SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ____ to _____.
Commission file number: 33-80987
MERIT BEHAVIORAL CARE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 22-3236927
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Maynard Drive 07656
Park Ridge, New Jersey (Zip Code)
(Address of principal executive offices)
(201) 391-8700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The only class of voting securities of the Registrant is its common stock, par
value $.01 per share (the "Common Stock"), 17.5% of which is held by
non-affiliates of the Registrant. The Common Stock is not registered under the
Securities Act of 1933, as amended (the "Securities Act"), is not publicly
traded and does not have a quantifiable market value.
The number of shares of the Common Stock outstanding as of December 1, 1996:
28,477,800.
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits as listed on the Exhibit Index and filed with the Registrant's
Registration Statement on Form S-4 (No. 33-80987) under the Securities Act or
its Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1996 are
incorporated by reference into Part IV of this Form 10-K.
<PAGE>
MERIT BEHAVIORAL CARE CORPORATION
FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business................................................. 3
Item 2. Properties...............................................25
Item 3. Legal Proceedings....................................... 26
Item 4. Submission of Matters to a Vote of Security Holders..... 28
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters................................... 28
Item 6. Selected Financial Data................................. 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 31
Item 8. Financial Statements and Supplementary Data............. 39
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.................. 39
PART III
Item 10. Directors and Executive Officers of the Registrant...... 40
Item 11. Executive Compensation.................................. 43
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................ 50
Item 13. Certain Relationships and Related Transactions.......... 51
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................... 54
SIGNATURES................................................................ 57
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PART I
- ------------------------------------------------------------------------------
Item 1. Business
GENERAL
Merit Behavioral Care Corporation ("MBC" or the "Company") is one of the
leading behavioral health managed care companies in the United States, arranging
for the provision of a full spectrum of behavioral healthcare services on a
nationwide basis. Behavioral healthcare involves the treatment of a variety of
behavioral health conditions such as emotional and mental health problems,
substance abuse and other personal concerns that require counseling, outpatient
therapy or more intensive treatment services. The Company provides behavioral
health managed care services through a systematic clinical approach with the
objective of diagnosing problems promptly and designing treatment plans to
ensure that patients receive the appropriate level of care in an efficient and
cost-effective manner. The Company manages behavioral healthcare programs for
its payor customers across all segments of the healthcare industry, including
health maintenance organizations ("HMOs"), Blue Cross/Blue Shield organizations
and other insurance companies, corporations and labor unions, federal, state and
local governmental agencies, and various state Medicaid programs. The Company's
programs covered more than 15 million people as of September 30, 1996, and
management expects that, based on new programs awarded to the Company as of
December 1, 1996, the Company will arrange for the provision of behavioral
healthcare services for more than 19 million people in its fiscal year ended
September 30, 1997.
The Company's clinical care program includes the use of intake
coordinators and professional case managers who coordinate and manage the
delivery of treatment services. The Company offers a full continuum of
behavioral healthcare services through contractual arrangements with
approximately 30,000 third-party network providers and approximately 2,400
third-party treatment facilities, as well as approximately 450 "staff providers"
employed by professional corporations (the "Professional Corporations") which
provide treatment services principally on behalf of the Company. The Company's
third-party network and staff providers include psychiatrists, psychologists,
licensed clinical social workers, marriage, family and child therapists,
licensed clinical professional counselors and nurses. Treatment services
arranged for and managed by MBC include outpatient care programs (such as
counseling and therapy), intermediate care programs (such as sub-acute emergency
care, intensive outpatient programs and partial hospitalization services),
inpatient treatment services and alternative care services (such as residential
treatment, home- and community-based programs and rehabilitative and support
services).
The Company has engaged in the provision of behavioral health managed care
programs since 1985, and has expanded its services and increased its revenue
through significant growth in its customer base and a series of strategic
acquisitions, joint ventures and other arrangements. In 1985, Albert S. Waxman,
Ph.D., the Company's Chairman and Chief Executive Officer, co-founded American
Biodyne, Inc., the Company's principal predecessor ("American Biodyne"), which
completed an initial public offering in 1991. In December 1992, Medco
Containment Services, Inc. ("Medco Containment") acquired American Biodyne and
combined American Biodyne's behavioral health managed care and employee
assistance program ("EAP") business with EAP operations previously acquired by
Medco Containment. In March 1993, MBC was formed as a holding company for all of
Medco Containment's behavioral health managed care and EAP operations. In
November 1993, Medco Containment was acquired by Merck & Co., Inc. ("Merck").
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On June 30, 1995, the Company and Medco Containment entered into an
Agreement and Plan of Merger (as amended, the "Merger Agreement") with MDC
Acquisition Corp. ("MDC"), a company formed by Kohlberg Kravis Roberts & Co.,
L.P. ("KKR"). Pursuant to the Merger Agreement, on October 6, 1995, MDC was
merged with and into the Company (the "Merger"), with the Company continuing as
the surviving corporation. Upon completion of the Merger, which was accounted
for as a recapitalization, Merck retained 15.0% of the Common Stock of the
post-Merger Company, and affiliates of KKR and members of MBC management
(together with related entities) owned approximately 73.9% and 11.1%,
respectively, of the post-Merger Common Stock.
The principal executive offices of the Company are located at One Maynard
Drive, Park Ridge, New Jersey 07656 and the Company's telephone number at that
address is (201) 391-8700. Unless the context indicates otherwise, all
references to the "Company" or "MBC" shall mean Merit Behavioral Care
Corporation and its consolidated subsidiaries.
BEHAVIORAL HEALTH MANAGED CARE INDUSTRY
Overview
Behavioral healthcare costs have increased significantly in the United
States in recent years. According to industry sources, the direct medical costs
of behavioral health problems, combined with the indirect costs, such as lost
productivity due to mental illness and alcohol and drug abuse, were estimated at
$314 billion in 1990. In addition, according to industry sources, direct
behavioral healthcare treatment costs in 1995 amounted to approximately $80
billion, or 8% of total healthcare industry spending. In response to these
escalating costs, behavioral health managed care companies, such as MBC, have
been formed. These companies focus on care management techniques with the goal
of improving early access to care, assuring an effective match between the
patient and the behavioral healthcare provider's specialty, and arranging for
the provision of an appropriate level of care in a cost-efficient and effective
manner. As behavioral health managed care companies have expanded access to a
full continuum of care, the result has been a significant decrease in occupancy
rates and average lengths of stay for inpatient facilities and an increase in
outpatient treatment and alternative care services.
According to Open Minds, a leading behavioral healthcare industry
publication, as of January 1996, approximately 124.7 million beneficiaries
(67.8% of the approximately 184 million American beneficiaries covered under
health insurance, excluding Medicare) were covered by some form of specialty
behavioral health managed care plan (i.e., a program typically operated by a
vendor specializing in behavioral health managed care services). This figure has
grown from 78 million beneficiaries in 1992, representing an approximate 12%
compound annual growth rate.
Segmentation
Open Minds divides the behavioral healthcare industry into the following
categories of care, based on services provided, extent of care management and
level of risk assumption:
Beneficiaries
(In Percent
Category of Care Millions)(1) of Total
- ------------------------------------- --------------- -----------
Utilization Review/Case Management Programs 38.0 30.5%
Non-Risk-Based Network Programs.......... 29.2 23.4
Risk-Based Network Programs.............. 27.4 22.0
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EAPs..................................... 20.2 16.2
Integrated Programs...................... 9.9 7.9
------------ -----------
Total.................................... 124.7 100.0%
- ------------
(1) Source: Open Minds: Managed Behavioral Health Market Share in
the United States, Gettysburg, Pennsylvania (1996).
These categories of care are described briefly below:
Utilization Review/Case Management Programs. Under utilization review/case
management programs, a behavioral health managed care company manages and often
arranges for treatment, but does not assume any of the responsibility for the
cost of providing treatment services. These programs are typically categorized
as administrative services only ("ASO") programs.
Non-Risk-Based Network Programs. Under non-risk-based network programs,
which also are typically categorized as ASO programs, the behavioral health
managed care company provides a full array of managed care services, including
selecting, credentialling and managing a network of providers (such as
psychologists, psychiatric hospitals, substance abuse clinics, etc.), and
performs utilization review, claims administration and case management
functions; however, the third-party payor remains responsible for the cost of
providing the treatment services rendered.
Risk-Based Network Programs. Under risk-based network programs, the
behavioral health managed care company assumes all or a portion of the
responsibility for the cost of providing a full or specified range of treatment
services. Most of these programs have payment arrangements in which the
behavioral health managed care company agrees to provide services in exchange
for a fixed fee per covered member per month (a "capitated" program) that varies
depending on the profile of the beneficiary population, or otherwise shares the
responsibility for providing all or some portion of the treatment services at a
specific cost per person. Under these programs, the behavioral health managed
care company not only approves and monitors a course of treatment, but also
arranges and pays for the provision of patient care (either through its
third-party network providers or staff providers or some combination thereof).
Employee Assistance Programs. An EAP is a worksite-based program designed
to assist in the early identification and resolution of productivity problems
associated with behavioral conditions or other personal concerns of employees.
Under an EAP, staff or network providers or other affiliated clinicians provide
assessment and referral services to employee beneficiaries. These services
consist of evaluating a patient's needs and, if indicated, providing limited
counseling and/or identifying an appropriate provider, treatment facility or
other resource for more intensive treatment services.
Integrated EAP/Behavioral Health Managed Care Programs. EAPs are utilized
in a preventive role and in facilitating early intervention and brief treatment
of behavioral healthcare problems before more extensive treatment is required.
Consequently, EAPs often are marketed and sold in tandem with behavioral health
managed care programs through "integrated" product offerings. Integrated
programs offer employers comprehensive management and treatment of all aspects
of behavioral healthcare by consolidating EAP and managed care services into a
single program.
Trend Toward Integrated Behavioral Healthcare Organizations
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An integrated behavioral healthcare organization combines delivery of
treatment services directly to patients with behavioral health managed care
services. The advantage of this combination is the ability of an integrated
behavioral healthcare organization to manage care more efficiently and
cost-effectively than traditional behavioral health managed care companies by
providing services directly to beneficiaries, rather than arranging for the
delivery of care through contracts with network providers and treatment
facilities. As the behavioral health managed care market has developed, pressure
on behavioral health managed care companies to provide high quality care at more
competitive rates has begun to result in closer relationships between behavioral
health managed care companies and providers of care. The Company believes that,
in the future, these two groups will continue to join together through
acquisitions, joint ventures and other arrangements, thereby forming integrated
behavioral healthcare organizations.
Areas of Growth
Management believes that the behavioral health managed care industry is
growing across all patient segments, particularly with respect to capitated
programs, as payors of behavioral healthcare benefits are seeking to reduce the
costs of treatment and shift the responsibility for such costs to other
entities, while maintaining high quality care. The Company also expects the
number of beneficiaries covered under capitated programs to increase, as HMOs
increase their penetration of the healthcare services market. Management
believes that a number of opportunities exist in the behavioral health managed
care industry for future growth, particularly in the Medicaid, Medicare and
uninsured markets.
Medicaid Market. Medicaid is a joint state and federally funded program to
provide healthcare benefits to approximately 36 million low income individuals,
including welfare recipients. A 1995 article in Health Care Financing Review
reported that, from 1991 to 1994, federal and state Medicaid spending increased
at an average annual rate of approximately 11%, as compared to an annual
increase in overall healthcare spending of approximately 7.5%. Moreover,
Medicaid costs were projected to rise from an estimated $138.4 billion in 1995
to $333.4 billion in 2005. State Medicaid programs have recently begun to shift
beneficiaries into managed care programs in order to control rising costs.
Despite the increase in managed care enrollment of Medicaid beneficiaries,
the Medicaid market remains unpenetrated to a large extent by managed care
organizations. As of June 1995, according to the Health Care Financing
Administration ("HCFA") of the United States Department of Health and Human
Services, only approximately 32% of all Medicaid beneficiaries were enrolled in
some form of managed care program. The Company expects the number of Medicaid
recipients enrolled in behavioral health managed care programs to increase
through two avenues: (i) subcontracts with HMOs and (ii) direct contracts with
state agencies. As HMOs increase their penetration of the Medicaid market, the
Company expects that many HMOs will continue to (or begin to) subcontract with
behavioral health managed care companies to provide services for Medicaid
beneficiaries. State agencies have also begun to contract directly with
behavioral health managed care companies to provide behavioral healthcare
services to their Medicaid beneficiaries. At least five states have already
"carved out" behavioral healthcare from their overall Medicaid programs and have
contracted directly with behavioral health managed care companies to provide
these services. As of October 1996, 15 other states had received approval from
HCFA for a Section 1115 waiver that would allow those states to implement
mandatory statewide Medicaid managed care programs, while 11 other states were
seeking similar approval.
Medicare Market. Medicare is a federally funded healthcare program for the
elderly. Medicare has experienced an increase in its beneficiary population over
the past several years, as well as rapidly escalating healthcare costs.
According to the Congressional Budget Office, Medicare spending has been
projected to increase from an estimated $176 billion in 1995 to $460 billion by
2005. Currently, only
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approximately 4.6 million, or 12.3%, of the approximately 37.4 million eligible
Medicare beneficiaries are enrolled in managed care programs. While enrollment
has increased from approximately 7% of the eligible Medicare beneficiaries in
1993, it is still considerably below that of the commercial and Medicaid
populations. Management believes that in response to increased healthcare costs,
the Medicare market will shift into managed care programs in the future. To the
extent that managed care plans increase their penetration among the Medicare
beneficiary population, the Company believes the Medicare market will continue
to represent an opportunity for growth among behavioral health managed care
companies.
Uninsured Market. In 1995, approximately 41 million people, or 15% of the
nation's total population, were not covered by any form of health insurance.
Recently, certain states have enacted mandatory health insurance programs that
automatically enroll all uninsured persons in managed care plans. To the extent
that managed care plans increase their penetration among this large uninsured
population, the Company believes that the uninsured market will continue to
represent an opportunity for growth among behavioral health managed care
companies.
GROWTH STRATEGY
The Company's objective is to expand its presence in both existing and new
behavioral health managed care markets by building on MBC's (i) proven clinical
care methodology, (ii) leading position and experience in managing capitated
programs, (iii) diverse and expanding customer base, particularly with respect
to HMOs and corporations, and (iv) experienced and clinically-oriented
management team. As part of its strategy, the Company intends to:
Continue to Pursue Capitated Contracts. Management believes MBC is the
leading provider of capitated managed care programs, covering over twice
as many beneficiaries under risk-based programs as its closest competitor.
As of January 1996, according to Open Minds, only 22% of all beneficiaries
covered by specialty behavioral health managed care programs were enrolled
in risk-based or capitated programs. The Company believes that the market
for capitated managed care services will continue to increase at a more
rapid rate than the overall market for behavioral health managed care
services because capitated compensation arrangements allow payors to
reduce their risk with respect to the cost of providing behavioral
healthcare services while continuing to provide access to high quality
care. Management believes that MBC's past experience and success in
managing capitated contracts for HMOs, corporations and other payors, as
well as its leading capitated market position, will enable MBC to benefit
from the expected market growth in capitated programs.
Increase Penetration of Medicaid Market. The Company believes that the
Medicaid market offers the greatest opportunity for growth in the
behavioral health managed care industry over the near term. Management
believes that as more state governmental agencies turn to managed care
organizations to administer their Medicaid programs, MBC's expertise in
managing capitated programs, its developing experience in managing
Medicaid populations and its existing business relationships with HMOs,
place the Company in a position to capitalize on this potential growth
opportunity. MBC currently manages care for Medicaid beneficiaries in
connection with the State of Iowa's Mental Health Access Program (the
"Iowa Medicaid Program") and the State of Tennessee's TennCare Partners
Program ("TennCare"), and also has contracts with HMOs focused on Medicaid
beneficiary populations in eight other states.
Expand Direct Treatment Services Capability. The Company intends to
further develop its capability to provide behavioral healthcare
treatment services directly to beneficiaries through its
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subsidiary, Continuum Behavioral Healthcare Corporation ("Continuum"). The
Company has entered, and intends to continue to enter, into acquisitions,
joint ventures and other arrangements with providers and facilities with
the objective of creating broad, integrated regional and local provider
and facility networks. Through this strategy, the Company hopes to enhance
its ability to bid for and more efficiently operate capitated managed care
programs, as well as to market Continuum's direct treatment services to
third-party payors of behavioral healthcare benefits, including other
managed care companies.
PROGRAMS AND SERVICES
The following table sets forth the number of beneficiaries covered by MBC
for each type of program offered as of September 30, 1996, and the revenue
attributable to each such program in fiscal 1996:
<TABLE>
<CAPTION>
Programs Beneficiaries Percent Revenue Percent
(In Millions, Except Percentages)
<S> <C> <C> <C> <C>
Capitated Programs.................. 8.2 52% $ 334.2 73%
EAPs................................ 3.8 25 46.9 10
Integrated Programs................. 2.4 15 40.4 9
ASO Programs........................ 1.3 8 13.0 3
Other............................... - - 23.3 5
------ ------- -------- -----
Total............................ 15.7 100% $ 457.8 100%
==== ==== ======= =====
</TABLE>
Capitated Programs. Under the Company's risk-based or "capitated"
programs, the Company typically arranges for the provision of a full range of
outpatient, intermediate and inpatient treatment services to beneficiaries of
its customers' healthcare benefit plans, primarily through fee arrangements in
which MBC assumes all or a portion of the responsibility for the cost of
providing such services. The Company arranges for the provision of treatment
services pursuant to a managed network model, under which care is delivered by
third-party network providers and, where appropriate, the Company's staff
providers. Management believes that the Company's mix of third-party network and
staff providers, as well as its experience in pricing capitated contracts and
managing the provision of care, allows it to structure programs to meet a
customer's specific healthcare benefits requirements.
Employee Assistance Programs. The Company's EAPs typically provide
assessment and referral services to employees of MBC's customers in an effort to
assist in the early identification and resolution of productivity problems
associated with employees who are impaired by behavioral conditions or other
personal concerns. For many EAP customers, MBC also provides limited outpatient
therapy (typically limited to eight or fewer sessions) to patients requiring
such services. For these services, the Company typically is paid a fixed fee per
member per month; however, the Company is usually not responsible for the cost
of providing care beyond these services. If further services are necessary
beyond limited outpatient therapy, the Company will refer the beneficiary to an
appropriate provider or treatment facility. A substantial majority of the
Company's existing customer contracts are EAP contracts. Management believes
that MBC is the leading provider (based on the number of beneficiaries covered)
of EAPs in the behavioral healthcare industry.
Integrated EAP/Behavioral Health Managed Care Programs. Under its
integrated programs, the Company typically establishes an EAP to function as the
"front end" of a managed care program that provides a full range of services,
including more intensive treatment services not covered by the EAP. The Company
usually manages the EAP and accepts all or some of the responsibility for the
cost of any
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additional treatment required upon referral out of the EAP, thus integrating the
two products and using both MBC's case management and clinical care techniques
to manage the provision of care.
ASO Programs. Under its ASO programs, the Company provides services
ranging from utilization review and claims administration to the arrangement for
and management of a full range of patient treatment services, but does not
assume any of the responsibility for the cost of providing treatment services.
CUSTOMERS, CONTRACTS AND MARKETING
Customers
The following table sets forth the number of beneficiaries covered by MBC
in each of its market segments as of September 30, 1996 and the revenue
attributable to each such segment for fiscal 1996:
<TABLE>
<CAPTION>
Market Beneficiaries Percent Revenue Percent
(In Millions, Except Percentages)
<S> <C> <C> <C> <C>
Corporations and Labor Unions... 6.7 43% $ 93.2 20%
HMOs(1)......................... 3.7 24 105.8 23
Blue Cross/Blue Shield and
Insurance Companies........ 3.0 19 88.1 19
Medicaid Programs............... 1.1 7 120.3 26
Governmental Agencies
(including CHAMPUS)....... 1.0 6 32.3 7
Other........................... .2 1 18.1 5
----- ----- ----- -----
Total....................... 15.7 100% $ 457.8 100%
==== ==== ===== ====
</TABLE>
---------------
(1) For purposes of this table, the HMO segment excludes HMOs that focus on
Medicaid, Civilian Health and Medical Program of the Uniformed Services
("CHAMPUS") or state employee plan beneficiary populations.
Contracts
The Company's contracts with customers typically have terms of one to five
years, and in certain cases contain renewal provisions (at the customer's
option) for successive terms of between one and two years (unless terminated
earlier). Substantially all of these contracts are immediately terminable with
cause and many, including the Company's agreement with the State of Iowa for the
Iowa Medicaid Program (the "Iowa Mental Health Contract"), the Company's
contract relating to the TennCare program and the Company's contracts in
connection with the Empire Joint Venture (as described below), are terminable
without cause by the customer either upon the provision of requisite notice and
the passage of a specified period of time (typically between 60 and 180 days) or
upon the occurrence of other specified events. In addition, the Company's
contracts with federal, state and local governmental agencies, under both direct
contracts and subcontract arrangements with HMOs, generally are conditioned upon
financial appropriations by one or more governmental agencies. These contracts
generally can be terminated or modified by the agency or HMO, as applicable, if
such appropriations are not made. In the ordinary course of business, the
Company's business arrangements with certain customers may continue beyond
expiration of the stated term of the applicable contracts while the terms of new
or renewed contracts are being negotiated. In such cases, the customer may
terminate the arrangements at any time.
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Marketing and Sales
The Company's marketing and sales organization is managed by the Company's
Chief Marketing Officer and is structured to address the Company's four
principal market segments: (i) HMOs; (ii) Blue Cross/Blue Shield organizations
and insurance companies, and federal, state and local governmental agency
employee programs (including CHAMPUS); (iii) corporations and labor unions; and
(iv) public entitlement programs (including Medicaid and Medicare). Each of
these four market segments is overseen by a General Manager who reports to the
Chief Marketing Officer. For each specific market, the Company employs
integrated teams of Sales Managers and Account Managers who work under the
supervision of the General Manager for that market. The Sales Managers and the
Account Managers, together with the Company's clinical management organization,
work closely to ensure that new customer programs are implemented successfully,
services delivered meet contract specifications and customer and member concerns
are promptly and effectively addressed.
The Company's sales and account management activities are supported by the
Company's Market Services staff, who assist in generating sales leads; prepare
proposals and responses to formal Requests for Proposals ("RFPs"); provide
product development support; perform competitive analyses; and train personnel
for program implementation. Marketing personnel also support the delivery of
services to existing accounts through assistance with program implementation and
development of customer communications materials such as program brochures,
summary plan descriptions and orientation documentation.
RECENT ACQUISITIONS, JOINT VENTURES AND OTHER SIGNIFICANT TRANSACTIONS
Empire. In September 1995, the Company invested $12.0 million to acquire
an 80% interest in a five-year joint venture (the "Empire Joint Venture") with
Empire Blue Cross and Blue Shield ("Empire") to provide behavioral health
managed care services in 28 counties in the State of New York to approximately
750,000 enrollees as of September 30, 1995. After the repayment of the Company's
initial investment and the direct payment by Empire to the Company of certain
administrative fees, risk charges and other amounts, the profits of the Empire
Joint Venture will be distributed 80% to MBC and 20% to Empire. In connection
with the Empire Joint Venture, Empire has the right at any time to require the
Company to purchase Empire's interest therein at a cash price equal to the fair
market value of such interest. In addition, Empire may terminate the Empire
Joint Venture at any time for convenience on written notice to the Company and
upon payment to the Company of a specified portion of the Company's $12.0
million investment (which portion declines over time and as repayments of such
investment are made to MBC during the life of the venture), together with up to
$2.0 million of expenses incurred by the Company in connection with the
termination of the venture.
Choate. In October 1995, a subsidiary of Continuum acquired Choate Health
Management, Inc. and certain related entities (collectively, "Choate"), a
Massachusetts-based integrated behavioral healthcare organization, for $8.7
million in cash at closing plus $1.3 million paid in July 1996. The Company may
be required to make additional payments relating to Choate based upon its future
financial performance.
ProPsych. In December 1995, the Company acquired ProPsych, Inc.
("ProPsych"), a Florida-based behavioral health managed care company. The
Company acquired ProPsych for an initial payment of $0.1 million, a payment of
$2.9 million in January 1996 and a final payment of $0.4 million in November
1996.
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Royal Health Care. In January 1996, the Company formed a joint venture
with the hospital sponsors of Neighborhood Health Providers LLC ("NHP") under
the name "Royal Health Care LLC" ("Royal"), in which each of the Company and NHP
holds 50% of the equity interests. Royal, in turn, and Empire have formed a
second joint venture company, Empire Community Delivery Systems LLC ("ECDS"), in
which Royal and Empire hold 33 1/3% and 66 2/3%, respectively, of the equity
interests. Empire and ECDS have entered into an agreement under which ECDS will
exclusively manage and operate, on behalf of Empire, healthcare benefit programs
(covering all services except behavioral healthcare and vision care) in the five
New York City boroughs for Medicaid beneficiaries enrolled in Empire plans. Each
of Empire and Royal will provide specified administrative and management
services to ECDS to support its delivery of services to Empire under such
agreement. Moreover, each of ECDS and Royal will hold specified equity interests
in certain independent practice associations (IPAs) providing treatment services
to the Empire Medicaid beneficiaries. In addition, Empire has entered into an
agreement with the Empire Joint Venture (80% of which is owned by the Company,
as described above) to exclusively provide all behavioral healthcare services in
New York City to such Empire Medicaid enrollees. The Royal and ECDS joint
ventures and related agreements have five-year terms, with up to three five-year
renewals (subject to applicable regulatory approvals). Each such venture and the
behavioral health agreement also contains customary termination provisions.
Prudential. In June 1996, the Company entered into an Alliance Agreement
(the "Alliance Agreement") with The Prudential Insurance Company of America
("Prudential"), under which Prudential selected the Company to provide
behavioral health managed care services to enrollees in specified Prudential
health benefit plans in certain areas of the country. The Alliance Agreement
contemplates that Prudential, from time to time, will designate geographic areas
in which the Company will provide such services. Pursuant to the Alliance
Agreement, to date the Company has been selected to service Prudential enrollees
in New York State, Connecticut and New Jersey (the "TriState Area"), North Texas
and Chicago, Illinois. The Company commenced providing services under the
program for North Texas August 1, 1996, the TriState Area September 5, 1996 and
Chicago December 1, 1996. The Alliance Agreement has an initial term of three
years and six months (expiring December 31, 1999), and will be automatically
renewed for a period of two years unless either party notifies the other that it
does not intend to renew the Alliance Agreement. The Alliance Agreement is
subject to certain rights of termination in favor of Prudential. Pursuant to a
separate agreement with Prudential, the Company assumed the responsibility for
providing services to those Prudential members currently serviced through
Prudential's service center operations in Houston, Texas. The Houston program
commenced August 1, 1996.
TennCare. In July 1996, the State of Tennessee implemented the TennCare
program, a mental health and substance abuse benefits program servicing
principally Medicaid eligibles and uninsured individuals residing in the State.
Two behavioral health organizations ("BHOs") were selected to provide services
in connection with such program. One such BHO is comprised of the Company and
Tennessee Behavioral Health, Inc. ("TBH"), a behavioral health company located
in Knoxville, Tennessee (the "TBH-MBC BHO") serving approximately 500,000
members as of September 30, 1996. The Company and TBH entered into an agreement
(the "BHO Agreement") under which they have agreed to operate a joint program to
service TennCare beneficiaries through such BHO. Pursuant to the BHO Agreement,
TBH entered into a direct contract with the State to service those TennCare
beneficiaries allocated to the TBH-MBC BHO; the Company, in turn, provides
designated services on behalf of TBH in performing its contract with the State.
Under the BHO Agreement, the Company will share in 51%, and TBH will share in
49%, of the profits and losses from their joint operation of the program, and
each of the Company and TBH holds one-half of the voting power on all program
decisions. The BHO Agreement provides that the TBH-MBC BHO will remain in effect
until the earlier of (i) the termination of the TennCare program or (ii) the
fourth anniversary of the BHO Agreement. The
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term of the TennCare program is 12 months commencing July 1, 1996 and
automatically renews for successive 12-month periods unless either party gives
notice of its intention not to renew. The contract between the State and TBH,
however, is subject to certain rights of termination in favor of the State,
including the right to terminate for convenience.
CHAMPUS Regions 7 and 8. In August 1996, TriWest Healthcare Alliance Corp.
("TriWest"), with which the Company previously entered into a Services Agreement
(the "Services Agreement") to provide behavioral health managed care services as
TriWest's subcontractor, entered into a prime contract with the Office of
CHAMPUS ("OCHAMPUS") to provide services to CHAMPUS beneficiaries in certain
geographic areas, principally in the southwest and midwestern United States,
designated as CHAMPUS Regions 7 and 8. This CHAMPUS program is expected to
service approximately 740,000 beneficiaries in such regions. The Services
Agreement has a term which is coterminous with that of TriWest's prime contract,
which has a term of one year with four option periods exercisable by OCHAMPUS.
The prime contract, however, is subject to certain rights of termination in
favor of OCHAMPUS, including the right of OCHAMPUS to terminate such contract
for convenience. Subject to certain rights of OCHAMPUS to delay implementation
of the program, this CHAMPUS program is expected to commence April 1, 1997 with
a phase-in period to begin prior to that date.
OPERATIONS
Administrative Structure
Divisional, Regional and Area Operations. The Company's behavioral health
managed care programs and EAPs are operated through an integrated service system
consisting of three divisions, which are organized into a national region and a
number of geographic regions (collectively, the "Regions"). These Regions are
divided into a number of separate area operations ("Areas"), with each Area
having independent administrative and management capabilities. All of the
Regions are supported by the Company's National Service Center, located in St.
Louis, Missouri (the "National Service Center"). MBC's National Region is
primarily responsible for servicing national corporate accounts. Particular
programs (such as state employee plans or Medicaid programs), however, require
local implementation due to the nature of the services provided or customer
requirements. Thus, each of the Areas delivers services to its local or regional
customers in a manner similar to the National Region's delivery of services on a
wider geographic scale to the Company's national accounts.
National Service Center. The National Service Center is an integral
component of MBC's administrative and clinical operations, serving as the
headquarters of the National Region and the center for policy decisions on key
clinical and operations matters nationwide. The National Service Center also is
responsible for providing back-up to the other Regions for certain aspects of
Regional administration, oversight and service delivery. Functions provided by
the National Service Center's 500-plus member support staff include:
Centralized Client Services. The National Service Center provides a
24-hour call center that performs after-hours crisis intervention. During
business hours, operators at the call center also serve as customer service
representatives, providing basic benefit and provider network information,
supporting claims payment activities and responding to customer inquiries.
Network Administration Services. The National Service Center
supports and coordinates provider network administration needs, including
credentialling and recredentialling functions, while Region and Area personnel
design and plan the Region's network, recruit and interview candidates,
negotiate contracts with providers and perform on-site examinations of potential
facility providers.
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Claims Administration Services. The National Service Center provides
centralized claims processing and payment services for most of the Company's
clients and programs. Processing claims includes verifying eligibility and third
party liability and coordinating payments with other third party payors.
Management Information Services. The National Service Center is
responsible for the operation, development and implementation of the Company's
management information systems, including the AMISYS(R) system described below.
Clinical Oversight. The Company's clinical management team is
located at the National Service Center and sets standards for all Region and
Area network personnel, including guidelines regarding contractual terms,
credentialling criteria and provider oversight procedures. In addition, the
National Service Center supports other clinical operations, including monitoring
of Area utilization performance, personnel training and quality management.
Clinical Care Operations
The Company manages care through a systematic, clinical approach with the
objective of diagnosing problems promptly and designing treatment plans to
ensure that patients receive the appropriate level of care in an effective and
cost-efficient manner. The fundamental principle of MBC's methodology in
managing care is that the efficacy, quality and cost-effectiveness of care are
enhanced by an accurate diagnosis and a targeted clinical assessment early in
the therapeutic process that is followed by appropriate treatment.
In order to access the Company's provider network, a beneficiary in need
of behavioral healthcare services typically initiates contact with the Company
by calling the appropriate toll-free telephone number, whereupon a specially
trained intake coordinator will assess the patient's eligibility and arrange for
inpatient admission or referral to an appropriate provider. Beneficiaries in
crisis will call the toll-free number or present themselves at an inpatient
facility, whereupon a clinician will assess the patient's needs and, if
indicated, arrange for an inpatient admission or a referral to an appropriate
provider. In both cases, the provider, in consultation with a clinical case
manager employed by the Company, will develop and implement a treatment plan
designed to meet the patient's needs. The designated provider and case manager
remain in contact throughout the course of the patient's treatment in an effort
to achieve an effective and efficient outcome. The provider's efficiency and the
quality of the treatment outcome are monitored by Company personnel, with a view
to determining which providers and treatment programs produce the highest
quality outcomes in the most efficient manner. As part of MBC's case management,
the Company's clinical services personnel prepare and review utilization reports
on a daily basis and monitor on a regular basis key clinical statistics, such as
referrals and facility admissions, average lengths of stay and recidivism.
The Company's clinical care program includes the following components:
Intake. Upon responding to a call to the Company's toll-free telephone
number, the intake coordinator asks a series of questions designed to assess
whether the beneficiary requires crisis intervention, verifies eligibility and
refers the caller to an appropriate provider. By having one individual verify
eligibility and arrange for referral to a provider, the process is streamlined
for the beneficiary and made cost-effective for MBC.
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Crisis Intervention. The Company provides crisis intervention on a 24-hour
basis. As part of these services, clinicians attempt to stabilize the patient's
condition, assess the patient's particular needs and, if indicated, make a
referral for services or authorize reimbursement for admission to an inpatient
facility.
Case Management. Typically, within 24 hours of a crisis inpatient
admission or after initial assessment by an outpatient provider, the provider
and MBC's case manager agree on a treatment plan for the patient. Throughout a
patient's full course of assessment and treatment, an MBC case manager
coordinates all aspects of the delivery of services with network providers and
facilities by consulting with the providers regarding a course of treatment. The
Company's case management procedures are based on comprehensive and flexible
clinical guidelines and treatment protocols that are developed internally and
are consistent with established industry standards. Intake coordinators and case
managers are supervised by the Company's senior clinical staff, who are
available for consultation and review the work of case managers and offer advice
and suggestions for improvement. Where required, standardized inpatient case
management procedures and protocols of the Company have been accredited by the
Utilization Review Accreditation Committee ("URAC"), an independent organization
based in Washington, D.C.
Quality Management. MBC has procedures in place to monitor quality
assurance (including the recruitment, credentialling, recredentialling, hiring
and orientation of providers and facilities), quality assessment (including
continuous audits of clinical utilization data, telephonic response times and
claims accuracy) and quality improvement (such as provider profiling and problem
identification and resolution). The Company's quality management program begins
with the initial selection of network and staff providers. Candidates for these
positions must satisfy an extensive set of professional and experience
requirements. In addition, many of the Company's providers also complete an
interview process designed to evaluate the practitioner's knowledge of clinical
principles and standards of ethical behavior. Staff providers typically are
required to complete orientation training in the Company's treatment philosophy
and administrative practices and are expected to participate in periodic
continuing education sessions. Network providers typically must participate in
periodic case conferences and accrue accredited continuing education credits to
enhance their skills in a behavioral health managed care delivery system. The
Company's continuing education programs are accredited by the American
Psychological Association for continuing education credit and by the Institute
of Behavioral Healthcare for continuing education units.
NETWORK AND STAFF PROVIDERS; FACILITIES
The Company's behavioral health managed care and EAP treatment services are
provided by a combination of third-party network providers and treatment
facilities as well as staff providers. Network and staff providers include a
variety of specialized behavioral healthcare personnel such as psychiatrists,
psychologists, licensed clinical social workers, substance abuse counselors and
other professionals.
Network Providers. As of September 30, 1996, MBC had contractual
arrangements with approximately 30,000 third-party network providers. MBC's
network providers are independent contractors located throughout the local areas
in which MBC's customer's beneficiary populations reside. Network providers work
out of their own offices, although staff providers and other resources of the
Company are available to assist them with consultation and other needs. Network
providers include both individual practitioners, as well as group practices or
other licensed centers or programs. Network providers typically execute standard
contracts with the Company for which they are typically paid by the Company on a
fee-for-service basis. In some cases, network providers are paid on a "case
rate" basis, whereby the provider is paid a set rate for an entire course of
treatment, or through other risk sharing
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arrangements. A network provider's contract with the Company typically has a
one-year term, with automatic renewal at the Company's option for successive
one-year terms, and generally may be terminated without cause by the Company or
the provider upon 30 to 90 days notice.
Staff Providers. Staff providers are behavioral healthcare practitioners
employed by the Professional Corporations to provide behavioral treatment
services principally to covered beneficiaries of certain MBC customers under
contracts between the Professional Corporations and the Company. As of September
30, 1996, the Professional Corporations employed approximately 450 staff
providers. Certain staff providers are also responsible for the supervision of
network providers, crisis assessment and monitoring compliance with the
Company's quality management procedures. The Company pays the Professional
Corporations a professional service fee under a participating provider
agreement; individual staff providers are paid by their respective Professional
Corporations on a salary basis. In addition, the Company provides certain
administrative and management services to each Professional Corporation under
separate administrative services agreements. These agreements between the
Company and each Professional Corporation typically have a one-year term that
automatically renews for successive one-year terms and generally may be
terminated by the Company upon 30 days notice following a substantial decrease
in enrollment of beneficiaries of plans to which the Professional Corporation
provides services.
Facilities. As of September 30, 1996, MBC had contractual arrangements
with approximately 2,400 third-party treatment facilities, including inpatient
psychiatric and substance abuse facilities, intensive outpatient programs,
partial hospitalization facilities, community health centers and other
community-based programs, rehabilitative and support programs, and other
intermediate care and alternative care facilities or programs. This variety of
facilities and programs enables the Company to offer patients a full continuum
of care and refer patients to the most appropriate facility or program within
that continuum. Typically, the Company contracts with facilities on a per diem
or fee-for-service basis and, in some cases, on a "case rate" or capitated
basis. The contracts between the Company and inpatient and other facilities
typically are for one year terms and, in some cases, are automatically renewable
at the Company's option. Facility contracts are usually terminable by the
Company upon 30 to 120 days notice.
INFORMATION SYSTEMS
The Company has dedicated substantial resources to implementing and
utilizing information systems required to manage the delivery of care in a
cost-effective manner. Because the Company has grown in part through recent
acquisitions, the Company currently employs a number of different information
systems in the operation of its behavioral health managed care and EAP business.
Although functionally independent of one another, together these systems enable
the Company to track program enrollee membership and verify beneficiaries'
eligibility for coverage, access program benefits, record and monitor
authorizations for treatment and cost of care, and process and pay claims. In
its current operations, the Company utilizes five primary systems: (i) servers,
supporting the delivery of services to certain of the Company's HMO, federal,
state and local governmental agency, and Blue Cross/Blue Shield organization and
insurance company customers; (ii) a system operating on a Hewlett-Packard
HP/9000 platform, supporting the delivery of services principally to certain of
the Company's HMO and insurance company customers; (iii) an IBM AS/400 system,
supporting the delivery of services principally to the Company's EAP and
integrated/EAP managed care customers; (iv) a DEC VAX 4500 system, supporting
the delivery of services principally to customers in the State of Texas; and (v)
AMISYS(R), a new, centralized system operating on a Hewlett-Packard HP/3000
platform which is intended to more fully integrate the Company's operations and
achieve additional efficiencies in the overall management of care.
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The Company believes that AMISYS(R) will enable the Company's intake
coordinators, clinical case managers and claims reviewers to more efficiently
determine eligibility for coverage, authorize and manage treatment and
adjudicate and process claims. The Company also believes AMISYS(R) will enhance
the services provided to both its customers and beneficiaries while creating
cost efficiencies for the Company by, among other things, measuring the
effectiveness of providers and treatment programs, monitoring outcomes and
enabling the Company to customize networks and rate structures. It is MBC's
intention to utilize AMISYS(R) to support most significant programs implemented
by MBC in the foreseeable future. The Company licenses AMISYS(R) from Amisys,
Inc.; however, the Company has made approximately $10 million of proprietary
enhancements to AMISYS(R) in order to adapt AMISYS(R) for use in the Company's
business.
To assist in the implementation of, and transition of its other four
systems to, AMISYS(R), MBC entered into an AMISYS Implementation and Systems
Integration Services Agreement with Perot Systems Corporation ("Perot") in
January 1996 (the "Perot Agreement"). As contemplated by the Perot Agreement,
the Company, utilizing both MBC and Perot personnel, has discontinued its use of
most of the servers formerly operating in its Area offices and replaced such
systems with AMISYS(R). In addition, the Company also intends to discontinue use
of its Hewlett-Packard HP/9000 platform and replace it with AMISYS(R) over the
next few years. The Company, with Perot's assistance, also began to utilize
AMISYS(R) to support certain of MBC's current programs during calender 1996, and
implemented AMISYS(R) in a number of additional locations during the year to
service new business.
CONTINUUM AND INTEGRATED BEHAVIORAL HEALTHCARE ORGANIZATION
STRATEGY
The Company is continuing to pursue its integrated behavioral healthcare
organization strategy by building its direct healthcare delivery system
capabilities through Continuum. The Company has begun to develop integrated
delivery systems in selected geographic markets to provide treatment services
directly to beneficiaries of healthcare benefit plans, in part by expanding
staff offices in certain areas and increasing efficiency through more stringent
clinical policies and supervision. In addition to its staff office base, the
Company is building its direct delivery system capabilities through
acquisitions, joint ventures and exclusive marketing and other arrangements with
provider groups to enable the Company to provide a wide range of behavioral
health treatment services in particular geographic areas, from outpatient care
through intermediate levels of care (such as partial hospitalization, intensive
outpatient programs and residential treatment programs) to inpatient care. For
example, in January 1994, the Company established a close affiliation with
Washton Institute, an alcoholism and substance abuse clinical operation that has
been a long-standing member of the Company's provider network in the New York
metropolitan area. Washton Institute is a central component of the Company's
plan to develop its integrated delivery capabilities in the New York City area.
The Company intends to establish other clinical practices based on the Washton
Institute model in other regions of the country. In addition, in October 1995,
the Company acquired Choate. The Company intends to build upon Choate's
significant presence in New England and expand Choate's integrated delivery
system into states in which MBC has significant business.
By providing care in an integrated setting, the Company expects to be able
to deliver more focused, higher quality services to better meet each patient's
individual needs. By both managing care and providing treatment services, the
Company intends to more effectively manage the delivery of services along the
full continuum of care, improve the quality and cost-effectiveness of services,
enhance its ability to market programs and enter new markets, market Continuum
as a treatment provider to payors and other managed care companies, and capture
a higher percentage of behavioral healthcare spending. Some of the Company's EAP
contracts require the Company to refer beneficiaries under those
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EAPs to staff providers; however, certain of the Company's EAP contracts
prohibit the Company from making such referrals. These prohibitions will limit,
to an extent, the Company's ability to provide services to such beneficiaries
through Continuum.
COMPETITION
The industry in which the Company conducts its business is highly
competitive. The Company competes with large insurance companies, HMOs,
preferred provider organizations ("PPOs"), third-party administrators ("TPAs"),
provider groups and other managed care companies. Many of the Company's
competitors are significantly larger and have greater financial, marketing and
other resources than the Company, and some of MBC's competitors provide a
broader range of services. The Company may also encounter substantial
competition in the future from new market entrants. Many of the Company's
customers that are managed care companies may, in the future, seek to provide
behavioral health managed care and EAP services to their employees or
subscribers directly or through affiliated organizations, rather than
contracting with the Company for such services. In addition, Continuum competes
with a wide range of large and established providers of behavioral healthcare
treatment services, most of which have greater experience in the delivery of
care, and many of which have greater financial and other resources. Because of
competition, the Company does not expect to be able to rely on price increases
to achieve revenue growth and expects to continue experiencing pressure on
direct operating margins.
EMPLOYEES
As of September 30, 1996, the Company employed approximately 2,800 persons
who perform executive and administrative functions and engage in marketing and
sales, clinical, development, customer service and other activities. The
Professional Corporations employed approximately 485 additional persons,
approximately 450 of whom are staff providers, on such date. None of the
employees of the Company or the Professional Corporations is covered by a
collective bargaining agreement. The Company considers its relationships with
its employees to be good.
INSURANCE
The Company currently maintains professional liability insurance with per
claim and aggregate coverage limits per annual term of the policy. The policy is
subject to self-insured retentions on a per claim basis and on an aggregate
basis and must be renewed annually. The policy is a "claims made" policy,
meaning that if a person were to file suit against the Company after the term of
the policy with respect to an alleged injury that occurred while the policy was
in force, the policy would not cover any costs or judgments arising therefrom.
The Company renewed the policy effective October 6, 1996 for a one-year term.
The Company's professional liability policy also covers the Professional
Corporations and certain of the Company's administrative staff that provide
services to the Company. The current coverage terms have been in effect since
January 1, 1994.
With the exception of certain EAP providers, as described below, it is the
Company's policy to require each network and staff provider to carry
professional liability insurance in a minimum amount per claim and in a minimum
aggregate amount per year for physicians and doctoral level psychologists, as
well as all other providers. Historically, the Company has provided professional
liability insurance for its EAP providers. The Company has, however, begun to
phase out such coverage and to require its EAP providers to carry their own
professional liability insurance in the same amounts as the Company requires its
staff providers to carry.
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All of the insurance coverage described above is subject to various
coverage limits, self-insured retentions and other conditions and limitations.
There can be no assurance that any such insurance will be sufficient to cover
any judgments, settlements or costs relating to any actions or claims, or that
any such insurance will be available to the Company or its network or staff
providers in the future on favorable terms, if at all. If the Company or its
providers are unable to secure adequate insurance in the future, or if the
insurance carried by the Company or its providers is not sufficient to cover any
judgments, settlements or costs relating to any present or future actions or
claims, there is no assurance that the Company or its providers will not be
subject to other liabilities which might have a material adverse effect on the
Company.
The Company also maintains general liability, property, automobile,
workers compensation and other insurance. The Company believes that it maintains
insurance coverage customary in the behavioral healthcare services industry, and
that such insurance is adequate as to the risks covered and the amounts of
coverage.
REGULATION
The managed healthcare industry and the provision of behavioral healthcare
treatment services are subject to extensive and evolving state and federal
regulation. The Company is subject to certain state laws and regulations,
including those governing: (i) the licensing of insurance companies, HMOs, PPOs,
TPAs and companies engaged in utilization review; (ii) the licensing of
healthcare professionals, including restrictions on business corporations from
practicing, controlling or exercising excessive influence over behavioral
healthcare services through the direct employment of psychiatrists or, in a few
states, psychologists and other behavioral healthcare professionals; and (iii)
the establishment and operation of behavioral healthcare programs, clinics and
facilities. These laws and regulations vary considerably among states, and the
Company may be subject to different types of laws and regulations depending on
the specific regulatory approach adopted by each state to regulate the managed
care business and the provision of behavioral healthcare treatment services. In
addition, the Company is subject to certain state and federal laws by virtue of
its relationships with its staff and network providers and with certain
customers, such as governmental agencies and HMOs maintaining health benefits
programs for Medicaid and Medicare beneficiaries, and as a result of the role
the Company assumes in connection with managing its customers' employee benefit
plans.
The Company believes its operations are structured to materially comply
with applicable laws and regulations, and that it has received, or is in the
process of applying for, all licenses and approvals that are material to the
operation of its business. However, regulation of the managed healthcare
industry is evolving, with new legislative enactments and regulatory initiatives
at the state and federal levels being implemented on a regular basis.
Consequently, it is possible that a court or regulatory agency may take a
position under existing or future laws or regulations, or as a result of a
change in the interpretation thereof, that such laws or regulations apply to the
Company in a different manner than the Company believes such laws or regulations
apply. Moreover, any such position may require significant alterations to the
Company's business operations in order to comply with such laws or regulations,
or interpretations thereof. Expansion of the Company's business to cover
additional geographic areas, to serve different types of customers, to provide
new services or to commence new operations could also subject the Company to
additional licensure requirements and/or regulation.
Licensure. Certain regulatory agencies having jurisdiction over the
Company possess discretionary powers when issuing or renewing licenses or
granting approval of proposed actions such as mergers, a change in ownership,
transfer or assignment of licenses and certain intracorporate transactions. One
or multiple agencies may require as a condition of such licensure or approval
that the
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Company cease or modify certain of its operations in order to comply with
applicable regulatory requirements or policies. In addition, the time necessary
to obtain licensure or approval varies from state to state, and difficulties in
obtaining a necessary licensure or approval may result in delays in the
Company's plans to expand operations in a particular state and, in some cases,
lost business opportunities. Compliance activities, mandated changes in the
Company's operations, delays in the expansion of the Company's business or lost
business opportunities as a result of regulatory requirements or policies could
have a material adverse effect on the Company.
Insurance, HMO and PPO Activities. To the extent that the Company operates
or is deemed to operate in one or more states as an insurance company, HMO, PPO
or similar entity, it may be required to comply with certain laws and
regulations that, among other things, may require the Company to maintain
minimum levels of deposits, capital, surplus, reserves or net worth. In many
states, entities that assume risk under contracts with licensed insurance
companies or HMOs have not been considered by state regulators to be conducting
an insurance or HMO business. As a result, the Company has not sought licensure
as either an insurer or HMO in certain states. The National Association of
Insurance Commissioners (the "NAIC") has undertaken a comprehensive review of
the regulatory status of entities arranging for the provision of healthcare
services through a network of providers that, like the Company, may assume risk
for the cost and quality of healthcare services, but that are not currently
licensed as an HMO or similar entity. The NAIC initiative will likely result in
the adoption of a model NAIC regulation in the areas of health plan standards
and financial solvency standards for such entities, which could be adopted by
individual states in whole or in part. Individual states have also recently
adopted their own regulatory initiatives that generally subject entities such as
the Company to additional regulation in the area of insurance or HMO standards,
including but not limited to requiring licensure, and greater financial solvency
protections. These laws and regulations may also limit the ability of the
Company to pay dividends, make certain investments and repay certain
indebtedness. Licensure as an insurance company, HMO or similar entity could
also subject the Company to regulations governing reporting and disclosure,
mandated benefits, and other traditional insurance regulatory requirements. PPO
regulations to which the Company may be subject typically require the Company to
register with the state and provide information concerning its operations,
particularly relating to provider and payor contracting. Based on the
information presently available to it, the Company does not believe that the
imposition of requirements related to maintaining prescribed levels of deposits,
capital, surplus, reserves or net worth, or complying with other regulatory
requirements applicable to its insurance company, HMO, PPO or similar
operations, would have a material adverse effect on the Company. Notwithstanding
the foregoing, the imposition of such requirements increases the Company's cost
of doing business and can delay the Company's conduct or expansion of its
business in some areas. In addition, failure by the Company to obtain and
maintain required licenses typically also constitutes an event of default under
the Company's contracts with its customers. The loss of business from one or
more of the Company's major customers as a result of such an event of default or
otherwise could have a material adverse effect on the Company.
Utilization Review and Third-Party Administrator Activities. Numerous
states in which the Company does business have adopted, or are expected to
adopt, regulations governing entities engaging in utilization review and TPA
activities. Utilization review regulations typically impose requirements with
respect to the qualifications of personnel reviewing proposed treatment,
timeliness and notice of the review of proposed treatment, and other matters.
TPA regulations typically impose requirements regarding claims processing and
payments and the handling of customer funds. Utilization review and TPA
regulations may increase the Company's cost of doing business in the event that
compliance therewith requires the Company to retain additional personnel to meet
the regulatory requirements and to take other required actions and make
necessary filings. Although compliance with utilization review regulations has
not had a material adverse effect on the Company, there can be no assurance that
specific
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regulations adopted in the future would not have such a result, particularly
since the nature, scope and specific requirements of such provisions vary
considerably among states that have adopted regulations of this type.
There is a trend among states to require licensure or certification of
entities performing utilization review or TPA activities; however, certain
federal courts have held that such licensure requirements are preempted by the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). ERISA
preempts state laws that mandate employee benefit structures or their
administration, as well as those that provide alternative enforcement
mechanisms. The Company believes that certain of its activities performed for
its self-insured employee benefit plan customers are exempt from otherwise
applicable state licensing or registration requirements based upon federal
preemption under ERISA and has relied on this general principle in determining
not to seek licensure for certain of its activities in many states. Existing
case law is not uniform on the applicability of ERISA preemption with respect to
state regulation of TPA activities. There can be no assurance that additional
licensure will not be required with respect to utilization review or TPA
activities in certain states.
"Any Willing Provider" Laws. Several states in which the Company does
business have also adopted, or are expected to adopt, "any willing provider"
laws. Such laws typically impose upon insurance companies, HMOs or other types
of third-party payors an obligation to contract with, or pay for the services
of, any healthcare provider willing to meet the terms of the payor's contracts
with similar providers. The Company is not subject to such laws in any states in
which it currently does business, although it has undertaken to comply with any
willing provider contracting requirements at the request of certain customers.
In addition, the Company could become subject to such laws in the future if they
are adopted by states in which the Company is licensed as an insurance company,
HMO or similar entity, or if the Company's customers become subject to such
laws. Compliance with any willing provider laws could significantly increase the
Company's costs of contracting with providers and have a material adverse effect
on its operations.
Professional Services. The provision of behavioral healthcare treatment
services by psychiatrists, psychologists and other providers is subject to state
regulation with respect to the practice of licensed healthcare professionals,
limitations on the ability of business corporations to directly provide, control
or exercise excessive influence over the services of licensed healthcare
professionals, and limitations on fee-splitting and payments for referrals.
Although under the Company's programs all direct clinical services other than
brief counseling services typically are provided by licensed professionals who
are either staff providers employed by or under contract with one of the
Professional Corporations, or are network providers under independent contractor
arrangements with the Company, state regulatory authorities or courts may in
certain instances determine that these relationships between the Company and the
Professional Corporations are unenforceable. With respect to the Company's
crisis intervention program, additional licensure of clinicians who provide
telephonic assessment or stabilization services to beneficiaries who are calling
from out-of-state may be required if such assessment or stabilization services
are deemed by regulatory agencies to be treatment provided in the beneficiary's
state. The Company believes that it could, if necessary, restructure its
operations to comply with changes in the interpretation or enforcement of such
laws and regulations, and that such restructuring would not have a material
adverse effect on its operations. However, the risk of such a determination
could grow as the Company expands its relationships with providers.
In contrast to certain states, regulators in several states in which the
Company does business have adopted policies that require HMOs or, in some
instances, insurance companies, to contract directly with licensed healthcare
providers, entities or provider groups, such as IPAs, for the provision of
treatment services, rather than with unlicensed intermediary companies. In such
states, the Company's
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customary model of contracting directly with its customers may need to be
modified so that, for example, the Professional Corporations or IPAs (rather
than the Company) contract directly with the HMO or insurance company, as
appropriate, for the provision of treatment services. The Company intends to
work with a number of these HMO customers to restructure existing contractual
arrangements, upon contract renewal or in renegotiations, so that the entity
which contracts with the HMO directly is a Professional Corporation or IPA. The
Company does not expect this method of contracting to have a material adverse
effect on its operations.
The Company's business is affected indirectly by regulations imposed upon
healthcare providers and the Company's customers. Regulations imposed upon
healthcare providers include provisions relating to the conduct of, and ethical
considerations involved in, the practice of psychiatry, psychology, social work
and related behavioral healthcare professions and, in certain cases, the common
law duty to warn others of danger or to prevent patient self-injury.
Confidentiality and patient privacy requirements are particularly strict in the
field of behavioral healthcare services, and additional legislative initiatives
relating to confidentiality are expected. Regulations imposed upon the Company's
customers include, among other things, benefits mandated by statute, exclusions
from coverages prohibited by statute, procedures governing the payment and
processing of claims, record keeping and reporting requirements, requirements
for and payment rates applicable to coverage of Medicaid and Medicare
beneficiaries, provider contracting and enrollee rights, and confidentiality
requirements. While the Company believes that such regulations do not at present
materially impair the Company's operations, there can be no assurance that such
indirect regulation will not have a material adverse effect on the Company in
the future.
Healthcare Programs, Clinics and Facilities. The Company is also
generally affected directly by regulations applicable to the operation of
healthcare programs, clinics and facilities. Regulations governing the operation
of behavioral health programs, clinics and facilities include provisions
relating to program, clinic or facility design, ownership, operation, treatment
procedures and medical records. In some instances, state laws require ownership
of clinics or facilities by licensed practitioners or individuals (rather than
corporations). In such cases, the Company maintains its relationship with the
clinic or facility other than through direct shareholder status, such as through
management services agreements between the Company and the Professional
Corporations. If the Company's contractual relationships with the licensed
clinics or facilities are deemed to convey an improper ownership interest in, or
improper control of, the clinic or facility, changes in the Company's operations
in the affected states could be required, and such contracts could potentially
be unenforceable. The existence of such restrictions in a given state may
present greater risks and may limit business opportunities as the Company
endeavors to expands its relationships with providers. Such restrictions could
have a material adverse effect on the Company.
ERISA. Certain of the Company's services are subject to the provisions of
ERISA. ERISA governs certain aspects of the relationship between
employer-sponsored healthcare benefit plans and certain providers of services to
such plans through a series of complex laws and regulations that are subject to
periodic interpretation by the Internal Revenue Service and the Department of
Labor. In some circumstances, and under certain customer contracts, the Company
may be expressly named as a "fiduciary" under ERISA, or be deemed to have
assumed duties that make it an ERISA fiduciary, and thus be required to carry
out its operations in a manner that complies with ERISA requirements. The
Company believes that it complies with ERISA requirements in all material
respects, and that continuing ERISA compliance efforts will not have a material
adverse effect on the Company.
Medicaid and Medicare. The Company provides and may in the future provide
services to some program beneficiaries who are also beneficiaries of the
Medicaid program, the Medicare program, other
21
<PAGE>
government sponsored healthcare programs, such as CHAMPUS, or the Federal
Employees Health Benefits Program. The Company's compensation for services
provided to such beneficiaries has historically been governed by the contracts
with its customers having government program recipients, as applicable, enrolled
in their healthcare benefits plans. Such customers typically have been either
governmental agencies or HMOs. The Company must also comply with any cost
reporting or other reporting requirements imposed by such government sponsored
programs, as well as any reimbursement limitations on what it may charge the
program or program beneficiaries. Such requirements may limit the amount of
reimbursements that MBC may receive from these programs or subject the Company
to periodic audits. The compensation received by the Company for such services
under its private customer contracts generally has not been affected by Medicaid
or Medicaid fee schedules or similar cost containment measures; however, the
Company's provision of services to Medicaid beneficiaries, or beneficiaries of
other government sponsored healthcare plans, through direct contracts with
federal, state or local government agencies, is affected by such measures, and
there can be no assurance that future legislation will not materially adversely
affect the Company's compensation for services provided to beneficiaries of
government sponsored healthcare programs under contracts with either government
agencies or HMOs or other similar entities.
The provision of services to beneficiaries of federally funded healthcare
programs may also subject the Company to various federal "fraud and abuse" laws,
including "anti-kickback" and "physician self-referral" laws. Similar state laws
could also govern the provision of services to beneficiaries of state funded
healthcare programs such as Medicaid. The federal anti-kickback laws prohibit
the knowing and willful solicitation, receipt or offering of any remuneration or
consideration, directly or indirectly, to induce or in exchange for referrals of
patients or for the ordering of services covered by federally funded healthcare
programs (excluding the Federal Employees Health Benefits Program) and state
funded healthcare programs, including Medicaid. The federal physician
self-referral laws impose restrictions on physician referrals of patients for
certain designated healthcare services to certain entities with which the
physician or any immediate family member has a compensation or investment or
ownership interest, and prevents the entity in question from lawfully being
reimbursed under the Medicaid and Medicare program for patients improperly
referred to it. Thus, these laws could impair the Company's ability to enter
into certain types of arrangements with physicians or other healthcare
providers. Certain state self-referral laws might apply to other types of
providers as well as a broader class of payors. With respect to its
non-governmental operations, the Company may be subject to similar laws and
regulations in a number of states, and proposed federal legislation would expand
the scope of some or all of the fraud and abuse restrictions to cover many
private payors of healthcare benefits. Penalties for violating existing fraud
and abuse laws include civil monetary penalties, criminal sanctions and
exclusion from participation in the Medicaid and Medicare programs. The Company
believes that its existing operations comply with such state and federal laws
and regulations based on their current interpretation and enforcement; however,
because the fraud and abuse laws, particularly anti-kickback provisions, have
been broadly construed to prohibit transactions in which any purpose of the
transaction violates the law, many transactions potentially could be held to be
improper. Uncertainty as to the scope and application of such laws continues;
therefore, there can be no assurance that future regulatory and enforcement
actions will not result in an interpretation of these laws and regulations that
would require the Company to materially change its operations or contractual
relationships in order to remain in compliance therewith.
Other Proposed Legislation. In the last five years, legislation has
periodically been introduced at the state and federal level providing for new
regulatory programs and materially revising existing regulatory programs. Any
such legislation, if enacted, could materially adversely affect the Company's
business, financial condition or results of operations. Such legislation could
include both federal and state bills affecting the Medicaid programs which may
be pending in or recently passed by state
22
<PAGE>
legislatures and which are not yet available for review and analysis. Such
legislation could also include proposals for national health insurance and other
forms of federal regulation of health insurance and healthcare delivery. It is
not possible at this time to predict whether any such legislation will be
adopted at the federal or state level, or the nature, scope or applicability to
the Company's business of any such legislation, or when any particular
legislation might be implemented. No assurance can be given that any such
federal or state legislation will not have a material adverse effect on the
Company.
CAUTIONARY STATEMENTS
This Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Although
the Company believes that its plans, intentions and expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such plans, intentions or expectations will be achieved. Important factors that
could cause actual results to differ materially from the Company's
forward-looking statements are set forth below and elsewhere in this Form 10-K.
All forward-looking statements attributable to the Company or persons acting on
behalf of the Company are expressly qualified in their entirety by the
cautionary statements set forth below.
Capitated Programs. In order for the Company's capitated contracts to be
profitable, MBC must accurately estimate the rate of service utilization by
beneficiaries enrolled in its programs. The Company's assumptions as to service
utilization rates and costs may not accurately and adequately reflect actual
utilization rates and costs, and increases in behavioral healthcare costs and
higher than anticipated utilization rates, significant aspects of which are
outside the Company's control, could cause expenses associated with such
contracts to exceed the Company's revenue for such contracts. Furthermore,
certain of such contracts require the Company to reserve a specified amount of
cash as financial assurance that it can meet its obligations thereunder. Such
amounts are not available to the Company for general corporate purposes.
Customer Contracts. Substantially all of the Company's customer contracts
are immediately terminable for cause, and many, including some of MBC's most
significant contracts, are terminable without cause by the customer or upon the
occurrence of certain other specified events. The Company is aware of several
contracts expiring in fiscal 1997 that will not be renewed; however, the Company
does not believe the loss of such contracts will result in a material adverse
effect on its results of operations. The Company's ten largest behavioral health
managed care customers had 36 contracts with MBC which accounted for
approximately 49% of the Company's revenue for fiscal 1996. Such contracts may
not be extended or successfully renegotiated, and the terms of any new or
renegotiated contracts (particularly financial terms) may not be comparable to
those of existing contracts. The loss of certain of these contracts could have a
material adverse effect on the Company.
Competition. The industry in which the Company conducts its business is
highly competitive. The Company competes with large insurance companies, HMOs,
PPOs, TPAs, provider groups and other managed care companies. Many of the
Company's competitors are significantly larger and have greater financial,
marketing and other resources than the Company, and some of MBC's competitors
provide a broader range of services. The Company may also encounter substantial
competition in the future from new market entrants. Many of the Company's
customers that are managed care companies may, in the future, seek to provide
behavioral health managed care and EAP services to their employees or
subscribers directly or through affiliated organizations, rather than
contracting with the Company for such services. Because of competition, the
Company does not expect to be able to rely on price increases to achieve revenue
growth and expects to continue experiencing pressure on direct operating
margins.
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<PAGE>
Key Management. The Company's growth depends largely upon the abilities
and experience of certain key management personnel. The loss of the services of
one or more of such key personnel could have a material adverse effect on the
Company.
Information Systems. The Company's operation of its programs, as well as
the implementation of its growth strategy, is dependent on its ability to store,
retrieve, process and manage data. Interruption of data processing capabilities
for any extended period of time, loss of stored data, programming errors or
other system-related problems could have a material adverse effect on the
Company. An integral part of the Company's strategy to improve its operating
efficiency and management of care involves its investment in a new information
system, AMISYS(R), which is expected to provide advantages over the Company's
other current information systems. The Company has begun the implementation of
AMISYS(R) into certain of its operations, and has commenced the process of
transitioning certain programs supported by its other existing systems to
AMISYS(R). The installation and implementation of AMISYS(R) involves the risk of
unanticipated delay and expense. Failure to complete the modifications to
AMISYS(R) required to adapt such system to the Company's business or to
successfully implement AMISYS(R) into its operations could adversely impact
MBC's operating efficiency and management of care and could result in the loss
of existing customers, difficulties in attracting new customers, increases in
operating expenses and other adverse consequences.
Control by KKR. KKR Associates and its General Partners control the
Company, having the power to elect its directors and appoint management. The
interests of KKR and its General Partners may not always be consistent with
those of the Company's equity and debt holders and other constituencies.
Dependence on Government Spending for Managed Healthcare; New Legislation.
A significant portion of the market for the Company's services is funded
directly or indirectly by governmental agencies, including Medicaid programs.
Any reduction in government spending for such programs could have a material
adverse effect on the Company. In addition, the Company's contracts with
governmental agencies generally are conditioned upon financial appropriations,
especially with respect to Medicaid programs. These contracts generally can be
terminated or modified by the customer if such appropriations are not made. The
Company's strategy for growth depends in part on the engagement of managed care
organizations to provide services to governmental agencies, especially with
respect to Medicaid programs. If such engagements do not occur or if such
contracts do not provide adequate pricing terms, the Company could be materially
adversely affected. In addition, legislation has periodically been introduced at
the state and federal level providing for new regulatory programs and materially
revising existing regulatory programs. Any such legislation, if enacted, could
materially adversely affect the Company. The Company is unable to predict the
impact on the Company's operations of future regulations or legislation
affecting government healthcare programs, or the healthcare industry in general.
Regulation. The Company's business is subject to extensive state and
federal regulation. State laws and regulations vary considerably, and the
Company may be subject to different types of laws and regulations depending on
the specific regulatory approach adopted by each state. State and federal laws
regulate the Company's relationships with its providers and with certain
customers, such as governmental agencies and HMOs servicing Medicaid and
Medicare beneficiaries, and its management of its customers' employee benefit
plans. Because regulation of the Company's business is evolving, new laws or
regulations applicable to the Company may be enacted, and existing laws and
regulations may be interpreted to apply to the Company's operations in a
different manner than previously thought. Any such development may require the
Company to secure additional licenses or restructure its operations to comply
with such laws and regulations. Any delay or failure to secure or maintain
licenses
24
<PAGE>
or otherwise comply with applicable laws and regulations or to so restructure
operations could lead to lost business opportunities and have a material adverse
effect on the Company.
Professional Liability; Insurance. The Company is regularly subject to
lawsuits alleging malpractice and related legal theories, some of which involve
situations in which participants in the Company's programs have committed
suicide. The Company may also be subject to claims of professional liability for
alleged negligence in performing utilization management activities, as well as
for acts and omissions of the Company's staff and network providers. The Company
could also become subject to claims for the costs of healthcare services denied.
There can be no assurance that the Company's procedures for limiting liability
have been or will be effective, or that one or more lawsuits will not have a
material adverse effect on the Company in the future. While the Company carries
professional liability insurance, it is subject to certain self-insured
retentions, may not apply in certain circumstances and may not be sufficient to
cover all damages or costs relating to present or future claims. Upon expiration
thereof, sufficient insurance may not be available to the Company or its
providers on favorable terms, if at all. If the Company or its providers are
unable to secure adequate insurance in the future, or if the insurance carried
by the Company or its providers is not applicable or is not sufficient to cover
any damages or costs relating to any present or future claims, the Company and
its providers could be subject to a liability that could have a material adverse
effect on the Company.
