-----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, RQkpyI5mh721IO5oNR61Whvqod4Ldg5OYabK0P4bS44xaFXgiqNOWuv/jfFirY24 7geltenC5o71X3iNqusLVQ== 0000950116-96-001183.txt : 19961104 0000950116-96-001183.hdr.sgml : 19961104 ACCESSION NUMBER: 0000950116-96-001183 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19961031 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: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-15267 FILM NUMBER: 96651503 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 S-4 1 As filed with the Securities and Exchange Commission on October 31, 1996 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- GENESIS HEALTH VENTURES, INC. (Exact name of registrant as specified in its charter) Pennsylvania 8050,5912,8099 06-1132947 - ------------------------------- ---------------------------- ------------------- (State or other jurisdiction of (Primary standard industrial (I.R.S. employer incorporation or organization) classification code number) dentification no.) 148 WEST STATE STREET Kennett Square, PA 19348 (610) 444-6350 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) -------------------- Michael R. Walker Chief Executive Officer GENESIS HEALTH VENTURES, INC. 148 West State Street Kennett Square, PA 19348 (610) 444-6350 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- Copy to: Richard J. McMahon, Esquire Blank Rome Comisky & McCauley 1200 Four Penn Center Plaza Philadelphia, Pennsylvania 19103 (215) 569-5500 -------------------- Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after the effective date of this Registration Statement. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. o
Proposed Proposed Title of each Amount maximum maximum Amount of class of securities to be offering price aggregate offering registration to be registered registered per unit price fee =================================================================================================================================== 9-1/4% Senior Subordinated Notes due $125,000,000 $1,000 $125,000,000 $37,879 2006 - -----------------------------------------------------------------------------------------------------------------------------------
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ SUBJECT TO COMPLETION, DATED OCTOBER 31, 1996 PROSPECTUS GENESIS HEALTH VENTURES, INC. Offer to Exchange its 9 1/4% Senior Subordinated Notes due 2006, which have been registered under the Securities Act of 1933, as amended, for any and all of its outstanding 9 1/4% Senior Subordinated Notes due 2006 The Exchange Offer will expire at 5:00 p.m., New York City time, on , 1996, unless extended. ------------------------------- Genesis Health Ventures, Inc., a Pennsylvania corporation ("Genesis" or the "Company"), hereby offers (the "Exchange Offer"), upon the terms and conditions set forth in this Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the "Letter of Transmittal"), to exchange $1,000 principal amount of its 9 1/4% Senior Subordinated Notes due 2006 (the "Exchange Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which this Prospectus is a part, for each $1,000 principal amount of its outstanding 9 1/4% Senior Subordinated Notes due 2006 (the "Existing Notes"), of which $125,000,000 principal amount is outstanding. The form and terms of the Exchange Notes are the same as the form and terms of the Existing Notes (which they replace), except that as of the date hereof the Exchange Notes have been registered under the Securities Act and, therefore, will not bear legends restricting their transfer and will not contain certain provisions included in the terms of the Existing Notes relating to an increase in the interest rate in certain circumstances relating to the timing of the Exchange Offer. The Exchange Notes will evidence the same debt as the Existing Notes (which they replace) and will be issued under and be entitled to the benefits of the Indenture, dated as of October 7, 1996 (the "Indenture"), between the Company and First Union National Bank, as trustee (the "Trustee"), which also governs the Existing Notes. The Exchange Notes and the Existing Notes are sometimes referred to herein collectively as the "Notes." See " Exchange Offer" and "Description of Exchange Notes." The Company will accept for exchange any and all Existing Notes duly tendered and not validly withdrawn prior to 5:00 p.m., New York City time, on , 1996, unless extended by the Company in its sole discretion (the "Expiration Date"). Tenders of Existing Notes may be withdrawn at any time prior to 5:00 p.m. New York City time on the Expiration Date. The Exchange Offer is subject to certain customary conditions. The Existing Notes were sold by the Company on October 7, 1996 to the Initial Purchasers (as defined herein) in transactions not registered under the Securities Act in reliance upon an exemption from registration under the Securities Act (the "Offering"). The Initial Purchasers subsequently resold the Existing Notes to qualified institutional buyers in reliance upon Rule 144A under the Securities Act and to a limited number of institutional accredited investors that agreed to comply with certain transfer restrictions and other conditions. Accordingly, the Existing Notes may not be reoffered, resold or otherwise transferred in the United States unless registered under the Securities Act or unless an applicable exemption from the registration requirements of the Securities Act is available. The Exchange Notes are being offered hereunder in order to satisfy the obligations of the Company under the Registration Rights Agreement (as defined herein) entered into by the Company in connection with the Offering. See "Exchange Offer." Under existing interpretations of the staff of the Securities and Exchange Commission (the "Commission") contained in several no-action letters to third parties, the Exchange Notes will in general be freely tradeable after the Exchange Offer without further registration under the Securities Act. However, any purchaser of Existing Notes who is an "affiliate" of the Company or who intends to participate in the Exchange Offer for the purpose of distributing the Exchange Notes (i) will not be able to rely on such interpretations of the staff of the Commission, (ii) will not be able to tender its Existing Notes in the Exchange Offer and (iii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of the Existing Notes, unless such sale or transfer is made pursuant to an exemption from such requirements. See "Exchange Offer" and "--Resale of the Exchange Notes." Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer (a "Participating Broker-Dealer") must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of Exchange Notes received in exchange for Existing Notes where such Existing Notes were acquired by such Participating Broker-Dealer as a result of market-making activities or other trading activities. Holders of Existing Notes not tendered and accepted in the Exchange Offer will continue to hold such Existing Notes and will be entitled to all the rights and benefits and will be subject to the limitations applicable thereto under the Indenture and with respect to transfer under the Securities Act. Holders of Existing Notes not tendered in the Exchange Offer will not retain any rights under the Registration Rights Agreement, except in limited circumstances. The Company will pay all the expenses incurred by it incident to the Exchange Offer. See "Exchange Offer." There has not previously been any public market for the Exchange Notes. The Company does not intend to list the Exchange Notes on any securities exchange or to seek approval for quotation through any automated quotation system. There can be no assurance that an active market for the Exchange Notes will develop. Merrill Lynch, Pierce, Fenner & Smith Incorporated, CS First Boston Corporation, Donaldson, Lufkin & Jenrette Securities Corporation, Alex. Brown & Sons Incorporated, BT Securities Corporation, and Montgomery Securities (the "Initial Purchasers") have informed the Company that they currently intend to make a market in the Exchange Notes, but are not obligated to do so and any such market making may be discontinued at any time without notice. The Initial Purchasers may act as principal or as agent in such transactions. If a market for the Exchange Notes should develop, the Exchange Notes could trade at a discount from their principal amount. See "Risk Factors -- Absence of Public Market." Moreover, to the extent that Existing Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Existing Notes could be adversely affected. ------------------------------ See "Risk Factors" on page 13 herein for a description of certain risks to be considered by holders who tender their Existing Notes in the Exchange Offer. ------------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSIONER OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is , 1996. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUMMARY The following summary information is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this Prospectus or incorporated by reference herein. Unless otherwise indicated, all information in the Prospectus reflects a three for two stock dividend on the Common Stock effective March 29, 1996. As used herein, unless the context otherwise requires, "Genesis" or the "Company" refers to Genesis Health Ventures, Inc. and its subsidiaries. The Company Genesis is a leading provider of healthcare and support services to the elderly. The Company has developed the Genesis ElderCare(sm) delivery model of integrated healthcare networks to provide cost-effective, outcome-oriented services to the elderly. Through these integrated healthcare networks, Genesis provides basic healthcare and specialty medical services to more than 75,000 customers in five regional markets in the Eastern United States in which over 3,000,000 people over the age of 65 reside. The networks include 153 eldercare centers with approximately 20,120 beds; 18 primary care physician clinics; approximately 70 physicians, physician assistants and nurse practitioners; 12 institutional pharmacies and six medical supply distribution centers serving over 52,000 beds; certified rehabilitation agencies providing services through over 290 contracts; and seven home healthcare agencies. Genesis has concentrated its eldercare networks in five geographic regions in order to achieve operating efficiencies, economies of scale and significant market share. The five geographic markets that Genesis principally serves are: Massachusetts/Connecticut/New Hampshire; Eastern Pennsylvania/Delaware Valley; Southern Delaware/Eastern Shore of Maryland; Baltimore, Maryland/Washington, D.C.; and Central Florida. Genesis eldercare services focus on the central medical and physical issues facing the more medically demanding elderly. By integrating the talents of physicians with case management, comprehensive discharge planning and, where necessary, home support services, the Company provides cost-effective care management to achieve superior outcomes and return customers to the community. The Company believes that its orientation toward achieving improved customer outcomes through its eldercare networks has resulted in increased utilization of specialty medical services, high occupancy of available beds, enhanced quality payor mix and a broader base of repeat customers. Specialty medical services revenues have increased at a compound annual rate of 37% from the fiscal year ended September 30, 1990 to the fiscal year ended September 30, 1995 and comprise 42% of the Company's revenues for the nine month period ended June 30, 1996. Specialty medical services typically generate higher profit margins than basic healthcare services and are less capital intensive. The Company's growth strategy is to enhance its existing eldercare networks, establish new eldercare networks in markets it deems attractive and broaden its array of high margin specialty medical services through internal development and selected acquisitions. Consistent with its strategy, the Company has made selected acquisitions of eldercare centers and rehabilitation, pharmacy, physician services and home healthcare companies. The Company's long-term strategy is to provide comprehensive eldercare services, in collaboration with other providers, on a prepaid basis in a managed care environment. The Company has undertaken several initiatives to position itself to compete in a managed care environment. These initiatives include: (i) establishing a managed care division to pursue and administer contracts with managed care organizations, develop clinical care protocols and monitor the delivery and utilization of medical care; (ii) developing a clinical administration and healthcare management information system to monitor and measure clinical and patient-outcome data; (iii) establishing the Genesis ElderCare(sm) brand name to increase awareness of the Company's eldercare services in the healthcare market; (iv) seeking strategic alliances with other healthcare providers to broaden the Company's continuum of care; and (v) creating an independent eldercare advisory board to formulate new and innovative approaches in the delivery of care. Recent Developments GMC Transaction In October 1996, the Company and Geriatric & Medical Companies, Inc. ("GMC") consummated the merger of GMC with a wholly-owned subsidiary of Genesis (the "GMC Transaction"). The merger added 26 eldercare centers with approximately 3,240 beds to Genesis. GMC also operates businesses which provide 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; pharmacy services; contract management services; diagnostic and rehabilitative management services; and information management services. Under the terms of the merger agreement, GMC shareholders received $5.75 per share in cash for each share of GMC stock. The purchase price of GMC stock was approximately $93,900,000. Prior to the Merger, GMC had outstanding approximately $133,100,000 of indebtedness which included approximately $87,600,000 which the Company loaned to GMC immediately prior to the Merger to prepay indebtedness. The Company funded the cash portion of the transaction and paid a portion of the assumed debt through the proceeds of the Offering and its Credit Facility (as defined herein). See "Management's Discussion and Analysis of Financial Condition and Results of Operations." National Health Transaction In July 1996, the Company acquired the outstanding stock of National Health Care Affiliates, Inc. and certain related entities (collectively, "National Health"). Prior to the closing of the stock acquisitions, an affiliate of a financial institution purchased nine of the National Health eldercare centers for $67,700,000 and subsequently leased the centers to a subsidiary of Genesis. The balance of the total consideration paid to National Health was funded with available cash of $51,800,000 and assumed debt of $7,900,000. The acquisition of the stock of National Health and lease of the eldercare centers from the financial institutional affiliate are referred to hereafter collectively as the National Health Transaction. The National Health Transaction added 16 eldercare centers in Florida, Virginia and Connecticut with approximately 2,200 beds to the Company. National Health also provided enteral nutrition and rehabilitation therapy services to the eldercare centers which it owns and leases. In addition, National Health manages four eldercare centers in Colorado with 382 beds pursuant to an agreement which expires in October 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." NeighborCare Transaction In June 1996, the Company acquired the pharmacy healthcare services businesses of NeighborCare Pharmacies, Inc. and certain related entities (collectively, "NeighborCare") for total consideration of approximately $57,250,000, comprised of approximately $47,250,000 in cash and 312,744 shares of Genesis Common Stock (the "NeighborCare Transaction"). Based in Baltimore, Maryland, NeighborCare operates institutional and retail pharmacy and infusion therapy businesses. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." -2- McKerley Transaction In November 1995, the Company acquired McKerley Health Care Centers, Inc. and certain related entities (collectively, "McKerley") for total consideration of approximately $68,700,000, including approximately $9,100,000 of assumed debt (the "McKerley Transaction"). McKerley owns or leases 15 eldercare centers in New Hampshire and Vermont with a total of 1,535 beds and operates a home healthcare business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Offering Notes............... The Existing Notes were sold by the Company on October 7, 1996 to Merrill Lynch, Pierce, Fenner & Smith Incorporated, CS First Boston Corporation, Donaldson, Lufkin & Jenrette Securities Corporation, Alex. Brown & Sons Incorporated, BT Securities Corporation, and Montgomery Securities (the "Initial Purchasers") pursuant to a Purchase Agreement, dated as of October 1, 1996 (the "Purchase Agreement"). The Initial Purchasers subsequently resold the Existing Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to a limited number of institutional accredited investors that agreed to comply with certain transfer restrictions and other conditions. Registration Rights Agreement......... Pursuant to the Purchase Agreement, the Company and the Initial Purchasers entered into a Registration Rights Agreement, dated October 7, 1996 (the "Registration Rights Agreement"), which grants the holders of the Existing Notes certain exchange and registration rights. The Exchange Offer is being made pursuant to the Registration Rights Agreement and such exchange rights terminate upon the consummation of the Exchange Offer. The Exchange Offer Securities Offered.. $125,000,000 aggregate principal amount of 9 1/4% Senior Notes due 2006. The Exchange Offer.. $1,000 principal amount of the Exchange Notes in exchange for each $1,000 principal amount of Existing Notes. As of the date hereof, $125,000,000 aggregate principal amount of Existing Notes are outstanding. The Company will issue the Exchange Notes on or promptly after the Expiration Date. Under existing interpretations of the staff of the Commission contained in several no-action letters to third parties, the Exchange Notes will in general be freely -3- tradeable after the Exchange Offer without further registration under the Securities Act. However, any purchaser of Existing Notes who is an "affiliate" of the Company or who intends to participate in the Exchange Offer for the purpose of distributing the Exchange Notes (i) will not be able to rely on such interpretations of the staff of the Commission, (ii) will not be able to tender its Existing Notes in the Exchange Offer and (iii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of the Existing Notes, unless such sale or transfer is made pursuant to an exemption from such requirements. Each Participating Broker-Dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of Exchange Notes received in exchange for Existing Notes where such Existing Notes were acquired by such Participating Broker-Dealer as a result of market-making activities or other trading activities. Any holder who tenders in the Exchange Offer with the intention to participate or for the purpose of participating in a distribution of the Exchange Notes cannot rely on the position of the staff of the Commission enunciated in no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Failure to comply with such requirements in such instance may result in such holder incurring liability under the Securities Act for which the holder is not indemnified by the Company. Expiration Date..... 5:00 p.m., New York City time, on , 1996, unless the Exchange Offer is extended by the Company in its sole discretion, in which case the term "Expiration Date" means that latest date and time to which the Exchange Offer is extended. -4- Accrued Interest on the Exchange Notes and Existing Notes. Interest on each Exchange Note will accrue from the latest date on which interest was paid on the Existing Notes surrendered in exchange therefor or, if no interest has been paid on the Existing Notes, from the date of original issuance of such Note. No interest will be paid on the Existing Notes accepted for exchange, and holders of Existing Notes whose Existing Notes are accepted for exchange will be deemed to have waived the right to receive any payment in respect of interest on the Existing Notes accrued up to the date of the issuance of the Exchange Notes. Holders of Existing Notes that are not exchanged will receive the accrued interest payable on April 1, 1997 in accordance with the Indenture. See "Exchange Offer -- Interest on the Exchange Notes." Conditions to the Exchange Offer..... The Exchange Offer is subject to certain customary conditions, which may be waived by the Company. See "Exchange Offer-- Conditions." Procedures for Tendering Existing Notes.............. Each holder of Existing Notes wishing to accept the Exchange Offer must complete, sign and date the accompanying Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile thereof, together with the Existing Notes to be exchanged and any other required documentation to the Exchange Agent (as defined herein) at the address set forth herein or effect a tender of such Existing Notes pursuant to the procedures for book- entry transfer as provided herein. By executing the Letter of Transmittal, each holder will represent to the Company that, among other things, the Exchange Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such Exchange Notes, whether or not such person is the holder, that neither the holder nor any such other person has any arrangement or understanding with any person to participate in the distribution of such Exchange Notes and that neither the holder nor any such other person is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company. See "Exchange Offer-- Purpose and Effect of the Exchange Offer" and "--Procedures for Tending." Each broker-dealer that receives Exchange Notes for its own account in exchange for Existing Notes, where such Existing Notes were acquired by such broker- dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a -5- prospectus in connection with any resale of such Exchange Notes. See "Exchange Offer-- Procedures for Tendering" and "Plan of Distribution." Untendered Notes.... Following the consummation of the Exchange Offer, holders of Existing Notes eligible to participate but who do not tender their Existing Notes will not have any further registration rights and such Existing Notes will continue to be subject to certain restrictions on transfer. Accordingly, the liquidity of the market for such Existing Notes could be adversely affected. Consequences of Failure to Exchange........... The Existing Notes that are not exchanged pursuant to the Exchange Offer will remain outstanding and continue to accrue interest and will also remain restricted securities. Accordingly, such Existing Notes may be resold only (i) to the Company, (ii) pursuant to Rule 144A or Rule 144 under the Securities Act or pursuant to some other exemption from registration under the Securities Act, (iii) outside the United States to a foreign person pursuant to the requirements of Regulation S under the Securities Act, or (iv) pursuant to an effective registration statement under the Securities Act. See "Exchange Offer-- Consequences of Failure to Exchange." Shelf Registration Statement.......... In the event that any changes in law or the applicable interpretations of the Securities Act by the staff of the Commission do not permit the Company to effect the Exchange Offer, or if for any other reason the Exchange Offer is not consummated within 120 days following the date of the original issue of the Existing Notes, or if any holder of the Existing Notes (other than the Initial Purchasers) is not eligible to participate in the Exchange Offer, or upon the request of any Initial Purchaser under certain circumstances, the Company will use its best efforts to cause to become effective by the 120th day after the original issue of the Existing Notes a shelf registration statement pursuant to the Securities Act with respect to the resale of the Notes (the "Shelf Registration Statement") and to keep the Shelf Registration Statement effective until three years after the effective date thereof (or until one year after such effective date if such Shelf Registration Statement is filed at the request of the Initial Purchasers under certain circumstances) or until such shorter period when all the Notes covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement or are eligible for resale pursuant to Rule 144 under the Securities Act without volume limitations. -6- Special Procedures for Beneficial Owners............. Any beneficial owner whose Existing Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering its Existing Notes, either make appropriate arrangements to register ownership of the Existing Notes in such owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Guaranteed Delivery Procedures......... Holders of Existing Notes who wish to tender their Existing Notes and whose Existing Notes are not immediately available or who cannot deliver their Existing Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent (or comply with the procedures for book-entry transfer) prior to the Expiration Date must tender their Existing Notes according to the guaranteed delivered procedures set forth in "Exchange Offer-- Guaranteed Delivery Procedures." Withdrawal Rights... Tenders may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Acceptance of Notes and Delivery of Exchange Notes..... The Company will accept for exchange any and all Existing Notes which are duly tendered in the Exchange Offer and not validly withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "Exchange Offer--Terms of the Exchange Offer." Certain Tax Consequences....... The exchange pursuant to the Exchange Offer should not be a taxable event for Federal income tax purposes. See "Tax Considerations." Use of Proceeds..... There will be no cash proceeds to the Company from the exchange pursuant to the Exchange Offer. See "Use of Proceeds." Exchange Agent...... First Union National Bank. -7- The Exchange Notes General............. The form and terms of the Exchange Notes are the same as the form and terms of the Existing Notes (which they replace) except that (i) the Exchange Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof, (ii) the Exchange Notes do not include provisions providing for an increase in the interest rate in certain circumstances relating to the timing of the Exchange Offer and (iii) the holders of Exchange Notes will not be entitled to certain rights under the Registration Rights Agreement, which rights will terminate when the Exchange Offer is consummated. The Exchange Notes will evidence the same debt as the Existing Notes and will be entitled to the benefits of the Indenture. See "Description of Notes." Securities Offered.. $125,000,000 principal amount of 9 1/4% Senior Subordinated Notes due 2006. Maturity Date....... October 1, 2006. Interest Payment Dates.............. April 1 and October 1 of each year, commencing April 1, 1997. Optional Redemption. The Exchange Notes are redeemable at the option of the Company, in whole or in part, in cash, at any time on or after October 1, 2001 at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. Change of Control... Upon the occurrence of a Change of Control (as defined herein), each holder of the Exchange Notes may require the Company to repurchase all or a portion of such holder's Exchange Notes at a purchase price in cash equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of repurchase. The occurrence of certain events that would constitute a Change in Control would also constitute a default under the company's existing $300,000,000 revolving credit facility and $150,000,000 lease financing facility (collectively, the "Credit Facility"), which ranks senior in right of payment to the Notes, and would also require the Company to offer to redeem the $25,000,000 principal amount of the company's 9 1/4% First Mortgage Bonds Series A, which rank senior in right of payment to the Notes, and $43,904,000 principal amount of the Company's 6% Convertible Senior Subordinated Debentures due 2003 (the "Convertible Debentures") and -8- $120,000,000 of the company's 9 3/4% Senior Subordinated Notes due 2005 (the "9 3/4% Notes"), which rank pari passu in right of payment to the Notes. the Company's ability to repurchase the Notes upon a Change in Control would also be limited by the terms of the Indenture and the Credit Facility. As a result of such limitation, a holder of a Note may not be able to require the Company to repurchase the Notes unless the Company is able to refinance the Credit Facility. In addition, there can be no assurance that the Company will have sufficient funds to repurchase the Notes if they were tendered upon a Change in Control. See "Description of the Notes -- Change in Control." Ranking............. The Exchange Notes will be unsecured senior subordinated obligations of the Company and, as such, will be subordinated to all existing and future Senior Indebtedness (as defined herein) of the Company. The Exchange Notes will also be effectively subordinated in right of payment to all existing and future liabilities of the Company's subsidiaries. As of June 30, 1996, on a pro forma basis after giving effect to the National Health Transaction and GMC Transaction and the sale of the Notes and the use of the net proceeds therefrom, the aggregate amount of Senior Indebtedness would have been approximately $402,123,000 (which includes approximately $9,980,000 of indebtedness and approximately $61,000,000 of lease obligations of subsidiaries and approximately $6,000,000 of indebtedness of other persons, all of which are guaranteed by the Company, and approximately $15,900,000 of letters of credit issued under the Company's Credit Facility primarily related to the Company's self-insurance programs) and, as of such date, the aggregate amount of liabilities of the subsidiaries of the Company, which consist primarily of trade payables and accrued compensation, that will effectively rank senior to the Exchange Notes was approximately $64,163,000. As of June 30, 1996, there were also outstanding $43,904,000 principal amount of the Convertible Debentures and $120,000,000 principal amount of the 9 3/4% Notes which will rank pari passu in right of payment to the Exchange Notes. The Exchange Notes will rank senior to all other subordinated indebtedness of the Company. The Credit Facility is secured by the stock and partnership interests of the Company's subsidiaries and substantially all of the Company's subsidiaries are co-obligors of the Credit Facility. See "Description of the Notes -- Subordination." -9- Restrictive Covenants.......... The Indenture contains certain covenants, including, but not limited to, covenants with respect to the following matters: (i) limitation on indebtedness; (ii) limitation on restricted payments; (iii) limitation on preferred stock of subsidiaries and subsidiary distributions; (iv) limitation on transactions with affiliates; (v) limitation on disposition of proceeds of asset sales; (vi) limitation on liens securing subordinated indebtedness; (vii) limitation on other senior subordinated indebtedness; (viii) limitation on issuance of guarantees of subordinated indebtedness; (ix) limitation on dividends and other payment restrictions affecting subsidiaries; and (x) limitation on merger and sale of assets. See "Description of the Notes-- Certain Covenants." Absence of a Public Market for the Notes.............. The Exchange Notes will be new securities for which there currently is no market. Although the Initial Purchasers have informed the Company that they currently intend to make a market in the Exchange Notes, they are not obligated to do so, and any such market making may be discontinued at any time without notice. Accordingly, there can be no assurance as to the development of liquidity of any market for the Exchange Notes. The Company does not intend to apply for listing of the Exchange Notes on any securities exchange or for quotation through the National Association of Securities Dealers Automated Quotation System. Risk Factors See "Risk Factors" beginning on page 13 for a discussion of certain factors which should be considered by prospective investors in evaluating an investment in the Notes. -10- SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except per share and operating data)
Year Ended September 30, --------------------------------------------------------------------------- 1991 1992 1993 1994 1995 -------- --------- -------- -------- ----------------------- Pro Forma, As Actual Adjusted(1) -------- ------------- Summary of Operations Data Net revenues.............................. $171,449 $196,253 $219,809 $388,616 $486,392 $874,594 Income from operations before depreciation, amortization, lease expense, interest and debenture conversion expense (EBITDAR) (2) 30,587 35,597 38,129 69,373 93,253 155,605 Depreciation and amortization............. 6,258 7,239 7,157 14,982 18,793 38,175 Lease expense............................. 7,460 7,207 7,026 11,376 13,798 23,205 Interest expense, net..................... 11,072 8,708 5,042 15,305 20,366 37,592 --------- ------- --------- ------- -------- -------- Debenture conversion expense.............. -- -- -- -- -- -- Earnings before extraordinary items and cumulative effect of change in accounting principle................... 3,595 7,710 11,909 17,691 25,531 35,825 Net income................................ 3,283 7,433 11,909 17,673 23,608 33,902 Other Financial Data EBITDAR (3)............................... $ 23,128 $ 28,390 $ 31,103 $ 57,997 $79,455 $132,400 Ratio of EBITDAR to interest expense plus rent expense........................... 1.65x 2.24x 3.16 2.60x 2.73x 2.56x Ratio of EBITDA to interest expense....... 2.09x 3.26x 6.17 3.79x 3.90x 3.52x Ratio of earnings to fixed charges (4).... 1.27x 1.78x 2.60 2.02x 2.15x 1.94x Capital expenditures...................... $ 3,843 $ 7,288 $ 23,151 $ 18,784 $ 24,718 Operating Data ElderCare Networks: Average eldercare center beds in service Wholly-owned and leased............. 4,432 4,719 4,534 7,530 8,268 Jointly-owned and managed........... 444 769 1,208 4,532 5,158 --------- ------- -------- -------- -------- Total............................... 4,876 5,488 5,742 12,062 13,426 ======== ======== ======== ======== ======== Occupancy percentage in wholly-owned and leased eldercare centers....... 96% 96% 95% 92% 92% Physicians, physician assistants and nurse practitioners................. 12 12 18 22 41 Rehabilitation contracts............... 54 100 106 152 232 Institutional pharmacies/medical supplies beds served................ 9,000 19,038 21,838 27,964 31,344 Payor mix Private and other...................... 43% 41% 42% 41% 38% Medicare............................... 9% 12% 14% 16% 21% Medicaid............................... 48% 47% 44% 43% 41% Revenue mix Basic healthcare services.............. 71% 69% 61% 62% 57% Specialty medical services............. 26% 26% 34% 32% 37% Management services and other.......... 3% 5% 5% 6% 6%
[RESTUBBED FROM TABLE BEFORE]
(Unaudited) Nine Months Ended June 30, ----------------------------------- 1995 1996 ------- ----------------------- Pro Forma, As Actual Actual Adjusted (1) ------- ------ ------------- Summary of Operations Data Net revenues.............................. $354,465 $460,354 $723,109 Income from operations before depreciation, amortization, lease expense, interest and Debenture conversion expense (EBITDAR) (2) 66,345 87,313 131,400 Depreciation and amortization............. 13,987 17,883 30,756 Lease expense............................. 10,388 11,948 19,064 Interest expense, net..................... 14,369 19,104 29,380 ------- ------- ------- Debenture conversion expense.............. -- 1,245 1,245 Earnings before extraordinary items and cumulative effect of change in accounting principle................... 17,508 23,759 32,466 Net income................................ 15,585 23,759 32,466 Other Financial Data EBITDAR (3)............................... $ 55,957 $ 75,365 $112,336 Ratio of EBITDAR to interest expense plus rent expense........................... 2.68x 2.81x 2.71x Ratio of EBITDA to interest expense....... 3.89x 3.94x 3.82x Ratio of earnings to fixed charges (4).... 2.10x 2.14x 2.03x Capital expenditures...................... $ 19,681 $26,151 Operating Data ElderCare Networks: Average eldercare center beds in service Wholly-owned and leased............. 8,268 9,062 Jointly-owned and managed........... 5,158 5,195 ------- ------ Total............................... 13,426 14,257 ======= ====== Occupancy percentage in wholly-owned and leased eldercare centers....... 92% 92% Physicians, physician assistants and nurse practitioners................. 41 68 Rehabilitation contracts............... 232 297 Institutional pharmacies/medical supplies beds served................ 31,145 46,139 Payor mix Private and other...................... 38% 39% Medicare............................... 21% 23% Medicaid............................... 41% 38% Revenue mix Basic healthcare services.............. 58% 52% Specialty medical services............. 36% 42% Management services and other.......... 6% 6%
(Unaudited) June 30, 1996 ---------------------------------------- Pro Forma, Actual As Adjusted (5) -------------------- --------------- Balance Sheet Data Working capital........................................ $227,599 $267,167 Total assets........................................... 878,348 1,272,993 Long-term debt......................................... 295,897 595,365 Shareholders' equity.................................. 500,238 500,238
-11- - ---------------- (1) Gives effect to the McKerley Transaction, NeighborCare Transaction, National Health Transaction, GMC Transaction and the sale by the Company of 6,500,000 shares of Common Stock in May 1996 (the "1996 Equity Offering"), as adjusted to reflect the Offering and the application of the estimated net proceeds therefrom as described under "Use of Proceeds." See "Pro Forma Condensed Consolidated Financial Information." (2) EBITDAR represents earnings before interest expense, income taxes, depreciation and amortization, extraordinary items, rental expense and debenture conversion expense. EBITDAR should not be considered an alternative measure of the Company's net income, operating performances, cash flow or liquidity. It is included herein to provide additional information related to the Company's ability to service debt. (3) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization, extraordinary items and debenture conversion expense. EBITDA should not be considered an alternative measure of the Company's net income, operating performance, cash flow or liquidity. It is included herein to provide additional information related to the Company's ability to service debt. The Indenture governing the Notes contains certain covenants that utilize a Consolidated Fixed Charge Coverage Ratio calculation that is based upon EBITDA. See "Description of the Notes" for a description of such covenants. (4) For the purpose of computing the ratio of earnings to fixed charges, earnings consist of the sum of earnings before income taxes and extraordinary items plus fixed charges. Fixed charges consist of interest on all indebtedness, amortization of debt discount and expenses, and that portion of rental expense that the Company believes to be representative of the interest factor. Fixed charges related to approximately $6,000,000 of debt guaranteed by the Company have not been included in the computation of the ratio. The definition of fixed charges used in this calculation differs from that used in the Fixed Charge Coverage Ratio covenants contained in the Indenture. (5) Gives effect to the National Health Transaction and the GMC Transaction, as adjusted to reflect the Sale of the Notes and the use of the proceeds therefrom as described under "Use of Proceeds." -12- CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS Certain statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" such as statements concerning Medicare and Medicaid programs and the Company's ability to meet its liquidity needs and control costs; certain statements contained in "Business" such as statements concerning strategy, government regulation, Medicare and Medicaid programs and legal proceedings; certain statements in the Pro Forma Condensed Consolidated Financial Information, such as certain of the Pro Forma Adjustments; and other statements contained herein regarding matters that are not historical facts are forward looking statements (as such term is defined in the Securities Act) 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 herein under "Risk Factors." RISK FACTORS In addition to the other information contained in the Prospectus, prospective investors should carefully consider the following risk factors before purchasing the Notes offered hereby. Certain Financial Considerations. The Company has substantial indebtedness and, as a result, significant debt service obligations. As of June 30, 1996, after giving pro forma effect to the National Health Transaction and GMC Transaction and the Offering and the use of proceeds therefrom, the Company would have had approximately $595,365,000 of long-term indebtedness which would have represented 54% of its total capitalization. See "Capitalization." The degree to which the Company is leveraged could have important consequences to holders of the Notes, including the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired; (ii) a substantial portion of the Company's cash flow from operations may be dedicated to the payment of principal and interest on its indebtedness, thereby reducing the funds available to the Company for its operations; (iii) all of the indebtedness incurred under the Credit Facility is scheduled to become due, and the indebtedness under the 9 3/4 % Notes is due, prior to the time any principal payments are required on the Notes; (iv) certain of the Company's borrowings are and will continue to be at variable rates of interest, which causes the Company to be vulnerable to increases in interest rates; and (v) certain of the Company's indebtedness contains financial and other restrictive covenants, including those restricting the incurrence of additional indebtedness, the creation of liens, the payment of dividends, sales of assets and minimum net worth requirements. Failure by the Company to comply with such covenants may result in an event of default which, if not cured or waived, could have a material adverse effect on the Company. The Company's ability to make scheduled payments or to refinance its obligations with respect to its indebtedness depends on its financial and operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond its control. Although the Company's cash flow from its operations has been sufficient to meet its debt service obligations in the past, there can be no assurance that the Company's operating results will continue to be sufficient for payment of the Company's indebtedness. The Company also has significant long-term operating lease obligations with respect to certain of its eldercare centers. Ranking. The Existing Notes will be subordinated to all existing and future Senior Indebtedness of the Company and will rank pari passu in right of payment with all of the Company's existing and future senior subordinated indebtedness. The Existing Notes will also be effectively subordinated to the indebtedness and other liabilities of the Company's subsidiaries. As of June 30, 1996, on a pro forma basis -13- after giving effect to the National Health Transaction and the GMC Transaction and the Offering and the use of proceeds therefrom, the aggregate amount of Senior Indebtedness outstanding would have been approximately $401,143,000 (which includes approximately $9,980,000 of indebtedness and approximately $61,000,000 of lease obligations of subsidiaries and approximately $6,000,000 of indebtedness of other persons, all of which are guaranteed by the Company, and approximately $15,900,000 of letters of credit issued under the Credit Facility primarily related to the Company's self-insurance programs) and, as of such date, the aggregate amount of liabilities of the subsidiaries of the Company, which consist primarily of trade payables and accrued compensation, that will effectively rank senior to the Existing Notes was approximately $64,163,000. Upon any payment or distribution of assets of the Company in a total or partial liquidation, dissolution, reorganization or similar proceeding, the holders of Senior Indebtedness may be entitled to receive payment in full before the holders of the Notes are entitled to receive any payment. In addition, under certain circumstances, no payment may be made with respect to the principal of or interest on the Notes if a payment default or other defaults exist with respect to certain Senior Indebtedness. See "Description of the Notes -- Subordination." Risk of Adverse Effect of Healthcare Reform. In addition to extensive existing government healthcare regulation, there are numerous initiatives on the federal and state levels for comprehensive reforms affecting the payment for and availability of healthcare services. It is not clear at this time what proposals, if any, will be adopted, or what effect such proposals would have on the Company's business. Aspects of certain of these healthcare proposals, such as reductions in funding of the Medicare and Medicaid programs, potential changes in reimbursement regulations by the Health Care Financing Administration ("HCFA"), enhanced pressure to contain healthcare costs by Medicare, Medicaid and other payors and permitting greater state flexibility in the administration of Medicaid, could adversely affect the Company. There can be no assurance that currently proposed or future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs or regulations will not have a material adverse effect on the Company. Concern about the potential effects of the proposed reform measures has contributed to the volatility of prices of securities of companies in healthcare and related industries, including the Company, and may similarly affect the price of the Company's securities in the future. See "Business --Government Regulation." Regulation. The federal government and all states in which the Company operates regulate various aspects of the Company's business. In particular, the development and operation of eldercare centers and the provision of healthcare services are subject to federal, state and local laws relating to the delivery and adequacy of medical care, distribution of pharmaceuticals, equipment, personnel, operating policies, fire prevention, rate-setting and compliance with building codes and environmental laws. Eldercare centers are subject to periodic inspection by governmental and other authorities to assure continued compliance with various standards, their continued licensing under state law, certification under the Medicare and Medicaid programs and continued participation in the Veterans Administration program and the ability to participate in other third party programs. The Company is also subject to inspection regarding record keeping and inventory control. The failure to obtain or renew any required regulatory approvals or licenses could adversely affect the continued expansion of the Company and could prevent it from offering its existing services. Many states have adopted Certificate of Need or similar laws which generally require that the appropriate state agency approve certain acquisitions and determine that a need exists for certain bed additions, new services and capital expenditures or other changes prior to beds and/or new services being added or capital expenditures being undertaken. To the extent that Certificates of Need or other similar approvals are required for expansion of Company operations, either through center acquisitions or expansion -14- or provision of new services or other changes, such expansion could be adversely affected by the failure or inability to obtain the necessary approvals, changes in the standards applicable to such approvals and possible delays and expenses associated with obtaining such approvals. The Company is also subject to federal and state laws which govern financial and other arrangements between healthcare providers. These laws often prohibit certain direct and indirect payments or fee-splitting arrangements between healthcare providers that are designed to induce or encourage the referral of Patients to, or the recommendation of, a particular provider for medical products and services. These laws include the federal "Stark legislations" which prohibit, with limited exceptions, the referral of patients for certain services, including home health services, physical therapy and occupational therapy, by a physician to an entity in which the physician has an ownership interest and the federal "anti-kickback law" which prohibits, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of Medicare and Medicaid patients or the purchasing, leasing, ordering or arranging for any goods, facility services or items for which payment can be made under Medicare and Medicaid. The federal government, private insurers and various state enforcement agencies have increased their scrutiny of providers, business practices and claims in an effort to identify and prosecute fraudulent and abusive practices. In addition, the federal government has issued recent fraud alerts concerning nursing services, double billing, home health services and the provision of medical supplies to nursing facilities; accordingly, these areas may come under closer scrutiny by the government. See "Business -- Governmental Regulation." Furthermore, some states restrict certain business relationships between physicians and other providers of healthcare services. Many states prohibit business corporations from providing, or holding themselves out as a provider of, medical care. Possible sanctions for violation of any of these restrictions or prohibitions include loss of licensure or eligibility to participate in reimbursement programs and civil and criminal penalties. These laws vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies. From time to time, the Company has sought guidance as to the interpretation of these laws; however, there can be no assurance that such laws will ultimately be interpreted in a manner consistent with the practices of the Company. Payment by Third Party Payors. For the years ended September 30, 1994 and 1995, and the nine months ended June 30, 1996, respectively, the Company derived approximately 41%, 38% and 39% of its patient service revenue from private pay sources, 16%, 21% and 23% from Medicare and 43%, 41% and 38% from various state Medicaid agencies. Both governmental and private third party payors have employed cost containment measures designed to limit payments made to healthcare providers such as the Company. Those measures include the adoption of initial and continuing recipient eligibility criteria which may limit payment for services, the adoption of coverage and duration criteria which limit the services which will be reimbursed and the establishment of payment ceilings which set the maximum reimbursement that a provider may receive for services. Furthermore, government payment programs are subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings and government funding restrictions, all of which may materially increase or decrease the rate of program payments to the Company for its services. There can be no assurance that payments under governmental and private third party payor programs will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. In addition, there can be no assurance that centers owned, leased or managed by the Company, or the provision of services and supplies by the Company, now or in the future will initially meet or continue to meet the requirements for participation in such programs. The Company could be adversely affected by the continuing efforts of governmental and private third party payors to contain the amount of reimbursement for healthcare services. In an attempt to limit the federal budget deficit, there have been, and the Company expects that there will continue to be, a number of proposals to limit Medicare and Medicaid reimbursement for healthcare services. In certain states -15- there have been proposals to eliminate the distinction in Medicaid payment for skilled versus intermediate care services and to establish a case mix prospective payment system pursuant to which the payment to a facility for a patient is based upon the patient's condition and need for services. The Company cannot at this time predict whether any of these proposals will be adopted or, if adopted and implemented, what effect, if any, such proposals will have on the Company. In addition, private payors, including managed care payors, increasingly are demanding discounted fee structures or the assumption by healthcare providers of all or a portion of the financial risk through prepaid capitation arrangements. Efforts to impose reduced allowances, greater discounts and more stringent cost controls by government and other payors are expected to continue. See "Business -- Revenue Sources." Competition. The healthcare industry is highly competitive. The Company competes with a variety of other companies in providing eldercare services. Certain competing companies have greater financial and other resources and may be more established in their respective communities than the Company. Competing companies may offer newer or different centers or services than the Company and may thereby attract the Company's customers who are either presently residents of its eldercare centers or are otherwise receiving its eldercare services. See "Business -- Competition." Risks Associated with Acquisition Strategy. The Company has recently completed several acquisitions of eldercare businesses. The Company also intends to pursue additional acquisitions in the future. There can be no assurance that the Company will be able to realize expected operating and economic efficiencies from its recent acquisitions or from any future acquisitions or that such acquisitions will not adversely affect the Company's results of operations or financial condition. In addition, there can be no assurance that the Company will be able to locate suitable acquisition candidates in the future, consummate acquisitions on favorable terms or successfully integrate newly acquired businesses with the Company's operations. The consummation of acquisitions likely will result in the incurrence or assumption by the Company of additional indebtedness. Absence of Public Market. The Existing Notes currently are owned by a relatively small number of beneficial owners. The Existing Notes have not been registered under the Securities Act and will be subject to restrictions on transferability to the extent that they are not exchanged for the Exchange Notes. The Exchange Notes will constitute a new issue of securities with no established trading market. Although the Exchange Notes generally will be permitted to be resold or otherwise transferred by the holders (who are not affiliates of the Company) without compliance with the registration requirements under the Securities Act, the Company does not intend to list the Exchange Notes on any national securities exchange or to seek the admission thereof to trading in the National Association of Securities Dealers Automated Quotation System. The Exchange Notes may trade at a discount from their initial offering price, depending upon prevailing interest rates, the market for similar securities, the performance of the Company and certain other factors. The Company has been advised by the Initial Purchasers that they intend to make a market in the Exchange Notes, as permitted by applicable laws and regulations; however, the Initial Purchasers are not obligated to do so and any such market making activities may be discontinued at any time without notice. In addition, such market-making activity will be subject to the limits imposed by the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act") and may be limited during the Exchange Offer. Accordingly, no assurance can be given that an active public or other market will develop for the Exchange Notes or as to the liquidity of the trading market for the Exchange Notes. Pursuant to the Registration Rights Agreement, the Company is required to consummate the Exchange Offer for the Existing Notes or file the Shelf Registration Statement covering resales of the Existing Notes within 120 days following the original issue of the Existing Notes. Until the Company performs its obligations under the Registration Rights Agreement, the Existing Notes may only be offered or sold pursuant to an exemption -16- from the registration requirements of the Securities Act and applicable state securities laws or pursuant to an effective registration statement under the Securities Act and applicable state securities laws. Exchange Offer Procedures. Issuance of Exchange Notes in exchange for Existing Notes pursuant to the Exchange Offer will be made only after a timely receipt by the Company of such Existing Notes, a properly completed and duly executed Letter of Transmittal and all other required documents. Therefore, holders of the Existing Notes desiring to tender such Existing Notes in exchange for Exchange Notes should allow sufficient time to ensure timely delivery. The Company is under no duty to give notification of defects or irregularities with respect to the tenders of Notes for exchange. Existing Notes that are not tendered or are tendered but not accepted will, following the consummation of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof and, upon consummation of the Exchange Offer, the registration rights under the Registration Rights Agreement will terminate. In addition, any holder of Existing Notes who tenders in the Exchange Offer for the purpose of participating in a distribution of the Exchange Notes may be deemed to have received restricted securities and, if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Each broker-dealer that receives Exchange Notes for its own account in exchange for Existing Notes, where such Existing Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. See "Plan of Distribution." To the extent that Existing Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Existing Notes could be adversely affected. See "--Consequences of the Exchange Offer on Non-Tendering Holders of the Existing Notes." Consequences of the Exchange Offer on Non-Tendering Holders of the Existing Notes. The Company intends for the Exchange Offer to satisfy its registration obligations under the Registration Rights Agreement. If the Exchange Offer is consummated, the Company does not intend to file further registration statements for the sale or other disposition of Existing Notes. Consequently, following completion of the Exchange Offer, holders of Existing Notes seeking liquidity in their investment would have to rely on an exemption to the registration requirements under applicable securities laws, including the Securities Act, with respect to any sale or other disposition of the Existing Notes. USE OF PROCEEDS The Company will not receive any cash proceeds from the Exchange Offer. The net proceeds to the Company from the Offering after deducting offering expenses and the Initial Purchasers' discount was approximately $121,000,000. The Company used the net proceeds from the Offering together with borrowings under its Credit Facility as follows: approximately $93,900,000 was used to pay the cash portion of the purchase price of the GMC Transaction; approximately $87,600,000 was used to made a loan to GMC immediately prior to the GMC Transaction to prepay $82,800,000 of debt which bore interest at a rate of 12 1/4 % per annum and was due in 2002 and to pay related prepayment expenses; and approximately $2,400,000 was used to prepay debt assumed as a part of the GMC Transaction which bore interest at a rate of 11 1/4% per annum and was due in 2001. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Transactions." -17- CAPITALIZATION The following table sets forth the capitalization of the Company: (i) as of June 30, 1996; (ii) on a pro forma basis to give effect to the National Health Transaction and GMC Transaction; and (iii) as adjusted to give effect to the Offering and the application of the estimated net proceeds therefrom as described in "Use of Proceeds."
June 30, 1996 ---------------------------------------------- Pro Forma, Actual Pro Forma As Adjusted ------------- ------------ ------------- (in thousands) Current installment of long-term debt.............................. $ 2,512 $ 7,332 $ 2,512 ============= ============ ============= Long-term debt, less current maturities: Senior long-term debt ......................................... $ 132,263 $ 422,911 $ 306,731 (1) 9 1/4% Senior Subordinated Notes due 2006...................... -- -- 125,000 9 3/4% Senior Subordinated Notes due 2005 (2).................. 119,730 119,730 119,730 6% Convertible Senior Subordinated Debentures due 2003..................................................... 43,904 43,904 43,904 ------------- ------------ ------------- Total long-term debt...................................... 295,897 586,545 595,365 Shareholders' equity: Common stock, $.02 par value, 60,000,000 shares authorized; 31,981,680 shares issued and 31,936,079 shares outstanding................................ 476 476 476 Additional paid-in capital..................................... 411,677 411,677 411,677 Retained earnings.............................................. 88,328 88,328 88,328 Treasury stock, at cost, 45,601 shares......................... (243) (243) (243) ------------- ------------ ------------- Total shareholders' equity................................... 500,238 500,238 500,238 ------------- ------------ ------------- Total capitalization...................................... 796,135 1,086,703 1,095,603 ============= ============ =============
- -------------------------- (1) Primarily includes $260,300,000 under the revolving credit facility of the Credit Facility; $23,700,000 9 1/4 % First Mortgage Bonds Series A due October 2007; and approximately $9,980,000 of indebtedness of subsidiaries guaranteed by the Company. The Company has recently entered into an agreement with the lenders of the Credit Facility which increases the revolving credit facility and the lease financing facility to $300,000,000 and $150,000,000, respectively. (2) Net of remaining original issue discount of $270,000. -18- EXCHANGE OFFER Purpose and Effect of the Exchange Offer The Existing Notes were originally sold by the Company on October 7, 1996 to the Initial Purchasers pursuant to the Purchase Agreement. The Initial Purchasers subsequently resold the Existing Notes to qualified institutional buyers in reliance on Rule 144A under the Securities Act and to a limited number of institutional accredited investors that agreed to comply with certain transfer restrictions and other conditions. As a condition to the closing under the Purchase Agreement, the Company entered into the Registration Rights Agreement with the Initial Purchasers, pursuant to which the Company agreed, for the benefit of the holders of the Existing Notes, at the Company's cost, among other things, to use its best efforts to (i) file within 30 days, and cause to become effective within 90 days, of the date of the original issuance of the Existing Notes, a registration statement on Form S-4 (the "Exchange Offer Registration Statement") which term shall encompass all amendments, exhibits, annexes and schedules thereto and of which this Prospectus is a part and (ii) cause the Exchange Offer to be consummated within 120 days of the original issuance of the Existing Notes. Promptly after the Exchange Offer Registration Statement has been declared effective, the Company will offer the Exchange Notes in exchange for the Existing Notes. The Company will keep the Exchange Offer open until the Expiration Date. For each Existing Note validly tendered to the Company pursuant to the Exchange Offer and not withdrawn by the holder thereof, the holder of such Existing Note will receive an Exchange Note having a principal amount equal to that of the tendered Existing Note. Interest on each Exchange Note will accrue from the last interest payment date on which interest was paid on the tendered Existing Note in exchange therefor or, if no interest has been paid on such Existing Note, from the date of the original issuance of the Existing Note. Under existing interpretations of the staff of the Commission contained in several no-action letters to third parties and subject to the immediately following sentence, the Company believes that the Exchange Notes would in general be freely tradeable after the Exchange Offer without further compliance with the registration and prospectus delivery requirements of the Securities Act. However, any purchaser of Existing Notes who is an "affiliate" of the Company or who intends to participate in the Exchange Offer for the purpose of distributing the Exchange Notes (i) will not be able to rely on the interpretation of the staff of the Commission, (ii) will not be able to tender its Existing Notes in the Exchange Offer and (iii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of the Existing Notes unless such sale or transfer is made pursuant to an exemption from such requirements. Each holder of the Existing Notes (other than certain specified holders) who wishes to exchange Existing Notes for Exchange Notes in the Exchange Offer will be required to represent that (i) it is not an "affiliate" of the Company, (ii) it is not a broker-dealer tendering Existing Notes acquired directly from the Company or if it is such a broker-dealer, it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable, (iii) any Exchange Notes to be received by it were acquired in the ordinary course of its business and (iv) at the time of commencement of the Exchange Offer, it has no arrangement with any person to participate in the distribution (within the meaning of the Securities Act) of the Exchange Notes. In addition, in connection with any resales of Exchange Notes, any broker-dealer who acquired the Existing Notes for its own account as a result of market-making or other trading activities (a "Participating Broker-Dealer") must deliver a prospectus meeting the requirements of the Securities Act. The Commission has taken the position that Participating Broker-Dealers may fulfill their prospectus delivery requirements with respect to the Exchange Notes (other than a resale of an unsold allotment from -19- the original sale of the Existing Notes), with the prospectus contained in the Exchange Offer Registration Statement. Under the Registration Rights Agreement, the Company is required to allow Participating Broker-Dealers and other persons subject to similar prospectus delivery requirements, if any, to use the prospectus contained in the Exchange Offer Registration Statement in connection with the resale of such Exchange Notes; provided however that the Company is only required to use its best efforts to maintain the effectiveness of the Exchange Offer Registration Statement for a period of 120 days following the closing of the Exchange Offer. In the event that any changes in law or the applicable interpretations of the staff of the Commission do not permit the Company to effect the Exchange Offer, or if for any reason the Exchange Offer is not consummated within 120 days following the date of original issue of the Existing Notes, or if any holder of the Existing Notes (other than the Initial Purchasers) is not eligible to participate in the Exchange Offer, or upon the request of any Initial Purchaser under certain circumstances, the Company will, at its cost, use its best efforts to (a) as promptly as practicable, file the Shelf Registration Statement covering resales of the Existing Notes, (b) cause the Shelf Registration Statement to be declared effective under the Securities Act by the 120th day after the original issue of the Existing Notes and (c) keep effective the Shelf Registration Statement until three years after its effective date (or until one year after such effective date if such Shelf Registration Statement is filed at the request of any Initial Purchaser under certain circumstances) or until such shorter period when all the Existing Notes covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement or are eligible for resale pursuant to Rule 144 under the Securities Act without volume limitations. The Company will, in the event of the filing of a Shelf Registration Statement, provide to each holder of the Existing Notes copies of the prospectus which is a part of the Shelf Registration Statement, notify each such holder when the Shelf Registration Statement for the Existing Notes has become effective and take certain other actions as are required to permit unrestricted resales of the Existing Notes. A holder of Existing Notes that sells such Existing Notes pursuant to the Shelf Registration Statement generally will be required to be named as a selling security holder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the Registration Rights Agreement which are applicable to such a holder (including certain indemnification obligations). In addition, each holder of the Existing Notes will be required to deliver information to be used in connection with the Shelf Registration Statement and to provide comments on the Shelf Registration Statement within the time periods set forth in the Registration Rights Agreement in order to have their Existing Notes included in the Shelf Registration Statement and to benefit from the provisions regarding liquidated damages set forth in the following paragraph. In the event that either (i) the Exchange Offer Registration Statement is not filed with the Commission on or prior to the 30th calendar day following the date of original issue of the Existing Notes, (ii) the Exchange Offer Registration Statement is not declared effective on or prior to the 90th calendar day following the date of original issue of the Existing Notes or (iii) the Exchange Offer is not consummated or a Shelf Registration Statement with respect to the Existing Notes is not declared effective on or prior to the 120th calendar day following the date of original issue of the Existing Notes, the interest rate borne by the Existing Notes shall be increased by one-quarter of one percent per annum following such 30-day period in the case of clause (i) above, following such 90-day period in the case of clause (ii) above or following such 120-day period in the case of clause (iii) above, which rate will be increased by an additional one-quarter of one percent per annum for each 90-day period that any additional interest continues to accrue. The aggregate amount of such increase from the original interest rate pursuant to those provisions will in no event exceed one percent. Upon (x) the filing of the Exchange Offer Registration Statement after the 30-day period described in clause (i) above, (y) the effectiveness of the Exchange Offer Registration Statement after the -20- 90-day period described in clause (ii) above or (z) the consummation of the Exchange Offer or the effectiveness of a Shelf Registration Statement, as the case may be, after the 120-day period described in clause (iii) above, the interest rate borne by the Existing Notes from the date of such filing, the date of such effectiveness or the day before the date of consummation, as the case may be, will be reduced to the original interest rate. Terms of the Exchange Offer Upon the terms and subject to the conditions set forth in this Prospectus and in the Letter of Transmittal, the Company will accept any and all Existing Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. The Company will issue $1,000 principal amount of Exchange Notes in exchange for each $1,000 principal amount of outstanding Existing Notes accepted in the Exchange Offer. Holders may tender some or all of their Existing Notes pursuant to the Exchange Offer. However, Existing Notes may be tendered only in integral multiples of $1,000. The Company has fixed the close of business on , 1996 as the record date for the Exchange Offer for purposes of determining the persons to whom this Prospectus and the Letter of Transmittal will be mailed initially. The form and terms of the Exchange Notes are the same as the form and terms of the Existing Notes (which they replace), except that as of the date hereof the Exchange Notes have been registered under the Securities Act and, therefore, will not bear legends restricting their transfer and will not contain certain provisions included in the terms of the Existing Notes relating to an increase in the interest rate in certain circumstances relating to the timing of the Exchange Offer. The holders of the Exchange Notes will not be entitled to certain rights under the Registration Rights Agreement, which rights will terminate when the Exchange Offer is consummated. The Exchange Notes will evidence the same debt as the Existing Notes and will be entitled to the benefits to the Indenture. Holders of the Existing Notes do not have any appraisal or dissenters' rights under the Business Corporation Law of Pennsylvania or the Indenture in connection with the Exchange Offer. The Company intends to conduct the Exchange Offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations of the Commission thereunder. The Company shall be deemed to have accepted validly tendered Existing Notes when, as and if the Company has given written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders for the purpose of receiving the Exchange Notes from the Company. If any tendered Existing Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, the certificates for any such unaccepted Existing Notes will be returned to the tendering holder thereof, at the Company's expense, as promptly as practicable after the Expiration Date. Holders who tender Existing Notes in the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of Existing Notes pursuant to the Exchange Offer. The Company will pay all charges and expenses, other than transfer taxes in certain circumstances, in connection with the Exchange Offer. See "--Fees and Expenses." -21- Expiration Date; Extension; Amendments The term "Expiration Date" shall mean 5:00 p.m., New York City time, on , 1996, unless the Company in its sole discretion extends the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. In order to extend the Exchange Offer, the Company will notify the Exchange Agent of any extension by written notice prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. The Company reserves the right, in its sole discretion, (i) to delay accepting any Existing Notes, to extend the Exchange Offer or to terminate the Exchange Offer if any of the conditions set forth below under "Conditions" shall not have been satisfied, by giving written notice of such delay, extension or termination to the Exchange Agent, or (ii) to amend the terms of the Exchange Offer in any manner. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by written notice thereof to the registered holders. Interest on the Exchange Notes Interest on each Exchange Note will accrue from the last date on which interest was paid on the Existing Note surrendered in exchange therefor or, if no interest has been paid on the Existing Note, from the date of original issuance of such Existing Note. No interest will be paid on the Existing Notes accepted for exchange, and holders of Existing Notes whose Existing Notes are accepted for exchange will be deemed to have waived the right to receive any payment in respect of interest on the Existing Notes accrued up to the date of the issuance of the Exchange Notes. Holders of Existing Notes whose Existing Notes are not exchanged will receive the accrued interest payable thereon on April 1, 1997, in accordance with the Indenture. Interest on the Exchange Notes is payable semi-annually on each April 1 and October 1, commencing on April 1, 1997. Procedures for Tendering Only a holder of Existing Notes may tender such Existing Notes in the Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign and date the Letter of Transmittal, or facsimile thereof, have the signatures thereon guaranteed if required by the Letter of Transmittal, and mail or otherwise deliver such Letter of Transmittal, or such facsimile thereof, together with the Existing Notes and any other required documents, to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. To be tendered effectively, the Existing Notes, the Letter of Transmittal and other required documents must be completed and received by the Exchange Agent at the address set forth below under "Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration Date. Delivery of the Existing Notes may be made by book-entry transfer in accordance with the procedures described below. Confirmation of such book-entry transfer must be received by the Exchange Agent prior to the Expiration Date. By executing the Letter of Transmittal, each holder will make to the Company the representations set forth above in the fourth paragraph under "Purpose and Effect of the Exchange Offer." -22- The tender by a holder and the acceptance thereof by the Company will constitute an agreement between such holder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. THE METHOD OF DELIVERY OF EXISTING NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR EXISTING NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS. Any beneficial owner whose Existing Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. See "Instruction to Registered Holder and/or Book-Entry Transfer Facility Participant from Owner" included with the Letter of Transmittal. Signatures on the Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or any other "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended that is a participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchange, Inc. Medallion Program or the Stock Exchange Medallion Program (an "Eligible Institution"), unless the Existing Notes tendered pursuant thereto are tendered (i) by a registered holder who has not completed the box entitled "Special Registration Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. In the event that signatures on the Letter of Transmittal or the notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be by an Eligible Institution. If the Letter of Transmittal is signed by a person other than the registered holder of any Existing Notes listed therein, such Existing Notes must be endorsed or accompanied by a properly completed bond power, signed by such registered holder as such registered holder's name appears on such Existing Notes with the signature thereon guaranteed by an Eligible Institution. If the Letter of Transmittal or any Existing Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and (except when Exchange Notes are being issued to replace Existing Notes registered in the same name) evidence satisfactory to the Company of their authority to so act must be submitted with the Letter of Transmittal. The Company understands that the Exchange Agent will make a request promptly after the date of this Prospectus to establish accounts with respect to the Existing Notes at the book-entry transfer facility, The Depository Trust Company (the "Book-Entry Transfer Facility"), for the purpose of facilitating the Exchange Offer, and subject to the establishment thereof, any financial institution that is a participant in the Book-Entry Transfer Facility's system may make book-entry delivery of Existing Notes by causing such -23- Book-Entry Transfer Facility to transfer such Existing Notes into the Exchange Agent's account with respect to the Existing Notes in accordance with the Book-Entry Transfer Facility's procedures for such transfer. Although delivery of the Existing Notes may be effected through book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility, an appropriate Letter of Transmittal properly completed and duly executed with any required signature guarantee and all other required documents must in each case be transmitted to and received or confirmed by the Exchange Agent at its address set forth below on or prior to the Expiration Date, or, if the guaranteed delivery procedures described below are compiled with, within the time period provided under such procedures. Delivery of documents to the Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Existing Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Existing Notes not properly tendered or any Existing Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right in its sole discretion to waive any defects, irregularities or conditions of tender as to particular Existing Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Existing Notes must be cured within such time as the Company shall determine. Although the Company intends to notify holders of defects or irregularities with respect to tenders of Existing Notes, neither the Company, the Exchange Agent nor any other person shall incur any liability for failure to give such notification. Tenders of Existing Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Existing Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering holders, unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. Guaranteed Delivery Procedures Holders who wish to tender their Existing Notes and (i) whose Existing Notes are not immediately available, (ii) who cannot deliver their Existing Notes, the Letter of Transmittal or any other required documents to the Exchange Agent or (iii) who cannot complete the procedures for book-entry transfer, prior to the Expiration Date, may effect a tender if: (a) the tender is made through an Eligible Institution; (b) prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the holder, the certificate number(s) of such Existing Notes and principal amount of Existing Notes tendered, stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the Expiration Date, the Letter of Transmittal (or facsimile thereof) together with the certificate(s) representing the Existing Notes (or a confirmation of book-entry transfer of such Existing Notes into the Exchange Agent's account at the Book-Entry Transfer Facility), and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent; and (c) such properly completed and executed Letter of Transmittal or facsimile thereof, as well as the certificate(s) representing all tendered Existing Notes in proper form for transfer (or a confirmation of -24- book-entry transfer of such Existing Notes into the Exchange Agent's account at the Book-Entry Transfer Facility), and all other documents required by the Letter of Transmittal are received by the Exchange Agent upon three New York Stock Exchange trading days after the Expiration Date. Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be sent to holders who wish to tender their Existing Notes according to the guaranteed delivery procedures set forth above. Withdrawal of Tenders Except as otherwise provided herein, tenders of Existing Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To withdraw a tender of Existing Notes in the Exchange Offer, a telegram, telex, facsimile transmission or letter must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Existing Notes to be withdrawn (the "Depositor"), (ii) identify the Existing Notes to be withdrawn (including the certificate number(s) and principal amount of such delivered Existing Notes, or, in the case of Existing Notes transferred by book-entry transfer, the name and number of the account at the Book-Entry Transfer Facility to be credited and the transaction code number), (iii) state that such Depositor is withdrawing its election to have the Existing Notes exchanged and specify the name in which any such Existing Notes are to be registered, if different from that of the Depositor and (iv) be signed by the holder in the same manner as the original signature on the Letter of Transmittal by which such Existing Notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the Trustee with respect to the Existing Notes register the transfer of such Existing Notes into the name of the person withdrawing the tender. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Existing Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no Exchange Notes will be issued with respect thereto unless the Existing Notes so withdrawn are validly retendered. Any Existing Notes which have been tendered but which are not accepted for exchange will be returned to the holder thereof without cost to such holder as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Existing Notes may be retendered by following one of the procedures described above under "Procedures for Tendering" at any time prior to the Expiration Date. Conditions Notwithstanding any other term of the Exchange Offer, the Company shall not be required to accept for exchange, or exchange Exchange Notes for, any Existing Notes, and may terminate or amend the Exchange Offer as provided herein before the acceptance of such Existing Notes, if: (a) the Exchange Offer or the making of any exchange by a holder of Existing Notes violates applicable law or any applicable interpretation by the staff of the Commission; or (b) the tendering of the Existing Notes is not in accordance with the Exchange Offer; (c) each holder of Existing Notes to be exchanged in the Exchange Offer shall not have represented that all Exchange Notes to be received by it shall be acquired in the ordinary course of business and that at the time of the consummation of the Exchange Offer it shall have no arrangement of -25- understanding with any person to participate in the distribution (within the meaning of the Securities Act) of the Exchange Notes and shall have made such other representations as may be reasonably necessary under applicable Commission rules, regulations or interpretations to render the use of the Exchange Offer Registration Statement or other appropriate form under the Securities Act available; or (d) any action or proceeding is instituted or threatened in any court or by or before any governmental agency with respect to the Exchange Offer which, in the judgment of the Company, would reasonably be expected to impair the ability of the Company to proceed with the Exchange Offer. If the Company determines in its sole discretion that any of the conditions are not satisfied, the Company may (i) refuse to accept any Existing Notes and return all tendered Existing Notes to the tendering holders, (ii) extend the Exchange Offer and retain all Existing Notes theretofore tendered in the Exchange Offer, subject, however, to the rights of holders to withdraw such Existing Notes (see "Withdrawal of Tenders") or (iii) waive such unsatisfied conditions with respect to the Exchange Offer and accept all properly tendered Existing Notes which have not been withdrawn. Exchange Agent First Union National Bank has been appointed as Exchange Agent for the Exchange Offer. Questions and requests for assistance, requests for additional copies of this Prospectus or of the Letter of Transmittal and requests for Notice of Guaranteed Delivery should be directed to the Exchange Agent addressed as follows: By Registered, Certified or Overnight Mail or Hand: First Union National Bank One Rodney Square 920 King Street, 1st Floor Wilmington, DE 19801 Attention: Corporate Trust Department By Facsimile: (302) 888-7544 Confirm: (302) 888-7530 Attention: Corporate Trust Department DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. -26- Fees and Expenses The expenses of soliciting tenders will be borne by the Company. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, facsimile, telephone or in person by officers and regular employees of the Company and its affiliates. The Company has not retained any dealer-manager in connection with the Exchange Offer and will not make any payments to brokers, dealers, or others soliciting acceptances of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The cash expenses to be incurred in connection with the Exchange Offer will be paid by the Company. Such expenses include fees and expenses of the Exchange Agent and Trustee, accounting and legal fees and printing costs, among others. Accounting Treatment The Exchange Notes will be recorded at the same carrying value as the Existing Notes, which is face value, as reflected in the Company's accounting records on the date of exchange. Accordingly, no gain or loss for accounting purposes will be recognized by the Company. The expenses of the Exchange Offer will be expenses over the term of the Exchange Notes. Consequences of Failure to Exchange The Existing Notes that are not exchanged for Exchange Notes pursuant to the Exchange Offer will remain outstanding and continue to accrue interest and will also remain restricted securities. Accordingly, such Existing Notes may be resold only (i) to the Company, (ii) pursuant to a registration statement which has been declared effective under the Securities Act, (iii) for so long as the Existing Notes are eligible for resale pursuant to Rule 144A under the Securities Act, to a person the seller reasonably believes is a "qualified institutional buyer" within the meaning of Rule 144A that purchases for its own account or for the account of a qualified institutional buyer and to whom notice is given that the transfer is being made in reliance on Rule 144A, (iv) pursuant to offer and sale to non-U.S. persons that occur outside the United States within the meaning of Regulation S under the Securities Act, (v) to an institutional "accredited investor" within the meaning of subparagraphs (a)(1), (a)(2), (a)(3) or (a)(7) of Rule 501 under the Securities Act that is acquiring the Existing Notes for its own account or for the account of such an institutional "accredited investor" for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act or (vi) pursuant to any other available exemption from the registration requirements of the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States and in accordance with the Indenture. Holders of Existing Notes not tendered in the Exchange Offer will not retain any rights under the Registration Rights Agreement, except in limited circumstances. Resale of the Exchange Notes With respect to resales of Exchange Notes, based on an interpretation by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that a holder or other person who receives Exchange Notes, whether or not such person is the holder (other than a person that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act), who receives Exchange Notes in -27- exchange for Existing Notes in the ordinary course of business and who is not participating, does not intend to participate, and has no arrangement or understanding with a person to participate, in the distribution of the Exchange Notes, will be allowed to resell the Exchange Notes to the public without further registration under the Securities Act and without delivering to the purchasers of the Exchange Notes a prospectus that satisfies the requirements of Section 10 of the Securities Act. However, if any holder acquires Exchange Notes in the Exchange Offer for the purpose of distributing or participating in a distribution of the Exchange Notes, such holder cannot rely on the position of the staff of the Commission enunciated in such no-action letters or any similar interpretive letters, and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction, unless an exemption from registration is otherwise available. Further, each Participating Broker-Dealer that receives Exchange Notes for its own account in exchange for Existing Notes, where such Existing Notes were acquired by such Participating Broker-Dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following discussion is based upon current provisions of the Internal Revenue Code of 1986, as amended, applicable Treasury regulations, judicial authority and administrative rulings and practice. There can be no assurance that the Internal Revenue Service (the "Service") will not take a contrary view, and no ruling from the Service has been or will be sought. Legislative, judicial or administrative changes or interpretations may be forthcoming that could alter or modify the statements and conditions set forth herein. Any such changes or interpretations may or may not be retroactive and could affect the tax consequences to holders. Certain holders (including insurance companies, tax-exempt organizations, financial institutions, broker-dealers, foreign corporations and persons who are not citizens or residents of the United States) may be subject to special rules not discussed below. The Company recommends that each holder consult such holder's own tax advisor as to the particular tax consequences of exchanging such holder's Existing Notes for Exchange Notes, including the applicability and effect of any state, local or foreign tax laws. The exchange of the Existing Notes for Exchange Notes pursuant to the Exchange Offer should not be treated as an "exchange" for federal income tax purposes because the Exchange Notes should not be considered to differ materially in kind or extent from the Existing Notes. Rather, the Exchange Notes received by a holder should be treated as a continuation of the Existing Notes in the hands of such holder. As a result, there should be no federal income tax consequences to holders exchanging Existing Notes for Exchange Notes pursuant to the Exchange Offer. -28- SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below for each of the fiscal years in the five-year period ended September 30, 1995 and as of September 30, 1995 have been derived from the Company's audited Consolidated Financial Statements, which have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The selected consolidated financial data presented below for the nine months ended June 30, 1995 and 1996 and as of June 30, 1996 have been derived from the unaudited Condensed Consolidated Financial Statements of the Company and, in the opinion of the Company, reflect and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations of the Company for such periods. The results of operations for the nine months ended June 30, 1996 are not necessarily indicative of the results that may be expected for a full fiscal year. The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the Consolidated Financial Statements of the Company and the related notes thereto included elsewhere in this Prospectus. -29-
