SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: June 30, 1997
Date of earliest event
reported: June 17, 1997
MAGELLAN HEALTH SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter).
Delaware 1-6639 58-1076737
- ----------------------- ---------------------- -------------------------------
(State of incorporation)(Commission File Number)(IRS Employer Identification No)
3414 Peachtree Road, N.E., Suite 1400, Atlanta, Georgia 30326
- --------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(404) 841-9200
- ----------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE>
Item 2. Disposition of Assets
On January 30, 1997, the Registrant ("Company" or "Magellan") announced
that it had entered into a series of transactions (the "Crescent Transactions")
including an agreement to sell substantially all of its domestic hospital real
estate and related personal property (the "Assets") to Crescent Real Estate
Equities Limited Partnership ("Crescent") and CBHS (as hereinafter defined). The
Crescent Transactions were approved by Magellan stockholders on May 30, 1997 and
were consummated on June 17, 1997. The Crescent Transactions are more fully
described in the Company's Proxy Statement filed on Schedule 14A on April 24,
1997, which is incorporated herein by reference. In addition, the Company's
domestic portion of its provider business segment will be operated as a joint
venture ("CBHS") that is initially owned equally by Magellan and Crescent
Operating, Inc., an affiliate of Crescent ("COI"). The Company received $417.2
million in cash (before costs estimated to be $12.5 million), which includes
$17.2 million for hospitals acquired after January 30, 1997, and warrants in COI
for the purchase of 2.5% of COI's common stock, exercisable over 12 years, as
consideration for the Assets. In addition to the Assets, Crescent and COI each
received 1,283,311 warrants (2,566,622 warrants in aggregate) to purchase
Magellan Common Stock at $30 per share, exercisable over 12 years.
In related agreements, (i) Crescent leased the real estate and related
assets to CBHS for annual rent beginning at $41.7 million, which includes $1.7
million for hospitals acquired after January 30, 1997 that were sold to
Crescent, with a 5% annual escalation clause, compounded annually, (the
"Facilities Lease") and (ii) CBHS will pay Magellan approximately $78 million in
annual franchise fees, subject to increase, for the use of assets retained by
Magellan and for support in certain areas. The franchise fees to be paid by CBHS
to the Company are subordinated to the lease obligations in favor of Crescent.
The assets retained by Magellan include, but are not limited to, the "CHARTER"
name, intellectual property, protocols and procedures, clinical quality
management, operating processes and the "1-800- CHARTER" telephone call center.
Magellan will provide CBHS ongoing support in areas including advertising and
marketing assistance, risk management services, outcomes monitoring, and
consultation on matters relating to reimbursement, government relations,
clinical strategies, regulatory matters, strategic planning and business
development.
The Company intends to initially use the proceeds from the sale of the
Assets to reduce its long-term debt, including borrowings under its Revolving
Credit Agreement. Under the terms of its Senior Subordinated Notes (the "Notes")
indentures, the Noteholders will have the right to put their Notes to the
Company at 101% of face value. The Company intends to maintain adequate cash
reserves and borrowing capacity to extinguish all the Notes, if necessary. The
Noteholder's right to put the Notes will expire on July 21, 1997. The Company
intends to use the remaining proceeds from the sale of the Assets, if any, after
debt reductions, to pursue acquisitions in its managed care and public sector
business segments, develop new products and increase managed care and public
sector marketing efforts.
The Company will account for its 50% investment in CBHS under the
equity method of accounting. The Company expects to record a loss before income
taxes of approximately $55 million to $60 million as a result of these
transactions, including, but not limited to, the write-off of certain
hospital-based intangible assets, collection fees associated with accounts
receivable, certain construction commitments and exit costs and the loss on the
sale of the Assets.
Item 7. Financial Statements and Exhibits
Unaudited Pro Forma Consolidated Financial Information
The Unaudited Pro Forma Consolidated Financial Statements are based on
the historical presentation of the consolidated financial statements of Magellan
and the historical operating results and financial position of the divested
operations and assets of CBHS. The Unaudited Pro Forma Consolidated Statements
of Operations for the year ended September 30, 1996 and the six months ended
March 31, 1997 give effect to the Crescent Transactions as if they had occurred
on October 1, 1995. The Unaudited Pro Forma Consolidated Statement of Operations
for the year ended September 30, 1996 also gives effect to the following
transactions completed during fiscal 1996 as if such transactions had been
completed on October 1, 1995: (i) the Green Spring Health Services, Inc. ("Green
Spring") acquisition, (ii)
2
<PAGE>
the issuance of the Shares (as hereinafter defined), (iii) the Share Repurchase
(as hereinafter defined) and (iv) the pre- closure operating results for the
nine acute care psychiatric hospitals that were closed or sold during fiscal
1996. The Company acquired a 61% ownership interest in Green Spring in December
1995. The "Shares" represent the 4,000,000 shares issued to Rainwater-Magellan
Holdings, L.P. on January 25, 1996. The "Share Repurchase" represents the
Company's repurchase of approximately 3,962,000 shares of Common Stock on
September 27, 1996. The Unaudited Pro Forma Consolidated Balance Sheet as of
March 31, 1997 gives effect to the Crescent Transactions as if they had occurred
on March 31, 1997. The pro forma consolidated statements of operations and
balance sheets do not effect for hospital acquisitions and closures during
fiscal 1997 as such transactions and events are not considered material to the
pro forma presentation.
On March 19, 1997, the Company announced that it had signed definitive
agreements to sell its three European Hospitals to Priory Hospitals Limited
("Priory") and enter into a franchise agreement with Priory for approximately
$76 million in aggregate consideration. On June 17, 1997, the Company announced
that the sale of its two United Kingdom hospitals had been referred to the
Monopolies and Mergers Commission ("MMC") by the Office of Fair Trade under the
provisions of the Fair Trading Act. The MMC is required to make their report by
September 15, 1997. The time period for receiving regulatory approval under the
definitive agreements has expired and the Company has begun exploring other
strategic alternatives related to its European hospitals. Accordingly, the sale
of the European Hospitals has been excluded from the pro forma presentations.
The Crescent Transactions resulted in (i) the sale of substantially all
of the Company's domestic provider real estate and related equipment (the
"Purchased Facilities") for $417.2 million (before costs estimated at $12.5
million) and the COI warrants to acquire 2.5% of the outstanding common stock of
COI, (ii) the creation of CBHS, which is 50% owned by the Company and engage in
the behavioral healthcare provider business and (iii) the Company's entry into
the healthcare franchising business. CBHS leased the Purchased Facilities from
Crescent under a twelve-year operating lease (subject to renewal) for $41.7
million annually, subject to adjustment, with a 5% escalator, compounded
annually. Magellan issued 2,566,622 warrants to Crescent and COI (1,283,311
Warrants each) with an exercise price of $30 per share. The Warrants issued to
Crescent and COI have been valued at $25 million in the Pro Forma Balance Sheet.
The exercise price of the COI Warrants will be determined after 30 days of
initial trading of COI common stock. The COI Warrants have been ascribed no
value in the Pro Forma Balance Sheet as the COI Warrants have nominal fair
value. The Company will account for its 50% investment in CBHS under the equity
method of accounting, which will significantly reduce the revenues and related
operating expenses presented in the Company's Statement of Operations. Divested
Operations in the Pro Forma Statements of Operations represent the businesses
that will be operated by CBHS after the closing. CBHS will include a significant
portion of the business included in Magellan's provider business segment and a
portion of Magellan's corporate overhead. A summary of Magellan's provider
business operations for the year ended September 30, 1996 is as follows (000's):
<TABLE>
<CAPTION>
Earnings
Before Interest,
Income Taxes
and Minority Depreciation
Net Revenue Interest and Amortization
----------- -------------- ----------------
<S> <C> <C> <C>
CBHS ............................... $ 808,744 $ 103,536 $ 28,863
Hospital-based joint ventures ...... 107,253 14,683 4,129
European hospitals ................. 32,230 8,853 1,078
General hospitals .................. 32,796 (89) 290
Other .............................. 56,916 1,289 (580)
---------- ---------- ----------
$1,037,939 $ 128,272 $ 33,780
========== ========== ==========
</TABLE>
The Company would have incurred a loss before income taxes, minority
interest and extraordinary items of approximately $59 million if the Crescent
Transactions were consummated on March 31, 1997. The components of
3
<PAGE>
the loss from the Crescent Transactions are more fully described in Note 21 to
the Pro Forma Consolidated Financial Statements.
The Unaudited Pro Forma Consolidated Financial Statements are presented
using two different assumptions. Under the terms of the Indenture, Noteholders
may elect to have the Company repurchase their Notes at 101% of the face value
of the Notes after the Closing. The Company mailed a notice to the Noteholders
on June 19, 1997 which, among other things, stated the latest date which the
holders of the Notes will have to tender their Notes to the Company (the "Notes
Payment Date"). The Notes Payment Date is July 21, 1997. On the Notes Payment
Date, the Company will be required to provide sufficient funds to the Trustee to
redeem all tendered Notes plus accrued interest to the Notes Payment Date. The
Company will not hire any outside agents to assist in this process. Noteholder
consent or approval of the Crescent Transactions was not required. Noteholders
may elect to have the Company repurchase their Notes for various reasons
including, but not limited to, concerns about the Company's prospects after the
Crescent Transactions, liquidity of the Notes in the open market and prevailing
bond and equity market conditions at the Notes Payment Date.
The first presentation assumes that no Noteholders elect to have their
Notes repurchased and the net proceeds from the Crescent Transactions are
deposited with no investment return after payment of indebtedness outstanding
under the Company's Revolving Credit Agreement and industrial revenue bonds for
certain of the Purchased Facilities. If the excess proceeds from the Crescent
Transactions were assumed to be invested at Magellan's historic temporary cash
investment rate of 5.4% for the year ended September 30, 1996 and 5.25% for the
six months ended March 31, 1997, pro forma consolidated net income and net
income per common share would be $27.4 million and $0.96, respectively, for the
year ended September 30, 1996 and $20.1 million and $0.70, respectively, for the
six months ended March 31, 1997.
The second presentation assumes that no Noteholders elect to have their
Notes repurchased by the Company and no net proceeds from the Crescent
Transactions are available for deposit. On January 29, 1997, the date preceding
public announcement of the Crescent Transactions, the bid and asked prices of
the Notes on the New York Stock Exchange were 110.75% and 111.25% of the face
value of the Notes, respectively. On June 16, 1997, the bid and asked prices of
the Notes on the New York Stock Exchange were 111.0% and 112.25% of the face
value of the Notes, respectively.
The Unaudited Pro Forma Consolidated Financial Statements do not
purport to be indicative of the results that actually would have been obtained
if the operations had been conducted as presented and they are not necessarily
indicative of operating results to be expected in future periods. The Company's
hospital business is seasonal in nature with a reduced demand for certain
services generally occurring in the first fiscal quarter around major holidays,
such as Thanksgiving and Christmas, and during the summer months comprising the
fourth fiscal quarter. The Franchise Fees are recognized ratably throughout the
year for purposes of the Unaudited Pro Forma Consolidated Financial Statements.
Accordingly, the Unaudited Pro Forma Statement of Operations for the six months
ended March 31, 1997 are not necessarily indicative of the pro forma results
expected for a full year. The Unaudited Pro Forma Consolidated Financial
Statements and notes thereto should be read in conjunction with the historical
consolidated financial statements and notes thereto of Magellan, which are
incorporated herein by reference.
4
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Assumes No Noteholders Elect to Have Their Notes Repurchased)
(Unaudited)
For The Year Ended September 30, 1996
(in thousands, except per share amounts)
Operations Pro Pro
Magellan Green Closed or Sold Forma Forma Divested
As Reported Spring In Fiscal 1996 Adjustments Combined Operations
----------- ----------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Revenue ................... $ 1,345,279 $ 46,232 $ (32,718) $ 0 $ 1,358,793 $ (808,744)
----------- ----------- ----------- ----------- ----------- -----------
Salaries, supplies and other
operating expenses ........ 1,064,445 40,120 (29,320) 0 1,075,245 (608,127)
Bad debt expense .............. 81,470 0 (2,306) 0 79,164 (70,021)
Depreciation and amortization . 48,924 1,693 (1,193) 381(1) 49,805 (28,863)
Interest, net ................. 48,017 (215) 0 4,246(2) 52,048 (4,852)
Stock option expense .......... 914 0 0 0 914 0
Equity in loss of CBHS ........ 0 0 0 0 0 0
Unusual items ................. 37,271 0 0 0 37,271 (997)
----------- ----------- ----------- ----------- ----------- -----------
1,281,041 41,598 (32,819) 4,627 1,294,447 (712,860)
---------- ----------- ----------- ----------- -----------
Income before income taxes
and minority interest .... 64,238 4,634 101 (4,627) 64,346 (95,884)
Provision for income taxes .... 25,695 1,900 40 (1,698)(3) 25,937 (38,354)
----------- ----------- ----------- ----------- ----------- -----------
Income before minority interest 38,543 2,734 61 (2,929) 38,409 (57,530)
Minority interest ............. 6,160 0 0 1,016 7,176 0
----------- ----------- ----------- ----------- ----------- -----------
Net income .................... $ 32,383 $ 2,734 $ 61 $ (3,945) $ 31,233 $ (57,530)
=========== =========== =========== =========== =========== ===========
Average number of common
shares outstanding ........ 31,014 (2,597)(5) 28,417
=========== =========== ===========
Net income per common share ... $ 1.04 $ 1.10
=========== ===========
Pro Pro
Forma Forma
Adjustments Consolidated
----------- ------------
Net Revenue ................... $ 78,200(6)$ 628,249
----------- ------------
Salaries, supplies and other
operating expenses ........ 3,360 470,478
Bad debt expense .............. 0 9,143
Depreciation and amortization . (308)(8) 20,634
Interest, net ................. (10,474)(9) 36,722
Stock option expense .......... 0 914
Equity in loss of CBHS ........ 7,659 (10) 7,659
Unusual items ................. 0 36,274
---------- -----------
237 581,824
---------- -----------
Income before income taxes
and minority interest .... 77,963 46,425
Provision for income taxes .... 31,185 (11) 18,768
---------- -----------
Income before minority interest 46,778 27,657
Minority interest ............. 0 7,176
---------- -----------
Net income .................... $ 46,778 $ 20,481 (9)
========== ===========
Average number of common
shares outstanding ........ 28,417
===========
Net income per common share ... $ 0.72(9)
===========
</TABLE>
See Notes to the Pro forma Consolidated Financial Statements(Unaudited)
5
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Assumes No Noteholders Elect to Have Their Notes Repurchased)
(Unaudited)
For The Six Months Ended March 31, 1997
(in thousands, except per share amounts)
Magellan Divested Pro Forma Pro Forma
As Reported Operations Adjustments Consolidated
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Revenue $ 696,741 $ (382,606) $ 39,100 (6) $ 353,235
-------------- -------------- -------------- --------------
Salaries, supplies and other
operating expenses.............. 566,333 (298,111) 3,222 (7) 271,444
Bad debt expense................... 35,375 (32,599) 0 2,776
Depreciation and amortization...... 26,187 (14,406) (131)(8) 11,650
Interest, net...................... 26,722 (2,096) (5,011)(9) 19,615
Stock option expense............... 1,433 0 0 1,433
Equity in loss of CBHS............. 0 0 11,475 (10) 11,475
Unusual items...................... 1,395 (2,500) 0 (1,105)
-------------- -------------- -------------- --------------
657,445 (349,712) 9,555 317,288
-------------- -------------- -------------- --------------
Income before income taxes
and minority interest......... 39,296 (32,894) 29,545 35,947
Provision for income taxes......... 15,718 (13,158) 11,818 (11) 14,378
-------------- -------------- -------------- --------------
Income before minority interest.... 23,578 (19,736) 17,727 21,569
Minority interest.................. 4,545 0 0 4,545
-------------- -------------- -------------- --------------
Net income......................... $ 19,033 $ (19,736) $ 17,727 $ 17,024 (9)
============== ============== ============== ==============
Average number of common
shares outstanding............. 28,657 28,657
============== ==============
Net income per common share........ $ 0.66 $ 0.59 (9)
============== ==============
</TABLE>
See Notes to the Pro forma Consolidated Financial Statements(Unaudited)
6
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Assumes All Noteholders Elect to Have Their Notes Repurchased)
(Unaudited)
For The Year Ended September 30, 1996
(in thousands, except per share amounts)
Operations Pro
Magellan Green Closed or Sold Pro Forma Forma
As Reported Spring In Fiscal 1996 Adjustments Combined
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net revenue...................... $ 1,345,279 $ 46,232 $ (32,718) $ 0 $ 1,358,793
-------------- -------------- -------------- -------------- --------------
Salaries, supplies and other
operating expenses............. 1,064,445 40,120 (29,320) 0 1,075,245
Bad debt expense................. 81,470 0 (2,306) 0 79,164
Depreciation and amortization.... 48,924 1,693 (1,193) 381 (1) 49,805
Interest, net.................... 48,017 (215) 0 4,246 (2) 52,048
Stock option expense............. 914 0 0 0 914
Equity in loss of CBHS........... 0 0 0 0 0
Unusual items.................... 37,271 0 0 0 37,271
-------------- -------------- -------------- -------------- --------------
1,281,041 41,598 (32,819) 4,627 1,294,447
-------------- -------------- -------------- -------------- --------------
Income before income taxes
and minority interest....... 64,238 4,634 101 (4,627) 64,346
Provision for income taxes....... 25,695 1,900 40 (1,698)(3) 25,937
-------------- -------------- -------------- -------------- --------------
Income before minority interest.. 38,543 2,734 61 (2,929) 38,409
Minority interest................ 6,160 0 0 1,016 (4) 7,176
-------------- -------------- -------------- -------------- --------------
Net income....................... $ 32,383 $ 2,734 $ 61 $ (3,945) $ 31,233
============== ============== ============== ============== ==============
Average number of common
shares outstanding........... 31,014 (2,597)(5) 28,417
============== ============== ==============
Net income per common share...... $ 1.04 $ 1.10
============== ==============
Divested Pro Forma Pro Forma
Operations Adjustments Consolidated
-------------- ------------ ------------
Net revenue...................... $ (808,744) $ 78,200 (6) $ 628,249
-------------- ----------- ------------
Salaries, supplies and other
operating expenses............. (608,127) 3,360 (7) 470,478
Bad debt expense................. (70,021) 0 9,143
Depreciation and amortization.... (28,863) (308)(8) 20,634
Interest, net.................... (4,852) (37,010)(9) 10,186
Stock option expense............. 0 0 914
Equity in loss of CBHS........... 0 7,659 (10) 7,659
Unusual items.................... (997) 0 36,274
-------------- ---------- ------------
(712,860) (26,299) 555,288
-------------- ---------- ------------
Income before income taxes
and minority interest....... (95,884) 104,499 72,961
Provision for income taxes....... (38,354) 41,800 (11) 29,383
-------------- ---------- ------------
Income before minority interest.. (57,530) 62,699 43,578
Minority interest................ 0 0 7,176
-------------- ---------- ------------
Net income....................... $ (57,530) $ 62,699 $ 36,402
============== ========== ============
Average number of common
shares outstanding........... 28,417
============
Net income per common share...... $ 1.28
============
</TABLE>
See Notes to the Pro Forma Consolidated Financial Statements(Unaudited)
7
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Assumes All Noteholders Elect to Have Their Notes Repurchased)
(Unaudited)
For The Six Months Ended March 31, 1997
(in thousands, except per share amounts)
Magellan Divested Pro Forma Pro Forma
As Reported Operations Adjustments Consolidated
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenue..................... $ 696,741 $ (382,606) $ 39,100 (6) $ 353,235
-------------- -------------- -------------- --------------
Salaries, supplies and other
operating expenses.......... 566,333 (298,111) 3,222 (7) 271,444
Bad debt expense................ 35,375 (32,599) 0 2,776
Depreciation and amortization... 26,187 (14,406) (131)(8) 11,650
Interest, net................... 26,722 (2,096) (18,677)(9) 5,949
Stock option expense............ 1,433 0 0 1,433
Equity in loss of CBHS.......... 0 0 11,475 (10) 11,475
Unusual items................... 1,395 (2,500) 0 (1,105)
-------------- -------------- -------------- --------------
657,445 (349,712) (4,111) 303,622
-------------- -------------- -------------- --------------
Income before income taxes
and minority interest...... 39,296 (32,894) 43,211 49,613
Provision for income taxes...... 15,718 (13,158) 17,285 (11) 19,845
-------------- -------------- -------------- --------------
Income before minority interest. 23,578 (19,736) 25,926 29,768
Minority interest............... 4,545 0 0 4,545
-------------- -------------- -------------- --------------
Net income...................... $ 19,033 $ (19,736) $ 25,926 $ 25,223
============== ============== ============== ==============
Average number of common
shares outstanding.......... 28,657 28,657
============== ==============
Net income per common share..... $ 0.66 $ 0.88
============== ==============
</TABLE>
See Notes to the Pro forma Consolidated Financial Statements(Unaudited)
8
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED BALANCE SHEET
(Assumes All Noteholders Elect to Have Their Notes Repurchased)
(Unaudited)
March 31, 1997
(In thousands)
ASSETS
Magellan Pro Forma Pro Forma
as Reported Adjustments Consolidated
-------------- -------------- --------------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents............... $ 114,245 $ 375,000 (18) $ 113,937
12,500 (18)
12,500 (18)
7,683 (18)
(12,475)(18)
(10,000)(18)
(381,766)(18)
(3,750)(18)
Accounts receivable, net................ 192,394 (19,660)(12) 172,734
Supplies................................ 4,465 (2,944)(13) 1,521
Other................................... 25,299 (4,396)(13) 20,903
-------------- ------------- --------------
Total Current Assets............... 336,403 (27,308) 309,095
Assets Restricted for Settlement of Unpaid
Claims and Other Long-Term Liabilities.. 96,402 0 96,402
Property and Equipment:
Land.................................... 82,705 (70,091)(14) 12,614
Buildings and improvements.............. 393,814 (325,229)(14) 68,585
Equipment............................... 154,831 (100,099)(14) 54,732
-------------- ------------- --------------
631,350 (495,419) 135,931
Accumulated depreciation................ (143,724) 111,894 (14) (31,830)
-------------- ------------- --------------
487,626 (383,525) 104,101
Construction in progress................ 3,735 (2,049)(14) 1,686
-------------- ------------- --------------
491,361 (385,574) 105,787
Other long-term assets......................... 32,126 (343)(13) 31,783
Deferred income tax assets..................... 0 13,265 (19) 13,265
Investment in/Advances to CBHS................. 0 15,493 (15) 15,493
Goodwill, net.................................. 125,329 (13,768)(16) 111,561
Other intangible assets, net................... 40,766 (9,943)(16) 30,823
-------------- -------------- --------------
$ 1,122,387 $ (408,178) $ 714,209
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................ $ 69,920 $ 0 $ 69,920
Accrued liabilities..................... 165,358 (12,333)(17) 153,025
Current maturities of long-term debtand
capital lease obligations........... 5,845 (2,003)(18) 3,842
-------------- ------------- --------------
Total Current Liabilities.......... 241,123 (14,336) 226,787
Long-term debt and capital lease obligations... 580,536 (360,708)(18) 219,828
Deferred income tax liabilities................ 15,295 (15,295)(19) 0
Reserve for unpaid claims...................... 62,316 0 62,316
Deferred credits and other long-term liabilities 24,211 0 24,211
Minority interest.............................. 56,698 0 56,698
Commitments and contingencies
Stockholders' equity:
Common stock............................ 8,307 0 8,307
Additional paid-in capital.............. 332,905 0 332,905
Accumulated deficit..................... (113,374) (42,839)(21) (156,213)
Warrants outstanding.................... 50 25,000 (20) 25,050
Common stock in treasury................ (82,731) 0 (82,731)
Cumulative foreign currency adjustments. (2,949) 0 (2,949)
-------------- -------------- --------------
Total stockholders' equity......... 142,208 (17,839) 124,369
-------------- -------------- --------------
$ 1,122,387 $ (408,178) $ 714,209
============== ============== ==============
</TABLE>
See Notes to the Pro Forma Consolidated Financial Statements(Unaudited)
9
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED BALANCE SHEET
(Assumes No Noteholders Elect to Have Their Notes Repurchased)
(Unaudited)
March 31, 1997
(In thousands)
ASSETS
Magellan Pro Forma Pro Forma
as Reported Adjustments Consolidated
-------------- -------------- --------------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents............... $ 114,245 $ 375,000 (18) $ 312,140
12,500 (18)
12,500 (18)
7,683 (18)
(12,475)(18)
(10,000)(18)
(187,313)(18)
Accounts receivable, net................ 192,394 (19,660)(12) 172,734
Supplies................................ 4,465 (2,944)(13) 1,521
Other................................... 25,299 (4,396)(13) 20,903
-------------- -------------- --------------
Total Current Assets............... 336,403 170,895 507,298
Assets Restricted for Settlement of Unpaid
Claims and Other Long-Term Liabilities.. 96,402 0 96,402
Property and Equipment:
Land.................................... 82,705 (70,091)(14) 12,614
Buildings and improvements.............. 393,814 (325,229)(14) 68,585
Equipment............................... 154,831 (100,099)(14) 54,732
-------------- -------------- --------------
631,350 (495,419) 135,931
Accumulated depreciation................ (143,724) 111,894 (14) (31,830)
-------------- -------------- --------------
487,626 (383,525) 104,101
Construction in progress................ 3,735 (2,049)(14) 1,686
-------------- -------------- --------------
491,361 (385,574) 105,787
Other long-term assets......................... 32,126 (343)(13) 31,783
Deferred income tax assets..................... 0 8,210 (19) 8,210
Investment in/Advances to CBHS................. 0 15,493 (15) 15,493
Goodwill, net.................................. 125,329 (13,768)(16) 111,561
Other intangible assets, net................... 40,766 (1,056)(16) 39,710
-------------- -------------- --------------
$ 1,122,387 $ (206,143) $ 916,244
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................ $ 69,920 $ 0 $ 69,920
Accrued liabilities..................... 165,358 7,120 (17) 172,478
Current maturities of long-term debt and
capital lease obligations........... 5,845 (2,003)(18) 3,842
-------------- -------------- --------------
Total Current Liabilities.......... 241,123 5,117 246,240
Long-term debt and capital lease obligations... 580,536 (185,708)(18) 394,828
Deferred income tax liabilities................ 15,295 (15,295)(19) 0
Reserve for unpaid claims...................... 62,316 0 62,316
Deferred credits and other long-term liabilities 24,211 0 24,211
Minority interest.............................. 56,698 0 56,698
Commitments and contingencies
Stockholders' equity:
Common stock............................ 8,307 0 8,307
Additional paid-in capital.............. 332,905 0 332,905
Accumulated deficit..................... (113,374) (35,257)(21) (148,631)
Warrants outstanding.................... 50 25,000 (20) 25,050
Common stock in treasury................ (82,731) 0 (82,731)
Cumulative foreign currency adjustments. (2,949) 0 (2,949)
-------------- -------------- --------------
Total stockholders' equity......... 142,208 (10,257) 131,951
-------------- -------------- --------------
$ 1,122,387 $ (206,143) $ 916,244
============== ============== ==============
</TABLE>
See Notes to the Pro Forma Consolidated Financial Statements(Unaudited)
10
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Notes (1) through (5) relate to the effect of the Green Spring
Acquisition, the issuance of the Shares and the Share Repurchase as if such
transactions occurred on October 1, 1995.
(1) The pro forma adjustments to amortization expense represent an increase
to amortization expense in conjunction with the 61% acquisition of
Green Spring.
(2) The pro forma adjustments to interest expense, net, represent the
interest expense incurred and the interest income forgone by Magellan
as a result of the Green Spring Acquisition and the Share Repurchase,
net of reductions in interest expense as a result of the issuance of
the Shares. Historic interest rates used for borrowings and temporary
cash investments were approximately 7.6% and 5.4%, respectively.
(3) The pro forma adjustments to income taxes represent the tax effect of
the pro forma adjustment to interest expense at Magellan's historic
effective tax rate of 40%.
(4) The pro forma adjustments to minority interest represent the 39%
minority interest in Green Spring and GPA as a result of the Green
Spring Acquisition.
(5) The pro forma adjustments to average number of common shares
outstanding give effect to the issuance of shares in the Green Spring
Acquisition and the issuance of the Shares, offset by the Share
Repurchase.
(6) The pro forma adjustments to net revenue represent Franchise Fees paid
to Magellan by CBHS pursuant to the Master Franchise Agreement. As
part of the Crescent Transactions, CBHS will lease the Purchased
Facilities from Crescent under the Facilities Lease. The annual base
rent under the Facilities Lease begins at $40 million for pro forma
purposes and escalates 5% per year, compounded annually. The
Subordination Agreement provides that the Franchise Fees are
subordinated in payment to the $40 million annual base rent, 5%
escalator rent and the additional rent under the Facilities Lease due
Crescent, in certain circumstances. The Company will be entitled to
pursue all available remedies for breach of the Master Franchise
Agreement, except that the Company does not have the right to take any
action that could reasonably be expected to force CBHS into bankruptcy
or receivership. If CBHS encounters a decline in earnings or financial
difficulties, such amounts due Crescent will be paid before any
Franchise Fees are paid. After the Crescent Transactions, the Company
will receive from CBHS initial Franchise Fees of approximately $78
million, subject to increase. The Company will provide CBHS with an
array of services, including advertising and marketing assistance,
risk management services, outcomes monitoring, consultation with
respect to matters relating to CBHS' business in which the Company has
expertise and the Company's operation of a telephone call center
utilizing the "1- 800-CHARTER" telephone number.
(7) The pro forma adjustments to salaries, supplies and other operating
expenses represent fees payable to CBHS of $10.6 million and $5.2
million for the year ended September 30, 1996 and the six months ended
March 31, 1997, respectively, for the management of hospital-based
businesses controlled by Magellan that are less than wholly-owned by
Magellan, net of reductions in corporate overhead of $7.2 million and
$2.0 million for the year ended September 30, 1996 and the six months
ended March 31, 1997, respectively, related to the transfer of
existing personnel and functions between Magellan and CBHS. The
Company and CBHS expect to incur incremental corporate overhead of
approximately $1 million annually as a result of the Crescent
Transactions. Magellan personnel transferred to CBHS and incremental
corporate overhead will occur primarily in the human resource, legal
and finance and accounting functions.
(8) The pro forma adjustments to depreciation and amortization represent
the amortization expense related to other intangible assets that would
become impaired as a result of the Crescent Transactions. The impaired
other intangible assets have a remaining net book value of
approximately $105,000 at March 31, 1997, which are included in the
impairment losses referred to in Note (16).
11
<PAGE>
(9) The pro forma adjustments to interest expense, net, assuming all of
the Notes are repurchased, represent the reduction in interest expense
for the assumed repurchase of the Notes at 101% of the aggregate
principal amount pursuant to the provisions of the Indenture, offset
by additional borrowings under the new credit agreement required to
fund the assumed repurchase of the Notes. The pro forma adjustment to
interest expense, net, assuming the Notes are not repurchased,
represents reductions in interest expense as a result of paying off
the outstanding borrowings under the Revolving Credit Agreement
(historic and pro forma) with no assumed investment of the excess
proceeds from the Crescent Transactions. If the excess proceeds from
the Crescent Transactions were assumed to be invested at Magellan's
historic temporary cash investment rate of 5.4% for the year ended
September 30, 1996 and 5.25% for the six months ended March 31, 1997,
pro forma consolidated net income and net income per common share
would be $27.4 million and $0.96 million, respectively, for the year
ended September 30, 1996 and $20.1 million and $0.70, respectively,
for the six months ended March 31, 1997.
(10) The pro forma adjustments to equity in loss of CBHS represent
Magellan's percentage interest (50%) in CBHS' pro forma loss for the
year ended September 30, 1996 and the six months ended March 31, 1997.
Magellan's investment in CBHS will be accounted for under the equity
method of accounting. The timing and terms of a 10% equity interest
grant to CBHS management will be addressed by the governing board of
CBHS at a later date. The Company anticipates that the granting of a
10% equity interest to CBHS management will result in equally shared
dilution of ownership interest between Magellan and COI and that the
grant will be at an exercise price at least equal to the fair value of
the underlying equity at the date of grant, which will not result in
compensation expense under the provisions of APB Opinion 25.
Magellan's ownership interest in CBHS is reflected at its initial
ownership percentage of 50% for the purposes of computing pro forma
equity in loss of CBHS. The Condensed Pro Forma Statements of
Operations and Balance Sheet of CBHS are as follows (000's).
<TABLE>
<CAPTION>
For the Year Ended September 30, 1996
---------------------------------------------------
Divested Pro Forma Pro Forma
STATEMENTS OF OPERATIONS: Operations Adjustments Consolidated
-------------- -------------- ---------------
<S> <C> <C> <C>
Net revenue.............................. $ 808,744 $ 10,615 (i) $ 819,359
-------------- -------------- ---------------
Salaries, supplies and other
operating expenses..................... 608,127 149,512 (ii) 757,639
Bad debt expense......................... 70,021 -- 70,021
Depreciation and amortization............ 28,863 (26,444)(iii) 2,419
Interest, net............................ 4,852 (1,252)(iv) 3,600
Unusual items............................ 997 -- 997
-------------- -------------- ---------------
712,860 121,816 834,676
-------------- -------------- ---------------
Income (loss) before income taxes........ 95,884 (111,201) (15,317)
Provision for income taxes............... 38,354 (38,354)(v) --
-------------- -------------- ---------------
Net income (loss)................... $ 57,530 $ (72,847) $ (15,317)
============== ============== ===============
For the Six Months Ended
March 31, 1997
---------------------------------------------------
Divested Pro Forma Pro Forma
STATEMENTS OF OPERATIONS: Operations Adjustments Consolidated
-------------- -------------- ---------------
Net revenue.............................. $ 382,606 $ 5,186 (i) $ 387,792
-------------- -------------- ---------------
Salaries, supplies and other
operating expenses..................... 298,111 73,093 (ii) 371,204
Bad debt expense......................... 32,599 -- 32,599
Depreciation and amortization............ 14,406 (12,367)(iii) 2,039
Interest, net............................ 2,096 304 (iv) 2,400
Unusual items............................ 2,500 -- 2,500
-------------- -------------- ---------------
349,712 61,030 410,742
-------------- -------------- ---------------
Income (loss) before income taxes........ 32,894 (55,844) (22,950)
Provision for income taxes............... 13,158 (13,158)(v) --
-------------- -------------- ---------------
Net income (loss)................... $ 19,736 $ (42,686) $ (22,950)
============== ============== ===============
</TABLE>
(i) Fees from Magellan for the management of hospital-based businesses
controlled by Magellan that are less than wholly-owned by
<TABLE>
<CAPTION>
(ii) The pro forma adjustments to salaries, supplies and other operating expenses are as follows (000's):
Six Months
Year Ended Ended
September 30, 1996 March 31, 1997
------------------ --------------
<S> <C> <C>
Franchise Fees (See Note 6).................. $ 78,200 $ 39,100
Rent Expense under the Facilities Lease...... 63,057 31,529
Additional Corporate Overhead (See Note 7)... 8,255 2,464
------------------ --------------
$ 149,512 $ 73,093
================== ==============
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
(iii) The pro forma adjustment to depreciation and amortization represents
the decrease in depreciation expense as a result of the sale of
property and equipment to Crescent by Magellan and the elimination of
amortization expense related to impaired intangible assets (See Note
16).
(iv) The pro forma adjustment to interest, net, is computed as follows
(000's):
Six Months
Year Ended Ended
September 30, 1996 March 31, 1997
------------------ ---------------
<S> <C> <C>
Interest expense on serviced IRBs $ (4,852) $ (2,096)
Interest expense for new borrowings 3,600 2,400
------------------ ---------------
$ (1,252) $ 304
================== ===============
Average borrowings $ 45,000 60,000
Borrowing rate 8.0% 8.0%
------------------ ---------------
Annual Interest $ 3,600 $ 4,800
================== ===============
Semi-Annual Interest $ 2,400
===============
</TABLE>
(v) CBHS will be formed as a limited liability company. Accordingly, no
tax benefit is presented as the tax consequences will pass through to
Magellan and COI.
<TABLE>
<CAPTION>
BALANCE SHEET March 31, 1997
- ---------------------------------------------------- -----------------
<S> <C>
Current assets...................................... $ 9,657
Property and equipment, net......................... 18,418
Other long-term assets.............................. 343
-----------------
Total assets................................. $ 28,418
=================
Accrued liabilities................................. $ 6,984
Capital lease obligation............................ 53
Note payable - Magellan............................. 10,000
-----------------
Total current liabilities.................... 17,037
Capital lease obligation............................ 888
Member capital...................................... 10,493
-----------------
Total liabilities and member capital......... $ 28,418
=================
</TABLE>
(11) The pro forma adjustments to provision for income taxes represent the
tax expense related to the pro forma adjustments at the Company's
historic effective tax rate of 40%.
(12) The pro forma adjustments to accounts receivable, net, represent the
reduction in the net realizable value of accounts receivable for
estimated collection fees on hospital-based receivables of $125.2
million for the divested operations pursuant to a contractual
obligation with CBHS, whereby CBHS will receive a fee equal to 5% of
collections for the first 120 days after the Closing ($4.4 million) and
estimated bad debt agency fees of 40% for receivables collected
subsequent to 120 days after the Closing ($15.3 million).
(13) The pro forma adjustments to supplies, other current assets and other
long-term assets represent the sale of such assets to CBHS at their
recorded amounts.
(14) The pro forma adjustments to land, buildings and improvements,
equipment, accumulated depreciation and construction in progress
represent the basis of real and personal property sold to Crescent and
contributed and sold by Magellan to CBHS. A summary of these
transactions is as follows (000's):
13
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Sales price......................................................... $ 400,000
Less: transaction costs............................................ (12,475)
Warrant valuation................................................... (25,000)
----------
Transaction consideration, net...................................... 362,525
Net book value of Property and Equipment sold to Crescent and CBHS.. 372,156
----------
Loss on sale of Property and Equipment to Crescent.................. $ (9,631)
==========
Net book value of Property and Equipment contributed to CBHS........ $ 13,418
==========
Total net book value of Property and Equipment sold and contributed. $ 385,574
==========
</TABLE>
(15) The pro forma adjustments to Investment in/Advances to CBHS represent
Magellan's capital contribution for its 50% ownership and voting
interest in CBHS in the form of contributed net assets and advances to
CBHS for working capital purposes. Magellan will provide a guarantee
under certain circumstances, not to exceed $65 million, for a CBHS
bank line of credit secured by CBHS' receivables. CBHS consummated a
senior secured credit facility at closing with a group of commercial
banks of up to $100 million pursuant to a 5-year revolving credit
facility. Each of the Company and COI will make a commitment to loan
CBHS up to $17.5 million each, for a period of five years. The Company
will have the right to require CBHS to draw down a portion of its loan
commitment, which will be funded equally by the Company and COI, and
will be used in the manner directed by the Company. The fair value of
the net assets contributed to CBHS by Magellan is approximately $5.5
million and the pro forma advance to CBHS by Magellan is approximately
$10.0 million.
(16) The pro forma adjustments to goodwill and other intangible assets
represent impairment losses related primarily to hospital-based
goodwill and other intangible assets as a result of the Crescent
Transactions, including the write-off of approximately $8.9 million in
unamortized deferred financing costs if the Notes are repurchased. The
Company is disposing of a significant portion of its provider business
segment. The impairment loss results from reducing the book value of
the Company's investment in CBHS to its approximate fair value. The
impairment losses represent the carrying amount of goodwill and other
intangible assets related to the divested or contributed operations.
(17) The pro forma adjustments to accrued liabilities represent the accrual
of $5.0 million of exit costs and the remaining obligation to construct
the Philadelphia Purchased Facility of $9.6 million, less the payment
of accrued interest for debt serviced as a result of the Crescent
Transactions of $20.0 million if the Notes are repurchased and $0.5
million if the Notes are not repurchased, and $7.0 million of accrued
vacation liabilities assumed by CBHS. The Company is exiting the
domestic provider business as a result of the Crescent Transactions.
The type and amount of exit costs accrued are as follows (000's):
<TABLE>
<CAPTION>
<S> <C>
Incremental staffing, consulting and related costs to prepare and coordinate
audits of terminating Medicare cost reports for divested businesses............ $ 2,000
Incremental staffing and related costs to perform accounting functions
related to retained hospital-based assets and liabilities...................... 2,000
Incremental staffing and related costs to prepare and file final income tax,
property tax, sales and use tax and other tax returns for divested businesses.. 1,000
---------
$ 5,000
=========
</TABLE>
The Company is constructing a hospital in Philadelphia to replace its
existing Philadelphia hospital. The Company has incurred $1.4 million
in construction costs through March 31, 1997 and is committed to incur
up to $11.0 million in total construction costs as part of the Crescent
Purchase Agreement.
(18) The pro forma adjustments to cash and cash equivalents, current
maturities of long-term debt and capital lease obligations ("CLOs") and
long-term debt and CLOs represent inflows and outflows of cash and the
changes in the Company's debt structure as a result of the Crescent
Transactions. A summary of the pro forma adjustments to cash and cash
equivalents is as follows (000's):
14
<PAGE>
<TABLE>
<CAPTION>
No Notes All Notes
Repurchased Repurchased
--------- -----------
<S> <C> <C>
Sale of Property and Equipment ............... $ 375,000 $ 375,000
Issuance of warrants to Crescent ............. 12,500 12,500
Issuance of warrants to COI .................. 12,500 12,500
Sale of supplies and other assets ............ 7,683 7,683
Transaction costs ............................ (12,475) (12,475)
Advance to CBHS .............................. (10,000) (10,000)
Debt and accrued interest payments ........... (187,313) (381,766)
Premium on Notes ............................. -- (3,750)
--------- ---------
$ 197,895 $ (308)
========= =========
</TABLE>
A summary of the Company's pro forma combined debt structure before the Crescent
Transactions and after the Crescent Transactions is as follows (000's):
<TABLE>
<CAPTION>
Pro Forma
Combined Pro Forma Pro Forma
Before the After the After the
Crescent Crescent Crescent
Transactions Transactions(1) Transactions(2)
------------ --------------- ---------------
<S> <C> <C> <C>
Revolving credit agreement.............. $ 121,000 $ 200,000 $ --
11.25% Senior Subordinated Notes........ 375,000 -- 375,000
Other long-term debt and CLOs........... 84,536 19,828 19,828
------------ -------------- --------------
Subtotal $ 580,536 $ 219,828 $ 394,828
------------ -------------- --------------
Current maturities of long-term debt
and CLOs............................. $ 5,845 $ 3,842 $ 3,842
============ ============== ==============
</TABLE>
(1) Assumes all Noteholders elect to have their Notes repurchased.
(2) Assumes no Noteholders elect to have their Notes repurchased.
(19) The pro forma adjustments to deferred income tax assets and liabilities
represent the tax consequences related to (i) accounts receivable
collection fees, (ii) loss on the sale of real and personal property to
Crescent, (iii) impairment losses related to intangible assets, (iv)
exit costs and related commitments and (v) the premium required to
service the Notes if the Notes are repurchased at the Company's
historic effective tax rate of 40%.
(20) The pro forma adjustments to warrants outstanding represent the fair
value of the 2,566,622 Warrants issued to Crescent and COI having an
exercise price of $30 per share. The Company will receive $12.5 million
each from Crescent and COI as consideration for the Warrants. The fair
value of the warrants was determined using the Black-Scholes method of
valuation. The Warrants will be exercisable by Crescent and COI at the
following times and in the following amounts:
15
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
of Common Stock End of
Date First Issuable Upon Exercise
Exercisable Exercise Period
June 17 of Warrants June 17
- ----------------- ------------------- ----------------
<C> <C> <C>
1998 30,000 2001
1999 62,325 2002
2000 97,114 2003
2001 134,513 2004
2002 174,678 2005
2003 217,770 2006
2004 263,961 2007
2005 313,433 2008
2006 366,376 2009
2007 422,961 2009
2008 483,491 2009
</TABLE>
(21) The pro forma adjustments to accumulated deficit represent the net loss
related to (i) estimated accounts receivable collection fees, (ii) loss
on the sale of real and personal property to Crescent, (iii) impairment
losses related to intangible assets, (iv) exit costs and related
commitments and (v) the premium required to service the Notes, if the
Notes are repurchased. The pre-tax loss and after-tax loss are
summarized as follows (000's):
<TABLE>
<CAPTION>
Pre-tax After-tax Note
Loss Loss Reference
-------------- --------------- --------------
<S> <C> <C>
Accounts receivable collection fees $ 19,660 $ 11,796 (12)
Impairment losses on intangible assets 14,824 8,894 (16)
Exit costs and construction obligation 14,647 8,788 (17)
Loss on the sale of property and equipment 9,631 5,779 (14)
-------------- ---------------
$ 58,762 $ 35,257
============== ===============
</TABLE>
The extraordinary loss on the early extinguishment of debt would be
approximately $7.6 million, net of tax, if all the Notes are repurchased.
The Closing of the Crescent Transactions will result in accelerated vesting
for options to purchase 1,210,375 shares of Common Stock under the 1996
Stock Option Plan. The accelerated vesting of options under the 1996 Stock
Option Plan is triggered by the Closing of the Crescent Transactions. The
Company believes the Crescent Transactions meet the definition of a
"sale...of all or substantially all" of the Company's assets included in
the 1996 Stock Option Plan, which is supported by relevant Delaware case
law.
Exhibits
2(a) Real Estate Purchase and Sale Agreement, dated January 29, 1997,
between the Company and Crescent Real Estate Equities Limited
Partnership, which was filed as Exhibit 2(a) to the Company's current
report on Form 8-K filed on April 23, 1997, and is incorporated herein
by reference.
2(b) Amendment No. 1, dated February 28, 1997, to the Real Estate Purchase
and Sale Agreement, dated January 29, 1997, between the Company and
Crescent Real Estate Equities Limited Partnership, which was filed as
Exhibit 2(b) to the Company's current report on Form 8-K filed on April
23, 1997, and is incorporated herein by reference.
2(c) Amendment No. 2, dated May 29, 1997, to the Real Estate Purchase and
Sale Agreement, dated January 29, 1997, between the Company and
Crescent Real Estate Equities Limited Partnership.
2(d) Contribution Agreement, dated June 16, 1997 between the Company and
Crescent Operating, Inc.
16
<PAGE>
4(a) Warrant Purchase Agreement, dated January 29, 1997, between the Company
and Crescent Real Estate Equities Limited Partnership which was filed
as Exhibit 4(a) to the Company's current report on Form 8-K, which was
filed on April 23, 1997, and is incorporated herein by reference.
4(b) Amendment No. 1,dated June 17, 1997, to the Warrant Purchase Agreement,
dated January 29, 1997, between the Company and Crescent Real Estate
Equities Limited Partnership.
99(a) Press release, dated June 17, 1997.
99(b) Master Lease Agreement, dated June 16, 1997, between Crescent Real
Estate Funding VII, L.P., as Landlord, and Charter Behavioral Health
Systems, LLC, as Tenant.
99(c) Master Franchise Agreement, dated June 17, 1997, between the Company
and Charter Behavioral Health Systems, LLC.
99(d) Form of Franchise Agreement, dated June 17, 1997, between the Company,
as Franchisor, and Franchise Owners.
99(e) Subordination Agreement, dated June 16, 1997, between the Company,
Charter Behavioral Health Systems, LLC and Crescent Real Estate
Equities Limited Partnership.
99(f) Operating Agreement of Charter Behavioral Health Systems, LLC, dated
June 16, 1997, between the Company and Crescent Operating, Inc.
99(g) Warrant Purchase Agreement, dated June 16, 1997, between the Company
and Crescent Operating, Inc.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: June 30, 1997 Magellan Health Services, Inc.
By: /s/ Craig L. McKnight
------------------------------
Executive Vice President and
Chief Financial Officer
18
<PAGE>
SECOND AMENDMENT TO
REAL ESTATE PURCHASE AND SALE AGREEMENT
THIS SECOND AMENDMENT TO REAL ESTATE PURCHASE AND SALE AGREEMENT (this
"Second Amendment") is made as of the 29th day of May, 1997, by and between
MAGELLAN HEALTH SERVICES, INC., a Delaware corporation ("Magellan" or the
"Seller"), and CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP, a Delaware
limited partnership (the "Purchaser").
R E C I T A L S
A. The parties entered into that certain Real Estate Purchase and Sale
Agreement dated as of January 29, 1997 (the "Agreement") and amended as of
February 28, 1997 (the "First Amendment"). Capitalized terms used but not
defined herein have the meanings ascribed to them in the Agreement and First
Amendment.
B. The parties desire to enter into this Second Amendment to evidence
their agreement to certain changes to the Agreement, as hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants set forth
herein, the parties hereby agree as follows:
Exhibit B, as attached to the Agreement, is hereby
amended to delete from entry number five hundred and
fifty-eight (558) the Laurel Brook/Charter Laurel
Heights Behavioral Health Systems, Inc. Facility
located at 3920 North Peachford Road, Atlanta,
Georgia, 30341. Pursuant to this Second Amendment,
such Facility shall no longer be a part of Exhibit B
or entry number 558 contained therein.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered this 29th day of May, 1997.
MAGELLAN HEALTH SERVICES, INC.,
a Deleware Corporation
By:\s\ Linton C. Newlin
--------------------------------
Title: Vice President and Secretary
----------------------------
<PAGE>
CRESCENT REAL ESTATE EQUITIES
LIMITED PARTNERSHIP, a Delaware
limited partnership
By: Crescent Real Estate
Equities, Ltd., A Delaware
corporation, its sole general
partner
By: \s\ David M. Dean
------------------------------
Title: Senior Vice President, Law
---------------------------
- 2 -
<PAGE>
CONTRIBUTION AGREEMENT
This CONTRIBUTION AGREEMENT, dated as of June 16, 1997 (the
"Agreement"), is entered into by and among Magellan Health Services, Inc., a
Delaware corporation ("Magellan"), Crescent Operating, Inc., a Delaware
corporation ("Crescent"), and Charter Behavioral Health Systems, LLC, formed
under the laws of the State of Delaware ("Charter LLC").
WHEREAS, Magellan and Crescent Real Estate Equities Limited
Partnership, a Delaware limited partnership ("CREELP"), have entered into a Real
Estate Purchase and Sale Agreement dated January 29, 1997, as amended by the
First Amendment to Real Estate Purchase and Sale Agreement dated as of February
28, 1997 and as further amended ("Real Estate Purchase and Sale Agreement"),
pursuant to which Magellan has agreed to cause certain of its subsidiaries
listed on Exhibit A to the Real Estate Purchase and Sale Agreement to sell to
CREELP or an affiliate of CREELP ("Crescent Affiliate"), and CREELP has agreed
to purchase, or to cause Crescent Affiliate to purchase, from those
subsidiaries, certain of the real property, related improvements, furniture,
equipment and fixtures owned by those subsidiaries (the "Facilities") and used
in the operation of Magellan's acute care psychiatric hospitals;
WHEREAS, Magellan and Crescent desire to operate and maintain Charter
LLC to (i) operate the Facilities and certain leased facilities (together, the
"Hospitals"); and (ii) engage in the business of hospital-based behavioral
healthcare using Charter LLC as the operating entity;
WHEREAS, it is a condition to the consummation of the Real Estate
Purchase and Sale Agreement and the other Transaction Documents (as defined in
the Real Estate Purchase and Sale Agreement) that Magellan cause its
subsidiaries listed on Exhibit A to this Agreement (each a "Magellan Subsidiary"
and together the "Magellan Subsidiaries") to contribute certain assets to
Charter LLC, and that Crescent contribute certain assets to Charter LLC, in
exchange for all of the interests in Charter LLC (the "Contribution");
WHEREAS, upon closing of the transactions contemplated by this
Agreement and the Real Estate Purchase and Sale Agreement, (i) Charter LLC and
Magellan, through its wholly owned subsidiary Charter Franchise Services, LLC
("CFS," collectively with Magellan, "Franchisor"), will enter into a Franchise
Agreement, dated the date hereof (the "Franchise Agreement") and will cause each
Charter LLC Subsidiary (as hereafter defined) to enter into a Franchise
Agreement dated the date hereof (the "Subsidiary Franchise Agreement" and,
collectively with the Master Franchise Agreement, the "Franchise Agreement"),
(ii) Charter Behavioral Health Systems, Inc. ("Charter Inc.") and Crescent will
enter into that certain Operating Agreement of Charter LLC dated the date hereof
(the "Charter LLC Agreement"), and (iii) Magellan, Crescent Affiliate, CFS and
Charter LLC will enter into a Subordination Agreement dated the date hereof (the
"Subordination Agreement");
- 1 -
<PAGE>
A G R E E M E N T:
In consideration of the mutual covenants contained in this Agreement
the parties agree as follows:
SECTION 1.
DEFINITIONS
1.1 Definitions. As used in this Agreement, the following terms
shall have the following meanings unless the context otherwise requires:
"Business" shall mean the business of the operation of an acute care
psychiatric hospital, part of an acute care general hospital operating an acute
care psychiatric unit, a behavioral healthcare residential treatment center, a
part of a facility operating a behavioral healthcare residential treatment
center, or other similar facility providing 24-hour behavioral healthcare, and
the delivery of behavioral healthcare from such facility and other affiliated
facilities; such behavioral healthcare to include inpatient hospitalization,
partial hospitalization programs, outpatient therapy, intensive outpatient
therapy, ambulatory detoxification, behavioral modification programs and related
services.
"Contribution Date" shall mean the moment in time immediately prior to
the Closing Date.
1.2 Other Defined Terms. Capitalized terms not otherwise defined
in this Agreement shall have the meanings given them in the Real Estate Purchase
and Sale Agreement.
SECTION 2.
CONTRIBUTION
2.1 Contribution of Assets Relating to the Hospitals by Magellan. On
the Contribution Date, on the terms and subject to the conditions set forth in
this Agreement, and in consideration for a 50% interest in Charter LLC, Magellan
will cause the relevant Magellan Subsidiary to (either directly or through
Magellan) contribute or assign to Charter LLC or a relevant, wholly owned
subsidiary of Charter LLC (a "Charter LLC Subsidiary") all of such Magellan
Subsidiary's right, title and interest in the following assets (the "Contributed
Assets") related to the Hospitals:
(a) All patient medical records;
(b) All licenses and permits used in the operation of the
Hospitals, to the extent that such licenses and permits are transferable;
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(c) All of the leasehold interests held by any Magellan Subsidiary as
lessee, in real or personal property including, but not limited to the leasehold
interests in those Hospitals set forth on Schedule 2.1(c);
(d) All of the furniture, fixtures equipment and leasehold improvements
owned by Magellan or a Magellan Subsidiary and located at a Hospital set forth
on Schedule 2.1(c) or any other leased premises included in Section 2.1(c);
(e) All contracts with physicians and other healthcare professionals;
(f) All operating, service, maintenance and loaned employee contracts;
(g) All payor contracts including but not limited to contracts with
employers, health maintenance organizations, preferred provider organizations,
managed care companies, and insurance companies but excluding all national and
regional contracts with vendors and payors, the benefits of which will be
provided to Charter LLC by Franchisor pursuant to the Franchise Agreement;
(h) The employment contract between Magellan and John M. DeStefanis;
(i) The stock of Charter Medical Executive Corporation ("CMEC"); and
(j) Employment files and records.
2.2 Excluded Assets. Magellan and Crescent expressly understand and
agree that neither Magellan nor any Magellan Subsidiary is conveying or
contributing to Charter LLC or any Charter LLC Subsidiary pursuant to Section
2.1 any of the following assets, rights or properties or any assets which are
not used in the conduct of the business of the Hospitals (the "Excluded
Assets"):
(a) Supplies and inventory relating to the Hospitals;
(b) Notes receivable relating to the Hospitals;
(c) Prepaid assets relating to the Hospitals;
(d) Prepaid expenses relating to the Hospitals;
(e) Lease deposits paid by either Magellan or any Magellan Subsidiary
as tenant in any lease relating to the Hospitals;
(f) Utility deposits relating to the Hospitals;
(g) Cash held in escrow accounts relating to the Hospitals;
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(h) The capital stock of any subsidiary of Magellan (other than CMEC)
or Magellan's interest in any joint venture including but not limited to the
joint ventures set forth on Schedule 2.2(h) (except as provided in Section 3.1);
(i) Corporate seals, minute books, stock ledgers or other books and
records pertaining to the organization, issuance of stock and capitalization of
the Magellan Subsidiaries;
(j) All rights, properties, and assets used by Magellan primarily in a
business other than the Business and not reasonably necessary for the
operation of the Business;
(k) All rights, properties, and assets that shall have been transferred
or disposed of by Magellan or any of its subsidiaries prior to the date of this
Agreement or prior to Closing in the ordinary course of business;
(l) Trademarks, trade names (including the "Charter" name),
corporate names and logos owned by Magellan and any of its subsidiaries;
(m) All real estate, furniture, fixtures and equipment to be
transferred to Crescent under the Real Estate Purchase and Sale Agreement;
(n) Any deferred tax asset of a Magellan Subsidiary at the Closing
Date;
(o) The Charter System (as defined in the Franchise Agreement)
including but not limited to all treatment protocols, written or unwritten, and
future improvements and modifications, whether made by CFS, Magellan, a Magellan
subsidiary, Charter LLC or a Charter LLC Franchisee as defined in the Franchise
Agreement;
(p) Policy and procedure manuals, written or unwritten, and future
improvements and modifications to such manuals, whether made by CFS, Magellan, a
Magellan subsidiary, Charter LLC or an Charter LLC Subsidiary;
(q) All cash, cash equivalents, short-term investments, marketable
securities, andaccounts receivable of Magellan and each Magellan Subsidiary;
(r) Patient related software systems;
(s) TRIMS system;
(t) Purchasing/ordering systems;
(u) Accounting systems;
(v) Call center system;
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(w) Intellectual property rights;
(x) Tax refunds, cost report adjustments and settlements relating to
periods prior to the Closing Date and liabilities or assets related to
depreciation recapture relating to periods prior to the Closing Date;
(y) Disproportionate Share Payments; and
(z) Assets (including business records) required in order to provide
the services to be provided by Franchisor pursuant to the Franchise Agreement.
2.3 Assumed Obligations. Magellan and Crescent expressly understand and
agree that all of the debts, obligations, duties and liabilities, liquidated or
unliquidated, contingent or fixed, relating to or arising out of the operation
of the Hospitals and the business of Charter LLC after the Closing (as well as
those in subsections (c) and (d) below) but excluding each and every liability
and obligation for which Magellan has agreed to indemnify Charter LLC pursuant
to Section 8 of this Agreement (the "Assumed Obligations") shall be assumed by
Charter LLC as of the Contribution Date regardless of whether such liabilities
are accrued on the books of Magellan or a Magellan Subsidiary, (or Charter LLC
shall otherwise be responsible for such debts, liabilities, duties and
liabilities), including, without limitation, the following:
(a) All such liabilities and obligations relating to the Contributed
Assets;
(b) All such liabilities and obligations relating to the Purchased
Assets (as hereafter defined);
(c) All liabilities and obligations relating to paid days off and
accrued vacation arising prior to the Contribution Date;
(d) All liabilities and obligations relating to sick days arising prior
to the Contribution Date;
(e) All such liabilities and obligations (excluding any payment
obligations) arising from the Consent Decrees and Settlements listed on Schedule
6.1(p) to the Real Estate Purchase and Sale Agreement;
(f) All such liabilities and obligations arising from Charter LLC's
participation in the contracts excluded from Section 2.1(g); and
(g) All such liabilities and obligations related to software
sublicensed to Charter LLC pursuant to the Franchise Agreement which are
licensed from third parties.
2.4 Excluded Liabilities. Any and all liabilities of Magellan or
a Magellan Subsidiary arising prior to the Closing, except as set forth in
Section 2.3(c) and (d) (the "Excluded Liabilities"), shall not be assumed by
Charter LLC and shall remain the liabilities and
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obligations of Magellan or the relevant Magellan Subsidiary except to the extent
covered by insurance, subject to Section 8.1. Without limiting the effect of the
foregoing, the term "Excluded Liabilities" includes the following liabilities
which arose or were incurred prior to the Closing:
(a) Any liability or obligation in respect of any federal, state,
local, foreign or other tax, levy, assessment or other governmental charge,
including, without limitation, income, business, occupation, franchise,
property, payroll, personal property, sales, transfer, employment, occupancy,
franchise or withholding taxes, and any premium, including, without limitation,
interest, penalties and additions in connection therewith;
(b) Any liability (to the extent not covered by insurance) arising from
any injury to or death of any person or damage to or destruction of any
property, whether based on negligence, breach of warranty, strict liability,
enterprise liability or any other legal or equitable theory, arising from the
ownership or operation of the Hospitals or the services performed by Magellan or
any of its subsidiaries prior to the Closing;
(c) The charges and taxes which Magellan has agreed to pay pursuant to
Section 9.1 of this Agreement;
(d) Adjustments or refunds of payments required by Medicare, Medicaid
or any other payor as a result of payments prior to the Contribution Date; and
(e) Fines or penalties assessed and arising out of activities occurring
prior to the Contribution Date.
2.5 Contribution of Cash by Crescent. On the Contribution Date, on the
terms and subject to the conditions set forth in this Agreement and in
consideration for a 50% interest in Charter LLC, Crescent shall contribute to
Charter LLC cash in the amount of $5.0 million (the "Crescent Contribution"),
which is equal to the purchase price of the Purchased Assets (as defined below).
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SECTION 3.
PURCHASE OF CERTAIN ASSETS BY CHARTER LLC
3.1 Asset Purchase. On the Closing Date, Charter LLC shall (a) purchase
from Charter Medical Information Systems ("CMIS") the assets of CMIS listed on
the computer printout (the "CMIS Assets") delivered by Magellan to Crescent on
the date hereof, which computer printout is separately bound and (b) shall
purchase from certain Magellan subsidiaries their respective interest in
Alliance for Behavioral Health ("Alliance," together with the CMIS Assets, the
"Purchased Assets").
3.2 Purchase of Working Capital. On the Closing Date, Charter LLC shall
purchase (with payment to be made within two business days of purchase) from the
Magellan Subsidiaries the following assets (the "Working Capital Assets")
relating to or used in the Hospitals and as the same exist on the Closing Date:
(a) Supplies and inventory relating to the Hospitals;
(b) Notes receivable relating to the Hospitals;
(c) Prepaid assets relating to the Hospitals;
(d) Prepaid expenses relating to the Hospitals;
(e) Lease deposits paid by either Magellan or any Magellan Subsidiary
as tenant in any lease relating to the Hospitals; and
(f) Utility deposits relating to the Hospitals.
3.3 Purchase Price. The aggregate purchase price for the Purchased
Assets is $5.0 million, and for the Working Capital Assets is $8.0 million (in
the aggregate, the "Purchase Price"). On the Closing Date, Charter LLC shall pay
to Magellan or its designated subsidiary cash equal to $5.0 million, with
payment for the Working Capital Assets to be made at the Closing or within two
business days of the Closing Date.
3.4 Post-Closing Adjustment. Within sixty (60) days after the Closing
Date, Magellan shall deliver to Charter LLC a statement (the "Statement")
setting forth the net book value of the Working Capital Assets as of the Closing
Date, together with appropriate supporting information. The net book value of
the Working Capital Assets shall be calculated from the books and records of
Magellan, in accordance with past practice. Charter LLC shall have thirty (30)
days to deliver to Magellan any objections ("Objections") it has to the
Statement. If Charter LLC does not submit any such Objections, the Statement
shall become final. If Charter LLC does deliver any Objections, Magellan and
Charter LLC shall negotiate in good faith to resolve the Objections as promptly
as practical. In the event Magellan and Charter LLC are unable to resolve the
Objections within thirty (30) days after such Objections are delivered to
Magellan,
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the matter shall be referred to Arthur Andersen LLP for final resolution of the
Objections, which resolution shall be binding upon the parties. Arthur Andersen
LLP shall resolve the Objections as promptly as practical, but in any event
within forty-five (45) days. If at any time the Objections to the Statement are
resolved in any manner set forth above, the Statement shall become final (the
"Final Statement"). If the Final Statement shows that the amount of Working
Capital Assets as of the Closing Date are less than $8.0 million (the
difference, the "Shortfall"), Magellan shall promptly pay Charter LLC the amount
of the Shortfall. If the Final Statement shows that the Working Capital Assets
as of the Closing Date are greater than $8.0 million (the "Surplus"), Charter
LLC shall promptly pay Magellan the amount of the Surplus.
SECTION 4.
CONSIDERATION AND CLOSING
4.1 Amount and Form of Consideration. On the Closing Date (i) in
consideration of the transfer and contribution of the Contributed Assets to
Charter LLC, Charter LLC shall deliver to the Magellan Subsidiaries fifty
percent (50%) (when aggregated with the membership interest held by Magellan
affiliates) of the issued and outstanding capital equity interests in Charter
LLC (the "Magellan Interest"), and (ii) in consideration of Crescent's transfer
and contribution of the Crescent Contribution to Charter LLC, Charter LLC shall
deliver to Crescent fifty percent (50%) of the issued and outstanding capital
equity interests in Charter LLC (the "Crescent Interest").
4.2 The Closing.
(a) The Contribution shall occur on the date, at the time and place,
and subject to the conditions set forth in the Real Estate Purchase and Sale
Agreement and herein.
(b) On the Closing Date, Magellan, CFS, Crescent, Charter LLC and each
Charter LLC Subsidiary (as applicable) shall execute and deliver the following
documents:
(i) the Charter LLC Agreement;
(ii) the Franchise Agreement;
(iii) the Warrant Agreement;
(iv) the Warrant Agreements dated the date of this Agreement
between Magellan and Crescent Operating (the "COI Warrant Agreements").
(v) subject to obtaining any required consent, assignments of
the contracts and leases included in the Contributed Assets, the
Purchased Assets and the Working Capital Assets; and
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(vi) such other instruments and documents, in form and
substance reasonably acceptable to Magellan and Crescent, as may be
necessary to effect the closing of the transactions contemplated by
this Agreement or to evidence the Contribution.
(c) On the Closing Date, Magellan shall execute and deliver to Charter
LLC the following:
(i) Assignments, bills of sale or other documents or
instruments of transfer to transfer to Charter LLC all tangible and
intangible personal property included in the Contributed Assets, the
Purchased Assets and the Working Capital Assets (which documents shall
include a general warranty to title of such assets except for those
assets which are leased, purchased on an installment basis or
encumbered by an Assumed Obligation);
(ii) Such instruments of assumption and other instruments or
documents as may be necessary to effect Charter LLC's assumption of the
Assumed Obligations; and
(iii) Such other instruments or documents as may be necessary
to effect the closing of the transactions contemplated by this
Agreement.
(d) At the closing, Crescent shall deliver by wire transfer, to an
account number designated by Charter LLC, the Crescent Contribution in
immediately available funds.
SECTION 5.
REPRESENTATIONS AND WARRANTIES
5.1 Representations and Warranties of Magellan. Magellan represents
and warrants to Charter LLC, as of the date hereof as follows:
(a) Organization and Power. Magellan and the Magellan Subsidiaries are
corporations or limited liability companies duly organized, validly existing and
in good standing under the laws of their respective states of incorporation or
formation, with power and authority to conduct the businesses in which they are
engaged, to lease and own the properties leased or owned by them and to enter
into and perform their obligations under this Agreement. Each of Magellan and
the Magellan Subsidiaries is qualified to do business and is in good standing as
a foreign corporation or limited liability company in each jurisdiction where
each of them is required to be so qualified, except where the failure to so
qualify would not have a material adverse effect on a Hospital or on the
business of the Hospitals taken as whole.
(b) Authorization. The execution and delivery of this Agreement by
Magellan and the Magellan Subsidiaries, the performance by Magellan and the
Magellan Subsidiaries of all obligations under this Agreement and the sale and
delivery of the Contributed Assets, the Purchased Assets and the Working Capital
Assets have been duly authorized by all necessary
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corporate action on the part of Magellan and the Magellan Subsidiaries. This
Agreement has been duly executed and delivered by Magellan and the Magellan
Subsidiaries and constitutes the legal, valid and binding obligation of each of
them, enforceable against each of Magellan and the Magellan Subsidiaries in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditor's
rights generally.
(c) No Violation. The execution and delivery of this Agreement by
Magellan and the Magellan Subsidiaries, and the consummation by Magellan and the
Magellan Subsidiaries of the transactions contemplated in this Agreement will
not conflict with or result in the breach or violation of any of the terms or
conditions of, or constitute (or with notice or lapse of time or both would
constitute) a default under, (i) any organizational documents of Magellan or any
Magellan Subsidiary, (ii) except as set forth on Schedule 5.1(c), any material
instrument, contract or other agreement to which Magellan or any Magellan
Subsidiary is a party or by which Magellan or any Magellan Subsidiary is bound,
(iii) any material provision of law, statute, rule or regulation of any court or
governmental authority to which Magellan or any Magellan Subsidiary is subject
(assuming applicable approvals and consents in Schedule 5.1(d) are obtained), or
(iv) except as set forth on Schedule 5.1(c), any judgment, decree, franchise,
order, license or permit applicable to Magellan or any Magellan Subsidiary,
except where such conflict, breach, violation or default would not have a
material adverse effect on a Hospital or on the business of the Hospitals taken
as a whole.
(d) Consents. Except as set forth in Schedule 5.1(d), no material
consent, approval, license or authorization of any third party, governmental
agency, commission, board or public authority is required in connection with the
execution, delivery and performance of this Agreement by Magellan or any
Magellan Subsidiary.
(e) Insurance. A complete and accurate schedule of all insurance
policies (including a statement of policy limits and deductibles) held by
Magellan and the Magellan Subsidiaries relating to the Hospitals or the Business
now in force, including, without limitation, malpractice, public liability,
property damage and workers compensation or other coverage, has been made
available to Crescent. All insurance policies remain in full force and effect
except where such failure to remain in full force and effect will not have a
material adverse effect on a Hospital or on the business of the Hospitals taken
as a whole.
(f) Litigation. Except as set forth in Schedule 5.1(f), there are no
lawsuits, proceedings, actions, arbitrations, claims or governmental
investigations, inquiries or proceedings pending or, to the knowledge of
Magellan, threatened, against Magellan or any Magellan Subsidiary seeking
damages for an amount in excess of $1 million, and there is no action, suit or
proceeding by any person or agency pending or, to the knowledge of Magellan,
threatened which questions the legality or validity of the transactions
contemplated hereby.
(g) Licenses, Accreditation and Third-Party Payors. Magellan and the
Magellan Subsidiaries hold all licenses, permits, registrations, approvals,
certificates, contracts, consents, accreditations, approvals and franchises
("Licenses and Permits") necessary to own or lease the Contributed Assets and to
conduct and operate the Hospitals in the manner presently operated
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and for participation in the Medicare and Medicaid reimbursement programs,
including, without limitation, all licenses, certificates of need and permits
required by the state in which they operate and by all other appropriate health
care facility licensing agencies, federal, state, county or local governmental
authorities and regulatory agencies, except where the failure to hold such
Licenses and Permits would not have a material adverse effect on a Hospital or
on the business of the Hospitals taken as a whole.
(h) The Business. Upon transfer to Charter LLC of the Contributed
Assets, the Purchased Assets and the Working Capital Assets, and consummation of
the transactions contemplated by the other Transactional Documents, (i) Charter
LLC will have or, through the Franchise Agreement or the Administrative Services
Agreement dated the date of this Agreement between Magellan and Charter LLC,
will have access to all tangible and intangible assets and all personnel
reasonably necessary to conduct a business that is substantially the same as and
that operates in accordance with the same standards of operation as the business
of the Hospitals prior to the Closing, and (ii) Charter LLC will have the means
to provide the services specified in Section 7.9.
(i) Contracts. Schedule 5.1(i) contains a listing of all contracts or
series of related contracts which are material to the business of the Hospitals,
taken as a whole ("Material Contracts"), including all amendments, modifications
and side letters thereto, currently in existence. With respect to each Material
Contract, neither Magellan nor any Magellan Subsidiary has received a notice of
termination, has sent a notice of termination, is in default, or has any
knowledge that any other party to such Material Contracts is in default
thereunder.
(j) No Other Owned Hospitals. Except as described on Schedule 5.1(j),
no Magellan Subsidiary owns or operates any Hospital other than the Hospitals
operated using the assets which are being contributed or sold pursuant to this
Agreement.
(k) Financial Statements. All books and records relating to operating
income and expenses of the Hospitals made available to CREELP or Crescent by
Magellan were and shall be those maintained by Magellan in regard to the
Hospitals in the normal course of business. The audited Financial Statements as
of and for the year ended September 30, 1996 (the "1996 Financial Statements")
furnished by Magellan to CREELP as a part of Magellan's Deliveries (as defined
in the Real Estate Purchase and Sale Agreement) have been prepared from the
books and records of Magellan in the ordinary course of business and present
fairly in all material respects the results of operations of Magellan for the
periods then ended and the financial condition of Magellan as of the date of the
1996 Financial Statements.
(l) No Material Adverse Change. Since the date of Magellan's 1996
Financial Statements, there has been no material adverse change in the business
or results of operations of Magellan and the Magellan Subsidiaries taken as a
whole or the business of the Hospitals taken as a whole.
(m) SEC Reports. The periodic reports filed by Magellan with the
Securities and Exchange Commission with respect to Magellan's immediately
preceding fiscal year and any
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interim periods in its current fiscal year did not as of their respective dates
contain any untrue statements of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
(n) Compliance With Laws. Magellan has delivered to Crescent or CREELP
its Proxy Statement to Shareholders for its 1997 Annual Meeting of Shareholders
held on May 30, 1997, at which, among other matters, shareholders of Magellan
approved the transactions which are the subject of the Transaction Documents.
Except as described in the Proxy Statement, or in documents filed with the
Securities and Exchange Commission pursuant to applicable law, Magellan is not
aware of any material risk that Magellan is, in the conduct of the Business
prior to the closing of the transactions contemplated by the Transaction
Documents or that Charter LLC will be, in the conduct of the Business after the
closing of the transactions contemplated by the Transaction Documents, in
violation of any applicable federal law specifically designed to regulate the
healthcare industry, which violation will have a material adverse effect on
Magellan or Charter LLC.
5.2 Representations and Warranties of Crescent. Crescent hereby
represents and warrants to Charter LLC as follows:
(a) Authorizations, etc. The execution and delivery of this Agreement
by Crescent and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of Crescent.
This Agreement has been duly executed and delivered by Crescent and constitutes
the valid and binding obligation of Crescent, enforceable against Crescent in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws of affecting creditor's
rights generally.
(b) No Violation. Neither the execution and delivery of this Agreement,
nor the consummation by Crescent of the transactions contemplated hereby will
conflict with or result in the breach or violation of any of the terms or
conditions of, or constitute (or with notice or lapse of time or both would
constitute) a default under, (i) organizational documents of Crescent, (ii) any
material instrument, contract or other agreement to which Crescent is a party or
by which Crescent is bound, (iii) any material provision of law, statute, rule
or regulation of any court or governmental authority to which Crescent is
subject, including any provision relating to the status of Crescent Real Estate
Equities Company ("CEI") as a real estate investment trust for federal income
tax purposes, or (iv) any judgment, decree, franchise, order, license or permit
applicable to Crescent, except where such conflict, breach, violation or default
would not have a material adverse effect on Crescent.
(c) Consents. Except as set forth in Schedule 5.2(c), no material
consent, approval, license or authorization of any third party, governmental
agency, commission, board or public authority is required in connection with the
execution, delivery and performance of this Agreement by Crescent.
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(d) SEC Reports. The Registration Statement on Form S-1 (File No.
333-25223) of Crescent, as declared effective by the Securities and Exchange
Commission on June 12, 1997, did not at such time contain any untrue statements
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
SECTION 6.
CONDITIONS TO CLOSING
6.1 Pre-Closing Conditions. The consummation of the transactions
contemplated by this Agreement by each party is subject to satisfaction of the
following conditions, as applicable:
(a) Satisfaction of all of the conditions to closing set forth in the
Real Estate Purchase and Sale Agreement;
(b) Execution of the Franchise Agreement;
(c) Execution of the Charter LLC Agreement;
(d) Execution of the Warrant Agreement and the COI Warrant Agreements;
and
(e) The truth and accuracy in all material respects of the
representations and warranties made herein and compliance in all material
respects with all covenants and the delivery by each party of an officer's
certificate so stating.
6.2 Failure of Conditions. If any condition described in subsections
(a) - (f) of Section 6.1 is not satisfied by the Closing Date, Crescent shall
have the right to terminate this Agreement by giving written notice of such
action to Magellan and Magellan shall have the right to terminate by giving
written notice to Crescent. Upon delivery of any such termination notice, this
Agreement shall terminate, and all rights and obligations of the parties
hereunder shall be released and discharged, except that Magellan, on the one
hand, and Crescent, on the other hand, shall each remain liable to the other for
all damages suffered by the other if the unsatisfied condition was due to a
breach by one party of any of the covenants, obligations, representations or
warranties of such party in this Agreement or any other failure by such party to
use its commercially reasonable best efforts to satisfy conditions precedent to
Closing that are within the control of such party to satisfy.
SECTION 7.
COVENANTS AND AGREEMENTS
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Magellan covenants and agrees, and will cause each Magellan Subsidiary
to covenant and agree, and, as applicable, Crescent and Charter LLC covenant and
agree as follows:
7.1 Unlisted Assets. To the extent that, subsequent to Closing, an
asset or right that is used in the conduct of the business of the Hospitals
prior to Closing and that was not listed as a Contributed Asset, Purchased
Asset, Working Capital Asset or an Excluded Asset is discovered to exist, either
such asset or right shall be conveyed to Charter LLC without charge or Charter
LLC shall receive the benefits of ownership of such asset through the Franchise
Agreement at no additional charge (except to the extent that the asset results
in an increase in franchise fees due to the gross revenue component of the
franchise fees);
7.2 Assignment or Transfer of Contributed Assets. To the extent that
any of the Contributed Assets cannot be assigned or otherwise transferred to
Charter LLC, Magellan will use its commercially reasonable best efforts to
create an alternative structure that will provide Charter LLC with substantially
the same rights, and produce substantially the same economic effect, as that
which would have been provided or produced if the Contributed Assets had been
transferred or assigned.
7.3 Parties' Commercially Reasonable Best Efforts. Magellan and
Crescent agree to use their commercially reasonable best efforts to cause all
their covenants and agreements and all conditions precedent to the consummation
of the Transactions contemplated by this Agreement to be performed, satisfied
and fulfilled.
7.4 Insurance Reserves. Magellan will cause Plymouth Insurance
Company Ltd. ("Plymouth") to maintain reserves in amounts that are reasonably
actuarially adequate to cover risks insured by Plymouth associated with the
operation of the business of the Hospitals.
7.5 Accounts Receivable. Charter LLC shall pay to Magellan all amounts
actually received by Charter LLC in payment of receivables relating to the
business of the Hospitals, which receivables were existing as of (or accrued
prior to) the Closing Date, in exchange for a fee payable to Charter LLC by
Magellan equal to 5% of receivables collected by Charter LLC and received by
Charter LLC or Magellan. The receivables will be collected in accordance with
the procedures (including the level of effort to be expended) established by
Charter Inc. prior to the Closing Date and disclosed to Charter LLC in writing
on or before the Closing Date. Any receivables remaining uncollected 120 days or
more after the Closing Date will be turned over to Magellan at its request and
Charter LLC shall have no further obligations as to such receivables but will
continue collection efforts for all receivables not so delivered to Magellan.
7.6 Brokers. Each party represents and warrants to the other that it
has not engaged, dealt with or otherwise discussed this Agreement or the
Transactions with any broker, agent or finder.
7.7 Specific Performance. The parties acknowledge and agree that their
respective rights and obligations that will arise out of this Agreement are
unique and irreplaceable, and that the failure of either party to perform its
obligations under this Agreement or any of the
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Transaction Documents would result in damage to the other party that could not
be adequately compensated by a monetary award. Subject to Section 8.4 of the
Real Estate Purchase and Sale Agreement but notwithstanding anything else to the
contrary, the parties therefore agree that if either party fails to perform its
obligations hereunder or with respect to any of the Transaction Documents, the
other party may, in addition to all other remedies, seek an order of specific
performance from a court of appropriate jurisdiction.
7.8 Third Party Consents; Further Assurances.
(a) If any party shall fail to obtain any third party consent
necessary, proper or advisable to effect the consummation of the Contribution,
the purchase of the Purchased Assets or the purchase of the Working Capital
Assets, such party shall use all commercially reasonable best efforts, and shall
take any such actions reasonably requested by the other parties hereto, to
minimize any adverse effect upon Charter LLC's business resulting, or that could
reasonably be expected to result after the date hereof, from the failure to
obtain such consent.
(b) In addition to the actions, contracts and other agreements and
documents and other papers specifically required to be taken or delivered
pursuant to this Agreement, each of the parties hereto shall execute such
contracts and other agreements and documents and take such further actions as
may be reasonably required or desirable to carry out the provisions of this
Agreement.
7.9 Services Agreements. Prior to closing, Magellan, in its capacity as
a joint venturer, will or will cause any Magellan Subsidiary which is a joint
venturer in any Joint Venture that owns or operates a domestic Hospital, which
Joint Ventures are set forth on Schedule 7.9 and defined in the Franchise
Agreement as "Existing Joint Ventures" (a "Joint Venture"), to enter into a
services agreement with Charter LLC for each such Hospital owned or operated by
a Joint Venture, pursuant to which Charter LLC will perform, to the extent
agreed by joint venture partners, all of Magellan's obligations under the Joint
Venture agreement in exchange for the payment to Charter LLC by Magellan of all
distributions and fees paid to Magellan by or on behalf of the Joint Venture.
Magellan will use its commercially reasonable best efforts to obtain the consent
of Magellan's joint venture partners to the performance, by Charter LLC, of
Magellan's obligations under the Joint Venture Agreements. Each service
agreement, as referred to in this Section 7.9, shall be approved by Crescent,
which approval shall not be unreasonably withheld. The services agreement(s)
shall continue in effect until termination of the Facilities Lease.
7.10 Employee Benefits. The parties agree to establish employee benefit
plans for the employees of Charter LLC providing for overall benefits in an
amount similar to the benefits provided by the employee benefit plans in effect
on the date hereof at Magellan and the Magellan Subsidiaries.
7.11 Title to Property. Magellan and the Magellan Subsidiaries shall
convey at the Closing pursuant to the form of bill of sale attached as Exhibit I
to the Real Estate Purchase and Sale Agreement, (i) good and marketable title to
the Contributed Assets, the Purchased Assets
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<PAGE>
and the Working Capital Assets (to Charter LLC or such Charter LLC Subsidiary as
Charter LLC directs) owned by Magellan or a Magellan Subsidiary, subject to no
liens, encumbrances or material claims whatsoever, except for the Assumed
Obligations and except for any liens, encumbrances and claims related to the
purchase of property on an installment basis in the ordinary course of business,
and (ii) all of their rights and interest in the Contributed Assets, the
Purchased Assets, and the Working Capital Assets leased by Magellan or a
Magellan Subsidiary.
7.12 Right to Inspect. Magellan shall grant Charter LLC the right to
inspect any and all business records retained by Magellan pursuant to Section
2.2(z) during reasonable business hours and upon reasonable prior notice.
Charter LLC shall grant Magellan access to any business records transferred to
Charter LLC during reasonable business hours and upon reasonable prior notice.
SECTION 8.
