 Lease Agreement STATE OF PENNSYLVANIA ) ) SS.: COUNTY OF __________ ) The foregoing Lease Agreement was acknowledged before me, the undersigned Notary Public, in the County of ______, State of Pennsylvania, this ____ day of October, 1996, by Robert C. Carpenter, as Assistant Vice President of MELLON FINANCIAL SERVICES CORPORATION #4, a Pennsylvania corporation, on behalf of the corporation. [Notarial Seal] _________________________ Notary Public My commission expires: ____________________ 64 Lease Agreement SCHEDULE I to LEASE AGREEMENT DESCRIPTION OF INITIAL SITES Atlantis Rehabilitation and Health Care Center Old Congress Road, Lantana, Florida; Bowman's Health Care Center South Ridgewood, Ormand Beach, Florida; Eagle Crest Nursing Center Parental Home Road, Jacksonville, Florida; Oakwood Rehabilitation and Health Care Center South East Bay Street, Eustis, Florida; Tierra Pines Health Care Center Ulmerton Road, Largo, Florida; Woodlands Nursing Center North 46th Street, Tampa, Florida; Williamsburg Health Care and Rehabilitation Center Mount Vernon Avenue, Williamsburg, Virginia; Winham Main Street, Route 240, Crozet, Virginia; Woodmont Health Care Center Dairy Lane, Fredrickburg, Virginia Attached hereto are legal descriptions for the above-described Sites. Lease Agreement Atlantis Legal Description A tract of land in Section 6, Township 45 South, Range 43 East, Palm Beach County, Florida, said parcel of land being specifically described as follows, to wit: BEGINNING at a point 33.00 feet West of the East line of said Section 6 and 40.00 feet South of the North line of said Section; thence bear South 00(degree) 10' 40" West, along a line parallel to and 33.00 feet West of, as measured at right angles to, the East line of said Section 6, a distance of 257.00 feet; thence North 89(degree) 55' 30" West, along a line parallel to the North line of said Section, a distance of 350.20 feet; thence North 00(degree) 10' 40" East, along a line parallel to the East line of said Section, a distance of 257 feet to a point on the South right-of-way line of the Lake Worth Drainage District Lateral No. 16; thence South 89(degree) 55' 30" East along said South right-of-way line, said line being parallel to and 40.00 feet South of, as measured at right angles to, the North line of said Section, a distance of 350.20 feet to the POINT OF BEGINNING. Said lands situate, lying and being in Palm Beach County, Florida. Tax Assessor's No. PCN 00-43-45-06-00-000-1051 2 Lease Agreement Bowman's Legal Description Lots 7, 8, 9, 10, 11 and 12, Block 2, HAND TRACT IN THE THOMAS FITCH GRANT, according to the map thereof, as recorded in Map Book P, Page 1, of the Public Records of Volusia County, Florida. 3 Lease Agreement Eagle Crest Legal Description That certain piece, parcel or tract of land, situate, lying and being a part of Farm 10, as shown on the Plat of Love Grove Farms, as recorded in Plat Book 7, page 3 of the current public records of Duval County, Florida, and being more particularly described as follows: Beginning at the Southeast corner of those lands shown on Plat of Sans Souci Estates Unit 2, as recorded in Plat Book 29 page 25 of said public records, said point also being the Southwest corner of said Farm 10; thence North 2 degrees 06 minutes 20 seconds East along the East line of said Sans Souci Estates, Unit 2, 342.62 feet; thence North 78 degrees 33 minutes 20 seconds East, 608.72 feet to the Southwesterly right of way line of Dean Road (a 50-foot right of way as now established by possession and usage); thence South 19 degrees 20 minutes 20 seconds East along said Southwesterly right of way line of Dean Road, 215.28 feet to its intersection with the Westerly right of way line of Parental Home Road (a 66-foot right of way as now established); thence South 8 degrees 14 minutes 00 seconds West along said Westerly right of way line of Parental Home Road, 286.04 feet to its intersection with the South line of said Farm 10; thence North 87 degrees 56 minutes 10 seconds West along said South line of Farm 10, 639.95 feet to the point of beginning. 4 Lease Agreement Oakwood Legal Description A tract of land located in the City of Eustis, Section 11, Township 19 South, Range 26 East, Lake County, Florida, and being Lots 1 to 16, inclusive, of Block 34, in Pendryville, a subdivision in the City of Eustis, Florida, according to the plat thereof recorded in Plat Book 1, Page 45, of the Public Records of Lake County, Florida, and also being otherwise described as Lots 1 to 16, inclusive, of Block 84, in the City of Eustis, Florida, according to the plat thereof recorded in Plat Book 1, Page 79, Public Records of Lake County, Florida, and being measured and described as follows: Beginning at a concrete monument located at the intersection of the Southerly edge of the right-of-way of Lemon Avenue (a 66-foot wide right-of-way) and the Westerly edge of Eustis Street (a 66- foot wide right-of-way); thence running Southerly along the Westerly edge of the right-of-way of Eustis Street, a distance of 264.35 feet to a concrete monument at the point of intersection of said Westerly edge of the right-of-way of Eustis Street and the Northerly edge of the right-of-way of Ward Avenue (a 66-foot wide right-of-way); thence running Westerly along a course making an interior angle of 89(degree)59'36" with the preceding course, a distance of 263.96 feet along the Northerly edge of the right-of-way of Ward Avenue to the point of intersection of said Northerly edge of the right-of-way of Ward Avenue with the Easterly edge of the right-of-way of Bay Street (a 66-foot wide right-of-way), said point being marked by an "X" cut in a retaining wall; thence running Northerly along a course making an interior angle of 90(degree)07'44" with the preceding course, a distance of 264.29 feet along the Easterly edge of the right-of-way of Bay Street, to the intersection of said Easterly right-of-way of Bay Street, with the Southerly edge of Lemon Avenue, said intersecting point being presently marked by an "X" cut in a sidewalk to an old residence; thence running Easterly along a course making an interior angle of 89(degree)53'03" with the preceding course, a distance of 264.59 feet along the Southerly edge of the right-of-way of Lemon Avenue to the point of beginning. 5 Lease Agreement Tierra Pines Legal Description Parcel 1: Commence at the Northeast corner of the Northwest 1/4 of Section 7, Township 30 South, Range 16 East, Pinellas County, Florida; thence North 87 deg 36 min 11 sec West along the North boundary of the Northwest 1/4 of said Section 7, 768.79 feet; thence South 00 deg 18 min 30 sec East, 75.00 feet Westerly of and parallel to the East boundary of Lot 2 of Pinellas Groves Subdivision of the Northwest 1/4 of said Section 7, as recorded in Plat Book 1, Page 55 of the public records of Pinellas County, Florida, 72.08 feet to a Point of Beginning; thence continue South 00 deg 18 min 30 sec East along the West boundary of a 50 foot wide non-exclusive easement recorded in O.R. Book 4636, Page 1802 of the public records of Pinellas County, Florida, 606.00 feet; thence North 87 deg 36 min 11 sec West, 215.00 feet; thence North 00 deg 18 min 30 sec West, 606.00 feet; thence South 87 deg 36 min 11 sec East along the Southerly right-of-way line of Ulmerton Road, 215.00 feet to the Point of Beginning. Parcel 2: Commence at the Northeast corner of the Northwest 1/4 of Section 7, Township 30 South, Range 16 East, Pinellas County, Florida; thence North 87 deg 36 min 11 sec West along the North boundary of the Northwest 1/4 of said Section 7, 743.76 feet; thence South 00 deg 18 min 30 sec East, 50.00 feet Westerly of and parallel to the East boundary of Lot 2 of Pinellas Groves Subdivision of the Northwest 1/4 of said Section 7, as recorded in Plat Book 1, Page 55 of the public records of Pinellas County, Florida, 72.08 feet to a Point of Beginning; thence continue South 00 deg 18 min 30 sec East along the centerline of a 50.00 foot wide non-exclusive easement recorded in O.R. Book 4636, Page 1802 of the public records of Pinellas County, Florida, 606.00 feet; thence North 87 deg 36 min 11 sec West, 25.03 feet; thence North 00 deg 18 min 30 sec West, 606.00 feet; thence South 87 deg 36 min 11 sec East along the Southerly right-of-way line of Ulmerton Road, 25.03 feet to the Point of Beginning. TOGETHER WITH a non-exclusive easement for ingress, egress, utilities and drainage, described as follows: The Westerly 25.00 feet of the Easterly 50.00 feet of the Southerly 605.32 feet of the Northerly 677.32 feet of Lot 2 of Pinellas Groves Subdivision of the Northwest 1/4 of said Section 6 Lease Agreement 7, Township 30 South, Range 16 East, as recorded in Plat Book 1, Page 55 of the public records of Pinellas County, Florida. 7 Lease Agreement Woodlands Legal Description The South 1/2 of the Southeast 1/4 of the Northeast 1/4 of the Southwest 1/4 of Section 4, Township 28 South, Range 19 East, LESS the East 25 feet thereof for road right-of-way, all lying and being in Hillsborough County, Florida. 8 Lease Agreement Williamsburg Legal Description ALL those certain lots, pieces or parcels of land located in the City of Williamsburg, Virginia, on the eastern most line of Mount Vernon Avenue, together with all improvements thereon and appurtenances thereto belonging, which are shown on a certain plat of survey dated March 10, 1989, by Harvey L. Parks, Inc., entitled "PLAT OF TWO PARCELS OF LAND WITH IMPROVEMENTS SHOWN THEREON, SITUATED ON THE EASTERN MOST LINE OF MOUNT VERNON AVENUE IN THE CITY OF WILLIAMSBURG, VIRGINIA.", and being more particularly described as follows: BEGINNING at a rod found on the northern line of Mount Vernon Avenue (55' R/W), said rod being 196.91' from the intersection with the southern line of Monticello Avenue, and running from said rod in a northerly direction N 49 degrees 37' 30" E a distance of 199.54' to a rod; thence S 40 degrees 22' 30" E a distance of 580.62' to a rod; thence S 49 degrees 37' 30" W a distance of 193.75' to a rod on the northern right-of-way line of Mount Vernon Avenue; thence along the northern right-of-way line of Mount Vernon Avenue along a curve to the right with a radius of 322.50' a length of 63.59' to a rod; thence along said right-of-way line N 40 degrees 22' 30" W a distance of 496.95' to a rod; thence continuing along said right-of-way on a curve to the right with a radius of 472.50' a length of 20.53' to a rod found, being the point and place of beginning, containing 2.663 acres, more or less, all in the City of Williamsburg, Virginia further described as Parcel No. 2 and Parcel No. 3, as shown on plat of survey made by Harvey L. Parks, Inc., dated March 10, 1989, a copy of which is attached to the Deed of Trust, recorded February 6, 1990, in the Clerk's Office, Circuit Court, City of Williamsburg, Virginia, in Deed Book 90, at page 710, reference to which is made for a more particular description. BEING the same property conveyed to The Industrial Development Authority of the City of Hopewell, Virginia, by deed from United Health Services, Inc., a Virginia corporation, dated October 14, 1976, recorded October 15, 1976, in the Clerk's Office, Circuit Court, City of Williamsburg, Virginia, in Deed Book 54, page 167. 9 Lease Agreement Windham Legal Description PARCEL ONE: ALL that certain lot, piece or parcel of land, with all improvements thereon and appurtenances thereto belonging, lying and being in White Hall District of Albemarle County, Virginia, containing 0.856 acres according to plat entitled "Plat Showing 0.856 Acre of Land With Improvements Shown, Situated On The Western Line of State Route No. 240, Lying in Crozet, White Hall District, Albemarle County, Virginia", made by Harvey L. Parks, Inc., dated March 15, 1989, and recorded in the Clerk's Office of the Circuit Court of Albermarle County, Virginia, in Deed Book 1086, page 505. BEGINNING at a rod found at the intersection of the northern property line of Parcel 62 owned by National Health Care Affiliates, Inc., and the eastern right of way line of High Street, running from said rod in a northerly direction N 26 degrees 12' 51" E a distance of 57.17' to a rod; thence S 74 degrees 17' 10" E a distance of 186.00' to a rod; thence S 58 degrees 47' 06" E a distance of 99.11' to a rod; thence S 65 degrees 06' 06" E a distance of 100.11' to a rod; thence S 37 degrees 06' 06" E a distance of 42.55' to a P.K. Nail found on the northern line of State Route No. 240; thence along the northern line of State Route No. 240 S 32 degrees 18' 45" W a distance of 62.72' to a point; thence continuing along the northern line of State Route No. 240 S 29 degrees 27' 54" W a distance of 40.88' to a point on the northern boundary line of property owned by the VA. National Bank (Parcel 60); thence N 64 degrees 36' 31" W a distance of 212.70' to a rod; thence N 25 degrees 40' 17" E a distance of 31.48' to a rod; thence S 64 degrees 21' 49" E a distance of 30.00' to a rod; thence N 25 degrees 38' 11" E a distance of 10.22' to a rod; thence S 64 degrees 21' 49" E a distance of 32.00" to a rod; thence N 25 degrees 38' 11" E a distance of 30.00' to a rod, thence N 64 degrees 21' 49" W a distance of 125.00' to a rod; thence S 25 degrees 38' 11" W a distance of 29.16' to a rod; thence N 64 degrees 19' 43" W a distance of 134.66' to a rod found, being the point and place of beginning, containing 0.856 acre, more or less, all in Crozet, White Hall District of Albemarle County, Virginia, as shown on plat of survey by Harvey L. Parks, Inc., dated March 15, 1989. Together with a non-exclusive easement, with maintenance 10 Lease Agreement agreement, 10 feet in width for vehicular and pedestrian traffic, parking and ingress and egress from State Route 240, recorded in the Clerk's Office of the Circuit Court of Albermarle County, Virginia, in Deed Book, 779, page 239. BEING the same property conveyed to the Industrial Development Authority of Albemarle County, Virginia, by deed from Windham, Incorporated, a Virginia corporation, dated January 1, 1980, recorded January 29, 1980, in the Clerk's Office, Circuit Court, Albemarle County, Virginia, in Deed Book 688, page 476, and leased to Windham, Incorporated by instrument dated January 1, 1980, recorded in the Clerk's Office, Circuit Court, Albermarle County, Virginia, in Deed Book 688, page 481. By Articles of Merger recorded May 21, 1984 in the aforesaid Clerk's Office in Deed Book 799, page 341, Windham, Incorporated merged into United Service Industries, Inc. By Certificate of Merger issued by the Commonwealth of Virginia State Corporation Commission on February 10, 1984, United Service Industries, Inc., a Virginia corporation merged into National Health Care Affiliates, Inc., a Florida corporation, thereby vesting fee simple title in the name of National Health Care Affiliates, Inc. PARCEL TWO: ALL that certain lot, piece or parcel of land, with all improvements thereon and appurtenances thereto belonging, lying and being in White Hall District of Albemarle County, Virginia, containing 0.2905 acre according to plat entitled "Plat of 0.2905 Acre Of Land, With Improvements Shown, Situated On The Eastern Line Of High Street, Lying in Crozet, White Hall District of Albemarle County, Virginia", made by Harvey L. Parks, Inc., dated March 15, 1989, recorded in the Clerk's Office of the Circuit Court of Albemarle County, Virginia, in Deed Book 1086, page 507. BEGINNING at a spike found at the intersection of the southern line of High Street and the northern property line of Va. National Bank (Parcel 60A), and running from said spike along the southern line of High Street in a northerly direction N 26 degrees 12' 51" E a distance of 44.91' to a pipe; thence S 64 degrees 19' 43" E a distance of 134.66' to a rod; thence N 25 degrees 38' 11" E a distance of 29.16' to a rod; thence S 64 degrees 21' 49" E a distance of 125.00' to a rod; thence S 25 degrees 38' 11" W a distance of 30.00' to a rod; thence N 64 degrees 21' 49" W a distance of 32.00' to a rod; thence S 25 degrees 38' 11" W a distance of 10.22' to a rod; thence N 64 degrees 21' 49" W a distance of 30.00' to a rod; thence S 25 degrees 40' 17" W a distance of 31.48' to a rod; thence N 65 degrees 01' 29" W a distance of 198.11' to a spike found, being 11 Lease Agreement the point and place of beginning, containing 0.2905 acre, more or less, all in Crozet, White Hall District of Albemarle County, Virginia, further described as Parcel 62, as shown on plat of survey made by Harvey L. Parks, Inc., dated March 15, 1989, recorded in Deed Book 1086, page 507. TOGETHER WITH a non-exclusive easement, with maintenance agreement, 10 feet in width for vehicular and pedestrian traffic, parking and ingress and egress from State Route 240, recorded in the Clerk's Office of the Circuit Court of Albemarle County, Virginia, in Deed Book 779, page 239. BEING the same real estate conveyed to Central Virginia Health Facilities, Inc., a Virginia corporation, by deed of exchange from Julia Sharp Vergara, divorced, dated January 4, 1979, recorded in the Clerk's Office of the Circuit Court of Albemarle County, Virginia, in Deed Book 664, page 615, and a portion conveyed to Central Virginia Health Facilities, Inc., recorded in Deed Book 655, page 191. By Consent of Shareholder, dated June 29, 1979; Plan of Merger of Central Virginia Health Facilities, Inc., with and into United Service Industries, Inc., dated June 30, 1979; and by Certificate of Merger issued by the Commonwealth of Virginia State Corporation Commission on February 10, 1984, United Service Industries, Inc., a Virginia corporation merged into National Health Care Affiliates, Inc., a Florida corporation, thereby vesting fee simple title in the name of National Health Care Affiliates, Inc., a Florida corporation. PARCEL THREE: ALL that certain lot of land situated in Albemarle County, Virginia, in Crozet, fronting on State Route 240 parallel to the C & O Railroad and bounded on the south by the land owned by the Industrial Development Authority of Albemarle County and on the west by High Street, on the east by State Route 240 and on the north by the C & O Railroad. BEING a portion of the same property conveyed to The Miller Manual School of Albemarle by the following deeds from: (i) Abraham Wayland and Martha T. Wayland, dated September 10, 1894, recorded in the Clerk's Office, Circuit Court, Albemarle County, Virginia, in Deed Book 102, page 231; and (ii) R.T.W. Duke, Commissioner of Circuit Court of Albemarle County, dated May 25, 1887, recorded June 13, 1887, in the Clerk's Office, Circuit Court, Albemarle County, Virginia, in 12 Lease Agreement Deed Book 88, page 103. Leased to National Health Care Affiliates by instrument dated January 1, 1979, recorded in Deed Book 786, page 655. 