Nine Months Ended Year Ended September 30, June 30, -------------------------------------------------------- ---------------------- 1991 1992 1993 1994 1995 1995 1996 -------- ---------- --------- ---------- --------- --------- ---------- (in thousands, except share and per share data) Statement of Operations Data: Net revenue: Basic healthcare services.............. $121,854 $134,763 $133,370 $240,264 $278,121 $206,073 $241,107 Specialty medical services............. 43,726 52,254 75,227 125,718 180,327 128,333 193,347 Management services and other, net..... 5,869 9,236 11,212 22,634 27,945 20,059 25,900 -------- -------- -------- -------- -------- -------- -------- Total net revenues.................. 171,449 196,253 219,809 388,616 486,393 354,465 460,354 -------- -------- -------- -------- -------- -------- -------- Income from operations before depreciation, amortization, lease expense, interest and Debenture conversion expense....... 30,587 35,597 38,129 69,373 93,253 66,345 87,313 Depreciation and amortization............. 6,258 7,239 7,157 14,982 18,793 13,987 17,883 Lease expense............................. 7,460 7,207 7,026 11,376 13,798 10,388 11,948 Interest expense, net..................... 11,072 8,708 5,042 15,305 20,366 14,369 19,104 Debenture conversion expense.............. -- -- -- -- -- -- 1,245 -------- -------- -------- -------- -------- -------- -------- Earnings before extraordinary items and cumulative effect of change in accounting principle.............................. 3,595 7,710 11,909 17,691 25,531 17,508 23,759 Net income................................ 3,283 7,433 11,909 17,673 23,608 15,585 23,759 Preferred stock dividend.................. 441 -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income available to common shareholders........................... $ 2,842 $ 7,433 $ 11,909 $ 17,673 $ 23,608 $ 15,585 $ 23,759 ======== ======== ======== ======== ======== ======== ======== Per common share data (fully diluted) (1) Earnings before extraordinary items, cumulative effect of change in accounting principle and Debenture conversion expense $ 0.39 $ 0.53 $0.67 $0.84(2) $ 1.03(2) $ 0.72(2) $ 0.91(2) Debenture conversion expense.............. -- -- -- -- -- -- (0.03)(3) Extraordinary item, net of tax............ -- -- -- -- -- (0.06) -- Net income................................ $ 0.35 $ 0.51 $0.67 $0.84(2) $ 0.97(2) $ 0.66(2) $ 0.88(2) Weighted average share of common stock and equivalents........................ 9,233,902 14,494,575 17,928,522 24,819,711 28,452,436 28,284,792 29,358,861 Ratio of earnings to fixed charges (4).... 1.27x 1.78x 2.60x 2.02x 2.15x 2.10x 2.14x
September 30, ----------------------------------------------------------- June 30, 1991 1992 1993 1994 1995 1996 ---------- --------- ---------- --------- --------- ---------- (in thousands) Balance Sheet Data: Working Capital................................... $ 14,689 $ 31,986 $ 50,081 $ 66,854 $ 134,114 $227,599 Total assets...................................... 173,220 188,677 236,978 511,698 600,389 878,348 Long-term debt ................................... 89,777 80,170 83,842 250,807 308,052 295,897 Shareholders' equity.............................. 52,340 82,703 125,348 195,466 221,548 500,238
- ----------------------------- (1) Reflects a three for two stock dividend on the Common Stock effective March 29, 1996. (2) Includes the assumed conversion of all of the Convertible Debentures which were issued on November 30, 1993. (3) In connection with an early conversion of a portion of the Convertible Debentures, the Company paid approximately $1,245,000 ($784,000 after tax) representing the prepayment of interest to converting Convertible Debenture holders. (4) For the purpose of computing the ratio of earnings to fixed charges, earnings consist of the sum of earnings before income taxes and extraordinary items plus fixed charges. Fixed charges consist of interest on all indebtedness, amortization of debt discount and expenses, and that portion of rental expense that the Company believes to be representative of the interest factor. Fixed charges related to approximately $6,000,000 of debt guaranteed by the Company have not been included in the computation of the ratio. The definition of fixed charges used in this calculation differs from that used in the Fixed Charge Coverage Ratio covenants contained in the Indenture. -30- 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 services to elderly customers. 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 healthcare. 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, subacute care programs, home healthcare, physician services, and other specialized services. Management services and other include fees earned for management of eldercare centers. Genesis delivers its services through three divisions. The largest, in terms of revenues, is Genesis Eldercare Centers, which at August 31, 1996 included 87 owned and leased eldercare centers. The second, Genesis Eldercare Services, provides specialty medical services to all centers owned, leased or managed by Genesis as well as to over 600 independent healthcare providers. The third, Genesis Eldercare Network Services, manages 40 eldercare centers. Certain Transactions In October 1996, the Company and GMC consummated the merger of GMC with a wholly-owned subsidiary of Genesis. Under the terms of the merger agreement, GMC shareholders received $5.75 per share in cash for each GMC share. The total consideration paid to stockholders of GMC to acquire their shares (including shares which may have been issued upon exercise of outstanding warrants, options and long-term incentive plans) was approximately $93,900,000. Prior to the Merger, GMC had outstanding approximately $133,100,000 of indebtedness which included approximately $87,600,000 which the Company loaned to GMC immediately prior to consummation of the Merger to repay $82,800,000 principal amount of indebtedness and to pay related prepayment expenses. The cash portion of the purchase price and the loan to GMC were provided through the sale by the Company of the Notes and borrowing under its Credit Facility. GMC owns and operates 18 long-term care facilities and six assisted living facilities with approximately 3,000 licensed beds. GMC also operates an ambulance transportation business, a medical supply business, a pharmacy business, a contract management service business, a diagnostic and rehabilitative management services business and a financial services and information systems business. In addition, GMC currently is developing two long-term care facilities with approximately 240 beds. In July 1996, the Company acquired the outstanding stock of National Health. Prior to the closing of the stock acquisitions, an affiliate of a financial institution purchased nine of the National Health eldercare centers for $67,700,000 and subsequently leased the centers to a subsidiary of Genesis. The balance of the total consideration paid to National Health was funded with available cash of $51,800,000 and assumed debt 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 owns and leases. In addition, National Health manages four eldercare centers in Colorado with 382 beds pursuant to an agreement which expires in October 1997. -31- In June 1996, the Company acquired the pharmacy healthcare services businesses of NeighborCare for total consideration of approximately $57,250,000, comprised of approximately $47,250,000 in cash and 312,744 shares of Genesis Common Stock. Based in Baltimore, Maryland, NeighborCare operates institutional and retail pharmacy and infusion therapy businesses. In March 1996, the Company acquired for total consideration of approximately $31,900,000, including the payment of assumed debt, the remaining approximately 71% joint venture interests of four eldercare centers in Maryland and the remaining 50% joint venture interest of an eldercare center in Florida (the "Partnership Interest Purchase") which had been acquired as part of the Meridian Transaction described below. In March 1996, the Company entered into a strategic alliance with Doctors Community Hospital, a 250-bed acute care hospital in Maryland, pursuant to which the Company sold to an affiliate of the hospital a 51% interest in Magnolia Gardens Center, a 104-bed eldercare center for approximately $2,900,000. As part of this transaction, the Company entered into a long-term agreement to manage the center. In March 1996, the Company sold four eldercare centers and a pharmacy in Indiana for approximately $22,250,000 (the "Indiana Transaction"). The properties were acquired as part of the Meridian Transaction described below. In January 1996, the Company acquired the speech therapy, occupational therapy and physical therapy services businesses of Medical and Rehab Support Services, Inc., Professional Rehabilitation Network, Inc. and Healthcare Rehab Services, Inc. (collectively, "Therapy Companies") for approximately $9,300,000. The Therapy Companies provide these services in the Company's Baltimore, Maryland/Washington, D.C. market. The acquisition was financed with borrowings under the Company's Credit Facility. Prior to January 1, 1996, the Company provided management, development and marketing services to life care communities operated by Adult Community Total Services, Inc. ("ACTS"), a Pennsylvania non-profit corporation, pursuant to a management agreement which was to expire in April 1998. Effective January 1, 1996, Genesis restructured its relationship with ACTS. Under the revised arrangement, Genesis was paid a $2,000,000 restructuring fee and will no longer manage the ACTS life care communities. Genesis will continue to provide development services for a fee in an amount equal to five percent of the total cost of developing and completing facilities developed by ACTS. The development portion of the contract has been extended to December 2002 and Genesis is guaranteed a minimum annual development fee of approximately $1,500,000 per year. Genesis also continues to provide certain ancillary services to the ACTS communities. In December 1995, the Company acquired substantially all of the assets of Franklin Nursing Home, Inc. ("Franklin") for approximately $3,600,000. Franklin operated a 250-bed long-term care facility located in Greenfield, Massachusetts. The acquisition was financed with borrowings under the Company's Credit Facility. In November 1995, the Company acquired McKerley for total consideration of approximately $68,700,000, including assumed debt of approximately $9,100,000. The transaction also provides for up to an additional $6,000,000 of contingent consideration payable upon the achievement of certain financial objectives through October 1997. McKerley owns or leases 15 eldercare centers in New Hampshire and Vermont with a total of 1,535 beds and operates a home healthcare business. The acquisition was financed with borrowings under the Company's Credit Facility. -32- In September 1995, the Company sold, and simultaneously entered into a three-year contract to manage, five eldercare centers totaling 606 beds to the AGE Institute of Massachusetts ("AIMASS") for $19,570,000 (the "AIMASS Transaction"). In August 1995, the Company entered into a software license agreement for a clinical operating system with Health Data Systems, Inc. The total commitment under the license agreement is $12,000,000. The Company has estimated the cost to install the system and related hardware, not including amounts paid for the software license, to be approximately $18,000,000. In June 1995, the Company acquired Eastern Medical Supplies, Inc. and its affiliate Eastern Rehab Services, Inc. (collectively, "Eastern Medical") for approximately $2,000,000. Eastern Medical sells and leases home medical equipment, respiratory products and services and rehabilitation equipment to patients at home throughout Maryland. The purchase was financed with borrowings under the Company's Credit Facility. In April 1995, the Company acquired TherapyCare Systems, L.P. ("TherapyCare") for approximately $7,000,000. TherapyCare provides physical therapy, occupational therapy and speech therapy to 73 long-term care centers throughout Pennsylvania. The purchase was financed with borrowings under the Company's Credit Facility. In March 1995, a joint venture in which the Company is a 55% partner acquired Delta Drug, Inc. ("Delta Drug") for approximately $1,700,000. Delta Drug, an institutional pharmacy company located in Providence, Rhode Island, serves over 2,000 long-term care beds. The Company's portion of the purchase price was financed with borrowings under the Company's Credit Facility. In November 1993, Genesis completed its acquisition of substantially all of the assets of Meridian, Inc., Meridian Healthcare, Inc. and their affiliated entities (collectively, "Meridian"). As a result of the transaction (the "Meridian Transaction"), Genesis owned, leased or managed an additional 36 eldercare centers. Of these 36 centers, 15 were wholly-owned, six were jointly-owned, seven were leased and eight were managed. Genesis also acquired certain of the other Meridian businesses, including the institutional pharmacy, qualified group purchasing business and rehabilitation therapy business and manages one additional retirement community. As part of the Meridian Transaction, Genesis entered into agreements to lease and operate, for ten years with a five year renewal option, seven eldercare centers that continue to be owned by certain shareholders of Meridian (the "Leased Centers") and obtained the option (the "Option") to purchase the Leased Centers after the expiration of the lease. The assets acquired in the Meridian Transaction are located primarily within four of the Company's five geographic markets. Nine Months Ended June 30, 1996 Compared to Nine Months Ended June 30, 1995. The Company's total net revenues for the nine months ended June 30, 1996 were $460,354,000 compared to $354,465,000 for the nine months ended June 30, 1995, an increase of $105,889,000 or 30%. Basic healthcare services increased $35,034,000 or 17%, which is primarily due to the McKerley Transaction and the Partnership Interest Purchase in March 1996 (which was partially offset by the sale of five eldercare centers in the AIMASS Transaction in September 1995, and the Indiana Transaction in March 1996), along with a shift in payor mix from Medicaid to Medicare and rate increases. Specialty medical service revenue increased $65,014,000 or 51%, of which approximately $30,005,000 is due to acquisitions, with the remainder due to other volume growth in the institutional pharmacy, medical supply and contract therapy divisions. Specialty medical service revenue per patient day in the health centers division increased 21% to $29.38 in the nine months ended June 30, 1996 as compared to $24.31 for the same period in the prior year -33- due primarily to treatment of higher acuity patients. Management services and other income increased $5,841,000 or 29% primarily due to an increase in service related business revenues (group purchasing and staff replacement services) of approximately $1,700,000 and an increase in transactional gains of approximately $3,700,000. Transactional and other activity in the nine months ended June 30, 1996 included gains recognized in connection with the sale of an investment, the Indiana Transaction and the sale of a majority interest in one eldercare center in Maryland. The Company's operating expenses before debenture conversion expense, depreciation, amortization and lease expense were $373,041,000 compared to $288,120,000 in the comparable prior period, an increase of $84,921 or 29%, which was due to the McKerley Transaction, the NeighborCare Transaction, an increase in cost of goods sold related to increased specialty medical service revenues, and inflationary wage and benefit increases. In the nine months ended June 30, 1996 the Company converted approximately $42,300,000 of its Convertible Debentures. In connection with the early conversion of a portion of the Convertible Debentures, the Company paid approximately $1,245,000 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 nine months ended June 30, 1996. Interest expense increased $4,735,000 or 33%. This increase reflects increased debt levels used to fund acquisitions and a higher average prevailing interest rate due to the issuance of $120,000,000 of 9 3/4% Notes partially offset by the repayment of approximately $115,480,000 of indebtedness in June 1996 from a part of the net proceeds of the Company's 1996 Equity Offering and interest income generated from investment of the remaining net proceeds. Fiscal 1995 Compared to Fiscal 1994 The Company's total net revenues for the fiscal year ended September 30, 1995 ("Fiscal 1995") were $486,393,000 compared to $388,616,000 for the fiscal year ended September 30, 1994 ("Fiscal 1994"), an increase of $97,777,000 or 25%. Basic healthcare services increased $37,857,000 or 16% of which approximately $20,500,000 is due to the Meridian Transaction included in the entire period in Fiscal 1995 as compared to ten months in Fiscal 1994, approximately $3,400,000 is due to two centers which were leased in Fiscal 1995 that were managed for a part of Fiscal 1994 and the remaining increase is due to providing care to higher acuity customers and to rate increases. Specialty medical services revenue increased $54,609,000 or 43% of which approximately $6,000,000 is due to the Meridian Transaction, approximately $13,000,000 is due to acquisitions during Fiscal 1995 and the remainder is due to other volume growth in the institutional pharmacy, medical supply and contract therapy divisions and increased acuity in the eldercare centers division. Specialty medical service revenue per patient day in the health centers division increased 41% to $25.06 in Fiscal 1995 compared to $17.80 in Fiscal 1994 primarily due to treatment of higher acuity patients. Management services and other income increased $5,311,000 or 23%. This increase is primarily due to the management contracts and other unrelated businesses acquired in the Meridian Transaction as well as inflationary rate increases. The number of eldercare centers under management contracts increased from 31 at September 30, 1994 to 35 at September 30, 1995. The Company's operating expenses before depreciation, amortization, lease expense and interest expense were $393,139,000 for Fiscal 1995 compared to $319,243,000 for Fiscal 1994, an increase of $73,896,000 or 23%. Salaries, wages and benefits increased $45,076,000 or 23% of which approximately $14,500,000 relates to the Meridian Transaction, approximately $3,100,000 related to two centers leased in -34- Fiscal 1995 that were managed for a part of Fiscal 1994 and the remainder is due to the impact of acquisitions and growth in the institutional pharmacy, medical supply and contract therapy divisions. Other operating expenses increased $28,885,000 or 26% of which approximately $8,500,000 is due to the Meridian Transaction and the remainder is due to increased sales in the pharmacy and medical supply divisions. Interest expense increased $5,061,000 or 33%. This increase in interest expense was due to increased debt used to finance the Meridian Transaction outstanding for the entire period of Fiscal 1995 compared to ten months in the prior year, borrowings under the revolving credit agreement and a higher average interest rate due to the issuance of the Notes in June 1995. Depreciation and amortization expense increased from $14,982,000 in Fiscal 1994 to $18,793,000 in Fiscal 1995 primarily due to the Meridian Transaction. Lease expense increased from $11,376,000 in Fiscal 1994 to $13,798,000 in Fiscal 1995 of which $1,000,000 is related to the Meridian Transaction, $500,000 is due to two centers that were leased in Fiscal 1995 that were managed for a part of Fiscal 1994 and the remainder is due to new leases as a result of growth of the eldercare services division and inflationary rate increases. In connection with the early repayment of debt and the restructuring and amendment of its bank credit facility, the Company recorded an extraordinary loss of approximately $1,923,000 to write off unamortized, deferred financing fees. Fiscal 1994 Compared to Fiscal 1993 The Company's total net revenues for Fiscal 1994 were $388,616,000 compared to $219,809,000 for the fiscal year ended September 30, 1993 ("Fiscal 1993"), an increase of $168,807,000 or 76.8%. Basic healthcare services increased $106,894,000 or 80.1% of which approximately $97,600,000 was due to the Meridian Transaction and the remainder was due to providing care to higher acuity customers and to rate increases. Specialty medical service revenue increased $50,491,000 or 67.1%. Of this increase, approximately $32,000,000 related to the Meridian Transaction, $13,200,000 related to increased sales to independent customers and a full year of operations for a medical supply company acquired in Fiscal 1993, and $5,300,000 related to intensity and rate increases. Management services and other income increased $11,422,000 or 101.9%. This increase is primarily attributable to management services contracts acquired in connection with the Meridian Transaction which accounted for approximately $4,100,000, approximately $2,700,000 of revenue associated with a qualified group purchasing business and other unrelated operations acquired in the Meridian Transaction, and the remainder is attributable to rate increases and a full year of revenue related to management contracts entered into in Fiscal 1993. The number of eldercare centers under management contracts increased from 24 at September 30, 1993 to 31 at September 30, 1994. The Company's operating expenses before depreciation, amortization, lease expense and interest expense were $319,243,000 for Fiscal 1994 compared to $181,680,000 for Fiscal 1993, an increase of $137,563,000 or 75.7%. Salaries, wages and benefits increased $80,241,000 or 71.5% of which approximately $66,400,000 was due to the Meridian Transaction and the remainder is related to other additional full-time equivalent personnel and increases in wages, incentive compensation accruals, workers' compensation and other payroll related benefits. -35- Other operating expenses increased $47,268,000 or 76.5% of which approximately $42,000,000 was related to the Meridian Transaction and $5,200,000 was due to an increase in cost of goods sold related to increased sales of specialty medical services. Interest expense increased $10,263,000 due to additional indebtedness of approximately $205,000,000 incurred in connection with the Meridian Transaction. This increase was partially offset by the June 1994 equity offering of 3,219,000 shares of Common Stock resulting in net proceeds of approximately $51,700,000 which was used to repay debt incurred in the Meridian Transaction. Depreciation and amortization expense increased $7,825,000 which consists of approximately $4,700,000 related to the additional depreciation expense associated with the assets acquired in the Meridian Transaction, $1,800,000 of goodwill amortization and approximately $500,000 of amortization from deferred financing fees. Lease expense increased from $7,026,000 in Fiscal 1993 to $11,376,000 in Fiscal 1994 due primarily to the lease agreements entered into in connection with the Meridian Transaction. Liquidity and Capital Resources Working capital increased to $227,599,000 at June 30, 1996 from $134,114,000 at September 30, 1995 due primarily to cash raised in the 1996 Equity Offering which was not used to repay indebtedness. Accounts receivable increased to $144,036,000 at June 30, 1996 from $101,124,000 at September 30, 1995. Approximately $14,300,000 of this increase relates to accounts receivables purchased as a part of the NeighborCare Transaction, approximately $4,800,000 of this increase relates to accounts receivables purchased as part of the McKerley Transaction, approximately $3,000,000 relates to accounts receivables purchased as part of the acquisition of the Therapy Companies in January 1996, approximately $3,800,000 relates to the Partnership Interest Purchase, and the remaining $17,012,000 relates primarily to the continuing shift in business mix to specialty medical services including the specialty medical businesses acquired during Fiscal 1995. Days of revenue in accounts receivable increased to 75 from 72 during this period. In October 1996, the Company amended and restructured its Credit Facility to provide for a $150,000,000 lease financing facility which bears interest at a floating rate equal, at the Company's option, to prime rate or LIBOR plus 1.09% and a $300,000,000 revolving credit facility which bears interest at a floating rate equal, at the Company's option, to prime rate or LIBOR plus 1.25%. Amounts outstanding under the revolving credit facility in September 1998 convert to a four year term loan that provides for equal annual amortization payments payable quarterly. At June 30, 1996, $86,800,000 was outstanding under the revolving credit facility and there were no amounts outstanding under the acquisition credit facility. The Company used the borrowings under the Credit Facility to fund the McKerley Transaction, the Partnership Interest Purchase, the acquisition of the Therapy Companies and a portion of the GMC Transaction. The revolving Credit Facility is secured by the stock and partnership interests of the Company's subsidiaries. In May 1996, the Company completed its 1996 Equity Offering of 6,500,000 shares of Common Stock at $32.50 per share, resulting in net proceeds of $202,280,000. The Company used the net proceeds from the offering to repay a portion of amounts outstanding under its Credit Facility and for working capital purposes. In March 1996, the Company sold four eldercare centers and a pharmacy in Indiana for approximately $22,250,000. The Company used the net proceeds from the sale to repay a portion of its Credit Facility. -36- In November 1995, the Company received in cash approximately $18,000,000 in connection with the September 1995 sale of five facilities in Massachusetts. The Company used the proceeds from the sale to repay a portion of its Credit Facility. The Company's cash flow from operations for the nine months ended June 30, 1996 was $14,228,000 compared to $7,191,000 for the nine months ended June 30, 1995. In June 1995, the Company completed an offering of $120,000,000 of 9 3/4% Notes. The Company used $100,000,000 of the net proceeds of the 9 3/4 % Notes offering to repay in full the term loan component of its Credit Facility and the remaining proceeds to repay a part of the revolving portion of the Credit Facility. In June 1994, the Company completed an offering of 3,264,457 shares of Common Stock at $17.00 per share, of which 3,219,457 were offered by the Company. The net proceeds to the Company of approximately $51,700,000 were used to repay a portion of the indebtedness incurred in the Meridian Transaction. 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 tangible net worth, interest coverage and debt service coverage, and must maintain certain liabilities to net worth and working capital ratios. 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. See "Risk Factors -- Regulation." The Company believes that its liquidity needs can be met by expected operating cash flow and availability of borrowings under its Credit Facility. At October 24, 1996, $196,250,000 was outstanding under the revolving credit facility and approximately $69,700,000 was outstanding under the lease financing facility, and approximately $86,950,000 was available under the revolving credit facility as a result of $16,800,000 outstanding letters of credit issued under the Credit Facility. Seasonality -37- 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. -38- BUSINESS General Genesis is a leading provider of healthcare and support services to the elderly. The Company has developed the Genesis ElderCare(sm) delivery model of integrated healthcare networks to provide cost-effective, outcome-oriented services to the elderly. Through these integrated healthcare networks, Genesis provides basic healthcare and specialty medical services to more than 75,000 customers in five regional markets in the Eastern United States in which over 3,000,000 people over the age of 65 reside. The networks include 153 eldercare centers with approximately 20,120 beds; 18 primary care physician clinics; approximately 70 physicians, physician assistants and nurse practitioners; 12 institutional pharmacies and six medical supply distribution centers serving over 52,000 beds; certified rehabilitation agencies providing services through over 290 contracts; and seven home healthcare agencies. Genesis has concentrated its eldercare networks in five geographic regions in order to achieve operating efficiencies, economies of scale and significant market share. The five geographic markets that Genesis principally serves are: Massachusetts/Connecticut/New Hampshire; Eastern Pennsylvania/Delaware Valley; Southern Delaware/Eastern Shore of Maryland; Baltimore, Maryland/Washington, D.C.; and Central Florida. Genesis eldercare services focus on the central medical and physical issues facing the more medically demanding elderly. By integrating the talents of physicians with case management, comprehensive discharge planning and, where necessary, home support services, the Company provides cost-effective care management to achieve superior outcomes and return customers to the community. The Company believes that its orientation toward achieving improved customer outcomes through its eldercare networks has resulted in increased utilization of specialty medical services, high occupancy of available beds, enhanced quality payor mix and a broader base of repeat customers. Specialty medical services revenues have increased at a compound annual rate of 37% from the fiscal year ended September 30, 1990 to the fiscal year ended September 30, 1995 and comprise 42% of the Company's revenues for the nine month period ended June 30, 1996. Specialty medical services typically generate higher profit margins than basic healthcare services and are less capital intensive. The Company's growth strategy is to enhance its existing eldercare networks, establish new eldercare networks in markets it deems attractive and broaden its array of high margin specialty medical services through internal development and selected acquisitions. Consistent with its strategy, the Company has made selected acquisitions of eldercare centers and rehabilitation, pharmacy, physician services and home healthcare companies. The Company's long-term strategy is to provide comprehensive eldercare services, in collaboration with other providers, on a prepaid basis in a managed care environment. The Company has undertaken several initiatives to position itself to compete in a managed care environment. These initiatives include: (i) establishing a managed care division to pursue and administer contracts with managed care organizations, develop clinical care protocols and monitor the delivery and utilization of medical care; (ii) developing a clinical administration and healthcare management information system to monitor and measure clinical and patient-outcome data; (iii) establishing the Genesis ElderCare (sm) brand name to increase awareness of the Company's eldercare services in the healthcare market; (iv) seeking strategic alliances with other healthcare providers to broaden the Company's continuum of care; and (v) creating an independent eldercare advisory board to formulate new and innovative approaches in the delivery of care. -39- The Company was incorporated in May 1985 as a Pennsylvania corporation. The Company's principal executive offices are located at 148 West State Street, Kennett Square, Pennsylvania 19348 and its telephone number at that location is (610) 444-6350. Basic Healthcare Services Genesis operates 153 eldercare centers (76 wholly-owned, three jointly-owned, 34 leased and 40 managed) located in 13 states. The centers offer three levels of care for their customers: skilled, intermediate and personal. Skilled care provides 24-hour per day professional services of a registered nurse; intermediate care provides less intensive nursing care; and personal care provides for the needs of customers requiring minimal supervision and assistance. Each eldercare center is supervised by a licensed healthcare administrator and employs a Medical Director to supervise the delivery of healthcare services to residents and a Director of Nursing to supervise the nursing staff. The Company maintains a corporate quality assurance program to ensure regulatory compliance and to enhance the standard of care provided in each center. In addition to programs to meet the healthcare needs of its customers, all Genesis eldercare centers offer a variety of quality of life programs. These include the Intergenerational Learning Program that enables residents to function both as students and as instructors in programs with community schools, as well as The Magic Mix Program that provides a supervised setting in which children of working parents can interact with residents of the centers after school. These programs have received recognition at both local and national levels. In eight of its eldercare centers, the Company operates Genesis ElderCare Focus programs which are dedicated to meeting the special medical, emotional and psychological needs of Alzheimer's patients. The Focus programs were developed in conjunction with the Dementia Research Clinic at the Johns Hopkins University School of Medicine. These units provide an environment that is designed or modified to assist those with cognitive loss. Clinical experts have experienced significant success and produced benefits to customers served in both Alzheimer's day services and dedicated residential units. The following table sets forth, for the periods indicated, information regarding the Company's average number of beds and average occupancy levels at its eldercare centers.
Nine Months Year Ended September 30, Ended June 30, ------------------------------------- ---------------------- 1993 1994 1995 1995 1996 ----------- ---------- ---------- ---------- ---------- Average Beds in Service Wholly-owned and Leased Centers.................... 4,534 7,530 8,268 8,268 9,062 Jointly-owned and Managed Centers.................. 1,208 4,532 5,158 5,158 5,195 Occupancy Based on Average Beds in Service Wholly-owned and Leased Centers.................... 95% 92% 92% 92% 92% Jointly-owned and Managed Centers.................. 94% 93% 95% 95% 95%
-40- Specialty Medical Services The Company emphasizes the delivery of specialty medical services which typically requires smaller capital investment and generates higher profit margins than providing basic healthcare services. The Company provides the specialty medical services described below. Institutional Pharmacy and Medical Supply Services. The Company provides pharmacy and other services including infusion therapy and medical supplies and equipment to eldercare centers it operates, as well as to independent healthcare providers by contract. The pharmacy services provided in these settings are tailored to meet the needs of the institutional customer. These services include highly specialized packaging and dispensing systems, computerized medical records processing and 24-hour emergency services. The Company's institutional pharmacy and medical supply services were developed to provide the products and support services required in the healthcare market. Institutional pharmacy services are designed to help assure quality of care and to control costs at the facilities served. Medical supply services are designed to assure availability and control through maintenance of a comprehensive inventory, extensive delivery services and special ordering and tracking systems. The Company also provides pharmacy consulting services to assure proper and effective drug therapy. The Company provides these services through 12 pharmacies (of which three are jointly-owned) and six distribution centers located in its various market areas. Approximately 76% of the sales attributable to pharmacy operations in Fiscal 1995 were generated through external contracts with independent healthcare providers with the balance attributable to centers operated by the Company. Rehabilitation Therapy. The Company provides an extensive range of rehabilitation therapy services, including speech pathology, physical therapy and occupational therapy through seven certified rehabilitation agencies in all five of its market concentrations. These services are provided by over 1,000 licensed rehabilitation therapists and assistants employed by Genesis to substantially all of the eldercare centers the Company operates, as well as by contract to healthcare facilities operated by others. Subacute Care Programs. The Company has established and actively markets programs for elderly and other customers who require subacute levels of medical care. These programs include ventilator care, intravenous therapy, post-surgical recovery, respiratory management, orthopedic or neurological rehabilitation, terminal care and various forms of coma, pain and wound management. Private insurance companies and other third party payors, including certain state Medicaid programs, have recognized that treating customers requiring subacute medical care in centers such as those operated by Genesis is a cost-effective alternative to treatment in an acute care hospital. The Company provides such care at rates that the Company believes are substantially below the rates typically charged by acute care hospitals for comparable services. Physician Services. The Company employs or has consulting arrangements with approximately 70 physicians, physician assistants and nurse practitioners to provide physician services at certain of its eldercare centers. These physicians, physician assistants and nurse practitioners provide a range of services, including direct patient care, the design and administration of clinical programs, such as the Company's subacute care program, as well as traditional medical director and utilization review services. The Company compensates these employees and consultants for services rendered and, where appropriate, bills directly for such services. The Company believes that the involvement of these -41- physicians in the Company's eldercare centers provides a significant competitive advantage. These physicians direct the operations of 18 free-standing physician clinics, as well as Functional Evaluation and Treatment Units in 16 of its eldercare centers. The purpose of each of these units is to provide a comprehensive assessment and treatment plan for all new admissions to the center. The process is directed by a physician specializing in gerontology and involves an intensive evaluation in which social service professionals, clinical staff and the customer and the customer's family participate. The Company believes that this program reduces average lengths of stay and increases discharge-to-home rates. The Company also believes the Functional Evaluation and Treatment Units enhance its reputation for providing quality care and result in improved occupancy rates, as well as improve its ability to attract subacute and other high acuity customers. Home Healthcare Services. The Company provides home healthcare services to customers in its markets through seven certified home health agencies owned by the Company. The Company currently provides these services in all of its geographic markets other than Central Florida and has been granted Certificates of Need to begin providing services in Central Florida. The services offered include skilled nursing care, physical, occupational and speech therapy, medical social services and home health aide services. The Company's focus is on providing infusion therapy, total parenteral nutrition, ventilator care and peritoneal dialysis. In June 1994, the Company entered into a joint venture with six other healthcare providers to purchase the Visiting Nurses Association in Baltimore ("VNA"), an organization which is one of the largest providers of home healthcare services in Maryland. Excluding VNA, the Company provided approximately 47,100 home healthcare visits in the nine months ended June 30, 1996. Management Services and Other Management Services. The Company provides management services to 43 eldercare centers (including three jointly-owned centers) pursuant to management agreements that provide generally for the Company's day-to-day responsibility for the operation and management of the centers. In turn, Genesis receives management fees, depending on the agreement, computed as either an overall fixed fee, a fixed fee per customer, a percentage of net revenues of the center plus an incentive fee, or a percentage of gross revenues of the center with some incentive clauses. The various management agreements, including option periods, terminate between 1996 and 2012. In March 1996, the Company entered into a strategic alliance with Doctors Community Hospital, a 250-bed acute hospital in Maryland. As part of this transaction, the Company entered into a long-term agreement to manage the hospital's subacute care center. Prior to January 1, 1996, the Company also provided management, development and marketing services to 15 life care communities operated by Adult Community Total Services, Inc. ("ACTS"), a Pennsylvania non-profit corporation pursuant to a management agreement which was to expire in April 1998. Effective January 1, 1996, Genesis restructured its relationship with ACTS. Under the revised arrangement, Genesis was paid a $2,000,000 restructuring fee and will no longer manage the ACTS life care communities. Genesis will continue to provide development services for a fee in an amount equal to five percent of the total cost of developing and completing facilities developed by ACTS. The development portion of the contract has been extended to December 2002 and Genesis is guaranteed a minimum annual development fee of $1,500,000 per year. Genesis also continues to provide certain ancillary services to the ACTS communities. -42- Group Purchasing. The Company's subsidiary, The Tidewater Healthcare Shared Services Group, Inc. ("Tidewater"), is one of the largest group purchasing companies in the mid-Atlantic region. Tidewater provides purchasing and shared service programs specially designed to meet the needs of eldercare centers and other long-term care facilities. Tidewater's services are contracted to approximately 1,200 members with over 141,000 beds in 25 states and the District of Columbia. Managed Care Initiatives The Company has undertaken several initiatives to position itself to compete effectively on a prepaid basis in a managed care environment. In January 1995, the Company established a Managed Care division which currently consists of 55 employees. The Managed Care division is responsible for pursuing and administering contracts with managed care organizations, developing clinical care protocol and monitoring the delivery and utilization of medical care. The Company has begun to develop a clinical administration and healthcare management information system to monitor and measure clinical and patient outcome data for use by healthcare providers and the Company. The Company is also seeking strategic alliances with selected providers in order to further the continuum of care, increase market share and customer acceptance and create strategic affiliations for negotiating with payors in a managed care environment. In addition to these initiatives, the Company has consolidated its core business under the Genesis ElderCare(sm) brand name in an effort to increase the Company's visibility among current and potential customers, payors and other healthcare providers. The Company has also created an independent eldercare advisory board composed of individuals with distinguished credentials in geriatric care to formulate new and innovative approaches in the delivery of care. Centers The following table provides information by state regarding the eldercare centers owned, leased and managed by the Company as of October 15, 1996.
Wholly-Owned Jointly-Owned Managed Centers Centers Leased Centers Centers Total ----------------- --------------- ----------------- --------------- ------------------ Centers Beds Centers Beds Centers Beds Centers Beds Centers Beds --------- ------- -------- ------ --------- ------- -------- ----- --------- -------- Massachusetts................ 8 1,092 -- -- -- -- 5 606 13 1,698 New Hampshire................ 7 651 -- -- 6 608 -- -- 13 1,259 Connecticut.................. 4 615 -- -- 1 120 -- -- 5 735 Vermont...................... 2 256 -- -- -- -- -- -- 2 256 Pennsylvania ................ 19 2,681 1 73 -- -- 8 1,082 28 3,836 New Jersey................... 14 1,606 -- -- 2 404 3 396 19 2,406 Delaware..................... 4 504 -- -- -- -- 1 99 5 603 Maryland..................... 12 1,958 2 206 9 1,326 4 706 27 4,196 Virginia..................... 2 421 -- -- 4 670 -- -- 6 1,091 Florida...................... 4 598 -- -- 10 1,231 13 1,404 27 3,223 West Virginia................ -- -- -- -- 2 180 -- -- 2 180 North Carolina............... -- -- -- -- -- -- 2 340 2 340 Colorado..................... -- -- -- -- -- -- 4 283 4 283 --------- ------- -------- ------ --------- ------- -------- ----- --------- -------- Total............... 76 10,382 3 279 34 4,539 40 4,916 153 20,116 ========= ======= ======== ====== ========= ======= ======== ===== ========= ========
-43- Revenue Sources The Company derives its basic healthcare and specialty medical revenue from private pay sources, state Medicaid programs and Medicare. The Company classifies payments from persons or entities other than the government as private pay and other revenue. The private pay and other classification also includes revenues from commercial insurers, health maintenance organizations and other charge-based payment sources. Blue Cross and Veterans Administration payments are included in private pay and other revenues and are made pursuant to renewable contracts negotiated with these payors. Medicare is a federally funded and administered health insurance program that consists of Parts A and B. Participation in Part B is voluntary and is funded in part through the payment of premiums. Benefits under Part A include inpatient hospital services, skilled nursing in an eldercare center and medical services such as physical, speech and occupational therapy, certain pharmaceuticals and medical supplies. Part B provides coverage for physician services. Part B also reimburses for medical services with the exception of pharmaceutical services. Medicare benefits are not available for intermediate and custodial levels of care; however, medical and physician services furnished to such patients may be reimbursable under Part B. Under the Part A reimbursement methodology, each eldercare center receives an interim payment during the year which is adjusted to reflect actual allowable direct and indirect costs of services based on the submission of a cost report at the end of each year. For services not billed through each eldercare center, the Company's specialty medical operations bill Medicare directly for nutritional support services, infusion therapy, certain medical supplies and equipment, physician services and certain therapy services as provided. Medicare payments for these services may be based on reasonable cost charges or a fixed-fee schedule determined by Medicare. Medicaid is the state administered reimbursement program that covers both skilled and intermediate long-term care. Although Medicaid programs vary from state to state, typically they provide for payment for services including nursing facility services, physician's services, therapy services and prescription drugs, up to established ceilings, at rates based upon cost reimbursement principles. Reimbursement rates are typically determined by the state from cost reports filed annually by each center, on a prospective or retrospective basis. In a prospective system, a rate is calculated from historical data and updated using an inflation index. The resulting prospective rate is final, but in some cases may be adjusted pursuant to an audit. In this type of payment system, center cost increases during the rate year do not affect payment levels in that year. In a retrospective system, final rates are based on reimbursable costs for that year. An interim rate is calculated from previously filed cost reports, and may include an inflation factor to account for the time lag between the final cost report settlement and the rate period. Consequently, center cost increases during any year may affect revenues in that year. Certain states are scheduled to convert, or have recently converted, from a retrospective system, which generally recognizes only two or three levels of care, to a case mix prospective pricing system, pursuant to which payment to a center for patient services directly considers the individual patient's condition and need for services. The effect, if any, of such a payment system on the Company is unclear. The Company employs specialists in reimbursement at the corporate level to monitor both Medicaid and Medicare regulatory developments to comply with all reporting requirements and to insure appropriate payments. -44- The following table reflects the allocation of customer service revenues among these sources of revenue.
Nine Months Year Ended September 30, Ended June 30, --------------------------------------------------- ---------------------- 1991 1992 1993 1994 1995 1995 1996 -------- --------- --------- --------- --------- ---------- ---------- Private pay and other.................. 43% 41% 42% 41% 38% 38% 39% Medicaid............................... 48 47 44 43 41 41 38 Medicare............................... 9 12 14 16 21 21 23 ------ ------ ------ ------- ------- ------- ------- Total......................... 100% 100% 100% 100% 100% 100% 100% ====== ====== ====== ======= ======= ======= =======
Marketing Marketing for eldercare centers is focused at the local level and is conducted primarily by the center administrator and its admissions director who call on referral sources such as doctors, hospitals, hospital discharge planners, churches and various community organizations. Besides actively soliciting admissions from these sources, the Company's marketing objective is to maintain public awareness of the eldercare center and its capabilities. The Company takes advantage of its regional concentrations in its marketing efforts, where appropriate, through consolidated marketing programs which benefit more than one center. Genesis markets specialty medical services to its managed eldercare centers, as well as to independent healthcare providers, in addition to providing such services to its owned and leased eldercare centers. The Company markets its rehabilitation therapy and institutional pharmacy and medical supply services through a direct sales force which primarily calls on eldercare centers, hospitals, clinics and home health agencies. The corporate business development department, through regional managers, markets the Company's subacute program directly to insurance companies, managed care organizations and other third party payors. In addition, the marketing department supports the eldercare centers in developing promotional materials and literature focusing on the Company's philosophy of care, services provided and quality clinical standards. See "Governmental Regulation" below for a discussion of the federal and state laws which limit financial and other arrangements between healthcare providers. In February 1996, the Company announced a consolidation of its core business under the name Genesis ElderCare(sm). The Genesis ElderCare logo and trademark have been featured in a series of print advertisements in publications serving the regional markets in which the Company operates. The Company's marketing of Genesis ElderCare is aimed at increasing awareness among decision makers in key professional and business audiences. The Company is using advertising to promote its brand name in trade, professional and business publications and to promote services directly to consumers. Personnel At October 15, 1996, Genesis employed over 26,500 people, including approximately 17,900 full-time and 8,500 part-time employees. Approximately 24% of these employees are physicians and nursing and professional staff. -45- The Company currently has collective bargaining agreements which relate to 41 facilities including eight managed eldercare centers. The agreements expire beginning in December 1996 through August 2000 and cover approximately 2,900 employees. The Company believes that its relationship with its employees is generally good. Employee Training and Development Genesis believes that nursing and professional staff retention and development has been and continues to be a critical factor in the successful operation of the Company. In response to this challenge, a compensation program which provides for annual merit reviews as well as financial and quality of care incentives has been implemented to promote center staff motivation and productivity and to reduce turnover rates. Management believes that the Company's wage rates for professional nursing staff are commensurate with market rates. The Company also provides employee benefit programs which management believes, as a package, exceed industry standards. The Company has not experienced any significant difficulty in attracting or retaining qualified personnel. In addition, Genesis has established an internal training and development program for both nurse assistants and nurses. Employee training is emphasized by the Company through a variety of in-house programs as well as a tuition reimbursement program. The Company has established, company-wide, the Genesis Nursing Assistant Specialist Program. This program is offered on a joint basis with community colleges. Classes are held on the employees' time, last for approximately six months and provide advanced instruction in nursing care. The Company pays the tuition. When all of the requirements for class participation have been met through attendance, discussion and examinations, the nurse aide graduates and is awarded the title of Nursing Assistant Specialist and receives a salary adjustment. The Company has maintained a retention rate of 75% since 1988 of the nurses aide graduates. Over 1,300 nurse aides have graduated from the Genesis Nursing Assistant Specialist Program and received an increase in salary. As the nurse aide continues through the career ladder, the Company continues to provide incentives. At the next level, Senior Nursing Assistant Specialist, the employee receives another increase in salary and additional tuition reimbursement of up to $2,250 toward becoming a Licensed Practical Nurse ("LPN") or Registered Nurse ("RN") and at the Senior Nursing Assistant Specialist Coordinator level, tuition reimbursement increases to a maximum of $3,000 per year towards a nursing degree. The Company began a junior level management and leadership training program in 1990 referred to as the Pilot Light Program. The target audience for this training is RNs and LPNs occupying charge nurse positions within the Company's nursing centers as well as junior level managers throughout the Genesis networks. Over 475 participants have graduated from this program. In addition, a flexible RN associate degree program has been established to meet the needs of those employees who cannot attend nursing school on a full-time basis. The program is conducted jointly with local community colleges and Regents College in New York. The program combines self-study, flexible class scheduling, mentoring and tutoring by Genesis professional nursing staff. This format allows for a self-paced RN degree. Currently, there are approximately 18 Genesis employees enrolled in this program, which the Company believes is the first of its kind in the United States. Government Regulation The federal government and all states in which the Company operates regulate various aspects of the Company's business. The Company's eldercare centers are subject to certain federal statutes and regulations and to statutory and regulatory licensing requirements by state and local authorities. All Genesis -46- eldercare centers are currently so licensed. In addition, eldercare centers are subject to various local building codes and other ordinances. All of the Company's eldercare centers and healthcare services, to the extent required, are licensed under applicable law. All eldercare centers and healthcare services, or practitioners providing the services therein, are certified or approved as providers under one or more of the Medicaid, Medicare or Veterans Administration programs. Licensing, certification and other applicable standards vary from jurisdiction to jurisdiction and are revised periodically. State and local agencies survey all eldercare centers on a regular basis to determine whether such centers are in compliance with governmental operating and health standards and conditions for participation in government sponsored third party payor programs. The Company believes that its centers are in substantial compliance with the various Medicare and Medicaid regulatory requirements applicable to them. However, in the ordinary course of its business, the Company receives notices of deficiencies for failure to comply with various regulatory requirements. Genesis reviews such notices and takes appropriate corrective action. In most cases, Genesis and the reviewing agency will agree upon the measures to be taken to bring the center into compliance with regulatory requirements. In some cases or upon repeat violations, the reviewing agency may take various adverse actions against a center, including the imposition of fines, temporary suspension of admission of new patients to the center, suspension or decertification from participation in the Medicare or Medicaid programs and, in extreme circumstances, revocation of a center's license. These actions may adversely affect the eldercare centers' ability to continue to operate, the ability of the Company to provide certain services, and eligibility to participate in the Medicare, Medicaid or Veterans Administration programs or to receive payments from other payors. Additionally, actions taken against one center may subject other centers under common control or ownership to adverse measures, including loss of licensure or eligibility to participate in Medicare and Medicaid programs. Certain of the Company's centers have received notices in the past from state agencies that, as a result of certain alleged deficiencies, the agency was taking steps to decertify the centers from participation in Medicare and Medicaid programs. In all cases, such deficiencies were remedied before any centers were decertified. All but four of the Genesis eldercare centers provide skilled nursing services and are currently certified to receive benefits provided under Medicare for these services. Additionally, all Genesis eldercare centers are currently certified to receive benefits under Medicaid. Both initial and continuing qualifications of an eldercare center to participate in such programs depend upon many factors including accommodations, equipment, services, patient care, safety, personnel, physical environment, and adequate policies, procedures and controls. Under the various Medicaid programs, the federal government supplements funds provided by the participating states for medical assistance to "medically indigent" persons. The programs are administered by the applicable state welfare or social service agencies. Although Medicaid programs vary from state to state, traditionally they have provided for the payment of certain expenses, up to established limits, at rates based generally on cost reimbursement principles. All states in which Genesis operates have adopted Certificate of Need or similar laws which generally require that a state agency approve certain acquisitions and determine that the need for certain bed additions, new services, and capital expenditures or other changes exists prior to the acquisition or addition of beds or services, the implementation of other changes, or the expenditure of capital. State approvals are generally issued for a specified maximum expenditure and require implementation of the proposal within a specified period of time. Failure to obtain the necessary state approval can result in the inability to provide the service, to operate the centers, to complete the acquisition, addition or other change, and can also result in the imposition of sanctions or adverse action on the center's license and adverse reimbursement action. -47- The Company is also subject to federal and state laws which govern financial and other arrangements between healthcare providers. These laws often prohibit certain direct and indirect payments or fee-splitting arrangements between healthcare providers that are designed to induce or encourage the referral of patients to, or the recommendation of, a particular provider for medical products and services. These laws include the "anti-kickback" provisions of the federal Medicare and Medicaid programs, which prohibit, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe or rebate) directly or indirectly in return for or to induce the referral of an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under Medicare or Medicaid. These laws also include the "Stark legislations" which prohibit, with limited exceptions, the referral of patients by physicians for certain services, including home health services, physical therapy and occupational therapy, to an entity in which the physician has an ownership interest. In addition, some states restrict certain business relationships between physicians and other providers of healthcare services. Many states prohibit business corporations from providing, or holding themselves out as a provider of medical care. Possible sanctions for violation of any of these restrictions or prohibitions include loss of licensure or eligibility to participate in reimbursement programs and civil and criminal penalties. These laws vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies. From time to time, the Company has sought guidance as to the interpretation of these laws; however, there can be no assurance that such laws will ultimately be interpreted in a manner consistent with the practices of the Company. Although the Company has contractual arrangements with some healthcare providers to which the Company pays fees for services rendered or products provided, the Company believes that its practices are not in violation of these laws. The Company cannot accurately predict whether enforcement activities will increase or the effect of any such increase on its business. There have also been a number of recent federal and state legislative and regulatory initiatives concerning reimbursement under the Medicare and Medicaid programs. In particular, the federal government has issued recent fraud alerts concerning double billing, home health services and the provisions of medical supplies. Accordingly, it is anticipated that these areas may come under closer scrutiny by the government. The Company cannot accurately predict the impact of any such initiatives. Competition The Company competes with a variety of other companies in providing healthcare services. Certain competing companies have greater financial and other resources and may be more established in their respective communities than the Company. Competing companies may offer newer or different centers or services than the Company and may thereby attract the Company's customers who are either presently residents of its eldercare centers or are otherwise receiving its healthcare services. The Company operates eldercare centers in 13 states. In each market, the Company's eldercare centers may compete for customers with rehabilitation hospitals, subacute units of hospitals, skilled or intermediate nursing centers and personal care or residential centers which offer comparable services to those offered by the Company's centers. Certain of these providers are operated by not-for-profit organizations and similar businesses which can finance capital expenditures on a tax-exempt basis or receive charitable contributions unavailable to the Company. In competing for customers, a center's local reputation is of paramount importance. Referrals typically come from acute care hospitals, physicians, religious groups, other community organizations, health maintenance organizations and the customer's families and friends. Members of a customer's family generally actively participate in selecting an eldercare center. Competition for subacute patients is intense among hospitals with long-term care capability, rehabilitation hospitals and other specialty providers and is expected to remain so in the future. Important competitive factors include the reputation in the community, services offered, the appearance of a center and the cost of services. -48- Genesis competes in providing specialty medical services with a variety of different companies. Generally, this competition is national, regional and local in nature. The primary competitive factors in the specialty medical services business are similar to those in the eldercare center business and include reputation, the quality of clinical services, responsiveness to patient needs, and the ability to provide support in other areas such as third party reimbursement, information management and patient record-keeping. Insurance Genesis carries property and general liability insurance, professional liability insurance, and medical malpractice insurance coverage in amounts deemed adequate by management. However, there can be no assurance that any current or future claims will not exceed applicable insurance coverage. Genesis also requires that physicians practicing at its eldercare centers carry medical malpractice insurance to cover their individual practices. Legal Proceedings On May 10, 1996, the Company's agent for service of process in Maryland received notice that Orem Medical Home Health Care, Inc. and Orem Medical Corporation (collectively, "Orem"), which are engaged in the business of selling, renting and servicing durable medical equipment and supplies, filed suit in the Circuit Court for Baltimore City on May 2, 1996 against Genesis and its subsidiary Eastern Medical Supplies, Inc. ("Eastern"). The suit alleges that Genesis and/or Eastern have interfered with certain contractual obligations and business relations between Orem and third parties and that Genesis and/or Eastern have induced such third parties to breach certain contractual obligations to Orem. The allegations relate to terminated discussions of a possible acquisition by Genesis of assets of Orem. Orem seeks compensatory and punitive damages and injunctive relief for such alleged actions. Genesis filed an answer to the complaint on June 24, 1996, generally denying the allegations and including a counter-claim for amounts due to its subsidiaries. The Company believes it has defenses to the claims, intends to vigorously defend such claims and believes that any amount paid or accrued with respect to this matter will not have a material adverse effect on the financial position or results of operations of the Company. However, there can be no assurance as to the outcome of the suit and that it will not have a material adverse effect on the financial position or results of operations of the Company. For a discussion of certain litigation in which GMC is involved see Note 14 to GMC's financial statements incorporated by reference herein. -49- MANAGEMENT Executive Officers and Directors The following table sets forth certain information with respect to the executive officers and directors of the Company.
Name Age Position - ------------------------------------------ ------------ ------------------------------------------------------ Michael R. Walker (1)..................... 48 Chairman and Chief Executive Officer Richard R. Howard (1)..................... 47 President, Chief Operating Officer and Director David C. Barr............................. 46 Executive Vice President John F. DePodesta......................... 51 Senior Vice President, Law and Public Policy George V. Hager, Jr....................... 40 Senior Vice President and Chief Financial Officer Edward B. Romanov, Jr..................... 45 Senior Vice President, Development Louis Swart............................... 57 Senior Vice President, Managed Operations Maryann Timon............................. 43 Senior Vice President for Managed Care Marc D. Rubinger.......................... 47 Vice President and Chief Information Officer Edward J. Boeggeman....................... 49 Vice President and Controller Allen R. Freedman (2)..................... 56 Director Samuel H. Howard (2)(3)................... 57 Director Roger C. Lipitz (2)....................... 54 Director Stephen E. Luongo (3)..................... 49 Director Alan B. Miller (3)........................ 59 Director Fred F. Nazem (1)......................... 55 Director
- ---------------------- (1) Member of the Executive Committee of the Board of Directors. (2) Member of the Audit Committee of the Board of Directors. (3) Member of the Compensation Committee of the Board of Directors. Michael R. Walker is the founder of the Company and has served as Chairman and Chief Executive Officer of the Company since its inception. In 1981, Mr. Walker co-founded Health Group Care Centers ("HGCC"). At HGCC, he served as Chief Financial Officer and, later, as President and Chief Operating Officer. Prior to its sale in 1985, HGCC operated nursing homes with 4,500 nursing beds in 12 states. From 1978 to 1981, Mr. Walker was the Vice President and Treasurer of AID Healthcare Centers, Inc. ("AID"). AID, which owned and operated 20 nursing centers, was co-founded in 1977 by Mr. Walker as the nursing home division of Hospital Affiliates International. Mr. Walker holds a Master of Business Administration degree from Temple University and a Bachelor of Arts in Business Administration from Franklin and Marshall College. Mr. Walker serves on the Board of Directors of Renal Treatment Centers, Inc. and the Board of Trustees of Universal Health Realty & Income Trust. Richard R. Howard has served as a director of the Company since its inception and as Chief Operating Officer since June 1986. He joined the Company in September 1985 as Vice President of Development. Mr. Howard's background in healthcare includes two years as the Chief Financial Officer of HGCC. Mr. Howard's experience also includes over ten years with Fidelity Bank, Philadelphia, Pennsylvania -50- and one year with Equibank, Pittsburgh, Pennsylvania. Mr. Howard is a graduate of the Wharton School, University of Pennsylvania, where he received a Bachelor of Science degree in Economics in 1971. David C. Barr has served as Executive Vice President of the Company since October 1988. Prior to joining Genesis, Mr. Barr was a principal of a private consulting firm, Kane Maiwurm Barr, Inc., which provided management consulting for small and medium-sized firms. Prior to forming this firm, he served as Executive Vice President of Allegheny Beverage Corporation, a service conglomerate. During 1984 and 1985, Mr. Barr served with Equibank, Pittsburgh, Pennsylvania, where he held several positions including Executive Vice President of Corporate Banking. Mr. Barr graduated in 1972 from the University of Miami with a Bachelor of Science degree in Accounting. John F. DePodesta joined the Company as Senior Vice President, Law and Public Policy in January 1996. Mr. DePodesta was previously a partner and currently is of-counsel in the law firm of Pepper, Hamilton & Scheetz. Mr. DePodesta received a Bachelor of Arts degree from Harvard College in 1966 and his Juris Doctor from the University of Pennsylvania Law School in 1969. Pepper, Hamilton & Scheetz performs outside legal services for the Company. George V. Hager, Jr. has served the Company as Senior Vice President and Chief Financial Officer since February 1994. Mr. Hager joined the Company in July 1992 as Vice President and Chief Financial Officer. Mr. Hager was previously partner in charge of the healthcare practice for KPMG Peat Marwick LLP in the Philadelphia office. Mr. Hager began his career at KPMG Peat Marwick LLP in 1979 and has over 15 years of experience in the healthcare industry. Mr. Hager received a Bachelor of Arts degree in Economics from Dickinson College in 1978 and a Master of Business Administration degree from Rutgers Graduate School of Management. He is a certified public accountant and a member of the AICPA and PICPA. Edward B. Romanov, Jr. has served as Senior Vice President, Development since May 1992. From June 1990 through April 1, 1995, Mr. Romanov served as a financial consultant to the Company pursuant to a Consulting and Services Agreement between the Company and American Community Environments Corporation of which he is an employee. Mr. Romanov was founder and President of WesTerra Construction, WesTerra Capital Company and WesTerra Development, through which Mr. Romanov developed and financed real estate projects. Mr. Romanov holds both a Master of Business Administration and a Bachelor of Science degree from Lehigh University. Louis Swart joined the Company in 1990 and became Senior Vice President, Managed Operations in 1994. Prior to joining the Company, Mr. Swart established and was President of Wedgwood Retirement Inns. After selling Wedgwood in 1988, he became President and Chief Executive Officer of Retirement Corporation of America, until it was sold in 1990. Mr. Swart currently serves on the Board of Directors of Sterling Health Care Corporation, a behavioral medicine hospital group. Mr. Swart is a graduate of the University of South Africa and completed his graduate work at Texas Christian University. He is founder and past director of the California Association of Senior Living Industries and is a member of the National Association of Senior Living Industries and American Association of Homes for the Aged. Maryann Timon has served as Senior Vice President for Managed Care since May 1996. From January 1995 through May 1996 she served as Corporate Vice President of the Managed Care Division. Ms. Timon joined the Company in December 1990 to form and serve as President of a wholly-owned subsidiary, Healthcare Services Network. Ms. Timon was previously President of Mercy Ventures, Inc., a five-company healthcare specialty group owned by Mercy Medical Center in Baltimore, Maryland. Ms. Timon has 25 years of experience providing eldercare healthcare services. Ms. Timon received an Associate Degree in Applied -51- Science in Nursing in 1973 from the State University of New York at Canton, a Bachelor of Science Degree in Nursing in 1976 from the State University of New York at Utica/Rome and a Master of Gerontological Nursing Degree in 1978 from the University of Rochester. Marc D. Rubinger has served as Vice President and Chief Information Officer since November 1995. Prior to joining the Company, Mr. Rubinger served as General Manager-Decision Support Systems of Shared Medical Systems. From 1975 through 1986, Mr. Rubinger was a partner with Ernst & Young in their national healthcare consulting practice. Mr. Rubinger received a Bachelor of Arts degree in Bioscience from Binghamton University in 1971 and a Masters of Health Administration and Planning from The George Washington University in 1973. Kenneth R. Kuhnle has served as Vice President and Treasurer of the Company since February 1990. He joined Genesis in October 1988 as Reimbursement Director, which includes responsibility for monitoring government programs as well as third party reimbursement planning and maximization. Mr. Kuhnle served as Reimbursement Manager for Beverly enterprises, owners and operators of long-term care centers, from January 1986 to October 1988 and as Medicare Auditor for Aetna Life Insurance Company from November 1982 to December 1985. He received a Bachelor of Science degree in Business Administration from Temple University in 1979. Mr. Kuhnle serves as President of the Delaware Healthcare Facilities Association and President of the Worcester chapter of the Massachusetts Federation of Nursing Homes. Edward J. Boeggeman has served as Vice President and Corporate Controller of the Company since December 1993. He joined Genesis in January 1993 as Controller of Genesis Health Centers. Mr. Boeggeman has over twenty years of experience in the healthcare industry, including four years with KPMG Peat Marwick LLP from 1979 to 1983. Prior to joining Genesis, he served in various accounting positions including Assistant Controller, Controller and Vice President of Financial Affairs at a teaching hospital, academic medical center and community hospital, all within the Greater Philadelphia area. Mr. Boeggeman received a Bachelor of Arts degree in Accounting from Villanova University in 1973 and is a certified public accountant. Allen R. Freedman has served as a director of the Company since February 1996. Since 1990, Mr. Freedman has served on the executive board of Fortis, a multinational financial services organization, which is the operating entity of Fortis AG, based in Belgium, and Fortis AMEV, based in the Netherlands. Since 1990, he has been Chairman and Chief Executive Officer of Fortis, Inc. and Chairman of the Board of its principal insurance and investment affiliates in the United States. These affiliates include American Security Group; Fortis Benefits Insurance Company; Time Insurance Company; and United Family Life Insurance Company. Mr. Freedman served as President of Fortis, Inc. from 1979 to 1990. Mr. Freedman is also a director of Fortis Advisors, Inc. and Systems and Computer Technology Corporation. Samuel H. Howard has served as a director of the Company since March 1988. He is the founder and chairman of Phoenix Healthcare Corporation ("Phoenix Healthcare") and the founder and President of Phoenix Communications Group, Inc. ("Phoenix Group") and Phoenix Holdings, Inc. all of which are based in Nashville, Tennessee. Formed in 1993, Phoenix Healthcare provides management services for managed care organizations, including health maintenance organizations serving Tennessee's Medicaid population through the innovative TennCare program which offers a managed care approach to meeting the healthcare needs of Tennessee's Medicaid and uninsured populations. In April 1990, Phoenix Group filed a petition under the Federal Bankruptcy laws. Phoenix Group proposed a plan of reorganization that was approved by the bankruptcy court in August 1991 and became effective in December 1991. Mr. Howard's past corporate and operations experience in the healthcare industry include having served as the Senior Vice President of Public Affairs for Hospital Corporation of America from August 1981 to January 1990, Vice President and -52- Treasurer for Hospital Affiliates International ("HAI"), and Vice President of Finance and Business for Meharry Medical College. In addition, Mr. Howard was a financial analyst for General Electric and a White House Fellow with U.S. Ambassador Arthur Goldberg. Mr. Howard is a member of the Board of Directors of O'Charley's Inc. Richard R. Howard and Samuel H. Howard are not related. Roger Lipitz has served as a director of the Company since March 1994. From January 1994 until January 1996, Mr. Lipitz served on a consulting basis as Director of Government Relations of the Company. From 1969 until its acquisition by the Company in 1993, Mr. Lipitz served as Chairman of the Board of Meridian Healthcare, Inc., a Maryland based long-term care company which operated over 5,000 beds and related businesses. Mr. Lipitz is a past president of the American Health Care Association, Health Facilities Association of Maryland and the National Council of Health Care Services. Since 1994, he has been Chairman of the Board of Allegis Health Management, Inc. (formerly known as Global Health Management, Inc.), a privately held Maryland based long-term care company. Mr. Lipitz is a member of the Board of Directors of Blue Cross and Blue Shield of Maryland. Stephen E. Luongo has served as a director of the Company since June 1985. He currently is a partner in the law firm of Blank Rome Comisky & McCauley. Blank Rome Comisky & McCauley serves as outside legal counsel for the Company. Alan B. Miller has served as a director of the Company since October 1993. Since 1978, he has been Chairman of the Board, President and Chief Executive Officer of Universal Health Services, Inc., a Pennsylvania based health services company. Prior thereto, Mr. Miller was Chairman of the Board, President and Chief Executive Officer of American Medicorp, Inc. Mr. Miller is Chairman of the Board of Trustees of Universal Health Realty Income Trust and a member of the Board of Directors of CDI Corp., GMIS, Inc., and Penn Mutual Life Insurance Company. Fred F. Nazem has served as a director of the Company since January 1989. Since 1981, he has been President of Nazem Inc. and Managing Partner of the general partner of several Nazem & Company limited partnerships which are affiliated venture capital funds. Mr. Nazem is a member of the Board of Directors of Consep, Inc., Tegal Corporation and Oxford Health Plans, Inc. as well as a number of privately held firms. -53- DESCRIPTION OF THE NOTES The Exchange Notes will be issued under an Indenture dated as of October 7, 1996 (the "Indenture") between the Company and First Union National Bank, as trustee (the "Trustee"). Upon the effectiveness of the Exchange Offer Registration Statement, the Indenture will be subject to, and governed by, the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). Certain capitalized terms used below are defined under "Certain Definitions." The following summary of the material provisions of the Indenture and the Notes does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all of the provisions of the Indenture, including the definitions of certain terms provided therein that are used herein but not otherwise defined, and to terms made a part of the Indenture by the Trust Indenture Act. A copy of the Indenture will be made available to holders of the Notes upon request and is filed as an exhibit to this Exchange Offer Registration Statement. See "Available Information". General The Exchange Notes and any Existing Notes that remain outstanding after consummation of the Exchange Offer will be treated as a single class of securities under the Indenture. The Exchange Notes offered hereby will mature on October 1, 2006, will be limited to $125,000,000 aggregate principal amount and will be unsecured obligations of the Company. The Exchange Notes will bear interest at 9 1/4 % per annum. Each Note will bear interest from October 7, 1996 or from the most recent interest payment date to which interest has been paid, payable semiannually on April 1 and October 1 of each year, commencing April 1, 1997 to the Person in whose name the Note (or any predecessor Note) is registered at the close of business on the September 15 or March 15 next preceding such interest payment date. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Principal of, premium, if any, and interest on the Notes will be payable, and the Notes will be exchangeable and transferable, at the office or agency of the Company in the City of New York maintained for such purposes; provided, however, that payment of interest may be made at the option of the Company by check mailed to the Person entitled thereto as shown on the security register. The Notes will be issued only in fully registered form without coupons, in denominations of $1,000 and any integral multiple thereof. No service charge will be made for any registration of transfer, exchange or redemption of Notes, except in certain circumstances for any documentary, stamp or similar issue or transfer taxes or other tax or other governmental charge that may be imposed in connection therewith. As discussed under "Exchange Offer; Registration Rights," pursuant to the Registration Rights Agreement, the Company has agreed for the benefit of the holders of the Notes, at the Company's cost, either (i) to effect a registered Exchange Offer under the Securities Act to exchange the Notes for Exchange Notes, which will have terms identical in all material respects to the Notes (except that the Exchange Notes will not contain terms with respect to transfer restrictions or interest rate increases) or (ii) in the event that any changes in law or applicable interpretations of the staff of the Commission do not permit the Company to effect the Exchange Offer, or if for any other reason the Exchange Offer is not consummated within 120 days following the date of the original issue of the Notes, or if any holder of the Notes (other than the Initial Purchasers) is not eligible to participate in the Exchange Offer, or upon the request of any Initial Purchaser in certain circumstances, to register the Notes for resale under the Securities Act through the Shelf Registration Statement. In the event that either (a) the Exchange Offer Registration Statement is not filed with the Commission on or prior to the 30th calendar day following the date of original issue of the Notes, (b) the Exchange Offer Registration Statement has not been declared effective on or prior to the 90th calendar day following the date of original issue of the Notes or (c) the Exchange Offer is not consummated -54- or a Shelf Registration Statement is not declared effective on or prior to the 120th calendar day following the date of original issue of the Notes, the interest rate borne by the Notes shall be increased by one-quarter of one percent per annum following such 30-day period in the case of clause (a) above, following such 90-day period in the case of clause (b) above or following such 120-day period in the case of clause (c) above, which rate will be increased by an additional one-quarter of one percent per annum for each 90-day period that any additional interest continues to accrue. The aggregate amount of such increase from the original interest rate pursuant to these provisions will in no event exceed one percent. Upon (x) the filing of the Exchange Offer Registration Statement after the 30-day period described in clause (a) above, (y) the effectiveness of the Exchange Offer Registration Statement after the 90-day period described in clause (b) above or (z) the consummation of the Exchange Offer or the effectiveness of a Shelf Registration Statement, as the case may be, after the 120-day period described in clause (c) above, the interest rate borne by the Notes from the date of such filing, the date of such effectiveness or the day before the date of consummation, as the case may be, will be reduced to the original interest rate if the Company is otherwise in compliance with this paragraph. See "Exchange Offer; Registration Rights." Existing Notes that remain outstanding after the consummation of the Exchange Offer and Exchange Notes issued in connection with the Exchange Offer will be treated as a single class of securities under the Indenture. Optional Redemption The Notes will be subject to redemption at any time on or after October 1, 2001 at the option of the Company, in whole or in part, on not less than 30 nor more than 60 days' prior notice in amounts of $1,000 or an integral multiple of $1,000 at the following redemption prices (expressed as a percentage of the principal amount), if redeemed during the 12-month period beginning on October 1 of each of the years indicated below: Year Redemption Price ------------------------------------------- ---------------- 2001....................................... 104.625% 2002....................................... 103.083% 2003....................................... 