-----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, DDpqDxno5x6KgTZdrQdhb6yg/zBOIZr/mCXDRTOHiFqryXN1VNYwCQTc/jgWipe9 yntVHEgcUIZmSvMpNN88Ww== 0000950116-98-000079.txt : 19980121 0000950116-98-000079.hdr.sgml : 19980121 ACCESSION NUMBER: 0000950116-98-000079 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19980116 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MULTICARE COMPANIES INC CENTRAL INDEX KEY: 0000890925 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 223152527 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-44479 FILM NUMBER: 98508779 BUSINESS ADDRESS: STREET 1: 411 HACKENSACK AVE CITY: HACKENSACK STATE: NJ ZIP: 07601 BUSINESS PHONE: 2014888818 MAIL ADDRESS: STREET 1: 411 HACKENSACK AVENUE CITY: HACKENSACK STATE: NJ ZIP: 07601 S-4 1 As filed with the Securities and Exchange Commission on January 16, 1998 Registration No. 333- =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- THE MULTICARE COMPANIES, INC. (Exact name of registrant as specified in its charter)
Delaware 8051 22-3152527 - -------------------------------------- ----------------------------------- ----------------------------------- (State or other jurisdiction of (Primary standard industrial (I.R.S. employer incorporation or organization) classification code number) identification no.)
433 HACKENSACK AVENUE HACKENSACK, NJ 07601 (201) 488-8818 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) -------------------- Michael R. Walker Chief Executive Officer THE MULTICARE COMPANIES, 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 LLP One Logan Square 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. [ ]
============================================================================================================================ 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% Senior Subordinated Notes due 2007 $250,000,000 $1,000 $250,000,000 $73,750 - ----------------------------------------------------------------------------------------------------------------------------
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. =============================================================================== 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. SUBJECT TO COMPLETION, DATED JANUARY 16, 1998 PROSPECTUS THE MULTICARE COMPANIES, INC. Offer to Exchange its 9% Senior Subordinated Notes due 2007, which have been registered under the Securities Act of 1933, as amended, for any and all of its outstanding 9% Senior Subordinated Notes due 2007. The Exchange Offer will expire at 5:00 p.m., New York City time, on ________, 1998, unless extended. ------------------------ The Multicare Companies, Inc. a Delaware corporation ("Multicare" 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% Senior Subordinated Notes due 2007 (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% Senior Subordinated Notes due 2007 (the "Existing Notes"), of which $250,000,000 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 August 11, 1997 (the "Indenture"), between the Company and PNC Bank, National Association, 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." Pursuant to an Agreement and Plan of Merger (the "Merger Agreement") with Genesis ElderCare Corp. and Genesis ElderCare Acquisition Corp. ("Acquisition Corp."), on October 10, 1997 (the "Merger Closing Date"), Acquisition Corp. was merged with and into the Company and the Company continued as the surviving corporation and became a subsidiary of Genesis ElderCare Corp. The Existing Notes were issued by Acquisition Corp. as part of the financings to consummate the Merger and, thereupon, became obligations of the Company. 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 , 1998, 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's predecessor on August 11, 1997 to the Placement Agents (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 Placement Agents subsequently resold the Existing Notes to qualified institutional buyers in reliance upon Rule 144A under the Securities Act. 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 -2- 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." The Existing Notes are designated for trading in the Private Offerings, Resales and Trading through Automated Linkages ("PORTAL") Market. 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 other than the Luxembourg Stock Exchange. There can be no assurance that an active market for the Exchange Notes will develop. Morgan Stanley Dean Witter, Montgomery Securities and First Union Capital Markets Corp. (the "Placement Agents") 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 Placement Agents 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 17 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 , 1998. -3- 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 and expected future capital expenditure requirements; expected effects of the Transactions; certain statements contained in "Business" such as statements concerning strategy, government regulation and Medicare and Medicaid programs; 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 within the meaning of the Securities Act. 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", including the following: the occurrence of changes in the mix of payment sources utilized by the Company's patients to pay for the Company's services; the adoption of cost containment measures by private pay sources and efforts by governmental reimbursement sources to impose cost containment measures; changes in the United States healthcare system and other changes in applicable government regulations that might affect the Company's profitability; the Company's continued ability to operate in a heavily regulated environment and to satisfy regulatory authorities; the Company's ability to staff its facilities appropriately with qualified healthcare personnel and to maintain a satisfactory relationship with labor unions; the level of competition in the Company's industry; the continued availability of insurance for the inherent risks of liability in the healthcare industry; price increases in pharmaceuticals, durable medical equipment and other items; the Company's reputation for delivering high-quality care and its ability to attract and retain patients; the ability of Genesis Health Ventures, Inc. ("Genesis") to develop the clinical and healthcare management information system to be used by the Company; and changes in general economic conditions. -4- 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. As used herein, unless the context otherwise requires, "Multicare" or the "Company" refers to The Multicare Companies, Inc. and its subsidiaries. THE COMPANY Multicare is a leading provider of high quality eldercare and specialty medical services in selected geographic regions. Multicare's eldercare services include skilled nursing care, assisted living, Alzheimer's care and related support activities traditionally provided in eldercare facilities. The Company's specialty medical services consist of (i) sub-acute care such as ventilator care, intravenous therapy and various forms of coma, pain and wound management and (ii) rehabilitation therapies such as occupational, physical and speech therapy and stroke and orthopedic rehabilitation. The Company also provides management services to 51 facilities and consulting services to 14 facilities. As of September 30, 1997, Multicare operated 155 eldercare facilities, 11 assisted living facilities and two outpatient rehabilitation centers (90 owned, 27 leased and 51 managed) in Connecticut, Illinois, Massachusetts, New Jersey, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia and Wisconsin with 17,615 beds. THE TRANSACTIONS The Tender Offer and Merger On June 16, 1997, Genesis ElderCare Corp., Acquisition Corp. and Multicare entered into the Merger Agreement whereby Acquisition Corp. agreed to make a tender offer (the "Tender Offer") to purchase all of the outstanding shares of common stock, par value $.01 per share (the "Shares"), of Multicare at a purchase price of $28.00 per Share. The Tender Offer was consummated on October 9, 1997. Acquisition Corp. was merged with and into the Company on the Merger Closing Date. Following the Merger, the Company continued as the surviving corporation and become a subsidiary of Genesis ElderCare Corp. Genesis ElderCare Corp. is owned by Genesis, The Cypress Group L.L.C. (together with its affiliates, "Cypress"), TPG Partners II, L.P. (together with its affiliates, "TPG") and Nazem, Inc. (together with its affiliates "Nazem"). Therapy and Pharmacy Sale Concurrently with the consummation of the Merger, the Company sold its contract therapy business (the "Therapy Sale") to Genesis for approximately $20.0 million in after-tax proceeds. Concurrently with the consummation of the Merger, the Company entered into a contract to sell its pharmacy business to Genesis for approximately $50.0 million in after-tax proceeds (the "Pharmacy Sale"). The Financings The Notes were issued by Acquisition Corp. as part of the financings to consummate the Tender Offer and the Merger and, upon consummation of the Merger, became direct obligations of the Company. The balance of the proceeds necessary to consummate the Tender Offer and the Merger were obtained from (i) borrowings under certain credit facilities (collectively, the "Credit Facility") provided by a group of banks -5- simultaneously with the consummation of the Tender Offer, (ii) equity contributions by Genesis ElderCare Corp. from the sale by Genesis ElderCare Corp. of its common stock to each of Genesis, Cypress, TPG and Nazem (the "Equity Contributions") and (iii) proceeds from the Therapy Sale and Pharmacy Sale. The Tender Offer, the Merger (including the Debt Conversion (as defined)), the Offering and the use of proceeds therefrom, the borrowings under the Credit Facility and the use of proceeds therefrom, the Equity Contributions and the use of proceeds therefrom, the Management Agreement, the Therapy Sale and the Pharmacy Sale and the use of proceeds therefrom are hereinafter collectively referred to as the "Transactions." The following table sets forth the estimated sources and uses of funds in connection with the Transactions:
Amount Amount Sources of Funds (in millions) Uses of Funds (in millions) - --------------------------------------- -------------- --------------------------------------- -------------- Credit Facility (1)(2)(3).............. $417.4 Tender Offer and Merger Notes (4).............................. 248.6 Consideration...................... $1,037.0 Equity Contributions................... 745.0 Refinance Debt (3)(5).................. 381.0 Therapy Sale Net Proceeds.............. 20.0 Severance/Other Payments............... 19.0 Pharmacy Sale Net Proceeds (2)......... 50.0 Transaction Fees and Expenses (6)...... 44.0 -------------- -------------- Total.............................. $1,481.0 Total.............................. $1,481.0 ============== ==============
- ---------------------------- (1) Excludes approximately $106.0 million that will be available to the Company under a revolving credit facility upon the consummation of the Transactions. (2) The Company borrowed an additional $50.0 million under the Credit Facility until the Pharmacy Sale is consummated, which is expected to occur in the first calendar quarter of 1998. (3) As of October 9, 1997, the Company had $309.3 million outstanding under its bank credit facility. (4) Notes are net of debt discount of $1.4 million. (5) Includes repayment of a $54.0 million lease financing facility. (6) Includes underwriting discounts and commissions in connection with the Offering and fees and expenses payable to Genesis, Cypress and TPG in connection with the Transactions. Put/Call Agreement Pursuant to an agreement (the "Put/Call Agreement") entered into by Genesis, Cypress, TPG and Nazem in connection with the Tender Offer and Merger, among other things, (i) Genesis has an option (the "Call"), exercisable from and after the fourth anniversary of the Merger Closing Date for a period of 270 days, to purchase the shares of common stock of Genesis ElderCare Corp. held by Cypress, TPG and Nazem and (ii) Cypress, TPG and Nazem have an option (the "Put"), exercisable from and after the fifth anniversary of the Merger Closing Date until the sixth anniversary of the Merger Closing Date, to sell their shares of common stock of Genesis ElderCare Corp. to Genesis. The option price in either case will be derived from a formula that calculates the equity value attributable to Cypress' and TPG's Genesis ElderCare Corp. common stock based upon a multiple of Genesis ElderCare Corp.'s EBITDAR. The multiple to be applied to EBITDAR will depend on whether the Call or the Put is being exercised. See "Management -- Certain Agreements." -6- THE OFFERING
Notes....................................... The Existing Notes were sold by Acquisition Corp. on August 11, 1997 to the Placement Agents pursuant to a Placement Agreement, dated as of August 4, 1997 (the "Placement Agreement"). The Placement Agents subsequently resold the Existing Notes in the United States to qualified institutional buyers pursuant to Rule 144A under the Securities Act. Registration Rights Agreement............... Pursuant to the Placement Agreement, the Company and the Placement Agents entered into a Registration Rights Agreement, dated August 11, 1997 (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.......................... $250,000,000 aggregate principal amount of 9% Senior Notes due 2007 (the "Exchange Notes"). 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, $250,000,000 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 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
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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 , 1998, 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. 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 February 1, 1998 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."
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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 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
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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 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 by March 31, 1998, or if any holder of the Existing Notes (other than the Placement Agents) is not eligible to participate in the Exchange Offer, 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 and (c) keep continuously effective the Shelf Registration Statement until the second anniversary of the Closing Date (as defined in the Placement Agreement) 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. 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."
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Withdrawal Rights........................... Tenders may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. See "Exchange Offer -- Withdrawal of Tenders" 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.............................. PNC Bank, National Association. 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." Issuer...................................... The Multicare Companies, Inc. Maturity.................................... August 1, 2007. Interest.................................... Payable semi-annually in cash, on February 1 and August 1, commencing on February 1, 1998.
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Optional Redemption......................... The Notes are redeemable at the option of the Company, in whole or in part, at any time on or after August 1, 2002, initially at 104.5% of their principal amount, plus accrued interest, declining ratably to 100% of their principal amount, plus accrued interest, on or after August 1, 2004. See "Description of the Notes-- Optional Redemption." Change in Control........................... Upon a Change in Control (as defined herein), the Company will be required to make an offer to purchase the Notes at a purchase price equal to 101% of their principal amount, plus accrued interest. Consummation of a transaction pursuant to the Put/Call Agreement will not constitute a Change in Control. See "Description of the Notes-- Repurchase of Notes upon a Change in Control." Ranking..................................... The Notes are unsecured, general obligations of the Company, subordinated in right of payment to all existing and future Senior Indebtedness of the Company, including indebtedness under the Credit Facility. The Notes rank pari passu in right of payment with any future senior subordinated indebtedness of the Company and will be senior in right of payment to all future subordinated indebtedness of the Company. In addition, the Notes are effectively subordinated to all liabilities of the Company's subsidiaries, including trade payables. At September 30, 1997, on a pro forma basis after giving effect to the Transactions, the Company (excluding its subsidiaries) would have had approximately $703.1 million of indebtedness outstanding, of which $454.5 million would have been Senior Indebtedness, and the Company's subsidiaries, on the same pro forma basis, would have had approximately $90.1 million of liabilities (excluding guarantees of the Company's indebtedness). See "Risk Factors-- Substantial Leverage" and "--Subordination of the Notes" and "Description of the Notes -- Subordination." Certain Covenants........................... The Indenture contains certain covenants, including, among others, covenants limiting the incurrence of additional indebtedness, the payment of dividends, the redemption of capital stock, the making of certain investments, the issuance of capital stock of subsidiaries, the creation of dividend and other restrictions affecting subsidiaries, transactions with affiliates, asset sales and certain mergers and consolidations. However, these limitations will be subject to a number of important qualifications and exceptions. See "Description of the Notes-- Certain Covenants." Use of Proceeds............................. The net proceeds of the Offering, together with the Equity Contributions, borrowings under the Credit Facility and the
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proceeds of the Therapy Sale and Pharmacy Sale, were used to purchase the Shares pursuant to the Tender Offer and the Merger; to refinance certain indebtedness of the Company; to make certain cash payments to employees of the Company in accordance with the Merger Agreement and certain noncompetition and consulting agreements; and to pay fees and expenses related to the Transactions. Book-Entry; Delivery and Form.............. Notes will be represented by one or more permanent global Notes in definitive, fully registered form, deposited with the Trustee as custodian for, and registered in the name of a nominee of, DTC. Listings and Trading....................... Application has been made to list the Notes on the Luxembourg Stock Exchange. The Notes have been designated eligible for trading in the PORTAL market. The Notes are a new issue of securities for which there is no existing trading market. There can be no assurance regarding the future development of a market for the Notes or the liquidity of any such market. See "Risk Factors-- Absence of a Public Market for the Notes; Volatility" and "Transfer Restrictions." Governing Law.............................. The Indenture and the Notes are governed by, and construed in accordance with, the laws of the State of New York. Trustee, Paying Agent and Registrar......... PNC Bank, National Association. Paying Agent, Transfer Agent and Listing Agent in Luxembourg.............. Banque Internationale a Luxembourg S.A.
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 -13- 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. RISK FACTORS Prospective investors should consider carefully certain matters relating to the Company, its business and an investment in the Notes. See "Risk Factors." -14- SUMMARY CONSOLIDATED FINANCIAL DATA The summary historical consolidated financial data presented below for, and as of, each of the years in the five-year period ended December 31, 1996 have been derived from the Consolidated Financial Statements of Multicare, including the notes thereto, which have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The summary historical consolidated financial data for, and as of, each of the nine months ended September 30, 1996 and 1997 have been derived from unaudited consolidated financial statements of Multicare which, in the opinion of management, include all adjustments (consisting only of normal recurring items) necessary for a fair and consistent presentation of such data. The results for the nine months ended September 30, 1997 are not necessarily indicative of results to be expected for the full fiscal year. The information set forth below should be read in conjunction with "Pro Forma Condensed Consolidated Financial Information," "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of Multicare, including the notes thereto, appearing elsewhere in this Prospectus.
Nine Months Ended Years Ended December 31, September 30, -------------------------------------------------- -------------------- 1992 1993 1994 1995 1996 1996 1997 ---------- -------- -------- -------- -------- -------- ---------- (in thousands, except ratio and operating data) Summary of Operations Data: Net revenues................................... $126,007 $162,384 $262,416 $353,048 $532,230 $386,890 $533,952 Income from operations before depreciation, amortization, lease expense, interest, taxes and extraordinary items ("EBITDAR") (1)...... 18,540 32,227 52,543 70,220 105,925 76,769 102,576 Depreciation and amortization.................. 5,734 6,292 9,358 13,171 22,344 16,048 21,620 Lease expense.................................. 226 862 2,823 5,039 12,110 8,874 12,693 Interest expense, net.......................... 9,410 13,229 12,866 16,065 25,164 18,947 21,640 Income before extraordinary item (2)........... 1,750 7,117 17,042 22,147 28,737 20,395 28,751 Net income..................................... $ 1,750 $ 3,254 $ 15,422 $ 18,425 $ 25,910 $ 18,914 $ 27,878 ========== ======== ======== ======== ======== ======== ========== Other Financial Data EBITDA (3)..................................... $ 18,314 $ 31,365 $ 49,720 $ 65,181 $ 93,815 $ 67,895 $89,883 Ratio of EBITDA to interest expense, net....... 1.9x 2.4x 3.9x 4.1x 3.7x 3.6x 4.1x Ratio of EBITDAR to interest expense, net, plus lease expense........................... 1.9x 2.3x 3.3x 3.3x 2.8x 2.8x 3.0x Ratio of earnings to fixed charges (4)......... 1.3x 1.9x 3.0x 2.9x 2.5x 2.8x 2.8x Capital expenditures........................... $ 2,838 $ 18,730 $ 31,785 $ 39,917 $ 64,215 $ 49,510 $39,301 Operating Data: Average number of licensed beds................ 3,271 4,241 6,006 6,861 11,620 11,168 16,224 Occupancy...................................... 91.0% 90.4% 92.2% 91.7% 91.0% 91.7% 90.4% Payor mix: Quality mix (5).............................. 55.5% 56.0% 62.5% 66.3% 64.5% 64.3% 67.3% Medicaid..................................... 44.5% 44.0% 37.5% 33.7% 35.5% 35.7% 32.7% Balance Sheet Data (at period end): Working capital................................ $ 39,696 $ 15,158 $ 34,005 $ 55,542 $ 39,327 $ 69,135 $ 51,822 Total assets................................... 155,485 162,255 308,755 470,958 761,667 659,096 823,133 Long-term debt, including current portion...... 146,906 106,137 156,878 283,082 429,168 427,983 424,046 Stockholders' equity........................... $ (11,276) $ 32,591 $100,105 $113,895 $207,935 $138,632 $263,174
- ---------- (1) EBITDAR represents earnings before interest expense, income taxes, depreciation and amortization, extraordinary items (net of tax benefit), debenture conversion expense and lease expense. EBITDAR should not be considered an alternative measure of Multicare's net income, operating performance, cash flow or liquidity. It is included herein to provide additional information related to Multicare's ability to service debt. (2) Multicare incurred extraordinary charges relating to early extinguishment of debt. (3) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization, extraordinary items (net of tax benefit) and debenture conversion expense. EBITDA should not be considered an alternative measure of Multicare's net income, operating performance, cash flow or liquidity. It is included herein to provide additional information related to Multicare'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 (net of tax benefit) plus fixed charges. Fixed charges consist of interest on all indebtedness, amortization of debt issuance costs and one-third of rental expense, which Multicare believes to be representative of the interest factor. The definition of fixed charges used in this calculation differs from that used in the Consolidated Fixed Charge Coverage Ratio contained in the Indenture. (5) Quality mix is defined as non-Medicaid patient revenues. -15- SUMMARY PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (Unaudited) The Summary Pro Forma Condensed Consolidated Financial Information presented below gives effect to the Transactions, the Concord Acquisition (as defined) and the A.D.S Acquisition (as defined). See "Pro Forma Condensed Consolidated Financial Information."
Year Ended Nine Months Ended December 31, 1996 September 30, 1997 ------------------------ ------------------------ Historical Pro Forma Historical Pro Forma ----------- ----------- ---------- ----------- (in thousands, except per ratio data) Statement of Operations Data: Net revenues.................................................. $ 532,230 $ 536,176 $ 533,952 $ 457,924 Expenses: Operating expenses......................................... 400,897 400,150 406,173 341,633 Corporate, general and administrative...................... 25,408 32,171 25,203 27,475 Depreciation and amortization.............................. 22,344 50,871 21,620 41,170 Lease expense.............................................. 12,110 11,241 12,693 9,024 Interest expense, net 25,164 59,008 21,640 44,618 Debenture conversion expense............................... -- -- 785 -- ----------- ----------- ---------- ----------- Total expense............................................ 485,923 553,441 488,114 463,920 Income (loss) before income taxes and extraordinary item. 46,307 (17,265) 45,838 (5,996) Income tax expense............................................ 17,570 3,841 17,087 2,340 ----------- ----------- ---------- ----------- Income (loss) before extraordinary item.................... $ 28,737 $ (21,106) $ 28,751 $ (8,336) =========== =========== ========== =========== Other Data: Adjusted EBITDA............................................... $ 93,815 $ 100,885 $ 89,883 $ 89,342 Adjusted EBITDAR.............................................. $ 105,925 $ 112,126 $ 102,576 $ 98,366 Ratio of Adjusted EBITDA to interest expense, net............. 3.7x 1.7x 4.1x 2.0x Ratio of Adjusted EBITDAR to interest expense, net, plus rent expense.......................................... 2.8x 1.6x 3.0x 1.8x Ratio of earnings to fixed charges (1)........................ 2.5x -- 2.8x --
- ---------------- (1) See Note 15 to Unaudited Pro Forma Condensed Consolidated Statement of Operations.
As of September 30, 1997 ------------------------ Historical Pro Forma ---------- ----------- Assets: (in thousands) Cash and equivalents........................................................ $ 2,118 $ 436 Accounts receivable......................................................... 119,522 94,192 Prepaid expenses and other current assets................................... 24,614 21,352 ---------- ----------- Current assets........................................................... 146,254 115,980 Property and equipment...................................................... 460,800 709,389 Goodwill, net............................................................... 171,324 755,545 Other assets................................................................ 44,755 84,742 ---------- ----------- Total assets............................................................. $ 823,133 $1,665,656 ========== =========== Liabilities and Stockholders' Equity Accounts payable............................................................ $ 28,863 $ 25,801 Accrued liabilities and other current liabilities........................... 64,944 48,081 Current portion of long-term debt........................................... 625 625 ---------- ----------- Current liabilities...................................................... 94,432 74,507 Long-term debt, excluding current maturities................................ 423,421 702,443 Deferred taxes.............................................................. 42,106 143,706 Stockholders' equity........................................................ 263,174 745,000 ---------- ----------- Total liabilities and stockholders' equity............................... $ 823,133 $1,665,656 ========== ===========
-16- RISK FACTORS An investment in the Notes involves a significant degree of risk. In addition to the other information contained in this Prospectus, prospective investors should carefully consider the following risk factors before purchasing the Notes offered hereby. Substantial Leverage The Company has substantial indebtedness and, as a result, significant debt service obligations. As of September 30, 1997, after giving pro forma effect to the Transactions, the Company would have had approximately $703.1 million of indebtedness outstanding which would have represented 49% of its total capitalization. See "Capitalization." In addition, as of September 30, 1997, after giving pro forma effect to the Transactions, the Company would have approximately $106.0 million of availability under its Credit Facility. The Company also has significant long-term operating lease obligations with respect to certain of its eldercare centers. On a pro forma basis after giving effect to the Transactions and the Concord and A.D.S Acquisitions, the Company's earnings would have been insufficient to cover its fixed charges for the year ended December 31, 1996 and the nine months ended September 30, 1997 by $20.0 million and $8.0 million, respectively. 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, 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 which, if breached, could result in an event of default under such indebtedness. 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. There can be no assurance that the Company's operating results will be sufficient for payment of the Company's indebtedness. Restrictive Debt Covenants The terms of the Credit Facility and the Indenture contain certain restrictive covenants, including, among others, covenants significantly limiting or prohibiting the ability of the Company and certain of its subsidiaries to incur indebtedness, make investments, engage in transactions with shareholders and affiliates, incur liens, create restrictions on the ability of certain subsidiaries to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. In addition, the Company will be required under the Credit Facility to maintain certain specified financial ratios. See "Description of the Credit Facility." There can be no assurance that the Company will be able to maintain such ratios or that such covenants will not adversely affect the Company's ability to finance its future operations or capital needs or to engage in other business activities that may be in the interest of the Company. The breach of any of these covenants or the inability of the Company to comply with the required financial ratios could result in a default under the Credit Facility or the Indenture. In the event of any such default, depending on the actions -17- taken by the lenders under the Credit Facility, the Company could be prohibited from making any payments of principal or interest on the Notes. In addition, such lenders could elect to declare all amounts borrowed under the Credit Facility, together with accrued interest, to be due and payable. If the Company were unable to repay such borrowings, the lenders under the Credit Facility could proceed against their collateral. If the indebtedness under the Credit Facility were to be accelerated, there can be no assurance that the assets of the Company would be sufficient to repay such indebtedness and the Notes in full. See " -- Subordination of the Notes," "Description of the Credit Facility" and "Description of the Notes -- Subordination." Subordination of the Notes The 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 Notes will also be effectively subordinated to the indebtedness and other liabilities of the Company's subsidiaries. As of September 30, 1997, on a pro forma basis after giving effect to the Transactions, the Company (excluding its subsidiaries) would have had approximately $703.1 million of indebtedness outstanding, of which $454.5 million would have been Senior Indebtedness, $22.4 million of indebtedness of other persons which are guaranteed by the Company, and approximately $1.8 million of letters of credit issued under the Credit Facility 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, would have been approximately $90.1 million. 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 will 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 certain 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. 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 provision of eldercare and specialty medical 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 and safety 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 -18- 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 maintain any required regulatory approvals or licenses could prevent the Company from offering services or adversely affect its ability to receive reimbursement of expenses and could result in the denial of reimbursement, the imposition of fines, temporary suspension of admission of new patients, suspension or decertification from the Medicaid or Medicare program, restrictions on the ability to acquire new facilities or expand existing facilities and, in extreme cases, revocation of the facility's license or closure of a facility. There can be no assurance that the facilities owned, leased or managed by the Company, or the provision of services and supplies by the Company, will meet or continue to meet the requirements for participation in the Medicaid or Medicare programs or state licensing authorities or that regulatory authorities will not adopt changes or new interpretations of existing regulations that would adversely affect the Company. 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 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. In addition, in most states the reduction of beds or the closure of a facility requires the approval of the appropriate state regulatory agency and, if the Company were to determine to reduce beds or close a facility, the Company could be adversely affected by a failure to obtain or a delay in obtaining such approval. 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 legislation" which prohibits, 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. A violation of the federal anti-kickback law could result in the loss of eligibility to participate in Medicare or Medicaid, or in civil or criminal penalties. 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 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 --Government 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. There can be no assurance that such laws will ultimately be interpreted in a manner consistent with the practices of the Company. -19- In the ordinary course of business, the Company's facilities receive notices of deficiencies following surveys for failure to comply with various regulatory requirements. From time to time, survey deficiencies have resulted in various penalties against certain facilities and the Company. These penalties have included monetary fines, temporary bans on the admission of new patients and the placement of restrictions on the Company's ability to obtain or transfer certificates of need in certain states. There can be no assurance that future surveys will not result in penalties or sanctions which could have a material adverse effect on the Company. In its role as owner and/or operator of properties, the Company may be subject to liability for investigating and remedying any hazardous substances that have come to be located on the property, including such substances that may have migrated off, or emitted, discharged, leaked, escaped or been transported from, the property. Ancillary to the Company's operations are, in various combinations, the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants or contaminants. Such activities may result in damage to individuals, property or the environment; may interrupt operations and/or increase their costs; may result in legal liability, damages, injunctions or fines; may result in investigations, administrative proceedings, penalties or other governmental agency actions; and may not be covered by insurance. There can be no assurance that the Company will not encounter such risks in the future, and such risks may have a material adverse effect on the operations or financial condition of the Company. Payment by Third Party Payors The Company derives a substantial percentage of its total revenues from private pay sources, state Medicaid programs for indigent patients and the federal Medicare program for certain elderly and disabled patients. The Company's financial condition and results of operations may be affected by the revenue reimbursement process, which in the Company's industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled. The majority of third-party payor balances are settled within two to three years following the provision of services. The Company's financial condition and results of operations may also be affected by the timing of reimbursement payments and rate adjustments from third-party payors. The Company has from time to time experienced delays in receiving reimbursement from third-party payors. For the years ended December 31, 1995 and 1996, and the nine months ended September 30, 1997, respectively, the Company derived approximately 41%, 40% and 43% of its patient service revenue from private pay sources, 25%, 25% and 24% from Medicare and 34%, 35% and 33% from various state Medicaid agencies. The Company typically receives a higher rate for services to private pay and Medicare patients than for services to patients eligible for assistance under Medicaid programs. Changes in the number of private pay patients and changes among different pay sources could significantly affect the profitability and cash flows of the Company. Both governmental and private third party payors (such as commercial insurers, managed care organizations, health maintenance organizations ("HMOs") and preferred providers organizations ("PPOs")) have employed cost containment measures designed to limit payments made to eldercare 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 may limit the services which will be reimbursed and the establishment of payment ceilings which may 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 -20- or, in the future, will be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. In addition, there can be no assurance that centers owned, leased or managed by the Company, or the provision of services and supplies by the Company, now or in the future will 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 reduce or limit the amount of reimbursement for healthcare services. In an attempt to reduce 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 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 -- Sources of Revenue." Managed care organizations and other third party payors have continued to consolidate in order to enhance their ability to influence the delivery of healthcare services. Consequently, the healthcare needs of a large percentage of the United States population are increasingly served by a small number of managed care organizations. These organizations generally enter into service agreements with a limited number of providers for needed services. To the extent such organizations terminate the Company as a preferred provider and/or engage the Company's competitors as a preferred or exclusive provider, the Company's business could be materially adversely affected. For those specialty medical services covered by the Medicare program, the Company is reimbursed for its direct costs plus an allocation of indirect costs up to a regional limit. As the Company expands its specialty medical services, the costs of care for these patients are expected to exceed the regional reimbursement limits. As a result, the Company has submitted and will be required to submit further exception requests to recover the excess costs from Medicare. There is no assurance the Company will be able to recover such excess costs under pending or any future requests. The failure to recover these excess costs in the future would adversely affect the Company's financial position and results of operations. The Company is subject to periodic audits by the Medicare and Medicaid programs, and the paying agencies for these programs have various rights and remedies against the Company if they assert that the Company has overcharged the programs or failed to comply with program requirements. Such payment agencies could seek to require the Company to repay any overcharges or amounts billed in violation of program requirements, or could make deductions from future amounts due to the Company. Such agencies could also impose fines, criminal penalties or program exclusions. Geographic Payor Concentration The Company's operations are located in Connecticut, Illinois, Massachusetts, New Jersey, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia and Wisconsin. Any adverse change in the regulatory environment, the reimbursement rates paid under the Medicaid program or in the supply and demand for services in the states in which the Company operates, and particularly in New Jersey, Pennsylvania, West Virginia and Massachusetts (in each of which the Company derived more than 10% of its total net revenues in the nine months ended September 30, 1997), could have a material adverse effect on the Company. -21- Competition The healthcare industry is highly competitive. The Company competes with a variety of other companies in providing eldercare and specialty medical 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. See "Business -- Competition. Risks Associated with the Multicare Acquisition As a result of the Merger, Genesis owns approximately 44% of Genesis ElderCare Corp., which owns 100% of the outstanding capital stock of the Company. The Company and Genesis have entered into a Management Agreement pursuant to which Genesis manages the Company's operations. The Company also uses Genesis' clinical administration and healthcare management information system to monitor and measure clinical and patient outcome data. Certain problems may arise in implementing the Management Agreement; for example, difficulties may be encountered by Genesis as a result of the loss of key personnel of the Company, the integration of the Company's corporate, accounting, financial reporting and management information systems with Genesis' systems and strain on existing levels of its personnel managing both businesses. There can be no assurance that Genesis will be able to successfully implement the Management Agreement or manage the Company's operations; failure to do so effectively and on a timely basis could have a material adverse effect on the Company's financial condition and results of operations. The Company may in the future engage in transactions with Genesis and its affiliates. Mr. Michael R. Walker, the Chairman of the Board and Chief Executive Officer of Genesis, has become the Chairman and Chief Executive Officer of the Company and Mr. George V. Hager, Jr., the Chief Financial Officer of Genesis, has become the Chief Financial Officer of the Company. In addition, Mr. Walker, Mr. Hager and Mr. Richard R. Howard, President and a member of the board of directors of Genesis, have become members of the board of directors of the Company. Based on the foregoing, Genesis and Messrs. Walker, Hager and Howard have substantial influence on the Company and the outcome of any matters submitted to the Company's stockholders for approval and are in positions that may result in conflicts of interest with respect to transactions involving the Company and Genesis. Genesis and its affiliates will provide healthcare and related services to the Company's customers and facilities either directly or through contracts with the Company. Conflicts of interest may arise in connection with the negotiation of the terms of such arrangements. Under the Stockholders' Agreement, certain transactions with Genesis will require the approval of the non-affiliated members of the Board of Directors. In addition, certain decisions concerning the operations or financial structure of the Company may present conflicts of interest between Genesis and the other indirect owners of the Company's equity and the holders of the Notes. Genesis may have an interest in pursuing acquisitions, divestitures, financings or other transactions which, in its judgment, could enhance the value of its equity, even though such transactions might involve risk to the holders of the Notes. See "Management -- Certain Agreements -- Put/Call Agreement." Genesis is in the business of providing healthcare and support services to the elderly, and substantially all of its markets are contiguous to or overlap with the Company's existing markets. Genesis may compete with the Company in certain of these markets or in the provision of certain healthcare services. Although directors of the Company who are also directors or officers of Genesis have certain fiduciary obligations to the Company under Delaware law, such directors and Genesis are in positions that may create potential conflicts of interest with respect to certain business opportunities available to and certain -22- transactions involving the Company. Neither Genesis nor Messrs. Walker, Hager and Howard are obligated to present to the Company any particular investment opportunity which comes to their attention, even if such opportunity is of a character which might be suitable for investment by the Company. Limitations on Change in Control The Indenture requires the Company, in the event of a Change in Control, to make an offer to purchase the Notes at 101% of the principal amount thereof, plus accrued interest to the purchase date. Certain events involving a Change in Control may be an event of default under the Credit Facility or indebtedness of the Company that may be incurred in the future. Moreover, the exercise by the holders of the Notes of their right to require the Company to purchase the Notes may cause a default under the Credit Facility or such other indebtedness, even if the Change in Control does not. There can be no assurance that the Company will have the financial resources necessary to repurchase the Notes upon a Change in Control. See "Description of the Notes -- Certain Covenants -- Repurchase of Notes upon a Change in Control." Risk of Fraudulent Transfer Liability If a court of competent jurisdiction in a suit by an unpaid creditor or a representative of creditors (such as a trustee in bankruptcy or a debtor-in-possession) were to find that either the Company did not receive fair consideration or reasonably equivalent value for issuing the Notes at the time of the incurrence of indebtedness represented by the Notes, the Company was insolvent, was rendered insolvent by reason of such incurrence, was engaged in a business or transaction for which its remaining assets constituted unreasonably small capital, intended to incur, or believed that it would incur, debts beyond its ability to pay as such debts matured, or intended to hinder, delay or defraud its creditors, such court could avoid such indebtedness or subordinate such indebtedness to other existing and future indebtedness of the Company. The measure of insolvency for purposes of the foregoing will vary depending upon the law of the relevant jurisdiction. Generally, however, a company would be considered insolvent for purposes of the foregoing if the sum of the company's debts is greater than all the company's property at a fair valuation, or if the present fair saleable value of the company's assets is less than the amount that will be required to pay its probable liability on its existing debts as they become absolute and matured. Adequacy of Certain Insurance The provision of healthcare services entails an inherent risk of liability. The Company maintains liability insurance providing coverage which it believes to be adequate. In addition, the Company maintains property, business interruption, and workers' compensation insurance covering all facilities in amounts deemed adequate by the Company. There can be no assurance that any future claims will not exceed applicable insurance coverage or that the Company will be able to continue its present insurance coverage on satisfactory terms, if at all. Absence of a Public Market for the Notes; Volatility The Notes are new securities for which there currently is no trading market, and there can be no assurance as to the liquidity of any market for the Notes that may develop, the ability of holders of the Notes to sell their Notes, or the prices at which holders of the Notes would be able to sell their Notes. If the Notes are traded after their initial issuance, they may trade at a discount from their initial offering price depending on many factors, including prevailing interest rates, the Company's operating results, the market for similar securities and other factors beyond the control of the Company, including general economic conditions. Although the Placement Agents have informed the Company that they currently intend to make a market in -23- the Notes, the Placement Agents 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 or liquidity of any market for the Notes, even following the consummation of the exchange offer or registration of the Notes. In addition, the market prices of the Notes may be volatile. Factors such as concern about the potential effect of proposed healthcare reform measures, the Company's earnings and cash flow and the differences between the Company's actual results and results expected by investors and analysts could cause the market prices of the Notes to fluctuate substantially. -24- USE OF PROCEEDS The net proceeds of the Offering, together with borrowings under the Credit Facility, the proceeds from the Therapy Sale, the Pharmacy Sale and the Equity Contributions were used to purchase the Shares pursuant to the Tender Offer and the Merger; to refinance certain indebtedness of the Company; to make certain cash payments to employees of the Company in accordance with the Merger Agreement and certain noncompetition and consulting agreements; and to pay fees and expenses related to the Transactions. The indebtedness to be refinanced was due from 2000 to 2002 and had an average interest rate of 7.1% per annum. See "The Tender Offer and Merger," "Pro Forma Condensed Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of the Credit Facility." The following table sets forth the estimated sources and uses of funds in connection with the Transactions:
Amount Amount Sources of Funds (in millions) Uses of Funds (in millions) - --------------------------------------- -------------- --------------------------------------- -------------- Credit Facility (1)(2)(3).............. $417.4 Tender Offer and Merger Notes (4).............................. 248.6 Consideration...................... $1,037.0 Equity Contributions................... 745.0 Refinance Debt (5)..................... 381.0 Therapy Sale Net Proceeds.............. 20.0 Severance/Other Payments............... 19.0 Pharmacy Sale Net Proceeds (2)......... 50.0 Transaction Fees and Expenses (6)...... 44.0 -------------- -------------- Total.............................. $1,481.0 Total.............................. $1,481.0 ============== ==============
- ----------------- (1) Excludes approximately $109.0 million that will be available to the Company under a revolving credit facility upon the consummation of the Transactions. (2) Because the Pharmacy Sale was not consummated concurrently with the Merger, the Company borrowed an additional $50.0 million under the Credit Facility until the Pharmacy Sale is consummated, which is expected to occur in the first calendar quarter of 1998. (3) As of October 9, 1997, the Company had $309.3 million outstanding under its bank credit facility. (4) Notes are net of debt discount of $1.4 million. (5) Includes repayment of a $54.0 million lease financing facility. (6) Includes underwriting discounts and commissions in connection with the Offering and fees and expenses payable to Genesis, Cypress and TPG in connection with the Transactions. -25- CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1997 (i) on an actual historical basis and (ii) on a pro forma basis after giving effect to the Transactions as if the Transactions had occurred on September 30, 1997. The following table should be read in conjunction with "Use of Proceeds," "Pro Forma Condensed Consolidated Financial Information," "Selected Consolidated Financial Data" and the Consolidated Financial Statements of Multicare, and the notes thereto, appearing elsewhere in this Prospectus.
As of September 30, 1997 ------------------------------- Actual Pro Forma ------------- ------------- (in thousands) Cash and cash equivalents.............................................. $ 2,118 $ 436 ============= ============= Current portion of long-term debt...................................... $ 625 $ 625 Long-term debt, excluding current portion: Bank Debt.......................................................... $ 305,129 $ 418,659 7% Convertible Debentures.......................................... 59,744 -- 12.5% Senior Subordinated Notes.................................... 23,376 -- Other long term debt............................................... 35,172 35,172 9% Senior Subordinated Notes (1)................................... -- 248,612 ------------- ------------- Total long-term debt, excluding current portion................ 423,421 702,443 Total stockholders' equity............................................. 263,174 745,000 ------------- ------------- Total capitalization........................................ $ 686,595 $ 1,447,443 ============= =============
- ---------------- (1) Notes are net of debt discount of $1.4 million. -26- EXCHANGE OFFER Purpose and Effect of the Exchange Offer The Existing Notes were originally sold by Acquisition Corp. on August 11, 1997 to the Placement Agents pursuant to the Placement Agreement. The Placement Agents subsequently resold the Existing Notes to qualified institutional buyers in reliance on Rule 144A under the Securities Act. As a condition to the closing under the Purchase Agreement, the Company entered into the Registration Rights Agreement with the Placement Agents 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 cause the Exchange Offer to be consummated by the earlier of (i) March 31, 1998 and (ii) six months after the Merger Closing Date. 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") may be deemed to be an "underwriter" within the meaning of the Securities Act and 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 the original sale of the Existing Notes), with the prospectus contained in the Exchange Offer Registration Statement so long as the prospectus otherwise meets the requirements of the Securities Act. 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 -27- Exchange Offer Registration Statement in connection with the resale of such Exchange Notes; provided however that the Company is not required to amend or supplement the prospectus contained in the Exchange Offer Registration Statement for a period exceeding 180 days after the last Exchange Date (as such period may be extended pursuant to the Registration Rights Agreement) and Participating Broker-Dealers are not authorized to deliver and will not deliver such prospectuses after such period in connection with the resale of such Exchange Notes. 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 by March 31, 1998, or if any holder of the Existing Notes (other than the Placement Agents) is not eligible to participate in the Exchange Offer, 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 and (c) keep continuously effective the Shelf Registration Statement until the second anniversary of the Closing Date (as defined in the Placement Agreement) 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 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 March 31, 1998, the interest rate borne by the Existing Notes shall be increased by one-half of one percent per annum. Upon the consummation of the Exchange Offer or the effectiveness of a Shelf Registration Statement, as the case may be, the interest rate borne by the Existing Notes from 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 ______________, 1998 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. -28- 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 Delaware General Corporation Law 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." Expiration Date; Extension; Amendments The term "Expiration Date" shall mean 5:00 p.m., New York City time, on , 1998, 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. -29- 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 February 1, 1998, in accordance with the Indenture. Interest on the Exchange Notes is payable semi-annually on each February 1 and August 1, commencing on February 1, 1998. 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." 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. -30- 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 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 -31- 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 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 -32- 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 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 PNC Bank, National Association 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: -33- By Registered, Certified or Overnight Mail or Hand: PNC Bank, National Association 1600 Market Street 30th Floor Philadelphia, Pennsylvania 19103 Attention: Sheila Wallbridge By Facsimile: 215-585-8872 Confirm: 215-585-6938 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. 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 expensed 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 -34- 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 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. -35- PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The following Unaudited Pro Forma Condensed Consolidated Financial Information is based on the historical financial statements appearing elsewhere in this Prospectus. The Unaudited Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 1997 gives effect to the following transactions (i) the Tender Offer, (ii) the Merger (including the Debt Conversion), (iii) the Offering and the application of proceeds therefrom, (iv) the Equity Contributions and the application of proceeds therefrom, (v) the closing of the Credit Facility and the application of the proceeds therefrom, and (vi) the Pharmacy Sale and Therapy Sale, as though each transaction had occurred as of January 1, 1996. The Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996 gives effect to (i) each of the foregoing transactions; (ii) the acquisition of Concord Health Group, Inc. ("Concord") by Multicare in February 1996 (the "Concord Acquisition"); and (iii) the acquisition of The A.D.S Group ("A.D.S") by Multicare in December 1996 (the "A.D.S Acquisition"), as though each transaction had occurred as of January 1, 1996. The Unaudited Pro Forma Condensed Consolidated Balance Sheet gives effect to each of the foregoing transactions other than the Concord and A.D.S Acquisitions, as though each transaction had occurred as of September 30, 1997. The contract therapy businesses to be sold by the Company to Genesis pursuant to the Therapy Sale were primarily acquired by the Company in April 1997; accordingly, except for reflecting the proceeds of the Therapy Sale in the pro forma balance sheet, no adjustments have been made in the pro forma information at December 31, 1996 to reflect the Therapy Sale. In connection with the Merger, the Company and Genesis entered into the Management Agreement pursuant to which Genesis manages the Company's operations. The Unaudited Pro Forma Condensed Consolidated Statements of Operations include the management fees payable to Genesis under the Management Agreement and the elimination of corporate, general and administrative expenses at the Company pursuant to the Management Agreement. The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable and are described in the notes accompanying the Unaudited Pro Forma Condensed Consolidated Statements of Operations and the Unaudited Pro Forma Condensed Consolidated Balance Sheet. The Unaudited Pro Forma Condensed Consolidated Financial Information is provided for informational purposes only and does not purport to represent what the Company's results of operations or financial position would actually have been had the transactions in fact occurred at such dates or to project the Company's results of operations or financial position at or for any future date or period. The Unaudited Pro Forma Condensed Consolidated Financial Information has been prepared using the purchase method of accounting, whereby the total cost of the Tender Offer and Merger are allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the effective date of the Merger. Such allocations are based on studies and valuations which have not yet been completed. Accordingly, the allocations and estimated lives reflected in the Unaudited Pro Forma Condensed Consolidated Financial Information are preliminary and subject to revision. However, the Company does not expect material changes to the allocation of the purchase price. The Unaudited Pro Forma Condensed Consolidated Financial Information should be read in conjunction with "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of Multicare, and notes thereto, appearing elsewhere in this Prospectus. -36- PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Year Ended December 31, 1996 ---------------------------------------------------------------------------------- Multicare/ A.D.S/ A.D.S/ Multicare/ Concord, Concord A.D.S/ Adjusted for Multicare Concord A.D.S Pro Forma Concord Transactions Transaction Historical Historical Historical Adjustments Pro Forma Adjustments Pro Forma ---------- ---------- ---------- ----------- --------- ------------ ------------ (in thousands, except ratio data) Statement of Operations Data: Net revenues.................................... $532,230 $ 8,090 $ 58,702 $ -- $ 599,02 $(62,846)(8) $ 536,176 Expenses........................................ Operating expenses.......................... 400,897 6,081 43,289 -- 450,267 (50,117)(8) 400,150 Corporate, general and administrative....... 25,408 545 7,778 (1,155)(3) 32,576 (405)(9) 32,171 Depreciation and amortization............... 22,344 351 1,166 734 (4) 24,595 26,276 (8)(10) 50,871 Lease expense............................... 12,110 -- -- 3,254 (5) 15,364 (4,123)(8)(11) 11,241 Interest expense, net....................... 25,164 520 2,228 1,000 (6) 28,912 30,096 (8)(11) 59,008 -------- -------- -------- -------- -------- -------- --------- Total expense............................. 485,923 7,497 54,461 3,833 551,714 1,727 553,441 Income (loss) before income taxes and extraordinary item.......................... 46,307 593 4,241 (3,833) 47,308 (64,573) (17,265) Income tax expense (benefit)................ 17,570 201 -- 442 (7) 18,213 (14,372)(12) 3,841 -------- -------- -------- --------- -------- -------- --------- Income (loss) before extraordinary item......... $ 28,737 392 $ 4,241 $ (4,275) $ 29,095 $(50,201) $ (21,106) ======== ======== ========= ========= ======== ======== ========= Other Data: Adjusted EBITDA (13)............................ $ 93,815 $ 100,885 Adjusted EBITDAR (14)........................... $105,925 $ 112,126 Ratio of Adjusted EBITDA to interest expense, net (13)...................................... 3.7x 1.7x Ratio of Adjusted EBITDAR to interest expense, net, plus rent expense 1(4)...................... 2.8x 1.6x Ratio of earnings to fixed charges (15)......... 2.5x -- Nine Months Ended September 30, 1997 ----------------------------------------------- Multicare Adjusted for Multicare Transactions Transactions Historical Adjustments Pro Forma ------------ ------------- ------------ Statement of Operations Net revenues......................................................... $ 533,952 $ (76,028)(8) $ 457,924 Expenses: Operating expenses............................................... 406,173 (64,540)(8) 341,633 Corporate, general and administrative............................ 25,203 2,272 (9) 27,475 Depreciation and amortization.................................... 21,620 19,550 (8)(10) 41,170 Lease expense.................................................... 12,693 (3,669)(8)(10) 9,024 Interest expense, net............................................ 21,640 22,978 (8)(11) 44,618 Debenture conversion expense..................................... 785 (785)(16) -- ------------ ------------- ------------ Total expenses................................................. 488,114 (24,194) 463,920 Income (loss) before income taxes and extraordinary item............. 45,838 (51,834) (5,996) Income tax expense (benefit)..................................... 17,087 (14,747)(12) 2,340 ------------ ------------- ------------ Income (loss) before extraordinary item.............................. $ 28,751 $ (37,087) $ (8,336) ============ ============= ============ Other Data: Adjusted EBITDA (13)................................................. $ 89,883 $ 89,342 Adjusted EBITDAR (14)................................................ $ 102,576 $ 98,366 Ratio of Adjusted EBITDA to interest expense, net (13)............... 4.1x 2.0x Ratio of Adjusted EBITDAR to interest expense, net, plus rent expense (14)........................................... 3.0x 1.8x Ratio of earnings to fixed charges (15).............................. 2.8x --
See Accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations. -37- NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share data) (1) Represents the historical results of operations of Concord from January 1, 1996 through February 1996. Multicare acquired the outstanding capital stock and warrants of Concord for approximately $75,000 including transaction costs, repaid approximately $41,000 of debt, and assumed historical debt of approximately $4,000. Total goodwill approximated $61,000. (2) Represents the historical results of A.D.S from January 1, 1996 through December 1996. Multicare paid approximately $10,000, repaid or assumed approximately $29,800 in debt, financed $51,000 through a lease facility and issued 554,973 shares of its common stock for A.D.S. Total goodwill approximated $29,900. (3) Reflects the elimination of duplicative positions at A.D.S and Concord, consolidation and closing of Concord corporate offices, elimination of various public company costs incurred by Concord, and the reduction of professional and accounting fees. (4) Reflects the additional depreciation and amortization expense resulting from the amortization of goodwill incurred in the Concord and A.D.S Acquisitions and depreciation resulting from the allocation of the purchase price for the Concord and A.D.S Acquisitions to property, plant, and equipment. Goodwill is being amortized over periods of 25 to 40 years. (5) Reflects the additional lease expense associated with the $51,000 lease financing entered into in connection with the A.D.S Acquisition. The lease facility will be repaid in connection with the Merger. (6) Reflects the additional interest expense on the incremental debt incurred in connection with the Concord and A.D.S Acquisitions of $120,000 and $39,800, respectively at a weighted average interest rate of 7%. (7) Income tax expense has been adjusted to reflect a consolidated effective tax rate of 38.5%. The primary difference between the expense calculated at statutory rates and the amount reflected in the pro forma statements is attributable to non-deductible goodwill and the provision for state income taxes. (8) Represents the elimination of the operating results relating to the Company's pharmacy business pursuant to the Pharmacy Sale as follows: Year Ended Nine Months Ended December 31, 1996 September 30, 1997 ----------------- ------------------- (in thousands) Revenues, net....................... $ (62,846) $ (65,380) Operating expenses.................. (50,117) (55,309) Depreciation and amortization....... (968) (656) Lease expense....................... (553) (933) Interest expense, net............... (43) (34) Represents the elimination of the operating results of the Company's therapy business pursuant to the Therapy Sale. The therapy business was primarily acquired by the Company in April 1997. -38- Nine Months Ended September 30, 1997 -------------------- (in thousands) Revenues, net ............................................ $ (10,648) Operating expenses........................................ (9,231) Depreciation and amortization............................. (226) Lease expense............................................. (58) Interest expense, net..................................... (377) (9) Represents net changes in corporate, general and administrative expense due to the elimination of Multicare/A.D.S/Concord Pro Forma corporate, general and administrative expense and the incurrence of management fees in connection with the Management Agreement.
Year Ended Nine Months Ended December 31, 1996 September 30, 1997 -------------------- ------------------- (in thousands) Multicare/A.D.S Concord Pro Forma corporate, general and administrative...... $ (32,576) $ (25,203) Management fee.................................. 32,171 27,475 ------------ ----------- Total................................. $ (405) $ 2,272 ============ ===========
(10) Depreciation and amortization have been increased by the amortization of goodwill and depreciation resulting from the allocation of the purchase price for the acquisition to property and equipment. The preliminary allocation of the purchase price has resulted in an increase to property and equipment ($254,000) and goodwill ($657,180) which are amortized over 30 years and 35 years, respectively, as follows:
Year Ended Nine Months Ended December 31, 1996 September 30, 1997 -------------------- ------------------- (in thousands) Depreciation and amortization................... $ 27,244 $ 20,432
(11) Interest and lease expense has been adjusted to reflect the indebtedness incurred in connection with the Tender Offer and Merger and the repayment of indebtedness (including the repayment of $54,000 under the lease financing facility) from the proceeds of the Credit Facility, Notes and Pharmacy Sale. The estimated average interest rate for the Credit Facility and for the Notes is 8.4% and 9.0%, respectively.
Year Ended Nine Months Ended December 31, 1996 September 30, 1997 -------------------- ------------------- (in thousands) Credit Facility................................. $ 33,207 $ 24,905 Notes........................................... 22,500 16,875 Other debt...................................... 3,344 2,508 Multicare/A.D.S//Concord Pro Forma interest expense............................. (28,912) (21,640) ----------- ---------- Total...................................... $ 30,139 $ 22,648 =========== ========== Lease expense................................... $ (3,570) $ (2,678)
-39- Each .25% change in the interest rate on the Credit Facility would change the Company's pro forma interest expense as follows:
Year Ended Nine Months Ended December 31, 1996 September 30, 1997 -------------------- ------------------- (in thousands) Credit Facility................................. $ 987 $ 741
(12) Represents income tax expense at an effective rate of 37% excluding the amortization of any non-deductible goodwill. The primary difference between the expense calculated at statutory rates and the amount reflected in the pro forma statements is attributable to non-deductible goodwill and the provision for state income taxes. (13) Adjusted EBITDA represents EBITDA plus the portion of the management fee that is accrued but not paid under the Management Agreement. Under the Management Agreement, for the year ended December 31, 1996 and the nine months ended September 30, 1997, the Company would have been prohibited from paying management fees of $8,271 and $9,550, respectively. EBITDA or Adjusted EBITDA should not be considered an alternative measure of the Company's net income, operating performance, cash flow or liquidity. Each 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 Adjusted EBITDA. See "Description of the Notes" for a description of such covenants. On a pro forma basis, for the year ended December 31, 1996 and the nine months ended September 30, 1997, EBITDA would have been $92,614 and $79,792, respectively, and the ratio of EBITDA to interest expense would have been 1.8x in both periods. (14) Adjusted EBITDAR represents EBITDAR plus the portion of the management fee that is accrued but not paid under the Management Agreement. Under the Management Agreement, for the year ended December 31, 1996 and the nine months ended September 30, 1997, the Company would have been prohibited from paying management fees of $8,271 and $9,550, respectively. EBITDAR or Adjusted EBITDAR should not be considered an alternative measure of the Company's net income, operating performance, cash flow or liquidity. Each is included herein to provide additional information related to the Company's ability to service debt. On a pro forma basis, for the year ended December 31, 1996 and the nine months ended September 30, 1997, EBITDAR would have been $103,855 and $88,816, respectively, and the ratio of EBITDAR to interest expense plus rent expense would have been 1.7x in both periods. (15) 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 (net of tax benefit) plus fixed charges. Fixed charges consist of interest on all indebtedness, amortization of debt discount and one-third of rental expense which the Company believes to be representative of the interest factor. For the year ended December 31, 1996 and the nine months ended September 30, 1997, on a pro forma basis, the Company's earnings would have been insufficient to cover its fixed charges by $19,965 and $8,021, respectively. The definition of fixed charges used in this calculation differs from that used in the Consolidated Fixed Charge Coverage Ratio contained in the Indenture. (16) Represents the elimination of the debenture conversion expense resulting from the premium paid by the Company to convert $11,000 of the Company's Convertible Debentures into common stock. -40- PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
September 30, 1997 -------------------------------------------------------------------------- Pro Forma Multicare Adjusted for Debt Therapy and Conversion, Multicare Debt Merger Pharmacy Merger and Historical Conversion(1) Adjustments Adjustments(4) Pharmacy Sale ------------ ------------- ------------ -------------- -------------- (in thousands) Assets Cash and equivalents........................ $ 2,118 -- -- $ (1,682) $ 436 Accounts receivable......................... 119,522 -- -- (25,330) 94,192 Prepaid expenses and other current assets... 24,614 -- -- (3,262) 21,352 ------------ ------------- ------------ -------------- -------------- Current assets........................... 146,254 -- -- (30,274) 115,980 Property and equipment ..................... 460,800 -- 254,000(2) (5,411) 709,389 Goodwill, net............................... 171,324 -- 657,180(2) (72,959) 755,545 Other assets................................ 44,755 -- 24,000(2) 15,987 84,742 ------------ ------------- ------------ -------------- -------------- Total assets.......................... $ 823,133 -- $ 935,180 $ (92,657) $ 1,665,656 ============ ============= ============ ============== ============== Liabilities and Stockholders' Equity Accounts payable............................ $ 28,863 -- -- $ (3,062) $ 25,801 Accrued liabilities and other current liabilities ............................ 64,944 -- -- (16,863) 48,081 Current portion of long-term debt........... 625 -- -- -- 625 ------------ ------------- ------------ -------------- -------------- Current liabilities...................... 94,432 -- -- (19,925) 74,507 Long-term debt, excluding current maturities 423,421 (59,744) 411,498(3)(4) (72,732) 702,443 Deferred taxes.............................. 42,106 -- 101,600(2) -- 143,706 Stockholders' equity........................ 263,174 59,744 422,082(2) -- 745,000 ------------ ------------- ------------ -------------- -------------- Total liabilities and stockholders' equity................................. $ 823,133 -- $ 935,180 $ (92,657) $ 1,665,656 ============ ============= ============ ============== ==============
See Accompanying Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet. -41- NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (in thousands) (1) Reflects the expected conversion of the 7% Senior Subordinated Convertible Debentures of Multicare into shares of Multicare common stock in connection with the Merger as follows: Long term debt....................................... $ (59,744) Stockholders' equity................................. 59,744 (2) Reflects the allocation of the purchase price for the Tender Offer and Merger and the Therapy Sale and Pharmacy Sale as follows:
Therapy Merger and Elimination Merger Adjustments Pharmacy Total ----------- ----------- ------------ ----------- ----------- (in thousands) Property and equipment.............. -- $ 254,000 $ 254,000 -- $ 254,000 Goodwill............................ (171,324) 828,504 657,180 (46,066) 611,114 Debt issuance costs, net............ -- 24,000 24,000 -- 24,000 Deferred taxes...................... -- 101,600 101,600 -- 101,600 Stockholders' equity................ (322,918) 745,000 422,082 23,934 446,016
In connection with the allocation of excess purchase price to property and equipment, a deferred tax liability of $101,600 has been recorded using an effective tax rate of 40% for the difference between the tax and book bases. (3) Reflects the acquisition of the common stock of Multicare in the Tender Offer and Merger, the repayment of indebtedness and a lease financing facility of Multicare in connection with the Merger, the proceeds of the Therapy Sale and the Pharmacy Sale and the related financing transactions as follows: (in thousands) Uses of funds: Tender offer and Merger consideration............ $ 1,037,000 Refinance debt................................... 327,000 Repay lease financing facility (i)............... 54,000 Severance and other payments..................... 19,000 Estimated transaction fees and expenses.......... 44,000 ---------------- Total........................................ $ 1,481,000 ================ Sources of funds: Credit facility.................................. $ 417,400 Notes ........................................... 248,600 Equity Contributions............................. 745,000 Pharmacy Sale net proceeds....................... 20,000 Therapy Sale net proceeds........................ 50,000 ---------------- Total........................................ $ 1,481,000 ================ - ---------------- (i) The lease financing facility represents a contingent liability and, accordingly, is not reflected in the Company's balance sheet. -42- (4) Reflects the Pharmacy Sale and Therapy Sale as follows: (in thousands) Cash and equivalents................................. $ (1,682) Accounts receivable.................................. (25,330) Prepaid expenses and other current assets............ (3,262) ---------------- Current assets.................................... (30,274) Property and equipment............................... (5,411) Goodwill............................................. (26,893) Other assets......................................... 15,987 ---------------- Total assets.................................... $ (46,591) ================ Accounts payable..................................... $ (3,062) Accrued liabilities and other current liabilities.... (16,863) ---------------- Current liabilities............................... (19,925) Long-term debt....................................... (2,732) Deferred taxes....................................... -- Stockholders' equity................................. (23,934) ---------------- Total liabilities and stockholders equity....... $ (46,591) ================ -43- SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below for, and as of, each of the years in the five-year period ended December 31, 1996 have been derived from the Consolidated Financial Statements of Multicare, including the notes thereto, which have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The selected consolidated financial data for, and as of, each of the nine months ended September 30, 1996 and 1997 have been derived from unaudited consolidated financial statements of Multicare which, in the opinion of management, include all adjustments (consisting only of normal recurring items) necessary for a fair and consistent presentation of such data. The results of the nine months ended September 30, 1997 are not necessarily indicative of results to be expected for the full fiscal year. The information set forth below should be read in conjunction with "Pro Forma Condensed Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Consolidated Financial Statements of Multicare including the notes thereto, appearing elsewhere in this Prospectus.