13 Lease Agreement PARCEL FOUR: ALL that certain lot, piece or parcel of land, with all improvements thereon and appurtenances thereto belonging, lying and being in White Hill District of Albemarle County, Virginia, containing 0.3927 acre according to plat entitled "Plat Showing 0.3927 Acre Of Land With Improvements Shown Situated On The Eastern Line Of High Street, Lying in Crozet, White Hill District of Albemarle County, Virginia", made by Harvey L. Parks, Inc., dated March 15, 1989, recorded in the Clerk's Office of the Circuit Court of Albemarle County, Virginia, in Deed Book 1086, page 506. BEGINNING at a rod found at the intersection of southern line of High Street and the northern property line of Stanley P. Wilcox (Parcel 56) and running from said rod in a northerly direction along the southern line of High Street N 32 degrees 06' 32" E a distance of 60.15' to a spike; thence S 57 degrees 40' 33" E a distance of 102.86' to a rod; thence S 32 degrees 21' 53" W a distance of 48.93' to a P.K. set; thence S 57 degrees 38' 07" E a distance of 109.00' to a P.K. set; thence N 32 degrees 21' 53" E a distance of 49.01' to a rod; thence S 57 degrees 40' 33" E a distance of 162.60 feet to a P.K. set on the northern line of State Route No. 240; thence along the northern line of State Route No. 240 S 34 degrees 00' W a distance of 60.33' to a P.K. set; thence N 57 degrees 34' 43" W a distance of 215.56' to a spike set; thence N 57 degrees 44' 44" W a distance of 156.91' to a rod found, being the point and place of beginning, containing 0.3927 acre, more or less, all in Crozet, White Hall District of Albemarle County, Virginia, as shown on plat of survey made by Harvey L. Parks, Inc., dated March 15, 1989, recorded in Deed Book 1086, page 506. TOGETHER WITH the right of way of ingress and egress over 10-foot strip as described in deed recorded in Deed Book 170, page 370, which strip adjoins the lot hereby conveyed on its southern boundary by instrument recorded in the Clerk's Office, Circuit Court, Albemarle County, Virginia, in Deed Book 695, page 232. TOGETHER WITH perpetual non-exclusive easement, with maintenance agreement, for vehicular and pedestrian traffic, parking and ingress and egress as recorded in the Clerk's Office, Circuit Court, Albemarle County, Virginia, in Deed Book 695, page 237. TOGETHER WITH a non-exclusive easement, with maintenance agreement, 10-feet in width for vehicular and pedestrian traffic, parking and ingress and egress from State Route 240 recorded in the Clerk's Office, Circuit Court, Albemarle County, Virginia, in 14 Lease Agreement Deed Book 779, page 239. BEING a part of the same real estate conveyed to United Service Industries, Inc., by the following deeds from: (i) Virginia National Bank, a national banking association, dated April 25, 1983, recorded June 15, 1983, in the Clerk's Office, Circuit Court, Albemarle County, Virginia, in Deed Book 766, page 29; and (ii) Central Fidelity Bank Charlottesville, a Virginia corporation, dated June 13, 1980, recorded June 20, 1980, in the aforesaid Clerk's Office, in Deed Book 695, page 232. By Certificate of Merger issued by the Commonwealth of Virginia State Corporation Commission on February 10, 1984, United Service Industries, Inc., a Virginia corporation merged into National Health Care Affiliates, Inc., a Florida corporation, thereby vesting fee simple title in the name of National Health Care Affiliates, Inc. 15 Lease Agreement Woodmont Legal Description All that certain tract or parcel of land, situate lying and being in Falmouth District, Stafford County, Virginia, containing 8.770 acres, as shown on plat of survey shown as Parcels 1 and 2 on plat of survey made by Potts, Minter & Associates, P.C., dated May 31, 1996, and further described as: Beginning at a point on the southern line of State Route 607, and from said point and place of beginning along a curve to the right with a radius of 2754.87 feet and an arc length of 214.97 feet, having a chord bearing South 46(degree)27'37" West and a distance of 214.92 feet to a point; thence along a curve to the right with a radius of 2277.50 feet, an arc length of 429.29, a chord bearing South 54(degree)05'44" West, and a distance of 428.65 feet to a point; thence, North 30(degree)30'14" West 40.00 feet to a point; thence along a curve to the right with a radius of 2237.50 feet, an arc length of 668.34 feet, a chord bearing South 68(degree)03'11" West, and a distance of 665.86 feet to a point; thence, South 76(degree)36'37" West 218.25 feet to a point; thence North 13(degree)23'23" West 362.21 feet to a point; thence, north 66(degree)54'00" East 209.00 feet to a point; thence, South 23(degree)06'00" East, 55.00 feet to a point; thence, North 66(degree)54'00" East, 100.00 feet to a point; thence, North 23(degree)06'00" West, 55.00 feet to a point; thence, North 66(degree)54'00" East, 364.44 feet to a point; thence South 37(degree)25'55" East, 191.34 feet to a point; thence, along a curve to the left with a radius of 230.00 feet, and an arc length of 370.11 feet to a point; thence along a non-tangent curve to the left with a radius of 248.41 feet, an arc length of 83.65 feet, a chord bearing North 18(degree)37'39" East 83.27 feet to a point; thence, North 08(degree)58'45" East, 193.51 feet to a point; thence, along the centerline of the old Route 607 South 81(degree)01'15" East, 80.01 feet to a point; thence, continuing along said old Route 607 South 85(degree)03'45" East, 263.09 feet to a point and place of beginning 8.770 acres. Parcel 1 is the same property conveyed to National Health Care Affiliates, Inc., by deed of Industrial Development Authority of Stafford County, Virginia, dated April 1, 1989, recorded in Deed Book 669, at Page 469, in the Clerk's Office of the Circuit Court of Stafford County, Virginia. 16 Lease Agreement Parcel 2 is part of the same property conveyed to United Health Services, Incorporated, by deed from Woodmont, Incorporated, dated November 19, 1975, recorded in Deed Book 281, page 492 in the aforesaid Clerk's Office. By Articles of Amendment recorded in Deed Book 549, page 101, United Health Services, Incorporated changed their name to United Service Industries, Incorporated. By Articles of Merger recorded in Deed Book 458, page 158, United Service Industries, Inc. merged into National Health Care Affiliates, Inc. EXHIBIT A TO LEASE AGREEMENT FORM OF LEASE SUPPLEMENT AND MEMORANDUM OF LEASE AND AGREEMENT THIS LEASE SUPPLEMENT AND MEMORANDUM OF LEASE AND AGREEMENT dated _____________, 19__ (this "Lease Supplement") is between MELLON FINANCIAL SERVICES CORPORATION #4, as Lessor (the "Lessor"), and GENESIS ELDERCARE PROPERTIES, INC., a Pennsylvania corporation and a wholly-owned subsidiary of Genesis Health Ventures, Inc., as Lessee (the "Lessee"); W I T N E S S E T H: WHEREAS, Lessee and Lessor have heretofore entered into that certain Amended and Restated Lease and Agreement dated as of October 7, 1996 (as amended, supplemented, or otherwise modified from time to time, the "Lease"). Unless otherwise defined herein, capitalized terms used herein shall have the meanings specified in the Lease; and WHEREAS, the Lease provides for the execution and delivery of a Lease Supplement on each Site Acquisition Closing Date substantially in the form hereof for the purpose of confirming the acceptance and lease of certain Site(s), specifying the Rent applicable to such Site(s) and setting forth certain other matters, all as required pursuant to the Lease; NOW, THEREFORE, in consideration of the premises and other good and sufficient consideration, Lessor and Lessee hereby agree as follows: 1. Delivery and Acceptance. Lessor hereby delivers and leases to, and confirms delivery and lease to, Lessee, and Lessee hereby accepts delivery and leases, and confirms acceptance of delivery and lease, from Lessor, under the Lease as hereby supplemented, of the Site(s) listed on Schedule I hereto. The term "Site" includes, without limitation, all of the right, title and interest of Lessor Lease Supplement or Lessee in and to the following and any proceeds (including, without limitation, insurance and condemnation proceeds) thereof: (A) the real property described in Schedule I attached hereto (the "Land"); all buildings, structures and other improvements now or in the future located on the Land (the "Improvements"; the Improvements and the Land are sometimes collectively referred to herein as the "Property"); (B) all the estate, right, title, claim or demand whatsoever of Lessor or Lessee, in possession or expectancy, in and to the Property or any part thereof; (C) all right, title and interest of Lessor in and to all of the fixtures, furnishings and fittings of every kind and nature whatsoever, and all appurtenances and additions thereto and substitutions or replacements thereof (together with, in each case, attachments, components, parts and accessories) currently owned or subsequently acquired by the Mortgagor and now or subsequently attached to, or contained in or used or usable in any way in connection with any operation or letting of the Property (all of the foregoing in this paragraph (C) being referred to as the "Fixtures"); (D) all right, title and interest of Lessor or Lessee in and to all of the fixtures, chattels, business machines, machinery, apparatus, equipment, furnishings, fittings and articles of personal property of every kind and nature whatsoever, and all appurtenances and additions thereto and substitutions or replacements thereof (together with, in each case, attachments, components, parts and accessories) currently owned or subsequently acquired by Mortgagor and now or subsequently attached to, or contained in or used or usable in any way in connection with any operation or letting of the Property, including but without limiting the generality of the foregoing, all screens, awnings, shades, blinds, curtains, draperies, artwork, carpets, rugs, storm doors and windows, furniture and furnishings, heating, electrical, and mechanical equipment, lighting, switchboards, plumbing, ventilating, air conditioning and air-cooling apparatus, refrigerating, and incinerating equipment, escalators, refrigerators, elevators, loading and unloading equipment and systems, stoves, ranges, laundry equipment, cleaning systems (including window cleaning apparatus), telephones, communication systems (including satellite dishes and antennae), televisions, computers (excluding software), sprinkler systems and other fire 2 Lease Supplement prevention and extinguishing apparatus and materials, security systems, motors, engines, machinery, pipes, pumps, tanks, conduits, appliances, fittings and fixtures of every kind and description (all of the foregoing in this paragraph (D) being referred to as the "Equipment"); (E) all right, title and interest of Lessor or Lessee in and to all substitutes and replacements of, and all additions and improvements to, the Improvements and the Fixtures and Equipment, subsequently acquired by Lessor or Lessee or constructed, assembled or placed by Lessor or Lessee on the Land, immediately upon such acquisition, release, construction, assembling or placement, including, without limitation, any and all building materials whether stored at the Property or offsite, and, in each such case, without any further lease, mortgage, conveyance, assignment or other act by Lessor or Lessee; (F) all right, title and interest of Lessor or Lessee in, to and under all books and records relating to or used in connection with the operation of the Property or the Fixtures or any part thereof; and all general intangibles related to the operation of the Improvements now existing or hereafter arising; and (G) all right, title and interest of Lessor or Lessee in and to (to the extent assignable) (i) all consents, licenses, building permits, certificates of occupancy and other governmental approvals relating to construction, completion, occupancy, use or operation of the Property or any part thereof and (ii) all plans and specifications relating to the Property. 2. Warranty. Lessee hereby represents and warrants that no event which would constitute a Casualty or an Event of Taking and no notice of such Casualty or Event of Taking has been given to Lessee or any of its Affiliates with respect to the Sites under the Lease has occurred with respect to the Sites set forth on Schedule I hereto as of the date hereof. Lessee hereby reaffirms each of the representations and warranties set forth at Section 4.1 of the Participation Agreement as if made on the date hereof, except to the extent any such representation and warranty relates to an earlier date, including the Sites set forth on Schedule I hereto are free and clear of all Liens other than Permitted Liens. 3. Term, Applicable Percentage. The term of this 3 Lease Supplement Lease Supplement shall commence on the date hereof and end on the Lease Termination Date. The Applicable Percentage on each Payment Date is set forth in the appropriate portion of Schedule II. 4. Renewal Terms, Lessee's Cost and Estimated Sales Costs. With respect to the Sites covered by this Lease Supplement and subject to the consent of the Participants pursuant to Section 2.10 of the Participation Agreement, Lessee shall have a five-year renewal option to be exercised pursuant to Section 6.1 of the Lease. The estimated sales costs for the Sites are set forth in Schedule II attached hereto. 5. Confirmation. Lessee hereby confirms its agreement, in accordance with the Lease as supplemented by this Lease Supplement, to pay Rent to Agent, for the benefit of Lessor, for the Sites leased hereunder. Nothing herein shall reduce Lessee's obligation to make all other payments required under the Lease, including those payments to be made on the last day of the Lease Term pursuant to Article VI of the Lease. 6. Incorporation into Lease. This Lease Supplement shall be construed in connection with and as part of the Lease, and all terms, conditions and covenants contained in the Lease, as supplemented by this Lease Supplement, shall be and remain in full force and effect and shall govern the Sites described in Schedule I hereto. 7. References. Any and all notices, requests, certificates and other instruments executed and delivered concurrently with or after the execution and delivery of this Lease Supplement may refer to the "Lease Agreement, dated as of October 7, 1996", or may identify the Lease in any other respect without making specific reference to this Lease Supplement, but nevertheless all such references shall be deemed to include this Lease Supplement, unless the context shall otherwise require. 8. Recording. Lessor and Lessee agree that this Lease Supplement shall be recorded at Lessee's sole cost and expense as required under Section 21.19 of the Lease. 9. Counterparts. This Lease Supplement may be executed in any number of counterparts, each executed counterpart constituting an original but all together one and the same instrument. 4 Lease Supplement 10. Nature of Transaction. (A) IT IS THE INTENT OF THE PARTIES HERETO THAT: (i) THE TRANSACTION CONTEMPLATED HEREBY CONSTITUTES AN OPERATING LEASE FROM LESSOR TO LESSEE FOR PURPOSES OF LESSEE'S FINANCIAL REPORTING, (ii) THE TRANSACTION CONTEMPLATED HEREBY PRESERVES OWNERSHIP IN THE SITES TO LESSEE FOR PURPOSES OF FEDERAL AND STATE TAX AND BANKRUPTCY PURPOSES, (iii) LESSEE, PURSUANT TO THE LEASE, GRANTS A SECURITY INTEREST OR LIEN, AS THE CASE MAY BE, IN THE SITES AND THE OTHER COLLATERAL TO LESSOR, (iv) FOR PURPOSES OF FEDERAL AND STATE TAX AND BANKRUPTCY PURPOSES, THE PAYMENT BY LESSEE OF BASIC RENT SHALL BE TREATED AS PAYMENTS OF INTEREST, AND THE PAYMENT BY LESSEE OF ANY AMOUNTS IN RESPECT OF THE LEASE BALANCE SHALL BE TREATED AS REPAYMENTS OF PRINCIPAL, AND (v) THE MORTGAGE AND ASSIGNMENT OF LEASE CREATE A LIEN AND SECURITY INTEREST IN LESSOR'S INTEREST IN AND TO THE SITES, THE LEASE AND THE OTHER OPERATIVE DOCUMENTS, SUBJECT TO CERTAIN LIMITED EXCEPTIONS. NEVERTHELESS, LESSEE ACKNOWLEDGES AND AGREES THAT NONE OF LESSOR, AGENT OR ANY LENDER HAS PROVIDED OR WILL PROVIDE TAX, ACCOUNTING OR LEGAL ADVICE TO LESSEE REGARDING THE OVERALL TRANSACTION OR MADE ANY REPRESENTATIONS OR WARRANTIES CONCERNING THE TAX, ACCOUNTING OR LEGAL CHARACTERISTICS OF THE OPERATIVE DOCUMENTS AND THAT LESSEE HAS OBTAINED AND RELIED UPON SUCH TAX, ACCOUNTING AND LEGAL ADVICE CONCERNING THE OPERATIVE DOCUMENTS AS IT DEEMS APPROPRIATE. (B) SPECIFICALLY, WITHOUT LIMITING THE GENERALITY OF SUBSECTION (A) OF THIS SECTION 10, BUT UNDERSTANDING THAT THE PARTIES' CHARACTERIZATION IS NOT THE SOLE DETERMINANT OF THE ISSUE, THE PARTIES HERETO INTEND AND AGREE THAT WITH RESPECT TO THE NATURE OF THE TRANSACTIONS EVIDENCED BY THIS LEASE IN THE CONTEXT OF THE EXERCISE OF REMEDIES UNDER THE OPERATIVE DOCUMENTS, RELATING TO AND ARISING OUT OF ANY INSOLVENCY OR RECEIVERSHIP PROCEEDINGS OR A PETITION UNDER THE UNITED STATES BANKRUPTCY LAWS OR ANY OTHER APPLICABLE INSOLVENCY LAWS OR STATUTE OF THE UNITED STATES OF AMERICA OR ANY STATE OR COMMONWEALTH THEREOF AFFECTING LESSEE, LESSOR OR ANY LENDER OR ANY ENFORCEMENT OR COLLECTION ACTIONS, THE TRANSACTIONS EVIDENCED BY THE OPERATIVE DOCUMENTS ARE LOANS MADE BY THE LESSOR AND THE LENDERS AS UNRELATED THIRD PARTY LENDERS TO LESSEE SECURED BY THE SITES. 