101.542% and thereafter at 100% of the principal amount, in each case, together with accrued and unpaid interest to the redemption date (subject to the right of holders of record on relevant record dates to receive interest due on an interest payment date). If less than all of the Notes are to be redeemed, the Trustee shall select the Notes or portions thereof to be redeemed pro rata, by lot or by any other method the Trustee shall deem fair and reasonable. Sinking Fund The Notes are not subject to the benefit of any sinking fund. Change in Control Upon the occurrence of any of the following events, each holder of the Notes shall have the right to require that the Company repurchase such holder's Notes in whole or in part in integral multiples of $1,000, at a purchase price in cash in an amount equal to 101% of the principal amount thereof, together with -55- accrued and unpaid interest, if any, to the date of purchase, pursuant to an offer (the "Change in Control Offer") made in accordance with the procedures described below and the other provisions in the Indenture. A "Change in Control" shall occur at any time that (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), in a single transaction or through a series of related transactions, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the total Voting Stock of the Company; (ii) the Company consolidates or merges with or into another corporation or conveys, transfers or leases all or substantially all of its assets to any Person, or any corporation consolidates or merges with or into the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is changed into or exchanged for cash, securities or other property, other than any such transaction where (A) the outstanding Voting Stock of the Company is changed into or exchanged for (x) Voting Stock of the surviving corporation which is not Redeemable Capital Stock or (y) cash, securities or other property in an amount which could be paid by the Company as a Restricted Payment as described under "Certain Covenants--Limitation on Restricted Payments" (and such amount shall be treated as a Restricted Payment subject to the provisions in the Indenture described under "Certain Covenants--Limitation on Restricted Payments"), and (B) the holders of the Voting Stock of the Company immediately prior to such transaction own, directly or indirectly, not less than 50% of the Voting Stock of the surviving corporation immediately after such transaction; (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of at least 66 2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office; or (iv) the Company is liquidated or dissolved or adopts a plan of liquidation. Within 30 days following a Change in Control and prior to the mailing of the notice to the holders of Notes provided for in the next paragraph, the Company covenants to (i) notify the lenders under the Credit Facility that a "Change in Control" under the Indenture has occurred and (ii) either (A) repay in full all Indebtedness under the Credit Facility and permanently reduce the commitments of the lenders thereunder or offer to repay in full all such Indebtedness and permanently reduce such commitments and repay the Indebtedness and permanently reduce the commitment of each lender who has accepted such offer or (B) obtain the requisite consent under the Credit Facility to permit the repurchase of the Notes as provided for in this covenant. The Company shall first comply with the provisions of this paragraph before it shall be required to repurchase the Notes in accordance with this covenant, but any failure to comply with the covenant to offer to purchase the Notes upon a Change in Control shall constitute an Event of Default under the Indenture. Within 30 days following any Change in Control, the Company shall send by first-class mail, postage prepaid, to the Trustee and to each holder of Notes, at his address appearing in the security register, a notice stating, among other things, that a Change in Control has occurred, the purchase price, the purchase date, which shall be a business day no earlier than 30 days nor later than 60 days from the date such notice is mailed, and certain other procedures that a holder of the Notes must follow to accept a Change in Control Offer or to withdraw such acceptance. The Company will comply, to the extent applicable, with the requirements of Rule 14e-1 under the Exchange Act and other securities laws or regulations in connection with the repurchase of the Notes as described above. -56- The use of the term "all or substantially all" in Indenture provisions such as clause (ii) of the definition of "Change in Control" and under "Merger and Sale of Assets, etc." has no clearly established meaning under New York law (which governs the Indenture) and has been the subject of limited judicial interpretation in a few jurisdictions. Accordingly, there may be a degree of uncertainty in ascertaining whether a particular transaction would involve a disposition of "all or substantially all" of the assets of a person, which uncertainty should be considered by prospective purchasers of the Notes. The occurrence of certain of the events which would constitute a Change in Control would constitute a default under the Credit Facility (currently in the principal amount of up to $265,950,000) and would require the Company to offer to redeem the 9 1/4 % First Mortgage Bonds, Series A (the "First Mortgage Bonds") (currently in the principal amount of $23,700,000), Convertible Debentures (currently in the principal amount of $43,904,000) and 9 3/4 % Notes (currently in the principal amount of $120,000,000). Future Indebtedness of the Company may contain prohibitions of certain events which would constitute a Change in Control or require the Company to offer to redeem such Indebtedness upon a Change in Control. Moreover, the exercise by the holders of the Notes of their right to require the Company to purchase the Notes could cause a default under such Indebtedness, even if the Change in Control itself does not, due to the financial effect of such purchase on the Company. Finally, the Company's ability to pay cash to the holders of the Notes upon a purchase may be limited by the Company's then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required purchases. Under its current financial condition, the Company believes that sufficient funds would not be available to make such required purchases. Even if sufficient funds were otherwise available, the terms of the Credit Facility will prohibit, subject to certain exceptions, the Company's prepayment of the Notes prior to their scheduled maturity. Consequently, if the Company is not able to prepay indebtedness outstanding under the Credit Facility and any other Senior Indebtedness containing similar restrictions or obtain requisite consents, the Company will be unable to fulfill its repurchase obligations if holders of the Notes exercise their purchase rights following a Change in Control, thereby resulting in a default under the Indenture. Furthermore, the Change in Control provisions may in certain circumstances make more difficult or discourage a takeover of the Company and the removal of incumbent management. Subordination The payment of the principal of, premium, if any, and interest on, the Notes will be subordinated, as described below, in right of payment to the prior payment in full in cash or Cash Equivalents of all Senior Indebtedness. The Notes will be senior subordinated indebtedness of the Company ranking pari passu with all other existing and future senior subordinated indebtedness of the Company and senior to all existing and future Subordinated Indebtedness of the Company. Upon the occurrence of any default in the payment of any Designated Senior Indebtedness no payment (other than any payments made pursuant to the provisions described under "Satisfaction and Discharge of Indenture; Covenant Defeasance" which have been deposited with the Trustee for at least 124 days) or distribution of any assets of the Company or any Subsidiary of any kind or character (excluding certain permitted equity or subordinated securities) shall be made by the Company or any Subsidiary or on behalf of, or out of the property of, the Company, or received by the Trustee or any Noteholder on account of the principal of, premium, if any, or interest on, the Notes or on account of the purchase, redemption, defeasance or other acquisition of or in respect of the Notes unless and until such default has been cured, waived or has ceased to exist or such Designated Senior Indebtedness shall have been paid in full in cash or Cash Equivalents. -57- Upon the occurrence of any non-payment default with respect to any Designated Senior Indebtedness pursuant to which the maturity thereof may be accelerated (a "Non-payment Default") and after the receipt by the Trustee and the Company from a representative or the holder of any Designated Senior Indebtedness of written notice of such Non-payment Default, no payment (other than any payments made pursuant to the provisions described under "-- Satisfaction and Discharge of Indenture; Covenant Defeasance" which have been deposited with the Trustee for at least 124 days) or distribution of any assets of the Company or any Subsidiary of any kind or character (excluding certain permitted equity or subordinated securities) may be made by the Company or any Subsidiary or on behalf of, or out of the property of, the Company or received by the Trustee or any Noteholder on account of any principal of, premium, if any, or interest on, the Notes or on account of the purchase, redemption, defeasance or other acquisition of or in respect of the Notes for the period specified below (the "Payment Blockage Period"). The Payment Blockage Period shall commence upon the receipt of notice of the Non-payment Default by the Trustee and the Company from a representative or the holder of any Designated Senior Indebtedness and shall end on the earliest of (subject to any blockage of payments that may then or thereafter be in effect pursuant to the second preceding paragraph) (i) 179 days after receipt of such notice by the Trustee (provided any Designated Senior Indebtedness as to which notice was given shall not theretofore have been accelerated), (ii) the date such Non-payment Default and all other Non-payment Defaults as to which notice is also given after such period is initiated shall have been cured or waived or shall have ceased to exist or the Senior Indebtedness related thereto shall have been paid in full or (iii) the date such Payment Blockage Period and any Payment Blockage Periods initiated during such period shall have been terminated by written notice to the Company or the Trustee from the senior representative and the holders of the Designated Senior Indebtedness that have given notice of a Non-payment Default at or after the initiation of such Payment Blockage Period, after which, in the case of clause (i), (ii) or (iii), the Company shall resume making any and all required payments in respect of the Notes, including any missed payments. In no event will a Payment Blockage Period extend beyond 179 days from the date of the receipt by the Trustee of the notice initiating the first such Payment Blockage Period (such 179-day period referred to as the "Initial Period"). Any number of notices of events of default may be given during the Initial Period; provided that during any 365-day consecutive period only one such period during which payment of principal of, or interest on, the Notes may not be made may commence and the duration of such period may not exceed 179 days. No Non-payment Default with respect to Designated Senior Indebtedness which existed or was continuing on the date of the commencement of any Payment Blockage Period will be, or can be, made the basis for the commencement of a second Payment Blockage Period whether or not within a period of 365 consecutive days, unless such default has been cured or waived for a period of not less than 90 consecutive days. If the Company fails to make any payment on the Notes when due or within any applicable grace period, whether or not on account of the payment blockage provisions referred to above, such failure would constitute an Event of Default under the Indenture and would enable the holders of the Notes to accelerate the maturity thereof. See "Events of Default." The Indenture will provide that in the event of any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relative to the Company or its assets, or any liquidation, dissolution or other winding up of the Company, whether voluntary or involuntary, or any assignment for the benefit of creditors or other marshaling of assets or liabilities of the Company, all Senior Indebtedness must be paid in full in cash or Cash Equivalents before any payment or distribution (excluding certain permitted equity or subordinated securities) is made on account of the principal of, premium, if any, or interest on the Notes. -58- By reason of such subordination, in the event of liquidation or insolvency, creditors of the Company who are holders of Senior Indebtedness may recover more, ratably, than the holders of the Notes and funds which would be otherwise payable to the holders of the Notes will be paid to the holders of the Senior Indebtedness to the extent necessary to pay the Senior Indebtedness in full in cash or Cash Equivalents, and the Company may be unable to meet its obligations fully with respect to the Notes. "Senior Indebtedness" means all obligations of the Company or any Subsidiary or Affiliate of the Company, now or hereafter existing, under or in respect of the Credit Facility, whether for principal, interest (including interest accruing after the filing of a petition by or against the Company under any state or federal Bankruptcy Laws, whether or not such interest is allowed as a claim after such filing in any proceeding under such law) or otherwise (including obligations in respect of the lease financing facility of the Credit Facility) and the principal of, premium, if any, and interest on all other Indebtedness of the Company (other than the Notes), whether outstanding on the date of the Indenture or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Notes. Notwithstanding the foregoing, "Senior Indebtedness" shall not include (i) Indebtedness evidenced by the Notes, (ii) Indebtedness evidenced by the Convertible Debentures, (iii) Indebtedness that is by its terms subordinate or junior in right of payment to any Indebtedness of the Company, (iv) Indebtedness which when incurred and without respect to any election under Section 1111(b) of the Bankruptcy Law is without recourse to the Company, (v) Indebtedness which is represented by Redeemable Capital Stock, (vi) Indebtedness for goods, materials or services purchased in the ordinary course of business or Indebtedness consisting of trade payables or other current liabilities (other than any current liabilities owing under, or in respect of, the Credit Facility), (vii) Indebtedness of or amounts owed by the Company for compensation to employees or for services, (viii) any liability for federal, state, local or other taxes owed or owing by the Company, (ix) Indebtedness of the Company to a Subsidiary of the Company or any other Affiliate of the Company or any of such Affiliate's subsidiaries, (x) that portion of any Indebtedness which at the time of issuance is issued in violation of the Indenture, and (xi) amounts owing under leases (other than Capital Lease Obligations and obligations in respect of the lease financing facility of the Credit Facility). The Notes shall rank pari passu in right of payment with the Indebtedness evidenced by the Convertible Debentures and the 9 3/4% Notes. "Designated Senior Indebtedness" is defined as (i) all Senior Indebtedness under, or in respect of, the Credit Facility and (ii) any other Senior Indebtedness which, at the time of determination, has an aggregate principal amount outstanding, together with any commitments to lend additional amounts, of at least $30,000,000 and is specifically designated in the instrument evidencing such Senior Indebtedness as "Designated Senior Indebtedness." As of June 30, 1996, after giving effect to the National Health Transaction and GMC Transaction and the Offering and the use of the proceeds therefrom, the aggregate amount of Senior Indebtedness outstanding would have been approximately $402,123,000 (which includes approximately $9,980,000 of indebtedness and approximately $61,000,000 of lease obligations of subsidiaries and approximately $6,000,000 of indebtedness of other persons, all of which are guaranteed by the Company, and approximately $15,900,000 of letters of credit issued under the Credit Facility primarily related to the Company's self-insurance programs) and, as of such date, the aggregate amount of liabilities of the subsidiaries of the Company, which consist primarily of trade payables and accrued compensation, that will effectively rank senior to the Notes was approximately $64,163,000. See "Risk Factors -- Ranking" and "Capitalization." -59- Certain Covenants The Indenture contains, among others, the following covenants: Limitation on Indebtedness. The Company will not, and will not permit any of its Subsidiaries to, create, incur, assume, or directly or indirectly guarantee or in any other manner become directly or indirectly liable for the payment of, any Indebtedness (including any Acquired Indebtedness but excluding Permitted Indebtedness) unless at the time of such event and after giving effect thereto on a pro forma basis the Company's Fixed Charge Coverage Ratio for the four full fiscal quarters immediately preceding such event, taken as one period, calculated on the assumption that (i) such Indebtedness had been incurred on the first day of such four-quarter period and (ii) any acquisition or disposition by the Company and its Subsidiaries of any assets out of the ordinary course of business, or any company or business facility, in each case since the first day of its last four completed fiscal quarters, had been consummated on such first day of such four-quarter period, would have been at least 2.00 to 1.00. Limitation on Restricted Payments. The Company will not, and will not permit any Subsidiary to, directly or indirectly: (i) declare or pay any dividend on, or make any distribution to holders of, any Capital Stock of the Company (other than dividends or distributions payable solely in shares of Qualified Capital Stock of the Company or in options, warrants or other rights to acquire Qualified Capital Stock of the Company); (ii) purchase, redeem, defease or otherwise acquire or retire for value any Capital Stock of the Company or any Affiliate thereof (other than any Wholly Owned Subsidiary of the Company) or any option, warrant or other right to acquire such Capital Stock of the Company or any Affiliate thereof; (iii) make any principal payment on, or redeem, repurchase, defease or otherwise acquire or retire for value in each case, prior to any scheduled repayment, or maturity, any Subordinated Indebtedness; or (iv) make any Investment in any Person (other than any Permitted Investment) unless the Person thereby becomes a Wholly Owned Subsidiary; (such payments described in (i) through (iv) collectively, "Restricted Payments") unless at the time of and after giving effect to the proposed Restricted Payment (the amount of any such Restricted Payment, if other than cash, as determined by the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution), (x) no Default or Event of Default shall have occurred and be continuing and such Restricted Payment shall not be an event which is, or after notice or lapse of time or both, would be, an "event of default" under the terms of any Indebtedness of the Company or any Subsidiary; (y) immediately before and immediately after giving effect to such transaction on a pro forma basis, the Company could incur $1.00 of additional Indebtedness under the provisions of "--Limitation on Indebtedness" (other than Permitted Indebtedness); and (3) the aggregate amount of all Restricted Payments (plus, without duplication, dividends and distributions paid to any Person other than the Company, a Wholly Owned Subsidiary or a Permitted Joint Venture as permitted by paragraph (b) under "-- Restrictions on Preferred Stock of Subsidiaries and Subsidiary Distributions" herein and any Restricted Payments made pursuant to clauses (i), (iv), (v) and (vi) of the succeeding paragraph) declared or made after the date of the Indenture shall not exceed the sum of: (A) 50% of the Consolidated Net Income of the Company accrued on a cumulative basis during the period beginning on the date of the Indenture and ending on the last day of the Company's last fiscal quarter ending prior to the date of such proposed Restricted Payment (or, if such aggregate cumulative Consolidated Net Income shall be a loss, minus 100% of such loss); -60- (B) the aggregate Net Cash Proceeds received after the date of the Indenture by the Company as capital contributions to the Company; (C) the aggregate Net Cash Proceeds received after the date of the Indenture by the Company from the issuance or sale (other than to any of its Subsidiaries) of shares of Capital Stock (other than Redeemable Capital Stock) of the Company or any options or warrants to purchase such shares (other than issuances in respect of clause (ii) of the subsequent paragraph) of Capital Stock (other than Redeemable Capital Stock) of the Company; (D) the aggregate Net Cash Proceeds received after the date of the Indenture by the Company (other than from any of its Subsidiaries) upon the exercise of any options or warrants to purchase shares of Capital Stock of the Company; (E) the aggregate Net Cash Proceeds received after the date of the Indenture by the Company for debt securities that have been converted into or exchanged for Qualified Capital Stock of the Company to the extent such debt securities are originally sold for cash plus the aggregate cash received by the Company at the time of such conversion or exchange; and (F) other Restricted Payments in an aggregate amount not to exceed $10,000,000. None of the foregoing provisions shall be deemed to prohibit the following Restricted Payments so long as in the case of clauses (ii), (iii), (v) and (vi) there is no Default or Event of Default continuing: (i) dividends paid within 60 days after the date of declaration if at the date of declaration, such payment would be permitted by the provisions of the preceding paragraph and such payment shall be deemed to have been paid on such date of declaration for purposes of the calculation required by the provisions of the foregoing paragraph; (ii) the redemption, repurchase or other acquisition or retirement of any shares of any class of Capital Stock of the Company or Subordinated Indebtedness in exchange for, or out of the net proceeds of, a substantially concurrent issue and sale (other than to a Subsidiary) of shares of Qualified Capital Stock of the Company; provided that any net proceeds from the issue and sale of such Qualified Capital Stock are excluded from clause 3(C) of the foregoing paragraph; (iii) the redemption, repurchase, or other acquisition or retirement of Subordinated Indebtedness of the Company (other than Redeemable Capital Stock) made by exchange for, or out of the proceeds of the substantially concurrent sale of, new Indebtedness of the Company so long as (A) the principal amount of such new Indebtedness does not exceed the principal amount of the Indebtedness being so redeemed, repurchased, acquired or retired for value (plus the amount of any premium required to be paid under the terms of the instrument governing the Indebtedness being so redeemed, repurchased, acquired or retired), (B) such Indebtedness is subordinated to Senior Indebtedness and the Notes at least to the same extent as such Subordinated Indebtedness so purchased, exchanged, redeemed, repurchased, acquired or retired for value, (C) such Indebtedness has a Stated Maturity for its final scheduled principal payment later than the Stated Maturity for the final scheduled principal payment of the Notes and (D) such Indebtedness has an Average Life to Stated Maturity equal to or greater than the remaining Average Life to Stated Maturity of the Notes; -61- (iv) any purchase, redemption or other acquisition of Capital Stock of a Permitted Joint Venture from a physician or other healthcare provider which is required to be purchased, redeemed or otherwise acquired by applicable law; (v) in addition to the transactions covered by clause (iv) of this paragraph, any purchase, redemption or other acquisition of Capital Stock of a Permitted Joint Venture; or (vi) the making of any payment pursuant to any guarantee of Indebtedness of a Permitted Joint Venture. Restrictions on Preferred Stock of Subsidiaries and Subsidiary Distributions. (a) The Company will not permit any Subsidiary to issue any Preferred Stock (other than Preferred Stock issued (i) prior to the date of the Indenture or (ii) to the Company or a Wholly Owned Subsidiary (collectively, "Permitted Preferred Stock")) or permit any Person (other than the Company or a Wholly Owned Subsidiary) to own or hold any interest in any Preferred Stock of any Subsidiary, other than with respect to any Preferred Stock issued prior to the date of the Indenture, unless a Subsidiary would be entitled to create, incur or assume Indebtedness pursuant to the covenant described under "-- Limitation on Indebtedness" in the aggregate principal amount equal to the aggregate liquidation value of the Preferred Stock to be issued. (b) The Company will not, and will not permit any Subsidiary to, declare or pay dividends or distributions on any Capital Stock of such Subsidiary to any Person (other than to the Company or any Wholly Owned Subsidiary or any lender in its capacity as a pledgee of Capital Stock of any Subsidiary under the Credit Facility); provided, that the foregoing shall not prohibit (i) (A) the Company or any Subsidiary from making any payment of dividends or distributions on the Capital Stock of any Subsidiary in the aggregate up to the amount of Restricted Payments that the Company could make at any time pursuant to the covenant described under "-- Limitation on Restricted Payments;" (B) the purchase, redemption, or other acquisition of the Capital Stock of a Permitted Joint Venture from a physician or other healthcare provider which is required to be purchased, redeemed or otherwise acquired by applicable law; or (C) the payment of pro rata dividends or distributions to holders of minority interests in the Capital Stock of a Subsidiary made in accordance with the terms of the Agreement pursuant to which such payment is made or (ii) in addition to the transactions covered by clause (i) (B) of this paragraph, in the event no Default or Event of Default has occurred and is continuing, the purchase, redemption, or other acquisition of the Capital Stock of a Permitted Joint Venture. Limitation on Transactions with Affiliates. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into or suffer to exist any transaction or series of related transactions (including, without limitation, the sale, purchase, exchange or lease of assets, property or services) with any Affiliate of the Company (other than a Wholly Owned Subsidiary or a Permitted Joint Venture) unless (i) such transaction or series of related transactions is on terms that are no less favorable to the Company or such Subsidiary, as the case may be, than would be available in a comparable transaction in arm's-length dealings with an unrelated third party and (ii) with respect to a transaction or series of related transactions involving payments in excess of $5,000,000 in the aggregate, the Company delivers an Officers' Certificate to the Trustee certifying that (A) such transaction complies with clause (i) above and (B) such transaction or series of related transactions shall have been approved by a majority of the independent directors of the Board of Directors of the Company; provided, however, that the foregoing restriction shall not apply to (x) any transaction or series of related transactions entered into prior to the date of the Indenture, (y) the payment of reasonable and customary regular fees to directors of the Company or any of its Subsidiaries who are not employees of the Company or any Affiliate or (z) the Company's employee compensation and other benefit arrangements. -62- Disposition of Proceeds of Asset Sales. (a) The Company will not, and will not permit any Subsidiary to, make any Asset Sale unless (i) the Company or such Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the shares or assets subject to such Asset Sale (as determined by the Board of Directors of the Company and evidenced in a board resolution whose determination shall be conclusive) and (ii) at least 75% of the proceeds from such Asset Sale when received consists of cash or Cash Equivalents; provided however, any Asset Sale which constitutes a Permitted Investment under clause (vii) or (viii) of the definition of Permitted Investment shall not be subject to the condition set forth in clause (ii) of this sentence. (b) If all or a portion of the Net Cash Proceeds of any Asset Sale are not required to be applied to repay permanently any outstanding Senior Indebtedness as required by the terms thereof, or, if not so required to be applied, the Company determines not to apply such Net Cash Proceeds to the prepayment of such Senior Indebtedness or if no such Senior Indebtedness is outstanding, then the Company may within one year of the Asset Sale, invest (or enter into a legally binding agreement to invest) the Net Cash Proceeds in properties and assets that (as determined by the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution) replace the properties and assets that were the subject of the Asset Sale or in properties and assets that will be used in the businesses of the Company, its Wholly Owned Subsidiaries or its Permitted Joint Ventures existing on the date of the Indenture or in any Healthcare Related Business. If any such legally binding agreement to invest any Net Cash Proceeds is terminated, then the Company may invest such Net Cash Proceeds, prior to the end of such one-year period or six months from such termination, whichever is later, in the business of the Company, its Wholly Owned Subsidiaries or Permitted Joint Ventures or in any Healthcare Related Business as provided above. The amount of such Net Cash Proceeds neither used to repay or prepay Senior Indebtedness nor used or invested as set forth in this paragraph (after the periods specified in this paragraph) constitutes "Excess Proceeds." (c) Subject to paragraph (f) below, when the aggregate amount of Excess Proceeds equals $10,000,000 or more, the Company shall apply the Excess Proceeds to the repayment of the Notes as follows: the Company shall make an offer to purchase (an "Offer") from all holders of the Notes in accordance with the procedures set forth in the Indenture in the maximum principal amount (expressed as a multiple of $1,000) of Notes that may be purchased out of an amount (the "Note Amount") equal to the product of such Excess Proceeds multiplied by a fraction, the numerator of which is the outstanding principal amount of the Notes, and the denominator of which is the sum of the outstanding principal amount of the Notes (subject to proration in the event such amount is less than the aggregate Offered Price (as defined herein) of all Notes tendered). The offer price shall be payable in cash in an amount equal to 100% of the principal amount of the Notes plus accrued and unpaid interest, if any, to the date such Offer is consummated (the "Offered Price"), in accordance with the procedures set forth in the Indenture. To the extent that the aggregate Offered Price of the Notes tendered pursuant to an Offer is less than the Note Amount relating thereto (such shortfall constituting a "Deficiency"), the Company may use such Deficiency, or a portion thereof, in the business of the Company, its Wholly Owned Subsidiaries or its Permitted Joint Ventures or any Healthcare Related Business. Upon completion of the purchase of all the Notes tendered pursuant to an Offer, the amount of Excess Proceeds shall be reset at zero. (d) Whenever the Excess Proceeds received by the Company exceed $10,000,000, such Excess Proceeds shall be set aside by the Company in a separate account pending (i) deposit with the Trustee or a paying agent of the amount required to purchase the Notes tendered in an Offer, (ii) delivery by the Company of the Offered Price to the holders of the Notes tendered in an Offer and (iii) application, as set forth above, of Excess Proceeds for general corporate purposes. Such Excess Proceeds may be invested in Temporary Cash Investments, provided that the maturity date of any investment made after the amount of Excess -63- Proceeds exceeds $10,000,000 shall not be later than the Offer Date. The Company shall be entitled to any interest or dividends accrued, earned or paid on such Temporary Cash Investments. (e) If the Company becomes obligated to make an Offer pursuant to clause (c) above, the Notes shall be purchased by the Company, at the option of the holder thereof, in whole or in part in integral multiples of $1,000, on a date that is not earlier than 30 days and not later than 60 days from the date the notice is given to holders, or such later date as may be necessary for the Company to comply with the requirements under the Exchange Act, subject to proration in the event the amount of Excess Proceeds is less than the aggregate Offered Price of all Notes tendered and to satisfaction by or on behalf of the holder of the requirements set forth in clause (f) below. (f) In the event that the Company shall be unable to purchase Notes from holders thereof in an Offer because of the provisions (i) of applicable law, (ii) of the Company's loan agreements, indentures or other contracts in existence on the date of the Indenture, (iii) permitted to exist or become effective by subparagraph (h)(ii) below or (iv) of the Credit Facility, the Company need not make an Offer. The Company shall then be obligated to (i) invest the Excess Proceeds in properties and assets to replace the properties and assets that were the subject of the Asset Sale or in properties and assets that (as determined by the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution) will be used in the businesses of the Company, its Wholly Owned Subsidiaries or its Permitted Joint Ventures existing on the date of the Indenture or in any Healthcare Related Business or (ii) apply the Excess Proceeds to repay Senior Indebtedness. (g) The Company shall comply with the applicable tender offer rules, including Rule 14e-1 under the Exchange Act, in connection with an Offer. (h) The Company will not, and will not permit any Subsidiary to, create or permit to exist or become effective any restriction (other than restrictions existing under (i) Indebtedness as in effect on the date of the Indenture or (ii) any Senior Indebtedness existing on the date of the Indenture or thereafter) that would materially impair the ability of the Company to make an Offer to purchase the Notes upon an Asset Sale or, if such Offer is made, to pay for the Notes tendered for purchase. Limitation on Liens Securing Subordinated Indebtedness. The Company will not, and will not permit any Subsidiary to, create, incur, assume or suffer to exist any Liens of any kind upon any of their respective assets or properties now owned or acquired after the date of the Indenture or any income or profits therefrom securing (i) any Indebtedness of the Company which is expressly by its terms subordinate or junior in right of payment to any other Indebtedness of the Company, unless the Notes are equally and ratably secured; provided that, if such Indebtedness which is expressly by its terms subordinate or junior in right of payment to any other Indebtedness of the Company is expressly subordinate to the Notes, the Lien securing such subordinated or junior Indebtedness shall be subordinate and junior to the Lien securing the Notes with the same relative priority as such subordinated or junior Indebtedness shall have with respect to the Notes; provided, further, that this clause (i) shall not be applicable to any Liens securing any such Indebtedness which became Indebtedness of the Company pursuant to a transaction permitted under "-- Merger and Sale of Assets, etc." or Liens securing Acquired Indebtedness and, in each case, which Liens were in existence at the time of such transaction or incurrence of such Acquired Indebtedness (unless such Indebtedness was incurred in connection with, or in contemplation of, such transaction or incurrence of such Acquired Indebtedness), so long as such Liens do not extend to or cover any property or assets of the Company or any Subsidiary other than property or assets acquired in such transaction or securing such Acquired Indebtedness, or (ii) any assumption, guarantee or other liability of any Subsidiary in respect of any Indebtedness of the Company which is expressly by its terms subordinate or junior in right of payment to any other Indebtedness -64- of the Company, unless the substantially similar assumption, guarantee or other liability of such Subsidiary in respect of the Notes is equally and ratably secured; provided that, if such subordinated Indebtedness is expressly by its terms subordinate or junior to the Notes, then the Lien securing the assumption, guarantee or other liability of such Subsidiary in respect of such subordinated or junior Indebtedness shall be subordinate and junior to the Lien securing the assumption, guarantee or other liability of such Subsidiary in respect of the Notes with the same relative priority as such subordinated or junior Indebtedness shall have with respect to the Notes; provided, further, that this clause (ii) shall not be applicable to Liens securing any such assumption, guarantee or other liability which existed at the time such Subsidiary became a Subsidiary and which Liens were in existence at the time of such transaction (unless such assumption, guarantee or other liability was incurred in connection with, or in contemplation of, such Person becoming a Subsidiary), so long as such Liens do not extend to or cover any property or assets of the Company or any Subsidiary other than the property or assets of such Person. Limitation on Other Senior Subordinated Indebtedness. The Company will not create, incur, assume, guarantee or in any other manner become liable with respect to any Indebtedness, other than the Notes, that is subordinate in right of payment to any Senior Indebtedness, unless such Indebtedness is also pari passu with, or subordinate in right of payment to, the Notes pursuant to subordination provisions substantially similar to those contained in the Indenture. Limitation on Issuance of Guarantees of Subordinated Indebtedness. (a) The Company will not permit any Subsidiary, directly or indirectly, to assume, guarantee or in any other manner become liable with respect to any Indebtedness of the Company which is expressly by its terms subordinate or junior in right of payment to any other Indebtedness of the Company unless (i) such Subsidiary simultaneously executes and delivers a supplemental indenture to the Indenture providing for a guarantee of payment of the Notes by such Subsidiary and (A) if any such assumption, guarantee or other liability is subordinated, the guarantee under the supplemental indenture shall be subordinated to the same extent as the Notes are subordinated to Senior Indebtedness of the Company under the Indenture and (B) if such subordinated or junior Indebtedness is by its terms expressly subordinated to the Notes, any such assumption, guarantee or other liability of such Subsidiary with respect to such subordinated or junior Indebtedness shall be subordinated to such Subsidiary's assumption, guarantee or other liability with respect to the Notes to the same extent as such subordinated or junior Indebtedness is subordinated or junior to the Notes under the Indenture; and (ii) such Subsidiary waives and will not in any manner whatsoever claim or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against the Company or any other Subsidiary as a result of any payment by such Subsidiary under its Guarantee. (b) Each guarantee created pursuant to the provisions described in the foregoing paragraph is referred to as a "Guarantee" and the issuer of each such Guarantee is referred to as a "Guarantor." Notwithstanding the foregoing, any Guarantee by a Subsidiary of the Notes shall provide by its terms that it (together with any Liens arising from such Guarantee) shall be automatically and unconditionally released and discharged upon (i) any sale, exchange or transfer, to any Person not an affiliate of the Company, of all of the Company's Capital Stock in, or all or substantially all the assets of, such Subsidiary, which is in compliance with the Indenture or (ii) the release or discharge of the assumption, guarantee or other liability which resulted in the creation of such Guarantee. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries. The Company will not, and will not permit any Subsidiary to, create or otherwise cause or suffer to exist or become effective any restriction of any kind, on the ability of any Subsidiary to (i) pay dividends or make any other distribution on its Capital Stock to the Company or any other Subsidiary, (ii) pay any Indebtedness owed to the Company or any other Subsidiary, (iii) make any Investment in the Company or any other Subsidiary -65- or (iv) transfer any of its property or assets to the Company or any other Subsidiary, except (a) any encumbrance or restriction existing under or by reason of applicable law; (b) any encumbrance or restriction existing under or by reason of customary non-assignment provisions of any lease governing a leasehold interest of the Company, or any Subsidiary; (c) any restriction pursuant to an agreement in effect at or entered into on the date of the Indenture as set forth in a schedule to the Indenture; (d) any restriction existing under the Credit Facility as in effect on the date of the Indenture; (e) any restriction, with respect to a Subsidiary that is not a Subsidiary on the date of the Indenture, in existence at the time such Person becomes a Subsidiary or created on the date it becomes a Subsidiary and not incurred in connection with, or in contemplation of, such Person becoming a Subsidiary; and (f) any restriction existing under any agreement that extends, renews, refinances or replaces the agreements containing the restrictions in the foregoing clauses (c) through (e), provided that the terms and conditions of any such restrictions are not materially less favorable to the holders of the Notes than those under or pursuant to the agreement evidencing the Indebtedness so extended, renewed, refinanced or replaced (in the opinion of the Board of Directors of the Company whose determination shall be conclusive). Reporting Requirements. The Indenture will require that the Company file with the Commission the annual reports, quarterly reports and other documents required to be filed with the Commission pursuant to Sections 13 and 15 of the Exchange Act, whether or not the Company has a class of securities registered under the Exchange Act. The Company will be required to file copies of such reports and documents with the Trustee within 15 days after it files them with the Commission. Additional Covenants. The Indenture also contains covenants with respect to the following matters: (i) payment of principal, premium and interest; (ii) maintenance of an office or agency in the City of New York; (iii) arrangements regarding the handling of money held in trust; (iv) maintenance of corporate existence; (v) payment of taxes and other claims; (vi) maintenance of properties; and (vii) maintenance of insurance. Merger and Sale of Assets, etc. The Company shall not, in a single transaction or through a series of related transactions, consolidate with or merge with or into any other Person or sell, assign, convey, transfer or lease or otherwise dispose of all or substantially all of its properties and assets as an entirety to any Person or group of affiliated Persons, or permit any of its Subsidiaries to enter into any such transaction or transactions if such transaction or transactions, in the aggregate, would result in a sale, assignment, transfer, lease or disposal of all or substantially all of the properties and assets of the Company and its Subsidiaries on a consolidated basis to any other Person or group of affiliated Persons, unless at the time and after giving effect thereto (i) either (A) the Company shall be the continuing corporation, or (B) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance, transfer, lease or disposition the properties and assets of the Company, substantially as an entirety (the "Surviving Entity") shall be a corporation duly organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and shall, in either case, expressly assume, by an indenture supplemental to the Indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Notes and the Indenture, and the Indenture shall remain in full force and effect; (ii) immediately before and immediately after giving effect to such transaction on a pro forma basis (and treating any Indebtedness not previously an obligation of the Company or a Subsidiary which becomes the obligation of the Company or any of its Subsidiaries in connection with or as a result of such transaction as having been incurred at the time of such transaction), no Default or Event of Default shall have occurred and be continuing; (iii) immediately after giving effect to such transaction on a pro forma basis, the Consolidated Net Worth of the Company (or the Surviving Entity if the Company is not the continuing obligor under the Indenture) is at least equal to the Consolidated Net Worth of the Company immediately before such transaction; -66- (iv) immediately before and immediately after giving effect to such transaction on a pro forma basis (and treating any Indebtedness not previously an obligation of the Company or a Subsidiary which becomes the obligation of the Company or any of its Subsidiaries in connection with or as a result of such transaction having been incurred at the time of such transaction), the Company (or the Surviving Entity if the Company is not the continuing obligor under the Indenture) could incur $1.00 of additional Indebtedness under the provisions of "-- Certain Covenants -- Limitation on Indebtedness" (other than Permitted Indebtedness); (v) each Guarantor, if any, unless it is the other party to the transactions described above, shall have by supplemental indenture confirmed that its Guarantee of the Notes shall apply to such person's obligations under the Indenture and the Notes; and (vi) the Company or the Surviving Entity shall have delivered to the Trustee an Officers' Certificate and an opinion of counsel, each stating that such consolidation, merger, transfer, lease or disposition and such supplemental indenture comply with the terms of the Indenture. Each Guarantor, if any (other than any Subsidiary whose Guarantee is being released pursuant to the provisions under "Certain Covenants -- Limitation on Issuance of Guarantees of Subordinated Indebtedness" as a result of such transaction), shall not, and the Company will not permit a Guarantor to, in a single transaction or through a series of related transactions, merge or consolidate with or into any other corporation or other entity (other than the Company or any Guarantor), or sell, assign, convey, transfer, lease or otherwise dispose of its properties and assets on a consolidated basis substantially as an entirety to any entity unless (i) either (A) such Guarantor shall be the continuing corporation or partnership or (B) the entity (if other than such Guarantor) formed by such consolidation or into which such Guarantor is merged or the entity which acquires by sale, assignment, conveyance, transfer, lease or disposition the properties and assets of such Guarantor substantially as an entirety shall be a corporation or partnership organized and validly existing under the laws of the United States, any state thereof or the District of Columbia and shall expressly assume by an indenture supplemental to the Indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of such Guarantor under the Notes and the Indenture; (ii) immediately before and immediately thereafter (and treating any Indebtedness not previously an obligation of the Company or a Subsidiary which becomes the obligation of the Company or any of its Subsidiaries in connection with or as a result of such transaction as having been incurred at the time of such transaction), no Default or Event of Default shall have occurred and be continuing; and (iii) such Guarantor shall have delivered to the Trustee an Officers' Certificate and an opinion of counsel, each stating that such consolidation, merger, sale, assignment, conveyance, transfer, lease or disposition and such supplemental indenture comply with the Indenture, and thereafter all obligations of the predecessor shall terminate. Notwithstanding the foregoing, any Wholly Owned Subsidiary may (i) merge or consolidate with or into any other Wholly Owned Subsidiary or the Company or (ii) sell, assign, convey, transfer, lease, or otherwise dispose of all or substantially all of its properties and assets to any other Wholly Owned Subsidiary or the Company; provided, that (A) any Person surviving any such merger or consolidation with a Guarantor or which acquires substantially all of the assets of any Guarantor (the "Acquisition Survivor") shall expressly assume by a supplemental indenture or guarantee executed and delivered to the Trustee, in form satisfactory to the Trustee, any obligations of such Subsidiary to guarantee the obligations owing under the Indenture; and (B) the Acquisition Survivor shall have delivered to the Trustee an Officers' Certificate and an opinion of counsel, each stating that the transaction and the supplemental guarantee or indenture executed in connection therewith comply with this provision and that all conditions precedent provided for in the Indenture relating to such transaction have been complied with. Upon any consolidation or merger, or any sale, assignment, conveyance, transfer, lease or disposition of all or substantially all of the properties and assets of the Company or any Guarantor in accordance with the immediately preceding paragraphs, the successor Person formed by such consolidation or into which the Company or such Guarantor, as the case may be, is merged or the successor Person to which such sale, -67- assignment, conveyance, transfer, lease or disposition is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company or such Guarantor, as the case may be, under the Indenture and/or the Guarantees, as the case may be, with the same effect as if such successor had been named as the Company or such Guarantor, as the case may be, herein and/or in the Guarantees, as the case may be. When a successor assumes all the obligations of its predecessor under the Indenture, the Notes or a Guarantee, as the case may be, the predecessor shall be released from those obligations; provided that in the case of a transfer by lease, the predecessor shall not be released from the payment of principal and interest on the Notes or a Guarantee, as the case may be. Events of Default An Event of Default will occur under the Indenture if: (i) there shall be a default in the payment of any interest on any Note when it becomes due and payable, and such default shall continue for a period of 30 days; (ii) there shall be a default in the payment of the principal of (or premium, if any, on) any Note at its Stated Maturity; (iii) (A) there shall be a default in the performance, or breach, of any covenant or agreement of the Company or of any Guarantor under the Indenture (other than a default in the performance or breach of a covenant or agreement which is specifically dealt with elsewhere in the Indenture) and such default or breach shall continue for a period of 30 days after written notice has been given, by certified mail (x) to the Company by the Trustee or (y) to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the outstanding Notes; (B) there shall be a default in the performance or breach of the provisions of "-- Merger and Sale of Assets, etc;" (C) the Company shall have failed to make or consummate an Offer in accordance with the provisions of "-- Certain Covenants -- Dispositions of Proceeds of Asset Sales;" or (D) the Company shall have failed to make or consummate a Change in Control Offer in accordance with the provisions of "Change in Control;" (iv) one or more defaults shall have occurred under any agreements, indentures or instruments under which the Company or any Subsidiary then has outstanding Indebtedness in excess of $5,000,000 in the aggregate and, if not already matured at its final maturity in accordance with its terms, such Indebtedness shall have been accelerated; (v) one or more judgments, orders or decrees for the payment of money in excess of $5,000,000, either individually or in the aggregate, shall be entered against the Company or any Subsidiary or any of their respective properties which is not fully covered by insurance, bond, surety or similar instrument and shall not be discharged and there shall have been a period of 60 days during which a stay of enforcement of such judgment or order, by reason of an appeal or otherwise, shall not be in effect; or (vi) certain events of bankruptcy, insolvency or reorganization with respect to the Company or any Subsidiary shall have occurred. If an Event of Default (other than as specified in clause (vi) occurs and is continuing, the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding may, and the Trustee upon the request of the holders of not less than 25% in aggregate principal amount of the Notes then outstanding shall, declare the principal of all the Notes due and payable immediately in an amount equal to the principal amount of the Notes, together with accrued and unpaid interest to the date the Notes become -68- due and payable, by a notice in writing to the Company (and to the Trustee, if given by the holders of the Notes and, if the Credit Facility is in effect, to the representative of the Credit Facility) and, upon any such declaration such principal shall become immediately due and payable and the Trustee may, at its discretion, proceed to protect and enforce the rights of the holders of Notes by appropriate judicial proceedings. If an Event of Default specified in clause (vi) above occurs and is continuing, then the principal of all the Notes shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any holder of the Notes. At any time after a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee, the holders of a majority in aggregate principal amount of the Notes then outstanding, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (a) the Company has paid or deposited with the Trustee a sum sufficient to pay (i) all sums paid or advanced by the Trustee under the Indenture and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, (ii) all overdue interest on all Notes, (iii) the principal of and premium, if any, on any Notes which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Notes, and (iv) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate borne by the Notes; and (b) all Events of Default, other than the non-payment of principal of the Notes which have become due solely by such declaration of acceleration, have been cured or waived. The holders of not less than a majority in aggregate principal amount of the Notes then outstanding may on behalf of the holders of all the Notes waive any past Defaults under the Indenture, except a Default in the payment of the principal of, premium, if any, or interest on any Note, or in respect of a covenant or provision which under the Indenture cannot be modified or amended without the consent of the holder of each Note then outstanding. The Company is also required to notify the Trustee within five days of the occurrence of any Default. The Trust Indenture Act contains limitations on the rights of the Trustee, should it become a creditor of the Company or any Guarantor, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. The Trustee is permitted to engage in other transactions, provided that if it acquires any conflicting interest it must eliminate such conflict upon the occurrence of an Event of Default or else resign. Satisfaction and Discharge of the Indenture; Covenant Defeasance The Indenture will cease to be of further effect as to all outstanding Notes (except as to (i) rights of registration of transfer and exchange and the Company's right of optional redemption; (ii) substitution of apparently mutilated, defaced, destroyed, lost or stolen Notes; (iii) rights of holders of the Notes to receive payments of principal and interest on the Notes; (iv) rights, obligations and immunities of the Trustee under the Indenture; and (v) rights of the holders of the Notes as beneficiaries of the Indenture with respect to the property so deposited with the Trustee payable to all or any of them), if (A) the Company will have paid or caused to be paid the principal of and interest on the Notes as and when the same will have become due and payable or (B) all outstanding Notes (except lost, stolen or destroyed Notes which have been replaced or paid) have been delivered to the Trustee for cancellation or (C) (x) the Notes not previously delivered to the Trustee for cancellation will have become due and payable or are by their terms to become due and payable within one year or are to be called for redemption under arrangements satisfactory to the Trustee upon delivery of notice and (y) the Company will have irrevocably deposited with the Trustee, as trust funds, cash, in an amount sufficient to pay principal of and interest on the outstanding -69- Notes, to maturity or redemption, as the case may be. Such trust may only be established if such deposit will not result in a breach or violation of, or constitute a default under, any agreement or instrument pursuant to which the Company is a party or by which it is bound and the Company has delivered to the Trustee an Officers' Certificate and an opinion of counsel, each stating that all conditions related to such defeasance have been complied with. The Indenture will also cease to be in effect (except as described in (i)-(v) in the immediately preceding paragraph) and the Indebtedness on all outstanding Notes will be discharged on the 123rd day after the irrevocable deposit by the Company with the Trustee, in trust, specifically pledged as security for, and dedicated solely to, the benefit of the holders of the Notes, of cash, U.S. Government Obligations (as defined in the Indenture), or a combination thereof, in an amount sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay the principal of and interest on the Notes then outstanding in accordance with the terms of the Indenture and the Notes. Such a trust may only be established if (i) such deposit will not result in a breach or violation of, or constitute a default under, any agreement or instrument to which the Company is a party or by which it is bound; (ii) the Company has delivered to the Trustee an opinion of counsel stating that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (B) since the date of this Indenture there has been a change in the applicable federal income tax law, in either case to the effect that, based thereon such opinion shall confirm that, the holders of the Notes will not recognize income, gain or loss for federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred; (iii) the Company has delivered to the Trustee an opinion of counsel to the effect that after the 123rd day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; and (iv) the Company has delivered to the Trustee an Officer's Certificate and an opinion of counsel, each stating that all conditions related to the defeasance have been complied with. The Company and any Guarantor may also be released from its obligations under certain covenants that are described in the Indenture and shall cease to be subject to clause (iii) of the first paragraph under "Events of Default," with respect to the Notes outstanding on the 123rd day after the irrevocable deposit by the Company with the Trustee, in trust, specifically pledged as security for, and dedicated solely to, the benefit of the holders of the Notes, cash, U.S. Government Obligations, or a combination thereof, in an amount sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay the principal of and interest on the Notes then outstanding in accordance with the terms of the Indenture and the Notes ("covenant defeasance"). Such covenant defeasance may only be effected if (i) such deposit will not result in a breach or violation of, or constitute a default under, any agreement or instrument to which the Company or any Guarantor is party or by which it is bound; (ii) the Company delivers to the Trustee an Officers' Certificate and an opinion of counsel to the effect that the holders of the Notes will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and covenant defeasance and will be subject to federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit and covenant defeasance had not occurred; (iii) the Company has delivered to the Trustee an opinion of counsel to the effect that after the 123rd day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; and (iv) the Company has delivered to the Trustee an Officer's Certificate and an opinion of counsel, each stating that all conditions related to the covenant defeasance have been complied with. Following such covenant defeasance, the Company may omit to comply with and will have no liability in respect of any term, condition or limitation set forth in such sections of the Indenture, whether directly or -70- indirectly by reason of any reference elsewhere in the Indenture of such sections or by reason of any reference in such sections to any other provision in the Indenture or in any other document, and such omission will not constitute an Event of Default. Modifications and Amendments Modifications and amendments of the Indenture may be made by the Company, the Guarantors, if any, and the Trustee with the consent of the holders of not less than a majority in aggregate principal amount of the outstanding Notes; provided, however, that no such modification or amendment may, without the consent of the holder of each outstanding Note affected thereby: (i) change the Stated Maturity of the principal of, or any installment of interest on, any Note, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the coin or currency in which the principal of any Note or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment after the Stated Maturity thereof (or, in the case of redemption, on or after the redemption date); (ii) amend, change or modify the obligation of the Company to make and consummate a Change in Control Offer in the event of a Change in Control or make and consummate the Offer with respect to any Asset Sales or modify any of the provisions or definitions with respect thereto; (iii) reduce the percentage in principal amount of outstanding Notes, the consent of whose holders is required for any such supplemental indenture or the consent of whose holders is required for any waiver of compliance with certain provisions of the Indenture or certain Defaults thereunder and their consequences provided for in the Indenture or with respect to any Guarantee; (iv) modify any of the provisions relating to supplemental indentures requiring the consent of holders or relating to the waiver of past defaults or relating to the waiver of certain covenants, except to increase the percentage of outstanding Notes required for such actions or to provide that certain other provisions of the Indenture cannot be modified or waived without the consent of the holder of each Note affected thereby; (v) except as otherwise permitted under "-- Merger and Sale of Assets, etc.," consent to the assignment or transfer by the Company or any Guarantor of any of their rights and obligations under the Indenture; or (vi) modify any of the provisions of the Indenture relating to the subordination of the Notes or any Guarantee in a manner adverse to the holders of the Notes. Any amendment to the subordination provisions of the Notes will also require the consent of the holders of Designated Senior Indebtedness. The holders of a majority in aggregate principal amount of the Notes then outstanding may waive compliance with certain restrictive covenants and provisions of the Indenture. Governing Law The Indenture, the Notes and any Guarantees will be governed by, and construed in accordance with, the laws of the State of New York, without giving effect to the conflicts of law principles thereof. Certain Definitions "Acquired Indebtedness" means Indebtedness of a Person (i) existing at the time such Person becomes a Subsidiary or (ii) assumed in connection with the acquisition of assets from such Person, in each case, other than Indebtedness incurred in connection with, or in contemplation of, such Person becoming a Subsidiary or such acquisition. Acquired Indebtedness shall be deemed to be incurred on the date of the related acquisition of assets from any Person or the date the acquired Person becomes a Subsidiary. "Affiliate" means with respect to any specified Person, (i) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person, (ii) any -71- other Person that owns, directly or indirectly, 5% or more of such specified Person's Capital Stock, (iii) any officer or director of (A) any such specified Person, (B) any Subsidiary of such specified Person or (C) any Person described in clauses (i) or (ii) above or (iv) any other Person having a relationship with any natural Person described in clauses (i), (ii) or (iii) above by blood, marriage or adoption not more remote than first cousin or any Person directly or indirectly controlling or controlled by or under direct or indirect common control with such other Person described in this clause (iv). For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person directly or indirectly, whether through ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Asset Sale" means any sale, issuance, conveyance, transfer, lease or other disposition (including, without limitation, by way of merger, consolidation or sale and leaseback transaction) (collectively, a "transfer"), directly or indirectly, in one or a series of related transactions, of (i) any Capital Stock of any Subsidiary; (ii) all or substantially all of the properties and assets of any division or line of business of the Company or its Subsidiaries; or (iii) any other properties or assets of the Company or any Subsidiary, other than in the ordinary course of business. For the purposes of this definition, the term "Asset Sale" shall not include (i) any transfer of properties and assets that is governed by the provisions described under "--Merger, Sale of Assets, etc.," (ii) any transfer of properties or assets of the Company to any Wholly Owned Subsidiary, or of any Subsidiary to the Company or any Wholly Owned Subsidiary in accordance with the terms of the Indenture or (iii) transfers of properties or assets in any twelve month period (A) the Fair Market Value of which does not, in the aggregate, exceed 2.5% of the Company's Consolidated Total Assets and (B) the Consolidated EBITDA related to such properties or assets does not, in the aggregate, exceed 2.5% of the Company's Consolidated EBITDA. "Attributable Debt" in respect of a sale-leaseback transaction or an operating lease in respect of a healthcare facility means, at the time of determination, the present value (discounted at the interest rate implicit in the lease, compounded semiannually) of the obligation of the lessee of the property subject to such sale-leaseback transaction or operating lease in respect of a healthcare facility for rental payments during the remaining term of the lease included in such transaction including any period for which such lease has been extended or may, at the option of the lessor, be extended or until the earliest date on which the lessee may terminate such lease without penalty or upon payment of penalty (in which case the rental payments shall include such penalty), after excluding all amounts required to be paid on account of maintenance and repairs, insurance, taxes, assessments, water, utilities and similar charges. "Average Life to Stated Maturity" means, as of the date of determination with respect to any Indebtedness, the quotient obtained by dividing (i) the sum of the products of (A) the number of years from the date of determination to the date or dates of each successive scheduled principal payment of such Indebtedness multiplied by (B) the amount of each such principal payment by (ii) the sum of all such principal payments. "Bankruptcy Law" means Title 11, United States Code, as amended, or any similar United States Federal or State law relating to bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or relief of debtors or any amendment to, succession to or change in any such law. "Capital Lease Obligation" of any Person means any obligation of such Person and its Subsidiaries on a Consolidated basis under any capital lease of real or personal property which, in accordance with GAAP, has been recorded on the balance sheet of such Person as a capitalized lease obligation. -72- "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents (however designated) of such Person's capital stock or equity interests. "Cash Equivalent" means (i) any security, maturing not more than six months after the date of acquisition, issued by the United States of America, or an instrumentality or agency thereof and guaranteed fully as to principal, premium, if any, and interest by the United States of America, (ii) any certificate of deposit, time deposit, money market account or bankers' acceptance, maturing not more than six months after the date of acquisition, issued by any commercial banking institution that is a member of the Federal Reserve System and that has combined capital and surplus and undivided profits of not less than $500,000,000, whose debt has a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's Investors Service, Inc. or any successor rating agency, or "A-1" (or higher) according to Standard & Poor's Corporation or any successor rating agency and (iii) commercial paper, maturing not more than three months after the date of acquisition, issued by any corporation (other than an Affiliate or Subsidiary of the Company) organized and existing under the laws of the United States of America with a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's Investors Service, Inc. or any successor rating agency, or "A-1" (or higher) according to Standard & Poor's Corporation or any successor rating agency. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or if at any time after the date of the Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Company" means Genesis Health Ventures, Inc., a corporation incorporated under the laws of Pennsylvania, until a successor Person shall have become such pursuant to the applicable provisions of the Indenture, and thereafter "Company" shall mean such successor Person. To the extent necessary to comply with the requirements of the provisions of Trust Indenture Act Sections 310 through 317 as they are applicable to the Company, the term "Company" shall include any other obligor with respect to the Notes for purposes of complying with such provisions. "Consolidated EBITDA" of any Person means with respect to any determination date, Consolidated Net Income before extraordinary items and gains or losses realized in connection with Asset Sales, plus (i) Consolidated Income Tax Expense, plus (ii) consolidated depreciation expense, plus (iii) consolidated amortization expense, plus (iv) Consolidated Interest Expense, plus (v) all other non-cash items reducing Consolidated Net Income of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, and less all non-cash items increasing Consolidated Net Income of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, in each case, for such Person's prior four full fiscal quarters for which financial results have been reported immediately preceding the determination date. "Consolidated Income Tax Expense" means for any period, as applied to any Person, the provision for federal, state, local and foreign income taxes of such Person and its Consolidated Subsidiaries for such period as determined in accordance with GAAP. "Consolidated Interest Expense" of any Person means, without duplication, for any period, as applied to any Person, the sum of (i) the interest expense of such Person and its Consolidated Subsidiaries for such period, on a consolidated basis, including, without limitation, (A) amortization of debt discount, (B) the net -73- cost under interest rate contracts (including amortization of discounts), (C) the interest portion of any deferred payment obligation and (D) accrued interest, plus (ii) the interest component of the Capital Lease Obligations paid, accrued and/or scheduled to be paid, or accrued by such Person during such period, in each case as determined in accordance with GAAP, plus (iii) Preferred Stock dividends in respect of Preferred Stock of the Company or any Subsidiary held by Persons other than the Company or a Wholly Owned Subsidiary. For purposes of clause (c) of the preceding sentence, dividends shall be deemed to be an amount equal to the actual dividends paid divided by one minus the applicable actual combined Federal, state, local and foreign income tax rate of the Company and its Consolidated Subsidiaries (expressed as a decimal). "Consolidated Net Income (Loss)" of any Person means, for any period, the Consolidated net income (or loss) of the Company and its Consolidated Subsidiaries for such period as determined in accordance with GAAP, adjusted, to the extent included in calculating such net income (loss), by excluding (i) all extraordinary gains or losses (less all fees and expenses relating thereto), (ii) the portion of net income of the Company and its Consolidated Subsidiaries allocable to investments in unconsolidated Persons to the extent that cash dividends or distributions have not actually been received by the Company or one of its Consolidated Subsidiaries, (iii) net income (or loss) of any Person combined with the Company or any of its Subsidiaries in a "pooling of interests" basis attributable to any period prior to the date of combination, (iv) any gain or loss, net of taxes, realized upon the termination of any employee pension benefit plan, (v) any gains or losses (less all fees and expenses relating thereto) in respect of dispositions of assets other than in the ordinary course of business, or (vi) the net income of any Subsidiary to the extent that the declaration of dividends or similar distributions by that Subsidiary of that income is not at the time permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulations applicable to that Subsidiary or its shareholders. "Consolidated Net Worth" of any Person means the Consolidated stockholders' equity (excluding Redeemable Capital Stock) of such Person and its Consolidated Subsidiaries, as set forth on the most recent consolidated balance sheet of such Person and its Consolidated Subsidiaries determined in accordance with GAAP. "Consolidated Rental Payments" of any Person means, for any period, the aggregate rental obligations of such Person and its Consolidated Subsidiaries (not including taxes, insurance, maintenance and similar expenses that the lessee is obligated to pay under the terms of the relevant leases), determined on a consolidated basis in conformity with GAAP, payable in respect of such period under Attributable Debt or leases of real or personal property not constituting Attributable Debt (net of income from subleases thereof, not including taxes, insurance, maintenance and similar expenses that the sublessee is obligated to pay under the terms of such sublease), whether or not such obligations are reflected as liabilities or commitments on a consolidated balance sheet of such Person and its Subsidiaries or in the notes thereto, excluding, however, in any event, (i) that portion of Consolidated Interest Expense of such Person representing payments by such person or any of its Consolidated Subsidiaries in respect of Capital Lease Obligations (net of payments to such Person or any of its Consolidated Subsidiaries under subleases qualifying as capitalized lease subleases to the extent that such payments would be deducted in determining Consolidated Interest Expense) and (ii) the aggregate amount of amortization of obligations of such Person and its Consolidated Subsidiaries in respect of such Capital Lease Obligations for such period (net of payments to such Person or any of its Consolidated Subsidiaries and subleases qualifying as capitalized lease subleases to the extent that such payments would be deducted in determining such amortization amount). "Consolidated Total Assets" of any Person means the Consolidated total assets of such Person and its Consolidated Subsidiaries, as set forth on the most recent consolidated balance sheet of such Person and its Consolidated Subsidiaries determined in accordance with GAAP. -74- "Consolidation" means, with respect to any Person, the consolidation of the accounts of such Person and each of its subsidiaries if and to the extent the accounts of such Person and each of its subsidiaries would normally be consolidated with those of such Person, all in accordance with GAAP. The term "Consolidated" shall have a similar meaning. "Credit Facility" means (i) the Credit Agreement, dated as of November 22, 1993, among the Company, the other borrowers parties thereto, the lenders parties thereto, Mellon Bank, N.A. as issuing bank and Mellon Bank, N.A. as agent for such lenders and such issuing bank, as the same may be amended, restated, renewed, extended, restructured, supplemented or otherwise modified from time to time, (ii) any Loan Documents (as defined in the Credit Agreement as in effect from time to time) and any other documents or instruments executed by the Company pursuant to or in connection with the Credit Agreement and (iii) any credit agreement, loan agreement, note purchase agreement, indenture or other agreement, document or instrument refinancing, refunding or otherwise replacing the Credit Agreement or any other agreement deemed a Credit Facility under clauses (i), (ii) or (iii) hereof, whether or not with the same agent, trustee, representative, lenders or holders, regardless of whether the Credit Agreement or Credit Facility or any portion thereof was outstanding or in effect at the time of such restatement, renewal, extension, restructuring, supplement or modification (including without limitation, the Second Amended and Restated Credit Agreement, dated October 7, 1996, among the Company, the other borrowers parties thereto, the lenders parties thereto, Mellon Bank, N.A. as issuing bank and Mellon Bank, N.A. as agent for such lenders and the Amended and Restated Participation Agreement, dated October 7, 1996, among Genesis ElderCare Properties, Inc., Mellon Financial Services Corporation #4, the lenders parties thereto and Mellon Bank, N.A. as agent for such lenders, as the same may be amended, restated, renewed, extended, restructured, supplemented and otherwise modified from time to time). Without limiting the generality of the foregoing, the term "Credit Facility" shall include any amendment, restatement, renewal, extension, restructuring, supplement or modification to any Credit Facility and all refundings, refinancings and replacements of any Credit Facility, including any agreement (a) extending the maturity of any Indebtedness incurred thereunder or contemplated thereby, (b) adding or deleting borrowers or guarantors thereunder, so long as such borrowers and guarantors include one or more of the Company and its Subsidiaries and their respective successors and assigns, provided that on the date thereof the addition of such borrower or guarantor would not be prohibited by the definition of "Permitted Indebtedness" and the provisions described under "-- Certain Covenants--Limitation on Liens securing Subordinated Indebtedness" and "-- Certain Covenants--Limitation on Issuance of Guarantees of Subordinated Indebtedness," (c) increasing the amount of Indebtedness incurred thereunder or available to be borrowed thereunder provided such increase is permitted to be incurred under the definition of "Permitted Indebtedness" or is or will be permitted to be incurred under the provisions described under "-- Certain Covenants--Limitation on Indebtedness" or (d) otherwise altering the terms and conditions thereof in a manner not prohibited by the definition of "Permitted Indebtedness" and the provisions described under "-- Certain Covenants--Limitation on Liens Securing Subordinated Indebtedness", "-- Certain Covenants-- Limitation on Issuance of Guarantees of Subordinated Indebtedness" and "-- Certain Covenants--Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries" and as such agreement may be amended, renewed, extended, substituted, refinanced, replaced or otherwise modified from time to time, and includes any agreement extending the maturity of all or any portion of the Indebtedness thereunder. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Eligible Accounts Receivables" as of any date means the book value of all accounts receivables of the Company and its Subsidiaries that would be shown on a Consolidated balance sheet of the Company and its Subsidiaries prepared on such date in accordance with GAAP, which are not more than 180 days past their due date and were entered into on normal payment terms. "Exchange Act" means the Securities Exchange Act of 1934, as amended. -75- "Fair Market Value" means, with respect to any asset or property, the sale value that would be obtained in an arm's-length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer. "Fiscal Year" with respect to the Company shall mean the fiscal year of the Company. "Fixed Charge Coverage Ratio" of any Person means, for any period, the ratio of (i) the sum of Consolidated Net Income, Consolidated Interest Expense, Consolidated Income Tax Expense, and one-third of Consolidated Rental Payments plus, without duplication, all depreciation, amortization and all other non-cash charges (excluding any such non-cash charge constituting an extraordinary item or loss or any non-cash charge which requires an accrual of or a reserve for cash charges for any future period), in each case, for such period, of the Company and its Subsidiaries on a Consolidated basis, as determined in accordance with GAAP to (ii) the sum of (A) Consolidated Interest Expense for such period and (B) one-third of Consolidated Rental Payments for such period; provided that in making such computation, the Consolidated Interest Expense attributable to interest on any Indebtedness computed on a pro forma basis and bearing a floating interest rate shall be computed as if the rate in effect on the date of computation had been the applicable rate for the entire period. "Generally Accepted Accounting Principles" or "GAAP" means generally accepted accounting principles in the United States, consistently applied, as in effect on the date of the Indenture. "Guarantee" means the guarantee by any Guarantor which guarantees the Indenture Obligations pursuant to a guarantee given in accordance with the Indenture. "Guaranteed Debt" of any Person means, without duplication, all Indebtedness of any other Person guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (i) to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness, (ii) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Indebtedness or to assure the holder of such Indebtedness against loss, (iii) to supply funds to, or in any other manner invest in, the debtor (including any agreement to pay for property or services without requiring that such property be received or such services be rendered), (iv) to maintain working capital or equity capital of the debtor, or otherwise to maintain the net worth, solvency or other financial condition of the debtor or (v) otherwise to assure a creditor against loss; provided that the term "Guaranteed Debt" shall not include endorsements for collection or deposit, in either case in the ordinary course of business. "Guarantor" means any Person which guarantees the Indenture Obligations pursuant to the Indenture. "Healthcare Related Business" means a business, the majority of whose revenues result from healthcare, long-term care, or managed care related businesses or facilities, including businesses which provide insurance relating to the costs of healthcare, long-term care or managed care services. "Indebtedness" means, with respect to any Person, without duplication, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services, excluding any trade payables and other accrued current liabilities arising in the ordinary course of business, but including, without limitation, all obligations, contingent or otherwise, of such Person in connection with any letters of credit or acceptances issued under letter of credit facilities, acceptance facilities or other similar facilities and in connection with any agreement to purchase, redeem, exchange, convert or otherwise acquire for value any Capital Stock of such Person, or any warrants, rights or options to acquire such Capital Stock, now or -76- hereafter outstanding, (ii) all obligations of such Person evidenced by bonds, notes, debentures or other similar instruments, (iii) every obligation of such Person issued or contracted for as payment in consideration of the purchase by such Person or an Affiliate of such Person of the Capital Stock or substantially all of the assets of another Person or in consideration for the merger or consolidation with respect to which such Person or an Affiliate of such Person was a party (other than any obligation of such Person to pay an amount to another Person based on income in respect of Capital Stock or assets which were purchased or in respect of such merger to which such Person or an Affiliate was a party except for such obligations which are required in accordance with GAAP to be classified as a liability on the balance sheet of such Person), (iv) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even if the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), but excluding trade payables and other accrued current liabilities arising in the ordinary course of business, (v) all obligations under Interest Rate Contracts of such Person, (vi) all Capital Lease Obligations of such Person, (vii) all indebtedness referred to in clauses (i) through (vi), (ix) and (x) of other Persons and all dividends of other Persons, the payment of which is secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien, upon any property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness, (viii) all Guaranteed Debt of such Person, (ix) all Redeemable Capital Stock valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid dividends and (x) all Attributable Debt of such Person. For purposes hereof, the "maximum fixed repurchase price" of any Redeemable Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Capital Stock as if such Redeemable Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to the Indenture, and if such price is based upon, or measured by, the Fair Market Value of such Redeemable Capital Stock, such Fair Market Value to be determined in good faith by the Board of Directors of the issuer of such Redeemable Capital Stock. "Indenture Obligations" means the obligations of the Company and any other obligor under the Indenture or under the Notes, including any Guarantor, to pay principal of, premium, if any, and interest when due and payable, and all other amounts due or to become due under or in connection with the Indenture, the Notes and the performance of all other obligations to the Trustee and the holders under the Indenture and the Notes, according to the terms thereof. "Interest Rate Contracts" means interest rate swap agreements, interest rate cap agreements, interest rate collar agreements, interest rate insurance, and other agreements or arrangements designed to provide protection against fluctuations in interest rates. "Investments" means, with respect to any Person, directly or indirectly, any advance, loan or other extension of credit (including any guarantee) or capital contribution to (by means of any transfer of cash or other property (tangible or intangible) to others, or any payment for property or services for the account or use of others or otherwise), or any purchase, acquisition or ownership by such Person of any Capital Stock, bonds, notes, debentures or other securities (including, without limitation, any interests in any partnership or joint venture) issued or owned by any other Person. "Lien" means any mortgage, charge, pledge, lien (statutory or otherwise), privilege, security interest, hypothecation or other encumbrance upon or with respect to any property of any kind, real or personal, movable or immovable, now owned or hereafter acquired. -77- "Maturity" when used with respect to any Note means the date on which the principal of such Note becomes due and payable as therein provided or as provided in the Indenture, whether at Stated Maturity, or any redemption date and whether by declaration of acceleration, Offer in respect of Excess Proceeds, Change in Control Offer in respect of a Change in Control, call for redemption or otherwise. "Net Cash Proceeds" means, with respect to any Asset Sale by any Person, the proceeds thereof in the form of cash or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of, or stock or other assets when disposed for, cash or Cash Equivalents (except to the extent that such obligations are financed or sold with recourse to the Company or any Subsidiary) net of (i) brokerage commissions and other reasonable fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes payable as a result of such Asset Sale, (iii) payments made to retire Indebtedness where payment of such Indebtedness is secured by the assets or properties the subject of such Asset Sale, (iv) amounts required to be paid to any Person (other than the Company or any Subsidiary) owning a beneficial interest in the assets subject to the Asset Sale and (v) appropriate amounts to be provided by the Company or any Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against any liabilities associated with such Asset Sale and retained by the Company or any Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as reflected in an Officers' Certificate delivered to the Trustee. "Permitted Indebtedness" means: (a) Indebtedness of up to $300,000,000 outstanding principal amount under the Credit Facility; (b) any guarantee by the Company or any Subsidiary under the Credit Facility; (c) Indebtedness (other than Indebtedness included in clause (d) below) in existence on the date of the Indenture; (d) Indebtedness of the Company pursuant to the Convertible Debentures; (e) Indebtedness of the Company pursuant to the Notes; (f) Indebtedness evidenced by letters of credit issued in the ordinary course of business consistent with past practice to support the Company's or any Subsidiary's insurance or self-insurance obligations (including to secure workers' compensation and other similar insurance coverages); (g) Interest Rate Contracts, to the extent that the notional principal amount of such obligations does not exceed the amount of Indebtedness outstanding or committed to be incurred on the date such Interest Rate Contracts are entered into; (h) Indebtedness of the Company to a Wholly Owned Subsidiary and Indebtedness of a Subsidiary to the Company or another Subsidiary; provided, however, that any subsequent issuance or transfer of any Capital Stock or any other event which results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any other subsequent transfer of any such Indebtedness (except to the Issuer or a Wholly Owned Subsidiary) shall be deemed, in each case to be incurred and shall be treated as an incurrence for purposes of the covenant described under "-- Limitation on Indebtedness" at the time the Wholly Owned Subsidiary in question ceased to be a Wholly Owned -78- Subsidiary; (i) any guarantees of Indebtedness by a Subsidiary entered into in accordance with "-- Certain Covenants--Limitation on Issuance of Guarantees of Subordinated Indebtedness"; (j) Indebtedness incurred by the Company or any Subsidiary consisting of Purchase Money Obligations in an amount not to exceed $15,000,000 at any one time outstanding; (k) Indebtedness incurred by the Company or any Wholly Owned Subsidiary consisting of Capital Lease Obligations in an amount not to exceed $15,000,000 at any time outstanding; (l) Indebtedness of the Company or any Wholly Owned Subsidiary, in addition to that described in clauses (a) through (k) of this definition of "Permitted Indebtedness," in an aggregate principal amount outstanding at any given time not to exceed $40,000,000; and (m) any renewals, extensions, substitutions, refundings, refinancings or replacements of any Indebtedness described in clauses (a) through (e) of this definition of "Permitted Indebtedness," including any successive renewals, extensions, substitutions, refundings, refinancings or replacements, so long as (i) any such new Indebtedness shall be in a principal amount that does not exceed the principal amount (or, if such Indebtedness being refinanced provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, such lesser amount as of the date of determination) so refinanced, plus the amount of any premium required to be paid under the terms of the instrument governing such Indebtedness being refinanced or the amount of any premium reasonably determined by the Company as necessary to accomplish such refinancing through means of a tender offer or privately negotiated transactions and, in each case, actually paid, plus the amount of expenses of the Company incurred in connection with such refinancing; (ii) in the case of any refinancing of Subordinated Indebtedness, such new Indebtedness is made subordinate to the Notes at least to the same extent as the Indebtedness being refinanced; and (iii) any such new Subordinated Indebtedness has an Average Life to Stated Maturity longer than the Average Life to Stated Maturity of the refinanced Subordinated Indebtedness and a final Stated Maturity later than the final Stated Maturity of the Notes. "Permitted Investment" means (i) the Notes or any Guarantees; (ii) Temporary Cash Investments; (iii) Indebtedness of the Company to a Subsidiary and Indebtedness of a Subsidiary to the Company or another Subsidiary; (iv) Investments in existence on the date of the Indenture; (v) Investments in any Wholly Owned Subsidiary by the Company or any Wholly Owned Subsidiary or any Investment in the Company by any Wholly Owned Subsidiary; (vi) receivables owing to the Company and its Subsidiaries if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; (vii) Investments in any Permitted Joint Ventures; (viii) Investments in any Healthcare Related Businesses, provided that the Company is able, at the time of such Investment and immediately after giving pro forma effect thereto, to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with the "Limitation on Indebtedness" covenant; (ix) Investments acquired or retained from another Person in connection with any sale, conveyance, transfer, lease or other disposition of any properties or assets to such Person in accordance with the covenant described under "-- Disposition of Asset Sales"; and (x) in addition to Permitted Investments described in the foregoing clauses (i) through (ix), Investments in the aggregate amount of $20,000,000 at any one time outstanding. "Permitted Joint Venture" means any Subsidiary which owns, operates or services Healthcare Related Businesses. -79- "Person" means any individual, corporation, limited or general partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Preferred Stock," as applied to any Person, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of Capital Stock of any other class of such corporation. "Property" means, with respect to any Person, all types of real, personal, tangible, intangible or mixed property owned by such Person whether or not included in the most recent consolidated balance sheet of such Person. "Purchase Money Obligations" means any Indebtedness of the Company or any Subsidiary incurred to finance the acquisition or construction of any Property or business (including Indebtedness incurred within 90 days following such acquisition or construction), including Indebtedness of a Person existing at the time such Person becomes a Subsidiary or assumed by the Company or a Subsidiary in connection with the acquisition of assets from such Person; provided, however, that any Lien on such Indebtedness shall not extend to any Property other than the Property so acquired or constructed. "Qualified Capital Stock" of any Person means any and all Capital Stock of such Person other than Redeemable Capital Stock. "Redeemable Capital Stock" means any Capital Stock that, either by its terms, by the terms of any security into which it is convertible or exchangeable or otherwise, is, or upon the happening of an event or passage of time would be, required to be redeemed prior to any Stated Maturity of the principal of the Notes or is redeemable at the option of the holder thereof at any time prior to any such Stated Maturity, or is convertible into or exchangeable for debt securities at any time prior to any such Stated Maturity at the option of the holder thereof. "Redemption Date" when used with respect to any Note to be redeemed pursuant to any provision in the Indenture means the date fixed for such redemption by or pursuant to the Indenture. "Securities Act" means the Securities Act of 1933, as amended. "Stated Maturity" when used with respect to any Indebtedness or any installment of interest thereon, means the dates specified in such Indebtedness as the fixed date on which the principal of such Indebtedness or such installment of interest is due and payable. "Subordinated Indebtedness" means Indebtedness of the Company subordinated in right of payment to the Notes. "Subsidiary" means (i) a corporation (A) at least 50% of the Voting Stock of which is at the time owned, directly or indirectly, by the Company and (B) of which the Company, directly or indirectly, has the right to elect a majority of the members of the Board of Directors either as a result of the ownership of a majority of the Voting Stock of such corporation or pursuant to a shareholders or other voting agreement or (ii) any partnership, joint venture, limited liability company or similar entity at least 50% of the total equity and voting interests of which (x) is at the time owned, directly or indirectly, by the Company whether in the -80- form of membership, general, special or limited partnership, or otherwise and (y) the Company or any Wholly Owned Subsidiary is a controlling general partner or otherwise controls such entity. "Temporary Cash Investments" means (i) any evidence of Indebtedness, maturing not more than one year after the date of acquisition, issued by the United States of America, or an instrumentality or agency thereof and guaranteed fully as to principal, premium, if any, and interest by the United States of America, (ii) any certificate of deposit, maturing not more than one year after the date of acquisition, issued by, or time deposit of, a commercial banking institution that is a member of the Federal Reserve System and that has combined capital and surplus and undivided profits of not less than $500,000,000, whose debt has a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's Investors Service, Inc. or any successor rating agency, or "A-1" (or higher) according to Standard & Poor's Corporation or any successor rating agency and (iii) commercial paper, maturing not more than one year after the date of acquisition, issued by a corporation (other than an Affiliate or Subsidiary of the Company) organized and existing under the laws of the United States of America with a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's Investors Service, Inc. or any successor rating agency, or "A-1" (or higher) according to Standard & Poor's Corporation or any successor rating agency. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended. "Voting Stock" means stock of the class or classes pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of a corporation (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of which is owned by the Company or another Wholly Owned Subsidiary. Trustee The Trustee is expected to be the trustee for the First Mortgage Bonds and the 9 3/4% Notes. Book-Entry Delivery and Form The certificates representing the Notes will be issued in fully registered form. Except as described in the next paragraph, the Notes initially will be represented by a Global Note in fully registered form without interest coupons (the "Global Note") and will be deposited with, or on behalf of, the Depository Trust Company, New York, New York ("DTC") and registered in the name of a nominee of DTC. Existing Notes (i) originally purchased by or transferred to institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) ("Institutional Accredited Investors") who are not "qualified institutional buyers" (as defined in Rule 144A) ("Qualified Institutional Buyers"), (ii) except as described below, purchased by or transferred to Persons outside the United States pursuant to sales in accordance with Regulation S under the Securities Act or (iii) held by Qualified Institutional Buyers who elect to take physical delivery of their certificates instead of holding their interest through the Global Note (and which are then unable to trade through DTC) (collectively referred to herein as the "Non-Global Purchasers"), will be in registered form without interest coupons ("Certificated Notes"). Upon the transfer of Certificated Notes initially issued to a Non-Global Purchaser to a Qualified Institutional Buyer, such -81- Certificated Notes will, unless the transferee requests otherwise or the Global Note has previously been exchanged in whole for Certificated Notes, be exchanged for an interest in the Global Note. DTC has advised the Company as follows: DTC is a limited purpose trust company organized under the laws of the State of New York, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered pursuant to the provision of Section 17A of the Exchange Act. DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations and certain other organizations. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly ("indirect participants"). Upon the issuance of the Global Note, DTC or its custodian will credit, on its internal system, the respective principal amount of the individual beneficial interests represented by such Global Note to the accounts of persons who have accounts with such depositary. Ownership of beneficial interests in the Global Note will be limited to persons who have accounts with DTC ("participants") or persons who hold interests through participants. Ownership of beneficial interests in the Global Note will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of persons other than participants). So long as DTC or its nominee is the registered owner or holder of the Global Note, DTC or such nominee, as the case may be, will be considered the sole record owner or holder of the Notes represented by such Global Note for all purposes under the Indenture and the Notes. No beneficial owners of an interest in the Global Note will be able to transfer that interest except in accordance with DTC's applicable procedures, in addition to those provided for under the Indenture. Payments of the principal of, premium, if any, and interest on the Global Note will be made to DTC or its nominee, as the case may be, as the registered owner thereof. Neither the Company, the Trustee, nor any paying agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Global Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. The Company expects that DTC or its nominee, upon receipt of any payment of principal, premium, if any, or interest in respect of the Global Note will credit participants' accounts with payments in amounts proportionate to their respective beneficial ownership interests in the principal amount of such Global Note, as shown on the records of DTC or its nominee. The Company also expects that payments by participants to owners of beneficial interests in such Global Note held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants. Transfers between participants in DTC will be effected in the ordinary way in accordance with DTC rules. If a Holder requires physical delivery of Certificates Notes for any reason, including to sell Notes to persons in states which require such delivery of such Notes or to pledge such Notes, such holder must transfer its interest in the Global Note, in accordance with the normal procedures of DTC and the procedures set forth in the Indenture. Neither the Company nor the Trustee will have any responsibility for the -82- performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. Subject to certain conditions, any person having a beneficial interest in the Global Note may, upon request to the Trustee, exchange such beneficial interest for Notes in the form of Certificated Notes. Upon any such issuance, the Trustee is required to register such Certificates Notes in the name of, and cause the same to be delivered to, such person or persons (or the nominee of any thereof). In addition, if DTC is at any time unwilling or unable to continue as a depositary for the Global Note and a successor depositary is not appointed by the Company within 90 days, the Company will issue Certificates Notes in exchange for the Global Note. PLAN OF DISTRIBUTION Each Participating Broker-Dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of Exchange Notes received in exchange for Existing Notes where such Existing Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that it will furnish to each Participating Broker-Dealer as many copies of this Prospectus, as amended or supplemented, as such Participating Broker-Dealer may reasonably request. In addition, each Participating Broker-Dealer shall be authorized to deliver this Prospectus in connection with the sale or transfer of the Exchange Notes. In addition, until , all dealers effecting transactions in the Exchange Notes may be required to deliver a Prospectus. The Company will not receive any proceeds from any sales of the Exchange Notes by Participating Broker-Dealers. Exchange Notes received by Participating Broker-Dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such Participating Broker-Dealer and/or the purchasers of any such Exchange Notes. Any Participating Broker-Dealer that resells the Exchange Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Notes and any omissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any Participating Broker-Dealer that requests such documents in the Letter of Transmittal. See "Exchange Offer -- Purpose and Effect of the Exchange Offer." LEGAL MATTERS Certain legal matters with respect to the legality of the issuance of the Exchange Notes offered hereby will be passed upon for the Company by Blank Rome Comisky & McCauley, Philadelphia, Pennsylvania. As to matters of New York laws, Blank Rome Comisky & McCauley will rely upon the -83- opinion of Simpson Thacher & Bartlett (a partnership which includes professional corporations) New York, New York. Stephen Luongo, a partner in Blank Rome Comisky & McCauley, is the beneficial owner of 36,847 shares of Common Stock and is a director of the Company. EXPERTS The consolidated financial statements of Genesis Health Ventures, Inc. and subsidiaries as of September 30, 1994 and 1995, and for each of the years in the three-year period ended September 30, 1995 have been included herein and in the Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein or incorporated by reference herein and upon the authority of said firm as experts in accounting and auditing. The financial statements of McKerley Health Care Centers, Inc. for the years ended December 31, 1994 and 1993, the financial statements of McKerley Health Facilities for the years ended December 31, 1994 and 1993, and the financial statements and other financial information of McKerley Health Care Center -- Concord Limited Partnership for the period from March 11, 1994 to December 31, 1994, appearing in Genesis Health Ventures, Inc.'s Current Report on Form 8-K/A dated April 5, 1996, and the financial statements of National Health Care Affiliates, Inc. and Related Entities for the year ended December 31, 1995, appearing in Genesis Health Venture, Inc.'s Current Report on Form 8-K/A dated May 3, 1996, have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon included therein and incorporated herein by reference in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of Geriatric & Medical Companies, Inc. and subsidiaries as of May 31, 1996 and for each of the years in the two-year period ended May 31, 1996 appearing in the Genesis Health Ventures, Inc.'s Current Report on Form 8-K/A dated July 11, 1996 have been audited by BDO Seidman, LLP, independent auditors, as set forth in their report therein and incorporated herein by reference in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission") . Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621 and 75 Park Place, 14th Floor, New York, New York 10007. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, the Company's Common Stock, Convertible Debentures and 9 3/4% Notes are listed on the New York Stock Exchange. The Company's reports, proxy statements and other information filed under the Exchange Act may also be inspected and copied at the offices of the New York Stock Exchange, 120 Broad Street, New York, New York 10005. This Prospectus constitutes a part of a Registration Statement filed by the Company with the Commission under the Securities Act. This Prospectus omits certain of the information contained in that -84- Registration Statement, and reference is hereby made to that Registration Statement and the exhibits filed therewith for further information with respect to the Company and the Common Stock offered hereby. Any statements contained herein concerning the provisions of any document are not necessarily complete, and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents and portions of documents filed by the Company with the Commission are hereby incorporated by reference into this Prospectus and made a part hereof: (i) the Annual Report on Form 10-K for the year ended September 30, 1995; (ii) the Quarterly Reports on Form 10-Q for the quarters ended December 31, 1995, March 31, 1996 and June 30, 1996, as amended;(iii) the Current Report on Form 8-K dated November 30, 1995, as amended; (iv) the Current Report on Form 8-K dated April 21, 1996; (v) the Current Report on Form 8-K dated May 3, 1996, as amended; (vi) the Current Report on Form 8-K dated May 8, 1996; (vii) the Current Report on Form 8-K dated July 11, 1996, as amended; (viii) the Current Report on Form 8-K dated July 26, 1996; and (ix) the Current Report on Form 8-K dated October 11, 1996. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering of the Common Stock offered hereby shall be deemed to be incorporated by reference in this Prospectus and to be part of this Prospectus from the date of filing of such documents. Any statement contained herein or in any document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed to constitute a part of this Prospectus, except as so modified or superseded. The Company hereby undertakes to provide without charge to each person, including any beneficial owner to whom a copy of this Prospectus has been delivered, upon written or oral request of such person, a copy of any or all of the information that has been incorporated by reference in this Prospectus (not including exhibits to such information unless such exhibits are specifically incorporated by reference into the information that this Prospectus incorporates). Written or oral requests for such copies should be directed to Genesis Health Ventures, 148 West State Street, Kennett Square, Pennsylvania 19348, Attention: Investor Relations, telephone: (610) 444-6350. -85- INDEX TO FINANCIAL INFORMATION