Nine Months Ended Years Ended December 31, September 30, --------------------------------------------------- ----------------------- 1992 1993 1994 1995 1996 1996 1997 --------- --------- -------- --------- --------- ---------- ------------ (in thousands, except ratio, per share and operating data) Statement of Operations Data: Net revenues............................. $126,007 $162,384 $262,416 $353,048 $532,230 $386,890 $ 533,952 Expenses: Operating expenses.................... 93,423 123,819 198,466 265,185 400,897 291,494 406,173 Corporate, general and administrative. 14,044 6,338 11,446 17,643 25,408 18,627 25,203 Depreciation and amortization......... 5,734 6,292 9,358 13,171 22,344 16,048 21,620 Lease expense......................... 226 862 2,823 5,039 12,110 8,874 12,693 Interest expense, net................. 9,410 13,229 12,866 16,065 25,164 18,947 21,640 Debenture conversion expense.......... -- -- -- -- -- -- 785(1) --------- --------- -------- --------- --------- ---------- --------- Total expenses........................... 122,837 150,540 234,920 317,103 485,923 353,990 488,114 Income before income taxes and extraordinary item.................... 3,170 11,844 27,496 35,945 46,307 32,900 45,838 Income tax expense....................... 1,420 4,727 10,454 13,798 17,570 12,505 17,087 Income before extraordinary item......... 1,750 7,117 17,042 22,147 28,737 20,395 28,751 Extraordinary item, net of tax benefit (2) -- 3,863 1,620 3,722 2,827 1,481 873 --------- --------- -------- --------- --------- ---------- --------- Net income............................... $ 1,750 $ 3,254 $ 15,422 $ 18,425 $ 25,910 $ 18,914 $ 27,878 ========= ========= ======== ========= ========= ========== ========= Per common share data (fully diluted): Income before extraordinary item per share.................................. $ .12 $ .42 $ .71 $ .84 $ .99 $ .71 $ .85 Net income per share..................... $ .12 $ .19 $ .64 $ .69 $ .90 $ .67 $ .82 Weighted average number of shares outstanding............................ 14,646 16,962 23,967 26,513 33,172 32,748 36,832 Other Financial Data: EBITDA (3)............................ $ 18,314 $ 31,365 $ 49,720 $ 65,181 $ 93,815 $ 67,895 $ 89,883 EBITDAR (4)........................... 18,540 32,227 52,543 70,220 105,925 76,769 102,576 Ratio of EBITDA to interest expense, net 1.9x 2.4x 3.9x 4.1x 3.7x 3.6x 4.1x Ratio of EBITDAR to interest expense, net, plus lease expense................ 1.9x 2.3x 3.3x 3.3x 2.8x 2.8x 3.0x Ratio of earnings to fixed charges (5) 1.3x 1.9x 2.9x 2.9x 2.5x 2.8x 2.8x Capital expenditures.................. $ 2,838 $ 18,730 $ 31,785 $ 39,917 $ 64,215 $ 49,510 $ 39,301 Operating Data: Average number of licensed beds....... 3,271 4,241 6,006 6,861 11,620 11,168 16,224 Occupancy............................. 91.0% 90.4% 92.2% 91.7% 91.0% 91.7% 90.4% Payor mix: Quality mix (6)................... 55.5% 56.0% 62.5% 66.3% 64.5% 64.3% 67.3% Medicaid.......................... 44.5% 44.0% 37.5% 33.7% 35.5% 35.7% 32.7% Balance Sheet Data (at period end): Working capital....................... $ 39,696 $ 15,158 $ 34,005 $ 55,542 $ 39,327 $ 69,135 $ 51,882 Total assets.......................... 155,485 162,255 308,755 470,958 761,667 659,096 823,133 Long-term debt, including current portion............................. 146,906 106,137 156,878 283,082 429,168 427,983 424,046 Stockholders' equity.................. $ (11,276) 32,591 100,105 113,895 207,935 $ 138,632 $ 263,174
- -------------- (1) Represents a non-recurring charge relating to the early conversion of $11.0 million of Multicare's 7% Convertible Debentures. (2) Multicare incurred extraordinary charges relating to early extinguishment of debt. (3) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization, extraordinary items (net of tax benefit) and debenture conversion expense. EBITDA should not be considered an alternative measure of Multicare's net income, operating performance, cash flow or liquidity. It is included herein to provide additional information related to Multicare'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) EBITDAR represents earnings before interest expense, income taxes, depreciation and amortization, extraordinary items (net of tax benefit), debenture conversion expense and lease expense. EBITDAR should not be considered an alternative measure of Multicare's net income, operating performance, cash flow or liquidity. It is included herein to provide additional information related to Multicare's ability to service debt. (5) 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 (net of tax benefit) plus fixed charges. Fixed charges consist of interest on all indebtedness, amortization of debt issuance costs and one-third of rental expense, which Multicare believes to be representative of the interest factor. The definition of fixed charges used in this calculation differs from that used in the Consolidated Fixed Charge Coverage Ratio contained in the Indenture. (6) Quality mix is defined as non-Medicaid patient revenues. -44- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of Multicare, including the notes thereto, appearing elsewhere in this Prospectus. Overview Multicare has experienced revenue growth in excess of 43% per year in the five-year period ended December 31, 1996, primarily through acquisitions of eldercare facilities and increased utilization of specialty medical services. It has been Multicare's strategy to expand through selective acquisitions, development of new facilities with geographically concentrated operations, and growth of specialty medical services. Upon consummation of the Merger, the Company and Genesis entered into the Management Agreement pursuant to which Genesis manages the Company's operations. Under Genesis' management, the Company's strategy is to integrate the talents of physicians with case management, comprehensive discharge planning and, where necessary, home support services, to provide cost effective care management to achieve superior outcomes and return the Company's customers to the community. Genesis' management believes that achieving improved customer outcomes will result in increased utilization of specialty medical services and a broader base of repeat customers in the Company's network. Moreover, the Company believes that this strategy will lead to continued high levels of occupancy of available beds, a high quality payor mix and same store growth in net revenues and EBITDAR. Genesis' management also will focus on the revenue and cost opportunities presented through the further integration of the Company's recent acquisitions. See "-- Acquisitions and Development." It is contemplated that the Company will do little, if any, new acquisitions or new construction after the Merger; accordingly, capital expenditures after the Merger should decrease significantly. Acquisitions and Development Multicare historically has grown through acquisition, construction, lease and management agreements. Summarized below are the recent acquisitions and development projects: In 1994, Multicare acquired the outstanding capital stock of Providence Health Care, Inc., an Ohio-based provider of eldercare and specialized healthcare services through 15 facilities with over 1,200 beds, located principally in Ohio. In January 1995, Multicare acquired the assets and operations of an institutional pharmacy business located in New Jersey. In December 1995, Multicare acquired the outstanding capital stock of Glenmark Associates, Inc., an eldercare provider through 21 facilities and several ancillary businesses with approximately 1,700 beds, located principally in West Virginia. In February 1996, Multicare acquired the outstanding capital stock of Concord, a provider of eldercare, assisted living, and specialty medical services through 11 facilities with over 1,600 licensed beds and several ancillary businesses in Pennsylvania. In December 1996, Multicare acquired A.D.S which owned, operated or managed over 50 eldercare and assisted living facilities with over 4,200 licensed beds, principally in Massachusetts. -45- Between 1994 and 1996, Multicare further expanded its regional bases by adding over 2,500 licensed beds through smaller acquisitions, construction of new facilities, expansion of existing facilities, leasing arrangements and management agreements. Results of Operations Quarterly Results Net Revenues. Net revenues for the nine months ended September 30, 1997 increased 38% or $147.1 million from the same period last year to $534.0 million. Net revenues for the three months ended September 30, 1997 increased 38% or $51.1 million from the same period last year to $186.0 million. Of the net revenues increase for the nine months ended September 30, 1997, 24% is attributable to the inclusion of results for the Company's recent acquisitions. The internal growth rate of revenues amounted to 14% in the nine months ended September 30, 1997, resulting mainly from increases in payor rates and changes in census mix, development and opening of additional beds, and growth in specialty medical service revenues. The revenue increase for the quarter ended September 30, 1997 was due to results from recent acquisitions of 23% and internal growth of 15%. The Company's quality mix of private, Medicare and insurance revenues was 67% of net revenues for the nine and three months ended September 30, 1997 compared to 64% in the similar periods of 1996. Occupancy rates were 90% for the nine months ended September 30, 1997 compared to 92% in the similar period of 1996. Occupancy rates were 92% for the three months ended September 30, 1997 and 1996. Operating Expense and Margins. Operating expenses for the nine months ended September 30, 1997 increased 39% or $114.7 million from the comparable period in 1996 to $406.2 million. Operating expenses for the three months ended September 30, 1997 increased 41% or $41.8 million from the comparable period in 1996 to $142.9 million. The increases in operating expenses for the nine and three month periods ended September 30, 1997 reflect the inclusion of results for the recent acquisitions of $69.6 million and $22.8 million, respectively. The remainder of the increase resulted primarily from higher salaries, wages and benefits and the expanded utilization of salaried therapists and nursing staffing levels to support higher patient acuities and more complex product lines such as subacute and Alzheimers care. Operating margins before interest were 13% of net revenues for the nine months ended September 30, 1997 and 1996, and 12% and 14% for the three month periods ended September 30, 1997 and 1996, respectively. Income before interest, taxes, depreciation, amortization and lease expense (EBITDAR) before debenture conversion expense was 19% and 20% of net revenues for the nine month periods ended September 30, 1997 and 1996 respectively. Income before interest, taxes, depreciation, amortization and lease expense (EBITDAR) was 19% and 21% of net revenues for the three months ended September 30, 1997 and 1996, respectively. Corporate, General and Administrative Expense. Corporate, general and administrative expense remained consistent at approximately 5% of net revenues for the nine month periods ended September 30, 1997 and 1996, respectively and 4% and 5% of net revenues for the quarter ended September 30, 1997 and 1996, respectively. The expenses include resources devoted to operations, finance, legal, risk management, and information systems in order to support the Company's operations. Lease Expense. Lease expense for the nine months ended September 30, 1997 increased 43% or $3.8 million from the same period last year to $12.7 million. In the third quarter of 1997 lease expense increased -46- 40% or $1.2 million from the same period last year to $4.3 million. The increases were primarily due to the inclusion of lease expense relating to a recent acquisition. Depreciation and Amortization Expense. Depreciation and amortization expense for the nine months ended September 30, 1997 increased 35% from the same period in 1996 to $21.6 million, while depreciation and amortization expense for the third quarter 1997 increased 29% to $7.5 million from the comparable period in 1996. The increases were primarily due to the inclusion of results for recent acquisitions. Interest Expense, net. Net interest expense for the nine months ended September 30, 1997 increased 14% from the same period in 1996 to $21.6 million, while net interest expense for the third quarter of 1997 increased 9% to $7.5 million from the same period a year ago. This is primarily a result of increased borrowings under the Company's credit facility in connection with the financing of recent acquisitions. These increases have been offset by decreases relating to the conversion of the Company's convertible debt and the purchase of the Company's senior notes. Debenture Conversion Expense. Debenture conversion expense for the nine months ended September 30, 1997 relates to the premium paid in January 1997 to convert $11 million of convertible debentures into common stock. Annual Results Net Revenues. Net revenues increased 51% or $179.2 million to $532.2 million in 1996 and 35% or $90.6 million to $353.0 million in 1995. Of the 1996 revenues increase, 37% is primarily attributable to the inclusion of results for the recent acquisitions. The internal growth rate of revenues amounted to 14% in 1996, resulting mainly from increases in payor rates and changes in census mix, development and opening of additional beds, and growth in specialty medical service revenues. The revenue increase in 1995 was predominantly due to results from recent acquisitions of 20% and internal growth of 15%. Multicare's quality mix of non-Medicaid patient revenues was 65%, 66% and 63%, respectively, in 1996, 1995 and 1994. The 1996 percentages reflect the impact of certain of Multicare's recent acquisitions which historically have generated lower revenues in these areas. Occupancy rates were 91%, 92% and 92%, respectively, for 1996, 1995 and 1994. Operating Expenses and Margins. Operating expenses increased 53% or $142.8 million to $413.0 million in 1996 and 34% or $68.9 million to $270.2 million in 1995. Operating margins were 13% in 1996 and 15% in 1994 and 1995. The decrease in operating margin in 1996 is due primarily to an increase in lease expense of $7.1 million relating to new operating leases. EBITDAR margins were 20% in 1996, 1995, and 1994. The increases in operating expenses in 1996 and 1995 reflect the inclusion of results for the recent acquisitions of $100.2 million and $37.6 million, respectively. The remaining increases resulted primarily from higher salaries, wages, and benefits ($23.4 million in 1996 and $17.7 million in 1995) for cost of living increases and the expanded utilization of salaried therapists and staffing levels to support higher patient acuities and more complex product lines. -47- Corporate, General and Administrative Expenses. Corporate, general and administrative expenses remained consistent at 5% of net revenues in 1996 and 1995. The expenses include resources devoted to operations, finance, legal, risk management, and information systems to support Multicare's operations. Depreciation and Amortization. Depreciation and amortization increased by $9.2 million in 1996 and $3.8 million in 1995. The increases related primarily to inclusion of depreciation and amortization for the recently acquired entities and to a lesser extent, amortization of debt issuance costs and other assets. Other Income (Expense). Net other expense increased 57% or $9.1 million in 1996 to $25.2 million, primarily as a result of interest expense from increased borrowings under Multicare's various credit agreements in connection with the financing of recent acquisitions. Net other expense increased 25% or $3.2 million in 1995 as a result of interest expense from higher borrowing levels on Multicare's credit agreements and interest associated with Multicare's Convertible Debentures. Extraordinary item. Multicare incurred extraordinary charges of $2.8 million, $3.7 million, and $1.6 million in 1996, 1995 and 1994, respectively, relating to the restructuring of its bank credit facilities and the purchase of Multicare's 12.5% Senior Subordinated Notes ("12.5% Notes"). Liquidity and Capital Resources The Company maintains adequate working capital from operating cash flows and lines of credit for continuing operations, debt service, and anticipated capital expenditures. At September 30, 1997, the Company had working capital of $51.8 million, compared to $39.3 million at December 31, 1996. Cash flow from operations was $50.3 million in 1996 compared to $11.0 million in 1995. The increase is due, in part, to improved collection of receivables. Net accounts receivable were $102.2 million at December 31, 1996 compared to $86.2 million at December 31, 1995. This increase is primarily attributable to the recent acquisitions, the utilization of specialty medical services for higher acuity level patients, and the timing of third-party interim and settlement payments. The allowance for doubtful accounts represents approximately 10% and 6% of gross accounts receivable at December 31, 1996 and 1995, respectively. -48- Cash flow from operations was $37.0 million for the nine months ended September 30, 1997 compared to cash from operations of $19.0 million in the comparable period of 1996. This increase is due, in part, to improved collections of accounts receivable and the conclusion of recent acquisitions. Net accounts receivable were $119.5 million at September 30, 1997 compared to $102.2 million at December 31, 1996. The increase in net accounts receivable is attributable to the recent acquisitions, the utilization of specialty medical services for higher acuity level patients, and the timing of third-party interim and settlement payments. Legislative and regulatory action and government budgetary constraints could change the timing of payments and reimbursement rates of the Medicare and Medicaid programs in the future. These changes could have a material adverse effect on the Company's future operating results and cash flows. Capital expenditures were $64.2 million, $39.9 million and $31.8 million in the years ended December 31, 1996, 1995 and 1994, respectively. These expenditures related primarily to new construction, existing facility expansion, further development of specialty medical services and capital improvements. As a result of the Merger, it is contemplated that the Company will do little, if any, further new acquisitions or new construction. Accordingly, capital expenditures after the Merger are expected to decrease significantly to approximately $50.0 million for 1997, $30.0 million for 1998 and $30.0 million for 1999. In January 1997 the Company purchased $6.5 million of its 12.5% Senior Subordinated Notes. In addition, in the nine month period ended September 30, 1997 $26.5 million of the Company's Convertible Debentures were converted into common stock. On June 16, 1997, Multicare entered into the Merger Agreement with Genesis ElderCare Corp. and Acquisition Corp. pursuant to which Acquisition Corp. offered to make the Tender Offer. The Tender Offer expired on Wednesday, October 8, 1997 and Acquisition Corp. accepted for purchase 32,790,495 Shares that had been validly tendered and not withdrawn. The Shares accepted pursuant to the Tender Offer constitute approximately 99.65% of Multicare's issued and outstanding Shares. On October 10, 1997, pursuant to the Merger Agreement, Acquisition Corp. was merged with and into Multicare (the "Surviving Corporation") and the remaining Shares not previously purchased in the Tender Offer were canceled, extinguished and converted into the right to receive $28.00 in cash. As a result of the Merger, Parent is the record and beneficial owner of all Shares of the Surviving Corporation. Parent is owned by Genesis, Cypress, TPG and Nazem and their affiliates. -49- In connection with the Merger, Multicare entered into three term loans and a revolving credit facility of up to $525 million, in the aggregate (collectively, the "Senior Facilities"), provided by a syndicate of banks and other financial institutions (collectively, the "Lenders") led by Mellon Bank, N.A., as administrative agent (the "Administrative Agent"), pursuant to a certain credit agreement dated as of October 14, 1997. The Senior Facilities are being used for the purpose of (i) refinancing certain short term facilities in the aggregate principal amount of $431.6 million which were funded on October 9, 1997 to acquire the Shares in the Tender Offer, refinance certain indebtedness of Multicare and pay fees and expenses related to the transactions, (ii) funding interest and principal payments on such facilities and on certain remaining indebtedness and (iii) funding working capital and general corporate purposes. The Senior Facilities consist of: (1) a $200 million six year term loan (the "Tranche A Term Facility"); (2) a $150 million seven year term loan (the "Tranche B Term Facility"); (3) a $50 million term loan maturing on June 1, 2005 (the "Tranche C Term Facility"); (4) a $125 million six year revolving credit facility (the "Revolving Credit Facility"); and (5) one or more Swing Loans (collectively, the "Swing Loan Facility") in integral principal multiples of $500,000 up to an aggregate unpaid principal amount of $10 million. The Tranche A Term Facility, Tranche B Term Facility and Tranche C Term Facility are subject to amortization in quarterly installments, commencing at the end of the first calendar quarter after the date of the consummation of the Merger (the "Closing Date"). The Revolving Credit Facility will mature six years after the Closing Date. All net proceeds received by Multicare from (i) the sale of assets of Multicare or its subsidiaries other than sales in the ordinary course of business (and other than the sale of Multicare's rehabilitation therapy business) and (ii) any sale of common stock or debt securities of Multicare in respect of common stock will be applied as a mandatory prepayment. Fifty percent of Excess Cash Flow must be applied to the Senior Facilities and shall be payable annually. The Senior Facilities are secured by a first priority security interest in all of the (i) stock of Multicare, (ii) stock, partnership interests and other equity of all of Multicare's present and future direct and indirect subsidiaries and (iii) intercompany notes among Parent and any subsidiaries or among any subsidiaries. Loans under the Senior Facilities bear, at Multicare's option, interest at the per annum Prime Rate as announced by the Administrative Agent, or the applicable Adjusted LIBO Rate. Loans under the Tranche A Term Facility bear interest at a rate equal to LIBO Rate plus 2.5%; loans under the Tranche B Term Facility bear interest at a rate equal to LIBO Rate plus 2.75%; loans under the Tranche C Term Facility bear interest at a rate equal to LIBO Rate plus 3.0%; loans under the Revolving Credit Facility bear interest at a rate equal to LIBO Rate plus 2.5%; and loans under the Swing Loan Facility bear interest at the Prime Rate unless otherwise agreed to by the parties. Subject to meeting certain financial covenants, the above-referenced interest rates will be reduced. The Long Term Credit Agreement contains a number of covenants that, among other things, restrict the ability of Multicare and its subsidiaries to dispose of assets, incur additional indebtedness, make loans -50- and investments, pay dividends, engage in mergers or consolidations, engage in certain transactions with affiliates and change control of capital stock, prepay debt, make material changes in accounting and reporting practices, create liens on assets, give a negative pledge on assets, make acquisitions and amend or modify documents. In addition, the Long Term Credit Agreement requires that Multicare and its affiliates maintain the Management Agreement (as defined below) as well as comply with certain financial covenants. On August 11, 1997, Acquisition Corp. sold to the Placement Agents $250 million principal amount of the Existing Notes which were issued pursuant to the Indenture. The Existing Notes bear interest at 9% per annum from August 11, 1997, payable semiannually on February 1 and August 1 of each year, commencing on February 1, 1998. Under the terms of the Indenture, the issuer of the 9% Notes is obligated to consummate the Exchange Offer pursuant to an effective registration statement or to cause resales of the Existing Notes to be registered under the Securities Act pursuant to an effective shelf registration statement. In the event that the Exchange Offer is not consummated and a shelf registration statement is not declared effective on or prior to March 31, 1998, the per annum interest rate on the Existing Notes will be increased by .5% until the Exchange Offer is consummated or the shelf registration statement is declared effective. The Existing Notes are unsecured, general obligations of the issuer, subordinated in right of payment to all existing and future Senior Indebtedness, as defined in the Indenture, of the issuer, including indebtedness under the Senior Facilities. The Existing Notes rank pari passu in right of payment with any future senior subordinated indebtedness of the issuer and are senior in right of payment to all future subordinated indebtedness of the issuer. The Existing Notes are redeemable at the option of the issuer, in whole or in part, at any time on or after August 1, 2002, initially at 104.5% of their principal amount, plus accrued interest, declining ratably to 100% of their principal amount, plus accrued interest, on or after August 1, 2004. The Existing Notes are subject to mandatory redemption at 101%. Upon a Change in Control, as defined in the Indenture, the issuer is required to make an offer to purchase the Existing Notes at a purchase price equal to 101% of their principal amount, plus accrued interest. The Indenture contains a number of covenants that, among other things, restrict the ability of the issuer of the Existing Notes to incur additional indebtedness, pay dividends, redeem capital stock, make certain investments, issue the capital stock of its subsidiaries, engage in mergers or consolidations or asset sales, engage in certain transactions with affiliates, and create dividend and other restrictions affecting its subsidiaries. Upon the consummation of the Merger, Multicare assumed all obligations of Acquisition Corp. with respect to and under the Existing Notes and the related Indenture. On October 9, 1997, Multicare, Genesis and Genesis ElderCare Network Services, Inc., a wholly-owned subsidiary of Genesis, entered into a management agreement (the "Management Agreement") pursuant to which Genesis will manage Multicare's operations. The Management Agreement has a term of five years with automatic renewals for two years unless either party terminates the Management Agreement. Genesis will be paid a fee of six percent of Multicare's net revenues for its services under the Management Agreement provided that payment of such fee in respect of any month in excess of the greater of (i) $1,991,666 and (ii) four percent of Multicare's consolidated net revenues for such month, shall be subordinate to the satisfaction of Multicare's senior and subordinate debt covenants; and provided, further, that payment of such fee shall be no less than $23.9 million in any given year. Under the Management Agreement, Genesis is responsible for Multicare's non-extraordinary sales, general and administrative expenses (other than certain specified third-party expenses), and all other expenses of Multicare will be paid by Multicare. -51- On October 10, 1997, Genesis entered into the Therapy Sale pursuant to which Genesis acquired all of the assets used in Multicare's outpatient and inpatient rehabilitation therapy business for $24 million, subject to adjustment. On October 10, 1997, Genesis and one of its wholly-owned subsidiaries entered into the Pharmacy Sale pursuant to which Genesis will acquire all of the outstanding capital stock and limited partnership interests of certain subsidiaries of Multicare that are engaged in the business of providing institutional pharmacy services to third parties for $50 million, subject to adjustment. Legislative and regulatory action and government budgetary constraints could change the timing of payments and reimbursement rates of the Medicare and Medicaid programs in the future. These changes could have a material adverse effect on the Company's future operating results and cash flows. There are numerous legislative and executive initiatives at the federal and state levels for comprehensive reforms affecting the payment for and availability of healthcare services, including without limitation, discussions at the federal level concerning budget reductions and the implementation of prospective payment systems for the Medicare and Medicaid programs. The Company is unable to predict the impact of healthcare reform proposals on the Company; however, it is possible that such proposals could have a material adverse effect on the Company. Any changes in reimbursement levels under Medicaid and Medicare and any changes in applicable government regulations could significantly affect the profitability of the Company. Various cost containment measures adopted by governmental pay sources have begun to limit the scope and amount of reimbursable healthcare expenses. Additional measures, including measures that have already been proposed in states in which the Company operates, may be adopted in the future as federal and state governments attempt to control escalating healthcare costs. There can be no assurance that currently proposed or future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs will not have a material adverse effect on the Company. In particular, changes to the Medicare reimbursement program that have been proposed could materially adversely affect the Company's revenues derived from ancillary services. See "Risk Factors -- Regulation" and "-- Payment By Third Party Payors." Seasonality Multicare'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. Inflation The healthcare industry is labor intensive. Wages and other labor related costs are especially sensitive to inflation. In addition, suppliers pass along rising costs to Multicare in the form of higher prices. When faced with increases in operating costs, Multicare has increased its charges for services. The Company's operations could be adversely affected if it is unable to recover future cost increases or experiences significant delays in increasing rates of reimbursement of its labor and other costs from Medicaid and Medicare revenue sources. -52- BUSINESS General Multicare is a leading provider of high quality eldercare and specialty medical services in selected geographic regions. Multicare's eldercare services include skilled nursing care, assisted living, Alzheimer's care and related support activities traditionally provided in eldercare facilities. The Company's specialty medical services consist of (i) sub-acute care such as ventilator care, intravenous therapy, and various forms of coma, pain and wound management and (ii) rehabilitation therapies such as occupational, physical and speech therapy and stroke and orthopedic rehabilitation. The Company also provides management services to 44 facilities and consulting services to 14 facilities. Multicare is well-positioned in its markets because it provides high quality care in concentrated geographic regions. As a result, Multicare has achieved high occupancy rates, a favorable payor mix and sustained total and same store growth in net revenues and operating profits. Multicare's overall occupancy rate was approximately 92%, 92% and 91% for the years ended December 31, 1994, 1995 and 1996, respectively, and 90% for the nine months ended September 30, 1997. Multicare achieved a quality mix (defined as non-Medicaid revenues) of 63%, 66% and 65% of net revenues for the years ended December 31, 1994, 1995 and 1996, respectively, and 67% for the nine months ended September 30, 1997. As of September 30, 1997, Multicare operated 155 eldercare facilities, 11 assisted living facilities and two outpatient rehabilitation centers (90 owned, 27 leased and 51 managed) in Connecticut, Illinois, Massachusetts, New Jersey, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia and Wisconsin with 17,615 beds. In terms of beds, the Company is the largest provider of eldercare services in Massachusetts, New Jersey and West Virginia. In addition, the Company is one of the largest providers of eldercare services in Pennsylvania, Ohio and Wisconsin. The Company operates high quality, attractive facilities, many of which are newly constructed; approximately one-third of the Company's beds are less than five years old. In addition, 75% of the Company's facilities are owned rather than leased. The Company believes that significant ownership of its assets enhances the Company's credit quality and financial flexibility. Patient Services Basic Healthcare Services Basic healthcare services are those traditionally provided to elderly patients in eldercare facilities and assisted living residences with respect to daily living activities and general medical needs. The Company provides 24-hour skilled nursing care by registered nurses, licensed practical nurses and certified nursing aides in all of its skilled nursing facilities. Each eldercare facility is managed by an on-site licensed administrator who is responsible for the overall operations of the facility, including quality of care. The medical needs of patients are supervised by a medical director who is a licensed physician. While treatment of patients is the responsibility of patients' attending physicians who are not employed by the Company, the medical director monitors all aspects of patient treatment. The Company also provides a broad range of support services including dietary services, therapeutic recreational activities, social services, housekeeping and laundry services, pharmaceutical and medical supplies and routine rehabilitation therapy. Each eldercare facility offers a number of activities designed to enhance the quality of life for patients. These activities include entertainment events, musical productions, arts and crafts and programs encouraging community interaction with patients and visits to the facility. The Company provides housing, personal care and support services as well as certain routine nursing services in its assisted living residences. -53- The Company currently provides specialized care for Alzheimer's patients under the supervision of specially trained skilled nursing, therapeutic recreation and social services personnel. The Company's Alzheimer's programs include music therapy, gross and fine motor activity, reality orientation and cognitive stimulation designed to counter the hyperactivity, memory loss, confusion and reduced learning ability experienced by Alzheimer's patients. Specialty Medical Services Specialty medical services are provided to patients with medically complex needs who generally require more intensive treatment and a higher level of skilled nursing care. These services typically generate higher profit margins than basic healthcare services because the higher complexity of the patients' medical conditions results in a need for increased levels of care and ancillary services. Sub-acute Care. Sub-acute care includes services provided to patients with medically complex conditions who require ongoing nursing and medical supervision and access to specialized equipment and services, but do not require many of the other services provided by an acute care hospital. Services in this category include ventilator care, intravenous therapy, wound care management, traumatic brain injury care, post-stroke CVA (cerebrovascular accident) care, CAPD (continuous ambulatory peritoneal dialysis), pain management, hospice care, and tracheotomy and other ostomy care. The Company provides a range of sub-acute care services to patients at its facilities. The Company plans to continue to expand its sub-acute care capabilities by supplementing and expanding currently available services and by developing expertise in additional services. Rehabilitation Therapies. The Company provides rehabilitation therapy programs at substantially all of its facilities. To complement the routine rehabilitation therapy services provided to its eldercare patients, the Company has developed specialized rehabilitation therapy programs to serve patients with complex care needs, such as motor vehicle and other accident victims, persons suffering from job-related injuries and disabilities, and joint-replacement patients. The Company employs full time physical, occupational, and speech therapists at a majority of its facilities. The Company also offers respiratory services at selected facilities. In addition, Multicare operates two outpatient rehabilitation facilities in New Jersey and Illinois. Upon consummation of the Merger, the Company sold its contract rehabilitation therapy business to Genesis. See "The Tender Offer and Merger." Institutional Pharmacy Services. Multicare operates eight institutional pharmacies which currently serve a total of approximately 30,000 beds. The pharmacies provide eldercare healthcare facilities and other institutions a variety of products and services including prescription drugs, pharmacy consulting, and enteral, urological and intravenous therapies. Upon the consummation of the Merger, the Company will sell its pharmacy business to Genesis. See "The Tender Offer and Merger." Operations General. The day-to-day operations of each eldercare facility are managed by an on-site state licensed administrator who is responsible for the overall operation of the facility, including quality of care, marketing, and financial performance. The administrator is assisted by an array of professional and non-professional personnel (some of whom may be independent providers), including a medical director, nurses and nursing assistants, social workers, therapists, dietary personnel, therapeutic recreation staff, and housekeeping, laundry and maintenance personnel. The business office staff at each facility manage the day-to-day administrative functions, including data processing, accounts payable, accounts receivable, billing and payroll. -54- Historically, the facilities operated by Multicare were divided into five divisions, each supervised by a team including a divisional director, a divisional controller, a marketing director, an operations performance director, and a clinical services director. The divisional and facility personnel were supported by a corporate staff based at Multicare's New Jersey headquarters. Upon consummation of the Merger, Genesis and the Company entered into the Management Agreement pursuant to which Genesis manages the Company's operations. Genesis is in the process of overlaying its existing regional and business unit management over the existing regional and business unit management at Multicare. The Company believes that the integration of Genesis and Multicare management will be facilitated by the geographic concentration of Multicare's facilities, the proximity of Multicare facilities to Genesis' existing markets, the quality of Multicare's unit and regional management and Multicare's existing information systems which will allow a rational phase-in of Genesis' management. See "Management -- Certain Agreements -- Management Agreement." Marketing. As a result of the Merger, Genesis manages the Company's marketing program. 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 organizations. Genesis management's marketing objective for the Company is to maintain public awareness of the eldercare center and its capabilities. Genesis' management attempts to take advantage of the Company's regional concentrations in its marketing efforts, where appropriate, through consolidated marketing programs which benefit more than one center. The Genesis corporate business development department, through regional managers, markets the Company's sub-acute program directly to insurance, managed care organizations and other third party payors. In addition, the Genesis marketing department, supports the eldercare centers in developing promotional materials and literature focusing on Genesis management's philosophy of care, services provided and quality clinical standards. See "-- Government Regulation" for a discussion of the federal and state laws which limit financial and other arrangements between healthcare providers. Genesis has consolidated its core business, and is in the process of consolidating the Company's core business, under the name Genesis ElderCare. The Genesis ElderCare logo and trademark have been featured in a series of print advertisements and publications serving many of the regional markets in which the Company operates. The marketing of Genesis ElderCare is aimed at increasing awareness among decision makers in key professional and business audiences. Genesis is using and will continue to use advertising to promote the Genesis ElderCare brand name in trade, professional and business publications and to promote services directly to consumers. Sources of Revenue The Company derives its revenues from private pay sources, state Medicaid programs for indigent patients and the federal Medicare program for certain elderly and disabled patients. The Company classifies payments from persons or entities other than the government as private pay and other revenue. The private pay and other revenue 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 revenue and are made pursuant to renewable contracts negotiated with these payors. The Company's rates for private pay patients are typically higher than rates for patients eligible for assistance under state-administered reimbursement programs. The private pay rates charged by the Company are influenced primarily by the rates charged by other providers in the local market and by Medicaid and Medicare reimbursement rates. Specialty medical services are usually reimbursed under casualty and health insurance coverages. The acuity levels for these insurance patients are generally higher -55- and require additional staff and increased utilization of facility resources, resulting in higher payment rates. Individual cases are either negotiated on a case by case basis with the insurer or the rates are prescribed through managed care contract provisions. 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 a skilled nursing facility 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 including but not limited to residence in assisted living facilities; however, medical and physician services furnished to such patients may be reimbursable under Part B. Under the Part A reimbursement methodology, each skilled nursing facility 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. Final settlements are subject to an audit of the filed cost report whereby adjustments may result in additional payments to the Company or in recoupments from the Company. As the Company is reimbursed for its direct costs plus an allocation of indirect costs up to a regional limit, to the extent that the Company expands its specialty medical services, the costs of care for these patients are expected to exceed the regional reimbursement limits. As a result, the Company has submitted and will be required to submit further exception requests to recover the excess costs from Medicare. There can be no assurance that the Company will be able to recover such excess costs under pending or any future requests. The failure to recover these excess costs in the future would adversely affect the Company's financial position and results of operations. For services not billed through a facility, the Company's specialty medical operations bill Medicare, when appropriate, 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. To date, adjustments from Medicare and Medicaid audits have not had a material adverse effect on the Company. There can be no assurance that future adjustments will not have a material adverse effect on the Company. Medicaid is the state administered reimbursement program that covers both skilled nursing facilities and intermediate eldercare. 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 facility, 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, facility 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, facility 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 facility 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 following table identifies Multicare's net revenues attributable to each of its revenue sources for the periods indicated below. -56-
Net Revenues ----------------------------------------------------------------------- Nine Months Ended Year Ended December 31, September 30, ----------------------------------------- -------------------------- 1994 1995 1996 1996 1997 ----------- ----------- ----------- ----------- ----------- Private and other...................... 39% 41% 40% 40% 43% Medicaid............................... 38 34 35 36 33 Medicare............................... 23 25 25 24 24 ----------- ----------- ----------- ----------- ----------- Total......................... 100% 100% 100% 100% 100% =========== =========== =========== =========== ===========
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 11 states. In each market, the Company's eldercare centers may compete for customers with rehabilitation hospitals, sub-acute units of hospitals, skilled or intermediate nursing centers, personal care or residential centers and assisted living facilities 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 sub-acute patients is intense among hospitals with long-term care capability, rehabilitation hospitals and other speciality 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. The Company 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 speciality 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 reimbursements, information management and patient record-keeping. The Company believes that state regulations which require the issuance of a Certificate of Need before a new eldercare center can be constructed or additional beds can be added to an existing facility reduce the possibility of overbuilding and promote higher utilization of existing facilities. However, a relaxation, expiration or elimination of Certificate of Need requirements could lead to an increase in competition. In addition, as cost containment measures have reduced occupancy rates at acute care hospitals, a number of these hospitals have converted portions of their facilities into sub-acute units. Competition from acute care hospitals could adversely affect the Company and certain states in which the Company operates have considered or are considering action that could facilitate such competition. See "Risk Factors -- Risks Associated with Multicare Transaction." -57- Government Regulation The federal government and all states in which the Company operates regulate various aspects of the Company's business. The Company's facilities are subject to certain federal statutes and regulations and to statutory and regulatory licensing and other requirements imposed by state and local authorities. All of the Company's facilities and programs, to the extent required, are licensed under applicable law and have any required Certificates of Need from responsible state authorities. Substantially all facilities 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 licensed facilities on a regular basis to determine whether such facilities 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 facilities 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. The Company reviews such notices and takes appropriate corrective action. In most cases, the Company and the reviewing agency will agree upon the measures to be taken to bring the facility into compliance with regulatory requirements. In some cases or upon repeat violations, the reviewing agency may take various adverse actions against a facility, including the imposition of fines, temporary suspension of admission of new patients to the facility, suspension or decertification from participation in the Medicare or Medicaid programs and, in extreme circumstances, revocation of a facility's license. These actions may adversely affect the facilities' 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 facility may subject other facilities under common control or ownership to adverse measures, including loss of licensure or eligibility to participate in Medicare and Medicaid programs. From time to time, survey deficiencies have resulted in various penalties against certain facilities and the Company. These penalties have included monetary fines, temporary bans on the admission of new patients and the placement of restrictions on the Company's ability to obtain or transfer certificates of need in certain states. To date, no survey deficiencies or any resulting penalties have had a material adverse effect on the Company's operations, however, there can be no assurance that future surveys will not result in penalties or sanctions which could have a material adverse effect on the Company. Both initial and continuing qualifications of a eldercare facility to participate in the Medicare and Medicaid programs depend upon many factors including accommodations, equipment, services, patient care, safety, personnel, physical environment, and adequate policies, procedures and controls. Failure to comply with these standards could result in the denial of reimbursement, the imposition of fines, temporary suspension of admission of new patients, the issuance of a provisional license for a facility, suspension or decertification from the Medicaid or Medicare program, restrictions on the ability to acquire new facilities or expand existing facilities and, in extreme cases, the imposition of limitations on a facility's license, the appointment of third-party temporary management for a facility, revocation of the facility's license or closure of a facility. There can be no assurance that the facilities owned, leased or managed by the Company, or the provision of services and supplies by the Company, will meet the requirements for participation in the Medicaid or Medicare programs or state licensing authorities. 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 -58- state, traditionally they have provided for the payment of certain expenses, up to established limits, at rates based generally on cost reimbursement principles. States in which the Company operates generally 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. Certificate of Need legislation is currently in place in all states in which the Company operates, except in Pennsylvania where the existing Certificate of Need legislation expired on December 18, 1996. A bill has been introduced in the Pennsylvania legislature to re-establish Certificate of Need requirements; however, the Company has been advised that there is little likelihood such bill will be passed. The Pennsylvania Department of Public Welfare has issued a policy statement to the effect that generally it will not enter into a provider agreement with any eldercare facility which did not receive Certificate of Need approval for the beds at issue prior to the sunset of Pennsylvania's Certificate of Need law. In addition, in most states the reduction of beds or the closure of a facility requires the approval of the appropriate state regulatory agency and, if the Company were to determine to reduce beds or close a facility, the Company could be adversely affected by a failure to obtain or a delay in obtaining such approval. 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 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 legislation" which prohibits, 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 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. There are numerous legislative and executive initiatives at the federal and state levels for healthcare reform with a view toward, among other things, slowing the overall rate of growth in healthcare -59- expenditures. The Company is unable to predict the impact of healthcare reforms on the Company; however it is possible that such proposals could have a material adverse effect on the Company. The Company is also subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. Among the types of regulatory requirements faced by health care providers are: air and water quality control requirements; waste management requirements; specific regulatory requirements applicable to asbestos, polychlorinated biphenyls, and radioactive substances; requirements for providing notice to employees and members of the public about hazardous materials and wastes; and certain other requirements. In its role as owner and/or operator of properties or facilities, the Company may be subject to liability for investigating and remedying any hazardous substances that have come to be located on the property, including such substances that may have migrated off, or emitted, discharged, leaked, escaped or been transported from, the property. Ancillary to the Company's operations are, in various combinations, the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants or contaminants. Such activities may result in damage to individuals, property or the environment; may interrupt operations and/or increase their costs; may result in legal liability, damages, injunctions or fines; may result in investigations, administrative proceedings, penalties or other governmental agency actions; and may not be covered by insurance. There can be no assurance that the Company will not encounter such risks in the future, and such risks may have a material adverse effect on the operations or financial condition of the Company. Employees As of September 30, 1997, Multicare employed approximately 15,500 persons. Approximately 2,000 employees at 28 of Multicare's facilities are covered by collective bargaining agreements. The Company believes that it has had good relationships with its employees and with the unions that represent its employees, but it cannot predict the effect of continued union representation or organizational activities on its future operations. The healthcare industry has at times experienced a shortage of qualified healthcare personnel. The Company competes with other healthcare providers and with non-healthcare providers for both professional and non-professional employees. While the Company has been able to retain the services of an adequate number of qualified personnel to staff its facilities appropriately and maintain its standards of quality care, there can be no assurance that continued shortages will not in the future affect the ability of the Company to attract and maintain an adequate staff of qualified healthcare personnel. A lack of qualified personnel at a facility could result in significant increases in labor costs at such facility or otherwise adversely affect operations at such facility. Any of these developments could adversely affect the Company's operating results or expansion plans. Insurance The provision of healthcare services entails an inherent risk of liability. Multicare maintains liability insurance providing coverage which it believes to be adequate. In addition, Multicare maintains property, business interruption, and workers' compensation insurance covering all facilities in amounts deemed adequate by Multicare. There can be no assurance that any future claims will not exceed applicable insurance coverage or that the Company will be able to continue its present insurance coverage on satisfactory terms, if at all. -60- Legal Proceedings Multicare is a party to claims and legal actions arising in the ordinary course of business. Multicare does not believe that any litigation to which Multicare is currently a party, alone or in the aggregate, will have a material adverse effect on the Company. Significant Acquisitions In December 1996, Multicare acquired A.D.S, an affiliated group of eldercare companies operating 22 eldercare facilities with 2,930 beds, 20 hospital based sub-acute units with 514 beds and eight assisted living facilities with 821 beds, all but one of which are located in Massachusetts. A.D.S also provided consulting services to an additional 14 facilities with 1,668 beds and operated several ancillary businesses. In December 1996, Multicare completed the acquisition of the assets and operations of three eldercare facilities in Rhode Island with 373 beds which Multicare had been managing since December 1995 when Multicare acquired the assets and operations of two related eldercare facilities with 356 beds in Connecticut. In February 1996, Multicare acquired the outstanding capital stock of Concord which operated 11 eldercare facilities with approximately 1,600 beds, including assisted living facilities, and several ancillary businesses in Pennsylvania. In December 1995, Multicare acquired the outstanding capital stock of Glenmark Associates, Inc., an eldercare service provider that operated 21 facilities and several ancillary businesses with approximately 1,700 beds located principally in West Virginia. In 1996 and 1997, Multicare completed the construction of four new skilled nursing facilities which are currently managed by the Company. One additional facility under construction is scheduled to open in 1997. In addition, Multicare opened its first three newly constructed assisted living facilities during 1996 and 1997. Properties As of September 30, 1997, Multicare operated 155 eldercare facilities, 11 assisted living facilities and two outpatient rehabilitation centers (90 owned, 27 leased and 51 managed). Multicare has sought to retain ownership of a significant portion of its real estate and it believes this provides it with substantial financing flexibility. Twenty-seven of Multicare's facilities are leased by the respective operating entities from third parties. The inability of the Company to make rental payments under these leases could result in loss of the leased property through eviction or other proceedings. Certain facility leases do not provide for non-disturbance from the mortgagee of the fee interest in the property and consequently each such lease is subject to termination in the event that the mortgage is foreclosed following a default by the owner. The Company considers its properties to be in good operating condition and suitable for the purposes for which they are being used. The following table summarizes by state certain information regarding Multicare's facilities and outpatient rehabilitation centers at September 30, 1997 (excluding 14 facilities with 1,668 beds at which Multicare provides quality assurance consulting services): -61-
Owned (1) Leased Managed Total -------------------- -------------------- -------------------- -------------------- Facilities Beds Facilities Beds Facilities Beds Facilities Beds ---------- -------- ---------- --------- ---------- --------- ---------- --------- Massachusetts................ 8 1,118 5 742 37 2,459 50 4,319 New Jersey................... 13 1,425 8 1,294 4 659 25 3,378 Pennsylvania................. 16 1,805 -- -- 3 654 19 2,459 West Virginia................ 17 1,503 4 326 1 62 22 1,891 Ohio......................... 10 896 4 250 -- -- 14 1,146 Connecticut.................. 5 766 2 250 6 872 13 1,888 Illinois..................... 10 876 1 92 -- -- 11 968 Wisconsin.................... 6 729 2 231 -- -- 8 960 Rhode Island................. 3 373 -- -- -- -- 3 373 Virginia..................... 1 90 1 85 -- -- 2 175 Vermont...................... 1 58 -- -- -- -- 1 58 ---------- -------- ---------- --------- ---------- --------- ---------- --------- Total............... 90 9,639 27 3,270 51 4,706 168 17,615 ========== ======== ========== ========= ========== ========= ========== =========
- ------------------------ (1) Includes seven facilities with 883 beds which are not wholly owned. -62- MANAGEMENT Directors and Executive Officers of the Company The following table sets forth certain information regarding each of the directors and executive officers of the Company. Each was appointed to his position with the Company at or about the time of the Tender Offer.
