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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X]
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[ ]
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ____ to ____
Commission File Number 1-12306
INTEGRATED HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 23-2428312
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
10065 RED RUN BLVD.
OWINGS MILLS, MARYLAND 21117
(Address of principal executive offices) (Zip code)
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Registrant's telephone number, including area code: 410-998-8400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered:
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Common Stock, par value
$.001 per share New York Stock Exchange
10 1/4% Senior Subordinated
Notes due 2006 New York Stock Exchange
9 1/2% Senior Subordinated
Notes due 2007 New York Stock Exchange
9 1/4% Senior Subordinated
Notes due 2008 New York Stock Exchange
5 3/4% Convertible Senior
Subordinated Debentures due 2001 New York Stock Exchange
6% Convertible Subordinated
Debentures due 2003 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
Aggregate market value of the Registrant's Common Stock held by
non-affiliates at March 18, 1998 (based on the closing sale price for such
shares as reported by the New York Stock Exchange): $1,651,788,293.
Common Stock outstanding as of March 18, 1998: 44,269,033 shares.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 1998 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
report.
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PART I
ITEM 1. BUSINESS
GENERAL OVERVIEW
Integrated Health Services, Inc. ("IHS" or the "Company") is one of the
nation's leading providers of post-acute healthcare services. Post-acute care is
the provision of a continuum of care to patients following discharge from an
acute care hospital. IHS' post-acute care services include subacute care,
skilled nursing facility care, home respiratory care, home health nursing care,
other homecare services and contract rehabilitation, hospice, lithotripsy and
diagnostic services. The Company's post-acute care network is designed to
address the fact that the cost containment measures implemented by private
insurers and managed care organizations and limitations on government
reimbursement of hospital costs have resulted in the discharge from hospitals of
many patients who continue to require medical and rehabilitative care. IHS'
post-acute healthcare system is intended to provide cost-effective continuity of
care for its patients in multiple settings and enable payors to contract with
one provider to provide all of a patient's needs following discharge from acute
care hospitals. The Company believes that its post-acute care network can be
extended beyond post-acute care to also provide "pre-acute" care, i.e., services
to patients which reduce the likelihood of a need for a hospital stay. IHS'
post-acute care network currently consists of over 2,000 service locations in 48
states and the District of Columbia.
The Company's post-acute care network strategy is to provide cost-effective
continuity of care for its patients in multiple settings, using geriatric care
facilities as platforms to provide a wide variety of subacute medical and
rehabilitative services more typically delivered in the acute care hospital
setting and using home healthcare to provide those medical and rehabilitative
services which do not require 24-hour monitoring. To implement its post-acute
care network strategy, IHS has focused on (i) developing market concentration
for its post-acute care services in targeted states due to increasing payor
consolidation and the increased preference of payors, physicians and patients
for dealing with only one service provider; (ii) expanding the range of home
healthcare and related services it offers to patients directly in order to
provide patients with a continuum of care throughout their recovery, to better
control costs and to meet the growing desire by payors for one-stop shopping;
and (iii) developing subacute care units. Given the increasing importance of
managed care in the healthcare marketplace and the continued cost containment
pressures from Medicare, Medicaid and private payors, the Company has been
restructuring its operations to enable IHS to focus on obtaining contracts with
managed care organizations and to provide capitated services. IHS' strategy is
to become a preferred or exclusive provider of post-acute care services to
managed care organizations and other payors.
In implementing its post-acute care network strategy, IHS has recently
focused on expanding its home healthcare services to take advantage of
healthcare payors' increasing focus on having healthcare provided in the
lowest-cost setting possible, recent advances in medical technology which have
facilitated the delivery of medical services in alternative sites and patients'
desires to be treated at home. Consistent with the Company's strategy, IHS in
October 1996 acquired First American Health Care of Georgia Inc. ("First
American"), a provider of home health services, principally home nursing, in 21
states, primarily Alabama, California, Florida, Georgia, Michigan, Pennsylvania
and Tennessee. IHS in October 1997 acquired RoTech Medical Corporation
("RoTech"), a provider of home healthcare products and services, with an
emphasis on home respiratory, home medical equipment and infusion therapy,
principally to patients in non-urban areas (the "RoTech Acquisition"). In
October 1997, IHS also acquired (the "Coram Lithotripsy Acquisition") the
lithotripsy division (the "Coram Lithotripsy Division") of Coram Healthcare
Corporation ("Coram"), which provided lithotripsy services and equipment
maintenance in 180 locations in 18 states, in order to expand the mobile
diagnostic treatment and services it offers to patients, payors and other
providers. Lithotripsy is a non-invasive technique that utilizes shock waves to
disintegrate kidney stones. IHS intends to use the home healthcare setting and
the delivery franchise of the home healthcare branch and agency network to (i)
deliver sophisticated care, such as skilled nursing care, home respiratory
therapy and rehabilitation, outside the hospital or nursing home; (ii) serve as
an entry point for patients into the IHS post-acute care network; and (iii)
provide a cost-effective site for case management and patient direction.
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IHS has also continued to expand its post-acute care network by increasing
the number of facilities it operates or manages. In September 1997, IHS acquired
Community Care of America, Inc. ("CCA"), which develops and operates skilled
nursing facilities in medically underserved rural communities (the "CCA
Acquisition"). IHS believes that CCA will broaden its post-acute care network to
include more rural markets and will complement its existing home care locations
in rural markets as well as RoTech's business. In addition, in December 1997,
IHS acquired from HEALTHSOUTH Corporation ("HEALTHSOUTH") 139 owned, leased or
managed long-term care facilities and 12 specialty hospitals, as well as a
contract therapy business having over 1,000 contracts and an institutional
pharmacy business serving approximately 38,000 beds (the "Facility
Acquisition").
The Company provides subacute care through medical specialty units
("MSUs"), which are typically 20 to 75 bed specialty units with physical
identities, specialized medical technology and staffs separate from the
geriatric care facilities in which they are located. MSUs are designed to
provide comprehensive medical services to patients who have been discharged from
acute care hospitals but who still require subacute or complex medical
treatment. The levels and quality of care provided in the Company's MSUs are
similar to those provided in the hospital but at per diem treatment costs which
IHS believes are generally 30% to 60% below the cost of such care in acute care
hospitals. Because of the high level of specialized care provided, the Company's
MSUs generate substantially higher net revenue and operating profit per patient
day than traditional geriatric care services.
IHS presently operates 312 geriatric care facilities (260 owned or leased
and 52 managed), excluding 18 facilities acquired in the CCA Acquisition and 20
facilities acquired in the Facility Acquisition which are being held for sale,
and 158 MSUs located within 84 of these facilities. Specialty medical services
revenues, which include all MSU charges, all revenue from providing
rehabilitative therapies, pharmaceuticals, medical supplies and durable medical
equipment to all its patients, all revenue from its Alzheimer's programs and all
revenue from its provision of pharmacy, rehabilitation therapy, home healthcare,
hospice care and similar services to third-parties, constituted approximately
65%, 70% and 79% of net revenues during the years ended December 31, 1995, 1996
and 1997, respectively. IHS also offers a wide range of basic medical services
as well as a comprehensive array of respiratory, physical, speech, occupational
and physiatric therapy in all its geriatric care facilities. For the year ended
December 31, 1997, approximately 35% of IHS' revenues were derived from home
health and hospice care, approximately 44% were derived from subacute and other
ancillary services, approximately 19% were derived from traditional basic
nursing services, and approximately 2% were derived from management and other
services. On a pro forma basis after giving effect to the acquisitions
consummated by IHS in 1997, for the year ended December 31, 1997, approximately
30% of IHS' revenues were derived from home health and hospice care,
approximately 43% were derived from subacute and other ancillary services,
approximately 26% were derived from traditional basic nursing home services and
the remaining approximately 1% were derived from management and other services.
INDUSTRY BACKGROUND
In 1983, the Federal government acted to curtail increases in healthcare
costs under Medicare, a Federal insurance program under the Social Security Act
primarily for individuals age 65 or over. Instead of continuing to reimburse
hospitals on a cost plus basis (i.e., the hospital's actual cost of care plus a
specified return on investment), the Federal government established a new type
of payment system based on prospectively determined prices rather than
retrospectively determined costs, with payment for inpatient hospital services
based on regional and national rates established under a system of
diagnosis-related groups ("DRGs"). As a result, hospitals bear the cost risk of
providing care inasmuch as they receive specified reimbursement for each
treatment regardless of actual cost.
Concurrent with the change in government reimbursement of healthcare costs,
a "managed care" segment of the healthcare industry emerged based on the theme
of cost containment. The health maintenance organizations and preferred provider
organizations, which constitute the managed care segment, are able to limit
hospitalization costs by giving physicians incentives to reduce hospital
utilization and by negotiating discounted fixed rates for hospital services. In
addition, traditional third party indemnity insurers began to limit
reimbursement to pre-determined amounts of "reasonable charges," regardless
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of actual cost, and to increase the amount of co-payment required to be paid by
patients, thereby requiring patients to assume more of the cost of hospital
care. These changes have resulted in the earlier discharge of patients from
acute care hospitals.
At the same time, the number of people over the age of 65 began to grow
significantly faster than the overall population. Further, advances in medical
technology have increased the life expectancies of an increasingly large number
of medically complex patients, many of whom require a high degree of monitoring
and specialized care and rehabilitative therapy that is generally not available
outside the acute care hospital. However, the changes in government and
third-party reimbursement and growth of the managed care segment of the
healthcare industry, when combined with the fact that the cost of providing care
to these patients in an acute care hospital is higher than in a non-acute care
hospital setting, provide economic incentives for acute care hospitals and
patients or their insurers to minimize the length of stay in acute care
hospitals. The early discharge from hospitals of patients who are not fully
recovered and still require medical care and rehabilitative therapy has
significantly contributed to the rapid growth of the home healthcare industry,
as have recent advances in medical technology, which have facilitated the
delivery of services in alternate sites, demographic trends, such as an aging
population, and a preference for home healthcare among patients. As a result,
home healthcare is among the fastest growing areas in healthcare.
However, for some of these patients home healthcare is not a viable
alternative because of their continued need for a high degree of monitoring,
more intensive and specialized medical care, 24-hour per day nursing care and a
comprehensive array of rehabilitative therapy. As a result, IHS believes there
is an increasing need for non-acute care hospital facilities which can provide
the monitoring, specialized care and comprehensive rehabilitative therapy
required by the growing population of subacute and medically complex patients.
Recent healthcare reform proposals, which have focused on containment of
healthcare costs, together with the desire of third party payors to contract
with one service provider for all post-acute care services, the increasing
complexity of medical services provided, growing regulatory and compliance
requirements and increasingly complicated reimbursement systems, have resulted
in a trend of consolidation of smaller, local operators who lack the
sophisticated management information systems, operating efficiencies and
financial resources to compete effectively into larger, more established
regional or national operators that offer a broad range of services, either
through its own network or through subcontracts with other third party service
providers.
The Balanced Budget Act of 1997 (the "BBA"), enacted in August 1997, makes
numerous changes to the Medicare and Medicaid programs that could significantly
affect the delivery of subacute care, skilled nursing facility care and home
healthcare. With respect to Medicare, the BBA provides, among other things, for
a prospective payment system for skilled nursing facilities to be implemented
for cost reporting periods beginning on or after July 1, 1998, a prospective
payment system for home nursing to be implemented for cost reporting periods
beginning on or after October 1, 1999, a reduction in current cost reimbursement
for home nursing care pending implementation of a prospective payment system,
reductions in reimbursement for oxygen and oxygen equipment for home respiratory
therapy and a shift of the bulk of home health coverage from Part A to Part B of
Medicare. With respect to Medicaid, the BBA repeals the so-called Boren
Amendment, which required state Medicaid programs to reimburse nursing
facilities for the costs that are incurred by efficiently and economically
operated providers in order to meet quality and safety standards. As a result,
states now have considerable flexibility in establishing payment rates.
COMPANY STRATEGY
The Company's post-acute care network strategy is to provide cost-effective
continuity of care for its patients in multiple settings, using geriatric care
facilities as platforms to provide a wide variety of subacute medical and
rehabilitative services more typically delivered in the acute care hospital
setting and using home healthcare to provide those medical and rehabilitative
services which do not require 24-hour monitoring. IHS believes that the success
of its post-acute care network strategy will depend in large part on its ability
to control each component of the post-acute care delivery system in order to
provide low-cost, high quality outcomes. The central elements of the Company's
business strategy are:
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Vertical Integration of Post-acute Care Services. IHS is expanding the
range of home healthcare and related services it offers to its patients directly
in order to serve the full spectrum of patient needs following acute
hospitalization. In addition to subacute care, the Company is now able to offer
directly to its patients, rather than through third-party providers, home
respiratory care, home nursing care, other homecare services, rehabilitation
(physical, occupational and speech), hospice care, lithotripsy services and
mobile x-ray and electrocardiogram services. As a full service provider, IHS
believes that it is better able to respond to the needs of its patients and
referral sources. In addition, the Company believes that by offering managed
care organizations and insurance companies a single source from which to obtain
a full continuum of care to patients following discharge from the acute care
hospital, it will attract healthcare payors seeking to improve the management of
healthcare quality as well as to reduce servicing and administrative expenses.
IHS also believes that offering a broad range of services will allow it to
better control certain costs, which will provide it with a competitive advantage
in contracting with managed care companies and offering capitated rates, whereby
the Company assumes the financial risk for the cost of care.
Expansion of Home-Based Services. The Company's strategy is to expand its
home healthcare services to take advantage of healthcare payors' increasing
focus on having healthcare provided in the lowest-cost setting possible and
patients' desires to be treated at home. IHS believes that the nation's aging
population, when combined with advanced technology which allows more healthcare
procedures to be performed at home, has resulted in an increasingly large number
of patients with long-term chronic conditions that can be treated effectively in
the home. In addition, a significant number of patients discharged from the
Company's MSUs require home healthcare. IHS also believes that it can expand its
home healthcare services to cover pre-acute, as well as post-acute, patients by
having home healthcare nurses provide preventive care services to home-bound
senior citizens. In addition, the Company believes that home healthcare will
help IHS contain costs, thereby providing it with a competitive advantage in
contracting with managed care companies and offering capitated rates. IHS
believes that the changing healthcare reimbursement environment, with the focus
on cost containment, will require healthcare providers to go "at risk" under
capitated service agreements, and that home healthcare will be a critical
component of its ability to do so. However, until a prospective payment system
for home nursing services is implemented under Medicare, IHS does not expect to
acquire additional home nursing companies and is currently exploring a
"spin-off" or other divestiture of its home nursing operations. IHS will,
however, continue to offer home nursing services as part of its post-acute care
services either by managing home nursing for third parties or contracting with
home nursing agencies for such services.
Focus on Managed Care. Given the increasing importance of managed care in
the healthcare marketplace and the continued cost containment pressures from
Medicare and Medicaid, IHS has, during 1996 and 1997, restructured its
operations to position IHS to focus on obtaining contracts with managed care
organizations and to provide capitated services. IHS' strategy is to become a
preferred or exclusive provider of post-acute care services to managed care
organizations and other payors. Although to date there has been limited demand
among managed care organizations for post-acute care services, IHS believes
demand will increase as HMOs continue to attempt to control healthcare costs and
to penetrate the Medicare market. As part of its focus on managed care and
capitated rates, IHS spent several years collecting outcome data for more than
80,000 patients. To date, the Company has service agreements with approximately
550 managed care organizations. In January 1996, IHS was chosen as the exclusive
capitated provider for five years of long-term care, subacute care and therapy
services to Sierra Health Plan's Health Plan of Nevada ("Sierra Health"), the
largest HMO in Nevada with approximately 28,000 Medicare enrollees and 145,000
commercial enrollees. As the exclusive provider, IHS provides all contracted
services to the HMOs' members; as a capitated provider, the Company accepts full
risk of patient care in exchange for a flat fee per enrollee. The agreement with
Sierra Health provides for annual capitation adjustments and the ability to
increase revenue through non-capitated services, although there can be no
assurance that these provisions will be effective to protect IHS. In September
1997, this agreement was extended through December 2002. In addition, in October
1996 the Company entered into a three-year agreement to provide, on an exclusive
basis, long-term and subacute care to patients of Foundation Health Corporation,
an HMO located in Florida, on a capitated basis. Foundation Health currently has
24,500 Medicare and 60,000 commercial enrollees. The agreement provides for
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increased revenues to IHS for reduced hospital utilization. Although IHS has
attempted to minimize its risk under the contract, there can be no assurance
that safeguards it implemented will be effective. In March 1998, the Company
entered into a one-year agreement with Prudential HealthCare(Reg. TM) pursuant
to which IHS will become a national provider of subacute care, long-term care,
home respiratory services, mobile diagnostic services (where available) and home
health services to Prudential HealthCare plan members. The agreement provides
that IHS will be presented to each local Prudential HealthCare plan as one of
two choices to provide such services to plan members. Generally, the local plan
will be required to sign one of the two national providers presented to it. See
"-- Cautionary Statements -- Risks Related to Managed Care Strategy."
Provide Subacute Care. The Company's strategy is designed to take advantage
of the need for early discharge of many patients from acute care hospitals by
providing the monitoring and specialized care still required by these persons
after discharge from acute care hospitals at per diem treatment costs which IHS
believes are generally 30% to 60% below the cost of care in acute care
hospitals. IHS also intends to continue to use its geriatric care facilities to
meet the increasing need for cost-efficient, comprehensive rehabilitation
treatment of these patients. To date, IHS has used MSUs as subacute specialty
units within its geriatric care facilities. The primary MSU programs currently
offered by IHS are complex care programs, ventilator programs, wound management
programs and cardiac care programs; other programs offered include subacute
rehabilitation, oncology and HIV. The Company opened its first MSU program in
April 1988 and currently operates 158 MSU programs in 84 facilities. IHS also
emphasizes the care of medically complex patients through the provision of a
comprehensive array of respiratory, physical, speech, occupational and
physiatric therapy. The Company intends that its MSUs be a lower cost
alternative to acute care or rehabilitation hospitalization of subacute or
medically complex patients. IHS intends to expand its specialty medical services
at its existing and newly acquired facilities. The Company believes that its
subacute care programs also serve as an important referral base for its home
healthcare and ancillary services. While IHS added 1,098 MSU beds in 1994 and
938 MSU beds in 1995, it added only an additional 383 MSU beds in 1996 and 185
beds in 1997. With the implementation of a prospective payment system for
skilled nursing facilities under Medicare, which will begin for IHS in 1999, IHS
intends to continue to provide subacute care services in its skilled nursing
facilities, although it does not anticipate continuing to expand significantly
its MSUs to provide such services.
Concentration on Targeted Markets. The Company has implemented a strategy
focused on the development of market concentration for its post-acute care
services in targeted states due to increasing payor consolidation. IHS also
believes that by offering its services on a concentrated basis in targeted
markets, together with the vertical integration of its services, it will be
better positioned to meet the needs of managed care payors. The Company now has
approximately 2,000 service locations in 48 states and the District of Columbia,
including 312 geriatric care facilities in 36 states (52 of which IHS manages),
with 63 service locations, including 12 geriatric care facilities (10 of which
IHS manages), in California, 46 service locations, including 13 geriatric care
facilities, in Colorado, 246 service locations, including 35 geriatric care
facilities (eight of which IHS manages), in Florida, 30 service locations,
including seven geriatric care facilities, in Kansas, 50 service locations,
including 16 geriatric care facilities, in Louisiana, 18 service locations,
including 11 geriatric care facilities, in Nebraska, 26 service locations,
including 15 geriatric care facilities, in Nevada, 42 service locations,
including 24 geriatric care facilities, in New Mexico, 97 service locations,
including 34 geriatric care facilities (13 of which IHS manages), in Ohio, 121
service locations, including 15 geriatric care facilities (three of which IHS
manages), in Pennsylvania, and 244 service locations, including 50 geriatric
care facilities (seven of which IHS manages), in Texas.
Expansion Through Acquisition. IHS has grown substantially through
acquisitions and the opening of MSUs and the acquisition of home healthcare and
related service providers, and expects to continue to expand its business by
acquiring additional geriatric care facilities in which to provide subacute care
and rehabilitation services, by expanding the amount of home healthcare and
related services it offers directly to its patients rather than through
third-party providers and by expanding the subacute care and rehabilitation
services in its existing geriatric care facilities. From January 1, 1991 to
date, IHS has increased the number of geriatric care facilities it owns or
leases from 25 to 260 (excluding the 38 facilities held for sale), has increased
the number of facilities it manages from 18 to 52 and has increased the number
of MSU programs it operates from 13 to 158. In addition, the Company now offers
certain
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related services, such as home healthcare, rehabilitation, lithotripsy, x-ray
and electrocardiogram, directly to its patients rather than relying on
third-party providers. See "-- Cautionary Statements -- Risks Associated with
Growth Through Acquisitions and Internal Development."
PATIENT SERVICES
BASIC MEDICAL SERVICES
IHS provides a wide range of basic medical services at its geriatric care
facilities which are licensed as skilled care nursing homes. Services provided
to all patients include required nursing care, room and board, special diets,
and other services which may be specified by a patient's physician who directs
the admission, treatment and discharge of the patient.
SPECIALTY MEDICAL SERVICES
Medical Specialty Units
IHS' MSUs are typically 20 to 75 bed subacute specialty care units located
within discrete areas of IHS' facilities, with physical identities, specialized
medical technology and medical staffs separate from the geriatric care
facilities in which they are located. An intensive care unit nurse, or a nurse
with specialty qualifications, serves as clinical coordinator of each unit,
which generally is staffed with nurses having experience in the acute care
setting. The operations of each MSU are generally overseen by a Board certified
specialist in that unit's area of treatment. The patients in each MSU are
provided with a high degree of monitoring and specialized care similar to that
provided by acute care hospitals. The physiological monitoring equipment
required by the MSU is equivalent to that found in the acute care hospital. IHS
opened its first MSU program during April 1988 and currently operates 158 MSUs
at 84 facilities. Approximately one-third of all of the Company's MSU patients
are under the age of 70.
Although each MSU has most of the treatment capabilities of an acute care
hospital in the MSU's area of specialization, IHS believes the per diem
treatment costs are generally 30% to 60% less than in acute care hospitals.
Additionally, the MSU is less "institutional" in nature than the acute care
hospital, families may visit MSU patients whenever they wish and family
counseling is provided. In marketing its MSU programs to insurers and healthcare
providers, IHS emphasizes the cost advantage of its treatment as compared to
acute care hospitals. IHS also emphasizes the improved "quality of life"
compared to acute care and long-term care hospitals in marketing its MSU
programs to hospital patients and their families. The primary MSU programs
currently offered by IHS are complex care programs, ventilator programs, wound
management programs and cardiac care programs; other programs offered include
subacute rehabilitation, oncology and HIV.
Complex Care Program. This program is designed to treat persons who are
generally subacute or chronically ill and sick enough to be treated in an acute
care hospital. Persons requiring this care include post-surgical patients,
cancer patients and patients with other diseases requiring long recovery
periods. This program is designed to provide the monitoring and specialized care
these patients require but in a less institutional and more cost efficient
setting than provided by hospitals. Some of the monitoring and specialized care
provided to these patients are apnea monitoring, continuous peripheral
intravenous therapy with or without medication, continuous subcutaneous
infusion, chest percussion and postural drainage, gastrostomy or naso-gastric
tube feeding, ileostomy or fistula care (including patient teaching),
post-operative care, tracheostomy care, and oral, pharyngeal or tracheal
suctioning. Patients in this program also typically undergo intensive
rehabilitative services to allow them to return home.
Ventilator Program. This program is designed for persons who require
ventilator assistance for breathing because of respiratory disease or
impairment. Persons requiring ventilation include sufferers of chronic
obstructive pulmonary disease, muscular atrophy and respiratory failure,
pneumonia, cancer, spinal cord or traumatic brain injury and other diseases or
injuries which impair respiration. Ventilators assist or effect respiration in
patients unable to breathe adequately for themselves by injecting heated,
humidified, oxygen-enriched air into the lungs at a pre-determined volume per
breath and number of
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breaths per minute and by controlling the relationship of inhalation time to
exhalation time. Patients in this program undergo respiratory rehabilitation to
wean them from ventilators by teaching them to breathe on their own once they
are medically stable. Patients are also trained to use the ventilators on their
own.
Wound Management Programs. These programs are designed to treat persons
suffering from post operative complications and persons infected by certain
forms of penicillin and other antibiotic resistant bacteria, such as methicillin
resistant staphylococcus aureus ("MRSA"). Patients infected with these types of
bacteria must be isolated under strict infection control procedures to prevent
the spread of the resistant bacteria, which makes MSUs an ideal treatment site
for these patients. Because of the need for strict infection control, including
isolation, treatment of this condition in the home is not practical.
Cardiac Care Program. This program is designed to treat persons suffering
from congestive heart failure, severe cardiac arrhythmia, pre/post transplants
and other cardiac diagnoses. The monitoring and specialized care provided to
these patients includes electrocardiographic monitoring/telemetry, continuous
hemodynamic monitoring, infusion therapy, cardiac rehabilitation, stress
management and dietary counseling, planning and education.
The Company believes that MSU programs can be developed to address a wide
variety of medical conditions which require specialized care. In addition, IHS
has developed MSU programs for subacute rehabilitation, oncology and HIV.
Rehabilitation
IHS provides a comprehensive array of rehabilitative services for patients
at all of its geriatric care facilities, including those in its MSU programs, in
order to enable those persons to return home. These services include respiratory
therapy with licensed respiratory therapists, physical therapy with a particular
emphasis on programs for the elderly, speech therapy, particularly for the
elderly recovering from cerebral vascular disorders, occupational therapy, and
physiatric care. A portion of the rehabilitative service hours are provided by
independent contractors. In order to reduce the number of rehabilitative
services hours provided by independent contractors, IHS began in late 1993 to
acquire companies which provide physical, occupational and speech therapy to
healthcare facilities.
The Company also offers a rehabilitation program to stroke victims and
persons who have undergone hip replacement.
The Company also offers rehabilitation services to skilled nursing
facilities not operated or managed by the Company. IHS believes that by offering
a comprehensive array of rehabilitative services through one provider, skilled
nursing facilities can provide quality patient care more efficiently and
cost-effectively. The Company believes that demand for a single provider for a
comprehensive array of rehabilitative services will increase as a result of the
prospective payment system being implemented under the BBA, which provides for a
fixed payment for these services.
Home Healthcare Services
IHS provides a broad spectrum of home healthcare services to the
recovering, disabled, chronically ill or terminally ill person. Home healthcare
services may be as basic as assisting with activities of daily living or as
complex as cancer chemotherapy. Care involves either or both a service component
(provided by registered nurses, home health aides, therapists and technicians
through periodic visits) and a product component (drugs, equipment and related
supplies). Time spent with a patient may range from one or two visits to
around-the-clock care. Patients may be treated for several weeks, several months
or the remainder of their lives. The home healthcare market is generally divided
into four segments: nursing services; infusion therapy; respiratory therapy; and
home medical equipment.
Home Nursing. Home nursing is the largest component of home healthcare, the
most labor-intensive and generally the least profitable. Home nursing services
range from skilled care provided by registered and other nurses, typically for
those recently discharged from hospitals, to unskilled services delivered by
home health aides for those needing help with the activities of daily living.
Home nursing also
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includes physical, occupational and speech therapy, as well as social worker
services. IHS substantially expanded its home nursing services through the
acquisition of First American, and currently provides home nursing services at
approximately 500 locations in 29 states. IHS is currently exploring a
"spin-off" or other divestiture of its home nursing operations, although IHS
intends to continue to offer home nursing services as part of its post-acute
care services either by managing home nursing for third parties or contracting
with home nursing agencies for such services. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Acquisition and Divestiture History."
Infusion Therapy. Infusion therapy, the second largest home healthcare
market, involves the intravenous administration of anti-infective, biotherapy,
chemotherapy, pain management, nutrition and other therapies. Infusion therapy
generally requires patient training, specialized equipment and periodic
monitoring by skilled nurses. Technological advances such as programmable pumps
that control frequency and intensity of delivery are increasing the percentage
of infections and diseases that are treatable in the home; previously these
infections and diseases generally required patients to be hospitalized. Home
infusion therapy is more skilled-labor-intensive than other home healthcare
segments. The acquisition of RoTech significantly expanded IHS' home infusion
therapy services.
Respiratory Therapy. Respiratory therapy is provided primarily to older
patients with chronic lung diseases (such as chronic obstructive pulmonary
disease, asthma and cystic fibrosis) or reduced respiratory function. The most
common therapy is home oxygen, delivered through oxygen gas systems, oxygen
concentration or liquid oxygen systems. Respiratory therapy is monitored by
licensed respiratory therapists and other clinical staff under the direction of
physicians. The acquisition of RoTech significantly expanded IHS' respiratory
therapy services.
Home Medical Equipment. Home medical equipment consists of the sale or
rental of medical equipment such as specialized beds, wheelchairs, walkers,
rehabilitation equipment and other patient aids. The acquisition of RoTech
significantly expanded IHS' provision of home medical equipment.
Lithotripsy Services
Lithotripsy is a non-invasive technique that uses shock waves to
disintegrate kidney stones. Depending on the particular lithotripter used, the
patient is sedated using either general anesthesia or a mild sedative while
seated in a bath or lying on a treatment table. The operator of the lithotripter
machine locates the stone using fluoroscopy and directs the shock waves toward
the stone. The shock waves then fragment the stone, thereby enabling the patient
to pass the fragments through the urinary tract. Because lithotripsy is
non-invasive and is provided on an outpatient basis, lithotripsy is an
attractive alternative to other more invasive techniques otherwise used in
treating urinary tract stones.
IHS currently owns a controlling interest in 10 lithotripsy partnerships as
well as two wholly owned lithotripsy partnerships and a wholly owned
lithotripter maintenance company. The Company's lithotripsy businesses currently
consist of an aggregate of 35 lithotripsy machines that provide services in 170
locations in 17 states. The other owners of the partnerships are primarily
physicians, many of whom utilize the partnership's equipment to treat their
patients. Seventeen of the 35 lithotripsy machines are stationary and located at
hospitals or ambulatory surgery centers, while the other 18 machines are mobile,
allowing them to be moved in order to meet patient needs and market demands.
IHS' lithotripsy businesses typically lease the machine on a per procedure basis
to a hospital, ambulatory surgery center or other facility providing care to the
patient. In some cases, the lithotripsy businesses bill the patient directly for
the use of the partnership's machine. The Company also provides maintenance
services to its own and third-party equipment.
The Company's agreements with its lithotripsy physician partners
contemplate that IHS will acquire the remaining interest in each partnership at
a defined price in the event that legislation is passed or regulations are
adopted that would prevent the physician from owning an interest in the
partnership and using the partnership's lithotripsy equipment for the treatment
of his or her patients. While current interpretations of existing law are
subject to considerable uncertainty, IHS believes that its partnership
arrangements with physicians in its lithotripsy business are in compliance with
current law. If, however, the Company were required to acquire the minority
interest of its physician partners in each of its lithotripsy partnerships, the
cost in aggregate would be material to IHS.
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In 1993, the Health Care Financing Administration ("HFCA") released a
proposed rule defining the rate at which ambulatory surgery centers and certain
hospitals would be reimbursed for the technical component of a lithotripsy
procedure. This proposed rule has not been finalized. IHS cannot predict what
the final rate for such reimbursement will be or what effect, if any, the
adoption of this proposed rule would have on lithotripsy revenue and whether
this decreased reimbursement rate will be applied to lithotripsy procedures
performed at hospitals, where a majority of IHS' lithotripsy machines are
currently utilized.
Mobile Diagnostic Services
The Company provides on-call mobile x-ray and electrocardiogram services,
both to its own facilities as well as to facilities operated by others. These
services are provided year round to over 8,100 facilities.
Alzheimer's Program
IHS also offers a specialized treatment program for persons with
Alzheimer's disease. This program, called "The Renaissance Program," is located
in a specially designed wing separated from the remainder of the facility. The
physical environment is designed to address the problems of disorientation and
perceptual confusion experienced by Alzheimer's sufferers. The Renaissance
Program is designed to help reduce the stress and agitation of Alzheimer's
disease by addressing the problems of short attention spans and hyperactivity.
The staff for this program is specially recruited and staff training is highly
specialized. This program is designed not only to provide care to persons
suffering from Alzheimer's disease, but also to work with the patient's family.
IHS currently offers The Renaissance Program at 12 of its geriatric care
facilities with a total of 345 beds. Patients pay a small premium to IHS' per
diem rate for basic medical care to participate in this program.
Hospice Services
IHS provides hospice services, including medical care, counseling and
social services, to the terminally ill in the greater Chicago metropolitan area,
Michigan and Pennsylvania. Hospice care is a coordinated program of support
services providing physical, psychological, social and spiritual care for dying
persons and their families. Services are provided in the home and/or inpatient
settings. The goal of hospice care is typically to improve a terminal patient's
quality of life rather than trying to extend life. IHS also provides hospice
care to the terminally ill at its facility in Miami, Florida.
MANAGEMENT AND OTHER SERVICES
The Company manages geriatric care facilities under contract for others to
capitalize on its specialized care programs without making the capital outlay
generally required to acquire and renovate a facility. IHS currently manages 52
geriatric care facilities with 6,212 licensed beds. IHS is responsible for
providing all personnel, marketing, nursing, resident care, dietary and social
services, accounting and data processing reports and services for these
facilities, although such services are provided at the facility owner's expense.
The facility owner is also obligated to pay for all required capital
expenditures. The Company manages these facilities in the same manner as the
facilities it owns or leases, and provides the same geriatric care services as
are provided in its owned or leased facilities. Contract acquisition costs for
legal and other direct costs incurred to acquire long-term management contracts
are capitalized and amortized over the term of the related contract.
IHS receives a management fee for its services which generally is equal to
4% to 8% of gross revenues of the geriatric care facility. Certain management
agreements also provide the Company with an incentive fee based on the amount of
the facility's operating income which exceeds stipulated amounts. Management fee
revenues are recognized when earned and billed generally on a monthly basis.
Incentive fees are recognized when operating results of managed facilities
exceed amounts required for incentive fees in accordance with the terms of the
management agreements. The management agreements generally have an initial term
of ten years, with IHS having a right to renew in most cases. The management
agreements expire at various times between December 1998 and February 2006
although all can be terminated earlier
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under certain circumstances. The Company generally has a right of first refusal
in respect of the sale of each managed facility. IHS believes that by
implementing its specialized care programs and services in these facilities, it
will be able to increase significantly the operating income of these facilities
and thereby increase the management fees the Company will receive for managing
these facilities.
IHS also manages private duty and Medicare certified home health agencies
in the Dallas/Fort Worth, Texas market.
QUALITY ASSURANCE
The Company has developed a comprehensive Quality Assurance Program to
verify that high standards of care are maintained at each facility operated or
managed by IHS. The Company requires that its facilities meet standards of care
more rigorous than those required by Federal and state law. Under the Company's
Quality Assurance Program standards for delivery of care are set and the care
and services provided by each facility are evaluated to insure they meet IHS'
standards. A quality assurance team evaluates each facility bi-annually,
reporting directly to IHS' Chief Executive Officer and to the Chief Operating
Officer, as well as to the administrator of each facility. Facility
administrator bonuses are dependent in part upon their facility's evaluation.
The Company also maintains an 800 number, called the "In-Touch Line," which is
prominently displayed above telephones in each facility and placed in patients'
bills. Patients and staff are encouraged to call this number if they have any
problem with nursing or administrative personnel which cannot be resolved
quickly at the facility level. This program provides IHS with an early-warning
of problems which may be developing at the facility.
IHS has also developed a specialized Quality Assurance Program for its MSU
programs. IHS has begun a program to obtain accreditation by the Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO") for each of
its facilities. At March 1, 1998, 88 of the Company's facilities had been fully
accredited by the JCAHO.
OPERATIONS
The day-to-day operations of each facility are managed by an on-site state
licensed administrator, and an on-site business office manager monitors the
financial operations of each facility. The administrator of each facility is
supported by other professional personnel, including the facility's medical
director, social workers, dietician and recreation staff. Nursing departments in
each facility are under the supervision of a director of nursing who is
state-registered. The nursing staffs are composed of registered nurses and
licensed practical nurses as well as nursing assistants.
The Company's home healthcare businesses are conducted through
approximately 500 branches which are managed through three geographic area
offices. The area office provides each of its branches with key management
direction and support services. IHS' organizational structure is designed to
create operating efficiencies associated with certain centralized services and
purchasing while also promoting local decision making.
IHS' corporate staff provides services such as marketing assistance,
training, quality assurance oversight, human resource management, reimbursement
expertise, accounting, cash management and treasury functions, internal auditing
and management support. Financial control is maintained through fiscal and
accounting policies that are established at the corporate level for use at each
facility and branch location. The Company has standardized operating procedures
and monitors its facilities and branch locations to assure consistency of
operations. IHS emphasizes frequent communications, the setting of operational
goals and the monitoring of actual results. The Company uses a financial
reporting system which enables it to monitor, on a daily basis, certain key
financial data at each facility such as payor mix, admissions and discharges,
cash collections, net revenue and staffing.
Each facility and branch location has all necessary state and local
licenses. Most facilities are certified as providers under the Medicare and
Medicaid programs of the state in which they are located.
SOURCES OF REVENUE
IHS receives payments for services rendered to patients from private
insurers and patients themselves, from the Federal government under Medicare,
and from the states in which certain of its facilities are located under
Medicaid. The sources and amounts of the Company's patient revenues are
determined by a
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number of factors, including licensed bed capacity of its facilities, occupancy
rate, the mix of patients and the rates of reimbursement among payor categories
(private, Medicare and Medicaid). Changes in the mix of IHS' patients among the
private pay, Medicare and Medicaid categories can significantly affect the
profitability of the Company's operations. Generally, private pay patients are
the most profitable and Medicaid patients are the least profitable. See "--
Federal and State Assistance Programs."
During the years ended December 31, 1995, 1996 and 1997, IHS derived
approximately $509.3 million, $562.5 million and $656.6 million, respectively,
or 44.7%, 40.5% and 33.6%, respectively, of its patient revenues from private
pay sources and approximately $629.8 million, $826.4 million and $1.3 billion,
respectively, or 55.3%, 59.5% and 66.4%, respectively, of its patient revenues
from government reimbursement programs. Patient revenues from government
reimbursement programs during these periods consisted of approximately $387.2
million, $516.7 million and $963.0 million, or 34.0%, 37.2% and 49.3% of total
patient revenues, respectively, from Medicare and approximately $242.6 million,
$309.7 million and $334.4 million, respectively, or 21.3%, 22.3% and 17.1% of
total patient revenues, respectively, from Medicaid. The increase in the
percentage of revenue from government reimbursement programs is due to the
higher level of Medicare and Medicaid patients serviced by the respiratory
therapy, rehabilitative therapy, home healthcare and mobile diagnostic companies
acquired beginning in 1994. In addition, IHS received payments from third
parties for its management and other services, which constituted approximately
3.3%, 3.2% and 2.0% of total net revenues for the years ended December 31, 1995,
1996 and 1997, respectively.
On a pro forma basis after giving effect to the acquisitions consummated by
IHS in 1997, during the year ended December 31, 1997, IHS derived approximately
$1.1 billion, or 31.1%, of its patient revenues from private pay sources and
approximately $2.4 billion, or 68.9%, of its patient revenues from government
reimbursement programs. Pro forma patient revenues from government reimbursement
programs during 1997 consisted of approximately $1.6 billion, or 44.5%, from
Medicare and approximately $857.3 million, or 24.4% from Medicaid.
Gross third party payor settlements receivable, primarily from Federal and
state governments (i.e., Medicare and Medicaid cost reports), were $58.5 million
at December 31, 1997, as compared to $42.6 million at December 31, 1996 and
$33.0 million at December 31, 1995. Approximately $12.8 million, or 21.9%, of
the third party payor settlements receivable, primarily from Federal and state
governments, at December 31, 1997 represent the costs for its MSU patients which
exceed regional reimbursement limits established under Medicare, as compared to
approximately $15.6 million, or 37%, at December 31, 1996 and approximately $7.6
million, or 23%, at December 31, 1995.
The Company's cost of care for its MSU patients generally exceeds regional
reimbursement limits established under Medicare. The success of IHS' MSU
strategy depends in part on its ability to obtain per diem rate approvals for
costs which exceed the Medicare established per diem rate limits and by
obtaining waivers of these limitations. IHS has submitted waiver requests for
325 cost reports, covering all cost report periods through December 31, 1996. To
date, final action has been taken by HCFA on all 325 waiver requests. The
Company's final rates as approved by HCFA represent approximately 95% of the
requested rates as submitted in the waiver requests. There can be no assurance,
however, that IHS will be able to recover its excess costs under any waiver
requests which may be submitted in the future. IHS' failure to recover
substantially all these excess costs would adversely affect its results of
operations and could adversely affect its MSU strategy. The implementation of a
prospective payment program for skilled nursing facilities under Medicare, which
IHS will begin in 1999, will significantly change the way IHS is paid for its
MSU care.
The BBA, enacted in August 1997, provides, among other things, for a
prospective payment system for skilled nursing facilities to be implemented for
cost reporting periods beginning on or after July 1, 1998, a prospective payment
system for home nursing to be implemented for cost reporting periods beginning
on or after October 1, 1999, a reduction in current cost reimbursement for home
nursing care pending implementation of a prospective payment system, reductions
(effective January 1, 1998) in Medicare reimbursement for oxygen and oxygen
equipment for home respiratory therapy and a shift of the bulk of home health
coverage from Part A to Part B of Medicare. The inability of IHS to provide
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home healthcare and/or skilled nursing services at a cost below the established
Medicare fee schedule could have a material adverse effect on IHS' home
healthcare operations, post-acute care network and business generally. In
addition, the BBA's repeal of the Boren Amendment, which required state Medicaid
programs to reimburse nursing facilities for the costs that are incurred by
efficiently and economically operated providers in order to meet quality and
safety standards, gives states considerable flexibility in establishing payment
rates.
Both private third party and governmental payors have undertaken cost
containment measures designed to limit payments made to healthcare providers
such as IHS. Furthermore, government programs are subject to statutory and
regulatory changes, retroactive rate adjustments, administrative rulings and
government funding restrictions, all of which may materially increase or
decrease the rate of program payments to facilities managed and operated by IHS.
There can be no assurance that payments under governmental and third-party
private payor programs will remain at levels comparable to present levels or
will, in the future, be sufficient to cover the costs allocable to patients
participating in such programs. In addition, there can be no assurance that
facilities owned, leased or managed by IHS now or in the future will initially
meet or continue to meet the requirements for participation in such programs.
The Company could be adversely affected by the continuing efforts of
governmental and private third party payors to contain the amount of
reimbursement for healthcare services. In an attempt to limit the Federal and
state budget deficits, there have been, and IHS expects that there will continue
to be, a number of additional proposals to limit Medicare and Medicaid
reimbursement for healthcare services. The Company cannot at this time predict
whether this legislation or any other legislation will be adopted or, if adopted
and implemented, what effect, if any, such legislation will have on IHS. See "--
Government Regulation" and "-- Cautionary Statements -- Risk of Adverse Effect
of Healthcare Reform."
GOVERNMENT REGULATION
The healthcare industry is subject to extensive federal, state and local
statutes and regulations. The regulations include licensure requirements,
reimbursement rules and standards and levels of services and care. Changes in
applicable laws and regulations or new interpretations of existing laws and
regulations could have a material adverse effect on licensure of IHS'
facilities, eligibility for participation in Federal and state programs,
permissible activities, costs of doing business, or the levels of reimbursement
from governmental, private and other sources. Political, economic and regulatory
influences are subjecting the healthcare industry in the United States to
fundamental change. It is not possible to predict the content or impact of
future legislation and regulations affecting the healthcare industry.
Most states in which IHS operates have statutes which require that prior to
the addition or construction of new beds, the addition of new services or
certain capital expenditures in excess of defined levels, the Company must
obtain a certificate of need ("CON") which certifies that the state has made a
determination that a need exists for such new or additional beds, new services
or capital expenditures. These state determinations of need or CON programs are
designed to comply with certain minimum Federal standards and to enable states
to participate in certain Federal and state health-related programs. Elimination
or relaxation of CON requirements may result in increased competition in such
states and may also result in increased expansion possibilities in such states.
Of the states in which the Company operates, the following require CONs for the
facilities that are owned, operated or managed by IHS: Alabama, Colorado,
Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky,
Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana,
Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, Ohio, Oklahoma,
South Carolina, Tennessee, Texas, Virginia, Washington, West Virginia and
Wisconsin. To date the conversion of geriatric care beds to MSU beds has not
required a CON.
The Company's facilities are also subject to licensure regulations. Each of
IHS' geriatric care facilities is licensed as a skilled care facility and
substantially all are certified as a provider under the Medicare program and
most are also certified by the state in which they are located as a provider
under the Medicaid program of that state. IHS believes it is in substantial
compliance with all material statutes and regulations applicable to its
business. In addition, all healthcare facilities are subject to various local
building codes and other ordinances.
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State and local agencies survey all geriatric care centers on a regular
basis to determine whether such centers are in compliance with governmental
operating and health standards and conditions for participation in government
medical assistance programs. Such surveys include reviews of patient utilization
of healthcare facilities and standards for patient care. IHS endeavors to
maintain and operate its facilities in compliance with all such standards and
conditions. However, in the ordinary course of its business the Company's
facilities receive notices of deficiencies for failure to comply with various
regulatory requirements. Generally, the facility and the reviewing agency will
agree upon the measures to be taken to bring the facility into compliance with
regulatory requirements. In some cases or upon repeat violations, the reviewing
agency may take adverse actions against a facility, including the imposition of
fines, temporary suspension of admission of new patients to the facility,
suspension or decertification from participation in the Medicare or Medicaid
programs, and, in extreme circumstances, revocation of a facility's license.
These adverse actions may adversely affect the ability of the facility to
operate or to provide certain services and its eligibility to participate in the
Medicare or Medicaid programs. In addition, such adverse actions may adversely
affect other facilities operated by IHS. See "-- Federal and State Assistance
Programs."
The operations of the Company's home healthcare branches are subject to
numerous Federal and state laws governing pharmacies, nursing services, therapy
services and certain types of home health agency activities. Certain of IHS'
employees are subject to state laws and regulations governing the professional
practice of respiratory therapy, physical, occupational, and speech therapies,
pharmacy and nursing. The failure to obtain, to renew or to maintain any of the
required regulatory approvals or licenses could adversely affect the Company's
home healthcare business and could prevent the branch involved from offering
products and services to patients. Generally, IHS is required to be licensed as
a home health agency in those states in which it provides traditional home
health or home nursing services. IHS' ability to expand its home healthcare
services will depend upon its ability to obtain licensure as a home health
agency, which may be restricted by state CON laws.
In September 1997, President Clinton, in an attempt to curb Medicare fraud,
imposed a moratorium on the certification under Medicare of new home healthcare
companies, which moratorium expired in January 1998, and implemented rules
requiring home healthcare providers to reapply for Medicare certification every
three years. In addition, HCFA will double the number of detailed audits of home
healthcare providers it completes each year and increase by 25% the number of
home healthcare claims it reviews each year. IHS cannot predict what effect, if
any, these new rules will have on IHS' business and the expansion of its home
healthcare operations.
Various Federal and state laws regulate the relationship between providers
of healthcare services and physicians or others able to refer medical services,
including employment or service contracts, leases and investment relationships.
These laws include the fraud and abuse provisions of Medicare and Medicaid and
similar state statutes (the "Fraud and Abuse Laws"), which prohibit the payment,
receipt, solicitation or offering of any direct or indirect remuneration
intended to induce the referral of Medicare or Medicaid patients or for the
ordering or providing of Medicare or Medicaid covered services, items or
equipment. Violations of these provisions may result in civil and criminal
penalties and/or exclusion from participation in the Medicare and Medicaid
programs and from state programs containing similar provisions relating to
referrals of privately insured patients. The Department of Health and Human
Services ("HHS") and other federal agencies have interpreted these provisions
broadly to include the payment of anything of value to influence the referral of
Medicare or Medicaid business. HHS has issued regulations which set forth
certain "safe harbors," representing business relationships and payments that
can safely be undertaken without violation of the Fraud and Abuse Laws. In
addition, certain Federal and state requirements generally prohibit certain
providers from referring patients to certain types of entities in which such
provider has an ownership or investment interest or with which such provider has
a compensation arrangement, unless an exception is available. The Company
considers all applicable laws in planning marketing activities and exercises
care in an effort to structure its arrangements with healthcare providers to
comply with these laws. However, there can be no assurance that all of IHS'
existing or future arrangements will withstand scrutiny under the Fraud and
Abuse Laws, safe harbor regulations or other state or federal legislation or
regulations, nor can IHS predict the effect of such rules and regulations on
these arrangements in particular or on IHS' operations in general.
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The Company's healthcare operations generate medical waste that must be
disposed of in compliance with Federal, state and local environmental laws,
rules and regulations. IHS' operations are also subject to compliance with
various other environmental laws, rules and regulations. Such compliance has not
materially affected, and IHS anticipates that such compliance will not
materially affect, the Company's capital expenditures, earnings or competitive
position, although there can be no assurance to that effect.
In addition to extensive existing government healthcare regulation, there
are numerous initiatives on the Federal and state levels for comprehensive
reforms affecting the payment for and availability of healthcare services. It is
not clear at this time what proposals, if any, will be adopted or, if adopted,
what effect such proposals would have on IHS' business. Aspects of certain of
these healthcare proposals, such as cutbacks in the Medicare and Medicaid
programs, containment of healthcare costs on an interim basis by means that
could include a short-term freeze on prices charged by healthcare providers, and
permitting greater state flexibility in the administration of Medicaid, could
adversely affect IHS. See "-- Sources of Revenue" and "-- Cautionary Statements
- -- Uncertainty of Government Regulation." There can be no assurance that
currently proposed or future healthcare legislation or other changes in the
administration or interpretation of governmental healthcare programs will not
have an adverse effect on the Company. Concern about the potential effects of
the proposed reform measures has contributed to the volatility of prices of
securities of companies in healthcare and related industries, including IHS, and
may similarly affect the price of the Company's securities in the future. IHS
cannot predict the ultimate timing or effect of such legislative efforts and no
assurance can be given that any such efforts will not have a material adverse
effect on the Company's business, results of operations and financial condition.
FEDERAL AND STATE ASSISTANCE PROGRAMS
Substantially all of IHS' geriatric care facilities are currently certified
to receive benefits as a skilled nursing facility provided under the Health
Insurance for the Aged and Disabled Act (commonly referred to as "Medicare"),
and substantially all are also certified under programs administered by the
various states using federal and state funds to provide medical assistance to
qualifying needy individuals ("Medicaid"). Both initial and continuing
qualification of a skilled nursing care facility to participate in such programs
depend upon many factors including, among other things, accommodations,
equipment, services, patient care, safety, personnel, physical environment, and
adequate policies, procedures and controls.
Services under Medicare consist of nursing care, room and board, social
services, physical and occupational therapies, drugs, biologicals, supplies,
surgical, ancillary diagnostic and other necessary services of the type provided
by extended care or acute care facilities. Under the Medicare program, the
federal government pays the reasonable direct and indirect allowable costs
(including depreciation and interest) of the services furnished and, through
September 30, 1993, provided a rate of return on equity capital (as defined
under Medicare). However, IHS' cost of care for its MSU patients generally
exceeds regional reimbursement limits established under Medicare. The Company
has submitted waiver requests to recover these excess costs. See "-- Sources of
Revenue." There can be no assurance, however, that IHS will be able to recover
its excess costs under the pending waiver requests or under any waiver requests
which may be submitted in the future. IHS' failure to recover substantially all
these excess costs would adversely affect its results of operations and could
adversely affect its MSU strategy. Even though the Company's cost of care for
its MSU patients generally exceeds regional reimbursement limits established
under Medicare for nursing homes, IHS' cost of care is still lower than the cost
of such care in an acute care hospital.
Under the new prospective payment system for Medicare reimbursement to
skilled nursing facilities, facilities will receive a pre-established daily rate
for each individual Medicare beneficiary being cared for, based on the activity
level of the patient. The pre-established daily rate will cover all routine,
ancillary and capital costs. This prospective payment system will be phased in
over four years on a blended rate of the facility-specific costs and the new
federal per diem, which has not to date been established. The blended rate for
the first year of transition will take 75% of the facility-specific per diem
rate and 25% of the federal per diem rate. In each subsequent transition year,
the facility-specific per diem rate component will decrease by 25% and the
federal per diem rate component will increase by 25%, ultimately resulting in a
rate based 100% upon the federal per diem. The facility-specific per diem
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rate is based upon the facility's 1995 cost report for routine, ancillary and
capital services, updated using a skilled nursing market basket index. The
federal per diem is calculated by the weighted average of each facility's
standardized costs, based upon the historical national average per diem for
freestanding facilities. Prospective payment for IHS' owned and leased skilled
nursing facilities will be effective beginning January 1, 1999 for all
facilities other than the facilities acquired from HEALTHSOUTH in the Facility
Acquisition, which will become subject to prospective payment on June 1, 1999.
Prospective payment for skilled nursing facilities managed by IHS will be
effective for each facility at the beginning of its first cost reporting period
beginning on or after July 1, 1998. The new prospective payment system will also
cover ancillary services provided to patients at skilled nursing facilities.
The Medicare program reimburses for home healthcare services under two
basic systems: cost-based and charge-based. Under the cost-based system, IHS is
reimbursed at the lowest of IHS' reimbursable costs (based on Medicare
regulations), cost limits established by HCFA or IHS' charges. While a small
amount of corporate level overhead is permitted as part of reimbursable costs
under Medicare regulations, such costs consist predominantly of expenses and
charges directly incurred in providing the related services, and cannot include
any element of profit or net income to IHS. Under the charge-based system,
Medicare reimburses the Company on a "prospective payment" basis, which consists
in general of either a fixed fee for a specific service or a fixed per diem
amount for providing certain services. As a result, IHS can generate profit or
net income from Medicare charge-based revenues by providing covered services in
an efficient, cost-effective manner. All nursing services (including related
products) are Medicare cost-based reimbursed, except for nursing services
provided to hospice patients. Hospice care and all other home healthcare
services (including non-nursing related products) are Medicare charge-based
reimbursed. The BBA provides for a reduction in current cost reimbursement for
home nursing care pending implementation of a prospective payment system.
The BBA requires that Medicare implement a prospective payment system for
home nursing services for cost reporting periods beginning on or after October
1, 1999, and implementation of a prospective payment system will be a critical
element to the success of the Company's expansion into home nursing services.
Based upon prior legislative proposals, IHS believes that a prospective payment
system would most likely provide for prospectively established per visit
payments to be made for all covered services, which are then subject to an
annual aggregate per episode limit at the end of the year. Home health agencies
that are able to keep their total expenses per visit during the year below their
per episode annual limits will be able to retain a specified percentage of the
difference, subject to certain aggregate limitations. Such changes could have a
material adverse effect on the Company and its growth strategy. The
implementation of a prospective payment system will require the Company to make
contingent payments related to the acquisition of First American of $155 million
over a period of five years. The failure to implement a prospective payment
system for home nursing services in the next several years could adversely
affect IHS' post-acute care network strategy. See "-- Cautionary Statements --
Risks Related to Recent Acquisitions." There can be no assurance that Medicare
will implement a prospective payment system for home nursing services in the
next several years or at all. The inability of IHS to provide home healthcare
services at a cost below the established Medicare fee schedule could have a
material adverse effect on the Company's home healthcare operations and its
post-acute care network.