Page -------- Consolidated Financial Statements Genesis Health Ventures, Inc. and Subsidiaries Independent Auditors' Report ...................................................................... F-3 Consolidated Balance Sheets as of September 30, 1994 and 1995 ..................................... F-4 Consolidated Statements of Operations for the years ended September 30, 1993, 1994 and 1995 ....... F-5 Consolidated Statements of Shareholders' Equity for the years ended September 30, 1993, 1994 and 1995 ............................................................................................. F-6 Consolidated Statements of Cash Flows for the years ended September 30, 1993, 1994 and 1995 ....... F-7 Notes to Consolidated Financial Statements ........................................................ F-8 Unaudited Condensed Consolidated Balance Sheet as of June 30, 1996 ................................ F-18 Unaudited Condensed Consolidated Statements of Operations for the three months and for the nine months ended June 30, 1995 and 1996 .............................................................. F-19 Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 1995 and 1996 ......................................................................................... F-20 Notes to Condensed Unaudited Consolidated Financial Statements .................................... F-21 Pro Forma Condensed Consolidated Financial Information Unaudited Pro Forma Condensed Consolidated Statements of Operations for the year ended September 30, 1995 and the nine months ended June 30, 1996 ................................................. F-23 Unaudited Pro Forma Condensed Consolidated Balance Sheet at June 30, 1996 ......................... F-31
F-1 (THIS PAGE INTENTIONALLY LEFT BLANK) F-2 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES INDEPENDENT AUDITORS' REPORT The Board of Directors Genesis Health Ventures, Inc.: We have audited the accompanying consolidated balance sheets of Genesis Health Ventures, Inc. and subsidiaries as of September 30, 1994 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended September 30, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Genesis Health Ventures, Inc. and subsidiaries as of September 30, 1994 and 1995, and the results of their operations, and their cash flows for each of the years in the three-year period ended September 30, 1995 in conformity with generally accepted accounting principles. As discussed in Note 8 to the consolidated financial statements, Genesis Health Ventures, Inc. and subsidiaries adopted the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, in 1994. KPMG Peat Marwick LLP Philadelphia, Pennsylvania November 29, 1995, except for Note 2 which is as of November 30, 1995, and Note 13 which is as of March 29, 1996 F-3 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, September 30, 1994 1995 --------------- --------------- Assets Current assets: Cash and equivalents ........................ $ 3,817,425 $ 10,387,506 Accounts receivable, net of allowance for doubtful accounts of $4,553,364 in 1994 and $6,178,673 in 1995 ........................ 72,920,814 101,123,573 Other receivables ........................... 22,107,924 36,739,637 Cost report receivables ..................... 12,035,953 26,270,819 Inventory ................................... 6,231,118 9,600,551 Prepaid expenses and other current assets ... 3,038,699 6,934,725 --------------- --------------- Total current assets ...................... 120,151,933 191,056,811 --------------- --------------- Property, plant and equipment, net ............... 243,549,782 243,660,567 Funds held by trustee ............................ 1,121,000 1,121,000 Contract rights, net ............................. 3,105,325 2,217,522 Other long-term assets ........................... 41,851,014 49,603,457 Goodwill, net .................................... 101,919,173 112,729,811 --------------- --------------- Total assets ................................. $511,698,227 $600,389,168 =============== =============== Liabilities and Shareholders' Equity Current liabilities: Accounts payable ............................ $ 10,709,815 $ 19,401,254 Accrued expenses ............................ 14,251,912 13,951,011 Current installments of long-term debt ...... 9,942,806 2,538,675 Accrued compensation ........................ 14,589,921 13,656,490 Interest .................................... 3,321,236 5,513,003 Income taxes payable ........................ 481,805 1,882,594 --------------- --------------- Total current liabilities ................. 53,297,495 56,943,027 --------------- --------------- Long-term debt ................................... 250,806,778 308,052,441 Deferred income taxes ............................ 9,268,272 8,698,272 Deferred gain and other long-term liabilities .... 2,859,522 5,147,891 Shareholders' equity: Common stock, par $.02, authorized 60,000,000 shares; issued and outstanding 21,829,365 and 21,773,125 at September 30, 1994; 22,081,267 and 22,035,666 at September 30, 1995 ...................................... 291,057 294,460 Additional paid-in capital .................. 153,573,281 155,927,049 Retained earnings ........................... 41,961,608 65,569,282 Treasury stock, at cost ..................... (359,786) (243,254) --------------- --------------- Total shareholders' equity .................. 195,466,160 221,547,537 --------------- --------------- Total liabilities and shareholders' equity .. $511,698,227 $600,389,168 =============== ===============
See accompanying notes to consolidated financial statements. F-4 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended September 30, ------------------------------------------------ 1993 1994 1995 ------------- ------------ ------------ Net revenues: Basic healthcare services . $133,370,007 $240,263,861 $278,120,711 Specialty medical services 75,226,895 125,717,823 180,326,730 Management services and other ................... 11,212,275 22,634,576 27,945,341 ----------- ------------ ------------ Total net revenues ...... 219,809,177 388,616,260 486,392,782 ----------- ------------ ------------ Operating expenses: Salaries, wages, and benefits ................ 112,293,001 192,533,861 237,610,082 Other operating expenses .. 61,791,025 109,059,421 137,944,784 General corporate expense . 7,595,972 17,649,907 17,584,487 Depreciation and amortization .. 7,157,110 14,982,173 18,792,823 Lease expense .................. 7,026,491 11,376,029 13,798,412 Interest expense, net .......... 5,042,254 15,305,139 20,366,456 ----------- ------------ ------------ Earnings before income taxes, extraordinary items and cumulative effect of a change in accounting principle .... 18,903,324 27,709,730 40,295,738 Income taxes ................... 6,994,230 10,018,535 14,764,941 ----------- ------------ ------------ Earnings before extraordinary items and cumulative effect of a change in accounting principle ............... 11,909,094 17,691,195 25,530,797 Extraordinary items, net of tax -- (552,585) (1,923,123) Cumulative effect of a change in accounting principle ......... -- 534,659 -- ----------- ------------ ------------ Net income ................. $ 11,909,094 $ 17,673,269 $ 23,607,674 =========== ============ ============ Per common share data: Primary: Earnings before extraordinary items and cumulative effect of a change in accounting principle ............... $ 0.67 $ 0.89 $ 1.13 Net income ................ $ 0.67 $ 0.89 $ 1.05 Weighted average shares of common stock and equivalents ............. 17,800,200 19,930,828 22,587,035 ----------- ------------ ------------ Fully diluted: Earnings before extraordinary items and cumulative effect of a change in accounting principle ............... $ 0.67 $ 0.84 $ 1.03 Net income ................ $ 0.67 $ 0.84 $ 0.97 Weighted average shares of common stock and equivalents ............. 17,928,522 24,819,711 28,452,436 ----------- ------------ ------------
See accompanying notes to consolidated financial statements. F-5 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional Common Paid-in Retained Treasury Stock Capital Earnings Stock Total ---------- -------------- ------------- ------------ ------------- Balance at September 30, 1992 .................. $206,389 $ 70,576,932 $12,379,245 $(459,786) $ 82,702,780 Issuance of additional common stock net of issuance costs ........ 38,700 30,051,359 -- -- 30,090,059 Exercise of common stock options and issuance of stock bonus awards .... 1,856 644,356 -- -- 646,212 1993 net earnings ...... -- -- 11,909,094 -- 11,909,094 ---------- -------------- ------------- ------------ ------------- Balance at September 30, 1993 .................. 246,945 101,272,647 24,288,339 (459,786) 125,348,145 ========== ============== ============= ============ ============= Issuance of additional common stock, net of issuance costs ........ 42,926 51,572,278 -- -- 51,615,204 Issuance of shares from Treasury .............. -- -- -- 100,000 100,000 Exercise of common stock options ............... 1,186 728,356 -- -- 729,542 1994 net earnings ...... -- -- 17,673,269 -- 17,673,269 ---------- -------------- ------------- ------------ ------------- Balance at September 30, 1994 .................. 291,057 153,573,281 41,961,608 (359,786) 195,466,160 ========== ============== ============= ============ ============= Issuance of additional common stock .......... 486 620,860 -- -- 621,346 Issuance of shares from Treasury .............. -- -- -- 116,532 116,532 Exercise of common stock options and issuance of stock bonus awards .... 2,917 1,732,908 -- -- 1,735,825 1995 net earnings ...... -- -- 23,607,674 -- 23,607,674 ---------- -------------- ------------- ------------ ------------- Balance at September 30, 1995 .................. $294,460 $155,927,049 $65,569,282 $(243,254) $221,547,537 ========== ============== ============= ============ =============
See accompanying notes to consolidated financial statements. F-6 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30, --------------------------------------------------- 1993 1994 1995 -------------- --------------- --------------- Cash flows from operating activities: Net income ........................................ $ 11,909,094 $ 17,673,269 $ 23,607,674 Adjustments to reconcile net income to net cash provided by operating activities: Charges (credits) included in operations not requiring funds: Provision for deferred taxes ................. 2,671,000 4,483,022 (1,270,000) Depreciation and amortization ................ 7,157,110 14,982,173 18,792,823 Amortization of deferred gain ................ (319,073) (319,000) (460,000) Extraordinary loss ........................... -- 552,585 1,923,123 Cumulative effect of a change in accounting principle ................................. -- (534,659) -- Changes in assets and liabilities excluding effects of acquisitions and dispositions: Increase in accounts receivable .............. (7,633,812) (15,485,474) (25,563,759) Increase in cost report receivables .......... (2,269,892) (1,769,744) (15,064,866) Increase in inventory ........................ (680,965) (936,575) (3,176,433) Increase in prepaid expenses and other current assets .................................... (2,416,862) (6,705,392) (420,516) Increase (decrease) in accounts payable and accrued expenses .......................... (673,355) 4,418,452 7,235,133 Increase in accrued compensation and interest 159,806 4,558,311 1,258,336 Increase (decrease) in income taxes payable .. (986,268) (353,955) 871,443 -------------- --------------- --------------- Total adjustments ................................... (4,992,311) 2,889,744 (15,874,716) -------------- --------------- --------------- Net cash provided by operating activities .... 6,916,783 20,563,013 7,732,958 -------------- --------------- --------------- Cash flows from investing activities: Capital expenditures .............................. (23,151,427) (18,784,116) (24,718,616) Cash paid net -- acquisitions ..................... (579,000) (214,306,437) (8,194,000) Other long-term asset additions ................... (11,874,540) (9,224,541) (13,130,338) (Increase) decrease in funds held by trustee ...... 710,913 (48,781) 25,777 -------------- --------------- --------------- Net cash used in investing activities .......... (34,894,054) (242,363,875) (46,017,177) -------------- --------------- --------------- Cash flows from financing activities: Net borrowings (repayments) under working capital revolving credit ............................... 34,644,287 (10,200,000) 30,100,000 Repayment of long-term debt ....................... (92,068,067) (26,059,621) (102,450,468) Proceeds from issuance of long-term debt .......... 60,828,534 125,000,000 119,700,000 Proceeds from issuance of convertible debentures .. -- 86,250,000 -- Proceeds from issuance of common stock ............ 30,505,275 52,047,896 100,000 Stock issuance costs .............................. (415,216) (432,692) -- Common stock options exercised .................... 576,588 522,542 1,735,825 Debt issuance costs ............................... (3,433,526) (5,050,930) (4,331,057) -------------- --------------- --------------- Net cash provided by financing activities ...... 30,637,875 222,077,195 44,854,300 -------------- --------------- --------------- Net increase in cash and equivalents ................ 2,660,604 276,333 6,570,081 Cash and equivalents: Beginning of year ................................. 880,488 3,541,092 3,817,425 End of year ....................................... $ 3,541,092 $ 3,817,425 $ 10,387,506 ============== =============== =============== Supplemental disclosure of cash flow information: Interest paid ..................................... $ 5,455,423 $ 12,085,369 $ 18,174,689 Income taxes paid ................................. $ 5,310,100 $ 5,159,000 $ 13,037,150 ============== =============== ===============
See accompanying notes to consolidated financial statements. F-7 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Genesis Health Ventures, Inc. (the Company) and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company provides a broad range of healthcare services to the geriatric population, principally within five geographic markets in the eastern United States. These services include basic healthcare services traditionally provided in geriatric care facilities; specialty medical services, such as rehabilitation therapy, institutional pharmacy and medical supply services and subacute care; and management services to independent geriatric care providers. PROPERTY, PLANT AND EQUIPMENT Land, land improvements, buildings, and equipment are stated at cost. Subsequent additions are recorded at cost. Depreciation of land improvements, buildings and equipment is calculated on the straight-line method over their estimated useful lives that range from three years to 35 years. Expenditures for maintenance and repairs necessary to maintain property and equipment in efficient operating condition are charged to operations. Costs of additions and betterments are capitalized. Interest costs associated with construction or renovation are capitalized in the period in which they are incurred. INVENTORIES Inventories of drugs and supplies are stated at the lower of cost or market. Cost is determined primarily on the first-in, first-out (FIFO) method. CONTRACTUAL ADJUSTMENTS Patient revenues are recorded based on standard charges applicable to all patients. Under Medicare, Medicaid, and other cost-based reimbursement programs, each facility is reimbursed for services rendered to covered program patients as determined by reimbursement formulas. The differences between established billing rates and the amounts reimbursable by the programs and patient payments are recorded as contractual adjustments and deducted from revenues. Retroactively calculated third-party contractual adjustments are accrued on an estimated basis in the period the related services are rendered. Revisions to estimated contractual adjustments are recorded based upon audits by third-party payors, as well as other communications with third-party payors such as desk reviews, regulation changes and policy statements. These revisions are made in the year such amounts are determined. INVESTMENTS Investments are carried at cost, which approximates fair value, and interest income is recognized as earned. DEFERRED FINANCING COSTS Financing costs have been deferred and are being amortized on a straight-line basis over the term of the related debt. Net deferred financing costs included in other long term assets were $8,123,000 and $9,425,000 at September 30, 1994 and 1995, respectively. F-8 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) CONTRACT RIGHTS Contract rights represent the value assigned to a management contract obtained in conjunction with the Company's acquisition of Genesis Management Resources, Inc. (formerly, Total Care Systems, Inc.). The contract is with a company that owns life care communities and provides for a management fee in exchange for management, marketing and development services provided to the communities. The Company obtained an independent appraisal with respect to the assigned value of the contract rights. Contract rights are being amortized over ninety-four months which represents the term of the related contract. GOODWILL Goodwill represents the excess of the purchase price over the fair market value of net assets acquired and is amortized on a straight-line basis from ten to forty years. Accumulated amortization at September 30, 1994 and 1995 was $3,300,000 and $6,200,000, respectively. Goodwill is reviewed for impairment whenever events or circumstances provide evidence that suggest that the carrying amount of goodwill may not be recoverable. The Company assesses the recoverability of goodwill by determining whether the amortization of the goodwill balance can be recovered through projected undiscounted future cash flows. INCOME TAXES Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement 109) was adopted by the Company in 1994. Statement 109 required a change from the deferred method to the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Under Statement 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Provision is made for deferred income taxes applicable to temporary differences between financial statement and taxable income. EARNINGS PER SHARE Primary earnings per share is based on the average number of shares of common stock outstanding during the period and the dilutive effect of stock options and other common stock equivalents. Fully diluted earnings per share reflect the conversion of the Convertible Senior Subordinated Debentures as if such conversion had occurred on the date of issuance and the related interest expense had not been incurred. CASH EQUIVALENTS Short-term investments which have a maturity of ninety days or less at acquisition are considered cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments is determined by reference to various market data and other valuation considerations. The fair value of financial instruments approximates their recorded values. NEW ACCOUNTING PRONOUNCEMENTS In March, 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (Statement 121). Statement 121 provides guidance for recognition and measurement of impairment of long-lived assets, certain identifiable intangibles and goodwill related both to F-9 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) assets to be held and used and assets to be disposed of. The Company is required to adopt Statement 121 for the year ending September 30, 1997. The Company has not yet quantified the impact, if any, of the adoption of Statement 121 may have on its consolidated financial statements. In October, 1995, the FASB issued Statement 123, "Accounting for Stock-Based Compensation" (Statement 123). Statement 123 allows companies the option to retain the current accounting approach for recognizing stock-based expense in the financial statements or to adopt a new accounting method based on the estimated fair value of employee stock options. Companies that do not follow the new fair value based method will be required to provide expanded disclosures in the footnotes. The Company is required to adopt Statement 123 for the year ending September 30, 1997. The Company expects to continue applying its current accounting approach and upon adoption will present the required footnote disclosures. (2) ACQUISITIONS/DISPOSITIONS On November 30, 1995, subsequent to fiscal year end, the Company acquired McKerley Health Care Centers, Inc. and related entities (collectively, "McKerley") for total consideration of approximately $68,700,000. The transaction also provides for up to an additional $6,000,000 of contingent consideration payable upon the achievement of certain financial objectives through October 1997. McKerley owns or leases 15 geriatric care facilities in New Hampshire and Vermont with a total of 1,535 beds and operates a home healthcare company. The acquisition was financed with long-term debt. On September 30, 1995, the Company sold, subject to a three year management contract, five facilities totaling 606 beds to the AGE Institute of Massachusetts ("AIMASS") for $19,570,000. On June 1, 1995, the Company acquired Eastern Medical Supplies, Inc. and its affiliate Eastern Rehab Services, Inc. (collectively, "Eastern Medical") for approximately $2,000,000. Eastern Medical sells and leases home medical equipment, respiratory products and services and rehabilitation equipment to patients at home throughout Maryland. On April 1, 1995, the Company acquired TherapyCare Systems, L.P. ("TherapyCare") for approximately $7,000,000. TherapyCare provides physical therapy, occupational therapy and speech therapy to 73 long-term care facilities throughout Pennsylvania. On March 1, 1995, a joint venture in which the Company is a 55% partner acquired Delta Drug, Inc. ("Delta Drug") for approximately $1,700,000. Delta Drug, an institutional pharmacy company located in Providence, Rhode Island, serves over 2,000 long-term care beds. On November 30, 1993, the Company acquired substantially all of the assets of Meridian, Inc., Meridian Healthcare, Inc. and their affiliated entities (Meridian). The purchase price was approximately $205,000,000, which included approximately $70,000,000 of debt paid prior to the consummation of the transaction. The transaction (Meridian Transaction) was financed with approximately $84,000,000 in proceeds from an offering of 6% Convertible Senior Subordinated Debentures issued in November 1993 and a bank credit facility. Meridian operated 36 geriatric care facilities and provided specialty medical and management services in six geographic markets in the United States. The Company allocated $121,000,000 of the excess purchase price to tangible assets and recorded approximately $84,000,000 in goodwill as a result of this transaction. The following unaudited pro forma statement of operations information gives effect to the Meridian Transaction described above as though it had occurred on October 1, 1992, after giving effect to certain adjustments, including amortization of goodwill, additional depreciation expense, increased interest expense on debt related to the acquisition and related income tax effects. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the acquisition occurred on October 1, 1992. F-10 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued)
Year Ended September 30, ------------------------ 1993 1994 ---------- ---------- (In thousands except per share data) Pro Forma Statement of Operations Information: Total net revenues ................................................ $364,266 $416,819 Income before extraordinary items and cumulative effect of an accounting change ................................................ 14,013 18,143 Net income ........................................................ 14,013 18,125 Primary earnings per share before extraordinary items and cumulative effect of an accounting change ........................ 0.78 0.91 Fully diluted earnings per share before extraordinary items and cumulative effect of an accounting change ........................ 0.73 0.85
(3) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at September 30, 1994 and 1995 consist of the following:
September 30, ----------------------------------- 1994 1995 -------------- ------------- Land ............................. $ 18,357,703 $ 17,606,305 Land improvements ................ 2,849,424 3,193,296 Buildings ........................ 222,355,216 219,636,621 Equipment ........................ 39,966,560 46,196,213 Construction in progress ......... 3,061,394 8,136,354 -------------- ------------- 286,590,297 294,768,789 Less accumulated depreciation .... 43,040,515 51,108,222 -------------- ------------- Net property, plant and equipment $243,549,782 $243,660,567 ============== =============
(4) LONG-TERM DEBT Long-term debt at September 30, 1994 and 1995 was as follows:
September 30, -------------------------------- 1994 1995 -------------- -------------- Secured--due 1996 to 2014; 7.88% to 12.00% (weighted average interest rate 1994--6.8%; 1995--8.22%) ........... $172,958,506 $101,138,191 Unsecured--due 1996 to 2008; 5.5% to 11.00% (weighted average interest rate 1994--8.3%; 1995-- 9.6%) ........... 1,572,492 123,523,700 Convertible Senior Subordinated Debentures due 2003--6% ... 86,250,000 86,250,000 -------------- -------------- 260,780,998 310,911,891 Less: Debt discount, net of amortization ................... 31,414 320,775 Current installments and short-term borrowings ....... 9,942,806 2,538,675 -------------- -------------- $250,806,778 $308,052,441 ============== ==============
At September 30, 1995, the Company has approximately $66,500,000 of floating rate debt based on prime or LIBOR with a weighted average interest rate of 7.19%. At September 30, 1995, the Company has $244,411,891 of fixed rate debt with a weighted average interest rate of 8.3%. On or after November 30, 1996, the Company may redeem the 6% Convertible Senior Subordinated Debentures (the Debentures) in whole or in part at a redemption price initially equal to 104.2% of the principal amount and decreasing annually thereafter. The Debentures are convertible into Common Stock at the option of the holder at anytime prior to maturity unless previously redeemed at a conversion price of $15.104 per share. F-11 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) In connection with financing the Meridian Transaction, the Company obtained a $200,000,000 bank facility to replace the then existing $65,000,000 term loan/revolving credit facility. The agreement provided for a $125,000,000 term loan and a $75,000,000 revolving credit facility which bore interest at the prime rate plus 1.5% or LIBOR plus 2.5%. In September 1995, the Company amended and restructured its bank credit facility to provide for a $200,000,000 revolving credit facility and a $100,000,000 acquisition credit facility. Both credit facilities bear interest at a floating rate equal, at the Company's option, to the prime rate or LIBOR plus 1.25%. Amounts outstanding under the credit facilities in September 1998 convert to a term loan that provides for equal annual amortization payable quarterly. At September 30, 1995, $66,500,000 was outstanding under the revolving credit facility. The credit facilities are secured by the stock of the Company's subsidiaries and first priority liens on the Company's accounts receivable, inventory and all other personal property. In June 1995, the Company completed an offering of $120,000,000 of 9 3/4 % Senior Subordinated Notes due 2005 (the Notes). Interest is payable on the Notes on June 15 and December 15 of each year commencing December 15, 1995. The Notes are redeemable at the option of the Company in whole or in part, at any time, on or after June 15, 2000 at a redemption price initially equal to 104.05% of the principal amount and decreasing annually thereafter. The Company used the net proceeds from the Notes offering to repay a portion of the bank credit facility. At September 30, 1995, sinking fund requirements and installments of long-term debt are as follows:
Year ending Principal September 30, Amount --------------- ------------- 1996 .......... $ 2,538,675 1997 .......... 2,291,318 1998 .......... 3,015,885 1999 .......... 18,863,477 2000 .......... 18,771,255 Thereafter .... $265,431,281
In November 1995, the Company entered into two separate interest rate swap agreements with two financial institutions. The first agreement is for a term of five years and a notional amount of $15,000,000 whereby the Company will make quarterly payments at a fixed rate of 5.86% and receive quarterly payments at a floating rate based on three month LIBOR (5.97% at September 30, 1995). The second agreement is for a term of three years and a notional amount of $5,000,000 whereby the Company will make quarterly payments based on a fixed rate of 5.66% and receive quarterly payments at a floating rate based on three month LIBOR In November 1995, the Company entered into an interest rate collar agreement for five years for a notional amount of $10,000,000. The agreement requires the Company to receive payments when three month LIBOR rate exceeds 6.25% and make payments when the three month LIBOR rate falls below 5.05%. Interest of $405,118 in 1994 and $457,000 in 1995 was capitalized in connection with facility renovations. During 1994 and 1995, the Company recorded an extraordinary loss, net of tax, of $552,585 and $1,923,123, related to the early retirement of debt. The Company is restricted from declaring any dividends or authorizing any other distribution on account of ownership of its capital stock unless certain conditions are met. (5) LEASES AND LEASE COMMITMENTS The Company leases certain facilities and equipment under operating leases. Future minimum payments for the next five years under operating leases at September 30, 1995 were as follows: F-12 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued)
Year ending Minimum September 30, payments --------------- ------------- 1996 .......... $14,835,340 1997 .......... 14,298,366 1998 .......... 11,083,307 1999 .......... 10,568,196 2000 .......... 8,504,859
In connection with the Meridian Transaction, the Company entered into agreements to lease seven geriatric care facilities for ten years, including a purchase option, that will continue to be owned by certain of Meridian's former shareholders. The annual lease payment is $6,000,000. If the Company exercised its option to purchase the leased facilities, the price at the end of the lease term would be $59,000,000. (6) PATIENT SERVICE REVENUE The distribution of net patient service revenue by class of payor for the years ended September 30, 1993, 1994 and 1995 was as follows:
Year ended September 30, ---------------------------------------------------- Class of payor 1993 1994 1995 --------------------- -------------- -------------- -------------- Private pay and other $ 87,122,847 $148,945,566 $175,205,592 Medicaid ............ 92,885,512 156,893,671 185,611,801 Medicare ............ 28,588,543 60,142,447 97,630,048 -------------- -------------- -------------- $208,596,902 $365,981,684 $458,447,441 ============== ============== ==============
The above revenue amounts are net of third-party contractual allowances of $46,170,589, $81,544,600 and $98,494,511 in 1993, 1994 and 1995, respectively. The Company has recorded cost report receivables from third-party payors (i.e., Medicare and Medicaid) of approximately $12,036,000 and $26,271,000 at September 30, 1994 and 1995, respectively. These amounts at September 30, 1995 are due primarily from Massachusetts ($6,900,000), Pennsylvania ($3,600,000) and Medicare ($15,600,000) for the 1987 through 1995 cost reporting periods. (7) RELATED PARTY TRANSACTIONS During 1987, certain directors and officers of the Company formed a partnership, Salisbury Medical Office Building General Partnership ("SMOB"), and purchased a building, a pharmacy and a medical center located in Salisbury, Maryland. The Company has entered into annual lease agreements with SMOB to lease the building. In Fiscal 1989, the Company entered into a five-year lease agreement to finance approximately $1,100,000 of equipment from SMOB. In accordance with the equipment lease agreement, the Company purchased the equipment at fair market value. The total lease payments and equipment purchase payments to SMOB for Fiscal 1993, 1994 and 1995 were $382,000, $420,000 and $198,000, respectively. In August 1993, the Company guaranteed a loan in the amount of $1,000,000 to Samuel H. Howard which amount was invested by Mr. Howard in Phoenix Healthcare Corporation. The guarantee is secured by a pledge of Mr. Howard's stock in Phoenix Healthcare Corporation. In return for such guarantee the Company received an option to purchase up to 25% of the stock of Phoenix Healthcare Corporation at a price of $.25 per share, subject to Mr. Howard's right to purchase the option for $1,000,000 upon release of the guarantee. In September 1994, Mr. Howard exercised his right to purchase the option for $1,000,000. The Company received as consideration $150,000 in cash and an $850,000 note bearing interest at 12% from Mr. Howard. At September 30, 1995, the balance of the note was $718,000 which was repaid in full subsequent to year end. Samuel H. Howard, a director of the Company, is the principal shareholder of Phoenix Healthcare Corporation. F-13 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) (8) INCOME TAXES As discussed in Note 1, the Company adopted Statement 109 as of October 1, 1993. The cumulative effect of this change in accounting for income taxes of $534,659 is determined as of October 1, 1993 and is reported separately in the consolidated statement of operations for the year ended September 30, 1994. As a result of applying Statement 109, earnings before income taxes for the years ended September 30, 1995 and 1994 were decreased $390,000 due to the effects of adjustments for prior purchase business combinations. Prior years financial statements have not been restated to apply the provisions of Statement 109. The Company has provided no valuation allowance for deferred tax assets. The Company believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. Total income tax expense for the years ended September 30, 1994 and 1995 was allocated as follows:
Year ended September 30, ----------------------------------- 1994 1995 ------------- ------------- Income from continuing operations $10,018,536 $14,764,941 Extraordinary item .............. (324,534) (1,129,452) ------------- ------------- Total .......................... $ 9,694,001 $13,635,489 ============= =============
The components of the provision for income taxes for the years ended September 30, 1993, 1994 and 1995 were as follows:
Year ended September 30, --------------------------------------------------------- 1993 1994 1995 ------------ ------------- ------------- Current: Federal .. $3,859,230 $ 4,768,513 $13,483,941 State .... 464,000 767,000 2,551,000 ------------ ------------- ------------- 4,323,230 5,535,513 16,034,941 ------------ ------------- ------------- Deferred: Federal .. 2,603,000 3,973,022 (650,000) State .... 68,000 510,000 (620,000) ------------ ------------- ------------- 2,671,000 4,483,022 (1,270,000) ------------ ------------- ------------- Total ..... $6,994,230 $10,018,535 $14,764,941 ============ ============= =============
Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rates of 34.75% for 1993 and 35% for 1994 and 1995 to net income before income taxes and extraordinary items as a result of the following:
Year ended September 30, --------------------------------------------- 1993 1994 1995 ------------ ------------- ------------- Computed "expected" tax expense ....................... $6,568,905 $ 9,698,246 $14,103,508 Increase (reduction) in income taxes resulting from: State and local income taxes, net of federal tax benefit ........................................ 348,000 830,000 1,255,000 Amortization of goodwill ............................ 260,000 154,000 197,000 Targeted jobs credits ............................... (128,000) (600,000) (528,000) Other, net .......................................... (54,675) (63,711) (262,567) ------------ ------------- ------------- Total income tax expense .............................. $6,994,230 $10,018,535 $14,764,941 ============ ============= =============
F-14 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) The sources of the differences between consolidated earnings for financial statement purposes and tax purposes and the tax effects are as follows:
Year ended September 30, ---------------------------------------------- 1993 1994 1995 ------------ ------------- -------------- Excess tax depreciation expense versus book depreciation $ 311,000 $ 1,007,000 $ 1,064,000 Excess tax gain versus book gain ....................... -- (302,000) (2,879,000) Accounts receivable allowance for doubtful accounts .... -- (312,000) (221,000) Amortization of deferred gain on sale and leaseback .... 125,000 128,000 103,000 Targeted jobs credit carryforward ...................... (128,000) 446,000 -- Accrued liabilities and reserves ....................... (58,000) (1,401,000) (280,000) Goodwill ............................................... -- 3,790,000 920,000 Alternative minimum tax credit ......................... 2,421,000 1,192,000 -- Other .................................................. -- (64,978) 23,000 ------------ ------------- -------------- Net deferred tax provision ............................ $2,671,000 $ 4,483,022 $(1,270,000) ============ ============= ==============
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 1994 and 1995 are presented below:
1994 1995 -------------- -------------- Deferred Tax Assets Accounts receivable .......... $ 970,000 $ 1,303,000 Accrued compensation ......... 220,000 532,000 Amortization of deferred gain 440,000 297,000 Goodwill ..................... 4,995,000 4,075,000 Accrued liabilities and reserves .................. 961,000 24,000 Other, net ................... 109,000 -- -------------- -------------- Net deferred tax assets ........ 7,695,000 6,231,000 -------------- -------------- Deferred Tax Liabilities Goodwill and Contract Rights . (7,061,000) (6,590,000) Depreciation ................. (9,770,000) (8,272,000) Other, net ................... (132,000) (67,000) -------------- -------------- Total deferred tax liability ... (16,963,000) 14,929,000 -------------- -------------- Net deferred liability ......... $ (9,268,000) $(8,698,000) ============== ==============
(9) STOCK OPTION PLANS The Company has two stock option plans (the "Employee Plan" and the "Directors Plan"). Under the Employee Plan, 2,000,000 shares of Common Stock were reserved for issuance to employees including officers and directors. Generally, the options granted in the Employee Plan become exercisable over a 5 year period and expire 10 years from the date of grant. All options granted under the Employee Plan have been at the fair market value of the common stock on the date of grant. F-15 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued)
Option Price Available per Share Outstanding Exercisable for Grant -------------- ------------- ------------- ----------- Balance at September 30, 1993 $ 2.22-$13.33 1,164,033 514,429 161,517 ------------- ---------- --------- ---------- Authorized ................... -- -- -- 450,000 Granted ...................... 13.17-17.00 691,500 -- (691,500) Became Exercisable ........... -- -- 305,156 -- Exercised .................... 4.45-10.50 (88,980) (88,980) -- Cancelled .................... -- (156,450) -- 156,450 ------------- ----------- --------- ---------- Balance at September 30, 1994 2.22-17.00 1,610,103 730,605 76,467 ------------- ----------- --------- ---------- Authorized ................... -- -- -- 1,050,000 Granted ...................... 19.67-20.25 740,625 -- (740,625) Became Exercisable ........... -- -- 400,692 -- Exercised .................... 5.33-16.83 (204,585) (204,585) -- Cancelled .................... -- (51,975) -- 51,975 ------------- ---------- --------- ---------- Balance at September 30, 1995 $ 2.22-$20.25 2,094,168 926,712 437,817 ============= ========== ========= ==========
(10) RETIREMENT PLAN The Company has a defined contribution plan covering all employees having 1,000 hours or more of service and one year of service in a plan year. Employees' contributions to the plan may be matched by the Company based on years of service. During the plan years ended December 31, 1993, 1994 and 1995, the Company accrued a match of 50% of employee contributions up to 3% of the employee's annual gross salary. Additionally, the Plan provides for discretionary employer contributions, based on profits of the Company, in the form of Company common stock and/or cash. The Company recorded retirement plan expense for the 401(k) match and the discretionary contribution of approximately $500,000, $959,000, and $1,128,000 for the years ended September 30, 1993, 1994, 1995, respectively. Certain employees of Meridian were eligible to participate in plans which qualified under Section 401(K) of the Internal Revenue Service Code. In accordance with the terms of the plans, employees elected to contribute a percentage of their respective annual compensation to the plans, subject to certain limitations. The Company was obligated to match 50% of each employee's contribution up to 3% of their respective annual compensation. Beginning January 1, 1995 one of these plans was merged into the Genesis Health Ventures, Inc. Retirement Plan. (11) COMMITMENTS AND CONTINGENCIES In connection with certain management agreements, the Company has guaranteed $23,240,000 of indebtedness of others, has lent $12,881,000 at various interest rates ranging from 7% to 10% and has agreed to provide working capital advances totalling $21,909,500. At September 30, 1995, $15,713,800 was outstanding related to cash advances under these working capital arrangements. In August 1995, the Company entered into a software license agreement for clinical operating system. The total commitment under the license agreement is $12,000,000 of which the Company has paid $3,500,000. The license agreement provides for a refund of amounts paid in the event the software does not meet the acceptance requirements as defined in the license agreement. The Company has estimated the cost to install the system and related hardware, not including amounts paid for the software license, to be approximately $18,000,000 over the next four years. The Company is self-insured for a portion of its workers' compensation and health insurance exposures. The Company's maximum self-insured exposure is $500,000 per claim with certain maximum aggregate policy limits per claim year. F-16 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) The Company's exposure to credit loss in the event of non-performance by the other party to the financial instrument for guarantees, loan commitments and letters of credit is represented by the dollar amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet financial instruments. The Company does not anticipate any material losses as a result of these commitments. Genesis is a party to litigation arising in the ordinary course of business. Genesis does not believe the results of such litigation, even if the outcome is unfavorable to the Company, would have a material adverse effect on its consolidated financial position or results of operations. (12) QUARTERLY FINANCIAL DATA (UNAUDITED) The Company's unaudited quarterly financial information is as follows:
Fully-diluted Earnings Earnings Per before Share before Cumulative Cumulative Effect of Effect of Accounting Accounting Change and Change and Fully-diluted Total Net Extraordinary Net Extraordinary Earnings (In thousands, except per share data) Revenues Items Earnings Items Per Share ---------------------------------- ----------- --------------- ---------- --------------- --------------- Quarter ended: December 31, 1994 ................ $111,553 $ 4,810 $ 4,810 $ .21 $.21 March 31, 1995 ................... 116,953 5,813 5,813 .24 .24 June 30, 1995 .................... 125,959 6,885 4,962 .28 .21 September 30, 1995 ............... 131,928 8,023 8,023 .31 .31 ----------- --------------- ---------- --------------- --------------- $486,393 $25,531 $23,608 $1.03 $.97 ----------- --------------- ---------- --------------- --------------- Quarter ended: December 31, 1993 ................ $ 71,913 $ 2,915 $ 3,055 $ .15 $.16 March 31, 1994 ................... 98,640 3,584 3,584 .19 .19 June 30, 1994 .................... 105,361 4,708 4,550 .23 .22 September 30, 1994 ............... 112,702 6,484 6,484 .27 .27 ----------- --------------- ---------- --------------- --------------- $388,616 $17,691 $17,673 $ .84 $.84 =========== =============== ========== =============== ===============
(13) SUBSEQUENT EVENT Effective March 29, 1996, the Company issued a three for two stock dividend on the Common Stock. Share and per share information in the accompanying consolidated financial statements has been adjusted accordingly. F-17 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
September 30, June 30, 1995 1996 -------------- ----------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents ..................................... $ 10,387 $ 70,626 Accounts receivable, net of allowance for doubtful accounts of $6,179 at September 30, 1995 and $9,674 at June 30, 1996 ... 101,124 144,036 Cost report receivables ....................................... 26,271 31,413 Inventory ..................................................... 9,601 16,872 Other current assets .......................................... 43,674 34,062 -------------- ----------- Total current assets ..................................... 191,057 297,009 -------------- ----------- Property, plant and equipment ................................... 294,769 375,628 Accumulated depreciation ........................................ (51,108) (62,240) -------------- ----------- 243,661 313,388 Goodwill and other intangibles, net ............................. 114,947 196,119 Other assets .................................................... 50,724 71,832 -------------- ----------- TOTAL ASSETS ............................................. $600,389 $878,348 ============== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses ......................... $ 52,522 $ 64,163 Current installments of long-term debt ........................ 2,539 2,512 Income taxes payable .......................................... 1,882 2,735 -------------- ----------- Total current liabilities ................................ 56,943 69,410 -------------- ----------- Long-term debt .................................................. 308,052 295,897 Deferred income taxes ........................................... 8,698 6,586 Deferred gain and other liabilities ............................. 5,149 6,217 Shareholders' Equity: Common stock, par value $.02, authorized 60,000,000 shares, issued and outstanding, 22,081,267 and 22,035,666 at September 30, 1995; 31,981,680 and 31,936,079 at June 30, 1996 ....................................................... 294 476 Additional paid-in capital .................................... 155,927 411,677 Retained earnings ............................................. 65,569 88,328 -------------- ----------- 221,790 500,481 Less treasury stock, at cost .................................... (243) (243) -------------- ----------- Total shareholders' equity ............................... 221,547 500,238 -------------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............... $600,389 $878,348 ============== ===========
See accompanying notes to condensed consolidated financial statements. F-18 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Three Months Ended Nine Months Ended June 30, June 30, ---------------------------- ---------------------------- 1995 1996 1995 1996 ------------ ------------ ------------ ------------ (Unaudited) (Unaudited) Net revenues: Basic healthcare services ....... $ 69,701 $ 85,846 $ 206,073 $ 241,107 Specialty medical services ...... 48,188 78,347 128,333 193,347 Management services and other, net .......................... 8,070 8,643 20,059 25,900 ------------ ------------ ------------ ------------ Total net revenues ........... 125,959 172,836 354,465 460,354 Operating expenses: Salaries, wages and benefits .... 62,009 80,919 175,612 223,244 Other operating expenses ........ 34,978 52,786 99,778 132,180 General corporate expense ....... 4,449 6,515 12,730 17,617 Debenture conversion expense ...... -- 155 -- 1,245 Depreciation and amortization ..... 5,003 6,648 13,987 17,883 Lease expense ..................... 3,657 4,086 10,388 11,948 Interest expense, net ............. 4,976 6,125 14,369 19,104 ------------ ------------ ------------ ------------ Earnings before income taxes and extraordinary item ........... 10,887 15,602 27,601 37,133 Income taxes ...................... 4,002 5,511 10,093 13,374 ------------ ------------ ------------ ------------ Earnings before extraordinary item ......................... 6,885 10,091 17,508 23,759 Extraordinary item, net of tax .. (1,923) -- (1,923) -- ------------ ------------ ------------ ------------ Net income ...................... $ 4,962 $ 10,091 $ 15,585 $ 23,759 ============ ============ ============ ============ Per common share data: Primary Earnings excluding debenture conversion expense and extraordinary item, net of tax $ .30 $ .37 $ .78 $ .96 Debenture conversion expense .... -- -- -- (.03) Extraordinary item, net of tax .. (.08) -- (.09) -- Net income ...................... $ .22 $ .37 $ .69 $ .93 Weighted average shares of Common Stock and equivalents ........ 22,635,350 27,507,276 22,556,985 25,438,335 Fully diluted Earnings excluding debenture conversion expense and extraordinary item, net of tax $ .28 $ .35 $ .72 $ .91 Debenture conversion expense .... -- -- -- (.03) Extraordinary item, net of tax .. (.07) -- (.06) -- Net income ...................... $ .21 $ .35 $ .66 $ .88 Weighted average shares of Common Stock and equivalents ........ 28,387,825 31,108,391 28,284,792 29,358,861
See accompanying notes to condensed consolidated financial statements. F-19 GENESIS HEALTH VENTURES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Nine Months Ended June 30, -------------------------- 1995 1996 ----------- ----------- (Unaudited) Cash flows from operating activities: Net income ......................................................... $ 15,585 $ 23,759 Adjustments to reconcile net income to net cash provided by operating activities: Charges (credits) included in operations not requiring funds: Provision for deferred taxes ..................................... 2,902 3,343 Depreciation and amortization .................................... 13,987 17,883 Amortization of deferred gain .................................... (345) (345) Debenture conversion expense ..................................... -- 1,245 Extraordinary item, net of tax ................................... 1,923 -- Changes in assets and liabilities excluding effects of acquisitions: Increase in accounts receivable .................................. (16,425) (16,348) Increase in cost report receivables .............................. (8,000) (6,418) Increase in inventory ............................................ (492) (2,207) (Increase) decrease in other current assets ...................... 1,562 (9,012) Increase (decrease) in accounts payable and accrued expenses ..... (4,265) 3,144 Increase (decrease) in income taxes payable ...................... 759 (816) ----------- ----------- Total adjustments ................................................ (8,394) (9,531) ----------- ----------- Net cash provided by operating activities ........................ 7,191 14,228 ----------- ----------- Cash flows from investing activities: Capital expenditures ............................................. (19,681) (26,151) Cash paid, net-- acquisitions .................................... (8,194) (140,816) Deferred and other long-term asset additions, net ................ (10,376) (8,856) Increase in trustee-held funds ................................... (490) (50) ----------- ----------- Net cash used in investing activities ............................ (38,741) (175,873) ----------- ----------- Cash flows from financing activities: Proceeds from issuance of Common Stock ........................... -- 211,250 Stock issuance costs ............................................. -- (9,248) Net borrowings under bank credit facility ........................ 19,600 20,300 Repayment of long-term debt ...................................... (101,353) (1,673) Proceeds from issuance of long-term debt ......................... 119,700 -- Debenture conversion expense ..................................... -- (1,245) Proceeds from exercise of common stock options ................... 981 2,500 Debt issuance costs .............................................. (3,600) -- ----------- ----------- Net cash provided by financing activities .......................... $ 35,328 $ 221,884 ----------- ----------- Net increase in cash and cash equivalents .......................... $ 3,778 $ 60,239 ----------- ----------- Cash and cash equivalents: Beginning of the period .......................................... 3,817 10,387 End of the period ................................................ $ 7,595 $ 70,626 ----------- ----------- Supplemental disclosure of cash flow information: Interest paid .................................................... $ 15,818 $ 22,755 ----------- ----------- Income taxes paid ................................................ $ 9,509 $ 12,451 =========== ===========
See accompanying notes to condensed consolidated financial statements. F-20 GENESIS HEALTH 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, 1995. 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. PRO FORMA FINANCIAL INFORMATION In July 1996, the Company and Geriatric & Medical Companies, Inc. ("GMC") entered into an agreement providing for the merger of GMC into a wholly-owned subsidiary of Genesis. The merger, and a related transaction with an affiliate of GMC, will add 19 long-term care facilities and eight residential care and independent living facilities with approximately 3,500 beds and certain ancillary businesses to Genesis. Under the terms of the merger agreement, unanimously approved by the board of directors of both companies, GMC shareholders would receive $5.75 per share in cash for each GMC share. The purchase price of GMC stock is approximately $91,000,000 and the total value of the transaction, including approximately $132,000,000 of assumed debt, is approximately $223,000,000. The Company expects to fund the cash portion of the transaction through its bank credit facility. Consummation of the transaction is expected in the fourth quarter of calendar 1996, and is subject to normal closing conditions, regulatory approvals and GMC shareholder approval. 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 operating lease agreements. The balance of the total consideration paid to National Health was funded with available cash ($51,800,000) and assumed debt ($7,900,000). National Health owns six eldercare centers in Florida with 863 beds, leases four eldercare centers in Florida with 368 beds, owns five eldercare centers in Virginia with 851 beds, and leases one eldercare center in Connecticut with 120 beds. National Health also provides enteral nutrition and rehabilitation therapy services to the eldercare centers which it owns and leases. In addition, National Health manages four eldercare centers in Colorado with 283 beds pursuant to an agreement which expires in October 1997. 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 all of the issued and outstanding stock and partnership interests of McKerley Health Care Centers, Inc., McKerley Health Care Center - Concord, Inc., McKerley Health Facilities and McKerley Health Care Center - Concord, L.P. (collectively, the "McKerley Entities"). The Company acquired the outstanding stock and partnership interests of the McKerley Entities for approximately $68,700,000, including assumed debt and after giving effect to the funds placed in escrow by the principals as described below. An additional $6,000,000 of purchase price is payable if certain financial objectives are achieved through October 1997. The transaction was financed with borrowings under the Company's bank credit facility. F-21 Pursuant to certain agreements executed on November 30, 1995, the Company directly or through one or more subsidiaries, agreed to provide certain services to the principals during the period ending November 30, 1998, and the principals agreed to make certain lease payments on behalf of the Company with respect to certain lease obligations of the McKerley Entities. As security for the principals' or their affiliates' obligation to make the required payments as they become due, the principals placed approximately $6,500,000 in an account with a third party escrow agent. The following unaudited pro forma 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 periods 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 pro forma financial information does not necessarily reflect the results of operations that would have occurred had the acquisitions occurred at the beginning of the periods presented.
(In thousands, except per share data) Nine Months Ended June 30, ------------------------- 1995 1996 ----------- ---------- Pro Forma Statement of Operations Information: Total net revenues ............................ $654,092 $723,109 Net income before extraordinary item and debenture conversion expense ................ 19,115 32,131 Primary earnings per share before extraordinary item and debenture conversion expense ....... .83 1.03 Fully diluted earnings per share before extraordinary item and debenture conversion expense ..................................... .77 .97
F-22 PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) The following Unaudited Pro Forma Condensed Consolidated Statement of Operations gives effect to: (i) the McKerley Transaction; (ii) the NeighborCare Transaction; (iii) the National Health Transaction; (iv) the 1996 Equity Offering and the application of the net proceeds therefrom; (v) the GMC Transaction; and (vi) the Offering and the application of the net proceeds therefrom, as if each had occurred at the beginning of the periods presented. The pro forma condensed statements of operations are based upon assumptions and include adjustments as described in the notes below. The pro forma information should be read in conjunction with the Company's historical consolidated financial statements, McKerley's historical combined financial statements, National Health's historical combined financial statements and GMC's historical combined financial statements. The column entitled "McKerley Historical Results" represents the historical combined results of McKerley for the year ended November 30, 1995. The column entitled "McKerley Historical Results" for the nine months ended June 30, 1996 represents the two months ended November 30, 1995. As a result of the differing year ends of Genesis and McKerley, the two months ended November 30, 1995 are included in both periods. The historical financial statements of NeighborCare for the year ended July 2, 1995 and the seven months ended April 30, 1996 are included in the columns "NeighborCare" in the tables below. The historical combined financial statements of National Health for the year ended December 31, 1995 and for the nine months ended June 30, 1996 are included in the columns "National Health" in the tables below. As a result of the differing year ends of Genesis and National Health, the three months ended December 31, 1995 is included in both periods. The column entitled "GMC Historical Results" for the year ended September 30, 1995 represents the historical results of GMC for the year ended May 31, 1995. The column entitled "GMC Historical Results" for the nine months ended June 30, 1996 represents the historical results of GMC for the nine months ended May 31, 1996. For purposes of this presentation, an effective tax rate of 37% has been assumed for McKerley, NeighborCare, National Health and GMC, for the historical results, and the resulting pro forma adjustments and offering adjustments. Such data is not necessarily indicative of the historical financial results that would have been achieved had the acquisitions occurred at the beginning of the periods presented or that may be expected to result in the future as a result of such transactions.
Year ended September 30, 1995 -------------------------------------------------------------------------------------------------------- National National Genesis McKerley McKerley NeighborCare NeighborCare Health Health Historical Historical Pro Forma Historical Pro Forma Historical Pro Forma Results Results Adjustments Results Adjustments Results Adjustments ---------- ---------- -------------- ------------ -------------- ---------- ------------ (In thousands, except per share data) Net revenues ......... $486,393 $57,266 $ 114 (A)(B)(C) $52,751 $ -- $108,785 $(22,949)(L)(P) Operating expense: Operating expenses other than depreciation, amortization and lease expense ............ 393,139 52,069 (6,063)(A)(D) 51,986 (1,849)(I)(K) 92,990 (26,435)(L)(O)(P) Depreciation and amortization ....... 18,793 1,900 1,079 (F) -- 2,547 (J) 4,055 1,067 (L)(M) Lease expense ........ 13,798 2,759 (1,244)(G) -- -- 3,176 4,716 (L)(N) Interest expense, net . 20,367 4,200 1,625 (A)(E) 1,276 1,880 (H) 6,177 (1,498)(L)(N) --------- --------- ---------- --------- -------- --------- -------- Earnings from operations before income taxes and extraordinary items . 40,296 (3,662) 4,717 (511) (2,578) 2,387 (799) --------- --------- ---------- --------- -------- --------- -------- Earnings from operations before extraordinary items .............. $ 25,531 $(2,307) $ 2,972 $ (322) $(1,624) $ 1,504 $(503) --------- --------- ---------- --------- -------- --------- -------- Fully diluted earnings per share before extraordinary items . $1.03 Weighted average common shares and equivalents 28,452 308 (H)
(RESTUBBED TABLE CONTINUED FROM ABOVE)
Pro Forma Pro Forma Consolidated Consolidated Genesis/McKerley/ Genesis/McKerley/ NeighborCare/ NeighborCare/ National Health National Health/ 1996 Results Adjusted GMC Results Equity for GMC GMC Adjusted for 1996 Offering 1996 Equity Historical Pro Forma Offering Equity Offering Adjustment Offering Results Adjustments Adjustment and Offering ----------- ------------------- ---------- ----------- ---------- ----------------- Net revenues ........... $ -- $682,360 $192,234 $ -- $ -- $874,594 Operating expense: Operating expenses other than depreciation, amortization and lease expense ............... -- 555,837 163,769 (617)(S)(T) -- 718,989 Depreciation and amortization .......... -- 29,441 8,734 -- -- 38,175 Lease expense .......... -- 23,205 -- -- -- 23,205 Interest expense, net .. (13,720)(Q) 20,307 14,666 4,987(S)(U) (2,368)(V) 37,592 --------- --------- ---------- -------- -------- -------- Earnings from operations before income taxes and extraordinary items ... 13,720 53,570 5,065 (4,370) 2,368 56,633 --------- --------- ---------- -------- -------- -------- Earnings from operations before extraordinary items ................. $ 8,644 $ 33,895 $ 3,191 $(2,753) $ 1,492 $ 35,825 --------- --------- ---------- -------- -------- -------- Fully diluted earnings per share before extraordinary items ... $1.12 Weighted average common shares and equivalents . 6,500 35,260
F-23
Nine Months ended June 30, 1996 --------------------------------------------------------------------------------------------------------- National National Genesis McKerley McKerley NeighborCare NeighborCare Health Health Historical Historical Pro Forma Historical Pro Forma Historical Pro Forma Results Results Adjustments Results Adjustments Results Adjustments ---------- ---------- ------------- - ------------ ------------- ---------- ------------- (In thousands, except per share data) Net revenues ......... $460,354 $ 9,671 $ 204(A)(B)(C) $39,765 $ -- $92,092 $(24,764)(L)(P) Operating expenses: Operating expenses other than depreciation, amortization and lease expense ............ 373,041 11,537 (3,820)(A)(D) 36,697 (1,078)(I)(K) 79,865 (27,635)(L)(O)(P) Debenture conversion expense ............ 1,245 -- -- -- -- -- -- Depreciation and amortization ....... 17,883 323 180 (F) 506 1,485(J) 3,556 286 (L)(M) Lease expense ........ 11,948 460 (207)(G) 857 -- 2,617 3,389 (L)(N) Interest expense, net . 19,104 1,158 (201)(A)(E) 1,171 671(H) 4,898 (1,432)(L)(N) --------- --------- -------- -------- -------- -------- ------- Earnings from operations before taxes and extraordinary items . 37,133 (3,807) 4,252 534 (1,078) 1,156 628 --------- --------- -------- -------- -------- -------- ------- Earnings from operations before extraordinary items .............. $ 23,759 $(2,398) $2,678 $ 336 $ (679) $ 728 $ 396 --------- --------- -------- -------- -------- -------- ------- Fully diluted earnings per share before extraordinary items and Debenture conversion expense . $0.91 Weighted average common shares and equivalents 29,359 239(H)
(RESTUBBED TABLE CONTINUED FROM ABOVE)
Pro Forma Consolidated Pro Forma Genesis/McKerley/ Consolidated NeighborCare/ Genesis/McKerley/ National Health/ 1996 NeighborCare/ GMC Results Equity National Health GMC GMC Adjusted for 1996 Offering Results Adjusted Historical Pro Forma Offering Equity Offering Adjustment for 1996 Equity Offering Results Adjustments Adjustment and Offering ---------- ------------------------ ---------- ---------------- ---------- ----------------- Net revenues ........... $ -- $577,322 $145,787 $ -- $ -- $723,109 Operating expenses: Operating expenses other than depreciation, amortization and lease expense ............... -- 468,607 125,455 (2,353)(R)(S)(T) 591,709 Debenture conversion expense ............... -- 1,245 -- -- -- 1,245 Depreciation and amortization .......... -- 24,219 6,537 -- -- 30,756 Lease expense .......... -- 19,064 -- -- -- 19,064 Interest expense, net .. (8,831)(Q) 16,538 12,408 2,210(R)(S)(U) (1,776)(V) 29,380 -------- --------- ---------- ------- -------- ------- Earnings from operations before taxes and extraordinary items ... 8,831 47,649 1,387 143 1,776 50,955 -------- --------- ---------- ------- -------- ------- Earnings from operations before extraordinary items ................. $ 5,563 $ 30,383 $ 874 $ 90 $ 1,119 $ 32,466 -------- --------- ---------- ------- -------- ------- Fully diluted earnings per share before extraordinary items and Debenture conversion expense ............... $1.01 Weighted average common shares and equivalents . 5,958 35,556
F-24 PRO FORMA ADJUSTMENTS ARE AS FOLLOWS: MCKERLEY TRANSACTION (A) The historical financial statements of McKerley include unusual, nonrecurring charges related to a provision to properly state certain insurance program liabilities, record a loss related to the termination of an interest rate swap agreement and to write off certain other long-term assets.
Year Ended Nine Months Ended September 30, 1995 June 30, 1996 ------------------ ----------------- (In thousands) Revenues, net ......................................... $ 204 $ 204 Operating expenses other than depreciation, amortization and lease expense ....................... (3,248) (3,248) Interest expense, net ................................. $ (566) $ (566)
(B) Effective October 1, 1995 the State of New Hampshire issued a reduction in payment rates under the Medical Assistance program. The annualized impact of this rate reduction is approximately $1,500,000.
Year Ended Nine Months Ended September 30, 1995 June 30, 1996 ------------------ ----------------- (In thousands) Revenues, net ................ $(1,500) --
(C) The former owners have agreed to pay certain Genesis subsidiaries for marketing and other services for approximately two years with annual payments of approximately $900,000. The former owners also agreed to lease 30,000 square feet of office space from the Company for approximately two years at an annual rate of $510,000. Year Ended Nine Months Ended September 30, 1995 June 30, 1996 ------------------ ----------------- (In thousands) Revenues, net ............. $1,410 -- (D) As a result of the McKerley Transaction, corporate overhead functions related to the prior owners, certain nursing staff and regional management of the nursing facilities will be merged. The Company has identified duplicative positions and the costs associated with such positions, and plans to eliminate these costs according to a transition plan within one year of the acquisition. Salary costs and other payments associated with certain McKerley principals who will not be joining Genesis have been identified and eliminated, as well as costs associated with other management positions which have already been vacated and will not be replaced. Support staff associated with these positions have also been eliminated. The components of the savings expected upon merging McKerley's operations into Genesis are as follows:
Annual Cost Nine Months Cost ------------- ---------------- (In thousands) Principal salaries, payments and cost of support personnel .............................................. $(1,693) $(418) Management to be eliminated due to overlap, and vacated management positions not to be replaced ................ (622) (104) Personnel reduction in operating staff to eliminate duplicative positions .................................. (500) (50) ------------- ---------------- $(2,815) $(572) ============= ================
F-25 The impact of the savings has been reflected in a pro forma adjustment as follows:
Year Ended Nine Months Ended September 30, 1995 June 30, 1996 ------------------ ----------------- (In thousands) Operating expenses other than depreciation, amortization and lease expense ....................... $(2,815) $(572)
(E) The McKerley Transaction was financed with borrowings under the Company's bank credit facilities aggregating approximately $68,700,000. The Company has repaid approximately $27,000,000 of assumed McKerley debt. The Company has also assumed a mortgage obligation of approximately $9,100,000 which was not immediately repaid. Interest rate assumptions are 7.25% for the Company's borrowing under its bank credit facilities.
Year Ended Nine Months Ended September 30, 1995 June 30, 1996 ------------------ ----------------- (In thousands) Interest expense, net: Interest expense -- bank facilities ............... $ 4,930 $ 822 Elimination of historical McKerley remaining interest expense ............................... (2,739) (457) ------------------ ----------------- $ 2,191 $ 365 ================== =================
(F) In accordance with generally accepted accounting principles, the net assets acquired are recorded at the lower of purchase price or fair value. The estimated fair value adjustments have been determined based on the most recent information available. The resultant excess of purchase price over fair value of net assets acquired is required to be amortized. The pro forma adjustment to reflect the increased depreciation and amortization is as follows:
Year Ended Nine Months Ended September 30, 1995 June 30, 1996 ------------------ ----------------- (In thousands) Depreciation and amortization expense... $1,079 $180
(G) The former owners have agreed to make certain lease payments on behalf of the Company with respect to certain lease obligations of the McKerley entities. The following pro forma adjustment reflects the impact of recognizing the resulting lease expense on a straight line basis over the remaining lease term:
Year Ended Nine Months Ended September 30, 1995 June 30, 1996 ------------------ ----------------- (In thousands) Lease expense .......... $(1,244) $(207)
F-26 NEIGHBORCARE TRANSACTION (H) A portion of the NeighborCare Transaction will be financed with borrowings under the Company's bank credit facilities aggregating approximately $47,250,000. Genesis expects to repay approximately $18,000,000 of NeighborCare debt assumed in the transaction. Interest rate assumptions are 6.8% for the Company's borrowings under its credit facilities.
Year Ended Nine Months Ended September 30, 1995 June 30, 1996 ------------------ ----------------- (In thousands) Interest expense, net: Interest expense -- bank facilities ............... $ 3,171 $ 1,842 Elimination of historical NeighborCare remaining interest expense ............................... (1,291) (1,171) ------------------ ----------------- $ 1,880 $ 671 ================== =================
Adjustment to reflect the issuance of $10,000,000 of Genesis Common Stock as a portion of the consideration. The stock issuance price has been estimated at $32.50 per share resulting in the issuance of 307,692 shares. (I) As a result of the NeighborCare Transaction, corporate and administrative overhead functions related to the prior ownership structure will be merged. Accordingly, Genesis has identified duplicative physical locations which will be merged into existing Genesis pharmacy and medical supply locations.
Annual Cost Nine Months Cost ------------- ---------------- (In thousands) Consolidation of institutional pharmacy locations ....... $ (300) $(175) Consolidation of medical supply division ................ (300) (175) Personnel reduction in operating staff to eliminate duplicative positions .................................. (615) (360) Other operating costs including legal and accounting fees, advertising and office expense ................... (474) (275) ------------- ---------------- $(1,689) $(985) ============= ================
The impact of the savings has been reflected in a pro forma adjustment as follows:
Year Ended Nine Months Ended September 30, 1995 June 30, 1996 ------------------ ----------------- (In thousands) Operating expenses other than depreciation, amortization and lease expense ....................... $(1,689) $(985)
(J) In accordance with generally accepted accounting principles, the net assets acquired are recorded at the lower of purchase price or fair value. The estimated fair value adjustments have been determined based on the most recent information available. The resultant excess of purchase price over fair value of net assets acquired is required to be amortized. The elimination of historical depreciation expense is the result of certain assets not being acquired by Genesis. The pro forma adjustment to reflect the net increased depreciation and amortization is as follows:
Year Ended Nine Months Ended September 30, 1995 June 30, 1996 ------------------ ----------------- (In thousands) Impact of step-up and allocation of goodwill . $2,706 $1,578 Elimination of historical depreciation expense (159) (93) ------------------ ----------------- Depreciation and amortization ................ $2,547 $1,485 ================== =================
F-27 (K) In connection with the NeighborCare Transaction, certain corporate office and furniture and fixture leases will be terminated. The pro forma adjustment to reflect this is as follows:
Year Ended Nine Months Ended September 30, 1995 June 30, 1996 ------------------ ----------------- (In thousands) Operating expenses other than depreciation, amortization and lease expense ....................... $(160) $(93)
NATIONAL HEALTH TRANSACTION (L) In connection with the National Health Transaction certain assets and liabilities were not acquired by Genesis. Additionally, certain businesses, including home health care, infusion therapy and assisted living facilities in New York State were not acquired. The statement of operations data from these assets is presented in a pro forma footnote below:
Year Ended Nine Months Ended September 30, 1995 June 30, 1996 ------------------ ----------------- (In thousands) Net Revenues ......................................... $(24,949) $(26,264) Operating expenses other than depreciation, amortization and lease expense ...................... (27,375) (28,340) Depreciation and amortization ........................ (1,290) (1,453) Lease expense ........................................ (233) (323) Interest expense, net ................................ (1,124) (1,151)
(M) In accordance with generally accepted accounting principles, the net assets acquired are recorded at the lower of the purchase price or fair value. The estimated fair value adjustments have been determined based on the most recent information available. The resultant excess of purchase price over fair value of net assets acquired is required to be amortized. The pro forma adjustment to reflect the increased depreciation and amortization is as follows:
Year Ended Nine Months Ended September 30, 1995 June 30, 1996 ------------------ ----------------- (In thousands) Depreciation and amortization...... $2,357 $1,739
(N) The National Health Transaction was financed by Genesis with borrowings under its bank credit facilities aggregating approximately $51,800,000. Genesis repaid approximately $36,200,000 of indebtedness assumed upon consummation of the transaction. The Company also assumed mortgage obligations of approximately $7,900,000 which were not repaid. Interest rate assumptions are 6.8% for the Company's borrowing under its bank credit facilities. Prior to the closing of the stock acquisitions, an affiliate of a financial institution purchased nine of the National Health eldercare centers and subsequently leased the centers to a subsidiary of Genesis under operating lease agreements.
Year Ended Nine Months Ended September 30, 1995 June 30, 1996 ------------------ ----------------- (In thousands) Interest expense, net: Interest expense-bank facility .................. $ 3,619 $ 2,714 Elimination of historical National Health remaining expense ............................ (3,993) (2,995) ------------------ ----------------- $ (374) $ (281) ================== ================= Lease expense ................................... $ 4,949 $ 3,712
F-28 (O) Genesis has identified certain cost saving opportunities in connection with the National Health Transaction. The Company has identified duplicative positions and the costs associated with such positions, and plans to eliminate these costs according to a transition plan within one year of the acquisition.
Year Ended Nine Months Ended September 30, 1995 June 30, 1996 ------------------ ----------------- (In thousands) Reduction in contract labor services .................... $(108) $ (81) Personnel reduction in operating staff to eliminate duplicative positions .................................. (252) (189) ------------------ ----------------- $(360) $(270) ================== =================
(P) Genesis has identified certain revenue synergies relating to its pharmacy, medical supply and group purchasing businesses. These services are currently not provided by Genesis to National Health facilities nor does National Health have the businesses to deliver these services.
Year Ended Nine Months Ended September 30, 1995 June 30, 1996 ------------------ ----------------- (In thousands) Revenues, net ........................................ $2,000 $1,500 Operating expenses other than depreciation, amortization and lease expense ...................... 1,300 975 ------------------ ----------------- Net impact ......................................... $ 700 $ 525 ================== =================
1996 EQUITY OFFERING ADJUSTMENT (Q) Adjustment to reflect the application of the net proceeds of the 1996 Equity Offering to repay indebtedness under the Company's bank credit facilities which currently bear interest at a weighted average annual rate of approximately 6.8%. Year Ended Nine Months Ended September 30, 1995 June 30, 1996 ------------------ ----------------- (In thousands) Interest, net .......... $(13,720) $(8,831) GMC TRANSACTION (R) The historical financial statements of GMC include unusual, non-recurring charges related to a provision to increase allowance for doubtful accounts, the settlement of a matter relating to reimbursement for nutritional services provided at a nursing facility previously managed by a GMC subsidiary and an amount recorded relating to a class action suit. The historical financial statements also include non-recurring charges related to additional interest incurred under GMC's credit facility and a discount on a note receivable.
Year Ended September 30, Nine Months Ended 1995 June 30, 1996 ----------------- ----------------- (In thousands) Operating expenses other than depreciation, amortization and lease expense ....................... -- $(2,300) Interest, net ......................................... -- (1,121)
F-29 (S) The historical financial results include a provision for costs on the sale of accounts receivable, which is included in the interest expense line item. The following pro forma adjustment represents the reclassification of the portion of the provision that relates to operating expenses:
Year Ended September 30, Nine Months Ended 1995 June 30, 1996 ----------------- ----------------- (In thousands) Operating expenses other than depreciation, amortization and lease expense ....................... $ 1,383 $ 1,447 Interest expense, net ................................. (1,383) (1,447)
(T) As a result of the GMC Transaction, certain corporate and administrative overhead functions related to the prior ownership structure will be merged. Genesis has identified duplicative physical locations which will be merged into existing Genesis administrative locations.
Nine Months Annual Cost Cost ------------ --------------- (In thousands) Personnel reduction in operating staff to eliminate duplicative position ................................... $(1,000) $ (750) Other operating costs including legal and accounting fees, advertising and office expense ................... (1,000) (750) ---------- -------- $(2,000) $(1,500) ========== ========
The impact of the savings have been reflected in a pro forma adjustment as follows:
Year Ended September 30, Nine Months Ended 1995 June 30, 1996 ----------------- ----------------- (In thousands) Operating expenses other than depreciation, amortization and lease expense ....................... $(2,000) $(1,500)
(U) A portion of the purchase price was financed with borrowings under the Company's bank credit facility of approximately $91,000,000. Interest rate assumptions are 6.8% for the Company's borrowings: Year Ended September 30, Nine Months Ended 1995 June 30, 1996 ----------------- ----------------- (In thousands) Interest expense -- bank facilities ..................... $6,370 $4,778 OFFERING ADJUSTMENT (V) Adjustment to reflect the application of the net proceeds of the Offering to repay a portion of assumed GMC term indebtedness ($108,000,000 at a weighted average rate of 12.25%) and other GMC indebtedness ($10,000,000 at a weighted average rate of 7%). The assumed rate of this Offering is 9.25%. Year Ended Nine Months Ended September 30, 1995 June 30, 1996 ----------------- ----------------- (In thousands) Interest expense, net: Interest expense -- offering ... $ 11,562 $ 8,672 Eliminate historical interest expense ...................... (13,930) (10,448) ---------- ----------- $ (2,368) $ (1,776) =========== =========== F-30 PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) The following unaudited pro forma condensed consolidated balance sheet includes the historical consolidated condensed balance sheet of the Company at June 30, 1996 and the pro forma adjustments to reflect the National Health Transaction, the GMC Transaction, as adjusted to reflect the Offering and the application of the estimated net proceeds as if they occurred on June 30, 1996. The pro forma adjustments should be read in conjunction with the Company's historical consolidated financial statements, National Health's historical combined financial statements and GMC's historical combined financial statements.