Name Age Position - ------------------------------------ -------- ----------------------------------------------------- Michael R. Walker................... 49 Chairman, Chief Executive Officer and Director George V. Hager, Jr................. 41 Senior Vice President, Chief Financial Officer and Director James L. Singleton.................. 42 Vice President, Assistant Secretary and Director James G. Coulter.................... 37 Vice President, Assistant Secretary and Director Jonathan J. Coslet.................. 32 Director Richard R. Howard................... 48 Director Karl I. Peterson.................... 26 Director William L. Spiegel.................. 35 Director James A. Stern...................... 47 Director
Michael R. Walker is the Chairman of the Board, Chief Executive Officer and a director of the Company. Mr. Walker is the founder of Genesis and has served as Chairman and Chief Executive Officer of Genesis since its inception in 1985. 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 eldercare facilities 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 on the Board of Trustees of Universal Health Realty & Income Trust. George V. Hager, Jr. is the Senior Vice President, Chief Financial Officer and a director of the Company. Mr. Hager has served as the Senior Vice President and Chief Financial Officer of Genesis since February 1994. Mr. Hager joined Genesis in July 1992 as Vice President and Chief Financial Officer. Prior thereto, Mr. Hager was the 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 American Institute of Certified Public Accountants and Pennsylvania Institute of Certified Public Accountants. James L. Singleton is a Vice President, Assistant Secretary and a director of the Company. Mr. Singleton has been a Vice Chairman of Cypress since its formation in April 1994. Prior to joining Cypress, he was a Managing Director in the Merchant Banking Group of Lehman Brothers Inc. Mr. Singleton holds a Master of Business Administration degree from the University of Chicago Graduate School of Business and a Bachelor of Arts degree from Yale University. Mr. Singleton serves on the Board of Directors of Able Body Corporation, Cinemark USA, Inc., L.P. Thebault Company and Williams Scotsman, Inc. -63- James G. Coulter is a Vice President, Assistant Secretary and a director of the Company. Mr. Coulter was a founding partner of TPG in 1992. Prior to forming TPG, Mr. Coulter was a Vice President of Keystone, Inc., the personal investment vehicle of Fort Worth, Texas-based investor, Robert M. Bass. Mr. Coulter holds a Master of Business Administration degree from Stanford University and a Bachelor of Arts degree from Dartmouth College. Mr. Coulter is Co-Chairman of the Board of Beringer Wine Estates. He also serves on the Board of Directors of America West Airlines, Inc., Virgin Cinemas Limited, Paradyne Partners, L.P. and Del Monte Corp. Mr. Coulter is also an officer of the general partner of Colony Investors and Newbridge Investment Partners. Jonathan J. Coslet is a director of the Company. Mr. Coslet has been a partner of TPG since 1993. Prior to joining TPG, Mr. Coslet was in the Investment Banking Department of Donaldson, Lufkin & Jenrette, specializing in leveraged acquisitions and high-yield finance. Mr. Coslet holds a Master of Business Administration degree from Harvard Business School, where he was a Baker Scholar and a Loeb Fellow, and a Bachelor of Science degree in Economics from the University of Pennsylvania Wharton School. Mr. Coslet serves on the Board of Directors of PPOM, L.P. Richard R. Howard is a director of the Company. Mr. Howard has served as a director of Genesis since its inception and as Chief Operating Officer since June 1986. Mr. Howard joined Genesis 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 and one year with Equibank, Pittsburgh, Pennsylvania. Mr. Howard is a graduate of the University of Pennsylvania Wharton School, where he received a Bachelor of Science degree in Economics in 1971. Karl I. Peterson is a director of the Company. Mr. Peterson has served as Vice President of TPG since 1995. Prior to joining TPG, Mr. Peterson was in the Mergers and Acquisitions Department and the Leveraged Buyout Group of Goldman, Sachs & Co. Mr. Peterson holds a Bachelor of Business Administration degree in Finance from the University of Notre Dame. William L. Spiegel is a director of the Company. Mr. Spiegel has been a Principal of Cypress since its formation in April 1994. Prior to joining Cypress, Mr. Spiegel was with Lehman Brothers Inc. where he worked in the Merchant Banking Group. Mr. Spiegel holds a Master of Business Administration degree from the University of Chicago Graduate School of Business, a Master of Arts degree in Economics from the University of Western Ontario and a Bachelor of Science degree in Economics from The London School of Economics. James A. Stern is a director of the Company. Mr. Stern has been Chairman of Cypress since its formation in April 1994. Prior to joining Cypress, Mr. Stern spent his entire career with Lehman Brothers Inc., most recently as head of the Merchant Banking Group. He served as head of Lehman's High Yield and Primary Capital Markets Groups, and was co-head of Investment Banking. In addition, Mr. Stern was a member of Lehman's Operating Committee. Mr. Stern holds a Master of Business Administration degree from Harvard Business School and a Bachelor of Science degree from Tufts University where he is a trustee. Mr. Stern is a director of Amtrol Inc., Cinemark USA, Inc., Lear Corporation, Noel Group, Inc. and R.P. Scherer Corporation. Certain Agreements Management Agreement. In connection with the Merger, the Company and Genesis entered into the Management Agreement pursuant to which Genesis manages the Company's operations. The Management -64- Agreement is for a term of five years with automatic renewals for two years unless either party terminates the agreement. Genesis is entitled to receive a fee of six percent of the Company's consolidated net revenues for its services under the Management Agreement provided that payment of such fee in respect of any month in excess of the greater of (i) $1,991,666 and (ii) four percent of the Company's consolidated net revenues for such month shall be subordinate to the satisfaction of the Company's senior and subordinate debt covenants and that payment of the management fee shall be no less than $23.9 million in any year. Under the Management Agreement, Genesis will be responsible for the Company's non-extraordinary sales, general and administrative expenses (other than certain specified third-party expenses), and all other expenses of the Company will be paid by the Company. Stockholders' Agreement. In connection with their investments in Genesis ElderCare Corp., Genesis, Cypress and TPG have entered into a Stockholders' Agreement (the "Stockholders' Agreement"). Pursuant to the Stockholders' Agreement, among other things, each of Genesis, Cypress and TPG, as holders of Genesis ElderCare Corp. common stock, will at all times have the right to designate one-third of the members to Genesis ElderCare Corp.'s Board of Directors. The following actions by Genesis ElderCare Corp. require the consent of a member of the Board designated by Cypress, TPG and Genesis: sales of capital stock, mergers, dissolution, acquisitions in excess of specified thresholds, transactions with affiliates, dividends and redemptions, loans and investments in excess of specified thresholds, amendments of articles, by-laws and loan documents, change in business, fundamental changes and material contracts (other than termination of the Management Agreement in accordance with its terms). The Stockholders' Agreement also provides that sales of Genesis ElderCare Corp. common stock by a stockholder to a party other than an affiliate of such stockholder (including partners) and, in the case of Cypress, other than TPG, and in the case of TPG, other than Cypress, will require approval of the other stockholders, and shall be subject to a right of first offer on the part of each such stockholder. Put/Call Agreement. In connection with the funding pursuant to their respective equity commitments, Genesis, Cypress, TPG and Nazem entered into an agreement dated as of October 9, 1997 pursuant to which, among other things, Genesis has the option, on the terms and conditions set forth in the Put/Call Agreement, to purchase (the "Call") the common stock of Parent held by Cypress, TPG and Nazem commencing on October 9, 2001 and for a period of 270 days thereafter, at a price determined pursuant to the terms of the Put/Call Agreement. Cypress, TPG and Nazem have the option, on the terms and conditions set forth in the Put/Call Agreement, to require Genesis to purchase (the "Put") such common stock of Parent commencing on October 9, 2002 and for a period of one year thereafter, at a price determined pursuant to the Put/Call Agreement. The prices determined for the Put and Call are based on a formula that calculates the equity value attributable to the common stock of Parent held by Cypress, TPG and Nazem plus a portion of the Genesis pharmacy business (the "Calculated Equity Value"). The Calculated Equity Value is determined based upon a multiple of Genesis ElderCare Corp.'s earnings before interest, taxes, depreciation, amortization and rental expenses, as adjusted ("EBITDAR") after deduction of certain liabilities plus a portion of the EBITDAR related to the Genesis pharmacy business. The multiple to be applied to EBITDAR depends on whether the Put or the Call is being exercised. Any payment to Cypress, TPG or Nazem under the Call or the Put may be in the form of cash or Genesis common stock at Genesis' option. Upon exercise of the Call, Cypress, TPG and Nazem will receive at a minimum their original investment plus a 25% compound annual return thereon regardless of the Calculated Equity Value. Any additional Calculated Equity Value attributable to Cypress', TPG's or Nazem's Genesis ElderCare Corp. common stock will be determined on the basis set forth in the Put/Call Agreement which provides generally for additional Calculated Equity Value to be divided based upon the proportionate share of the capital -65- contributions of the stockholders to Parent. Upon exercise of the Put by Cypress, TPG or Nazem, there will be no minimum return to Cypress, TPG or Nazem; any payment to Cypress, TPG or Nazem will be limited to Cypress', TPG's or Nazem's share of the Calculated Equity Value based upon a formula set forth in the terms of the Put/Call Agreement which provides generally for the preferential return of the stockholders' capital contributions (subject to certain priorities), a 25% compound annual return on Cypress, TPG's and Nazem's capital contributions and the remaining Calculated Equity Value to be divided based upon the proportionate share of the capital contributions of the stockholders to Parent. Cypress', TPG's and Nazem's rights to exercise the Put will be accelerated upon an event of bankruptcy of Genesis, a change of control of Genesis or an extraordinary dividend or distribution or the occurrence of the leverage recapitalization of Genesis. Upon an event of acceleration or the failure by Genesis to satisfy its obligations upon exercise of the Put, Cypress, TPG and Nazem have the right, inter alia, to terminate the Stockholders' Agreement and Management Agreement and to control the sale or liquidation of Parent. In the event of such sale, the proceeds from such sale will be distributed among the parties as contemplated by the formula for the Put option exercise price and Cypress, TPG and Nazem will retain a claim against Genesis for the difference, if any, between the proceeds of such sale and the put option exercise price. In the event of a bankruptcy or change of control of Genesis, the option price shall be payable solely in cash provided any such payment will be subordinated to the payment of principal and interest under the Genesis Bank Financing. Commencing on October 10, 2003, if the Put option has not been exercised, subject to Genesis' right of first offer, Cypress and TPG have the right to sell their stock of Genesis ElderCare Corp. Genesis shall have the right to participate in such sale and Cypress and TPG will have the right to require Genesis to participate in such sale. Upon such sale, Genesis shall pay to Cypress and TPG (in cash or Genesis common stock at Genesis' option) the difference between the proceeds received by them and the amount they would have received had they exercised the Put on October 9, 2003. The Put/Call Agreement also contains certain restriction on Genesis' right to take certain corporate actions including its ability to sell all or a portion of its pharmacy business. Therapy and Pharmacy Sale. Concurrently with the consummation of the Merger, the Company sold all of the assets used in its outpatient and inpatient rehabilitation therapy business to Genesis for approximately $24.0 million and entered into an agreement to sell all of the outstanding capital stock and limited partnership interests of certain subsidiaries of the Company that are engaged in the business of providing institutional pharmacy services to third parties to Genesis for approximately $50.0 million, subject to adjustment. -66- DESCRIPTION OF THE NOTES The Existing Notes will be issued under an Indenture to be dated as of August 1, 1997 (the "Indenture") between the Issuer and PNC Bank, National Association, trustee (the "Trustee"). A copy of the Indenture is available upon request from the Issuer. The following summary of certain provisions of the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Indenture, including the definitions of certain terms therein and those terms made a part thereof by the Trust Indenture Act of 1939, as amended. Whenever particular defined terms of the Indenture not otherwise defined herein are referred to, such defined terms are incorporated herein by reference. For definitions of certain capitalized terms used in the following summary, see "Certain Definitions." General The Notes will mature on August 1, 2007, will be initially limited to $250,000,000 aggregate principal amount, and will be unsecured senior subordinated obligations of the Issuer. The Notes bear interest at 9% per annum from August 11, 1997 or from the most recent interest payment date to which interest has been paid, payable semiannually on February 1 and August 1 of each year, commencing February 1, 1998, to the Person in whose name the Note (or any predecessor Note) is registered at the close of business on the January 15 or July 15 next preceding such interest payment date. If, by March 31, 1998, the Issuer has not consummated a registered exchange offer for the Notes or caused a shelf registration statement with respect to resales of the Notes to be declared effective, the interest rate per annum on the Notes will increase by .5% until the consummation of a registered exchange offer or the effectiveness of a shelf registration statement. See "-- Registration Rights." 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 Issuer in the City of New York maintained for such purposes; provided, however, that payment of interest may be made at the option of the Issuer 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. See "-- Book-Entry; Delivery and Form." 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. Subject to the covenants described below under "-- Certain Covenants" and applicable law, the Issuer may issue additional Notes under the Indenture. The Notes offered hereby and any additional Notes subsequently issued would be treated as a single class for all purposes under the Indenture. Optional Redemption The Notes will be redeemable, at the Issuer's option, in whole or in part, at any time or from time to time, on or after August 1, 2002 and prior to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by first class mail to each Holder's last address as it appears in the Security Register, at the following redemption prices (expressed in percentages of principal amount), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of Holders of record on the relevant regular record date that is on or prior to the redemption date to receive interest due on an interest payment date), if redeemed during the 12-month period commencing August 1, of the years set forth below: -67- Year Redemption Price - ------- -------------------- 2002................................................... 104.500% 2003................................................... 102.250 2004 and thereafter.................................... 100.000 In the case of any partial redemption, selection of the Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not listed on a national securities exchange, by lot or by such other method as the Trustee in its sole discretion shall deem to be fair and appropriate; provided that no Note of $1,000 in principal amount or less shall be redeemed in part. If any Note is to be redeemed in part only, the notice of redemption relating to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. Sinking Fund The Notes will not be subject to the benefit of any sinking fund. Registration Rights The Issuer has agreed with the Placement Agents, for the benefit of the Holders, that the Issuer will use its best efforts, at its cost, to file and cause to become effective a registration statement with respect to a registered offer (the "Exchange Offer") to exchange the Existing Notes for the Exchange Notes with terms identical to the Existing Notes (except that the Exchange Notes will not bear legends restricting the transfer thereof nor contain terms concerning interest rate increases). Upon such registration statement being declared effective, the Issuer shall offer the Exchange Notes in return for surrender of the Existing Notes. Such offer shall remain open for not less than 20 business days after the date notice of the Exchange Offer is mailed to Holders. For each Existing Note surrendered to the Issuer under the Exchange Offer, the Holder will receive an Exchange Note of equal principal amount. Interest on each Exchange Note shall accrue from the last Interest Payment Date on which interest was paid on the Existing Notes so surrendered or, if no interest has been paid on such Existing Notes, from the Closing Date. In the event that applicable interpretations of the staff of the Securities and Exchange Commission (the "Commission") do not permit the Issuer to effect the Exchange Offer, or under certain other circumstances, the Issuer shall, at its cost, use its best efforts to cause to become effective a shelf registration statement (the "Shelf Registration Statement") with respect to resales of the Existing Notes and to keep such Shelf Registration Statement effective until two years after the Closing Date, or such shorter period that will terminate when all Existing Notes covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement. The Issuer shall, in the event of such a shelf registration, provide to each Holder copies of the prospectus, notify each Holder when the Shelf Registration Statement for the Existing Notes has become effective and take certain other actions as are required to permit resales of the Existing Notes. A Holder that sells its 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 that are applicable to such a Holder (including certain indemnification obligations). In the event that the Exchange Offer is not consummated and a Shelf Registration Statement is not declared effective on or prior to March 31, 1998, the per annum interest rate borne by the Notes will be -68- increased by .5% until the Exchange Offer is consummated or the Shelf Registration Statement is declared effective. If the Issuer effects the Exchange Offer, the Issuer will be entitled to close the Exchange Offer 20 business days after the commencement thereof, provided that it has accepted all Existing Notes theretofore validly surrendered in accordance with the terms of the Exchange Offer. Existing Notes not tendered in the Exchange Offer shall bear interest at the rate set forth on the cover page of this Prospectus and be subject to all of the terms and conditions specified in the Indenture and to certain transfer restrictions. 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 Issuer ranking pari passu with all other existing and future senior subordinated indebtedness of the Issuer and senior to all existing and future Subordinated Indebtedness of the Issuer. After giving pro forma effect to the Transactions, as of September 30, 1997 the Company would have had approximately $703.1 million of Indebtedness outstanding, of which $454.5 million would have been Senior Indebtedness. See "Risk Factors -- Substantial Leverage" and "Capitalization." Notwithstanding the foregoing, payment from (x) the money or the proceeds of U.S. Government Obligations held in any defeasance trust described under "-- Defeasance" below and (y) the money or the proceeds of U.S. Government Securities held under the Escrow Agreement, will not be contractually subordinated in right of payment to any Senior Indebtedness or subject to the restrictions described herein. Upon the occurrence of any default in the payment of any Designated Senior Indebtedness no payment or distribution of any assets of the Issuer or any Subsidiary of any kind or character (excluding certain permitted equity or subordinated securities) shall be made by the Issuer or any Subsidiary or on behalf of, or out of the property of, the Issuer, 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. 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 Issuer 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 from the money or the proceeds of U.S. Government Obligations held in any defeasance trust described under "-- Defeasance" or distribution of any assets of the Issuer or any Subsidiary of any kind or character (excluding certain permitted equity or subordinated securities) may be made by the Issuer or any Subsidiary or on behalf of, or out of the property of, the Issuer or any Subsidiary or received by the Trustee or any Noteholder on account of any principal of, premium, if any, or interest on, the Notes (including payments under any guaranty thereof) or on account of the purchase, redemption or other acquisition of or in respect of the Notes (or any guaranty thereof) 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 Issuer from a representative or the holder of any Designated Senior Indebtedness and shall end on the earliest of (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 -69- 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 Issuer 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 Issuer 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"). Not more than one Payment Blockage Period may be commenced with respect to the Notes during any period of 360 consecutive days; provided that, subject to the limitations set forth in the next sentence, the commencement of a Payment Blockage Period by the representative of Designated Senior Indebtedness other than the Credit Facility shall not bar the commencement of another Payment Blockage Period by the representative for the Credit Facility within such period of 360 consecutive days. Notwithstanding anything in the Indenture to the contrary, there must be 180 days in any 360-day period in which no Payment Blockage Period is in effect. No event of default (other than an event of default pursuant to the financial maintenance covenants under the Credit Facility) that existed or was continuing (it being acknowledged that any subsequent action that would give rise to an event of default pursuant to any provision under which an event of default previously existed or was continuing shall constitute a new event of default for this purpose) on the date of commencement of any Payment Blockage Period with respect to the Designated Senior Indebtedness initiating such Payment Blockage Period shall be, or shall be made, the basis for the commencement of a second Payment Blockage Period by the representative for, or the holders of, such Designated Senior Indebtedness, whether or not within a period of 360 consecutive days, unless such event of default shall have been cured or waived for a period of not less than 90 consecutive days. If the Issuer 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 Issuer or its assets, or any liquidation, dissolution or other winding up of the Issuer, whether voluntary or involuntary, or any assignment for the benefit of creditors or other marshaling of assets or liabilities of the Issuer, 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. By reason of such subordination, in the event of liquidation or insolvency, creditors of the Issuer 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 Issuer may be unable to meet its obligations fully with respect to the Notes. "Senior Indebtedness" means the following obligations, whether outstanding on the Closing Date or thereafter Incurred: (a) all Indebtedness and other monetary obligations of the Issuer or any Subsidiary of the Issuer under or in respect of the Credit Facility (including obligations in respect of any lease financing facility of the Credit Facility) or any Interest Rate Contract or Currency Agreement related to Indebtedness -70- under the Credit Facility, whether for principal, interest (including interest accruing after the filing of a petition by or against the Issuer or any Subsidiary of the Issuer 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), fees, expenses, indemnification or otherwise, and (b) the principal of, premium, if any, and interest on all other Indebtedness of the Issuer (other than the Notes) 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 be pari passu with or subordinated in right of payment to the Notes. Notwithstanding the foregoing, "Senior Indebtedness" shall not include (i) Indebtedness that is by its terms subordinate in right of payment to any Indebtedness of the Issuer, (ii) Indebtedness which when incurred and without respect to any election under Section 1111(b) of the Bankruptcy Law is without recourse to the Issuer, (iii) any repurchase, redemption or other obligation in respect of Redeemable Capital Stock, (iv) Indebtedness for goods, materials or services purchased in the ordinary course of business or indebtedness consisting of trade payables or other current liabilities, (v) Indebtedness of or amounts owed by the Issuer to employees, officers or directors, (vi) any liability for federal, state, local or other taxes owed or owing by the Issuer, (vii) Indebtedness of the Issuer to a Subsidiary of the Issuer or any other Affiliate of the Issuer or any of such Affiliate's subsidiaries, (viii) that portion of any Indebtedness which at the time of issuance is issued in violation of the Indenture and (ix) amounts owing under leases (other than Capital Lease Obligations). "Designated Senior Indebtedness" is defined as (i) all Senior Indebtedness under, or in respect of, the Credit Facility and any Interest Rate Contract or Currency Agreement related to Indebtedness under 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." Certain Covenants The Indenture will contain, among others, the following covenants: Limitation on Indebtedness. The Issuer will not, and will not permit any of its Restricted Subsidiaries to, Incur 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 Issuer'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, and any Indebtedness Incurred or repaid after the first day of such four-quarter period and on or prior to the date of such event (other than Indebtedness Incurred or repaid under a revolving credit or similar arrangement to the extent of the commitment thereunder (or under any predecessor revolving credit or similar arrangement) in effect on the last day of such four quarter period unless any portion of such Indebtedness is projected, in the reasonable judgment of the senior management of the Issuer, to remain outstanding for a period in excess of 12 months from the date of the Incurrence thereof), had been Incurred or repaid on the first day of such four-quarter period and (ii) any acquisition or disposition by the Issuer and its Restricted Subsidiaries out of the ordinary course of business of any assets constituting a company, division, line of business or business facility, in each case after the first day of such four-quarter period, and on or prior to the date of such event, had been consummated on the first day of such four-quarter period (including giving pro forma effect to the application of the proceeds of any such disposition), would have been at least equal to 2:00:1.00. Limitation on Restricted Payments. The Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly: -71- (i) declare or pay any dividend on, or make any distribution to holders of, its Capital Stock (other than (x) dividends or distributions payable solely in shares of its Qualified Capital Stock or in options, warrants or other rights to acquire such Qualified Capital Stock and (y) pro rata dividends or distributions on Common Stock of Restricted Subsidiaries held by minority stockholders); (ii) purchase, redeem, defease or otherwise acquire or retire for value any Capital Stock (or any option, warrant or other right to acquire such Capital Stock) of (A) the Issuer or an Unrestricted Subsidiary held by any Person or (B) a Restricted Subsidiary held by an Affiliate of the Issuer (other than any Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of such holder) of 5% or more of the Capital Stock of the Issuer; (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 a Permitted Investment) (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 Issuer or any Restricted Subsidiary; (y) the Issuer could Incur $1.00 of additional Indebtedness under the "Limitation on Indebtedness" covenant (other than Permitted Indebtedness); and (z) the aggregate amount of all Restricted Payments, including any Restricted Payments made pursuant to clauses (i) and (iv) of the succeeding paragraph, declared or made after the Closing Date shall not exceed the sum of: (A) 50% of the Consolidated Net Income of the Issuer accrued on a cumulative basis during the period beginning on the first day of the fiscal quarter beginning immediately following the Closing Date and ending on the last day of the fiscal quarter ending prior to the date of such proposed Restricted Payment for which reports have been filed with the Commission or provided to the Trustee pursuant to the "Reporting Requirements" covenant (or, if such aggregate cumulative Consolidated Net Income shall be a loss, minus 100% of the amount of such loss); (B) the aggregate Net Cash Proceeds received after the Closing Date by the Issuer as capital contributions to the Issuer; (C) the aggregate Net Cash Proceeds received after the Closing Date by the Issuer from the issuance and sale (other than to any of its Subsidiaries) of shares of Qualified Capital Stock of the Issuer or any options or warrants to purchase such shares (other than issuances to the extent used to make a Restricted Payment under clause (ii) of the subsequent paragraph) of Qualified Capital Stock of the Issuer; (D) the aggregate Net Cash Proceeds received after the Closing Date by the Issuer for debt securities that have been converted into or exchanged for Qualified Capital Stock of the Issuer to the extent such debt securities were originally sold for cash plus the aggregate cash received by the Issuer at the time of such conversion or exchange; and -72- (E) $10 million. None of the foregoing provisions shall be deemed to prohibit the following Restricted Payments so long as in the case of clauses (ii), (iii) and (iv) at the time of and after giving effect to the proposed Restricted Payment no Default or Event of Default shall have occurred and be 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; (ii) the redemption, repurchase or other acquisition or retirement of Capital Stock of the Issuer 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 Issuer; (iii) the redemption, repurchase, or other acquisition or retirement of Subordinated Indebtedness of the Issuer, including premium, if any, and accrued and unpaid interest, made by exchange for, or out of the proceeds of the substantially concurrent sale of, Indebtedness of the Issuer permitted to be Incurred under clause (k) of the definition of "Permitted Indebtedness"; and (iv) Investments in an aggregate amount not to exceed $25 million in any Person which owns, operates or services Healthcare Related Businesses. Restrictions on Preferred Stock of Restricted Subsidiaries. The Issuer will not sell, and will not permit any Restricted Subsidiary, directly or indirectly, to issue or sell, any Preferred Stock of a Restricted Subsidiary other than to the Issuer or a Wholly Owned Restricted Subsidiary, or permit any Person (other than the Issuer or a Wholly Owned Restricted Subsidiary) to own or hold any Preferred Stock of any Restricted Subsidiary, unless such Restricted Subsidiary would be entitled to Incur Indebtedness pursuant to the "Limitation on Indebtedness" covenant in an aggregate principal amount equal to the aggregate liquidation value of the Preferred Stock to be issued. Limitation on Transactions with Affiliates. The Issuer will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, enter into, renew or extend 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 Issuer (other than a Wholly Owned Restricted Subsidiary) unless (i) such transaction or series of related transactions is on terms that are no less favorable to the Issuer or such Restricted 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 $10 million in the aggregate, the Issuer 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 Issuer or for which the Issuer or a Restricted Subsidiary has received a written opinion of a nationally recognized investment banking firm stating that the transaction is fair to the Issuer or such Restricted Subsidiary from a financial point of view (a copy of which opinion shall be attached to such Officers' Certificate); provided, however, that the foregoing restriction shall not apply to (a) the payment of reasonable and customary regular fees to directors of the Issuer or any of its Restricted Subsidiaries who are not employees of the Issuer or any Affiliate, (b) the payment of monthly fees in accordance with the "Limitation on Management Fees" covenant described below and the reimbursement of expenses pursuant to the terms of management agreements with Genesis or any of its affiliates, (c) any payments or other transactions pursuant to any tax-sharing agreement between the Issuer and any other -73- Person with which the Issuer files a consolidated tax return or with which the Issuer is part of a consolidated group for tax purposes, (d) the Therapy Sale, provided the Issuer or its Restricted Subsidiaries receives at least $20 million from the Therapy Sale, (e) the Pharmacy Sale, provided the Issuer or its Restricted Subsidiaries receives at least $50 million from the Pharmacy Sale, (f) transactions in the ordinary course of business with Genesis or any of its Affiliates, related to the Issuer's healthcare businesses or facilities; provided that the aggregate amount of any such transactions in any twelve month period does not exceed $10 million, (g) any Restricted Payments not prohibited by the "Limitation on Restricted Payments" covenant or (h) the payment of fees and expenses in connection with the Transactions to Genesis, Cypress and TPG. Limitation on Asset Sales. The Issuer will not, and will not permit any Restricted Subsidiary to, consummate any Asset Sale, unless (i) the consideration received by the Issuer or such Restricted Subsidiary is at least equal to the fair market value of the assets sold or disposed of and (ii) at least 75% of the consideration received consists of cash or Temporary Cash Investments. In the event and to the extent that the Net Cash Proceeds received by the Issuer or any of its Restricted Subsidiaries from one or more Asset Sales occurring on or after the Closing Date in any period of 12 consecutive months exceed $10 million, then the Issuer shall or shall cause the relevant Restricted Subsidiary to (i) within 12 months after the date Net Cash Proceeds so received exceed $10 million (A) apply an amount equal to such excess Net Cash Proceeds to permanently repay Senior Indebtedness of the Issuer or any Subsidiary Guarantor or Indebtedness of any other Restricted Subsidiary, in each case owing to a Person other than the Issuer or any of its Restricted Subsidiaries or (B) invest an equal amount, or the amount not so applied pursuant to clause (A) (or enter into a definitive agreement committing to so invest within 12 months after the date of such agreement; provided that if any such agreement is terminated, the Issuer may invest such Net Cash Proceeds prior to the end of the 12-month period referred to in clause (i) or six months after the termination of such agreement, whichever is later), in property or assets (other than current assets) of a nature or type or that are used in a business (or in a company having property and assets of a nature or type, or engaged in a business) similar or related to the nature or type of the property and assets of, or the business of, the Issuer and its Restricted Subsidiaries existing on the date of such investment and (ii) apply (no later than the end of the 12-month period referred to in clause (i)) such excess Net Cash Proceeds (to the extent not applied pursuant to clause (i)) as provided in the following paragraph of this "Limitation on Asset Sales" covenant. The amount of such excess Net Cash Proceeds required to be applied (or to be committed to be applied) during such 12-month period as set forth in clause (i) of the preceding sentence and not applied as so required by the end of such period shall constitute "Excess Proceeds." If, as of the first day of any calendar month, the aggregate amount of Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this "Limitation on Asset Sales" covenant totals at least $10 million, the Issuer must commence, not later than the fifteenth Business Day of such month, and consummate an Offer to Purchase from the Holders on a pro rata basis an aggregate principal amount of Notes equal to the Excess Proceeds on such date, at a purchase price equal to 100% of the principal amount of the Notes, plus, in each case, accrued interest (if any) to the Payment Date. Repurchase of Notes upon a Change in Control. The Issuer must commence, within 30 days of the occurrence of a Change in Control, and consummate an Offer to Purchase for all Notes then outstanding, at a purchase price equal to 101% of the principal amount thereof, plus accrued interest (if any) to the Payment Date. There can be no assurance that the Issuer will have sufficient funds available at the time of any Change in Control to make any debt payment (including repurchases of Notes) required by the foregoing covenant (as well as may be contained in other securities of the Issuer which might be outstanding at the time). The above covenant requiring the Issuer to repurchase the Notes will, unless consents are obtained, -74- require the Issuer to repay all indebtedness then outstanding which by its terms would prohibit such Note repurchase, either prior to or concurrently with such Note repurchase. Limitation on Liens. The Issuer will not, and will not permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Liens of any kind upon any of its respective properties now owned or acquired after the Closing Date or any income or profits therefrom securing (i) any Indebtedness of the Issuer which is expressly subordinate in right of payment to any other Indebtedness of the Issuer, unless the Notes are equally and ratably secured; provided that, if such Indebtedness is subordinate in right of payment to the Notes, the Lien securing such Indebtedness shall be subordinate to the Lien securing the Notes with the same relative priority as such subordinated 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 Issuer pursuant to a transaction permitted under "-- Merger, Sales 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 and not Incurred in connection with or in contemplation of such transaction or Incurrence, so long as such Liens do not extend to or cover any property or assets of the Issuer or any Restricted Subsidiary other than property or assets acquired in such transaction, or (ii) any assumption, guarantee or other liability of any Restricted Subsidiary in respect of any Indebtedness of the Issuer which is expressly subordinate in right of payment to any other Indebtedness of the Issuer, unless the substantially similar assumption, guarantee or other liability of such Restricted Subsidiary in respect of the Notes is equally and ratably secured; provided that, if such subordinated Indebtedness is subordinate in right of payment to the Notes, the Lien securing the assumption, guarantee or other liability of such Restricted Subsidiary in respect of such Indebtedness shall be subordinate to the Lien securing the assumption, guarantee or other liability of such Restricted Subsidiary with respect to the Notes with the same relative priority as such subordinated 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 Restricted Subsidiary became a Restricted 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 Restricted Subsidiary), so long as such Liens do not extend to or cover any property or assets of the Issuer or any other Restricted Subsidiary. Limitation on Senior Subordinated Indebtedness. The Issuer will not Incur 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; provided that the foregoing limitation shall not apply to distinctions between categories of Senior Indebtedness of the Issuer that exist by reason of any Liens or Guarantees arising or created in respect of some but not all of such Senior Indebtedness. Limitation on Issuance of Guarantees by Restricted Subsidiaries. (a) The Issuer will not permit any Restricted Subsidiary, directly or indirectly, to assume, guarantee or in any other manner become liable with respect to any Indebtedness of the Issuer which is expressly by its terms pari passu with or subordinate in right of payment to the Notes ("Guaranteed Indebtedness") unless (i) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to the Indenture providing for a guarantee of payment of the Notes by such Restricted Subsidiary 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 Issuer or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Subsidiary Guarantee. If the Guaranteed Indebtedness is (A) pari passu with the Notes, then the Guarantee of such Guaranteed Indebtedness shall be pari passu with, or subordinate in right of payment to, the Subsidiary Guarantee or (B) subordinated to the Notes, then the -75- Guarantee of such Guaranteed Indebtedness shall be subordinated in right of payment to the Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is subordinated in right of payment to the Notes. (b) Each guarantee created pursuant to the provisions described in the foregoing paragraph is referred to as a "Subsidiary Guarantee" and the issuer of each such Guarantee is referred to as a "Subsidiary Guarantor." Notwithstanding the foregoing, any Subsidiary Guarantee may provide by its terms that it (together with any Liens arising from such Subsidiary Guarantee) shall be automatically and unconditionally released and discharged upon (i) any sale, exchange or transfer, to any Person not an Affiliate of the Issuer, of all of the Issuer's Capital Stock in, or all or substantially all the assets of, such Subsidiary Guarantor, 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 Subsidiary Guarantee, except a release or discharge by or as a result of payment under such Subsidiary Guarantee. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. The Issuer will not, and will not permit any Restricted Subsidiary to, create or otherwise cause or suffer to exist or become effective any restriction of any kind, on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distribution on its Capital Stock to the Issuer or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to the Issuer or any other Restricted Subsidiary, (iii) make any Investment in the Issuer or any other Restricted Subsidiary or (iv) transfer any of its property or assets to the Issuer or any other Restricted 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 Issuer, or any Restricted Subsidiary; (c) any restriction pursuant to an agreement in effect at or entered into on the Closing Date; (d) any restriction, with respect to a Restricted Subsidiary that is not a Subsidiary on the Closing Date, in existence at the time such Person becomes a Restricted Subsidiary and not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary; (e) any restriction existing under any agreement that extends, renews, refinances or replaces the agreements containing the restrictions in the foregoing clauses (c) and (d), 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 so extended, renewed, refinanced or replaced (in the opinion of the Board of Directors of the Issuer whose determination shall be conclusive); (f) arising or agreed to in the ordinary course of business, not relating to any Indebtedness, and that do not, individually or in the aggregate, detract from the value of property or assets of the Issuer or any Restricted Subsidiary in any manner material to the Issuer or any Restricted Subsidiary; (g) with respect to a Restricted Subsidiary and imposed pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock of, or property and assets of, such Restricted Subsidiary or (h) contained in the terms of any Indebtedness or any agreement pursuant to which such Indebtedness was issued if (A) the encumbrance or restriction applies only in the event of a payment default or a default with respect to a financial covenant contained in such Indebtedness or agreement, (B) the encumbrance or restriction is not materially more disadvantageous to the Holders of the Notes than is customary in comparable financings (as determined by the Issuer) and (C) the Issuer determines that any such encumbrance or restriction will not materially affect the Issuer's ability to make principal or interest payments on the Notes. Limitation on Management Fees. The Issuer will not, and will not permit any of its Restricted Subsidiaries to pay any management fees in any month to the extent such fees would exceed the greater of (i) $1,991,666 and (ii) 4% of the Issuer's consolidated net revenues for such month; provided that the Issuer may pay management fees in excess of such amount (including accrued fees) to the extent that (A) both before and after giving effect to the proposed payment (x) no Default or Event of Default shall have occurred and be continuing and (y) the Issuer's Fixed Charge Coverage Ratio for the four full fiscal quarters -76- immediately preceding such event, taken as one period and calculated on the assumption that (I) any Indebtedness Incurred or repaid after the first day of such four-quarter period and on or prior to the date of such payment (other than Indebtedness Incurred or repaid under a revolving credit or similar arrangement to the extent of the commitment thereunder (or under any predecessor revolving credit or similar arrangement) in effect on the last day of such four quarter period unless any portion of such Indebtedness is projected, in the reasonable judgment of the senior management of the Issuer, to remain outstanding for a period in excess of 12 months from the date of the Incurrence thereof), had been Incurred or repaid on the first day of such four-quarter period, (II) any acquisition or disposition by the Issuer and its Restricted Subsidiaries out of the ordinary course of business of any assets constituting a company, division, line of business or business facility, in each case after the first day of such four-quarter period, and on or prior to the date of such payment, had been consummated on the first day of such four-quarter period (including giving pro forma effect to the application of the proceeds of any such disposition) and (III) the proposed management fees were paid during such period, would have been at least equal to 2:00:1.00; and (B) the aggregate amount of management fees paid with respect to any month do not exceed 6% of the Issuer's consolidated net revenues for such month. To the extent the Issuer is prohibited from paying any management fees as a result of clause (y) of the proviso to the preceding sentence, the Issuer may accrue such fees until they may be paid in accordance with this "Limitation on Management Fees" covenant provided the payment of such fees is subordinated in right of payment to the prior payment in full in cash or Cash Equivalents of all of the Issuer's obligations under the Notes and the Indenture. Reporting Requirements. At all times from and after the earlier of (i) the date of the commencement of an Exchange Offer or the effectiveness of the Shelf Registration Statement (the "Registration") and (ii) the date that is six months after the Closing Date, in either case, whether or not the Issuer is then required to file reports with the Commission, the Issuer shall file with the Commission all such reports and other information as it would be required to file with the Commission by Section 13(a) or 15(d) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") if it were subject thereto. The Issuer shall supply the Trustee and each Holder or shall supply to the Trustee for forwarding to each such Holder, without cost to such Holder, copies of such reports and other information. In addition, at all times prior to the earlier of the date of the Registration and the date that is six months after the Closing Date, the Issuer shall, at its cost, deliver to each Holder of the Notes quarterly and annual reports substantially equivalent to those which would be required by the Exchange Act. In addition, at all times prior to the Registration, upon the request of any Holder or any prospective purchaser of the Notes designated by a Holder, the Issuer shall supply to such Holder or such prospective purchaser the information required under Rule 144A under the Securities Act. Merger, Sale of Assets, etc. The Issuer 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 Restricted 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 Issuer and its Restricted 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 Issuer shall be the continuing corporation, or (B) the Person (if other than the Issuer) formed by such consolidation or into which the Issuer is merged or the Person which acquires by conveyance, transfer, lease or disposition the properties and assets of the Issuer, 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 -77- satisfactory to the Trustee, all the obligations of the Issuer 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 Issuer or a Restricted Subsidiary which becomes the obligation of the Issuer or any of its Restricted 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 Issuer (or the Surviving Entity if the Issuer is not the continuing obligor under the Indenture) is at least equal to the Consolidated Net Worth of the Issuer 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 Issuer or a Restricted Subsidiary which becomes the obligation of the Issuer or any of its Restricted Subsidiaries in connection with or as a result of such transaction as having been incurred at the time of such transaction), the Issuer (or the Surviving Entity if the Issuer is not the continuing obligor under the Indenture) could incur $1.00 of additional Indebtedness under the "Limitation on Indebtedness" covenant (other than Permitted Indebtedness); provided that this clause (iv) shall not apply to a consolidation or merger with or into a Wholly Owned Restricted Subsidiary with a positive net worth; provided that, in connection with any such merger or consolidation, no consideration (other than Qualified Capital Stock in the Surviving Entity or the Issuer) shall be issued or distributed to the stockholders of the Issuer; and (v) the Issuer 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. 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 Issuer in accordance with the immediately preceding paragraph, the successor Person formed by such consolidation or into which the Issuer 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 Issuer under the Indenture with the same effect as if such successor had been named as the Issuer herein. When a successor assumes all the obligations of its predecessor under the Indenture and the Notes, 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. Events of Default The following events will be defined as "Events of Default" in the Indenture: (a) default in the payment of principal of (or premium, if any, on) any Note when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise, whether or not such payment is prohibited by the subordination provisions described under "Subordination"; (b) default in the payment of interest on any Note when the same becomes due and payable, and such default continues for a period of 30 days, whether or not such payment is prohibited by the subordination provisions described under "--Subordination"; (c) default in the performance or breach of the "Merger, Sale of Assets, etc." provisions contained in the Indenture or the failure to make or consummate an Offer to Purchase in accordance with the "Limitation on Asset Sales" or "Repurchase of Notes upon a Change in Control" covenant; (d) the Issuer defaults in the performance of or breaches any other covenant or agreement of the Issuer in the Indenture or under the Notes (other than a default specified in clause (a), (b) or (c) above) and such default or breach continues for a period of 30 consecutive days after written notice by the Trustee or the Holders of 25% or more in aggregate principal amount of the Notes; (e) there occurs with respect to any issue or issues of Indebtedness of the Issuer or any Significant Subsidiary having an outstanding principal amount of $10 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, (I) an -78- event of default that has caused the holder thereof to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration and/or (II) the failure to make a principal payment at the final (but not any interim) fixed maturity and such defaulted payment shall not have been made, waived or extended within 30 days of such payment default; (f) any final judgment or order (not covered by insurance) for the payment of money in excess of $10 million in the aggregate for all such final judgments or orders against all such Persons (treating any deductibles, self-insurance or retention as not so covered) shall be rendered against the Issuer or any Significant Subsidiary and shall not be paid or discharged, and there shall be any period of 30 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid or discharged against all such Persons to exceed $10 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of the Issuer or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Issuer or any Significant Subsidiary or for all or substantially all of the property and assets of the Issuer or any Significant Subsidiary or (C) the winding up or liquidation of the affairs of the Issuer or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 30 consecutive days; or (h) the Issuer or any Significant Subsidiary (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Issuer or any Significant Subsidiary or for all or substantially all of the property and assets of the Issuer or any Significant Subsidiary or (C) effects any general assignment for the benefit of creditors. If an Event of Default (other than an Event of Default specified in clause (g) or (h) above that occurs with respect to the Issuer) occurs and is continuing under the Indenture, the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes, then outstanding, by written notice to the Issuer (and to the Trustee if such notice is given by the Holders), may, and the Trustee at the request of such Holders shall, declare the principal of, premium, if any, and accrued interest on the Notes to be immediately due and payable. Upon a declaration of acceleration, such principal of, premium, if any, and accrued interest shall be immediately due and payable. In the event of a declaration of acceleration because an Event of Default set forth in clause (e) above has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if the event of default triggering such Event of Default pursuant to clause (e) shall be remedied or cured by the Issuer or the relevant Significant Subsidiary or waived by the holders of the relevant Indebtedness within 60 days after the declaration of acceleration with respect thereto. If an Event of Default specified in clause (g) or (h) above occurs with respect to the Issuer, the principal of, premium, if any, and accrued interest on the Notes then outstanding 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. The Holders of at least a majority in principal amount of the outstanding Notes by written notice to the Issuer and to the Trustee, may waive all past defaults and rescind and annul a declaration of acceleration and its consequences if (i) all existing Events of Default, other than the nonpayment of the principal of, premium, if any, and interest on the Notes that have become due solely by such declaration of acceleration, have been cured or waived and (ii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. For information as to the waiver of defaults, see "-- Modification and Waiver." The Holders of at least a majority in aggregate principal amount of the outstanding Notes may 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. However, the Trustee may refuse to follow any -79- direction that conflicts with law or the Indenture, that may involve the Trustee in personal liability, or that the Trustee determines in good faith may be unduly prejudicial to the rights of Holders of Notes not joining in the giving of such direction and may take any other action it deems proper that is not inconsistent with any such direction received from Holders of Notes. A Holder may not pursue any remedy with respect to the Indenture or the Notes unless: (i) the Holder gives the Trustee written notice of a continuing Event of Default; (ii) the Holders of at least 25% in aggregate principal amount of outstanding Notes make a written request to the Trustee to pursue the remedy; (iii) such Holder or Holders offer the Trustee indemnity satisfactory to the Trustee against any costs, liability or expense; (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (v) during such 60-day period, the Holders of a majority in aggregate principal amount of the outstanding Notes do not give the Trustee a direction that is inconsistent with the request. However, such limitations do not apply to the right of any Holder of a Note to receive payment of the principal of, premium, if any, or interest on such Note or to bring suit for the enforcement of any such payment, on or after the due date expressed in the Notes, which right shall not be impaired or affected without the consent of the Holder. The Indenture will require certain officers of the Issuer to certify, on or before a date not more than 90 days after the end of each fiscal year, that a review has been conducted of the activities of the Issuer and its Restricted Subsidiaries and the Issuer's and its Restricted Subsidiaries' performance under the Indenture and that the Issuer has fulfilled all obligations thereunder, or, if there has been a default in the fulfillment of any such obligation, specifying each such default and the nature and status thereof. The Issuer will also be obligated to notify the Trustee of any default or defaults in the performance of any covenants or agreements under the Indenture. Defeasance Defeasance and Discharge. The Indenture will provide that the Issuer will be deemed to have paid and will be discharged from any and all obligations in respect of the Notes on the 123rd day after the deposit referred to below, and the provisions of the Indenture will no longer be in effect with respect to the Notes (except for, among other matters, certain obligations to register the transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes, to maintain paying agencies and to hold monies for payment in trust) if, among other things, (A) the Issuer has deposited with the Trustee, in trust, money and/or U.S. Government Obligations that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued interest on the Notes on the Stated Maturity of such payments in accordance with the terms of the Indenture and the Notes, (B) the Issuer has delivered to the Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not recognize income, gain or loss for federal income tax purposes as a result of the Issuer's exercise of its option under this "Defeasance" provision 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, which Opinion of Counsel must be based upon (and accompanied by a copy of) a ruling of the Internal Revenue Service to the same effect unless there has been a change in applicable federal income tax law after the Closing Date such that a ruling is no longer required or (y) a ruling directed to the Trustee received from the Internal Revenue Service to the same effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel to the effect that the creation of the defeasance trust does not violate the Investment Company Act of 1940 and after the passage of 123 days following the deposit, the trust fund will not be subject to the effect of Section 547 of the Bankruptcy Law or Section 15 of the New York Debtor and Creditor Law, (C) immediately after giving effect to such deposit on a pro forma basis, no Event of Default, or event that after the giving of notice or lapse of time or both would become an Event of Default, shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after the date of such deposit, and such deposit shall not result in -80- a breach or violation of, or constitute a default under, any other agreement or instrument to which the Issuer or any of its Subsidiaries is a party or by which the Issuer or any of its Subsidiaries is bound, (D) the Issuer is not prohibited from making payments in respect of the Notes by the provisions described under "-- Subordination" above and (E) if at such time the Notes are listed on a national securities exchange, the Issuer has delivered to the Trustee an Opinion of Counsel to the effect that the Notes will not be delisted as a result of such deposit, defeasance and discharge. Defeasance of Certain Covenants and Certain Events of Default. The Indenture further will provide that the provisions of the Indenture will no longer be in effect with respect to clauses (iii) and (iv) under "-- Merger, Sale of Assets, etc." and all the covenants described herein under "--Covenants," clause (c) under "-- Events of Default" with respect to such clauses (iii) and (iv) under "-- Merger, Sale of Assets, etc.," clause (d) with respect to such other covenants and clauses (e) and (f) under "-- Events of Default" shall be deemed not to be Events of Default, and the provisions described herein under "Subordination" with respect to the assets held by the Trustee referred to below shall not apply, upon, among other things, the deposit with the Trustee, in trust, of money and/or U.S. Government Obligations that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued interest on the Notes on the Stated Maturity of such payments in accordance with the terms of the Indenture and the Notes, the satisfaction of the provisions described in clauses (B)(ii), (C), (D) and (E) of the preceding paragraph and the delivery by the Issuer to the Trustee of an Opinion of Counsel to the effect that, among other things, the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance of certain covenants and Events of Default 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 and defeasance had not occurred. Defeasance and Certain Other Events of Default. In the event the Issuer exercises its option to omit compliance with certain covenants and provisions of the Indenture with respect to the Notes as described in the immediately preceding paragraph and the Notes are declared due and payable because of the occurrence of an Event of Default that remains applicable, the amount of money and/or U.S. Government Obligations on deposit with the Trustee will be sufficient to pay amounts due on the Notes at the time of their Stated Maturity but may not be sufficient to pay amounts due on the Notes at the time of the acceleration resulting from such Event of Default. However, the Issuer will remain liable for such payments. Modification and Waiver Modifications and amendments of the Indenture may be made by the Issuer 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 each Holder affected thereby, (i) change the Stated Maturity of the principal of, or any installment of interest on, any Note, (ii) reduce the principal amount of, or premium, if any, or interest on, any Note, (iii) change the place or currency of payment of principal of, or premium, if any, or interest on, any Note, (iv) impair the right to institute suit for the enforcement of any payment on or after the Stated Maturity (or, in the case of a redemption, on or after the Redemption Date) of any Note, (v) reduce the above-stated percentage of outstanding Notes the consent of whose Holders is necessary to modify or amend the Indenture, (vi) waive a default in the payment of principal of, premium, if any, or interest on the Notes, (vii) modify the subordination provisions or the Escrow Agreement in a manner adverse to the Holders or (viii) reduce the percentage or aggregate principal amount of outstanding Notes the consent of whose Holders is necessary for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults. Any -81- amendment to the subordination provisions under the Indenture that is adverse to the holders of Senior Indebtedness will require the consent of such holders. Certain Definitions "Acquired Indebtedness" means Indebtedness of a Person (i) existing at the time such Person becomes a Restricted Subsidiary or (ii) existing at the time and assumed in connection with the acquisition of assets by a Restricted Subsidiary from such Person, in each case, other than Indebtedness incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary or such acquisition; provided that Indebtedness of a Person which is redeemed, defeased, retired or otherwise repaid at the time of or immediately upon consummation of the transactions by which such Person becomes a Restricted Subsidiary or such asset acquisition shall not be Acquired Indebtedness. 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 Restricted 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 Restricted Subsidiary; (ii) all or substantially all of the properties and assets of any division or line of business of the Issuer or its Restricted Subsidiaries; or (iii) any other properties or assets of the Issuer or any Restricted Subsidiary, other than in the ordinary course of business. For the purposes of this definition, the term "Asset Sale" shall not include (a) any transfer of properties and assets that is governed by the provisions described under "-- Merger, Sale of Assets, etc.," (b) any transfer of properties or assets of the Issuer to a Restricted Subsidiary, or of a Restricted Subsidiary to the Issuer or another Restricted Subsidiary, (c) any transfer of inventory, receivables and other current assets, (d) any transfer of assets for consideration at least equal to the Fair Market Value of the assets transferred, to the extent that the consideration received would satisfy clause (B) of the "Limitation on Asset Sales" covenant, (e) the Therapy Sale, (f) the Pharmacy Sale, or (g) any transfer of property or assets with a Fair Market Value not in excess of $1 million in any transaction or series of related transactions. "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 -82- 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" 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" means the discounted present value of the rental obligations under any lease of real or personal property which, in accordance with GAAP, is required to be 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, whether voting or non-voting) 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 Ratings Services 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 Issuer) 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 Ratings Services or any successor rating agency. "Change in Control" means any time that (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than an Existing Stockholder or Genesis ElderCare Corp., in a single transaction or through a series of related transactions, is or becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 35% of the total voting power of the Voting Stock of the Issuer on a fully diluted basis and such ownership is greater than the amount of voting power of the Voting Stock of the Issuer, on a fully diluted basis, held by Genesis and its Affiliates on such date; (ii) the Issuer 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 Issuer, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Issuer is changed into or exchanged for cash, securities or other property, other than any such transaction where (A) the outstanding Voting Stock of the Issuer 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 Issuer as a Restricted Payment under the "Limitation on Restricted Payments" covenant (and such amount shall be treated as a Restricted Payment), and (B) the holders of the Voting Stock of the Issuer immediately prior to such -83- 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 Issuer (together with any new directors whose election by such Board of Directors or whose nomination for election by the stockholders of the Issuer was (a) approved by a vote of at least 66% 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 or (b) approved by Genesis in connection with its acquisition of the Common Stock of the Issuer held by Cypress or TPG) cease for any reason to constitute a majority of the Board of Directors of the Issuer then in office; or (iv) the Issuer is liquidated or dissolved or adopts a plan of liquidation. "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. "Consolidated EBITDA" of any Person means, with respect to any period, the Consolidated Net Income of such Person for such period, plus, to the extent such amount was deducted in calculating such Consolidated Net Income (i) Consolidated Income Tax Expense, (ii) depreciation expense, (iii) amortization expense, (iv) Consolidated Interest Expense, (v) all other non-cash items reducing Consolidated Net Income (other than items that will require cash payments and for which an accrual or reserve is, or is required by GAAP to be, made), less all non-cash items increasing Consolidated Net Income and (vi) all management fees, and minus all management fees paid during such period (whether or not such fees were deducted in calculating Consolidated Net Income for such period), all as determined on a consolidated basis in accordance with GAAP; provided that, if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA of the Issuer shall be reduced (to the extent not otherwise reduced in accordance with GAAP) by an amount equal to (A) the amount of the Consolidated Net Income attributable to such Restricted Subsidiary multiplied by (B) the percentage ownership interest in the income of such Restricted Subsidiary not owned on the last day of such period by the Issuer or any of its Restricted Subsidiaries. "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 (other than income taxes (either positive or negative) attributable to extraordinary and non-recurring gains or losses or sales of assets) as determined in accordance with GAAP. "Consolidated Interest Expense" 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, 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 calculated in accordance with the effective interest method of accounting 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 Issuer or any Restricted Subsidiary held by Persons other than the Issuer or a Wholly Owned Restricted 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 Issuer and its Consolidated Subsidiaries (expressed as a decimal). -84- "Consolidated Net Income" of any Person means, for any period, as applied to any Person, the net income (or loss) of such Person 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 (without duplication) (i) all extraordinary gains or losses (less all fees and expenses relating thereto), (ii) the portion of net income of such Person and its Consolidated Subsidiaries allocable to investments in Persons other than Consolidated Subsidiaries to the extent that cash dividends or distributions have not actually been received by such Person or one of its Consolidated Subsidiaries, (iii) net income (or loss) of any Person combined with such Person or any of its Consolidated Subsidiaries on 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 Consolidated Subsidiary to the extent that the declaration or payment of dividends or similar distributions by that Consolidated 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 Consolidated Subsidiary. "Consolidated Net Worth" of any Person means the Consolidated stockholders' equity (excluding Redeemable Capital Stock or any equity security convertible into or exchangeable for Indebtedness, the cost of treasury stock and the principal amount of any promissory notes receivable for the sale of 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 (which shall be as of a date not more than 90 days prior to the date of such computation 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). "Consolidation" means, (i) with respect to the Issuer, the consolidation of the accounts of the Issuer and each of its Restricted Subsidiaries and (ii) with respect to any other Person, the consolidation of the accounts of such Person and each of its Subsidiaries, in each case if and to the extent the accounts of such Person and such 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) any and all credit agreements (whether of the Issuer or any Subsidiary) contemplated by the Amended and Restated Commitment Letter dated June 14, 1997 between the Issuer and Mellon Bank, N.A., Citicorp Securities, Inc., Citibank, N.A., First Union Capital Markets Corp., First Union -85- National Bank and NationsBank, N.A. as the same may be amended, restated, renewed, extended, restructured, supplemented or otherwise modified from time to time; (ii) any agreements, instruments and documents executed or delivered pursuant to or in connection with such 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 clause (i), (ii) or (iii) hereof, whether or not with the same agent, trustee, representative, lenders or holders, regardless of whether the Credit Facility or any portion thereof was outstanding or in effect at the time of such restatement, renewal, extension, restructuring, supplement or modification. 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, provided that the addition of such borrower or guarantor would not be prohibited by the "Limitation on Indebtedness," "Limitation on Liens" and "Limitation on Issuance of Guarantees by Restricted Subsidiaries" covenants, (c) increasing the amount of Indebtedness Incurred thereunder or available to be borrowed thereunder, provided such increase is permitted to be Incurred under the "Limitation on Indebtedness" covenant, or (d) otherwise altering the terms and conditions thereof in a manner not prohibited by the "Limitation on Indebtedness," "Limitation on Liens," "Limitation on Issuance of Guarantees by Restricted Subsidiaries" and "Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries" covenants. Notwithstanding the foregoing, with respect to any agreement providing for the refinancing, refunding or replacement of Indebtedness under the Credit Facility, such agreement shall be the Credit Facility under the Indenture only if a notice to that effect is delivered by the Issuer to the Trustee and there shall be at any time only one instrument that is (together with the related agreements, instruments and documents) the Credit Facility under the Indenture. "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Escrow Agreement" means the Escrow and Security Agreement made and entered into as of the Closing Date by and among the Issuer, Genesis and the Placement Agents in favor of the Trustee for the Holders of the Notes. "Existing Stockholders" means Genesis, The Cypress Group L.L.C. and TPG Partners II, L.P. and their Affiliates. "Expiration Date" means October 31, 1997, subject to an extension of up to one month at the Issuer's option. "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 under no compulsion to buy as determined in good faith by the Board of Directors, whose determination shall be conclusive if evidenced by a Board Resolution. "Fixed Charge Coverage Ratio" of any Person means, for any period, the ratio of (i) the sum of Consolidated EBITDA plus one-third of Consolidated Rental Payments, in each case for such period, of the Issuer and its Consolidated Subsidiaries, as determined in accordance with GAAP to (ii) the sum of -86- Consolidated Interest Expense and one-third of Consolidated Rental Payments, in each case, for such period of the Issuer and its Consolidated Subsidiaries; 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 Closing Date. "Genesis" means Genesis Health Ventures, Inc. "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. "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. "Incur" means, with respect to any Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become liable for or with respect to, or become responsible for the payment of, contingently or otherwise, such Indebtedness, including an "Incurrence" of Acquired Indebtedness; provided that neither the accrual of interest nor the accretion of original issue discount shall be considered an Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person, without duplication, (i) all indebtedness of such Person for borrowed money, (ii) all obligations for the payment of money of such Person 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 hereafter outstanding, (iii) all obligations of such Person evidenced by bonds, notes, debentures or other similar instruments, (iv) all obligations under Interest Rate Contracts and Currency Agreements of such Person, (v) all Capital Lease Obligations of such Person, (vi) all Indebtedness of other Persons the payment of which is secured by a 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; provided that the amount of such Indebtedness shall be the lesser of (A) the fair market value of such asset at such date of determination and (B) the amount of such Indebtedness, (vii) all Guaranteed Debt of such Person, (viii) all Redeemable Capital Stock valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued and -87- unpaid dividends, and (ix) all Attributable Debt of such Person. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations, the maximum liability upon the occurrence of the contingency giving rise to the obligation, provided (A) that the amount outstanding at any time of any Indebtedness issued with original issue discount is the face amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at the time of its issuance as determined in conformity with GAAP, (B) that money borrowed and set aside at the time of the Incurrence of any Indebtedness in order to prefund the payment of the interest on such Indebtedness shall not be deemed to be "Indebtedness" and (C) that Indebtedness shall not include any liability for federal, state, local or other taxes. 