Substantial Leverage and Related Considerations. The Company incurred
substantial indebtedness in connection with the Merger, and is highly leveraged.
Such indebtedness included borrowings under a $205.0 million senior credit
facility (the "Senior Credit Facility") provided under the Credit Agreement
dated as of October 6, 1995, as amended, among the Company, the lending
institutions listed therein and The Chase Manhattan Bank, N.A., as Agent (the
"Credit Agreement") entered into in connection with the Merger, and the
Company's 11 1/2% Senior Subordinated Notes due 2005 (the "Notes"). The
Company's ability to make scheduled payments of principal of, or to pay interest
on, or to refinance its indebtedness (including the Notes), depends on its
future performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond its
control. There can be no assurance that the Company's business will generate
sufficient cash flow from operations or that future working capital borrowings
will be available in an amount sufficient to enable MBC to service its
indebtedness, including the Notes, or make necessary capital expenditures. The
Notes are general unsecured obligations of the Company and are subordinated in
right of payment to all Senior Indebtedness (as defined in the indenture for the
Notes (the "Indenture")) of the Company (which includes all indebtedness under
the Senior Credit Facility).
Item 2. Properties
The Company's principal executive offices, with approximately 37,500
square feet in the aggregate, are located in Park Ridge, New Jersey; the lease
for the Company's headquarters expires in 2006. The Company leases approximately
195,500 square feet in the aggregate for the National Service Center in St.
Louis, Missouri, under three leases expiring between 2001 and 2003. In addition,
the Company leases approximately 64,000 square feet in the aggregate in New York
City relating to the Empire Joint Venture and other business; the lease for the
New York City space expires in 2008. The Company also maintains an office with
approximately 24,800 square feet in the aggregate in San Francisco, California;
the lease for the San Francisco office expires in 1997. As of September 30,
1996, the Company also maintained approximately 150 other offices in 31 states
under leases which have terms of up to 10 years and range in size up to 30,000
square feet. Management believes that the Company's offices and other properties
are adequate for its current needs and that suitable additional space will be
available as required.
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<PAGE>
Item 3. Legal Proceedings
The management and administration of the delivery of behavioral health
managed care and EAP services, and the direct provision of behavioral health
treatment services, entail significant risks of liability. In recent years, the
Company and its network and staff providers have been subject to a number of
actions and claims alleging malpractice, professional negligence and other
related legal theories. Many of these actions and claims seek substantial
damages and therefore require the Company to incur significant fees and costs
related to their defense.
From time to time, the Company is subject to various actions and claims
arising from the acts or omissions of its staff providers, its employees, its
network providers or other parties. In the normal course of its business, the
Company receives reports relating to suicides and other serious incidents
involving patients enrolled in the Company's programs. Such incidents may give
rise to malpractice, professional negligence and other related actions and
claims against the Company, its employees and its network and staff providers.
As the number of beneficiaries covered by the Company grows, the number of
providers employed by the Professional Corporations or under contract with the
Company increases and the nature and scope of services provided by the Company
in its managed care and EAP business expands, actions and claims against the
Company (and, in turn, possible legal liability) predicated on malpractice,
professional negligence or other related legal theories can be expected to
increase. In addition, as Continuum's business develops, the Company may become
subject to additional actions and claims alleging malpractice, professional
negligence and other related theories arising from the behavioral health
treatment services rendered directly to patients by Continuum.
The Company carries insurance in respect of liabilities arising from
actions and claims based on alleged malpractice, professional negligence and
other related theories. The Company's staff providers are also required to
maintain professional liability insurance on a per claim and aggregate basis.
All such insurance is subject to various coverage limits, self-insured
retentions and other limitations and conditions. To the extent the Company's
customers are entitled to indemnification under their contracts with the Company
relating to liabilities they incur arising from the operation of the Company's
programs, such indemnification may not be covered under the Company's insurance
policies. In addition, to the extent that certain actions and claims seek
punitive and compensatory damages arising from alleged intentional misconduct by
the Company, such damages, if awarded, may not be covered, in whole or in part,
by the Company's insurance policies. In the ordinary course of business, the
Company is also subject to actions and claims with respect to its employees,
staff providers, network providers and suppliers of services. The Company does
not believe that any pending action against the Company alleging malpractice,
professional negligence or other related theories will have a material adverse
effect on the Company. To date, claims and actions against the Company alleging
professional negligence have not resulted in material liabilities to the
Company; however, there can be no assurance that pending or future actions or
claims for professional liability will not have a material adverse effect on the
Company.
From time to time, the Company receives notifications from and engages in
discussions with various governmental agencies concerning its business and
operations. As a response to these contacts with regulators, the Company in many
instances implements changes to its operations, revises its filings with such
agencies and/or seeks additional licenses to conduct its business. In recent
years, in response to governmental agency inquiries or discussions with
regulators, the Company has determined to seek licensure as a single service
HMO, TPA or utilization review agent in one or more jurisdictions.
The Company was recently involved in legal proceedings related to the Iowa
Mental Health Contract. The proceedings arose out of the initial decision of the
Iowa Department of Human Services (the "Iowa DHS") in May 1994 to award the Iowa
Mental Health Contract to Value Behavioral Health,
26
<PAGE>
Inc. (the "Competitor"). The Company contested the decision on the basis that,
among other things, the Competitor should have been disqualified because of
certain conflicts of interest. After the Iowa DHS denied the Company
administrative relief, the Company filed suit in the District Court of Iowa for
Polk County (the "Iowa District Court"). In October 1994, the Iowa District
Court disqualified the Competitor from performing services under the Iowa Mental
Health Contract because of various conflicts of interest. The Competitor
appealed the Iowa District Court decision to the Iowa Supreme Court. In the
meantime, in January 1995, the Company and the Iowa DHS signed the definitive
Iowa Mental Health Contract, under which the Company commenced services in March
1995. Subsequently, in July 1996, the Iowa Supreme Court dismissed the
Competitor's appeal and affirmed the Iowa District Court decision. To the
Company's knowledge, the Competitor has not petitioned the U.S. Supreme Court to
review the Iowa Supreme Court ruling; consequently, management believes the
legal proceedings surrounding the Iowa Mental Health Contract are concluded.
In October 1996, a group of eight plaintiffs purporting to represent an
uncertified class of psychiatrists, psychologists and clinical social workers
brought an action under the federal antitrust laws in the United States District
Court for the Southern District of New York against nine behavioral health
managed care organizations, including the Company (collectively, "Defendants")
entitled Edward M. Stephens, Jose A. Yaryura-Tobias, Judith Green, Ph.D., Fugen
Neziroglu, Ph.D., Ona Robinson, Ph.D., Laurie A. Baum, C.S.W., Agnes Wohl,
C.S.W., and The On-Step Institute For Mental Health Research, Inc., individually
and on behalf of all others similarly situated, v. CMG Health, FHC Options,
Inc., Foundation Health PsychCare Services, Inc., Green Spring Health Services,
Inc., Human Affairs International, Inc., Merit Behavioral Care Corp., MCC
Behavioral Care Inc., United Behavioral Systems, Inc., and Value Behavioral
Health, Inc., 96 Civ. 7798 (KMW). The complaint alleges that Defendants violated
section 1 of the Sherman Act by engaging in a conspiracy to fix the prices at
which Defendants purchase services from mental healthcare providers such as
plaintiffs. The complaint further alleges that Defendants engaged in a group
boycott to exclude mental healthcare providers from Defendants' networks in
order to further the goals of the alleged conspiracy. The complaint also
challenges the propriety of Defendants' capitation arrangements with their
respective customers, although it is unclear from the complaint whether
plaintiffs allege that Defendants unlawfully conspired to enter into capitation
arrangements with their respective customers. The complaint seeks treble damages
against Defendants in an unspecified amount and a permanent injunction
prohibiting Defendants from engaging in the alleged conduct which forms the
basis of the complaint, plus costs and attorneys' fees. Defendants must move,
answer or otherwise respond with respect to the complaint in January 1997. The
Company intends to vigorously defend itself in this litigation. However, there
can be no assurance that the outcome of this litigation will be favorable to the
Company. An unfavorable outcome could have a material adverse effect on the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters to a vote of its security holders
during the fourth quarter of the fiscal year covered by this report.
PART II
- ------------------------------------------------------------------------------
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
27
<PAGE>
There is no established public trading market for the Common Stock. There
were 27 holders of the Common Stock at December 1, 1996. The Company has not
paid dividends on the Common Stock to date and does not currently intend to pay
dividends on the Common Stock in the foreseeable future. The payment of
dividends is restricted by the Senior Credit Facility and the Indenture. See
Note 6 to the Company's consolidated financial statements set forth in Part IV
below.
Item 6. Selected Financial Data
The following selected historical financial data were derived from, and
should be read in conjunction with, the historical consolidated financial
statements of the Company and of MBC prior to the acquisition of Medco
Containment by Merck (referred to herein as the "Predecessor"), including the
respective notes thereto, included elsewhere herein. The historical consolidated
financial statements of the Predecessor for the fiscal year ended September 30,
1992 are unaudited. The historical consolidated financial statements of the
Predecessor for the fiscal year ended September 30, 1993 and the period from
October 1, 1993 through November 17, 1993 and of the Company for the period from
November 18, 1993 through September 30, 1994 and for the fiscal years ended
September 30, 1995 and 1996 are audited. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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<PAGE>
<TABLE>
<CAPTION>
Predecessor(6) MBC MBC
Fiscal Year Ended Nov. 18, 1993 Fiscal Year Fiscal Year
September 30, Oct.1-Nov17 to Ended Ended
1992 1993 1993 Sept. 30, 1994 Sept. 30,1995 Sept. 30, 1996(10)
---- ---- ---- --------- -------- ----------
Income Statement Data:
<S> <C> <C> <C> <C> <C> <C>
Revenue $121.6 $197.4 $31.0 $245.9 $361.5 $457.8
Operating expenses(1) 111.9. 180.5 29.3 225.4 335.8 426.2
Amortization of intan. 1.4 1.8 0.3 17.1 21.4 25.8
Restructuring charge --- 1.7 --- --- --- 3.0
------ ------ ----- ------ ------ ------
Operating income(2) 8.3 13.4 1.4 3.4 4.3 2.8
Other expense (income)(3) 0.4 (0.6) (0.1) (0.8) (1.5) (2.8)
Interest expense 23.8
Merger costs......... -- 2.4 --- --- --- 4.0
------- ------- ----- ------ ------- -------
Income (loss) before income
taxes and cumulative effect
of accounting change 7.9 11.6 1.5 4.2 5.8 (22.2)
Provision (benefit) for
income taxes 3.1 6.1 0.6 2.1 4.5 (5.3)
------- ------- ------ ------ ------- ------
Income (loss) before
cumulative effect of
accounting change 4.8 5.3 0.9 2.1 1.3 (16.9)
Cumulative effect of
accounting change(10) -- -- -- -- -- (1.0)
------- ------- ------ ------ ------- ------
Net income (loss) $ 4.8 $ 5.5 $ 0.9 $ 2.1 $ 1.3 $(17.9)
======= ======= ====== ====== ====== ======
Pro forma net
income (loss) for
the effect of
the accounting
change(19) $ 4.8 $ 5.5 $ 0.9 $ 2.1 $ 0.3 $(16.9)
======= ======== ====== ====== ====== ======
Deficiency of earnings
to fixed charges(7) $(22.2)
======
Balance Sheet Data (at end of periods):
Cash, cash equivalents and
short-term marketable
securities(5) $ 9.5 $ 21.9 $ 32.7 $ 34.1 $ 53.0
Total assets 60.2 91.9 259.3 305.4 344.8
Due to parent
(noninterest bearing) 0.9 5.9 37.9 70.8 ---
Long-term debt 254.0
Stockholders' equity 31.3 47.0 121.0 122.3 (29.5)
Other Data:
Adjusted EBITDA(4) 11.8 20.0 2.2 25.5 34.0 45.1
Adjusted EBITDA margin(8)9.7% 10.1% 7.1% 10.4% 9.4% 9.9%
Cash provided by
operating activies $ 1.9 $ 18.3 $ 2.9 $ 19.2 $ 26.1 $ 28.6
Cash used for investing
activities (1.5) (17.3) (1.6) (43.3) (54.2) (41.3)
Cash provided by financing
activities 0.9 4.9 0.5 31.6 32.9 30.6
Depreciation and
amortization(9) 3.2 4.3 0.7 21.3 28.2 36.5
Capital expenditures:
Information systems --- 8.6 0.2 15.0 23.2 15.7
Other capital
expenditures 2.3 1.0 1.0 1.8 8.3 8.1
------ ------ ------ ------ ------ ------
Total capital
expenditures 2.3 9.6 1.2 16.8 31.5 23.8
</TABLE>
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<PAGE>
Notes to Selected Financial Data:
(1) Represents the sum of direct service costs and selling, general and
administrative expenses.
(2) Operating income equals income before income taxes, interest expense, other
income and expense and merger costs.
(3) Represents primarily interest income, except for 1992 which includes $0.3
million of expenses related to a legal settlement and $0.4 million of
acquisition-related expenses.
(4) "Adjusted EBITDA" represents the sum of operating income, depreciation and
amortization, and other income and expense, excluding restructuring charges in
1993 and 1996, and other non-recurring charges in 1992. Adjusted EBITDA is
presented because a similar measure is used in the covenants contained in the
Indenture and MBC believes that Adjusted EBITDA is a widely accepted financial
indicator of a company's ability to service debt. However, Adjusted EBITDA
should not be construed as an alternative to MBC's operating income, net income
or cash flow from operating activities (as determined in accordance with
generally accepted accounting principles) and should not be construed as an
indication of MBC's operating performance or as a measure of MBC's liquidity. In
addition, items excluded from EBITDA, such as restructuring charges and
depreciation and amortization, are significant components in understanding and
assessing the Company's financial performance.
(5) Includes restricted cash and short-term marketable securities classified as
a long-term asset. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--Cash in
Claims Funds and Restricted Cash."
(6) On November 18, 1993, Merck acquired all of the outstanding shares of Medco
Containment in a transaction accounted for by the purchase method. The amounts
related to periods prior to November 18, 1993, were derived from Predecessor
financial statements. The historical cost basis of the Predecessor differs from
that of the Company due to the allocation of a portion of the total purchase
price of Medco Containment to the Company's assets and liabilities.
(7) For purposes of this computation, earnings consist of income before taxes
plus fixed charges. Fixed charges consist of interest expense (including
amortization of deferred financing fees) and one-third of rental expense,
representing that portion of rental expense deemed by MBC to be attributable to
interest. For the period presented, earnings were insufficient to cover fixed
charges and, therefore, such deficiency is presented above. The ratios of
earnings to fixed charges for the periods prior to October 6, 1995 are not
presented because the Company did not have interest expense prior to
consummation of the Merger.
(8) "Adjusted EBITDA margin" represents Adjusted EBITDA as a percentage of
revenue. As noted in footnote (4) above, Adjusted EBITDA is presented because
MBC believes it is a widely accepted financial indicator of a company's ability
to service debt. However, Adjusted EBITDA margin should not be construed as an
alternative to MBC's operating income as a percentage of revenue or net income
as a percentage of revenue (as derived from operating income and net income
determined in accordance with generally accepted accounting principles).
Adjusted EBITDA margin should not be construed as an indication of MBC's
operating performance or as a measure of MBC's liquidity.
(9) Excludes amortization of deferred financing costs.
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(10) Effective October 1, 1995, the Company changed its method of accounting for
deferred start-up costs related to new contracts or expansion of existing
contracts (i) to expense costs relating to start-up activities incurred after
commencement of services under the contract, and (ii) to limit the amortization
period for deferred start-up costs to the initial contract period. Prior to
October 1, 1995, the Company capitalized start-up costs related to the
completion of the provider networks and reporting systems beyond commencement of
contracts and, in limited instances, amortized the start-up costs over a period
that included the initial renewal term associated with the contract. Under the
new policy, the Company does not defer contract start-up costs after contract
commencement or include the initial renewal term in the amortization period. The
change was made to increase the focus on controlling costs associated with
contract start-ups.
The Company recorded a pre-tax charge of $1.8 million ($1.0 million after taxes)
in its fiscal 1996 first quarter results of operations as a cumulative effect of
the change in accounting. Had the Company adopted this accounting principle in
the prior year, fiscal 1995 net income would have been $0.3 million. There was
no pro forma effect of this change for fiscal years prior to 1995.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
Effect on MBC of Merck's Acquisition of Medco Containment
Merck acquired Medco Containment, the Company's former parent, on November
18, 1993 in a transaction that was accounted for by the purchase method. For
purposes of this "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Company's results of operations for fiscal 1994
include both the results of operations of the Predecessor from October 1, 1993
through November 17, 1993, and of the Company from November 18, 1993 through
September 30, 1994. The effect of the acquisition of Medco Containment by Merck
was to increase the goodwill and other intangibles and related deferred taxes of
the Company; the Company's subsequent results of operations reflect such
increases.
Revenue
Typically, the Company charges each of its HMO, Blue Cross/Blue Shield
organization, insurance company, corporate, union, governmental and other
customers a flat monthly capitation fee for each beneficiary enrolled in such
customer's behavioral health managed care plan or EAP. This capitation fee is
generally paid to MBC in the current month. Contract revenue billed in advance
of performing related services is deferred and recognized ratably over the
period to which it applies. For a number of the Company's behavioral health
managed care programs, the capitation fee is divided into outpatient and
inpatient fees, which are recognized separately. Outpatient revenue is
recognized monthly as it is received; inpatient revenue is recognized monthly
and is in most cases (i) paid to the Company monthly (in cases where the Company
is responsible for the payment of inpatient claims) or in certain cases (ii)
retained by the customer for payment of inpatient claims. When the customer
retains the inpatient revenue, actual inpatient costs are periodically
reconciled to amounts retained and the Company receives the excess of the
amounts retained over the cost of services, or reimburses the customer if the
cost of services exceeds the amounts retained. In certain instances, such excess
or deficiency is shared between the Company and the customer.
The Company's revenue increased by $79.5 million, or 40.3%, from fiscal
1993 to fiscal 1994, by $84.6 million, or 30.6%, from fiscal 1994 to fiscal
1995, and by $96.3 million, or 26.6%, from fiscal
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1995 to fiscal 1996. Such revenue growth has been derived from existing
customers, new customers, acquisitions, joint ventures and other arrangements.
For existing customers, revenue growth has resulted from increased membership
serviced under existing behavioral health managed care and EAP contracts, and
from additional contracts with such customers offering new programs or expanding
into new geographical areas. The comparability of revenue from the relevant
periods has also been affected by the various acquisitions, joint ventures and
other arrangements discussed in this Form 10-K.
Direct Service Costs and Margins
Direct service costs are comprised principally of expenses associated with
managing, supervising and providing the Company's services, including
third-party network provider charges, various charges associated with the
Professional Corporations, inpatient facility charges, costs associated with
members of management principally engaged in the Company's clinical operations
and their support staff, and rent for certain offices maintained by the Company
in connection with the delivery of services. Direct service costs are recognized
in the month in which services are expected to be rendered. Network provider and
facility charges for authorized services that have not been reported and billed
to the Company (known as incurred but not reported expenses, or "IBNR") are
estimated and accrued based on historical experience, current enrollment
statistics, patient census data and other information.
The Company has experienced an increase in direct service costs as a
percentage of revenue (which have been offset to varying degrees by various
initiatives described below) primarily as a result of changing product mix and
pricing pressure associated with both the competitive bid process for new
contracts and negotiations to extend existing contracts. The portion of MBC's
revenue (73% for fiscal 1996) attributable to capitated managed care programs
has continuously been increasing. Because capitated managed care programs
require the Company to incur greater direct service costs than EAPs and ASO
managed care programs, the direct profit margins attributable to such programs
are lower than the direct profit margins attributable to the Company's other
programs. The Company is continuing to focus on reducing direct service costs.
Efforts intended to reduce these costs include: (i) negotiating better rates
and/or different compensation arrangements (such as retainer arrangements,
volume discounts, case rates and capitation of fees) with third-party network
providers and treatment facilities; (ii) contracting with treatment facilities
that provide a broader spectrum of treatment programs in an effort to expand
beneficiary access to a broader continuum of care, thereby achieving more
cost-effective treatment; (iii) focusing management and clinical care techniques
on patients requiring more intensive treatment services to assure that such
patients receive the appropriate level of care in a cost-efficient and effective
manner; (iv) implementing a new information system intended to enable MBC to
improve the productivity and efficiency of its operations; (v) increasing the
overall efficiency of MBC's staff provider system by closing or consolidating
less efficient staff offices, streamlining operations and increasing the
efficiency of remaining staff offices; and (vi) increasing the Company's
capability to provide direct treatment services, thereby allowing MBC to deliver
more cost-effective services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses are comprised principally of
corporate and regional overhead expenses, such as marketing and sales, legal,
finance, information systems and administrative expenses, as well as
professional and consulting fees, and the compensation of members of the
Company's senior management. The Company expects selling, general and
administrative expenses to grow over the near term, primarily due to growth in
information systems expenses related to the implementation of AMISYS(R) as well
as increases in regional administration and sales and marketing operations
necessary to support the growth of the Company's business; however, the Company
expects selling, general and administrative expenses to grow at a rate less than
that of anticipated revenue growth
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in fiscal 1997. There can be no assurance, however, that anticipated revenue
growth will occur or that any such revenue growth will occur at a rate greater
than the rate of growth in selling, general and administrative expenses.
Amortization of Intangibles
As a result of Merck's acquisition of Medco Containment in November 1993,
the Company's financial statements include an allocation by Merck of the excess
of its cost over fair market value of the net assets acquired. Accordingly,
goodwill and other acquisition-related intangibles in the amount of $160.0
million were recorded on the Company's balance sheet as of November 1993 and are
being amortized over various periods. A noncurrent deferred tax liability of
$47.8 million was established to reflect the tax consequences of the difference
between the financial and tax reporting bases of the identified intangibles. The
Company's total goodwill also includes goodwill associated with the Company's
acquisition of BenesYs, Inc. ("BenesYs"), a Houston-based behavioral health
managed care organization, and of certain assets of Washton Institute. In
addition, the acquisition of Choate in October 1995, the payment made to Empire
in connection with the Empire Joint Venture in September 1995, the acquisition
of ProPsych in December 1995, and various contingent consideration payments,
together with the goodwill recognized from the BenesYs and Washton transactions,
resulted in the incurrence of additional goodwill of approximately $62.6
million. Amortization of acquisition-related intangibles was $17.2 million in
fiscal 1994, $20.1 million in fiscal 1995, and $22.8 million in fiscal 1996.
The Company also capitalizes certain start-up expenses related to new
contracts and amortizes these amounts over the life of the contracts. When the
Company enters into a new contract or significantly expands services for an
existing customer, the Company typically incurs up-front start-up costs that
historically have ranged from $50,000 to $2.5 million per program. These
start-up costs include, among other things, the costs of recruiting,
interviewing and training providers and support staff, establishing offices and
other facilities, acquiring furniture, computers and other equipment, and
implementing information systems. As of September 30, 1996, the Company's
balance sheet reflected $6.1 million of deferred start-up costs, net of
amortization, categorized under long-term assets.
Liquidity
The Company's liquidity is affected by the one- to four-month lag between
the time the Company receives cash from capitation payments under new contracts
and the time when the Company pays the claims for services rendered by
third-party network providers and treatment facilities relating to such
capitation payments. During the first few months of a new contract, the Company
builds cash balances as capitation payments are received and also builds a
payables balance as direct service costs are accrued based on expected levels of
service. After the first several months of a contract, monthly claims payments
typically increase to normal levels and the contract generates cash more in line
with the expected profit margin for that contract. When a contract is
terminated, monthly capitation payments cease on contract termination, but
claims for services rendered prior to termination continue to be received and
paid for several months. This post-contract termination period is often referred
to as the "run-off" period. To date, contract terminations have not had a
material impact on the Company's liquidity.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS 121 establishes accounting standards for the impairment of
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long-lived assets and certain identified intangibles to be disposed of or held
and used by an entity. SFAS 121 is effective for fiscal years beginning after
December 15, 1995. The Company will adopt SFAS 121 in fiscal 1997 and does not
expect its implementation to have a material effect on its results of operations
or its financial condition.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 establishes financial accounting and reporting standards
for stock-based employee compensation plans. SFAS 123 is effective for fiscal
years beginning after December 15, 1995. The Company will adopt SFAS 123 in
fiscal 1997 and does not expect its implementation to have a material effect on
its results of operations or its financial condition.
RESULTS OF OPERATIONS
Selected Operating Results
The following table sets forth certain statement of operations items of MBC
expressed as a percentage of revenue:
Fiscal Year Ended September 30,
1994 1995 1996
----- ---- ----
Revenue............................. 100.0% 100.0% 100.0%
Direct service costs................ 77.1 79.1 79.0
------ ------ ------
Direct profit margin.............. 22.9 20.9 21.0
Selling, general and administrative
expenses.......................... 14.9 13.8 14.1
Amortization of intangibles......... 6.3 5.9 5.7
Restructuring charge................ --- --- 0.6
-------- -------- -------
Operating Income................. 1.7 1.2 0.6
Other income........................ 0.3 0.4 0.6
Interest expense.................... --- --- (5.2)
Merger costs........................ --- --- (0.8)
-------- -------- -------
Income (loss) before income taxes and
cumulative effect of accounting change 2.1 1.6 (4.8)
Provision (benefit) for income taxes... 1.0 1.2 (1.1)
------- ------- -------
Income (loss) before cumulative effect
of accounting change............ 1.1% 0.4% (3.7)%
======= ======= =======
Adjusted EBITDA margin.............. 10.0% 9.4% 9.9%
Fiscal 1996 Compared to Fiscal 1995
Revenue. Revenue increased by $96.3 million, or 26.6%, to $457.8 million
for fiscal 1996 from $361.5 million for fiscal 1995. Of this increase, $87.7
million was attributable to the inclusion of revenue for the entire period from
certain contracts that commenced during the prior fiscal year as well as
additional revenue from existing customers generated by an increase in both the
number of programs managed by the Company on behalf of such customers and an
increase in the number of beneficiaries enrolled in such customers' programs;
and $26.4 million was attributable to new customers commencing service in the
current year, the majority of which was derived from two contracts totalling
$20.9 million. In addition, the Company's acquisitions of Choate and ProPsych
contributed an
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additional $18.4 million in revenue for fiscal 1996. These revenue increases
were partially offset by a $36.2 million decrease in revenue as a result of the
termination of certain contracts, five of which accounted for $21.1 million of
such decrease. Certain of these contracts had terminated in various periods of
the prior fiscal year. Contract price increases were not a material factor in
the increase in revenue.
Direct Service Costs. Direct service costs increased by $75.7 million, or
26.5%, to $361.7 million for fiscal 1996 from $286.0 million for fiscal 1995. As
a percentage of revenue, direct service costs decreased from 79.1% for fiscal
1995 to 79.0% for fiscal 1996. This net decrease in the direct service cost
percentage was due to a variety of largely offsetting factors. The direct
service cost percentage was positively impacted by lower inpatient utilization
in fiscal 1996 as compared to the prior year related to a significant contract
with an HMO focused on the Medicaid beneficiary population. Such decrease
resulted from the implementation of changes in program management and
modification of the clinical treatment protocols applicable to such contract. In
addition, the Company started to realize the benefits in fiscal 1996 of a
nationwide recontracting program with providers which began in the second
quarter of such year. The Company is continuing its efforts to reduce direct
service costs to mitigate the effects of pricing pressure, which is expected to
continue in fiscal 1997, associated with the competitive bid process for new
contracts and negotiations to extend existing contracts. The direct service cost
percentage was adversely impacted by the loss in the fourth quarter of fiscal
1995 of two contracts with higher than average direct profit margins and a
renewal of a significant contract on lower pricing terms. In addition, the
Company earned a lower than average direct profit margin on a significant state
Medicaid program which was not in effect for the entire twelve month period in
the prior year. Furthermore, in the fourth quarter of fiscal 1996, the Company
commenced providing services under the TennCare program. Due to the unusual
structure of the TennCare program, the direct profit margin under such contract
was lower than the Company's average direct profit margin for fiscal 1996 and is
expected to continue to be lower in future periods. The Company anticipates
that, in light of the relative significance of the TennCare program to the
Company, the full year effect of this program will cause the Company's overall
direct service cost percentage to increase over such percentage for fiscal 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $14.7 million, or 29.5%, to $64.5 million
for fiscal 1996 from $49.8 million for fiscal 1995. The increase in total
selling, general and administrative expenses was primarily attributable to (i)
growth in marketing and sales administrative staff, corporate and regional
management and support systems associated with the higher sales volume, (ii)
expenses associated with the expansion of the Company's National Service Center,
which will allow for growth beyond MBC's current needs, and (iii) expenses
related to the planned deployment of the Company's new information systems. As a
percentage of revenue, selling, general and administrative expenses increased to
14.1% for fiscal 1996 from 13.8% for fiscal 1995. The increase in such expenses,
coupled with unanticipated delays in the planned start dates of significant new
contracts (including TennCare) secured by the Company, contributed to the
increase in selling, general and administrative expenses as a percentage of
revenue. With respect to the TennCare program, the Company anticipates that such
program will not require additional selling, general and administrative expenses
in fiscal 1997. This is expected to result in a decline in the Company's overall
selling, general and administrative expenses as a percentage of revenue in
fiscal 1997, which should offset the expected increase described above in the
Company's 1997 direct service cost percentage.
Amortization of Intangibles. Amortization of intangibles increased by $4.5
million, or 21.0%, to $25.9 million for fiscal 1996 from $21.4 million for
fiscal 1995. The increase was primarily due to an increase in amortization of
goodwill recognized in connection with the acquisitions of Choate and
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ProPsych and the Empire Joint Venture, as well as to increases in the
amortization of deferred contract start-up costs related to new contracts.
Restructuring Charge. The Company recorded a pre-tax restructuring charge
of $3.0 million related to a plan, adopted and approved in the fourth quarter of
1996, to restructure its staff offices by exiting certain geographic markets and
streamlining Continuum's field and administrative management organization. This
decision was in response to the results of underperforming locations affected by
the lack of sufficient patient flow in the geographic areas serviced by these
offices and the Company's ability to purchase healthcare services at lower rates
from the network. In addition, it was determined the Company would be able to
expand beneficiary access to specialists and other providers thereby achieving
more cost-effective treatment and to favorably shift a portion of the economic
risk, in some cases, of providing outpatient healthcare to the provider through
the use of case rates and other alternative reimbursement methods. The
restructuring charge is comprised primarily of accruals for employee severance,
real property lease terminations and write-off of certain assets in geographic
markets which are being exited. The Company anticipates the restructuring plan
will be substantially completed by February 28, 1997.
Other Income (Expense). For fiscal 1996, other income and expense
consisted of (i) interest expense of $23.8 million incurred as a result of the
increase in long-term debt resulting from the Merger; (ii) merger expenses of
$4.0 million consisting primarily of professional and advisory fees; and (iii)
interest and other income of $2.8 million relating primarily to investment
earnings on the Company's short-term investments and restricted cash balances.
Income Taxes. The Company recorded a benefit for income taxes during
fiscal 1996 based upon the Company's pre-tax loss in such period. The resulting
income tax benefit has been partially offset by the nondeductible nature of
certain merger costs.
Cumulative Effect of Accounting Change
Effective October 1, 1995, the Company changed its method of accounting
for deferred start-up costs related to new contracts or expansion of existing
contracts (i) to expense costs relating to start-up activities incurred after
commencement of services under the contract, and (ii) to limit the amortization
period for deferred start-up costs incurred prior to the commencement of
services to the initial contract period. Prior to October 1, 1995, the Company
capitalized start-up costs related to the completion of the provider networks
and reporting systems beyond commencement of contracts and, in limited
instances, amortized the start-up costs over a period that included the initial
renewal term associated with the contract. Under the new policy, the Company
does not defer contract start-up costs after contract commencement or include
the initial renewal term in the amortization period. The change was made to
increase the focus on controlling costs associated with contract start-ups.
The Company recorded a pre-tax charge of $1.8 million ($1.0 million after
taxes) in the first quarter of fiscal 1996 as a cumulative effect of a change in
accounting. The pro forma impact of this change for the year ended September 30,
1995 would be to increase costs and expenses by $1.8 million ($1.0 after taxes).
There was no pro forma effect on periods prior to fiscal 1995. The effect of the
change on the current year presented cannot be reasonably estimated.
Fiscal 1995 Compared to Fiscal 1994
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Revenue. Revenue increased by $84.6 million, or 30.6%, to $361.5 million
for fiscal 1995 from $276.9 million for fiscal 1994. Of this increase, $42.8
million was attributable to additional revenue from existing customers generated
by an increase in both the number of programs managed by MBC on behalf of such
customers and an increase in the number of beneficiaries enrolled in such
customers' programs, as well as the inclusion of revenue for the entire period
from certain contracts that commenced in the prior period; and $55.4 million was
attributable to new customers, including two contracts in the HMO market, seven
contracts in the corporate market, five contracts with HMOs focused on Medicaid
beneficiary populations, one contract in the governmental agencies market, the
Iowa Mental Health Contract and one month of the Empire Joint Venture. In
addition, the full year impact of BenesYs, acquired in 1994, and Washton
Institute, from which MBC acquired certain assets and with which the Company
entered into an exclusive affiliation arrangement in 1994, contributed an
additional $7.2 million in revenue. These revenue increases were partially
offset by a $20.7 million decrease in revenue as a result of the termination of
certain contracts, five of which accounted for $16.9 million of such decrease.
Contract price increases were not a material factor in the increase in revenue.
Direct Service Costs. Direct service costs increased by $72.6 million, or
34.0%, to $286.0 million for fiscal 1995 from $213.4 million for fiscal 1994. As
a percentage of revenue, direct service costs increased from 77.1% for fiscal
1994 to 79.1% for fiscal 1995. These increases were principally due to lower
than average direct operating margins generated under two Medicaid contracts
implemented in fiscal 1995 and the loss of a Blue Cross/Blue Shield organization
contract that had a higher than average direct operating margin. (The Blue
Cross/Blue Shield organization terminated its contract when it made an
investment in a competitor of the Company.) These increases were also the result
of an increase in the percentage of revenue derived from capitated contracts,
which generally have higher direct service costs, as well as a change in the mix
of capitated contracts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $8.6 million, or 20.6%, to $49.8 million
for fiscal 1995 from $41.3 million for fiscal 1994. As a percentage of revenue,
selling, general and administrative expenses decreased to 13.8% for fiscal 1995
from 14.9% for fiscal 1994. The increase in total selling, general and
administrative expenses was primarily attributable to growth in information
systems staff, marketing and sales and administrative staff, corporate and
regional management, and support systems; however, these expenses were allocated
over a larger revenue base, leading to the decrease in selling, general and
administrative expenses as a percentage of revenue.
Amortization of Intangibles. Amortization of intangibles increased by $4.0
million, or 22.7%, to $21.4 million for fiscal 1995 from $17.4 million for
fiscal 1994, primarily due to the amortization, for the full period, of
intangibles allocated to the Company as a result of the purchase of Medco
Containment by Merck in November 1993, as well as to increases in the
amortization of deferred start-up costs related to new contracts.
Income Taxes. The provision for income taxes increased by $1.8 million, or
66.7%, to $4.5 million in fiscal 1995 from $2.7 million in fiscal 1994. The
effective combined federal and state income tax rate was 77.3% in fiscal 1995 as
compared to 47.7% in fiscal 1994. The increase in such rate was due to (i)
amortization, for the full period, of non-deductible goodwill allocated to the
Company as a result of the purchase of Medco Containment by Merck; (ii) an
increase in certain non-deductible expenses incurred in 1995 which were
significant relative to the amount of pretax income; and (iii) a shift of the
Company's income to states having higher statutory income tax rates.
Liquidity and Capital Resources
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General. For fiscal 1996, operating activities provided cash of $28.5
million, investing activities used cash of $41.3 million and financing
activities provided cash of $30.6 million, resulting in a net increase in cash
and cash equivalents of $17.8 million. Investing activities in fiscal 1996
consisted principally of (i) capital expenditures of $23.8 million related
primarily to the continued development of the Company's new information systems
and expansion of the Company's National Service Center; (ii) payments totaling
$2.9 million for funding under joint ventures with Neighborhood Health
Providers, LLC, Community Health Network of Connecticut, Inc., and Royal Health
Care LLC; and (iii) payments totaling $12.7 million for the acquisitions of
Choate and ProPsych.
Merger Indebtedness. In October 1995, the Company completed the Merger. In
connection with the Merger, Merck received $326.0 million in cash (which amount
reflects various purchase price adjustments) and retained approximately 15% of
the Common Stock of the post-Merger Company. The Merger was financed with $115.0
million of new cash equity from affiliates of KKR and Company management. The
balance of the transaction was funded with a $75.0 million bridge loan (the
"Bridge Loan") provided by an affiliate of KKR and $155.0 million of initial
borrowings under the Senior Credit Facility. Such funds were utilized to redeem
Common Stock for $258.1 million, repay amounts due Merck of $67.9 million, and
pay certain fees and expenses related to the Merger. In November 1995, the
Company issued $100.0 million in aggregate principal amount of its 11 1/2%
Senior Subordinated Notes due 2005 (the "Private Notes"), the net proceeds of
which were applied to repay the Bridge Loan and a portion of the revolving
credit facility of the Senior Credit Facility (the "Revolving Credit Facility").
In March 1996, the Company exchanged the Private Notes for $100.0 million in
aggregate principal amount of the Notes. As of September 30, 1996, $34.0 million
of revolving loans and $0.4 million of letters of credit were outstanding under
the Revolving Credit Facility, and approximately $50.6 million was available for
future borrowing.
Adjusted EBITDA. Adjusted EBITDA, a financial measure used in the Credit
Agreement and the Indenture, increased by $11.1 million, or 32.6%, to $45.1
million for the twelve months ended September 30, 1996 from $34.0 million for
the twelve months ended September 30, 1995.
Acquisitions. In October 1995, the Company acquired Choate for $8.7
million; in July 1996, the Company made an interim payment of contingent
consideration to Choate's former shareholders of $1.3 million. The Company may
be obligated to make additional contingent payments relating to Choate based on
the 1996 and 1997 pre-tax income of Choate. In December 1995, the Company
acquired ProPsych for an initial payment of $0.1 million and a payment of $2.9
million made in January 1996. In November 1996, the Company paid $0.4 million to
the former shareholders of ProPsych in full settlement of any and all contingent
consideration due to such former shareholders. From time to time, the Company
has engaged in and continues to engage in preliminary discussions with respect
to potential acquisitions and joint ventures.
Cash in Claims Funds and Restricted Cash. As of September 30, 1996, the
Company had total cash balances (including cash equivalents) of $53.0 million,
of which $33.2 million was restricted under certain contractual, fiduciary and
regulatory requirements; moreover, of such amount, $5.7 million was classified
as a long-term asset on the Company's balance sheet. Under certain contracts,
the Company is required to establish segregated claims funds into which a
portion of its capitation fee is held until a reconciliation date (which
reconciliation typically occurs annually). Until that time, cash funded under
these arrangements is unavailable to the Company for purposes other than the
payment of claims. In addition, California and Illinois state regulatory
requirements restrict access to cash held by the Company's subsidiaries in such
states. As of September 30, 1996, the Company also held surplus cash balances,
classified as cash and cash equivalents, as required by the contracts held by
the Company
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relating to both the State of Iowa and the State of Tennessee to provide
behavioral health managed care services to each of those state's Medicaid
populations.
Availability of Cash. Historically, the Company has funded its operations
primarily with cash generated from operations and through the funding of certain
acquisitions, investments and other transactions by its former parent, Merck.
The Company expects to finance its capital requirements in the future through
existing cash balances, cash generated from operations and borrowings under its
revolving credit facility. Based upon the current level of cash flows from
operations and anticipated growth, the Company believes that available cash,
together with available borrowings under the Revolving Credit Facility, and
other sources of liquidity, will be adequate to meet the Company's anticipated
future requirements for working capital, capital expenditures, and scheduled
payments of principal and interest on its indebtedness for the foreseeable
future. There can be no assurance, however, that the Company's business will
generate sufficient cash flow from operations or that future working capital
borrowings will be available in an amount sufficient to enable MBC to service
its indebtedness, including the Notes, or make necessary capital expenditures.
Seasonality
MBC's revenue and direct service costs are affected to a certain degree by
seasonality in the Company's business. The Company's existing revenue base is
relatively consistent due to the nature of its contracts; however, new revenue
generated through increases in membership and customer programs varies each
month. The greatest fluctuations usually occur in January and, to a lesser
extent, July, as these are the primary enrollment periods for most healthcare
benefit plans. January and July are also months in which the Company commences a
significant portion of its programs for new customers, as HMOs and corporations
typically contract for healthcare services on a calendar year basis and state
governments usually operate on a mid-year contracting cycle. Nevertheless,
behavioral health managed care programs for new customers may begin any time;
for example, some of the Company's largest programs to date, the Iowa Mental
Health Contract and the Empire Joint Venture, began on March 1, 1995 and
September 1, 1995, respectively. In addition, direct service costs generally
vary with revenue; however, they are also affected by seasonality. Utilization
of services (and therefore, direct service costs) for HMOs, Blue Cross/Blue
Shield organizations and insurance companies generally tend to be higher overall
in the Company's first and second fiscal quarters (ending in December and
March). Direct service costs also increase in MBC's second fiscal quarter to the
extent of annual wage increases for employees.
Inflation
The effects of inflation on MBC's financial condition and results of
operations were not material during any of the periods presented.
Item 8. Financial Statements and Supplementary Data
The financial statements of the Company set forth on pages F-1 through
F-21 hereof are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None
PART III
39
<PAGE>
- ------------------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrant
Directors and Executive Officers
The following table sets forth certain information regarding MBC's
directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- ----------- -----------------------------------------------------
<S> <C>
Albert S. Waxman, Ph.D 56 Chairman and Chief Executive Officer
Henry R. Kravis 52 Director
George R. Roberts 53 Director
Edward A. Gilhuly 37 Director
Todd A. Fisher 31 Director
Ronald D. Geraty, M.D. 50 Executive Vice President, New Business
Development and Director; President of
Continuum
Arthur H. Halper 49 Executive Vice President, Chief
Financial Officer and Director
Michael G. Lenahan, Esq. 37 Executive Vice President, Mergers &
Acquisitions, General Counsel and Secretary
David B. Stone 50 Executive Vice President and Chief
Marketing Officer
Richard C. Surles, Ph.D. 52 Executive Vice President, Operations
Terry R. Thompson 38 Executive Vice President, Business Operations
and Director
</TABLE>
Albert S. Waxman, Ph.D. has served as Chief Executive Officer and as a Director
of MBC since its incorporation in March 1993. Dr. Waxman has served as Chairman
of the Board of Directors of MBC since December 1994 and served as Co-Chairman
of the Board of Directors of MBC from March 1993 until December 1994. Dr. Waxman
also served as President of MBC from March 1993 through December 1993. Dr.
Waxman was a co-founder of American Biodyne and has served as its Chairman or
Co-Chairman since 1985, its Chief Executive Officer since December 1990, and
also served as its President from May 1990 until April 1993. Since January 1990,
Dr. Waxman has served as Chief Executive Officer of both Novatech Management
Corporation and Waxman Enterprises, private venture capital firms. Since June
1990, Dr. Waxman has served as a member of the Board of Directors of Norland
Corporation, a medical device company in the osteoporosis field, and Oestech
Inc., a medical device company. Dr. Waxman founded Diasonics, Inc., a medical
imaging company, where he served as Chairman of the Board, Chief Executive
Officer and President from 1977 through 1987. Dr. Waxman holds Ph.D. and M.S.
degrees in electrical engineering from Princeton University, where he is a
member of the advisory council of the School of Engineering and Applied
Sciences, and a B.S. degree in electrical engineering from City College of New
York.
Henry R. Kravis became a Director of MBC in October 1995. Mr. Kravis is a
Founding Partner of KKR and KKR Associates and is a member of the limited
liability company which serves as the General Partner of KKR. Mr. Kravis is also
a director of AutoZone, Inc., Borden, Inc., Bruno's, Inc., Duracell
International, Inc., Flagstar Companies, Inc., Flagstar Corporation, IDEX
Corporation, K-III Communications Corporation, Newsquest Capital PLC,
Owens-Illinois, Inc., Owens-Illinois Group, Inc., Safeway Inc., Union Texas
Petroleum Holdings, Inc. and World Color Press, Inc.
40
<PAGE>
George R. Roberts became a Director of MBC in October 1995. Mr. Roberts is a
Founding Partner of KKR and KKR Associates and is a member of the limited
liability company which serves as the General Partner of KKR. Mr. Roberts is
also a director of AutoZone, Inc., Borden, Inc., Bruno's, Inc., Duracell
International, Inc., Flagstar Companies, Inc., Flagstar Corporation, IDEX
Corporation, K-III Communications Corporation, Newsquest Capital PLC,
Owens-Illinois, Inc., Owens-Illinois Group, Inc., Safeway Inc., Union Texas
Petroleum Holdings, Inc. and World Color Press, Inc.
Edward A. Gilhuly became a Director of MBC in October 1995. Mr. Gilhuly was a
General Partner of KKR from January 1995 until January 1996, when he became a
member of the limited liability company which serves as the General Partner of
KKR. Mr. Gilhuly is also a General Partner of KKR Associates and, prior to 1995,
was an Executive of KKR. Mr. Gilhuly is also a director of Doubletree Hotels
Corporation, Layne Christensen Company, Owens-Illinois, Inc., Owens-Illinois
Group, Inc., Red Lion Properties, Inc. and Union Texas Petroleum Holdings, Inc.
Todd A. Fisher became a Director of MBC in October 1995. Mr. Fisher has been an
Executive of KKR since June 1993 and a Limited Partner of KKR Associates since
December 1993. From 1992 to June 1993, Mr. Fisher was an associate at Goldman,
Sachs & Co. Prior to 1992, Mr. Fisher attended the Wharton School of Business at
the University of Pennsylvania.
Ronald D. Geraty, M.D. has served as a Director of MBC since May 1996, President
of Continuum since its formation in July 1994 and an Executive Vice President of
MBC since its incorporation in March 1993. Dr. Geraty has also served as Senior
Vice President, New Business Development of American Biodyne since May 1992 and
as Vice President of American Biodyne from December 1991 to May 1992. He served
as President of Assured Health Systems, Inc. (acquired by American Biodyne in
1991) from September 1989 through May 1992. In addition, he is currently an
Instructor in Psychiatry at the Harvard Medical School. Dr. Geraty holds an M.D.
from the Loma Linda University School of Medicine, Loma Linda, California and
attended Columbia Union College in Washington, D.C.
Arthur H. Halper has served as a Director of MBC since May 1996, and as
Executive Vice President and Chief Financial Officer of MBC since December 1994.
Mr. Halper served as Executive Vice President, Mergers and Acquisitions of MBC
from November 1993 to December 1994, and as Senior Vice President of Finance and
Treasurer of MBC from its incorporation in March 1993 through November 1993. Mr.
Halper has also served as Chief Financial Officer, Executive Vice President and
Treasurer of American Biodyne since December 1994, and served as a Senior Vice
President of American Biodyne from January 1994 to December 1994, as a Vice
President of American Biodyne from March 1993 to January 1994 and as Regional
Vice President of American Biodyne for the Mid-Atlantic Region from January 1992
through March 1993. Mr. Halper also has served as Chief Operating Officer of
AGCA, Inc. (acquired by American Biodyne in 1992) since November 1990. Mr.
Halper, a Certified Public Accountant, holds a B.A. degree in Business
Administration from Rutgers University.
Michael G. Lenahan, Esq. has served as Executive Vice President, Mergers &
Acquisitions of MBC since January 1996, Executive Vice President, General
Counsel and Secretary of MBC since November 1993, and General Counsel or
Executive Vice President, Legal of American Biodyne and each of MBC's other
subsidiaries since January 1994. Mr. Lenahan held the position of Vice
President-Legal of Medco Containment from March 1993 until August 1995. Prior
thereto, Mr. Lenahan was an associate with the New York law firm of Shearman &
Sterling. Mr. Lenahan holds a J.D. degree from New York University School of Law
and a B.A. degree in Political Science from the State University of New York at
Binghamton.
41
<PAGE>
David B. Stone has served as Executive Vice President and Chief Marketing
Officer of MBC since June 1994 and served as Senior Vice President of MBC from
January 1994 to June 1994. Mr. Stone also served as Vice President of MBC from
its incorporation in March 1993 to January 1994. Mr. Stone has served as
President of Personal Performance Consultants, Inc. ("PPC"), a subsidiary of
MBC, since August 1994 and served as Senior Vice President of Managed Care
Services and Chief Marketing Officer of PPC from June 1993 until August 1994.
From August 1988 to April 1992, Mr. Stone was Vice President of Sales and
Marketing for Preferred Health Care, Ltd. and Chief Marketing Officer of Empire
Mental Health Choice, a joint venture between Preferred Health Care Ltd. and
Empire. Mr. Stone holds an M.S.W. degree from the Columbia School of Social Work
and an M.B.A. degree from Pace University.
Richard C. Surles, Ph.D. has served as an Executive Vice President of MBC since
November 1994. In October 1995, Dr. Surles assumed the position of Executive
Vice President, Service System Development of MBC and, commencing in January
1996, became Executive Vice President, Operations of MBC. Dr. Surles served as
the New York State Commissioner of Mental Health from October 1987 to November
1994. Dr. Surles holds a Ph.D. degree in Administration and Organizational
Behavior from the University of North Carolina.
Terry R. Thompson has served as a Director of MBC since October 1996 and as
Executive Vice President, Business Operations of MBC since September 1996. Prior
to joining MBC, Mr. Thompson was an executive of Medco Containment from
September 1990 to January 1996. Most recently, Mr. Thompson served as Executive
Vice President of Operations of Merck/Medco Managed Care, Inc., and as President
and a Director of National Pharmacies, Inc., NRx Services, Inc., Paid
Prescriptions, Inc. and a number of other subsidiaries of Medco Containment,
from October 1994 to January 1996. Mr. Thompson also served as a Senior Vice
President of Synetic, Inc. ("Synetic"), at such time a subsidiary of Medco
Containment, and was responsible for five of Synetic's institutional pharmacy
companies from October 1993 to October 1994. From September 1991 to October
1993, Mr. Thompson held the position of Senior Vice President-Eastern Region of
Medco Containment, and from September 1990 to September 1991 he served as a Vice
President and General Manager for the company. Prior to joining Medco
Containment, Mr. Thompson worked for Federal Express Corporation from 1975 to
1990, holding various positions during such period, serving most recently as
Managing Director, Boston Operations. Mr. Thompson serves on the Board of
Directors of The Entertainment Connection, Inc., an Internet products company,
and Operation Link-Up, a not-for-profit corporation dedicated to Paterson, New
Jersey high school students. Mr. Thompson holds a B.B.A. degree in Management
from Memphis State University.
Messrs. Kravis and Roberts are first cousins.
Recent Changes
In November 1996, the Company entered into an employment agreement with
John P. Docherty, M.D., under which Dr. Docherty will assume the position of
Executive Vice President and Chief Medical Officer of the Company effective
March 1, 1997.
Effective May 31, 1996, Richard S. Chung, M.D. resigned from his position
as Executive Vice President and Chief Clinical Officer of the Company. Effective
April 1, 1996, Shannon R. Kennedy, Ph.D. resigned from his position as President
and Chief Operating Officer of the Company. In December 1995, Philip Morlan
resigned from his position as Executive Vice President and Chief Information
Officer of the Company. Upon the departure of each such executive from the
Company, MBC purchased
42
<PAGE>
all shares of Common Stock acquired by such executive on October 6, 1995 in
connection with the Merger.
Item 11. Executive Compensation
The following table sets forth in summary form all compensation for all
services rendered in all capacities to the Company paid or accrued during the
three fiscal years ended September 30, 1996 to the Chief Executive Officer of
the Company and the four other most highly compensated executive officers of the
Company (collectively, with the Chief Executive Officer, the "Named Executive
Officers"). Such table represents historical compensation and is not indicative
of future compensation to be received by the Named Executive Officers.
<TABLE>
<CAPTION>
Historical Summary Compensation Table
Long Term
Annual Compensation Compensation
Securities
Other Annual Underlying All Other
Named Executive Officer Year Salary Bonus Compensation MBC Options Compensation(2)
(#)
<S> <C> <C> <C>
Albert S. Waxman, Ph.D. 1996 $435,000 $ 65,250 --- 2,800,000 ---
Chairman and 1995 405,417 70,000 --- --- ---
Chief Executive Officer 1994 400,000 86,262 --- --- ---
Ronald D. Geraty, M.D. 1996 275,000 41,250 --- 300,000 $1,000
Executive Vice President, 1995 241,750 27,125 --- --- 800
Business Development; 1994 217,000 32,688 --- --- 800
President of Continuum
Arthur H. Halper 1996 250,000 37,500 --- 150,000 1,500
Executive Vice President 1995 210,000 20,625 --- --- 1,200
Chief Financial Officer 1994 165,000 32,209 --- --- 1,200
Richard C. Surles, Ph.D 1996 250,000 100,000 $77,977(1) 120,000 ---
Executive Vice President 1995 177,083 0 --- --- ---
Operations 1994 0 0 --- --- ---
David B. Stone 1996 225,000 33,750 --- 300,000 1,900
Executive Vice President 1995 225,000 24,771 --- --- 1,500
Chief Marketing Officer 1994 180,082 10,079 --- --- 1,500
</TABLE>
- ----------------------
(1) Represents reimbursement of expenses in connection
with Dr. Surles' relocation to the Company's corporate headquarters.
(2) Represents the Company's matching contribution under the Merit Behavioral
Care Corporation 401(k) Plan.
43
<PAGE>
Options/SAR Grants in Fiscal 1996
The following table summarizes options to acquire shares of Common Stock
granted in fiscal 1996 to the Named Executive Officers.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable Value
Number of % of Total of Assumed Annual Rates
Securities Options Granted Exercise of Stock Price Appreciation
Underlying to Employees Price Expiration for Option Term
Name Options Granted in Fiscal Year $/Share Date 5% 10%
- ---- --------------- -------------- ------- --------- ----------------------
(#)
<S> <C> <C> <C> <C> <C> <C>
Albert S. Waxman 2,800,000 42.9% $5.00 10/06/2005 $8,804,525 $22,312,394
Ronald D. Geraty 300,000 4.6 5.00 10/06/2005 943,342 2,390,614
Arthur H. Halper 150,000 2.3 5.00 10/06/2005 471,671 1,195,307
Richard C. Surles 120,000 1.8 5.00 10/06/2005 377,337 956,245
David B. Stone 300,000 4.6 5.00 10/06/2005 943,342 2,390,614
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
The following table sets forth the number of shares covered by both
exercisable and unexercisable options to acquire shares of Common Stock held by
the Named Executive Officers as of September 30, 1996.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities In the Money
Underlying Unexercise Options/SARs Options/SARs at
at Fiscal Year End Fiscal Year End(1)
Shares
Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ------------ ------------- ----------- -------------
#)
<S> <C>
Albert S. Waxman -- -- -- 2,800,000 -- --
Ronald D. Geraty -- -- -- 300,000 -- --
Arthur H. Halper -- -- -- 150,000 -- --
Richard C. Surles -- -- -- 120,000 -- --
David B. Stone -- -- -- 300,000 -- --
</TABLE>
- --------------
(1)Until such time there is a public market in which the Common Stock may be
traded, the value of such options is determined under a formula delineated
under the 1995 Option Plan. As of September 30, 1996, based on such formula,
no value was associated with such options.
44
<PAGE>
The following table sets forth the number of shares covered by both
exercisable and unexercisable options to acquire shares of common stock of Merck
held by the Named Executive Officers as of September 30, 1996.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities In the Money
Underlying Unexercised Merck Optins/SARs Merck Options/SARs
at Fiscal Year End at Fiscal Year End(1)
Shares
Acquired Value
Name(2) on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
(#) (#) (#)
<S> <C> <C> <C> <C> <C> <C>
Albert S. Waxman 86,685 $3,781,881 471,047 109,262 $23,099,156 $5,293,198
Ronald D. Geraty --- --- 9,363 6,070 428,939 247,808
Arthur H. Halper 1,098 53,739 24,280 12,141 1,163,862 581,979
David B. Stone 9,743 439,385 --- 4,857 --- 233,792
</TABLE>
- ----------------
(1)Values for "in-the-money" options represent the positive spread between the
respective exercise prices of outstanding options and $70.375, the value of
the common stock of Merck as of September 30, 1996, as reported on the New
York Stock Exchange Composite Tape.
(2)Richard C. Surles holds no options to acquire shares of common stock
of Merck.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of MBC's Board of Directors is comprised of
Messrs. Gilhuly and Fisher. Mr. Gilhuly is a member of the limited liability
company which serves as the General Partner of KKR and is also a General Partner
of KKR Associates. Mr. Fisher is an Executive of KKR and a Limited Partner of
KKR Associates. KKR Associates beneficially owned 73.7% of MBC's outstanding
Common Stock as of December 1, 1996. As a General Partner of KKR Associates, Mr.
Gilhuly may be deemed to share beneficial ownership of the Common Stock
beneficially owned by KKR Associates; however, Mr. Gilhuly disclaims any such
beneficial ownership.
Compensation of Directors
Each director who is not an employee of the Company receives an aggregate
annual fee of $25,000, payable in quarterly installments. Directors who are also
employees of the Company receive no remuneration for serving as directors.
Management Incentive Plan
The Board of Directors of MBC has adopted an Annual Incentive Plan for Key
Employees of MBC (the "Incentive Plan"). The Incentive Plan provides that each
fiscal year MBC senior management will designate as participants
("Participants") in the Incentive Plan those employees of MBC who are in a
position to significantly impact the performance of the Company. Participants
will be eligible to receive payments under the Incentive Plan equal to a
specified percentage of their base salaries if the Company attains certain
performance goals set by the Compensation Committee.
1995 Merit Stock Option Plan
In October 1995, MBC adopted the 1995 Stock Purchase and Option Plan for
Employees of Merit Behavioral Care Corporation and Subsidiaries (the "1995
Option Plan") providing for the issuance of up to 8,561,000 shares of authorized
but unissued or reacquired shares of Common Stock, subject to
45
<PAGE>
adjustment to reflect certain events such as stock dividends, stock splits,
recapitalization, mergers or reorganizations of or by the Company. The 1995
Option Plan is intended to assist the Company in attracting and retaining
employees of outstanding ability and to promote the identification of their
interests with those of the stockholders of the Company. The 1995 Option Plan
permits the issuance of Common Stock (the "Purchase Stock") and the grant of
Non-Qualified Stock Options (the "1995 Options") to purchase shares of Common
Stock (the issuance of Purchase Stock and the grant of Options pursuant to the
Plan being a "1995 Grant"). Unless sooner terminated by MBC's Board of
Directors, the 1995 Option Plan will expire on October 6, 2005. Such termination
will not affect the validity of any 1995 Grant outstanding on the date of
termination.
Each individual 1995 Option agreement provides that, upon certain events
(each, an "Acceleration Event"), the 1995 Options will become immediately
exercisable. The 1995 Option agreements provide that an Acceleration Event
occurs if the participant's employment with the Company is terminated by such
participant for "good reason" or by the Company without "cause" (each as defined
in the MBC Management Stockholder's Agreements (as defined)) within one year
following certain change in control events.
The 1995 Option Plan provides generally that the exercise price of 1995
Options and the purchase price of any Common Stock granted for consideration
will not be less than 50% of the fair market value per share of Common Stock on
the date of such 1995 Grant. Each participant in the 1995 Option Plan is
required to enter into a stockholder's agreement with MBC substantially similar
to the MBC Management Stockholder's Agreements described below.
The Compensation Committee of MBC's Board of Directors administers the
1995 Option Plan, including, without limitation, the determination of the
employees to whom 1995 Grants will be made, the number of shares of Common Stock
subject to each 1995 Grant, and the various terms of such 1995 Grants. The
Compensation Committee of MBC's Board of Directors may from time to time amend
the terms of any 1995 Grant, but, except for adjustments made upon a change in
the Common Stock of the Company by reason of a stock split, spin-off, stock
dividend, stock combination or reclassification, recapitalization,
reorganization, consolidation, change of control, or similar event, such action
shall not adversely affect the rights of any participant under the 1995 Option
Plan with respect to the Purchase Stock and the 1995 Options without such
participant's consent. MBC's Board of Directors retains the right to amend,
suspend or terminate the 1995 Option Plan.
1996 Merit Stock Option Plan
In January 1996, MBC adopted the Merit Behavioral Care Corporation
Employee Stock Option Plan (the "1996 Option Plan") providing for the issuance
of up to 1,000,000 shares of authorized but unissued or reacquired shares of
Common Stock, subject to adjustment to reflect certain events such as stock
dividends, stock splits, recapitalization, mergers or reorganizations of or by
the Company. The 1996 Option Plan is intended to provide incentive to employees
of MBC to remain in the employ of the Company and to increase their interest in
the success of the Company through the grant of stock options. Substantially all
full-time employees of MBC (other than those receiving 1995 Options) who
commenced employment with MBC prior to January 1, 1996 are eligible to
participate in the 1996 Option Plan. The 1996 Option Plan permits the grant of
Non-Qualified Stock Options (the "1996 Options") to purchase shares of Common
Stock (each such grant of 1996 Options being a "1996 Grant"). Unless sooner
terminated by the MBC Board of Directors, the 1996 Option Plan will expire on
January 1, 2006. Such termination will not affect the validity of any 1996 Grant
outstanding as the date of termination.
46
<PAGE>
The Compensation Committee of the MBC Board of Directors administers the
1996 Plan, including, without limitation, the determination of employees to whom
1996 Grants will be made, the number of shares of Common Stock subject to each
1996 Grant, and the terms of such 1996 Grant. 1996 Grants to participants under
the 1996 Option Plan are determined based on their length of service with the
Company, with reference to the following service categories: (a) less than one
year; (b) one to two years; (c) two to three years; and (d) greater than three
years. Each participant will be required to execute an agreement with MBC (a
"1996 Option Agreement") containing the following terms, among others: the
number of 1996 Options; the exercise price therefor; and the vesting schedule
for the 1996 Options.
The 1996 Option Agreements prohibit the participants from transferring
1996 Options, subject to enumerated exceptions. The 1996 Options are not
exercisable until after the date when at least 25% of the then outstanding
shares of Common Stock (on a fully diluted basis) have been sold in underwritten
public offerings under the Securities Act (the "Public Company Date") and,
thereafter, only when the shares of Common Stock underlying such 1996 Options
have been registered under the Securities Act and qualified under applicable
state "blue sky" laws, or MBC has determined that an exemption from such
registration and "blue sky" qualification is available. In addition, upon
termination of the participant's employment with MBC at any time, all unvested
1996 Options will be canceled and, if such termination is for Cause (as defined
in the 1996 Option Agreements), all vested Options also will be canceled. If
such employment is terminated prior to the Public Company Date without Cause,
MBC will have the right for three years after such termination to require the
participant to surrender for cancellation all vested 1996 Options in exchange
for a payment determined under the 1996 Option Plan. If such employment is
terminated without Cause after the Public Company Date, the participant's vested
1996 Options will remain exercisable for 90 days following such termination.
The MBC Board of Directors has reserved the right to amend or terminate
the 1996 Option Plan, provided that no such amendment or termination may
adversely affect the rights of participants in their 1996 Options.
Employment Agreements
Albert S. Waxman. American Biodyne has entered into an amended and
restated employment agreement, dated as of August 17, 1992 and amended as of
October 1, 1993, with Albert S. Waxman. The agreement provides that Dr. Waxman
will be employed by American Biodyne for a period of five years and will receive
a base salary of $400,000 plus a yearly discretionary bonus. Such annual base
salary has been subsequently increased. American Biodyne may terminate the
agreement for cause or by mutual agreement with Dr. Waxman. Dr. Waxman may
terminate the agreement for good reason. If American Biodyne terminates the
agreement for reasons other than cause or if Dr. Waxman terminates the agreement
for good reason, Dr. Waxman will be entitled to (i) receive his base salary
until the earliest of five years, death or the occurrence of a circumstance that
constitutes cause or (ii) elect the employment status of Chairman Emeritus of
American Biodyne.
Michael G. Lenahan. The Company and Medco Containment have entered into an
employment agreement, dated as of February 1, 1995, with Michael G. Lenahan. The
agreement provides that Mr. Lenahan will be employed by the Company for a period
of three years and receive a base salary of $200,000 per year, plus a yearly
discretionary bonus and certain other fringe benefits. Such annual base salary
has been subsequently increased. Mr. Lenahan may terminate the agreement for
cause or upon a change of control of MBC. The Company may terminate the
agreement for cause, without cause upon 30 days' written notice or if Mr.
Lenahan becomes disabled. If Mr. Lenahan terminates the agreement or if the
Company terminates the agreement without cause, he is entitled to work for the
Company as a consultant for a period of one year and to be paid at the base
compensation rate in effect at the time of
47
<PAGE>
termination or, at his election, to assume a senior level position in the legal
department of Medco Containment.
Richard C. Surles. The Company has entered into an employment agreement,
effective January 16, 1995, with Richard C. Surles. The agreement provides that
Dr. Surles will be employed by the Company for the period ending January 16,
1998 and receive (i) a minimum base salary of $250,000 per year, plus a yearly
discretionary bonus, (ii) loans in connection with his relocation and (iii) an
advance on his salary in the form of a loan of $25,000. The Company may
terminate the agreement for cause, if Dr. Surles becomes disabled or without
cause. Dr. Surles may terminate the agreement upon not less than six months'
written notice. If the Company terminates the agreement without cause, Dr.
Surles will be entitled to receive (i) his base compensation for the balance of
the term of the agreement (but in no event less than one year) and (ii)
insurance and medical benefits for the same term as base compensation is paid.
David B. Stone. The Company, American Biodyne and PPC have entered into a
management agreement, dated April 27, 1992 and amended as of April 30, 1993,
with David B. Stone. The agreement provides for an initial employment period
that ended on March 31, 1995 and was automatically renewed according to its
terms for an additional two years. The agreement provides that Mr. Stone shall
receive a minimum base annual salary of $176,000, plus a discretionary bonus
based on targeted performance objectives, and certain other benefits. Such
annual base salary has been subsequently increased. Mr. Stone may terminate the
agreement for good reason and the Company may terminate the agreement for cause
or if Mr. Stone becomes disabled. If Mr. Stone terminates the agreement for good
reason or if the Company terminates the agreement for reasons other than for
cause, Mr. Stone will be entitled to compensation equal to the greater of (i)
his then current salary at the time of entering into the agreement for the
remainder of the term (up to two years) or (ii) his then current salary for a
period of one year.
Terry R. Thompson. The Company has entered into an employment agreement,
effective as of September 3, 1996, with Terry R. Thompson. The agreement
provides that Mr. Thompson will receive a base salary of $350,000 per year
during his employment with the Company, plus a yearly discretionary bonus and
certain other fringe benefits. The employment agreement remains in effect until
terminated (i) by the Company (with or without cause) upon the provision to Mr.
Thompson of six months' prior notice, (ii) by the Company upon Mr. Thompson's
death or disability, or (iii) by Mr. Thompson for good reason upon the provision
by Mr. Thompson of six months' prior notice. If the Company terminates Mr.
Thompson's employment without cause, or Mr. Thompson terminates his employment
with the Company for good reason, Mr. Thompson will be entitled to receive (i)
his base compensation for 12 months from the date of termination and (ii)
insurance and medical benefits for the same term as base compensation is paid.
In accordance with such agreement, Mr. Thompson acquired shares of Common Stock
under an agreement having substantially the same terms as an MBC Management
Stockholder's Agreement and received a grant of 1995 Options. Under the
employment agreement, the Company has agreed that, in the event Mr. Thompson is
offered and accepts a promotion, he will receive an additional grant of 1995
Options.
Severance Agreements
On October 6, 1995, the Company entered into severance agreements
(collectively, the "Severance Agreements") with Dr. Waxman, Dr. Geraty, Mr.