INDEMNIFICATION
8.1 Indemnification Obligations of Magellan. Magellan shall indemnify
and hold harmless Charter LLC and its subsidiaries and affiliates, each of their
respective officers, directors, partners, employees, agents and representatives
and each of the permitted successors and assigns of any of the foregoing
(collectively, the "Charter LLC Indemnified Parties") from, against and in
respect of any and all claims, liabilities, obligations, losses, costs,
expenses, penalties, fines and other judgments (at equity or at law) and damages
(including, without limitation, amounts paid in settlement, costs of
investigation and reasonable attorneys' fees and expenses) (collectively,
"Claims and Damages") arising out of or relating to (i) any breach of any
representation, warranty, covenant, agreement or undertaking made by Magellan in
this Agreement or in any certificate, agreement, exhibit or schedule delivered
pursuant to this Agreement, or (ii) the ownership, lease or operation of the
Hospitals and attributable to events arising prior to the Closing (including
claims made after Closing related to events occurring prior to Closing) other
than Assumed Obligations or liabilities to the extent they are covered by
existing insurance, provided, however, that if the insurer does not pay insured
amounts under the terms of the policies, Magellan shall indemnify the Charter
LLC Indemnified Parties for such debts, liabilities and obligations. The Claims
and Damages of the Charter LLC Indemnified Parties described in this Section 8.1
as to which the Charter LLC Indemnified Parties are entitled to indemnification
are hereinafter collectively referred to as "Charter LLC Losses."
Notwithstanding anything to the contrary contained herein, Magellan's indemnity
obligations hereunder will not extend to claims arising out of willful
misconduct or fraud of Charter LLC.
8.2 Indemnification Obligations of Charter LLC. Charter LLC shall
indemnify and hold harmless Magellan and its subsidiaries and affiliates and
each of their respective officers, directors, partners, employees, agents and
representatives and each of the permitted successors and assigns of any of the
foregoing (collectively, the "Magellan Indemnified Parties") from, against and
in respect of any and all Claims and Damages arising out of or relating to any
debts, liabilities and obligations relating to (i) the ownership, lease or
operation of the Hospitals and
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<PAGE>
attributable to events which arise after the Closing or (ii) the Assumed
Obligations. The Claims and Damages of the Magellan Indemnified Parties
described in this Section 8.2 as to which the Magellan Indemnified Parties are
entitled to indemnification are hereinafter collectively referred to as
"Magellan Losses." Notwithstanding anything to the contrary contained herein,
Charter LLC's indemnity obligations hereunder will not extend to claims arising
out of willful misconduct or fraud of Magellan.
8.3 Indemnification Procedure.
(a) Promptly after receipt by a Charter LLC Indemnified Party or a
Magellan Indemnified Party (each an "Indemnified Party") of notice by a third
party of any complaint or the commencement of any action or proceeding with
respect to which indemnification is being sought hereunder, such Indemnified
Party shall notify Charter LLC, if the Indemnified Party is a Magellan
Indemnified Party, or Magellan, if the Indemnified Party is a Charter LLC
Indemnified Party (the "Indemnifying Party"), of such complaint or of the
commencement of such action or proceeding; provided, however, that the failure
to so notify the Indemnifying Party shall not relieve the Indemnifying Party
from liability for such claim arising otherwise than under this Agreement and
such failure to so notify the Indemnifying Party shall relieve the Indemnifying
Party from liability which the Indemnifying Party may have under this Agreement
with respect to such claim if, but only if, and only to the extent that, such
failure to notify the Indemnifying Party results in the forfeiture by the
Indemnifying Party of rights and defenses otherwise available to the
Indemnifying Party with respect to such claim. The Indemnifying Party shall have
the right, upon written notice to the Indemnified Party, to assume the defense
of such action or proceeding, including the employment of counsel reasonably
satisfactory to the Indemnified Party and the payment of the reasonable fees and
disbursements of such counsel. In the event, however, that the Indemnifying
Party declines or fails to assume the defense of the action or proceeding or to
employ counsel reasonably satisfactory to the Indemnified Party, in either case
in a timely manner, then such Indemnified Party may employ counsel to represent
or defend it in any such action or proceeding and the Indemnifying Party shall
pay the reasonable fees and disbursements of such counsel as incurred; provided,
however, that the Indemnifying Party shall not be required to pay the fees and
disbursements of more than one counsel for all Indemnified Parties in any
jurisdiction in any single action or proceeding. In any action or proceeding
with respect to which indemnification is being sought hereunder, the Indemnified
Party or the Indemnifying Party, whichever is not assuming the defense of such
action, shall have the right to participate in such litigation and to retain its
own counsel at such party's own expense. The Indemnifying Party or the
Indemnified Party, as the case may be, shall at all times use reasonable efforts
to keep the Indemnifying Party or the Indemnified Party, as the case may be,
reasonably apprised of the status of the defense of any action, the defense of
which it is maintaining and to cooperate in good faith with the Indemnifying
Party or the Indemnified Party, as the case may be, with respect to the defense
of any such action.
(b) No Indemnified Party may settle or compromise any claim or consent
to the entry of any judgment with respect to which indemnification is being
sought hereunder without the prior written consent of the Indemnifying Party,
unless such settlement, compromise or consent includes an unconditional release
of the Indemnifying Party from all liability arising out of such
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<PAGE>
claim. An Indemnifying Party may not, without the prior written consent of the
Indemnified Party, settle or compromise any claim or consent to the entry of any
judgment with respect to which indemnification is being sought hereunder unless
such settlement, compromise or consent includes an unconditional release of the
Indemnified Party from all liability arising out of such claim and does not
contain any equitable order, judgment or term which in any manner affects,
restrains or interferes with the business of the Indemnified Party or any of the
Indemnified Party's respective affiliates.
(c) In the event an Indemnified Party shall claim a right to payment
pursuant to this Agreement, such Indemnified Party shall send written notice of
such claim to the appropriate Indemnifying Party. Such notice shall specify the
basis for such claim. As promptly as possible after the Indemnified Party has
given such notice, such Indemnified Party and the appropriate Indemnifying Party
shall establish the merits and amount of such claim (by mutual agreement,
litigation, arbitration or otherwise) and, within five business days of the
final determination of the merits and amount of such claim, the Indemnifying
Party shall deliver to the Indemnified Party immediately available funds in an
amount equal to such claim as determined hereunder.
(d) Liability Limits. To the extent any claim for Charter LLC Losses
against Magellan is based upon the alleged inaccuracy of any representation or
warranty contained in Section 5 of this Agreement, then, for a period beginning
on the Closing Date and ending two years later, Magellan shall only be liable
for such Charter LLC Losses solely to the extent that any such Charter LLC
Losses exceed in the aggregate in any one year, one million dollars
($1,000,000.00). Beginning two years after the Closing Date, Magellan shall be
liable for such Charter LLC Losses solely to the extent that any such Charter
LLC Losses exceed in the aggregate during such period, ten million dollars
($10,000,000.00); provided, however, that to the extent a claim for Charter LLC
Losses is not based on the inaccuracy of a representation or warranty contained
in Section 5 of this Agreement, then such claim shall not be subject to the
limitations above, nor shall the amount of any such Charter LLC Losses be
included with other Charter LLC Losses in determining whether such basket
amounts have been reached.
(e) Claim Periods. Indemnification obligations under this Section 8 for
pre-closing and post-closing debts, liabilities or obligations and for a breach
of representations, warranties or covenants shall survive until expiration of
the applicable statute of limitations.
SECTION 9.
MISCELLANEOUS
9.1 Fees and Expenses; Transfer Costs. Fees and expenses incident to
the negotiation, preparation and execution of this Agreement and the performance
of the Contribution (including attorneys', accountants', financial advisors' and
other advisors' fees and disbursements) shall be borne by the party incurring
the expense. Magellan shall pay all sales, transfer and other recording charges
and conveyance taxes in connection with the transfer of the
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<PAGE>
Contributed Assets, the Purchased Assets and the Working Capital Assets to
Charter LLC and in connection with the transfer of any licenses or permits to
Charter LLC.
9.2 Notices. Whenever any notice is required or permitted hereunder,
such notice shall be in writing and (a) sent by certified mail, postage prepaid,
return receipt requested, (b) given by established overnight commercial courier
for delivery on the next business day with delivery charges prepaid or duly
charged, (c) personally hand-delivered or (d) sent by facsimile transmission
with confirmation of receipt received, to the applicable address or facsimile
number set forth below:
(i) if to Crescent:
Gerald W. Haddock, Esq.
President and Chief Operating Officer
Crescent
777 Main Street
Suite 2100
Fort Worth, Texas 76102
Facsimile: (817) 878-0429
with a copy to:
David M. Dean, Esq.
Senior Vice President, Law
Crescent
777 Main Street
Suite 2100
Fort Worth, Texas 76102
Facsimile: (817) 878-0429
Wendelin A. White, Esq.
Shaw, Pittman, Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Facsimile: (202) 663-8007
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<PAGE>
(ii) if to Magellan:
Steve J. Davis, Esq.
Executive Vice President,
Administrative Services and General Counsel
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Facsimile: (404) 814-5793
with a copy to:
Robert W. Miller, Esq.
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303-1763
Facsimile:(404) 572-5100
Notices which are mailed shall be deemed effective upon receipt. Notices which
are hand- delivered shall be deemed effective upon tender to a natural person at
the address shown. Notices which are delivered by overnight courier shall be
deemed given on the next business day after delivery to such courier. Notices
which are delivered by facsimile transmission shall be deemed received upon
electronic confirmation of delivery.
9.3 Entire Agreement. This Agreement and the Transaction Documents
(together with the exhibits and schedules hereto and thereto) supersede all
prior agreements and understandings, both oral and written, between the parties
with respect to the subject matter hereof, all of which are null, void and of no
force or effect.
9.4 Waivers and Amendments. This Agreement may be amended, modified,
superseded, canceled, renewed or extended, and the terms and conditions of this
Agreement may be waived, only by a written instrument signed by the parties
hereto or, in the case of a waiver, by the party waiving compliance.
9.5 Governing Law. This Agreement shall be governed by the laws of the
State of Delaware, without regard to the application of choice of law
principles. The rule that an Agreement should be construed against the party
drafting it shall not apply to this Agreement because all parties have played a
significant role in negotiating and drafting this Agreement.
9.6 Severability. If any term, covenant or condition of this Agreement
is held to be invalid or unenforceable in any respect, such invalidity or
unenforceability shall not affect any other provision, and this Agreement shall
be construed as if such invalid or unenforceable provision had never been
contained in this Agreement.
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<PAGE>
9.7 Binding Effect; Benefit. This Agreement shall inure to the benefit
of and be binding upon the parties hereto and their respective successors and
assigns. Nothing in this Agreement, expressed or implied, is intended to confer
on any person other than the parties hereto or their respective successors and
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
9.8 No Assignment. This Agreement may not be assigned without the
prior written consent of the other party.
9.9 Arbitration.
(a) Following Closing, any controversy, claim or question of
interpretation arising out of or relating to this Agreement or the breach
thereof shall be finally settled by arbitration in Delaware, under the
then-effective Commercial Arbitration Rules of the American Arbitration
Association as modified by this Agreement, and judgment on the award rendered by
the arbitrators may be entered in any court having jurisdiction. The award
rendered by the arbitrators shall be final and binding on the parties and not
subject to further appeal. Such arbitration can be initiated by written notice
by either party (the "Claimant") to the other party, which notice shall identify
the Claimant's selected arbitrator. The party receiving such notice (the
"Respondent") shall identify its arbitrator within ten (10) business days
following its receipt of such notice. The arbitrator selected by the Claimant
and the arbitrator selected by the Respondent shall, within ten (10) business
days of their appointment, select a third neutral arbitrator. In the event that
they are unable to do so, either party may request the American Arbitration
Association to appoint the third neutral arbitrator. The arbitrators shall have
the authority to award any remedy or relief that a court in Delaware could order
or grant, including, without limitation, specific performance of any obligation
created under this Agreement, the issuance of injunctive or other provisional
relief, or the imposition of sanctions for abuse or frustration of the
arbitration process. The arbitration award will be in writing and specify the
factual and legal basis for the award.
(b) The arbitrators shall instruct the non-prevailing party to pay all
costs of the proceedings, including the fees and expenses of the arbitrators and
the reasonable attorneys' fees and expenses of the prevailing party. If the
arbitrators determine that there is not a prevailing party, each party shall be
instructed to bear its own costs and to pay one-half of the fees and expenses of
the arbitrators.
9.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which taken
together shall constitute one and the same instrument.
9.11 Exhibits and Schedules. The exhibits and schedules delivered or to
be delivered pursuant to this Agreement are a part of this Agreement as if set
forth in full within the Agreement.
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<PAGE>
9.12 Headings. The headings in this Agreement are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
CRESCENT OPERATING, INC.
By: \s\ Jeffrey L. Stevens
-------------------------------------
Name: Jeffrey L. Stevens
Title: Chief Financial Officer,
Treasurer and Secretary
MAGELLAN HEALTH SERVICES, INC.
By: \s\ Linton C. Newlin
-------------------------------------
Name: Linton C. Newlin
Title: Vice President and Secretary
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<PAGE>
FIRST AMENDMENT TO THE
WARRANT PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO THE WARRANT PURCHASE AGREEMENT (this "First
Amendment") is made as of the 17th day of June, 1997, by and between MAGELLAN
HEALTH SERVICES, INC., a Delaware corporation (the "Company"), and CRESCENT REAL
ESTATE EQUITIES LIMITED PARTNERSHIP, a Delaware limited partnership ("Buyer").
R E C I T A L S
A. The Company and Buyer entered into that certain Warrant Purchase
Agreement dated as of January 29, 1997 (the "Agreement"). Capitalized terms used
but not defined herein have the meanings ascribed to them in the Agreement.
B. The parties desire to enter into this First Amendment to evidence
their agreement to certain changes to the Agreement, as hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants set forth
herein, the Company and the Buyer hereby agree as follows:
1. Section 1.2 is deleted in its entirety and replaced with the
following:
1.2 Purchase Price and Payment. The parties hereto acknowledge
that the Purchase Price for the Warrants was made by them in
arm's length negotiation. The aggregate purchase price for the
Warrants is Twelve Million Five Hundred Thousand Dollars
($12,500,000) (the "Purchase Price"). The Purchase Price
payable by Buyer for the Warrants shall be paid by Buyer on or
before Closing Date (as hereinafter defined) in immediately
available funds by confirmed wire transfer to a bank account
to be designated by the Company (such designation to occur no
later than the third Business Day prior to the Closing Date).
2. Section 3.8 is deleted in its entirety and replaced with the
following:
3.8 Rights Plan. Based upon the representation of Buyer in
Section 4.6 hereof and relying upon the information in the
most recent Schedule 13D filed by Rainwater-Magellan
Holdings,L.P. related to stock ownership in the Company, the
execution of this Agreement and the issuance of the Warrant
Shares (assuming the continued validity of the representation
of Buyer in Section 4.6 hereof) shall not cause an issuance of
certificates within the
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<PAGE>
meaning of Section 3 of the Rights Agreement dated as of July
21, 1992, as amended by the First Amendment to Rights
Agreement dated as of May 30, 1997, between the Company and
First Union National Bank of North Carolina (the "Rights
Agreement") or a Triggering Event as defined in the Rights
Agreement.
3. The reference to "Crescent Opportunity Corporation ("COC")" in
Section 5.5 should read "Crescent Operating, Inc. ("COI")".
4. Section 5.12 of the Agreement is deleted in its entirety.
5. The definition of "Rights Agreement" contained in Section 11.1
is deleted in its entirety and replaced with the following:
"Rights Agreement" means that certain Rights Agreement, dated
as of July 21, 1992, as amended by the First Amendment to
Rights Agreement, dated as of May 30, 1997, between the
Company and First Union National Bank of North Carolina, as
rights agent.
6. Annex I is deleted in its entirety and replace with Annex I
attached hereto.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered this 17th day of June, 1997.
MAGELLAN HEALTH SERVICES, INC., a
Delaware corporation
By: \s\ Linton C. Newlin
-------------------------------
Title: Vice President and Secretary
-------------------------------
CRESCENT REAL ESTATE EQUITIES
LIMITED PARTNERSHIP, a Delaware limited
partnership
By: Crescent Real Estate Equities,
Ltd., A Delaware corporation, its sole
general partner
By: \s\ David M. Dean
-------------------------------
Title: Senior Vice President, Law
-------------------------------
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<PAGE>
FOR IMMEDIATE RELEASE
Investor Contact: Kevin Helmintoller
(404) 814-5742
Media Contact: Robert Mead
(212) 445-8208
MAGELLAN ANNOUNCES THE CLOSING OF THE CRESCENT
TRANSACTIONS, AN AMENDED BANK FACILITY, BOND REPURCHASE
OFFER AND EXPIRATION OF EUROPEAN SALE
- --------------------------------------------------------------------------------
ATLANTA, GA, June 17, 1997 -- Magellan Health Services, Inc. (NYSE:MGL)
announced that the transactions with Crescent Real Estate Equities Co.
(NYSE:CEI) and its affiliates closed today. Charter Behavioral Health Systems
began operations as a privately held joint venture owned by Magellan and
Crescent Operating Inc. Magellan will now focus on the higher growth segments of
behavioral and other specialty managed care, public sector privatization and
franchise operations. Simultaneously with this closing, Magellan entered into an
amended $200 million credit facility with a group of commercial banks to assist
the Company in its acquisition and product expansion strategy.
As a result of the Crescent transactions the Company is also offering
to repurchase the 11.25% Senior Subordinated Notes at 101% of face value per the
terms of the indenture. Notices are being distributed immediately and
bondholders will have until July 17 to respond.
Separately, Magellan announced that the sale of the European operations
to Priory Hospitals Limited has been referred to the Monopolies and Mergers
Commission (MMC) by the Office of Fair Trade under the provisions of the Fair
Trading Act. The MMC is required to make
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their report by September 15, 1997. However, the time period for receiving
regulatory approval per the agreement with Priory has expired and Magellan is
exploring other alternatives.
Mac Crawford, chairman, president, and CEO said, "The closing of the
Crescent transactions marks a significant step in the continuing development of
Magellan's strategy. Management has concentrated heavily on closing these
transactions and can now focus on the growth of the other segments of our
business. Proceeds from the Crescent transactions will immediately strengthen
Magellan's balance sheet. Nearly $200 million will be used to pay down the
Company's current bank credit facility and outstanding industrial revenue bonds
and the Company will have over $500 million in cash and available credit."
Crawford continued, "Though I am disappointed that the sale to Priory
has not closed, it is important to remember that the European facilities are
some of our most profitable operations and contribute significantly to earnings
per share on a quarterly basis. We also believe there are opportunities to
pursue franchise expansion in Europe."
Magellan Health Services, Inc. is one of the country's largest
integrated behavioral health care companies. Its business units include:
Majority owned Green Spring Health Services, a leader in behavioral managed care
services; Magellan Public Solutions, serving public sector agencies with
privatized behavioral health services; Charter Franchise Services, an
international franchisor of behavioral health care systems; and 50% interest in
Charter Behavioral Health Systems, the largest operator of free-standing
behavioral facilities in the U.S.
###
<PAGE>
MASTER LEASE AGREEMENT
DATED JUNE 16, 1997
BY AND BETWEEN
CRESCENT REAL ESTATE FUNDING VII, L.P.
AS LANDLORD,
AND
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
AND EACH OF THE FACILITY SUBSIDIARIES LISTED ON EXHIBIT B,
AS TENANT
<PAGE>
Table of Contents
1 DEFINITIONS 1
1.1 "Additional Charges" 1
1.2 "Additional Rent" 1
1.3 "Affiliated Person" 1
1.4 "Agreement" 2
1.5 "Allowance" 2
1.6 "Applicable Laws" 2
1.7 "Award" 2
1.8 "Business Day" 2
1.9 "Capital Addition" 2
1.10 "Capital Additions Cost" 3
1.11 "Capital Expenditure" 3
1.12 "Change in Control" 3
1.13 "Code" 3
1.14 "Collective Leased Properties" 4
1.15 "Commencement Date" 4
1.16 "Comparable Facility" 4
1.17 "Condemnation" 4
1.18 "Condemnor" 4
1.19 "Contractor" 4
1.20 "Contractor's" 4
<PAGE>
1.21 "Default" 4
1.22 "Designated Leased Property" 4
1.23 "Encumbrance" 4
1.24 "Entity" 4
1.25 "Environment" 5
1.26 "Environmental Notice" 5
1.27 "Environmental Obligation" 5
1.28 "Environmental Report" 5
1.29 "Event of Default" 5
1.30 "Extended Terms" 5
1.31 "Facility" 5
1.32 "Facility Mortgage" 5
1.33 "Facility Mortgagee" 5
1.34 "Facility Subsidiaries" 5
1.35 "Facility Trade Name" 5
1.36 "Fair Market Rental" 5
1.37 "Fair Market Value" 5
1.38 "Financial Officer's Certificate". 6
1.39 "Financials" 6
1.40 "Fiscal Year" 6
1.41 "Fixed Term" 6
1.42 "Fixtures" 6
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<PAGE>
1.43 "Franchise Agreement" 6
1.44 "Franchise Fees" 6
1.45 "Franchise Subordination Agreement" 6
1.46 "Franchisor" 6
1.47 "GAAP" 6
1.48 "Government Agencies" 6
1.49 "Hazardous Substances" 7
1.50 "Impositions" 7
1.51 "Indebtedness" 8
1.52 "Insurance Requirements" 8
1.53 "Land" 8
1.54 "Landlord" 8
1.55 "Lease Year" 8
1.56 "Leased Improvements" 8
1.57 "Leased Personal Property" 8
1.58 "Leased Property" 9
1.59 "Legal Requirements" 9
1.60 "Lending Institution" 9
1.61 "Lien" 9
1.62 "Management Agreement" 9
1.63 "Manager" 9
1.64 "Minimum Rent" 9
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1.65 "Notice" 10
1.66 "Non-Priority Additional Rent" 10
1.67 "Officer's Certificate" 10
1.68 "OpCo" 10
1.69 "Overdue Rate" 10
1.70 "Parent" 10
1.71 "Permitted Encumbrances" 10
1.72 "Person" 10
1.73 "Philadelphia Facility" 10
1.74 "Primary Intended Use" 10
1.75 "Prime Rate" 11
1.76 "Priority Additional Rent Base Amount" 11
1.77 "Purchase Agreement" 11
1.78 "Qualified Affiliate" 11
1.79 "Qualified Appraiser" 11
1.80 "Regulated Medical Wastes" 12
1.81 "Rent" 12
1.82 "SEC" 12
1.83 "State" 12
1.84 "Subordinated Creditor" 12
1.85 "Subordination Agreement" 12
1.86 "Subsidiary" 12
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1.87 "Substitute Leased Property" 12
1.88 "Substitution Date" 12
1.89 "Tenant" 12
1.90 "Tenant's Personal Property" 12
1.91 "Term" 13
1.92 "Unsuitable for Its Primary Intended Use" 13
1.93 "Work" 13
2 COLLECTIVE LEASED PROPERTIES AND TERM 13
2.1 Collective Leased Properties. 13
2.2 Condition of Collective Leased Properties. 14
2.3 Fixed Term. 15
2.4 Extended Term. 15
2.5 Determination of Minimum Rent for Extended Terms. 16
3 RENT 16
3.1 Rent. 16
3.2 Late Payment of Rent. 18
3.3 Net Lease. 19
3.4 No Termination, Abatement, Etc. 19
3.5 Annual Allowance. 19
4 USE OF THE COLLECTIVE LEASED PROPERTIES 20
4.1 Permitted Use. 20
4.2 Compliance with Legal and Insurance Requirements, Etc. 22
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4.3 Compliance with Medicaid and Medicare Requirements. 22
4.4 Environmental Matters. 22
4.5 Tenant's Right to Close Facilities. 24
5 MAINTENANCE AND REPAIRS 25
5.1 Maintenance and Repair. 25
5.2 Tenant's Personal Property. 26
5.3 Yield Up. 27
5.4 Encroachments, Restrictions, Etc. 28
5.5 Landlord to Grant Easements, Etc. 28
5.6 Philadelphia Facility. 29
6 CAPITAL ADDITIONS, ETC. 29
6.1 Construction of Capital Additions to the Leased Property. 29
6.2 Financing of Capital Additions. 29
6.3 Capital Additions Financed by Landlord. 30
6.4 Non-Capital Additions. 31
6.5 Salvage. 31
6.6 Landlord's Right of First Refusal to Provide Financing for
Capital Additions. 31
7 LIENS 32
7.1 Liens. 32
7.2 Landlord's Lien. 32
8 PERMITTED CONTESTS 33
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9 INSURANCE AND INDEMNIFICATION 34
9.1 General Insurance Requirements. 34
9.2 Replacement Cost. 35
9.3 Waiver of Subrogation. 35
9.4 Form Satisfactory, Etc. 35
9.5 Blanket Policy. 36
9.6 No Separate Insurance. 36
9.7 Indemnification of Landlord. 37
9.8 Independent Contractor. 37
10 CASUALTY 38
10.1 Insurance Proceeds. 38
10.2 Damage or Destruction. 38
10.3 Tenant's Property. 39
10.4 Restoration of Tenant's Property. 39
10.5 No Abatement of Rent. 39
10.6 Waiver. 39
11 CONDEMNATION 40
11.1 Total Condemnation, Etc. 40
11.2 Partial Condemnation. 40
11.3 Abatement of Rent. 41
11.4 Temporary Condemnation. 41
11.5 Allocation of Award. 41
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12 DEFAULTS AND REMEDIES 41
12.1 Events of Default. 41
12.2 Remedies. 44
12.3 Tenant's Waiver. 45
12.4 Application of Funds. 46
12.5 Landlord's Right to Cure Tenant's Default. 46
12.6 Landlord's Right to Assume Contracts. 46
13 HOLDING OVER 47
14 LANDLORD'S DEFAULT 47
15 LANDLORD FINANCING 47
16 SUBLETTING AND ASSIGNMENT 48
16.1 Subletting and Assignment. 48
16.2 Required Sublease Provisions. 48
16.3 Permitted Assignments and Subleases. 49
16.4 Sublease Limitation. 50
16.5 Tenant's Right to Mortgage its Leasehold. 50
17 ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS 50
17.1 Estoppel Certificates. 50
17.2 Financial Statements. 51
17.3 General Operations. 51
18 LANDLORD'S RIGHT TO INSPECT 52
19 APPRAISAL 53
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20 FACILITY MORTGAGES 55
20.1 Landlord May Grant Liens. 55
20.2 Subordination of Lease. 55
20.3 Notice to Mortgagee and Ground Landlord. 56
21 ADDITIONAL COVENANTS OF TENANT 56
21.1 Conduct of Business. 56
21.2 Maintenance of Accounts and Records. 56
21.3 Payments to Franchisor. 57
21.4 Management of Collective Leased Properties. 57
21.5 Liens and Encumbrances. 57
22 MISCELLANEOUS 58
22.1 Limitation on Payment of Rent. 58
22.2 No Waiver. 58
22.3 Remedies Cumulative. 58
22.4 Severability. 58
22.5 Acceptance of Surrender. 59
22.6 No Merger of Title. 59
22.7 Conveyance by Landlord. 59
22.8 Quiet Enjoyment. 59
22.9 Landlord's Consent. 60
22.10 Memorandum of Lease. 60
22.11 Notices. 60
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22.12 Construction. 61
22.13 Counterparts; Headings. 62
22.14 Applicable Law, Etc. 62
22.15 Substitution of Leased Properties. 62
22.16 No Broker. 64
22.17 Confidentiality. 65
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Exhibits
A The Land/Street Addresses
B Facility Subsidiaries
<PAGE>
MASTER LEASE AGREEMENT
THIS MASTER LEASE AGREEMENT is entered into as of the 16th day of June, 1997, by
and between CRESCENT REAL ESTATE FUNDING VII, L.P., a Delaware limited
partnership, having its principal office at 777 Main Street, Suite 2100, Fort
Worth, Texas 76102 ("Landlord"), CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC, a
Delaware limited liability company, having its principal office at Suite 900,
3414 Peachtree Rd., N.E., Atlanta, GA 30326 ("OpCo"), and each of the entities
listed on Exhibit B attached hereto.
W I T N E S S E T H :
WHEREAS, Landlord owns fee simple title to the Collective Leased Properties
(this and other capitalized terms used and not otherwise defined herein having
the meanings ascribed to such terms in Article 1); and
WHEREAS, Landlord wishes to lease the Collective Leased Properties to Tenant and
Tenant wishes to lease the Collective Leased Properties from Landlord, all
subject to and upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual covenants herein contained and
other good and valuable consideration, the mutual receipt and legal sufficiency
of which are hereby acknowledged, Landlord and Tenant hereby agree as follows:
1
DEFINITIONS
For all purposes of this Agreement, except as otherwise expressly provided or
unless the context otherwise requires, (i) the terms defined in this Article
shall have the meanings assigned to them in this Article and include the plural
as well as the singular, (ii) all accounting terms not otherwise defined herein
shall have the meanings assigned to them in accordance with GAAP, (iii) all
references in this Agreement to designated "Articles," "Sections" and other
subdivisions are to the designated Articles, Sections and other subdivisions of
this Agreement, and (iv) the words "herein," "hereof," "hereunder" and other
words of similar import refer to this Agreement as a whole and not to any
particular Article, Section or other subdivision.
1.1 "Additional Charges" shall have the meaning given such term in Section
3.1.3.
1.2 "Additional Rent" shall mean the monthly sum of One Million Six Hundred and
Sixty-Six Thousand Six Hundred Sixty-Seven Dollars ($1,666,667.00).
1.3 "Affiliated Person" shall mean, with respect t any Person, (a) in the case
of any such Person which is a partnership, any partner in such partnership,
(b) in the case of any such
<PAGE>
Person which is a limited liability company, any member of such company, and (c)
any other Person which is a Parent, a Subsidiary, or a Subsidiary of a Parent
with respect to such Person or to one or more of the Persons referred to in the
preceding clauses (a) and (b).
1.4 "Agreement" shall mean this Master Lease Agreement, including Exhibits A and
B hereto, as it and they may be amended from time to time as herein provided.
1.5 "Allowance" shall mean an annual amount with respect to each Lease Year not
to exceed the additional rent for each such Lease Year. The Allowance shall be
paid by Landlord to Tenant pursuant to Section 3.5 hereof.
1.6 "Applicable Laws" shall mean all applicable laws, statutes, regulations,
rules, ordinances, codes, licenses, permits and orders (whether now existing or
hereafter enacted or promulgated irrespective of whether its enactment is
foreseeable or contemplated), of all courts of competent jurisdiction and G
vernment Agencies, and all applicable judicial and administrative and regulatory
decrees, judgments and orders, including common law rulings, relating to injury
to, or the protection of, real or personal property or human health (except
those requirements which, by definition, are solely the responsibility of
employers) or the Environment, including, without limitation, all valid
requirements of courts and other Government Agencies pertaining to reporting,
licensing, permitting, investigation, remediation and removal of underground
improvements (including, without limitation, treatment or storage tanks, or
water, gas or oil wells), or emissions, discharges, releases or threatened
releases of Hazardous Substances, chemical substances, pesticides, petroleum or
petroleum products, pollutants, contaminants or hazardous or toxic substances,
materials or wastes whether solid, liquid or gaseous in nature, into the
Environment, or relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Substances or
Regulated Medical Wastes, underground improvements (including, without
limitation, treatment or storage tanks, or water, gas or oil wells), or
pollutants, contaminants or hazardous or toxic substances, materials or wastes,
whether solid, liquid or gaseous in nature.
1.7 "Award" shall mean all compensation, sums or other value awarded, paid or
received by virtue of a total or partial Condemnation of any of the Collective
Leased Properties (after deduction of all reasonable legal fees and other
reasonable costs and expenses, including, without limitation, expert witness
fees, incurred by Landlord, in connection with obtaining any such award).
1.8 "Business Day" shall mean any day other than Saturday, Sunday, or any other
day on which banking institutions in the states of Texas, Georgia and the State
are authorized by law or executive action to close.
1.9 "Capital Addition" shall mean one or more new buildings, or one or more
additional structures annexed to any portion of any of the Leased Improvements
with respect to any of the Collective Leased Properties, or the material
expansion of existing improvements, which are constructed on any parcel or
portion of the Land during the Term, including the
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construction of a new wing or new story, the renovation of existing improvements
on any of the Collective Leased Properties in order to provide a functionally
new facility needed to provide services not previously offered, or any material
expansion, construction, renovation or conversion in order to increase by more
than 10% the bed capacity of any Facility, to change the purpose for which such
beds are utilized or to improve materially the quality of any Facility.
1.10 "Capital Additions Cost" shall mean the cost of any Capital Addition
proposed to be made by Tenant at any of the Collective Leased Properties,
whether paid for by Tenant or Landlord. Such cost shall include (a) the cost of
construction of the Capital Addition, including site preparation and
improvement, materials, labor, supervision, developer and administrative fees,
legal fees, and related design, engineering and architectural services, the cost
of any fixtures, the cost of equipment and other personalty, the cost of
construction financing (including, but not limited to, capitalized interest) and
other miscellaneous costs approved by Landlord, (b) if agreed to by Landlord in
writing, in advance, the cost of any land (including all related acquisition
costs incurred by Tenant) contiguous to the applicable Leased Property which is
to become a part of such Leased Property purchased for the purpose of placing
thereon a Capital Addition or any portion thereof or for providing means of
access thereto, or parking facilities therefor, including the cost of surveying
the same, (c) the cost of insurance, real estate taxes, water and sewage charges
and other carrying charges for such Capital Addition during construction, (d)
title insurance charges, (e) filing, registration and recording taxes and fees,
(f) documentary stamp or transfer taxes, and (g) all actual and reasonable costs
and expenses of Landlord and Tenant and, if agreed to by Landlord in writing, in
advance, any Lending Institution committed to finance the Capital Addition
relating to financing for the Capital Addition, including, but not limited to,
all (i) reasonable attorneys' fees and expenses, (ii) printing expenses, (iii)
filing, registration and recording taxes and fees, (iv) documentary stamp or
transfer taxes, (v) title insurance charges and appraisal fees, (vi) rating
agency fees, and (vii) commitment fees charged by any Lending Institution
advancing or offering to advance any portion of any financing to which Landlord
has consented in writing for such Capital Addition.
1.11 "Capital Expenditure" shall mean any expenditure with respect to the
Collective Leased Properties that is properly categorized as a capital
expenditure in accordance with GAAP.
1.12 "Change in Control" shall mean the acquisition by any Person, or two or
more Persons acting in concert, of beneficial ownership (within the meaning of
Rule 13d-3 of the SEC) of 50% or more, or rights, options or warrants to acquire
50% or more, of the outstanding shares of voting stock of Tenant or any Facility
Subsidiary, as the case may be, or the merger or consolidation of Tenant or any
Facility Subsidiary (except with OpCo, a Facility Subsidiary or a wholly-owned
Subsidiary of OpCo), as the case may be with or into any other Person or any one
or a series of related sales or conveyances to any Person (except to OpCo, a
Facility Subsidiary or a wholly-owned subsidiary of OpCo) of all or
substantially all of the assets of Tenant or any Facility Subsidiary, as the
case may be. In the case of OpCo, only the following shall constitute a Change
in Control; (i) a sale or conveyance in one or a related series of transactions
of all or substantially all the assets of OpCo to any Person and (ii) a merger
or consolidation in which
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OpCo is not the surviving or resulting entity or of which the holders of the
equity interests of OpCo immediately prior to the merger or consolidation do not
own more than 50% of the equity interests in the surviving or resulting entity
immediately after the merger or consolidation.
1.13 "Code" shall mean the Internal Revenue Code of 1986 and, to the extent
applicable, the Treasury Regulations promulgated thereunder, each as from time
to time amended.
1.14"Collective Leased Properties" shall have the meaning given such term in
Section 2.1.
1.15"Commencement Date" shall mean June 17, 1997.
1.16 "Comparable Facility" shall mean a facility having as its primary use the
Primary Intended Use and which is reasonably acceptable to Landlord, with an
expected future profitability substantially equivalent to or greater than that
of the Designated Leased Property which Tenant proposes that it replace, both
immediately prior to such substitution and as reasonably projected over the term
of this Agreement, taking into account any cash paid or received in connection
with the substitution and any other relevant factors.
1.17 "Condemnation" shall mean, with respect to any of the Collective Leased
Properties, (a) the exercise of any governmental power with respect to such
Leased Property, whether by legal proceedings or otherwise, by a Condemnor of
its power of condemnation, (b) a voluntary sale or transfer of such Leased
Property by Landlord to any Condemnor, either under threat of condemnation or
while legal proceedings for condemnation are pending, and (c) a taking or
voluntary conveyance of all or part of such Leased Property, or any interest
therein, or right accruing thereto or use thereof, as the result or in
settlement of any Condemnation or other eminent domain proceeding affecting such
Leased Property, whether or not the same shall have actually been commenced.
1.18 "Condemnor" shall mean any public or quasi-public authority, or private
corporation or individual, having the power of Condemnation.
1.19 "Contractor" shall have the meaning given such term in Section 9.8.
1.20 "Contractor's" Insurance Certificate" shall have the meaning given such
term in Section 9.8.
1.21 "Default" shall mean any event or condition which with the giving of notice
and/or lapse of time may ripen into an Event of Default.
1.22 "Designated Leased Property" shall mean a property designated by Tenant
pursuant to Section 22.15 on which there exists a Comparable Facility which
Tenant proposes to substitute for a Leased Property.
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1.23 "Encumbrance" shall have the meaning given such term in Section 20.1.
1.24 "Entity" shall mean any corporation, general or limited partnership,
limited liability company or artnership, stock company or association, joint
venture, association, company, trust, bank, trust company, land trust, business
trust, cooperative, any government or agency or political subdivision thereof or
any other entity.
1.25 "Environment" shall mean soil, surface waters, ground waters, land, stream,
sediments, surface or subsurface strata, ambient air, physical structures and
equipment, and where radon gas is present, the interior air of buildings.
1.26 "Environmental Notice" shall have the meaning given such term in Section
4.4.1.
1.27 "Environmental Obligation" shall have the meaning given such term in
Section 4.
1.28 "Environmental Report" shall have the meaning given such term in Section
4.4.2.
1.29 "Event of Default" shall have the meaning given such term in Section 12.1.
1 30 "Extended Terms" shall have the meaning given such term in Section 2.4.
1.31 "Facility" shall mean, with respect to any of the Collective Leased
Properties, the facility offering health care or related services being operated
or proposed to be operated on such Leased Property.
1.32 "Facility Mortgage" shall mean, with respect to any of the Collective
Leased Properties, any Encumbrance placed upon such Leased Property in
accordance with Article 20.
1.33 "Facility Mortgagee" shall mean the holder of any Facility Mortgage.
1.34 "Facility Subsidiaries" shall mean the Entities listed on Exhibit B
attached hereto, each of which is a wholly owned Subsidiary of OpCo.
1.35 "Facility Trade Name" shall mean, with respect to any Facility, any name
under which Tenant has conducted the business of operating such Facility at any
time during the Term.
1.36 "Fair Market Rental" shall mean, with respect to any of the Collective
Leased Properties, the rental which a willing tenant not compelled to rent would
pay a willing landlord not compelled to lease for the use and occupancy of such
Leased Property (including all Capital Additions) on the terms and conditions of
this Agreement or the term in question , assuming Tenant is not in default
hereunder and determined by agreement between Landlord and Tenant or, failing
agreement, in accordance with the appraisal procedures set forth in Article 19.
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1.37 "Fair Market Value" shall mean, with respect to any of the Collective
Leased Properties, the price that a willing buyer not compelled to buy would pay
a willing seller not compelled to sell for such Leased Property (without taking
into account any reduction in value resulting from any indebtedness to which
such Leased Property is subject), assuming the same is unencumbered by this
Agreement and determined by agreement between Landlord and Tenant or, failing
agreement, the appraisal procedures set forth in Article 19.
1.38 "Financial Officer's Certificate" shall mean, as to any Person, a
certificate of the chief financial officer of such Person, duly authorized,
accompanying the financial statements required to be delivered by such Person
pursuant to Section 17.2, in which such officer shall certify (a) that such
statements have been properly prepared in accordance with GAAP and fairly
present in all material respects the financial condition of such Person at and
as of the dates thereof and the results of its and their operations for the
periods covered thereby, (except that, in the case of financial statements
delivered pursuant to Sections 17.2(a) and 17.2(c), the certificate shall state
the extent to which such financial statements are not in accordance with GAAP)
and (b) certify that such officer has reviewed this Agreement and has no
knowledge of any Default or Event of Default hereunder.
1.39 "Financials" shall mean, for any Fiscal Year or other accounting period of
OpCo, annual audited and quarterly unaudited financial statements for OpCo,
including OpCo's balance sheet and the related statements of income and cash
flows, all in reasonable detail, and setting forth in comparative form the
corresponding figures for the corresponding period in the preceding Fiscal Year,
and prepared in accordance with GAAP throughout the periods reflected, except to
the extent GAAP is customarily not complied with by OpCo in preparing quarterly
unaudited financial statements.
1.40 "Fiscal Year" shall mean the twelve (12) month period from October 1 to
September 30.
1.41 "Fixed Term" shall have the meaning given such term in Section 2.3.
1.42 "Fixtures" shall have the meaning given such term in Section 2.1(d).
1.43 "Franchise Agreement" shall mean, collectively, that certain Franchise
Agreement of even date herewith by and between Franchisor, as franchisor, and
OpCo, as franchisee and those certain Franchise Agreements of even date herewith
by and between Franchisor, as franchisor, and each of the Facility Subsidiaries,
as franchisee.
1.44 "Franchise Fees" shall mean all amounts payable by Tenant to Franchisor
under the Franchise Agreement.
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1.45 "Franchise Subordination Agreement" shall mean that certain Subordination
Agreement of even date herewith, as the same may be amended from time to time,
by and among OpCo, Landlord and Franchisor.
1.46 "Franchisor" shall mean, collectively, Magellan Health Services, Inc., a
Delaware corporation, and Charter Franchise Services, LLC, a Delaware limited
liability company.
1.47 "GAAP" shall mean generally accepted accounting principles consistently
applied.
1.48 "Government Agencies" shall mean any court, agency, authority, board
(including, without limitation, environmental p otection, planning and zoning),
bureau, commission, department, office or instrumentality of any nature
whatsoever of any governmental unit of the United States or the State or any
county or any political subdivision of any of the foregoing, whether now or
hereafter in existence, having jurisdiction over Tenant or the Collective Leased
Properties or any portion thereof or the Facilities operated thereon.
1.49 "Hazardous Substances" shall mean any substance:
(a) the presence of which requires or may hereafter require notification,
investigation or remediation under any federal, state or local statute,
regulation, rule, ordinance, order, action or policy; or
(b) which is or becomes defined as a "hazardous waste," "hazardous
material" or "hazardous substance" or "pollutant" or contaminant" under
any present or future federal, state or local statute, regulation, rule
or ordinance or amendments thereto including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act
(42 U.S.C, et seq.) and the Resource Con ervation and Recovery Act (42
U.S.C, section 6901 et seq.) and the regulations promulgated
thereunder; or
(c) which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous and is or
becomes regulated by any governmental authority, agency, department,
commission, board, agency or instrumentality of the United States, any
state of the United States, or any political subdivision thereof; or
(d) the presence of which on any of the Collective Leased Properties
causes or threatens to cause a nuisance upon such Leased Property or to
adjacent properties or poses or threatens to pose a hazard to any of
the Collective Leased Properties or to the health or safety of persons
on or about any of the Collective Leased Properties; or
(e) without limitation, which contains gasoline, diesel fuel or other
petroleum hydrocarbons or volatile organic compounds; or
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(f) without limitation, which contains polychlorinated biphenyls (PCBs)
or asbestos or urea formaldehyde foam insulation; or
(g) without limitation, which contains or emits radioactive particles,
waves or material; or
1.50 "Impositions" shall mean, with respect to any of the Collective Leased
Properties, collectively, all taxes (including, without limitation, all taxes
imposed under the laws of the State, as such laws may be amended from time to
time, and all ad valorem, sales and use, single business, gross receipts,
transaction privilege, rent or similar taxes as the same relate to or are
imposed upon Landlord, Tenant or the business conducted upon such Leased
Property), assessments (including, without limitation, all assessments for
public improvements or benefit, whether or not commenced or completed prior to
the date hereof and whether or not to be completed within the Term), ground
rents, water, sewer or other rents and charges, excises, tax levies, fees
(including, without limitation, license, permit, inspection, authorization and
similar fees) and all other governmental charges, in each case whether general
or special, ordinary or extraordinary, or foreseen or unforeseen, of every
character in respect of such Leased Property or the business conducted thereon
by Tenant (including all interest and penalties thereon due to any failure in
payment by Tenant), which at any time prior to, during or in respect of the Term
hereof may be assessed or imposed on or in respect of or be a lien upon (a)
Landlord's interest in such Leased Property, (b) such Leased Property or any
part thereof or any rent therefrom or any estate, right, title or interest
therein, or (c) any occupancy, operation, use or possession of, or sales from,
or activity conducted on, or in connection with such Leased Property or the
leasing or use of such Leased Property or any part thereof by Tenant; provided,
however, that nothing contained herein shall be construed to require Tenant to
pay (i) any tax based on net income imposed on Landlord, (ii) any net revenue
tax of Landlord, (iii) any transfer fee or other tax imposed with respect to the
sale, exchange, financing, mortgaging, or other disposition by Landlord of the
applicable Leased Property or the proceeds thereof (other than in connection
with the sale, exchange or other disposition to, or in connection with a
transaction involving, Tenant), or (iv) any single business, franchise fees,
gross receipts (other than a tax on any rent received by Landlord from Tenant),
transaction privilege, rent or similar taxes as the same relate to or are
imposed upon Landlord, except to the extent that any tax, assessment, tax levy
or charge that Tenant is obligated to pay pursuant to the first sentence of this
definition and that is in effect at any time during the Term hereof is totally
or partially repealed, and a tax, assessment, tax levy or charge set forth in
clause (i) or (ii) preceding is levied, assessed or imposed expressly in lieu
thereof.
1.51 "Indebtedness" shall mean all obligations, contingent or otherwise, which
in accordance with GAAP should be reflected on the obligor's balance sheet as
debt.
1.52 "Insurance Requirements" shall mean all terms of any insurance policy
required by this Agreement and all requirements of the issuer of any such
policy.
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1.53 "Land" shall have the meaning given such term in Section 2.1(a).
1.54 "Landlord" shall have the meaning given such term in the preamble to this
Agreement.
1.55 "Lease Year" shall mean any consecutive annual period starting on the
Commencement Date and ending on the day prior to the anniversary thereof;
provided that if the Commencement Date is not the first day of a calendar month
then the first (1st) Lease Year shall end on the last day of the calendar month
in which occurs the date which would otherwise be the last day of such Lease
Year.
1.56 "Leased Improvements" shall have the meaning given such term in Section
2.1(b).
1.57 "Leased Personal Property" shall have the meaning given such term in
Section 2.1(e).
1.58 "Leased Property" shall mean any one of the Collective Leased Properties.
1.59 "Legal Requirements" shall mean, with respect to any of the Collective
Leased Properties, all federal, state, county, municipal and other governmental
statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and
injunctions af ecting such Leased Property or the maintenance, construction,
alteration or operation thereof, whether now or hereafter enacted or in
existence, including, without limitation, (a) all permits, licenses,
certificates of need, authorizations and regulations necessary to operate such
Leased Property for its Primary Intended Use, and (b) all covenants, agreements,
restrictions and encumbrances contained in any instruments at any time in force
affecting such Leased Property, including those which may (i) require material
repairs, modifications or alterations in or to such Leased Property or (ii) in
any way adversely affect the use and enjoyment thereof.
1.60 "Lending Institution" shall mean any insurance company, federally insured
commercial or savings bank, national banking association, savings and loan
association, employees' welfare, pension or retirement fund or system, syndicat
d lenders' group, commercial finance company, leasing company, corporate profit
sharing or pension trust, college or university, or real estate investment
trust, including any corporation qualified to be treated for federal tax
purposes as a real estate investment trust, such trust having a net worth of at
least $50,000,000.
1.61 "Lien" shall mean any mortgage, security interest, pledge, collate al
assignment, or other encumbrance, lien or charge of any kind, or any transfer of
any property or assets for the purpose of subjecting the same to the payment of
Indebtedness or performance of any other obligation in priority to payment of
any Person's general creditors.
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1.62 "Management Agreement" shall mean any agreement whether written or oral
entered into between Tenant and any other party (including any Affiliated Person
as to Tenant) pursuant to which management services are provided to all or
substantially all of any Facility, together with all amendments, modifications
or supplements thereto.
1.63 "Manager" shall mean the management party under any Management Agreement
1.64 "Minimum Rent" shall mean the following monthly sums with respect to the
Fixed Term:
Lease Year Minimum Rent Lease Year
1 $3,476,666.67
2 $3,650,500.00
3 $3,833,025.00
4 $4,024,676.25
5 $4,225,910.06
6 $4,437,205.56
7 $4,659,065.84
8 $4,892,019.13
9 $5,136,620.09
10 $5,393,451.09
11 $5,663,123.64
12 $5,946,279.82
With respect to each Extended Term, the Minimum Rent shall be an amount
determined in accordance with Section 2.5.
1.65 "Notice" shall mean a notice given in accordance with Section 22.11.
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1.66 "Non-Priority Additional Rent" shall mean the installments of additional
rent with respect to any Lease Year in excess of the Priority Additional Rent
Base Amount.
1.67 "Officer's Certificate" shall mean a certificate signed by an officer of
Tenant.
1.68 "OpCo" shall have the meaning given such term in the preamble to this
Agreement.
1.69 "Overdue Rate" shall mean, on any date, a per annum rate of interest equal
to the lesser of the Prime Rate plus six (6) percentage points and the maximum
rate then permitted under applicable law.
1.70 "Parent" shall mean, with respect to any Person, any Person which owns
directly, or indirectly through one or more Subsidiaries, more than fifty
percent (50%) of beneficial equity interest in such Person.
1.71 "Permitted Encumbrances" shall mean with respect to any of the Collective
Leased Properties, all rights, restrictions, and easements of record set forth
on Schedule B to the applicable owner's or leasehold title insurance policy
issued to Landlord on the date hereof, plus any other such encumbrances as may
have been consented to in writing by Landlord from time to time, plus items that
constitute Permitted Exceptions under and as that term is defined in the
Purchase Agreement.
1.72 "Person" shall mean any individual or Entity, and the heirs, executors,
administrators, legal representatives, successors and assigns of such Person
where the context so admits.
1.73 "Philadelphia Facility" shall mean the "Charter Fairmount" Facility
currently under renovation and located in Philadelphia, Pennsylvania.
1.74 "Primary Intended Use" shall have the meaning given such term in Section
4.1.1.
1.75 "Prime Rate" shall mean the rate of interest per annum publicly announced
from time to time by The Chase Manhattan Bank (or its successor) as its prime
rate in effect at its principal office in New York City, New York.
1.76 "Priority Additional Rent Base Amount" for any Lease Year shall mean an
amount of Additional Rent equal to Ten Million Dollars ($10,000,000); provided,
however, that if Landlord funds, or makes an irrevocable commitment to fund,
Capital Expenditures for any Lease Year in an amount in excess of Ten Million
Dollars ($10,000,000) at Tenant's request, then the Priority Additional Rent
Base Amount for such Lease Year shall be increased to the amount of Capital
Expenditures funded or committed to be funded by Landlord for such Lease Year.
Notwithstanding the foregoing, in the event that, and for so long as, the
accrued and unpaid Franchise Fees, including interest thereon, if any, equal or
exceed Fifteen Million Dollars
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($15,000,000), then the Priority Additional Rent Base Amount for any such Lease
Year shall be reduced to $0.00; provided, however, that if Landlord funds, or
makes an irrevocable commitment to fund, Capital Expenditures for any Lease Year
in any amount at Tenant's request, then the Priority Additional Rent Base Amount
for such Lease Year shall be increased from $0.00 to the amount of Capital
Expenditures funded or committed to be funded by Landlord for such Lease Year.
The Priority Additional Rent Base Amount shall be computed monthly in advance of
the payment of Rent due hereunder for the next succeeding month. Such
calculation shall be made on the 25th day of the month, unless the 25th day of
the month is not a Business Day, in which event such calculation for such month
shall be made on the first Business Day following such 25th day. Notwithstanding
anything set forth above to the contrary, if any request by Tenant to Landlord
for a disbursement of the Allowance in any Fiscal Year is for an amount in
excess of the amount budgeted for capital expenditures in Tenant's approved
annual budget for such Fiscal Year, then the Priority Additional Rent Base
Amount shall not be increased as provided above to the extent that the amount of
such request is above the budgeted amount unless such request is accompanied by
Franchisor's consent to such requested amount.
1.77 "Purchase Agreement" shall have the meaning given uch term in Section 22.15
hereof.
1.78 "Qualified Affiliate" shall mean any (x) Parent or Subsidiary of OpCo, or
(y) partnership or limited liability company in which OpCo has an ownership
interest of not less than 25%, whether or not such interest is controlling.
1.79 "Qualified Appraiser" shall mean an appraiser who is not in control of,
controlled by or under common control with either Landlord or Tenant and has not
been an employee of Landlord or Tenant or any Affiliated Person with respect to
either of Landlord or Tenant at any time, who is qualified to appraise
commercial real estate in the State and is a member of the American Institute of
Real Estate Appraisers (or any successor association or body of comparable
standin if such Institute is not then in existence) and who has held his or her
certificate as an M.A.I, or its equivalent for a period of not less than three
(3) years, and has been actively engaged in the appraisal of commercial real
estate in such area for a period of not less than five (5) years, immediately
preceding his or her appointment hereunder.
1.80 "Regulated Medical Wastes" shall mean all materials generated by Tenant,
subtenants, patients, occupants or the operators of the Collective Leased
Properties which are now or may hereafter be subject to regulation pursuant to
the Material Waste Tracking Act of 1988, or any Applicable Laws promulgated by
any Government Agencies.
1.81 "Rent" shall mean, collectively, the Minimum Rent, Additional Rent and
Additional Charges.
1.82 "SEC" shall mean the Securities and Exchange Commission.
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1.83 "State" shall mean, as to each Leased Property, the state in which such
Leased Property is located.
1.84 "Subordinated Creditor" shall mean any creditor of Tenant which is a party
to a Subordination Agreement in favor of Landlord.
1.85 "Subordination Agreement" shall mean any agreement executed by a
Subordinated Creditor pursuant to which the payment and performance of Tenant's
obligations to such Subordinated Creditor are subordinated to the payment and
performance of Tenant's obligations to Landlord under this Agreement.
1.86 "Subsidiary" shall mean, with respect to any Person, any Entity in which
such Person owns directly, or indirectly through one or more Subsidiaries, more
than fifty percent (50%) of the beneficial equity interest of such Person.
1.87 "Substitute Leased Property" shall have the meaning given such term in
Section 22.15 hereof.
1.88 "Substitution Date" shall have the meaning given such term in Section 22.15
hereof.
1.89 "Tenant" shall mean OpCo and the Facility Subsidiaries listed in Exhibit B,
jointly and severally.
1.90 "Tenant's Personal Property" shall mean all tangible personal property now
owned or hereafter acquired by Tenant on or after the date hereof and located at
any of the Collective Leased Properties or used in connection with Tenant's
business at any of the Collective Leased Properties, including, without
limitation, all motor vehicles and consumable inventory and supplies, furniture,
furnishings, movable walls and partitions, equipment and machinery and all other
tangible personal property of Tenant, and all modifications, replacements,
alterations and additions to such personal property installed at the expense of
Tenant.
1.91 "Term" shall mean, collectively, the Fixed Term and the Extended Terms, to
the extent properly exercised pursuant to the provisions of Section 2.4, unless
sooner terminated pursuant to the provisions of this Agreement.
1.92 "Unsuitable for Its Primary Intended Use" shall mean, with respect to any
Facility, a state or condition of such Facility such that (a) following any
damage or destruction involving such Leased Property, such Leased Property
cannot reasonably be expected to be restored to substantially the same condition
as existed immediately before such damage or destruction, and as otherwise
required by Section 10.2.3, within six (6) months following such damage or
destruction or such shorter period of time as to which business interruption
insurance
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is available to cover Rent and other costs related to such Leased Property
following such damage or destruction, or (b) as the result of a partial taking
by Condemnation, such Facility cannot be operated, in the good faith judgment of
OpCo, on a commercially practicable basis for its Primary Intended Use taking
into account, among other relevant factors, the number of usable beds, the
amount of square footage, or the revenues affected by such damage or destruction
or partial taking.
1.93 "Work" shall have the meaning given such term in Section 10.2.3.
2
COLLECTIVE LEASED PROPERTIES AND TERM
2.1 Collective Leased Properties.
Upon and subject to the terms and conditions hereinafter set forth,
Landlord leases to Tenant and Tenant leases from Landlord all of the following
(collectively, the "Collective Leased Properties"):
(a) those certain tracts, pieces and parcels of land conveyed to
Landlord pursuant to Deeds dated on or about the date hereof, the
common names and street addresses of which are set forth in Exhibit A
attached hereto (the "Land");
(b) all buildings, structures, Fixtures and other improvements of every
kind including, but not limited to, alleyways and connecting tunnels,
sidewalks, utility pipes, conduits and lines (on-site and off-site),
parking areas and roadways appurtenant to such buildings and
structures presently situated upon the Land and all Capital Additions
(collectively, the "Leased Improvements");
(c) all easements, rights and appurtenances relating to the Land and
the Leased Improvements;
(d) all equipment, machinery, fixtures, and other items of property,
now or hereafter permanently affixed to or incorporated into the Leased
Improvements, including, without limitation, all furnaces, boilers,
heaters, electrical equipment, heating, plumbing, lighting,
ventilating, refrigerating, incineration, air and water pollution
control, waste disposal, air-cooling and air-conditioning systems and
apparatus, sprinkler systems and fire and theft protection equipment,
all of which, to the maximum extent permitted by law, are hereby deemed
by the parties hereto to constitute real estate, together with all
replacements, modifications, alterations and additions thereto, but
specifically excluding Tenant's Personal Property (collectively, the
"Fixtures");
(e) all machinery, equipment, furniture, furnishings, moveable walls or
partitions, computers or trade fixtures or other personal property of
any kind or descript on used or
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useful in Tenant's business on or in the Leased Improvements, and
located on or in the Leased Improvements, including, without
limitation, all "Personal Property" as defined in the Purchase
Agreement, and all modifications, replacements, alterations and
additions to such personal property, except items, if any, included
within the category of Fixtures, but specifically excluding Tenant's
Personal Property (collectively, the "Leased Personal Property"); and
(f) all leases of space (including any security deposits held by Tenant
pursuant thereto) in the Leased Improvements to tenants thereof.
Landlord hereby assigns to Tenant, and Tenant hereby assumes, all of
the leases described in clause (f) immediately preceding, such assumption being
to the full extent set forth in the Assignment of Leases executed at the closing
pursuant to the Purchase Agreement. In connection therewith, Tenant agrees to
perform any and all covenants of landlord thereunder, past, present and future.
Notwithstanding the foregoing, such leases shall, without the necessity of
further documentation, be deemed reassigned to Landlord upon the expiration or
earlier termination of the Term. In connection with any reassignment thereof
occurring following an Event of Default hereunder, such reassignment shall not
release Tenant from any liability thereunder with respect to the period ending
prior to the expiration of the Term.
2.2 Condition of Collective Leased Properties.
Tenant acknowledges receipt and delivery of possession of the Collective
Leased Properties and Tenant accepts the Collective Leased Properties in their
"as is" condition, subject to the rights of all occupants and parties in
possession, the existing state of title, including all covenants, conditions,
restrictions, reservations, mineral leases, easements and other matters of
record or that are visible or apparent on the Collective Leased Properties, all
applicable Legal Requirements, the lien of financing instruments, mortgages and
deeds of trust, and such other matters which would be disclosed by an inspection
of the Collective Leased Properties and the record title thereto or by an
accurate survey thereof. TENANT REPRESENTS THAT IT HAS INSPECTED THE COLLECTIVE
LEASED PROPERTIES AND ALL OF THE FOREGOING AND HAS FOUND THE CONDITION THEREOF
SATISFACTORY AND IS NOT RELYING ON ANY REPRESENTATION OR WARRANTY OF LANDLORD OR
LANDLORD'S AGENTS OR EMPLOYEES WITH RESPECT THERETO, AND TENANT WAIVES ANY CLAIM
OR ACTION AGAINST LANDLORD IN RESPECT OF THE CONDITION OF THE COLLECTIVE LEASED
PROPERTIES. LANDLORD MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN
RESPECT OF THE COLLECTIVE LEASED PROPERTIES OR ANY PART THEREOF, EITHER AS TO
ITS FITNESS FOR USE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR
OTHERWISE, OR AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT
OR PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY TENANT. To the
maximum extent permitted by law, however, Landlord hereby assigns to Tenant all
of Landlord's rights to proceed against any predecessor in title for breaches of
warranties or representations or for latent defects in the
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Collective Leased Properties. Landlord shall fully cooperate with Tenant in the
prosecution of any such claims, in Landlord's or Tenant's name, all at Tenant's
sole cost and expense. Tenant shall indemnify, defend, and hold harmless
Landlord from and against any loss, cost, damage or liability (including
reasonable attorneys' fees) incurred by Landlord in connection with such
cooperation.
2.3 Fixed Term.
The initial term of this Agreement (the "Fixed Term") shall commence at
12:01 a.m. on the Commencement Date and shall expire at 11:59 p.m. on the last
day of the twelfth (12th) Lease Year.
2.4 Extended Term.
Provided that no Default or Event of Default shall have occurred and be
continuing and this Agreement shall be in full force and effect, Tenant shall,
subject to Section 2.5 below, have the right to extend the Term for each of four
(4) consecutive five (5)-year renewal terms (collectively, the "Extended Terms")
for all, and not less than all, of the Collective Leased Properties.
Each Extended Term shall commence on the day succeeding the expiration of
the Fixed Term or the preceding Extended Term, as the case may be. All of the
terms, covenants and provisions of this Agreement (including but not limited to
those with respect to Additional Rent and payments of the Allowance) shall apply
to each such Extended Term, except that (x) the Minimum Rent for each Extended
Term shall be the Fair Market Rental for such Extended Term and shall be
determined pursuant to Section 2.5 below and (y) Tenant shall have no right to
extend the Term beyond the expiration of the Extended Terms. If Tenant shall
elect to exercise any of the aforesaid options, it shall do so by giving
Landlord Notice thereof not later than one (1) year prior to the scheduled
expiration of the then current Term of this Agreement (Fixed Term or Extended
Term, as the case may be), it being understood and agreed that time shall be of
the essence with respect to the giving of such Notice. Tenant may not exercise
its option for more than one such Extended Term at a time. If Tenant shall fail
to give any such Notice, this Agreement shall automatically terminate at the end
of the Term then in effect and Tenant shall have no further option to extend the
Term of this Agreement. If Tenant shall give such Notice, the extension of this
Agreement shall be automatically effected without the execution of any
additional documents, it being understood and agreed, however, that Tenant and
Landlord shall execute such documents and agreements as either party shall
reasonably require to evidence the same. Notwithstanding the provisions of the
foregoing sentence, if, subsequent to the giving of such Notice, an Event of
Default shall occur and be continuing, unless Landlord shall otherwise consent
in writing, the extension of this Agreement shall cease to take effect and this
Agreement shall automatically terminate at the end of the Term then in effect
and Tenant shall have no further option to extend the Term of this Agreement.
2.5 Determination of Minimum Rent for Extended Terms.
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The Minimum Rent for each Extended Term shall be equal to the amount set
forth in clause (x) in Section 2.4 above and shall be determined by the mutual
greement of Landlord and Tenant within thirty (30) days after Landlord receives
Tenant's Notice exercising its option to extend with respect to such Extended
Term, but in no event earlier than twelve (12) months prior to the commencement
of the applicable Extended Term. In the event Landlord and Tenant are unable to
agree on the Minimum Rent for such Extended Term within such period, such
Minimum Rent shall be determined pursuant to appraisal in accordance with
Article 19.
3
RENT
3.1 Rent.
Tenant shall pay to Landlord, in lawful money of the United States of
America which shall be legal tender for the payment of public and private debts,
without offset, abatement, demand or deduction, Minimum Rent, Additional Rent
and Additional Charges, during the Term, except as hereinafter expressly
provided. All payments to Landlord shall be made by wire transfer of immediately
available federal funds or by other means acceptable to Landlord and Tenant,
each in its sole discretion. Rent for any partial month shall be prorated on a
per diem basis based on a 365-day year and the actual number of days elapsed.
3.1.1 Minimum Rent.
Minimum Rent shall be paid in advance on the first day of each calendar
month; provided, however, that the first monthly installment of Minimum Rent
shall be payable on the Commencement Date.
3.1.2 Additional Rent.
Additional Rent shall be paid in advance on the first day of each calendar
month; provided, however, that the first monthly installment of Additional Rent
shall be payable on the Commencement Date. Except as otherwise set forth in
Section 12.1(a) hereof, Tenant's failure to pay Additional Rent shall not
constitute a Default or Event of Default hereunder.
3.1.3 Additional Charges.
In addition to the Minimum Rent and Additional Rent payable hereunder,
Tenant shall pay and discharge as and when due and payable the following
(collectively, "Additional Charges"):
(a) Impositions. Subject to Article 8 relating to Permitted Contests,
Tenant shall pay, or cause to be paid, all Impositions before any fine,
penalty, interest or cost (other
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than any opportunity cost as a result of a failure to take advantage of any
discount for early payment) may be added for non-payment, such payments to
be made directly to the taxing authorities where feasible, and shall
promptly, upon request, furnish to Landlord copies of official receipts or
other satisfactory proof evidencing such payments. If any such Imposition
may, at the option of the taxpayer, lawfully be paid in installments
(whether or not interest shall accrue on the unpaid balance of such
Imposition), Tenant may exercise the option to pay the same (and any
accrued interest on the unpaid balance of such Imposition) in installments
and, in such event, shall pay such installments during the Term as the same
become due and before any fine, penalty, premium, further interest or cost
may be added thereto. Landlord, at its expense, shall, to the extent
required or permitted by applicable law, prepare and file all tax returns
in respect of Landlord's net income, gross receipts, sales and use, single
business, transaction privilege, rent, ad valorem, franchise taxes and
taxes on its capital stock, and Tenant, at its expense, shall, to the
extent required or permitted by applicable laws and regulations, prepare
and file all other tax returns and reports in respect of any Imposition as
may be required by any government or Government Agency. Provided no Default
or Event of Default shall have occurred and be continuing, if any refund
shall be due from any taxing authority in respect of any Imposition paid by
Tenant, the same shall be paid over to or retained by Tenant. Landlord and
Tenant shall, upon request of the other, provide such data as is maintained
by the party to whom the request is made with respect to the Collective
Leased Properties as may be necessary to prepare any required returns and
reports. In the event Government Agencies classify any property covered by
this Agreement as personal property, Tenant shall file all personal
property tax returns in such jurisdictions where it may legally so file.
Each party shall, to the extent it possesses the same, provide the other,
upon request, with cost and depreciation records necessary for filing
returns for any property so classified as personal property. Where Landlord
is legally required to file personal property tax returns, Landlord shall
provide Tenant with copies of assessment notices in sufficient time for
Tenant to file a protest. All Impositions assessed against such personal
property shall be (irrespective of whether Landlord or Tenant shall file
the relevant return) paid by Tenant not later than the last date on which
the same may be made without interest or penalty. If the provisions of any
Facility Mortgage require deposits on account of Impositions to be made
with such Facility Mortgagee, provided the Facility Mortgagee has not
elected to waive such provision, Tenant shall either pay Landlord the
monthly amounts required at the time and place that payments of Minimum
Rent are required and Landlord shall transfer such amounts to such Facility
Mortgagee or, pursuant to written direction by Landlord, Tenant shall make
such deposits directly with such Facility Mortgagee. Landlord shall,
however, use commercially reasonable best efforts to cause any Facility
Mortgagee not to impose such obligation on Tenant.
Landlord shall give prompt Notice to Tenant of all Impositions payable
by Tenant hereunder of which Landlord at any time has knowledge; provided,
however, that Landlord's failure to give any such Notice shall in no way
diminish Tenant's obligation hereunder to pay such Impositions, except that
Landlord shall (unless Tenant itself knew, or should have known,
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about the existence of such Impositions obligation) pay all penalties, fines and
other expenses arising out of Landlord's failure to give such Notice.
(b) Utility Charges. Tenant shall pay or cause to be paid all charges for
electricity, power, gas, oil, water and other utilities used in connection
with the Collective Leased Properties.
(c) Insurance Premiums. Tenant shall pay or cause to be paid all premiums
for the insurance coverage required to be maintained pursuant to Article 9.
(d) Other Charges. Tenant shall pay or cause to be paid all other amounts,
liabilities and obligations which Tenant assumes or agrees to pay under
this Agreement, including, without limitation, all agreements to indemnify
Landlord under Sections 4.4 and 9.7.
(e) Prorations. Tenant shall pay or cause to be paid all amounts required
to be paid by OpCo under Section 10.4 of the Purchase Agreement.
(f) Reimbursement for Additional Charges. If Tenant pays or causes to be
paid property taxes or similar Additional Charges attributable to periods
after the end of the Term, whether upon expiration or sooner termination of
this Agreement (other than termination following an Event of Default),
Tenant may, within sixty (60) days of the end of the Term, provide Notice
to Landlord of its estimate of such amounts. Landlord shall promptly
reimburse Tenant for all payments of such taxes and other similar
Additional Charges that are attributable to any period after the Term of
this Agreement (unless this Agreement shall have been terminated following
an Event of Default). Tenant acknowledges that it has no claims against
Landlord for Additional Charges attributable to the periods prior to the
first day of the Term.
3.2 Late Payment of Rent.
If any installment of (i) Minimum Rent, (ii) Additional Rent (with respect
to which Landlord has made a disbursement of the Allowance) or (iii) Additional
Charges (but only as to those Additional Charges which are payable directly to
Landlord) shall not be paid on its due date, Tenant shall pay Landlord, on
demand, as Additional Charges, a late charge (to the extent permitted by law)
computed at the Overdue Rate on the amount of such installment, from the due
date of such installment to the date of payment thereof. To the extent that
Tenant pays any Additional Charges directly to Landlord or any Facility
Mortgagee pursuant to any requirement of this Agreement, Tenant shall be
relieved of its obligation to pay such Additional Charges to the Entity to which
they would otherwise be due.
In the event of any failure by Tenant to pay any Additional Charges when
due, Tenant shall promptly pay and discharge, as Additional Charges, every fine,
penalty, interest and cost which may be added for non-payment or late payment of
such items. Landlord shall have all legal, equitable and contractual rights,
powers and remedies provided either in this Agreement or by statute or otherwise
in the case of non-payment of the Additional Charges as in the case of
non-payment of
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the Minimum Rent and Additional Rent, except as otherwise specifically provided
in this Agreement.
3.3 Net Lease.
The Minimum Rent shall be absolutely net to Landlord so that this Agreement
shall yield to Landlord the full amount of the installments or amounts of
Minimum Rent throughout the Term, subject to any other provisions of this
Agreement which expressly provide for adjustment of such Minimum Rent.
3.4 No Termination, Abatement, Etc.
Except as otherwise specifically provided in this Agreement, Tenant, to the
maximum extent permitted by law, shall remain bound by this Agreement in
accordance with its terms and shall neither take any action without the consent
of Landlord to modify, surrender or terminate this Agreement, nor seek, nor be
entitled to any abatement, deduction, deferment or reduction of the Rent, or
set-off against the Rent, nor shall the respective obligations of Landlord and
Tenant be otherwise affected by reason of (a) any damage to or destruction of
any of the Collective Leased Properties or any portion thereof from whatever
cause or any Condemnation; (b) the lawful or unlawful prohibition of, or
restriction upon, Tenant's use of any of the Collective Leased Properties, or
any portion thereof, or the interference with such use by any Person or by
reason of eviction by paramount title; (c) any claim which Tenant may have
against Landlord by reason of any default or breach of any warranty by Landlord
under this Agreement or any other agreement between Landlord and Tenant, or to
which Landlord and Tenant are parties; (d) any bankruptcy, insolvency,
reorganization, composition, readjustment, liquidation, dissolution, winding up
or other proceedings affecting Landlord or any assignee or transferee of
Landlord; or (e) for any other cause whether similar or dissimilar to any of the
foregoing. Tenant hereby waives all rights arising from any occurrence
whatsoever, which may now or hereafter be conferred upon it by law, to (i)
modify, surrender or terminate this Agreement or quit or surrender any of the
Collective Leased Properties or any portion thereof, or (ii) entitle Tenant to
any abatement, reduction, suspension or deferment of the Rent or other sums
payable or other obligations to be performed by Tenant hereunder, except as
otherwise specifically provided in this Agreement. The obligations of Tenant
hereunder shall be separate and independent covenants and agreements, and the
Rent and all other sums payable by Tenant hereunder shall continue to be payable
in all events unless the obligations to pay the same shall be terminated
pursuant to the express provisions of this Agreement.
3.5 Annual Allowance.
Provided no Default or Event of Default pursuant to Section 12.1(a) hereof
has occurred and is continuing and this Agreement shall be in full force and
effect, Landlord shall pay the Allowance to, or at the direction of, Tenant
during each Lease Year of the Term. At least Ten Million Dollars ($10,000,000)
of the Allowance shall be used to pay for Capital Expenditures made during such
Lease Year. At Tenant's election, Tenant shall have the right to use up to Ten
Million Dollars ($10,000,000) of the Allowance to pay for Impositions, premiums
for insurance required pursuant
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to Article 9 hereof and franchise fees due and owing under the Franchise
Agreement. Anything in this Agreement to the contrary notwithstanding, any and
all assets paid for (or which are the subject of reimbursements to Tenant) by
disbursements of the Allowance with respect to Capital Expenditures shall
immediately be the property of Landlord and constitute part of the Collective
Leased Properties. Any portion of the Allowance not utilized in a particular
Lease Year shall, subject to the sentence immediately following, remain
available for use in subsequent Lease Years. Notwithstanding the foregoing (x)
in the event less than $10,000,000 of the Allowance for any Lease Year is used
to pay for Capital Expenditures, then a portion of any amount remaining to be
used in subsequent Lease Years shall be used only for Capital Expenditures, such
portion being equal to the amount by which Capital Expenditures funded with the
Allowance for such Lease Year were less than $10,000,000 and (y) in the event
any portion of the Allowance (including amounts accrued from prior Lease Years)
is not utilized as of the last day of the Term, such amount shall be deemed
forfeited and Tenant will receive no payment or credit with respect thereto.
In order to receive a disbursement of the Allowance, Tenant shall submit to
Landlord (but not more often than twice monthly) a statement, certified pursuant
to an Officer's Certificate transmitted therewith, setting forth in reasonable
detail a description of the Capital Expenditures, impositions, premiums for
insurance required pursuant to Article 9 hereof, and Franchise Fees incurred or
owing during such Lease Year and for which an Allowance disbursement is sought.
Such Officer's Certificate shall certify that the expenditures for which
reimbursement is sought are either within Tenant's approved annual budget or
have been approved by Franchisor. Within five (5) Business Days after receipt
thereof, Landlord shall reimburse to Tenant (or, upon Tenant's written
direction, included along with such certified statement, pay third-party
contractors or vendors identified therein) appropriate amounts requested. Upon
two (2) Business Days prior Notice Landlord shall have the right to audit
Tenant's books and records to confirm the accuracy of any such statement.
The foregoing provision hereof notwithstanding, in no event shall Landlord
be obligated (x) to make disbursements in any Lease Year in excess of Ten
Million Dollars ($10,000,000) with respect to impositions, premiums for
insurance required pursuant to Article 9 hereof, and Franchise Fees, except to
the extent that any amounts carry over from previous years pursuant to the first
paragraph of Section 3.5, (y) to make disbursements with respect to any Lease
Year in excess of the Additional Rent theretofore paid for such Lease Year,
except to the extent that any amounts carry over from previous years pursuant to
the first paragraph of Section 3.5 or (z) to make any disbursements of the
Allowance if Tenant has failed to pay any monthly installments of Additional
Rent at least equal to such disbursements.
4
USE OF THE COLLECTIVE LEASED PROPERTIES
4.1 Permitted Use.
4.1.1 Primary Intended Use.
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Tenant shall, at all times during the Term and at any other time that
Tenant shall be in possession of any Leased Property, subject to Section 4.5
hereof, continuously use each of the Collective Leased Properties for the
operation of a licensed acute or chronic care psychiatric hospital; licensed
residential treatment center; licensed subacute hospital; licensed substance
abuse, neurological, geriatric, correctional, juvenile justice or other
healthcare service facility providing inpatient care; outpatient facility; or
any combination of the foregoing; and the healthcare services provided by or at
a Leased Property may include inpatient hospitalization, partial hospitalization
programs, outpatient therapy, intensive outpatient therapy, ambulatory
detoxification, behavioral modification programs and related services (provided
such related services constitutes services intended to be provided as part of
the "Franchised Business," as such term is defined in the Franchise Agreement),
and for such other uses as may be incidental or necessary thereto, including the
operation of any medical office buildings located on any such Leased Property
(such use being hereinafter referred to as such Leased Property's "Primary
Intended Use"). Tenant shall not use any of the Collective Leased Properties or
any portion thereof for any other use without the prior written consent of
Landlord. No use shall be made or permitted to be made of any of the Collective
Leased Properties and no acts shall be done thereon which will cause the
cancellation of any insurance policy covering any of the Collective Leased
Properties or any part thereof (unless another adequate policy is available),
nor shall Tenant sell or otherwise provide to residents or patients therein, or
permit to be kept, used or sold in or about any of the Collective Leased
Properties any article which may be prohibited by law or by the standard form of
fire insurance policies, or any other insurance policies required to be carried
hereunder, or fire underwriter's regulations. Tenant shall, at its sole cost,
comply with all of the requirements pertaining to the Collective Leased
Properties of any insurance board, association, organization or company
necessary for the maintenance of insurance, as herein provided, covering the
Collective Leased Properties and Tenant's Personal Property, including, without
limitation, the Insurance Requirements. Tenant shall not take or omit to take
any action, the taking or omission of which materially impairs the value or the
usefulness of any of the Collective Leased Properties or any part thereof for
its Primary Intended Use.
4.1.2 Necessary Approvals.
Tenant shall proceed with all due diligence and exercise best efforts to
obtain and maintain all approvals necessary to use and operate, for its Primary
Intended Use, each o the Collective Leased Properties and each Facility located
thereon under applicable law and, without limiting the foregoing, shall use its
commercially reasonable best efforts to maintain appropriate licensure and
participation in those reimbursement programs for which a Facility is eligible
and in which management of the Facility desires to participate.
4.1.3 Lawful Use, Etc.
Tenant shall not use or suffer or permit the use of any of the Collective
Leased Properties or Tenant's Personal Property for any unlawful purpose. Tenant
shall not commit or suffer to be committed any waste on any of the Collective
Leased Properties, or in any Facility, nor shall Tenant cause or permit any
nuisance thereon or therein. Tenant shall neither suffer nor permit
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any of the Collective Leased Properties or any portion thereof, including any
Capital Addition or Tenant's Personal Property, to be used in such a manner as
(i) might reasonably tend to impair Landlord's (or Tenant's, as the case may be)
title thereto or to any portion thereof, or (ii) may reasonably make possible a
claim or claims for adverse usage or adverse possession by the public, as such,
or of implied dedication of the applicable Leased Property or any portion
thereof.
4.2 Compliance with Legal and Insurance Requirements, Etc.
Subject to the provisions of Article 8, Tenant, at its sole expense, shall
(i) comply in all material respects with Legal Requirements and Insurance
Requirements in respect of the use, operation, maintenance, repair, alteration
and restoration of all of the Collective Leased Properties, and (ii) procure,
maintain and comply in all material respects with all appropriate licenses,
certificates of need, permits, and other authorizations and agreements required
for any use of the Collective Leased Properties and Tenant's Personal Property
then being made, and for the proper erection, installation, operation and
maintenance of the Collective Leased Properties or any part thereof, including,
without limitation, any Capital Additions.
4.3 Compliance with Medicaid and Medicare Requirements.
Tenant shall, at its sole cost and expense, make whatever improvements (capital
or ordinary) as are required to conform each of the Collective Leased Properties
to such standards as may, from time to time, be required by Federal Medicare
(Title 18) or Medicaid (Title 19), to the extent Tenant is a participant in such
programs or any other applicable programs or legislation, or capital
improvements required by any other governmental agency having jurisdiction over
such Leased Property as a condition of the continued operation of such Leased
Property for its Primary Intended Use.
4.4 Environmental Matters.
4.4.1 Restriction on Use, Etc.
Tenant shall not store, spill upon, dispose of or transfer to or from the
Collective Leased Properties any Hazardous Substance, except that Tenant may
store, transfer and dispose of Hazardous Substances in compliance with all
Applicable Laws. Tenant shall maintain the Collective Leased Properties at all
times free of any Hazardous Substance (except such Hazardous Substan es as are
maintained in compliance with all Applicable Laws). Tenant shall promptly: (a)
notify Landlord in writing of any material change in the nature or extent of
Hazardous Substances at any of the Collective Leased Properties, (b) transmit to
Landlord a copy of any Community Right to Know report which is required to be
filed by Tenant with respect to any of the Collective Leased Properties pursuant
to SARA Title III or any other Applicable Law, (c) transmit to Landlord copies
of any demand letters, complaints or other documents initiating legal action,
citations, orders, notices or other material communications asserting claims by
private parties or government agencies with respect to Hazardous Substances
received by Tenant or its agents or representatives (collectively,
"Environmental Notice"), which Environmental Notice requires a written response
or any action
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to be taken and/or if such Environmental Notice gives notice of and/or could
give rise to a material violation of any Applicable Law and/or could give rise
to any material cost, expense, loss or damage (an "Environmental Obligation"),
(d) observe and comply with all Applicable Laws relating to the use, maintenance
and disposal of Hazardous Substances and all orders or directives from any
official, court or agency of competent jurisdiction relating to the use or
maintenance or requiring the removal, treatment, containment or other
disposition thereof, and (e) pay or otherwise dispose of any fine, charge or
Imposition related thereto, unless Tenant shall contest the same in good faith
and by appropriate proceedings and the right to use and the value of any of the
Collective Leased Properties is not materially and adversely affected thereby.
If at any time Hazardous Substances are discovered in violation of
Applicable Laws on any of the Collective Leased Properties, Tenant shall take
all actions and incur any and all expenses, as may be necessary or as may be
required by any Government Agency, (i) to clean up and remove from and about
such Leased Properties all Hazardous Substances thereon, (ii) to contain and
prevent any further release or threat of release of Hazardous Substances on or
about such Leased Properties and (iii) to use good faith efforts to eliminate
any further release or threat of release of Hazardous Substances on or about
such Leased Properties.