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. "Interest Rate Contracts" means interest rate swap agreements, interest rate cap agreements, interest rate collar agreements, interest rate insurance, and other similar agreements or arrangements. "Investment" means, with respect to any Person, directly or indirectly, any advance, loan or other extension of credit (including, without limitation, any guarantee or similar arrangement but excluding advances in the ordinary course of business that are, in conformity with generally accepted accounting principles, recorded as accounts receivable on the balance sheet of the Issuer or a Restricted Subsidiary) 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 and shall include (i) the designation of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the issuance or sale of Capital Stock of a Restricted Subsidiary if immediately after giving effect thereto such Restricted Subsidiary would no longer constitute a Restricted Subsidiary and the Issuer or another Restricted Subsidiary would have an Investment in such Restricted Subsidiary after giving effect to such issuance or sale. For purposes of the definition of "Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant, (i) "Investment" shall include the fair market value of the assets (net of liabilities (other than liabilities to the Issuer or any of its Restricted Subsidiaries)) of any Restricted Subsidiary at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair market value of the assets (net of liabilities (other than liabilities to the Issuer or any of its Restricted Subsidiaries)) of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary shall be considered a reduction in outstanding Investments and (iii) "Investment" shall include the fair market value of the Capital Stock (or any other remaining Investment), held by the Issuer or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to be a Restricted Subsidiary; provided that the fair market value of the Investment in an Unrestricted Subsidiary or any other Person that has ceased to be a Restricted Subsidiary shall not exceed the aggregate amount of Investments previously made in such Person valued at the time such Investments were made less the net reduction of such Investments. "Issuer" means Genesis ElderCare Acquisition Corp. and, following the Merger, Multicare until a successor replaces it pursuant to the provisions described under "-- Merger, Sale of Assets, etc." and thereafter means the successor. -88- "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. "Merger" means the merger of Genesis ElderCare Acquisition Corp. with and into Multicare which shall be the surviving corporation in the merger. "Merger Closing Date" means the date the Merger is consummated. "Multicare" means The Multicare Companies, Inc. "Net Cash Proceeds" means (a) 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 Issuer or any Restricted 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 either (A) is secured by the assets or properties sold or (B) is required to be paid as a result of such Asset Sale, (iv) amounts required to be paid to any Person (other than the Issuer or any Subsidiary of the Issuer) owning a beneficial interest in the assets subject to the Asset Sale and (v) appropriate amounts to be provided by the Issuer or any Restricted 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 Issuer or any Restricted 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 and (b) with respect to any issuance or sale of Capital Stock, the proceeds of such issuance or sale 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 such obligations are financed or sold with recourse to the Issuer or any Restricted Subsidiary), net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Offer to Purchase" means an offer to purchase Notes by the Issuer from the Holders commenced by mailing a notice to the Trustee and each Holder stating: (i) the covenant pursuant to which the offer is being made and that all Notes validly tendered will be accepted for payment on a pro rata basis; (ii) the purchase price and the date of purchase (which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the "Payment Date"); (iii) that any Note not tendered will continue to accrue interest pursuant to its terms; (iv) that, unless the Issuer defaults in the payment of the purchase price, any Note accepted for payment pursuant to the Offer to Purchase shall cease to accrue interest on and after the Payment Date; (v) that Holders electing to have a Note purchased pursuant to the Offer to Purchase will be required to surrender the Note, together with the form entitled "Option of the Holder to Elect Purchase" on the reverse side of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Payment Date; (vi) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day immediately preceding the Payment Date, a telegram, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Notes delivered for purchase and a statement that such Holder is withdrawing his election to have such Notes -89- purchased; and (vii) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. On the Payment Date, the Issuer shall (i) accept for payment on a pro rata basis Notes or portions thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying Agent money sufficient to pay the purchase price of all Notes or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee all Notes or portions thereof so accepted together with an Officers' Certificate specifying the Notes or portions thereof accepted for payment by the Issuer. The Paying Agent shall promptly mail to the Holders of Notes so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail to such Holders a new Note equal in principal amount to any unpurchased portion of the Note surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. The Issuer will publicly announce the results of an Offer to Purchase as soon as practicable after the Payment Date. The Trustee shall act as the paying agent for an Offer to Purchase. The Issuer will comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable, in the event that the Issuer is required to repurchase Notes pursuant to an Offer to Purchase. "Permitted Indebtedness" means: (a) Indebtedness outstanding at any time in an aggregate principal amount not to exceed $625 million, less any amount of such Indebtedness permanently repaid as provided under the "Limitation on Asset Sales" covenant; (b) Indebtedness of Multicare in existence on the Merger Closing Date; provided that upon consummation of the Merger not more than $40 million of such Indebtedness shall remain outstanding; (c) Indebtedness of the Issuer pursuant to the Notes; (d) Indebtedness evidenced by letters of credit issued in the ordinary course of business consistent with past practice to support the Issuer's or any Subsidiary's insurance or self-insurance obligations (including to secure workers' compensation and other similar insurance coverages) to the extent such letters of credit are not drawn upon or, if drawn upon, to the extent such drawing is reimbursed no later than the third Business Day following a demand for reimbursement; (e) Interest Rate Contracts and Currency Agreements to the extent that the notional principal amount of such obligations under Interest Rate Contracts does not exceed the amount of Indebtedness outstanding or committed to be incurred on the date such Interest Rate Contracts are entered into; (f) Indebtedness owed (A) to the Issuer evidenced by an unsubordinated promissory note or (B) to any Restricted Subsidiary; provided, however, that any subsequent issuance or transfer of any Capital Stock or any other event which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any other subsequent transfer of any such Indebtedness (except to the Issuer or a Restricted Subsidiary) shall be deemed, in each case to be an Incurrence of such Indebtedness not permitted by this clause (f); (g) any guarantees of Indebtedness by a Restricted Subsidiary entered into in accordance with the "Limitation on Issuance of Guarantees by Restricted Subsidiaries" covenant; -90- (h) Indebtedness incurred by the Issuer or any Restricted Subsidiary, and any renewals, extensions, substitutions, refundings, refinancings or replacements thereof, in an amount not to exceed $20 million at any one time outstanding to finance the acquisition or construction of any property or assets or any business, including Acquired Indebtedness and Indebtedness incurred within 90 days after such acquisition or construction, less any amount of such Indebtedness permanently repaid as provided under the "Limitation on Asset Sales" covenant; (i) Capital Lease Obligations, and any renewals, extensions, substitutions, refundings, refinancings or replacements thereof, in an amount not to exceed $10 million at any time outstanding, less any amount of such Indebtedness permanently repaid as provided under the "Limitation on Asset Sales" covenant; (j) Indebtedness in addition to that described in clauses (a) through (i) of this definition of "Permitted Indebtedness," in an aggregate principal amount outstanding at any time not to exceed $20 million, less any amount of such Indebtedness permanently repaid as provided under the "Limitation on Asset Sales" covenant; and (k) any renewals, extensions, substitutions, refundings, refinancings or replacements of any Indebtedness (other than Indebtedness Incurred under clause (a), (d), (e), (f), (g), (h), (i) or (j) 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 Issuer 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 Issuer incurred in connection with such refinancing; (ii) in case the Notes are refinanced in part or the Indebtedness to be refinanced is pari passu with the Notes, such new Indebtedness is expressly made pari passu with, or subordinate in right of payment to, the remaining Notes; (iii) in the case of any refinancing of Subordinated Indebtedness, such new Indebtedness is made subordinate in right of payment to the Notes at least to the same extent as the Indebtedness being refinanced; and (iv) such new Indebtedness, determined as of the date of Incurrence of such new Indebtedness, does not mature prior to the Stated Maturity of the Indebtedness to be refinanced or refunded, and the Average Life of such new Indebtedness is at least equal to the remaining Average Life of the Indebtedness to be refinanced or refunded; provided that in no event may Indebtedness of the Issuer be refinanced by means of any Indebtedness of any Restricted Subsidiary pursuant to this clause (k). For purposes of determining any particular amount of Indebtedness under the "Limitation on Indebtedness" covenant, (1) Indebtedness Incurred under the Credit Facility on or prior to the Merger Closing Date shall be treated as Incurred pursuant to clause (a) of this "Permitted Indebtedness" definition, (2) Guarantees, Liens or obligations with respect to letters of credit supporting Indebtedness otherwise included in the determination of such particular amount shall not be included and (3) any Liens granted pursuant to the equal and ratable provisions referred to in the "Limitation on Liens" covenant described below shall not be treated as Indebtedness. For purposes of determining compliance with the "Limitation on Indebtedness" covenant, in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described in this "Permitted Indebtedness" definition (other than Indebtedness referred to in clause (1) of -91- the preceding sentence), the Issuer, in its sole discretion, shall classify such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of such clauses. "Permitted Investment" means (i) Investments in the Issuer or a Restricted Subsidiary or a Person which will, upon the making of such Investment, become a Restricted Subsidiary or be merged or consolidated with or into or transfer or convey all or substantially all its assets to the Issuer or a Restricted Subsidiary; provided that such Person's primary businesses are Healthcare Related Businesses; (ii) Temporary Cash Investments; (iii) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses in accordance with GAAP; and (iv) Investments in existence on the Closing Date (including Investments held by Multicare and its Subsidiaries). "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. "Pharmacy Sale" means the sale of Multicare's pharmacy business to Genesis or any of its Affiliates in connection with the Merger. "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. "Qualified Capital Stock" of any Person means any Capital Stock of such Person other than Redeemable Capital Stock. "Redeemable Capital Stock" means any class or series of Capital Stock of any Person that by its terms or otherwise is (i) required to be redeemed prior to the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of such class or series of Capital Stock at any time prior to the Stated Maturity of the Notes or (iii) convertible into or exchangeable for Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled maturity prior to the Stated Maturity of the Notes; provided that any Capital Stock that would not constitute Redeemable Capital Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change in control" occurring prior to the Stated Maturity of the Notes shall not constitute Disqualified Stock if the "asset sale" or "change in control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in the "Limitation on Asset Sales" and "Repurchase of Notes upon a Change in Control" covenants described above and such Capital Stock specifically provides that such Person will not repurchase or redeem any such stock pursuant to such provision prior to the Issuer's repurchase of such Notes as are required to be repurchased pursuant to the "Limitation on Asset Sales" and "Repurchase of Notes upon a Change in Control" covenants described above. "Registration Rights Agreement" means the Registration Rights Agreement dated the Closing Date among the Issuer and the Placement Agents. "Restricted Subsidiary" means any Subsidiary of the Issuer other than an Unrestricted Subsidiary. -92- "Significant Subsidiary" means, at any date of determination, any Restricted Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal year of the Issuer, accounted for more than 10% of the consolidated revenues of the Issuer and its Restricted Subsidiaries or (ii) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of the Issuer and its Restricted Subsidiaries, all as set forth on the most recently available consolidated financial statements of the Issuer for such fiscal year. "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 any Indebtedness of the Issuer subordinated in right of payment to the Notes. "Subsidiary" means, with respect to any Person, any corporation, association or other business entity of which more than 50% of the voting power of the outstanding Voting Stock is owned, directly or indirectly, by such Person and one or more other Subsidiaries of such Person. "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 and money market 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 Ratings Services or any successor rating agency or any money market fund sponsored by a registered broker dealer or mutual fund distributor, (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 Issuer) 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 Ratings Services or any successor rating agency and (iv) securities with maturities of six months or less from the date of acquisition issued or fully and unconditionally guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings Services or Moody's Investors Service, Inc. "Tender Offer" means the offer to purchase all of the issued and outstanding shares of Common Stock of Multicare made by Genesis ElderCare Acquisition Corp. "Therapy Sale" means the sale of Multicare's contract therapy business to Genesis or any of its Affiliates in connection with the Merger. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended. "Unrestricted Subsidiary" means (i) any Subsidiary of the Issuer that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below; and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Restricted Subsidiary (including any newly acquired or newly formed Subsidiary of the Issuer) to be an Unrestricted -93- Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Issuer or any Restricted Subsidiary; provided that (A) any guarantee by the Issuer or any Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the Issuer or such Restricted Subsidiary (or both, if applicable) at the time of such designation; (B) either (I) the Subsidiary to be so designated has total assets of $1,000 or less or (II) if such Subsidiary has assets greater than $1,000, such designation would be permitted under the "Limitation on Restricted Payments" covenant described below and (C) if applicable, the Incurrence of Indebtedness and the Investment referred to in clause (A) of this proviso would be permitted under the "Limitation on Indebtedness" and "Limitation on Restricted Payments" covenants described below. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that (i) no Default or Event of Default shall have occurred and be continuing at the time of or after giving effect to such designation and (ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately after such designation would, if Incurred at such time, have been permitted to be Incurred (and shall be deemed to have been Incurred) for all purposes of the Indenture. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "U.S. Government Securities" means securities that 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 (x) the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America or (y) that are rated at least "Aaa" (or the then equivalent grade) by Moody's Investors Service, Inc. or "AAA" (or the then equivalent grade) by Standard & Poor's Ratings Services. "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 Restricted Subsidiary" means a Restricted Subsidiary all the Capital Stock of which is owned by the Issuer or another Wholly Owned Restricted Subsidiary. Trustee The Indenture provides that, except during the continuance of a Default, the Trustee will not be liable, except for the performance of such duties as are specifically set forth in such Indenture. If an Event of Default has occurred and is continuing, the Trustee will use the same degree of care and skill in its exercise of the rights and powers vested in it under the Indenture as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. The Indenture and provisions of the Trust Indenture Act incorporated by reference therein contain limitations on the rights of the Trustee, should it become a creditor of the Issuer, 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, however, that if it acquires any conflicting interest, it must eliminate such conflict or resign. -94- No Personal Liability of Incorporators, Stockholders, Officers, Directors or Employees The Indenture provides that no recourse for the payment of the principal of, premium, if any, or interest on any of the Notes or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Issuer in the Indenture, or in any of the Notes or because of the creation of any Indebtedness represented thereby, shall be had against any incorporator, stockholder, officer, director, employee or controlling person of the Issuer or of any successor Person thereof. Each Holder, by accepting the Notes, waives and releases all such liability. Book-Entry; Delivery and Form The Notes will be represented by a permanent global Note in definitive, fully registered form without interest coupons (the "Global Note") and will be deposited with the Trustee as custodian for, and registered in the name of a nominee of, DTC. Ownership of beneficial interests in a Global Note is limited to persons who have accounts with DTC ("participants") or persons who hold interests through participants. Ownership of beneficial interests in a Global Note is 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). Qualified institutional buyers may hold their interests in a Restricted Global Note directly through DTC if they are participants in such system, or indirectly through organizations which are participants in such system. So long as DTC, or its nominee, is the registered owner or holder of a Global Note, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the Notes represented by such Global Note for all purposes under the Indenture and the Notes. No beneficial owner of an interest in a 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, and interest on, a Global Note will be made to DTC or its nominee, as the case may be, as the registered owner thereof. Neither the Issuer, 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 a Global Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. The Issuer expects that DTC or its nominee, upon receipt of any payment of principal or interest in respect of a Global Note, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Note as shown on the records of DTC or its nominee. The Issuer 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 and will be settled in same-day funds. The Issuer expects that DTC will take any action permitted to be taken by a holder of Notes (including the presentation of Notes for exchange as described below) only at the direction of one or more participants to whose account the DTC interests in a Global Note is credited and only in respect of such -95- portion of the aggregate principal amount of Notes as to which such participant or participants has or have given such direction. However, if there is an Event of Default under the Notes, DTC will exchange the applicable Global Note for Certificated Notes, which it will distribute to its participants and which may be legended as set forth under the heading "-- Transfer Restrictions." The Issuer understands that: DTC is a limited purpose trust company organized under the laws of the State of New York, a "banking organization" within the meaning of 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 provisions 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 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"). Although DTC is expected to follow the foregoing procedures in order to facilitate transfers of interests in a Global Note among its participants, DTC is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither the Issuer nor the Trustee will have any responsibility for the performance by DTC or its participants or indirect participants of its obligations under the rules and procedures governing its operations. If DTC is at any time unwilling or unable to continue as a depositary for the Global Notes and a successor depositary is not appointed by the Issuer within 90 days, the Issuer will issue Certificated Notes, which may bear the legend referred to under "-- Transfer Restrictions," in exchange for the Global Notes. Holders of an interest in a Global Note may receive Certificated Notes, which may bear the legend referred to under "-- Transfer Restrictions," in accordance with the DTC's rules and procedures, in addition to those provided for under the Indenture. -96- CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS The following summary describes certain United States federal income tax consequences of the ownership of the Notes as of the date hereof. Except where noted, it deals only with Notes held as capital assets and does not deal with special situations, such as those of dealers in securities or currencies, tax exempt organizations, individual retirement accounts and other tax deferred accounts, financial institutions, life insurance companies, persons holding Notes as a part of a hedging or conversion transaction or a straddle, persons subject to the alternative minimum tax or holders of Notes whose "functional currency" is not the U.S. dollar. Furthermore, the discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be repealed, revoked or modified so as to result in federal income tax consequences different from those discussed below. In addition, except as otherwise indicated, the following does not consider the effect of any applicable foreign, state, local or other tax laws or estate or gift tax considerations. Persons considering the purchase, ownership or disposition of Notes should consult their own tax advisors concerning the federal income tax consequences in light of their particular situations, as well as any consequences arising under the laws of any other taxing jurisdiction. Stated Interest on Notes Except as set forth below, interest on a Note will generally be taxable to a United States Holder as ordinary income from domestic sources at the time it is paid or accrued in accordance with the United States Holder's method of accounting for tax purposes. As used herein, a "United States Holder" of a Note means a holder that is a citizen or resident of the United States, a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, an estate the income of which is subject to United States federal income taxation regardless of its source, or a trust if (i) a U.S. court is able to exercise primary supervision over the administration of the trust and (ii) one or more U.S. trustees or fiduciaries have the authority to control all substantial decisions of the trust. A "Non-United States Holder" is a holder that is not a United States Holder. Failure of the Company to consummate the Exchange Offer or to file or cause to be declared effective the Shelf Registration Statement as described under "Description of the Notes -- Registration Rights" will cause additional interest to accrue on the Notes in the manner described therein. According to Treasury regulations, the possibility of a change in the interest rate will not affect the amount of interest income recognized by a United States Holder (or the timing of such recognition) if the likelihood of the change, as of the date the Notes are issued, is remote. The Company believes that the likelihood of a change in the interest rate on the Notes is remote and does not intend to treat the possibility of a change in the interest rate as affecting the yield to maturity of any Note. In the unlikely event that the interest rate on the Notes is increased, then such increased interest may be treated as original issue discount, includible by a United States Holder in income as such interest accrues, in advance of receipt of any cash payment thereof. If, as anticipated, the issue price of the Notes will equal their stated principal amount, and because the likelihood of a change in the interest rate is remote, the Notes will not be issued with original issue discount. Market Discount If a United States Holder purchases a Note for an amount that is less than its principal amount, the amount of the difference will be treated as "market discount" for U.S. federal income tax purposes, unless such difference is less than a specified de minimis amount. Under the market discount rules, a United States Holder will be required to treat any partial principal payment on, or any gain on the sale, exchange, retirement or other disposition of, a Note as ordinary income to the extent of the market discount which has -97- not previously been included in income and is treated as having accrued on such Note at the time of such payment or disposition. In addition, the United States Holder may be required to defer, until the maturity of the Note or its earlier disposition in a taxable transaction, the deduction of all or a portion of the interest expense on any indebtedness incurred or continued to purchase or carry such Note. Any market discount will be considered to accrue ratably during the period from the date of acquisition to the maturity date of the Note, unless the United States Holder elects to accrue on a constant interest method. A United States Holder of a Note may elect to include market discount in income currently as it accrues (on either a ratable or constant interest method), in which case the rule described above regarding deferral of interest deductions will not apply. This election to include market discount in income currently once made applies to all market discount obligations acquired on or after the first taxable year to which the election applies and may not be revoked without the consent of the Internal Revenue Service (the "IRS"). Amortizable Bond Premium A United States Holder that purchases a Note for an amount in excess of the principal amount will be considered to have purchased the Note at a "premium." A United States Holder generally may elect to amortize the premium over the remaining term of the Note on a constant yield method. However, if the Note is purchased at a time when the Note may be optionally redeemed for an amount that is in excess of its principal amount, special rules would apply that could result in a deferral of the amortization of bond premium until later in the term of the Note. The amount amortized in any year will be treated as a reduction of the United States Holder's interest income from the Note. Bond premium on a Note held by a United States Holder that does not make such an election will decrease the gain or increase the loss otherwise recognized on disposition of the Note. The election to amortize premium on a constant yield method, once made, applies to all debt obligations held or subsequently acquired by the electing United States Holder on or after the first day of the first taxable year to which the election applies and may not be revoked without the consent of the IRS. Sale, Exchange and Retirement of Notes Upon the sale, exchange, redemption, retirement or other disposition of a Note, a United States Holder generally will recognize gain or loss equal to the difference between the amount realized upon the sale, exchange, redemption, retirement or other disposition and such holder's adjusted tax basis of the Note. A United States Holder's adjusted tax basis in a Note will, in general, be the United States Holder's cost therefor, increased by market discount previously included in income by the United States Holder and reduced by any amortized premium previously deducted from income by the United States Holder. Except as described above with respect to market discount or except to the extent the gain or loss is attributable to accrued but unpaid stated interest, such gain or loss will be capital gain or loss and will be long-term capital gain or loss if at the time of sale, exchange, redemption, retirement or other disposition the Note has been held for more than one year. Under current law, net long-term capital gains of individuals are, under certain circumstances, taxed at lower rates than items of ordinary income. The deductibility of capital losses is subject to limitations. The exchange of a Note by a United States Holder for an Exchange Note should not constitute a taxable exchange. A United States Holder will have the same tax basis and holding period in the Exchange Note as it did in the Note. -98- Non-United States Holders Under present United States federal income and estate tax law, and subject to the discussion below concerning backup withholding: (a) no United States federal withholding tax will be imposed with respect to the payment by the Company or paying agent of principal or interest on a Note owned by a Non-United States Holder (the "Portfolio Interest Exception"), provided (i) that such Non-United States Holder does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Company entitled to vote within the meaning of section 871(h)(3) of the Code and the regulations thereunder, (ii) such Non-United States Holder is not a controlled foreign corporation that is related, directly or indirectly, to the Company through stock ownership, (iii) such Non-United States Holder is not a bank whose receipt of interest on a Note is described in section 881(c)(3)(A) of the Code and (iv) such Non-United States Holder satisfies the statement requirement (described generally below) set forth in section 871(h) and section 881(c) of the Code and the regulations thereunder; (b) no United States federal withholding tax will be imposed generally with respect to any gain or income realized by a Non-United States Holder upon the sale, exchange, redemption, retirement or other disposition of a Note; and (c) a Note beneficially owned by an individual who at the time of death is a Non-United States Holder will not be subject to United States federal estate tax as a result of such individual's death, provided that such individual does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the company entitled to vote within the meaning of section 871(h)(3) of the Code and provided that the interest payments with respect to such Note would not have been, if received at the time of such individual's death, effectively connected with the conduct of a United States trade or business by such individual. To satisfy the requirement referred to in (a)(iv) above, the beneficial owner of such Note, or a financial institution holding the Note on behalf of such owner, must provide, in accordance with specified procedures, a paying agent of the Company with a statement to the effect that the beneficial owner is not a United States Holder. Pursuant to current temporary Treasury regulations, these requirements will be met if (1) the beneficial owner provides his name and address, and certifies, under penalties of perjury, that he is not a United States Holder (which certification may be made on an Internal Revenue Service Form W-8 (or successor form)) or (2) a financial institution holding the Note on behalf of the beneficial owner certifies, under penalties of perjury, that such statement has been received by it and furnishes a paying agent with a copy thereof. The IRS has proposed regulations that, if finalized, would modify certain of the certification requirements described above. If a Non-United States Holder cannot satisfy the requirements of the Portfolio Interest Exception described in (a) above, payments on a Note made to such Non-United States Holder will be subject to a 30% withholding tax unless the beneficial owner of the Note provides the Company or its paying agent, as the case may be, with a properly executed (1) Internal Revenue Service Form 1001 (or successor form) claiming an exemption from withholding under the benefit of a tax treaty or (2) Internal Revenue Service Form 4224 (or successor form) stating that interest paid on the Note is not subject to withholding tax because it is effectively connected with the beneficial owner's conduct of a trade or business in the United States. If a Non-United States Holder is engaged in a trade or business in the United States and payment on a Note is effectively connected with the conduct of such trade or business, the Non-United States Holder, -99- although exempt from United States federal withholding tax as discussed above, will be subject to United States federal income tax on such payment on a net income basis in the same manner as if it were a United States Holder. In addition, if such holder is a foreign corporation, it may be subject to a branch profits tax equal to 30% of its effectively connected earnings and profits for the taxable year, subject to adjustments. For this purpose, such payment on a Note will be included in such foreign corporation's earnings and profits. Any gain or income realized upon the sale, exchange, retirement or other disposition of a Note generally will not be subject to United States federal income tax unless (i) such gain or income is effectively connected with a trade or business in the United States of the Non-United States Holder or (ii) in the case of a Non-United States Holder who is an individual, such individual is present in the United States for 183 days or more in the taxable year of such sale, exchange, retirement or other disposition, and certain other conditions are met. Information Reporting and Backup Withholding In general, information reporting requirements will apply to payments on a Note and to the proceeds of the sale of a Note made to United States Holders other than certain exempt recipients (such as corporations). A 31% backup withholding tax will apply to such payments if the United States Holder fails to provide a taxpayer identification number or certification of foreign or other exempt status or fails to report in full dividend and interest income. No information reporting or backup withholding will be required with respect to payments made by the Company or any paying agent to Non-United States Holders if a statement described in (a)(iv) under "-- Non-United States Holders" has been received and the payor does not have actual knowledge that the beneficial owner is a United States person. In addition, backup withholding and information reporting will not apply if payments on a Note are paid or collected by a foreign office of a custodian, nominee or other foreign agent on behalf of the beneficial owner of such Note, or if a foreign office of a broker (as defined in applicable Treasury regulations) pays the proceeds of the sale of a Note to the owner thereof. If, however, such nominee, custodian, agent or broker is, for United States federal income tax purposes, a United States person, a controlled foreign corporation or a foreign person that derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States, such payments will be subject to information reporting (but not backup withholding), unless (1) such custodian, nominee, agent or broker has documentary evidence in its records that the beneficial owner is not a United States person and certain other conditions are met or (2) the beneficial owner otherwise establishes an exemption. Temporary Treasury regulations provide that the Treasury is considering whether backup withholding will apply with respect to payments of principal, interest or the proceeds of a sale that are not subject to backup withholding under the current regulations. Payments on a Note paid to the beneficial owner of a Note by a United States office of a custodian, nominee or agent, or the payment by the United States office of a broker of the proceeds of sale of a Note, will be subject to both backup withholding and information reporting unless the beneficial owner provides the statement referred to in (a)(iv) above and the payor does not have actual knowledge that the beneficial owner is a United States person or otherwise establishes an exemption. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against such holder's United States federal income tax liability provided the required information is furnished to the IRS. -100- LEGAL MATTERS Certain legal matters with respect to the legality of the Notes will be passed upon for the Company by Blank Rome Comisky & McCauley LLP, Philadelphia, Pennsylvania. EXPERTS The consolidated financial statements of the Company and its subsidiaries as of December 31, 1995 and 1996, and for each of the years in the three-year period ended December 31, 1996 included herein have been audited by KPMG Peat Marwick LLP, independent certified public accountants as stated in their report, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. AVAILABLE INFORMATION Multicare 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 Commissioner's regional offices located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621 and 75 Park Place, 14 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. The Commission also maintains a World Wide Web site that contains registration statements, reports, proxy and information statements and other materials that are filed through the Commission's Electronic Data Gathering, Analysis and Retrieval System. This Web site can be accessed at http://www.sec.gov. -101- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Consolidated Financial Statements Independent Auditor's Report..................................................................................F-3 Consolidated Balance Sheets as of December 31, 1995 and 1996..................................................F-4 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996.....................................................................................................F-5 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996.................................................................................................F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996.................................................................................................F-7 Notes to Consolidated Financial Statements....................................................................F-8 Consolidated Balance Sheets as of December 31, 1996 and September 30, 1997 (unaudited)........................F-17 Unaudited Consolidated Statements of Operations for the three months ended September 30, 1996 and 1997 and the nine months ended September 30, 1996 and 1997........................F-18 Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1997.................................................................................................F-19 Notes to Unaudited Consolidated Financial Statements..........................................................F-20
F-1 F-2 THIS PAGE [INTENTIONALLY BLANK] Independent Auditor's Report The Board of Directors The Multicare Companies, Inc. We have audited the accompanying consolidated balance sheets of The Multicare Companies, Inc. and subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. 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 The Multicare Companies, Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Short Hills, New Jersey February 4, 1997 F-3 The Multicare Companies, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31 (In thousands, except share data)
1995 1996 ----------- ---------- ASSETS Current assets: Cash and cash equivalents .......................................... $ 3,921 $ 1,150 Accounts receivable, net of allowance for doubtful accounts of $5,241 and $11,531 in 1995 and 1996, respectively ........................ 86,168 102,234 Prepaid expenses and other current assets ........................... 8,181 14,586 Deferred taxes ...................................................... 3,353 3,833 --------- --------- Total current assets ............................................. 101,623 121,803 Property, plant and equipment: Land, buildings and improvements ................................. 260,952 386,870 Equipment, furniture and fixtures ................................. 39,048 58,963 Construction in progress .......................................... 24,979 43,373 --------- --------- 324,979 489,206 Less accumulated depreciation and amortization ..................... 38,212 46,187 --------- --------- 286,767 443,019 Goodwill, net ...................................................... 59,610 157,298 Debt issuance costs, net .......................................... 4,738 4,017 Other assets ...................................................... 18,220 35,530 --------- --------- $ 470,958 $ 761,667 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ................................................... $ 13,619 $ 26,948 Accrued liabilities ................................................ 30,850 54,707 Current portion of long-term debt ................................. 1,612 821 --------- --------- Total current liabilities .......................................... 46,081 82,476 Long-term debt ...................................................... 281,470 428,347 Deferred taxes ...................................................... 24,200 42,909 Contingent stock purchase commitment .............................. 5,312 -- Stockholders' equity: Preferred stock, par value $.01, 7,000,000 shares authorized, none issued Common stock, par value $.01, 70,000,000 shares authorized, 17,680,932 and 30,133,535 issued and outstanding in 1995 and 1996, respectively ............................................. 177 301 Additional paid-in capital ....................................... 75,419 143,513 Retained earnings ................................................ 38,299 64,121 --------- --------- Total stockholders' equity ....................................... 113,895 207,935 --------- --------- $ 470,958 $ 761,667 ========= =========
See accompanying notes to consolidated financial statements. F-4 The Multicare Companies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31
1994 1995 1996 ------------- ------------- ------------- (In thousands, except per share data) Net revenues .................................... $ 262,416 $ 353,048 $ 532,230 Expenses: Operating expenses: Salaries, wages and benefits .................. 127,407 171,471 258,404 Other operating expenses ..................... 71,020 93,714 142,493 Corporate, general and administrative ............ 11,446 17,643 25,408 Lease expense .................................... 2,823 5,039 12,110 Depreciation and amortization ..................... 9,358 13,171 22,344 --------- --------- --------- Total expenses .............................. 222,054 301,038 460,759 --------- --------- --------- Income from operations ..................... 40,362 52,010 71,471 Other income (expense): Investment income .............................. 296 2,713 425 Interest expense .............................. (13,162) (18,778) (25,589) --------- --------- --------- Total other income (expense) ............... (12,866) (16,065) (25,164) --------- --------- --------- Income before income taxes and extraordinary item ........................ 27,496 35,945 46,307 Income tax expense .............................. 10,454 13,798 17,570 --------- --------- --------- Income before extraordinary item ............ 17,042 22,147 28,737 Extraordinary item--loss on extinguishment of debt, net of tax benefit of $1,057, $2,379 and $1,884 in 1994, 1995, and 1996, respectively ............... 1,620 3,722 2,827 --------- --------- --------- Net income ................................. $ 15,422 $ 18,425 $ 25,910 ========= ========= ========= Income per common and common equivalent share data: Income before extraordinary item ............... $ .71 $ .84 $ 1.02 Net income .................................... $ .64 $ .69 $ .92 Weighted average number of common and common equivalent shares outstanding ......... 23,967 26,513 28,062 Income per common share assuming full dilution: Income before extraordinary item ............... $ .71 $ .84 $ .99 Net income .................................... $ .64 $ .69 $ .90 Weighted average number of common shares outstanding assuming full dilution ............ 23,967 26,513 33,172
See accompanying notes to consolidated financial statements. F-5 The Multicare Companies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31
Common Stock Additional Total -------------------- Paid-In Retained Stockholders' Shares Amount Capital Earnings Equity --------- -------- ------------ ---------- -------------- (In thousands) Balances, December 31, 1993 ............... 14,230 $ 142 $ 27,997 $ 4,452 $ 32,591 Issuance of common stock in connection with public offering ..................... 3,450 35 52,000 52,035 Effect of restricted stock .................. (18) 57 57 Net income ................................. 15,422 15,422 ------ ------ --------- -------- --------- Balances, December 31, 1994 ............... 17,662 177 80,054 19,874 100,105 Exercise of stock options (including tax benefit) ................................. 19 304 304 Proceeds from issuance of put options ...... 373 373 Contingent stock purchase commitment . (5,312) (5,312) Net income ................................. 18,425 18,425 ------ ------ --------- -------- --------- Balances, December 31, 1995 ............... 17,681 177 75,419 38,299 113,895 Exercise of stock options (including tax benefit) ................................. 21 347 347 Shares issued under stock purchase plan . 30 442 442 Contingent stock purchase commitment . 5,312 5,312 Stock split ................................. 8,847 88 (88) -- Issuance of common stock in connection with public offering ..................... 3,000 30 51,982 52,012 Issuance of stock in acquisition ............ 555 6 10,011 10,017 Net income ................................. 25,910 25,910 ------ ------ --------- -------- --------- Balances, December 31, 1996 ............... 30,134 $ 301 $ 143,513 $ 64,121 $ 207,935 ====== ====== ========= ======== =========
See accompanying notes to consolidated financial statements. F-6 The Multicare Companies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31
1994 1995 1996 ------------ ------------ ------------ (In thousands) Cash flows from operating activities: Net income .......................................... $ 15,422 $ 18,425 $ 25,910 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary item .............................. 2,677 6,101 4,711 Depreciation and amortization .................. 9,583 13,204 22,029 Provision for doubtful accounts .................. 1,712 3,483 4,760 Changes in assets and liabilities: Deferred taxes ................................. 1,162 (445) (1,208) Accounts receivable ........................... (28,479) (25,104) (13,967) Prepaid expenses and other current assets . (8,270) (1,479) (2,528) Accounts payable and accrued liabilities ...... 8,419 (3,174) 10,566 --------- ---------- ---------- Net cash provided by operating activities . 2,226 11,011 50,273 --------- ---------- ---------- Cash flows from investing activities: Net marketable securities (acquired) sold ......... 5,195 (200) 202 Assets and operations acquired ..................... (40,435) (63,415) (193,067) Capital expenditures .............................. (31,785) (39,917) (64,215) Proceeds from sale-leaseback ........................ -- 12,522 -- Proceeds from repayment of construction advances -- 11,000 -- Other assets ....................................... (2,351) (1,072) (5,531) --------- ---------- ---------- Net cash used in investing activities ............ (69,376) (81,082) (262,611) --------- ---------- ---------- Cash flows from financing activities: Proceeds from issuance of common stock ............ 52,035 -- 52,012 Proceeds from exercise of stock options and stock purchase plan .................................... -- 245 717 Proceeds from issuance of put options ............... -- 373 -- Proceeds from long-term debt ........................ 221,465 278,154 562,981 Payments of long-term debt ........................ (203,574) (208,358) (402,848) Debt issuance costs ................................. (1,750) (4,431) (3,295) --------- ---------- ---------- Net cash provided by financing activities ......... 68,176 65,983 209,567 --------- ---------- ---------- Increase (decrease) in cash and cash equivalents 1,026 (4,088) (2,771) Cash and cash equivalents at beginning of year ...... 6,983 8,009 3,921 --------- ---------- ---------- Cash and cash equivalents at end of year ............ $ 8,009 $ 3,921 $ 1,150 ========= ========== ========== Supplemental disclosure of non cash investing and financing activities: Fair value of assets and operations acquired ......... $ 90,560 $ 134,323 $ 213,873 Debt and liabilities assumed in connection with assets and operations acquired ..................... 50,125 70,908 10,789 Stock issued in connection with assets and operations acquired .......................................... -- -- 10,017 --------- ---------- ---------- $ 40,435 $ 63,415 $ 193,067 ========= ========== ==========
See accompanying notes to consolidated financial statements. F-7 The Multicare Companies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1994, 1995 and 1996 (In thousands, except share and per share data) The Multicare Companies, Inc. and Subsidiaries (Multicare or the Company) own, operate and manage skilled nursing facilities which provide long-term care and specialty medical services in selected geographic regions within the eastern and midwestern United States. In addition, the Company operates assisted-living facilities, institutional pharmacies, medical supply companies, outpatient rehabilitation centers and other ancillary healthcare businesses. NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION The Multicare Companies, Inc. was organized in March 1992. The consolidated financial statements include the accounts of the Company and its majority owned and controlled subsidiaries. Investments in affiliates that are not majority owned are reported using the equity method. All significant intercompany transactions and accounts of the Company have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Cash Equivalents Cash equivalents consist of highly liquid instruments with original maturities of three months or less. (b) Financial Instruments The carrying amounts of cash, marketable securities, and other current assets and current liabilities approximate fair value due to the short term maturity of these instruments. The fair value of the Company's long term debt is estimated based on quoted market prices or current rates offered to the Company for similar instruments with the same remaining maturities. (c) Debt Issuance Costs Debt issuance costs are amortized on a straight-line basis over periods of four to ten years. (d) Goodwill Goodwill resulting from acquisitions accounted for as purchases is amortized on a straight-line basis over periods of fifteen to forty years. At December 31, 1995 and 1996, accumulated amortization of goodwill was $1,832 and $4,636, respectively. (e) Other Assets At December 31, 1995 and 1996, other assets include $1,300 and $1,331, representing amounts due from stockholders. Direct costs incurred to develop and implement new specialty medical services at certain facilities are deferred during the start-up period and amortized on a straight-line basis over five years. At December 31, 1995 and 1996, investments in non-consolidated affiliates included in other assets amounted to $5,054 and $19,913, respectively. Results of operations relating to the non-consolidated affiliates were insignificant to the Company's financial statements in 1995 and 1996. F-8 The Multicare Companies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Years Ended December 31, 1994, 1995 and 1996 (In thousands, except share and per share data) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) (f) Net Revenues Net revenues primarily consist of services paid for by patients and amounts for services provided that are reimbursable by certain third-party payors. Medicare and Medicaid revenues are determined by various rate setting formulas and regulations. Final determinations of amounts paid by Medicaid and Medicare are subject to review or audit. In the opinion of management, adequate provision has been made for any adjustment that may result from these reviews or audits. To the extent that final determination may result in amounts which vary from management estimates, future earnings will be charged or credited. (g) Property, Plant and Equipment Land, buildings and improvements, equipment, furniture and fixtures are stated at cost. Depreciation of buildings and improvements is calculated using the straight-line method over their estimated useful lives that range from twenty to forty years. Depreciation of equipment and furniture and fixtures is calculated using the straight-line method over their estimated useful lives that range from five to ten years. Depreciation expense for the years ended December 31, 1994, 1995, and 1996 was $8,146, $10,875, and $17,724, respectively. (h) Income Taxes The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. (i) Net Income Per Share The computation of primary earnings per share is based on the weighted average number of outstanding shares during the period and includes, when their effect is dilutive, common stock equivalents consisting of certain shares subject to stock options. Fully diluted earnings per share additionally assumes the conversion of the Company's Convertible Subordinated Debentures. Net income used in the computation of fully diluted earnings per share was determined on the assumption that the convertible debentures were converted and net income was adjusted for the amounts representing interest and amortization of debt issuance costs, net of tax effect. (j) Stock Split In May 1996, the Company effected a three-for-two stock split in the form of a 50% stock dividend. In 1996, stockholders' equity has been adjusted to give recognition to the stock split by reclassifying from retained earnings to common stock the par value of the additional shares arising from the stock split. All references to average number of shares outstanding, stock options, and per share amounts have been restated to reflect the stock split. (k) SFAS 121 The Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of ", on January 1, 1996. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. Adoption of this Statement did not have any impact on the Company's financial position, results of operations, or liquidity. F-9 The Multicare Companies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Years Ended December 31, 1994, 1995 and 1996 (In thousands, except share and per share data) NOTE 3 -- ACQUISITIONS In March 1994, the Company acquired the outstanding capital stock of Providence Health Care, Inc. (Providence), an Ohio-based provider of long-term nursing care through 15 long-term care facilities for a cash purchase price of approximately $29,000 and the assumption and refinancing of approximately $27,000 of indebtedness. Total goodwill approximated $16,900. In January 1995, the Company acquired the assets and operations of an institutional pharmacy business for a purchase price of approximately $12,000. Total goodwill approximated $11,000. In December 1995, the Company completed the acquisition of Glenmark Associates, Inc. (Glenmark). The Company acquired the outstanding capital stock of Glenmark for approximately $32,000 including transaction costs, repaid approximately $24,200 of debt, and assumed historical debt of approximately $24,700. Total goodwill approximated $30,000. In February 1996, the Company completed the acquisition of Concord Health Group, Inc. (Concord). The Company acquired the outstanding capital stock and warrants of Concord for approximately $75,000 including transaction costs, repaid approximately $41,000 of debt, and assumed historical debt of approximately $4,000. Total goodwill approximated $61,000. In December 1996, the Company completed the acquisition of The A.D.S Group (A.D.S). The Company paid approximately $10,000, repaid or assumed approximately $29,800 in debt, financed $51,000 through a lease facility, and issued 554,973 shares of its common stock for A.D.S. Total goodwill approximated $29,900. All acquisitions have been accounted for using the purchase method of accounting and, accordingly, the consolidated financial statements reflect the results of operations of each facility from the date of acquisition. The following unaudited pro forma financial information has been prepared as if the Glenmark, Concord and A.D.S acquisitions had been consummated on January 1, 1995. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the acquisitions occurred on January 1, 1995:
1995 1996 ----------- ---------- (Unaudited) Net revenues ................................. $ 512,995 $ 599,022 Income before extraordinary item ............ 20,006 29,095 Net income .................................... 16,284 26,267 Income per common share assuming full dilution: Income before extraordinary item ............ .74 .98 Net income ................................. $ .60 $ .90
NOTE 4 -- INCOME TAXES The provision for income taxes, exclusive of income taxes related to the extraordinary items, consists of the following: 1994 1995 1996 ----------- ------------ --------- Federal: Current ............... $ 8,810 $ 11,092 $ 13,554 Deferred ............... (594) (35) 1,275 State: Current ............... 2,343 2,876 2,695 Deferred ............... (105) (135) 46 -------- -------- -------- $ 10,454 $ 13,798 $ 17,570 ======== ======== ======== F-10 The Multicare Companies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Years Ended December 31, 1994, 1995 and 1996 (In thousands, except share and per share data) NOTE 4 -- INCOME TAXES -- (Continued) The difference between the Company's effective tax rate and the Federal statutory tax rate of 35% is primarily attributable to state taxes. The tax effects of temporary differences giving rise to deferred tax assets and liabilities at December 31, 1995 and 1996 are as follows:
1995 1996 ---------- --------- Deferred tax assets: Accounts receivable .............................. $ 1,620 $ 1,642 Employee benefits and compensated absences ...... 1,429 2,191 Other .......................................... 829 -- -------- -------- $ 3,878 $ 3,833 ======== ======== Deferred tax liabilities: Property, plant and equipment .................. $ 24,408 $ 42,033 Other .......................................... 317 876 -------- -------- $ 24,725 $ 42,909 ======== ========
Cash paid for income taxes was $9,504, $12,910 and $14,555 in 1994, 1995 and 1996, respectively. NOTE 5 -- FINANCING OBLIGATIONS Long-term debt at December 31, 1995 and 1996 is as follows:
1995 1996 ----------- ---------- Bank credit facility, with interest at approximately 6% in 1995 and 7% in 1996 ............................................................... $ 105,629 $ 276,429 Convertible debentures, due 2003, with interest at 7%, convertible at $17.33 per share ...................................................... 86,250 86,250 Senior Subordinated Notes, due 2002, net of unamortized original issue discount of $911 and $682 in 1995 and 1996, respectively, with interest at 12.5% ................................................... 36,990 29,719 Mortgages and other debt, including unamortized premium of $3,819 and $3,412, in 1995 and 1996, respectively, payable on varying monthly or quarterly installments with interest at rates between 6% and 12%. These loans mature between 1999 and 2033 ..................... 43,202 26,135 Revenue bonds, rates ranging from 7% to 10%, with maturities between 2004 and 2015, net of unamortized discount of $465 and $431 in 1995 and 1996, respectively ................................. 11,011 10,635 --------- --------- $ 283,082 $ 429,168 Less current portion ................................................... 1,612 821 --------- --------- $ 281,470 $ 428,347 ========= =========
In 1995, the Company restructured its credit agreement with The Chase Manhattan Bank, N.A. to extend the amount of available credit to $200,000. In addition, several terms, including the interest rate were revised. The Company recorded an extraordinary charge of $1,206, net of tax, for the write-off of debt issuance costs and prepayment penalties relating to the restructuring of the credit facility and extinguishment of certain mortgage debt. F-11 The Multicare Companies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Years Ended December 31, 1994, 1995 and 1996 (In thousands, except share and per share data) NOTE 5 -- FINANCING OBLIGATIONS -- (Continued) In March 1995, the Company completed an offshore offering and a concurrent private placement in the United States of $86,250 of its 7% Convertible Subordinated Debentures (Convertible Debentures) due 2003. The Convertible Debentures are convertible at a price of $17.33 per share. The net proceeds approximated $83,300 of which $23,000 was used to repay amounts outstanding under the Company's credit agreement, with the remainder utilized for general corporate purposes. In January 1997, $11,000 of Convertible Debentures were converted into common stock. The Company purchased or retired an aggregate amount of $38,177 of its $100,000 Senior Subordinated Notes (Notes) in 1994, 1995 and 1996, resulting in extraordinary charges after tax of $1,620, $2,516 and $957, respectively, for premiums paid above the recorded values and the write-off of debt issuance costs and original issue discounts. In January 1997, the Company purchased $6,500 principal amount of Notes. In 1996, the Company restructured its credit agreement with The Chase Manhattan Bank, N.A. to extend the amount of credit available from $200,000 to $350,000 and to revise other terms. In December 1996, the Company entered into a new $350,000 credit facility which expires in 2000 and added a $60,000 lease facility with NationsBank, N.A., as agent. The Company recorded extraordinary charges of $1,870, net of tax, for the write-off of unamortized debt issuance costs related to the restructurings. The fair value of the Company's debt, based on quoted market prices or current rates for similar instruments with the same maturities was approximately $288,767 and $432,398 at December 31, 1995 and 1996, respectively. The Company is subject to various financial and restrictive covenants under its credit facility and other indebtedness and is in compliance with such covenants at December 31, 1996. At December 1996, the aggregate maturities of long-term debt for the five years ending December 31, 2001 and thereafter are as follows: 1997 ............ $ 821 1998 ............ 1,335 1999 ............ 804 2000 ............ 277,146 2001 ............ 759 Thereafter ...... 146,004 --------- 426,869 Discount ......... (1,113) Premium ......... 3,412 --------- $429,168 ========= Interest expense of $1,225, $1,605 and $2,773 was capitalized in 1994, 1995 and 1996, respectively, in connection with new construction and facility renovations and expansions. Cash paid for interest was $13,565, $17,704 and $25,762 in 1994, 1995, and 1996, respectively. F-12 The Multicare Companies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Years Ended December 31, 1994, 1995 and 1996 (In thousands, except share and per share data) NOTE 6 -- ACCRUED LIABILITIES At December 31, 1995 and 1996, accrued liabilities consist of the following: 1995 1996 ---------- --------- Salaries and wages ......... $ 11,428 $ 19,469 Deposits from patients ...... 2,437 3,386 Interest ..................... 4,739 4,742 Insurance .................. 2,492 7,079 Other ........................ 9,754 20,031 -------- -------- $ 30,850 $ 54,707 ======== ======== NOTE 7 -- COMMITMENTS AND CONTINGENCIES The Company has operating leases on certain of its facilities and offices. Three of such leases are with entities that are owned wholly or in part by certain of the stockholders of the Company. In 1996, the Company renegotiated and amended the terms of certain of its capital lease agreements, resulting in their treatment as operating leases which did not have a material impact on the financial statements. Minimum rental commitments under all noncancelable leases at December 31, 1996 are as follows: Operating ---------- 1997 ............ $ 17,145 1998 ............ 17,170 1999 ............ 16,193 2000 ............ 15,870 2001 ............ 15,612 Thereafter ...... 65,070 --------- $ 147,060 ========= Letters of credit ensure the Company's performance or payment to third parties in accordance with specified terms and conditions. At December 31, 1996, letters of credit outstanding amounted to $1,709. Included in the accompanying consolidated financial statements are management fees and interest income from related parties of $1,501, $1,689 and $123 for the years ended December 31, 1994, 1995, and 1996, respectively. There are numerous legislative and executive initiatives at the federal and state levels for comprehensive reforms affecting the payment for and availability of healthcare services. The Company is unable to predict the impact of healthcare reform proposals on the Company; however, it is possible that such proposals could have a material adverse effect on the Company. Any changes in reimbursement levels under Medicaid and Medicare and any changes in applicable government regulations could significantly affect the profitability of the Company. Various cost containment measures adopted by governmental pay sources have begun to limit the scope and amount of reimbursable healthcare expenses. Additional measures, including measures that have already been proposed in states in which the Company operates, may be adopted in the future as federal and state governments attempt to control escalating healthcare costs. There can be no assurance that currently proposed or future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs will not have a material adverse effect on the Company. In particular, changes to the Medicare reimbursement program that have been proposed could materially adversely affect the Company's revenues derived from ancillary services. F-13 The Multicare Companies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Years Ended December 31, 1994, 1995 and 1996 (In thousands, except share and per share data) NOTE 7 -- COMMITMENTS AND CONTINGENCIES -- (Continued) The healthcare industry is labor intensive. Wages and other labor related costs are especially sensitive to inflation. In addition, suppliers pass along rising costs to the Company in the form of higher prices. When faced with increases in operating costs, the Company has increased its charges for services. The Company's operations could be adversely affected if it is unable to recover future cost increases or experiences significant delays in increasing rates of reimbursement of its labor and other costs from Medicaid and Medicare revenue sources. The Company is from time to time subject to claims and suits arising in the ordinary course of business. In the opinion of management, the ultimate resolution of pending legal proceedings will not have a material effect on the Company's consolidated financial statements. NOTE 8 -- CAPITAL STOCK AND STOCK PLANS In May 1996, the Company increased the number of authorized shares of preferred and common stock for the purpose of effecting a three-for-two stock split in the form of a 50% stock dividend. In October 1996, the Company completed a public offering of 3,000,000 shares of its common stock, resulting in net proceeds of $52,000. The proceeds from the offering were used to repay a portion of outstanding bank indebtedness under the Company's credit agreement which was incurred to finance certain of the Company's acquisitions. The Company's 1993 Stock Option Plan and Non-Employee Director Stock Option Plan (Plans) provide for the issuance of options to directors, officers, key employees and consultants of the Company. The aggregate number of shares authorized for issuance under the Plans is 3,840,000. Options are issued at market value on the date of the grant, vest ratably over maximum periods of five years, and expire ten years from the date of the grant. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", and applies APB Opinion No. 25 in accounting for its plans and, accordingly, has not recognized compensation cost for stock option plans and stock purchase plans in its financial statements. Had the Company determined compensation cost based on the fair value at the grant date consistent with the provisions of SFAS 123, the Company's net income would have been changed to the pro forma amounts indicated below: 1995 1996 ---------- --------- Net income--as reported ............... $ 18,425 $ 25,910 Net income--pro forma .................. 17,530 24,181 Net income per share--as reported ...... .69 .90 Net income per share--pro forma ......... .66 .85 The fair value of the stock options granted in 1995 and 1996 is estimated at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for 1995 and 1996: dividend yield of 0%; expected volatility of 38.4%; a risk-free interest rate of 6.5%; and expected lives of 9.9 years. F-14 The Multicare Companies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Years Ended December 31, 1994, 1995 and 1996 (In thousands, except share and per share data) NOTE 8 -- CAPITAL STOCK AND STOCK PLANS -- (Continued) Presented below is a summary of the stock option plans for the years ended December 31, 1994, 1995 and 1996:
1994 1995 1996 -------------------------- ------------------------ ----------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------- ---------- ----------- ---------- ----------- --------- Options outstanding at beginning of year ........................ 395,250 $ 7.09 1,772,778 $ 10.74 2,441,364 $ 11.46 Granted ........................ 1,585,893 10.94 750,828 13.10 828,746 17.60 Exercised ........................ -- -- (27,969) 8.73 (24,789) 11.05 Forfeited/expired ............... (208,365) 8.33 (54,273) 12.15 (78,084) 13.10 --------- ------ --------- -------- --------- ------- Options outstanding at end of year 1,772,778 $10.74 2,441,364 $ 11.46 3,167,237 $ 13.03 ========= ========= ========= Weighted-average grant-date fair value of options granted ...... $7.08 $8.23 $11.06
The following table summarizes information for stock options outstanding at December 31, 1996:
Weighted Avg. Remaining Weighted Avg. Weighted Avg. Number Contractual Exercise Number Exercise Range of Exercise Prices Outstanding Life Price Exercisable Price - -------------------------- ------------- -------------- --------------- ------------- -------------- $6.67-$10.83 ............ 311,251 6.8 $ 8.06 165,749 $ 7.71 11.17-14.67 ............ 2,051,610 7.6 11.97 826,881 11.81 16.00-20.59 ............ 804,376 9.5 17.66 22,500 18.67 --------- --- ------ ------- ------ 3,167,237 8.0 $13.03 1,015,130 $11.29 ========= === ====== ========= ======
The Company's Employee Stock Purchase Plan (ESPP) was adopted by the Company's Board of Directors in 1995 and approved by shareholders in 1996. The ESPP permits employees of the Company to purchase the Company's common stock at a price equal to the lesser of 85% of the fair market value of the common stock on the first or last day of each quarter. There are 1,200,000 shares authorized for issuance under the ESPP. In 1996, the Company adopted the Directors Retainer and Meeting Fee Plan (Directors Plan) under which a director who is not an employee of the Company may elect to receive payment of all or any portion of his or her annual cash retainer and meeting fees either in cash or shares of the Company's common stock. The number of shares payable is determined by the fair market value of a share on the date payment is due. The aggregate number of shares authorized for issuance under the Directors Plan is 75,000. In 1995, the Company issued put options on 500,000 shares of its common stock which expired unexercised in 1996. As of December 31, 1995 the balance in Contingent stock purchase commitment is the amount the Company would have been obligated to pay if all of the remaining put options were exercised. At December 31, 1996, the Company has 4,976,000 shares of its common stock reserved for the conversion of its Convertible Debentures. NOTE 9 -- SUBSEQUENT EVENTS (UNAUDITED) In February 1997, options to purchase 556,000 shares of common stock were granted at exercise prices representing fair market value as of the date of the grants. F-15 The Multicare Companies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Years Ended December 31, 1994, 1995 and 1996 (In thousands, except share and per share data) NOTE 10 -- QUARTERLY RESULTS OF OPERATIONS (Unaudited)
Year Ended December 31, 1995 -------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter(1) ---------- ---------- ---------- ----------- Net revenues .................................... $ 81,700 $ 85,605 $ 90,948 $ 94,795 Income from operations ........................... 12,350 12,652 13,443 13,565 Income before extraordinary item ............... 5,094 5,264 5,780 6,009 Net income ....................................... 5,094 5,264 5,780 2,287 Income per common share assuming full dilution(2): Income before extraordinary item ............... .19 .20 .22 .23 Net income .................................... $ .19 $ .20 $ .22 $ .09 Price range of stock (2)(3)(4) High .......................................... $ 15 1/2 $ 15 1/8 $ 15 5/8 $ 16 1/8 Low ............................................. $ 11 5/8 $ 11 1/4 $ 11 1/4 $ 11 3/4
Year Ended December 31, 1996 ------------------------------------------------------ First Second Third Fourth Quarter(1) Quarter Quarter Quarter(1) ------------ ----------- ----------- ----------- Net revenues .................................... $ 120,057 $ 131,889 $ 134,944 $ 145,340 Income from operations ........................... 15,478 17,610 18,759 19,624 Income before extraordinary item ............... 6,197 6,780 7,418 8,342 Net income ....................................... 4,716 6,780 7,418 6,996 Income per common share assuming full dilution(2): Income before extraordinary item ............... .23 .24 .26 .27 Net income .................................... $ .18 $ .24 $ .26 $ .23 Price range of stock (2)(3)(4) High .......................................... $ 19 1/4 $ 20 7/8 $ 21 3/4 $ 22 3/8 Low ............................................. $ 14 7/8 $ 17 1/2 $ 18 $ 17 3/4
- ------------ (1) The Company incurred extraordinary charges of $3,722, $1,481 and $1,346, net of taxes, in the fourth quarter of 1995, first quarter of 1996, and fourth quarter of 1996, respectively, relating to extinguishment of debt. (2) Income per share and prices have been adjusted for a 50% stock dividend in May 1996. (3) The Company has not paid cash dividends and does not anticipate paying cash dividends in the foreseeable future. (4) Stock prices are from official data released by the NASDAQ stock market and The New York Stock Exchange. As of February 21, 1997, there were approximately 88 record holders of the Company's common stock. NOTE 11 -- SUBSEQUENT EVENT (UNAUDITED) On June 16, 1997, Genesis ElderCare Acquisition Corp. (Acquisition Corp.) and the Company entered into an Agreement and Plan of Merger (the Merger Agreement) whereby Acquisition Corp. agreed to make the Tender Offer to purchase all of the outstanding shares of common stock, par value $.01 per share (the Shares), of the Company at a purchase price of $28.00 per Share. Consummation of the Tender Offer is subject to certain conditions. As soon as practicable after the consummation of the Tender Offer, Acquisition Corp. will be merged with and into the Company. Following the Merger, the Company will continue as the surviving corporation and become a subsidiary of Genesis ElderCare Corp. Genesis ElderCare Corp. will be owned by Genesis Health Ventures, Inc., The Cypress Group L.L.C. and TPG Partners II, L.P. F-16 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except share data)
December 31, September 30, 1996 1997 ------------------- ------------------- Assets (Unaudited) Current assets: Cash and cash equivalents................................... $ 1,150 2,118 Accounts receivable, net.................................... 102,234 119,522 Prepaid expenses and other current assets................... 18,419 24,614 ------------------- ------------------- Total current assets.................................... 121,803 146,254 Property, plant and equipment, net............................. 443,019 460,800 Goodwill, net.................................................. 157,298 171,324 Other assets................................................... 39,547 44,755 ------------------- ------------------- $ 761,667 823,133 =================== =================== Liabilities and Stockholders' Equity Current liabilities: Accounts payable............................................ $ 26,948 28,863 Accrued liabilities......................................... 54,707 64,944 Current portion of long-term debt........................... 821 625 ------------------- ------------------- Total current liabilities............................... 82,476 94,432 Long-term debt................................................. 428,347 423,421 Deferred taxes................................................. 42,909 42,106 Stockholders' equity: Preferred stock, par value $.01, 7,000,000 shares -- -- authorized, none issued..................................... Common stock, par value $.01, 70,000,000 shares authorized; 30,133,535 and 31,731,963 issued and outstanding in 1996 and 1997, respectively.............. 301 317 Additional paid-in-capital..................................... 143,513 170,858 Retained earnings.............................................. 64,121 91,999 ------------------- ------------------- Total stockholders' equity..................................... 207,935 263,174 ------------------- ------------------- $ 761,667 823,133 =================== ===================
F-17 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) (In thousands, except per share data)
Three Months ended Nine Months ended September 30, September 30, -------------------------- -------------------------- 1996 1997 1996 1997 ------------- ------------ ------------ ------------ Net revenues................................................ $134,944 185,996 386,890 533,952 Expenses: Operating expense........................................ 101,025 142,873 291,494 406,173 Corporate, general and administrative expense............ 6,214 8,112 18,627 25,203 Lease expense............................................ 3,105 4,335 8,874 12,693 Depreciation and amortization expense.................... 5,841 7,537 16,048 21,620 Interest expense, net.................................... 6,863 7,472 18,947 21,640 Debenture conversion expense............................. -- -- -- 785 -------- ------- ------- ------- Total expenses....................................... 123,048 170,329 353,990 488,114 -------- ------- ------- ------- Income before income taxes and extraordinary item........... 11,896 15,667 32,900 45,838 Income tax expense.......................................... 4,478 5,857 12,505 17,087 -------- ------- ------- ------- Income before extraordinary item............................ 7,418 9,810 20,395 28,751 Extraordinary item - loss on extinguishment of debt, net of tax benefit....................................... -- -- 1,481 873 -------- ------- ------- ------- Net income.................................................. $ 7,418 9,810 18,914 27,878 ======== ======= ======= ======= Income per common and common equivalent share data:......... Income before extraordinary item............................ $.27 .30 .74 .89 Net income.................................................. $.27 .30 .69 .87 Weighted average number of common and common equivalent shares outstanding............................ 27,606 32,823 27,506 32,172 Income per common share assuming full dilution: Income before extraordinary item............................ $.26 .28 .71 .85 Net income.................................................. $.26 .28 .67 .82 Weighted average number of common shares outstanding assuming full dilution................................... 32,774 37,016 32,748 36,832
See accompanying notes to consolidated financial statements. F-18 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Nine months ended September 30, ------------------------------ 1996 1997 -------------- -------------- Cash flows from operating activities: Net cash provided by operating activities.................... $18,997 37,048 -------- ------- Cash flows from investing activities: Assets and operations acquired............................... (122,940) (22,568) Capital expenditures......................................... (49,510) (39,301) Other assets................................................. (2,005) (9,465) Proceeds from repayment of construction advances............. -- 13,100 -------- ------- Net cash used in investing activities........................ (174,455) (58,234) -------- ------- Cash flows from financing activities: Proceeds from exercise of stock options and 511 1,075 stock purchase plan....................................... Proceeds from long-term debt................................. 218,200 112,400 Payments of long-term debt................................... (62,874) (91,310) Debt issuance costs.......................................... (2,407) (195) Other, net................................................... -- 184 -------- ------- Net cash provided by financing activities.................... 153,430 22,154 -------- ------- Increase (decrease) in cash and cash equivalents............. (2,028) 968 Cash and cash equivalents at beginning of period............. 3,921 1,150 -------- ------- Cash and cash equivalents at end of period................... $1,893 2,118 ======== =======
See accompanying notes to consolidated financial statements. F-19 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated financial Statements September 30, 1997 (Unaudited) (1) Organization and Basis of Presentation The Multicare Companies, Inc. and Subsidiaries (Multicare or the Company) own, operate and manage skilled nursing facilities which provide long-term care and specialty medical services in selected geographic regions within the eastern and midwestern United States. In addition, the Company operates assisted-living facilities, institutional pharmacies, medical supply companies, outpatient rehabilitation centers and other ancillary healthcare businesses. The financial information as of September 30, 1997 and for the three and nine months ended September 30, 1996 and 1997, is unaudited and has been prepared in conformity with the accounting principles and practices as reflected in the Company's audited annual financial statements. The unaudited financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position as of September 30, 1997 and the operating results and cash Flows for the three and nine months ended September 30, 1996 and 1997. Results for interim periods are not necessarily indicative of those to be expected for the year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto incorporated in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. (2) Completed Merger On June 16, 1997, Multicare entered into an Agreement and Plan of Merger (the "Merger Agreement") with Genesis ElderCare Corp. (the "Parent"), and Genesis ElderCare Acquisition Corp., a wholly owned subsidiary of Parent (the "Acquisition Corp.") pursuant to which Acquisition Corp. offered to acquire all outstanding shares of common stock (the Shares"), of Multicare at a purchase price of $28.00 per Share, net to the seller in cash (the "Tender Offer"). The Tender Offer expired on Wednesday, October 8, 1997 and Acquisition Corp. accepted for purchase 32,790,495 Shares that had been validly tendered and not withdrawn. The Shares accepted pursuant to the Tender Offer constitute approximately 99.65% of Multicare's issued and outstanding Shares. On October 10, 1997, pursuant to the Merger Agreement, Acquisition Corp. was merged with and into Multicare F-20 (the "Surviving Corporation") and the remaining Shares not previously purchased in the Tender Offer were canceled, extinguished and converted into the right to receive $28.00 in cash. As a result of the Merger, Parent is the record and beneficial owner of all Shares of the Surviving Corporation. Parent is owned by Genesis Health Ventures, Inc., a Pennsylvania corporation ("Genesis"), The Cypress Group L.L.C. (together with its affiliates, "Cypress"), TPG Partners II, L.P. (together with its affiliates, "TPG") and Nazem, Inc. (together with its affiliates, "Nazem") and their affiliates. (3) Commitments and Contingencies There are numerous legislative and executive initiatives at the federal and state levels for comprehensive reforms affecting the payment for and availability of healthcare services, including without limitation discussions at the federal level concerning budget reductions and the implementation of prospective payment systems for the Medicare and Medicaid programs. The Company is unable to predict the impact of healthcare reform proposals on the Company; however, it is possible that such proposals could have a material adverse effect on the Company. Any changes in reimbursement levels under Medicaid and Medicare and any changes in applicable government regulations could significantly affect the profitability of the Company. Various cost containment measures adopted by governmental pay sources have begun to limit the scope and amount of reimbursable healthcare expenses. Additional measures, including measures that have already been proposed in states in which the Company operates, may be adopted in the future as federal and state governments attempt to control escalating healthcare costs. There can be no assurance that currently proposed or future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs will not have a material adverse effect on the Company. In particular, changes to the Medicare reimbursement program that have been proposed could materially adversely affect the Company. The Company is from time to time subject to claims and suits arising in the ordinary course of business. In the opinion of management, the ultimate resolution of pending legal proceedings will not have a material effect on the Company's consolidated financial statements. (4) Capital Stock and Net Income Per Share In May 1996, the Company effected a three-for-two stock split in the form of a 50% stock dividend. All references to average number of shares outstanding and per share amounts have been restated to reflect the stock split. The computation of primary earnings per share is based on the weighted average number of outstanding shares during the period and includes when their effect is dilutive, common stock equivalents consisting of certain shares subject to stock options. Fully diluted earning per share additionally assumes the conversion of the Company's Convertible Subordinated Debentures. Net income used in the computation of fully diluted earnings per share was determined on the assumption that the convertible debentures were converted and net income was adjusted for the amounts representing interest and amortization of debt issuance costs, net of tax effect. F-21 In February 1997 the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," ("FASB 128") which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. The impact of FASB 128 on the calculation of earnings per share amounts is not expected to be material. (5) Acquisitions In February 1996, the Company completed the acquisition of Concord Health Group, Inc. (Concord). The Company acquired the outstanding capital stock and warrants of Concord for approximately $75,000 including transaction costs, repaid approximately $41,000 of debt, and assumed historical debt of approximately $4,000. Total goodwill approximated $61,000. In December 1996, the Company completed the acquisition of The A.D.S Group (A.D.S). The Company paid approximately $10,000, repaid or assumed approximately $29,800 in debt, financed $51,000 through a lease facility, and issued 554,973 shares of its common stock for A.D.S. Total goodwill approximated $30,700. The following unaudited pro forma financial information gives effect to the acquisitions of Concord and A.D.S as if such transactions occurred on January 1, 1996:
Pro Forma for the Nine months ended September 30, 1996 ---------------------- Net revenues....................................................... $ 438,137 Income before extraordinary item................................... 22,170 Net income......................................................... 20,689 Income before extraordinary item per common and common equivalent share assuming full dilution....................... .75 Net income per common and common equivalent share assuming full dilution........................................ $ .71
F-22 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers. Section 145 of the General Corporation Law of the State of Delaware (the "DGCL") provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation in such capacity at another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that such person's conduct was unlawful. Section 145 of DGCL also provides that a corporation may indemnify any person who was or is a party or threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted under similar standards, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 145 of the DGCL also provides that to the extent that a director, officer, employee or agent of a corporation is successful on the merits or otherwise in the defense of any action referred to above, or in defense of any claim, issue or matter therein, the corporation must indemnify such person against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. In accordance with Section 145 of the DGCL, the Registrant's By-laws provide that the Registrant will indemnify, to the maximum extent permitted by applicable law, any person who was or is a party, or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, including, without limitation, any action by or in the right of the Registrant to procure a judgment in its favor, by reason of the fact that such person, or a person of whom such person is the legal representative, is or was a director or officer of the Registrant or is or was serving in any capacity at the request of the Registrant for any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against judgments, fines, penalties, exercise taxes, amounts paid in settlement and costs, charges and expenses (including attorneys' fees and disbursements). The Registrant's By-laws also provide that expenses (including attorneys' fees and disbursements) incurred by an officer or director in defending an action, suit or proceeding will be paid by the Registrant in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such person seeking indemnification to repay such amount in the event that it shall be ultimately II-1 determined by final judicial decision from which there is no further right of appeal that such person is not entitled to be indemnified by the Registrant for such expenses. Section 102(B)(7) of the DGCL permits a corporation to provide in its certificate of incorporation that a director of a corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL (regarding certain illegal distributions) or (iv) for any transaction from which the director derived an improper personal benefit. The Registrant's Certificate of Incorporation provides that the personal liability of the Registrant's directors to the Registrant or any of its stockholders for monetary damages for breach of fiduciary duty by such director as a director is limited to the fullest extent permitted by Delaware law. The Registrant also maintains directors' and officers' liability insurance covering certain liabilities that may be incurred by directors and officers of the Registrant in the performance of their duties. Item 21. A. Financial Statement Schedules. Report of Independent Auditors Valuation and Qualifying Accounts B. Exhibits.
Exhibit No. Description - ----------- ----------- 2.1 (1) Agreement and Plan of Merger dated June 16, 1997 by and among Genesis ElderCare Corp., Genesis ElderCare Acquisition Corp., Genesis Health Ventures, Inc. and The Multicare Companies, Inc. 4.1 Form of 9% Senior Subordinated Note due 2007 4.2 Indenture, dated August 11, 1997 by and among Genesis ElderCare Acquisition Corp., PNC Bank, National Association, as trustee, and Banque Internationale a Luxembourg, S.A., as paying agent. 5 Opinion of Blank Rome Comisky & McCauley LLP. 23.1 Consent of KPMG Peat Marwick LLP. 23.2 Consent of Blank Rome Comisky & McCauley LLP included in the opinion filed as Exhibit 5 hereto). 24 Power of Attorney (included on page II-5). 25 Statement of Eligibility of Trustee on Form T-1.