Halper, Mr. Lenahan, Mr. Stone and Dr. Surles. Each Severance Agreement provides
that if, prior to October 6, 2000, (i) the Company terminates employment of the
applicable officer for reasons other than for "cause" (as defined therein) or
(ii) the officer terminates employment on his own initiative for "good reason"
(as defined therein), such officer
48
<PAGE>
will be entitled, for a period of twelve months, to be paid the excess, if any,
of his base salary at the time of such termination over any other payments made
by the Company to such officer under other employment or consulting agreements
then in effect.
MBC Management Stockholder's Agreements
In connection with the Merger and from time to time thereafter, the
Company has entered into stockholder's agreements (each, an "MBC Management
Stockholder's Agreement") with all management employees that are stockholders of
MBC or holders of any 1995 Options (each, an "MBC Management Stockholder").
Pursuant to each MBC Management Stockholder's Agreement, the MBC Management
Stockholder may not transfer any shares of Common Stock acquired thereby or upon
exercise of vested 1995 Options (collectively, the "Plan Shares") within five
years after the purchase date thereof, except as described below and except (a)
for certain transfers to family members, similar transfers in the nature of
estate planning and in connection with the loans described under "Certain
Relationships and Related Transactions," (b) pursuant to a Qualified Public
Offering (as defined therein), in which event only a stated percentage of his
Plan Shares becomes transferable or (c) pursuant to certain sales of Common
Stock by MBC Associates, L.P., an affiliate of KKR ("MBC Associates"), in which
event the MBC Management Stockholder is entitled to sell a stated percentage of
his Plan Shares. Each MBC Management Stockholder's Agreement provides the MBC
Management Stockholder with the right to (a) require the Company to repurchase
all of his Plan Shares and pay him a stated price for cancellation of 1995
Options upon a Permitted Retirement (as defined therein), death or disability,
(b) until the later of five years after the purchase date or the first Qualified
Public Offering, have the Company register a stated percentage of his Plan
Shares under the Securities Act in connection with certain public offerings, and
(c) prior to the fifth anniversary of the first Public Offering (as defined
therein), include a stated percentage of his Plan Shares in any sale of Common
Stock by MBC Associates or an affiliate to any non-affiliated person (other than
a Public Offering). Each MBC Management Stockholder's Agreement also provides
the Company with (a) prior to a Public Offering, the right of first refusal to
buy Plan Shares owned by each MBC Management Stockholder on essentially the same
terms and conditions as such MBC Management Stockholder proposes in a sale of
his Plan Shares to another purchaser, (b) the right to repurchase all of the MBC
Management Stockholder's Plan Shares and pay him a stated price for cancellation
of his 1995 Options upon certain events, including termination of employment
(with or without cause) or an unpermitted transfer of Plan Shares and (c) prior
to the fifth anniversary of the first Public Offering, the right to require the
MBC Management Stockholder to sell a stated percentage of his Plan Shares in any
sale of Common Stock by MBC Associates or an affiliate to any non-affiliated
person (other than a Public Offering). Upon a "change of control" (as defined
therein) of the Company, the transfer restrictions, right of first refusal, and
certain other rights with respect to sale and repurchase of the Plan Shares and
cancellation of 1995 Options as described above will lapse.
The repurchase price of the Plan Shares under the MBC Management
Stockholder's Agreements depends upon the nature of the event that triggers the
repurchase and whether such repurchase occurs at the election of the MBC
Management Stockholder or the Company. Generally, if the repurchase is at the
participant's election, the repurchase price per share will be the greater of
purchase price paid by the MBC Management Stockholder (the "Plan Share Purchase
Price") and the market price; if the Common Stock is not then publicly traded,
the repurchase price per share will be the Plan Share Purchase Price plus the
increase, if any, in book value per share since the date of purchase of the Plan
Shares.
Generally, if the repurchase is at the Company's election, the repurchase
price per share will be the lesser of (a) the market price and (b) the Plan
Share Purchase Price plus a stated percentage (the "Percentage") of the amount
by which the market price exceeds the Plan Share Purchase Price; if the Common
Stock is not then publicly traded, the repurchase price per share will be the
lesser of (a) the
49
<PAGE>
Base Value Per Share (as defined below) and (b) the Plan Share Purchase Price,
plus the Percentage multiplied by the increase, if any, in book value per share
since the date of the purchase of the Plan Shares. The Percentage is 0% during
the first year following the MBC Management Stockholder's purchase of Plan
Shares, and increases annually thereafter (up to 100%) in increments of 20%. The
"Base Value Per Share" equals the Plan Share Purchase Price per share plus the
change (positive or negative) in book value per share since the date of the
purchase.
If the Company repurchases Plan Shares as described above, it also must
pay the MBC Management Stockholder the excess, if any, of the repurchase price
applied to the repurchase of Plan Shares, over the exercise prices of the
applicable 1995 Options, multiplied by the number of Exercisable Option Shares.
Each MBC Management Stockholder's Agreement defines Exercisable Option Shares as
shares of Common Stock which, at the time of determination, could be purchased
by the MBC Management Stockholder upon exercise of his outstanding exercisable
1995 Options.
Each MBC Management Stockholder's Agreement also contains noncompete
provisions, pursuant to which each MBC Management Stockholder has agreed, for
the term of his employment and one year thereafter, not to produce, sell or
distribute, directly or indirectly, any product or service sold or distributed
by the Company or its affiliated entities. The Company may extend the noncompete
period for one additional year by giving notice thereof and paying the MBC
Management Stockholder an amount equal to his annual base salary, calculated as
of the time of termination of employment (the "Noncompete Amount"). If the MBC
Management Stockholder's employment with the Company is terminated without
"cause" or for "good reason" (each as defined therein), the noncompete
requirements will apply to the first year following termination of employment
only if the Company pays the MBC Management Stockholder the Noncompete Amount.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known to MBC as of
December 1, 1996 regarding the beneficial ownership of Common Stock by (i) all
persons who own beneficially more than 5% of the Common Stock, (ii) each
director of MBC, (iii) the Chief Executive Officer of MBC and each of the Named
Executive Officers and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
Percentage
Number of of Common
Beneficial Owner Shares Stock
- ----------------------------------------------- -------------------- -------------
<S> <C> <C> <C>
KKR Associates(1) 21,000,000 73.7%
9 West 57th Street
New York, NY 10019
Merck & Co., Inc.(2) 4,262,800 15.0
One Merck Drive
Whitehouse Station, NJ 08889
The Albert S. Waxman Family
Charitable Remainder Unitrust(3) 1,000,000 3.5
50
<PAGE>
Albert S. Waxman(4) 1,055,100 3.7
Ronald D. Geraty(5) 100,000 0.4
David B. Stone(5) 100,000 0.4
Arthur H. Halper(6) 50,000 0.2
Richard C. Surles(7) 40,000 0.1
All directors and executive officers as a
group (11 persons) 1,495,100 5.3
</TABLE>
---------------- -----
Total 27,757,900 97.5%
(1)Shares of Common Stock shown as beneficially owned by KKR Associates are held
by MBC Associates and KKR Partners II, L.P. ("KKR Partners II"); KKR Associates
is the sole general partner of both MBC Associates and KKR Partners II and
possesses sole voting and investment power with respect to such shares. KKR
Associates is a limited partnership, the general partners of which are Henry R.
Kravis, George R. Roberts, Robert I. MacDonnell, Paul E. Raether, Michael W.
Michelson, Michael T. Tokarz, James H. Greene, Jr., Perry Golkin, Clifton S.
Robbins, Scott M. Stuart and Edward A. Gilhuly. Messrs. Kravis, Roberts and
Gilhuly are also directors of the Company. Such individuals may be deemed to
share beneficial ownership of the shares shown as beneficially owned by KKR
Associates. Such individuals disclaim beneficial ownership of any such shares.
(2)Represents shares held by Medco Holdings Corp., a subsidiary of Medco
Containment, which is a wholly owned subsidiary of Merck.
(3)Represents shares held by The Albert S. Waxman Family Charitable Remainder
Unitrust, of which Albert S. Waxman is trustee. As trustee, Dr. Waxman may be
deemed to have beneficial ownership of the shares shown as beneficially owned by
such trust. Dr. Waxman disclaims beneficial ownership of any such shares.
(4)Does not include options to acquire 560,000 shares of Common Stock that are
exercisable within 60 days of the date hereof.
(5)Does not include options to acquire 60,000 shares of Common Stock that are
exercisable within 60 days of the date hereof.
(6)Does not include options to acquire 30,000 shares of Common Stock that are
exercisable within 60 days of the date hereof.
(7)Does not include options to acquire 24,000 shares of Common Stock that are
exercisable within 60 days of the date hereof.
(8)Does not include options to acquire 764,000 shares of Common Stock in the
aggregate that are exercisable within 60 days of the date hereof.
Item 13. Certain Relationships and Related Transactions
Transactions with KKR. KKR Associates beneficially owned 73.7% of MBC's
outstanding Common Stock as of December 1, 1996. Messrs. Kravis, Roberts and
Gilhuly, directors of the Company, are members of the limited liability company
which serves as the General Partner of KKR and also are General Partners of KKR
Associates. Mr. Fisher, also a director of the Company, is an Executive of KKR
and a Limited Partner of KKR Associates. KKR, an affiliate of KKR Associates,
received a fee of
51
<PAGE>
$5.5 million for negotiating the Merger and arranging the financing therefor
and, from time to time in the future, KKR may receive customary investment
banking fees for services rendered to the Company in connection with
divestitures, acquisitions and certain other transactions. In addition, KKR has
agreed to render management, consulting and financial services to the Company
for an initial annual fee of $300,000. During fiscal 1996, KKR received $400,000
in fees for such services. Executives of KKR who also serve as directors of the
Company receive customary directors' fees.
In connection with the Merger, the Company incurred $75.0 million of
subordinated indebtedness under the Bridge Loan provided by MBC Associates, the
general partner of which is KKR Associates. A portion of the net proceeds from
the offering of the Private Notes in November 1995 (which were subsequently
exchanged for the Notes) was applied to repay all indebtedness outstanding under
the Bridge Loan (including accrued interest).
MBC Associates and KKR Partners II (collectively, the "KKR Investors")
have the right, under certain circumstances and subject to certain conditions,
to require the Company to register under the Securities Act shares of Common
Stock held by them pursuant to a registration rights agreement entered into in
connection with the Merger and certain stockholders' agreements. Such
registration rights will generally be available to the KKR Investors until
registration under the Securities Act is no longer required to enable them to
resell the Common Stock owned by them. Such registration rights agreement
provides, among other things, that the Company will pay all expenses in
connection with the first six registrations requested by the KKR Investors and
in connection with any registration commenced by the Company as a primary
offering. In addition, other stockholders besides the KKR Investors, including
the MBC Management Stockholders and Medco Containment, will be allowed to
participate in any registration process, subject to certain conditions and
exceptions.
Transactions with Management. In connection with the Merger, certain MBC
Management Stockholders borrowed all or a portion of the purchase price for the
Plan Shares acquired by them pursuant to their respective MBC Management
Stockholder's Agreements. Dr. Waxman borrowed $5.0 million; Dr. Surles borrowed
$200,000; Dr. Geraty borrowed $250,000; Mr. Stone borrowed $250,000; and Mr.
Morlan, the Company's former Executive Vice President and Chief Information
Officer, borrowed $100,000. In addition, in connection with his purchase of
shares of Common Stock, Mr. Thompson borrowed $500,000. All such borrowings are
evidenced by promissory notes from the applicable MBC Management Stockholder and
are secured by a pledge of such MBC Management Stockholder's Plan Shares. Each
promissory note provides for the payment of interest at a rate of 6.5% per
annum. The promissory notes of Dr. Waxman, Dr. Surles and Mr. Thompson mature on
December 31, 2000. In connection with Mr. Morlan's separation from the Company,
the Company acquired Mr. Morlan's shares of Common Stock. As part of such
transaction, the Company cancelled Mr. Morlan's promissory note. Mr. Stone
repaid his loan in November 1995, and Dr. Geraty repaid his loan in October
1996.
Dr. Waxman owns all of the shares of LNY Corp., a limited partner of 38
Newbury Ventures/MBC Limited Partnership ("38 Newbury"). In connection with the
Merger, the Company entered into a Stock Purchase and Stockholder's Agreement
(the "38 Newbury Stockholder's Agreement"), dated as of October 6, 1995, with 38
Newbury and MBC Associates. Pursuant to the 38 Newbury Stockholder's Agreement,
38 Newbury purchased 600,000 shares of Common Stock for $3.0 million. The 38
Newbury Stockholder's Agreement provides the Company with the right of first
refusal to purchase shares of Common Stock on the same terms and conditions as
are proposed by a third party offer at any time prior to a Public Offering (as
defined therein). Also under the 38 Newbury Stockholder's Agreement, at any time
prior to the fifth anniversary of the first Public Offering, (i) MBC Associates
may require 38 Newbury to include a pro rata portion of its shares of Common
Stock in any
52
<PAGE>
sale by MBC Associates of its holdings of Common Stock and (ii) 38 Newbury has
the option to include a pro rata portion of its shares in any sale by MBC
Associates of its holdings of Common Stock. The 38 Newbury Stockholder's
Agreement further provides that, upon the later of the first Public Offering and
the fifth anniversary of the Stock Closing (as defined therein), the parties
will be bound by certain provisions of the registration rights agreement
discussed above between the Company and the KKR Investors.
Transactions with Merck and Medco Containment. In connection with the
Merger, the Company entered into a stockholders' agreement (the "Medco
Stockholders' Agreement") with the KKR Investors and Medco Containment (together
with the KKR Investors, the "Stockholders").
Pursuant to the Medco Stockholders' Agreement, Medco Containment has the
right to include a pro rata portion of its shares of Common Stock in any
proposed transfer of KKR Investors' Common Stock (other than to affiliates of
the KKR Investors) at the same price per share and upon the same terms and
conditions as such shares of KKR Investors' Common Stock would be sold to the
proposed transferee. The Medco Stockholders' Agreement also provides the KKR
Investors with the right to require Medco Containment to sell all of its shares
of Common Stock in a proposed transfer by the KKR Investors of 100% of the KKR
Investors' Common Stock.
Medco Containment will have the right, on two occasions following the
earlier to occur of (i) 180 days after the initial public offering of Common
Stock and (ii) five years from the closing date of the Merger, to cause the
Company to file a registration statement in connection with the sale of shares
of Common Stock held by Medco Containment. The Company has agreed to pay certain
expenses of such offerings. The Stockholders will, upon request, execute 180 day
market stand-off agreements in connection with the initial public offering of
Common Stock, if so requested by the underwriters for such an initial public
offering.
After the Company's initial public offering, each time the Company files a
registration statement (other than on Form S-4 or S-8) in connection with a sale
of shares of Common Stock by the Company, the KKR Investors or any of their
respective Affiliates (as defined therein), the Company, at the request of Medco
Containment, will use its reasonable efforts to effect the registration of all
shares of Common Stock owned by Medco Containment that the Company has been so
requested to register by Medco Containment. In the event that the managing
underwriter or underwriters determines that a proposed offering including shares
of Medco Containment and the KKR Investors exceeds the number of shares of
Common Stock that can be sold without having a significant adverse effect on
such offering or that inclusion of such Stockholders' shares would significantly
and adversely affect the offering, the number of shares held by the KKR
Investors and Medco Containment, if any, to be registered shall be in proportion
to the relative sizes of their holdings of Common Stock.
In certain circumstances, including the issuance of Common Stock by the
Company to Affiliates of the KKR Investors, Medco Containment will have the
right to subscribe for and purchase additional shares of Common Stock at the
same price and upon the same terms and conditions so as to enable Medco
Containment to maintain its percentage of ownership of shares of Common Stock as
of the time of the Company's proposal to issue shares of Common Stock. In
addition, Medco Containment has the right to designate a person to observe all
Board of Directors' meetings and to approve certain transactions with affiliates
(other than transactions as to which no approval of institutional lenders is
required).
Pursuant to the Merger Agreement, Medco Containment agreed to abide by a
confidentiality provision relating to all information it possesses regarding the
Company. A portion of the purchase price for the Company was allocated to the
consideration paid to Merck in connection with the Merger.
53
<PAGE>
In the ordinary course of business, the Company provides EAP services to
certain divisions of Merck and behavioral health managed care services to Medco
Containment.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(1) Financial Statements. See accompanying Index to Financial Statements and
Financial Statement Schedules on page 58.
(2) Financial Statement Schedules. See accompanying Index to Financial
Statements and Financial Statement Schedules on page 58.
(3) Exhibits (Numbered in accordance with Item 601 of Regulation S-K).
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Pages
- ----------- ---------------------------------------------------- --------------
<S> <C> <C> <C>
2.1 Agreement and Plan of Merger, dated as of June 30, 1995, among Medco
Containment Services, Inc., Medco Behavioral Care Corporation and *
MDC Acquisition Corp.
2.2 Amendment to Agreement and Plan of Merger, dated as of October 6,
1995, among Medco Containment Services, Inc., Medco Behavioral *
Care Corporation and MDC Acquisition Corp.
3.1 Certificate of Incorporation, as amended, of Merit Behavioral *
Care Corporation.
3.2 Certificate of Merger. *
3.3 By-Laws of Merit Behavioral Care Corporation. *
4.1 Indenture, dated as of November 22, 1995, between Merit
Behavioral Care Corporation and Marine Midland Bank, as truste *
relating to $100,000,000 aggregate principal amount of 11 1/2%
Senior Subordinated Notes due 2005.
4.2 Registration Rights Agreement, dated as of November 17, 1995, among
Merit Behavioral Care Corporation, BT Securities Corporation, Chase *
Securities, Inc., Morgan Stanley & Co. Incorporated and Smith
Barney Inc.
4.3 Specimen Form of 11 1/2% Senior Subordinated Notes due 2005 *
(included as part of Exhibit 4.1)
4.4 Specimen Form of 11 1/2% Senior Subordinated Notes due 2005 *
(included as part of Exhibit 4.1 hereto)
10.1 Credit Agreement, dated as of October 6, 1995, among Medco
Behavioral Care Corporation, Chase Manhattan Bank, N.A., as agent *
and the various lending institutions parties thereto.
10.2 First Amendment to Credit Agreement, dated as of October 6, 1995,
among Merit Behavioral Care Corporation, Chase Manhattan Bank, *
N.A., as agent, Bankers Trust Company, as documentation agent and
the various lending institutions party thereto.
10.3 Second Amendment to Credit Agreement, dated as of December 1,
54
<PAGE>
1995, among Merit Behavioral Care Corporation, Chase Manhattan Bank,
N.A., as agent, and the various lending institutions and New Banks *
(as defined) party thereto.
10.4 Purchase Agreement, dated as of November 17, 1995, among
Merit Behavioral Care Corporation, BT Securities Corporation, *
Chase Securities, Inc., Morgan Stanley & Co. Incorporated
and Smith Barney Inc.
10.5 Sub-Sublease Agreement, dated as of August 17, 1993, between
Electronic Data Systems Corporation and Medco Behavioral *
Care Systems Corporation.
10.6 Lease with respect to the corporate headquarters in
Park Ridge, New Jersey. *
10.7 Agreement for the License/Sublicense of Computer Software
Products and the Purchase of Computer Equipment, dated as of *
April 28, 1993, between American International Healthcare, Inc. (now
Amisys, Inc.) and Medco Behavioral Care Systems Corporation.
10.8 1995 Stock Purchase and Option Plan for Employees of Merit *
Behavioral Care Corporation and Subsidiaries.
10.9 Management Incentive Plan. *
10.9.1 1996 Merit Behavioral Care Corporation Employee Stock Option Plan. *
10.10 Stockholder's Agreement, dated as of October 6, 1995, among
Medco Behavioral Care Corporation, Albert S. Waxman and *
MBC Associates, L.P.
10.10.1 Non-Qualified Stock Option Agreement, dated as of October 6, 1995, ***
between Medco Behavioral Care Corporation and Albert S. Waxman
10.11 Stockholder's Agreement, dated as of October 6, 1995, among Medco
Behavioral Care Corporation, Albert S. Waxman Family Charitable *
Remainder Unitrust, Albert S. Waxman and MBC Associates, L.P.
10.12 Stock Purchase and Stockholder's Agreement, dated as of October 6,
1995, among Medco Behavioral Care Corporation, 38 Newbury *
Ventures/MBC Limited Partnership and MBC Associates, L.P.
10.13 Amended and Restated Employment Agreement, dated as of August
17, 1992, between American Biodyne, Inc. and Albert S. Waxman (the *
"Waxman Employment Agreement.")
10.14 Amendment to the Waxman Employment Agreement, dated as of *
October 1, 1993.
10.16 Employment Agreement, dated as of February 1, 1995, among Medco *
Behavioral Care Corporation, Medco Containment Services, Inc.
and Michael G. Lenahan.
10.17 Employment Agreement, dated as of January 18, 1996, between Merit *
Behavioral Care Corporation and Richard C. Surles.
10.18 Management Agreement, dated as of April 27, 1992, between American
Biodyne, Inc. and David B. Stone (the "Stone Management Agreement"). *
10.19 Amendment to the Stone Management Agreement, dated as of
April 30, 1993, among American Biodyne, Inc., Medco Behavioral *
Care Corporation, Personal Performance Consultants, Inc. and
David B. Stone.
10.21 Severance Agreement, dated as of October 6, 1995, between Medco *
Behavioral Care Corporation and Ron Geraty.
10.22 Severance Agreement, dated as of October 6, 1995, between Medco *
55
<PAGE>
Behavioral Care Corporation and Arthur Halper.
10.24 Severance Agreement, dated as of October 6, 1995, between Medco *
Behavioral Care Corporation and Michael G. Lenahan.
10.25 Severance Agreement, dated as of October 6, 1995, between Medco *
Behavioral Care Corporation and Dennis Moody.
10.26 Severance Agreement, dated as of October 6, 1995, between Medco *
Behavioral Care Corporation and David B. Stone.
10.27 Severance Agreement, dated as of October 6, 1995, between Medco *
Behavioral Care Corporation and Richard C. Surles.
10.28 Severance Agreement, dated as of October 6, 1995, between Medco *
Behavioral Care Corporation and Albert S. Waxman.
10.29 Registration Rights Agreement, dated as of October 6, 1995, among *
MDC Acquisition Corp., MBC Associates, L.P. and KKR Partners II, L.P.
10.30 Stockholders' Agreement, dated as of October 6, 1995, among Medco
Behavioral Care Corporation, MBC Associates, L.P., KKR Partners II, *
L.P. and Medco Containment Services, Inc.
10.31 Amisys Implementation and Systems Integration Services Agreement
between Perot Systems Corporation and Merit Behavioral Care **
Corporation, effective as of January 12, 1996 (confidential
treatment requested)
10.32 Lease Agreement dated as of August 14, 1991 between Cooke ***
Properties, Inc. and Empire Blue Cross and Blue Shield
10.33 Assignment and Assumption of Lease dated as of May 31, 1996 between ***
Empire Blue Cross and Blue Shield and Merit Behavioral
Care Corporation
10.34 First Supplemental Agreement, dated as of May 31, 1996 between ***
Chrysler Properties Inc. (formerly, Cooke Properties, Inc.) and
Merit Behavioral Care Corporation
10.35 Second Supplemental Agreement, dated as of October 1, 1996 between ***
Chrysler Properties Inc. and Merit Behavioral Care Corporation
10.36 First Amendment to Lease Agreement, dated as of July 1, 1996 with ***
respect to corporate headquarters in Park Ridge, New Jersey by and
between Sartak Holdings, Inc. and Merit Behavioral Care Corporation
10.37 Employment Agreement, dated as of September 3, 1996, between ***
Merit Behavioral Care Corporation and Terry R. Thompson.
21.1 Subsidiaries of Merit Behavioral Care Corporation. ***
25.1 Statement of Eligibility and Qualification (Form T-1) under the Trust *
Indenture Act of 1939 of Marine Midland Bank (bound separately).
27.1 Financial Data Schedule (electronic filing only).
----------------------
</TABLE>
* Incorporated by reference to the Company's Registration Statement on Form S-4
(Commission File No. 33-80987).
** Incorporated by reference to the Company's Form 10-Q/A for the quarterly
period ended March 31, 1996.
***Filed herewith.
(4) Reports on Form 8-K. No current reports on Form 8-K were filed
during the fourth quarter of MBC's fiscal year ended September 30,
1996.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
MERIT BEHAVIORAL CARE CORPORATION
By: /s/ Albert S. Waxman
Albert S. Waxman
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report on Form 10-K has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Albert S. Waxman Chairman and Chief December 23, 1996
- ---------------------------------
Albert S. Waxman Executive Officer
/s/ Arthur H. Halper Executive Vice President, December 23, 1996
- ---------------------------------
Arthur H. Halper Chief Financial Officer
and Director
/s/ Ronald D. Geraty Executive Vice President, December 23, 1996
- ---------------------------------
Ronald D. Geraty New Business Development
and Director
/s/ Terry R. Thompson Executive Vice President, December 23, 1996
- ---------------------------------
Terry R. Thompson Business Operations
and Director
/s/ Henry R. Kravis Director December 23, 1996
- ---------------------------------
Henry R. Kravis
/s/ George R. Roberts Director December 23, 1996
- ---------------------------------
George R. Roberts
/s/ Edward A. Gilhuly Director December 23, 1996
- ---------------------------------
Edward A. Gilhuly
/s/ Todd A. Fisher Director December 23, 1996
- ---------------------------------
Todd A. Fisher
57
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Financial Statements
Independents Auditors' Report.........................F-1
Consolidated Balance Sheets...........................F-2
Consolidated Statements of Operations.................F-3
Consolidated Statements of Stockholders' Equity.......F-4
Consolidated Statements of Cash Flows.................F-5
Notes to Consolidated Financial Statements............F-6
Financial Statement Schedules
All schedules for which provision is made in the applicable regulations
of the Securities and Exchange Commission are omitted because they are not
required under the related instructions or are not applicable or the required
information is shown in the Consolidated Financial Statements or the notes
thereto.
58
<PAGE>
To the Board of Directors
Merit Behavioral Care Corporation
We have audited the accompanying consolidated balance sheets of Merit Behavioral
Care Corporation (the "Company") as of September 30, 1996 and 1995, and the
related consolidated statements of operations, stockholder's equity, and cash
flows for the twelve month periods ended September 30, 1996 and 1995, the period
from November 18, 1993 to September 30, 1994 (Successor periods), and the period
from October 1, 1993 to November 17, 1993 (Predecessor period). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Merit Behavioral Care
Corporation as of September 30, 1996 and 1995, and the results of its operations
and its cash flows for the twelve months periods ended September 30, 1996 and
1995, the period from November 18, 1993 to September 30, 1994, (Successor
periods), and the period from October 1, 1993 to November 17, 1993, (Predecessor
period) in conformity with generally accepted accounting principles.
As discussed in Note 3 to the financial statements, on November 18, 1993 the
Company was acquired in an acquisition accounted for as a purchase, and a new
basis of accounting was established. Therefore the financial statements
subsequent to November 17, 1993 (Successor) are not comparable to the prior
financial statements (Predecessor).
As discussed in Note 4 to the financial statements, effective October 1, 1995,
the Company changed its method of accounting for deferred contract start-up
costs related to new contracts or expansion of existing contracts.
/s/ Deloitte & Touche LLP
December 12, 1996
F-1
<PAGE>
<TABLE>
<CAPTION>
MERIT BEHAVIORAL CARE CORPORATION SUCCESSOR
AND PREDECESSOR COMPANY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30,
1996 1995
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents................................. $ 47,375 $ 29,531
Accounts receivable, net of allowance for
doubtful accounts of $1,996 and $525................... 28,383 27,648
Short-term marketable securities.......................... --- 1,143
Deferred income taxes..................................... 2,296 1,944
Other current assets...................................... 2,481 2,625
Total current assets.................................. 80,535 62,891
Property, plant and equipment, net........................ 67,880 54,974
Other Assets :
Goodwill and other intangibles, net of accumulated amortization of
$59,781 and $37,017.................................. 162,849 171,139
Restricted cash........................................... 5,668 3,485
Deferred financing costs, net of accumulated amortization
of $1,142........................................... 11,362 ---
Other..................................................... 16,507 12,931
196,386 187,555
Total assets.............................................. $ 344,801 $305,420
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $5,888 $ 3,623
Claims payable............................................ 57,611 42,631
Deferred revenue.......................................... 6,577 9,582
Accrued interest.......................................... 5,008 ---
Current portion of long-term debt......................... 500 ---
Other current liabilities................................. 13,079 9,294
Total current liabilities........................... 88,663 65,130
Due to parent (noninterest bearing)....................... --- 70,813
Long-term debt............................................ 253,500 ---
Deferred income taxes..................................... 30,669 44,744
Other long-term liabilities............................... 1,451 2,400
Commitments and Contingencies
Stockholders' Equity:
Common stock (40,000,000 shares authorized, $0.01 par value,
28,398,800 shares issued at September 30, 1996)........ 284 10
Additional paid in capital................................ (9,756) 118,877
Retained (deficit) earnings............................... (14,435) 3,446
Notes receivable from officers............................ (5,470) ---
(29,377) 122,333
Less common stock in treasury (21,000 shares)............ (105) ---
Total stockholders' equity............................. (29,482) 122,333
Total liabilities and stockholders' equity................ $344,801 $305,420
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
MERIT BEHAVIORAL CARE CORPORATION SUCCESSOR
AND PREDECESSOR COMPANY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
Successor Predecessor
Twelve months Twelve months
ended September 30, ended September 30, 11/18/93 10/01/93
1996 1995 to 9/30/94 to 11/17/93
<S> <C> <C> <C> <C>
Revenue............................. $457,830 $361,549 $245,858 $31,030
Expenses:
Direct service costs.............. 361,684 286,001 189,633 23,782
Selling, general and administrative 64,523 49,823 35,726 5,537
Amortization of intangibles....... 25,869 21,373 17,153 264
Restructuring charge.............. 2,995 --- --- ---
455,071 357,197 242,512 29,583
Operating income.................... 2,759 4,352 3,346 1,447
Other income (expense)
Interest income and other......... 2,838 1,498 846 102
Interest expense.................. (23,826) --- --- ---
Merger costs...................... (3,972) --- --- ---
(24,960) 1,498 846 102
(Loss) income before income taxes
and cumulative effect of accounting
change............................ (22,201) 5,850 4,192 1,549
(Benefit) provision for income taxes (5,332) 4,521 2,075 665
(Loss) income before cumulative effect
of accounting change.............. (16,869) 1,329 2,117 884
Cumulative effect of accounting change
for deferred contract start-up costs, net
of tax benefit of $757............ (1,012) --- --- ---
Net (loss) income................... $ (17,881) $ 1,329 $ 2,117 $ 884
Pro forma net (loss) income
assuming the new method of
accounting for deferred
contract start-up costs is applied
retroactively.................... $ (16,869) $ 317 $ 2,117 $ 884
</TABLE>
The accompanying notes are an integral part of these
statements.
F-3
<PAGE>
MERIT BEHAVIORAL CARE CORPORATION SUCCESSOR
AND PREDECESSOR COMPANY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
Retained Notes
Common Stock Additional (Deficit) Receivable Common Stock
Shares Amount Paid In Capital Earnings from Officers in Treasury
Balance September 30, 1993
<S> <C> <C> <C>
(Predecessor)....................... 1,000,000 $ 10 $ 31,310 $ 15,690 $ --- $ ---
Repurchase of warrants issued by
American Biodyne.................. --- --- (429) --- --- ---
Net income.......................... --- --- --- 884 --- ---
Balance November 17, 1993
(Predecessor)....................... 1,000,000 10 30,881 16,574 --- ---
Allocation of goodwill and other
intangibles and related tax effect, net --- --- 71,422 --- --- ---
Transfer of retained earnings to additional
paid in capital in connection with the
acquisition of Medco by Merck..... --- --- 16,574 (16,574) --- ---
Net income.......................... --- --- --- 2,117 --- ---
Balance September 30, 1994.......... 1,000,000 10 118,877 2,117 --- ---
Net income.......................... --- --- --- 1,329 --- ---
Balance September 30, 1995.......... 1,000,000 10 118,877 3,446 --- ---
Recapitalization from merger:
Redemption of common stock........ (915,754) (9) (258,129) --- --- ---
Merger with MDC Acquisition Corp.. 415,023 4 104,996 --- --- ---
Stock dividend.................... 24,763,531 247 (247) --- --- ---
Issuance of stock to management... 3,156,000 32 15,748 --- (5,800) ---
Deferred taxes associated with merger --- --- 7,594 --- --- ---
Tax benefit from exercise of Merck
stock options..................... --- --- 1,505 --- --- ---
Repayment of notes receivable....... --- --- --- --- 265 ---
Cancel note receivable.............. (20,000) --- (100) --- 100 ---
Repurchase of common stock.......... --- --- --- --- --- (600)
Sale of common stock................ --- --- --- --- (35) 495
Net loss............................ --- --- --- (17,881) --- ---
Balance September 30, 1996.......... 28,398,800 $ 284 $ (9,756) $(14,435) $ (5,470) $(105)
</TABLE>
The accompanying notes are an integral part of these
statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
MERIT BEHAVIORAL CARE CORPORATION SUCCESSOR
AND PREDECESSOR COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Successor Predecessor
Twelve months Twelve months
ended September 30,ended September 30, 11/18/93 10/01/93
1996 1995 to 9/30/94 to 11/17/93
CASH FLOWS FROM OPERATING
ACTIVITIES:
<S> <C> <C> <C> <C>
Net (Loss) Income....................... $(17,881) $ 1,329 $ 2,117 $ 884
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Cumulative effect of accounting change 1,012 --- --- ---
Depreciation and amortization......... 36,527 28,150 21,282 722
Amortization of deferred financing costs 1,142 --- --- ---
Deferred taxes and other.............. (6,068) 379 (4,390) ---
Restructuring charge.................. 2,995 --- --- ---
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Accounts receivable................... 265 (8,545) (6,990) (603)
Other current assets.................. 536 (995) (44) 226
Deferred contract start-up costs...... (4,816) (6,231) (1,181) (39)
Accounts payable and accrued liabilities 14,864 11,982 8,447 1,711
Net cash provided by operating activities 28,576 26,069 19,241 2,901
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property, plant and equipment(23,808) (31,529) (16,801) (1,211)
Cash used for acquisitions, net of cash acquired
(12,676) (9,580) (23,380) ---
Investments in and advances to joint ventures
(2,931) (14,860) (1,550) ---
Repayments of advances from joint ventures 420 --- --- ---
Sales (purchases) of marketable securities 1,143 3,533 (890) (11)
Long-term restrictions placed on cash. (2,183) (211) (217) ---
Change in non-current assets and other (1,282) (1,503) (446) (380)
Net cash used for investing activities (41,317) (54,150) (43,284) (1,602)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from capital contribution.... 114,980 --- --- ---
Borrowings from parent................ --- 32,882 31,536 525
Proceeds from bridge loan............. 75,000 --- --- ---
Proceeds from revolving credit facility 163,500 --- --- ---
Proceeds from senior term loans....... 120,000 --- --- ---
Proceeds from sale of notes........... 100,000 --- --- ---
Redemption of common stock............ (258,138) --- --- ---
Repayment of due to parent............ (67,878) --- --- ---
Repayment of bridge loan.............. (75,000) --- --- ---
Repayment of revolving credit facility (129,500) --- --- ---
Payment of financing costs............ (12,504) --- --- ---
Other................................. 125 --- --- ---
Net cash provided by financing activities 30,585 32,882 31,536 525
INCREASE IN CASH AND
CASH EQUIVALENTS...................... 17,844 4,801 7,493 1,824
Cash and cash equivalents at beginning
of period............................. 29,531 24,730 17,237 15,413
CASH AND CASH EQUIVALENTS AT
END OF PERIOD......................... $ 47,375 $29,531 $24,730 $17,237
</TABLE>
The accompanying notes are an integral part of these
statements.
F-5
<PAGE>
MERIT BEHAVIORAL CARE CORPORATION SUCCESSOR
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
(dollars in thousands)
1. ORGANIZATION
Merit Behavioral Care Corporation (the "Company") was incorporated in the State
of Delaware in March 1993 as a wholly owned subsidiary of Medco Containment
Services, Inc. ("Medco"). Through its wholly-owned subsidiaries, American
Biodyne, Inc. ("American Biodyne") and PPC Group, Inc. ("PPC"), the Company
manages behavioral healthcare programs for payors across all segments of the
healthcare industry, including health maintenance organizations, Blue Cross/Blue
Shield organizations and other insurance companies, corporations and labor
unions, federal, state and local governmental agencies, and various state
Medicaid programs. Behavioral healthcare involves the treatment of a variety of
behavioral health conditions such as emotional and mental health problems,
substance abuse and other personal concerns that require counseling, outpatient
therapy or more intensive treatment services.
On November 18, 1993, Merck & Co., Inc. ("Merck") acquired all of the
outstanding shares of Medco (See Note 3).
On October 6, 1995, the Company completed a merger (the "Merger") with MDC
Acquisition Corp. ("MDC"), a company formed by Kohlberg Kravis Roberts & Co.,
L.P. ("KKR"), whereby MDC was merged with and into the Company. In connection
with the Merger, the Company changed its name from Medco Behavioral Care
Corporation to Merit Behavioral Care Corporation (See Note 2).
2. MERGER
Prior to the Merger, the Company was a wholly-owned subsidiary of Merck & Co.,
Inc. ("Merck"). As a result of the Merger, KKR and Company management and
related entities own approximately 85% of the post-Merger common stock of the
Company. In connection with the Merger, Merck received $326,016 in cash (which
reflects various final purchase price adjustments) and retained approximately
15.0% of the common stock of the post-Merger Company. The Merger was accounted
for as a recapitalization which resulted in a charge to equity of $258,138 to
reflect the redemption of common stock. In conjunction with the Merger, the
Company paid a stock dividend of approximately 49.6 shares for each share of the
Company's stock then outstanding.
The Merger was financed with $114,980 of new cash equity, consisting of $105,000
from affiliates of KKR and $9,980 from Company management and related entities
("Management"). Management acquired an additional $5,800 of equity which was
funded by loans from the Company. The balance of the transaction was funded with
a $75,000 bridge loan (the "Bridge Loan") provided by an affiliate of KKR and
$155,000 of initial borrowings under a $205,000 senior credit facility among the
Company, The Chase Manhattan Bank, N.A. and Bankers Trust Company (the "Senior
Credit Facility"). The aforementioned proceeds were utilized to redeem common
stock for $258,138, repay amounts due Merck of $67,878, and pay certain fees and
expenses related to the Merger. Of the total fees and expenses, $5,500 was paid
to KKR.
3. BASIS OF PRESENTATION
On November 18, 1993, Merck acquired all the outstanding shares of Medco in a
transaction accounted for by the purchase method. As a result of this
acquisition, a new basis of accounting was established and as such, the
appraised value of the Company's assets and liabilities was recognized as of
November 18, 1993.
The financial position, results of operations and cash flows prior to November
18, 1993 are deemed to be Predecessor Company financial statements and are not
comparable with the financial statements of the Successor Company. The portion
of the total purchase price for Medco paid by Merck allocated to the
accompanying financial statements and the determination of fair value of the
identifiable assets and liabilities of the Company was
F-6
<PAGE>
MERIT BEHAVIORAL CARE CORPORATION SUCCESSOR
AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
3. BASIS OF PRESENTATION--(Continued)
determined by independent appraisal.
The appraisal determined that identified intangible assets, consisting
principally of customer contracts, had an appraised value of $112,000 and
related deferred taxes of $47,800 at the acquisition date. These identified
intangible assets are being amortized on a straight line basis over a weighted
average life of 12 years. Based on the allocation of the purchase price to the
net tangible and identified intangible assets and liabilities of the Company, an
excess of the allocated purchase price over the fair value of net assets
acquired of approximately $47,988 was recorded as goodwill. Such goodwill is
being amortized on a straight line basis over 40 years.
Amounts included in the footnotes relating to results of operations for 1994
include amounts for the period from October 1, 1993 to September 30, 1994.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all liquid investment instruments with an original
maturity of three months or less to be the equivalent of cash for purposes of
balance sheet presentation.
Included in cash and cash equivalents at September 30, 1996 and 1995 is $11,713
and $7,048, respectively, of cash held under the terms of certain of the
Company's customer contracts that require a claims fund to be established and
segregated for the purpose of paying customer behavioral healthcare claims.
Under these arrangements, a reconciliation process is typically conducted
annually between the customer and the Company to determine the amount of
unexpended funds, if any, accruing to the Company. This cash is unavailable to
the Company for purposes other than the payment of customer claims until such
reconciliation process has been completed. The amount of cash held under such
arrangements in excess of anticipated customer claims at September 30, 1996 and
1995 was $4,267 and $4,513, respectively.
The Company held a surplus cash balance of $9,685 and $8,920 as of September 30,
1996 and 1995, respectively, as required by the Company's contract with the
State of Iowa. In addition, at September 30, 1996 the Company held surplus cash
balances of $5,244 as required by various of the Company's other contracts.
These contracts required the segregation of such cash as financial assurance
that the Company can meet its obligations thereunder.
F-7
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
The Company has a subsidiary organized in the state of Missouri that is licensed
to do business as a foreign corporation in the State of California and is
subject to regulation by the Department of Corporations of the State of
California. Pursuant to these regulatory requirements, certain amounts of cash
are retained for the use of this subsidiary. Included in cash and cash
equivalents at September 30, 1996 and 1995 is $900 and $201, respectively,
subject to such requirements.
Restricted Cash
At September 30, 1996 and 1995, $7,168 and $6,376, respectively, of cash and
marketable securities were held by subsidiaries of the Company that are
organized and regulated under state law as insurance companies. Such insurance
companies are required to maintain certain minimum statutory deposits and
reserves with respect to the payment of future claims. The amount of cash in
excess of the liabilities of such subsidiaries and not available for dividend to
the Company without prior regulatory approval was $5,510 and $3,128 at September
30, 1996 and 1995, respectively. As a result, such amounts of cash held by these
subsidiaries have been classified as a long-term asset in the accompanying
consolidated balance sheets.
In the ordinary course of business, the Company has pledged certain short-term
investments as collateral in support of various leases for office space. Such
investments are unavailable for general corporate purposes until such time as
the lease expires. At September 30, 1996 and 1995, $158 and $357 of investments
were collateralized under such arrangements, and are classified as a long-term
asset in the accompanying consolidated balance sheets.
Short-Term Marketable Securities
Short-term marketable securities consist of certificates of deposit, carried at
amortized cost which approximates market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. For financial reporting
purposes, depreciation is provided principally on a straight line basis over the
estimated useful lives of the assets as follows:
Machinery and equipment.................... 5 Years
Integrated managed care information system. 7 Years
Furniture and fixtures..................... 15 Years
Leasehold improvements..................... Life of lease
Expenditures for maintenance, repairs and renewals of minor items are charged to
operations as incurred. Major betterments are capitalized.
Construction-in-progress primarily represents costs incurred in the development
of an integrated managed care information system (the "System"). In addition to
purchased hardware and software costs, the payroll and related benefits of
employees who are exclusively engaged in the development and deployment of the
System are capitalized. The System was substantially complete in October 1995 at
which time the Company began installing the System in various area and regional
offices in the Company's service delivery system. As the System is
F-8
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
installed in an office, the office is allocated a ratable portion of the total
cost of the System, at which time the allocated cost is depreciated over an
estimated useful life of 7 years.
Goodwill and Other Intangibles
The Company amortizes costs in excess of the net assets of businesses acquired
on a straight line basis over periods not to exceed 40 years. Contingent
consideration is charged to goodwill when paid and is amortized over the
remaining life of such goodwill, not to exceed 40 years. The Company
periodically reviews the carrying value of goodwill to assess recoverability and
other than temporary impairments. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset would be compared to
the asset's carrying amount to determine if a write-down to market value or
discounted cash flow is required. Goodwill and intangible assets consisted of
the following at September 30, 1996 and 1995:
1996 1995
---- ----
Customer Contracts.................. $ 80,000 $ 80,000
Provider Network.................... 12,000 12,000
Trade Names and other............... 20,000 20,000
Goodwill............................ 110,630 96,156
$222,630 $208,156
Deferred Contract Start-up Costs
The Company defers contract start-up costs related to new contracts or expansion
of existing contracts that require the implementation of separate, dedicated
service delivery teams, provider networks and delivery systems or the
establishment of a local clinical organization in a new geographic area to
service the new program. The Company defers only costs which (i) are separately
identified, incremental and segregated from ordinary operating expenses; (ii)
provide a direct, quantifiable benefit to future periods; and (iii) are fully
recoverable from contract revenues directly attributable to such benefit. The
incremental costs deferred by the Company include, among other things,
consulting fees, salary costs, travel costs, office costs and network and
reporting system development costs. Consulting fees deferred by the Company
relate primarily to the recruitment, credentialling and contracting of the
particular customer's provider network. The salary costs relate primarily to
employees of the Company dedicated to clinical protocol design, network
development activities and program reporting and information systems
customization for the specific customer. These contract start-up costs are
capitalized and amortized on a straight line basis over the initial term of the
related contract. The amortization periods range from one to five years, with a
weighted-average life at September 30, 1996 of 3.3 years. Amortization of
deferred contract start-up costs was $2,848, $1,315 and $247 for the periods
ended September 30, 1996, 1995 and 1994, respectively. During the periods ended
September 30, 1996, 1995 and 1994, the Company deferred contract start-up costs
of $4,816, $6,231 and $1,220, respectively. Other non-current assets include
$6,077 and $5,865 of unamortized deferred contract start-up costs at September
30, 1996 and 1995, respectively.
Effective October 1, 1995, the Company changed its method of accounting for
deferred start-up costs related to new contracts or expansion of existing
contracts (i) to expense costs relating to start-up activities incurred after
commencement of services under the contract, and (ii) to limit the amortization
period for deferred start-up costs to the initial contract period. Prior to
October 1, 1995, the Company capitalized start-up costs related to the
completion of the provider networks and reporting systems beyond commencement of
contracts and, in limited instances, amortized the start-up costs over a period
that included the initial renewal term associated with the contract. Under the
new policy, the Company does not defer contract start-up costs after contract
commencement, or amortize start-up costs beyond the initial renewal term. The
change was made to increase the focus on controlling costs associated with
contract start-ups.
F-9
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
The pro forma effect of the change, had the Company adopted this new accounting
policy in prior years, is to decrease total assets by $1,769 and decrease total
liabilities by $757 as of September 30, 1995, and to increase costs and expenses
by $1,769 ($1,012 after taxes) for the year ended September 30, 1995. There was
no pro forma effect of this change on the year ended September 30, 1994. The
effect of the change on the current year period presented cannot be reasonably
estimated.
Revenue Recognition
Typically, the Company charges each of its customers a flat monthly capitation
fee for each beneficiary enrolled in such customer's behavioral health managed
care plan or EAP. This capitation fee is generally paid to the Company in the
current month. Contract revenue billed in advance of performing related services
is deferred and recognized ratably over the period to which it applies. For a
number of the Company's behavioral health managed care programs, the capitation
fee is divided into outpatient and inpatient fees, which are recognized
separately.
Outpatient revenue is recognized monthly as it is received; inpatient revenue is
recognized monthly and is in most cases (i) paid to the Company monthly (in
cases where the Company is responsible for the payment of inpatient claims) or
in certain cases (ii) retained by the customer for payment of inpatient claims.
When the customer retains the inpatient revenue, actual inpatient costs are
periodically reconciled to amounts retained and the Company receives the excess
of the amounts retained over the cost of services, or reimburses the customer if
the cost of services exceeds the amounts retained. In certain instances, such
excess or deficiency is shared between the Company and the customer. A
significant portion of the Company's revenue is derived from capitated
contracts.
Direct Service Costs
Direct service costs are comprised principally of expenses associated with
managing, supervising and providing the Company's services, including
third-party network provider charges, inpatient facility charges, costs
associated with members of management principally engaged in the Company's
clinical operations and their support staff, and rent for certain offices
maintained by the Company in connection with the delivery of services. Direct
service costs are recognized in the month in which services are expected to be
rendered. Network provider and facility charges for authorized services that
have not been reported and billed to the Company (known as incurred but not
reported expenses, or "IBNR") are estimated and accrued based on historical
experience, current enrollment statistics, patient census data and other
information. Such costs are included in the caption "Claims payable" in the
accompanying consolidated balance sheets.
Income Taxes
Deferred taxes are provided for the expected future income tax consequences of
events that have been recognized in the Company's financial statements. Deferred
tax assets and liabilities are determined based on the temporary differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
temporary differences are expected to reverse.
Disclosure of Fair Value of Financial Instruments
The carrying amount reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities
approximates fair value because of the immediate or short-term maturity of these
financial instruments. The Company believes the carrying value of a note
receivable from a software development company is a reasonable estimate of the
fair value of the underlying intellectual property that secures repayment of the
note. The carrying amount of loans made to certain joint ventures engaged in the
development of
F-10
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
Medicaid programs (Note 9) approximates fair value which was estimated by
discounting future cash flows using rates at which similar loans would be made
to borrowers with similar credit ratings. The carrying value for the variable
rate debt outstanding under the Senior Credit Facility (as described in Note 6)
approximates the fair value. The fair value of the Company's senior subordinated
notes (see Note 6) is estimated to be $106,125 at September 30, 1996 (based on
quoted market prices) which compares to the carrying value of $100,000.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade receivables. Concentrations of credit
risk with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base and the dispersion of such
customers across different businesses and geographic regions.
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment consisted of the following at September 30:
1996 1995
Machinery and equipment.................... $ 44,896 $ 33,815
Integrated managed care information system. 28,349 ---
Furniture and fixtures..................... 12,795 10,677
Leasehold improvement...................... 2,977 2,477
Construction-in-progress................... --- 18,723
89,017 65,692
Accumulated depreciation and
amortization............................. (21,137) 10,718)
$67,880 $54,974
Depreciation and amortization related to property, plant and equipment was
$10,658, $6,776 and $4,587 for the periods ended September 30, 1996, 1995 and
1994, respectively.
6. LONG-TERM DEBT
At September 30, 1996, long-term debt consists of the following:
Revolving Loans .................... $ 34,000
Senior Term Loan A................. 70,000
Senior Term Loan B.................. 50,000
Notes............................... 100,000
254,000
Less current portion................ (500)
$253,500
Senior Credit Facility - In October 1995, the Company entered into a credit
agreement (the "Credit Agreement"), which provides for secured borrowings from a
syndicate of lenders. The Senior Credit Facility consists of (i) a six and
one-half year revolving credit facility providing for up to $85,000 in revolving
loans, which includes borrowing capacity available for letters of credit of up
to $20,000, and (ii) a term loan facility providing for up to $120,000 in term
loans, consisting of a $70,000 senior term loan with a maturity of six and
one-half years ("Senior Term Loan A"),
F-11
6. LONG-TERM DEBT-(Continued)
and a $50,000 senior term loan with a maturity of eight years ("Senior Term Loan
B"). At September 30, 1996, $34,000 of revolving loans and three letters of
credit totaling $425 were outstanding under the Revolving Credit Facility, and
approximately $50,575 was available for future borrowing.
The annual amortization schedule of the Senior Term Loans is $500 in fiscal
1997, $3,000 in 1998, $10,500 in 1999, $13,000 in 2000, $20,500 in 2001 and
$72,500 thereafter. The Senior Term Loans are subject to mandatory prepayment
(i) with the proceeds of certain asset sales and (ii) on an annual basis with
50% of the Company's Excess Cash Flow (as defined in the Credit Agreement) for
so long as the ratio of the Company's Total Debt (as defined in the Credit
Agreement) to annual Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA" as defined in the Credit Agreement) is greater than 3.5
to 1.0.
The Company is charged a commitment fee calculated at an EBITDA-dependent rate
ranging from .250% to 0.500% per annum of the commitment under the Revolving
Credit Facility in effect on each day. The Company is charged a letter of credit
fee calculated at an EBITDA-dependent rate ranging from 0.375% to 1.750% per
annum of the face amount of each letter of credit and a fronting fee calculated
at a rate equal to 0.250% per annum of the face amount of each letter of credit.
Loans under the Credit Agreement bear interest at EBITDA-dependent floating
rates, which are, at the Company's option, based upon (i) the higher of the
Federal funds rate plus 0.5%, or bank prime rates, or (ii) Eurodollar rates.
Rates on borrowing outstanding under the Senior Credit Facility averaged 8.3%
for the year ended September 30, 1996.
Notes - On November 22, 1995, the Company issued $100,000 aggregate principal
amount of 11 1/2% senior subordinated notes due 2005 (the "Private Notes"), the
net proceeds of which were applied to repay the Bridge Loan (including accrued
interest) and a portion of the revolving loans under the Senior Credit Facility.
On March 20, 1996, the Company exchanged the Private Notes for $100,000
aggregate principal amount of 11 1/2% Senior Subordinated Notes due 2005 that
are registered under the Securities Act of 1933 (the "Notes"). The Notes are
senior subordinated, unsecured obligations of the Company.
The Company may be obligated to purchase at the holders' option all or a portion
of the Notes upon a change of control or asset sale, as defined in the indenture
for the Notes (the "Notes Indenture"). The Notes are not redeemable at the
Company's option prior to November 15, 2000, except that at any time on or prior
to November 15, 1998, under certain conditions the Company may redeem up to 35%
of the initial principal amount of the Notes originally issued with the net
proceeds of a public offering of the common stock of the Company. The redemption
price is equal to 111.50% of the principal amount if the redemption is on or
prior to November 15, 1997, and 110.50% if the redemption is on or prior to
November 15, 1998. From and after November 15, 2000, the Notes will be subject
to redemption at the option of the Company, in whole or in part, at various
redemption prices, declining from 105.75% of the principal amount to par on and
after November 15, 2004. The Notes mature on November 15, 2005.
The Credit Agreement and the Notes Indenture contain restrictive covenants that,
among other things and under certain conditions, limit the ability of the
Company to incur additional indebtedness, to acquire (including a limitation on
capital expenditures) or to dispose of assets or operations, to incur liens on
its property or assets, to make advances, investments and loans, and to pay
dividends. The Company must also satisfy certain financial covenants and tests.
Borrowings under the Credit Agreement are secured by a first priority lien on
the capital stock of and certain of the Company's subsidiaries.
F-12
7. NOTES RECEIVABLE FROM OFFICERS
In October 1995, the Company loaned several officers an aggregate of $5,800 for
the purchase of common stock of the Company; subsequent to the Merger,
additional loans totaling $35 were made to officers for the purchase of shares
from treasury. Each loan is represented by a promissory note which bears
interest at a rate of 6.5% per annum.
These notes are full recourse obligations of the officers, are collateralized by
the pledge of common stock of the Company held by such officers and may be
prepaid in part or in full without notice or penalty. One note for $250 was
repaid as of December 31, 1995, another note for $100 was canceled in January
1996 and a third note for $15 was repaid in July 1996. The remaining outstanding
notes are due as follows: $250 in 1997, $20 in 1998 and $5,200 in 2001. The
notes are shown as a reduction of stockholders' equity in the accompanying
consolidated balance sheets.
8. ACQUISITIONS
On October 5, 1995, the Company acquired Choate Health Management, Inc. and
certain related entities ("Choate"), a Massachusetts-based integrated behavioral
healthcare organization. The purchase price consisted of an initial payment of
$8,730 and subsequent contingent payments to the former shareholders of Choate
based on future financial performance. Contingent consideration related to
Choate is calculated at six times calendar year 1997 pre-tax income of Choate,
less $9,278. An interim payment relating to such contingent consideration in the
amount of $1,278 was made by the Company to the former shareholders of Choate in
July 1996; such payment was recorded as goodwill. An additional interim payment
of the Choate contingent consideration may be required based on the 1996 pre-tax
income of Choate. Any additional payments related to Choate will be recorded as
goodwill.
On December 19, 1995, the Company paid an initial $50 with a subsequent payment
of $2,950 in January 1996 to acquire ProPsych, Inc. ("ProPsych"), a
Florida-based behavioral health managed care company. As of September 30, 1996,
the Company recorded additional goodwill in the amount of $400 for a final
contingent payment made to the former shareholders of ProPsych in November 1996.
In August 1996, the Company paid approximately $340 to acquire Orion Life
Insurance Company ("Orion"), a Delaware life and health insurance company. Orion
holds insurance licenses in 17 states and provides the Company with the ability
to underwrite future business in those states should a customer require that a
licensed insurance entity underwrite its behavioral health program.
On February 28, 1994, the Company acquired Group Plan Clinic, Inc. and BenesYs,
Inc. (collectively "BenesYs"), behavioral health managed care companies
principally serving the Texas market. The purchase price for BenesYs consisted
of an initial payment of $9,757 and subsequent contingent payments of $1,500 for
the extension of certain customer contracts. The Company was obligated to pay
additional consideration upon the achievement of certain financial targets for
the 12 months ended December 31, 1994. In September 1995, the Company paid
$8,550 to the former shareholders of BenesYs in full settlement of any and all
contingent consideration due to such former shareholders.
On January 31, 1994, the Company completed a series of transactions with The
Washton Institute, Inc. ("Washton"), a provider of outpatient treatment and
counseling services for alcoholism and substance abuse in the New York city
area. As a result of such transactions, the Company acquired the clinical
protocols of Washton, entered into management and affiliation agreements with
Washton, and licensed to Washton the use of the acquired clinical protocols on a
nonexclusive basis. The purchase price for such protocols and other interests
consisted of an initial payment at closing of $2,240 and a subsequent payment of
$650 in April 1995 that was based on the achievement of certain financial
targets for the 12 months ended December 31, 1994.
F-13
8. ACQUISITIONS--(Continued)
The transactions discussed above have been recorded using the purchase method of
accounting. The excess of the purchase price over the estimated fair value of
the assets acquired in these acquisitions was $39,276 as of September 30, 1996.
The results of operations of the companies acquired have been included in the
consolidated financial statements commencing with the aforementioned acquisition
dates. Pro forma results of operations have not been presented for the Choate,
ProPsych, and Orion acquisitions because the effect of the acquisitions was not
significant.
In April 1992, Medco issued 584,452 shares of its common stock, valued at
$13,019, to acquire PPC. PPC provides Employee Assistance Program ("EAP")
services principally to the corporate marketplace. Goodwill and other
intangibles amounting to $14,315 were recognized in the accompanying financial
statements as a result of this transaction. In June 1994, Medco made a
contractual payment of $5,000 to the former owners of PPC which was based upon
the achievement of certain financial performance targets for the 24 months ended
December 31, 1993. In August 1994, Medco agreed to pay the former owners of PPC
additional consideration of $3,723 in full settlement of any and all contingent
consideration due them for achievement of certain financial performance targets
for periods subsequent to December 31, 1993.
In February 1994, Medco made a final contingent payment of $2,108 to the former
shareholders of a behavioral health managed care company purchased by American
Biodyne in October 1991.
In November 1993, the Company reacquired stock warrants for $429 that were
previously issued by American Biodyne in January 1991. The warrants were
originally issued by American Biodyne in consideration for the acquisition of
certain clinical protocols from a behavioral health managed care company and
gave the holder the right to receive additional shares of American Biodyne
common stock based upon certain performance targets. The cash payment was
charged to additional paid in capital.
In April 1993, Medco issued 394,259 shares of its common stock valued at $10,000
for the settlement of contingent consideration due the former shareholders of a
behavioral health managed care company purchased by American Biodyne in January
1992. The Company also made cash payments in the periods ending September 30,
1994 and 1993 totaling $475 to a former principal and employee of such company
in connection with such settlement.
The transactions with Washton, the acquisition of BenesYs, investments in
certain joint ventures (Note 9), and certain contingent performance-based
payments were funded by advances from Medco. These advances are reflected in the
caption "Due to parent" in the accompanying balance sheet as of September 30,
1995.
9. JOINT VENTURES
In March 1994, the Company entered into a joint venture partnership with
Community Sector Systems, Inc. ("CSS"), a software development company, to
market a proprietary clinical information, communications and case documentation
software package. The Company contributed $125 in capital, loaned $1,375 to CSS
in 1994 and made an additional loan of $300 to CSS in 1995. In the event of a
default on the loan, the Company has a security interest in the underlying
intellectual property.
In April 1995, the Company entered into a joint venture with Neighborhood Health
Providers, LLC ("NHP"), an organization consisting of five hospitals located in
Brooklyn and Queens, New York, under which the Company agreed to fund up to
$1,650 of NHP's Medicaid program development costs in the form of $150 in
capital contributions and $1,500 in unsecured debt, in exchange for an 80%
interest in such joint venture. As of September 30, 1996 and 1995, the Company
had advanced $1,500 and $1,026 to NHP, respectively.
Also in April 1995, the Company entered into a contractual arrangement with
Community Health Network of Connecticut, Inc. ("CHN"), an organization
consisting of 11 not-for-profit health centers in Connecticut, under which the
Company has agreed to provide CHN with up to a total of $4,000 in unsecured debt
to help finance
F-14
9. JOINT VENTURES--(Continued)
CHN's Medicaid program development costs. As of September 30, 1996 and 1995, the
Company had advanced $2,079 and $1,800 to CHN, respectively.
In September 1995, the Company paid $12,010 to Empire Blue Cross and Blue Shield
("Empire") for the right to provide behavioral health managed care services to
approximately 750,000 of their enrollees in the State of New York for a period
of five years. In connection therewith, the Company formed a limited liability
company (the "Empire Joint Venture") with the Company and Empire receiving
ownership interests of 80% and 20%, respectively. The payment was charged to
goodwill and is being amortized over the life of the underlying contract.
In January 1996, the Company formed a joint venture with the hospital sponsors
of NHP under the name "Royal Health Care LLC" ("Royal"), in which each of the
Company and NHP holds 50% of the equity interests. During 1996, the Company made
a capital contribution in the amount of $200 to Royal, as well as provided an
unsecured loan in the amount of $1,561. Royal, in turn, and Empire have formed a
second joint venture company, Empire Community Delivery Systems LLC ("ECDS"), in
which Royal and Empire hold 33 1/3% and 66 2/3%, respectively, of the equity
interests. Empire and ECDS have entered into an agreement under which ECDS will
exclusively manage and operate, on behalf of Empire, health care benefit
programs (covering all services except behavioral healthcare and vision care) in
the five New York City boroughs for Medicaid beneficiaries enrolled in Empire
plans. Each of Empire and Royal will provide specified administrative and
management services to ECDS to support its delivery of services to Empire under
such agreement. Moreover, each of ECDS and Royal will hold specified equity
interests in certain independent practice associations (IPAs) providing
treatment services to the Empire Medicaid beneficiaries. In addition, Empire has
entered into an agreement with the Empire Joint Venture to exclusively provide,
on behalf of Empire, all behavioral healthcare services in New York City to such
Empire Medicaid enrollees. The Royal and ECDS joint ventures and related
agreements have five year terms, with up to three five-year renewals (subject to
applicable regulatory approvals). Each such venture and agreement also contains
customary termination provisions. The Company is accounting for its interest in
Royal using the equity method.
The receivables from, and the investments in, CSS, NHP, CHN and Royal are
reflected in "other assets" in the accompanying balance sheets.
10. INCOME TAXES
Prior to the Merger, the Company filed a consolidated federal income tax return
with Merck. Though no formal tax sharing agreement existed between the Company
and Merck, the Company computed federal income taxes on a separate return basis
and recorded such taxes in the caption "Due to parent".
The components of income tax expense (benefit) for the periods ended September
30, are as follows:
1996 1995 1994
Current:
Federal.......................... $ --- $3,030 $5,748
State............................ 736 1,112 1,974
736 4,142 7,722
Deferred :
Federal ......................... (5,495) 200 (3,692)
State............................ (573) 179 (1,290)
(6,068) 379 (4,982)
Total...............................$ (5,332) $4,521 $2,740
F-15
10. INCOME TAXES--(Continued)
The difference between the U.S. federal statutory tax rate and the Company's
effective tax rate are as follows:
1996 1995 1994
U.S. federal statutory tax rate..... (35.0)% $35.0% 35.0%
State income taxes (net of federal benefit)
0.4 14.4 7.8
Merger expenses..................... 5.8 --- ---
Goodwill............................ 2.3 13.1 3.4
Expenses without tax benefit....... 2.0 13.9 ---
Other............................... 0.5 0.9 1.5
Effective tax rate.................. (24.0)% 77.3% 47.7%
At September 30, 1996, the Company had $23,707 of deferred income tax assets and
$52,080 of deferred income tax liabilities which have been netted for
presentation purposes. The significant components of these amounts are shown on
the balance sheet as follows:
<TABLE>
<CAPTION>
1996 1995
Current Non Current Current Non Current
Asset Liability Asset Liability
<S> <C> <C> <C> <C>
Provision for estimated expenses.... $ 2,630 $ 2,161 $ 2,283 $ 2,618
Capitalized expenses................ (334) (1,436) (339) (1,562)
Net operating loss carryforwards.... --- 9,170 --- ---
Accelerated depreciation............ --- (14,605) --- (11,145)
Intangible asset differences........ --- (25,959) --- (34,655)
$ 2,296 $(30,669) $ 1,944 $(44,744)
</TABLE>
Management believes that the deferred tax assets will be fully realized based on
future reversals of existing taxable temporary differences. As a result, no
valuation allowance has been provided. At September 30, 1996, the Company had
U.S. federal net operating loss carryforwards of approximately $25,580 for tax
purposes. Approximately $5,920 of the carryforwards expire in 2010 and the
remainder expire in 2011.
F-16
<PAGE>
11. COMMITMENTS AND CONTINGENCIES
a. Leases
The Company leases office facilities and equipment under various noncancelable
operating leases.
At September 30, 1996, the minimum aggregate rental commitments under
noncancelable leases, excluding renewal options, are as follows:
........
1997....................................... $12,506
1998....................................... 10,604
1999....................................... 8,569
2000....................................... 7,255
2001....................................... 6,272
Thereafter................................. 15,019
Minimum lease payments..................... 60,225
Less amounts representing sublease income.. (1,884)
$58,341
Several of the leases contain escalation provisions due to increased maintenance
costs and taxes. Scheduled rent increases are amortized on a straight-line basis
over the lease term. Total rent expense for the periods ended September 30,
1996, 1995 and 1994 amounted to $13,059, $10,115 and $9,652, respectively.
b. Employment Agreements
The Company and certain of its subsidiaries have employment agreements with
various officers and certain other management personnel that provide for salary
continuation for a specified number of months under certain circumstances. The
aggregate commitment for future salaries at September 30, 1996, excluding
bonuses, was approximately $6,016.
c. Legal Proceedings
In October 1996, a group of eight plaintiffs purporting to represent an
uncertified class of psychiatrists and clinical social workers brought an action
under the federal antitrust laws in the United States District Court for the
Southern District of New York against nine behavioral health managed care
organizations, including the Company (collectively, "Defendants"). The complaint
alleges that Defendants violated section 1 of the Sherman Act by engaging in a
conspiracy to fix the prices at which Defendants purchase services from mental
healthcare providers such as plaintiffs. The complaint further alleges that
Defendants engaged in a group boycott to exclude mental healthcare providers
from Defendants' networks in order to further the goals of the alleged
conspiracy. The complaint also challenges the propriety of Defendents'
capitation arrangements with their respective customers, although it is unclear
from the complaint whether plaintiffs allege that Defendants unlawfully
conspired to enter into capitation arrangements with their respective customers.
The complaint seeks treble damages against Defendants in an unspecified amount
and a permanent injunction prohibiting Defendants from engaging in the alleged
conduct which forms the basis of the complaint, plus costs and attorneys' fees.
Defendants must move, answer or otherwise respond with respect to the complaint
in January 1997. The Company intends to vigorously defend itself in this
litigation. No amounts are recorded on the books of the Company in anticipation
of a loss as a result of this contingency.
The Company is engaged in various other legal proceedings that have arisen in
the ordinary course of its business. The Company believes that the ultimate
outcome of such proceedings will not have a material effect on the Company's
financial position, liquidity or results of operations.
