Management And Affiliation Agreement

MANAGEMENT AND AFFILIATION AGREEMENT


THIS MANAGEMENT AND AFFILIATION AGREEMENT (the "Agreement"), dated as of August 31, 1996, by and between GENESIS ELDERCARE NETWORK SERVICES, INC., a Pennsylvania corporation ("Manager"), GENESIS HEALTH VENTURES, INC., a Pennsylvania corporation ("Genesis") and AGE INSTITUTE OF FLORIDA, INC., a Florida not-for-profit corporation ("Age").


BACKGROUND


A. On the date hereof, Age acquired eleven (11) eldercare centers located in Pinellas, Polk, Volusia, Bay and Okaloosa Counties in the State of Florida, and listed on Exhibit "A" attached hereto and hereby made a part hereof (collectively, the "Facilities"), together with all equipment, fixtures and other tangible and intangible assets of Edgemont Partners, LP., a Tennessee limited partnership ("Edgemont") as more particularly described in that certain Asset Purchase Agreement dated the date hereof by and between Age and Edgemont (the "Asset Purchase Agreement") (the Facilities and all such equipment, fixtures and assets, collectively, the "Property").


B. Manager is in the business of operating and managing eldercare centers and providing operational, accounting and financial services to such facilities and Manager is willing to provide the management services with respect to the Facilities on the basis, terms and conditions set forth below.


C. Manager is a subsidiary of Genesis, a recognized leader in providing healthcare services to the geriatric population. Genesis operates through health service networks (hereinafter referred to as the "Genesis Health Network") composed primarily of operating owned, leased and managed long-term care facilities, providing specialty medical services to long-term care providers and patients and developing advanced clinical protocols and personnel training programs. The Genesis Health Network also includes developing, and providing services through, managed care programs for the geriatric and subacute care populations. Age desires to affiliate with the Genesis Health Network to, among other things, receive Genesis' expertise in clinical programming and personnel training; have its Facilities provide care through Genesis' third party managed care payor agreements; and access Genesis' expertise in managed care pricing and patient care.


TERMS


NOW, THEREFORE, in consideration of the mutual representations, covenants and agreements set forth below, and intending to be legally bound, Manager and Age agree as follows:


SECTION 1 Appointment of Manager. Age hereby appoints and employs Manager as operating manager of the Facilities, and Manager agrees to act as operating manager of the Facilities, to supervise and direct the day to day business activities, management and operation, expansion, repair and renovation of the Facilities and all phases of its operations in the name of and on behalf of Age and for Age's account during the term of this Agreement.


SECTION 2 Term. The term of this Agreement shall commence on the date hereof (the "Commencement Date") and shall continue for a period of ten (10) years from the Commencement Date (such time period is hereinafter referred to as the "Initial Term"). After the expiration of the Initial Term or any subsequent term, this Agreement shall automatically renew for a period of five (5) years unless either party provides the other party with prior written notice of its intention to terminate this Agreement at the end of its current term which notice is given at least one hundred and twenty (120) days prior to the expiration of the Initial Term or any subsequent term.


SECTION 3 Responsibilities of Manager-Management. In connection with the supervision, direction and management of the Facilities, beginning on the Commencement Date, Manager or its subcontractor(s) shall (either directly or through supervision of employees of the Facilities), as agent and on behalf of Age, perform or cause to be performed, the following services:


3.1 Manage the operation of the Facilities, including, but not limited to, the provision of long-term nursing care to residents, staffing, accounting services (but not audit services), billing, collections, rate setting, and general on-site administration.