Under the various Medicaid programs, the federal government supplements
funds provided by the participating states for medical assistance to qualifying
needy individuals. The programs are administered by the applicable state welfare
or social service agencies. Although Medicaid programs vary from state to state,
typically they provide for the payment of certain expenses, up to established
limits. The BBA repeals the so-called Boren Amendment, which required state
Medicaid programs to reimburse nursing facilities for the costs that are
incurred by efficiently and economically operated providers in order to meet
quality and safety standards. By repealing the Boren Amendment, the BBA eases
the impediments on the states' ability to reduce their Medicaid reimbursement
for such services and, as a result, states now have considerable flexibility in
establishing payment rates. The majority of the MSU programs are not required to
participate in the various state Medicaid programs. However, should the
Company's MSU programs be required to admit Medicaid patients as a condition to
continued participation in such programs by the facility in which the MSU
program is located, IHS' results of operations
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could be adversely affected since IHS' cost of care in its MSU programs is
substantially in excess of state Medicaid reimbursement rates.
Funds received by the Company under Medicare and Medicaid are subject to
audit with respect to the proper preparation of annual cost reports upon which
reimbursement is based. Such audits can result in retroactive adjustments of
revenue from these programs, resulting in either amounts due to the government
agency from IHS or amounts due IHS from the government agency.
Both the Medicare and Medicaid programs are subject to statutory and
regulatory changes, administrative rulings, interpretations of policy
determinations by insurance companies acting as Medicare fiscal intermediaries
and governmental funding restrictions, all of which may materially increase or
decrease the rate of program payments to healthcare facilities. Since 1985,
Congress has consistently attempted to limit the growth of Federal spending
under the Medicare and Medicaid programs. IHS can give no assurance that
payments under such programs will in the future remain at a level comparable to
the present level or be sufficient to cover the operating and fixed costs
allocable to such patients. Changes in reimbursement levels under Medicare or
Medicaid and changes in applicable governmental regulations could significantly
affect IHS' results of operations. It is uncertain at this time whether
legislation on healthcare reform will ultimately be implemented or whether other
changes in the administration or interpretation of governmental healthcare
programs will occur. There can be no assurance that future healthcare
legislation or other changes in the administration or interpretation of
governmental healthcare programs will not have an adverse effect on the results
of operations of IHS. The Company cannot at this time predict whether any
healthcare reform legislation will be adopted or, if adopted and implemented,
what effect, if any, such legislation will have on IHS. See "-- Cautionary
Statements -- Risk of Adverse Effect of Healthcare Reform."
COMPETITION
The healthcare industry is highly competitive and is subject to continuing
changes in the provision of services and the selection and compensation of
providers. IHS competes on a local and regional basis with other providers on
the basis of the breadth and quality of its services, the quality of its
facilities and, to a limited extent, price. The Company also competes with other
providers in the acquisition and development of additional facilities and
service providers. IHS' current and potential competitors include national,
regional and local operators of geriatric care facilities, acute care hospitals
and rehabilitation hospitals, extended care centers, retirement centers and
community home health agencies and similar institutions, many of which have
significantly greater financial and other resources than IHS. In addition, the
Company competes with a number of tax-exempt nonprofit organizations which can
finance acquisitions and capital expenditures on a tax-exempt basis or receive
charitable contributions unavailable to IHS. New service introductions and
enhancements, acquisitions, continued industry consolidation and the development
of strategic relationships by the Company's competitors could cause a
significant decline in sales or loss of market acceptance of the Company's
services or intense price competition, or make IHS' services noncompetitive.
Further, technological advances in drug delivery systems and the development of
new medical treatments that cure certain complex diseases or reduce the need for
healthcare services could adversely impact the business of IHS. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors or that competitive pressures will not have a material
adverse effect on the Company's business, financial condition and results of
operations. IHS also competes with various healthcare providers with respect to
attracting and retaining qualified management and other personnel. Any
significant failure by IHS to attract and retain qualified employees could have
a material adverse effect on its business, results of operations and financial
condition.
The geriatric care facilities operated and managed by IHS primarily compete
on a local and regional basis with other skilled care providers. The Company's
MSUs primarily compete on a local basis with acute care and long-term care
hospitals. In addition, some skilled nursing facilities have developed units
which provide a greater level of care than the care traditionally provided by
nursing homes. The degree of success with which IHS' facilities compete varies
from location to location and depends on a number of factors. The Company
believes that the specialized services and care provided, the quality of care
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provided, the reputation and physical appearance of facilities and, in the case
of private pay patients, charges for services, are significant competitive
factors. In light of these factors, IHS seeks to meet competition in each
locality by improving the appearances of, and the quality and types of services
provided at, its facilities, establishing a reputation within the local medical
communities for providing competent care services, and by responding
appropriately to regional variations in demographics and tastes. There is
limited, if any, competition in price with respect to Medicaid and Medicare
patients, since revenues for services to such patients are strictly controlled
and based on fixed rates and cost reimbursement principles. Because IHS'
facilities compete primarily on a local and regional basis rather than a
national basis, the competitive position of IHS varies from facility to facility
depending upon the types of services and quality of care provided by facilities
with which each of IHS' facilities compete, the reputation of the facilities
with which each of IHS' facilities compete, and, with respect to private pay
patients, the cost of care at facilities with which each of IHS' facilities
compete.
The home healthcare market is highly competitive and is divided among a
large number of providers, some of which are national providers but most of
which are either regional or local providers. IHS believes that the primary
competitive factors are availability of personnel, the price of the services and
quality considerations such as responsiveness, the technical ability of the
professional staff and the ability to provide comprehensive services.
The market for specialty medical services is highly fragmented and
competitive. The Company believes the primary competitive factors are quality of
services, charges for services and responsiveness to the needs of patients,
families and the facilities in which such services are provided.
EMPLOYEES
As of March 15, 1998, IHS had approximately 86,000 full-time and regular
part-time employees. Full-time and regular part-time service and maintenance
employees at 54 facilities, totaling approximately 4,100 employees, are covered
by collective bargaining agreements. IHS' corporate staff consisted of
approximately 1,900 people at such date. The Company believes its relations with
its employees are good.
IHS seeks the highest quality of professional staff within each market.
Competition in the recruitment of personnel in the health care industry is
intense, particularly with respect to nurses. Many areas are already facing
nursing shortages, and it is expected that the shortages will increase in the
future. Although the Company has, to date, been successful in hiring and
retaining nurses and rehabilitation professionals, IHS in the future may
experience difficulty in hiring and retaining nurses and rehabilitation
professionals. The Company believes that its future success and the success of
its MSU programs will depend in large part upon its continued ability to hire
and retain qualified personnel.
INSURANCE
Healthcare companies are subject to medical malpractice, personal injury
and other liability claims which are generally covered by insurance. The Company
maintains liability insurance coverage in amounts deemed appropriate by
management based upon historical claims and the nature and risks of its
business. There can be no assurance that a future claim will not exceed
insurance coverage or that such coverage will continue to be available. In
addition, any substantial increase in the cost of such insurance could have an
adverse effect on IHS' business, results of operations and financial condition.
CAUTIONARY STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements regarding the Company's
expected future financial position, results of operations, cash flows, financing
plans, business strategy, competitive position, plans and objectives and words
such as "anticipate," "believe," "estimate," "expect," "intend," "plan" and
other similar expressions are forward-looking statements. Such forward-looking
statements are inherently uncertain, and stockholders must recognize that actual
results could differ materially from those projected or contemplated in the
forward-looking statements as a result of a variety of factors, including the
following:
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Risks Related to Substantial Indebtedness. The Company's indebtedness is
substantial in relation to its stockholders' equity. At December 31, 1997, IHS'
total long-term debt, including current portion, accounted for 74.8% of its
total capitalization. IHS also has significant lease obligations with respect to
the facilities operated pursuant to long-term leases, which aggregated
approximately $704.9 million at December 31, 1997. For the year ended December
31, 1997 the Company's rent expense was $105.1 million ($163.7 million on a pro
forma basis after giving effect to the acquisitions consummated by IHS in 1997).
In addition, IHS is obligated to pay up to an additional $155 million in respect
of the acquisition of First American during 2000 to 2004 under certain
circumstances, of which $113.0 million (representing the present value thereof)
has been recorded at December 31, 1997. The Company's strategy of expanding its
specialty medical services and growing through acquisitions may require
additional borrowings in order to finance working capital, capital expenditures
and the purchase price of any acquisitions. The degree to which the Company is
leveraged, as well as its rent expense, could have important consequences to
securityholders, including: (i) IHS' ability to obtain additional financing in
the future for working capital, capital expenditures, acquisitions or general
corporate purposes may be impaired, (ii) a substantial portion of IHS' cash flow
from operations may be dedicated to the payment of principal and interest on its
indebtedness and rent expense, thereby reducing the funds available to IHS for
its operations, (iii) certain of IHS' borrowings bear, and will continue to
bear, variable rates of interest, which expose IHS to increases in interest
rates, and (iv) certain of IHS' indebtedness contains financial and other
restrictive covenants, including those restricting the incurrence of additional
indebtedness, the creation of liens, the payment of dividends and sales of
assets and imposing minimum net worth requirements. In addition, IHS' leverage
may also adversely affect IHS' ability to respond to changing business and
economic conditions or continue its growth strategy. There can be no assurance
that IHS' operating results will be sufficient for the payment of IHS'
indebtedness. If IHS were unable to meet interest, principal or lease payments,
or satisfy financial covenants, it could be required to seek renegotiation of
such payments and/or covenants or obtain additional equity or debt financing. If
additional funds are raised by issuing equity securities, the Company's
stockholders may experience dilution. Further, such equity securities may have
rights, preferences or privileges senior to those of the Common Stock. To the
extent IHS finances its activities with additional debt, IHS may become subject
to certain additional financial and other covenants that may restrict its
ability to pursue its growth strategy and to pay dividends on the Common Stock.
There can be no assurance that any such efforts would be successful or timely or
that the terms of any such financing or refinancing would be acceptable to IHS.
See "-- Risks Related to Capital Requirements."
In connection with IHS' offering of its 9 1/4% Senior Subordinated Notes
due 2008 (the "9 1/4% Senior Notes"), Standard & Poors ("S&P") confirmed its B
rating of IHS' other subordinated debt obligations, but with a negative outlook,
and assigned the same rating to the 9 1/4% Senior Notes. In November 1997, S&P
placed the Company's senior credit and subordinated debt ratings on CreditWatch
with negative implications due to the proposed Facility Acquisition and in
January 1998 S&P downgraded IHS' corporate credit and bank loan ratings to B+
and its subordinated debt ratings to B- as a result of the Facility Acquisition.
S&P stated that the speculative grade ratings reflect the Company's high debt
leverage and aggressive acquisition strategy, uncertainties with respect to
future government efforts to control Medicare and Medicaid and the unknown
impact on IHS of recent changes in healthcare regulation providing for a
prospective payment system for both nursing homes and home healthcare. S&P noted
IHS' outlook was stable. In connection with the offering of the 9 1/4% Senior
Notes, Moody's Investors Service ("Moody's") downgraded to B2 the Company's
other senior subordinated debt obligations, but noted that the outlook for the
rating was stable, and assigned the new rating to the 9 1/4% Senior Notes.
Moody's stated that the rating action reflects Moody's concern about the
Company's continued rapid growth through acquisitions, which has resulted in
negative tangible equity of $114 million, making no adjustment for the $259
million of convertible debt of IHS outstanding. Moody's also stated that the
availability provided by the Company's new credit facility and the 9 1/4% Senior
Notes positioned the Company to complete sizable acquisition transactions using
solely debt. Moody's further noted that the rating reflects that there are
significant changes underway in the reimbursement of services rendered by IHS,
and that the exact impact of these changes is uncertain.
Risks Associated with Growth Through Acquisitions and Internal Development.
IHS' growth strategy involves growth through acquisitions and internal
development and, as a result, IHS is subject to
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various risks associated with this growth strategy. The Company's planned
expansion and growth require that the Company expand its home healthcare
services through the acquisition of additional home healthcare providers and
that the Company acquire, or establish relationships with, third parties which
provide post-acute care services not currently provided by the Company and that
the Company acquire, lease or acquire the right to manage for others additional
facilities. Such expansion and growth will depend on the Company's ability to
create demand for its post-acute care programs, the availability of suitable
acquisition, lease or management candidates and the Company's ability to finance
such acquisitions and growth. The successful implementation of the Company's
post-acute healthcare system, including the capitation of rates, will depend on
the Company's ability to expand the amount of post-acute care services it offers
directly to its patients rather than through third-party providers. There can be
no assurance that suitable acquisition candidates will be located, that
acquisitions can be consummated, that acquired facilities and companies can be
successfully integrated into the Company's operations, or that the Company's
post-acute healthcare system, including the capitation of rates, can be
successfully implemented. The post-acute care market is highly competitive, and
the Company faces substantial competition from hospitals, subacute care
providers, rehabilitation providers and home healthcare providers, including
competition for acquisitions. The Company anticipates that competition for
acquisition opportunities will intensify due to the ongoing consolidation in the
healthcare industry. See "-- Risks Related to Managed Care Strategy" and "--
Competition."
The successful integration of acquired businesses, including First
American, RoTech, CCA, the Coram Lithotripsy Division and the facilities and
other businesses acquired from HEALTHSOUTH, is important to the Company's future
financial performance. The anticipated benefits from any of these acquisitions
may not be achieved unless the operations of the acquired businesses are
successfully combined with those of the Company in a timely manner. The
integration of the Company's recent acquisitions will require substantial
attention from management. The diversion of the attention of management, and any
difficulties encountered in the transition process, could have a material
adverse effect on the Company's operations and financial results. In addition,
the process of integrating the various businesses could cause the interruption
of, or a loss of momentum in, the activities of some or all of these businesses,
which could have a material adverse effect on the Company's operations and
financial results. There can be no assurance that the Company will realize any
of the anticipated benefits from its acquisitions. The acquisition of service
companies that are not profitable, or the acquisition of new facilities that
result in significant integration costs and inefficiencies, could also adversely
affect the Company's profitability.
IHS' current and anticipated future growth has placed, and will continue to
place, significant demands on the management, operational and financial
resources of IHS. The Company's ability to manage its growth effectively will
require it to continue to improve its operational, financial and management
information systems and to continue to attract, train, motivate, manage and
retain key employees. There can be no assurance that IHS will be able to manage
its expanded operations effectively. See "-- Risks Related to Capital
Requirements."
There can be no assurance that the Company will be successful in
implementing its strategy or in responding to ongoing changes in the healthcare
industry which may require adjustments to its strategy. If IHS fails to
implement its strategy successfully or does not respond timely and adequately to
ongoing changes in the healthcare industry, the Company's business, financial
condition and results of operations will be materially adversely affected.
Risks Related to Managed Care Strategy. Managed care payors and traditional
indemnity insurers have experienced pressure from their policyholders to curb or
reduce the growth in premiums paid to such organizations for healthcare
services. This pressure has resulted in demands on healthcare service providers
to reduce their prices or to share in the financial risk of providing care
through alternate fee structures such as capitation or fixed case rates. Given
the increasing importance of managed care in the healthcare marketplace and the
continued cost containment pressures from Medicare and Medicaid, IHS has been
restructuring its operations to enable IHS to focus on obtaining contracts with
managed care organizations and to provide capitated services. The Company
believes that its home healthcare capabilities will be an important component of
its ability to provide services under capitated and other alternate fee
arrangements. However, to date there has been limited demand among managed care
organizations for post-acute care network
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services, and there can be no assurance that demand for such services will
increase. Further, IHS has limited experience in providing services under
capitated and other alternate fee arrangements and setting the applicable rates.
Accordingly, there can be no assurance that the fees received by IHS will cover
the cost of services provided. If revenue for capitated services is insufficient
to cover the treatment costs, IHS' operating results could be adversely
affected. As a result, the success of IHS' managed care strategy will depend in
large part on its ability to increase demand for post-acute care services among
managed care organizations, to obtain favorable agreements with managed care
organizations and to manage effectively its operating and healthcare delivery
costs through various methods, including utilization management and competitive
pricing for purchased services. Additionally, there can be no assurance that
pricing pressures faced by healthcare providers will not have a material adverse
effect on the Company's business, results of operations and financial condition.
Further, pursuing a strategy focused on risk-sharing fee arrangements
entails certain regulatory risks. Many states impose restrictions on a service
provider's ability to provide capitated services unless it meets certain
financial criteria, and may view capitated fee arrangements as an insurance
activity, subjecting the entity accepting the capitated fee to regulation as an
insurance company rather than merely a licensed healthcare provider accepting a
business risk in connection with the manner in which it is charging for its
services. The laws governing risk-sharing fee arrangements for healthcare
service providers are evolving and are not certain at this time. If the
risk-sharing activities of IHS require licensure as an insurance company, there
can be no assurance that IHS could obtain or maintain the necessary licensure,
or that IHS would be able to meet any financial criteria imposed by a state. If
the Company were precluded from providing services under risk-sharing fee
arrangements, its managed care strategy would be adversely affected. See "--
Uncertainty of Government Regulation."
Risks Related to Capital Requirements. IHS' growth strategy requires
substantial capital for the acquisition of additional home healthcare and
related service providers and geriatric care facilities. The effective
integration, operation and expansion of the existing businesses will also
require substantial capital. The Company expects to finance new acquisitions
from a combination of funds from operations, borrowings under its bank credit
facility and the issuance of debt and equity securities. IHS may raise
additional capital through the issuance of long-term or short-term indebtedness
or the issuance of additional equity securities in private or public
transactions, at such times as management deems appropriate and the market
allows. Any of such financings could result in dilution of existing equity
positions, increased interest and amortization expense or decreased income to
fund future expansion. There can be no assurance that acceptable financing for
future acquisitions or for the integration and expansion of existing businesses
and operations can be obtained. The Company's bank credit facility limits the
Company's ability to make acquisitions, and certain of the indentures under
which the Company's outstanding senior subordinated debt securities were issued
limit the Company's ability to incur additional indebtedness unless certain
financial tests are met. See "-- Risks Related to Substantial Indebtedness."
Risks Related to Recent Acquisitions. IHS has recently completed several
major acquisitions, including the acquisitions of First American, RoTech, CCA
and the Coram Lithotripsy Division and the Facility Acquisition, and is still in
the process of integrating those acquired businesses. The IHS Board of Directors
and senior management of IHS face a significant challenge in their efforts to
integrate the acquired businesses, including First American, RoTech, CCA, the
Coram Lithotripsy Division and the facilities and other businesses acquired from
HEALTHSOUTH. The dedication of management resources to such integration may
detract attention from the day-to-day business of IHS. The difficulties of
integration may be increased by the necessity of coordinating geographically
separated organizations, integrating personnel with disparate business
backgrounds and combining different corporate cultures. There can be no
assurance that there will not be substantial costs associated with such
activities or that there will not be other material adverse effects of these
integration efforts. Further, there can be no assurance that management's
efforts to integrate the operations of IHS and newly acquired companies will be
successful or that the anticipated benefits of the recent acquisitions will be
fully realized.
IHS has recently expanded significantly its home healthcare operations.
During the years ended December 31, 1996 and 1997, home healthcare accounted for
approximately 16.3% and 35.4%, respectively, of IHS' total revenues. On a pro
forma basis, after giving effect to the acquisitions and divesti-
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tures consummated by IHS in 1996 and 1997, home healthcare accounted for
approximately 28.8% and 29.6% of IHS' total revenues in 1996 and 1997,
respectively. On a pro forma basis, approximately 70.7% and 73.0% of IHS' home
healthcare revenues were derived from Medicare in the years ended December 31,
1996 and 1997, respectively. On a pro forma basis, after giving effect to the
acquisitions and divestitures consummated by IHS in 1996 and 1997, home nursing
services accounted for approximately 64.2% and 56.2%, respectively, of IHS' home
healthcare revenues in these periods. Medicare has developed a national fee
schedule for infusion therapy and home medical equipment which provides
reimbursement at 80% of the amount of any fee on the schedule. The remaining 20%
is paid by other third party payors (including Medicaid in the case of
"medically indigent" patients) or patients. With respect to home nursing,
Medicare generally reimburses for the cost of providing such services, up to a
regionally adjusted allowable maximum per visit and per discipline with no fixed
limit on the number of visits prior to 1998. There generally is no deductible or
coinsurance. As a result, there is no reward for efficiency, provided that costs
are below the cap, and traditional home healthcare services carry relatively low
margins. The BBA provides for a reduction in current cost reimbursement for home
nursing care pending implementation of a prospective payment system. The BBA
provides for implementation of a prospective payment system for home nursing
services for cost reporting periods beginning on or after October 1, 1999, and
implementation of a prospective payment system will be a critical element to the
success of IHS' expansion into home nursing services. Based upon prior
legislative proposals, IHS believes that a prospective payment system would most
likely provide a healthcare provider a predetermined rate for a given service,
with providers that have costs below the predetermined rate being entitled to
keep some or all of this difference. There can be no assurance that Medicare
will implement a prospective payment system for home nursing services in the
next several years or at all. The implementation of a prospective payment system
will require IHS to make contingent payments related to the First American
Acquisition of $155 million over a period of five years. Until a prospective
payment system for home nursing services is introduced, IHS anticipates that
margins for home nursing will remain low and may adversely impact its financial
performance. IHS is currently exploring ways to reduce the impact of its home
nursing business on its financial performance. See "-- Patient Services --
Specialty Medical Services -- Home Healthcare Services -- Home Nursing." In
addition, the BBA reduces the Medicare national payment limits for oxygen and
oxygen equipment used in home respiratory therapy by 25% in 1998 and 30% (from
1997 levels) in 1999 and each subsequent year. Approximately 50% of RoTech's
total revenues for 1997 were derived from the provision of oxygen services to
Medicare patients. The inability of IHS to realize operating efficiencies and
provide home healthcare services at a cost below the established Medicare fee
schedule could have a material adverse effect on IHS' home healthcare operations
and its post-acute care network. See "-- Risk of Adverse Effect of Healthcare
Reform."
Reliance on Reimbursement by Third Party Payors. The Company receives
payment for services rendered to patients from private insurers and patients
themselves, from the Federal government under Medicare, and from the states in
which it operates under Medicaid. The healthcare industry is experiencing a
trend toward cost containment, as government and other third party payors seek
to impose lower reimbursement and utilization rates and negotiate reduced
payment schedules with service providers. These cost containment measures,
combined with the increasing influence of managed care payors and competition
for patients, has resulted in reduced rates of reimbursement for services
provided by IHS, which has adversely affected, and may continue to adversely
affect, IHS' margins, particularly in its skilled nursing and subacute
facilities. Aspects of certain healthcare reform proposals, such as cutbacks in
the Medicare and Medicaid programs, reductions in Medicare reimbursement rates
and/or limitations on reimbursement rate increases, containment of healthcare
costs on an interim basis by means that could include a short-term freeze on
prices charged by healthcare providers, and permitting greater state flexibility
in the administration of Medicaid, could adversely affect the Company. There can
be no assurance that adequate reimbursement levels will continue to be available
for services to be provided by IHS which are currently being reimbursed by
Medicare, Medicaid or private payors. Significant limits on the scope of
services reimbursed and on reimbursement rates and fees could have a material
adverse effect on the Company's results of operations and financial condition.
See "-- Risk of Adverse Effect of Healthcare Reform." During the years ended
December 31, 1995, 1996 and 1997, the Company derived approximately 55%, 60% and
66%, respectively, of its patient revenues from Medicare and Medicaid. On a pro
forma basis
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after giving effect to the acquisitions and divestitures consummated by IHS in
1996 and 1997, approximately 69% of the Company's patient revenues have been
derived from Medicare and Medicaid during the years ended December 31, 1996 and
1997, respectively.
The sources and amounts of the Company's patient revenues derived from the
operation of its geriatric care facilities and MSU programs are determined by a
number of factors, including licensed bed capacity of its facilities, occupancy
rate, the mix of patients and the rates of reimbursement among payor categories
(private, Medicare and Medicaid). Changes in the mix of the Company's patients
among the private pay, Medicare and Medicaid categories can significantly affect
the profitability of the Company's operations. The Company's cost of care for
its MSU patients generally exceeds regional reimbursement limits established
under Medicare. The success of the Company's MSU strategy will depend in part on
its ability to obtain per diem rate approvals for costs which exceed the
Medicare established per diem rate limits and by obtaining waivers of these
limitations. There can be no assurance that the Company will be able to obtain
the waivers necessary to enable the Company to recover its excess costs.
Managed care organizations and other third party payors have continued to
consolidate to enhance their ability to influence the delivery of healthcare
services. Consequently, the healthcare needs of a large percentage of the United
States population are provided by a small number of managed care organizations
and third party payors. These organizations generally enter into service
agreements with a limited number of providers for needed services. To the extent
such organizations terminate IHS as a preferred provider and/or engage IHS'
competitors as a preferred or exclusive provider, the business of IHS could be
materially adversely affected.
Risk of Adverse Effect of Healthcare Reform. In addition to extensive
existing government healthcare regulation, there are numerous initiatives on the
federal and state levels for comprehensive reforms affecting the payment for and
availability of healthcare services, including a number of proposals that would
significantly limit reimbursement under Medicare and Medicaid. It is not clear
at this time what proposals, if any, will be adopted or, if adopted, what effect
such proposals would have on the Company's business. Aspects of certain of these
healthcare proposals, such as cutbacks in the Medicare and Medicaid programs,
containment of healthcare costs on an interim basis by means that could include
a short-term freeze on prices charged by healthcare providers, and permitting
greater state flexibility in the administration of Medicaid, could adversely
affect the Company. The BBA provides, among other things, for a prospective
payment system for skilled nursing facilities to be implemented for cost
reporting periods beginning on or after July 1, 1998, a prospective payment
system for home nursing to be implemented for cost reporting periods beginning
on or after October 1, 1999, a reduction in current cost reimbursement for home
nursing care pending implementation of a prospective payment system, reductions
(effective January 1, 1998) in Medicare reimbursement for oxygen and oxygen
equipment for home respiratory therapy and a shift of the bulk of home health
coverage from Part A to Part B of Medicare. The BBA also instituted consolidated
billing for skilled nursing facility services, under which payments for
non-physician Part B services for beneficiaries no longer eligible for Part A
skilled nursing facility care will be made to the facility, regardless of
whether the item or service was furnished by the facility, by others under
arrangement or under any other contracting or consulting arrangement, effective
for items or services furnished on or after July 1, 1997. The inability of IHS
to provide home healthcare and/or skilled nursing services at a cost below the
established Medicare fee schedule could have a material adverse effect on IHS'
home healthcare operations, post-acute care network and business generally. IHS
expects that there will continue to be numerous initiatives on the federal and
state levels for comprehensive reforms affecting the payment for and
availability of healthcare services, including proposals that will further limit
reimbursement under Medicare and Medicaid. It is not clear at this time what
proposals, if any, will be adopted or, if adopted, what effect such proposals
will have on IHS' business. See "-- Risks Related to Recent Acquisitions" and
"-- Reliance on Reimbursement by Third Party Payors." There can be no assurance
that currently proposed or future healthcare legislation or other changes in the
administration or interpretation of governmental healthcare programs will not
have an adverse effect on the Company or that payments under governmental
programs will remain at levels comparable to present levels or will be
sufficient to cover the costs allocable to patients eligible for reimbursement
pursuant to such programs. Concern about the potential effects of the proposed
reform measures has contributed to the volatility of prices of securities of
companies in healthcare
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and related industries, including the Company, and may similarly affect the
price of the Company's securities in the future. See "-- Uncertainty of
Government Regulation."
Under the new prospective payment system for Medicare reimbursement to
skilled nursing facilities, facilities will receive a pre-established daily rate
for each individual Medicare beneficiary being cared for, based on the activity
level of the patient. The pre-established daily rate will cover all routine,
ancillary and capital costs. It is anticipated that this prospective payment
system will be phased in over four years on a blended rate of the
facility-specific costs and the new federal per diem, which has not to date been
established. The blended rate for the first year of transition will take 75% of
the facility-specific per diem rate and 25% of the federal per diem rate. In
each subsequent transition year, the facility-specific per diem rate component
will decrease by 25% and the federal per diem rate component will increase by
25%, ultimately resulting in a rate based 100% upon the federal per diem. The
facility-specific per diem rate is based upon the facility's 1995 cost report
for routine, ancillary and capital services, updated using a skilled nursing
market basket index. The federal per diem is calculated by the weighted average
of each facility's standardized costs, based upon the historical national
average per diem for freestanding facilities. Prospective payment for IHS' owned
and leased skilled nursing facilities will be effective beginning January 1,
1999 for all facilities other than the facilities acquired from HEALTHSOUTH,
which will become subject to prospective payment on June 1, 1999. Prospective
payment for skilled nursing facilities managed by IHS will be effective for each
facility at the beginning of its first cost reporting period beginning on or
after July 1, 1998. The new prospective payment system will also cover ancillary
service provided to patients at skilled nursing facilities.
IHS anticipates that the prospective payment system for home nursing will
provide for prospectively established per visit payments to be made for all
covered services, which will then be subject to an annual aggregate per episode
limit at the end of the year. Home health agencies that are able to keep their
total expenses per visit during the year below their per episode annual limits
will be able to retain a specified percentage of the difference, subject to
certain aggregate limitations. Such changes could have a material adverse effect
on the Company and its growth strategy. The implementation of a prospective
payment system will require the Company to make contingent payments related to
the acquisition of First American of $155 million over a period of five years.
The failure to implement a prospective payment system for home nursing services
in the next several years could adversely affect IHS' post-acute care network
strategy. See "-- Risks Related to Recent Acquisitions."
With respect to Medicaid, the BBA repeals the so-called Boren Amendment,
which required state Medicaid programs to reimburse nursing facilities for the
costs that are incurred by efficiently and economically operated providers in
order to meet quality and safety standards. As a result, states now have
considerable flexibility in establishing payment rates.
Uncertainty of Government Regulation. The Company and the healthcare
industry generally are subject to extensive federal, state and local regulation
governing licensure and conduct of operations at existing facilities,
construction of new facilities, acquisition of existing facilities, additions of
new services, certain capital expenditures, the quality of services provided and
the manner in which such services are provided and reimbursement for services
rendered. Changes in applicable laws and regulations or new interpretations of
existing laws and regulations could have a material adverse effect on licensure,
eligibility for participation, permissible activities, operating costs and the
levels of reimbursement from governmental and other sources. There can be no
assurance that regulatory authorities will not adopt changes or new
interpretations of existing regulations that could adversely affect the Company.
The failure to maintain or renew any required regulatory approvals or licenses
could prevent the Company from offering existing services or from obtaining
reimbursement. In certain circumstances, failure to comply at one facility may
affect the ability of the Company to obtain or maintain licenses or approvals
under Medicare and Medicaid programs at other facilities. In addition, in the
conduct of its business the Company's operations are subject to review by
federal and state regulatory agencies to assure continued compliance with
various standards, their continued licensing under state law and their
certification under the Medicare and Medicaid programs. In the course of these
reviews, problems are from time to time identified by these agencies. Although
the Company has to date been able to resolve these problems in a manner
satisfactory to the regulatory agencies without a material adverse effect on its
business, there can be no assurance that it will be able to do so in the future.
23
<PAGE>
In 1995 HCFA implemented stricter guidelines for annual state surveys of
long-term care facilities and expanded remedies available to enforce compliance
with the detailed regulations mandating minimum healthcare standards. Remedies
include fines, new patient admission moratoriums, denial of reimbursement,
federal or state monitoring of operations, closure of facilities and termination
of provider reimbursement agreements. These provisions eliminate the ability of
operators to appeal the scope and severity of any deficiencies and grant state
regulators the authority to impose new remedies, including monetary penalties,
denial of payments and termination of the right to participate in the Medicare
and/or Medicaid programs. The Company believes these new guidelines may result
in an increase in the number of facilities that will not be in "substantial
compliance" with the regulations and, as a result, subject to increased
disciplinary actions and remedies, including admission holds and termination of
the right to participate in the Medicare and/or Medicaid programs. In ranking
facilities, survey results subsequent to October 1990 are considered. As a
result, the Company's acquisition of poorly performing facilities could
adversely affect the Company's business to the extent remedies are imposed at
such facilities.
In September 1997, President Clinton, in an attempt to curb Medicare fraud,
imposed a moratorium on the certification under Medicare of new home healthcare
companies, which moratorium expired in January 1998, and implemented rules
requiring home healthcare providers to reapply for Medicare certification every
three years. In addition, HCFA will double the number of detailed audits of home
healthcare providers it completes each year and increase by 25% the number of
home healthcare claims it reviews each year. IHS cannot predict what effect, if
any, these new rules will have on IHS' business and the expansion of its home
healthcare operations.
The Company is also subject to federal and state laws which govern
financial and other arrangements between healthcare providers. These laws often
prohibit certain direct and indirect payments or fee-splitting arrangements
between healthcare providers that are designed to induce or encourage the
referral of patients to, or the recommendation of, a particular provider for
medical products and services. These laws include the federal "Stark Bills,"
which prohibit, with limited exceptions, financial relationships between
ancillary service providers and referring physicians, and the federal
"anti-kickback law," which prohibits, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of Medicare and Medicaid patients. The Office of Inspector General of the
Department of Health and Human Services, the Department of Justice and other
federal agencies interpret these fraud and abuse provisions liberally and
enforce them aggressively. The BBA contains new civil monetary penalties for
violations of these laws and imposes an affirmative duty on providers to insure
that they do not employ or contract with persons excluded from the Medicare
program. The BBA also provides a minimum 10 year period for exclusion from
participation in Federal healthcare programs of persons convicted of a prior
healthcare violation. In addition, some states restrict certain business
relationships between physicians and other providers of healthcare services.
Many states prohibit business corporations from providing, or holding themselves
out as a provider of, medical care. Possible sanctions for violation of any of
these restrictions or prohibitions include loss of licensure or eligibility to
participate in reimbursement programs (including Medicare and Medicaid), asset
forfeitures and civil and criminal penalties. These laws vary from state to
state, are often vague and have seldom been interpreted by the courts or
regulatory agencies. The Company seeks to structure its business arrangements in
compliance with these laws and, from time to time, the Company has sought
guidance as to the interpretation of such laws; however, there can be no
assurance that such laws ultimately will be interpreted in a manner consistent
with the practices of the Company.
Many states have adopted certificate of need or similar laws which
generally require that the appropriate state agency approve certain acquisitions
or capital expenditures in excess of defined levels and determine that a need
exists for certain new bed additions, new services and the acquisition of such
medical equipment or capital expenditures or other changes prior to beds and/or
services being added. Many states have placed a moratorium on granting
additional certificates of need or otherwise stated their intent not to grant
approval for new beds. To the extent certificates of need or other similar
approvals are required for expansion of the Company's operations, either through
facility acquisitions or expansion or provision of new services or other
changes, such expansion could be adversely affected by the failure or inability
to obtain the necessary approvals, changes in the standards applicable to such
approvals and possible delays in, and the expenses associated with, obtaining
such approvals.
24
<PAGE>
The Company is unable to predict the future course of federal, state or
local regulation or legislation, including Medicare and Medicaid statutes and
regulations. Further changes in the regulatory framework could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "-- Risk of Adverse Effect of Healthcare Reform."
Competition. The healthcare industry is highly competitive and is subject
to continuing changes in the provision of services and the selection and
compensation of providers. The Company competes on a local and regional basis
with other providers on the basis of the breadth and quality of its services,
the quality of its facilities and, to a more limited extent, price. The Company
also competes with other providers in the acquisition and development of
additional facilities and service providers. The Company's current and potential
competitors include national, regional and local operators of geriatric care
facilities, acute care hospitals and rehabilitation hospitals, extended care
centers, retirement centers and community home health agencies, other home
healthcare companies and similar institutions, many of which have significantly
greater financial and other resources than the Company. In addition, the Company
competes with a number of tax-exempt nonprofit organizations which can finance
acquisitions and capital expenditures on a tax-exempt basis or receive
charitable contributions unavailable to the Company. New service introductions
and enhancements, acquisitions, continued industry consolidation and the
development of strategic relationships by IHS' competitors could cause a
significant decline in sales or loss of market acceptance of IHS' services or
intense price competition or make IHS' services noncompetitive. Further,
technological advances in drug delivery systems and the development of new
medical treatments that cure certain complex diseases or reduce the need for
healthcare services could adversely impact the business of IHS. There can be no
assurance that IHS will be able to compete successfully against current or
future competitors or that competitive pressures will not have a material
adverse effect on IHS' business, financial condition and results of operations.
IHS also competes with various healthcare providers with respect to attracting
and retaining qualified management and other personnel. Any significant failure
by IHS to attract and retain qualified employees could have a material adverse
effect on its business, results of operations and financial condition.
Effect of Certain Anti-Takeover Provisions. IHS' Third Restated Certificate
of Incorporation and By-laws, as well as the Delaware General Corporation Law
(the "DGCL"), contain certain provisions that could have the effect of making it
more difficult for a third party to acquire, or discouraging a third party from
attempting to acquire, control of IHS. These provisions could limit the price
that certain investors might be willing to pay in the future for shares of
Common Stock. Certain of these provisions allow IHS to issue, without
stockholder approval, preferred stock having voting rights senior to those of
the Common Stock. Other provisions impose various procedural and other
requirements that could make it more difficult for stockholders to effect
certain corporate actions. In addition, the IHS Stockholders' Rights Plan, which
provides for discount purchase rights to certain stockholders of IHS upon
certain acquisitions of 20% or more of the outstanding shares of Common Stock,
may also inhibit a change in control of IHS. As a Delaware corporation, IHS is
subject to Section 203 of the DGCL, which, in general, prevents an "interested
stockholder" (defined generally as a person owning 15% or more of the
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) for three years following the date such person became
an interested stockholder unless certain conditions are satisfied.
Possible Volatility of Stock Price. There may be significant volatility in
the market price of the Common Stock. Quarterly operating results of IHS,
changes in general conditions in the economy, the financial markets or the
healthcare industry, or other developments affecting IHS or its competitors,
could cause the market price of the Common Stock to fluctuate substantially. In
addition, in recent years the stock market and, in particular, the healthcare
industry segment, has experienced significant price and volume fluctuations.
This volatility has affected the market price of securities issued by many
companies for reasons unrelated to their operating performance. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been initiated against such
company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
upon IHS' business, operating results and financial condition.
25
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- ----- -----------------------------------------------
<S> <C> <C>
Robert N. Elkins, M.D. .......... 54 Chairman of the Board,
Chief Executive Officer and President
W. Bradley Bennett .............. 32 Executive Vice President -- Chief Accounting
Officer
Brian K. Davidson ............... 40 Executive Vice President -- Development
Marshall A. Elkins .............. 50 Executive Vice President and General Counsel
Stephen P. Griggs ............... 40 President of RoTech Medical Corporation
Marc B. Levin ................... 43 Executive Vice President -- Investor Relations
Anthony R. Masso ................ 56 Executive Vice President -- Managed Care
C. Taylor Pickett ............... 36 Executive Vice President -- Chief Financial
Officer
C. Christian Winkle ............. 35 Executive Vice President -- Chief Operating
Officer
</TABLE>
- ----------
The officers of the Company are elected annually and serve at the pleasure of
the Board of Directors.
Robert N. Elkins, M.D. has been Chairman of the Board and Chief Executive
Officer of the Company since March 1986 and President since March 1998 and also
served as President from March 1986 to July 1994. From 1980 until co-founding
IHS with Timothy F. Nicholson, a director of the Company, in 1986, Dr. Elkins
was a co-founder and Vice President of Continental Care Centers, Inc., an owner
and operator of long-term healthcare facilities. From 1976 through 1980, Dr.
Elkins was a practicing physician. Dr. Elkins is a graduate of the University of
Pennsylvania, received his M.D. degree from the Upstate Medical Center, State
University of New York, and completed his residency at Harvard University
Medical Center. Dr. Elkins is the brother of Marshall Elkins, Executive Vice
President and General Counsel of the Company.
W. Bradley Bennett has been Executive Vice President -- Chief Accounting
Officer of the Company since September 1996. From April 1996 to September 1996,
he served as Senior Vice President -- Chief Accounting Officer of the Company,
as Senior Vice President -- Corporate Controller from November 1995 to April
1996, and as Vice President -- Corporate Controller from December 1992 to
November 1995. From October 1991, when he joined IHS, to December 1992, he
served as Assistant Corporate Controller. For five years prior to joining IHS,
Mr. Bennett was with KPMG Peat Marwick LLP, Certified Public Accountants. Mr.
Bennett is a Certified Public Accountant and a Summa Cum Laude graduate of
Loyola College, receiving a B.A. in Accounting.
Brian K. Davidson has been Executive Vice President -- Development of the
Company since November 1995. From January 1993 to November 1995 he served as
Senior Vice President -- Development. From January 1991, when he joined IHS, to
January 1993 he served as Senior Vice President -- Managed Operations of the
Company. For more than five years prior to joining IHS, Mr. Davidson served as
Chief Operating Officer of the Tutera Group, a management company operating
skilled nursing beds and retirement apartment units. Mr. Davidson received B.S.
and M.S. degrees from Central Missouri State University.
Marshall A. Elkins has been Executive Vice President and General Counsel of
the Company since November 1995. From July 1992 to November 1995 he served as
Senior Vice President and General Counsel of the Company and from January 1990
to July 1992 he served as General Counsel and Vice President of the Company.
From July 1987 until joining IHS in 1990, Mr. Elkins was in private practice in
New York City. Mr. Elkins served as General Counsel to US West Capital
Corporation and later as Assistant General Counsel of US West Financial Services
Corporation from July 1985 to July 1987. Prior thereto, Mr. Elkins was associate
counsel at CIT Corporation from 1980 to 1985. Mr. Elkins received a B.A. degree
from the University of Wisconsin and a J.D. from New York Law School. Mr. Elkins
is the brother of Robert N. Elkins, Chairman, Chief Executive Officer and
President of the Company.
26
<PAGE>
Stephen P. Griggs has served as President of RoTech Medical Corporation,
which was acquired by IHS in October 1997, since 1992. Prior to joining RoTech
in 1988, where he also was a director and Chief Operating Officer, Mr. Griggs
was controller for Church Street Station. Mr. Griggs received a B.A. in Business
Administration from East Tennessee State University and a degree in Accounting
from the University of Central Florida.
Marc B. Levin has been Executive Vice President -- Investor Relations since
November 1995. From March 1993 to November 1995 he served as Senior Vice
President -- Investor Relations and from May 1991 to March 1993 he served as
Vice President -- Investor Relations of the Company. From March 1989 until May
1991, Mr. Levin served as Vice President -- Corporate Controller/Administration
of the Company. Prior to joining IHS in 1989, Mr. Levin served in various
capacities with Beverly Enterprises for six years, most recently as Assistant to
the President -- Eastern Division. Mr. Levin is a Certified Public Accountant
and received B.S. and M.B.A. degrees from the University of Maryland.
Anthony R. Masso has been Executive Vice President -- Managed Care since
June 1994. Prior to joining IHS, Mr. Masso served in several managed care
operating roles as Senior Vice President of American MedCenters, an HMO company
in Minneapolis and as Regional Vice President of Aetna Health Plans for the
Midwest and Eastern Divisions. He had operational responsibility for thirteen
HMOs, serving on the boards of ten. For twelve years, Mr. Masso served as a
senior executive in the federal HMO office of the Department of Health and Human
Services. Mr. Masso is a graduate of the University of Rhode Island and holds a
masters degree from Syracuse University.
C. Taylor Pickett has been Executive Vice President -- Chief Financial
Officer since January 1998. From November 1996 to January 1998 he served as
Executive Vice President -- Symphony Health Services, and from February 1995 to
November 1996 he served as Senior Vice President -- Symphony Health Services.
Mr. Pickett joined IHS in September 1993 as Vice President of Acquisitions and
Taxes. Prior to joining IHS, Mr. Pickett was Director of Taxes for PHH
Corporation. Mr. Pickett is a Certified Public Accountant and received a B.S.
degree in Accounting from the University of Delaware and a J.D. from the
University of Maryland School of Law.
C. Christian Winkle has been Executive Vice President -- Chief Operating
Officer since April 1997. From November 1995 to April 1997 he served as
Executive Vice President -- Field Operations of the Company's owned and leased
facilities, and from March 1994 to November 1995 he served as Senior Vice
President -- Operations. Mr. Winkle joined IHS in September 1990 as Regional
Vice President of Operations and President -- MSU Product Development. Prior to
joining IHS, Mr. Winkle was the Executive Director of the Renaissance
Rehabilitation & Diagnostic Hospital in Chattanooga, Tennessee. Mr. Winkle is a
graduate of Case Western Reserve University in Cleveland, Ohio.
ITEM 2. PROPERTIES
The Company owns 86 geriatric care facilities with 13,215 licensed beds,
leases 174 geriatric care facilities with 22,468 licensed beds and manages 52
geriatric care facilities with 6,212 licensed beds. The leases for the leased
facilities have terms of four to 20 years, expiring on various dates between
1998 and 2020. The leases generally can be renewed and the Company generally has
a right of first refusal to purchase the leased facility. The Company is
obligated with respect to many of the leased facilities to pay additional rent
in an amount equal to a specified percentage of the amount by which the
facility's gross revenues exceed a specified amount (generally based on the
facility's gross revenues during its first year of operation). The Company
leases its headquarters in Owings Mills, Maryland under an eight year lease
expiring in May 2001.
27
<PAGE>
The following table presents certain information regarding the Company's
owned, leased and managed service locations (excluding the 38 facilities with
3,746 licensed beds held for sale) as of March 15, 1998.
<TABLE>
<CAPTION>
OWNED LEASED MANAGED
----------------------- ----------------------- -----------------------
OTHER
LICENSED LICENSED LICENSED SERVICE
STATE FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS LOCATIONS
- ------------------------------ ------------ ---------- ------------ ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Alabama ...................... 5 562 63
Arizona ...................... 35
Arkansas ..................... 43
California ................... 2 249 10 1,239 51
Colorado ..................... 3 459 10 1,480 33
Connecticut .................. 3 585 4
Delaware ..................... 1 153 2
District of Columbia ......... 2
Florida ...................... 19 2,409 8 1,033 8 755 211
Georgia ...................... 7 905 1 62 109
Idaho ........................ 1 218 7
Illinois ..................... 1 140 1 55 1 150 73
Indiana ...................... 1 145 39
Iowa ......................... 2 221 5 352 18
Kansas ....................... 1 149 6 654 23
Kentucky ..................... 1 100 37
Louisiana .................... 1 189 15 1,653 34
Maine ........................ 1
Maryland ..................... 11
Massachusetts ................ 1 201 4 583 8
Michigan ..................... 3 395 3 361 77
Minnesota .................... 8
Mississippi .................. 5 651 35
Missouri ..................... 1 176 4 552 33
Montana ...................... 3 220 1 278 23
Nebraska ..................... 9 571 2 130 7
Nevada ....................... 2 220 13 1,877 11
New Hampshire ................ 2 180 1 68 6
New Jersey ................... 1 58 16
New Mexico ................... 2 157 22 2,258 18
New York ..................... 2
North Carolina ............... 2 275 9 1,092 61
North Dakota ................. 1
Ohio ......................... 6 590 15 1,520 13 1,269 63
Oklahoma ..................... 1 174 1 60 45
Oregon ....................... 1
Pennsylvania ................. 4 831 8 1,094 3 440 106
Rhode Island ................. 1
South Carolina ............... 1 160 26
South Dakota ................. 9
Tennessee .................... 1 124 60
Texas ........................ 22 3,188 21 2,705 7 993 194
Utah ......................... 12
Vermont ...................... 1
Virginia ..................... 1 114 28
Washington ................... 1 210 18
West Virginia ................ 1 126 12
Wisconsin .................... 1 111 10
Wyoming ...................... 2 220 19
</TABLE>
28
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings that are incidental to
the conduct of its business. The Company is not involved in any pending or
threatened legal proceedings which the Company believes could reasonably be
expected to have a material adverse effect on the Company's financial condition,
liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. A special meeting of the stockholders of Integrated Health Services,
Inc. was held on October 21, 1997.
c. The proposal to approve the acquisition of RoTech Medical Corporation
was approved, with 18,981,517 shares voted in favor, 36,421 shares voted
against, 81,925 shares abstaining and 6,557,749 broker nonvotes.
29
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Common stock is traded on the New York Stock Exchange under the symbol
"IHS". The following table sets forth for the periods indicated the high and low
last reported sale prices for the Common Stock as reported by the New York Stock
Exchange.
<TABLE>
<CAPTION>
HIGH LOW
---------- ----------
<S> <C> <C>
CALENDAR YEAR 1996
First Quarter .......... $26 $20 1/8
Second Quarter ......... 27 7/8 23 3/8
Third Quarter .......... 25 7/8 20 1/2
Fourth Quarter ......... 27 22
</TABLE>
<TABLE>
<CAPTION>
HIGH LOW
---------- -----------
<S> <C> <C>
CALENDAR YEAR 1997
First Quarter .......... $32 3/8 $23 3/4
Second Quarter ......... 39 26 7/8
Third Quarter .......... 39 1/8 32 11/16
Fourth Quarter ......... 33 7/8 28 5/16
</TABLE>
As of March 18, 1998, there were approximately 1,752 record holders of the
Common Stock.
In 1996 and 1997 the Company declared a cash dividend of $0.02 per share.
The payment of any future dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, future earnings,
operations, capital requirements, the general financial condition of the
Company, contractual restrictions and general business conditions. The Company's
term loan and revolving credit facility prohibits the payment of dividends
without the consent of the lenders, and the indentures under which the Company's
10 1/4% Senior Subordinated Notes due 2006, 9 1/2% Senior Subordinated Notes due
2007 and 9 1/4% Senior Subordinated Notes due 2008 limit the payment of
dividends unless certain financial tests are met.
30
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following tables summarize certain selected consolidated financial
data, which should be read in conjunction with the Company's Consolidated
Financial Statements and related Notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere herein. The
selected consolidated financial data set forth below for each of the years in
the five-year period ended December 31, 1997 and as of the end of each of such
periods have been derived from the Consolidated Financial Statements of the
Company which have been audited by KPMG Peat Marwick LLP, independent certified
public accountants. The consolidated financial statements as of December 31,
1996 and 1997 and for each of the years in the three year period ended December
31, 1997, and the independent auditors' report thereon, are included elsewhere
herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1993 1994 1995 1996 1997
-------------- -------------- -------------- ------------ -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1)(2):
Net revenues: .....................................
Basic medical services ........................... $ 113,508 $ 269,817 $ 368,569 $ 389,773 $ 382,274
Specialty medical services ....................... 162,017 404,401 770,554 999,209 1,571,704
Management services and other .................... 20,779 37,884 39,765 45,713 39,219
---------- ---------- ---------- ---------- ----------
Total ........................................... 296,304 712,102 1,178,888 1,434,695 1,993,197
Cost and expenses:
Operating expenses ............................... 212,936 528,131 888,551 1,093,948 1,479,006
Corporate administrative and general ............. 16,832 37,041 56,016 60,976 76,824
Depreciation and amortization .................... 8,126 26,367 39,961 41,681 70,750
Rent ............................................. 23,156 42,158 66,125 77,785 105,136
Interest, net .................................... 5,705 20,602 38,977 64,110 115,201
Loss from impairment of long-lived assets and
other non-recurring charges (income)(3) ......... -- -- 132,960 (14,457) 133,042
---------- ---------- ---------- ---------- ----------
Earnings (loss) before equity in earnings of
affiliates, income taxes, extraordinary items
and cumulative effect of accounting change ..... 29,549 57,803 (43,702) 110,652 13,238
Equity in earnings of affiliates .................. 1,241 1,176 1,443 828 88
---------- ---------- ---------- ---------- ----------
Earnings (loss) before income taxes, ex-
traordinary items and cumulative effect
of accounting change ........................... 30,790 58,979 (42,259) 111,480 13,326
Income tax provision (benefit) .................... 12,008 22,117 (16,270) 63,715 24,449
---------- ---------- ---------- ---------- ----------
Earnings (loss) before extraordinary items
and cumulative effect of accounting
change ......................................... 18,782 36,862 (25,989) 47,765 (11,123)
Extraordinary items(4) ............................ 2,275 4,274 1,013 1,431 20,552
---------- ---------- ---------- ---------- ----------
Earnings (loss) before cumulative effect of
accounting change .............................. 16,507 32,588 (27,002) 46,334 (31,675)
Cumulative effect of accounting change(5) ......... -- -- -- -- 1,830
---------- ---------- ---------- ---------- ----------
Net earnings (loss) ............................. $ 16,507 $ 32,588 $ (27,002) $ 46,334 $ (33,505)
========== ========== ========== ========== ==========
Per Common Share(6):
Basic:
Earnings (loss) before extraordinary items
and cumulative effect of accounting
change ......................................... $ 1.50 $ 2.18 $ (1.21) $ 2.12 $ (0.39)
Earnings (loss) before cumulative effect of
accounting change .............................. 1.32 1.93 (1.26) 2.06 (1.12)
Net earnings (loss) ............................. $ 1.32 $ 1.93 $ (1.26) $ 2.06 $ (1.19)
Diluted:
Earnings (loss) before extraordinary items
and cumulative effect of accounting
change ......................................... $ 1.36 $ 1.77 $ (1.21) $ 1.83 $ (0.39)
Earnings (loss) before cumulative effect of
accounting change .............................. 1.23 1.61 (1.26) 1.78 (1.12)
Net earnings (loss) ............................. $ 1.23 $ 1.61 $ (1.26) $ 1.78 $ (1.19)
Weighted average number of common shares
outstanding(6) ...................................
Basic ........................................... 12,522 16,910 21,463 22,529 28,253
Diluted ......................................... 17,101 26,558 21,463 31,564 28,253
========== ========== ========== ========== ==========
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and temporary investments .................... $ 65,295 $ 63,347 $ 41,304 $ 41,072 $ 61,007
Working capital ................................... 69,495 76,383 136,315 57,549 63,117
Total assets ...................................... 776,324 1,255,989 1,433,730 1,993,107 5,063,144
Long-term debt, including current portion ......... 402,536 551,452 770,661 1,054,747 3,238,233
Stockholders' equity .............................. 216,506 453,811 431,528 534,865 1,088,161
</TABLE>
- ----------------
(1) The Company has grown substantially through acquisitions and the opening of
MSUs, which acquisitions and MSU openings materially affect the
comparability of the financial data reflected herein. In addition, IHS sold
its pharmacy division in July 1996, a majority interest in its assisted
living services subsidiary ("ILC") in October 1996 (the "ILC Offering") and
the remaining interest in ILC in July 1997 (the "ILC Sale"). See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Acquisition and Divestiture History."
(2) In 1995, the Company merged with IntegraCare, Inc. ("IntegraCare") in a
transaction accounted for as a pooling of interests. Accordingly, the
Company's historical financial statements for all periods prior to the
effective date of the merger have been restated to include the results of
IntegraCare. See Note 1(o) of Notes to Consolidated Financial Statements.