11. Grant and Foreclosure on Lessee's Estate. Lessee hereby grants to ______________, as trustee (together with all successor trustees, the "Trustee") for the benefit 5 Lease Supplement of _________________, IN TRUST, WITH POWER OF SALE, all of Lessee's right, title and interest in and to the Sites listed on Schedule I and, upon the occurrence of a Lease Event of Default, Lessor shall have the power and authority, after proper notice and lapse of such time as may be required by law, to cause Trustee to sell such Sites by notifying Trustee of that election and depositing with Trustee this instrument and receipts and evidence of expenditures made and secured hereby as Trustee may reasonably require. Upon receipt of any such notice from Lessor, Trustee shall cause to be recorded, published and delivered to Lessee such Notice of Default and Election to Sell as is then required by applicable statutory authority and by this instrument, which notice shall set forth, among other things, the nature of the breach(es) or default(s), the action(s) required to effect a cure thereof and the time period within which that cure may be effected. If no cure is effected within the statutory time limits following recordation of the Notice of Default and Election to Sell and after Notice of Sale has been given as required by the above-referenced statutes, Trustee may without further notice or demand sell and convey the Sites in accordance with the above-referenced statutes. The Sites may be sold as a whole or in separate lots, parcels or items and in such order as Lessor may direct, at public auction to the highest bidder for cash in lawful money of the United States payable at the time of sale. Lessor may purchase all or any part of the Sites at such sale. Lessee acknowledges that sales for cash or on credit to a wholesaler, retailer or user of the Sites, at a public or private auction, are all commercially reasonable. Trustee shall deliver to such purchaser(s) a good and sufficient deed or deeds conveying the property so sold, but without any covenant or warranty express or implied. The recitals in such deed of any matter or fact shall be conclusive proof of the truthfulness thereof. Any Person, including Lessee, Trustee or Lessor, may purchase at any sale. After deducting all costs, fees and expenses of Lessor and Trustee, including costs of evidence of title in connection with any sale, Lessor shall apply the proceeds of sale, in the following order of priority, to payment of the following (collectively, the "Obligations"): (i) first, all amounts expended by or for the account of Lessor under the terms hereof and not then repaid, with accrued interest at the Overdue Rate; and (ii) second, all other amounts then due and owing hereunder including, without limitation, all Accrued Variable Rent, Supplemental Rent, the full amount of the Lease Balance as of the date of sale as if this Lease had been terminated with respect to all of the Sites then 6 Lease Supplement subject to this Lease under Section 6.3, and all other amounts then payable by Lessee under this Lease and the other Operative Documents, with Lessor having the right to apply the proceeds of sale to the amounts described above in this clause (ii) in such order, proportion and priority as Lessor may elect in its sole and absolute discretion. To the extent permitted by applicable statutes, Trustee may postpone the sale of all or any portion of the Sites by public announcement at the time and place of sale, and from time to time thereafter may again postpone that sale by public announcement or subsequently noticed sale, and without further notice may make such sale at the time fixed at the last postponement or may, in its discretion, give a new notice of sale. A sale of less than all of the Sites or any defective or irregular sale made hereunder shall not exhaust the power of sale provided for herein, and subsequent sales may be made hereunder until all of the Obligations have been satisfied or the entire Sites sold, without defect or irregularity. No action of Lessor or Trustee based upon the provisions contained herein or contained in the applicable statutes, including, without limitation, the giving of the Notice of Default and Election to Sell or the Notice of Sale, shall constitute an election of remedies which would preclude Lessor from pursuing judicial foreclosure before a completed sale pursuant to the power of sale contained herein. Lessor shall have the right, with the irrevocable consent of Lessee hereby given and evidenced by the execution of this instrument, to obtain appointment of a receiver by any court of competent jurisdiction without further notice to Lessee, which receiver shall be authorized and empowered to enter upon and take possession of the Sites, including all personal property constituting a permanent part of the Site and fixtures thereto used upon or in connection with the real property herein conveyed (and any other personal property constituting a part of the Site which Lessee acquired with the funds of Lessor or the Lenders), to let the Sites, to receive all the rents, issues and profits, if any, which may be due or become due in respect to the leasing of the Sites to another party and apply the rents after payment of all necessary charges and expenses to reduction of the Obligations in such order, proportion and priority as Lessor may elect. At the option of Lessor, the receiver shall accomplish entry and taking possession of the Sites by actual entry and possession or by notice to Lessee. The receiver so appointed by a court of competent jurisdiction shall be empowered to issue receiver's certificates for funds advanced by Lessor for the purpose of protecting the 7 Lease Supplement value of the Sites as security for the Obligations. The amounts evidenced by receiver's certificates shall bear interest at the Overdue Rate and may be added to the Obligations if Lessee or a junior lienholder purchases the Sites at the trustee's sale. Trustee or any successor acting hereunder may resign and thereupon be discharged of the trusts hereunder upon thirty (30) days' prior written notice to Lessor. Regardless of whether Trustee resigns, Lessor may, from time to time, substitute a successor or successors to any Trustee named herein or acting hereunder in accordance with any statutory procedure for such substitution; or if Lessor, in its sole and absolute discretion, so elects, and if permitted by law, Lessor may substitute such successors or successors by recording, in the office of the recorder of the county or counties where a Site is located, a document executed by Lessor and containing the name of the original Lessee and Lessor hereunder, the book and page where this instrument (or a memorandum hereof) is recorded (and/or instrument number, as applicable) and the name of the new Trustee, which instrument shall be conclusive proof of proper substitution of such successor Trustee or Trustees, who shall, without conveyance from the predecessor Trustee, succeed to the rights, powers and duties hereunder. It is acknowledged that A POWER OF SALE HAS BEEN GRANTED IN THIS INSTRUMENT; A POWER OF SALE MAY ALLOW LESSOR TO TAKE THE SITES AND SELL THEM WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY LESSEE UNDER THIS INSTRUMENT. 12. Governing Law. THIS LEASE SUPPLEMENT HAS BEEN DELIVERED IN, AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, EXCEPT THAT FORECLOSURE UPON THE SITES SUBJECT TO THIS LEASE SUPPLEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE IN WHICH THE SITE SUBJECT TO THIS LEASE SUPPLEMENT IS LOCATED. [remainder of page intentionally left blank] 8 Lease Supplement IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement to be duly executed and delivered on the day and year first above written. MELLON FINANCIAL SERVICES CORPORATION, as Lessor By___________________________ Name Printed:________________ Title:_______________________ Address: One Mellon Bank Center Rm 151-4444 Pittsburgh, PA 15258-0001 Attention: Leasing Group GENESIS ELDERCARE PROPERTIES, INC., as Lessee By___________________________ Name Printed:________________ Title:_______________________ Address: 148 West State Street Kennett Square, PA 19348 Attn: George V. Hager, Jr. [Conform execution and acknowledgments to applicable state requirements in state where applicable Site is located] 9 Lease Supplement STATE OF _______________ ) ) SS.: COUNTY OF ______________ ) The foregoing Lease Supplement was acknowledged before me, the undersigned Notary Public, in the County of _______________, State of ____________, this ____ day of _______________, 19____, by____________________ ___________________________, as _________________________ of GENESIS ELDERCARE PROPERTIES, INC., a Pennsylvania corporation, on behalf of the corporation. [Notarial Seal] _________________________ Notary Public My commission expires:________________ [USE APPROPRIATE NOTARY FORMS FOR APPLICABLE STATE] 10 Lease Supplement STATE OF _______________ ) ) SS.: COUNTY OF ______________ ) The foregoing Lease Supplement was acknowledged before me, the undersigned Notary Public, in the County of _______________, State of ____________, this ____ day of _______________, 19____, by___________________ ___________________________, as _________________________ of MELLON FINANCIAL SERVICES CORPORATION #4, on behalf of the Corporation. [Notarial Seal] _________________________ Notary Public My commission expires:________________ [USE APPROPRIATE NOTARY FORMS FOR APPLICABLE STATE] 11 Lease Supplement SCHEDULE I TO LEASE SUPPLEMENT Sites 12 Lease Supplement SCHEDULE II TO LEASE SUPPLEMENT Applicable Estimated Principal Site Percentage Sales Costs Amortization Amount - ---- ---------- ----------- ------------------- To be conformed to requirements of local law for each state. EX-10.2 3 PARTICIPATION AGREEMENT SECOND AMENDMENT TO AMENDED AND RESTATED PARTICIPATION AGREEMENT This SECOND AMENDMENT TO AMENDED AND RESTATED PARTICIPATION AGREEMENT, dated as of March 7, 1997 (this "Amendment") is entered into among GENESIS ELDERCARE PROPERTIES, INC., as Lessee; MELLON FINANCIAL SERVICES CORPORATION #4, as Lessor; various financial institutions as Lenders and MELLON BANK, N.A., a national banking association, as Agent for Lessor and the Lenders. Recitals A. Lessee, Lessor, Lenders and Agent entered into that certain Amended and Restated Participation Agreement dated as of October 7, 1996, as amended by that certain Amendment to Amended and Restated Participation Agreement dated as of January 31, 1997 (as the same is hereby amended and as the same may be further amended, modified or supplemented from time to time, the "Participation Agreement"), evidencing a $150,000,000 synthetic lease facility (the "Synthetic Lease Facility). B. A certain Second Amended and Restated Credit Agreement, among Genesis Health Ventures, Inc. and certain Subsidiaries thereof as Borrowers, Mellon Bank, N.A. as Administrative Agent and Co-Syndication Agent, Citibank, N.A. as Co-Syndication Agent, certain other Co-Agents named therein and certain Lenders named therein was entered into on October 7, 1996. On October 11, 1996, in connection with an acquisition by Genesis Health Ventures, Inc., certain additional Subsidiaries became Borrowers thereunder (as so modified, the "Existing Credit Agreement" and, as the same is hereby amended and as the same may be further amended, modified or supplemented from time to time, the "Credit Agreement"). Unless otherwise defined herein, terms are used herein as defined in the Participation Agreement. C. The Borrowers have requested that the total amount of the commitment under the Existing Credit Agreement be increased from $300,000,000 to $375,000,000. There will not be any increase in amount of the Synthetic Lease Facility. However, in order to continue the proportionate relationship of each Lender under the Credit Agreement and each Lender in the Synthetic Lease Facility, the Existing Credit Agreement and the Participation Agreement and other Operative Documents are being amended as of the date hereof to provide for (a) the increase in the total commitment under the Existing Credit Agreement and the inclusion of any additional Lenders, (b) the inclusion of any additional Lenders under the Credit Agreement as additional Lenders in the Synthetic Lease Facility, (c) a downward adjustment in existing interests in the Synthetic Lease Facility to allow for appropriate allocations, and (d) a commensurate increase in commitments under the Credit Agreement. The Lenders are willing to make such changes to the Participation Agreement and other Operative Documents, subject to the terms and conditions set forth below. NOW THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows. Agreement 1. Amendments to Participation Agreement. The Participation Agreement is hereby amended as of the Amendment Effective Date (as defined below) as follows: a. Change in Commitment; New Schedule I-A. The individual Commitment of each Lender under the Participation Agreement shall be amended by deleting Schedule I to the Participation Agreement and replacing it with a new Schedule I-A which shall be delivered by the Agent to each Lender, Lessor and Lessee within ten days of the Amendment Effective Date. Said new Schedule I-A shall specify the Amendment Effective Date, and shall reflect the revised Commitments and revised percentage interest of the Lenders and the additional Lenders: b. Additional Lenders added to Notice and Funding Offices Schedule; Amended Schedule II. Schedule II to the Participation Agreement is hereby amended by adding notice and funding office information of the additional Lenders to a revised Schedule II to be delivered by the Agent to each Lender, Lessor and Lessee within ten days of the Amendment Effective Date. c. Additional Definition: Amendment Effective Date. The following new definition shall be added to Appendix 1 of the Participation Agreement in its correct alphabetical location: "Amendment Effective Date" shall have the meaning ascribed to such term in Section 4 to the Second Amendment to Amended and Restated Participation Agreement dated as of March 7, 1997. d. Joinder of Additional Lenders. Each Person that shall agree to be a Lender under the Participation Agreement shall execute a joinder thereto, effective as of the Amendment Effective Date, in form and substance satisfactory to the Agent and thereafter shall be a Lender thereunder and under each Operative Document for all purposes as if it had been an original signatory to the Participation Agreement. e. New Schedule V; Commitments Outstanding. A new Schedule V setting forth the outstanding amount of each Lender's (i) Total Commitment, (ii) Transaction Costs Commitment and (iii) Acquisition and Construction Commitment, as of the Amendment Effective Date shall be delivered by Agent to Lessor, Lessee and each Lender within ten days of the Amendment Effective Date. 2. Representations and Warranties. In order to induce the Lenders and the Agent to agree to amend the Participation Agreement, Lessee makes the following representations and warranties, which shall survive the execution and delivery of this Amendment: (a) No Lease Event of Default has occurred and is continuing or would exist immediately after giving affect to the amendments contained herein; and (b) Each of the representations and warranties set forth in the Participation Agreement is true and correct in all material respects both before and after giving effect to the amendments and transactions contemplated hereby as though each such representation and warranty were made at and as of the date hereof and as of the Amendment Effective Date. 3. Notes. On the Amendment Effective Date, Lessor shall issue a replacement Note to each existing Lender and a new Note to each new Lender. The principal amount of each -2- Lenders' Note shall be equal to the amount of its Revised Commitment as specified on Schedule I-A. All Advances made under the Synthetic Lease Facility on or after the Amendment Effective Date will be made by all Lenders pro rata in accordance with Schedule I-A. On April 24, 1997, each new Lender (i) will deliver to Agent in immediately available funds, its Commitment Percentage of the aggregate amount of the outstanding Loan, calculated as of the date immediately preceding the Amendment Effective Date, as specified by Agent, and (ii) the Agent will remit to each existing Lender, its Commitment Percentage of the amounts received under clause (i). 4. Amendment Effective Date. The amendments set forth in Section 1 above shall be effective on the date (the "Amendment Effective Date") that each of the following conditions is satisfied: a. Execution of Amendment. Lessee, Lessor, Agent and the Lenders shall have executed a counterpart to this Amendment. b. Joinder of New Lenders. The additional Lenders, Agent and the Lessee shall have executed a joinder to the Participation Agreement as set forth in Section 1 (d) above. c. Opinion. The Agent shall have received opinions of Ira C. Gubernick, in-house counsel of Guarantor, and Blank, Rome, Comisky & McCauley as to this Amendment and such other matters as the Agent may request. d. Investment Letter. The Agent shall have received an Investor's Letter substantially in the form of Exhibit G to the Participation Agreement from each additional Lender. e. Credit Agreement Amendment. The Credit Agreement shall have been amended to provide for the inclusion of any new Lenders and the adjustment of each Lender's interest therein. f. Other Documents and Information. The Agent shall have received such other documents and information as it shall reasonably request. 5. Counterparts. This Amendment may be executed in counterparts and by different parties hereto in separate counterparts, each of which, when executed and delivered, shall be deemed to be an original and all of which, when taken together, shall constitute one and the same instrument. A facsimile signature shall be deemed to be the functional equivalent of a manually executed original for all purposes. 