3.2 Select, employ, supervise and train an adequate staff, as required by law and subject to availability, of nurses, nurse aides, office and other employees, including an administrator (the "Administrator") and a registered nurse as director of nursing (the "Director of Nursing") (each of whom may be replaced by Manager from time to time), and promote, direct, assign and discharge all such employees at Manager's sole discretion; provided, that the initial employment of the Administrator and Director of Nursing requires the prior consent of Age, which consent shall not be unreasonably withheld or delayed. At Age's request, such employees shall be employees of Manager or its Affiliates and carried on the payroll of the Facilities; provided, that Age may decide to directly employ the employees at the Facilities. Age agrees to reimburse Manager for the direct and indirect employment related costs associated with any such


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employee, including, without limitation, compensation, salary, bonuses, reasonable business expense reimbursements approved by Manager, employer's FICA payments, unemployment compensation and other employment taxes, bonuses, automobile allowances, vacation, personal and sick leave benefits, workers' compensation, group life, health and accident insurance premiums, disability and other benefits (collectively, "Employment Costs"). Notwithstanding the foregoing, during the term of this Agreement, Manager or its Affiliate, in Manager's sole discretion, may directly employ the Facilities' Administrator and Director of Nursing. The compensation payable to the Administrator and Director of Nursing shall be paid by Age and shall be reasonable and in line with compensation payable by other similar nursing home operators to administrators and nursing directors of comparable facilities in the Facilities' general market area.


3.3 With the prior written consent of Age, institute and amend from time to time, general salary scales, personnel policies and appropriate employee benefits for all employees of the Facilities.


3.4 Issue bills for services and materials furnished by the Facilities and collect accounts receivable and monies owed to the Facilities; design and maintain accounting, billing, patient and collection records; and prepare and file, or supervise the preparation and filing of, insurance, Medicare, Medicaid and any and all other necessary or desirable applications, reports and claims related to revenue production. Age expressly constitutes Manager, to the extent permitted by applicable law, as its agent to administer, process and collect, on Age's behalf and in its name, all Medicare and Medicaid receivables. Manager shall have the right to enforce Age's rights as creditor under any contract relating to the Facilities or in connection with rendering any services at the Facilities for the purposes of collecting accounts receivable and monies owed the Facilities, and Manager shall make reasonable efforts to collect all such receivables and monies.


3.5 Plan, supervise and conduct a program of regular maintenance and repair, except that any single physical improvement or series of related improvements (other than budgeted capital items or maintenance and repair items) costing more than Twenty-five Thousand Dollars ($25,000) for any single Facility shall be subject to the prior written approval of Age.


3.6 Purchase food, beverage, medical, cleaning and other supplies, equipment, furniture and furnishings necessary for the operation and maintenance of the Facilities and contract for all necessary services for the account of Age, except that the purchase of any single item or series of related items of equipment, furniture or furnishings (other than budgeted or emergency items at


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Manager's discretion) which cost more than Twenty-five Thousand Dollars ($25,000) for any single Facility shall be subject to the prior approval of Age.


3.7 Administer, supervise, coordinate and schedule all patient and other services of the Facilities, including the provision of food, barber/beautician and other ancillary services. Subject to the terms of Section 9 hereof, Manager may contract with any of its Affiliates on an arms-length basis after prior written approval by Age, including, but not limited to, for the provision of the following categories of service at Age's expense: dietary, janitorial and housekeeping, contract maintenance, data processing, group purchasing, pharmacy, medical, enteral feeding and therapy and rehabilitation services. Manager shall use such consultants or other professionals in connection with the provision and delivery of such services, as Manager shall select in its reasonable business judgment.


3.8 Provide for the payment of accounts payable, employee payroll, taxes, insurance premiums and other obligations of the Facilities.


3.9 With the prior consent of Age, institute standards and procedures for admitting and discharging residents, for charging residents for services and for collecting the charges from residents or third parties.


3.10 Furnish to Age for review and approval, policy manuals discussing aspects of the operation of the Facilities and propose revisions to such policy manuals from time to time.


3.11 With Age's consent, not to be unreasonably withheld or delayed, obtain and maintain insurance coverage for the Facilities, including insurance coverage naming Age, Manager and such other persons as may be reasonably requested by Age as additional insureds, with respect to services that could be provided by the Facilities.