F-17
d. Insurance
Under the Company's professional liability insurance policy, coverage is limited
to the period in which a claim is asserted, rather than when the incident giving
rise to such claim occurred. The Company has obtained professional liability
insurance through October 6, 1997; however, in the event the Company was unable
to obtain professional liability insurance at the expiration of the current
policy period, it is possible that the Company would be uninsured for claims
asserted after the expiration of the current policy period. Historical
experience of the Company does not indicate that losses, if any, arising from
claims asserted after the expiration of the current professional liability
policy period would have a material effect on the Company's financial position,
liquidity or results of operations.
12. RELATED PARTY TRANSACTIONS
During the period ended September 30, 1996, the Company paid consulting fees and
board fees to KKR totaling approximately $5,900. Of such amount, $5,500 related
to the Merger and associated financing transactions.
In addition to the amounts advanced by the parent for acquisition transactions
described in Note 8, Medco disbursed funds on behalf of the Company for the
payment of certain of the Company's U.S. federal, state and local income taxes
prior to the Merger.
Included in expense for the periods ended September 30, 1996, 1995 and 1994 are
charges totaling $1,218, $703 and $467, respectively, related to a prescription
drug benefit program administered by Medco.
The average balance due to the parent (Medco) for fiscal 1995 and 1994 was
$40,996 and $4,472, respectively; such balance was repaid in full on October 6,
1995 in connection with the Merger. A summary of intercompany activity with the
parent is as follows:
Due to parent, October 1, 1993............. $ 1,403
Allocation of costs from parent............ 407
Intercompany purchases..................... 402
Income taxes paid by parent................ 10,494
Cash transfers from parent................. 25,225
Due to parent, September 30, 1994.......... 37,931
Allocation of costs from parent............ 379
Intercompany purchases..................... 659
Income taxes paid by parent................ 3,795
Cash transfer from parent.................. 28,049
Due to parent, September 30,1995........... 70,813
Adjustment to income taxes paid by parent . (2,935)
Repayment made in connection with the Merger (67,878)
Due to parent, September 30,1996...........$ ---
13. RESTRUCTURING CHARGE
The Company recorded a pre-tax restructuring charge of $2,995 related to a plan,
adopted and approved in the fourth quarter of 1996, to restructure its staff
offices by exiting certain geographic markets and streamlining Continuum's field
and administrative management organization. This decision was in response to the
results of underperforming locations affected by the lack of sufficient patient
flow in the geographic areas serviced by these
F-18
13. RESTRUCTURING CHARGE--(continued)
offices and the Company's ability to purchase healthcare services at lower rates
from the network. In addition, it was determined the Company would be able to
expand beneficiary access to specialists and other providers thereby achieving
more cost-effective treatment and to favorably shift a portion of the economic
risk, in some cases, of providing outpatient healthcare to the provider through
the use of case rates and other alternative reimbursement methods. The
restructuring charge is comprised primarily of accruals for employee severance,
real property lease terminations and write-off of certain assets in geographic
markets which are being exited. The Company anticipates the restructuring plan
will be substantially completed by February 28, 1997.
14. MAJOR CUSTOMERS
For fiscal 1996, 1995 and 1994, no customer accounted for more than 10% of the
Company's operating revenues.
15. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) savings plan covering substantially all employees who
have completed one year of active employment during which 1,000 hours of service
has been credited. Under the plan, an employee may elect to contribute on a
pre-tax basis to a retirement account up to 15% of the employee's compensation
up to the maximum annual contributions permitted by the Internal Revenue Code.
The Company matches employee contributions at the rate of 25% of the employee's
contributions to the 401(k) savings plan, up to a maximum of 6% of an employee's
annual compensation. Effective January 1, 1997, the Company will match employee
contributions at the rate of 50% of the employee's contributions to the 401(k)
savings plan, up to a maximum of 6% of an employee's annual compensation.
The Company's 401(k) savings plan contribution recognized as expense for the
periods ended September 30, 1996, 1995 and 1994 was $542, $330 and $327,
respectively.
16. STOCK OPTIONS AND AWARDS
In October 1995, the Company adopted the 1995 Stock Purchase and Option Plan for
Employees of Merit Behavioral Care Corporation and Subsidiaries (the "1995
Option Plan"). The 1995 Option Plan provides for the issuance of up to 8,561,000
shares of common stock to key employees of the Company. The 1995 Option Plan
permits the issuance of common stock and the grant of non-qualified stock
options (the "1995 Options") to purchase shares of common stock. The exercise
price of 1995 Options will not be less than 50% of the fair market value per
share of common stock on the date of such grant. Such options vest at the rate
of 20% per year over a period of five years.
F-19
16. STOCK OPTIONS AND AWARDS--(Continued)
In January 1996, the Company adopted a second stock option plan, the Merit
Behavioral Care Corporation Employee Stock Option Plan ("1996 Employee Option
Plan"). The 1996 Employee Option Plan, which covers all employees not included
in the 1995 Option Plan whose employment commenced prior to January 1, 1996,
provides for the issuance of up to 1,000,000 shares of common stock of the
Company. The 1996 Employee Option Plan permits the issuance of common stock and
the grant of non-qualified stock options (the "1996 Employee Options") to
purchase shares of common stock. The 1996 Employee Options vest on the fourth
anniversary of the date of grant, provided that the employee remains employed
with the Company on such date. The 1996 Employee Options are exercisable after
an initial public offering of common stock of the Company meeting certain
requirements.
Information regarding the Company's stock option plans is summarized below:
<TABLE>
<CAPTION>
1996
1995 Employee
Option Plan Option Plan
Shares under option:
<S> <C>
Outstanding at October 1, 1995......... --- ---
Granted................................ 5,698,000 835,175
Canceled............................... (585,000) (119,625)
Outstanding at September 30, 1996...... 5,113,000 715,550
Option price per share:
At September 30, 1996.................. $ 5.00 $ 7.50
</TABLE>
Prior to the Merger, employees of the Company participated in stock option plans
administered by Merck. Pursuant to these plans, options were granted at the fair
market value of Merck common stock on the date of grant and generally vest over
a period of five years. The Company realizes an income tax benefit when Company
employees exercise either a) nonqualified Merck stock options; or b) Merck
incentive stock options, assuming the underlying common stock is sold within one
year from the date that the incentive stock option was exercised. This benefit
results in a decrease in tax liabilities and an increase in additional paid in
capital. During 1996, the Company recorded a tax benefit of $1,505 from the
exercise of Merck options. Information regarding the options outstanding under
these plans held by employees of the Company at September 30, 1996 is as
follows:
Option Price
Shares Per Share
Vested........................... 905,504 $3.78 to $35.75
Unvested......................... 391,169 $3.78 to $35.75
Total............................ 1,296,673
Through September 30, 1995, employees of the Company participated in an Employee
Stock Purchase Plan administered by Merck. The stock plan permitted employees of
the Company to purchase Merck common stock at the end of each quarter at a price
equal to 85% of the fair market value at that date.
F-20
<PAGE>
17. SUPPLEMENTAL INFORMATION
Supplemental cash flow information and noncash investing and financing
activities are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Supplemental Cash Flow Information:
Cash paid for income taxes....... $1,100 $2,167 $1,858
Cash paid for interest........... 17,676 --- ---
Supplemental Noncash Investing and
Financing Activities:
Record deferred taxes associated
with the Merger............... 7,594 --- ---
Exercise of Merck stock options............. 1,505 --- ---
Acquisitions:
Fair value of assets acquired,
other than cash............ 14,360 --- 15,429
Liabilities assumed.......... (2,962) --- (3,907)
Consideration paid........... 11,398 --- 11,522
Contingent consideration..... 1,278 9,580 11,858
Cash used for acquisitions,
net of cash acquired...........$12,676 $ 9,580 $23,380
</TABLE>
18. RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS 121
establishes accounting standards for the impairment of long-lived assets and
certain identified intangibles to be disposed of or held and used by an entity.
SFAS 121 is effective for fiscal years beginning after December 15, 1995. The
Company will adopt SFAS 121 in fiscal 1997 and does not expect its
implementation to have a material effect on its results of operations or its
financial condition.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation". SFAS 123 establishes financial accounting and reporting standards
for stock-based employee compensation plans. SFAS 123 is effective for fiscal
years beginning after December 15, 1995. The Company will adopt SFAS 123 in
fiscal 1997 and does not expect its implementation to have a material effect on
its results of operations or its financial condition.
F-21
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, dated as of October 6, 1995 is made by and between Medco
Behavioral Care Corporation, a Delaware corporation hereinafter referred to as
the "Company," and Albert S. Waxman, an employee of, or consultant to, the
Company or a Subsidiary (as defined below) of the Company, hereinafter referred
to as "Optionee."
WHEREAS, the Company wishes to afford the Optionee the opportunity to
purchase shares of its $.01 par value Common Stock ("Common Stock");
WHEREAS, pursuant to the Stockholder's Agreement, the Optionee is entitled
to receive a grant of Non-Qualified Stock Options;
WHEREAS, the Company wishes to carry out the Plan (as defined below), the
terms of which are hereby incorporated by reference and made a part of this
Agreement; and
WHEREAS, the Committee (as defined below) appointed to administer the Plan
has determined that it would be to the advantage and best interest of the
Company and its stockholders to grant the Non-Qualified Stock Option(s) provided
for herein to the Optionee as an incentive for increased efforts during his term
of employment with the Company or its Subsidiaries or Affiliates, and has
advised the Company thereof and instructed the undersigned officers to issue
said Options;
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever the following terms are used in this Agreement, they
shall have the meaning specified in the Plan or below unless the context clearly
indicates to the contrary.
Section 12. - Acceleration Event
"Acceleration Event" with respect to an Optionee shall mean that
each of the following has occurred:
(a) (i) a sale of all or substantially all of the assets of the
Company to a Person who is not an Affiliate of KKR or an entity in which
the shareholders of the Company
<PAGE>
immediately prior to such transaction do not control more than 40% of
the voting power of such entity immediately following the transaction,
(ii) a sale by KKR or any of its Affiliates resulting in 50% or more of
the voting power of the Company being held by a Person or Group that
does not include KKR or any of its Affiliates or (iii) a merger or
consolidation of the Company into another Person which is not an
Affiliate of KKR or an entity in which the shareholders of the Company
immediately prior to such transaction do not control more than 40% of
the voting power immediately following the transaction. "Group" means
two or more Persons acting together as a partnership, limited
partnership, syndicate or other group for the purpose of acquiring,
holding or disposing of securities of the Company,
(b) Employees and partners of KKR and its Affiliates or their
designees do not collectively constitute a majority of the Board of
Directors of (in case of the event described in subsection (a)(i)) the
acquiring Person, or (in case of the events described in subsection
(a)(ii) or (iii)) the Company, and
(c) if the Optionee is an employee of the Company or a
Subsidiary, such employment is terminated without "Cause" or with "Good
Reason" (as such terms are defined in the Stockholder's Agreement)
within one year following the later of the events described in
subsections (a) and (b).
Section 13. - Affiliate
"Affiliate" shall mean (a) with respect to any Person, any other
Person directly or indirectly controlling, controlled by, or under common
control with, such Person, and (b) with respect to the Company, also any entity
designated by the Board of Directors of the Company in which the Company or one
of its Affiliates has an interest, and (c) with respect to Kohlberg Kravis
Roberts & Co., L.P. ("KKR"), also any Affiliate of any partner of KKR. For
purposes of this Agreement, "Person" means an individual, partnership,
corporation, business trust, joint stock company, trust, unincorporated
association, joint venture, governmental authority or other entity of whatever
nature, and "control" shall have the meaning given such term under Rule 405 of
the Securities Act of 1933.
Section 14. - Code
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Section 15. - Committee
"Committee" shall mean the Compensation Committee of the Company.
Section 16. - Grant Date
"Grant Date" shall mean the date on which the Options provided
for in this Agreement were granted.
Section 17. - Options
"Options" shall mean the Non-Qualified Stock Options to purchase
Common Stock granted under this Agreement.
Section 18. - Permanent Disability
The Optionee shall be deemed to have a "Permanent Disability" if
the Optionee is unable to engage in the activities required by the job by reason
of any medically determined physical or mental impairment which can be expected
to result in death or which has lasted or can be expected to last for a
continuous period of not less than 12 months, as reasonably determined by the
Board of Directors of the Company in good faith and in its discretion.
Section 19. - Plan
"Plan" shall mean the 1995 Stock Purchase and Option Plan for Employees of
Medco Behavioral Care Corporation and Subsidiaries.
Section 20. - Permitted Retirement
"Permitted Retirement" shall mean retirement at age 65 or over
(or such other age as may be approved by the Board of Directors of the Company)
after having been employed by the Company or one of its Subsidiaries or
Affiliates for at least three years after the Grant Date.
Section 21. - Pronouns
The masculine pronoun shall include the feminine and neuter, and
the singular the plural, where the context so indicates.
Section 1.11 - Purchase Date
"Purchase Date" shall mean October __, 1995.
Section 1.12 - Secretary
"Secretary" shall mean the Secretary of the Company.
Section 1.13 - Stockholder's Agreement
"Stockholder's Agreement" shall mean that certain Stockholder's
Agreement dated as of January 1, 1996 between the Optionee and the Company.
Section 1.14 - Subsidiary
"Subsidiary" with respect to any entity shall mean any
corporation (or other entity) in an unbroken chain of corporations (or other
entities) beginning with such entity if each of the corporations (or entities),
or group of commonly controlled corporations (or entities), other than the last
corporation (or entity) in the unbroken chain, then owns stock (or other equity
interest) possessing 50% or more of the total combined voting power of all
classes of equity in one of the other entities in such chain.
Section 1.15 - Value
"Value" of a share of Common Stock for periods prior to a "Public
Offering" (as defined in the Stockholder's Agreement) shall mean the "Base Value
Per Share" (as defined in the Stockholder's Agreement) and for subsequent
periods shall mean the "Market Price Per Share" (as defined in the Stockholder's
Agreement).
ARTICLE II
GRANT OF OPTIONS
Section 22. - Grant of Options
For good and valuable consideration, on and as of the date hereof
the Company irrevocably grants to the Optionee an Option to purchase any part or
all of an aggregate of the number of shares set forth with respect to each such
Option on the signature page hereof of its $.01 par value Common Stock upon the
terms and conditions set forth in this Agreement.
Section 23. - Exercise Price
The exercise price of the shares of stock covered by the
Option(s) shall be $5.00 per share without commission or other charge.
Section 24. - Consideration to the Company
In consideration of the granting of these Option(s) by the
Company, the Optionee agrees to render faithful and efficient services to the
Company or one of its Subsidiaries or Affiliates, with such duties and
responsibilities as the Company shall from time to time prescribe. Nothing in
this Agreement or in the Plan shall confer upon the Optionee any right to
continue in the employ of the Company or any of its Subsidiaries or Affiliates
or shall interfere with or restrict in any way the rights of the Company and its
Subsidiaries and Affiliates, which are hereby expressly reserved, to terminate
the employment of the Optionee at any time for any reason whatsoever, with or
without Cause.
Section 25. - Adjustments in Options
Subject to Section 9 of the Plan, in the event that the
outstanding shares of the stock subject to an Option are, from time to time,
changed into or exchanged for cash or a different number or kind of shares of
the Company or other securities of the Company by reason of a merger,
consolidation, recapitalization, reclassification, stock split, stock dividend,
combination of shares, or otherwise, the Committee shall make an appropriate and
equitable adjustment in the number and kind of shares or other consideration and
the exercise price as to which such Option, or portions thereof then
unexercised, shall be exercisable in order to prevent dilution or enlargement of
the benefits intended to be made available with respect to any Option. Any such
adjustment made by the Committee shall be final and binding upon the Optionee,
the Company and all other interested persons.
ARTICLE III
PERIOD OF EXERCISABILITY
Section 3.1 - Commencement of Exercisability
<TABLE>
<CAPTION>
(a) The Option shall become exercisable as follows:
Date Option Number of Option Shares
Becomes Exercisable As to Which Option
Is Exercisable
<S> <C>
Grant Date through the first anniversary of the Grant 0%
Date
After the first anniversary of the Grant Date 20%
After the second anniversary of the Grant Date 40%
After the third anniversary of the Grant Date 60%
After the fourth anniversary of the Grant Date 80%
After the fifth anniversary of the Grant Date 100%
</TABLE>
(b) Notwithstanding the foregoing, the Option shall become
exercisable for the period set forth in Section 3.2 as to 100% of the shares of
Common Stock subject to such Option upon the happening of an Acceleration Event
(but only to the extent such Option has not otherwise terminated).
(c) Notwithstanding the foregoing, no Option shall become
exercisable as to any additional shares of Common Stock following the
termination of employment of the Optionee for any reason. Any Option which is
non-exercisable as of the Optionee's termination of employment shall be
immediately cancelled.
Section 3.2 - Expiration of Options
Except as otherwise provided in Section 5 or 6 of the
Stockholder's Agreement, the Options may not be exercised to any extent by
Optionee after the first to occur of the following events:
(a) The tenth anniversary of the Grant Date; or
(b) The first anniversary of the date of the Optionee's
termination of employment by reason of death, Permanent Disability or
Permitted Retirement; or
(c) The first business day which is fifteen calendar days after
the earlier of (i) 75 days after termination of employment of the
Optionee for any reason not specified in subsection (b) or (ii) the
delivery of notice by the Company that it does not intend to exercise
its call right under Section 6 of the Stockholder's Agreement; provided,
however, that in any event the Options shall remain exercisable under
this subsection 3.2(c) until at least 45 days after termination of
employment of the Optionee for any reason other than for death,
Permanent Disability or Permitted Retirement; or
(d) The date the Option is terminated pursuant to Section 5, 6 or
10(b) of the Stockholder's Agreement;
(e) If the Committee so determines pursuant to Section 9 of the
Plan, the effective date of either the merger or consolidation of the
Company into another Person, or the exchange or acquisition by another
Person of all or substantially all of the Company's assets or 80% or
more of its then outstanding voting stock, or the recapitalization,
reclassification, liquidation or dissolution of the Company. At least
ten (10) days prior to the effective date of such merger, consolidation,
exchange, acquisition, recapitalization, reclassification, liquidation
or dissolution, the Committee shall give the Optionee notice of such
event if the Option has then neither been fully exercised nor become
unexercisable under this Section 3.2.
ARTICLE IV
EXERCISE OF OPTION
Section 4.1 - Person Eligible to Exercise
During the lifetime of the Optionee, only he may exercise an
Option or any portion thereof. After the death of the Optionee, any exercisable
portion of an Option may, prior to the time when an Option becomes unexercisable
under Section 3.2, be exercised by his personal representative or by any person
empowered to do so under the Optionee's will or under the then applicable laws
of descent and distribution.
Section 4.2 - Partial Exercise
Any exercisable portion of an Option or the entire Option, if
then wholly exercisable, may be exercised in whole or in part at any time prior
to the time when the Option or portion thereof becomes unexercisable under
Section 3.2; provided, however, that any partial exercise shall be for whole
shares of Common Stock only.
Section 4.3 - Manner of Exercise
An Option, or any exercisable portion thereof, may be exercised
solely by delivering to the Secretary or his office all of the following prior
to the time when the Option or such portion becomes unexercisable under Section
3.2:
(a) Notice in writing signed by the Optionee or the other person
then entitled to exercise the Option or portion thereof, stating that
the Option or portion thereof is thereby exercised, such notice
complying with all applicable rules established by the Committee;
(b) Full payment for the shares with respect to which the Option,
or portion thereof, is exercised in one or more of the following forms:
(i) cash; (ii) surrender of shares of Common Stock then issuable upon
exercise of the Option (or owned by Optionee duly endorsed for transfer
to the Company) having a Value on the date of Option exercise equal to
the necessary aggregate exercise price of the Option or exercised
portion thereof;
(c) A bona fide written representation and agreement, in a form
reasonably satisfactory to the Committee, signed by the Optionee or
other person then entitled to exercise such Option or portion thereof,
stating that the shares of stock are being acquired for his own account,
for investment and without any present intention of distributing or
reselling said shares or any of them except as may be permitted under
the Securities Act of 1933, as amended (the "Act"), and then applicable
rules and regulations thereunder, and that the Optionee or other person
then entitled to exercise such Option or portion thereof will indemnify
the Company against and hold it free and harmless from any loss, damage,
expense or liability resulting to the Company if any sale or
distribution of the shares by such person is contrary to the
representation and agreement referred to above; provided, however, that
the Committee may, in its absolute discretion, take whatever additional
actions it deems appropriate to ensure the observance and performance of
such representation and agreement and to effect compliance with the Act
and any other federal or state securities laws or regulations;
(d) Full payment to the Company of all amounts which, under
federal, state or local law, it is required to withhold upon exercise of
the Option, in one or more of the following forms: (i) cash; (ii)
surrender of shares of Common Stock then issuable upon exercise of the
Option (or owned by Optionee duly endorsed for transfer to the Company)
having a Value on the date of Option exercise equal to the required
amount; and
(e) In the event the Option or portion thereof shall be exercised
pursuant to Section 4.1 by any person or persons other than the
Optionee, appropriate proof of the right of such person or persons to
exercise the Option.
Without limiting the generality of the foregoing, the Committee may require an
opinion of counsel acceptable to it to the effect that any subsequent transfer
of shares acquired on exercise of an Option does not violate the Act, and may
issue stop-transfer orders covering such shares. Share certificates evidencing
stock issued on exercise of this Option shall bear an appropriate legend
referring to the provisions of subsection (c) above and the agreements herein.
The written representation and agreement referred to in subsection (c) above
shall, however, not be required if the shares to be issued pursuant to such
exercise have been registered under the Act, and such registration is then
effective in respect of such shares.
Section 4.4 - Conditions to Issuance of Stock Certificates
The shares of stock deliverable upon the exercise of an Option,
or any portion thereof, may be either previously authorized but unissued shares
or issued shares which have then been reacquired by the Company. Such shares
shall be fully paid and nonassessable. The Company shall not be required to
issue or deliver any certificate or certificates for shares of stock purchased
upon the exercise of an Option or portion thereof prior to fulfillment of all of
the following conditions:
(a) The obtaining of approval or other clearance from any state
or federal governmental agency which the Committee shall, in its
absolute discretion, determine to be necessary or advisable; and
(b) The lapse of such reasonable period of time following the
exercise of the Option as the Committee may from time to time establish
for reasons of administrative convenience.
Section 4.5 - Rights as Stockholder
The holder of an Option shall not be, nor have any of the rights
or privileges of, a stockholder of the Company in respect of any shares
purchasable upon the exercise of the Option or any portion thereof unless and
until certificates representing such shares shall have been issued by the
Company to such holder.
ARTICLE V
MISCELLANEOUS
Section 5.1 - Administration
The Committee shall have the power to interpret the Plan and this
Agreement and to adopt such rules for the administration, interpretation and
application of the Plan as are consistent therewith and to interpret or revoke
any such rules. All actions taken and all interpretations and determinations
made by the Committee shall be final and binding upon the Optionee, the Company
and all other interested persons. No member of the Committee shall be personally
liable for any action, determination or interpretation made in good faith with
respect to the Plan or the Options. In its absolute discretion, the Board of
Directors may at any time and from time to time exercise any and all rights and
duties of the Committee under the Plan and this Agreement.
Section 5.2 - Options Not Transferable
Except as provided in the Stockholder's Agreement, neither the
Options nor any interest or right therein or part thereof shall be liable for
the debts, contracts or engagements of the Optionee or his successors in
interest or shall be subject to disposition by transfer, alienation,
anticipation, pledge, encumbrance, assignment or any other means whether such
disposition be voluntary or involuntary or by operation of law by judgment,
levy, attachment, garnishment or any other legal or equitable proceedings
(including bankruptcy), and any attempted disposition thereof shall be null and
void and of no effect; provided, however, that this Section 5.2 shall not
prevent transfers by will or by the applicable laws of descent and distribution.
Section 5.3 - Shares to Be Reserved
The Company shall at all times during the term of the Options
reserve and keep available such number of shares of stock as will be sufficient
to satisfy the requirements of this Agreement.
Section 5.4 - Notices
Any notice to be given under the terms of this Agreement to the
Company shall be addressed to the Company in care of its Secretary, and any
notice to be given to the Optionee shall be addressed to him at the address
given beneath his signature hereto. By a notice given pursuant to this Section
5.4, either party may hereafter designate a different address for notices to be
given to him. Any notice which is required to be given to the Optionee shall, if
the Optionee is then deceased, be given to the Optionee's personal
representative if such representative has previously informed the Company of his
status and address by written notice under this Section 5.4. Any notice shall
have been deemed duly given when enclosed in a properly sealed envelope or
wrapper addressed as aforesaid, deposited (with postage prepaid) in a post
office or branch post office regularly maintained by the United States Postal
Service.
Section 5.5 - Titles
Titles are provided herein for convenience only and are not to
serve as a basis for interpretation or Construction of this Agreement.
Section 5.6 - Applicability of Plan and Stockholder's Agreement
The Options and the shares of Common Stock issued to the Optionee
upon exercise of the Options shall be subject to all of the terms and provisions
of the Plan and the Stockholder's Agreement, to the extent applicable to the
Options and such shares. In the event of any conflict between this Agreement and
the Plan, the terms of the Plan shall control. In the event of any conflict
between this Agreement and the Stockholder's Agreement, the terms of the
Stockholder's Agreement shall control.
Section 5.7 - Amendment
This Agreement may be amended only by a writing executed by the
parties hereto which specifically states that it is amending this Agreement.
Section 5.8 - Governing Law
The laws of the State of Delaware shall govern the
interpretation, validity and performance of the terms of this Agreement
regardless of the law that might be applied under principles of conflicts of
laws.
Section 5.9 - Jurisdiction
Any suit, action or proceeding against the Optionee with respect
to this Agreement, or any judgment entered by any court in respect of any
thereof, may be brought in any court of competent jurisdiction in the State of
Delaware or New York, as the Company may elect in its sole discretion, and the
Optionee hereby submits to the non-exclusive jurisdiction of such courts for the
purpose of any such suit, action, proceeding or judgment. The Optionee hereby
irrevocably waives any objections which he may now or hereafter have to the
laying of the venue of any suit, action or proceeding arising out of or relating
to this Agreement brought in any court of competent jurisdiction in the State of
Delaware or New York, and hereby further irrevocably waives any claim that any
such suit, action or proceeding brought in any such court has been brought in
any inconvenient forum. No suit, action or proceeding against the Company with
respect to this Agreement may be brought in any court, domestic or foreign, or
before any similar domestic or foreign authority other than in a court of
competent jurisdiction in the State of Delaware or New York, and the Optionee
hereby irrevocably waives any right which he may otherwise have had to bring
such an action in any other court, domestic or foreign, or before any similar
domestic or foreign authority. The Company hereby submits to the jurisdiction of
such courts for the purpose of any such suit, action or proceeding.
[signature page follows]
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and
delivered by the parties hereto.
MEDCO BEHAVIORAL CARE CORPORATION
By /s/ Michael G. Lenahan
Its EVP
/s/ Albert S. Waxman Aggregate number of shares
Optionee of Common Stock for which the
Option is granted hereunder:
Address
Optionee's Taxpayer
Identification Number:
COOKE PROPERTIES INC.,
Landlord
AND
EMPIRE BLUE CROSS AND BLUE SHIELD
Tenant
LEASE
PREMISES:
The Kent Building
666 Third Avenue
New York, New York 10017
The Entire 5th Floor and a
Portion of the 6th Floor
<PAGE>
LEASE, dated August 14, 1991 between Cooke Properties Inc., a California
corporation having an office at 405 Lexington Avenue, New York, New York 10174
(hereinafter called "Landlord") and Empire Blue Cross and Blue Shield, a New
York Not-For-Profit Health Service Corporation, having an office at 622 Third
Avenue New York New York 10017 (hereinafter called "Tenant").
W I T N E S S E T H:
ARTICLE
1.1 Landlord hereby leases to Tenant, and Tenant here hires from
Landlord, the premises hereinafter described, in the building known as The Kent
Building, 666 Third Avenue, New York, New York 10017 (hereinafter called the
"Building"), for the term hereinafter stated, for the rents hereinafter reserved
and upon and subject to the conditions (including limitations, restrictions and
reservations) and covenants hereinafter provided. A copy of the Certificate of
occupancy for the Building in effect on the date hereof is annexed to this Lease
as Exhibit A. The plot of land on which the Building is erected is hereinafter
called the "Land". Each party hereto hereby expressly covenants and agrees to
observe and perform all of the conditions and covenants herein contained on its
art to be observed and performed.
1.2 The premises hereby leased to Tenant is the entire 5th floor and a
portion of the 6th floor of the Building, containing a total of approximately
forty-one thousand three hundred twenty (41,320) rentable square feet as shown
hatched the floor plan annexed hereto as Exhibit B. Said premises together with
all fixtures and equipment which at the commencement, or during the term, of
this Lease are thereto attached (except items not deemed to be included therein
and removable by Tenant as provided in Article 14) constitute and are
hereinafter called the "Demised Premises".
1.3 The term of this Lease, for which the Demised Premises are hereby
leased, shall commence on a date (hereinafter called the "Commencement Date")
which shall be the later of August 15, 1991 or the date that Landlord shall have
both, substantially completed Landlord's Work as required by (and defined in)
Section 3.1(a) and shall have removed asbestos from the Demised Premises
pursuant to Section 3.3 (a), and shall on the date which is the last day of the
calendar month in which shall occur the date which is five (5) years and six (6)
months after the Commencement Date, which ending date is hereinafter called the
"Expiration Date", or shall end on such earlier date upon which said term may
expire or be canceled or terminate pursuant to any of the conditions or
covenants of this Lease pursuant to law. For the purposes of this Section 1.3,
Landlord shall be deemed to have substantially completed Landlord's Work when
the Demised Premises are ready for Tenant's Initial Alterations (as hereinafter
defined), and any remaining Landlord's Work will not unreasonably or materially
interfere with or delay any of Tenant's Initial Alterations. Promptly following
the Commencement Date, Landlord and Tenant shall both execute a written
instrument to confirm the Commencement Date and anticipated Expiration Date.
1.4 The rents reserved under this Lease, for the term thereof, shall be and
consist of (a) fixed rent of one million three hundred sixty-three thousand five
hundred sixty dollars and no cent ($1,363,560.00) per year which shall be
payable in equal installments in advance on the first day of each and every
calendar month during the term of this Lease, except that Tenant shall pay the
first monthly installment of fixed rend on the execution of this Lease, and
(b) additional rent consisting of all other sums of money as
shall become due from and payable by Tenant to Landlord hereunder (for default
in the payment of which Landlord shall have the same remedies as for a default
in the payment of fixed rent), all to be paid to Landlord at its office, or such
other place, or to such agent and at such place, as Landlord may designate by
notice to Tenant, in lawful money of the United States of America. Such payment
of rent shall be in cash or by check (drawn upon a bank whose principal office
is located within the continental United States of America), subject to
collection.
(c) Tenant shall receive a rental credit of one hundred thirteen
thousand six hundred thirty dollars and no cent ($113,630.00) per month for the
first six (6) months of the term. In recognition of this credit, Tenant shall
not be required to pay fixed rent or any portion thereof which is attributable
to the first six (6) months of the term of this Lease beginning on
1.5 Tenant shall pay the fixed rent and additional rent herein reserved
promptly as and when the same shall become due and payable, without demand
therefor and without any abatement, deduction or setoff whatsoever except as
expressly provided in this Lease.
1.6 If the Commencement Date occurs on a day other than the first day of
a calendar month, the fixed rent for such calendar month shall be prorated and
the balance of the first month's fixed rent theretofore paid shall be credited
against the next monthly installment of fixed rent.
ARTICLE 2
Use
2.1 The Demised Premises shall be used for the following, but for no
other purpose, namely: Executive and administrative office of Tenant and any
Related Entity (hereinafter defined) whose business is in an affiliated health
field. Landlord acknowledges that Tenant intends to occupy the Demised Premises
for the operation of a program proprietary of Tenant to be conducted under the
name "Empire Mental Health Choice".
2.2 Tenant shall not use or permit the use of the Demised Premises or
any part thereof in any way which would violate any of the covenants,
agreements, terms, provisions and conditions of this Lease or for any unlawful
purposes or in an unlawful manner or in violation of the Certificate of
Occupancy for the Demised Premises or the Building. Tenant shall not suffer or
permit the Demised Premises or any part thereof to be used in any manner or
anything to be done therein or anything to be brought into or kept therein which
shall in any way impair the character, reputation or appearance of the Building
as a high quality office building, impair or interfere with any of the Building
services or the proper and economic heating, cleaning, air-conditioning or other
servicing of the Building or the Demised Premises, or impair or interfere with
the use of any of the other areas of the Building by, or occasion discomfort,
inconvenience or annoyance to, any of the other tenants or occupants of the
Building. Without limiting the generality of the foregoing, under no
circumstances shall the Demised Premises be used for the treatment of any
patients. Tenant shall not install any electrical or other equipment of any kind
which might cause any such impairment, interference, discomfort, inconvenience,
or annoyance. Those portions, if any, of the Demised Premises which are
identified as toilets and utility areas shall be used by Tenant only for the
purposes for which they are designed.
2.3 It is understood that no property, other than such as might normally
be brought upon or kept in the Demised Premises as an incident to the reasonable
use of the Demised Premises for the purposes herein permitted, will be brought
upon or be kept in the Demised Premises.
2.4 If any governmental license or permit shall be required for the
proper and lawful conduct of Tenant's business or other activity carried on in
the Demised Premises, and if the failure to secure such license or permit, might
or would, in any way, affect Landlord, then Tenant, at Tenant's expense, shall
duly procure and thereafter maintain such license or permit and submit the same
for inspection by Landlord. Tenant, at Tenant' expense, shall, at all times,
comply with the requirements of each such license or permit.
ARTICLE 3
3.1 Landlord shall perform the following work (collectively the "Landlord's
Work"):
(a) Prior to delivery of the Demised Premises to Tenant, to demolish and
remove the existing walls, ceilings, doors, HVAC ducts and other improvements,
if any, now in the Demised Premises and deliver the Demised Premises to Tenant
broom clean; and
(b) Within a reasonable time after the Commencement Date, but not later
than thirty (30) days after Tenant shall have delivered to Landlord Tenant's
plans and specifications for Tenant's Initial Alterations, to construct a
demising wall on the 6th floor of the Building in the area denoted on Exhibit B
hereto to separate the Demised Premises from the balance of the 6th floor of the
Building and create a public corridor and, in connection therewith, to leave an
opening for a door from the Demised Premises to the public corridor (which door
will be installed by Tenant as art of Tenant's Initial Alterations); and
(c) Within a reasonable period of time after the Commencement Date, but
not later than November 1, 1991, and only at such time or times and in such
matter as shall not unreasonably and materially interfere with Tenant's Initial
Alterations, to "box-in" the top portions of any risers or columns from which
Landlord shall have removed asbestos or asbestos-treated material as
contemplated by Section 3.3 (a) of this Lease; and
(d) Within seventy-five (75) days after the Commencement Date (i) clean
the 5th and 6th floor public rest rooms, replace or repair broken fixtures or
tiles therein, replace or repair broken light fixtures, paint the ceilings the
stall doors and replace the toilet seats, (ii) install the ceiling light
fixtures, paint and otherwise finish the public corridor on the sixth floor in
accordance with the standards of the balance of the Building, and (iii) finish
and modernize the elevator lobby on the sixth floor to the standards of the
elevator lobbies in the balance of the Building.
3.2 Landlord shall undertake and complete Landlord's Work in a
good, workmanlike manner and in compliance with all laws, ordinances, rules,
orders and regulations of all governmental authorities and of all insurance
bodies having jurisdiction. With respect to any work by Landlord or Tenant in or
about the Demised Premises for the period from and after the Commencement Date
is contemplated in Section 3.1, Landlord and Tenant agree that they will
cooperate each with the other so as to perform their respective work in a manner
which will not unreasonably and materially interfere with or delay the work of
the other.
3.3 (a) Tenant acknowledges that Landlord has delivered to Tenant
a copy of a report prepared by a duly licensed asbestos inspector stating the
extent, if any, that the Demised Premises or the elevator shafts for the bank of
the elevators which service floors two through six contain asbestos-treated
materials, Prior to the execution and delivery of this Lease, Landlord and
Tenant have inspected the Demised Premises and indicated on a floor plan
thereof, those areas in which asbestos treated materials are located (such areas
being known as the "Designated Asbestos Areas"), Landlord shall, at Landlord's
sol cost and expense, prior to the Commencement Date remove the asbestos-treated
materials from the Designated Asbestos Areas. Without limiting the generality of
the foregoing, if, pursuant to Asbestos Requirements (hereinafter defined),
either the encapsulation, removal or treatment of asbestos-treated material
located in or about the Demised Premises or the common areas of the Building
("Common Areas") shall be required, Landlord shall, at Landlord's cost and
expense, comply with such Asbestos Requirements with respect to the
encapsulation, removal or treatment of the asbestos-treated materials. Landlord
further acknowledges and agrees that if the asbestos report referred to above
indicates that the Demised Premises contains any asbestos-treated material in
areas in addition to the Designated Asbestos Areas (from which areas the
asbestos shall be removed as aforesaid) if and only to the extent required by
the Asbestos Requirements, Landlord shall, as part of Landlord's Work, comply
with all Asbestos Requirements with respect to the encapsulation, removal or
treatment of the asbestos-treated material in the Demised Premises; it being
understood, however, that if, pursuant to Asbestos Requirements, the
encapsulation, removal or treatment of any such asbestos-treated material in the
Demised Premises (other than the Designated Asbestos Areas) shall not be
required, Landlord shall have no obligation with respect thereto.
(b) During the term of this Lease, Landlord shall advise Tenant whether
any work has been commenced, is on-going or is contemplated to remove, treat or
encapsulate asbestos or asbestos-treated material in any part of the Building
(such work hereinafter the "Building Asbestos Work") provided, however, it being
understood and agreed that Landlord shall not be require to advise Tenant with
respect to any building asbestos work, except upon Tenant's request, where such
building asbestos work is occurring anywhere in the Building other than on the
third through eighth floors. With respect to Building Asbestos Work on the third
through eighth floors, inclusive, Landlord shall be obligated to advise Tenant
without necessity of a request from Tenant. During the course of any Building
Asbestos Work, or at any time during the term of this Lease, Tenant shall have
the right, at its sole cost and expense, to have the Demised Premises or Common
Areas of the Building tested by a licensed asbestos inspector to determine
whether the air within the Common Areas the Building or the Demised Premises
contain levels of friable asbestos in excess of levels permitted by applicable
Asbestos Requirements. If Tenant's licensed asbestos inspector shall issue its
written report indicating that the air in the Common areas of the Building or in
the Demised Premises contains levels of friable asbestos in excess of levels
permitted by the applicable Asbestos Requirements, Tenant shall forthwith notify
Landlord thereof and shall provide to Landlord a copy of the written report.
Thereafter, Landlord shall have the right to have its own licensed asbestos
inspector test the air in the Common Areas of the Building and the Demised
Premises provided that Landlord shall do so within five (5) days after
Landlord's receipt of Tenant's written report. If the inspection by Landlord's
licensed asbestos inspector does not indicate that the air in Common Areas of
the Building or the Demised Premises contains levels of friable asbestos in
excess of levels permitted by applicable Asbestos Requirements, Landlord and
Tenant shall instruct their licensed asbestos inspectors to immediately select a
third licensed asbestos inspector who shall be acceptable to both Landlord's and
Tenant's inspector and whose determination shall be binding on Landlord and
Tenant. Each party shall pay the costs of its own inspector. The costs of the
third inspection shall be paid by the party with whose inspection report said
third inspector disagrees. If the third inspector's test shall disclose that the
air in the Common Areas of the Building or the Demised Premises contains levels
of friable asbestos in excess of levels permitted by applicable Asbestos
Requirements (or if Landlord does not contest Tenant's inspector's determination
or if Landlord's inspector agrees with Tenant's inspector), and, as a result of
the presence in the air in the Common Areas of the Building or the Demised
Premises of levels of friable asbestos in excess of levels permitted by
applicable Asbestos Requirements (i) Tenant shall cease using all or a part of
the Demised Premises for the uses described in Section 2.1 of this Lease (which
shall not preclude access to the Demised Premises for removal by Tenant of its
property, or the inspection of the Demised Premises or Common Areas for the
presence of asbestos containing materials or otherwise) or if Tenant is
prevented from having access to the Demised Premises by reason of Asbestos
Requirements, in either event, for in excess of seven (7) consecutive business
days (of which condition Tenant shall give to Landlord notice forthwith upon the
commencement of such period and upon the expiration of such period), then the
fixed rent and additional rent hereunder shall be abated one day for each day
thereafter (in the same proportion as the ratio of the portion of the Demised
Premises in which Tenant has ceased to conduct its business bears to the entire
Demised Premises or, if the entire Demised Premises shall such abatement shall
be affected, such abatement shall be for the entire fixed rent and additional
rent) until such time as the level of friable asbestos in the Demised Premises
or the Common Areas of the Building shall be reduced to or below the level
permitted by the applicable Asbestos Requirements (as determined by the
agreement of Landlord's inspector and Tenant's inspector or by the third
licensed asbestos inspector); and (ii) if Tenant shall cease using the Demised
Premises for the uses described in Section 2.1 of this Lease or if Tenant is
prevented from having access to the Demised Premises by reason of Asbestos
Requirements, in either event, for more than one hundred five (105) consecutive
days then, at any time after the expiration of the one hundred fifth (105th)
day, but prior to the date that Landlord shall have reduced the levels of
friable asbestos in the air to or below the permitted by applicable Asbestos
Requirements, Tenant shall have the right to give to Landlord written notice of
Tenant's intention to terminate this Lease, which notice shall set a date not
less than fifteen (15) Business Days (hereinafter defined) after the date of
such notice as the Expiration Date of this Lease such right of termination being
Tenant's sole and exclusive remedy (as between Landlord and Tenant, but without
precluding third party claims or cross-claims) due to the fact that Landlord
shall not have reduced the levels of friable asbestos in the air to or below the
levels permitted by applicable Asbestos Requirements within said one hundred
five (105) consecutive period. Notwithstanding the foregoing, if prior to the
expiration of the fifteen (15) Business Day period set forth in Tenant's notice,
Landlord shall have reduced the level of friable asbestos in the air to or below
the levels permitted by applicable Asbestos Requirements, Tenant shall not have
the right to terminate this Lease and this Lease shall continue in full force
and effect. If this Lease terminates in accordance with the provisions of this
Section 3.3(b), the term of this Lease shall expire as of the date set forth in
Tenant's notice of termination as if such date was the Expiration Date, and all
rights, obligations and liabilities of the parties hereunder shall cease and
terminate as of said date.
(c) Notwithstanding anything in this Section 3.3 to the contrary,
Tenant acknowledges and agrees that Landlord shall have absolutely no obligation
to encapsulate, remove or treat any asbestos-treated materials in the Additional
Premises (hereinafter defined), except as specifically set forth in Article 44
of this Lease.
(d) Asbestos Requirements shall mean all present and future laws,
rules, orders, ordinances, regulations, statutes, requirements, codes and
executive orders, of all governmental and municipal authorities having
jurisdiction and of any and all of their departments and bureaus pertaining or
relating to the use, maintenance, presence, encapsulation, removal or treatment
of asbestos containing or treated materials applicable to the Building.
3.4 Other than Landlord's Work, Landlord shall not be obligated to make
any improvements or alterations to or within the Demised Premises whatsoever.
ARTICLE 4
Deleted Prior to Execution
ARTICLE 5
Adjustments of Rents
5.1 As used in this Article 5 the words and terms which follow mean and
include the following:
(a) "Tax Year" shall mean each period of twelve months,
commencing on the first day of July of each such period, in which occurs any
part of the term of this Lease or such other period of twelve months occurring
during the term of this Lease as hereafter may be duly adopted as the fiscal
year for real estate tax purposes of the City of New York.
(b) "Operation Year" shall mean each calendar year, subsequent to
the calendar year 1992 in which occurs any part of the term of this Lease.
(c) "Tenant's Proportionate Share" shall mean .087.
(d) Deleted Prior to Execution.
(e) "Assessed Valuation" shall mean the amount for which any
parcel of real property or structure or improvement is assessed by the City of
New York for the purposes of Real Estate Taxes.
(f) "Real Estate Taxes" shall mean the sum of (i) the amount
determined by multiplying (x) the Assessed Valuation of the Land and the
Building for any Tax Year by (y) the real of such event on a basis consistent
with the principles underlying the provisions of this Article 5 taking into
consideration (y) the portion of such Tax Year or Operation Year which shall
have elapsed prior to the date of such event or (z) in the case of any such
increase or decrease in the area of the Demised Premises the portion of the
Demised Premises to which the same relates.
5.7 Payments shall be made pursuant to this Article 5 notwithstanding
the fact that an Escalation statement is furnished to Tenant after the
expiration of the term of this Lease.
5.8 In case the Real Estate Taxes for any Tax Year or part thereof shall
be reduced before Tenant shall have paid Tenant's Proportionate Share of any
excess thereof in respect of such Tax Year, pursuant to Section 5.2 hereof, the
Real Estate Taxes for such Tax Year shall be deemed to include any expenses
including counsel fees incurred by Landlord in connection with reducing the
Assessed Valuation and/or in obtaining such reduction.
5.9 Deleted Prior to Execution.
5.10 Unless Tenant shall be a tax exempt organization, Tenant shall pay
to Landlord any occupancy tax or rent tax now effect or hereafter enacted, if
payable by Landlord in the firs instance or hereafter required to be paid by
Landlord. Such tax shall be paid to Landlord as additional rent upon demand.
5.11 If all or any part of the fixed rent or addition rent shall at any
time become uncollectible, reduced or require to be refunded by virtue of any
rules, regulations, orders, la or stabilization laws, of governmental or
quasi-governmental authorities having jurisdiction, then for the period
prescribe thereby Tenant shall pay to Landlord the maximum amounts permitted
pursuant thereto but not in excess of the fixed rent and additional rent
reserved under this Lease. Upon the expiration of the applicable period of time
during which such amounts shall be uncollectible, reduced or refunded, Tenant
shall pay to Landlord as additional rents, within fifteen (15) days after
demand, all such uncollected, reduced or refunded amount that would have been
payable for the period absent such rules, regulations, orders, laws or
ordinances; provided, however, that the retroactive collection thereof shall
then be lawful.
ARTICLE 6
Failure to Give Possession
6.1 If the Demised Premises shall not be available delivery to Tenant on
the specific date, if any, hereinbefore designated for the commencement of the
term of this Lease for reason whatsoever, then this Lease shall not be affected
thereby, in such case, said specified date, if any, shall be deemed to be
postponed until the date when the Demised Premises shall be available for
delivery to Tenant, and Tenant shall not be entitled to possession of the
Demised Premises until the same available for delivery to Tenant, provided,
however, that Ten shall have no claim against Landlord, and Landlord shall have
liability to Tenant by reason of any such postponement of said specific date,
and the parties hereto further agree that any failure to have the Demised
Premises available for delivery to Tenant on said specific date or on the
Commencement Date shall no way affect the obligations of Tenant hereunder nor
shall the same be construed in any way to extend the term of this Lease and
furthermore, this Section 6.1 shall be deemed to be an express provision to the
contrary of Section 223-a of the Real Property Law of the State of New York and
any other law of like import now or hereafter in force.
6.2 Notwithstanding the provisions of Section 6.1 to the contrary, if
the Commencement Date shall not have occurred on or before November 15, 1991, at
any time thereafter, but prior to the Commencement Date, Tenant shall have the
right to terminate this Lease by giving written notice of its election to do so
to Landlord, which notice shall set a date which is not less than fifteen (15)
days after the date of giving of such notice as the date for the termination of
the Lease. In such event, unless the Commencement Date shall occur prior to the
date set forth in Tenant's notice as the date for termination of this Lease,
this Lease shall terminate as of such date as if such date were originally set
forth herein as the Expiration Date and neither party shall have any further
rights hereunder. Tenant's right of termination as aforesaid shall be Tenant's
sole and exclusive remedy and the provisions of this Section 6.2 shall be deemed
to be an express provision to the contrary as contemplated by Section 223-a of
the Real Property Law of the State of New York and any other law of like
important now or hereafter in force.
6.3 The provisions of Section 6.1 shall apply not only to the delivery
of the Demised Premises to Tenant as of the Commencement Date but shall also
apply to the delivery to Tenant of any Additional Premises (hereinafter defined)
pursuant to Tenant's options as set forth in Article 44 of this Lease.
ARTICLE 7
Subordination, Notice to
Lessors and Mortgagees
7.1 This Lease, and all rights of Tenant hereunder, are and shall be
subject and subordinate in all respects to all ground leases, overriding leases
and underlying leases of the Land and/or the Building now or hereafter existing
and to all mortgages which may now or hereafter affect the Land and/or the
Building and/or any of such leases, whether or not such mortgages shall also
cover other lands and/or buildings to each and every advance made or hereafter
to be made under such mortgages, and to all renewals, modifications,
replacements and extensions of such leases and such mortgages and spreaders and
consolidations of such mortgages. This Section 7.1 shall be self-operative and
no further instrument of subordination shall be required. In confirmation of
such subordination, Tenant shall promptly execute and deliver any instrument
that Landlord, the lessor of any such lease or the holder of any such mortgage
or any of their respective successors in interest may reasonably request to
evidence such subordination. The leases to which this Lease is, at the time
referred to, subject and subordinate pursuant to this Article are hereinafter
sometimes called "superior leases" and the mortgages to which this Lease is, at
the time referred to, subject and subordinate are hereafter sometimes called
"superior mortgages" and the lessor of a superior lease or its successor in
interest at the time referred to is sometimes hereinafter called a "lessor" and
the holder of a superior mortgage or its successor in interest at the time
referred to is sometimes hereinafter called a "holder". Landlord agrees that
Landlord shall request the holder of the existing superior mortgage, and any
future holder of any future superior mortgage, to enter into a non-disturbance
and attornment agreement with Tenant, which agreement shall be substantially in
the form of the agreement annexed hereto as Schedule 1 ("Non-Disturbance
Agreement"). Landlord agrees to use all reasonable efforts to cause the existing
holder of the current superior mortgage, and any future holder of any future
superior mortgage, to execute the Non-Disturbance Agreement; it being understood
and agreed, however, that Landlord shall have no obligation to expend any money
in excess of one Thousand Dollars ($1,000.00) or commence any action or
proceeding to induce any such holder to do so or to agree to any modification of
any mortgage in connection with the obtaining of such Non-Disturbance Agreement.
Landlord shall have no liability to Tenant for its failure to obtain such
NonDisturbance Agreement and Tenant's obligations under this Lease shall not be
affected by reason of such failure to obtain such Non-Disturbance Agreement.
7. In the event of any act or omission of Landlord which would give
Tenant the right, immediately or after lapse of a period of time, to cancel or
terminate this Lease, or to claim a partial or total eviction, Tenant shall not
exercise such right (i) until it has given written notice of such act or
omission to the holder of each superior mortgage and the lessor each superior
lease whose name and address shall previously have been furnished to Tenant in
writing, and (ii) unless such act or omission shall be one which is not capable
of being remedied by Landlord or such holder or lessor within a reasonable
period of time, until a reasonable period for remedying such act or omission
shall have elapsed following the giving of such notice and following the time
when such holder or lessor shall have become entitled under such superior
mortgage or superior lease, as the case may be, to remedy the same (which
reasonable period shall in no event be less than the period to which Landlord
would be entitled under this Lease or otherwise, after similar notice to effect
such remedy), provided such holder of lessor shall with due diligence give
Tenant written notice of its intention to, and commence and continue to, remedy
such act or omission.
7.3 If the lessor of a superior lease or the holder of a superior
mortgage shall succeed to the rights of Landlord und this Lease, whether through
possession or foreclosure action or delivery of a new lease or deed, then (but
subject to the provisions of any Non-Disturbance Agreement between Tenant and
such lessor or holder) at the request of such party so succeeding to Landlord's
rights (herein sometimes called "successor landlord") and upon such successor
landlord's providing to Tenant reasonably acceptable evidence that it has
succeeded to Landlord's interest under this Lease and a written agreement to
accept Tenant's attornment, Tenant shall attorn to and recognize such successor
landlord as Tenant's landlord under this Lease, and shall promptly execute and
deliver any instrument that such successor landlord may reasonably request to
evidence such attornment. Upon such attornment this Lease shall continue in full
force and effect as, or as if it were, a direct lease between the successor
landlord and Tenant upon all of the terms covenants, conditions, agreements and
provisions, as are set forth in this Lease except that the successor landlord
shall not
(a) be liable for any previous act or omission of Landlord under
this Lease,
(b) be subject to any offset, not expressly provided for in this
Lease, which shall have theretofore accrued to Tenant against Landlord, or
(c) be bound by any previous modification of the Lease, not expressly
provided for in this Lease, or by any previous prepayment of more than one
month's fixed rent, unless such modification or prepayment shall have been
expressly approved in writing by the lessor of the superior lease or the holder
of the superior mortgage through or by reason of which the property tax rate
applicable to the Borough of Manhattan for such Tax Year plus (ii) any special
or extraordinary assessments and governmental levies imposed against the Land
and the Building. If, due to a future change in the method of taxation, any
franchise, income, profit or other tax, however designated, shall be levied
against Landlord in substitution, in whole or part, for or in lieu of any tax
which would otherwise constitute "Real Estate Taxes", such franchise, income,
profit or other tax shall be deemed to be Real Estate Taxes for the purposes
hereof and shall be deemed to be included in the term "Real Estate Taxes".
(g) "Real Estate Tax Base" shall mean the Real Estate Taxes for
the Tax Year commencing July 1, 1992 and ending on June 30, 1993.
(h) Deleted Prior to Execution.
(i) Deleted Prior to Execution.
(j) Deleted Prior to Execution.
(k) "Escalation Statement" shall mean a statement in writing
signed by Landlord, setting forth the amount payable by Tenant for a specified
Tax Year or Operation Year (as the case may be) pursuant to this Article 5.
5.2 If the Real Estate Taxes for any Tax Year shall be greater
(resulting in an excess) than the Real Estate Tax Base, then Tenant shall pay to
Landlord as additional rent for such Tax Year, an amount equal to the Tenant's
Proportionate share of such excess.
5.3 If the Operating Expenses as defined in Exhibit for any operation
Year shall be greater (resulting in an excess than the operating Expenses for
the Base Year then Tenant shall pay to Landlord as additional rent for such
operation Year and proportionate Share of Increase as defined in Exhibit C.
5.4 Any such additional rent payable by reason of the provisions of
Section 5.2 hereof shall be payable within fifteen (15) days after Landlord
shall furnish to Tenant (and Tenant shall have received from Landlord) an
Escalation Statement with respect to Real Estate Taxes for any tax Year.
5.5 Any such additional rent payable by reason of the provisions of
Section 5.3 shall commence as of the first day the relevant Operation Year and,
after Landlord shall furnish Tenant with an Escalation Statement relating to
such Operation Year, all monthly installments of rental shall reflect
one-twelfth of the annual amount of such adjustment until a new adjustment
becomes effective pursuant to the provisions of this Article 5, provided
however, that if said Escalation Statement furnished to Tenant after the
commencement of such Operation Year, there shall be promptly paid by Tenant to
Landlord, an amount equal to the portion of such adjustment allocable to the
part of such Operation Year which shall have elapsed prior to the first day of
the calendar month next succeeding the calendar month in which said Escalation
Statement is furnished to Tenant.
5.6 In the event (i) that the date of the expiration or other
termination of this Lease shall be a day other than the last day of a Tax Year
or an Operation Year, or (ii) of any increase or decrease in the area of the
Premises (as may be provided herein), then in each such event in applying the
provisions of this Article 5 with respect to any Tax Year or Operation Year in
which such event shall have occurred, appropriate adjustments shall be made to
reflect the occurrence successor landlord shall have succeeded to the rights of
Landlord under this Lease.
ARTICLE 8
Quite Enjoyment
8.1 So long as Tenant pays all of the fixed rent and additional rent due
hereunder and performs and observes all of the other terms, covenants and
conditions of this lease to be performed and observed by Tenant, Tenant shall
peaceably and quietly have, hold and enjoy the Demised Premises subject,
nevertheless, to the terms and provisions of this Lease and, as provided in
Article 7 (but subject to the provisions of any Non-Disturbance Agreement
between Tenant and any lessor or holder) to the superior leases and the superior
mortgages.
ARTICLE 9
Brokerage
9.1 Tenant covenants, represents, and warrants that Tenant has had no
dealings or negotiations with any broker, or agent other than Cushman &
Wakefield, Inc. in connection with the consummation of this Lease. Tenant and
Landlord covenant and agree to pay, hold harmless and indemnify the other from
and against any and all cost, expense (including reasonable attorneys' fees) or
liability for any compensation, commissions or charges claimed by any other
broker or agent, other than the broker set forth in this Section 9.1, with
respect to this Lease or the negotiation thereof based upon the acts of the
indemnifying party or its agents or representatives, Landlord will pay any
commission due Cushman & Wakefield, Inc., in connection with this Lease based
upon the terms of The Agency Agreement between Cooke Properties Inc., and
Cushman & Wakefield Inc. The liability of Landlord and Tenant under this Article
9 shall survive the Expiration Date or the date of sooner termination of the
term of this Lease.
ARTICLE 10
Compliance With Laws
10.1 Tenant, at Tenant's expense, shall comply with laws and ordinances
(including but not limited to local laws #5 and #16), and all rules, orders and
regulations of all governmental authorities and of all insurance bodies, at any
duly issued or in force, applicable to the Demised Premises or any part thereof
or to Tenant's use thereof, except that Tenant shall not hereby be under any
obligation to comply with any ordinance, rule, order or regulation requiring any
structural alteration of the Demised Premises unless such alteration is required
by reason of a condition has been created by, at the instance of Tenant, or is
attributable to the use or manner of use to which Tenant puts the Demised
Premises, or is required by reason of a breach of any of Tenant's covenants and
agreements hereunder. Where any structural alteration of the Demised Premises is
required by any such law, ordinance, rule, order or regulation, and, (i) by
reason of the express except hereinabove contained, Tenant is not under any
obligation to such alteration, and (ii) the reasonably estimated cost of such
alteration exceeds Two Hundred Thousand Fifty Dollars ($250,000.00) (the "Cost
Base") then Landlord shall have the option of making such alteration and paying
the cost thereof by giving to Tenant not less than thirty (30) days' prior
written notice of such termination; provided, however, that if within fifteen
(15) days after the giving by Landlord of its notice of termination as
aforesaid, Tenant shall give written notice to Landlord stating that Tenant
elects to make such alteration at the expense of Tenant (with respect to costs
in excess of the Cost Base), then such notice of termination shall be
ineffective provided that Tenant, at Tenant's expense, shall, concurrently with
the giving of such notice to Landlord, execute and deliver to Landlord Tenant's
written undertaking, with a surety and in form and substance satisfactory to
Landlord, obligating Tenant to promptly and duly make such alteration in a
manner satisfactory to Landlord and to save Landlord harmless from any and all
costs, expenses, penalties and/or liabilities (including, but not limited to,
accountants' and attorneys' fees) in connection therewith or by reason thereof
in excess of the Cost Base; and Tenant covenants and agrees that, after so
electing to make any such alteration, Tenant will, at Tenant's expense in excess
of the Cost Base, and in compliance with all the covenants, agreements, terms,
provisions and conditions of this Lease, make such alteration, and will promptly
and duly perform all the conditions of such undertaking and that all such
conditions of such undertaking shall be deemed to constitute provisions of this
Lease to be kept or performed on the part of Tenant with the same force and
effect as if the same had been set forth herein, Upon the completion of all such
work and the furnishing by Tenant to Landlord of the documentation required
under Article 13 with respect to Tenant's Changes (as defined in Article 13),
including, without limitation, the architect's certificate that Tenant has
substantially completed all work required of Tenant and mechanic's lien waivers
from each contractor employed by Tenant in connection therewith Landlord shall
pay to Tenant the Two Hundred Fifty Thousand Dollars ($250,000.00) representing
the Cost Base.
10.2 In the event that a notice of termination shall be given by
Landlord under the provisions of this Article 10 and such notice shall not be
negated by Tenant as provided in Section 10.1, this Lease and the term and
estate hereby granted shall expire as of the date specified in such notice with
the same effect as if that Date were the Expiration Date of this Lease, and the
fixed rent and additional rent payable hereunder shall be apportioned as of such
date of termination.
10.3 Landlord, at its sole cost and expense (but subject to inclusion of
such cost and expenses as part of Operating Expenses), shall comply with, or
shall cause the other tenants occupants of space within the Building to comply
with, all laws and ordinances (including, but not limited to local laws #5 and
#16) and all rules, orders and regulations of all governmental authorities and
of all insurance bodies at any time duly issue or in force, applicable to the
Demised Premises or the Building, except to the extent that Tenant is required
by the provisions of Section 10.1 to comply therewith, and subject, further, to
Landlord's right to contest the applicability or legality thereof.
ARTICLE 11
Insurance
11.1 Tenant shall not violate, or permit the violation of, any condition
imposed by the standard fire insurance policy then issued for office buildings
in the Borough of Manhattan City of New York, and shall not do, or permit
anything to be done, or keep or permit anything to be kept in the Demised
Premises, which would increase the fire or other casualty insurance rate on the
Building or the property therein over the rate which would otherwise then be in
effect (unless Tenant pays the resulting premium as provided in Section 11.3
hereof) or which would result in insurance companies refusing to insure the
Building or any of such property in amount reasonably satisfactory to Landlord.
11.2 Landlord and Tenant shall each secure an appropriate clause in, or
an endorsement upon, each fire or extended coverage or rent insurance policy
obtained by it and covering the Building, the Demised Premises or the personal
property, fixtures and equipment located therein or thereon, pursuant to which
the respective insurance companies waive subrogation or permit the insured,
prior to any loss, to agree with a third party to waive any claim it might have
against said third party. The waiver of subrogation or permission for waive of
any claim hereinbefore referred to shall extend to the agents of each party and
its employees and, in the case of Tenant, shall also extend to all other persons
and entities occupying or using the Demised Premises in accordance with the
terms of this Lease. If and to the extent that such waiver or permission can be
obtained only upon payment of an additional charge then the part benefitting
from the waiver or permission shall pay such charge upon demand, or shall be
deemed to have agreed that the party obtaining the insurance coverage in
question shall be free of an further obligations under the revisions hereof
relating to such waiver or permission.
Subject to the foregoing provisions of this Section 11.2, and insofar as
may be permitted by the terms of the insurance policies carried by it, each
party hereby releases the other with respect to any claim (including a claim for
negligence) which it might otherwise have against the other party for loss,
damages or destruction with respect to its property by fire or other casualty
(including rental value or business interest as the case may be occurring during
the term of this Lease.
11.3 If, by reason of any failure of Tenant to comply with the
provisions of Section 10.1 or Section 11.1 the rate fire insurance with extended
coverage on the Building or equipment or other property of Landlord shall be
higher than it otherwise would be, Tenant shall reimburse Landlord, on demand,
for that part of the premiums for fire insurance and extended coverage paid by
Landlord because of such failure on the part of Tenant.
11.4 A schedule or make up of rates for the Building the Demised
Premises, as the case may be, issued by the New York Fire Insurance Rating
Organization or other similar body making rates for fire insurance and extended
coverage for the premises concerned, shall be conclusive evidence of the facts
therein stated and of the several items and charges in the fire insurance rate
with extended coverage then applicable to such premises.
l1.5(a)Tenant shall obtain prior to the Commencement Date, and
thereafter during the term of this Lease keep in full force and effect the
following insurance:
(i) a policy of commercial general liability and property damage insurance
with a contractual liability endorsement that extends to, among other
events, the indemnities by Tenant as set forth in Section 21.2 of this
Lease, with minimum limits of liability of a combined single limit with
respect to each occurrence of five million dollars ($5,000,000,00) for
injury or death to persons and damage to property, or such greater amount
as Landlord may from time to time reasonably require with respect to
similar premises, uses and occupancies; and
(ii) insurance against loss or damage by fire, with extended coverage
including "all risk" coverage, such coverage intended to provide the
broadest possible coverage available, in an amount equal to one hundred
(100%) percent of the full replacement value of (a) all of Tenant's
furniture, trade fixtures, equipment and other personal property located in
or appurtenant to the Premises and (b) all leasehold improvements made by
Tenant during the term of the Lease, including Tenant's Initial
Alterations, without diminution of such replacement cost for depreciation
or obsolescence.
(b) All insurance policies required to be maintained by Tenant
under this Lease shall contain provisions that:
(i) no act (other than willful, deliberate acts which are customarily not
covered under the type of insurance policies Tenant is required to maintain
pursuant to this Lease) or omission of Tenant shall affect or limit the
obligation of the insurance company to pay the amount of any loss
sustained;
(ii) such policy shall not be cancelled or modified without at least ten
(10) days prior written notice to Landlord, which notice to be effective
must be actually received by Landlord and shall contain the policy number
and the names of the insureds and certificate holder;
(iii) Tenant is named as the insured and Landlord, and each lessor and each
holder of a mortgage (whose names and addresses shall have been provided to
Tenant by such lessor, such holder or Landlord) are each named as an
additional insured, except as to that portion of Tenant's fire and casualty
policy which relates solely to Tenant's furniture, moveable trade fixtures,
personal property and business equipment (including its telephone
equipment), which shall name Tenant as the sole insured;
(iv) such policy is primary and non-contributory with any insurance carried
by Landlord; and
(v) such policy shall be for a term of not less than one (1) year.
(c) All insurance required to be carried by Tenant pursuant to
the terms of this Lease shall be effected under valid and enforceable policies
issued by reputable and independent insurers licensed to do business in the
State of New York each of which shall be rated by Best's Rating Guide Property
Casualty Division not less than "A" or "A+" as to its general policy holder
rating, and at least "XIII" as to its financial rating provided that such
ratings are then available to an insurance company licensed to do business in
the State of New York, it being understood that if such ratings are not then
available to an insurance company licensed to do business in the State of New
York, the insurance required to be carried by Tenant pursuant to the terms of
this Lease shall be effected under valid and enforceable policies issued by
reputable and independent insurers licensed to do business in the State of New
York each of which shall have the highest rating then available from Best's
Rating Guide Property - Casualty Division. The casualty and liability insurance
required to be maintained by Tenant may be effected by a policy or policies of
blanket insurance which may cover other properties provided that the protection
and coverage afforded thereunder shall not be less than the protection or
coverage which would have been afforded under a separate policy relating to the
Demised Premises only and, that in all other respects of such policy shall
comply with the other provisions of this Article 11.
(d) An original or a certified copy of each such Policy or a
certificate thereof shall be delivered to Landlord prior to the Commencement
Date and thereafter not less than fifteen (15) days prior to the scheduled
expiration thereof. Tenant's failure, in whole or in part, to provide to
Landlord a policy or certificate of insurance as set forth in this Article 11
and in the form required by this Article 11 shall be, and shall be deemed to be,
a material default hereunder entitling Landlord to exercise any and all of the
remedies provided herein and at law or in equity, and the parties hereto
expressly acknowledge and agree that Landlord may, but shall have no obligation
or duty whatsoever, to cure such a default whether by obtaining the
aforementioned insurance at its own or at Tenant's cost or expense, or
otherwise. If Landlord elects to obtain any such insurance following Tenant's
default in so doing, the costs incurred by Landlord, including without
limitation, the premiums and other charges and expenses, shall be additional
rent hereunder and shall be due immediately upon demand.
(e) It is expressly understood and agreed that Landlord will not
carry insurance on Tenant's fixtures, furnishings, equipment or other property
or effects or insurance against interruption of Tenant's business.
11.6 Except as specifically set forth in this Lease, Landlord and Tenant
and agree that, to the extent a claim is covered by the insurance that the
claimant is obligated by this Lease to obtain and maintain, the claimant will
look first to its own insurance for satisfaction of the claim.
ARTICLE 12
Rules and Regulations 12.1 Tenant and its employees and agents shall
observe and comply with the Rules and Regulations annexed hereto as Exhibit
D, and such reasonable changes therein (whether by modification,
elimination, or addition) as Landlord at any time or times hereafter may
make and communicate in writing to Tenant, provided, however, that in case
of any conflict or inconsistency between the provisions of this Lease and
any of the Rules and Regulations as originally promulgated or as changed,
the provisions of this Lease shall control.