6. Ratification. The Participation Agreement, as amended by this Amendment, and the other Operative Documents are, and shall continue to be, in full force and effect and are hereby in all respects confirmed, approved and ratified. 7. Payment of Expenses. Without limiting other payment obligations of Lessee set forth in the Operative Documents, Lessee agrees to pay all costs and expenses incurred by the Agent in connection with the preparation, execution and delivery of this Amendment and any other documents or instruments which may be delivered in connection herewith, including, without limitation, the reasonable fees and expenses of its counsel, Mayer, Brown & Platt. -3- 8. Authorization to Agents. Each Lender hereby authorizes the Agent to take such action (including, without limitation, signing amendments to the other Operative Documents) as it shall deem necessary or appropriate to carry out the purposes of this Amendment. 9. Governing Law. This Amendment shall be construed in accordance with, and governed by the laws of, the Commonwealth of Pennsylvania, without regard to choice of law principles. 10. References. From and after the Amendment Effective Date, each reference in the Participation Agreement to "this Agreement", "hereof", "hereunder" or words of like import, and all references to the Participation Agreement in any and all Operative Documents, other agreements, instruments, documents, certificates and writings of every kind and nature, shall be deemed to mean the Participation Agreement as modified and amended by this Amendment and as the same may be further amended, modified or supplemented in accordance with the terms thereof. -4- IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above. GENESIS ELDERCARE PROPERTIES, INC., as Lessee By:_______________________________ Name Printed: George V. Hager, Jr. Title: Senior Vice President MELLON FINANCIAL SERVICES CORPORATION #4, as Lessor By:________________________________ Name Printed: Robert C. Carpenter Title: Assistant Vice President MELLON BANK, N.A., not in its individual capacity except as expressly stated herein, but solely as Agent By:________________________________ Name Printed: Carol Paige Title: Vice President MELLON BANK, N.A., as Lender By:________________________________ Name Printed: Carol Paige Title: Vice President CITIBANK, N.A., as Lender By:________________________________ Name Printed:______________________ Title:_____________________________ FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as Lender By:________________________________ Name Printed:______________________ Title:_____________________________ NATIONSBANK, N.A., as Lender By:________________________________ Name Printed:______________________ Title:_____________________________ FLEET NATIONAL BANK, as Lender By:________________________________ Name Printed:______________________ Title:_____________________________ CORESTATES BANK, N.A., as Lender By:________________________________ Name Printed:______________________ Title:_____________________________ PNC BANK, NATIONAL ASSOCIATION, as Lender By:________________________________ Name Printed:______________________ Title:_____________________________ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Lender By:________________________________ Name Printed:______________________ Title:_____________________________ CREDIT LYONNAIS NEW YORK BRANCH, as Lender By:________________________________ Name Printed:______________________ Title:_____________________________ CREDIT SUISSE FIRST BOSTON, as Lender By:________________________________ Name Printed:______________________ Title:_____________________________ By:________________________________ Name Printed:______________________ Title:_____________________________ AMSOUTH BANK OF ALABAMA, as Lender By:________________________________ Name Printed:______________________ Title:_____________________________ BANQUE PARIBAS, as Lender By:________________________________ Name Printed:______________________ Title:_____________________________ By:________________________________ Name Printed:______________________ Title:_____________________________ CREDITANSTALT CORPORATE FINANCE, INC., as Lender By:________________________________ Name Printed:______________________ Title:_____________________________ By:________________________________ Name Printed:______________________ Title:_____________________________ SIGNET BANK, as Lender By:________________________________ Name Printed:______________________ Title:_____________________________ THE SUMITOMO BANK, LIMITED, as Lender By:________________________________ Name Printed:______________________ Title:_____________________________ By:________________________________ Name Printed:______________________ Title:_____________________________ THE FIRST NATIONAL BANK OF MARYLAND, as Lender By:________________________________ Name Printed:______________________ Title:_____________________________ EX-10.3 4 CREDIT AGREEMENT EXECUTION COPY AMENDMENT NO. 1 TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT AMENDMENT NO. 1, dated as of March 7, 1997 by and among: Genesis Health Ventures, Inc. and certain Subsidiaries identified on the signature pages hereto as "Borrowers"; the institutions identified on the signature pages hereto as "Lenders"; Mellon Bank, N.A. as Issuer of Letters of Credit; Mellon Bank, N.A. as Administrative Agent and Co-Syndication Agent; Citibank, N.A. as Co-Syndication Agent; and the other Co-Agents specified on the signature pages hereto. Background A certain Second Amended and Restated Credit Agreement, among Genesis Health Ventures, Inc. and certain Subsidiaries thereof as Borrowers, Mellon Bank, N.A. as Administrative Agent and Co-Syndication Agent, Citibank, N.A. as Co-Syndication Agent, certain other Co-Agents named therein and certain Lenders named therein was entered into on October 7, 1996. On October 11, 1996, in connection with an acquisition by Genesis Health Ventures, Inc., certain additional Subsidiaries became Borrowers thereunder (as so modified, the "Existing Credit Agreement" and, as the same is hereby amended and as the same may be further amended, modified or supplemented from time to time, the "Credit Agreement"). Unless otherwise defined herein, terms are used herein as defined in the Existing Credit Agreement. Also on October 7, 1996, Genesis Eldercare Properties, Inc., one of the Borrowers under the Existing Credit Agreement, entered into a certain Amended and Restated Participation Agreement (the "Participation Agreement") and related documents evidencing a $150,000,000 Synthetic Lease Facility. The Participation Agreement and other Synthetic Lease Facility Documents (as defined in the Credit Agreement) as amended or modified to (but not including) the date hereof are collectively referred to herein as the "Existing Synthetic Lease Facility Documents". Each of the Lenders under the Existing Credit Agreement are participants in the Participation Agreement. Each of the Borrowers under the Credit Agreement are guarantors of the Synthetic Lease Facility (as defined in the Credit Agreement). The Borrowers have requested that the total amount of the commitment under the Existing Credit Agreement be increased from $300,000,000 to $375,000,000. There will not be any increase in amount of the Synthetic Lease Facility. However, in order to continue the proportionate relationship of each Lender under the Credit Agreement and each participant in the Synthetic Lease Facility, both the Existing Credit Agreement and the Existing Synthetic Lease Facility Documents are being amended as of the date hereof to provide for (a) the increase in the total commitment under the Existing Credit Agreement and the inclusion of any new Lenders, (b) the inclusion of any new Lenders under the Credit Agreement as participants in the Synthetic Lease Facility, (c) a downward adjustment in existing interests in the Synthetic Lease Facility to allow for appropriate allocations, and (d) a commensurate increase in commitments under the Credit Agreement. The Lenders are willing to make such changes to the Credit Agreement, subject to the terms and conditions set forth below. NOW THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows. Agreement 1. Amendments to Existing Credit Agreement. The Existing Credit Agreement shall be, as of the Amendment Effective Date (as defined below), amended in each of the following respects. 1.1 Change in Commitment; New Exhibit G. The total Commitment of all Lenders under the Credit Agreement and the individual Commitment of each Lender under the Credit Agreement shall be amended to be the amounts set forth on a new Exhibit G which shall be delivered by the Agent to each Lender and Borrower within ten days of the Amendment Effective Date. Said new Exhibit G shall also specify the Amendment Effective Date and shall be added as an additional Exhibit to the Credit Agreement. The information on Exhibit G shall conform to the following criteria: (a) As to each Lender that is a party to the Credit Agreement prior to the Amendment Effective Date (an "Existing Lender"), unless otherwise specifically agreed to in a writing between such Existing Lender and the Agent, (i) the sum of its revised Commitment on said Exhibit G and its revised participation in the Synthetic Lease Facility (after giving effect to the related amendments to the Synthetic Lease Facility Documents) shall be equal to (ii) the sum of such Existing Lender's Initial Commitment under the Existing Credit Facility and its initial participation interest in the Synthetic Lease under the Existing Synthetic Lease Facility Documents; (b) Each new Lender and each Existing Lender will have the same percentage interest in the Credit Agreement as such Lender/participant has in the Synthetic Lease Facility; and (c) The aggregate amount of the total Commitments under the Credit Agreement shall not exceed Three Hundred and Seventy-Five Million Dollars ($375,000,000). The increased amount of the Commitments may be allocated among such institutions as the Agent (in its sole discretion) may determine. 1.2 Additional Definition: Amendment Effective Date. The following new definition shall be added to Section 1.1 of the Existing Credit Agreement in its correct alphabetical location: "Amendment Effective Date" shall have the meaning ascribed to such term in Amendment No. 1, dated as of March 7, 1997 to this Agreement. 1.3 Amendment to Section 2.1: Initial Commitment. The second sentence of Section 2.1(a) of the Existing Credit Agreement shall be amended in its entirety to read as follows: -2- On the Amendment Effective Date, each Lender's Commitment shall be equal to the amount set forth as its "Revised Commitment" next to its name on Exhibit G attached hereto, and shall be subject to adjustment pursuant to the terms hereof. 1.4 Amendment to Exhibit F: Commitment Percentage. Exhibit F to the Existing Credit Agreement shall be amended in its entirety to read as set forth on a new Exhibit F to be delivered to the Lenders and the borrowers by the Agent within ten days of the Amendment Effective Date. Said new Exhibit F shall set forth the correct percentage interest of each Lender in the total Commitment under the Credit Agreement after giving effect to the new Commitment allocations set forth on Exhibit G. 1.5 Joinder of Additional Lenders. Each Person that shall agree to be a Lender under the Credit Agreement shall execute a joinder thereto, effective as of the Amendment Effective Date, in form and substance satisfactory to the Agent and thereafter shall be a Lender thereunder and under each Loan Document for all purposes as if it had been an original signatory to the Credit Agreement. 1.6 Amendment to Section 2.7: Prepayments. In order to allow for the prepayment of Loans bearing interest at the Euro-Rate Option prior to the expiration of the applicable Funding Period subject to breakage costs, Section 2.7 is amended by replacing the colon after the parenthetical phrase "(subject, however, to Section 2.12(b) hereof)" with a period and by deleting clauses (a) and (b) thereof. 2. Representations and Warranties. In order to induce the Lenders and the Agent to agree to amend the Credit Agreement, each of the Borrowers, jointly and severally, makes the following representations and warranties, which shall survive the execution and delivery of this Amendment No. 1: (a) No Default has occurred and is continuing or would exist immediately after giving affect to the amendments contained herein; and (b) Each of the representations and warranties set forth in the Credit Agreement is true and correct in all material respects both before and after giving effect to the amendments and transactions contemplated hereby as though each such representation and warranty were made at and as of the date hereof and as of the Amendment Effective Date. 3. Notes. On the Amendment Effective Date, the Borrowers shall issue a replacement Note to each Existing Lender and a new Note to each new Lender. The principal amount of each Lenders' Note shall be equal to the amount of its "Revised Commitment" as specified on Exhibit G. 4. Amendment Effective Date. The amendments set forth in Section 1 above shall be effective on the date (the "Amendment Effective Date") that each of the following conditions is satisfied: 4.1 Execution of Amendment. The Issuer, each of the Borrowers, the Lenders and the Agents shall have executed a counterpart to this Amendment No. 1. -3- 4.2 Joinder of New Lenders. The additional Lenders and the Borrowers shall have executed a joinder to the Credit Agreement as set forth in Section 1.5 above. 4.3 Opinion. The Agent shall have received an opinion of Blank, Rome, Comisky & McCauley as to the enforceability of this Amendment No. 1 and such other matters as the Agent may request. 4.4 Fees. Each of the Existing Lenders shall have received such amendment fees as are specified in the letter dated February 25, 1997 from Carol Paige, Vice President of Mellon Bank, N.A. as Agent to each Existing Lender and all other amounts payable to it under the Loan Documents. 4.5 Amendment to Synthetic Lease Facility Documents. The Existing Synthetic Lease Facility Documents shall have been amended to provide for the inclusion of any new Lenders as participants thereunder and the adjustment in each participant's interest therein to maintain the same proportionate interest under the Credit Agreement and the Synthetic Lease Facility after giving effect to this Amendment No. 1 and those amendments to the Synthetic Lease Facility Documents. In addition, there shall have been appropriate provisions made for payments in connection with the Synthetic Lease Facility Documents to account for the necessary adjustments to the outstanding amounts thereunder to effect the reallocation contemplated hereby. 4.6 Other Documents and Information. The Agent shall have received such other documents and information as it shall reasonably request. 5. Counterparts. This Amendment No. 1 may be executed in counterparts and by different parties hereto in separate counterparts, each of which, when executed and delivered, shall be deemed to be an original and all of which, when taken together, shall constitute one and the same instrument. A facsimile signature shall be deemed to be the functional equivalent of a manually executed original for all purposes. 6. Ratification. The Credit Agreement, as amended by this Amendment No. 1, and the other Loan Documents are, and shall continue to be, in full force and effect and are hereby in all respects confirmed, approved and ratified. Without limiting the generality of the foregoing, the undersigned Borrowers, in their capacity as "Grantors" under the Pledge Agreement, confirm that the security interest granted pursuant to the Pledge Agreement secures all of the Secured Obligations (as defined in the Pledge Agreement) including, without limitation, all repayment obligations in connection with loans made under the new commitment amount and under any other new commitment amount from time to time. 7. Payment of Expenses. Without limiting other payment obligations of the Borrowers set forth in the Loan Documents, the Borrowers hereby, jointly and severally, agree to pay all costs and expenses incurred by the Agent in connection with the preparation, execution and delivery of this Amendment No. 1 and any other documents or instruments which may be delivered in connection herewith, including, without limitation, the reasonable fees and expenses of its counsel, Drinker Biddle & Reath. -4- 8. Authorization to Agents. Each Lender hereby authorizes the Agent and the Collateral Agent to take such action (including, without limitation, signing amendments to Loan Documents) as shall be consistent with the purposes hereof as it shall deem necessary or appropriate to carry out the purposes of this Amendment No. 1. 9. Governing Law. This Amendment No. 1 shall be construed in accordance with, and governed by the laws of, the Commonwealth of Pennsylvania, without regard to choice of law principles. 