3.12 Negotiate and enter into, in the name of and on behalf of Age, such agreements, contracts and orders as it may deem necessary or advisable for the furnishing of services, concessions and supplies for the operation and maintenance of the Facilities in accordance with the Facilities' budgets.


3.13 Handle and settle employee relation matters, union and non-union, and negotiate on behalf of Age (and in conjunction with Age's counsel) with any labor union lawfully entitled to represent employees who work at the Facilities; provided, however, any collective bargaining agreement or labor contract must be submitted to Age for its prior approval and provided, further, that


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the institution of any labor litigation and any labor settlement in excess of the sum of Twenty-five Thousand Dollars ($25,000) for any single Facility must be approved by Age.


3.14 As appropriate, file or contract for filing, annual and semi-annual Medicare and Medicaid cost reports, budget cost reports for setting the Facilities' initial rate and interim rate increase requests.


3.15 Make periodic evaluations of the performances of all departments of the Facilities and provide written notification to Age in the event of any material substandard performances. At Age's written request, Manager shall make available any such evaluations to Age.


3.16 Implement and maintain accounting and internal control systems using accounts and classifications consistent with those used in similar nursing home facilities operated by Manager.


3.17 Implement and maintain a program to provide objective measurements of the quality of healthcare provided at the Facilities, and Manager may utilize patient questionnaires and interviews, periodic inspection, and such other techniques as Manager may reasonably deem necessary to maintain the quality of healthcare at the Facilities.


SECTION 4 Responsibilities of Age. Age makes the following covenants which are material covenants and upon which Manager relies as an inducement to enter into this Agreement:


4.1 Age will cooperate with Manager in every respect to allow Manager to perform its services under this Agreement and will furnish Manager with all information required by it for the performance of its services under this Agreement. Age will permit Manager full access to the Facilities and will allow Manager to examine and copy any data in the possession and control of Age affecting management and/or operation of the Facilities.


4.2 Age will examine documents and contracts submitted by Manager and render reasonable decisions pertaining thereto, when required, promptly, to avoid unreasonable delay in the progress of Manager's work, and, in any event, if Age shall not respond negatively in writing to the notice within ten (10) days after the notice is sent, Age shall be deemed to have approved the matter submitted to Age. In any emergency situation (as determined by Manager), Manager shall not be required to seek or obtain Age's approval for any actions which Manager, in its sole judgment, deems necessary or appropriate to respond to such situations, provided Manager promptly thereafter reports such action to Age. Age shall


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execute and deliver any and all applications and other documents that may reasonably be deemed by Manager to be necessary or proper to be executed by Age in connection with the operation of the Facilities.


4.3 Age agrees that Manager retains all ownership and other rights in all proprietary systems, policy and other manuals, materials and other information, in whatever form, developed by Manager or its Affiliates in the performance of its services under this Agreement. Nothing contained in this Agreement shall be construed as a license or transfer of such information either during the term of this Agreement or otherwise. Upon termination of this Agreement, or earlier upon Manager's request, Age shall immediately return all such information to Manager.


4.4 As long as Age shall owe funds to Manager, or any Affiliate of Manager, Age shall not (without the consent of Manager, which may be withheld in its sole discretion) withdraw, lend, pledge or divert any revenues of the Facilities, except as may be provided in this Agreement or the budgets applicable to the Facilities.


4.5 During the term of this Agreement and for a period of two years following the termination of this Agreement, Age shall not, directly or indirectly, for Age or on behalf of any other person or business entity, solicit, recruit, entice or persuade any employee of Manager or its Affiliates to leave the employ of Manager or its Affiliates or to contract with Age or any other person; provided, that, the foregoing shall not limit Age from employing employees of the Facilities in accordance with Section 3.2 hereof.