- -------------------------- (1) Incorporated by reference to the Tender Offer Statement on Schedule 14D-1 filed by Genesis ElderCare Corp. and Genesis ElderCare Acquisition Corp. on June 20, 1997. 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 II-2 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; (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. II-3 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-4 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 January 15, 1998. THE MULTICARE COMPANIES, 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, Richard R. Howard and George V. Hager, Jr., 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 January 15, 1998 - ----------------------------------------- Director Michael R. Walker /s/ Jonathan J. Coslet Director January 15, 1998 - ----------------------------------------- Jonathan J. Coslet /s/ James G. Coulter Vice President, Assistant Secretary and January 15, 1998 - ----------------------------------------- Director James G. Coulter /s/ George V. Hager, Jr. Senior Vice President, Chief Financial January 15, 1998 - ----------------------------------------- Officer and Director George V. Hager, Jr. /s/ Richard R. Howard Director January 15, 1998 - ----------------------------------------- Richard R. Howard /s/ James V. McKeon Vice President, Controller and January 15, 1998 - ----------------------------------------- Assistant Secretary James V. McKeon /s/ Karl I. Peterson Director January 15, 1998 - ----------------------------------------- Karl I. Peterson /s/ James L. Singleton Vice President, Assistant Secretary and January 15, 1998 - ----------------------------------------- Director James L. Singleton /s/ William L. Spiegel Director January 15, 1998 - ----------------------------------------- William L. Spiegel /s/ James A. Stern Director January 15, 1998 - ----------------------------------------- James A. Stern
II-5 SCHEDULE INDEX Report of Independent Auditors Valuation and Qualifying Accounts II-6 Independent Auditors' Report The Board of Directors The Multicare Companies, Inc.: Under date of February 4, 1997, we reported on the consolidated balance sheets of The Multicare Companies, Inc. and subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, as contained in the prospectus. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule on valuation and qualifying accounts. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Short Hills, New Jersey February 4, 1997 II-7 SCHEDULE II THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 31, 1994, 1995, 1996 (In thousands)
Balance at Charged to Charged to Balance beginning of costs and other at end period expenses accounts(1) Deductions of period ------------------------------------------------------------------ Year ended December 31, 1996: Allowance for doubtful accounts $5,241 4,760 2,502 972 11,531 ====== ===== ===== === ====== Year ended December 31, 1995: Allowance for doubtful accounts $2,726 3,483 -- 968 5,241 ====== ===== ===== === ====== Year ended December 31, 1994: Allowance for doubtful accounts $1,642 1,712 -- 628 2,726 ====== ===== ===== === ======
- ----------- (1) Represents amounts related to acquisitions. (2) Represents amounts written-off as uncollectible. II-8 EXHIBIT INDEX
Exhibit No. Description Page - ----------- ----------- ---- 2.1 (1) Agreement and Plan of Merger dated June 16, 1997 by and among Genesis ElderCare Corp., Genesis ElderCare Acquisition Corp., Genesis Health Ventures, Inc. and The Multicare Companies, Inc. 4.1 Form of 9% Senior Subordinated Note due 2007 4.2 Indenture, dated August 11, 1997 by and among Genesis ElderCare Acquisition Corp., PNC Bank, National Association, as trustee, and Banque Internationale a Luxembourg, S.A., as paying agent. 5 Opinion of Blank Rome Comisky & McCauley LLP. 23.1 Consent of KPMG Peat Marwick LLP. 23.2 Consent of Blank Rome Comisky & McCauley LLP included in the opinion filed as Exhibit 5 hereto). 24 Power of Attorney (included on page II-5). 25 Statement of Eligibility of Trustee on Form T-1.
(1) Incorporated by reference to the Tender Offer Statement on Schedule 14D-1 filed by Genesis ElderCare Corp. and Genesis ElderCare Acquisition Corp. on June 20, 1997. EX-4 2 EXHIBIT 4.1 [FACE OF NOTE] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS 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. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.08 OF THE INDENTURE. THE MULTICARE COMPANIES, INC. 9% Senior Subordinated Note due 2007 [CUSIP] [CINS] [__________] No. $_________ THE MULTICARE COMPANIES, INC., a Delaware corporation (the "Issuer", which term includes any successor under the Indenture hereinafter referred to), for value received, promises to pay to _____________, or its registered assigns, the principal sum of ____________ ($___ ) on August 1, 2007. Interest Payment Dates: February 1 and August 1, commencing February 1, 1998. Regular Record Dates: January 15 and July 15. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. IN WITNESS WHEREOF, the Issuer has caused this Note to be signed manually or by facsimile by its duly authorized officers. Date: THE MULTICARE COMPANIES, INC. By: ___________________________________ Name: Title: 2 (Trustee's Certificate of Authentication) This is one of the 9% Senior Subordinated Notes due 2007 described in the within-mentioned Indenture. PNC BANK, NATIONAL ASSOCIATION as Trustee By: ___________________________________ Authorized Signatory 3 [REVERSE SIDE OF NOTE] THE MULTICARE COMPANIES, INC. 9% Senior Subordinated Note due 2007 1. Principal and Interest. The Issuer will pay the principal of this Note on August 1, 2007. The Issuer promises to pay interest on the principal amount of this Note on each Interest Payment Date, as set forth below, at the rate per annum shown above. Interest will be payable semiannually (to the holders of record of the Notes at the close of business on the January 15 or July 15 immediately preceding the Interest Payment Date) on each Interest Payment Date, commencing February 1, 1998. 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 August 11, 1997; provided that, if there is no existing default in the payment of interest and this Note is authenticated between a Regular Record Date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such Interest Payment Date. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Issuer shall pay interest on overdue principal and premium, if any, and interest on overdue installments of interest, to the extent lawful, at a rate per annum that is 2% in excess of the rate otherwise payable. 2. Method of Payment. The Issuer will pay interest (except defaulted interest) on the principal amount of the Notes as provided above on each February 1 and August 1 commencing February 1, 1998 to the persons who are Holders (as reflected in the Security Register at the close of business on the January 15 or July 15 immediately preceding the Interest Payment Date), in each case, even if the Note is cancelled on registration of transfer or registration of exchange after such record date; provided that, with respect to the payment of principal, the Issuer will make payment to the Holder that surrenders this Note to a Paying Agent on or after August 1, 2007. The Issuer will pay principal, premium, if any, and as provided above, interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Issuer may pay principal, premium, if any, and interest by its check payable in such money. It may mail an interest check to a Holder's registered address (as reflected in the 4 Security Register). If a payment date is a date other than a Business Day at a place of payment, payment may be made at that place on the next succeeding day that is a Business Day and no interest shall accrue for the intervening period. 3. Paying Agent and Registrar. Initially, the Trustee will act as authenticating agent, Paying Agent and Registrar. The Issuer may change any authenticating agent, Paying Agent or Registrar without notice. The Issuer, any Subsidiary or any Affiliate of any of them may act as Paying Agent, Registrar or co-Registrar. 4. Indenture; Limitations. The Issuer issued the Notes under an Indenture dated as of August 11, 1997 (the "Indenture"), between the Issuer, PNC Bank, National Association, trustee (the "Trustee") and Banque Internationale a Luxembourg S.A., a paying agent. Capitalized terms herein are used as defined in the Indenture unless otherwise indicated. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act. The Notes are subject to all such terms, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of all such terms. To the extent permitted by applicable law, in the event of any inconsistency between the terms of this Note and the terms of the Indenture, the terms of the Indenture shall control. The Notes are general obligations of the Issuer. 5. Optional Redemption. The Notes will be redeemable, at the Issuer's option, in whole or in part, at any time or from time to time, on or after August 1, 2002 and prior to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by first-class mail to each Holder's last address, as it appears in the Security Register, at the following Redemption Prices (expressed in percentages of principal amount), plus accrued and unpaid interest to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date that is prior to the Redemption Date to receive interest due on an Interest Payment Date), if redeemed during the 12-month period commencing August 1 of the years set forth below: Redemption Year Price ---- ---------- 2002............................... 104.500% 2003............................... 102.250 2004 and thereafter................ 100.000 Notes in original denominations larger than $1,000 may be redeemed in part. On and 5 after the Redemption Date, interest ceases to accrue on Notes or portions of Notes called for redemption, unless the Issuer defaults in the payment of the Redemption Price. 6. Repurchase upon Change of Control. Upon the occurrence of any Change of Control, each Holder shall have the right to require the repurchase of its Notes by the Issuer in cash pursuant to the offer described in the Indenture at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (the "Payment Date"). A notice of such Change of Control will be mailed within 30 days after any Change of Control occurs to each Holder at its last address as it appears in the Security Register. Notes in original denominations larger than $1,000 may be sold to the Issuer in part. On and after the Payment Date, interest ceases to accrue on Notes or portions of Notes surrendered for purchase by the Issuer, unless the Issuer defaults in the payment of the purchase price. 7. Denominations; Transfer; Exchange. The Notes are in registered form without coupons in denominations of $1,000 of principal amount and multiples of $1,000 in excess thereof. A Holder may register the transfer or exchange of Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer or exchange of any Notes selected for redemption. Also, it need not register the transfer or exchange of any Notes for a period of 15 days before the day of mailing of a notice of redemption of Notes selected for redemption. 8. Persons Deemed Owners. A Holder shall be treated as the owner of a Note for all purposes. 9. Unclaimed Money. If money for the payment of principal, premium, if any, or interest remains unclaimed for two years, the Trustee and the Paying Agent will pay the money back to the Issuer at its request. After that, Holders entitled to the money must look to the Issuer for payment, unless an abandoned property law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. 6 10. Discharge Prior to Redemption or Maturity. If the Issuer deposits with the Trustee money or U.S. Government Obligations sufficient to pay the then outstanding principal of, premium, if any, and accrued interest on the Notes (a) to redemption or maturity, the Issuer will be discharged from the Indenture and the Notes, except in certain circumstances for certain sections thereof, and (b) to the Stated Maturity, the Issuer will be discharged from certain covenants set forth in the Indenture. 11. Amendment; Supplement; Waiver. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding, and any existing default or compliance with any provision may be waived with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding. Without notice to or the consent of any Holder, the parties thereto may amend or supplement the Indenture or the Notes to, among other things, cure any ambiguity, defect or inconsistency and make any change that does not materially and adversely affect the rights of any Holder. 12. Restrictive Covenants. The Indenture imposes certain limitations on the ability of the Issuer and its Restricted Subsidiaries, among other things, to Incur additional Indebtedness, make Restricted Payments, use the proceeds from Asset Sales, engage in transactions with Affiliates or merge, consolidate or transfer substantially all of its assets. Within 45 days after the end of each fiscal quarter (90 days after the end of the last fiscal quarter of each year), the Issuer must report to the Trustee on compliance with such limitations. 13. Subordination. The payment of the Notes will, to the extent set forth in the Indenture, be subordinated in right of payment to the prior payment in full, in cash or Cash Equivalents, of all Senior Indebtedness. 14. Successor Persons. When a successor person or other entity assumes all the obligations of its predecessor under the Notes and the Indenture, the predecessor person will be released from those obligations. 15. Defaults and Remedies. The following events constitute "Events of Default" under the Indenture: (a) default in the payment of principal of (or premium, if any, on) any Note when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise, whether or not such payment is 7 prohibited by the subordination provisions set forth in Article Eleven; (b) default in the payment of interest on any Note when the same becomes due and payable, and such default continues for a period of 30 days, whether or not such payment is prohibited by the subordination provisions set forth in Article Eleven; (c) default in the performance or breach of Article Five or Section 3.01(b) of the Indenture or the failure to make or consummate an Offer to Purchase in accordance with Section 4.10 or 4.11 of the Indenture; (d) default in the performance of or breach of any covenant or agreement of the Issuer in the Indenture or under the Notes (other than a default specified in clause (a), (b) or (c) above), and such default or breach continues for a period of 30 consecutive days after written notice by the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding; (e) there occurs with respect to any issue or issues of Indebtedness of the Issuer or any Significant Subsidiary having an outstanding principal amount of $10 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, (I) an event of default that has caused the holder thereof to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration and/or (II) the failure to make a principal payment at the final (but not any interim) fixed maturity and such defaulted payment shall not have been made, waived or extended within 30 days of such payment default; (f) any final judgment or order (not covered by insurance) for the payment of money in excess of $10 million in the aggregate for all such final judgments or orders against all such Persons (treating any deductibles, self-insurance or retention as not so covered) shall be rendered against the Issuer or any Significant Subsidiary and shall not be paid or discharged, and there shall be any period of 30 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid or discharged against all such Persons to exceed $10 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of the Issuer or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Issuer or any Significant Subsidiary or for all or substantially all of the property and assets of the Issuer or any Significant Subsidiary or (C) the winding up or liquidation of the affairs of the Issuer or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 30 consecutive days; (h) the Issuer or any Significant Subsidiary (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Issuer or any Significant Subsidiary or for all or substantially all of the property and assets of the Issuer or any Significant Subsidiary or (C) effects any general assignment for the benefit of creditors; or (i) the Guaranty Documents are not executed and delivered within three Business Days after the consummation of the Tender Offer (unless prior to or at the end of such three Business Days the Merger shall have been consummated). 8 If an Event of Default, as defined in the Indenture, occurs and is continuing, the Trustee may, and at the direction of the Holders of at least 25% in aggregate principal amount of the Notes then outstanding shall, declare all the Notes to be due and payable. If a bankruptcy or insolvency default with respect to the Issuer occurs and is continuing, the Notes automatically become due and payable. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Notes. Subject to certain limitations, Holders of at least a majority in principal amount of the Notes then outstanding may direct the Trustee in its exercise of any trust or power. 16. Trustee Dealings with Issuer. The Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from and perform services for the Issuer or its Affiliates and may otherwise deal with the Issuer or its Affiliates as if it were not the Trustee. 17. No Recourse Against Others. No incorporator or any past, present or future partner, stockholder, other equity holder, officer, director, employee or controlling person as such, of the Issuer or of any successor Person shall have any liability for any obligations of the Issuer under the Escrow Agreement, the Notes or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes. 18. Authentication. This Note shall not be valid until the Trustee or authenticating agent signs the certificate of authentication on the other side of this Note. 19. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors Act). The Issuer will furnish a copy of the Indenture to any Holder upon written request and without charge. Requests may be made to The Multicare Companies, Inc., 148 West State Street, Kennett Square, Pennsylvania 19348; Attention: George V. Hager, Jr. 9 [FORM OF TRANSFER NOTICE] FOR VALUE RECEIVED the undersigned registered holder hereby sell(s), assign(s) and transfer(s) unto Insert Taxpayer Identification No. ________________________________________________________________________________ Please print or typewrite name and address including zip code of assignee ________________________________________________________________________________ the within Note and all rights thereunder, hereby irrevocably constituting and appointing __________________________________________________ attorney to transfer said Note on the books of the Issuer with full power of substitution in the premises. 10 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Note purchased by the Issuer pursuant to Section 4.10 or 4.11 of the Indenture, check the Box: |_| If you wish to have a portion of this Note purchased by the Issuer pursuant to Section 4.10 or 4.11 of the Indenture, state the amount: $___________________. Date: Your Signature: (Sign exactly as your name appears on the other side of this Note) Signature Guarantee: ________________________________ 11 EX-4.2 3 EXHIBIT 4.2 ============================================================================== GENESIS ELDERCARE ACQUISITION CORP., Issuer and PNC BANK, NATIONAL ASSOCIATION, Trustee and BANQUE INTERNATIONALE A LUXEMBOURG S.A., Paying Agent ---------------- Indenture Dated as of August 11, 1997 ---------------- 9% Senior Subordinated Notes due 2007 ============================================================================== CROSS-REFERENCE TABLE ---------------------
TIA Sections Indenture Sections - ------------ ------------------ ss. 310(a)(1)........................................................ 7.10 (a)(2)........................................................ 7.10 (b)........................................................... 7.08 ss. 313(c)........................................................... 7.06; 11.02 ss. 314(a)........................................................... 4.17; 11.02 (a)(4)........................................................ 4.16; 11.02 (c)(1)........................................................ 11.03 (c)(2)........................................................ 11.03 (e)........................................................... 11.04 ss. 315(b)........................................................... 7.05; 11.02 ss. 316(a)(1)(A)..................................................... 6.05 (a)(1)(B)..................................................... 6.04 (b)........................................................... 6.07 ss. 317(a)(1)........................................................ 6.08 (a)(2)........................................................ 6.09 ss. 318(a)........................................................... 11.01 (c)........................................................... 11.01
Note: The Cross-Reference Table shall not for any purpose be deemed to be a part of the Indenture. TABLE OF CONTENTS
Page ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. Definitions.................................................................................. 1 SECTION 1.02. Incorporation by Reference of Trust Indenture Act............................................ 24 SECTION 1.03. Rules of Construction........................................................................ 25 ARTICLE TWO THE NOTES SECTION 2.01. Form and Dating.............................................................................. 25 SECTION 2.02. Restrictive Legends.......................................................................... 27 SECTION 2.03. Execution, Authentication and Denominations.................................................. 29 SECTION 2.04. Registrar and Paying Agent................................................................... 29 SECTION 2.05. Paying Agent to Hold Money in Trust.......................................................... 30 SECTION 2.06. Transfer and Exchange........................................................................ 31 SECTION 2.07. Book-Entry Provisions for Global Notes....................................................... 31 SECTION 2.08. Special Transfer Provisions.................................................................. 33 SECTION 2.09. Replacement Notes............................................................................ 37 SECTION 2.10. Outstanding Notes............................................................................ 37 SECTION 2.11. Temporary Notes.............................................................................. 37 SECTION 2.12. Cancellation................................................................................. 38 SECTION 2.13. CUSIP Numbers................................................................................ 38 SECTION 2.14. Defaulted Interest........................................................................... 38 SECTION 2.15. Issuance of Additional Notes................................................................. 39 ARTICLE THREE REDEMPTION SECTION 3.01. Right of Redemption; Mandatory Redemption.................................................... 39 SECTION 3.02. Notices to Trustee........................................................................... 40 SECTION 3.03. Selection of Notes to Be Redeemed............................................................ 40 SECTION 3.04. Notice of Redemption......................................................................... 40 SECTION 3.05. Effect of Notice of Redemption............................................................... 41 SECTION 3.06. Deposit of Redemption Price.................................................................. 41 SECTION 3.07. Payment of Notes Called for Redemption....................................................... 42 SECTION 3.08. Notes Redeemed in Part....................................................................... 42 - --------
Note: The Table of Contents shall not for any purposes be deemed to be a part of the Indenture. ii
ARTICLE FOUR COVENANTS SECTION 4.01. Payment of Notes............................................................................. 42 SECTION 4.02. Maintenance of Office or Agency.............................................................. 42 SECTION 4.03. Limitation on Indebtedness................................................................... 43 SECTION 4.04. Limitation on Restricted Payments............................................................ 43 SECTION 4.05. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries.............................................................. 45 SECTION 4.06. Limitations on Preferred Stock of Restricted Subsidiaries.................................... 46 SECTION 4.07. Limitation on Issuances of Guarantees by Restricted Subsidiaries............................. 46 SECTION 4.08. Limitation on Transactions with Stockholders and Affiliates.................................. 47 SECTION 4.09. Limitation on Liens.......................................................................... 48 SECTION 4.10. Limitation on Asset Sales.................................................................... 49 SECTION 4.11. Repurchase of Notes upon a Change in Control................................................. 49 SECTION 4.12. Limitation on Senior Subordinated Indebtedness............................................... 50 SECTION 4.13. Limitation on Management Fees................................................................ 50 SECTION 4.14. Existence.................................................................................... 50 SECTION 4.15. Payment of Taxes and Other Claims............................................................ 51 SECTION 4.16. Maintenance of Properties and Insurance...................................................... 51 SECTION 4.17. Notice of Defaults........................................................................... 51 SECTION 4.18. Compliance Certificates...................................................................... 52 SECTION 4.19. Commission Reports and Reports to Holders.................................................... 52 SECTION 4.20. Waiver of Stay, Extension or Usury Laws...................................................... 53 ARTICLE FIVE SUCCESSOR CORPORATION SECTION 5.01. When Issuer May Merge, Etc................................................................... 53 SECTION 5.02. Successor Substituted........................................................................ 54 ARTICLE SIX DEFAULT AND REMEDIES SECTION 6.01. Events of Default............................................................................ 55 SECTION 6.02. Acceleration................................................................................. 56 SECTION 6.03. Other Remedies............................................................................... 57 SECTION 6.04. Waiver of Past Defaults...................................................................... 57 SECTION 6.05. Control by Majority.......................................................................... 57 SECTION 6.06. Limitation on Suits.......................................................................... 57 SECTION 6.07. Rights of Holders to Receive Payment......................................................... 58 SECTION 6.08. Collection Suit by Trustee................................................................... 58
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SECTION 6.09. Trustee May File Proofs of Claim............................................................. 59 SECTION 6.10. Priorities................................................................................... 59 SECTION 6.11. Undertaking for Costs........................................................................ 59 SECTION 6.12. Restoration of Rights and Remedies........................................................... 60 SECTION 6.13. Rights and Remedies Cumulative............................................................... 60 SECTION 6.14. Delay or Omission Not Waiver................................................................. 60 ARTICLE SEVEN TRUSTEE SECTION 7.01. General ..................................................................................... 60 SECTION 7.02. Certain Rights of Trustee.................................................................... 61 SECTION 7.03. Individual Rights of Trustee................................................................. 62 SECTION 7.04. Trustee's Disclaimer......................................................................... 62 SECTION 7.05. Notice of Default............................................................................ 62 SECTION 7.06. Reports by Trustee to Holders................................................................ 62 SECTION 7.07. Compensation and Indemnity................................................................... 62 SECTION 7.08. Replacement of Trustee....................................................................... 63 SECTION 7.09. Successor Trustee by Merger, Etc............................................................. 64 SECTION 7.10. Eligibility.................................................................................. 64 SECTION 7.11. Money Held in Trust.......................................................................... 64 SECTION 7.12. Withholding Taxes............................................................................ 65 ARTICLE EIGHT DISCHARGE OF INDENTURE SECTION 8.01. Termination of Issuer's Obligations.......................................................... 65 SECTION 8.02. Defeasance and Discharge of Indenture........................................................ 66 SECTION 8.03. Defeasance of Certain Obligations............................................................ 68 SECTION 8.04. Application of Trust Money................................................................... 70 SECTION 8.05. Repayment to Issuer.......................................................................... 70 SECTION 8.06. Reinstatement................................................................................ 70 ARTICLE NINE AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 9.01. Without Consent of Holders................................................................... 71 SECTION 9.02. With Consent of Holders...................................................................... 71 SECTION 9.03. Revocation and Effect of Consent............................................................. 72 SECTION 9.04. Notation on or Exchange of Notes............................................................. 73 SECTION 9.05. Trustee to Sign Amendments, Etc.............................................................. 73 SECTION 9.06. Conformity with Trust Indenture Act.......................................................... 74
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ARTICLE TEN SECURITY SECTION 10.01. Security.................................................................................... 74 ARTICLE ELEVEN SUBORDINATION SECTION 11.01. Agreement to Subordinate.................................................................... 75 SECTION 11.02. Distribution on Dissolution, Liquidation, Bankruptcy or Reorganization....................................................................... 76 SECTION 11.03. Suspension of Payment When Senior Indebtedness in Default................................... 77 SECTION 11.04. Payment Permitted if No Default............................................................. 79 SECTION 11.05. Subrogation to Rights of Holders of Senior Indebtedness..................................... 79 SECTION 11.06. Provisions Solely to Define Relative Rights................................................. 79 SECTION 11.07. Trustee to Effectuate Subordination......................................................... 80 SECTION 11.08. No Waiver of Subordination Provisions....................................................... 80 SECTION 11.09. Notice to Trustee........................................................................... 81 SECTION 11.10. Reliance on Judicial Order or Certificate of Liquidating Agent.............................. 82 SECTION 11.11. Rights of Trustee as a Holder of Senior Indebtedness; Preservation of Trustee's Rights.................................................................. 82 SECTION 11.12. Trust Moneys and Escrowed Funds Not Subordinated............................................ 82 SECTION 11.13. No Suspension of Remedies................................................................... 82 SECTION 11.14. Trustee's Relation to Senior Indebtedness................................................... 82 SECTION 11.15. Other Rights of Holders of Senior Indebtedness.............................................. 83 ARTICLE TWELVE MISCELLANEOUS SECTION 12.01. Trust Indenture Act of 1939................................................................. 83 SECTION 12.02. Notices..................................................................................... 83 SECTION 12.03. Certificate and Opinion as to Conditions Precedent.......................................... 85 SECTION 12.04. Statements Required in Certificate or Opinion............................................... 85 SECTION 12.05. Rules by Trustee, Paying Agent or Registrar................................................. 86 SECTION 12.06. Payment Date Other Than a Business Day...................................................... 86 SECTION 12.07. Governing Law............................................................................... 86 SECTION 12.08. No Adverse Interpretation of Other Agreements............................................... 86 SECTION 12.09. No Recourse Against Others.................................................................. 86 SECTION 12.10. Successors.................................................................................. 87 SECTION 12.11. Duplicate Originals......................................................................... 87 SECTION 12.12. Separability................................................................................ 87 SECTION 12.13. Table of Contents, Headings, Etc............................................................ 87
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EXHIBIT A Form of Note..................................................................................A-1 EXHIBIT B Form of Certificate...........................................................................B-1 EXHIBIT C Form of Certificate to Be Delivered in Connection with Transfers Pursuant to Non-QIB Accredited Investors.........................................C-1 EXHIBIT D Form of Certificate to Be Delivered in Connection with Transfers Pursuant to Regulation S.........................................................D-1 EXHIBIT E Form of Supplemental Indenture................................................................E-1
INDENTURE, dated as of August 11, 1997, between GENESIS ELDERCARE ACQUISITION CORP., a Delaware corporation (the "Issuer"), PNC Bank, National Association, a national banking association duly organized under the laws of the United States of America (the "Trustee"), and Banque Internationale a Luxembourg S.A. (a "Paying Agent"). RECITALS The Issuer has duly authorized the execution and delivery of this Indenture to provide for the issuance initially of up to $250,000,000 aggregate principal amount of the Issuer's 9% Senior Subordinated Notes due 2007 (the "Notes") issuable as provided in this Indenture. The Notes will be secured pursuant to the terms of an Escrow Agreement (as defined herein) as provided by Article Ten of this Indenture. All things necessary to make this Indenture a valid agreement of the Issuer, in accordance with its terms, have been done, and the Issuer has done all things necessary to make the Notes, when executed by the Issuer and authenticated and delivered by the Trustee hereunder and duly issued by the Issuer, the valid obligations of the Issuer as hereinafter provided. This Indenture is subject to, and shall be governed by, the provisions of the Trust Indenture Act of 1939 that are required to be a part of and to govern indentures qualified under the Trust Indenture Act of 1939. AND THIS INDENTURE FURTHER WITNESSETH For and in consideration of the premises and the purchase of the Notes by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders, the Issuer and the Trustee, as follows. ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. Definitions. ----------- "Acquired Indebtedness" means Indebtedness of a Person (i) existing at the time such Person becomes a Restricted Subsidiary or (ii) existing at the time and assumed in connection with the acquisition of assets by a Restricted Subsidiary from such Person, in each case, other than Indebtedness incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary or such acquisition; provided that Indebtedness of a Person which is redeemed, defeased, retired or otherwise repaid at the time of or immediately upon consummation of the transactions by which such Person becomes a Restricted Subsidiary or such asset acquisition shall not be Acquired Indebtedness. 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 Restricted Subsidiary. 2 "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 clause (i) or (ii) above or (iv) any other Person having a relationship with any natural Person described in clause (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. "Agent" means any Registrar, Co-Registrar, Paying Agent or authenticating agent. "Agent Members" has the meaning provided in Section 2.07(a). "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 Restricted Subsidiary; (ii) all or substantially all of the properties and assets of any division or line of business of the Issuer or its Restricted Subsidiaries; or (iii) any other properties or assets of the Issuer or any Restricted Subsidiary, other than in the ordinary course of business. For the purposes of this definition, the term "Asset Sale" shall not include (a) any transfer of properties and assets that is governed by Article Five, (b) any transfer of properties or assets of the Issuer to a Restricted Subsidiary, or of a Restricted Subsidiary to the Issuer or another Restricted Subsidiary, (c) any transfer of inventory, receivables and other current assets, (d) any transfer of assets for consideration at least equal to the Fair Market Value of the assets transferred, to the extent that the consideration received would satisfy clause (B) of Section 4.10, (e) the Therapy Sale, (f) the Pharmacy Sale, or (g) any transfer of property or assets with a Fair Market Value not in excess of $1 million in any transaction or series of related transactions. "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 3 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" 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" means the Board of Directors of the Issuer or any committee of such Board of Directors duly authorized to act under this Indenture. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Issuer to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in The City of New York, or in the city of the Corporate Trust Office of the Trustee, are authorized by law to close. "Capital Lease Obligation" means the discounted present value of the rental obligations under any lease of real or personal property which, in accordance with GAAP, is required to be 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, whether voting or non-voting) of such Person's capital stock or equity interests. "Cash Collateral Account" means the account established with the Trustee pursuant to the terms of the Escrow Agreement for the deposit of the net proceeds from the sale of the Notes and such other purposes as specified therein. "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 4 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 Ratings Services 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 Issuer) 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 Ratings Services or any successor rating agency. "Change in Control" means any time that (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than an Existing Stockholder or Genesis ElderCare Corp., in a single transaction or through a series of related transactions, is or becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 35% of the total voting power of the Voting Stock of the Issuer on a fully diluted basis and such ownership is greater than the amount of voting power of the Voting Stock of the Issuer, on a fully diluted basis, held by Genesis and its Affiliates on such date; (ii) the Issuer 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 Issuer, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Issuer is changed into or exchanged for cash, securities or other property, other than any such transaction where (A) the outstanding Voting Stock of the Issuer 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 Issuer as a Restricted Payment under Section 4.04 (and such amount shall be treated as a Restricted Payment), and (B) the holders of the Voting Stock of the Issuer 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 Issuer (together with any new directors whose election by such Board of Directors or whose nomination for election by the stockholders of the Issuer was (a) approved by a vote of at least 66% 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 or (b) approved by Genesis in connection with its acquisition of the Common Stock of Genesis ElderCare Corp. held by Cypress or TPG) cease for any reason to constitute a majority of the Board of Directors of the Issuer then in office; or (iv) the Issuer is liquidated or dissolved or adopts a plan of liquidation. "Closing Date" means the date on which the Notes are originally issued under this Indenture. 5 "Collateral" means the Collateral as defined in the Escrow Agreement. "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. "Common Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person's equity, other than Preferred Stock of such Person, whether outstanding on the Closing Date or issued thereafter, including, without limitation, all series and classes of such common stock. "Consolidated EBITDA" of any Person means, with respect to any period, the Consolidated Net Income of such Person for such period, plus, to the extent such amount was deducted in calculating such Consolidated Net Income (i) Consolidated Income Tax Expense, (ii) depreciation expense, (iii) amortization expense, (iv) Consolidated Interest Expense, (v) all other non-cash items reducing Consolidated Net Income (other than items that will require cash payments and for which an accrual or reserve is, or is required by GAAP to be, made), less all non-cash items increasing Consolidated Net Income and (vi) all management fees, and minus all management fees paid during such period (whether or not such fees were deducted in calculating Consolidated Net Income for such period), all as determined on a consolidated basis in accordance with GAAP; provided that, if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA of the Issuer shall be reduced (to the extent not otherwise reduced in accordance with GAAP) by an amount equal to (A) the amount of the Consolidated Net Income attributable to such Restricted Subsidiary multiplied by (B) the percentage ownership interest in the income of such Restricted Subsidiary not owned on the last day of such period by the Issuer or any of its Restricted Subsidiaries. "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 (other than income taxes (either positive or negative) attributable to extraordinary and non-recurring gains or losses or sales of assets) as determined in accordance with GAAP. "Consolidated Interest Expense" 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, 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 calculated in accordance with the effective interest method of accounting 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 6 during such period, in each case as determined in accordance with GAAP, plus (iii) Preferred Stock dividends in respect of Preferred Stock of the Issuer or any Restricted Subsidiary held by Persons other than the Issuer or a Wholly Owned Restricted 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 Issuer and its Consolidated Subsidiaries (expressed as a decimal). "Consolidated Net Income" of any Person means, for any period, as applied to any Person, the net income (or loss) of such Person 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 (without duplication) (i) all extraordinary gains or losses (less all fees and expenses relating thereto), (ii) the portion of net income of such Person and its Consolidated Subsidiaries allocable to investments in Persons other than Consolidated Subsidiaries to the extent that cash dividends or distributions have not actually been received by such Person or one of its Consolidated Subsidiaries, (iii) net income (or loss) of any Person combined with such Person or any of its Consolidated Subsidiaries on 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 Consolidated Subsidiary to the extent that the declaration or payment of dividends or similar distributions by that Consolidated 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 Consolidated Subsidiary. "Consolidated Net Worth" of any Person means the Consolidated stockholders' equity (excluding Redeemable Capital Stock or any equity security convertible into or exchangeable for Indebtedness, the cost of treasury stock and the principal amount of any promissory notes receivable for the sale of 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 (which shall be as of a date not more than 90 days prior to the date of such computation 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 7 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). "Consolidation" means, (i) with respect to the Issuer, the consolidation of the accounts of the Issuer and each of its Restricted Subsidiaries and (ii) with respect to any other Person, the consolidation of the accounts of such Person and each of its Subsidiaries, in each case if and to the extent the accounts of such Person and such Subsidiaries would normally be consolidated with those of such Person, all in accordance with GAAP. The term "Consolidated" shall have a similar meaning. "Corporate Trust Office" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date of this Indenture, located at 1600 Market Street, Philadelphia, PA 19103, Attention: Sheila Wallbridge. "Credit Facility" means (i) any and all credit agreements (whether of the Issuer or any Subsidiary of the Issuer) contemplated by the Amended and Restated Commitment Letter dated as of June 14, 1997 between the Issuer and Mellon Bank, N.A., Citicorp Securities, Inc., Citibank, N.A., First Union Capital Markets Corp., First Union National Bank and NationsBank, N.A. as the same may be amended, restated, renewed, extended, restructured, supplemented or otherwise modified from time to time; (ii) any agreements, instruments and documents executed or delivered pursuant to or in connection with such 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 clause (i), (ii) or (iii) hereof, whether or not with the same agent, trustee, representative, lenders or holders, regardless of whether the Credit Facility or any portion thereof was outstanding or in effect at the time of such restatement, renewal, extension, restructuring, supplement or modification. 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, provided that the addition of such borrower or guarantor would not be prohibited by Sections 4.03, 4.07 and 4.09, (c) increasing the amount of Indebtedness Incurred thereunder or available to be borrowed 8 thereunder, provided such increase is permitted to be Incurred under Section 4.03, or (d) otherwise altering the terms and conditions thereof in a manner not prohibited by Sections 4.03, 4.05, 4.07 and 4.09. Notwithstanding the foregoing, with respect to any agreement providing for the refinancing, refunding or replacement of Indebtedness under the Credit Facility, such agreement shall be the Credit Facility under the Indenture only if a notice to that effect is delivered by the Issuer to the Trustee and there shall be at any time only one instrument that is (together with the related agreements, instruments and documents) the Credit Facility under the Indenture. No amendment or modification to the Credit Facility shall be considered a refinancing, refunding or replacement of Indebtedness under the Credit Facility for the purpose of requiring notice pursuant to the preceding sentence. "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement. "Cypress" means The Cypress Group L.L.C., together with its Affiliates or any of their respective successors. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Depositary" means The Depository Trust Issuer, its nominees, and their respective successors. "Designated Senior Indebtedness" means (i) all Senior Indebtedness under, or in respect of, the Credit Facility and any Interest Rate Contract or Currency Agreement related to Indebtedness under 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." "Escrow Agreement" means the Escrow and Security Agreement made and entered into as of the Closing Date by and among the Issuer, Genesis and the Placement Agents in favor of the Trustee for the Holders. "Escrow Agreement Officers' Certificate" means the Officers' Certificate as defined in the Escrow Agreement. "Escrow Agreement Opinion of Counsel" means the Opinion of Counsel as defined in the Escrow Agreement. "Event of Default" has the meaning provided in Section 6.01. 9 "Excess Proceeds" has the meaning provided in Section 4.10. "Exchange Act" means the Securities Exchange Act of 1934. "Exchange Notes" means any securities of the Issuer containing terms identical to the Notes (except that such Exchange Notes shall be registered under the Securities Act and shall not contain terms concerning interest rate increases) that are issued and exchanged for the Notes pursuant to the Registration Rights Agreement and this Indenture. "Exchange Offer" means the exchange offer by the Issuer of Exchange Notes for the Notes pursuant to the terms of the Registration Rights Agreement. "Existing Stockholders" means Genesis, The Cypress Group L.L.C. and TPG Partners II, L.P. and their Affiliates. "Expiration Date" means October 31, 1997, subject to an extension of up to one month at the Issuer's option. "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 under no compulsion to buy as determined in good faith by the Board of Directors, whose determination shall be conclusive if evidenced by a Board Resolution. "Fixed Charge Coverage Ratio" of any Person means, for any period, the ratio of (i) the sum of Consolidated EBITDA plus one-third of Consolidated Rental Payments, in each case for such period, of the Issuer and its Consolidated Subsidiaries, as determined in accordance with GAAP to (ii) the sum of Consolidated Interest Expense and one-third of Consolidated Rental Payments, in each case, for such period of the Issuer and its Consolidated Subsidiaries; 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 Closing Date. All ratios and computations contained or referred to in this Indenture shall be computed in conformity with GAAP applied on a consistent basis, except that computations made for purposes of determining compliance with the terms of the covenants and with other provisions of this Indenture shall be made without giving effect to (i) the amortization of any expenses incurred in connection with the offering of the Notes, the Tender Offer or the Merger and 10 (ii) except as otherwise provided, the amortization of any amounts required or permitted by Accounting Principles Board Opinion Nos. 16 and 17. "Genesis" means Genesis Health Ventures, Inc. "Global Notes" has the meaning provided in Section 2.01. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services (unless such purchase arrangements are on arm's-length and are entered into in the ordinary course of business), to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "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. "Guaranty Documents" means the Supplemental Indenture and the opinion of counsel substantially in the form of Exhibit B-2 to the Escrow Agreement. "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 "Holder" means the registered holder of any Note. "Incur" means, with respect to any Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become liable for or with respect to, or become responsible for the payment of, contingently or otherwise, such Indebtedness, including an "Incurrence" of Acquired Indebtedness; provided that neither the accrual of interest nor the accretion of original issue discount shall be considered an Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person, without duplication, (i) all indebtedness of such Person for borrowed money, (ii) all obligations for the payment of money of such Person 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 hereafter outstanding, (iii) all obligations of such Person evidenced by bonds, notes, debentures or other similar instruments, (iv) all obligations under Interest Rate Contracts and Currency Agreements of such Person, (v) all Capital Lease Obligations of such Person, (vi) all Indebtedness of other Persons the payment of which is secured by a 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; provided that the amount of such Indebtedness shall be the lesser of (A) the fair market value of such asset at such date of determination and (B) the amount of such Indebtedness, (vii) all Guaranteed debt of such Person, (viii) all Redeemable Capital Stock valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid dividends, and (ix) all Attributable Debt of such Person. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations, the maximum liability upon the occurrence of the contingency giving rise to the obligation, provided (A) that the amount outstanding at any time of any Indebtedness issued with original issue discount is the face amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at the time of its issuance as determined in conformity with GAAP, (B) that money borrowed and set aside at the time of the Incurrence of any Indebtedness in order to prefund the payment of the interest on such Indebtedness shall not be deemed to be "Indebtedness" and (C) that Indebtedness shall not include any liability for federal, state, local or other taxes. 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 12 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. "Indenture" means this Indenture as originally executed or as it may be amended or supplemented from time to time by one or more indentures supplemental to this Indenture entered into pursuant to the applicable provisions of this Indenture. "Initial Blockage Period" has the meaning provided in Section 11.03. "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 Payment Date" means each semiannual interest payment date on February 1 and August 1 of each year, commencing February 1, 1998. "Interest Rate Contracts" means interest rate swap agreements, interest rate cap agreements, interest rate collar agreements, interest rate insurance, and other similar agreements or arrangements. "Investment" means, with respect to any Person, directly or indirectly, any advance, loan or other extension of credit (including, without limitation, any guarantee or similar arrangement but excluding advances in the ordinary course of business that are, in conformity with generally accepted accounting principles, recorded as accounts receivable on the balance sheet of the Issuer or a Restricted Subsidiary) 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 and shall include (i) the designation of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the issuance or sale of Capital Stock of a Restricted Subsidiary if immediately after giving effect thereto such Restricted Subsidiary would no longer constitute a Restricted Subsidiary and the Issuer or another Restricted Subsidiary would have an Investment in such Restricted Subsidiary after giving effect to such issuance or sale. For purposes of the definition of "Unrestricted Subsidiary" and Section 4.04, (i) "Investment" shall include the fair market value of the assets (net of liabilities (other than liabilities to the Issuer or any of its Restricted Subsidiaries)) of any Restricted Subsidiary at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair market value of the assets (net of liabilities (other than liabilities to the Issuer or any of its Restricted Subsidiaries)) of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary shall be considered a reduction in outstanding Investments and (iii) "Investment" shall include the fair market value of the Capital Stock (or any other remaining Investment), held by the Issuer or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to be a Restricted Subsidiary; provided that 13 the fair market value of the Investment in an Unrestricted Subsidiary or any other Person that has ceased to be a Restricted Subsidiary shall not exceed the aggregate amount of Investments previously made in such Person valued at the time such Investments were made less the net reduction of such Investments. "Issuer" means Genesis ElderCare Acquisition Corp. and, following the Merger, Multicare until a successor replaces it pursuant to Article Five and thereafter means the successor. "Issuer Order" means a written request or order signed in the name of the Issuer (i) by its Chairman, a Vice Chairman, its President or a Vice President and (ii) by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary and delivered to the Trustee; provided, however, that such written request or order may be signed by any two of the officers or directors listed in clause (i) above in lieu of being signed by one of such officers or directors listed in such clause (i) and one of the officers listed in clause (ii) above. "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. "Merger" means the merger of Genesis ElderCare Acquisition Corp. with and into Multicare which shall be the surviving corporation in the merger. "Merger Closing Date" means the date the Merger is consummated. "Multicare" means The Multicare Companies, Inc. "Net Cash Proceeds" means (a) 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 Issuer or any Restricted 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 either (A) is secured by the assets or properties sold or (B) is required to be paid as a result of such Asset Sale, (iv) amounts required to be paid to any Person (other than the Issuer or any Subsidiary of the Issuer) owning a beneficial interest in the assets subject to the Asset Sale and (v) appropriate amounts to be provided by the Issuer or any Restricted 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 Issuer or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other 14 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 and (b) with respect to any issuance or sale of Capital Stock, the proceeds of such issuance or sale 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 such obligations are financed or sold with recourse to the Issuer or any Restricted Subsidiary), net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Non-payment Default" means any default or event of default under or in respect of any Designated Senior Indebtedness, other than a Payment Default. "Non-U.S. Person" means a person who is not a "U.S. person" (as defined in Regulation S). "Notes" means any of the securities, as defined in the first paragraph of the recitals hereof, that are authenticated and delivered under this Indenture. For all purposes of this Indenture, the term "Notes" shall include the Notes initially issued on the Closing Date, any Exchange Notes to be issued and exchanged for any Notes pursuant to the Registration Rights Agreement and this Indenture and any other Notes issued after the Closing Date under this Indenture. For purposes of this Indenture, all Notes shall vote together as one series of Notes under this Indenture. "Offer to Purchase" means an offer to purchase Notes by the Issuer from the Holders commenced by mailing a notice to the Trustee and each Holder stating: (i) the covenant pursuant to which the offer is being made and that all Notes validly tendered will be accepted for payment on a pro rata basis; (ii) the purchase price and the date of purchase (which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the "Payment Date"); (iii) that any Note not tendered will continue to accrue interest pursuant to its terms; (iv) that, unless the Issuer defaults in the payment of the purchase price, any Note accepted for payment pursuant to the Offer to Purchase shall cease to accrue interest on and after the Payment Date; (v) that Holders electing to have a Note purchased pursuant to the Offer to Purchase will be required to surrender the Note, together with the form entitled "Option of the Holder to Elect Purchase" on the reverse side of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Payment Date; (vi) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day immediately preceding the Payment Date, a telegram, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Notes delivered for purchase and a statement that such Holder is withdrawing his election to have such Notes purchased; and (vii) 15 that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. On the Payment Date, the Issuer shall (i) accept for payment on a pro rata basis Notes or portions thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying Agent money sufficient to pay the purchase price of all Notes or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee all Notes or portions thereof so accepted together with an Officers' Certificate specifying the Notes or portions thereof accepted for payment by the Issuer. The Paying Agent shall promptly mail to the Holders of Notes so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail to such Holders a new Note equal in principal amount to any unpurchased portion of the Note surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. The Issuer will publicly announce the results of an Offer to Purchase as soon as practicable after the Payment Date. The Trustee shall act as the paying agent for an Offer to Purchase. The Issuer will comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable, in the event that the Issuer is required to repurchase Notes pursuant to an Offer to Purchase. "Officer" means, with respect to the Issuer, (i) the Chairman of the Board, the Chief Executive Officer, the President, any Vice President or the Chief Financial Officer, and (ii) the Treasurer or any Assistant Treasurer, or the Secretary or any Assistant Secretary. "Officers' Certificate" means a certificate signed by one Officer listed in clause (i) of the definition thereof and one Officer listed in clause (ii) of the definition thereof or two officers listed in clause (i) of the definition thereof. Each Officers' Certificate (other than certificates provided pursuant to TIA Section 314(a)(4)) shall include the statements provided for in TIA Section 314(e). "Offshore Global Note" has the meaning provided in Section 2.01. "Offshore Notes Exchange Date" has the meaning provided in Section 2.01. "Offshore Physical Notes" has the meaning provided in Section 2.01. "Opinion of Counsel" means a written opinion signed by legal counsel, who may be an employee of or counsel to the Issuer, that meets the requirements of Section 12.04 hereof. Each such Opinion of Counsel shall include the statements provided for in TIA Section 314(e). "Paying Agent" has the meaning provided in Section 2.04, except that, for the purposes of Article Eight, the Paying Agent shall not be the Issuer or a Subsidiary of the Issuer or an Affiliate of any of them. The term "Paying Agent" includes any additional Paying Agent. 16 "Payment Blockage Period" has the meaning provided in Section 11.03. "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. "Permanent Offshore Global Notes" has the meaning provided in Section 2.01. "Permitted Indebtedness" means: (a) Indebtedness outstanding at any time in an aggregate principal amount not to exceed $625 million, less any amount of such Indebtedness permanently repaid as provided under Section 4.10; (b) Indebtedness of Multicare in existence on the Merger Closing Date; provided that upon consummation of the Merger not more than $40 million of such Indebtedness shall remain outstanding; (c) Indebtedness of the Issuer pursuant to the Notes; (d) Indebtedness evidenced by letters of credit issued in the ordinary course of business consistent with past practice to support the Issuer's or any Subsidiary's insurance or self-insurance obligations (including to secure workers' compensation and other similar insurance coverages) to the extent such letters of credit are not drawn upon or, if drawn upon, to the extent such drawing is reimbursed no later than the third Business Day following a demand for reimbursement; (e) Interest Rate Contracts and Currency Agreements to the extent that the notional principal amount of such obligations under Interest Rate Contracts does not exceed the amount of Indebtedness outstanding or committed to be incurred on the date such Interest Rate Contracts are entered into; (f) Indebtedness owed (A) to the Issuer evidenced by an unsubordinated promissory note or (B) to any Restricted Subsidiary; provided, however, that any subsequent issuance or transfer of any Capital Stock or any other event which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any other subsequent transfer of any such Indebtedness (except to the Issuer or a Restricted Subsidiary) shall be deemed, in each case to be an Incurrence of such Indebtedness not permitted by this clause (f); (g) any guarantees of Indebtedness by a Restricted Subsidiary entered into in accordance with Section 4.07; 17 (h) Indebtedness incurred by the Issuer or any Restricted Subsidiary, and any renewals, extensions, substitutions, refundings, refinancings or replacements thereof, in an amount not to exceed $20 million at any one time outstanding to finance the acquisition or construction of any property or assets or any business, including Acquired Indebtedness and Indebtedness incurred within 90 days after such acquisition or construction, less any amount of such Indebtedness permanently repaid as provided under Section 4.10; (i) Capital Lease Obligations, and any renewals, extensions, substitutions, refundings, refinancings or replacements thereof, in an amount not to exceed $10 million at any time outstanding, less any amount of such Indebtedness permanently repaid as provided under Section 4.10; (j) Indebtedness in addition to that described in clauses (a) through (i) of this definition of "Permitted Indebtedness," in an aggregate principal amount outstanding at any time not to exceed $20 million, less any amount of such Indebtedness permanently repaid as provided under Section 4.10; and (k) any renewals, extensions, substitutions, refundings, refinancings or replacements of any Indebtedness (other than Indebtedness Incurred under clause (a), (d), (e), (f), (g), (h), (i) or (j) 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 Issuer 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 Issuer incurred in connection with such refinancing; (ii) in case the Notes are refinanced in part or the Indebtedness to be refinanced is pari passu with the Notes, such new Indebtedness is expressly made pari passu with, or subordinate in right of payment to, the remaining Notes; (iii) in the case of any refinancing of Subordinated Indebtedness, such new Indebtedness is made subordinate in right of payment to the Notes at least to the same extent as the Indebtedness being refinanced; and (iv) such new Indebtedness, determined as of the date of Incurrence of such new Indebtedness, does not mature prior to the Stated Maturity of the Indebtedness to be refinanced or refunded, and the Average Life of such new Indebtedness is at least equal to the remaining Average Life of the Indebtedness to be refinanced or refunded; provided that in no event may Indebtedness of the Issuer be refinanced by means of any Indebtedness of any Restricted Subsidiary pursuant to this clause (k). 18 For purposes of determining any particular amount of Indebtedness under Section 4.03, (1) Indebtedness Incurred under the Credit Facility on or prior to the Merger Closing Date shall be treated as Incurred pursuant to clause (a) of this "Permitted Indebtedness" definition, (2) Guarantees, Liens or obligations with respect to letters of credit supporting Indebtedness otherwise included in the determination of such particular amount shall not be included and (3) any Liens granted pursuant to the equal and ratable provisions referred to in Section 4.09 shall not be treated as Indebtedness. For purposes of determining compliance with Section 4.03, in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described in this "Permitted Indebtedness" definition (other than Indebtedness referred to in clause (1) of the preceding sentence), the Issuer, in its sole discretion, shall classify such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of such clauses. (l) Notwithstanding the foregoing, for so long as the Credit Facility is outstanding, Indebtedness Incurred under clause (a) above shall consist of (i) $525 million of Indebtedness incurred under the Credit Facility (less any amount referred to in clause (iii)), (ii) $100 million of Indebtedness (whether or not incurred under the Credit Facility) and (iii) additional Indebtedness equal to the amount by which, after giving effect to any amendment, restatement, renewal, extension, restructuring, supplement or other modification of the Credit Facility, the principal amounts outstanding and the commitments under the Credit Facility have been permanently reduced (which may include subsequent increases in the Credit Facility) less, without duplication, in the case of Indebtedness described in clauses (i), (ii) or (iii), any amount of such Indebtedness permanently repaid as provided under ss.4.10. "Permitted Investment" means (i) Investments in the Issuer or a Restricted Subsidiary or a Person which will, upon the making of such Investment, become a Restricted Subsidiary or be merged or consolidated with or into or transfer or convey all or substantially all its assets to the Issuer or a Restricted Subsidiary; provided that such Person's primary businesses are Healthcare Related Businesses; (ii) Temporary Cash Investments; (iii) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses in accordance with GAAP; and (iv) Investments in existence on the Closing Date (including Investments held by Multicare and its Subsidiaries). "Permitted Junior Notes" has the meaning provided in Section 11.02. "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. "Pharmacy Sale" means the sale of Multicare's pharmacy business to Genesis or any of its Affiliates in connection with the Merger. 19 "Physical Notes" has the meaning provided in Section 2.01. "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. "principal" of a debt security, including the Notes, means the principal amount due on the Stated Maturity as shown on such debt security. "Private Placement Legend" means the legend initially set forth on the Notes in the form set forth in Section 2.02. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. "Qualified Capital Stock" of any Person means any Capital Stock of such Person other than Redeemable Capital Stock. "Redeemable Capital Stock" means any class or series of Capital Stock of any Person that by its terms or otherwise is (i) required to be redeemed prior to the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of such class or series of Capital Stock at any time prior to the Stated Maturity of the Notes or (iii) convertible into or exchangeable for Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled maturity prior to the Stated Maturity of the Notes; provided that any Capital Stock that would not constitute Redeemable Capital Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change in control" occurring prior to the Stated Maturity of the Notes shall not constitute Disqualified Stock if the "asset sale" or "change in control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in Sections 4.10 and 4.11 and such Capital Stock specifically provides that such Person will not repurchase or redeem any such stock pursuant to such provision prior to the Issuer's repurchase of such Notes as are required to be repurchased pursuant to Sections 4.10 and 4.11. "Redemption Date" means, when used with respect to any Note to be redeemed, the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price" means, when used with respect to any Note to be redeemed, the price at which such Note is to be redeemed pursuant to this Indenture. "Registrar" has the meaning provided in Section 2.04. 20 "Registration" has the meaning provided in Section 4.19. "Registration Rights Agreement" means the Registration Rights Agreement dated the Closing Date among the Issuer and the Placement Agents. "Registration Statement" means the Registration Statement as defined and described in the Registration Rights Agreement. "Regular Record Date" for the interest payable on any Interest Payment Date means the January 15 or July 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Regulation S" means Regulation S under the Securities Act. "Responsible Officer," when used with respect to the Trustee, means the chairman or any vice chairman of the board of directors, the chairman or any vice chairman of the executive committee of the board of directors, the chairman of the trust committee, the president, any vice president, any assistant vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any trust officer or assistant trust officer, the controller or any assistant controller or any other officer of the Trustee in its Corporate Trust Department customarily performing functions similar to those performed by any of the above-designated officers and in each case having direct responsibility for the administration of this Indenture or the Escrow Agreement and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his or her knowledge of and familiarity with the particular subject. "Restricted Payments" has the meaning provided in Section 4.04. "Restricted Subsidiary" means any Subsidiary of the Issuer other than an Unrestricted Subsidiary. "Rule 144A" means Rule 144A under the Securities Act. "Securities Act" means the Securities Act of 1933. "Security Register" has the meaning provided in Section 2.04. "Senior Indebtedness" means the following obligations, whether outstanding on the Closing Date or thereafter Incurred: (a) all Indebtedness and other monetary obligations of the Issuer or any Subsidiary of the Issuer under or in respect of the Credit Facility (including obligations in respect of any lease financing facility of the Credit Facility) or any Interest Rate Contract or Currency Agreement related to Indebtedness under the Credit Facility, whether for 21 principal, interest (including interest accruing after the filing of a petition by or against the Issuer or any Subsidiary of the Issuer 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), fees, expenses, indemnification or otherwise, and (b) the principal of, premium, if any, and interest on all other Indebtedness of the Issuer (other than the Notes) 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 be pari passu with or subordinated in right of payment to the Notes. Notwithstanding the foregoing, "Senior Indebtedness" shall not include (i) Indebtedness that is by its terms subordinate in right of payment to any Indebtedness of the Issuer, (ii) Indebtedness which when incurred and without respect to any election under Section 1111(b) of the Bankruptcy Law is without recourse to the Issuer, (iii) any repurchase, redemption or other obligation in respect of Redeemable Capital Stock, (iv) Indebtedness for goods, materials or services purchased in the ordinary course of business or indebtedness consisting of trade payables or other current liabilities, (v) Indebtedness of or amounts owed by the Issuer to employees, officers, or directors, (vi) any liability for federal, state, local or other taxes owed or owing by the Issuer, (vii) Indebtedness of the Issuer to a Subsidiary of the Issuer or any other Affiliate of the Issuer or any of such Affiliate's subsidiaries, (viii) that portion of any Indebtedness which at the time of issuance is issued in violation of the Indenture and (ix) amounts owing under leases (other than Capital Lease Obligations). "Senior Representative" has the meaning provided in Section 11.01. "Shelf Registration Statement" means the Shelf Registration Statement as defined and described in the Registration Rights Agreement. "Significant Subsidiary" means, at any date of determination, any Restricted Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal year of the Issuer, accounted for more than 10% of the consolidated revenues of the Issuer and its Restricted Subsidiaries or (ii) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of the Issuer and its Restricted Subsidiaries, all as set forth on the most recently available consolidated financial statements of the Issuer for such fiscal year. "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 any Indebtedness of the Issuer subordinated in right of payment to the Notes. 22 "Subsidiary" means, with respect to any Person, any corporation, association or other business entity of which more than 50% of the voting power of the outstanding Voting Stock is owned, directly or indirectly, by such Person and one or more other Subsidiaries of such Person. "Subsidiary Guarantee" has the meaning provided in Section 4.07. "Supplemental Indenture" means the indenture supplemental hereto substantially in the form of Exhibit E to this Indenture. "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 and money market 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 Ratings Services or any successor rating agency or any money market fund sponsored by a registered broker dealer or mutual fund distributor, (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 Issuer) 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 Ratings Services or any successor rating agency and (iv) securities with maturities of six months or less from the date of acquisition issued or fully and unconditionally guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings Services or Moody's Investors Service, Inc. "Temporary Offshore Global Notes" has the meaning provided in Section 2.01. "Tender Offer" means the offer to purchase all of the issued and outstanding shares of Common Stock of Multicare made by Genesis ElderCare Acquisition Corp. "Therapy Sale" means the sale of Multicare's contract therapy business to Genesis or any of its Affiliates in connection with the Merger. "TIA" or "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended. 