12.2 Nothing contained in this Lease shall be construed to impose upon
Landlord any duty or obligation to Tenant to enforce the Rules and Regulations
or the terms, covenants or conditions in any other lease, as against any other
tenant, and Landlord shall not be liable to Tenant for violation of the same by
any other tenant or its employees, agents, or visitors, except that Landlord
shall not enforce any Rule or Regulation against Tenant which Landlord shall not
then be enforcing against all other office tenants in the Building.
12.3 Nothing contained in Paragraph 5 of the Rules and Regulations shall
or shall be deemed to prohibit or prevent the Tenant first named in this Lease
from displaying (a) on the entrance doors of the Demised Premises and (b) in the
elevator lobbies of the floors which are occupied entirely by such Tenant, such
Tenant's usual and customary logo, trademark, service mark or other symbol
identifying Tenant or Tenant's services offered from the Demised Premises,
including Empire Mental Health Choice.
ARTICLE 13
Tenant's Changes
13.1 Tenant covenants and agrees that Tenant will make no alterations,
installations, repairs, additions, improvements or replacements, including,
without limitation, Tenant's Initial Alterations (as defined in Section 13-2)
(hereinafter collectively called "Tenant's Changes") in, to or about the Demised
Premises without Landlord's prior written consent, and then only by contractors
or mechanics set forth in Schedule 2 annexed hereto or otherwise approved in
advance by Landlord which consent, provided that such contractors comply with
the provisions of Section 13.3, shall not be unreasonably withheld or unduly
delayed. Tenant's Changes shall be done at Tenant's sole expense and at such
times and in such manner as Landlord may from time to time designate. Prior to
the commencement of any Tenant's Changes, Tenant shall submit to Landlord, for
Landlord's written approval, three sets of plans and specifications (to be
prepared by a licensed architect and/or engineer and at the expense of Tenant)
of such proposed Tenant's Changes in detail reasonably satisfactory to Landlord.
The Landlord reserves the right to refer such plans and specifications to
Landlord's consulting architects and/or engineers for review at Tenant's expense
not to exceed fifty cents ($0.50) for each square foot of the Demised Premises
affected by the applicable Tenant's Changes, provided, however, that in no event
shall the expenses for such architects and/or engineer's review of Tenant's
plans and specifications for Tenant's Initial Alterations exceed $5,000,00. The
Tenant shall comply with all reasonable changes or requirements recommended by
Landlord's consultants. Landlord shall not unreasonably withhold or unduly delay
its consent to any non-structural Tenant's Changes provided that such Tenant's
Changes (i) are not visible from the-outside of the Building, (ii) do not affect
any part of the Building other than the Demised Premises, (iii) do not adversely
affect any service required to be furnished by Landlord to Tenant or to any
other tenant or occupant of the Building, (iv) do not adversely affect the
proper functioning of any of the Building mechanical, electrical, sanitary,
heating, air-conditioning, ventilating, elevator, plumbing, life safety or other
service systems and (v) do not reduce the value or utility of the Demised
Premises or the Building. In no event shall any material or equipment be
incorporated in or to the Demised Premises in connection with any such Tenant's
Changes which is subject to any lien, security agreement, charge, mortgage or
encumbrance of any kind whatsoever or is subject to any conditional sale or
other similar or dissimilar title retention agreement. Tenant's Changes shall at
all times comply with (1) all laws, rules, orders, regulations and ordinances of
governmental and municipal authorities having jurisdiction thereof, (2) the
rules and regulations of Landlord, and (3) architectural plans and
specifications prepared by and at the expense of Tenant theretofore submitted to
Landlord for Landlord's prior written approval and approved by Landlord, and
shall be undertaken and completed in a good, workmanlike manner using new or
comparable to new materials which shall be of a quality comparable to the
original installations in the Demised Premises. No Tenant's Changes shall be
commenced by Tenant or any one acting for or on behalf of Tenant until Landlord
has approved such plans and specifications, and no amendments or additions to
such plans and specifications shall be made without the prior written consent of
Landlord. With respect to any Tenant's Changes having a cost in excess of Fifty
Thousand Dollars ($50,000.00), Tenant shall deliver to Landlord waivers of lien
from all contractors, subcontractors and material suppliers involved in the
performance of such Tenant's Changes and the furnishing of materials in
connection therewith, together with a certificate from Tenant's architect
stating that (i) in the architect's opinion, such Tenant's Changes have been
performed (and completed) in a good and workmanlike manner and in accordance
with the plans and specifications therefore as approved by Landlord, and (ii)
all contractors, subcontractors and material suppliers have been paid for the
work performed in connection with such Tenant's Changes or the material
furnished in connection therewith.
13.2 Following the Commencement Date, Tenant shall commence and proceed
to complete within one (1) year after the Commencement Date all of the work
necessary for Tenant to prepare the Demised Premises for Tenant's use and
occupancy and, at Tenant's election, to construct an internal stairway, to be
denoted on Tenant's plans and specifications, and to be in an area of the
Demised Premises reasonably agreed to by Landlord and Tenant (all of the work
necessary to do so, exclusive of Landlord's Work, is herein referred to as
"Tenant's Initial Alterations"). Tenant's Initial Alterations shall be
undertaken and completed in accordance with this Lease and the provisions of
this Article 13 provided, however, that Landlord agrees that, provided Tenant's
plans and specifications for Tenant's Initial Alterations are in reasonably
sufficient detail so as to show the design, character and appearance of the work
to be included as Tenant's Initial Alterations, Landlord shall review and
approve or disapprove same within ten (10) business days after Tenant's
submission thereof to Landlord. If Landlord shall inform Tenant in writing, of
its objections to said plans and specifications, Tenant shall comply with all
changes or requirements reasonably recommended by Landlord's consultants and
shall submit revised plans and specifications to Landlord. The failure of
Landlord to inform Tenant of any further objections to the revised plans and
specifications within seven (7) business days after Tenant's submission of such
revised plans and specifications shall constitute Landlord's approval thereof.
13.3 Tenant agrees that it will not at any time prior or during the term
of this Lease, either directly or indirectly use any contractors, labor or
materials if the use of such contractors, labor or materials would create any
difficulty with other contractors, or labor engaged by Tenant or Landlord or
other engaged in the construction, maintenance or operation of the Building or
any part thereof. Landlord acknowledges and agrees that the contractors and/or
engineers set forth on Schedule 2 annexed to this Lease do not violate the
provisions of this Section 13.3.
13.4 (a) Prior to making any Tenant's Changes, include Tenant's Initial
Alterations, Tenant shall, at Tenant's sole cost and expense obtain all permits,
approvals and certificates required by all governmental or municipal authorities
having jurisdiction and shall furnish copies thereof to Landlord, shall furnish
to Landlord duplicate original policies or certificate thereof of workers'
compensation and builder's risk insurance covering all persons to be employed by
Tenant and Tenant's contractors and subcontractors in connection with Tenant's
changes, such insurance to otherwise comply with the provisions of Article 11 of
this Lease and, upon completion of Tenant's Changes, obtain, at Tenant's expense
certificates of final approval thereof if same are required by any governmental
or municipal authority having jurisdiction, a copy of which shall be furnished
to Landlord.
(b) Any review or approval by Landlord of any plans and/or
specifications with respect to any Tenant's Changes is solely for Landlord's
benefit and without any representation to Tenant or another person or entity
with respect to the adequacy, correctness, legality or efficiency thereof, or
otherwise.
13.5 All plans and specifications submitted by Tenant to Landlord for
Landlord's approval shall, if applicable, comply with the compartmentation
requirements of the City of New York Local Law #5/1973, as amended, and Landlord
shall not be deemed unreasonable in withholding its consent to any plans or
specifications not complying therewith.
13.6 If any mechanic's lien is filed against the Building or the Demised
Premises for work done or claimed to be done or for materials furnished or
claimed to be furnished to Tenant, including, without limitation, in connection
with Tenant's Changes, the same shall be discharged by Tenant, at its expense,
within thirty (30) days thereafter, by filing the bond required by law, by
payment or otherwise. Nothing contained in this Lease shall constitute a consent
or request by Landlord, express or implied, for the performance of any labor or
services or the furnishing of any materials or other property in respect of the
Demised Premises or any part thereof, nor as giving Tenant any right, power or
authority to contract for or permit the performance of any labor or services or
the furnishing of any materials of other property in such fashion as would
permit the making of any claim against Landlord in respect thereof. Notice is
hereby given that Landlord shall not be liable for any labor or materials
furnished or to be furnished to Tenant on credit and that no mechanic or other
lien for any such labor or material shall attach to the Building or affect the
reversion or other estate or interest of Landlord in and to the Demised
Premises.
ARTICLE 14
Tenant's Property
14.1 All fixtures, equipment, improvements, installations and
appurtenances attached to or built into the Demised Premises at the commencement
or during the term of the Lease, whether by Landlord at its own expense or at
the expense of Tenant, or by Tenant at the expense of Landlord (including
Tenant's Initial Alterations) shall be and remain a part Demised Premises and
shall not be removed by Tenant, except as hereinafter in this Article 14
expressly provided.
14.2 All paneling, movable partitions, lighting fixtures, special
cabinet work, other business and trade fixtures, machinery and equipment,
communications equipment and office equipment, whether or not attached to or
built into the Demised Premises, which are installed in the Demised Premises or
for the account of Tenant, without expense to Landlord, and which can be removed
without permanent structural damage to the Building, and all furniture,
furnishings and other articles of movable personal property owned by Tenant and
located in the Demised Premises (all of which are sometimes called "Tenant's
Property"), shall be and shall remain the property of Tenant and may be removed
by it at any time during the term of the Lease; provided that if any of Tenant's
Property is removed, Tenant shall repair or pay the cost of repairing any damage
to the Demised Premises or the Building resulting from such removal. Any
equipment or other property for which Landlord shall have granted any allowance
or credit to Tenant (including the Tenant Improvement Allowance and Additional
Tenant Improvement Allowance, if any) shall not be deemed to have been installed
by or for the account of Tenant, without expense to Landlord, and shall not be
removed by Tenant.
14.3 At or before the Expiration Date, or the date of any earlier
termination of this Lease, or as promptly as practicable after such an earlier
termination date, Tenant at its expense, shall remove from the Demised Premises
all of Tenant's Property except such items thereof as Tenant shall have
expressly agreed in writing with Landlord were to remain and to become the
property of Landlord, and shall repair any damage to the Demised Premises or the
Building resulting from such removal.
14.4 Any other items of Tenant's Property (except money, securities and
other like valuables) which shall remain in the Demised Premises after the
Expiration Date or after a period of fifteen (15) days following an earlier
termination date, may, at the option of the Landlord, be deemed to have been
abandoned, and in such case either may be retained by Landlord as its property
or may be disposed of, without accountability, in such manner as Landlord may
see fit at Tenant's expense.
ARTICLE 15
Repairs and Maintenance
15.1 Tenant shall, throughout the term of this Lease, at Tenant's sole
cost and expense, take good care of the Demised Premises and the fixtures,
equipment, facilities and appurtenances therein and shall make all
non-structural repairs thereto as and when needed to preserve them in good
working order and condition, reasonable wear and tear accepted. All of Tenant's
repairs shall be of quality or class comparable to the original work or
construction and shall be made in accordance with the applicable provisions of
Article 13 hereof. In addition, Tenant, at its expense, shall promptly make all
repairs, ordinary or extraordinary, interior or exterior, structural or
otherwise, in and about the Demised Premises and the Building, as shall be
required by reason of (i) the performance or existence of Tenant's Initial
Alterations or other Tenant's Changes, (ii) the installation, use or operation
of Tenant's Property in the Demised Premises, (iii) the moving of Tenant's
Property or any other property owned or being delivered to or from Tenant in or
out of the Building, or (iv) the acts or omissions of Tenant or any of its
employees, agents, contractors quests and invitees; but Tenant shall not be
responsible, for any of such repairs as are required by reason of Landlord's
neglect or other fault in the manner of performing any of Tenant's Changes which
may be undertaken by Landlord for Tenant's account or are otherwise required by
reason of neglect or other fault of Landlord or its employees, agents,
contractors, guests and invitees. Except if due to the neglect or other fault of
Landlord or its employees, agents or contractors, Tenant, at its expense, shall
replace all scratched, damaged or broken doors and glass in the Demised Premises
and shall be responsible for all repairs, maintenance and replacement of wall
and floor coverings in the Demised Premises and for the repair and maintenance
of all lighting fixtures therein.
15.2 Landlord, at its expense, shall keep and maintain the Building and
its fixtures, appurtenances, systems and facilities serving the Building and
Demises Premises, in working order, condition and repair and shall make all
repairs, structural and otherwise, interior and exterior, as and when needed in
or about the Demised Premises, except for those repairs for which Tenant is
responsible pursuant to any other provisions of this Lease.
15.3 Except as expressly provided in this Lease, Landlord shall have no
liability to Tenant by reason of any inconvenience, annoyance, interruption or
injury to business arising from Landlord's making any repairs or changes which
Landlord is required or permitted by this Lease, or required by law, to make in
or to any portion of the Building or the Demised Premises, or in or to the
fixtures, equipment, or appurtenances of the Building or the Demised Premises.
Landlord shall undertake any such repairs or changes in a manner which will not
unreasonably and materially interfere with Tenant's use or occupancy of the
Demised Premises.
ARTICLE 16
Electricity
16.1 Landlord will furnish to Tenant, through transmission facilities
installed by it in the Building, alternating electric current to be used by
Tenant for the lighting fixtures and electrical receptacles installed in the
Demised Premises, but Landlord shall not be liable in any way to Tenant for any
failure or defect in supply or character of electric current furnished to the
Demised Premises, except as set forth in Section 16.7 of this Lease. Landlord
shall furnish and install (unless such installation is made by a duly qualified
employee of Tenant) all lighting tubes, lamps and bulbs used in the Demised
Premises and Tenant shall pay Landlord's reasonable charges therefor on demand
as additional rent. All ballasts shall be installed by Landlord and Tenant shall
pay Landlord's reasonable charges therefore on demand as additional rent
provided, however, that Tenant shall have the right to install such ballasts, at
Tenant's sole cost and expense, provided that Tenant employs a licensed
electrical contractor who complies with the provisions of Section 13.3, to do
so. Tenant shall use said electric current for lighting and, insofar as
Landlord's facilities are not burdened thereby and applicable laws and insurance
regulations permit, for operation, during normal business hours (i.e., the
Regular Hours of each Business Day, as both terms are defined in Article 17) of
such equipment as is normally used in connection with the operation of a usual
business office.
16.2 Tenant's use of electric current in the Demised Premises shall not
at any time exceed the capacity of any of the electrical conductors and
equipment in or otherwise serving the Demised Premises and in no event shall
exceed the Building Standard allotment of six (6) watts per square foot. Tenant
shall be allowed to make or perform or permit the making or performing of, any
alterations to wiring installations or other electrical facilities in or serving
the Demised Premises or any additions to the business machines, office equipment
or other appliances in the Demised Premises which utilize electrical energy
without the prior consent of Landlord so long as such usage does not exceed six
(6) watts per square foot. If the usage should exceed six (6) watts per square
foot, all additional risers, connections and/or other equipment required
therefor shall be installed by Landlord and the cost thereof shall be paid by
Tenant upon Landlord's demand. Landlord may also require that Tenant shall agree
to an increase in the annual fixed rent payable hereunder by an amount which
will reflect additional electric current made available to Tenant. If Landlord
and Tenant cannot agree thereon, such amount shall be determined by a reputable
independent electrical engineer to be selected by Landlord. If the Tenant
disputes the results of such survey, the dispute may, at Tenant's option to be
exercised strictly in accordance with section 16.3 (f), be submitted to dispute
resolution as provided in said Section 16.3 (f). When the amount of such
increase is so determined, the parties shall execute an agreement supplementary
hereto to reflect such increase in the amount of the annual fixed rent payable
hereunder effective from the date such additional service is made available to
Tenant; but such increase shall be effective from such date even if such
supplementary agreement is not executed.
16.3 (a) The annual fixed rent specified in this Lease includes
$123,960,00 per annum (the "Electric Charge") representing the estimated charge
for the furnishing of electrical service by Landlord to the Demised Premises,
based upon the rates charged as of August 1, 1991 by the public utility
furnishing electric energy to the Building. The Electric Charge is based upon
certain theoretical assumptions incorporating estimates of consumption of
electrical energy by lighting fixtures and other office equipment and machines
incident to the use of any premises as ordinary executive and general offices,
the anticipated periods of operation of such lighting fixtures, and office
equipment and machines and the cost of furnishing such electric energy.
(b) From time to time during the term hereof, the Electric Charge
may be increased to take into account:
(i) any material addition to the lighting fixtures, equipment and machines
in the Demised Premises;
(ii) use by Tenant of electric energy in the Demised Premises in excess of
the quantity considered and/or during periods of use other than those
considered in estimating the Electric Charge or determining any "Adjusted
Electric Charge" (as hereinafter defined) pursuant to this Article 16; or
(iii) any increase in Landlord's cost or expenses for or in connection with
the furnishing by it of electric energy to Tenant, in accordance with the
provisions of this Lease, which shall be due to any change in the rates
char by the public utility furnishing electric energy to the Building from
the rates charged as of August 1, 1991 by such utility or any change in
taxes based on the amounts charged by said public utility since the
effective date of the Electric Charge or the Adjusted Electric Charge, as
the case may be, then in effect.
Such increases in costs, except for those pursuant to subsection 16.3
(b) (iii) above, which increases in costs pursuant to said subsection 16.3 (b)
(iii) shall be based solely upon and equal to the increase in the rates charged
by the public utility for furnishing such electrical energy, shall be calculated
and reflected in the electricity and fixed rent in following manner: First: the
average monthly number of kilowatts of demand and the average monthly number of
kilowatt hours of consumption (or at the option of Landlord only the average
monthly number of kilowatt hours of consumption) shall first determined for the
electricity used in the entire Building over the twelve (12) monthly periods
immediately preceding rate change. Second: the cost thereof to Landlord shall be
at the rates in effect immediately prior to the rate change and at the rates in
effect immediately after the rate change. Third: the percentage by which such
cost after the rate change is greater than such cost before the rate change
shall be determined. Fourth: the Electric Charge or Adjusted Electric Charge, as
the case may be, shall be increased by the same percentage.
(c) Whenever, at any time during the term of this Lease, the
Electric Charge shall be increased, pursuant to clause (1) or (2) of paragraph
(b) of this Section 16.3, Landlord shall furnish to Tenant a survey setting
forth a new Electric Charge. (Any new Electric Charge pursuant to clauses (1),
(2), or (3) of paragraph (b) of this Section 16.3 is hereinafter sometimes
called the "Adjusted Electric Charge.")
(d) Upon the determination of an Adjusted Electric Charge
pursuant to clauses (1) or (2) of paragraph (b) of this Section 16.3, Landlord
shall furnish to Tenant a statement in writing recomputing and adjusting the
annual fixed rent hereunder by an appropriate sum representing any increase from
the Electric Charge then in effect, which statement shall be accompanied by the
survey upon which said increase was based, or in the case of any increase made
pursuant to clause (3) of paragraph (b) of this Section 16.3. the inclusion of
sufficient detail to enable Tenant to verify the increase referred to therein.
(e) Each such adjustment shall be effective retroactively
as of
(i) the effective date of the material addition in usage by Tenant, as
respects any increase made pursuant to clause (1) and (2) of paragraph (b)
of this Section 16.3, or
(ii) the date of the change in rates, as respects any increase made
pursuant to clause (3) of paragraph (b) of this Section 16.3.
Within twenty (20) days after the furnishing of any such
statement in writing, Tenant shall pay to Landlord as additional rent the
retroactive underpayment of annual fixed rent.
(f) Landlord and Tenant agree that Landlord's reputable, licensed
and independent electrical consultant may, from time to time, make surveys in
the Demised Premises covering the electrical equipment and fixtures and the uses
of current therein and, as aforesaid, the Electric Charge may be changed in
accordance with such survey. The determination of the change in the Electric
Charge by Landlord's consultant shall be binding and conclusive on Landlord and
on Tenant from and after the date of the delivery of copies of such
determination to Landlord and Tenant unless, within twenty (20) days after
delivery of a copy to Tenant, Tenant to Landlord written notice of its dispute
of such determination. If Tenant disputes such determination. it shall, at its
own expense within seven (7) Business Days after the date of its notice, at its
own expense, obtain from an independent, reputable, licensed electrical
consultant, its own survey of Tenant's electrical lighting and power load and
hours of use thereof and a determination in the change of the Electrical Charge
in accordance with the provisions of this Article 16. Upon completion of
Tenant's survey, Tenant shall forthwith provide to Landlord a copy. Thereafter,
Tenant's consultants and Landlord's consultants shall seek to agree on the
revised Electric Charge or Adjusted Electric Charge. If the two consultants can
not agree, they shall choose a third reputable, independent electrical
consultant the cost of which shall be shared equally by Landlord and Tenant, to
make a similar survey and the determination of the change in the Electric Charge
by such third electrical consultant shall be controlling. If Landlord's
consultant and Tenant's consultant can not agree on such third consultant within
ten (10) days after it is determined by either consultant that they are unable
to agree upon the revised Electric Charge or Adjusted Electric Charge, then
either Landlord or Tenant may apply to the Real Estate Board of New York, Inc.,
for the appointment of such third consultant. However, pending such final
determination, Tenant shall pay to Landlord the amount of the increased Electric
Charge as determined by Landlord's electrical consultant provided, however, that
if the final determination differs from the determination made by Landlord's
consultant, Landlord and Tenant shall make an adjustment for any deficiency owed
by Tenant or average paid by Tenant pursuant to the decision of Landlord's
electrical consultant.
(g) Landlord shall not be required, in connection with any survey
to be conducted in accordance with clauses (1) or (2) of paragraph (b) of this
Section 16.3. to document the basis for its belief that there has been material
addition to the lighting fixtures, equipment and machines in the Demised
Premises or that Tenant uses electrical energy in the Demised Premises in excess
of the quantity considered or during periods other than those considered in
estimating the Electric Charge or any Adjusted Electric Charge, or to have or
produce any basis therefor whatever, it being the intention of the parties that
Landlord shall have the right to initiate a survey or determination hereunder at
any time during the term of this Lease for any reason whatsoever.
16.4 Provided that Landlord elects to discontinue furnishing electric
energy to not less than ninety percent (90%) of the tenants in the Building, and
provided that electrical energy is available to Tenant from Consolidated Edison
Company of New York-or another public utility or private company, Landlord
reserves the right to discontinue furnishing electric energy to Tenant in the
Demised Premises at any time upon not less than ninety (90) days notice to
Tenant. If Landlord exercises such right of termination, this Lease shall
continue in full force and effect and shall be unaffected thereby, except only
that, from and after the effective date of such termination, Landlord shall not
be obligated to furnish electric energy to Tenant and the fixed rent payable
under this Lease shall be reduced by $123,960,00 per year plus the amount of any
increases pursuant to this Section 16.4. If Landlord so discontinues furnishing
electric energy to Tenant, Tenant shall arrange to obtain electric energy
directly from the public utility company furnishing electric service to the
Building. Such electric energy may be furnished to Tenant by means of the then
existing building system feeders, risers and wiring to the extent that the same
are available, suitable and safe for such purposes. All meters an additional
panel boards, feeders, risers, wiring and other conductors and equipment which
may be required to obtain electric energy directly from such public utility
company shall be installed by Landlord at its expense.
16.5 Notwithstanding the aforesaid provisions of this Article, if
pursuant to an action of the Public Service Commission of the State of New York,
or otherwise, sub-metering of electricity is permitted at the Building, Landlord
shall have the option, at Landlord's sole cost and expense, of installing
sub-meters to measure Tenant's electricity consumption and to charge the Tenant
for its electric consumption at the then applicable rate, if any, for
sub-metered electricity. In the event no such rate is promulgated, then Landlord
shall bill Tenant and Tenant shall pay Landlord for Tenant's electric
consumption at the same rates and frequency that Landlord is obligated to pay to
the local utility company furnishing electricity to the Building and all such
sums shall be collectible as additional rent payable hereunder.
16.6 In no event will the amount of fixed annual rent be decreased due
to adjustments in the Electric Charge or Adjusted Electric Charge pursuant to
this Article 16.
16.7 If the supply of electrical energy to the Demised Premises shall be
interrupted due to a cause or causes within Landlord's control for a period of
fifteen (15) consecutive Business Days, then, unless within said fifteen (15)
consecutive Business Day period Landlord shall have restored the service of
electrical energy to the Demised Premises (or if such restoration of service, in
good faith and with the exercise of diligence, cannot be completed within said
fifteen (15) Business Day period, then, unless Landlord has commenced to restore
such electrical energy service and is proceeding with diligence and continuity
to do so) at the end of the fifteen (15) Business Day period, as Tenant's sole
and exclusive remedy, at Tenant's option, the fixed rent and additional rent
payable by Tenant under this Lease shall be abated one day for each day after
said fifteen (15) Business Day period until such time as the electrical energy
service to the Demised Premises shall have been restored following an
interruption due to a cause or causes within Landlord's control. For the
purposes of this Section 16.7, if the supply of electrical energy to the
Premises shall be interrupted due to a strike or labor troubles, laws, rules,
regulations of governmental ordinances, governmental action or preemption in
connection with a national emergency or by reason or any legal requirement, fire
or other-casualty, failure of the public utility to supply same to the Building,
acts of God, civil commotion, third-party criminal behavior, terrorism, war, or
other acts or occurrences outside of Landlord's control and which are commonly
described as "force ___ events, such events, and each of them, shall be deemed
to be causes not within Landlord's control. Without limiting the generality of
the foregoing, an event shall be deemed to be within Landlord's control if such
event is due to repairs or alterations performed (or failed to be performed) by
Landlord or the failure of Landlord to maintain the Building systems owned or
controlled by Landlord which provide the electrical energy to the Building and
the Demised Premises. In no other event shall Landlord be liable, in any way,
for an interruption of the service of electrical energy or a failure or defect
in the supply or character or electrical current or energy furnished to the
Demised Premises.
ARTICLE 17
Heat, Ventilation
and Air Conditioning
17.1 Landlord, at its expense, shall maintain and operate in accordance
with Section 15.2 of this Lease, the heating, ventilating and air-conditioning
systems (the "Systems") and shall furnish heat, ventilating and air-conditioning
(hereinafter collectively called "air-conditioning service") in the Demised
Premises through the Systems, during "Regular Hours" (i.e., daytime business
hours, but not before 8:30 a.m. or after 6:00 p.m. Monday through Friday) of
"Business Days" (which shall mean all days except Saturdays, Sundays and days
observed by the Federal, state or municipal government or unions whose members
are employed at the Building, as holidays) throughout the year. If Tenant shall
require air-conditioning service at any other time (hereinafter called "After
Hours"), Landlord shall furnish such After Hours air-conditioning service upon
reasonable advance notice from Tenant, and Tenant shall pay Landlord's then
established charges therefor on Landlord's demand. In no event shall Tenant be
required to pay more for After Hours air-conditioning service then any other
tenant in the Building. Notwithstanding the foregoing, on or before January 31st
during each year of the term of this Lease, Tenant shall have the right to
designate two non-Business Days during such calendar year on which dates Tenant
intends to open the Demised Premises for business notwithstanding that such
dates are non-Business Days. Landlord agrees that on such days, Landlord shall
furnish After Hours air-conditioning service to the Demised Premises and Tenant
shall pay to Landlord in lieu of Landlord's established charges therefore, an
amount equal to fifty percent (50%) of Landlord's then established charges for
each such day, or such other amount as Landlord and Tenant may agree upon by
written instrument signed by both parties. Upon receipt of Tenant's notice
designating the two non-Business Days as aforesaid, Landlord shall advise Tenant
of the costs to Tenant for such After Hours air-conditioning service for the two
designated dates.
17.2 The use of the Demised Premises, or any part thereof, in a manner
exceeding the design conditions thereof (including occupancy and connected
electrical load) for air-conditioning service in the Demised Premises, or
rearrangement of partitioning which interferes with normal operation of the
air-conditioning service in the Demised Premises, or the use of computer or data
processing machines (other than customary desk top network personal computers
and workstations) may require changes in the Systems servicing Tenant, at its
expense, as Tenant's Changes pursuant to Article 13. Tenant agrees to lower and
keep closed the Venetian blinds or other window coverings in the Demised
Premises whenever required for the proper operation of the air-conditioning
service.
ARTICLE 18
Landlord's Other Services
18.1 Landlord, at its expense, shall provide public elevator service,
passenger and service, by elevators serving the floor on which the Demised
Premises are situated during Regular Hours of Business Days, and shall have at
least one passenger elevator subject to call at all other times including
non-Business Days.
18.2 Landlord, at its expense, shall cause the Demised Premises,
including the exterior and the interior of the windows thereof, to be cleaned.
Tenant shall pay to Landlord on demand the costs incurred by Landlord for (a)
extra cleaning work in the Demised Premises required because of (i) misuse or
neglect on the part of Tenant or its employees or visitors, (ii) use of portions
of the Demised Premises for preparation, serving or consumption of food or
beverages, data processing or reproducing operations in excess of customary
office operations, private lavatories or toilets or other special purposes
requiring greater or more difficult cleaning work than office areas, (iii)
unusual quantity of interior glass surfaces, (iv) non-building standard
materials or finishes installed by Tenant or at its request, (b) removal from
the Demised Premises and the Building of so much of any refuse and rubbish of
Tenant as shall exceed that ordinarily accumulated daily in the routine of
business office occupancy, and (c) cleaning services used by Tenant on days
other than Business Days. Landlord, its cleaning contractor and their employees
shall have After Hours access to the Demised Premises and the use (at Tenant's
expense) of light, power and water in the Demised Premises as reasonably
required for the purpose of cleaning the Demised Premises in accordance with
Landlord's obligations hereunder.
18.3 Landlord, at its expense, shall furnish adequate hot and cold water
to the floors on which the Demised Premises are located, for drinking, lavatory
and cleaning purposes. If Tenant uses water for any other purpose Landlord, at
Tenant's expense, may install meters to measure Tenant's consumption of water
and/or steam, as the case may be. Tenant shall pay for the quantities of water
and/or steam shown on such meters, at Landlord's cost thereof, on the rendition
of Landlord's bills therefor.
18.4 Landlord reserves the right, without any liability to Tenant,
except as otherwise expressly provided in this Lease, to stop service of any of
the heating, ventilating, air-conditioning, electric, sanitary, steam, elevator
or other Building systems serving the Demised Premises or the rendition of any
of the other services required of Landlord under this Lease, whenever and for so
long as may be reasonably necessary, by reason of accidents, emergencies,
strikes or the making of repairs or changes which Landlord is required by this
Lease or by law to make or in good faith deems necessary, by reason of
difficulty in securing proper supplies of fuel, steam, water, electricity, labor
or supplies, or by governmental restriction or by reason of any other cause
beyond Landlord's reasonable control including those events enumerated in
Section 16.7 as not being within Landlord's control.
ARTICLE 19
Access, Changes in
Building Facilities, Name
19.1 Except for the inside surfaces of all walls, windows and doors
bounding the Demised Premises, all of the Building, including exterior Building
walls, core corridor walls and doors and any core corridor entrance, any
terraces or roofs adjacent to the Demised Premises, and any space in or adjacent
to the Demised Premises, used for shafts, stacks, pipes, conduits, fan rooms,
ducts, electric or other utilities, sinks or other Building facilities, and the
use thereof, as well as access thereto through the Demised Premises for the
purposes of operation, maintenance, decoration and repair, are reserved to
Landlord.
19.2 Landlord reserves the right to make such changes, alterations,
additions, improvements, repairs or replacements in or to the Building
(including the Demised Premises) and the fixtures and equipment thereof, as well
as in or to the street entrances, halls, passages, elevators, escalators,
stairways and other parts thereof, and to erect, maintain and use pipes, duct
and conduits in and through the Demised Premises, all as Landlord may deem
necessary or desirable; provided, however, that there no unreasonable
obstruction of the means of access to the Demised Premised or unreasonable
interference with the use of the Demised Premises. Nothing contained in this
Article 19 shall impose upon Landlord any duty, obligation or liability with
respect to making any repair, replacement or improvement or complying with any
law, order or requirement of any governmental or other authority, except only to
the extent otherwise specifically set forth in this Lease.
19.3 Landlord reserves the right to name the Building and to change the
name or address of the Building at any time from time to tine. Neither this
Lease nor any use by Tenant shall give Tenant any easement or other right in or
to the use, if any, of any door or any passage or any concourse or any place
connecting the Building with any subway or any other building; or to any public
conveniences, and the use of such doors, passages, concourses, plazas and
conveniences may without notice to Tenants be regulated or discontinued at any
time by Landlord. If at a time any windows of the Demised Premises are
temporarily darkened or obstructed incident to or by reason of repairs,
replacement maintenance and/or cleaning in, on, to or about the Building of any
part or parts thereof, or are temporarily or permanently closed or rendered
inoperable, Landlord shall not be liable for any damage Tenant may sustain
thereby, and Tenant shall not be entitled to and compensation therefor nor
abatement of rent nor shall the same release Tenant from its obligations
hereunder nor constitute an eviction.
19.4 There shall be no allowance to Tenant for a diminution of rental
value and no liability on the part of Landlord by reason of inconvenience,
annoyance or injury to business arising from Landlord, Tenant or others making
any changes, alterations, additions, improvements, repairs or replacements in or
to any portion of the Building or the Demised Premises, or in or to fixtures,
appurtenances or equipment thereof, and no liability upon Landlord for failure
of Landlord or others to make any changes, alterations, additions, improvements,
repairs or replacements in or to any portion of the Building or the Demised
Premises, or in or to the fixtures, appurtenances or equipment thereof, unless
with respect to a failure by Landlord to make repairs, such failure is a default
by Landlord of its obligations under this Lease.
19.5 Landlord or Landlord's agent shall have the right to enter and/or
pass through the Demised Premises or any part thereof, at reasonable times
during reasonable hours (i) to examine the Demised Premises and to show them to
the fee owners, lessors of superior leases, holders of superior mortgages, or
prospective purchasers, mortgagees or lessees of the Building as an entirety,
and (ii) for the purpose of making such repairs or changes or doing such
repainting in or to the Demised Premises in or to the Building or its facilities
as may be provided for this Lease or as it may be required to make by law or in
order repair and maintain the Building or its fixtures or facilities. Landlord,
without cost or charge to Landlord by Tenant, shall be allowed to take all
materials into and upon the Demised Premise that may be required for such
repairs, changes, repainting and maintenance, without liability to Tenant
(except to the extent not covered by the insurance that Tenant is required to
maintain pursuant to this Lease, for damages to property or injuries to persons
caused by the negligence of Landlord, its employees, agents, contractors and
representatives). Landlord shall also have the right to enter on and/or pass
through the Demised Premises, or any part thereof, at such times as such entry
shall be required by circumstances of emergency affecting the Demised Premises
or the Building. Entry by Landlord to or through the Demised Premises, where
possible, shall be upon prior notice to Tenant, oral or written, as the
circumstances may dictate, except in emergencies. During any such entry,
Landlord shall not unreasonably obstruct the means of access to the Demised
Premise or unreasonably interfere with the use of the Demised Premises by
Tenant.
19.6 During the period of twelve (12) months prior to the Expiration
Date Landlord may exhibit the Demised Premises prospective tenants, such entry
to be at reasonable times during normal business hours.
19.7 For purposes of this Article 19, the term "Landlord" shall include
lessors of leases and the holders mortgages to which this Lease is subject and
subordinate as provided in Article 7.
19.8 Landlord acknowledges that Tenant has advised Landlord that some of
the business records to be maintained by Tenant in the Demised Premises may be
of a confidential nature or contain other proprietary information. Landlord
agrees that Landlord, its agents, employees, contractors and representatives
shall use all reasonable efforts to avoid a breach of confidentiality and the
disclosure of any such confidential information. Tenant agrees to take such
precautions as may be necessary or appropriate to prevent the inadvertent
disclosure and such confidential or other information to Landlord or Landlord's
agents, employees, contractors or representatives. The foregoing shall not apply
to any information which, at the time of its disclosure is or which thereafter
becomes, through no fault of Landlord, part of the public domain by publication
or otherwise or information which might have been acquired directly or
indirectly without violation of the foregoing provisions of this Lease, Landlord
agrees to indemnify and hold Tenant harmless from any cost, expense, loss,
liability or claims therefore arising directly from a breach by Landlord, its
agents, employees, contractors or representatives of the confidentiality
provisions of this Section 19.8 due to Landlord's active gross negligence or
wilful malfeasance, provided, however, that it is a condition precedent to the
effectiveness of this indemnification that (i) Tenant shall have taken such
precautions as may be necessary or appropriate to prevent the inadvertent
disclosure of any such confidential or proprietary information to Landlord or
Landlord's agents, employees, contractors or representatives, and (ii) Landlord
shall have reasonably prompt notice of any such claim, loss, cost or expense
asserted against Tenant and the opportunity for Landlord to appear and defend
against such claims, utilizing counsel of Landlord's choice. Nothing contained
in this Section 19.8 shall or shall be deemed to require Landlord to provide any
service to the Demised Premises, including, without limitation, cleaning
services, in a fashion which differs in any material respect from the provision
of such service to the other tenants in the Building.
ARTICLE 20
Notice of Accidents 20.1 Tenant shall give notice to Landlord, promptly
after Tenant learns thereof, of (i) any accident in or about the Demised
Premises for which Landlord might be liable, (ii) all fires in the Demised
Premises, (iii) all damages to or defects in the Demised Premises,
including the fixtures, equipment and appurtenances thereof for the repair
of which Landlord might be responsible, and (iv) all damage to or defects
in any parts of appurtenances or the Building's sanitary, electrical,
heating, ventilating, air-conditioning, elevator and other systems located
in or passing through the Demised Premises or any part thereof.
ARTICLE 21
Non-Liability and Indemnification
21.1 Neither Landlord nor any agent or employee of Landlord shall be
liable to Tenant for any injury or damage to Tenant or to any other person or
for any damage to, or loss (by theft or otherwise) of, any property of Tenant or
of any other person, irrespective of the cause of such injury, damage or loss,
unless caused by or due to the negligence of Landlord, its agents or employees,
with or without contributory negligence on the part of Tenant.
21.2 Tenant shall indemnify, save harmless and defend Landlord and its
agents against and from (a) any and all claims (i) arising from (x) the use or
occupancy of the Demised Premises, or (y) any work or thing whatsoever done, or
any condition created (other than by Landlord for Landlord's or Tenant's
account) in or about the Demised Premises during the term of this Lease or
during the period of time, if any, prior to the Commencement Date that Tenant
may have been given access to the Demised Premises, or (ii) arising from any
negligent or otherwise wrongful act or omission of Tenant or any of its
subtenants or its or their employees, agents or contractors, and (b) all
reasonable costs, expenses and liabilities incurred in or in connection with
each such claim or action or proceeding brought thereon. In case any action or
proceeding be brought against Landlord by reason of any such claim, Tenant, upon
notice from Landlord, shall defend such action or proceeding.
21.3 Except as otherwise expressly provided in this Lease, this Lease
and the obligations of Tenant hereunder shall be in no way affected, impaired or
excused because Landlord is unable to fulfill, or is delayed in fulfilling, any
of its obligations under this Lease by reason of strike, other labor trouble,
governmental pre-emption or priorities or other controls in connection with a
national or other public emergency or shortages of fuel, supplies or labor
resulting therefrom, or other like cause beyond Landlord's reasonable control.
ARTICLE 22
Destruction or Damage
22.1 If the Building or the Demised Premises shall be partially or
totally damaged or destroyed by fire or other cause, then whether or not the
damage or destruction shall have resulted from the fault or neglect of Tenant,
or its employees, agents or visitors (and if this Lease shall not have been
terminated as in this Article 22 hereinafter provided), Landlord shall repair
the damage and restore and rebuild the Building and/or the Demised Premises, at
its expense, with reasonable dispatch after notice to it of the damage or
destruction; provided, however, that Landlord shall not be required to repair or
replace any of Tenant's Property, including without limitation, Tenant's Initial
Alterations, it being understood and agreed that Landlord's obligations with
respect to the Demised Premises shall be to restore the Demised Premises to
substantially the same condition as existed on the Commencement Date.
22.2 If the Building or the Demised Premises shall be partially damaged
or partially destroyed by fire or other cause, the fixed rent and additional
rent payable hereunder shall be abated to the extent that the Demised Premises
shall have been rendered untenantable and for the period from the date of such
damage or destruction to the date which is thirty (30) days after the date that
the damage shall be substantially repaired or restored. If the Demised Premises
or a major part thereof shall be totally (which shall be deemed to include
substantially totally) damaged or destroyed or rendered completely (which shall
be deemed to include substantially completely) untenantable on account of fire
or other cause, the rent fixed rent and additional rent abate as of the date of
the damage or destruction and until the date which is thirty (30) days after
Landlord shall have repaired, restored and rebuilt the Building and the Demised
Premises, provided, however, that should Tenant reoccupy a portion of the
Demised Premises during the period the Demised Premises are made completely
untenantable, fixed rent and additional rent allocable to such portion shall be
payable by Tenant from the date of such occupancy.
22.3 If the Building or the Demised Premises shall be totally damaged or
destroyed by fire or other cause, or if the Building shall be so damaged or
destroyed by fire or other cause as to require a reasonably estimated
expenditure of more than forty (40%) percent of the full insurable value of the
Building immediately prior to the casualty, then in either such case Landlord
may terminate this Lease by giving Tenant notice to such effect within one
hundred eighty (180) days after the date of the casualty. In case of any damage
or destruction mentioned in this Article 22, Tenant may terminate this Lease by
notice to Landlord, if Landlord has not completed the making of the required
repairs and restored and rebuilt the Building and the Demised Premises within
eighteen (18) months from the date of such damage or destruction, or within such
period after such date (not exceeding six (6) months) as shall equal the
aggregate period Landlord may have been delayed in doing so by adjustment of
insurance, labor trouble, governmental controls, act of God, or any other cause
beyond Landlord's reasonable control and such termination shall be effective
upon the expiration of thirty (30) days after the date of such notice. Without
limiting the generality of the foregoing, if, during the last eighteen (18)
months of the term of this Lease, fifty percent (50%) or more of the area of the
Demised Premises is damaged or destroyed by fire or other casualty and are,
thus, rendered unusable and untenantable by Tenant, Tenant shall have the right
to terminate this Lease by giving Landlord notice to such affect within twenty
(20) days after the date of the fire or other casualty. If Tenant elects to
terminate this Lease as aforesaid, this Lease shall terminate on the date which
is thirty (30) days after the date of the fire of other casualty as if such date
were the Expiration Date herein originally fixed. In such event, and in any
other event under this Article 22 wherein Tenant has the right to terminate this
Lease due to a fire or other casualty, as a condition to the effectiveness of
Tenant's termination notice and to the termination of this Lease in accordance
therewith, Tenant shall, and hereby agrees to, assign to Landlord all of
Tenant's right, title and interest in and to all insurance proceeds with respect
to Tenant's Initial Alterations and Landlord shall have the sole right to adjust
any loss in connection therewith.
22.4 No damages, compensation or claim shall by payable by Landlord for
inconvenience, loss of business or annoyance arising from any repair or
restoration of any portion of the Demised Premises or of the Building pursuant
to this Article 22. Landlord shall use its best efforts to effect such repair or
restoration promptly and in such manner as not unreasonably to interfere with
Tenant's use and occupancy.
22.5 Notwithstanding any of the foregoing provisions of this Article 22,
if Landlord or the lessor of any superior lease or the holder of any superior
mortgage shall be unable to collect all of the insurance proceeds (including
rent insurance proceeds) applicable to damage or destruction to the Demised
Premises or the Building by fire or other cause, by reason of Tenant's willful
acts or omissions some action or inaction on the part of Tenant or any of its
employees, agents or contractors, then, without prejudice to any other remedies
which may be available against Tenant, there shall be no abatement of Tenant's
fixed rent and additional rent until the total amount of such rents not abated
which would otherwise have been abated equals the amount of uncollected
insurance proceeds. The provisions of this 22.5 shall not, in any way, obviate
or adversely affect Landlord's obligation under Section 11.2 of this Lease with
respect to obtaining a waiver of subrogation of permission for waiver of claim
in Landlord's fire and casualty insurance policies.
22.6 Landlord will not carry separate insurance of any kind on Tenant's
Property and Landlord shall not be obligated to repair any damage thereto or
replace the same.
22.7 In the event of the termination of this Lease pursuant to any of
the provisions of this Article 22, this Lease and the term and estate hereby
granted shall expire as of the date of such termination with the same effect as
if that were the Expiration Date, and the fixed rent and additional rent payable
hereunder shall be apportioned as of such date.
22.8 The provisions of this Article 22 shall be considered an express
agreement governing any case of damage or destruction of the Demised Premises by
fire or other casualty, and Section 227 of the Real Property Law of the State of
New York, providing for a contingency in the absence of an express agreement,
and any other law of like import, now or hereafter in force, shall have no
application to the Demised Premises and this Lease.
ARTICLE 23
Condemnation
23.1 In the event that the whole of the Demised Premises shall be
lawfully condemned or taken in any manner for any public use, this Lease and the
term and estate hereby granted shall forthwith cease and terminate as of the
date of vesting of title. In the event that only a part of the Demised Premises
shall be so condemned or taken, then, effective as of the date of vesting of
title, the fixed rent and additional rents under Article 5 hereunder shall be
abated in an amount proportionate to the area of the Demised Premises so
condemned or taken. In the event that only a part of the Building shall be so
condemned or taken, then (a) Landlord (whether or not the Demised Premises be
affected) may, at Landlord's option, terminate this Lease and the term and
estate hereby granted as of the date of such vesting of title by notifying
Tenant in writing of such termination within sixty (60) days following the date
on which Landlord shall have received notice of vesting of title, or (b) if such
condemnation or taking shall be of a substantial part of the Demised Premises or
of a substantial part, of the means of access thereto, Tenant may, at Tenant's
option, by delivery of notice in writing to Landlord within thirty (30) days
following the date on which Tenant shall have received notice of vesting of
title, terminate this Lease and the term and estate hereby granted as of the
date of vesting of title, or (c) if neither Landlord nor Tenant elects to
terminate this Lease, as aforesaid, this Lease shall be and remain unaffected by
such condemnation or taking, except that the fixed rent and additional rents
payable under Article 5 payable hereunder shall be abated to the extent
hereinbefore provided in this Article 23. In the event that only a part of the
Demised Premises shall be so condemned or taken and this Lease and the term and
estate hereby grant with respect to the remaining portion of the Demised
Premises are not terminated as hereinbefore provided, Landlord will, with
reasonable diligence and at its expense, restore the remaining portion of the
Demised Premises as nearly as practicable to the same condition as it was in
prior to such condemnation or taking.
23.2 In the event of its termination in any of the events hereinbefore
provided, this Lease and the term and estate hereby granted shall expire as of
the date of such termination with the same effect as if that were the Expiration
Date, and the fixed rent and additional rent payable hereunder shall be
apportioned as of such date.
23.3 In the event of any condemnation or taking hereinbefore mentioned
of all or a part of the Building, Landlord shall be entitled to receive the
entire award in the condemnation proceeding, including any award made for the
value of the estate vested by this Lease in Tenant, and Tenant hereby expressly
assigns to Landlord any and all right, title and interest of Tenant now or
hereafter arising in or to any such award or any part thereof, and Tenant shall
be entitled to receive no part of such award.
23.4 It is expressly understood and agreed that the provisions of this
Article 23 shall not be applicable to any condemnation or taking for
governmental occupancy for a limited period, If the temporary use of all or any
part of the Demised Premises shall be taken at any time during the term of this
Lease for any public or quasi-public purpose by any lawful power or authority,
by the exercise of the right of condemnation or eminent domain, or by agreement
between Tenant and those authorized to exercise such right, the term of the
Lease shall not be affected in any way and Tenant shall continue to pay in full
the fixed rent and additional rent herein provided to be paid by Tenant, and,
subject to the other provisions of this Article 23 and except as hereinafter
provided, Tenant shall be entitled to receive any award or payment for such use.
If such taking is for a period extending beyond the term of this Lease and if
any award or payment made for such use is made in a lump sum, such award or
payment shall be apportioned between Landlord and Tenant as of the Expiration
Date. If such taking results in changes or alterations in or to the Demised
Premises which would necessitate an expenditure, after repossession, to restore
the Demised Premises to its former condition and such award or payment includes
an amount (whether or not specified) to compensate for such expenditure, and if
possession of the Demised Premises shall revert to Tenant prior to the
expiration of the term, Tenant shall restore the Demised Premises at Tenant's
own cost, and in all respects indemnify Landlord against and save Landlord
harmless from matters resulting from such taking, and the portion, if any, of
the award or payment to compensate for such expenditure shall be made available
by Landlord for the purpose of paying the cost of such restoration to be
performed by Tenant. If possession of the Premises shall revert to Landlord
after expiration of the term of this Lease, such portion of said award shall be
paid and shall belong solely to Landlord.
23.5 In the event any part of the Demised Premises be taken to effect
compliance with any law or requirement of public authority other than in the
manner hereinabove provided in this Article 23, then (i) if such compliance is
the obligation of Tenant under this Lease, Tenant shall not be entitled to any
diminution or abatement of rent or other compensation from Landlord therefor,
but (ii) if such compliance is the obligation of Landlord under this Lease, the
fixed rent hereunder shall be reduced and additional rents under Article 5 shall
be adjusted in the same manner as is provided in Section 23.1 according to the
reduction in rentable area of the Demised Premises resulting from such taking,
provided, however, that if such taking is of a substantial part of the Demised
Premises or of a substantial part of the means of access thereto, Tenant may, at
Tenant's option terminate this Lease in the manner, and following the procedures
as set forth in Section 23.1.
ARTICLE 24
Surrender
24.1 On the Expiration Date, or upon any earlier termination of this
Lease, or upon any re-entry by Landlord upon the Demised Premises, Tenant shall
quit and surrender the Demised Premises to Landlord in good order, condition and
repair, except for ordinary wear and tear and such damage or destruction as
Landlord is required to repair or restore under this Lease, and Tenant shall
remove all of Tenant's Property therefrom except as otherwise expressly provided
in this Lease.
24.2 Tenant agrees it shall indemnify and save Landlord harmless against
all costs, claims, loss or liability resulting from delay by Tenant i-n
surrendering the Demised Premises, including, without limitation, any claims
made by any succeeding tenant founded on such delay. The parties recognize and
agree that the damage to Landlord resulting from any failure by Tenant timely to
surrender the Demised Premises will be substantial, will exceed the amount of
monthly rent theretofore payable hereunder, and will be impossible of accurate
measurement. Tenant therefore agrees that if possession of the Demised Premises
is not surrendered to Landlord within two (2) days after the date of the
expiration or sooner termination of the term of this Lease, then Tenant will pay
Landlord as liquidated damages for each month and for each portion of any month
during which Tenant holds over in the Demised Premises after expiration or
termination of the term of this Lease, a sum equal to two (2) times the average
rent and additional rent which was payable per month under this Lease during the
last six months of the term hereof. The aforesaid obligations shall survive the
expiration or sooner termination of the term of this Lease.
ARTICLE 25
Conditions of Limitation
25.1 This Lease and the term and estate hereby granted are subject to
the limitation that whenever Tenant shall make an assignment of the property of
Tenant for the benefit of creditors, or shall file a voluntary petition under
any bankruptcy or insolvency law or any involuntary petition alleging an act of
bankruptcy or insolvency shall be filed against Tenant under any bankruptcy or
insolvency law, or whenever a petition shall be filed by or against Tenant under
the reorganization provisions of any law of like import, or whenever a petition
shall be filed by Tenant under the arrangement provisions of the United States
Bankruptcy Act or under the provisions of any law of like import, or whenever a
permanent receiver of Tenant of or for the property of Tenant shall be
appointed, then, Landlord may, (a) at any time after receipt of notice of the
occurrence of any such event, or (b) if such event occurs without the
acquiescence of Tenant, at any time after the event continues for thirty (30)
days, give Tenant a notice of intention to end the term of this Lease at the
expiration of ten (10) days from the date of service of such notice of
intention, and upon the expiration of said ten (10) day period this Lease and
the term and estate hereby granted, whether or not the term shall theretofore
have commenced, shall terminate with the same effect as if that day were the
Expiration Date, but Tenant shall remain liable for damages as provided in
Article 27.
25.2 This Lease and the term and estate hereby granted are subject to
further limitation as follows:
(a) whenever Tenant shall default in the payment of any
installment of fixed rent, or in the payment of any additional rent or any other
charge payable by Tenant to Landlord, on any day upon which the same ought to be
paid, and such default shall continue for five (5) days after Landlord shall
have given Tenant notice specifying such default, or
(b) whenever Tenant shall fail to perform and observe the non
monetary obligations contained in this Lease on Tenant's part to perform and
observe, and if such default shall continue and shall not be remedied by Tenant
within fifteen (15) days after Landlord shall have given to Tenant a notice
specifying the same, or, in the case of a default which cannot with due
diligence be cured within a period of fifteen (15) days and the continuance of
which for the period required for cure will not subject Landlord to the risk of
criminal liability (as more particularly described in Article 10 hereof) or
termination of any superior lease or foreclosure of any superior mortgage, if
Tenant shall not, (i) within said fifteen (15) day period advise Landlord of
Tenant's intention to duly institute such steps necessary to remedy such
situation, (ii) duly institute within said fifteen (15) day period, and
thereafter diligently and continuously prosecute to completion all steps
necessary to remedy the same and (iii) complete such remedy within a reasonable
period of time after the date of the giving of said notice of Landlord, or
(c) whenever any event shall occur or any contingency shall arise
whereby this Lease or the estate hereby granted or the unexpired balance of the
term hereof would, by operation of law or otherwise, devolve upon or pass to any
person, firm or corporation other than Tenant, except as expressly permitted by
Article 36, or
(d) whenever Tenant shall vacate and abandon the Demised Premises
(unless as a result of a casualty) with the intention not to return thereto, or
(e) whenever Tenant shall default in the due keeping, observing
or performance of any covenant, agreement, provision or condition of Article 2
hereof on the part of Tenant to be kept, observed or performed and if such
default shall continue and shall not be remedied by Tenant within seventy-two
(72) hours after Landlord shall have given to Tenant a notice specifying the
same,
then in any of said cases set forth in the foregoing Subsections (a),(b),
(c),(d) and (e) Landlord may give to Tenant a notice of intention to end the
term of this Lease at the expiration of three (3) days from the date of the
service of such notice of intention, and upon the expiration of said three (3)
days this Lease and the term and estate hereby granted, shall terminate with the
same effect as if that day were the Expiration Date, but Tenant shall remain
liable for damages as provided in Article 27.
25.3 If an order for relief is entered in any case which is commenced by
or against Tenant under the present or any future federal bankruptcy code,
Landlord shall be entitled to invoke any and all rights and remedies available
to it under such bankruptcy code or this Lease, including, without limitation,
such rights and remedies as may be necessary to protect adequately Landlord's
right, title and interest in and to the Demised Premises or any part thereof.
ARTICLE 26
Re-Entry by Landlord 26.1 If Tenant shall default in the payment of any
installment of fixed rent, or of any additional rent, on any date upon
which the same ought to be paid, and if such default shall continue for
five (5) days after Landlord shall have given to Tenant a notice specifying
such default, or if this Lease shall expire or be terminated as in Article
25 provided, Landlord or Landlord's agents and employees may immediately or
at any time thereafter re-enter the Demised Premises, or any part thereof,
by summary dispossess proceedings or by any suitable action or proceeding
at law (but, absent a Court order, not by force), to the end that, Landlord
may have, hold and enjoy the Demised Premises again as and of its first
estate and interest therein. The word re-enter, as herein used, is not
restricted to its technical legal meaning. In the event of any termination
of this Lease under the provision of Article 25 or if Landlord shall
re-enter the Demised Premises under the provisions of this Article 26 or in
the event of the termination of this Lease, or of re-entry, by or under any
summary dispossess or other proceedings or action or any provision of law
by reason of default hereunder on the part of Tenant, Tenant shall
thereupon pay to Landlord the fixed rent and additional rent payable by
Tenant to Landlord up to the time of such termination of this Lease, or of
such recovery of possession of the Demised Premises by Landlord, as the
case may be, and shall also pay to Landlord
26.2 In the event of a breach or threatened breach by Tenant of any of
its obligations under this Lease, Landlord shall also have the right of
injunction. The special remedies to which Landlord may resort hereunder are
cumulative and are not intended to be exclusive of any other remedies or means
of redress to which Landlord may lawfully be entitled at any time and Landlord
may invoke any remedy allowed at law or in equity as of specific remedies were
not provided for herein.
26.3 If this Lease shall terminate under the provisions of Article 25,
or if Landlord shall re-enter the Demised Premises under the provisions of this
Article 26, or in the event of the termination of this Lease, or of re-entry, by
or under any summary dispossess or other proceeding or action or any provision
of law by reason of default hereunder on the part of Tenant, Landlord shall be
entitled to retain all monies, if any, paid by Tenant to Landlord, whether as
advance rent, security or otherwise, but such monies shall be credited by
Landlord against any fixed rent or additional rent due from Tenant at the time
of such termination or re-entry or, at Landlord's option, against any damages
payable by Tenant under Article 27 or pursuant to law.
ARTICLE 27
Damages
27.1 If this Lease is terminated under the provisions Article 25, or if
Landlord shall re-enter the Demised Premises under the provisions of Article 26,
or in the event of the termination of this Lease, or of re-entry, by or under
any summary dispossess or other proceeding or action or any provisions of law by
reason of default hereunder on the part of Tenant, Tenant shall pay to Landlord
as damages, at the election of Landlord, either:
(a) a sum which at the time of such termination this Lease or at
the time of any such re-entry by Landlord, as the case may be re resents the
then value of the excess, of
(i) the aggregate of the fixed rent and additional rent payable hereunder
which would have been payable by Tenant (conclusively presuming the
additional rent to be same as was payable for the year immediately
preceding such termination) for the period commencing with such earlier
termination of this Lease or the date of any such re-entry, as the case may
be, and ending with the Expiration Date, had this Lease no so terminated or
had Landlord not so re-entered the Demised Premises, over
(ii) the aggregate rental value of the Demised Premises for the same
period, or
(b) sums equal to the fixed rent and the additional rent (as
above presumed) payable hereunder which would have been payable by Tenant had
this Lease not so terminated, or had Landlord not so re-entered the Demised
Premises, payable upon the due date therefor specified herein following such
termination or such re-entry and until the Expiration Date, provided, however,
that if Landlord shall re-let the Demised Premises during said period, Landlord
shall credit Tenant with the net rents received by Landlord from such
re-letting, which shall be equal to the loss rents as and when received by
Landlord from such re-letting, less the expenses incurred or paid by Landlord in
terminating this Lease or in re-entering the Demised Premises and in securing
possession thereof, as well as the expenses of re-letting, including altering
and preparing the Demised Premises for new tenants, brokers' commissions, and
all other expenses properly chargeable against the Demised Premises and the
rental thereof. Any such re-letting may be for a period shorter or longer than
the remaining term of this Lease; but in no event shall Tenant be entitled to
receive any excess of such net rents over the sums payable by Tenant to Landlord
hereunder, or shall Tenant be entitled in any suit for the collection of damages
pursuant to this Subsection 27.1(b) to a credit in respect of any net rents from
a re-letting, except to the extent that such net rents are actually received by
Landlord. If the Demised Premises or any part thereof should be re-let in
combination with other space, the rent received from such re-letting and the
expenses of re-letting shall be apportioned on a square foot basis. If the
Demised Premises or any part thereof be re-let by Landlord for the unexpired
portion of the term of this Lease, or any part thereof, before presentation of
proof of such damages to any court, commission or tribunal, the amount of rent
reserved upon such re-letting shall, prima facie, be the fair and reasonable
rental value for the Demised Premises, or part thereof, so re-let during the
term of the re-letting.
27.2 Suit or suits for the recovery of such damages, any installments
thereof, may be brought by Landlord from time to time at its election, and
nothing contained herein shall be deemed to require Landlord to postpone suit
until the date when the term of this Lease would have expired if it had not been
terminated under the provisions of Article 25, or under any provision of law, or
had Landlord not re-entered the Demised Premises, Nothing herein contained shall
be construed to limit or preclude recovery by Landlord against Tenant for any
sums of damages to which, in addition to the damages particularly provided
above, Landlord may lawfully be entitled by reason of any default hereunder on
the part of tenant. Nothing herein contained shall be construed to limit or
prejudice the right of the termination of this Lease or re-entry of the Demised
Premises for the default of Tenant under this Lease, an amount equal to the
maximum allowed by any statute or rule of law in effect at the time when, and
governing the proceedings in which such damages are to be proved whether or not
such amount be greater, equal to, or less than any of the sums referred to in
Section 27.1.
ARTICLE 28
Waivers
28.1 Tenant does hereby waive and surrender all right and privilege
which Tenant might have under or by reason of present or future law, to redeem
the Demised Premises or to a continuance of this Lease for the term hereby
demised after being dispossessed or ejected therefrom by process of law or under
the terms of this Lease or after the termination of this Lease as herein
provided.
28.2 In the event that Tenant is in arrears in payment of fixed rent or
additional rent hereunder, Tenant waives Tenant's right, if any, to designate
the items against which any payments made by Tenant are to be credited, and
Tenant agrees that Landlord may apply any payments made by Tenant to any items
it sees fit, irrespective of and notwithstanding any designation or request by
Tenant as to the items against which any such payments shall be credited.
28.3 Landlord and Tenant hereby waive trial by jury in any action,
proceeding or counterclaim brought by either against the other or any matter
whatsoever arising out of or in any way connected with this Lease, the
relationship of landlord and tenant, Tenant's use or occupancy of the Demised
Premises including any claim of injury or damage, or any emergency or other
statutory remedy with respect thereto, Tenant also waives the provisions of any
law relating to notice and/or delay __ of execution in case of an eviction or
dispossess, and of any other law of like import now or hereafter in effect. If
Landlord commences any summary proceeding, Tenant agrees that Tenant will not
interpose any counterclaim of whatever nature or description in any such
proceeding, except for mandatory counterclaims.
28.4 The provisions of Article 17 and 18 shall be considered express
agreements governing the services to be furnished by Landlord, and Tenant agrees
that any laws and/or requirements of public authorities, now or hereafter in
force, shall have no application in connection with any enlargement of
Landlord's obligations with respect to such services.
ARTICLE 29
No Other Waivers or Modifications
29.1 The failure of either party to insist in any one more instances
upon the strict performance of any one or more of the obligations of this Lease,
or to exercise any election here contained, shall not be construed as a waiver
or relinquishment for the future of the performance of such one or more
obligations of this Lease or of the right to exercise such election, but the
same shall continue and remain in full force and effect with respect to any
subsequent breach, act or omission. No executory agreement hereafter made
between Landlord and Tenant shall be made between Landlord and Tenant shall be
effective to change, modify, waive, release, discharge, terminate or effect an
abandonment of this Lease, in whole or in part, unless such executory agreement
is in writing, refers expressly to this Lease and is signed by the party against
whom enforcement of the change, modification, waiver, release, discharge or
termination or effectuation of the abandonment is sought.
29.2 The following specific provisions of this Section 29.2 shall not be
deemed to limit the generality of Section 29.1;
(a) No agreement to accept a surrender of all or any part of the
Demised Premises shall be valid unless in writing and signed by Landlord unless
same is pursuant to a final non-appealable Court order that does not require
Landlord's signature, The delivery of keys to an employee of Landlord or its
agents shall not operate as a termination of this Lease or surrender of the
Demised Premises. If Tenant shall at any time request Landlord to sublet the
Demised Premises for Tenant's account, Landlord or its agent is authorized to
receive said keys for such purposes without releasing Tenant from any of its
obligations under this Lease.
ARTICLE 35
No other Representations,
Construction, Governing Law, Inability To Perform
35.1 Tenant expressly acknowledges and agrees that Landlords has not
made and is not making, and Tenant, in executing and delivering this Lease, is
not relying upon, any warranties, representations, promises or statements,
except to the extent that the same are expressly set forth in this Lease or in
any other written agreement which may be made between the parties concurrently
with the execution and delivery of this Lease and shall expressly refer to this
Lease. This Lease and said other written agreement(s) made concurrently
herewith, if any, are hereinafter referred to as the "Lease Documents". it is
understood and agreed that all understandings and agreements heretofore had
between the parties are merged in the Lease Documents, which alone fully and
completely express their agreement and that the same are entered into after full
investigation, neither party relying upon any statement nor representation made
by the other and not embodied in the Lease Documents.
35.2 If any of the provisions of this Lease, or the application thereof
to any person or circumstances, shall, to any extent, be invalid or
unenforceable, the remainder of this Lease, or the application of said provision
or provisions to persons of circumstances other than those as to whom or which
it is held invalid or unenforceable, shall not be affected thereby, and, subject
to the foregoing, every provision of this Lease shall be valid and enforceable
to the fullest extent permitted by law.
35.3 This Lease shall be governed in all respects by the laws of the
State of New York. Any legal action or proceeding with respect to this Lease, or
any of the transactions contemplated hereby shall be brought only in the Courts
of the State of New York located in the County of New York.
35.4 Except as otherwise specifically set forth in the Lease, this Lease
and the obligation of Tenant to pay fixed rent and additional rent hereunder and
perform all of the other covenants and agreements hereunder on the part of
Tenant to be performed shall in no-way be affected, impaired or excused because
Landlord is unable to fulfill any of its obligations under this Lease or to
supply or is delayed in supplying any service expressly or impliedly to be
supplied or is unable to make or is delayed in making any repair, additions,
alterations or decorations or is unable to supply or is delayed in supplying any
equipment or fixtures if Landlord is prevented or delayed from so doing by
reason of strike or labor troubles or any outside cause whatsoever including but
not limited to, governmental preemption in connection with a national emergency
or by reason of any rule, order or regulation of any department or subdivision
thereof of any government agency or by reason of the conditions of supply and
demand which have been or are affected by war or other; and those events set
forth in Section 16.7 as being not withing Landlord's control.
ARTICLE 36
Assignment, Mortgaging, Subletting, Etc.
36.1 Tenant expressly covenants and agrees that it shall not, and does
not have the right or power to, assign, mortgage, pledge, encumber, hypothecate
or otherwise transfer this Lease or any interest of Tenant herein, nor sublet
all or any part of the Demised Premises or suffer or permit the Demised Premises
or any part thereof to be used or occupied by others (whether for desk space,
mailing privileges or otherwise), without the prior written consent of Landlord
in each instance.
36.2 If Tenant shall at any time or times during the term of this Lease
desire to assign this Lease or sublet all or any part of the Demised Premises,
Tenant shall give notice thereof to Landlord which notice shall be deemed an
offer from Tenant to Landlord whereby Landlord shall have the option to
terminate this Lease (as to a sublease of less than all or substantially all of
the Demised Premises, to terminate this Lease only as to the portion of the
Demised Premises which Tenant desires to sublet). Said option may be exercised
by Landlord by notice to Tenant at any time within forty-five (45) days after
the aforesaid notice has been given by Tenant to Landlord and during such
forty-five (45) day period Tenant shall not assign this Lease nor sublet such
space to any person. If Landlord exercises its option to terminate this Lease,
this Lease shall end and expire on the date set forth in Landlord's notice,
which date (the "Surrender Date") shall be the last day of the calendar month in
which occurs the date which is one hundred twenty (120) days after the date of
Landlord's notice, and the fixed rent and a coitional rent hereunder shall be
paid and apportioned to such date,
36.3 If Landlord exercises its option to terminate this Lease pursuant
to Section 36.2, Landlord shall be free to, and shall have no liability to
Tenant if Landlord should, lease the Demised Premises (or any part thereof) to
Tenant's prospective assignee or subtenant. In the event of such surrender by
Tenant of a portion of the Demised Premises, effective as of the date
immediately following the Surrender Date, the fixed rent payable by Tenant under
this Lease shall be reduced by an amount equal to that portion of the fixed rent
payable under this Lease which is allocable to the space so surrendered and the
additional rent payable by Tenant under this Lease shall be equitably adjusted,
If the entire Demised Premises be so surrendered by Tenant, this Lease shall be
canceled and terminated as of the Surrender Date with the same force and effect
as if the Surrender Date were the date herein specified for the expiration of
the full term of Lease, In the event of such surrender by Tenant of a portion of
the Demised Premises, any changes, improvements and alterations to the space
constituting the Demised Premises after the Surrender Date (i.e., the space not
so surrendered by Tenant) or any part thereof (including, but not limited to,
the erection of a demising wall to separate the space constituting the Demised
Premises after the Surrender Date from the space so surrendered) made necessary
or desirable by reason of such surrender shall be made by Landlord at Tenant's
expense. Tenant covenants and agrees that, in the event of such surrender by
Tenant of a portion of the Demised Premises, Tenant, at Tenant's expense, shall
and will at all times provide and permit reasonably appropriate means of ingress
to and egress from such portion of the Demised Premises so surrendered, permit
the occupant or occupants of such portion the use of the core facilities on said
floor, and permit on said floor reasonably appropriate directional signs for
each occupant or occupants and appropriate designations in the passenger cabs
serving said floor.