(3) In 1995, consists of (i) expenses of $1,939,000 related to the merger with
IntegraCare, (ii) a $21,915,000 loss on the write-off of accrued management
fees ($8,496,000), loans ($11,097,000) and contract acquisition costs
($2,322,000) related to the Company's termination of its agreement, entered
into in January 1994, to manage 23 long-term care and psychiatric facilities
owned by Crestwood Hospital, (iii) the write-off of $25,785,000 of deferred
pre-opening costs resulting from a change in accounting estimate regarding
the future benefit of deferred pre-opening costs and (iv) a loss of
$83,321,000 resulting from the Company's election in December 1995 of early
implementation of SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. In 1996, consists
primarily of (i) a gain of $34,298,000 from the sale of its pharmacy
division, (ii) a loss of $8,497,000 from its sale of shares in its assisted
living services subsidiary, (iii) a $7,825,000 loss on write-off of accrued
management fees and loans resulting from the Company's termination of its
ten year management contract with All Seasons, originally entered into
during September 1994 and (iv) a $3,519,000 exit cost resulting from the
closure of redundant home healthcare agencies. Because IHS' investment in
the Capstone common stock received in the sale of its pharmacy division had
a very small tax basis, the taxable gain on the sale significantly exceeded
the gain for financial reporting purposes, thereby resulting in a
disproportionately higher income tax provision related to the sale. In 1997,
consists primarily of (i) a gain of $7,580,000 realized on the shares of
Capstone common stock received in the sale of its pharmacy division, (ii)
the write-off of $6,555,000 of accounting, legal and other costs resulting
from the proposed merger transaction with Coram, (iii) the payment to Coram
of $21,000,000 in connection with the termination of the proposed merger
transaction with Coram, (iv) a gain of $3,914,000 from the ILC Sale, (v) a
loss of $4,750,000 resulting from termination payments in connection with
the RoTech Acquisition and (vi) loss of $112,231,000 resulting from its plan
to dispose of certain non-strategic assets to allow the Company to focus on
its core operations. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Acquisition and Divestiture
History" and "-- Results of Operations" and Notes 1(g), 1(k), 1(o) and 19 of
Notes to Consolidated Financial Statements.
(4) In 1993, the Company recorded a loss on extinguishment of debt of $3,730,000
relating primarily to the write-off of deferred financing costs. Such loss,
reduced by the related income tax effect of $1,455,000, is presented for the
year ended December 31, 1993 as an extraordinary loss of $2,275,000. In
1994, the Company recorded a loss on extinguishment of debt of $6,839,000
relating primarily to the write-off of deferred financing costs. Such loss,
reduced by the related income tax effect of $2,565,000, is presented for the
year ended December 31, 1994 as an extraordinary loss of $4,274,000. In
1995, the Company recorded a loss on extinguishment of debt of $1,647,000
relating primarily to prepayment charges and the write-off of deferred
financing costs. Such loss, reduced by the related income tax effect of
$634,000, is presented for the year ended December 31, 1995 as an
extraordinary loss of $1,013,000. In 1996, the Company recorded a loss on
extinguishment of debt of $2,327,000, relating primarily to the write-off of
deferred financing costs. Such loss, reduced by the related income tax
effect of $896,000, is presented in the statement of operations for the year
ended December 31, 1996 as an extraordinary loss of $1,431,000. In 1997, IHS
recorded a loss on extinguishment of debt of $33,692,000, representing
approximately (i) $23,554,000 of cash payments for premium and consent fees
relating to the early extinguishment of $214,868,000 aggregate principal
amount of IHS' senior subordinated notes and (ii) $10,138,000 of deferred
financing costs written off in connection with the early extinguishment of
such debt and the Company's revolving credit facility. Such loss, reduced by
the related income tax effect of $13,140,000, is presented in the statement
of operations for the year ended December 31, 1997 as an extraordinary loss
of $20,552,000.
(5) Represents the write-off, net of income tax benefit, of the unamortized
balance of costs of business process reengineering and information
technology projects. See Note 20 of Notes to Consolidated Financial
Statements.
(6) The share and per share information for the years ended December 31, 1993,
1994, 1995 and 1996 have been restated to reflect share and per share
information in accordance with Statement of Financial Accounting Standards
No. 128, "Earnings per Share," which was required to be adopted by the
Company effective with its financial statements for the year ended December
31, 1997. See Notes 1(m) and 12 of Notes to Consolidated Financial
Statements. The diluted weighted average number of common shares outstanding
for the years ended December 31, 1993, 1994 and 1996 includes the assumed
conversion of the convertible subordinated debentures into IHS Common Stock.
Additionally, interest expense and amortization of underwriting costs
related to such debentures are added, net of tax, to income for the purpose
of calculating diluted earnings per share. Such amounts aggregated
$4,516,000, $10,048,000 and $9,888,000 for the years ended December 31,
1993, 1994 and 1996, respectively. The diluted weighted average number of
common shares outstanding for the years ended December 31, 1995 and 1997
does not include the assumed conversion of the convertible subordinated
debentures or the related interest expense and underwriting costs, as such
conversion would be anti-dilutive.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this Annual Report on Form 10-K concerning the Company's
business outlook or future economic performance; anticipated profitability,
revenues, expenses or other financial items; and product line growth, together
with other statements that are not historical facts, are "forward-looking
statements" as that term is defined under Federal Securities Laws.
Forward-looking statements are subject to risks, uncertainties and other factors
which could cause actual results to differ materially from those stated in such
statements. Such risks, uncertainties and factors include, but are not limited
to, the Company's substantial indebtedness, growth strategy, managed care
strategy, capital requirements and recent acquisitions as well as competition,
government regulation, general economic conditions and the other risks detailed
in the Company's filings with the Securities and Exchange Commission, including
this Annual Report on Form 10-K. See "Item 1. Business -- Cautionary
Statements."
INTRODUCTION
In the past 15 years, the number of people over the age of 65 began to grow
significantly faster than the overall population. At the same time, advances in
medical technology have increased the life expectancies of an increasingly large
number of medically complex patients. This trend, combined with the
implementation of healthcare cost containment measures by private insurers and
government reimbursement programs, has created a need for a more cost efficient
alternate site for the provision of a wide range of medical and rehabilitative
services which traditionally have been provided in an acute care hospital. To
address this need, the Company began in the late 1980s to develop medical
specialty units within its geriatric care facilities. The Company opened its
first MSU in April 1988 in conjunction with HEALTHSOUTH, and as of December 31,
1997 operated 158 MSUs totaling 3,740 beds. Beginning in 1993, the Company began
to expand the range of related services it offers to its patients directly in
order to serve the full spectrum of patients' post-acute care needs. The Company
is now able to offer directly to its patients, rather than through third party
providers, a continuum of care following discharge from an acute care hospital.
IHS' post-acute services include subacute care, home care, skilled nursing
facility care, home respiratory care, home health nursing care, other homecare
services and contract rehabilitation, hospice, lithotripsy and diagnostic
services.
The Company's post-acute care network strategy is to provide cost-effective
continuity of care for its patients in multiple settings, using geriatric care
facilities as platforms to provide a wide variety of subacute medical and
rehabilitative services more typically delivered in the acute care hospital
setting and using home healthcare to provide those medical and rehabilitative
services which do not require 24-hour monitoring. To implement its post-acute
care network strategy, the Company has focused on (i) developing market
concentration for its post-acute care services in targeted states due to
increasing payor consolidation and the increased preference of payors,
physicians and patients for dealing with only one service provider; (ii)
expanding the range of home healthcare and related services it offers to
patients directly in order to provide patients with a continuum of care
throughout their recovery, to better control costs and to meet the growing
desire by payors for one-stop shopping; and (iii) developing subacute care
units. Given the increasing importance of managed care in the healthcare
marketplace and the continued cost containment pressures from Medicare, Medicaid
and private payors, IHS has been restructuring its operations to enable IHS to
focus on obtaining contracts with managed care organizations and to provide
capitated services. IHS' strategy is to become a preferred or exclusive provider
of post-acute care services to managed care organizations and other payors.
The Balanced Budget Act of 1997 (the "BBA"), enacted in August 1997, makes
numerous changes to the Medicare and Medicaid programs which could significantly
affect the delivery of subacute care, skilled nursing facility care and home
healthcare. With respect to Medicare, the BBA required the establishment of a
prospective payment system for skilled nursing facilities, under which such
facilities will be paid a federal per diem rate, based on level of medical
acuity, for virtually all covered services provided to Medicare patients. The
prospective payment system will be phased in over three cost reporting periods,
starting with cost report periods beginning on or after July 1, 1998. The BBA
also instituted consolidated billing for skilled nursing facility services,
under which payments for non-physician Part B services for beneficiaries no
longer eligible for Part A skilled nursing facility care will
33
<PAGE>
be made to the facility, regardless of whether the item or service was furnished
by the facility, by others under arrangement or under any other contracting or
consulting arrangement, effective for items or services furnished on or after
July 1, 1997. The BBA also reduced the Medicare national payment limits for
oxygen and oxygen equipment used in home respiratory therapy by 25% in 1998 and
30% (from 1997 levels) in 1999 and each subsequent year. In addition, the BBA
requires the Secretary of the Department of Health and Human Services to
establish a prospective payment system for home nursing services starting with
cost report periods beginning after October 1, 1999. Based upon prior
legislative proposals, IHS anticipates that the prospective payment system for
home nursing will provide for prospectively established per visit payments to be
made for all covered services, subject to an annual aggregate per episode unit,
with providers having costs below the predetermined rate being able to keep some
or all of the difference. Under the BBA, home health agencies are also required
to submit claims for all services, and all payments will be made to the home
health agency regardless of whether the item or service was furnished by the
agency or others. The BBA also contains provisions affecting outpatient
rehabilitation providers, including a 10% reduction in operating and capital
costs in 1998, a fee schedule for therapy services beginning in 1999, and the
application of per beneficiary caps beginning in 1999. With respect to Medicaid,
the BBA repeals the so-called Boren Amendment, which required state Medicaid
programs to reimburse nursing facilities for the costs that are incurred by
efficiently and economically operated providers in order to meet quality and
safety standards. As a result, states now have considerable flexibility in
establishing payment rates.
GENERAL
Basic Medical Services
The Company includes in basic medical services revenues all room and board
charges for its geriatric care patients (other than patients in its MSU and
Alzheimer's programs) at its owned and leased geriatric care and assisted living
facilities.
The following table sets forth the Company's sources of basic medical
services revenues by payor type for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PRO FORMA
-------------------------------------------------------------- ----------
1993 1994 1995 1996 1997 1997(1)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Private Pay(2) ......... 52.9% 40.8% 37.4% 37.0% 37.6% 28.4%
Medicare ............... 12.6 9.9 11.5 12.2 12.0 24.3
Medicaid ............... 34.5 49.3 51.1 50.8 50.4 47.3
----- ----- ----- ----- ----- -----
Total ................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
- ----------------
(1) Gives effect to acquisitions consummated by IHS in 1997.
(2) The Company classifies revenues from commercial insurers, health maintenance
organizations (HMOs) and other charge-based sources and from individuals
(including the co-insurance portion of Medicare paid by individuals) as
private pay.
The decrease in the percentage of basic medical services revenues received
from private pay sources and Medicare from 1993 to 1997 and the commensurate
increase in the percentage received from Medicaid was primarily the result of
the higher level of Medicaid patients in the geriatric care facilities in which
the Company acquired ownership or leasehold interests. The Company seeks to
increase the percentage of basic medical services revenues received from private
pay sources and Medicare.
Changes in the mix of the Company's patients among the private pay,
Medicare and Medicaid categories can significantly affect the profitability of
the Company's operations. Generally, private pay patients constitute the most
profitable category of patients and Medicaid patients the least profitable.
The occupancy percentages for those beds from which basic medical services
revenues are derived are shown in the table below. The percentages are
calculated both on the basis of the weighted average number of beds licensed
(regardless of whether such beds are actually available for the provision of
basic medical services) and the weighted average number of beds in service for
the period. In certain
34
<PAGE>
facilities the Company temporarily operates fewer beds than it is licensed to
operate so as to permit routine maintenance and to accommodate patients desiring
private rooms. In addition, the Company has removed beds from service for
extended periods as certain facilities have undergone construction projects for
expansion purposes and to implement its medical specialty units. All revenues
derived from licensed beds located in MSUs or used in the Renaissance Program
are included in specialty medical services revenues; accordingly, such beds are
not considered beds licensed or beds in service for purposes of determining
occupancy for those beds from which basic medical services revenues are derived.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PRO FORMA
-------------------------------------------------------------- ----------
1993 1994 1995 1996 1997 1997(1)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Beds Licensed ........... 80.6% 83.2% 81.7% 82.7% 83.2% 85.6%
Beds in Service ......... 87.4 92.2 92.7 93.1 93.3 93.9
----- ----- ----- ----- ----- -----
</TABLE>
- ----------
(1) Gives effect to acquisitions consummated by IHS in 1997.
Specialty Medical Services
Specialty medical services revenues include all charges to the Company's
MSU patients for room and board as well as all revenues from providing
rehabilitative therapies, pharmaceuticals, medical supplies and durable medical
equipment to all its patients. The Company also includes in this classification
all revenues from its Alzheimer's programs and all revenue from its provision of
pharmacy, rehabilitative, home healthcare, lithotripsy, mobile x-ray and
electrocardiogram and similar services.
The following table sets forth the Company's sources of specialty medical
services revenues by payor type for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PRO FORMA
-------------------------------------------------------------- ----------
1993 1994 1995 1996 1997 1997(1)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Private Pay(2) ......... 51.6% 47.6% 48.2% 45.0% 32.7% 32.0%
Medicare ............... 45.4 48.2 44.8 48.0 58.3 51.6
Medicaid ............... 3.0 4.2 7.0 7.0 9.0 16.4
----- ----- ----- ----- ----- -----
Total ................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
- ----------------
(1) Gives effect to acquisitions consummated by IHS in 1997.
(2) The Company classifies revenues from commercial insurers, health maintenance
organizations (HMOs) and other charge-based sources and from individuals
(including the co-insurance portion of Medicare paid by individuals) as
private pay.
The decrease in the percentage of specialty medical services revenues
received from private pay sources from 1993 to 1997 and the commensurate
increase in Medicare and Medicaid was primarily the result of the higher level
of Medicare and Medicaid patients serviced by the facilities and related
services companies acquired during this period, as well as the opening of new,
and the expansion of existing, MSU programs. The Company's experience has been
that Medicare patients constitute a higher percentage of an MSU program's
initial occupancy.
The average occupancy rate of the Company's MSU beds (on a weighted average
basis) was 80.0% in the year ended December 31, 1997 as compared with 76.9% in
the year ended December 31, 1996, 72.0% in the year ended December 31, 1995 and
71.4% in the year ended December 31, 1994. Average occupancy in the Alzheimer's
programs in the Company's owned and leased facilities, which had an average of
345 beds in the years ended December 31, 1997 and 1996, 394 beds in the year
ended December 31, 1995 and 314 beds in the year ended December 31, 1994, was
78.8%, 77.2%, 77.9% and 83.4%, respectively.
35
<PAGE>
The following table sets forth the percentage of specialty medical services
revenues generated by the Company's MSU programs, rehabilitation and other
services and Alzheimer's programs for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PRO FORMA
-------------------------------------------------------------- ----------
1993 1994 1995 1996 1997 1997(1)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
MSU Programs .................. 71.1% 47.5% 37.7% 37.5% 24.1% 14.5%
Other Ancillaries (1) ......... 25.1 50.8 61.0 61.4 75.1 85.0
Alzheimer's Programs .......... 3.8 1.7 1.3 1.1 0.8 0.5
----- ----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
- ----------------
(1) Gives effect to acquisitions consummated by IHS in 1997.
(2) Consists of pharmacy, rehabilitative, home healthcare, lithotripsy, mobile
x-ray and electrocardiogram and similar services. The Company sold its
pharmacy division in July 1996. See "-- Acquisition and Divestiture
History."
The percentage decrease in MSU revenue in 1995, 1996 and 1997 was primarily
the result of the acquisition of rehabilitation, home healthcare and similar
service companies in connection with the Company's vertical integration strategy
and the implementation of the Company's post-acute care network. MSU revenue as
a percentage of total revenues and as a percentage of specialty medical revenues
is expected to continue to decrease as the Company implements its vertical
integration strategy and continues to expand its post-acute care network through
the acquisition of rehabilitation, home healthcare and similar service
companies. While IHS added 1,098 MSU beds in 1994 and 938 MSU beds in 1995, it
added only an additional 383 beds in 1996 and 185 beds in 1997. With the
implementation of a prospective payment system for skilled nursing facilities
under Medicare, which will begin for IHS in 1999, IHS intends to continue to
provide subacute care services in its skilled nursing facilities, although it
does not anticipate continuing to expand significantly its MSUs to provide such
services.
IHS had home healthcare revenues of approximately $234.0 million and $704.9
million in the years ended December 31, 1996 and 1997, respectively,
representing approximately 16.9% and 35.4%, respectively, of IHS' total revenues
in those periods. Home nursing services accounted for approximately 98.6% and
84.0% of IHS' home healthcare revenues in 1996 and 1997, respectively,
respiratory therapy accounted for approximately 0% and 13.7%, respectively,
infusion therapy accounted for approximately 0% and 1.7%, respectively, and home
medical equipment accounted for approximately 1.4% and 0.6%, respectively. On a
pro forma basis after giving effect to the acquisitions consummated by IHS in
1997, IHS had home healthcare revenues of approximately $1.1 billion in 1997,
representing approximately 30.0% of IHS' total revenues in 1997. On a pro forma
basis, home nursing services, respiratory therapy, infusion therapy and home
medical equipment accounted for approximately 56.2%, 27.0%, 6.1% and 10.7%,
respectively, of IHS' home healthcare revenues in 1997.
Until a prospective payment system for home nursing services is introduced,
IHS anticipates that margins for home nursing will remain low and may adversely
impact its financial performance. IHS is currently exploring ways to reduce the
impact of its home nursing business on its financial performance.
IHS is continuing to expand its home respiratory therapy services. The BBA
reduces the national payment limits for oxygen and oxygen equipment used in home
respiratory therapy services by 25% in 1998 and 30% (from 1997 levels) in 1999
and each subsequent year. Approximately 50% of RoTech's total revenues for 1997
were derived from the provision of oxygen services to Medicare patients.
MANAGEMENT SERVICES AND OTHER
The Company's management agreements for its geriatric care facilities
provide for a management fee to the Company generally equal to 4% to 8% of the
gross revenues of the facility. In addition, certain of such agreements contain
a provision wherein the Company may earn an incentive fee based on certain
levels of performance. See "Item 1. Business -- Management Services." At
December 31, 1997, the Company was managing 57 geriatric care facilities with a
total of 6,546 beds. Also, all revenue derived from Health Care Consulting,
Inc., a specialty reimbursement and consulting company with expertise in
subacute rehabilitation programs which was acquired effective September 30,
1993, is included in this revenue category.
36
<PAGE>
The revenues derived from certain activities relating to the operation of
the Company's facilities such as patient laundry, vending sales, guest meals,
and beauty and barber services are classified in this category as other revenue.
Other revenue constituted approximately 16.9%, 16.3% and 15.8%, respectively, of
management services and other revenues during the years ended December 31, 1995,
1996 and 1997. The Company expects other revenue to continue to decrease as a
percentage of management services and other revenues.
ACQUISITION AND DIVESTITURE HISTORY
Facility Expansion
The Company commenced operations on March 25, 1986. From inception to June
30, 1988, the Company acquired seven geriatric care facilities with a total of
900 beds and acquired leasehold interests in seven geriatric care facilities
having a total of 1,050 beds. The Company initiated its MSU program in April
1988, in conjunction with HEALTHSOUTH Rehabilitation Corporation, with a 16 bed
unit serving patients with traumatic brain injury.
During the fiscal year ended June 30, 1989 the Company acquired leasehold
interests in six geriatric care facilities having 974 beds and entered into an
agreement to manage one geriatric care facility having 121 beds. One of the six
leased facilities, having 143 beds, was subject to a sublease to a third party
and was managed by the Company for such third party. The sublease terminated
February 2, 1991 and the facility was treated as a leased, rather than a
managed, facility. In addition, the Company opened two MSU programs totalling 35
beds.
During fiscal year ended June 30, 1990 the Company acquired one geriatric
care facility having 101 beds, a leasehold interest in one facility having 210
beds, and a 49% joint venture interest in a 160 bed geriatric care facility
which was managed by the Company until its purchase in September 1994. IHS also
entered into agreements to manage three other geriatric care facilities having
468 beds and acquired 90% (assuming the exercise of all options and related
exchange rights) of the stock of Professional Community Management
International, Inc. ("PCM"), which managed residential retirement community
living units in Southern California. The Company sold PCM in 1994. The Company
also opened six MSU programs totalling 77 beds.
In December 1990 the Company acquired leasehold interests in four geriatric
care facilities having 328 beds and received by assignment management agreements
covering 12 facilities having 1,403 beds. On July 24, 1990, the Company assumed
the management of 14 of these 16 facilities and, subsequent to July 24, 1990,
assumed the management of the remaining two facilities, pending the consummation
of the acquisition. In 1991 the owners of four of these managed facilities
terminated the Company's management agreement for those facilities. During the
six months ended December 31, 1990 the Company opened four MSU programs
totalling 71 beds.
In December 1991 the Company leased two geriatric care facilities having a
total of 258 beds. The Company also opened six MSU programs totalling 106 beds.
During 1992 the Company expanded its MSU focus by opening thirteen MSU
programs totaling 250 beds at its facilities, expanding seven MSU programs by 61
beds and converting its neuro-rehabilitation MSU program for the treatment of
patients with traumatic brain injury, which was operated in conjunction with
HEALTHSOUTH Rehabilitation Corporation, to a 16 bed complex care MSU program.
Also the Company expanded by acquiring one geriatric care facility with a total
of 120 beds, leasing five facilities having a total of 640 beds and entering
into thirteen management contracts having a total of 1,481 beds. The total cost
of the aforementioned acquisitions was approximately $13.9 million, which
includes all costs to secure the facility or leasehold interest. None of the
acquisitions were individually significant and all were financed with cash flow
from operations and borrowings under the Company's line of credit.
During 1993, the Company expanded its MSU focus by opening 30 MSU programs
totaling 442 beds (including four MSU programs totalling 84 beds at its managed
facilities) and expanding 24 MSU programs by 140 beds. On December 1, 1993 the
Company acquired substantially all of the United
37
<PAGE>
States operations of Central Park Lodges, Inc. ("CPL"), consisting of 30
geriatric care facilities (24 owned and 6 leased) and nine retirement
facilities, totaling 5,210 beds, a division which provides pharmacy consulting
services and supplies, prescription drugs and intravenous medications to
geriatric care facilities through five pharmacies in Florida, Pennsylvania and
Texas, and a division which provides healthcare personnel and support services
to home healthcare and institutional markets through five branch locations
located in Florida and Pennsylvania. The Company disposed of seven retirement
facilities and five of the geriatric care facilities acquired from CPL that the
Company did not consider to fit within its post-acute care strategy. The total
cost of the CPL acquisition was approximately $185.3 million, including $20.1
million in assumption of indebtedness, warrants to purchase 100,000 shares of
common stock of the Company at a purchase price per share of $28.92 (valued at
$1.4 million), and other direct acquisition costs. The $163.8 million cash paid
to purchase CPL was financed using the Company's term loan and revolving credit
facility. The number of shares and price per share are subject to adjustment
under certain circumstances. In addition, the Company agreed to provide
consulting services to Trizec for the development of subacute care programs at
its Canadian facilities. The Company received a consulting fee of $4.0 million
and $3.0 million in 1994 and 1995, respectively.
During 1993, the Company also acquired eight geriatric care facilities (two
of which had previously been leased by IHS), leased one facility and entered
into nine management contracts.
During 1994, the Company continued to expand its MSU focus by opening 49
MSU programs totalling 998 beds (including four MSU programs totalling 102 beds
at its managed facilities which includes 33 beds located at a facility no longer
managed by the Company as of August 1994) and expanding 18 MSU programs by 100
beds. During the same period, the Company acquired five geriatric care
facilities (two of which had been previously leased and three of which had been
managed by IHS), leased 49 (three of which had been previously owned and seven
of which had been previously managed) and entered into 42 management contracts
(five of which have become leased facilities, one of which has become an owned
facility and one of which was terminated).
Effective January 1, 1994, the Company entered into an agreement to manage
23 facilities in California, consisting of 14 geriatric care facilities having
1,875 beds and nine psychiatric facilities having 1,265 beds (the "Crestwood
Facilities"), owned by certain affiliated partnerships (the "Crestwood
Partnerships") and leased by Crestwood Hospitals, Inc. ("Crestwood"). The
management agreement had a term of ten years and provided for payments to IHS
based upon a percentage of the gross revenues of the Crestwood Facilities.
Pursuant to this transaction, IHS had agreed to loan Crestwood up to $11
million, including a $7 million line of credit. IHS was granted purchase options
whereby it had the option upon expiration of its management agreement to
purchase certain partnership interests of the partnerships which own 19 of the
23 Crestwood Facilities at a purchase price equal to the product determined by
multiplying (i) the sum of (a) ten times the net cash flow of the 19 facilities
for the year ended December 31, 2003, plus (b) the amount of the outstanding
mortgages on the 19 facilities, by (ii) a percentage equal to the percentage
ownership of the partners whose interests IHS chooses to purchase. IHS also had
an option to purchase Crestwood on the expiration of the management agreement at
a purchase price equal to fair market value determined by an appraisal. If IHS
elected to purchase Crestwood prior to the expiration of the management
agreement, it was obligated to pay Crestwood a break-up fee of $6 million. The
Company was obligated to purchase Crestwood if it elected to purchase the
partnership interests of the partnerships which own the Crestwood Facilities.
IHS paid the stockholders of Crestwood a non-refundable purchase option deposit
consisting of $3 million in cash and 168,067 shares of IHS Common Stock. This
agreement was terminated in 1995 and, as a result, the Company incurred a loss
of $21.915 million. See Note 19 of Notes to Consolidated Financial Statements.
In February 1994 the Company entered into management agreements to manage,
on an interim basis, eight geriatric care facilities, aggregating 1,174 beds, in
Delaware, Massachusetts, New Jersey and Pennsylvania previously operated by
IFIDA Health Care Group Ltd. ("IFIDA"). Upon the earlier of the completion by
the owners of the eight facilities of the refinancing of certain debt or May 18,
1995, IHS was obligated to lease and operate these facilities, and was granted
an option to purchase any or all of these facilities. Five of these facilities
were subsequently leased by the Company in July 1994 and one management
agreement for a facility was terminated in August 1994. The remaining two
facilities were
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leased in 1995. The annual lease payments for these facilities currently are
$4.1 million. The purchase price per facility is equal to the greater of its
fair market value or its allocable percentage (as agreed to by the parties) of
$59.5 million ($57 million if the option is exercised prior to the seventh year
of the lease). The Company has to date made purchase option deposits aggregating
$6.6 million with respect to these facilities, and is obligated to make
additional purchase option deposits aggregating $500,000 during each year of the
agreement. IHS has agreed to loan the owners of the eight facilities an
aggregate of up to $3.5 million for working capital purposes, and issued to the
owners of the eight facilities an aggregate of 90,000 shares of Common Stock.
In May 1994 the Company sold its 49% interest in two separate joint
ventures formed with Sunrise Terrace, Inc. ("Sunrise") to develop and operate
two assisted living facilities. Each facility was to be managed by Sunrise;
Sunrise had a 51% interest in, and the Company had a 49% interest in, the
venture's capital, earnings and losses. Sunrise had an option to purchase the
Company's interest in either venture at any time, and the Company had a right to
require Sunrise to purchase the Company's interest in the Fairfax, Virginia
venture. The assisted living facility in Fairfax, Virginia opened in October
1990; the second facility was being constructed in Bound Brook, New Jersey at
the time of sale.
In May 1990, a wholly owned subsidiary of IHS, Integrated of Amarillo, Inc.
("IAI"), purchased a geriatric care facility in Amarillo, Texas, and contributed
the facility to a joint venture in exchange for a 49% interest therein. The
Company managed the facility, for which it received a management fee equal to 6%
of gross revenues. The venturers shared in the venture's capital, earnings and
losses in accordance with their respective interests in the venture except that
net taxable operating losses were borne 100% by the other venturer. In September
1994, the Company purchased the remaining 51% interest in this joint venture.
As of August 31, 1994 the Company entered into a Facilities Agreement,
Lease Agreement and certain other agreements with Litchfield Asset Management
Corp. ("LAM") pursuant to which it leased, effective September 1, 1994, on a
triple net basis, 43 geriatric care facilities (consisting of 41 skilled nursing
facilities and two retirement centers), including two facilities previously
leased and two facilities previously managed by the Company (the "LPIMC
Facilities"), aggregating approximately 5,400 beds located in 12 states. The
Company and Litchfield Investment Company, L.L.C., the successor to LAM ("LIC"),
subsequently amended and restated these agreements effective October 1, 1997.
The Company's current annual lease payments are approximately $13.7 million,
based upon the annual debt service of monies borrowed by LIC to refinance the
LPIMC Facilities. In addition, the Company made refundable lease deposits
aggregating $33 million, and will make additional refundable deposits during the
initial term (including any extension thereof) of the leases aggregating
approximately $4 million per annum. Rent payments are subject to escalation
commencing October 1998 in an amount equal to two percent (three percent if the
Company elects to pay such increase in shares of the Company's Common Stock) of
the net annual incremental revenues of the LPIMC Facilities (subject to certain
maximums). The leases have initial terms of eleven years, subject to renewal by
the Company for one additional period of seven years and three additional
periods of five years each, and the Company has guaranteed all lease payments.
The Company has also received options to purchase each of the LPIMC Facilities,
at any time after nine months prior to the end of the fourth lease year, for a
purchase price that will represent (i) during the fourth through tenth years
following the lease commencement date, such facility's allocable percentage of
the total amount of $343 million (to be increased annually after the fifth year
by the rate of increase in the consumer price index) and (ii) beginning in the
twelfth year following the lease commencement date, the greater of (a) fair
market value, (b) 125% of the release cost of the monies borrowed by LIC which
are applicable to such facility or (c) five times the contribution margin of
such facility. The Company loaned LIC's principal stockholders an aggregate of
$3 million. In addition, the Company issued LAM warrants to purchase 300,000
shares of the Company's Common Stock at an exercise price of $31.33 per share,
and has granted LAM "piggy-back" registration rights with respect to the shares
of Common Stock issuable upon exercise of such warrants. The Company has agreed
to issue up to an additional 50,000 shares of Common Stock if the leases are
terminated prior to October 1, 2006. The agreement with LAM requires that the
Company meet certain financial tests. IHS has sublet two of these facilities to
Integrated Living Communities, Inc. ("ILC"), formerly the Company's wholly-owned
assisted living services subsidiary.
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In September 1994, the Company entered into a management agreement with All
Seasons to manage six geriatric care facilities with 872 beds located in the
State of Washington. During the fourth quarter of 1996 the Company terminated
its management contract with All Seasons. As a result of the termination, the
Company incurred a $7.8 million loss on the termination. See Note 19 of Notes to
Consolidated Financial Statements.
In February 1995, the Company entered into a management agreement to manage
a 190 bed geriatric care facility located in Aurora, Colorado.
In March 1995, the Company entered into a management agreement to manage 34
geriatric care facilities in Texas, California, Florida, Nevada and Mississippi
(the "Preferred Care Facilities"). The management agreement has a term of ten
years and provides for payments to the Company based upon a percentage of
adjusted gross revenues and adjusted earnings before interest, taxes,
depreciation and amortization of the Preferred Care Facilities. The Company has
also been granted an option to purchase the Preferred Care Facilities, between
March 29, 1996 and the date of the termination of the management agreement, for
$80 million net of purchase option deposits plus adjustments for inflation. The
Company has a non-refundable purchase option deposit of $20.6 million which will
be applied against the purchase price if the Company elects to acquire the
facilities.
During 1995, the Company purchased five geriatric care facilities (two of
which were previously leased). Also, the Company leased three facilities, all of
which were previously managed. The total cost of these acquisitions was
approximately $30.6 million, which includes legal fees and other costs incurred
to secure the facilities or leasehold interests in the facilities.
During 1995, the Company continued to expand its MSU focus by opening 31
MSU programs totalling 691 beds (including two MSU programs totalling 63 beds at
its managed facilities) and expanding existing programs by 177 beds (including
17 beds at managed facilities).
In January 1996, the Company entered into agreements to manage four
assisted living facilities in California and Ohio having a total of 234 beds.
The management agreements subsequently were transferred to ILC.
In January 1996, the Company purchased Vintage Health Care Center, a 110
bed skilled nursing and assisted living facility in Denton, Texas for $6.9
million. A condominium interest in the assisted living portion of this facility,
as well as in the assisted living portion of the Company's Dallas at Treemont
and West Palm Beach facilities, were transferred as a capital contribution to
ILC in June 1996.
In May 1996, the Company assumed leases for a 96 bed skilled nursing
facility and a 240 bed residential facility located in Las Vegas, Nevada.
In July 1996, the Company assumed a lease for a skilled nursing facility in
Chicago, Illinois.
In October 1996, ILC completed its initial public offering, which reduced
IHS' ownership in ILC to approximately 37%. IHS sold its remaining 37% interest
in ILC in July 1997. See "-- Divestitures."
In December 1996, the Company sold its Palestine facility located in
Palestine, Texas. Total proceeds from the sale were $1.3 million.
In addition, in 1996 the Company transferred to ILC, as a capital
contribution, ownership of three facilities.
During 1996, the Company opened MSU programs totalling 184 beds (including
one MSU program totalling 28 beds at a managed facility) and expanding existing
programs by 199 beds.
On September 25, 1997, the Company acquired, through a cash tender offer
and subsequent merger, Community Care of America, Inc. ("CCA") for a purchase
price of approximately $34.3 million in cash. In addition, in connection with
the CCA Acquisition IHS repaid approximately $58.5 million of indebtedness
assumed in the CCA Acquisition (including restructuring fees of $4.9 million)
and assumed approximately $17.3 million of indebtedness. CCA develops and
operates skilled nursing facilities in medically underserved rural communities.
CCA currently operates 53 licensed long-term care facilities
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with 4,390 licensed beds (of which 18 facilities are being held for sale), one
rural healthcare clinic, two outpatient rehabilitation centers (one of which is
being held for sale), one child day care center and 124 assisted living units
within seven of the facilities which CCA operates. CCA currently operates in
Alabama, Colorado, Florida, Georgia, Iowa, Kansas, Louisiana, Maine, Missouri,
Nebraska, Texas and Wyoming.
On December 31, 1997, IHS acquired from HEALTHSOUTH 139 owned, leased or
managed long-term care facilities (of which 20 facilities are being held for
sale), 12 specialty hospitals, a contract therapy business having over 1,000
contracts and an institutional pharmacy business serving approximately 38,000
beds. IHS paid approximately $1.16 billion in cash and assumed approximately $91
million in debt. IHS intends to dispose of the institutional pharmacy business.
During 1997, the Company extended existing MSU programs by 185 beds, but
did not open any new MSU programs.
In January 1998, IHS formed Lyric Health Care LLC ("Lyric") and transferred
five geriatric care facilities to Lyric, which then sold the five facilities to
Omega Healthcare Investors, Inc. ("Omega"), a publicly-traded real estate
investment trust, for approximately $44.5 million. Lyric immediately leased back
the five facilities from Omega. IHS manages the facilities for Lyric, pursuant
to which it receives 4% of the facilities' revenues as well as incentive fees
based on excess cash flow. In a related transaction Lyric in February 1998 sold
a 50% interest to an entity controlled by Timothy Nicholson, a director of the
Company. As a result, IHS now owns a 50% interest in Lyric. Mr. Nicholson is the
Managing Director of Lyric. The Company recorded a $2.5 million loss on the sale
of these facilities in 1997. IHS expects to sell additional facilities to real
estate investment trusts, which Lyric may then lease back, all of which IHS will
manage. IHS also expects that Lyric will also acquire facilities from third
parties.
In February 1998, the Company leased a 100 bed skilled nursing facility,
and in March 1998 leased seven skilled nursing facilities having a total of 816
beds. IHS has also reached a definitive agreement to purchase a company
operating 44 skilled nursing facilities having a total of 5,622 beds for a
purchase price of approximately $70.4 million. There can be no assurance the
transaction will close on these terms on different terms or at all.
Vertical Integration
During 1993 the Company began to implement its strategy of expanding the
range of related services it offers directly to its patients in order to serve
the full spectrum of patient needs following acute hospitalization. As a result,
the Company is now able to offer directly to its patients, rather than through
third-party providers, home healthcare, rehabilitation (physical, occupational
and speech), lithotripsy, and mobile x-ray and electrocardiogram and similar
services. See "Item 1. Business -- Company Strategy."
In June 1993, the Company acquired all of the outstanding stock of Patient
Care Pharmacy, Inc. ("PCP"), a California corporation engaged in the business of
providing pharmacy services to geriatric care facilities and other healthcare
providers in Southern California. The Company combined the operations of PCP
with CPL's pharmacy operations. The total cost for PCP was $10.4 million
including $9.84 million representing the issuance of 425,674 shares of the
Company's Common Stock. In addition, the Company had agreed to make contingent
payments in the shares of the Company's Common Stock following each of the next
three years based upon the earnings of PCP. On March 3, 1995, the Company and
the PCP stockholders terminated all rights to contingent payments in
consideration for a payment of $3.5 million in the form of 92,434 shares of IHS
Common Stock. IHS sold this business in July 1996. See "-- Divestitures."
In July 1993, Comprehensive Post Acute Services, Inc. ("CPAS"), a newly
formed subsidiary 80% owned by the Company and 20% owned by Chi Systems, Inc.,
formerly Chi Group, Inc. ("Chi"), acquired joint ventures and contracts to
develop and manage subacute programs from Chi. Chi is a healthcare consulting
company in which John Silverman, a director of the Company, is President and
Chief Financial Officer and an approximately 16% stockholder. The purchase price
was $200,000 and IHS had made available a loan commitment of $300,000 for
working capital purposes, which loan bore interest at a rate equal to Citicorp's
base rate plus four percent. As of July 21, 1994, the Company
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purchased the remaining 20% of CPAS from Chi for 5,200 shares of IHS Common
Stock valued at $159,900. In connection with this transaction, the Company
engaged Chi to act as consultant with respect to the Company's transitional care
units. The consulting agreement, which expired June 30, 1997, provides for the
payment, in four equal installments, of a $100,000 annual consulting fee.
In October 1993, the Company acquired, effective as of September 30, 1993,
Health Care Systems, Inc., which owns Health Care Consulting, Inc. ("HCC") and
RMi, Inc., a Rehabilitation Company ("RMI"), for $1.85 million in cash and a
five-year earnout, up to a maximum of $3.75 million based upon achievement of
pre-tax earnings targets. HCC is a specialty reimbursement and consulting
company with expertise in subacute rehabilitation programs. RMI provides direct
therapy services, including physical therapy, occupational therapy and speech
pathology, to healthcare facilities. RMI also provides management and consulting
services in the oversight and training of therapists employed by geriatric care
facilities to facilitate higher quality patient care. In July 1996, the Company
issued warrants to purchase 20,000 shares of Common Stock at a purchase price
per share of $37.88 to each of Scott Robertson, Gary Kelso and Grantly Payne in
exchange for their rights under the five-year earn-out agreement.
In December 1993, the Company purchased all of the capital stock of
Associated Therapists Corporation, d/b/a Achievement Rehab ("Achievement"), a
provider of rehabilitation therapy services on a contract basis to various
geriatric facilities in Minnesota, Indiana and Florida. The purchase price of
$22.5 million consisted of 839,865 shares of the Company's Common Stock (based
on the average price of the stock of $26.79), plus a contingent earn-out
payment, also payable in shares of Common Stock, based upon increases in
Achievement's earnings in 1994, 1995 and 1996 over a base amount. The total cost
was applied primarily to intangible assets. The final earn-out amount of
approximately $26.44 million was paid in March 1997 through the issuance of
976,504 shares of IHS Common Stock.
On July 7, 1994, the Company acquired all the outstanding capital stock of
Cooper Holding Corporation ("Cooper"), a Delaware corporation engaged in the
business of providing mobile x-ray and electrocardiogram services to long-term
care and subacute care facilities in California, Florida, Georgia, Indiana,
Nebraska, Ohio, Oklahoma, Texas and Virginia. The purchase price for Cooper was
approximately $44.5 million, including $19.9 million representing the issuance
of 593,953 shares of the Company's Common Stock and options to acquire 51,613
shares of Common Stock (based on the average closing price of the Common Stock
of $30.81 over the 30 day period prior to June 2, 1994, the date on which the
Cooper acquisition was publicly announced). In addition, the Company repaid
approximately $27.2 million of Cooper's debt.
On August 8, 1994, the Company acquired substantially all the assets of
Pikes Peak Pharmacy, Inc., a company which provides pharmacy services to
patients at nine facilities in Colorado Springs, Colorado which have an
aggregate of 625 beds, for $646,000. The Company subsequently sold this business
as part of the sale of the pharmacy division.
On September 23, 1994 the Company acquired substantially all of the assets
of Pace Therapy, Inc., a company which provides physical, occupational, speech
and audiology therapy services to approximately 60 facilities in Southern
California and Nevada. The purchase price for Pace was $5.8 million,
representing the issuance of 181,822 shares of the Company's Common Stock. In
addition, the Company repaid approximately $1.6 million of Pace's debt.
On October 7, 1994 the Company acquired all of the outstanding stock of
Amcare, Inc., an institutional pharmacy serving approximately 135 skilled
nursing facilities in California, Minnesota, New Jersey and Pennsylvania. The
purchase price for Amcare was $21.0 million, including $10.5 million
representing the issuance of 291,101 shares of the Company's Common Stock. The
Company subsequently sold this business in the sale of its pharmacy division.
On October 11, 1994 the Company acquired substantially all of the assets of
Pharmaceutical Dose Service of La., Inc., an institutional pharmacy serving 14
facilities. The purchase price for PDS was $4.2 million, including $3.9 million
representing the issuance of 122,117 shares of the Company's Common Stock. The
Company subsequently sold this business in the sale of its pharmacy division.
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On November 2, 1994 the Company acquired all of the outstanding stock of
CareTeam Management Services, Inc., a home health company serving Arizona,
Kansas, Missouri, New Mexico, North Carolina and Texas. The purchase for
CareTeam was $5.9 million, including $5.2 million representing the issuance of
147,068 shares of the Company's Common Stock.
On November 3, 1994 the Company acquired all of the outstanding stock of
Therapy Resources, a company which provides physical, occupational, speech and
audiology services to approximately 22 geriatric care facilities and operates
seven out-patient rehabilitation facilities. The purchase price was $1.6
million.
On November 3, 1994 the Company acquired all of the outstanding stock of
Rehab People, Inc., a company which provides physical, occupational and speech
therapy services to approximately 38 geriatric care facilities in Delaware, New
York, North Carolina and Pennsylvania. The purchase price for Rehab People was
$10 million representing the issuance of 318,471 shares of Common Stock.
On November 3, 1994, the Company acquired certain assets of Portable X-Ray
Service of Rhode Island, Inc., a mobile x-ray company, for a purchase price of
$2.0 million including $700,000 representing the issuance of 19,739 shares of
the Company's Common Stock.
On November 18, 1994 the Company acquired substantially all of the assets
of Medserv Corporation's Hospital Services Division, which provides respiratory
therapy. The purchase price was $21.0 million.
On December 9, 1994, the Company acquired all rights of Jule Institutional
Supply, Inc. under a management agreement with Samaritan Care, Inc. ("Samaritan
Care"), an entity which provides hospice services, for a purchase price of $14.0
million, representing the issuance of 375,134 shares of the Company's Common
Stock. In addition, the Company acquired the membership interests in Samaritan
Care for no additional consideration.
On December 23, 1994, the Company acquired all of the outstanding stock of
Partners Home Health, Inc., a home health infusion company operating in seven
states. The purchase price was $12.4 million, representing the issuance of
332,516 shares of the Company's Common Stock.
Between August 1994 and January 1995, the Company acquired six additional
radiology and diagnostic service providers for an aggregate consideration of
$3.8 million. These entities provide radiology and diagnostic services in
Indiana, Louisiana, North Carolina, Pennsylvania and Texas.
In January 1995, the Company acquired four ancillary services companies
which provide mobile x-ray and electrocardiogram services to long-term care and
subacute care facilities. The total purchase price was $3.6 million, including
$300,000 representing the issuance of 7,935 shares of the Company's Common
Stock.
In February 1995, the Company acquired all of the assets of ProCare Group,
Inc. and its affiliated entities, which provide home health services in Broward,
Dade and Palm Beach counties, Florida. The total purchase price was $3.9
million, including $3.6 million representing the issuance of 95,062 of the
Company's Common Stock.
In March 1995, the Company purchased Samaritan Management, Inc., which
provides hospice services in Michigan, for $5.5 million, and acquired
substantially all of the assets of Fidelity Health Care, Inc., a company which
provides home healthcare services, temporary staffing services and infusion
services in Ohio, for $2.1 million.
In June 1995, the Company acquired three ancillary services companies which
provide mobile x-ray and electrocardiogram services to long-term and subacute
care facilities. The total purchase price was $2.2 million.
In August 1995, the Company acquired all of the outstanding stock of Senior
Life Care Enterprises, Inc., which provides home health, supplemental staffing,
and management services. The total purchase price was $6.0 million representing
the issuance of 189,785 shares of the Company's Common Stock.
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In September 1995, the Company merged with IntegraCare, Inc.
("IntegraCare"), which provides physical, occupational and speech therapy to
skilled nursing facilities in Florida and operated seven physician practices, in
a transaction that was accounted for as a pooling of interests. Accordingly, the
Company's historical financial statements for all periods prior to the effective
date of the merger have been restated to include the results of IntegraCare. In
addition, the Company incurred $1.9 million of costs as a result of the
IntegraCare merger. This amount is included as a non-recurring charge in the
Company's Statement of Operations for the year ended December 31, 1995. The
Company intends to dispose of the physician practices acquired in this
acquisition.
During 1995, the Company acquired 12 companies providing primarily home
healthcare, x-ray and electrocardiagram services. The total purchase price for
these companies was $8.7 million, and no single acquisition had total costs in
excess of $2.0 million.
In March 1996, the Company acquired all of the outstanding stock of Rehab
Management Systems, Inc., which operates outpatient rehabilitative clinics and
inpatient therapy centers. The total purchase price was $10.0 million, including
$8.0 million representing the issuance of 385,542 shares of the Company's Common
Stock.
In May 1996, the Company acquired all of the assets of Hospice of the Great
Lakes, Inc., which provides hospice services in Illinois. The total purchase
price was $8.2 million representing the issuance of 304,822 shares of the
Company's Common Stock.
In July 1996, the Company sold its pharmacy division. See "--
Divestitures."
In August 1996, the Company acquired all of the outstanding stock of J.R.
Rehab Associates, Inc., which provides rehab therapy services to nursing homes,
hospitals and other healthcare providers. The total purchase price was $2.1
million.
In August 1996, the Company acquired the assets of ExtendiCare of
Tennessee, Inc., which provides home healthcare services, for $3.4 million, and
the assets of Edgewater Home Infusion Services, Inc., which provides home
infusion services, for $8.0 million.
In September 1996, the Company acquired the assets of Century Health
Services, Inc., which provides home healthcare services, for $2.4 million, and
all of the outstanding stock of Signature Home Care, Inc., which provides home
healthcare and management services, for $9.2 million, including $4.7 million
representing the issuance of 196,374 shares of the Company's Common Stock. In
addition, the Company repaid approximately $1.6 million of Century's debt and
$1.9 million of Signature's debt.
In October 1996, the Company acquired, through merger, First American
Health Care of Georgia, Inc. ("First American"). a provider of home health
services in 21 states, principally Alabama, California, Florida, Georgia,
Michigan, Pennsylvania and Tennessee. The purchase price for First American was
$154.1 million in cash plus contingent payments of up to $155 million. The
contingent payments will be payable if (i) legislation is enacted that changes
the Medicare reimbursement methodology for home health services to a
prospectively determined rate methodology, in whole or in part, or (ii) in
respect of any year the percentage increase in the seasonally unadjusted
Consumer Price Index for all Urban Consumers for the Medical Care expenditure
category (the "Medical CPI") is less than 8% or, even if the Medical CPI is
greater than 8% in such year, in any subsequent year prior to 2004 the
percentage increase in the Medical CPI is less than 8%. If payable, the
contingent payments will be paid as follows: $10 million for 1999, which must be
paid on or before February 14, 2000; $40 million for 2000, which must be paid on
or before February 14, 2001; $51 million for 2001, which must be paid on or
before February 14, 2002; $39 million for 2002, which must be paid on or before
February 14, 2003; and $15 million for 2003, which must be paid on or before
February 14, 2004. IHS borrowed the cash purchase price paid at the closing
under its revolving credit facility. $115 million of the $154.1 million paid at
closing was paid to HCFA, the Department of Justice and the United States
Attorney for the Southern District of Georgia in settlement of claims by the
United States government seeking repayment from First American of certain
overpayments and unallowable reimbursements under Medicare. The total settlement
with the United States government was $255 million; the remaining $140 million
will be paid from the contingent payments to the extent such payments become
due.
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In November 1996, the Company acquired the assets of Mediq Mobile X-ray
Services, Inc., which provides mobile diagnostic services, for $10.1 million,
including $5.2 million representing the issuance of 203,721 shares of the
Company's Common Stock, and the assets of Total Rehab Services, LLC and Total
Rehab Services 02, LLC, which provide contract rehabilitative and respiratory
services, for $8.0 million, including $2.7 million representing the issuance of
106,559 shares of the Company's Common Stock. In addition, the Company repaid
approximately $3.9 million of Total Rehab's debt.
In November 1996, the Company acquired all of the outstanding stock of
Lifeway, Inc., which provides physician and disease management services. The
total purchase price was $900,000 representing the issuance of 38,502 shares of
the Company's Common Stock. IHS also issued 48,129 shares of Common Stock to
Robert Elkins, Chairman and Chief Executive Officer of the Company, in payment
of outstanding loans of $1.1 million from Mr. Elkins to LifeWay.
During 1996, the Company acquired seven companies providing primarily
mobile x-ray services. The total purchase price was $2.6 million, and no single
acquisition had total costs in excess of $2.0 million.
In January 1997, the Company acquired all of the outstanding stock of
In-Home Healthcare, Inc., which provides home healthcare services. The total
purchase price was $3.2 million.
In February 1997, the Company acquired the assets of Portable X-Ray Labs,
Inc., which provides mobile x-ray services, for $4.9 million.
In June 1997, the Company acquired all the outstanding capital stock of
Health Care Industries, Inc., a home health company in Florida, for $1.8
million, and substantially all the assets of Rehab Dynamics, Inc. and
Restorative Therapy, Ltd., related contract rehab companies, for $19.7 million,
including $11.5 million representing the issuance of 331,379 shares of the
Company's Common Stock.
In August 1997, IHS acquired all the outstanding capital stock of Arcadia
Services, Inc., a home health company, for $17.2 million representing the
issuance of 581,451 shares of the Company's Common Stock, and all the
outstanding capital stock of Ambulatory Pharmaceutical Services, Inc. and APS
American, Inc., related home health companies, for $36.3 million, including
$18.1 million representing the issuance of 532,240 shares of the Company's
Common Stock.
In September 1997, the Company acquired all the outstanding capital stock
of Barton Creek Health Care, Inc., a home health company. Total purchase price
was $4.9 million.
In October 1997, IHS acquired RoTech through merger of a wholly-owned
subsidiary of IHS into RoTech (the "RoTech Merger"), with RoTech becoming a
wholly-owned subsidiary of IHS. RoTech provides home healthcare products and
services, with an emphasis on home respiratory, home medical equipment and
infusion therapy, primarily to patients in non-urban areas. IHS issued
approximately 15,598,400 shares of Common Stock in the RoTech Merger, and
reserved for issuance approximately 1,737,476 shares of Common Stock issuable
upon exercise of RoTech options. The RoTech Merger consideration aggregated
approximately $506.6 million, substantially all of which was recorded as
goodwill. IHS repaid the $201.0 million of RoTech bank debt assumed in the
transaction and repurchased $107.836 million of RoTech's convertible
subordinated debentures; $2.164 million principal amount of RoTech debentures,
convertible into approximately 47,865 shares of Common Stock, remains
outstanding.
In October 1997, IHS acquired substantially all of the assets of Coram's
Lithotripsy Division, which operated 20 mobile lithotripsy units and 13
fixed-site machines in 180 locations in 18 states. The Coram Lithotripsy
Division also provides maintenance services to its own and third-party
equipment. Lithotripsy is a non-invasive technique that utilizes shock waves to
disintegrate kidney stones. IHS paid approximately $131.0 million in cash for
the Coram Lithotripsy Division, including the payment of $1.0 million of
intercompany debt to Coram.
In November 1997, IHS purchased the remaining 60% interest in HPC America,
Inc., an operator of home infusion and home healthcare companies, for $26.1
million. IHS purchased a 40% interest in HPC America in September 1995 for $8.2
million.
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In November 1997, the Company acquired the assets of Durham Meridian
Limited Partnership, owner of Treyburn Nursing Center, a skilled nursing
facility, for $4.8 million. The Company also acquired the assets of Richards
Medical Company, Inc. for $2.0 million, Central Medical Supply Company, Inc. for
$1.9 million and Hallmark Respiratory Care for $3.8 million, which are all home
healthcare providers. In addition, the Company purchased a leasehold interest in
Shadow Mountain, a skilled nursing facility, for $4.0 million.
In December 1997, the Company purchased the assets of Sunshine Medical
Equipment, Inc., a home healthcare provider, for $3.3 million and the assets of
the Quest entities of Bradley Medical, Inc., home respiratory care businesses,
for $33.0 million.
During 1997, the Company acquired 17 companies providing primarily home
healthcare and diagnostic services. The total purchase price for these companies
was $9.0 million, and no single acquisition had total costs in excess of $2.0
million.
In January 1998, the Company acquired all the outstanding capital stock of
Paragon Rehabilitative Services, Inc., an Ohio corporation which provides
contract rehabilitation services to nursing homes, long-term care facilities and
other healthcare facilities. The merger consideration was $10.8 million, which
was paid through the issuance of 361,851 shares of the Company's Common Stock.
In January 1998, the Company acquired the assets of nine respiratory
companies for approximately $9.4 million. In February 1998, the Company acquired
the assets of 12 additional respiratory companies for approximately $18.9
million. In March 1998 (through March 20, 1998), IHS acquired two respiratory
companies for approximately $1.8 million.
In addition, at March 20, 1998, IHS had reached agreements in principle to
acquire a lithotripsy company for approximately $10.5 million and 15 respiratory
companies for approximately $42.4 million. There can be no assurance that any of
these pending acquisitions will be consummated on the proposed terms, on
different terms or at all.