Pro Forma, As Adjusted Pro Forma Consolidated National Pro Forma Genesis/ National Health GMC National Genesis Health Adjustments GMC Adjustments Health/GMC -------- --------- ------------ --- ------------ ------------- (In thousands) Current assets................. $297,009 $23,401 $(9,108)(A) $75,834 $ -- $387,136 Property and equipment, net .. 313,388 58,608 7,346 (A)(D) 93,042 73,325(E) 545,709 Other assets ................. 267,951 13,795 (7,426)(A)(D) 22,808 44,000(E) 341,128 ------- ------ ------ ------ ------ ------- Total assets ................. $878,348 $95,804 $(9,188) $191,684 $117,325 $1,273,973 ======== ======= ======= ======== ======== ========== Current liabilities .......... $ 69,410 $21,777 $(3,349)(A)(B)(C) $ 37,951 $ (5,820)(F)(G) $ 119,969 Long term debt, excluding current maturities .......... 295,897 68,826 (1,158)(A)(B) 130,775 101,025 (G) 595,365 Other liabilities ............ 12,803 -- 520 (C) 4,078 41,000 (E) 58,401 Shareholders' equity ......... 500,238 5,201 (5,201)(A)(D) 18,880 (18,880)(E) 500,238 ------- ------ ------ ------ ------ ------- Total liabilities and shareholders' equity ........ $878,348 $95,804 $(9,188) $191,684 $117,325 $1,273,973 ======== ======= ======= ======== ======== ==========
Pro forma adjustments are as follows: NATIONAL HEALTH TRANSACTION (A) The assets and liabilities of National Health not acquired or assumed by Genesis in the National Health Transaction are eliminated in a pro forma adjustment as follows: (In thousands) Current assets ...................................... $(9,108) Property and equipment ............................. (9,686) Other assets ....................................... (11,141) ------- Total assets ....................................... $(29,935) ======== Current liabilities ................................ $ (5,249) Long term debt, excluding current maturities ....................................... (16,758) Other liabilities ................................. -- Shareholders' equity .............................. (7,928) ------- Total liabilities and shareholders' equity $(29,935) ======== (B) The National Health Transaction was financed by Genesis with borrowings under its bank credit facilities of approximately $51,800,000 which includes the repayment of approximately $36,200,000. Additionally, Genesis assumed existing indebtedness of approximately $7,900,000 which was not repaid immediately. The impact of the borrowings under the bank credit facilities is reflected in the following pro forma adjustment: (In thousands) Current liabilities ..................................... $ (100) Long term debt, excluding current maturities ........... 15,600 F-31 (C) Transaction costs which include professional fees, duplicative salary costs and severance, taxes and title costs and certain other costs incurred or to be incurred in order to consummate the transaction will be accrued, net of tax benefits, in the amount of $2,520,000. The following pro forma adjustment represents the accrual for these costs: (In thousands) Current liabilities ......................................... $2,000 Other liabilities .......................................... 520 (D) Purchase accounting adjustments include the following allocations: (In thousands) Property and equipment, net .................................. $17,032 Other assets ................................................ 3,715 Shareholders' equity ........................................ 2,727 GMC TRANSACTION (E) Purchase accounting adjustments include the following allocations: (In thousands) Property and equipment, net .............................. $72,345 Other assets ............................................ 44,000 Other liabilities ....................................... 41,000 Shareholders' equity .................................... (18,880) (F) Transaction costs which include professional fees, duplicative salary costs and severance, taxes and title costs and certain other costs incurred or to be incurred in order to consummate the transaction will be accrued in the amount of $8,000,000. The following pro forma adjustment represents the accrual for these costs: (In thousands) Current liabilities ....................................... $8,000 (G) The GMC Transaction was financed by the payment of $93,900,000 representing the equity purchase price, the repayment of approximately $90,000,000 of existing indebtedness and the assumption of approximately $47,900,000 of other indebtedness. The following pro forma adjustment represents the incremental debt incurred in the transaction and reflects the repayment of certain GMC indebtedness with the net proceeds of the Offering: (In thousands) Current liabilities ..................................... $ (8,820) Long-term debt .... .................................... 101,025 F-32 No dealer, salesperson or other individual has been authorized to give any information or make any representations other than those contained or incorporated by reference in this Prospectus in connection with the offer made by this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, the Exchange Notes in any jurisdiction where, or to any person to whom, it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has not been any change in the facts set forth in this Prospectus or in the affairs of the Company since the date hereof. ---------------- TABLE OF CONTENTS Page Summary....................................................1 Cautionary Statement Regarding Forward Looking Statements..............................13 Risk Factors..............................................13 Use of Proceeds...........................................17 Capitalization............................................18 Exchange Offer............................................19 Certain Federal Income Tax Consequences...................28 Selected Consolidated Financial Data .....................29 Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................31 Business..................................................39 Management................................................50 Description of the Notes..................................54 Plan of Distribution......................................83 Legal Matters.............................................83 Experts...................................................84 Available Information.....................................84 Index to Financial Statements............................F-1 Until , 1996 all dealers effecting transactions in the Notes offered hereby, whether or not participating in this distribution, may be required to deliver a Prospectus. GENESIS HEALTH VENTURES, INC. PROSPECTUS Offer to Exchange its 9 1/4Senior Subordinated Notes due 2006, which have been registered under the Securities Act of 1933, as amended, for any and all of its outstanding 9 1/4Senior Subordinated Notes due 2006 , 1996 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers. Sections 1741 through 1750 of Chapter 17, Subchapter D, of the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL") contain provisions for mandatory and discretionary indemnification of a corporation's directors, officers and other personnel, and related matters. Under Section 1741, subject to certain limitations, a corporation has the power to indemnify directors and officers under certain prescribed circumstances against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with an action or proceeding, whether civil, criminal, administrative or investigative, to which any of them is a party by reason of his being a representative, director or officer of the corporation or serving at the request of the corporation as a representative of another corporation, partnership, joint venture, trust or other enterprise, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Under Section 1743, indemnification of expenses actually and reasonably incurred is mandatory to the extent that the officer or director has been successful on the merits or otherwise in defense of any action or proceeding. Section 1742 provides for indemnification in derivative actions except in respect of any claim, issue or matter as to which the person has been adjudged to be liable to the corporation unless and only to the extent that the proper court determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for the expenses that the court deems proper. Section 1744 provides that, unless ordered by a court, any indemnification under Section 1741 or 1742 shall be made by the corporation only as authorized in the specific case upon a determination that the representative met the applicable standard of conduct, and such determination will be made by the board of directors (i) by a majority vote of a quorum of directors not parties to the action or proceeding; (ii) if a quorum is not obtainable, or if obtainable and a majority vote of a quorum of disinterested directors so directs, by independent legal counsel; or (iii) by the shareholders. Section 1745 provides that expenses incurred by an officer, director, employee or agent in defending a civil or criminal action or proceeding may be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. Section 1746 provides generally that, except in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness, the indemnification and advancement of expenses provided by Subchapter 17D of the BCL shall not be deemed exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of shareholders of disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding that office. II-1 Section 1747 also grants to a corporation the power to purchase and maintain insurance on behalf of any director or officer against any liability incurred by him or her in his or her capacity as officer or director, whether or not the corporation would have the power to indemnify him or her against the liability under Subchapter 17D of the BCL. Section 1748 and 1749 extend the indemnification and advancement of expenses provisions contained in Subchapter 17D of the BCL to successor corporations in fundamental changes and to representatives serving as fiduciaries of employee benefit plans. Section 1750 provides that the indemnification and advancement of expenses provided by, or granted pursuant to, Subchapter 17D of the BCL, shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs and personal representative of such person. For information regarding provisions under which a director or officer of the Company may be insured or indemnified in any manner against any liability which he or she may incur in his or her capacity as such, reference is made to Article III of the Company's Bylaws, which provides in general that the Company shall indemnify its officers and directors to the fullest extent authorized by law. The Company also provides insurance coverage to its directors and officers for up to $20 million. Item 21. Exhibits Exhibit No. Description - -------------- ------------------------------------------------------------- 2.1(1) Agreement and Plan of Reorganization, dated September 19, 1993, by and among Genesis Health Ventures, Inc., a Pennsylvania corporation, MI Acquisition Corporation, a Pennsylvania corporation and a wholly-owned subsidiary of Genesis, MHC Acquisition Corporation, a Pennsylvania corporation and a wholly-owned subsidiary of Genesis, PEI Acquisition Corporation, a Pennsylvania corporation and wholly-owned subsidiary of Genesis, TW Acquisition Corporation, a Pennsylvania corporation and a wholly-owned subsidiary of Genesis, SRS Acquisition, a Pennsylvania corporation and a wholly-owned subsidiary of Genesis, Meridian Healthcare, Inc., a Maryland corporation, Meridian Inc., a Maryland corporation, Pharmacy Equities, Inc., a Maryland corporation, The Tidewater Healthcare Shared Services Group, Inc., a Maryland corporation, Staff Replacement Services, Inc., a Maryland corporation, Michael J. Batza, Jr., Edward A. Burchell, Earl L. Linehan, Roger C. Lipitz and Arnold I. Richman (collectively, the "Reorganization Agreement"). 2.2(2) Amended and Restated Amendment to Reorganization Agreement dated November 23, 1993. 2.3(3) Agreement made as of the 18th day of August 1995 by and among Genesis Health Ventures, Inc., a Pennsylvania corporation, and Accumed, Inc., a New Hampshire corporation, McKerley Health Care Centers, Inc., a New Hampshire corporation, McKerley Health Care Center -- Concord, Inc., a New Hampshire corporation, McKerley Health Facilities, a New Hampshire general partnership and McKerley Health Care Center -- Concord, L.P., a New Hampshire limited partnership (collectively, the "McKerley Agreement"). 2.4(4) Amendment Number One to McKerley Agreement dated November 30, 1995. II-2 2.5(5) Stock Purchase Agreement dated April 21, 1996, by and among Genesis Health Ventures, Inc., a Pennsylvania corporation and NeighborCare Pharmacies, Inc., a Maryland corporation, Professional Pharmacy Services, Inc., a Maryland corporation, Medical Services Group, Inc., a Maryland corporation, CareCard, Inc., a Maryland corporation, Transport Services, Inc., a Maryland corporation, Michael G. Bronfein, Jessica Bronfein, Stanton G. Ades, Renee Ades, The Chase Manhattan Bank, N.A. and PPS Acquisition Corp., a Maryland corporation and a wholly-owned subsidiary of Genesis. 2.6(5) Merger Agreement dated April 21, 1996, by and among Genesis Health Ventures, Inc., a Pennsylvania corporation, Professional Pharmacy Services, Inc., a Maryland corporation, PPS Acquisition Corp., a Maryland corporation and a wholly-owned subsidiary of Genesis, and The Chase Manhattan Bank, N.A. 2.7(6) Purchase Agreement dated as of May 3, 1996, by and among Mark E. Hamister, Oliver C. Hamister, George E. Hamister, Julia L. Hamister, The George E. Hamister Trust, and The Oliver C. Hamister Trust, National Health Care Affiliates, Inc., Oak Hill Health Care Center, Inc., Derby National Center Corporation, Delaware Avenue Partnership, EIDOS, Inc., VersaLink, Inc., each of the individuals identified in Schedule A to the Purchase Agreement, Sal H. Alfiero, Gerald S. Lippes and Genesis Health Ventures, Inc. 2.8(7) Agreement to purchase Partnership Interests, made as of March 1, 1996, by and among Meridian Health, Inc., Fairmont Associates, Inc. and MHC Holding Company. 2.9(7) Purchase and Sale Agreement, dated January 16, 1996, by and among Genesis Health Ventures of Indiana, Inc. and Hallmark Healthcare Limited Partnership, as seller, and Hunter Acquisitions, L.L.C., as purchaser. 2.10(8) Agreement and Plan of Merger, dated as of July 11, 1996, by and among Genesis Health Ventures, Inc., a Pennsylvania corporation, G Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Genesis, and Geriatric & Medical Companies, Inc., a Delaware corporation. 4.1 Form of 9 1/4% Senior Subordinated Notes Due 2006. 4.2 Indenture dated as of October 7, 1996 between the Company and First Union National Bank, as trustee. 4.3 Registration Rights Agreement dated October 7, 1996 among the Company and the Initial Purchasers. 5 Opinion of Blank Rome Comisky & McCauley. 23.1 Consent of KPMG Peat Marwick LLP. 23.2 Consents of Ernst & Young LLP. -II-3 23.3 Consent of BDO Seidman LLP. 23.4 Consent of Blank Rome Comisky & McCauley (included in the opinion filed as Exhibit 5 hereto). 24.1 Power of Attorney (included on Page II-6). 25.1 Statement of Eligibility of Trustee on Form T-1. - ---------- (1) Incorporated by reference to Form 8-K dated September 19, 1993. (2) Incorporated by reference to Form 8-K/A dated November 30, 1993. (3) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 33-40007). (4) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 33-51670). (5) Incorporated by reference to Form 8-K dated April 21, 1996. (6) Incorporated by reference to Form 8-K dated May 3, 1996. (7) Incorporated by reference to Form 10-Q for the period ended March 31, 1996. (8) Incorporated by reference to Form 8-K/A dated July 11, 1996. Item 22. Undertakings. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; II-4 (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement: Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the registration statement is on Form S-3 or Form S-8, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally promptly means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. II-5 SIGNATURES AND POWER OF ATTORNEY Pursuant to the requirements of the Securities Act, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Kennett Square, Commonwealth of Pennsylvania, on October 31, 1996. GENESIS HEALTH VENTURES, INC. By: /s/ Michael R. Walker ---------------------- Michael R. Walker Chairman, Chief Executive Officer and Director KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael R. Walker and Richard R. Howard, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution or resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Registration Statement, and to file the same, with all exhibits thereto, and other documentation in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated.
Signature Capacity Date - ---------------------------------------- ---------------------------------------- ---------------------------------- /s/ Michael R. Walker Chairman, Chief Executive Officer and October 31, 1996 -------------------------- Director Michael R. Walker /s/ Richard R. Howard President, Chief Operating Officer and October 31, 1996 - ----------------------------- Director Richard R. Howard _____________________________ Director Allen R. Freedman /s/ Samuel H. Howard Director October 31, 1996 - ----------------------------- Samuel H. Howard /s/ Roger C. Lipitz Director October 31, 1996 - ----------------------------- Roger C. Lipitz /s/ Stephen E. Luongo Director October 31, 1996 - ----------------------------- Stephen E. Luongo /s/ Alan B. Miller Director October 31, 1996 - ----------------------------- Alan B. Miller /s/ Fred F. Nazem Director October 31, 1996 - ----------------------------- Fred F. Nazem /s/ George V. Hager, Jr. Senior Vice President and Chief October 31, 1996 - ----------------------------- Financial Officer George V. Hager, Jr. /s/ Edward J. Boeggeman Vice President and Controller October 31, 1996 - ----------------------------- Edward J. Boeggeman
II-6 EXHIBIT INDEX Exhibit No. Description - -------------- ------------------------------------------------------------- 2.1(1) Agreement and Plan of Reorganization, dated September 19, 1993, by and among Genesis Health Ventures, Inc., a Pennsylvania corporation, MI Acquisition Corporation, a Pennsylvania corporation and a wholly-owned subsidiary of Genesis, MHC Acquisition Corporation, a Pennsylvania corporation and a wholly-owned subsidiary of Genesis, PEI Acquisition Corporation, a Pennsylvania corporation and wholly-owned subsidiary of Genesis, TW Acquisition Corporation, a Pennsylvania corporation and a wholly-owned subsidiary of Genesis, SRS Acquisition, a Pennsylvania corporation and a wholly-owned subsidiary of Genesis, Meridian Healthcare, Inc., a Maryland corporation, Meridian Inc., a Maryland corporation, Pharmacy Equities, Inc., a Maryland corporation, The Tidewater Healthcare Shared Services Group, Inc., a Maryland corporation, Staff Replacement Services, Inc., a Maryland corporation, Michael J. Batza, Jr., Edward A. Burchell, Earl L. Linehan, Roger C. Lipitz and Arnold I. Richman (collectively, the "Reorganization Agreement"). 2.2(2) Amended and Restated Amendment to Reorganization Agreement dated November 23, 1993. 2.3(3) Agreement made as of the 18th day of August 1995 by and among Genesis Health Ventures, Inc., a Pennsylvania corporation, and Accumed, Inc., a New Hampshire corporation, McKerley Health Care Centers, Inc., a New Hampshire corporation, McKerley Health Care Center -- Concord, Inc., a New Hampshire corporation, McKerley Health Facilities, a New Hampshire general partnership and McKerley Health Care Center -- Concord, L.P., a New Hampshire limited partnership (collectively, the "McKerley Agreement"). 2.4(4) Amendment Number One to McKerley Agreement dated November 30, 1995. 2.5(5) Stock Purchase Agreement dated April 21, 1996, by and among Genesis Health Ventures, Inc., a Pennsylvania corporation and NeighborCare Pharmacies, Inc., a Maryland corporation, Professional Pharmacy Services, Inc., a Maryland corporation, Medical Services Group, Inc., a Maryland corporation, CareCard, Inc., a Maryland corporation, Transport Services, Inc., a Maryland corporation, Michael G. Bronfein, Jessica Bronfein, Stanton G. Ades, Renee Ades, The Chase Manhattan Bank, N.A. and PPS Acquisition Corp., a Maryland corporation and a wholly-owned subsidiary of Genesis. 2.6(5) Merger Agreement dated April 21, 1996, by and among Genesis Health Ventures, Inc., a Pennsylvania corporation, Professional Pharmacy Services, Inc., a Maryland corporation, PPS Acquisition Corp., a Maryland corporation and a wholly-owned subsidiary of Genesis, and The Chase Manhattan Bank, N.A. 2.7(6) Purchase Agreement dated as of May 3, 1996, by and among Mark E. Hamister, Oliver C. Hamister, George E. Hamister, Julia L. Hamister, The George E. Hamister Trust, and The Oliver C. Hamister Trust, National Health Care Affiliates, Inc., Oak Hill Health Care Center, Inc., Derby National Center Corporation, Delaware Avenue Partnership, EIDOS, Inc., VersaLink, Inc., each of the individuals identified in Schedule A to the Purchase Agreement, Sal H. Alfiero, Gerald S. Lippes and Genesis Health Ventures, Inc. 2.8(7) Agreement to purchase Partnership Interests, made as of March 1, 1996, by and among Meridian Health, Inc., Fairmont Associates, Inc. and MHC Holding Company. 2.9(7) Purchase and Sale Agreement, dated January 16, 1996, by and among Genesis Health Ventures of Indiana, Inc. and Hallmark Healthcare Limited Partnership, as seller, and Hunter Acquisitions, L.L.C., as purchaser. 2.10(8) Agreement and Plan of Merger, dated as of July 11, 1996, by and among Genesis Health Ventures, Inc., a Pennsylvania corporation, G Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Genesis, and Geriatric & Medical Companies, Inc., a Delaware corporation. 4.1 Form of 9 1/4% Senior Subordinated Notes Due 2006. 4.2 Indenture dated as of October 7, 1996 between the Company and First Union National Bank, as trustee. 4.3 Registration Rights Agreement dated October 7, 1996 among the Company and the Initial Purchasers. 5 Opinion of Blank Rome Comisky & McCauley. 23.1 Consent of KPMG Peat Marwick LLP. 23.2 Consents of Ernst & Young LLP. 23.3 Consent of BDO Seidman LLP. 23.4 Consent of Blank Rome Comisky & McCauley (included in the opinion filed as Exhibit 5 hereto). 24.1 Power of Attorney (included on Page II-6). 25.1 Statement of Eligibility of Trustee on Form T-1. - ---------- (1) Incorporated by reference to Form 8-K dated September 19, 1993. (2) Incorporated by reference to Form 8-K/A dated November 30, 1993. (3) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 33-40007). (4) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 33-51670). (5) Incorporated by reference to Form 8-K dated April 21, 1996. (6) Incorporated by reference to Form 8-K dated May 3, 1996. (7) Incorporated by reference to Form 10-Q for the period ended March 31, 1996. (8) Incorporated by reference to Form 8-K/A dated July 11, 1996. EX-4.1 2 FORM OF EXCHANGE NOTE [FORM OF FACE OF EXCHANGE NOTE] No.___________________ $_____________ GENESIS HEALTH VENTURES, INC. 9 1/4% Senior Subordinated Note due 2006 GENESIS HEALTH VENTURES, INC., a corporation duly organized and validly existing under the laws of the Commonwealth of Pennsylvania (herein called the "Company", which term includes any successor corporation under the Indenture referred to on the reverse hereof), for value received hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of _________________________________ United States dollars on October 1, 2006 at the office or agency of the Company maintained for that purpose in New York, New York, and to pay interest thereon at the rate per annum specified on this Note. The Company will pay interest semi-annually on April 1 and October 1 of each year (the "Interest Payment Date"). Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from October 7, 1996; provided that the first interest payment date shall be April 1, 1997. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Note is registered at the close of business on the Record Date for such interest, which shall be March 15 or September 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid, or duly provided for, and interest on such defaulted interest at the interest rate borne by the Notes, to the extent lawful, shall forthwith cease to be payable to the Noteholder on such Record Date, and may be paid to the Person in whose name this Note is registered at the close of business on a special record date which date shall be the fifteenth day next preceding the date fixed by the Company for the payment of defaulted interest or the next succeeding Business Day if such date is not a Business Day. The Company shall, by written notice to the Trustee, fix each such special record date and payment date. At least 15 days before the special record date, the Company (or the Trustee, in the name of and at the expense of the Company) shall mail to each Noteholder, with a copy to the Trustee, a notice that states the subsequent special record date, the payment date and the amount of defaulted interest, and interest payable on such defaulted interest, if any, to be paid. If this Note is a Global Note, all payments in respect of this Note will be made to the Depository or its nominee in immediately available funds in accordance with customary procedures established from time to time by the Depository. If this Note is not a Global Note, payment of the principal of, premium, if any, and interest on this Note will be made at the office or agency of the Company maintained for that purpose in the City of New York, or at such other office or agency of the Company as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the address of the Person entitled thereto as such address shall appear on the Note Register. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. Reference is made to the further provisions of this Note set forth on the reverse hereof, including, without limitation, provisions subordinating the payment of principal of and premium if any, and interest on the Notes to all Senior Indebtedness, and provisions giving the holder of this Note the right to require the Company to repurchase this Note upon any Change in Control, in each case on the terms and subject to the limitations referred to on the reverse hereof and as more fully specified in the Indenture. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. THIS NOTE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID STATE. This Note shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by the Trustee under the Indenture referred to on the reverse hereof. IN WITNESS WHEREOF, GENESIS HEALTH VENTURES, INC. has caused this instrument to be duly executed under its corporate seal. Dated: GENESIS HEALTH VENTURES, INC. By:__________________________ Chief Executive Officer [Corporate Seal] Attest: _____________________ Secretary [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This is one of the Notes described in the within-mentioned Indenture. FIRST UNION NATIONAL BANK, as Trustee By______________________________ Authorized Officer [FORM OF REVERSE OF EXCHANGE NOTE] GENESIS HEALTH VENTURES, INC. 9 1/4% SENIOR SUBORDINATED NOTE DUE 2006 This Note is one of a duly authorized issue of Notes of the Company known as its 9 1/4% Senior Subordinated Notes due 2006 (herein referred to as the "Notes"), limited to the aggregate principal amount of $125,000,000, all issued or to be issued under and pursuant to an indenture, dated as of October 7, 1996 (herein referred to as the "Indenture"), duly executed and delivered between the Company and First Union National Bank, trustee (herein referred to as the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the respective rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Notes. The Indenture contains provisions for defeasance at any time of (a) the entire Indebtedness on the Notes and (b) certain restrictive covenants and related Defaults and Events of Default, in each case upon compliance with certain conditions set forth therein. The Indebtedness evidenced by the Notes is, to the extent and in the manner provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness (as defined in the Indenture), whether outstanding on the date of the Indenture or thereafter, and this Note is issued subject to such provisions. Each Holder of this Note, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in the Indenture and (c) appoints the Trustee his attorney-in-fact for such purpose; provided, however, that the indebtedness evidenced by this Note shall cease to be so subordinate and subject in right of payment upon any defeasance of this Note referred to in clause (a) or (b) of the next preceding paragraph. The Notes are subject to redemption, as a whole or in part, at any time on or after October 1, 2001 at the option of the Company upon not less than 30 nor more than 60 days' prior notice by first-class mail, at the election of the Company, in amounts of $1,000 or an integral multiple of $1,000 at the following redemption prices (expressed as a percentage of the principal amount) if redeemed during the 12-month period beginning October 1 of the years indicated below: Redemption Year Price ---- ---------- 2001 ......................104.625% 2002 ......................103.083% 2003 ......................101.542% and thereafter at 100% of the principal amount, in each case, together with accrued and unpaid interest, if any, to the Redemption Date. If less than all of the Notes are to be redeemed, such portion of the Notes shall be redeemed pro rata, by lot or by any other method the Trustee shall deem fair and reasonable. Upon the occurrence of a Change in Control, each Noteholder may require the Company to repurchase all or a portion of such Holder's Notes at a purchase price in cash equal to 101% of the principal amount thereof, together with accrued and unpaid interest to the date of repurchase. Under certain circumstances, in the event the Net Cash Proceeds received by the Company from any Asset Sale, which is not used to prepay Senior Indebtedness or invested in properties or assets used in the businesses of the Company, exceeds $10,000,000, the Company will be required to apply such proceeds to the repayment of the Notes. In the case of any redemption of Notes, interest installments whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Notes of record at the close of business on the relevant Record Date referred to on the face hereof. Notes (or portions thereof) for whose redemption and payment provision is made in accordance with the Indenture shall cease to bear interest from and after the date of redemption. In the event of redemption of this Note in part only, a new Note or Notes for the unredeemed portion hereof shall be issued in the name of the Noteholder hereof upon the cancellation hereof. If an Event of Default shall occur and be continuing, the principal amount of all the Notes may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions (including certain amendments permitted without the consent of any Noteholders) as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Noteholders under the Indenture at any time by the Company and the Trustee with the consent of the Noteholders of a specified percentage in aggregate principal amount of the Notes at the time outstanding. The Indenture also contains provisions permitting the Noteholders of specified percentages in aggregate principal amount of the Notes at the time outstanding, on behalf of the Holders of all the Notes, to waive compliance by the Company with certain provisions of the Indenture and certain past Defaults under the Indenture and their consequences. Any such consent or waiver by or on behalf of the Holder of this Note shall be conclusive and binding upon such Noteholder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company or any Guarantor (in the event such Guarantor is obligated to make payments in respect of the Notes), which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Note at the times, place, and rate, and in the coin or currency, herein prescribed, subject to the subordination provisions of the Indenture. A Noteholder shall register the transfer or exchange of Notes in accordance with the Indenture. No service charge shall be made for any registration of transfer or exchange or redemption of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to and at the time of due presentment of this Note for registration of transfer, the Company, the Trustee, the Paying Agent and any agent of the Company or the Trustee may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note is overdue, and neither the Company, the Trustee nor any agent shall be affected by notice to the contrary. All terms used in this Note which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. ASSIGNMENT FORM I or we assign and transfer this Note to - ---------------------------------------------------------------- - ---------------------------------------------------------------- (Print or type name, address and zip code of assignee) - ---------------------------------------------------------------- (Insert Social Security or other identifying number of assignee) and irrevocably appoint ________________________________________ agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Dated: ____________________ Signed: __________________________ (Sign exactly as name appears on the other side of this Note) EX-4.2 3 INDENTURE =============================================================================== GENESIS HEALTH VENTURES, INC. AND FIRST UNION NATIONAL BANK, Trustee _________________ INDENTURE Dated as of October 7, 1996 _________________ 9 1/4% Senior Subordinated Notes due 2006 =============================================================================== RECONCILIATION AND TIE SHEET* between PROVISIONS OF THE TRUST INDENTURE ACT OF 1939, AS AMENDED and INDENTURE DATED AS OF October 7, 1996 between GENESIS HEALTH VENTURES, INC. and FIRST UNION NATIONAL BANK, Trustee Section Section of of Act Indenture - ------- ---------- 310(a)(1).....................................................8.9 310(a)(2).....................................................8.9 310(a)(3).....................................................Inapplicable 310(a)(4).....................................................Inapplicable 310(b)........................................................8.8, 8.10 310(c)........................................................Inapplicable 311(a)........................................................8.13 311(b)........................................................8.13 311(c)........................................................Inapplicable 312(a)........................................................6.1, 6.2(a) 312(b)........................................................6.2(b) 312(c)........................................................6.2(c) 313(a)........................................................6.4(a) 313(b)(1).....................................................Inapplicable 313(b)(2).....................................................6.4(b) 313(c)........................................................6.4(c) 313(d)........................................................6.4(d) 314(a)(1).....................................................6.3(a) 314(a)(2).....................................................6.3(b) 314(a)(3).....................................................6.3(c) 314(a)(4).....................................................5.19 314(b)........................................................Inapplicable 314(c)(1).....................................................15.5 314(c)(2).....................................................15.5 314(c)(3).....................................................Inapplicable 314(d)........................................................Inapplicable 314(e)........................................................15.5 314(f)........................................................Inapplicable 315(a)........................................................8.1(a) 315(b)........................................................8.14 315(c)........................................................8.1(a) 315(d)........................................................8.1(c) 315(e)........................................................7.14 316(a)(1).....................................................7.13, 7.12 316(a)(2).....................................................Inapplicable 316(b)........................................................7.8 317(a)........................................................7.4 317(b)........................................................5.4 318(a)........................................................15.7 - -------- * This Reconciliation and Tie Sheet is not a part of the Indenture.
TABLE OF CONTENTS** Page ---- ARTICLE I DEFINITIONS SECTION 1.1 Certain terms defined..................................................................2 SECTION 1.2 Other Definitions.................................................................... 20 SECTION 1.3 Incorporation by Reference of Trust Indenture Act.................................... 21 SECTION 1.4 Rules of Construction................................................................ 21 ARTICLE II ISSUE, DESCRIPTION, REGISTRATION AND EXCHANGE OF NOTES.......................................................... 22 SECTION 2.1 Designation, amount, authentication and delivery of Notes................................................................. 22 SECTION 2.2 Form of Notes and Trustee's certificate.............................................. 22 SECTION 2.3 Date of Notes and denominations...................................................... 23 SECTION 2.4 Execution of Notes................................................................... 24 SECTION 2.5 Registration, Registration of Transfer and Exchange of Notes............................................................. 24 SECTION 2.6 Temporary Notes...................................................................... 25 SECTION 2.7 Mutilated, destroyed, lost or stolen Notes........................................... 26 SECTION 2.8 Cancellation of surrendered Notes.................................................... 27 SECTION 2.9 Defaulted Interest................................................................... 27 SECTION 2.10 CUSIP Number......................................................................... 28 SECTION 2.11 Book-Entry Provisions for Global Note................................................ 28 SECTION 2.12 Special Transfer Provisions.......................................................... 29 ARTICLE III SUBORDINATION OF NOTES SECTION 3.1 Agreement to subordinate............................................................. 31 SECTION 3.2 Distribution on dissolution, liquidation, bankruptcy or reorganization...................................................... 32 SECTION 3.3 Suspension of Payment When Senior Indebtedness in Default........................................................................ 33 SECTION 3.4 Payment Permitted if No Default...................................................... 35 SECTION 3.5 Subrogation to Rights of Holders of Senior Indebtedness...................................................................... 35 SECTION 3.6 Provisions Solely to Define Relative Rights.......................................... 35 SECTION 3.7 Trustee to Effectuate Subordination.................................................. 36 SECTION 3.8 No Waiver of Subordination Provisions................................................ 36 SECTION 3.9 Notice to Trustee.................................................................... 37 SECTION 3.10 Reliance on Judicial Order or Certificate of Liquidating Agent.............................................................. 38
- -------- ** This Table of Contents is not part of the Indenture. -i-
Page ---- SECTION 3.11 Rights of Trustee as a Holder of Senior Indebtedness; Preservation of Trustee's Rights.................................................................. 38 SECTION 3.12 Article Applicable to Paying Agents.................................................. 39 SECTION 3.13 No Suspension of Remedies............................................................ 39 SECTION 3.14 Trustee's Relation to Senior Indebtedness............................................ 39 SECTION 3.15 Other Rights of Holders of Senior Indebtedness....................................... 39 ARTICLE IV REDEMPTION AND PURCHASES OF NOTES SECTION 4.1 Redemption Prices.................................................................... 40 SECTION 4.2 Notice of Redemption; Selection of Notes............................................. 40 SECTION 4.3 When Notes called for redemption become due and payable....................................................................... 42 SECTION 4.4 Cancellation of Redeemed Notes....................................................... 42 SECTION 4.5 Purchase of Notes Upon Change in Control............................................. 42 ARTICLE V COVENANTS SECTION 5.1 Payment of principal of and premium, if any, and interest on Notes............................................................. 46 SECTION 5.2 Maintenance of office or agency for registration of transfer, exchange and payment of Notes........................................ 46 SECTION 5.3 Appointment to fill a vacancy in the office of Trustee........................................................................ 46 SECTION 5.4 Provision as to Paying Agent......................................................... 46 SECTION 5.5 Maintenance of Corporate Existence................................................... 48 SECTION 5.6 Payment of Taxes and Other Claims.................................................... 48 SECTION 5.7 Maintenance of Properties............................................................ 48 SECTION 5.8 Insurance............................................................................ 48 SECTION 5.9 Limitation on Indebtedness........................................................... 49 SECTION 5.10 Limitation on Restricted Payments.................................................... 49 SECTION 5.11 Restrictions on Preferred Stock of Subsidiaries and Subsidiary Distributions...................................................... 52 SECTION 5.12 Limitation on Transactions with Affiliates........................................... 52 SECTION 5.13 Disposition of Proceeds of Asset Sales............................................... 53 SECTION 5.14 Limitation on Liens Securing Subordinated Indebtedness...................................................................... 57 SECTION 5.15 Limitation on Other Senior Subordinated Indebtedness...................................................................... 58 SECTION 5.16 Limitation on Issuance of Guarantees of Subordinated Indebtedness......................................................... 59 SECTION 5.17 Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries............................................... 59 SECTION 5.18 Provision of Financial Statements.................................................... 60 SECTION 5.19 Statement by Officers as to Default.................................................. 60 SECTION 5.20 Waiver of Certain Covenants.......................................................... 61 SECTION 5.21 Further assurance.................................................................... 61
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Page ---- ARTICLE VI NOTEHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 6.1 Company to furnish Trustee information as to names and addresses of Noteholders................................................ 61 SECTION 6.2 Preservation and disclosure of lists................................................. 62 SECTION 6.3 Reports by the Trustee............................................................... 63 SECTION 6.4 Reports by the Company............................................................... 65 ARTICLE VII REMEDIES SECTION 7.1 Events of Default.................................................................... 65 SECTION 7.2 Acceleration of Maturity; Rescission and Annulment..................................................................... 67 SECTION 7.3 Collection of Indebtedness and Suits for Enforcement by Trustee............................................................ 68 SECTION 7.4 Trustee May File Proofs of Claim..................................................... 69 SECTION 7.5 Trustee May Enforce Claims Without Possession of Notes.......................................................................... 70 SECTION 7.6 Application of Money Collected....................................................... 70 SECTION 7.7 Limitation on Suits.................................................................. 70 SECTION 7.8 Unconditional Right of Holders to Receive Principal, Premium and Interest................................................... 71 SECTION 7.9 Restoration of Rights and Remedies................................................... 71 SECTION 7.10 Rights and Remedies Cumulative....................................................... 72 SECTION 7.11 Delay or Omission Not Waiver......................................................... 72 SECTION 7.12 Control by Holders................................................................... 72 SECTION 7.13 Waiver of Past Defaults.............................................................. 72 SECTION 7.14 Undertaking for Costs................................................................ 73 SECTION 7.15 Waiver of Stay, Extension or Usury Laws.............................................. 73 ARTICLE VIII CONCERNING THE TRUSTEE SECTION 8.1 Duties and responsibilities of Trustee............................................... 73 SECTION 8.2 Reliance on document, opinions, etc.................................................. 75 SECTION 8.3 No responsibility for recitals, etc.................................................. 76 SECTION 8.4 Trustee, Paying Agent or Note Registrar may own Notes......................................................................... 77 SECTION 8.5 Moneys received by Trustee to be held in trust without interest............................................................ 77 SECTION 8.6 Compensation and expenses of Trustee................................................. 77 SECTION 8.7 Right of Trustee to rely on Officers' Certificate where no other evidence specifically prescribed........................................................... 78 SECTION 8.8 Conflicting interest of Trustee...................................................... 78 SECTION 8.9 Requirements for eligibility of Trustee.............................................. 78 SECTION 8.10 Resignation or removal of Trustee.................................................... 79 SECTION 8.11 Acceptance by successor to Trustee; notice of succession of a Trustee........................................................ 80
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Page ---- SECTION 8.12 Successor to Trustee by merger, consolidation or succession to business......................................................... 81 SECTION 8.13 Limitations on rights of Trustee as a creditor....................................... 81 SECTION 8.14 Notice of Defaults................................................................... 81 ARTICLE IX CONCERNING THE NOTEHOLDERS SECTION 9.1 Evidence of action by Noteholders.................................................... 82 SECTION 9.2 Proof of execution of instruments and of holding of Notes.................................................................. 82 SECTION 9.3 Who may be deemed owners of Note..................................................... 82 SECTION 9.4 Notes owned by Company or controlled by controlling persons disregarded for certain purposes.................................................................. 83 SECTION 9.5 Record date for action by Noteholders................................................ 83 SECTION 9.6 Instruments executed by Noteholders bind future holders.................................................................... 83 ARTICLE X NOTEHOLDERS MEETINGS SECTION 10.1 Purposes for which meetings may be called............................................ 84 SECTION 10.2 Manner of calling meetings; record date.............................................. 84 SECTION 10.3 Call of meeting by Company or Noteholders............................................ 85 SECTION 10.4 Who may attend and vote at meetings.................................................. 85 SECTION 10.5 Manner of voting at meetings and record to be kept........................................................................... 85 SECTION 10.6 Exercise of rights of Trustee and Noteholders not to be hindered or delayed..................................................... 86 ARTICLE XI SUPPLEMENTAL INDENTURES SECTION 11.1 Purposes for which supplemental Indentures may be entered into without consent of Noteholders....................................................................... 86 SECTION 11.2 Modification of Indenture with consent of holders of 51 percent in principal amount of Notes.......................................................................... 88 SECTION 11.3 Effect of supplemental indentures.................................................... 89 SECTION 11.4 Conformity with Trust Indenture Act.................................................. 89 SECTION 11.5 Notes may bear notation of changes by supplemental indentures........................................................... 89 SECTION 11.6 Officers' Certificate and Opinion of Counsel......................................... 89 SECTION 11.7 Modification of Indenture with consent of holders of Senior Indebtedness.................................................... 90
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Page ---- ARTICLE XII CONSOLIDATION, MERGER AND SALE SECTION 12.1 Merger and Sale of Assets, etc....................................................... 90 SECTION 12.2 Successor Substituted................................................................ 92 SECTION 12.3 Opinion of Counsel................................................................... 93 ARTICLE XIII SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS SECTION 13.1 Legal Defeasance and Covenant Defeasance of the Notes......................................................................... 93 SECTION 13.2 Termination of Obligations upon Cancellation of the Notes...................................................................... 96 SECTION 13.3 Survival of Certain Obligations...................................................... 96 SECTION 13.4 Acknowledgment of Discharge by Trustee............................................... 97 SECTION 13.5 Application of Trust Assets.......................................................... 97 SECTION 13.6 Repayment to the Company; Unclaimed Money............................................ 97 SECTION 13.7 Reinstatement........................................................................ 97 ARTICLE XIV IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 14.1 Incorporators, stockholders, officers and directors of Company or any Guarantor (other than the Company) exempt from individual liability.............................................................. 98 ARTICLE XV MISCELLANEOUS PROVISIONS SECTION 15.1 Successors and assigns of Company bound by Indenture......................................................................... 99 SECTION 15.2 Acts of board, committee or officer of successor corporation valid....................................................... 99 SECTION 15.3 Required notices or demand may be served by mail; waiver...................................................................... 99 SECTION 15.4 Indenture and Notes to be construed in accordance with the laws of the State of New York..........................................................................100 SECTION 15.5 Evidence of compliance with conditions precedent.........................................................................100 SECTION 15.6 Payments due on Saturdays, Sundays and holidays..........................................................................101 SECTION 15.7 Provisions required by Trust Indenture Act to control........................................................................101 SECTION 15.8 Provisions of this Indenture and Notes for the sole benefit of the parties and the Noteholders...................................................................101
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Page ---- SECTION 15.9 Severability.........................................................................101 SECTION 15.10 Indenture may be executed in counterparts; acceptance by Trustee.............................................................102 SECTION 15.11 Article and Section headings.........................................................102 EXHIBIT A-1 FORM OF INITIAL NOTE.................................................................A-1 EXHIBIT A-2 FORM OF EXCHANGE NOTE................................................................A-2 EXHIBIT B FORM OF LEGEND.......................................................................B-1 EXHIBIT C FORM OF CERTIFICATE..................................................................C-1
-vi- THIS INDENTURE, dated as of the 7th day of October, 1996, between GENESIS HEALTH VENTURES, INC., a corporation duly organized and existing under the laws of the Commonwealth of Pennsylvania (hereinafter referred to as the "Company"), and First Union National Bank, a national banking association (not in its individual capacity but solely as trustee hereunder, hereinafter referred to as the "Trustee"). W I T N E S S E T H : WHEREAS, for its lawful corporate purposes, the Company has duly authorized an issue of its 9 1/4% Senior Subordinated Notes due 2006 (hereinafter referred to as the "Initial Notes") and 9 1/4% Senior Subordinated Notes due 2006 (the "Exchange Notes" and, together with the Initial Notes, the "Notes") which Exchange Notes are to be issued in exchange for the Initial Notes pursuant to the Registration Rights Agreement and containing terms identical in all material respects to the Initial Notes (except that (i) the transfer restrictions thereon shall be eliminated and (ii) there will be no provision for the payment of interest rate increases); and, to provide the terms and conditions upon which the Notes are to be authenticated, issued and delivered, the Company has duly authorized the execution and delivery of this Indenture; and WHEREAS, all acts and things necessary to make the Notes, when executed by the Company and authenticated and delivered by the Trustee as in this Indenture provided, the valid, binding and legal obligations of the Company, and to constitute these presents a valid indenture and agreement according to its terms, have been done and performed, and the execution and delivery of this Indenture and the issue hereunder of the Notes have in all respects been duly authorized, and the Company, in the exercise of the legal right and power vested in it, executes and delivers this Indenture and proposes to make, execute, issue and deliver the Notes; NOW, THEREFORE, THIS INDENTURE WITNESSETH: That in order to declare the terms and conditions upon which the Notes are authenticated, issued, delivered and held, and in consideration of the premises, of the purchase and acceptance of the Notes by the holders thereof and of the sum of one dollar to it duly paid by the Trustee at the execution of these presents, the receipt whereof is hereby acknowledged, the Company covenants and agrees with the Trustee, for the equal and proportionate benefit of the respective holders from time to time of the Notes, as follows: 2 ARTICLE I DEFINITIONS SECTION 1.1 Certain terms defined. The terms defined in this Section 1.1 (except as herein otherwise expressly provided or unless the context otherwise requires), for all purposes of this Indenture and of any indenture supplemental hereto, shall have the respective meanings specified in this Section 1.1. "Acquired Indebtedness" means Indebtedness of a Person (i) existing at the time such Person becomes a Subsidiary or (ii) assumed in connection with the acquisition of assets from such Person, in each case, other than Indebtedness incurred in connection with, or in contemplation of, such Person becoming a Subsidiary or such acquisition. Acquired Indebtedness shall be deemed to be incurred on the date of the related acquisition of assets from any Person or the date the acquired Person becomes a Subsidiary. "Affiliate" means with respect to any specified Person, (i) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person, (ii) any other Person that owns, directly or indirectly, 5% or more of such specified Person's Capital Stock, (iii) any officer or director of (A) any such specified Person, (B) any Subsidiary of such specified Person or (C) any Person described in clauses (i) or (ii) above or (iv) any other Person having a relationship with any natural Person described in clauses (i), (ii) or (iii) above by blood, marriage or adoption not more remote than first cousin or any Person directly or indirectly controlling or controlled by or under direct or indirect common control with such other Person described in this clause (iv). For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person directly or indirectly, whether through ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Asset Sale" means any sale, issuance, conveyance, transfer, lease or other disposition (including, without limitation, by way of merger, consolidation or sale and leaseback transaction) (collectively, a "transfer"), directly or indirectly, in one or a series of related transactions, of (i) any Capital Stock of any Subsidiary; (ii) all or substantially all of the properties and assets of any division or line of business of the Company or its Subsidiaries; or (iii) any other properties or assets of the Company or any Subsidiary, other than in the ordinary course of business. For the purposes of this definition, the term "Asset Sale" shall not include (i) any transfer of properties and assets that is governed by the provisions described under Article XII, (ii) any transfer of 3 properties or assets of the Company to any Wholly Owned Subsidiary, or of any Subsidiary to the Company or any Wholly Owned Subsidiary in accordance with the terms hereof or (iii) transfers of properties or assets in any twelve month period (A) the Fair Market Value of which does not, in the aggregate, exceed 2.5% of the Company's Consolidated Total Assets and (B) the Consolidated EBITDA related to such properties or assets does not, in the aggregate, exceed 2.5% of the Company's Consolidated EBITDA. "Attributable Debt" in respect of a sale-leaseback transaction or an operating lease in respect of a healthcare facility means, at the time of determination, the present value (discounted at the interest rate implicit in the lease, compounded semi-annually) of the obligation of the lessee of the property subject to such sale-leaseback transaction or operating lease in respect of a healthcare facility for rental payments during the remaining term of the lease included in such transaction including any period for which such lease has been extended or may, at the option of the lessor, be extended or until the earliest date on which the lessee may terminate such lease without penalty or upon payment of penalty (in which case the rental payments shall include such penalty), after excluding all amounts required to be paid on account of maintenance and repairs, insurance, taxes, assessments, water, utilities and similar charges. "Average Life to Stated Maturity" means, as of the date of determination with respect to any Indebtedness, the quotient obtained by dividing (i) the sum of the products of (a) the number of years from the date of determination to the date or dates of each successive scheduled principal payment of such Indebtedness multiplied by (b) the amount of each such principal payment by (ii) the sum of all such principal payments. "Bankruptcy Law" means Title 11, United States Code, as amended, or any similar United States Federal or State law relating to bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or relief of debtors or any amendment to, succession to or change in any such law. "Board of Directors", when used with reference to the Company, means the Board of Directors of the Company, or the executive committee of the Board of Directors of the Company, or any other committee of the Board of Directors of the Company lawfully empowered to take the action in connection with which such term is used. "Book-Entry Note" means a Note represented by a Global Note and registered in the name of the nominee of the Depository. "Business Day" means a day other than a Saturday, a Sunday or a day which shall be in the City of New York, New York a day on which banking institutions are authorized or obligated 4 by law or required by executive order to be closed or a day other than a day on which the Trustee or the Paying Agent is authorized or obligated by law or required by executive order to be closed. "Capital Lease Obligation" of any Person means any obligation of such Person and its Subsidiaries on a Consolidated basis under any capital lease of real or personal property which, in accordance with GAAP, has been recorded on the balance sheet of such Person as a capitalized lease obligation. "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents (however designated) of such Person's capital stock or equity interests. "Cash Equivalent" means (i) any security, maturing not more than six months after the date of acquisition, issued by the United States of America, or an instrumentality or agency thereof and guaranteed fully as to principal, premium, if any, and interest by the United States of America, (ii) any certificate of deposit, time deposit, money market account or bankers' acceptance, maturing not more than six months after the date of acquisition, issued by any commercial banking institution that is a member of the Federal Reserve System and that has combined capital and surplus and undivided profits of not less than $500,000,000, whose debt has a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's Investors Service, Inc. or any successor rating agency, or "A-1" (or higher) according to Standard and Poor's Corporation or any successor rating agency and (iii) commercial paper, maturing not more than three months after the date of acquisition, issued by any corporation (other than an Affiliate or Subsidiary of the Company) organized and existing under the laws of the United States of America with a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's Investors Service, Inc. or any successor rating agency, or "A-1" (or higher) according to Standard and Poor's Corporation or any successor rating agency. "Change in Control" means the occurrence of any of the following events: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), in a single transaction or through a series of related transactions, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the total Voting Stock of the Company; (ii) the Company consolidates or merges with or into another corporation or conveys, transfers or leases all or substantially all of its assets to any Person, or any corporation consolidates or merges with or into the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is changed into or exchanged for cash, securities or other property, other than any such transaction where (A) the outstanding Voting Stock of the Company is changed into or exchanged for (x) Voting Stock of the surviving corporation which 5 is not Redeemable Capital Stock or (y) cash, securities or other property in an amount which could be paid by the Company as a Restricted Payment as described under Section 5.10 (and such amount shall be treated as a Restricted Payment subject to the provisions of Section 5.10), and (B) the holders of the Voting Stock of the Company immediately prior to such transaction own, directly or indirectly, not less than 50% of the Voting Stock of the surviving corporation immediately after such transaction; (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of at least 66-2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office; or (iv) the Company is liquidated or dissolved or adopts a plan of liquidation. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or if at any time after the date hereof such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Company" means Genesis Health Ventures, Inc., a corporation incorporated under the laws of Pennsylvania, until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. To the extent necessary to comply with the requirements of the provisions of Trust Indenture Act Sections 310 through 317 as they are applicable to the Company, the term "Company" shall include any other obligor with respect to the Notes for purposes of complying with such provisions. "Consolidated EBITDA" of any Person means with respect to any determination date, Consolidated Net Income before extraordinary items and gains or losses realized in connection with Asset Sales, plus (i) Consolidated Income Tax Expense, plus (ii) consolidated depreciation expense, plus (iii) consolidated amortization expense, plus (iv) Consolidated Interest Expense, plus (v) all other non-cash items reducing Consolidated Net Income of such Person and its Subsidiaries, determined on a Consolidated basis in accordance with GAAP, and less all non-cash items increasing Consolidated Net Income of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, in each case, for such Person's prior four full fiscal 6 quarters for which financial results have been reported immediately preceding the determination date. "Consolidated Income Tax Expense" means for any period, as applied to any Person, the provision for federal, state, local and foreign income taxes of such Person and its Consolidated Subsidiaries for such period as determined in accordance with GAAP. "Consolidated Interest Expense" of any Person means, without duplication, for any period, as applied to any Person, the sum of (i) the interest expense of such Person and its Consolidated Subsidiaries for such period on a consolidated basis, including, without limitation, (a) amortization of debt discount, (b) the net cost under interest rate contracts (including amortization of discounts), (c) the interest portion of any deferred payment obligation and (d) accrued interest, plus (ii) the interest component of the Capital Lease Obligations paid, accrued and/or scheduled to be paid, or accrued by such Person during such period, in each case as determined in accordance with GAAP, plus (iii) Preferred Stock dividends in respect of Preferred Stock of the Company or any Subsidiary held by Persons other than the Company or a Wholly Owned Subsidiary. For purposes of clause (c) of the preceding sentence, dividends shall be deemed to be an amount equal to the actual dividends paid divided by one minus the applicable actual combined Federal, state, local and foreign income tax rate of the Company and its Consolidated Subsidiaries (expressed as a decimal). "Consolidated Net Income (Loss)" of any Person means, for any period, the Consolidated net income (or loss) of the Company and its Consolidated Subsidiaries for such period as determined in accordance with GAAP, adjusted, to the extent included in calculating such net income (loss), by excluding (i) all extraordinary gains or losses (less all fees and expenses relating thereto), (ii) the portion of net income of the Company and its Consolidated Subsidiaries allocable to investments in unconsolidated Persons to the extent that cash dividends or distributions have not actually been received by the Company or one of its Consolidated Subsidiaries, (iii) net income (or loss) of any Person combined with the Company or any of its Subsidiaries in a "pooling of interests" basis attributable to any period prior to the date of combination, (iv) any gain or loss, net of taxes, realized upon the termination of any employee pension benefit plan, (v) any gains or losses (less all fees and expenses relating thereto) in respect of dispositions of assets other than in the ordinary course of business, or (vi) the net income of any Subsidiary to the extent that the declaration of dividends or similar distributions by that Subsidiary of that income is not at the time permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulations applicable to that Subsidiary or its shareholders. 7 "Consolidated Net Worth" of any Person means the Consolidated stockholders' equity (excluding Redeemable Capital Stock) of such Person and its Consolidated Subsidiaries, as set forth on the most recent consolidated balance sheet of such Person and its Consolidated Subsidiaries determined in accordance with GAAP. "Consolidated Rental Payments" of any Person means, for any period, the aggregate rental obligations of such Person and its Consolidated Subsidiaries (not including taxes, insurance, maintenance and similar expenses that the lessee is obligated to pay under the terms of the relevant leases), determined on a consolidated basis in conformity with GAAP, payable in respect of such period under Attributable Debt or leases of real or personal property not constituting Attributable Debt (net of income from subleases thereof, not including taxes, insurance, maintenance and similar expenses that the sublessee is obligated to pay under the terms of such sublease), whether or not such obligations are reflected as liabilities or commitments on a consolidated balance sheet of such Person and its Subsidiaries or in the notes thereto, excluding, however, in any event, (i) that portion of Consolidated Interest Expense of such Person representing payments by such Person or any of its Consolidated Subsidiaries in respect of Capital Lease Obligations (net of payments to such Person or any of its Consolidated Subsidiaries under subleases qualifying as capitalized lease subleases to the extent that such payments would be deducted in determining Consolidated Interest Expense) and (ii) the aggregate amount of amortization of obligations of such Person and its Consolidated Subsidiaries in respect of such Capital Lease Obligations for such period (net of payments to such Person or any of its Consolidated Subsidiaries and subleases qualifying as capitalized lease subleases to the extent that such payments would be deducted in determining such amortization amount). "Consolidated Total Assets" of any Person means the Consolidated total assets of such Person and its Consolidated Subsidiaries, as set forth on the most recent consolidated balance sheet of such Person and its Consolidated Subsidiaries determined in accordance with GAAP. "Consolidation" means, with respect to any Person, the consolidation of the accounts of such Person and each of its subsidiaries if and to the extent the accounts of such Person and each of its subsidiaries would normally be consolidated with those of such Person, all in accordance with GAAP. The term "Consolidated" shall have a similar meaning. "Convertible Debentures" means the Company's 6% Convertible Senior Subordinated Debentures due 2003. "Credit Facility" means (i) the Credit Agreement, dated as of November 22, 1993, among the Company, the other borrowers parties thereto, the lenders parties thereto, Mellon Bank, N.A. 8 as issuing bank and Mellon Bank, N.A. as agent for such lenders and such issuing bank, as the same may be amended, restated, renewed, extended, restructured, supplemented or otherwise modified from time to time and (ii) any Loan Documents (as defined in the Credit Agreement as in effect from time to time) and any other documents or Instruments executed by the Company pursuant to or in connection with the Credit Agreement, and (iii) any credit agreement, loan agreement, note purchase agreement, indenture or other agreement, document or instrument refinancing, refunding or otherwise replacing the aforesaid Credit Agreement or any other agreement deemed a Credit Facility under clause (i), (ii) or (iii) hereof, whether or not with the same agent, trustee, representative, lenders or holders, regardless of whether the aforesaid Credit Agreement or Credit Facility or any portion thereof was outstanding or in effect at the time of such restatement, renewal, extension, restructuring, supplement or modification (including without limitation, the Second Amended and Restated Credit Agreement, dated October 7, 1996, among the Company, the other borrowers parties thereto, the lenders parties thereto, Mellon Bank, N.A. as issuing bank and Mellon Bank, N.A. as agent for such lenders and the Amended and Restated Participation Agreement, dated October 7, 1996, among Genesis ElderCare Properties, Inc., Mellon Financial Services Corporation #4, the lenders parties thereto and Mellon Bank, N.A. as agent for such lenders, as the same may be amended, restated, renewed, extended, restructured, supplemented and otherwise modified from time to time). Without limiting the generality of the foregoing, the term "Credit Facility" shall include any amendment, restatement, renewal, extension, restructuring, supplement or modification to any Credit Facility and all refundings, refinancings and replacements of any Credit Facility, including any agreement (a) extending the maturity of any Indebtedness incurred thereunder or contemplated thereby, (b) adding or deleting borrowers or guarantors thereunder, so long as such borrowers and guarantors include one or more of the Company and its Subsidiaries and their respective successors and assigns, provided that on the date thereof the addition of such borrower or guarantor would not be prohibited by the definition of "Permitted Indebtedness" and the provisions of Sections 5.14 and 5.16, (c) increasing the amount of Indebtedness incurred thereunder or available to be borrowed thereunder provided such increase is permitted to be incurred under the definition of "Permitted Indebtedness" or is or will be permitted to be incurred under Section 5.9 or (d) otherwise altering the terms and conditions thereof in a manner not prohibited by the definition of "Permitted Indebtedness" and the provisions of Sections 5.14, 5.16 and 5.17 and as such agreement may be amended, renewed, extended, substituted, refinanced, replaced or otherwise modified from time to time, and includes any agreement extending the maturity of all or any portion of the Indebtedness thereunder. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. 9 "Depository" shall mean The Depository Trust Company, New York, New York, or its nominee or successors and assigns, or such other depository institution hereinafter appointed by the Company. "Designated Senior Indebtedness" means (i) all Senior Indebtedness under or in respect of the Credit Facility and (ii) any other Senior Indebtedness which, at the time of determination, has an aggregate principal amount outstanding, together with any commitments to lend additional amounts, of at least $30,000,000 and is specifically designated in the instrument evidencing such Senior Indebtedness as "Designated Senior Indebtedness." "Eligible Accounts Receivables" as of any date means the book value of all accounts receivables of the Company and its Subsidiaries that would be shown on a Consolidated balance sheet of the Company and its Subsidiaries prepared on such date in accordance with GAAP, which are not more than 180 days past their due date and were entered into on normal payment terms. "Event of Default" means any event specified in Section 7.1, continued for the period of time, if any, and after giving of notice, if any, therein designated. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Notes" has the meaning provided in the preamble of this Indenture. "Exchange Offer" means, subject to the terms of the Registration Rights Agreement, the offer by the Company to the Noteholders of the opportunity to exchange their Initial Notes for Exchange Notes pursuant to a registration statement filed with the Commission. "Exchange Offer Registration Statement" means the Exchange Offer Registration Statement as defined in the Registration Rights Agreement. "Fair Market Value" means, with respect to any asset or property, the sale value that would be obtained in an arm's-length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer. "Fiscal Year" with respect to the Company shall mean the fiscal year of the Company. "Fixed Charge Coverage Ratio" of any Person means, for any period, the ratio of (i) the sum of Consolidated Net Income, Consolidated Interest Expense, Consolidated Income Tax Expense, and one-third of Consolidated Rental Payments plus, without duplication, all depreciation, amortization and all other non- 10 cash charges (excluding any such non-cash charge constituting an extraordinary item or loss or any non-cash charge which requires an accrual of or a reserve for cash charges for any future period), in each case, for such period, of the Company and its Subsidiaries on a Consolidated basis, as determined in accordance with GAAP to (ii) the sum of (a) Consolidated Interest Expense for such period and (b) one-third of Consolidated Rental Payments for such period; provided that in making such computation, the Consolidated Interest Expense attributable to interest on any Indebtedness computed on a pro forma basis and bearing a floating interest rate shall be computed as if the rate in effect on the date of computation had been the applicable rate for the entire period. "Generally Accepted Accounting Principles" or "GAAP" means generally accepted accounting principles in the United States, consistently applied, as in effect on the date hereof. "Global Note" means a Note evidencing all or part of the Notes to be issued as Book-Entry Notes, issued to the Depository in accordance with this Indenture. "Guarantee" means the guarantee by any Guarantor which guarantees the Indenture Obligations pursuant to a guarantee given in accordance with this Indenture. "Guaranteed Debt" of any Person means, without duplication, all Indebtedness of any other Person guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (i) to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness, (ii) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Indebtedness or to assure the holder of such Indebtedness against loss, (iii) to supply funds to, or in any other manner invest in, the debtor (including any agreement to pay for property or services without requiring that such property be received or such services be rendered), (iv) to maintain working capital or equity capital of the debtor, or otherwise to maintain the net worth, solvency or other financial condition of the debtor or (v) otherwise to assure a creditor against loss; provided that the term "Guaranteed Debt" shall not include endorsements for collection or deposit, in either case in the ordinary course of business. "Guarantor" means any Person which guarantees the Indenture Obligations pursuant to this Indenture. "Healthcare Related Business" means a business, the majority of whose revenues result from healthcare, long-term care, or managed care related businesses or facilities, including businesses which provide insurance relating to the costs of healthcare, long-term care or managed care services. 11 "Indebtedness" means, with respect to any Person, without duplication, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services, excluding any trade payables and other accrued current liabilities arising in the ordinary course of business, but including, without limitation, all obligations, contingent or otherwise, of such Person in connection with any letters of credit or acceptances issued under letter of credit facilities, acceptance facilities or other similar facilities and in connection with any agreement to purchase, redeem, exchange or otherwise acquire for value any Capital Stock of such Person, or any warrants, rights or options to acquire such Capital Stock, now or hereafter outstanding, (ii) all obligations of such Person evidenced by bonds, notes, debentures or other similar instruments, (iii) every obligation of such Person issued or contracted for as payment in consideration of the purchase by such Person or an Affiliate of such Person of the Capital Stock or substantially all of the assets of another Person or in consideration for the merger or consolidation with respect to which such Person or an Affiliate of such Person was a party (other than any obligation of such Person to pay an amount to another Person based on income in respect of Capital Stock or assets which were purchased or in respect of such merger to which such Person or an Affiliate was a party except for such obligations which are required in accordance with GAAP to be classified as a liability on the balance sheet of such Person), (iv) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even if the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), but excluding trade payables and other accrued current liabilities arising in the ordinary course of business, (v) all obligations under Interest Rate Contracts of such Person, (vi) all Capital Lease Obligations of such Person, (vii) all indebtedness referred to in clauses (i) through (vi), (ix) and (x) of other Persons and all dividends of other Persons, the payment of which is secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien, upon any property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness, (viii) all Guaranteed Debt of such Person, (ix) all Redeemable Capital Stock valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid dividends and (x) all Attributable Debt of such Person. For purposes hereof, the "maximum fixed repurchase price" of any Redeemable Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Capital Stock as if such Redeemable Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the Fair Market Value of such Redeemable Capital Stock, such Fair Market Value to be determined 12 in good faith by the Board of Directors of the issuer of such Redeemable Capital Stock. "Indenture" means this instrument as originally executed, or, if amended or supplemented as herein provided, as so amended or supplemented. "Indenture Obligations" means the obligations of the Company and any other obligor hereunder or under the Notes, including any Guarantor, to pay principal of, premium, if any, and interest when due and payable, and all other amounts due or to become due under or in connection with this Indenture, the Notes and the performance of all other obligations to the Trustee and the holders under this Indenture and the Notes, according to the terms thereof. "Initial Notes" has the meaning provided in the preamble to this Indenture. "Institutional Accredited Investor" means an institution that is an "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. "Interest Rate Contracts" means interest rate swap agreements, interest rate cap agreements, interest rate collar agreements, interest rate insurance, and other agreements or arrangements designed to provide protection against fluctuations in interest rates. "Investments" means, with respect to any Person, directly or indirectly, any advance, loan or other extension of credit (including any guarantee) or capital contribution to (by means of any transfer of cash or other property (tangible or intangible) to others, or any payment for property or services for the account or use of others or otherwise), or any purchase, acquisition or ownership by such Person of any Capital Stock, bonds, notes, debentures or other securities (including, without limitation, any interests in any partnership or joint venture) issued or owned by any other Person. "Lien" means any mortgage, charge, pledge, lien (statutory or otherwise), privilege, security interest, hypothecation or other encumbrance upon or with respect to any property of any kind, real or personal, movable or immovable, now owned or hereafter acquired. "Maturity" when used with respect to any Note means the date on which the principal of such Note becomes due and payable as therein provided or as provided herein, whether at Stated Maturity, or any redemption date and whether by declaration of acceleration, Offer in respect of Excess Proceeds, Change in Control Offer in respect of a Change in Control, call for redemption or otherwise. 13 "Net Cash Proceeds" means, with respect to any Asset Sale by any Person, the proceeds thereof in the form of cash or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of, or stock or other assets when disposed for, cash or Cash Equivalents (except to the extent that such obligations are financed or sold with recourse to the Company or any Subsidiary) net of (i) brokerage commissions and other reasonable fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes payable as a result of such Asset Sale, (iii) payments made to retire Indebtedness where payment of such Indebtedness is secured by the assets or properties the subject of such Asset Sale, (iv) amounts required to be paid to any Person (other than the Company or any Subsidiary) owning a beneficial interest in the assets subject to the Asset Sale and (v) appropriate amounts to be provided by the Company or any Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against any liabilities associated with such Asset Sale and retained by the Company or any Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as reflected in an Officers' Certificate delivered to the Trustee. "Non-payment Default" means any default or event of default under or in respect of any Designated Senior Indebtedness, other than a Payment Default. "Notes" has the meaning provided in the preamble to this Indenture. "Noteholder; Registered Holder; Holder; or Holder of Notes" or other similar terms means any person who shall at the time be the registered holder of any Note or Notes in the Note Register kept for that purpose in accordance with the provisions of this Indenture. "Note Register and Note Registrar" shall have the respective meanings specified in Section 2.5. "Officers' Certificate" means a certificate signed by the Chief Executive Officer or the President or any Vice President and by the Chief Financial Officer or Treasurer or the Secretary or an Assistant Secretary of the Company. Each such certificate shall include the statements provided for in Section 15.5. "Opinion of Counsel" means an opinion in writing signed by legal counsel of the Company. Each such opinion shall include the statements provided for in Section 15.5. 14 "outstanding", when used with reference to Notes, subject to the provisions of Section 9.4, means, as of any particular time, all Notes authenticated and delivered by the Trustee under this Indenture, except (a) Notes theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (b) Notes, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee, provided that such Notes shall have reached their stated maturity or, if such Notes are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as provided in Article IV; and (c) Notes in lieu of or in substitution for which other Notes shall have been authenticated and delivered pursuant to the terms of Section 2.7, unless the holder thereof demonstrates to the Trustee that any such Notes are held by bona fide holders in due course. "Payment Default" means any default in the payment when due (at maturity, upon acceleration of maturity, upon mandatory prepayment or otherwise) of any amount owing under or in respect of any Designated Senior Indebtedness. "Permitted Indebtedness" means: (a) Indebtedness of up to $300,000,000 outstanding principal amount under the Credit Facility; (b) any guarantee by the Company or any Subsidiary under the Credit Facility; (c) Indebtedness (other than Indebtedness included in clause (d) below) in existence on the date hereof; (d) Indebtedness of the Company pursuant to the Convertible Debentures; (e) Indebtedness of the Company pursuant to the Notes; (f) Indebtedness evidenced by letters of credit issued in the ordinary course of business consistent with past practice to support the Company's or any Subsidiary's insurance or self-insurance obligations (including to secure workers' compensation and other similar insurance coverages); (g) Interest Rate Contracts, to the extent that the notional principal amount of such obligations does not exceed the amount of Indebtedness outstanding or committed 15 to be incurred on the date such Interest Rate Contracts are entered into; (h) Indebtedness of the Company to a Wholly Owned Subsidiary (provided that any Indebtedness of the Company owing to a Wholly Owned Subsidiary is subject to the Intercompany Agreement) and Indebtedness of a Subsidiary to the Company or another Subsidiary; provided, however, that any subsequent issuance or transfer of any Capital Stock or any other event which results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any other subsequent transfer of any such Indebtedness (except to the Issuer or a Wholly Owned Subsidiary) shall be deemed, in each case to be incurred and shall be treated as an incurrence for purposes of Section 5.9 hereof at the time the Wholly Owned Subsidiary in question ceased to be a Wholly Owned Subsidiary; (i) any guarantees of Indebtedness by a Subsidiary entered into in accordance with Section 5.16; (j) Indebtedness incurred by the Company or any Subsidiary consisting of Purchase Money Obligations in an amount not to exceed $15,000,000 at any one time outstanding; (k) Indebtedness incurred by the Company or any Wholly Owned Subsidiary consisting of Capital Lease Obligations in an amount not to exceed $15,000,000 at any time outstanding; (l) Indebtedness of the Company or any Wholly Owned Subsidiary, in addition to that described in clauses (a) through (k) of this definition of "Permitted Indebtedness," in an aggregate principal amount outstanding at any given time not to exceed $40,000,000; and (m) any renewals, extensions, substitutions, refundings, refinancings or replacements of any Indebtedness described in clauses (a) through (e) of this definition of "Permitted Indebtedness," including any successive renewals, extensions, substitutions, refundings, refinancings or replacements, so long as (i) any such new Indebtedness shall be in a principal amount that does not exceed the principal amount (or, if such Indebtedness being refinanced provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, such lesser amount as of the date of determination) so refinanced, plus the amount of any premium required to be paid under the terms of the instrument governing such Indebtedness being refinanced or the amount of any premium reasonably determined by the Company as necessary to accomplish such refinancing through means of a tender offer or privately negotiated transactions and, in each case, actually paid, plus the amount of expenses of the Company 16 incurred in connection with such refinancing; (ii) in the case of any refinancing of Subordinated Indebtedness, such new Indebtedness is made subordinate to the Notes at least to the same extent as the Indebtedness being refinanced; and (iii) any such new Subordinated Indebtedness has an Average Life to Stated Maturity longer than the Average Life to Stated Maturity of the Notes and a final Stated Maturity later than the final Stated Maturity of the Notes. "Permitted Investment" means (i) the Notes or any Guarantees; (ii) Temporary Cash Investments; (iii) Indebtedness of the Company to a Subsidiary (provided that any Indebtedness of the Company owing to a Wholly Owned Subsidiary is subject to the Intercompany Agreement) and Indebtedness of a Subsidiary to the Company or another Subsidiary; (iv) Investments in existence on the date hereof; (v) Investments in any Wholly Owned Subsidiary by the Company or any Wholly Owned Subsidiary or any Investment in the Company by any Wholly Owned Subsidiary; (vi) receivables owing to the Company and its Subsidiaries if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; (vii) Investments in Permitted Joint Ventures; (viii) Investments in any Healthcare Related Businesses, provided that the Company is able, at the time of such Investment and immediately after giving pro forma effect thereto, to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with Section 5.9; (ix) Investments acquired or retained from another Person in connection with any sale, conveyance, transfer, lease or other disposition of any properties or assets to such Person in accordance with Section 5.13; and (x) in addition to Permitted Investments described in the foregoing clauses (i) through (ix), Investments in the aggregate amount of $20,000,000 at any one time outstanding. "Permitted Joint Venture" means any Subsidiary which owns, operates or services Healthcare Related Business. "Person" means any individual, corporation, limited or general partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Preferred Stock," as applied to any Person, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of Capital Stock of any other class of such corporation. "Private Placement Legend" means the legend initially set forth on the Notes in the form set forth on Exhibit A-1. "Property" means, with respect to any Person, all types of real, personal, tangible, intangible or mixed property owned 17 by such Person whether or not included in the most recent consolidated balance sheet of such Person. "Purchase Money Obligations" means any Indebtedness of the Company or any Subsidiary incurred to finance the acquisition or construction of any Property or business (including Indebtedness incurred within 90 days following such acquisition or construction), including Indebtedness of a Person existing at the time such Person becomes a Subsidiary or assumed by the Company or a Subsidiary in connection with the acquisition of assets from such Person; provided, however, that any Lien on such Indebtedness shall not extend to any Property other than the Property so acquired or constructed. "Qualified Capital Stock" of any Person means any and all Capital Stock of such Person other than Redeemable Capital Stock. "Qualified Institutional Buyer" or "QIB" shall have the meaning specified in Rule 144A under the Securities Act. "Redeemable Capital Stock" means any Capital Stock that, either by its terms, by the terms of any security into which it is convertible or exchangeable or otherwise, is, or upon the happening of an event or passage of time would be, required to be redeemed prior to any Stated Maturity of the principal of the Notes or is redeemable at the option of the holder thereof at any time prior to any such Stated Maturity, or is convertible into or exchangeable for debt securities at any time prior to any such Stated Maturity at the option of the holder thereof. "Redemption Date" when used with respect to any Note to be redeemed pursuant to any provision in this Indenture means the date fixed for such redemption by or pursuant to this Indenture. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of the date hereof, by and among the Company and the other parties thereto, relating to the Exchange Offer as such agreement may be amended, modified or supplemented from time to time. "Responsible Officer", when used with respect to the Trustee, means any officer including, without limitation, any Vice President, any assistant secretary or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Security" has the meaning set forth in Rule 144(a)(3) under the Securities Act; provided, that the Trustee shall be entitled to request and rely upon an Opinion of Counsel with respect to whether any Note is a Restricted Security. 18 "Securities Act" means the Securities Act of 1933, as amended. "Senior Indebtedness" means all obligations of the Company or any Subsidiary or Affiliate of the Company, now or hereafter existing, under or in respect of the Credit Facility, whether for principal, interest (including interest accruing after the filing of a petition by or against the Company under any state or federal Bankruptcy Laws, whether or not such interest is allowed as a claim after such filing in any proceeding under such law) or otherwise (including obligations in respect of the lease financing facility of the Credit Facility) and the principal of, premium, if any, and interest on all other Indebtedness of the Company (other than the Notes), whether outstanding on the date hereof or hereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Notes. Notwithstanding the foregoing, "Senior Indebtedness" shall not include (i) Indebtedness evidenced by the Notes, (ii) Indebtedness evidenced by the Convertible Debentures, (iii) Indebtedness that is by its terms subordinate or junior in right of payment to any Indebtedness of the Company, (iv) Indebtedness which when incurred and without respect to any election under Section 1111(b) of the Bankruptcy Law is without recourse to the Company, (v) Indebtedness which is represented by Redeemable Capital Stock, (vi) Indebtedness for goods, materials or services purchased in the ordinary course of business or Indebtedness consisting of trade payables or other current liabilities (other than any current liabilities owing under, or in respect of, the Credit Facility), (vii) Indebtedness of or amounts owed by the Company for compensation to employees or for services, (viii) any liability for federal, state, local or other taxes owed or owing by the Company, (ix) Indebtedness of the Company to a Subsidiary of the Company or any other Affiliate of the Company or any of such Affiliate's subsidiaries, (x) that portion of any Indebtedness which at the time of issuance is issued in violation of this Indenture, and (xi) amounts owing under leases (other than Capital Lease Obligations and obligations in respect of the lease financing facility of the Credit Facility). "Stated Maturity" when used with respect to any Indebtedness or any installment of interest thereon, means the dates specified in such Indebtedness as the fixed date on which the principal of such Indebtedness or such installment of interest is due and payable. "Subordinated Indebtedness" means Indebtedness of the Company subordinated in right of payment to the Notes. "Subsidiary" means (i) a corporation (a) at least 50% of the Voting Stock of which is at the time owned, directly or 19 indirectly, by the Company and (b) of which the Company, directly or indirectly, has the right to elect a majority of the members of the Board of Directors either as a result of the ownership of a majority of the Voting Stock of such corporation or pursuant to a shareholders or other voting agreement or (ii) any partnership, joint venture, limited liability company or similar entity at least 50% of the total equity and voting interests of which (x) is at the time owned, directly or indirectly, by the Company whether in the form of membership, general, special or limited partnership, or otherwise and (y) the Company or any Wholly Owned Subsidiary is a controlling general partner or otherwise controls such entity. "Temporary Cash Investments" means (i) any evidence of Indebtedness, maturing not more than one year after the date of acquisition, issued by the United States of America, or an instrumentality or agency thereof and guaranteed fully as to principal, premium, if any, and interest by the United States of America, (ii) any certificate of deposit, maturing not more than one year after the date of acquisition, issued by, or time deposit of, a commercial banking institution that is a member of the Federal Reserve System and that has combined capital and surplus and undivided profits of not less than $500,000,000, whose debt has a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's Investors Service, Inc. or any successor rating agency, or "A-1" (or higher) according to Standard and Poor's Corporation or any successor rating agency and (iii) commercial paper, maturing not more than one year after the date of acquisition, issued by a corporation (other than an Affiliate or Subsidiary of the Company) organized and existing under the laws of the United States of America with a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's Investors Service, Inc. or any successor rating agency, or "A-1" (or higher) according to Standard and Poor's Corporation or any successor rating agency. "Trustee" means the person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended. "U.S. Government Obligations" means securities which are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the 20 issuer thereof, and shall also include a depository receipt issued by a bank or trust Company as custodian with respect to any such U.S. Government Obligations or a specific payment of interest on or principal of any such U.S. Government Obligations held by such custodian for the account of the holder of a depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligations or the specific payment of interest on or principal of the U.S. Government Obligations evidenced by such depository receipt. "Voting Stock" means stock of the class or classes pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of a corporation (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of which is owned by the Company or another Wholly Owned Subsidiary. SECTION 1.2 Other Definitions. Defined in Term Section "Acquisition Survivor.................. 