23 "TPG" means TPG Partners II, L.P., together with its Affiliates, and any of their respective successors. "Transactions" means, collectively, the Tender Offer, the Merger, the offering of the Notes issued hereunder, the management agreement to be entered into by Genesis in connection with the Merger, the Therapy Sale and the Pharmacy Sale. "Trustee" means the party named as such in the first paragraph of this Indenture until a successor replaces it in accordance with the provisions of Article Seven of this Indenture and thereafter means such successor. "Unrestricted Subsidiary" means (i) any Subsidiary of the Issuer that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below; and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Restricted Subsidiary (including any newly acquired or newly formed Subsidiary of the Issuer) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Issuer or any Restricted Subsidiary; provided that (A) any guarantee by the Issuer or any Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the Issuer or such Restricted Subsidiary (or both, if applicable) at the time of such designation; (B) either (I) the Subsidiary to be so designated has total assets of $1,000 or less or (II) if such Subsidiary has assets greater than $1,000, such designation would be permitted under Section 4.04 and (C) if applicable, the Incurrence of Indebtedness and the Investment referred to in clause (A) of this proviso would be permitted under Sections 4.03 and 4.04. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that (i) no Default or Event of Default shall have occurred and be continuing at the time of or after giving effect to such designation and (ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately after such designation would, if Incurred at such time, have been permitted to be Incurred (and shall be deemed to have been Incurred) for all purposes of this Indenture. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "U.S. Global Notes" has the meaning provided in Section 2.01. "U.S. Government Obligations" means securities that 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 issuer thereof at any time prior to the 24 Stated Maturity of the Notes, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation 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 Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt. "U.S. Government Securities" means securities that 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 (x) the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America or (y) that are rated at least "Aaa" (or the then equivalent grade) by Moody's Investors Service, Inc. or "AAA" (or the then equivalent grade) by Standard & Poor's Ratings Services. "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). "U.S. Physical Notes" has the meaning provided in Section 2.01. "Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary all the Capital Stock of which is owned by the Issuer or another Wholly Owned Restricted Subsidiary. SECTION 1.02. Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Notes; "indenture security holder" means a Holder or a Noteholder; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; and 25 "obligor" on the indenture securities means the Issuer or any other obligor on the Notes. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by a rule of the Commission and not otherwise defined herein have the meanings assigned to them therein. SECTION 1.03. Rules of Construction. Unless the context otherwise requires: (i) a term has the meaning assigned to it; (ii) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (iii) "or" is not exclusive; (iv) words in the singular include the plural, and words in the plural include the singular; (v) provisions apply to successive events and transactions; (vi) "herein," "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; (vii) all ratios and computations based on GAAP contained in this Indenture shall be computed in accordance with the definition of GAAP set forth in Section 1.01; and (viii) all references to Sections or Articles refer to Sections or Articles of this Indenture unless otherwise indicated. ARTICLE TWO THE NOTES SECTION 2.01. Form and Dating. The Notes and the Trustee's certificate of authentication shall be substantially in the form annexed hereto as Exhibit A with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture. The Notes may have notations, legends or endorsements required by law, stock exchange agreements to which the Issuer is subject or usage. The Issuer shall approve the form of the Notes and any notation, legend or endorsement on the Notes. Each Note shall be dated the date of its authentication. 26 The terms and provisions contained in the form of the Notes annexed hereto as Exhibit A shall constitute, and are hereby expressly made, a part of this Indenture. To the extent applicable, the Issuer and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Notes offered and sold in reliance on Rule 144A shall be issued initially in the form of one or more permanent global Notes in registered form, substantially in the form set forth in Exhibit A (the "U.S. Global Notes"), registered in the name of the nominee of the Depositary, deposited with the Trustee, as custodian for the Depositary, duly executed by the Issuer and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the U.S. Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, in accordance with the instructions given by the Holder thereof, as hereinafter provided. Notes offered and sold in offshore transactions in reliance on Regulation S shall be issued initially in the form of one or more temporary global Notes in registered form substantially in the form set forth in Exhibit A (the "Temporary Offshore Global Notes"), registered in the name of the nominee of the Depositary, deposited with the Trustee, as custodian for the Depositary, duly executed by the Issuer and authenticated by the Trustee as hereinafter provided. At any time following September 22, 1997 (the "Offshore Notes Exchange Date"), upon receipt by the Trustee and the Issuer of a certificate substantially in the form of Exhibit B hereto, one or more permanent global Notes in registered form substantially in the form set forth in Exhibit A (the "Permanent Offshore Global Notes"; and together with the Temporary Offshore Global Notes, the "Offshore Global Notes") duly executed by the Issuer and authenticated by the Trustee as hereinafter provided shall be deposited with the Trustee, as custodian for the Depositary, and the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the Temporary Offshore Global Notes in an amount equal to the principal amount of the beneficial interest in the Temporary Offshore Global Notes transferred. Notes offered and sold in reliance on Regulation D under the Securities Act shall be issued in the form of permanent certificated Notes in registered form in substantially the form set forth in Exhibit A (the "U.S. Physical Notes"). Notes issued pursuant to Section 2.07 in exchange for interests in the Offshore Global Notes shall be in the form of permanent certificated Notes in registered form substantially in the form set forth in Exhibit A (the "Offshore Physical Notes"). The Offshore Physical Notes and U.S. Physical Notes are sometimes collectively herein referred to as the "Physical Notes." The U.S. Global Notes and the Offshore Global Notes are sometimes referred to herein as the "Global Notes." The definitive Notes shall be typed, printed, lithographed or engraved or produced by any combination of these methods or may be produced in any other manner permitted by the 27 rules of any securities exchange on which the Notes may be listed, all as determined by the Officers executing such Notes, as evidenced by their execution of such Notes. SECTION 2.02. Restrictive Legends. Unless and until a Note is exchanged for an Exchange Note in connection with an effective Registration Statement pursuant to the Registration Rights Agreement, the U.S. Global Notes, Temporary Offshore Global Notes and each U.S. Physical Note shall bear the following legend on the face thereof: THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, OR (C) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR"), (2) AGREES THAT IT WILL NOT, WITHIN TWO YEARS AFTER THE ORIGINAL ISSUANCE OF THE NOTES, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE ISSUER OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (E) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE) AND IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF NOTES OF LESS THAN $100,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE ISSUER THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS NOTE WITHIN TWO YEARS AFTER THE ORIGINAL ISSUANCE OF THE NOTES, THE HOLDER 28 MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO THE TRUSTEE. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE AND THE ISSUER SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTIONS. Each Global Note, whether or not an Exchange Note, shall also bear the following legend on the face thereof: UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS 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. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.08 OF THE INDENTURE. 29 SECTION 2.03. Execution, Authentication and Denominations. Subject to Article Four, the aggregate principal amount of Notes which may be authenticated and delivered under this Indenture is unlimited. The Notes shall be executed by two Officers of the Issuer. The signature of these Officers on the Notes may be by facsimile or manual signature in the name and on behalf of the Issuer. If an Officer whose signature is on a Note no longer holds that office at the time the Trustee or authenticating agent authenticates the Note, the Note shall be valid nevertheless. A Note shall not be valid until the Trustee or authenticating agent manually signs the certificate of authentication on the Note. The signature shall be conclusive evidence that the Note has been authenticated under this Indenture. At any time and from time to time after the execution of this Indenture, the Trustee or an authenticating agent shall upon receipt of a Issuer Order authenticate for original issue Notes in the aggregate principal amount specified in such Issuer Order; provided that the Trustee shall be entitled to receive an Officers' Certificate and an Opinion of Counsel of the Issuer in connection with such authentication of Notes. Such Issuer Order shall specify the amount of Notes to be authenticated and the date on which the original issue of Notes is to be authenticated and in case of an issuance of Notes pursuant to Section 2.15, shall certify that such issuance is in compliance with Article Four. The Trustee may appoint an authenticating agent to authenticate Notes. An authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such authenticating agent. An authenticating agent has the same rights as an Agent to deal with the Issuer or an Affiliate of the Issuer. The Trustee shall not be liable for the misconduct or negligence of any authenticating agent appointed with due care. The Notes shall be issuable only in registered form without coupons and only in denominations of $1,000 in principal amount and any integral multiple of $1,000 in excess thereof. SECTION 2.04. Registrar and Paying Agent. The Issuer shall maintain an office or agency where Notes may be presented for registration of transfer or for exchange (the "Registrar"), an office or agency where Notes may be presented for payment (the "Paying Agent") and an office or agency where notices and demands to or upon the Issuer in respect of the Notes and this Indenture may be served, which shall be in the Borough of Manhattan, The City of New York or at the principal Corporate Trust Office of the Trustee. The Issuer shall cause the Registrar to keep a register of the Notes and of their transfer and exchange (the "Security Register"). The Issuer may have one or more co-Registrars and one or more additional Paying Agents. 30 The Issuer shall enter into an appropriate agency agreement with any Agent not a party to this Indenture. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Issuer shall give prompt written notice to the Trustee of the name and address of any such Agent and any change in the address of such Agent. If the Issuer fails to maintain a Registrar, Paying Agent and/or agent for service of notices and demands, the Trustee shall act as such Registrar, Paying Agent and/or agent for service of notices and demands. The Issuer may remove any Agent upon written notice to such Agent and the Trustee; provided that no such removal shall become effective until (i) the acceptance of an appointment by a successor Agent to such Agent as evidenced by an appropriate agency agreement entered into by the Issuer and such successor Agent and delivered to the Trustee or (ii) notification to the Trustee that the Trustee shall serve as such Agent until the appointment of a successor Agent in accordance with clause (i) of this proviso. The Issuer, any Subsidiary of the Issuer, or any Affiliate of any of them may act as Paying Agent, Registrar or co-Registrar, and/or agent for service of notice and demands. The Issuer initially appoints the Trustee as Registrar, Paying Agent, authenticating agent and agent for service of notice and demands and Banque Internationale a Luxembourg S.A., as Paying Agent. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders and shall otherwise comply with TIA ss. 312(a). If the Trustee is not the Registrar, the Issuer shall furnish to the Trustee as of each Regular Record Date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders, including the aggregate principal amount of Notes held by each Holder. SECTION 2.05. Paying Agent to Hold Money in Trust. Not later than 11:00 a.m. (New York City time) on each due date of the principal, premium, if any, and interest on any Notes, the Issuer shall deposit with the Paying Agent money in immediately available funds sufficient to pay such principal, premium, if any, and interest so becoming due. The Issuer shall require each Paying Agent other than the Trustee to agree in writing that such Paying Agent shall hold in trust for the benefit of the Holders or the Trustee all money held by the Paying Agent for the payment of principal of, premium, if any, and interest on the Notes (whether such money has been paid to it by the Issuer or any other obligor on the Notes), and such Paying Agent shall promptly notify the Trustee of any default by the Issuer (or any other obligor on the Notes) in making any such payment. The Issuer at any time may require a Paying Agent to pay all money held by it to the Trustee and account for any funds disbursed, and the Trustee may at any time during the continuance of any payment default, upon written request to a Paying Agent, require such Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed. Upon doing so, the Paying Agent shall have no further liability for the money so paid over to the Trustee. If the Issuer or any Subsidiary of the Issuer or any Affiliate of any of them acts as Paying Agent, it will, on or before each due date of any principal of, premium, if any, or interest on the Notes, segregate and hold in a separate trust fund for the benefit of the Holders a sum of money sufficient to pay such principal, premium, if any, or interest so 31 becoming due until such sum of money shall be paid to such Holders or otherwise disposed of as provided in this Indenture, and will promptly notify the Trustee of its action or failure to act. SECTION 2.06. Transfer and Exchange. The Notes are issuable only in registered form. A Holder may transfer a Note only by written application to the Registrar stating the name of the proposed transferee and otherwise complying with the terms of this Indenture. No such transfer shall be effected until, and such transferee shall succeed to the rights of a Holder only upon, final acceptance and registration of the transfer by the Registrar in the Security Register. Prior to the registration of any transfer by a Holder as provided herein, the Issuer, the Trustee, and any agent of the Issuer shall treat the person in whose name the Note is registered as the owner thereof for all purposes whether or not the Note shall be overdue, and neither the Issuer, the Trustee, nor any such agent shall be affected by notice to the contrary. Furthermore, any Holder of a Global Note shall, by acceptance of such Global Note, agree that transfers of beneficial interests in such Global Note may be effected only through a book entry system maintained by the Holder of such Global Note (or its agent) and that ownership of a beneficial interest in the Note shall be required to be reflected in a book entry. When Notes are presented to the Registrar or a co-Registrar with a request to register the transfer or to exchange them for an equal principal amount of Notes of other authorized denominations (including an exchange of Notes for Exchange Notes), the Registrar shall register the transfer or make the exchange as requested if its requirements for such transactions are met (including that such Notes are duly endorsed or accompanied by a written instrument of transfer in form satisfactory to the Trustee and Registrar duly executed by the Holder thereof or by an attorney who is authorized in writing to act on behalf of the Holder); provided that no exchanges of Notes for Exchange Notes shall occur until a Registration Statement shall have been declared effective by the Commission and that any Notes that are exchanged for Exchange Notes shall be cancelled by the Trustee. To permit registrations of transfers and exchanges, the Issuer shall execute and the Trustee shall authenticate Notes at the Registrar's request. No service charge shall be made for any registration of transfer or exchange or redemption of the Notes, but the Issuer may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or other similar governmental charge payable upon exchanges pursuant to Section 2.11, 3.08 or 9.04). The Registrar shall not be required (i) to issue, register the transfer of or exchange any Note during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Notes selected for redemption under Section 3.03 and ending at the close of business on the day of such mailing, or (ii) to register the transfer of or exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. SECTION 2.07. Book-Entry Provisions for Global Notes. (a) The U.S. Global Notes and Offshore Global Notes initially shall (i) be registered in the name of the Depositary for such 32 Global Notes or the nominee of such Depositary, (ii) be delivered to the Trustee as custodian for such Depositary and (iii) bear legends as set forth in Section 2.02. Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depositary, or the Trustee as its custodian, or under the Global Note, and the Depositary may be treated by the Issuer, the Trustee and any agent of the Issuer or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Issuer, the Trustee or any agent of the Issuer or the Trustee, from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a holder of any Note. Neither the Issuer nor the Trustee shall be liable for any delay by the Depositary in identifying the beneficial owners of the Notes and the Issuer and the Trustee may conclusively rely on, and shall be protected in relying on, instructions from the Depositary for all purposes (including with respect to the registration and delivery, and the respective principal amounts, of any Notes to be issued). (b) Transfers of a Global Note shall be limited to transfers of such Global Note in whole, but not in part, to the Depositary, its successors or their respective nominees. Interests of beneficial owners in a Global Note may be transferred in accordance with the rules and procedures of the Depositary and the provisions of Section 2.08. In addition, U.S. Physical Notes and Offshore Physical Notes shall be transferred to all beneficial owners in exchange for their beneficial interests in the U.S. Global Notes or the Offshore Global Notes, respectively, if (i) the Depositary notifies the Issuer that it is unwilling or unable to continue as Depositary for the U.S. Global Notes or the Offshore Global Notes, as the case may be, and a successor depositary is not appointed by the Issuer within 90 days of such notice, (ii) an Event of Default has occurred and is continuing and the Registrar has received a request from the Depositary or (iii) in accordance with the rules and procedures of the Depositary and the provisions of Section 2.08. (c) Any beneficial interest in one of the Global Notes that is transferred to a person who takes delivery in the form of an interest in the other Global Note will, upon transfer, cease to be an interest in such Global Note and become an interest in the other Global Note and, accordingly, will thereafter be subject to all transfer restrictions, if any, and other procedures applicable to beneficial interests in such other Global Note for as long as it remains such an interest. (d) In connection with any transfer of a portion of the beneficial interests in the U.S. Global Notes to beneficial owners pursuant to paragraph (b) of this Section 2.07, the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the U.S. Global Notes in an amount equal to the principal amount of the beneficial interest in the 33 U.S. Global Notes to be transferred, and the Issuer shall execute, and the Trustee shall authenticate and deliver, one or more U.S. Physical Notes of like tenor and amount. (e) In connection with the transfer of the entire U.S. Global Note or Offshore Global Note to beneficial owners pursuant to paragraph (b) of this Section 2.07, the U.S. Global Note or Offshore Global Note, as the case may be, shall be deemed to be surrendered to the Trustee for cancellation, and the Issuer shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depositary in exchange for its beneficial interest in the U.S. Global Note or Offshore Global Note, as the case may be, an equal aggregate principal amount of U.S. Physical Notes or Offshore Physical Notes, as the case may be, of authorized denominations. (f) Any U.S. Physical Note delivered in exchange for an interest in the U.S. Global Note pursuant to paragraph (b) or (d) of this Section 2.07 shall, except as otherwise provided by paragraph (f) of Section 2.08, bear the legend regarding transfer restrictions applicable to the U.S. Physical Note set forth in Section 2.02. (g) Any Offshore Physical Note delivered in exchange for an interest in the Offshore Global Note pursuant to paragraph (b) of this Section 2.07 shall, except as otherwise provided by paragraph (f) of Section 2.08, bear the legend regarding transfer restrictions applicable to the Offshore Physical Note set forth in Section 2.02. (h) The registered holder of a 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 2.08. Special Transfer Provisions. Unless and until a Note is exchanged for an Exchange Note in connection with an effective Registration Statement pursuant to the Registration Rights Agreement, the following provisions shall apply: (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 to any Institutional Accredited Investor which is not a QIB (excluding Non-U.S. Persons): (i) The Registrar shall register the transfer of any Note, whether or not such Note bears the Private Placement Legend, if (x) the requested transfer is after the time period referred to in Rule 144(k) under the Securities Act or (y) the proposed transferee has delivered to the Registrar (A) a certificate substantially in the form of Exhibit C hereto and (B) if the aggregate principal amount of the Notes being transferred is less than $100,000, an opinion of counsel acceptable to the Issuer that such transfer is in compliance with the Securities Act. 34 (ii) If the proposed transferor is an Agent Member holding a beneficial interest in the U.S. Global Note, upon receipt by the Registrar of (x) the documents, if any, required by paragraph (i) and (y) instructions given in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the U.S. Global Note in an amount equal to the principal amount of the beneficial interest in the U.S. Global Note to be transferred, and the Issuer shall execute, and the Trustee shall authenticate and deliver, one or more U.S. Physical 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 U.S. Physical Note or an interest in the U.S. Global Note to a QIB (excluding Non-U.S. Persons): (i) If the Note to be transferred consists of (x) U.S. Physical Notes, the 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 Issuer and the 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 Issuer and the 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 Issuer 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 or (y) an interest in the U.S. Global Note, the transfer of such interest may be effected only through the book entry system maintained by the Depositary. (ii) If the proposed transferee is an Agent Member, and the Note to be transferred consists of U.S. Physical Notes, upon receipt by the Registrar of the documents referred to in clause (i) and instructions given in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and an increase in the principal amount of the U.S. Global Note in an amount equal to the principal amount of the U.S. Physical Notes to be transferred, and the Trustee shall cancel the U.S. Physical Note so transferred. (c) Transfers of Interests in the Temporary Offshore Global Note. The following provisions shall apply with respect to registration of any proposed transfer of interests in the Temporary Offshore Global Note: 35 (i) The Registrar shall register the transfer of any Note (x) if the proposed transferee is a Non-U.S. Person and the proposed transferor has delivered to the Registrar a certificate substantially in the form of Exhibit D hereto or (y) if the proposed transferee is a QIB and the proposed transferor has checked the box provided for on the form of Note stating, or has otherwise advised the Issuer and the 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 Issuer and the 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 Issuer 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. (ii) If the proposed transferee is an Agent Member, upon receipt by the Registrar of the documents referred to in clause (i)(y) above and instructions given in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and an increase in the principal amount of the U.S. Global Note in an amount equal to the principal amount of the Temporary Offshore Global Note to be transferred, and the Trustee shall decrease the amount of the Temporary Offshore Global Note. (d) Transfers of Interests in the Permanent Offshore Global Note or Offshore Physical Notes to U.S. Persons. The following provisions shall apply with respect to any transfer of interests in the Permanent Offshore Global Note or Offshore Physical Notes to U.S. Persons: The Registrar shall register the transfer of any such Note without requiring any additional certification. (e) Transfers to Non-U.S. Persons at Any Time. The following provisions shall apply with respect to any transfer of a Note to a Non-U.S. Person: (i) Prior to September 22, 1997, the Registrar shall register any proposed transfer of a Note to a Non-U.S. Person upon receipt of a certificate substantially in the form of Exhibit D hereto from the proposed transferor. (ii) On and after September 22, 1997, the Registrar shall register any proposed transfer to any Non-U.S. Person if the Note to be transferred is a U.S. Physical Note or an interest in the U.S. Global Note, upon receipt of a certificate substantially in the form of Exhibit D hereto from the proposed transferor. 36 (iii) (a) If the proposed transferor is an Agent Member holding a beneficial interest in the U.S. Global Note, upon receipt by the Registrar of (x) the documents, if any, required by paragraph (ii) and (y) instructions in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the U.S. Global Note in an amount equal to the principal amount of the beneficial interest in the U.S. Global Note to be transferred, and (b) if the proposed transferee is an Agent Member, upon receipt by the Registrar of instructions given in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and an increase in the principal amount of the Offshore Global Note in an amount equal to the principal amount of the U.S. Physical Notes or the U.S. Global Note, as the case may be, to be transferred, and the Trustee shall cancel the Physical Note, if any, so transferred or decrease the amount of the U.S. Global Note. (f) Private Placement Legend. Upon the transfer, exchange or replacement of Notes not bearing the Private Placement Legend, the 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 Registrar shall deliver only Notes that bear the Private Placement Legend unless either (i) the circumstances contemplated by the fourth paragraph of Section 2.01 or paragraph (a)(i)(x) or (e)(ii) of this Section 2.08 exist or (ii) there is delivered to the Registrar an Opinion of Counsel reasonably satisfactory to the Issuer 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. (g) 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 Registrar shall not register a transfer of any Note unless such transfer complies with the restrictions on transfer of such Note set forth in this Indenture. In connection with any transfer of Notes, each Holder agrees by its acceptance of the Notes to furnish the Registrar or the Issuer such certifications, legal opinions or other information as either of them may reasonably require to confirm that such transfer is being made pursuant to an exemption from, or a transaction not subject to, the registration requirements of the Securities Act; provided that the Registrar shall not be required to determine (but may rely on a determination made by the Issuer with respect to) the sufficiency of any such certifications, legal opinions or other information. The Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 2.07 or this Section 2.08. The Issuer 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 Registrar. 37 SECTION 2.09. Replacement Notes. If a mutilated Note is surrendered to the Trustee or if the Holder claims that the Note has been lost, destroyed or wrongfully taken, the Issuer shall issue and the Trustee shall authenticate a replacement Note of like tenor and principal amount and bearing a number not contemporaneously outstanding; provided that the requirements of the second paragraph of Section 2.10 are met. If required by the Trustee or the Issuer, an indemnity bond must be furnished that is sufficient in the judgment of both the Trustee and the Issuer to protect the Issuer, the Trustee or any Agent from any loss that any of them may suffer if a Note is replaced. The Issuer may charge such Holder for its expenses and the expenses of the Trustee in replacing a Note. In case any such mutilated, lost, destroyed or wrongfully taken Note has become or is about to become due and payable, the Issuer in its discretion may pay such Note instead of issuing a new Note in replacement thereof. Every replacement Note is an additional obligation of the Issuer and shall be entitled to the benefits of this Indenture. SECTION 2.10. Outstanding Notes. Notes outstanding at any time are all Notes that have been authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation and those described in this Section 2.10 as not outstanding. If a Note is replaced pursuant to Section 2.09, it ceases to be outstanding unless and until the Trustee and the Issuer receive proof satisfactory to them that the replaced Note is held by a bona fide purchaser. If the Paying Agent (other than the Issuer or an Affiliate of the Issuer) holds on the maturity date money sufficient to pay Notes payable on that date, then on and after that date such Notes cease to be outstanding and interest on them shall cease to accrue. A Note does not cease to be outstanding because the Issuer or one of its Affiliates holds such Note, provided, however, that in determining whether the Holders of the requisite principal amount of the outstanding Notes have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Notes owned by the Issuer or any other obligor upon the Notes or any Affiliate of the Issuer or of such other obligor shall be disregarded and deemed not to be outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Notes which a Responsible Officer of the Trustee knows to be so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Notes and that the pledgee is not the Issuer or any other obligor upon the Notes or any Affiliate of the Issuer or of such other obligor. SECTION 2.11. Temporary Notes. Until definitive Notes are ready for delivery, the Issuer may prepare and the Trustee shall authenticate temporary Notes. Temporary Notes shall 38 be substantially in the form of definitive Notes but may have insertions, substitutions, omissions and other variations determined to be appropriate by the Officers executing the temporary Notes, as evidenced by their execution of such temporary Notes. If temporary Notes are issued, the Issuer will cause definitive Notes to be prepared without unreasonable delay. After the preparation of definitive Notes, the temporary Notes shall be exchangeable for definitive Notes upon surrender of the temporary Notes at the office or agency of the Issuer designated for such purpose pursuant to Section 4.02, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Notes the Issuer shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Notes of authorized denominations. Until so exchanged, the temporary Notes shall be entitled to the same benefits under this Indenture as definitive Notes. SECTION 2.12. Cancellation. The Issuer at any time may deliver to the Trustee for cancellation any Notes previously authenticated and delivered hereunder which the Issuer may have acquired in any manner whatsoever, and may deliver to the Trustee for cancellation any Notes previously authenticated hereunder which the Issuer has not issued and sold. The Registrar and the Paying Agent shall forward to the Trustee any Notes surrendered to them for transfer, exchange or payment. The Trustee shall cancel all Notes surrendered for transfer, exchange, payment or cancellation and shall destroy them in accordance with its normal procedure. Except as expressly permitted by this Indenture, the Issuer may not issue new Notes to replace Notes it has paid in full or delivered to the Trustee for cancellation. SECTION 2.13. CUSIP Numbers. The Issuer in issuing the Notes may use "CUSIP," "CINS" or "ISIN" numbers (if then generally in use), and the Trustee shall use CUSIP, CINS or ISIN numbers, as the case may be, in notices of redemption or exchange as a convenience to Holders; provided that any such notice shall state that no representation is made as to the correctness of such numbers either as printed on the Notes or as contained in any notice of redemption or exchange and that reliance may be placed only on the other identification numbers printed on the Notes. The Issuer will promptly notify the Trustee of any change in "CUSIP," "CINS" or "ISIN" numbers for the Notes. SECTION 2.14. Defaulted Interest. If the Issuer defaults in a payment of interest on the Notes, it shall pay, or shall deposit with the Paying Agent money in immediately available funds sufficient to pay, the defaulted interest, plus (to the extent lawful) any interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date. A special record date, as used in this Section 2.14 with respect to the payment of any defaulted interest, shall mean the 15th day next preceding the date fixed by the Issuer for the payment of defaulted interest, whether or not such day is a Business Day. At least 15 days before the subsequent special record date, the Issuer shall mail to each Holder and to the Trustee a notice that states the subsequent special record date, the payment date and the amount of defaulted interest to be paid. 39 SECTION 2.15. Issuance of Additional Notes. The Issuer may, subject to Article Four of this Indenture, issue additional Notes under this Indenture. The Notes issued on the Closing Date and any additional Notes subsequently issued shall be treated as a single class for all purposes under this Indenture. ARTICLE THREE REDEMPTION SECTION 3.01. Right of Redemption; Mandatory Redemption. (a) The Notes will be redeemable, at the Issuer's option, in whole or in part, at any time or from time to time, on or after August 1, 2002 and prior to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by first-class mail to each Holder's last address, as it appears in the Security Register, at the following Redemption Prices (expressed in percentages of principal amount), plus accrued and unpaid interest to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date that is prior to the Redemption Date to receive interest due on an Interest Payment Date), if redeemed during the 12-month period commencing August 1 of the years set forth below: Redemption Year Price ---- ---------- 2002........................... 104.500% 2003........................... 102.250 2004 and thereafter............ 100.000 (b) In the event that the Tender Offer is not consummated and certain other conditions set forth in the Escrow Agreement are not satisfied by the Expiration Date, or if it appears, in the sole judgment of the Issuer, that the Tender Offer will not be consummated and such conditions will not be satisfied by the Expiration Date, the Issuer shall redeem the Notes in whole, on 10 days' prior notice mailed by first-class mail to each Holder's last address as it appears in the Security Register, at a Redemption Price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest to the Redemption Date. On the earlier of (i) the Expiration Date, if the Trustee has not received the Escrow Agreement Officers' Certificate stating that the Tender Offer has been consummated (or will be consummated promptly upon the release of the escrowed proceeds of the offering of the Notes to the Issuer) and certain conditions have been satisfied and the Escrow Agreement Opinion of Counsel, and (ii) such date on which the Trustee receives an officer's certificate under the Escrow Agreement that the Tender Offer will not be consummated and such conditions will not be satisfied by the Expiration Date, the Trustee will mail by first-class mail to each Holder's last address as it appears in the Security Register a written notice that the Notes will be redeemed within 10 days of such notice. 40 SECTION 3.02. Notices to Trustee. If the Issuer elects to redeem Notes pursuant to Section 3.01(a) or (b), it shall notify the Trustee in writing of the Redemption Date and the principal amount of Notes to be redeemed. The Issuer shall give notice provided for in this Section 3.02, (i) pursuant to an election to redeem Notes under Section 3.01(a), in an Officers' Certificate at least 45 days before the Redemption Date and (ii) pursuant to an election to redeem Notes under Section 3.01(b), in an Officers' Certificate at least 15 days before the Redemption Date (in each case unless a shorter period shall be satisfactory to the Trustee). SECTION 3.03. Selection of Notes to Be Redeemed. If less than all of the Notes are to be redeemed at any time, the Trustee shall select the Notes to be redeemed in compliance with the requirements, as certified to it by the Issuer, of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not listed on a national securities exchange, by lot or by such other method as the Trustee in its sole discretion shall deem fair and appropriate; provided that no Notes of $1,000 in principal amount or less shall be redeemed in part. The Trustee shall make the selection from the Notes outstanding and not previously called for redemption. Notes in denominations of $1,000 in principal amount may only be redeemed in whole. The Trustee may select for redemption portions (equal to $1,000 in principal amount or any integral multiple thereof) of Notes that have denominations larger than $1,000 in principal amount. Provisions of this Indenture that apply to Notes called for redemption also apply to portions of Notes called for redemption. The Trustee shall notify the Issuer and the Registrar promptly in writing of the Notes or portions of Notes to be called for redemption. SECTION 3.04. Notice of Redemption. With respect to any redemption of Notes pursuant to Section 3.01(a), at least 30 days but not more than 60 days before a Redemption Date, the Issuer, and with respect to any redemption of Notes pursuant to Section 3.01(b), within 10 days before a Redemption Date, the Trustee, shall mail a notice of redemption by first-class mail to each Holder whose Notes are to be redeemed. The notice shall identify the Notes to be redeemed and shall state: (i) the Redemption Date; (ii) the Redemption Price; (iii) the name and address of the Paying Agent; (iv) that Notes called for redemption must be surrendered to the Paying Agent in order to collect the Redemption Price; 41 (v) that, unless the Issuer defaults in making the redemption payment, interest on Notes called for redemption ceases to accrue on and after the Redemption Date and the only remaining right of the Holders is to receive payment of the Redemption Price plus accrued interest to the Redemption Date upon surrender of the Notes to the Paying Agent; (vi) that, if any Note is being redeemed in part, the portion of the principal amount (equal to $1,000 in principal amount or any integral multiple thereof) of such Note to be redeemed and that, on and after the Redemption Date, upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion thereof will be reissued; and (vii) that, if any Note contains a CUSIP, CINS or ISIN number as provided in Section 2.13, no representation is being made as to the correctness of the CUSIP, CINS or ISIN number either as printed on the Notes or as contained in the notice of redemption and that reliance may be placed only on the other identification numbers printed on the Notes. At the Issuer's request (which request may be revoked by the Issuer at any time prior to the time at which the Trustee shall have given such notice to the Holders), made in writing to the Trustee at least 45 days (or such shorter period as shall be satisfactory to the Trustee) before a Redemption Date, the Trustee shall give the notice of redemption pursuant to Section 3.01(a) in the name and at the expense of the Issuer. If, however, the Issuer gives such notice to the Holders, the Issuer shall concurrently deliver to the Trustee an Officers' Certificate stating that such notice has been given. The Trustee shall give the notice of redemption if and as required pursuant to Section 3.01(b). SECTION 3.05. Effect of Notice of Redemption. Once notice of redemption is mailed, Notes called for redemption become due and payable on the Redemption Date and at the Redemption Price. Upon surrender of any Notes to the Paying Agent, such Notes shall be paid at the Redemption Price, plus accrued interest, if any, to the Redemption Date. Notice of redemption shall be deemed to be given when mailed, whether or not the Holder receives the notice. In any event, failure to give such notice, or any defect therein, shall not affect the validity of the proceedings for the redemption of Notes held by Holders to whom such notice was properly given. SECTION 3.06. Deposit of Redemption Price. On or prior to any Redemption Date, the Issuer shall deposit with the Paying Agent (or, if the Issuer is acting as its own Paying Agent, shall segregate and hold in trust as provided in Section 2.05) money sufficient to pay the Redemption Price of and accrued interest on all Notes to be redeemed on that date other than 42 Notes or portions thereof called for redemption on that date that have been delivered by the Issuer to the Trustee for cancellation. SECTION 3.07. Payment of Notes Called for Redemption. If notice of redemption has been given in the manner provided above, the Notes or portion of Notes specified in such notice to be redeemed shall become due and payable on the Redemption Date at the Redemption Price stated therein, together with accrued interest to such Redemption Date, and on and after such date (unless the Issuer shall default in the payment of such Notes at the Redemption Price and accrued interest to the Redemption Date, in which case the principal, until paid, shall bear interest from the Redemption Date at the rate prescribed in the Notes), such Notes shall cease to accrue interest. Upon surrender of any Note for redemption in accordance with a notice of redemption, such Note shall be paid and redeemed by the Issuer at the Redemption Price, together with accrued interest, if any, to the Redemption Date; provided that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders registered as such at the close of business on the relevant Regular Record Date. SECTION 3.08. Notes Redeemed in Part. Upon surrender of any Note that is redeemed in part, the Issuer shall execute and the Trustee shall authenticate and deliver to the Holder a new Note equal in principal amount to the unredeemed portion of such surrendered Note. ARTICLE FOUR COVENANTS SECTION 4.01. Payment of Notes. The Issuer shall pay the principal of, premium, if any, and interest on the Notes on the dates and in the manner provided in the Notes and this Indenture. An installment of principal, premium, if any, or interest shall be considered paid on the date due if the Trustee or Paying Agent (other than the Issuer, a Subsidiary of the Issuer, or any Affiliate of any of them) holds on that date money designated for and sufficient to pay the installment. If the Issuer or any Subsidiary of the Issuer or any Affiliate of any of them acts as Paying Agent, an installment of principal, premium, if any, or interest shall be considered paid on the due date if the entity acting as Paying Agent complies with the last sentence of Section 2.05. As provided in Section 6.09, upon any bankruptcy or reorganization procedure relative to the Issuer, the Trustee shall serve as the Paying Agent, if any, for the Notes. The Issuer shall pay interest on overdue principal, premium, if any, and interest on overdue installments of interest, to the extent lawful, at the rate per annum specified in the Notes. SECTION 4.02. Maintenance of Office or Agency. The Issuer will maintain in the Borough of Manhattan, The City of New York, an office or agency where Notes may be surrendered for registration of transfer or exchange or for presentation for payment and where 43 notices and demands to or upon the Issuer in respect of the Notes and this Indenture may be served. The Issuer will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Issuer shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 12.02. The Issuer may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided that no such designation or rescission shall in any manner relieve the Issuer of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York for such purposes. The Issuer will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Issuer hereby initially designates the Corporate Trust Office of the Trustee as such office of the Issuer in accordance with Section 2.04. SECTION 4.03. Limitation on Indebtedness. The Issuer will not, and will not permit any of its Restricted Subsidiaries to, Incur 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 Issuer'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, and any Indebtedness Incurred or repaid after the first day of such four-quarter period and on or prior to the date of such event (other than Indebtedness Incurred or repaid under a revolving credit or similar arrangement to the extent of the commitment thereunder (or under any predecessor revolving credit or similar arrangement) in effect on the last day of such four-quarter period unless any portion of such Indebtedness is projected, in the reasonable judgment of the senior management of the Issuer, to remain outstanding for a period in excess of 12 months from the date of the Incurrence thereof) had been Incurred or repaid on the first day of such four-quarter period and (ii) any acquisition or disposition by the Issuer and its Restricted Subsidiaries out of the ordinary course of business of any assets constituting a company, division, line of business or business facility, in each case after the first day of such four-quarter period, and on or prior to the date of such event, had been consummated on the first day of such four-quarter period (including giving pro forma effect to the application of the proceeds of any such disposition), would have been at least equal to 2:00:1.00. SECTION 4.04. Limitation on Restricted Payments. The Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly: 44 (i) declare or pay any dividend on, or make any distribution to holders of, its Capital Stock (other than (x) dividends or distributions payable solely in shares of its Qualified Capital Stock or in options, warrants or other rights to acquire such Qualified Capital Stock and (y) pro rata dividends or distributions on Common Stock of Restricted Subsidiaries held by minority stockholders); (ii) purchase, redeem, defease or otherwise acquire or retire for value any Capital Stock (or any option, warrant or other right to acquire such Capital Stock) of (A) the Issuer or an Unrestricted Subsidiary held by any Person or (B) a Restricted Subsidiary held by an Affiliate of the Issuer (other than any Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of such holder) of 5% or more of the Capital Stock of the Issuer; (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 a Permitted Investment) (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 Issuer or any Restricted Subsidiary; (y) the Issuer could Incur $1.00 of additional Indebtedness under Section 4.03 (other than Permitted Indebtedness); and (z) the aggregate amount of all Restricted Payments, including any Restricted Payments made pursuant to clauses (i) and (iv) of the succeeding paragraph, declared or made after the Closing Date shall not exceed the sum of: (A) 50% of the Consolidated Net Income of the Issuer accrued on a cumulative basis during the period beginning on the first day of the fiscal quarter beginning immediately following the Closing Date and ending on the last day of the fiscal quarter ending prior to the date of such proposed Restricted Payment for which reports have been filed with the Commission or provided to the Trustee pursuant to Section 4.19 (or, if such aggregate cumulative Consolidated Net Income shall be a loss, minus 100% of the amount of such loss); (B) the aggregate Net Cash Proceeds received after the Closing Date by the Issuer as capital contributions to the Issuer; 45 (C) the aggregate Net Cash Proceeds received after the Closing Date by the Issuer from the issuance and sale (other than to any of its Subsidiaries) of shares of Qualified Capital Stock of the Issuer or any options or warrants to purchase such shares (other than issuances to the extent used to make a Restricted Payment under clause (ii) of the subsequent paragraph) of Qualified Capital Stock of the Issuer; (D) the aggregate Net Cash Proceeds received after the Closing Date by the Issuer for debt securities that have been converted into or exchanged for Qualified Capital Stock of the Issuer to the extent such debt securities were originally sold for cash plus the aggregate cash received by the Issuer at the time of such conversion or exchange; and (E) $10 million. None of the foregoing provisions shall be deemed to prohibit the following Restricted Payments so long as in the case of clauses (ii), (iii) and (iv) at the time of and after giving effect to the proposed Restricted Payment no Default or Event of Default shall have occurred and be 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; (ii) the redemption, repurchase or other acquisition or retirement of Capital Stock of the Issuer 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 Issuer; (iii) the redemption, repurchase, or other acquisition or retirement of Subordinated Indebtedness of the Issuer, including premium, if any, and accrued and unpaid interest, made by exchange for, or out of the proceeds of the substantially concurrent sale of, Indebtedness of the Issuer permitted to be Incurred under clause (k) of the definition of "Permitted Indebtedness"; and (iv) Investments in an aggregate amount not to exceed $25 million in any Person which owns, operates or services Healthcare Related Businesses. SECTION 4.05. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. The Issuer will not, and will not permit any Restricted Subsidiary to, create or otherwise cause or suffer to exist or become effective any restriction of any kind, on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distribution on its Capital Stock to the Issuer or any other Restricted Subsidiary, (ii) pay any Indebtedness owed 46 to the Issuer or any other Restricted Subsidiary, (iii) make any Investment in the Issuer or any other Restricted Subsidiary or (iv) transfer any of its property or assets to the Issuer or any other Restricted 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 Issuer, or any Restricted Subsidiary; (c) any restriction pursuant to an agreement in effect at or entered into on the Closing Date; (d) any restriction, with respect to a Restricted Subsidiary that is not a Subsidiary on the Closing Date, in existence at the time such Person becomes a Restricted Subsidiary and not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary; (e) any restriction existing under any agreement that extends, renews, refinances or replaces the agreements containing the restrictions in the foregoing clauses (c) and (d), provided that the terms and conditions of any such restrictions are not materially less favorable to the Holders than those under or pursuant to the agreement so extended, renewed, refinanced or replaced (in the opinion of the Board of Directors of the Issuer whose determination shall be conclusive); (f) arising or agreed to in the ordinary course of business, not relating to any Indebtedness, and that do not, individually or in the aggregate, detract from the value of property or assets of the Issuer or any Restricted Subsidiary in any manner material to the Issuer or any Restricted Subsidiary; (g) with respect to a Restricted Subsidiary and imposed pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock of, or property and assets of, such Restricted Subsidiary; or (h) contained in the terms of any Indebtedness or any agreement pursuant to which such Indebtedness was issued if (A) the encumbrance or restriction applies only in the event of a payment default or a default with respect to a financial covenant contained in such Indebtedness or agreement, (B) the encumbrance or restriction is not materially more disadvantageous to the Holders than is customary in comparable financings (as determined by the Issuer) and (C) the Issuer determines that any such encumbrance or restriction will not materially affect the Issuer's ability to make principal or interest payments on the Notes. SECTION 4.06. Limitations on Preferred Stock of Restricted Subsidiaries. The Issuer will not sell, and will not permit any Restricted Subsidiary, directly or indirectly, to issue or sell, any Preferred Stock of a Restricted Subsidiary other than to the Issuer or a Wholly Owned Restricted Subsidiary, or permit any Person (other than the Issuer or a Wholly Owned Restricted Subsidiary) to own or hold any Preferred Stock of any Restricted Subsidiary, unless such Restricted Subsidiary would be entitled to Incur Indebtedness pursuant to Section 4.03 in an aggregate principal amount equal to the aggregate liquidation value of the Preferred Stock to be issued. SECTION 4.07. Limitation on Issuances of Guarantees by Restricted Subsidiaries. (a) The Issuer will not permit any Restricted Subsidiary, directly or indirectly, to assume, guarantee or in any other manner become liable with respect to any Indebtedness of the Issuer which is expressly by its terms pari passu with or subordinate in right of payment to the Notes ("Guaranteed Indebtedness") unless (i) such Restricted Subsidiary simultaneously executes and 47 delivers a supplemental indenture to the Indenture providing for a guarantee of payment of the Notes by such Restricted Subsidiary 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 Issuer or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Subsidiary Guarantee. If the Guaranteed Indebtedness is (A) pari passu with the Notes, then the Guarantee of such Guaranteed Indebtedness shall be pari passu with, or subordinate in right of payment to, the Subsidiary Guarantee or (B) subordinated to the Notes, then the Guarantee of such Guaranteed Indebtedness shall be subordinated in right of payment to the Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is subordinated in right of payment to the Notes. (b) Each guarantee created pursuant to the provisions described in the foregoing paragraph is referred to as a "Subsidiary Guarantee," and the issuer of each such Guarantee is referred to as a "Subsidiary Guarantor." Notwithstanding the foregoing, any Subsidiary Guarantee may provide by its terms that it (together with any Liens arising from such Subsidiary Guarantee) shall be automatically and unconditionally released and discharged upon (i) any sale, exchange or transfer, to any Person not an Affiliate of the Issuer, of all of the Issuer's Capital Stock in, or all or substantially all the assets of, such Subsidiary Guarantor, 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 Subsidiary Guarantee, except a release or discharge by or as a result of payment under such Subsidiary Guarantee. SECTION 4.08. Limitation on Transactions with Stockholders and Affiliates. The Issuer will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, enter into, renew or extend 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 Issuer (other than a Wholly Owned Restricted Subsidiary) unless (i) such transaction or series of related transactions is on terms that are no less favorable to the Issuer or such Restricted 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 $10 million in the aggregate, the Issuer 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 Issuer or for which the Issuer or a Restricted Subsidiary has received a written opinion of a nationally recognized investment banking firm stating that the transaction is fair to the Issuer or such Restricted Subsidiary from a financial point of view (a copy of which opinion shall be attached to such Officers' Certificate); provided, however, that the foregoing restriction shall not apply to (a) the payment of reasonable and customary regular fees to directors of the Issuer or any of its Restricted Subsidiaries who are not employees of the Issuer or any Affiliate, (b) the payment of monthly fees in accordance with Section 4.13 and the reimbursement of expenses pursuant to the terms of management agreements with Genesis or 48 any of its affiliates, (c) any payments or other transactions pursuant to any tax-sharing agreement between the Issuer and any other Person with which the Issuer files a consolidated tax return or with which the Issuer is part of a consolidated group for tax purposes, (d) the Therapy Sale, provided the Issuer or its Restricted Subsidiaries receives at least $20 million from the Therapy Sale, (e) the Pharmacy Sale, provided the Issuer or its Restricted Subsidiaries receives at least $50 million from the Pharmacy Sale, (f) transactions in the ordinary course of business with Genesis or any of its Affiliates, related to the Issuer's healthcare businesses or facilities; provided that the aggregate amount of any such transactions in any twelve month period does not exceed $10 million, (g) any Restricted Payments not prohibited by Section 4.04 or (h) the payment of fees and expenses in connection with the Transactions to Genesis, Cypress and TPG. SECTION 4.09. Limitation on Liens. The Issuer will not, and will not permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Liens of any kind upon any of its respective properties now owned or acquired after the Closing Date or any income or profits therefrom securing (i) any Indebtedness of the Issuer which is expressly subordinate in right of payment to any other Indebtedness of the Issuer, unless the Notes are equally and ratably secured; provided that, if such Indebtedness is subordinate in right of payment to the Notes, the Lien securing such Indebtedness shall be subordinate to the Lien securing the Notes with the same relative priority as such subordinated 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 Issuer pursuant to a transaction permitted under Article Five 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 and not Incurred in connection with or in contemplation of such transaction or Incurrence, so long as such Liens do not extend to or cover any property or assets of the Issuer or any Restricted Subsidiary other than property or assets acquired in such transaction, or (ii) any assumption, guarantee or other liability of any Restricted Subsidiary in respect of any Indebtedness of the Issuer which is expressly subordinate in right of payment to any other Indebtedness of the Issuer, unless the substantially similar assumption, guarantee or other liability of such Restricted Subsidiary in respect of the Notes is equally and ratably secured; provided that, if such subordinated Indebtedness is subordinate in right of payment to the Notes, the Lien securing the assumption, guarantee or other liability of such Restricted Subsidiary in respect of such Indebtedness shall be subordinate to the Lien securing the assumption, guarantee or other liability of such Restricted Subsidiary with respect to the Notes with the same relative priority as such subordinated 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 Restricted Subsidiary became a Restricted 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 Restricted Subsidiary), so long as such Liens do not extend to or cover any property or assets of the Issuer or any other Restricted Subsidiary. 49 SECTION 4.10. Limitation on Asset Sales. The Issuer will not, and will not permit any Restricted Subsidiary to, consummate any Asset Sale, unless (i) the consideration received by the Issuer or such Restricted Subsidiary is at least equal to the fair market value of the assets sold or disposed of and (ii) at least 75% of the consideration received consists of cash or Temporary Cash Investments. In the event and to the extent that the Net Cash Proceeds received by the Issuer or any of its Restricted Subsidiaries from one or more Asset Sales occurring on or after the Closing Date in any period of 12 consecutive months exceed $10 million, then the Issuer shall or shall cause the relevant Restricted Subsidiary to (i) within 12 months after the date Net Cash Proceeds so received exceed $10 million (A) apply an amount equal to such excess Net Cash Proceeds to permanently repay Senior Indebtedness of the Issuer or any Subsidiary Guarantor or Indebtedness of any other Restricted Subsidiary, in each case owing to a Person other than the Issuer or any of its Restricted Subsidiaries or (B) invest an equal amount, or the amount not so applied pursuant to clause (A) (or enter into a definitive agreement committing to so invest within 12 months after the date of such agreement; provided that if any such agreement is terminated, the Issuer may invest such Net Cash Proceeds prior to the end of the 12-month period referred to in clause (i) or six months after the termination of such agreement, whichever is later), in property or assets (other than current assets) of a nature or type or that are used in a business (or in a company having property and assets of a nature or type, or engaged in a business) similar or related to the nature or type of the property and assets of, or the business of, the Issuer and its Restricted Subsidiaries existing on the date of such investment and (ii) apply (no later than the end of the 12-month period referred to in clause (i)) such excess Net Cash Proceeds (to the extent not applied pursuant to clause (i)) as provided in the following paragraph of this Section 4.10. The amount of such excess Net Cash Proceeds required to be applied (or to be committed to be applied) during such 12-month period as set forth in clause (i) of the preceding sentence and not applied as so required by the end of such period shall constitute "Excess Proceeds." If, as of the first day of any calendar month, the aggregate amount of Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this Section 4.10 totals at least $10 million, the Issuer must commence, not later than the fifteenth Business Day of such month, and consummate an Offer to Purchase from the Holders on a pro rata basis an aggregate principal amount of Notes equal to the Excess Proceeds on such date, at a purchase price equal to 100% of the principal amount of the Notes, plus, in each case, accrued interest (if any) to the Payment Date. SECTION 4.11. Repurchase of Notes upon a Change in Control. The Issuer must commence, within 30 days of the occurrence of a Change in Control, and consummate an Offer to Purchase for all Notes then outstanding, at a purchase price equal to 101% of the principal amount thereof, plus accrued interest (if any) to the Payment Date. Within 30 days following a Change of Control, the Issuer shall mail a notice to each Holder and the Trustee stating the terms of the Change of Control. 50 SECTION 4.12. Limitation on Senior Subordinated Indebtedness. The Issuer will not Incur 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; provided that the foregoing limitation shall not apply to distinctions between categories of Senior Indebtedness of the Issuer that exist by reason of any Liens or Guarantees arising or created in respect of some but not all of such Senior Indebtedness. SECTION 4.13. Limitation on Management Fees. The Issuer will not, and will not permit any of its Restricted Subsidiaries to, pay any management fees in any month to the extent such fees would exceed the greater of (i) $1,991,666 and (ii) 4% of the Issuer's consolidated net revenues for such month; provided that the Issuer may pay management fees in excess of such amount (including accrued fees) to the extent that (A) both before and after giving effect to the proposed payment (x) no Default or Event of Default shall have occurred and be continuing and (y) the Issuer's Fixed Charge Coverage Ratio for the four full fiscal quarters immediately preceding such event, taken as one period and calculated on the assumption that (I) any Indebtedness Incurred or repaid after the first day of such four-quarter period and on or prior to the date of such payment (other than Indebtedness Incurred or repaid under a revolving credit or similar arrangement to the extent of the commitment thereunder (or under any predecessor revolving credit or similar arrangement) in effect on the last day of such four quarter period unless any portion of such Indebtedness is projected, in the reasonable judgment of the senior management of the Issuer, to remain outstanding for a period in excess of 12 months from the date of the Incurrence thereof), had been Incurred or repaid on the first day of such four-quarter period, (II) any acquisition or disposition by the Issuer and its Restricted Subsidiaries out of the ordinary course of business of any assets constituting a company, division, line of business or business facility, in each case after the first day of such four-quarter period, and on or prior to the date of such payment, had been consummated on the first day of such four-quarter period (including giving pro forma effect to the application of the proceeds of any such disposition) and (III) the proposed management fees were paid during such period, would have been at least equal to 2:00:1.00; and (B) the aggregate amount of management fees paid with respect to any month do not exceed 6% of the Issuer's consolidated net revenues for such month. To the extent the Issuer is prohibited from paying any management fees as a result of clause (y) of the proviso to the preceding sentence, the Issuer may accrue such fees until they may be paid in accordance with this Section 4.13 provided the payment of such accrued fees is subordinated in right of payment to the prior payment in full in cash or Cash Equivalents of all of the Issuer's obligations under the Notes and this Indenture. SECTION 4.14. Existence. Subject to Articles Four and Five of this Indenture, the Issuer will do or cause to be done all things necessary to preserve and keep in full force and effect its existence and the existence of each of its Restricted Subsidiaries in accordance with the respective organizational documents of the Issuer and each such Subsidiary and the rights (whether pursuant to charter, partnership certificate, agreement, statute or otherwise), material 51 licenses and franchises of the Issuer and each such Subsidiary; provided that the Issuer shall not be required to preserve any such right, license or franchise, or the existence of any Restricted Subsidiary, if the maintenance or preservation thereof is no longer desirable in the conduct of the business of the Issuer and its Restricted Subsidiaries taken as a whole. SECTION 4.15. Payment of Taxes and Other Claims. The Issuer will pay or discharge and shall cause each of its Subsidiaries to pay or discharge, or cause to be paid or discharged, before the same shall become delinquent (i) all material taxes, assessments and governmental charges levied or imposed upon (a) the Issuer or any such Subsidiary, (b) the income or profits of any such Subsidiary which is a corporation or (c) the property of the Issuer or any such Subsidiary and (ii) all material lawful claims for labor, materials and supplies that, if unpaid, might by law become a lien upon the property of the Issuer or any such Subsidiary; provided that the Issuer shall not be required to pay or discharge, or cause to be paid or discharged, any such tax, assessment, charge or claim the amount, applicability or validity of which is being contested in good faith by appropriate proceedings and for which adequate reserves have been established. SECTION 4.16. Maintenance of Properties and Insurance. The Issuer will cause all properties used or useful in the conduct of its business or the business of any of its Restricted Subsidiaries to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Issuer may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided that nothing in this Section 4.16 shall prevent the Issuer or any such Subsidiary from discontinuing the use, operation or maintenance of any of such properties or disposing of any of them, if such discontinuance or disposal is, in the judgment of the Issuer, desirable in the conduct of the business of the Issuer or such Subsidiary. The Issuer will provide or cause to be provided, for itself and its Restricted Subsidiaries, insurance (including appropriate self-insurance) against loss or damage of the kinds customarily insured against by corporations similarly situated and owning like properties, including, but not limited to, products liability insurance and public liability insurance, with reputable insurers or with the government of the United States of America, or an agency or instrumentality thereof, in such amounts, with such deductibles and by such methods as shall be customary for corporations similarly situated in the industry in which the Issuer or any such Restricted Subsidiary, as the case may be, is then conducting business. SECTION 4.17. Notice of Defaults. In the event that the Issuer becomes aware of any Default or Event of Default, the Issuer, promptly after it becomes aware thereof, will give written notice thereof to the Trustee. 52 SECTION 4.18. Compliance Certificates. (a) The Issuer shall deliver to the Trustee, within 45 days after the end of each fiscal quarter (90 days after the end of the last fiscal quarter of each year), an Officers' Certificate stating whether or not the signers know of any Default or Event of Default that occurred during such fiscal quarter. In the case of the Officers' Certificate delivered within 90 days after the end of the Issuer's fiscal year, such certificate shall contain a certification from the principal executive officer, principal financial officer or principal accounting officer of the Issuer that a review has been conducted of the activities of the Issuer and its Restricted Subsidiaries and the Issuer's and its Restricted Subsidiaries' performance under this Indenture and that the Issuer has complied with all conditions and covenants under this Indenture. For purposes of this Section 4.18, such compliance shall be determined without regard to any period of grace or requirement of notice provided under this Indenture. If the officers of the Issuer signing such certificate do know of such a Default or Event of Default, the certificate shall describe any such Default or Event of Default and its status. The first certificate to be delivered pursuant to this Section 4.18(a) shall be for the first fiscal quarter beginning after the execution of this Indenture. (b) The Issuer shall deliver to the Trustee, within 90 days after the end of the Issuer's fiscal year, a certificate signed by the Issuer's independent certified public accountants stating (i) that their audit examination has included a review of the terms of this Indenture and the Notes as they relate to accounting matters, (ii) that they have read the most recent Officers' Certificate delivered to the Trustee pursuant to paragraph (a) of this Section 4.18 and (iii) whether, in connection with their audit examination, anything came to their attention that caused them to believe that the Issuer was not in compliance with any of the terms, covenants, provisions or conditions of Article Four and Section 5.01 of this Indenture as they pertain to accounting matters and, if any Default or Event of Default has come to their attention, specifying the nature and period of existence thereof; provided that such independent certified public accountants shall not be liable in respect of such statement by reason of any failure to obtain knowledge of any such Default or Event of Default that would not be disclosed in the course of an audit examination conducted in accordance with generally accepted auditing standards in effect at the date of such examination. SECTION 4.19. Commission Reports and Reports to Holders. At all times from and after the earlier of (i) the date of the commencement of an Exchange Offer or the effectiveness of the Shelf Registration Statement (the "Registration") and (ii) the date that is six months after the Closing Date, in either case, whether or not the Issuer is then required to file reports with the Commission, the Issuer shall file with the Commission the annual, quarterly and other reports and other information required by Section 13(a) or 15(d) of the Exchange Act, regardless of whether such sections of the Exchange Act are applicable to the Issuer (unless the Commission will not accept such a filing). The Issuer shall mail or cause to be mailed copies of such reports and information to Holders and the Trustee within 15 days after the date it files such reports and information with the Commission or after the date it would have been required to file such reports and information with the Commission had it been subject to such sections 53 of the Exchange Act; provided, however, that the copies of such reports and information mailed to Holders may omit exhibits, which the Issuer will supply to any Holder at such Holder's request. In addition, at all times prior to the earlier of the date of the Registration and the date that is six months after the Closing Date, the Issuer shall, at its cost, deliver to each Holder of the Notes quarterly and annual reports substantially equivalent to those which would be required by the Exchange Act. In addition, at all times prior to the Registration, upon the request of any Holder or any prospective purchaser of the Notes designated by a Holder, the Issuer shall supply to such Holder or such prospective purchaser the information required under Rule 144A under the Securities Act. SECTION 4.20. Waiver of Stay, Extension or Usury Laws. The Issuer 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 law or other law that would prohibit or forgive the Issuer from paying all or any portion of the principal of, premium, if any, or interest on the Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or that may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) the Issuer 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 FIVE SUCCESSOR CORPORATION SECTION 5.01. When Issuer May Merge, Etc. The Issuer 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 Restricted 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 Issuer and its Restricted 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 Issuer shall be the continuing corporation, or (B) the Person (if other than the Issuer) formed by such consolidation or into which the Issuer is merged or the Person which acquires by conveyance, transfer, lease or disposition the properties and assets of the Issuer, 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 this Indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Issuer under the Notes and this Indenture, and this Indenture shall remain in full force and effect; (ii) immediately before 54 and immediately after giving effect to such transaction on a pro forma basis (and treating any Indebtedness not previously an obligation of the Issuer or a Restricted Subsidiary which becomes the obligation of the Issuer or any of its Restricted 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 Issuer (or the Surviving Entity if the Issuer is not the continuing obligor under the Indenture) is at least equal to the Consolidated Net Worth of the Issuer 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 Issuer or a Restricted Subsidiary which becomes the obligation of the Issuer or any of its Restricted Subsidiaries in connection with or as a result of such transaction as having been incurred at the time of such transaction), the Issuer (or the Surviving Entity if the Issuer is not the continuing obligor under this Indenture) could incur $1.00 of additional Indebtedness under Section 4.03 (other than Permitted Indebtedness); provided that this clause (iv) shall not apply to (x) a consolidation or merger with or into a Wholly Owned Restricted Subsidiary with a positive net worth; provided that, in connection with any such merger or consolidation, no consideration (other than Qualified Capital Stock in the Surviving Entity or the Issuer) shall be issued or distributed to the stockholders of the Issuer or (y) the merger of Genesis ElderCare Acquisition Corp. with and into Multicare; and (v) the Issuer 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. SECTION 5.02. 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 Issuer in accordance with the immediately preceding paragraph, the successor Person formed by such consolidation or into which the Issuer 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 Issuer under this Indenture with the same effect as if such successor had been named as the Issuer herein. When a successor assumes all the obligations of its predecessor under this Indenture and the Notes, 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. 