SECTION 5 Fees


5.1 Management Fee. Beginning on the Commencement Date, in addition to any other fees due to Manager and reimbursements for operating expenses at the Facilities (including, without limitation, salaries and benefits for employees at the Facilities), compensation to the Manager, consists of a monthly fee (the "Management Fee"), payable in arrears on the last business day of each month, equal to the product of Net Revenue (as defined in Section 15.16(d) of this Agreement) for the immediately preceding month multiplied by 6%.


5.2 Other Fees and Reimbursements. The fees listed above shall be in addition to any and all other reimbursements due Manager, including, without limitation, reimbursements for salaries and benefits for employees, tax contests, costs for filing and expenses related to preparing or contracting for filing reports or


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requests to Medicare, its intermediary or Medicaid and costs incurred by the Manager in representing Age in connection with any and all audits, reviews and appeals of Medicare and Medicaid Cost Reports; provided, that, costs for preparation and filing of Medicaid and Medicare cost reports for the Facilities shall be at no additional cost to Age.


5.3 Overdue Invoices. Age shall pay Manager interest on amounts due to Manager which are not paid within thirty (30) days of their due date at a rate of 15% per annum, which rate is subject to adjustment from time to time, to reflect changes in the prime rate announced from time to time by Mellon Bank, N.A.


SECTION 6 Budgets and Reports.


6.1 Annual Budget. Within ninety (90) days of the date of the Commencement Date, and no later than sixty (60) days prior to the end of each fiscal year of the Facilities, Manager shall submit to Age an annual budget (each an "Annual Budget") covering the operations of and proposed capital expenditures to be made with respect to the Facilities for the next fiscal year (or the remainder of the current fiscal year, in the case of the initial budget). Age shall approve or disapprove the annual budget submitted by Manager no later than thirty (30) days prior to the end of each Facilities' fiscal year. Manager shall not make any expenditure which would have the effect of causing the Budget with respect to each Facility to be exceeded, without first obtaining Age's approval thereof.


6.2 Capital Expenditures. The Annual Budget shall include a capital budget (the "Capital Budget") outlining a program of capital expenditures as may be required by applicable law, any lender of Age or in Manager's reasonable business judgment during the next fiscal year (or the remainder of the current fiscal year, in the case of the initial budget), in which each proposed capital expenditure will be designated as either mandatory, highly recommended or desirable. Age may approve or reject, in its discretion, each proposed capital expenditure, except those indicated as mandatory. Age shall not unreasonably withhold or delay its consent to highly recommended capital expenditures. Manager shall be responsible for designating as a "mandatory capital expenditure" any expenditure which, if not made would, in Manager's reasonable judgment, (a) cause the Facilities to lose or put at risk its license, (b) place at risk the life of a patient of the Facilities, (c) cause the ineligibility of the Facilities under any third party payor program applicable to the Facilities or (d) cause the issuance of a formal notice that the operating license for the Facilities or any substantial portion of the Facilities


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will be revoked or suspended or qualified in any material adverse respect.


6.3 Operating Budget. The Annual Budget shall include an operating budget (the "Operating Budget") setting forth an estimate of operating revenues and expenses for the Facilities for the next fiscal year (or the remainder of the current fiscal year, in the case of the initial budget), together with an explanation of anticipated changes in the Facilities. Manager shall provide to Age upon written request such other reports, including a cost comparison report, and all appropriate Medicare and Medicaid reports necessary under these programs, as are normally provided by Manager to owners of other similar nursing home facilities managed by Manager.


6.4 Reports. As soon as available and in any event within forty-five (45) days after the end of each month, Manager shall provide to Age a report reconciling the actual operating expenses incurred during such month to the operating expenses shown on the Operating Budget for such month. Manager shall also furnish or arrange for the preparation of such other reports which shall include: (a) unaudited monthly financial statements of Age for the month then ended, prepared on a basis consistent with the annual statements; (b) at Age's expense, audited annual financial statements of Age prepared by a nationally recognized certified public accounting firm or other independent certified public accounting firm, prepared in accordance with generally accepted accounting principles, and including a balance sheet, a statement of income and expen ...