12.1(c) "applicants"........................... 6.2(b) "Certificated Notes"................... 2.2 "Change in Control Offer".............. 4.5(a) "Change in Control Purchase Date"...... 4.5(c) "Change in Control Purchase Price"..... 4.5(a) "covenant defeasance................... 13.1(c) "Deficiency"........................... 5.13(c) "Excess Proceeds....................... 5.13(b) "Initial Blockage Period".............. 3.3(b) "legal defeasance"..................... 13.1(b) "Note Amount".......................... 5.13(c) "Offered Price"........................ 5.13(c) "Payment Blockage Period".............. 3.3(b) "Permitted Junior Notes"............... 3.2(a) "Permitted Preferred Stock" ........... 5.11(a) "record date".......................... 2.3 "Restricted Payments".................. 5.10(d) "Senior Representative"................ 3.1 "Surviving Entity"..................... 12.1(a) 21 SECTION 1.3 Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the Trust Indenture Act, the provision is incorporated by reference in and made a part of this Indenture. The following Trust Indenture Act terms used in this Indenture have the following meanings: "indenture securities" means the Notes; "indenture security holder" means a Noteholder; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; and "obligor" on the Notes means the Company, any other obligor upon the Notes or any successor obligor upon the Notes. All other terms used in this Indenture that are defined by the Trust Indenture Act, defined by Trust Indenture Act reference to another statute or defined by Commission rule under the Trust Indenture Act have the meanings so assigned to them. SECTION 1.4 Rules of Construction. Unless the context otherwise requires: (a) a term has the meaning assigned to it; (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (c) "or" is not exclusive; (d) words in the singular include the plural, and in the plural include the singular; (e) provisions apply to successive events and transactions; and (f) Unless the context otherwise requires, all references herein to "Articles", "Sections" and other subdivisions refer to the corresponding Articles, Sections and other subdivisions of this Indenture, and the words "herein", "hereof", "hereby", "hereunder" and words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision hereof. 22 ARTICLE II ISSUE, DESCRIPTION, REGISTRATION AND EXCHANGE OF NOTES SECTION 2.1 Designation, amount, authentication and delivery of Notes. The Trustee shall authenticate (i) Initial Notes for original issue in the aggregate principal amount of $125,000,000 and (ii) Exchange Notes from time to time for issue, in the aggregate principal amount not to exceed $125,000,000 for issuance in exchange for a like principal amount of Initial Notes pursuant to an exchange offer registration statement under the Securities Act, in each case upon receipt of a written order of the Company signed by its Chief Executive Officer, President or a Vice President without any further corporate action by the Company. The Initial Notes shall be designated as 9 1/4% Senior Subordinated Notes due 2006. Exchange Notes may have such distinctive series designation as, and such changes in the form thereof, as are specified in the written order referred to in the preceding sentence. Such written order with respect to the Initial Notes or the Exchange Notes shall specify the amount of Notes to be authenticated, the series and type of Notes and the date on which the Notes are to be authenticated, whether the Notes are to be Initial Notes or Exchange Notes, whether the Notes are to be Certificated Notes or a Global Note and whether or not the Notes shall bear the Private Placement Legend, or such other information as the Trustee may reasonably request (such specification can be provided by attaching a form of Note consistent with the provisions hereof containing such information). The aggregate principal amount of Notes outstanding at any time may not exceed $125,000,000, except as provided in Section 2.7. Nothing contained in this Section 2.1 or elsewhere in this Indenture, or in the Notes, is intended to or shall limit execution by the Company or authentication or delivery by the Trustee of Notes under the circumstances contemplated by Sections 2.5, 2.6, 2.7, 4.3 and 11.5. SECTION 2.2 Form of Notes and Trustee's certificate. The Initial Notes and the Exchange Notes and the Trustee's certificate of authentication to be borne by the Notes shall be substantially in the form of Exhibits A-1 and A-2, respectively, which exhibits are part of this Indenture. The Notes may have such letters, numbers or other marks of identification or designation and such legends or endorsements printed, lithographed or engraved thereon as the officers executing the same may deem appropriate and as are not inconsistent with the provisions of this Indenture, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Notes may be listed, or to conform to usage. 23 Notes offered and sold in reliance on Rule 144A under the Securities Act may be issued initially in the form of one or more Global Notes in registered form, substantially in the form set forth in Exhibit A-1, deposited with, or on behalf of, the Depository, and shall bear the legend set forth on Exhibit B. The aggregate principal amount of any Global Note may from time to time be increased or decreased by adjustments made on the records of the Depository or the custodian for the Depository. Notes offered and sold in reliance on any other exemption from registration under the Securities Act other than as described in the preceding paragraph shall be issued, and Notes offered and sold in reliance on Rule 144A under the Securities Act may be issued, in the form of certificated securities in registered form in substantially the form set forth in Exhibit A-1 (the "Certificated Notes"). The Trustee shall be conclusively entitled to rely on the form of Notes (Global or Certificated Notes) as provided by the Company. Likewise, the Trustee shall be conclusively entitled to rely upon statements therein to the effect that they are being offered and sold in reliance on Rule 144A under the Securities Act, or upon another exemption from registration under the Securities Act, as directed by the Company. SECTION 2.3 Date of Notes and denominations. The Notes shall bear interest at the rate per annum set forth in their title, payable semi-annually on April 1 and October 1, beginning April 1, 1997, shall mature on October 1, 2006 and shall be issuable as registered Notes without coupons in denominations of $1,000 and any integral multiple thereof. The person in whose name any Note is registered at the close of business on any record date (as defined herein) with respect to any interest payment date shall be entitled to receive the interest payable thereon on such interest payment date notwithstanding the cancellation of such Note upon any registration of transfer or exchange thereof subsequent to such record date and prior to such interest payment date (subject to the provisions of Article IV in the case of any Note or Notes, or portion thereof, called for redemption on a date subsequent to the record date and prior to such interest payment date and in the case of any Note or Notes, or portion thereof, with respect to which the holder has delivered a written acceptance of a Change in Control Offer or an Offer pursuant to Section 5.13(c) on a date subsequent to such record date). The principal of and interest on the Notes shall be payable at the office or agency to be maintained by the Company in accordance with the provisions of Section 5.2 for such purpose; provided, however, that payment of interest may be made at the option of the Company by check mailed by first class mail to the address of the person entitled thereto as such address shall appear in the Note Register. The term "record date" as used in this Section 2.3 with respect to any interest payment date shall mean the close of business on March 15 or September 15, as the case may be, next preceding such 24 interest payment date, whether or not such March 15 or September 15 is a Business Day. The Notes shall be dated the date of their authentication. Interest shall accrue on the Notes as provided in the Notes. Interest on the Notes shall be computed on the basis of a 360-day year comprised of twelve 30-day months. SECTION 2.4 Execution of Notes. The Notes shall be signed on behalf of the Company, manually or in facsimile, by its Chief Executive Officer or its President or a Vice President under its corporate seal (which may be in facsimile) reproduced thereon and attested, manually or in facsimile, by its Secretary or an Assistant Secretary or Treasurer or Assistant Treasurer. Only such Notes as shall bear thereon a certificate of authentication substantially in the form contained in Exhibits A-1 and A-2 hereto, signed manually by the Trustee, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee upon any Note executed by the Company shall be conclusive evidence that the Note so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. In case any officer of the Company whose signature appears on any of the Notes, manually or in facsimile, shall cease to be such officer before such Notes so signed shall have been authenticated and delivered by the Trustee, such Notes nevertheless may be authenticated and delivered as though the person whose signature appears on such Notes had not ceased to be such officer of the Company; and any Note may be signed, and the corporate seal reproduced thereon may be attested, on behalf of the Company, manually or in facsimile, by persons as, at the actual date of the execution of such Note, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such officer. SECTION 2.5 Registration, Registration of Transfer and Exchange of Notes. Subject to Sections 2.11 and 2.12, Notes may be exchanged for a like aggregate principal amount of Notes of other authorized denominations. The Notes to be exchanged shall be surrendered at the office or agency to be maintained by the Company in accordance with the provisions of Section 5.2, and the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor the Note or Notes which the Noteholder making the exchange shall be entitled to receive. The Company shall keep or cause to be kept, at the office or agency to be maintained by the Company in accordance with the provisions of Section 5.2, a register or registers (the register maintained in such office and in any other office or agency designated pursuant to Section 5.2 being herein referred 25 to as the "Note Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall register or provide for the registration of Notes and shall register the transfer of Notes as in this Article II provided. The Trustee is hereby appointed "Note Registrar" for the purpose of registering Notes and transfers of Notes as herein provided. Upon surrender for registration of transfer of any Note at such office or agency (including an exchange of Initial Notes for Exchange Notes), the Company shall execute and the Trustee shall authenticate and deliver in the name of the transferee or transferees a new Note or Notes for a like aggregate principal amount; provided that no exchange of Initial Notes for Exchange Notes shall occur until an Exchange Offer Registration Statement shall have been declared effective by the Commission, the Trustee shall have received an Officers' Certificate confirming that the Exchange Offer Registration Statement has been declared effective by the Commission and the Initial Notes to be exchanged for the Exchange Notes shall be cancelled by the Trustee. All Notes presented or surrendered for exchange, registration of transfer, redemption, purchase or payment shall, if so required by the Company or the Note Registrar, be accompanied by a written instrument or instruments of transfer, in form satisfactory to the Company, duly executed by the registered holder or by his duly authorized attorney and, in every case, each Note presented or surrendered for registration of transfer shall be accompanied by the assignment form attached to the Notes, duly executed by the registered holder or by his duly authorized attorney. No service charge shall be made for any exchange or registration of transfer of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto. The Company shall not be required to issue, register the transfer of or exchange any Notes for a period of 15 days next preceding any date for the selection of Notes to be redeemed. The Company shall not be required to register the transfer of or exchange any Note called or being called for redemption except, in the case of any Note to be redeemed in part, the portion thereof not to be so redeemed. The Company shall not be required to register the transfer of or exchange any Note in respect of which a notice relating to a Change in Control Offer or an Excess Proceeds Offer has been given (unless such notice has been withdrawn in accordance with Sections 4.5 and 5.13) except, in the case of any Note to be purchased in part, the portion thereof not to be so purchased. SECTION 2.6 Temporary Notes. Pending the preparation of definitive Notes, the Company may execute and the Trustee shall authenticate and deliver temporary Notes (printed, lithographed or typewritten) of any authorized denomination and substantially in the form of the definitive Notes, but with or 26 without a recital of specific redemption prices and with such omissions, insertions and variations as may be appropriate for temporary Notes, all as may be determined by the Board of Directors of the Company. Temporary Notes may contain such reference to any provisions of this Indenture as may be appropriate. Every such temporary Note shall be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Notes. Without unnecessary delay the Company will execute and deliver to the Trustee definitive Notes and thereupon any or all temporary Notes shall be surrendered in exchange therefor, at the office or agency to be maintained by the Company in accordance with the provisions of Section 5.2, and the Trustee shall authenticate and deliver in exchange for such temporary Notes an equal aggregate principal amount of definitive Notes. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits under this Indenture as definitive Notes authenticated and delivered hereunder. SECTION 2.7 Mutilated, destroyed, lost or stolen Notes. In case any temporary or definitive Note shall become mutilated or be destroyed, lost or stolen, the Company, in the case of any mutilated Note shall, and in the case of any destroyed, lost or stolen Note in its discretion may, execute, and upon the Company's request the Trustee shall authenticate and deliver, a new Note bearing a number, letter or other distinguishing symbol not contemporaneously outstanding in exchange and substitution for the mutilated Note, or in lieu of and in substitution for the Note so destroyed, lost or stolen, or, instead of issuing a substituted Note if any such Note shall have matured or shall be about to mature or shall have been selected for redemption or if the Company shall have received a notice from Holders accepting a Change in Control Offer or an Excess Proceeds Offer in respect of any such Note (unless such notice has been withdrawn in accordance with Section 4.5 or 5.13), the Company may pay the same without surrender thereof except in the case of a mutilated Note. In every case the applicant for a substituted Note or for such payment shall furnish to the Company and to the Trustee such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and to the Trustee evidence to their satisfaction of the destruction, loss or theft of such Note and of the ownership thereof. The Trustee shall authenticate any such substituted Note and deliver the same, or the Trustee or any Paying Agent of the Company shall make any such payment, upon the written request or authorization of any officer of the Company, and shall incur no liability to anyone by reason of anything done or omitted to be done by it in good faith under the provisions of this Section 2.7. Upon the issue of any substituted Note, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. 27 Every substituted Note issued pursuant to the provisions of this Section 2.7 in substitution for any destroyed, lost or stolen Note shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Note shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. All Notes shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes, and shall preclude (to the extent lawful) any and all other rights or remedies, notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. SECTION 2.8 Cancellation of surrendered Notes. All Notes surrendered for the purpose of payment, redemption, purchase by the Company at the option of the holder, exchange, substitution or registration of transfer, shall, if surrendered to the Company or any Paying Agent or registrar, be delivered to the Trustee and the same, together with Notes surrendered to the Trustee for cancellation, shall be cancelled by the Trustee and no Notes shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. The Trustee shall destroy cancelled Notes and shall deliver certificates of destruction thereof to the Company. If the Company shall purchase or otherwise acquire any of the Notes, however, such purchase or acquisition shall not operate as a payment, redemption or satisfaction of the indebtedness represented by such Notes unless and until the Company, at its option, shall deliver or surrender the same to the Trustee for cancellation. SECTION 2.9 Defaulted Interest. If the Company defaults in a payment of interest on the Notes, it shall pay the defaulted interest plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date, which date shall be the fifteenth day next preceding the date fixed by the Company for the payment of defaulted interest or the next succeeding Business Day if such date is not a Business Day, in each case at the rate provided in the Notes. The Company shall, by written notice to the Trustee, fix each such special record date and payment date. At least 15 days before the special record date, the Company (or the Trustee, in the name of and at the expense of the Company) shall mail to each Holder, with a copy to the Trustee, a notice that states the subsequent special record date, the payment date and the amount of defaulted interest, and interest payable on such defaulted interest, if any, to be paid. 28 SECTION 2.10 CUSIP Number. The Company in issuing the Notes may use a "CUSIP" number, and if so, the Trustee shall use the CUSIP number in notices of redemption or exchange as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Notes, and that reliance may be placed only on the other identification numbers printed on the Notes. SECTION 2.11 Book-Entry Provisions for Global Note. (a) One or more Global Notes initially shall (i) be registered in the name of the Depository or the nominee of such Depository, (ii) be delivered to the Trustee as custodian for such Depository and (iii) bear legends contained in Exhibit B. Members of, or participants in, the Depository ("Agent Members") shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depository, or the Trustee as its custodian, or under the Global Note, and the Depository may be treated by the Company, the Trustee, the Paying Agent and the Note Registrar and any agent of the same as the absolute owner and Holder of the Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee, the Paying Agent and the Note Registrar or any agent of the same from giving effect to any written certification, proxy or other authorization furnished by the Depository or impair, as between the Depository and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of any Note. (b) Transfers of the Global Note shall be limited to transfers in whole, but not in part, to the Depository, its successors or their respective nominees. Interests of beneficial owners in the Global Notes may be transferred or exchanged for Certificated Notes in accordance with the rules and procedures of the Depository and the provisions of Section 2.12. In addition, Certificated Notes shall be transferred to all beneficial owners in exchange for their beneficial interests in the Global Note if (i) the Depository notifies the Company that it is unwilling or unable to continue as Depository for the Global Note and a successor depository is not appointed by the Company within 90 days of such notice or (ii) an Event of Default has occurred and is continuing and the Note Registrar has received a request from the Depository to issue Certificated Notes. (c) In connection with any transfer or exchange of a portion of the beneficial interest in any Global Note to beneficial owners pursuant to paragraph (b), the Note Registrar shall (if one or more Certificated Notes are to be issued) reflect on its books and records the date and a decrease in the principal amount of the Global Note in an amount equal to the 29 principal amount of the beneficial interest in the Global Note to be transferred, and the Company shall execute and the Trustee shall authenticate and deliver, one or more Certificated Notes of like tenor and amount. (d) In connection with the transfer of the Global Note as an entirety to beneficial owners pursuant to paragraph (b), the Global Note shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depository in exchange for its beneficial interest in the Global Note, an equal aggregate principal amount of Certificated Notes of authorized denominations. (e) Any Certificated Note constituting a Restricted Security delivered in exchange for an interest in a Global Note pursuant to paragraph (b) or (c) shall, except as otherwise provided by paragraphs (a)(i)(x) and (z) of Section 2.12, bear the legend regarding transfer restrictions applicable to the Certificated Notes set forth in Exhibit A-1. (f) The Holder of any Global Note may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Notes. SECTION 2.12 Special Transfer Provisions. (a) Transfers to Non-QIB Institutional Accredited Investors. The following provisions shall apply with respect to the registration of any proposed transfer of a Note constituting a Restricted Security to any Institutional Accredited Investor which is not a QIB: (i) the Note Registrar shall register the transfer of any Note constituting a Restricted Security, whether or not such Note bears the Private Placement Legend, if (x) the requested transfer is after the date which is three years after the initial issuance of the Initial Notes, (y) in the case of a transfer to an Institutional Accredited Investor which is not a QIB (excluding Non-U.S. Persons), the proposed transferee has delivered to the Note Registrar a certificate substantially in the form of Exhibit C hereto or (z) the Trustee and Note Registrar have received both an Opinion of Counsel and an Officers' Certificate directing transfer without a Private Placement Legend; and (ii) if the proposed transferor is an Agent Member holding a beneficial interest in a Global Note, upon, receipt by the Note Registrar of (x) the certificate, if any, required by paragraph (i) above and (y) instructions given in accordance with the Depository's and the Note Registrar's procedures, 30 whereupon (a) the Note Registrar shall reflect on its books and records the date and (if the transfer does not involve a transfer of outstanding Certificated Notes) a decrease in the principal amount of a Global Note in an amount equal to the principal amount of the beneficial interest in a Global Note to be transferred, and (b) the Company shall execute and the Trustee shall authenticate upon receipt of a written order of the Company signed by its Chief Executive Officer, President or a Vice President and deliver one or more Certificated Notes of like tenor and amount. (b) Transfers to QIBs. The following provisions shall apply with respect to the registration of any proposed transfer of a Note constituting a Restricted Security to a QIB: (i) the Note Registrar shall register the transfer if such transfer is being made by a proposed transferor who has checked the box provided for on the form of Note stating, or has otherwise advised the Company and the Note Registrar in writing, that the sale has been made in compliance with the provisions of Rule 144A to a transferee who has signed the certification provided for on the form of Note stating, or has otherwise advised the Company and the Note Registrar in writing, that it is purchasing the Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A; and (ii) if the proposed transferee is an Agent Member, and the Notes to be transferred consist of Certificated Notes which after transfer are to be evidenced by an interest in the Global Note, upon receipt by the Note Registrar of instructions given in accordance with the Depository's and the Note Registrar's procedures, the Note Registrar shall reflect on its books and records the date and an increase in the principal amount of the Global Note in an amount equal to the principal amount of the Certificated Notes to be transferred, and the Trustee shall cancel the Certificated Notes so transferred. (c) Private Placement Legend. Upon the transfer, exchange or replacement of Notes not bearing the Private Placement Legend, the Note Registrar shall deliver Notes that do not bear the Private Placement Legend. Upon the transfer, exchange or replacement of Notes bearing the Private Placement Legend, the Note Registrar shall deliver only Notes that bear the Private Placement Legend unless (i) the circumstances 31 contemplated by paragraph (a)(i)(x) of this Section 2.12 exist, (ii) there is delivered to the Note Registrar and the Trustee an Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act or (iii) such Note has been sold pursuant to an effective registration statement under the Securities Act. (d) General. By its acceptance of any Note bearing the Private Placement Legend, each Holder of such a Note acknowledges the restrictions on transfer of such Note set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Note only as provided in this Indenture. The Note Registrar shall retain copies of all letters, notices and other written communications received by it pursuant to Section 2.11 or this Section 2.12. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Note Registrar. The Trustee shall be entitled to obtain and conclusively rely upon, in connection with any transfer of a Note, an opinion of counsel opining as to whether such Note is a Restricted Security, and whether the transferee is an Institutional Accredited Investor or a QIB. ARTICLE III SUBORDINATION OF NOTES SECTION 3.1 Agreement to subordinate. The Company, for itself, its successors and assigns, covenants and agrees, and each holder of Notes, by his or her acceptance thereof, likewise covenants and agrees, that the payment of the principal of and premium, if any, and interest on each and all of the Notes is hereby expressly subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full, in cash or Cash Equivalents of all Senior Indebtedness. This Article III constitutes a continuing offer to all persons or entities who become holders of, or continue to hold, Senior Indebtedness, each of whom is an obligee hereunder and is entitled to enforce such holder's rights hereunder, subject to the provisions hereof, without any act or notice of acceptance hereof or reliance hereon. For the purposes of this Article III, (a) no Senior Indebtedness shall be deemed to have been paid in full unless and until all commitments or other obligations of the lenders thereunder to make advances or otherwise extend credit shall have terminated and the holders thereof shall have indefeasibly 32 received payment in full in cash or Cash Equivalents, and (b) the term "Senior Representative" shall mean the indenture trustee or other trustee, agent or representative for any Senior Indebtedness. SECTION 3.2 Distribution on dissolution, liquidation, bankruptcy or reorganization. Upon any distribution of assets of the Company upon any total or partial dissolution, winding up, liquidation or reorganization of the Company, whether in bankruptcy, insolvency, reorganization or receivership proceedings or upon an assignment for the benefit of creditors or any other marshalling of the assets and liabilities of the Company or otherwise, (a) The holders of Senior Indebtedness shall be entitled to receive payment in full in cash or Cash Equivalents or, as acceptable to each holder of Senior Indebtedness, in any other manner, of all amounts due on or in respect of all Senior Indebtedness before the Holders of the Notes are entitled to receive any payment or distribution of any kind or character (excluding securities of the Company provided for in a plan of reorganization with respect to the Company approved by the bankruptcy court that are equity securities or are subordinated in right of payment to all Senior Indebtedness to the same extent as, or to a greater extent than, the Notes are so subordinated as provided in this Article; such securities are hereinafter collectively referred to as "Permitted Junior Notes") on account of principal of, premium, if any, or interest on the Notes (including any payment or other distribution which may be received from the holders of Subordinated Indebtedness as a result of any payment on such Subordinated Indebtedness); and (b) any payment or distribution of assets of the Company or any Subsidiary of any kind or character, whether in cash, property or securities (excluding Permitted Junior Notes), by set-off or otherwise, to which the Holders or the Trustee would be entitled but for the provisions of this Article (including any payment or other distribution which may be received from the holders of Subordinated Indebtedness as a result of any payment on such Subordinated Indebtedness) shall be paid by the liquidating trustee or agent or other Person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly to the holders of Senior Indebtedness or their Senior Representative or Representatives, ratably according to the aggregate amounts remaining unpaid on account of the Senior Indebtedness held or represented by each, to the extent necessary to make payment in full in cash, Cash Equivalents or in any other form acceptable to each, of all Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness; and (c) in the event that, notwithstanding the foregoing provisions of this Section, the Trustee or the Holder of any 33 Notes shall have received any payment or distribution of assets of the Company or any Subsidiary of any kind or character, whether in cash, property or securities (excluding Permitted Junior Notes), in respect of principal, premium, if any, and interest on the Notes before all Senior Indebtedness is paid in full, then and in such event, such payment or distribution (including any payment or other distribution which may be received from the holders of Subordinated Indebtedness as a result of any payment on such Subordinated Indebtedness) shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Company for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in cash, Cash Equivalents or, as acceptable to each holder of Senior Indebtedness, any other manner, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness or deposited with a court of competent jurisdiction. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the sale or conveyance of its property or assets as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided in Article XII shall not be deemed a dissolution, winding up, liquidation or reorganization of the Company for the purposes of this Article III if such other corporation shall, as a part of such consolidation, merger, sale or conveyance, comply with the conditions stated in Article XII. If the Trustee or any holder of Notes does not file a proper claim or proof of debt in the form required in any proceeding referred to above prior to 30 days before the expiration of the time to file such claim in such proceeding, then the holder of any Senior Indebtedness (or its Representative) is hereby authorized, and has the right, to file an appropriate claim or claims for or on behalf of such holder of Notes. SECTION 3.3 Suspension of Payment When Senior Indebtedness in Default. (a) Unless Section 3.2 shall be applicable, upon the occurrence of a Payment Default, then no payment (other than any payments made pursuant to Section 13.1 which have been deposited with the Trustee for at least 124 days) or distribution of any assets of the Company or any Subsidiary of any kind or character (excluding Permitted Junior Notes) shall be made by the Company or any Subsidiary or on behalf of or out of the property of the Company, or received by the Trustee or any Noteholder on account of principal of, premium, if any, or interest on, the Notes or on account of the purchase, redemption, defeasance (whether under Section 13.1(b) or 13.1(c)) or other acquisition of or in respect 34 of the Notes unless and until such Payment Default shall have been cured or waived in writing by the holders of the Designated Senior Indebtedness or shall have ceased to exist or the Designated Senior Indebtedness shall have been paid in full in cash, Cash Equivalents or in any other manner as acceptable to each holder of such Senior Indebtedness, after which the Company shall resume making any and all required payments in respect of the Notes, including any missed payments. (b) Unless Section 3.2 shall be applicable, upon (i) the occurrence of a Non-payment Default and (ii) receipt by the Trustee and the Company from a Senior Representative or the holder of any Designated Senior Indebtedness of written notice of such occurrence, no payment (other than any payments made pursuant to Section 13.1 which have been deposited with the Trustee for at least 124 days) or distribution of any assets of the Company or any Subsidiary of any kind or character (excluding Permitted Junior Notes) shall be made by the Company or any Subsidiary or on behalf of or out of the property of the Company, or received by the Trustee or any Noteholder on account of any principal of, premium, if any, or interest on, the Notes or on account of the purchase, redemption, defeasance (whether under Section 13.1(b) or 13.1(c)) or other acquisition of or in respect of Notes for a period ("Payment Blockage Period") commencing on the date of receipt by the Trustee of such notice unless and until the earliest of (subject to any blockage of payments that may then or thereafter be in effect under subsection (a) of this Section 3.3) (x) 179 days after receipt of such written notice by the Trustee (provided any Designated Senior Indebtedness as to which notice was given shall theretofore have not been accelerated), (y) the date such Non-payment Default and all other Non-payment Defaults as to which notice is also given after such period is initiated shall have been cured or waived in writing by the holders of the Designated Senior Indebtedness or shall have ceased to exist or the Senior Indebtedness related thereto shall have been paid in full in cash or Cash Equivalents or (z) the date such Payment Blockage Period and any Payment Blockage Periods initiated during such period shall have been terminated by written notice to the Company or the Trustee from the Senior Representative and the holders of the Designated Senior Indebtedness that have given notice of a Non-payment Default at or after the initiation of such Payment Blockage Period, after which in the case of clause (x), (y) or (z), the Company shall resume making any and all required payments in respect of the Notes including any missed payments. Notwithstanding any other provision of this Indenture, in no event shall a Payment Blockage Period extend beyond 179 days from the date of the receipt by the Company or the Trustee of the notice referred to in clause (ii) of this paragraph (b) (the "Initial Blockage Period"). Any number of notices of Non-payment Default may be given during the Initial Blockage Period; provided that during any 365-day consecutive period only one such period during which payment of principal of, or interest on, the Notes may not be made may commence and the duration of such period may not exceed 179 days. 35 No Non-payment Default with respect to Designated Senior Indebtedness which existed or was continuing on the date of the commencement of any Payment Blockage Period will be, or can be, made the basis for the commencement of a second Payment Blockage Period, whether or not within a period of 365 consecutive days, unless such default shall have been cured or waived for a period of not less than 90 consecutive days. (c) In the event that, notwithstanding the foregoing, the Company or any Subsidiary shall make, or the Trustee or any Noteholder shall receive, any payment to the Trustee or the Holder of any Notes prohibited by the foregoing provisions of this Section, then and in such event such payment shall be paid over and delivered forthwith to a Senior Representative of the holders of the Designated Senior Indebtedness or as a court of competent jurisdiction shall direct. SECTION 3.4 Payment Permitted if No Default. Nothing contained in this Article, elsewhere in this Indenture or in any of the Notes shall prevent the Company, at any time except during the pendency of any case, proceeding, dissolution, liquidation or other winding up, assignment for the benefit of creditors or other marshaling of assets and liabilities of the Company referred to in Section 3.2 or under the conditions described in Section 3.3, from making payments at any time of principal of, premium, if any, or interest on the Notes. SECTION 3.5 Subrogation to Rights of Holders of Senior Indebtedness. Subject to the payment in full of all Senior Indebtedness, the Holders of the Notes shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments and distributions of cash, property and securities applicable to the Senior Indebtedness until the principal of, premium, if any, and interest on the Notes shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness of any cash, property or securities to which the Holders of the Notes or the Trustee would be entitled except for the provisions of this Article, and no payments over pursuant to the provisions of this Article to the holders of Senior Indebtedness by Holders of the Notes or the Trustee, shall, as among the Company, its creditors other than holders of Senior Indebtedness, and the Holders of the Notes, be deemed to be a payment or distribution by the Company to or on account of the Senior Indebtedness. SECTION 3.6 Provisions Solely to Define Relative Rights. The provisions of this Article are intended solely for the purpose of defining the relative rights of the Holders of the Notes on the one hand and the holders of Senior Indebtedness on the other hand. Nothing contained in this Article or elsewhere in this Indenture or in the Notes is intended to or shall (i) impair, as among the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Notes, the obligation of the Company, which is absolute and unconditional, to pay to 36 the Holders of the Notes the principal of, premium, if any, and interest on the Notes as and when the same shall become due and payable in accordance with their terms; or (ii) affect the relative rights against the Company of the Holders of the Notes and creditors of the Company other than the holders of Senior Indebtedness; or (iii) prevent the Trustee or the Holder of any Note from exercising all remedies otherwise permitted by applicable law upon Default under this Indenture, subject to the rights, if any, under this Article of the holders of Senior Indebtedness (A) in any case, proceeding, dissolution, liquidation or other winding up, assignment for the benefit of creditors or other marshaling of assets and liabilities of the Company referred to in Section 3.2, to receive, pursuant to and in accordance with such Section, cash, property and securities otherwise payable or deliverable to the Trustee or such Holder, or (B) under the conditions specified in Section 3.3, to prevent any payment prohibited by such Section or enforce their rights pursuant to Section 3.3(c). SECTION 3.7 Trustee to Effectuate Subordination. Each Holder of a Note by his or her acceptance thereof authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article and appoints the Trustee his or her attorney-in-fact for any and all such purposes, including, in the event of any dissolution, winding-up, liquidation or reorganization of the Company whether in bankruptcy, insolvency, receivership proceedings, or otherwise, the timely filing of a claim for the unpaid balance of the indebtedness of Company owing to such Holder in the form required in such proceedings and the causing of such claim to be approved. If the Trustee does not file a proper claim at least 30 days before the expiration of the time to file such claim, then the holders of Senior Indebtedness, and their agents, trustees or other representatives are authorized to do so for and on behalf of the Holders of the Notes. SECTION 3.8 No Waiver of Subordination Provisions. (a) No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any non-compliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. (b) Without limiting the generality of subsection (a) of this Section, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Notes, without incurring responsibility to the Holders of the Notes and without impairing 37 or releasing the subordination provided in this Article or the obligations hereunder of the Holders of the Notes to the holders of Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, or waive compliance with the terms of, Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any Person liable in any manner for the collection or payment of Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company and any other Person; provided, however, that in no event shall any such actions limit the right of the Holders of the Notes to take any action to accelerate the maturity of the Notes pursuant to Article VII of this Indenture or to pursue any rights or remedies hereunder or under applicable laws if the taking of such action does not otherwise violate the terms of this Article, subject to the rights, if any, under this Article, of the holders, from time to time, of Senior Indebtedness to receive the cash, property or securities receivable upon the exercise of such rights or remedies. SECTION 3.9 Notice to Trustee. (a) The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment to or by the Trustee in respect of the Notes. Notwithstanding the provisions of this Article or any provision of this Indenture, the Trustee or any Paying Agent shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee or any Paying Agent in respect of the Notes, unless and until the Trustee shall have received written notice thereof from the Company or a holder of Senior Indebtedness or from a Senior Representative or any trustee, fiduciary or agent therefor; and, prior to the receipt of any such written notice, the Trustee shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section at least three Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of, premium, if any, or interest on any Note), then, anything herein contained to the contrary notwithstanding but without limiting the rights and remedies of the holders of Senior Indebtedness or any trustee, fiduciary or agent thereof, the Trustee shall have full power and authority to receive such money and to apply the same to the purpose for which such money was received and shall not be affected by any notice to the contrary which may be received by it within three Business Days prior to such date; nor shall the Trustee be charged with knowledge of the elimination of the act or condition preventing any such payment unless and until the Trustee shall have received an Officers' Certificate to such effect. 38 (b) The Trustee shall be entitled to rely on the delivery to it of a written notice to the Trustee and the Company by a Person representing himself to be a Senior Representative or a holder of Senior Indebtedness (or a trustee, fiduciary or agent therefor) to establish that such notice has been given by a Senior Representative or a holder of Senior Indebtedness (or a trustee, fiduciary or agent thereof and the Trustee shall have no duty to investigate the authenticity thereof or the authority of the person signing and shall have no liability for relying thereon); provided, however, that failure to give such notice to the Company shall not affect in any way the ability of the Trustee to rely on such notice. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment or the Trustee or the Paying Agent may deposit the funds in question with a court of competent jurisdiction. SECTION 3.10 Reliance on Judicial Order or Certificate of Liquidating Agent. Upon any payment or distribution of assets of the Company referred to in this Article, the Trustee and the Holders of the Notes shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other person making such payment or distribution, delivered to the Trustee or to the Holders of Notes, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount of amounts paid or distributed thereon and all other facts pertinent thereto or to this Article, provided that the foregoing shall apply only if such court has been fully apprised of the provisions of this Article. SECTION 3.11 Rights of Trustee as a Holder of Senior Indebtedness; Preservation of Trustee's Rights. The trustee in its individual capacity shall be entitled to all the rights set forth in this Article with respect to any Senior Indebtedness which may at any time be held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such 39 holder. Nothing in this Article shall apply to claims of, or payments to, the Trustee under or pursuant to Section 8.6. SECTION 3.12 Article Applicable to Paying Agents. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting under this Indenture, the term "Trustee" as used in this Article shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article in addition to or in place of the Trustee; provided, however, that Section 3.11 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as Paying Agent. SECTION 3.13 No Suspension of Remedies. Nothing contained in this Article shall limit the right of the Trustee or the Holders of Notes to take any action to accelerate the maturity of the Notes pursuant to Article VII of this Indenture or to pursue any rights or remedies hereunder or under applicable law, subject to the rights, if any, under this Article of the holders, from time to time, of Senior Indebtedness to receive the cash, property or securities receivable upon the exercise of such rights or remedies. SECTION 3.14 Trustee's Relation to Senior Indebtedness. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article, and no implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read into this Article against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and the Trustee shall not be liable to any holder of Senior Indebtedness if it shall, without gross negligence or wilful misconduct, pay over or deliver to Holders, the Company or any other Person (other than a court of competent jurisdiction) moneys or assets to which any holder of Senior Indebtedness shall be entitled by virtue of this Article or otherwise. SECTION 3.15 Other Rights of Holders of Senior Indebtedness. All rights and interests under this Indenture of the holders of Senior Indebtedness, and all agreements and obligations of the Trustee, the Holders of the Notes and the Company under this Article shall remain in full force and effect irrespective of (i) any lack of validity or enforceability of the Credit Facility, and promissory notes evidencing the Credit Facility or any other agreement or instrument relating thereto or to any other Senior Indebtedness or (ii) any other circumstance that might constitute a defense available to, or a discharge of, a guarantor or surety (other than as a result of any payments indefeasibly made on the Credit Facility or any other Senior Indebtedness). 40 The holders of Senior Indebtedness are hereby authorized to demand specific performance of this Article, whether or not the Company shall have complied with any provisions of this Article applicable to it, at any time when the Trustee or any Holder of the Notes shall have failed to comply with any of these provisions. The provisions of this Article shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Senior Indebtedness is rescinded or must otherwise be returned by any holder of Senior Indebtedness upon the insolvency, bankruptcy or reorganization of the Company or otherwise, all as though such payment had not been made. ARTICLE IV REDEMPTION AND PURCHASES OF NOTES SECTION 4.1 Redemption Prices. On or after October 1, 2001 the Company may, at its option, redeem at any time all or from time to time any part of the Notes, on any date prior to maturity at the redemption prices and subject to the conditions specified in the Notes, together with interest accrued and unpaid thereon to the date fixed for redemption at the following redemption prices (expressed as a percentage of the principal amount) if redeemed during the 12-month period beginning October 1 of the years indicated below: Redemption Year Price 2001 ......................104.625% 2002 ......................103.083% 2003 ......................101.542% and thereafter at 100% of the principal amount, in each case, together with accrued and unpaid interest, if any, to the Redemption Date. SECTION 4.2 Notice of Redemption; Selection of Notes. In case the Company shall desire to exercise such right to redeem all or, as the case may be, any part of the Notes in accordance with the right reserved so to do, the Company, or at the Company's written request, the Trustee in the name and at the expense of the Company, shall give notice of such redemption to holders of the Notes to be redeemed as hereinafter in this Section 4.2 provided. Notice of redemption shall be given to the holders of Notes to be redeemed as a whole or in part by mailing by first-class mail a notice of such redemption not less than 30 nor more than 60 days prior to the date fixed for redemption to their last addresses as they shall appear in the Note Register, but failure 41 to give such notice by mailing to the holder of any Note designated for redemption as a whole or in part, or any defect therein, shall not affect the validity of the proceedings for the redemption of any other Notes. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives the notice. Each such notice of redemption shall specify the total principal amount to be redeemed, the date fixed for redemption and the redemption price at which Notes are to be redeemed, and shall state that payment of the redemption price of the Notes to be redeemed will be made at the office or agency to be maintained by the Company in accordance with the provisions of Section 5.2, upon presentation and surrender of such Notes, that interest accrued to the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon will cease to accrue. If less than all the Notes are to be redeemed, the notice of redemption to each holder shall state the aggregate principal amount of the Notes to be redeemed and shall identify the Notes of such holders to be redeemed. In case any Note is to be redeemed in part only, the notice which relates to such Note shall state the portion of the principal amount thereof to be redeemed (which shall be $1,000 or an integral multiple thereof), and shall state that on and after the date fixed for redemption, upon surrender of such Note, the holder will receive the redemption price together with accrued interest in respect of the principal amount thereof called for redemption and, without charge, a new Note or Notes of authorized denominations for the principal amount thereof remaining unredeemed. On or prior to the date fixed for redemption specified in the notice of redemption given as provided in this Section 4.2, the Company will deposit with the Trustee or with one or more Paying Agents (or, if the Company is acting as its own Paying Agent, set aside, segregate and hold in trust as provided in Section 5.4(c)) immediately available funds sufficient to redeem on the date fixed for redemption all the Notes or portions of Notes so called for redemption at the appropriate redemption price, together with accrued interest to the date fixed for redemption. If less than all the Notes are to be redeemed, the Company shall give the Trustee, not less than 45 nor more than 60 days (or such shorter period acceptable to the Trustee) in advance of the date fixed for redemption, notice of the aggregate principal amount of Notes to be redeemed, and thereupon the Trustee shall select the Notes or portions thereof to be redeemed by lot or such other method as the Trustee shall deem fair and appropriate and shall thereafter promptly notify the Company of the Notes or portions thereof to be redeemed. 42 SECTION 4.3 When Notes called for redemption become due and payable. If the giving of notice of redemption shall have been completed as above provided, the Notes or portions of Notes specified in such notice (and not theretofore purchased pursuant to Sections 4.5 and 5.13) shall become due and payable on the date and at the place stated in such notice at the applicable redemption price, together with interest accrued to the date fixed for redemption, and on and after such date fixed for redemption (unless the Company shall default in the payment of such Notes at the redemption price, together with interest accrued to the date fixed for redemption) interest on the Notes or portions of Notes so called for redemption shall cease to accrue. On presentation and surrender of such Notes at said place of payment in said notice specified, on or after the date fixed for redemption the said Notes shall be paid and redeemed by the Company at the applicable redemption price, together with interest accrued to the date fixed for redemption. Upon presentation of any Note which is redeemed in part only, the Company shall execute and register and the Trustee shall authenticate and deliver at the expense of the Company, a new Note or Notes in principal amount equal to the unredeemed portion of the Note so presented. SECTION 4.4 Cancellation of Redeemed Notes. All Notes surrendered to the Trustee, upon redemption pursuant to the provisions of this Article IV, shall be forthwith cancelled by it. SECTION 4.5 Purchase of Notes Upon Change in Control. (a) Upon the occurrence of a Change in Control, each Holder shall have the right to require that the Company repurchase such Holder's Notes pursuant to an offer described in subsection (c) of this Section (a "Change in Control Offer") in whole or in part in integral multiples of $1,000, at a purchase price (the "Change in Control Purchase Price") in cash in an amount equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase, in accordance with the procedures set forth in Subsections (b), (c), (d) and (e) of this Section. (b) Within 30 days following a Change in Control and prior to the mailing of the notice relating to the Change in Control Offer to Holders provided for in paragraph (c) below, the Company covenants to (i) notify the lenders under the Credit Facility that a Change in Control has occurred and (ii) either (1) repay in full all Indebtedness under the Credit Facility and permanently reduce to zero the commitments of the lenders thereunder or offer to repay in full all such Indebtedness and permanently reduce such commitments and repay the Indebtedness and permanently reduce to zero the commitment of each lender who has accepted such offer or (2) obtain the requisite consent under the Credit Facility to permit the repurchase of the Notes as provided for in this Section 4.5. The Company shall first comply with this subsection (b) before it shall be required to 43 repurchase the Notes pursuant to this Section 4.5, and any failure to comply with this subsection (b) shall constitute a Default of this covenant for purposes of Section 7.1(c)(iv). (c) Within 30 days following any Change in Control, the Company shall send by first-class mail, postage prepaid, to the Trustee and to each Holder of the Notes, at his address appearing in the Note Register, a notice specifying, among other things: (1) that a Change in Control has occurred, the date of such event, and that such Holder has the right to require the Company to repurchase such Holder's Notes in whole or in part at the Change in Control Purchase Price in cash; (2) the circumstances and relevant facts regarding such Change in Control (including but not limited to information with respect to pro forma historical income, cash flow and capitalization after giving effect to such Change in Control, if any); (3) (i) the most recently filed Annual Report on Form 10-K (including audited consolidated financial statements) of the Company, the most recent subsequently filed Quarterly Report on Form 10-Q, as applicable, and any Current Report on Form 8-K of the Company filed subsequent to such Quarterly Report (or in the event the Company is not required to prepare any of the foregoing Forms, the comparable information required to be prepared by the Company and any Guarantor pursuant to Section 5.18), (ii) a description of material developments in the Company's business subsequent to the date of the latest of such reports and (iii) such other information, if any, concerning the business of the Company which the Company in good faith believes will enable such Holders to make an informed investment decision; (4) that the Change in Control Offer is being made pursuant to this Section 4.5 and that all Notes properly tendered pursuant to such Change in Control Offer will be accepted for payment at the Change in Control Offer Purchase Price; (5) the purchase date (the "Change in Control Purchase Date") which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed; (6) the Change in Control Purchase Price; (7) that the tender is revocable and instructions determined by the Company that a Holder must follow in order to have Notes purchased (including, but not limited to, the place at which Notes shall be presented and surrendered for 44 purchase) and materials necessary to comply with applicable tender rules; (8) that the Change in Control Purchase Price for any Note which has been properly tendered and not withdrawn will be paid promptly following the Change in Control Offer Purchase Date; and (9) the procedures for withdrawing a tender. (d) Upon receipt by the Company of the proper tender of Notes the Holder of the Note in respect of which such proper tender was made shall (unless the tender of such Note is properly withdrawn) thereafter be entitled to receive solely the Change in Control Purchase Price with respect to such Note. Upon surrender of any such Note for purchase in accordance with the foregoing provisions, such Note shall be paid by the Company at the Change in Control Purchase Price; provided, however, that installments of interest whose Stated Maturity is on or prior to the Change in Control Purchase Date shall be payable to the Holders of such Notes, registered as such on the record dates according to the terms and the provisions of Section 2.3. If any Note tendered for purchase shall not be so paid upon surrender thereof, the principal thereof (and premium, if any, thereon) shall, until paid, bear interest from the Change in Control Purchase Date at the rate borne by such Note. Holders electing to have Notes purchased will be required to give notice and surrender such Notes to the Company at the address specified in the Company's aforementioned notice at least two Business Days prior to the Change in Control Purchase Date. Any Note that is to be purchased only in part shall be surrendered to the Company or its agent at the address specified in the Company's aforementioned notice (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereto or such Holder's attorney duly authorized in writing), and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Note, without service charge, one or more new Notes of any authorized denominations as requested by such Holder in an aggregate principal amount equal to, and in exchange for, the portion of the principal amount of the Note so surrendered that is not purchased. (e) Not later than the Change in Control Purchase Date, the Company shall (i) accept for payment Notes or portions thereof tendered pursuant to the Change in Control Offer, (ii) in the event the Company is not acting as its own Paying Agent, no later than 11 a.m. (New York time) on the Business Day prior to the Change in Control Purchase Date, deposit with the Paying Agent an amount of cash sufficient to pay the aggregate Change in Control Purchase Price of all the Notes or portions thereof that are to be purchased as of the Change in Control Purchase Date and (iii) deliver to the Paying Agent an Officers' Certificate 45 stating the Notes or portions thereof accepted for payment by the Company. The Paying Agent shall promptly mail or deliver to Holders of Notes so accepted payment in an amount equal to the Change in Control Purchase Price of the Notes purchased from each such Holder, and the Company shall execute and the Trustee shall promptly authenticate and mail or deliver to such Holders a new Note equal in principal amount to any unpurchased portion of the Note surrendered. Any Notes not so accepted shall be promptly mailed or delivered by the Paying Agent at the Company's expense to the Holder thereof. The Company will publicly announce the results of the Change in Control Offer on the Change in Control Purchase Date. For purposes of this Section 4.5, the Company shall choose a Paying Agent which shall not be the Company. (f) Any acceptances by Holders of the Change in Control Offer may be withdrawn before or after delivery of Notes by the Holder to the Company, by means of a written notice of withdrawal delivered by the Holder to the Company or its agent at the address specified in the Company's aforementioned notice at any time prior to the close of business on two Business Days prior to the Change in Control Purchase Date specifying, as applicable: (1) the certificate number of the Note in respect of which such notice of withdrawal is being submitted, (2) the principal amount of the Note (which shall be $1,000 or an integral multiple thereof) with respect to which such notice of withdrawal is being submitted, and (3) the principal amount, if any, of such Note (which shall be $1,000 or an integral multiple thereof) that remains subject to the Change in Control Offer and that has been or will be delivered to the Company or its agent for purchase by the Company. (g) The Trustee and the Paying Agent shall return to the Company any cash that remains unclaimed, together with interest or dividends, if any, thereon, held by them for the payment of the Change in Control Purchase Price; provided, however, that, to the extent that the aggregate amount of cash deposited by the Company pursuant to clause (e)(ii) exceeds the aggregate Change in Control Purchase Price of the Notes or portions thereof to be purchased, then the Trustee shall hold such excess for the Company and promptly after the Business Day following the Change in Control Purchase Date the Trustee shall upon demand return any such excess to the Company together with interest or dividends, if any, thereon. (h) The Company shall comply with the applicable tender offer rules, including Rule 14e-1 under the Exchange Act, in connection with a Change in Control Offer. 46 ARTICLE V COVENANTS SECTION 5.1 Payment of principal of and premium, if any, and interest on Notes. The Company will duly and punctually pay or cause to be paid the principal of and premium, if any, and interest on the Notes at the time and place and in the manner provided in the Notes and this Indenture. SECTION 5.2 Maintenance of office or agency for registration of transfer, exchange and payment of Notes. So long as any of the Notes shall remain outstanding, the Company will maintain an office or agency in the Borough of Manhattan, the City of New York, State of New York, where the Notes may be surrendered for exchange or registration of transfer as in this Indenture provided, and where notices and demands to or upon the Company in respect to the Notes may be served, and where the Notes may be presented or surrendered for payment. The Company may also from time to time designate one or more other offices or agencies where Notes may be presented or surrendered for any and all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York, State of New York for such purposes. The Company will give to the Trustee prompt written notice of the location of any such office or agency and of any change of location thereof. The Company initially appoints the Trustee its office or agency for each of said purposes. In case the Company shall fail to maintain any such office or agency or shall fail to give such notice of the location or of any change in the location thereof, such surrenders, presentations and demands may be made and notices may be served at the office of the Trustee in the City of Wilmington, State of Delaware, and the Company hereby appoints the Trustee its agent to receive at the aforesaid office all such surrenders, presentations, notices and demands. The Trustee will give the Company prompt notice of any change in location of the Trustee's principal office. SECTION 5.3 Appointment to fill a vacancy in the office of Trustee. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 8.10, a Trustee, so that there shall at all times be a Trustee hereunder. SECTION 5.4 Provision as to Paying Agent. (a) If the Company shall appoint a paying agent other than the Trustee, it will cause such Paying Agent to execute and deliver to the Trustee an instrument in which such agent shall undertake, subject to the provisions of this Section 5.4, (i) that it will hold all sums held by it as such agent for the payment of the principal of, premium, if any, 47 or interest on the Notes whether such sums have been paid to it by the Company (or by any other obligor on the Notes) in trust for the benefit of the holders of the Notes and will notify the Trustee of the receipt of sums to be so held, (ii) that it will give the Trustee notice of any failure by the Company (or by any other obligor on the Notes) to make any payment of the principal of, premium, if any, or interest on the Notes when the same shall be due and payable, (iii) that it will at any time during the continuance of any Event of Default specified in subsection (a) or (b) of Section 7.1, upon the written request of the Trustee, deliver to the Trustee all sums so held in trust by it, and (iv) acknowledge, accept and agree to comply in all aspects with the provisions of this Indenture relating to the duties, rights and liabilities of such Paying Agent, including, without limitation, the provision of Article III hereof. (b) If the Company shall not act as its own Paying Agent, it will, by 11 a.m. on the Business Day prior to each due date of the principal of or premium, if any, or interest on any Notes, deposit with such Paying Agent a sum in same day funds sufficient to pay the principal of, premium, if any, or interest so becoming due, such sum to be held in trust for the benefit of the holders of Notes entitled to such principal of or premium, if any, or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its failure so to act. (c) If the Company shall act as its own Paying Agent, it will, on or before each due date of the principal of or premium, if any, or interest on the Notes, set aside, segregate and hold in trust for the benefit of the persons entitled thereto, a sum sufficient to pay such principal or premium or interest so becoming due and will notify the Trustee of any failure to take such action. (d) Anything in this Section 5.4 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge of this Indenture, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust by it, or any Paying Agent hereunder, as required by this Section 5.4, such sums to be held by the Trustee upon the trusts herein contained. (e) Anything in this Section 5.4 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 5.4 is subject to the provisions of Sections 13.6 and 13.7. 48 SECTION 5.5 Maintenance of Corporate Existence. So long as any of the Notes shall remain outstanding, the Company will at all times (except as otherwise provided or permitted in this Section 5.5 or elsewhere in this Indenture) do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and franchises and the corporate existence and franchises of each Subsidiary; provided that nothing herein shall require the Company to continue the corporate existence or franchises of any Subsidiary if in the judgment of the Company it shall be necessary, advisable or in the interest of the Company to discontinue the same. SECTION 5.6 Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary, the failure to pay or discharge of which would have a material adverse effect on the condition (financial or otherwise), earnings or business affairs of the Company and its Subsidiaries taken as one enterprise; provided, however, that the Company shall not be required to pay or cause to be paid or discharged any such tax, assessment or governmental charge whose amount, applicability or validity is being contested in good faith by appropriate proceedings properly instituted and diligently conducted and in respect of which appropriate reserves (in the good faith judgment of management of the Company) are being maintained in accordance with GAAP consistently applied. SECTION 5.7 Maintenance of Properties. The Company will cause all properties owned or leased by the Company or any Subsidiary or used or held for use in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition and repair as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly conducted at all times; provided, however, that nothing in this Section shall prevent the Company from (i) discontinuing the use, operation or maintenance of any of such properties if such discontinuance is, in the judgment of the Board of Directors of the Company or the Subsidiary concerned, or of any officer (or other agent employed by the Company or any Subsidiary) having managerial responsibility for such property, desirable in the conduct of its business or the business of any Subsidiary or (ii) selling any properties; provided that the proceeds of such sale shall be applied in accordance with Section 5.13, if applicable. SECTION 5.8 Insurance. The Company shall provide or cause to be provided for itself and any Subsidiaries of the Company insurance (including appropriate self-insurance) with insurers, believed by the Company to be responsible, against loss or damage of the kinds customarily insured against by Persons similarly situated and owning like properties in the same general areas in which the Company or such Subsidiaries operate, unless 49 such failure to provide or cause to be provided such insurance would not have a material adverse effect on the condition (financial or otherwise), earnings or business affairs of the Company and its Subsidiaries taken as one enterprise. SECTION 5.9 Limitation on Indebtedness. The Company will not, and will not permit any of its Subsidiaries to, create, incur, assume, or directly or indirectly guarantee or in any other manner become directly or indirectly liable for the payment of, any Indebtedness (including any Acquired Indebtedness but excluding Permitted Indebtedness) unless at the time of such event and after giving effect thereto on a pro forma basis the Company's Fixed Charge Coverage Ratio for the four full fiscal quarters immediately preceding such event, taken as one period, calculated on the assumption that (i) such Indebtedness had been incurred on the first day of such four-quarter period and (ii) any acquisition or disposition by the Company and its Subsidiaries of any assets out of the ordinary course of business, or any company or business facility, in each case since the first day of its last four completed fiscal quarters, had been consummated on such first day of such four-quarter period, would have been at least 2.00 to 1.00. SECTION 5.10 Limitation on Restricted Payments. The Company will not, and will not permit any Subsidiary to, directly or indirectly: (a) declare or pay any dividend on, or make any distribution to holders of, any Capital Stock of the Company (other than dividends or distributions payable solely in shares of Qualified Capital Stock of the Company or in options, warrants or other rights to acquire Qualified Capital Stock of the Company); (b) purchase, redeem, defease or otherwise acquire or retire for value any Capital Stock of the Company or any Affiliate thereof (other than any Wholly Owned Subsidiary of the Company) or any option, warrant or other right to acquire such Capital Stock of the Company or any Affiliate thereof; (c) make any principal payment on, or redeem, repurchase, defease or otherwise acquire or retire for value in each case, prior to any scheduled repayment, or maturity, any Subordinated Indebtedness; or (d) make any Investment in any Person (other than any Permitted Investment) unless the Person thereby becomes a Wholly Owned Subsidiary; (such payments described in (a) through (d) collectively, "Restricted Payments") unless at the time of and after giving effect to the proposed Restricted Payment (the amount of any such Restricted Payment, if other than cash, as determined by the 50 Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution), (1) no Default or Event of Default shall have occurred and be continuing; and such Restricted Payment shall not be an event which is, or after notice or lapse of time or both, would be, an "event of default" under the terms of any Indebtedness of the Company or any Subsidiary; (2) immediately before and immediately after giving effect to such transaction on a pro forma basis, the Company could incur $1.00 of additional Indebtedness under Section 5.9 (other than Permitted Indebtedness); and (3) the aggregate amount of all Restricted Payments (plus, without duplication, dividends and distributions paid to any Person other than the Company, a Wholly Owned Subsidiary or a Permitted Joint Venture as permitted by Section 5.11 and any Restricted Payments made pursuant to clauses (i), (iv), (v) and (vi) of the succeeding paragraph) declared or made after the date hereof shall not exceed the sum of (A) 50% of the Consolidated Net Income of the Company accrued on a cumulative basis during the period beginning on the date hereof and ending on the last day of the Company's last fiscal quarter ending prior to the date of such proposed Restricted Payment (or, if such aggregate cumulative Consolidated Net Income shall be a loss, minus 100% of such loss); (B) the aggregate Net Cash Proceeds received after the date hereof by the Company as capital contributions to the Company; (C) the aggregate Net Cash Proceeds received after the date hereof by the Company from the issuance or sale (other than to any of its Subsidiaries) of shares of Capital Stock (other than Redeemable Capital Stock) of the Company or any options or warrants to purchase such shares (other than issuances in respect of clause (ii) of the subsequent paragraph) of Capital Stock (other than Redeemable Capital Stock) of the Company; (D) the aggregate Net Cash Proceeds received after the date hereof by the Company (other than from any of its Subsidiaries) upon the exercise of any options or warrants to purchase shares of Capital Stock of the Company; (E) the aggregate Net Cash Proceeds received after the date hereof by the Company for debt securities that have been converted into or exchanged for Qualified Capital Stock of the Company to the extent such debt securities are originally sold for cash plus the aggregate cash received by the Company at the time of such conversion or exchange; and (F) other Restricted Payments in an aggregate amount not to exceed $10,000,000. 51 None of the foregoing provisions shall be deemed to prohibit the following Restricted Payments so long as in the case of clauses (ii), (iii), (v) and (vi) there is no Default or Event of Default continuing: (i) dividends paid within 60 days after the date of declaration if at the date of declaration, such payment would be permitted by the provisions of the preceding paragraph and such payment shall be deemed to have been paid on such date of declaration for purposes of the calculation required by the provisions of the foregoing paragraph; (ii) the redemption, repurchase or other acquisition or retirement of any shares of any class of Capital Stock of the Company or Subordinated Indebtedness in exchange for, or out of the net proceeds of, a substantially concurrent issue and sale (other than to a Subsidiary) of shares of Qualified Capital Stock of the Company; provided that any net proceeds from the issue and sale of such Qualified Capital Stock are excluded from clause 3(C) of the foregoing paragraph; (iii) the redemption, repurchase, or other acquisition or retirement of Subordinated Indebtedness of the Company (other than Redeemable Capital Stock) made by exchange for, or out of the proceeds of the substantially concurrent sale of, new Indebtedness of the Company so long as (A) the principal amount of such new Indebtedness does not exceed the principal amount of the Indebtedness being so redeemed, repurchased, acquired or retired for value (plus the amount of any premium required to be paid under the terms of the instrument governing the Indebtedness being so redeemed, repurchased, acquired or retired), (B) such Indebtedness is subordinated to Senior Indebtedness and the Notes at least to the same extent as such Subordinated Indebtedness so purchased, exchanged, redeemed, repurchased, acquired or retired for value, (C) such Indebtedness has a Stated Maturity for its final scheduled principal payment later than the Stated Maturity for the final scheduled principal payment of the Notes and (D) such Indebtedness has an Average Life to Stated Maturity equal to or greater than the remaining Average Life to Stated Maturity of the Notes; (iv) any purchase, redemption or other acquisition of Capital Stock of a Permitted Joint Venture from a physician or other healthcare provider which is required to be purchased, redeemed or otherwise acquired by applicable law; (v) in addition to the transactions covered by clause (iv) of this paragraph, any purchase, redemption or other acquisition of Capital Stock of a Permitted Joint Venture; or (vi) the making of any payment pursuant to any guarantee of Indebtedness of a Permitted Joint Venture. 52 SECTION 5.11 Restrictions on Preferred Stock of Subsidiaries and Subsidiary Distributions. (a) The Company will not permit any Subsidiary to issue any Preferred Stock (other than Preferred Stock issued (i) prior to the date hereof or (ii) to the Company or a Wholly Owned Subsidiary (collectively, "Permitted Preferred Stock")), or permit any Person (other than the Company or a Wholly Owned Subsidiary) to own or hold any interest in any Preferred Stock of any Subsidiary, other than with respect to any Preferred Stock issued prior to the date hereof, unless a Subsidiary would be entitled to create, incur or assume Indebtedness pursuant to Section 5.9 in the aggregate principal amount equal to the aggregate liquidation value of the Preferred Stock to be issued. (b) The Company will not, and will not permit any Subsidiary to, declare or pay dividends or distributions on any Capital Stock of such Subsidiary to any Person (other than to the Company or any Wholly Owned Subsidiary or any lender in its capacity as a pledgee of Capital Stock of any Subsidiary under the Credit Facility); provided, that the foregoing shall not prohibit (i)(A) the Company or any Subsidiary from making any payment of dividends or distributions on the Capital Stock of any Subsidiary in the aggregate up to the amount of Restricted Payments that the Company could make at any time pursuant to Section 5.10; (B) the purchase, redemption, or other acquisition of the Capital Stock of a Permitted Joint Venture from a physician or other healthcare provider which is required to be purchased, redeemed or otherwise acquired by applicable law; or (C) the payment of pro rata dividends or distributions to holders of minority interests in the Capital Stock of a Subsidiary made in accordance with the terms of the agreement pursuant to which such payment is made; or (ii) in addition to the transactions covered by clause (i)(B) of this paragraph, in the event no Default or Event of Default has occurred and is continuing, the purchase, redemption, or other acquisition of the Capital Stock of a Permitted Joint Venture. SECTION 5.12 Limitation on Transactions with Affiliates. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into or suffer to exist any transaction or series of related transactions (including, without limitation, the sale, purchase, exchange or lease of assets, property or services) with any Affiliate of the Company (other than a Wholly Owned Subsidiary or a Permitted Joint Venture) unless (i) such transaction or series of related transactions is on terms that are no less favorable to the Company or such Subsidiary, as the case may be, than would be available in a comparable transaction in arm's-length dealings with an unrelated third party and (ii) with respect to a transaction or series of related transactions involving payments in excess of $5,000,000 in the aggregate, the Company delivers an Officers' Certificate to the Trustee certifying that (x) such transaction complies with clause (i) above and (y) such transaction or series of related transactions shall have been 53 approved by a majority of the independent directors of the Board of Directors of the Company; provided, however, that the foregoing restriction shall not apply to (a) any transaction or series of related transactions entered into prior to the date hereof, (b) the payment of reasonable and customary regular fees to directors of the Company or any of its Subsidiaries who are not employees of the Company or any Affiliate or (c) the Company's employee compensation and other benefit arrangements. SECTION 5.13 Disposition of Proceeds of Asset Sales. (a) The Company will not, and will not permit any Subsidiary to, make any Asset Sale unless (i) the Company or such Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the shares or assets subject to such Asset Sale (as determined by the Board of Directors of the Company and evidenced in a board resolution whose determination shall be conclusive) and (ii) at least 75% of the proceeds from such Asset Sale when received consists of cash or Cash Equivalents; provided, however, any Asset Sale which constitutes a Permitted Investment under clause (vii) or (viii) of the definition of Permitted Investment shall not be subject to the condition set forth in clause (ii) of this sentence. (b) If all or a portion of the Net Cash Proceeds of any Asset Sale are not required to be applied to repay permanently any outstanding Senior Indebtedness as required by the terms thereof, or, if not so required to be applied, the Company determines not to apply such Net Cash Proceeds to the prepayment of such Senior Indebtedness or if no such Senior Indebtedness is outstanding, then the Company may within one year of the Asset Sale, invest (or enter into a legally binding agreement to invest) the Net Cash Proceeds in properties and assets that (as determined by the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution) replace the properties and assets that were the subject of the Asset Sale or in properties and assets that will be used in the businesses of the Company, its Wholly Owned Subsidiaries or its Permitted Joint Ventures existing on the date hereof or in any Healthcare Related Business. If any such legally binding agreement to invest any Net Cash Proceeds is terminated, then the Company may invest such Net Cash Proceeds, prior to the end of such one-year period or six months from such termination, whichever is later, in the business of the Company, its Wholly Owned Subsidiaries or Permitted Joint Ventures or in any Healthcare Related Business as provided above. The amount of such Net Cash Proceeds neither used to repay or prepay Senior Indebtedness nor used or invested as set forth in this paragraph (after the periods specified in this paragraph) constitutes "Excess Proceeds." (c) Subject to paragraph (f) below, when the aggregate amount of Excess Proceeds equals $10,000,000 or more, the Company shall apply the Excess Proceeds to the repayment of the Notes as follows: the Company shall make an offer to purchase (an 54 "Offer") from all holders of the Notes in accordance with the procedures set forth herein in the maximum principal amount (expressed as a multiple of $1,000) of Notes that may be purchased out of an amount (the "Note Amount") equal to the product of such Excess Proceeds multiplied by a fraction, the numerator of which is the outstanding principal amount of the Notes, and the denominator of which is the sum of the outstanding principal amount of the Notes (subject to proration in the event such amount is less than the aggregate Offered Price (as defined herein) of all Notes tendered). The offer price shall be payable in cash in an amount equal to 100% of the principal amount of the Notes plus accrued and unpaid interest, if any, to the date such Offer is consummated (the "Offered Price"), in accordance with the procedures set forth herein. To the extent that the aggregate Offered Price of the Notes tendered pursuant to an Offer is less than the Note Amount relating thereto (such shortfall constituting a "Deficiency"), the Company may use such Deficiency, or a portion thereof, in the business of the Company, its Wholly Owned Subsidiaries or its Permitted Joint Ventures or any Healthcare Related Business. Upon completion of the purchase of all the Notes tendered pursuant to an Offer, the amount of Excess Proceeds shall be reset at zero. (d) Whenever the Excess Proceeds received by the Company exceed $10,000,000, such Excess Proceeds shall be set aside by the Company in a separate account pending (i) deposit with the Trustee or a Paying Agent of the amount required to purchase the Notes tendered in an Offer, (ii) delivery by the Company of the Offered Price to the holders of the Notes tendered in an Offer and (iii) application, as set forth above, of Excess Proceeds for general corporate purposes. Such Excess Proceeds may be invested in Temporary Cash Investments, provided that the maturity date of any investment made after the amount of Excess Proceeds exceeds $10,000,000 shall not be later than the Offer Date. The Company shall be entitled to any interest or dividends accrued, earned or paid on such Temporary Cash Investments. (e) If the Company becomes obligated to make an Offer pursuant to clause (c) above, the Notes shall be purchased by the Company, at the option of the holder thereof, in whole or in part in integral multiples of $1,000, on a date that is not earlier than 30 days and not later than 60 days from the date the notice is given to holders, or such later date as may be necessary for the Company to comply with the requirements under the Exchange Act, subject to proration in the event the amount of Excess Proceeds is less than the aggregate Offered Price of all Notes tendered and to satisfaction by or on behalf of the holder of the requirements set forth in clause (f) below. (f) In the event that the Company shall be unable to purchase Notes from holders thereof in an Offer because of the provisions (i) of applicable law, (ii) of the Company's loan agreements, indentures or other contracts in existence on the date hereof, (iii) permitted to exist or become effective by 55 subparagraph (h)(ii) below or (iv) of the Credit Facility, the Company need not make an Offer. The Company shall then be obligated to (i) invest the Excess Proceeds in properties and assets to replace the properties and assets that were the subject of the Asset Sale or in properties and assets that (as determined by the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution) will be used in the businesses of the Company, its Wholly Owned Subsidiaries or its Permitted Joint Ventures existing on the date hereof or in any Healthcare Related Business or (ii) apply the Excess Proceeds to repay Senior Indebtedness. (g) The Company shall comply with the applicable tender offer rules, including Rule 14e-1 under the Exchange Act, in connection with an Offer. (h) The Company will not, and will not permit any Subsidiary to, create or permit to exist or become effective any restriction (other than restrictions existing under (i) Indebtedness as in effect on the date hereof or (ii) any Senior Indebtedness existing on the date hereof or thereafter) that would materially impair the ability of the Company to make an Offer to purchase the Notes upon an Asset Sale or, if such Offer is made, to pay for the Notes tendered for purchase. (i) Subject to paragraph (f) above, within 30 days after the date on which the amount of Excess Proceeds equals or exceeds $10,000,000, the Company shall send by first-class mail, postage prepaid, to the Trustee and to each Holder of the Notes, at his or her address appearing in the Note Register, a notice specifying, among other things: (1) that the Holder has the right to require the Company to repurchase, subject to proration, such Holder's Notes at the Offered Price; (2) the Purchase Date; (3) the instructions a Holder must follow in order to have its Notes purchased in accordance with paragraph (c) of this Section; and (4) (i) the most recently filed Annual Report on Form 10-K (including audited consolidated financial statements of the Company, the most recent subsequently filed Quarterly Report on Form 10-Q and any Current Report on Form 8-K of the Company filed subsequent to such Quarterly Report, other than Current Reports describing Asset Sales otherwise described in the offering materials (or corresponding successor reports) (or in the event the Company is not required to prepare any of the foregoing Forms, the comparable information required pursuant to Section 5.18), (ii) a description of material developments in the Company's business subsequent to the date of the latest of such 56 Reports, (iii) if material, appropriate pro forma financial information, and (iv) such other information, if any, concerning the business of the Company which the Company in good faith believes will enable such Holders to make an informed investment decision. (j) Holders electing to have Notes purchased will be required to give notice and surrender such Notes to the Company at the address specified in the notice at least two Business Days prior to the Purchase Date. An election may be withdrawn before or after delivery by the Holder to the Company or its agent at the address specified in writing by the Company, by means of a written notice of withdrawal delivered by the Holder to the Company or its agent at any time prior to the close of business on two Business Days prior to the Purchase Date specifying, as applicable: (1) the certificate number of the Note in respect of which such notice of withdrawal is being submitted; (2) the principal amount of the Note (which shall be $1,000 or an integral multiple thereof) with respect to which such notice of withdrawal is being submitted; and (3) the principal amount, if any, of such Note (which shall be $1,000 or an integral multiple thereof) that remains subject to the original notice of the Offer and that has been or will be delivered to the Company or its agent for purchase by the Company. Holders will be entitled to withdraw their election if the Company receives, not later than two Business Days prior to the Purchase Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Notes delivered for purpose by the Holder as to which his election is to be withdrawn and a statement that such Holder is withdrawing his election to have such Notes purchased. (k) Not later than the Purchase Date, the Company shall (i) accept for payment Notes or portions thereof tendered pursuant to the Offer, (ii) by 11 a.m. on the Business Day prior to the Purchase Date, deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 5.4(c)) an amount of money in same day funds (or New York Clearing House funds if such deposit is made prior to the Purchase Date) sufficient to pay the aggregate Offered Price of all the Notes or portions thereof which are to be purchased on that date (iii) deliver to the Paying Agent an Officers' Certificate stating the securities or portions thereof accepted for payment by the Company. The Trustee and the Paying Agent shall return to the Company any cash that remains unclaimed, together with interest 57 or dividends, if any, thereon, held by them for the payment of the Offered Price; provided, however, that, to the extent that the aggregate amount of cash deposited by the Company with the Trustee in respect of an offer exceeds the aggregate Offered Price of the Notes or portions thereof to be purchased, then the Trustee shall hold such excess for the Company and promptly after the Business Day following the Purchase Date the Trustee shall upon demand return any such excess to the Company together with interest or dividends, if any, thereon. (l) Notes to be purchased shall, on the Purchase Date, become due and payable at the Offered Price and from and after such date (unless the Company shall default in the payment of the Offered Price) such Notes shall cease to bear interest. Such Offered Price shall be paid to such Holder promptly following the later of the Business Day following the Purchase Date and the time of delivery of such Note to the relevant Paying Agent at the office of such Paying Agent by the Holder thereof in the manner required. Upon surrender of any such Note for purchase in accordance with the foregoing provisions, such Note shall be paid by the Company at the Offered Price; provided, however, that installments of interest whose Stated Maturity is on or prior to the Purchase Date shall be payable to the Holders of such Notes, registered as such on the record dates according to the terms and the provisions of Section 2.3; provided further that Notes to be purchased are subject to proration in the event the Notes Amount is less than the aggregate Offered Price of all Notes tendered for purchase, with such adjustments as may be appropriate by the Trustee so that only Notes in denominations of $1,000 or integral multiples thereof, shall be purchased. If any Note tendered for purchase shall not be so paid upon surrender thereof, the principal thereto (and premium, if any, thereon) shall, until paid, bear interest from the Purchase Date at the rate borne by such Note. Any Note that is to be purchased only in part shall be surrendered to a Paying Agent at the office of such Paying Agent (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing), and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Note, without service charge, one or more new Notes of any authorized denomination as requested by such Holder in an aggregate principal amount equal to, and in exchange for, the portion of the principal amount of the Note so surrendered that is not purchased. SECTION 5.14 Limitation on Liens Securing Subordinated Indebtedness. The Company will not, and will not permit any Subsidiary to, create, incur, assume or suffer to exist any Liens of any kind upon any of their respective assets or properties now owned or acquired after the date hereof or any income or profits therefrom securing (i) any Indebtedness of the Company which is expressly by its terms subordinate or junior in right of payment 58 to any other Indebtedness of the Company, unless the Notes are equally and ratably secured; provided that, if such Indebtedness which is expressly by its terms subordinate or junior in right of payment to any other Indebtedness of the Company is expressly subordinate to the Notes, the Lien securing such subordinated or junior Indebtedness shall be subordinate and junior to the Lien securing the Notes with the same relative priority as such subordinated or junior Indebtedness shall have with respect to the Notes; provided, further, that this clause (i) shall not be applicable to any Liens securing any such Indebtedness which became Indebtedness of the Company pursuant to a transaction permitted under Article XII or Liens securing Acquired Indebtedness and, in each case, which Liens were in existence at the time of such transaction or incurrence of such Acquired Indebtedness (unless such Indebtedness was incurred in connection with, or in contemplation of, such transaction or incurrence of such Acquired Indebtedness), so long as such Liens do not extend to or cover any property or assets of the Company or any Subsidiary other than property or assets acquired in such transaction or securing such Acquired Indebtedness, or (ii) any assumption, guarantee or other liability of any Subsidiary in respect of any Indebtedness of the Company which is expressly by its terms subordinate or junior in right of payment to any other Indebtedness of the Company, unless the substantially similar assumption, guarantee or other liability of such Subsidiary in respect of the Notes is equally and ratably secured; provided that, if such subordinated Indebtedness is expressly by its terms subordinate or junior to the Notes, then the Lien securing the assumption, guarantee or other liability of such Subsidiary in respect of such subordinated or junior Indebtedness shall be subordinate and junior to the Lien securing the assumption, guarantee or other liability of such Subsidiary in respect of the Notes with the same relative priority as such subordinated or junior Indebtedness shall have with respect to the Notes; provided, further, that this clause (ii) shall not be applicable to Liens securing any such assumption, guarantee or other liability which existed at the time such Subsidiary became a Subsidiary and which Liens were in existence at the time of such transaction (unless such assumption, guarantee or other liability was incurred in connection with, or in contemplation of, such Person becoming a Subsidiary), so long as such Liens do not extend to or cover any property or assets of the Company or any Subsidiary other than the property or assets of such Person. SECTION 5.15 Limitation on Other Senior Subordinated Indebtedness. The Company will not create, incur, assume, guarantee or in any other manner become liable with respect to any Indebtedness, other than the Notes, that is subordinate in right of payment to any Senior Indebtedness, unless such Indebtedness is also pari passu with, or subordinate in right of payment to, the Notes pursuant to subordination provisions substantially similar to those contained herein. 