10. References. From and after the Amendment Effective Date, each reference in the Credit Agreement to "this Agreement", "hereof", "hereunder" or words of like import, and all references to the Credit Agreement in any and all Loan Documents, other agreements, instruments, documents, certificates and writings of every kind and nature, shall be deemed to mean the Credit Agreement as modified and amended by this Amendment No. 1 and as the same may be further amended, modified or supplemented in accordance with the terms thereof. Further, each reference to the "Lenders", the "Notes", "Commitment", "Initial Commitment", or "Commitment Percentage" shall be and mean a reference to the same as modified in accordance with the provisions of this Amendment No. 1 and as the same may be further amended, modified or supplemented from time to time in accordance with the terms of the Credit Agreement. IN WITNESS WHEREOF, the parties have caused this Amendment No. 1 to be duly executed as of the date first above written. GENESIS HEALTH VENTURES, INC., a Pennsylvania corporation By_______________________________________________________ Title: General Counsel-Corporate and Secretary Address for notices: Suite 100 148 West State Street Kennett Square, PA 19348 Attention: Senior Vice President and Chief Financial Officer Telephone: 610-444-6350 Facsimile: 610-444-3365 BREVARD MERIDIAN LIMITED PARTNERSHIP, a Maryland limited partnership By: Meridian Healthcare, Inc., a Pennsylvania corporation, its sole general partners -5- CATONSVILLE MERIDIAN LIMITED PARTNERSHIP, a Maryland limited partnership By: Meridian Health, Inc., a Pennsylvania corporation, one of its general partners EASTON MERIDIAN LIMITED PARTNERSHIP, a Maryland limited partnership By: Meridian Health, Inc., a Pennsylvania corporation, its sole general partner EDELLA STREET ASSOCIATES, a Pennsylvania limited partnership By: Genesis Health Ventures of Clarks Summit, Inc., its sole general partner GENESIS PROPERTIES LIMITED PARTNERSHIP, a Pennsylvania limited partnership By: Genesis Health Ventures of Arlington, Inc., its sole general partner GREENSPRING MERIDIAN LIMITED PARTNERSHIP, a Maryland limited partnership By: Meridian Healthcare, Inc., a Pennsylvania corporation, its sole general partner HAMMONDS LANE MERIDIAN LIMITED PARTNERSHIP, a Maryland limited partnership By: Meridian Healthcare, Inc., a Pennsylvania corporation, one of its general partners MERIDIAN/CONSTELLATION LIMITED PARTNERSHIP By: Meridian Healthcare, Inc., general partner -6- MERIDIAN EDGEWOOD LIMITED PARTNERSHIP By: Meridian Healthcare, Inc., a general partner MERIDIAN PERRING LIMITED PARTNERSHIP By: Meridian Healthcare, Inc., a general partner MERIDIAN VALLEY LIMITED PARTNERSHIP By: Meridian Healthcare, Inc., a general partner MERIDIAN VALLEY VIEW LIMITED PARTNERSHIP By: Meridian Healthcare, Inc., a general partner MILLVILLE MERIDIAN LIMITED PARTNERSHIP, a Maryland limited partnership By: Meridian Healthcare, Inc., a Pennsylvania corporation, its sole general partner PHILADELPHIA AVENUE ASSOCIATES, a Pennsylvania limited partnership By: Philadelphia Avenue Corp., its sole general partner RIVER STREET ASSOCIATES, a Pennsylvania limited partnership By: Genesis Health Ventures of Wilkes-Barre, Inc., its sole general partner SEMINOLE MERIDIAN LIMITED PARTNERSHIP, a Maryland limited partnership By: Meridian Health, Inc., a Pennsylvania corporation, its sole general partner STATE STREET ASSOCIATES, L.P., a Pennsylvania limited partnership By: State Street Associates, Inc. its sole general partner -7- THERAPY CARE SYSTEMS, L.P. a Pennsylvania limited partnership By: Genesis Eldercare Rehabilitation Services, Inc. its sole general partner VOLUSIA MERIDIAN LIMITED PARTNERSHIP, a Maryland limited partnership By: Meridian Health, Inc., a Pennsylvania corporation, its sole general partner GENESIS PROPERTIES OF DELAWARE LTD PARTNERSHIP, L.P., a Delaware limited partnership By: Genesis Properties of Delaware Corporation, a general partner McKERLEY HEALTH FACILITIES, a New Hampshire general partnership By: Meridian Health, Inc., a Pennsylvania corporation, and Meridian Healthcare, Inc., a Pennsylvania corporation, its general partners NORTH CAPE CONVALESCENT CENTER ASSOCIATES, L.P. a Pennsylvania limited partnership By:__________________ On behalf of each of the foregoing as General Counsel-Corporate and Secretary of the general partner GENESIS HEALTH VENTURES OF ARLINGTON, INC., a Pennsylvania corporation GENESIS HEALTH VENTURES OF BLOOMFIELD, INC., a Pennsylvania corporation -8- GENESIS HEALTH VENTURES OF CLARKS SUMMIT, INC., a Pennsylvania corporation GENESIS HEALTH VENTURES OF MASSACHUSETTS, INC., a Pennsylvania corporation GENESIS HEALTH VENTURES OF NAUGATUCK, INC., a Pennsylvania corporation GENESIS HEALTH VENTURES OF SALISBURY, INC., a Pennsylvania corporation GENESIS HEALTH VENTURES OF WAYNE, INC., a Pennsylvania corporation GENESIS HEALTH VENTURES OF WEST VIRGINIA, INC., a Pennsylvania corporation GENESIS HEALTH VENTURES OF WINDSOR, INC., a Pennsylvania corporation GENESIS IMMEDIATE MED CENTER, INC., a Pennsylvania corporation GENESIS ELDERCARE HOME SERVICES, INC. a Pennsylvania corporation GENESIS ELDERCARE PHYSICIAN SERVICES, INC., a Pennsylvania corporation HEALTHCARE RESOURCES CORP., a Pennsylvania corporation KNOLLWOOD MANOR, INC., a Pennsylvania corporation -9- MERIDIAN HEALTH, INC., a Pennsylvania corporation MERIDIAN HEALTHCARE, INC., a Pennsylvania corporation PHILADELPHIA AVENUE CORPORATION, a Pennsylvania corporation GENESIS ELDERCARE STAFFING SERVICES INC. a Pennsylvania corporation STATE STREET ASSOCIATES, INC., a Pennsylvania corporation SUBURBAN MEDICAL SERVICES, INC. a Pennsylvania corporation GENESIS ELDERCARE REHABILITATION SERVICES, INC., a Pennsylvania corporation THERAPY CARE INC., a Pennsylvania corporation THE TIDEWATER HEALTHCARE SHARED SERVICES GROUP, INC., a Pennsylvania corporation WYNCOTE HEALTHCARE CORP. a Pennsylvania corporation ASCO HEALTHCARE, INC., a Maryland corporation BRINTON MANOR, INC., a Delaware corporation CONCORD HEALTHCARE CORPORATION, a Delaware corporation CRYSTAL CITY NURSING CENTER, INC., a Maryland corporation EASTERN MEDICAL SUPPLIES, INC., a Maryland corporation GENESIS HEALTH SERVICES CORPORATION, a Delaware corporation -10- GENESIS HEALTHCARE CENTERS HOLDINGS, INC., a Delaware corporation GENESIS HOLDINGS, INC., a Delaware corporation GENESIS PROPERTIES OF DELAWARE CORPORATION, a Delaware corporation HILLTOP HEALTH CARE CENTER, INC., a Delaware corporation KEYSTONE NURSING HOME, INC., a Delaware corporation LINCOLN NURSING HOME, INC., a Delaware corporation McKERLEY HEALTH CARE CENTERS, INC., a New Hampshire corporation WAYSIDE NURSING HOME, INC., a Delaware corporation PROFESSIONAL PHARMACY SERVICES, INC., a Maryland Corporation MEDICAL SERVICES GROUP, INC., a Maryland Corporation NEIGHBORCARE PHARMACIES, INC., a Maryland Corporation DERBY NURSING CENTER CORPORATION, a Connecticut Corporation GENESIS ELDERCARE NATIONAL CENTERS INC., a Florida Corporation GENESIS ELDERCARE NETWORK SERVICES, INC., a Pennsylvania Corporation GENESIS ELDERCARE PROPERTIES, INC., a Pennsylvania Corporation OAK HILL HEALTH CARE CENTER, INC., a Virginia Corporation VERSALINK, INC., a Delaware Corporation -11- GERIATRIC & MEDICAL COMPANIES, INC. a Delaware corporation GERIATRIC & MEDICAL SERVICES, INC. a New Jersey corporation BURLINGTON WOODS CONVALESCENT CENTER, INC. a New Jersey corporation CRESTVIEW CONVALESCENT HOME, INC. a Pennsylvania corporation CRESTVIEW NORTH, INC. a Pennsylvania corporation DIVERSIFIED DIAGNOSTICS, INC. a Pennsylvania corporation GMC MEDICAL CONSULTING SERVICES, INC. a Pennsylvania corporation GERIATRIC AND MEDICAL INVESTMENTS CORP. a Delaware corporation GERIMED CORP. a Pennsylvania corporation GMS INSURANCE SERVICES, INC. a Pennsylvania corporation HCHS, INC. a Pennsylvania corporation HSS-PARA TRANSIT, INC. a Pennsylvania corporation INNOVATIVE PHARMACY SERVICES, INC. a New Jersey corporation LIFE SUPPORT AMBULANCE, INC. a Pennsylvania corporation LIFE SUPPORT MEDICAL, INC. a Pennsylvania corporation METRO PHARMACEUTICALS, INC. a Pennsylvania corporation -12- UNITED HEALTH CARE SERVICES, INC. a Pennsylvania corporation VALLEY MEDICAL SERVICES, INC. a Pennsylvania corporation VALLEY TRANSPORT AMBULANCE SERVICE, INC. a Pennsylvania corporation VILLAS REALTY & INVESTMENT, INC. a Pennsylvania corporation WEISENFLUH AMBULANCE SERVICE, INC. a Pennsylvania corporation By: ___________________________________________________ On behalf of each of the foregoing as General Counsel-Corporate and Secretary -13- Agents and Lenders: MELLON BANK, N.A., as a Lender, as Issuer, as Agent and as Co-Syndication Agent By ____________________________________________________ Title: Vice President CITIBANK, N.A., as a Lender and as Co-Syndication Agent By ____________________________________________________ Title: FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as a Lender and as a Co-Agent By ____________________________________________________ Title: NATIONSBANK, N.A., as a Lender and as a Co-Agent By ____________________________________________________ Title: -14- FLEET NATIONAL BANK By ____________________________________________________ Title: CORESTATES BANK, N.A. By ____________________________________________________ Title: PNC BANK, NATIONAL ASSOCIATION By ____________________________________________________ Title: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By ____________________________________________________ Title: -15- CREDIT LYONNAIS NEW YORK BRANCH By ____________________________________________________ Title: CREDIT SUISSE FIRST BOSTON By ____________________________________________________ Title: By ____________________________________________________ Title: AMSOUTH BANK OF ALABAMA By ____________________________________________________ Title: BANQUE PARIBAS By ____________________________________________________ Title: By ____________________________________________________ Title: -16- CREDITANSTALT CORPORATE FINANCE, INC. By ____________________________________________________ Title: By ____________________________________________________ Title: SIGNET BANK By ____________________________________________________ Title: THE SUMITOMO BANK, LIMITED By ____________________________________________________ Title: By ____________________________________________________ Title: THE FIRST NATIONAL BANK OF MARYLAND By ____________________________________________________ Title: -17- EX-10.4 5 EXHIBIT 10.4 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AGREEMENT, made as of this 1st day of April, 1997, by and between Michael R. Walker ("Employee") and Genesis Health Ventures, Inc., a Pennsylvania corporation ("Employer"). BACKGROUND Employee has been employed by Employer as its Chief Executive Officer since the founding of the corporation. Employer and Employee desire to continue Employee's employment and to amend and restate the existing employment agreement between Employee and Employer dated April 1, 1994, all upon the conditions and terms herein set forth. NOW, THEREFORE, intending to be legally bound hereby, and in consideration of the mutual covenants set forth herein, Employee and Employer agree as follows: 1. Employment and Duties. Employer shall continue to employ Employee as Employer's Chairman and Chief Executive Officer during the term of employment set forth in Section 2 hereof. Employee shall perform the duties of the Chairman and Chief Executive Officer of Employer and shall provide to Employer such other services befitting Employee's position as are requested of him from time to time by the Board of Directors of Employer. Employee shall have supervision and control over, and responsibility for, the business and affairs of Employer as provided in the Bylaws of Employer, subject to the direction of Employer's Board of Directors. Employee shall report only to the Board of Directors of Employer and his powers and authority shall be superior to those of -1- any officer or employee of Employer. Employee shall devote his full time, energy, skill and best efforts to the business and affairs of Employer provided, however, that nothing herein shall preclude Employee from serving as a director, trustee, officer of, or partner in, any other firm, trust, corporation or partnership or from pursuing personal investments, as long as such activities do not interfere with Employee's performance of his duties hereunder. In performing his duties hereunder, Employee shall not be required to relocate outside a radius of five (5) miles from the center of Kennett Square, Pennsylvania. Employee agrees to continue to serve without additional compensation, as a director of the Employer and any of its subsidiaries and in one or more executive offices of any of the Employer's subsidiaries. 2. Term. The term of Employee's employment under this Agreement shall be a three year period commencing on the date hereof and ending on March 31, 2000, unless further extended or sooner terminated in accordance with the other provisions hereof (the "Term"). On March 31, 2000 and on the last day of each contract year thereafter, the Term shall be automatically extended for one year. The last day of the Term, as from time to time extended, is hereinafter referred to as the "Expiration Date." The Employer or Employee may elect to terminate the automatic extension of the Term set forth in this section by giving written notice of such election not less than one (1) year prior to the end of the then current term. 3. Compensation. 3.1 Base Salary. Employer shall pay to Employee as his base compensation for all services rendered hereunder an annual base salary of $600,000 per year ("Base Salary"), payable in accordance with Employer's -2- normal payroll practices for employees. Employer shall deduct or cause to be deducted from the Base Salary all taxes and amounts required by law to be withheld. Employee's Base Salary shall be reviewed by the Board of Directors no less frequently than annually, with the first such review to be made within one year after the date of this Agreement. Employer will cooperate with Employee to defer up to 12% of Employee's then current Base Salary. 3.2 Benefits. During the Term, subject to the other provisions of this Agreement, Employee shall be entitled to participate and shall be included in any savings, 401(K), pension, profit-sharing, group medical or similar plan adopted by Employer now existing, or established hereafter, to the extent he is eligible under the general provisions thereof. In addition, Employee shall be provided with disability insurance providing a disability benefit consistent with Employer's Disability insurance plan and term life insurance providing a $6,000,000 death benefit to Employee's designated beneficiaries. 3.3 Incentive Compensation. In addition to his base compensation, Employee shall be entitled to receive such non-cash incentive compensation, including stock options, as may be determined from time to time by the Board of Directors of Employer or the appropriate committee of the Board of Directors. 3.4 Fringe Benefits. 3.4.1 Vacation. Employee shall be entitled to five weeks of vacation during each year. 3.4.2 Reimbursement of Expenses. Employee is authorized to incur ordinary, necessary and reasonable expenses in the course of Employer's business. Employer shall reimburse Employee for such expenses upon presentation by the Employee of an itemized account of such expenditures -3- in accordance with Employer's established policy, unless such expenses have been paid directly by the Employer. 3.5 Entire Compensation. The compensation provided for in this Section shall be the full consideration for the services to be rendered by Employee to Employer hereunder. 4. Termination. 4.1 Notice of Termination. Any termination by Employer or by Employee shall be communicated by written Notice of Termination to the other party hereto. As used in this Agreement, "Notice of Termination" means a notice specifying the termination provision in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee's employment under the provision specified. As used in this Agreement, "Date of Termination" shall mean the date specified in the Notice of Termination. 4.2 Grounds for Termination. 4.2.1 Termination upon Death. Employee's employment with Employer and all of Employee's rights to compensation and benefits hereunder shall automatically terminate upon his death, except that Employee's heirs, personal representatives or estate shall be entitled to any unpaid portion of his Salary and accrued benefits up to the Date of Termination and shall also be entitled to reimbursement for any expenses incurred by Employee hereunder. In addition, Employee's heirs, personal representatives or estate shall be entitled to receive the full amount of Incentive Compensation, if any, earned by Employee prior to death (determined in accordance with Section 3.3 hereof). -4- 4.2.2 Termination upon Disability. If Employee becomes disabled, Employee shall continue to receive all of his compensation and benefits in accordance with Section 3 for a period of six (6) months following the Onset of Disability (as defined in this Section 4.2.2). Any amounts due to Employee under this Section 4.2.2 shall be reduced, dollar-for-dollar, by any amounts received by Employee under any disability insurance policy or plan provided to Employee by Employer. "Onset of Disability" means the first day on which Employee shall be unable to attend to the regular affairs of Employer on a full time basis by reason of physical or mental incapacity, sickness or infirmity. If Employee's disability continues for more than twelve (12) months after the Onset of Disability or for periods aggregating more than twelve (12) months during any twenty-four (24) month period, then Employer shall have the right to terminate Employee's employment immediately upon notice, and all of his rights to compensation and benefits hereunder shall simultaneously terminate, except that Employee shall be entitled to any unpaid portion of his Salary and accrued benefits up to the Date of Termination and to any benefits which are to be continued or paid after the Date of Termination in accordance with the terms of the corresponding benefit plans. 