55 ARTICLE SIX DEFAULT AND REMEDIES SECTION 6.01. Events of Default. An "Event of Default" shall occur with respect to the Notes if: (a) the Issuer defaults in the payment of the principal of (or premium, if any, on) any Note when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise, whether or not such payment is prohibited by Article Eleven; (b) the Issuer defaults in the payment of interest on any Note when the same becomes due and payable, and such default continues for a period of 30 days, whether or not such payment is prohibited by Article Eleven; (c) the Issuer defaults in the performance of, or breaches the provisions of, Article Five or Section 3.01(b) or fails to make or consummate an Offer to Purchase in accordance with Section 4.10 or 4.11; (d) the Issuer defaults in the performance of or breaches any covenant or agreement of the Issuer in this Indenture or under the Notes (other than a default specified in clause (a), (b) or (c) above), and such default or breach continues for a period of 30 consecutive days after written notice by the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding; (e) there occurs with respect to any issue or issues of Indebtedness of the Issuer or any Significant Subsidiary having an outstanding principal amount of $10 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, (I) an event of default that has caused the holder thereof to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration and/or (II) the failure to make a principal payment at the final (but not any interim) fixed maturity and such defaulted payment shall not have been made, waived or extended within 30 days of such payment default; (f) any final judgment or order (not covered by insurance) for the payment of money in excess of $10 million in the aggregate for all such final judgments or orders against all such Persons (treating any deductibles, self-insurance or retention as not so covered) shall be rendered against the Issuer or any Significant Subsidiary and shall not be paid or discharged, and there shall be any period of 30 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid or discharged against all such Persons to 56 exceed $10 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of the Issuer or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Issuer or any Significant Subsidiary or for all or substantially all of the property and assets of the Issuer or any Significant Subsidiary or (C) the winding up or liquidation of the affairs of the Issuer or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 30 consecutive days; (h) the Issuer or any Significant Subsidiary (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Issuer or any Significant Subsidiary or for all or substantially all of the property and assets of the Issuer or any Significant Subsidiary or (C) effects any general assignment for the benefit of creditors; or (i) the Guaranty Documents are not executed and delivered within three Business Days after the consummation of the Tender Offer (unless prior to or at the end of such three Business Days the Merger shall have been consummated). SECTION 6.02. Acceleration. If an Event of Default (other than an Event of Default specified in clause (g) or (h) of Section 6.01 that occurs with respect to the Issuer) occurs and is continuing under this Indenture, the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding, by written notice to the Issuer (and to the Trustee if such notice is given by the Holders), may, and the Trustee at the request of such Holders shall, declare the principal of, premium, if any, and accrued interest on the Notes to be immediately due and payable. Upon a declaration of acceleration, such principal, premium, if any, and accrued interest shall be immediately due and payable. In the event of a declaration of acceleration because an Event of Default set forth in clause (e) of Section 6.01 has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if the event of default triggering such Event of Default pursuant to clause (e) shall be remedied or cured by the Issuer or the relevant Significant Subsidiary or waived by the holders of the relevant Indebtedness within 60 days after the declaration of acceleration with respect thereto. If an Event of Default specified in clause (g) or (h) of Section 6.01 occurs with respect to the Issuer, the principal of, premium, if any, and accrued interest on the Notes then outstanding 57 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. The Holders of at least a majority in principal amount of the outstanding Notes, by written notice to the Issuer and to the Trustee, may waive all past defaults and rescind and annul a declaration of acceleration and its consequences if (i) all existing Events of Default, other than the nonpayment of the principal of, premium, if any, and interest on the Notes that have become due solely by such declaration of acceleration, have been cured or waived and (ii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. SECTION 6.03. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may, and at the direction of the Holders of at least a majority in principal amount of the outstanding Notes shall, pursue any available remedy by proceeding at law or in equity to collect the payment of principal of, premium, if any, or interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. SECTION 6.04. Waiver of Past Defaults. Subject to Sections 6.02, 6.07 and 9.02, the Holders of at least a majority in principal amount of the outstanding Notes, by notice to the Trustee, may waive an existing Default or Event of Default and its consequences, except a Default in the payment of principal of, premium, if any, or interest on any Note as specified in clause (a) or (b) of Section 6.01 or in respect of a covenant or provision of this Indenture which 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 such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereto. SECTION 6.05. Control by Majority. The Holders of at least a majority in aggregate principal amount of the outstanding Notes may 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. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that may involve the Trustee in personal liability, or that the Trustee determines in good faith may be unduly prejudicial to the rights of Holders of Notes not joining in the giving of such direction and may take any other action it deems proper that is not inconsistent with any such direction received from Holders of Notes. SECTION 6.06. Limitation on Suits. A Holder may not pursue any remedy with respect to this Indenture or the Notes unless: 58 (i) the Holder gives the Trustee written notice of a continuing Event of Default; (ii) the Holders of at least 25% in aggregate principal amount of outstanding Notes make a written request to the Trustee to pursue the remedy; (iii) such Holder or Holders offer (and if requested provide) the Trustee indemnity satisfactory to the Trustee against any costs, liability or expense; (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (v) during such 60-day period, the Holders of a majority in aggregate principal amount of the outstanding Notes do not give the Trustee a direction that is inconsistent with the request. For purposes of Section 6.05 of this Indenture and this Section 6.06, the Trustee shall comply with TIA Section 316(a) in making any determination of whether the Holders of the required aggregate principal amount of outstanding Notes have concurred in any request or direction of the Trustee to pursue any remedy available to the Trustee or the Holders with respect to this Indenture or the Notes or otherwise under the law. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over such other Holder. The limitations set forth in this Section 6.06 shall not apply to the right of any Holder of a Note to receive payment of the principal of, premium, if any, or interest on, such Note or to bring suit for the enforcement of any such payment, on or after the due date expressed in the Notes, which right shall not be impaired or affected without the consent of the Holder. SECTION 6.07. Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of the principal of, premium, if any, or interest on, such Note or to bring suit for the enforcement of any such payment, on or after the due date expressed in the Notes, shall not be impaired or affected without the consent of such Holder. SECTION 6.08. Collection Suit by Trustee. If an Event of Default in payment of principal, premium or interest specified in clause (a), (b) or (c) of Section 6.01 occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Issuer or any other obligor of the Notes for the whole amount of principal, premium, if any, and accrued interest remaining unpaid, together with interest on overdue principal, premium, if any, and, to the extent that payment of such interest is lawful, interest on overdue 59 installments of interest, in each case at the rate specified in the Notes, and 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. SECTION 6.09. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and 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 any other amounts due the Trustee under Section 7.07) and the Holders allowed in any judicial proceedings relative to the Issuer (or any other obligor of the Notes), its creditors or its property and shall be entitled and empowered to collect and receive any monies, securities or other property payable or deliverable upon conversion or exchange of the Notes or upon any such claims and to distribute the same, and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official 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 to the Trustee any amount due to 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 7.07. Nothing herein contained shall be deemed to empower 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 6.10. Priorities. If the Trustee collects any money pursuant to this Article Six, it shall pay out the money in the following order: First: to the Trustee for all amounts due under Section 7.07; Second: to Holders for amounts then due and unpaid for principal of, premium, if any, and interest on the Notes 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, respectively; and Third: to the Issuer or any other obligors of the Notes, as their interests may appear, or as a court of competent jurisdiction may direct. The Trustee, upon prior written notice to the Issuer, may fix a record date and payment date for any payment to Holders pursuant to this Section 6.10. SECTION 6.11. Undertaking for Costs. 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 or omitted 60 by it as Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of the suit, and the court may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07, or a suit by Holders of more than 10% in principal amount of the outstanding Notes. SECTION 6.12. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture 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, subject to any determination in such proceeding, the Issuer, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Issuer, Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 6.13. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or wrongfully taken Notes in Section 2.09, 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 6.14. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder 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 Six 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. ARTICLE SEVEN TRUSTEE SECTION 7.01. General. The duties and responsibilities of the Trustee shall be as provided by the TIA and as set forth herein. Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. 61 Whether or not herein 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 Article Seven. SECTION 7.02. Certain Rights of Trustee. Subject to TIA Sections 315(a) through (d): (i) the Trustee may rely, and shall be protected in acting or refraining from acting, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in any such document; (ii) before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel, which shall conform to Section 12.04. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such certificate or opinion; (iii) the Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any attorney or agent appointed with due care; (iv) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction; (v) the Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within its rights or powers or for any action it takes or omits to take in accordance with the written direction of the Holders of a majority in principal amount of the outstanding Notes 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; (vi) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; and (vii) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, 62 notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Issuer personally or by agent or attorney. SECTION 7.03. Individual Rights of Trustee. The Trustee, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with the Issuer or its Affiliates with the same rights it would have if it were not the Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to TIA Sections 310(b) and 311. SECTION 7.04. Trustee's Disclaimer. The Trustee (i) makes no representation as to the validity or adequacy of this Indenture or the Notes, (ii) shall not be accountable for the Issuer's use or application of the proceeds from the Notes and (iii) shall not be responsible for any statement in the Notes other than its certificate of authentication. SECTION 7.05. Notice of Default. If any Default or any Event of Default occurs and is continuing and if such Default or Event of Default is known to a Responsible Officer of the Trustee, the Trustee shall mail to each Holder in the manner and to the extent provided in TIA Section 313(c) notice of the Default or Event of Default within 45 days after it occurs, unless such Default or Event of Default has been cured; provided, however, that, except in the case of a default in the payment of the principal of, premium, if any, or interest on any Note, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interest of the Holders. SECTION 7.06. Reports by Trustee to Holders. Within 60 days after each August 1, beginning with August 1, 1998, the Trustee shall mail to each Holder as provided in TIA Section 313(c) a brief report dated as of such August 1, if required by TIA Section 313(a). SECTION 7.07. Compensation and Indemnity. The Issuer shall pay to the Trustee such compensation as shall be agreed upon in writing for its services. The compensation of the Trustee shall not be limited by any law on compensation of a trustee of an express trust. The Issuer shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses and advances incurred or made by the Trustee. Such expenses shall include the reasonable compensation and expenses of the Trustee's agents and counsel. The Issuer shall indemnify the Trustee against any and all losses, liabilities, obligations, damages, penalties, judgments, actions, suits, proceedings, reasonable costs and expenses 63 (including reasonable fees and disbursements of counsel) of any kind whatsoever which may be incurred by the Trustee in connection with any investigative, administrative or judicial proceeding (whether or not such indemnified party is designated a party to such proceeding) arising out of or in connection with the acceptance or administration of its duties under this Indenture; provided, however, that the Issuer need not reimburse any expense or indemnify against any loss, obligation, damage, penalty, judgment, action, suit, proceeding, reasonable cost or expense (including reasonable fees and disbursements of counsel) of any kind whatsoever which may be incurred by the Trustee in connection with any investigative, administrative or judicial proceeding (whether or not such indemnified party is designated a party to such proceeding) in which it is determined that the Trustee acted with negligence, bad faith or willful misconduct. The Trustee shall notify the Issuer promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Issuer shall not relieve the Issuer of its obligations hereunder, unless the Issuer is materially prejudiced thereby. The Issuer shall defend the claim and the Trustee shall cooperate in the defense. Unless otherwise set forth herein, the Trustee may have separate counsel and the Issuer shall pay the reasonable fees and expenses of such counsel. The Issuer need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. To secure the Issuer's payment obligations in this Section 7.07, the Trustee shall have a lien prior to the Notes on all money or property held or collected by the Trustee, in its capacity as Trustee, except money or property held by the Trustee pursuant to the Escrow Agreement and money or property held in trust to pay principal of, premium, if any, and interest on particular Notes. If the Trustee incurs expenses or renders services after the occurrence of an Event of Default specified in clause (g) or (h) of Section 6.01, the expenses and the compensation for the services will be intended to constitute expenses of administration under Title 11 of the Bankruptcy Law or any applicable federal or state law for the relief of debtors. SECTION 7.08. Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.08. The Trustee may resign at any time by so notifying the Issuer in writing at least 30 days prior to the date of the proposed resignation. The Holders of a majority in principal amount of the outstanding Notes may remove the Trustee by so notifying the Trustee in writing and may appoint a successor Trustee with the consent of the Issuer. The Issuer may remove the Trustee if: (i) the Trustee is no longer eligible under Section 7.10; (ii) the Trustee is adjudged a bankrupt or an insolvent; (iii) a receiver or other public officer takes charge of the Trustee or its property; or (iv) the Trustee becomes incapable of acting pursuant to the requirement of TIA Section 310(b). 64 If the Trustee resigns or is removed, or if a vacancy exists in the office of Trustee for any reason, the Issuer shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Issuer. If the successor Trustee does not deliver its written acceptance required by the next succeeding paragraph of this Section 7.08 within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Issuer or the Holders of a majority in principal amount of the outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Issuer. Immediately after the delivery of such written acceptance, subject to the lien provided in Section 7.07, (i) the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee, (ii) the resignation or removal of the retiring Trustee shall become effective and (iii) the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail notice of its succession to each Holder. If the Trustee is no longer eligible under Section 7.10, any Holder who satisfies the requirements of TIA Section 310(b) may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. The Issuer shall give notice of any resignation and any removal of the Trustee and each appointment of a successor Trustee to all Holders. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Issuer's obligation under Section 7.07 shall continue for the benefit of the retiring Trustee. SECTION 7.09. Successor Trustee by Merger, Etc. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation or national banking association, the resulting, surviving or transferee corporation or national banking association without any further act shall be the successor Trustee with the same effect as if the successor Trustee had been named as the Trustee herein. SECTION 7.10. Eligibility. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1). The Trustee shall have a combined capital and surplus of at least $25 million as set forth in its most recent published annual report of condition. SECTION 7.11. Money Held in Trust. The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree with the Issuer. Money held in trust 65 by the Trustee need not be segregated from other funds except to the extent required by law and except for money held in trust under Article Eight of this Indenture. SECTION 7.12. Withholding Taxes. The Trustee, as agent for the Issuer, shall exclude and withhold from each payment of principal and interest and other amounts due hereunder or under the Notes any and all withholding taxes applicable thereto as required by law. The Trustee agrees to act as such withholding agent and, in connection therewith, whenever any present or future taxes or similar charges are required to be withheld with respect to any amounts payable in respect of the Notes, to withhold such amounts and timely pay the same to the appropriate authority in the name of and on behalf of the Holders of the Notes, that it will file any necessary withholding tax returns or statements when due, and that, as promptly as possible after the payment thereof, it will deliver to each Holder of a Note appropriate documentation showing the payment thereof, together with such additional documentary evidence as such Holders may reasonably request from time to time. ARTICLE EIGHT DISCHARGE OF INDENTURE SECTION 8.01. Termination of Issuer's Obligations. Except as otherwise provided in this Section 8.01, the Issuer may terminate its obligations under the Notes and this Indenture if: (i) all Notes previously authenticated and delivered (other than destroyed, lost or stolen Notes that have been replaced or Notes that are paid pursuant to Section 4.01 or Notes for whose payment money or securities have theretofore been held in trust and thereafter repaid to the Issuer, as provided in Section 8.05) have been delivered to the Trustee for cancellation and the Issuer has paid all sums payable by it hereunder; or (ii) (A) the Notes mature within one year or all of them are to be called for redemption within one year under arrangements satisfactory to the Trustee for giving the notice of redemption, (B) the Issuer irrevocably deposits in trust with the Trustee during such one-year period, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee, as trust funds solely for the benefit of the Holders for that purpose, money or U.S. Government Obligations sufficient (in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee), without consideration of any reinvestment of any interest thereon, to pay principal, premium, if, any, and interest on the Notes to maturity or redemption, as the case may be, and to pay all other sums payable by it hereunder, (C) no Default or Event of Default with respect to the Notes shall have occurred and be continuing on the date of such deposit, (D) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Issuer is a party or by which it is bound and 66 (E) the Issuer has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in each case stating that all conditions precedent provided for herein relating to the satisfaction and discharge of this Indenture have been complied with. With respect to the foregoing clause (i), the Issuer's obligations under Section 7.07 shall survive. With respect to the foregoing clause (ii), the Issuer's obligations in Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 2.09, 2.14, 4.01, 4.02, 7.07, 7.08, 8.04, 8.05, 8.06 and Article Eleven (with respect to payments in respect of Indebtedness that is subordinated in right of payment to any Senior Indebtedness other than with respect to the assets held in trust as described in the foregoing clause (ii)) shall survive until the Notes are no longer outstanding. Thereafter, only the Issuer's obligations in Sections 7.07, 8.05 and 8.06 shall survive. After any such irrevocable deposit, the Trustee upon request shall acknowledge in writing the discharge of the Issuer's obligations under the Notes and this Indenture except for those surviving obligations specified above. SECTION 8.02. Defeasance and Discharge of Indenture. The Issuer will be deemed to have paid and will be discharged from any and all obligations in respect of the Notes on the 123rd day after the date of the deposit referred to in clause (A) of this Section 8.02, and the provisions of this Indenture will no longer be in effect with respect to the Notes, and the Trustee, at the expense of the Issuer, shall execute proper instruments acknowledging the same, except as to (i) rights of registration of transfer and exchange, (ii) substitution of apparently mutilated, defaced, destroyed, lost or stolen Notes, (iii) rights of Holders to receive payments of principal thereof and interest thereon, (iv) the Issuer's obligations under Section 4.02, (v) the rights, obligations and immunities of the Trustee hereunder and (vi) the rights of the Holders as beneficiaries of this Indenture with respect to the property so deposited with the Trustee payable to all or any of them; provided that the following conditions shall have been satisfied: (A) with reference to this Section 8.02, the Issuer has irrevocably deposited or caused to be irrevocably deposited with the Trustee (or another trustee satisfying the requirements of Section 7.10 acting as the agent of the Trustee) and conveyed all right, title and interest for the benefit of the Holders, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee as trust funds in trust, specifically pledged to the Trustee for the benefit of the Holders as security for payment of the principal of, premium, if any, and interest, if any, on the Notes, and dedicated solely to, the benefit of the Holders, in and to (1) money in an amount, (2) U.S. Government Obligations that, through the payment of interest, premium, if any, and principal in respect thereof in accordance with their terms, will provide, not later than one day before the due date of any payment referred to in this clause (A), money in an amount or (3) 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 and discharge, without consideration of the reinvestment of such interest and after payment of all federal, state and local taxes 67 or other charges and assessments in respect thereof payable by the Trustee, the principal of, premium, if any, and accrued interest on the outstanding Notes at the Stated Maturity of such principal or interest; provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to the payment of such principal, premium, if any, and interest with respect to the Notes; (B) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Issuer is a party or by which it is bound and is permitted by Article Eleven; (C) immediately after giving effect to such deposit on a pro forma basis, no Default or Event of Default shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after such date of deposit; (D) the Issuer shall have delivered to the Trustee (1) either (x) a ruling directed to the Trustee received from the Internal Revenue Service to the effect that the Holders will not recognize income, gain or loss for federal income tax purposes as a result of the Issuer's exercise of its option under this Section 8.02 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 option had not been exercised or (y) an Opinion of Counsel to the same effect as the ruling described in clause (x) above accompanied by a ruling to that effect published by the Internal Revenue Service, unless there has been a change in the applicable federal income tax law since the date of this Indenture such that a ruling from the Internal Revenue Service is no longer required and (2) an Opinion of Counsel to the effect that (x) the creation of the defeasance trust does not violate the Investment Issuer Act of 1940 and (y) after the passage of 123 days following the deposit (except, with respect to any trust funds for the account of any Holder who may be deemed to be an "insider" for purposes of the Bankruptcy Law, after one year following the deposit), the trust funds will not be subject to the effect of Section 547 of the Bankruptcy Law or Section 15 of the New York Debtor and Creditor Law in a case commenced by or against the Issuer under either such statute, and either (I) the trust funds will no longer remain the property of the Issuer (and therefore will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally) or (II) if a court were to rule under any such law in any case or proceeding that the trust funds remained property of the Issuer, (a) assuming such trust funds remained in the possession of the Trustee prior to such court ruling to the extent not paid to the Holders, the Trustee will hold, for the benefit of the Holders, a valid and perfected security interest in such trust funds that is not avoidable in bankruptcy or otherwise except for the effect of Section 552(b) of the Bankruptcy Law on interest on the trust funds accruing after the commencement of a case under such statute and (b) the Holders will be entitled to receive adequate protection of their interests in such trust funds if such trust funds are used in such case or proceeding; 68 (E) if the Notes are then listed on a national securities exchange, the Issuer shall have delivered to the Trustee an Opinion of Counsel to the effect that such deposit, defeasance and discharge will not cause the Notes to be delisted; and (F) the Issuer has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in each case stating that all conditions precedent provided for herein relating to the defeasance contemplated by this Section 8.02 have been complied with. Notwithstanding the foregoing, prior to the end of the 123-day (or one year) period referred to in clause (D)(2)(y) of this Section 8.02, none of the Issuer's obligations under this Indenture shall be discharged. Subsequent to the end of such 123-day (or one year) period with respect to this Section 8.02, the Issuer's obligations in Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 2.09, 2.14, 4.01, 4.02, 7.07, 7.08, 8.05, 8.06 and Article Eleven (with respect to payments in respect of Indebtedness that is subordinated in right of payment to any Senior Indebtedness other than with respect to the assets held in trust as described in this Section 8.02) shall survive until the Notes are no longer outstanding. Thereafter, only the Issuer's obligations in Sections 7.07, 8.05 and 8.06 shall survive. If and when a ruling from the Internal Revenue Service or an Opinion of Counsel referred to in clause (D)(1) of this Section 8.02 is able to be provided specifically without regard to, and not in reliance upon, the continuance of the Issuer's obligations under Section 4.01, then the Issuer's obligations under such Section 4.01 shall cease upon delivery to the Trustee of such ruling or Opinion of Counsel and compliance with the other conditions precedent provided for herein relating to the defeasance contemplated by this Section 8.02. After any such irrevocable deposit, the Trustee upon request shall acknowledge in writing the discharge of the Issuer's obligations under the Notes and this Indenture except for those surviving obligations in the immediately preceding paragraph. SECTION 8.03. Defeasance of Certain Obligations. The Issuer may omit to comply with any term, provision or condition set forth in clauses (iii) and (iv) of Section 5.01 and Sections 4.03 through 4.19, clause (c) of Section 6.01 with respect to clauses (iii) and (iv) of Section 5.01, clause (d) of Section 6.01 with respect to Sections 4.03 through 4.19, and clauses (e) and (f) of Section 6.01 shall be deemed not to be Events of Default, and Article Eleven shall not apply to the money and/or U.S. Government Obligations held by the trust referred to in clause (i) below, in each case with respect to the outstanding Notes if: (i) with reference to this Section 8.03, the Issuer has irrevocably deposited or caused to be irrevocably deposited with the Trustee (or another trustee satisfying the requirements of Section 7.10) and conveyed all right, title and interest to the Trustee for the benefit of the Holders, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee as trust funds in trust, specifically pledged to the Trustee for the benefit of the Holders as security for payment of the principal of, 69 premium, if any, and interest, if any, on the Notes, and dedicated solely to, the benefit of the Holders, in and to (A) money in an amount, (B) U.S. Government Obligations that, through the payment of interest and principal in respect thereof in accordance with their terms, will provide, not later than one day before the due date of any payment referred to in this clause (i), money in an amount or (C) 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 and discharge, without consideration of the reinvestment of such interest and after payment of all federal, state and local taxes or other charges and assessments in respect thereof payable by the Trustee, the principal of, premium, if any, and interest on the outstanding Notes on the Stated Maturity of such principal or interest; provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to the payment of such principal, premium, if any, and interest with respect to the Notes; (ii) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Issuer is a party or by which it is bound and is permitted by Article Eleven; (iii) immediately after giving effect to such deposit on a pro forma basis, no Default or Event of Default shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after such date of deposit; (iv) the Issuer has delivered to the Trustee an Opinion of Counsel to the effect that (A) the creation of the defeasance trust does not violate the Investment Issuer Act of 1940, (B) the Trustee, for the benefit of the Holders, has a valid first-priority security interest in the trust funds, (C) the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance of certain obligations 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 and defeasance had not occurred and (D) after the passage of 123 days following the deposit (except, with respect to any trust funds for the account of any Holder who may be deemed to be an "insider" for purposes of the Bankruptcy Law, after one year following the deposit), the trust funds will not be subject to the effect of Section 547 of the Bankruptcy Law or Section 15 of the New York Debtor and Creditor Law in a case commenced by or against the Issuer under either such statute, and either (1) the trust funds will no longer remain the property of the Issuer (and therefore will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally) or (2) if a court were to rule under any such law in any case or proceeding that the trust funds remained property of the Issuer, (x) assuming such trust funds remained in the possession of the Trustee prior to such court ruling to the extent not paid to the Holders, the Trustee will hold, for the benefit of the Holders, a valid and perfected 70 security interest in such trust funds that is not avoidable in bankruptcy or otherwise (except for the effect of Section 552(b) of the Bankruptcy Law on interest on the trust funds accruing after the commencement of a case under such statute) and (y) the Holders will be entitled to receive adequate protection of their interests in such trust funds if such trust funds are used in such case or proceeding; (v) if the Notes are then listed on a national securities exchange, the Issuer shall have delivered to the Trustee an Opinion of Counsel to the effect that such deposit defeasance and discharge will not cause the Notes to be delisted; and (vi) the Issuer has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in each case stating that all conditions precedent provided for herein relating to the defeasance contemplated by this Section 8.03 have been complied with. SECTION 8.04. Application of Trust Money. Subject to Section 8.06, the Trustee or Paying Agent shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 8.01, 8.02 or 8.03, as the case may be, and shall apply the deposited money and the money from U.S. Government Obligations in accordance with the Notes and this Indenture to the payment of principal of, premium, if any, and interest on the Notes; but such money need not be segregated from other funds except to the extent required by law. SECTION 8.05. Repayment to Issuer. Subject to Sections 7.07, 8.01, 8.02 and 8.03, the Trustee and the Paying Agent shall promptly pay to the Issuer upon request set forth in an Officers' Certificate any excess money held by them at any time and thereupon shall be relieved from all liability with respect to such money. The Trustee and the Paying Agent shall pay to the Issuer upon request any money held by them for the payment of principal, premium, if any, or interest that remains unclaimed for two years. After payment to the Issuer, Holders entitled to such money must look to the Issuer for payment as general creditors unless an applicable law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 8.01, 8.02 or 8.03, as the case may be, by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Issuer's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.01, 8.02 or 8.03, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Section 8.01, 8.02 or 8.03, as the case may be; provided that, if the Issuer has made any payment of principal of, premium, if any, or interest on any Notes because of the reinstatement of its obligations, the Issuer shall be subrogated to 71 the rights of the Holders of such Notes to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE NINE AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 9.01. Without Consent of Holders. The Issuer, when authorized by a resolution of its Board of Directors (as evidenced by a Board Resolution delivered to the Trustee), and the Trustee may amend or supplement this Indenture or the Notes without notice to or the consent of any Holder: (1) to cure any ambiguity, defect or inconsistency in this Indenture; provided that such amendments or supplements shall not, in the good faith opinion of the Board of Directors as evidenced by a Board Resolution, adversely affect the interests of the Holders in any material respect; (2) to comply with Article Five; (3) to comply with any requirements of the Commission in connection with the qualification of this Indenture under the TIA; (4) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee; or (5) to make any change that, in the good faith opinion of the Board of Directors as evidenced by a Board Resolution, does not materially and adversely affect the rights of any Holder. SECTION 9.02. With Consent of Holders. Subject to Sections 6.04 and 6.07 and without prior notice to the Holders, the Issuer, when authorized by its Board of Directors (as evidenced by a Board Resolution delivered to the Trustee), and the Trustee may amend this Indenture, the Notes and the Escrow Agreement with the written consent of the Holders of a majority in principal amount of the Notes then outstanding, and the Holders of a majority in principal amount of the Notes then outstanding by written notice to the Trustee may waive future compliance by the Issuer with any provision of this Indenture, the Notes and the Escrow Agreement. Notwithstanding the provisions of this Section 9.02, without the consent of each Holder affected, an amendment or waiver, including a waiver pursuant to Section 6.04, may not: 72 (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 adversely affect any right of repayment at the option of any Holder of any Note, or change any place of payment where, or the currency in which, 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 on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date); (ii) reduce the percentage in principal amount of outstanding Notes the consent of whose Holders is required for any such supplemental indenture, for any waiver of compliance with certain provisions of this Indenture or certain Defaults and their consequences provided for in this Indenture; (iii) waive a default in the payment of principal of, premium, if any, or interest on, any Note; (iv) modify Article Eleven or the Escrow Agreement in a manner that adversely affects the rights of any Holder in any material respect; or (v) modify any of the provisions of this Section 9.02, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each outstanding Note affected thereby. Notwithstanding the foregoing and without affecting any restrictions on amendments to this Indenture under the Credit Facility, any amendment to the provisions of Article Eleven that is adverse to the holders of Senior Indebtedness shall require the consent of such holders. It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Issuer shall mail to the Holders affected thereby a notice briefly describing the amendment, supplement or waiver. The Issuer will mail supplemental indentures to Holders upon request. Any failure of the Issuer to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture or waiver. SECTION 9.03. Revocation and Effect of Consent. Until an amendment or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the Note of 73 the consenting Holder, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent as to its Note or portion of its Note. Such revocation shall be effective only if the Trustee receives the notice of revocation before the time the amendment, supplement or waiver becomes effective. An amendment, supplement or waiver shall become effective on receipt by the Trustee of written consents from the Holders of the requisite percentage in principal amount of the outstanding Notes. The Issuer may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver. If a record date is fixed, then, notwithstanding the last two sentences of the immediately preceding paragraph, those persons who were Holders at such record date (or their duly designated proxies) and only those persons shall be entitled to consent to such amendment, supplement or waiver or to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. After an amendment, supplement or waiver becomes effective, it shall bind every Holder unless it is of the type described in any of clauses (i) through (v) of the second paragraph of Section 9.02. In case of an amendment or waiver of the type described in clauses (i) through (v) of the second paragraph of Section 9.02, the amendment or waiver shall bind each Holder who has consented to it and every subsequent Holder of a Note that evidences the same indebtedness as the Note of the consenting Holder. SECTION 9.04. Notation on or Exchange of Notes. If an amendment, supplement or waiver changes the terms of a Note, the Trustee may require the Holder to deliver it to the Trustee. At the Issuer's expense, the Trustee may place an appropriate notation on the Note about the changed terms and return it to the Holder and the Trustee may place an appropriate notation on any Note thereafter authenticated. Alternatively, if the Issuer or the Trustee so determines, the Issuer in exchange for the Note shall issue and the Trustee shall authenticate a new Note that reflects the changed terms. Failure to make the appropriate notation, or issue a new Note, shall not affect the validity and effect of such amendment, supplement or waiver. SECTION 9.05. Trustee to Sign Amendments, Etc. The Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of any amendment, supplement or waiver authorized pursuant to this Article Nine is authorized or permitted by this Indenture and that it will be valid and binding upon the Issuer. Subject to the preceding sentence, the Trustee shall sign such amendment, supplement or waiver if the same does not adversely affect the rights, duties, liabilities or immunities of the Trustee. The Trustee may, but shall not be obligated to, execute any such amendment, supplement or waiver that affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. 74 SECTION 9.06. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article Nine shall conform to the requirements of the TIA as then in effect. ARTICLE TEN SECURITY SECTION 10.01. Security. (a) On the Closing Date, the Issuer shall (i) enter into the Escrow Agreement and comply with the terms and provisions thereof and (ii) cause the Collateral to be pledged to the Trustee for the benefit of the Holders in an amount equal to the net proceeds to be received by the Issuer from the sale of the Notes. The Collateral shall be pledged by the Issuer to the Trustee for the benefit of the Holders and shall be held by the Trustee in the Cash Collateral Account pending disposition pursuant to the terms of the Escrow Agreement. (b) Each Holder, by its acceptance of a Note, consents and agrees to the terms of the Escrow Agreement (including, without limitation, the provisions providing for foreclosure and release of the Collateral) as the same may be in effect or may be amended from time to time in accordance with its terms, and authorizes and directs the Trustee to enter into the Escrow Agreement and to perform its respective obligations and exercise its respective rights thereunder in accordance therewith. The Issuer will do or cause to be done all such acts and things as may be necessary or proper, or as may be required by the provisions of the Escrow Agreement, to assure and confirm to the Trustee the security interest in the Collateral contemplated hereby, by the Escrow Agreement or any part thereof, as from time to time constituted, so as to render the same available for the security and benefit of this Indenture and of the Notes secured hereby, according to the intent and purposes herein expressed. The Issuer shall take, or shall cause to be taken, any and all actions reasonably required (and any action requested by the Trustee) to cause the Escrow Agreement to create and maintain, as security for the obligations of the Issuer under this Indenture and the Notes, valid and enforceable first priority liens in and on all the Collateral, in favor of the Trustee, superior to and prior to the rights of third Persons and subject to no other Liens. (c) The release of any Collateral pursuant to the Escrow Agreement will not be deemed to impair the security under this Indenture in contravention of the provisions hereof if and to the extent the Collateral is released pursuant to this Indenture and the Escrow Agreement. To the extent applicable, the Issuer shall cause TIA Section 314(d) relating to the release of property or securities from the Lien and security interest of the Escrow Agreement (other than pursuant to Sections 7(c) and 7(d) thereof) and relating to the substitution therefor of any property or securities to be subjected to the Lien and security interest of the Escrow Agreement to be complied with. Any certificate or opinion required by TIA Section 314(d) may be made by an Officer of the Issuer, except in cases where TIA Section 314(d) requires that such 75 certificate or opinion be made by an independent Person, which Person shall be an independent engineer, appraiser or other expert selected by the Issuer. (d) The Issuer shall cause TIA Section 314(b), relating to opinions of counsel regarding the Lien under the Escrow Agreement, to be complied with. The Trustee may, to the extent permitted by Sections 7.01 and 7.02 hereof, accept as conclusive evidence of compliance with the foregoing provisions the appropriate statements contained in such instruments. (e) The Trustee, in its sole discretion and without the consent of the Holders, may, and at the request of the Holders of at least 25% in aggregate principal amount of Notes then outstanding shall, on behalf of the Holders, take all actions it deems necessary or appropriate in order to (i) enforce any of the terms of the Escrow Agreement and (ii) collect and receive any and all amounts payable in respect of the obligations of the Issuer thereunder. The Trustee shall have power to institute and to maintain such suits and proceedings as the Trustee may deem expedient to preserve or protect its interests and the interests of the Holders in the Collateral (including power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with, such enactment, rule or order would impair the security interest hereunder or be prejudicial to the interests of the Holders or of the Trustee). ARTICLE ELEVEN SUBORDINATION SECTION 11.01. Agreement to Subordinate. The Issuer, for itself, its successors and assigns, covenants and agrees, and each Holder, 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 (including any payment in connection with the repurchase, redemption or other acquisition thereof) 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 Eleven 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. All provisions of this Article Eleven shall be subject to Section 11.12. For the purposes of this Article Eleven, (a) no Senior Indebtedness shall be deemed to have been paid in full unless and until all commitments or other obligations of the holders of the Senior Indebtedness to make advances or otherwise extend credit shall have terminated and the holders thereof shall have indefeasibly received payment in full in cash or Cash Equivalents, and 76 (b) the term "Senior Representative" shall mean the indenture trustee or other trustee, agent or representative for any Senior Indebtedness. SECTION 11.02. Distribution on Dissolution, Liquidation, Bankruptcy or Reorganization. Upon any distribution of assets of the Issuer upon any total or partial dissolution, winding up, liquidation or reorganization of the Issuer, 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 Issuer 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 and obligations due on or in respect of all Senior Indebtedness before the Holders are entitled to receive any payment or distribution of any kind or character (excluding securities of the Issuer provided for in a plan of reorganization with respect to the Issuer 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 Issuer or any Subsidiary of the Issuer 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 any Holder shall have received any payment or distribution of assets of the Issuer or any Subsidiary of the Issuer of any kind or character, whether in cash, property or securities (excluding Permitted Junior Notes), in respect of principal, 77 premium, if any, and interest on the Notes before all Senior Indebtedness is paid in full in cash, 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 Issuer 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 Issuer with, or the merger of the Issuer into, another corporation or the liquidation or dissolution of the Issuer 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 Five shall not be deemed a dissolution, winding up, liquidation or reorganization of the Issuer for the purposes of this Article Eleven if such other corporation shall, as a part of such consolidation, merger, sale or conveyance, comply with the conditions stated in Article Five. If the Trustee or any Holder 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 Senior Representative) is hereby authorized, and has the right, to file an appropriate claim or claims for or on behalf of such Holder. SECTION 11.03. Suspension of Payment When Senior Indebtedness in Default. (a) Unless Section 11.02 shall be applicable, upon the occurrence of a Payment Default, then no payment or distribution of any assets of the Issuer or any Subsidiary of the Issuer of any kind or character (excluding Permitted Junior Notes) shall be made by the Issuer or any Subsidiary of the Issuer or on behalf of or out of the property of the Issuer, 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 8.02 or 8.03) or other acquisition of or in respect 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 Designated Senior Indebtedness, after which the Issuer shall resume making any and all required payments in respect of the Notes, including any missed payments. (b) Unless Section 11.02 shall be applicable, upon (i) the occurrence of a Non-payment Default pursuant to which the maturity of the applicable Designated Senior 78 Indebtedness may be accelerated, either immediately or upon the giving of notice, the passage of time or both, and (ii) receipt by the Trustee and the Issuer 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 8.02 or 8.03 or from the money or proceeds of U.S. Government Securities held under the Escrow Agreement as provided in Section 10.01) or distribution of any assets of the Issuer or any Subsidiary of the Issuer of any kind or character (excluding Permitted Junior Notes) shall be made by the Issuer or any Subsidiary of the Issuer or on behalf of or out of the property of the Issuer or any Subsidiary of the Issuer, or received by the Trustee or any Holder on account of any principal of, premium, if any, or interest on, the Notes (including payments under any guaranty thereof) or on account of the purchase, redemption or other acquisition of or in respect of Notes (including payments under any guaranty thereof) for a period ("Payment Blockage Period") commencing on the date of receipt by the Trustee of such notice until the earliest of (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 Issuer 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 Issuer 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 Issuer or the Trustee of the notice referred to in clause (ii) of this paragraph (b) (the "Initial Blockage Period"). Not more than one Payment Blockage Period may be commenced with respect to the Notes during any period of 360 consecutive days; provided that, subject to the limitations set forth in the next sentence, the commencement of a Payment Blockage Period by the representative of Designated Senior Indebtedness other than the Credit Facility shall not bar the commencement of another Payment Blockage Period by the representative for the Credit Facility within such period of 360 consecutive days. Notwithstanding anything in this Indenture to the contrary, there must be 180 days in any 360-day period in which no Payment Blockage Period is in effect. No event of default (other than an event of default pursuant to the financial maintenance covenants under the Credit Facility) that existed or was continuing (it being acknowledged that any subsequent action that would give rise to an event of default pursuant to any provision under which an event of default previously existed or was continuing shall constitute a new event of default for this purpose) on the date of commencement of any Payment Blockage Period with respect to the Designated Senior Indebtedness initiating such Payment Blockage Period shall be, or shall be made, the basis for the commencement of a second Payment Blockage Period by the representative for, or the holders of, such Designated Senior 79 Indebtedness, whether or not within a period of 360 consecutive days, unless such event of 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 Issuer or any Subsidiary of the Issuer shall make, or the Trustee or any Holder shall receive, any payment to the Trustee or any Holder 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. SECTION 11.04. Payment Permitted if No Default. Nothing contained in this Article, elsewhere in this Indenture or in any of the Notes shall prevent the Issuer, 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 Issuer referred to in Section 11.02 or under the conditions described in Section 11.03, from making payments at any time of principal of, premium, if any, or interest on the Notes. SECTION 11.05. Subrogation to Rights of Holders of Senior Indebtedness. Subject to the payment in full of all Senior Indebtedness, the Holders 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 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 or the Trustee, shall, as among the Issuer, its creditors other than holders of Senior Indebtedness, and the Holders, be deemed to be a payment or distribution by the Issuer to or on account of the Senior Indebtedness. SECTION 11.06. 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 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 Issuer, its creditors other than holders of Senior Indebtedness and the Holders, the obligation of the Issuer, which is absolute and unconditional, to pay to the Holders 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 Issuer of the Holders and creditors of the Issuer other than their rights in relation to the holders of Senior Indebtedness; or (iii) prevent the Trustee or any Holder from exercising all remedies otherwise permitted by applicable law upon Default under this Indenture, subject to the rights, under this Article of the holders of Senior Indebtedness to receive distributions and payments otherwise payable to Holders (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 Issuer 80 referred to in Section 11.02, 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 11.03, to prevent any payment prohibited by such Section or enforce their rights pursuant to Section 11.03(c). SECTION 11.07. Trustee to Effectuate Subordination. Each Holder 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 Issuer whether in bankruptcy, insolvency, receivership proceedings, or otherwise, the timely filing of a claim for the unpaid balance of the indebtedness of Issuer 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. SECTION 11.08. 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 Issuer or any Holder or by any act or failure to act, in good faith, by any such holder, or by any non-compliance by the Issuer or any Holder 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, without incurring responsibility to the Holders and without impairing or releasing the subordination provided in this Article or the obligations hereunder of the Holders 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; (iv) exercise or refrain from exercising any rights against the Issuer and any other Person; (v) amend, supplement, restate or otherwise modify or restructure the Senior Indebtedness; and (vi) otherwise deal with any Person liable on account of Senior Indebtedness; provided, however, that in no event shall any such actions limit the right of the Holders to take any action to accelerate the maturity of the Notes pursuant to Article Six 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 81 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 11.09. Notice to Trustee. (a) The Issuer shall give prompt written notice to the Trustee of any fact known to the Issuer 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 Issuer 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. (b) The Trustee shall be entitled to rely on the delivery to it of a written notice to the Trustee and the Issuer 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 Issuer 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. 82 SECTION 11.10. Reliance on Judicial Order or Certificate of Liquidating Agent. Upon any payment or distribution of assets of the Issuer referred to in this Article, the Trustee and the Holders 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, 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 Issuer, the amount thereof or payable thereon, the amount or 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 11.11. 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 holder of Senior Indebtedness. Nothing in this Article shall apply to claims of, or payments to, the Trustee under or pursuant to Section 7.07. SECTION 11.12. Trust Moneys and Escrowed Funds Not Subordinated. Notwithstanding anything contained herein to the contrary, payments from (x) money or the proceeds of U.S. Government Obligations held in trust under Article Eight by the Trustee for the payment of principal of, premium, if any, and interest on the Notes (provided that at the time deposited, such deposit did not violate any then outstanding Senior Indebtedness) and (y) money or the proceeds of U.S. Government Securities held under the Escrow Agreement shall not be subordinated to the prior payment of any Senior Indebtedness or subject to the restrictions set forth in this Article Eleven, and none of the Holders shall be obligated to pay over any such amount to any holder of Senior Indebtedness. SECTION 11.13. No Suspension of Remedies. Nothing contained in this Article shall limit the right of the Trustee or the Holders to take any action to accelerate the maturity of the Notes pursuant to Article Six 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 11.14. 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 83 against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness. SECTION 11.15. 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 and the Issuer 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). The holders of Senior Indebtedness are hereby authorized to demand specific performance of this Article, whether or not the Issuer shall have complied with any provisions of this Article applicable to it, at any time when the Trustee or any Holder 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 Issuer or otherwise, all as though such payment had not been made. ARTICLE TWELVE MISCELLANEOUS SECTION 12.01. Trust Indenture Act of 1939. Prior to the effectiveness of the Registration Statement, this Indenture shall incorporate and be governed by the provisions of the TIA that are required to be part of and to govern indentures qualified under the TIA. After the effectiveness of the Registration Statement, this Indenture shall be subject to the provisions of the TIA that are required to be a part of this Indenture and shall, to the extent applicable, be governed by such provisions. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA 318(c), the imposed duties shall control. SECTION 12.02. Notices. Any notice or communication shall be sufficiently given if in writing and delivered in person, mailed by first-class mail or sent by telecopier transmission addressed as follows: 84 if to the Issuer: ----------------- Genesis ElderCare Acquisition Corp. 148 West State Street Kennett Square, PA 19348 Telecopier No.: (610) 444-7483 Attention: George V. Hager, Jr. if to the Trustee: ------------------ PNC Bank, National Association Corporate Trust Department 1600 Market Street Philadelphia, PA 19103 Telecopier No.: (215) 585-8872 Attention: Sheila Wallbridge if to the Paying Agent: ----------------------- Banque Internationale a Luxembourg S.A. 69, route d'Esch L-1470 Luxembourg Telecopier No.: (352) 4590-4227 Attention: Jacques Kinnen The Issuer, the Trustee or the Paying Agent by notice to the other may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) 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 answered back, if telexed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Copies of any such communication or notice to a Holder shall also be mailed to the Trustee and each Paying Agent at the same time. Any notice or communication (i) mailed to a Holder shall be mailed to it at its address as it appears on the Security Register by first-class mail and shall be sufficiently given to him if so mailed within the time prescribed and (ii) for so long as the Notes are listed on the Luxembourg Stock Exchange, shall be published in a leading newspaper of general circulation in Luxembourg, not later than the latest date, and not earlier than the earliest date, prescribed 85 in the Notes for the giving of such notice or communication. Copies of any such communication or notice to a Holder shall also be mailed to the Trustee and each Agent at the same time. Failure to transmit a notice or communication to a Holder as provided herein or any defect in any such notice shall not affect its sufficiency with respect to other Holders. Except for a notice to the Trustee, which is deemed given only when received, and except as otherwise provided in this Indenture, if a notice or communication is mailed in the manner provided in this Section 12.02, 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, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 12.03. Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Issuer to the Trustee to take any action under this Indenture, the Issuer shall furnish to the Trustee: (i) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (ii) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of such Counsel, all such conditions precedent have been complied with. SECTION 12.04. Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA Section 314(a)(4)) shall comply with the provisions of TIA Section 314(e) and shall include: (i) a statement that each person signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; 86 (ii) a brief statement as to the nature and scope of the examination or investigation upon which the statement or opinion contained in such certificate or opinion is based; (iii) a statement that, in the opinion of each such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (iv) a statement as to whether or not, in the opinion of each such person, such condition or covenant has been complied with; provided, however, that, with respect to matters of fact, an Opinion of Counsel may rely on an Officers' Certificate or certificates of public officials. SECTION 12.05. Rules by Trustee, Paying Agent or Registrar. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Paying Agent or Registrar may make reasonable rules for its functions. SECTION 12.06. Payment Date Other Than a Business Day. If an Interest Payment Date, Redemption Date, Payment Date, Stated Maturity or date of maturity of any Note shall not be a Business Day, then payment of principal of, premium, if any, or interest on such Note, as the case may be, 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 Interest Payment Date, Payment Date or Redemption Date, or at the Stated Maturity or date of maturity of such Note; provided that no interest shall accrue for the period from and after such Interest Payment Date, Payment Date, Redemption Date, Stated Maturity or date of maturity, as the case may be. SECTION 12.07. Governing Law. The laws of the State of New York shall govern this Indenture and the Notes. The Trustee, the Issuer and the Holders agree to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to this Indenture or the Notes. SECTION 12.08. No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Issuer or any Subsidiary of the Issuer. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 12.09. No Recourse Against Others. No recourse for the payment of the principal of, premium, if any, or interest on any of the Notes, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Issuer contained in this Indenture, or in any of the Notes, or because of the creation of any Indebtedness represented thereby, shall be had against any incorporator or against any past, present or future partner, shareholder, other equityholder, officer, director, 87 employee or controlling person, as such, of the Issuer or of any successor Person, either directly or through the Issuer or any successor Person, 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 all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Notes. SECTION 12.10. Successors. All agreements of the Issuer in this Indenture and the Notes shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successor. SECTION 12.11. Duplicate Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 12.12. Separability. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 12.13. Table of Contents, Headings, Etc. The Table of Contents, Cross-Reference Table and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms and provisions hereof. SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the date first written above. GENESIS ELDERCARE ACQUISITION CORP. By: /s/ Michael R. Walker -------------------------------- Attest: /s/ Ira C. Gubernick Name: Michael R. Walker ------------------------ Title: Chairman and Chief Name: Ira C. Gubernick Executive Officer Title: Secretary PNC BANK, NATIONAL ASSOCIATION By: -------------------------------- Name: Title: BANQUE INTERNATIONALE A LUXEMBOURG S.A. By: -------------------------------- Name: Title: SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the date first written above. GENESIS ELDERCARE ACQUISITION CORP. By: -------------------------------- Name: Title: PNC BANK, NATIONAL ASSOCIATION By: /s/ Shelia Wallbridge -------------------------------- Name: Shelia Wallbridge Title: Assistant Vice President BANQUE INTERNATIONALE A LUXEMBOURG S.A. By: -------------------------------- Name: Title: SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the date first written above. GENESIS ELDERCARE ACQUISITION CORP. By: -------------------------------- Name: Title: PNC BANK, NATIONAL ASSOCIATION By: -------------------------------- Name: Title: BANQUE INTERNATIONALE A LUXEMBOURG S.A. By: /s/ Daniel Schammo -------------------------------- Name Daniel Schammo Title: Premier Conseller EXHIBIT A --------- [FACE OF NOTE] GENESIS ELDERCARE ACQUISITION CORP. 9% Senior Subordinated Note due 2007 [CUSIP] [CINS] [__________] No. $_________ GENESIS ELDERCARE ACQUISITION CORP., a Delaware corporation (the "Issuer", which term includes any successor under the Indenture hereinafter referred to), for value received, promises to pay to _____________, or its registered assigns, the principal sum of ____________ ($____) on August 1, 2007. Interest Payment Dates: February 1 and August 1, commencing February 1, 1998. Regular Record Dates: January 15 and July 15. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. IN WITNESS WHEREOF, the Issuer has caused this Note to be signed manually or by facsimile by its duly authorized officers. Date: August 11, 1997 GENESIS ELDERCARE ACQUISITION CORP. By: ---------------------------- Name: Title: (Trustee's Certificate of Authentication) This is one of the 9% Senior Subordinated Notes due 2007 described in the within-mentioned Indenture. PNC BANK, NATIONAL ASSOCIATION as Trustee By: --------------------------- Authorized Signatory A-4 [REVERSE SIDE OF NOTE] GENESIS ELDERCARE ACQUISITION CORP. 9% Senior Subordinated Note due 2007 1. Principal and Interest. ---------------------- The Issuer will pay the principal of this Note on August 1, 2007. The Issuer promises to pay interest on the principal amount of this Note on each Interest Payment Date, as set forth below, at the rate per annum shown above. Interest will be payable semiannually (to the holders of record of the Notes at the close of business on the January 15 or July 15 immediately preceding the Interest Payment Date) on each Interest Payment Date, commencing February 1, 1998. If an exchange offer (the "Exchange Offer") registered under the Securities Act is not consummated and a shelf registration statement (the "Shelf Registration Statement") under the Securities Act with respect to resales of the Notes is not declared effective by the Commission, on or prior to the earlier of (x) the date that is six months after the Merger Closing Date and (y) March 31, 1998, in accordance with the terms of the Registration Rights Agreement dated as of August 11, 1997 between the Issuer and Morgan Stanley & Co. Incorporated, First Union Capital Markets Corp. and Montgomery Securities, the per annum interest rate borne by the Notes shall be increased by 0.5% from the rate shown above accruing from the earlier of (x) the date that is six months after the Merger Closing Date and (y) March 31, 1998, payable in cash semiannually, in arrears, on each Interest Payment Date, commencing August 1, 1998 until the Exchange Offer is consummated or the Shelf Registration Statement is declared effective. The Holder of this Note is entitled to the benefits of such Registration Rights Agreement. 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 August 11, 1997; provided that, if there is no existing default in the payment of interest and this Note is authenticated between a Regular Record Date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such Interest Payment Date. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Issuer shall pay interest on overdue principal and premium, if any, and interest on overdue installments of interest, to the extent lawful, at a rate per annum that is 2% in excess of the rate otherwise payable. A-5 2. Method of Payment. ----------------- The Issuer will pay interest (except defaulted interest) on the principal amount of the Notes as provided above on each February 1 and August 1 commencing February 1, 1998 to the persons who are Holders (as reflected in the Security Register at the close of business on the January 15 or July 15 immediately preceding the Interest Payment Date), in each case, even if the Note is cancelled on registration of transfer or registration of exchange after such record date; provided that, with respect to the payment of principal, the Issuer will make payment to the Holder that surrenders this Note to a Paying Agent on or after August 1, 2007. The Issuer will pay principal, premium, if any, and as provided above, interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Issuer may pay principal, premium, if any, and interest by its check payable in such money. It may mail an interest check to a Holder's registered address (as reflected in the Security Register). If a payment date is a date other than a Business Day at a place of payment, payment may be made at that place on the next succeeding day that is a Business Day and no interest shall accrue for the intervening period. 3. Paying Agent and Registrar. -------------------------- Initially, the Trustee will act as authenticating agent, Paying Agent and Registrar. The Issuer may change any authenticating agent, Paying Agent or Registrar without notice. The Issuer, any Subsidiary or any Affiliate of any of them may act as Paying Agent, Registrar or co-Registrar. 4. Indenture; Limitations. ---------------------- The Issuer issued the Notes under an Indenture dated as of August 11, 1997 (the "Indenture"), between the Issuer, PNC Bank, National Association, trustee (the "Trustee") and Banque Internationale a Luxembourg S.A., a paying agent. Capitalized terms herein are used as defined in the Indenture unless otherwise indicated. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act. The Notes are subject to all such terms, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of all such terms. To the extent permitted by applicable law, in the event of any inconsistency between the terms of this Note and the terms of the Indenture, the terms of the Indenture shall control. The Notes are general obligations of the Issuer. A-6 5. Optional Redemption. ------------------- The Notes will be redeemable, at the Issuer's option, in whole or in part, at any time or from time to time, on or after August 1, 2002 and prior to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by first-class mail to each Holder's last address, as it appears in the Security Register, at the following Redemption Prices (expressed in percentages of principal amount), plus accrued and unpaid interest to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date that is prior to the Redemption Date to receive interest due on an Interest Payment Date), if redeemed during the 12-month period commencing August 1 of the years set forth below: Redemption Year Price ---- ---------- 2002............................... 104.500% 2003............................... 102.250 2004 and thereafter................ 100.000 Notes in original denominations larger than $1,000 may be redeemed in part. On and after the Redemption Date, interest ceases to accrue on Notes or portions of Notes called for redemption, unless the Issuer defaults in the payment of the Redemption Price. 6. Special Redemption. ------------------ In the event that the Tender Offer is not consummated and certain other conditions set forth in the Escrow Agreement are not satisfied by the Expiration Date, or if it appears, in the sole judgment of the Issuer, that the Tender Offer will not be consummated and such conditions will not be satisfied by the Expiration Date, the Issuer shall redeem the Notes in whole, on 10 days' prior notice mailed by first-class mail to each Holder's last address as it appears in the Security Register, at a Redemption Price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest to the Redemption Date. On the earlier of (i) the Expiration Date, if the Trustee has not received the Escrow Agreement Officers' Certificate that the Tender Offer has been consummated (or will be consummated promptly upon the release of the escrowed proceeds of the offering of the Notes to the Issuer) and certain conditions have been satisfied and the Escrow Agreement Opinion of Counsel, and (ii) such date on which the Trustee receives an officer's certificate under the Escrow Agreement that the Tender Offer will not be consummated and such conditions will not be satisfied by the Expiration Date, the Trustee will mail by first-class mail to each Holder's last address as it appears in the Security Register a written notice that the Notes will be redeemed within 10 days of such notice. A-7 7. Repurchase upon Change of Control. --------------------------------- Upon the occurrence of any Change of Control, each Holder shall have the right to require the repurchase of its Notes by the Issuer in cash pursuant to the offer described in the Indenture at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (the "Payment Date"). A notice of such Change of Control will be mailed within 30 days after any Change of Control occurs to each Holder at its last address as it appears in the Security Register. Notes in original denominations larger than $1,000 may be sold to the Issuer in part. On and after the Payment Date, interest ceases to accrue on Notes or portions of Notes surrendered for purchase by the Issuer, unless the Issuer defaults in the payment of the purchase price. 8. Denominations; Transfer; Exchange. --------------------------------- The Notes are in registered form without coupons in denominations of $1,000 of principal amount and multiples of $1,000 in excess thereof. A Holder may register the transfer or exchange of Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer or exchange of any Notes selected for redemption. Also, it need not register the transfer or exchange of any Notes for a period of 15 days before the day of mailing of a notice of redemption of Notes selected for redemption. 9. Persons Deemed Owners. --------------------- A Holder shall be treated as the owner of a Note for all purposes. 10. Unclaimed Money. --------------- If money for the payment of principal, premium, if any, or interest remains unclaimed for two years, the Trustee and the Paying Agent will pay the money back to the Issuer at its request. After that, Holders entitled to the money must look to the Issuer for payment, unless an abandoned property law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. 11. Discharge Prior to Redemption or Maturity. ----------------------------------------- If the Issuer deposits with the Trustee money or U.S. Government Obligations sufficient to pay the then outstanding principal of, premium, if any, and accrued interest on the Notes (a) to redemption or maturity, the Issuer will be discharged from the Indenture and the Notes, A-8 except in certain circumstances for certain sections thereof, and (b) to the Stated Maturity, the Issuer will be discharged from certain covenants set forth in the Indenture. 12. Amendment; Supplement; Waiver. ----------------------------- Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding, and any existing default or compliance with any provision may be waived with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding. Without notice to or the consent of any Holder, the parties thereto may amend or supplement the Indenture or the Notes to, among other things, cure any ambiguity, defect or inconsistency and make any change that does not materially and adversely affect the rights of any Holder. 13. Restrictive Covenants. --------------------- The Indenture imposes certain limitations on the ability of the Issuer and its Restricted Subsidiaries, among other things, to Incur additional Indebtedness, make Restricted Payments, use the proceeds from Asset Sales, engage in transactions with Affiliates or merge, consolidate or transfer substantially all of its assets. Within 45 days after the end of each fiscal quarter (90 days after the end of the last fiscal quarter of each year), the Issuer must report to the Trustee on compliance with such limitations. 14. Subordination. ------------- The payment of the Notes will, to the extent set forth in the Indenture, be subordinated in right of payment to the prior payment in full, in cash or Cash Equivalents, of all Senior Indebtedness. 15. Successor Persons. ----------------- When a successor person or other entity assumes all the obligations of its predecessor under the Notes and the Indenture, the predecessor person will be released from those obligations. 