4.4.2 Environment Report.
Six (6) months prior to expiration of the Term, Tenant shall designate a
qualified environmental engineer, satisfactory to Landlord in its sole
discretion, which engineer shall conduct an environmental investigation of the
Collective Leased Properties and prepare an environmental site assessment report
(the "Environmental Report") with respect thereto. The scope of such
Environmental Report shall include, without limitation, review of relevant
records, interviews with persons knowledgeable about the Collective Leased
Properties and relevant governmental agencies, a site inspection of the
Collective Leased Properties, any buildings, the fencelines of the Collective
Leased Properties and adjoining properties (Phase I) and shall otherwise be
reasonably satisfactory in form and substance to Landlord. If such
investigation, in the opinion of the performing engineer, indicates that any of
the Collective Leased Properties are not environmentally sound and free from
oil, asbestos, radon and other Hazardous Substances (except in compliance with
Applicable Laws), such investigation shall also include a more detailed physical
site inspection, appropriate testing, subsurface and otherwise, and review of
historical records (Phase II) to demonstrate the compliance of such of the
Collective Leased Properties with Applicable Laws and the absence of Hazardous
Substances except in compliance with Applicable Laws.
All Environmental Reports, and supplements and amendments thereto, shall be
provided to Landlord contemporaneously with delivery thereof to Tenant. With
respect to any recommendations contained in the Environmental Report, violations
of Applicable Laws and/or the existence of any conditions at any of the
Collective Leased Properties which could give rise to an Environmental
Obligation, Tenant shall promptly give Notice thereof to Landlord, together with
a description, setting forth in reasonable detail, all actions Tenant proposes
to take in connection therewith and Tenant shall promptly take all actions, and
incur any and all expenses, as may be required by Applicable Law or by any
Government Agency or, in the case of conditions that could give rise to
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an Environmental Obligation, as may be reasonably required by Landlord, (i) to
clean up, remove or remediate from and about the Collective Leased Properties
all Hazardous Substances thereon, (ii) to contain, prevent and eliminate any
further release or threat of release of Hazardous Substances on or about the
Collective Leased Properties, and (iii) otherwise to eliminate such violation or
condition from the Collective Leased Properties in accordance with Applicable
Law .
Landlord shall, provided no Event of Default has occurred and is
continuing, Landlord shall, upon receipt of a bill, along with reasonable
substantiation thereof, promptly reimburse Tenant for the reasonable
out-of-pocket costs incurred in the preparation of the Phase I Environmental
Report. In no event shall Landlord be obligated to pay or reimburse Tenant for
the costs incurred in connection with any Phase II Report or in connection with
any actions taken or proposed to be taken by Tenant as described in the
immediately preceding paragraph.
4.4.3 Indemnification of Landlord.
Tenant shall protect, indemnify and hold harmless Landlord and each
Facility Mortgagee, their trustees, officers, agents, employees and
beneficiaries, and any of their respective successors or assigns (hereafter the
"Indemnities," and when referred to singly, an "Indemnitee") for, from and
against any and all debts, liens, claims, causes of action, administrative
orders or notices, costs, fines, penalties or expenses (including, without
limitation, reasonable attorneys' fees and expenses) imposed upon, incurred by
or asserted against any Indemnitee resulting from, either directly or
indirectly, the presence in, the Environment or any properties surrounding any
of the Collective Leased Properties of any Hazardous Substances. Tenant's duty
herein includes, but is not limited to, indemnification for costs associated
with personal injury or property damage claims as a result of the presence of
Hazardous Substances in, upon or under the soil or ground water of any of the
Collective Leased Properties in violation of any Applicable Law. Upon Notice
from Landlord, Tenant shall undertake the defense, at Tenant's sole cost and
expense, of any indemnification duties set forth herein. The foregoing
provisions hereof notwithstanding, Tenant's indemnification of any Facility
Mortgagee pursuant to this Section 4.4.3 shall not extend to or include the
investigation and defense expenses (including, but not limited to, legal and
consulting fees and expenses) incurred by such Facility Mortgagee.
Tenant shall, upon demand, pay to Landlord, as an Additional Charge, any
cost, expense, loss or damage (including, without limitation, reasonable
attorneys' fees) incurred by Landlord in asserting any right under this Section
4.4, including without limitation any right of indemnity under this Section
4.4.3 or otherwise arising from a failure of Tenant strictly to observe and
perform the foregoing requirements, which amounts shall bear interest from the
date incurred until paid by Tenant to Landlord at the Overdue Rate.
4.4.4 Survival.
The provisions of this Section 4.4 shall survive the expiration or sooner
termination of this Agreement.
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4.5 Tenant's Right to Close Facilities.
Provided that no Default or Event of Default (except pursuant to Section
12.1(e)) shall have occurred and be continuing, Tenant shall have the right at
any time and from time to time, to cease its operations in any or all of the
Facilities. Nothing herein shall entitle Tenant to any reduction in Rent or
diminish any of Tenant's other obligations, including without limitation
obligations to (x) maintain and insure any and all facilities, and (y) surrender
each Facility upon expiration or sooner termination of the Term with all
Tenant's Personal Property in place.
5
MAINTENANCE AND REPAIRS
5.1 Maintenance and Repair.
5.1.1 Tenant's Obligations.
Tenant shall, at its sole cost and expense, keep each of the Collective
Leased Properties and all private roadways, sidewalks and curbs appurtenant
thereto (and Tenant's Personal Property) in good order and repair, reasonable
wear and tear excepted (whether or not the need for such repairs occurs as a
result of Tenant's use, any prior use, the elements or the age of the Collective
Leased Properties or Tenant's Personal Property, or any portion thereof), and
shall promptly make all necessary and appropriate repairs and replacements
thereto of every kind and nature, whether interior or exterior, structural or
nonstructural, ordinary or extraordinary, foreseen or unforeseen or arising by
reason of a condition existing prior to the commencement of the Term necessary
for the Primary Intended Use (concealed or otherwise); provided, however, that
Tenant shall be permitted to prosecute claims against Landlord's predecessors in
title for breach of any representation or warranty made to or on behalf of
Landlord or for any latent defects in the Collective Leased Properties. All
repairs shall be made in a good, workmanlike and first-class manner, in
accordance with all applicable federal, state and local statutes, ordinances,
by-laws, codes, rules and regulations relating to any such work. Except as
permitted by Section 4.5, Tenant shall not take or omit to take any action, the
taking or omission of which materially impairs the value or the usefulness of
any of the Collective Leased Properties or any part thereof for its respective
Primary Intended Use. Tenant's obligations under this Section 5.1.1 as to any of
the Collective Leased Properties shall be limited, in the event of any casualty
or Condemnation involving such Leased Property, as set forth in Sections 10.2
and 11.2. Notwithstanding any provisions of this Section 5.1 to the contrary,
Tenant's obligations with respect to Hazardous Substances are as set forth in
Section 4.4.
5.1.2 Landlord's Obligations.
Landlord shall not, under any circumstances, be required to build or
rebuild any improvement on the Collective Leased Properties, or to make any
repairs, replacements, alterations, restorations or renewals of any nature or
description to the Collective Leased Properties, whether ordinary or
extraordinary, structural or nonstructural, foreseen or unforeseen, or to make
any
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expenditure whatsoever with respect thereto, or to maintain the Collective
Leased Properties in any way, except as specifically provided herein. Tenant
hereby waives, to the maximum extent permitted by law, the right to make repairs
at the expense of Landlord pursuant to any law in effect on the date hereof or
hereafter enacted. Landlord shall have the right to give, record and post, as
appropriate, notices of nonresponsibility under any mechanic's lien laws now or
hereafter existing.
5.1.3 Nonresponsibility of Landlord; No Mechanics Liens.
Landlord's interest in the Collective Leased Properties shall not be
subject to liens for Capital Additions made by Tenant, and Tenant shall have no
power or authority to create any lien or permit any lien to attach to any of the
Collective Leased Properties or the present estate, reversion or other estate of
Landlord in the Collective Leased Properties or on the building or other
improvements thereon as a result of Capital Additions made by Tenant or for any
other cause or reason. All materialmen, contractors, artisans, mechanics and
laborers and other persons contracting with Tenant with respect to the
Collective Leased Properties, or any part thereof, are hereby charged with
notice that such liens are expressly prohibited and that they must look solely
to Tenant to secure payment for any work done or material furnished for Capital
Additions by Tenant or for any other purpose during the term of this Agreement.
Nothing contained in this Agreement shall be deemed or construed in any way
as constituting the consent or request of Landlord, express or implied, by
inference or otherwise, to any contractor, subcontractor, laborer or materialmen
for the performance of any labor or the furnishing of any materials for any
alteration, addition, improvement or repair to any of the Collective Leased
Properties or any part thereof or as giving Tenant any right, power or authority
to contract for or permit the rendering of any services or the furnishing of any
materials that would give rise to the filing of any lien against any of the
Collective Leased Properties or any part thereof nor to subject Landlord's
estate in any of the Collective Leased Properties or any part thereof to
liability under any Mechanic's Lien Law of the State in any way, it being
expressly understood that Landlord's estate shall not be subject to any such
liability.
5.2 Tenant's Personal Property.
Tenant may (and shall as provided hereinbelow), at its expense, install,
affix or assemble or place on any parcels of the Land or in any of the Leased
Improvements any items of Tenant's Personal Property, and Tenant may, subject to
Section 7.2 and the conditions set forth below, remove and replace the same at
any time in the ordinary course of business, provided that no Default or Event
of Default has occurred and is continuing. Tenant shall provide and maintain
throughout the Term all such Tenant's Personal Property as shall be necessary in
order to operate all of the Facilities located at the Collective Leased
Properties in compliance in all material respects with all applicable licensure
and certification requirements, in compliance with applicable Legal Requirements
and Insurance Requirements and otherwise in accordance with customary practice
in the industry for such Primary Intended Use. All of Tenant's Personal Property
(except that removed and replaced in the ordinary course of business as
permitted above, but including supplies and inventory that are equivalent, on an
aggregate basis, in amount and value similar to that reasonably established for
use
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by the Facilities in the immediately preceding Lease Year) shall remain at the
Collective Leased Properties at the expiration or earlier termination of this
Agreement without the necessity of any payment by Landlord to Tenant and without
any obligation to account therefor.
If Tenant uses any material item of tangible personal property on, or in
connection with, any Leased Property which belongs to anyone other than Tenant,
Tenant shall use its commercially reasonable best efforts to require the
agreement permitting such use to provide that Landlord or its designee may
assume Tenant's rights under such agreement upon management or operation of the
applicable Facility by Landlord or its designee.
5.3 Yield Up.
Upon the expiration or sooner termination of this Agreement, Tenant shall
vacate and surrender each of the Collective Leased Properties to Landlord in the
condition in which each of the Collective Leased Properties was in on the
Commencement Date, except as repaired, rebuilt, restored, altered or added to as
permitted or required by the provisions of this Agreement, reasonable wear and
tear excepted (and Condemnation, in the event that this Agreement is terminated
with respect to any of the Collective Leased Properties following a Condemnation
in accordance with Article 11). Rents, real estate taxes and utilities shall be
prorated in the same manner as set forth in Section 10.4 of the Purchase
Agreement. Along therewith Tenant shall surrender to Landlord any and all
records and documents related to the Collective Leased Properties and Tenant's
Personal Property (i.e., but not, subject to Section 12.6 hereof, documents
primarily related to Tenant's business operated therein) including documents and
records obtained by Tenant pursuant to Section 10.2 of the Purchase Agreement.
Landlord (or its designee) shall have the right, but not the obligation, to
assume any or all contracts relating to the Collective Leased Properties and
Tenant's Personal Property (i.e., contracts not primarily related to the
business operated therein). In no event shall Landlord (or its designee) have
any liability under such contracts for obligations or liabilities accruing under
such contracts prior to the date of such assumption by such party. Tenant shall
deliver to Landlord keys and security deposits (for assumed leases) in the same
fashion as described in Sections 10.2(e) and 10.4(d) of the Purchase Agreement.
In addition, upon the expiration or earlier termination of this Agreement,
Tenant shall, at Landlord's sole cost and expense, use its commercially
reasonable best efforts to transfer to and cooperate with Landlord or Landlord's
nominee in connection with the processing of all applications for licenses,
operating permits and other governmental authorizations and all contracts,
including contracts with governmental or quasi-governmental entities which may
be necessary for the operation of the Facilities located on the Collective
Leased Properties. If requested by Landlord, Tenant will continue to manage any
such Facility after the expiration or sooner termination of the Term and for as
long thereafter as is necessary (but not to exceed six (6) months following the
date of such expiration or sooner termination) to obtain all necessary licenses,
operating permits and other governmental authorizations, on such reasonable
terms as Landlord shall request, but in any event Landlord shall pay to Tenant a
management fee equal to the sum of (i) reasonable out-of-pocket costs and
expenses of Tenant in providing management services, (ii) reasonable allocated
internal costs of Tenant in providing management services (including but not
limited to a reasonably
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allocated portion of the salaries and benefits costs of Tenant personnel who
provide such services), and (iii) 10% of the sum of (i) and (ii). In connection
with any such management arrangement, Tenant will, use its commercially
reasonable best efforts to the extent reasonable necessary, maintain in effect
during the period of its management arrangement, those contracts, including (for
sixty (60) days after such expiration or sooner termination, but after sixty
(60) days, only if the Franchise Agreement has been assumed pursuant to Section
12.6) the Franchise Agreement, necessary for the performance of such management
responsibilities and for the operation of the Facilities for the Primary
Intended Use.
5.4 Encroachments, Restrictions, Etc.
If any of the Leased Improvements shall, at any time, encroach upon any
property, street or right-of-way adjacent to the affected Leased Property, or
shall violate the agreements or conditions contained in any lawful restrictive
covenant or other agreement affecting any of the Collective Leased Properties,
or any part thereof, or shall impair the rights of others under any easement or
right-of-way to which any of the Collective Leased Properties is subject, upon
the request of Landlord (but only as to any encroachment, violation or
impairment that is not a Permitted Encumbrance) or of any Person affected by any
such encroachment, violation or impairment, Tenant shall, at its sole cost and
expense, subject to its right to contest the existence of any encroachment,
violation or impairment in accordance with the provisions of Article 8, either
(a) obtain valid and effective waivers or settlements of all claims, liabilities
and damages resulting from each such encroachment, violation or impairment,
whether the same shall affect Landlord or Tenant, or (b) make such changes in
the Leased Improvements and take such other actions as are reasonably
practicable to remove such encroachment and to end such violation or impairment,
including, if necessary, the alteration of any of the Leased Improvements and,
in any event, take all such actions as may be necessary in order to ensure the
continued operation of the affected Leased Improvements for their respective
Primary Intended Use substantially in the manner and to the extent such Leased
Improvements were operated prior to the assertion of such violation, impairment
or encroachment. Any such alteration shall be made in conformity with the
applicable requirements of this Article 5. Tenant's obligations under this
Section 5.4 shall be in addition to and shall in no way discharge or diminish
any obligation of any insurer under any policy of title or other insurance.
5.5 Landlord to Grant Easements, Etc.
Landlord shall from time to time, so long as no Default or Event of Default
shall have occurred and be continuing, at the request of Tenant and at Tenant's
sole cost and expense, (a) grant easements and other rights in the nature of
easements with respect to any of the Collective Leased Properties to third pa
ties, (b) release existing easements or other rights in the nature of easements
which are for the benefit of any of the Collective Leased Properties, (c)
dedicate or transfer unimproved portions of any of the Collective Leased
Properties for road, highway or other public purposes, (d) execute petitions to
have any of the Collective Leased Properties annexed to any municipal
corporation or utility district, (e) execute amendments to any covenants and
restrictions affecting any of the Collective Leased Properties and (f) execute
and deliver to any Person any instrument appropriate to confirm or effect such
grants, release, dedications, transfers, petitions and
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amendments (to the extent of its interests in such Leased Property); provided,
however, that Landlord shall have first determined that such grant, release,
dedication, transfer, petition or amendment is not detrimental to the operation
of the applicable Leased Property for its Primary Intended Use and does not
materially reduce the value of such Leased Property, and Landlord shall have
received an Officer's Certificate confirming such determination, together with
such additional information as Landlord may request.
5.6 Philadelphia Facility.
In the event Franchisor does not complete the renovation/reconstruction of
the Philadelphia Facility in a timely manner as required by the Purchase
Agreement for any reason (whether or not such failure constitutes a breach of
covenant by Franchisor pursuant to Section 7.1(q) of the Purchase Agreement),
Tenant shall promptly do so at its sole cost. Tenant shall permit Franchisor to
have access to the property on which the Philadelphia Facility is to be
constructed for the purpose of performing such obligation.
6
CAPITAL ADDITIONS, ETC.
6.1 Construction of Capital Additions to the Leased Property.
Tenant shall not construct or install Capital Additions on any of the
Collective Leased Properties without obtaining Landlord's prior written consent,
which consent shall not be unreasonably withheld, provided that no consent shall
be required for any Capital Addition so long as (a) the Capital Additions Costs
for such Capital Addition are less than $1,000,000, (b) such construction or
installation would not adversely affect or violate any Legal Requirement or
Insurance Requirement applicable to the applicable Leased Property and (c)
Landlord shall have received an Officer's Certificate certifying as to the
satisfaction of the conditions set out in clauses (a) and (b) above. If
Landlord's consent is required, prior to commencing construction of any Capital
Addition, Tenant shall submit to Landlord, in writing, a proposal setting forth,
in reasonable detail, any proposed Capital Addition and shall provide to
Landlord such plans and specifications, permits, licenses, contracts and other
information concerning the proposed Capital Addition as Landlord may reasonably
request. Landlord shall have thirty (30) days to review all materials submitted
to Landlord in connection with any such proposal. Failure of Landlord to respond
to Tenant's proposal within thirty (30) days after receipt of all information
and materials requested by Landlord in connection with the proposed Capital
Addition shall be deemed to constitute approval of such proposed Capital
Addition. Without limiting the generality of the foregoing, such proposal shall
indicate the approximate projected cost of constructing such Capital Addition
and the use or uses to which it will be put. No Capital Addition shall be made
which would tie in or connect any Leased Improvement on the applicable Leased
Property with any other improvements on property adjacent to such Leased
Property (and not part of the Land) including, without limitation, tie-ins of
buildings or other structures or utilities. Any Capital Additions shall, upon
the expiration or sooner termination of this Agreement, pass to and become the
property of Landlord, free and clear of all
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encumbrances other than Permitted Encumbrances.
6.2 Financing of Capital Additions.
Tenant may arrange for financing for Capital Additions from a Lending
Institution; provided, however, that (i) any security interests in any property
of Tenant, including, without limitation, Tenant's leasehold interest in the
Collective Leased Properties, shall be expressly and fully subordinated to this
Agreement and to the interest of Landlord in the Collective Leased Properties
and to the rights of any then or thereafter existing Facility Mortgagee; and
(ii) Landlord shall have a right of first refusal to provide financing for
Capital Additions in accordance with Section 6.6.
6.3 Capital Additions Financed by Landlord.
If Landlord shall, (i) at the request of Tenant and in Landlord's sole
discretion, or (ii) in the exercise of its rights of first refusal to provide
financing pursuant to Section 6.6 hereof, elect to finance any proposed Capital
Addition, Tenant shall provide Landlord with such information as Landlord may
from time to time request, including, without limitation, the following:
(a) Evidence that such Capital Addition will be and, upon completion, has
been, completed in compliance with the applicable requirements of State
and federal law with respect to capital expenditures for health care
facilities;
(b) Copies of all building, zoning and land use permits and approvals
and, upon completion of such Capital Addition, a copy of the
certificate of occupancy for such Capital Addition, if required;
(c) Such information, certificates, licenses, permits or other
documents necessary to confirm that Tenant will be able to use the
Capital Addition upon completion thereof in accordance with the Primary
Intended Use, including all required federal, State or local government
licenses and approvals;
(d) An Officer's Certificate and a certificate from Tenant's architect
setting forth, in reasonable detail, the projected (or actual, if
available) Capital Additions Cost, and invoices and lien waivers from
Tenant's contractors for such work;
(e) A deed conveying to Landlord title to any land acquired for the
purpose of onstructing the Capital Addition free and clear of any
liens or encumbrances, except those
approved by Landlord, and, upon completion of the Capital Addition, a
final as-built survey thereof reasonably satisfactory to Landlord;
(f) Endorsements to any outstanding policy of title insurance covering
the applicable Leased Property, or a commitment therefor, satisfactory
in form and substance to Landlord, (i) updating such policy without any
additional exceptions except as approved by Landlord, and (ii)
increasing the coverage thereof by an amount equal to the Fair Market
Value of the
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Capital Addition (except to the extent covered by the owner's policy of
title insurance referred to in subparagraph (g) below);
(g) If appropriate, (i) an owner's policy of title insurance insuring
fee simple title to any land conveyed to Landlord pursuant to
subparagraph (e) above, free and clear of all liens and encumbrances,
except those approved by Landlord, and (ii) a lender's policy of title
insurance, reasonably satisfactory in form and substance to Landlord
and any Facility Mortgagee;
(h) An appraisal of the applicable Leased Property by a Qualified
Appraiser, acceptable to Landlord, and/or an Officer's Certificate
stating that the value of the applicable Leased Property upon
completion of the Capital Addition exceeds the Fair Market Value
thereof prior to the commencement of such Capital Addition by an amount
not less than 80% of the Capital Additions Cost; and
(1) Prints of architectural and engineering drawings relating to such
Capital Addition and such other certificates, documents, opinions of
counsel, appraisals, surveys, certified copies of duly adopted
resolutions of the board of directors of Tenant authorizing the
execution and delivery of any lease amendment, or other instruments as
may be reasonably required by Landlord, any Facility Mortgagee and any
Lending Institution advancing or reimbursing Landlord or Tenant for
any portion of the Capital Additions Cost.
If Landlord shall finance the proposed Capital Addition, Landlord may
elect (with Tenant's consent, such consent not to be unreasonably withheld) to
obtain repayment of amounts so financed by an increase in the Rent payable
hereunder.
6.4 Non-Capital Additions.
Tenant shall have the right, at Tenant's sole cost and expense, to make
additions, modifications or improvements to the Collective Leased Properties
which are not Capital Additions ("Non-Capital Additions") from time to time as
Tenant, in its discretion, may deem desirable for the applicable Primary
Intended Use, provided that any such Non-Capital Addition will not materially
detract from the value, operating efficiency or revenue-producing capability of
the applicable Leased Property or adversely affect the ability of Tenant to
comply with the provisions of this Agreement, and, without limiting the
foregoing, will not violate any Legal Requirement or Insurance Requirement
applicable to the applicable Leased Property. All such Non-Capital Additions
shall, upon expiration or earlier termination of this Agreement, pass to and
become the property of Landlord, free and clear of all liens and encumbrances,
other than Permitted Encumbrances.
6.5 Salvage.
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All materials which are scrapped or removed in connection with the making
of either Capital Additions or Non-Capital Additions or repairs required by
Article 5 shall be the property of the Landlord.
6.6 Landlord's Right of First Refusal to Provide Financing for Capital
Additions.
In the event that at any time during the Term Tenant shall elect to obtain
construction financing in excess of $1,000,000 for any Capital Additions, Tenant
shall give Notice thereof to Landlord, which notice shall set forth in
reasonable detail the terms of such financing, shall identify the source thereof
and shall include a copy of a final form of commitment letter therefor. Landlord
shall have the right, exercisable by the giving of Notice to Tenant within
thirty (30) days after such notice from Tenant, to provide a final form of
commitment for such financing on the same terms and conditions as described in
the Notice given to Landlord. In the event that Landlord shall exercise such
option, Tenant shall be obligated to obtain such financing from Landlord on the
terms and conditions set forth in the Notice to Landlord. In the event that
Landlord shall decline to provide such financing or shall fail to give such
notice to Tenant, Tenant shall be free to obtain such financing from the party
identified in, and on the terms and conditions set forth in, the Notice given to
Landlord with respect thereto.
7
LIENS
7.1 Liens.
Subject to Article 8 and Section 16.5, Tenant shall not, directly or
indirectly, create or allow to remain and shall promptly discharge, at its
expense, any lien, encumbrance, attachment, title retention agreement or claim
up on the Collective Leased Properties or a non-consensual lien against Tenant's
leasehold interest therein or any attachment, levy, claim or encumbrance in
respect of the Rent, other than (a) Permitted Encumbrances, (b) restrictions,
liens and other encumbrances which are consented to in writing by Landlord, (c)
liens for those taxes of Landlord which Tenant is not required to pay hereunder,
(d) subleases permitted by Article 16, (e) liens for Impositions or for sums
resulting from noncompliance with Legal Requirements so long as (i) the same are
not yet payable, or (ii) are being contested in accordance with Article 8, (f)
liens of mechanics, laborers, materialmen, suppliers or vendors incurred in the
ordinary course of business that are not yet due and payable or are for sums
that are being contested in accordance with Article 8, and (g) any Facility
Mortgages or other liens which are the responsibility of Landlord pursuant to
the provisions of Article 20.
7.2 Landlord's Lien.
In addition to any statutory landlord's lien and in order to secure payment
of the Rent and all other sums payable hereunder by Tenant and the performance
of all of Tenant's other obligations hereunder, and to secure payment of any
loss, cost or damage which Landlord may suffer by reason of Tenant's breach of
this Agreement, Tenant hereby grants unto Landlord a security interest in and
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an express contractual lien upon Tenant's Personal Property, and all proceeds
therefrom, subject to any Permitted Encumbrances; and such Tenant's Personal
Property shall not be removed from the Collective Leased Properties at any time
when a Default or an Event of Default has occurred and is continuing as
otherwise permitted pursuant to Section 5.2. In addition, Tenant hereby grants
unto Landlord a security interest in those contracts described in Section 12.6
hereof.
Upon Landlord's request, Tenant shall execute and deliver to Landlord
financing statements in form sufficient to perfect the security interest of
Landlord in (x) Tenant's Personal Property and the proceeds thereof, and (y) the
contracts described in Section 12.6 hereof, in accordance with the provisions of
the applicable laws of the State. The security interest herein granted is in
addition to any statutory lien for the Rent.
8
PERMITTED CONTESTS
Tenant shall have the right to contest the amount or validity of any
Imposition, Legal Requirement, Insurance Requirement, lien, attachment, levy,
encumbrance, charge or claim (collec ively, "Claims") as to any of the
Collective Leased Properties, by appropriate legal proceedings, conducted in
good faith and with due diligence, provided that (a) the foregoing shall in no
way be construed as relieving, modifying or extending Tenant's obligation to pay
any Claims as finally determined, (b) such contest shall not cause Landlord or
Tenant to be in default under any mortgage or deed of trust (except with respect
to any Facility Mortgage, the terms of which have not been fully disclosed to
Tenant) encumbering such Leased Property or any interest therein or result in or
reasonably be expected to result in a lien attaching to such Leased Property,
(c) no part of such Leased Property nor any Rent therefrom shall be in any
immediate danger of sale, forfeiture, attachment or loss, and (d) Tenant shall
indemnify and hold harmless Landlord from and against any cost, claim, damage,
penalty or reasonable expense, including reasonable attorneys' fees, incurred by
Landlord in connection therewith or as a result thereof. Upon Landlord's request
made as a result of a requirement of any Facility Mortgagee, Tenant shall either
(i) provide a bond or other assurance reasonably satisfactory to Landlord that
all Claims which may be assessed against any of the Collective Leased
Properties, together with all interest and penalties thereon will be paid, or
(ii) deposit within the time otherwise required for payment with a bank or trust
company, as trustee, as security for the payment of such Claims, an amount
sufficient to pay the same, together with interest and penalties in connection
therewith and all Claims which may be assessed against or become a Claim on any
of the Collective Leased Properties, or any part thereof, in connection with any
such contest. Tenant shall furnish Landlord and any Facility Mortgagee with
reasonable evidence of such deposit within five (5) days after request therefor.
Landlord agrees, however, to use commercially reasonable best efforts to cause
any Facility Mortgagee not to require any bond or deposit by Tenant as
hereinabove provided. Landlord agrees to join in any such proceedings if
required legally to prosecute such contest, provided that Landlord shall not
thereby be subjected to any liability therefor (including, without limitation,
for the payment of any costs or expenses in connection therewith). Tenant shall
be entitled to any refund of any Claims and such charges and penalties or
interest thereon which have been paid by Tenant or paid by Landlord and for
which Landlord has been fully
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reimbursed by Tenant. If Tenant shall fail (x) to pay any Claims when finally
determined, (y) to provide security therefor as provided in this Article 8, or
(z) to prosecute any such contest diligently and in good faith, Landlord may,
upon reasonable notice to Tenant (which notice may be oral and shall not be
required if Landlord shall reasonably determine that the same is not
practicable), pay such charges, together with interest and penalties due with
respect thereto, and Tenant shall reimburse Landlord therefor, upon demand, as
Additional Charges.
9
INSURANCE AND INDEMNIFICATION
9.1 General Insurance Requirements.
Tenant shall, at all times during the Term and at any other time Tenant
shall be in possession of any of the Collective Leased Properties, keep each of
the Collective Leased Properties and Tenant's Personal Property insured against
the risks and in the amounts as follows and shall maintain (for so long as such
insurance is commercially available) the following insurance:
(a) "All-risk" property insurance, including insurance against loss or damage by
fire, vandalism and malicious mischief, explosion of steamboilers, pressure
vessels or other similar apparatus, now or hereafter installed in the Facility
located at such Leased Property, extended coverage perils, earthquake (providing
annual aggregate limits of One Hundred Million Dollars ($100,000,0 0) as to all
locations outside of California and annual aggregate limits of Fifty Million
Dollars ($50,000,000) as to all locations within California) and all physical
loss perils insurance, including, but not limited to, sprinkler leakage, in an
amount (subject to Section 9.5) equal to one hundred percent (100%) of the then
full Replacement Cost thereof (as defined in Section 9.2), with the usual
extended coverage endorsements, including a Replacement Cost Endorsement and
Builder's Risk Coverage during the continuance of any construction at such
Leased Property;
(b) Business interruption and blanket earnings plus extra expense under a rental
value insurance policy covering risk of loss during the lesser of the first
twelve (12) months of reconstruction or the actual reconstruction period
necessitated by the occurrence of any of the hazards described in subparagraphs
(a) and (b) above in such amounts as may be customary for comparable properties
in the area and in an amount sufficient to prevent Landlord or Tenant from
becoming a co-insurer;
(c) Comprehensive general liability insurance, including bodily injury and
property damage (on the broadest form available, including broad form
contractual liability, fire legal liability and completed operations coverage)
having policy limits as to claims with respect to the Collective Leased
Properties of at least One Million Dollars ($1,000,000) per occurrence, Three
Million Dollars ($3,000,000) aggregate per location, subject to a Five Million
Dollar ($5,000,000) aggregate limit as to all locations, and with respect to
claims arising out of malpractice in an amount not less than One Million Dollars
($1,000,000) per occurrence, subject to a Five Million Dollars ($5,000,000)
aggregate limit as to all Facilities, provided that such limits shall be
modified to conform to any required underlying statutory coverage, such as State
Patient Compensation Funds, or the like, and Umbrella coverage shall be provided
having limits of Twenty Million Dollars ($20,000,000) per occurrence and in the
aggregate and attaching in excess of policy limits as to general liability,
malpractice, Patient Compensation Fund programs, where applicable, and
employer's liability coverage;
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(d) Flood (when the applicable Leased Property is located in whole or in part
within an area identified as an area having special flood hazards and in which
flood insurance has been made available under the National Flood Insurance Act
of 1968, as amended, or the Flood Disaster Protection Act of 1973, as amended
(or any successor acts thereto)) and such other hazards and in such amounts as
may be customary for comparable properties in the area, said coverage to be in
an amount equal to the lesser of the full Replacement Cost of the applicable
Leased Property or the maximum amount available;
(e) Worker's compensation insurance coverage for all persons employed by Tenant
on the applicable Leased Property with statutory limits and otherwise with
limits of and provisions in accordance with the requirements of applicable
local, State and federal law, and employer's liability insurance having a limit
of $1,000,000; and
(f) Such additional insurance and endorsements (and/or increased amounts of
insurance hereinabove required) as may be reasonably required, from time to
time, by Landlord.
9.2 Replacement Cost.
"Replacement Cost" as used herein, shall mean the actual replacement cost
of the property requiring replacement from time to time, including an increased
cost of construction endorsement, less exclusions provided in the standard form
of fire insurance policy. In the event either party believes that the then full
Replacement Cost has increased or decreased at any time during the Term, such
party, at its own cost, shall have the right to have such full Replacement Cost
redetermined by an accredited appraiser approved by the other, which approval
shall not be unreasonably withheld or delayed. The party desiring to have the
full Replacement Cost so redetermined shall forthwith, on receipt of such
determination by such appraiser, give written notice thereof to the other. The
determination of such appraiser shall be final and binding on the parties
hereto, and Tenant shall forthwith conform the amount of the insurance carried
to the amount so determined by the appraiser.
9.3 Waiver of Subrogation.
Landlord and Tenant agree that (insofar as and to the extent that such
agreement may be effective without invalidating or making it impossible to
secure insurance coverage from responsible insurance companies doing business in
the State) with respect to any property loss which is covered by insurance then
being carried by Landlord or Tenant, respectively, the party carrying such
insurance and suffering said loss releases the other of and from any and all
claims with respect to such loss; and they further agree that their respective
insurance companies shall have no right of subrogation against the other on
account thereof, even though extra premium may result therefrom. In the event
that any extra premium is payable by Tenant as a result of this provision,
Landlord shall not be liable for reimbursement to Tenant for such extra premium.
9.4 Form Satisfactory, Etc.
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All insurance policies and endorsements required pursuant to this Article 9
shall be fully paid for, nonassessable and shall contain such provisions and
expiration dates and be in such form and amounts and issued by insurance
carriers authorized to do business in the State, having a general policy
holder's rating f at least A-in Best's latest rating guide (or such other
comparable rating or such other customarily used rating agency as may be
required by any Facility Mortgagee), and otherwise as shall be approved by
Landlord. Without limiting the foregoing, such policies shall include only
deductibles reasonably approved by Landlord and shall name Landlord and any
Facility Mortgagee as additional insureds. All losses shall be payable to
Landlord or Tenant as provided in Article 10. Any loss adjustment shall require
the prior written consent of Landlord and Tenant. Tenant shall pay all insurance
premiums and deliver policies or certificates thereof to Landlord prior to their
effective date (and, with respect to any renewal policy, thirty (30) days prior
to the expiration of the existing policy), and, in the event Tenant shall fail
to effect such insurance as herein required, to pay the premiums therefor or to
deliver such policies or certificates to Landlord or any Facility Mortgagee at
the times required, Landlord shall have the right, but not the obligation, to
acquire such insurance and pay the premiums therefor, which amounts shall be
payable to Landlord, upon demand, as Additional Charges, together with interest
accrued thereon at the Overdue Rate from the date such payment is made until the
date repaid. All such policies shall provide Landlord (and any Facility
Mortgagee, if required by the same) thirty (30) days' prior written notice of
any material modification, expiration or cancellation of such policy. Tenant may
satisfy its insurance obligations through the use of (i) a risk retention group
or purchasing group or captive insurance company with a capital structure
reasonably approved by Landlord or (ii) a self insurance program with retention
limits reasonably approved by Landlord and an excess policy or policies provided
by an insurer meeting the requirements of this Agreement.
9.5 Blanket Policy.
Notwithstanding anything to the contrary contained in this Article 9,
Tenant's obligation to maintain the insurance herein required may be brought
within the coverage of a so-called blanket policy or policies of insurance
carried and maintained by Tenant, provided that (a) the coverage thereby
afforded will not be reduced or diminished from that which would exist under a
separate policy meeting all other requirements of this Agreement, except that
the blanket all-risk policy may provide coverage as to the Collective Leased
Properties to a limit of Two Hundred Million Dollars ($200,000,000) per
occurrence and (b) the requirements of this Article 9 are otherwise satisfied.
9.6 No Separate Insurance.
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Tenant shall not take out separate insurance concurrent in form or
contributing in the event of loss with that required by this Article 9, or
increase the amount of any existing insurance by securing an additional policy
or additional policies, unless all parties having an insurable interest in the
subject matter of such insurance, including Landlord and all Facility
Mortgagees, are included therein as additional insureds and the loss is payable
under such insurance in the same manner as losses are payable under the
insurance required to be carried pursuant to this Agreement. In the event Tenant
shall take out any such separate insurance or increase any of the amounts of the
then existing insurance, Tenant shall give Landlord prompt Notice thereof.
9.7 Indemnification of Landlord.
Notwithstanding the existence of any insurance provided for herein and
without regard to the policy limits of any such insurance, Tenant shall protect,
indemnify and hold harmless Landlord for, from and against all liabilities,
obligations, claims, damages, penalties, causes of action, costs and reasonable
expenses (including, without limitation, reasonable attorneys' fees), to the
maximum extent permitted by law, imposed upon or incurred by or asserted against
Landlord by reason of: (a) any accident, injury to or death of persons or loss
of or damage to property occurring on or about the Collective Leased Properties
or adjoining sidewalks or rights of way, including, without limitation, any
claims of malpractice, (b) any past, present or future use, misuse, non-use,
condition, management, maintenance or repair of the Collective Leased Properties
or Tenant's Personal Property or any litigation, proceeding or claim by
governmental entities or other third parties to which Landlord is made a party
or participant relating to the Collective Leased Properties or Tenant's Personal
Property or such use, misuse, non-use, condition, management, maintenance, or
repair thereof, including failure to perform obligations (other than
Condemnation proceedings), to which Landlord is made a party, (c) any
Impositions (which are the obligations of Tenant to pay pursuant to the
applicable provisions of this Agreement), and (d) any failure on the part of
Tenant or anyone claiming under Tenant to perform or comply with any of the
terms of this Agreement. Tenant shall pay all amounts payable under this Section
9.7 within ten (10) days after demand therefor and, if not timely paid, such
amounts shall bear interest at the Overdue Rate from the date of determination
to the date of payment. Tenant, at its expense, shall contest, resist and defend
any such claim, action or proceeding asserted or instituted against Landlord or
may compromise or otherwise dispose of the same, with Landlord's prior written
consent (which consent may not be unreasonably withheld or delayed). The
obligations of Tenant under this Section 9.7 are in addition to the obligations
set forth in Section 4.4 and shall survive the termination of this Agreement.
9.8 Independent Contractor.
Tenant shall cause any person or company (each a "Contractor") entering
upon any of the Collective Leased Properties to provide any installation,
construction or repair which x) constitutes a Capital Addition or (y) has an
anticipated cost in excess of $250,000 to: (a) have in full force and effect
Contractor's Liability Coverage (hereafter defined) effective throughout the
period said Contractor is upon said Leased Property and (b) deliver a
certificate ("Contractor's Insurance Certificate") evidencing compliance with
subpart (a) to Tenant prior to the Contractor's first entry upon said Leased
Property. As used herein the term Contractor's Liability Coverage means a
comprehensive general liability insurance policy meeting the requirements of
this Article 9 (as if
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required to be provided by Tenant) except the minimum policy limit shall be
$500,000 per occurrence and $1,000,000 in the aggregate. Within thirty (30) days
after delivery of Landlord's written request, Tenant shall deliver copies of all
Contractor's Certificates to Landlord.
10
CASUALTY
10.1 Insurance Proceeds.
All proceeds payable by reason of any loss or damage to the Collective
Leased Properties, or any portion thereof, and insured under any policy of
property or casualty insurance required by Article 9 (other than proceeds of
business interruption insurance) in excess of $1,000,000 shall be paid directly
to Landlord and retained by Landlord (subject to the provisions of Section
10.2). If Tenant is required to reconstruct or repair any of the Collective
Leased Properties as provided herein, such proceeds shall be paid out by
Landlord from time to time for the reasonable costs of reconstruction or repair
of such Leased Property necessitated by such damage or destruction, subject to
the provisions of Section 10.2.3. Provided no Default or Event of Default has
occurred and is continuing, any excess proceeds of insurance remaining after the
completion of the restoration shall be paid to Tenant. All salvage resulting
from any risk covered by insurance shall belong to Landlord.
10.2 Damage or Destruction.
10.2.1 Obligation to Restore. If, during the Term, any of the Collective Leased
Properties shall be totally or partially destroyed Tenant shall promptly restore
such Facility as provided in Section 10.2.3.
10.2.2 Insufficient Insurance Proceeds. If the cost of the repair or restoration
of the applicable Leased Property exceeds the amount of insurance proceeds
received by Landlord pursuant to Article 10, upon the demand of Landlord, Tenant
shall contribute any excess amounts needed to restore such Leased Property. Such
difference shall be paid by Tenant to Landlord and held by Landlord, together
with any other insurance proceeds, for application to the cost of repair and
restoration.
10.2.3 Disbursement of Proceeds. Tenant shall, at its sole cost and expense,
commence promptly and continue diligently to perform the repair and restoration
of such Leased Property (hereinafter called the "Work"), or shall cause the same
to be done, so as to restore such Leased Property in full compliance with all
Legal Requirements and so that such Leased Property shall be at least equal in
value and general utility to its general utility and value immediately prior to
such damage or destruction. Subject to the terms hereof, Landlord shall advance
such property and casualty insurance proceeds and the amounts paid to it
pursuant to Section 10.2.2 to Tenant regularly during the repair and restoration
period so as to permit payment for the cost of any such restoration and repair.
Any such advances shall be for not less than $100,000 (or such lesser amount
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as equals the entire balance of the repair and restoration) and Tenant shall
submit to Landlord a written requisition and substantiation therefor on such
form or forms as may be reasonably acceptable to Landlord. Landlord may, at its
option, condition advancement of said insurance proceeds and other amounts on
(i) the absence of any Default or Event of Default, (ii) its approval of plans
and specifications of an architect satisfactory to Landlord, (iii) general
contractors' estimates, (iv) architect's certificates, (v) unconditional lien
waivers of general contractors, (vi) evidence of approval by all governmental
authorities and other regulatory bodies whose approval is required and (vii)
such other certificates as Landlord may, from time to time, reasonably require.
Landlord's obligation to disburse insurance proceeds under this Article 10
shall be subject to the release of such proceeds by the applicable Facility
Mortgagee to Landlord.
Tenant's obligation to restore the applicable Leased Property pursuant to
this Article 10 shall be subject to the release of available insurance proceeds
by the applicable Facility Mortgagee to Landlord; provided, however, that Tenant
shall be entitled to cease operations at such Facility pursuant to and in
accordance with Section 4.5 above. In the event Tenant elects to close such
Facility as aforesaid, Tenant shall, as Additional Charges, pay to Landlord all
property or casualty insurance proceeds received in connection therewith, along
with any deductible or retention, but in no event shall Tenant pay to Landlord
less than the full Replacement Cost of such Facility, including Tenant's
Personal Property.
10.3 Tenant's Property.
All insurance proceeds payable by reason of any loss of or damage to any of
Tenant's Personal Property shall be paid to Tenant, and, to the extent necessary
to repair or replace Tenant's Personal Property in accordance with Section 10.4,
Tenant shall hold such proceeds in trust to pay the cost of repairing or
replacing damaged Tenant's Personal Property.
10.4 Restoration of Tenant's Property.
If Tenant is required to restore the applicable Leased Property as
hereinabove provided, Tenant shall either (a) restore all alterations and
improvements made by Tenant and Tenant's Personal Property, or (b) replace such
alterations and improvements and Tenant's Personal Property with improvements or
items of the same or better quality and utility in the operation of such Leased
Property.
10.5 No Abatement of Rent.
This Agreement shall remain in full force and effect and Tenant's
obligation to make all payments of Rent and to pay all other charges as and when
required under this Agreement shall remain unabated during the Term
notwithstanding any damage involving any of the Collective Leased Properties
(provided that Landlord shall credit against such payments any amounts paid to
Landlord as a consequence of such damage under any business interruption
insurance obtained by Tenant hereunder). The provisions of this Article 10 shall
be considered an express agreement governing any cause of damage or destruction
to the applicable Leased Property and, to the
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maximum extent permitted by law, no local or State statute, laws, rules,
regulation or ordinance in effect during the Term which provide for such a
contingency shall have any application in such case.
10.6 Waiver.
Tenant hereby waives any statutory rights of termination which may arise by
reason of any damage or destruction of any of the Collective Leased Properties.
11
CONDEMNATION
11.1 Total Condemnation, Etc.
If either (i) the whole of any of the Collective Leased Properties shall be
taken by Condemnation or (ii) a Condemnation of less than the whole of any of
the Collective Leased Properties renders such Leased Property Unsuitable for Its
Primary Intended Use, this Agreement shall terminate with respect to such Leased
Property, Tenant and Landlord shall seek the Award for their interests in such
Leased Property as provided in Section 11.5 and the Minimum Rent thereafter
payable shall be reduced by one-twelfth (1/12th) of the product of (x) ten
percent (10%), and (y) the Award received by Landlord with respect to such
Leased Property, net of all expenses incurred by Landlord in obtaining the same,
including reasonable attorneys' fees.
11.2 Partial Condemnation.
In the event of a Condemnation of less than the whole of any of the
Collective Leased Properties such that such Leased Property is still suitable
for its Primary Intended Use, Tenant shall, at its sole cost and expense,
commence promptly and continue diligently to restore the untaken portion of the
Leased Improvements on such Leased Property so that such Leased Improvements
shall constitute a complete architectural unit of the same general character and
condition (as nearly as may be possible under the circumstances) as the Leased
Improvements existing immediately prior to such Condemnation, in full compliance
with all Legal Requirements. Subject to the terms hereof, Landlord shall
contribute to the cost of restoration that part of the Award necessary to
complete such repair or restoration, together with severance and other damages
awarded for the taken Leased Improvements, to Tenant regularly during the
restoration period so as to permit payment for the cost of such repair or
restoration. Landlord may, at its option, condition advancement of such Award
and other amounts on (i) the absence of any continuing Event of Default, (ii)
its approval of plans and specifications of an architect satisfactory to
Landlord (which approval shall not be unreasonably withheld or delayed), (iii)
general contractors' estimates, (iv) architect's certificates, (v) unconditional
lien waivers of general contractors, (vi) evidence of approval by all
governmental authorities and other regulatory bodies whose approval is required
and (vii) such other certificates as Landlord may, from time to time, reasonably
require. Landlord's obligation under this Section 11.2 to disburse the Award and
such other amounts shall be subject to (x) the collection thereof by Landlord
and (y) the satisfaction of any applicable requirements of any Facility
Mortgage, and the release of such Award
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by the applicable Facility Mortgagee. Tenant's obligation to restore the
applicable Leased Property shall be subject to the release of the Award by the
applicable Facility Mortgagee to Landlord. If the cost of the restoration of the
applicable Leased Property exceeds that part of the Award necessary to complete
such restoration, together with severance and other damages awarded for the
taken Leased Improvements, Tenant shall contribute upon the demand of Landlord
any excess amounts needed to restore such Leased Property. Such difference shall
be paid by Tenant to Landlord and held by Landlord, together with such part of
the Award and such severance and other damages, for application to the cost of
restoration.
11.3 Abatement of Rent.
Other than as specifically provided in this Agreement, this Agreement shall
remain in full force and effect and Tenant's obligation to make all payments of
Rent and to pay all other charges as and when required under this Agreement
shall remain unabated during the Term notwithstanding any Condemnation involving
the Collective Leased Properties. The provisions of this Article 11 shall be
considered an express agreement governing any Condemnation involving any or all
of the Collective Leased Properties and, to the maximum extent permitted by law,
no local or State statute, law, rule, regulation or ordinance in effect during
the Term which provides for such a contingency shall have any application in
such case.
11.4 Temporary Condemnation.
In the event of any temporary Condemnation of all or any part of the
Collective Leased Properties or Tenant's interest therein, this Agreement shall
continue in full force and effect, and Tenant shall continue to pay, in the
manner and on the terms herein specified, the full amount of the Rent. Tenant
shall continue to perform and observe all of the other terms and conditions of
this Agreement on the part of Tenant to be performed and observed. Provided no
Default or Event of Default has occurred and is continuing, the entire amount of
any Award made for such temporary Condemnation allocable to the Term, whether
paid by way of damages, rent or otherwise, shall be paid to Tenant. Tenant
shall, promptly upon the termination of any such period of temporary
Condemnation, at its sole cost and expense, restore such Leased Property to the
condition that existed immediately prior to such Condemnation, in full
compliance with all Legal Requirements, unless such period of temporary
Condemnation shall extend beyond the expiration of the Term, in which event
Tenant shall not be required to make such restoration. For purposes of this
Section 11.4, a Condemnation shall be deemed to be temporary if the period of
such Condemnation is not expected to, and does not, exceed twenty-four (24)
months.
11.5 Allocation of Award.
Except as provided in the second sentence of this Section 11.5, the total
Award shall be solely the property of and payable to Landlord. Any portion of
the Award made for the taking of Tenant's leasehold interest in the applicable
Leased Property, loss of business during the remainder of the Term, or Tenant's
removal and relocation expe ses shall be the sole property of and payable to
Tenant (subject to the provisions of Section 11.2). In any Condemnation
proceedings, Landlord
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and Tenant shall each seek its own Award in conformity herewith, at its own
expense.
12
DEFAULTS AND REMEDIES
12.1 Events of Default.
The occurrence of any one or more of the following events shall constitute
an "Event of Default" hereunder:
(a) Tenant fails (i) to make any payment of the Rent payable hereunder when
due and such failure continues for a period of ten (10) days after the date
due, or (ii) to make any required payments of real estate taxes by the
earlier of (a) ten (10) days following Notice from Landlord that such
payment is due and owing and unpaid, and (b) the date which is 30 days
prior to the date on which a Government Authority has the right to sell or
initiate the process for selling the applicable Leased Property due to a
failure to pay the real estate taxes. The foregoing provisions hereof
notwithstanding, (x) Tenant's failure to pay Additional Rent shall not
constitute an Event of Default, except if Tenant fails to pay Additional
Rent in at least the amount of the Allowance disbursed to date by Landlord,
and (y) with respect to the failure to pay Additional Charges that are
amounts owed to third parties (other than real estate taxes), the failure
to pay such amounts shall not constitute an Event of Default under this
Section 12.1(a) if Tenant pays the same in full, along with all interest,
penalties and late charges due and owing to such third parties, no later
than ten (10) days following Notice from Landlord that such sum is due and
owing. In the event Landlord gives Notice of such circumstances to Tenant
twice in any Lease Year, then on each subsequent occasion for the remainder
of such Lease Year when Landlord gives Tenant any such Notice, Tenant shall
pay to Landlord, as Additional Charges (whether or not Tenant pays such
third party within ten (10) days as aforesaid), the sum of One Thousand
Five Hundred Dollars ($1,500).
(b) Tenant fails to maintain the insurance coverages required under Article
9 within five (5) days after Notice thereof from Landlord.
(c) Tenant defaults in the due observance or performance of any of the
terms, covenants or agreements contained herein to be performed or observed
by it (other than as specified in clauses (a) and (b) above), and, in
either case, such default continues for a period of thirty (30) days after
Notice thereof from Landlord to Tenant (provid d that no such Notice shall
be required if Landlord reasonably determines that immediate action is
necessary to protect person or property); provided, however, that if such
default is susceptible of cure but such cure cannot be accomplished with
due diligence within such period of time and if, in addition, Tenant
commences to cure such default within thirty (30) days after Notice thereof
from Landlord and thereafter prosecutes the curing of such default with all
due diligence, such period of time shall be extended to such period of time
(not to exceed an additional one hundred eighty (180) days in the
aggregate) as may be necessary
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to cure such default with all due diligence.
(d) Any obligation of Tenant in respect of any Indebtedness in a principal
amount in excess of $10,000,000 for money borrowed or for the deferred
purchase price of any material property or services, is declared to be, or
is a result of acceleration becomes, due and payable prior to the stated
maturity thereof.
(e) There occurs a final unappealable determination by applicable federal
or State authorities of the revocation or limitation of any license,
permit, certification, certificate of need or approval required for the
lawful operation of any of the Facilities in accordance with its Primary
Intended Use or the loss or limitation of any license, permit,
certification, certificate of need or approval under any other
circumstances under which Tenant is required to cease its operation of such
Facility in accordance with its Primary Intended Use at the time of such
loss or limitation, provided, however, that if Tenant ceases its operations
in such Facility pursuant to and in accordance with its right to do so
under Section 4.5 hereof, the closing thereof shall cause such Event of
Default to be deemed no longer continuing.
(f) Any representation or warranty made by or on behalf of Tenant under or
in connection with this Agreement, or in any document, certificate, or
agreement delivered in connection herewith proves to have been false or
misleading in any material respect on the date when made or deemed made.
(g) Tenant is generally not paying its debts as they become due, or Tenant
makes a general assignment for the benefit of creditors.
(h) Any petition is filed by or against Tenant under the Federal bankruptcy
laws, or any other proceeding is instituted by or against Tenant seeking to
adjudicate it a bankrupt or insolvent, or seeking liquidation,
reorganization, arrangement, adjustment or composition of it or its debts
under any law relating to bank uptcy, insolvency or reorganization or
relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, trustee, custodian or other similar official for
Tenant or for any substantial part of the property of Tenant and such
proceeding is not dismissed within ninety (90) days after institution
thereof, or Tenant takes any action to authorize or effect any of the
actions set forth above in this paragraph.
(i) Tenant causes or institutes any proceeding for its dissolution or
termination.
(j) subject to Section 4.5 hereof, Tenant voluntarily ceases operation of
any of the Collective Leased Properties for its Primary Intended Use for a
period in excess of thirty (30) consecutive days, except as a result of
damage, destruction or partial or complete Condemnation.
(k) The estate or interest of Tenant in any of the Collective Leased
Properties or any
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part thereof is levied upon or attached in any proceeding and the same is
not vacated or discharged within the later of (x) one hundred and twenty
(120) days after commencement thereof, unless the amount in dispute is less
than $100,000 in which case Tenant shall give notice to Landlord of the
dispute but Tenant may defend in any suitable way, and (y) thirty (30) days
after receipt by Tenant of Notice thereof from Landlord (unless Tenant
shall be contesting such lien or attachment in good faith in accordance
with Article 8).
(l) Any Change in Control of Tenant occurs.
In any such event, Landlord, in addition to all other remedies
available to it, may terminate this Agreement with respect to all but not less
than all of the Collective Leased Properties by giving Notice thereof to Tenant
and upon the expiration of the time, if any, fixed in such Notice, this
Agreement shall terminate and all rights of Tenant under this Agreement shall
cease. Landlord shall have and may exercise all rights and remedies available at
law and in equity to Landlord as a result of Tenant's breach of this Agreement.
Upon the occurrence of an Event of Default, Landlord may, in addition to
any other remedies provided herein, enter upon the Collective Leased Properties
and take possession of, and either (i) retain any and all of Tenant's Personal
Property on any such Leased Property, without liability for trespass or
conversion (Tenant hereby waiving any right to Notice or hearing prior to such
taking of possession by Landlord) or (ii) sell the same at public or private
sale, after giving Tenant reasonable Notice of the time and place of any public
or private sale, at which sale Tenant or its assigns may purchase all or any
portion of Tenant's Personal Property. Unless otherwise provided by law and
without intending to exclude any other manner of giving Tenant reasonable
notice, the requirement of reasonable Notice shall be met if such Notice is
given at least five (5) days before the date of sale. The proceeds from any such
disposition shall belong to Landlord and shall not be applied as a credit
against the indebtedness which is secured by the security interest granted in
Section 7.2.
The foregoing provisions hereof notwithstanding, Landlord shall have no
right to assert any remedy hereunder, and an Event of Default shall be deemed to
no longer exist, if Tenant cures an Event of Default (A) under Section 12.1(a)
prior to the earlier of (x) the commencement by Landlord of the exercise of any
remedy under this Agreement by Landlord or (y) Landlord's Notice to Tenant
stating that an Event of Default exists and further stating Landlord's intention
to assert one or more remedies hereunder; and (B) under any of Section
12.(b)-(l), prior to the commencement by Landlord of the exercise of any remedy
under this Agreement by Landlord.
12.2 Remedies.
None of (a) the termination of this Agreement pursuant to Section 12.1, (b)
the repossession of the Collective Leased Properties, (c) the failure of
Landlord to re-let any or all of the Collective Leased Properties, or (d) the
reletting of any or all of the Collective Leased Properties, shall relieve
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Tenant of its liability and obligations hereunder, all of which shall survive
any such termination, repossession or re-letting. In the event of any such
termination, Tenant shall forthwith pay to Landlord all Rent due and payable
with respect to the Collective Leased Properties through and including the date
of such termination. Thereafter, Tenant, until the end of what would have been
the Term of this Agreement in the absence of such termination, and whether or
not any of the Collective Leased Properties or any portion thereof shall have
been re-let, shall be liable to Landlord for, and shall pay to Landlord, as
current damages, the Rent and other charges which would be payable hereunder for
the remainder of the Term had such termination not occurred, less the net
proceeds, if any, of any re-letting of the Collective Leased Properties, after
deducting all expenses in connection with such reletting, including, without
limitation, all repossession costs, brokerage commissions, legal expenses,
attorneys' fees, advertising, expenses of employees, alteration costs and
expenses of preparation for such reletting. Tenant shall pay such current
damages to Landlord monthly on the days on which the Minimum Rent would have
been payable hereunder if this Agreement had not been so terminated.
At any time after such termination, whether or not Landlord shall have
collected any such current damages, as liquidated final damages beyond the date
of such termination, at Landlord's election, Tenant shall pay to Landlord either
(a) an amount equal to the excess, if any, of the Rent and other charges which
would be payable hereunder from the date of such termination (assuming that, for
the purposes of this paragraph, annual payments by Tenant on account of
Impositions would be the same as payments required for the immediately preceding
twelve calendar months, or if less than twelve calendar months have expired
since the Commencement Date, the payments required for such lesser period
projected to an annual amount) for what would be the then unexpired term of this
Agreement if the same remained in effect, over the Fair Market Rental for the
same period, or (b) an amount equal to the lesser of (i) the Rent and other
charges that would have been payable for the balance of the Term had it not been
terminated, and (ii) the aggregate of the Rent and other charges accrued in the
twelve (12) months ended next prior to such termination (without reduction for
any free rent or other concession or abatement). In the event this Agreement is
so terminated prior to the expiration of the first full year of the Term, the
liquidated damages which Landlord may elect to recover pursuant to clause
(b)(ii) of this paragraph shall be calculated as if such termination had
occurred on the first anniversary of the Commencement Date. Nothing contained in
this Agreement shall, however, limit or prejudice the right of Landlord to prove
and obtain in proceedings for bankruptcy or insolvency 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, the damages are to be proved, whether or not
the amount be greater than, equal to, or less than the amount of the loss or
damages referred to above.
In case of any Event of Default, re-entry, expiration and dispossession by
summary proceedings or otherwise, Landlord may (a) relet any of the Collective
Leased Properties or any part or parts thereof, either in the name of Landlord
or otherwise, for a term or terms which may, at Landlord's option, be equal to,
less than or exceed the period which would otherwise have constituted the
balance of the Term and may grant concessions or free rent to the extent that
Landlord considers advisable and necessary to relet the same, and (b) may make
such reasonable alterations, repairs and decorations in any applicable Leased
Property or any portion thereof as
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Landlord, in its sole and absolute discretion, considers advisable and necessary
for the purpose of reletting any such Leased Property; and the making of such
alterations, repairs and decorations shall not operate or be construed to
release Tenant from liability hereunder as aforesaid. Landlord shall in no event
be liable in any way whatsoever for any failure to relet all or any portion of
the Collective Leased Properties, or, in the event that any of the Collective
Leased Properties is relet, for failure to collect the rent under such
reletting. To the maximum extent permitted by law, Tenant hereby expressly
waives any and all rights of redemption granted under any present or future laws
in the event of Tenant being evicted or dispossessed, or in the event of
Landlord obtaining possession of any of the Collective Leased Properties, by
reason of the violation by Tenant of any of the covenants and conditions of this
Agreement.
12.3 Tenant's Waiver.
IF THIS AGREEMENT IS TERMINATED PURSUANT TO SECTION 12.1 OR 12.2, TENANT
WAIVES, TO THE EXTENT PERMITTED BY LAW, ANY RIGHT TO A TRIAL BY JURY IN THE
EVENT OF SUMMARY PROCEEDINGS TO ENFORCE THE REMEDIES SET FORTH IN THIS ARTICLE
12 AND THE BENEFIT OF ANY LAWS NOW OR HEREAFTER IN FORCE EXEMPTING PROPERTY FROM
LIABILITY FOR RENT OR FOR DEBT.
12.4 Application of Funds.
Any payments received by Landlord under any of the provisions of this
Agreement during the existence or continuance of any Default or Event of Default
(and any payment made to Landlord rather than Tenant due to the existence o any
Default or Event of Default) shall be applied to Tenant's obligations under this
Agreement in such order as Landlord may determine or as may be prescribed by the
laws of the State.
12.5 Landlord's Right to Cure Tenant's Default.
If an Event of Default shall have occurred and be continuing, Landlord,
after Notice to Tenant (which Notice shall not be required if Landlord shall
reasonably determine immediate action is necessary to protect person or
property), without waiving or releasing any obligation of Tenant and without
waiving or releasing any Event of Default, may (but shall not be obligated to),
at any time thereafter, make such payment or perform such act for the account
and at the expense of Tenant, and may, to the maximum extent permitted by law,
enter upon any of the Collective Leased Properties or any portion thereof for
such purpose and take all such action thereon as, in Landlord's sole and
absolute discretion, may be necessary or appropriate therefor, including the
management of the Facility located thereon by Landlord or its designee, and
Tenant hereby irrevocably appoints, in the event of such election by Landlord,
Landlord or its designee as manager of any such Facility and its attorney in
fact for such purpose, irrevocably and coupled with an interest, in the name,
place and stead of Tenant. No such entry shall be deemed an eviction of Tenant.
All reasonable costs and expenses (including, without limitation, reasonable
attorneys' fees) incurred by Landlord in connection therewith, together with
interest thereon (to the extent permitted by law) at the Overdue Rate from the
date such sums are paid by Landlord until repaid, shall be paid by Tenant to
Landlord,
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on demand.
12.6 Landlord's Right to Assume Contracts.
In the event Landlord elects to terminate this Agreement or otherwise
obtains possession of the Collective Leased Properties following an Event of
Default, Landlord (or its designee) shall have the right, at its sole and
absolute discretion, upon Notice to Tenant within sixty (60) days after Landlord
terminates this Agreement or otherwise obtains possession following an Event of
Default, to assume all (but not less than all) of the contracts utilized by
Tenant in the operation of its business, including the Franchise Agreement, and
Tenant will cooperate in effecting such assumption. In no event will Landlord
(or its designee) have any liability under such contracts for obligations or
liabilities accruing under such contracts prior to the date of such assumption
by such party.
13
HOLDING OVER
Any holding over by Tenant after the expiration or sooner termination of
this Agreement shall be treated as a daily tenancy at sufferance at a rate equal
to two (2) times the Minimum Rent the in effect plus Additional Charges and
other charges herein provided (prorated on a daily basis). Tenant shall also pay
to Landlord all damages (direct or indirect) sustained by reason of any such
holding over. Otherwise, such holding over shall be on the terms and conditions
set forth in this Agreement, to the extent applicable. Nothing contained herein
shall constitute the consent, express or implied, of Landlord to the holding
over of Tenant after the expiration or earlier termination of this Agreement.
14
LANDLORD'S DEFAULT
If Landlord shall default in the performance or observance of any of its
covenants or obligations set forth in this Agreement and such default shall
continue for a period of thirty (30) ays after Notice thereof from Tenant to
Landlord and any applicable Facility Mortgagee, or such additional period as may
be reasonably required to correct the same, Tenant may declare the occurrence of
a "Landlord Default" by a second Notice to Landlord and to such Facility
Mortgagee. Thereafter, Tenant may forthwith cure the same and, subject to the
provisions of the following paragraph, invoice Landlord for costs and expenses
(including reasonable attorneys' fees and court costs) incurred by Tenant in
curing the same, together with interest thereon from the date Landlord receives
Tenant's invoice, at the Overdue Rate. Tenant shall have no right to terminate
this Agreement for any default by Landlord hereunder and no right, for any such
default, to offset or counterclaim against any Rent or other charges due
hereunder.
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If Landlord shall in good faith dispute the occurrence of any Landlord Default
and Landlord, before the expiration of the applicable cure period, shall give
Notice thereof to Tenant, setting forth, in reasonable detail, the basis
therefor, no Landlord Default shall be deemed to have occurred and Landlord
shall have no obligation with respect thereto until final adverse determination
thereof. If Tenant and Landlord shall fail, in good faith, to resolve any such
dispute within ten (10) days after Landlord's Notice of dispute, either may
submit the matter for resolution to a court of competent jurisdiction.
15
LANDLORD FINANCING
In the event that at any time during the Term, OpCo, or any Subsidiary of OpCo,
shall elect to obtain financing for any health care related facilities owned or
leased or to be owned or leased by OpCo, or such subsidiary, OpCo shall give (or
cause such Subsidiary to give, as the case may be) Notice thereof to Landlord,
which notice shall set forth in reasonable detail the terms of such financing,
shall identify the source thereof and shall include a copy of an applicable
commitment letter. Landlord shall have the right, exercisable by the giving of
Notice to OpCo (or such Subsidiary, as the case may be) within thirty (30) days
after such Notice from OpCo (or such Subsidiary, as the case may be), to provide
such financing on the same terms and conditions as described in the Notice given
to Landlord. In the event that Landlord shall exercise such option, OpCo (or
such Subsidiary, as the case may be) shall be obligated to obtain such financing
from Landlord on the terms and conditions set forth in the Notice to Landlord.
In the event that Landlord shall decline to provide such financing or shall fail
to give such Notice to OpCo (or such Subsidiary, as the case may be), OpCo (or
such Subsidiary, as the case may be) shall be free to obtain such financing from
the party identified in, and on the terms and conditions set forth in, the
Notice given to Landlord with respect thereto. Notices to OpCo and any
Subsidiary shall be given as if a Notice to Tenant.
16
SUBLETTING AND ASSIGNMENT
16.1 Subletting and Assignment.
Except as provided in Sections 16.3 and 16.5 below, Tenant shall not,
without the prior written consent of Landlord (which consent may be given or
withheld in its sole and absolute discretion), assign, mortgage, pledge,
hypothecate, encumber or otherwise transfer this Agreement or sublease (which
term shall be deemed to include the granting of concessions, licenses and the
like), all or any part of the Collective Leased Properties or suffer or permit
this Agreement or the leasehold estate created hereby or any other rights
arising under this Agreement to be assigned, transferred, mortgaged, pledged,
hypothecated or encumbered, in whole or in part, whether voluntarily,
involuntarily or by operation of law, or permit the use or occupancy of any of
the
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Collective Leased Properties by anyone other than Tenant, or any of the
Collective Leased Properties to be offered or advertised for assignment or
subletting. For purposes of this Section 16.1, an assignment of this Agreement
shall be deemed to include any Change in Control of Tenant.
If this Agreement is assigned or if any of the Collective Leased Properties
or any part thereof are sublet (or occupied by anybody other than Tenant and its
employees) in contravention of this Agreement, Landlord may collect the rents
from such assignee, subtenant or occupant, as the case may be, and apply the net
amount collected to the Rent herein reserved, but no such collection shall be
deemed a waiver of the provisions set forth in the first paragraph of this
Section 16.1, the acceptance by Landlord of such assignee, subtenant or
occupant, as the case may be, as a tenant, or a release of Tenant from the
future performance by Tenant of its covenants, agreements or obligations
contained in this Agreement.
No subletting or assignment shall in any way impair the continuing primary
liability of Tenant hereunder, and no consent to any subletting or assignment in
a particular instance shall be deemed to be a waiver of the prohibition set
forth in this Section 16.1. No assignment, subletting or occupancy shall affect
any Primary Intended Use. Any subletting, assignment or other transfer of
Tenant's interest under this Agreement in contravention of this Section 16.1
shall be voidable at Landlord's option.
16.2 Required Sublease Provisions.
Any sublease of all or any portion of any of the Collective Leased
Properties shall provide (a) that it is subject and subordinate to this
Agreement and to the matters to which this Agreement is or shall be subject or
subordinate; (b) that in the event of termination of this Agreement or reentry
or dispossession of Tenant by Landlord under this Agreement, Landlord may, at
its option, terminate such sublease or 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 neither Landlord nor any Facility
Mortgagee, as holder of a mortgage or as Landlord under this Agreement, if such
mortgagee succeeds to that position, shall (i) be liable for any act or omission
of Tenant under such sublease, (ii) be subject to any credit, counterclaim,
offset or defense which theretofore accrued to such subtenant against Tenant,
(iii) be bound by any previous modification of such sublease not consented to in
writing by Landlord or by any previous prepayment of more than one (1) month's
Rent, (iv) be bound by any covenant of Tenant to undertake or complete any
construction of such Leased Property or any portion thereof, (v) be required to
account for any security deposit of the subtenant other than any security
deposit actually delivered to Landlord by Tenant, (vi) be bound by any
obligation to make any payment to such subtenant or grant any credits, except
for services, repairs, maintenance and restoration provided for under the
sublease that are to be performed after the date of such attornment, (vii) be
responsible for any monies owing by Tenant to the credit of such subtenant, or
(viii) be required to remove any Person occupying any portion of the Collective
Leased Properties; and (c), in the event that such subtenant receives a written
Notice from Landlord or any Facility Mortgagee stating that an Event of Default
has occurred and is continuing, such subtenant shall thereafter be obligated to
pay all rentals accruing under such sublease directly to the party giving such
Notice or
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as such party may direct. All rentals received from such subtenant by Landlord
or the Facility Mortgagee, as the case may be, shall be credited against the
amounts owing by Tenant under this Agreement and such sublease shall provide
that the subtenant thereunder shall, at the request of Landlord, execute a
suitable instrument in confirmation of such agreement to attorn. An original
counterpart of each such sublease and assignment and assumption, duly executed
by Tenant and such subtenant or assignee, as the case may be, in form and
substance reasonably satisfactory to Landlord, shall be delivered promptly to
Landlord upon request and (a) in the case of an assignment, the assignee shall
assume in writing and agree to keep and perform all of the terms of this
Agreement on the part of Tenant to be kept and performed and shall be, and
become, jointly and severally liable with Tenant for the performance thereof and
(b) in case of either an assignment or subletting, Tenant shall remain primarily
liable, as principal rather than as surety, for the prompt payment of the Rent
and for the performance and observance of all of the covenants and conditions to
be performed by Tenant hereunder.
The provisions of this Section 16.2 shall not be deemed a waiver of the
provisions set forth in the first paragraph of Section 16.1.
16.3 Permitted Assignments and Subleases.
Notwithstanding the requirements set forth in Section 16.1 that Landlord's
prior written consent be obtained in connection with any assignment, mortgage,
pledge, encumbrance or other transfer of this Lease or any sublease of all or
any part of the Collective Leased Properties, but subject to the provisions of
Section 16.4 and any other express conditions or limitations set forth in this
Article 16, Tenant may, in each instance, (x) after Notice to Landlord, sublease
any or all of the Collective Leased Properties, or assign this Agreement, to any
Qualified Affiliate and (y) sublease space at any of the Collective Leased
Properties for laundry, commissary, child care or medical office or other
purposes in furtherance of the applicable Primary Intended Use, so long as such
sublease will not violate or affect any Legal Requirement or Insurance
Requirement, and Tenant shall provide such additional insurance coverage
applicable to the activities to be conducted in such subleased space as Landlord
may require. In connection with any sublease of any Leased Property, or
assignment of this Agreement, any and all Facilities affected by or the subject
of such transaction shall continue to be operated under and pursuant to the
Franchise Agreement, and Tenant shall provide to Landlord, upon request,
documentation confirming that the operation thereof, in such manner, has the
approval and consent of Franchisor.
16.4 Sublease Limitation.
Anything contained in this Agreement to the contrary notwithstanding,
Tenant shall not sublet any of the Collective Leased Properties on any basis
such that all or any part of the Rent would fail to qualify as "rents from real
property" within the meaning of Section 856(d) of the Code, o any similar or
successor provision thereto. This limitation shall include, but not be limited
to, situations where (a) the rental to be paid by any sublessee thereunder would
be based, in whole or in part, on the income or profits derived by the business
activities of such sublessee, or (b) the sublessee would have a relationship to
Crescent Real Estate Equities, Inc., described in Section
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856(d)(2)(B) of the Code, or any similar or successor provision thereto.
16.5 Tenant's Right to Mortgage its Leasehold.
Tenant may, subject to Article 15 and Section 6.6 hereof, assign its
interest in this Agreement to a Lending Institution as collateral for
Indebtedness, provided, however, any security interests in any property of
Tenant, including without limitation Tenant's leasehold interest in the
Collective Leased Properties, shall be expressly and fully subordinated to this
Agreement and to the interest of Landlord in the Collective Leased Properties
and to the rights of any then or thereafter existing Facility Mortgagee.
17
ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS
17.1 Estoppel Certificates.
At any time and from time to time, upon not less than ten (10) days prior
Notice by Landlord, Tenant shall furnish to Landlord an Officer's Certificate
certifying that this Agreement is unmodified and in full force and effect (or
that this Agreement is in full force and effect as modified and setting forth
the modifications), the date to which the Rent has been paid, that no Default or
an Event of Default has occurred and is continuing or, if a Default or an Event
of Default shall exist, specifying in reasonable detail the nature thereof, and
the steps being taken to remedy the same, and such additional information as
Landlord may reasonably request. Any such certificate furnished pursuant to this
Section 17.1 may be relied upon by Landlord, any Facility Mortgagee and any
prospective purchaser or mortgagee of any of the Collective Leased Properties.
17.2 Financial Statements.
OpCo shall furnish the following statements to Landlord:
(a) within forty-five (45) days after each of the first three quarters of
any Fiscal Year, the most recent Financials and the most recent unaudited
financial statements of OpCo accompanied by the Financial Officer's
Certificate;
(b) within one hundred twenty (120) days after the end of each Fiscal Year,
the most recent Financials for such Fiscal Year, including the most recent
financial statements of OpCo audited and reported upon by an independent
certified publi accountant reasonably satisfactory to Landlord and
accompanied by a Financial Officer's Certificate;
(c) within thirty (30) days after the end of each calendar month, an
unaudited statement of income of OpCo, accompanied by a Financial Officer's
Certificate;
(d) promptly after the sending or filing thereof, copies of all periodic
reports which
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OpCo files with the SEC or any stock exchange on which its shares are
listed or traded;
(e) promptly after the delivery thereof to OpCo, a copy of any management
letter or written report prepared by the certified public accountants with
respect to the financial condition, operations, business or prospects of
OpCo, as the case may be; and
(f) at the expense of Landlord, at any time and from time to time upon not
less than forty-five (45) days Notice from Landlord, any Financials or any
other financial reporting information required to be filed by Landlord with
any securities and exchange commission, the SEC or any successor agency, or
any other governmental authority, or required pursuant to any order issued
by any court, governmental authority or arbitrator in any litigation to
which Lan lord is a party, for purposes of compliance therewith, promptly,
upon Notice from Landlord, such other information concerning the business,
financial condition and affairs of Tenant as Landlord may reasonably
request from time to time.
Landlord may at any time, and from time to time, provide any Facility
Mortgagee with copies of any of the foregoing statements, provided that such
Facility Mortgagee has executed and delivered a confidentiality agreement
reasonably satisfactory to Tenant.
17.3 General Operations.
Tenant covenants and agrees to furnish to Landlord within thirty (30) days after
written request therefor:
17.3.1 Reimbursement, Licensure, Etc.
Within thirty (30) days after receipt or modification thereof :
(a) copies of all material licenses and certificates of need authorizing
Tenant to operate each Facility for its Primary Intended Use;
(b) a list of all Medicare and Medicaid certifications and all related
participating provider agreements; and
(c) copies of all reports of surveys, statements of deficiencies, plans of
correction, and all material correspondence relating thereto, including,
without limitation, all reports and material correspondence concerning
compliance with or enforcement of l censure, Medicare/Medicaid, and
accreditation requirements, including physical environment and Life Safety
Code survey reports (excluding, however, correspondence which may be
subject to any attorney-client privilege).
Upon Notice from Landlord from time to time, Tenant shall make
available for inspection and copying by Landlord, where such records are kept
and maintained in the normal course of business:
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(d) all Medicare and Medicaid certifications, together with all
participating provider agreements and all material correspondence relating
thereto with respect to each Facility (excluding, however, correspondence
which may be subject to any attorney-client privilege); and
(e) such other confirmation as to the licensure and Medicare and Medicaid
participation of Tenant as Landlord may reasonably request from time to
time.
17.3.2 Annual Budgets.
Not less than sixty (60) days after the commencement of any Fiscal Year,
proposed annual income and ordinary expense and capital improvement budgets
setting forth projected income and costs and expenses projected to be incurred
by Tenant in managing, owning, maintaining and operating the Facilities during
the next succeeding Fiscal Year.
18
LANDLORD'S RIGHT TO INSPECT
Tenant shall permit Landlord and its authorized representatives to inspect
the Collective Leased Properties during usual business hours upon not less than
twenty-four (24) hours' notice (provided that no such notice shall be required
if Landlord shall reasonably determine immediate action is necessary to protect
person or property), and to make such repairs as Landlord is permitted or
required to make pursuant to the terms of this Agreement, provided that any
inspection or repair by Landlord or its representatives will not unreasonably
interfere with Tenant's use and operation of the applicable Leased Property and
further provided that in the event of an emergency, as determined by Landlord in
its sole discretion, prior Notice shall not be necessary.
19
APPRAISAL
In the event that it becomes necessary to determine the Fair Market Value
or Fair Market Rental of any of the Collective Leased Properties for any purpose
of this Agreement and the parties cannot agree thereon, such Fair Market Value
or Fair Market Rental, as the case may be, shall be determined upon the written
demand of either party in accordance with the following procedure.
The party requesting an appraisal, by Notice given to the other, shall
propose and unilaterally approve a Qualified Appraiser. The other party, by
Notice given within fifteen (15) days after receipt of such Notice appointing
the first Qualified Appraiser, may appoint a second Qualified Appraiser. If the
other party fails to appoint the second Qualified Appraiser within such fifteen
(15)-day period, such party shall have waived its right to appoint a Qualified
Appraiser, the first Qualified Appraiser shall appoint a second Qualified
Appraiser within fifteen (15) days thereafter,
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and the Fair Market Value or Fair Market Rental, as the case may be, shall be
determined by the Qualified Appraisers as set forth below.
The two Qualified Appraisers shall thereupon endeavor to agree upon the
Fair Market Value or Fair Market Rental, as the case may be. If the two
Qualified Appraisers so named cannot agree upon such value or rental, as the
case may be, within thirty (30) days after the designation of the second such
appraiser, each such appraiser shall, within five (5) days after the expiration
of such thirty (30)-day period, submit his appraisal of fair market value to the
other appraiser in writing, and if the fair market values set forth in such
appraisals vary by five percent (5%) or less of the greater value, the fair
market value shall be determined by calculating the average of the two fair
market values determined by the two appraisers.
If the fair market values set forth in the two appraisals vary by more than
five percent (5%) of the greater value, the two Qualified Appraisers shall
select a third Qualified Appraiser within an additional fifteen (15) days
following the expiration of the aforesaid five (5)-day period. If the two
appraisers are unable to agree upon the appointment of a third appraiser within
such fifteen (15)-day period, either party may, upon written notice to the
other, request that such appointment be made by the then President (or
equivalent officer) of the State's Chapter of the American Institute of Real
Estate Appraisers, or his or her designee or, if there is no such organization
or if such individual declines to make such appointment, by any state or Federal
court of competent jurisdiction for the State.
In the event that all three of the appraisers cannot agree upon Fair Market
Value or Fair Market Rental, as the case may be, within twenty (20) days
following the selection of the third appraiser, each appraiser shall, within ten
(10) days thereafter, submit his appraisal of fair market value to the other two
appraisers in writing, and the fair market value shall be determined by
calculating the average of the two numerically closest values (or, if the values
are equidistant, the average of all three values) determined by the three
appraisers.
In the event that any appraiser appointed hereunder does not or is unable
to perform his or her obligation hereunder, then the party or the appraisers
appointing such appraiser shall have the right to propose and approve
unilaterally a substitute Qualified Appraiser, but if the party or the
appraisers who have the right to appoint a substitute Qualified Appraiser fail
to do so within ten (10) days after written notice from the other party (or
either party in the event such appraiser was appointed by the other appraisers),
either party may, upon written notice to the party having the right to appoint a
substitute Qualified Appraiser, request that such appointment be made by such
officer of the American Institute of Real Estate Appraisers or court of
competent jurisdiction as described above; provided, however, that a party who
has the right to appoint an appraiser or a substitute appraiser shall have the
right to make such appointment only up until the time such appointment is made
by such officer or court.
In connection with the appraisal process, Tenant shall provide the
appraisers full access during normal business hours to examine the applicable
Leased Property, the books, records and files of Tenant and all agreements,
leases and other operating agreements relating to the applicable Leased
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Property.
The costs (other than Landlord's counsel fees) of each such appraisal shall
be borne by Tenant and shall be included as part of the Additional Charges. Upon
determining such value, the appraisers shall promptly notify Landlord and Tenant
in writing of such determination. If any party shall fail to appear at the
hearings appointed by the appraisers, the appraisers may act in the absence of
such party.
The determination of the Qualified Appraisers made in accordance with the
foregoing provisions shall be final and binding upon the parties, such
determination may be entered as an award in arbitration in a court of competent
jurisdiction, and judgment thereon may be entered.
Notwithstanding anything in this Agreement to the contrary, (x) the parties
agree that the Minimum Rent for the Fixed Term provided for in Section 1.64
hereof shall not be evidence of the Fair Market Rental for any Extended Term,
and (y) if Minimum Rent for any Extended Term as determined by appraisal
pursuant to this Article 19 is not satisfactory to Landlord, in Landlord's sole
discretion, or Franchisor elects to void Tenant's extension of the Franchise
Agreement with respect to such Extended Term pursuant to the Franchise
Agreement, then Landlord shall have the right to render void Tenant's election
to extend the Term with respect to such Extended Term upon Notice given to
Tenant no later than thirty (30) days following the later of the determination
of the Minimum Rent pursuant to this Article 19, or Franchisor's election to
render void the extension of the Franchise Agreement pursuant to the Franchise
Agreement, in which event this Agreement shall expire on the last day of the
Fixed Term or the then current Extended Term, as applicable.
20
FACILITY MORTGAGES
20.1 Landlord May Grant Liens.
Without the consent of Tenant, Landlord may, subject to the terms and
conditions set forth in this Section 20.1, from time to time, directly or
indirectly, create or otherwise cause to exist any lien, encumbrance or title
retention agreement ("Encumbrance") upon any of the Collective Leased
Properties, or any portion thereof or interest therein, whether to secure any
borrowing or other means of financing or refinancing. Any such Encumbrance shall
include the right to prepay (whether or not subject to a prepayment penalty) and
shall provide (subject to Section 20.2 below) that it is subject to the rights
of Tenant under this Agreement.
20.2 Subordination of Lease.
Subject to Section 20.1, this Agreement, any and all rights of Tenant
hereunder, are and shall be subject and subordinate to any ground or master
lease, and all renewals, extensions, modifications and replacements thereof, and
to all mortgages and deeds of trust, which may now or her after affect the
Collective Leased Properties, or any of them, or any improvements thereon and/or
any of such
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leases, whether or not such mortgages or deeds of trust shall also cover other
lands and/or buildings and/or leases, to each and every advance made or
hereafter to be made under such mortgages and deeds of trust, and to all
renewals, modifications, replacements and extensions of such leases and such
mortgages and deeds of trust and all consolidations of such mortgages and deeds
of trust. This section shall be self-operative and no further instrument of
subordination shall be required. In confirmation of such subordination, (i)
Tenant shall promptly execute, acknowledge and deliver any instrument that
Landlord, the lessor under any such lease or the holder of any such mortgage or
the trustee or beneficiary of any deed of trust or any of their respective
successors in interest may reasonably request to evidence such subordination,
and (ii) the lessor under any such lease or the holder of any such mortgage or
the trustee or beneficiary of any such deed of trust shall execute and deliver
to Tenant a Non-Disturbance Agreement reasonably satisfactory to Tenant (taking
into account, however, the reasonable requirements of the lessor or lender,
including a lender becoming such in connection with a non-recourse securitized
loan), including provisions with respect to insurance and casualty matters.