4.2.3 Termination for Cause. At any time during the Term, Employer may terminate Employee's employment hereunder for Cause (as defined herein), effective immediately upon notice to Employee, if at a duly convened meeting of the Board of Directors of which Employee was given reasonable advance notice and at which Employee and his counsel had the opportunity to be heard, a resolution was duly adopted by the affirmative vote of not less than two-thirds of the entire membership of the Board finding that, in the good faith judgment of the Board, (1) an event (which is described in the resolution in reasonable detail) constituting Cause has occurred, and (2) either -5- Employee had a reasonable opportunity to take remedial action but failed or refused to do so, or an opportunity to take remedial action would not have been meaningful or appropriate under the circumstances. For purposes of this Agreement, Cause shall mean: (1) Employee willfully breaches or fails to diligently perform any or all of his duties under this Agreement (other than such failure resulting from Employee's incapacity due to physical or mental illness) and Employee continues to do so after demand for substantial performance is delivered by the Employer that specifically identifies the manner in which the Employer believes the Employee has not diligently performed his duties under this Agreement, (2) Employee commits an act of dishonesty or breach of trust, (3) Employee willfully violates or breaches any of the provisions of this Agreement, (4) Employee's act or omission to act results in or is intended to result directly in unjust gain to or personal enrichment of Employee at Employer's expense, or (5) Employee is indicted for or convicted of a felony or any crime involving larceny, embezzlement or moral turpitude. Notwithstanding anything to the contrary contained herein, the term "Cause" shall not include any act or omission to act of the Employee: (1) if such act or omission has been approved by the Board of Directors of Employer; or (2) which is the result of bad judgment or negligence on the part of the Employee. On termination of this Agreement pursuant to this Section 4.2.3, all rights to compensation and benefits of Employee shall cease as of the Date of Termination, except Employee shall be entitled to any unpaid portion of his Salary and benefits earned to the Date of Termination. The Employee shall have the option to have assigned to him at no cost and with no apportionment of -6- prepaid premiums any assignable insurance policy owned by the Employer and relating specifically to the Employee. 4.2.4 Termination without Cause. This Agreement may be terminated by the Corporation upon thirty (30) days' prior written notice without Cause being assigned therefor upon affirmative vote of a majority of the members of the Board of Directors entitled to vote on the matter. On termination of this Agreement without Cause, Employee shall be entitled to the payments he would have received had the Agreement been terminated under the provisions of Section 4.2.3 and shall, in addition, be entitled to severance compensation equal to two times his then current Base Salary. 4.2.5 Termination for "Good Reason". Employee may, upon thirty (30) days' prior written notice, terminate this Agreement for Good Reason if (1) Employer elects to terminate the automatic extension of the Term, (2) if Employer significantly changes Employee's duties or reduces Employee's responsibility or authority, (3) Employer's principal office is moved to a location outside a radius of five (5) miles from the center of Kennett Square, Pennsylvania, or (4) Employee is removed from Employer's Board of Directors. If Employee terminates this Agreement for Good Reason, he shall be entitled to the payments he would have received under Section 4.2.3 and shall, in addition, be entitled to receive severance compensation equal to two (2) times his then current Base Salary. 4.3 Mitigation. Employee shall not be required to mitigate the amount of any payment provided for in Section 4 by seeking employment or otherwise. Employer shall not be entitled to set off against the amounts payable to Employee hereunder any amounts earned by Employee in other employment after termination of his employment with Employee hereunder or any amounts which might have been earned by Employee in other employment had he sought -7- such other employment. The amounts payable to Employee hereunder shall not be treated as damages but as severance compensation to which Employee is entitled by reason of termination of his employment in the circumstances contemplated by this Agreement. 4.4 Procedure Upon Termination. On termination of employment regardless of the reason, Employee shall promptly return to Employer all documents (including copies) and other property of Employer, including without limitation, customer lists, manuals, letters, materials, reports, and records in his possession or control no matter from whom or in what manner acquired. 5. Employee's Covenants. 5.1 Discoveries. Employee shall communicate to Employer and preserve as confidential information of Employer each discovery, idea, design, invention and improvement relating in any manner to Employer's business, whether or not patentable and whether or not reduced to practice, which is conceived, developed or made by Employee, whether alone, or jointly with others, at any time during the Term hereof (such discoveries, ideas, designs, inventions and improvements are referred to as "Employee's Discoveries"). All of Employee's Discoveries shall be Employer's exclusive property, and all of Employee's right, title and interest therein are hereby irrevocably assigned to Employer. Employee shall not, except with Employer's express prior written consent, or except in the proper course of his employment with Employer, use any of Employee's Discoveries for his own benefit or the benefit of any Person (as defined herein), or disclose any of Employee's Discoveries to any outside Person through publication or in any other manner. For purposes of this Agreement, the term "Person" means a natural person, corporation, partnership, trust, estate, joint venture, sole proprietorship, -8- government (and any branch or subdivision thereof), governmental agency, association, cooperative or other entity. 5.2 Nondisclosure. At all times during and after the Term, Employee shall keep confidential and shall not, except with Employer's express prior written consent, or except in the proper course of his employment with Employer, directly or indirectly, communicate, disclose, divulge, publish, or otherwise express, to any Person, or use for his own benefit or the benefit of any Person, any trade secrets, confidential or proprietary knowledge or information, no matter when or how acquired, concerning the conduct and details of Employer's business, including without limitation names of customers and suppliers, marketing methods, trade secrets, policies, prospects and financial condition. For purposes of this Section 5.2, confidential information shall not include any information which is now known by or readily available to the general public or which becomes known by or readily available to the general public other than as a result of any improper act or omission of Employee. 5.3 Non-competition. During the Term hereof and for a period of two (2) years thereafter, Employee shall not, except with Employer's express prior written consent, directly or indirectly, in any capacity, for the benefit of any Person: (1) Communicate with or solicit any Person who is or during such period becomes a customer, supplier, employee, salesman, agent or representative of Employer, in any manner which interferes or might interfere with such Person's relationship with Employer, or in an effort to obtain such Person as a customer, supplier, employee, salesman, agent, or representative of any business in competition with Employer within 100 miles of any office or facility owned, leased or operated by Employer. -9- (2) Establish, engage, own, manage, operate, join or control, or participate in the establishment, ownership (other than as the owner of less than 1% of the stock of a corporation whose shares are publicly traded), management, operation or control of, or be a director, officer, employee, salesman, agent or representative of, or be a consultant to, any Person in any business in competition with Employer, at any location within 100 miles of any office or facility owned, leased or operated by Employer, or act or conduct himself in any manner which he would have reason to believe inimical or contrary to the best interests of Employer. 5.4 Enforcement. Employee acknowledges that any breach by him of any of the covenants and agreements of this Section 5 ("Covenants") will result in irreparable injury to Employer for which money damages could not adequately compensate Employer, and therefore, in the event of any such breach, Employer shall be entitled, in addition to all other rights and remedies which Employer may have at law or in equity, to have an injunction issued by any competent court enjoining and restraining Employee and/or all other Persons involved therein from continuing such breach. The existence of any claim or cause of action which Employee or any such other Person may have against Employer shall not constitute a defense or bar to the enforcement of any of the Covenants. If Employer is obliged to resort to litigation to enforce any of the Covenants which has a fixed term, then such term shall be extended for a period of time equal to the period during which a material breach of such Covenant was occurring, beginning on the date of a final court order (without further right of appeal) holding that such a material breach occurred or, if later, the last day of the original fixed term of such Covenant. 5.5 Consideration. Employee expressly acknowledges that the Covenants are a material part of the consideration bargained for by Employer -10- and, without the agreement of Employee to be bound by the Covenants, Employer would not have agreed to enter into this Agreement. 5.6 Scope. If any portion of any Covenant or its application is construed to be invalid, illegal or unenforceable, then the other portions and their application shall not be affected thereby and shall be enforceable without regard thereto. If any of the Covenants is determined to be unenforceable because of its scope, duration, geographical area or similar factor, then the court making such determination shall have the power to reduce or limit such scope, duration, area or other factor, and such Covenant shall then be enforceable in its reduced or limited form. 6. Miscellaneous. 6.1 Notices. All notices, requests, demands, consents or other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if and when (1) delivered personally, (2) mailed by first class certified mail, return receipt requested, postage prepaid, or (3) sent by a nationally recognized express courier service, postage or delivery charges prepaid, to the parties at their respective addresses stated below or to such other addresses of which the parties may give notice in accordance with this Section. If to Employer, to: Genesis Health Ventures, Inc. 148 West State Street, Suite 100 Kennett Square, PA 19348 Attention: Law Department -11- With a copy to: Blank, Rome, Comisky & McCauley 1200 Four Penn Center Plaza Philadelphia, PA 19103 Attention: Stephen E. Luongo, Esquire If to Employee, to: Michael R. Walker 228 North Garfield Street Kennett Square, PA 19348 6.2 Entire Understanding. This Agreement, sets forth the entire understanding between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous, written, oral, expressed or implied, communications, agreements and understandings with respect to the subject matter hereof. 6.3 Modification. This Agreement shall not be amended, modified, supplemented or terminated except in writing signed by both parties. No action taken by Employer hereunder, including without limitation any waiver, consent or approval, shall be effective unless approved by a majority of the Board. 6.4 Prior Agreements. Employee represents to Employer (1) that there are no restrictions, agreements or understandings whatsoever to which Employee is a party which would prevent or make unlawful his execution of this Agreement or his employment hereunder, (2) that his execution of this Agreement and his employment hereunder shall not constitute a breach of any contract, agreement or understanding, oral or written to which he is a party or by which he is bound and (3) that he is free and able to execute this Agreement and to enter into employment by Employer. -12- 6.5 Termination of Prior Employment Agreements. All prior employment agreements between Employee and Employer (and/or any of its affiliates) are hereby terminated as of the date hereof as fully performed on both sides. 6.6 Parties in Interest. This Agreement and all rights of Employee hereunder shall inure to the benefit of, bind and be enforceable by Employee and his heirs, personal representatives, estate and beneficiaries, and Employer and its successors and assigns. This Agreement is a personal employment contract of Employer, being for the personal services of Employee, and shall not be assignable by Employee. 6.7 Severability. If any provision of this Agreement is construed to be invalid, illegal or unenforceable, then the remaining provisions hereof shall not be affected thereby and shall be enforceable without regard thereto. 6.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original hereof, and it shall not be necessary in making proof of this Agreement to produce or account for more than one counterpart hereof. 6.9 Section Headings. Section and subsection headings in this Agreement are inserted for convenience of reference only, and shall neither constitute a part of this Agreement nor affect its construction, interpretation, meaning or effect. 6.10 References. All words used in this Agreement shall be construed to be of such number and gender as the context requires or permits. 6.11 Controlling Law. This Agreement is made under, and shall be governed by, construed and enforced in accordance with, the substantive laws of Pennsylvania applicable to agreements made and to be performed entirely therein. -13- 6.12 Settlement of Disputes. Any claims, controversies, demands, disputes or differences between or among the parties hereto or any persons bound hereby arising out of, or by virtue of, or in connection with, or relating to this Agreement shall be submitted to and settled by arbitration in Philadelphia Pennsylvania, before and in accordance with the rules then obtaining of JUDICATE. In the event JUDICATE does not exist for settlement of disputes at the time either or both of the parties desire to submit a claim, controversy, demand, dispute or difference to arbitration, then such claim, controversy, demand, dispute or difference shall be submitted to and settled by arbitration in Philadelphia, Pennsylvania before a single arbitrator who shall be knowledgeable in the field of business law and employment relations and such arbitration shall be in accordance with the rules then obtaining of the American Arbitration Association. The parties agree to bear joint and equal responsibility for all fees of the arbitrator, abide by any decision rendered as final and binding, and waive the right to submit the dispute to a public tribunal for a jury or non-jury trial. 6.13 Approval and Authorizations. The execution and the implementation of the terms and conditions of this Agreement have been fully authorized by the Board. 6.14 Indulgences, Etc. Neither the failure nor delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall the single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. -14- 6.15 Legal Expenses. In the event that the Employee institutes any legal action to enforce his rights under, or to recover damages for breach of this Agreement, the Employee, if he is the prevailing party, shall be entitled to recover from the Employer any actual expenses for attorney's fees and disbursements incurred by him. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above mentioned, under Seal, intending to be legally bound hereby. EMPLOYER: Genesis Health Ventures, Inc. Attest: _____________________ By: _________________________ Secretary President (Corporate Seal) EMPLOYEE: ______________________________ Michael R. Walker EX-10.5 6 EXHIBIT 10.5 GENESIS HEALTH VENTURES, INC. AMENDED AND RESTATED EMPLOYEE STOCK OPTION PLAN 1. Purpose of Plan The purpose of this Amended and Restated Employee Stock Option Plan (the "Plan") is to provide additional incentive to officers and key employees of Genesis Health Ventures, Inc. (the "Company") and each present or future parent or subsidiary corporation by encouraging them to invest in shares of the Company's common stock, par value $.02 per share ("Common Stock"), and thereby acquire a proprietary interest in the Company and an increased personal interest in the Company's continued success and progress, to the mutual benefit of directors, officers, employees and stockholders. 2. Aggregate Number of Shares 4,500,000 shares of the Company's Common Stock, shall be the aggregate number of shares which may be issued under this Plan. Notwithstanding the foregoing, in the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Stock Option Committee, hereinafter referred to, deems in its sole discretion to be similar circumstances, the aggregate number and kind of shares which may be issued under this Plan shall be appropriately adjusted in a manner determined in the sole discretion of the Stock Option Committee. Reacquired shares of the Company's Common Stock, as well as unissued shares, may be used for the purpose of this Plan. Common Stock of the Company subject to options which have terminated unexercised, either in whole or in part, shall be available for future options granted under this Plan. 3. Class of Persons Eligible to Receive Options All officers and key employees of, and consultants and advisors to, the Company and any present or future Company parent or subsidiary corporation are eligible to receive an option or options under this Plan, provided that Incentive Stock Options (as described below) may be issued only to employees. The individuals who shall, in fact, receive an option or options shall be selected by the Stock Option Committee, in its sole discretion, except as otherwise specified in Section 4 hereof. The maximum number of options which may be granted to any participant in any one year is options for 750,000 shares of Common Stock subject to appropriate adjustment in the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Stock Option Committee deems in its sole discretion to be similar circumstances. 