In the event of any such surrender by Tenant the Demised Premises or a
portion thereof, Landlord and Tenant shall, at the request of either party,
execute and deliver an agreement in recordable form to the effect hereinbefore
stated.
36.4 In the event Landlord does not exercise or timely exercise the
option referred to in Section 36.2 hereof, Landlord covenants not to
unreasonably withhold or delay its consent to such proposed assignment or
subletting by Tenant of such space to the proposed assignee or subtenant on said
covenants, agreements, terms, provisions and conditions set forth in the notice
to Landlord referred to in Section 36.2, provided, however, that Landlord shall
not in any event be obligated to consent to any such proposed assignment or
subletting unless all of the following conditions are satisfied:
(a) the proposed assignee or subtenant is (i) of a financial
standing and (ii) engaged in a business reasonably satisfactory to Landlord, and
the premises will be used in a manner which is in keeping with the then
standards of the Building and the proposed assignment or subletting does not
violate any negative covenants as to use contained in any other lease made
between Landlord and other tenant(s) of the Building;
(b) the proposed assignee or subtenant is a reasonably reputable
party;
(c) the proposed assignee or subtenant is not then a tenant,
subtenant or othhrwise an occupant of any part of The Chrysler or Building or
Building or a corporation or other entity which controls or is controlled
by such tenant, subtenant or occupant or is under common control with such
tenant, subtenant or occupant;
(d) that the assignment or subletting shall not have the effect
(or give the utility company serving the Building with electricity cause to
claim) that Landlord may not service the Demised Premises, or any part thereof,
or any other rentable portion of the Building with electricity on a "rent
inclusion" basis;
(e) there shall be no default by Tenant under any of the terms,
covenants and conditions of this Lease at the time that Landlord's consent to
any such assignment or subletting is requested and on the effective date of the
assignment or the proposed sublease;
(f) the proposed assignee or subtenant shall not be (i) a
government or any subdivision or agency thereof, or (ii) a school, college,
university or educational institution of any type, whether for profit or
nonprofit or (iii) an employment or recruitment agency;
(g) Tenant shall reimburse Landlord for any reasonable expenses
that may be incurred by Landlord in connection with the proposed assignment or
sublease, including without limitation the reasonable costs of investigating the
acceptability of a proposed assignee or subtenant and reasonable legal expenses
incurred in connection with the granting of any requested consent to the
assignment or sublease;
(h) the proposed assignment shall be for a consideration or the
proposed subletting shall be at a rental rate not less than the rental rates
being charged under leases being entered into by Landlord for comparable space
in the Building and for a comparable term and in no event shall Tenant advertise
or list with brokers at any lower rental rate;
(i) such proposed subletting will result in there being no more
than three (3) occupants per floor of the Demised Premises including Tenant and
all subtenants, and
(j) the space to be sublet shall be regular in shape with
appropriate means of ingress and egress and suitable for normal renting
purposes.
36.5 If Landlord fails to exercise its option under section 36.2 and
consents to a proposed assignment or sublease and Tenant fails to execute and
deliver the assignment or sublease to which Landlord consented within one
hundred twenty (120) days after the giving of such consent, then, Tenant shall
again comply with all of the provisions and conditions of Section 36.2 before
assigning this Lease or subletting all or part of the Demised Premises.
36.6 With respect to each and every sublease or subletting authorized by
Landlord or made without the need for Landlord's consent pursuant to Section
36.9, under the provisions of this Lease, it is further agreed that each
sublease shall provide that it is subject and subordinate to this Lease and to
the matters to which this Lease is or shall be subordinate, and that in the
event of termination, re-entry or dispossession by Landlord under this Lease,
Landlord may, at its option, take over all of the right, title and interest of
Tenant, as sublessor, under such sublease, and such subtenant shall, at
Landlord's option, attorn to Landlord pursuant to the then executory provisions
of such sublease, except that Landlord shall not (a) be liable for any previous
act or omission of Tenant under such sublease, (b) be subject to any
counterclaim, offset or defense, not expressly provided in such sublease, which
theretofore accrued to such subtenant against Tenant, (c) be responsible for any
monies owing by or on deposit with Tenant to the credit of such subtenant
whether in the nature of security or otherwise unless and to the extent such
monies are delivered to Landlord, or (d) be bound-by any previous modification
of such sublease or by any previous prepayment of more than one (1) month's
fixed rent and additional rent. The provisions of this Section shall be
self-operative and no further instrument shall be required to give effect to
this provision.
36.7 If the Landlord shall give its consent to any assignment of this
Lease or to any sublease or if Tenant shall enter into any other assignment or
sublease permitted hereunder, Tenant shall in consideration therefor, pay to
Landlord, as additional rent:
(a) in the case of an assignment, an amount equal to all sums and
other considerations paid to Tenant by the assignee for or by reason of such
assignment (including, but not limited to, sums paid for the sale of Tenant's
fixtures, lease-hold improvements, equipment, furniture, furnishings or other
personal property) less all expenses reasonably and actually incurred by Tenant
on account of brokerage commissions and advertising costs in connection with
such assignment; and
(b) in the case of a sublease, any rents, additional charges or
other consideration payable under the sublease to Tenant by the subtenant which
is in excess of the fixed rent and additional rent accruing during the term of
the sublease in respect of the subleased space (at the rate per square foot
payable by Tenant hereunder) pursuant to the terms hereof (including, but, not
limited to, sums paid for the sale or rental of Tenant's fixtures, leasehold
improvements, equipment, furniture or other personal property), less all
expenses reasonably and actually incurred by Tenant on account of brokerage
commissions, advertising costs and the cost of demising the premises so sublet
in connection with such sublease. The sums payable under this Section shall be
paid to Landlord as and when payable by the subtenant to Tenant.
36.8 If Tenant is a corporation other than a corporation whose stock is
listed and traded on an internationally recognized stock exchange (hereinafter
referred to as a "public corporation"), the provisions of Section 36.1 shall
apply to a transfer (by one or more transfers) of a majority of the stock of
Tenant as if such transfer or a majority of the stock of Tenant were an
assignment of this Lease; but said provisions shall not apply to transactions
with a corporation into or with which Tenant is merged or consolidated or to
which substantially all of Tenant's assets are transferred, provided that in any
of such events (i) the successor to Tenant has a net worth computed in
accordance with generally accepted accounting principles at least equal to the
greater of (a) the net worth of Tenant immediately prior to such merger,
consolidation or transfer, or (b) the net worth of Tenant herein named on the
date of this Lease and (ii) proof satisfactory to Landlord of such net worth
shall have been delivered to Landlord at least ten (10) days prior to the
effective date of any such transaction.
If Tenant is a partnership, the provisions of Section 36.1 shall apply
in the case of a transfer of partnership interests as if such transfer were an
assignment of this Lease.
36.9 Tenant may, without Landlord's consent, but otherwise upon
compliance with the provisions of this Lease, including the provisions of
section 36.11, permit any corporations or other business entities which control,
are controlled by, or are under common control with Tenant including a joint
venture in which Tenant is a joint venture partner with control, (each a
"Related Entity") to sublet all or part of the Demised Premises for any of the
purposes permitted to Tenant, subject however to compliance with Tenant's
obligations under this Lease. Such subletting shall not be deemed to vest in any
such Related Entity any right or interest in this Lease or the Demised Premises
nor shall it relieve, release, impair or discharge any of Tenant's obligations
hereunder. For the purposes hereof, "control" shall be deemed to mean ownership
of not less than 50% of all of the legal and equitable interest in any other
business entities.
36.10 Any assignment or transfer, even if made with Landlord's consent,
shall be made only if, and shall not be effective until, the assignee shall
execute, acknowledge and deliver to Landlord an agreement in form and substance
reasonably satisfactory to Landlord whereby the assignee shall assume the
obligations of this Lease on the part of Tenant to be performed or observed.
36.11 Each subletting pursuant to this Article 36 shall be subject to
all the covenants, agreements, terms, provisions and conditions contained in
this Lease. Tenant shall promptly furnish to Landlord a copy of each such
sublease, Tenant covenants and agrees that, notwithstanding such assignment or
any such subletting to any subtenant and/or acceptance of rent or additional
rent by Landlord from any subtenant, Tenant shall and will remain fully liable
for the payment of the fixed rent and additional rent due and to become due
hereunder and for the performance of all the covenants, agreements, terms,
provisions and conditions contained in this Lease on the part of Tenant to be
performed. Tenant further covenants and agrees that notwithstanding any such
assignment or subletting, no other and further assignment, underletting or
subletting of the Demised Premises or any part thereof shall or will be made
except upon compliance with and subject to the provisions of this Article 36.
36.12 If this Lease be assigned, or if the Demised Premises or any part
thereof be sublet or occupied by anybody other than Tenant, Landlord may, after
default by Tenant, collect rent from the assignee, subtenant (but without
increasing the obligations of the subtenant under its sublease) or occupant, and
apply the net amount collected to the rent herein reserved, but no such
assignment, subletting, occupancy or collection shall be deemed a waiver by
Landlord of any of Tenant's covenants contained in this Article 36 or the
acceptance of the assignee, subtenant or occupant as tenant, or a release of
Tenant from the further performance by Tenant of covenants on the part of Tenant
herein contained.
36.13 Landlord will, at the request of Tenant and at Tenant's expense,
maintain listings on the Building directory of the names of Tenant, Tenant's
program, Empire Mental Health Choice and any other Related Entity, person, firm,
association or corporation in occupancy of the Demised Premises or any part
thereof as permitted hereunder, and the names of any officers or employees of
any of the foregoing, provided, however, that the number of names so listed
shall be in the same proportion to the capacity of the Building directory as the
aggregate number of square feet of rentable area of the Demised Premises is to
the aggregate number of square feet of rentable area of the Building. The
listing of any name other than that of the Tenant and Empire Mental Health
Choice, whether on the doors of the Demised Premises, on the Building directory,
or otherwise shall not operate to vest any right or interest in this Lease or in
the Demised Premises or be deemed to be the written consent of the Landlord
mentioned in this Article 36, it being expressly understood that any such
listing is a privilege extended by Landlord revocable at will by written notice
to Tenant.
ARTICLE 37
Security Deposit
37.1 The original named tenant, Empire Blue Cross and Blue Shield shall
not be required to deposit with Landlord any security deposit. However, if this
Lease is assigned or otherwise transferred to any entity which is not a Related
Entity (for the purposes of this Article 37 such successor or assignee being
referred to as the "Successor Tenant"), Landlord shall have the right to
require, as a condition to Landlord's consent to such assignment of this Lease,
that the Successor Tenant deposit with Landlord an amount equal to two (2)
months fixed rent and additional rent, computed as of the effective date of the
assignment, which sum shall be deposited as security for the faithful
performance and observance by the Successor Tenant of the terms, provisions,
covenants and conditions of this Lease. It is agreed that in the event the
Successor Tenant defaults in respect of any of the terms, provisions, covenants
and conditions of this Lease, including, but not limited to, the payment of rent
and additional rent, Landlord may use, apply or retain the whole or any part of
the security so deposited to the extent required for the payment of any rent and
additional rent or any other sum as to which the Successor Tenant is in default
or for any sum which Landlord may expend or may be required to expend by reason
of Successor Tenant's default in respect of any of the terms, provisions,
covenants and conditions of this Lease, including but not limited to, any
damages or deficiency accrued before or after summary proceedings or other
re-entry by Landlord. In the event that the Successor Tenant shall fully and
faithfully comply with all of the terms, provisions, covenants and conditions of
this Lease, the security shall be returned to the Successor Tenant after the
date fixed as the end of the Lease and after delivery of entire possession of
the Demised Premises to Landlord. In the event of a sale of the Land and
Building or leasing of the Building of which the Demised Premises form a part,
Landlord shall have the right to transfer the security to the vendee or lessee
and Landlord shall thereupon be released by the Successor Tenant from all
liability for the return of such security; and the Successor Tenant agrees to
look solely to the new Landlord for the return of said security. It is agreed
that the provisions hereof shall apply to every transfer or assignment made of
the security to a new Landlord. The Successor Tenant covenants that it will not
assign or encumber or attempt to assign or encumber the monies deposited herein
as security and that neither Landlord nor its successors or assigns shall be
bound by any such assignment, encumbrance, attempted assignment or attempted
encumbrance. In the event Landlord applies or retains any-portion or all of the
security deposited, the Successor Tenant shall forthwith restore the amount so
applied or retained so that at all times the amount deposited shall be the
amount set forth above,
ARTICLE 38
Deleted Prior to Execution
ARTICLE 39
Miscellaneous
39.1 Notwithstanding anything contained in this Lease to the contrary,
Tenant covenants and agrees that Tenant will not use the Demised Premises or any
part thereof, or permit the Demised Premises or any part thereof to be used,
(a) for a banking, trust company, or safe deposit business,
(b) as a savings bank, or a savings and loan association or a loan company,
(c) for the sale of travelers checks and/or foreign money exchange,
(d) as a stock brokerage office dealing with the general public on an off
the street basis,
(e) as a news and/or cigar stand, or
(f) as a restaurant and/or bar and/or for the sale of confectionery and/or
soda and/or beverages and/or sandwiches and/or ice cream and/or baked goods
or the preparation, dispensing or consumption of food or beverages in any
manner whatsoever, provided, however, that in connection with, and
incidental to, Tenant's use of the Demised Premises for general and
executive offices, Tenant, at its sole cost and expense, and upon
compliance with all applicable laws, rules, regulations and ordinances, may
use a portion of the Demised Premises for an employee's lounge and may
install therein a "dwyer" or similar unit or microwave ovens for the
purposes of warming food, and vending machines ` which, if same dispense
beverages or other liquids or refrigerates, shall each have a waterproof
pan located thereunder, connected to a drain. 39.2 Tenant hereby
represents, covenants and agrees that Tenant's business is not photographic
reproductions and/or documentary reproductions and/or offset printing.
Notwithstanding anything contained in this Lease to the contrary, Tenant
covenants and agrees that Tenant will not use the Demised Premises or any
part thereof or permit the Demised Premises or any part thereof to be used,
for the business of photographic reproductions and/or documentary
reproductions and/or offset printing. Nothing contained in this Section
39.2 shall preclude Tenant from using any part of the Demised Premises for
photographic reproductions and/or documentary reproduction and/or offset
printing in connection with, either directly or indirectly, its own
business.
39.3 If, in connection with obtaining financing for the Building. a
bank, insurance company or other lending institution shall request reasonable
modifications in this Lease as a condition to such financing, Tenant will not
unreasonably withhold, delay or defer its consent thereto, provided that such
modifications do not increase the obligations of Tenant hereunder, alter the
economic terms of this Lease, decrease Landlord's obligations or materially
adversely affect the leasehold interest hereby created.
39.4 If Landlord shall consent to Tenant's request for the omission or
removal of any part of, or the insertion of any door or other opening in, any
wall separating the Demised Premises from adjoining space leased to another
tenant, then (i) Tenant shall be responsible for all risk or damage to, or loss
or theft of, property arising as an incident to such omission or removal or the
use of such door or other opening, or because of the existence thereof, and
shall indemnify and save Landlord harmless from and against any claim, demand or
action for, or on account of, any such loss, theft or damage, subject to the
provisions of Section 11.6, unless due to Landlord's negligence, and (ii) in the
event of termination of this Lease or the lease of said other tenant, Landlord
may enter the Demised Premises and Landlord, at Tenant's expense, may close up
such door or other opening by erecting a wall to match the wall separating the
Demised Premises from said adjoining space, and Tenant shall not be entitled to
any diminution or abatement of rent or other compensation by reason thereof;
provided, however, that nothing herein contained shall be deemed to vest Tenant
with any right or interest in, or with respect to, said adjoining space, or the
use thereof, and Tenant hereby expressly waives any right to be made a party to,
or to be served with process or other notice under or in connection with any
proceeding or action which may hereafter be instituted by Landlord for the
recovery of the possession of said adjoining space, unless Landlord, in its sole
discretion, elects to make Tenant a party to such action.
39.5 Without incurring any liability to Tenant, but subject to the
provisions of Section 19.5, Landlord may permit access to the Demised-Premises
and open the same, whether or not Tenant shall be present, upon demand of any
receiver, trustees assignee for the benefit of creditors, sheriff, marshal or
court officer entitled to, or reasonably purporting to be entitled to, such
access for the purpose of taking possession of, or removing, Tenant's Property
or for any other lawful purpose (but this provision and any action by Landlord
shall not be deemed to be a consent or recognition that the person or official
making such demand has any right or interest in or to this Lease, or in or to
the Demised Premises), or upon demand of any representatives of the fire,
police, building, sanitation or other department of the city, state or federal
governments. Landlord shall be entitled to rely upon and assume the genuineness
of all certificates or credentials presented to Landlord by the individuals
seeking such access.
39.6 Tenant shall not be entitled to exercise any right of termination
or other option granted to it by this Lease (if any) at any time when Tenant
then currently is in default in the performance or observance of any of the
covenants, terms, provisions or conditions on its part to be performed or
observed under this Lease.
39.7 Tenant shall not place or permit to be placed any vending machines
in the Demised Premises, except as provided in Section 39.1(vi) or otherwise
with the prior written consent of Landlord in each instance.
39.8 Tenant shall not occupy any space in The Chrysler Building or the
Building (by assignment, sublease or otherwise) other than the Demised Premises,
except with the prior written consent of Landlord in each instance.
39.9 Tenant will not clean, nor require, permit, suffer or allow to be
cleaned, any window in the Demised Premises, from the outside in violation of
Section 202 of the Labor Law or of the rules of the Board of Standards and
Appeals, or of any other board or body having or asserting jurisdiction.
39.10 Tenant agrees that its sole remedies in cases where Landlord's
reasonableness in exercising its judgment or withholding its consent or approval
is applicable pursuant to a specific provision of this Lease, or any rider or
separate agreement relating to this Lease, if any, shall be those in the nature
of an injunction, declaratory judgment, or specific performance, the rights to
money damages or other remedies being hereby specifically waived.
39.11 The Article headings of this Lease are for convenience only and
are not to be given any effect whatsoever in construing this Lease.
39.12 This Lease shall not be binding upon Landlord unless and until it
is signed by Landlord and a signed copy thereof is delivered by Landlord to
Tenant.
39.13 The definitions set forth in Exhibit E annexed hereto shall be
utilized for purposes of this Lease and all agreements supplemental to this
Lease, unless the context otherwise requires.
39.14 The various terms which are defined in other Articles of this
Lease or are defined in Exhibits annexed hereto, shall have the meanings
specified in such other Articles and Exhibits for all purposes of this Lease and
all agreements supplemental thereto, unless the context shall otherwise require.
39.15 The Exhibits annexed to this Lease shall be deemed part of this
Lease with the same force and effect as if such Exhibits were numbered Articles
of this Lease.
39.16 Tenant shall not, except with the prior written consent of
Landlord, use or permit to be used the words "Chrysler Building" or any
combination or simulation thereof for any purpose whatsoever including (but not
limited to) as or for any corporate, firm or trade name, trademark or
designation or description of merchandise or services or as part of an address.
39.17 If either Landlord or Tenant shall institute any action or
proceeding against the other relating to the provisions of this Lease or any
default hereunder then, in that event, the unsuccessful party in such action or
proceeding (whether as plaintiff or defendant therein) agrees to reimburse the
successful party for all reasonable expenses incurred in connection therewith,
including reasonable attorney's fees, costs and disbursements incurred by the
successful party.
ARTICLE 40
Late Charges
40.1 If Tenant shall fail to pay all or any part of any installment of
fixed annual rent or additional rent for more than ten (10) days after the same
shall have become due and payable, then Tenant shall pay as additional rent
hereunder to Landlord a late charge of Six Cents ($0.06) for each dollar of the
amount of such fixed annual rent or additional rent which shall not have been
paid to Landlord within such ten (10) days after becoming due and payable.
Notwithstanding the foregoing, at such time or times during the term of this
Lease that the amounts payable by Tenant for items of additional rent shall be
increased or changed pursuant to the provisions of this Lease, no late charge
shall be due or payable until the expiration of twenty (20) days after the date
that Tenant shall receive a statement from Landlord requiring the payment
thereof at the increased or changed rate.
40.2 In every case in which Tenant is required by the terms of this
Lease to pay to Landlord a sum of money (including without limitation, payment
of fixed and additional rent) and payment is not made within ten (10) days after
the same shall become due, Tenant shall pay as additional rent hereunder,
interest on such sum or so much thereof as shall be unpaid from the date it
becomes due until it is paid. Such interest shall be computed at a rate which
shall be two (2%) percent per month; provided, however, in no event shall such
interest be in excess of the highest rate of interest which shall from time to
time be permitted under the laws of the State of New York to be charged on late
payments of sums of money due pursuant to the terms of a lease. Any late charge
paid pursuant to Section 40.1 above shall reduce interest accrued hereunder with
respect to the same late payment.
40.3 The late charge payable pursuant to Section 40.1 above and the
interest payable pursuant to Section 40.2 above shall be (i) payable on demand
and (ii) without prejudice to any of Landlord's rights and remedies hereunder at
law or in equity for nonpayment or late payment of rent or other sum and in
addition to any such rights and remedies. No failure by Landlord to insist upon
the strict performance by Tenant of Tenant's obligations to pay late charges and
interest as provided in this Article 40 shall constitute waiver by Landlord of
its right to enforce the provisions of this Article 40 in any instance
thereafter occurring. The provisions of this Article 40 shall not be construed
in any way to extend the grace periods or notice periods provided for in Article
25 of this Lease.
ARTICLE 41
Deleted Prior to Execution
ARTICLE 42
Tenant's Initial Alterations
Tenant Improvement Allowance
42.1 Following the Commencement Date, Tenant shall commence Tenant's
Initial Alterations and complete same within the one year after the Commencement
Date. Tenant's Initial Alterations shall be undertaken and completed in
accordance with the terms of this Lease, including, without limitation, the
provisions of Article 13 hereof. Subject to the provisions of this Article 42,
Landlord shall contribute an amount not to exceed One Million Eight Hundred
Fifty-Nine Thousand Four Hundred Dollars ($1,859,400.00) (the "Tenant
Improvement Allowance") toward the cost of Tenant's Initial Alterations.
Landlord shall disburse a portion of the Tenant Improvement Allowance to Tenant
from time to time, within fifteen (15) days after receipt of the items set forth
in Section 42.2 provided that on the date of a request and on the date of
disbursement from the Tenant Improvement Allowance, Tenant shall not be in
default in performing or observing any of the obligations on Tenant's part to be
performed and observed under this Lease following any required notice and the
expiration of any applicable grace period. Disbursements to Tenant of portions
of the Tenant Improvement Allowance shall not be made more frequently then
monthly.
42.2 Landlord shall reimburse Tenant from the Tenant Improvement
Allowance for costs incurred by Tenant in connection with Tenant's Initial
Alterations upon Landlord's receipt of the following items:
(a) A request from Tenant for such disbursement signed by the
officer of Tenant designated in writing for such purpose, which request shall
certify that the amount requested is equal to the aggregate amounts theretofore
paid or payable by Tenant to Tenant's contractors, subcontractors and material
suppliers which requested funds have not been the subject of a previous
disbursement from the Tenant Improvement Allowance;
(b) Photocopies of all receipts, invoices and bills for the work
completed and materials furnished in connection with Tenant's Initial
Alterations and incorporated in the Demised Premises which are to be paid from
the requested disbursement or which have been paid by Tenant and for which
Tenant is seeking reimbursement;
(c) A certificate of Tenant's independent licensed architect
stating (i) that, in the architect's opinion, the portion of Tenant's Initial
Alterations theretofore completed and for which the disbursement is requested
was performed in a good and workmanlike manner and substantially in accordance
with the final plans and specifications therefore, as approved by Landlord, (ii)
the percentage of completion of the Tenant's Initial Alterations as of the date
of such certificate, and (iii) the estimated total cost to complete the
performance of Tenant's Initial Alterations; and
(d) Any amounts payable to Landlord in connection with Tenant's
Initial Alterations including, without limitation, any payments due for use of
the freight elevator. The freight elevator charges payable by Tenant in
connection with Tenant's Initial Alterations and the initial "move-in" by Tenant
into the Demised Premises thereafter shall not exceed Eighty-Five Dollars
($85.00) per hour.
42.3 In no event shall the aggregate amount paid by Landlord to Tenant
under this Article 42 exceed the amount of the Tenant Improvement Allowance.
Within sixty (60) days after the completion of Tenant's Initial Alterations and
upon the satisfaction of the conditions set forth in Section 42.4, any amount of
the Tenant Improvement Allowance which has not previously been disbursed shall
be retained by Landlord, Upon the disbursement of the entire Tenant Improvement
Allowance (or the portion thereof if, upon completion of Tenant's Initial
Alterations, the Tenant Improvement Allowance is not exhausted) Landlord shall
have no further obligation or liability whatsoever to Tenant for any further
disbursements of any portion of the Tenant Improvement Allowance or otherwise to
contribute towards the cost of Tenant's Initial Alterations, it being understood
and agreed that Tenant shall complete, at its sole cost and expense, Tenant's
Initial Alterations whether or not the Tenant Improvement Allowance is
sufficient to fund such completion.
42.4 Notwithstanding anything in this Article or this Lease to the
contrary, on the earlier to occur of the date which is fifteen (15) days after
completion of Tenant's Initial Alterations or the date upon which Tenant makes a
request for disbursement to Tenant of the balance of funds remaining in the
Tenant Improvement Allowance, as a condition to such release, if appropriate but
in any event not later than fifteen (15) days following substantial completion
of Tenant's Initial Alterations, Tenant shall deliver to Landlord waivers of
lien from all contractors, subcontractors and material suppliers involved in the
performance of Tenant's Initial Alterations and the furnishing of materials in
connection therewith, together with a certificate from Tenant's independent
licensed architect stating that (i) in the architect's opinion, Tenant's Initial
Alterations have been performed (and completed) in a good and workmanlike manner
and in accordance with the final plans and specifications therefore as approved
by Landlord, and (ii) all contractors, subcontractors and material suppliers
have been paid for the work performed in connection with Tenant's Initial
Alterations or the materials furnished through such date.
42.5 Notwithstanding anything in this Article 42 or this Lease to the
contrary, Tenant, not Landlord shall be entitled to all rebates or credits due
in connection with the Consolidated Edison of New York rebate program in
connection with the work undertaken by Tenant as part of Tenant's Initial
Alterations or as part of Tenant's Changes to any Additional Premises (as
defined in Article 44). Landlord agrees to cooperate with Tenant, at Tenant's
sole cost and expense in connection with Tenant's application for any such
rebates or credits.
ARTICLE 43
Option to Renew
43.1 Provided that this Lease is in full force and effect and Tenant is
not then currently in default hereunder, Tenant shall have the option to extend
the original term of this Lease for one (1) extension period of five (5) years
("Renewal Term"), commencing upon the expiration of the original term of this
Lease, provided that Tenant shall give Landlord written notice of the exercise
of its option at least twelve (12) months prior to the Expiration Date. The
Renewal Term shall be on the same terms, covenants and conditions as are
contained in this Lease for the original term except for:
(i) the provisions of Section 1.4 (a) respecting the fixed rent,
which shall be payable during the Renewal Term in accordance with the provisions
of Section 43.2;
(ii) the provisions of Section 1.4(c);
(iii) the covenants relative to the preparation of the
Demised Premises byLandlord contained in Article 3 of this Lease;
(iv) the Tenant Improvement Allowance contained in Article 42
of this Lease;
(v) the Caption to Renew contained in this Article 43;
none of which shall be applicable to the Renewal Term. In addition, following
Tenant's exercise of the option to extend the original term of this Lease for
the Renewal Term, the Expiration Date referred to in Section 1.3 shall be deemed
to be the last day of the Renewal Term or such earlier date upon which the term
of this Lease may expire or be canceled or terminated. In no event shall Tenant
shall have any further right of renewal beyond the Renewal Term. Any termination
or expiration of this Lease during the original term shall terminate all rights
of renewal hereunder.
43.2 The provisions of Section 1.4 of this Lease shall not be applicable
to the Renewal Term. The fixed rent payable during each year of the Renewal Term
shall be the amount determined by (a) multiplying Thirty-Eight Dollars ($38.00)
by the number of rentable square feet then contained in the Demise Premises, and
adding thereto (b) the amount determined by multiplying the number of rentable
square feet then contained in the Demised Premises by the amount of all
increases in the Electrical Charge or Adjusted Electrical Charge pursuant to
Article 16 of this Lease, provided, however, that in no event shall the fixed
rent during the Renewal Term be less than one Million Five Hundred Seventy
Thousand One Hundred Sixty Dollars ($1,570,160.00).
ARTICLE 44
Options for Additional Space
44.1 With respect to the premises cross-hatched and highlighted in red
on page B-3 of Exhibit "B" and denoted there as the "6th Floor Rear Premises",
provided that this Lease is in full force and effect and Tenant is not then
currently in default hereunder, upon ten (10) Business Days written notice to
Landlord, given not later than the last day provided for Tenant to exercise its
option for the Renewal Term as provided in Article 43, Tenant shall have the
option to lease the entire 6th Floor Rear Premises which contains approximately
7,185 rentable square feet. In such event, on the eleventh (11th) Business Day
following the date of Tenant's notice to Landlord, the entire 6th Floor Rear
Premises shall be added to and be deemed a part of the Demised Premises, upon
and subject to all of the same terms and conditions of this Lease (provided,
however, in no event shall the exercise of the option pursuant to this Section
44.1 be or be deemed to extend the term of this Lease). Tenant acknowledges and
agrees that, except as set forth in Section 44.4 of this Lease, Landlord shall
have no obligation to perform any work (including, without limitation, any of
the work described herein as "Landlord's Work") with respect to the 6th Floor
Rear Premises if, as and when same is added to the Demised Premises pursuant
this Article 44, and Tenant shall accept the 6th Floor Rear Premises, as
appropriate, in its then "as is" condition provide that same is delivered to
Tenant vacant and broom-clean, Notwithstanding the foregoing, Landlord and
Tenant acknowledge and agree that from time to time and at various times during
the term of this Lease, at anytime prior to Landlord's receipt of notice from
Tenant exercising its option under this Section 44.1 Landlord shall have the
right to lease to other tenants, all or portion of the 6th Floor Rear Premises
provided, however, that Landlord agrees that all such leases for the 6th Floor
Rear Premises or any portion or portions thereof, to be entered into by Landlord
with such other tenants during the original term of this Lease, shall provide
for a term which is co-terminis with the original term of this Lease. If Tenant
elects to extend the term of this Lease as provided in Article 43, unless Tenant
simultaneously with or prior to the exercise of the option for the Renewal Term,
exercises the option contained in this Section 44.1, during the Renewal Term
Landlord shall have the right to enter into any lease for all or any portion of
the 6th Floor Rear Premises as Landlord shall, in its sole discretion, determine
without any limitation or restriction whatsoever, whether as to the term of such
lease or otherwise. Tenant's option which is provided in this Section 44.1 shall
terminate as of the date which is the last date for Tenant to exercise its
option for the Renewal Term as set forth in Article 43.
44.2 At all times during the original term of this Lease and the Renewal
Term, if any, with respect to the premises cross-hatched and highlighted in blue
on page B-4 of Exhibit "B" and denoted thereon as the "6th Floor Front
Premises", which contains approximately 14,700 rentable square feet provided
that this Lease is in full force and effect and Tenant is not then currently in
default hereunder, Landlord agrees that it shall not enter into a lease for the
entire 6th Floor Front Premises or any portion thereof with any tenant without
first notifying Tenant that Landlord in good faith, intends to enter into a bona
fide lease for all or a portion of the 6th Floor Front Premises. Tenant shall
have ten (10) Business Days after Landlord's notice to notify Landlord in
writing whether Tenant desires to exercise its option to lease all or such
portion of the 6th Floor Front Premises as Landlord then intends to lease, If
Tenant exercises its option to lease all or any such portion of the 6th Floor
Front Premises, then as of the expiration of said ten (10) Business Day period,
the 6th Floor Front Premises or such portion thereof shall be added to and be
deemed a part of the Demised Premises, upon and subject to all of the same terms
and conditions of this Lease (provided, however, in no event shall the exercise
of the option pursuant to this Section 44.2 be or be deemed to extend the term
of this Lease). Tenant acknowledges and agrees that, except as set forth in
section 44.4 of this Lease, Landlord shall have no obligation to perform any
work (including, without limitation, any of the work described herein as
"Landlord's Work") with respect to any portion of the 6th Floor Front Premises
which is added to the Demised Premises pursuant to this Article 44. Tenant shall
accept the 6th Floor Front Premises or the portions thereof, as appropriate, in
its then "as is" condition provided that same is delivered to Tenant vacant and
broom-clean, If Tenant shall not timely exercise its option for the 6th Floor
Front Premises or any such portion thereof, or shall reject same within the ten
(10) Business Days (failure to timely so accept, time being of the essence,
being deemed a rejection), then Landlord shall have the right to enter into any
lease for the 6th Floor Front Premises or such portion thereof as Landlord
intends to lease, as Landlord, in its sole discretion, shall determine, without
any limitation or restriction whatsoever, whether as to the term of such lease
or otherwise, and Tenant's option with respect to the entire 6th Floor Front
Premises or such portion thereof as Landlord intended to lease, shall be null,
void and of no further force or effect,
44.3 Provided that (i) this Lease is in full force and effect, (ii)
Tenant is not then currently in default hereunder, (iii) Tenant has exercised
its option for the Renewal Term and (iv) Tenant has, prior to the commencement
of the Renewal Term, exercised its option to add to the Demised Premises, and
has, in fact, added to the Demised Premises of the 6th Floor Rear Premises or
all or a portion of the 6th Floor Front Premises (collectively, the "Additional
Premises") then upon the commencement of the Renewal Term, Landlord agrees to
pay to Tenant an amount equal to $22,50 per rentable square foot, (Additional
Tenant Improvement Allowance") for each rentable square foot of the total
Additional Premises which Tenant has leased as of the commencement of the
Renewal Term. The Additional Tenant Improvement Allowance shall be paid to
Tenant upon the commencement of the Renewal Term. After the commencement of the
Renewal Term, no Additional Tenant improvement Allowance shall be due or payable
with respect to any Additional Premises. Except for the Additional Tenant
(b) The receipt by Landlord of rent with knowledge of breach of
any obligation of this Lease shall not be deemed a waiver of such breach or any
subsequent breach.
(c) No payment by Tenant or receipt by Landlord of a lesser
amount than the correct fixed rent or additional rent due hereunder shall be
deemed to be other than a payment on account, nor shall any endorsement or
statement on any check or any letter accompanying any check or payment be deemed
an accord and satisfaction, and Landlord may accept such check or payment
without prejudice to Landlord's right to recover the balance or pursue any other
remedy in this Lease or at law provided.
ARTICLE 30
Curing Tenant's
Defaults, Additional Rent; Legal Fees
30.1 If Tenant shall default in the performance of any of Tenant's
obligations under this Lease, Landlord, without thereby waiving such default,
may (but shall not be obligated to) cure such default for the account and at the
expense of Tenant, (a) without notice, in a case of emergency, and (b) in any
other case, only if such default continues after the expiration of (i) five (5)
days from the date Landlord gives Tenant notice of intention so to do, or (ii)
the applicable grace period provided in Section 25.2 or elsewhere in this Lease
for cure of such default, whichever occurs later, Any amount paid or any
contractual liability incurred by Landlord in curing such default, including
reasonable attorney's fees and disbursements, if any, shall be deemed paid or
incurred for the account of Tenant, and Tenant agrees to reimburse Landlord
therefor on demand, If Tenant shall fail to reimburse Landlord upon demand for
any amount paid for the account of Tenant hereunder, said amount shall be
additional rent and shall be due and payable along with the next installment of
fixed rent due hereunder.
ARTICLE 31
Parties Bound
31.1 The obligations of this Lease shall bind and benefit the successors
and assigns of the parties with the same effect as if mentioned in each instance
where a party is named or referred to, except that no violation of the
provisions of Article 36 shall operate to vest any rights in any successor or
assignee of Tenant and that the provisions of this Article 31 shall not be
construed as modifying the conditions of limitation contained in Article 25.
However, the obligations of Landlord under this Lease shall not be binding upon
Landlord herein named with respect to any period subsequent to the transfer of
its interest in the Building as owner or lessee thereof and in the event of such
transfer said obligations shall thereafter be binding upon each transferee of
the interest of Landlord herein named as such owner or lessee) Building, but
only with respect to the period ending with a subsequent transfer within the
meaning of this Article 31.
31.2 If Landlord shall be an individual, joint venture, tenancy in
common, copartnership, unincorporated association, or corporation, Tenant shall
look only to such Landlord's estate and property in the Building (or the
proceeds thereof) and, where expressly so provided in this Lease, to offset
against the rents payable under this Lease, for the satisfaction of Tenant's
remedies or the collection of a judgment (or other judicial process) requiring
the payment of money by Landlord hereunder, and no other property or assets of
such Landlord shall be subject to levy, execution or other enforcement procedure
for the satisfaction of Tenant's remedies under or with respect to this Lease,
the relationship of landlord and tenant hereunder or Tenant's use or occupancy
of the Demised Premises.
ARTICLE 32
Notices
32.1 Except as otherwise provided in this Lease, a notice or
communication which Landlord may desire or be required to give Tenant, shall be
deemed sufficiently given or rendered if, in writing, delivered to Tenant
personally or sent by registered or certified mail or by overnight courier which
provides receipted delivery, addressed to Tenant at 622 Third Avenue, New York,
New York 10017 attn: Mr. Michael Schwartz, Director of Real Estate. Any notice
by Tenant to Landlord must be served by registered or certified mail or by
overnight courier which provides receipted delivery, addressed to Landlord at
the address first hereinabove given with a copy of Landlord c/o Cushman &
Wakefield, Inc., The Chrysler Building, 405 Lexington Avenue, New York, New York
10174 or at such other address as Landlord shall designate by written notice.
The time of the giving of such notice or communication shall be deemed to be the
time when the same is delivered to the intended recipient if personally
delivered or sent by overnight courier or two (2) days after same has been
postmarked if sent by mail. Either party hereto may change its mailing address
by giving notice to the other pursuant to the provisions of this Article 32 but
such notice of change of address shall be effective only if actually received.
ARTICLE 33
Estoppel Certificate, Memorandum
33.1 Each party agrees, at any time and from time to time, as requested
by the other party, upon not less than twenty (20) days prior notice, to execute
and deliver to the other a statement certifying that this Lease is unmodified
and in full force and effect (or if there have been modifications that the same
is in full force as modified and stating the modifications), certifying the
dates to which the fixed rent and additional rent have been paid, and stating
whether or not, to the best knowledge of the signer, the other party is in
default in performance of any of his obligations under this Lease, and, if so,
specifying each such default of which the signer may have knowledge, it being
intended that any such statement delivered pursuant hereto may be relied upon by
others with whom the party requesting such certificate may be dealing.
33.2 At the request of either party, Landlord and Tenant shall promptly
execute, acknowledge and deliver a memorandum with respect to this Lease
sufficient for recording. Such memorandum shall not in any circumstances be
deemed to change or otherwise affect any of the obligations or provisions of
this Lease.
ARTICLE 34
Deleted Prior to Execution
ARTICLE 35
No Other Representations,
Construction, Governing Law. Inability To Perform
35.1 Tenant expressly acknowledges and agrees that Landlord has not made
and is not making, and Tenant, in executing and delivering this Lease, is not
relying upon, any warranties, representations, promises or statements, except to
the extent that the same are expressly set forth in this Lease or in any other
written agreement which may be made between the parties concurrently with the
execution and delivery of this Lease and shall expressly refer to this Lease.
This Lease and said other written agreement(s) made concurrently herewith, if
any, are hereinafter referred to as the "Lease Documents". It is understood and
agreed that all understandings and agreements heretofore had between the parties
are merged in the Lease Documents, which alone fully and completely express
their agreement and that the same are entered into after full investigation,
neither party relying upon any statement or representation made by the other and
not embodied in the Lease Documents.
35.2 If any of the provisions of this Lease, or the application thereof
to any person or circumstances, shall, to any extent, be invalid or
unenforceable, the remainder of this Lease, or the application of said provision
or provisions to persons of circumstances other than those as to whom or which
it is held invalid or unenforceable, shall not be affected thereby, and, subject
to the foregoing, every provision of this Lease shall be valid and enforceable
to the fullest extent permitted by law.
35.3 This Lease shall be governed in all respects by the laws of the
State of New York. Any legal action or proceeding with respect to this Lease, or
any of the transactions contemplated hereby shall be brought only in the Courts
of the State of New York located in the County of New York.
35.4 Except as otherwise specifically set forth in the Lease, this Lease
and the obligation of Tenant to pay fixed rent and additional rent hereunder and
perform all of the other covenants and agreements hereunder on the part of
Tenant to be performed shall in no-way be affected, impaired or excused because
Landlord is unable to fulfill any of its obligations under this Lease or to
supply or is delayed in supplying any service expressly or impliedly to be
supplied or is unable to make or is delayed in making any repair, additions,
alterations or decorations or is unable to supply or is delayed in supplying any
equipment or fixtures if Landlord is prevented or delayed from so doing by
reason of strike or labor troubles or any outside cause whatsoever including but
not limited to, governmental preemption in connection with a national emergency
or by reason of any rule, order or regulation of any department or subdivision
thereof of any government agency or by reason of the conditions of supply and
demand which have been or are affected by war or other emergency and those
events set forth in Section 16.7 as being not within Landlord's control.
ARTICLE 35
Assignment, Mortgaging, Subletting, Etc.
36.1 Tenant expressly covenants and agrees that it shall not, and does
not have the right or power to, assign, mortgage, pledge, encumber, hypothecate
or otherwise transfer this Lease or any interest of Tenant herein, nor sublet
all or any part of the Demised Premises or suffer or permit the Demised Premises
or any part thereof to be used or occupied by others (whether for desk space,
mailing privileges or otherwise), without the prior written consent of Landlord
in each instance.
36.2 If Tenant shall at any time or times during the term of this Lease
desire to assign this Lease or sublet all or any part of the Demised Premises,
Tenant shall give notice thereof to Landlord which notice shall be deemed an
offer from Tenant to Landlord whereby Landlord shall have the option to
terminate this Lease (as to a sublease of less than all or substantially all of
the Demised Premises, to terminate this Lease only as to the portion of the
Demised Premises which Tenant desires to sublet). Said option may be exercised
by Landlord by notice to Tenant at any time within forty-five (45) days after
the aforesaid notice has been given by Tenant to Landlord and during such
forty-five (45) day period Tenant shall not assign this Lease nor sublet such
space to any person. If Landlord exercises its option to terminate this Lease,
this Lease shall end and expire on the date set forth in Landlord's notice,
which date (the "Surrender Date") shall be the last day of the calendar month in
which occurs the date which is one hundred twenty (120) days after the date of
Landlord's notice, and the fixed rent and additional rent hereunder shall be
paid and apportioned to such date.
36.3 If Landlord exercises its option to terminate this Lease pursuant
to Section 36.2, Landlord shall be free to, and shall have no liability to
Tenant if Landlord should, lease the Demised Premises (or any part thereof) to
Tenant's prospective assignee or subtenant. In the event of such surrender by
Tenant of a portion of the Demised Premises, effective as of the date
immediately following the Surrender Date, the fixed rent payable by Tenant under
this Lease shall be reduced by an amount equal to that portion of the fixed rent
payable under this Lease which is allocable to the space so surrendered and the
additional rent payable by Tenant under this Lease shall be equitably adjusted,
If the entire Demised Premises be so surrendered by Tenant, this Lease shall be
canceled and terminated as of the Surrender Date with the same force and effect
as if the Surrender Date were the date herein specified for the expiration of
the full term of Lease. In the event of such surrender by Tenant of a portion of
the Demised Premises, any changes, improvements and alterations to the space
constituting the Demised Premises after the Surrender Date (i.e., the space not
so surrendered by Tenant) or any part thereof (including, but not limited to,
the erection of a demising wall to separate the space constituting the Demised
Premises after the Surrender Date from the space so surrendered) made necessary
or desirable by reason of such surrender shall be made by Landlord at Tenant's
expense. Tenant covenants and agrees that, in the event of such surrender by
Tenant of a portion of the Demised Premises, Tenant, at Tenant's expense, shall
and will at all times provide and permit reasonably appropriate means of ingress
to and egress from such portion of the Demised Premises so surrendered, permit
the occupant or occupants of such portion the use of the core facilities on said
floor, and permit on said floor reasonably appropriate directional signs for
each occupant or occupants and appropriate designations in the passenger cabs
serving said floor.
In the event of any such surrender by Tenant of the Demised Premises or
a portion thereof, Landlord and Tenant shall, at the request of either party,
execute and deliver an agreement in recordable form to the effect hereinbefore
stated.
36.4 In the event Landlord does not exercise or timely exercise the
option referred to in Section 36.2 hereof, Landlord covenants not to
unreasonably withhold or delay its consent to such proposed assignment or
subletting by Tenant of such space to the proposed assignee or subtenant on said
covenants, agreements, terms, provisions and conditions set forth in the notice
to Landlord referred to in Section 36.2, provided, however, that Landlord shall
not in any event be obligated to consent to any such proposed assignment or
subletting unless all of the (a) the proposed assignee or subtenant is (i) of
financial standing and (ii) engaged in a business reasonably satisfactory to
Landlord, and the premises will be used in a manner which is in keeping with the
then standards of the Building and the proposed assignment or subletting does
not violate any negative covenants as to use contained in any other lease made
between Landlord and other tenant(s) of the Building;
(b) the proposed assignee or subtenant is a reasonably
reputable party;
(c) the proposed assignee or subtenant is not a tenant, subtenant
or otherwise an occupant of any part of The Chrysler or Building or the Building
or a corporation or other entity which controls or is controlled by such tenant,
subtenant or occupant or is under common control with such tenant, subtenant or
occupant or is under common control with such tenant, subtenant or occupant;
(d) that the assignment or subletting shall not have the effect
(or give the utility company serving the Building with electricity cause to
claim) that Landlord may not service the Demised Premises, or any part thereof,
or any other rentable portion of the Building with electricity on a "rent
inclusion" basis;
(e) there shall be no default by Tenant under any of the terms,
covenants and conditions of this Lease at the time that Landlord's consent to
any such assignment or subletting is requested and on the effective date of the
assignment or the propped sublease;
(f) the proposed assignee or subtenant shall not be (i) a government or
any subdivision or agency thereof, or (ii) school, college, university or
educational institution of any type, whether for profit or nonprofit or (iii) an
employment or recruitment agency;
(g) Tenant shall reimburse Landlord for any reasonable expenses that may
be incurred by Landlord in connection with the proposed assignment or sublease,
including without limitation the reasonable costs of investigating the
acceptability of a proposed assignee or subtenant and reasonable legal expenses
incurred in connection with the granting of any requested consent to the
assignment or sublease;
(h) the proposed assignment shall be for a consideration or the
proposed subletting shall be at a rental rate not less than the rental rates
being charged under leases being entered into by Landlord for comparable space
in the Building and for a comparable term and in no event shall Tenant advertise
or list with brokers at any lower rental rate;
(i) such proposed subletting will result in there being no more
than three (3) occupants per floor of the Demised Premises including Tenant and
all subtenants, and
(j) the space to be sublet shall be regular in shape with
appropriate means of ingress and egress and suitable for normal renting
purposes.
36.5 If Landlord fails to exercise its option under Section 36.2 and
consents to a proposed assignment or sublease and Tenant fails to execute and
deliver the assignment or sublease to which Landlord consented within one
hundred twenty (120) days after the giving of such consent, then, Tenant shall
again comply with all of the provisions and conditions of Section 36.2 before
assigning this Lease or subletting all or part of the Demised Premises.
36.6 With respect to each and every sublease or subletting authorized by
Landlord or made without the need for Landlord's consent pursuant to Section
36.9, under the provisions of this Lease, it is further agreed that each
sublease shall provide that it is subject and subordinate to this Lease and to
the matters to which this Lease is or shall be subordinate, and that in the
event of termination, re-entry or dispossession by Landlord under this Lease,
Landlord may, at its option, take over all of the right, title and interest of
Tenant, as sublessor, under such sublease, and such subtenant shall, at
Landlord's option, attorn to Landlord pursuant to the then executory provisions
of such sublease, except that Landlord shall not (a) be liable for any previous
act or omission of Tenant under such sublease, (b) be subject to any
counterclaim, offset or defense, not expressly provided in such sublease, which
theretofore accrued to such subtenant against Tenant, (c) be responsible for any
monies owing by or on deposit with Tenant to the credit of such subtenant
whether in the nature of security or otherwise unless and to the extent such
monies are delivered to Landlord, or (d) be bound by any previous modification
of such sublease or by any previous prepayment of more than one (1) month's
fixed rent and additional rent. The provisions of this Section shall be
self-operative and no further instrument shall be required to give effect to
this provision.
36.7 If the Landlord shall give its consent to any assignment of this
Lease or to any sublease or if Tenant shall enter into any other assignment or
sublease permitted hereunder, Tenant shall in consideration therefor, pay to
Landlord, as additional rent:
(a) in the case of an assignment, an amount equal to all sums and
other considerations paid to Tenant by the assignee for or by reason of such
assignment (including, but not limited to, sums paid for the sale of Tenant's
fixtures, lease-hold improvements, equipment, furniture, furnishings or other
personal property) less all expenses reasonably and actually incurred by Tenant
on account of brokerage commissions and advertising costs in connection with
such assignment; and
(b) in the case of a sublease, any rents, additional charges or
other consideration payable under the sublease to Tenant by the subtenant which
is in excess of the fixed rent and additional rent accruing during the term of
the sublease in respect of the subleased space (at the rate per square foot
payable by Tenant hereunder) pursuant to the terms hereof (including, but, not
limited to, sums paid for the sale or rental of Tenant's fixtures, leasehold
improvements, equipment, furniture or other personal property), less all
expenses reasonably and actually incurred by Tenant on account of brokerage
commissions, advertising costs and the cost of demising the premises so sublet
in connection with such sublease. The sums payable under this section shall be
paid to Landlord as and when payable by the subtenant to Tenant.
36.8 If Tenant is a corporation other than a corporation whose stock is
listed and traded on an internationally recognized stock exchange (hereinafter
referred to as a "public corporation"), the provisions of Section 36.1 shall
apply to a transfer (by one or more transfers) of a majority of the stock of
Tenant as if such transfer or a majority of the stock of Tenant were an
assignment of this Lease; but said provisions shall not apply to transactions
with a corporation into or with which Tenant is merged or consolidated or to
which substantially all of Tenant's assets are transferred, provided that in any
of such events (i) the successor to Tenant has a net worth computed in
accordance with generally accepted accounting principles at least equal to the
greater of (a) the net worth of Tenant immediately prior to such merger,
consolidation or transfer, or (b) the net worth of Tenant herein named on the
date of this Lease and (ii) proof satisfactory to Landlord of such net worth
shall have been delivered to Landlord at least ten (10) days prior to the
effective date of any such transaction.
If Tenant is a partnership, the provisions of Section 36.1 shall apply
in the case of a transfer of partnership interests as if such transfer were an
assignment of this Lease.
36.9 Tenant may, without Landlord's consent, but otherwise upon
compliance with the provisions of this Lease, including the provisions of
Section 36.11, permit any corporations or other business entities which control,
are controlled by, or are under common control with Tenant including a joint
venture in which Tenant is a joint venture partner with control, (each a
"Related Entity") to sublet all or part of the Demised Premises for any of the
purposes permitted to Tenant, subject however to compliance with Tenant's
obligations under this Lease. Such subletting shall not be deemed to vest in any
such Related Entity any right or interest in this Lease or the Demised Premises
nor shall it relieve, release, impair or discharge any of Tenant's obligations
hereunder. For the purposes hereof, "control" shall be deemed to mean ownership
of not less than 50% of all of the legal and equitable interest in any other
business entities.
36.10 Any assignment or transfer, even if made with Landlord's consent,
shall be made only if, and shall not be effective until, the assignee shall
execute, acknowledge and deliver to Landlord an agreement in form and substance
reasonably satisfactory to Landlord whereby the assignee shall assume the
obligations of this Lease on the part of Tenant to be performed or observed.
36.11 Each subletting pursuant to this Article 36 shall be subject to
all the covenants, agreements, terms, provisions and conditions contained in
this Lease. Tenant shall promptly furnish to Landlord a copy of each such
sublease, Tenant covenants and agrees that, notwithstanding such assignment or
any such subletting to any subtenant and/or acceptance of rent or additional
rent by Landlord from any subtenant, Tenant shall and will remain fully liable
for the payment of the fixed rent and additional rent due and to become due
hereunder and for the performance of all the covenants, agreements, terms,
provisions and conditions contained in this Lease on the part of Tenant to be
performed. Tenant further covenants and agrees that notwithstanding any such
assignment or subletting, no other and further assignment, underletting or
subletting of the Demised Premises or any part thereof shall or will be made
except upon compliance with and subject to the provisions of this Article 36.
36.12 If this Lease be assigned, or if the Demised Premises or any part
thereof be sublet or occupied by anybody other than Tenant, Landlord may, after
default by Tenant, collect rent from the assignee, subtenant (but without
increasing the obligations of the subtenant under its sublease) or occupant, and
apply the net amount collected to the rent herein reserved, but no such
assignment, subletting, occupancy or collection shall be deemed a waiver by
Landlord of any of Tenant's covenants contained in this Article 36 or the
acceptance of the assignee, subtenant or occupant as tenant, or a release of
Tenant from the further performance by Tenant of covenants on the part of Tenant
herein contained.
36.13 Landlord will, at the request of Tenant and at Tenant's expense,
maintain listings on the Building directory of the names of Tenant, Tenant's
program, Empire Mental Health Choice and any other Related Entity, person, firm,
association or corporation in occupancy of the Demised Premises or any part
thereof as permitted hereunder, and the names of any officers or employees of
any of the foregoing, provided, however, that the number of names so listed
shall be in the same proportion to the capacity of the Building directory as the
aggregate number of square feet of rentable area of the Demised Premises is to
the aggregate number of square feet of rentable area of the Building. The
listing of any name other than that of the Tenant and Empire Mental Health
Choice, whether on the doors of the Demised Premises, on the Building directory,
or otherwise shall not operate to vest any right or interest in this Lease or in
the Demised Premises or be deemed to be the written consent of the Landlord
mentioned in this Article 36, it being expressly understood that any such
listing is a privilege extended by Landlord revocable at will by written notice
to Tenant.
ARTICLE 37
Security Deposit
37.1 The original named tenant, Empire Blue Cross and Blue Shield shall
not be required to deposit with Landlord any security deposit. However, if this
Lease is assigned or otherwise transferred to any entity which is not a Related
Entity (for the purposes of this Article 37 such successor or assignee being
referred to as the "Successor Tenant"), Landlord shall have the right to
require, as a condition to Landlord's consent to such assignment of this Lease,
that the Successor Tenant deposit with Landlord an amount equal to two (2)
months fixed rent and additional rent, computed as of the effective date of the
assignment, which sum shall be deposited as security for the faithful
performance, and observance by the Successor Tenant of the terms, provisions,
covenants and conditions of this Lease. It is agreed that in the event the
Successor Tenant defaults in respect of any of the terms, provisions, covenants
and conditions of this Lease, including, but not limited to, the payment of rent
and additional rent, Landlord may use, apply or retain the whole or any part of
the security so deposited to the extent required for the payment of any rent and
additional rent or any other sum as to which the Successor Tenant is in default
or for any sum which Landlord may expend or may be required to expend by reason
of Successor Tenant's default in respect of any of the terms, provisions,
covenants and conditions of this Lease, including but not limited to, any
damages or deficiency accrued before or after summary proceedings or other
re-entry by Landlord. In the event that the Successor Tenant shall fully and
faithfully comply with all of the terms, provisions, covenants and conditions of
this Lease, the security shall be returned to the Successor Tenant after the
date fixed as the end of the Lease and after delivery of entire possession of
the Demised Premises to Landlord. In the event of a sale of the Land and
Building or leasing of the Building of which the Demised Premises form a part,
Landlord shall have the right to transfer the security to the vendee or lessee
and Landlord shall thereupon be released by the Successor Tenant from all
liability for the return of such security; and the Successor Tenant agrees to
look solely to the new Landlord for the return of said security. It is agreed
that then provisions hereof shall apply to every transfer or assignment made of
the security to a new Landlord. The Successor Tenant covenants that it will not
assign or encumber or attempt to assign or encumber the monies deposited herein
as security and that neither Landlord nor its successors or assigns shall be
bound by any such assignment, encumbrance, attempted assignment or attempted
encumbrance. In the event Landlord applies or retains any-portion or all of the
security deposited, the Successor Tenant shall forthwith restore the amount so
applied or retained so that at all times the amount deposited shall be the
amount set forth above,
ARTICLE 38
Deleted Prior to Execution
ARTICLE 39
Miscellaneous
39.1 Notwithstanding anything contained in this Lease to the contrary,
Tenant covenants and agrees that Tenant will not use the Demised Premises or any
part thereof, or permit the Demised Premises or any part thereof to be used,
(a) for a banking, trust company, or safe deposit business,
(b) as a savings bank, or a savings and loan association or
a loan company,
(c) for the sale of travelers checks and/or foreign
money exchange,
(d) as a stock brokerage office dealing with the general
public on an off the street basis,
(e) as a news and/or cigar stand, or
(f) as a restaurant and/cr bar and/or for the sale of
Confectionery and/or soda and/or beverages and/or sandwiches and/or ice cream
and/or baked goods or the preparation, dispensing or consumption of food or
beverages in any manner whatsoever, provided, however, that in connection with,
and incidental to, Tenant's use of the Demised Premises for general and
executive offices, Tenant, at its sole cost and expense, and upon compliance
with all applicable laws, rules, regulations and ordinances, may use a portion
of the Demised Premises for an employee's lounge and may install therein a
"dwyer" or similar unit or microwave ovens for the purposes of warming food, and
vending machines, which, if same dispense beverages or other liquids or
refrigerates, shall each have a waterproof pan located thereunder, connected to
a drain.
39.2 Tenant hereby represents, covenants and agrees that Tenant's
business is not photographic reproductions and/or documentary reproductions
and/or offset printing. Notwithstanding anything contained in this Lease to the
contrary, Tenant covenants and agrees that Tenant will not use the Demised
Premises or any part thereof or permit the Demised Premises or any part thereof
to be used, for the business of photographic reproductions and/or documentary
reproductions and/or offset printing. Nothing contained in this Section 39.2
shall preclude Tenant from using any part of the Demised Premises for
photographic reproductions and/or documentary reproduction and/or offset
printing in connection with, either directly or indirectly, its own business.
39.3 If, in connection with obtaining financing for the Building, a
bank, insurance company or other lending institution shall request reasonable
modifications in this Lease as a condition to such financing, Tenant will not
unreasonably withhold, delay or defer its consent thereto, provided that such
modifications do not increase the obligations of Tenant hereunder, alter the
economic terms of this Lease, decrease Landlord's obligations or materially
adversely affect the leasehold interest hereby created.
39.4 If Landlord shall consent to Tenant's request for the omission or
removal of any part of, or the insertion of any door or other opening in, any
wall separating the Demised Premises from adjoining space leased to another
tenant, then Tenant shall be responsible for all risk or damage to, or loss or
theft of, property arising as an incident to such omission or removal or the use
of such door or other opening, or because of the existence thereof, and shall
indemnify and save Landlord harmless from and against any claim, demand or
action for, or on account of, any such loss, theft or damage, subject to the
provisions of Section 11.6, unless due to Landlord's negligence, and (ii) in the
event of termination of this Lease or the lease of said other tenant, Landlord
may enter the Demised Premises and Landlord, at Tenant's expense, may close up
such door or other opening by erecting a wall to match the wall separating the
Demised Premises from said adjoining space, and Tenant shall not be entitled to
any diminution or abatement of rent or other compensation by reason thereof;
provided, however, that nothing herein contained shall be deemed to vest Tenant
with any right or interest in, or with respect to, said adjoining space, or the
use thereof, and Tenant hereby expressly waives any right to be made a party to,
or to be served with process or other notice under or in connection with any
proceeding or action which may hereafter be instituted by Landlord for the
recovery of the possession of said adjoining space, unless Landlord, in its sole
discretion, elects to make Tenant a party to such action.
39.5 Without incurring any liability to Tenant, but subject to the
provisions of Section 19.5, Landlord may permit access to the Demised-Premises
and open the same, whether or not Tenant shall be present, upon demand of any
receiver, trustee, assignee for the benefit of creditors, sheriff, marshal or
court officer entitled to, or reasonably purporting to be entitled to, such
access for the purpose of taking possession of, or removing, Tenant's Property
or for any other lawful purpose (but this provision and any action by Landlord
shall not be deemed to be a consent or recognition that the person or official
making such demand has any right or interest in or to this Lease, or in or to
the Demised Premises), or upon demand of any representatives of the fire,
police, building, sanitation or other department of the city, state or federal
governments, Landlord shall be entitled to rely upon and assume the genuineness
of all certificates or credentials presented to Landlord by the individuals
seeking such access.
39.6 Tenant shall not be entitled to exercise any right of termination
or other option granted to it by this Lease (if any) at any tire when Tenant
then currently is in default in the performance or observance of any of the
covenants, terms, provisions or conditions on its part to be performed or
observed under this Lease.
39.7 Tenant shall not place or permit to be placed any vending machines
in the Demised Premises, except as provided in Section 39.1(vi) or otherwise
with the prior written consent of Landlord in each instance.
39.8 Tenant shall not occupy any space in The Chrysler Building or the
Building (by assignment, sublease or otherwise) other than the Demised Premises,
except with the prior written consent of Landlord in each instance.
39.9 Tenant will not clean, nor require, permit, suffer or allow to be
cleaned, any window in the Demised Premises, from the outside in violation of
Section 202 of the Labor Law or of the rules of the Board of Standards and
Appeals, or of any other board or body having or asserting jurisdiction.
39.10 Tenant agrees that its sole remedies in cases where Landlord's
reasonableness in exercising its judgment or withholding its consent or approval
is applicable pursuant to a specific provision of this Lease, or any rider or
separate agreement relating to this Lease, if any, shall be those in the nature
of an injunction, declaratory judgment, or specific performance, the rights to
money damages or other remedies being hereby specifically waived.
39.11 The Article headings of this Lease are for convenience only and
are not to be given any effect whatsoever in construing this Lease.
39.12 This Lease shall not be binding upon Landlord unless and until it
is signed by Landlord and a signed copy thereof is delivered by Landlord to
Tenant.
39.13 The definitions set forth in Exhibit E annexed hereto shall be
utilized for purposes of this Lease and all agreements supplemental to this
Lease, unless the context otherwise requires.
39.14 The various terms which are defined in other Articles of this
Lease or are defined in Exhibits annexed hereto, shall have the meanings
specified in such other Articles and Exhibits for all purposes of this Lease and
all agreements supplemental thereto, unless the context shall otherwise require.
39.15 The Exhibits annexed to this Lease shall be deemed -part of this
Lease with the same force and effect as if such Exhibits were numbered Articles
of this Lease.
39.16 Tenant shall not, except with the prior written consent of
Landlord, use or permit to be used the words "Chrysler Building" or any
combination or simulation thereof for any purpose whatsoever including (but not
limited to) as or for any corporate, firm or trade name, trademark or
designation or description of merchandise or services or as part of an address.
39.17 If either Landlord or Tenant shall institute any action or
proceeding against the other relating to the provisions of this Lease or any
default hereunder then, in that event, the unsuccessful party in such action or
proceeding (whether as plaintiff or defendant therein) agrees to reimburse the
successful party for all reasonable expenses incurred in connection therewith,
including reasonable attorney's fees, costs and disbursements incurred by the
successful party.
ARTICLE 40
Late Charges
40.1 If Tenant shall fail to pay all or any part of any installment of
fixed annual rent or additional rent for more than ten (10) days after the same
shall have become due and payable, then Tenant shall pay as additional rent
hereunder to Landlord a late charge of Six Cents ($0.06) for each dollar of the
amount of such fixed annual rent or additional rent which shall not have been
paid to Landlord within such ten (10) days after becoming due and payable.
Notwithstanding the foregoing, at such time or times during the term of this
Lease that the amounts payable by Tenant for items of additional rent shall be
increased or changed pursuant to the provisions of this Lease, no late charge
shall be due or payable until the expiration of twenty (20) days after the date
that Tenant shall receive a statement from Landlord requiring the payment
thereof at the increased or changed rate.
40.2 In every case in which Tenant is required by the terms of this
Lease to pay to Landlord a sum of money (including without limitation, payment
of fixed and additional rent) and payment is not made within ten (10) days after
the same shall become due, Tenant shall pay as additional rent hereunder,
interest on such sum or so much thereof as shall be unpaid from the date it
becomes due until it is paid. Such interest shall be computed at a rate which
shall be two (2%) percent per month; provided, however, in no event shall such
interest be in excess of the highest rate of interest which shall from time to
time be permitted under the laws of the State of New York to be charged on late
payments of sums of money due pursuant to the terms of a lease. Any late charge
paid pursuant to Section 40.1 above shall reduce interest accrued hereunder with
respect to the same late payment.
40.3 The late charge payable pursuant to Section 40.1 above and the
interest payable pursuant to Section 40.2 above shall be (i) payable on demand
and (ii) without prejudice to any of Landlord's rights and remedies hereunder at
law or in equity for nonpayment or late payment of rent or other sum and in
addition to any such rights and remedies. No failure by Landlord to insist upon
the strict performance by Tenant of Tenant's obligations to pay late charges and
interest as provided in this Article 40 shall constitute waiver by Landlord of
its right to enforce the provisions of this Article 40 in any instance
thereafter occurring. The provisions of this Article 40 shall not be construed
in any way to extend the grace periods or notice periods provided for in Article
25 of this Lease.
ARTICLE 41
Deleted Prior to Execution
ARTICLE 42
Tenant's Initial Alterations
Tenant Improvement Allowance
42.1 Following the Commencement Date, Tenant shall commence Tenant's
Initial Alterations and complete same within the one year after the Commencement
Date. Tenant's Initial Alterations shall be undertaken and completed in
accordance with the terms of this Lease, including, without limitation, the
provisions of Article 13 hereof. Subject to the provisions of this Article 42,
Landlord shall contribute an amount not to exceed One Million Eight Hundred
Fifty-Nine Thousand Four Hundred Dollars ($1,859,400.00) (the "Tenant
Improvement Allowance") toward the cost of Tenant's Initial Alterations.
Landlord shall disburse a portion o-f the Tenant Improvement Allowance to Tenant
from time to time, within fifteen (15) days after receipt of the items set forth
in Section 42.2 provided that on the date of a request and on the date of
disbursement from the Tenant Improvement Allowance, Tenant shall not be in
default in performing or observing any of the obligations on Tenant's part to be
performed and observed under this Lease following any required notice and the
expiration of any applicable grace period. Disbursements to Tenant of portions
of the Tenant Improvement Allowance shall not be made more frequently then
monthly.