Divestitures
On July 11, 1991, the Company sold its audiology business to Hearing Health
Services, Inc., a newly-formed affiliate of privately-held Foster Management
Company. The sale involved all customer lists, license agreements, store leases,
property and equipment, accounts receivable and merchandise inventory. The
Audiology Division's products and services, which were offered at 34 retail
outlets (of which 12 were located in speech pathologist/professional/doctor
offices) in Florida and Illinois, included hearing aids, protective and
assistive listening devices, and hearing, testing and aural rehabilitation
services. The Company received $5 million for substantially all the assets of
the Audiology Division as follows: $1 million in cash and a combination of
common and preferred stock valued by independent financial advisors at $4
million. The common stock was repurchased for $2.6 million plus interest in July
1996 and the preferred stock is convertible under certain conditions and has a
liquidation preference of $2 million. Approximately $450,000 of the cash
proceeds were paid to NovaCare, Inc., an affiliate of Foster Management Company,
representing amounts owed by IHS to NovaCare, Inc. for services rendered. The
Company determined to discontinue the audiology business in June 1990 because it
could not be integrated effectively into its primary business. A substantial
portion of the audiology business had been acquired from Dr. Thomas F. Frist,
Jr., who was a director of the Company until June 1993.
On April 27, 1994, the Company sold its approximate 92% interest in
Professional Community Management International, Inc. ("PCM") to PCM at its book
value of $4.3 million. The Company accepted a promissory note for the full
amount of the purchase price, which note bears interest at 6.36% per annum and
is payable by PCM in installments over a 40 year period. The promissory note is
secured by a pledge of PCM stock held by certain PCM stockholders and a security
interest in all tangible and intangible assets of PCM. Certain stockholders of
PCM also executed personal guarantees with respect to the payment of $1.2
million over a period of six years, subject to reduction in an amount equal to
the amortization of the principal amount of the note. PCM manages residential
condominium units in retirement communities in Southern California.
46
<PAGE>
In July 1996, IHS sold its pharmacy division to Capstone Pharmacy Services,
Inc. ("Capstone") for a purchase price of $150 million, consisting of cash of
$125 million and shares of Capstone common stock having a value of $25 million.
In connection with the sale of the pharmacy division, IHS agreed that prior to
July 2001 neither it nor any of its subsidiaries would be involved, directly or
indirectly, in the operation, management or conduct of any business that
provides institutional pharmacy dispensing or consulting services to long-term
care facilities (including skilled nursing facilities) located within a 150 mile
radius of any IHS long-term care facility or any pharmacy sold to, or operated
by, Capstone, except in certain limited circumstances. The Company's pharmacy
division operated institutional pharmacies in eight states providing service to
over 40,000 beds within 379 facilities. Approximately 17% of the beds were then
owned, leased or managed by IHS. IHS' revenues for the years ended December 31,
1995 and 1996 included revenue generated by the pharmacy division of
approximately $91.0 million (of which $17.5 million was revenue from services to
IHS facilities) and approximately $63.6 million (of which $11.3 million was
revenue from services to IHS facilities), respectively. The Company's earnings
(loss) before income taxes for the years ended December 31, 1995 and 1996
included earnings before income taxes generated by the pharmacy division of
approximately $6.6 million and $6.4 million, respectively. IHS has determined
that its ownership of pharmacy operations is not critical to the development and
implementation of its post-acute care network strategy.
On October 9, 1996, Integrated Living Communities, Inc. ("ILC"), at the
time a wholly-owned subsidiary of IHS which provides assisted living and related
services to the private pay elderly market, completed an initial public offering
of ILC common stock. IHS sold 1,400,000 shares of ILC common stock in the
offering, for which it received aggregate net proceeds of approximately $10.4
million. In addition, ILC used approximately $7.4 million of the proceeds from
the offering to repay outstanding indebtedness to IHS. IHS recorded a pre-tax
loss of approximately $8.5 million in the fourth quarter of 1996 as a result of
this transaction. On July 2, 1997, IHS sold the remaining 2,497,900 shares of
ILC common stock it owned, representing 37.3% of the outstanding ILC common
stock, for $11.50 per share in a cash tender offer (the "ILC Sale"). IHS
recorded a gain of approximately $3.9 million from the ILC Sale in 1997. IHS'
revenues for the years ended December 31, 1995 and 1996 include revenue
generated by ILC of approximately $16.3 million and $17.1 million, respectively.
The Company's earnings (loss) before income taxes for the years ended December
31, 1995 and 1996 include earnings (loss) before income taxes generated by ILC
of approximately $(4.0) million and $1.7 million, respectively. IHS has
determined that the direct operation of assisted-living communities is not
required for its post-acute care network strategy.
In developing its post-acute healthcare system, IHS continuously evaluates
whether owning and operating businesses which provide certain ancillary
services, or contracting with third parties for such services, is more
cost-effective. As a result, the Company is continuously evaluating its existing
operations to determine whether to retain or divest operations. To date, IHS has
divested its pharmacy division and its assisted living services division, and
may divest additional divisions or assets in the future. IHS is currently
pursuing the sale of the pharmacy operations acquired in the acquisition of
certain businesses from HEALTHSOUTH, the sale of approximately 46 facilities
(excluding the 38 facilities held for sale) to real estate investment trust(s)
which would then lease the facilities to Lyric with IHS managing such
facilities, and a "spin-off" of its home nursing operations, although there can
be no assurance it will successfully complete any or all of these transactions.
47
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated the
percentage of net revenues represented by certain items reflected in the
Company's statement of operations and the percentage change in such items from
the prior corresponding fiscal periods.
<TABLE>
<CAPTION>
PERIOD TO PERIOD
PERCENTAGE OF NET REVENUES INCREASE (DECREASE)
-------------------------------- -----------------------
YEAR YEAR
ENDED ENDED
DECEMBER DECEMBER
31, 1996 31, 1997
COMPARED COMPARED
YEARS ENDED DECEMBER 31, TO 1995 TO 1996
-------------------------------- ---------- ------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net revenues:
Basic medical services ................................... 31.3% 27.2% 19.2% 5.8% ( 1.9)%
Specialty medical services ............................... 65.4 69.6 78.9 29.7 57.3
Management services and other ............................ 3.3 3.2 1.9 15.0 ( 14.2)
----- ----- ----- ----- -------
Total Revenues .......................................... 100.0 100.0 100.0 21.7 38.9
----- ----- ----- ----- -------
Costs and Expenses:
Operating expenses ....................................... 75.4 76.2 74.2 23.1 35.2
Corporate administrative and general ..................... 4.8 4.3 3.9 8.9 26.0
Depreciation and amortization ............................ 3.4 2.9 3.5 4.3 69.7
Rent ..................................................... 5.6 5.4 5.3 17.6 35.2
Interest, net ............................................ 3.3 4.5 5.8 64.5 79.7
Loss from impairment of long-lived assets and other
non-recurring charges (income) .......................... 11.2 ( 1.0) 6.7 * *
----- ----- ----- ----- -------
Earnings (loss) before equity in earnings of affiliates,
income taxes, extraordinary items and cumulative
effect of accounting change ............................ ( 3.7) 7.7 0.6 353.2 ( 88.0)
Equity in earnings of affiliates .......................... 0.1 0.1 0.0 (42.6) ( 89.4)
----- ----- ----- ----- -------
Earnings (loss) before income taxes, extraordinary
items and cumulative effect of accounting change ....... ( 3.6) 7.8 0.6 363.8 ( 88.0)
Federal and state income taxes ............................ ( 1.4) 4.5 1.2 491.6 ( 61.6)
----- ----- ----- ----- -------
Earnings (loss) before extraordinary items and cumu-
lative effect of accounting change ..................... ( 2.2) 3.3 ( 0.6) 283.8 ( 123.3)
Extraordinary items ....................................... 0.1 0.1 1.0 41.3 1,336.2
----- ----- ----- ----- -------
Earnings (loss) before cumulative effect of account-
ing change ............................................. ( 2.3) 3.2 ( 1.6) 271.6 ( 168.4)
Cumulative effect of accounting change .................... -- -- 0.1 -- *
----- ----- ----- ----- -------
Net earnings (loss) ..................................... ( 2.3) 3.2 ( 1.7) 271.6 ( 172.3)
===== ===== ===== ===== =======
</TABLE>
- ----------
* Not meaningful.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net revenues for the year ended December 31, 1997 increased $558.50
million, or 38.9% to $1,993.20 million from the comparable period in 1996. Such
increase was attributable to (1) growth in revenues from facilities and
ancillary companies in operation in both periods and facilities and ancillary
companies acquired during 1996 and (2) the addition of new facilities acquired
or leased and ancillary service businesses acquired in 1997 which increased
revenue by $203.31 million. Net revenues in 1996 include revenue of $63.61
million from the pharmacy division prior to its sale in July 1996 and revenues
of $17.1 million from ILC prior to its initial public offering in October 1996.
Basic medical services revenue decreased $7.50 million, or 1.9%, from $389.77
million in 1996 to $382.27 million in 1997. This decrease was attributable to
the conversion of existing basic medical services beds to MSU beds during 1997,
partially offset by the acquisition of 33 owned or leased long-term care
facilities in September 1997 in the CCA Acquisition. Specialty medical services
revenue increased from $999.21 million to $1,571.70 million. Of the $572.50
million increase, $181.53 million, or 31.7%, was attributable to revenue from
acquisitions subsequent to December 31, 1996. The remainder of the increase is
due to increased revenue at facilities in operation in both periods, facilities
and ancillary companies acquired during 1996, and the conversion of basic
medical services beds to MSU beds in 1996 and 1997 partially offset by the sale
of the pharmacy division in 1996. Management services and other revenues
decreased from $45.71 million to $39.22 million.
48
<PAGE>
Total expenses for the period increased from $1,324.04 million to $1,979.96
million, an increase of 49.5%. Of the $655.92 million increase, $166.11 million,
or 25.3%, was attributable to expenses from acquisitions subsequent to December
31, 1996. The remainder of this increase was due to the acquisition of
facilities and ancillary companies during 1996, increased expenses at facilities
and ancillary companies in operation in both periods, partially offset by the
sale of the pharmacy division and a majority interest in ILC in 1996. Salaries,
wages and benefits paid to personnel increased $268.75 million, or 38.7%, from
the year ended December 31, 1996. The increase resulted from salary increases
for existing employees, increases in salaries due to facilities and ancillary
companies acquired during 1996 and 1997, as well as additional personnel needed
due to increased census and the increased medical acuity level of the Company's
patients. Other operating expenses, which include physician fees and fees paid
to independent contractors providing rehabilitative therapy, utilities, food
supplies and facility maintenance, increased $116.31 million, or 29.1%, in 1997
as compared to 1996. This increase was attributable to the aforementioned
facilities and ancillary companies acquired in 1996 and 1997.
Corporate administrative and general expenses for the year ended December
31, 1997 increased by $15.85 million, or 26.0%, over the comparable period in
1996. This increase primarily represents additional operations, information
systems, finance, accounting and other personnel to support the growth of owned
and leased facilities and related services businesses. Depreciation and
amortization increased to $70.75 million during the year ended December 31,
1997, a 69.7% increase as compared to $41.68 million in 1996. Of the $29.07
million increase, $11.15 million, or 38.3%, was attributable to depreciation and
amortization at facilities and ancillary businesses acquired in 1997. The
remaining increase was primarily due to the amortization and depreciation
related to increased routine and capital expenditures at existing facilities,
increased debt issue costs and depreciation and amortization of facilities and
ancillary companies acquired during 1996. Rent expense increased by $27.35
million, or 35.2%, over the comparable period in 1996, primarily as a result of
increased rental equipment at ancillary companies acquired during 1997 and 24
additional facilities leased in 1997. Net interest expense increased $51.09
million, or 79.7%, during the year ended December 31, 1997 to $115.20 million.
The increase was primarily the result of the full year effect of the 10 1/4%
Senior Subordinated Notes due 2006 issued in May 1996, the 9 1/2% Senior
Subordinated Notes due 2007 issued in May 1997, the 9 1/4% Senior Subordinated
Notes due 2008 issued in September 1997 and the $750 million term loan borrowed
in September 1997, partially offset by the repurchase of substantially all the
Company's outstanding 9 5/8% Senior Subordinated Notes due 2002 and the 10 3/4%
Senior Subordinated Notes due 2004, the payoff of the Company's $700 million
revolving credit facility and lower interest rates.
During 1997 the Company recorded non-recurring charges of $133.04 million.
During 1997, the Company recorded a $27.55 million non-recurring charge
resulting from the termination of its proposed merger with Coram, recognized a
$7.58 million gain on the sale of shares received on the sale of the pharmacy
division and a $3.91 million gain on the sale of its remaining interest in ILC
and recorded a $4.75 million charge resulting from termination payments in
connection with the RoTech acquisition. In addition, in connection with the
acquisitions of CCA, RoTech, the Coram Lithotripsy Division and certain
businesses from HEALTHSOUTH Corporation, the Company has chosen to dispose of
certain business activities, including the Company's physician practices,
outpatient clinics, selected nursing facilities in nonstrategic markets, as well
as all international activities. In addition, the Company terminated a national
purchasing contract and wrote-off a purchase option deposit on certain managed
facilities. As a result the Company recorded a non-recurring charge of $112.23
million. In 1996, IHS had non-recurring income of $14.46 million, consisting
primarily of a gain of $34.30 million from the sale of the pharmacy division,
partially offset by a loss of $8.50 million from its sale of shares of ILC, a
$7.82 million loss related to the termination of a management contract and a
$3.52 million non-recurring charge resulting from the closure of certain
redundant home health agencies.
Earnings before income taxes and extraordinary items decreased by 88.0% to
$13.33 million for the year ended December 31, 1997 from $111.48 million for the
comparable period in 1996. The decrease was primarily due to certain
non-recurring charges discussed above. Excluding the non-recurring income and
charges, earnings before income taxes and extraordinary items in 1997 increased
$49.35 million, or 50.9%, over 1996. Of this increase, $37.20 million, or 75.4%,
resulted from acquisitions consummated subsequent to December 31, 1996. The
remaining increase was due to acquisitions consummated during 1996 and
49
<PAGE>
improved operations from facilities and ancillary companies in operation during
both periods. The provision for state and federal income taxes decreased from
$63.72 million in 1996 to $24.45 million in 1997. This decrease was primarily
the result of the non-recurring charge in 1997 and the disproportionately high
income tax provision related to the sale of the Company's pharmacy division in
1996. Because the Company's investment in the common stock received in the sale
of the Company's pharmacy division had a very small tax basis, the taxable gain
on the sale significantly exceeded the gain for financial reporting purposes.
Net loss and diluted loss per share for 1997 was $33.51 million and $1.19 per
share, respectively, compared to net earnings and diluted earnings per share for
1996 of $46.33 million and $1.78 per share. During the year ended December 31,
1997, the Company incurred a $20.55 million (net of tax benefit), or 73 cents
per share (diluted), extraordinary loss on the extinguishment of debt, as
compared to $1.43 million, or 6 cents per share (diluted), in 1996. During 1997
the Company incurred a $1.83 million (net of tax benefit), or 7 cents per share
(diluted), loss on a cumulative effect of accounting change related to the
Company's adoption of EITF 97-13, which required the Company to write-off the
unamortized balance of costs of business process engineering and information
technology projects. Weighted average shares decreased from 31,563,585 (diluted)
in 1996 to 28,253,218 (diluted) in 1997. The weighted average shares decreased
because the impact of the convertible debentures and options outstanding were
not included in weighted average shares in 1997 because they were anti-dilutive.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net revenues for the year ended December 31, 1996 increased $255.81
million, or 21.7%, to $1,434.70 million from the comparable period in 1995. Such
increase was attributable to (1) growth in revenues from facilities and
ancillary companies in operation in both periods and facilities and ancillary
companies acquired during 1995, as well as the conversion of MSU beds at
existing facilities of $78.17 million, (2) the addition of new facilities
acquired or leased and ancillary service businesses acquired in 1996 which
increased revenue by $171.69 million, and (3) increased management services and
other revenue of $5.95 million. The increase in revenues was partially offset by
the sale of the pharmacy division in July 1996, which generated revenues of
$91.0 million in 1995 and $63.6 million in 1996. In addition, net revenues
include revenues for ILC of $16.3 million, and $17.1 million in 1995 and 1996
(through October 9, 1996). Basic medical services revenue increased $21.20
million, or 5.8%, from $368.57 million in 1995 to $389.77 million in 1996. Of
the $21.20 million increase, $12.20 million, or 57.5%, was attributable to the
addition of 391 leased and 110 owned beds in 1996. The remainder of the increase
was due to the addition of facilities during 1995, partially offset by the
conversion of existing basic medical services beds to MSU beds. Specialty
medical services revenue increased from $770.55 million to $999.21 million. Of
the $228.66 million increase, $158.87 million, or 69.5%, was attributable to
revenue from acquisitions subsequent to December 31, 1995. The remainder of the
increase is due to increased revenue at facilities in operation in both periods,
facilities and ancillary companies acquired during 1995, and the conversion of
basic medical services beds to MSU beds in 1996 partially offset by the sale of
the pharmacy division and a majority interest in ILC. Management services and
other revenues increased from $39.77 million to $45.71 million. The increase was
due to the addition of four management contracts in 1996, 43 management
contracts during 1995 and improved operating results at facilities managed in
both periods, partially offset by the termination in December 1995 of an
agreement to manage 23 facilities.
Total expenses for the period increased from $1,222.59 million to $1,324.04
million, an increase of 8.3%. This increase was due to the acquisition of
facilities and ancillary companies subsequent to December 31, 1995, partially
offset by the sale of the pharmacy division and a majority interest in ILC.
Salaries, wages and benefits paid to personnel increased $144.37 million, or
26.3%, from the year ended December 31, 1995. Of the $144.37 million increase,
approximately $86.50 million was attributable to facilities and ancillary
companies acquired subsequent to December 31, 1995. The remaining increase
resulted from salary increases for existing employees, increases in salaries due
to facilities and ancillary companies acquired during 1995, as well as
additional personnel needed due to increased census and the increased medical
acuity level of the Company's patients. Other operating expenses, which include
physician fees and fees paid to independent contractors providing rehabilitative
therapy, utilities, food supplies and facility maintenance, increased $61.03
million, or 18.0%, in 1996 as compared to 1995. Of this increase, approximately
$58.79 million was attributable to the aforementioned facilities and ancillary
companies acquired in 1996.
50
<PAGE>
Corporate administrative and general expenses for the year ended December
31, 1996 increased by $4.96 million, or 8.9%, over the comparable period in
1995. This increase primarily represents additional operations, information
systems, finance, accounting and other personnel to support the growth of owned,
leased and managed facilities and related services businesses. Depreciation and
amortization increased to $41.68 million during the year ended December 31,
1996, a 4.3% increase as compared to $39.96 million in the comparable period of
1995. Of the $1.72 million increase, $4.01 million was attributable to
depreciation and amortization at facilities and ancillary businesses acquired in
1996. The remaining increase was primarily due to the amortization and
depreciation related to increased routine and capital expenditures at existing
facilities, increased debt issue costs and increases in depreciation and
amortization of facilities and ancillary companies acquired during 1995,
partially offset by a change in accounting method in 1996 from deferring and
amortizing pre-opening costs to expensing them when incurred. Rent expense
increased by $11.66 million, or 17.6%, over the comparable period in 1995,
primarily as a result of increased rental equipment at ancillary companies
acquired during 1996, two leaseholds acquired in 1996 and increases in
contingent rentals based on gross revenues. Net interest expense increased
$25.13 million during the year ended December 31, 1996 to $64.11 million. The
increase was primarily the result of the full year effect of the 9 5/8% Senior
Subordinated Notes due 2002 issued in May 1995, the 10 1/4% Senior Subordinated
Notes due 2006 issued in May 1996, and increased borrowings under the Company's
$700 million revolving credit facility which closed in May 1996.
In the fourth quarter of 1995, the Company, as well as industry analysts,
concluded that Medicare and Medicaid reform was imminent. Both the House and
Senate balanced budget proposals proposed a reduction in future growth in
Medicare and Medicaid spending from 10% a year to approximately 4-6% a year.
While Medicare and Medicaid reform had been discussed prior to the fourth
quarter, the Company came to believe that a future reduction in the growth of
Medicare and Medicaid spending was virtually a certainty. Such reforms include,
in the near term, a continued freeze in the Medicare routine costs limit
("RCL"), followed by reduced increases in later years, more stringent
documentation requirements for Medicare RCL exception requests, reductions in
the growth in Medicaid reimbursement in most states, as well as salary
equivalency in rehabilitative services, and, in the longer term (2-3 years), a
switch to a prospective payment system for home care and nursing homes, and
repeal of the "Boren Amendment", which requires that states pay hospitals
"reasonable and adequate" rates. The Company estimated the effect of the
aforementioned reforms on each nursing and subacute facility, as well as on its
rehabilitative services, respiratory therapy, home care, mobile diagnostic and
pharmacy divisions by reducing (or in some cases increasing) the future revenues
and expense growth rates for the impact of each of the aforementioned factors.
Accordingly, these events and circumstances triggered the early adoption of
Statement of Financial Accounting Standards ("SFAS") No. 121 in the fourth
quarter of 1995. In accordance with SFAS No. 121, the Company estimated the
future cash flows expected to result from those assets to be held and used.
In estimating the future cash flows for determining whether an asset is
impaired, and if expected future cash flows used in measuring assets are
impaired, the Company grouped its assets at the lowest level for which there are
identifiable cash flows independent of other groups of assets. These levels were
each of the individual nursing/subacute facilities, and each of the home health,
rehabilitative therapy, respiratory therapy, pharmacy and mobile diagnostics
divisions. The results of comparing future undiscounted cash flows to historical
carrying value were that some individual nursing facilities and one assisted
living facility were identified for an impairment charge. None of the remaining
facilities or business units were eligible since only those facilities or
business units where the carrying value exceeded the undiscounted cash flows are
considered impaired. Prior to adoption of SFAS 121, the Company evaluated
impairment on the entity level. Such an evaluation yielded no impairment as of
September 30, 1995.
After determining the facilities identified for an impairment charge the
Company determined the estimated fair value of such facilities. Also, the
Company obtained valuation estimates prepared by independent appraisers or had
received offers from potential buyers on six of the facilities eligible for
impairment, comprising 72.4% of the total charge. Such valuation estimates were
obtained to corroborate the Company's estimate of value. The excess carrying
value of goodwill, buildings and improvements, leasehold improvements and
equipment above the fair value was $83.32 million (of which $1.53
51
<PAGE>
million represented goodwill and $81.79 million represented property and
equipment) and is included in the statement of operations for 1995 as loss on
impairment of long-lived assets.
In 1996, IHS had non-recurring income of $14.46 million, consisting
primarily of a gain of $34.30 million from the sale of the pharmacy division,
partially offset by a loss of $8.50 million from its sale of shares of ILC, a
$7.82 million loss related to the termination of a management contract and a
$3.52 million non-recurring charge resulting from the closure of certain
redundant home health agencies. During the fourth quarter of 1995, the Company
terminated a 10 year contract entered into in January 1994 to manage 23
long-term care and psychiatric facilities in California owned by Crestwood
Hospital. The terms of the contract required the payment of a management fee to
IHS and a preferred return to the Crestwood owners. IHS terminated the
management contract with Crestwood Hospital due primarily to changes in
California Medicaid rates which no longer provided sufficient cash flow at the
facilities to support both IHS' management fee and the preferred return to the
owners. As a result, the Company incurred a loss of $21.92 million. Such loss
consists of the write-off of $8.50 million of management fees, $11.10 million of
loans made to Crestwood Hospital and the owners of Crestwood, as well as the
interest thereon, and $2.32 million of contract acquisition costs. During the
third quarter of 1995, the Company merged with IntegraCare, Inc. in a
transaction accounted for as a pooling of interests. In connection with this
transaction, the Company incurred merger costs of $1.94 million for accounting,
legal and other costs. In addition, in the fourth quarter of 1995 IHS changed
its accounting estimate regarding the future benefit of deferred pre-opening
costs. This change was made in recognition of the change in the estimated future
benefit of such costs resulting from the effect of the aforementioned Medicare
and Medicaid reforms. As a result, the Company wrote-off $25.78 million of
deferred pre-opening costs. See "-- Acquisition and Divestiture History."
Equity in earnings of affiliates decreased by 42.6% to $828,000 from $1.44
million in the comparable period of 1995. Equity in earnings of affiliates
include for 1996 IHS' 37.3% interest in the earnings (loss) of ILC from October
9, 1996, the closing date of ILC's initial public offering, which resulted in
ILC no longer being a wholly owned subsidiary of IHS.
Earnings before income taxes and extraordinary item increased by 363.8% to
$111.48 million for the year ended December 31, 1996, as compared to a loss of
$42.26 million for the comparable period in 1995. The increase was primarily due
to certain non-recurring charges and income discussed previously as well as
significant acquisitions during 1996. The provision for state and federal income
taxes increased from a benefit of $16.27 million in 1995 to an expense of $63.72
million in 1996. Net earnings and diluted earnings per share for 1996 were
$46.33 million and $1.78 per share, respectively, compared to a net loss and
diluted loss per share for 1995 of $27.00 million and $1.26 per share. During
the year ended December 31, 1996, the Company incurred a $1.43 million (net of
tax benefit), or 4 cents a share (diluted), extraordinary loss on the
extinguishment of debt, as compared to $1.01 million, or 5 cents a share
(diluted), in 1995. Weighted average shares increased from 21,463,464 (diluted)
in 1995 to 31,563,585 (diluted) in 1996. The weighted average shares increased
because the impact of the convertible debentures and options outstanding were
not included in weighted average shares in 1995 because they were anti-dilutive.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had net working capital of $63.12
million, as compared with $57.55 million at December 31, 1996. There are no
material capital commitments for capital expenditures as of the date of this
filing. Patient accounts receivable and third-party payor settlements receivable
increased $276.55 million to $603.43 million at December 31, 1997, as compared
to $326.88 million at December 31, 1996. The entire increase resulted from
patient accounts receivable and third-party payor settlements of facilities and
ancillary service businesses acquired in 1997, partially offset by a $12.70
million decrease in patient accounts receivable and third-party payor
settlements of facilities and ancillary service businesses in operation during
both years and $11.68 million of patient accounts receivable and third-party
payor settlements at December 31, 1996 of facilities and ancillary service
businesses sold in 1997. Gross patient accounts receivable were $726.15 million
at December 31, 1997 as compared with $340.8 million at December 31, 1996.
Third-party payor settlements receivable from federal and
52
<PAGE>
state governments (i.e., Medicare and Medicaid cost reports) were $58.55 million
at December 31, 1997 as compared to $42.59 million at December 31, 1996.
Approximately $12.80 million, or 21.9%, of the third-party payor settlements
receivable at December 31, 1997 represent the costs for its MSU patients which
exceed regional reimbursement limits established under Medicare, as compared to
approximately $15.6 million, or 36.7%, at December 31, 1996. The Company's cost
of care for its MSU patients generally exceeds regional reimbursement limits
established under Medicare. The success of the Company's MSU strategy will
depend in part on its ability to obtain reimbursement for those costs which
exceed the Medicare established reimbursement limits by obtaining waivers of
these cost limitations. The Company has submitted waiver requests for 325 cost
reports, covering all cost report periods through December 31, 1996. To date,
final action has been taken by the Health Care Financing Administration ("HFCA")
on all 325 waiver requests. The Company's final rates as approved by HCFA
represent approximately 95% of the requested rates as submitted in the waiver
requests. There can be no assurance, however, that the Company will be able to
recover its excess costs under any waiver requests which may be submitted in the
future. The Company's failure to recover substantially all these excess costs
would adversely affect its results of operations and could adversely affect its
MSU strategy.
All remaining balance sheet increases were due to acquisitions and normal
growth in operations in both years which was consistent with the growth in
revenues of such operations in 1997.
On May 30, 1997, IHS issued $450 million aggregate principal amount of its
9 1/2% Senior Subordinated Notes due 2007 (the "9 1/2% Senior Notes"). Interest
on the 9 1/2% Senior Notes is payable semi-annually on March 15 and September
15. The 9 1/2% Senior Notes are redeemable for cash at any time after September
15, 2002, at IHS' option, in whole or in part, initially at a redemption price
equal to 104.75% of the principal amount and declining to 100% of the principal
amount on September 15, 2005, plus accrued interest thereon to the date fixed
for redemption. In addition, the Company may redeem up to $150 million principal
amount of the 9 1/2% Senior Notes at any time prior to September 15, 2000 at a
redemption price equal to 108.50% of the aggregate principal amount so redeemed,
plus accrued interest thereon, out of the net cash proceeds of one or more
Public Equity Offerings (as defined in the indenture under which the 9 1/2%
Senior Notes were issued). In the event of a change in control of IHS (as
defined in the indenture under which the 9 1/2% Senior Notes were issued), each
holder of 9 1/2% Senior Notes may require IHS to repurchase such holder's 9 1/2%
Senior Notes, in whole or in part, at 101% of the principal amount thereof, plus
accrued interest to the repurchase date. The Company used approximately $247.2
million of the net proceeds from the sale of the 9 1/2% Senior Notes to
repurchase substantially all its outstanding 9 5/8% Senior Subordinated Notes
due 2002 and 10 3/4% Senior Subordinated Notes due 2004 and the remaining $191.0
million of net proceeds to pay down borrowings under its $700 million revolving
credit facility.
On September 11, 1997, IHS issued $500 million aggregate principal amount
of its 9 1/4% Senior Subordinated Notes due 2008 (the "9 1/4% Senior Notes").
Interest on the 9 1/4% Senior Notes is payable semi-annually on January 15 and
July 15. The 9 1/4% Senior Notes are redeemable in whole or in part at the
option of IHS at any time on or after January 15, 2003, at a price, expressed as
a percentage of the principal amount, initially equal to 104.625% and declining
to 100% on January 15, 2006, plus accrued interest thereon. In addition, IHS may
redeem up to $166,667,000 aggregate principal amount of 9 1/4% Senior Notes at
any time and from time to time prior to January 15, 2001 at a redemption price
equal to 109.25% of the aggregate principal amount thereof, plus accrued
interest thereon, out of the net cash proceeds of one or more Public Equity
Offerings (as defined in the indenture under which the 9 1/4% Senior Notes were
issued). In the event of a change in control of IHS (as defined in the indenture
under which the 9 1/4% Senior Notes were issued), each holder of 9 1/4% Senior
Notes may require IHS to repurchase such holder's 9 1/4% Senior Notes, in whole
or in part, at 101% of the principal amount thereof, plus accrued interest to
the repurchase date. The Company used approximately $321.5 million of the net
proceeds to repay all amounts outstanding under the Company's $700 million
revolving credit facility, and used the remaining approximately $164.9 million
to pay a portion of the purchase price for the acquisition of the businesses
acquired from HEALTHSOUTH and for general corporate purposes, including working
capital.
The indentures under which the 9 1/2% Senior Notes and the 9 1/4% Senior
Notes were issued contain certain covenants, including, but not limited to,
covenants with respect to the following matters: (i) limitations on additional
indebtedness unless certain ratios are met; (ii) limitations on other
subordinated debt;
53
<PAGE>
(iii) limitations on liens; (iv) limitations on the issuance of preferred stock
by IHS' subsidiaries; (v) limitations on transactions with affiliates; (vi)
limitations on certain payments, including dividends; (vii) application of the
proceeds of certain asset sales; (viii) restrictions on mergers, consolidations
and the transfer of all or substantially all of the assets of IHS to another
person; and (ix) limitations on investments and loans.
On September 15, 1997, the Company entered into a $1.75 billion revolving
credit and term loan facility with Citibank, N.A., as Administrative Agent, and
certain other lenders (the "New Credit Facility") to replace its existing $700
million revolving credit facility. The New Credit Facility consists of a $750
million term loan facility (the "Term Facility") and a $1 billion revolving
credit facility, including a $100 million letter of credit subfacility and a $10
million swing line subfacility (the "Revolving Facility"). The Term Facility,
all of which was borrowed on September 17, 1997, matures on September 30, 2004
and will be amortized beginning December 31, 1998 as follows: 1998 -- $7.5
million; each of 1999, 2000, 2001 and 2002 -- $7.5 million (payable in equal
quarterly installments); 2003 -- $337.5 million (payable in equal quarterly
installments); and 2004 -- $375 million (payable in equal quarterly
installments). Any unpaid balance will be due on the maturity date. The Term
Facility bears interest at a rate equal to, at the option of IHS, either (i) in
the case of Eurodollar loans, the sum of (x) one and three-quarters percent or
two percent (depending on the ratio of the Company's Debt (as defined in the New
Credit Facility) to earnings before interest, taxes, depreciation, amortization
and rent, pro forma for any acquisitions or divestitures during the measurement
period (the "Debt/EBITDAR Ratio")) and (y) the interest rate in the London
interbank market for loans in an amount substantially equal to the amount of
borrowing and for the period of borrowing selected by IHS or (ii) the sum of (a)
the higher of (1) Citibank, N.A.'s base rate or (2) one percent plus the latest
overnight federal funds rate plus (b) a margin of one-half percent or
three-quarters of one percent (depending on the Debt/EBITDAR Ratio). The Term
Facility can be prepaid at any time in whole or in part without penalty.
In connection with the acquisition of certain businesses from HEALTHSOUTH,
IHS and the lenders under the New Credit Facility amended the New Credit
Facility to provide for an additional $400 million term loan facility (the
"Additional Term Facility") to finance a portion of the purchase price for the
acquisition and to amend certain covenants to permit the consummation of the
acquisition. The Additional Term Facility, which was borrowed at the closing of
the acquisition, will mature on December 31, 2005, and will be amortized
beginning December 31, 1998 as follows: 1998 -- $4 million; each of 1999, 2000,
2001, 2002 and 2003 -- $4 million (payable in equal quarterly installments);
2004 -- $176 million (payable in equal quarterly installments); and 2005 -- $200
million (payable in equal quarterly installments). The Additional Term Facility
bears interest at a rate equal to, at the option of IHS, either (i) in the case
of Eurodollar loans, the sum of (x) two and one-quarter percent or two and
one-half percent (depending on the Debt/EBITDAR Ratio) and (y) the interest rate
in the London interbank market for loans in an amount substantially equal to the
amount of borrowing and for the period of borrowing selected by IHS or (ii) the
sum of (a) the higher of (1) Citibank, N.A.'s base rate or (2) one percent plus
the latest overnight federal funds rate plus (b) a margin of one percent or one
and one-quarter percent (depending on the Debt/EBITDAR Ratio). The Additional
Term Facility can be prepaid at any time in whole or in part without penalty.
The Revolving Facility will reduce to $800 million on September 30, 2001
and $500 million on September 30, 2002, with a final maturity on September 15,
2004; however, the $100 million letter of credit subfacility and $10 million
swing line subfacility will remain at $100 million and $10 million,
respectively, until final maturity. The Revolving Facility bears interest at a
rate equal to, at the option of IHS, either (i) in the case of Eurodollar loans,
the sum of (x) between three-quarters of one percent and one and three-quarters
percent (depending on the Debt/EBITDAR Ratio) and (y) the interest rate in the
London interbank market for loans in an amount substantially equal to the amount
of borrowing and for the period of borrowing selected by IHS or (ii) the sum of
(a) the higher of (1) Citibank, N.A.'s base rate or (2) one percent plus the
latest overnight federal funds rate plus (b) a margin of between zero percent
and one-half percent (depending on the Debt/EBITDAR Ratio). Amounts repaid under
the Revolving Facility may be reborrowed prior to the maturity date.
The New Credit Facility limits IHS' ability to incur indebtedness or
contingent obligations, to make additional acquisitions, to sell or dispose of
assets, to create or incur liens on assets, to pay dividends, to purchase or
redeem IHS' stock and to merge or consolidate with any other person. In
addition, the New Credit Facility requires that IHS meet certain financial
ratios, and provides the banks with the right to
54
<PAGE>
require the payment of all amounts outstanding under the facility, and to
terminate all commitments under the facility, if there is a change in control of
IHS or if any person other than Dr. Robert N. Elkins, IHS' Chairman and Chief
Executive Officer, or a group managed by Dr. Elkins, owns more than 40% of IHS'
stock. The New Credit Facility is guaranteed by all of IHS' subsidiaries (other
than inactive subsidiaries) and secured by a pledge of all of the stock of
substantially all of IHS' subsidiaries.
The New Credit Facility replaced the Company's $700 million revolving
credit facility (the "Prior Credit Facility"). As a result, the Company recorded
an extraordinary loss on extinguishment of debt of approximately $2.39 million
(net of related tax benefit of approximately $1.52 million) in the third quarter
of 1997 resulting from the write-off of deferred financing costs of $3.91
million related to the Prior Credit Facility.
Net cash provided by operating activities was $46.15 million for the year
ended December 31, 1997 as compared to $33.83 million provided by operating
activities for the comparable period in 1996. Cash provided by operating
activities for the year ended December 31, 1997 increased from the comparable
period in 1996 primarily as a result of an increase in net earnings before
non-cash charges, partially offset by an increase in patient accounts and
third-party payor settlements receivable and a decrease in accounts payable and
accrued expenses.
Net cash provided by financing activities was $1,688.83 million for the
year ended December 31, 1997 as compared to $249.53 million for the comparable
period in 1996. In both periods, the Company received proceeds from long-term
borrowings. In addition, in 1996 IHS reissued in connection with contingent
earnouts all 400,600 shares of its common stock in treasury, which shares were
repurchased in 1995 for $12.79 million. In 1997 the Company repurchased 548,500
shares of its Common Stock for approximately $19.81 million.
Net cash used by investing activities was $1,721.04 million for the year
ended December 31, 1997 as compared to $283.25 million for the year ended
December 31, 1996. Cash used for the purchase of property, plant and equipment
was $126.86 million for the year ended December 31, 1997 and $145.90 million in
the comparable period in fiscal 1996. During 1996, the Company sold a majority
interest in its assisted living division and its pharmacy division for
approximately $136.71 million. Cash used for business acquisitions was $1,560.40
million for 1997 as compared to $242.82 million for 1996.
IHS' contingent liabilities (other than liabilities in respect of
litigation and the contingent payments in respect of the First American
acquisition) aggregated approximately $86.60 million as of December 31, 1997.
The Company is obligated to purchase its Greenbriar facility upon a change in
control of IHS. The net price of the facility is approximately $4.01 million.
The Company has guaranteed approximately $6.60 million of the lessor's
indebtedness. IHS is required, upon certain defaults under the lease, to
purchase its Orange Hills facility at a purchase price equal to the greater of
$7.13 million or the facility's fair market value. The Company has guaranteed
approximately $4.02 million owed by Tutera Group, Inc. and Sunset Plaza Limited
Partnership, a partnership affiliated with a partnership in which IHS has a 49%
interest, to Finova Capital Corporation. IHS has established several irrevocable
standby letters of credit with the Bank of Nova Scotia totaling $32.37 million
at December 31, 1997 to secure certain of the Company's self-insured workers'
compensation obligations, health benefits and other obligations. In addition,
IHS has several surety bonds in the amount of $32.47 million to secure certain
of the Company's health benefits, patient trust funds and other obligations. In
addition, with respect to certain acquired businesses IHS is obligated to make
certain contingent payments if earnings of the acquired business increase or
earnings targets are met. The Company is also obligated under certain
circumstances to make contingent payments of up to $155 million in respect of
IHS' acquisition of First American, of which $113.04 million (representing its
present value) was recorded on the balance sheet at December 31, 1997. The
Company is obligated to purchase the remaining interests in its lithotripsy
partnerships at a defined price in the event legislation is passed or
regulations adopted that would prevent the physician partners from owning an
interest in the partnership and using the partnership's lithotripsy equipment
for the treatment of his or her patients. See " -- Acquisition and Divestiture
History -- Acquisitions." In addition, IHS has obligations under operating
leases aggregating approximately $704.89 million at December 31, 1997.
The liquidity of the Company will depend in large part on the timing of
payments by private third-party and governmental payors. In addition, the
Company's liquidity is dependent upon the timing of the approv-
55
<PAGE>
als, if any, of waivers of Medicare regional cost reimbursement limitations
which exceed the limits established under Medicare. Costs in excess of the
regional reimbursement limits relate to the delivery of services and patient
care to the Company's MSU patients.
The Company anticipates that working capital from operations and borrowings
under revolving credit facilities will be adequate to cover its scheduled debt
payments and future anticipated capital expenditure requirements throughout
1998. The Company will fund future acquisitions with a combination of cash flow
from operations, bank borrowings and debt and equity offerings.
YEAR 2000 COMPLIANCE
The Company has conducted a comprehensive review of its computer systems to
identify the systems that are affected by the "Year 2000" issue and has
substantially completed an implementation plan to resolve this issue. This issue
affects computer systems that have date sensitive programs that may not properly
recognize the year 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail, resulting in business
interruption. In 1997, the Company commenced a year 2000 conversion project for
all of its locations to address necessary software upgrades, training, data
conversion, testing and implementation. The Company will incur internal staff
costs as well as consulting and other expenses to complete the project by the
middle of 1999. Costs related to the year 2000 issue are being expensed as
incurred. The Company does not expect the amounts required to be expensed during
the project to have a material effect on its financial position or results of
operation.
The year 2000 issue is expected to affect the systems of various entities
with which the Company interacts, including payors, suppliers and vendors. There
can be no assurance that the systems of other companies on which the Company's
systems rely will be timely converted, or that a failure by another company's
systems to be year 2000 compliant would not have a material adverse effect on
the Company.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains, and losses)
in a full set of general purpose financial statements. Also, the FASB recently
issued Statement of Financial Standards No. 132, "Employers' Disclosure about
Pensions and other Post Retirement Benefits," which revises employers disclosure
about pensions and other post retirement benefit plans. It is anticipated that
SFAS No. 130 and No. 132 will have no material effect on current or future
financial statements of the Company. The Company will adopt SFAS No. 130 and No.
132 in its fiscal year 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers and the material countries in which
the entity holds assets and reports revenue. The Company has elected to early
adopt SFAS No. 131 in 1997. See Note 22 to Notes to Consolidated Financial
Statements.
56
<PAGE>
QUARTERLY RESULTS (UNAUDITED)
Set forth below is certain summary information with respect to the
Company's operations for the last eight fiscal quarters.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
1996
---------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
------------ ------------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues:
Basic medical services ...................... $ 97,216 $ 98,063 $ 101,189 $ 93,305
Specialty medical services .................. 219,525 226,868 211,904 340,912
Management services and other ............... 10,532 10,849 12,572 11,760
--------- --------- --------- --------
Total ..................................... 327,273 335,780 325,665 445,977
Cost and Expenses:
Operating expenses .......................... 249,895 254,274 241,177 348,602
Corporate administrative and general ........ 15,093 14,854 14,943 16,086
Depreciation and amortization ............... 8,274 8,505 9,130 15,772
Rent ........................................ 17,656 17,879 18,445 23,805
Interest, net ............................... 14,214 15,888 15,931 18,077
Other non-recurring charges (in-
come)(1) ................................... -- -- (34,298) 19,841
--------- --------- --------- --------
Earnings (loss) before equity in earnings
(loss) of affiliates, income taxes,
extraordinary items and cumulative
effect of accounting change ................ 22,141 24,380 60,337 3,794
Equity (loss) in earnings of affiliates ...... 300 460 323 (255)
--------- --------- --------- --------
Earnings (loss) before income taxes,
extraordinary items and cumulative
effect of accounting change ................ 22,441 24,840 60,660 3,539
Income tax provision (benefit)(1) ............ 8,640 9,563 44,149 1,363
--------- --------- --------- --------
Earnings (loss) before extraordinary
items and cumulative effect of ac-
counting change ............................ 13,801 15,277 16,511 2,176
Extraordinary items (2) ...................... -- 1,431 -- --
--------- --------- --------- --------
Earnings (loss) before cumulative effect
of accounting change(2) .................... 13,801 13,846 16,511 2,176
Cumulative effect of accounting change(3) -- -- -- -
--------- --------- --------- --------
Net earnings (loss) ......................... $ 13,801 $ 13,846 $ 16,511 $ 2,176
========= ========= ========= ========
Per Common Share-basic(4):
Earnings (loss) before extraordinary
items and cumulative effect of ac-
counting change(2) ......................... $ .64 $ .68 $ .72 $ .09
Earnings (loss) before cumulative effect
of accounting change(3) .................... .64 .62 .72 .09
Net earnings (loss) ......................... $ .64 $ .62 $ .72 $ .09
========= ========= ========= ========
Per Common Share-diluted(4):
Earnings (loss) before extraordinary
items and cumulative effect of ac-
counting change(2) ......................... $ .54 $ .56 $ .60 $ .09
Earnings (loss) before cumulative effect
of accounting change(3) .................... .54 .51 .60 .09
Net earnings (loss) ......................... $ .54 $ .51 $ .60 $ .09
========= ========= ========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
1997
-----------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ----------- ---------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues:
Basic medical services ...................... $ 88,755 $ 88,055 $ 91,458 $ 114,006
Specialty medical services .................. 362,689 360,113 370,769 478,133
Management services and other ............... 9,499 9,805 10,694 9,221
-------- -------- -------- ---------
Total ..................................... 460,943 457,973 472,921 601,360
Cost and Expenses:
Operating expenses .......................... 352,412 338,736 348,470 439,388
Corporate administrative and general ........ 18,016 18,135 19,917 20,756
Depreciation and amortization ............... 15,030 15,814 16,974 22,932
Rent ........................................ 24,009 25,786 25,527 29,814
Interest, net ............................... 21,421 23,224 27,346 43,210
Other non-recurring charges (in-
come)(1) ................................... (1,025) 21,072 -- 112,995
-------- -------- -------- ---------
Earnings (loss) before equity in earnings (loss)
of affiliates, income taxes, extraordinary items
and cumulative effect of accounting change .. 31,080 15,206 34,687 (67,735)
Equity (loss) in earnings of affiliates ...... 181 (83) (811) 801
-------- -------- -------- ---------
Earnings (loss) before income taxes,
extraordinary items and cumulative
effect of accounting change ................ 31,261 15,123 33,876 (66,934)
Income tax provision (benefit)(1) ............ 12,192 5,898 13,212 (6,853)
-------- -------- -------- ---------
Earnings (loss) before extraordinary
items and cumulative effect of ac-
counting change ............................ 19,069 9,225 20,664 (60,081)
Extraordinary items (2) ...................... -- 18,168 2,384 --
-------- -------- -------- ---------
Earnings (loss) before cumulative effect
of accounting change(2) .................... 19,069 (8,943) 18,280 (60,081)
Cumulative effect of accounting change(3) - - -- 1,830
-------- -------- -------- ---------
Net earnings (loss) ......................... $ 19,069 $ (8,943) $ 18,280 $ (61,911)
======== ======== ======== =========
Per Common Share-basic(4):
Earnings (loss) before extraordinary
items and cumulative effect of ac-
counting change(2) ......................... $ .81 $ .37 $ .81 $ (1.55)
Earnings (loss) before cumulative effect
of accounting change(3) .................... .81 (.36) .72 (1.55)
Net earnings (loss) ......................... $ .81 $ (.36) $ .72 $ (1.59)
======== ======== ======== =========
Per Common Share-diluted(4):
Earnings (loss) before extraordinary
items and cumulative effect of ac-
counting change(2) ......................... $ .64 $ .32 $ .63 $ (1.55)
Earnings (loss) before cumulative effect
of accounting change(3) .................... .64 (.18) .57 (1.55)
Net earnings (loss) ......................... $ .64 $ (.18) $ .57 $ (1.59)
======== ======== ======== =========
</TABLE>
- ----------
(1) In 1996, consists of (i) a gain of $34,298,000 in the third quarter from the
sale of its pharmacy division, (ii) a loss in the fourth quarter of
$8,497,000 from its sale of shares in the ILC offering, (iii) a $7,825,000
loss on write-off of accrued management fees and loans resulting from the
Company's termination of its 10-year agreement to manage six geriatric care
facilities owned by All Seasons in the fourth quarter and (iv) a $3,519,000
exit cost resulting from the closure of redundant home healthcare agencies
in the fourth quarter. Because IHS' investment in the Capstone common stock
received in the sale of its pharmacy division had a very small tax basis,
the taxable gain on the sale significantly exceeded the gain for financial
reporting purposes, thereby resulting in a disproportionately higher income
tax provision related to the sale in the third quarter of 1996. In 1997,
consists primarily of (i) a gain in the first quarter of $7,580,000 realized
on the shares of Capstone common stock received in the sale of its pharmacy
division, (ii) the write-off in the first quarter of $6,555,000 of
accounting, legal and other costs resulting from the proposed merger
transaction with Coram, (iii) the payment in the second quarter to Coram of
$21,000,000 in connection with the termination of the proposed merger
transaction with Coram, (iv) a gain in the third quarter of $3,914,000 from
the ILC Sale, (v) a loss in the third quarter of $4,750,000 from termination
payments in connection with the RoTech acquisition and (vi) a loss in the
fourth quarter of $112,231,000 resulting from its plan to dispose of certain
non-strategic assets to allow the Company to focus on its core operations.
See Note 19 of Notes to Consolidated Financial Statements.
(2) Extraordinary items relate to extinguishment of debt. See Note 16 of
Consolidated Financial Statements.
(3) Represents the write-off, net of income tax benefits, of the unamortized
balance of costs of business process engineering and information technology
projects. See Note 20 of Notes to Consolidated Financial Statements.
57
<PAGE>
(4) The share and per share information have been restated to reflect share and
per share information in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share," which was required to be adopted by
the Company effective with its financial statements for the year ended
December 31, 1997. See Notes 1(m) and 12 of Notes to Consolidated Financial
Statements. The diluted weighted average number of common shares outstanding
for each quarter other than the quarters ended December 31, 1996 and 1997
includes the assumed conversion of the convertible subordinated debentures
into IHS Common Stock. Additionally, interest expense and amortization of
underwriting costs related to such debentures are added, net of tax, to
income for the purpose of calculating diluted earnings per share. The
diluted weighted average number of common shares outstanding for the
quarters ended December 31, 1996 and 1997 does not include the assumed
conversion of the convertible subordinated debentures or the related
interest expense and underwriting costs, as such conversion would be
anti-dilutive.
From January 1, 1996 through December 31, 1997, the Company acquired 81
geriatric care facilities (including 29 facilities which it had previously
managed but excluding the 38 facilities held for sale), leased 105 geriatric
care facilities (26 of which had previously been managed) and entered into
management agreements to manage 63 geriatric care facilities. During this
period, the Company sold its interest in two geriatric care facilities and seven
retirement facilities (five owned and two leased) and agreements to manage 88
facilities were terminated. In addition, during this period the Company opened
15 MSUs totalling 184 beds and expanded existing MSUs (including MSUs opened
during this period) by 384 beds. During this period, the Company's sold its
pharmacy and assisted living divisions. See "-- Acquisition and Divestiture
History -- Divestitures."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report ................................................. 59
Consolidated Balance Sheets at December 31, 1996 and 1997 .................... 60
Consolidated Statements of Operations for the years ended December 31, 1995,
1996 and 1997 .............................................................. 61
Consolidated Statements of Stockholders' Equity for the years ended Decem-
ber 31, 1995, 1996 and 1997 ................................................ 62
Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1996 and 1997 .............................................................. 63
Notes to Consolidated Financial Statements ................................... 64
Schedule II -- Valuation and Qualifying Accounts ............................. 102
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission have been
omitted because they are not required under the related instructions, are
inapplicable or the information has been provided in the Consolidated Financial
Statements or the Notes thereto.
58
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Integrated Health Services, Inc.:
We have audited the accompanying consolidated financial statements of Integrated
Health Services, Inc. and subsidiaries (the Company) as listed in the
accompanying index. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule listed in the
accompanying index. These consolidated financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Integrated Health
Services, Inc. and subsidiaries at December 31, 1996 and 1997 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
As discussed in notes 1(k) and 19 to the consolidated financial statements, in
1995 the Company adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Also, effective January 1, 1996, the Company changed its accounting method from
deferring and amortizing pre-opening costs of medical specialty units to
recording them as an expense when incurred.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
March 25, 1998
59
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997
------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .......................................... $ 39,028 $ 52,965
Temporary investments .............................................. 2,044 8,042
Patient accounts and third-party payor settlements receivable,
net (note 3) ..................................................... 326,883 603,432
Inventories, prepaid expenses and other current assets ............. 26,243 53,152
Income tax receivable .............................................. 20,992 --
---------- ----------
Total current assets ............................................. 415,190 717,591
Property, plant and equipment, net (note 5) ......................... 864,335 1,318,633
Assets held for sale (note 2) ....................................... -- 111,629
Intangible assets (notes 2 and 6) ................................... 572,159 2,815,272
Investments in and advances to affiliates (note 4) .................. 76,047 19,527
Other assets ........................................................ 65,376 80,492
---------- ----------
Total assets ..................................................... $1,993,107 $5,063,144
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt (note 8) ...................... $ 16,547 $ 36,081
Accounts payable and accrued expenses (note 7) ..................... 341,094 615,967
Income tax payable ................................................. -- 2,426
---------- ----------
Total current liabilities ........................................ 357,641 654,474
---------- ----------
Long-term debt (note 8):
Revolving credit and term loan facility less current maturities..... 342,650 1,673,500
Mortgages and other long-term debt less current maturities ......... 71,800 167,606
Subordinated debt .................................................. 623,750 1,361,046
---------- ----------
Total long-term debt ............................................. 1,038,200 3,202,152
---------- ----------
Other long-term liabilities (note 9) ................................ 33,851 113,042
Deferred income taxes (note 13) ..................................... 22,283 --
Deferred gain on sale-leaseback transactions ........................ 6,267 5,315
Commitments and contingencies (notes 4, 9, 10, 11, 14 and 21)
Stockholders' equity (note 11): .....................................