4. Administration of Plan (a) This Plan shall be administered by the Stock Option Committee (the "Committee") appointed by the Company's Board of Directors. The Committee shall consist of a minimum of two and a maximum of seven members of the Board of Directors, each of whom shall be a "Non-Employee Director" as defined in Rule 16b-3(b)(3) under the Securities Exchange Act of 1934, as amended, of the Securities and Exchange Commission (the "SEC") or any future corresponding rule. The Committee shall, in addition to its other authority and subject to the provisions of this Plan, determine which individuals are eligible to receive options under this Plan, which individuals shall in fact be granted an option or options, whether the option shall be an incentive stock option or a non-qualified stock option, the number of shares to be subject to each of the options, the time or times at which the options shall be granted, the rate of option exercisability, and, subject to Section 5 hereof, the price at which each of the options is exercisable and the duration of the option. (b) The Committee shall adopt such rules for the conduct of its business and administration of this Plan as it considers desirable. A majority of the members of the Committee shall constitute a quorum for all purposes. The vote or written consent of a majority of the members of the Committee on a particular matter shall constitute the act of the Committee on such matter. The Committee shall have the right to construe the Plan and the options issued pursuant to it, to correct defects and omissions and to reconcile inconsistencies to the extent necessary to effectuate the Plan and the options issued pursuant to it, and such action shall be final, binding and conclusive upon all parties concerned. No member of the Committee or the Board of Directors shall be liable for any act or omission (whether or not negligent) taken or omitted in good faith, or for the exercise of an authority or discretion granted in connection with the Plan to a Committee or the Board of Directors, or for the acts or omissions of any other members of a Committee or the Board of Directors. Subject to the numerical limitations on Committee membership set forth in Section 4(a) hereof, the Board of Directors may at any time appoint additional members of the Committee and may at any time remove any member of the Committee with or without cause. Vacancies in the Committee, however caused, may be filled by the Board of Directors, if it so desires. 5. Incentive Stock Options and Non-Qualified Stock Options (a) Options issued pursuant to this Plan may be either Incentive Stock Options granted pursuant to Section 5(b) hereof or Non-Qualified Stock Options granted pursuant to Section 5(c) hereof, as determined by the Committee. An "Incentive Stock Option" is an option which satisfies all of the requirements of Section 422A of the Code and the regulations thereunder, and a Non-Qualified Stock Option is an option which either does not satisfy all of those requirements or the terms of the option provide that it will not be treated as an Incentive Stock Option. The Committee may grant both an Incentive Stock Option and a Non-Qualified Stock Option to the same person, or more than one of each type of option to the same person. The option price for Incentive Stock Options issued under this Plan shall be equal at least to the fair market value (as defined below) of the Company's Common Stock on the date of the grant of the option. The option price for Non-Qualified Stock Options issued under this Plan shall be at least equal to the fair market value of the Common Stock on the date of the grant of the option except that the -2- minimum option price may be equal to or greater than 85% of the fair market value of the Company's Common Stock as of the date of the grant of the option if the discount is expressly granted in lieu of a reasonable amount of salary or cash bonus. If an Incentive Stock Option is granted to an individual who, at the time the option is granted, owns shares of Common Stock equal to more than 10 percent of the total combined voting power of the Common Stock of the Company or any subsidiary corporation of the Company (a "10% Stockholder"), the option price shall not be less than 110 percent of the fair market value, as determined by the Committee in accordance with its interpretation of the requirements of Section 422A of the Code and the regulations thereunder, of the Company's Common Stock on the date of grant of the option, and such option shall not be exercisable after the expiration of five years from the date the option is granted. The fair market value of the Company's Common Stock on any particular date shall mean the last reported sale price of a share of the Company's Common Stock on any stock exchange on which such stock is then listed or admitted to trading, or on the NASDAQ National Market System, on such date, or if no sale took place on such day, the last such date on which a sale took place, or if the Common Stock is not then quoted on the NASDAQ National Market System, or listed or admitted to trading on any stock exchange, the average of the bid and asked prices in the over-the-counter market on such date, or if none of the foregoing, a price determined by the Committee. (b) Subject to the authority of the Committee set forth in Section 4(a) hereof, Incentive Stock Options issued pursuant to this Plan shall be issued substantially in the form set forth in Appendix I hereof, which form is hereby incorporated by reference and made a part hereof, and shall contain substantially the terms and conditions set forth therein. Incentive Stock Options shall not be exercisable after the expiration of ten years (five years in the case of 10% Stockholders) from the date such options are granted, unless terminated earlier under the terms of the option. At the time of the grant of an Incentive Stock Option hereunder, the Committee may, in its discretion, modify or amend any of the option terms contained in Appendix I for any particular optionee, provided that the option as modified or amended satisfies the requirements of Section 422A of the Code and the regulations thereunder. Each of the options granted pursuant to this Section 5(b) is intended, if possible, to be an "Incentive Stock Option" as that term is defined in Section 422A of the Code and the regulations thereunder. In the event this Plan or any option granted pursuant to this Section 5(b) is in any way inconsistent with the applicable legal requirements of the Code or the regulations thereunder for an Incentive Stock Option, this Plan and such option shall be deemed automatically amended as of the date hereof to conform to such legal requirements, if such conformity may be achieved by amendment. (c) Subject to the authority of the Committee set forth in Section 4(a) hereof, Non-Qualified Stock Options issued pursuant to this Plan shall be issued substantially in the form set forth in Appendix II hereof, which form is hereby incorporated by reference and made a part hereof, and shall contain substantially the terms and conditions set forth therein. Non-Qualified Stock Options shall expire ten years after the date they are granted, unless terminated earlier under the option terms. At the time of granting a Non-Qualified Stock Option hereunder, the Committee may, in its discretion, -3- modify or amend any of the option terms contained in Appendix II for any particular optionee. (d) Neither the Company nor any of its current or future parent, subsidiaries or affiliates, nor their officers, directors, stockholders, stock option plan committees, employees or agents shall have any liability to any optionee in the event (i) an option granted pursuant to Section 5(b) hereof does not qualify as an "Incentive Stock Option" as that term is used in Section 422A of the Code and the regulations thereunder; (ii) any optionee does not obtain the tax treatment pertaining to an Incentive Stock Option; or (iii) any option granted pursuant to Section 5(c) hereof is an "Incentive Stock Option." 6. Modification, Amendment, Suspension and Termination Options shall not be granted pursuant to this Plan after August 1, 2004. The Board of Directors reserves the right at any time, and from time to time, to modify or amend this Plan in any way, or to suspend or terminate it, effective as of such date, which date may be either before or after the taking of such action, as may be specified by the Board of Directors; provided, however, that such action shall not affect options granted under the Plan prior to the actual date on which such action occurred. If a modification or amendment of this Plan is required by the Code or the regulations thereunder to be approved by the stockholders of the Company in order to permit the granting of "Incentive Stock Options" (as that term is defined in Section 422A of the Code and regulations thereunder) pursuant to the modified or amended Plan, such modification or amendment shall also be approved by the stockholders of the Company in such manner as is prescribed by the Code and the regulations thereunder. If the Board of Directors voluntarily submits a proposed modification, amendment, suspension or termination for stockholder approval, such submission shall not require any future modifications, amendments (whether or not relating to the same provision or subject matter), suspensions or terminations to be similarly submitted for stockholder approval. 7. Effectiveness of Plan This Plan shall become effective on the date of its adoption by the Company's Board of Directors, subject however to approval by the holders of the Company's Common Stock in the manner as prescribed in the Code and the regulations thereunder. Options may be granted under this Plan prior to obtaining stockholder approval, provided such options shall not be exercisable until stockholder approval is obtained. 8. General Conditions (a) Nothing contained in this Plan or any option granted pursuant to this Plan shall confer upon any employee the right to continue in the employ of the Company or any affiliated or subsidiary corporation or interfere in any way with the rights of the Company or any affiliated or subsidiary corporation to terminate his employment in any way. -4- (b) Corporate action constituting an offer of stock for sale to any employee under the terms of the options to be granted hereunder shall be deemed complete as of the date when the Committee authorizes the grant of the option to the employee, regardless of when the option is actually delivered to the employee or acknowledged or agreed to by him. (c) The terms "parent corporation" and "subsidiary corporation" as used throughout this Plan, and the options granted pursuant to this Plan, shall (except as otherwise provided in the option form) have the meaning that is ascribed to that term when contained in Section 422A(b) of the Code and the regulations thereunder, and the Company shall be deemed to be the grantor corporation for purposes of applying such meaning. (d) References in this Plan to the Code shall be deemed to also refer to the corresponding provisions of any future United States revenue law. (e) The use of the masculine pronoun shall include the feminine gender whenever appropriate. -5- APPENDIX I INCENTIVE STOCK OPTION To:__________________________________________________________________________ Name __________________________________________________________________________ Address __________________________________________________________________________ Date of Grant:____________________________________ You are hereby granted an option, effective as of the date hereof, to purchase __________ shares of common stock, par value $.02 per share ("Common Stock"), of Genesis Health Ventures, Inc. (the "Company") at a price of $___ per share pursuant to the Company's Amended and Restated Employee Stock Option Plan (the "Plan"). Your option may first be exercised on and after ________, but not before that time. [On and after _________ and prior to _________, your option may be exercised for up to % of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Stock Option Committee deems in its sole discretion to be similar circumstances). Each succeeding year thereafter, your option may be exercised for up to an additional ___% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Stock Option Committee deems in its sole discretion to be similar circumstances).](1) No fractional shares shall be issued or delivered. This option shall terminate and is not exercisable after [five/ten] years from the date of its grant (the "Scheduled Termination Date"), except if terminated earlier as hereafter provided. You may exercise your option by giving written notice to the Secretary of the Company on forms supplied by the Company at its then principal executive office, accompanied by payment of the option price for the total number of shares you specify that you wish to purchase. The payment may be in any of the following forms: (a) cash, which - -------- (1) The bracketed portion of this paragraph should be included if the number of shares which may be acquired upon exercise of the option will increase over time. may be evidenced by a check; (b) certificates representing shares of Common Stock of the Company, which will be valued by the Secretary of the Company at the fair market value per share of the Company's Common Stock (as determined in accordance with the Plan) on the last trading day immediately preceding the delivery of such certificates to the Company, accompanied by an assignment of the stock to the Company; or (c) any combination of cash and Common Stock of the Company valued as provided in clause (b). Any assignment of stock shall be in a form and substance satisfactory to the Secretary of the Company, including guarantees of signature(s) and payment of all transfer taxes if the Secretary deems such guarantees necessary or desirable. Your option will, to the extent not previously exercised by you, terminate three months after the date on which your employment by the Company or a Company subsidiary corporation is terminated other than by reason of (i) disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder, in which case your option will terminate one year from the onset of disability, or death (but in no event later than the Scheduled Termination Date), whether such termination be voluntary or not. After the date your employment is terminated, as aforesaid, you may exercise this option only for the number of shares which you had a right to purchase and did not purchase on the date your employment terminated. If you are employed by a Company subsidiary corporation, your employment shall be deemed to have terminated on the date your employer ceases to be a Company subsidiary corporation, unless you are on that date transferred to the Company or another Company subsidiary corporation. Your employment shall not be deemed to have terminated if you are transferred from the Company to a Company subsidiary corporation, or vice versa, or from one Company subsidiary corporation to another Company subsidiary corporation. If you die while employed by the Company or a Company subsidiary corporation, your legatee(s), distributee(s), executor or administrator, as the case may be, may, at any time within one year after the date of your death (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase during your lifetime. If your employment by the Company or a Company subsidiary corporation is terminated by reason of your becoming disabled (within the meaning of Section 22(e)(3) of the Code and the regulations thereunder), you or your legal guardian or custodian may at any time within one year after the date of such termination (but in no event later than the Scheduled Termination Date), exercise the option as to any shares, which you have a right to purchase and did not purchase prior to such termination. Your executor, administrator, guardian or custodian must present proof of his authority satisfactory to the Company prior to being allowed to exercise this option. In the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Stock Option Committee deems in its sole discretion to be similar circumstances, the number and kind of shares subject to this option and the option price of such shares shall be -2- appropriately adjustedin a manner to be determined in the sole discretion of the Stock Option Committee. This option is not transferable otherwise than by will or the laws of descent and distribution, and is exercisable during your lifetime only by you, including, for this purpose, your legal guardian or custodian in the event of disability. Until the option price has been paid in full pursuant to due exercise of this option and the purchased shares are delivered to you, you do not have any rights as a stockholder of the Company. The Company reserves the right not to deliver to you the shares purchased by virtue of the exercise of this option during any period of time in which the Company deems, in its sole discretion, that such delivery would violate a federal, state, local or securities exchange rule, regulation or law. Notwithstanding anything to the contrary contained herein, this option is not exercisable until all the following events occur and during the following periods of time: (a) Until the Plan pursuant to which this option is granted is approved by the stockholders of the Company in the manner prescribed by the Code and the regulations thereunder; (b) Until this option and the optioned shares are approved and/or registered with such federal, state or local regulatory bodies or agencies and securities exchanges as the Company may deem necessary or desirable; or (c) During any period of time in which the Company deems that the exercisability of this option, the offer to sell the shares optioned hereunder, or the sale hereof, may violate a federal, state, local or securities exchange rule, regulation or law, or may cause the Company to be legally obligated to issue or sell more shares than the Company is legally entitled to issue or sell. The following two paragraphs shall be applicable if, on the date of exercise