Any lease to which this Agreement is, at the time referred to, subject and
subordinate is herein called "Superior Lease" and the lessor of a Superior Lease
or its successor in interest at the time referred to, is herein called "Superior
Landlord" and any mortgage or deed of trust to which this Agreement is, at the
time referred to, subject and subordinate, is herein called "Superior Mortgage"
and the holder, trustee or beneficiary of a Superior Mortgage is herein called
"Superior Mortgagee."
If any Superior Landlord or Superior Mortgagee or the nominee or designee
of any Superior Landlord or Superior Mortgagee shall succeed to the rights of
Landlord under this Agreement with respect to one or more of the Collective
Leased Properties, whether through possession or foreclosure action or delivery
of a new lease or deed, or otherwise, then at the request of such party so
succeeding to Landlord's rights (herein called "Successor Landlord") and upon
such Successor Landlord's written agreement to accept Tenant's attornment,
Tenant shall attorn to and recognize such Successor Landlord as Tenant's
landlord under this Agreement with respect to one or more of the Collective
Leased Properties, and shall promptly execute and deliver any instrument that
such Successor Landlord may reasonably request to evidence such attornment. Upon
such attornment, this Agreement shall continue in full force and effect as a
direct lease between the Successor Landlord and Tenant upon all of the terms,
conditions and covenants as are set forth in this Agreement, except that the
Successor Landlord (unless formerly the landlord under this Agreement or its
nominee or designee) shall not be (a) liable in any way to Tenant for any act or
omission, neglect or default on the part of Landlord under this Agreement, (b)
responsible for any monies owing by or on deposit with Landlord to the credit of
Tenant, (c) subject to any counterclaim or setoff which theretofore accrued to
Tenant against Landlord, (d) bound by any modification of this Agreement
subsequent to such Superior Lease or Mortgage, or by any previous prepayment of
Minimum Rent or Additional Rent for more than one (1) month, which was not
approved in writing by the Superior Landlord or the Superior Mortgagee thereto,
(e) liable to Tenant beyond the Successor Landlord's interest in the applicable
Leased Property and the rents, income, receipts, revenues, issues and profits
issuing from such Leased Property, (f) responsible for the performance of any
work to be done by the Landlord under this Agreement to render the applicable
Leased
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Property ready for occupancy by Tenant, or (g) required to remove any Person
occupying the applicable Leased Property or any part thereof, except if such
person claims by, through or under the Successor Landlord. Tenant agrees at any
time and from time to time to execute a suitable instrument in confirmation of
Tenant's agreement to attorn, as aforesaid.
20.3 Notice to Mortgagee and Ground Landlord.
Subsequent to the receipt by Tenant of notice from any Person that it is a
Facility Mortgagee or that it is the ground lessor under a lease with Landlord,
as ground lessee, which includes the applicable Leased Property as part of the
demised premises, no notice from Tenant to Landlord as to the applicable Leased
Property shall be effective unless and until a copy of the same is given to such
Facility Mortgagee or ground lessor, and the curing of any of Landlord's
defaults by such Facility Mortgagee or ground lessor shall be treated as
performance by Landlord.
21
ADDITIONAL COVENANTS OF TENANT
21.1 Conduct of Business.
Tenant shall do or cause to be done all things necessary to preserve, renew
and keep in full force and effect and in good standing its corporate existence
and its rights and licenses necessary to conduct such business.
21.2 Maintenance of Accounts and Records.
Tenant shall keep records and books of account in which full, true and
correct entries in all material respects will be made of dealings and
transactions in relation o the business and affairs of Tenant.
21.3 Payments to Franchisor.
All payments by Tenant of Franchise Fees under the Franchise Agreement
shall be subordinated to payments of Rent (other than Non-Priority Additional
Rent) due to Landlord to the extent and on the terms provided in the Franchise
Subordination Agreement, and Tenant shall not make any payment of the Franchise
Fees, directly or indirectly, or set apart any sum or property therefor, or
agree to do so, other than as permitted in and by the Franchise Subordination
Agreement.
21.4 Management of Collective Leased Properties.
Tenant shall not enter into any Management Agreement unless the terms
thereof have been previously approved in writing by Landlord, which approval may
be given or withheld in Landlord's sole and absolute discretion, except for
Management Agreements between OpCo and a Facility
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Subsidiary. All management fees, payments in connection with any extension of
credit and fees for services provided in connection with the operation of the
applicable Leased Property, payable by Tenant or any Affiliated Person as to
Tenant shall be subordinated to all of the obligations of Tenant due under this
Agreement pursuant to a Subordination Agreement. Tenant shall not agree to any
change in the Manager of any of the Collective Leased Properties and/or any
Facility, to any change in any Management Agreement, terminate any Management
Agreement or permit any Manager to assign any Management Agreement without the
prior written approval of Landlord in each instance, which approval may be given
or withheld in Landlord's sole and absolute discretion. Any Management Agreement
shall provide that Landlord shall be provided notice of any defaults thereunder
and, at Landlord's option, an opportunity to cure such defaults and shall
otherwise be in form and substance satisfactory to Landlord in its sole and
absolute discretion. If Landlord shall cure any of Tenant's defaults under any
Management Agreement, the cost of such cure shall be payable upon demand by
Tenant to Landlord with interest accruing from the demand date at the Overdue
Rate and Landlord shall have the same rights and remedies for failure to pay
such costs on demand as for Tenant's failure to pay Minimum Rent. Tenant shall
deliver to Landlord any instrument requested by Landlord to implement the intent
of the foregoing provision.
21.5 Liens and Encumbrances.
Except as permitted by Sections 7.1 and 16.5, Tenant shall not create or
incur or suffer to be created or incurred or to exist any Lien on this Agreement
or Tenant's ersonal Property now or at any time hereafter owned, other than:
(a) Security interests securing the purchase price of equipment or personal
property acquired after the Commencement Date; provided, however, that (i)
such Lien shall at all times be confined solely to the asset in question;
and (ii) the aggregate principal amount of Indebtedness secured by any such
Lien shall not excee the cost of acquisition or construction of the
property subject thereto; and
(b) Permitted Encumbrances.
22
MISCELLANEOUS
22.1 Limitation on Payment of Rent.
All agreements between Landlord and Tenant herein are hereby expressly
limited so that in no contingency or event whatsoever, whether by reason of
acceleration of Rent, or otherwise, shall the Rent or any other amounts payable
to Landlord under this Agreement exceed the maximum permissible under applicable
law, the benefit of which may be asserted by Tenant as a defense, and if, from
any circumstance whatsoever, fulfillment of any provision of this Agreement, at
the time performance of such provision shall be due, shall involve transcending
the limit of validity prescribed by law, or if from any circumstances Landlord
should ever receive as fulfillment of such provision such an excessive amount,
then, ipso facto, the amount which would be excessive shall
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be applied to the reduction of the installment(s) of Minimum Rent next due and
not to the payment of such excessive amount. This provision shall control every
other provision of this Agreement and any other agreements between Landlord and
Tenant.
22.2 No Waiver.
No failure by Landlord to insist upon the strict performance of any term
hereof or to exercise any right, power or remedy consequent upon a breach
thereof, and no acceptance of full or partial payment of Rent during the
continuance of any such breach, shall constitute a waiver of any such breach or
of any such term. To the maximum extent permitted by law, no waiver of any
breach shall affect or alter this Agreement, which shall continue in full force
and effect with respect to any other then existing or subsequent breach.
22.3 Remedies Cumulative.
To the maximum extent permitted by law, each legal, equitable or
contractual right, power and remedy of Landlord, now or hereafter provided
either in this Agreement or by statute or otherwise, shall be cumulative and
concurrent and shall be in addition to every other right, power and remedy and
the exercise or beginning of the exercise by Landlord of any one or more of such
rights, powers and remedies shall not preclude the simultaneous or subsequent
exercise by Landlord of any or all of such other rights, powers and remedies.
22.4 Severability.
Any clause, sentence, paragraph, section or provision of this Agreement
held by a court of competent jurisdiction to be invalid, illegal or ineffective
shall not impair, invalidate or nullify the remainder of this Agreement, but
rather the effect thereof shall be confined to the clause, sentence, paragraph,
section or provision so held to be invalid, illegal or ineffective, and this
Agreement shall be construed as if such invalid, illegal or ineffective
provisions had never been contained therein.
22.5 Acceptance of Surrender.
No surrender to Landlord of this Agreement or of any of the Collective
Leased Properties or any part thereof, or of any interest therein, shall be
valid or effective unless agreed to and accepted in writing by Landlord and no
act by Landlord or any representative or agent of Landlord, other than such a
written acceptance by Landlord, shall constitute an acceptance of any such
surrender.
22.6 No Merger of Title.
It is expressly acknowledged and agreed that it is the intent of the
parties that there shall be no merger of this Agreement or of the leasehold
estate created hereby by reason of the fact that the same Person may acquire,
own or hold, directly or indirectly this Agreement or the leasehold estate
created her by and the fee estate or ground landlord's interest in any of the
Collective Leased Properties.
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22.7 Conveyance by Landlord.
If Landlord or any successor owner of all or any portion of any of the
Collective Leased Properties shall convey all or any portion of the Collective
Leased Properties in accordance with the terms hereof other than as security for
a debt, and the grantee or transferee of such of the Collective Leased
Properties shall expressly assume all obligations of Landlord hereunder arising
or accruing from and after the date of such conveyance or transfer, Landlord or
such successor owner, as the case may be, shall thereupon be released from all
future liabilities and obligations of Landlord under this Agreement with respect
to such of the Collective Leased Properties arising or accruing from and after
the date of such conveyance or other transfer and all such future liabilities
and obligations shall thereupon be binding upon the new owner.
22.8 Quiet Enjoyment.
So long as Tenant shall pay the Rent as the same becomes due and shall
comply with all of the terms of this Agreement, Tenant shall peaceably and
quietly have, hold and enjoy the Collective Leased Properties for the Term, free
of hindrance or molestation by Landlord or anyone claiming by, through or under
Landlord, but subject to (a) any Encumbrance permitted under Article 20 or
otherwise permitted to be created by Landlord hereunder, (b) all Permitted
Encumbrances, (c) liens as to obligations of Landlord that are either not yet
due or which are being contested in good faith and by proper proceedings, and
(d) liens that have been consented to in writing by Tenant. Except as otherwise
provided in this Agreement, no failure by Landlord to comply with the foregoing
covenant shall give Tenant any right to cancel or terminate this Agreement or
abate, reduce or make a deduction from or offset against the Rent or any other
sum payable under this Agreement, or to fail to perform any other obligation of
Tenant hereunder.
22.9 Landlord's Consent.
Where provision is made in this Agreement for Landlord's consent and
Landlord shall fail or refuse to give such consent, Tenant shall not be entitled
to any damages for any withholding by Landlord of its consent, it being intended
that Tenant's sole remedy shall be an action for specific performance or
injunction, and that such remedy shall be available only in those cases where
Landlord has expressly agreed in writing not unreasonably to withhold its
consent.
22.10 Memorandum of Lease.
Neither Landlord nor Tenant shall record this Agreement. However, Landlord
and Tenant shall promptly, upon the request of the other, enter into a short
form memorandum of this Agreement, in form suitable for recording under the laws
of the State in which reference to this Agreement, and all options contained
herein, shall be made. Tenant shall pay all costs and expenses of recording such
memorandum.
22.11 Notices.
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(a) Any and all notices, demands, consents, approvals, offers, elections
and other communications required or permitted under this Agreement shall
be deemed adequately given if in writing and the same shall be delivered
either in hand, by telecopier with written acknowledgment of receipt, or by
mail or Federal Express or similar expedited commercial carrier, addressed
to the recipient of the notice, postpaid and registered or certified with
return receipt requested (if by mail), or with all freight charges prepaid
(if by Federal Express or similar carrier).
(b) All notices required or permitted to be sent hereunder shall be deemed
to have been given for all purposes of this Agreement upon the date of
acknowledged receipt, in the case of a notice by telecopier, and, in all
other cases, upon the date of receipt or refusal, except that whenever
under this Agreement a notice is either received on a day which is not a
Business Day or is required to be delivered on or before a specific day
which is not a Business Day, the day of receipt or required delivery shall
automatically be extended to the next Business Day.
(c) All such notices shall be addressed:
if to Landlord to:
Gerald W. Haddock, Esq.
Chief Executive Officer and President
CRE Management VII Corp.
777 Main Street
Suite 2100
Forth Worth, Texas 76102
Facsimile: (817) 878-0429
with copies to:
David M. Dean, Esq.
Senior Vice President, Law
CRE Management VII Corp.
777 Main Street
Suite 2100
Forth Worth, Texas 76102
Facsimile: (817) 878-0429
and
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Wendelin A. White, Esq.
Shaw, Pittman, Potts & Trowbridge
2300 N Street, N.W.
Washington, DC 20037
Facsimile: (202) 663-8007
If to Tenant to:
Steve J. Davis, Esq.
Executive Vice President,
Administrative Services and General Counsel
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Facsimile: (404) 814-5793
with a copy to:
Robert W. Miller, Esq.
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303-1763
Facsimile: (404) 572-5100
(d)By notice given as herein provided, the parties hereto and their
respective successor and assigns shall have the right from time to time and
at any time during the term of this Agreement to change their respective
addresses effective upon receipt by the other parties of such notice and
each shall have the right to specify as its address any other address
within the United States of America.
22.12 Construction.
Anything contained in this Agreement to the contrary notwithstanding, all
claims against, and liabilities of, Tenant or Landlord arising prior to any date
of termination or expiration of this Agreement with respect to any of the
Collective Leased Properties shall survive such termination or expiration. In no
event shall Landlord be liable for any consequential damages suffered by Tenant
as the result of a breach of this Agreement by Landlord. Neither this Agreement
nor any provision hereof may be changed, waived, discharged or terminated except
by an instrument in writing signed by the party to be charged. All the terms and
provisions of this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns. Each term or
provision of this Agreement to be performed by Tenant shall be construed as an
independent covenant and condition. Time is of the essence with respect to the
exercise of any rights of Tenant under this Agreement. Except as otherwise set
forth in this Agreement, any obligations of Tenant and Landlord (including
without limitation, any monetary, repair and indemnification obligations)
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shall survive the expiration or sooner termination of this Agreement.
22.13 Counterparts; Headings.
This Agreement may be executed in two or more counterparts, each of which
shall constitute an original, but which, when taken together, shall constitute
but one instrument and shall become effective as of the date hereof when copies
hereof, which, when taken together, bear the signatures of each of the parties
hereto shall have been signed. Headings in this Agreement are for purposes of
reference only and shall not limit or affect the meaning of the provisions
hereof.
22.14 Law, Etc.
This Agreement shall be interpreted, construed, applied and enforced in
accordance with the laws of the State of Delaware applicable to contracts
between residents of Delaware which are to be performed entirely within
Delaware, regardless of (i) where this Agreement is executed or delivered; or
(ii) where any payment or other performance required by this Agreement is made
or required to be made; or (iii) where any breach of any provision of this
Agreement occurs, or any cause of action otherwise accrues; or (iv) where any
action or other proceeding is instituted or pending; or (v) the nationality,
citizenship, domicile, principal place of business, or jurisdiction of
organization or domestication of any party; or (vi) whether the laws of the
forum jurisdiction otherwise would apply the laws of a jurisdiction other than
the State of Delaware; or (vii) any combination of the foregoing.
Notwithstanding the foregoing, the laws of the State shall apply to the
perfection and priority of liens upon and the disposition of and disposition
with respect to any of the Collective Leased Properties.
To the maximum extent permitted by applicable law, any action to enforce,
arising out of, or relating in any way to, any of the provisions of this
Agreement may be brought and prosecuted in such court or courts located in the
State of Delaware as is provided by law; and the parties consent to the
jurisdiction of said court or courts located in the State of Delaware and to
service of process by registered mail, return receipt requested, or by any other
manner provided by law.
22.15 of Leased Properties.
Provided no Default or Event of Default has occurred and is continuing at
the time of exercise of the right provided for in this Section 22.15, Tenant
shall have the right, from time to time, to substitute for a Designated Leased
Property another parcel of improved real property meeting criteria hereinafter
set forth and otherwise acceptable to Landlord (the "Substitute Leased
Property"). If Tenant makes such election, Tenant shall give Notice to Landlord
of Tenant's intention proposing a substitution closing date (the "Substitution
Date") not less than sixty (60) days or more than one-hundred twenty (120) days
from the date of such Notice and offering to Landlord a proposed Substitute
Leased Property meeting the following criteria: the Substitute Leased Property
shall be improved with a Comparable Facility; shall have a total value equal to
or greater than the total value of the Designated Leased Property to Landlord
(each as reasonably determined by Landlord); shall be freely transferable to
Landlord unencumbered by any existing lease, mortgage, or other encumbrance; and
shall be subject to no other exceptions to title except
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those approved by Landlord, which approval shall not be unreasonably withheld.
Tenant shall convey the Substitute Leased Property to Landlord in exchange for
the Designated Leased Property, Landlord shall simultaneously exchange the
Designated Leased Property, for the Substitute Leased Property, and the parties
shall simultaneously execute and deliver an amendment to this Lease. The
Landlord shall have thirty (30) days following receipt of such Notice within
which to accept or reject such offer; provided, however, that Landlord shall
have at least ten (10) days following receipt of any appraisal of the Substitute
Leased Property or the Designated Leased Property (or both) requested by
Landlord within which to accept or reject such offer. If Landlord accepts the
proposed Substitute Leased Property, the substitution shall proceed in a manner
(a) intended to qualify such substitution as a "like-kind" exchange within the
meaning of Section 1031 of the Internal Revenue Code of 1986, as amended (the
"Code") with respect to Landlord, and (b) which will satisfy Landlord's
requirements related to taxation as a real estate investment trust. Landlord may
demand, at Tenant's expense, a reasonably acceptable opinion of counsel or
private letter ruling from the Internal Revenue Service indicating that the
substitution will have no material adverse tax consequences to Landlord. After
closing, the Substitute Leased Property shall be deemed a Leased Property for
all purposes. Substitution hereunder and the closing shall be made on the
following terms and shall be subject to the following conditions:
(a) the Substitution Date, Tenant shall execute, acknowledge and deliver to
Landlord a warranty deed in the customary form for the relevant
jurisdiction conveying to Landlord, free and clear of any title exceptions
except those approved by Landlord as set forth above, title to the
Substitute Leased Property, and Landlord shall simultaneously execute,
acknowledge and deliver to Tenant a warranty deed conveying to Tenant, free
and clear of title exceptions, except Permitted Encumbrances and those
approved by Tenant (based on the same criteria for approval as for
Landlord), title to the Designated Leased Property; provided, however, that
in no event shall Landlord have any obligation to cure or remove title
exceptions affecting the Designated Leased Property, Tenant's only recourse
being to designate an alternative Designated Leased Property for
substitution or to rescind its Notice of election to substitute a
Substitute Leased Property.
(b) or prior to the Substitution Date, Landlord and Tenant shall have
executed, acknowledged and delivered an amendment to this Lease (the
"Amendment to Lease") (the Lease, as amended, herein referred to as the
"Amended Lease") which shall provide for the deletion of the legal
description of the Designated Leased Property and the substitution of the
legal description of the Substitute Leased Property therefor.
(c) shall have provided Landlord, at Tenant's sole cost, with a title
insurance policy satisfactory in form and substance to Landlord, effective
on the date of exchange, covering the Substitute Leased Property and
containing no exceptions to title to the Substitute Leased Property other
than encumbrances approved by Landlord as provided herein, and having such
affirmative insurance and endorsements as may be required by Landlord.
(d) shall have provided Landlord with representations and warranties with
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respect to the Substitute Leased Property reasonably satisfactory to
Landlord (unless otherwise reasonably required, generally similar to the
representations and warranties contained in Section 6.1 of that certain
Real Estate Purchase and Sale Agreement dated as of January 29, 1997, as
amended through the date hereof by and between Magellan Health Services,
Inc., as seller, and Crescent Real Estate Equities Limited Partnership,
predecessor in interest of Landlord, as purchaser (the "Purchase
Agreement")), such representations and warranties shall survive the closing
and Landlord shall have the same remedies for breach thereof as are
provided for in the Purchase Agreement.
(e) shall provide Landlord with documentation satisfactory to Landlord
confirming that Tenant has the right to operate the Substitute Leased
Property in accordance with the Primary Intended Use and under and pursuant
to the Franchise Agreement.
(f) shall reimburse Landlord, as Additional Charges, for any and all costs
and expenses incurred by Landlord, including Landlord's reasonable
attorneys' fees, in effecting the substitution proposed (whether or not
closing occurs).
Landlord and Tenant hereby covenant that once the Notice of intent to
substitute a Substitute Leased Property for the Designated Leased Property
described therein has been delivered and Landlord accepts the Substitute Leased
Property identified therein, each party will promptly perform all acts and
deliver all documents required on its part to be delivered or to satisfy the
conditions of closing set forth herein. In the event that the Substitute Leased
Property has not been exchanged for the Designated Leased Property within thirty
(30) days after the Substitution Date specified in Tenant's Notice of its
intention to substitute by reason of the acts or omissions of one party, then
the other party shall have the right to elect not to proceed with the
substitution.
Tenant covenants that, following the closing of the exchange of the
Substitute Leased Property, neither it nor any of its Affiliated Persons will
use the Designated Leased Property as a facility having as its primary use the
Primary Intended Use for at least one year after the Substitution Date.
22.16 Broker.
Each party hereby represents and warrants to the other that it has not
engaged, dealt with or otherwise discussed this transaction with any broker,
agent or finder. Each party agrees to indemnify and hold the other harmless from
and against any claim arising out of a breach of the foregoing agreement and
representation and warranty.
22.17 Confidentiality.
Landlord shall maintain the confidentiality of information provided by
Tenant pursuant to Sections 17.2 and 17.3 hereof or otherwise under this
Agreement. Landlord may, however, disclose such information to its attorneys,
consultants, partners, directors, officers and employees, and lenders and
purchasers (actual and potential). As a condition of such disclosure to any
lender or purchaser
-66-
<PAGE>
(actual or potential), such lender or purchaser shall be obligated to execute a
Confidentiality Agreement reasonably satisfactory to Tenant. The provisions of
this Section 22.18 shall not be applicable to disclosure of information required
by applicable law, rule or regulation or the order of any court.
IN WITNESS WHEREOF, the parties have executed this Agreement as a sealed
instrument as of the date above first written.
LANDLORD:
Crescent Real Estate FUNDING VII, L.P.
Attest: By: CRE Management VII Corp.
\s\ Sylvia M. Mahaffey By: \s\ David M. Dean
- ------------------------------ ----------------------------
Name: Sylvia M. Mahaffey David M. Dean
Title: Assistant Secretary Senior Vice President, Law
-67-
<PAGE>
TENANT:
Attest: CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
\s\ Jay P. Moran By:\s\ Mark Ford
- ------------------------ ---------------------------------------
Name: Jay P. Moran Name: Mark Ford
Title: Title: Vice President, General Counsel
and Secretary
Attest: FACILITY SUBSIDIARIES
\s\ Jay P. Moran By: \s\ John R. Hamilton III
- ------------------------ --------------------------------------
Name:John R. Hamilton IIITitle:
Executive Vice President of each of the Limited
Liability Companies and of each Sole General
Partner of each of the Limited Partnerships
listed on Exhibit B attached hereto, on behalf
of each of the said Limited Liability Companies
and Limited Partnerships
<PAGE>
MASTER FRANCHISE AGREEMENT
<PAGE>
TABLE OF CONTENTS
1. DEFINITIONS...........................................................1
1.1. "Affiliate"..................................................1
1.2. "Business Day"...............................................1
1.3. "Capitalized Lease"..........................................1
1.4. "Charter System".............................................1
1.5. "EBITDA".....................................................1
1.6. "Fair Market Value of the Franchise".........................1
1.7. "Franchise Agreement"........................................1
1.8. "Franchised Business"........................................2
1.9. "Hospital/RTC Based Behavioral Healthcare Business"..........2
1.10. "Interest"...................................................2
1.11. "Joint Ventures".............................................2
1.12. "Licensed Marks".............................................2
1.13. "New Products"...............................................2
1.14. "OpCo Franchise Agreements"..................................2
1.15. "OpCo Franchisees"...........................................2
1.16. "OpCo's Business"............................................2
1.17. "Prime Rate".................................................2
1.18. "Qualified Appraiser"........................................2
1.19. "Supermajority Vote of the Board"............................3
1.20. "Territory"..................................................3
1.21. "Transaction Documents"......................................3
2. GRANT AND ACCEPTANCE OF FRANCHISE.....................................3
2.1. Existing Facilities..........................................3
2.2. New Facilities...............................................3
2.3. Condition....................................................4
3. GUARANTY OF FRANCHISEE OBLIGATIONS....................................4
3.1. Definition of "Obligations"................................ 4
3.2. Guaranty................................................... 4
3.3. OpCo's Liability Absolute.................................. 5
3.4. Additional Waivers......................................... 5
3.5. Parties Benefitted......................................... 5
3.6. Continuing Effect.......................................... 6
3.7. Scope of Guaranty.......................................... 6
i
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4. TERM..................................................................6
4.1. Initial Term.................................................6
4.2. Extended Term................................................6
4.3. Determination of Annual Continuing Fee for Extended Terms....7
4.4. Appraisal....................................................7
4.5. New Annual Continuing Fee....................................9
5. ANNUAL CONTINUING FEES................................................9
5.1. Annual Continuing Fee........................................9
5.2. Definition of "Contract Year"................................9
5.3. Monthly Installments........................................10
5.4. Annual Continuing Fee for Short Contract Year...............10
5.5. Credit for Payments by OpCo Franchisees.....................10
5.6. Payment Following Contract Year End.........................10
5.7. Taxes.......................................................10
5.8. OpCo Gross Revenues.........................................11
5.9. Additional Remedies for Past Due Annual Continuing Fees.....12
5.10. Subordination...............................................12
5.11. Interest....................................................12
5.12. Negotiation of Fees.........................................13
6. THE CHARTER SYSTEM.................................................. 13
7. MANAGED CARE AGREEMENTS/PREFERRED PROVIDER STATUS....................13
8. OPERATION OF CALL CENTER.............................................14
9. ENHANCEMENT OF THE CHARTER SYSTEM....................................14
10. MANAGEMENT CONTRACTS/JOINT VENTURES/CONSULTING
AGREEMENTS...........................................................15
11. ADVERTISING AND MARKETING............................................15
11.1. Annual Expenditures.........................................15
11.2. Approval of Advertising.....................................15
12. STATEMENTS, RECORDS AND FEE PAYMENTS.................................15
12.1. Maintenance of Records; Audit Rights........................15
12.2. Tax Reports.................................................16
12.3. Reports.....................................................16
12.4. Unaudited Periodic Statements...............................16
12.5. Audited Annual Statement....................................16
ii
<PAGE>
13. ADDITIONAL COVENANTS OF OPCO.........................................17
13.1. Covenant During Term........................................17
13.2. Covenant Not to Compete Post-Term...........................17
13.3. Acknowledgment of Reasonableness............................17
13.4. Confidential Information....................................17
13.5. Confidential Agreements with Certain Employees..............18
13.6. Severability................................................18
14. FRANCHISOR COVENANT NOT TO COMPETE...................................19
15. NEGATIVE COVENANTS OF OPCO...........................................19
15.1. Restriction of Indebtedness.................................19
15.2. Restrictions on Liens.......................................19
15.3. Dividends and Redemptions...................................19
15.4. Acquisitions and Investments................................19
15.5. Liquidation; Merger; Disposition of Assets..................19
15.6. Salaries and Other Compensation.............................20
15.7. Affiliates..................................................20
15.8. Business Activities.........................................20
15.9. No Bankruptcy...............................................20
16. TRANSFER AND ASSIGNMENT..............................................20
16.1. Assignment by Franchisor....................................20
16.2. Assignment by OpCo..........................................20
16.3. Consent Not a Waiver........................................21
16.4. Consequences of Permitted Assignment to Crescent............21
16.5. Parties Bound and Benefitted................................22
17. RIGHTS OF AGGRIEVED PARTY UPON DEFAULT...............................22
17.1. Franchisor's Right to Terminate.............................22
17.2. OpCo's Right to Terminate...................................22
17.3. Franchisor's Right to Participate in Involuntary Bankruptcy
Petition................................................... 23
17.4. Other Remedies............................................. 23
18. INSURANCE............................................................23
18.1. Maintenance of Insurance....................................23
18.2. Notices of Claims under Insurance Policies..................23
18.3. Notices of Other Claims/Events..............................23
19. INDEMNIFICATION AND INDEPENDENT CONTRACTOR...........................23
19.1. Indemnification and Hold Harmless.......................... 23
19.2. Independent Contractor..................................... 24
iii
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20. WRITTEN APPROVALS, WAIVERS AND AMENDMENT............................ 24
20.1. Prior Approvals............................................ 24
20.2. No Waiver.................................................. 24
20.3. Written Amendments......................................... 24
21. ENFORCEMENT......................................................... 24
21.1. Inspections.................................................24
21.2. No Right to Offset..........................................25
22. REPRESENTATION OF FRANCHISOR.........................................25
23. ENTIRE AGREEMENT.....................................................25
24. NOTICES..............................................................25
25. GOVERNING LAW AND DISPUTE RESOLUTION.................................27
25.1. Governing Law...............................................27
25.2. Arbitration/Litigation......................................27
26. SEVERABILITY, CONSTRUCTION AND OTHER MATTERS.........................28
26.1. Severability................................................28
26.2. Regulatory Reports..........................................28
26.3. Counterparts................................................29
26.4. Table of Contents, Headings and Captions....................29
<PAGE>
MASTER FRANCHISE AGREEMENT
THIS MASTER FRANCHISE AGREEMENT is made and entered into this 17th day
of June, 1997 by and between Magellan Health Services, Inc., a Delaware
corporation ("Magellan"), and its wholly-owned subsidiary, Charter Franchise
Services, LLC, a Delaware limited liability company (together, hereinafter
referred to as the "Franchisor"), and Charter Behavioral Health Systems, LLC, a
Delaware limited liability company (hereinafter referred to as "OpCo").
W I T N E S S E T H :
In consideration of the mutual covenants hereinafter set forth, the parties
agree as follows:
1. DEFINITIONS
In addition to other words and terms defined elsewhere in this Agreement,
the following words and terms shall have the meanings set forth below:
1.1. "Affiliate" shall mean any person, firm or corporation, which,
directly or indirectly, controls, is controlled by, or is under common control
with, OpCo.
1.2. "Business Day" shall mean any day other than Saturday, Sunday or any
other day on which banking institutions in the States of Texas or Georgia are
authorized by law or executive action to close.
1.3. "Capitalized Lease" shall mean any lease which is capitalized on the
books of the lessee, or should be so capitalized under generally accepted
accounting principles.
1.4. "Charter System" shall have the meaning ascribed to it in the recitals
to the Franchise Agreement.
1.5. "EBITDA" shall mean earnings before interest, taxes, depreciation, and
amortization of OpCo on a consolidated basis as shown on OpCo's monthly
financial statements regularly prepared by OpCo.
1.6. "Fair Market Value of the Franchise" shall mean, for the purposes of
determining the Annual Continuing Fee (as hereinafter defined) for each Extended
Term (as hereinafter defined), the amount which is the fair market value of the
rights granted to OpCo under and pursuant to this Agreement and the rights
granted to OpCo and OpCo Franchisees under and pursuant to the OpCo Franchise
Agreements, for a one-year period.
1.7. "Franchise Agreement" shall mean the Charter Franchise Services, LLC
Franchise Agreement attached as Exhibit 1 hereto.
<PAGE>
1.8. "Franchised Business" shall have the meaning ascribed to it in the
recitals to the Franchise Agreement.
1.9. "Hospital/RTC Based Behavioral Healthcare Business" shall have the
meaning ascribed to it in the recitals to the Franchise Agreement.
1.10. "Interest" shall have the meaning ascribed to it in the Operating
Agreement (as defined in Section 1.21).
1.11. "Joint Ventures" shall mean the "Existing Joint Ventures" (as listed
on Exhibit 3 hereto) and all other similar arrangements of OpCo for so long as
OpCo is an equity owner in any Joint Venture or so long as OpCo has a services
agreement with an Existing Joint Venture on the terms contemplated in Section
7.9 of the Contribution Agreement.
1.12. "Licensed Marks" shall have the meaning ascribed to it in the
recitals to the Franchise Agreement.
1.13. "New Products" shall have the meaning ascribed to it in Section 1.3
of the Franchise Agreement.
1.14. "OpCo Franchise Agreements" shall mean each and all of the Franchise
Agreements entered into pursuant to Article 2 of this Agreement.
1.15. "OpCo Franchisees" shall mean as of any particular date all of the
entities designated as Franchise Owners under and pursuant to the OpCo Franchise
Agreements except that OpCo Franchisees as of any particular date shall not
include any entity that is not OpCo or in which OpCo does not have voting
control through stock ownership.
1.16. "OpCo's Business" shall mean and include the business of OpCo and all
OpCo Franchisees on a consolidated basis.
1.17. "Prime Rate" shall mean the prime rate of interest published from
time to time by the Wall Street Journal.
1.18. "Qualified Appraiser" shall mean an appraiser who is not in control
of, controlled by or under common control with either OpCo or Franchisor and has
not been an employee of OpCo or Franchisor or any affiliate with respect to
either of OpCo or Franchisor at any time, who is qualified to appraise the Fair
Market Value of the Franchise, and has been actively engaged in the appraisal of
assets, rights, businesses and, to the extent reasonably practicable to locate
such an appraiser, an appraiser who has been actively engaged in the appraisal
of franchises, for a period of not less than five (5) years, immediately
preceding his or her appointment hereunder.
<PAGE>
1.19. "Supermajority Vote of the Board" shall mean a vote of not less than
80% of the members of the entire Board of Directors of OpCo.
1.20. "Territory" shall have the meaning ascribed to it in Section 1.1 of
the Franchise Agreement.
1.21. "Transaction Documents" shall mean this Agreement, the OpCo Franchise
Agreements, the Master Lease Agreement dated as of the date hereof by and
between Crescent Real Estate Funding VII, L.P., a Delaware limited partnership
("Crescent"), as Landlord, and OpCo and each of the Facility Subsidiaries listed
on Exhibit C thereto, as Tenant (the "Facilities Lease"); the Operating
Agreement of OpCo dated as of the date hereof (the "Operating Agreement") by and
between Charter Behavioral Health Systems, Inc. and Crescent Operating, Inc., a
Delaware corporation ("Crescent Operating"); the Warrant Purchase Agreements
dated as of the date hereof between Magellan and Crescent Operating; the Warrant
Purchase Agreement dated as of January 29, 1997, as amended, by and between
Crescent Real Estate Equities Limited Partnership, a Delaware limited
partnership, and Magellan, the Real Estate Purchase and Sale Agreement dated
January 29, 1997, as amended, by and between Magellan and Crescent; the
Contribution Agreement dated as of the date hereof by and between Magellan,
Crescent Operating and OpCo, and the Subordination Agreement dated as of the
date hereof between Franchisor, Crescent and OpCo.
2. GRANT AND ACCEPTANCE OF FRANCHISE
2.1. Existing Facilities. Subject to the terms and conditions hereof,
immediately following the execution of this Agreement, Franchisor shall enter
into a franchise agreement for each facility listed on Exhibit 2 hereto with the
subsidiary of OpCo which leases such facility, and OpCo agrees to cause each
subsidiary which operates a facility listed on Exhibit 2 to enter into a
franchise agreement with Franchisor. Each franchise agreement shall be in the
form of the Franchise Agreement, completed with the name of the Franchisee, the
name of the business, the Territory and the fees to be inserted in Section 4.2
thereof; all in accordance with Exhibit 4 hereto.
2.2. Certain Additional Covenants. The covenants and agreements set forth
in Exhibit 5, including Attachment A thereto, are incorporated herein and deemed
a part hereof. Each OpCo Franchisee shall be a third party beneficiary of the
provisions of Exhibit 5 relating to Territories, Secondary Territories, and if
applicable, RTC/CD Facilities, all as applicable to such OpCo Franchisee's
respective Franchised Business.
2.3. New Facilities. In the event that OpCo or a subsidiary of OpCo shall
during the term hereof develop, acquire or lease any additional Hospital/RTC
Based Behavioral Healthcare Business(es), Franchisor agrees to enter into a
franchise agreement with OpCo or with the subsidiary of OpCo developing,
acquiring or leasing each such Hospital/RTC Based Behavioral
<PAGE>
Healthcare Business, subject to such Hospital/RTC Based Behavioral Healthcare
Business's meeting, and each facility at which such Hospital/RTC Based
Behavioral Healthcare Business is conducted meeting, Franchisor's reasonable
standards and requirements (which shall be consistent with, and not more onerous
than, the existing standards for OpCo Franchisees) and subject to such
Hospital/RTC Based Behavioral Healthcare Business's not having any of its
facilities in the Hospital/RTC Based Behavioral Healthcare Business (i) in the
Territory of any other franchisee of Franchisor (subject to the franchisee
affected thereby either, at such franchisee's option, waiving the prohibition or
agreeing to amend such franchisee's franchise agreement to eliminate the
conflict) or (ii) in a geographic area wherein Franchisor is prohibited from
granting a franchise to operate a Hospital/RTC Based Behavioral Healthcare
Business pursuant to any judgment, order or decree or pursuant to any
contractual provision existing prior to the date of such development,
acquisition or leasing. Each franchise agreement entered into pursuant to this
Section 2.3 shall be in the form of the Franchise Agreement, completed with the
name of the OpCo Franchisee, the name of the business, the Territory, as
reasonably specified by Franchisor utilizing the guidelines set forth in Exhibit
6 hereto and the fees inserted in Section 4.2 (such fees to be as reasonably
specified by Franchisor); it being understood that for so long as such
franchisee is an OpCo Franchisee, no additional fees (other than such as result
from increases in OpCo Gross Revenues) will be due to Franchisor from OpCo.
2.4. Condition. Franchisor's obligation to enter into any Franchise
Agreement pursuant to Sections 2.1 and 2.3 hereof shall be subject to
Franchisor's having complied with all federal and state laws, rules and
regulations applicable to the execution and delivery of such Franchise
Agreement. OpCo agrees to cooperate with Franchisor, and Franchisor and OpCo
agree to use commercially reasonable best efforts to comply with all such laws,
rules and regulations.
3. GUARANTY OF FRANCHISEE OBLIGATIONS
3.1. Definition of "Obligations". The term "Obligations", as used in this
Article 3, shall refer to any and all debts, obligations, and liabilities of
each and every of the present and future OpCo Franchisees to Franchisor arising
out of or relating to the OpCo Franchisees' respective Franchise Agreements with
Franchisor, whether such Franchise Agreements and/or such debts, obligations and
liabilities are heretofore, now, or hereafter made, incurred, or created,
whether such debts, obligations and liabilities are voluntary or involuntary,
liquidated or unliquidated, secured or unsecured, and including but not limited
to contingent debts, obligations and liabilities, and including both principal
and interest on such debts, obligations or liabilities, and whether or not any
or all such debts, obligations and liabilities are or become unenforceable
against OpCo Franchisees as a result of the operation of bankruptcy or
insolvency laws.
3.2. Guaranty. OpCo hereby (a) unconditionally guarantees the full and
prompt payment and performance of the Obligations when due, whether by
acceleration or otherwise, (b) agrees to pay all costs, expenses and reasonable
attorneys' fees incurred by Franchisor in enforcing this guaranty and the
Obligations and realizing on any collateral therefor, and (c) agrees to pay to
Franchisor the amount of any payments which were made to Franchisor or another
in full or partial satisfaction of the Obligations and which are recovered from
Franchisor by a trustee, receiver, creditor or other party pursuant to
applicable law. This is a guarantee of
<PAGE>
payment, and not of collection. Franchisor shall not be obligated to: (i) take
any steps whatsoever to collect from, or to file any claim of any kind against
any OpCo Franchisee, any guarantor, or any other person or entity liable for
payment or performance of any of the Obligations, or (ii) take any steps
whatsoever to protect, accept, obtain, enforce, take possession of, perfect its
interest in, foreclose or realize on collateral or security, if any, for the
payment or performance of any of the Obligations or any guarantee of any of the
Obligations, or (iii) in any other respect exercise any diligence whatever in
collecting or attempting to collect any of the Obligations by any means.
3.3. OpCo's Liability Absolute. OpCo shall have the right to assert any
defenses to enforcement of the Obligations that would be available to OpCo
Franchisees, other than defenses based on bankruptcy or insolvency laws.
However, except for the preceding sentence, OpCo's liability for payment and
performance of the Obligations shall be absolute and unconditional. OpCo
unconditionally and irrevocably waives each and every defense which, under
principles of guarantee or suretyship law, would otherwise operate to impair or
diminish such liability; and nothing whatever except actual full payment and
performance to Franchisor of the Obligations shall operate to discharge OpCo's
liability under this Article 3. Without limiting the generality of the
foregoing, Franchisor shall have the exclusive right, which may be exercised
from time to time without diminishing or impairing the liability of OpCo in any
respect, and without notice of any kind to OpCo, to: (a) in connection with the
relationship between Franchisor and any OpCo Franchisee under a Franchise
Agreement, extend any credit to any OpCo Franchisee, (b) accept any collateral,
security or guarantee for any Obligations or any other credit, (c) determine
how, when and what application of payments, credits and collections, if any,
shall be made on the Obligations and any other credit and accept partial
payments, (d) determine what, if anything, shall at any time be done with
respect to any collateral or security, (e) subordinate, sell, transfer,
surrender, release or otherwise dispose of all or any of such collateral or
security, and purchase or otherwise acquire any such collateral or security at
foreclosure or otherwise, and (f) with or without consideration grant, permit or
enter into any waiver, amendment, extension, modification, refinancing,
indulgence, compromise, settlement, subordination, discharge or release of: (i)
any of the Obligations and any agreement relating to any of the Obligations,
(ii) any obligations of any guarantor or other person or entity liable for
payment or performance of any of the Obligations, and any agreement relating to
such obligations and (iii) any collateral or security or agreement relating to
collateral or security for any of the foregoing, provided that, with respect to
(c) and (d) relating to collateral or security, Franchisor must deal with any
such collateral or security in a commercially reasonable manner.
3.4. Additional Waivers. OpCo hereby unconditionally waives (a)
presentment, notice of dishonor, protest, demand for payment and all notices of
any kind, including without limitation: notice of acceptance hereof, notice of
the creation of any of the Obligations (except as otherwise expressly required
in this Agreement), notice of nonpayment, nonperformance or other default on any
of the Obligations, and notice of any action taken to collect upon or enforce
any of the Obligations against any Franchise Owner (as defined in the preamble
to the Franchise Agreement), (b) any claim for contribution against any
co-guarantor, until the Obligations have been paid or performed in full and such
payments are not subject to any right of recovery, and (c) any setoffs against
Franchisor which would otherwise impair Franchisor's rights against OpCo
hereunder.
<PAGE>
3.5. Parties Benefitted. Subject to Section 16.1 below, the rights of
Franchisor under this Article 3 shall inure to the benefit of Franchisor and its
successors and assigns, including every holder or owner of any of the
Obligations, and shall be binding upon OpCo and OpCo's successors and assigns.
3.6. Continuing Effect. This is a continuing guarantee and shall continue
in effect as to those of the Obligations arising out of or relating to each OpCo
Franchise Agreement until Franchisor shall have received written notice of
termination of that OpCo Franchise Agreement (hereinafter, a "Terminated
Agreement") in accordance with its terms; provided that this guarantee shall
continue in effect thereafter with respect to all Obligations which arise out of
or are related to all OpCo Franchise Agreements of which such notice shall not
have been received, and with respect to all Obligations which were incurred
under a Terminated Agreement prior to Franchisor's receipt of such notice of
termination.
3.7. Scope of Guaranty. Nothing contained in this Article 3 shall cause the
cumulative liability of OpCo and any OpCo Franchisee for any particular
Obligation to exceed the amount of such Obligation; and the payment by OpCo, an
OpCo Franchisee or another person (other than Franchisor) in full or partial
satisfaction of any particular Obligation shall correspondingly reduce the
liability of OpCo and the particular OpCo Franchisee for such Obligation,
subject to subsection 3.2(c) above.
4. TERM
4.1. Initial Term. Unless sooner terminated pursuant to Article 16 hereof,
this Agreement shall extend for an initial term (the "Initial Term") ending on
the day prior to the anniversary date that is twelve (12) years from the date
hereof, provided that if the date hereof is not the first day of a calendar
month, then the Initial Term shall end on the last day of the calendar month in
which occurs the date which would otherwise be the last day of the Initial Term.
4.2. Extended Term. Provided that OpCo shall be in compliance with the
terms and conditions hereof, and this Agreement shall be in full force and
effect, OpCo shall, subject to Section 4.4 below, have the right to extend the
term of this Agreement, for each of four (4) consecutive five (5)-five year
renewal terms (collectively, the "Extended Terms").
Each Extended Term shall commence on the day succeeding the expiration of
the Initial Term or the preceding Extended Term, as the case may be. All of the
terms, covenants and provisions of this Agreement shall apply to each such
Extended Term, except that (x) the Annual Continuing Fee for each Extended Term
shall be the Fair Market Value of the Franchise as determined for such Extended
Term and shall be determined pursuant to Section 4.4 below and (y) OpCo shall
have no right to extend the Term beyond the expiration of the Extended Terms. If
OpCo shall elect to exercise any of the aforesaid options, it shall do so by
giving Franchisor notice thereof not later than one (1) year prior to the
scheduled expiration of the then current term of this Agreement (Initial Term or
Extended Term, as the case may be), it being understood and agreed that time
shall be of the essence with respect to the giving of such notice. OpCo may not
<PAGE>
exercise its option for more than one such Extended Term at a time. If OpCo
shall fail to give any such notice, this Agreement shall automatically terminate
at the end of the term then in effect and OpCo shall have no further option to
extend the term of this Agreement. If OpCo shall give such notice, the extension
of this Agreement shall be automatically effected without the execution of any
additional documents; it being understood and agreed, however, that OpCo and
Franchisor shall execute such documents and agreements as either party shall
reasonably require to evidence the same. Notwithstanding the provisions of the
previous sentence, if, subsequent to the giving of notice of its election to
exercise its right to extend the term of this agreement OpCo shall cease to be
in compliance with the terms and conditions hereof and such non-compliance shall
be continuing, unless Franchisor shall otherwise consent in writing, the
extension of this agreement shall automatically terminate at the end of the
Initial Term or Extended Term then in effect, and OpCo shall have no further
option to extend the term of this Agreement.
4.3. Determination of Annual Continuing Fee for Extended Terms. The Annual
Continuing Fee for each Extended Term shall be determined by the mutual
agreement of OpCo and Franchisor within thirty (30) days after Franchisor
receives OpCo's notice exercising its option to extend with respect to such
Extended Term, but in no event earlier than twelve (12) months prior to the
commencement of the applicable Extended Term. In the event OpCo and Franchisor
are unable to agree on the Annual Continuing Fee for such Extended Term within
such period, such Annual Continuing Fee shall be determined pursuant to
appraisal in accordance with Section 4.4 below.
4.4. Appraisal. In the event that it becomes necessary to determine the
Fair Market Value of the Franchise and the parties cannot agree thereon, such
Fair Market Value of the Franchise shall be determined upon the written demand
of either party in accordance with the following procedure.
The party requesting an appraisal, by notice given to the other, shall
propose and unilaterally approve a Qualified Appraiser. The other party, by
notice given within fifteen (15) days after receipt of such notice appointing
the first Qualified Appraiser, may appoint a second Qualified Appraiser. If the
other party fails to appoint the second Qualified Appraiser within such fifteen
(15)-day period, such party shall have waived its right to appoint a Qualified
Appraiser, the first Qualified Appraiser shall appoint a second Qualified
Appraiser within fifteen (15) days thereafter, and the Fair Market Value of the
Franchise shall be determined by the Qualified Appraisers as set forth below.
The two Qualified Appraisers shall thereupon endeavor to agree upon the
Fair Market Value of the Franchise. If the two Qualified Appraisers so named
cannot agree upon such value within thirty (30) days after the designation of
the second such appraiser, each such appraiser shall, within five (5) days after
the expiration of such thirty (30)-day period, submit his appraisal of the Fair
Market Value of the Franchise to the other appraiser in writing, and if the fair
market values set forth in such appraisals vary by five percent (5%) or less of
the greater value, the Fair Market Value of the Franchise shall be determined by
calculating the average of the two fair market values determined by the two
appraisers.
<PAGE>
If the fair market values set forth in the two appraisals vary by more than
five percent (5%) of the greater value, the two Qualified Appraisers shall
select a third Qualified Appraiser within an additional fifteen (15) days
following the expiration of the aforesaid five (5)-day period. If the two
appraisers are unable to agree upon the appointment of a third appraiser within
such fifteen (15)-day period, either party may, upon written notice to the
other, request that such appointment be made by any state court of competent
jurisdiction for the State of Delaware.
In the event that all three of the appraisers cannot agree upon the Fair
Market Value of the Franchise within twenty (20) days following the selection of
the third appraiser, each appraiser shall, within ten (10) days thereafter,
submit his appraisal of the Fair Market Value of the Franchise to the other two
appraisers in writing, and the Fair Market Value of the Franchise shall be
determined by calculating the average of the two numerically closest values (or,
if the values are equidistant, the average of all three values) determined by
the three appraisers.
In the event that any appraiser appointed hereunder does not or is unable
to perform his or her obligation hereunder, then the party or the appraisers
appointing such appraiser shall have the right to propose and approve
unilaterally a substitute Qualified Appraiser, but if the party or the
appraisers who have the right to appoint a substitute Qualified Appraiser fail
to do so within ten (10) days after written notice from the other party (or
either party in the event such appraiser was appointed by the other appraisers),
either party may, upon written notice to the party having the right to appoint a
substitute Qualified Appraiser, request that such appointment be made by such
court of competent jurisdiction as described above; provided, however, that a
party who has the right to appoint an appraiser or a substitute appraiser shall
have the right to make such appointment only up until the time such appointment
is made by such court.
The parties agree that the Annual Continuing Fee for the Initial Term
provided for in Section 5.1 shall not be evidence of the Fair Market Value of
the Franchise for any Extended Term.
In connection with the appraisal process, OpCo shall and shall cause OpCo
Franchisees to provide the appraisers full access during normal business hours
to examine the books, records, files and facilities of OpCo and all OpCo
Franchisees.
The costs of each such appraisal shall be borne equally by the parties.
Upon determining such value, the appraisers shall promptly notify OpCo and
Franchisor in writing of such determination. The determination of the Qualified
Appraisers made in accordance with the foregoing provisions shall be final and
binding upon the parties, such determination may be entered as an award in
arbitration in a court of competent jurisdiction, and judgment thereon may be
entered.
Notwithstanding anything in this Agreement to the contrary, if the Annual
Continuing Fee for any Extended Term as determined by appraisal pursuant to this
Section 4.4 is not satisfactory to Franchisor in Franchisor's sole discretion,
or if Crescent elects to void OpCo's extension of
<PAGE>
the Facilities Lease with respect to such Extended Term pursuant to Article 19
of the Facilities Lease, then Franchisor shall have the right to render void
OpCo's election to extend the term with respect to such Extended Term upon
notice given to OpCo no later than thirty (30) days following the later of the
determination of the Annual Continuing Fee pursuant to this Section 4.4, or
Crescent's election to render void the extension of the Facilities Lease
pursuant to the Facilities Lease, in which event this Agreement shall expire on
the last day of the Initial Term or the then current Extended Term, as
applicable.
4.5. New Annual Continuing Fee. The Fair Market Value of the Franchise, as
agreed by the parties or as determined by the Qualified Appraisers shall be the
Annual Continuing Fee provided for in Section 5.1 below, for the succeeding
Extended Term.
5. ANNUAL CONTINUING FEES
5.1. Annual Continuing Fee. For each "Contract Year" (as hereinafter
defined) during the Initial Term, OpCo shall pay to Franchisor, subject to the
terms of Section 5.4 below, an annual continuing fee (the "Annual Continuing
Fee") in the amount of the greater of:
(a) Seventy-Eight Million Three Hundred Thousand Dollars ($78,300,000)
plus (i) an amount calculated by multiplying Seventy-Eight Million Three
Hundred Thousand Dollars ($78,300,000) by the percentage increase in the
Consumer Price Index, United States City Average for All Urban Consumers
for All items (as published by the U.S. Department of Labor, Bureau of
Labor Statistics) (the "CPI") between the end of the latest period for
which said index has been published prior to the date of this Agreement and
the end of the latest period for which said index has been published prior
to the first day of said Contract Year (the "Minimum Annual Continuing
Fee"), except that no adjustment to the Minimum Annual Continuing Fee shall
be made for the second Contract Year (Contract Year beginning October 1,
1997); it being understood that the adjustment made for the third Contract
Year (Contract Year beginning October 1, 1998) shall take into
consideration the change in the CPI between the end of the latest period
for which said index has been published prior to the date of this Agreement
and the end of the latest period for which said index has been published
prior to the first day of the third Contract Year plus (ii) New Management
Arrangement Fees; or
(b) Seventy-Eight Million Three Hundred Thousand Dollars ($78,300,000)
plus (i) 3% of OpCo Gross Revenues above One Billion Dollars
($1,000,000,000) and up to and including One Billion, Two Hundred Million
Dollars ($1,200,000,000) during said Contract Year, plus (ii) 5% of OpCo
Gross Revenues above One Billion, Two Hundred Million Dollars
($1,200,000,000) during said Contract Year, plus (iii) New Management
Arrangement Fees.
5.2. Definition of "Contract Year". As used in this Article 5, the term
"Contract Year" shall refer to any period which begins on the date of this
Agreement or any succeeding October 1 and ends on the earlier of the following
September 30 or the effective date of expiration or termination of this
Agreement.
<PAGE>
5.3. Monthly Installments. During each Contract Year, OpCo shall make
monthly installments against the Annual Continuing Fee for said Contract Year.
During the first and second Contract Years, each such monthly installment shall
be equal to 1/12th of the Minimum Annual Continuing Fee for said Contract Year.
During each subsequent Contract Year, each such monthly installment shall be
equal to 1/12th of the greater of (a) the Minimum Annual Continuing Fee for said
Contract Year or (b) the Annual Continuing Fee for the preceding Contract Year.
The first monthly installment shall be paid on the date of this Agreement; and
subsequent installments shall be paid on or before the first day of each
subsequent calendar month during the Initial Term and each Extended Term of this
Agreement.
5.4. Annual Continuing Fee for Short Contract Year. If the term of this
Agreement includes any Contract Year of less than 365 days (i.e., because the
date of this Agreement or the effective date of expiration or termination of
this Agreement is in the middle of a Contract Year), the Annual Continuing Fee
for such Contract Year shall be the greater of:
(a) the product of the Minimum Annual Continuing Fee for said Contract
Year times a fraction the numerator of which is the number of days that
this Agreement was in effect during said Contract Year (the "Effective
Days") and the denominator of which is 365, or
(b) the product of the amount calculated pursuant to subsection 5.1(b)
above (provided, however, that for purposes of said calculation the "OpCo
Gross Revenues" for said Contract Year shall be "OpCo Gross Revenues" as
defined in Section 5.8 below for said Contract Year times a fraction the
numerator of which is 365 and the denominator of which is the Effective
Days), times a fraction the numerator of which is the Effective Days and
the denominator of which is 365.
5.5. Credit for Payments by OpCo Franchisees. Amounts paid by OpCo
Franchisees to Franchisor, if any, pursuant to Article 4 of the respective
Franchise Agreements shall reduce dollar for dollar OpCo's obligation pursuant
to Sections 5.1, 5.3 and 5.4 above.
5.6. Payment Following Contract Year End. If the aggregate dollar amount of
payments delivered by OpCo to Franchisor in payment of the Annual Continuing Fee
in respect of any Contract Year pursuant to Section 5.3 above is different than
the Annual Continuing Fee for said Contract Year, a payment in the amount of
such overpayment or underpayment shall be made by the appropriate party within
seventy-five (75) days after the end of said Contract Year.
5.7. Taxes. OpCo shall pay to Franchisor the amount of all sales taxes, use
taxes, and similar taxes imposed upon or required to be collected on account of
the Annual Continuing Fee and of goods or services furnished to OpCo and OpCo
Franchisees by Franchisor, whether such goods or services are furnished by sale,
lease or otherwise.
<PAGE>
5.8. OpCo Gross Revenues. "OpCo Gross Revenues" shall mean the sum of:
(a) the Gross Revenues (as defined in the Franchise Agreement) of all
OpCo Franchisees.
Plus,
(b) subject to Article 10 unless otherwise agreed by Franchisor and
OpCo pursuant to Article 10 for any Joint Venture or Managed Business (as
defined below), the gross revenues ("Business Gross Revenues") of all the
businesses which are the subject of Joint Ventures (the "Joint Venture
Businesses") and the businesses which are the subject of management
agreements and other agreements and arrangements of OpCo pursuant to which
OpCo provides management, consulting or other services for so long as any
such agreements or arrangements are in effect (the "Managed Businesses").
"Business Gross Revenues" shall mean the aggregate gross patient charges
from each of the Joint Venture Businesses and each of the Managed
Businesses at established billing rates less provision for contractual
adjustments and provision for denied claims (where collection is not
pursued directly from the patient), determined in accordance with generally
accepted accounting principles, and the gross amount of all other revenues
from whatever source derived (whether in form of cash, credit, agreements
to pay, or other consideration, and whether or not payment is received at
the time of the sale or provisions of services) which arise from or are
derived by each of the Joint Venture Businesses and each of the Managed
Businesses, or any other person affiliated with such business, directly or
indirectly from products or services sold or provided directly or
indirectly by each of the Joint Venture Businesses and each of the Managed
Businesses or from the sale of products or services associated with the use
of the Licensed Marks. Business Gross Revenues shall not include amounts
not actually collected (bad debts) to the extent that such have been
included in Business Gross Revenues reported to Franchisor for prior
periods.
Plus,
(c) except for amounts paid to OpCo by Franchisor pursuant to
Paragraph 5 of Exhibit 5, the gross amounts of all OpCo's revenues from
whatever source derived (whether in the form of cash, credit, agreements to
pay, or other consideration, and whether or not payment is received at the
time of the sale or provision of services), which arise from or are derived
by OpCo, or any person affiliated with OpCo, directly or indirectly from
products or services sold or provided directly or indirectly by OpCo or
from the sale of services or products associated with the use of the
Licensed Marks, excluding any amounts received by OpCo from any OpCo
Franchisee the Gross Revenues of which are included in OpCo Gross Revenues
pursuant to (a) above, and excluding any amounts received by OpCo from
Joint Venture Businesses and Managed Businesses, the Business Gross
Revenues of which are included in OpCo Gross Revenues pursuant to (b)
above.
<PAGE>
5.9. Additional Remedies for Past Due Annual Continuing Fees. In addition
to all other rights and remedies provided for herein and at law or in equity,
subject to the Subordination Agreement in the event that there are Annual
Continuing Fees past due from OpCo to Franchisor, Franchisor shall have the
rights, exercisable upon written notice to OpCo, set forth in the table below
opposite the amount past due:
RIGHTS OF FRANCHISOR/
AMOUNT IN ARREARS PROHIBITED ACTIONS BY OPCO
==================== ==========================================================
6,000,000 or more 1. Right to prohibit any incentive compensation to
OpCo management.
2. Right to prohibit any vesting of OpCo
management equity.
$18,000,000 or more 1. Right to prohibit any salary increases for key
personnel of OpCo.
2. Right to prohibit any additional hiring by OpCo.
3. Right to prohibit any new hospital
acquisitions/joint ventures directly or indirectly.
Above $24,000,000 1. Right to require five percent (5%) cutback on
budgeted expenses under the then current
approved OpCo annual budget.
2. Right to require monthly approval of
expenditures of the OpCo Business by
Franchisor, including capital and operating
expenditures.
3. Right to require transfer of control and
management of OpCo and of Franchised
Businesses of OpCo Franchisees to Franchisor.
==================== ==========================================================
Rights are cumulative. OpCo agrees that, upon the exercise of any such right by
Franchisor, OpCo will cease taking any prohibited action and will take the
action required by Franchisor and will otherwise cooperate with Franchisor in
carrying out the purpose and intent of this Section.
5.10. Subordination. Franchisor's right to receive the payments required to
be made by OpCo pursuant to this Article 5 is subject to the Subordination
Agreement.
5.11. Interest. OpCo shall pay to Franchisor interest on any amounts which
are past due at the lower of the maximum rate permitted by law or the Prime
Rate, plus six percent (6%) per annum; provided however that interest shall not
accrue on past due amounts (i) to the extent Franchisor does not receive such
payments as a result of the operation of the Subordination Agreement and (ii) to
the extent OpCo fails to achieve EBITDA sufficient to pay such amounts, subject
to OpCo's having during such period operated in accordance with OpCo's
then-current annual budget approved by OpCo's Board of Directors.
<PAGE>
5.12. Negotiation of Fees. Each party hereby acknowledges that: (a) the
Annual Continuing Fee payable pursuant to this Article 5 was established during
the course of extensive, good faith, arms-length negotiations between the
parties, in which each party was represented by counsel and advised by
accountants, which professionals are familiar with the healthcare industry and
franchising, and (b) it is fully satisfied that the Annual Continuing Fee
payable pursuant to this Article 5 represents the present, and (as applicable)
reasonably anticipated during the Initial Term, Fair Market Value of the
Franchise.
6. THE CHARTER SYSTEM
Franchisor hereby grants to OpCo the right and license to utilize the
Charter System in connection with the management and administration of the
businesses franchised by Franchisor pursuant to Article 2 hereof, the management
and administration of the businesses of the Existing Joint Ventures, the
existing Managed Businesses and all New Arrangements pursuant to Article 10. In
connection with the use of the Charter System in connection with the management
and administration of such businesses, OpCo shall conform and comply with all
covenants, rules, regulations, terms, conditions and procedures which are and
may hereafter be reasonably required by Franchisor as applicable to the use by
OpCo Franchisees of the Charter System under and pursuant to the OpCo Franchise
Agreements, as applicable to OpCo's management and administration of such
businesses. Upon expiration or termination of this Agreement OpCo shall conform
and comply with all covenants, rules, regulations, terms, conditions and
procedures which are or may hereafter be applicable to the discontinuance by
OpCo Franchisees of the use of the Charter System under and pursuant to the OpCo
Franchise Agreement (including under Article 13 of the OpCo Franchise
Agreements), as applicable to OpCo's business under and pursuant to the Charter
System and the discontinuance thereof.
7. MANAGED CARE AGREEMENTS/PREFERRED PROVIDER STATUS
The parties agree that during the continuance of this Agreement, all
existing and future Managed Care Agreements, as defined below, shall be held in
the name of Franchisor or a subsidiary of Franchisor. OpCo agrees during the
continuance of this Agreement that neither it nor any subsidiary or affiliate
will enter into any Managed Care Agreements. For the purposes of this Master
Franchise Agreement, "Managed Care Agreements" means any and all contracts,
agreements, letters of agreement, memoranda of understanding, or any like
written or oral agreement (hereinafter referred to as "Managed Care Agreement"),
with any insurer, managed care company or any other third-party payor
(hereinafter collectively referred to as "Payor") which is obligated to pay for
behavioral health care benefits for any person pursuant to a Payor benefit
contract with such person, and under which such Managed Care Agreements such
behavioral health services are provided for a negotiated reimbursement rate. The
parties agree that for the purposes of this Master Franchise Agreement, Managed
Care Agreements shall not include any agreement for the provision of behavioral
health care services solely with a county or a local employee assistance program
with services provided by a single OpCo subsidiary.
<PAGE>
The parties acknowledge that Franchisor or a subsidiary of Franchisor shall
subcontract with OpCo to provide staffing to service and negotiate such Managed
Care Agreements; provided, however, that Franchisor shall retain the right to
determine which, if any, Managed Care Agreement shall be entered into in
Franchisor's name. Franchisor shall use commercially reasonable best efforts,
subject to applicable law, to cause OpCo Franchisees to have "preferred
provider" status in connection with Franchisor's managed behavioral healthcare
business on a basis substantially consistent with existing covenants, terms and
conditions, unless the customer directs otherwise.
8. OPERATION OF CALL CENTER
Franchisor agrees to continue to operate or will provide a toll free "800"
telephone number and related call center (the "800 Call Center"), to provide
substantially the same services to OpCo Franchisees as those provided by the 800
Call Center operating immediately prior to the execution of this Agreement,
subject to such modifications as Franchisor deems advisable from time to time to
comply with applicable law or subject to such restructuring as OpCo and
Franchisor shall agree. Each party agrees to use commercially reasonable best
efforts to negotiate any such restructuring to comply with applicable law. OpCo
shall have the right to and agrees to cause OpCo Franchisees to advertise the
"800" telephone number and otherwise cooperate with Franchisor to use the 800
Call Center as a means of assisting customers to locate the places of business
of franchisees of Franchisor.
9. ENHANCEMENT OF THE CHARTER SYSTEM
Franchisor and OpCo agree to cooperate in the creation, enhancement and
updating of written manuals and materials setting forth the treatment,
financial, legal and other protocols, programs and procedures, quality
standards, quality assessment methods, performance improvement and monitoring
programs and other matters comprising the Charter System. Such manuals and other
materials (together "Charter System Materials") shall be prepared in a manner
suitable for use by Franchisor in franchising others to use the Charter System.
No changes shall be made by OpCo or OpCo Franchisees to the Charter System or
the Charter System Materials without the express written consent of Franchisor,
which consent shall not be unreasonably withheld. All protocols, programs,
procedures, standards and methods, and all Charter System Materials shall be
owned by Franchisor and used by OpCo and OpCo Franchisees only under and
pursuant to this Agreement and the OpCo Franchise Agreements.
10. MANAGEMENT CONTRACTS/JOINT VENTURES/CONSULTING
AGREEMENTS
OpCo agrees during the continuance of this Agreement that it will not enter
into any new management agreements, joint ventures or consulting or other
agreements relating to a Hospital/RTC Based Behavioral Healthcare Business ("New
Arrangements") except (i) in the event a Franchise Agreement is entered into by
Franchisor with respect to such business, or (ii) with the written consent of
Franchisor in each instance. In each instance of a joint venture in which
Franchisor shall have provided such written consent, Franchisor and OpCo, prior
thereto, shall have agreed with
<PAGE>
respect to the joint venture (i) to the payment to Franchisor, in addition to
all other amounts payable pursuant to this Agreement, of a percentage of OpCo's
gross receipts from such New Arrangement agreeable to OpCo and Franchisor or
(ii) to the inclusion in Gross Revenues of the Business Gross Revenues of any
such Joint Venture. In each instance of a management agreement, consulting
agreement or other agreement or arrangement of Franchise Owner pursuant to which
Franchise Owner provides management, consulting or other services, Franchise
Owner shall pay to Franchisor (i) with respect to any such services provided to
businesses within the Territory, 15% of (a) the gross amounts received by
Franchise Owner, less (b) Franchise Owner's direct costs (not including
overhead) of providing such services, or (ii) with respect to any such services
provided to businesses outside the Territory, 30% of (a) the gross amounts
received by Franchise Owner, less (b) Franchise Owner's direct costs (not
including overhead) of providing such services (the amounts received by
Franchisor pursuant to (i) or (ii) above are herein referred to as "New
Arrangement Management Fees").
11. ADVERTISING AND MARKETING
11.1. Annual Expenditures. OpCo agrees that, in each year during the
continuance of this Agreement, OpCo and OpCo Franchisees will expend such amount
on advertising and marketing the Charter System and the OpCo Franchisees'
businesses as is at least equal to the amount budgeted by OpCo in good faith
pursuant to its then-current annual budget for such expenditures. If Franchisor
determines that the amount so budgeted by OpCo in its approved annual budget for
any year is significantly higher or lower than advisable, OpCo will establish a
budget for such expenditures by Supermajority Vote of the Board. OpCo shall from
time to time at the request of Franchisor upon reasonable prior notice provide
to Franchisor reports of OpCo of such expenditures.
11.2. Approval of Advertising. All advertising by OpCo and OpCo Franchisees
shall be in such media, and of such type and format as Franchisor may reasonably
approve; shall be conducted in a dignified manner and shall conform to such
standards and requirements as Franchisor may reasonably specify. Advertising
approved by Franchisor as meeting the requirements of the preceding sentence
shall continue to be deemed approved unless and until Franchisor shall notify
OpCo otherwise. OpCo and OpCo Franchisees shall not use any advertising or
promotional plans or materials not prepared by Franchisor unless and until OpCo
and OpCo Franchisees have received written approval from Franchisor following
the submission of samples thereof to Franchisor. If written approval is not
received by OpCo and OpCo Franchisees from Franchisor or its designee within
fifteen (15) days of the date of receipt by Franchisor of such samples,
Franchisor shall be deemed to have disapproved such samples.
12. STATEMENTS, RECORDS AND FEE PAYMENTS
12.1. Maintenance of Records; Audit Rights. OpCo shall, in a manner
reasonably satisfactory to Franchisor, maintain original, full and complete
records, accounts, books, data, licenses, contracts and invoices which shall
accurately reflect all particulars relating to OpCo's Business and such
statistical and other information or records as Franchisor may require and shall
keep all such information for not less than three (3) years, even if this
Agreement is no longer in
<PAGE>
effect. OpCo shall compile and provide to Franchisor any statistical or
financial information regarding the operation of OpCo's Business, the services
and products sold by it, or data of a similar nature as Franchisor may
reasonably request. Franchisor and its designated agents shall have the right to
examine and audit such records, accounts, books and data at all reasonable times
to insure that OpCo is complying with the terms of this Agreement. In connection
with any such examination or audit, Franchisor shall not be entitled to any
adjustment to the extent that OpCo Gross Revenues have been computed in
accordance with Section 5.8 and in accordance with generally accepted accounting
principles consistently applied. If such inspection discloses, and it is
ultimately determined, that the OpCo Gross Revenues during any scheduled
reporting period actually exceeded the amount reported by OpCo as OpCo Gross
Revenues by an amount equal to two percent (2%) or more of the OpCo Gross
Revenues originally reported to Franchisor, OpCo shall bear the cost of such
inspection and audit (not including any premium or contingent fee arrangement)
and shall pay any such deficiency with interest from the date due, until paid,
at the lesser of the highest rate permitted by applicable law or the Prime Rate,
plus six percent (6%) per annum, immediately upon the request of Franchisor.
12.2. Tax Reports. Upon Franchisor's request, OpCo shall furnish Franchisor
with a copy of each of OpCo's and OpCo Franchisee's reports and returns of
sales, use and gross receipt taxes and complete copies of any state or federal
income tax returns covering the operation of the OpCo Business.
12.3. Reports. Upon Franchisor's request, OpCo shall furnish Franchisor
with a copy of each of OpCo's and all OpCo Franchisees' reports required under
applicable federal and state laws, rules and regulations, including but not
limited to such reports required under "Medicare" and "Medicaid" laws, rules and
regulations.
12.4. Unaudited Periodic Statements. OpCo shall prepare and deliver to
Franchisor on a quarterly basis, no later than twenty-five (25) days following
the close of each fiscal quarter of OpCo, an unaudited profit and loss statement
in a form reasonably satisfactory to Franchisor covering OpCo's Business for the
prior fiscal quarter and fiscal year to date and showing OpCo Gross Revenues for
the prior fiscal quarter and fiscal year to date, all of which shall be
certified by OpCo to present fairly in all material respects such matters. OpCo
shall also submit to Franchisor no later than twenty-five (25) days following
the close of each fiscal quarter of OpCo during the term of this Agreement, an
unaudited balance sheet reflecting the financial position of the OpCo's Business
as of the preceding fiscal quarter end.
12.5. Audited Annual Statement. In addition to the foregoing unaudited
statements, within 75 days after the close of each fiscal year of OpCo, OpCo
shall furnish to Franchisor, at OpCo's expense, an audited statement of income
and retained earnings of OpCo's Business for such fiscal year and an audited
balance sheet of OpCo's Business as of the end of such fiscal year, all prepared
in accordance with generally accepted accounting principles and certified to by
a certified public accountant. Such financial statements shall be accompanied by
a certificate of such certified public accountant certifying OpCo Gross Revenues
for the prior year.
<PAGE>
13. ADDITIONAL COVENANTS OF OPCO
13.1. Covenant During Term. During the Term of this Agreement, OpCo
covenants not to engage directly or indirectly as an owner, operator, in any
managerial capacity, or otherwise in any business (i) other than as a franchisee
of the Charter System pursuant to a Franchise Agreement; (ii) other than
pursuant to an agreement with Franchisor with regard to one or more New
Products; (iii) other than pursuant to New Arrangements; (iv) other than OpCo's
business of the management and administration of the businesses franchised by
Franchisor pursuant to Article 2 hereof or pursuant to the Joint Ventures, or
businesses conducted by OpCo Franchisees with regard to one or more New
Products.
13.2. Covenant Not to Compete Post-Term. Following the termination or
expiration of this Agreement and for a period expiring on the earlier of three
(3) years following the expiration or termination of this Agreement or the
thirty-second anniversary of the date of this Agreement, OpCo covenants not
directly or indirectly to engage as an owner, operator, or in any managerial
capacity (i) in any Hospital/RTC Based Behavioral Healthcare Business, or (ii)
in any business with respect to a New Product, other than pursuant to a written
agreement with Franchisor; provided, however, that OpCo shall not be prohibited
hereby from owning equity securities of any such businesses whose shares are
traded on a stock exchange or on the over-the-counter market so long as the
ownership interest represents five percent (5%) or less of the total number of
outstanding shares of such business. The geographic area of the restrictions
provided for in this Section 13.2 shall be limited to (i) the Territories of the
OpCo Franchisees at the date of the termination or expiration of this Agreement
and during the two years prior thereto, which Territories shall, from time to
time, be included in Exhibit 3 hereto; (ii) the geographic areas within a ten
(10) mile radius of any Joint Venture Business and Managed Business in existence
at the date of the expiration or termination of this Agreement, which shall from
time to time be included as a part of Exhibit 3 hereto, and (iii) and the
geographic areas within a ten (10) mile radius of any place of business of OpCo
at the date of the expiration or termination of this Agreement.
13.3. Acknowledgment of Reasonableness. The parties hereto acknowledge that
the provisions of Sections 13.1 and 13.2 have been negotiated fully and fairly
by the parties, each being represented and advised by counsel. OpCo acknowledges
that it is willingly and freely agreeing to the provisions of Section 13.1 and
13.2 as reasonable and necessary under the circumstances. One of the
acknowledged reasonable business purposes of Franchisor is to protect
Franchisor's goodwill and proprietary rights. OpCo further acknowledges that
Franchisor would not enter into this Agreement without the covenants of Sections
13.1 and 13.2 and that it is fair and reasonable to OpCo that OpCo be subject to
such covenants.
13.4. Confidential Information. During the Term of this Agreement and
following the expiration or termination of the Agreement, OpCo covenants not to
communicate directly or indirectly, nor to divulge to or use for its benefit or
the benefit of any other person or legal entity, any trade secrets which are
proprietary to Franchisor or any information, knowledge or know-how deemed
confidential by Franchisor pursuant to Section 10.4 of the Franchise Agreement,
except as permitted by Franchisor. Notwithstanding the foregoing, this
obligation shall not apply to
<PAGE>
information: (a) which at the time of disclosure is readily available to the
trade or public; (b) which after disclosure becomes readily available to the
trade or public, other than through breach of this Agreement; (c) which is
subsequently lawfully and in good faith obtained by such party from an
independent third party without breach of this Agreement; (d) which was in
possession of such party prior to the date of disclosure; or (e) which is
disclosed to others in accordance with the terms of a prior written
authorization between the parties to this Agreement. In the event of any
termination, expiration or non-renewal of this Agreement, OpCo agrees that it
will never use Franchisor's confidential information, trade secrets, methods of
operation or any proprietary components of the Charter System in the design,
development or operation of any behavioral healthcare business, including,
without limitation, any Hospital/RTC Based Behavioral Healthcare Business. The
protection granted hereunder shall be in addition to and not in lieu of all
other protections for such trade secrets and confidential information as may
otherwise be afforded in law or in equity.
13.5. Confidential Agreements with Certain Employees. Consistent with
Franchisor's existing policies with respect to employee non-disclosure
agreements, OpCo agrees to maintain and cause new employees of OpCo to execute
employee non-disclosure agreements, in the form employed by Franchisor as of the
date hereof (or such other form as reasonably requested by Franchisor), which
shall prohibit disclosure by such parties to any other person or legal entity of
any trade secrets or any other information, knowledge or know-how deemed
confidential by Franchisor concerning the operation of the Charter System.
Franchisor shall be a third party beneficiary of such agreements and OpCo shall
not amend, modify or terminate any such agreement without Franchisor's prior
written consent.
13.6. Severability. The parties agree that each of the foregoing covenants
shall be construed as independent of any other covenant or provision of this
Agreement. Should any part of one or more of these restrictions be found to be
unenforceable by virtue of its scope in terms of area, business activity
prohibited or length of time, and should such part be capable of being made
enforceable by reduction of any or all thereof, OpCo and Franchisor agree that
the same shall be enforced to the fullest extent permissible under the law. In
addition, Franchisor may, unilaterally, at any time, in its sole discretion,
revise any of the covenants in this Section 13 so as to reduce the obligations
of OpCo hereunder. The running of any period of time specified in this Section
13 shall be tolled and suspended for any period of time in which OpCo is found
by a court of competent jurisdiction to have been in violation of any
restrictive covenant. OpCo further expressly agrees that the existence of any
claim it may have against Franchisor whether or not arising from this Agreement,
shall not constitute a defense to the enforcement by Franchisor of the covenants
in this Article 13.
14. ADDITIONAL FRANCHISOR COVENANT NOT TO COMPETE
14.1. Covenant Not to Compete. Franchisor agrees that OpCo shall be a
third-party beneficiary of the covenants set forth in Section 1 of each of the
OpCo Franchise Agreements as and to the extent such restrict Franchisor from
engaging in certain businesses and as such shall have full rights to enforce
such covenants.
<PAGE>
14.2. Wholly-owner Subsidiary. Franchisor agrees that throughout the term
of this Agreement, Charter Franchise Services, LLC shall remain a wholly-owned
subsidiary of Magellan.
14.3. Waiver of Surety Defenses by Franchisor and Nature of Obligations.
The obligations of Franchisor under this Agreement are joint and several and
include any and all debts, obligations, whether of payment or performance, and
liabilities arising out of or relating to this Agreement, whether such debts,
obligations and liabilities are heretofore, now, or hereafter made, incurred, or
created, whether such debts, obligations and liabilities are voluntary or
involuntary, liquidated or unliquidated, secured or unsecured, and including but
not limited to contingent debts, obligations and liabilities, and whether or not
any or all such debts, obligations and liabilities are or become unenforceable
against either Franchisor as a result of the operation of bankruptcy or
insolvency laws.
With respect to any debt, liability or obligation with respect to which one
Franchisor is deemed to be a surety or guarantor of the other Franchisor, such
Franchisor deemed to be a surety or guarantor hereby unconditionally and
irrevocably waives (a) (i) any right to require that any action be brought
against the other Franchisor without regard to whether the other Franchisor, or
both, were directly responsible for any breach of this Agreement; (ii)
presentment, notice of dishonor, protest, diligence, demand for payment,
performance or enforcement, and all notices of any kind, including without
limitation: notice of acceptance hereof, notice of the creation of any
obligations of Franchisor hereunder (except as otherwise expressly required in
this Agreement) notice of nonpayment, nonperformance or other default, and
notice of any action taken to collect upon any of the obligations of Franchisor
hereunder or enforce any of the provisions hereof against Franchisor; and (iii)
any claim for contribution from any other person, including the other
Franchisor; and (b) except to the extent that OpCo would not have had the
benefit of such protections had the Franchisor not been deemed to be a surety or
guarantor (i) any failure of OpCo to take any steps to preserve its rights
hereunder; (ii) any setoffs against OpCo which would otherwise impair OpCo's
rights against either Franchisor hereunder; and (iii) any requirement to
mitigate damages. Each Franchisor also expressly waives the provisions of
Sections 49-25 and 49-26 of the Code of Virginia.
15. NEGATIVE COVENANTS OF OPCO
In the event that pursuant to Section 15 of the Operating Agreement
Franchisor sells its entire Interest in OpCo, from and after the close of the
sale of Franchisor's entire Interest (a "Buy/Sell Event"), OpCo shall not do any
of the following, without the prior written consent of Franchisor:
15.1. Restriction of Indebtedness. Create, incur or assume any indebtedness
for borrowed money or the deferred purchase price of any asset (including
obligations under Capitalized Leases), except indebtedness subordinated to all
debts, obligations and liabilities of OpCo to Franchisor pursuant to a
subordination agreement on terms and conditions acceptable to Franchisor;
15.2. Restrictions on Liens. Create or permit to be created any mortgage,
pledge, encumbrance or other lien or security interest in any property or
assets, except for any such that individually or in the aggregate are immaterial
to OpCo.
<PAGE>
15.3. Dividends and Redemptions. Make any distribution on account of any
Interest, or redeem, purchase or otherwise acquire directly or indirectly, any
Interest, except that OpCo shall have the right to make cash distributions so
long as no default has occurred and is continuing in the payment of any amount
due from OpCo to Franchisor pursuant to this Agreement and so long as, after
giving effect to the payment of the distribution sufficient working capital is
available for the payment of Annual Continuing Fees as provided in Article 5
hereof and budgeted operating expenses for the three full calendar months
following the date of payment of such distribution.
15.4. Acquisitions and Investments. Acquire any material assets or any
other business or make any material loan, advance or extension of credit to, or
investment in, any other person, corporation or other entity, including
investments acquired in exchange for stock or other securities or obligations of
any nature (other than to subsidiaries or in connection with cash management
functions in the ordinary course of business), or create or participate in the
creation of any subsidiary or joint venture.
15.5. Liquidation; Merger; Disposition of Assets. Liquidate or dissolve; or
merger with or into or consolidate with or into any corporation or other entity;
or sell, lease, transfer or otherwise dispose of all or any substantial part of
its property, assets or business (other than sales made in the ordinary course
of business).
15.6. Salaries and Other Compensation. Modify salaries, bonuses,
profit-sharing payments or any other compensation from that set forth in the
Annual Budget in effect at the time of the Buy/Sell Event to any officers,
directors, and other employees receiving in excess of $150,000 in annual
compensation and benefits (including without limitation, severance payments).
15.7. Affiliates. Amend the Facilities Lease to increase the amount or
accelerate the payment of the Rent (as defined in the Facilities Lease) or any
installment thereof or engage in any material transaction with (i) any
Affiliate, (ii) Crescent or (iii) an Affiliate of Crescent, other than pursuant
to contracts or ongoing arrangements existing at the time of the Buy/Sell Event,
including amending in any material respect any such contracts or other ongoing
arrangements existing at the time of such Buy/Sell Event.
15.8. Business Activities. Fail to carry on its business activities in
substantially the manner such activities are conducted on the date of the close
of the sale of Franchisor's Interest or make any material change in the nature
of its business or enter into any material contract that is not in the ordinary
course of OpCo's business.