Preferred stock, authorized 15,000,000 shares; no shares issued
and outstanding in 1996 and 1997 ................................. -- --
Common stock, $0.001 par value. Authorized 150,000,000 shares;
issued 23,628,250 shares in 1996 and 43,098,373 shares in 1997
(including 548,500 treasury shares in 1997) ...................... 24 43
Additional paid-in capital ......................................... 445,667 1,062,436
Retained earnings .................................................. 79,814 45,495
Unrealized gain on available for sale securities ................... 9,360 --
Treasury stock, at cost (548,500 shares in 1997) ................... -- (19,813)
---------- ----------
Total stockholders' equity ....................................... 534,865 1,088,161
---------- ----------
Total liabilities and stockholders' equity ....................... $1,993,107 $5,063,144
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
60
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Net revenues:
Basic medical services .................................. $ 368,569 $ 389,773 $ 382,274
Specialty medical services .............................. 770,554 999,209 1,571,704
Management services and other ........................... 39,765 45,713 39,219
---------- ---------- ----------
Total revenues ........................................ 1,178,888 1,434,695 1,993,197
---------- ---------- ----------
Costs and expenses:
Operating expenses:
Salaries, wages, and benefits ......................... 549,766 694,137 962,886
Other operating expenses .............................. 338,785 399,811 516,120
Corporate administrative and general .................... 56,016 60,976 76,824
Depreciation and amortization ........................... 39,961 41,681 70,750
Rent (note 10) .......................................... 66,125 77,785 105,136
Interest (net of investment income of $1,876 in 1995,
$2,233 in 1996 and $7,629 in 1997) (note 8) ........... 38,977 64,110 115,201
Loss on impairment of long-lived assets and other
non-recurring charges (income), net (notes 6 and 19) 132,960 (14,457) 133,042
---------- ---------- ----------
Total costs and expenses .............................. 1,222,590 1,324,043 1,979,959
---------- ---------- ----------
Earnings (loss) before equity in earnings
of affiliates, income taxes,extraordinary items
and cumulative effect of accounting change ........... (43,702) 110,652 13,238
Equity in earnings of affiliates (note 4) ................ 1,443 828 88
---------- ---------- ----------
Earnings (loss) before income taxes, extraordinary
items and cumulative effect of accounting change. (42,259) 111,480 13,326
Federal and state income taxes (note 13) ................. (16,270) 63,715 24,449
---------- ---------- ----------
Earnings (loss) before extraordinary items and cu-
mulative effect of accounting change ................. (25,989) 47,765 (11,123)
Extraordinary items (note 16) ............................ 1,013 1,431 20,552
---------- ---------- ----------
Earnings (loss) before cumulative effect of account-
ing change ........................................... (27,002) 46,334 (31,675)
Cumulative effect of accounting change (note 20) ......... -- -- 1,830
---------- ---------- ----------
Net earnings (loss) ................................... $ (27,002) $ 46,334 $ (33,505)
========== ========== ==========
Per Common Share -- basic:
Earnings (loss) before extraordinary items and cumu-
lative effect of accounting change .................... $ (1.21) $ 2.12 $ (0.39)
Earnings (loss) before cumulative effect of accounting
change ................................................ ( 1.26) 2.06 ( 1.12)
Net earnings (loss) ..................................... $ (1.26) $ 2.06 $ (1.19)
========== ========== ==========
Per Common Share -- diluted:
Earnings (loss) before extraordinary items and cumu-
lative effect of accounting change .................... $ (1.21) $ 1.83 $ (0.39)
Earnings (loss) before cumulative effect of accounting
change ................................................ ( 1.26) 1.78 ( 1.12)
Net earnings (loss) ..................................... $ (1.26) $ 1.78 $ (1.19)
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
61
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN
STOCK STOCK CAPITAL
----------- -------- --------------
<S> <C> <C> <C>
Balance at December 31, 1994 .................... $-- $21 $ 392,402
Issuance of 385,216 common shares in
connection with acquisitions .................. -- 1 9,794
Issuance of warrants in connection with
acquisitions .................................. -- -- 339
Issuance of 49,377 common shares in con-
nection with employee stock purchase
plan .......................................... -- -- 1,339
Acquisition of 400,600 common shares of
treasury stock ................................ -- -- --
Exercise of employee stock options for
340,244 common shares ......................... -- -- 5,676
Exercise of warrants for 44,181 common
shares ........................................ -- -- 795
Declaration of cash dividend, $0.02 per
common share .................................. -- -- --
Net loss ....................................... -- -- --
--- --- ----------
Balance at December 31, 1995 .................... -- 22 410,345
--- --- ----------
Issuance of 1,632,873 common shares in
connection with acquisitions and man-
agement agreements ............................ -- 2 35,435
Re-issuance of 400,600 common shares of
treasury stock in payment of earn-out in
connection with prior acquisitions ............ -- -- (3,592)
Issuance of 68,661 common shares in con-
nection with employee stock purchase
plan .......................................... -- -- 1,401
Exercise of employee stock options for
141,382 common shares ......................... -- -- 2,078
Unrealized gain on available for sale secu-
rities ........................................ -- -- --
Declaration of cash dividend, $0.02 per
common share .................................. -- -- --
Net earnings ................................... -- --
--- ----------
Balance at December 31, 1996 .................... -- 24 445,667
--- --- ----------
Issuance of 976,504 shares of common
stock in payment of earn-out in connec-
tion with prior acquisition ................... -- 1 26,438
Issuance of 16,993,217 common shares in
connection with acquisitions .................. -- 17 553,385
Issuance of 81,434 common shares in con-
nection with employee stock purchase
plan .......................................... -- -- 1,757
Exercise of employee stock options for
1,418,968 common shares ....................... -- 1 28,169
Tax benefit arising from exercise of em-
ployee stock options .......................... -- -- 7,020
Reversal of unrealized gain on available for
sale securities ............................... -- -- --
Acquisition of 548,500 common shares of
treasury stock ................................ -- -- --
Declaration of cash dividend, $0.02 per com-
mon share ..................................... -- -- --
Net loss ....................................... -- -- --
--- --- ----------
Balance at December 31, 1997 .................... $-- $43 $1,062,436
=== === ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
AVAILABLE FOR
RETAINED SALE TREASURY
EARNINGS SECURITIES STOCK TOTAL
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 .................... $ 61,388 $ -- $ -- $ 453,811
Issuance of 385,216 common shares in
connection with acquisitions .................. -- -- -- 9,795
Issuance of warrants in connection with
acquisitions .................................. -- -- -- 339
Issuance of 49,377 common shares in con-
nection with employee stock purchase
plan .......................................... -- -- -- 1,339
Acquisition of 400,600 common shares of
treasury stock ................................ -- -- (12,790) (12,790)
Exercise of employee stock options for
340,244 common shares ......................... -- -- -- 5,676
Exercise of warrants for 44,181 common
shares ........................................ -- -- -- 795
Declaration of cash dividend, $0.02 per
common share .................................. (435) -- -- (435)
Net loss ....................................... (27,002) -- -- (27,002)
---------- --------- --------- ----------
Balance at December 31, 1995 .................... 33,951 -- (12,790) 431,528
---------- --------- --------- ----------
Issuance of 1,632,873 common shares in
connection with acquisitions and man-
agement agreements ............................ -- -- -- 35,437
Re-issuance of 400,600 common shares of
treasury stock in payment of earn-out in
connection with prior acquisitions ............ -- -- 12,790 9,198
Issuance of 68,661 common shares in con-
nection with employee stock purchase
plan .......................................... -- -- -- 1,401
Exercise of employee stock options for
141,382 common shares ......................... -- -- -- 2,078
Unrealized gain on available for sale secu-
rities ........................................ -- 9,360 -- 9,360
Declaration of cash dividend, $0.02 per
common share .................................. (471) -- -- (471)
Net earnings ................................... 46,334 -- -- 46,334
---------- --------- --------- ----------
Balance at December 31, 1996 .................... 79,814 9,360 -- 534,865
---------- --------- --------- ----------
Issuance of 976,504 shares of common
stock in payment of earn-out in connec-
tion with prior acquisition ................... -- -- -- 26,439
Issuance of 16,993,217 common shares in
connection with acquisitions .................. -- -- -- 553,402
Issuance of 81,434 common shares in con-
nection with employee stock purchase
plan .......................................... -- -- -- 1,757
Exercise of employee stock options for
1,418,968 common shares ....................... -- -- -- 28,170
Tax benefit arising from exercise of em-
ployee stock options .......................... -- -- - 7,020
Reversal of unrealized gain on available for
sale securities ............................... -- (9,360) -- (9,360)
Acquisition of 548,500 common shares of
treasury stock ................................ -- -- (19,813) (19,813)
Declaration of cash dividend, $0.02 per com-
mon share ..................................... (814) -- -- (814)
Net loss ....................................... (33,505) -- -- (33,505)
---------- --------- --------- ----------
Balance at December 31, 1997 .................... $ 45,495 $ -- $ (19,813) $1,088,161
========== ========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
62
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
-------------- ------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ................................................ $ (27,002) $ 46,334 $ (33,505)
Adjustments to reconcile net earnings (loss) to net cash pro-
vided by operating activities: ...................................
Extraordinary items .............................................. 1,647 2,327 33,690
Loss from impairment of long-lived assets and other non-
recurring charges (income) ...................................... 131,021 (14,457) 133,042
Cumulative effect of accounting change ........................... -- -- 3,000
Undistributed results of affiliates .............................. (431) 2 157
Depreciation and amortization .................................... 39,961 41,681 70,750
Deferred income taxes and other non-cash items ................... (22,920) 3,462 (30,139)
Amortization of deferred gain on sale-leaseback .................. (1,018) (982) (1,035)
Increase in patient accounts and third-party payor settlements
receivable ...................................................... (62,512) (44,232) (50,041)
(Increase) decrease in supplies, inventories, prepaid expenses
and other current assets ........................................ (6,121) 82 (14,403)
Increase (decrease) in accounts payable and accrued expenses 1,177 4,086 (88,789)
(Increase) decrease in income taxes receivable ................... (16,517) (4,475) 20,992
(Decrease) increase in income taxes payable ...................... (5,686) -- 2,426
---------- ---------- ------------
Net cash provided by operating activities ....................... 31,599 33,828 46,145
---------- ---------- ------------
Cash flows from financing activities: ...............................
Proceeds from issuance of capital stock, net ....................... 8,399 3,479 29,927
Proceeds from long-term borrowings ................................. 510,659 1,087,175 3,280,565
Repayment of long-term borrowings .................................. (307,440) (830,434) (1,532,276)
Deferred financing costs ........................................... (5,512) (10,251) (45,500)
Payment of prepayment premiums and fees on debt extinguish-
ment ............................................................. -- -- (23,598)
Purchase of treasury stock ......................................... (12,790) -- (19,813)
Dividends paid ..................................................... (398) (435) (471)
---------- ---------- ------------
Net cash provided by financing activities ....................... 192,918 249,534 1,688,834
---------- ---------- ------------
Cash flows from investing activities: ...............................
Purchases of temporary investments ................................. (401) (5,645) (828,505)
Sales of temporary investments ..................................... 672 5,988 822,507
Business acquisitions .............................................. (82,686) (242,819) (1,560,396)
Purchases of property, plant, and equipment ........................ (145,065) (145,902) (126,860)
Disposition of assets .............................................. 33,153 136,709 54,137
Payment of termination fees and other costs of terminated
merger ........................................................... -- -- (27,555)
Payments of severance fees related to acquisition and other
costs ............................................................ -- -- (10,492)
Intangible assets .................................................. (14,183) -- --
Investment in affiliates and other assets .......................... (37,779) (31,582) (43,878)
---------- ---------- ------------
Net cash used by investing activities ............................ (246,289) (283,251) (1,721,042)
---------- ---------- ------------
Increase (decrease) in cash and equivalents ...................... (21,772) 111 13,937
Cash and cash equivalents, beginning of period ...................... 60,689 38,917 39,028
---------- ---------- ------------
Cash and cash equivalents, end of period ............................ $ 38,917 $ 39,028 52,965
========== ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
63
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Basis of Presentation
Integrated Health Services, Inc. (IHS), a Delaware corporation, was formed
on March 25, 1986. The consolidated financial statements include the accounts of
IHS and its majority-owned and controlled subsidiaries (the Company). In
consolidation, all significant intercompany balances and transactions have been
eliminated. Investments in affiliates in which the Company has significant
influence but less than majority ownership and control are accounted for by the
equity method (see note 4).
(b) Medical Services Revenues
Medical services revenues are recorded at established rates and adjusted
for differences between such rates and estimated amounts reimbursable by
third-party payors when applicable. Estimated settlements under third-party
payor retrospective rate setting programs (primarily Medicare and Medicaid) are
accrued in the period the related services are rendered. Settlements receivable
and related revenues under such programs are based on annual cost reports
prepared in accordance with Federal and state regulations, which reports are
subject to audit and retroactive adjustment in future periods. In the opinion of
management, adequate provision has been made for such adjustments and final
settlements will not have a material effect on financial position or results of
operations. Basic medical services revenues represent routine service (room and
board) charges of geriatric and assisted living facilities, exclusive of medical
specialty units. Specialty medical services revenues represent ancillary service
charges of geriatric and assisted living facilities, revenues generated by
medical specialty units and revenues of pharmacy, rehabilitation, diagnostic,
respiratory therapy, home health, hospice and similar service operations.
(c) Cash Equivalents and Investments in Debt and Equity Securities
Cash equivalents consist of highly liquid debt instruments with original
maturities of three months or less at the date of investment by the Company.
Temporary investments, consisting primarily of preferred stocks and municipal
bonds, are classified as a trading security portfolio and are recorded at their
fair value, with net unrealized gains or losses included in earnings.
(d) Property, Plant and Equipment
The Company capitalizes costs associated with acquiring health care
facilities and related interests therein. Pre-acquisition costs represent direct
costs of the investigation and negotiation of the acquisition of operating
facilities and ancillary business units; indirect and general expenses related
to such activities are expensed as incurred. Pre-construction costs represent
direct costs incurred to secure control of the development site, including the
requisite certificate of need and other approvals, and to perform other initial
tasks which are essential to the development and construction of a facility.
Pre-acquisition and pre-construction costs are transferred to construction in
progress and depreciable asset categories when the related tasks are completed.
Interest cost incurred during construction is capitalized. Non-refundable
purchase option fees related to operating leases are generally classified as
leasehold interests and treated as deposits until (1) the option is exercised,
whereupon the deposit is applied as a credit against the purchase price, or (2)
the option period expires, whereupon the deposit is written off as lease
termination expense.
Total costs of facilities acquired are allocated to land, land
improvements, equipment and buildings (or leasehold interests therein) based on
their respective fair values determined generally by independent appraisal. Cost
in excess of such identified fair values is classified as intangible assets of
businesses acquired.
64
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(e) Depreciation
Depreciation is provided on the straight-line basis over the estimated
useful lives of the assets, generally 25 years for land improvements, 10 years
for equipment, 40 years for buildings and the term of the lease for costs of
leasehold interests and improvements.
(f) Deferred Financing Costs
The Company defers financing costs incurred to obtain long-term debt and
amortizes such costs over the term of the related obligation. Debt discount is
amortized using the debt outstanding (interest) method over the term of the
related debt.
(g) Deferred Pre-opening Costs
Through December 31, 1995, direct costs incurred to initiate and implement
new medical specialty units (MSUs) at nursing facilities (e.g., respiratory
therapy, rehabilitation and Alzheimers' units) were deferred during the
pre-opening period and amortized on a straight-line basis over five years, which
corresponded to the period over which the Company receives reimbursement from
Medicare. Effective January 1, 1996, the Company changed its policy to expense
such costs when incurred (see note 19).
(h) Intangible Assets Acquired
Intangible assets of businesses acquired (primarily goodwill) are amortized
by the straight-line method primarily over 40 years, the period over which such
costs are recoverable through operating cash flows (see note 6).
(i) Deferred Gains on Sale-Leaseback Transactions
Gains on the sales of nursing facilities which are leased back under
operating leases are initially deferred and amortized over the terms of the
leases in proportion to and as a reduction of related rental expense.
(j) Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," ("APB No. 25") in accounting for its stock
options. Additional information required by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," ("SFASNo. 123") is
discussed in note 11.
(k) Impairment of Long-Lived Assets
Management regularly evaluates whether events or changes in circumstances
have occurred that could indicate an impairment in the value of long-lived
assets. In December 1995, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In
accordance with the provisions of SFAS No. 121, if there is an indication that
the carrying value of an asset is not recoverable, the Company estimates the
projected undiscounted cash flows, excluding interest, of the related individual
facilities and business units (the lowest level for which there are identifiable
cash flows independent of other groups of assets) to determine if an impairment
loss should be recognized. The amount of impairment loss is determined by
comparing the historical carrying value of the asset to its estimated fair
value. Estimated fair value is determined through an evaluation of recent
financial performance and projected discounted cash flows of its facilities and
business units using standard industry valuation techniques, including the use
of independent appraisals when considered necessary. If an asset tested for
recoverability was acquired in a business combination accounted for using the
purchase method, the related goodwill is included as part of the carrying value
and evaluated as described above in determining the recoverability of that
asset.
65
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(k) Impairment of Long-Lived Assets -(CONTINUED)
In addition to consideration of impairment upon the events or changes in
circumstances described above, management regularly evaluates the remaining
lives of its long-lived assets. If estimates are changed, the carrying value of
affected assets is allocated over the remaining lives.
Prior to adoption of SFAS No. 121 in 1995, the Company performed its
analyses of impairment of long-lived assets by consideration of the projected
undiscounted cash flows on an entity-wide basis. The effect of the adoption of
SFAS 121 in December 1995 required the Company to perform this analysis on a
facility-by-facility and individual business unit basis. This resulted in the
recognition of a loss on impairment of long-lived assets (see note 19). If the
facility-by-facility and individual business unit analysis had been adopted
prior to December 1995, the Company may have incurred the loss on impairment of
long-lived assets prior to December 1995.
(l) Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary
differences between financial statement carrying amounts and the related tax
bases of assets and liabilities. Such tax effects are measured by applying
enacted statutory tax rates applicable to future years in which the differences
are expected to reverse, and the effect of a change in tax rates is recognized
in the period the legislation is enacted.
(m) Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128") during the fourth quarter of the year
ended December 31, 1997. SFAS No. 128 establishes revised standards for
computing and presenting earnings per share ("EPS") data. Additional information
required by SFAS No. 128 is discussed in Note 12.
(n) Business and Credit Concentrations
The Company's medical services revenues are generated through approximately
2,000 service locations in 48 states and the District of Columbia, including 312
owned, leased and managed geriatric care facilities (excluding 38 facilities
held for sale). The Company generally does not require collateral or other
security in extending credit to patients; however, the Company routinely obtains
assignments of (or is otherwise entitled to receive) benefits receivable under
the health insurance programs, plans or policies of patients (e.g., Medicare,
Medicaid, commercial insurance and managed care organizations) (see note 3).
(o) Merger with IntegraCare, Inc.
In August 1995, the Company merged with IntegraCare, Inc. (Integra) which
provides physical, occupational and speech services to skilled nursing
facilities, hospitals, outpatient clinics, home health agencies and schools in
Florida. The Company exchanged 681,723 shares of its Common Stock for all of the
outstanding stock of Integra. The merger was accounted for using the pooling of
interests method and the consolidated financial statements and related notes for
1995 have been restated to combine the financial data of the Company and Integra
for those periods. The accounting practices of the Company and Integra were
comparable; therefore, no adjustments to net assets of either enterprise were
required to effect the combination. The consolidated statements of operations
include revenues of $17,886 in 1995 and net earnings of $891 in 1995 related to
the operations of Integra prior to the date of the merger.
(p) Management Agreements
IHS manages geriatric care facilities under contract for others for a fee
which generally is equal to 4% to 8% of the gross revenue of the geriatric care
facility. Under the terms of the contract, IHS is responsible for providing all
personnel, marketing, nursing, resident care, dietary and social services,
66
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(p) Management Agreements -(CONTINUED)
accounting and data processing reports and services for these facilities,
although such services are provided at the facility owner's expense. In
addition, certain management agreements also provide IHS with an incentive fee
based on the amount of the facility's operating income in excess of stipulated
amounts. Management fee revenues are recognized when earned and billed,
generally on a monthly basis. Incentive fees are recognized when operating
results of managed facilities exceed amounts required for incentive fees in
accordance with the terms of the management agreement. Management agreements
generally have an initial term of ten years, with IHS having a right to renew in
most cases. Contract acquisition costs for legal and other direct costs incurred
by IHS to acquire long-term management contracts are capitalized and amortized
over the term of the related contract. Management periodically evaluates its
deferred contract costs for recoverability by assessing the projected
undiscounted cash flows, excluding interest, of the managed facilities; any
impairment in the financial condition of the facility will result in a writedown
by IHS of its deferred contract costs.
(q) Assets held for Sale
Assets held for sale represent the assets of 19 geriatric care facilities
acquired in connection with the acquisition of Community Care of America, Inc.,
20 geriatric care facilities acquired in connection with the acquisition of
certain businesses from HEALTHSOUTH Corporation and two physician practices
acquired in the acquisition of RoTech Medical Corporation which are intended to
be sold within the next year (see note 2). Such amounts are carried at estimated
net realizable value, less estimated carrying costs to be incurred during the
holding period.
(r) Derivative Financial Instruments
The Company utilizes interest rate swap agreements to manage market risks
and reduce its exposure resulting from fluctuations in interest rates. Amounts
currently due to or from interest rate swap counterparties are recorded as
adjustments to interest expense in the period in which they accrue. Gains or
losses on terminated agreements are included in accounts payable and accrued
expenses and amortized to interest expense over the shorter of the original term
of the agreements or the life of the financial instruments to which they are
matched.
(s) Reclassifications
Certain amounts presented in 1995 and 1996 have been reclassified to
conform with the presentation for 1997.
67
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(2) BUSINESS ACQUISITIONS
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 1997
Acquisitions in 1997 and the manner of payment are summarized as follows:
<TABLE>
<CAPTION>
MONTH TRANSACTION DESCRIPTION
- ----------- ------------------------------------------------------------------------
<S> <C>
January Stock of In-Home Health Care, Inc., a home healthcare services pro-
vider
February Assets of Portable X-Ray Labs, Inc., a mobile x-ray services
provider
March Payment of earnout in connection with Achievement Rehab acquisi-
tion in December 1993
June Stock of Health Care Industries, Inc., a home healthcare services
provider
June Assets of Rehab Dynamics, Inc. and Restorative Therapy, Ltd., con-
tract rehabilitation companies(2)
August Stock of Ambulatory Pharmaceutical Services, Inc. and APS American,
Inc., home healthcare services providers
August Stock of Arcadia Services, Inc., a home healthcare services provider
September Stock and assets of Barton Creek Healthcare, Inc., a home health-
care services provider
September Stock of Community Care of America, Inc., an operator of skilled
nursing facilities
October Assets of Coram Lithotripsy Division, an operator of lithotripsy
units
October Stock of RoTech Medical Corporation, a respiratory therapy company
November Assets of Durham Meridian Limited Partnership (Treyburn)
November Stock of HPC America, Inc., an operator of home infusion and home
healthcare companies
November Assets of Richards Medical Company, Inc., a respiratory therapy com-
pany
November Assets of Central Medical Supply Company, Inc., a respiratory
therapy company
November Assets of Hallmark Respiratory Care, a respiratory therapy company
November Leasehold interest in Shadow Mountain, a skilled nursing facility
December Assets of certain businesses owned by HEALTHSOUTH Corporation
December Assets of Sunshine Medical Equipment, Inc., a respiratory therapy
company
December Assets of Quest, Inc., a respiratory therapy company
Various 17 acquisitions, each with total costs of less than $2,000
Various Cash payments of acquisition costs accrued
</TABLE>
<PAGE>
COMMON
CASH STOCK ACCRUED
MONTH PAID ISSUED(1) LIABILITIES TOTAL COST
- ----------- ------------ ----------- ------------- -------------
January $ 3,200 $ -- $ 250 $ 3,450
February 4,900 -- 1,300 6,200
March -- 26,439 -- 26,439
June 1,825 -- 500 2,325
June 8,203 11,460 2,500 22,163
August 18,125 18,125 1,950 38,200
August -- 17,169 3,000 20,169
September 4,857 -- 280 5,137
September 99,883 -- 5,995 105,878
October 131,000 -- 7,500 138,500
October -- 506,648 22,597 529,245
November 4,775 -- -- 4,775
November 26,127 -- 825 26,952
November 1,993 -- 160 2,153
November 1,872 -- 178 2,050
November 3,768 -- 145 3,913
November 4,020 -- 42 4,062
December 1,159,142 -- 50,980 1,210,122
December 3,290 -- 270 3,560
December 33,000 -- 385 33,385
Various 9,010 -- 894 9,904
Various 41,406 -- (41,406) --
---------- -------- ---------- ----------
$1,560,396 $579,841 $ 58,345 $2,198,582
========== ======== ========== ==========
- ----------
(1) Represents shares of IHS common stock as follows: 976,504 shares for the
Achievement Rehab earnout; 331,379 shares for Rehab Dynamics and Restorative
Therapy; 532,240 shares for Ambulatory Pharmaceutical Services and APS
American; 531,198 shares for Arcadia Services; and 15,598,400 shares for
RoTech Medical Corporation. Subsequent to December 31, 1997, the Company
issued an additional 50,253 shares to the stockholders of Arcadia Services.
(2) Pursuant to an agreement with the former owners of Rehab Dynamics, Inc., an
earnout of up to $11.7 million is potentially payable, 60% of which is to be
in the Company's common stock.
68
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(2) BUSINESS ACQUISITIONS -(CONTINUED)
The allocation of the total costs of the 1997 acquisitions to the assets
acquired and liabilities assumed is summarized as follows:
<TABLE>
<CAPTION>
PROPERTY,
CURRENT PLANT AND ASSETS HELD OTHER
ASSETS EQUIPMENT FOR SALE ASSETS
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
In-Home Health Care, Inc. ........... $ 989 $ 229 $ -- $ 7
Portable X-Ray Labs, Inc. ........... 1,309 -- -- 11
Achievement Rehab ................... -- -- -- --
Health Care Industries, Inc. ........ 805 204 -- 41
Rehab Dynamics, Inc. & Restor-
ative Therapy, Ltd. ................ 4,140 954 -- 107
Ambulatory Pharmaceutical Ser-
vices, Inc. & APS America, Inc. . 1,987 48 -- 8
Arcadia Services, Inc. .............. 3,980 348 -- 2,464
Barton Creek Healthcare, Inc. ....... 884 96 -- --
Community Care of America, Inc. . 12,022 39,286 12,030 (11,111)
Coram Lithotripsy Division .......... 6,286 5,775 -- 3,736
RoTech Medical Corporation .......... 95,274 119,724 16,000 10,086
Durham Meridian Limited Partner-
ship ............................... 1,325 8,453 -- 102
HPC America, Inc. ................... 3,882 754 -- (5,756)
Richards Medical Company, Inc. ...... 228 279 -- --
Central Medical Supply Company,
Inc. ............................... 283 173 -- --
Hallmark Respiratory Care ........... 617 391 -- 3
Shadow Mountain ..................... -- 4,062 -- --
HEALTHSOUTH
Corporation businesses ............. 176,031 232,864 80,647 --
Sunshine Medical Equipment, Inc...... 374 200 -- --
Quest Inc. .......................... 3,164 2,207 -- 17
Other acquisitions .................. 734 933 -- 38
-------- -------- -------- ----------
$314,314 $416,980 $108,677 $ (247)
======== ======== ======== ==========
<CAPTION>
INTANGIBLE CURRENT LONG-TERM TOTAL
ASSETS LIABILITIES LIABILITIES COST
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
In-Home Health Care, Inc. ........... $ 3,856 $ (797) $ (834) $ 3,450
Portable X-Ray Labs, Inc. ........... 5,653 (297) (476) 6,200
Achievement Rehab ................... 26,439 -- -- 26,439
Health Care Industries, Inc. ........ 2,505 (1,080) (150) 2,325
Rehab Dynamics, Inc. & Restor-
ative Therapy, Ltd. ................ 21,478 (3,204) (1,312) 22,163
Ambulatory Pharmaceutical Ser-
vices, Inc. & APS America, Inc. . 41,624 (5,467) -- 38,200
Arcadia Services, Inc. .............. 39,233 (24,724) (1,132) 20,169
Barton Creek Healthcare, Inc. ....... 7,293 (3,136) -- 5,137
Community Care of America, Inc. . 109,682 (38,768) (17,263) 105,878
Coram Lithotripsy Division .......... 162,625 (39,422) (500) 138,500
RoTech Medical Corporation .......... 669,615 (244,665) (136,789) 529,245
Durham Meridian Limited Partner-
ship ............................... -- (1,072) (4,033) 4,775
HPC America, Inc. ................... 28,480 -- (408) 26,952
Richards Medical Company, Inc. ...... 1,646 -- -- 2,153
Central Medical Supply Company,
Inc. ............................... 1,625 (31) -- 2,050
Hallmark Respiratory Care ........... 2,902 -- -- 3,913
Shadow Mountain ..................... -- -- -- 4,062
HEALTHSOUTH
Corporation businesses ............. 979,691 (158,068) (101,043) 1,210,122
Sunshine Medical Equipment, Inc...... 2,986 -- -- 3,560
Quest Inc. .......................... 27,997 -- -- 33,385
Other acquisitions .................. 9,755 (1,476) (80) 9,904
---------- ---------- ---------- ----------
$2,145,085 $ (522,207) $ (264,020) $2,198,582
========== ========== ========== ==========
</TABLE>
69
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(2) BUSINESS ACQUISITIONS -(CONTINUED)
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 1996
Acquisitions in 1996 and the manner of payment are summarized as follows:
<TABLE>
<CAPTION>
MONTH TRANSACTION DESCRIPTION
- ----------- ----------------------------------------------------------------------
<S> <C>
January Assets of Vintage Healthcare Center, a 110 bed facility in Denton,
Texas
March Stock of Rehab Management Systems, Inc., a multi-state operator
of outpatient rehabilitative clinics and inpatient therapy centers
May Assets of Hospice of the Great Lakes, Inc., an Illinois hospice ser-
vice provider
May Preferred Care, Inc. purchase option deposits in connection with
management agreements
August Stock of J.R. Rehab Associates, Inc., a North Carolina provider of
rehabilitative therapy services to nursing homes, hospitals and oth-
ers
August Assets of Extendicare of Tennessee Inc., a home health provider
August Assets of Edgewater Home Infusion Services Inc., a home infusion
services provider
September Assets of Century Health Services Inc., a home health provider
September Stock of Signature Home Care, Inc., a home health provider
October Stock of First American Health Care of Georgia, Inc., a home health
services provider
Various Litchfield Asset Management, Inc., purchase option deposits in con-
nection with operating leases
November Assets of Mediq Mobile X-Ray Services, Inc., a mobile diagnostic
service provider
November Assets of Total Rehab Services, LLC and Total Rehab Services O2,
LLC, a provider of contract rehabilitative and respiratory services
December Stock, at carryover basis, of Lifeway, Inc., a provider of physician
management and disease management services
Various Contingent purchase price payments on prior acquisition of The
Rehab People in 1994
Various 7 acquisitions, each with total costs of less than $2,000
Various Cash payments of acquisition costs accrued in 1995 and 1996
</TABLE>
<PAGE>
COMMON
CASH STOCK ACCRUED
MONTH PAID ISSUED(1) LIABILITIES TOTAL COST
- ----------- ---------- ----------- ------------- -----------
January $ 6,900 $ -- $ -- $ 6,900
March 2,000 8,000 2,900 12,900
May -- 8,200 1,000 9,200
May 3,100 7,250 -- 10,350
August 2,100 -- 200 2,300
August 3,411 -- 200 3,611
August 7,974 -- 300 8,274
September 3,992 -- 200 4,192
September 6,447 4,725 2,500 13,672
October 154,084 -- 22,000 176,084
Various 4,018 -- -- 4,018
November 4,942 5,200 5,500 15,642
November 9,173 2,700 1,250 13,123
December 935 (1,440) 275 (230)
Various -- 10,000 -- 10,000
Various 2,566 -- 65 2,631
Various 31,177 -- (31,177) --
-------- -------- ---------- --------
$242,819 $ 44,635 $ 5,213 $292,667
======== ======== ========== ========
- ----------
(1) Represents shares of IHS common stock as follows: 385,542 shares for RMS,
304,822 shares for Hospice, 305,300 shares for Preferred Care, 196,374
shares for Signature, 203,721 shares for Mediq, 106,559 shares for Total
Rehab, 95,615 shares for Lifeway, and 435,540 shares for The Rehab People.
70
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(2) BUSINESS ACQUISITIONS -(CONTINUED)
The allocation of the total cost of the 1996 acquisitions to the assets
acquired and liabilities assumed is summarized as follows:
<TABLE>
<CAPTION>
PROPERTY,
CURRENT PLANT AND OTHER
ASSETS EQUIPMENT ASSETS
----------- ----------- -----------
<S> <C> <C> <C>
Vintage ................................... $ -- $ 6,900 $ --
Rehab Management Systems (RMS) ............ 1,644 1,021 165
Hospice of the Great Lakes (Hospice) . -- 144 25
Preferred Care ............................ -- 10,350 --
J.R. Rehab ................................ 532 149 --
Extendicare ............................... 2,229 18 --
Edgewater ................................. 1,789 160 1
Century ................................... 5,628 139 202
Signature ................................. 19,938 7,521 99
First American ............................ 44,608 22,438 73,226
Litchfield ................................ -- 4,018 --
Mediq ..................................... 4,518 431 21
Total Rehab ............................... 5,505 128 --
Lifeway ................................... 158 270 70
Rehab People .............................. -- -- --
Other acquisitions ........................ -- 1,863 --
-------- -------- --------
$ 86,549 $ 55,550 $ 73,809
======== ======== ========
<CAPTION>
INTANGIBLE CURRENT LONG-TERM TOTAL
ASSETS LIABILITIES LIABILITIES COST
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Vintage ................................... $ -- $ -- $ -- $ 6,900
Rehab Management Systems (RMS) ............ 12,832 (1,848) (914) 12,900
Hospice of the Great Lakes (Hospice) . 9,031 -- -- 9,200
Preferred Care ............................ -- -- -- 10,350
J.R. Rehab ................................ 3,159 (1,540) -- 2,300
Extendicare ............................... 1,945 (581) -- 3,611
Edgewater ................................. 7,685 (1,313) (48) 8,274
Century ................................... 12,140 (13,917) -- 4,192
Signature ................................. 21,122 (18,077) (16,931) 13,672
First American ............................ 227,406 (152,095) (39,499) 176,084
Litchfield ................................ -- -- -- 4,018
Mediq ..................................... 15,600 (4,928) -- 15,642
Total Rehab ............................... 11,982 (4,492) -- 13,123
Lifeway ................................... -- (728) -- (230)
Rehab People .............................. 10,000 -- -- 10,000
Other acquisitions ........................ 1,600 (832) -- 2,631
--------- ---------- ---------- ---------
$ 334,502 $ (200,351) $ (57,392) $ 292,667
========= ========== ========== =========
</TABLE>
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 1995
Acquisitions in 1995 and the manner of payment are summarized as follows:
<TABLE>
<CAPTION>
MONTH TRANSACTION DESCRIPTION
- ---------- ---------------------------------------------------------------------------
<S> <C>
January Assets of four ancillary service companies
February Assets of ProCare Group, Inc., and its affiliated entities, a home
health service provider in Broward, Dade and Palm Beach counties,
Florida
March Management agreement to manage 34 geriatric care facilities in Texas,
California, Florida, Nevada and Mississippi (known collectively as
the "Preferred Care Facilities")
March Stock of Samaritan Management, Inc., a hospice service provider in
Michigan
March Substantially all the assets of Fidelity Health Care, Inc., a home
healthcare, temporary staffing and infusion services provider in Ohio
June Stock of three ancillary service companies providing mobile x-ray and
electrocardiagram services to long-term care and subacute care
facilities
August Stock of Senior Life Care Enterprises, Inc. ("SLC"), a home health,
supplemental staffing and management service provider
August Stock of Avenel, a 120 bed facility in Plantation, Florida
August Hershey at Woodlands, a 213 bed nursing and personal care facility in
Pennsylvania
November Stock of Governor's Park, a 150 bed facility in Illinois
December Stock of Carrington Pointe, an assisted living facility in
Massachusetts
Various Litchfield Asset Management, Inc., purchase option deposits in con-
nection with operating leases
Various 12 acquisitions, each with total costs of less than $2,000
Various Cash payments of acquisition costs accrued in 1994 and 1995
<CAPTION>
COMMON
CASH STOCK ACCRUED
MONTH PAID ISSUED(1) LIABILITIES TOTAL COST
- ---------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
January $ 3,324 $ 300 $ -- $ 3,624
February 300 3,600 675 4,575
March 10,200 -- -- 10,200
March 5,500 -- 1,000 6,500
March 2,140 -- 350 2,490
June 2,200 -- -- 2,200
August -- 6,000 700 6,700
August 6,360 -- -- 6,360
August 2,100 -- -- 2,100
November 10,035 -- -- 10,035
December 11,800 -- -- 11,800
Various 4,018 -- -- 4,018
Various 8,461 234 1,065 9,760
Various 16,248 -- (16,248) --
------- ------- --------- -------
$82,686 $10,134 $ (12,458) $80,362
======= ======= ========= =======
</TABLE>
- ----------
(1) Represents shares of IHS common stock as follows: 7,935 shares for four
ancillary service companies, 95,062 shares for ProCare, 92,434 shares for
the PCP earnout, and 189,785 shares for SLC.
71
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(2) BUSINESS ACQUISITIONS -(CONTINUED)
The allocation of the total cost of the 1995 acquisitions to the assets
acquired and liabilities assumed is summarized as follows:
<TABLE>
<CAPTION>
PROPERTY,
CURRENT PLANT AND OTHER INTANGIBLE CURRENT LONG-TERM TOTAL
ASSETS EQUIPMENT ASSETS ASSETS LIABILITIES LIABILITIES COST
--------- ----------- ----------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Four ancillary service companies ....... $ -- $ 501 $ -- $ 3,155 $ -- $ (32) $ 3,624
ProCare ................................ 57 154 47 4,434 -- (117) 4,575
Preferred Care ......................... -- 10,200 -- -- -- -- 10,200
Samaritan of Michigan .................. 265 -- -- 6,775 (540) -- 6,500
Fidelity ............................... 8 183 -- 2,299 -- -- 2,490
Diagnostics ............................ -- 176 -- 2,458 (434) -- 2,200
Senior Life Care Enterprises (SLC) ..... 4,314 103 (202) 5,638 (1,428) (1,725) 6,700
Avenel ................................. -- 6,360 -- -- -- -- 6,360
Hershey ................................ -- 7,870 -- -- -- (5,770) 2,100
Governor's Park ........................ 832 9,203 -- -- -- -- 10,035
Carrington Pointe ...................... -- 11,800 -- -- -- -- 11,800
Litchfield ............................. -- 4,018 -- -- -- -- 4,018
Other acquisitions ..................... 112 8,748 (140) 8,391 (851) (6,500) 9,760
------- -------- ------- -------- --------- --------- --------
$ 5,588 $ 59,316 $ (295) $ 33,150 $ (3,253) $ (14,144) $ 80,362
======= ======== ======= ======== ========= ========= ========
</TABLE>
Unaudited pro forma combined results of operations of the Company giving
effect to the foregoing acquisitions for the years ended December 31, 1996 and
1997 are presented below. Such pro forma presentation has been prepared assuming
that the acquisitions had been made as of January 1, 1996.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1996 1997
--------------- -------------
<S> <C> <C>
Revenues ................................................................ $ 3,541,385 $3,570,918
Earnings (loss) before extraordinary items and cumulative effect of ac-
counting change ........................................................ 2,305 (4,911)
Earnings (loss) before cumulative effect of accounting change ........... 874 (25,463)
Net earnings (loss) ..................................................... 874 (27,293)
Per common share--basic:
Earnings (loss) before extraordinary items and cumulative effect of
accounting change .................................................... 0.06 (0.11)
Earnings (loss) before cumulative effect of accounting change .......... 0.02 (0.57)
Net earnings (loss) .................................................... 0.02 (0.61)
</TABLE>
The unaudited pro forma results include the historical accounts of the
Company and the historical accounts for the acquired businesses adjusted to
reflect (1) depreciation and amortization of the acquired identifiable tangible
and intangible assets based on the new cost basis of the acquisitions, (2) the
interest expense resulting from the financing of the acquisitions, (3) the new
cost basis for the allocation of corporate overhead expenses and (4) the related
income tax effects. The pro forma results are not necessarily indicative of
actual results which might have occurred had the operations and management teams
of the Company and the acquired companies been combined in prior years.
In connection with its business acquisitions, the Company incurs
transaction costs, costs to exit certain activities and costs to terminate or
relocate certain employees of acquired companies. Liabilities accrued in the
acquisition cost allocations represent direct costs of acquisitions, which
consist primarily of transaction costs for legal, accounting and consulting
fees, of $3,376 in 1995, $16,299 in 1996 and
72
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(2) BUSINESS ACQUISITIONS -(CONTINUED)
$66,440 in 1997, as well as exit costs and employee termination and relocation
costs of $414 in 1995, $20,091 in 1996 and $33,220 in 1997. Accrued acquisition
liabilities for exit costs and employee termination and relocation costs are
recognized in accordance with EITF 95-3, "Recognition Of Liabilities In
Connection With A Purchase Business Combination" and are summarized as follows
for the years ended December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
EMPLOYEE
TERMINATION AND
EXIT RELOCATION
COSTS COSTS TOTAL
----------- ---------------- -----------
<S> <C> <C> <C>
Acquired companies - 1995 .................. $ -- $ 414 $ 414
Payments charged against liability ......... -- (414) (414)
Adjustments recorded to:
Cost of acquisitions ...................... -- -- --
Operations ................................ -- -- --
-------- --------- ---------
Balance at December 31, 1995 ............... -- -- --
-------- --------- ---------
Acquired companies - 1996 .................. 8,203 11,888 20,091
Payments charged against liability ......... (2,326) (6,198) (8,524)
Adjustments recorded to:
Cost of acquisitions ...................... -- (528) (528)
Operations ................................ -- -- --
-------- --------- ---------
Balance at December 31, 1996 ............... 5,877 5,162 11,039
-------- --------- ---------
Acquired companies - 1997 .................. 10,205 23,015 33,220
Payments charged against liability ......... (3,952) (11,346) (15,298)
Adjustments recorded to:
Cost of acquisitions ...................... (1,925) 160 (1,765)
Operations ................................ -- -- --
-------- --------- ---------
Balance at December 31, 1997 ............... $ 10,205 $ 16,991 $ 27,196
======== ========= =========
</TABLE>
The Company has not finalized its plans to exit activities (exit plans) and
to terminate or relocate employees (termination plans) of certain companies
acquired in 1997. Accordingly, unresolved issues could result in additional
liabilities and increases to the acquisition cost. These adjustments will be
reported primarily as an increase or decrease in goodwill.
The exit plans at December 31, 1997 consist of the discontinuation of
certain activities of the businesses acquired from HEALTHSOUTH Corporation,
Arcadia Services and Ambulatory Pharmaceutical Services, including estimates for
costs related to the closure of duplicative facilities, lease termination fees
and other exit costs as defined in EITF 95-3. Significant exit activities
relating to the 1997 acquisitions are expected to be completed by December 31,
1998. The exit plans at December 31, 1996 consist primarily of the
discontinuation of certain activities of First American, including estimates for
costs related to the closure of duplicative facilities, lease termination fees
and other exit costs as defined in EITF 95-3. Significant exit activities
relating to the 1996 acquisitions were completed by December 31, 1997.
The termination plans at December 31, 1997 relate primarily to the
following employee groups with the indicated anticipated dates of completion of
termination/relocation: businesses acquired from HEALTHSOUTH Corporation by
December 1998, RoTech and the Lithotripsy Division of Coram by October 1998,
Portable X-Ray Labs by February 1998, Rehab Dynamics by June 1998, Arcadia and
Ambulatory Pharmaceutical Services by August 1998, and Community Care of America
by September 1998. The termination plans at December 31, 1996 relate primarily
to the following employee groups
73
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(2) BUSINESS ACQUISITIONS -(CONTINUED)
with the indicated dates of completion of termination/relocation: First American
by October 1997, Mediq and Total Rehab by November 1997, RMS by March 1997,
Signature by September 1997, Hospice of the Great Lakes by May 1997, and
Edgewater by August 1997.
In addition to the accrued acquisition liabilities described above, the
Company allocates the cost of its business acquisitions to the respective assets
acquired and liabilities assumed, including preacquisition contingencies, on the
basis of estimated fair values at the date of acquisition. Often the Company
must await additional information for the resolution or final measurement of
such contingencies during the allocation period, which usually does not exceed
one year from the date of acquisition. Accordingly, the effect of the resolution
or final measurement of preacquisition contingencies during the allocation
period is treated as an acquisition adjustment primarily to the amount of
goodwill recorded. After the allocation period, such resolution or final
measurement is recognized in the determination of net earnings. Preacquisition
contingencies in connection with the Company's business acquisitions primarily
relate to Medicare and Medicaid regulatory compliance matters, claims subject to
intermediary audits, income tax matters and legal proceedings. During the three
years ended December 31, 1997, the Company resolved or completed the final
measurement of certain preacquisition contingencies related to business
acquisitions. Accordingly, the Company adjusted the original allocation of these
businesses by increasing goodwill, decreasing certain third-party payor
settlements receivable, and increasing certain current liabilities. Management
is aware of certain adjustments that might be required with respect to
acquisitions recorded at December 31, 1997; accordingly, the original allocation
could be adjusted to the extent that finalized amounts differ from the
estimates.
(3) PATIENT ACCOUNTS AND THIRD-PARTY PAYOR SETTLEMENTS RECEIVABLE
Patient accounts and third-party payor settlements receivable consist of
the following as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Patient accounts receivable ......................................... $340,803 $726,149
Allowance for doubtful accounts ..................................... 41,527 161,438
-------- --------
299,276 564,711
Third party payor settlements, less allowance for contractual adjust-
ments of $14,979 and $19,827........................................ 27,607 38,721
-------- --------
$326,883 $603,432
======== ========
</TABLE>
Gross patient accounts receivable and third-party payor settlements
receivable from the Federal government (Medicare) were $148,791 and $260,463 at
December 31, 1996 and 1997, respectively. Medicare receivables include pending
requests for exceptions to the Medicare established routine cost limitations for
the reimbursement of costs exceeding these limitations (before related
allowances for contractual adjustments) of $15,640 and $12,803 at December 31,
1996 and 1997, respectively. Amounts receivable from various states (Medicaid)
were $61,675 and $137,707 respectively, at such dates, which relate primarily to
the states of Colorado, Florida, Nebraska, New Mexico, Pennsylvania and Texas.
74
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(4) INVESTMENTS IN AND ADVANCES TO AFFILIATES
The Company's investments in and advances to affiliates at December 31,
1996 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Investments accounted for by the equity method:
HPC .......................................... $ 8,003 $ --
Tutera ....................................... 7,551 7,737
Speciality ................................... 9,379 6,059
Integrated Living Communities ................ 24,531 --
Other ........................................ 799 4,000
------- -------
50,263 17,796
Other investments:
Capstone Pharmacy Services, Inc. ............. 24,019 --
Other ........................................ 1,765 1,731
------- -------
$76,047 $19,527
======= =======
</TABLE>
Investments in significant unconsolidated affiliates are summarized below.
HPC AMERICA, INC. (HPC)
In September 1995, a wholly owned subsidiary of IHS (Southwood), invested
$8,200 for a 40% interest in HPC America, Inc. ("HPC"), a Delaware corporation
that operates home infusion and home healthcare companies, in addition to owning
physician practices. Subject to certain material transactions requiring the
approval of Southwood, the business was conducted under the direction of the
Chief Executive Officer and President of HPC. Southwood had a right of first
refusal to purchase the remaining 60% interest in HPC at any time through March
1997 and the exclusive right to purchase the remaining 60% interest in HPC for
the six month period beginning March 1997, in each case based upon a multiple of
HPC's earnings. Southwood purchased the remaining 60% interest in HPC (excluding
the physician practices) for $26,127 and sold its 40% interest in HPC's
physician practices in November 1997. (See note 2).
TUTERA HEALTH CARE MANAGEMENT, L.P.
In January, 1993, a wholly-owned subsidiary of IHS, Integrated Health
Services of Missouri, Inc. ("IHSM"), invested $4,650 for a 49% interest in
Tutera Health Care Management, L.P. (the "Partnership" or "Tutera"), a
partnership newly formed to manage and operate approximately 8,000 geriatric
care and assisted retirement beds. Cenill, Inc., a wholly owned subsidiary of
Tutera Group, Inc., is the sole general partner of the Partnership and owns a
51% interest therein. Subject to certain material transactions requiring the
approval of IHSM, the business of the Partnership is conducted by its general
partner. IHSM has the right to become a 51% owner and sole general partner of
the Partnership, or to purchase the general partner's entire interest in the
Partnership, in each case for a price based upon a multiple of the Partnership's
earnings, under the following circumstances: (a) if earnings decline and the
general partner fails to implement operational changes recommended by IHS; (b)
if the general partner discontinues its relationship with the partnership and
the general partner fails to accept IHS' suggested replacement; or (c) if the
general partner defaults on its revolving credit and security agreement with
Continental Bank and fails to pay obligations within 36 months of the default.
The Company has guaranteed the debt of the partnership, up to $4,020, which debt
bears interest at prime plus 1 3/4% and matures in October 1998.
75
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(4) INVESTMENTS IN AND ADVANCES TO AFFILIATES-(CONTINUED)
SPECIALITY CARE PLC
In April 1993, a wholly owned subsidiary of IHS (Southwood), acquired a
21.28% interest in the common stock and a 47.64% interest in the 6% cumulative
convertible preferred stock of Speciality Care PLC, an owner and operator of
geriatric care facilities in the United Kingdom. The total cost of the
investment was $748 for the common stock and $2,245 for the preferred stock. The
preferred stock contains certain preferences as to liquidation. In 1994,
Southwood loaned an additional $1,000 to Speciality bearing interest at 9%. In
January 1995 Southwood applied $627 of the loan to pay for additional shares of
common and preferred stock of Speciality subscribed for in November 1994.
In June 1995 the Company loaned an additional $8,575 to Speciality bearing
interest at 12%; this loan was subsequently repaid in August 1995. In addition
the Company invested an additional $4,384 in Speciality. As a result of the
Company's additional investment, the Company has a 21.30% interest in the common
stock and a 63.65% interest in the 6% cumulative convertible preferred stock.
Upon conversion of the preferred stock, the Company will own approximately
31.38% of Speciality (assuming no further issuances). IHS sold its interest in
Speciality in 1998. (See note 23).
INTEGRATED LIVING COMMUNITIES, INC. (ILC)
In November 1995, the Company formed ILC as a wholly-owned subsidiary to
operate the Company's assisted living and other senior housing facilities owned,
leased and managed by the Company. Following formation of ILC, the Company
transferred to ILC as a capital contribution the Company's ownership interests
in three facilities, condominium interests in three facilities and agreements to
manage nine facilities (five of which have subsequently been terminated), and
sublet to ILC two facilities. On October 9, 1996, ILC completed an initial
public offering of its shares at $8.00 per share, in which ILC sold 2,800,000
shares and received aggregate net proceeds of approximately $19,100, and the
Company sold 1,400,000 shares and received aggregate net proceeds of
approximately $10,400. In addition, ILC repaid $7,400 owed to the Company.
Following the offering, the Company owned 2,497,900 shares of ILC common stock,
representing 37.3% of the outstanding ILC common stock, and loaned ILC $3,400.
In the third quarter of 1997, the Company sold its remaining shares in ILC in
connection with the purchase of ILC by Senior Lifestyle Corporation. The Company
recognized a non-recurring gain of $3,914 on the sale, and received full payment
of its loan to ILC.
CAPSTONE PHARMACY SERVICES, INC.
On July 30, 1996, the Company sold its pharmacy division to Capstone
Pharmacy Services, Inc. for a purchase price of $150,000, consisting of cash of
$125,000 and unregistered shares of Capstone common stock having a value of
approximately $25,000. The Company's investment in Capstone common stock
represents less than 8% of the total Capstone shares. Such investment was
recorded at carryover basis of $14,659 and classified as securities available
for sale. An unrealized gain of $9,360 was reflected in stockholders' equity
with respect to such investment, as the current market value of the Capstone
shares at December 31, 1996 was $24,019. The Capstone shares were registered
with the Securities and Exchange Commission in the first fiscal quarter of 1997
and, accordingly, the Company reversed the unrealized gain of $9,360 and
recognized a nonrecurring gain of $7,580.
76
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(4) INVESTMENTS IN AND ADVANCES TO AFFILIATES-(CONTINUED)
The Company's equity in earnings (loss) of affiliates for the years ended
December 31, 1995, 1996 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- --------- ---------
<S> <C> <C> <C>
HPC .................................... $ (185) $ 82 $ 253
Tutera ................................. 960 883 486
Integrated Living Communities .......... -- (241) (440)
Speciality ............................. 668 104 (211)
------ ------ ------
$1,443 $ 828 $ 88
====== ====== ======
</TABLE>
At December 31, 1997 the Company's investment in Tutera exceeded its equity
in the underlying net assets by $3,150, which is being amortized over 15 years.
The Company received cash distributions from its affiliates of $1,012 in 1995,
$830 in 1996 and $245 in 1997. During 1996, the Company's 250,000 common shares
or $2,600 investment in Hearing Health Services, Inc. was repurchased for
approximately $2,600. The Company continues to hold an investment in Hearing
Health Services, Inc. preferred stock.
Selected financial information for the combined affiliates accounted for
under the equity method (excluding HPC and ILC in 1997) is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
-------------- -------------
<S> <C> <C>
Working capital ......... $ 2,007 $ 4,870
Total assets ............ 141,167 46,880
Long-term debt .......... 19,399 14,366
Equity .................. $ 82,707 $24,367
======== =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
---------- ----------- ----------
<S> <C> <C> <C>
Revenues .................... $64,294 $118,995 $ 38,621
Net earnings (loss) ......... 1,316 1,550 (2,133)
======= ======== ========
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1996 and 1997 are summarized
as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ------------
<S> <C> <C>
Land .................................................... $ 38,236 $ 43,929
Buildings and improvements .............................. 356,063 638,919
Leasehold improvements and leasehold interests .......... 218,107 248,476
Equipment ............................................... 270,248 442,919
Construction in progress ................................ 67,169 84,623
Pre-construction and pre-acquisition costs .............. 19,603 5,696
-------- ----------
969,426 1,464,562
Less accumulated depreciation and amortization .......... 105,091 145,929
-------- ----------
Net property, plant and equipment ...................... $864,335 $1,318,633
======== ==========
</TABLE>
Included in leasehold improvements and leasehold interests are purchase
option deposits on 89 facilities of $74,131 at December 31, 1996, of which
$29,375 is refundable, and $78,149 at December 31, 1997, of which $33,393 is
refundable.
77
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(6) INTANGIBLE ASSETS
Intangible assets are summarized as follows at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
----------- -------------
<S> <C> <C>
Intangible assets of businesses acquired, primarily goodwill .......... $570,651 $2,803,325
Deferred financing costs .............................................. 26,842 62,250
-------- ----------
597,493 2,865,575
Less accumulated amortization ......................................... 25,334 50,303
-------- ----------
Net intangible assets ................................................ $572,159 $2,815,272
======== ==========
</TABLE>
The Company amortizes goodwill primarily over 40 years. Management
regularly evaluates whether events or circumstances have occurred that would
indicate an impairment in the value or the life of goodwill. In December 1995,
the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." In accordance with the
provisions of SFAS No. 121, if there is an indication that the carrying value of
an asset, including goodwill, is not recoverable, the Company estimates the
projected undiscounted cash flows, excluding interest, of the related business
unit to determine if an impairment loss should be recognized. Such impairment
loss is determined by comparing the carrying amount of the asset, including
goodwill, to its estimated fair value. With its adoption of SFAS 121 in December
1995, the Company performed the impairment analysis at the individual facility
and business unit basis. Prior to the adoption of SFAS 121 the Company performed
the analysis on an entity-wide basis (see note 19).
In addition, in the fourth quarter of 1995 IHS adopted a change in
accounting estimate and wrote-off $25,785 of deferred pre-opening costs (see
note 19). Effective January 1, 1996, the Company changed its accounting method
from deferring and amortizing pre-opening costs of medical specialty units to
recording them as an expense when incurred.