59 SECTION 5.16 Limitation on Issuance of Guarantees of Subordinated Indebtedness. (a) The Company will not permit any Subsidiary, directly or indirectly, to assume, guarantee or in any other manner become liable with respect to any Indebtedness of the Company which is expressly by its terms subordinate or junior in right of payment to any other Indebtedness of the Company unless (i) such Subsidiary simultaneously executes and delivers a supplemental indenture to this Indenture providing for a guarantee of payment of the Notes by such Subsidiary and (A) if any such assumption, guarantee or other liability is subordinated, the guarantee under the supplemental indenture shall be subordinated to the same extent as the Notes are subordinated to Senior Indebtedness of the Company under this Indenture and (B) if such subordinated or junior Indebtedness is by its terms expressly subordinated to the Notes, any such assumption, guarantee or other liability of such Subsidiary with respect to such subordinated or junior Indebtedness shall be subordinated to such Subsidiary's assumption, guarantee or other liability with respect to the Notes to the same extent as such subordinated or junior Indebtedness is subordinated or junior to the Notes under this Indenture; and (ii) such Subsidiary waives and will not in any manner whatsoever claim or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against the Company or any other Subsidiary as a result of any payment by such Subsidiary under its Guarantee. (b) Each guarantee created pursuant to the provisions described in the foregoing paragraph is referred to as a "Guarantee" and the issuer of each such Guarantee is referred to as a "Guarantor." Notwithstanding the foregoing, any Guarantee by a Subsidiary of the Notes shall provide by its terms that it (together with any Liens arising from such Guarantee) shall be automatically and unconditionally released and discharged upon (i) any sale, exchange or transfer, to any Person not an affiliate of the Company, of all of the Company's Capital Stock in, or all or substantially all the assets of, such Subsidiary, which is in compliance with this Indenture or (ii) the release or discharge of the assumption, guarantee or other liability which resulted in the creation of such Guarantee. SECTION 5.17 Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries. The Company will not, and will not permit any Subsidiary to, create or otherwise cause or suffer to exist or become effective any restriction of any kind, on the ability of any Subsidiary to (i) pay dividends or make any other distribution on its Capital Stock to the Company or any other Subsidiary, (ii) pay any Indebtedness owed to the Company or any other Subsidiary, (iii) make any Investment in the Company or any other Subsidiary or (iv) transfer any of its property or assets to the Company or any other Subsidiary, except (a) any encumbrance or restriction existing under or by reasons of applicable law; (b) any encumbrance or restriction existing under or by reason of customary non-assignment provisions of any lease IND 60 governing a leasehold interest of the Company, or any Subsidiary; (c) any restriction pursuant to an agreement in effect at or entered into on the date hereof as set forth in Schedule I hereto; (d) any restriction existing under the Credit Facility as in effect on the date hereof; (e) any restriction, with respect to a Subsidiary that is not a Subsidiary on the date hereof, in existence at the time such Person becomes a Subsidiary or created on the date it becomes a Subsidiary and not incurred in connection with, or in contemplation of, such Person becoming a Subsidiary; and (f) any restriction existing under any agreement that extends, renews, refinances or replaces the agreements containing the restrictions in the foregoing clauses (c) through (e), provided that the terms and conditions of any such restrictions are not materially less favorable to the holders of the Notes than those under or pursuant to the agreement evidencing the Indebtedness so extended, renewed, refinanced or replaced (in the opinion of the Board of Directors of the Company whose determination shall be conclusive). Notwithstanding the foregoing, nothing in this Section 5.17 shall prohibit or restrict the creation, incurrence, assumption, suffering to exist or becoming effect of any Indebtedness or Liens upon any of the assets of the Company and its Subsidiaries, the pledge by the Company or any Subsidiary of any Capital Stock of any Subsidiary, the guarantee of any Indebtedness by an Subsidiary, in each case, in accordance with the other terms of this Indenture, or any action taken to exercise any remedy in respect of any such Indebtedness, Lien or pledge or to enforce such guarantee. SECTION 5.18 Provision of Financial Statements. As long as any of the Notes remain outstanding hereunder, The Company and any Guarantor will be required to file with the Commission the annual reports, quarterly reports and other information which the Company and the Guarantors, if any, are required to be filed with the Commission pursuant to Section 13(a), 13(c) or 15(d) of the Exchange Act, whether or not the Company or any Guarantor has a class of securities registered under the Exchange Act. The Company and any Guarantor will supply without cost to each Holder of the Notes and file with the Trustee within fifteen days after the Company and the Guarantors, if any, copies of such annual reports, quarterly reports and any other such information. SECTION 5.19 Statement by Officers as to Default. (a) The Company will deliver to the Trustee, on or before a date not more than 60 days after the end of each fiscal quarter and not more than 120 days after the end of each Fiscal Year of the Company ending after the date hereof, a written statement signed by two executive officers of the Company, one of whom shall be the principal executive officer, principal financial officer or principal accounting officer of the Company, stating whether or not, after a review of the activities of the Company during such year or such quarter and of the Company's performance under this Indenture, to the best knowledge, based on 61 such review, of the signers thereof, the Company has fulfilled all its obligations and is in compliance with all conditions and covenants under this Indenture throughout such year or quarter, as the case may be, and, if there has been a Default specifying each Default and the nature and status thereof. (b) When any Default or Event of Default has occurred and is continuing, or if the Trustee or any Holder or the trustee for or the holder or any other evidence of Indebtedness of the Company or any Subsidiary gives any notice or takes any other action with respect to a claimed default (other than with respect to Indebtedness in the principal amount of less than $1,000,000), the Company shall deliver to the Trustee by registered or certified mail or by telegram, telex or facsimile transmission followed by hard copy an Officers' Certificate specifying such Default, Event of Default, notice or other action within five Business Days of its occurrence. SECTION 5.20 Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any covenant or condition set forth in Sections 5.6 through 5.12 and 5.15 through 5.19, if, before or after the time for such compliance, the Holders of not less than a majority in aggregate principal amount of the Notes at the time outstanding waive such compliance in such instance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect SECTION 5.21 Further assurance. From time to time whenever reasonably demanded by the Trustee the Company will make, execute and deliver or cause to be made, executed and delivered any and all such further and other instruments and assurances as may be reasonably necessary or proper to carry out the intention of or to facilitate the performance of the terms of this Indenture or to secure the rights and remedies hereunder of the holders of the Notes. ARTICLE VI NOTEHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 6.1 Company to furnish Trustee information as to names and addresses of Noteholders. The Company will furnish or cause to be furnished to the Trustee: (a) semi-annually, not more than 15 days after each record date for the payment of interest, a list of the names and addresses of the Noteholders as of such record date; 62 (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; and (c) after the consummation of the Exchange Offer, any other information as may be required from time to time in accordance with Section 312(a) of the Trust Indenture Act; provided, however, that so long as the Trustee is the Note Registrar, no such list shall be required to be furnished. SECTION 6.2 Preservation and disclosure of lists. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Notes (i) contained in the most recent list furnished to it as provided in Section 6.1 and (ii) received by it in the capacity of the paying agent (if so acting) and Note Registrar. The Trustee may destroy any list furnished to it as provided in Section 6.1 upon receipt of a new list so furnished. (b) In case three or more holders of Notes (hereinafter referred to as "applicants") apply in writing to the Trustee, and furnish to the Trustee reasonable proof that each such applicant has owned a Note for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Notes with respect to their rights under this Indenture or under the Notes, and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within five Business Days after the receipt of such application, at its election either (i) afford such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 6.2; or (ii) inform such applicants as to the approximate number of holders of Notes whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 6.2, and as to the approximate cost of mailing to such Noteholders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Noteholder whose name and address appears in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 6.2, a copy of the form of proxy 63 or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Commission, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of Notes or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. After opportunity for hearing upon the objections specified in the written statement so filed, the Commission may enter an order either sustaining one or more of such objections or refusing to sustain any of them. If the Commission, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, said Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Noteholders with reasonable promptness after the entry of such order and the renewal of such tender, otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Each and every holder of the Notes, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any Paying Agent nor the Note Registrar shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Notes in accordance with the provisions of subsection (b) of this Section 6.2, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b). SECTION 6.3 Reports by the Trustee. (a) On October 1 of each year, beginning in 1997, so long as there are any Notes outstanding hereunder, the Trustee shall transmit by mail to all Noteholders a brief report dated as of such reporting date with respect to any of the following events which may have occurred during the twelve months preceding the date of such report (but if no such event has occurred within such period, no report need be transmitted): (1) any change to its eligibility under Section 8.9 and its qualification under Section 8.8; (2) the creation of or any material change to a relationship specified in Section 310(b)(1) through Section 310(b)(10) of the Trust Indenture Act; (3) the character and amount of any advances (and if the Trustee elects so to state, the circumstances 64 surrounding the making thereof) made by the Trustee (as such) which remain unpaid on the date of such report, and for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Notes, on any property or funds held or collected by it as Trustee, except that the Trustee shall not be required (but may elect) to state such advances if such advances so remaining unpaid aggregate not more than 0.5 percent of the principal amount of the Notes outstanding on the date of such report; (4) the amount, interest rate, and maturity date of all other indebtedness owing by the Company (or by any other obligor on the Notes) to the Trustee in its individual capacity, on the date of such report, with a brief description of any property held as collateral security therefor, except an indebtedness based upon a creditor relationship arising in any manner described in paragraph (2), (3), (4) or (6) of subsection (b) of Section 311 of the Trust Indenture Act; (5) any change to the property and funds, if any, physically in the possession of the Trustee (as such) on the date of such report; (6) any additional issue of Notes which the Trustee has not previously reported; and (7) any action taken by the Trustee in the performance of its duties under this Indenture which it has not previously reported and which in its opinion materially affects the Notes, except action in respect of a Default, notice of which has been or is to be withheld by it in accordance with the provisions of Section 8.14. (b) The Trustee shall transmit to the Noteholders, as hereinafter provided, a brief report with respect to the character and amount of any advances made by the Trustee (as such) since the date of the last report transmitted pursuant to the provisions of subsection (a) of this Section 6.3 (or if no such report has yet been so transmitted, since the date of execution of this Indenture), for the reimbursement of which it claims or may claim a lien or charge prior to that of the Notes on property or funds held or collected by it as Trustee, and which it has not previously reported pursuant to this subsection (b), except that the Trustee shall not be required to report such advances if such advances remaining unpaid at any time aggregate 10% or less of the principal amount of Notes outstanding at such time, such report to be transmitted within 90 days after such time. (c) Reports pursuant to this Section 6.3 shall be transmitted by mail to all holders of Notes, as the names and addresses of such holders appear in the Note Register. 65 (d) A copy of each such report shall, at the time of such transmission to Noteholders, be furnished to the Company and be filed by the Trustee with each stock exchange upon which the Notes are listed and also with the Commission. The Company will notify the Trustee when and as the Notes become listed on any stock exchange. (e) Notwithstanding the foregoing provisions of this Section 6.3, the foregoing provisions of this Section 6.3 shall not be operative as a part of this Indenture until this Indenture is qualified under the Trust Indenture Act, and, until such qualification, this Indenture shall be construed as if this Section 6.3 were not contained herein. SECTION 6.4 Reports by the Company. (a) The Company will, for so long as any Notes remain outstanding, furnish to the Noteholders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. (b) Such reports shall be delivered to the Note Registrar and the Note Registrar will mail them at the Company's expense to the Noteholders at their addresses appearing in the Note Register maintained by the Note Registrar. (e) Upon qualification of this Indenture under the TIA, the Company shall also comply with the provisions of Trust Indenture Act ss. 314(a). ARTICLE VII REMEDIES SECTION 7.1 Events of Default. "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be occasioned by the provisions of Article III or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) there shall be a default in the payment of any interest on any Note when it becomes due and payable, and such default shall continue for a period of 30 days; (b) there shall be a default in the payment of the principal of (or premium, if any, on) any Note at its Stated Maturity; 66 (c) (i) there shall be a default in the performance, or breach, of any covenant or agreement of the Company or of any Guarantor under this Indenture (other than a default in the performance or breach of a covenant or agreement which is specifically dealt with elsewhere in this Indenture) and such default or breach shall continue for a period of 30 days after written notice has been given, by certified mail, (x) to the Company by the Trustee or (y) to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the outstanding Notes; (ii) there shall be a default in the performance or breach of the provisions of Article XII; (iii) the Company shall have failed to make or consummate an Offer in accordance with Section 5.13; or (iv) the Company shall have failed to make or consummate a Change in Control Offer in accordance with Section 4.5; (d) one or more defaults shall have occurred under any agreements, indentures or instruments under which the Company or any Subsidiary then has outstanding Indebtedness in excess of $5,000,000 in the aggregate and, if not already matured at its final maturity in accordance with its terms, such Indebtedness shall have been accelerated; (e) one or more judgments, orders or decrees for the payment of money in excess of $5,000,000, either individually or in the aggregate, shall be entered against the Company or any Subsidiary or any of their respective properties which is not fully covered by insurance, bond, surety or similar instrument and shall not be discharged and there shall have been a period of 60 days during which a stay of enforcement of such judgment or order, by reason of an appeal or otherwise, shall not be in effect; (f) the entry of a decree or order by a court having jurisdiction in the premises (i) for relief in respect of the Company or any Subsidiary in an involuntary case or proceeding under any Bankruptcy Law or (ii) adjudging the Company or any Subsidiary a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment or composition of or in respect of the Company or any Subsidiary under any Bankruptcy Law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or any Subsidiary or of any substantial part of any of their properties, or ordering the winding up or liquidation of any of their affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; or (g) the institution by the Company or any Subsidiary of a voluntary case or proceeding under any Bankruptcy Law or any other case or proceedings to be adjudicated a bankrupt or insolvent, or the consent by the Company or any Subsidiary to the entry of a decree or order for relief in 67 respect of the Company or any Subsidiary in any involuntary case or proceeding under any Bankruptcy Law or to the institution of bankruptcy or any insolvency proceedings against the Company or any Subsidiary, or the filing by the Company or any Subsidiary of a petition or answer or consent seeking reorganization or relief under any Bankruptcy Law, or the consent by it to the filing of any such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of any of the Company or any Subsidiary or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due or taking of corporate action by the Company or any Subsidiary in furtherance of any such action. The Company shall deliver to the Trustee within five days after the occurrence thereof, written notice, in the form of an Officers' Certificate, of any Default, its status and what action the Company is taking or proposes to take with respect thereto. SECTION 7.2 Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Sections 7.1(f) and (g)) occurs and is continuing, the Trustee or the Holders of not less than 25% in aggregate principal amount of the Notes outstanding may, and the Trustee upon the request of the Holders of not less than 25% in aggregate principal amount of the Notes outstanding shall, declare the principal of all the Notes to be due and payable immediately in an amount equal to the principal amount of the Notes, together with accrued and unpaid interest to the date the Notes become due and payable, by a notice in writing to the Company (and to the Trustee, if given by the Holders and, if the Credit Facility is in effect, to the Senior Representative with respect thereto), and upon any such declaration such principal shall become immediately due and payable. If an Event of Default specified in Sections 7.1(f) and (g) occurs and is continuing, then the principal of all the Notes shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. At any time after such declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in aggregate principal amount of the Notes outstanding, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if: (a) the Company has paid or deposited with the Trustee a sum sufficient to pay 68 (i) all sums paid or advanced by the Trustee under Section 8.6 and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, (ii) all overdue interest on all Notes, (iii) the principal of and premium, if any, on any Notes which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Notes, and (iv) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate borne by the Notes; and (b) all Events of Default, other than the non-payment of principal of Notes which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 7.13. No such rescission shall affect any subsequent default or impair any right consequent thereon provided in Section 7.13. SECTION 7.3 Collection of Indebtedness and Suits for Enforcement by Trustee. The Company and any Guarantor covenant that if (a) default is made in the payment of any interest on any Note when such interest becomes due and payable and such default continues for a period of 30 days, or (b) default is made in the payment of the principal of or premium, if any, on any Note at the stated maturity thereof, (c) the Company and any such Guarantor will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Notes, subject to Article III, the whole amount then due and payable on such Notes for principal and premium, if any, and interest, with interest upon the overdue principal and premium, if any, and, to the extent that payment of such interest shall be legally enforceable, upon overdue installments of interest, at the rate borne by the Notes; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company or any Guarantor, as the case may be, fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid and may prosecute such proceeding to judgment or 69 final decree, and may enforce the same against the Company or any Guarantor or any other obligor upon the Notes and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any Guarantor or any other obligor upon the Notes, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders under this Indenture or the Guarantees by such appropriate private or judicial proceedings as the Trustee shall deem most effectual to protect and enforce such rights, including, seeking recourse against any Guarantor pursuant to the terms of any Guarantee, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein or therein, or to enforce any other proper remedy, including, without limitation, seeking recourse against any Guarantor pursuant to the terms of a Guarantee, or to enforce any other proper remedy, subject however to Section 7.12. SECTION 7.4 Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor, including each Guarantor, upon the Notes or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal, and premium, if any, and interest owing and unpaid in respect of the Notes and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) subject to Article III, to collect and receive any moneys or other property payable or deliverable on any such claims and claims and to distribute the same; and any custodian, in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 8.6. 70 Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 7.5 Trustee May Enforce Claims Without Possession of Notes. All rights of action and claims under this Indenture or the Notes may be prosecuted and enforced by the Trustee without the possession of any of the Notes or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Notes in respect to which such judgment has been recovered. SECTION 7.6 Application of Money Collected. Any money collected by the Trustee pursuant to this Article or otherwise on behalf of the Holders or the Trustee pursuant to this Article or through any proceeding or any arrangement or restructuring in anticipation or in lieu of any proceeding contemplated by this Article shall be applied, subject to applicable law, in the following order, at the date or dates taxed by the Trustee and, in case of the distribution of such money on account of principal, premium, if any, or interest, upon presentation of the Notes and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 8.6; SECOND: Subject to Article III, to the payment of the amounts then due and unpaid upon the Notes for principal, premium, if any, and interest, in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal, premium, if any, and interest; and THIRD: Subject to Article III, the balance, if any, to the Person or Persons entitled thereto, including the Company, provided that all sums due and owing to the Holders and the Trustee have been paid in full as required by this Indenture. SECTION 7.7 Limitation on Suits. Subject to Section 7.8, no Holder of any Notes shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless 71 (a) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (b) the Holders of not less than 25% in principal amount of the outstanding Notes shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (c) such Holder or Holders have offered to the Trustee an indemnity satisfactory to the Trustee against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the outstanding Notes; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture or any Guarantee to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner provided in this Indenture or any Guarantee and for the equal and ratable benefit of all the Holders. SECTION 7.8 Unconditional Right of Holders to Receive Principal, Premium and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Note shall have the right on the terms stated herein, which is absolute and unconditional, to receive payment of the principal of, premium, if any, and (subject to Section 2.3) interest on such Note on the respective Stated Maturities expressed in such Note (or, in the case of redemption, on the Redemption Date, or, in the case of a Change in Control Offer, on the Change in Control Purchase Date, or, in the case of an Excess Proceeds Offer, on the Purchase Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder, subject to Article III. SECTION 7.9 Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture or the Guarantees and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Company, each of the Guarantors, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter 72 all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 7.10 Rights and Remedies Cumulative. No right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 7.11 Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Note to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 7.12 Control by Holders. The Holders of not less than a majority in aggregate principal amount of the outstanding Notes shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided that (a) such direction shall not be in conflict with any rule of law or with this Indenture or any Guarantee or expose the Trustee to personal liability; and (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. SECTION 7.13 Waiver of Past Defaults. The Holders of not less than a majority in aggregate principal amount of the outstanding Notes may on behalf of the Holders of all the Notes waive any past Default hereunder and its consequences, except a Default (a) in the payment of the principal of, premium, if any, or interest on any Note, or (b) in respect of a covenant or provision hereof which under Article XI cannot be modified or amended without the consent of the Holder of each outstanding Note affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no 73 such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 7.14 Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Note by his or her acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the outstanding Notes, or to any suit instituted by any Holder for the enforcement of the payment of the principal of, premium, if any, or interest on any Note on or after the respective Stated Maturities expressed in such Note (or, in the case of redemption, on or after the Redemption Date). SECTION 7.15 Waiver of Stay, Extension or Usury Laws. Each of the Company and any Guarantor covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury or other law wherever enacted, now or at any time hereafter in force, which would prohibit or forgive the Company or any Guarantor from paying all or any portion of the principal of, premium, if any, or interest on the Notes contemplated herein or in the Notes or which may affect the covenants or the performance of this Indenture; and each of the Company and any Guarantor (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE VIII CONCERNING THE TRUSTEE SECTION 8.1 Duties and responsibilities of Trustee. (a) Except during the continuance of an Event of Default: 74 (i) the Trustee undertakes to perform such duties and only such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. (b) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (c) Except as specifically set forth in Section 3.14 herein, no provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that (i) this subsection shall not be construed to limit the effect of subsection (a) of this Section 8.1; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a responsible officer or officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (iii) the Trustee shall not be liable with respect to any action taken, suffered or omitted to be taken by it in good faith in accordance with the direction of the holders of not less than a majority or, in the case of any direction delivered pursuant to Section 7.2, 25% in principal amount of the Notes at the time outstanding (determined as provided in Section 9.3, 9.4 or 9.5) relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and (iv) no provision contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties hereunder or in the 75 exercise of any of its rights or powers, if the Trustee reasonably believes that the repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (d) The Trustee shall not be required to take notice or to be deemed to have notice of any Default or Event of Default hereunder except (i) upon the failure by the Company to pay (or cause to be paid) any payments to be made to the Trustee required to be made to the Trustee pursuant to the provisions of this Indenture and (ii) if the Trustee is serving as Paying Agent, upon the failure by the Company to pay (or cause to be paid) any payments to be made to the Paying Agent required to be made to the Paying Agent pursuant to the terms of this Indenture, unless the Trustee is specifically notified in writing of such Default or Event of Default by the Company or the Holders of at least 25% in aggregate principal amount of outstanding Notes. (e) Whether or not expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section and, upon qualification of this Indenture under the Trust Indenture Act, the Trust Indenture Act. SECTION 8.2 Reliance on document, opinions, etc. Subject to the provisions of Section 8.1: (a) The Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) Any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an instrument signed in the name of the Company by (i) the Chief Executive Officer, the President or any Vice President and (ii) the Secretary or any Assistant Secretary or the Treasurer or any Assistant Treasurer (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors of the Company may be evidenced to the Trustee by a copy thereof certified by the Secretary or any Assistant Secretary of the Company; (c) The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; 76 (d) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by or pursuant to this Indenture at the request, order or direction of any of the Noteholders, pursuant to the provisions of this Indenture, unless such Noteholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; but nothing herein contained shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default (which has not been cured or waived), to exercise such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs; (e) The Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; (f) Prior to the occurrence of an Event of Default hereunder and after the curing or waiving of all Events of Default, the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, note, other evidence of indebtedness or other paper or document, unless requested in writing so to do by the holders of not less than a majority in aggregate principal amount of the Notes then outstanding (determined as provided in Section 9.4 or 9.5); provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expenses or liability as a condition to so proceeding. The reasonable expense of every such examination shall be paid by the Company or, if paid by the Trustee, shall be repaid by the Company upon demand; and (g) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys. The Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. SECTION 8.3 No responsibility for recitals, etc. The recitals contained herein and in the Notes (other than the certificate of authentication on the Notes) shall be taken as the statements of the Company, and the Trustee assumes no 77 responsibility for the correctness of the same. The Trustee makes no representation as to the validity or sufficiency of this Indenture or of the Notes. The Trustee shall not be accountable for the use or application by the Company of any of the Notes or of the proceeds of such Notes, or for the use or application of any moneys paid over by the Trustee in accordance with any provision of this Indenture, or for the use or application of any moneys received by any Paying Agent other than the Trustee. The Trustee shall not be responsible for (or accountable for) determining whether transferees are QIBs or Institutional Accredited Investors, and the Trustee shall be entitled to conclusively rely upon Officers' Certificates, certificates of transferees and Opinions of Counsel relating to the same and whether the Notes are Restricted Securities. SECTION 8.4 Trustee, Paying Agent or Note Registrar may own Notes. The Trustee, any Paying Agent or Note Registrar, in its individual or any other capacity, may become the owner or pledgee of Notes with the same rights it would have if it were not Trustee, Paying Agent or Note Registrar. SECTION 8.5 Moneys received by Trustee to be held in trust without interest. Subject to the provisions of Section 13.6 and Article III, all moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any moneys received by it hereunder except such as it may agree with the Company to pay thereon. SECTION 8.6 Compensation and expenses of Trustee. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation, and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee (including as the Paying Agent and the Note Registrar) in connection with the acceptance or administration of its trust under this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Company also covenants to indemnify the Trustee and any director, officer, employee or agent of the Trustee for any loss, liability or expense (including without limitation costs and expenses of litigation, and of investigation, counsel fees, damages, judgments and amounts paid in settlement) incurred in connection with any act or omission on the part of the Trustee with respect to this Indenture or the Notes (other than any loss, liability or expense incurred by reason of willful misfeasance, bad faith or negligence of the Trustee in the performance of its duties hereunder). The obligations of the Company under this Section 8.6 to compensate the Trustee and to pay or reimburse the Trustee 78 for expenses, disbursements and advances shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture. Such additional indebtedness shall be secured by a lien prior to that of the Notes upon all property and funds held or collected by the Trustee as such, except funds held in trust by the Trustee pursuant to Article XIII for the payment of principal of or premium, if any, or interest on particular Notes. SECTION 8.7 Right of Trustee to rely on Officers' Certificate where no other evidence specifically prescribed. Subject to the provisions of Section 8.1, whenever in the administration of the provisions of this Indenture, the Trustee shall deem it necessary or desirable that a matter to be proved or established prior to taking, suffering or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such Certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken, suffered or omitted by it under the provisions of this Indenture upon the faith thereof. SECTION 8.8 Conflicting interest of Trustee. The Trustee shall be subject to the provisions of Section 310(b) of the Trust Indenture Act notwithstanding that this Indenture may not be qualified under the Trust Indenture Act. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. Nothing herein shall prevent the Trustee from filing with the Commission the application referred to in the second to last paragraph of Section 310(b) of the Trust Indenture Act. SECTION 8.9 Requirements for eligibility of Trustee. The Trustee hereunder shall at all times be a corporation organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of Columbia authorized under such laws to exercise corporate trust powers, having a combined capital and surplus (computed in accordance with Section 310(a)(2) of the Trust Indenture Act) of at least $50,000,000, subject to supervision or examination by Federal, state, territorial, or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 8.9, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. This Indenture shall always have a Trustee who satisfies the 79 requirements of Sections 310(a)(1) and (5) of the Trust Indenture Act. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 8.9, the Trustee shall resign immediately in the manner and with the effect specified in this Article. SECTION 8.10 Resignation or removal of Trustee. (a) No resignation or removal of the Trustee and no appointment of a successor trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 8.11. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by the holders of a majority in principal amount of the outstanding Notes by written notice, delivered to the Trustee and to the Company. (d If at any time: (1) the Trustee shall fail to comply with Section 310(b) of the Trust Indenture Act with respect to the Notes after written request therefor by the Company or by any Noteholder who has been a bona fide holder of a Note or Notes for at least six months, or (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 8.9 and shall fail to resign after written request therefor by the Company or by any such Noteholder, or (3) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors of the Company, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 7.14, any Noteholder who has been a bona fide holder of a Note or Notes for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee 80 and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the trustee and appoint a successor trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of the Trustee for any cause, the Company shall promptly appoint a successor trustee. If, within one year after such resignation, removal or incapacity, or the occurrence of such vacancy, a successor trustee shall be appointed by the holders of a majority in principal amount of the Notes outstanding by written notice delivered to the Company and the retiring trustee, the successor trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor trustee and supersede the successor trustee appointed by the Company. If no successor trustee shall have been so appointed by the Company or the Noteholders and accepted appointment in the manner hereinafter provided, subject to Section 7.14, any Noteholder who has been a bona fide holder of a Note for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor trustee by mailing written notice of such event by first-class mail, postage prepaid, to the Noteholders as their names and addresses appear in the Note Register. Each notice shall include the name of the successor trustee and the address of its principal Corporate Trust Office. SECTION 8.11 Acceptance by successor to Trustee; notice of succession of a Trustee. Any successor trustee appointed as provided in Section 8.10 shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties, trusts and obligations of its predecessor hereunder, with like effect as if originally named as trustee herein; but, nevertheless, on the written request of the Company or of the successor trustee, the trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 8.6, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act. Upon request of any such successor trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a lien upon all property of funds held or collected by such Trustee to secure any amounts then due it pursuant to the provisions of Section 8.6. 81 No successor trustee shall accept appointment as provided in this Section 8.11 unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 8.8 and eligible under the provisions of Section 8.9. Upon acceptance of appointment by a successor trustee as provided in this Section 8.11, the Company shall mail to the Noteholders by first-class mail notice thereof. If the Company fails to mail such notice within 30 days after acceptance of appointment by the successor trustee, the successor trustee shall, in its discretion, cause such notice to be mailed at the expense of the Company. SECTION 8.12 Successor to Trustee by merger, consolidation or succession to business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger or conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be qualified under the provisions of Section 8.8 and eligible under the provisions of Section 8.9, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Notes shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Notes so authenticated; and in case at that time any of the Notes shall not have been authenticated, any successor to the Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor trustee; provided, however, that the right to adopt the certificate of authentication of any predecessor trustee or authenticate Notes in the name of any predecessor trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 8.13 Limitations on rights of Trustee as a creditor. If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Notes), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). SECTION 8.14 Notice of Defaults. If a Default occurs and is continuing, the Trustee shall mail to Noteholders a notice of the Default within 90 days after it occurs. Except in the case of a Default in payment on any Note (including the failure to make a mandatory redemption, if any, pursuant thereto), the Trustee may withhold the notice if and so long as a committee of 82 its Responsible Officers in good faith determines that withholding the notice is in the interests of Holders. ARTICLE IX CONCERNING THE NOTEHOLDERS SECTION 9.1 Evidence of action by Noteholders. Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Notes may take any action (including the making of any demand or request, the giving of any notice, consent, or waiver or the taking of any other action), the fact that the holders of such specified percentage, determined as of the time such action was taken or, if a record date was set with respect thereto pursuant to Section 9.5, as of such record date, have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by Noteholders in person or by agent or proxy appointed in writing, or (b) by the record of the holders of Notes voting in favor thereof at any meeting of Noteholders duly called and held in accordance with the provisions of Article X, or (c) by a combination of such instrument or instruments and any such record of such a meeting of Noteholders. SECTION 9.2 Proof of execution of instruments and of holding of Notes. Subject to the provisions of Sections 8.1, 8.2 and 10.5, proof of the execution of any instrument by a Noteholder or his agent or proxy shall be sufficient if made in accordance with the provisions set forth herein. The ownership of Notes shall be proved by the Note Register, or by a certificate of the registrar thereof. The record of any Noteholders' meeting shall be proved in the manner provided in Section 10.5. SECTION 9.3 Who may be deemed owners of Note. Prior to due presentation for registration of transfer, the Company, the Trustee, any Paying Agent, and any Note Registrar may deem and treat the person in whose name any Note shall be registered in the Note Register as the absolute owner of such Note (whether or not such Note shall be overdue and notwithstanding any notation of ownership or other writing thereon) for the purposes of receiving payment of or on account of the principal of and premium, if any, and interest on such Note, for all purposes; and neither the Company nor the Trustee nor any Paying Agent nor any Note Registrar shall be affected by any notice to the contrary. All such payments so made to, or upon the order of, any such holder, shall be valid and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Note. 83 SECTION 9.4 Notes owned by Company or controlled by controlling persons disregarded for certain purposes. In determining whether the holders of the requisite aggregate principal amount of Notes have concurred in any demand, direction, request, notice, consent, waiver or other action under this Indenture, Notes which are owned by the Company or any other obligor on the Notes or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Notes shall be disregarded and deemed not to be outstanding for the purpose of any such determination, provided that for the purposes of determining whether the Trustee shall be protected in relying on any such demand, direction, request, notice, consent or waiver, only Notes which the Note Register states are so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 9.4, if, subject to Section 8.2, any pledgee shall demonstrate to the Trustee the pledgee's right to vote such Notes and that the pledgee is not a person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. SECTION 9.5 Record date for action by Noteholders. Whenever in this Indenture it is provided that holders of a specified percentage in aggregate principal amount of the Notes may take any action (including the making of any demand or request, the giving of any direction, notice, consent or waiver or the taking of any other action), other than any action taken at a meeting of Noteholders called pursuant to Article X, the Company, pursuant to a resolution of its Board of Directors, or the holders of at least ten percent in aggregate principal amount of the Notes then outstanding, may fix the record date by mailing notice thereof (the record date so fixed to be a Business Day not less than 15 nor more than 20 days after the date on which such written notice shall be given) to the Trustee. If a record date is fixed according to this Section 9.5, only persons shown as Noteholders in the Note Register at the close of business on the record date so fixed shall be entitled to take the requested action and the taking of any such action by the holders on the record date of the required percentage of the aggregate principal amount of the Notes shall be binding on all Noteholders, provided that the taking of the requested action by the holders on the record date of the percentage in aggregate principal amount of the Notes specified in this Indenture in connection with such action shall have been evidenced to the Trustee, as provided in Section 9.1, not later than 180 days after such record date. SECTION 9.6 Instruments executed by Noteholders bind future holders. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 9.1, of the taking of any action by the holders of the percentage in aggregate principal amount of the Notes specified in this 84 Indenture in connection with such action, any holder of a Note which is shown by the evidence to be included in the Notes the holders of which have consented to such action may, by filing written notice with the Trustee at its principal office and upon proof of holding as provided in Section 9.2, revoke such action so far as concerns such Note. Except as aforesaid any such action taken by the holder of any Note and any direction, demand, request, waiver, consent, vote or other action of the holder of any Note which by any provisions of this Indenture is required or permitted to be given shall be conclusive and binding upon such holder and upon all future holders and owners of such Note, and of any Note issued in lieu thereof, irrespective of whether or not any notation in regard thereto is made upon such Note. Any action taken by the holders of the percentage in aggregate principal amount of the Notes specified in this Indenture in connection with such action shall be conclusively binding upon the holders of all the Notes. ARTICLE X NOTEHOLDERS MEETINGS SECTION 10.1 Purposes for which meetings may be called. A meeting of Noteholders may be called at any time and from time to time pursuant to the provisions of this Article X for any of the following purposes: (i) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by Noteholders pursuant to any of the provisions of Article VII; (ii) to remove the Trustee and appoint a successor trustee pursuant to the provisions of Article VIII; (iii) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 11.2; or (iv) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of the Notes under any other provisions of this Indenture or under applicable law. SECTION 10.2 Manner of calling meetings; record date. The Trustee may at any time call a meeting of Noteholders to take any action specified in Section 10.1, to be held at such time and at such place in the City of Wilmington, State of Delaware, as the Trustee shall determine. Notice of every meeting of the Noteholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such 85 meeting, shall be mailed not less than 30 nor more than 60 days prior to the date fixed for the meeting to such Noteholders at their addresses as such addresses appear in the Note Register. For the purpose of determining Noteholders entitled to notice of any meeting of Noteholders, the Trustee shall fix in advance a date as the record date for such determination, such date to be a business day not more than ten days prior to the date of the mailing of such notice as hereinabove provided. Only persons in whose name any Note shall be registered in the Note Register at the close of business on a record date fixed by the Trustee as aforesaid, or by the Company or the Noteholders as in Section 10.3 provided, shall be entitled to notice of the meeting of Noteholders with respect to which such record date was so fixed. SECTION 10.3 Call of meeting by Company or Noteholders. In case at any time the Company, pursuant to a resolution of its Board of Directors or the holders of at least ten percent in aggregate principal amount of the Notes then outstanding, shall have requested the Trustee to call a meeting of Noteholders to take any action authorized in Section 10.1 by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed notice of such meeting within 20 days after receipt of such request, then the Company or the holders of Notes in the amount above specified, as the case may be, may fix the record date with respect to, and determine the time and the place in said City of Wilmington for, such meeting and may call such meeting to take any action authorized in Section 10.1, by mailing notice thereof as provided in Section 10.2. The record date fixed as provided in the preceding sentence shall be set forth in a written notice to the Trustee and shall be a business day not less than 15 nor more than 20 days after the date on which such notice is sent to the Trustee. SECTION 10.4 Who may attend and vote at meetings. Only persons entitled to receive notice of a meeting of Noteholders and their respective proxies duly appointed by an instrument in writing shall be entitled to vote at such meeting. The only persons who shall be entitled to be present or to speak at any meeting of Noteholders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. When a determination of Noteholders entitled to vote at any meeting of Noteholders has been made as provided in this Section, such determination shall apply to any adjournments thereof. SECTION 10.5 Manner of voting at meetings and record to be kept. The vote upon any resolution submitted to any meeting of Noteholders shall be by written ballots on each of which shall be subscribed the signature of the Noteholder or proxy casting such ballot and the identifying number or numbers of the Notes held or represented in respect of which such ballot is cast. The permanent chairman of the meeting shall appoint two 86 inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Noteholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 10.2. The record shall show the identifying numbers of the Notes voting in favor of or against any resolution. Each counterpart of such record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the counterparts shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee. Any counterpart record so signed and verified shall be conclusive evidence of the matters therein stated and shall be the record referred to in clause (b) of Section 9.1. SECTION 10.6 Exercise of rights of Trustee and Noteholders not to be hindered or delayed. Nothing in this Article X contained shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Noteholders or any rights expressly or impliedly conferred hereunder to make such call, any hinderance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the Noteholders under any of the provisions of this Indenture or of the Notes. ARTICLE XI SUPPLEMENTAL INDENTURES SECTION 11.1 Purposes for which supplemental Indentures may be entered into without consent of Noteholders. The Company, when authorized by a resolution of the Board of Directors, and the Trustee may from time to time and at any time, without notice to or the consent of any Noteholders, enter into an indenture or indentures supplemental hereto (which shall comply with the provisions of the Trust Indenture Act as then in effect) for one or more of the following purposes: (a) to evidence the succession of another corporation to the Company, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Company herein and in the Notes pursuant to Article XII; (b) to add to the covenants of the Company such further covenants, restrictions or conditions as its Board 87 of Directors shall consider to be for the protection of the holders of Notes, and to make the occurrence, or the occurrence and continuance, of a default in any of such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction or condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; (c) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture or any supplemental indenture, provided that such actions shall not be materially inconsistent with the terms of this Indenture and shall not adversely affect the interests of the holders of the Notes; (d) to provide for the issuance under this Indenture of Notes, whether or not then outstanding, in coupon form (including signatures registrable as to principal only) and to provide for exchangeability of such Notes with Notes issued hereunder in fully registered form and to make all appropriate changes for such purpose; (e) to comply with requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act; (f) to provide for the issuance of the Exchange Notes (which will have terms identical in all material respects to the Initial Notes except that the transfer restrictions contained in the Initial Notes will be modified or eliminated, as appropriate, and the Exchange Notes will not have provisions with respect to interest rate increases as provided in the Registration Rights Agreement), and which will be treated together with any outstanding Initial Notes as a single class of Notes under the Indenture. The Trustee is hereby authorized to join with the Company in the execution and delivery of any such supplemental indenture, to make any further appropriate agreement and stipulations which may be therein contained and to accept the conveyance, transfer, mortgage, pledge or assignment of any property thereunder, provided that if any such supplemental indenture affects the Trustee's own rights, duties or immunities 88 under this Indenture or otherwise, the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. Any supplemental indenture authorized by the provisions of this Section 11.1 may be executed by the Company and the Trustee without notice to or the consent of the holders of any of the Notes at the time outstanding, notwithstanding any of the provisions of Section 11.2. SECTION 11.2 Modification of Indenture with consent of holders of 51 percent in principal amount of Notes. With the consent (evidenced as provided in Section 9.1) of the holders of not less than 51 percent in aggregate principal amount of the Notes at the time outstanding (determined as provided in Section 9.4), or, if a record date is set with respect to such consent in accordance with Section 9.5, as of such record date, the Company, when authorized by a resolution of its Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall comply with the provisions of the Trust Indenture Act as then in effect) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Notes; provided, however, that without the consent of the holder of each outstanding Note, no such supplemental indenture shall (i) extend the stated maturity of any Note, reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof or reduce any premium payable upon the redemption thereof or the amount payable thereon in the event of a Change in Control or acceleration of the amount thereof payable in bankruptcy, or (ii) reduce the aforesaid percentage of aggregate principal amount of Notes, the consent of the holders of which is required for any such supplemental indenture. Upon the request of the Company, accompanied by a copy of a resolution of its Board of Directors certified by the Secretary or an Assistant Secretary of the Company authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Noteholders as aforesaid, the Trustee shall join with the Company in the execution and delivery of such supplemental indenture, provided that if such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Noteholders under this Section 11.2 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. 89 Promptly after the execution and delivery by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section 11.2, the Company shall mail a notice to the Noteholders, setting forth in general terms the substance of such supplemental indenture. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. Copies of any supplemental indenture shall be available for inspection by any Noteholder at the principal corporate trust office of the Trustee. SECTION 11.3 Effect of supplemental indentures. Upon the execution and delivery of any supplemental indenture pursuant to the provisions of this Article XI, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitation of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Notes shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 11.4 Conformity with Trust Indenture Act. From the date this Indenture is qualified under the Trust Indenture Act, every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect. SECTION 11.5 Notes may bear notation of changes by supplemental indentures. Notes authenticated and delivered after the execution and delivery of any supplemental indenture pursuant to the provisions of this Article XI, or after any action taken at a Noteholders' meeting pursuant to Article X, may bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture or as to any action taken at any such meeting. If the Company or the Trustee shall so determine, new Notes so modified as to conform, in the opinion of the Trustee and the Board of Directors of the Company, to any modification of this Indenture contained in any such supplemental indenture may be prepared by the Company, authenticated by the Trustee and delivered in exchange for the Notes then outstanding. Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such supplemental indenture or Noteholders' meeting. SECTION 11.6 Officers' Certificate and Opinion of Counsel. In connection with the execution of any supplemental indenture, the Trustee shall receive and, subject to the provisions of Sections 8.1 and 8.2, shall be fully protected in relying upon an Officers' Certificate and an Opinion of Counsel stating that the execution of such supplemental indenture is authorized and permitted by this Indenture (including, without 90 limitation, Section 11.7) as conclusive evidence that any such supplemental indenture complies with the provisions of this Article XI. SECTION 11.7 Modification of Indenture with consent of holders of Senior Indebtedness. No amendment, supplement or other modification may be made to any provision of this Indenture (including any definition included in Article I or elsewhere herein) that adversely affects the rights under Article III or under any other provision of this Indenture of any holder of Senior Indebtedness unless the holders of Senior Indebtedness expressly consent in writing thereto. ARTICLE XII CONSOLIDATION, MERGER AND SALE SECTION 12.1 Merger and Sale of Assets, etc. (a) The Company shall not, in a single transaction or through a series of related transactions, consolidate with or merge with or into any other Person or sell, assign, convey, transfer or lease or otherwise dispose of all or substantially all of its properties and assets as an entirety to any Person or group of affiliated Persons, or permit any of its Subsidiaries to enter into any such transaction or transactions if such transaction or transactions, in the aggregate, would result in a sale, assignment, transfer, lease or disposal of all or substantially all of the properties and assets of the Company and its Subsidiaries on a consolidated basis to any other Person or group of affiliated Persons, unless at the time and after giving effect thereto: (i) either (A) the Company shall be the continuing corporation, or (B) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance, transfer, lease or disposition the properties and assets of the Company, substantially as an entirety (the "Surviving Entity") shall be a corporation duly organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and shall, in either case, expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Notes and hereunder, and this Indenture shall remain in full force and effect; (ii) immediately before and immediately after giving effect to such transaction on a pro forma basis (and treating any Indebtedness not previously an obligation of the Company or a Subsidiary which becomes the obligation of the Company or any of its Subsidiaries in connection with or as a result of such transaction as having been incurred at 91 the time of such transaction), no Default or Event of Default shall have occurred and be continuing; (iii) immediately after giving effect to such transaction on a pro forma basis, the Consolidated Net Worth of the Company (or the Surviving Entity if the Company is not the continuing obligor hereunder) is at least equal to the Consolidated Net Worth of the Company immediately before such transaction; (iv) immediately before and immediately after giving effect to such transaction on a pro forma basis (and treating any Indebtedness not previously an obligation of the Company or a Subsidiary which becomes the obligation of the Company or any of its Subsidiaries in connection with or as a result of such transaction as having been incurred at the time of such transaction), the Company (or the Surviving Entity if the Company is not the continuing obligor hereunder) could incur $1.00 of additional Indebtedness under Section 5.9 (other than Permitted Indebtedness); (v) each Guarantor, if any, unless it is the other party to the transactions described above, shall have by supplemental indenture confirmed that its Guarantee of the Notes shall apply to such person's obligations hereunder and the Notes; and (vi) the Company or the Surviving Entity shall have delivered to the Trustee an Officers' Certificate and an opinion of counsel, each stating that such consolidation, merger, transfer, lease or disposition and such supplemental indenture comply with the terms of this Indenture. (b) Each Guarantor, if any (other than any Subsidiary whose Guarantee is being released pursuant to Section 5.16 as a result of such transaction), shall not, and the Company will not permit a Guarantor to, in a single transaction or through a series of related transactions, merge or consolidate with or into any other corporation or other entity (other than the Company or any Guarantor), or sell, assign, convey, transfer, lease or otherwise dispose of its properties and assets on a consolidated basis substantially as an entirety to any entity unless (i) either (A) such Guarantor shall be the continuing corporation or partnership or (B) the entity (if other than such Guarantor) formed by such consolidation or into which such Guarantor is merged or the entity which acquires by sale, assignment, conveyance, transfer, lease or disposition the properties and assets of such Guarantor substantially as an entirety shall be a corporation or partnership organized and validly existing under the laws of the United States, any state thereof or the District of Columbia and shall expressly assume by an indenture supplemental to this Indenture, executed and delivered to 92 the Trustee, in form satisfactory to the Trustee, all the obligations of such Guarantor under the Notes and hereunder; (ii) immediately before and immediately thereafter (and treating any Indebtedness not previously an obligation of the Company or a Subsidiary which becomes the obligation of the Company or any of its Subsidiaries in connection with or as a result of such transaction as having been incurred at the time of such transaction), no Default or Event of Default shall have occurred and be continuing; and (iii) such Guarantor shall have delivered to the Trustee an Officers' Certificate and an opinion of counsel, each stating that such consolidation, merger, sale, assignment, conveyance, transfer, lease or disposition and such supplemental indenture comply with this Indenture, and thereafter all obligations of the predecessor shall terminate. (c) Notwithstanding the foregoing, any Wholly Owned Subsidiary may (i) merge or consolidate with or into any other Wholly Owned Subsidiary or the Company or (ii) sell, assign, convey, transfer, lease, or otherwise dispose of all or substantially all of its properties and assets to any other Wholly Owned Subsidiary or the Company; provided, that (x) any Person surviving any such merger or consolidation with a Guarantor or which acquires substantially all of the assets of any Guarantor (the "Acquisition Survivor") shall expressly assume by a supplemental indenture or guarantee executed and delivered to the Trustee, in form satisfactory to the Trustee, any obligations of such Subsidiary to guarantee the obligations owing hereunder; and (y) the Acquisition Survivor shall have delivered to the Trustee an Officers' Certificate and an opinion of counsel, each stating that the transaction and the supplemental guarantee or indenture executed in connection therewith comply with this provision and that all conditions precedent provided for herein relating to such transaction have been complied with. SECTION 12.2 Successor Substituted. Upon any consolidation or merger, or any sale, assignment, conveyance, transfer, lease or disposition of all or substantially all of the properties and assets of the Company or any Guarantor in accordance with the immediately preceding paragraphs, the successor Person formed by such consolidation or into which the Company or such Guarantor, as the case may be, is merged or the successor Person to which such sale, assignment, conveyance, transfer, lease or disposition is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company or such Guarantor, as the case may be, under this Indenture and/or the Guarantees, as the case may be, with the same effect as if such successor had been named as the Company or such Guarantor, as the case may be, herein and/or in the Guarantees, as the case may be. When a successor assumes all the obligations of its predecessor under this Indenture, the Notes or 93 a Guarantee, as the case may be, the predecessor shall be released from those obligations; provided that in the case of a transfer by lease, the predecessor shall not be released from the payment of principal and interest on the Notes or a Guarantee, as the case may be. SECTION 12.3 Opinion of Counsel. The Trustee, subject to the provisions of Sections 8.1 and 8.2, may receive and rely on an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale or conveyance, and any such assumption, complies with the provisions of this Article XII. ARTICLE XIII SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS SECTION 13.1 Legal Defeasance and Covenant Defeasance of the Notes. (a) The Company may, at its option by Board resolution, at any time, with respect to the Notes, elect to have either paragraph (b) or paragraph (c) below be applied to the outstanding Notes upon compliance with the conditions set forth in paragraph (d). (b) Upon the Company's exercise under paragraph (a) of the option applicable to this paragraph (b), the Company and any Guarantor shall be deemed to have been released and discharged from its obligations with respect to the outstanding Notes on the date the conditions set forth below are satisfied (hereinafter, "legal defeasance"). For this purpose, such legal defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding Notes, which shall thereafter be deemed to be "outstanding" only for the purposes of the Sections of and matters under this Indenture referred to in (i) and (ii) below, and to have satisfied all its other obligations under such Notes and this Indenture insofar as such Notes are concerned, except for the following which shall survive until otherwise terminated or discharged hereunder: (i) the rights of Holders of outstanding Notes to receive solely from the trust fund described in paragraph (d) below and as more fully set forth in such paragraph, payments in respect of the principal of, premium, if any, and interest on such Notes when such payments are due and (ii) obligations listed in Section 13.3. (c) Upon the Company's exercise under paragraph (a) of the option applicable to this paragraph (c), the Company and any Guarantor shall be released and discharged from its obligations under any covenant contained in Article XII and in Sections 4.5 and 5.3 through 5.22 with respect to the outstanding Notes on and after the date the conditions set forth below are 94 satisfied (hereinafter, "covenant defeasance"), and the Notes shall thereafter be deemed to be not "outstanding" for the purpose of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the outstanding Notes, the Company (each Guarantor, if any) may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 7.1(c), nor shall any event referred to in Section 7.1(d) or 7.1(e) thereafter constitute a Default or an Event of Default thereunder but, except as specified above, the remainder of this Indenture and such Notes shall be unaffected thereby. (d) The following shall be the conditions to application of either paragraph (b) or paragraph (c) above to the outstanding Notes: (i) The Company shall have irrevocably deposited in trust with the Trustee, pursuant to an irrevocable trust and security agreement in form and substance satisfactory to the Trustee, cash or U.S. Government Obligations maturing as to principal and interest at such times, or a combination thereof, in such amounts as are sufficient, without consideration of the reinvestment of such interest and after payment of all Federal, state and local taxes or other charges or assessments in respect thereof payable by the Trustee, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof (in form and substance reasonably satisfactory to the Trustee) delivered to the Trustee, to pay the principal of, premium, if any, and interest on the outstanding Notes on the dates on which any such payments are due and payable in accordance with the terms of this Indenture and of the Notes; (ii) (A) No Event of Default shall have occurred or be continuing on the date of such deposit, and (B) no Default or Event of Default under Section 7.1(f) or 7.1(g) shall occur on or before the 123rd day after the date of such deposit; (iii) Such deposit will not result in a Default under this Indenture or a breach or violation of, or constitute a default under, any other instrument or agreement to which the Company or any Guarantor is a party or by which it or its property is bound; 95 (iv) In the case of a legal defeasance under paragraph (b) above, the Company has delivered to the Trustee an Opinion of Counsel stating that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (B) since the date of this Indenture there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Notes will not recognize income, gain or loss for federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to federal income tax on the same amounts and in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred; and, in the case of a covenant defeasance under paragraph (c) above, the Company shall deliver to the Trustee an Officers' Certificate and an Opinion of Counsel, in form and substance reasonably satisfactory to the Trustee, to the effect that Holders of the Notes will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred; (iv) The Holders shall have a perfected security interest under applicable law in the cash or U.S. Government Obligations deposited pursuant to Section 13(d)(i) above; (v) The Company shall have delivered to the Trustee an Opinion of Counsel, in form and substance reasonably satisfactory to the Trustee, to the effect that, after the passage of 123 days following the deposit, the trust funds will not be subject to any applicable bankruptcy, insolvency, reorganization or similar law affecting creditors' rights generally; (vi) such defeasance shall not cause the Trustee to have a conflicting interest with respect to any securities of the Company or any Guarantor; and (vii) The Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent specified herein relating to the defeasance contemplated by this Section 13.1 have been complied with; provided, however, that no deposit under clause (d)(i) above shall be effective to terminate the obligations of the Company or any Subsidiary Guarantor under the Notes or this Indenture prior to 123 days following any such deposit. In connection with the issuance of debt securities the proceeds of which will be used to redeem all the Notes then outstanding, none of Sections 5.9, 5.10 and 5.14 shall be 96 violated by the issuance of such debt securities to the extent the Company complies with all of the provisions of this Section 13.1(d) other than Section 13.1(d)(ii)(B). SECTION 13.2 Termination of Obligations upon Cancellation of the Notes. In addition to the Company's rights under Section 13.1, the Company may terminate all of its obligations under this Indenture (subject to Section 13.3) when: (a) (i) all Notes theretofore authenticated and delivered (other than Notes which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.7) have been delivered to the Trustee for cancellation; (ii) the Company has paid or caused to be paid all other sums payable hereunder and under the Notes by the Company; and (iii) the Company has delivered to the Trustee an Officers' Certificate, stating that all conditions precedent specified herein relating to the satisfaction and discharge of this Indenture have been complied with; or (b) (i) the Notes not previously delivered to the Trustee for cancellation will have become due and payable or are by their terms to become due and payable within one year or are to be called for redemption under arrangements satisfactory to the Trustee upon delivery of notice; (ii) the Company will have irrevocably deposited with the Trustee, as trust funds, cash, in an amount sufficient to pay principal of and interest on the outstanding Notes, to maturity or redemption, as the case may be; (iii) such deposit will not result in a breach or violation of, or constitute a default under, any agreement or instrument pursuant to which the Company or any Subsidiary is a party or by which it or its property is bound; and (iv) and the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions related to such defeasance have been complied with. SECTION 13.3 Survival of Certain Obligations. Notwithstanding the satisfaction and discharge of this Indenture and of the Notes referred to in Section 13.1 or 13.2, the respective obligations of the Company, and the Trustee under Sections 2.4, 2.5, 2.7, 2.8, 2.9, 2.10, 2.11, 5.2, 6.1, 7.8, 7.14, 8.6, 8.10, 13.5, 13.6 and 13.7 and shall survive until the Notes are no longer outstanding, and thereafter the obligations of the Company and the Trustee under Sections 7.14, 8.6, 13.5, 13.6 and 13.7 shall survive. Nothing contained in this Article XIII shall abrogate any of the obligations or duties of the Trustee under this Indenture. 97 SECTION 13.4 Acknowledgment of Discharge by Trustee. Subject to Section 13.7, after (i) the conditions of Section 13.1 or 13.2 have been satisfied, (ii) the Company has paid or caused to be paid all other sums payable hereunder by the Company and (iii) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent referred to in clause (i) above relating to the satisfaction and discharge of this Indenture have been complied with, the Trustee upon written request shall acknowledge in writing the discharge of the Company's obligations under this Indenture except for those surviving obligations specified in Section 13.3. SECTION 13.5 Application of Trust Assets. The Trustee shall hold any cash or U.S. Government Obligations deposited with it in the irrevocable trust established pursuant to Section 13.1 or 13.2, as the case may be. The Trustee shall apply the deposited cash or the U.S. Government Obligations, together with earnings thereon, through the Paying Agent, in accordance with this Indenture and the terms of the irrevocable trust agreement established pursuant to Section 13.1 or 13.2, as the case may be, to the payment of principal of, premium, if any, and interest on the Notes. The cash or U.S. Government Obligations so held in trust and deposited with the Trustee in compliance with Section 13.1 or 13.2, as the case may be, shall not be part of the trust estate under this Indenture, but shall constitute a separate trust fund for the benefit of all Holders entitled thereto. SECTION 13.6 Repayment to the Company; Unclaimed Money. Upon termination of the trust established pursuant to Section 13.1 or 13.2, as the case may be, the Trustee and the Paying Agent shall promptly pay to the Company upon request any excess cash or U.S. Government Obligations held by them. Additionally, if money for the payment of principal, premium, if any, or interest remains unclaimed for six years, the Trustee and the Paying Agents will pay the money back to the Company forthwith. After that, all liability of the Trustee and such Paying Agents with respect to such money shall cease. The Trustee and the Paying Agent shall pay to the Company upon request, and, if applicable, in accordance with the irrevocable trust established pursuant to Section 13.1 or 13.2, any cash or U.S. Government Obligations held by them for the payment of principal of, premium, if any, or interest on the Notes that remain unclaimed for six years after the date on which such payment shall have become due. After payment to the Company, Holders entitled to such payment must look to the Company for such payment as general creditors unless an applicable abandoned property law designates another person. SECTION 13.7 Reinstatement. If the Trustee or Paying Agent is unable to apply any cash or U.S. Government Obligations in accordance with Section 13.1 or 13.2 by reason of any legal proceeding or by reason of any order or judgment of any court or 98 governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 13.1 or 13.2 until such time as the Trustee or Paying Agent is permitted to apply all such cash or U.S. Government Obligations in accordance with Section 13.1 or 13.2, as the case may be; provided that if the Company makes any payment of principal of, premium, if any, or interest on any Notes following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money held by the Trustee or the Paying Agent. ARTICLE XIV IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 14.1 Incorporators, stockholders, officers and directors of Company or any Guarantor (other than the Company) exempt from individual liability. No recourse under or upon any obligation, covenant or agreement of this Indenture or any indenture supplemental hereto or of any Note, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or any Guarantor (other than the Company) or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Indenture and the obligations issued hereunder are solely corporate obligations, and that no such personal liability whatever shall attach to, or is or shall be incurred by, the incorporators, stockholders, officers or directors, as such, of the Company or any Guarantor (other than the Company) or of any successor corporation, or any of them, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Notes or implied therefrom; and that any and all such personal liability of every name and nature, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, every such incorporator, stockholder, officer or director, as such, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Notes or implied therefrom are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of such Notes. 99 ARTICLE XV MISCELLANEOUS PROVISIONS SECTION 15.1 Successors and assigns of Company bound by Indenture. All the covenants, stipulations, promises and agreements in this Indenture contained by or on behalf of the Company shall bind its successors and assigns, whether so expressed or not. SECTION 15.2 Acts of board, committee or officer of successor corporation valid. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. SECTION 15.3 Required notices or demand may be served by mail; waiver. Any notice or demand which by any provisions of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Notes to or on the Company may be given or served by being deposited postage prepaid (except as provided in Section 7.1(c)) by first class mail in a post office letter box addressed (until another address is filed by the Company with the Trustee for such purpose), as follows: Genesis Health Ventures, Inc., 148 West State Street, Kennett Square, Pennsylvania 19348, Attention: Michael R. Walker, Chairman and Chief Executive Officer. Any notice, direction, request or demand by any Noteholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made at the office of the Trustee, One Rodney Square, 920 King Street, 1st Floor, Wilmington, DE 19801 to the attention of Corporate Trust Administration (or at such other address as the Trustee shall notify the Company pursuant to Section 5.2). Any notice to be given by the Trustee to any Senior Representative shall be sent to such address as such Senior Representative may from time to time designate to the Trustee in writing. Any notice or communication to a Noteholder shall be mailed by first-class mail to his address shown in the Note Register. Failure to mail a notice or communication to a Noteholder or any defect in it shall not affect its sufficiency with respect to other Noteholders. If a notice or communication is mailed in the manner so provided within the time prescribed, it is duly given, whether or not the addressee receives it. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the person entitled to receive such notice, either before or after the event or action relating thereto, and such waiver shall be equivalent of such notice. Waivers of notice by Noteholders shall be filed with the 100 Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. SECTION 15.4 Indenture and Notes to be construed in accordance with the laws of the State of New York. This Indenture and each Note shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be governed by and construed in accordance with the laws of said State. SECTION 15.5 Evidence of compliance with conditions precedent. Upon any request or application by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent have been complied with, except that in the case of any such application or demand as to which the furnishing of such document is specifically required by any provision of this Indenture relating to such particular application or demand, such statement of compliance may be added to the more specifically required document, in which case no additional certificate or opinion need be furnished. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. Any certificate, statement or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of or representations by counsel, unless such officer knows that the certificate or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of counsel may be based, insofar as it relates to factual matters information with respect to which is in the possession of the Company, upon the certificate, statement or opinion of or representations by an officer or officers of the Company, unless such counsel knows that the certificate, statement or opinion or 101 representations with respect to the matters upon which his certificate, statements or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of an officer of the Company or of counsel may be based, insofar as it relates to accounting matters, upon a certificate or opinion of or representations by an accountant or firm of accountants unless such officer or counsel, as the case may be, knows that the certificate or opinion or representations with respect to the accounting matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate or opinion of any independent firm of public accountants filed with the Trustee shall contain a statement that such firm is independent. SECTION 15.6 Payments due on Saturdays, Sundays and holidays. In any case where the date of payment of interest on or principal of the Notes or the date fixed for redemption or purchase of any Note shall not be a Business Day, then payment of interest or principal and premium, if any, need not be made on such date, but may be made on the next succeeding business day with the same force and effect as if made on the date of payment or the date fixed for redemption or purchase, and no interest shall accrue for the period after such original date of payment or such original date fixed for redemption or purchase. SECTION 15.7 Provisions required by Trust Indenture Act to control. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with another provision included in this Indenture which is required to be included in this Indenture by any of Sections 310 to 317, inclusive, of the Trust Indenture Act, such required provision shall control. SECTION 15.8 Provisions of this Indenture and Notes for the sole benefit of the parties and the Noteholders. Nothing in this Indenture or in the Notes, expressed or implied, shall give or be construed to give any person, firm or corporation, other than the parties hereto and the holders of the Notes and of the Senior Indebtedness, any legal or equitable right, remedy or claim under or in respect of this Indenture, or under any covenant, condition or provision herein contained, all its covenants, conditions and provisions being for the sole benefit of the parties hereto and of the holders of the Notes and of the Senior Indebtedness. SECTION 15.9 Severability. In case any one or more of the provisions contained in this Indenture or in the Notes shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Indenture or of such Notes, but this Indenture and such Notes shall be construed as if 102 such invalid or illegal or unenforceable provision had never been contained herein or therein. SECTION 15.10 Indenture may be executed in counterparts; acceptance by Trustee. This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. First Union National Bank hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth. SECTION 15.11 Article and Section headings. The Article and Section references herein and in the Table of Contents are for convenience of reference only and shall not affect the construction hereof. 103 IN WITNESS WHEREOF, GENESIS HEALTH VENTURES, INC. has caused this Indenture to be signed and acknowledged by its Chief Executive Officer, its President or one of its vice presidents, and its corporate seal to be affixed hereunto, and the same to be attested by its Secretary or an Assistant Secretary; and First Union National Bank has caused this Indenture to be signed and acknowledged by one of its authorized officers, has caused its corporate seal to be affixed hereunto, and the same to be attested by one of its Assistant Secretaries, all as of the day and year first written above. GENESIS HEALTH VENTURES, INC. By: /s/ Michael R. Walker -------------------------------- [Corporate Seal] Name: Michael R. Walker ------------------------- Title: Chairman and CEO ------------------------ Attest: /s/ Ira C. Gubernick --------------------------- FIRST UNION NATIONAL BANK By: /s/ Thomas J. Brett -------------------------------- Name:__________________________ Title:_________________________ Attest: /s/ Stephen J. Kaba ---------------------------- EXHIBIT A-1 [FORM OF FACE OF NOTE] THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION, THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL, OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE WHICH IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144") TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL, "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPHS (a)(1), (2), (3) or (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR", FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. A-1-1 No._________________ $___________ GENESIS HEALTH VENTURES, INC. 9 1/4% Senior Subordinated Note due 2006 GENESIS HEALTH VENTURES, INC., a corporation duly organized and validly existing under the laws of the Commonwealth of Pennsylvania (herein called the "Company", which term includes any successor corporation under the Indenture referred to on the reverse hereof), for value received hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of ______________________________ United States dollars on October 1, 2006 at the office or agency of the Company maintained for that purpose in New York, New York, and to pay interest thereon at the rate per annum specified on this Note. The Company will pay interest semi-annually on April 1 and October 1 of each year (the "Interest Payment Date"). Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from October 7, 1996; provided that the first interest payment date shall be April 1, 1997. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Note is registered at the close of business on the Record Date for such interest, which shall be March 15 or September 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid, or duly provided for, and interest on such defaulted interest at the interest rate borne by the Notes, to the extent lawful, shall forthwith cease to be payable to the Holder on such Record Date, and may be paid to the Person in whose name this Note is registered at the close of business on a special record date which date shall be the fifteenth day next preceding the date fixed by the Company for the payment of defaulted interest or the next succeeding Business Day if such date is not a Business Day. The Company shall, by written notice to the Trustee, fix each such special record date and payment date. At least 15 days before the special record date, the Company (or the Trustee, in the name of and at the expense of the Company) shall mail to each Holder, with a copy to the Trustee, a notice that states the subsequent special record date, the payment date and the amount of defaulted interest, and interest payable on such defaulted interest, if any, to be paid. If this Note is a Global Note, all payments in respect of this Note will be made to the Depository or its nominee in immediately available funds in accordance with customary procedures established from time to time by the Depository. If this Note is not a Global Note, payment of the principal of, A-1-2 premium, if any, and interest on this Note will be made at the office or agency of the Company maintained for that purpose in the City of New York, or at such other office or agency of the Company as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the address of the Person entitled thereto as such address shall appear on the Note Register. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. Reference is made to the further provisions of this Note set forth on the reverse hereof, including, without limitation, provisions subordinating the payment of principal of and premium if any, and interest on the Notes to all Senior Indebtedness, and provisions giving the holder of this Note the right to require the Company to repurchase this Note upon any Change in Control, in each case on the terms and subject to the limitations referred to on the reverse hereof and as more fully specified in the Indenture. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. THIS NOTE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID STATE. This Note shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by the Trustee under the Indenture referred to on the reverse hereof. IN WITNESS WHEREOF, GENESIS HEALTH VENTURES, INC. has caused this instrument to be duly executed under its corporate seal. Dated: GENESIS HEALTH VENTURES, INC. By:_________________________ Chief Executive Officer [Corporate Seal] Attest: _______________________ Secretary A-1-3 [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This is one of the Notes described in the within-mentioned Indenture. FIRST UNION NATIONAL BANK, as Trustee By___________________________ Authorized Officer A-1-4 [FORM OF REVERSE OF NOTE] GENESIS HEALTH VENTURES, INC. 9 1/4% SENIOR SUBORDINATED NOTE DUE 2006 This Note is one of a duly authorized issue of Notes of the Company known as its 9 1/4% Senior Subordinated Notes due 2006 (the "Initial Notes"), limited to the aggregate principal amount of $125,000,000, all issued or to be issued under and pursuant to an indenture, dated as of October 7, 1996 (herein referred to as the "Indenture"), duly executed and delivered between the Company and First Union National Bank, trustee (herein referred to as the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the respective rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Notes. The Notes include the Initial Notes and the Exchange Notes issued in exchange for the Initial Notes pursuant to the Indenture. The Initial Notes and the Exchange Notes are treated as a single class of securities under the Indenture. The Indenture contains provisions for defeasance at any time of (a) the entire Indebtedness on the Notes and (b) certain restrictive covenants and related Defaults and Events of Default, in each case upon compliance with certain conditions set forth therein. The Indebtedness evidenced by the Notes is, to the extent and in the manner provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness (as defined in the Indenture), whether outstanding on the date of the Indenture or thereafter, and this Note is issued subject to such provisions. Each Holder of this Note, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in the Indenture and (c) appoints the Trustee his attorney-in-fact for such purpose; provided, however, that the indebtedness evidenced by this Note shall cease to be so subordinate and subject in right of payment upon any defeasance of this Note referred to in clause (a) or (b) of the next preceding paragraph. The Notes are subject to redemption, as a whole or in part, at any time on or after October 1, 2001 at the option of the Company upon not less than 30 nor more than 60 days' prior notice by first-class mail, at the election of the Company, in amounts of $1,000 or an integral multiple of $1,000 at the following redemption prices (expressed as a percentage of the A-1-5 principal amount) if redeemed during the 12-month period beginning October 1 of the years indicated below: Redemption Year Price ---- ---------- 2001 ......................104.625% 2002 ......................103.083% 2003 ......................101.542% and thereafter at 100% of the principal amount, in each case, together with accrued and unpaid interest, if any, to the Redemption Date. If less than all of the Notes are to be redeemed, such portion of the Notes shall be redeemed pro rata, by lot or by any other method the Trustee shall deem fair and reasonable. Upon the occurrence of a Change in Control, each Holder may require the Company to repurchase all or a portion of such Holder's Notes at a purchase price in cash equal to 101% of the principal amount thereof, together with accrued and unpaid interest to the date of repurchase. Under certain circumstances, in the event the Net Cash Proceeds received by the Company from any Asset Sale, which is not used to prepay Senior Indebtedness or invested in properties or assets used in the businesses of the Company, exceeds $10,000,000, the Company will be required to apply such proceeds to the repayment of the Notes. In the case of any redemption of Notes, interest installments whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Notes of record at the close of business on the relevant Record Date referred to on the face hereof. Notes (or portions thereof) for whose redemption and payment provision is made in accordance with the Indenture shall cease to bear interest from and after the date of redemption. In the event of redemption of this Note in part only, a new Note or Notes for the unredeemed portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof. If an Event of Default shall occur and be continuing, the principal amount of all the Notes may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions (including certain amendments permitted without the consent of any Holders) as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders under the Indenture at any time by the A-1-6 Company and the Trustee with the consent of the Holders of a specified percentage in aggregate principal amount of the Notes at the time outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Notes at the time outstanding, on behalf of the Holders of all the Notes, to waive compliance by the Company with certain provisions of the Indenture and certain past Defaults under the Indenture and their consequences. Any such consent or waiver by or on behalf of the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company or any Guarantor (in the event such Guarantor is obligated to make payments in respect of the Notes), which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Note at the times, place, and rate, and in the coin or currency, herein prescribed, subject to the subordination provisions of the Indenture. In addition to the rights provided to Noteholders under the Indenture, Holders of Initial Notes shall have all the rights set forth in the Registration Rights Agreement among the Company and the Initial Purchasers on behalf of Holders of the Initial Notes. Pursuant to the Registration Rights Agreement, the Company will be obligated to consummate an exchange offer pursuant to which the holder of this Note shall have the right to exchange this Note for the Company's 9 1/4% Senior Subordinated Notes due 2006 (the "Exchange Notes"), which have been registered under the Securities Act, in like principal amount and having terms identical in all material respects as the Initial Notes (except for terms with respect to transfer restrictions or interest rate increases). The Holders of the Initial Notes shall be entitled to receive certain additional interest payments in the event such exchange offer is not consummated and upon certain other conditions, all pursuant to and in accordance with the terms of the Registration Rights Agreement. Additional interest which may be payable pursuant to the Registration Rights Agreement shall be payable in the same manner as set forth herein with respect to the stated interest. The provision of the Registration Rights Agreement relating to such additional interest are incorporated herein by reference and made a part hereof as if set forth herein in full. The Company will furnish to any Noteholder upon written request and without charge a copy of the Indenture and/or the Registration Rights Agreement. Requests may be made to: A-1-7 Genesis Health Venture, Inc. 148 West State Street Kennett Square Pennsylvania 19348 Attention: General Counsel A Noteholder shall register the transfer or exchange of Notes in accordance with the Indenture. No service charge shall be made for any registration of transfer or exchange or redemption of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to and at the time of due presentment of this Note for registration of transfer, the Company, the Trustee, the Paying Agent and any agent of the Company or the Trustee may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note is overdue, and neither the Company, the Trustee nor any agent shall be affected by notice to the contrary. All terms used in this Note which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. A-1-8 ASSIGNMENT FORM I or we assign and transfer this Note to - -------------------------------------------------------------- - -------------------------------------------------------------- (Print or type name, address and zip code of assignee) - -------------------------------------------------------------- (Insert Social Security or other identifying number of assignee) and irrevocably appoint ________________________ agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. In connection with any transfer of this Note occurring prior to the date which is the earlier of (i) the date of the declaration by the Commission of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Act") covering resales of this Note (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) the date which is three years after the initial issuance of the Notes, the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer and that: [Check One] [ ] (a) this Note is being transferred in compliance with the exemption from registration under the Securities Act provided by Rule 144A thereunder. or [ ] (b) this Note is being transferred other than in accordance with (a) above and documents are being furnished which comply with the conditions of transfer set forth in this Note and the Indenture. If none of the foregoing boxes is checked, the Trustee or Registrar shall not be obligated to register this Note in the name of any person other than the Noteholder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 2.12 of the Indenture shall have been satisfied. Dated:__________________ Signed: ________________________ (Sign exactly as name appears on the other side of this Note) A-1-9 TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A under the Securities Act and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A under the Securities Act or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A under the Securities Act. Dated: _______________________ _____________________________ NOTICE: To be executed by an executive officer A-1-10 EXHIBIT A-2 [FORM OF FACE OF EXCHANGE NOTE] No.