15.9. No Bankruptcy. (i) Dissolve or liquidate, in whole or in part, or
institute proceedings to be adjudicated bankrupt or insolvent, (ii) consent to
the institution of bankruptcy or insolvency proceedings against it, (iii) file a
petition seeking or consent to reorganization or relief under any applicable
federal or state law relating to bankruptcy, (iv) consent to the appointment of
a receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of OpCo or a substantial part of its property, (v) make a general
assignment for the benefit of creditors, (vi) admit in writing its
<PAGE>
inability to pay its debts generally as they become due, or (vii) take any
corporate or other action to authorize any of the actions set forth in clauses
(i) through (vi) of this paragraph.
16. TRANSFER AND ASSIGNMENT
16.1. Assignment by Franchisor. This Agreement and all rights and duties
hereunder may not be assigned or transferred by Franchisor except (i) with the
prior written consent of OpCo and Crescent, in its capacity as lessor under the
Facilities Lease, which consent shall not be unreasonably withheld, conditioned
or delayed, or (ii) to an entity which simultaneously therewith acquires all or
substantially all of Franchisor's business and assets. Franchisor may grant a
security interest in Franchisor's rights and interest in (but not its
obligations under) this Agreement to any of Franchisor's lenders by means of an
assignment for collateral purposes.
16.2. Assignment by OpCo. This Agreement and all rights and duties
hereunder may not be assigned or transferred by OpCo except (i) with the written
consent of Franchisor, which consent shall not be unreasonably withheld,
conditioned or delayed, (ii) to an entity which simultaneously therewith
acquires all or substantially all of OpCo's business and assets, provided in
each case that such transferee/assignee also acquires or assumes OpCo's rights
and obligations under the Facilities Lease, or (iii) if the Facilities Lease is
terminated prior to the end of the Initial Term or any Extended Term as a result
of an Event of Default under the Facilities Lease, and if Crescent exercises its
election under the Facilities Lease to assume all (and not less than all) of the
obligations of OpCo under this Agreement and all other agreements specified in
the Facilities Lease from the date of such assumption, to Crescent or its
designee.
16.3. Consent Not a Waiver. Franchisor's consent to an assignment by OpCo
granted herein shall not constitute a waiver of any claims it may have against
the transferring party, nor shall it be deemed a waiver of Franchisor's right to
demand exact compliance with any of the terms of this Agreement by the
transferee.
16.4. Consequences of Permitted Assignment to Crescent. Following
assignment of this Agreement to Crescent pursuant to subsection 16.2(iii) above,
anything to the contrary in Section 17.1 and Section 17.3 below notwithstanding,
Franchisor may (i) terminate this Agreement and all of said assignee's rights
hereunder for "good cause", which shall mean the occurrence of any default
described in (a) through (f) below, effective immediately upon the date
Franchisor gives written notice of termination, upon such other date as may be
set forth in such notice of termination, or in those instances enumerated below
in paragraph (a), automatically upon the occurrence of an event of default. The
occurrence of any one or more of the following events shall constitute an event
of default and grounds for termination of this Agreement by Franchisor:
(a) Automatically, without notice or action required by Franchisor, if
said assignee becomes insolvent or makes a general assignment for the
benefit of creditors, or, unless otherwise prohibited by law, if a petition
in bankruptcy is filed by said assignee, or such a petition is filed
against and consented to by said assignee or not dismissed within thirty
(30) days, or if a bill in equity or other proceeding for the appointment
of a receiver
<PAGE>
of said assignee or other custodian for said assignee's business or assets
is filed and consented to by said assignee, or if a receiver or other
custodian (permanent or temporary) of said assignee's assets or property,
or any part thereof, is appointed;
(b) If there is any violation of any transfer and assignment provision
contained in this Article 16 of this Agreement;
(c) If said assignee fails, for a period of fifteen (15) days after
notification of non-compliance by appropriate authority to comply with any
law, rule or regulation applicable to the operation of its business;
provided, however, that if such non-compliance is susceptible to cure but
such cure cannot be accomplished with due diligence within such period of
time, and if, in addition, said assignee commences to cure such
non-compliance within fifteen (15) days after notification of
non-compliance and thereafter prosecutes the curing of such non-compliance
with due diligence, such period of time shall be extended to such period of
time (not to exceed an additional ninety (90) days in the aggregate) as may
be necessary to cure such non-compliance with due diligence and further
provided, that Franchisor may not terminate this Agreement pursuant to this
Section 16.4(c) if such non-compliance is the non-compliance of one or more
Franchised Businesses (and not of OpCo) and Franchisor may as a result
terminate the corresponding Franchise Agreement or Franchise Agreements;
(d) If said assignee, other than in an immaterial respect, violates
any covenant of confidentiality or non-disclosure contained in Section 13.4
or Section 13.5 of this Agreement;
(e) If said assignee fails to perform or breaches any covenant,
obligation, term, condition, warranty or certification herein (other than
those related to the payment of amounts due Franchisor, which are the
subject of [F] below) and fails to cure such non-compliance or deficiency
within thirty (30) days after Franchisor's written notice thereof;
provided, however, that if such non-compliance or deficiency is susceptible
to cure but such cure cannot be accomplished with due diligence within such
period of time, and if, in addition, said assignee commences to cure such
non-compliance or deficiency within thirty (30) days after notification of
non-compliance or deficiency and thereafter prosecutes the curing of such
non-compliance or deficiency with due diligence, such period of time shall
be extended to such period of time (not to exceed an additional one hundred
eighty (180) days in the aggregate) as may be necessary to cure such
non-compliance or deficiency with due diligence;
(f) If said assignee fails to pay the Annual Continuing Fee owed to
Franchisor under this Agreement when due or within ten (10) days
thereafter, or fails to pay any other amounts owed to Franchisor under this
Agreement within ten (10) days after notice from Franchisor of such
obligation,
or (ii) participate in the filing of an involuntary petition for the entry of an
"order for relief" with respect to said assignee pursuant to Section 303 of the
U.S. Bankruptcy Code, anything to the contrary in Section 17.3 below
notwithstanding.
<PAGE>
16.5. Parties Bound and Benefitted. This Agreement shall be binding on the
parties and their respective successors and assigns. This Agreement shall inure
to the benefit of the parties and their respective permitted successors and
assigns.
17. RIGHTS OF AGGRIEVED PARTY UPON DEFAULT
17.1. Franchisor's Right to Terminate. Except as otherwise provided in
Section 16.4 above, Franchisor may not terminate this Agreement prior to the
expiration of its term (whether because of OpCo's breach, material or otherwise)
except with the prior written consent of (i) OpCo, which consent shall be
evidenced by a Supermajority Vote of the Board of OpCo, and (ii) the prior
written consent of Crescent, in its capacity as lessor under the Facilities
Lease. The provisions of this Section 17.1 shall not in any way be deemed to
limit or restrict Franchisor's right to terminate any franchise agreement or
other agreement in accordance with its terms.
17.2. OpCo's Right to Terminate. OpCo may not terminate this Agreement
prior to the expiration of its term (whether because of Franchisor's breach,
material or otherwise) except with the prior written consent of Franchisor and
Crescent, in its capacity as lessor under the Facilities Lease. Any decision by
OpCo to terminate this Agreement shall be evidenced by a Supermajority Vote of
the Board.
17.3. Franchisor's Right to Participate in Involuntary Bankruptcy Petition.
Except as otherwise provided in Section 16.4 above, Franchisor shall not
participate in the filing of an involuntary petition for the entry of an "order
for relief" with respect to OpCo pursuant to Section 303 of the U.S. Bankruptcy
Code.
17.4. Other Remedies. Except as otherwise provided in this Article 17 or in
the Subordination Agreement, nothing in this Agreement shall abridge the
remedies available to Franchisor as a result of the breach by OpCo of the terms
of this Agreement, including, but not limited to, seeking any remedy at law or
in equity, including seeking and obtaining judgments and enforcing such
judgments.
18. INSURANCE
18.1. Maintenance of Insurance. Throughout the term of this Agreement, OpCo
shall maintain in effect at all times a policy or policies of insurance,
designating Franchisor as an additional insured at OpCo's sole cost and expense,
as set forth on Exhibit 6.
18.2. Notices of Claims under Insurance Policies. OpCo shall promptly
notify Franchisor of any and all claims against OpCo, any OpCo Franchisee and/or
Franchisor under said policies of insurance and shall deliver to Franchisor
certificates evidencing that the insurance required by Section 17.1 is in full
force and effect within thirty (30) days after signing this Agreement and each
year thereafter. Such insurance certificates shall contain a statement that the
insurance shall not be cancelled without thirty (30) days' prior written notice
to OpCo and to Franchisor.
<PAGE>
18.3. Notices of Other Claims/Events. OpCo shall promptly notify Franchisor
of any and all demands, claims, suits, actions, causes of action, proceedings
and assessments (together "Claims") brought, made or threatened in writing
against OpCo and/or any OpCo Franchisee, and of the occurrence of any events
which might result in such a Claim, in each case within five (5) business days
after OpCo becomes aware thereof, and will provide to Franchisor information
concerning such Claims or events as Franchisor may from time to time reasonably
request.
19. INDEMNIFICATION AND INDEPENDENT CONTRACTOR
19.1. Indemnification and Hold Harmless. OpCo agrees to protect, defend,
indemnify, and hold Franchisor, and its respective directors, officers, agents,
attorneys and shareholders, jointly and severally, harmless from and against all
claims, actions, proceedings, damages, costs, expenses and other losses and
liabilities, directly or indirectly incurred (including without limitation
reasonable attorneys' and accountants' fees) as a result of, arising out of, or
connected with the operation of OpCo's Business, except those directly resulting
from Franchisor's willful misconduct or fraud. Franchisor agrees to protect,
defend, indemnify and hold OpCo, and its respective directors, officers, agents,
attorneys and shareholders, jointly and severally, harmless from and against all
claims, actions, proceedings, damages, costs, expenses and other losses and
liabilities, directly or indirectly arising out of or connected with the
operation of the OpCo's Business arising directly from Franchisor's willful
misconduct or fraud.
19.2. Independent Contractor. In all dealings with third parties including,
without limitation, employees, suppliers and patients, OpCo shall disclose in an
appropriate manner reasonably acceptable to Franchisor that it is an independent
entity. Nothing in this Agreement is intended by the parties hereto to create a
fiduciary relationship between them nor to constitute OpCo an agent, legal
representative, subsidiary, joint venturer, partner, employee or servant of
Franchisor for any purpose whatsoever. It is understood and agreed that OpCo is
an independent contractor and is in no way authorized to make any contract,
warranty or representation or to create any obligation on behalf of Franchisor.
20. WRITTEN APPROVALS, WAIVERS AND AMENDMENT
20.1. Prior Approvals. Whenever this Agreement requires Franchisor's prior
approval, OpCo shall make a timely written request. Unless a different time
period is specified in this Agreement, Franchisor shall respond with its
approval or disapproval within fifteen (15) days of receipt of such request. If
Franchisor has not specifically approved a request within such fifteen (15) day
period, such failure to respond shall be deemed disapproval of any such request.
20.2. No Waiver. No failure of Franchisor to exercise any power reserved to
it by this Agreement and no custom or practice of the parties at variance with
the terms hereof shall constitute a waiver of Franchisor's right to demand exact
compliance with any of the terms herein. No waiver or approval by Franchisor of
any particular breach or default by OpCo, nor any delay, forbearance or omission
by Franchisor to act or give notice of default or to exercise any power or right
arising by reason of such default hereunder, nor acceptance by Franchisor of any
payments due hereunder
<PAGE>
shall be considered a waiver or approval by Franchisor of any preceding or
subsequent breach or default by OpCo of any term, covenant or condition of this
Agreement.
20.3. Written Amendments. Except as otherwise specifically provided in this
Agreement, no amendment, change or variance from this Agreement shall be binding
upon either Franchisor or OpCo except by mutual written agreement or in
accordance with Section 3.10 of the Subordination Agreement.
21. ENFORCEMENT
21.1. Inspections. In order to ensure compliance with this Agreement and to
enable Franchisor to carry out its obligation under this Agreement, OpCo agrees
that Franchisor and its designated agents shall be permitted, with or without
notice, full and complete access during business hours to inspect all premises
at which OpCo's Business is conducted and all records thereof, including, but
not limited to, records relating to OpCo's and OpCo's Franchisees' patients,
suppliers, employees and agents. OpCo shall cooperate fully with Franchisor and
its designated agents requesting such access.
21.2. No Right to Offset. OpCo will not, for any reason, withhold payment
of any monthly payment, fee or any other fees or payments due to the Franchisor
under this Agreement or pursuant to any other contract, agreement or obligation
to the Franchisor. OpCo shall not have the right to "offset" any liquidated or
unliquidated amounts, damages or other funds allegedly due to OpCo from the
Franchisor against any monthly payment, fee or any other fees or payments due to
the Franchisor under this Agreement or otherwise.
22. REPRESENTATION OF FRANCHISOR
Franchisor has delivered to OpCo a copy of its final proxy statement for
Magellan's 1987 Annual Meeting of Shareholders ("Proxy Statement") to
shareholders for its Annual Meeting of Shareholders at which, among other
matters, shareholders of Franchisor will consider and vote on the transactions
which are the subject of the Transaction Documents. Except as described in the
Proxy Statement, or in documents filed with the Securities Exchange Commission
pursuant to applicable law, Franchisor is not aware of any material risk that
Franchisor is, in the conduct of the Business (as defined in the Contribution
Agreement) prior to the closing of the transaction contemplated by the
Transaction Documents, or that OpCo will be, in the conduct of the Business
after the closing of the transaction contemplated by the Transaction Documents,
in violation of applicable federal law specifically designed to regulate the
healthcare industry, which violation will have a material adverse effect on
Franchisor or OpCo. Franchisor will, without the requirement that it waive any
privilege, provide Crescent and OpCo with access to its counsel Sanford
Teplitzky to discuss issues relating to Franchisor's business and the
performance by the parties of the Transaction Documents under applicable federal
law specifically designed to regulate the healthcare industry.
<PAGE>
23. ENTIRE AGREEMENT
This Agreement including the exhibits referred to herein and the
Transaction Documents contain the entire agreement of the parties. No other
agreements, written or oral, shall be deemed to exist, and all prior agreements
and understandings are superseded hereby. There are no conditions to this
agreement which are not expressed herein or in the Transaction Documents.
24. NOTICES
Any and all notices, demands, consents, approvals, offers, elections and
other communications required or permitted under this Agreement shall be deemed
adequately given if in writing and the same shall be delivered either in hand,
by telecopier with written acknowledgement of receipt, or by mail or Federal
Express or similar expedited commercial carrier, addressed to the recipient of
the notice, postpaid and registered or certified with return receipt requested
(if by mail), or with all freight charges prepaid (if by Federal Express or
similar carrier).
All notices required or permitted to be sent hereunder shall be deemed to
have been given for all purposes of this Agreement upon the date of acknowledged
receipt, in the case of a notice by telecopier, and, in all other cases, upon
the date of receipt or refusal, except that whenever under this agreement a
notice is either received on a day which is not a Business Day or is required to
be delivered on or before a specific day which is not a Business Day, the day of
receipt or required delivery shall automatically be extended to the next
Business Day.
All such notices shall be addressed:
If to OpCo, to:
Charter Behavioral Health Systems, LLC
3414 Peachtree Road, N.E.
Suite 900
Atlanta, Georgia 30326
Facsimile: (404) 814-5795
with copies to:
David M. Dean
Senior Vice President, Law
Crescent Real Estate Equities, Ltd.
777 Main Street
Suite 2100
Fort Worth, Texas 76102
Facsimile: (817) 878-0429
<PAGE>
and
Wendelin A. White
Shaw, Pittman, Potts & Trowbridge
2300 N Street, N.W.
Washington, DC 20037
Facsimile: (202) 663-8007
If to Franchisor, to:
Steve J. Davis
Executive Vice President,
Administrative Services and General Counsel
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Facsimile: (404) 814-5793
with copies to:
Robert W. Miller
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303-1763
Facsimile: (404) 572-5100
and
Benn S. DiPasquale
Foley & Lardner
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5367
Facsimile: (414) 297-4998
By notice given as herein provided, the parties hereto and their respective
successor and assigns shall have the right from time to time and at any time
during the term of this Agreement to change their respective addresses effective
upon receipt by the other parties of such notice and each shall have the right
to specify as its address any other address within the United States of America.
25. GOVERNING LAW AND DISPUTE RESOLUTION
25.1. Governing Law. This Agreement shall be interpreted, construed,
applied and enforced in accordance with the laws of the State of Delaware
applicable to contacts among residents of Delaware which are to be performed
entirely within Delaware, regardless of (i)
<PAGE>
where this Agreement is executed or delivered; or (ii) where any payment or
other performance required to be made; or (iii) where any breach of any
provision of this Agreement occurs, or any cause of action otherwise accrues; or
(iv) where any action or other proceeding is instituted or pending; or (v) the
nationality, citizenship, domicile, principal place of business or jurisdiction
of organization or domestication of any party; or (vi) whether the laws of the
forum jurisdiction otherwise would apply the laws of a jurisdiction other than
the State of Delaware; or (vii) any combination of the foregoing.
Subject to Section 25.2 below, to the maximum extent permitted by
applicable law, any action to enforce, arising out of, or relating in any way
to, any of the provisions of this Agreement may be brought and prosecuted in
such court or courts located in the State of Delaware as is provided by law; and
the parties consent to the jurisdiction of said court or courts located in the
State of Delaware and to service of process by registered mail, return receipt
requested, or by any other manner provided by law.
25.2. Arbitration/Litigation.
(a) Any dispute, controversy or claim arising out of or relating to
this Agreement or any contract or agreement entered into pursuant hereto or
the performance by the parties of its or their terms shall be settled by
binding arbitration held in Wilmington, Delaware, in accordance with the
Commercial Arbitration Rules of the American Arbitration Association then
in effect. Judgment upon the award rendered by the arbitrator(s) may be
entered in any court having in personam and subject matter jurisdiction.
The parties hereby submit to the in personam jurisdiction of the federal
and state courts in Delaware, for the purpose of confirming any such award
and entering judgment thereon.
(b) Notwithstanding the foregoing, Franchisor may, in its discretion,
apply to a court of competent jurisdiction for equitable relief from any
violation or threatened violation of the covenants of OpCo in this
Agreement. OpCo acknowledges that its violation or threatened violation of
the provisions of Article 13 would cause Franchisor irreparable injury and,
in addition to any other remedies to which Franchisor may be entitled, that
Franchisor shall be entitled to injunctive relief.
26. SEVERABILITY, CONSTRUCTION AND OTHER MATTERS
26.1. Severability. Should any provision of this Agreement be for any
reason held invalid, illegal or unenforceable by a court of competent
jurisdiction, such provision shall be deemed restricted in application to the
extent required to render it valid; and the remainder of this Agreement shall in
no way be affected and shall remain valid and enforceable for all purposes. In
the event that any provision of this Agreement should be for any reason held
invalid, illegal or unenforceable by a court of competent jurisdiction, or in
the event the performance or compliance by any party with any provision of this
Agreement shall result in such party being in violation of any law, rule or
regulation of any governmental authority, then in any of such events the parties
agree to use commercially reasonable best efforts to amend in a manner
reasonably consistent with each parties'
<PAGE>
economic interests the obligations of the parties under and pursuant to the
Agreement so as to cause the parties obligations hereunder to be enforceable and
not in violation of any law, rule or regulation of any governmental authority.
In the event such total or partial invalidity or unenforceability of any
provision of this Agreement exists only with respect to the laws of a particular
jurisdiction, this paragraph shall operate upon such provision only to the
extent that the laws of such jurisdiction are applicable to such provision. Each
party agrees to execute and deliver to the other any further documents which may
be reasonably required to effectuate fully the provisions hereof. OpCo
understands and acknowledges that Franchisor shall have the right, in its sole
discretion, on a temporary or permanent basis, to reduce the scope of any
covenant or provision of this Agreement binding upon OpCo, or any portion
hereof, without OpCo's consent, effective immediately upon receipt by OpCo of
written notice thereof, and OpCo agrees that it will comply forthwith with any
covenant as so modified, which shall be fully enforceable.
26.2. Regulatory Reports. Each party agrees to reasonably cooperate with
the other in providing on a timely basis all documents and information in its
possession or reasonably available to it, reasonably required by the other for
reports or filings required by any governmental or other regulatory authority.
26.3. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, but such counterparts together shall constitute one and the same
instrument.
26.4. Table of Contents, Headings and Captions. The table of contents,
headings and captions contained herein are for the purposes of convenience and
reference only and are not to be construed as a part of this Agreement. All
terms and words used herein shall be construed to include the number and gender
as the context of this Agreement may require. The parties agree that each
section of this Agreement shall be construed independently of any other section
or provision of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement under seal on the date first written above.
MAGELLAN HEALTH SERVICES, INC.
By: \s\ Howard A. McLure
------------------------------
Title: Senior Vice President
---------------------------
CHARTER FRANCHISE SERVICES, LLC
By: \s\ Howard A. McLure
-------------------------------
Title: Senior Vice President
----------------------------
CHARTER BEHAVIORAL HEALTH
SYSTEMS, LLC
By: \s\ W. Stephen Love
--------------------------------
Title: Senior Vice President and CFO
-----------------------------
<PAGE>
CHARTER FRANCHISE SERVICES, LLC
FRANCHISE AGREEMENT
<PAGE>
TABLE OF CONTENTS
PAGE
1. GRANT OF FRANCHISE................................................... 2
1.1. Grant.............................................. 2
1.2. Modifications; Amendments to Charter System........ 2
1.3. New Products....................................... 3
1.4. Territory Exclusive................................ 3
1.5. Outpatient Providers............................... 3
1.6. Reservation of Rights.............................. 3
2. TERM................................................................. 4
3. OPERATING ASSISTANCE................................................. 4
4. FEES................................................................. 5
4.1. Franchise Fee...................................... 5
4.2. Annual Continuing Fee.............................. 5
4.3. Definition of "Contract Year"...................... 5
4.4. Monthly Installments............................... 5
4.5. Annual Continuing Fee for Short Contract Year...... 6
4.6. Payment Following Contract Year End................ 6
4.7. Taxes.............................................. 6
4.8. Advances by Franchisor............................. 6
4.9. Interest........................................... 6
4.10. Gross Revenues..................................... 7
LICENSED MARKS................................................................ 8
5.1. Ownership.......................................... 8
5.2. Authorized Use..................................... 8
5.3. Infringement....................................... 9
5.4. Operation Under Licensed Marks..................... 9
5.5. Modification/Replacement of Licensed Marks......... 9
6. STANDARDS OF OPERATION...............................................10
6.1. Compliance with System.............................10
6.2. Compliance With Law................................10
6.3. Joint Commission on Accreditation of Health Care
Organizations (JCAHO)..............................10
6.4. Maintenance of Standards...........................10
6.5. Operation in Conformity with Prescribed Methods,
Standards and Specifications.......................11
6.6. Printed Materials; Marketing.......................11
<PAGE>
6.7. Ownership Identification...........................11
6.8. Patient Relations..................................11
6.9. Right to Inspect...................................11
6.10. Variation of Standards.............................11
6.11. Accounting Equipment and Software..................12
6.12. Discoveries and Ideas..............................12
7. CONFIDENTIAL OPERATING MANUAL........................................12
7.1. Compliance with Confidential Operating Manual......12
7.2. Revisions..........................................12
8. ADVERTISING AND MARKETING............................................12
8.1. Local Advertising..................................12
8.2. Approval of Advertising............................13
8.3. Participation in Cooperative Advertising and/or
Marketing Programs................................ 13
8.4. Operation of Call Center.......................... 13
8.5. Subordination and Alternative Performance of
Obligations....................................... 13
9. STATEMENTS, RECORDS AND FEE PAYMENTS................................ 14
9.1. Maintenance of Records; Audit Rights...............14
9.2. Reports............................................14
9.3. Tax Reports........................................14
9.4. Unaudited Periodic Statements......................14
9.5. Annual Statement...................................15
10. ADDITIONAL COVENANTS.................................................15
10.1. Covenant ..........................................15
10.2. Covenant Not to Compete............................15
10.3. Acknowledgment of Reasonableness...................15
10.4. Confidential Information...........................16
10.5. Confidential Agreements with Certain Employees.....16
10.6. Severability.......................................16
11. TRANSFER AND ASSIGNMENT..............................................17
11.1. Assignment by Franchisor...........................17
11.2. Assignment by Franchise Owner......................17
11.3. Conditions of Any Approval.........................17
11.4. Consent Not a Waiver..................................18
11.5. Parties Bound and Benefitted.......................19
<PAGE>
12. DEFAULT AND TERMINATION..............................................19
12.1. Franchisor's Right to Terminate....................19
12.2. Franchise Owner's Right to Terminate...............20
13. POST TERM OBLIGATIONS................................................20
13.1. Cease Operations...................................20
13.2. Pay All Sums Outstanding...........................21
13.3. Return Confidential Operating Manual...............21
13.4. Cease Use of System................................21
14. INSURANCE ...........................................................21
14.1. Maintenance of Insurance...........................21
14.2. Notices of Claims..................................21
14.3. Notices of Other Claims/Events.....................21
15. TAXES, PERMITS AND INDEBTEDNESS......................................22
15.1. Payment............................................22
15.2. Compliance with all Laws and Regulations...........22
15.3. Full Responsibility................................22
16. INDEMNIFICATION AND INDEPENDENT CONTRACTOR...........................22
16.1. Indemnification and Hold Harmless..................22
16.2. Independent Contractor.............................22
17. WRITTEN APPROVALS, WAIVERS, FORMS OF AGREEMENT
AND AMENDMENT........................................................23
17.1. Prior Approvals....................................23
17.2. No Waiver..........................................23
17.3. Form of Agreements.................................23
17.4. Written Amendments.................................23
18. ENFORCEMENT..........................................................24
18.1. Inspections........................................24
18.2. Injunctive Relief..................................24
18.3. Costs and Expenses.................................24
18.4. No Right to Offset.................................24
19. ENTIRE AGREEMENT.....................................................24
20. NOTICES..............................................................25
<PAGE>
21. GOVERNING LAW AND DISPUTE RESOLUTION.................................25
21.1. Governing Law......................................25
21.2. Arbitration........................................25
22. SEVERABILITY, CONSTRUCTION...........................................26
22.1. Severability.......................................26
22.2. Regulatory Reports.................................26
22.3. Counterparts.......................................27
22.4. Table of Contents, Headings and Captions...........27
23. MANAGEMENT CONTRACTS/JOINT VENTURES/CONSULTING
AGREEMENTS...........................................................27
24. MANAGED CARE AGREEMENTS/PREFERRED PROVIDER STATUS....................27
25. ACKNOWLEDGMENTS......................................................28
FRANCHISE AGREEMENT
THIS FRANCHISE AGREEMENT (the "Agreement or the "Franchise Agreement")
is entered into effective June 17, 1997 (the "Effective Date") by and between
MAGELLAN HEALTH SERVICES, INC., a Delaware corporation ("Magellan"), and its
wholly-owned subsidiary, CHARTER FRANCHISE SERVICES, LLC, a Delaware limited
liability company (together, "Franchisor"), and CHARTER BEHAVIORAL HEALTH SYSTEM
OF CENTRAL GEORGIA, LLC ("Franchise Owner").
W I T N E S S E T H :
A. Franchisor owns or has the right to license certain trade names,
trademarks, service marks and/or indicia of origin identified on Exhibit "1"
hereto (the "Licensed Marks"), the uniqueness and value of which are
acknowledged by Franchise Owner. In connection therewith, Franchisor has
developed a plan for a system for the operation of Hospital/RTC Based Behavioral
Healthcare Businesses (as hereinafter defined) under the Licensed Marks, which
system includes the right and license to utilize existing computer software
owned by Franchisor or, subject to the terms of the respective license
agreement, licensed to Franchisor, and, immediately prior to the date hereof,
utilized by the business which is the subject of this Agreement, existing
treatment protocols, existing treatment, financial, legal and other programs and
procedures, existing quality standards, existing quality assessment methods,
existing performance improvement and monitoring programs, advertising and
marketing assistance, promotional materials, consultation and other matters
relating to the operation of Hospital/RTC Based Behavioral Healthcare Businesses
(the "Charter System"), all of which are designed to enhance the reputation and
goodwill with the public of establishments operated pursuant to the Charter
System. "Hospital/RTC Based Behavioral Healthcare Business" as used herein shall
mean the business of the operation of an acute care psychiatric hospital, part
of an acute care general hospital operating an acute care psychiatric unit,
department, division or other organizational subdivision, a behavioral
healthcare residential treatment center, a part of a facility operating a
behavioral healthcare residential treatment center, or other similar facility
providing 24-hour behavioral healthcare (together an "In Patient Facility"), and
the delivery of behavioral healthcare from such facility and other facilities in
the Territory, including outpatient facilities; such behavioral healthcare to
include inpatient hospitalization, partial hospitalization programs, outpatient
therapy, intensive outpatient therapy, ambulatory detoxification, behavioral
modification programs and related services. As used herein, the term "Behavioral
Modification Programs and Related Services" shall mean any type of programs or
services for providing behavioral modification without regard to whether such
behavioral modification may be provided in an In Patient Facility or other
affiliated facility and shall include, for example, weight loss, stress
management, smoking cessation and similar products and programs.
B. Franchise Owner desires, upon the terms and conditions set forth
herein, to obtain a license to use the Charter System in the operation of its
Hospital/RTC Based Healthcare
<PAGE>
Business (the "Franchised Business"). Franchisor is willing, upon the terms and
conditions set forth herein, to license Franchise Owner to operate the
Franchised Business.
C. Franchise Owner is a subsidiary corporation of Charter Behavioral
Health Systems, LLC ("OpCo") or is otherwise affiliated with OpCo. OpCo and
Franchisor have entered into a Master Franchise Agreement dated as of the date
hereof (the "Master Franchise Agreement") pursuant to which, among other
matters, Franchisor has agreed to grant franchises to certain subsidiaries and
affiliates of OpCo; a copy of the Master Franchise Agreement is attached hereto
as Exhibit 2. This Franchise Agreement is one of the franchise agreements
granted under and pursuant to the Master Franchise Agreement.
D. Immediately prior hereto Franchisor operated, through a wholly-owned
subsidiary, the business which is the subject of this agreement. Substantially
simultaneously herewith, Franchisor is transferring to Franchise Owner's parent,
OpCo, certain of the business and assets (including personnel) heretofore
utilized by Franchisor to provide services and support to the business which is
the subject of this Agreement (the business and assets (including personnel)
retained by Franchisor heretofore utilized by Franchisor to provide service and
support to the business which is the subject of this Agreement are herein
referred to as the "Retained Servicing Business" and the business and assets
(including personnel) transferred by Franchisor to OpCo heretofore utilized by
Franchisor to provide service and support to the business which is the subject
of this Agreement are herein referred to as the "Transferred Servicing
Business").
1. GRANT OF FRANCHISE
1.1. Grant. Subject to all of the terms and conditions herein,
Franchisor grants to Franchise Owner the right and franchise to use the Charter
System in the operation of the Franchised Business at any present or future
facilities located in the geographic area described in Exhibit 3 to this
Agreement (the "Territory"). Franchise Owner agrees at all times during the
continuance of this Agreement to use its commercially reasonable best efforts to
promote and operate the Franchised Business. The Franchised Business shall be
operated only under the following name: Charter Behavioral Health System of
Central Georgia, LLC. Subject to all of the terms and conditions herein,
Franchisor hereby also grants to Franchise Owner the right and license to
utilize the Charter System in connection with the management and administration
of the businesses of the any presently existing Joint Ventures, Managed
Businesses and all New Arrangements in the Hospital/RTC Based Behavioral
Healthcare Business pursuant to Article 23.
1.2. Modifications; Amendments to Charter System. Franchisor reserves
the right from time to time to amend, modify, delete (subject to Article 3) or
enhance any portion of the Charter System (including any of the Licensed Marks)
as may be advisable in Franchisor's sole judgment to change, maintain or enhance
the Charter System trade names or the reputation, efficiency, competitiveness
and/or quality of the Charter System, or to adapt it to new conditions, laws,
regulations or technology, or to better serve the public. Franchise Owner shall
have the right without additional consideration (other than such as results from
increases in Gross Revenues) to
<PAGE>
utilize the amendments, modifications and enhancements; and Franchise Owner, at
its expense, will fully comply with all such amendments, modifications,
deletions and enhancements reasonably designated as applicable to then existing
franchise owners similarly situated. Franchisor shall not be obligated to make
improvements or develop new software for use of Franchise Owner, but to the
extent that Franchisor does so Franchise Owner shall have the right and license
to use such new or improved software without additional consideration (other
than such as results from increases in Gross Revenues).
1.3. New Products. Until such time as Franchise Owner ceases to be an
OpCo Franchisee (as defined in the Master Franchise Agreement), and subject to
Franchise Owner complying with such reasonable terms and conditions as
Franchisor shall provide, Franchise Owner shall have the right and option to
utilize in the Territory in connection with its Franchised Business new products
and new concepts developed by Franchisor for the delivery of behavioral
healthcare and Behavioral Modification Programs and Related Services ("New
Products"), provided the Franchise Owner will not have such right or option with
respect to any such New Products (i) which deal with the delivery of behavioral
healthcare incidental to the treatment of a non-behavioral illness or condition,
(ii) where the behavioral illness (e.g., alcohol or substance abuse) is not the
primary diagnosis (e.g., behavioral healthcare treatment for depression
following a diagnosis for cancer (cancer being the primary diagnosis); weight
loss behavioral healthcare treatment following a heart attack (heart disease
being the primary diagnosis)), or (iii) that are used by Franchisor or its
subsidiaries (and not offered to third parties pursuant to any franchise or
similar arrangement) in connection with its business operations. To the extent
that Franchise Owner does not have the right to a New Product pursuant to the
terms of this Section, does not elect to utilize a New Product or elects to
utilize a New Product but fails or refuses to comply with such reasonable terms
and conditions as Franchisor shall provide in connection therewith (in which
event Franchise Owner shall be deemed to have elected not to utilize a New
Product), then Franchisor may itself operate or franchise others to operate
businesses utilizing such New Product from facilities in the Territory.
Franchise Owner shall have the right to utilize a New Product without paying to
Franchisor any additional fees (other than such as results from increases in
Gross Revenues).
1.4. Territory Exclusive. Franchisor agrees that during the term of
this Agreement, it will not, except as otherwise provided in this Article 1,
establish or maintain, or franchise any other person or firm to establish or
maintain, a facility located within the Territory that (i) uses the Charter
System, (ii) engages, directly or indirectly, in the Hospital/RTC Based
Healthcare Business, or (iii) subject to Section 1.3 above, provides Behavioral
Modification Programs and Related Services.
1.5. Outpatient Providers. Franchisor may not, without the written
consent of Franchise Owner in each instance, establish or maintain a business,
or grant franchises or other licenses to individual physicians, psychologists or
other mental healthcare professionals or to groups thereof or to entities
employing such, to operate businesses, for the delivery of behavioral healthcare
at a facility within the Territory that (i) uses the Charter System, (ii)
engages, directly or indirectly,
<PAGE>
in the Hospital/RTC Based Behavioral Healthcare Business, or (iii) subject to
Section 1.3 above, provides Behavioral Modification Programs and Related
Services.
1.6 Reservation of Rights. Franchise Owner acknowledges and agrees
that, in addition to the rights contained in other subsections of this Article
1, Franchisor may grant to another or others the right and franchise to operate,
at facilities outside the Territory, Hospital/RTC Based Behavioral Healthcare
Businesses utilizing the Charter System, even if such businesses compete with
Franchise Owner's Franchised Business, and that Franchisor may otherwise use and
grant to others the right to use the Licensed Marks, or any other names and
marks, for other businesses. It is understood that nothing contained in this
Agreement shall prevent Franchisor (i) from providing behavioral healthcare
incidental to the managed behavioral healthcare business or incidental to any
other business the principal purpose of which is not the operation of a
Hospital/RTC Based Behavioral Healthcare Business, and (ii) from, pursuant to
contracts with federal, state and local governments and governmental agencies,
providing health and human services, including behavioral healthcare services,
to the mentally retarded, the developmentally disabled, the elderly, persons
under the control or supervision of criminal/juvenile justice systems and other
designated populations.
2. TERM
This Agreement, unless sooner terminated pursuant to Article 12 hereof,
shall extend from the Effective Date until the date of expiration or termination
of the Master Franchise Agreement.
3. OPERATING ASSISTANCE
Franchisor reserves the right to require Franchise Owner to maintain
standards of quality, appearance and service at all Franchised Business
facilities, thereby maintaining the public image and reputation of the Charter
System and the demand for the services and products provided thereunder, and to
that end Franchisor shall provide Franchise Owner with the following ongoing
assistance:
(a) Advertising and marketing assistance including
consultation, access to media buying programs and access to broadcast
and other advertising pieces and materials produced by Franchisor from
time to time for franchise owners.
(b) Risk management services, including risk
financing planning, loss control and claims management.
(c) Outcomes monitoring.
(d) Access to Managed Care Agreements (as
hereinafter defined).
<PAGE>
(e) Consultation by telephone or at Franchisor's
offices with respect to matters relating to the Franchised Business in
which Franchisor has expertise, including matters relating to
reimbursement, government relations, clinical strategies, regulatory
matters, strategic planning and business development.
Franchisor shall maintain reasonable expertise and provide a
minimum level and quality of assistance within the scope of the Retained
Servicing Business, in accordance with commercially reasonable standards
substantially similar to the level and quality of such assistance provided to
the business which is the subject of this Agreement immediately prior to the
date hereof by the Retained Servicing Business. Nothing contained herein shall
require Franchisor to maintain expertise or provide assistance within the scope
of the Transferred Servicing Business.
4. FEES
4.1. Franchise Fee. There is no initial franchise fee for the initial
term or any renewal term.
4.2. Annual Continuing Fee. For each "Contract Year" (as hereinafter
defined), Franchise Owner shall pay to Franchisor, subject to the terms of
Section 4.5 below, an annual continuing fee (the "Annual Continuing Fee") in the
amount of the greater of:
(a) Eight Hundred Sixty-Nine Thousand Dollars ($869,000) plus
(i) an amount calculated by multiplying Eight Hundred Sixty-Nine
Thousand Dollars ($869,000) by the percentage increase in the Consumer
Price Index, United States City Average for All Urban Consumers for All
items (as published by the U.S. Department of Labor, Bureau of Labor
Statistics) (the "CPI") between the end of the latest period for which
said index has been published prior to the date of this Agreement and
the end of the latest period for which said index has been published
prior to the first day of said Contract Year (the "Minimum Annual
Continuing Fee"), except that no adjustment to the Minimum Annual
Continuing Fee shall be made for the second Contract Year (Contract
Year commencing October 1, 1997) it being understood that the
adjustment made for the third Contract Year (Contract Year commencing
October 1, 1998) shall take into consideration the change in the CPI
between the end of the latest period for which said index has been
published prior to the date of this Agreement and the end of the latest
period for which said index has been published prior to the first day
of the third Contract Year, and (ii) New Arrangement Management Fees
(as defined in Article 23); or
(b) Eight Hundred Sixty-Nine Thousand Dollars ($869,000) plus
(i) 3% of Gross Revenues above Ten Million Seven Hundred Twenty-Nine
Thousand Dollars ($10,729,000) and less than Twelve Million Eight
Hundred Seventy-Five Thousand Dollars ($12,875,000) during said
Contract Year, (ii) 5% of Gross Revenues above Twelve Million Eight
Hundred Seventy-Five Thousand Dollars ($12,875,000) during said
Contract Year, and (iii) New Arrangement Management Fees.
<PAGE>
4.3. Definition of "Contract Year". As used in this Article 4, the term
"Contract Year" shall refer to any period which begins on the date of this
Agreement or any succeeding October 1 and ends on the earlier of the following
September 30 or the effective date of expiration or termination of this
Agreement.
4.4. Monthly Installments. During each Contract Year, Franchise Owner
shall make monthly installments against the Annual Continuing Fee for said
Contract Year. During each of the first and second Contract Years, each such
monthly installment shall be equal to 1/12th of the Minimum Annual Continuing
Fee for said Contract Year. During each subsequent Contract Year, each such
monthly installment shall be equal to 1/12th of the greater of (a) the Minimum
Annual Continuing Fee for said Contract Year or (b) the Annual Continuing Fee
for the preceding Contract Year. The first monthly installment shall be paid on
the date of this Agreement; and subsequent installments shall be paid on or
before the first day of each subsequent calendar month during the term of this
Agreement.
4.5. Annual Continuing Fee for Short Contract Year. If the term of this
Agreement includes any Contract Year of less than 365 days (i.e., because the
date of this Agreement or the effective date of expiration or termination of
this Agreement is in the middle of a Contract Year), the Annual Continuing Fee
for such Contract Year shall be the greater of:
(a) the product of the Minimum Annual Continuing Fee for said
Contract Year times a fraction the numerator of which is the number of
days that this Agreement was in effect during said Contract Year (the
"Effective Days"), and the denominator of which is 365, or
(b) the product of the amount calculated pursuant to
subsection 4.2(b) above (provided, however, that for purposes of said
calculation the "Gross Revenues" for said Contract Year shall be "Gross
Revenues" as defined in Section 4.10 below for said Contract Year times
a fraction the numerator of which is 365 and the denominator of which
is the Effective Days), times a fraction the numerator of which is the
Effective Days and the denominator of which is 365.
4.6. Payment Following Contract Year End. If the aggregate dollar
amount of payments made by Franchise Owner to Franchisor in respect of any
Contract Year pursuant to Section 4.4 above is different than the Annual
Continuing Fee for said Contract Year, a payment in the amount of such
overpayment or underpayment shall be made by the appropriate party within
seventy-five (75) days after the end of said Contract Year.
4.7. Taxes. Franchise Owner shall pay to Franchisor the amount of all
sales taxes, use taxes, and similar taxes imposed upon or required to be
collected on account of the Annual Continuing Fees and of goods or services
furnished to Franchise Owner by Franchisor, whether such goods or services are
furnished by sale, lease or otherwise.
<PAGE>
4.8. Advances by Franchisor. Franchise Owner shall pay to Franchisor
all amounts, if any, advanced by Franchisor or which Franchisor has paid, or for
which Franchisor has become obligated, on behalf of Franchise Owner.
4.9. Interest. Franchise Owner shall pay to Franchisor interest on any
amounts which are past due at the lower of the maximum rate permitted by law or
the Prime Rate, plus six percent (6%) per annum. The term" Prime Rate" as used
in this Agreement shall mean the prime rate of interest from time to time as
published in The Wall Street Journal.
4.10. Gross Revenues. "Gross Revenues" shall mean the sum of the
following:
(a) the aggregate gross patient charges from
operation of the Franchised Business at established billing rates, less
provision for contractual adjustments and provision for denied claims
(where collection is not pursued directly from the patient), determined
in accordance with generally accepted accounting principles, and the
gross amount of all other revenues from whatever source derived
(whether in the form of cash, credit, agreements to pay, or other
consideration, and whether or not payment is received at the time of
the sale or provision of services) which arise from or are derived by
Franchise Owner or any other person affiliated with Franchise Owner,
directly or indirectly from products or services sold or provided
directly or indirectly by Franchise Owner, or from the sale of services
or products associated with the use of the Licensed Marks. Gross
Revenues shall not include amounts not actually collected (bad debts)
to the extent such have been included in Gross Revenues reported to
Franchisor for prior periods.
Plus,
(b) for any joint venture ("Joint Venture"), subject
to Article 23, or Managed Business (as defined below), the gross
revenues ("Business Gross Revenues") of all the businesses which are
the subject of Joint Ventures (the "Joint Venture Businesses") and the
businesses which are the subject of management agreements and other
agreements and arrangements of Franchise Owner pursuant to which
Franchise Owner provides management, consulting or other services for
so long as any such agreements or arrangements are in effect (the
"Managed Businesses"). "Business Gross Revenues" shall mean the
aggregate gross patient charges from each of the Joint Venture
Businesses and each of the Managed Businesses unless New Arrangement
Management Fees are paid pursuant to Article 23 with respect to a
Managed Business, at established billing rates, less provision for
contractual adjustments and provision for denied claims (where
collection is not pursued directly from the patient), determined in
accordance with generally accepted accounting principles, and the gross
amount of all other revenues from whatever source derived (whether in
form of cash, credit, agreements to pay, or other consideration, and
whether or not payment is received at the time of the sale or
provisions of services) which arise from or are derived by each of the
Joint Venture Businesses and each of the Managed
<PAGE>
Businesses, or any other person affiliated with such business, directly
or indirectly from products or services sold or provided directly or
indirectly by each of the Joint Venture Businesses and each of the
Managed Businesses or from the sale of products or services associated
with the use of the Licensed Marks. Business Gross Revenues shall not
include amounts not actually collected (bad debts) to the extent that
such have been included in Business Gross Revenues reported to
Franchisor for prior periods.
Plus,
(c) the gross amounts of all Franchise Owner's other
revenues from whatever source derived (whether in the form of cash,
credit, agreements to pay, or other consideration, and whether or not
payment is received at the time of the sale or provision of services),
which arise from or are derived by Franchise Owner, or any person
affiliated with Franchise Owner, directly or indirectly from products
or services sold or provided directly or indirectly by Franchise Owner
or from the sale of services or products associated with the use of the
Licensed Marks, excluding any amounts received by Franchise Owner from
Joint Venture Businesses and Managed Businesses.
4.11. Subordination and Alternative Performance of Obligations.
Franchisor's right to receive the payments required to be made by Franchise
Owner pursuant to this Article 4 is subject to that certain Subordination
Agreement dated as of the date hereof by and among Franchisor, Crescent Real
Estate Equities Limited Partnership ("Crescent") and OpCo (the "Subordination
Agreement"). Franchise Owner shall pay all amounts required to be paid by
Franchise Owner pursuant to this Article 4 to OpCo, rather than to Franchisor,
until the earliest of (i) the date on which OpCo ceases to have voting control
of Franchise Owner through stock ownership, or (ii) the date of the termination
or expiration of the Master Franchise Agreement, or (iii) the date OpCo shall:
(i) become insolvent; or (ii) be unable, or admit in writing its inability to
pay its debts as they mature; or (iii) make a general assignment for the benefit
of creditors or to an agent authorized to liquidate any substantial amount of
its property; or (iv) become the subject of an "order for relief" within the
meaning of the United States Bankruptcy Code; or (v) become the subject of a
creditor's petition for liquidation, reorganization or to effect a plan or other
arrangement with creditors; or (vi) apply to a court for the appointment of a
custodian or receiver for any of its assets; or (vii) have a custodian or
receiver appointed for any of its assets (with or without its consent); or
(viii) otherwise become the subject of any insolvency proceedings or propose or
enter into any formal or informal composition or arrangement with its creditors.
5. LICENSED MARKS
5.1. Ownership. Franchise Owner expressly acknowledges Franchisor's
rights in and to the Licensed Marks and agrees not to represent in any manner
that Franchise Owner has acquired any ownership rights in the Licensed Marks.
Franchise Owner further acknowledges and agrees that any and all goodwill
associated with the Charter System and identified by the Licensed Marks shall
inure directly and exclusively to the benefit of Franchisor.
<PAGE>
5.2. Authorized Use. Franchise Owner understands and agrees that any
use of the Licensed Marks other than as expressly authorized by this Agreement,
without Franchisor's prior written consent, may constitute an infringement of
Franchisor's rights therein and that the right to use the Licensed Marks granted
herein does not extend beyond the termination or expiration of this Agreement.
Franchise Owner expressly covenants that, during the term of this Agreement and
thereafter, Franchise Owner shall not, directly or indirectly, commit any act of
infringement or contest or aid others in contesting the validity or registration
of Franchisor's right to use the Licensed Marks or take any other action in
derogation thereof.
5.3. Infringement. Franchise Owner shall promptly notify Franchisor of
any claim, demand or cause of action that Franchisor may have based upon or
arising from any unauthorized attempt by any person or legal entity to use the
Licensed Marks, any colorable variation thereof, or any other mark, name or
indicia in which Franchisor has or claims a proprietary interest (an
"Unauthorized Third Party Use"). Franchise Owner shall assist Franchisor, upon
request and at Franchisor's expense, in taking such action, if any, as
Franchisor may deem appropriate to halt such Unauthorized Third Party Use, but
shall take no action nor incur any expenses on Franchisor's behalf without
Franchisor's prior written approval. If Franchisor undertakes the defense or
prosecution of any litigation relating to the Licensed Marks, Franchise Owner
agrees to execute any and all documents and to do such acts and things as may,
in the opinion of Franchisor's legal counsel, be reasonably necessary to carry
out such defense or prosecution. If Franchisor does not take action to halt any
Unauthorized Third Party Use, Franchise Owner at its expense may take action as
it deems appropriate to halt such Unauthorized Third Party Use.
5.4. Operation Under Licensed Marks. Franchise Owner further agrees and
covenants to operate and advertise only under the names or marks from time to
time designated by Franchisor for use by similar Charter System franchise
owners; to adopt and use the Licensed Marks solely in the manner prescribed by
Franchisor; to refrain from using the Licensed Marks to perform any activity or
to incur any obligation or indebtedness in such a manner as may, in any way,
subject Franchisor to liability therefor; to observe all laws with respect to
the registration of trade names and assumed or fictitious names, to include in
any application therefor a statement that Franchise Owner's use of the Licensed
Marks is limited by the terms of this Agreement, and to provide Franchisor with
a copy of any such application and other registration document(s); to observe
such requirements with respect to trademark and service mark registrations and
copyright notices as Franchisor may, from time to time, require, including,
without limitation, affixing "SM", "TM", or (R) adjacent to all such Licensed
Marks in any and all uses thereof; and to utilize such other appropriate notice
of ownership, registration and copyright as Franchisor may require.
5.5. Modification/Replacement of Licensed Marks. Franchisor reserves
the right, in its sole discretion, to designate one or more new, modified or
replacement Licensed Marks for use by franchise owners and to require the use by
Franchise Owner of any such new, modified or replacement Licensed Marks in
addition to or in lieu of any previously designated Licensed
<PAGE>
Marks. Any expenses or costs associated with the use by Franchise Owner of any
such new, modified or replacement Licensed Marks shall be the sole
responsibility of Franchise Owner.
6. STANDARDS OF OPERATION
Franchisor shall establish and Franchise Owner shall maintain standards
of quality, appearance and operation for the Franchised Business. For the
purpose of enhancing the public image and reputation of businesses operating
under the Charter System, protecting the goodwill associated with the Licensed
Marks, and for the purpose of increasing the demand for services and products
provided by Franchisor and its franchisees, the parties agree as follows:
6.1. Compliance with System. Franchise Owner agrees in connection with
the Franchised Business to utilize and comply with all treatment protocols,
treatment, financial, legal and other programs and procedures, quality
standards, quality assessment methods, performance improvement and monitoring
programs and other matters which now or hereafter comprise the Charter System,
and to comply with all Charter System rules, regulations, policies and
standards, including all such contained in the "Confidential Operating Manual"
(as hereinafter defined).
6.2. Compliance With Law. Franchise Owner agrees at all times to
operate the Franchised Business, and to keep all premises at which the
Franchised Business operates, in compliance with all applicable federal, state
and local laws, rules and regulations.
6.3. Joint Commission on Accreditation of Health Care Organizations
(JCAHO). Franchise Owner agrees to maintain throughout the term of this
Agreement accreditation by the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO"). Franchise Owner also agrees to obtain, within such
reasonable times as may be specified by Franchisor, and maintain throughout the
term of this Agreement accreditation by other organizations as required by law
or reasonably specified by Franchisor. All costs of obtaining and maintaining
accreditation(s) shall be borne and paid by Franchise Owner.
6.4. Maintenance of Standards. Franchise Owner agrees to maintain all
premises from or at which the Franchised Business is conducted, and all
furnishings and equipment thereon, in conformity with Franchisor's then-current
standards, at all times during the term of this Agreement, and to make such
repairs and replacements thereto as Franchisor may require. Without limiting the
generality of the foregoing, Franchise Owner specifically agrees:
(a) To keep all such premises at all times in a high
degree of sanitation, repair, order and condition, including, without
limitation, such periodic repainting of the exterior and interior of
the premises, such maintenance and repairs to all fixtures,
furnishings, signs and equipment as Franchisor may from time to time
reasonably direct; and
<PAGE>
(b) To meet and maintain at all times all
governmental standards, certifications and ratings applicable to the
operation of the premises and the Franchised Business or such higher
minimum standards, certifications and ratings as set forth by
Franchisor from time to time in its Confidential Operating Manual or
otherwise in writing.
6.5. Operation in Conformity with Prescribed Methods, Standards and
Specifications. Franchise Owner agrees to operate the Franchised Business in
conformity with such methods, standards and specifications as Franchisor may
from time to time prescribe in its Confidential Operating Manual to insure that
Franchisor's required degree of quality, service and image is maintained; and to
refrain from deviating therefrom and from otherwise operating in any manner
which adversely reflects on Franchisor's name and goodwill, or on the Licensed
Marks.
6.6. Printed Materials; Marketing. Franchise Owner shall use only
business stationery, business cards, marketing materials, advertising materials,
printed materials or forms which have been approved in advance by Franchisor.
Franchise Owner shall not employ any person to act as a representative of
Franchise Owner in connection with local promotion of the Franchised Business in
any public media without the prior written approval of Franchisor. Any and all
supplies or materials purchased, leased or licensed by Franchise Owner shall
always meet those standards specified by Franchisor in the Confidential
Operating Manual or otherwise in writing.
6.7. Ownership Identification. In all advertising displays and
materials and at all premises from or at which the Franchised Business is
conducted, Franchise Owner shall, in such form and manner as may be specified by
Franchisor in the Confidential Operating Manual, notify the public that
Franchise Owner is operating the business licensed hereunder as a franchisee of
Franchisor and shall identify its business location in the manner specified by
Franchisor in the Confidential Operating Manual.
6.8. Patient Relations. Franchise Owner shall respond promptly to
patient complaints and shall take such other steps as may be required to insure
positive patient relations.
6.9. Right to Inspect. Franchise Owner hereby grants to Franchisor and
its agents the right to enter upon any premises from which Franchise Owner
conducts the Franchised Business, without notice, at any reasonable time for the
purpose of conducting inspections of the premises and Franchise Owner's books
and records; and Franchise Owner agrees to render such assistance as may
reasonably be requested and to take such steps as may be necessary to correct
any deficiencies upon the request of Franchisor or its agents.
6.10. Variation of Standards. Because complete and detailed uniformity
under many varying conditions may not be possible or practical, Franchisor
specifically reserves the right and privilege, in its sole discretion and as it
may deem in the best interests of all concerned in any specific instance, to
vary standards for any of its franchisees based upon the peculiarities of a
particular circumstance, or any other conditions which Franchisor deems to be of
importance to the successful operation of the Franchised Business. Franchise
Owner shall have no recourse
<PAGE>
against Franchisor on account of any variation from standard specifications and
practices granted to any franchise owner and shall not be entitled to require
Franchisor to grant Franchise Owner a like or similar variation hereunder.
6.11. Accounting Equipment and Software. Franchise Owner agrees
to maintain, develop, update and replace any equipment and software as
reasonably necessary for the purpose of recording, collecting or otherwise
supporting revenues.
6.12. Discoveries and Ideas. Franchise Owner agrees to disclose
promptly to Franchisor all discoveries made or ideas conceived by Franchise
Owner or a person affiliated with Franchise Owner that pertain to the Charter
System. Franchise Owner hereby grants to Franchisor all right, title and
interest to such discoveries and ideas, and agrees to cooperate with Franchisor
in securing Franchisor's rights to such discoveries and ideas. "Discoveries" and
"ideas" shall be interpreted broadly and shall not be limited to those
discoveries or ideas which are potentially patentable or copyrightable.
Franchisor shall not be obligated to compensate Franchise Owner for any such
discoveries or ideas and Franchise Owner has no expectation of any such
compensation.
7. CONFIDENTIAL OPERATING MANUAL
7.1. Compliance with Confidential Operating Manual. In order to protect
the reputation and goodwill of the businesses operating under the Charter System
and to maintain standards of operation under the Licensed Marks, Franchise Owner
shall conduct the Franchised Business operated under the Charter System in
accordance with various written instructions and confidential manuals
(hereinafter and previously referred to as the "Confidential Operating Manual"),
including such amendments thereto as Franchisor may publish from time to time,
all of which Franchise Owner acknowledges belong solely to Franchisor and shall
be on loan from Franchisor during the term of this Agreement. When any provision
in this Agreement requires that Franchise Owner comply with any standard,
specification or requirement of Franchisor, unless otherwise indicated such
standard, specification or requirement shall be such as is set forth in this
Agreement or as may, from time to time, be set forth by Franchisor in the
Confidential Operating Manual.
7.2. Revisions. Franchise Owner understands and acknowledges that
Franchisor may, from time to time, revise the contents of the Confidential
Operating Manual to implement new or different requirements for the operation of
the Franchised Business, and Franchise Owner expressly agrees to comply at its
expense with all such reasonably changed requirements which are by their terms
mandatory; provided that such requirements shall also be applied in a reasonably
nondiscriminatory manner to comparable businesses operated under the Charter
System by other of Franchisor's franchisees.
<PAGE>
8. ADVERTISING AND MARKETING
Recognizing the value of standardized advertising and marketing
programs to the furtherance of the goodwill and public image of the Charter
System, the parties agree as follows:
8.1. Local Advertising. At its expense, Franchise Owner agrees to
conduct on an annual basis continuing local advertising in form, content and
media approved by Franchisor, in an amount equal to three percent (3%) of Gross
Revenues. Franchise Owner shall submit evidence of any such expenditures to
Franchisor on an annual basis not later than sixty (60) days after the close of
each fiscal year for the preceding fiscal year. In the event that Franchise
Owner shall fail to expend such sums on local advertising during any fiscal
year, the difference between the amount expended and the amount required to be
expended shall be paid to Franchisor, in addition to other amounts payable
pursuant to this Agreement.
8.2. Approval of Advertising. All advertising by Franchise Owner shall
be in such media, and of such type and format as Franchisor may approve; shall
be conducted in a dignified manner and shall conform to such standards and
requirements as Franchisor may specify. Advertising approved by Franchisor as
meeting the requirements of the preceding sentence shall continue to be deemed
approved unless and until Franchisor shall notify OpCo otherwise. Franchise
Owner shall not use any advertising or promotional plans or materials not
prepared by Franchisor unless and until Franchise Owner has received written
approval from Franchisor following the submission of samples thereof to
Franchisor. If written approval is not received by Franchise Owner from
Franchisor or its designee within fifteen (15) days of the date of receipt by
Franchisor of such samples, Franchisor shall be deemed to have disapproved such
advertising or promotional plans or materials.
8.3. Participation in Cooperative Advertising and/or Marketing
Programs. Franchise Owner shall participate in all cooperative advertising
and/or marketing programs as are from time to time prescribed by Franchisor,
provided however, that no such cooperative advertising and/or marketing programs
shall require Franchise Owner to adhere to any specific price(s). The terms and
conditions required for participation in any such cooperative advertising
program or programs shall be as specified in the Confidential Operations Manual.
8.4. Operation of Call Center. Franchisor agrees to operate or will
provide a toll free "800 telephone number" and related call center (the "800
Call Center") to provide substantially the same services to Franchise Owner as
those provided by the 800 Call Center operating immediately prior to the
execution of this Agreement, subject to such modification as Franchisor deems
advisable from time to time to comply with applicable law or subject to such
restructuring as Franchisor shall reasonably require to comply with applicable
law. Franchise Owner agrees to advertise the "800 telephone number" and
otherwise cooperate with Franchisor to use the 800 Call Center as a means of
assisting customers to locate the places of business of franchisees of
Franchisor.
<PAGE>
8.5. Subordination and Alternative Performance of Obligations.
Franchise Owner shall make all payments required to be made by Franchise Owner
pursuant to this Article 8 to OpCo, rather than to Franchisor, until the earlier
of (i) the date on which OpCo ceases to have voting control of Franchise Owner
through stock ownership, or (ii) the date of the termination or expiration of
the Master Franchise Agreement, or (iii) in the event OpCo shall: (i) become
insolvent; or (ii) be unable, or admit in writing its inability to pay its debts
as they mature; or (iii) make a general assignment for the benefit of creditors
or to an agent authorized to liquidate any substantial amount of its property;
or (iv) become the subject of an "order for relief" within the meaning of the
United States Bankruptcy Code; or (v) become the subject of a creditor's
petition for liquidation, reorganization or to effect a plan or other
arrangement with creditors; or (vi) apply to a court for the appointment of a
custodian or receiver for any of its assets; or (vii) have a custodian or
receiver appointed for any of its assets (with or without its consent); or
(viii) otherwise become the subject of any insolvency proceedings or propose or
enter into any formal or informal composition or arrangement with its creditors.
9. STATEMENTS, RECORDS AND FEE PAYMENTS
9.1. Maintenance of Records; Audit Rights. Franchise Owner shall, in a
manner reasonably satisfactory to Franchisor, maintain original, full and
complete records, accounts, books, data, licenses, contracts and invoices which
shall accurately reflect all particulars relating to Franchised Business and
such statistical and other information or records as Franchisor may require, and
shall keep all such information for not less than three (3) years, even if this
Agreement is no longer in effect. Franchise Owner shall compile and provide to
Franchisor any statistical or financial information regarding the operation of
the Franchised Business, the services and products sold by it, or data of a
similar nature as Franchisor may reasonably request. Franchisor and its
designated agents shall have the right to examine and audit such records,
accounts, books and data at all reasonable times to insure that Franchise Owner
is complying with the terms of this Agreement. In connection with any such
examination or audit, Franchisor shall not be entitled to any adjustment to the
extent that Gross Revenues have been computed in accordance with Section 4.10
and in accordance with generally accepted accounting principles consistently
applied. If such inspection discloses and it is ultimately determined that the
Gross Revenues during any scheduled reporting period actually exceeded the
amount reported by Franchise Owner as its Gross Revenues by an amount equal to
two percent (2%) or more of the Gross Revenues originally reported to
Franchisor, Franchise Owner shall bear the cost of such inspection and audit
(not including any premium or contingent fee arrangement) and shall pay any such
deficiency with interest from the date due until paid at the lesser of the Prime
Rate, plus six percent (6%) per annum or the highest rate permitted by
applicable law, immediately upon the request of Franchisor.
9.2. Reports. Upon Franchisor's request, Franchise Owner shall furnish
Franchisor with a copy of each of Franchise Owner's reports required under
applicable federal and state laws, rules and regulations, including but not
limited to all such reports required under "Medicare" and "Medicaid" laws, rules
and regulations.
<PAGE>
9.3. Tax Reports. Upon Franchisor's request, Franchise Owner shall
furnish Franchisor with a copy of each of its reports and returns of sales, use
and gross receipt taxes and complete copies of any state or federal income tax
returns covering the operation of the Franchised Business.
9.4. Unaudited Periodic Statements. Franchise Owner shall prepare and
deliver to Franchisor on a quarterly basis, no later than twenty-five (25) days
following the close of each fiscal quarter, an unaudited profit and loss
statement in a form reasonably satisfactory to Franchisor covering Franchise
Owner's business for the prior fiscal quarter and showing Gross Revenues for the
prior fiscal quarter and fiscal year to date, all of which shall be certified by
Franchise Owner to present fairly in all material respects such matters.
Franchise Owner shall also submit to Franchisor no later than twenty-five (25)
days following the close of each fiscal quarter, an unaudited balance sheet
reflecting the financial position of the Franchised Business as of the preceding
fiscal quarter end.
9.5. Annual Statement. In addition to the foregoing unaudited
statements, within 75 days after the close of each fiscal year of Franchise
Owner, Franchise Owner shall furnish to Franchisor, at Franchise Owner's
expense, an unaudited statement of income and retained earnings of Franchise
Owner for such fiscal year and an unaudited balance sheet of Franchise Owner as
of the end of such fiscal year, all prepared in accordance with generally
accepted accounting principles and certified to by a Franchise Owner as true and
correct. If audited statements are prepared by or for Franchise Owner for any
fiscal year, such shall be provided to Franchisor in lieu of the unaudited
statements required pursuant to this Section 9.5. Such financial statements
shall be accompanied by a certificate certifying Franchise Owner's Gross
Revenues for the prior year.
10. ADDITIONAL COVENANTS
10.1. Covenant During Term. During the term of this Agreement,
Franchise Owner covenants not to engage in the United States as an owner,
operator, or in any managerial capacity in any Hospital/RTC Based Behavioral
Healthcare Business, other than as a franchisee of the Charter System pursuant
to this Agreement; provided, however, that Franchise Owner shall not be
prohibited hereby from owning equity securities of any Hospital/RTC Based
Behavioral Healthcare Business whose shares are traded on a stock exchange or on
the over-the-counter market so long as said ownership interest represents five
percent (5%) or less of the total number of outstanding shares of such business.
10.2. Covenant Not to Compete Post-Term. Following the termination or
expiration of this Agreement and for a period expiring on the earlier of three
(3) years following the expiration or termination of this Agreement or the
thirty-second anniversary of the date of this Agreement, Franchise Owner
covenants not to engage in the Territory as an owner, operator, or in any
managerial capacity in any Hospital/RTC Based Behavioral Healthcare Business,
other than as a franchisee of the Charter System pursuant to this Agreement;
provided, however, that Franchise
<PAGE>
Owner shall not be prohibited hereby from owning equity securities of any
Hospital/RTC Based Behavioral Healthcare Business whose shares are traded on a
stock exchange or on the over-the-counter market so long as said ownership
interest represents five percent (5%) or less of the total number of outstanding
shares of such business.
10.3. Acknowledgment of Reasonableness. The parties hereto acknowledge
that the provisions of Sections 10.1 and 10.2 have been negotiated fully and
fairly by the parties, each being represented and advised by counsel. Franchise
Owner acknowledges that it is willingly and freely agreeing to the provisions of
Sections 10.1 and 10.2 as reasonable and necessary under the circumstances. One
of the acknowledged reasonable business purposes of Franchisor is to protect
Franchisor's goodwill and proprietary rights. Franchise Owner further
acknowledges that Franchisor would not enter into this Agreement without the
covenants of Sections 10.1 and 10.2 and that it is fair and reasonable to
Franchise Owner that Franchise Owner be subject to such covenants.
10.4. Confidential Information. During the term of this Agreement and
following the expiration or termination of this Agreement, Franchise Owner
covenants not to communicate directly or indirectly, nor to divulge to or use
for its benefit or the benefit of any other person or legal entity, any trade
secrets which are proprietary to Franchisor or any information, knowledge or
know-how identified to Franchise Owner by Franchisor in writing as confidential
(including but not limited to the Confidential Operating Manual), except as
permitted by Franchisor. Notwithstanding the foregoing, this obligation shall
not apply to information: (a) which at the time of disclosure is readily
available to the trade or public; (b) which after disclosure becomes readily
available to the trade or public, other than through breach of this Agreement;
(c) which is subsequently lawfully and in good faith obtained by such party from
an independent third party without breach of this Agreement; (d) which was in
possession of such party prior to the date of disclosure; or (e) which is
disclosed to others in accordance with the terms of a prior written
authorization between the parties to this Agreement. In the event of any
termination, expiration or non-renewal of this Agreement, Franchise Owner agrees
that it will never use Franchisor's confidential information, trade secrets,
methods of operation or any proprietary components of the Charter System in the
design, development or operation of any behavioral healthcare business,
including, without limitation, any Hospital/RTC Based Behavioral Healthcare
Business. The protection granted hereunder shall be in addition to and not in
lieu of all other protections for such trade secrets and confidential
information as may otherwise be afforded in law or in equity.
10.5. Confidential Agreements with Certain Employees. Consistent with
Franchisor's existing practices with respect to employee non-disclosure
agreements, Franchise Owner agrees to maintain and cause new employees of
Franchise Owner to execute employee non-disclosure agreements in the form
employed by Franchisor as of the date hereof (or such other form as reasonably
requested by Franchisor), with its managers, which shall prohibit disclosure by
such parties to any other person or legal entity of any trade secrets or any
other information, knowledge or know-how identified as confidential by
Franchisor in writing to Franchise Owner concerning the operation of the
Franchised Business. Franchisor shall be a third party beneficiary of such
<PAGE>
agreements and Franchise Owner shall not amend, modify or terminate any such
agreement without Franchisor's prior written consent.
10.6. Severability. The parties agree that each of the foregoing
covenants shall be construed as independent of any other covenant or provision
of this Agreement. Should any part of one or more of these restrictions be found
to be unenforceable by virtue of its scope in terms of area, business activity
prohibited or length of time, and should such part be capable of being made
enforceable by reduction of any or all thereof, Franchise Owner and Franchisor
agree that the same shall be enforced to the fullest extent permissible under
the law. In addition, Franchisor may, unilaterally, at any time, in its sole
discretion, revise any of the covenants in this Article 10 so as to reduce the
obligations of Franchise Owner hereunder. The running of any period of time
specified in this Article 10 shall be tolled and suspended for any period of
time in which the Franchise Owner is found by a court of competent jurisdiction
to have been in violation of any restrictive covenant. Franchise Owner further
expressly agrees that the existence of any claim it may have against Franchisor
whether or not arising from this Agreement, shall not constitute a defense to
the enforcement by Franchisor of the covenants in this Article 10.
10.7. Waiver of Surety Defenses by Franchisor and Nature of
Obligations. The obligations of Franchisor under this Agreement are joint and
several and include any and all debts, obligations, whether of payment or
performance, and liabilities arising out of or relating to this Agreement,
whether such debts, obligations and liabilities are heretofore, now, or
hereafter made, incurred, or created, whether such debts, obligations and
liabilities are voluntary or involuntary, liquidated or unliquidated, secured or
unsecured, and including but not limited to contingent debts, obligations and
liabilities, and whether or not any or all such debts, obligations and
liabilities are or become unenforceable against either Franchisor as a result of
the operation of bankruptcy or insolvency laws.
With respect to any debt, liability or obligation with respect
to which one Franchisor is deemed to be a surety or guarantor of the other
Franchisor, such Franchisor deemed to be a surety or guarantor hereby
unconditionally and irrevocably waives (a) (i) any right to require that any
action be brought against the other Franchisor without regard to whether the
other Franchisor, or both, were directly responsible for any breach of this
Agreement; (ii) presentment, notice of dishonor, protest, diligence, demand for
payment, performance or enforcement, and all notices of any kind, including
without limitation: notice of acceptance hereof, notice of the creation of any
obligations of Franchisor hereunder (except as otherwise expressly required in
this Agreement), notice of nonpayment, nonperformance or other default, and
notice of any action taken to collect upon any of the obligations of Franchisor
hereunder or enforce any of the provisions hereof against Franchisor; and (iii)
any claim for contribution from any other person, including the other
Franchisor; and (b) except to the extent that Franchise Owner would not have had
the benefit of such protections had the Franchisor not been deemed to be a
surety or guarantor (i) any failure of Franchise Owner to take any steps to
preserve its rights hereunder; (ii) any setoffs against Franchise Owner which
would otherwise impair Franchise Owner's rights against
<PAGE>
either Franchisor hereunder; and (iii) any requirement to mitigate damages. Each
Franchisor also expressly waives the provisions of Sections 49-25 and 49-26 of
the Code of Virginia.
11. TRANSFER AND ASSIGNMENT
11.1. Assignment by Franchisor. This Agreement and all rights and
duties hereunder may not be assigned or transferred by Franchisor except (i)
with the prior written consent of Franchise Owner and Crescent, in its capacity
as lessor under the Facilities Lease (as defined in Section 1.21 of the Master
Franchise Agreement), which consent shall not be unreasonably withheld,
conditioned or delayed, or (ii) to an entity which simultaneously therewith
acquires all or substantially all of Franchisor's business and assets.
Franchisor may grant a security interest in Franchisor's rights and interest in
(but not its obligations under) this Agreement to any of Franchisor's lenders by
means of an assignment for collateral purposes.
11.2. Assignment by Franchise Owner.. This Agreement and any rights and
duties hereunder may not be assigned or transferred by Franchise Owner except
(i) with the prior written consent of Franchisor, which consent shall not be
unreasonably withheld, conditioned or delayed, to any entity which
simultaneously therewith acquires all or substantially all of Franchise Owner's
business and assets (including the assignment of Franchise Owners's rights and
obligations as lessee under the lease with Crescent), or (ii) if the Facilities
Lease is terminated prior to the end of the Initial Term or any Extended term as
a result of an Event of Default under the Facilities Lease, and if Crescent
exercises its election under the Facilities Lease to assume all (but not less
than all) of the Obligations of Franchise Owner under this Agreement and all
other agreements specified in the Facilities Lease from the date of such
assumption, to Crescent or its designee. A transaction or transactions pursuant
to which OpCo no longer has voting control of Franchise Owner through stock
ownership shall be deemed an assignment or transfer of this Agreement.
11.3. Conditions of Any Approval. Franchise Owner understands and
acknowledges the vital importance of the performance of Franchise Owner to the
market position and overall image of Franchisor. The consent of Franchisor to an
assignment or transfer by Franchise Owner shall be subject, but not be limited
to, the following conditions:
(a) The proposed transferee is a person or entity
which meets the Franchisor's standards of qualification then applicable
with respect to all new applicants for similar Charter System
franchisees;
(b) The proposed transfer is upon reasonable
terms and conditions;
(c) As of the effective date of the proposed
transfer, all obligations of Franchise Owner hereunder and under any
other agreements between Franchise Owner and Franchisor are satisfied
in all material respects;
<PAGE>
(d) As of the effective date of the proposed
transfer, all obligations of the proposed transferee to the Franchisor
under all other agreements of any kind between the proposed transferee
and Franchisor are satisfied in all material respects;
(e) Franchise Owner must request that Franchisor
provide the prospective transferee with the Franchisor's current form
of disclosure document required by the Federal Trade Commission's Trade
Regulation Rule on Franchising and/or other applicable state franchise
registration/disclosure laws, and a receipt for such document shall be
delivered to Franchisor, acknowledging that Franchisor shall not be
liable for any representations other than those contained in such
disclosure document;
(f) The proposed transferee must execute a new
franchise agreement, namely, Franchisor's then-current form of facility
franchise agreement, which may contain terms and conditions
substantially different from those in this Agreement, for an initial
term equal to the time remaining in the term of this Agreement, unless
the proposed transferee would be or is an OpCo Franchisee;
(g) The transferor and the transferee shall have
executed a general release under seal where required, in a form
reasonably satisfactory to Franchisor, of any and all claims
(including, without limitation, claims arising under federal, state,
and local laws, rules, and ordinances) against Franchisor, its parent,
subsidiaries, affiliates and their officers, directors, attorneys,
shareholders, and employees, in their corporate and individual
capacities, arising out of, or connected with, the performance of this
Agreement or any other agreement; and
(h) The transferee shall demonstrate to Franchisor's
reasonable satisfaction that (i) it meets all of Franchisor's
requirements for becoming one of its franchisees, including, without
limitation, that it meets Franchisor's managerial and business
standards then in effect for similarly situated franchise owners; (ii)
possesses a good moral character, business reputation, and satisfactory
credit rating; and (iii) is not a competitor of Franchisor, will comply
with all instruction and training requirements of Franchisor and has
the aptitude and ability to operate the Franchised Business (as may be
evidenced by prior related business experience or otherwise).
11.4. Consent Not a Waiver. Franchisor's consent to an assignment by
the Franchise Owner granted herein shall not constitute a waiver of any claims
it may have against the transferring party, nor shall it be deemed a waiver of
Franchisor's right to demand exact compliance with any of the terms of this
Agreement by the transferee.
11.5. Parties Bound and Benefitted. This Agreement shall be binding
on the parties and their respective successors and assigns. This Agreement shall
inure to the benefit of the parties and their respective permitted successors
and assigns.
<PAGE>
12. DEFAULT AND TERMINATION
12.1. Franchisor's Right to Terminate. Franchisor may not terminate
this Agreement prior to the expiration of its term except for "good cause,"
which shall mean the occurrence of any event of default described in (a) and (f)
below, but shall specifically not include the failure to pay Franchisor any
amount due to Franchisor under and pursuant to Articles 4 or 8 hereof, which
Franchisor agrees will not be an event of default giving rise to a right to
terminate this Agreement. Upon the occurrence of any such event of default,
Franchisor may, at its option, and without waiving its rights hereunder or any
other rights available at law or in equity, including its rights to damages,
terminate this Agreement and all of Franchise Owner's rights hereunder effective
immediately upon the date Franchisor gives written notice of termination, upon
such other date as may be set forth in such notice of termination, or in those
instances enumerated below in paragraph (a), automatically upon the occurrence
of an event of default. The occurrence of any one or more of the following
events shall constitute an event of default and grounds for termination of this
Agreement by Franchisor:
(a) Automatically, without notice or action required
by Franchisor, if Franchise Owner becomes insolvent or makes a general
assignment for the benefit of creditors, or, unless otherwise
prohibited by law, if a petition in bankruptcy is filed by Franchise
Owner, or such a petition is filed against and consented to by
Franchise Owner or not dismissed within thirty (30) days, or if a bill
in equity or other proceeding for the appointment of a receiver of
Franchise Owner or other custodian for Franchise Owner's business or
assets is filed and consented to by Franchise Owner, or if a receiver
or other custodian (permanent or temporary) of Franchise Owner's assets
or property, or any part thereof, is appointed;
(b) If there is any violation of any transfer and
assignment provision contained in Article 11 of this Agreement;
(c) If Franchise Owner fails, for a period of fifteen
(15) days after notification of non-compliance by appropriate authority
to comply with any law, rule or regulation applicable to the operation
of the Franchised Business; provided, however, that if such
non-compliance is susceptible to cure but such cure cannot be
accomplished with due diligence within such period of time, and if, in
addition, Franchise Owner commences to cure such non-compliance within
15 days after notification of non-compliance and thereafter prosecutes
the curing of such non-compliance with due diligence, such period of
time shall be extended to such period of time (not to exceed an
additional ninety (90) days in the aggregate) as may be necessary to
cure such non-compliance with due diligence;
(d) If Franchise Owner, other than in an immaterial
respect, violates, any covenant of confidentiality or non-disclosure
contained in Article 10 of this Agreement;
<PAGE>
(e) If Franchise Owner fails to perform or breaches
any covenant, obligation, term, condition, warranty or certification
herein or fails to operate the Franchised Business as specified by
Franchisor herein or in the Confidential Operating Manual and fails to
cure such noncompliance or deficiency within thirty (30) days after
Franchisor's written notice thereof; provided, however, that if such
non-compliance or deficiency is susceptible to cure but such cure
cannot be accomplished with due diligence within such period of time,
and if, in addition, Franchise Owner commences to cure such
non-compliance or deficiency within 30 days after notification of
non-compliance or deficiency and thereafter prosecutes the curing of
such non-compliance or deficiency with due diligence, such period of
time shall be extended to such period of time (not to exceed an
additional one hundred eighty (180) days in the aggregate) as may be
necessary to cure such non-compliance or deficiency with due diligence;
(f) If Franchise Owner abandons the operation of all
or any substantial part of the Franchised Business conducted under this
Agreement for twenty-four (24) hours or longer (except as otherwise
provided herein or agreed to by Franchisor) or defaults under any
mortgage, deed of trust or lease with Franchisor or any third party
covering the Franchised Business or of any premises from or at which
the Franchised Business is operated and Franchisor or such third party
treats such act or omission as a default, and Franchise Owner fails to
cure such default to the satisfaction of Franchisor or such third party
within any applicable cure period granted Franchise Owner by Franchisor
or such third party;
12.2. Franchise Owner's Right to Terminate. Franchise Owner may not
terminate this Agreement prior to the expiration of its term (whether because of
Franchisor's breach, material or otherwise) except with the prior written
consent of Franchisor.
13. POST TERM OBLIGATIONS
Upon the expiration or termination of this Agreement, Franchise Owner
shall immediately:
13.1. Cease Operations. Cease to be a franchisee of Franchisor under
this Agreement and cease to operate the former Franchised Business under the
Charter System. Franchise Owner shall not thereafter, directly or indirectly,
represent to the public that the former Franchised Business is or was operated
or in any way connected with the Charter System or hold itself out as a present
(or, publicly, as a former) franchisee of Franchisor at or with respect to any
premises from or at which the Franchised Business operated;
13.2. Pay All Sums Outstanding. Pay all sums owing to Franchisor
subject to the Subordination Agreement.
<PAGE>
13.3. Return Confidential Operating Manual. Return to Franchisor the
Confidential Operating Manual and all trade secret and other confidential
materials, equipment and other property owned by Franchisor, and all copies
thereof, including all such provided to any third party by Franchise Owner.
(Franchisor shall not provide any such to any third parties without the written
consent of Franchisor in each instance.) Franchise Owner shall retain no copy or
record of any of the foregoing; provided Franchise Owner may retain its copy of
this Agreement, any correspondence between the parties, and any other document
which Franchise Owner reasonably needs for compliance with any applicable
provision of law.
13.4. Cease Use of System. Cease to use in advertising, or in any
manner whatsoever, any methods, procedures, protocols, programs, procedures or
techniques associated with the Charter System in which Franchisor has a
proprietary right, title or interest; cease to use the Licensed Marks and any
other marks and indicia of operation associated with the Charter System and
remove all trade dress, physical characteristics, color combinations and other
indications of operation under the Charter System from any premises from or at
which the Franchised Business operated. Without limiting the generality of the
foregoing, Franchise Owner agrees that in the event of any termination or
expiration of this Agreement, it will remove all signage bearing the Licensed
Marks, and, upon Franchisor's request, deliver the facia for such signs to
Franchisor, and will remove any items which are characteristic of the Charter
System "trade dress" from any premises from or at which the Franchised Business
operated. Franchise Owner agrees that Franchisor or a designated agent may enter
upon any premises from or at which the Franchised Business operated at any time
in a reasonable manner to make such changes at Franchise Owner's sole risk and
expense and without liability for trespass.
14. INSURANCE
14.1. Maintenance of Insurance. Throughout the term of this Agreement,
Franchise Owner shall maintain in effect at all times a policy or policies of
insurance, designating Franchisor as an additional insured at Franchise Owner's
sole cost and expense as described on Exhibit 4 hereto.
14.2. Notices of Claims. Franchise Owner shall promptly notify
Franchisor of any and all claims against Franchise Owner and/or Franchisor under
said policies of insurance and shall deliver to Franchisor certificates
evidencing that the insurance required by Section 14.1 is in full force and
effect within thirty (30) days after signing this Agreement and each year
thereafter. Such insurance certificates shall contain a statement that the
insurance shall not be canceled without thirty (30) days' prior written notice
to Franchise Owner and to Franchisor.
14.3. Notices of Other Claims/Events. Franchise Owner shall provide to
Franchisor notice of any and all demands, claims, suits, actions, causes of
action, proceedings and assessments (together "Claims") brought, made or
threatened in writing against Franchise Owner, and of the occurrence of any
events which might result in such a Claim, in each case within five (5) business
days after Franchise Owner becomes aware thereof, and will provide to Franchisor
<PAGE>
information concerning such Claims or events as Franchisor may from time to time
reasonably request.
15. TAXES, PERMITS AND INDEBTEDNESS
15.1. Payment. Franchise Owner shall promptly pay when due any and all
federal, state and local taxes, including without limitation unemployment and
sales taxes, levied or assessed with respect to any services or products
furnished, used or licensed pursuant to this Agreement and all accounts or other
indebtedness of every kind incurred by Franchise Owner in the operation of the
Franchised Business.