(7) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1996 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
Accounts payable ................................................ $ 69,947 $261,290
Accrued salaries and wages ...................................... 68,058 70,417
Accrued workers' compensation and other claims .................. 19,203 12,490
Accrued interest ................................................ 16,892 33,530
Accrued acquisition liabilities (exit costs and employee termina-
tion and relocation costs) .................................... 5,514 27,196
Accrued transaction costs ....................................... 5,525 40,489
Other accrued expenses .......................................... 155,955 170,555
-------- --------
$341,094 $615,967
======== ========
</TABLE>
78
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(8) LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1996 1997
----------- ------------
<S> <C> <C>
Revolving credit and term loan facility notes:
Revolving credit loans .................................................................. $342,650 $ 535,000
Term loans .............................................................................. -- 1,150,000
-------- ----------
342,650 1,685,000
10.125% mortgage note payable in monthly installments of $64, including interest, due
August 1997 ............................................................................. 5,502 --
8.094% note payable, due December 2001 ................................................... 9,314 9,205
Prime plus 1.25% note payable (9.75% at December 31, 1997), due December 2000 ............ 8,087 7,954
Mortgages payable in monthly installments of $62, including interest at rates ranging from
9% to 14% ............................................................................... 8,604 7,264
9.75% mortgage note payable in monthly installments of $107, including interest, with
final payment of $13,087 in October 1998................................................ 13,332 13,198
Prime plus 1% (9.5% at December 31, 1997) note payable in monthly installments of $89,
including interest, with final payment in January 2020 .................................. 9,793 9,671
Seller notes, interest rates ranging from 10% to 14%, with final payment of $2,971 in July
2000 .................................................................................... 3,710 3,495
LIBOR plus 1.75% (7.72% at December 31, 1997) mortgage note payable in monthly in-
stallments of $51, including interest, with final payment due December 2000.............. 6,392 6,274
8.8% factored receivables note due December 8, 1998, interest payable monthly ............ 5,000 --
Prime plus 1% note payable due May 1997 .................................................. 1,500 --
12.0% note payable in monthly installments of $153, including interest, with final payment
due May 2000 ............................................................................ 5,130 3,509
Mortgages payable in monthly installments of $89, including interest at rates ranging from
10.09% to 10.64% ........................................................................ -- 8,800
10.89% mortgage note payable in monthly installments of $41, including interest, due April
2015 .................................................................................... -- 3,850
11.50% mortgage note payable in monthly installments of $65, including interest, due
January 2006 ........................................................................... -- 4,981
11.00% mortgage note payable in monthly installments of $216, including interest, due
December 2010 .......................................................................... -- 19,185
11.50% mortgage note payable in monthly installments of $55, including interest, due
January 2006 ........................................................................... -- 4,197
10.95% mortgage note payable in monthly installments of $74, including interest, due
January 2004 ........................................................................... -- 5,240
Obligations under capital leases bearing interest at 9.09% ............................... -- 46,185
11.00% mortgage note payable in monthly installments of $41, including interest, due
December 2006 .......................................................................... -- 2,821
8.60% mortgage note payble in monthly installments of $30, including interest, due July -- 4,032
2034 ...................................................................................
Unfavorable lease obligations in connection with business acquisitions ................... -- 10,000
Other .................................................................................... 11,983 22,326
Subordinated debt:
5 3/4% Convertible Senior Subordinated Debentures due January 1, 2001, with
interest payable semi-annually on January 1 and July 1 ................................... 143,750 143,750
6% Convertible Subordinated Debentures due December 31, 2003, with interest payable
semi-annually on January 1 and July 1 ................................................. 115,000 115,000
5 1/4% Convertible Subordinated Debentures due June 1, 2003 of RoTech Medical Corpora-
tion, with interest payable semi-annually on June 1 and December 1 .................... -- 2,164
10 3/4% Senior Subordinated Notes due July 15, 2004, with interest payable semi-annually
on January 15 and July 15 .............................................................. 100,000 107
</TABLE>
79
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(8) LONG-TERM DEBT -(CONTINUED)
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
9 5/8% Senior Subordinated Notes due May 31, 2002, with interest payable semi-annually
on May 31 and November 30 .............................................................. 115,000 25
10 1/4% Senior Subordinated Notes due April 30, 2006, with interest payable semi-annually
on April 30 and October 30 ............................................................ 150,000 150,000
9 1/2% Senior Subordinated Notes due September 15, 2007, with interest payable semi-
annually on March 15 and September 15 ................................................. -- 450,000
9 1/4% Senior Subordinated Notes due January 15, 2008, with interest payable semi-
annually on January 15 and July 15 .................................................... -- 500,000
------- -------
Total subordinated debt ............................................................... 623,750 1,361,046
------- ---------
Total debt ............................................................................... 1,054,747 3,238,233
Less current portion ..................................................................... 16,547 36,081
--------- ---------
Total long-term debt, less current portion .............................................. $1,038,200 $3,202,152
========== ==========
</TABLE>
REVOLVING CREDIT AND TERM LOAN FACILITY
On September 15, 1997, the Company entered into a $1,750,000 revolving
credit and term loan facility with Citibank, N.A., as Administrative Agent, and
certain other lenders (the "New Credit Facility") to replace its existing
$700,000 revolving credit facility. The New Credit Facility consists of a
$750,000 term loan facility (the "Term Facility") and a $1,000,000 revolving
credit facility, including a $100,000 letter of credit subfacility and a $10,000
swing line subfacility (the "Revolving Facility"). The Term Facility, all of
which was borrowed on September 17, 1997, matures on September 30, 2004 and will
be amortized beginning December 31, 1998 as follows: 1998 -- $7,500; each of
1999, 2000, 2001 and 2002 -- $7,500 (payable in equal quarterly installments);
2003 -- $337,500 (payable in equal quarterly installments); and 2004 -- $375,000
(payable in equal quarterly installments). Any unpaid balance will be due on the
maturity date. The Term Facility bears interest at a rate equal to, at the
option of IHS, either (i) in the case of Eurodollar loans, the sum of (x) one
and three-quarters percent or two percent (depending on the ratio of the
Company's Debt (as defined in the New Credit Facility) to earnings before
interest, taxes, depreciation, amortization and rent, pro forma for any
acquisitions or divestitures during the measurement period (the "Debt/EBITDAR
Ratio")) and (y) the interest rate in the London interbank market for loans in
an amount substantially equal to the amount of borrowing and for the period of
borrowing selected by IHS or (ii) the sum of (a) the higher of (1) Citibank,
N.A.'s base rate or (2) one percent plus the latest overnight federal funds rate
plus (b) a margin of one-half percent or three-quarters of one percent
(depending on the Debt/EBITDAR Ratio). The Term Facility can be prepaid at any
time in whole or in part without penalty.
In connection with the December 1997 acquisition of certain businesses from
HEALTHSOUTH Corporation (see note 2), IHS and the lenders under the New Credit
Facility amended the New Credit Facility to provide for an additional $400,000
term loan facility (the "Additional Term Facility") to finance a portion of the
purchase price for the acquisition and to amend certain covenants to permit the
consummation of the acquisition. The Additional Term Facility, which was
borrowed at the closing of the acquisition, will mature on December 31, 2005,
and will be amortized beginning December 31, 1998 as follows: 1998 -- $4,000;
each of 1999, 2000, 2001, 2002 and 2003 -- $4,000 (payable in equal quarterly
installments); 2004 -- $176,000 (payable in equal quarterly installments); and
2005 -- $200,000 (payable in equal quarterly installments). The Additional Term
Facility bears interest at a rate equal to, at the option of IHS, either (i) in
the case of Eurodollar loans, the sum of (x) two and one-quarter percent or two
and one-half percent (depending on the Debt/EBITDAR Ratio) and (y) the interest
rate in the London interbank market for loans in an amount substantially equal
to the amount of borrowing and for the period of borrowing selected by IHS or
(ii) the sum of (a) the higher of (1) Citibank, N.A.'s base
80
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(8) LONG-TERM DEBT -(CONTINUED)
rate or (2) one percent plus the latest overnight federal funds rate plus (b) a
margin of one percent or one and one-quarter percent (depending on the
Debt/EBITDAR Ratio). The Additional Term Facility can be prepaid at any time in
whole or in part without penalty.
The Revolving Facility will reduce to $800,000 on September 30, 2001 and
$500,000 on September 30, 2002, with a final maturity on September 15, 2004;
however, the $100,000 letter of credit subfacility and $10,000 swing line
subfacility will remain at $100,000 and $10,000, respectively, until final
maturity. The Revolving Facility bears interest at a rate equal to, at the
option of IHS, either (i) in the case of Eurodollar loans, the sum of (x)
between three-quarters of one percent and one and three-quarters percent
(depending on the Debt/EBITDAR Ratio) and (y) the interest rate in the London
interbank market for loans in an amount substantially equal to the amount of
borrowing and for the period of borrowing selected by IHS or (ii) the sum of (a)
the higher of (1) Citibank, N.A.'s base rate or (2) one percent plus the latest
overnight federal funds rate plus (b) a margin of between zero percent and
one-half percent (depending on the Debt/EBITDAR Ratio). Amounts repaid under the
Revolving Facility may be reborrowed prior to the maturity date.
The New Credit Facility limits IHS' ability to incur indebtedness or
contingent obligations, to make additional acquisitions, to sell or dispose of
assets, to create or incur liens on assets, to pay dividends, to purchase or
redeem IHS' stock and to merge or consolidate with any other person. In
addition, the New Credit Facility requires that IHS meet certain financial
ratios, and provides the lenders with the right to require the payment of all
amounts outstanding under the facility, and to terminate all commitments under
the facility, if there is a change in control of IHS or if any person other than
Dr. Robert N. Elkins, IHS' Chairman and Chief Executive Officer, or a group
managed by Dr. Elkins, owns more than 40% of IHS' stock. The New Credit Facility
is guaranteed by all of IHS' subsidiaries (other than inactive subsidiaries) and
secured by a pledge of all of the stock of substantially all of IHS'
subsidiaries.
The New Credit Facility replaced the Company's $700,000 revolving credit
facility (the "Prior Credit Facility"). As a result, the Company recorded an
extraordinary loss on extinguishment of debt of approximately $2,384 (net of
related tax benefit of approximately $1,524) in the third quarter of 1997
resulting from the write-off of deferred financing costs of $3,908 related to
the Prior Credit Facility. See note 16.
In May 1996, IHS entered into a $700,000 revolving credit facility,
including a $100,000 letter of credit subfacility, with Citibank, N.A., as
administrative agent, and certain other lenders. The Prior Credit Facility
consisted of a $700,000 revolving loan which reduced to $560,000 on June 30,
2000 and $315,000 on June 30, 2001, with a final maturity on June 30, 2002. The
Prior Credit Facility was guaranteed by IHS' subsidiaries and secured by a
pledge of all of the stock of substantially all of IHS' subsidiaries. Loans
under the Prior Credit Facility bore interest at a rate based on various market
indices similar to those for the New Credit Facility (7.38% at December 31,
1996). On May 15, 1996, IHS borrowed $328,200 under the Prior Credit Facility to
repay amounts outstanding under its $500,000 credit facility. See note 16.
The Company utilizes interest rate swap agreements to manage interest rate
exposure on its floating rate revolving credit and term loan facility. The
principal objective of such contracts is to minimize the risks and/or costs
associated with financial operating activities. Each interest rate swap is
matched as a hedge against existing floating rate debt. The Company does not
hold derivative financial instruments for trading or speculative purposes. At
December 31, 1997, the Company had outstanding $1.05 billion notional amount of
floating to fixed interest rate swap agreements. These swap agreements expire at
various dates through 2004 and effectively convert an aggregate principal amount
of $1.05 billion of variable rate long-term debt into fixed rate borrowings. The
variable interest rates are based on the three month LIBOR rate (5.81% at
December 31, 1997). The weighted average fixed interest rate under these
agreements was 5.89% at December 31, 1997.
81
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(8) LONG-TERM DEBT -(CONTINUED)
SUBORDINATED DEBT
On September 11, 1997, IHS issued $500,000 aggregate principal amount of
its 9 1/4% Senior Subordinated Notes due 2008 (the "9 1/4% Senior Notes").
Interest on the 9 1/4% Senior Notes is payable semi-annually on January 15 and
July 15. The 9 1/4% Senior Notes are redeemable in whole or in part at the
option of IHS at any time on or after January 15, 2003, at a price, expressed as
a percentage of the principal amount, initially equal to 104.625% and declining
to 100% on January 15, 2006, plus accrued interest thereon. In addition, IHS may
redeem up to $166,667 aggregate principal amount of 9 1/4% Senior Notes at any
time and from time to time prior to January 15, 2001 at a redemption price equal
to 109.25% of the aggregate principal amount thereof, plus accrued interest
thereon, out of the net cash proceeds of one or more Public Equity Offerings (as
defined in the indenture under which the 9 1/4% Senior Notes were issued). IHS
used approximately $321,500 of the net proceeds to repay all amounts outstanding
under the Company's $700,000 revolving credit facility and used the remaining
approximately $164,900 of net proceeds to pay a portion of the purchase price
for the acquisition of the businesses acquired from HEALTHSOUTH and for general
corporate purposes, including working capital.
In May 1997, the Company issued $450,000 aggregate principal amount of its
9 1/2% Senior Subordinated Notes due 2007 (the "9 1/2% Senior Notes"). Interest
on the 9 1/2% Senior Notes is payable semiannually on March 15 and September 15,
commencing September 15, 1997. The 9 1/2% Senior Notes are redeemable for cash
at any time on or after September 15, 2002, at the option of the Company, in
whole or in part, initially at the redemption price equal to 104.75% of
principal amount, declining to 100% of principal amount on September 15, 2005,
plus accrued interest thereon to the date fixed for redemption. In addition, IHS
may redeem up to $150,000 aggregate principal amount of 9 1/2% Senior Notes at
any time and from time to time prior to September 15, 2000 at a redemption price
equal to 108.50% of the aggregate principal amount thereof, plus accrued
interest thereon, out of the net cash proceeds of one or more Public Equity
Offerings (as defined in the indenture under which the 9 1/2% Senior Notes were
issued). The Company used approximately $247,200 of the net proceeds from the
sale of the 9 1/2% Senior Notes to repurchase substantially all of its
outstanding 9 5/8% Senior Subordinated Notes due 2002 and 10 3/4% Senior
Subordinated Notes due 2004 and to pay pre-payment premiums, consent fees and
accrued interest related to the repurchase; the remainder was used to repay a
portion of the balance then outstanding under its revolving credit facility. In
connection with the repurchase, the Company recorded an extraordinary loss of
$18,168 (net of tax). See note 16.
On May 29, 1996, the Company issued $150,000 aggregate principal amount of
its 10 1/4% Senior Subordinated Notes due 2006 (the "10 1/4% Senior Notes").
Interest on the 10 1/4% Senior Notes is payable semi-annually on April 30 and
October 30. The 10 1/4% Senior Notes are redeemable for cash at any time after
April 30, 2001, at IHS' option, in whole or in part, initially at a redemption
price equal to 105.125% of the principal amount, declining to 100% of the
principal amount on April 30, 2004, plus accrued interest thereon to the date
fixed for redemption. Because certain actions were not taken to effect an
exchange offer within specified periods whereby each holder of 10 1/4% Senior
Notes would be offered the opportunity to exchange such notes for new notes
identical in all material respects to the 10 1/4% Senior Notes, except that the
new notes would be registered under the Securities Act, the interest rate on the
10 1/4% Senior Notes increased to 10.5% beginning November 25, 1996, and
continued to increase by 0.25% each 90 days until the exchange offer was
commenced, which occurred on November 26, 1997.
On May 18, 1995, the Company issued $115,000 aggregate principal amount of
its 9 5/8% Senior Subordinated Notes due 2002, Series A (the "9 5/8% Senior
Notes"). Interest on the 9 5/8% Senior Notes is payable semi-annually on May 31
and November 30. The 9 5/8% Senior Notes are not redeemable prior to maturity.
On May 30, 1997, the Company repurchased $114,975 aggregate principal amount of
the 9 5/8% Senior Notes pursuant to a cash tender offer. As a condition of the
Company's obligation to
82
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(8) LONG-TERM DEBT -(CONTINUED)
repurchase tendered 9 5/8% Senior Notes, tendering holders consented to
amendments to the indenture under which the 9 5/8% Senior Notes were issued
which eliminated or modified most of the restrictive covenants previously
contained in such indenture.
On July 7, 1994, the Company issued $100,000 aggregate principal amount of
its 10 3/4% Senior Subordinated Notes due 2004 (the "10 3/4% Senior Notes").
Interest on the 10 3/4% Senior Notes is payable semi-annually on January 15 and
July 15. The 10 3/4% Senior Notes are redeemable in whole or in part at the
option of the Company at any time on or after July 15, 1999, at a price,
expressed as a percentage of the principal amount, initially equal to 105.375%
and declining to 100% on July 15, 2002, plus accrued interest thereon. On May
30, 1997, the Company repurchased $99,893 aggregate principal amount of the 10
3/4% Senior Notes pursuant to a cash tender offer. As a condition of the
Company's obligation to repurchase tendered 10 3/4% Senior Notes, tendering
holders consented to amendments to the indenture under which the 10 3/4% Senior
Notes were issued which eliminated or modified most of the restrictive covenants
previously contained in such indenture.
The Company's $115,000 aggregate principal amount of 6% convertible
subordinated debentures (the "6% Debentures") are due December 31, 2003. The
Company's 5 3/4% convertible senior subordinated debentures (the "5 3/4%
Debentures") in the aggregate principal amount of $143,750 are due January 1,
2001. The $2,164 aggregate principal amount of 5 1/4% convertible subordinated
debentures of RoTech Medical Corporation (the "5 1/4% Debentures") are due June
1, 2003. At any time prior to redemption or final maturity, the 5 3/4%
Debentures, the 6% Debentures and the 5 1/4% Debentures are convertible into
approximately 4,409,509 shares, 3,579,766 shares and 47,865 shares,
respectively, of Common Stock of the Company at $32.60 per share, $32.125 per
share and $45.21 per share, respectively, at the option of the holder, subject
to adjustment upon the occurrence of certain events. The 5 3/4% Debentures, 6%
Debentures and 5 1/4% Debentures are redeemable in whole or in part at the
option of the Company at any time after January 2, 1997, January 1, 1996 and
June 4, 1999, respectively, at initial redemption prices expressed as a
percentage of principal of 103.29%, 104.2% and 103.0%, respectively.
In the event of a change in control of IHS (as defined), each debt holder
may require the Company to repurchase the debt, in whole or in part, at
redemption prices of 100% of the principal amount in the case of the 5 3/4%
Debentures, the 6% Debentures and the 5 1/4% Debentures and 101% of the
principal amount in the case of the 10 3/4% Senior Notes, 9 5/8% Senior Notes,
10 1/4% Senior Notes, 9 1/2% Senior Notes and 9 1/4% Senior Notes.
The indentures under which each of the 10 1/4% Senior Notes, the 9 1/2%
Senior Notes and the 9 1/4% Senior Notes were issued contain certain covenants,
including but not limited to, covenants with respect to the following matters:
(i) limitations on additional indebtedness unless certain coverage ratios are
met; (ii) limitations on other subordinated debt; (iii) limitations on liens;
(iv) limitations on the issuance of preferred stock by IHS' subsidiaries; (v)
limitations on transactions with affiliates; (vi) limitations on certain
payments, including dividends; (vii) application of the proceeds of certain
asset sales; (viii) restrictions on mergers, consolidations and the transfer of
all or substantially all of the assets of IHS to another person; and (ix)
limitations on investments and loans. The indentures under which each of the 10
3/4% Senior Notes and 9 5/8% Senior Notes were issued contain certain limited
covenants, including a covenant with respect to the application of the proceeds
of certain asset sales.
83
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(8) LONG-TERM DEBT -(CONTINUED)
At December 31, 1997, the aggregate maturities of long-term debt for the
five years ending December 31, 2002 and thereafter are as follows:
<TABLE>
<S> <C>
1998 ............... $ 36,081
1999 ............... 30,166
2000 ............... 27,079
2001 ............... 305,639
2002 ............... 315,496
Thereafter ......... 2,523,772
----------
$3,238,233
==========
</TABLE>
Interest capitalized to construction in progress was $5,155 in 1995, $3,800
in 1996 and $3,600 in 1997.
(9) OTHER LONG-TERM LIABILITIES AND CONTINGENCIES RELATED TO FIRST AMERICAN
ACQUISITION
As indicated in note 2, the Company acquired all of the outstanding stock
of First American Health Care of Georgia, Inc. in October 1996. The purchase
price includes contingent payments, certain of which have been determined to be
probable, and the present value thereof is recorded as other long-term
liabilities as of December 31, 1996 and 1997.
Prior to its acquisition by the Company, First American was under
protection of the U.S. Bankruptcy Court, with which it had filed a petition for
reorganization under Chapter 11 of the Bankruptcy Code on February 21, 1996 (the
petition date) following its and its two principal shareholders' convictions on
multiple counts of having made improper Medicare reimbursement claims.
Immediately preceding the Chapter 11 filing, First American and its principal
shareholders had entered into a merger agreement with the Company. In connection
with the bankruptcy proceedings and the establishment and approval of First
American's plan of reorganization, the merger agreement was amended and
confirmed by the Bankruptcy Court on October 4, 1996.
Pursuant to the terms of the First American plan of reorganization and the
amended merger agreement, the purchase price included contingent payments of up
to $155,000. The merger agreement provided that the contingent payments will be
payable (1) if legislation is enacted that changes the Medicare reimbursement
methodology for home health services to a prospectively determined rate
methodology, in whole or in part, or (2) if, in respect to payments contingently
payable for any year through 2003, the percentage increase through 2004 in the
seasonally unadjusted Consumer Price Index for all Urban Consumers for the
Medical Care expenditure category (the "Medical CPI") is less than 8%. If
payable, the contingent payments will be due on February 14 as follows: $10,000
in 2000; $40,000 in 2001; $51,000 in 2002; $39,000 in 2003; and $15,000 in 2004.
The contingent payments would be payable to the Health Care Financing
Administration ("HCFA") for $140,000 and to the former shareholders of First
American for $15,000.
The contingent payments to HCFA, which are due only if the contingent
payments described above become payable, and $95,000 of the cash purchase price
paid by the Company, which was paid to HCFA, are in full settlement of HCFA's
claims made to the Bankruptcy Court related to First American's Medicare
reimbursement claims for all periods prior to the petition date and of any
claims by HCFA related to First American's Medicare reimbursement claims made
after the petition date through December 31, 1996.
The Company has accrued the present value of the payments contingently
payable to HCFA and the former shareholders of First American of $10,000 in 2000
and $40,000 in 2001 at December 31, 1996 and the Company accrued the present
value of the remaining payments at December 31, 1997. The present value of these
payments of $33,851 at December 31, 1996 and $113,042 at December 31, 1997 was
determined using a discount rate of 8% per annum from the dates of probable
payment. The entire
84
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(9) OTHER LONG-TERM LIABILITIES AND CONTINGENCIES RELATED TO FIRST AMERICAN
ACQUISITION -(CONTINUED)
amount is now considered probable because the Balanced Budget Act of 1997,
enacted in August 1997, requires the implementation of a prospective payment
system for home nursing services starting with cost reporting periods beginning
after October 1, 1999. The contingent payments due in 2000 and 2001 were
considered probable at December 31, 1996 because management believed the
anticipated Medical CPI in 1999 and 2000 would probably trigger the required
payments; however, management was unable to predict at the time what the Medical
CPI will be in years subsequent to 2000.
(10) LEASES
The Company has entered into operating leases as lessee of 180 health care
facilities and certain office facilities expiring at various dates through
February 2020. Minimum rent payments due under operating leases in effect at
December 31, 1997 are summarized as follows:
<TABLE>
<S> <C>
1998 ....................... $ 86,643
1999 ....................... 83,524
2000 ....................... 82,883
2001 ....................... 73,557
2002 ....................... 64,388
Subsequent to 2002 ......... 313,897
--------
Total ..................... $704,892
========
</TABLE>
The Company also leases equipment under short-term operating leases having
rentals of approximately $27,656 per year.
The leases of health care facilities provide renewal options for various
terms at fair market rentals at the expiration of the initial term, except for
leases of three facilities which have no renewal options. The Company generally
has the option or right of first refusal to purchase the facilities at fair
market value determined by independent appraisal (or by formula based upon the
cash flow of the facility, as defined) or, with respect to certain leases, at a
fixed price representing the fair market value at the inception of the lease.
Under certain conditions, the Company may be required to exercise the options to
buy the facilities. In connection with 55 leases the Company has paid purchase
option deposits aggregating $57,599 at December 31, 1997, of which $33,393 is
refundable. The Company has also guaranteed approximately $6,600 of indebtedness
of a lessor of one facility.
Minimum rentals are generally subject to adjustment based on the consumer
price index or the annual rate of five year U.S. Treasury securities. Also, the
leases generally provide for contingent rentals, based on gross revenues of the
facilities in excess of base year amounts, and additional rental obligations for
real estate taxes, utilities, insurance and repairs. Contingent rentals were
$2,777 in 1995, $3,565 in 1996 and $2,744 in 1997.
(11) CAPITAL STOCK
The Company is authorized to issue up to 150,000,000 shares of common stock
and 15,000,000 shares of preferred stock. The Board of Directors is authorized
to issue shares of preferred stock in one or more series and to determine and
fix the rights, preferences and privileges of each series, including dividend
rights and preferences, conversion rights, voting rights, redemption rights and
the terms of any sinking fund. The issuance of such preferred stock may have the
effect of delaying, deferring or preventing a change in control of the Company
without further action by the stockholders and may adversely affect the voting
and other rights of the holders of common stock, including the loss of voting
control to others. As of December 31, 1996 and 1997, there were no shares of
preferred stock outstanding.
85
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(11) CAPITAL STOCK -(CONTINUED)
In addition, IHS has designated 750,000 shares of preferred stock as Series
A Junior Participating Cumulative Preferred Stock, $.01 par value per share. The
IHS Stockholders' Rights Plan ("IHS Rights Plan") provides that one preferred
stock purchase right ("Right") will be issued with each share of IHS common
stock prior to the earlier of (a) 10 days following a public announcement that
an individual or group has acquired beneficial ownership of 20% or more of the
outstanding common stock or (b) 10 business days following the commencement of a
tender or exchange offer resulting in the beneficial ownership by a person or
group of 20% or more of the outstanding common stock. When exercisable, each
Right entitles the registered holder to purchase from IHS one one-hundredth of a
share of Series A preferred stock at a price of $135.00 per one one-hundredth of
a share of Series A preferred stock, subject to adjustment.
Series A preferred stock purchasable upon exercise of the Rights will not
be redeemable and is junior to any other series of preferred stock that may be
authorized and issued by IHS. In addition, the Series A preferred stockholders
will be entitled to the following:
o Minimum preferential quarterly dividend payment of $1 per share and an
aggregate dividend of 100 times the dividend declared per share of common
stock;
o Preferential liquidation payment of $100 per share and an aggregate payment of
100 times the payment made per share of common stock;
o 100 votes per share, voting together with common stock;
o In the event of merger, consolidation or other transaction in which common
stock is exchanged, each share of Series A preferred stock will receive 100
times the amount received per share of common stock.
These rights are protected by customary antidilution provisions.
The Company declared a $0.02 per share cash dividend in 1995, 1996 and
1997.
At December 31, 1996 and 1997 the Company had outstanding stock options as
follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Stock options outstanding pursuant to:
1990 Employee Stock Option Plan ................................... 832,906 486,478
1992 Employee Stock Option Plan ................................... 903,715 740,170
Stock Option Plan for Non-Employee Directors ...................... 200,000 50,000
1994 Stock Incentive Plan ......................................... 2,316,355 1,669,594
Senior Executives' Stock Option Plan .............................. 1,800,000 1,800,000
Stock Option Compensation Plan for Non-Employee Directors ......... 200,000 128,082
1995 Board of Director's Plan ..................................... 300,000 300,000
1996 Employee Stock Option Plan ................................... 1,886,000 2,987,475
RoTech converted options .......................................... -- 1,737,476
Other options ..................................................... 311,123 262,133
--------- ---------
Total stock options outstanding ................................. 8,750,099 10,161,408
========= ==========
</TABLE>
86
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(11) CAPITAL STOCK -(CONTINUED)
The 1990 Employee Stock Option Plan, the 1992 Employee Stock Option Plan
and the 1996 Employee Stock Option Plan provide that options may be granted to
certain employees at a price per share not less than the fair market value at
the date of grant as well as non-qualified options. In 1993, the Company adopted
the Senior Executives' Stock Option Plan and the 1994 Stock Incentive Plan,
which provide for the issuance of options with terms similar to the 1992 plan.
In addition, the Company has adopted two Stock Option Plans for Non-Employee
Directors and a Stock Option Compensation Plan for Non-Employee Directors. The
Board of Directors has authorized the issuance of 14,278,571 shares of Common
Stock under the plans. Such options have been granted with exercise prices equal
to or greater than the estimated fair market value of the common stock on the
date of grant; accordingly, the Company has recorded no compensation expense
related to such grants. The options' maximum term is 10 years. Vesting for the
1990, 1992 and 1994 Employee Stock Option Plans are graded over four to six
years. Vesting for the 1996 Plan is over two to four years. Vesting for the
Directors' plans is one year after the date of grant. Vesting for the Senior
Executives' Plan is generally over three years. In addition, the Company
provides an Employee Stock Purchase Plan whereby employees have the right to
purchase the Company's common stock at 90% of the quoted market price, subject
to certain limitations.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------ ------------------------ ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------- ---------- ------------- ---------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding-beginning of period 5,879,832 $ 25.98 6,377,554 $ 20.19 8,750,099 $ 20.94
Granted .................................... 1,059,146 28.81 3,096,500 22.14 2,975,272 25.15
Exercised .................................. (340,244) 19.61 (141,382) 14.55 (1,418,968) 19.81
Cancelled .................................. (221,180) 29.63 (582,573) 20.66 (144,995) 21.67
--------- -------- --------- -------- ---------- --------
Options outstanding--end of period ......... 6,377,554 20.19 8,750,099 20.94 10,161,408 22.24
--------- -------- --------- -------- ---------- --------
Options exercisable--end of period ......... 2,731,876 $ 20.15 3,914,843 $ 20.18 5,777,973 $ 22.25
========= ======== ========= ======== ========== ========
</TABLE>
The following summarizes information about stock options outstanding as of
December 31, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE
- ------------------- ------------- ------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
under $15.......... 108,019 2.57 $ 11.85 68,855 $ 11.49
$15 to $20......... 2,325,762 8.39 19.24 550,607 17.88
$20 to $25......... 6,471,927 7.34 21.47 4,441,411 21.32
over $25........... 1,255,700 9.48 32.87 717,100 32.44
--------- ---- -------- --------- --------
Totals ........... 10,161,408 7.80 $ 22.24 5,777,973 $ 22.25
========== ==== ======== ========= ========
</TABLE>
87
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(11) CAPITAL STOCK -(CONTINUED)
The Company applies APB No. 25 and related interpretations in accounting
for its stock options. Accordingly, no compensation expense has been recognized
in connection with its stock options. Had compensation expense for the Company's
stock options been determined consistent with SFAS No. 123, the Company's net
earnings (loss) and earnings (loss) per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
--------------------------- ------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ------------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net earnings (loss) ................... $ (27,002) $ (44,752) $ 46,334 $ 43,082 $ (33,505) $ (48,187)
Basic earnings (loss) per share ....... (1.26) (2.09) 2.06 1.91 (1.19) (1.71)
Diluted earnings (loss) per share ..... (1.26) (2.09) 1.78 1.68 (1.19) (1.71)
========= ========= ========= ========= ========= =========
</TABLE>
The fair value of the options (including the Employee Stock Purchase Plan)
for purposes of the above pro forma disclosure was estimated on the date of
grant or modification using the Black-Scholes option pricing model and the
following assumptions: a risk-free interest rate of 5.40% to 6.74% in 1995 and
1996 and 5.80% in 1997, weighted average expected lives of 2 to 9 years for
options and 6 months for the Employee Stock Purchase Plan, 0.1% dividend yield
and volatility of 26.3% in 1995 and 1996 and 30.1% in 1997. The effects of
applying SFAS No. 123 in the pro forma net earnings (loss) and earnings (loss)
per share may not be representative of the effects on such pro forma information
for future years. In November 1995, the Board of Directors authorized a
modification to the options outstanding under the Company's option plans which
resulted in the change of the exercise price to $20.875, the market price on the
date of the modification, for certain options with exercise prices over $21.00.
Because no compensation was recognized for the original options, the modified
options are treated as a new grant. Under SFAS 123, compensation cost of $23,655
in 1995 is recognized immediately for vested options for the fair value of the
new options on the modification date. The effect of this modification has been
included in the pro forma earnings (loss) per share amounts above. In September
1997, the Board of Directors authorized a modification to the options
outstanding under the Company's option plans which resulted in a two year
acceleration of the options held by senior and executive vice presidents. Under
SFAS 123, compensation cost of $1,229 in 1997 is recognized immediately for the
vested options. The effect of this modification has been included in the pro
forma per share amounts above.
Warrant transactions are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
1995 PRICE 1996 PRICE 1997 PRICE
------------ ---------- ------------ ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Warrants outstanding--beginning of year 497,181 $ 29.28 518,000 $ 31.30 498,000 $ 31.03
Granted to sellers ..................... 65,000 37.95 -- -- 780,000 33.12
Exercised .............................. (44,181) 18.35 -- -- (3,000) 20.00
Cancelled .............................. -- -- (20,000) 38.02 -- --
------- -------- ------- -------- ------- --------
Warrants outstanding--end of year ...... 518,000 $ 31.30 498,000 $ 31.03 1,275,000 $ 32.34
======= ======== ======= ======== ========= ========
</TABLE>
In 1995, the Company's Board of Directors authorized the repurchase in the
open market of up to $50,000 of the Company's common stock. The purpose of the
repurchase program was to have available treasury shares of common stock to
satisfy contingent earn-out payments under prior business combinations accounted
for by the purchase method. The repurchases were funded from cash from
operations and drawings under the Company's revolving credit facility. In 1995,
the Company repurchased 400,600 shares of common stock for an aggregate purchase
price of approximately $12,790. No shares were repurchased in 1996. The
repurchase program was discontinued in September 1996. During 1996 the Company
reissued all 400,600 shares in partial satisfaction of earn-out payments.
88
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(11) CAPITAL STOCK -(CONTINUED)
In 1997, the Company's Board of Directors authorized the repurchase in the
open market of up to $20,000 of the Company's common stock. The purpose of the
repurchase program was to have available treasury shares of common stock to (i)
satisfy contingent earn-out payments under prior business combinations accounted
for by the purchase method, (ii) issue in connection with acquisitions and (iii)
issue upon exercise of outstanding options. The repurchases were funded from
cash from operations and proceeds from the sale of the Company's debt
securities. In 1997, the Company repurchased 548,500 shares of common stock for
an aggregate purchase price of approximately $19,813.
(12) EARNINGS PER SHARE
The Company adopted SFAS No. 128 during the fourth quarter of the year
ended December 31, 1997. SFAS No. 128 establishes revised standards for
computing and presenting earnings per share (EPS) data. It requires dual
presentation of "basic" and "diluted" EPS on the face of the statements of
operations and a reconciliation of the numerators and denominators used in the
basic and diluted EPS calculations. As required by SFAS No. 128, EPS data for
prior periods presented have been restated to conform to the new standard.
Basic EPS is calculated by dividing net earnings (loss) by the weighted
average number of common shares outstanding for the applicable period. Diluted
EPS is calculated after adjusting the numerator and the denominator of the basic
EPS calculation for the effect of all potential dilutive common shares
outstanding during the period. Information related to the calculation of net
earnings per share of common stock is summarized as follows:
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- ----------
<S> <C> <C> <C>
For the Year ended December 31, 1996
Basic EPS ................................................. $47,765 22,529,000 $ 2.12
Adjustment for interest on convertible debentures ......... 9,888 -- --
Incremental shares from assumed exercise of dilutive op-
tions and warrants ...................................... -- 1,045,310 --
Incremental shares from assumed conversion of the con-
vertible subordinated debentures ........................ -- 7,989,275 --
------- ---------- ------
Diluted EPS ............................................... $57,653 31,563,585 $ 1.83
======= ========== ======
</TABLE>
For the years ended December 31, 1995 and 1997, no exercise of options and
warrants nor conversion of subordinated debentures is assumed since their effect
is antidilutive. The weighted average number of common shares outstanding was
21,463,464 in 1995 and 28,253,218 in 1997.
89
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(13) INCOME TAXES
The provision for income taxes on earnings before income taxes and
extraordinary items is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
------------- ----------- ------------
<S> <C> <C> <C>
Federal .......... $ (13,341) $ 55,577 $ 20,783
State ............ (2,929) 8,138 3,666
--------- -------- ---------
$ (16,270) $ 63,715 $ 24,449
========= ======== =========
Current .......... $ 7,732 $ 21,515 $ 39,042
Deferred ......... (24,002) 42,200 (14,593)
--------- -------- ---------
$ (16,270) $ 63,715 $ 24,449
========= ======== =========
</TABLE>
The amount computed by applying the Federal corporate tax rate of 35% in
1995, 1996 and 1997 to earnings before income taxes and extraordinary items is
summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ----------- -----------
<S> <C> <C> <C>
Income tax computed at statutory rates .................. $ (14,791) $ 39,018 $ 4,664
State income taxes, net of Federal tax benefit .......... (1,904) 5,290 2,383
Amortization of non-deductible intangibles .............. 1,975 2,293 5,568
Basis difference on assets sold ......................... -- 16,136 5,784
Merger costs and other special charges .................. -- -- 6,362
Valuation allowance adjustment .......................... (2,111) (1,353) --
Other ................................................... 561 2,331 (312)
--------- -------- -------
$ (16,270) $ 63,715 $24,449
========= ======== =======
</TABLE>
Deferred income tax (assets) liabilities at December 31, 1996 and 1997 are
as follows:
<TABLE>
<CAPTION>
1996 1997
------------ -----------
<S> <C> <C>
Excess of book over tax basis of assets ......................... $ 109,900 $ 166,520
Deferred pre-opening costs ...................................... 84 --
Insurance reserves .............................................. (10,874) (7,209)
Deferred gain on sale-leaseback ................................. (2,413) (2,040)
Allowance for doubtful accounts ................................. (21,753) (69,787)
Accrued Medicare settlement ..................................... (23,523) (41,330)
Accrued litigation .............................................. (7,354) (5,402)
Accrued vacation ................................................ (4,059) (3,810)
Other accrued expenses not yet deductible for tax ............... (12,729) (37,754)
Pre-acquisition separate company net operating loss carryforwards (4,679) (23,868)
Other ........................................................... (317) 277
--------- ---------
22,283 (24,403)
Valuation allowance ............................................. -- 24,403
--------- ---------
$ 22,283 $ --
========= =========
</TABLE>
The decreases in the valuation allowance for deferred tax assets in 1995
and 1996 are attributable to the utilization of pre-acquisition separate company
net operating loss carryforwards. Also, the Company recorded deferred tax assets
in connection with business acquisitions of $32,093 in 1997, which, net of a
valuation allowance of $24,403 related thereto, has been applied as a reduction
to goodwill.
90
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(13) INCOME TAXES-(CONTINUED)
At December 31, 1997, certain subsidiaries of the Company had
pre-acquisition net operating loss carryforwards available for Federal and state
income tax purposes of approximately $61,669 which expire in the years 1998
through 2009. The annual utilization of these net operating loss carryforwards
is subject to certain limitations under the Internal Revenue Code.
(14) OTHER COMMITMENTS AND CONTINGENCIES
IHS' contingent liabilities (other than liabilities in respect of
litigation and the First American acquisition) aggregated approximately $86,603
as of December 31, 1997. IHS is obligated to purchase its Greenbriar facility
upon a change in control of IHS. The net price of the facility is approximately
$4,014. IHS has guaranteed approximately $6,600 of the lessor's indebtedness.
IHS is required, upon certain defaults under the lease, to purchase its Orange
Hills facility at a purchase price equal to the greater of $7,130 or the
facility's fair market value. IHS has guaranteed approximately $4,020 owed by
Tutera Group, Inc. and Sunset Plaza Limited Partnership, a partnership
affiliated with a partnership in which IHS has a 49% interest, to Finova Capital
Corporation. IHS has established several irrevocable standby letters of credit
with the Bank of Nova Scotia to secure certain of IHS' self-insured workers'
compensation obligations, health benefits and other obligations. The maximum
obligation was $32,367 at December 31, 1997. In addition, IHS has several surety
bonds in the amount of $32,472 to secure certain of the Company's health
benefits, patient trust funds and other obligations. In addition, with respect
to certain acquired businesses IHS is obligated to make certain contingent
payments if earnings of the acquired business increase or earnings targets are
met. IHS is also obligated under certain circumstances to make contingent
payments of up to $155,000 in respect of IHS' acquisition of First American (see
note 9). In addition, IHS has obligations under operating leases aggregating
approximately $704,892 at December 31, 1997. (See note 10).
IHS leases ten facilities from Meditrust, a publicly-traded real estate
investment trust. With respect to all the facilities leased from Meditrust, IHS
is obligated to pay additional rent in an amount equal to a specified percentage
(generally five percent) of the amount by which the facility's gross revenues
exceed a specified amount (generally based on the facility's gross revenues
during its first year of operation). If an event of default occurs under any
Meditrust lease or any other agreement IHS has with Meditrust, Meditrust has the
right to require IHS to purchase the facility leased from the partnership at a
price equal to the higher of the then current fair market value of the facility
or the original purchase price of the facility paid by Meditrust plus (i) the
cost of certain capital expenditures paid for by Meditrust, (ii) an adjustment
for the increase in the cost of living index since the commencement of the lease
and (iii) all rent then due and payable (all such amounts to be determined
pursuant to the prescribed formula contained in the lease). In addition, each
Meditrust lease provides that a default under any other Meditrust lease or any
other agreement IHS has with Meditrust constitutes a default under such lease.
Upon such default, Meditrust has the right to terminate the leases and to seek
damages based upon lost rent.
The Company maintains a 401(k) plan available to substantially all
employees who have been with the Company for more than six months. In general,
employees may defer up to 20% of their salary subject to the maximum permitted
by law. The Company may make a matching contribution, at its discretion, equal
to a portion of the employee's contribution. Employee and employer contributions
are vested immediately. The Company made a contribution of $351 in 1996 related
to the 1995 plan year and has made no contributions for other years. The Company
also maintains supplemental executive retirement plans for certain of its senior
officers.
91
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(15) SUPPLEMENTAL CASH FLOW INFORMATION
See note 2 for information concerning significant non-cash investing and
financing activities related to business acquisitions and note 19 for such
information related to non-recurring charges for the years ended December 31,
1995, 1996 and 1997. Other significant non-cash investing and financing
activities are as follows:
o The Company declared cash dividends, which resulted in increases in current
liabilities offset by decreases in retained earnings of $435 in 1995, $471
in 1996 and $814 in 1997.
o The sale of certain non-strategic assets in 1996 resulted in decreases in
net current assets of $449, property of $8,730, other assets of $3,803, an
increase in net current liabilities of $144 and a decrease in long term
debt of $4,008. Total cash received from the sales was $1,293.
o An increase in additional paid-in capital of $7,020 in 1997 resulted from
the exercise of stock options under the Company's various plans, which
increased the Company's current taxes receivable by $7,020.
o An increase in goodwill and other long-term liabilities of $75,000 in 1997
resulted from the Company recording the present value of the remaining
contingent payments to HCFA. (See note 9).
Cash payments for interest were $49,863 in 1995, $56,883 in 1996 and
$104,747 in 1997. Cash payments for income taxes were $27,549 in 1995, $38,193
in 1996 and $24,971 in 1997.
(16) EXTRAORDINARY ITEMS
In the third quarter of 1997, the Company replaced its $700,000 revolving
credit facility with the $1,750,000 revolving credit and term loan facility (see
note 8). This event has been accounted for as an extinguishment of debt and the
Company has recorded a loss on extinguishment of debt of $3,908, relating
primarily to the write-off of deferred financing costs. Such loss, reduced by
the related income tax effect of $1,524, is presented in the statement of
operations as an extraordinary item of $2,384.
In the second quarter of 1997, the Company recorded a pre-tax loss of
$29,782 representing (1) approximately $23,600 of cash payments for pre-payment
premium and tender and consent fees relating to the early extinguishment of debt
resulting from the Company's repurchase pursuant to cash tender offers of
$99,893 principal amount of the Company's $100,000 aggregate principal amount of
outstanding 10 3/4% Senior Subordinated Notes due 2004 and $114,975 of the
Company's $115,000 aggregate principal amount of outstanding 9 5/8% Senior
Subordinated Notes due 2002 and (2) approximately $6,200 relating to the
write-off of deferred financing costs. Such loss, reduced by the related income
tax effect of $11,614, is presented in the statement of operations as an
extraordinary loss of $18,168.
In the second quarter of 1996, the Company replaced its $500,000 revolving
credit and term loan facility with the $700,000 revolving credit facility (see
note 8). This event has been accounted for as an extinguishment of debt and the
Company has recorded a loss on extinguishment of debt of $2,327 relating
primarily to the write-off of deferred financing costs. Such loss, reduced by
the related income tax effect of $896, is presented in the statement of
operations as an extraordinary item of $1,431.
In the second quarter of 1995, the Company replaced its $250,000 revolving
credit and term loan facility with a $500,000 revolving credit and term loan
facility (see note 8). This event has been accounted for as an extinguishment of
debt and the Company has recorded a loss on extinguishment of debt of $826
representing the write-off of deferred financing costs. In the fourth quarter of
1995, the Company incurred prepayment penalties on debt in the amount of $821.
Such losses, reduced by the related income tax effect of $634, is presented in
the statement of operations as an extraordinary item of $1,013.
92
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, patient accounts
receivable, other current assets, accounts payable and accrued expenses
approximates fair value because of the short-term maturity of these instruments.
The fair value of temporary investments is estimated based on quoted market
prices for these or similar investments. The fair value of third-party payor
settlements receivable is estimated by discounting anticipated cash flows using
estimated market discount rates to reflect the time value of money. The fair
value of the Company's long-term debt is estimated based on current rates
offered to the Company for similar instruments with the same remaining
maturities. Management of the Company believes the carrying amount of the above
financial instruments approximates the estimated fair value. The Company has
investments in unconsolidated affiliates described in note 4, which are untraded
companies and joint ventures. The Company has notes receivable from unaffiliated
individuals and untraded companies totaling $28,102 and $15,524 at December 31,
1996 and 1997, respectively. Also, the Company has purchase option deposits of
$74,131 and $78,149 on 89 leased and managed facilities of which $29,375 and
$33,393 is refundable at December 31, 1996 and 1997, respectively, and has
guaranteed the indebtedness of two of its leased facilities. It is not
practicable to estimate the fair value of these investments, notes and
guarantees since they are not traded, no quoted values are readily available for
similar financial instruments and the Company believes it is not cost-effective
to have valuations performed. However, management believes that there has been
no permanent impairment in the value of such investments and no indication of
probable loss on such guarantees.
(18) RELATED PARTY TRANSACTIONS
In January 1998, IHS began to manage five facilities leased from a real
estate investment trust by an entity equally owned by IHS and an entity
controlled by Timothy Nicholson, a director of the Company. The five facilities
were sold to the real estate investment trust by IHS in January 1998. (See note
23).
In September 1997, the Company acquired through a cash tender offer and
subsequent merger Community Care of America, Inc. ("CCA") for a purchase price
of $4.00 per share, for an aggregate of $34,300. Dr. Robert N. Elkins, chairman,
chief executive officer and president of the Company, was a director of CCA and
beneficially owned approximately 21% of CCA's shares, and John Silverman, a
director and at the time an employee of the Company, was chairman of the board
of directors of CCA. In December 1996, the Company loaned $2,000 to CCA and
received a management agreement and warrants to purchase up to 9.9% of CCA's
common stock at a price of $3.25 per share. The loan bore interest at the annual
rate of interest set forth in the Company's revolving credit agreement plus 2%
and was due on December 27, 1998.
In September 1997, the Company purchased the Naples, Florida residence of
Lawrence P. Cirka, the former President of the Company, for approximately
$4,800. The Company intends to resell the property within the next year.
In December 1997, the Company sold its aircraft to RNE Skyview LLC, a
limited liability company in which Dr. Robert N. Elkins, IHS' chairman, chief
executive officer and president, is the sole member, and simultaneously entered
into a lease agreement for such aircraft with RNE Skyview LLC. No gain or loss
was recorded on the sale.
During 1997, the Company loaned Dr. Robert N. Elkins, IHS' chairman, chief
executive officer and president, approximately $13,500. Dr. Elkins used the cash
proceeds from the loan to exercise options to purchase 650,000 shares of common
stock, which shares he continues to hold. In addition, the Company has made
available loans to members of senior management in order to purchase stock in
the open market and/or to exercise stock options.
In November 1996, the Company purchased LifeWay, Inc. ("LifeWay"), a
disease management company in Miami, Florida for approximately $900 through the
issuance of 38,502 shares of common stock. Prior to the purchase, IHS owned
approximately 10% of LifeWay and Dr. Robert N. Elkins, IHS'
93
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(18) RELATED PARTY TRANSACTIONS -(CONTINUED)
chairman, chief executive officer and president, beneficially owned
approximately 65%. IHS also issued 48,129 shares of Common Stock to Dr. Elkins
in payment of outstanding loans of $1,125 from Dr. Elkins to LifeWay and 8,984
shares in partial payment of a bonus to a stockholder of LifeWay.
In October 1996, the Company loaned $3,445 to ILC, which loan was repaid in
1997. Dr. Robert N. Elkins, chairman, chief executive officer and president of
the Company, was chairman of the board of directors of ILC and Lawrence P.
Cirka, at the time president and chief operating officer of the Company, was a
director of ILC.
In April 1993, a wholly-owned subsidiary of the Company acquired a 21.28%
interest in the common stock and a 47.64% interest in the 6% cumulative
preferred stock of Speciality Care PLC, an owner and operator of geriatric care
facilities in the United Kingdom. Robert N. Elkins, chairman of the board, chief
executive officer and president of the Company, was a director of Speciality
Care PLC until its sale in February 1998, and Timothy Nicholson, a director of
the Company, was chairman and managing director of Speciality Care PLC until its
sale in February 1998. Mr. Nicholson was formerly executive vice president of
the Company. In 1995 the Company invested an additional $4,384 in Speciality
Care PLC. As a result of the Company's additional investment, the Company had a
21.3% interest in the Common Stock and a 63.65% interest in the 6% cumulative
convertible preferred stock at December 31, 1997. The Company's equity in
Speciality Care PLC was $6,059 at December 31, 1997 (see notes 4 and 23).
(19) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING CHARGES
<TABLE>
<CAPTION>
1995 1996 1997
---------- ------------ -----------
<S> <C> <C> <C>
Loss on impairment of long-lived assets -- nursing and assisted
living facilities ................................................. $ 83,321 $ -- $ --
Write-off of deferred pre-opening costs in connection with change
in accounting estimate ............................................ 25,785 -- --
Loss on management contract terminations:
Nursing facilities ................................................ 21,915 7,825 3,700
Home health ....................................................... -- -- 8,199
IntegraCare merger costs ........................................... 1,939 -- --
Gain on sale of pharmacy division .................................. -- (34,298) (7,580)
Loss (gain) on sale of Integrated Living Communities, Inc. ......... -- 8,497 (3,914)
Loss on closure of redundant operations:
Home health ....................................................... -- 3,519 1,387
Rehabilitation .................................................... -- -- 2,929
Termination of Coram merger and related settlement costs ........... -- -- 27,555
Termination payments in connection with RoTech acquisition ......... -- -- 4,750
Write-down to net realizable value of assets to be sold:
Physician practice and outpatient clinic operations ............... -- -- 58,912
Nursing facilities ................................................ -- -- 2,500
Termination of other business activities:
International investment and development activities ............... -- -- 5,490
Pre-acquisition activities ........................................ -- -- 4,500
Purchase options on nursing facilities ............................ -- -- 6,268
National purchasing contract ...................................... -- -- 5,742
Other .............................................................. -- -- 12,604
-------- --------- --------
$132,960 $ (14,457) $133,042
======== ========= ========
</TABLE>
In the fourth quarter of 1995, the Company, as well as industry analysts,
believed that Medicare and Medicaid reform was imminent. Both the House and
Senate balanced budget proposals proposed a reduction in future growth in
Medicare and Medicaid spending from 10% a year to approximately 4-6%
94
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(19) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING CHARGES
-(CONTINUED)
a year. While Medicare and Medicaid reform had been discussed prior to the
fourth quarter, the Company came to believe that a future reduction in the
growth of Medicare and Medicaid spending was now virtually a certainty. Such
reforms include, in the near term, a continued freeze in the Medicare routine
cost limit ("RCL"), followed by reduced increases in later years, more stringent
documentation requirements for Medicare RCL exception requests, reduction in the
growth in Medicaid reimbursement in most states, as well as salary equivalency
in rehabilitative services and, in the longer term (2-3 years), a switch to a
prospective payment system for home care and nursing homes, and repeal of the
"Boren Amendment", which requires that states pay hospitals "reasonable and
adequate" rates. The Company estimated the effect of the aforementioned reforms
on each nursing and subacute facility, as well as on its rehabilitative
services, respiratory therapy, home care, mobile diagnostic and pharmacy
divisions by reducing (or in some cases increasing) the future revenues and
expense growth rates for the impact of each of the aforementioned factors.
Accordingly, these events and circumstances triggered the early adoption of
Statement of Financial Accounting Standards No. 121 in the fourth quarter of
1995. In accordance with SFAS No. 121, the Company estimated the future cash
flows expected to result from those assets to be held and used.
In estimating the future cash flows for determining whether an asset is
impaired, and if expected future cash flows used in measuring assets are
impaired, the Company grouped its assets at the lowest level for which there are
identifiable cash flows independent of other groups of assets. These levels were
each of the individual nursing/subacute facilities, and each of the home health,
rehabilitative therapy, respiratory therapy, pharmacy and mobile diagnostics
divisions. The results of comparing future undiscounted cash flows to historical
carrying value were that 12 individual nursing facilities and one assisted
living facility were identified for an impairment charge. None of the remaining
facilities or business units were identified since only those facilities or
business units where the carrying value exceeded the undiscounted cash flows are
considered impaired. The business units having significant goodwill were not
identified for an impairment charge because projected undiscounted cash flows
were sufficient to recover goodwill over the remainder of the 40 year estimated
useful life. Prior to adoption of SFAS 121, the Company evaluated impairment on
the entity level. Such an evaluation yielded no impairment as of September 30,
1995.
After determining the facilities eligible for an impairment charge, the
Company determined the estimated fair value of such facilities. Also, the
Company obtained valuation estimates prepared by independent appraisers or had
received offers from potential buyers on 6 of the 12 facilities identified for
impairment, comprising 72% of the total charge. Such valuation estimates were
obtained to corroborate the Company's estimate of value. The excess carrying
value of goodwill, buildings and improvements, leasehold improvements and
equipment above the fair value was $83,321 (of which $1,533 represented goodwill
and $81,788 represented property and equipment), which was included in the
statement of operations for 1995 as loss on impairment of long-lived assets.