42.2 Landlord shall reimburse Tenant from the Tenant Improvement
Allowance for costs incurred by Tenant in connection with Tenant's Initial
Alterations upon Landlord's receipt of the following items:
(a) A request from Tenant for such disbursement signed by the
officer of Tenant designated in writing for such purpose, which request shall
certify that the amount requested is equal to the aggregate amounts theretofore
paid or payable by Tenant to Tenant's contractors, subcontractors and material
suppliers which requested funds have not been the subject of a previous
disbursement from the Tenant Improvement Allowance;
(b) Photocopies of all receipts, invoices and bills for the work
completed and materials furnished in connection with Tenant's Initial
Alterations and incorporated in the Demised Premises which are to be paid from
the requested disbursement or which have been paid by Tenant and for which
Tenant is seeking reimbursement;
(c) A certificate of Tenant's independent licensed architect
stating (i) that, in the architect's opinion, the portion of Tenant's Initial
Alterations theretofore completed and for which the disbursement is requested
was performed in a good and workmanlike manner and substantially in accordance
with the final plans and specifications therefore, as approved by Landlord, (ii)
the percentage of completion of the Tenant's Initial Alterations as of the date
of such certificate, and (iii) the estimated total cost to complete the
performance of Tenant's Initial Alternations;
(d) Any amounts payable to Landlord in connection with Tenant's
Initial Alterations including, without limitation, any payments due for use of
the freight elevator. The freight elevator charges payable by Tenant in
connection with Tenant's Initial Alterations and the initial "move-in" by Tenant
into the Demised Premises thereafter shall not exceed Eighty-Five Dollars
($85.00) per hour.
42.3 In no event shall the aggregate amount paid by to Tenant under this
Article 42 exceed the amount of the Tenant Improvement Allowance. Within sixty
(60) days after the completion of Tenant's Initial Alterations and upon the
satisfaction of the conditions set forth in Section 42.4, any amount of the
Tenant Improvement Allowance which has not previously been disbursed shall be
retained by Landlord. Upon the disbursement of the entire Tenant Improvement
Allowance (or the portion thereof if, upon completion of Tenant's Initial
Alterations, the Tenant Improvement Allowance is not exhausted) Landlord shall
have no further obligation or liability whatsoever to Tenant for any further
disbursements of any portion of the Tenant Improvement Allowance or otherwise to
contribute towards the cost of Tenant's Initial Alterations, it being understood
and agreed that Tenant shall complete, at its sole cost and expense, Tenant's
Initial Alterations whether or not the Tenant Improvement Allowance is
sufficient to fund such completion.
42.4 Notwithstanding anything in this Article or this Lease to the
contrary, on the earlier to occur of the date which is fifteen (15) days after
completion of Tenant's Initial Alterations or the date upon which Tenant makes a
request for disbursement to Tenant of the balance of funds remaining in the
Tenant Improvement Allowance, as a condition to such release, if appropriate but
in any event not later than fifteen (15) days following substantial completion
of Tenant's Initial Alterations, Tenant shall deliver to Landlord waivers of
lien from all contractors, subcontractors and material suppliers involved in the
performance of Tenant's Initial Alterations and the furnishing of materials in
connection therewith, together with a certificate from Tenant's independent
licensed architect stating that (i) in the architect's opinion, Tenant's Initial
Alterations have been performed (and completed) in a good and workmanlike manner
and in accordance with the final plans and specifications therefore as approved
by Landlord, and (ii) all contractors, subcontractors and material suppliers
have been paid for the work performed in connection with Tenant's Initial
Alterations or the materials furnished through such date.
42.5 Notwithstanding anything in this Article 42 or this Lease to the
contrary, Tenant, not Landlord shall be entitled to all rebates or credits due
in connection with the Consolidated Edison of New York rebate program in
connection with the work undertaken by Tenant as part of Tenant's Initial
Alterations or as part of Tenant's Changes to any Additional Premises (as
defined in Article 44). Landlord agrees to cooperate with Tenant, at Tenant's
sole cost and expense in connection with Tenant's application for any such
rebates or credits.
ARTICLE 43
Option to Renew
43.1 Provided that this Lease is in full force and effect and Tenant is
not then currently in default hereunder, Tenant shall have the option to extend
the original term of this Lease for one (1) extension period of five (5) years
("Renewal Term") commencing upon the expiration of the original term of this
Lease, provided that Tenant shall give Landlord written notice of the exercise
of its option at least twelve (12) months prior to the Expiration Date. The
Renewal Term shall be on the same terms, covenants and conditions as are
contained in this Lease for the original term except for:
(i) the provisions of Section 1.4 (a) respecting the fixed rent, which
shall be payable during the Renewal Term in accordance with the provisions
of Section 43.2;
(ii) the provisions of Section 1.4(c);
(iii) the covenants relative to the preparation of the Demised Premises by
Landlord contained in Article 3 of this Lease;
(iv) the Tenant Improvement Allowance contained in Article 42 of this
Lease;
(v) the Option to Renew contained in this Article 43;
none of which shall be applicable to the Renewal Term. In addition, following
Tenant's exercise of the option to extend the original term of this Lease for
the Renewal Term, the Expiration Date referred to in Section 1.3 shall be deemed
to be the last day of the Renewal Term or such earlier date upon which the term
of this Lease may expire or be canceled or terminated. In no event shall Tenant
shall have any further right of renewal beyond the Renewal Term. Any termination
or expiration of this Lease during the original term shall terminate all rights
of renewal hereunder.
43.2 The provisions of Section 1.4 of this Lease shall not be applicable
to the Renewal Term. The fixed rent payable during each year of the Renewal Term
shall be the amount determined by (a) multiplying Thirty-Eight Dollars ($38.00)
by the number of rentable square feet then contained in the Demise Premises, and
adding thereto (b) the amount determined by multiplying the number of rentable
square feet then contained in the Demised Premises by the amount of all
increases in the Electrical Charge or Adjusted Electrical Charge pursuant to
Article 16 of this Lease, provided, however, that in no event shall the fixed
rent during the Renewal Term be less than One Million Five Hundred Seventy
Thousand One Hundred Sixty Dollars.
ARTICLE 44
Options for Additional Space
44.1 With respect to the premises cross-hatched and highlighted in red
on page B-3 of Exhibit "B" and denoted there as the "6th Floor Rear Premises",
provided that this Lease is i full force and effect and Tenant is not then
currently in default hereunder, upon ten (10) Business Days written notice to
Landlord, given not later than the last day provided for Tenant to exercise its
option for the Renewal Term as provided in Article 43, Tenant shall have the
option to lease the entire 6th Floor Rear Premises which contains approximately
7,185 rentable square feet. In such event, on the eleventh (11th) Business Day
following the date of Tenant's notice to Landlord, the entire 6 Floor Rear
Premises shall be added to and be deemed a part of the Demised Premises, upon
and subject to all of the same terms and conditions of this Lease (provided,
however, in no event shall the exercise of the option pursuant to this Section
44.1 be or opened to extend the term of this Lease). Tenant acknowledges and
agrees that, except as set forth in Section 44.4 of this Lease, Landlord shall
have no obligation to perform any work (including, without limitation, any of
the work described herein as "Landlord's Work") with respect to the 6th Floor
Rear Premises if, as and when same is added to the Demised Premises pursuant
this Article 44, and Tenant shall accept the 6th Floor Rear Premises, as
appropriate, in its then "as is" condition provide that same is delivered to
Tenant vacant and broom-clean. Notwithstanding the foregoing, Landlord and
Tenant acknowledge and agree that from time to time and at various times during
the term of this Lease, at any time prior to Landlord's receipt of notice from
Tenant exercising its option under this Section 44.1 Landlord shall have the
right to lease to other tenants, all or any portion of the 6th Floor Rear
Premises provided, however, that Landlord agrees that all such leases for the
6th Floor Rear Premises or any portion or portions thereof, to be entered into
by Landlord with such other tenants during the original term of this Lease,
shall provide for a term which is co-terminis with the original term of this
Lease. If Tenant elects to extend the term of this Lease as provided in Article
43, unless Tenant, simultaneously with or prior to the exercise of the option
for the Renewal Term, exercises the option contained in this Section 44.1,
during the Renewal Term Landlord shall have the right to enter into any lease
for all or any portion of the 6th Floor Rear Premises as Landlord shall, in its
sole discretion, determine without any limitation or restriction whatsoever,
whether as to the term of such lease or otherwise. Tenant's option which is
provided in this Section 44.1 shall terminate as of the date which is the last
date for Tenant to exercise its option for the Renewal Term as set forth in
Article 43.
44.2 At all times during the original term of this Lease and the Renewal
Term, if any, with respect to the premises cross-hatched and highlighted in blue
on page B-4 of Exhibit "B" and denoted thereon as the "6th Floor Front
Premises", which contains approximately 14,700 rentable square feet provided
that this Lease is in full force and effect and Tenant is not then currently in
default hereunder, Landlord agrees that it shall not enter into a lease for the
entire 6th Floor Front Premises or any portion thereof with any tenant without
first notifying Tenant that Landlord in good faith, intends to enter into a bona
fide lease for all or a portion of the 6th Floor Front Premises, Tenant shall
have ten (10) Business Days after Landlord's notice to notify Landlord in
writing whether Tenant desires to exercise its option to lease all or such
portion of the 6th Floor Front Premises as Landlord then intends to lease. If
Tenant exercises its option to lease all or any such portion of the 6th Floor
Front Premises, then as of the expiration of said ten (10) Business Day period,
the 6th Floor Front Premises or such portion thereof shall be added to and be
deemed a part of the Demised Premises, upon and subject to all of the same terms
and conditions of this Lease (provided, however, in no event shall the exercise
of the option pursuant to this Section 44.2 be or be deemed to extend the term
of this Lease), Tenant acknowledges and agrees that, except as set forth in
Section 44.4 of this Lease, Landlord shall have no obligation to perform any
work (including, without limitation, any of the work described herein as
"Landlord's Work") with respect to any portion of the 6th Floor Front Premises
which is added to the Demised Premises pursuant to this Article 44. Tenant shall
accept the 6th Floor Front Premises or the portions thereof, as appropriate, in
its then "as is" condition provided that same is delivered to Tenant vacant and
broom-clean. If Tenant shall not timely exercise its option for the 6th Floor
Front Premises or any such portion thereof, or shall reject same within the ten
(10) Business Days (failure to timely so accept, time being of the essence,
being deemed a rejection), then Landlord shall have the right to enter into
anylease for the-6th Floor Front Premises or such portion thereof as Landlord
intended to lease, as Landlord, in its sole discretion, shall determine, without
any limitation or restriction whatsoever, whether as to the term of such lease
or otherwise, and Tenant's option with respect to the entire 6th Floor Front
Premises or such portion thereof as Landlord intended to lease, shall be null,
void and of no further force or effect.
44.3 Provided that (i) this Lease is in full force and effect, (ii)
Tenant is not then currently in default hereunder, (iii) Tenant has exercised
its option for the Renewal Term and (iv) Tenant has, prior to the commencement
of the Renewal Term, exercised its option to add to the Demised Premises, and
has, in fact, added to the Demised Premises of the 6th Floor Rear Premises or
all or a portion of the 6th Floor Front Premises (collectively, the "Additional
Premises") then upon the commencement of the Renewal Term, Landlord agrees to
pay to Tenant an amount equal to $22.50 per rentable square foot, (Additional
Tenant Improvement Allowance") for each rentable square foot of the total
Additional Premises which Tenant has leased as of the commencement of the
Renewal Term. The Additional Tenant Improvement Allowance shall be paid to
Tenant upon the commencement of the Renewal Term. After the commencement of the
Renewal Term, no Additional Tenant Improvement Allowance shall be due or payable
with respect to any Additional Premises. Except for the Additional Tenant
Improvement Allowance, and the provisions of Section 44.4, Landlord -shall have
absolutely no obligation or liability whatsoever to Tenant for any disbursements
toward, or for any of the costs or expenses incurred by Tenant in connection
with, any Tenant's Changes with respect to the Demised Premises and the
Additional Premises or to provide any work, labor or materials with respect
thereto. It is understood and agreed that Tenant shall complete, at Tenant's
sole cost and expense, all Tenant's Changes with respect to the Additional
Premises whether or not the Additional Tenant Improvement Allowance is
sufficient to fund such Completion. The Failure of Landlord to pay to Tenant the
Additional Tenant Improvement Allowance upon the commencement of the Renewal
Term shall be a default by Landlord under this Lease.
44.4 If any Additional Premises are added to the Demised Premises
pursuant to this Article 44, and 3-f upon taking possession thereof, Tenant
shall discover asbestos or asbestos containing or asbestos-treated materials in
the ducts, pipes or other portions of the ceiling thereof running on a
horizontal plane through the Additional Premises, Tenant shall immediately
notify Landlord thereof, but in no event later than ninety (90) days after the
Additional Premises have been added to the Demised Premises. If Tenant so timely
notifies Landlord, Landlord shall promptly upon receipt of Tenant's notice,
commence and proceed with diligence to remove all such asbestos, asbestos
containing materials or asbestos-treated materials from the horizontal ceiling
plane portions of the Additional Premises, such removal to be undertaken in
accordance with Asbestos Requirements and at Landlord's sole cost and expense,
Landlord's removal of same shall be undertaken and completed in a manner which
shall minimize interference with, or any delay of, any Tenant's Changes in the
Additional Premises. In no event shall Landlord have any obligation to remove
asbestos or asbestos containing or asbestos-treated materials, if any, from any
portion of the walls, columns, risers, or other vertical plane portions of the
Additional Premises. If Tenant does not so notify Landlord of the presence of
asbestos or asbestos containing or asbestos-treated materials in the ducts,
pipes or other portions of the ceiling thereof running on a horizontal plane
through the Additional Premises within said ninety (90) day period, as
aforesaid, Landlord shall have no obligation pursuant to this Section 44.4 to
remove any asbestos or asbestos containing or asbestos-treated materials from
any portion of the Additional Premises.
44.5 If any Additional Premises are added to the Demised Premises
pursuant to this Article 44, promptly thereafter Landlord and Tenant shall
execute and deliver a written instrument to be prepared by Landlord which shall
set forth the revised rentable square footage of the Demised Premises, a revised
Tenant's Proportionate Share and the revised fixed rent The increases in fixed
rent and additional rent shall become due and payable immediately upon the
Additional Premises becoming part of the Demised Premises and shall be paid, if
such event occurs on a date other than the first day of a month, pro rata for
such partial month, upon such event occurring, and thereafter along with the
monthly payments of fixed rent and additional rent reserved under this Lease.
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this
Lease as of the day and year first above written.
COOKE PROPERTIES INC.
Landlord
By: /s/ Michael R. Darrow
Name: Michael R. Dillow
Title: Vice President
EMPIRE BLUE CROSS AND BLUE SHIELD
Tenant
By: /s/ Albert A. Cardone
Name: Albert A. Cardone
Title: C.O.B. - C.E.O.
<PAGE>
EXHIBIT A
Certificate of Occupancy
See Attached two (2) Pages
<PAGE>
EXHIBIT B
Floor Plan
All Areas, Dimensions And
Conditions Are Approximate
See Attached Four (4) Pages.
<PAGE>
EXHIBIT C
Operating Expense Escalation
A.Tenant acknowledges that Tenant has been advised by Landlord that the
Building is operated, repaired, improved, altered and generally maintained
as a single integrated building along with The Chrysler Building located at
405 Lexington Avenue, New York, New York 10174, and that Landlord's records
with respect to Operating Expenses are kept on a consolidated basis
treating both buildings as a single entity. Tenant has requested that
Landlord provide to Tenant the Statement of Operating Expenses and
Statement of Projected Operating Expenses and otherwise compute Tenant's
Proportionate Share of operating Expenses and of Increases in Operating
Expenses as if the Building were operated independent of The Chrysler
Building, and Landlord has agreed to do so. Tenant acknowledges that the
Operating expenses for the Building shall include the proportionate share
of the Common operating Expenses (hereinafter defined) attributable, on a
pro rata basis, to the Building (as opposed to the Chrysler Building) and
Tenant acknowledges and agrees that the proportionate allocation of the
Common Operating Expenses on such pro rata basis is fair and equitable,
Tenant acknowledges and agrees that, as of the date of this Lease, the pro
rata share of Common Operating Expenses allocated to the Building shall be
thirty-three and thirty-three one hundredths percent (33.33-%).
B. For the purpose of Exhibit C the following definitions shall apply:
1. The term "Common Operating Expenses" shall mean all Operating
Expenses incurred in connection with the unified operation of the
Building with the building known as The Chrysler Building located
at 405 Lexington Avenue, New York, NY 10174 as described in
Section A of this Exhibit C. Common Operating Expenses shall
include, without limitation the operating Expenses described in
Section C of this Exhibit C, exclusive of Operating Expenses
consisting of a Capital Expenditure which benefits solely The
Chrysler Building and not the Building.
2 The term "Building" when used in connection with this Exhibit C
and the determination of Operating Expenses shall mean not only
the Building as defined in this Lease, but also include the
Building's proportionate share of all Common Operating Expenses.
3 The term "Tenant's Proportionate Share" shall mean .087.
4. The term "Base Year" shall mean the calendar year 1992.
5. The term "Operation Year" shall mean each calendar year,
subsequent to the Base Year in which occurs any part of the term
of the Lease.
6 The term "Operating Expenses" shall mean the total of all costs
and expenses including any taxes thereon, incurred or borne by
Landlord or Landlord's managing agent (whether directly or
through independent contractors) in connection with the
operation, maintenance, management and security of the Building
and any plazas, sidewalks and curbs adjacent thereto, and the
services provided tenants therein, except as otherwise
specifically modified in section C of this Exhibit C.
7. The term "Projected operating Expenses" shall mean the reasonably
estimated operating Expenses for the current Operation Year. The
Projected Operating Expenses shall be computed by Landlord or
Landlord's managing agent based upon known conditions for the
current Operation Year.
8 The term "Statement of operating Expenses" shall mean the annual
statement of actual Operating Expenses for the Building, The
Statement of operating Expenses shall be written, detailed and
prepared on an annual basis after the expiration of the Base Year
and Operation Year. The Statement of operating Expenses shall be
prepared by Landlord or Landlord's managing agent for the purpose
of determining Tenant's Proportionate Share of Increase, The
Statement of Operating Expenses shall be certified in writing as
correct by an officer of Landlord or Landlord's managing agent.
9. The term "Statement of Projected Operating Expenses" shall mean
the written statement setting forth in detail the estimate of
Projected Operating Expenses for the current Operation Year. The
Statement of Projected Operating Expenses shall be prepared by
Landlord or Landlord's managing agent for the purpose of
determining Tenant's Proportionate Share of Projected Increase.
10. The term "Tenant's Proportionate Share of Increase" shall
mean the product obtained by multiplying Tenant's
Proportionate Share by the increase in Operating Expenses
for an Operation Year over Operating Expenses for the Base
Year.
11. The term "Tenant's Proportionate Share of Projected
Increase" shall mean the product obtained by multiplying
Tenant's Proportionate Share by the increase in Projected
Operating Expenses for the current Operation Year over
Operating Expenses for the Base Year.
12. The term "Labor Costs" shall include, without limitation,
the cost and expense of salaries, wages, payroll taxes and
other so-called "fringe" benefits which include without
limitation, medical benefits, surgical benefits, general
welfare benefits, group insurance benefits, retirement
plans, pension plans, vacation pay, sickness pay; etc.
13. The term "Capital Expenditure" shall mean the cost and
expense of any alteration, addition, change, replacement,
improvement or repair which under generally accepted
accounting principles consistently applied as pertaining
to the real estate industry, is properly classified as a
capital expenditure.
C. For the purpose of Exhibit C the definition operating Expenses shall be
modified as follows:
1. Operating Expenses shall include, without limitation, the cost and
expense of the following:
(a) Labor Costs for employees of Landlord or Landlord's managing agent who
are engaged in the operation and maintenance of the Building ("Building
Employees");
(b) uniforms and the cost of cleaning such uniforms for the Building
Employees;
(c) workmen's compensation insurance and any other insurance carried by
Landlord or Landlord's managing agent which relates to the Building
Employees;
(d) fire, casualty, liability, rent and other insurance carried by
Landlord;
(e) utilities furnished to the building, including any taxes on such
utilities, and such utilities shall include, without limitation, steam,
heat, ventilation, air-conditioning, water, sewer rental, oil, gas;
(f) electricity furnished to the Building, including any taxes on such
electricity, except the cost of electricity furnished to the demised space
of tenants of the Building shall be excluded;
(g) repairs, maintenance, replacements, improvements and the related
supplies which are necessary for the continued operations of the Building
as first class office building in the Borough of Manhattan, City of New
York;
(h) repair and maintenance for elevators and escalators;
(i) cleaning and window cleaning;
(j) management fees for Landlord and/or Landlord's managing agent;
(k) professional and consulting fees;
(1) protection and security;
(m) lobby decorations;
(n) interior and exterior landscape repair and maintenance;
(o) trash removal and snow removal;
(p) painting of public portions of the Building and other similar
non-tenanted areas;
(q) dues or fees for associations; and
(r) telephone usage.
2. Operating Expenses shall exclude, the cost and expense of the following:
(a) Labor Costs for employees of Landlord or Landlord's managing agent who
are above the grade of building manager;
(b) Real Estate Tax and any items specifically included in the definition
of Real Estate Taxes;
(c) Ground Rent;
(d) mortgage interest, financing charges and letter of credit fees;
(e) Capital Expenditures, subject however to Sections C3, C4 and C5 of this
Exhibit C;
(f) depreciation or amortization expense, subject however to Sections C3,
C4 and C5 of this Exhibit C;
(g) legal fees, brokerage commissions, advertising expenses and other costs
incurred in leasing or attempting to lease any portion of the Building;
(h) leasehold improvements made to space which is leased to tenants of the
Building and other expenses incurred in preparing space for use by other
tenants; (i) legal fees relating to the sale or financing of the Building,
a dispute with a tenant of the Building or the protesting of Real Estate
Taxes;
(j) expenses to the extent Landlord is compensated or reimbursed by any
insurance or other compensation from a third party (other than Tenant or
another tenant of the Building solely with respect to After Hours services,
including, without limitation, HVAC and freight elevators);
(k) insurance premiums to the extent Landlord is entitled to be reimbursed
by a tenant of the Building pursuant to Article 11 of the Lease;
(1) Capital Expenditures and other Operating Expenses which are not Common
operating Expenses and which benefit solely the tenant's of the Chrysler
Building; and
(m) Tax penalties, interest or fines incurred as a result of Landlord's
negligence, inability or unwillingness to make payments when due,
3. If a Capital Expenditure is made in an Operation Year and results in
savings or reductions in Operating Expenses or is in lieu of a repair, then
the annual amortization or depreciation of the cost of such Capital
Expenditure, as amortized or depreciated on a straight line basis over the
number of years utilized by Landlord for federal income tax purposes, plus
an annual charge for interest upon the unamortized or undepreciated portion
of such Capital expenditure at the prevailing prime rate plus 100 basis
points during the Operation Year in question or the amount by which the
Operating Expenses for each Operation Year Capital expenditure as
reasonably determined by Landlord, which ever is greater, shall be included
in Operating Expenses beginning with the Operating Year in which the
Capital Expenditure was made.
4. If a Capital Expenditure is made in an operation Year in compliance with
the requirement of any federal, state or local law, or governmental
regulation, the Federal Occupational, Safety and Health Act, and similar
laws now or hereafter in force or effect, or if such Capital Expenditure
generally benefits the tenants of the Buildings, then the annual
amortization or depreciation of the cost of the Capital Expenditure, as
amortized or depreciated on a straight line basis over the number of years
utilized by Landlord for federal income tax purposes, plus an annual charge
for interest upon the unamortized or undepreciated portion of such Capital
Expenditure at the prevailing prime rate plus l00 basis points shall be
included in Operating Expenses beginning with the Operation Year in which
the Capital Expenditure was made.
5. If an item of capital equipment is leased in an Operation Year and
results in savings or reductions in operating Expenses or is in lieu of a
repair, then the greater of the rentals and other costs paid pursuant to
such leasing or the amount by which operating Expenses for each operating
year during such lease term have been reduced shall be included in
Operating Expenses for the Operation Year in which they were incurred.
6. If during the Base Year or any Operation Year, less than one hundred
percent (100%) of the rentable area of the Building was occupied by tenants
making full utilization of such area, operating Expenses for such Base Year
or Operation Year shall be increased to an amount which would have been
reasonably incurred if the rentable area of the Building was one hundred
percent (100%) occupied by tenants making full utilization of such area.
7. If during the Base Year or any Operation Year, Landlord shall not
furnish any particular item(s) of work or service, which would constitute
an operating Expense hereunder, to a portion of the Building (including
without limitation the Demised Premises) because such item(s) of work or
service are not required or desired by the tenant (including without
limitation to Tenant) of such portion, or tenant is itself obtaining and
providing such item(s) of work or service, or for any other reasons, then,
Operating Expenses for such Base Year or Operation Year shall be increased
to an-a-mount which would have been reasonably incurred if Landlord had
furnished such item(s) of work or service at its own expense.
D. Commencing with the first Operation Year and any subsequent Operation
Year, Landlord shall furnish Tenant with a Statement of Projected Operating
Expenses which supports the computation of Tenant's Proportionate Share of
Projected Increase for the current operation Year. Tenant shall pay to
Landlord as additional rent, Tenant's Proportionate Share of Projected
Increase in equal monthly installments in advance; but if such statement
shall be delivered after the first month of such operation Year, the
charges which shall have accumulated for such Operation Year shall be paid
within ten (10) days of Tenant's receipt.
E. If during any Operation Year or part thereof Landlord shall not have
furnished Tenant with a Statement of Projected Operating Expenses for the
current Operation Year, then Tenant shall continue to pay Landlord the sums
payable for the immediately preceding Operation Year until the Statement of
Projected operating Expenses for the current Operation Year shall have been
furnished to Tenant, at which time the monthly installments by Tenant shall
be adjusted retroactively pursuant to Section C of this Exhibit C.
F. After the expiration of the Base Year and Each Operation Year, Landlord
shall furnish Tenant with the Statement of Operating Expenses setting forth
Tenant's Proportionate Share of Increase. For the Base Year or Operation
Year in question:
1. If Tenant's Proportionate Share of Projected Increase exceeds Tenant's
Proportionate Share of Increase, Landlord shall forthwith either (i) pay
the amount of such excess directly to Tenant or (ii) permit Tenant to
credit the amount of such excess against the subsequent payment of rent due
hereunder;
2. If Tenant's Proportionate Share of Increase exceeds Tenant's
Proportionate Share of Projected Increase, Tenant shall forthwith pay the
amount of such excess to Landlord.
G. Every statement given by Landlord pursuant to Section E of this Exhibit
C shall be conclusive and binding upon Tenant unless (i) within sixty (60)
days after the receipt of such statement Tenant shall notify Landlord that
it disputes the correctness thereof, (ii) if such dispute shall not have
been settled by agreement, Tenant shall submit the dispute for resolution
in accordance with Section J of this Exhibit C within ninety (90) days
after receipt of the statement. Pending the determination of such dispute
by agreement or such dispute resolution as aforesaid, Tenant shall either
(i) within thirty (30) days after receipt of such statement, pay additional
rent in accordance with Landlord's statement if additional rent is owed, or
(ii) in the event that Landlord's statement shows that Landlord owes Tenant
money, Tenant may either accept such payment from Landlord or apply the
credit shown on such statement against subsequent payments of additional
rent, and such payment, acceptance of payment and credit against additional
rent shall all be without prejudice to Tenant's position. If the dispute
shall be determined in Tenant's favor, Landlord shall forthwith pay Tenant
the amount of Tenant's overpayment resulting from compliance with
Landlord's statement.
H. In the event (i) that the date of the expiration or other termination of
this Lease shall be a day other than the last day of an Operation year, or
(ii) of any increase or decrease in the space comprising the Demised
Premises (as may be provided herein), then in each such event in applying
the provisions of this Exhibit C with respect to any operation Year in
which such event shall have occurred, appropriate adjustments shall be made
to reflect the occurrence of such event on a basis consistent with the
principles underlying the provisions of this Exhibit C taking into
consideration (y) the portion of the Operation Year which shall have
elapsed prior to the date of such expiration or termination or, (z) in the
case of any increase or decrease the portion of the Demised Premises to
which the same relates and the portion of the Operation year which shall
have elapsed prior to the date of such increase or decrease.
I. Payments shall be made pursuant to this Exhibit C notwithstanding the
fact that statements pursuant to this Exhibit C are furnished to Tenant
after the expiration of the term of this Lease.
J. In the event of a dispute between Landlord and Tenant with respect to
Landlord's statement of Operating Expenses, such dispute shall be
determined as provided in this Section J of Exhibit C. Landlord and Tenant
shall each appoint a person as arbitrator who shall have had at least ten
(10) years experience in the City, County and State of New York in a
profession, business or occupation involving the determination of operating
expenses for buildings similar to the Building. The appointment of each
such arbitrator shall be confirmed in writing by each party to the other.
The arbitrator so appointed, in the event of their failure to agree upon
the matter so submitted within thirty (30) days of their appointment, shall
appoint a third arbitrator having similar qualifications to each of them,
If the two arbitrators can not agree on the appointment of such third
arbitrator, the third arbitrator shall be appointed by the Real Estate
Board of New York, Inc. from its qualified panel of arbitrators who shall
meet the experienced criteria set forth above. If Landlord or Tenant shall
fail to so appoint an arbitrator for a period of twenty (20) Business Days
after written notice from the other demanding such appointment, then the
arbitrator appointed by the party not in default hereunder shall appoint
the second arbitrator and the two arbitrators so appointed shall, in the
event of their failure to agree upon any decision within thirty (30) days
thereafter, appoint the third arbitrator. The two arbitrators, or the three
arbitrators, as appropriate, after being duly sworn to perform their duties
with impartiality and fidelity, shall proceed to determine the question
submitted. The decision of the arbitrators shall be rendered within thirty
(30) days after their appointment, and such decision shall be in writing
and in duplicate, one counterpart thereof to be delivered to each of
Landlord and Tenant. The decision of the arbitrators shall be binding,
final and conclusive on the parties. The fees of the arbitrators and the
expenses incident to the proceedings shall be borne equally between
Landlord and Tenant, unless the arbitrators, by their decision shall
otherwise direct. The fees of the respective counsel, if any, engaged by
the parties and the fees of expert witnesses and other witnesses called for
by the parties, if any, shall be paid by the respective party engaging such
counsel or calling or engaging such witnesses.
<PAGE>
EXHIBIT D
Rules and Regulations
1. The right of tenants in the entrances, corridors, elevators and
escalators of the Building are limited to ingress and egress from the tenant's
premises for the tenants and their employees, licensees and invitees, and no
tenant shall use, or permit the use of, the entrances, corridors, escalators or
elevators for any other purpose. No tenant shall invite to the tenant's
premises, or permit the visit of, persons in such numbers or under such
conditions as to interfere with the use and enjoyment of any of the plazas,
entrances, corridors, escalators, elevators and other facilities of the Building
by other tenants. Fire exits and stairways are for emergency use only, and they
shall not be used for any other purpose by the tenants, their employees,
licensees or invitees. No tenant shall encumber or obstruct, or permit the
encumbrance or obstruction of, any of the sidewalks, plazas, entrances,
corridors, escalators, elevators, fire exits or control and operate the public
portions of the Building and the public facilities, as well as facilities
furnished for the common use of the tenants, in such manner as it deems best for
the benefit of the tenants generally.
2. Landlord may refuse admission to the Building outside of ordinary
business hours to any person not having a pass issued by the Landlord or not
otherwise properly identified, and may require all persons admitted to or
leaving the Building outside of ordinary business hours to register. Any person
whose presence in the Building at any time shall, in the judgment of Landlord,
be prejudicial to the safety, character, reputation and interests of the
Building or of its tenants may be denied access to the Building or may be
ejected therefrom. In case of invasion, riot, public excitement or other
commotion Landlord may prevent all access to the Building during the continuance
of the same, by closing the doors or otherwise, for the safety of the tenants
and protection of property in the Building. Landlord may require any person
leaving the Building with any package or other object to exhibit a pass from the
tenant from whose premises the package or object is being removed, but the
establishment and enforcement of such requirement shall not impose any
responsibility on Landlord for the protection of any tenant against the removal
of property from the premises of the tenant. Landlord shall, in no way, be
liable to any tenant for damages or person to or from the tenant's premises or
the Building under the provisions of this rule. Canvassing, soliciting or
peddling in the Building is prohibited, and every tenant shall co-operate to
prevent the same.
3. No Tenant shall obtain or accept for use in its premises ice,
drinking water, food, beverage, towel, barbering, boot blacking, floor
polishing, lighting maintenance, cleaning or other similar services from any
persons not authorized by Landlord in writing, in Landlord's reasonable
judgment, to furnish such services, provided that the charges for such services
by persons authorized by Landlord are reasonably competitive and, where
appropriate and consonant with the security and proper operation of the
Building, sufficient persons are so authorized for the same service to provide
tenants with a reasonably competitive selection. Such service shall be furnished
only at such hours, in such places within the tenant's premises and under such
reasonable regulations as may be fixed by Landlord.
4. The cost of repairing any damage to the public portions of the
Building or the public facilities or to any facilities used in common with other
tenants, caused by the acts or omissions of a tenant or the employees, licensees
or invitees of the tenant, shall be paid by such tenant as additional rent.
5. No lettering, sign, advertisement, notice or object shall be
displayed in or on the windows or doors, or on the outside of any tenant's
premises, except that the name of the tenant may be displayed on the entrance
door of the tenant's premises, and in the elevator lobbies of the floors which
are occupied entirely by any tenant, subject to the approval of Landlord as to
the size, color and style of such display. The inscription of the name of the
tenant on the door of the tenant's premises shall be done by Landlord at
Tenant's expense; any other listings shall be in the discretion of Landlord.
6. No awnings or other projections over or around the windows shall
be installed by any tenant, and only such window blinds as are supplied or
permitted by Landlord shall be used in a tenant's premises, Linoleum, tile or
other floor coverings shall be laid in a tenant's premises only in a manner
approved by Landlord which approval may be part of the approval of Tenant's
Initial Alterations or the Tenant's Changes.
7. Landlord shall have the right to prescribe the weight and
position of safes and other objects of excessive weight, and no safe or other
object whose weight exceeds the lawful load for the area upon which it would
stand shall be brought into or kept upon a tenant's premises. If, in the
judgment of Landlord, it is necessary to distribute the concentrated weight of
any heavy object, the work involved in such distribution shall be done at the
expense of the tenant and in such manner as Landlord shall determine. The moving
of safes and other heavy objects shall take place only outside of ordinary
business hours upon previous notice to Landlord, and the persons employed to
move the same in and out of the Building shall be reasonably acceptable to
Landlord and, if so required by law, shall hold a Master Rigger's license.
Freight, furniture, business equipment, merchandise and bulky matter of any
description shall be delivered to and removed from the premises only in the
freight elevators and through the service entrances and corridors, and only
during hours and in a manner approved by Landlord. Arrangements will be made by
Landlord with any tenant for moving large quantities of furniture and equipment
into or out of the Building.
8. No machines or mechanical equipment of any kind, other than
ordinary moveable business machines and such other equipment as may be permitted
pursuant to tenants and pursuant to their lease, may be installed or operated in
any tenant's premises without Landlord's prior written consent, and in no case
(even where the same are of a type so accepted or as so consented to by
Landlord) shall any machines or mechanical equipment be so placed or operated as
to disturb other tenants; but machines and mechanical equipment which may be
permitted to be installed and maintained by such tenant as to prevent any
disturbing noise, vibration, or electrical or other interference from being
transmitted from such premises to any other area of the Building.
9. No noise, including the playing of any musical instruments, radio
or television, which, in the judgment of Landlord, might disturb other tenants
in the Building, shall be made or permitted by any tenant, and no cooking shall
be done in any tenant's premises, except as expressly approved by Landlord.
Nothing shall be done or permitted in any tenant's premises, and nothing shall
be brought into or kept in any tenant's premises, which could impair or
interfere with any of the Building services or the proper and economic heating,
cleaning or other servicing of the Building or the premises, or the use or
enjoyment by any other tenant of any other premises, nor shall there be
installed by any tenant any ventilating, air-conditioning, electrical or other
equipment of any kind which, in the judgment of Landlord, might cause any such
impairment or interference. No dangerous, inflammable, combustible or explosive
object or material shall be brought into the Building by any tenant or with the
permission of any tenant, Any cuspidors or similar containers or receptacles
used in any tenant's premises shall be cared for and cleaned by and at the
expense of the tenant.
10. No acids, vapors or other materials shall be discharged or
permitted to be discharged into the waste lines, vents or flues of the Building
which may damage them, The water and wash closets and other plumbing fixtures in
or serving any tenant's premises shall not be used for any purpose other than
the purpose for which they were designed or constructed, and no sweepings,
rubbish, rags, acids or other foreign substances shall be deposited therein.
11. No additional locks or bolts of any kind shall be placed upon
any of the doors or windows in any tenant's premises and no lock or any door
therein shall be changed or altered in any respect. Additional keys for a
tenant's premises and toilet rooms shall be procured only from Landlord, which
may make reasonable charge therefor. Upon the termination of a tenant's lease,
all keys of the tenant's premises and toilet rooms shall be delivered to
Landlord.
12. All entrance doors in each tenant's premises shall be left
locked and all windows shall be left closed by the tenant when the tenant's
premises are not in use. Entrance doors shall not be left open at any time.
13. Hand trucks not equipped with rubber tires and side
guards shall not be used within the Building.
14. All windows in each tenant's premises shall be kept closed and
all blinds therein above the ground floor shall be lowered and closed when and
as reasonably required because of the position of the sun, during the operation
of the Building air-conditioning system to cool or ventilate the tenant's
premises.
15. Landlord reserves the right to rescind, alter or waive any rule
or regulation at any time prescribed for the Building when, it its reasonable
judgment, it deems it reasonably necessary, desirable or proper for its best
interest and for the best interests of the tenants, and no alteration or waiver
of any rule or regulation in favor of one tenant shall operate as an alteration
or waiver in favor of any other tenant. The Landlord shall not be responsible to
any tenant for the non-observance or violation by any other tenant of any of the
rules and regulations at any time prescribed for the Building.
<PAGE>
EXHIBIT E
Definitions
(a) The term mortgage shall include an indenture of mortgage and
deed of trust to a trustee to secure an issue of bonds, and the term mortgagee
shall include such a trustee.
(b) The terms include, including, and such as shall each be
construed as if followed by the phrase "without being limited to".
(c) The term obligations of this Lease, and words of like import,
shall mean the covenants to pay rent and additional rent under this Lease and
all of the other covenants and conditions contained in this Lease. Any provision
in this Lease that one party or the other or both shall do or not do or shall
cause or permit or not cause or permit a particular act, condition or
circumstance shall be deemed to mean that such party so covenants or both
parties so covenant, as the case may be.
(d) The term Tenant's obligations hereunder, and words of like
import, and the term Landlord's obligations hereunder, and words of like import,
shall mean the obligations of this Lease which are to be performed or observed
by Tenant, or by Landlord, as the case may be, Reference to performance of
either party's obligations under this Lease shall be construed as "performance
and observance".
(e) Reference to Landlord as having no liability to Tenant or being
without liability to Tenant shall mean that, except as may be specifically set
forth in the subject lease provisions, Tenant is not entitled to terminate this
Lease, or to claim actual or constructive eviction, partial or total, or to
receive any abatement or diminution of rent, or to be relieved in any manner of
any of its other obligations hereunder, or to be compensated for loss or injury
suffered or to enforce any other kind of liability whatsoever against Landlord
under or with respect to this Lease or with respect to Tenant's use or occupancy
of the Demised Premises.
(f) The term laws and/or requirements of public authorities, and
words of like import, shall means laws and ordinances of any or all of the
Federal, State, City, County and Borough Governments and rules, regulations,
orders and/or directives of any or all departments, subdivisions, bureaus,
agencies or offices thereof, or of any other governmental, public or
quasi-public authorities having jurisdiction in the premises, and/or the
direction of any public officer pursuant to law.
(g) The term requirements of insurance bodies, and words of like
import, shall mean rules, regulations, orders and other requirements of the New
York Board of Fire Underwriters and/or the New York Fire Insurance Rating
organization and/or any other similar body performing the same, or similar
functions and having jurisdiction or cognizance of the Building and/or the
Demised Premises.
(h) The term repair shall be deemed to include restoration and
replacement as may be necessary to achieve and/or maintain good working order
and condition.
(i) Reference to termination of this Lease includes expiration or
earlier termination of the term of this Lease or cancellation of this Lease
pursuant to any of the provisions of this Lease or to law. Upon a termination of
this Lease, the term and estate granted by this Lease shall end at midnight of
the date of termination as of such date of expiration of the term of
<PAGE>
Jul 12, 1991
FLOORING:
B. SHEHADI & SON
27 WEST 24TH STREET
NEW YORK, NY 10010
MR, ED FUENTES
(212) 366-0533
GUNDOLT CARPET WORKROOHJ,
750 COMMERCE ROAD
LINDEN, NJ 07036
MR. KENNETH TVETER
(201) 862-2800
SCS CARPET SYSTEHS
200 LEXINGTON AVENUE
NEW YORK, NY 10016
MR STANLEY GREENBAUM
(212)
SHERLAND & FARRINGTON,INC.
417 CANAL STREET
NEW YORK, NY 10013
MR. DARREN SHERLAND
(212) 925-3200
PATINGING & WALLPAPER
MAR-KAL CONTRACTING
272 41ST STREET
BROOKLYN NY 11232
MR. ALAN KEPPLER
HUDSON - SHATZ PAINTING CO., INC.
429 WEST 53RD STREET
NEW YORK, NY 10019
Mr. ALEXANDER MAH
RAMM PAINTING
1006 GLENN DR.
FRANKLYN SQ. NY 11010
MR. RALPH NATALE
Jul 12, 1991
LATHE & ACOUSTICS:
JAMES A. PHILLIPS, INC.
ONE PENN PLAZA, SUITE 2825
NEW YORK, NY 10119
MR. JOHN MARKHAM (212) 564-5380
NATIONAL ACOUSTICS, INC.
515 WEST 36TH STREET
NEW YORK, NY 10018
MR, WAYNE BURMASTER
(212) 695-1252
ESS & VEE
23-30 50TH AVENUE
LONG ISLAND CITY,NY 111010
MR. ANTHONY VERDERAME
(718) 786-1100
Jul 12, 1991
MILLWORK:
WOOD DOORS
CUSTOM INTERIORS
795 TRUMBULL STREET
ELIZABETH, NJ 07201
MR. SYMOUR COHEN
(908) 289-8885
(212) 558-6857
INTERNATIONAL WOODCRAFT & CONSTRUCTI
20-31 129th STREET
COLLEGE POINT, NY 11356
MR. FRANCO NAPOLITATIO
(212) 461-5579 (BEEPER)
GLENDALE PRODUCTS COMPANY
8000 COOPER ANENUE
GLE14DALE, NY 11385
MR. VINCENZO ALCAMO
(718) 326-2700 OR 326-3424
MILLWRIGHT WOODWORK AND INSTALLERS,
991 PECONIC AVENUE
WEST BABYLON, NY 11704
MR. MARTIN SHERLOCK
(516) 587-2635
DRYWALL
NASTASI WHITE, INC.
129-09 26TH AVEN
FLUSHING, NY 11
MR. ANTHONY NAST
WELLCRAFT CONSTRUCTION
15 HARRISON AVE.
STATEN ISLAND NY 10302
MR. FRANK IACOBELLIS
ESS & VEE
23-30 50TH AVENUE
LONG ISLAND CITY, NY ill
MR. ANTHONY VERDERAME
CUSTOM INTERIORS
795 TRUMBULL STREE
ELIZABETH, NJ 072
MR. SYMOUR COHEN
(908) 289-8885
I II
Jul 12, 1991
SPRINKLERS:
TRIANGLE FIRE PROTECTION CORP,
75-17 COOPER AVENUE
GLENDALE, NY 11385
KRe GUENTER RGCHSTEINL;R
(718) 326-9120
RAEL SPRIMMER
601 MERRICK RDe
LYNBROOK NY, 111563
MR. DAVE ISRAEL
(516) 593-2000
PACE PLUMBING CORP,
41 BOX STREET
BROOKLYN, NY 11222
MR - HAROLD BLOOCK
(718) 389-6100
PAGE 7 OF 15
Jul 12, 1991
DOOR & MIRRORS:
(ELEVATOR LOBBY
AND TOILETS)
ACTIVE STORE FRONTS, I
55 DALE STREET
WEST BABYLONT NY 11704
MR, LOOUIS KREFSKY
(516) 454-6166
UNION PORT GLASS INCE
1003-1017 LIBERTY AVENUE
BROOKLYN, NY 11208-2899
MR. DEAN SHAPIRO
(718) 827-7410
ISLAND GLASS
350 UNIONDALE AVENUE
UNIONDALE, NY 11553
MR. VIC BOKOR
(516) 481-7575
PAGE 8 OF 15
ASSIGNMENT made as of May 31, 1996 between Empire Blue Cross Blue Shield
("Assignor"), a New York Not-For-Profit Health Service Corporation, having
an office at 622 Third Avenue, New York, New York 10017, and Merit
Behavioral Care Corporation ("Assignee"), a New Jersey corporation having
an office at One Maynard Drive Park Ridge, New Jersey 07656.
W I T N E S S E T H
WHEREAS, Assignor is the owner and holder of the tenant's leasehold estate
under that certain lease dated as of August 14, 1991 ("Lease") with respect
to a portion of the 6th floor and the entire 5th floor as more particularly
described in the Lease ("Demised Premises") in the building known as The
Kent Building, 666 Third Avenue, New York, New York 10017 ("Building")
between Cooke Properties Inc. as landlord and Assignor, as tenant; and
WHEREAS, Assignor desires to assign the Lease to Assignee, and Assignee
desires to assume the rights and obligations of Assignor under the Lease,
on the terms hereinafter set forth.
NOW, THERAFTER, for good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, Assignor and Assignee,
intending to be legally bound agree as follows:
1. Assignor hereby assigns, transfers, releases and sets over unto
Assignee, without recourse, all of the estate right, title and interest of
Assignor in, to and under the Lease
TO HAVE AND TO HOLD the same unto Assignee, its successors and assigns,
from and after the date hereof and for all the remainder of the term of the
Lease, subject to the rents, covenants, terms and conditions contained
therein. The foregoing assignment is expressly made without representation
or warranty (either express or implied) of any nature or kind, or recourse
against Assignor, unless expressly set forth herein.
1. Assignee hereby accepts the assignment of the Lease from Assignor and
hereby assumes the obligation to observe and perform all of the terms,
covenants and conditions of the Lease to be observed or performed by the
tenant thereunder from and after the date hereof, with the same force and
effect as if the Assignee had executed the Lease originally as the tenant
named therein.
2. Assignee hereby agrees to indemnify, defend and hold Assignor harmless
from and against any and all manner of obligations, suits, claims, actions,
damages, charges, liabilities, losses, costs or expenses (including,
without limitation, reasonable attorneys' fees and disbursements) which
Assignor may directly or indirectly sustain or which may arise in
connection with or by reason of Assignee's failure to observe, perform or
comply with any of the obligations of the tenant under the Lease.
3. Assignor hereby agrees to indemnify, defend and hold Assignee harmless
from and against any and all manner or obligations, suits, claims, actions,
damages, charges, liabilities, losses, costs or expenses (including,
without limitation, reasonable attorneys' fees and disbursements) which
Assignee may directly or indirectly sustain or which may arise in
connection with or by reason of Assignor's failure to observe, perform or
comply with any of the obligations of the tenant under the Lease relating
to the period of time prior to the date hereof.
4. Assignor warrants and represents that (a) the Lease has not been
modified or amended; (b) the Lease is in full force and effect in
accordance with its terms, Assignor is not in default thereunder and no
event has occurred or failed to occur which, with the giving of notice or
the passenger of time or both, would constitute a default by Assignor
thereunder; and (c) Assignor owns the Lease free and clear of any liens or
encumbrances and has the power and authority to assign same to Assignee in
accordance with this assignment.
5. Except as may be expressly herein provided, this assignment shall not
create any rights in any third parties against Assignor or Assignee not
otherwise heretofore in existence.
6. This assignment may not be amended or modified except by an instrument
in writing executed by the parties hereto.
7. This assignment shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, successors and assigns.
IN WTINESS WHEREOF, Assignor and Assignee have have executed this
assignment as of the day and year frist written above.
EMPIRE BLUE CROSS BLUE SHIELD
By: /s/ Michael L. Kent
------------------------------
Name: Michael L. Kent
Title: Senior Vice President
MERIT BEHAVIORAL CARE CORPORATION
By: /s/ Louis T. Haggis
------------------------------
Name: Louis T. Haggis
Title: Vice President
FIRST SUPPLEMENTAL AGREEMENT
FIRST SUPPLEMENTAL AGREEMENT ("Agreement") made as of May 31, 1996 between
CHRYSLER PROPERTIES INC, formerly known as Cooke Properties Inc, a
California corporation having an office at 405 Lexington Avenue, New York
New York 10174 ("Landlord") and MERIT BEHAVIORAL CARE CORPORATION, a
Delaware Corporation having an office at One Maynard Drive Park Ridge, New
Jersey 07656 ("Tenant").
W I T N E S S E T H
WHEREAS:
A. Landlord and Tenant's predecessor-in-interest, Empire Blue
Cross Blue Shield ("Empire"), heretofore entered into a certain lease dated as
of August 14, 1991 ("Lease") with respect to a portion of the 6th floor and the
entire 5th floor as more particularly described in the Lease ("Demised
Premises") in the building known as The Kent Building, 666 Third Avenue, New
York, New York 10017 ("Building"); and
B. By an assignment and assumption of lease of even date
herewith ("Assignment"), Empire assigned all of its right, title and interest in
and to the Lease to Tenant, and Tenant assumed the performance and observance of
all of the obligations on the tenant's part to be performed and observed under
the Lease for the period from and after the effective date of the Assignment;
and
C. The parties hereto desire to modify the Lease to provide for,
among other things, (i) an extension of the term of Lease, (ii) a change in the
rent payable under the Lease, and (iii) an addition to the Demised Premises, all
on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual
covenants hereinafter contained, the parties hereto agree as follows:
1. All terms contained in this Agreement, unless otherwise
defined herein, shall, for the purposes hereof, have the same meaning ascribed
to them in the Lease.
2. All of the terms, covenants and provisions of this Agreement
shall be effective June 1, 1996 ("Effective Date").
3. The Expiration Date of the Lease shall mean March 31,
2008.
4. Section 1.2 of the Lease is hereby modified to provide that
the Demised Premises shall include the following additional space in the
Building:
The portion of the 6th floor containing approximately twenty two
thousand six hundred eighty (22,680) square feet, substantially
as shown hatched on the floor plan annexed hereto as Exhibit "A"
("First Added Space").
Tenant acknowledges that Tenant has examined the First Added
Space and accepts the First Added Space "as is", in the condition and state of
repair existing on the date hereof subject to normal wear and tear. Tenant
acknowledges that no work is to be performed, or materials supplied by Landlord
in connection therewith, except for (i) the "Tenant's Construction Work" as
hereinafter defined) and (ii) that Landlord shall provide to Tenant an ACP-5
form for filing with respect to the Tenant's Construction Work to the First
Added Space.
5. Section 1.4(a) of the Lease is hereby modified to provide
that the annual fixed rent payable pursuant to the Lease shall be as follows:
a) for the period June 1, 1996 through August 31,
1997, two million nine thousand nine hundred forty
dollars and no cents ($2,009,940.00) per annum;
b) for the period September 1, 1997 through October
31, 2002, one million eight hundred twenty four
thousand dollars and no cents ($1,824,000.00) per
annum; and
c) for the period from November 1, 2002 through the
Expiration Date, two million sixteen thousand
dollars and no cents ($2,016,000.00) per annum.
6. Article 5 and Exhibit C of the Lease are hereby
modified to provide that:
a) the Operation Year pursuant to Section 5.1(b)
shall mean the calendar year 1997; and
b) "Tenants' Proportionate Share" as set forth in
subsection 5.1(c) and paragraph B. 3. in Exhibit C
shall mean .1401; and
c) the Real Estate Tax Base pursuant to Section
5.1(g) shall mean the Real Estate Taxes for the
calendar year 1997; and
d) the Base Year pursuant to paragraph B. 4 in
Exhibit C shall be the calendar year 1997.
7. The amount "$123,960.00" in Section 16.3(a) and in Section
16.4 for the Electric Charge are changed to $160,000.00, and the date of August
1, 1991 in Section 16.3 shall be changed to June 1, 1996.
8. Section 5.7 of the Lease is hereby deleted and the
following new Section 5.7 shall be substituted:
"5.7. Payments shall be made pursuant to this Article 5
notwithstanding the fact that an Escalation Statement is
furnished to Tenant after the expiration of the term of this
Lease. Any Escalation Statement furnished by Landlord to Tenant
pursuant to this Article 5 shall be conclusively binding upon
Tenant unless within sixty (60) days after such Statement is
sent, Tenant shall send a written notice to Landlord objecting
to such Statement and specifying the respects in which such
Statement is disputed. Notwithstanding the foregoing, pending
the resolution of any such dispute, Tenant shall pay to Landlord
when due the amount of any such Escalation Statement, as
provided in Article 5 hereof."
9. Article 10 of the Lease is hereby modified by adding
the following new Section 10.4:
"10.4. Supplementing the provisions of Section 10.1,
Tenant, at Tenant's expense, shall be responsible for ensuring
that both the structure and layout of the Demised Premises, as
well as Tenant's activities within the Demised Premises, are and
continue to be in compliance with the Americans with
Disabilities Act of 1990 and local law #58, as well as all rules
and regulations promulgated pursuant to either the Act or local
law #58, or both."
10. Provided that Tenant shall not then be in default of any of
the terms and conditions of the Lease, Tenant shall receive a rental credit of
(i) $154,161.67 per month for the months of June, July, August, September and
October of 1996; (ii) a rental credit of $49,140.00 per month for the period
from November 1, 1996 through May 31, 1997; (iii) a rental credit of $49,140.00
per month for the months of December of 1997, January and February of 1998; (iv)
a rental credit of $154,666.67 per month for the months of November and December
of 2002 and January, February and March of 2003; and (v) a rental credit of
$54,810.00 per month for the months of April, May, June, July, August, September
and October of 2003.
Tenant acknowledges that Landlord's agreement to
provide to Tenant the rent credit provided in this paragraph 10 has been granted
to Tenant as a material part of the consideration for Tenant's entering into
this Agreement, timely paying the rentals reserved in the Lease and otherwise
timely performing and observing the terms and conditions to be performed and
observed by Tenant under the Lease. Accordingly, if after having received the
benefit of all or any part of this rent credit, Tenant shall default in
performing and observing the terms and conditions to be performed and observed
by Tenant under the Lease, Landlord may, in addition to any other remedies
Landlord may have under this Lease, at its option, elect that Tenant shall
immediately become obligated to pay to Landlord all rent theretofore credited to
Tenant pursuant to this paragraph 10. In addition, if this Lease shall be
terminated pursuant to the provisions of Article 25 or Article 26, all rent
credited to Tenant pursuant to this paragraph 10 and including the date of
termination, shall, at Landlord's option, be deemed immediately due and payable.
11. Tenant acknowledges that Landlord has entered into an
agreement with McBride Corporate Real Estate ("McBride"), one of the brokers
identified in paragraph 17 of this Agreement, which provides, among other
things, that at the request of Landlord and McBride, one or more installments of
the brokerage commission payable by Landlord to McBride shall be paid by Tenant,
in consideration of which Tenant shall receive a rent credit in the amount of
the payment made by Tenant to McBride on Landlord's behalf. Tenant agrees that
if Landlord and McBride shall so request payment by Tenant of commissions
payable by Landlord to McBride, Tenant shall make the requested payment and upon
such payment shall be entitled to an unconditional and automatic rent credit
equal to the amount of such payment, such credit to be provided to Tenant with
respect to the rent installment payable for the month in which the payment by
Tenant to McBride shall have been made.
12. Landlord agrees that it shall cause the improvements to the
First Added Space to be constructed in accordance with detailed plans and
specifications (walls, doors, ceiling, lighting, paint, carpet, HVAC,
electrical, millwork, class E devices, etc., but excluding furniture,
furnishings, office equipment, telephone equipment, etc.) prepared by and at the
expense of Tenant in accordance with Article 13 of the Lease (the construction
of such improvements herein, the "Tenant's Construction Work"); provided,
however, that Landlord shall not be obligated to fund any part of the cost of
the Tenant's Construction Work in excess of nine hundred thousand dollars and no
cents ($900,000.00)("Tenant Improvement Allowance"). Tenant shall submit
complete, detailed architectural and mechanical drawings to Landlord within
thirty (30) days of the execution of this Agreement for Landlord's review and
comment as provided in Section 13.1. Tenant's architect shall be subject to
Landlord's reasonable approval. Upon Landlord's approval of the detailed plans
and specifications, Landlord shall seek competitive bids on the Tenant's
Construction Work from reputable, responsible general contractors who shall
comply with the requirements of the Lease, including the provisions of Section
13.3. Within five (5) days after receipt of the bids, Landlord and Tenant shall
select for the performance of Tenant's Construction Work, the single qualified
contractor which shall have submitted the lowest bid ("Bid"). If the total cost
of the Tenant's Construction Work, based upon the accepted Bid exceeds the
amount of the Tenant Improvement Allowance, then in such event, Tenant shall,
within five (5) days of receipt of the bid, either pay the amount of the overage
to Landlord ("Tenant Improvement Payment"), or revise the scope of the Tenant's
Construction Work to achieve a cost less than the Tenant Improvement Allowance
by revising the detailed plans and specifications so that Landlord may seek
revised pricing from the acceptable contractor, which will be presented once
more to Tenant for Tenant's reasonable acceptance of price. Notwithstanding that
the amount of the Bid may be less than the amount of the Tenant Improvement
Allowance, the Tenant Improvement Allowance shall remain at the amount of nine
hundred thousand dollars and no cents ($900,000.00). The difference between the
amount of the Bid and the Tenant Improvement Allowance shall be deemed to be a
fund which shall be the first sums used to pay for any additional Tenant
Improvements requested by Tenant.
Upon final acceptance of the Bid either at a price which does
not exceed the Tenant Improvement Allowance, or upon revision of the scope of
work or the payment of the Tenant Improvement Payment, as appropriate, Landlord
will enter in to a contract or contracts with the contractor or contractors
awarded the Tenant's Construction Work. Thereafter, work will commence under the
direction of Landlord and Tenant's architect. Tenant agrees to cooperate with
Landlord in causing the Tenant's Construction Work to be completed
expeditiously.
Landlord and Tenant recognize that during the course of
construction of the Tenant's Construction Work, Tenant may desire to amend or
revise the plans and specifications and scope of the work. If such amendments or
revisions cause an increase in the project cost in excess of the Tenant
Improvement Allowance (as same may have been supplemented by the Tenant
Improvement Payment), then the increase shall be payable by Tenant to Landlord
upon Tenant's request to Landlord to issue a change order to the contractor for
the revised scope of work. Landlord shall not be obligated to issue a change
order until the payment for the cost thereof is received by Landlord.
Upon the completion of Tenant's Construction Work, in the event
the cost is less than the Tenant Improvement Allowance, Landlord will credit the
difference to Tenant in the form of a rent credit, in a monthly amount not
exceeding the monthly rent due hereunder, until the difference between the
actual cost of the Tenant's Construction Work and the Tenant Improvement
Allowance is met, once all invoices have been submitted to Landlord and paid and
Landlord has been provided general releases and waivers of lien from all
contractors, subcontractors and materialmen involved in the performance of
Tenant's Construction Work and the materials furnished in connection therewith,
and a certificate from Tenant's architect certifying that (i) in his or her
opinion, Tenant's Construction Work has been completed in a good and workmanlike
manner and completed in accordance with the final detailed plans and
specifications as approved by Landlord, and (ii) all contractors, subcontractors
and materialmen have been paid in full.
13. Landlord agrees that upon execution of this Agreement,
Landlord shall request the holder of the existing superior mortgage, to enter in
to a non-disturbance and attornment agreement with Tenant, which agreement shall
be substantially in the form of the agreement annexed in the Lease as Schedule
1, ("Non-Disturbance Agreement"). If after sixty (60) days from the Landlord's
request for a Non-Disturbance Agreement, such agreement is not obtained, then
Landlord shall have no liability to Tenant for its failure to obtain such
Non-Disturbance Agreement and Tenant's obligations under this Lease shall not be
affected by reason of such failure to obtain such Non-Disturbance Agreement.
14. Section 13.2 and all references to "Tenant's Initial
Alterations", Articles 42, 43 and 44 and Schedule 2 shall be deleted in their
entirety from the Lease. In addition, Exhibit B thereto is supplemented by
adding thereto Exhibit A to this Agreement.
15. Simultaneously with the execution of this Agreement, Tenant
shall pay to Landlord as additional rent, nine hundred thousand dollars and no
cents ($900,000.00).
16. If, on both the "Exercise Date" (hereinafter defined) and on
the "Early Termination Date" (hereinafter defined), the Lease shall be in full
force and effect and Tenant is not in violation of any covenant, agreement,
term, provision or condition of this Lease on Tenant's part to be performed and
observed following required notice, if any, and the expiration of any applicable
cure period, then Tenant shall have the option to terminate this Lease effective
as of October 31, 2002 ("Early Termination Date"), provided that Tenant has
given Landlord written notice of its election to so terminate the Lease prior to
October 31, 2001 (the date such notice is given being the "Exercise Date"). If
Tenant elects to terminate the Lease, then the Early Termination Date shall have
the same meaning as the Expiration Date of the Lease and Tenant shall continue
to pay, and will owe, all fixed rent and additional rent, and will continue to
perform and observe all of the covenants, agreements, terms, provisions and
conditions of this Lease on Tenant's part to be performed and observed up to and
including the Early Termination Date.
17. Tenant covenants, represents and warrants that Tenant has
had no dealings or negotiations with any broker or agent other than Cushman &
Wakefield, Inc and McBride Corporate Real Estate, in connection with the
consummation of this Agreement and Tenant covenants and agrees to pay, hold
harmless and indemnify Landlord and Cushman & Wakefield, Inc, from and against
any and all cost, expense (including reasonable attorneys' fees) or liability
for any compensation, commissions or charges claimed by any other broker or
agent other than Cushman & Wakefield, Inc and McBride Corporate Real Estate,
with respect to this Agreement or the negotiation thereof.
18. This Agreement may not be changed orally, but only by an
agreement in writing signed by the party against which enforcement of any
waiver, change, modification or discharge is sought.
19. Except as modified by this Agreement, the Lease and all
covenants, agreements, terms and conditions thereof shall remain in full force
and effect and are hereby in all respects ratified and confirmed.
20. The covenants, agreements, terms and conditions contained in
this Agreement shall bind and inure to the benefit of the parties hereto and
their respective successors and, except as otherwise provided in the Lease as
hereby supplemented, their respective assigns.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
LANDLORD:
CHRYSLER PROPERTIES INC
By: /s/ Michael R. Dillow
Michael R. Dillow, Vice President
TENANT:
MERIT BEHAVIORAL CARE CORPORATION
By: /s/ Arthur H. Halper
Arthur H. Halper, EVP & CFO
print name and title
<PAGE>
EXHIBIT A
Floor Plan
All areas, dimensions and conditions are approximate.
[Diagram -- Floor Plan]
SECOND SUPPLEMENTAL AGREEMENT
SECOND SUPPLEMENTAL AGREEMENT ("Agreement") made as of October
____ , 1996 between CHRYSLER PROPERTIES INC, a California corporation having an
office at 405 Lexington Avenue, New York New York 10174 ("Landlord") and MERIT
BEHAVIORAL CARE CORPORATION, a Delaware corporation having an office at One
Maynard Drive Park Ridge, New Jersey 07656 ("Tenant").
W I T N E S S E T H
WHEREAS:
A. Landlord and Tenant heretofore entered into a certain lease
dated as of August 14, 1991 and a First Supplemental Agreement dated May 31,
1996 ("Lease") with respect to the entire 5th floor and the entire 6th floor as
more particularly described in the Lease ("Demised Premises") in the building
known as The Kent Building, 666 Third Avenue, New York, New York 10017
("Building"); and
B. The parties hereto desire to modify the Lease to provide for,
among other things, an addition to the Demised Premises on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual
covenants hereinafter contained, the parties hereto agree as follows:
1. All terms contained in this Agreement, unless otherwise
defined herein, shall, for the purposes hereof, have the same meaning ascribed
to them in the Lease.
2. All of the terms, covenants and provisions of this Agreement
shall be effective October 1, 1996 ("Effective Date").
3. Section 1.2 of the Lease is hereby modified to provide that
the Demised Premises shall include the following additional space in the
building known as the Chrysler Building, 405 Lexington Avenue, New York, New
York 10174 ("Chrysler Building"):
A portion of the 47th floor containing approximately four
thousand four hundred (4,400) square feet, substantially as
shown hatched on the floor plan annexed hereto as Exhibit "A"
("Second Added Space").
Tenant acknowledges that Tenant has examined the Second Added
Space and accepts the Second Added Space "as is", in the condition and state of
repair existing on the date hereof subject to normal wear and tear. Tenant
acknowledges that no work is to be performed, or materials supplied by Landlord
in connection therewith, except for (i) the "Tenant's Second Construction Work"
as hereinafter defined) and (ii) that Landlord shall provide to Tenant an ACP-5
form for filing with respect to the Tenant's Construction Work to the Second
Added Space.
4. Section 1.4 (a) of the Lease is hereby modified to provide
that the annual fixed rent payable for the Second Added Space pursuant to the
Lease shall be as follows:
a) for the period October 1, 1996 through October 31,
2002, one hundred twenty five thousand four hundred
dollars and no cents ($125,400.00) per annum; and
b) for the period from November 1, 2002 through the
Expiration Date, one hundred thirty eight thousand
six hundred dollars and no cents ($138,600.00) per
annum.
5. Article 5 of the Lease is hereby modified to provide the
following with respect to the Second Added Space only:
a) Tenant's Proportionate Share as set forth in subsection
5.1 (c) shall mean .00469.
b) the following shall be added as subsection 5.1 (d); "Area of
the Premises" shall mean the rentable square foot area of the
Demised Premises (which the parties have agreed, for the
purposes of this Article 5 shall be 4,400 rentable squre feet).
c) the following shall be added as subsection 5.1 (h);
"Hourly Wage Rate" as respects any Operation Year shall mean
(A) as to porters, the minimum hourly wage rate prescribed to be
paid to porters appropriately by applicable labor agreements and
computed on an hourly basis, in major office buildings
(hereinafter called "Class A Office Buildings") and in effect as
of January 1 in such Operation Year (or if such rate shall be
subject to change during an Operation Year then the average
thereof for such Operation Year as reasonably estimated or
calculated by Landlord) pursuant to an agreement between the
Realty Advisory Board on Labor Relations, Incorporated (or any
successor thereto) and Local 32B of the Service Employees
International Union, AFL-CIO (or any successor thereto) covering
the wage rates of porters in Class A Office Buildings, and
(B) as to female cleaners, the minimum hourly wage prescribed to
be paid to female cleaners by applicable labor agreements and
computed on an hourly basis, in Class A Office Buildings and in
effect as of January 1 in such Operation Year (or if such rate
shall be subject to change during an Operation Year then the
average thereof for such Operation Year as reasonably estimated
or calculated by Landlord) pursuant to an agreement between said
Board (or any successor thereto) and Local 32J of said Union (or
any successor thereto) covering the wage rates of female cleaners
in Class A Office Buildings;
which said minimum hourly wage rates shall be computed on
the basis of the total weekly amount required to be paid to said
porters and female cleaners in the Building for regular work
weeks with respect to porters and with respect to female cleaners
(exclusive of any overtime or premium pay work in such regular
work weeks). Such total weekly amounts shall be exclusive of all
payments or benefits of every nature and kind (including those
required to be paid by the employer directly to the taxing
authorities or others on account of the employment) such as, but
without limiting the generality of the foregoing, social
security, unemployment and all other similar taxes, holiday and
vacation pay, incentive pay, accident, health and welfare
insurance programs, pension plans, guarantee pay plans and
supplemental unemployment benefit programs, and fringe benefits,
payments, plans or programs of a similar or dissimilar nature,
irrespective of whether they may be required or provided for in
any applicable law or regulation or otherwise. If there is no
such agreement in effect as of any such January 1 by which the
Hourly Wage Rate for porters or for female cleaners is
determinable, computations and payments shall thereupon be made
upon the basis of the Hourly Wage Rate being paid by Landlord or
by the contractor performing the cleaning services for Landlord
on such January 1 for said porters or female cleaners, as the
case may be, and appropriate retroactive adjustment shall
thereafter be made when the Hourly Wage Rate paid on such January
1 pursuant to such agreement for porters or for female cleaners
is finally determined and provided further that if as of the last
day of such Operation Year no such agreement covering the January
1 occurring in such Operation Year shall have been in effect, the
Hourly Wage Rate paid by Landlord or by the contractor performing
the cleaning services for Landlord on such January 1 for said
porters and female cleaners, as the case may be, shall be for all
purposes hereof deemed to be such Hourly Wage Rate prescribed by
such an agreement and in effect as of such January 1. As used
herein, the term "porters" shall mean that classification of
employee engaged in the general maintenance and operation of
office buildings most nearly comparable to that classification
now applicable to porters in the current agreement with said
Local 32B (which classification is presently termed "others" in
said agreement).
d) the following shall be added as subsection 5.1 (i);
"Labor Rate" for any Operation Year shall mean the sum of the
Hourly Wage Rate for the category of employees defined in the
contract above as "others".
e) the following shall be added as subsection 5.1
(j); "Base Labor Rate" shall mean the Labor Rate in effect
on December 31, 1997.
f) the following shall be added as subsection 5.1 (l);
"Ground Rent" shall mean any ground rent payable by Landlord
pursuant to any ground lease or ground leases or modification
thereof affecting the Land and/or the Chrysler Building.
g) the following shall be added as subsection 5.1
(m); "Ground Rent Base Year" shall mean the calendar year
1997.