15.2. Compliance with all Laws and Regulations. Franchise Owner shall
comply with all federal, state and local laws, rules and regulations and timely
obtain any and all permits, certificates and licenses for the full and proper
conduct of the Franchised Business.
15.3. Full Responsibility. Franchise Owner hereby expressly
covenants and agrees to accept full and sole responsibility for any and all
debts and obligations incurred in the operation
of the Franchised Business.
16. INDEMNIFICATION AND INDEPENDENT CONTRACTOR
16.1. Indemnification and Hold Harmless. Franchise Owner agrees to
protect, defend, indemnify, and hold Franchisor, and its respective directors,
officers, agents, attorneys and shareholders, jointly and severally, harmless
from and against all claims, actions, proceedings, damages, costs, expenses and
other losses and liabilities, directly or indirectly incurred (including without
limitation reasonable attorneys' and accountants' fees) as a result of, arising
out of, or connected with the operation of the Franchised Business, except those
directly arising from Franchisor's willful misconduct or fraud. Franchisor
agrees to protect, defend, indemnify and hold Franchise Owner, and its
respective directors, officers, agents, attorneys and shareholders, jointly and
severally, harmless from and against all claims, actions, proceedings, damages,
costs, expenses and other losses and liabilities, directly or indirectly arising
out of or connected with the operation of the Franchised Business arising
directly from Franchisor's willful misconduct or fraud.
16.2. Independent Contractor. In all dealings with third parties
including, without limitation, employees, suppliers and patients, Franchise
Owner shall disclose in an appropriate manner reasonably acceptable to
Franchisor that it is an independent entity licensed by Franchisor. Nothing in
this Agreement is intended by the parties hereto to create a fiduciary
relationship between them nor to constitute either party an agent, legal
representative, subsidiary, joint venturer, partner, employee or servant of the
other for any purpose whatsoever. It is understood and agreed that Franchise
Owner is an independent contractor and is in no way authorized to make any
contract, warranty or representation or to create any obligation on behalf of
Franchisor.
17. WRITTEN APPROVALS, WAIVERS, FORMS OF AGREEMENT AND
AMENDMENT
17.1. Prior Approvals. Whenever this Agreement requires Franchisor's
prior approval, Franchise Owner shall make a timely written request. Unless a
different time period is specified in this Agreement, Franchisor shall respond
with its approval or disapproval within fifteen (15) days of receipt of such
request. If Franchisor has not specifically approved a request within such
fifteen (15) day period, such failure to respond shall be deemed disapproval of
any such request.
17.2. No Waiver. No failure of Franchisor to exercise any power
reserved to it by this Agreement and no custom or practice of the parties at
variance with the terms hereof shall constitute a waiver of Franchisor's right
to demand exact compliance with any of the terms herein. No waiver or approval
by Franchisor of any particular breach or default by Franchise Owner, nor any
delay, forbearance or omission by Franchisor to act or give notice of default or
to exercise any power or right arising by reason of such default hereunder, nor
acceptance by Franchisor of any payments due hereunder shall be considered a
waiver or approval by Franchisor of any preceding or subsequent breach or
default by Franchise Owner of any term, covenant or condition of this Agreement.
17.3. Form of Agreements. No warranty or representation is made by
Franchisor that all Charter System franchise agreements heretofore or hereafter
issued by Franchisor do or will contain terms substantially similar to those
contained in this Agreement. Further, Franchise Owner recognizes and agrees that
Franchisor may, in its reasonable business judgment, due to local business
conditions or otherwise, waive or modify comparable provisions of other
franchise agreements heretofore or hereafter granted to other Charter System
franchise owners in a non-uniform manner, subject, however, to those provisions
of this Agreement which require Franchisor to act toward its Franchise Owners on
a reasonably nondiscriminatory basis.
17.4. Written Amendments. Except as otherwise specifically provided in
this Agreement, no amendment, change or variance from this Agreement shall be
binding upon either Franchisor or Franchise Owner except by mutual written
agreement or in accordance with Section 3.10 of the Subordination Agreement. If
an amendment of this Agreement is executed at Franchise Owner's request, any
legal fees or costs of preparation in connection therewith shall, at the option
of Franchisor, be paid by Franchise Owner.
18. ENFORCEMENT
18.1. Inspections. In order to ensure compliance with this Agreement
and to enable Franchisor to carry out its obligation under this Agreement,
Franchise Owner agrees that Franchisor and its designated agents shall be
permitted, with or without notice, full and complete access during business
hours to inspect all premises from or at which the Franchised Business is
conducted and all records thereof, including, but not limited to, records
relating to Franchise
<PAGE>
Owner's patients, suppliers, employees and agents. Franchise Owner shall
cooperate fully with Franchisor and its designated agents requesting such
access.
18.2. Injunctive Relief. Franchisor or its designee shall be entitled
to obtain, without bond, declaratory judgments, temporary and permanent
injunctions, and orders of specific performance, in order to enforce the
provisions of this Agreement relating to Franchise Owner's use of the Licensed
Marks, the obligations of Franchise Owner upon termination or expiration of this
Agreement, and assignment of this Agreement and/or ownership interests in
Franchise Owner or to prohibit any act or omission by Franchise Owner or its
employees which constitutes a violation of any applicable law or regulation,
which is dishonest or misleading to prospective or current customers of
businesses operated under the Charter System, which constitutes a danger to
other franchise owners, employees, patients or the public, or which may impair
the goodwill associated with the Licensed Marks.
18.3. Costs and Expenses. If Franchisor secures any declaratory
judgment, injunction or order of specific performance pursuant to this Article
18, or otherwise, if any provision of this Agreement is enforced at any time by
Franchisor or if any amounts due from Franchise Owner to Franchisor are, at any
time, collected by or through an attorney at law or collection agency, Franchise
Owner shall be liable to Franchisor for all costs and expenses of enforcement
and collection including, but not limited to, court costs and reasonable
attorneys' fees.
18.4. No Right to Offset. Franchise Owner will not, for any reason,
withhold payment of any monthly payment, fee or any other fees or payments due
to the Franchisor under this Agreement or pursuant to any other contract,
agreement or obligation to the Franchisor. Franchise Owner shall not have the
right to "offset" any liquidated or unliquidated amounts, damages or other funds
allegedly due to the Franchise Owner from the Franchisor against any monthly
payment, fee or any other fees or payments due to the Franchisor under this
Agreement or otherwise.
19. ENTIRE AGREEMENT
THIS AGREEMENT INCLUDING THE EXHIBITS REFERRED TO HEREIN AND THE
TRANSACTION DOCUMENTS (AS DEFINED IN THE MASTER FRANCHISE AGREEMENT) CONTAIN THE
ENTIRE AGREEMENT OF THE PARTIES. NO OTHER AGREEMENTS, WRITTEN OR ORAL, SHALL BE
DEEMED TO EXIST, AND ALL PRIOR AGREEMENTS AND UNDERSTANDINGS ARE SUPERSEDED
HEREBY. THERE ARE NO CONDITIONS TO THIS AGREEMENT WHICH ARE NOT EXPRESSED HEREIN
OR IN THE TRANSACTION DOCUMENTS. NO OFFICER, EMPLOYEE OR AGENT OF FRANCHISOR HAS
ANY AUTHORITY TO MAKE ANY REPRESENTATION OR PROMISE NOT CONTAINED IN THIS
AGREEMENT OR IN THE TRANSACTION DOCUMENTS, AND FRANCHISE OWNER AGREES THAT IT
HAS EXECUTED THIS AGREEMENT WITHOUT RELIANCE UPON ANY SUCH REPRESENTATION OR
PROMISE. THIS
<PAGE>
AGREEMENT SHALL NOT BE BINDING UPON FRANCHISOR UNTIL EXECUTED BY AN AUTHORIZED
OFFICER THEREOF.
20. NOTICES
Any notice required to be given hereunder shall be in writing and shall
be either mailed by certified mail, return receipt requested or delivered by a
recognized courier service, receipt acknowledged. Notices to Franchise Owner
shall be addressed to it at the address listed in Article 1 of this Agreement.
Notices to Franchisor shall be addressed to it at the address listed in Article
1 of this Agreement. Attention: President. Any notice complying with the
provisions hereof shall be deemed to be given three (3) days after mailing, or
on the date of receipt, whichever is earlier. Each party shall have the right to
designate any other address for such notices by giving notice thereof in the
foregoing manner, and in such event all notices to be mailed after receipt of
such notice shall be sent to such other address.
21. GOVERNING LAW AND DISPUTE RESOLUTION
21.1. Governing Law. This Agreement shall be interpreted, construed,
applied and enforced in accordance with the laws of the State of Delaware
applicable to contacts among residents of Delaware which are to be performed
entirely within Delaware, regardless of (i) where this Agreement is executed or
delivered; or (ii) where any payment or other performance required to be made;
or (iii) where any breach of any provision of this Agreement occurs, or any
cause of action otherwise accrues; or (iv) where any action or other proceeding
is instituted or pending; or (v) the nationality, citizenship, domicile,
principal place of business or jurisdiction of organization or domestication of
any party; or (vi) whether the laws of the forum jurisdiction otherwise would
apply the laws of a jurisdiction other than the State of Delaware; or (vii) any
combination of the foregoing.
Subject to Section 21.2 below, to the maximum extent permitted by
applicable law, any action to enforce, arising out of, or relating in any way
to, any of the provisions of this Agreement may be brought and prosecuted in
such court or courts located in the State of Delaware as is provided by law; and
the parties consent to the jurisdiction of said court or courts located in the
State of Delaware and to service of process by registered mail, return receipt
requested, or by any other manner provided by law.
21.2. Arbitration Litigation. (a) Any dispute, controversy or claim
arising out of or relating to this Agreement or any contract or agreement
entered into pursuant hereto or the performance by the parties of its or their
terms shall be settled by binding arbitration held in Wilmington, Delaware, in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association then in effect. Judgment upon the award rendered by the
arbitrator(s) may be entered in any court having in personam and subject matter
jurisdiction. The parties hereby submit to the in personam jurisdiction of the
federal and state courts in Delaware, for the purpose of confirming any such
award and entering judgment thereon; and
<PAGE>
(b) Notwithstanding the foregoing, Franchisor may, in its
discretion, apply to a court of competent jurisdiction for equitable relief from
any violation or threatened violation of the covenants of Franchise Owner in
this Agreement, including but not limited to, as provided in Section 18.2.
Franchise Owner acknowledges that its violation or threatened violation of the
provisions of Article 10 would cause irreparable injury and, in addition to any
other remedies to which Franchisor may be entitled, that Franchisor shall be
entitled to injunctive relief.
22. SEVERABILITY, CONSTRUCTION AND OTHER MATTERS
22.1. Severability. Should any provision of this Agreement be for any
reason held invalid, illegal or unenforceable by a court of competent
jurisdiction, such provision shall be deemed restricted in application to the
extent required to render it valid; and the remainder of this Agreement shall in
no way be affected and shall remain valid and enforceable for all purposes. In
the event that any provision of this Agreement should be for any reason held
invalid, illegal or unenforceable by a court of competent jurisdiction, or in
the event the performance or compliance by any party with any provision of this
Agreement shall result in such party being in violation of any law, rule or
regulation of any governmental authority, then in any of such events the parties
agree to use commercially reasonable best efforts to amend in a manner
reasonably consistent with each party's economic interests the obligations of
the parties under and pursuant to this Agreement so as to cause the parties'
obligations hereunder to be enforceable and not in violation of any law, rule or
regulation of any governmental authority. In the event such total or partial
invalidity or unenforceability of any provision of this Agreement exists only
with respect to the laws of a particular jurisdiction, this paragraph shall
operate upon such provision only to the extent that the laws of such
jurisdiction are applicable to such provision. Each party agrees to execute and
deliver to the other any further documents which may be reasonably required to
effectuate fully the provisions hereof. Franchise Owner understands and
acknowledges that Franchisor shall have the right, in its sole discretion, on a
temporary or permanent basis, to reduce the scope of any covenant or provision
of this Agreement binding upon Franchise Owner, or any portion hereof, without
Franchise Owner's consent, effective immediately upon receipt by Franchise Owner
of written notice thereof, and Franchise Owner agrees that it will comply
forthwith with any covenant as so modified, which shall be fully enforceable.
22.2. Regulatory Reports. Each party agrees to reasonably cooperate
with the other in providing on a timely basis all documents and information in
its possession or reasonably available to it, reasonably required by the other
for reports or filings required by any governmental or other regulatory
authority.
22.3. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, but such counterparts together shall constitute one and the same
instrument.
22.4. Table of Contents, Headings and Captions. The table of contents,
headings and captions contained herein are for the purposes of convenience and
reference only and are not to
<PAGE>
be construed as a part of this Agreement. All terms and words used herein shall
be construed to include the number and gender as the context of this Agreement
may require. The parties agree that each section of this Agreement shall be
construed independently of any other section or provision of this Agreement.
23. MANAGEMENT CONTRACTS/JOINT VENTURES/CONSULTING
AGREEMENTS
Franchise Owner agrees during the continuance of this Agreement that it
will not enter into any new management agreements, Joint Ventures or consulting
or other agreements relating to a Hospital/RTC Based Behavioral Healthcare
Business ("New Arrangements") except (i) in the event a Franchise Agreement is
entered into by Franchisor with respect to such business, or (ii) with the
written consent of Franchisor in each instance. In each instance of a Joint
Venture in which Franchisor shall have provided such written consent, Franchisor
and Franchise Owner, prior thereto, shall have agreed with respect to the Joint
Venture (i) to the payment to Franchisor, in addition to all other amounts
payable pursuant to this Agreement, of a percentage of Franchise Owner's gross
receipts from such New Arrangement agreeable to Franchise Owner and Franchisor
or (ii) to the inclusion in Gross Revenues of the Business Gross Revenues of any
such Joint Venture. For each Managed Business that is the subject of a New
Arrangement, Franchise Owner shall pay to Franchisor (i) with respect to any
such services provided to Managed Businesses within the Territory, 15% of (a)
the total fees received by Franchise Owner, less (b) Franchise Owner's direct
costs (not including overhead) of providing such services, or (ii) unless
otherwise agreed by Franchisee or Franchise Owner, with respect to any such
services provided to Managed Businesses outside the Territory, 30% of (a) the
total fees received by Franchise Owner, less (b) Franchise Owner's direct costs
(not including overhead) of providing such services (the amounts received by
Franchisor pursuant to (i) or (ii) above are herein referred to as "New
Arrangement Management Fees").
24. MANAGED CARE AGREEMENTS/PREFERRED PROVIDER STATUS
The parties agree that during the continuance of this Agreement, all
existing and future Managed Care Agreements, as defined below, shall be held in
the name of Franchisor or a subsidiary of Franchisor. Franchise Owner agrees
during the continuance of this Agreement that neither it nor any subsidiary or
affiliate will enter into any Managed Care Agreements. For the purposes of this
Agreement, "Managed Care Agreements" means any and all contracts, agreements,
letters of agreement, memoranda of understanding, or any like written or oral
agreement (hereinafter referred to as "Managed Care Agreement"), with any
insurer, managed care company or any other third-party payor (hereinafter
collectively referred to as "Payor") which is obligated to pay for behavioral
health care benefits for any person pursuant to a Payor benefit contract with
such person, and under which such Managed Care Agreements such behavioral health
services are provided for a negotiated reimbursement rate. The parties agree
that for the purposes of this Agreement, Managed Care Agreements shall not
include any
<PAGE>
agreement for the provision of behavioral health care services solely with a
county or a local employee assistance program with services provided solely by
Franchise Owner.
The parties acknowledge that Franchisor or a subsidiary of Franchisor
shall subcontract with OpCo to provide staffing to service and negotiate such
Managed Care Agreements; provided, however, that Franchisor shall retain the
right to determine which, if any, Managed Care Agreement shall be entered into
in Franchisor's name. Franchisor shall use commercially reasonable best efforts,
subject to applicable law, to cause Franchise Owner to have "preferred provider"
status in connection with Franchisor's managed behavioral healthcare business on
a basis substantially consistent with existing covenants, terms and conditions,
unless the customer directs otherwise.
25. ACKNOWLEDGMENTS
25.1. FRANCHISE OWNER ACKNOWLEDGES THAT FRANCHISOR OR ITS AGENT HAS
PROVIDED FRANCHISE OWNER WITH A FRANCHISE OFFERING CIRCULAR NOT LATER THAN THE
EARLIER OF THE FIRST PERSONAL MEETING HELD TO DISCUSS THE SALE OF A FRANCHISE,
TEN (10) BUSINESS DAYS BEFORE THE EXECUTION OF THIS AGREEMENT, OR TEN (10)
BUSINESS DAYS BEFORE ANY PAYMENT OF ANY CONSIDERATION. FRANCHISE OWNER FURTHER
ACKNOWLEDGES THAT FRANCHISE OWNER HAS READ SUCH FRANCHISE OFFERING CIRCULAR AND
UNDERSTANDS ITS CONTENTS.
25.2. FRANCHISE OWNER ACKNOWLEDGES THAT FRANCHISOR HAS PROVIDED FRANCHISE
OWNER WITH A COPY OF THIS AGREEMENT AND ALL RELATED DOCUMENTS, FULLY COMPLETED,
AT LEAST FIVE (5) BUSINESS DAYS PRIOR TO FRANCHISE OWNER'S EXECUTION HEREOF.
25.3. FRANCHISE OWNER IS AWARE OF THE FACT THAT OTHER PRESENT OR FUTURE
FRANCHISE OWNERS OF FRANCHISOR MAY OPERATE UNDER DIFFERENT FORMS OF
AGREEMENT(S), AND CONSEQUENTLY THAT FRANCHISOR'S OBLIGATIONS AND RIGHTS WITH
RESPECT TO ITS VARIOUS DEVELOPERS AND FRANCHISE OWNERS MAY DIFFER MATERIALLY IN
CERTAIN CIRCUMSTANCES.
25.4. FRANCHISE OWNER ACKNOWLEDGES THAT THIS INSTRUMENT AND THE TRANSACTION
DOCUMENTS CONSTITUTE THE ENTIRE AGREEMENT OF THE PARTIES. EXCEPT AS SET FORTH IN
THE TRANSACTION DOCUMENTS, THIS AGREEMENT TERMINATES AND SUPERSEDES ANY PRIOR
AGREEMENT BETWEEN THE PARTIES CONCERNING THE SAME SUBJECT MATTER.
25.5. FRANCHISE OWNER ACKNOWLEDGES THAT COMPUTER SOFTWARE LICENSED
HEREUNDER IS FURNISHED "AS IS". FRANCHISOR MAKES NO WARRANTIES, WHETHER EXPRESS
OR IMPLIED WITH RESPECT TO SUCH
<PAGE>
SOFTWARE AND DOCUMENTATION DESCRIBING SUCH SOFTWARE, ITS QUALITY, ITS
PERFORMANCE, MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE. THE ENTIRE
RISK AS TO THE QUALITY AND PERFORMANCE OF SOFTWARE AND DOCUMENTATION DESCRIBING
SUCH SOFTWARE IS WITH FRANCHISE OWNER.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement under seal on the date first written above.
MAGELLAN HEALTH SERVICES, INC.
By: ________________________________
Title: _______________________
CHARTER FRANCHISE SERVICES, LLC
By: ________________________________
Title: _______________________
CHARTER BEHAVIORAL HEALTH
SYSTEM OF CENTRAL GEORGIA,
LLC
By: ________________________________
Title: _______________________
<PAGE>
SUBORDINATION AGREEMENT
THIS SUBORDINATION AGREEMENT (this "Agreement") is made as of the 16th day of
June, 1997, among CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC, a Delaware limited
liability company ("OpCo"), CRESCENT REAL ESTATE FUNDING VII, L.P., a Delaware
limited partnership ("Crescent"), MAGELLAN HEALTH SERVICES, INC., a Delaware
corporation ("MHS"), and CHARTER FRANCHISE SERVICES, LLC, a Delaware limited
liability company ("Charter Franchise"). MHS and Charter Franchise are
hereinafter referred to collectively as "Magellan."
RECITALS:
A. Crescent, as landlord, and OpCo and each of certain wholly-owned subsidiaries
of OpCo (collectively, the "Initial OpCo Subs"), collectively as tenant, are
parties to that certain Master Lease Agreement of even date herewith (as the
same may be amended or modified, the "Lease").
B. Magellan, as franchisor, and OpCo, as franchisee, are parties to that certain
Master Franchise Agreement dated effective as of June 17, 1997, and each of the
Initial OpCo Subs, as a franchisee, and Magellan, as franchisor, is a party to
an individual franchise agreement as described in the Master Franchise Agreement
(the Master Franchise Agreement and such individual franchise agreements,
together with any new franchise agreements now or hereafter entered into between
Magellan, as franchisor, and OpCo, any Initial OpCo Sub, or any other subsidiary
of OpCo now or hereafter in existence, as such Master Franchise Agreement,
individual franchise agreements or other franchise agreements may be amended or
modified, are referred to herein collectively as the "Franchise Agreement").
C. OpCo and Magellan desire to subordinate, to the extent set forth herein, the
payment and performance of the Franchise Agreement to the payment and
performance of certain obligations under the Lease upon the terms and conditions
set forth below, and Magellan and Crescent desire to establish certain duties,
rights and responsibilities among themselves with respect to the obligations of
the OpCo, the Initial OpCo Subs, and any other subsidiary of OpCo now or
hereafter in existence that enters into a franchise agreement with MHS and/or
Charter Franchise (the Initial OpCo Subs and such other subsidiaries of OpCo
being hereinafter referred to collectively as the "OpCo Subs").
NOW, THEREFORE, in consideration of the foregoing and other valuable
consideration hereby acknowledged, and in order to induce Crescent to enter into
the Lease with OpCo, OpCo, Crescent and Magellan agree as follows:
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1
DEFINITIONS
1.1 "Additional Charges" hall have the meaning given such term in the Lease
payable with respect to the Term.
1.2"Additional Rent" shall have the meaning given such term in the Lease payable
with respect to the Term.
1.3 than Saturday, Sunday, or any other day
on which banking institutions in the states of Texas, Georgia, and the State are
authorized by law or executive action to close.
1.4Collective Leased Properties" shall have the meaning given such term in the
Lease.
1.5Debtor Relief Laws" shall mean any applicable liquidation, conservatorship,
bankruptcy, moratorium, rearrangement, insolvency, reorganization or similar
laws relating to the relief of debtors, readjustment of indebtedness or
composition, and affecting the rights of creditors generally, which may from
time to time be in effect.
1.6Franchise Agreement" shall have the meaning given such term in the Recitals
to this Agreement.
1.7Franchise Fees" shall mean, collectively, the franchise fees payable to
Magellan under the Franchise Agreement, including interest and late charges, as
well as any fees payable to Magellan by OpCo or any OpCo Sub with respect to
Joint Ventures and/or Managed Businesses (as such terms are defined in the
Master Franchise Agreement) pursuant to Section 10 of the Master Franchise
Agreement to the extent not already included in the calculation of "Franchise
Fees" as defined in the Master Franchise Agreement.
1.8Lease" shall have the meaning given such term in the Recitals to this
Agreement.
1.9Lease Year" shall have the meaning given such term in the Lease.
1.10Leased Property" shall have the meaning given such term in the Lease.
1.11Minimum Rent" shall have the meaning given such term in the Lease payable
with respect to the Term.
1.12 Additional Rent" shall mean the amount of additional rent with respect to
any Lease Year in excess of the Priority Additional Rent Base Amount.
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1.13 Additional Rent Monthly Amount" shall mean, for each month
in a Lease Year, the monthly installment of Additional Rent payable for such
month equal to one-twelfth (1/12th) of the difference between (a) the total
Additional Rent payable for such Lease Year minus (b) the Priority Additional
Rent Base Amount for such Lease Year calculated for such month as provided below
in the definition of "Priority Additional Rent Base Amount."
1.14 Payments" shall have the meaning given such term in Section 2.2.
1.15Plan" shall have the meaning given such term in Section 2.4(c).
1.16 Additional Rent Base Amount" for any Lease Year shall mean an
amount of Additional Rent equal to Ten Million Dollars ($10,000,000); provided,
however, that if Crescent, as landlord, funds, or makes an irrevocable
commitment to fund, Capital Expenditures (as defined in the Lease) for any Lease
Year in an amount in excess of Ten Million Dollars ($10,000,000) at OpCo's
request, then the Priority Additional Rent Base Amount for such Lease Year shall
be increased to the amount of Capital Expenditures funded or committed to be
funded by Crescent for such Lease Year. Notwithstanding the foregoing, in the
event that, and for so long as, the accrued and unpaid Franchise Fees equal or
exceed Fifteen Million Dollars ($15,000,000), then the Priority Additional Rent
Base Amount for any such Lease Year shall be reduced to $0.00; provided,
however, that if Crescent funds, or makes an irrevocable commitment to fund,
Capital Expenditures for any Lease Year in any amount at OpCo's request, then
the Priority Additional Rent Base Amount for such Lease Year shall be increased
from $0.00 to the amount of Capital Expenditures funded or committed to be
funded by Crescent for such Lease Year. The Priority Additional Rent Base Amount
shall be computed monthly in advance of the payment of Rent required to be made
under the Lease for the next succeeding month. Such calculation shall be made on
the 25th day of the month, unless the 25th day of the month is not a Business
Day, in which event such calculation for such month shall be made on the first
Business Day following such 25th day. Notwithstanding anything set forth above
to the contrary, if any request by OpCo to Crescent to fund Capital Expenditures
under the Lease is for an amount in excess of the amount budgeted therefor in
OpCo's approved Annual Budget (as defined in OpCo's Operating Agreement), then
the Priority Additional Rent Base Amount shall not be increased as provided
above to the extent that the amount of such request is above the budgeted amount
unless such request is accompanied by OpCo's certification that Magellan has
approved such requested amount. Magellan acknowledges and agrees that Crescent
shall be entitled to rely upon OpCo's certification that any amount requested
either (i) is within the approved Annual Budget of OpCo or (ii) has been
approved by Magellan, and in the latter event such certification by OpCo shall
be accompanied by Magellan's written consent to such requested amount.
1.17Rent" shall mean, collectively, all Minimum Rent, including late charges and
default rate interest, and Additional Rent, but shall exclude Additional Charges
except to the extent that Additional Charges include late charges and default
rate interest.
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1.18Rescission Event" shall have the meaning given such term in Section 3.4.
1.19Returned Payment" shall have the meaning given such term in Section 3.4.
1.20State" shall mean, as to each Leased Property, the state in which such
Leased Property is located.
1.21Term" shall have the meaning given such term in the Lease.
2
SUBORDINATION
2.1 Agreement to Subordinate. Notwithstanding any provision in the Franchise
Agreement or any other agreement between (i) MHS and/or Cha ter Franchise and
(ii) OpCo or between (i) MHS and/or Charter Franchise and (ii) any OpCo Sub to
the contrary, the Franchise Fees (including any increases thereto effected from
time to time by amendments to the Franchise Agreement adding new Leased
Properties to the facilities covered thereby) are and shall be, to the extent
and in the manner hereinafter set forth, subject, subordinate and junior in
right of payment and liquidation to the prior irrevocable payment in full of the
Rent (other than Non-Priority Additional Rent), as the Rent (other than
Non-Priority Additional Rent) may be increased from time to time by amendments
to the Lease adding new Leased Properties that are also covered by the Franchise
Agreement to the Collective Leased Properties. Magellan acknowledges receipt of
a true and complete copy of the Lease. Unless and until all Rent (other than
Non-Priority Additional Rent) shall have been fully paid and the Term shall have
expired, neither MHS nor Charter Franchise will, except as otherwise expressly
provided herein, take or receive, or retain, from OpCo, any OpCo Sub, or any
other person or entity, by setoff or in any other manner, payment of all or any
part of the Franchise Fees, or accept any security therefor, and neither OpCo
nor any OpCo Sub shall make, give or permit, directly or indirectly, any such
payment, and neither MHS nor Charter Franchise shall demand or sue for any such
payment to the extent prohibited in Section 2.3. Notwithstanding the foregoing
payment subordination, but subject to the provisions of Sections 2.3 and 2.4,
OpCo may pay, and Magellan may receive, the Permitted Payments, as defined in
Section 2.2.
2.2 Permitted Payments. Notwithstanding any provision contained in this
Agreement to the contrary, so long no "Default" or "Event of Default" (as
defined therein) under or within the meaning of the Lease has occurred and is
continuing with respect to the payment of Rent (other than Non-Priority
Additional Rent), or would be created by making the payments to Magellan
hereinafter described, and so long as none of OpCo or any OpCo Sub is the
subject of any proceeding under any Debtor Relief Laws, OpCo may pay to
Magellan, and Magellan may accept from OpCo, the regularly scheduled monthly
installment of the Franchise Fees in any month, when due, as well as any accrued
and unpaid monthly installments of the Franchise Fees
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(collectively, the "Permitted Payments"), after payment by OpCo of all Rent due
for such month, excluding the Non-Priority Additional Rent Monthly Amount for
such month. Further, notwithstanding any provision contained in this Agreement
to the contrary, except in the case of a Rescission Event, Crescent shall not be
entitled to recover from Magellan any Permitted Payment or any portion thereof
that has been properly made to Magellan in accordance with the terms of this
Section 2.2.
2.3 Agreement Not to Enforce Payment or Commence Action.
(a) Notwithstanding any provision contained in this Agreement, the Franchise
Agreement or any other agreement to the contrary, prior to the payment in full
of all Rent (other than Non-Priority Additional Rent) payable un er the Lease
and the expiration of the Term, (i) neither MHS nor Charter Franchise shall
object to, challenge, hinder or delay the exercise by Crescent of any right or
remedy it may have under or with respect to the Lease or any other agreement, or
otherwise at law or in equity, against OpCo, any OpCo Sub or any of its or their
assets or properties, and (ii) neither MHS nor Charter Franchise shall have any
right to file an involuntary proceeding against OpCo or any OpCo Sub under any
Debtor Relief Laws or otherwise to enforce payment of any of the Permitted
Payments or any other portion of the Franchise Fees against OpCo or any OpCo
Sub, or to otherwise take any action against OpCo or any OpCo Sub (including,
without limitation, any proceeding under Debtor Relief Laws), or against any
property or assets of OpCo or any OpCo Sub, in order to collect the Permitted
Payments or any other portion of the Franchise Fees, without the prior written
consent of Crescent, if such action could reasonably be expected to lead to
OpCo's or any OpCo Sub's filing of a voluntary proceeding, or other creditors of
OpCo or any OpCo Sub filing an involuntary proceeding against OpCo or any OpCo
Sub, under any Debtor Relief Laws. However, so long as no "Default" or "Event of
Default" under the Lease has occurred and is continuing with respect to the
payment of Rent (other than Non-Priority Additional Rent), and so long as none
of OpCo or any OpCo Sub is the subject of any proceeding under any Debtor Relief
Laws, Magellan may pursue any default remedy available under the Franchise
Agreement or at law or in equity or otherwise, except as provided above in this
Section 2.3.
(b) Each of Crescent and Magellan covenants to the other that it shall use
commercially reasonable best efforts to provide in a timely fashion written
notice of the commencement and progress of any remedial actio undertaken against
OpCo or any OpCo Sub, including providing to such party copies of any and all
correspondence to OpCo or any OpCo Sub from such party with respect to any of
such party's rights or remedies and any pleadings or similar material; provided,
however, that failure to provide any such written notice or any such copies
shall not affect the validity of any action undertaken or render either Crescent
or Magellan liable to the other or to any other person or entity.
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2.4 In Furtherance of Subordination.
(a) In the event (i) of any distribution, division or application, voluntary or
involuntary, by operation of law or otherwise, of all or any substantial part of
the assets or business of OpCo or any OpCo Sub to creditors of OpCo or any OpCo
Sub, or (ii) upon any indebtedness of Op o or any OpCo Sub becoming due and
payable by reason of any dissolution, liquidation or other winding up of OpCo or
any OpCo Sub or its business, or by reason of any sale, receivership,
insolvency, reorganization or bankruptcy proceedings, assignment for the benefit
of creditors, or any arrangement or proceeding by or against OpCo or any OpCo
Sub for any relief under any Debtor Relief Laws (whether voluntary or
involuntary), or any other marshaling of the assets and liabilities of OpCo or
any OpCo Sub, until the Rent (other than Non-Priority Additional Rent) has been
paid in full (subject, however, to the terms of Section 3.4 below) (A) all
payments and distributions of any kind or character (whether in cash, property
or securities) in respect of the Franchise Fees to which Magellan would be
entitled if the Franchise Fees were not subordinated as provided herein shall be
made directly to Crescent for application in accordance with the terms of the
Lease, and (B) neither MHS nor Charter Franchise shall seek the lifting, for its
own benefit, of any automatic stay or similar restriction imposed by reason of
any such arrangement or proceeding.
(b) All payments or distributions on or with respect to the Franchise Fees which
are received by MHS and/or Charter Franchise contrary to the provisions of this
Agreement, whether in cash, properties or securities (including without
limitation any distributions received on a count of any security interests,
liens, or other encumbrances), shall be received in trust for the benefit of
Crescent, shall be segregated from other funds and property held by Magellan and
shall be forthwith paid over to Crescent in the same form as so received (with
any necessary endorsement) to be applied (in the case of cash) to, or held as
collateral (in the case of non-cash property or securities) for, the payment or
prepayment of the Rent (other than Non-Priority Additional Rent) in accordance
with the terms of the Lease. In the event of any failure by MHS and/or Charter
Franchise to make any such endorsement or assignment, Crescent is hereby
irrevocably authorized to make the same.
(c) Magellan shall file in a timely manner a claim or claims, in the form
required in any proceeding described in subsection (a) above, for the full
outstanding am unt of the Franchise Fees and shall use commercially reasonable
best efforts to cause said claim or claims to be approved and all payments and
other distributions in respect thereof to be made directly to Crescent until all
Rent (other than Non-Priority Additional Rent) payable under the Lease has been
paid in full. MHS and Charter Franchise each irrevocably authorizes and empowers
Crescent, in connection with any proceeding or distribution described in
subsection (a) above, in the name of MHS and Charter Franchise, respectively, or
otherwise, to demand, sue for, collect and receive and receipt for any and all
such payments or distributions, and file, prove, and vote or consent in any such
proceedings with respect to any and all claims of MHS and/or Charter Franchise
relating to the Franchise Fees if MHS and/or Charter Franchise shall not have
duly filed such claim or proof of claim at least ten (10) days prior to the last
day on which such
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claim or proof of claim may be filed. Magellan agrees that (i) without the prior
written consent of Crescent, which consent shall not be unreasonably withheld,
it will not vote such claim in favor of any plan of reorganization or similar
structure (a "Plan") under which the terms of the Lease are changed in any way,
and (ii) it will not vote against any Plan if Crescent votes in favor of the
same unless, under such Plan, the Franchise Fees, or any portion thereof, would
not be subordinate in right of payment to distributions to Crescent on account
of the Rent (other than Non-Priority Additional Rent). Magellan further agrees
that, in view of the difficulty of estimating damages from any violation by MHS
and/or Charter Franchise of the terms of this subsection (c), Crescent shall be
entitled to injunctive relief to prevent or rescind any action taken by MHS
and/or Charter Franchise in violation of this subsection (c), as well as damages
and other forms of relief available for breach of contract.
(d) Crescent shall be entitled to enforce specific performance of this Agreement
at any time when MHS and/or Charter Franchise shall have failed to comply with
any of the provisions of this Agreement applicable to it. Magellan hereby
irrevocably waives any defense based on the adequacy of a remedy at law which
might be asserted as a bar to such remedy of specific performance. (e) Nothing
provided in this Agreement is intended to relieve OpCo of its obligation to pay
Franchise Fees due under the Franchise Agreement.
2.5 Application of Payments Received. All payments and distributions received by
Crescent in respect of the Franchise Fees, to the extent received in or
converted into cash, may be applied by Crescent first to the payment of any and
all expenses (including reasonable attorneys' fees and legal expenses) paid or
incurred by Crescent in enforcing this Agreement or in endeavoring to collect or
realize upon any of the Franchise Fees or any security therefore, and any
balance shall, solely as between Magellan and Crescent, be applied by Crescent,
in such order of application as Crescent may from time to time select, toward
the payment of Rent (other than Non-Priority Additional Rent) remaining unpaid,
but as between OpCo or any OpCo Sub and its creditors, no such payments or
distributions of any kind or character shall be deemed to be payments or
distributions in respect of Rent.
3
MISCELLANEOUS
3.1 Notices. Whenever any notice is required or permitted hereunder, such notice
shall be in writing and (a) sent by certified mail, postage prepaid, return
receipt requested, (b) given by established overnight commercial courier for
delivery on the next Business Day with delivery charges prepaid or duly charged,
(c) personally hand-delivered or (d) sent by facsimile transmission with
confirmation of receipt received, to the applicable addre s or facsimile number
set forth below:
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As to Crescent: Gerald W. Haddock
President and Chief Executive Officer
CRE Management VII Corp.
777 Main Street
Suite 2100
Fort Worth, Texas 76102
Facsimile: (817) 878-0429
with copies to: David M. Dean, Esq.
Senior Vice President, Law
Crescent Real Estate Equities Company
777 Main Street
Suite 2100
Fort Worth, Texas 76102
Facsimile: (817) 878-0429
Wendelin A. White, Esq.
Shaw, Pittman, Potts & Trowbridge
2300 N Street, N.W.
Washington, DC 20037
Facsimile: (202) 663-8007
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As to OpCo or any Charter Behavioral Health Systems, LLC
OpCo Sub: 3414 Peachtree Road, N.E.
Suite 900
Atlanta, Georgia 30326
Attn: Chief Legal Counsel
Facsimile: (404)
As to MHS and/or Steve J. Davis, Esq.
Charter Franchise Executive Vice President, Administrative
Services and General Counsel
3414 Peachtree Road, N.E.
Suite 1400
Atlanta, Georgia 30326
Facsimile: (404) 814-5793
with a copy to: Robert W. Miller
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303-1763
Facsimile: (404) 572-5100
Notices which are mailed shall be deemed effective upon receipt.
Notices which are hand-delivered shall be deemed effective upon tender to a
natural person at the address shown. Notices which are delivered by overnight
courier shall be deemed given on the next Business Day after delivery to such
courier. Notices which are delivered by facsimile transmission shall be deemed
received upon electronic confirmation of delivery.
1.No Waivers. No failure or delay on the part of any party to exercise, and no
course of dealing with respect to, any right, power or privilege under this
Agreement or any document or instrument relating to the Lease or the Franchise
Agreement shall operate as a
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waiver thereof. No single or partial exercise of any such right, power or
privilege shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. The remedies herein provided are
cumulative and not exclusive of any remedies provided by law.
2. Amendments, Supplements and Waivers. The provisions of this Agreement may
not be amended, modified or waived except by the written agreement of Magellan
and Crescent (without any necessity for notice to or consent by OpCo or any OpCo
Sub, which notice and consent are expressly WAIVED by OpCo). The provisions of
this Agreement shall be solely for the benefit of Crescent and Magellan and may
not be relied upon or enforced by OpCo, any OpCo Sub or any other person or
entity other than Crescent and Magellan.
3. Continuing Agreement; Successors and Assigns. This Agreement is a continuing
agreement and shall be binding upon and, except as provided in Section 3.3,
inure to the benefit of each of the parties hereto, and their respective
successors and assigns. Further, this Agreement shall remain in full force and
effect until the Rent shall have been irrevocably paid in full and shall
continue to be effective, or be reinstated, as the case may be, if at any time
any payment of all or any part of the Rent (a "Returned Payment") is rescinded
or must otherwise be returned upon the insolvency, bankruptcy or reorganization
of OpCo or any OpCo Sub, or by reason of the operation of any other applicable
law or order of court (a "Rescission Event"), all as though such payment had not
been made. No party hereto shall sell, assign, pledge, encumber or otherwise
dispose of the Franchise Agreement or the Lease, as the case may be, or any
amounts payable thereunder, unless such sale, assignment, pledge, encumbrance or
disposition is made expressly subject to the terms and provisions of this
Agreement. Nothing herein is intended or shall be construed to give any other
person any right, remedy or claim with respect to this Agreement, the Lease, or
the Franchise Agreement. Notwithstanding the foregoing, Magellan shall be
entitled to collaterally assign its rights but not its obligations under the
Franchise Agreement, subject to the terms and provisions of this Agreement, as
well as its rights but not its obligations under this Agreement, to any of its
lenders.
4. Severability. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under present or future laws during the term hereof,
such provision shall be fully severable, this Agreement shall be construed and
enforced as if such illegal, invalid or unenforceable provision had never
comprised a part hereof, and the remaining provisions hereof shall remain in
full force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance herefrom. Furthermore, in lieu of
such illegal, invalid or unenforceable provision there shall be added
automatically as a part of this Agreement a legal, valid and enforceable
provision as similar in terms to the illegal, invalid or unenforceable provision
as may be possible.
5. Counterparts. This Agreement may be executed in any number of counterparts,
all of which taken together shall constitute one and the same instrument. In
making proof of this Agreement it shall not be necessary to produce or account
for more than one such counterpart.
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6. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND GOVERNED BY THE LAWS OF
THE STATE OF DELAWARE AND THE UNITED STATES OF AMERICA.
7. WAIVER OF JURY TRIAL. EACH OF OPCO, MAGELLAN AND CRESCENT hereby irrevocably
waives, to the full extent permitted by applicable law, any right to have a jury
participate in resolving any dispute arising out of, in connection with, related
to, or incidental to this Agreement.
8. ENTIRE AGREEMENT. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT AMONG
THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
9. Amendment of Franchise Agreement. Magellan agrees that, unless and until all
Rent (other than Non-Priority Additional Rent) shall have been irrevocably paid
in full (subject, however, to the terms of Section 3.4 above) and the Term shall
have expired, without Crescent's prior written consent the Franchise Agreement
shall not be amended, modified, or supplemented by any of the parties thereto in
any manner that would increase or accelerate payment of the Franchise Fees or
any installment thereof, except for an increase in the Franchise Fees in
connection with the addition of a new Leased Property to the facilities covered
by the Franchise Agreement or in connection with the implementation of New
Products (as defined in the Franchise Agreement). If the Franchise Agreement is
amended without Crescent's prior written consent in a manner that violates the
provisions of this Section 3.10, then the increased or accelerated portion of
the Franchise Fees shall be subordinate and junior in right of payment and
liquidation to the prior irrevocable payment in full of all Rent, Additional
Rent (including all Non-Priority Additional Rent), and all Additional Charges.
10. No Subrogation Until Payment in Full. Without Crescent's prior written
consent, Magellan shall not be entitled to be subrogated to any of the rights of
Crescent against OpCo, any OpCo Sub, or any other person or entity, or any
liens, security interests or assignments now or hereafter securing the Lease,
until all of the Rent (other than Non-Priority Additional Rent) shall have been
irrevocably paid in full (subject, however, to the terms of Section 3.4 above)
and the Term shall have expired.
11. Amendment of Lease. Crescent may, at any time and from time to time, without
the consent of or notice to Magellan, and without impairing or releasing the
obligations of Magellan hereunder, (a) enter into any amendment or modification
of the Lease, including, without limitation, any amendment which extends the
maturity of the Fixed Term or any Extended Term, except the fourth Extended Term
(as such terms are defined in the Lease), of the Lease (whether or not in
accordance with the renewal options set forth therein) or extends or
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reduces any installment of Rent or waives any Default or Event of Default
thereunder; (b) exercise or refrain from exercising any rights against OpCo, any
OpCo Sub or any other person or entity; (c) subject to the terms and provisions
of Section 2.5 hereof, apply any sums by whomsoever paid or however realized to
the Lease; (d) sell, exchange, release, surrender, realize upon or otherwise
deal with, in any manner and in any order, any property whatsoever and by
whomsoever at any time pledged or mortgaged to secure the Lease; (e) release
anyone liable in any manner for the payment or collection of any Rent, and (f)
settle or compromise all or any part of the Rent and subordinate the payment of
any part of the Rent to the payment of any other indebtedness. Notwithstanding
the foregoing, Crescent shall not, without prior notice to and written consent
of Magellan, amend or modify the Lease in any manner that would increase the
amount or accelerate the payment of Rent or any installment thereof (other than
Non-Priority Additional Rent and other than an increase in Rent in connection
with the addition of new Leased Properties to the Collective Leased Properties)
or that would extend the Term beyond the fourth Extended Term. In the event that
Crescent, OpCo and the OpCo Subs amend the Lease to increase the amount or
accelerate the payment of the Rent or any installment thereof (other than
Non-Priority Additional Rent and other than an increase in Rent in connection
with the addition of new Leased Properties to the Collective Leased Properties)
payable thereunder, or to extend the Term beyond the fourth Extended Term, this
Agreement shall remain in full force and effect and the Franchise Fees shall
continue to be subject, subordinate and junior in right of payment and
liquidation to the prior irrevocable payment of the Rent (other than
Non-Priority Additional Rent) to the extent and in the manner set forth herein
as though the Rent payable under the Lease had not been so increased or the Term
so extended beyond the fourth Extended Term; provided, however, that in the
event that Crescent, OpCo and the OpCo Subs, without the prior written consent
of Magellan, so amend the Lease to increase the amount or accelerate the payment
of Minimum Rent or Additional Rent (other than Non-Priority Additional Rent),
then the portion of the Rent constituting such increase or the portion of the
Rent or any installment thereof so accelerated, as applicable, shall be
subordinate and junior in right of payment and liquidation to the prior
irrevocable payment of the Franchise Fees to the extent and in the manner that
the Franchise Fees are subordinated pursuant to this Agreement.
12. Further Assurances. Each of Magellan and OpCo will, at its expense and at
any time and from time to time, promptly execute and deliver all further
instruments and documents (including without limitation assignments and proofs
of claim), and promptly take all further action (including, without limitation,
filing proofs of claim and taking other actions to collect the Franchise Fees),
or cause such instruments and documents to be executed and delivered and such
actions to be taken, that may be necessary or desirable, or that Crescent may
reasonably request, in order to protect any right or interest granted or
purported to be granted hereby or to enable Crescent to exercise and enforce its
rights and remedies hereunder. For purposes of this Section 3.13, "promptly"
shall be deemed to mean within five (5) Business Days after written request
therefor unless in the judgment of Crescent, exercised in good faith, faster
action is required to achieve the intended purpose.
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13. Representations and Warranties. Each of Magellan, Crescent and OpCo hereby
represents and warrants as to itself that (i) the execution, delivery and
performance by such party of this Agreement have been duly and validly
authorized by all necessary action and (ii) this Agreement has been duly and
validly executed and delivered by such party and constitutes the legal, valid
and binding obligation of such party, enforceable against such party in
accordance with its terms, except as such enforcement may be limited by
bankruptcy, conservatorship, receivership, insolvency, moratorium or similar
laws affecting creditors' rights generally or by general principles of equity.
14. Expenses, Etc. OpCo agrees to pay, upon demand, to Crescent the amount of
any and all losses, costs and expenses, including the fees and expenses of
Crescent's counsel, which Crescent may incur as a result of any breach by OpCo
of its obligations hereunder or in connection with the exercise or enforcement
of any of Crescent's rights or interests hereunder, which exercise or
enforcement results directly or indirectly from, or arises by reason of, any
action or any failure to take an action required of OpCo hereunder. Magellan
agrees to pay, upon demand, to Crescent the amount of any and all losses, costs
and expenses, including the fees and expenses of Crescent's counsel, which
Crescent may incur as a result of any breach by MHS and/or Charter Franchise of
its obligations hereunder or in connection with the exercise or enforcement of
any of Crescent's rights or interests hereunder, which exercise or enforcement
results directly or indirectly from, or arises by reason of, any action or any
failure to take any action required of MHS and/or Charter Franchise hereunder.
Crescent shall not have any obligation to make demand of, or take any action
against, OpCo under this Section 3.15 prior to making demand of, or taking
action against, MHS and/or Charter Franchise pursuant to this Section 3.15.
15. Arbitration in Some Events. Disputes between Magellan and Crescent relating
to amounts owing to Magellan or Crescent under the Franchise Agreement or the
Lease, as such agreements are affected by this Agreement, will be subject to
resolution by binding arbitration in Delaware before the American Arbitration
Association and governed by the Commercial Arbitration Rules then in effect.
Nothing set forth in this Section 3.16, however, shall impair or restrict in any
way either party's right to seek equitable relief in connection with the
enforcement of this Agreement.
16. Consent to Assumption of Franchise Agreement. Magellan hereby consents to
the assumption by Crescent or Crescent's designee of the Franchise Agreement and
all rights and obligations of the franchisee thereunder from the date of such
assumption in the event of an Event of Default by OpCo under the Lease and
exercise by Crescent of its election, in its sole and absolute discretion, under
the remedies provisions of the Lease to assume or have its d esignee assume all
of the revenue producing contracts relating to the Collective Leased Properties.
-13-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first set forth above.
CRESCENT REAL ESTATE FUNDING VII, L.P.
WITNESS: CRE Management VII Corp., a Delaware corporation
By: \s\ Sylvia M. Mahaffey By: \s\ David M. Dean
----------------------- --------------------------------
Name: Sylvia M. Mahaffey Name: David M. Dean
--------------------- ------------------------------
Title: Assistant Secretary Title: Senior Vice President, Law
-------------------- -----------------------------
CHARTER BEHAVIORAL HEAL SYSTEMS, LLC
By: \s\ W. Stephen Love
--------------------------------
Name: W. Stephen Love
------------------------------
Title: Senior Vice President and CFO
-----------------------------
MAGELLAN HEALTH SERVICES, INC.
By: \s\ James R. Bedenbaugh
--------------------------------
Name: James R. Bedenbaugh
------------------------------
Title: Vice President and Treasurer
-----------------------------
CHARTER FRANCHISE SERVICES, LLC
By: \s\ Linton C. Newlin
--------------------------------
Name: Linton C. Newlin
------------------------------
Title: Vice President and Secretary
-----------------------------
-14-
<PAGE>
1
AMENDED AND RESTATED
OPERATING AGREEMENT
OF
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
This AMENDED AND RESTATED OPERATING AGREEMENT (this "Agreement"),
dated as of June 16, 1997 is entered into by and between Charter Behavioral
Health Systems, Inc., a Delaware corporation ("Charter Inc.") and a wholly owned
subsidiary of Magellan Health Services, Inc. ("Magellan"), a Delaware
corporation, and Crescent Operating, Inc. ("Crescent Operating"), a Delaware
corporation and a designee of Crescent Real Estate Equities Limited Partnership
("Crescent"), a Delaware limited partnership (Charter Inc. and Crescent
Operating being referred to individually as a "Member" and collectively as the
"Members"),and Magellan (who is a party solely with respect to the agreements in
Section 3.2(e) of this Agreement), and shall be effective as of the 17 day of
June, 1997 (the "Effective Date").
W I T N E S S E T H:
WHEREAS, Charter Inc. is currently engaged in the business of operating
acute care psychiatric hospitals and certain related activities;
WHEREAS, Magellan and Crescent are parties to that certain Real Estate
Purchase and Sale Agreement, dated January 29, 1997, as amended (the "Real
Estate Purchase and Sale Agreement"), pursuant to which Magellan has agreed to
cause Charter Inc. and certain subsidiaries of Charter Inc. to sell to Crescent
or its designated affiliate ("Crescent Affiliate") substantially all of the real
property and related improvements, furniture, fixtures and equipment (including
medical office buildings located on such real property) owned by Charter Inc.
and used in the operation of Charter Inc.'s acute care psychiatric hospitals
(the "Purchased Facilities");
WHEREAS, Magellan and Crescent have agreed that, upon closing of the
Real Estate Purchase and Sale Agreement, Crescent Affiliate and Charter
Behavioral Health Systems, LLC (the "Company") shall enter into a master lease
(the "Facilities Lease"), pursuant to which Crescent Affiliate shall lease the
Purchased Facilities and certain other applicable property (collectively, the
"Facilities") to the Company;
WHEREAS, Magellan, Crescent Operating and the Company are parties to
that certain Contribution Agreement, dated of even date herewith (the
"Contribution Agreement"), pursuant to which, among other things, Magellan
agreed that certain of its subsidiaries ("Contributing Subsidiaries") would
contribute certain assets (the "Contribution Assets") to the Company in
<PAGE>
2
exchange for the grant of a membership interest in the Company, and Crescent
Operating agreed to contribute cash to the Company in exchange for a membership
interest in the Company;
WHEREAS, in order to facilitate the transactions contemplated by the
Real Estate Purchase and Sale Agreement, Magellan and Charter Inc. formed the
Company pursuant to a Certificate of Formation filed with the Secretary of State
of the State of Delaware on March 14, 1997 and entered into an Operating
Agreement with respect to the Company pursuant to which Magellan owned a 99%
membership interest in the Company and Charter Inc. owned a 1% membership
interest in the Company;
WHEREAS, prior to the date hereof, Magellan made a capital contribution
of a 1% interest in the Company to Magellan Executive Corporation ("MEC");
WHEREAS, prior to the date hereof, Magellan made a capital contribution
of a 98% interest in the Company to Charter, Inc.;
WHEREAS, immediately prior to the execution of this Agreement, the
Contributing Subsidiaries contributed the Contributed Assets in exchange for a
membership interest in the Company, which in the aggregate and together with the
membership interest of Charter Inc. and MEC, constituted a 50% membership
interest in the Company;
WHEREAS, immediately prior to the execution of this Agreement, each of
the Contributing Subsidiaries and MEC assigned their membership interest in the
Company to Charter Inc. by execution of the Assignment of Limited Liability
Company Interest and Amendment to Limited Liability Company Agreement of Charter
Behavioral Health Systems, LLC, dated the date hereof;
WHEREAS, contemporaneously with the execution of this Agreement,
Crescent Operating is contributing $5 million cash to the Company in exchange
for a 50% membership interest in the Company;
WHEREAS, as a result of the foregoing Crescent Operating has a 50%
membership interest in the Company and Charter Inc. has a 50% membership
interest in the Company; and
WHEREAS, the Members desire to operate and maintain the limited
liability company known as Charter Behavioral Health Systems, LLC, as formed
under the laws of the State of Delaware as March 14, 1997, which shall operate
the Facilities (as hereafter defined), and certain leased facilities, and engage
in the business of hospital-based behavioral healthcare.
<PAGE>
3
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto and of other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto agree to
amend and restate the Company's Operating Agreement, dated March 14, 1997, as
follows:
SECTION 1.
DEFINITIONS
1.1 Definitions.
Capitalized words and phrases used in this Agreement have the following
meanings:
"Act" means the Delaware Limited Liability Company Act, 6 Del. C.
ss.18-101, et seq., as amended from time to time (or any corresponding
provisions of succeeding law).
"Action" means any claim, action, suit, arbitration, inquiry,
proceeding or investigation by or before any governmental authority or other
authority with jurisdiction and power to adjudicate such Action.
"Additional Capital Contribution" has the meaning specified in Section
3.2(e) hereof.
"Adjusted Capital Account Deficit" means, with respect to any Member,
the deficit balance, if any, in such Member's Capital Account as of the end of
the relevant Allocation Year, after giving effect to the following adjustments:
(a) Credit to such Capital Account of any amounts which such Member is
deemed to be obligated to restore pursuant to the penultimate sentences in
Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations; and
(b) Debit to such Capital Account the items described in Sections
1.704-1(b)(2)(ii)(d)(4), 1.704-2(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6) of
the Regulations.
"Affiliate" means, with respect to any Person (i) any individual,
corporation, limited liability company, partnership, trust or other legal entity
directly or indirectly controlling, controlled by or under common control with
such Person, (ii) any officer, director, general partner, member or trustee of
such Person or (iii) any individual who is an officer, director, general
partner, member or trustee of any Person described in clauses (i) or (ii) of
this sentence. For purposes of this definition, the terms "controlling,"
"controlled by" or "under common control with" shall mean the possession, direct
or indirect, of the power to direct or cause the direction of the management and
policies of a
<PAGE>
4
Person, whether through the ownership of voting securities, by contract or
otherwise, or the power to elect at least 50% of the directors, general
partners, members or persons exercising similar authority with respect to such
Person.
"Agreement" or "Operating Agreement" means this Amended and Restated
Operating Agreement of Charter Behavioral Health Systems, LLC, as amended from
time to time, which shall constitute the limited liability company agreement of
the Company for all purposes of the Act. Words such as "herein," "hereinafter,"
"hereof," "hereto" and "hereunder" refer to this Agreement as a whole, unless
the context otherwise requires.
"Allocation Year" means (i) the period commencing on the Effective Date
and ending on September 30, 1997, (ii) any subsequent twelve (12) month period
commencing on October 1 and ending on September 30 (except as may be required by
Regulations promulgated under Section 706 of the Code), or (iii) any portion of
the period described in clauses (i) or (ii) for which the Company is required to
allocate Profits, Losses and other items of Company income, gain, loss or
deduction pursuant to Section 6 hereof.
"Annual Budget" has the meaning specified in Section 8.3(a).
"Bankruptcy" means, with respect to any Person, a "Voluntary
Bankruptcy" or an "Involuntary Bankruptcy." A "Voluntary Bankruptcy" means, with
respect to any Person (i) the inability of such Person generally to pay its
debts as such debts become due, or an admission in writing by such Person of its
inability to pay its debts generally or a general assignment by such Person for
the benefit of creditors, (ii) the filing of any petition or answer by such
Person seeking to adjudicate itself as bankrupt or insolvent, or seeking for
itself any liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of such Person or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of debtors, or
seeking, consenting to, or acquiescing in the entry of an order for relief or
the appointment of a receiver, trustee, custodian or other similar official for
such Person or for any substantial part of its property or (iii) corporate or
other action taken by such Person to authorize any of the actions set forth
above. An "Involuntary Bankruptcy" means, with respect to any Person, without
the consent or acquiescence of such Person, (i) the entering of an order for
relief or approving a petition for relief or reorganization or any other
petition seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or other similar relief under any present or future
bankruptcy, insolvency or similar statute, law or regulation, (ii) the filing of
any such petition against such Person which petition shall not be dismissed
within ninety (90) days, or (iii) without the consent or acquiescence of such
Person, the entering of an order appointing a trustee, custodian, receiver or
liquidator of such Person or of all or any substantial part of the property of
such Person which order shall not be dismissed within ninety (90) days. The
foregoing is intended to supersede and replace the events listed in Sections
18-304(a) and (b) of the Act.
"Business" means (i) the operation of an acute care psychiatric
hospital, part of an acute care general hospital operating an acute care
psychiatric unit, a behavioral healthcare residential
<PAGE>
5
treatment center, a part of a facility operating a behavioral healthcare
residential treatment center, or other similar facility providing 24-hour
behavioral healthcare, and the delivery of behavioral healthcare from such
facility and other affiliated facilities; such behavioral healthcare to include
inpatient hospitalization, partial hospitalization programs, outpatient therapy,
intensive outpatient therapy, ambulatory detoxification, behavioral modification
programs and related services; and (ii) additional services, concepts or
products undertaken pursuant to the Franchise Agreement.
"Business Day" means a day of the year on which banks are not required
or authorized to close in Atlanta, Georgia or Dallas, Texas.
"Capital Account" means, with respect to any Member, the Capital
Account maintained for such Member in accordance with the following provisions:
(a) To each Member's Capital Account there shall be credited
(i) such Member's Capital Contributions, (ii) such Member's
distributive share of Profits and any items in the nature of income or
gain which are specially allocated pursuant to Section 6.3 or Section
6.4 hereof and (iii) the amount of any Company liabilities assumed by
such Member or which are secured by any Property distributed to such
Member;
(b) To each Member's Capital Account there shall be debited
(i) the amount of money and the Gross Asset Value of any Property
distributed to such Member pursuant to any provision of this Agreement,
(ii) such Member's distributive share of Losses and any items in the
nature of expenses or losses which are specially allocated pursuant to
Section 6.3 or Section 6.4 hereof and (iii) the amount of any
liabilities of such Member assumed by the Company or which are secured
by any Property contributed by such Member to the Company;
(c) In the event a Member's Interest is Transferred in
accordance with the terms of this Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent it
relates to the Transferred Interest; and
(d) In determining the amount of any liability for purposes of
subparagraphs (a) and (b) above there shall be taken into account Code
Section 752(c) and any other applicable provisions of the Code and
Regulations.
The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner
consistent with such Regulations. In the event the Governing Board determines
that it is prudent to modify the manner in which the Capital Accounts, or any
debits or credits thereto (including, without limitation, debits or credits
relating to liabilities which are secured by contributed or distributed Property
or which are assumed by the Company or any Members), are computed in order to
comply with such Regulations, the Governing Board may make such modification,
provided that such modification is not likely to have a material effect on
<PAGE>
6
the amounts distributed to any Person pursuant to Section 13 hereof upon the
dissolution of the Company. The Governing Board also shall (i) make any
adjustments that are necessary or appropriate to maintain equality between the
Capital Accounts of the Members and the amount of capital reflected on the
Company's balance sheet, as computed for book purposes, in accordance with
Regulations Section 1.704-1(b)(2)(iv)(q), and (ii) make any appropriate
modifications in the event unanticipated events might otherwise cause this
Agreement not to comply with Regulations Section 1.704-1(b).
"Capital Contributions" means, with respect to any Member, the amount
of money and the initial Gross Asset Value of any Property (other than money)
contributed to the Company with respect to such Member's Interest.
"Certificate" means the certificate of formation filed with the
Secretary of State of the State of Delaware pursuant to the Act to form the
Company, as originally executed and as amended, modified, supplemented or
restated from time to time, as the context requires.
"Charter Director" means a Director designated by Charter Inc. in
accordance with Section 8.1 hereof.
"Charter Inc." has the meaning specified in the introductory
statement.
"Chief Executive Officers" has the meaning specified in Section 15.2
hereof.
"Code" means the United States Internal Revenue Code of 1986, as
amended from time to time.
"COI Warrant Agreement" means the Warrant Agreement dated the date
hereof between Crescent Operating and Magellan pursuant to which Crescent
Operating is issuing warrants to Magellan.
"Company" means the limited liability company, known as Charter
Behavioral Health Systems, LLC, formed pursuant to this Agreement and the
Certificate.
"Company Minimum Gain" has the meaning given the term "partnership
minimum gain" in Sections 1.704-2(b)(2) and 1.704-2(d) of the Regulations.
"Contributing Subsidiaries" has the meaning specified in the
introductory statement.
"Contribution Agreement" has the meaning specified in the recitals.
"Crescent" has the meaning specified in the introductory statement.
<PAGE>
7
"Crescent Director" means a Director designated by Crescent Operating
in accordance with Section 8.1 hereof.
"Crescent Operating" has the meaning specified in the introductory
statement.
"Deadlock" has the meaning specified in Section 15.1 hereof.
"Debt" of a Person means (iii) any indebtedness for borrowed money or
the deferred purchase price of Property as evidenced by a note, bonds, or other
instruments, (ii) obligations as lessee under capital leases, (iii) to the
extent of the fair market value of any asset owned or held by such Person,
obligations secured by any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind existing on any such asset whether or not the Company
has assumed or become liable for the obligations secured thereby, (iv) any
obligation under any interest rate swap agreement (the amount of such obligation
shall be deemed to be the amount that would be required to be paid by such
Person to sell, unwind or terminate the swap transaction), (v) trade credit
incurred other than in the ordinary course of business and (vi) obligations
under direct or indirect guarantees of (including obligations (contingent or
otherwise) to assure a creditor against loss in respect of) indebtedness or
obligations of the kinds referred to in clauses (i), (ii), (iii), (iv) and (v)
above.
"Depreciation" means, for each Allocation Year, an amount equal to the
depreciation, amortization, or other cost recovery deduction allowable for
United States federal income tax purposes with respect to an asset for such
Allocation Year, except that if the Gross Asset Value of an asset differs from
its adjusted basis for United States federal income tax purposes at the
beginning of such Allocation Year, Depreciation shall be an amount which bears
the same ratio to such beginning Gross Asset Value as the United States federal
income tax depreciation, amortization, or other cost recovery deduction for such
Allocation Year bears to such beginning adjusted tax basis; provided, however,
that if the adjusted basis for United States federal income tax purposes of an
asset at the beginning of such Allocation Year is zero (0), Depreciation shall
be determined with reference to such beginning Gross Asset Value using any
reasonable method selected by the Governing Board.
"Director" means any of the individuals provided in Section 8.1 hereof
or otherwise designated by the Members to serve on the Governing Board pursuant
to this Agreement and "Directors" means all of such individuals.
"Dissolution Event" has the meaning specified in Section 14.1 hereof.
"Effective Date" has the meaning specified in the introductory
statement.
"Election Notice" has the meaning specified in Section 12.8 hereof.
"Encumbrances" has the meaning specified in Section 4.2 hereof.
<PAGE>
8
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Liabilities" has the meaning specified in Section 9.7(a)
hereof.
"Executive Officer" means each of the Chairman of the Governing Board,
the Vice Chairman of the Governing Board, the President, any Vice President
designated as an "Executive Vice President" of the Company by the Governing
Board, the Chief Financial Officer and the Treasurer.
"Facilities Lease" means (i) that certain Master Lease Agreement, dated
as of June ___, 1997, between Crescent Affiliate, as landlord, and the Company
and its subsidiaries, as lessees, and any amendment or renewal thereof, and (ii)
any other real estate lease agreements between Crescent Affiliate, as landlord,
and the Company or a subsidiary of the Company, as lessee.
"Fair Market Value" has the meaning specified in Section 12.9 hereof.
"First Offer Period" shall mean a period commencing upon delivery of an
Offer Notice and expiring at 5:00 p.m., New York time, on the 15th Business Day
following delivery of such Offer Notice; provided, however, if the Proposed
Transfer involves Non-Cash Consideration, the First Offer Period shall not
expire until the 10th Business Day after a binding determination of the Fair
Market Value of such Non-Cash Consideration has been made in accordance with
Section 12.9 hereof.
"Fiscal Quarter" means (i) the period commencing on the Effective Date
and ending on June 30, 1997, (ii) any subsequent three-month period commencing
on each of January 1, April 1, July 1 and October 1 and ending on the last date
before the next such date and (iii) the period commencing on the immediately
preceding January 1, April 1, July 1 or October 1, as the case may be, and
ending on the date on which all Property is distributed to the Members pursuant
to Section 12 hereof.
"Fiscal Year" means (i) the period commencing on the Effective Date and
ending on September 30, 1997, (ii) any subsequent twelve (12) month period
commencing on October 1 and ending on September 30 (except as may be required by
Regulations promulgated under Section 706 of the Code), or (iii) the period
commencing on the immediately preceding October 1 and ending on the date on
which all Property is distributed to the Members pursuant to Section 14 hereof.
"Franchise Agreement" means (i) the Master Franchise Agreement, dated
June ___, 1997 among Magellan, through its wholly-owned subsidiary, Charter
Franchise Services, LLC ("CFS") (Magellan and CFS, collectively "Franchisor")
and the Company and any amendment or renewal thereof and (ii) any Franchise
Agreement entered into between Franchisor and the Company or its Affiliates.
"Franchisor" means, collectively, Magellan and CFS.
<PAGE>
9
"GAAP" means generally accepted accounting principles in effect in the
United States of America from time to time.
"Governing Board" has the meaning specified in Section 8.1 hereof.
"Gross Asset Value" means, with respect to any asset, the asset's
adjusted basis for United States federal income tax purposes, except as follows:
(a) The initial Gross Asset Value of any asset contributed by
a Member to the Company shall be the gross fair market value of such
asset, as determined by the Governing Board; provided that the initial
Gross Asset Values of the assets contributed to the Company pursuant to
Section 3.1 hereof shall be the Net Asset Values of such assets as set
forth in such Section, increased by any liabilities either treated as
assumed by the Company upon the contribution of such assets or to which
such assets are treated as subject when contributed pursuant to the
provisions of Code Section 752;
(b) The Gross Asset Values of all Company assets shall be
adjusted to equal their respective gross fair market values (taking
Code Section 7701(g) into account), as determined by the Governing
Board as of the following times: (i) the acquisition of an additional
interest in the Company by any new or existing Member in exchange for
more than a de minimis Capital Contribution; (ii) the distribution by
the Company to a Member of more than a de minimis amount of Company
property as consideration for an interest in the Company; and (iii) the
liquidation of the Company within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g), provided that an adjustment described in clauses
(i) and (ii) of this paragraph shall be made only if the Governing
Board reasonably determines that such adjustment is necessary to
reflect the relative economic interests of the Members in the Company;
(c) The Gross Asset Value of any item of Company assets
distributed to any Member shall be adjusted to equal the gross fair
market value (taking Code Section 7701(g) into account) of such asset
on the date of distribution as determined by the Governing Board; and
(d) The Gross Asset Values of Company assets shall be
increased (or decreased) to reflect any adjustments to the adjusted
basis of such assets pursuant to Code Section 734(b) or Code Section
743(b), but only to the extent that such adjustments are taken into
account in determining Capital Accounts pursuant to Regulations Section
1.704-1(b)(2)(iv)(m), and subparagraph (vi) of the definition of
"Profits" and "Losses" provided, however, that Gross Asset Values shall
not be adjusted pursuant to this subparagraph (d) to the extent that an
adjustment pursuant to subparagraph (b) is necessary or appropriate in
connection with a transaction that would otherwise result in an
adjustment pursuant to this subparagraph (d).
<PAGE>
10
If the Gross Asset Value of an asset has been determined or adjusted pursuant to
subparagraph (b) or (d), such Gross Asset Value shall thereafter be adjusted by
the Depreciation taken into account with respect to such asset, for purposes of
computing Profits and Losses.
"Interest" means a Member's ownership interest in the Company,
including all rights attributable to a member of a limited liability company
under the Act.
"Involuntary Bankruptcy" has the meaning set forth in the definition
of Bankruptcy.
"Issuance Items" has the meaning specified in Section 6.3(h) hereof.
"Lender" has the meaning set forth in Section 8.2(11) hereof.
"Liquidator" has the meaning specified in Section 14.5(a) hereof.
"Magellan" has the meaning specified in the introductory statement.
"Major Decision" has the meaning specified in Section 8.2 hereof.
"MEC" has the meaning specified in introductory statement.
"Member" means Crescent Operating, Charter Inc. or any Person who is
admitted as a Member pursuant to the terms of this Agreement. "Members" means
all such Persons.
"Member Advance" has the meaning specified in Section 3.2(e) hereof.
"Member Commitment" has the meaning specified in Section 3.2(e) hereof.
"Member Nonrecourse Debt" has the same meaning as the term "Member
nonrecourse debt" in Section 1.704-2(b)(4) of the Regulations.
"Member Note" has the meaning specified in Section 3.2(e) hereof.
"Member Nonrecourse Debt Minimum Gain" means an amount, with respect to
each Member Nonrecourse Debt, equal to the Company Minimum Gain that would
result if such Member Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Section 1.704-2(i)(3) of the Regulations.
"Member Nonrecourse Deductions" has the same meaning as the term
"Member nonrecourse deductions" in Sections 1.704-2(i)(1) and 1.704-2(i)(2) of
the Regulations.
"Net Asset Value" means, with respect to any asset contributed by a
Member to the Company, the Gross Asset Value of such asset at the time of its
contribution, reduced by any
<PAGE>
11
liabilities either treated as assumed by the Company upon the contribution of
such asset or to which such asset is treated as subject when contributed
pursuant to the provisions of Code Section 752; provided that the initial Net
Asset Value of the assets contributed to the Company pursuant to Section 3.1
hereof shall be as set forth in such Section.
"Non Cash Consideration" has the meaning specified in Section 12.8(e)
hereof.
"Nonrecourse Deductions" has the meaning set forth in Section 1.704-2
(b)(1) of the Regulations.
"Nonrecourse Liability" has the meaning set forth in Section 1.704-2
(b)(3) of the Regulations.
"Non-Selling Member" has the meaning specified in Section 12.8 hereof.
"Offer Notice" has the meaning specified in Section 12.8 hereof.
"Offer Percentage" has the meaning specified in Section 12.8 hereof.
"Offering Party" has the meaning specified in Section 15.3(a) hereof.
"Original Capital Contribution" means, with respect to any Member, any
Capital Contribution provided by such Member as of the Effective Date.
"Percentage Interest" means the Interest of each Member expressed as a
percentage as initially set forth in Section 3.1 hereof, or as subsequently
established by the Members in accordance with the provisions of this Agreement.
"Percentage Interests" means the entire percentage interest of
ownership in the Company.
"Permitted Transfer" has the meaning set forth in Section 12.2 hereof.
"Person" means any individual, partnership (whether general or
limited), limited liability company, corporation, trust, estate, association,
nominee or other entity.
"Profits" and "Losses" mean, for each Allocation Year, an amount equal
to the Company's taxable income or loss for such Allocation Year, determined in
accordance with Code Section 703(a) (for this purpose, all items of income,
gain, loss, or deduction required to be stated separately pursuant to Code
Section 703(a)(1) shall be included in taxable income or loss), with the
following adjustments (without duplication):
<PAGE>
12
(a) Any income of the Company that is exempt from United States Federal
income tax and not otherwise taken into account in computing Profits or Losses
pursuant to this definition of "Profits" and "Losses" shall be added to such
taxable income or loss;
(b) Any expenditures of the Company described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account
in computing Profits or Losses pursuant to this definition of "Profits" and
"Losses" shall be subtracted from such taxable income or loss;
(c) In the event that the Gross Asset Value of any Company asset is
adjusted pursuant to subparagraphs (b) or (c) of the definition of Gross Asset
Value, the amount of such adjustment shall be treated as an item of gain (if the
adjustment increases the Gross Asset Value of the asset) or an item of loss (if
the adjustment decreases the Gross Asset Value of the asset) from the
disposition of such asset and shall be taken into account for purposes of
computing gain or loss;
(d) Gain or loss resulting from any disposition of Property with
respect to which gain or loss is recognized for United States federal income tax
purposes shall be computed by reference to the Gross Asset Value of the Property
disposed of, notwithstanding that the adjusted tax basis of such Property
differs from its Gross Asset Value;
(e) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in computing such taxable income or loss, there
shall be taken into account Depreciation for such Allocation Year, computed in
accordance with the definition of Depreciation;
(f) To the extent an adjustment to the adjusted tax basis of any
Company asset pursuant to Code Section 734(b) is required, pursuant to
Regulations Section 1.704-(b)(2)(iv)(m)(4), to be taken into account in
determining Capital Accounts as a result of a distribution other than in
liquidation of a Member's Interest in the Company, the amount of such adjustment
shall be treated as an item of gain (if the adjustment increases the basis of
the asset) or loss (if the adjustment decreases such basis) from the disposition
of such asset and shall be taken into account for purposes of computing Profits
or Losses;
(g) Notwithstanding any other provision of this definition, any items
which are specially allocated pursuant to Section 6.3 or Section 6.4 hereof
shall not be taken into account in computing Profits or Losses; and
(h) The amounts of the items of Company income, gain, loss or deduction
available to be specially allocated pursuant to Sections 6.3 and 6.4 hereof
shall be determined by applying rules analogous to those set forth in
subparagraphs (a) through (f) above.
"Property" means all real and personal property acquired by the
Company, including cash, and any improvements thereto, and shall include both
tangible and intangible property.
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13
"Proposed Transfer" has the meaning specified in Section 12.8 hereof.
"Protected Information" means trade secrets, confidential or
proprietary information, intellectual property, knowledge or know-how pertaining
primarily to the operation of the Company or the Business or any confidential or
proprietary information concerning any Member, including, without limitation,
research and development information, inventions, formulas, methods, techniques,
processes, protocols, plans, procedures, contracts, financial information,
computer models and know-how. Protected Information shall not include Protected
Information which at the time of its disclosure was in the public domain other
than as result of a breach hereof by any of the parties hereto.
"Purchasing Party" has the meaning specified in Section 15.3(b)
hereof.
"Real Estate Purchase and Sale Agreement" has the meaning specified in
the recitals.
"Reconstitution Period" has the meaning specified in Section 14.1(b).
"Regulations" means the Income Tax Regulations, including Temporary
Regulations, promulgated under the Code, as such regulations are amended from
time to time.
"Regulatory Allocations" has the meaning specified in Section 6.4
hereof.
"Responding Party" has the meaning specified in Section 15.3(a)
hereof.
"Right of First Refusal" has the meaning specified in Section 12.8
hereof.
"Second Offer Period" shall mean a period commencing on the first
Business Day following the First Offer Period and expiring at 5:00 p.m., New
York time on the 10th Business Day thereafter.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Member" has the meaning specified in Section 12.8 hereof.
"Selling Party" has the meaning set forth in Section 15.3(b) hereof.
"Senior Facility" has the meaning set forth in Section 8.2(13) hereof.
"Stated Value" has the meaning specified in Section 15.3(a) hereof.
"Third Party Purchaser" has the meaning specified in Section 12.8
hereof.
<PAGE>
14
"Transaction Agreements" means the Real Estate Purchase and Sale
Agreement, the Contribution Agreement, the Facilities Lease, the Franchise
Agreement, the Warrant Agreement, the COI Warrant Agreement, that certain
Subordination Agreement, dated of even date herewith, among Magellan, CFS, the
Company and Crescent Real Estate Funding VII, L.P., and this Agreement,
collectively.
"Transfer" means, as a noun, any voluntary or involuntary transfer,
sale, pledge or hypothecation or other disposition and, as a verb, voluntarily
or involuntarily to transfer, sell, pledge or hypothecate or otherwise dispose
of.
"Voluntary Bankruptcy" has the meaning set forth in the definition of
"Bankruptcy."
"Warrant Agreement" means, collectively, that certain Warrant
Agreement, dated January 29, 1997 between Magellan and Crescent, as amended, and
that certain Warrant Agreement, dated of even date herewith, between Magellan
and Crescent Operating.
SECTION 2.
THE COMPANY
2.1 Formation.
The Company was formed pursuant to the Certificate attached hereto as
Exhibit A. The fact that the Certificate is on file in the office of the
Secretary of State of the State of Delaware shall constitute notice that the
Company is a limited liability company. Simultaneously with the execution of
this Agreement, each of the Directors designated in Section 8.1 shall be
admitted as Directors of the Company. The rights and liabilities of the Members
and Directors shall be as provided under the Act, the Certificate and this
Operating Agreement.
2.2 Name.
The name of the Company is Charter Behavioral Health Systems, LLC and
all business of the Company shall be conducted in such name or in such other
name as the Governing Board may designate. The Governing Board may change the
name of the Company upon ten (10) Business Days notice to the Members and shall
change it to eliminate the name "Charter" upon expiration of the Franchise
Agreement in accordance with the terms thereof.
2.3 Purpose; Powers.
(a) The purposes of the Company are to (i) operate the Business, (ii)
make such additional investments and engage in such additional activities as the
Governing Board may approve pursuant to Section 8.2 and (iii) engage in any and
all activities and exercise any power permitted
<PAGE>
15
to limited liability companies under the laws of the State of Delaware, as
applicable, related or incidental to the purposes set forth in clauses (i) and
(ii).
(b) The Company shall have the power to do any and all acts necessary,
appropriate, proper, advisable, incidental or convenient to or in furtherance of
the purposes of the Company set forth in this Section 2.3 and has, without
limitation, any and all powers that may be exercised on behalf of the Company by
the Governing Board pursuant to Section 8 hereof.
2.4 Principal Place of Business; Agent for Service of Process.
(a) The principal place of business of the Company shall be
located at such place as is determined by the Governing Board.
(b) The registered agent for service of process on the Company in the
State of Delaware shall be Corporation Service Company or any successor as
appointed by the Governing Board in accordance with the Act. The address for the
registered agent shall be:
Corporation Service Company
1013 Centre Road
Wilmington, Delaware 19805-1297
(c) The initial registered office of the Company in the State of
Delaware is:
Charter Behavioral Health Systems, LLC
c/o Corporation Service Company
1013 Centre Road
Wilmington, Delaware 19805-1297
The Company may maintain other offices, as determined by the Governing
Board.
(d) The principal place of business of Charter Inc. is:
Charter Behavioral Health Systems, Inc.
3414 Peachtree Road, N.E., Suite 1400
Atlanta, Georgia 30326
Attention: General Counsel
(e) The principal place of business of Crescent Operating is:
Crescent Operating, Inc.
777 Main Street
Suite 2100
Fort Worth, Texas 76102
<PAGE>
16
Attention: Gerald W. Haddock
2.5 Term.
The term of the Company commenced on the date the Certificate was filed
in the office of the Secretary of State of the State of Delaware in accordance
with the Act. The Members intend that the existence of the Company shall
continue until the earlier to occur of (i) the winding up and liquidation of the
Company and the completion of its business following a Dissolution Event, as
provided in Section 14 hereof or (ii) ninety-nine (99) years from the date on
which the term of the Company commences.
2.6 Title to Property.
All Property owned by the Company shall be owned by the Company as an
entity, and no Member shall have any ownership interest in such Property in its
individual name, and each Member's interest in the Company shall be personal
property for all purposes. At all times after the Effective Date, the Company
shall hold title to all of its Property in the name of the Company or a wholly
owned subsidiary and not in the name of any Member.
2.7 Payments of Individual Obligations.
The Company's credit and assets shall be used solely for the benefit of
the Company, and no asset of the Company shall be transferred or encumbered for,
or in payment of, any individual obligation of any Member.
SECTION 3.
MEMBER SHARES, CAPITAL CONTRIBUTIONS AND FUNDING
3.1 Original Capital Contributions.
On the Effective Date, Charter Inc. (and its affiliates) and Crescent
Operating have each made an Original Capital Contribution to the Company, with
the initial Net Asset Value of each such Original Capital Contribution (which
shall also constitute the initial Capital Account balance of the Member making
the Original Capital Contribution) immediately after the date of the Original
Capital Contributions being as follows:
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17
Initial Net Asset Percentage
Property Value of Original Interest
Name Contributed Capital Contribution
- ------------------ -------------- -------------------- ----------
Charter Inc. Property and
Assumed
Obligations $5.0 million 50.0%
described in
Section 2.1 and
2.3 of the
Contribution
Agreement
Crescent Operating Cash $5.0 million 50.0%
3.2 Other Matters.
(a) Except as otherwise provided in this Agreement, no Member shall
demand or receive a return on or of its Capital Contributions or withdraw from
the Company without the consent of all Members. Under circumstances requiring a
return of any Capital Contributions, no Member has the right to receive Property
other than cash except as may be specifically provided herein.
(b) No Member shall receive any interest, salary or drawing with
respect to its Capital Contributions or its Capital Account or for services
rendered on behalf of the Company, or otherwise, in its capacity as a Member,
except as otherwise provided in this Agreement or approved by the Governing
Board, or except as provided in the Transaction Agreements.
(c) No Member shall be liable for the Debts or any other
obligations of the Company.
(d) A Member shall not be required to restore a deficit balance in its
Capital Account or to lend any funds to the Company, except as otherwise
provided herein or in the Transaction Agreements.
(e) Each of Charter Inc. and Crescent Operating will contribute an
additional $2.5 million to the capital of the Company within five (5) days after
Closing ("Additional Capital Contribution"). Additionally, on the Effective
Date, (i) each of Charter Inc. and Crescent Operating shall agree to loan
(either directly or through an Affiliate) the Company up to an aggregate of
$17.5 million each (a "Member Commitment"), which Member Commitments shall
terminate on the fifth anniversary of the Effective Date, and (ii) the Company
shall execute notes (the "Member Notes"), one to Charter Inc. and one to
Crescent Operating, as security for each such Member Commitment at the time of
any loan pursuant to a Member Commitment (the form of the note is attached as
Exhibit D). Magellan, in its sole discretion, shall have the right to require
the Company, from time
<PAGE>
18
to time, to draw down a portion of the Member Commitments by providing written
notice specifying the total amount to be drawn, and the date (which shall not be
less than thirty Business Days after the date of such notice)of such draw. Each
such draw (a "Member Advance") shall be funded 50% by Charter Inc. from its
Member Commitment and 50% by Crescent Operating from its Member Commitment.