In connection with the adoption of SFAS No. 121 described above, the
Company adopted a change in accounting estimate to write-off in 1995 all
deferred pre-opening costs of MSUs. This change was made in recognition of the
circumstances, discussed above, which raised doubt about and thereby triggered
the assessment of recoverability of long-lived assets in 1995. These
circumstances also raised doubt as to the estimated future benefit and
recoverability of deferred pre-opening costs, resulting in the Company's
decision to write-off $25,785 of deferred pre-opening costs. In connection with
the change in accounting estimate regarding the future benefits and
recoverability of deferred pre-opening costs, the Company has changed its
accounting method beginning in 1996 from deferring and amortizing pre-opening
costs to recording them as an expense when incurred. The effect of this change
in 1996 was to decrease amortization expense by approximately $3,900 and to
increase operating expenses by approximately $3,900.
95
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(19) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING CHARGES
-(CONTINUED)
During the fourth quarter of 1995, the Company terminated the Crestwood
management contract, a 10 year contract entered into in January 1994 to manage
23 long-term care and psychiatric facilities in California owned by Crestwood
Hospital. The terms of the contract required the payment of a management fee to
IHS and a preferred return to the Crestwood owners. IHS terminated the
management contract with Crestwood Hospital due primarily to changes in
California Medicaid rates which no longer provided sufficient cash flow at the
facilities to support both IHS' management fee and the preferred return to the
owners. As a result, the Company incurred a $21,915 loss on the termination of
this contract. Such loss consists of the write-off of $8,496 of management fees,
$11,097 of loans made to Crestwood Hospital and the owners of Crestwood, as well
as the interest thereon, and $2,322 of contract acquisition costs.
During the third quarter of 1995, the Company merged with IntegraCare, Inc.
in a transaction accounted for as a pooling of interests. In connection with
this transaction, the Company incurred merger costs of $1,939 for accounting,
legal, and other costs. These costs are included as an other non-recurring
charge on the statement of operations.
On July 30, 1996, the Company sold its pharmacy division to Capstone
Pharmacy Services, Inc. ("Capstone") for a purchase price of $150,000,
consisting of cash of $125,000 and unregistered shares of Capstone common stock
having a value of approximately $25,000. The Company had determined that its
ownership of pharmacy operations is not critical to the development and
implementation of its post-acute care network strategy. As a result of the sale,
the Company recorded a $34,298 pre-tax gain ($298 gain after income taxes).
Because IHS's investment in the pharmacy division had a very small tax basis,
the taxable gain on the sale significantly exceeded the gain for financial
reporting purposes, thereby resulting in a disproportionately higher income tax
provision related to the sale (see note 4). The Capstone common stock received
in the sale was recorded at its carryover cost of $14,659. During the first
quarter of 1997, the Company recorded the remaining gain of $7,580 on its
investment in the Capstone shares when such shares were registered. Previously,
such gain was accounted for as an unrealized gain on available for sale
securities.
On October 9, 1996, ILC, a wholly owned subsidiary of IHS, completed an
initial public offering of ILC common stock. The Company had determined that the
direct operation of assisted-living communities is not required for its
post-acute care network strategy. In connection with the ILC offering the
Company sold 1,400,000 of ILC common stock and recorded a $8,497 loss. Following
the offering, the Company continued to own 2,497,900 shares of ILC Common Stock,
representing 37.3% of the outstanding ILC common stock (see note 4). In the
third quarter of 1997, the Company sold its remaining interest in ILC. The sale
resulted in a non-recurring gain of $3,914.
The Company's strategy is to expand its home health care services to take
advantage of health care payors' increasing focus on having healthcare provided
in the lowest-cost setting possible and patients' desires to be treated at home.
As a result, during the fourth quarter of 1996, the Company acquired First
American Health Care of Georgia Inc. ("First American"), a provider of home
health services in 21 states, principally Alabama, California, Florida, Georgia,
Michigan, Pennsylvania and Tennessee. In addition, the Company has acquired
other home care companies during 1994, 1995 and 1996. In the fourth quarter of
1996, the Company recorded a $3,519 non-recurring charge resulting from the
closure of certain redundant home care agencies in those markets where First
American presently provides home health services.
In connection with the acquisition of First American, the Company
terminated the All Seasons management contract, a 10 year contract entered into
in September 1994 to manage six geriatric care facilities in Washington State.
As a result of the lack of synergies with First American home care agencies, as
well as changes to the reimbursement environment within the state of Washington,
the
96
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(19) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING CHARGES
-(CONTINUED)
Company believed it was in its best interest to terminate such contract. As a
result, the Company incurred a $7,825 loss on the termination. Such loss
consists of the write-off of $3,803 of management fees and $4,022 of loans made
to All Seasons.
On October 19, 1996, the Company and Coram Healthcare Corporation ("Coram")
entered into a definitive agreement and plan of merger (the "Merger Agreement")
providing for the merger of a wholly-owned subsidiary of IHS into Coram, with
Coram becoming a wholly-owned subsidiary of IHS. Under the terms of the Merger
Agreement, holders of Coram common stock were to receive for each share of Coram
common stock 0.2111 of a share of the Company's common stock, and IHS would have
assumed approximately $375,000 of indebtedness. On April 4, 1997, IHS notified
Coram that it had exercised its rights to terminate the Merger Agreement. IHS
also terminated the March 30, 1997 letter amendment, setting forth proposed
revisions to the terms of the merger (which included a reduction in the exchange
ratio to 0.15 of a share of IHS common stock for each share of Coram common
stock), prior to the revisions becoming effective at the close of business on
April 4, 1997. On May 5, 1997, IHS and Coram entered into a settlement agreement
pursuant to which the Company paid Coram $21,000 in full settlement of all
claims Coram might have against IHS pursuant to the Merger Agreement, which the
Company recognized as a non-recurring charge in the second quarter. In addition,
during the first quarter the Company incurred a non-recurring charge of $6,555
relating to accounting, legal and other costs related to the merger.
In September 1997, the Company recorded a non-recurring charge of $4,750
resulting from termination payments in connection with its fourth quarter merger
with RoTech Medical Corporation.
In connection with the consummation of certain recent acquisitions, IHS has
incurred costs to discontinue or dispose of certain activities previously
performed by the Company. In addition, the Company has elected to exit certain
activities acquired over the past several years that are no longer considered a
part of core operations. Such businesses include physician practices, outpatient
clinics, selected nursing facilities in non-strategic markets and international
investment and development activities.
The Company is presently entertaining offers for the sale of its physician
practices, outpatient clinics and certain nursing facilities. The write down to
net realizable value is based upon these offers. The remaining portion of the
charge relates to the exit of international operations, termination of a
national purchasing contract and the write-off of purchase option deposits on
certain managed facilities.
At this time, a formal plan of restructuring measures is currently being
formulated with respect to certain recent acquisitions; however, it is not
practicable at this time to estimate the nature, timing or total cost of the
various potential restructuring measures or to assess the likelihood that
particular restructuring measures will be implemented. Therefore, no provision
for the cost of such restructuring measures has been included in the financial
statements. Management's decision with respect to the nature and timing of any
restructuring measures may require that non-recurring charges, potentially
significant, be recorded in IHS' statements of operations in subsequent periods.
(20) CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In November 1997, the Emerging Issues Task Force ("EITF") reached consensus
on Issue 97-13 concerning costs of projects that combine business process
reengineering and information technology transformation. EITF Issue 97-13 now
requires that certain costs of business process reengineering and information
technology projects be expensed as incurred. These costs include costs related
to the formulation, evaluation and selection of alternative software, costs of
the determination of needed technology, certain data conversion costs, training
costs and post-implementation application maintenance and support costs. In
accordance with EITF Issue 97-13, the unamortized balance of these costs of
$3,000 has been written-off in the fourth quarter of 1997 and reported as the
cumulative effect of a change in accounting principle (net of income taxes of
$1,170) of $1,830.
97
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(21) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The following information is provided in accordance with the AICPA
Statement of Position No. 94-6, "Disclosure of Certain Significant Risks and
Uncertainties."
The Company's strategy is to use geriatric care facilities as a platform to
provide a wide variety of post-acute medical and rehabilitative services more
typically delivered in the acute care hospital setting and to use home
healthcare to provide those medical and rehabilitative services which do not
require 24-hour monitoring. Post-acute care includes subacute care, outpatient
and home care, inpatient and outpatient rehabilitation, diagnostic, respiratory
therapy and pharmacy services. The Company's post-acute health care system is
intended to provide continuity of care for its patients following discharge from
acute care hospitals. The Company also manages such operations for other owners
for a fee, which is generally based on a percentage of the gross revenue. The
Company and others in the health care business are subject to certain inherent
risks, including the following:
o Substantial dependence on revenues derived from reimbursement by the
Federal Medicare and state Medicaid programs;
o Ability to obtain per diem rates approvals for costs which exceed the
Federal Medicare established per diem rates;
o Government regulations, government budgetary constraints and proposed
legislative and regulatory changes; and
o Lawsuits alleging malpractice and related claims.
Such inherent risks require the use of certain management estimates in the
preparation of the Company's financial statements and it is reasonably possible
that a change in such estimates may occur.
The Company receives payment for a significant portion of services rendered
to patients from the Federal government under Medicare and from the states in
which its facilities and/or services are provided, are located under Medicaid.
Revenue derived from Medicare and various state Medicaid reimbursement programs
represented 49.3% and 17.1%, respectively, of the Company's revenue for the year
ended December 31, 1997, and the Company's operations are subject to a variety
of other Federal, state and local regulatory requirements. Failure to maintain
required regulatory approvals and licenses and/or changes in such regulatory
requirements could have a significant adverse effect on the Company. Changes in
Federal and state reimbursement funding mechanisms, related government budgetary
constraints and differences between final settlements and estimate settlements
receivable under Medicare and Medicaid retrospective reimbursement programs,
which are subject to audit and retroactive adjustment, could have a significant
adverse effect on the Company. The Company's cost of care for its MSU patients
generally exceeds regional reimbursement limits established under Medicare. The
success of the Company's MSU strategy will depend in part on its ability to
obtain per diem rate approvals for costs which exceed the Medicare established
per diem rate limits and by obtaining waivers of these limitations.
The Company is subject to malpractice and related claims, which arise in
the normal course of business and which could have a significant effect on the
Company. As a result, the Company maintains occurrence basis professional and
general liability insurance with coverage and deductibles which management
believes to be appropriate.
The Company is also subject to workers' compensation and employee health
benefit claims, which are primarily self-insured; however, the Company does
maintain certain stop-loss and other insurance coverage which management
believes to be appropriate. Provisions for estimated settlements relating to the
workers' compensation and health benefit plans are provided in the period of the
related claim on a case by case basis plus an amount for incurred but not
reported claims. Differences between the amounts accrued and subsequent
settlements are recorded in operations in the period of settlement.
98
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(21) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES -(CONTINUED)
The Company believes that adequate provision for the aforementioned items
has been made in the accompanying consolidated financial statements and that
their ultimate resolution will not have a material effect on the consolidated
financial statements.
Since its inception, the Company has grown through acquisitions, and
realization of acquisition costs, including intangible assets of businesses
acquired, is dependent initially upon the consummation of the acquisitions and
subsequently upon the Company's ability to successfully integrate and manage
acquired operations. Also, the Company's development of post-acute care networks
is dependent upon successfully effecting economics of scale, the recruitment of
skilled personnel and the expansion of services and related revenues.
(22) SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers.
IHS has chosen to early adopt SFAS No. 131 in 1997. As of December 31,
1997, IHS has two primary operating segments: the nursing facilities services
segment and the home health services segment. No other individual business
segment is individually in excess of the 10% thresholds of SFAS No. 131. IHS
management analyzes its business on a contribution margin basis before corporate
and fixed costs (interest, depreciation and amortization, rent and non-recurring
items):
<TABLE>
<CAPTION>
HOME HEALTH NURSING FACILITIES
SEGMENT AND OTHER CONSOLIDATED
------------- ------------------- -------------
<S> <C> <C> <C>
Revenues .................... $ 705,033 1,288,164 1,993,197
Operating Expenses .......... $ 667,997 811,009 1,479,006
---------- --------- ---------
Contribution Margin ......... $ 37,036 477,155 514,191
Total Assets ................ $1,637,561 3,425,583 5,063,144
</TABLE>
Since there is no inter-segment revenue or receivables, a reconciliation to
consolidated operations is not presented. Additionally, because the acquisition
of First American Home Care did not occur until October 1996, the Home Health
Nursing division did not represent a segment exceeding the 10% thresholds of
SFAS No. 131 in 1996 and segment reporting is therefore not presented. Revenue
derived from Medicare and various state Medicaid reimbursement programs
represented 49.3% and 17.1%, respectively, of the Company's total revenue for
the year ended December 31, 1997 and the Company's operations are subject to a
variety of other federal, state, and local regulatory requirements as discussed
more fully in note 20. The Company does not evaluate its operations on a
geographic basis.
(23) SUBSEQUENT EVENTS
In January 1998, the Company acquired Paragon Rehabilitative Services Inc.,
a contract rehabilitation company in Ohio. The total purchase price was
approximately $10,777.
In January 1998, the Company acquired the assets of nine respiratory
companies. The total purchase price of these respiratory companies was
approximately $9,370.
99
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(23) SUBSEQUENT EVENTS -(CONTINUED)
In February 1998, the Company entered into an agreement with Mapleton
Enterprises to lease a 100 bed skilled nursing facility in Montana.
In February 1998, the Company acquired twelve respiratory companies. The
total purchase price of these respiratory companies was approximately $18,904.
In March 1998, the Company entered into an agreement with Carrolton
Management Company to lease seven skilled nursing facilities having a total of
816 beds.
In March 1998, the Company acquired two respiratory companies. The total
purchase price of the two companies was approximately $1,825.
The Company has reached a definitive agreement to purchase a company
operating 44 skilled nursing facilities having a total of 5,622 beds. The
approximate purchase price of these facilities is $70,350. In addition, the
Company has reached agreements in principle to purchase a lithotripsy company
for approximately $10,500 and 15 respiratory companies for approximately
$42,359. There can be no assurance that any of these pending acquisitions will
be consummated on the proposed terms, different terms, or at all.
In January 1998, the Company sold five long-term care facilities to Omega
Healthcare Investors, Inc. for $44,500, which facilities were leased back by
Lyric Health Care LLC ("LLC"), a newly formed subsidiary of IHS, at an annual
rent of approximately $4,500. The Company recorded a $2.5 million loss on the
sale of these facilities in 1997. IHS also entered into management and franchise
agreements with LLC. The management and franchise agreements' initial terms are
13 years with two renewal options of 13 years each. The base management fee is
3% of gross revenues, subject to increase if gross revenues exceed $450,000. In
addition, the agreement provides for an incentive management fee equal to 70% of
annual net cash flow (as defined in the management agreement). The duties of IHS
as manager include the following: accounting, legal, human resources,
operations, materials and facilities management and regulatory compliance. The
annual franchise fee is 1% of gross revenues, which grants LLC the authority to
use the Company's trade names and proprietary materials.
In a related transaction, TFN Healthcare Investors, Inc. ("TFN") purchased
a 50% interest in LLC for $1,000 and IHS' interest in LLC was reduced to 50%.
The LLC will dissolve on December 31, 2047 unless extended for an additional 12
months. On February 1, 1998 LLC also entered into a five year employment
agreement with Timothy F. Nicholson, the principal stockholder of TFN and a
director of the Company. Pursuant to LLC's operating agreement, Mr. Nicholson
will serve as Managing Director of LLC and will have the day-to-day authority
for the management and operation of LLC and will initiate policy proposals for
business plans, acquisitions, employment policy, approval of budgets, adoption
of insurance programs, additional service offerings, financing strategy,
ancillary service usage, change in material terms of any lease and
adoption/amendment of employee health, benefit and compensation plans. As a
result of the aforementioned transactions, IHS will account for its investment
in Lyric using the equity method of accounting since IHS no longer controls
Lyric.
In February 1998 Speciality Care, PLC was acquired by Craegmoor Healthcare
Company Limited, an owner and operator of residential nursing homes in the
United Kingdom. Craegmoor operates 65 nursing homes with 3,106 beds, including
the 24 homes with 1,142 beds owned by Speciality Care. The stockholders of
Speciality Care received 10% of the oustanding ordinary shares of Craegmoor; as
a result of its ownership of Speciality Care, IHS owns approximately 5.3% of the
outstanding ordinary shares of Craegmoor Healthcare.
(24) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements.
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(24) RECENT ACCOUNTING PRONOUNCEMENTS -(CONTINUED)
SFAS No. 130 was issued to address concerns over the practice of reporting
elements of comprehensive income directly in equity. SFAS No 130 is effective
for both interim and annual periods beginning in 1998. Comparative financial
statements provided for earlier periods are required to be reclassified to
reflect the provisions of this Statement. Also, the FASB recently issued
Statement of Financial Standards No. 132, Employers' Disclosure About Pensions
and Other Post Retirement Benefits. SFAS No. 132 revises employers' disclosures
about pension and other post retirement benefit plans, and it is effective in
1998. It is anticipated that SFAS No. 130 and SFAS No. 132 will have no material
effect on current or future financial statements of the Company.
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INTEGRATED HEALTH SERVICES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
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YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
-------------- -------------- -------------
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Allowance for doubtful accounts:
Balance at beginning of period .............................. $ 16,630 $ 18,128 $ 41,527
Provisions for bad debts .................................... 19,359 29,913 41,356
Acquired companies .......................................... 993 10,932 107,078
Accounts receivable written-off (net of recoveries) ......... (18,854) (17,446) (28,523)
--------- --------- ---------
$ 18,128 $ 41,527 $ 161,438
========= ========= =========
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTOR
The section entitled "Proposal No. 1--Elections of Directors" in the
Company's Proxy Statement for the Annual Meeting of stockholders is incorporated
herein by reference.
EXECUTIVE OFFICERS
See "Part I--Item 1. Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Company's Proxy
Statement for the Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Beneficial Ownership of Common Stock" in the
Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Executive Compensation--Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions" in the
Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated
herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
(1) and (2) See "Index to Consolidated Financial Statements and
Supplemental Schedules" at Item 8 of this Annual Report on Form 10-K.
(3) The following exhibits are filed or incorporated by reference as part
of this Annual Report (Exhibit Nos. 10.27, 10.28, 10.29, 10.30, 10.31, 10.32,
10.33, 10.34, 10.35, 10.36, 10.37, 10.38, 10.39, 10.40, 10.41, 10.42, 10.43,
10.44, 10.45, 10.46, 10.47, 10.48, 10.49, 10.50, 10.51, 10.52, 10.53, and 10.74
are management contracts, compensatory plans or arrangements):
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2.1 -- Agreement and Plan of Merger, dated as of July 6, 1997, among
Integrated Health Ser- vices, Inc., IHS Acquisition XXIV, Inc. and
RoTech Medical Corporation. (1)
2.2 -- Agreement and Plan of Merger, dated as of August 1, 1997, among
Integrated Health Services, Inc., IHS Acquisition XXVI, Inc. and
Community Care of America, Inc. (2)
2.3 -- Purchase and Sale Agreement, entered into as of November 3, 1997,
between HEALTHSOUTH Corporation, Horizon/CMS Healthcare Corporation
and Integrated Health Services, Inc. (3)
3.1 -- Third Restated Certificate of Incorporation, as amended. (4)
3.2 -- Amendment to the Third Restated Certificate of Incorporation, dated
May 26, 1995. (5)
3.3 -- Certificate of Designation of Series A Junior Participating
Cumulative Preferred Stock (6)
3.4 -- By-laws, as amended.
4.1 -- Indenture, dated as of December 1, 1992, between Integrated Health
Services, Inc. and Signet Trust Company, as Trustee, relating to
the Company's 6% Convertible Subordi- nated Debentures. (7)
4.2 -- Form of 6% Debenture (included in 4.1). (7)
4.3 -- Indenture, dated as of December 15, 1993, from Integrated Health
Services, Inc., as Issuer, to The Bank of New York (as successor in
interest) to NationsBank of Virginia, N.A., as Trustee, relating to
the Company's 5 3/4% Convertible Senior Subordinated Debentures due
2001. (8)
4.4 -- Form of 5 3/4% Debenture (included in 4.3) (8)
4.5 -- Registration Rights Agreement, dated as of December 17, 1993,
between Integrated Health Services, Inc. and Smith Barney Shearson
Inc. relating to the Company's 5 3/4% Convertible Senior
Subordinated Debentures due 2001. (8)
4.6 -- Supplemental Indenture dated as of September 15, 1994 between
Integrated Health Services, Inc. and The Bank of New York (as
successor in interest) to NationsBank of Vir- ginia N.A. (9)
4.7 -- Amended and Restated Supplemental Indenture, dated as of May 15,
1997, between Integrated Health Services, Inc. and Signet Trust
Company, Inc., as Trustee, relating to the Company's 10 3/4% Senior
Subordinated Notes due 2004. (10)
4.8 -- Form of Note (included in 4.7). (10)
4.9 -- Second Amended and Restated Supplemental Indenture, dated as of May
15, 1997, from Integrated Health Service, Inc. to Signet Trust
Company, as trustee, relating to the Company's 9 5/8% Senior
Subordinated Notes due 2002 and 9 5/8% Senior Subordinated Notes
due 2002, Series A. (10)
4.10 -- Form of 9 5/8% Senior Subordinated Notes (included in 4.9). (10)
4.11 -- Indenture, dated as of May 15, 1996 between the Company and Signet
Trust Company, as Trustee. (11)
4.12 -- Form of 10 1/4% Senior Subordinated Notes (included in 4.11). (11)
104
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4.13 -- Indenture, dated as of May 30, 1997, between Integrated Health
Services, Inc. and First Union National Bank of Virginia, as
Trustee, relating to the Company's 9 1/2% Senior Subordinated Notes
due 2007. (10)
4.14 -- Form of 9 1/2% Senior Subordinated Note (included in 4.13). (10)
4.15 -- Indenture, dated as of September 11, 1997, between Integrated
Health Services, Inc. and First Union National Bank of Virginia, as
Trustee, relating to the Company's 9 1/4% Senior Subordinated Notes
due 2008. (12)
4.16 -- Form of 9 1/4% Senior Subordinated Note (included in 4.15). (12)
4.17 -- Indenture, dated as of June 1, 1996, between RoTech Medical
Corporation and PNC
Bank, Kentucky, Inc., as Trustee, relating to RoTech's 5 1/4%
Convertible Subordinated Debentures due 2003. (13)
4.18 -- Form of 5 1/4% Convertible Subordinated Debtures (included in
4.17). (13)
10.1 -- Letter dated March 28, 1991 from Integrated Health Services of
Brentwood, Inc., Inte grated Health Services, Inc., Alpine Manor,
Inc., Briarcliff Nursing Home, Inc., Cambridge Group, Inc.,
Integrated Health Services of Riverbend, Inc., Integrated Health
Services of Cliff Manor, Inc., Integrated Health Group, Elm Creek
of IHS, Inc., Spring Creek of IHS, Inc., Carriage-By-The-Lake of
IHS, Inc. and Firelands of IHS, Inc. to Meditrust Mortgage
Investments, Inc. (14)
10.2 -- Loan and Security Agreement dated as of May 1, 1990 by and between
Sovran Bank/ Central South and Integrated of Amarillo, Inc. (14)
10.3 -- Amended and Restated Promissory Note dated April 8, 1991 made by
Integrated of Amarillo, Inc. in favor of Sovran Bank/Tennessee in
the aggregate principal amount of $ 300,000. (14)
10.4 -- Construction Loan Agreement dated November, 1990 by and between
First National Bank of Vicksburg and River City Limited
Partnership. (14)
10.5 -- Guaranty and Suretyship Agreement, dated as of January 1, 1992,
between Integrated Health Services, Inc. and Nationsbank of
Tennessee. (14)
10.6 -- Deed of Trust Note from Integrated Health Services at Alexandria,
Inc. to Oakwood Living Centers of Virginia, Inc., dated June 4,
1993. (15)
10.7 -- Loan Agreement dated as of December 30, 1993, by and among
Integrated Health Ser- vices at Colorado Springs, Inc. as Borrower,
Integrated Health Services, Inc., as Guarantor, and Bell Atlantic
Tricon Leasing Corp. (8)
10.8 -- Promissory Note, dated December 30, 1993 made by Integrated Health
Services at Colo- rado Springs, Inc. in favor of Bell Atlantic
Tricon Leasing Corp. (8)
10.9 -- Guaranty Agreement, dated as of December 30, 1993, made by
Integrated Health Ser- vices, Inc. in favor of Bell Atlantic Tricon
Leasing Corp. (8)
10.10 -- Credit Agreement, dated as of May 15, 1996, as amended, by and
among Integrated Health Services, the lenders named therein, and
Citibank, N.A., as administrative agent. (10)
10.11 -- Amendment No. 3 to Revolving Credit Agreement, dated as of May 15,
1996, as amended, among Integrated Health Services, Inc., Citibank
N.A., as administrative agent thereunder and the other financial
institutions party thereto. (16)
10.12 -- Guaranty by Integrated Health Services, Inc. dated December 16,
1993 to IFIDA Healthcare Group, Ltd., Morris Manor Associates,
Plymouth House Health Care Center, Inc., Chateau Associates,
Broomall Associates, Lake Ariel Associates, Winthrop House
Associates, Limited Partnership, Mill Hill Associates, Limited
Partnership, Hillcrest Associates and Kent Associates, L.P. (7)
10.13 -- Loan Agreement, dated December 20, 1993, by and between Integrated
Health Services at Central Florida, Inc. and Southtrust Bank of
Alabama, National Association. (8)
10.14 -- Mortgage and Security Agreement, dated December 20, 1993, between
Integrated Health Services of Central Florida, Inc. and Southtrust
Bank of Alabama, National Association. (17)
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105
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10.15 -- Guaranty Agreement, dated December 20, 1993, by Integrated Health
Services, Inc. in favor of Southtrust Bank of Alabama, National
Association. (17)
10.16 -- Assignment and Pledge of Deposit Account, dated December 20, 1993,
from Integrated Health Services at Central Florida, Inc. in favor
of Southtrust Bank of Alabama, National Association. (17)
10.17 -- Amended and Restated Purchase Option, dated as of October 1, 1992,
by and between Inte- grated Health Services of Green Briar, Inc.
and Skilled Rehabilitative Services, Inc. (7)
10.18 -- Receivables Purchase Agreement, dated as of September 30, 1992, by
and between Skilled Rehabilitative Services, Inc. and Integrated
Health Services of Green Briar, Inc. (7)
10.19 -- Promissory Note, dated October 1, 1992, made by Integrated Health
Services of Green Briar, Inc. to the order of Skilled
Rehabilitative Services, Inc. (7)
10.20 -- Letter dated February 18, 1994, to IFIDA Health Care Group, Ltd.
from Integrated Health Services, Inc. (17)
10.21 -- Facilities Agreement dated as of August 31, 1994 by and among
Litchfield Asset Management Corp., Integrated Health Services of
Lester, Inc and Integrated Health Services, Inc. (18)
10.22 -- First Amendment to Facilities Agreement, dated as of September 30,
1997, among Litchfield Investment Company, L.L.C., Integrated
Health Services of Lester, Inc. and Integrated Health Services, Inc.
10.23 -- Purchase Option Agreement dated as of August 31, 1994 between
Litchfield Asset Management Corp. and Integrated Health Services of
Lester, Inc. As permitted by the instructions of Item 601 of
Regulation S-K, the 42 additional Purchase Option Agreements
between subsidiaries of Integrated Health Services, Inc. and
Litchfield Asset Management Corp. have been omitted because each
such agreement is substantially identical in all material respects
to the aforementioned Purchase Option. (18)
10.24 -- Guaranty dated as of August 31, 1994 by Integrated Health Services,
Inc. for the benefit of Litchfield Asset Management Corp. (18)
10.25 -- Warrant to Purchase Shares of Common Stock of Integrated Health
Services, Inc. dated as of August 31, 1994 issued to Litchfield
Asset Management Corp. (18)
10.26 -- Participation Agreement dated as of August 31, 1994 between
Litchfield Asset Management Corp. and Integrated Health Services of
Lester, Inc. (18)
10.27 -- Form of Indemnity Agreement. (14)
10.28 -- Integrated Health Services, Inc. Equity Incentive Plan, as amended.
(19)
10.29 -- Integrated Health Services, Inc. 1990 Employee Stock Option Plan,
as amended. (19)
10.30 -- Integrated Health Services, Inc. 1992 Stock Option Plan (19)
10.31 -- Integrated Health Services, Inc. Employee Stock Purchase Plan (19)
10.32 -- Senior Executives' Stock Option Plan. (20)
10.33 -- Cash Bonus Replacement Plan (21)
10.34 -- Integrated Health Services, Inc. Stock Option Plan for New
Non-Employee Directors, as amended. (22)
10.35 -- Integrated Health Services, Inc. Stock Option Compensation Plan for
Non-Employee Direc- tors, as amended. (22)
10.36 -- Integrated Health Services, Inc. 1995 Stock Option Plan for
Non-Employee Directors. (22)
10.37 -- Stock Option Agreement, dated as of November 27, 1995, by and
between Integrated Health Services, Inc. and John Silverman. (22)
10.38 -- Integrated Health Services, Inc. 1994 Stock Incentive Plan, as
amended. (22)
10.39 -- 1996 Stock Incentive Plan of Integrated Health Services, Inc., as
amended.
10.40 -- 1998 Stock Compensation Plan
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106
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10.41 -- Integrated Health Services, Inc. Amended and Restated Key Employee
Supplemental Executive Retirement Plan ("Plan A").
10.42 -- Integrated Health Services, Inc. Supplemental Executive Retirement
Plan ("Plan B") (23)
10.43 -- Integrated Health Services, Inc. Supplemental Deferred Compensation
Plan ("Plan Z") (23)
10.44 -- Employment Agreement dated January 1, 1994 between Integrated
Health Services, Inc. and Robert N. Elkins. (24)
10.45 -- Amendment No. 1 to Employment Agreement dated as of January 1, 1995
between Integrated Health Services, Inc. and Robert N. Elkins.
(24)
10.46 -- Amendment No. 2 to Employment Agreement, effective as of November
18, 1997, between Integrated Health Services, Inc. and Robert N.
Elkins.
10.47 -- Supplemental Agreement, effective as of November 18, 1997, by and
between Integrated Health Services, Inc. and Robert N. Elkins.
10.48 -- Promissory Note, dated September 29, 1997, made by Robert N. Elkins
in favor of Integrated Health Services, Inc.
10.49 -- Employment Agreement dated as of January 1, 1994 between Integrated
Health Services, Inc. and Lawrence P. Cirka. (24)
10.50 -- Amendment to Employment Agreement dated as of January 1, 1995
between Integrated Health Services, Inc. and Lawrence P. Cirka.
(24)
10.51 -- Relocation Agreement, dated as of August 5, 1997, between
Integrated Health Services, Inc. and Lawrence P. Cirka.
10.52 -- Employment Agreement dated as of October 1, 1996 between Integrated
Health Services, Inc. and C. Christian Winkle.(25)
10.53 -- Employment Agreement, dated as of October 21, 1997, between RoTech
Medical Corporation and Stephen Griggs.
10.54 -- Revolving Credit and Security Agreements, dated as of December 30,
1992, between Integrated Health Services, Inc. and Morgan Hill
Health Care Investors, Inc. (26)
10.55 -- Purchase Option and Right of First Refusal Agreement, dated January
20, 1993, among Integrated Health Services of Missouri, Inc.,
Dominic F. Tutera, Joseph C. Tutera, and Michael J. Tutera. (26)
10.56 -- Purchase Option and Right of First Refusal Agreement dated January
20, 1993, between Integrated Health Services of Missouri, Inc. and
Dominic F. Tutera. (26)
10.57 -- Revolving Credit and Security Agreement dated January 20, 1993,
between Integrated Health Services of Missouri, Inc. and Cenill,
Inc. (26)
10.58 -- Guaranty dated July 1, 1992 made by Integrated Health Services,
Inc. (26)
10.59 -- Guaranty dated September 15, 1992 made by Integrated Health
Services, Inc. (26)
10.60 -- Aircraft Lease Agreement between RNE Skyview LLC and Integrated
Health Services, Inc., dated as of December 12, 1997.
10.61 -- Assignment Agreement dated May 28, 1993 among Square D Company,
Integrated Health Services, Inc., Manekin at Owings Mills I Limited
Partnership, and McDonough School, Inc. (15)
10.62 -- Assignment dated June 1, 1993 among Integrated Health Services,
Inc., Rouse-Teachers Properties, Inc., Rouse Office Management,
Inc. and Square D Company. (15)
10.63 -- Investment Agreement for Speciality Care PLC dated July 26, 1995.
(23)
10.64 -- Credit Amendment, dated as of September 15, 1997, by and among
Integrated Health Services, Inc., the lenders named therein, and
Citibank, N.A., as administrative agent. (27)
10.65 -- Amendment No. 1 dated as of December 1, 1997, to the Revolving
Credit and Term Loan Agreement among Integrated Health Services,
Inc., the lenders parties to the Credit Agreement and Citbank,
N.A., as administrative agent for the lenders. (28)
107
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10.66 -- Settlement Agreement and Mutual Release, made and entered into as
of Monday, May 5, 1997, by and between Integrated Health Services,
Inc. and Coram Healthcare Corporation.(16)
10.67 -- Purchase Agreement, dated as of January 13, 1998, between Omega
Healthcare Investors, Inc. and Gainesville Health Care Center,
Inc., Rest Haven Nursing Center (Chestnut Hill), Inc., Rikad
Properties, Inc., Integrated Management-Governor's Park, Inc. and
Lyric Health Care LLC and Lyric Health Care Holdings, Inc.
10.68 -- Master Franchise Agreement, dated as of January 13, 1998, between
Integrated Health Services Franchising Co., Inc. and Lyric Health
Care LLC.
10.69 -- Master Management Agreement, dated as of January 13, 1998, between
Lyric Health Care LLC and IHS Facility Management, Inc.
10.70 -- Indemnity Agreement, dated as of January 13, 1998 by and between
Integrated Health Services, Inc. and Omega Healthcare Investors,
Inc.
10.71 -- Master Lease, dated as of January 13, 1998, between Omega
Healthcare Investors, Inc. and Lyric Health Care Holdings, Inc.
10.72 -- Amended and Restated Operating Agreement of Lyric Health Care LLC,
dated as of February 1, 1998, by and between Integrated Health
Services, Inc. and TFN Healthcare Investors, LLC.
10.73 -- Employment Agreement, effective as of February 1, 1998, by and
between Lyric Health Care LLC and Timothy F. Nicholson.
10.74 -- Warrant to purchase shares issued to Shephen Griggs.
10.75 -- Share Acquisition Agreement relating to Speciality Care Limited.
21 -- Subsidiaries of Registrant.
23.1 -- Consent of KPMG Peat Marwick LLP.
27 -- Financial Data Schedule.
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(1) Incorporated herein by reference to the Company's Current Report on Form
8-K dated July 6, 1997.
(2) Incorporated herein by reference to the Company's Tender Offer Statement on
Schedule 14D-1 filed with the Securities and Exchange Commission on August
7, 1997.
(3) Incorporated herein by reference to the Company's Current Report on Form
8-K dated November 3, 1997.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-3, Nos 33-77754, effective June 29, 1994.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-4, No. 33-94130, effective September 15, 1995.
(6) Incorporated by reference to the Company's Current Report on Form 8-K dated
September 27, 1995.
(7) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-54458, effective December 9, 1992.
(8) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-76322, effective June 29, 1994.
(9) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-81378, effective September 21, 1994.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1997.
(11) Incorporated by reference to the Company's Quarterly Report on From 10-Q
for the period ended June 30, 1994.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997.
(13) Incorporated by reference to RoTech Medical Corporation's Registration
Statement on Form S-3, No. 333-10915, effective September 10, 1996.
(14) Incorporated by reference to the Company's Registration Statement on Form
S-1, No. 33-39339, effective April 25, 1991.
(15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1993.
(16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1997.
(17) Incorporated by reference the Company's Annual Report on Form 10-K for the
year ended December 31, 1993.
(18) Incorporated by reference to the Company's Current Report on Form 8-K dated
August 31, 1994.
(19) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1992.
(20) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1994.
(21) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1995.</TABLE>
108
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(22) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1996.
(23) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(24) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1996.
(25) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(26) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
(27) Incorporated by reference from the Company's Current Report on 8-K dated
September 15, as amended.
(28) Incorporated by reference to the Company's Current Report on Form 8-K,
dated December 31, 1993.
</TABLE>
(b) Reports on Form 8-K
(1) Current Report on Form 8-K dated October 21, 1997, as amended,
reporting the Company's acquisition of RoTech Medical Corporation.
(2) Current Report on Form 8-K dated November 3, 1997, as amended,
reporting the Company's agreement to purchase 139 owned, leased or managed
long-term care facilities, 12 specialty hospitals and certain other
businesses from HEALTHSOUTH Corporation.
(3) Current Report on Form 8-K dated December 31, 1997, as amended,
reporting the acquisition of 139 owned, leased or managed long-term care
facilities, 12 specialty hospitals and certain other businesses from
HEALTHSOUTH Corporation;
(c) Exhibits
See (a) (3) above.
(d) Financial Statement Schedules
See "Index to Consolidated Financial Statements and Supplemental
Schedule" at Item 8 of this Annual Report on Form 10-K. Schedules not
included herein are omitted because they are not applicable or the
required information appears in the Consolidated Financial Statements or
notes thereto.
109
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
INTEGRATED HEALTH SERVICES, INC.
(Registrant)
By: /s/ Robert N. Elkins
------------------------------------
March 26, 1998 Robert N. Elkins
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
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SIGNATURE TITLE DATE
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/s/ Robert N. Elkins Chairman of the Board, President March 26, 1998
- ------------------------- and Chief Executive Officer
Robert N. Elkins (Principal Executive Officer)
- ------------------------- Director March , 1998
Edwin M. Crawford
- ------------------------- Director March , 1998
Kenneth M. Mazik
/s/ Robert A. Mitchell Director March 26, 1998
- ---------------------------
Robert A. Mitchell
/s/ Charles W. Newhall III Director March 26, 1998
- ---------------------------
Charles W. Newhall III
/s/ Timothy F. Nicholson Director March 26, 1998
- -------------------------
Timothy F. Nicholson
/s/ John L. Silverman Director March 26, 1998
- -------------------------
John L. Silverman
/s/ George H. Strong Director March 26, 1998
- -------------------------
George H. Strong
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- ----------------------------------- ---------------
<S> <C> <C>
/s/ C. Taylor Pickett Executive Vice President -- Chief March 26, 1998
- ------------------------- Financial Officer (Principal
C. Taylor Pickett Financial Officer)
/s/ W. Bradley Bennett Executive Vice President -- Chief March 26, 1998
- ------------------------- Accounting Officer (Principal
W. Bradley Bennett Accounting Officer)
</TABLE>
BY-LAWS
of
INTEGRATED HEALTH SERVICES, INC.
Article 1
CORPORATION OFFICE
Section 1.1. Registered Office. The registered office of the Corporation
shall be 1220 Market Street Building, Wilmington, County of New Castle,
Delaware, 19801.
Section 1.2. Principal Office. The principal office of the Corporation
shall be in Owings Mills, Maryland.
Section 1.3. Other Offices. The Corporation may also have offices at such
other places as the Board of Directors may from time to time designate or the
business of the Corporation may from time to time require.
Article 2
STOCKHOLDERS' MEETINGS
Section 2.1. Place and Time of Meetings. All meetings of the stockholders
shall be held at such time and place as may be fixed from time to time by the
Board of Directors and stated in the notice of meeting or in a duly executed
waiver of notice thereof. If no such place is fixed by the Board of Directors,
meetings of the stockholders shall be held at the principal office of the
Corporation.
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Section 2.2. Annual Meetings. The annual meeting of the stockholders shall
be held on the third Thursday in April in each year, if not a legal holiday,
and, if a legal holiday, then on the next full business day, at the
Corporation's principal office or at such other place, date and time as shall be
designated from time to time by the Board of Directors and stated in the notice
of meeting or a duly executed waiver of notice thereof.
At such annual meeting, the stockholders shall elect successors to the
directors whose terms shall expire that year to serve for a term of one year and
until their successors shall have been duly elected and qualified or until their
earlier resignation or removal. The stockholders also shall transact such other
business as may properly be brought before the meeting.
Section 2.3. Nomination and Election of Directors. At each annual meeting
of stockholders, the stockholders entitled to vote shall elect the directors. No
person shall be eligible for election as a director unless nominated in
accordance with the procedures set forth in this Section 2.3. Nominations of
persons for election to the Board of Directors may be made by the Board of
Directors or any committee designated by the Board of Directors or by any
stockholder entitled to vote for the election of directors at the applicable
meeting of stockholders who complies with the notice procedures set forth in
this Section 2.3. Such nominations, other than those made by the Board of
Directors, or any committee designated by the Board of Directors, may be made
only if written notice of a stockholder's intent to nominate one or more persons
for election is given, either by personal delivery or by United States certified
mail, postage prepaid, to the Secretary of the Corporation and received (i) not
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less than 120 days nor more than 150 days before the first anniversary of the
date of the Corporation's proxy statement in connection with the last annual
meeting of stockholders, or (ii) if the applicable annual meeting has been
changed by more than 30 days from the date contemplated at the time of the
previous year's proxy statement, not less than 60 days before the date of the
applicable annual meeting, or (iii) with respect to any special meeting of
stockholders called for the election of directors, not later than the close of
business on the seventh day following the date in which notice of such meeting
is first given to stockholders. Each such stockholder's notice shall set forth
(a) as to the stockholder giving the notice, (i) the name and address, as they
appear on the Corporation's stock transfer books, of such stockholders, (ii) a
representation that such stockholder is a stockholder of record and intends to
appear in person or by proxy at such meeting to nominate the person or persons
specified in the notice, (iii) the class and number of shares of stock of the
Corporation beneficially owned by such stockholder, and (iv) a description of
all arrangements or understandings between such stockholder and each nominee and
any other person or persons naming such person or persons pursuant to which the
nomination or nominations are to be made by such stockholder; and (b) as to each
person whom the stockholder proposes to nominate for election as a director, (i)
the name, age, business address and, if known, residence address of such person,
(ii) the principal occupation or employment of such person, (iii) the class and
number of shares of stock of the Corporation which are beneficially owned by
such person, (iv) any other information relating to such person that is required
to be disclosed in solicitations of proxies for election of directors or is
otherwise required by the rules and regulations of the Securities and Exchange
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Commission promulgated under the Securities Exchange Act of 1934, as amended,
and (v) the written consent of such person to be named in the proxy statement as
a nominee and to serve as a director if elected. The secretary of the
Corporation shall deliver each such stockholder's notice that has been timely
received to the Board of Directors or a committee designated by the Board of
Directors for review. Any person nominated for election as director by the Board
of Directors or any committee designated by the Board of Directors shall, upon
the request of the Board of Directors or such committee, furnish to the
secretary of the Corporation all such information pertaining to such person that
is required to be set forth in a stockholder's notice of nomination. The
chairman of the meeting of stockholders shall, if the facts warrant, determine
that a nomination was not made in accordance with the procedures prescribed by
this Section 2.3, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
Section 2.4. Special Meetings. Unless otherwise provided by law, special
meetings of the stockholders may be called by the chairman of the Board of
Directors, the deputy chairman of the Board of Directors (if any) or the
president or by order of the Board of Directors, whenever deemed necessary.
Section 2.5. Notice of Meetings. Written notice of all meetings of
stockholders other than adjourned meetings of stockholders, stating the place,
date and hour, and, in the case of special meetings of stockholders, the purpose
or purposes thereof, shall be served upon or mailed, postage prepaid, or
telegraphed, charges prepaid, not less than ten nor more than sixty days before
the date of the meeting to each stockholder entitled to vote thereat
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at such address as appears on the books of the Corporation. Such notices may be
given at the discretion of, or in the name of, the Board of Directors, the
President, any Vice President, the Secretary or any Assistant Secretary. When a
meeting is adjourned, it shall not be necessary to give any notice of the
adjourned meeting or of the business to be transacted at the adjourned meeting,
other than by announcement at the meeting at which such adjournment is taken.
Section 2.6. Organization and Order of Business. At all meetings of the
stockholders, the chairman of the Board of Directors or, in his absence, the
deputy chairman of the Board of Directors (if any) or, in the absence of both,
the president, shall act as chairman. In the absence of all of the foregoing
officers or, if present, with their consent, a majority of the shares entitled
to vote at such meeting, may appoint any person to act as chairman. The
secretary of the Corporation or, in his absence, an assistant secretary, shall
act as secretary at all meetings of the stockholders. In the event that neither
the secretary nor any assistant secretary is present, the chairman may appoint
any person to act as secretary of the meeting.
The chairman shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts and things as are necessary
or desirable for the proper conduct of the meeting, including, without
limitation, the establishment of procedures for the dismissal of business not
properly presented, the maintenance of order and safety, limitations on the time
allotted to questions or comments on the affairs of the Corporation,
restrictions on entry to such meeting after the time prescribed for the
commencement thereof and the opening and closing of the voting polls.
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<PAGE>
At each annual meeting of stockholders, only such business shall be
conducted as shall have been properly brought before the meeting (a) by or at
the direction of the Board of Directors or (b) by any stockholder of the
Corporation who shall be entitled to vote at such meeting and who complies with
the notice procedures set forth in this Section 2.6. In addition to any other
applicable requirements, for business to be properly brought before an annual
meeting by a stockholder, the stockholder must have given timely notice thereof
in writing to the secretary of the Corporation. To be timely, a stockholder's
notice must be given, either by personal delivery or by United States certified
mail, postage prepaid, and received at the principal executive offices of the
Corporation (i) not less than 120 days nor more than 150 days before the first
anniversary of the date of the Corporation's proxy statement in connection with
the last annual meeting of stockholders or (ii) if no annual meeting was held in
the previous year or the date of the applicable annual meeting has been changed
by more than 30 days from the date contemplated at the time of the previous
year's proxy statement, not less than 60 days before the date of the applicable
annual meeting. A stockholder's notice to the secretary shall set forth as to
each matter the description of the business desired to be brought before the
annual meeting, including the complete text of any resolutions to be presented
at the annual meeting, (b) the name and address, as they appear on the
Corporation's stock transfer books, of such stockholder proposing such business,
(c) a representation that such stockholder is a stockholder of record and
intends to appear in person or by proxy at such meeting to bring the business
before the meeting specified in the notice, (d) the class and number of shares
of stock of the Corporation beneficially owned by the stockholder and (e) any
material interest of
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the stockholder in such business. Notwithstanding anything in the By-Laws to the
contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this Section 2.6. The chairman of an
annual meeting shall, if the facts warrant, determine that the business was not
brought before the meeting in accordance with the procedures prescribed by this
Section 2.6, and if he should so determine, he shall so declare to the meeting
and the business not properly brought before the meeting shall not be
transacted. Notwithstanding the foregoing provisions of this Section 2.6, a
stockholder seeking to have a proposal included in the Corporation's proxy
statement shall comply with the requirements of Regulation 14A under the
Securities Exchange Act of 1934, as amended (including, but not limited to, Rule
14a-8 or its successor provision). The secretary of the Corporation shall
deliver each such stockholder's notice that has been timely received to the
Board of Directors or a committee designated by the Board of Directors for
review.
Section 2.7. Quorum of and Action by Stockholders. The presence, in person,
by proxy, of stockholders entitled to cast a majority of the votes which all
stockholders are entitled to cast on the particular matter shall constitute a
quorum for purposes of considering such matter, and, unless otherwise
specifically provided by statute, the acts of such stockholders at a duly
organized meeting shall be the acts of stockholders with respect to such matter.
If, however, such quorum shall not be present at any meeting of the
stockholders, the stockholders entitled to vote thereat present in person or by
proxy may, except as otherwise provided by statute, adjourn the meeting from
time to time to such time
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<PAGE>
and place as they may determine, without notice other than an announcement at
the meeting, until a quorum shall be present in person or by proxy.
At any adjourned meeting at which a quorum had been present, stockholders
present in person or by proxy at a duly organized and constituted meeting, can
continue to do business with respect to any matter properly submitted to the
meeting until adjournment, notwithstanding the withdrawal of enough stockholders
to leave less than a quorum for the purposes of considering any particular such
matter.
Section 2.8. Voting. Except as may be otherwise provided by statute or by
the Certificate of Incorporation, at every meeting of the stockholders, every
stockholder entitled to vote thereat shall have the right to one vote for every
share having voting power standing in his name on the stock transfer books of
the Corporation on the record date fixed for the meeting. No share shall be
voted at any meeting if any installment is due and unpaid thereon.
Section 2.9. Voting by Proxy. Every stockholder entitled to vote at a
meeting of the stockholders or to express consent or dissent to corporate action
in writing without a meeting may authorize another person or persons to act for
him by proxy. Every proxy shall be executed in writing by the stockholder or his
duly authorized attorney in fact and filed with the Secretary of the
Corporation. A proxy, unless coupled with an interest, shall be revocable at
will, notwithstanding any other agreement or any provision in the proxy to the
contrary, but the revocation of a proxy shall not be effective until written
notice thereof has been given to the Secretary of the Corporation. No unrevoked
proxy shall be voted or
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acted upon after three years from the date of its execution, unless a longer
time is expressly provided therein. A proxy shall not be revoked by the death or
incapacity of the maker, unless, before the vote is counted or the authority is
exercised, written notice of such death or incapacity is given to the Secretary
of the Corporation.
Section 2.10. Record Date. The Board of Directors may fix a time, not more
than sixty nor less than ten days prior to the date of any meeting of the
stockholders, or the date fixed for the payment of any dividend or distribution
or distribution, or the date for the allotment of rights or the date when any
change or conversion or exchange of shares will be made or go into effect, as
the record date for the determination of the stockholders entitled to notice of,
or to vote at, such meeting, or to receive any such allotment of rights or to
exercise the rights in respect to any such change or conversion or exchange of
shares. In such case, only such stockholders as shall be stockholders of record
on the date so fixed shall be entitled to notice of, or to vote at, such meeting
or to receive payment of such dividend, or to receive such allotment of rights
or to exercise such rights, as the case may be, notwithstanding any transfer of
any shares on the books of the Corporation after any record date fixed as
aforesaid.
The Board of Directors may close the books of the Corporation against
transfers of shares during the whole or any part of such period, and in such
case written or printed notice thereof shall be mailed at least ten days before
the closing thereof to each stockholder of record at the address appearing on
the stock transfer books of the Corporation or supplied by him to the
Corporation for the purpose of notice. While the stock transfer books of the
Corporation are closed, no transfer of shares shall be made thereon.
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If no record date is fixed by the Board of Directors for the determination
of stockholders who are entitled to receive notice of, or to vote at, a meeting
of the stockholders, or to receive payment of any such dividend or distribution,
or to receive any such allotment of rights or to exercise the rights in respect
to any such change or conversion or exchange of shares, transferees of shares
which are transferred on the stock transfer books of the Corporation within the
ten days immediately preceding the date of such meeting, dividend, distribution,
allotment of rights or exercise of such rights shall not be entitled to notice
of, or to vote at, such meeting, or to receive payment of any dividend or
distribution, or to receive any such allotment of rights or to exercise the
rights in respect to any such change or conversion or exchange of shares.
Section 2.11. Stockholder's List. The officer or agent having charge of the
stock transfer books for shares of the Corporation shall make, at least ten days
before each meeting of the stockholders, a complete alphabetical list of the
stockholders entitled to vote at the meeting, with their addresses and the
number of shares held by each, which list shall be kept on file either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting or if not so specified, at the place
where the meeting is to be held and shall be subject to inspection by any
stockholder for any purpose germane to the meeting at any time during usual
business hours for a period of at least ten days prior to the meeting. Such list
shall be produced at the meeting and shall be kept open for inspection by any
stockholder during the entire meeting. The original stock transfer books of
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the Corporation shall be prima facie evidence as to who are the stockholders
entitled to exercise the rights of a stockholder.
Section 2.12. Inspectors of Election. In advance of any meeting of the
stockholders, the Board of Directors may appoint inspectors of election, who
need not be stockholders, to act at such meeting or any adjournment thereof. If
inspectors of election are not so appointed, the chairman of any such meeting
may, and on the request of any stockholder or his proxy, shall make such
appointment at the meeting. The number of inspectors shall be one or three. If
appointed at a meeting on the request of one or more stockholders or proxies,
the majority of shares present and entitled to vote shall determine whether one
or three inspectors are to be appointed. No person who is a candidate for office
shall act as an inspector.
The inspectors of election shall do all such acts as may be proper to
conduct the election or vote and such other duties as may be prescribed by
statute with fairness to all stockholders, and, if requested by the chairman of
the meeting or any stockholder or his proxy, shall make a written report of any
matter determined by them and execute a certificate as to any fact found by
them. If there are three inspectors of election, the decision, act or
certificate of a majority shall be the decision, act or certificate of all.
Section 2.13. Action by Written Consent of the Stockholders. Any action
required to be taken at an annual or special meeting of stockholders, or of a
class thereof, or any action which may be taken at any annual or special meeting
of such stockholders, or of a class thereof, may be taken without a meeting,
without prior notice and without a vote, if a
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consent or consents in writing setting forth the action so taken shall be signed
by the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted.
Article 3
DIRECTORS
Section 3.1. Powers.
(a) General Powers. The Board of Directors shall have all the power and
authority granted by law to the Board of Directors, including all powers
necessary or appropriate to the management of the business and affairs of the
Corporation.
(b) Specific Powers. Without limiting the general powers conferred by the
last preceding clause and the powers conferred by the Certificate of
Incorporation and these By-laws of the Corporation, it is hereby expressly
declared that the Board of Directors shall have the following powers:
(i) To appoint any person, firm or corporation to accept and hold in trust
for the Corporation any property belonging to the Corporation or in which it is
interested, and to authorize any such person, firm or corporation to execute any
documents and perform any duties that may be requisite in relation to any such
trust;
(ii) To appoint a person or persons to vote shares of another corporation
held and owned by the Corporation;
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(iii) By resolution adopted by a majority of the whole Board of Directors,
to designate one or more committees, each committee to consist of one or more of
the directors of the Corporation. To the extent provided in any such resolution,
and to the extent permitted by law, a committee so designated shall have and may
exercise the authority of the Board of Directors in the management of the
business and affairs of the Corporation. The Board of Directors may designate
one or more directors as alternate members of any committee, who may replace any
absent of disqualified member at any meeting of the committee. If specifically
granted this power by the Board of Directors in its resolution establishing the
committee, in the absence or disqualification of any member and all designated
alternates of such committee or committees or if the whole Board of Directors
has failed to designate alternate members, the member or members thereof present
at any meeting and not disqualified from voting, whether or not he or they
constitute a quorum, may unanimously appoint another director to act at the
meeting in the place of any such absent or disqualified member;
(iv) To fix the place, time and purpose of meetings of the stockholders;
and
(v) To fix the compensation of directors and officers for their services.