5.2. If the Real Estate Taxes for any Tax Year shall be greater
than the Real Estate Tax Base, then Tenant shall pay to Landlord
as additional rent for such Tax Year, an amount equal to the
Tenant's Proportionate Share of such excess. Tenant hereby
acknowledges that Landlord is obligated to make a tax equivalent
payment or payments in lieu of Real Estate Taxes pursuant to an
existing ground lease affecting the Land and/or Chrysler Building
(or any modifications or amendments thereof) or new ground
lease(s). Tenant shall make payment of additional rent on account
of Real Estate Taxes pursuant to this Section 5.2,
notwithstanding the amount or amounts Landlord pays or is
obligated to pay pursuant to the aforesaid ground lease or ground
leases except that if the tax equivalent payment or payments in
lieu of Real Estate Taxes for any Tax Year shall exceed the Real
Estate Taxes for such Tax Year such payment or payments shall be
deemed to be Real Estate Taxes for the purpose of determining any
excess thereof over the Real Estate Tax Base pursuant to this
Section 5.2.
5.3. If the Labor Rate for any Operation Year shall be greater
(resulting in an excess) than the Base Labor Rate, then Tenant
shall pay to Landlord as additional rent for such Operation Year
an amount equal to the product obtained by multiplying (a) the
Area of the Premises, times (b) 1.0, times (c) the number of
cents (including any fraction of a cent) by which the Labor Rate
for such Operation Year exceeds the Base Labor Rate.
5.12. If the Ground Rent for any calendar year in which occurs
any part of the term of this Lease shall be more than the Ground
Rent for the Ground Rent Base Year, Tenant shall pay as
additional rent for such calendar year an amount equal to
Tenant's Proportionate Share of the amount by which the Ground
Rent for such calendar year is greater than the Ground Rent for
the Ground Rent Base Year (such amount is hereinafter called the
"Ground Rent Payment"). The Ground Rent Payment shall be payable
by Tenant to Landlord within ten (10) days after receipt of a
demand from Landlord therefor, which demand shall be accompanied
by a statement showing Landlord's computation of the Ground Rent
Payment."
6. The amount in Section 16.3(a) and in Section 16.4 for the
Electric Charge shall be $11,000.00 per annum for the Second Added Space.
7. Provided that Tenant shall not then be in default of any of the terms
and conditions of the Lease, Tenant shall receive a rental credit of (i)
$9,533.33 per month for the period October 1, 1996 through September 30, 1997;
(ii) a rental credit of $9,533.33 per month for the months of December of 1997,
January and February of 1998; and (iii) a rental credit of $10,633.33 per month
for the months of November and December of 2002 and for the period of January 1,
2003 thru October 31, 2003.
Tenant acknowledges that Landlord's agreement to provide to
Tenant the rent credit provided in this paragraph 7 has been granted to Tenant
as a material part of the consideration for Tenant's entering into this
Agreement, timely paying the rentals reserved in the Lease and otherwise timely
performing and observing the terms and conditions to be performed and observed
by Tenant under the Lease. Accordingly, if after having received the benefit of
all or any part of this rent credit, Tenant shall default in performing and
observing the terms and conditions to be performed and observed by Tenant under
the Lease, Landlord may, in addition to any other remedies Landlord may have
under this Lease, at its option, elect that Tenant shall immediately become
obligated to pay to Landlord all rent theretofore credited to Tenant pursuant to
this paragraph 7. In addition, if this Lease shall be terminated pursuant to the
provisions of Article 25 or Article 26, all rent credited to Tenant pursuant to
this paragraph 7 and including the date of termination, shall, at Landlord's
option, be deemed immediately due and payable.
8. Tenant acknowledges that Landlord has entered into an agreement with
McBride Corporate Real Estate ("McBride"), one of the brokers identified in
paragraph 17 of this Agreement, which provides, among other things, that at the
request of Landlord and McBride, one or more installments of the brokerage
commission payable by Landlord to McBride shall be paid by Tenant, in
consideration of which Tenant shall receive a rent credit in the amount of the
payment made by Tenant to McBride on Landlord's behalf. Tenant agrees that if
Landlord and McBride shall so request payment by Tenant of commissions payable
by Landlord to McBride, Tenant shall make the requested payment and upon such
payment shall be entitled to an unconditional and automatic rent credit equal to
the amount of such payment, such credit to be provided to Tenant with respect to
the rent installment payable for the month in which the payment by Tenant to
McBride shall have been made.
9. Landlord agrees that it shall cause the improvements to the Second
Added Space to be constructed in accordance with detailed plans and
specifications (walls, doors, ceiling, lighting, paint, carpet, HVAC,
electrical, millwork, class E devices, etc., but excluding furniture,
furnishings, office equipment, telephone equipment, etc.) prepared by and at the
expense of Tenant in accordance with Article 13 of the Lease (the construction
of such improvements herein, the "Tenant's Second Construction Work"); provided,
however, that Landlord shall not be obligated to fund any part of the cost of
the Tenant's Second Construction Work in excess of two hundred thousand dollars
and no cents ($200,000.00)("Tenant Improvement Allowance Two"). Tenant shall
submit complete, detailed architectural and mechanical drawings to Landlord
within thirty (30) days of the execution of this Agreement for Landlord's review
and comment as provided in Section 13.1. Tenant's architect shall be subject to
Landlord's reasonable approval. Upon Landlord's approval of the detailed plans
and specifications, Landlord shall seek competitive bids on the Tenant's Second
Construction Work from reputable, responsible general contractors who shall
comply with the requirements of the Lease, including the provisions of Section
13.3. Within five (5) days after receipt of the bids, Landlord and Tenant shall
select for the performance of Tenant's Second Construction Work, the single
qualified contractor which shall have submitted the lowest bid ("Bid"). If the
total cost of the Tenant's Second Construction Work, based upon the accepted Bid
exceeds the amount of the Tenant Improvement Allowance Two, then in such event,
Tenant shall, within five (5) days of receipt of the bid, either pay the amount
of the overage to Landlord ("Tenant Improvement Payment Two"), or revise the
scope of the Tenant's Second Construction Work to achieve a cost less than the
Tenant Improvement Allowance Two by revising the detailed plans and
specifications so that Landlord may seek revised pricing from the acceptable
contractor, which will be presented once more to Tenant for Tenant's reasonable
acceptance of price. Notwithstanding that the amount of the Bid may be less than
the amount of the Tenant Improvement Allowance Two, the Tenant Improvement
Allowance Two shall remain at the amount of two hundred thousand dollars and no
cents ($200,000.00). The difference between the amount of the Bid and the Tenant
Improvement Allowance Two shall be deemed to be a fund which shall be the first
sums used to pay for any additional Tenant Improvements requested by Tenant.
Upon final acceptance of the Bid either at a price which does not exceed
the Tenant Improvement Allowance Two, or upon revision of the scope of work or
the payment of the Tenant Improvement Payment Two, as appropriate, Landlord will
enter in to a contract or contracts with the contractor or contractors awarded
the Tenant's Second Construction Work. Thereafter, work will commence under the
direction of Landlord and Tenant's architect. Tenant agrees to cooperate with
Landlord in causing the Tenant's Second Construction Work to be completed
expeditiously.
Landlord and Tenant recognize that during the course of construction of
the Tenant's Second Construction Work, Tenant may desire to amend or revise the
plans and specifications and scope of the work. If such amendments or revisions
cause an increase in the project cost in excess of the Tenant Improvement
Allowance Two (as same may have been supplemented by the Tenant Improvement
Payment Two), then the increase shall be payable by Tenant to Landlord upon
Tenant's request to Landlord to issue a change order to the contractor for the
revised scope of work. Landlord shall not be obligated to issue a change order
until the payment for the cost thereof is received by Landlord.
Upon the completion of Tenant's Second Construction Work, in the event
the cost is less than the Tenant Improvement Allowance Two, Landlord will credit
the difference to Tenant in the form of a rent credit, in a monthly amount not
exceeding the monthly rent due hereunder, until the difference between the
actual cost of the Tenant's Second Construction Work and the Tenant Improvement
Allowance Two is met, once all invoices have been submitted to Landlord and paid
and Landlord has been provided general releases and waivers of lien from all
contractors, subcontractors and materialmen involved in the performance of
Tenant's Second Construction Work and the materials furnished in connection
therewith, and a certificate from Tenant's architect certifying that (i) in his
or her opinion, Tenant's Second Construction Work has been completed in a good
and workmanlike manner and completed in accordance with the final detailed plans
and specifications as approved by Landlord, and (ii) all contractors,
subcontractors and materialmen have been paid in full.
10. Simultaneously with the execution of this Agreement, Tenant shall
pay to Landlord as additional rent, two hundred thousand dollars and no cents
($200,000.00).
11. Tenant covenants, represents and warrants that Tenant has had no
dealings or negotiations with any broker or agent other than Cushman &
Wakefield, Inc and McBride Corporate Real Estate, in connection with the
consummation of this Agreement and Tenant covenants and agrees to pay, hold
harmless and indemnify Landlord and Cushman & Wakefield, Inc, from and against
any and all cost, expense (including reasonable attorneys' fees) or liability
for any compensation, commissions or charges claimed by any other broker or
agent other than Cushman & Wakefield, Inc and McBride Corporate Real Estate,
with respect to this Agreement or the negotiation thereof.
12. This Agreement may not be changed orally, but only by an agreement
in writing signed by the party against which enforcement of any waiver, change,
modification or discharge is sought.
13. Except as modified by this Agreement, the Lease and all covenants,
agreements, terms and conditions thereof shall remain in full force and effect
and are hereby in all respects ratified and confirmed.
14. The covenants, agreements, terms and conditions contained in
this Agreement shall bind and inure to the benefit of the parties hereto and
their respective successors and, except as otherwise provided in the Lease as
hereby supplemented, their respective assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
LANDLORD:
CHRYSLER PROPERTIES INC
By: /s/ Michael R. Dillow
Michael R. Dillow, Vice President
TENANT:
MERIT BEHAVIORAL CARE CORPORATION
By: /s/ Louis T. Haggis
Louis T. Haggis, Vice President - Treasury Operations
<PAGE>
EXHIBIT A
Floor Plan
All areas, dimensions and conditions are approximate
[Diagram- Floor Plan]
FIRST AMENDMENT TO LEASE AGREEMENT
THIS FIRST AMENDMENT TO LEASE AGREEMENT, made as of the lst day of July,
1996, by and between SARTAK HOLDINGS, INC., a New Jersey corporation,
successor in interest to National Utility Service, Inc., "Lessor" and MERIT
BEHAVIORAL CARE CORP., a Delaware corporation, successor in interest to
Medco Behavioral Care Corporation, "Lessee". W I T N E S S E T H: WHEREAS,
Lessors predecessor in interest, National Utility Service, Inc. and Lessees
predecessor in interest Medco Behavioral Care Corporation entered into a
Lease dated as of November 30, 1993 (the "Lease") for certain Premises
described in the Lease; and WHEREAS, the Commencement Date of the Lease is
January 31, 1994 and the termination of the initial term is January 31,
2004; and
WHEREAS, Lessee exercised its right to lease the Expansion Space as defined
in the Lease and consisting of 5,119 rentable square feet; and
WHEREAS, Lessee has requested that Lessor lease to it additional office
area in the Building; and WHEREAS, Lessor and Lessee wish to amend the
Lease as hereinafter provided. NOW, THEREFORE, in consideration of the
mutual covenants herein made and other good and valuable consideration, the
parties hereto agree as follows: 1. All definitions and terms set forth in
the Lease shall have the same meaning herein except as specifically amended
or otherwise intended to have a different meaning. 2. (a) Lessor hereby
leases to Lessee and Lessee hereby leases the following space: 15,973
rentable square feet located on the second floor, north wing of the
Building (the "Additional
<PAGE>
Premises") for the same purposes as set forth in Paragraph First of the
Lease. (b) Lessor at its cost and expense shall provide a "turn-key" fit up
of the Additional Premises with plans (the "AP Plans") mutually agreed upon
by Lessor and Lessee, provided that the fitup of the Additional Premises
shall be with improvements and finishes comparable to those provided by
Lessor in the Expansion Space (the "AP Fitup"), (c) Subject to Lessors
receipt of sealed construction documentation documents and Plans from
Lessee by July 15, 1996 Lessor will undertake the AP Fitup and use its best
efforts to complete such fitup on or about September 30, 1996. Lessor shall
give Lessee five (5) days prior written notice of the date it estimates the
AP Fitup will be substantially completed. 3. The term of the Lease shall be
extended for a period of ten (10) years commencing October 1, 1996 and to
end at 12:00 midnight September 30, 2006 (the "New Term"). 4. On the date
which is the later of (i) October 1, 1996 or (ii) the date upon which the
AP Fitup has been substantially completed as set forth in Lessor's notice
referred to in Paragraph 2 (c) above, (the "AP Commencement Date") ,
Lessee's rights in and to the lease and occupancy of the Expansion Space
shall terminate and Lessee shall vacate such space as of such date. 5. From
and after the date hereof to the AP Commencement Date the Basic Rent
payable by Lessee and all Additional Rent payable under the Lease shall be
the same as is due from Lessee as of the date hereof. Commencing on the AP
Commencement Date the Basic Rent for the Premises described in the Lease,
exclusive of the Expansion Space and constituting original 21,480 rentable
square feet leased to Lessee under the Lease (the "Initial Premises") plus
the Additional Premises shall be as follows, based upon the aggregate of
the Initial Premises and Additional Premises (collectively the "Combined
Premises") being 37,453 rentable square feet: October 1, 1996 to September
30, 1997 in the amount of $595,502.70 calculated at the rate of $15,90 per
rentable
<PAGE>
square foot payable in equal monthly installments of $49,625.23; October 11
1997 to January 31, 1999 in the amount of $969,283,63 calculated at the
rate of $19.41 per rentable square foot payable in equal monthly
installments of $60,580.23; February 1, 1999 to September 30, 2001, the
amount of $2,298,811.60 calculated at the rate of $23.01 per rentable
square foot payable in equal monthly installments of $71,816.13; and
October 1, 2001 to September 30, 2006 in the amount of $4,213,462.50
calculated at the rate of $22.50 per rentable square foot payable in equal
monthly installments of $70,224.375. In the event the AP Commencement Date
is other than the first day of the month, the Basic Rent for such month
shall be prorated, If the Additional Premises have been completed and
occupied by Lessee prior to October 1. 1996, the New Basic Rent shall
nevertheless become effective on October 1, 1996. 6. Lessee shall pay to
Lessor an amount not to exceed $50,000 against Lessors costs to retrofit
the Expansion space ("Retrofit Cost") to be vacated on the AP Commencement
Date. The term "retrofit" shall mean the removal of all improvements
presently located in the Expansion Space and the improvements undertaken by
Lessor to make such provision ready for a new tenant after the AP
Commencement Date, For the period commencing October 11 1997 through
September 30, 2001 (the "Repayment Period"), Lessee shall pay to Lessor as
Additional Rent the sum of $0.42 per rentable square foot of the Combined
Premises for each twelve (12) month period from October 1 through September
30, If the retrofit is completed prior to October 1, 1997 then the actual
cost thereof shall be utilized to determine the Retrofit Cost, which sum up
to $50,000 shall be amortized over the Repayment Period. In the event the
retrofit has not been completed by October 1, 1997 and Lessee has commenced
the payment at the start of the Payment Period, when the retrofit is
completed and if the costs of the retrofit is less than $50,000, then the
Retrofit Cost payable during
<PAGE>
the Payment Period shall be recalculated to equal the actual cost to Lessor
and any overpayments made by Lessee shall be credited against the
recalculated payments next due from Lessee. Lessor shall provide Lessee
with reasonable documentation supporting the Retrofit Cost and the
calculation of the payment for the Repayment Period upon completion of the
retrofit. 7. On and after the AP Commencement Date the term "Premises" and
"Demised Premises" whenever used in the Lease shall mean the combined
Premises defined herein. 8. On and after the AP Commencement Date, Lessees
proportionate share whenever that phrase is used, shall be 26,745% (with
respect to a rentable area of 37,453 square feet which the parties agree is
the proper square footage of the Combined Premises and that these shall be
no further measurement thereof). 9. Lessor and Lessee agree that the Base
Period defined in the Lease shall remain as 1994 and shall be the Base
Period utilized with respect to the Combined Premises. 10. Paragraph
Twenty-Fifth of the Lease is hereby deleted in its entirety. 11. Paragraph
Thirty-Fourth of the Lease is hereby amended, effective as of the AP
Commencement Date to provide that Lessee's occupancy of the Combined
Premises (as the 37,453 rentable square feet shall include 142 parking
spaces, of which 16 shall be reserved as set forth on Schedule I to the
Lease. 12. Lessor and Lessee hereby confirm the provisions of Paragraph
Thirty-Sixth of the Lease with respect to the Brokers instrumental in the
leasing of the Additional Premises and that Lessor shall pay the fees
therefor in accordance with the terms of a separate agreement. 13. The
first paragraph of Paragraph Fortieth of the Lease is hereby deleted in its
entirety. The second paragraph of Paragraph Fortieth is hereby amended to
provide that Lessee shall have the right to terminate the Lease, effective
as of the end of the New Term Fifth Lease year, that
<PAGE>
is September 30, 2001, upon not less than nine (9) months notice as thereon
provided; that the reference to the calculation of unamortized costs as to
the Initial Premises shall remain as thereon set forth, but that there
shall be added to such calculation the Lessor's unamortized cost of the
improvements to the Additional Premises as provided in this First
Amendment. The aggregate cost of the foregoing unamortized costs shall
constitute the payment for the Early Termination Right. All references
therein to the Expansion Space is hereby deleted. 14. Paragraph
Forty-Fourth of the Lease is hereby amended in its entirety as follows:
"FORTY-FOURTH - EXPANSION OPTION.
So long as Lessee is not in default hereunder after the expiration of
any applicable grace period, Lessee shall have a right of first refusal to lease
the space adjacent to the Demised Premises currently occupied by Possehl Inc.,
subject to Possehl Inc. rights thereto pursuant to its lease (the "New Expansion
Space") upon the same terms and conditions offered in writing by any unrelated
third party to Lessor and which Lessor is willing to accept, provided: (i) not
less than three (3) years remain on the Lease term, including any extensions, if
Lessee shall have given notice effective to extend the term under Paragraph
FIFTY-FIFTH and (ii) the tenant fitup set forth in the unrelated third party
offer shall be proportionally reduced by the same percentage that the number of
months that have elapsed from the Commencement Date bears to the lease term.
Lessee shall have twelve (12) days from the date Lessor gives written notice to
Lessee of the amount of contiguous space proposed to be leased and the terms,
together with a copy of the written offer, within which to accept or reject
Lessor's offer to lease such contiguous space. If Lessee elects to lease such
contiguous space, then the terms and rent shall be at the rate offered by the
unrelated third party, except that the term for the New Expansion Space shall be
coterminous with the Term for the Premises. Tenant shall pay Additional Rent on
the New Expansion Premises in the same manner and utilizing the same Base Period
as utilized in connection with the Demised Premises, Lessee's Proportionate
Share for the New Expansion Space shall be determined by the percentage which
reflects the percentage the New Expansion Space bears to the total rentable
square footage of the Building. The rent commencement date for the Expansion
Space shall commence on the date Lessors Work has been substantially completed
as such term is defined in Paragraph THIRTY-NINTH. Except with respect to the
rent as set forth herein, upon the delivery of possession of the New Expansion
Space to Lessee by Lessor, the New Expansion Space shall be deemed to be a part
of the Demised Premises and subject to all the terms and conditions of this
Lease including the Lease Termination Date and Renewal Option, The right of
first refusal granted to Lessee pursuant to this Paragraph FORTYFOURTH shall not
be deemed to extend to any space in the Building contiguous to the New Expansion
Space."
<PAGE>
15. Except as specifically set forth in this First Amendment to Lease
and except for any inconsistencies between the Lease and this First Amendment in
which case the First Amendment shall prevail, the parties agree in all respects
that the terms and conditions of the Lease shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as
of the day and year first above written.
WITNESS: LESSOR:
SARTAK HOLDINGS, INC.
/s/ By:/s/ Sarkis Soultanian, President
WITNESS: LESSOR:
MERIT BEHAVIORAL CARE CORP.
/s/ By: /s/ Arthur H. Halper
Executive Vice President and
Chief Financial Officer
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
this 3rd day of September, 1996 by and between MERIT BEHAVIORAL CARE
CORPORATION, a Delaware corporation (the "Company"), and Terry R. Thompson, an
individual with an address at 327 Allison Way, Wyckoff, New Jersey 07481
("Employee").
WHEREAS, the Company desires to engage Employee to provide services
pursuant to the terms of this Agreement;
WHEREAS, Employee desires to provide such services to the Company pursuant
to this Agreement; and
WHEREAS, both parties hereto acknowledge that the services to be performed
by Employee under this Agreement shall require a high degree of diligence,
creativity and responsiveness appropriate to the Company's business
intentions;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained in this Agreement, the parties agree as follows:
SELECTED DEFINITIONS
1.1 Defined Terms. As used herein, the terms below shall have the following
meanings:
"Affiliate" shall mean a subsidiary of the Company and any
other business entity controlled by, controlling, or under common
control with, the Company from time to time.
"Board" shall mean the Board of Directors of the Company.
"Business" shall mean the business of the Company and it
subsidiaries, including, without limitation, the business of
providing and arranging for the provision of behavioral health
(including mental health and substance abuse) managed care
programs, behavioral health care delivery services, and employee
assistance programs.
<PAGE>
"CEO" shall mean the Chairman of the Board and Chief
Executive Officer of the Company.
"Common Stock" shall mean the common stock, par value $.01
per share, of the Company.
"Compensation Committee" shall have the meaning such term
is given in Section 4.1 hereof.
"Confidential Information" shall have the meaning such
term is given in Section 5.1 hereof.
"Consideration Date" shall have the meaning such term is
given in Section 2.1(b) hereof.
"Developments" shall have the meaning such term is given
in Section 5.2 hereof.
"Disability Termination Right" shall have the meaning such
term is given in Section 3.5 hereof.
"Employee Note" shall have the meaning such term is given
in Section 4.4 hereof.
"Employment Period" shall have the meaning such term is
given in Section 3.1 hereof.
"Initial Shares" shall have the meaning such term is given
in Section 4.4 hereof.
"1995 Option Plan" shall mean the 1995 Stock Purchase and
Option Plan for employees of Medco Behavioral Care Corporation
and Subsidiaries.
"Non-Competition Period" shall have the meaning such term
is given in Section 5.3 hereof.
"Option Agreement" shall have the meaning such term is
given in Section 4.3(a) hereof.
"Options" shall mean non-qualified options to purchase
newly issued shares of Common Stock.
<PAGE>
"Stockholder's Agreement" shall have the meaning such term
is given in Section 4.4 hereof.
"Subsequent Shares" shall have the meaning such term is
given in Section 4.4 hereof.
"Termination for Cause" shall have the meaning such term
is given in Section 3.2 hereof.
"Termination for Good Reason" shall have the meaning such
term is given in Section 3.4 hereof.
"Territory" means the United States of America, its
territories and possessions (including Puerto Rico).
"Total Base Compensation" shall have the meaning such term
is given in Section 4.1 hereof.
SECTION 2. EMPLOYMENT
2.1 Title; Duties. (a) The Company agrees to employ Employee as
Executive Vice President, Business Operations of the Company for the Employment
Period, and Employee hereby accepts such employment. In such position, Employee
shall report to Albert S. Waxman, Ph.D., Chairman of the Board and CEO;
provided, that if Dr. Waxman is no longer employed by the Company, Employee
shall report to the then current CEO. Employee shall be responsible for, among
other areas, the following operations: Information Systems, Network
Administration, Claims and Human Resources, as well as other areas assigned to
Employee by the CEO. Employee also shall perform such other duties with regard
to the Business as are generally performed by such an employee of a company, and
such other duties as may from time to time be reasonably requested by the CEO or
the Board.
(b) (i) The Company agrees that, not later than six (6) months
after the date of this Agreement (the "Consideration Date"), the Company shall
consider Employee for promotion to the position of President and Chief Operating
Officer of the Company. It is understood that any such promotion is entirely at
the discretion of the CEO and the Board, and that the Company shall not be
obligated to promote Employee to such position.
(ii) If the Company offers to promote Employee to such position on or
prior to the Consideration Date, and Employee accepts such promotion, then
Employee shall continue to report to the CEO. If Employee receives such offer
and accepts such promotion, Employee also shall perform such other duties with
regard to the Business as are generally performed by such an employee of a
company, and such other duties as may from time to time be reasonably requested
by the CEO or the Board. In the event the Company determines to offer to
<PAGE>
promote Employee to President and Chief Operating Officer of the Company as
described above, and Employee accepts such promotion, Employee shall be entitled
to receive the additional grant of Options described in Section 4.3(b) hereof.
(iii) In the event the Company does not offer to promote Employee to the
position of President and Chief Operating Officer of the Company on or
prior to the Consideration Date:
(A) Employee may elect to terminate this Agreement for
Good Reason under Section 3.4(d) hereof; provided, that Employee
must make such election in a written notice delivered to the
Company not later than sixty (60) days after the Consideration
Date; or
(B) If Employee does not deliver the notice described in
clause (A) above prior to such date, Employee shall continue in
his position as Executive Vice President, Business Operations of
the Company, subject to all terms and conditions of this
Agreement.
2.2 Performance of Duties. Employee agrees to devote his exclusive and
full professional time and attention to his duties as an employee of the Company
and to perform such duties in an efficient, trustworthy and businesslike manner.
In addition, Employee agrees that he will not render to others any service of
any kind or engage in any other business activity (including, without
limitation, any involvement in any business in which Employee has any
administrative or operating responsibility) which conflicts with the performance
of his duties under this Agreement (except as to any other activities which are
approved in writing by the Board or the CEO).
During the term of this Agreement, Employee agrees to devote his full
business time and efforts, and to otherwise use his best efforts, to manage the
operations of the Company and its subsidiaries, to maximize the Company's
results of operations and profits, to satisfy the directions of the Board and
the CEO, and to otherwise fulfill the agreements and covenants set forth in this
Agreement. Employee acknowledges that the failure to satisfy any covenant set
forth in this Agreement may cause the Company irreparable harm and shall have
denied the Company and the Affiliates of a substantial and valuable asset.
2.3 Directorship. At the next meeting of the Board, Employee shall
be elected a director of the Company.
SECTION 3. EMPLOYMENT PERIOD; TERMINATION OF EMPLOYMENT
3.1 Employment Period. Subject at all times to Section 3.3 hereof, this
Agreement and Employee's employment hereunder shall continue until
terminated by the earliest of (a) the Company's discharge of Employee and
termination of this Agreement pursuant to Sections 3.2,
<PAGE>
3.3 or 3.5 hereof; (b) Employee's death; or (c) Employee's termination of his
employment and this Agreement pursuant to Section 3.4 hereof. If Employee shall
continue in the employ of the Company beyond the termination of this Agreement,
such employment shall be deemed to continue on a month-to-month basis terminable
by either party on thirty (30) days prior written notice. The period during
which Employee is employed by the Company under this Agreement or otherwise is
referred to herein as the " Employment Period." In all events, the
post-termination provisions of Section 5 hereof shall survive termination of the
Employment Period and this Agreement.
3.2 Termination by the Company for "Cause." The Company shall have the
right to discharge Employee and terminate this Agreement, by written notice
provided to Employee not less than thirty (30) days prior to the intended date
of discharge and termination, for any or all of the following "causes" (a
"Termination for Cause"):
(a) a finding by the Board that Employee has harmed the Company or
any Affiliate through a dishonest, fraudulent, willful or
reckless act in the performance of his employment duties, or
refusal or failure to perform such duties, and such harm is not
remedied by Employee within twenty (20) days after notice to
Employee from the Company specifying such harm and demanding that
Employee remedy such problem;
(b) Employee's conviction of a crime; or
(c) Employee's willful disregard of the lawful policies or procedures
of the Company, or his failure to follow a lawful direction of
the Board or CEO, and such disregard or failure is not remedied
by Employee within twenty (20) days after notice to Employee from
the Company specifying such disregard or failure and demanding
that Employee remedy such problem.
3.3 Termination by the Company without "Cause." The Company shall have
the right to discharge Employee and terminate this Agreement, by written notice
provided to Employee not less than one hundred eighty (180) days prior to the
intended date of discharge and termination, without "cause" at any time during
the Employment Period, for any reason or for no reason.
3.4 Termination by Employee for "Good Reason." Employee may terminate
his employment with the Company and this Agreement, by written notice provided
to the Company not more than one hundred eighty (180) days prior to the intended
date of termination, for any or all of the following reasons (a "Termination for
Good Reason"):
(a) a material adverse change in the nature of Employee's job duties
without his consent;
<PAGE>
(b) a material reduction in the rate of Employee's Total Base Compensation;
(c) a material breach by the Company of the Stockholder's Agreement; or
(d) a determination by the Company not to offer to promote Employee to the
position of President and Chief Operating Officer on or prior to the
Consideration Date, as provided in Section 2.1(b) hereof.
3.5 Termination by the Company due to Disability of Employee. The
Company shall have the right to discharge Employee and terminate this Agreement,
by written notice provided to Employee not less than thirty (30) days prior to
the intended date of discharge and termination, upon the determination by the
Board in good faith and in its discretion that Employee is unable to engage in
activities required by his employment (or reasonable substitute employment) by
reason of any medically determined physical or mental impairment which can be
expected to result in death or which has lasted or can be expected to last for a
continuous period of not less than twelve (12) months (referred to herein as the
"Disability Termination Right").
3.6 Death. The Employment Period shall terminate forthwith upon the
death of Employee.
SECTION 4. COMPENSATION
4.1 Annual Salary. The Company shall pay to Employee during the
Employment Period base compensation at the rate of $350,000 per year ("Total
Base Compensation"), payable in equal installments pursuant to the Company's
customary payroll policies in force at the time of payment (but not less
frequently than monthly), less required payroll deductions. Employee shall be
entitled to annual increases of Total Base Compensation as may be determined
from time to time by the Board, or any compensation committee designated by the
Board from its members (the "Compensation Committee"), in either case in its
sole discretion.
4.2 Bonus. In addition to Total Base Compensation, Employee shall be
eligible for a bonus based upon Employee's Total Base Compensation with respect
to each calendar year or portion of a calendar year (other than the period from
the date hereof through September 30, 1996) during the Employment Period. Such
bonus shall be awarded pursuant to the existing bonus plan of the Company (a
copy of which has been provided to Employee prior to the date hereof) or a
successor plan applicable to executive officers of the Company adopted by the
Board or the Compensation Committee. For purposes of the existing bonus plan,
Employee's "Target Percentage" is thirty percent (30%); for any successor plan,
Employee's bonus percentage (subject to the applicable terms of the plan) also
shall be thirty percent (30%). Employee acknowledges and agrees that bonuses
under such existing plan (and any successor plan) are determined by the CEO, the
Board or the Compensation Committee, in his or its absolute discretion, based
upon the attainment of agreed financial targets and other factors, are not
<PAGE>
guaranteed for any calendar year or period or in any specified amount, and may
be less than or greater than Employee's "Target Percentage" or bonus percentage,
as applicable, of his Total Base Compensation.
4.3 Options. (a) Employee shall be granted Options to purchase 350,000
shares of Common Stock on the date of this Agreement. The exercise price for
such Options will be $5.00 per share. Such Options will be granted pursuant to,
and governed by, the 1995 Option Plan (a copy of which is attached hereto as
Exhibit A) and the Non-Qualified Stock Option Agreement to be entered into
between the Company and Employee on the date of this Agreement attached hereto
as Exhibit B (the "Option Agreement").
(b) In the event the Company determines to offer to promote
Employee to President and Chief Operating Officer, and Employee accepts that
promotion, as contemplated in Section 2.1(b) hereof, the Company shall grant to
Employee Options to purchase an additional 250,000 shares of Common Stock. The
exercise price for such additional Options will be established by the Board in
its reasonable judgment on or shortly after the Consideration Date. Such
Options, if granted, also will be granted pursuant to the 1995 Option Plan and a
stock option agreement having terms substantially similar to those contained in
the Option Agreement.
4.4 Purchase of Common Stock. On the date of this Agreement, the Company
and Employee will enter into the Stockholder's Agreement attached hereto as
Exhibit C (the "Stockholder's Agreement"), providing for the issuance and sale
by the Company to Employee, and the purchase by Employee from the Company, of
150,000 shares of Common Stock at the price of $5.00 per share. The purchase of
100,000 of such shares of Common Stock (the "Initial Shares") will take place on
the date of this Agreement. Employee will effect payment for the Initial Shares
by delivery to the Company of Employee's promissory note in favor of the
Company, attached hereto as Exhibit D, in the principal amount of $500,000 (the
"Employee Note") in accordance with the terms of the Stockholder's Agreement.
The payment of the principal amount of, and all accrued and unpaid interest
under, the Employee Note will be secured by the pledge by Employee of the
Initial Shares. Such pledge will be made by Employee pursuant to the Repayment
and Stock Pledge Agreement attached hereto as Exhibit E. Provided that he is
still employed by the Company, Employee will purchase the remaining 50,000
shares of Common Stock (the "Subsequent Shares") not later than December 31,
1996. As provided in the Stockholder's Agreement, Employee will effect payment
for the Subsequent Shares by delivery to the Company of $250,000 in cash.
4.5 Reimbursement of Expenses. During the term of this Agreement, the
Company will reimburse Employee for all ordinary and necessary business expenses
incurred by Employee in connection with the Business. Reimbursement of such
expenses shall be paid monthly, upon submission by Employee of vouchers
itemizing such expenses in a form satisfactory to the Company, properly
identifying the nature and business purpose of any expenditures.
<PAGE>
4.6 Benefits. During the term of this Agreement, the Company shall
provide Employee with such insurance, medical, sick leave, holiday and other
benefits as may be given from time to time to executive officers of the Company
as set forth from time to time by the Board and management of the Company.
Employee may take such vacation period or periods during each year as shall be
consistent, in the Company's judgment, with Employee's responsibilities and the
Company's vacation policies and practices for other executive officers of the
Company, but not less than four (4) weeks during any full calendar year of the
Employment Period.
4.7 Effect of Termination of Employment. (a) Termination by the Company
for "Cause," pursuant to the Disability Termination Right or upon Employee's
Death. In the event of termination of Employee's employment and this Agreement
by the Company pursuant to Sections 3.2, 3.5 or 3.6 hereof, Employee (or, if
applicable, his estate) shall be entitled to receive only payment of his earned
and unpaid compensation and benefits through the effective date of such
termination.
(b) Termination by the Company without "Cause" or by Employee for
"Good Reason." In the event of termination of Employee's employment and this
Agreement by the Company under Section 3.3 hereof or by Employee under Section
3.4 hereof, Employee shall be entitled to (i) continue to receive from the
Company Total Base Compensation in accordance with Section 4.1 hereof for a
period of twelve (12) months from the date of termination, (ii) require the
Company to continue Employee's insurance and medical benefits (or provide
substantially comparable benefits if Employee ceases to be eligible to
participate in the relevant insurance and medical benefit arrangements) for the
remainder of the term for which Total Base Compensation is required to be paid
pursuant to clause (i) above at the same rates as then in effect with respect to
current employees and (iii) subject to the terms of the Stockholder's Agreement,
exercise all Options granted in accordance with Section 4.3 hereof which are
vested as of the date of termination (subject to and in accordance with the
terms of the 1995 Option Plan and the Option Agreement). The shares of Common
Stock purchased by Employee as described in Section 4.4 hereof shall continue to
be governed by the provisions of the Stockholder's Agreement.
4.8 Release. The benefits to Employee described in Section 4.7(b) hereof
may, at the Company's option, be conditioned upon Employee's execution and
delivery of a general release of the Company and the Affiliates, and its and
their respective directors, officers, employees and agents, from any claims or
obligations arising out of this Agreement and the termination hereof, other than
the express obligations of the Company to make such payments and provide such
benefits, if any, as are described in Section 4.7(b) hereof and to pay to
Employee his earned and unpaid compensation and other benefits to the effective
date of termination. Employee acknowledges that the payments and benefits under
Section 4.7(b) hereof are in lieu of all such claims that Employee may have
against the Company and the Affiliates and are liquidated damages (and not a
penalty). Notwithstanding any termination hereunder, the Company shall have no
obligation to make such payments or continue such benefits under Section 4.7(b)
hereof,
<PAGE>
and the Options shall terminate immediately, in the event of a breach by
Employee of his covenants in Section 5 hereof.
SECTION 5. CONFIDENTIAL INFORMATION, DEVELOPMENTS,
NON-COMPETITION/NON-SOLICITATION AND RELATED MATTERS
5.1 Restrictions on Use and Disclosure. Employee will not disclose or
use at any time, for so long as Employee is employed by the Company or any
Affiliate and for a period of five years thereafter, any Confidential
Information (as defined below) of which Employee is or becomes aware, whether or
not such information is developed by him, except to the extent that such
disclosure or use is directly related to and required by Employee's performance
of duties, if any, assigned to Employee by the CEO or the Company, or such
Confidential Information becomes public other than through action of Employee or
is compelled by legal process. As used in this Agreement, the term "Confidential
Information" means information that is not generally known to the public and
that is used, developed or obtained by the Company or any Affiliate in
connection with its business, including, but not limited to: (i) products or
services, (ii) fees, costs and pricing structures, (iii) designs, (iv) computer
software, including operating systems, applications and program listings, (v)
flow charts, manuals and documentation, (vi) data bases, (vii) accounting and
business methods, (viii) inventions, devices, new developments, methods and
processes, whether patentable or unpatentable and whether or not reduced to
practice, (ix) customers, clients and providers, and customer, client and
provider lists, (x) other copyrightable works, (xi) all technology and trade
secrets, and (xii) all similar and related information in whatever form.
Confidential Information will not include any information that has been
published in a form generally available to the public prior to the date Employee
proposes to disclose or use such information. Employee will perform all actions
reasonably requested by the Company (whether during or after the Non-Competition
Period) to establish and confirm such ownership at the Company's expense
(including, without limitation, assignments, consents, powers of attorney and
other instruments).
5.2 Assignment of Developments. All Developments that are at any time
made, conceived or suggested by Employee, whether acting alone or in conjunction
with others, during or as a result of Employee's employment with the Company or
any Affiliate, shall be the sole and absolute property of the Company, free of
any reserved or other rights of any kind on Employee's part. During Employee's
employment and, if such Developments were made, conceived or suggested by
Employee during or as a result of Employee's employment with the Company or any
Affiliate, thereafter, Employee shall promptly make full disclosure of any such
Developments to the Company and, at the Company's cost and expense, do all acts
and things (including, among others, the execution and delivery under oath of
patent and copyright applications and instruments of assignment) deemed by the
Company to be necessary or desirable at any time in order to effect the full
assignment to the Company of Employee's right and title, if any, to such
Developments. For purposes of this Agreement, the term "Developments" shall mean
all data, discoveries, findings, reports, designs, inventions,
<PAGE>
improvements, methods, practices, techniques, developments, programs, concepts
and ideas, whether or not patentable, relating to the present or planned
activities, or future activities of which Employee is aware, or the products and
services of the Company or any Affiliate.
5.3 Restriction on Competitive Employment. Employee shall not (as an
individual, principal, agent, employee, consultant or otherwise), directly or
indirectly, during the period commencing on the date hereof and ending on the
first anniversary of termination of Employee's employment with the Company
(whether under this Agreement or otherwise) (the applicable period being the
"Non-Competition Period"), absent the Company's prior written approval, engage
in activities in the Territory for, on behalf of or relating to, or render
services to, or have any equity, ownership or profit participation interest in
(other than as a 5% or less holder of the equity securities of a public
company), any firm or business engaged or about to become engaged in (i) the
Business or (ii) any other business in which the Company or any subsidiary of
the Company was engaged during Employee's employment with the Company and as to
which Employee had involvement during such employment or obtained Confidential
Information.
5.4 Restriction on Solicitation. During Employee's employment with the
Company and until the end of the Non-Competition Period, Employee shall not,
directly or indirectly, (i) solicit or contact for business purposes any
existing customer, provider or patient, or prospective customer, provider or
patient, of the Company or any subsidiary of the Company, (ii) induce, or
attempt to induce, any employees, agents, consultants or providers of or to the
Company or any subsidiary of the Company to do anything from which Employee is
restricted by reason of Sections 5.1 through 5.4 hereof, (iii) interfere with
existing or proposed contracts, business agreements or other arrangements, or
knowingly interfere with future contracts, business agreements or other
arrangements, between the Company or any subsidiary of the Company and any
individual, firm or enterprise including, but not limited to, third party
payors, through disrupting or diverting or attempting to divert such contracts,
business agreements or other arrangements to any other individual, firm or
enterprise (including a competitor of the Company or any subsidiary of the
Company), or (iv) offer or aid others to offer employment to anyone who is an
employee, agent or consultant of or to the Company or any subsidiary of the
Company.
5.5 Equitable Relief. Employee acknowledges that a breach of the
covenants contained herein, including without limitation the covenants contained
in Sections 5.1 through 5.4 hereof, may cause irreparable damage to the Company
or one or more of its subsidiaries, the exact amount of which will be difficult
to ascertain, and that the remedies at law for any such breach will be
inadequate. Accordingly, Employee agrees that, in addition to any other remedy
which may be available at law or in equity, the Company and any such subsidiary
shall be entitled to specific performance and injunctive relief to prevent any
actual, intended or likely breach. The parties acknowledge that the time, scope,
geographic area and other provisions of Sections 5.1 through 5.4 hereof have
been specifically negotiated by sophisticated commercial parties and agree that
all such provisions are reasonable under the circumstances of the transactions
contemplated by this Agreement, including the compensation to Employee described
in Section 4 hereof. In the event that the agreements in Section 5.1 through 5.4
hereof or any
<PAGE>
other provision contained in this Agreement shall be determined by any court of
competent jurisdiction to be unenforceable by reason of their extending for too
great a period of time or over too great a geographical area or by reason of
their being too extensive in any other respect, such agreements or provisions
shall be interpreted to extend only over the maximum period of time for which
they may be enforceable and/or over the maximum geographical area as to which
they may be enforceable and/or to the maximum extent in all other respects as to
which they may be enforceable, all as determined by such court in such action so
as to be enforceable to the extent consistent with then applicable law. The
existence of any claim or cause of action which Employee may have against the
Company or any such subsidiary of the Company, as the case may be, shall not
constitute a defense or bar to the enforcement of any of the provisions of
Sections 5.1 through 5.4 hereof and shall be pursued through separate court
action by Employee.
5.6 Survival. Unless otherwise provided, the provisions of Sections 5.1
through 5.5 hereof shall survive the termination of this Agreement.
SECTION 6. INDEMNIFICATION
During the Employment Period, the Company shall provide Employee with
directors and officers indemnification as provided in the Company's articles of
incorporation and bylaws and directors and officers liability insurance coverage
as is generally afforded executive officers of the Company.
SECTION 7. MISCELLANEOUS PROVISIONS
7.1 Assignment and Successors. The rights and obligations of the Company
under this Agreement may be assigned, and shall inure to the benefit of and be
binding upon the successors and assigns of the Company. Employee's rights or
obligations hereunder may not be assigned to or assumed by any other person. No
other persons shall have any right, benefit or obligation hereunder.
7.2 Notices. Any notice, request, instruction or other document or
communication to be given hereunder shall be in writing and shall be deemed to
have been duly given (i) if mailed, at the time when mailed in any general or
branch office of the United States Postal Service, enclosed in a registered or
certified postage-paid envelope, (ii) if sent by facsimile transmission, when so
sent and receipt acknowledged by an appropriate telephone or facsimile receipt,
or (iii) if sent by other means, when actually received by the party to which
such notice has been directed, in each case at the respective addresses or
numbers set forth below or such other address or number as such party may have
fixed by notice:
<PAGE>
If to the Company:
Merit Behavioral Care Corporation
One Maynard Drive
Park Ridge, NJ 07656
Attn: Executive Vice President and General Counsel
Fax: (201) 573-1324
If to Employee:
Terry A. Thompson
327 Allison Way
Wyckoff, NJ 07481
With a copy to:
Cohn Lifland Pearlman Herrmann & Knopf
Park 80 Plaza West-One
Saddle Brook, NJ 07662
Attention: Albert L. Cohn, Esq.
Fax: (201) 845-9423
7.3 Severability. If any provision or portion of this Agreement shall be
or become illegal, invalid or unenforceable in whole or in part for any reason,
such provision shall be ineffective only to the extent of such illegality,
invalidity or unenforceability without invalidating the remainder of such
provision or the remaining provisions of this Agreement. Upon such determination
that any term or other provision is invalid, illegal or incapable of being
enforced, the parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner to the end that the agreements contemplated
hereby are fulfilled to the extent possible.
7.4 Amendment. This Agreement constitutes the entire agreement between
the parties hereto with respect to the subject matter hereof and may be
modified, amended or waived only by a written instrument signed by both parties
hereto.
7.5 Counterparts. This Agreement may be executed and delivered
(including by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original, but all of which taken
together shall constitute one and the same agreement.
7.6 Interpretation. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
<PAGE>
The language in all parts of this Agreement shall in all cases be construed
according to its fair meaning, and not strictly for or against any party hereto.
In this Agreement, unless the context otherwise requires, the masculine,
feminine and neuter genders and the singular and the plural include one another.
7.7 Non-Waiver of Rights and Breaches. No failure or delay of any party
hereto in the exercise of any right given to such party hereunder shall
constitute a waiver thereof unless the time specified herein for the exercise of
such right has expired, nor shall any single or partial exercise of any right
preclude other or further exercise thereof or of any other right. The waiver of
a party hereto of any default of any other party shall not be deemed to be a
waiver of any subsequent default or other default by such party, whether similar
or dissimilar in nature.
7.8 Governing Law; Consent to Jurisdiction. THIS AGREEMENT SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
JERSEY APPLICABLE TO CONTRACTS EXECUTED IN AND TO BE PERFORMED IN THAT STATE.
Each party hereby irrevocably (i) submits to the jurisdiction of any New Jersey
State or federal court sitting in the City of Newark, New Jersey, with respect
to matters arising out of or relating hereto; (ii) agrees that all claims with
respect to such action or proceeding may be heard and determined in such New
Jersey State or federal court; (iii) waives, to the fullest possible extent, the
defense of an inconvenient forum; (iv) consents to service of process upon it by
mailing or delivering such service, in the case of the Company, as specified in
Section 7.2 hereof or, in the case of Employee, to CT Corporation System as his
agent (the costs of which agent shall be borne by the Company), and Employee
authorizes and directs his agent to accept such service; and (v) agrees that a
final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law.
EXECUTION
The parties, intending to be legally bound, executed this Agreement as
of the date first above written, whereupon it became effective in accordance
with its terms.
MERIT BEHAVIORAL CARE CORPORATION
/s/Albert S.Waxman
Albert S. Waxman, Ph.D.
Chairman of the Board and
Chief Executive Officer
/s/Terry R. Thompson
Terry R. Thompson
<PAGE>
EXHIBITS
A. 1995 Option Plan (previously filed)
B. Non-Qualified Stock Option Agreement (previously filed)
C. Stockholder's Agreement (previously filed)
D. Employee Note
E. Repayment and Stock Pledge Agreement
<PAGE>
Exhibit D -- Employee Note
SECURED PROMISSORY NOTE
$500,000.00 Park Ridge, New Jersey
November 15, 1996
FOR VALUE RECEIVED, the undersigned hereby unconditionally promises to
pay to the order of Merit Behavioral Care Corporation (the "Company"), at its
office at One Maynard Drive, Park Ridge, New Jersey 07656 in lawful money of the
United States, FIVE HUNDRED THOUSAND DOLLARS ($500,000.00). The undersigned
promises to pay interest in like money at such office on the unpaid principal
amount hereof from time to time outstanding from the date hereof at the rate of
6.5% per annum. Interest shall be calculated annually on the basis of a 365 day
year and the number of actual days elapsed.
All accrued and unpaid interest hereunder shall be due and payable as of
the first day of each calendar year commencing January 1, 1997. Except as
otherwise provided herein or in the Repayment and Stock Pledge Agreement between
the Company and the undersigned dated the date hereof (the "Pledge"), the
principal amount hereof and any accrued and unpaid interest and all other
amounts owing hereunder shall be due and payable in full on December 31, 2000.
Notwithstanding the foregoing, the unpaid principal amount hereof, all
accrued and unpaid interest hereunder and all other amounts owing hereunder
shall be due and payable in full on the date which is two months after the date
of termination of the undersigned's employment with the Company or any of its
subsidiaries, provided, however, this paragraph shall have no force and effect
in the event the Company has not elected to repurchase the shares purchased by
the undersigned pursuant to this Note.
This Note is issued in connection with the purchase by the undersigned
of shares of Common Stock of the Company and the execution by the undersigned of
the Stockholder's Agreement (the "Stockholder's Agreement") and the pledge of
such Stock and other collateral (the "Pledged Securities") pursuant to the
Pledge.
The undersigned shall have the right to prepay this Note, in whole or in
part, at any time without notice and without penalty and, notwithstanding
anything to the contrary herein, this Note shall be prepaid, in whole or in part
and from time to time, from the proceeds from any sale, transfer or other
disposition of Pledged Securities. Any partial prepayments shall be applied
first to accrued and unpaid interest and then to principal.
Notwithstanding the existence of the Pledged Securities as security for
repayment of the Note, the undersigned remains personally liable to the Company
for any deficiency which the Pledged Securities do not cover.
<PAGE>
If an Event of Default (as defined in the Pledge) shall have occurred
and be continuing, then, at such time, the unpaid principal amount hereof, all
accrued and unpaid interest hereunder and all other amounts owing hereunder
shall be and become immediately due and payable without notice to the
undersigned.
The Company shall have all of the rights of a secured creditor under the
New York Commercial Code with respect to the Pledged Securities pledged as
security hereunder.
The undersigned promises to pay all costs and expenses, including
reasonable attorney's fees, incurred by the Company in collecting or attempting
to collect the indebtedness under this Note.
If any payment of principal or interest on this Note becomes due and
payable on a day other than a business day, such payment shall be made on the
next succeeding business day. As used herein, the term "business day" means any
day other than a Saturday, Sunday or other day on which banks in the City of New
York, New York are authorized by law to close.
Except as otherwise provided herein, presentment for payment, demand,
notice of dishonor, protest and notice of protest are hereby waived. All
notices, declarations and other communications hereunder shall be in writing,
hand delivered (including delivery by a courier service) as follows:
If to the Company
Merit Behavioral Care Corporation
One Maynard Drive
Park Ridge, New Jersey 07656
Attn: General Counsel
If to the undersigned:
Terry R. Thompson
327 Allison Way
Wyckoff, New Jersey 07481
or to such other address as the Company or the undersigned may deliver to the
other party from time to time in writing in like manner.
<PAGE>
This Note shall not be assigned by the undersigned without the prior
written consent of the Company. This Note may be assigned by the Company at any
time.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF NEW YORK.
/s/ Terry R. Thompson
------------------------------------
Terry R. Thompson
<PAGE>
Exhibit E -- Repayment and Stock Pledge Agreement
REPAYMENT AND STOCK PLEDGE AGREEMENT
THIS REPAYMENT AND STOCK PLEDGE AGREEMENT dated as of
November 15, 1996 is made and entered into by and between Merit Behavioral Care
Corporation (the "Company"), and Terry R. Thompson (the "Pledgor").
RECITALS
A. The Company has entered into a Stockholder's Agreement, dated
as of September 3, 1996 with the Pledgor (the "Stockholder's Agreement") whereby
the Company has agreed to issue and sell to Pledgor certain shares of Common
Stock of the Company, and has granted or may in the future grant to Pledgor
options to purchase Common Stock of the Company.
B. As the purchase price for 100,000 shares of the Purchase Stock
(as defined in the Stockholder's Agreement), the Pledgor is delivering to the
Company the promissory note of the Pledgor dated November 15, 1996 in the
principal amount of $500,000.00 (the "Note").
C. The Pledgor wishes to grant further security and assurance to
the Company in order to secure the payment of the Note and to that effect to
pledge to the Company the Stock (as defined in the Stockholder's Agreement) to
be acquired pursuant to the Stockholder's Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and for other
good and valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
i. Pledge.
(a) As security for the payment and performance of all
obligations of the Pledgor on the Note, including the payment of the
principal of and interest on the Note, and in order to secure the
Pledgor's obligations under the Stockholder's Agreement and this
Agreement, the Pledgor hereby delivers, pledges and assigns the Stock to
the Company and creates in the Company a security interest in the
Pledged Securities (as defined below).
(b) The Pledged Securities under this Agreement shall
consist of the Stock and all securities, certificates and instruments
representing or evidencing ownership of the Pledged Securities
hereunder, and all proceeds and products of any Pledged Securities
hereunder, including, without limitation, stock, cash, property or other
dividends, securities, rights and other property now or hereafter at any
time or from time
<PAGE>
to time received, receivable or otherwise distributed or distributable
in respect of or in exchange for any or all of such Pledged Securities
including proceeds delivered to the Pledgee pursuant to Section 2 and
any substituted or additional Pledged Securities required to be supplied
under the terms of this Agreement.
ii. Repayment. The Pledgor hereby agrees that at any time if the Pledgor
shall have received any cash payment or other distribution in respect of,
or upon transfer, sale or other disposition of, the Pledged Securities,
then and in each case until the Note is paid in full (including interest),
the Pledgor shall immediately deliver to the Company such amount in partial
or full payment of the principal and interest on the Note.
iii. Administration of Security. The following provisions shall govern the
administration of the Pledged Securities:
(a) So long as no Event of Default (as defined below) has occurred and is
continuing, the Pledgor shall be entitled to act with respect to the
Pledged Securities in any manner not inconsistent with this Agreement, the
Stockholder's Agreement, the Note, or any document or instrument delivered
or to be delivered pursuant to or in connection with the Stockholder's
Agreement.
(b) The Pledgor shall immediately upon request by the Company and in
confirmation of the security interests hereby created, execute and deliver
to the Company such further instruments, deeds, transfers, assurances and
agreements, in form and substance as the Company shall request, including
any financing statement and amendments thereto, or any other documents, as
required under New York law and other applicable law to protect the
security interests created hereunder.
iv. Defaults. The occurrence of any one or more of the following events or
conditions shall constitute an "Event of Default" under this Agreement:
(a) The Pledgor fails to make any principal or interest payment required
pursuant to the Note within 30 days of the due date therefor.
(b) The Pledgor makes or has made, or furnishes or has furnished, any
material written warranty, representation or statement to the Company in
connection with this Agreement or the Note which is or was false or
misleading when made or furnished.
(c) Any lien or encumbrance other than that created by this Agreement is
placed on or any levy is made on the Pledged Securities, or any portion
thereof; or the Pledged Securities, or any portion thereof, are seized or
attached pursuant to legal process, and such lien, encumbrance, levy,
seizure, or attachment is not removed or released within thirty (30) days
from the time such lien or encumbrance was placed thereon or such levy,
seizure or attachment was effected.
<PAGE>
(d) The Pledgor commences or proposes to commence any bankruptcy,
reorganization or insolvency proceeding, or other proceeding under any
federal, state or other law for the relief of debtors.
(e) The Pledgor fails to obtain dismissal, within sixty (60) days after
commencement thereof, of any bankruptcy, insolvency, or reorganization
proceeding or other proceeding for relief under any bankruptcy law,
including, without limitation, the Federal Bankruptcy Code, or any law for
the relief of debtors, instituted against the Pledgor by one or more third
parties, fails to oppose actively such proceeding, or, in any such
proceeding defaults or files an answer admitting the material allegations
upon which the proceeding was based, or alleges its willingness to have an
order for relief entered or its desire to seek liquidation, reorganization
or adjustment of its debts.
(f) Any receiver, trustee or custodian is appointed by a court of competent
jurisdiction to take possession of all or any substantial portion of the
assets of the Pledgor.
(g) The Pledgor shall fail generally to pay his debts as such debts become
due.
(h) The Pledgor shall effect or there shall otherwise occur a Transfer (as
defined in the Stockholder's Agreement) not otherwise permitted under the
Stockholder's Agreement.
v. Remedies in Case of an Event of Default.
(a) In case an Event of Default shall have occurred and be continuing, the
Company shall be entitled to vote the Pledged Securities and shall have all
of the remedies of a secured party under the New York Uniform Commercial
Code, and, without limiting the foregoing, shall have the right, subject to
any necessary regulatory approvals, to sell, assign and deliver the whole
or, from time to time, any part of the Pledged Securities, or any interest
in any part thereof, at any private sale or at public auction, with or
without demand of performance or other demand, advertisement or notice of
the time or place of sale or adjournment thereof or otherwise (except the
Company shall give 10 days' notice to the Pledgor of the time and place of
any sale pursuant to this Section 5), for cash, and credit or for other
property, for immediate or future delivery, and for such price or prices
and on such terms as the Company shall, in its absolute discretion,
determine, the Pledgor hereby waiving and releasing any and all right or
equity of redemption whether before or after sale hereunder. At any such
sale the Company may bid for and purchase the whole or any part of the
Pledged Securities so sold free from any such right or equity of
redemption. The Company shall apply the proceeds of any such sale first to
the payment of all costs and expenses, including reasonable attorneys fees,
incurred by the Company in enforcing its rights under this Agreement and
then to the payment of interest on and principal of the Note, with such
payments to be applied in the Company's sole discretion.
<PAGE>
(b) The Pledgor recognizes that the Company may be unable to effect a
public sale of all or a part of the Pledged Securities by reason of certain
prohibitions contained in the Securities Act of 1933, as amended (the
"Act"), or in the rules and regulations promulgated thereunder, but may be
compelled to resort to one or more private sales to a restricted group of
purchasers who will be obliged to agree, among other things, to acquire the
Pledged Securities for their own account, for investment and not with a
view to the distribution or resale thereof. The Pledgor agrees that private
sales so made may be at prices and on other terms less favorable to the
seller than if the Pledged Securities were sold at public sale, and that
the Company has no obligation to delay the sale of the Pledged Securities
for the period of time necessary to permit the registration of the Pledged
Securities for public sale under the Act. The Pledgor agrees that a private
sale or sales made under the foregoing circumstances shall be deemed to
have been made in a commercially reasonable manner.
(c) If any consent, approval or authorization of any state, municipal or
other governmental department, agency or authority should be necessary to
effectuate any sale or disposition by the Company pursuant to this Section
5 of the Pledged Securities, or any partial disposition of the Pledged
Securities, the Pledgor will execute all such applications and other
instruments as may be required in connection with securing any such
consent, approval or authorization, and will otherwise use his best efforts
to secure the same.
(d) Neither failure nor delay on the part of the Company to exercise any
right, remedy, power or privilege provided for herein or by statute or at
law or in equity shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, remedy, power or privilege preclude any
other or further exercise thereof or the exercise of any other right,
remedy, power or privilege.
vi. Pledgor's Obligations Not Affected. The obligations of the Pledgor
under this Agreement shall remain in full force and effect without regard
to, and shall not be impaired or affected by: (a) any subordination,
amendment or modification of or addition or supplement to the Stockholder's
Agreement or the Note, or any assignment or transfer of either thereof; (b)
any exercise or non-exercise by the Company of any right, remedy, power or
privilege under or in respect of this Agreement, the Stockholder's
Agreement or the Note, or any waiver of any such right, remedy, power or
privilege; (c) any waiver, consent, extension, indulgence or other action
or inaction in respect of this Agreement, the Stockholder's Agreement or
the Note, or any assignment or transfer of any thereof; or (d) any
bankruptcy, insolvency, reorganization, arrangement, readjustment,
composition, liquidation or the like, of the Company or its successors,
whether or not the Pledgor shall have notice or knowledge of any of the
foregoing.
vii. Transfers by Pledgor. The Pledgor will not sell, assign, transfer or
otherwise dispose of, grant any option with respect to, or mortgage, pledge
or otherwise encumber the Pledged Securities or any interest therein.
<PAGE>
viii. Attorney-in-Fact. The Company or its successor is hereby appointed
the attorney-in-fact of the Pledgor for the purpose of carrying out the
provisions of this Agreement and taking any action and executing any
instrument which the Company reasonably may deem necessary or advisable to
accomplish the purposes hereof, including without limitation, the execution
of the applications and other instruments described in Section 5(c), which
appointment as attorney-in-fact is irrevocable as one coupled with an
interest.
ix. Termination. Upon payment in full of principal of and interest on the
Note and upon the due performance of and compliance with all the provisions
of the Note, this Agreement shall terminate, and the Pledgor shall be
entitled to the return of such of the Pledged Securities as has not
theretofore been sold, released pursuant to Section 5 or otherwise applied
pursuant to the provisions of this Agreement.
x. Notices. All notices or other communications required or permitted to be
given hereunder shall be delivered as provided in the Stockholder's
Agreement.
xi. Miscellaneous. The Company and its assigns shall have no obligation in
respect of the Pledged Securities, except to hold and dispose of the same
in accordance with the terms of this Agreement. Neither this Agreement nor
any provisions hereof may be amended, modified, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the amendment, modification, waiver, discharge
or termination is sought. The provisions of this Agreement shall be binding
upon the successors and assigns of the Pledgor. The captions in this
Agreement are for convenience of reference only and shall not define or
limit the provisions hereof. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New
York, without regard to the conflicts of laws rules thereof. This Agreement
may be executed simultaneously in several counterparts, each of which is an
original, but all of which together shall constitute one instrument.
[signature page follows]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Repayment
and Pledge Agreement to be executed and delivered on the date first above
written.
MERIT BEHAVIORAL CARE CORPORATION
By________________________________
Its________________________________
PLEDGOR
---------------------------------
Terry R. Thompson
<PAGE>
SUBSIDIARIES OF
MERIT BEHAVIORAL CARE CORPORATION
Subsidiary State of Organization
Achievement and Guidance Centers of New York, Inc. NY
Addiction Treatment Services Inc. NY
AGCA Acquisition Corporation-New York, Inc. DE
AGCA Acquisition Corporation-Pennsylvannia DE
AGCA Headquarters Limited Partnership PA
AGCA New York, Inc. NY
AGCA, Inc. PA
AGCA IPA of New York, Inc. NY
AGCA/Better Health Plan, Inc. NY
AGCA/Chubb Health, Inc. NY
AGCA/Net Recovery Systems PA
AGCA/Sanus New York, Inc. NY
Alliance Health Systems, Inc. IN
American Biodyne, Inc. DE
Arizona Biodyne, Inc. AZ
Assured Health Systems, Inc. MA
BCOV-GP, Inc. DE
BenesYs, Inc. DE
Biodyne Holding Company of Ohio, Inc. OH
California Biodyne Health Services, Inc. CA
Choate Health Management, Inc. MA
Choate Integrated Behavioral Healthcare Corporation MA
Choate Mental Health Center, Inc. MA
Colorado Biodyne, Inc. CO
Companion Benefit Alternatives, Inc. SC
<PAGE>
Continuum Behavioral Healthcare Corporation DE
EMHC-MBC of New York LLC NY
EMHC-MBC Services of New York LLC NY
EMHC/MBC IPA Providers of New York, LLC NY
Group Plan Clinic, Inc. TX
Hawaii Biodyne, Inc. HI
Indiana Biodyne, Inc. IN
Louisiana Biodyne, Inc. LA
Maine Biodyne, Inc. ME
Massachusetts Biodyne, Inc. MA
MBC Behavioral Care of New York, Inc. NY
MBC Behavioral Health Services of New York, Inc. NY
MBC Federal Programs, Inc. DE
MBC Health Care of New York, Inc. NY
MBC Health Providers of Texas, Inc. TX
MBC Health Services of New York, Inc. NY
MBC Management Services of New York, LLC NY
MBC National Service Corporation DE
MBC of America, Inc. DE
MBC of Louisiana, Inc. LA
MBC of Nebraska, Inc. NE
MBC of New York, Inc. NY
MBC of Tennessee, Inc. TN
MBC of Tennessee, LLC TN
MBC Providers of New York, Inc. NY
MBC Washington Systems, Inc. WA
MBC/IPA Providers of NewYork, LLC NY
MBCS of North Carolina, Inc. NC
Merit Behavioral Care Corporation of Iowa IA
Merit Behavioral Care of California, Inc. CA
<PAGE>
Merit Behavioral Care of Florida, Inc. FL
Merit Behavioral Care of Georgia, Inc. GA
Merit Behavioral Care of Illinois, Inc. IL
Merit Behavioral Care of Maryland, Inc. MD
Merit Behavioral Care of Montana, Inc. MT
Merit Behavioral Care of Pennsylvania, Inc. PA
Merit Behavioral Care of Texas, Inc. TX
Merit Behavioral Care Systems Corporation OH
Merit Health Insurance Company IL
Merit Holdings Corp. DE
Michigan Biodyne, Inc. MI
New Mexico Biodyne, Inc. NM
Nevada Biodyne, Inc. NV
Ohio Biodyne, Inc. OH
Orion Life Insurance Company DE
P.P.C., Inc. MO
Personal Performance Consultants of New York, Inc. NY
PPC Group, Inc. DE
ProPsych, Inc. FL
Quality Healthcare Solutions, Inc. PA
Tennessee Biodyne, Inc. TN
U.S. IPA Providers, Inc. NY
Vermont Biodyne, Inc. VT
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS
ON PAGES F-2 THROUGH F-3 OF THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001005530
<NAME> Merit Behavioral Care Corporation
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 47,375
<SECURITIES> 0
<RECEIVABLES> 30,379
<ALLOWANCES> 1,996
<INVENTORY> 0
<CURRENT-ASSETS> 80,535
<PP&E> 89,017
<DEPRECIATION> 21,137
<TOTAL-ASSETS> 344,801
<CURRENT-LIABILITIES> 88,663
<BONDS> 253,500
0
0
<COMMON> 284
<OTHER-SE> (29,766)
<TOTAL-LIABILITY-AND-EQUITY> 344,801
<SALES> 0
<TOTAL-REVENUES> 457,830
<CGS> 0
<TOTAL-COSTS> 361,684
<OTHER-EXPENSES> 25,869
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,826
<INCOME-PRETAX> (22,201)
<INCOME-TAX> (5,332)
<INCOME-CONTINUING> (16,869)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,012)
<NET-INCOME> (17,881)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