of this option, the Common Stock to be purchased pursuant to such exercise has not been registered under the Securities Act of 1933, as amended, and under applicable state securities laws, and shall continue to be applicable for so long as such registration has not occurred: (a) The optionee hereby agrees, warrants and represents that he will acquire the Common Stock to be issued hereunder for his own account for investment purposes only, and not with a view to, or in connection with, any resale or other distribution of any of such shares, except as hereafter permitted. The optionee further agrees that he will not at any time make any offer, sale, transfer, pledge or other disposition of such Common Stock to be issued hereunder without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company to the effect that the proposed transaction will be exempt from such registration. The optionee shall execute such instruments, representations, acknowledgments and agreements as the Company may, in its sole -3- discretion, deem advisable to avoid any violation of federal, state, local or securities exchange rule, regulation or law. (b) The certificates for Common Stock to be issued to the optionee hereunder shall bear the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under applicable state securities laws. The shares have been acquired for investment and may not be offered, sold, transferred, pledged or otherwise disposed of without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company that the proposed transaction will be exempt from such registration." The foregoing legend shall be removed upon registration of the legended shares under the Securities Act of 1933, as amended, and under any applicable state laws or upon receipt of an opinion of counsel acceptable to the Company that said registration is no longer required. The sole purpose of the agreements, warranties, representations and legend set forth in the two immediately preceding paragraphs is to prevent violations of the Securities Act of 1933, as amended, and any applicable state securities laws. It is the intention of the Company and you that this option shall, if possible, be an "incentive stock option" as that term is used in Section 422A of the Code and the regulations thereunder. In the event this option is in any way inconsistent with the legal requirements of the Code or the regulations thereunder for an "incentive stock option," this option shall be deemed automatically amended as of the date hereof to conform to such legal requirements, if such conformity may be achieved by amendment. This option shall be subject to the terms of the Plan in effect on the date this option is granted, which terms are hereby incorporated herein by reference and made a part hereof. In the event of any conflict between the terms of this option and the terms of the Plan in effect on the date of this option, the terms of the Plan shall govern. This option constitutes the entire understanding between the Company and you with respect to the subject matter hereof and no amendment, modification or waiver of this option, in whole or in part, shall be binding upon the Company unless in writing or signed by the President of the Company. This option and the performances of the parties hereunder shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania. -4- Please sign the copy of this option and return it to the Company's Secretary, thereby indicating your understanding of and agreement with its terms and conditions. GENESIS HEALTH VENTURES, INC. By:_____________________________________ I hereby acknowledge receipt of a copy of the foregoing stock option and, having read it hereby signify my understanding of, and my agreement with, its terms and conditions. ________________________________________ ________________________________ (Signature) (Date) -5- APPENDIX II NON-QUALIFIED STOCK OPTION To:___________________________________________________________________________ Name ___________________________________________________________________________ Address ___________________________________________________________________________ Date of Grant:______________________________________ You are hereby granted an option, effective as of the date hereof, to purchase _________ shares of common stock, par value $.02 per share ("Common Stock"), of Genesis Health Ventures, Inc. (the "Company") at a price of $____ per share pursuant to the Company's Amended and Restated Employee Stock Option Plan (the "Plan"). Your option may first be exercised on and after _______, but not before that time. [On and after _______ and prior to ______, your option may be exercised for up to ___% of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Stock Option Committee deems in its sole discretion to be similar circumstances). Each succeeding year thereafter, your option may be exercised for up to an additional % of the total number of shares subject to the option minus the number of shares previously purchased by exercise of the option (as adjusted for any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Stock Option Committee deems in its sole discretion to be similar circumstances).](1) No fractional shares shall be issued or delivered. This option shall terminate and is not exercisable after ten years from the date of its grant (the "Scheduled Termination Date"), except if terminated earlier as hereafter provided. You may exercise your option by giving written notice to the Secretary of the Company on forms supplied by the Company at its then principal executive office, - -------- The bracketed portion of this paragraph should be included if the number of shares which may be acquired upon exercise of the option will increase over time. accompanied by payment of the option price for the total number of shares you specify that you wish to purchase. The payment may be in any of the following forms: (a) cash, which may be evidenced by a check; (b) certificates representing Common Stock of the Company which will be valued by the Secretary of the Company at the fair market value per share of the Company's Common Stock (as determined in accordance with the Plan) on the last trading day immediately preceding the delivery of such certificates to the Company, accompanied by an assignment of the stock to the Company; or (c) any combination of cash and Common Stock of the Company valued as provided in clause (b). Any assignment of stock shall be in a form and substance satisfactory to the Secretary of the Company, including guarantees of signature(s) and payment of all transfer taxes if the Secretary deems such guarantees necessary or desirable. Your option will, to the extent not previously exercised by you, terminate three months after the date on which your employment by the Company or a Company subsidiary corporation is terminated other than by reason of (i) disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder, in which case your option will terminate one year from the onset of disability, or death (but in no event later than the Scheduled Termination Date), whether such termination be voluntary or not. After the date your service or employment is terminated, as aforesaid, you may exercise this option only for the number of shares which you had a right to purchase and did not purchase on the date you ceased to be a director or your employment terminated. If you are employed by a Company subsidiary corporation, your employment shall be deemed to have terminated on the date your employer ceases to be a Company subsidiary corporation, unless you are on that date transferred to the Company or another Company subsidiary corporation. Your employment shall not be deemed to have terminated if you are transferred from the Company to a Company subsidiary corporation, or vice versa, or from one Company subsidiary corporation to another Company subsidiary corporation. If you die while employed by the Company or a Company subsidiary corporation, your legatee(s), distributee(s), executor or administrator, as the case may be, may, at any time within one year after the date of your death (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase during your lifetime. If your service with the Company or a Company parent or subsidiary corporation is terminated by reason of your becoming disabled (within the meaning of Section 22(e)(3) of the Code and the regulations thereunder), you or your legal guardian or custodian may at any time within one year after the date of such termination (but in no event later than the Scheduled Termination Date), exercise the option as to any shares which you had a right to purchase and did not purchase prior to such termination. Your executor, administrator, guardian or custodian must present proof of his authority satisfactory to the Company prior to being allowed to exercise this option. -2- In the event of any change in the outstanding shares of the Common Stock of the Company by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Stock Option Committee deems in its sole discretion to be similar circumstances, the number and kind of shares subject to this option and the option price for such shares shall be appropriately adjusted in a manner to be determined in the sole discretion of the Stock Option Committee. This option is not transferable otherwise than by will or the laws of descent and distribution, and is exercisable during your lifetime only by you, including, for this purpose, tour legal guardian or custodian in the event of disability. Until the option price has been paid in full pursuant to due exercise of this option and the purchased shares are delivered to you, you do not have any rights as a stockholder of the Company. The Company reserves the right not to deliver to you the shares purchased by virtue of exercise of this option during any period of time in which the Company deems, in its sole discretion, that such delivery may not be consummated without violating a federal, state, local or securities exchange rule, regulation or law. Notwithstanding anything to the contrary contained herein, this option is not exercisable until all the following events occur and during the following periods of time: (a) Until the Plan pursuant to which this option is granted is approved by the stockholders of the Company in the manner prescribed by the Code and the regulations thereunder; (b) Until this option and the optioned shares are approved and/or registered with such federal, state and local regulatory bodies or agencies and securities exchanges as the Company may deem necessary or desirable; or (c) During any period of time in which the Company deems that the exercisability of this option, the offer to sell the shares optioned hereunder, or the sale thereof, may violate a federal, state, local or securities exchange rule, regulation or law, or may cause the Company to be legally obligated to issue or sell more shares than the Company is legally entitled to issue or sell. The following two paragraphs shall be applicable if, on the date of exercise of this option, the Common Stock to be purchased pursuant to such exercise has not been registered under the Securities Act of 1933, as amended, and under applicable state securities laws, and shall continue to be applicable for so long as such registration has not occurred: -3- (a) The optionee hereby agrees, warrants and represents that he will acquire the Common Stock to be issued hereunder for his own account for investment purposes only, and not with a view to, or in connection with, any resale or other distribution of any of such shares, except as hereafter permitted. The optionee further agrees that he will not at any time make any offer, sale, transfer, pledge or other disposition of such Common Stock to be issued hereunder without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company to the effect that the proposed transaction will be exempt from such registration. The optionee shall execute such instruments, representations, acknowledgments and agreements as the Company may, in its sole discretion, deem advisable to avoid any violation of federal, state, local or securities exchange rule, regulation or law. (b) The certificates for Common Stock to be issued to the optionee hereunder shall bear the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under applicable state securities laws. The shares have been acquired for investment and may not be offered, sold, transferred, pledged or otherwise disposed of without an effective registration statement under the Securities Act of 1933, as amended, and under any applicable state securities laws or an opinion of counsel acceptable to the Company that the proposed transaction will be exempt from such registration." The foregoing legend shall be removed upon registration of the legended shares under the Securities Act of 1933, as amended, and under any applicable state laws or upon receipt of an opinion of counsel acceptable to the Company that said registration is no longer required. The sole purpose of the agreements, warranties, representations and legend set forth in the two immediately preceding paragraphs is to prevent violations of the Securities Act of 1933, as amended, and any applicable state securities laws. It is the intention of the Company and you that this option shall not be an "incentive stock option" as that term is used in Section 422A of the Code and the regulations thereunder. This option shall be subject to the terms of the Plan in effect on the date this option is granted, which terms are hereby incorporated herein by reference and made a part hereof. In the event of any conflict between the terms of this option and the terms of the Plan in effect on the date of this option, the terms of the Plan shall govern. This option constitutes the entire understanding between the Company and you with respect to the -4- subject matter hereof and no amendment, modification or waiver of this option, in whole or in part, shall be binding upon the Company unless in writing and signed by the President of the Company. This option and the performances of the parties hereunder shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania. Please sign the copy of this option and return it to the Company's Secretary, thereby indicating your understanding of and agreement with its terms and conditions. GENESIS HEALTH VENTURES, INC. By:_____________________________________ I hereby acknowledge receipt of a copy of the foregoing stock option and, having read it hereby signify my understanding of, and my agreement with, its terms and conditions. __________________________________________ _________________________________ (Signature) (Date) -5- EX-11 7 EXHIBIT 11 Exhibit 11 GENESIS HEALTH VENTURES STATEMENT RE COMPUTATION OF EARNINGS PER SHARE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (in thousands, except share and per share data)
3/31/97 3/31/96 ----------- ----------- Primary Earnings Per Share: ----------- ----------- Reported net income $ 13,494 $ 7,810 ----------- ----------- Weighted average shares & CSE's: 36,372,903 25,306,685 ----------- ----------- ----------- ----------- Primary EPS - Net income $ 0.37 $ 0.31 =========== =========== Fully Diluted Earnings Per Share: ----------- ----------- Reported net income $ 13,494 $ 7,810 ----------- ----------- Interest expense, amortization and other costs related to the assumed conversion of the Convertible Debentures, net of tax 697 ----------- ----------- Adjusted net income $ 13,494 $ 8,507 ----------- ----------- Weighted average shares & CSE's: Common shares 36,372,903 25,306,685 Additional option shares 1,790 Convertible Debenture shares 3,491,047 ----------- ----------- Total 36,374,693 28,797,732 ----------- ----------- ----------- ----------- Fully diluted EPS - Net income $ 0.37 $ 0.30 =========== ===========
GENESIS HEALTH VENTURES STATEMENT RE COMPUTATION OF EARNINGS PER SHARE SIX MONTHS ENDED MARCH 31, 1997 AND 1996 (in thousands, except share and per share data)
3/31/97 3/31/96 ------------- ------------- Primary Earnings Per Share: Reported earnings before debenture conversion expense and extraordinary item $ 25,002 $ 14,355 Debenture conversion expense, net of tax (687) Extraordinary item, net of tax (553) ------------ ------------ Reported net income $ 24,449 $ 13,668 ------------ ------------ Weighted average shares & CSE's: 35,285,093 24,730,819 ------------ ------------ Primary EPS before debenture conversion expense $0.71 $0.58 Primary EPS - Debenture conversion expense ($0.03) Primary EPS - Extraordinary item, net of tax ($0.02) ------------ ------------ change in accounting principle Primary EPS - Net income $ 0.69 $ 0.55 Fully Diluted Earnings Per Share: Reported earnings before debenture conversion expense $ 25,002 $ 14,355 Debenture conversion expense, net of tax (687) Extraordinary item, net of tax ($ 553) ------------ ------------ Reported net income 24,449 13,668 Adjustments to net income: Interest expense, amortization and other costs related to the assumed conversion of the Convertible Debentures, net of tax 303 1,485 ------------ ------------ Adjusted net income $ 24,752 $ 15,153 ------------ ------------ Weighted average shares & CSE's: Common shares 35,285,093 24,730,819 Additional option shares 92,881 Convertible Debenture shares 884,889 4,085,900 ------------ ------------ Total 36,262,863 28,816,719 ------------ ------------ Fully diluted EPS before debenture conversion expense $ 0.70 $ 0.55 Fully diluted EPS - Debenture conversion expense (0.02) Fully diluted EPS - Extraordinary item, net of tax ($ 0.02) ============ ============ Fully diluted EPS - Net income $ 0.68 $ 0.53 ============ ============
EX-27 8 FINANCIAL DATA SCHEDULE
5 3-MOS SEP-30-1996 JAN-01-1997 MAR-31-1997 13,835,000 5,973,000 233,518,000 (36,531,000) 24,866,000 320,140,000 633,540,000 (77,879,000) 1,341,213 128,737,000 0 0 0 699,000 582,267,000 1,341,213 273,263,000 273,263,000 225,188,000 243,052,000 0 0 8,960,000 21,251,000 7,757,000 0 0 0 0 13,494,000 0.37 0.37
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