Magellan agrees to provide funding to Charter Inc. if required for Charter Inc.
to fund its Member Commitment. Each Member Advance shall bear interest at a rate
of 10% per annum and have a term of five years (notwithstanding any termination
of the Member Commitment after the Member Advance is made). Notwithstanding
anything to the contrary, neither Magellan nor the Company shall have the right
to require a Member Advance from Crescent Operating unless Charter Inc. is
required to make a Member Advance in the same amount as that required for
Crescent Operating. Until the Company secures a Senior Facility in an amount of
at least $55 million supported by the Company without a guarantee from Crescent
Operating, payments under any Member Advances which are required to be made to
Charter Inc. shall be subordinated to payments under any Member Advances which
are required to be made to Crescent Operating. If either Charter Inc. or
Crescent Operating shall fail to make a Member Advance pursuant to this
paragraph within fifteen Business Days of the date specified above, with respect
to the Additional Capital Contribution, or in such notice from Charter Inc.
requiring a Member Advance and such failure continues for an additional ten
Business Days after notice from the other Member, then such defaulting Member
shall be deemed to have sold its membership interest in the Company to the other
Member upon delivery of payment by such other Member to the defaulting Member of
the sum of $100. Except for the foregoing, the Members shall not be required to
make any additional capital contributions or loans to the Company. Such
obligation to make Additional Capital Contributions or loans is solely for the
benefit of the Members, and no Person shall be considered a third-party
beneficiary of such obligation. The Company shall use all Additional Capital
Contributions and Member Advances for the benefit of the Company in such manner
as Charter Inc., in its sole discretion, directs.
(f) The Directors shall not have any personal liability for the
repayment of any Capital Contributions of any Member.
(g) Notwithstanding any other provision of this Agreement, each Member
agrees to approve such amendments to this Agreement as are necessary to allocate
up to 10% of the Percentage Interests in the Company, equally from each Member,
for future incentive payments to management.
<PAGE>
19
SECTION 4.
REPRESENTATIONS AND WARRANTIES OF CHARTER INC.
Charter Inc. represents and warrants to Crescent Operating as of the date hereof
as follows:
4.1 Organization and Authority of Charter Inc.
Charter Inc. is a corporation duly formed, validly existing and in good
standing under the laws of the State of Delaware and has all necessary power and
authority to enter into this Agreement, to carry out its obligations hereunder
and to consummate the transactions contemplated hereby. This Agreement has been
duly executed and delivered by Charter Inc., and (assuming due execution and
delivery by Crescent Operating) constitutes the legal, valid and binding
obligation of Charter Inc. enforceable against Charter Inc. in accordance with
its terms, except as enforceability may be limited by bankruptcy,
conservatorship, receivership, insolvency, moratorium or similar laws affecting
creditors' rights generally or by general principles of equity.
4.2 No Conflict.
The execution, delivery and performance by Charter Inc. of this
Agreement does not and will not (i) violate or conflict with the certificate of
incorporation or bylaws of Charter Inc., (ii) conflict with or violate any law,
rule, regulations, order, writ, judgment, injunction, decree, determination or
award applicable to Charter Inc. or (iii) result in any breach of, or constitute
a default (or event which with the giving of notice or lapse of time, or both,
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of any
pledge, lien, security interest, mortgage, charge, adverse claim or ownership or
use, or other encumbrance of any kind (collectively "Encumbrances") on any of
the assets or properties of Charter Inc. pursuant to, any note, bond, indenture,
contract, agreement, lease, license, permit, franchise or other instrument
relating to such assets or properties to which Charter Inc. is a party or by
which any of such assets or properties is bound or affected, except, in the case
of (ii) or (iii), any conflict, violation, breach or default which would not
individually or in the aggregate have a material adverse effect on Charter Inc.
or the Company.
4.3 Consents and Approvals.
Except as set forth on Schedule 4.3, the execution and delivery by
Charter Inc. of this Agreement does not and will not, and the performance by
Charter Inc. of this Agreement does not and will not, require any consent,
approval, authorization or other action by, or filing with or notification to,
any governmental or regulatory authority. Charter Inc. is in compliance in all
material respects with all laws and regulations of all governmental or
quasi-governmental authorities having jurisdiction over the business of Charter
Inc.
<PAGE>
20
SECTION 5.
REPRESENTATIONS AND WARRANTIES OF Crescent Operating
Crescent Operating represents and warrants to Charter Inc. as of the date hereof
as follows:
5.1 Organization and Authority of Crescent Operating.
Crescent Operating is a corporation, duly formed, validly existing and
in good standing under the laws of the State of Delaware and has all necessary
power and authority to enter into this Agreement, to carry out its obligations
hereunder and to consummate the transactions contemplated hereby. This Agreement
has been duly executed and delivered by Crescent Operating and (assuming due
execution and delivery by Charter Inc.) constitutes its legal, valid and binding
obligation enforceable against Crescent Operating in accordance with its terms,
except as enforceability may be limited by bankruptcy, conservatorship,
receivership, insolvency, moratorium or similar laws affecting creditors' rights
generally or by general principles of equity.
5.2 No Conflict.
The execution, delivery and performance by Crescent Operating of this
Agreement does not and will not (i) violate or conflict with the organizational
documents of Crescent Operating, (ii) conflict with or violate any law, rule,
regulation, order, writ, judgment, injunction, decree, determination or award
applicable to Crescent Operating or (iii) result in any breach of, or constitute
a default (or event which with the giving of notice or lapse of time, or both,
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of any
Encumbrance on any of the assets or properties of Crescent Operating pursuant
to, any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument relating to such assets or properties to
which Crescent Operating is a party or by which any of such assets or properties
is bound or affected, except, in the case of (ii) or (iii), any conflict,
violation, breach or default which would not individually or in the aggregate
have a material adverse effect on Crescent Operating or the Company.
5.3 Consents and Approvals.
Except as set forth in Schedule 5.3, the execution and delivery of this
Agreement by Crescent Operating does not and will not, and the performance of
this Agreement by Crescent Operating does not and will not, require any consent,
approval, authorization or other action by, or filing with or notification to,
any governmental or regulatory authority. Crescent Operating is in compliance in
all material respects with all laws and regulations of all governmental or
quasi-governmental authorities having jurisdiction over the business of Crescent
Operating. Crescent Operating has no knowledge of material violations of laws or
regulations relating to the business of Crescent Operating and no written notice
of any material violation of any such law, regulation or ordinance has been
received by Crescent Operating except for violations or alleged violations that
are being
<PAGE>
21
corrected in the ordinary course of business pursuant to an approved plan of
correction and are listed on Schedule 5.3.
SECTION 6.
ALLOCATIONS
6.1 Profits.
After giving effect to the special allocations set forth in Sections
6.3 and 6.4, Profits for any Allocation Year shall be allocated to the Members
in proportion to their Percentage Interests.
6.2 Losses.
After giving effect to the special allocations set forth in Sections
6.3 and 6.4 and subject to Section 6.5, Losses for any Allocation Year shall be
allocated to the Members in proportion to their Percentage Interests.
6.3 Special Allocations.
The following special allocations shall be made in the following order:
(a) Minimum Gain Charge Back. Except as otherwise provided in Section
1.704-2(f) of the Regulations, notwithstanding any other provision of this
Section 6, if there is a net decrease in Company Minimum Gain during any
Allocation Year, each Member shall be specially allocated items of Company
income and gain for such Allocation Year (and, if necessary, subsequent
Allocation Years) in an amount equal to such Member's share of the net decrease
in Company Minimum Gain, as determined in accordance with Regulations Section
1.704-2(g). Allocations pursuant to the previous sentence shall be made in
proportion to the respective amounts required to be allocated to each Member
pursuant thereto. The items to be so allocated shall be determined in accordance
with Sections 1.704-2(f)(6) and 1.704-2(j)(2) of the Regulations. This Section
6.3(a) is intended to comply with the minimum gain charge back requirement in
Section 1.704-2(f) of the Regulations and shall be interpreted consistently
therewith.
(b) Member Minimum Gain Charge Back. Except as otherwise provided in
Section 1.704-2(i)(4) of the Regulations, notwithstanding any other provision of
this Section 6, if there is a net decrease in Member Nonrecourse Debt Minimum
Gain attributable to a Member Nonrecourse Debt during any Allocation Year, each
Member who has a share of the Member Nonrecourse Debt Minimum Gain attributable
to such Member Nonrecourse Debt, determined in accordance with Section
1.704-2(i)(5) of the Regulations, shall be specially allocated items of Company
income and gain for such Allocation Year (and, if necessary, subsequent
Allocation Years) in an amount equal to such Member's share of the net decrease
in Member Nonrecourse Debt, determined in accordance
<PAGE>
22
with Regulations Section 1.704-2(i) (4). Allocations pursuant to the previous
sentence shall be made in proportion to the respective amounts required to be
allocated to each Member pursuant thereto. The items to be so allocated shall be
determined in accordance with Sections 1.704-2(i)(4) and 1.704-2(j)(2) of the
Regulations. This Section 6.3(b) is intended to comply with the minimum gain
charge back requirement in Section 1.704-2(i)(4) of the Regulations and shall be
interpreted consistently therewith.
(c) Qualified Income Offset. In the event any Member unexpectedly
receives any adjustments, allocations, or distributions described in Sections
1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6) of
the Regulations, items of Company income and gain shall be specially allocated
to such Member in an amount and manner sufficient to eliminate, to the extent
required by the Regulations, the Adjusted Capital Account Deficit of the Member
as quickly as possible; provided that an allocation pursuant to this Section
6.3(c) shall be made only if and to the extent that the Member would have an
Adjusted Capital Account Deficit after all other allocations provided for in
Section 6 have been tentatively made as if this Section 6.3(c) were not in the
Agreement.
(d) Gross Income Allocation. In the event any Member has a deficit
Capital Account at the end of any Allocation Year which is in excess of the sum
of the amount such Member is deemed to be obligated to restore pursuant to the
penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5),
each such Member shall be specially allocated items of Company income and gain
in the amount of such excess as quickly as possible, provided that an allocation
pursuant to this Section 6.3(d) shall be made only if and to the extent that
such Member would have a deficit Capital Account in excess of such amount after
all other allocations provided for in this Section 6 have been made as if
Section 6.3(c) and this Section 6.3(d) were not in the Agreement.
(e) Nonrecourse Deductions. Nonrecourse Deductions for any
Allocation Year shall be specially allocated to the Members in proportion to
their respective Percentage Interests.
(f) Member Nonrecourse Deductions. Any Member Nonrecourse Deductions
for any Allocation Year shall be specially allocated to the Member who bears the
economic risk of loss with respect to the Member Nonrecourse Debt to which such
Member Nonrecourse Deductions are attributable in accordance with Regulations
Section 1.704-2(i)(1).
(g) Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Company asset, pursuant to Code Section 734(b) or Code
Section 743(b) is required, pursuant to Regulations Section
1.704-1(b)(2)(iv)(m)(2) or 1.704-1(b)(2)(iv)(m)(4), to be taken into account in
determining Capital Accounts as the result of a distribution to a Member in
complete liquidation of such Member's interest in the Company, the amount of
such adjustment to Capital Accounts shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis) and such gain or loss shall be specially allocated to the
Members in accordance with their interests in the Company in the event
Regulations
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23
Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Member to whom such
distribution was made in the event Regulations Section 1.704-1(b)(2)(iv)(m)(4)
applies.
(h) Allocations Relating to Taxable Issuance of Company Interest. Any
income, gain, loss or deduction realized as a direct or indirect result of the
issuance of Interests by the Company to a Member (the "Issuance Items") shall be
allocated among the Members so that, to the extent possible, the net amount of
such Issuance Items, together with all other allocations under this Agreement to
each Member, shall be equal to the net amount that would have been allocated to
each such Member if the Issuance Items had not been realized.
6.4 Curative Allocations.
The allocations set forth in Sections 6.3(a) to (g) and 6.5 (the
"Regulatory Allocations") are intended to comply with certain requirements of
the Regulations. It is the intent of the Members that, to the extent possible,
all Regulatory Allocations shall be offset either with other Regulatory
Allocations or with special allocations of other items of Company income, gain,
loss or deduction pursuant to this Section 6.4. Therefore, notwithstanding any
other provision of this Section 6 (other than the Regulatory Allocations), the
Governing Board shall make such offsetting special allocations of Company
income, gain, loss or deduction in whatever manner it determines appropriate so
that, after such offsetting allocations are made, each Member's Capital Account
balance is, to the extent possible, equal to the Capital Account balance such
Member would have had if the Regulatory Allocations were not part of the
Agreement and all Company items were allocated pursuant to Sections 6.1 and 6.2;
provided, however, that the Governing Board shall not make offsetting special
allocations if and to the extent that such Regulatory Allocations were or likely
will be offset with Regulatory Allocations in prior or future years.
6.5 Loss Limitation.
Losses allocated pursuant to Section 6.2 hereof shall not exceed the
maximum amount of Losses that can be allocated without causing any Member to
have an Adjusted Capital Account Deficit at the end of any Allocation Year. In
the event some but not all of the Members would have Adjusted Capital Account
Deficits as a consequence of an allocation of Losses pursuant to Section 6.2
hereof, the limitation set forth in this Section 6.5 shall be applied on a
Member by Member basis and Losses not allocable to any Member as a result of
such limitation shall be allocated to the other Members in accordance with the
positive balances in such Members' Capital Accounts so as to allocate the
maximum permissible Losses to each Member under Section 1.704- 1(b)(2)(ii)(d) of
the Regulations.
6.6 Other Allocation Rules.
(a) For purposes of determining the Profits, Losses, or any other items
allocable to any period, Profits, Losses, and any such other items shall be
determined on a daily, monthly, or other
<PAGE>
24
basis, as determined by the Governing Board, using any permissible method under
Code Section 706 and the Regulations thereunder.
(b) The Members are aware of the income tax consequences of the
allocations made by this Section 6 and hereby agree to be bound by the
provisions of this Section 6 in reporting their shares of Company income and
loss for income tax purposes.
(c) For purposes of making all allocations pursuant to this Section 6
for any Allocation Year, cash distributed within thirty (30) days after the last
day of such Allocation Year shall be treated as having been distributed on such
last day pursuant to Section 7.1 hereof.
(d) Solely for purposes of determining a Member's proportionate share
of the "excess nonrecourse liabilities" of the Company within the meaning of
Regulations Section 1.752-3(a)(3), the Members' interests in Company profits
shall be in proportion to their Percentage Interests.
(e) To the extent permitted by Section 1.704-2(h)(3) of the
Regulations, the Governing Board shall endeavor to treat distributions of cash
as having been made from the proceeds of a Nonrecourse Liability or a Member
Nonrecourse Debt only to the extent that such distributions would cause or
increase an Adjusted Capital Account Deficit for any Member.
6.7 Tax Allocations: Code Section 704(c).
In accordance with Code Section 704(c) and the Regulations thereunder,
income, gain, loss, and deduction with respect to any Property contributed to
the capital of the Company shall, solely for tax purposes, be allocated among
the Members so as to take account of any variation between the adjusted basis of
such Property to the Company for federal income tax purposes and its initial
Gross Asset Value (computed in accordance with the definition of Gross Asset
Value). Any such variation with respect to the Contributed Assets (as defined in
the Contribution Agreement) shall be calculated using the remedial allocation
method described in Regulation Section 1.704-3(d).
In the event the Gross Asset Value of any Company asset is adjusted
pursuant to subparagraph (b) of the definition of Gross Asset Value, subsequent
allocations of income, gain, loss, and deduction with respect to such asset
shall take account of any variation between the adjusted basis of such asset for
federal income tax purposes and its Gross Asset Value in the same manner as
under Code Section 704(c) and the Regulations thereunder.
Any elections or other decisions relating to such allocations shall be
made by a supermajority (of at least 80%) of the Governing Board in any manner
that reasonably reflects the purpose and intention of this Agreement.
Allocations pursuant to this Section 6.7 are solely for purposes of federal,
state, and local taxes and shall not affect, or in any way be taken into account
in computing, any Member's Capital Account or share of Profits, Losses, other
items, or distributions pursuant to any provision of this Agreement.
<PAGE>
25
SECTION 7.
DISTRIBUTIONS
7.1 Distribution of Available Cash. Subject to the provisions of this
Section 7, the Company's available cash shall be distributed to the Members, in
such amounts and only at such times as determined by the Governing Board, in
proportion to their respective Percentage Interests. In no event shall any cash
distribution be made to the Members unless and until rent due under the
Facilities Lease and fees due under the Franchise Agreement are fully paid in
the year of any distribution.
7.2 Amounts Withheld. Each Member hereby authorizes the Company to
withhold from or pay on behalf of or with respect to such Member any amount of
federal, state, local, or foreign taxes that the Governing Board determines that
the Company is required to withhold or pay with respect to any amount
distributable or allocable to such Member pursuant to this Agreement, including,
without limitation, any taxes required to be withheld or paid by the Company
pursuant to Sections 1441, 1442, 1445, or 1446 of the Code. Any amount paid on
behalf of or with respect to a Member shall constitute a loan by the Company to
such Member, which loan shall be repaid by such Member within fifteen (15) days
after notice from the Governing Board that such payment must be made unless (i)
the Company withholds such payment from a distribution which would otherwise be
made to the Member, or (ii) the Governing Board determines, in its sole and
absolute discretion, that such payment may be satisfied out of the available
funds of the Company which would, but for such payment, be distributed to the
Member. Any amounts withheld pursuant to the foregoing clauses (i) or (ii) shall
be treated as having been distributed to such Member. Each Member hereby
unconditionally and irrevocably grants to the Company a security interest (which
shall be subordinate to any pledge granted to a financial institution as
contemplated by Section 12.2) in such Member's Percentage Interest to secure
such Member's obligation to pay to the Company any amounts required to be paid
pursuant to this Section 7.2. In the event that a Member fails to pay any
amounts owed to the Company pursuant to this Section 7.2 when due, the Governing
Board may, in its sole and absolute discretion, elect to make the payment to the
Company on behalf of such defaulting Member and, until repayment of such loan,
shall succeed to all rights and remedies of the Company against such defaulting
Member (including, without limitation, the right to receive distributions). Any
amounts payable by a Member hereunder shall bear interest at the base rate on
corporate loans at large United States money center commercial banks, as
published from time to time in the Wall Street Journal, plus four percentage
points (but not higher than the maximum lawful rate) from the date such amount
is due (i.e., fifteen (15) days after demand) until such amount is paid in full.
Each Member shall take such actions as the Company or the Governing Board shall
request in order to perfect or enforce the security interest created hereunder.
<PAGE>
26
SECTION 8.
MANAGEMENT
8.1 Directors; Governing Board.
(a) The management of the Company shall be vested in the four-member
Governing Board (the "Governing Board") designated by the Members as provided in
Sections 8.1(c) and (d) hereof.
(b) The number of Persons, each of whom shall be an individual
(hereinafter referred to as "Directors") on the Governing Board shall be four
(4) unless otherwise provided herein. Each Director shall be a "Manager," as
defined in the Act, who shall have authority to act on behalf of the Company as
set forth herein. The Directors shall serve without compensation but shall be
entitled to reimbursement for their out-of-pocket costs for their services
hereunder.
(c) Simultaneously with the execution hereof, Charter Inc. hereby
designates the individuals set forth in Items (1) through (2) as Charter
Directors and Crescent Operating hereby designates the individuals set forth in
Items (3) through (4) as Crescent Directors, such that the name and address of
the Directors who shall serve until their respective successors shall have been
designated and qualified are as follows:
Name Business Address and Telephone Number
- ----------------------- -----------------------------------------
1. Steve Davis 3414 Peachtree Road, N.E., Suite 1400
Atlanta, GA 30326
Tel.: (404) 869-9200
2. Craig L. McKnight 3414 Peachtree Road, N.E., Suite 1400
Atlanta, GA 30326
Tel.: (404) 869-9200
3. John C. Goff 777 Main Street, Suite 2100
Fort Worth, TX 76102
Tel.: (817) 877-0477
4. Gerald W. Haddock 777 Main Street, Suite 2100
Fort Worth, TX 76102
Tel.: (817) 877-0477
(d) No vote of the Members shall be required to designate Directors.
Rather, Charter Inc. shall have the right to designate two (2) Charter
Directors, and Crescent Operating shall have the right to designate two (2)
Crescent Directors. A Director shall remain in office until removed by the
Member designating such Director. With respect to any Director other than the
initial Directors set
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27
forth in Section 8.1(c) hereof, Charter Inc. or Crescent Operating, as the case
may be, shall designate such Director by delivering to the Company the Member's
written statement designating such Director and setting forth such Director's
business address and telephone number.
(e) A Director may be removed at any time, with or without cause,
solely by the Member originally designating such Director. Removal shall be
accomplished by delivery of written notice to the Company demanding such removal
and designating the Person who shall fill the position of the removed Director.
(f) In the event any Director dies or is unwilling or unable to serve
as such or is removed from office by the Member that designated such Director,
the appropriate Member shall promptly designate a successor to such Director. A
Director chosen to fill a vacancy shall be designated by the Member whose
previously designated Director shall have been removed or shall have resigned.
(g) Each Director shall have one (1) vote. Except as otherwise provided
in Sections 8.2 and 8.3 hereof, the Governing Board shall act by the affirmative
vote of a majority of the total number of Directors on the Governing Board. A
Director may authorize any other Director to act for him by proxy on all matters
in which a Director is entitled to participate, including waiving notice of any
meeting, or voting or participating at a meeting. Every proxy must be signed by
the Director or its attorney-in-fact. No proxy shall be valid after the
expiration of eleven (11) months from the date thereof unless otherwise provided
in the proxy. Every proxy shall be revocable at the pleasure of the Director
executing it.
(h) The Governing Board shall have the power to delegate authority to
such committees of Directors, officers, employees, agents and representatives of
the Company as it may from time to time deem appropriate. Any delegation of
authority to take any action must be approved in the same manner as would be
required for the Governing Board to approve such action directly.
(i) A Director shall not be liable under a judgment, decree or order of
court, or in any other manner, for a debt, obligation or liability of the
Company.
8.2 Major Decisions.
Notwithstanding the other provisions of this Section 8, no officer or
employee of the Company shall have any authority to cause or permit the Company
or any of its subsidiaries or Affiliates to take any of the following actions or
make any of the following decisions (each, a "Major Decision") without the prior
express action and approval of at least eighty percent (80%) of the Governing
Board:
(1) any sale, lease, transfer or other disposition of any
asset of the Company or any subsidiary of the Company in an amount in
excess of $50,000, to the extent such sale, lease, transfer, other
disposition or granting of security interest was not previously
approved in the Annual Budget for the then current Fiscal Year;
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28
(2) the acquisition from any Person of any stock or interest
in any corporation, company, partnership, association, business or
business division, whether by stock purchase, asset purchase,
contribution, merger or other business combination or joint venture, or
otherwise causing or permitting the Company to be a party to a merger,
transfer of assets, consolidation or reorganization with any other
Person, provided, however, that the Company shall have the right to
invest in short-term, highly liquid investments (which mature in no
more than 60 days) with appropriate safety of principal including,
without limitation, U.S.
Government securities;
(3) the filing of a voluntary petition for bankruptcy,
insolvency or the making of any assignment for the benefit of creditors
by or of the Company or any other action which would constitute a
Bankruptcy of the Company, or the substantial equivalent thereof;
(4) the election to dissolve and terminate the Company;
(5) causing or permitting the Company to engage in any
business or activities other than the Business;
(6) except as provided in the Transaction Agreements, the
Company's entry into any agreement or contract that is proposed to be
entered into between the Company and any Member or Affiliate of a
Member or any amendment thereof;
(7) any entering into, modification, amendment, extension or
termination by the Company of any contract which delegates the
management of any significant part of the business of the Company to
any Person not employed by the Company;
(8) the selection of any Person to act as Liquidator in
connection with the liquidation and termination of the Company in
accordance with Section 14;
(9) approval of a commitment for any capital expenditure
(to the extent not previously approved in the Annual Budget for the
then current Fiscal Year);
(10) entering into any (i) contract of any sort not in the
ordinary course of business or (ii) contract or series of related
contracts calling for payments by the Company of more than the contract
limit authorized by the Governing Board, or, in the absence of such
express authorization, $10,000 in any one Fiscal Year (to the extent
not previously approved in the Annual Budget for the then current
Fiscal Year);
(11) incurring any indebtedness by the Company or granting any
security interest in any asset of the Company to the extent not
previously approved in the Annual Budget; provided, however, that if
requested by a bank or group of banks (the "Lender") which has
committed to provide the Company with a credit facility of at least $55
million (the "Senior Facility"), the Company shall (i) cause any
subsidiaries of the Company designated by the
<PAGE>
29
Lender to guarantee the debt incurred by the Company under the Senior
Facility, (ii) pledge its ownership interest in any subsidiaries of the
Company designated by the Lender to the Lender as security for the debt
incurred by the Company under the Senior Facility, and (iii) grant a
security interest in its accounts receivables to the Lender as security
for the debt incurred by the Company under the Senior Facility;
(12) except as may be expressly provided hereunder, the
admission of any Person to the Company as an additional Member or
substitute Member or the issuance of any additional Interests or rights
to acquire Interests in the Company;
(13) making a loan of Company funds to any Person, or
guaranteeing any obligation or indebtedness of any Person, to the
extent not previously approved in the Annual Budget;
(14) making a loan of Company funds to or guaranteeing any
obligation or indebtedness of any Member or any Affiliate of any
Member;
(15) approval of the Annual Budget for the Company for any
Fiscal Year and approval of any changes (as described in Section 8.3)
to such Annual Budget;
(16) the employment or retention of any Person (including,
without limitation, counsel, auditors and consultants) whose gross
annual compensation (including benefits) or fees are reasonably likely
to exceed $150,000 in any fiscal year (unless previously approved in
the Annual Budget);
(17) the establishment, amendment or termination of any
employee pension, profit sharing or other benefit plan;
(18) any change of the Company's fiscal year;
(19) any distributions to the Members;
(20) entering into any employment agreement with any
employee of the Company;
(21) selecting any Executive Officer or removing either
the Chairman of the Governing Board or the President of the Company;
(22) any change in accounting principles used by the
Company, except to the extent required by GAAP;
(23) closing any hospital or Facility which the Governing
Board has determined is in the financial best interests of the Company;
<PAGE>
30
(24) the decision to renew any Facilities Lease;
(25) the decision to renew any Franchise Agreement;
(26) the decision to make an initial public offering of
any interest (debt or equity) in the Company;
(27) the Company's decision to exercise its right of
purchase of an interest during the Second Offer Period in accordance
with Section 12;
(28) any amendment of this Agreement or the Certificate;
(29) any capital contribution by any Member other than the
Additional Capital Contribution;
(30) certain tax matters as provided in Sections 6.7 and
9.5; and
(31) amending the limited liability operating agreement or
other organizational documents of any subsidiary of the Company.
Notwithstanding the foregoing or any other provision hereof (i) Charter Inc.
shall have the approval and other rights relating to the Company's business and
operations specified in Section 15 of the Franchise Agreement in the event that
Charter Inc. is the Selling Party pursuant to an exercise of the buy-sell option
pursuant to Section 15.3 and (ii) nothing in this Section 8.2 shall require the
approval of the Governing Board for the performance, by the Company, of any of
its obligations under the Transaction Agreements.
8.3 Annual Budget.
(a) The President and the Treasurer of the Company have proposed an
annual operating and capital budget for the Company for the Fiscal Year ending
September 30, 1997 (for such Fiscal Year and each subsequent Fiscal Year, the
"Annual Budget"). The proposed annual operating and capital budget shall be
deemed approved by the Governing Board upon the execution of this Agreement as
the 1997 Annual Budget.
(b) After the adoption of the initial Annual Budget for the Company,
the President and the Treasurer of the Company shall prepare or cause to be
prepared a proposed Annual Budget for the Company for the succeeding Fiscal Year
containing the information set forth on Schedule 8.3 which shall be submitted to
the Governing Board for consideration and approval within 30 days after the
September 30 immediately preceding such Fiscal Year. Upon approval by the
Governing Board, the proposed Annual Budget shall become the Annual Budget for
the next succeeding Fiscal Year.
<PAGE>
31
(c) If the Governing Board is unable to agree on the Annual Budget,
then until such time as the Governing Board is able to adopt and approve an
Annual Budget, the Annual Budget shall consist of the items in the proposed
Annual Budget which are not in dispute and, with respect to those items in
dispute, the items and amounts in the prior year's Annual Budget shall be deemed
to constitute the approved amounts in the Annual Budget, as the case may be;
provided, however, that the amount budgeted for acquisitions or financing for
the then-current Fiscal Year shall be the amount that the parties are able to
agree upon or, if they are unable to agree, then these amounts shall be zero for
the then-current Fiscal Year unless necessary for ongoing operations.
Notwithstanding anything contained herein to the contrary, to the extent that an
expenditure is required to be made pursuant to a legally binding obligation of
the Company which has been previously approved by the Governing Board or the
Members (or not required to be approved pursuant to this Agreement) or to the
extent that any such expenditure is beyond the Company's control, such as
utility costs, taxes and insurance premiums, then the approved Annual Budget for
the current fiscal year shall be deemed to include such expenditure.
(d) Upon approval of an Annual Budget by the Governing Board, the
Company shall, and the officers of the Company shall cause the Company to,
conduct its operations in accordance therewith, and no modifications shall be
made except in accordance with Section 8.2.
8.4 Meetings of the Governing Board.
(a) The Governing Board shall hold regular meetings no less frequently
than once every Fiscal Quarter and shall establish meeting times, dates and
places and requisite notice requirements (not shorter than those provided in
Section 8.5(b)) and adopt rules or procedures consistent with the terms of this
Agreement. At such meetings the Governing Board shall transact such business as
may properly be brought before the meeting, whether or not the notice of such
meeting referenced the action taken at such meeting.
(b) Special meetings of the Governing Board may be called by any
Director. Notice of each such meeting shall be given to each Director on the
Governing Board by telephone, telecopy, telegram or similar method (in each
case, notice shall be given at least five (5) Business Days before the time of
the meeting) or sent by first-class mail (in which case notice shall be given at
least ten (10) days before the meeting), unless a longer notice period is
established by the Governing Board. Each such notice shall state (i) the time,
date, place (which shall be at the principal office of the Company unless
otherwise agreed to by all Directors) or other means of conducting such meeting
and (ii) the purpose of the meeting to be so held. No actions other than those
specified in the notice may be considered at any special meeting unless
unanimously approved by the Directors. Any Director may waive notice of any
meeting in writing before, at or after such meeting. The attendance of a
Director at a meeting shall constitute a waiver of notice of such meeting,
except when a Director attends a meeting for the express purpose of objecting to
the transaction of any business because the meeting was not properly called.
<PAGE>
32
(c) A majority of the Governing Board as constituted at a particular
time shall constitute a quorum for the transaction of business at such time.
(d) Any action required to be taken at a meeting of the Governing
Board, or any action that may be taken at a meeting of the Governing Board, may
be taken at a meeting held by means of telephone conference or other
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in such a meeting shall constitute
presence in person at such meeting.
(e) Notwithstanding anything to the contrary in this Section 8.4, the
Governing Board may take without a meeting any action that may be taken by the
Governing Board under this Agreement if such action is approved by the unanimous
written consent of the Directors.
8.5 Governing Board Powers.
(a) Except as otherwise provided in this Agreement, the Governing Board
shall have the right and authority to take all actions which the Governing Board
deems necessary, useful or appropriate for the management and conduct of the
Business.
(b) Except as otherwise provided in this Agreement, all powers to
control and manage the Business and affairs of the Company shall be exclusively
vested in the Governing Board, and the Governing Board may exercise all powers
of the Company and do all such lawful acts as are not by statute, the
Certificate or this Agreement directed or required to be exercised or done by
the Members, and no Member shall have any right or power to control or manage
the Business.
(c) The Governing Board will establish policies and guidelines for the
hiring of employees to permit the Company to act as an operating company with
respect to its Business. The Governing Board may adopt appropriate management
incentive plans and employee benefit plans in accordance with Section 8.2.
8.6 Independent Activities; Transactions with Affiliates.
(a) Each Director shall be required to devote such time to the affairs
of the Company as may be necessary to manage and operate the Company and its
subsidiaries and shall be free to serve any other Person or enterprise in any
capacity that such Director may deem appropriate in his, her or its discretion.
(b) To the extent permitted by applicable law and subject to the
provisions of this Agreement, in furtherance of the purposes of the Company set
forth in Section 2.3, the Governing Board is hereby authorized to cause the
Company to purchase or lease property (whether real, personal or mixed) from,
sell or lease such property to or otherwise deal with any Member or Director,
acting on its own behalf, or any Affiliate of any Member or Director; provided
that any such purchase, sale, lease, dealing or other transaction shall be made
in accordance with Section 8.2.
<PAGE>
33
(c) Each Member and Director and any Affiliate thereof may also lend
money to, borrow money from, act as a surety, guarantor or endorser for,
guarantee or assume one or more specific obligations of, provide collateral for,
and transact other business with the Company and, subject to other applicable
law, have the same rights and obligations with respect thereto as a Person who
is not a Member, subject to Section 8.2.
8.7 Officers.
(a) The officers of the Company initially shall be those listed on
Exhibit C. Thereafter, the Executive Officers shall be chosen by the Governing
Board as provided in Section 8.2. The Company may also have, at the discretion
of the Governing Board, such other officers as are desired, including one or
more Vice Presidents, one or more Assistant Vice Presidents, one or more
Assistant Secretaries and one or more Assistant Treasurers, and such other
officers and agents as it shall deem necessary who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Governing Board. In the event there are two
or more Vice Presidents, then one or more may be designated as Executive Vice
President, Senior Vice President, or other similar or dissimilar title. At the
time of the election of officers, the Governing Board may determine the order of
their rank. Any number of offices may be held by the same person.
(b) The officers of the Company shall hold office until their
successors are chosen by the Governing Board and commence to perform their
respective duties, provided that the initial Chairman of the Governing Board and
the initial President of the Company shall serve until resignation or
termination by the Governing Board in accordance with Section 8.2. Any other
officer elected or appointed by the Governing Board may be removed at any time
with or without cause by the Governing Board in accordance with Section 8.2. If
the office of any officer or officers becomes vacant for any reason, such
vacancy shall be filled by the Governing Board in accordance with Section 8.2
and this Section 8.7.
(c) The officers of the Company shall include:
(1) The Chairman of the Governing Board. The Chairman of the
Governing Board shall, if present, preside at all meetings of the
Governing Board and all meetings of the Members and exercise and
perform such other powers and duties as may be from time to time
assigned to him by the Governing Board. All Executive Officers engaged
in strategic planning and development and in capital functions,
including without limitation, the Treasurer, Chief Financial Officer
and the senior officers responsible for acquisitions, shall report to
the Chairman of the Governing Board with respect to those functions,
but shall continue to report to the President with respect to other
functions. If there is no President, the Chairman of the Governing
Board shall in addition be the Chief Executive Officer of the Company
and shall have the powers and duties prescribed in clause (3) below.
The initial Chairman of the Governing Board shall be John C. Goff.
<PAGE>
34
(2) Vice Chairman of the Governing Board. The Vice Chairman of
the Governing Board shall exercise and perform such other powers and
duties as may be from time to time assigned to him by the Governing
Board. In the absence of the Chairman of the Governing Board, he or she
shall preside at all meetings of the Governing Board.
(3) President. Subject to such supervisory powers, if any, as
may be given by the Governing Board to the Chairman of the Governing
Board, the President shall be the Chief Executive Officer of the
Company and shall, subject to the control of the Governing Board, have
general supervision, direction and control of the Business and officers
of the Company. He shall be an ex-officio member of all committees and
shall have the general powers and duties of management usually vested
in the office of President and chief executive officer of corporations
organized under the laws of the State of Delaware, and shall have such
other powers and duties as may be prescribed by the Governing Board.
The initial President shall be John M. DeStefanis.
(4) Vice President. In the absence or disability of the
President and the Chairman of the Governing Board, the Vice Presidents
in order of their rank as fixed by the Governing Board, or if not
ranked, the Vice President designated by the Governing Board, shall
perform all the duties of the President, and when so acting shall have
all the powers and be subject to all the restrictions upon the
President. The Vice Presidents shall have such other duties as from
time to time may be prescribed for them, respectively, by the Governing
Board.
(5) Assistant Vice President. The Assistant Vice President, or
if there be more than one, the Assistant Vice Presidents, shall have
such duties as from time to time may be prescribed for them,
respectively, by the Governing Board.
(6) Secretary. The Secretary shall attend all sessions of the
Governing Board and all meetings of the Members and record all votes
and the minutes of all proceedings in a book to be kept for that
purpose and shall perform like duties for the standing committees when
required by the Governing Board. The Secretary shall give, or cause to
be given, notice of all meetings of the Members and of the Governing
Board and shall perform such other duties as may be prescribed by the
Governing Board.
(7) Assistant Secretary. The Assistant Secretary, or if there
be more than one, the Assistant Secretaries in the order determined by
the Governing Board, of if there be no such determination, the
Assistant Secretary designated by the Governing Board, shall, in the
absence or disability of the Secretary, perform the duties and exercise
the powers of the Secretary and shall perform such other duties and
have such other powers as the Governing Board may from time to time
prescribe.
(8) Treasurer. The Treasurer shall have the custody of
the corporate funds and securities and shall keep full and accurate
accounts of receipts and disbursements in books
<PAGE>
35
belonging to the Company and shall deposit all moneys and other
valuable effects in the name and to the credit of the Company, in such
depositories as may be designated by the Governing Board. The Treasurer
shall disburse the funds of the Company as may be ordered by the
Governing Board, taking proper vouchers for such disbursements, and
shall render to the Governing Board, at its regular meetings, or when
the Governing Board so requires, an account of all of his transactions
as Treasurer and of the financial condition of the Company.
(9) Assistant Treasurer. The Assistant Treasurer, or if there
shall be more than one, the Assistant Treasurers in the order
determined by the Governing Board, or if there be no such
determination, the Assistant Treasurer designated by the Governing
Board, shall, in the absence or disability of the Treasurer, perform
the duties and exercise the powers of the Treasurer and shall perform
such other duties and have such other powers as the Governing Board may
from time to time prescribe.
8.8 Indemnification of the Directors.
(a) Unless otherwise provided in Section 8.8(d) hereof, the Company,
its receiver, or its trustee (in the case of its receiver or trustee, to the
extent of Property contributed to the Company) shall indemnify, save harmless,
and pay all judgments and claims against any Director relating to any liability
or damage incurred by reason of any act performed or omitted to be performed by
any Director in connection with the Business, including reasonable attorneys'
fees incurred by the Director in connection with the defense of any action based
on any such act or omission, which attorneys' fees may be paid as incurred.
(b) Unless otherwise provided in Section 8.8(d) hereof, in the event of
any action by a Member against any Director, including a Company derivative
suit, the Company shall indemnify, save harmless, and pay all expenses of such
Director, including reasonable attorneys' fees, incurred in the defense of such
action.
(c) Unless otherwise provided in Section 8.8(d) hereof, the Company
shall indemnify, save harmless, and pay all expenses, costs, or liabilities of
any Director, if for the benefit of the Company and in accordance with this
Agreement said Director makes any deposit or makes any other similar payment or
assumes any obligation in connection with any Property proposed to be acquired
by the Company and suffers any financial loss as the result of such action.
(d) Notwithstanding the provisions of Sections 8.8(a), 8.8(b) and
8.8(c) above, such Sections shall be enforced only to the maximum extent
permitted by law and no Director shall be indemnified from any liability for the
fraud, intentional misconduct, gross negligence or a knowing violation of the
law which was material to the cause of action.
(e) The obligations of the Company set forth in this Section 8.8 are
expressly intended to create third party beneficiary rights of each of the
Directors and any Member is authorized, on
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36
behalf of the Company, to give written confirmation to any Director of the
existence and extent of the Company's obligations to such Director hereunder.
8.9 Filings.
(a) Each Director is hereby authorized to and shall execute and cause
the Certificate to be filed in the office of the Secretary of State of the State
of Delaware as an authorized person within the meaning of the Act. The Governing
Board shall take any and all other actions reasonably necessary to perfect and
maintain the status of the Company as a limited liability company under the laws
of the State of Delaware, including the preparation and filing of such
amendments to the Certificate and such other assumed name certificates,
documents, instruments and publications as may be required by law, including,
without limitation, action to reflect:
(1) a change in the Company name; or
(2) a correction of false or erroneous statements in the
Certificate or the desire of the Members to make a change in any
statement therein in order that it shall accurately represent the
agreement among the Members.
(b) The Members and the Governing Board shall execute and cause to be
filed original or amended certificates and shall take any and all other actions
as may be reasonably necessary to perfect and maintain the status of the Company
as a limited liability company or similar type of entity under the laws of any
other jurisdictions in which the Company engages in business.
(c) Upon the dissolution and completion of the winding up and
liquidation of the Company in accordance with Section 14, the Liquidator, as an
authorized person within the meaning of the Act, shall promptly execute and
cause to be filed statements of intent to dissolve and certificate of
cancellation in accordance with the Act and the laws of any other jurisdictions
in which the Liquidator deems such filing necessary or advisable.
8.10 Other Agreements.
(a) [Intentionally left blank].
(b) Franchise Fees. Notwithstanding any other provision herein, each of
Crescent Operating and Charter Inc. agrees that if franchise fees due Franchisor
pursuant to the Franchise Agreement are past due for any reason in the amounts
set forth below, the Charter Inc. Directors shall have the right to prohibit the
Company from taking one or more of the following actions, and to exercise one or
more of the following rights:
<PAGE>
37
Amount in Arrears Rights of Charter Inc./Prohibited Actions By
the Company
$6 million to $18 million 1. No incentive compensation to management
2. No vesting of management equity
Above $18 million to $24 million 1. No salary increases for key personnel
2. No additional hiring
3. No new hospital acquisitions/joint
ventures
Above $24 million 1. 5% cutback on expenses provided for in the
Annual Budget
2. Monthly approval of expenditures by
Charter Inc. (capital and operating)
3. Rights to require transfer of management
and control of the Company and its
subsidiaries to Charter Inc.
SECTION 9.
ROLE OF MEMBERS
9.1 Rights or Powers.
The Members shall not have any right or power to take part in the
management or control of the Company or its Business and affairs or to act for
or bind the Company in any way, except the Members have all the rights and
powers specifically set forth in this Agreement and, to the extent not
inconsistent with this Agreement, in the Act. A Member, any Affiliate thereof or
an employee, stockholder, agent, director or officer of a Member or any
Affiliate thereof, may also be an employee or be retained as an agent of the
Company. The existence of these relationships and acting in such capacities will
not result in the Member's being deemed to be participating in the control of
the Business of the Company or otherwise affect the limited liability of the
Member. A Member shall not, in its capacity as a Member, take part in the
operation, management or control of the Company's business, transact any
business in the Company's name or have the power to sign documents for or
otherwise bind the Company.
9.2 Voting Rights.
No Member has any voting right except with respect to those matters
specifically reserved for a Member vote as set forth in this Agreement or as
required in the Act. A Member shall have one vote for each Percentage Interest
such Member has in the Company (for example, initially, Charter Inc. and
Crescent Operating will each hold a 50% Interest in the Company and each have
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38
fifty votes). The approval of Members owning eighty percent (80%) or more of the
Percentage Interests in the Company is required to act on any matter submitted
to a vote of the Members.
9.3 Meetings of the Members.
(a) Meetings of the Members may be called upon the written request of
any Member. Such notice of meeting shall state the location of the meeting and
the nature of the business to be transacted. Notice of any such meeting shall be
given to all Members not less than seven (7) Business Days nor more than thirty
(30) days prior to the date of such meeting. Members may vote in person, by
proxy or by telephone at such meeting and may waive advance notice of such
meeting. Members which own in the aggregate eighty percent (80%) or more of the
Percentage Interests in the Company constitute a quorum for the transaction of
business at a meeting of the Members. Whenever the vote or consent of Members is
permitted or required under the Agreement, such vote or consent may be given at
a meeting of the Members or may be given in accordance with the procedure
prescribed in this Section 9.3.
(b) Each Member may authorize any Person or Persons to act for it by
proxy on all matters in which a Member is entitled to participate, including
waiving notice of any meeting, or voting or participating at a meeting. Every
proxy must be signed by the Member or its attorney-in-fact. No proxy shall be
valid after the expiration of eleven (11) months from the date thereof unless
otherwise provided in the proxy. Every proxy shall be revocable at the pleasure
of the Member executing it.
(c) Notwithstanding this Section 9.3, the Company may take any action
contemplated under this Agreement as approved by the consent of the Members,
such consent to be provided in writing, or by telephone or facsimile, if such
telephone conversation or facsimile is followed by a written summary of the
telephone conversation or facsimile communication sent by registered or
certified mail, postage and charges prepaid, addressed as described in Section
16.2 hereof, or to such other address as such Person may from time to time
specify by notice to the Members and Directors.
9.4 Required Member Consents.
Notwithstanding any other provision of this Operating Agreement, no
action may be taken by the Company (whether by the Governing Board or otherwise)
in connection with the following matters without the approval of Members owning
at least 80% of the outstanding Percentage Interest:
(a) Cause or permit the Company to engage in any activity that is
not consistent with the purposes of the Company as set forth in Section 2.3
hereof;
(b) Knowingly do any act in contravention of this Agreement;
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39
(c) Cause the Company to reorganize, recapitalize, merge or
consolidate with another Person;
(d) Elect to dissolve or liquidate the Corporation;
(e) Cause the Company to take any action that would cause a
Bankruptcy of the Company;
(f) Possess Company assets, or assign rights in any Company
assets, for other than a Company purpose;
(g) Confess a judgment against the Company;
(h) Change the Percentage Interest of any Member without the
consent of the affected Member; or
(i) Amend this Agreement.
9.5 Tax Elections.
The Governing Board by supermajority (at least 80%) vote (except as
provided below) shall, without any further consent of the Members being required
(except as specifically required herein), make any and all elections for United
States federal, state, local, and foreign tax purposes including, without
limitation, any election, if permitted by applicable law: (i) to adjust the
basis of Property pursuant to Code Sections 754, 734(b) and 743(b), or
comparable provisions of state, local or foreign law, in connection with
Transfers of Interests and Company distributions (provided that no such election
shall be made with respect to any transfers or distributions during the
Company's fiscal year ending September 30, 1997) and (ii) with the consent of
all of the Members, to extend the statute of limitations for assessment of tax
deficiencies against the Members with respect to adjustments to the Company's
United States federal, state, local or foreign tax returns. Charter Inc. is
specifically authorized to act as the "Tax Matters Member" under Section 6231 of
the Code and in any similar capacity under state or local law; provided,
however, that the Tax Matters Member shall not, without the consent of the
Members holding at least 80% of the Percentage Interests, file a request for
administrative review of any Partnership item (as defined in Section 6231 of the
Code) which may be expected to result in the material assessment of tax against
a Member, initiate judicial review of any adjustment with respect to any
Partnership item, or enter into any agreement with the Internal Revenue Service
(or any state and local taxing authority) that would result in any material
change in any item of income, gain, loss, deduction, or credit or Profits or
Losses as previously reported or in the allocation of such items of Profits or
Losses. The Tax Matters Member shall be responsible for preparing and filing, or
causing to be prepared and filed, all federal, state, and local tax returns and
shall submit all federal, state, and local income tax returns and any other
material federal, state, and local tax returns to the Governing Board for review
and supermajority (at least 80%) approval at least fifteen days prior to the
filing of such returns. The Company shall reimburse the Tax Matters
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40
Member for all direct expenses incurred by the Tax Matters Member in fulfilling
its duties hereunder.
9.6 Members' Liability.
No Member shall be liable under a judgment, decree or order of a court,
or in any other manner for the Debts or any other obligations or liabilities of
the Company solely by reason of being a Member of the Company. A Member shall be
liable only to make the Capital Contributions described in Section 3, on the
terms therein described, and shall not be required to lend any funds to the
Company, or to make any other contributions, assessments or payments to the
Company; provided that a Member may be required to repay distributions made to
it as provided in Section 18- 607 of the Act.
9.7 Company's Liabilities.
(a) Notwithstanding any other provision of this Agreement and except
for those liabilities assumed by the Company pursuant to the Contribution
Agreement, the Company shall not assume, or otherwise be responsible for, any
liabilities or obligations of any Member whether actual or contingent, or
liquidated or unliquidated, arising or occurring prior to the date hereof
("Excluded Liabilities"), which Excluded Liabilities shall include, without
limitation:
(1) Any liability or obligation of any Member (other than as
provided in the Facilities Lease) in respect of any federal, state,
local, foreign or other tax, levy, impost, fee, assessment or other
governmental charge, including, without limitation, income, estimated
income, business, occupation, franchise, property, payroll, personal
property, sales, transfer, use, employment, commercial rent, occupancy,
franchise or withholding taxes, and any premium, including, without
limitation, interest, penalties and additions in connection therewith;
(2) Any liability (to the extent not covered by insurance)
arising from any injury to or death of any person or damage to or
destruction of any property, whether based on negligence, breach of
warranty, strict liability, enterprise liability or any other legal or
equitable theory arising from services performed by or on behalf of any
Member prior to the date hereof;
(3) Any liability or obligation of any Member resulting from
entering into, performing its obligations pursuant to or consummating
the transactions contemplated by, this Agreement.
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41
9.8 Partition.
While the Company remains in effect or is continued, each Member agrees
not to have any Company Property partitioned or file a complaint or institute
any suit, action or proceeding at law or in equity to have any Company Property
partitioned, and each Member, on behalf of itself, its successors and its
assigns hereby waives any such right.
9.9 Other Instruments.
Each Member hereby agrees to execute and deliver to the Company within
five (5) Business Days after receipt of a written request therefor, such other
and further documents and instruments, statements of interest and holdings,
designations, powers of attorney and other instruments and to take such other
action as the Governing Board deems necessary to comply with any laws, rules or
regulations as may be necessary to enable the Company to carry out fully the
provisions of this Agreement in accordance with its terms.
SECTION 10.
ACCOUNTING, BOOKS AND RECORDS;
CONFIDENTIALITY
10.1 Accounting, Books and Records.
(a) The Company shall keep on site at its principal place of
business each of the following:
(1) Separate books of account for the Company which shall show
a true and accurate record of all costs and expenses incurred, all
charges made, all credits made and received, and all income derived in
connection with the conduct of the Company and the operation of its
business in accordance with this Operating Agreement;
(2) A current list of the full name and last known business,
residence, or mailing address of each Member and Director, both past
and present;
(3) A copy of the Certificate and all amendments thereto,
together with executed copies of any powers of attorney pursuant to
which any amendment has been executed;
(4) Copies of the Company's federal, state, and local
income tax returns and reports, if any, for the three most recent years;
(5) Copies of this Operating Agreement; and
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42
(6) Unless contained in this Operating Agreement, a statement
prepared and certified as accurate by the Governing Board of the
Company which describes:
(a) The amount of cash and a description and
statement of the agreed value of the other property
contributed by each Member and which each Member has agreed to
contribute in the future;
(b) Any right of a Member to receive distributions
and the relative preferences and designations of the Member's
Interest.
(b) The Company shall use the accrual method of accounting in
preparation of its financial reports and for tax purposes and shall keep its
books and records accordingly. Any Member or its designated representative has
the right at its own cost and expense, at any reasonable time, to have access to
and inspect and copy the contents of such books or records. The Governing Board
shall be reimbursed by such Member for reasonable costs incurred as a result of
such inspection. Notwithstanding anything in the Act (including Section
18-305(c) of the Act) or this Agreement to the contrary, the Governing Board
shall not have the right to keep confidential from any Member any information
concerning the Company.
10.2 Reports.
The Governing Board shall be responsible for causing the preparation of
(i) monthly financial reports of the Company, and (ii) annual audited financial
statements in conformity with SEC standards, if required, within 75 days of the
Company's year end, and (iii) the coordination of financial matters of the
Company with the Company's accountants.
10.3 Confidentiality.
Except as required by law, each Member shall cause each of its
affiliates to treat and safeguard as confidential and secret any Protected
Information. None of the Members hereto or any of their respective affiliates
shall use or disclose, furnish or make accessible to any Person any Protected
Information.
SECTION 11.
AMENDMENTS
Amendments to this Agreement may be proposed by any Director or any
Member. Following such proposal, the Governing Board shall submit to the Members
a verbatim statement of any proposed amendment, providing that counsel for the
Company shall have approved of the same in writing as to form, and the Governing
Board shall include in any such submission a recommendation as to the proposed
amendment. The Governing Board shall seek the written vote
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43
of the Members on the proposed amendment or shall call a meeting to vote thereon
and to transact any other business that it may deem appropriate.
SECTION 12.
TRANSFERS
12.1 Restrictions on Transfers.
Except as otherwise permitted by this Agreement, no Member shall
Transfer all or any portion of its Interest.
12.2 Permitted Transfers.
Subject to the conditions and restrictions set forth in Section 12.3
hereof, a Member may at any time Transfer all (but not less than all) of its
Interest to (i) a wholly owned subsidiary of that Member, provided that the
transferee subsidiary agrees to retransfer all of such Interest to such
transferring Member if such transferee subsidiary ceases to be a wholly owned
subsidiary of the transferring Member, (ii) the transferor's administrator or
trustee to whom such Interest is transferred involuntarily by operation of law,
(iii) any transferee if the transfer is approved by all Members which own twenty
percent (20%) or more of the outstanding Percentage Interests, in their sole
discretion, (iv) in the case of Crescent Operating, to a single transferee if
such transfer is necessary for Crescent Real Estate Equities Company ("CEI"), as
currently operated or as operated or proposed to be operated in the future to
avoid jeopardizing its status as a real estate investment trust (a "REIT") under
the Code, provided that prior to any transfer made by Crescent Operating
pursuant to this clause (iv), Crescent Operating shall provide Charter Inc. with
a written opinion of counsel that such transfer is necessary to avoid
jeopardizing the qualification of CEI as a REIT, subject to Charter Inc.'s right
of first refusal under Section 12.8; provided that Charter Inc. will notify
Crescent Operating within 15 days after receiving notice from Crescent Operating
of its intent to transfer pursuant to this clause (iv) and a written opinion of
counsel referred to above, whether it will exercise such rights, and, if it
elects to exercise such right, shall complete the purchase of such Interest
within 25 days after the original notice from Crescent Operating (subject to the
right of Charter Inc. to extend the date for completion of the purchase for up
to an additional 20 days if necessary to obtain any regulatory approvals
required in connection therewith) and (v) to any Person upon compliance with the
provisions of Section 12.8 hereof (any such Transfer being referred to in this
Agreement shall be a "Permitted Transfer"). A permitted transferee or other
transferee shall be admitted as a substituted Member of the Company in
accordance with Section 12.6.
In addition, a Member may also transfer its Interest, except for any
voting rights associated with such Interest (other than voting rights in respect
of the matters listed in Section 9.4) and the right to designate Directors on
the Governing Board (each of which rights will remain with such Member), (i) in
the form of a pledge to a bona fide financial institution, which, immediately
prior
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44
to the creation of such pledge, is not an Affiliate of such Member, to secure
bona fide arms' length recourse indebtedness of such Member and/or its
subsidiaries, or (ii) in the form of a pledge to Crescent Real Estate Equities
Limited Partnership pursuant to that certain Line of Credit and Security
Agreement, dated as of May 21, 1997, and that certain Amended and Restated
Credit and Security Agreement, as amended, dated as of May 30, 1997, if the
pledgee thereof agrees (i) to provide the Company with all notices of
foreclosure by such pledgee and (ii) in the event such pledgee becomes a Member,
to be bound by the provisions of this Agreement applicable to its transferor, it
being understood that both (x) the making of such pledge and (y) such financial
institution's becoming a Member as the result of foreclosure on such pledge in
full or partial satisfaction of all or any part of the indebtedness secured
thereby or otherwise as a result of the exercise by it of its rights and
remedies with respect thereto shall each constitute a Permitted Transfer and
such financial institution shall be a "Member" for the purposes of this
Agreement, subject to the limitations described above. If such financial
institution transfers any portion of a Member's Interest pursuant to the terms
of this Agreement, including pursuant to Section 15.3 in the event of an
Unresolved Deadlock, then, upon the consummation of such transfer, the
transferee shall have all of the rights associated with such transferred
Interest prior to its transfer to such financial institution (including all
voting rights and the right to designate Directors related to such transferred
Interest or a portion thereof), and the Member which initially transferred its
Interest to such financial institution shall have no more rights in such
Interest (to the extent transferred by the financial institution).
12.3 Conditions to Permitted Transfers.
A Transfer shall not be treated as a Permitted Transfer under Section
12.2 hereof unless and until the following conditions are satisfied:
(a) Except in the case of a Transfer involuntarily by operation of law,
the transferor and transferee shall execute and deliver to the Company such
documents and instruments of conveyance as may be necessary or appropriate in
the opinion of counsel to the Company to effect such Transfer and to confirm the
agreement of the transferee to be bound by the provisions of this Section 12,
and to comply with the requirements of Code Section 6050K. In the case of a
Transfer of Interests involuntarily by operation of law, the Transfer shall be
confirmed by presentation to the Company of legal evidence of such Transfer, in
form and substance satisfactory to counsel to the Company. In all cases, unless
the requirements of this sentence have been waived by the Governing Board, the
Company shall be reimbursed by the transferor and/or transferee for all costs
and expenses that it reasonably incurs in connection with such Transfer.
(b) The transferor and transferee shall furnish the Company with the
transferee's taxpayer identification number, sufficient information to determine
the transferee's initial tax basis in the Interest transferred, and any other
information reasonably necessary to permit the Company to file all required
federal and state tax returns and other legally required information statements
or returns. Without limiting the generality of the foregoing, the Company shall
not be required to make any
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45
distribution otherwise provided for in this Agreement with respect to any
transferred Interest until it has received such information.
(c) Either (i) the Transfer occurs pursuant to an effective
registration statement under the Securities Act and any applicable state
securities law or (ii) the Transfer is exempt from registration or is otherwise
in compliance with the Securities Act and applicable state securities law, and
the transferor has furnished to the Company evidence (which may but need not in
the discretion of the Governing Board include an opinion of counsel) reasonably
satisfactory to the Governing Board.
(d) The Transfer will not cause the Company to be deemed to be an
"investment company" under the Investment Company Act of 1940, as amended, and
the transferor shall provide an opinion of counsel to such effect, unless the
Governing Board waives the requirement that such opinion be provided. Such
opinion and counsel shall be reasonably satisfactory to the Governing Board.
(e) The Transfer will not cause the Company to be deemed to be a
publicly traded partnership under Code Section 7704.
12.4 Prohibited Transfers.
Any purported Transfer of an Interest that is not a Permitted Transfer
shall be null and void and of no force or effect whatever; provided that, if the
Company is required to recognize a Transfer that is not a Permitted Transfer (or
if the Company, in its sole discretion, elects to recognize a Transfer that is
not a Permitted Transfer), the Interest transferred shall be strictly limited to
the transferor's rights to allocations and distributions as provided by this
Agreement with respect to the transferred Interest, which allocations and
distributions may be applied (without limiting any other legal or equitable
rights of the Company) to satisfy any debts, obligations, or liabilities for
damages that the transferor or transferee of such Interest may have to the
Company.
In the case of a Transfer or attempted Transfer of an Interest that is
not a Permitted Transfer, the parties engaging or attempting to engage in such
Transfer shall be liable to indemnify and hold harmless the Company and the
other Members from all cost, liability, and damage that the Company or any of
such indemnified Members may incur (including, without limitation, incremental
tax liabilities, lawyers' fees and expenses) as a result of such Transfer or
attempted Transfer and efforts to enforce the indemnity granted hereby. Any
indemnification payments made to the Company under this Section 12.4, to the
extent paid with respect to costs, liabilities or other damages incurred by a
Member, shall immediately be paid by the Company to such Member.
12.5 Rights of Unadmitted Assignees.
A Person who acquires an Interest but who is not admitted as a
substituted Member pursuant to Section 12.6 hereof shall be entitled only to
allocations and distributions with respect to such
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46
Interest in accordance with this Agreement, and shall not have any of the rights
of a Member under the Act or this Agreement.
12.6 Admission of Substituted Members.
Subject to the other provisions of this Section 12, a transferee of an
Interest may be admitted to the Company as a substituted Member only upon
satisfaction of each of the conditions set forth in this Section 12.6:
(a) (i) The non-transferring Members consent to such admission, which
consent may be given or withheld in the sole and absolute discretion of each
such Member, or (ii) the Interest with respect to which the transferee is being
admitted was acquired by means of a Permitted Transfer;
(b) The transferee of an Interest shall, by written instrument in form
and substance reasonably satisfactory to the Director (and, in the case of
clause (ii) below, the transferor Member), (i) accept and adopt the terms and
provisions of this Agreement, including this Section 12 and (ii) assume the
obligations of the transferor Member under this Agreement with respect to the
transferred Interest. The transferor Member shall be released from all such
assumed obligations except (i) those obligations or liabilities of the
transferor Member arising out of a breach of this Agreement and (ii) in the case
of a Transfer to any Person other than a Member, those obligations or
liabilities of the transferor Member based on events occurring, arising or
maturing prior to the date of Transfer;
(c) Unless the requirements of this Section 12.6(c) have been waived by
the Governing Board, the transferee pays or reimburses the Company for all
reasonable legal, filing, and publication costs that the Company incurs in
connection with the admission of the transferee as a Member with respect to the
Transferred Interest; and
(d) If required by the Governing Board, the transferee (other than a
transferee that was a Member prior to the Transfer) shall deliver to the Company
evidence of the authority of such Person to become a Member and to be bound by
all of the terms and conditions of this Agreement, and the transferee and
transferor shall each execute and deliver such other instruments as the
Governing Board reasonably deems necessary or appropriate to effect, and as a
condition to, such Transfer, including amendments to the Certificate or any
other instrument filed with the State of Delaware or any other state or
governmental authority.
12.7 Distributions and Allocations in Respect of Transferred Interests.
If all or any portion of an Interest is Transferred during any
Allocation Year in compliance with the provisions of this Section 12, Profits,
Losses, each item thereof, and all other items attributable to the Transferred
Interest for such Allocation Year shall be divided and allocated between the
transferor and the transferee by taking into account their varying Percentage
Interests during the Fiscal Year in accordance with Code Section 706(d), using
any conventions permitted by
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47
law and agreed to by the transferor and transferee. All distributions on or
before the date of such Transfer shall be made to the transferor, and all
distributions thereafter shall be made to the transferee. Solely for purposes of
making such allocations and distributions, the Company shall recognize such
Transfer not later than the end of the calendar month during which it is given
notice of such Transfer; provided that, if the Company is given notice of a
Transfer at least ten (10) Business Days prior to the Transfer, the Company
shall recognize such Transfer as of the date of such Transfer; and provided
further that if the Company does not receive a notice stating the date such
Interest was transferred and such other information as the Director may
reasonably require within thirty (30) days after the end of the Allocation Year
during which the Transfer occurs, then all such items shall be allocated, and
all distributions shall be made, to the Person who, according to the books and
records of the Company, was the owner of the Interest on the last day of such
Allocation Year. Neither the Company nor the Director shall incur any liability
for making allocations and distributions in accordance with the provisions of
this Section 12.7, whether or not the Director or the Company has knowledge of
any Transfer of ownership of any Interest.
12.8 Right of First Refusal
(a) In the event that any Member has a binding, written offer from an
unrelated Person for the Transfer of its Interest other than pursuant to a
Permitted Transfer and desires to accept such offer to purchase (a "Proposed
Transfer"), such Member (the "Selling Member") shall deliver to the Company and
the remaining Members (the "Non-Selling Members") written notice of the material
terms of such offer, including the proposed purchaser thereof, the amount,
nature and payment schedule of the consideration to be received, the conditions,
if any, associated therewith and any other material terms of such offer (an
"Offer Notice"). The Offer Notice shall constitute an irrevocable offer by the
Selling Member to sell all (but not less than all) of its Interest subject to
the Proposed Transfer (i) first, to the Non-Selling Members and (ii) second, if
and only if at that time there are more than two (2) Members, to the Company on
terms and conditions of the Proposed Transfer, except that a purchaser under
this Section 12.8 shall have the right to pay cash in an amount equal to the
Fair Market Value of any Non-Cash Consideration (the "Right of First Refusal").
(b) During the First Offer Period, each Non-Selling Member may elect to
purchase all or any portion of such Non-Selling Member's Offer Percentage (as
hereinafter defined) of the Interest subject to the Proposed Transfer by
delivering written notice of such election stating the percentage of the
Interest to be purchased (an "Election Notice") to the Company and the Selling
Member prior to the expiration of the First Offer Period. As used herein, a
Member's Offer Percentage shall be a fraction, the numerator of which is equal
to the Percentage Interest of the Company held by such Member on the date of the
Offer Notice and the denominator of which is the Percentage Interests held on
such date by all Non-Selling Members (the "Offer Percentage"); provided that a
Member shall have the right in an Election Notice to agree to purchase all or
any portion of the Interest that could be purchased by other Members; and, if
one or more Members do not deliver an Election Notice or elect to purchase less
than their respective Offer Percentages, then the portion of the Interest that
could have been purchased by such Members shall be purchased by Members that, in
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48
an Election Notice, agreed to purchase such portion of the Interest, and each
such Member shall purchase the portion of the Interest indicated in an Election
Notice, unless the sum of the portions of the Interest exceeds the Interest so
available for purchase, in which case the portions of the Interest shall be
purchased pro rata on the basis of the proportionate amount of the Offer
Percentage of such Members that deliver an Election Notice. The failure by any
Non-Selling Member to deliver an Election Notice during the First Offer Period
shall be deemed to be an election by such Member not to purchase any of the
Interest subject to the Proposed Transfer.
(c) If the Non-Selling Members do not elect during the First Offer
Period to purchase all of the Interest subject to the Proposed Transfer, during
any Second Offer Period, the Company may elect to purchase all (but not less
than all) of the Interest that the Non-Selling Members did not elect to purchase
during the First Offer Period by delivering an Election Notice to the Selling
Member prior to the expiration of the Second Offer Period. The failure by the
Company to deliver an Election Notice during any Second Offer Period shall be
deemed to be an election by the Company not to purchase any of the Interest
subject to the Proposed Transfer.
(d) If the Non-Selling Members and, if applicable, the Company (either
individually or collectively) do not elect to purchase all of the Interest
subject to the Proposed Transfer, the Selling Member may, Transfer to the
purchaser named in the Offer Notice (the "Third Party Purchaser") all (but not
less than all) of the Interest subject to the Proposed Transfer in accordance
with the terms and conditions set forth in the Offer Notice; provided, however,
that if the Selling Member has not consummated the Transfer of such Interest
within the 45 Business Day period following any Second Offer Period, all of the
restrictions on Transfer contained in this Agreement shall again be in effect
with respect to such Interest.
(e) If the consideration for the sale of Interest pursuant to this
Right of First Refusal is cash consideration, the purchase price to be paid by
each of the Non-Selling Members and the Company, as applicable, shall be equal
to the total consideration set forth in the Offer Notice multiplied by the
percentage of such Interest being purchased by such Non-Selling Member or the
Company, as applicable. If the consideration for the Proposed Transfer consists
of consideration that is other than cash consideration payable in immediately
available funds at the closing thereunder ("Non-Cash Consideration") or consists
of a combination of cash consideration and Non-Cash Consideration, the purchase
price shall be cash in an amount equal to the total of the cash consideration,
if any, and the Fair Market Value of the Non-Cash Consideration as determined in
accordance with Section 12.9 hereof.
(f) The purchase and sale of Interest pursuant to this Right of First
Refusal shall be consummated at a closing that shall occur at the principal
business office of the Company within 20 Business Days following the expiration
of the relevant Offer Period, or at such other place or time as may be mutually
acceptable to the parties. At such closing, the Selling Member shall deliver a
certificate or other instrument representing the Interest being purchased, free
and clear of all liens, claims, encumbrances (other than as a result of this
Agreement) and defects in title and duly endorsed for Transfer to the
appropriate purchaser and, in exchange therefor, the purchaser of such
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Interest shall pay the purchase price, as provided in Section 12.8(e) hereof, at
such closing by bank wire transfer of immediately available funds to a bank
account designated in writing by the Selling Member at least three Business Days
prior to such closing.
12.9 Determination of Fair Market Value.
In the event that a determination of the fair market value of Non-Cash
Consideration is required pursuant to the Right of First Refusal, the Selling
Member shall specify in the applicable Offer Notice its good faith estimate of
the fair market value of any Non-Cash Consideration to be paid in connection
with the proposed transfer. If a majority of the disinterested members of the
Governing Board agrees with the estimated fair market value of such Non-Cash
Consideration, the estimate shall be deemed to be the Fair Market Value (the
"Fair Market Value") thereof for purposes of this Agreement. If a majority of
the disinterested members of the Governing Board does not agree with the
estimated fair market value, the Governing Board shall, within 10 Business Days
of receipt of the Offer Notice, deliver to the Selling Member written notice of
its disagreement and shall, for a period of 10 Business Days after delivering
such notice, negotiate with the Selling Member for the purpose of determining
the fair market value of the Non-Cash Consideration that is acceptable to the
Governing Board and the Selling Member. If the Governing Board and the Selling
Member are unable to agree on a fair market value during the aforementioned
negotiation period, the Company and the Selling Member shall appoint a mutually
agreeable appraiser of recognized standing with respect to the nature of the
property constituting the Non-Cash Consideration to complete an appraisal of the
property constituting the Non-Cash Consideration. Such appraiser shall render a
binding and non-appealable appraisal of the Fair Market Value of the property
constituting the Non-Cash Consideration within 10 Business Days of such
appraiser's appointment or, if it is not reasonably possible to complete such
appraisal in such time period, such longer period as shall be reasonably
necessary to complete such appraisal (not to exceed 30 Business Days). The
Company and the Selling Member each shall bear one-half of the costs of such
appraisal.
12.10 Tag-Along and Bring-Along Rights.
(a) Exercise of "Tag-Along Right."
(i) Transfers by the Majority Member. In the event that
Charter Inc.'s or Crescent Operating's Percentage Interest in the Company
decreases to less than 25%, the other party (the "Majority Member") shall not
Transfer all or part of its Interest without complying with the provisions of
this Section 12.10(a). If the Majority Member desires to Transfer all or part of
its Interest (the "Offered Interest") to a proposed transferee, each of the
other Members (a "Remaining Member") may elect (the "Tag-Along Right") to sell
to such proposed transferee, on the same terms, consideration (on a Percentage
Interest basis) and conditions as were offered to the Majority Member, all of
the Interest then owned by each Remaining Member (if the Majority Member is
proposing to sell all of its Interest) or a portion of its Interest (if the
Majority Member is proposing to sell less than all of its Interest) in the same
proportion as the Interest proposed to be sold by the Majority Member.
<PAGE>
50
(ii) Notification of Proposed Transfers. In the event of a
proposed Transfer subject to this Section 12.10(a), the Majority Member shall
notify in writing all Remaining Members of the proposed Transfer. Such notice
shall set forth: (i) the name of the proposed transferee and the portion of the
Interest that is to be transferred by the Majority Member, (ii) the proposed
amount and form of consideration and terms and conditions of payment offered by
such proposed transferee, and (iii) that the proposed transferee has been
informed of the Tag-Along Right provided for in this Section 12.10(a) and has
agreed to purchase additional Interests in accordance with the terms hereof. The
Tag-Along Right may be exercised by any Remaining Member by delivery of a
written notice to the Company (the "Tag-Along Notice") within 30 days following
receipt of the notice specified in the immediately preceding sentence stating
that the Remaining Member wishes to participate in such transfer to the proposed
transferee by including such Remaining Member's Interest (or a portion thereof).
The Tag-Along Notice shall also specify, in the event that only a portion of the
Majority Member's Interest is being purchased, whether or not the Remaining
Member wishes to have any additional portion (up to all) of his Interest
purchased if any other Remaining Member does not exercise such Member's
Tag-Along Right. In the event that any proposed transferee does not purchase the
Interest of the Majority Member or Remaining Member who has exercised such
Member's Tag-Along Right on the same terms, consideration (if applicable, on a
Percentage Interest basis) and conditions as those set forth in the notice
delivered by the Majority Member then the sale by the Majority Member to the
proposed transferee shall be void ab initio and of no force and effect, and the
Company shall not recognize or give effect to such transfer. Notwithstanding the
foregoing, if any Remaining Member shall not exercise its Tag-Along Right
provided for herein, the other Remaining Members shall have the right, upon
receipt of written confirmation from the Remaining Members not participating in
the Tag-Along Right, to include in their respective Tag-Along Notices, and to
have purchased by the proposed transferee, an additional Interest equal to each
such Member's pro rata portion of the Interest not included in the Tag-Along
Right by the non-electing Remaining Member.
(b) Exercise of "Bring-Along Right"
(i) Transfers by the Majority Member. In the event that
Charter Inc.'s or Crescent Operating's Percentage Interest in the Company
decreases to less than 25% and the Majority Member proposes to Transfer its
Interest to a proposed third party transferee in an arms-length transaction,
then the Majority Member may, at its option, require (the "Bring-Along Right")
each other Member to sell all of its Interest (the "Designated Interest") to the
proposed transferee, at the same time and on the same terms, consideration (on a
Percentage Interest basis) and conditions at which the Majority Member is
selling its Interest.
(ii) Notification of Proposed Transfer. The Majority Member
shall exercise its Bring-Along Right by sending written notice of the exercise
of the Bring-Along Right to each of the other Members. Such notice shall set
forth: (i) the name and address of the proposed transferee and the proposed
amount and form of consideration to be paid by the proposed transferee and (ii)
the terms and conditions of such transaction. Such notice shall be accompanied
by copies of all documents required to be executed by the Members in connection
with such transaction. Within 10
<PAGE>
51
days following receipt of the notice, each of the other Members shall deliver to
a representative of the Majority Member, designated in the notice, instruments
(or other appropriate documents necessary to transfer the Designated Interest)
representing the Designated Interest held by such Member, duly endorsed,
together with fully executed copies of all other documents required to be
executed in connection with such transactions, including (if requested)
customary legal opinions from the counsel to such Member. In the event that a
Member should fail to deliver such instruments to the Majority Member, the
Company shall cause its books and records to show that such Designated Interest
is bound by the provisions of this Section 12.10(b) and that such Designated
Interest shall be transferred only to the third party purchaser upon surrender
for transfer by the holder thereof. If requested by the Majority Member, each
Member shall also cause a representative that is duly authorized to execute
documents and to act on behalf of such Member to attend the closing of the
transaction and to take such actions as are reasonably requested by the Majority
Member.
(iii) Return of Designated Interest. If, within 120 days after
the Majority Member gives such notice, the sale of the Designated Interest by
the Majority Member in accordance herewith has not been completed, the Majority
Member shall return to each Member all instruments or other documentation
representing the Designated Interest that such Member delivered for sale
pursuant hereto.
(iv) Payment for Designated Interest. Simultaneously with the
consummation of the sale of the Designated Interest by the Majority Member and
the other Members pursuant to this Section 12.10(b), the Majority Member shall
remit, or cause the transferee to remit, to each of the Members the total sales
price of the Designated Interest sold pursuant thereto (net of the other
Members' pro rata share of any transaction expenses), and shall furnish such
other evidence of the completion and time of completion of such sale or other
disposition and the terms thereof as may be reasonably requested by such
Members.
SECTION 13.
POWER OF ATTORNEY
13.1 Directors as Attorneys-In-Fact.
Each Member hereby makes, constitutes, and appoints each of the
Directors, severally, with full power of substitution and resubstitution, its
true and lawful attorney-in-fact for it and in its name, place, and stead and
for its use and benefit, to sign, execute, certify, acknowledge, swear to, file,
publish and record (i) all certificates of formation, amended name or similar
certificates, and other certificates and instruments (including counterparts of
this Operating Agreement) which the Governing Board may deem necessary to be
filed by the Company under the laws of the State of Delaware or any other
jurisdiction in which the Company is doing or intends to do business in order to
preserve its status as a limited liability company or conduct business in such
state; (ii) any and all
<PAGE>
52
duly authorized amendments, restatements or changes to this Operating Agreement
and the instruments described in clause (i), as now or hereafter amended, which
the Governing Board may deem necessary to effect a change or modification of the
Company in accordance with the terms of this Operating Agreement, including,
without limitation, amendments, restatements or changes to reflect the admission
of any substituted Member and the disposition by any Member of its interest in
the Company; (iii) all certificates of cancellation and other instruments which
the Liquidator deems necessary or appropriate to effect the dissolution and
termination of the Company pursuant to the terms of this Operating Agreement;
and (iv) any other instrument which is now or may hereafter be required by law
to be filed on behalf of the Company or is deemed necessary by the Governing
Board to comply with any laws, rules or regulations or as may be necessary to
enable the Company to carry out fully the provisions of this Operating Agreement
in accordance with its terms. Each Member authorizes each such attorney-in-fact
to take any further action which such attorney-in-fact shall consider necessary
in connection with any of the foregoing, hereby giving each such
attorney-in-fact full power and authority to do and perform each and every act
or thing whatsoever requisite to be done in connection with the foregoing as
fully as such Member might or could do personally, and hereby ratify and confirm
all that any such attorney-in-fact shall lawfully do, or cause to be done, by
virtue thereof or hereof.
13.2 Nature of Special Power.
The power of attorney granted to each Director pursuant to this Section
13:
(a) Is a special power of attorney coupled with an interest and is
irrevocable;
(b) May be exercised by any such attorney-in-fact by listing the
Members executing any agreement, certificate, instrument, or other document with
the single signature of any such attorney-in-fact acting as attorney-in-fact for
such Members; and
(c) Shall survive and not be affected by the subsequent Bankruptcy,
insolvency, dissolution, or cessation of existence of a Member and shall survive
the delivery of an assignment by a Member of the whole or a portion of its
interest in the Company (except that where the assignment is of such Member's
entire interest in the Company and the assignee, with the consent of the other
Members, is admitted as a substituted Member, the power of attorney shall
survive the delivery of such assignment for the sole purpose of enabling any
such attorney-in-fact to effect such substitution) and shall extend to such
Member's or assignee's successors and assigns.
<PAGE>
53
SECTION 14.
DISSOLUTION AND WINDING UP
14.1 Dissolution Events.
(a) Dissolution. The Company shall dissolve and shall commence
winding up and liquidating upon the first to occur of any of the following
(each a "Dissolution Event"):
(1) The unanimous vote of the Members to dissolve, wind
up, and liquidate the Company;
(2) A judicial determination that an event has occurred
that makes it unlawful, impossible or impractical to carry on the Business;
(3) The expiration of the Company's term;
(4) The entry of a decree of judicial dissolution; or
(5) The Bankruptcy, retirement, resignation or expulsion of
any Member; provided that any such event will not be deemed a
Dissolution Event if within ninety (90) days after such Dissolution
Event if the Company has one (1) or more remaining Members and such
Member or Members agree to continue the business and affairs of the
Company.
(b) Reconstitution. If it is determined, by a court of competent
jurisdiction, that the Company has dissolved prior to the occurrence of a
Dissolution Event, then within an additional ninety (90) days after such
determination (the "Reconstitution Period"), all of the Members may elect to
reconstitute the Company and continue its Business on the same terms and
conditions set forth in this Agreement by forming a new limited liability
company on terms identical to those set forth in this Agreement. Unless such an
election is made within the Reconstitution Period, the Company shall liquidate
and wind up its affairs in accordance with Section 14.2 hereof. If such an
election is made within the Reconstitution Period, then:
(1) The reconstituted limited liability company shall
continue until the occurrence of a Dissolution Event as provided in
this Section 14.1(a);
(2) All necessary steps shall be taken to cancel this
Agreement and the Certificate and to enter into a new operating
agreement and certificate of organization; provided that the right of
the Members to select successor Directors and to reconstitute and
continue the Business shall not exist and may not be exercised unless
the Company has received an opinion of counsel that the exercise of the
right would not result in the loss of limited liability of any Member
and neither the Company nor the reconstituted limited liability
<PAGE>
54
company would cease to be treated as a partnership for U.S. federal
income tax purposes upon the exercise of such right to continue.
14.2 Winding Up.
Upon the occurrence of a Dissolution Event, the Company shall continue
solely for the purposes of winding up its affairs in an orderly manner,
liquidating its assets, and satisfying the claims of its creditors and Members,
and no Member shall take any action that is inconsistent with, or not necessary
to or appropriate for, the winding up of the Company's business and affairs;
provided that all covenants contained in this Operating Agreement and
obligations provided for in this Operating Agreement shall continue to be fully
binding upon the Members until such time as the Property has been distributed
pursuant to this Section 14.2 and the Certificate has been canceled pursuant to
the Act. The Liquidator shall be responsible for overseeing the winding up and
dissolution of the Company, which winding up and dissolution shall be completed
within ninety (90) days of the occurrence of the Dissolution Event. The
Liquidator shall take full account of the Company's liabilities and Property and
shall cause the Property or the proceeds from the sale thereof (as determined
pursuant to Section 12.6), to the extent sufficient therefor, to be applied and
distributed, to the maximum extent permitted by law, in the following order:
(a) First, to creditors (including Members and Directors who are
creditors, to the extent otherwise permitted by law) in satisfaction of all of
the Company's Debts and other liabilities (whether by payment or the making of
reasonable provision for payment thereof), other than liabilities for which
reasonable provision for payment has been made and liabilities for distribution
to Members under Section 18-601 or 18-604 of the Act;
(b) Second, except as provided in this Agreement, to Members and
former Members of the Company in satisfaction of liabilities for distribution
under Sections 18-601 or 18-604 of the Act; and
(c) The balance, if any, to the Members in accordance with the positive
balance in their Capital Accounts, after giving effect to all contributions,
distributions and allocations for all periods.
14.3 Rights of Members.
Except as otherwise provided in this Agreement, each Member shall look
solely to the Property of the Company for the return of its investment and has
no right or power to demand or receive Property other than cash from the
Company. If the assets of the Company remaining after payment or discharge of
the Debts or liabilities of the Company are insufficient to return such
investment, the Members shall have no recourse against the Company or any other
Member or Director.
<PAGE>
55
14.4 Notice of Dissolution/Termination.
(a) In the event a Dissolution Event occurs, the Liquidator shall,
within thirty (30) days thereafter, provide written notice thereof to each of
the Members and to all other parties with whom the Company regularly conducts
business (as determined in the discretion of the Liquidator) and shall publish
notice thereof in a newspaper of general circulation in each place in which the
Company regularly conducts business (as determined in the discretion of the
Liquidator).
(b) Upon completion of the distribution of the Company's Property as
provided in this Section 14, the Company shall be terminated, and the Liquidator
shall cause the filing of the Certificate of Cancellation pursuant to Section
18-203 of the Act and shall take all such other actions as may be necessary to
terminate the Company.
14.5 The Liquidator.
(a) Definition. The "Liquidator" shall mean a Person appointed by the
Governing Board to oversee the dissolution of the Company and shall have the
power of attorney granted to the Directors pursuant to Section 13.
(b) Fees. The Company is authorized to pay a reasonable fee to the
Liquidator for its services performed pursuant to this Section 14 and to
reimburse the Liquidator for its reasonable costs and expenses incurred in
performing those services, other than a Liquidator that is also a Member or
Director.