16. Defaults and Remedies. --------------------- The following events constitute "Events of Default" under the Indenture: (a) default in the payment of principal of (or premium, if any, on) any Note when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise, whether or not such payment is prohibited by the subordination provisions set forth in Article Eleven; (b) default in the payment of interest on any Note when the same becomes due and payable, and such default A-9 continues for a period of 30 days, whether or not such payment is prohibited by the subordination provisions set forth in Article Eleven; (c) default in the performance or breach of Article Five or Section 3.01(b) of the Indenture or the failure to make or consummate an Offer to Purchase in accordance with Section 4.10 or 4.11 of the Indenture; (d) default in the performance of or breach of any covenant or agreement of the Issuer in the Indenture or under the Notes (other than a default specified in clause (a), (b) or (c) above), and such default or breach continues for a period of 30 consecutive days after written notice by the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding; (e) there occurs with respect to any issue or issues of Indebtedness of the Issuer or any Significant Subsidiary having an outstanding principal amount of $10 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, (I) an event of default that has caused the holder thereof to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration and/or (II) the failure to make a principal payment at the final (but not any interim) fixed maturity and such defaulted payment shall not have been made, waived or extended within 30 days of such payment default; (f) any final judgment or order (not covered by insurance) for the payment of money in excess of $10 million in the aggregate for all such final judgments or orders against all such Persons (treating any deductibles, self-insurance or retention as not so covered) shall be rendered against the Issuer or any Significant Subsidiary and shall not be paid or discharged, and there shall be any period of 30 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid or discharged against all such Persons to exceed $10 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of the Issuer or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Issuer or any Significant Subsidiary or for all or substantially all of the property and assets of the Issuer or any Significant Subsidiary or (C) the winding up or liquidation of the affairs of the Issuer or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 30 consecutive days; (h) the Issuer or any Significant Subsidiary (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Issuer or any Significant Subsidiary or for all or substantially all of the property and assets of the Issuer or any Significant Subsidiary or (C) effects any general assignment for the benefit of creditors; or (i) the Guaranty Documents are not executed and delivered within three Business Days after the consummation of the Tender Offer (unless prior to or at the end of such three Business Days the Merger shall have been consummated). A-10 If an Event of Default, as defined in the Indenture, occurs and is continuing, the Trustee may, and at the direction of the Holders of at least 25% in aggregate principal amount of the Notes then outstanding shall, declare all the Notes to be due and payable. If a bankruptcy or insolvency default with respect to the Issuer occurs and is continuing, the Notes automatically become due and payable. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Notes. Subject to certain limitations, Holders of at least a majority in principal amount of the Notes then outstanding may direct the Trustee in its exercise of any trust or power. 17. Trustee Dealings with Issuer. ---------------------------- The Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from and perform services for the Issuer or its Affiliates and may otherwise deal with the Issuer or its Affiliates as if it were not the Trustee. 18. No Recourse Against Others. -------------------------- No incorporator or any past, present or future partner, stockholder, other equity holder, officer, director, employee or controlling person as such, of the Issuer or of any successor Person shall have any liability for any obligations of the Issuer under the Escrow Agreement, the Notes or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes. 19. Authentication. -------------- This Note shall not be valid until the Trustee or authenticating agent signs the certificate of authentication on the other side of this Note. 20. Abbreviations. ------------- Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors Act). The Issuer will furnish a copy of the Indenture to any Holder upon written request and without charge. Requests may be made to Genesis ElderCare Acquisition Corp., 148 West State Street, Kennett Square, Pennsylvania 19348; Attention: George V. Hager, Jr. A-11 [FORM OF TRANSFER NOTICE] FOR VALUE RECEIVED the undersigned registered holder hereby sell(s), assign(s) and transfer(s) unto Insert Taxpayer Identification No. - ---------------------------------- - -------------------------------------------------------------------------------- Please print or typewrite name and address including zip code of assignee - -------------------------------------------------------------------------------- the within Note and all rights thereunder, hereby irrevocably constituting and appointing attorney to transfer said Note ------------------------------------ on the books of the Issuer with full power of substitution in the premises. [THE FOLLOWING PROVISION TO BE INCLUDED ON ALL NOTES OTHER THAN EXCHANGE NOTES, PERMANENT OFFSHORE GLOBAL NOTES AND PERMANENT OFFSHORE PHYSICAL NOTES] In connection with any transfer of this Note occurring prior to the date which is the earlier of (i) the date the Shelf Registration Statement is declared effective or (ii) the end of the period referred to in Rule 144(k) under the Securities Act, the undersigned confirms that without utilizing any general solicitation or general advertising that: [Check One] [ ] (a) this Note is being transferred in compliance with the exemption from registration under the Securities Act of 1933 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. A-12 If none of the foregoing boxes is checked, the Trustee or other Registrar shall not be obligated to register this Note in the name of any Person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 2.08 of the Indenture shall have been satisfied. Date: ------------------------------ ----------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within-mentioned instrument in every particular, without alteration or any change whatsoever. 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 of 1933 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 Issuer as the undersigned 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 the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: ------------------------------ ----------------------------------- NOTICE: To be executed by an executive officer A-13 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Note purchased by the Issuer pursuant to Section 4.10 or 4.11 of the Indenture, check the Box: |_| If you wish to have a portion of this Note purchased by the Issuer pursuant to Section 4.10 or 4.11 of the Indenture, state the amount: $___________________. Date:______________ Your Signature: _______________________________________________________________ (Sign exactly as your name appears on the other side of this Note) Signature Guarantee: ______________________________ EXHIBIT B --------- Form of Certificate ------------------- PNC Bank, National Association 1600 Market Street Philadelphia, PA 19103 Attention: Corporate Trust Department Re: Genesis ElderCare Acquisition Corp. (the "Issuer") 9% Senior Subordinated Notes due 2007 (the "Notes") --------------------------------------------------- Dear Sirs: This letter relates to U.S. $__________ principal amount of Notes represented by a Note (the "Legended Note") which bears a legend outlining restrictions upon transfer of such Legended Note. Pursuant to Section 2.01 of the Indenture dated as of August 11, 1997 (the "Indenture") relating to the Notes, we hereby certify that we are (or we will hold such securities on behalf of) a person outside the United States to whom the Notes could be transferred in accordance with Rule 904 of Regulation S promulgated under the U.S. Securities Act of 1933. Accordingly, you are hereby requested to exchange the legended certificate for an unlegended certificate representing an identical principal amount of Notes, all in the manner provided for in the Indenture. You and the Issuer 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 proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Holder] By: -------------------------------- Authorized Signature EXHIBIT C --------- Form of Certificate to Be Delivered in Connection with Transfers to Non-QIB Accredited Investors ----------------------------------------- PNC Bank, National Association 1600 Market Street Philadelphia, PA 19103 Attention: Corporate Trust Department Re: Genesis ElderCare Acquisition Corp. (the "Issuer") 9% Senior Subordinated Notes due 2007 (the "Notes") --------------------------------------------------- Dear Sirs: In connection with our proposed purchase of $____________aggregate principal amount of the Notes, we confirm that: 1. We understand that any subsequent transfer of the Notes is subject to certain restrictions and conditions set forth in the Indenture dated as of August 11, 1997 (the "Indenture"), relating to the Notes, 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 (the "Securities Act"). 2. 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 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 Issuer or any subsidiary thereof, (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 you and to the Issuer a signed letter substantially in the form of this letter, (D) outside the United States in accordance with Rule 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 any of the Notes from us a notice advising such purchaser that resales of the Notes are restricted as stated herein. 3. We understand that, on any proposed resale of any Notes, we will be required to furnish to you and the Issuer such certifications, legal opinions and other information as you and C-2 the Issuer 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. 4. 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 its investment. 5. We are acquiring the Notes purchased by us for our own 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 and the Issuer 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 proceedings or official inquiry with respect to the matters covered hereby. Very truly yours, [Name of Transferee] By: -------------------------- Authorized Signature EXHIBIT D --------- Form of Certificate to Be Delivered in Connection with Transfers Pursuant to Regulation S -------------------------------------------------- _________,___ PNC Bank, National Association 1600 Market Street Philadelphia, PA 19103 Attention: Corporate Trust Department Re: Genesis ElderCare Acquisition Corp. (the "Issuer") 9% Senior Subordinated Notes due 2007 (the "Notes") --------------------------------------------------- Dear Sirs: In connection with our proposed sale of U.S.$______ aggregate principal amount of the Notes, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the Securities Act of 1933 and, accordingly, we represent that: (1) the offer of the Notes was not made to a person in the United States; (2) at the time the buy order was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States; (3) no directed selling efforts have been made by us in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; and (4) the transaction is not part of a plan or scheme to evade the registration requirements of the U.S. Securities Act of 1933. You and the Issuer 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 proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By: ------------------------ Authorized Signature EXHIBIT E FORM OF FIRST SUPPLEMENTAL INDENTURE THE FIRST SUPPLEMENTAL INDENTURE (this "Supplemental Indenture") dated as of __________, 1997, among The Multicare Companies, Inc., a Delaware corporation ("Multicare"), Genesis ElderCare Acquisition Corp., a Delaware corporation (the "Issuer"), PNC Bank, National Association, as trustee under the indenture referred to below (the "Trustee") and Banque Internationale a Luxembourg S.A. (a "Paying Agent"). R E C I T A L S WHEREAS, the Issuer heretofore executed and delivered to the Trustee an indenture (the "Indenture"), dated as of August 11, 1997, providing for the issuance of an aggregate principal amount of $250,000,000 of 9% Senior Subordinated Notes due 2007 (the "Notes"); WHEREAS, the Tender Offer is required to be consummated by the Expiration Date and the Merger is required to be consummated within four months after consummation of the Tender Offer; WHEREAS, Multicare desires to guarantee, on a senior subordinated basis, the obligations of the Issuer under the Indenture and the Notes and to comply with the requirements of the Indenture with respect to the execution of a supplemental indenture in connection with its senior subordinated guaranty; and WHEREAS, pursuant to Section 9.01 of the Indenture, the Issuer and the Trustee are authorized to execute and deliver this Supplemental Indenture. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Issuer, Multicare and the Trustee mutually covenant and agree for the equal and ratable benefit of the holders of the Notes as follows: 2 ARTICLE ONE DEFINITIONS SECTION 1.01. Definitions. Unless otherwise defined herein, terms defined in the Indenture are used herein as defined therein. In addition, as used herein: "Guaranteed Obligations" has the meaning provided in Section 2.01. "Guarantor Senior Indebtedness" means the following obligations whether outstanding on the Closing Date or thereafter Incurred: (a) all Indebtedness and other monetary obligations of Multicare or any Subsidiary of Multicare under or in respect of the Credit Facility (including obligations in respect of any lease financing facility of the Credit Facility) or any Interest Rate Contract or Currency Agreement related to Indebtedness under the Credit Facility, whether for principal, interest (including interest accruing after the filing of a petition by or against Multicare or any Subsidiary of Multicare 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), fees, expenses, indemnification or otherwise, and (b) the principal of, premium, if any, and interest on all other Indebtedness of Multicare (other than the Multicare Senior Subordinated Guaranty) 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 be pari passu with or subordinated in right of payment to the Multicare Senior Subordinated Guaranty. Notwithstanding the foregoing, "Senior Indebtedness" shall not include (i) Indebtedness that is by its terms subordinate in right of payment to any Indebtedness of Multicare, (ii) Indebtedness which when incurred and without respect to any election under Section 1111(b) of the Bankruptcy Law is without recourse to Multicare, (iii) any repurchase, redemption or other obligation in respect of Redeemable Capital Stock, (iv) Indebtedness for goods, materials or services purchased in the ordinary course of business or indebtedness consisting of trade payables or other current liabilities, (v) Indebtedness of or amounts owed by Multicare to employees, officers, or directors, (vi) any liability for federal, state, local or other taxes owed or owing by Multicare, (vii) Indebtedness of Multicare to a Subsidiary of Multicare or any other Affiliate of Multicare or any of such Affiliate's subsidiaries, (viii) that portion of any Indebtedness which at the time of issuance is issued in violation of the Indenture and (ix) amounts owing under leases (other than Capital Lease Obligations). "Guarantor Designated Senior Indebtedness" means (i) all Guarantor Senior Indebtedness under, or in respect of, the Credit Facility and any Interest Rate Contract or Currency Agreement related to Indebtedness under the Credit Facility and (ii) any other Guarantor 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 3 instrument evidencing such Senior Indebtedness as "Guarantor Designated Senior Indebtedness." "Guarantor Subordinated Indebtedness" means any Indebtedness of Multicare subordinated in right of payment to the Multicare Senior Subordinated Guaranty. "Multicare Restricted Subsidiary" means any Subsidiary of Multicare other than a Multicare Unrestricted Subsidiary. "Multicare Unrestricted Subsidiary" means (i) any Subsidiary of Multicare that at the time of determination shall be designated a Multicare Unrestricted Subsidiary by the Board of Directors in the manner provided below; and (ii) any Subsidiary of a Multicare Unrestricted Subsidiary. The Board of Directors may designate any Multicare Restricted Subsidiary (including any newly acquired or newly formed Subsidiary of Multicare) to be a Multicare Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, Multicare or any Multicare Restricted Subsidiary; provided that (A) any guarantee by Multicare or any Multicare Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by Multicare or such Multicare Restricted Subsidiary (or both, if applicable) at the time of such designation; (B) either (I) the Subsidiary to be so designated has total assets of $1,000 or less or (II) if such Subsidiary has assets greater than $1,000, such designation would be permitted under Section 4.04 of the Indenture and (C) if applicable, the Incurrence of Indebtedness and the Investment referred to in clause (A) of this proviso would be permitted under Sections 4.03 and 4.04 of the Indenture. The Board of Directors may designate any Multicare Unrestricted Subsidiary to be a Multicare Restricted Subsidiary; provided that (i) no Default or Event of Default shall have occurred and be continuing at the time of or after giving effect to such designation and (ii) all Liens and Indebtedness of such Multicare Unrestricted Subsidiary outstanding immediately after such designation would, if Incurred at such time, have been permitted to be Incurred (and shall be deemed to have been Incurred) for all purposes of the Indenture. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "Multicare Senior Subordinated Guaranty" means the unconditional guaranty by Multicare of the Guaranteed Obligations on the terms and conditions provided herein. "Placement Agreement" means the placement agreement between the Issuer and Morgan Stanley & Co. Incorporated, Montgomery Securities and First Union Capital Markets Corp. dated August 4, 1997. 4 ARTICLE TWO MULTICARE SENIOR SUBORDINATED GUARANTY SECTION 2.01. Multicare Senior Subordinated Guaranty. Subject to the provisions of this Article Two, Multicare, as primary obligor and not merely as surety, hereby fully, unconditionally and irrevocably guarantees, from the consummation of the Tender Offer to and until the consummation of the Merger, to each Holder and to the Trustee on behalf of the Holders: (i) the due and punctual payment of the principal of, premium, if any, on and interest on each Note, when and as the same shall become due and payable, whether at maturity, by acceleration or otherwise, the due and punctual payment of interest on the overdue principal of and interest, if any, on the Notes, to the extent lawful, and the due and punctual performance of all other obligations of the Issuer to the Holders or the Trustee (the "Guaranteed Obligations"), all in accordance with the terms of such Note and the Indenture and (ii) in the case of any extension of time of payment or renewal of any Notes or any of such other obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, at Stated Maturity, by acceleration or otherwise. Multicare hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of merger or bankruptcy of the Issuer any right to require a proceeding first against the Issuer the benefit of discussion, protest or notice with respect to any such Note or the debt evidenced thereby and all demands whatsoever, and covenants that this Multicare Senior Subordinated Guaranty will not be discharged as to any such Note except upon the earlier of (x) the payment in full of the principal thereof, premium, if any, and interest thereon and (y) the consummation of the Merger. The maturity of the obligations guaranteed hereby may be accelerated as provided in Article Six of the Indenture for the purposes of this Article Two. In the event of any declaration of acceleration of such obligations as provided in Article Six of the Indenture, such obligations (whether or not due and payable) shall forthwith become due and payable by Multicare for the purpose of this Article Two. In addition, without limiting the foregoing provisions, upon the effectiveness of any acceleration under Article Six of the Indenture, the Trustee shall promptly make a demand for payment on the Notes under the Multicare Senior Subordinated Guaranty provided for in this Article Two. If the Trustee or the Holder of any Note is required by any court or otherwise to return to the Issuer or Multicare, or any custodian, receiver, liquidator, trustee, sequestrator or other similar official acting in relation to the Issuer or Multicare, any amount paid to the Trustee or such Holder in respect of a Note, this Multicare Senior Subordinated Guaranty, to the extent theretofore discharged, shall be reinstated in full force and effect. Multicare further agrees, to the fullest extent that it may lawfully do so, that, as between it, on the one hand, and the Holders and the Trustee, on the other hand, the maturity of the obligations guaranteed hereby may be accelerated as provided in Article Two hereof for the purposes of this Multicare Senior Subordinated Guaranty, notwithstanding any stay, injunction or other prohibition extant under any applicable bankruptcy law preventing such acceleration in respect of the obligations guaranteed hereby. 5 Until such time as the Notes are fully and finally paid, including all interest, premium, principal and liquidated damages with respect thereto, Multicare hereby irrevocably waives any claim or other rights which it may now or hereafter acquire against the Issuer that arise from the existence, payment, performance or enforcement of its obligations under this Multicare Senior Subordinated Guaranty and the Indenture, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution, indemnification, any right to participate in any claim or remedy of the Holders against the Issuer or any collateral which any such Holder or the Trustee on behalf of such Holder hereafter acquires, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law, including, without limitation, the right to take or receive from the Issuer, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim or other rights. If any amount shall be paid to Multicare in violation of the preceding sentence and the principal of, premium, if any, and accrued interest on the Notes shall not have been paid in full, such amount shall be deemed to have been paid to Multicare for the benefit of, and held in trust for the benefit of, the Holders, and shall forthwith be paid to the Trustee for the benefit of the Holders to be credited and applied upon the principal of, premium, if any, and accrued interest on the Notes. Multicare acknowledges that it will receive direct and indirect benefits from the issuance of the Notes pursuant to this Indenture and that the waivers set forth in this Section 2.01 are knowingly made in contemplation of such benefits. The Multicare Senior Subordinated Guaranty set forth in this Section 2.01 shall not be valid or become obligatory for any purpose with respect to a Note until the certificate of authentication on such Note shall have been signed by or on behalf of the Trustee. SECTION 2.02. Obligations Unconditional. Subject to Section 2.05, nothing contained in this Article Two or in the Indenture or in the Notes is intended to or shall impair, as between Multicare and the Holders, the obligation of Multicare, which is absolute and unconditional, upon failure by the Issuer, to pay to the Holders 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 is intended to or shall affect the relative rights of the Holders and creditors of Multicare, nor shall anything herein or therein prevent any Holder or the Trustee on their behalf from exercising all remedies otherwise permitted by applicable law upon default under the Indenture. Without limiting the foregoing, nothing contained in this Article Two will restrict the right of the Trustee or the Holders to take any action to declare the Multicare Senior Subordinated Guaranty to be due and payable prior to the Stated Maturity of the Notes pursuant to Section 6.02 of the Indenture or to pursue any rights or remedies hereunder. SECTION 2.03. Notice to Trustee. Multicare shall give prompt written notice to the Trustee of any fact known to Multicare which would prohibit the making of any payment 6 to or by the Trustee in respect of the Multicare Senior Subordinated Guaranty pursuant to the provisions of this Article Two. SECTION 2.04. This Article Not to Prevent Events of Default. The failure to make a payment on account of principal of, premium, if any, or interest on the Notes by reason of any provision of this Article will not be construed as preventing the occurrence of an Event of Default. SECTION 2.05. Net Worth Limitation. Notwithstanding any other provision of the Indenture or the Notes, this Multicare Senior Subordinated Guaranty shall not be enforceable against Multicare in an amount in excess of the net worth of Multicare at the time that determination of such net worth is, under applicable law, relevant to the enforceability of this Multicare Senior Subordinated Guaranty. Such net worth shall include any claim or future claim of Multicare against the Issuer for reimbursement and any claim against any grantor of a Guarantee for contribution. ARTICLE THREE SUBORDINATION SECTION 3.01. Agreement to Subordinate. Multicare, for itself, its successors and assigns, covenants and agrees, and each Holder, 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 under this Multicare Senior Subordinated Guaranty (including any payment in connection with the repurchase, redemption or other acquisition thereof) 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 Guarantor Senior Indebtedness. This Article Three constitutes a continuing offer to all persons or entities who become holders of, or continue to hold, Guarantor 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. All provisions of this Article Three shall be subject to Section 3.12. For the purposes of this Article Three, (a) no Guarantor Senior Indebtedness shall be deemed to have been paid in full unless and until all commitments or other obligations of the holders of the Senior Indebtedness thereunder to make advances or otherwise extend credit shall have terminated and the holders thereof shall have indefeasibly received payment in full in cash or Cash Equivalents, and (b) the term "Guarantor Senior Representative" shall mean the indenture trustee or other trustee, agent or representative for any Guarantor Senior Indebtedness. 7 SECTION 3.02. Distribution on Dissolution, Liquidation, Bankruptcy or Reorganization. Upon any distribution of assets of Multicare upon any total or partial dissolution, winding up, liquidation or reorganization of Multicare, 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 Multicare or otherwise, (a) the holders of Guarantor Senior Indebtedness shall be entitled to receive payment in full in cash or Cash Equivalents or, as acceptable to each holder of Guarantor Senior Indebtedness, in any other manner, of all amounts and obligations due on or in respect of all Guarantor Senior Indebtedness before the Holders are entitled to receive any payment or distribution of any kind or character (excluding securities of Multicare provided for in a plan of reorganization with respect to Multicare approved by the bankruptcy court that are equity securities or are subordinated in right of payment to all Guarantor Senior Indebtedness to the same extent as, or to a greater extent than, the Multicare Senior Subordinated Guaranty is so subordinated as provided in this Article; such securities are hereinafter collectively referred to as "Multicare 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 Guarantor Subordinated Indebtedness as a result of any payment on such Guarantor Subordinated Indebtedness); (b) any payment or distribution of assets of Multicare or any Subsidiary of Multicare of any kind or character, whether in cash, property or securities (excluding Multicare 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 Guarantor Subordinated Indebtedness as a result of any payment on such Guarantor 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 Guarantor Senior Indebtedness or their Guarantor Senior Representative or Representatives, ratably according to the aggregate amounts remaining unpaid on account of the Guarantor 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 Guarantor Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of such Guarantor Senior Indebtedness; and (c) in the event that, notwithstanding the foregoing provisions of this Section 3.02, the Trustee or any Holder shall have received any payment or distribution of assets of Multicare or any Subsidiary of Multicare of any kind or character, whether in cash, property or securities (excluding Multicare Permitted Junior Notes), in respect of principal, premium, if any, and interest on the Notes before all Guarantor Senior 8 Indebtedness is paid in full in cash, then and in such event, such payment or distribution (including any payment or other distribution which may be received from the holders of Guarantor Subordinated Indebtedness as a result of any payment on such Guarantor 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 Multicare for application to the payment of all Guarantor Senior Indebtedness remaining unpaid to the extent necessary to pay all Guarantor Senior Indebtedness in full in cash, Cash Equivalents or, as acceptable to each holder of Guarantor Senior Indebtedness, any other manner, after giving effect to any concurrent payment or distribution to or for the holders of Guarantor Senior Indebtedness or deposited with a court of competent jurisdiction. The consolidation of Multicare with, or the merger of Multicare into, another corporation or the liquidation or dissolution of Multicare 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 Five of the Indenture shall not be deemed a dissolution, winding up, liquidation or reorganization of Multicare for the purposes of this Article Three if such other corporation shall, as a part of such consolidation, merger, sale or conveyance, comply with the conditions stated in Article Five of the Indenture. If the Trustee or any Holder 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 Guarantor Senior Indebtedness (or its Guarantor Senior Representative) is hereby authorized, and has the right, to file an appropriate claim or claims for or on behalf of such Holder. SECTION 3.03. Suspension of Payment When Guarantor Senior Indebtedness in Default. (a) Unless Section 3.02 shall be applicable, upon the occurrence of a Payment Default in respect of Guarantor Designated Senior Indebtedness, then no payment or distribution of any assets of Multicare or any Subsidiary of Multicare of any kind or character (excluding Multicare Permitted Junior Notes) shall be made by Multicare or any Subsidiary of Multicare or on behalf of or out of the property of Multicare, or received by the Trustee or any Holder on account of principal of, premium, if any, or interest on, the Notes or on account of the purchase, redemption, defeasance (whether under Section 8.02 or 8.03 of the Indenture) or other acquisition of or in respect of the Notes unless and until such Payment Default shall have been cured or waived in writing by the holders of the Guarantor Designated Senior Indebtedness or shall have ceased to exist or the Guarantor 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 Guarantor Designated Senior Indebtedness, after which Multicare shall resume making any and all required payments in respect of the Notes, including any missed payments. 9 (b) Unless Section 3.02 shall be applicable, upon (i) the occurrence of a Non-payment Default pursuant to which the maturity of the applicable Designated Senior Indebtedness may be accelerated in respect of Guarantor Designated Senior Indebtedness, either iimmediately or upon the giving of notice, the passage of time, or both, and (ii) receipt by the Trustee and Multicare from a Guarantor Senior Representative or the holder of any Guarantor Designated Senior Indebtedness of written notice of such occurrence, no payment (other than any payments made pursuant to Section 8.02 or 8.03 of the Indenture or from the money or proceeds of U.S. Government Securities held under the Escrow Agreement as provided in Section 10.01 of the Indenture) or distribution of any assets of Multicare or any Subsidiary of Multicare thereof of any kind or character (excluding Multicare Permitted Junior Notes) shall be made by Multicare or any Subsidiary of Multicare thereof or on behalf of or out of the property of Multicare or any Subsidiary of Multicare, or received by the Trustee or any Holder on account of any principal of, premium, if any, or interest on, the Notes (including payments under any guaranty thereof) or on account of the purchase, redemption or other acquisition of or in respect of Notes (including payments under any guaranty thereof) for a period ("Payment Blockage Period") commencing on the date of receipt by the Trustee of such notice until the earliest of (x) 179 days after receipt of such written notice by the Trustee (provided any Guarantor 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 Guarantor Designated Senior Indebtedness or shall have ceased to exist or the Guarantor 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 Multicare or the Trustee from the Guarantor Senior Representative and the holders of the Guarantor 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), Multicare shall resume making any and all required payments in respect of the Notes including any missed payments. Notwithstanding any other provision of this Supplemental Indenture, in no event shall a Payment Blockage Period extend beyond 179 days from the date of the receipt by Multicare or the Trustee of the notice referred to in clause (ii) of this paragraph (b) (the "Initial Blockage Period"). Not more than one Payment Blockage Period may be commenced with respect to the Notes during any period of 360 consecutive days; provided that subject to the limitations set forth in the next sentence, the commencement of a Payment Blockage Period by the representative of Guarantor Designated Senior Indebtedness other than the Credit Facility shall not bar the commencement of another Payment Blockage Period by the representative for the Credit Facility within such period of 360 consecutive days. Notwithstanding anything in this Supplemental Indenture to the contrary, there must be 180 days in any 360-day period in which no Payment Blockage Period is in effect. No event of default (other than an event of default pursuant to the financial maintenance covenants under the Credit Facility) that existed or was continuing (it being acknowledged that any subsequent action that would give rise to an event of default pursuant to any provision under which an event of default previously existed or was 10 continuing shall constitute a new event of default for this purpose) on the date of commencement of any Payment Blockage Period with respect to the Guarantor Designated Senior Indebtedness initiating such Payment Blockage Period shall be, or shall be made, the basis for the commencement of a second Payment Blockage Period by the representative for, or the holders of, such Guarantor Designated Senior Indebtedness, whether or not within a period of 360 consecutive days, unless such event of 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, Multicare or any of its Subsidiaries shall make, or the Trustee or any Holder shall receive, any payment to the Trustee or any Holder prohibited by the foregoing provisions of this Section, then and in such event such payment shall be paid over and delivered forthwith to a Guarantor Senior Representative of the holders of the Guarantor Designated Senior Indebtedness. SECTION 3.04. Payment Permitted If No Default. Nothing contained in this Article, in the Indenture or in any of the Notes shall prevent Multicare, 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 Multicare referred to in Section 3.02 of this Supplemental Indenture and Section 11.02 of the Indenture or under the conditions described in Section 3.03 of this Supplemental Indenture and Section 11.03 of the Indenture, from making payments at any time of principal of, premium, if any, or interest on the Notes. SECTION 3.05. Subrogation to Rights of Holders of Guarantor Senior Indebtedness. Subject to the payment in full of all Guarantor Senior Indebtedness, Holders shall be subrogated to the rights of the holders of such Guarantor Senior Indebtedness to receive payments and distributions of cash, property and securities applicable to the Guarantor 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 Guarantor Senior Indebtedness of any cash, property or securities to which the Holders 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 Guarantor Senior Indebtedness by Holders or the Trustee, shall, as among Multicare, its creditors other than holders of Guarantor Senior Indebtedness, and the Holders, be deemed to be a payment or distribution by Multicare to or on account of the Guarantor Senior Indebtedness. SECTION 3.06. 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 on the one hand and the holders of Guarantor Senior Indebtedness on the other hand. Nothing contained herein or in the Indenture or in the Notes is intended to or shall (i) impair, as among Multicare, its creditors other than holders of Guarantor Senior Indebtedness and the Holders, the obligation of Multicare, which is absolute and unconditional, to pay to the Holders the 11 principal of, premium, if any, and interest on the Notes under this Multicare Senior Subordinated Guaranty in accordance with its terms; or (ii) affect the relative rights against Multicare of the Holders and creditors of Multicare other than their rights in relation to the holders of Guarantor Senior Indebtedness; or (iii) prevent the Trustee or any Holder from exercising all remedies otherwise permitted by applicable law upon Default under the Indenture, subject to the rights, under this Article of the holders of Guarantor Senior Indebtedness to receive distributions and payments otherwise payable to Holders (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 Multicare referred to in Section 3.02 of this Supplemental Indenture, 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 3.03 of this Supplemental Indenture, to prevent any payment prohibited by such Section or enforce their rights pursuant to Section 3.03(c) of this Supplemental Indenture. SECTION 3.07. Trustee to Effectuate Subordination. Each Holder 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 Multicare whether in bankruptcy, insolvency, receivership proceedings, or otherwise, the timely filing of a claim for the unpaid balance of the indebtedness of Multicare 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 Guarantor Senior Indebtedness, and their agents, trustees or other representatives are authorized to do so for and on behalf of the Holders. SECTION 3.08. No Waiver of Subordination Provisions. (a) No right of any present or future holder of any Guarantor 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 Multicare or any Holder or by any act or failure to act, in good faith, by any such holder, or by any non-compliance by Multicare or any Holder with the terms, provisions and covenants of this Supplemental 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 Guarantor Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders, without incurring responsibility to the Holders and without impairing or releasing the subordination provided in this Article or the obligations hereunder of the Holders to the holders of Guarantor 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, Guarantor Senior 12 Indebtedness or any instrument evidencing the same or any agreement under which Guarantor Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Guarantor Senior Indebtedness; (iii) release any Person liable in any manner for the collection or payment of Guarantor Senior Indebtedness; (iv) exercise or refrain from exercising any rights against Multicare and any other Person; (v) amend, supplement, restate or otherwise modify or restructure the Guarantor Senior Indebtedness; and (vi) otherwise deal with any Person liable on account of Guarantor Senior Indebtedness; provided, however, that in no event shall any such actions limit the right of the Holders to take any action to accelerate the maturity of the Notes pursuant to Article Six of the Indenture or to pursue any rights or remedies thereunder 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 Guarantor Senior Indebtedness to receive the cash, property or securities receivable upon the exercise of such rights or remedies. SECTION 3.09. Notice to Trustee. (a) Multicare shall give prompt written notice to the Trustee of any fact known to Multicare 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 the 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 Multicare, a holder of Senior Indebtedness or a holder of Guarantor Senior Indebtedness or from a Guarantor 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 Guarantor 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. (b) The Trustee shall be entitled to rely on the delivery to it of a written notice to the Trustee and Multicare by a Person representing himself to be a Guarantor Senior Representative or a holder of Guarantor Senior Indebtedness (or a trustee, fiduciary or agent therefor) to establish that such notice has been given by a Guarantor Senior Representative or a holder of Guarantor 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 13 signing and shall have no liability for relying thereon); provided, however, that failure to give such notice to Multicare 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 Guarantor 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 Guarantor 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 Multicare referred to in this Article, the Trustee and the Holders 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, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of Guarantor Senior Indebtedness and other indebtedness of Multicare, the amount thereof or payable thereon, the amount or 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 Guarantor 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 Guarantor Senior Indebtedness which may at any time be held by it, to the same extent as any other holder of Guarantor Senior Indebtedness, and nothing in this Supplemental Indenture shall deprive the Trustee of any of its rights as such holder of Guarantor Senior Indebtedness. Nothing in this Article shall apply to claims of, or payments to, the Trustee under or pursuant to Section 7.07 of the Indenture. SECTION 3.12. Trust Moneys and Escrowed Funds Not Subordinated. Notwithstanding anything contained herein to the contrary, payments from (x) money or the proceeds of U.S. Government Obligations held in trust under Article Eight by the Trustee for the payment of principal of, premium, if any, and interest on the Notes (provided that at the time deposited, such deposit did not violate any then outstanding Guarantor Senior Indebtedness) and (y) money or the proceeds of U.S. Government Securities held under the Escrow Agreement shall not be subordinated to the prior payment of any Guarantor Senior Indebtedness or subject 14 to the restrictions set forth in this Article Three, and none of the Holders shall be obligated to pay over any such amount to any holder of Guarantor Senior Indebtedness. SECTION 3.13. No Suspension of Remedies. Nothing contained in this Article shall limit the right of the Trustee or the Holders to take any action to accelerate the maturity of the Notes pursuant to Article Six of the 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 Guarantor 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 Guarantor Senior Indebtedness. With respect to the holders of Guarantor 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 Guarantor 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 Guarantor Senior Indebtedness. SECTION 3.15. Other Rights of Holders of Guarantor Senior Indebtedness. All rights and interests under this Supplemental Indenture of the holders of Guarantor Senior Indebtedness, and all agreements and obligations of the Trustee, the Holders and Multicare 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 Guarantor 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 Guarantor Senior Indebtedness). The holders of Guarantor Senior Indebtedness are hereby authorized to demand specific performance of this Article, whether or not Multicare shall have complied with any provisions of this Article applicable to it, at any time when the Trustee or any Holder 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 Guarantor Senior Indebtedness is rescinded or must otherwise be returned by any holder of Guarantor Senior Indebtedness upon the insolvency, bankruptcy or reorganization of Multicare or otherwise, all as though such payment had not been made. 15 ARTICLE FOUR EXECUTION AND DELIVERY OF MULTICARE SENIOR SUBORDINATED GUARANTY SECTION 4.01. Execution of Multicare Senior Subordinated Guaranty. (a) To evidence its Multicare Senior Subordinated Guaranty set forth in this Supplemental Indenture, Multicare hereby agrees that a notation of such Multicare Senior Subordinated Guaranty substantially in the form of Annex A hereto shall be endorsed by an officer of Multicare on each Note authenticated and delivered by the Trustee after the date hereof until consummation of the Merger. (b) Notwithstanding the foregoing, Multicare hereby agrees that the Multicare Senior Subordinated Guaranty set forth herein shall remain in full force and effect for the term provided herein notwithstanding any failure to endorse on each Note a notation of such Multicare Senior Subordinated Guaranty. (c) If an officer whose signature is on this Supplemental Indenture or on the Multicare Senior Subordinated Guaranty no longer holds that office at the time the Trustee authenticates the Note on which a Multicare Senior Subordinated Guaranty is endorsed, the Multicare Senior Subordinated Guaranty shall be valid nevertheless. SECTION 4.02. Delivery and Enforceability of Multicare Senior Subordinated Guaranty. (a) The delivery of the Note by the Trustee, after the authentication thereof under the Indenture, shall constitute due delivery of the Multicare Senior Subordinated Guaranty set forth in this Supplemental Indenture on behalf of Multicare. (b) Multicare hereby agrees that its obligations hereunder shall be unconditional, regardless of the validity, regularity or enforceability of the Notes or this Supplemental Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder with respect to any provisions hereof or thereof, the recovery of any judgment against the Issuer, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. SECTION 4.03. Waiver of Presentment; Rights and Remedies. (a) Multicare hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Issuer, any right to require a proceeding first against the Issuer, protest, notice and all demands whatsoever and covenants that the Multicare Senior Subordinated Guaranty made pursuant to this Supplemental Indenture will not be discharged except by complete performance of the obligations contained in the Notes and the Indenture. (b) If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Supplemental Indenture and such proceeding has been discontinued 16 or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then, and in every such case, subject to any determination in such proceeding, Multicare, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of Multicare, the Trustee and the Holders shall continue as though no such proceeding had been instituted. ARTICLE FIVE MISCELLANEOUS PROVISIONS SECTION 5.01. Releases upon Release of Multicare Senior Subordinated Guaranty. Concurrently with the release or discharge of this Multicare Senior Subordinated Guaranty (other than a release or discharge by or as a result of payment under such guarantee of Guaranteed Obligations), Multicare shall automatically be released from and relieved of its obligations under this Supplemental Indenture. Upon delivery by the Issuer to the Trustee of an Officers' Certificate to the effect that such release or discharge has occurred, the Trustee shall execute any documents reasonably required in order to evidence the release of Multicare from its obligations under this Supplemental Indenture. SECTION 5.02. Effect of Supplemental Indenture. Upon the execution and delivery of this Supplemental Indenture by Multicare, the Issuer and the Trustee, the Indenture shall be supplemented in accordance herewith, and this Supplemental Indenture shall form a part of the Indenture for all purposes, and every Holder heretofore or hereafter authenticated and delivered under the Indenture shall be bound thereby. SECTION 5.03. Indenture Remains in Full Force and Effect. Except as supplemented hereby, all provisions in the Indenture shall remain in full force and effect. SECTION 5.04. Indenture and Supplemental Indenture Construed Together. This Supplemental Indenture is an indenture supplemental to and in implementation of the Indenture, and the Indenture and this Supplemental Indenture shall henceforth be read and construed together. SECTION 5.05. Conflict with Trust Indenture Act. If any provision of this Supplemental Indenture limits, qualifies or conflicts with any provision of the Trust Indenture Act that is required under such Act to be part of and govern any provision of this Supplemental Indenture, the provision of such Act shall control. If any provision of this Supplemental Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the provision of such Act shall be deemed to apply to the Indenture as so modified or to be excluded by this Supplemental Indenture, as the case may be. 17 SECTION 5.06. Separability Clause. In case any provision in this Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 5.07. Effect of Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. SECTION 5.08. Benefits of Supplemental Indenture, Etc. Nothing in this Supplemental Indenture, the Indenture or the Notes express or implied, shall give to any Person, other than the parties hereto and thereto and their successors hereunder and thereunder and the Holders, any benefit of any legal or equitable right, remedy or claim under the Indenture, this Supplemental Indenture or the Notes. SECTION 5.09. Successors and Assigns. All covenants and agreements in this Supplemental Indenture by Multicare shall bind its successors and assigns, whether so expressed or not. SECTION 5.10. Certain Duties and Responsibilities of Trustee. In entering into this Supplemental Indenture, the Trustee shall be entitled to the benefit of every provision of the Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee, whether or not elsewhere herein so provided. SECTION 5.11. Governing Law. This Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York. SECTION 5.12. Counterparts. This Supplemental Indenture may be executed in counterparts, each of which, when so executed, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. Dated: _____________, 1997 THE MULTICARE COMPANIES, INC. By: ________________________________ Name: Title GENESIS ELDERCARE ACQUISITION Dated: _____________, 1997 CORP. By: ________________________________ Name: Title: Dated: _____________, 1997 PNC BANK, NATIONAL ASSOCIATION as Trustee By: ________________________________ Name: Title: ANNEX A TO SUPPLEMENTAL INDENTURE FORM OF NOTATION OF MULTICARE SENIOR SUBORDINATED GUARANTY ON NOTE The Multicare Companies, Inc. ("Multicare"), as primary obligor and not merely as surety, fully unconditionally and irrevocably guarantees (a) the due and punctual payment of the principal of, premium, if any, or interest on the Notes, whether at Stated Maturity or an Interest Payment Date, by acceleration, call for redemption or otherwise, (b) the due and punctual payment of interest on the overdue principal and premium of, and interest on the Notes and (c) that in case of any extension of time of payment or renewal of any Notes or any of such other obligations, the same will be promptly paid in full when due in accordance with the terms of the extension or renewal, whether at Stated Maturity, by acceleration or otherwise. Notwithstanding the foregoing, in the event that the Multicare Senior Subordinated Guaranty would constitute or result in a violation of any applicable fraudulent conveyance or similar law of any relevant jurisdiction, the liability of Multicare under its Multicare Senior Subordinated Guaranty shall be limited to such amount as will not, after giving effect thereto, and to all other liabilities of Multicare, result in such amount constituting a fraudulent transfer or conveyance. The Multicare Senior Subordinated Guaranty shall not be valid or obligatory for any purpose until the certificate of authentication on the Note upon which the Multicare Senior Subordinated Guaranty is noted shall have been executed by the Trustee under the Indenture by the manual or facsimile signature of one of its authorized officers. THE MULTICARE COMPANIES, INC. By: ______________________________ Name: Title: EX-5 4 EXHIBIT 5 [LETTERHEAD OF BLANK ROME COMISKY & McCAULEY LLP] January 15, 1998 The Multicare Companies, Inc. 433 Hackensack Avenue Hackensack, NJ 07601 Re: The Multicare Companies, Inc. 9% Senior Subordinated Notes due 2007 Registration Statement on Form S-4 Gentlemen: We have acted as counsel to The Multicare Companies, 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 $250,000,000 in principal amount of 9% Senior Subordinated Notes due 2007 (the "Exchange Notes") for outstanding $250,000,000 in principal amount of 9% Senior Subordinated Notes due 2007. The Exchange Notes will be issued pursuant to the Indenture (the "Indenture") dated as of August 11, 1997, by and among the Company's predecessor, Genesis ElderCare Acquisition Corp., a Delaware corporation, PNC Bank, National Association, as trustee, and Banque Internationale A Luxembourg S.A., as paying agent. 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 the Delaware General Corporation Law, and no opinion is expressed as to the laws of any other jurisdiction. While the Indenture provides that it will be governed by the substantive laws of the State of New York, we The Multicare Companies, Inc. January 15, 1998 Page 2 have assumed for the purposes of this opinion that the Indenture will be governed by the laws of the Commonwealth of Pennsylvania. 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 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, insolvency, reorganization, fraudulent conveyance, fraudulent transfer, preference, moratorium and other similar laws or equitable principles affecting creditors' rights or remedies; (c) the effect of equitable subordination or any other doctrine which may subordinate claims under the Indenture or the Notes; (d) general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing; (e) the effect of applicable law and court decisions which may now or hereafter limit or render unenforceable certain rights and remedies; and (f) the application of a standard of "good faith" or "commercial reasonableness" to any decisions, actions or conduct under the Indenture. 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, /s/ BLANK ROME COMISKY & McCAULEY LLP ------------------------------------- BLANK ROME COMISKY & McCAULEY LLP 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 March 1992 through the date hereof. 4. The Indenture. 5. The Registration Statement. 6. Agreement and Plan of Merger dated June 16, 1997 by and among Genesis ElderCare Corp., Genesis ElderCare Acquisition Corp., Genesis Health Ventures, Inc. and The Multicare Companies, Inc. 7. Certificate of Ownership and Merger dated October 10, 1997. EX-23 5 EXHIBIT 23.1 Exhibit 23.1 Independent Accountants Consent The Board of Directors The Multicare Companies, Inc. We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. KPMG Peat Marwick LLP Short Hills, New Jersey January 15, 1998 EX-25 6 EXHIBIT 25 Exhibit 25 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORM T-1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 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) PNC BANK, NATIONAL ASSOCIATION (Exact Name of Trustee as Specified in its Charter) NOT APPLICABLE (Jurisdiction of incorporation or organization if not a U.S. national bank) 25-1146430 (I.R.S. Employer Identification No.) One PNC Plaza FifthAvenue and Wood Street, Pittsburgh, Pennsylvania 15222 (Address of principal executive offices - Zip code) Allan K. Poust, Vice President, PNC Bank, National Association 27th Floor, One Oliver Plaza, Pittsburgh, Pennsylvania 15222-2602 (412) 762-2838 (Name, address and telephone number of agent for service) THE MULTICARE COMPANIES, INC. (Exact name of obligor as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 22-3152527 (I.R.S. Employer Identification No.) 433 Hackensack Avenue Hackensack, New Jersey 07601 (Address of principal executive offices - Zip code) 9% Senior Subordinated Notes Due 2007 (Title of the indenture securities) - -------------------------------------------------------------------------------- Item 1. General information. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Comptroller of the Currency Washington, D.C. Federal Reserve Bank of Cleveland Cleveland, Ohio Federal Deposit Insurance Corporation Washington, D.C. (b) Whether it is authorized to exercise corporate trust powers. Yes. (See Exhibit T-1-3) Item 2. Affiliations with obligor and underwriters. If the obligor or any underwriter for the obligor is an affiliate of the trustee, describe each such affiliation. Neither the obligor nor any underwriter for the obligor is an affiliate of the trustee. Item 3 through Item 14. The issuer currently is not in default under any of its outstanding securities for which PNC Bank is trustee. Accordingly, responses to Items 3 through 14 of Form T-1 are not required pursuant to Form T-1 General Instructions B. Item 15. Foreign trustee. Identify the order or rule pursuant to which the foreign trustee is authorized to act as sole trustee under the indentures qualified or to be qualified under the Act. Not applicable (trustee is not a foreign trustee). Item 16. List of exhibits. List below all exhibits filed as part of this statement of eligibility. Exhibit T-1-1 - Articles of Association of the trustee, as presently in effect. Exhibit T-1-2 - Copy of Certificate of the Authority of the Trustee to Commence Business, filed as Exhibit 2 to Trustee's Statement of Eligibility and Qualification, Registration No. 2-58789 and incorporated herein by reference. Exhibit T-1-3 - Copy of Certificate as to Authority of the Trustee to Exercise Trust Powers, filed as Exhibit 3 to Trustee's Statement of Eligibility and Qualification, Registration No. 2-58789, and incorporated herein by reference. -2- Exhibit T-1-4 - The By-Laws of the trustee, filed as Exhibit 4 to Trustee's Statement of Eligibility and Qualification, Registration No. 333-28711 and incorporated herein by reference. Exhibit T-1-5 - The consent of the trustee required by Section 321(b of the Act. Exhibit T-1-6 - The copy of the Balance Sheet taken from the latest Report of Condition of the trustee published in response to call made by Comptroller of the Currency under Section 5211 U.S. Revised Statutes. NOTE The answers to this statement, insofar as such answers relate to (a) what persons have been underwriters for any securities of the obligor within three years prior to the date of filing this statement, or are owners of 10% or more of the voting securities of the obligor, or are affiliates or directors or executive officers of the obligor, and (b) the voting securities of the trustee owned beneficially by the obligor and each director and executive officer of the obligor, are based upon information furnished to the trustee by the obligor and also, in the case of (b) above, upon an examination of the trustee's records. While the trustee has no reason to doubt the accuracy of any such information furnished by the obligor, it cannot accept any responsibility therefor. -------------------------- Signature appears on next page -3- SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, PNC Bank, National Association, a corporation organized and existing under the laws of the United States of America, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Pittsburgh and Commonwealth of Pennsylvania on January 12, 1998. PNC BANK, NATIONAL ASSOCIATION (Trustee) By /s/ Allan K. Poust ------------------------ Allan K. Poust Vice President -4- EXHIBIT T-1-1 ARTICLES OF ASSOCIATION PNC BANK, NATIONAL ASSOCIATION (Amended and Restated as of September 15, 1997) FIRST: The title of this Association shall be "PNC Bank, National Association." SECOND: The main office of the Association shall be in the City of Pittsburgh, Allegheny County, Pennsylvania. The general business of the Association shall be conducted at its main office and its branches. THIRD: The Board of Directors of the Association shall consist of not fewer than five (5) nor more than twenty-five (25) persons, the exact number of Directors within such minimum and maximum limits to be fixed and determined from time to time by a resolution of a majority of the full Board of Directors or by resolution of the shareholders at any annual or special meeting thereof. Each Director shall own such minimum qualifying equity interest in the ultimate parent bank holding company of the Association as shall be required from time to time by applicable law or regulation. Unless otherwise provided by the laws of the United States, any vacancy in the Board of Directors for any reason, including an increase in the number thereof, may be filled by action of the Board of Directors, within the limits then specified by law. A majority of the Board of Directors then in office shall be necessary to constitute a quorum for the transaction of business at any meeting of the Board. FOURTH: The annual meeting of the shareholders for the election of Directors and the transaction of whatever other business may be brought before said meeting shall be held at the main office or such other place as the Board of Directors may designate, on the day of each year specified therefor in the By-Laws, but if no election is held on that day, it may be held on any subsequent day according to the provisions of law; and all elections shall be held according to such lawful regulations as may be prescribed by the Board of Directors. Any action which may be taken at a meeting of the shareholders of the Association may be taken without a meeting if a consent in writing setting forth the action so taken is signed by all the shareholders who would be entitled to vote at a meeting for such purpose. Terms of Directors, including Directors selected to fill vacancies, shall expire at the regular meeting of shareholders at which Directors are elected, unless a Director resigns or is removed from office prior to the date of such meeting. Despite the expiration of a Director's term, the Director shall continue to serve until his or her successor is elected and qualifies or until there is a decrease in the number of Directors and his or her position is eliminated. A Director may resign at any time by delivering written notice to the Board of Directors, its Chairman, or to the Association's Secretary, which resignation shall be effective when the notice is delivered unless the notice specifies a later effective date. FIFTH: The amount of the authorized capital stock of the Association shall be Two Hundred Eighteen Million Nine Hundred Eighteen Thousand, Five Hundred and Seventy Dollars ($218,918,570), divided into 6,735,956 shares of common stock of the par value of Thirty-Two Dollars and Fifty Cents ($32.50) each, but said capital stock may be increased or decreased from time to time in accordance with the provisions of the laws of the United States. No holder of shares of the capital stock of any class of the Association shall have any preemptive or preferential right of subscription to any shares of any class of stock of the Association, whether now or hereafter authorized, or to any obligations convertible into stock of the Association, issued or sold, nor any right of subscription to any thereof other than such, if any, as the Board of Directors, in its discretion, may from time to time determine and at such price as the Board of Directors may from time to time fix. The Association, at any time and from time to time, may authorize and issue debt obligations, whether or not subordinated, without the approval of the shareholders. SIXTH: The Board of Directors shall appoint one of its members President of the Association who shall be Chairman of the Board; but the Board of Directors may appoint a Director, in lieu of the President, to be Chairman of the Board, who shall perform such duties as may be designated by the Board of Directors. The Board of Directors shall have the power to appoint one or more Vice Presidents of various ranks; to appoint a Cashier, a Secretary, and such other officers and employees -6- as may be required or deemed advisable to transact the business of the Association; to fix the salaries to be paid such officers and employees; to dismiss at its pleasure such officers and employees and to appoint others to take their place. The business and affairs of the Association shall be managed by or under the direction of the Board of Directors. The Board of Directors shall have the power to define the duties of officers and employees of the Association and to require adequate bonds from them for the faithful performance of their duties; to make all By-Laws and adopt all resolutions that may be lawful for the general regulation of the business of the Association and the management of its affairs, including but not limited to, the manner of election or appointment of Directors, officers, or employees and the appointment of judges of election, and generally to do and perform all acts that may be lawful for a Board of Directors to do and perform. Notwithstanding any provision of this or any other Article, the Board of Directors may delegate to the management of the Association such authorities and powers as the Board of Directors deems advisable from time to time, to the fullest extent permitted by applicable laws, regulations, and safe and sound banking practices. SEVENTH: (a) Subject to any prohibitions or limitations set forth in sections (b) and (g) of this Article or the Association's By-Laws, the Association may indemnify or reimburse any Director, officer, or employee for, or advance amounts in payment of, any expenses actually and reasonably incurred in any threatened, pending or completed action or proceeding, whether civil, criminal, administrative, or investigative, to which such individual was or is a party or a potential party by reason of his or her performance of official duties on behalf of or at the request of the Association. Such duties shall specifically include, but not be limited to, service performed at the request of the Association as a representative of a domestic or foreign corporation for profit or not-for-profit, partnership, joint venture, trust or other enterprise. For purposes of this Article, "expenses" shall include, but not be limited to, attorneys' fees and costs, judgments, fines, taxes, penalties, and amounts paid or to be paid in settlement. (b) Notwithstanding any provision of this Article or the Association's By-Laws, the following prohibitions and limitations shall apply: (i) No indemnification -7- shall be made in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court of competent jurisdiction to have constituted willful misconduct or recklessness; (ii) No indemnification shall be made for any expenses incurred in an administrative proceeding or civil action instituted by a federal banking agency which proceeding or action results in a final order or settlement pursuant to which the Director, officer or employee is assessed a civil money penalty; removed from office or prohibited from participating in the conduct of the Association's affairs; or is required to cease and desist from or take any affirmative action described in Section 8(b) of the Federal Deposit Insurance Act with respect to the Association; (iii) The Association may advance expenses to a Director, officer or employee in connection with an action or proceeding under 12 U.S.C. ss.ss.164 or 1818 only if the Board of Directors has first made such determinations and findings and otherwise satisfied such procedural requirements, if any, as may be specified by rule, regulation, advice, or guidance issued by a federal banking agency having jurisdiction over the Association; (iv) Any advance of expenses must be subject to a written and legally binding agreement which specifies, at a minimum, that reimbursement to the Association of expenses advanced (including expenses already paid) shall be required if and to the extent that: (a) the expenses are not covered by any insurance policy or fidelity bond purchased by the Association or its holding company; (b) the Board of Directors finds that the Director, officer, or employee willfully misrepresented factors relevant to the Board's decision to advance expenses; or (c) for any other reason the expenses advanced subsequently become prohibited indemnification payments, as defined in 12 C.F.R. ss.359.1(1); and (v) No indemnification shall be made with respect to amounts provided for by any compromise settlement unless such settlement shall have been approved by a court of competent jurisdiction, or the holders of record of a majority of the outstanding shares of the Association, or the Board of Directors, acting by vote of Directors not parties to the same or substantially the same action, or proceeding, constituting a majority of the whole number of Directors. (c) The Association may provide for the payment of reasonable premiums for insurance policies or fidelity bonds covering the payment of expenses and the liabilities -8- of its Directors, officers, and employees, provided that no such insurance or fidelity bond coverage may be purchased for a final order assessing any judgment or civil money penalty against such individuals in an administrative proceeding or civil action commenced by a federal banking agency. (d) Any amendment or repeal of this Article, or the adoption of any other provision of the Articles of Association or By-Laws which has the effect of increasing the liability of the Association's Directors, officers, and employees shall operate prospectively only and shall not affect any action taken, or any failure to act, prior to the adoption of such amendment, repeal or other provisions. (e) The Board of Directors may adopt By-Law provisions consistent with this Article and may limit the classes of individuals to whom this Article shall apply. In the event of any inconsistency or conflict between this Article and such By-Law provisions, this Article shall control; provided, that a By-Law provision limiting the classes of individuals to whom this Article shall apply shall not be deemed to be such an inconsistency or conflict. (f) The rights of indemnification or reimbursement provided for in this Article shall not be exclusive of other rights, if any, to which such Directors, officers, or employees, or their personal representatives, may be entitled as a matter of Pennsylvania law. (g) Notwithstanding any other provision of this Article or the Association's By-Laws, the Association shall not make or agree to make any prohibited indemnification payment, as defined in 12 C.F.R. ss.359.1(1). EIGHTH: The Board of Directors shall have the power, without the approval of the shareholders, to change the location of the main office to any other place within the limits of the City of Pittsburgh, Allegheny County, Pennsylvania, and to establish or change the location of any branch or branches of the Association subject to the approval of the Comptroller of the Currency. NINTH: The corporate existence of the Association shall continue until terminated in accordance with the laws of the United States. TENTH: The Board of Directors of the Association, or any three (3) or more shareholders owning, in the aggregate, not less than ten (10%) percent of the stock of the Association, may call -9- a special meeting of the shareholders at any time. Unless otherwise provided by the laws of the United States or duly waived, a notice of the time, place, and purpose of every annual and every special meeting of the shareholders shall be given by first-class mail, postage prepaid, mailed at least ten (10) days prior to the date of such meeting to each shareholder of record at his address as shown upon the books of the Association. ELEVENTH: These Articles of Association may be amended at any regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the stock of this Association, unless the vote of the holders of a greater amount of stock is required by law, and in that case by the vote of the holders of such greater amount. TWELFTH: Honorary or advisory directors, without voting power or power of final decision in matters concerning the business of the Association, may be appointed by resolution of a majority of the full Board of Directors, or by resolution of shareholders at any annual or special meeting. Honorary or advisory directors shall not be counted to determine the number of Directors of the Association or the presence of a quorum in connection with any Board action and shall not be required to own a qualifying equity interest. Honorary or advisory directors may be appointed to one or more advisory boards of directors of the Association, to serve upon such terms and conditions as may be specified by the Board of Directors, or the Association's By-Laws. -10- EXHIBIT T-1-5 CONSENT OF TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990, in connection with the proposed issuance by The Multicare Companies, Inc., of its 9% Senior Subordinated Notes Due 2007, we hereby consent that reports of examination by Federal, State, Territorial, or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. PNC BANK, NATIONAL ASSOCIATION (Trustee) By /s/ Allan K. Poust ------------------------ Allan K. Poust Vice President Dated: January 12, 1998 EXHIBIT T-1-6 SCHEDULE RC - BALANCE SHEET FROM REPORT OF CONDITION Consolidating domestic and foreign subsidiaries of PNC BANK, NATIONAL ASSOCIATION of PITTSBURGH in the state of PENNSYLVANIA at the close of business on September 30, 1997 filed in response to call made by Comptroller of the Currency, under title 12, United States Code, Section 161 Charter Number 540 Comptroller of the Currency Northeastern District BALANCE SHEET
Thousands of Dollars ASSETS Cash and balances due from depository institutions Noninterest-bearing balances and currency and coin................................... $ 3,291,380 Interest-Bearing Balances............................................................ 122,778 Securities Held-to-maturity securities.......................................................... 0 Available-for-sale securities........................................................ 5,669,736 Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs: Federal funds sold and Securities purchased under agreements to resell...................................... 869,038 Loans and lease financing receivables: Loans and leases, net of unearned income $44,571,048 LESS: Allowance for loan and lease losses 812,830 LESS: Allocated transfer risk reserve 0 Loans and leases, net of unearned income, allowance and reserve............................................................ 43,758,218 Trading assets ........................................................................ 134,154 Premises and fixed assets (including capitalized leases)............................... 716,561 Other real estate owned ............................................................... 50,869 Investments in unconsolidated subsidiaries and associated companies ............................................................... 3,679 Customers' liability to this bank on acceptances outstanding......................................................................... 50,248 Intangible assets ..................................................................... 1,575,419 Other assets........................................................................... 1,406,879 ----------- Total Assets........................................................................ $ 57,648,959 ===========
LIABILITIES Deposits: In domestic offices................................................................. $34,197,693 Noninterest-bearing $ 8,472,726 Interest-bearing 25,724,967 In foreign offices, Edge and Agreement subsidiaries, and IBFs......................................................................... 1,544,664 Noninterest-bearing $ 6,571 Interest-bearing 1,538,093 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs: Federal funds purchased and Securities sold under agreements to repurchase................................... 2,156,756 Demand notes issued to U.S. Treasury................................................... 799,995 Trading Liabilities.................................................................... 155,047 Other borrowed money With original maturity of one year or less.......................................... 10,085,030 With original maturity of more than one year through three years.................... 882,274 With original maturity of more than one year........................................ 1,169,398 Bank's liability on acceptances executed and outstanding............................... 50,248 Subordinated notes and debentures ..................................................... 645,953 Other liabilities...................................................................... 1,080,158 -------------- Total liabilities...................................................................... 52,767,216 EQUITY CAPITAL Perpetual preferred stock and related surplus.......................................... 0 Common Stock........................................................................... 218,919 Surplus. . . .......................................................................... 1,933,735 Undivided profits and capital reserves................................................. 2,760,127 Net unrealized holding gains (losses) on available-for-sale securities....................................................... (31,038) Cumulative foreign currency translation adjustments.................................... 0 Total equity capital................................................................... 4,881,743 ----------- Total liabilities and equity capital................................................... $ 57,648,959 ===========
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