___________________ $_____________ GENESIS HEALTH VENTURES, INC. 9 1/4% Senior Subordinated Note due 2006 GENESIS HEALTH VENTURES, INC., a corporation duly organized and validly existing under the laws of the Commonwealth of Pennsylvania (herein called the "Company", which term includes any successor corporation under the Indenture referred to on the reverse hereof), for value received hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of _________________________________ United States dollars on October 1, 2006 at the office or agency of the Company maintained for that purpose in New York, New York, and to pay interest thereon at the rate per annum specified on this Note. The Company will pay interest semi-annually on April 1 and October 1 of each year (the "Interest Payment Date"). Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from October 7, 1996; provided that the first interest payment date shall be April 1, 1997. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Note is registered at the close of business on the Record Date for such interest, which shall be March 15 or September 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid, or duly provided for, and interest on such defaulted interest at the interest rate borne by the Notes, to the extent lawful, shall forthwith cease to be payable to the Noteholder on such Record Date, and may be paid to the Person in whose name this Note is registered at the close of business on a special record date which date shall be the fifteenth day next preceding the date fixed by the Company for the payment of defaulted interest or the next succeeding Business Day if such date is not a Business Day. The Company shall, by written notice to the Trustee, fix each such special record date and payment date. At least 15 days before the special record date, the Company (or the Trustee, in the name of and at the expense of the Company) shall mail to each Noteholder, with a copy to the Trustee, a notice that states the subsequent special record date, the payment date and the amount of defaulted interest, and interest payable on such defaulted interest, if any, to be paid. A-2-1 If this Note is a Global Note, all payments in respect of this Note will be made to the Depository or its nominee in immediately available funds in accordance with customary procedures established from time to time by the Depository. If this Note is not a Global Note, payment of the principal of, premium, if any, and interest on this Note will be made at the office or agency of the Company maintained for that purpose in the City of New York, or at such other office or agency of the Company as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the address of the Person entitled thereto as such address shall appear on the Note Register. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. Reference is made to the further provisions of this Note set forth on the reverse hereof, including, without limitation, provisions subordinating the payment of principal of and premium if any, and interest on the Notes to all Senior Indebtedness, and provisions giving the holder of this Note the right to require the Company to repurchase this Note upon any Change in Control, in each case on the terms and subject to the limitations referred to on the reverse hereof and as more fully specified in the Indenture. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. THIS NOTE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID STATE. This Note shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall A-2-2 have been signed by the Trustee under the Indenture referred to on the reverse hereof. IN WITNESS WHEREOF, GENESIS HEALTH VENTURES, INC. has caused this instrument to be duly executed under its corporate seal. Dated: GENESIS HEALTH VENTURES, INC. By:__________________________ Chief Executive Officer [Corporate Seal] Attest: _____________________ Secretary A-2-3 [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This is one of the Notes described in the within-mentioned Indenture. FIRST UNION NATIONAL BANK, as Trustee By______________________________ Authorized Officer A-2-4 [FORM OF REVERSE OF EXCHANGE NOTE] GENESIS HEALTH VENTURES, INC. 9 1/4% SENIOR SUBORDINATED NOTE DUE 2006 This Note is one of a duly authorized issue of Notes of the Company known as its 9 1/4% Senior Subordinated Notes due 2006 (herein referred to as the "Notes"), limited to the aggregate principal amount of $125,000,000, all issued or to be issued under and pursuant to an indenture, dated as of October 7, 1996 (herein referred to as the "Indenture"), duly executed and delivered between the Company and First Union National Bank, trustee (herein referred to as the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the respective rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Notes. The Indenture contains provisions for defeasance at any time of (a) the entire Indebtedness on the Notes and (b) certain restrictive covenants and related Defaults and Events of Default, in each case upon compliance with certain conditions set forth therein. The Indebtedness evidenced by the Notes is, to the extent and in the manner provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness (as defined in the Indenture), whether outstanding on the date of the Indenture or thereafter, and this Note is issued subject to such provisions. Each Holder of this Note, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in the Indenture and (c) appoints the Trustee his attorney-in-fact for such purpose; provided, however, that the indebtedness evidenced by this Note shall cease to be so subordinate and subject in right of payment upon any defeasance of this Note referred to in clause (a) or (b) of the next preceding paragraph. The Notes are subject to redemption, as a whole or in part, at any time on or after October 1, 2001 at the option of the Company upon not less than 30 nor more than 60 days' prior notice by first-class mail, at the election of the Company, in amounts of $1,000 or an integral multiple of $1,000 at the following redemption prices (expressed as a percentage of the A-2-5 principal amount) if redeemed during the 12-month period beginning October 1 of the years indicated below: Redemption Year Price ---- ---------- 2001 ......................104.625% 2002 ......................103.083% 2003 ......................101.542% and thereafter at 100% of the principal amount, in each case, together with accrued and unpaid interest, if any, to the Redemption Date. If less than all of the Notes are to be redeemed, such portion of the Notes shall be redeemed pro rata, by lot or by any other method the Trustee shall deem fair and reasonable. Upon the occurrence of a Change in Control, each Noteholder may require the Company to repurchase all or a portion of such Holder's Notes at a purchase price in cash equal to 101% of the principal amount thereof, together with accrued and unpaid interest to the date of repurchase. Under certain circumstances, in the event the Net Cash Proceeds received by the Company from any Asset Sale, which is not used to prepay Senior Indebtedness or invested in properties or assets used in the businesses of the Company, exceeds $10,000,000, the Company will be required to apply such proceeds to the repayment of the Notes. In the case of any redemption of Notes, interest installments whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Notes of record at the close of business on the relevant Record Date referred to on the face hereof. Notes (or portions thereof) for whose redemption and payment provision is made in accordance with the Indenture shall cease to bear interest from and after the date of redemption. In the event of redemption of this Note in part only, a new Note or Notes for the unredeemed portion hereof shall be issued in the name of the Noteholder hereof upon the cancellation hereof. If an Event of Default shall occur and be continuing, the principal amount of all the Notes may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions (including certain amendments permitted without the consent of any Noteholders) as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Noteholders under the Indenture at any time by A-2-6 the Company and the Trustee with the consent of the Noteholders of a specified percentage in aggregate principal amount of the Notes at the time outstanding. The Indenture also contains provisions permitting the Noteholders of specified percentages in aggregate principal amount of the Notes at the time outstanding, on behalf of the Holders of all the Notes, to waive compliance by the Company with certain provisions of the Indenture and certain past Defaults under the Indenture and their consequences. Any such consent or waiver by or on behalf of the Holder of this Note shall be conclusive and binding upon such Noteholder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company or any Guarantor (in the event such Guarantor is obligated to make payments in respect of the Notes), which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Note at the times, place, and rate, and in the coin or currency, herein prescribed, subject to the subordination provisions of the Indenture. A Noteholder shall register the transfer or exchange of Notes in accordance with the Indenture. No service charge shall be made for any registration of transfer or exchange or redemption of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to and at the time of due presentment of this Note for registration of transfer, the Company, the Trustee, the Paying Agent and any agent of the Company or the Trustee may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note is overdue, and neither the Company, the Trustee nor any agent shall be affected by notice to the contrary. All terms used in this Note which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. A-2-7 ASSIGNMENT FORM I or we assign and transfer this Note to - ---------------------------------------------------------------- - ---------------------------------------------------------------- (Print or type name, address and zip code of assignee) - ---------------------------------------------------------------- (Insert Social Security or other identifying number of assignee) and irrevocably appoint ________________________________________ agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Dated: ____________________ Signed: __________________________ (Sign exactly as name appears on the other side of this Note) A-2-8 EXHIBIT B THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS NOTE IS NOT EXCHANGEABLE FOR NOTES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER THAN A TRANSFER OF THIS NOTE AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT AND SUCH CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO., OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL, SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. B-1 EXHIBIT C Form of Certificate To Be Delivered in Connection with Transfers to Non-QIB Accredited Investors ________________________, ______ Re: GENESIS HEALTH VENTURES, INC. 9 1/4% Senior Subordinated Notes due October 1, 2006 Ladies and Gentlemen: In connection with our proposed purchase of 9 1/4% Senior Subordinated Notes due 2006 (the "Notes") of Genesis Health Ventures, Inc. (the "Company"), we confirm that: 1. We have received a copy of the Offering Memorandum (the "Offering Memorandum"), dated October __, 1996, relating to the Notes and such other information as we deem necessary in order to make our investment decision. We acknowledge that we have read the matters under the caption "Notices to Investors". 2. We understand that any subsequent transfer of the Notes is subject to certain restrictions and conditions set forth in the Indenture relating to the Notes (as described in the Offering Memorandum) and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Notes except in compliance with, such restrictions and conditions and the Securities Act of 1933, as amended (the "Securities Act"). 3. We understand that the offer and sale of the Notes have not been registered under the Securities Act, and that the Notes may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell any Notes, we will do so only (A) to the Company, or any of its subsidiaries, (B) in accordance with Rule 144A under the Securities Act to a "qualified institutional buyer" (as defined therein), (C) to an institutional "accredited investor" (as defined below) that, prior to such transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the Trustee and the Note Registrar (each as defined in the Indenture relating to the Notes), a signed letter containing certain representations and agreements relating to the restrictions on transfer of the Notes (the form of which letter can be obtained from the Trustee and the Note Registrar), (D) outside the United States in accordance with Rule C-1 904 of Regulation S under the Securities Act, (E) pursuant to the exemption from registration provided by Rule 144 under the Securities Act (if available), or (F) pursuant to an effective registration statement under the Securities Act, and we further agree to provide to any person purchasing Notes from us a notice advising such purchaser that resales of the Notes are restricted as stated herein. 4. We understand that, on any proposed resale of Notes, we will be required to furnish to the Trustee, the Note Registrar and the Company, such certification, legal opinions and other information as the Trustee, the Note Registrar and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Notes purchased by us will bear a legend to the foregoing effect. 5. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Notes, and we and any accounts for which we are acting are each able to bear the economic risk of our or their investment, as the case may be. 6. We are acquiring the Notes purchased by us for our account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. You, the Company, and the Initial Purchasers are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, By:_____________________________ Name: Title: C-2 EX-4.3 4 REGISTRATION RIGHTS AGREEMENT Registration Rights Agreement Dated as of October 7, 1996 among Genesis Health Ventures, Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, CS First Boston Corporation, Donaldson Lufkin & Jenrette Securities Corporation, Alex. Brown & Sons Incorporated, BT Securities Corporation, and Montgomery Securities REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into as of October 7, 1996, by and among Genesis Health Ventures, Inc., a Pennsylvania corporation (the "Company"), and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), CS First Boston Corporation, Donaldson, Lufkin & Jenrette Securities Corporation, Alex. Brown & Sons Incorporated, BT Securities Corporation and Montgomery Securities (collectively, the "Initial Purchasers"). This Agreement is made pursuant to the Purchase Agreement dated October 1, 1996 among the Company and the Initial Purchasers (the "Purchase Agreement"), which provides for the sale by the Company to the Initial Purchasers of $125,000,000 aggregate principal amount of the Company's 9 1/4% Senior Subordinated Notes due 2006 (the "Notes"). In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Company has agreed to provide to the Initial Purchasers and their direct and indirect transferees and assigns the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the closing under the Purchase Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "1933 Act" shall mean the Securities Act of 1933, as amended from time to time, and the rules and regulations of the SEC promulgated thereunder. "1934 Act" shall mean the Securities Exchange Act of 1934, as amended from time to time, and the rules and regulations of the SEC promulgated thereunder. "Closing Time" shall mean the Closing Time as defined in the Purchase Agreement. "Company" shall have the meaning set forth in the preamble of this Agreement and also includes the Company's successors. "Depositary" shall mean The Depository Trust Company, or any other depositary appointed by the Company, provided, however, that any such depositary must have an address in the Borough of Manhattan, in the City of New York. "Exchange Notes" shall mean 9 1/4% Senior Subordinated Notes due 2006 issued by the Company under the Indenture containing terms identical to the Notes (except that (i) interest thereon shall accrue from the last date on which interest was paid on the Notes or, if no such interest has 2 been paid, from October 7, 1996, (ii) the transfer restrictions thereon shall be eliminated and (iii) certain provisions relating to an increase in the stated rate of interest thereon shall be eliminated) to be offered to Holders of Notes in exchange for Notes pursuant to the Exchange Offer. "Exchange Offer" shall mean the exchange offer by the Company of Registrable Notes for Exchange Notes pursuant to Section 2(a) hereof. "Exchange Offer Registration" shall mean a registration under the 1933 Act effected pursuant to Section 2(a) hereof. "Exchange Offer Registration Statement" shall mean an exchange offer registration statement on Form S-4 (or, if applicable, on another appropriate form), and all amendments and supplements to such registration statement, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Holders" shall mean the Initial Purchasers, for so long as they own any Registrable Notes, and each of their successors, assigns and direct and indirect transferees who become registered owners of Registrable Notes under the Indenture. "Indenture" shall mean the Indenture relating to the Notes dated as of October 7, 1996 among the Company and First Union National Bank, National Association, as trustee, as the same may be amended from time to time in accordance with the terms thereof. "Initial Purchasers" shall have the meaning set forth in the preamble of this Agreement. "Majority Holders" shall mean the Holders of a majority of the aggregate principal amount of outstanding Registrable Notes; provided, that whenever the consent or approval of Holders of a specified percentage of Registrable Notes is required hereunder, Registrable Notes held by the Company or any of its affiliates (as such term is defined in Rule 405 under the 1933 Act) (other than the Initial Purchasers or subsequent holders of Registrable Notes if such subsequent holders are deemed to be such affiliates solely by reason of their holding of such Registrable Notes) shall be disregarded in determining whether such consent or approval was given by the Holders of such required percentage or amount. "Person" shall mean an individual, partnership, limited liability company, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof. 3 "Prospectus" shall mean the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including a prospectus supplement with respect to the terms of the offering of any portion of the Registrable Notes covered by a Shelf Registration Statement, and by all other amendments and supplements to a prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "Purchase Agreement" shall have the meaning set forth in the preamble of this Agreement. "Registrable Notes" shall mean the Notes; provided, however, that the Notes shall cease to be Registrable Notes when (i) a Registration Statement with respect to such Notes shall have been declared effective under the 1933 Act and such Notes shall have been disposed of pursuant to such Registration Statement, (ii) such Notes shall have been sold to the public pursuant to Rule 144 (or any similar provision then in force, but not Rule 144A) under the 1933 Act, (iii) such Notes shall have ceased to be outstanding or (iv) such Notes have been exchanged for Exchange Notes upon consummation of the Exchange Offer. "Registration Expenses" shall mean any and all expenses incident to performance of or compliance by the Company with this Agreement, including without limitation: (i) all SEC, stock exchange or National Association of Securities Dealers, Inc. ("NASD") registration and filing fees, (ii) all fees and expenses incurred in connection with compliance with state or other securities or blue sky laws and compliance with the rules of the NASD (including reasonable fees and disbursements of counsel for any underwriters or Holders in connection with state or other securities or blue sky qualification of any of the Exchange Notes or Registrable Notes), (iii) all expenses of any Persons in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any Prospectus, any amendments or supplements thereto, certificates representing the Exchange Notes and other documents relating to the performance of and compliance with this Agreement, (iv) all rating agency fees, (v) all fees and expenses incurred in connection with the listing, if any, of any of the Registrable Notes on any securities exchange or exchanges, (vi) all fees and disbursements relating to the qualification of the Indenture under applicable securities laws, (vii) the reasonable fees and disbursements of counsel for the Company and, in the case of a Shelf Registration Statement, the reasonable fees and disbursements (including the expenses of preparing and distributing any underwriting or securities sales agreement) of one counsel (in addition to appropriate local counsel) 4 for the Holders (which counsel shall be selected in writing by the Majority Holders), (viii) the fees and expenses of the independent public accountants of the Company, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, (ix) the fees and expenses of a "qualified independent underwriter" if required by Schedule E of the By Laws of the NASD in connection with the offering of the Registrable Securities, (x) the fees and expenses of the trustee, including its counsel, and any escrow agent or custodian, and (xi) any fees and disbursements of the underwriters customarily required to be paid by issuers or sellers of securities and the reasonable fees and expenses of any special experts retained by the Company in connection with any Registration Statement, but excluding underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Notes by a Holder. "Registration Statement" shall mean any registration statement of the Company which covers any of the Exchange Notes or Registrable Notes pursuant to the provisions of this Agreement, and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "SEC" shall mean the Securities and Exchange Commission. "Shelf Registration" shall mean a registration effected pursuant to Section 2(b) hereof. "Shelf Registration Statement" shall mean a "shelf" registration statement of the Company pursuant to the provisions of Section 2(b) of this Agreement which covers all of the then Registrable Notes on an appropriate form under Rule 415 under the 1933 Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Trustee" shall mean the trustee with respect to the Notes under the Indenture. 2. Registration Under the 1933 Act. (a) Exchange Offer Registration. To the extent not prohibited by any applicable law or applicable interpretation of the Staff of the SEC, the Company shall use its best efforts to (A) file within 30 days after the date hereof an Exchange Offer Registration Statement covering the offer by the Company to the Holders to 5 exchange all of the Registrable Notes for Exchange Notes, (B) cause such Exchange Offer Registration Statement to be declared effective by the SEC within 90 days after the date hereof, (C) cause such Exchange Offer Registration Statement to remain effective until the closing of the Exchange Offer and (D) consummate the Exchange Offer within 120 days following the date hereof. The Exchange Notes will be issued under the Indenture. Upon the effectiveness of the Exchange Offer Registration Statement, the Company shall promptly commence the Exchange Offer, it being the objective of such Exchange Offer to enable each Holder (other than Participating Broker-Dealers (as defined in Section 3(f)) eligible and electing to exchange Registrable Notes for Exchange Notes (assuming that such Holder is not an affiliate of the Company within the meaning of Rule 405 under the 1933 Act, acquires the Exchange Notes in the ordinary course of such Holder's business and has no arrangements or understandings with any person to participate in the Exchange Offer for the purpose of distributing the Exchange Notes) to trade such Exchange Notes from and after their receipt without any limitations or restrictions under the 1933 Act and without material restrictions under the securities laws of a substantial proportion of the several states of the United States. In connection with the Exchange Offer, the Company shall: (i) mail to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (ii) keep the Exchange Offer open for not less than 30 business days after the date notice thereof is mailed to the Holders (or longer if required by applicable law); (iii) use the services of the Depositary for the Exchange Offer with respect to Notes evidenced by global certificates; (iv) permit Holders to withdraw tendered Registrable Notes at any time prior to the close of business, New York City time, on the last business day on which the Exchange Offer shall remain open, by sending to the institution specified in the notice, a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Registrable Notes delivered for exchange, and a statement that such Holder is withdrawing his election to have such Notes exchanged; and (v) otherwise comply in all respects with all applicable laws relating to the Exchange Offer. As soon as practicable after the close of the Exchange Offer, the Company shall: 6 (i) accept for exchange Registrable Notes duly tendered and not validly withdrawn pursuant to the Exchange Offer in accordance with the terms of the Exchange Offer Registration Statement and the letter of transmittal which is an exhibit thereto; (ii deliver, or cause to be delivered, to the Trustee for cancellation all Registrable Notes so accepted for exchange by the Company; and (iii) cause the Trustee promptly to authenticate and deliver Exchange Notes to each Holder of Registrable Notes equal in amount to the Registrable Notes of such Holder so accepted for exchange. Interest on each Exchange Note will accrue from the last date on which interest was paid on the Registrable Notes surrendered in exchange therefor or, if no interest has been paid on the Registrable Notes, from October 7, 1996. The Exchange Offer shall not be subject to any conditions, other than that the Exchange Offer, or the making of any exchange by a Holder, does not violate applicable law or any applicable interpretation of the Staff of the SEC. Each Holder of Registrable Notes (other than Participating Broker-Dealers) who wishes to exchange such Registrable Notes for Exchange Notes in the Exchange Offer shall have represented that (i) it is not an affiliate (as defined in Rule 405 under the 1933 Act) of the Company, (ii) it is not a broker-dealer tendering Notes acquired directly from the Company or if it is such a broker-dealer, it will comply with the registration and prospectus delivery requirements of the 1933 Act to the extent applicable, (iii) any Exchange Notes to be received by it were acquired in the ordinary course of business, (iv) at the time of the commencement of the Exchange Offer it has no arrangement with any person to participate in the distribution (within the meaning of the 1933 Act) of the Exchange Notes and (v) it is not acting on behalf of any person who could not make the representations in clauses (i) through (iv). The Company shall inform the Initial Purchasers of the names and addresses of the Holders to whom the Exchange Offer is made, and the Initial Purchasers shall have the right to contact such Holders and otherwise facilitate the tender of Registrable Notes in the Exchange Offer. (b) Shelf Registration. (i) If, because of any change in law or applicable interpretations thereof by the Staff of the SEC, the Company is not permitted to effect the Exchange Offer as contemplated by Section 2(a) hereof or (ii) if for any other reason the Exchange Offer cannot be consummated within 120 days following the date hereof, or (iii) upon the request of any Holder (other than an Initial Purchaser) who is not eligible to participate in the Exchange Offer (with respect to Registrable Notes held by any such Holders) or (iv) upon the request of any Initial Purchaser (with respect to any Registrable Notes which it acquired directly from the Company) following the consummation of 7 the Exchange Offer if any such Initial Purchaser shall hold Registrable Notes which it acquired directly from the Company and if such Initial Purchaser is not permitted, in the opinion of counsel to such Initial Purchaser, pursuant to applicable law or applicable interpretation of the Staff of the SEC to participate in the Exchange Offer, the Company shall, at its cost: (A) as promptly as practicable, file with the SEC a Shelf Registration Statement relating to the offer and sale of the Registrable Notes by the Holders from time to time in accordance with the methods of distribution elected by the Majority Holders of such Registrable Notes and set forth in such Shelf Registration Statement, and use their best efforts to cause such Shelf Registration Statement to be declared effective by the SEC by the 120th day after the date hereof (or promptly in the event of a request by any Holder (other than an Initial Purchaser) who is not eligible to participate in the Exchange Offer as described in clause (iii) above or Initial Purchaser pursuant to clause (iv) above). In the event that the Company is required to file a Shelf Registration Statement upon the request of any Holder (other than an Initial Purchaser) not eligible to participate in the Exchange Offer pursuant to clause (iii) above or upon the request of any Initial Purchaser pursuant to clause (iv) above, the Company shall file and have declared effective by the SEC both an Exchange Offer Registration Statement pursuant to Section 2(a) with respect to all Registrable Notes and a Shelf Registration Statement (which may be a combined Registration Statement with the Exchange Offer Registration Statement) with respect to offers and sales of Registrable Notes held by such Holder or such Initial Purchaser after completion of the Exchange Offer; (B) use its best efforts to keep the Shelf Registration Statement continuously effective in order to permit the Prospectus forming part thereof to be usable by Holders for a period of three years from the Issuance Date (or one year from the date the Shelf Registration Statement is declared effective if such Shelf Registration Statement is filed upon the request of any Initial Purchaser pursuant to clause (iv) above) or such shorter period which will terminate when all of the Registrable Notes covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement or all of the Registrable Notes become eligible for resale pursuant to Rule 144 under the 1933 Act without volume restrictions; and (C) notwithstanding any other provisions hereof, use its best efforts to ensure that (i) any Shelf Registration Statement and any amendment thereto and any Prospectus forming a part thereof and any supplement thereto complies in all material respects with the 1933 Act and the rules and regulations thereunder, (ii) any Shelf Registration 8 Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any Prospectus forming part of any Shelf Registration Statement, and any supplement to such Prospectus (as amended or supplemented from time to time), does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in light of the circumstances under which they were made, not misleading. The Company further agrees, if necessary, to supplement or amend the Shelf Registration Statement if reasonably requested by the Majority Holders with respect to information relating to the Holders and otherwise as required by Section 3(b) below, to use all reasonable efforts to cause any such amendment to become effective and such Shelf Registration to become usable as soon as practicable thereafter and to furnish to the Holders of Registrable Notes copies of any such supplement or amendment promptly after its being used or filed with the SEC. (c) Expenses. The Company shall pay all Registration Expenses in connection with the registration pursuant to Section 2(a) and 2(b). Each Holder shall pay all expenses of its counsel other than as set forth in the preceding sentence, underwriting discounts and commissions (prior to the reduction thereof with respect to selling concessions, if any) and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Notes pursuant to the Shelf Registration Statement. (d) Effective Registration Statement. (i) The Company will be deemed not to have used its best efforts to cause a Registration Statement to become, or to remain, effective during the requisite period if the Company voluntarily takes any action that would result in any such Registration Statement not being declared effective or in the Holders of Registrable Notes covered thereby not being able to exchange or offer and sell such Registrable Notes during that period unless (A) such action is required by applicable law or (B) such action is taken by the Company in good faith and for valid business reasons (but not including avoidance of the Company's obligations hereunder), including a material corporate transaction, so long as the Company promptly complies with the requirements of Section 3(k) hereof, if applicable. (ii) An Exchange Offer Registration Statement pursuant to Section 2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b) hereof will not be deemed to have become effective unless it has been declared effective by the SEC; provided, however, that if, after it has been declared effective, the offering of Registrable Notes pursuant to a Registration Statement is interfered with by any stop order, injunction or 9 other order or requirement of the SEC or any other governmental agency or court, such Registration Statement will be deemed not to have been effective during the period of such interference, until the offering of Registrable Notes pursuant to such Registration Statement may legally resume. (e) Increase in Interest Rate. In the event that either (i) the Exchange Offer Registration Statement is not filed with the Commission on or prior to the 30th day following the date hereof, (ii) the Exchange Offer Registration Statement is not declared effective on or prior to the 90th day following the date hereof or (iii) the Exchange Offer is not consummated on or prior to the 120th day following the date hereof or a Shelf Registration Statement with respect to the Registrable Notes is not declared effective on or prior to the 120th day following the date hereof (or, if such Shelf Registration Statement is filed pursuant to Section 2(b)(iii), the 60th day following the request therefor if later than such 120th day), the interest rate borne by the Registrable Notes shall be increased by one-quarter of one percent per annum following such 30-day period in the case of clause (i) above, following such 90-day period in the case of clause (ii) above or following such 120-day period in the case of clause (iii) above, which rate will be increased by an additional one-quarter of one percent per annum for each 90-day period that any such additional interest continues to accrue, provided that the aggregate increase in such interest rate will in no event exceed one-percent. Upon (x) the filing of the Exchange Offer Registration Statement after the 30-day period described in clause (i) above, (y) the effectiveness of the Exchange Offer Registration Statement after the 90-day period described in clause (ii) above or (z) consummation of the Exchange Offer or the effectiveness of a Shelf Registration Statement, as the case may be, after the 120-day period described in clause (iii) above, the interest rate borne by the Registrable Notes from the date of such filing, the date of such effectiveness or the date before the date of such consummation, as the case may be, will be reduced to the original interest rate if the Company is otherwise in compliance with this paragraph. If the Company issues a notice that the Shelf Registration Statement is unusable pending the announcement of a material corporate transaction or otherwise pursuant to Section 3(k) hereof, or such a notice is required under applicable securities laws to be issued by the Company, and the aggregate number of days in any consecutive twelve-month period for which all such notices are issued or required to be issued exceeds 30 days in the aggregate, then the interest rate borne by the Registrable Notes will be increased by one-quarter of one percent per annum following the date that such Shelf Registration Statement ceases to be usable beyond the 30-day period permitted above, which rate shall be increased by an additional one-quarter of one percent per annum for each 90-day period that such additional interest continues to accrue; provided that the aggregate increase in such annual interest rate may in no event exceed one percent. Upon the Company declaring that the Shelf Registration Statement is usable after the 10 interest rate has been increased pursuant to the preceding sentence, the interest rate borne by the Registrable Notes will be reduced to the original interest rate if the Company is otherwise in compliance with this paragraph; provided, however, that if after any such reduction in interest rate the Shelf Registration Statement again ceases to be usable beyond the period permitted above, the interest rate will again be increased and thereafter reduced pursuant to the foregoing provisions. (f) Specific Enforcement. Without limiting the remedies available to the Initial Purchasers and the Holders, the Company acknowledges that any failure by the Company to comply with its respective obligations under Sections 2(a) and 2(b) hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Company's obligations under Sections 2(a) and 2(b) hereof. 3. Registration Procedures. In connection with the obligations of the Company with respect to the Registration Statements pursuant to Sections 2(a) and 2(b) hereof, the Company shall: (a) prepare and file with the SEC a Registration Statement, within the time period specified in Section 2, on the appropriate form under the 1933 Act, which form (i) shall be selected by the Company, (ii) shall, in the case of a Shelf Registration, be available for the sale of the Registrable Notes by the selling Holders thereof and (iii) shall comply as to form in all material respects with the requirements of the applicable form and include or incorporate by reference all financial statements required by the SEC to be filed therewith, and use its best efforts to cause such Registration Statement to become effective and remain effective in accordance with Section 2 hereof; (b) prepare and file with the SEC such amendments and post-effective amendments to (i) the Exchange Offer Registration Statement as may be necessary under applicable law to keep such Exchange Offer Registration Statement effective for the period required to comply with Section 2(a) and 3(f) hereof and (ii) the Shelf Registration Statement as may be necessary under applicable law to keep such Shelf Registration Statement effective for the period required pursuant to Section 2(b) hereof; cause each Prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the 1933 Act; and comply with the provisions of the 1933 Act with respect to the disposition of all securities covered by each Registration Statement during the 11 applicable period in accordance with the intended method or methods of distribution by the selling Holders thereof; (c) in the case of a Shelf Registration, (i) notify each Holder of Registrable Notes, at least ten days prior to filing, that a Shelf Registration Statement with respect to the Registrable Notes is being filed and advising such Holders that the distribution of Registrable Notes will be made in accordance with the method elected by the Majority Holders; and (ii) furnish to each Holder of Registrable Notes, to counsel for the Initial Purchasers, to counsel for the Holders and to each underwriter of an underwritten offering of Registrable Notes, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto and such other documents as such Holder or underwriter may reasonably request, including financial statements and schedules and, if the Holder so requests, all exhibits (including those incorporated by reference) in order to facilitate the public sale or other disposition of the Registrable Notes; and (iii) subject to the last paragraph of Section 3, hereby consent to the use of the Prospectus, including each preliminary Prospectus, or any amendment or supplement thereto by each of the selling Holders of Registrable Notes in connection with the offering and sale of the Registrable Notes covered by the Prospectus or any amendment or supplement thereto; (d) use its best efforts to register or qualify the Registrable Notes under all applicable state securities or "blue sky" laws of such jurisdictions as any Holder of Registrable Notes covered by a Registration Statement and each underwriter of an underwritten offering of Registrable Notes shall reasonably request by the time the applicable Registration Statement is declared effective by the SEC, to cooperate with the Holders in connection with any filings required to be made with the NASD, keep each such registration or qualification effective during the period such Registration Statement is required to be effective and do any and all other acts and things which may be reasonably necessary or advisable to enable such Holder to consummate the disposition in each such jurisdiction of such Registrable Notes owned by such Holder; provided, however, that the Company shall not be required to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d) or (ii) take any action which would subject it to general service of process or taxation in any such jurisdiction if it is not then so subject; (e) in the case of a Shelf Registration, notify each Holder of Registrable Notes and counsel for such Holders promptly and, if requested by such Holder or counsel, 12 confirm such advice in writing promptly (i) when a Registration Statement has become effective and when any post-effective amendments and supplements thereto become effective, (ii) of any request by the SEC or any state securities authority for post-effective amendments and supplements to a Registration Statement and Prospectus or for additional information after the Registration Statement has become effective, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) if, between the effective date of a Registration Statement and the closing of any sale of Registrable Notes covered thereby, the representations and warranties of the Company contained in any underwriting agreement, securities sales agreement or other similar agreement, if any, relating to such offering cease to be true and correct in all material respects, (v) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Notes for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, (vi) of the happening of any event or the discovery of any facts during the period a Shelf Registration Statement is effective which makes any statement made in such Shelf Registration Statement or the related Prospectus untrue in any material respect or which requires the making of any changes in such Shelf Registration Statement or Prospectus in order to make the statements therein not misleading and (vii) of any determination by the Company that a post-effective amendment to a Registration Statement would be appropriate; (f) (A) in the case of the Exchange Offer, (i) include in the Exchange Offer Registration Statement a "Plan of Distribution" section covering the use of the Prospectus included in the Exchange Offer Registration Statement by broker-dealers who have exchanged their Registrable Notes for Exchange Notes for the resale of such Exchange Notes, (ii) furnish to each broker-dealer who desires to participate in the Exchange Offer, without charge, as many copies of each Prospectus included in the Exchange Offer Registration Statement, including any preliminary prospectus, and any amendment or supplement thereto, as such broker-dealer may reasonably request, (iii) include in the Exchange Offer Registration Statement a statement that any broker-dealer who holds Registrable Notes acquired for its own account as a result of market-making activities or other trading activities (a "Participating Broker-Dealer"), and who receives Exchange Notes for Registrable Notes pursuant to the Exchange Offer, may be a statutory underwriter and must deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of such Exchange Notes, (iv) subject to the last paragraph of Section 3, hereby consent to the use of the Prospectus forming part of 13 the Exchange Offer Registration Statement or any amendment or supplement thereto, by any broker-dealer in connection with the sale or transfer of the Exchange Notes covered by the Prospectus or any amendment or supplement thereto, and (v) include in the transmittal letter or similar documentation to be executed by an exchange offeree in order to participate in the Exchange Offer (x) the following provision: "If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange Notes for its own account in exchange for Registrable Notes, it represents that the Registrable Notes to be exchanged for Exchange Notes were acquired by it as a result of market-making activities or other trading activities and acknowledges that it will deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of such Exchange Notes pursuant to the Exchange Offer; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the 1933 Act"; and (y) a statement to the effect that by a broker-dealer making the acknowledgment described in subclause (x) and by delivering a Prospectus in connection with the exchange of Registrable Securities, the broker-dealer will not be deemed to admit that it is an underwriter within the meaning of the 1933 Act; and (B) to the extent any Participating Broker-Dealer participates in the Exchange Offer, the Company shall use its best efforts to cause to be delivered at the request of an entity representing the Participating Broker-Dealers (which entity shall be one of the Initial Purchasers, unless it elects not to act as such representative) only one, if any, "cold comfort" letter with respect to the Prospectus in the form existing on the last date for which exchanges are accepted pursuant to the Exchange Offer and with respect to each subsequent amendment or supplement, if any, effected during the period specified in clause (C) below; and (C) to the extent any Participating Broker-Dealer participates in the Exchange Offer, the Company shall use its best efforts to maintain the effectiveness of the Exchange Offer Registration Statement for a period of 120 days following the closing of the Exchange Offer; and 14 (D) the Company shall not be required to amend or supplement the Prospectus contained in the Exchange Offer Registration Statement as would otherwise be contemplated by Section 3(b), or take any other action as a result of this Section 3(f), for a period exceeding 120 days after the last date for which exchanges are accepted pursuant to the Exchange Offer (as such period may be extended by the Company) and Participating Broker-Dealers shall not be authorized by the Company to, and shall not, deliver such Prospectus after such period in connection with resales contemplated by this Section 3. (g) (A) in the case of an Exchange Offer, furnish counsel for the Initial Purchasers and (B) in the case of a Shelf Registration, furnish counsel for the Holders of Registrable Notes, copies of any request by the SEC or any state securities authority for amendments or supplements to a Registration Statement and Prospectus or for additional information; (h) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement as soon as practicable and provide immediate notice to each Holder of the withdrawal of any such order; (i) in the case of a Shelf Registration, furnish to each Holder of Registrable Notes, without charge, at least one conformed copy of each Registration Statement and any post-effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested); (j) in the case of a Shelf Registration, cooperate with the selling Holders of Registrable Notes to facilitate the timely preparation and delivery of certificates representing Registrable Notes to be sold and not bearing any restrictive legends; and cause such Registrable Notes to be in such denominations (consistent with the provisions of the Indenture) and registered in such names as the selling Holders or the underwriters, if any, may reasonably request at least one business day prior to the closing of any sale of Registrable Notes; (k) in the case of a Shelf Registration, upon the occurrence of any event or the discovery of any facts, each as contemplated by Section 3(e)(vi) hereof, use its best efforts to prepare a supplement or post-effective amendment to a Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Notes, such Prospectus will not contain at the time of such delivery any untrue statement of a material fact or omit to state a material 15 fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company agrees to notify each Holder to suspend use of the Prospectus as promptly as practicable after the occurrence of such an event, and each Holder hereby agrees to suspend use of the Prospectus until the Company has amended or supplemented the Prospectus to correct such misstatement or omission. At such time as such public disclosure is otherwise made or the Company determines that such disclosure is not necessary, in each case to correct any misstatement of a material fact or to include any omitted material fact, the Company agrees promptly to notify each Holder of such determination and to furnish each Holder such numbers of copies of the Prospectus, as amended or supplemented, as such Holder may reasonably request; (l) obtain a CUSIP number for all Exchange Notes, or Registrable Notes, as the case may be, not later than the effective date of a Registration Statement, and provide the Trustee with printed certificates for the Exchange Notes or the Registrable Notes, as the case may be, in a form eligible for deposit with the Depositary; (m) (i) cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended (the "1939 Act"), in connection with the registration of the Exchange Notes, or Registrable Notes, as the case may be, (ii) cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the 1939 Act and (iii) execute, and use its best efforts to cause the Trustee to execute, all documents as may be required to effect such changes, and all other forms and documents required to be filed with the SEC to enable the Indenture to be so qualified in a timely manner; (n) in the case of a Shelf Registration, enter into agreements (including underwriting agreements) and take all other customary and appropriate actions (including those reasonably requested by the Majority Holders) in order to expedite or facilitate the disposition of such Registrable Notes and in such connection whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration: (i) make such representations and warranties to the Holders of such Registrable Notes and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in similar underwritten offerings as may be reasonably requested by them; 16 (ii) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters, if any, and the holders of a majority in principal amount of the Registrable Notes being sold) addressed to each selling Holder and the underwriters, if any, covering the matters customarily covered in opinions requested in sales of securities or underwritten offerings; (iii) obtain "cold comfort" letters and updates thereof from the Company's independent certified public accountants addressed to the underwriters, if any, and will use best efforts to have such letters addressed to the selling Holders of Registrable Notes, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters to underwriters in connection with similar underwritten offerings; (iv) enter into a securities sales agreement with the Holders and an agent of the Holders providing for, among other things, the appointment of such agent for the selling Holders for the purpose of soliciting purchases of Registrable Notes, which agreement shall be in form, substance and scope customary for similar offerings; (v) if an underwriting agreement is entered into, cause the same to set forth indemnification provisions and procedures substantially equivalent to the indemnification provisions and procedures set forth in Section 5 hereof with respect to the underwriters and all other parties to be indemnified pursuant to said Section; and (vi) deliver such documents and certificates as may be reasonably requested and as are customarily delivered in similar offerings. The above shall be done at (i) the effectiveness of such Shelf Registration Statement (and, if appropriate, each post-effective amendment thereto) and (ii) each closing under any underwriting or similar agreement as and to the extent required thereunder. In the case of any underwritten offering, the Company shall provide written notice to the Holders of all Registrable Notes of such underwritten offering at least 30 days prior to the filing of a prospectus supplement for such underwritten offering. Such notice shall (x) offer each such Holder the right to participate in such underwritten offering, (y) specify a date, which shall be no earlier than 10 days following the date of such notice, by which such Holder must inform the Company of its intent to participate in such underwritten 17 offering and (z) include the instructions such Holder must follow in order to participate in such underwritten offering; (o) in the case of a Shelf Registration, make available for inspection by representatives of the Holders of the Registrable Notes and any underwriters participating in any disposition pursuant to a Shelf Registration Statement and any counsel or accountant retained by such Holders or underwriters, at reasonable times and in a reasonable manner, all financial and other records, pertinent corporate documents and properties of the Company reasonably requested by any such persons, and cause the respective officers, directors, employees, and any other agents of the Company to supply all information reasonably requested by any such representative, underwriter, special counsel or accountant in connection with a Registration Statement; (p) (i) a reasonable time prior to the filing of any Exchange Offer Registration Statement, any Prospectus forming a part thereof, any amendment to an Exchange Offer Registration Statement or amendment or supplement to a Prospectus, provide copies of such document to the Initial Purchasers, and make such changes in any such document prior to the filing thereof as any of the Initial Purchasers or their counsel may reasonably request; (ii) in the case of a Shelf Registration, a reasonable time prior to filing any Shelf Registration Statement, any Prospectus forming a part thereof, any amendment to such Shelf Registration Statement or amendment or supplement to such Prospectus, provide copies of such document to the Holders of Registrable Notes, to the Initial Purchasers, to counsel on behalf of the Holders and to the underwriter or underwriters of an underwritten offering of Registrable Notes, if any, and make such changes in any such document prior to the filing thereof as the Holders of Registrable Notes, the Initial Purchasers on behalf of such Holders, their counsel and any underwriter may reasonably request; and (iii) cause the representatives of the Company to be available for discussion of such document as shall be reasonably requested by the Holders of Registrable Notes, the Initial Purchasers on behalf of such Holders or any underwriter and shall not at any time make any filing of any such document of which such Holders, the Initial Purchasers on behalf of such Holders, their counsel or any underwriter shall not have previously been advised and furnished a copy or to which such Holders, the Initial Purchasers on behalf of such Holders, their counsel or any underwriter shall reasonably object; (q) in the case of a Shelf Registration, use their best efforts to cause all Registrable Securities to be listed on any securities exchange on which similar debt 18 securities issued by the Company are then listed if requested by the Majority Holders or by the underwriter or underwriters of an underwritten offering of Registrable Securities, if any; (r) in the case of a Shelf Registration, unless the rating in effect for the Notes applies to the Exchange Notes and the Notes to be sold pursuant to a Shelf Registration, use its best efforts to cause the Registrable Notes to be rated with the appropriate rating agencies, if so requested by the Majority Holders or by the underwriter or underwriters of an underwritten offering of Registrable Notes, if any, unless the Registrable Notes are already so rated; (s) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC and make available to its security holders, as soon as reasonably practicable, an earnings statement covering at least 12 months which shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158 thereunder; and (t) cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by any underwriter and its counsel. In the case of a Shelf Registration Statement, the Company may (as a condition to such Holder's participation in the Shelf Registration) require each Holder of Registrable Notes to furnish to the Company such information regarding such Holder and the proposed distribution by such Holder of such Registrable Notes and make such representations, in each case, as the Company may from time to time reasonably request in writing. In the case of a Shelf Registration Statement, each Holder agrees that, upon receipt of any notice from the Company of the happening of any event or the discovery of any facts, each of the kind described in Section 3(e)(ii)-(vi) hereof, such Holder will forthwith discontinue disposition of Registrable Notes pursuant to a Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(k) hereof, and, if so directed by the Company, such Holder will deliver to the Company (at its expense) all copies in its possession, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Notes current at the time of receipt of such notice. If the Company shall give any such notice to suspend the disposition of Registrable Notes pursuant to a Shelf Registration Statement as a result of the happening of any event or the discovery of any facts, each of the kind described in Section 3(e)(vi) hereof, the Company shall be deemed to have used its best efforts to keep the Shelf Registration Statement effective during such period of suspension provided that the Company shall use its best efforts to file and have declared effective (if an 19 amendment) as soon as practicable an amendment or supplement to the Shelf Registration Statement and shall extend the period during which the Registration Statement shall be maintained effective pursuant to this Agreement by the number of days during the period from and including the date of the giving of such notice to and including the date when the Holders shall have received copies of the supplemented or amended Prospectus necessary to resume such dispositions. 4. Underwritten Registrations. If any of the Registrable Notes covered by any Shelf Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will manage the offering will be selected by the Majority Holders of such Registrable Notes included in such offering and shall be reasonably acceptable to the Company. No Holder of Registrable Notes may participate in any underwritten registration hereunder unless such Holder (a) agrees to sell such Holder's Registrable Notes on the basis provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. 5. Indemnification and Contribution. (a) The Company shall indemnify and hold harmless each Initial Purchaser, each Holder, including Participating Broker-Dealers, each underwriter who participates in an offering of Registrable Notes, their respective affiliates, and their respective directors, officers, employees, agents and each Person, if any, who controls any of such parties within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment thereto) pursuant to which Exchange Notes or Registrable Notes were registered under the 1933 Act, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the 20 aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 5(d) below) any such settlement is effected with the written consent of the Company; and (iii) against any and all expenses whatsoever, as incurred (including reasonable fees and disbursements of counsel chosen by any indemnified party), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any court or governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) of this Section 5(a); provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of an untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by the Initial Purchasers, any Holder, including Participating Broker-Dealers, or any underwriter expressly for use in the Registration Statement (or any amendment or supplement thereto) or the Prospectus (or any amendment or supplement thereto). The foregoing indemnity with respect to any untrue statement contained in or any omission from a Prospectus shall not inure to the benefit of any Initial Purchaser, any Holder, including Participating Broker-Dealers or any underwriter (or any person who controls such party within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act) from whom the person asserting any such loss, liability, claim, damage or expense purchased any of the Notes that are the subject thereof if the Company shall sustain the burden of proving that such person was not sent or given a copy of such Prospectus as amended or supplemented at or prior to the written confirmation of the sale of such Notes to such person and the untrue statement contained in or the omission from such Prospectus was corrected in such amended or supplemented Prospectus, unless such failure resulted from noncompliance by the Company with its obligations hereunder to furnish the Initial Purchasers with copies of such Prospectus as amended or supplemented. (b) In the case of a Shelf Registration, each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company, each Initial Purchaser, each underwriter who participates in an offering of Registrable Notes and the other selling Holders and each of their respective directors and officers (including each officer of the Company who signed the Registration Statement) and each Person, if any, who controls the 21 Company, any Initial Purchaser, any underwriter or any other selling Holder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, against any and all loss, liability, claim, damage and expense described in the indemnity contained in Section 5(a) hereof, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto) or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such Holder, as the case may be, expressly for use in the Registration Statement (or any amendment thereto), or the Prospectus (or any amendment or supplement thereto); provided, however, that no such Holder shall be liable for any claims hereunder in excess of the amount of net proceeds received by such Holder from the sale of Registrable Notes pursuant to such Shelf Registration Statement. (c) Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying party or parties be liable for the fees and expenses of more than one counsel (in addition to any local counsel) for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 5 hereof (whether or not the indemnified parties are actual or potential parties thereof), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 5(a)(ii) hereof effected without its 22 written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request with such request prior to the date of such settlement. (e) If the indemnification provided for in any of the indemnity provisions set forth in this Section 5 is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand, the Initial Purchasers on another hand, and the Holders on another hand, from the offering of the Exchange Notes or Registrable Notes included in such offering or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand, the Initial Purchasers on another hand, and the Holders on another hand, in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand, the Initial Purchasers on another hand, and the Holders on another hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company, the Initial Purchasers or the Holders and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Initial Purchasers and the Holders of the Registrable Securities agree that it would not be just and equitable if contribution pursuant to this Section 5 were determined by pro rata allocation (even if the Initial Purchasers were treated as one entity, and the Holders were treated as one entity, for such purpose) or by another method of allocation which does not take account of the equitable considerations referred to above in Section 5. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 5 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by a governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation 23 (within the meaning of Section 11(f) of the 1993 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 5, each person, if any, who controls an Initial Purchaser or Holder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Initial Purchaser or Holder, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. The parties hereto agree that any underwriting discount or commission or reimbursement of fees paid to any Initial Purchaser pursuant to the Purchase Agreement shall not be deemed to be a benefit received by any Initial Purchaser in connection with the offering of the Exchange Securities or Registrable Securities in such offering. 6. Miscellaneous. (a) Rule 144 and Rule 144A. For so long as the Company is subject to the reporting requirements of Section 13 or 15 of the 1934 Act, the Company covenants that it will file the reports required to be filed by it under Section 13(a) or 15(d) of the 1934 Act and the rules and regulations adopted by the SEC thereunder, that if it ceases to be so required to file such reports, it will upon the request of any Holder of Registrable Notes (i) make publicly available such information as is necessary to permit sales pursuant to Rule 144 under the 1933 Act, (ii) deliver such information to a prospective purchaser as is necessary to permit sales pursuant to Rule 144A under the 1933 Act and it will take such further action as any Holder of Registrable Notes may reasonably request and (iii) take such further action that is reasonable in the circumstances, in each case, to the extent required from time to time to enable such Holder to sell its Registrable Notes without registration under the 1933 Act within the limitation of the exemptions provided by (x) Rule 144 under the 1933 Act, as such Rule may be amended from time to time, (y) Rule 144A under the 1933 Act, as such Rule may be amended from time to time, or (z) any similar rules or regulations hereafter adopted by the SEC. Upon the request of any Holder of Registrable Notes, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements. (b) No Inconsistent Agreements. The Company has not entered into nor will the Company on or after the date of this Agreement enter into any agreement which is inconsistent with the rights granted to the Holders of Registrable Notes in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's other issued and outstanding securities under any such agreements. 24 (c) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of Holders of at least a majority in aggregate principal amount of the outstanding Registrable Notes affected by such amendment, modification, supplement, waiver or departure; provided, however, that no amendment, modification, supplement or waiver or consent to any departure from the provisions of Section 5 hereof shall be effective as against any Holder of Registrable Notes unless consented to in writing by such Holder. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telecopier, or any courier guaranteeing overnight delivery (i) if to a Holder (other than an Initial Purchaser), at the most current address set forth on the records of the Registrar under the Indenture, (ii) if to an Initial Purchaser, to Merrill Lynch at the most current address given by such Initial Purchaser to the Company by means of a notice given in accordance with the provisions of this Section 6(d), which address initially is the address set forth in the Purchase Agreement; and (iii) if to the Company, initially at the Company's address set forth in the Purchase Agreement and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 6(d). All such notices and communications shall be deemed to have been duly given; at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands, or other communications shall be concurrently delivered by the Person giving the same to the Trustee, at the address specified in the Indenture. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; provided that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of the terms hereof or of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Registrable Notes, in any manner, whether by operation of law or otherwise, such Registrable Notes shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Notes, such Person shall be conclusively deemed to have agreed to be 25 bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement and, if applicable, the Purchase Agreement, and such Person shall be entitled to receive the benefits hereof. (f) Third Party Beneficiary. The Holders shall be third party beneficiaries to the agreements made hereunder between the Company, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall continue one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. (j) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. 26 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. GENESIS HEALTH VENTURES, INC. By: /s/ George V. Hager, Jr. ------------------------------- Name: George V. Hager, Jr. Title: Sr. Vice President and CFO CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated CS FIRST BOSTON CORPORATION DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION ALEX. BROWN & SONS INCORPORATED BT SECURITIES CORPORATION MONTGOMERY SECURITIES By: MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated By /s/ Gregory A. Margolies ------------------------------------------- Authorized Signatory For itself and as representative of the other Initial Purchasers named in Schedule A hereto. EX-5 5 LEGAL OPINION October 31, 1996 (215) 569-5500 Genesis Health Ventures, Inc. 148 West State Street Kennett Square, PA 19348 Re: Genesis Health Ventures, Inc. 9 1/4% Senior Subordinated Notes due 2006 Registration Statement on Form S-4 ---------------------------------- Gentlemen: We have acted as counsel to Genesis Health Ventures, Inc. (the "Company") in connection with the Registration Statement on Form S-4 (the "Registration Statement") filed by the Company with the Securities and Exchange Commission under the Securities Act of 1933, as amended, relating to the offer to exchange by the Company of up to $125,000,000 in principal amount of 9 1/4% Senior Subordinated Notes due 2006 (the "Exchange Notes") for outstanding $125,000,000 in principal amount of 9 1/4% Senior Subordinated Notes due 2006. The Exchange Notes will be issued pursuant to an Indenture between the Company and First Union National Bank, as trustee (the "Indenture"). This opinion is being furnished pursuant to the requirements of Item 601(b)(5) of Regulation S-K. In rendering this opinion, we have examined only the documents listed on Exhibit "A" attached hereto. We have not performed any independent investigation other than the document examination described. Our opinion is therefore qualified in all respects by the scope of that document examination. We have assumed and relied, as to questions of fact and mixed questions of law and fact, on the truth, completeness, authenticity and due authorization of all certificates, documents and records examined and the genuineness of all signatures. This opinion is limited to the laws of the Commonwealth of Pennsylvania and no opinion is expressed as to the laws of any other jurisdiction, except that as to matters of New York law, we have relied on the opinion of Simpson Thacher & Bartlett (a partnership that includes professional corporations), New York, New York, attached as Exhibit "B." Based upon and subject to the foregoing, we are of the opinion that the Exchange Notes that are being offered by the Company pursuant to the Registration Statement, when issued by the Genesis Health Ventures, Inc. October 31, 1996 Page 2 - ----------------------------- Company as contemplated by the Registration Statement and in accordance with the Indenture, will be binding obligations of the Company. The opinions expressed herein are qualified in all respects by, and subject to, the following: (a) no opinion is rendered as to the availability of equitable remedies including, but not limited to, specific performance and injunctive relief, (b) the effect of bankruptcy, reorganization, insolvency, fraudulent conveyance, moratorium and other similar laws or equitable principles affecting creditors' rights or remedies; (c) general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing and (d) the effect of applicable law and court decisions which may now or hereafter limit or render unenforceable certain rights and remedies. This opinion is given as of the date hereof. We assume no obligation to update or supplement this opinion to reflect any facts or circumstances which may hereafter come to our attention or any changes in laws which may hereafter occur. This opinion is strictly limited to the matters stated herein and no other or more extensive opinion is intended, implied or to be inferred beyond the matters expressly stated herein. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" in the Prospectus which is part of the Registration Statement. Sincerely, BLANK ROME COMISKY & McCAULEY EXHIBIT "A" 1. The Company's Amended and Restated Articles of Incorporation. 2. The Company's Amended and Restated Bylaws. 3. The Company's Minute Books from May 1985 through the date hereof. 4. Indenture. 5. The Registration Statement. EXHIBIT "B" October 31, 1996 Genesis Health Ventures, Inc. 148 West State Street Kennett Square, PA 19348 Ladies and Gentlemen: We have acted as counsel to Merrill Lynch, Pierce, Fenner & Smith Incorporated, CS First Boston Corporation, Donaldson, Lufkin & Jenrette Securities Corporation, Alex. Brown & Sons Incorporated, BT Securities Corporation and Montgomery Securities (the "Initial Purchasers") in connection with the Registration Statement on Form S-4 (the "Registration Statement") filed by Genesis Health Ventures, Inc., a Pennsylvania corporation (the "Company") with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Securities Act"), relating to the issuance by the Company of $125,000,000 aggregate principal amount of its 9 1/4% Senior Subordinated Notes due 2006 (the "Exchange Notes"). The Exchange Notes are to be issued by the Company in exchange for $125,000,000 aggregate principal amount of its outstanding 9 1/4% Senior Subordinated Notes due 2006 (the "Notes") We have examined the Registration Statement, which incorporates by reference the Annual Report on Form 10-K of the Company for the fiscal year ended September 30, 1995, the Quarterly Reports on Form 10-Q of the Company for the quarters ended December 31, 1995, March 31, 1996 (as amended by a Form 10-Q/A of Genesis Health Ventures, Inc. -2- October 31, 1996 the Company dated March 31, 1996) and June 30, 1996, the Current Report on Form 8-K/A of the Company dated November 30, 1993, the Current Report on Form 8-K of the Company dated November 30, 1995 (as amended by Current Reports on Form 8-K/A of the Company dated November 1, 1996, November 2, 1996 and November 3, 1996), the Current Report on Form 8-K of the Company dated April 21, 1996, the Current Report on Form 8-K of the Company dated May 3, 1996 (as amended by the Current Report on Form 8-K/A of the Company dated November 1, 1996), the Current Report on Form 8-K of the Company dated May 8, 1996, the Current Report on Form 8-K/A of the Company dated July 11, 1996, the Current Report on Form 8-K of the Company dated July 26, 1996 and the Current Report on Form 8-K of the Company dated October 11, 1996; and the Indenture, dated as of October 7, 1996 (the "Indenture"), between the Company and First Union National Bank, as trustee (the "Trustee"), relating to the Notes and the Exchange Notes. In addition, we have examined, and have relied as to matters of fact upon originals or copies, certified or otherwise identified to our satisfaction, of such corporate records, agreements, documents and other instruments and such certificates or comparable documents of public officials and of officers and representatives of the Company, and have made such other and further investigations, as we have deemed relevant and necessary as a basis for the opinions hereinafter set forth. In such examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as Genesis Health Ventures, Inc. -3- October 31, 1996 certified or photostatic copies, and the authenticity of the originals of such latter documents. Based upon the foregoing, and subject to the qualifications and limitations stated herein, when (i) the Indenture has been duly qualified under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), (ii) the Board of Directors of the Company, a duly constituted and acting committee thereof or duly authorized officers thereof has taken all necessary corporate action to approve the issuance and terms of the Exchange Notes, the terms of the exchange and related matters, and (iii) the Exchange Notes have been duly executed, authenticated, issued and delivered in accordance with the provisions of the Indenture upon the exchange, we are of the opinion that the Exchange Notes will constitute valid and legally binding obligations of the Company enforceable against the Company in accordance with their terms. Our opinion set forth above is subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. We are members of the Bar of the State of New York and we do not express any opinion herein concerning any law other than the law of the State of New York and the federal law of the United States. Genesis Health Ventures, Inc. -4- October 31, 1996 This opinion letter is rendered to you in connection with the above described transaction. This opinion letter may not be relied upon by you for any other purpose, or relied upon by, or furnished to, any other person, firm or corporation without our prior written consent, except that Blank Rome Comisky & McCauley, counsel for the Company, may rely upon this opinion letter in rendering their legal opinion pursuant to the Indenture insofar as the opinions expressed therein relate to or are dependent upon matters governed by laws of the State of New York. Very truly yours, SIMPSON THACHER & BARTLETT EX-23.1 6 CONSENT OF KPMG PEAT MARWICK LLP Consent of Independent Auditors The Board of Directors Genesis Health Ventures, Inc. We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. We also consent to the incorporation by reference in this Registration Statement on Form S-4 of Genesis Health Ventures, Inc. of our report dated November 29, 1995 on the financial statement schedules for each of the years in the three-year period ended September 30, 1995, which report appears in the September 30, 1995 annual report on Form 10-K of Genesis Health Ventures, Inc. KPMG Peat Marwick LLP Philadelphia, Pennsylvania October 30, 1996 EX-23.2 7 CONSENTS OF ERNST & YOUNG LLP Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-4) for the registration of $125,000,000, 9 1/4% Senior Subordinated Notes, due 2006 and to the incorporation by reference therein of our report dated February 6, 1995, with respect to the financial statements and other financial information of McKerley Health Care Center-Concord Limited Partnership included in Genesis Health Ventures, Inc.'s Current Report (Form 8K/A), dated April 5, 1996, filed with the Securities and Exchange Commission. Ernst & Young LLP Manchester, New Hampshire October 24, 1996 Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-4) for the registration of $125,000,000, 9 1/4% Senior Subordinated Notes, due 2006 and to the incorporation by reference therein of our report dated February 24, 1995, with respect to the financial statements of McKerley Health Facilities included in Genesis Health Ventures, Inc.'s Current Report (Form 8K/A), dated April 5, 1996, filed with the Securities and Exchange Commission. Ernst & Young LLP Manchester, New Hampshire October 24, 1996 Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-4) for the registration of $125,000,000, 9 1/4% Senior Subordinated Notes, due 2006 and to the incorporation by reference therein of our report dated February 24, 1995, with respect to the financial statements of McKerley Health Care Centers, Inc. included in Genesis Health Ventures, Inc.'s Current Report (Form 8K/A), dated April 5, 1996, filed with the Securities and Exchange Commission. Ernst & Young LLP Manchester, New Hampshire October 24, 1996 Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-4) and the related Prospectus of Genesis Health Ventures, Inc. for the registration of $125,000,000 Senior Subordinated Notes, due 2006 and to the incorporation by reference therein of our report dated March 15, 1996, with respect to the combined financial statements of National Health Care Affiliates, Inc. and Related Entities for the year ended December 31, 1995, included in Genesis Health Ventures, Inc. Current Report (Form 8K/A), dated May 3, 1996, filed with the Securities and Exchange Commission. Ernst & Young LLP Buffalo, New York October 24, 1996 EX-23.3 8 CONSENT OF BDO SEIDMAN LLP Consent of Independent Certified Public Accountants Genesis Health Ventures, Inc. 148 West State Street Kennett Square, Pennsylvania 19348 We hereby consent to the incorporation by reference in the Prospectus constituting a part of the Registration Statement of Form S-4 dated October 31, 1996, for the registration of 9-1/4% Senior Subordinated Notes due 2006 of our report dated August 20, 1996, relating to the consolidated financial statements of Geriatrics & Medical Companies, Inc. as of May 31, 1996 and for each of the years in the two-year period ended May 31, 1996 included in the Genesis Health Ventures, Inc.'s current report on Form 8-K/A dated July 11, 1996 filed with the Securities and Exchange Commission. We also consent to us being named as "Experts" in the Prospectus. BDO Seidman, LLP Philadelphia, Pennsylvania October 31, 1996 EX-25.1 9 FORM T-1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) FIRST UNION NATIONAL BANK (Exact Name of Trustee as Specified in its Charter) 22-1147033 (I.R.S. Employer Identification No.) 101 NORTHSIDE PLAZA, ELKTON, MARYLAND (Address of Principal Executive Offices) 21921 (Zip Code) FIRST UNION NATIONAL BANK ONE RODNEY SQUARE 920 KING STREET, 1ST FLOOR WILMINGTON, DE 19801 ATTENTION: CORPORATE TRUST ADMINISTRATION 302-888-7530 (Name, address and telephone number of Agent for Service) GENESIS HEALTH VENTURES, INC. (Exact Name of Obligor as Specified in its Charter) PENNSYLVANIA (State or other jurisdiction of Incorporation) 1132947 (I.R.S. Employer Identification No.) 148 WEST STATE STREET KENNETT SQUARE, PENNSYLVANIA (Address of Principal Executive Offices) 19348 (Zip Code) 9 1/4% SENIOR SUBORDINATED NOTES DUE 2006 (Title of Indenture Securities) 1. General information. Furnish the following information as to the trustee: a) Name and address of each examining or supervisory authority to which it is subject: Comptroller of the Currency United States Department of the Treasury Washington, D.C. 20219 Federal Reserve Bank (3rd District) Philadelphia, PA 19106 Federal Deposit Insurance Corporation Washington, D.C. 20429 b) Whether it is authorized to exercise corporate trust powers. Yes. 2. Affiliations with obligor. If the obligor is an affiliate of the trustee, describe each such affiliation. None. 3. Voting securities of the trustee. Furnish the following information as to each class of voting securities of the trustee: Not applicable - see answer to Item 13. 4. Trusteeships under other indentures. If the trustee is a trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the obligor are outstanding, furnish the following information: Not applicable - see answer to Item 13. 5. Interlocking directorates and similar relationships with the obligor or underwriters. If the trustee or any of the directors or executive officers of the trustee is a director, 2 officer, partner, employee, appointee, or representative of the obligor or of any underwriter for the obligor, identify each such person having any such connection and state the nature of each such connection. Not applicable - see answer to Item 13. 6. Voting securities of the trustee owned by the obligor or its officials. Furnish the following information as to the voting securities of the trustee owned beneficially by the obligor and each director, partner, and executive officer of the obligor: Not applicable - see answer to Item 13. 7. Voting securities of the trustee owned by underwriters or their officials. Furnish the following information as to the voting securities of the trustee owned beneficially by each underwriter for the obligor and each director, partner, and executive officer of each such underwriter: Not applicable - see answer to Item 13. 8. Securities of the obligor owned or held by the trustee. Furnish the following information as to securities of the obligor owned beneficially or held as collateral security for obligations in default by the trustee: Not applicable - See answer to Item 13. 9. Securities of underwriters owned or held by the trustee. If the trustee owns beneficially or holds as collateral security for obligations in default any securities of an underwriter for the obligor, furnish the following information as to each class of securities of such underwriter any of which are so owned or held by the trustee: Not applicable - see answer to Item 13. 3 10. Ownership or holdings by the trustee of voting securities of certain affiliates or security holders of the obligor. If the trustee owns beneficially or holds as collateral security for obligations in default voting securities of a person who, to the knowledge of the trustee (1) owns 10 percent or more of the voting stock of the obligor or (2) is an affiliate, other than a subsidiary, of the obligor, furnish the following information as to the voting securities of such person: Not applicable - see answer to Item 13. 11. Ownership or holdings by the trustee of any securities of a person owning 50 percent or more of the voting securities of the obligor. If the trustee owns beneficially or holds as collateral security for obligations in default any securities of a person who, to the knowledge of the trustee, owns 50 percent or more of the voting securities of the obligor, furnish the following information as to each class of securities of such person any of which are so owned or held by the trustee: Not applicable - see answer to Item 13. 12. Indebtedness of the obligor to the trustee. Except as noted in the instructions, if the obligor is indebted to the trustee, furnish the following information: Not applicable - see answer to Item 13. 13. Defaults by the obligor. (a) State whether there is or has been a default with respect to the securities under this Indenture. Explain the nature of any such default. None. (b) If the trustee is a trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the obligor are outstanding, or is trustee for more than one 4 outstanding series of securities under the indenture, state whether there has been a default under any such indenture or series, identify the indenture or series affected, and explain the nature of any such default. None. 14. Affiliations with the underwriters. If any underwriter is an affiliate of the trustee, describe each such affiliation. Not applicable - see answer to Item 13. 13. Foreign trustee. Identify the order or rule pursuant to which the trustee is authorized to act as sole trustee under indentures qualified or to be qualified under the Act. Not applicable - trustee is a national banking association organized under the laws of the United States. 16. List of Exhibits. List below all exhibits filed as part of this statement of eligibility. 1. Copy of Articles of Association of the trustee as now in --- effect.** 2. Copy of the Certificate of the Comptroller of the Currency --- date dated January 11, 1994, evidencing the authority of the trustee to transact business.* 3. Copy of the Certification of Fiduciary Powers of the --- trustee by the office of the Comptroller of the Currency dated July 24, 1992.* 4. Copy of existing by-laws of the trustee.** --- 5. Copy of each indenture referred to in Item 4, if the --- obligor is in default. Not applicable. 5 x 6. Consent of the trustee required by Section 321(b) of the --- Act. x 7. Copy of report of condition of the trustee at the close of --- business on June 30, 1996, published pursuant to the requirements of its supervising authority. 8. Copy of any order pursuant to which the foreign trustee is --- authorized to act as sole trustee under indentures qualified or to be qualified under the Act. Not applicable. 9. Consent to service of process required of foreign trustees --- pursuant to Rule 10a-4 under the Act. Not applicable. - ----------------- *Previously filed with the Securities Exchange Commission on February 11, 1994 as an Exhibit to Form T-1 in connection with Registration Statement Number 22-73340 and **previously filed with the Securities Exchange Commission on March 6, 1996 with Registration Statement Number 333-1102 and incorporated herein by reference. NOTE The trustee disclaims responsibility for the accuracy or completeness of information contained in this Statement of Eligibility and Qualification not known to the trustee and not obtainable by it through reasonable investigation and as to which information it has obtained from the obligor and has had to rely or will obtain from the principal underwriters and will have to rely. 6 SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, First Union National Bank, a national banking association organized and existing under the laws of the United States of America, has duly caused this Statement of Eligibility and Qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Wilmington and State of Delaware, on the 31st day of October, 1996. FIRST UNION NATIONAL BANK By: /s/ Stephen J. Kaba ------------------------ Stephen J. Kaba Vice President 7 EXHIBIT 6 CONSENT OF TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, and in connection with the proposed issue of Genesis Health Ventures, Inc., 9 1/4% Senior Subordinated Notes Due 2006, First Union National Bank, hereby consents that reports of examinations by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. FIRST UNION NATIONAL BANK By: /s/ Stephen J. Kaba -------------------------- Stephen J. Kaba Vice President Wilmington, Delaware October 31, 1996 8 EXHIBIT 7 REPORT OF CONDITION Consolidating domestic and foreign subsidiaries of the First Union National Bank of Elkton in the State of Maryland, at the close of business on June 30, 1996 published in response to call made by Comptroller of the Currency, under Title 12, United States Code, Section 161. Charter Number 33869 Comptroller of the Currency Northeastern District. Statement of Resources and Liabilities
ASSETS Thousand of Dollars Cash and balance due from depository Institutions: Noninterest-bearing balances and currency and coin .................................... 1,772,664 Interest-bearing balances ............................................................... 124,929 Securities .............................................................................. ///////// Hold-to-maturity securities ............................................................. 531,451 Available-for-sale securities ......................................................... 5,080,485 Federal funds sold and securities purchased under agreements to resell in domestic ...... ///////// office of the bank and of its Edge and Agreement subsidiaries, and in IBFs: ........... ///////// Federal funds sold ....................................................................... 26,481 Securities purchased under agreements to resell ......................................... 223,204 Loans and leases financing receivables: Loan and leases, net of unearned income .................20,255,779 LESS: Allowance for loan and lease losses ................ 412,158 LESS: Allocated transfer risk reserve ..................... 0 Loans and leases, net of unearned income, allowance, and reserve ....................... 19,843,621 Assets held in trading accounts ................................................................. 0 Premises and fixed assets (including capitalized leases) .................................. 390,936 Other real estate owned .................................................................... 58,628 Investment in unconsolidated subsidiaries and associated companies ......................... 26,343 Customer's liability to this bank on acceptances outstanding ............................... 51,547 Intangible assets ......................................................................... 747,578 Other assets .............................................................................. 798,531 Total assets ........................................................................... 29,676,398 LIABILITIES Deposits: In domestic offices .................................................................. 24,056,990 Noninterest-bearing .................................. 4,453,778 Interest-bearing .....................................19,603,212 In foreign offices, Edge and Agreement subsidiaries, and IBFs ........................... 308,954 Noninterest-bearing ..................................... 0 Interest-bearing ........................................308,954 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge and Agreement subsidiaries, and IBFs Federal fund purchased .................................................................. 389,394 Securities sold under agreements to repurchase .......................................... 820,273 Demand notes issued to the U.S. Treasury .................................................. 113,120 Trading liabilities ............................................................................. 0 Other borrowed money .................................................................... ///////// With original maturity of one year or less ............................................... 6,829 With original maturity of more than one year ............................................ 10,338
9 Mortgage indebtedness and obligations under capitalized leases ............................. 16,467 Bank's liability on acceptances executed and outstanding ................................... 51,827 Subordinated notes and debentures ......................................................... 175,000 Other liabilities ......................................................................... 708,654 Total liabilities ...................................................................... 26,657,846 Limited-life preferred stock and related surplus ................................................ 0 EQUITY CAPITAL Perpetual preferred stock and related surplus ............................................. 160,540 Common stock .............................................................................. 452,156 Surplus ................................................................................. 1,300,080 Undivided profits and capital reserves .................................................. 1,150,698 Net unrealized holding gains (losses) on available-for-sale securities .................... (44,922) Cumulative foreign currency translation adjustments ............................................. 0 Total equity capital .................................................................... 3,018,552 Total liabilities, limited-life preferred stock and equity capital ..................... 29,676,398
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