(c) Indemnification. The Company shall indemnify, save harmless, and
pay all judgments and claims against such Liquidator or any officers, directors,
stockholders, agents or employees of the Liquidator relating to any liability or
damage incurred by reason of any act performed or omitted to be performed by the
Liquidator, or any officers, directors, stockholders, agents or employees of the
Liquidator in connection with the winding up of the Company, including
reasonable attorneys' fees incurred by the Liquidator, officer, director,
stockholder, agent or employee in connection with the defense of any action
based on any such act or omission, which attorneys' fees may be paid as
incurred, except to the extent such liability or damage is caused by the fraud,
intentional misconduct of, or a knowing violation of the laws by the Liquidator
which was material to the cause of action.
14.6 Form of Liquidating Distributions.
For purposes of making distributions required by Section 14.2 hereof,
the Liquidator may determine whether to distribute all or any portion of the
Property in-kind or to sell all or any portion of the Property and distribute
the proceeds therefrom.
SECTION 15.
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56
MANAGEMENT DEADLOCK
15.1 Existence of a Deadlock
A deadlock of the Governing Board (a "Deadlock") shall be deemed to
exist if the Governing Board shall be unable to reach agreement by the required
vote on (i) a Major Decision, (ii) a decision involving the expenditure of more
than $10 million or (iii) a decision relating to the election of Executive
Officers, provided that any matter referred to in (i), (ii) or (iii) has been
submitted for consideration at two successive meetings.
15.2 Discussions by Chief Executive Officers
If a Deadlock exists, the Members or Governing Board, as appropriate,
shall negotiate in good faith and use their respective best efforts to resolve
such Deadlock. If, however, after 20 Business Days such Deadlock remains, any
Member, by giving notice to the other Members, may request that such Deadlock be
referred for resolution to the Chief Executive Officer of Charter Inc. and the
Chief Executive Officer of Crescent Operating (the "Chief Executive Officers")
(or, if a Member's Chief Executive Officer is on the Company's Governing Board,
another senior officer or director designated by the Member). The Chief
Executive Officers shall meet within 20 Business Days thereafter and shall
attempt in good faith to resolve such Deadlock. Any resolution agreed to in
writing by the Chief Executive Officers shall be final and binding on the
Company and the Members, so long as the resolution is not inconsistent with any
provision of this Agreement.
15.3 Buy/Sell Option
In the event of a failure to resolve a Deadlock pursuant to Section
15.2 within forty (40) Business Days after a Member makes the request for
resolution by the Chief Executive Officers (an "Unresolved Deadlock"), either
Member, at any time thereafter, shall be authorized to offer to purchase all of
the Interest of the other Member pursuant to the procedures set forth in the
following provisions:
(a) Either Crescent Operating or Charter Inc. (the initiating party
being hereinafter referred to as the "Offering Party") may by written notice to
the other party (the "Responding Party") state the aggregate fair value of all
of the outstanding Interests in the Company (the "Stated Value"). The giving of
such notice of Stated Value by the Offering Party shall constitute the
irrevocable offer of such party to purchase all of the Responding Party's
Interest in the Company or to sell to the Responding Party all of the Offering
Party's Interest in the Company for the respective purchase price provided for
hereinafter.
(b) Within thirty (30) days after receipt of said notice, the
Responding Party shall determine whether it shall sell its Interest or purchase
the Offering Party's Interest in the Company as provided herein and shall give
written notice to the Offering Party of its decision and shall designate in that
notice which party will be the "Selling Party" and which party shall be the
<PAGE>
57
"Purchasing Party." If the Responding Party shall fail to give notice of its
election within the said 15-day period, then the Responding Party shall be
deemed to have given notice of its election to sell all of its Interest in the
Company pursuant to the provisions hereof.
(c) Within forty-five (45) days after the date on which the Responding
Party receives the notice of Stated Value from the Offering Party, Crescent
Operating and Charter Inc. shall close the purchase of all of the Interest in
the Company then owned by the Selling Party. The purchase price for such
Interest shall be the product obtained by multiplying the Stated Value times the
Percentage Interest owned by the Selling Party. The Purchasing Party shall pay
the purchase price for such Interest in cash or by certified check at the
closing. The Selling Party shall deliver to the Purchasing Party at the closing
such documents and instruments as may be necessary or desirable, in the opinion
of counsel for the Purchasing Party, to effect the transfer of the Selling
Party's Interest to the Purchasing Party, which Interest shall be free and clear
of all Encumbrances.
(d) If the Selling Party is Charter Inc. and, after the close of
the purchase of Charter Inc.'s Interest by Crescent Operating, the Company fails
to pay to Franchisor all amounts due Franchisor under the Franchise Agreement,
Crescent Operating acknowledges that Charter Inc. shall have the rights granted
to Franchisor under Section 15 of the Franchise Agreement.
15.4 Continuation of Business
During the pendency of any Deadlock relating to the approval of any
Annual Budget for an ensuing Fiscal Year, the Governing Board and the President
shall conduct the Business of the Company in accordance with Section 8.3(c) of
this Agreement.
SECTION 16.
MISCELLANEOUS
16.1 Time.
In computing any period of time pursuant to this Agreement, the day of
the act, event or default from which the designated period of time begins to run
shall not be included, but the time shall begin to run on the next succeeding
day. The last day of the period so computed shall be included, unless it is a
Saturday, Sunday or legal holiday, in which event the period shall run until the
end of the next day which is not a Saturday, Sunday or legal holiday.
16.2 Notices.
Any notice, payment, demand, or communication required or permitted to
be given by any provision of this Agreement shall be in writing and shall be
deemed to have been delivered, given, and received for all purposes (i) if
delivered personally to the Person or to an officer of the Person
<PAGE>
58
to whom the same is directed or (ii) when the same is actually received, if sent
either by registered or certified mail, postage and charges prepaid, or by
facsimile, if such facsimile is followed by a hard copy of the facsimile
communication sent promptly thereafter by registered or certified mail, postage
and charges prepaid, addressed as follows, or to such other address as such
Person may from time to time specify by notice to the Members and Governing
Board:
(a) If to the Governing Board or Company, to the address
determined pursuant to Section 2.4(a) hereof;
(b) If to the Directors, to the addresses set forth in Section 8.1
hereto and thereafter at such address notified by such Director to the Company
in writing; and
(c) If to a Member, to the appropriate address set forth in Section
2.4(b) or 2.4(c) hereof and thereafter at such address notified by such Member
to the Company in writing.
16.3 Binding Effect
Except as otherwise provided in this Agreement, every covenant, term,
and provision of this Agreement shall be binding upon and inure to the benefit
of the Members and their respective successors, transferees, and assigns.
16.4 Construction.
Every covenant, term, and provision of this Agreement shall be
construed simply according to its fair meaning and not strictly for or against
any Member.
16.5 Headings.
Section and other headings contained in this Agreement are for
reference purposes only and are not intended to describe, interpret, define, or
limit the scope, extent, or intent of this Agreement or any provision hereof.
16.6 Severability.
Except as otherwise provided in the succeeding sentence, every
provision of this Agreement is intended to be severable, and, if any term or
provision of this Agreement is illegal or invalid for any reason whatsoever,
such illegality or invalidity shall not affect the validity or legality of the
remainder of this Agreement. The preceding sentence of this Section 16.6 shall
be of no force or effect if the consequence of enforcing the remainder of this
Agreement without such illegal or invalid term or provision would be to cause
any Member to lose the material benefit of its economic bargain.
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59
16.7 Incorporation by Reference.
No exhibit, schedule, or other appendix attached to this Agreement and
referred to herein is incorporated in this Agreement by reference unless this
Agreement expressly otherwise provides.
16.8 Variation of Terms.
All terms and any variations thereof shall be deemed to refer to
masculine, feminine, or neuter, singular or plural, as the identity of the
Person or Persons may require.
16.9 Governing Law.
The laws of the State of Delaware (other than the choice of law
provisions thereof) shall govern the validity of this Agreement, the
construction of its terms, and the interpretation of the rights and duties
arising hereunder.
16.10 Waiver of Jury Trial.
Each of the Members irrevocably waives, to the extent permitted by law,
all rights to trial by jury and all rights to immunity by sovereignty or
otherwise in any action, proceeding or counterclaim arising out of or relating
to this Agreement.
16.11 Counterpart Execution.
This Agreement may be executed in any number of counterparts with the
same effect as if all of the Members had signed the same document. All
counterparts shall be construed together and shall constitute one agreement.
16.12 No Material Impairment.
No Member shall take any action that could impair materially such
Member's ability to perform its duties and obligations under this Agreement.
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60
IN WITNESS WHEREOF, the parties have executed and entered into this
Operating Agreement of the Company as of the day first above set forth.
CHARTER BEHAVIORAL HEALTH SERVICES,
INC.
\s\ W. Stephen Love
-------------------------------------------
Name: W. Stephen Love
Title: Senior Vice President
CRESCENT OPERATING, INC.
\s\ Jeffrey L. Stevens
-------------------------------------------
Name: Jeffrey L. Stevens
Title: Chief Financial Officer, Treasurer and
Secretary
MAGELLAN HEALTH SERVICES, INC.
\s\ Linton C. Newlin
-------------------------------------------
By: Linton C. Newlin
Title: Vice President and Secretary
<PAGE>
WARRANT PURCHASE AGREEMENT
WARRANT PURCHASE AGREEMENT (this "Agreement"), dated as of June 17,
1997, between Magellan Health Services, Inc., a Delaware corporation (the
"Company"), and Crescent Operating, Inc., a Delaware corporation (the "Buyer").
WHEREAS, the Company desires to sell to Buyer, and Buyer desires to
purchase from the Company, warrants to purchase shares of common stock of the
Company, par value $.25 per share ("Common Stock"); and
WHEREAS, the Company and Crescent Real Estate Equities Limited
Partnership ("Crescent") entered into that certain Real Estate Purchase and Sale
Agreement dated January 29, 1997 ("REIT Purchase Agreement"), as amended,
pursuant to which Crescent agreed to purchase certain real estate and related
assets from the Company; and
WHEREAS, the Company and Crescent also agreed to certain other
transactions pursuant to the Transaction Documents (as defined in the REIT
Purchase Agreement).
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, the Company and Buyer hereby agree as follows:
ARTICLE I
TERMS OF THE TRANSACTION
1.1 Agreement to Sell and to Purchase Warrants. At the Closing (as
defined in the REIT Purchase Agreement), and on the terms and subject to the
conditions set forth in this Agreement, the Company shall sell to Buyer, and
Buyer shall purchase from the Company, warrants (collectively, the "Warrants")
to purchase shares of Common Stock. The Warrants shall be exercisable during the
periods set forth on Annex 1 and shall constitute the right to purchase that
number of shares of Common Stock as set forth on Annex 1 (subject to adjustment
from time to time as provided in the Warrants). The Warrants shall be in
substantially the form set forth as Exhibit A hereto (except for the number of
shares and the exercise periods which shall be in accordance with Annex I).
1.2 Purchase Price and Payment. The parties hereto acknowledge that the
Purchase Price for the Warrants was made by them in arm's length negotiation.
The aggregate purchase price for the Warrants is Twelve Million Five Hundred
Thousand Dollars ($12,500,000) (the "Purchase Price"). The Purchase Price
payable by Buyer for the Warrants shall be paid by Buyer on or before the
Closing Date (as hereinafter defined) in immediately available funds by
confirmed wire transfer to a bank account to be designated by the Company (such
designation to occur no later than the third Business Day prior to the Closing
Date).
-1-
<PAGE>
1.3 Defined Terms. A list of terms used in this Agreement is set
forth in Article XI.
ARTICLE II
CLOSING AND CLOSING DATE
The Closing of the transactions contemplated hereby shall occur at the
time of the Closing of the REIT Purchase Agreement and upon satisfaction of the
conditions to Closing set forth herein and therein. The date on which the
Closing is required to take place is herein referred to as the "Closing Date."
All Closing transactions shall be deemed to have occurred simultaneously.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Buyer, as of the date hereof,
that:
3.1 Corporate Organization. The Company is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority in all material
respects to own, lease, and operate its properties and to carry on its business
as now being conducted. No actions or proceedings to dissolve the Company are
pending or, to the best knowledge of the Company, are threatened.
3.2 Capitalization of the Company.
(a) As of January 29, 1997, the authorized capital stock of the Company
consisted of (i) 80,000,000 shares of Common Stock, of which, as of that date,
28,686,091 shares were outstanding and 4,423,740 shares were held in the
Company's treasury, and (ii) 10,000,000 shares of Preferred Stock, without par
value, of which, as of that date, no shares are outstanding. All outstanding
shares of capital stock of the Company have been validly issued and are fully
paid and nonassessable, and no shares of capital stock of the Company are
subject to, nor have any been issued in violation of, preemptive or similar
rights. As of January 29, 1997, (i) an aggregate of 4,369,752 shares of Common
Stock were reserved for issuance pursuant to stock options granted to certain
directors, officers, and employees; (ii) an aggregate of 2,168,661 shares of
Common Stock were reserved for issuance and issuable upon the exercise of
outstanding warrants; (iii) certain shares of Common Stock were reserved for
issuance upon the exercise of certain purchase rights which become exercisable
pursuant to the terms of the Rights Agreement; and (iv) an aggregate of
2,831,739 shares of Common stock were reserved for issuance and issuable under
the Exchange Agreement.
-2-
<PAGE>
(b) Except as set forth above in subparagraph (a) of this Section 3.2
and as contemplated by this Agreement, there are outstanding (i) no shares of
capital stock or other voting securities of the Company; (ii) no securities of
the Company convertible into or exchangeable for shares of capital stock or
other voting securities of the Company; (iii) no options or other rights to
acquire from the Company, and no obligation of the Company to issue or sell, any
shares of capital stock or other voting securities of the Company or any
securities of the Company convertible into or exchangeable for such capital
stock or voting securities; and (iv) other than employee compensation plans
based on the Company's earnings and executive officer employment agreements, no
equity equivalents, interests in the ownership or earnings, or other similar
rights of or with respect to the Company. There are no outstanding contractual
obligations of the Company to repurchase, redeem or otherwise acquire any shares
of Common Stock or any other securities of the type described in clauses
(i)-(iv) of the preceding sentence.
3.3 Authority Relative to This Agreement. The Company has full
corporate power and authority to execute, deliver, and perform this Agreement to
which it is a party and to consummate the transactions contemplated hereby. The
execution, delivery, and performance by the Company of this Agreement, and the
consummation by it of the transactions contemplated hereby, have been duly
authorized by all necessary corporate action of the Company. This Agreement has
been duly executed and delivered by the Company and constitutes, and the
Warrant, when executed by the Company will be, a valid and legally binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except that such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting
creditors' rights generally or by general principles of equity.
3.4 Noncontravention. The execution, delivery, and performance by the
Company of this Agreement and the Warrants and the consummation by it of the
transactions contemplated hereby do not and will not (i) conflict with or result
in a violation of any provision of the Company's Restated Certificate of
Incorporation or the Company's Bylaws, as amended, or the charter, bylaws or
other governing instruments of any Subsidiary, (ii) conflict with or result in a
violation of any provision of, or constitute (with or without the giving of
notice or the passage of time or both) a default under, or give rise (with or
without the giving of notice or the passage of time or both) to any right of
termination, cancellation, or acceleration under, any bond, debenture, note,
mortgage, indenture, lease, agreement, or other instrument or obligation to
which the Company or any Subsidiary is a party or by which the Company or any
Subsidiary or any of their respective properties may be bound, (iii) result in
the creation or imposition of any Encumbrance upon the properties of the Company
or any Subsidiary, or (iv) assuming compliance with the matters referred to in
Section 3.5, violate any Applicable Law binding upon the Company or any
Subsidiary, except, in the case of clauses (ii), (iii), and (iv) above, for any
such conflicts, violations, defaults, terminations, cancellations,
accelerations, or Encumbrances which would not, individually or in the
aggregate, have a material adverse effect on the business, assets, results of
operations, or financial condition of the Company and the Subsidiaries taken as
a whole or the ability of the Company to consummate the transactions
contemplated hereby.
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3.5 Governmental Approvals. No consent, approval, order, or
authorization of, or declaration, filing, or registration with, any Governmental
Entity is required to be obtained or made by the Company or any Subsidiary in
connection with the execution, delivery, or performance by the Company of this
Agreement or the consummation by it of the transactions contemplated hereby,
other than (i) compliance with any applicable requirements of the HSR Act; (ii)
compliance with any applicable requirements of the Securities Act; (iii)
compliance with any applicable requirements of the Exchange Act; (iv) compliance
with any applicable state securities laws; and (v) such consents, approvals,
orders, or authorizations which, if not obtained, and such declarations,
filings, or registrations which, if not made, would not, individually or in the
aggregate, have a material adverse effect on the business, assets, results of
operations, or financial condition of the Company or on the ability of the
Company to consummate the transactions contemplated hereby. The representations
and warranties of the Company contained in this Section 3.5, insofar as such
representations and warranties pertain to compliance by the Company with the
requirements of the Securities Act and applicable state securities laws, are
based on the representations and warranties of Buyers contained in Section 4.5.
3.6 Authorization of Issuance: Reservation of Shares. When issued and
delivered pursuant to this Agreement against payment therefor, the Warrants will
have been duly authorized, issued and delivered and will constitute valid and
legally binding obligations of the Company entitled to the benefits provided
therein. During the period within which the Warrants may be exercised, the
Company will at all times have authorized and reserved for the purpose of issue
upon exercise of the Warrants, a sufficient number of shares of Common Stock to
provide for the exercise of the Warrants. All shares of Common Stock which are
issuable upon exercise of the Warrants (the "Warrant Shares") will, when issued,
be validly issued, fully paid and nonassessable. Upon exercise of the Warrants
the issuance of the Warrant Shares will not be subject to any preemptive or
similar rights.
3.7 SEC Filings. The Company has filed with the Commission all forms,
reports, schedules, statements, and other documents (excluding exhibits)
required to be filed by it since September 30, 1995 under the Securities Act,
the Exchange Act, and all other federal securities laws. All forms, reports,
schedules, statements, and other documents (including all amendments thereto)
filed by the Company with the Commission since such date are herein collectively
referred to as the "SEC Filings." The SEC Filings, at the time filed, complied
in all material respects with all applicable requirements of federal securities
laws. None of the SEC Filings, including, without limitation, any financial
statements or schedules included therein, at the time filed, contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
contained therein, in light of the circumstances under which they were made, not
misleading except as the same was corrected or superseded in a subsequent
document duly filed with the Commission. The audited consolidated financial
statements and unaudited consolidated interim financial statements of the
Company included in the SEC Filings present fairly in all material respects, in
conformity with generally accepted accounting principles applied on a consistent
basis (except as may be indicated in the notes thereto and, in the case of the
unaudited consolidated interim financial statements, except to the extent that
preparation
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of such financial statements in accordance with generally accepted accounting
principles is not required by applicable rules of the Commission), the
consolidated financial position of the Company as of the dates thereof and its
consolidated results of operations and cash flows for the periods then ended
(subject to normal year-end adjustments in the case of any interim financial
statements).
3.8 Rights Plan. Based upon the representation of Buyer in Section 4.6
hereof and relying upon the information in the most recent Schedule 13D filed by
Rainwater-Magellan Holdings, L.P. related to stock ownership in the Company, the
execution of this Agreement and the issuance of the Warrant Shares (assuming the
continued validity of the representation of Buyer in Section 4.6 hereof) shall
not cause an issuance of certificates within the meaning of Section 3 of the
Rights Agreement dated as of July 21, 1992, as amended by the First Amendment to
Rights Agreement, dated as of May 30, 1997 between the Company and First Union
National Bank of North Carolina (the "Rights Agreement") or a Triggering Event
as defined in the Rights Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to the Company that:
4.1 Organization. Buyer is duly organized, validly existing, and
in good standing under the laws of the jurisdiction of its formation.
4.2 Authority Relative to This Agreement. Buyer has full power and
authority to execute, deliver, and perform this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery, and performance by
Buyer of this Agreement, and the consummation by it of the transactions
contemplated hereby, have been duly authorized by all necessary action of Buyer.
This Agreement has been duly executed and delivered by Buyer and constitutes a
valid and legally binding obligation of Buyer, enforceable against Buyer in
accordance with its terms, except that such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws
affecting creditors' rights generally or by general principles of equity.
4.3 Noncontravention. The execution, delivery, and performance by Buyer
of this Agreement and the consummation by it of the transactions contemplated
hereby do not and will not (i) conflict with or result in a violation of any
provision of the charter, bylaws, or similar organizational documents of Buyer,
(ii) conflict with or result in a violation of any provision of, or constitute
(with or without the giving of notice or the passage of time or both) a default
under, or give rise (with or without the giving of notice or the passage of time
or both) to any right of termination, cancellation, or acceleration under, any
bond, debenture, note, mortgage, indenture, lease, agreement, or other
instrument or obligation to which Buyer is a party or by which Buyer or any of
its properties may be bound, (iii) result in the creation or imposition of any
Encumbrance upon the properties of Buyer, or (iv) violate any Applicable Law
binding upon Buyer, except, in the
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case of clauses (ii), (iii), and (iv) above, for any such conflicts, violations,
defaults, terminations, cancellations, accelerations, or Encumbrances which
would not, individually or in the aggregate, have a material adverse effect on
the business, assets, results of operations, or financial condition of Buyer or
on the ability of Buyer to consummate the transactions contemplated hereby.
4.4 Governmental Approvals. Other than any HSR Act filing, no consent,
approval, order, or authorization of, or declaration, filing, or registration
with, any Governmental Entity is required to be obtained or made by Buyer in
connection with the execution, delivery, or performance by Buyer of this
Agreement or the consummation by it of the transactions contemplated hereby.
4.5 Purchase for Investment. Buyer has been furnished with all
information that it has requested for the purpose of evaluating the proposed
acquisition of the Warrants pursuant hereto, and Buyer has had an opportunity to
ask questions of and receive answers from the Company regarding the Company and
its business, assets, results of operations, and financial condition and the
terms and conditions of the issuance of the Warrants. Buyer is acquiring the
Warrants to be purchased by it for its own account for investment and not for
distribution in any manner that would violate applicable securities laws. Buyer
can bear the risk of an investment in the Warrants, and has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of a prospective investment in the Warrants. The
acquisition of such Warrants by Buyer at Closing shall constitute Buyer's
confirmation of the foregoing representations. Buyer understands that such
Warrants are being sold to it in a transaction which is exempt from the
registration requirements of the Securities Act, and that, in making the
representations and warranties contained in Section 3.5 pertaining to compliance
by the Company with the requirements of the Securities Act and applicable
securities laws, the Company is relying, to the extent applicable, upon Buyer's
representations set forth herein.
4.6 No Other Shares. Except for such rights as may be conferred on
Buyer by this Agreement, as of the date hereof, Buyer does not beneficially own,
directly or indirectly through any subsidiary, or any affiliate of the Buyer in
which the Buyer directly or indirectly owns stock or equity interests, and
Crescent Real Estate Equities Company does not own, any shares of capital stock
of the Company.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Press Releases. Except as may be required by Applicable Law,
neither Buyer, on the one hand, nor the Company, on the other, shall issue any
press release with respect to this Agreement or the transactions contemplated
hereby without the prior written consent of the other party (which consent shall
not be unreasonably withheld under the circumstances). Any such press release
required by Applicable Law shall only be made after reasonable notice to the
other party.
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5.2 Stock Exchange Listing. The Company shall use its commercially
reasonable best efforts to cause the Warrant Shares to be approved for listing
on the New York Stock Exchange, subject to official notice of issuance, prior to
the date any such Warrant Shares become issuable upon the exercise of the
Warrants.
5.3 Registration Rights.
(a) Registration of Warrant Shares. At least 90 days prior to the date
on which the Warrant Shares are issuable upon exercise of the Warrant, the
Company will prepare and file one or more registration statements under the
Securities Act, and use its commercially reasonable best efforts to cause such
registration statements to become effective as promptly as possible, with
respect to the issuance of the Warrant Shares upon exercise of the Warrants and
the resale of the Registrable Warrant Shares.
(b) Registration Procedures. With respect to each registration
statement filed in accordance with this Section 5.3 (the "Registration
Statement"), the Company shall:
(i) cause the Registration Statement and the related
prospectus and any amendment or supplement, (A) to comply in all
material respects with the applicable requirements of the Securities
Act and under the rules and regulations promulgated thereunder, and (B)
not to contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading;
(ii) prepare and file with the Commission such amendments and
supplements to the Registration Statement and the prospectus used in
connection therewith, and upon the mandatory expiration of the
Registration Statement, one or more additional registration statements,
as may be necessary to keep the Registration Statement effective on a
continual basis for so long as the Buyer or its permitted transferee
owns any Underlying Warrant Shares; provided that the Company shall not
be required to maintain the effectiveness of any Registration Statement
filed hereunder for a period in excess of twelve years and sixty (60)
days from the Closing Date;
(iii) furnish, upon written request, to Buyer a copy of any
amendment or supplement to the Registration Statement or prospectus
prior to filing it after effectiveness and not file any such amendment
or supplement to which Buyer shall have reasonably objected on the
grounds that such amendment or supplement does not comply in all
material respects with the requirements of the Securities Act or of the
rules or regulations promulgated thereunder;
(iv) furnish to Buyer such number of copies of the
Registration Statement, each amendment and supplement thereto, the
prospectus used in connection therewith (including, without limitation,
each preliminary prospectus and final prospectus) and such other
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document as Buyer may reasonably request in order to facilitate the
disposition of the Registrable Warrant Shares owned by Buyer;
(v) use its commercially reasonable best efforts to register
or qualify all Registrable Warrant Shares covered by the Registration
Statement under such other securities or blue sky laws of the states of
the United States as may be required for the issuance and sale of the
Registrable Warrant Shares, to keep such registration or qualification
in effect for so long as the Registration Statement remains in effect
except that the Company shall not for any such purpose be required to
qualify generally to do business as a foreign corporation in any
jurisdiction in which it is not and would not, but for the requirements
of this Section 5.3, be obligated to be so qualified, or to subject
itself to taxation in any such jurisdiction, or to consent to general
service of process in any such jurisdiction;
(vi) prior to any sale of the Registrable Warrant Shares
effected on a national securities exchange, deliver to such national
securities exchange copies of the prospectus to be used in connection
with the offering to be conducted pursuant to the Registration
Statement;
(vii) upon discovery that, or upon the happening of any event
as a result of which, the prospectus included in the Registration
Statement, as then in effect, includes or in the judgment of the
Company may include an untrue statement of a material fact or omits or
may omit to state any material fact required to be stated in such
prospectus or necessary to make the statements in such prospectus not
misleading in the light of the circumstances in which they were made,
which circumstance requires amendment of the Registration Statement or
supplementation of the prospectus, prepare and file as promptly as
reasonably possible a supplement to or an amendment of such prospectus
as may be necessary so that, as when delivered (if required by the
Securities Act) to a purchaser of Registrable Warrant Shares, such
prospectus shall not include an untrue statement of a material fact or
omit to state a material fact required to be stated in such prospectus
or necessary to make the statements in such prospectus not misleading
in the light of the circumstances in which they were made;
(viii) otherwise use its commercially reasonable best efforts
to comply with all applicable rules and regulations under the
Securities Act and, in its discretion, to make available to its
securities holders, as soon as reasonably practicable, an earnings
statement covering the period of at least twelve months, but not more
than eighteen months, beginning with the first month of the first
fiscal quarter after the effective date of the Registration Statement,
which earnings statement shall satisfy the provisions of section 11(a)
of the Securities Act;
(ix) provide and cause to be maintained a transfer agent and
registrar for all Registrable Warrant Shares covered by the
Registration Statement from and after a date not later than the
effective date of the Registration Statement;
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(x) use its commercially reasonable best efforts to list all
Registrable Warrant Shares covered by the Registration Statement on any
national securities exchange on which securities of the same class as
the Registrable Warrant Shares are then listed;
(xi) after any sale of the Registrable Warrant Shares pursuant
to this Section 5.3, to the extent not prohibited by law, cause any
restrictive legends to be removed and any transfer restrictions to be
rescinded with respect to the Registrable Warrant Shares;
(xii) enter into such customary agreements (including, without
limitation, underwriting agreements in customary form, substance, and
scope) and take all such other actions as the holders of a majority of
the Registrable Warrant Shares being sold or the underwriters, if any,
reasonably request in order to expedite or facilitate the disposition
of such Warrant Shares;
(xiii) in the event of the issuance of any stop order
suspending the effectiveness of the Registration Statement, or of any
order suspending or preventing the use of any related prospectus or
suspending the disqualification of any Common Stock included in the
Registration Statement for sale in any jurisdiction, the Company will
use its commercially reasonable best efforts promptly to obtain the
withdrawal of such order; and
(xiv) use its commercially reasonable best efforts to cause
such Registrable Warrant Shares covered by the Registration Statement
to be registered with or approved by such other governmental agencies
or authorities as may be necessary to enable the Buyer thereof to
consummate the disposition of such Warrant Shares.
(c) Obligations of Buyer. The Buyer holding Registrable Warrant Shares
shall furnish to the Company such information regarding the Buyer as the Company
may from time to time reasonably request in writing (and will notify the Company
of any changes in such information) and as shall be required by the Securities
Act in connection with such registration.
(d) Delay of Sales. During any period in which the Company is
maintaining the effectiveness of a Registration Statement for the Registrable
Warrant Shares pursuant to this Section 5.3, the Company shall have the right,
upon giving notice to the Buyer holding Registrable Warrant Shares of the
exercise of such right, to require the Buyer not to sell any Registrable Warrant
Shares pursuant to such Registration Statement for a period of time the Company
deems reasonably necessary, which time shall be specified in such notice but in
no event longer than a period of 90 days, if (i) the Company is engaged in an
offering of shares by the Company for its own account or is engaged in or
proposes to engage in discussions or negotiations with respect to, or has
proposed or taken a substantial step to commence, or there otherwise is pending,
any merger, acquisition, other form of business combination, divestiture, tender
offer, financing or other transaction, or there is an event or state of facts
relating to the Company, in each case which is material to the Company (any such
negotiation, step, event or state of facts being herein called a "Material
Activity"), (ii) such Material Activity would, in the opinion of counsel for the
Company reasonably acceptable to Buyer,
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require disclosure so as to permit the Registrable Warrant Shares to be sold in
compliance with applicable law, and (iii) such disclosure would, in the
reasonable judgment of the Company, be adverse to its interests in any material
respect. The Company shall have no obligation to include in any notice
contemplated by this subparagraph (f) any reference to or description of the
facts based upon which the Company is delivering such notice.
(e) Indemnification.
(i) The Company shall indemnify and hold harmless the Buyer
holding Registrable Warrant Shares and its directors, Affiliates and
officers, and each other person, if any, who controls the Buyer within
the meaning of the Securities Act against any losses, claims, damages,
liabilities or expenses (including reasonable fees and expenses of
counsel), joint or several, to which the Buyer or any such director,
Affiliate or officer or participating or controlling person may become
subject under the Securities Act or otherwise in connection with or as
a result of a sale by the Buyer of the Registrable Warrant Shares,
insofar as such losses, claims, damages, liabilities or expenses (or
related actions or proceedings) arise out of or are based upon (i) any
untrue statement of any material fact contained in the Registration
Statement, any preliminary prospectus, final prospectus or summary
prospectus contained in the Registration Statement, or any amendment or
supplement to the Registration Statement, or any document incorporated
by reference in the Registration Statement, or (ii) any omission to
state in any such document a material fact required to be stated in any
such document or necessary to make the statements in any such document
not misleading, and the Company will reimburse the Buyer and each such
director, Affiliate, officer, participating person and controlling
person for any legal or any other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim,
damage, liability or expense (or action or proceeding in respect of any
such loss, claim, damage, liability or expense) which arises out of or
is based upon an untrue statement or omission made in the Registration
Statement, any such preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement except for any untrue statement or
omission made in reliance upon and in conformity with written
information furnished to the Company by the Buyer or any such director,
Affiliate, officer, participating person or controlling person for use
in the preparation of the Registration Statement. Such indemnity shall
remain in full force and effect regardless of any investigation made by
or on behalf of the Buyer or any such director, Affiliate, officer,
participating person or controlling person and shall survive the
transfer of Registrable Warrant Shares by the Buyer.
(ii) The Buyer shall indemnify and hold harmless (in the same
manner and to the same extent as set forth in clause (i) of this
subparagraph (f)) the Company, each director of the Company, each
officer of the Company who shall sign the Registration Statement and
each other person, if any, who controls the Company within the meaning
of the Securities Act, with respect to any untrue statement in or
omission from the Registration Statement, any preliminary prospectus,
final prospectus or summary prospectus included in the Registration
Statement, or any amendment or supplement to the Registration
Statement, but only to the
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extent that such statement or omission was made in direct reliance upon
and in conformity with written information furnished to the Company by
the Buyer for use in the preparation of the Registration Statement,
preliminary prospectus, final prospectus, summary prospectus, amendment
or supplement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Company or
any such director, officer or controlling person and shall survive the
transfer of the Registrable Warrant Shares by the Buyer.
(iii) Indemnification under this Section 5.3 shall be made as
set forth in Article IX hereof.
(f) Registration Expenses. All expenses incident to the Company's
registration of the Registrable Warrant Shares pursuant to the provisions of
this Section 5.3, including, without limitation, all registration and filing
fees, fees and expenses of compliance with securities or blue sky laws, printing
and engraving expenses, messenger and delivery expenses and fees and
disbursements of counsel for the Company and all independent certified public
accountants, underwriters (excluding underwriting discounts and any selling
commissions) and any persons retained by the Company (all such expenses being
herein called "Registration Expenses"), will be paid by the Company; provided,
that, all expenses incurred by the Buyer holding Registrable Warrant Shares to
retain any counsel, accountant or other advisor will not be deemed to be
Registration Expenses and will be paid by the Buyer. The underwriting discounts
or commissions and any selling commissions together with any stock transfer or
similar taxes attributable to sales of the Registrable Warrant Shares will be
paid by the Buyer.
5.4 Fees and Expenses. The parties shall each pay their own fees and
expenses and those of their agents, advisors, attorneys and accountants with
respect to the negotiation and execution of this Agreement.
5.5 Restrictions on Transfers: Restrictions on Exercise of
Warrants.
(a) Restrictions on Transfer of Warrants and Warrant Shares.
Subject to the provisions of subsections (b) and (c), without having obtained
the prior written consent of the Company, the Buyer shall not:
(i) sell or transfer any of the Warrants held by it to
any other person, except for Excluded Transfers (as defined below) or to a
wholly owned Subsidiary; and
(ii) prior to the twelfth anniversary of the Closing Date,
except for an Excluded Transfer, sell or transfer in a privately
negotiated transaction to a single purchaser and its Affiliates, or any
"Group" (as such term is defined in Rule 13d-5(b)(1) under the Exchange
Act) any combination of Warrants and/or Warrant Shares, if the
aggregate number of Warrant Shares and Underlying Warrant Shares to be
so transferred equals 5% or more of
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the Common Stock then outstanding on a fully-diluted basis (i.e.
including all shares of Common Stock issuable under the terms of any
options, warrants and similar rights).
(b) Exceptions to Transfer Restrictions. Notwithstanding subsection
(a), the Buyer may sell or transfer any of the Warrants and/or Warrant Shares to
any person pursuant to, as a result of, or in connection with (i) a tender offer
or an exchange offer approved by the Board of Directors of the Company; (ii) the
consummation of a merger (provided the Company is not the surviving corporation
in such merger), consolidation, or a sale of all or substantially all the assets
of the Company; or (iii) any other "Fundamental Change Transaction" (as such
term is defined in the Warrant) (any transfer pursuant to this Section 5.5(b),
an "Excluded Transfer").
(c) Transferees. During the period in which the restrictions set forth
in this Section 5.5 remain applicable, neither Buyer nor any transferee shall be
entitled to, directly or indirectly, sell or transfer any of the Warrants and/or
Warrant Shares in an Excluded Transfer to any person who is not a party to this
Agreement, unless the purported transferee executes an instrument acknowledging
that it is bound by the terms of this Section 5.5 and such instrument is
delivered to the Company.
5.6 Indemnification of Brokerage. Each of the parties hereto agrees to
indemnify and hold harmless each other party from and against any claim or
demand for a commission or other compensation by any financial advisor, broker,
agent, finder, or similar intermediary claiming to have been employed by or on
behalf of such indemnifying party and to bear the cost of legal fees and
expenses incurred in defending against any such claim or demand.
5.7 Delivery of Information. The Company will deliver to the Buyer
promptly upon the filing thereof, copies of all registration statements (other
than the exhibits thereto and any registration statements on Form S-8 or its
equivalent) and reports on Forms 10-K (or their equivalents) which the Company
shall have filed with the Commission or any similar reports filed with any state
securities commission or office.
5.8 Rule 144 and Rule 144A Information. With a view to making available
to the Buyer the benefits of Rule 144 and Rule 144A promulgated under the 1933
Act and any other rule or regulation of the Commission that may at any time
permit the Buyer to sell Common Stock of the Company to the public without
registration, the Company agrees to:
(i) make and keep public information available, as those
terms are understood and defined in Rule 144;
(ii) file with the Commission in a timely manner all
reports and other documents required of the Company under the
Securities Act and the Exchange Act; and
(iii) furnish to Buyer forthwith upon request (A) a written
statement by the Company that it has complied with the reporting
requirements of Rule 144, the Securities Act and the Exchange Act, (B)
a copy of the most recent annual or quarterly report of the
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Company and such other reports and documents so filed by the Company
under the Securities Act and the Exchange Act and (C) such other
information as may be reasonably requested by each Buyer in availing
itself of any rule or regulation of the Commission which permits the
selling of any such securities without registration; and
(iv) comply with all rules and regulations of the
Commission applicable to the Company in connection with use of Rule
144A (or any successor thereto); and
(v) within five business days of the Company's receipt of a
request made by, or on behalf of, any prospective transferee of who is
a Qualified Institutional Buyer (as defined in Rule 144A) and would be
purchasing Common Stock of the Company in reliance upon Rule 144A),
provide to such prospective transferee copies of annual audited and
quarterly unaudited financial statements of the Company for it to
comply with Rule 144A.
5.9 Standstill.
(a) General. Buyer agrees that during the four year period ending on
the anniversary of the Closing Date, it will not, and it will cause its
Affiliates and employees (other than Richard E. Rainwater, John C. Goff and
Gerald W. Haddock) not to, purchase additional shares (excluding any acquisition
of shares of Common Stock or Equity Securities pursuant to warrants outstanding
pursuant to that certain Stock and Warrant Purchase Agreement dated December 22,
1995 between the Company and Richard E. Rainwater and certain other buyers) of
the Company's Common Stock (or other Equity Securities) so that Buyer and its
Affiliates and employees collectively own 20% or more of the Company's Common
Stock then outstanding; provided, however, that Buyer and its Affiliates and
employees shall not be deemed to own 20% or more of the Common Stock then
outstanding solely by reason of the Company's purchase of any Common Stock
unless thereafter Buyer and its Affiliates and employees purchase any additional
shares of Common Stock (excluding any acquisition of Warrant Shares upon
exercise of the Warrants, which shall not be restricted hereunder).
(b) Additional Standstill Obligations. Buyer further agrees that during
the twelve year period ending on the anniversary of the Closing Date, it will
not, and it will cause its Affiliates and employees not to, without prior
Company consent, (i) effect or cause to be effected any (A) "solicitation" of
"proxies" (as such terms are used in the proxy rules of the Commission) with
respect to the Company or any action resulting in such person becoming a
"participant" in any "election contest" (as such terms are used in the proxy
rules of the Commission) with respect to the Company, or (B) any tender or
exchange offer or offer for a merger, consolidation, share exchange or business
combination involving the Company or substantially all of its assets, (ii)
propose any matter for submission to a vote of the stockholders of the Company,
or (iii) sell any shares of the Company's Common Stock (or other Equity
Securities) short.
(c) Amendments to Rights Agreement. If the Company undertakes the
purchase of any Common Stock under circumstances in which any exercise of
Warrants would be considered to
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cause Buyer and its Affiliates to become an "Acquiring Person" under the Rights
Agreement, the Company agrees to amend the Rights Agreement to either (i)
include the Buyer and its Affiliates in the definition of an "Initial
Shareholder", or (ii) change the definition of "Exempt Person" so as to exclude
any exercise of the Warrants from being considered as an additional purchase of
shares of Common Stock for purposes of the Rights Agreement. The Company agrees
to amend the Rights Agreement prior to Closing to the extent, if any, necessary
to prevent any of the transactions contemplated hereby, including any issuance
of Warrant Shares, to cause an issuance of certificates under Section 3 of the
Rights Agreement or a Triggering Event under the Rights Agreement.
5.10 Notices. The Company agrees to give the Buyer notice of any of the
events referred to in Section 4(g) of the Warrants at least five (5) Business
Days prior to any record date established or related to any such event which the
Buyer agrees to keep strictly confidential unless and until any such event has
been publicly announced.
5.11 Survival of Covenants. Except for any covenant or agreement which
by its terms expressly terminates as of a specific date, the covenants and
agreements of the parties hereto contained in this Agreement shall survive the
Closing without contractual limitation.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF THE COMPANY
The obligations of the Company to consummate the transactions
contemplated by this Agreement shall be subject to the fulfillment on or prior
to the Closing Date of each of the following conditions:
6.1 Representations and Warranties True. All the representations and
warranties of Buyer contained in this Agreement shall be true and correct on and
as of the Closing Date in all material respects, except to the extent that any
such representation or warranty is made as of a specified date, in which case
such representation or warranty shall have been true and correct as of such
specified date, except to the extent contemplated by this Agreement.
6.2 Covenants and Agreements Performed. Buyer shall have performed and
complied with all covenants and agreements required by this Agreement, if any,
to be performed or complied with by it on or prior to the Closing Date in all
material respects.
6.3 HSR Act. To the extent that the HSR Act is applicable to the
transaction contemplated herein, all waiting periods (and any extensions
thereof) applicable to this Agreement and the transactions contemplated hereby
under the HSR Act shall have expired or been terminated.
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6.4 Legal Proceedings. No Proceeding shall, on the Closing Date, be
pending or threatened seeking to restrain, prohibit, or obtain damages or other
relief in connection with this Agreement or the consummation of the transactions
contemplated hereby.
6.5 Certificate. The Company shall have received a certificate executed
by a duly authorized person on behalf of Buyer dated the Closing Date,
representing and certifying, in such detail as the Company may reasonably
request, that the conditions set forth in Sections 6.1, 6.2 and 6.4 have been
fulfilled.
6.6 Other Conditions. All conditions to closing set forth in the
REIT Purchase Agreement have been satisfied or waived.
6.7 Other Transactions. All Transactions under the other
Transaction Documents (as defined in the REIT Purchase Agreement) have been
consummated contemporaneously herewith.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF BUYER
The obligations of Buyer to consummate the transactions contemplated by
this Agreement shall be subject to the fulfillment on or prior to the Closing
Date of each of the following conditions:
7.1 Representations and Warranties True. All the representations and
warranties of the Company contained in this Agreement shall be true and correct
on and as of the Closing Date in all material respects, except to the extent
that any such representation or warranty is made as of a specified date, in
which case such representation or warranty shall have been true and correct as
of such specified date, except to the extent contemplated by this Agreement.
7.2 Covenants and Agreements Performed. The Company shall have
performed and complied with all covenants and agreements required by this
Agreement to be performed or complied with by it on or prior to the Closing Date
in all material respects.
7.3 Legal Proceeding. No Proceeding shall, on the Closing Date, be
pending or threatened seeking to restrain, prohibit, or obtain damages or other
relief in connection with this Agreement or the consummation of the transactions
contemplated hereby.
7.4 Certificates. Buyer shall have received a certificate or
certificates representing the Warrants, in definitive form representing the
Warrants purchased by it, ( in substantially the form set forth in Exhibit A
hereto) registered in the name of Buyer and duly executed by the Company.
7.5 Other Conditions. All conditions to closing the REIT Purchase
Agreement have been satisfied or waived.
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7.6 Other Transactions. All Transactions under the other Transaction
Documents (as defined in the REIT Purchase Agreement) have been consummated
contemporaneously herewith.
ARTICLE VIII
TERMINATION, AMENDMENT, AND WAIVER
8.1 Termination. This Agreement shall be terminated and the
transactions contemplated hereby abandoned if the REIT Purchase Agreement is
terminated.
8.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 8.1, this Agreement shall become void and have no
effect, except that the agreements contained in this Section and in Sections
5.1, 5.4 and 5.6 and Article IX shall survive the termination hereof. Nothing
contained in this Section shall relieve any party from liability for any breach
of this Agreement.
8.3 Amendment. This Agreement may not be amended except by an
instrument in writing signed by or on behalf of all the parties hereto.
8.4 Waiver. No failure or delay by a party hereto in exercising any
right, power, or privilege hereunder shall operate as a waiver thereof nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power, or privilege. The provisions
of this Agreement may not be waived except by an instrument in writing signed by
or on behalf of the party against whom such waiver is sought to be enforced.
ARTICLE IX
SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
9.1 Survival. The representations and warranties of the parties hereto
contained in this Agreement or in any certificate, instrument or document
delivered pursuant hereto shall survive the Closing, regardless of any
investigation made by or on behalf of any party, until the first anniversary of
the Closing Date (the "Survival Date"). No action may be brought with respect to
a breach of any representation after the Survival Date unless, prior to such
time, the party seeking to bring such an action has notified the other party of
such claim, specifying in reasonable detail the nature of the loss suffered. The
provisions of this Section 9.1 shall have no effect upon any of the covenants of
the parties set forth in Article V or any of the other obligations of the
parties hereto under the Agreement, whether to be performed later, at or after
the Closing.
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9.2 Indemnification by Company. The Company shall indemnify, defend,
and hold harmless Buyer from and against any and all claims, actions, causes of
action, demands, losses, damages, liabilities, costs, and expenses (including
reasonable attorneys' fees and expenses) (collectively, "Damages"), asserted
against, resulting to, imposed upon, or incurred by Buyer, directly or
indirectly, by reason of or resulting from any breach by the Company of any of
its representations, warranties, covenants, or agreements contained in this
Agreement or in any certificate, instrument, or document delivered pursuant
hereto. Notwithstanding anything to the contrary contained herein, the Company's
indemnity obligations hereunder (i) will not extend to Damages arising out of
negligence, willful misconduct or fraud of the Buyer and (ii) with respect to
indemnification Damages under this Section 9.2 (other than, for each of (i) and
(ii), Damages related to the ability of the Buyer to exercise the Warrants,
receive the Warrant Shares, or sell the Warrant Shares related to the failure of
Magellan to effect the registration of the Warrant Shares), the Company's
indemnification obligations (x) for a period of two (2) years following the
Closing, shall not arise until the aggregate Damages resulting from the breach
exceed $1,000,000, at which time such indemnity obligations shall cover all
Damages, and (y) after two (2) years following the Closing, shall not arise
until the aggregate Damages during such period resulting from the breach exceed
$10,000,000, at which time such indemnity obligations shall cover all Damages.
9.3 Indemnification by Buyer. Buyer shall indemnify, defend, and hold
harmless the Company from and against any and all Damages asserted against,
resulting to, imposed upon, or incurred by the Company, directly or indirectly,
by reason of or resulting from any breach by Buyer of any of its
representations, warranties, covenants, or agreements contained in this
Agreement or in any certificate, instrument, or document delivered pursuant
hereto. Notwithstanding anything to the contrary contained herein, Buyer's
indemnity obligations hereunder (i) will not extend to Damages arising out of
negligence, willful misconduct or fraud of the Company and (ii) with respect to
indemnification Damages under this Section 9.3, the Buyer's indemnification
obligations (x) for a period of two (2) years following the Closing, shall not
arise until the aggregate Damages resulting from the breach exceed $1,000,000,
at which time such indemnity obligations shall cover all Damages, and (y) after
two (2) years following the Closing, shall not arise until the aggregate Damages
during such period resulting from the breach exceed $10,000,000, at which time
such indemnity obligations shall cover all Damages.
9.4 Procedure for Indemnification. Promptly after receipt by an
indemnified party under Section 9.2 or 9.3 of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is to be
made against an indemnifying party under such Section, give written notice to
the indemnifying party of the commencement thereof, but the failure so to notify
the indemnifying party shall not relieve it of any liability that it may have to
any indemnified party except to the extent the indemnifying party demonstrates
that the defense of such action is prejudiced thereby. In case any such action
shall be brought against an indemnified party and it shall give written notice
to the indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate therein and, to the extent that it may wish, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. If the indemnifying party elects to assume the defense of
such action, the indemnified party shall have the right to employ separate
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counsel at its own expense and to participate in the defense thereof. If the
indemnifying party elects not to assume (or fails to assume) the defense of such
action, the indemnified party shall be entitled to assume the defense of such
action with counsel of its own choice, at the expense of the indemnifying party.
If the action is asserted against both the indemnifying party and the
indemnified party and there is a conflict of interests which renders it
inappropriate for the same counsel to represent both the indemnifying party and
the indemnified party, the indemnifying party shall be responsible for paying
for separate counsel for the indemnified party; provided, however, that if there
is more than one indemnified party, the indemnifying party shall not be
responsible for paying for more than one separate firm of attorneys to represent
the indemnified parties, regardless of the number of indemnified parties. The
indemnifying party shall have no liability with respect to any compromise or
settlement of any action effected without its written consent (which shall not
be unreasonably withheld).
ARTICLE X
MISCELLANEOUS
10.1 Notices. All notices, requests, demands, and other communications
required or permitted to be given or made hereunder by any party hereto shall be
in writing and shall be deemed to have been duly given or made if delivered
personally, or transmitted by first class registered or certified mail, postage
prepaid, return receipt requested, or sent by prepaid overnight delivery
service, or sent by cable, telegram, or telefax, to the parties at the addresses
and telefax numbers set forth opposite their names on the signature page hereof
(or at such other addresses and telefax numbers as shall be specified by the
parties by like notice).
10.2 Entire Agreement. This Agreement, together with the Transaction
Documents, constitutes the entire agreement between the parties hereto with
respect to the subject matter hereof and supersedes all prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof.
10.3 Binding Effect; Assignment; No Third Party Benefit. This Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective legal representatives, successors, and permitted assigns. Except as
otherwise expressly provided in this Agreement, neither this Agreement nor any
of the rights, interests, or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties.
Except as provided in Article IX, nothing in this Agreement, express or implied,
is intended to or shall confer upon any person other than the parties hereto,
and their respective legal representatives, successors, and permitted assigns,
any rights, benefits, or remedies of any nature whatsoever under or by reason of
this Agreement.
10.4 Severability. If any provision of this Agreement is held to
be unenforceable, this Agreement shall be considered divisible and such
provision shall be deemed inoperative to the extent
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it is deemed unenforceable, and in all other respects this Agreement shall
remain in full force and effect; provided however, that if any such provision
may be made enforceable by limitation thereof, then such provision shall be
deemed to be so limited and shall be enforceable to the maximum extent permitted
by applicable law.
10.5 Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware,
without regard to the principles of conflicts of laws thereof.
10.6 Counterparts. This Agreement may be executed by the parties hereto
in any number of counterparts, each of which shall be deemed an original, but
all of which shall constitute one and the same agreement. Each counterpart may
consist of a number of copies hereof each signed by less than all, but together
signed by all, the parties hereto.
ARTICLE XI
DEFINITIONS
11.1 Certain Defined Terms. As used in this Agreement, each of the
following terms has the meaning given it in this Article:
"Affiliate" has the meaning specified in Rule 12b-2
promulgated under the Exchange Act.
"Applicable Law" means any statute, law, rule, or regulation
or any judgment, order, writ, injunction, or decree of any Governmental
Entity to which a specified person or property is subject.
"Business Day" shall mean any day other than a Saturday, a
Sunday, or a day on which banking institutions in Atlanta, Georgia or
Dallas, Texas are authorized or obligated by law or executive order to
close.
"Encumbrances" means liens, charges, pledges, options,
mortgages, deeds of trust, security interests, claims, restrictions
(whether on voting, sale, transfer, disposition, or otherwise),
easements, and other encumbrances of every type and description,
whether imposed by law, agreement, understanding, or otherwise.
"Equity Ownership Interests" shall mean, with respect to the
Buyer, at any time, the fraction (a) having as its numerator the number
of shares of Common Stock and Underlying Warrant Shares held
beneficially by the Buyer at such time, and (b) having as its
denominator the aggregate number of shares of Common Stock (calculated
on a fully diluted basis) issued and outstanding at such time.
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"Equity Securities" means any capital stock of the Company,
and any securities directly or indirectly convertible into, or
exercisable or exchangeable for any capital stock of the Company, or
any right, option, warrant or other security which, with the payment of
additional consideration, the expiration of time or the occurrence of
any event shall give the holder thereof the right to acquire any
capital stock of the company or any security convertible into or
exercisable or exchangeable for, any capital stock of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchange Agreement" means that certain Exchange Agreement
among the Company and certain other parties dated as of December 13,
1995.
"Governmental Entity" means any court or tribunal in any
jurisdiction (domestic or foreign) or any public, governmental, or
regulatory body, agency, department, commission, board, bureau, or
other authority or instrumentality (domestic or foreign).
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, enterprise,
unincorporated organization, or Governmental Entity.
"Proceedings" means all proceedings, actions, suits,
investigations, and inquiries by or before any arbitrator or
Governmental Entity.
"Registrable Warrant Shares" means the Warrant Shares and any
Common Stock or other Equity Securities issued with respect thereto by
way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise.
"Rights Agreement" means that certain Rights Agreement, dated
as of July 21,1992, as amended by the First Amendment to Rights
Agreement, dated as of May 30, 1997 between the Company and First Union
National Bank of North Carolina, as rights agent.
"Securities Act" means the Securities Act of 1933, as amended.
"Subsidiary" means any corporation more than 50% of whose
outstanding voting securities, or any general partnership, joint
venture, or similar entity more than 50% of whose total equity
interests, is owned, directly or indirectly, by the Company, or any
limited partnership of which the Company or any Subsidiary is a general
partner.
"Underlying Warrant Shares" shall mean, at any time, all
shares of Common Stock which may be acquired upon exercise of the
Warrants. For purposes hereof, any person who
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holds Warrants shall be deemed to be the holder of the Underlying
Warrant Shares obtainable upon exercise of such Warrants.
11.2 Certain Additional Defined Terms. In addition to such terms as are
defined in the opening paragraph of and the recitals to this Agreement and in
Section 11.1, the following terms are used in this Agreement as defined in the
Sections set forth opposite such terms:
Defined Term Section Reference
Closing..............................................................Article II
Closing Date.........................................................Article II
Damages.....................................................................9.2
Excluded Transfer...........................................................5.5
Material Activity...........................................................5.3
Purchase Price..............................................................1.2
Registration Expenses.......................................................5.3
Registration Statement......................................................5.3
SEC Filings.................................................................3.7
Survival Date...............................................................9.1
Warrant Shares..............................................................3.6
Warrants....................................................................1.1
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IN WITNESS WHEREOF, the parties have executed this Agreement, or caused
this Agreement to be executed by their duly authorized representatives, all as
of the day and year first above written.
MAGELLAN HEALTH SERVICES, INC.
Address:
3414 Peachtree Road, N.E. Suite 1400
Atlanta, Georgia 30326 By:\s\ Linton C. Newlin
Fax: (404) 814-5717 -----------------------------------
Linton C. Newlin
Vice President and Secretary
CRESCENT OPERATING, INC.
By: \s\ Jeffrey L. Stevens
----------------------------------
Jeffrey L. Stevens
Chief Financial Officer, Treasurer
and Secretary
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EXHIBIT A
(Form of Warrants)
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THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, OR OTHERWISE
DISPOSED OF UNLESS REGISTERED PURSUANT TO THE PROVISIONS OF THAT ACT OR UNLESS
AN OPINION OF COUNSEL TO THE COMPANY OR OTHER COUNSEL, REASONABLY SATISFACTORY
TO THE COMPANY IS OBTAINED STATING THAT SUCH DISPOSITION IS IN COMPLIANCE WITH
AN AVAILABLE EXEMPTION FROM SUCH REGISTRATION.
THE RIGHT TO SELL OR OTHERWISE TRANSFER THIS WARRANT IS SUBJECT TO CERTAIN
RESTRICTIONS SET FORTH IN A WARRANT PURCHASE AGREEMENT DATED JUNE 17, 1997,
BETWEEN THE COMPANY AND THE INITIAL BUYER OF THE WARRANTS, A COPY OF WHICH
AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF THE COMPANY. THIS WARRANT MAY
NOT BE SOLD OR TRANSFERRED EXCEPT UPON THE CONDITIONS SPECIFIED IN THE WARRANT
PURCHASE AGREEMENT AND IN THIS WARRANT, AND NO SALE OR TRANSFER OF THIS WARRANT
SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL SUCH CONDITIONS SHALL HAVE BEEN
COMPLIED WITH.
------------------------------------------------------------------
CRESCENT OPERATING, INC.
(Incorporated under the laws of the State of Delaware)
Void after 5:00 p.m., Dallas, Texas, local time,
on [June ___], 2001
No. ___ Right to Purchase
[_______] Shares
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, [Magellan Health Services,
Inc., a Delaware corporation] (the "Holder"), or registered assigns, is entitled
to purchase from Crescent Operating, Inc., a Delaware corporation (the
"Company"), at any time or from time to time during the period specified in
Paragraph 2 hereof, an amount as calculated below, of fully paid and
nonassessable shares of the Company's Common Stock, par value $.01 per share
(the "Common Stock"), at an exercise price as calculated below (the "Exercise
Price"). The term "Warrant Shares", as used herein, refers to the shares of
Common Stock purchasable hereunder. The number of Warrant Shares issuable
pursuant to this Warrant shall be limited to the number of Warrant Shares that
bears the same relationship to [_______] Warrant Shares as the number of shares
of Common Stock of the Holder issued to the Company and Crescent Real Estate
Equities Limited Partnership, a Delaware limited partnership ("Crescent")
pursuant to the Warrant Purchase Agreement dated June 17, 1997
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by and between the Company and the Holder, and the Warrant Purchase Agreement
dated January 29, 1997, as subsequently amended, by and between Crescent and the
Holder, respectively (collectively, the "Holder Purchase Agreements") in
connection with the respective corresponding numbered warrants, bears to the
number of shares of common stock of the Holder issuable under such numbered
warrants.
The Exercise Price shall be the highest price obtained by multiplying a
factor of 1.25 by the arithmetic mean, over the period of 30 consecutive days on
which the national securities exchange, automated quotation system or
over-the-counter market on which the Common Stock is then listed, admitted to
trading or quoted (or if such Common Stock is traded on more than one national
securities exchange, automated quotation system or over-the-counter market, the
national securities exchange, automated quotation system or over-the-counter
market as designated by the Company) is open for trading on a regular basis (any
such day is a "Trading Day") beginning the Trading Day immediately following
June 17, 1997, on each such Trading Day, of the high and low sale prices of
shares of Common Stock or if no such sale takes place on such date, the average
of the highest closing bid and lowest closing asked prices thereof on such date,
in each case as officially reported on the national securities exchange,
automated quotation system or over-the-counter market on which the Common Stock
is then listed, admitted to trading or quoted. The Warrant Shares and the
Exercise Price are subject to adjustment as provided in Paragraph 4 hereof.
This Warrant, together with all warrants issued upon transfer, exchange
or in replacement hereof pursuant to Paragraph 7 hereof (collectively, the
"Warrants"), is issued pursuant to, and is subject to all terms, provisions, and
conditions contained in, that certain Warrant Purchase Agreement, dated June
[17], 1997 (the "Purchase Agreement"), by and between the Company and the
Holder. This Warrant is subject to the following additional terms, provisions,
and conditions:
1. Manner of Exercise; Issuance of Certificates; Payment for Shares.
Subject to the provisions hereof and the provisions of the Purchase Agreement
which restrict the exercise of the Warrants, this Warrant may be exercised by
the holder hereof, in whole or in part, by the surrender of this Warrant,
together with a completed Exercise Agreement in the form attached hereto, to the
Company during normal business hours on any business day at the Company's
principal office in Fort Worth, Texas (or such other office or agency of the
Company as it may designate by notice to the holder hereof), during the Exercise
Period (as defined in Paragraph 2), and upon payment to the Company of the
Exercise Price for the Warrant Shares specified in said Exercise Agreement,
which such payment shall be made in cash or by certified or official bank check.
The Company shall not be required to issue fractional Warrant Shares upon any
exercise of the Warrant, but instead shall pay to the holder of this Warrant the
cash value of any such fractional Warrant Shares. The Warrant Shares so
purchased shall be deemed to be issued to the holder hereof or its designee as
the record owner of such shares as of the close of business on the date on which
this Warrant shall have been surrendered, the completed Exercise Agreement
delivered, and payment made for such shares as aforesaid. Certificates for the
Warrant Shares so purchased, representing the aggregate number of shares
specified in said Exercise Agreement, shall be delivered to the holder hereof
within a reasonable time, not exceeding ten business days, after this Warrant
shall have been so exercised.
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The certificates so delivered shall be in such denominations as may be
reasonably requested by the holder hereof, shall, unless the Warrant Shares
evidenced by such certificate have previously been registered under the
Securities Act of 1933, as amended (the "Securities Act"), be imprinted with a
restrictive legend substantially similar to the legend appearing on the face of
this Warrant, and shall be registered in the name of said holder or such other
name as shall be designated by said holder. If this Warrant shall have been
exercised only in part, then, unless this Warrant has expired, the Company
shall, at its expense, at the time of delivery of said certificates, deliver to
said holder a new Warrant representing the number of shares with respect to
which this Warrant shall not then have been exercised, which Warrant shall be
imprinted on its face with the same legend appearing on the face of this
Warrant. The Company shall pay all taxes and other expenses and charges payable
in connection with the preparation, execution, and delivery of stock
certificates (and any new Warrants) pursuant to this Paragraph 1 except that, in
case such stock certificates shall be registered in a name or names other than
the holder of this Warrant, funds sufficient to pay all stock transfer taxes
which shall be payable in connection with the execution and delivery of such
stock certificates shall be paid by the holder hereof to the Company at the time
of the delivery of such stock certificates by the Company as mentioned above.
2. Period of Exercise. Subject to the provisions of the Purchase
Agreement which restrict the exercise of the Warrants, this Warrant is
exercisable at any time or from time to time during the period commencing when
either the Company or Crescent exercises its respective corresponding numbered
warrant under the respective Holder Purchase Agreements and ending at 5:00 p.m.
Dallas, Texas, local time, on [ ] (the "Exercise Period").
3. Certain Actions Prohibited. The Company will not, by amendment of
certificate of incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed by it hereunder, but will at all times in
good faith assist in the carrying out of all the provisions of this Warrant and
in the taking of all such action as may reasonably be requested by the holder of
this Warrant in order to protect the exercise privilege of the holder of this
Warrant against dilution or other impairment, consistent with the tenor and
purpose of this Warrant.
Without limiting the generality of the foregoing,
(i) the Company will not increase the par value of the shares
of Common Stock receivable upon the exercise of this Warrant above the Exercise
Price then in effect,
(ii) before taking any action which would cause an adjustment
reducing the Exercise Price below the then par value of the shares of Common
Stock so receivable, the Company will take all such corporate action as may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of Common Stock at such adjusted Exercise
Price upon the exercise of this Warrant, or
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(iii) the Company will not take any action which results in
any adjustment of the Exercise Price if the total number of shares of Common
Stock issuable after the action upon the exercise of this Warrant would exceed
the total number of shares of Common Stock then authorized by the Company's
charter and available for other than the purpose of issue upon such exercise.
4. Anti-dilution Provisions. The Exercise Price shall be subject to
adjustment from time to time as provided in this Paragraph 4. Upon each
adjustment of the Exercise Price, the holder of this Warrant shall thereafter be
entitled to purchase, at the Exercise Price resulting from such adjustment, the
largest number of Warrant Shares obtained by multiplying the Exercise Price in
effect immediately prior to such adjustment by the number of Warrant Shares
purchasable hereunder immediately prior to such adjustment and dividing the
product thereof by the Exercise Price resulting from such adjustment. For
purposes of this Paragraph 4, the term "Capital Stock," as used herein, includes
the Common Stock and any additional class of stock of the Company having no
preference as to dividends or distributions on liquidation which may be
authorized in the future by an amendment to the Company's charter, provided that
the shares purchasable pursuant to this Warrant shall include only shares of
Common Stock, or shares resulting from any subdivision or combination of the
Common Stock, or in the case of any reorganization, reclassification,
consolidation, merger, or sale of the character referred to in this Paragraph 4,
the stock or other securities or property provided for in this Paragraph 4.
(a) Subdivisions and Combinations. In case at any time the Company
shall (i) subdivide the outstanding shares of Capital Stock into a greater
number of shares, or (ii) combine the outstanding shares of Capital Stock into a
smaller number of shares, the Exercise Price in effect immediately prior thereto
shall be adjusted proportionately so that the adjusted Exercise Price shall bear
the same relation to the Exercise Price in effect immediately prior to such
event as the total number of shares of Capital Stock outstanding immediately
prior to such event shall bear to the total number of shares of Capital Stock
outstanding immediately after such event. Such adjustment shall become effective
immediately after the effective date of a subdivision or combination.
(b) Stock Dividends. In case the Company at any time after the date
hereof shall declare, order, pay or make any dividend or other distribution to
all holders of the Capital Stock payable in Capital Stock, then in each such
case, subject to Paragraph 4(d) hereof, the Exercise Price in effect immediately
prior to the close of business on the record date fixed for the determination of
holders of any class of securities entitled to receive such dividend or
distribution shall be reduced to a price (calculated to the nearest .001 of a
cent) determined by multiplying such Exercise Price by a fraction
(i) the numerator of which shall be the number of shares of
Capital Stock outstanding immediately prior to such dividend or distribution,
and
(ii) the denominator of which shall be the number of shares of
Capital Stock outstanding immediately after such dividend or distribution.
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<PAGE>
Such adjustment shall be made on the date such dividend is paid or such
distribution is made and shall become effective retroactive to the record date
for the determination of shareholders entitled to receive such dividend or
distribution.
(c) Dividends other than Stock Dividends. In case the Company at any
time after the date hereof shall declare, order, pay or make any dividend or
other distribution to all holders of the Capital Stock, other than a dividend
payable in shares of Capital Stock (including, without limitation, dividends or
distributions payable in cash, evidences of indebtedness, rights, options or
warrants to subscribe for or purchase any Capital Stock or other securities, or
any other securities or other property), then, and in each such case, subject to
Paragraph 4(d) hereof, the Exercise Price in effect immediately prior to the
close of business on the record date fixed for the determination of holders of
any class of securities entitled to receive such dividend or distribution shall
be reduced to a price (calculated to the nearest .001 of a cent) determined by
multiplying such Exercise Price by a fraction
(i) the numerator of which shall be the "Market Price" (as
defined below) in effect on such record date or, if any class of Capital Stock
trades on an ex-dividend basis, the trading date immediately prior to the date
of commencement of ex-dividend trading, less the value of such dividend or
distribution (as determined in good faith by the Board of Directors of the
Company) applicable to one share of Capital Stock, and
(ii) the denominator of which shall be such Market Price on
such record date of, if any class of Capital Stock trades on an ex-dividend
basis, the trading date immediately prior to the date of commencement of
ex-dividend trading.
Such adjustment shall be made on the date such dividend is paid or such
distribution is made and shall become effective retroactive to the record date
for the determination of shareholders entitled to receive such dividend or
distribution.
For the purpose hereof, "Market Price" shall mean, on any date
specified herein, (A) if any class of Capital Stock is listed or admitted to
trading on any national securities exchange, the highest price obtained by
taking the arithmetic mean over a period of 20 consecutive days on which such
national securities exchange (or if such stock is traded on more than one
national securities exchange, the exchange the Company has designated under the
Securities Exchange Act of 1934 to receive copies of reports filed by the
Company under such act) is open for trading on a regular basis (any such day is
a "Trading Day") ending the Trading Day immediately prior to such date of the
average, on each such Trading Day, of the high and low sale prices of shares of
each such class of Capital Stock or if no such sale takes place on such date,
the average of the highest closing bid and lowest closing asked prices thereof
on such date, in each case as officially reported on all national securities
exchanges on which each such class of Capital Stock is then listed or admitted
to trading, or (B) if no shares of any class of Capital Stock are then listed or
admitted to trading on any national securities exchange, the highest closing
price of any class of Capital Stock on such date [traded] in the
over-the-counter market[or quoted by and automated quotation system] or, if no
such shares of
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<PAGE>
any class of Capital Stock are then quoted in any such system, as published by
the National Quotation Bureau, Inc. or any similar successor organization, and
in either case as reported by any member firm of the New York Stock Exchange
selected by the Company. If no shares of any class of Capital Stock are then
listed or admitted to trading on any national securities exchange and if no
closing bid and asked prices thereof are then so quoted or published in the
over-the-counter market, "Market Price" shall mean the higher of (x) the book
value per share of Capital Stock (assuming for the purposes of this calculation
the economic equivalence of all shares of all class of Capital Stock) as
determined on a fully diluted basis in accordance with generally accepted
accounting principles by the Board of Directors of the Company as of the last
day of any month ending within 60 days preceding the date as of which the
determination is to be made or (y) the fair value per share of classes of
Capital Stock (assuming for the purposes of this calculation the economic
equivalence of all shares of all classes of Capital Stock), as determined on a
fully diluted basis in good faith by the Board of Directors of the Company, as
of a date which is 15 days preceding the date as of which the determination is
to be made.
(d) Minimum Adjustment of Exercise Price. If the amount of any
adjustment of the Exercise Price required pursuant to this Paragraph 4 would be
less than one percent (1%) of the Exercise Price in effect at the time such
adjustment is otherwise so required to be made, such amount shall be carried
forward and adjustment with respect thereto made at the time of and together
with any subsequent adjustment which, together with such amount and any other
amount or amounts so carried forward, shall aggregate at least one percent (1%)
of such Exercise Price; provided that, upon the exercise of this Warrant, all
adjustments carried forward and not theretofore made up to and including the
date of such exercise shall, with respect to the portion of this Warrant then
exercised, be made to the nearest .001 of a cent.
(e) Fundamental Change Transaction. In case at any time after the date
hereof a purchase, tender, or exchange offer shall have been made to and
accepted by the holders of more than 50% of the outstanding shares of Capital
Stock, or the Company is otherwise a party to any transaction (including,
without limitation, a merger, consolidation, sale of all or substantially all
the Company's assets, liquidation, or recapitalization of the Capital Stock)
which is to be effected in such a way that as a result of such transaction or
offer (x) the holders of Common Stock (or any other securities of the Company
then issuable upon the exercise of this Warrant) shall be entitled to receive
stock or other securities or property (including cash) with respect to or in
exchange for Common Stock (or such other securities), or (y) the Capital Stock
ceases to be a publicly traded security either listed on the American Stock
Exchange or the New York Stock Exchange, traded in the over-the-counter market,
or quoted on an automated quotation system, or any successor thereto or
comparable system (each such transaction being herein called a "Fundamental
Change Transaction"), then, as a condition of such Fundamental Change
Transaction, lawful and adequate provision shall be made whereby the holder of
this Warrant shall thereafter have the right to purchase and receive upon the
basis and upon the terms and conditions specified in this Warrant, and in lieu
of the shares of Common Stock (or such other securities) purchasable immediately
before such transaction upon the exercise hereof, such stock or other securities
or property (including cash) as may be issuable or payable with respect to or in
exchange for a number of outstanding shares of
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<PAGE>
Common Stock (or such other securities) equal to the number of shares of Common
Stock (or such other securities) purchasable immediately before such transaction
upon the exercise hereof, had such Fundamental Change Transaction not taken
place. In any such case appropriate provision shall be made with respect to the
rights and interests of the holder of this Warrant to the end that the
provisions hereof (including, without limitation, the provisions for adjustments
of the Exercise Price and of the number of Warrant Shares purchasable upon
exercise hereof) shall thereafter be applicable, as nearly as reasonably may be,
in relation to the stock or other securities or property thereafter deliverable
upon the exercise hereof (including an immediate adjustment of the Exercise
Price if by reason of or in connection with such Fundamental Change Transaction
any securities are issued or event occurs which would, under the terms hereof,
require an adjustment of the Exercise Price). In the event of a consolidation or
merger of the Company with or into another corporation or entity as a result of
which a greater or lesser number of shares of common stock of the surviving
corporation or entity are issuable to holders of Capital Stock in respect of the
number of shares of Capital Stock outstanding immediately prior to such
consolidation or merger, then the Exercise Price in effect immediately prior to
such consolidation or merger shall be adjusted in the same manner as though
there were a subdivision or combination of the outstanding shares of Capital
Stock. The Company shall not effect any such Fundamental Change Transaction
unless prior to or simultaneously with the consummation thereof the successor
corporation or entity (if other than the Company) resulting from such
consolidation or merger or the corporation or entity purchasing such assets and
any other corporation or entity the shares of stock or other securities or
property of which are receivable thereupon by the holder of this Warrant shall
expressly assume, by written instrument executed and delivered (and satisfactory
in form) to the holder of this Warrant, (I) the obligation to deliver to such
holder such stock or other securities or property as, in accordance with the
foregoing provisions, such holder may be entitled to purchase and (ii) all other
obligations of the Company hereunder.
(f) Notice of Adjustment. Upon the occurrence of any event requiring an
adjustment of the Exercise Price, then and in each such case the Company shall
promptly deliver to the holder of this Warrant a notice stating the Exercise
Price resulting from such adjustment and the increase or decrease, if any, in
the number of shares of Common Stock issuable upon exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based. Within 90 days after each fiscal year in which
any such adjustment shall have occurred, or within 30 days after any request
therefor by the holder of this Warrant stating that such holder contemplates
exercise of this Warrant, the Company will deliver to the holder of this Warrant
a certificate of the Company's chief financial officer confirming the statements
in the most recent notice delivered under this Paragraph 4(f).
(g) Other Notices. In case at any time:
(i) the Company shall declare or pay to all the holders of
Capital Stock any dividend (whether payable in Capital Stock, cash, securities
or other property);
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<PAGE>
(ii) the Company shall offer for subscription pro rata to
all the holders of Capital Stock any additional shares of stock of any class or
other rights;
(iii) there shall be any capital reorganization, or
reclassification of the Capital Stock of the Company, or consolidation or merger
of the Company with, or sale of all or substantially all its assets to, another
corporation or other entity;
(iv) there shall be a voluntary or involuntary dissolution,
liquidation, or winding-up of the Company; or
(v) there shall be any other Fundamental Change
Transaction;
then, in any one or more of such cases, the Company shall give to the holder of
this Warrant (a) at least five (5) Business Days prior to the record date
established or related to any event referred to in clause (I) - (v) above
(which, for purposes of events referred to in clauses (I) - (v) above, shall be
the date on which the books of the Company shall close or a record shall be
taken for such dividend, distribution, or subscription rights or for determining
rights to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation, winding-up, or
Transaction) written notice of such record date and (b) in the case of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding-up, or Transaction known to the Company, at least 30 days
prior written notice of the date (or, if not then known, a reasonable
approximation thereof by the Company) when the same shall take place. Such
notice in accordance with the foregoing clause (a) shall also specify, in the
case of any such dividend, distribution, or subscription rights, the date on
which such holders of Capital Stock shall be entitled thereto, and such notice
in accordance with the foregoing clause (b) shall also specify the date on which
such holders of Capital Stock shall be entitled to exchange their Capital Stock
for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation,
winding-up, or Transaction, as the case may be. Such notice shall also state
that the action in question or the record date is subject to the effectiveness
of a registration statement under the Securities Act, or to a favorable vote of
security holders, if either is required.
(h) Certain Events. If any event occurs as to which, in the good faith
judgment of the Board of Directors of the Company, the other provisions of this
Paragraph 4 are not strictly applicable or if strictly applicable would not
fairly protect the exercise rights of the holder of this Warrant in accordance
with the essential intent and principles of such provisions, then the Board of
Directors of the Company shall make such adjustment, if any, on a basis
consistent with such essential intent and principles, necessary to preserve,
without dilution, the rights of the holder of this Warrant; provided, that no
such adjustment shall have the effect of increasing the Exercise Price as
otherwise determined pursuant to this Paragraph 4.
5. Issue Tax. The issuance of certificates for Warrant Shares upon
the exercise of this Warrant shall be made without charge to the holder of
this Warrant or such shares for any issuance tax in respect thereof, provided
that the Company shall not be required to pay any tax which may
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<PAGE>
be payable in respect of any transfer involved in the issuance and delivery of
any warrant or certificate in a name other than the holder of this Warrant.
6. No Rights or Liabilities as a Shareholder. This Warrant shall not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
7. Transfer, Exchange, and Replacement of Warrant; Registration
Rights.
(a) Restrictions on Transfer of Warrants. This Warrant shall not be
transferable to any person or entity other than a wholly-owned affiliate of the
Holder or as permitted under the Purchase Agreement. The transfer of this
Warrant to a wholly-owned affiliate or other transferee permitted under the
Purchase Agreement and all rights hereunder, in whole or in part, is registrable
at the office or agency of the Company referred to in Paragraph 7(e) hereof by
the holder hereof in person or by his duly authorized attorney, upon surrender
of this Warrant properly endorsed. Upon any transfer of this Warrant to any
wholly-owned affiliate or other permitted transferee, other than a wholly-owned
affiliate or other permitted transferee who is at that time a holder of other
Warrants, the Company shall have the right to require the holder and the
affiliate or other transferee to make customary representations to the extent
reasonably necessary to assure that the transfer will comply with the Securities
Act and any applicable state securities laws. Each holder of this Warrant, by
taking or holding the same, consents and agrees that this Warrant, then endorsed
in blank, shall be deemed negotiable, and that the holder hereof, when this
Warrant shall have been so endorsed, may be treated by the Company and all other
persons dealing with this Warrant as the absolute owner and holder hereof for
any purpose and as the person entitled to exercise the rights represented by
this Warrant and to the registration of transfer hereof on the books of the
Company; but until due presentment for registration of transfer on such books
the Company may treat the registered holder hereof as the owner and holder
hereof for all purposes, and the Company shall not be affected by any notice to
the contrary.
(b) Warrant Exchangeable for Different Denominations. This Warrant is
exchangeable, upon the surrender hereof by the holder hereof at the office or
agency of the Company referred to in Paragraph 7(e) hereof, for new Warrants of
like tenor representing in the aggregate the right to purchase the number of
shares of Common Stock which may be purchased hereunder, each of such new
Warrants to be imprinted with the same legend appearing on the face of this
Warrant and to represent the right to purchase such number of shares as shall be
designated by said holder hereof at the time of such surrender. For purposes
hereof, the term "Warrant" shall be deemed to include any and all such
replacement Warrants, whether issued pursuant to this subparagraph (b) or any
other Paragraph hereof.
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<PAGE>
(c) Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
(d) Cancellation; Payment of Expenses. Upon the surrender of this
Warrant in connection with any transfer, exchange, or replacement as provided in
this Paragraph 7, this Warrant shall be promptly canceled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses and charges payable in connection with the preparation, execution, and
delivery of Warrants pursuant to this Paragraph 7.
(e) Register. The Company shall maintain, at its principal office in
Fort Worth, Texas (or such other office or agency of the Company as it may
designate by notice to the holder hereof), a register for this Warrant, in which
the Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant.
(f) Registration Rights. The issuance of any Warrant Shares required
to be reserved for purposes of exercise of this Warrant and the resale of such
Warrant Shares are entitled to the benefits of the registration rights set forth
in the Purchase Agreement.
8. Notices. All notices, requests, and other communications required or
permitted to be given or delivered hereunder to the holder of this Warrant shall
be in writing, and shall be personally delivered, or shall be sent by certified
or registered mail, postage prepaid and addressed, to such holder at the address
shown for such holder on the books of the Company, or at such other address as
shall have been furnished to the Company by notice from such holder. All
notices, requests, and other communications required or permitted to be given or
delivered hereunder to the Company shall be in writing, and shall be personally
delivered, or shall be sent by certified or registered mail, postage prepaid and
addressed, to the office of the Company at 777 Main Street, Fort Worth, Texas
76102, Attention: Chief Financial Officer, or at such other address as shall
have been furnished to the holder of this Warrant by notice from the Company.
Any such notice, request, or other communication may be sent by telegram or
telex, but shall in such case be subsequently confirmed by a writing personally
delivered or sent by certified or registered mail as provided above. All
notices, requests, and other communications shall be deemed to have been given
either at the time of the delivery thereof to (or the receipt by, in the case of
a telegram or telex) the person entitled to receive such notice at the address
of such person for purposes of this Paragraph 8, or, if mailed, at the
completion of the third full day following the time of such mailing thereof to
such address, as the case may be.
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<PAGE>
9. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH THE LAWS OF DELAWARE, WITHOUT REGARD TO ANY
CHOICE OF LAW PRINCIPLES OF SUCH STATE.
10. Remedies. The Company stipulates that the remedies at law of the
holder of this Warrant in the event of any default or threatened default by the
Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific enforcement of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.
11. Miscellaneous.
(a) Amendments. This Warrant and any provision hereof may not be
changed, waived, discharged, or terminated orally, but only by an instrument in
writing signed by the party (or any predecessor in interest thereof) against
which enforcement of the same is sought.
(b) Descriptive Headings. The descriptive headings of the several
paragraphs of this Warrant are inserted for purposes of reference only, and
shall not affect the meaning or construction of any of the provisions hereof.
(c) Successors and Assigns. This Warrant shall, to the extent provided
in Section 4(e), be binding upon any entity succeeding to the Company by merger,
consolidation, or acquisition of all or substantially all the Company's assets.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer under its corporate seal, attested by its duly
authorized officer, on this __ day of June __, 1997.
CRESCENT OPERATING, INC.
By:__________________________
Name: Gerald W. Haddock
Title: President and Chief
Executive Officer
[CORPORATE SEAL]
Attest:
_____________________________
Jeffrey L. Stevens, Secretary
<PAGE>
FORM OF EXERCISE AGREEMENT
Dated: _____________, ____.
To: ____________________
____________________
____________________
Attention: ________
The undersigned, pursuant to the provisions set forth in the within
Warrant, hereby agrees to purchase _____ shares of Common Stock covered by such
Warrant, and makes payment herewith in full therefor at the price per share
provided by such Warrant [in cash or by certified or official bank check in the
amount of $______________] held by the undersigned and any applicable taxes
payable by undersigned. Please issue a certificate or certificates for such
shares of Common Stock in the name of and pay any cash for any fractional share
to:
Name:___________________________________________________
Signature:______________________________________________
Title of Signing Officer or Agent (if any):_____________
Note: The above signature should correspond
exactly with the name on the face of the
within Warrant or with the name of the
assignee appearing in the assignment form.
and, if said number of shares of Common Stock shall not be all the shares
purchasable under the within Warrant, a new Warrant is to be issued in the name
of said undersigned covering the balance of the shares purchasable thereunder
less any fraction of a share paid in cash.
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers all the rights represented by and under the within Warrant, with
respect to the number of shares of Common Stock covered thereby set forth
hereinbelow, to:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
, and hereby irrevocably constitutes and appoints _______________________ as
agent and attorney-in-fact to transfer said Warrant on the books of the
within-named corporation, with full power of substitution in the premises.
Dated: ______________, ____.
In the presence of
- -----------------------------------
Name:_________________________________________
Signature:____________________________________
Title of Signing Officer or Agent
(if any):_____________________________________
Address: _____________________________________
Note: The above signature should correspond
exactly with the name on the face of
the within Warrant.
<PAGE>