Section 3.2. Number and Terms of Directors. The Board of Directors shall
consist of nine directors, who shall be natural persons of full age and need not
be residents of Delaware or stockholders of the Corporation, except that
whenever all of the shares of the Corporation are owned beneficially and of
record by either one or two stockholders, the number of directors may be less
than five but not less than the number of stockholders.
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Within the limits above specified, the number of directors shall be determined
by resolution of the Board of Directors. Directors shall be elected by the
stockholders, and each director shall be elected for a one-year term and until
his successor shall be elected, subject to removal as provided by statute.
Section 3.3. Vacancies. Except as otherwise provided in the Certificate of
Incorporation, these By-laws or written agreement, vacancies on the Board of
Directors, including vacancies resulting from an increase in the number of
directors, shall be filled by a majority of the remaining members of the Board
of Directors, though less than a quorum, or by the sole remaining director, as
the case may be, irrespective of whether holders of any class or series of stock
or other voting securities of the Corporation are entitled to elect one or more
directors to fill such vacancies or newly created directorships at the next
annual meeting of the stockholders. Each person so elected shall be a director
until his successor is elected by the stockholders at the annual meeting of the
stockholders at which the class of directors to which he was elected is up for
election or at any special meeting of the stockholders prior thereto duly called
for that purpose.
Section 3.4. Organization Meetings. The organization meeting of each newly
elected Board of Directors shall be held immediately following the meeting of
the stockholders at which such directors were elected without the necessity of
notice to such directors to constitute a legally convened meeting or at such
time and place as may be fixed by a notice, or a waiver of notice, or a consent
signed by all of such directors.
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Section 3.5. Regular Meetings. The Board of Directors shall have the power
to fix by resolution the place, date and hour of regular meetings of the Board
of Directors.
Section 3.6. Special Meetings. Special meetings of the Board of Directors
may be called by the President of the Corporation on one day's notice to each
director, either personally or by mail, telephone or telegram. Special meetings
of the Board of Directors shall be called by the President or the Secretary of
the Corporation in like manner and on like notice upon the written request of
any two directors.
Section 3.7. Notices of Meetings. All meetings of the Board of Directors
may be held at such times and places as may be specified in the notice of
meeting or in a duly executed waiver of notice thereof. Notice of regular
meetings of the Board of Directors shall be given to each director at least
three days before each meeting either personally or by mail, telegram or
telephone. One or more directors may participate in any meeting of the Board of
Directors, or of any committee thereof, by means of a conference telephone or
similar communications equipment which enables all persons participating in the
meeting to hear one another, and such participation in a meeting shall
constitute presence in person at the meeting.
Section 3.8. Quorum. At all meetings of the Board of Directors, the
presence, in person or by telephonic or similar communications, of a majority of
the members of the Board of Directors shall constitute a quorum for the
transaction of business, and the acts of a majority of the directors present at
a duly convened meeting at which a quorum is present shall be the acts of the
Board of Directors, except as may be otherwise specifically provided by statute,
by the Certificate of Incorporation of the Corporation, these By-laws or written
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agreement. If a quorum shall not be present, in person or by telephonic or
similar communications equipment, at any meeting of the Board of Directors, the
directors present may adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be so present.
Section 3.9. Action by Unanimous Written Consent. Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if all members of the Board of
Directors or a committee thereof, as the case may be, consent thereto in
writing, and such consent is filed with the minutes of proceedings of the Board
of Directors, or committee.
Section 3.10. Compensation. Directors, as such, may receive a stated salary
for their services, or a fixed sum and expenses for attendance at regular or
special meetings of the Board of Directors, or any committee thereof, or any
combination of the foregoing as may be determined from time to time by
resolution of the Board of Directors, and nothing contained herein shall be
construed to preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor.
Article 4
OFFICERS
Section 4.1. Election and Office. The officers of the Corporation shall be
elected annually by the Board of Directors at its organization meeting and shall
consist of a Chairman of the Board, a President, a Secretary and a Treasurer.
The Board of Directors may
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also elect one or more Vice Presidents and such other officers and appoint such
agents as it shall deem necessary. Each officer of the Corporation shall hold
office for such term, have such authority and perform such duties as set forth
in these By-laws or as may from time to time be prescribed by the Board of
Directors in consultation with the President. Any two or more offices may be
held by the same person.
Section 4.2. Salaries. The salaries of all officers of the Corporation
shall be fixed by the Board of Directors.
Section 4.3. Removal and Vacancies. The Board of Directors may remove any
officer or agent elected or appointed at any time and within the period, if any,
for which such person was elected or employed whenever in the judgment of the
Board of Directors it is in the best interests of the Corporation, and all
persons shall be elected and employed subject to the provisions hereof. If the
office of any officer becomes vacant for any reason, the vacancy shall be filled
by the Board of Directors.
Section 4.4. Powers and Duties of the President. Unless otherwise
determined by the Board of Directors, the President shall have the usual duties
of a chief executive officer with general supervision over and direction of the
affairs of the Corporation. In the exercise of these duties and subject to the
limitations of the laws of the State of Delaware or any other applicable law,
these By-laws and the actions of the Board of Directors, he may appoint,
suspend, and discharge employees, agents and assistant officers, may fix the
compensation of all officers and assistant officers, shall preside at all
meetings of the stockholders at which he shall be present, and, unless there is
a Chairman of the Board of
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Directors, shall preside at all meetings of the Board of Directors and shall be
a member of all committees. He shall also do and perform such other duties as
from time to time may be assigned to him by the Board of Directors.
Unless otherwise determined by the Board of Directors, the President shall
have full power and authority on behalf of the Corporation to attend and to act
and to vote at any meeting of the stockholders of any corporation in which the
Corporation may hold stock, and, at any such meeting, shall possess and may
exercise any and all the rights and powers incident to the ownership of such
stock and which, as the owner thereof, the Corporation might have possessed and
exercised.
Section 4.5. Powers and Duties of Vice Presidents. Each Vice President
shall have such duties as may be assigned to him from time to time by the Board
of Directors, the Executive Committee, the Chairman of the Board or the
President. In the event of a temporary absence of the President on vacation or
business, the President may designate a Vice President or Vice Presidents who
will perform the duties of the President in such absence. In the event of a
prolonged absence of the President due to illness or disability or for any other
reason, the Board of Directors shall designate a Vice President or Vice
Presidents who will perform the duties of the President during such absence.
Section 4.6. Powers and Duties of the Secretary. The Secretary of the
Corporation shall attend all meetings of the Board of Directors and of the
stockholders and shall keep accurate records thereof in one or more minute books
kept for that purpose, shall give, or cause to be given, the required notice of
all meetings of the stockholders and of the
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Board of Directors, shall keep in safe custody the corporate seal of the
Corporation and affix the same to any instrument requiring it, and when so
affixed, it shall be attested by his signature or by the signature of the
Treasurer or any Assistant Secretary or Assistant Treasurer of the Corporation.
The Secretary also shall keep, or cause to be kept, the stock certificate books,
stock transfer books and stock ledgers of the Corporation, in which shall be
recorded all stock issues, transfers, the dates of same, the names and addresses
of all stockholders and the number of shares held by each, shall, when
necessary, prepare new certificates upon the transfer of shares and the
surrender of the old certificates, shall cancel such surrendered certificates
and shall perform such other duties as may be assigned to him by the President.
Section 4.7. Powers and Duties of the Treasurer. The Treasurer of the
Corporation shall have the custody of the Corporation's funds and securities,
shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation, shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories as
shall be designated by the President, shall disburse the funds of the
Corporation as may be ordered by the President or the Board of Directors, taking
proper vouchers for such disbursements, shall render to the President and the
Board of Directors, at the regular meetings of the Board of Directors or
whenever they may require it, an account of all his transactions as Treasurer
and of the financial condition of the Corporation and shall have the right to
affix the seal of the Corporation to any instrument requiring it, and to attest
to the same by his signature and, if so required by the Board of Directors, he
shall
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give bond in such sum and with such surety as the Board of Directors may from
time to time direct.
Section 4.8. Designation of a Chief Financial Officer. The Board of
Directors shall have the power to designate from among the Chairman, any Vice
Chairman, the President, any Vice President or the Treasurer of the corporation
a Chief Financial Officer who shall be deemed the principal financial and
accounting officer. In the vent that the Treasurer is not designated by the
Board of Directors as the Chief Financial Officer, the Treasurer shall report to
the Chief Financial Officer from time to time concerning all duties which the
Treasurer is obligated to perform and the Chief Financial Officer shall, subject
to the reasonable direction of the President or the Board of Directors, at his
election, assume such of the duties of the Treasurer as are provided in Section
4.7 hereof as he shall deem appropriate.
Article 5
INDEMNIFICATION OF DIRECTORS, OFFICERS OR OTHER PERSONS
Section 5.1. The Corporation shall indemnify any director of the
Corporation and any officer of the Corporation holding the position of Senior
Vice President or any higher office of the Corporation who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative,
by reason of the fact that he or she is or was a director or an officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise
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against expenses (including attorneys' fees), judgments, fines, and amounts paid
in settlement actually and reasonably incurred by him or her in connection with
such action, suit, or proceeding to the fullest extent and in the manner set
forth in and permitted by the General Corporation Law, and any other applicable
law, as from time to time in effect.
Section 5.2. The provisions of Section 5.1 shall be deemed to be a contract
between the Corporation and each director and officer who serves in such
capacity at any time while Section 5.1 and the relevant provisions of Delaware
General Corporation Law and any other applicable law, if any, are in effect, and
any repeal or modification thereof shall not affect any rights or obligations
then existing, with respect to any state of facts then or theretofore existing,
or any action, suit or proceeding theretofore, or thereafter brought or
threatened based in whole or in part upon any such state of facts.
Section 5.3. The Corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending, or completed
action, suit or proceeding, whether civil, criminal, administrative, or
investigative by reason of the fact that he or she is or was an officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, or other enterprise, against expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding to the extent and in the manner set forth in and permitted by
the General Corporation Law, and any other applicable law, as from time to time
in effect.
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Section 5.4. To the extent that a director, officer, employee or agent of
the Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 5.1 or 5.3 of this by-law, or
in defense of any claim, issue or matter therein, he or she shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him or her in connection therewith.
Section 5.5. Any indemnification pursuant to Sections 5.1 or 5.3 of this
by-law (unless ordered by a court) shall be made by the Corporation only upon a
determination that indemnification of the director, officer, employee or agent
is proper in the circumstances because he or she has met the applicable standard
of conduct; to-wit, that he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
or she reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. Such determination
shall be made (1) by a majority vote of the directors who are not parties to
such action, suit or proceeding, even though less than a quorum, or (2) if there
are no such directors, or if such directors so direct, by independent legal
counsel in a written opinion, or (3) by the stockholders.
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Section 5.6. The Corporation shall, with respect to persons entitled to
indemnification pursuant to Section 5.1, and may, with respect to persons who
may be indemnified pursuant to Section 5.3, pay the expenses incurred in
defending any proceeding in advance of its final determination, provided,
however, that such advances may be made only upon the representation that such
person believes he or she is entitled to indemnification thereunder and the
receipt of an undertaking by such person to repay all amounts advanced if it
should be ultimately determined that such person is not entitled to be
indemnified thereunder.
Section 5.7. The indemnification and advancement of expenses provided by,
or granted pursuant to, this by-law shall not be deemed exclusive of any other
rights to which any person seeking indemnification or advancement of expenses
may be entitled under any certificate of incorporation, articles of
incorporation, articles of association, by-law, agreement, vote of stockholders
or disinterested directors, or otherwise, both as to action in his or her
official capacity and as to action in another capacity while holding such
office.
Section 5.8. The Corporation may purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against him
or her and incurred by him or her in any such capacity, or arising out of his or
her status as such, whether or not the Corporation would have the power to
indemnify him or her against such liability under the provisions of this by-law
or of applicable law, if and whenever
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the Board of Directors of the Corporation deems it to be in the best interests
of the Corporation to do so.
Section 5.9. For purposes of this by-law and indemnification thereunder,
any person who is or was a director or officer of any other corporation of which
the Corporation owns or controls or at the time owned or controlled directly or
indirectly a majority of the shares of stock entitled to vote for election of
directors of such other corporation shall be conclusively presumed to be serving
or to have served as such director or officer at the request of the Corporation.
Section 5.10. The Corporation may provide indemnification under this by-law
to any employee or agent of the Corporation or of any other corporation of which
the Corporation owns or controls or at the time owned or controlled directly or
indirectly a majority of the shares of stock entitled to vote for election of
directors or to any director, officer, employee or agent of any other
corporation, partnership, joint venture, trust or other enterprise in which the
Corporation has or at the time had an interest as an owner, creditor, or
otherwise, if and whenever the Board of Directors of the Corporation deems it in
the best interests of the Corporation to do so.
Section 5.11. For purposes of this by-law, references to "the Corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer,
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employee or agent of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under this by-law with respect to
the resulting or surviving corporation as he or she would have with respect to
such constituent corporation if its separate existence had continued.
Section 5.12. The Corporation may, to the fullest extent permitted by the
Delaware General Corporation Law, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment) indemnify any and
all persons whom the Corporation shall have power to indemnify under said law
from and against any and all of the expenses, liabilities or other matters
referred to in or covered by said law, if and whenever the Board of Directors of
the Corporations deems it to be in the best interests of the Corporation to do
so.
Section 5.13. The indemnification or advancement of expenses provided by,
or granted pursuant to, this by-law shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit of
the heirs, executors and administrators of such a person.
Section 5.14. If a claim under this Section 5 is not paid in full by the
Corporation within 30 days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the
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expense of prosecuting such claim. It shall be a defense to any such action,
other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation, that the
claimant has not met the standards of conduct enumerated above which make it
permissible under the Delaware General Corporation Law for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation,
including its Board of Directors, independent legal counsel, or its
stockholders, to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth above and
in the Delaware General Corporation Law, nor an actual determination by the
Corporation, including its Board of Directors, independent legal counsel, or its
stockholders that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
Section 5.15. If this Section 5 or any portion thereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Corporation shall
nevertheless indemnify, and advance expenses to, each director, officer,
employee or agent of the Corporation to the full extent permitted by any
applicable portion of this Section 5 that shall not have been invalidated and to
the full extent permitted by applicable law.
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Article 6
CAPITAL STOCK
Section 6.1. Stock Certificates. The certificates for shares of the
Corporation's capital stock shall be numbered and registered in a share register
as they are issued, shall bear the name of the registered holder, the number and
class of shares represented thereby and the par value of each share or a
statement that such shares are without par value, as the case may be, shall be
signed by the President or any Vice President of the Corporation and the
Secretary, any Assistant Secretary or the Treasurer of the Corporation or any
other person properly authorized by the Board of Directors and shall bear the
seal of the Corporation, which seal may be a facsimile engraved or printed.
Where the certificate is signed by a transfer agent or a registrar, the
signature of any corporate officer on such certificate may be a facsimile
engraved or printed. In case any officer who has signed, or whose facsimile
signature has been placed upon, any share certificate shall have ceased to be
such officer because of death, resignation or otherwise, before the certificate
is issued, it may be issued by the Corporation with the same effect as if the
office had not ceased to be such at the date of its issue.
Section 6.2. Transfer of Shares. Upon surrender to the Corporation of a
share certificate duly endorsed by the person named in the certificate or by an
attorney duly appointed in writing and accompanied where necessary by proper
evidence of succession, assignment or authority to transfer, a new certificate
shall be issued to the person entitled
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thereto and the old certificate cancelled and the transfer recorded upon the
stock transfer books and share register of the Corporation.
Section 6.3. Lost Certificates. Should any stockholder of the Corporation
allege the loss, theft or destruction of one or more certificates for shares of
the Corporation and request the issuance by the Corporation of a substitute
certificate therefor, the Board of Directors may direct that a new certificate
of the same tenor and for the same number of shares be issued to such person
upon such person's making of an affidavit in form satisfactory to the Board of
Directors setting forth the facts in connection therewith, provided that prior
to the receipt of such request the Corporation shall not have either registered
a transfer of such certificate or received notice that such certificate has been
acquired by a bona fide purchaser. When authorizing such issuance of a new
certificate, the Board of Directors may, in its discretion and as a condition
precedent to the issuance of such certificate, require the owner of such lost,
stolen or destroyed certificate, or his heirs or legal representatives, as the
case may be, to advertise the same in such manner as the Board of Directors
shall require and/or to give the Corporation a bond in such form and for such
sum and with such surety or sureties, with fixed or open penalty, as shall be
satisfactory to the Board of Directors, as indemnity for any liability or
expense which it may incur by reason of the original certificate remaining
outstanding.
Section 6.4. Dividends. The Board of Directors may, from time to time, at
any duly convened regular or special meeting or by unanimous consent, declare
and pay
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dividends upon the outstanding shares of capital stock of the Corporation in
cash, property or shares of the Corporation.
Before payment of any dividend, there may be set aside out of any funds of
the Corporation available for dividends such sum or sums as the Board of
Directors from time to time, in its absolute discretion, shall deem proper as a
reserve fund to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation or for such other
purposes as the Board of Directors shall believe to be in the best interests of
the Corporation, and the Board of Directors may reduce or abolish any such
reserve in the manner in which it was created.
Article 7
FINANCIAL REPORT TO STOCKHOLDERS
The President of the Corporation and the Board of Directors shall present
at each annual meeting of the stockholders a full and complete statement of the
business and affairs of the Corporation for the preceding year. Such statement
shall be prepared and presented in whatever manner the Board of Directors shall
deem advisable and need not be verified by a certified public accountant or sent
to the stockholders of the Corporation.
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Article 8
CHECKS AND NOTES
All checks or demands for money and notes of the Corporation shall be
signed by such officer or officers or such other person or persons as the Board
of Directors or the President may from time to time designate.
Article 9
FISCAL YEAR
The fiscal year of the Corporation shall be as determined from time to time
by resolution of the Board of Directors.
Article 10
SEAL
The seal of the Corporation shall have inscribed thereon the name of the
Corporation, the year of its organization and the words "Corporate Seal,
Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or in any manner reproduced.
Article 11
NOTICES; COMPUTING TIME PERIODS
Section 11.1. Method and Contents of Notice. Whenever, under the provisions
of statute or of the Certificate of Incorporation or of these By-laws, written
notice is required
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to be given to any person, it may be given to such person either personally or
by sending a copy thereof through the mail postage prepaid, or by telegram,
charges prepaid, to his address appearing on the books of the Corporation or
supplied by him to the Corporation for the purpose of notice. If the notice is
sent by mail or telegraph, it shall be deemed to have been given to the person
entitled thereto when deposited in the United States mail or with a telegraph
office for transmission to such person. Such notice shall specify the place, day
and hour of the meeting, if any, and, in the case of a special meeting of the
stockholders, the general nature of the business to be transacted.
Section 11.2. Waiver of Notice. Any written notice required to be given to
any person may be waived in a writing signed by the person entitled to such
notice whether before or after the time stated therein. Attendance of any person
entitled to notice, whether in person or by proxy, at any meeting shall
constitute a waiver of notice of such meeting, except where any person attends a
meeting for the express purpose of objecting to the transaction of any business
because the meeting was not lawfully called or convened. Where written notice is
required for any meeting, the waiver thereof must specify the purpose only if it
is for a special meeting of the stockholders.
Section 11.3. Computing Time Periods. In computing the number of days for
purposes of these By-laws, all days shall be counted, including Saturdays,
Sundays or holidays; provided, however, that if the final day of any time period
falls on a Saturday, Sunday or holiday, then the final day shall be deemed to be
the next day which is not a Saturday, Sunday or holiday. In computing the number
of days for the purpose of giving
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notice of any meeting, the date upon which the notice is given shall be counted
but the day set for the meeting shall not be counted.
Article 12
AMENDMENTS
These By-laws may be altered, amended or repealed by a majority vote of the
stockholders entitled to vote thereon at any annual or special meeting duly
convened after notice to the stockholders of that purpose or by a majority vote
of the members of the Board of Directors at any regular or special meeting of
the Board of Directors duly convened after notice to the Board of Directors of
that purpose, subject always to the power of the stockholders to change such
action of the Board of Directors.
Article 13
INTERPRETATION OF BY-LAWS
All words, terms and provisions of these By-laws shall be interpreted and
defined by and in accordance with the General Corporation Law of the State of
Delaware, as amended, and as amended from time to time hereafter.
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FIRST AMENDMENT
TO
FACILITIES AGREEMENT
AMONG
LITCHFIELD INVESTMENT COMPANY, L.L.C.,
INTEGRATED HEALTH SERVICES OF LESTER, INC.
AND
INTEGRATED HEALTH SERVICES, INC.
AS OF SEPTEMBER 30, 1997
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<PAGE>
FIRST AMENDMENT
TO
FACILITIES AGREEMENT
THIS FIRST AMENDMENT TO FACILITIES AGREEMENT ("First Amendment"), is
made and entered into as of the 30th day of September, 1997, among Litchfield
Investment Company, L.L.C., a Connecticut limited liability company, with
principal offices at 128 Litchfield Road, New Milford, Connecticut 06776
(hereinafter referred to as "Litchfield"), Integrated Health Services of Lester,
Inc., a Delaware corporation, with principal offices at 10065 Red Run Boulevard,
Owings Mills, Maryland 21117 (hereinafter referred to as "IHS") and Integrated
Health Services, Inc., a Delaware corporation, with principal offices at 10065
Red Run Boulevard, Owings Mills, Maryland 21117 (hereinafter referred to as
"Integrated").
W I T N E S S E T H:
WHEREAS, pursuant to an Agreement to Convey, dated as of June 30, 1997,
between Litchfield Asset Management Corp. (hereinafter referred to as "LAMC")
and Litchfield, Litchfield is the present owner of the real property,
improvements and personal property constituting forty-one (41) skilled nursing
home facilities and two (2) retirement centers, as described on Exhibit A
attached hereto and made a part hereof for all purposes (hereinafter referred
to, collectively, as the "Facilities"); and
WHEREAS, pursuant to forty-three (43) Leases, each dated as of August
31, 1994 (hereinafter referred to, collectively, as the "Prior Leases"), between
LAMC and IHS, LAMC leased the Facilities to IHS, during the term from September
1, 1994 (hereinafter referred to as the "Effective Date of the Prior Leases") to
September 30, 1997; and
WHEREAS, pursuant to forty-three (43) Purchase Option Agreements, each
dated as of August 31, 1994 (hereinafter referred to, collectively, as the
"Prior Purchase Option Agreements"), between LAMC and IHS, LAMC granted to IHS
options to purchase each of the Facilities; and
WHEREAS, pursuant to the Termination of Leases and Purchase Option
Agreements, dated as of September 30, 1997, between Litchfield and IHS,
Litchfield and IHS terminated the Prior Leases and the Prior Purchase Option
Agreements; and
WHEREAS, Litchfield and IHS have (a) entered into forty-three (43)
Leases, each dated as of September 30, 1997 (hereinafter referred to,
collectively, as the "Leases"), whereby Litchfield has leased each of the
Facilities to IHS and (b) entered into forty-three (43) Purchase Option
Agreements, each dated as of September 30, 1997 (hereinafter referred to,
collectively, as the "Purchase Option Agreements"), whereby Litchfield granted
to IHS options to purchase each of the Facilities; and
WHEREAS, concurrently with the execution and delivery of this First
Amendment, the Leases and the Purchase Option Agreements, among other things (a)
Litchfield, the Principal Members of Litchfield, Integrated and
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IHS will enter into the Amended and Restated Non-Competition and Secrecy
Agreement, dated as of September 30, 1997 (hereinafter referred to as the
"Non-Competition and Secrecy Agreement"), (b) Litchfield and IHS will enter into
the Amended and Restated Participation Agreement, dated as of September 30, 1997
(hereinafter referred to as the "Participation Agreement"), and (c) Integrated
will execute the Guaranty, dated as of September 30, 1997 (hereinafter referred
to as the "Guaranty"), as to payment of certain obligations of IHS under the
Leases and the Prior Leases; and
WHEREAS, to refinance the secured indebtedness encumbering the
Facilities, German American Capital Corporation, a Maryland corporation
(hereinafter referred to as the "Lender") shall make a loan to Litchfield,
subject to the terms and conditions of the Credit Agreement, dated as of
September 30, 1997, between Litchfield and Lender (hereinafter referred to as
the "Loan Agreement"); and
NOW THEREFORE, in consideration of the mutual promises and covenants
herein contained in this First Amendment and other good and valuable
consideration, the receipt and sufficiency of which hereby are acknowledged, and
intending to be legally bound hereby, the parties hereto agree as follows:
1. Section 1.15 of the Facilities Agreement is amended and
restated as follows:
1.15 Guaranty. "Guaranty" shall mean the Guaranty, dated
as of September 30, 1997, from Integrated for the benefit of Litchfield.
2. Section 1.25 of the Facilities Agreement is amended and restated as
follows:
1.25 Knowledge. "Knowledge" of a party shall mean (a) actual
knowledge of an officer or management level employee of such party, with respect
to a corporation, including actual knowledge of any of the Principal Members of
Litchfield, (b) actual knowledge of a general partner or management level
employee of such party, with respect to a partnership, or (c) actual knowledge
of the person with respect to a natural person.
3. Section 1.27 of the Facilities Agreement is amended as follows:
1.27 Leases or Lease. "Leases" shall mean, collectively, the
forty-three (43) leases, each dated as of September 30, 1997, between Litchfield
and IHS. Reference to any one of the Leases individually and not specifically
shall be referred to herein as a "Lease".
4. Section 1.28 of the Facilities Agreement is amended and restated as
follows:
1.28 Litchfield. "Litchfield" shall mean Litchfield Investment
Company, L.L.C., a Connecticut limited liability company, with principal offices
at 128 Litchfield Road, New Milford, Connecticut 06776.
5. Section 1.34 of the Facilities Agreement is amended and restated as
follows:
1.34 Non-Competition and Secrecy Agreement. "Non-Competition
and Secrecy Agreement" shall mean the Amended and Restated Non-Competition and
Secrecy Agreement, dated as of September 30, 1997, among Litchfield, the
Principal Members of Litchfield, Integrated and IHS.
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6. Section 1.35 of the Facilities Agreement is amended and restated as
follows:
1.35 Participation Agreement. "Participation Agreement" shall
mean the Amended and Restated Participation Agreement, dated as of September 30,
1997, between IHS and Litchfield.
7. Section 1.40 of the Facilities Agreement is amended and restated as
follows:
1.40 Principal Members of Litchfield. "Principal Members of
Litchfield" shall mean (a) Eugene H. Rosen whose address is 139 North Shore
Road, New Preston, Connecticut 06777, (b) Bruce Weinstein, whose address is 562
Tepi Drive, Southbury, Connecticut 06488, and (c) Michael S. McGee, whose
address is 5A Davison Lane West, West Islip, New York 11795.
8. Section 1.41 of the Facilities Agreement is amended and restated as
follows:
1.41 Purchase Option Agreements or Purchase Option Agreement.
"Purchase Option Agreements" shall mean, collectively, the forty-three (43)
purchase option agreements, each dated as of September 30, 1997, between
Litchfield and IHS. Reference to any one of the Purchase Option Agreements
individually and not specifically shall be referred to herein as a "Purchase
Option Agreement".
9. Section 1.45 of the Facilities Agreement is amended and restated as
follows:
1.45 Transaction Documents. "Transaction Documents" shall mean
(a) the Facilities Agreement; (b) the First Amendment; (c) the Leases; (d) the
Purchase Option Agreements; (e) the Memoranda of Lease; (f) the Memoranda of
Option to Purchase Real Estate; (g) the Non-Competition and Secrecy Agreement;
(h) the Guaranty; (i) the Warrant; (j) the Participation Agreement; (k) the
Litchfield Shareholders Notes; (l) the Integrated Loan Agreements; (m) the
Assignment of Litchfield Leases; (n) the Guaranties, dated as of August 31,
1994, by each of the Principal Members of Litchfield; (o) the Guaranty referred
to in Section IX hereof, dated as of August 31, 1994, by AVE; (p) the Guaranty
referred to in Section IX hereof, dated as of August 31, 1994, by LAMC; (q) the
Security Agreement/ Proceeds, dated as of August 31, 1994, by and between
Litchfield and IHS; (r) the Termination of Lease and Purchase Option, dated as
of August 31, 1994, among LAMC, IHS, IHS at Hanover and Heritage/Highlands; (s)
the Termination of Lease and Purchase Option, dated as of August 31, 1994, by
and among LAMC, IHS, IHS at Hawthorne, and Charlotte; (t) the Termination of
Management Agreement, dated as of August 31, 1994, by and among LAMC, IHS, IHS
at Great Bend and Manorwood; (u) the Termination of Management Agreement, dated
as of August 31, 1994, by and among LAMC, IHS, IHS at Wichita and Manorwood (v)
the Prior Leases, each dated as of August 31, 1994, by and between LAMC and IHS;
(w) the Prior Purchase Option Agreements, each dated as of August 31, 1994, by
and between LAMC and IHS; (x) the Security Agreement/Proceeds, dated as of
September 30, 1997, by and between Litchfield and IHS; and (y) the Termination
of Leases and Purchase Option Agreements, dated as of September 30, 1997, by and
between Litchfield and IHS.
10. Article I is amended by adding the following definitions to the end
thereof:
1.47 Prior Leases. "Prior Leases" shall mean, collectively,
the forty-three (43) leases, each dated as of August 31, 1994, between LAMC and
IHS.
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1.48 Prior Purchase Option Agreements. "Prior Purchase Option
Agreements" shall mean, collectively, the forty-three (43) purchase option
agreements, each dated as of August 31, 1994, between LAMC and IHS.
1.49 LAMC. "LAMC" shall mean Litchfield Asset Management
Corp., a Connecticut corporation, with principal offices at 128 Litchfield Road,
New Milford, Connecticut 06776.
11. Subsections (a) and (b) of Section 15.7 of the Facilities
Agreement are amended and restated as follows:
(a) Litchfield shall indemnify and hold harmless IHS,
Integrated, and their respective officers, directors, shareholders, employees,
agents, and assigns (collectively, the "IHS Indemnified Parties"), from any and
all liabilities, obligations, losses, demands, judgments, actions, suits, causes
of action, claims, proceedings, investigations, citations, matters, damages,
penalties, sanctions, costs, expenses, and disbursements (including, without
limitation reasonable attorneys' and consultants' fees and expenses), whether or
not subject to litigation, (hereinafter collectively referred to as the
"Claims") of any kind or character imposed upon, arising out of, in connection
with, incurred or in any way attributed or relating to the following:
(i) the use, operation, possession, or
management of the Facilities prior to the Effective Date of
the Prior Leases, whether or not IHS or Integrated is a party;
provided, however, that this indemnification does not relate
to any Claims relating to the use, operation, possession or
management of the IHS Leased Facilities by IHS at Hawthorne
accruing or arising on or after April 1, 1993, and IHS at
Hanover accruing or arising on or after July 7, 1992, or the
IHS Managed Facilities by IHS at Great Bend and IHS at Wichita
accruing or arising on or after July 16, 1993;
(ii) the breach or failure of any
representation, warranty or covenant that is contained in the
Facilities Agreement, the First Amendment or contained in any
other agreement or Transaction Documents to which Litchfield,
LAMC, any principal shareholder or member of Litchfield, LAMC
and AVE, on the one hand, and IHS or Integrated, on the other
hand, are parties;
(iii) other than the IHS Leased Facilities
and the IHS Managed Facilities (except as otherwise agreed
upon by Litchfield), the termination of any and all management
agreements pertaining to the Facilities in effect prior to the
Effective Date of the Prior Leases, including, but not limited
to, all management agreements with Health Care Capital;
(iv) all cancellation fees, if any,
attributable to IHS's termination of the HSG Contracts for
which Litchfield is liable in accordance with Section 11.13
herein.
(v) any and all matters arising out of the
cause of action entitled, "Life Care Centers of America, Inc.
v. Charles Town Associates Limited Partnership, et al.,"
United States District Court, Eastern District of Tennessee,
Southern Division, No. 1:92-CV-170;
B3 310046.5 00575 00527
3/27/98 10:01 AM
4
<PAGE>
(vi) any and all Claims accruing prior to
the Effective Date of the Prior Leases relating to any current
or former employee, consultant or independent contractor of
the Partnerships, Litchfield, LAMC, or any of the Facilities,
including, but not limited to, (A) the termination or
discharge of any current or former employee, consultant, or
independent contractor of the Partnerships or Litchfield or
LAMC or any of the Facilities prior to the Effective Date of
the Prior Leases; (B) Claims under federal, state, or local
laws, rules or regulations, accruing prior to the Effective
Date of the Prior Leases, related to wages, hours, fair
employment practices, unfair labor practices, or other terms
and conditions of employment and claims arising under the
Worker Adjustment and Retraining Notification Act or any
analogous state statute; (C) matters arising from any
severance policy, claim, agreement or contract; or (D) any and
all Claims that accrue after the Effective Date of the Prior
Leases with respect to the matters provided for in Section
11.16 herein and Section 3.4 of the Prior Leases;
(vii) any and all Claims asserted by or on
behalf of any of the Limited Partners of any of the
Partnerships in connection with or relating to the activities
of LAMC or Litchfield or any of the General Partners of such
Partnerships and their respective affiliates in respect of the
transactions contemplated in this Agreement and the other
Transaction Documents;
(viii) any and all Claims that relate to
information provided by or on behalf of any of the
Partnerships or LAMC or Litchfield concerning the Facilities,
Litchfield, LAMC, any of the Partnerships, any of the General
Partners and their respective affiliates, to third parties
which was used or relied upon to effect the transactions
contemplated in this Agreement, the First Amendment, and by
the other Transaction Documents;
(ix) subject to the provisions of Section
11.13 hereof, any and all Claims for any termination,
cancellation, acceleration or modification, penalties or
payments or performance obligations relating to Contracts or
Leases provided for under Section 11.13 herein;
(x) other than for the (A) liens, claims or
encumbrances established under the Loan Documents, or (B)
liens, claims or encumbrances necessary to effect the
transactions contemplated in this Agreement, the First
Amendment, and the other Transaction Documents, any mortgage,
pledge, lien, or encumbrance made on any of the Facilities or
assets relating to any of the Facilities, and any claims
asserted therefrom, other than and except for the Permitted
Liens; provided, however, that this subparagraph shall have no
application to any Claims which did not arise from, accrue or
result from any action or inaction prior to the Effective Date
of the Prior Leases;
(xi) any and all Claims with respect to any
qualified or non-qualified retirement or benefit plans or
arrangements established before the Effective Date of the
Prior Leases involving any current or former employee,
consultant or independent contractor of the Partnerships,
Litchfield, LAMC or any of the Facilities;
B3 310046.5 00575 00527
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5
<PAGE>
(xii) except as otherwise set forth in this
Agreement, in particular Section 11.13 herein, any and all
EXHIBIT 10.22
FIRST AMENDMENT
TO
FACILITIES AGREEMENT
AMONG
LITCHFIELD INVESTMENT COMPANY, L.L.C.,
INTEGRATED HEALTH SERVICES OF LESTER, INC.
AND
INTEGRATED HEALTH SERVICES, INC.
AS OF SEPTEMBER 30, 1997
<PAGE>
FIRST AMENDMENT
TO
FACILITIES AGREEMENT
THIS FIRST AMENDMENT TO FACILITIES AGREEMENT ("First Amendment"), is
made and entered into as of the 30th day of September, 1997, among Litchfield
Investment Company, L.L.C., a Connecticut limited liability company, with
principal offices at 128 Litchfield Road, New Milford, Connecticut 06776
(hereinafter referred to as "Litchfield"), Integrated Health Services of Lester,
Inc., a Delaware corporation, with principal offices at 10065 Red Run Boulevard,
Owings Mills, Maryland 21117 (hereinafter referred to as "IHS") and Integrated
Health Services, Inc., a Delaware corporation, with principal offices at 10065
Red Run Boulevard, Owings Mills, Maryland 21117 (hereinafter referred to as
"Integrated").
W I T N E S S E T H:
WHEREAS, pursuant to an Agreement to Convey, dated as of June 30, 1997,
between Litchfield Asset Management Corp. (hereinafter referred to as "LAMC")
and Litchfield, Litchfield is the present owner of the real property,
improvements and personal property constituting forty-one (41) skilled nursing
home facilities and two (2) retirement centers, as described on Exhibit A
attached hereto and made a part hereof for all purposes (hereinafter referred
to, collectively, as the "Facilities"); and
WHEREAS, pursuant to forty-three (43) Leases, each dated as of August
31, 1994 (hereinafter referred to, collectively, as the "Prior Leases"), between
LAMC and IHS, LAMC leased the Facilities to IHS, during the term from September
1, 1994 (hereinafter referred to as the "Effective Date of the Prior Leases") to
September 30, 1997; and
WHEREAS, pursuant to forty-three (43) Purchase Option Agreements, each
dated as of August 31, 1994 (hereinafter referred to, collectively, as the
"Prior Purchase Option Agreements"), between LAMC and IHS, LAMC granted to IHS
options to purchase each of the Facilities; and
WHEREAS, pursuant to the Termination of Leases and Purchase Option
Agreements, dated as of September 30, 1997, between Litchfield and IHS,
Litchfield and IHS terminated the Prior Leases and the Prior Purchase Option
Agreements; and
WHEREAS, Litchfield and IHS have (a) entered into forty-three (43)
Leases, each dated as of September 30, 1997 (hereinafter referred to,
collectively, as the "Leases"), whereby Litchfield has leased each of the
Facilities to IHS and (b) entered into forty-three (43) Purchase Option
Agreements, each dated as of September 30, 1997 (hereinafter referred to,
collectively, as the "Purchase Option Agreements"), whereby Litchfield granted
to IHS options to purchase each of the Facilities; and
WHEREAS, concurrently with the execution and delivery of this First
Amendment, the Leases and the Purchase Option Agreements, among other things (a)
Litchfield, the Principal Members of Litchfield, Integrated and
<PAGE>
IHS will enter into the Amended and Restated Non-Competition and Secrecy
Agreement, dated as of September 30, 1997 (hereinafter referred to as the
"Non-Competition and Secrecy Agreement"), (b) Litchfield and IHS will enter into
the Amended and Restated Participation Agreement, dated as of September 30, 1997
(hereinafter referred to as the "Participation Agreement"), and (c) Integrated
will execute the Guaranty, dated as of September 30, 1997 (hereinafter referred
to as the "Guaranty"), as to payment of certain obligations of IHS under the
Leases and the Prior Leases; and
WHEREAS, to refinance the secured indebtedness encumbering the
Facilities, German American Capital Corporation, a Maryland corporation
(hereinafter referred to as the "Lender") shall make a loan to Litchfield,
subject to the terms and conditions of the Credit Agreement, dated as of
September 30, 1997, between Litchfield and Lender (hereinafter referred to as
the "Loan Agreement"); and
NOW THEREFORE, in consideration of the mutual promises and covenants
herein contained in this First Amendment and other good and valuable
consideration, the receipt and sufficiency of which hereby are acknowledged, and
intending to be legally bound hereby, the parties hereto agree as follows:
1. Section 1.15 of the Facilities Agreement is amended and restated as
follows:
1.15 Guaranty. "Guaranty" shall mean the Guaranty, dated as of
September 30, 1997, from Integrated for the benefit of Litchfield.
2. Section 1.25 of the Facilities Agreement is amended and restated as
follows:
1.25 Knowledge. "Knowledge" of a party shall mean (a) actual
knowledge of an officer or management level employee of such party, with respect
to a corporation, including actual knowledge of any of the Principal Members of
Litchfield, (b) actual knowledge of a general partner or management level
employee of such party, with respect to a partnership, or (c) actual knowledge
of the person with respect to a natural person.
3. Section 1.27 of the Facilities Agreement is amended as follows:
1.27 Leases or Lease. "Leases" shall mean, collectively, the
forty-three (43) leases, each dated as of September 30, 1997, between Litchfield
and IHS. Reference to any one of the Leases individually and not specifically
shall be referred to herein as a "Lease".
4. Section 1.28 of the Facilities Agreement is amended and restated as
follows:
1.28 Litchfield. "Litchfield" shall mean Litchfield Investment
Company, L.L.C., a Connecticut limited liability company, with principal offices
at 128 Litchfield Road, New Milford, Connecticut 06776.
5. Section 1.34 of the Facilities Agreement is amended and restated as
follows:
1.34 Non-Competition and Secrecy Agreement. "Non-Competition
and Secrecy Agreement" shall mean the Amended and Restated Non-Competition and
Secrecy Agreement, dated as of September 30, 1997, among Litchfield, the
Principal Members of Litchfield, Integrated and IHS.
2
<PAGE>
6. Section 1.35 of the Facilities Agreement is amended and restated as
follows:
1.35 Participation Agreement. "Participation Agreement" shall mean
the Amended and Restated Participation Agreement, dated as of September 30,
1997, between IHS and Litchfield.
7. Section 1.40 of the Facilities Agreement is amended and restated as
follows:
1.40 Principal Members of Litchfield. "Principal Members of
Litchfield" shall mean (a) Eugene H. Rosen whose address is 139 North Shore
Road, New Preston, Connecticut 06777, (b) Bruce Weinstein, whose address is 562
Tepi Drive, Southbury, Connecticut 06488, and (c) Michael S. McGee, whose
address is 5A Davison Lane West, West Islip, New York 11795.
8. Section 1.41 of the Facilities Agreement is amended and restated as
follows:
1.41 Purchase Option Agreements or Purchase Option Agreement.
"Purchase Option Agreements" shall mean, collectively, the forty-three (43)
purchase option agreements, each dated as of September 30, 1997, between
Litchfield and IHS. Reference to any one of the Purchase Option Agreements
individually and not specifically shall be referred to herein as a "Purchase
Option Agreement".
9. Section 1.45 of the Facilities Agreement is amended and restated as
follows:
1.45 Transaction Documents. "Transaction Documents" shall mean (a)
the Facilities Agreement; (b) the First Amendment; (c) the Leases; (d) the
Purchase Option Agreements; (e) the Memoranda of Lease; (f) the Memoranda of
Option to Purchase Real Estate; (g) the Non-Competition and Secrecy Agreement;
(h) the Guaranty; (i) the Warrant; (j) the Participation Agreement; (k) the
Litchfield Shareholders Notes; (l) the Integrated Loan Agreements; (m) the
Assignment of Litchfield Leases; (n) the Guaranties, dated as of August 31,
1994, by each of the Principal Members of Litchfield; (o) the Guaranty referred
to in Section IX hereof, dated as of August 31, 1994, by AVE; (p) the Guaranty
referred to in Section IX hereof, dated as of August 31, 1994, by LAMC; (q) the
Security Agreement/ Proceeds, dated as of August 31, 1994, by and between
Litchfield and IHS; (r) the Termination of Lease and Purchase Option, dated as
of August 31, 1994, among LAMC, IHS, IHS at Hanover and Heritage/Highlands; (s)
the Termination of Lease and Purchase Option, dated as of August 31, 1994, by
and among LAMC, IHS, IHS at Hawthorne, and Charlotte; (t) the Termination of
Management Agreement, dated as of August 31, 1994, by and among LAMC, IHS, IHS
at Great Bend and Manorwood; (u) the Termination of Management Agreement, dated
as of August 31, 1994, by and among LAMC, IHS, IHS at Wichita and Manorwood (v)
the Prior Leases, each dated as of August 31, 1994, by and between LAMC and IHS;
(w) the Prior Purchase Option Agreements, each dated as of August 31, 1994, by
and between LAMC and IHS; (x) the Security Agreement/Proceeds, dated as of
September 30, 1997, by and between Litchfield and IHS; and (y) the Termination
of Leases and Purchase Option Agreements, dated as of September 30, 1997, by and
between Litchfield and IHS.
10. Article I is amended by adding the following definitions to the end
thereof:
1.47 Prior Leases. "Prior Leases" shall mean, collectively, the
forty-three (43) leases, each dated as of August 31, 1994, between LAMC and IHS.
3
<PAGE>
1.48 Prior Purchase Option Agreements. "Prior Purchase Option
Agreements" shall mean, collectively, the forty-three (43) purchase option
agreements, each dated as of August 31, 1994, between LAMC and IHS.
1.49 LAMC. "LAMC" shall mean Litchfield Asset Management Corp., a
Connecticut corporation, with principal offices at 128 Litchfield Road, New
Milford, Connecticut 06776.
11. Subsections (a) and (b) of Section 15.7 of the Facilities Agreement
are amended and restated as
follows:
(a) Litchfield shall indemnify and hold harmless IHS, Integrated,
and their respective officers, directors, shareholders, employees, agents, and
assigns (collectively, the "IHS Indemnified Parties"), from any and all
liabilities, obligations, losses, demands, judgments, actions, suits, causes of
action, claims, proceedings, investigations, citations, matters, damages,
penalties, sanctions, costs, expenses, and disbursements (including, without
limitation reasonable attorneys' and consultants' fees and expenses), whether or
not subject to litigation, (hereinafter collectively referred to as the
"Claims") of any kind or character imposed upon, arising out of, in connection
with, incurred or in any way attributed or relating to the following:
(i) the use, operation, possession, or
management of the Facilities prior to the Effective Date of
the Prior Leases, whether or not IHS or Integrated is a party;
provided, however, that this indemnification does not relate
to any Claims relating to the use, operation, possession or
management of the IHS Leased Facilities by IHS at Hawthorne
accruing or arising on or after April 1, 1993, and IHS at
Hanover accruing or arising on or after July 7, 1992, or the
IHS Managed Facilities by IHS at Great Bend and IHS at Wichita
accruing or arising on or after July 16, 1993;
(ii) the breach or failure of any
representation, warranty or covenant that is contained in the
Facilities Agreement, the First Amendment or contained in any
other agreement or Transaction Documents to which Litchfield,
LAMC, any principal shareholder or member of Litchfield, LAMC
and AVE, on the one hand, and IHS or Integrated, on the other
hand, are parties;
(iii) other than the IHS Leased Facilities
and the IHS Managed Facilities (except as otherwise agreed
upon by Litchfield), the termination of any and all management
agreements pertaining to the Facilities in effect prior to the
Effective Date of the Prior Leases, including, but not limited
to, all management agreements with Health Care Capital;
(iv) all cancellation fees, if any,
attributable to IHS's termination of the HSG Contracts for
which Litchfield is liable in accordance with Section 11.13
herein.
(v) any and all matters arising out of the
cause of action entitled, "Life Care Centers of America, Inc.
v. Charles Town Associates Limited Partnership, et al.,"
United States District Court, Eastern District of Tennessee,
Southern Division, No. 1:92-CV-170;
4
<PAGE>
(vi) any and all Claims accruing prior to
the Effective Date of the Prior Leases relating to any current
or former employee, consultant or independent contractor of
the Partnerships, Litchfield, LAMC, or any of the Facilities,
including, but not limited to, (A) the termination or
discharge of any current or former employee, consultant, or
independent contractor of the Partnerships or Litchfield or
LAMC or any of the Facilities prior to the Effective Date of
the Prior Leases; (B) Claims under federal, state, or local
laws, rules or regulations, accruing prior to the Effective
Date of the Prior Leases, related to wages, hours, fair
employment practices, unfair labor practices, or other terms
and conditions of employment and claims arising under the
Worker Adjustment and Retraining Notification Act or any
analogous state statute; (C) matters arising from any
severance policy, claim, agreement or contract; or (D) any and
all Claims that accrue after the Effective Date of the Prior
Leases with respect to the matters provided for in Section
11.16 herein and Section 3.4 of the Prior Leases;
(vii) any and all Claims asserted by or on
behalf of any of the Limited Partners of any of the
Partnerships in connection with or relating to the activities
of LAMC or Litchfield or any of the General Partners of such
Partnerships and their respective affiliates in respect of the
transactions contemplated in this Agreement and the other
Transaction Documents;
(viii) any and all Claims that relate to
information provided by or on behalf of any of the
Partnerships or LAMC or Litchfield concerning the Facilities,
Litchfield, LAMC, any of the Partnerships, any of the General
Partners and their respective affiliates, to third parties
which was used or relied upon to effect the transactions
contemplated in this Agreement, the First Amendment, and by
the other Transaction Documents;
(ix) subject to the provisions of Section
11.13 hereof, any and all Claims for any termination,
cancellation, acceleration or modification, penalties or
payments or performance obligations relating to Contracts or
Leases provided for under Section 11.13 herein;
(x) other than for the (A) liens, claims or
encumbrances established under the Loan Documents, or (B)
liens, claims or encumbrances necessary to effect the
transactions contemplated in this Agreement, the First
Amendment, and the other Transaction Documents, any mortgage,
pledge, lien, or encumbrance made on any of the Facilities or
assets relating to any of the Facilities, and any claims
asserted therefrom, other than and except for the Permitted
Liens; provided, however, that this subparagraph shall have no
application to any Claims which did not arise from, accrue or
result from any action or inaction prior to the Effective Date
of the Prior Leases;
(xi) any and all Claims with respect to any
qualified or non-qualified retirement or benefit plans or
arrangements established before the Effective Date of the
Prior Leases involving any current or former employee,
consultant or independent contractor of the Partnerships,
Litchfield, LAMC or any of the Facilities;
5
<PAGE>
(xii) except as otherwise set forth in this
Agreement, in particular Section 11.13 herein, any and all
Claims accruing prior to the Effective Date of the Prior
Leases with respect to admission agreements, patient
contracts, or agreements with others at the Facilities;
(xiii) any deficiencies or inaccuracies
relating to patient funds and accounts associated therewith at
the Facilities, which arose or accrued prior to the Effective
Date of the Prior Leases;
(xiv) any Claims arising out of LAMC's or
the Partnerships' failure to have kept or maintained patient
records and other related records at the Facilities in
accordance with applicable Law; or
(xv) the violation of any Environmental Law
or the existence, presence or Release of any Hazardous
Material (collectively, "Environmental Liability") where the
Environmental Liability is based on an event or condition at
or relating to any Facility that commenced or existed prior to
the Effective Date of the Prior Leases; provided, however,
that Litchfield's indemnification obligation hereunder shall
be limited solely to Claims (of any kind and nature
whatsoever) (i) for remediation of and response actions
related to such Environmental Liability (including, without
limitation, any such Claim for cleanup, treatment, corrective
action, compliance, financial assurance, restoration, removal,
abatement, encapsulation, containment, revegetation,
monitoring, sampling, investigation, study, assessment, and
the protection of, or mitigative action related to, wildlife,
aquatic species, wetlands, vegetation, flora and fauna) and
(ii) asserted by a third party relating to such Environmental
Liability (including, without limitation, any Claim involving
natural resource damages, property damage, payment of fines or
penalties or settlement amounts, or any other action or cause
of action by, or obligation to, a third party (including,
without limitation, any Claim for personal injury or death,
contribution or cost recovery)). Notwithstanding the
foregoing, Litchfield and IHS will share equally the liability
for Hazardous Materials in existence on the Effective Date of
the Prior Leases, but not in violation of Environmental Law on
the Effective Date of the Prior Leases, whether as a result of
limits permissible under applicable Environmental Law, lack of
restriction or prohibition under applicable Environmental Law
(i.e., non-friable asbestos) or changes in Environmental Law.
Litchfield further covenants and agrees to defend the IHS
Indemnified Parties on account of said Claims and to pay any judgment against
the IHS Indemnified Parties, or any other amount as indicated in this Section
15.7(a), along with all reasonable costs and expenses relative to any such
Claims, including attorneys' fees and expenses; provided, however, that the IHS
Indemnified Parties shall, nevertheless, have the right, if they so elect, to
participate (with counsel of their choosing, which counsel must be approved by
Litchfield, which approval may not be unreasonably withheld) in the defense of
any such Claim in which they may be a party without relieving Litchfield of the
obligation to defend the same. To the extent applicable, the IHS Indemnified
Parties covenant not to settle or compromise any Claim under this section
without the written consent of Litchfield, which consent may not be unreasonably
withheld or delayed under the circumstances. Failure to comply with the
preceding covenant shall be deemed a complete waiver of any rights that the IHS
Indemnified Parties have or may have under this Section 15.7(a).
6
<PAGE>
(b) IHS shall indemnify and hold harmless Litchfield and its
officers, members, directors, shareholders, employees, agents, and assigns (the
"Litchfield Indemnified Parties") from any and all liabilities, obligations,
losses, demands, judgments, actions, suits, causes of action, claims,
proceedings, investigations, citations, matters, damages, penalties, sanctions,
costs, expenses, and disbursements (including, without limitation reasonable
attorneys' and consultants' fees and expenses), whether or not subject to
litigation, (hereinafter collectively referred to as the "Claims") of any kind
or character imposed upon, arising out of, in connection with, incurred or in
any way attributed or relating to the following:
(i) the breach or failure of any
representation, warranty or covenant made by IHS that is
contained in the Facilities Agreement or the First Amendment
or contained in any other agreement or Transaction Documents
to which Litchfield, LAMC or IHS are parties; provided,
however, for purposes of this subsection (i) only, the term
Transaction Documents shall not include the Leases or the
Prior Leases;
(ii) any and all Claims related to information
provided by or on behalf of IHS or Integrated concerning IHS
and Integrated, to third parties which was used or relied upon
to effect the transactions contemplated in this Agreement, the
First Amendment and by the other Transaction Documents;
(iii) any and all Claims arising out of, in
connection with, or resulting from the use, operation,
management or possession of the Hawthorne Nursing Center by
IHS of Hawthorne from April 1, 1993 until the Effective Date
of the Prior Leases;
(iv) any and all Claims arising out of, in
connection with or resulting from the use, operation,
management or possession of the Hanover House Nursing Center
by IHS at Hanover from December 7, 1992 until the Effective
Date of the Prior Leases;
(v) any and all Claims arising out of, in
connection with or resulting from the use, operation,
management or possession of the IHS Managed Facilities by IHS
at Great Bend and IHS as Wichita from July 16, 1993 until the
Effective Date of the Prior Leases; and
(vi) any and all Claims arising out of, in
connection with or resulting from the cancellation of the HSG
Contracts for which IHS is liable pursuant to the provisions
of Section 11.13 hereof.
IHS further covenants and agrees to defend the Litchfield
Indemnified Parties on account of said Claims and to pay any judgment against
the Litchfield Indemnified Parties, or any other amount as indicated in this
Section 15.7(b), along with all reasonable costs and expenses relative to any
such Claims, including attorneys' fees and expenses; provided, however, that the
Litchfield Indemnified Parties shall, nevertheless, have the right, if they so
elect, to participate (with counsel of their choosing, which counsel must be
approved by IHS, which approval may not be unreasonably withheld) in the defense
of any such Claim in which it may be a party without relieving IHS of the
obligation to defend the same. To the extent applicable, the Litchfield
Indemnified Parties covenant not to settle or compromise any Claim under this
section without the written consent of IHS, which consent may not be
unreasonably
7
<PAGE>
withheld or delayed under the circumstances. Failure to comply with the
preceding covenant shall be deemed a complete waiver of any rights that the
Litchfield Indemnified Parties have or may have under this Section 15.7(b).
12. Section 15.8 of the Facilities Agreement is deleted.
13. Section 15.9 of the Facilities Agreement is amended and restated as
follows:
15.9 Sales, Assignments or Transfers of Litchfield and the
Facilities; Right of First Refusal. The ownership interest of Litchfield held by
the Principal Members of Litchfield on the Effective Date or Litchfield's
ownership interest in the Facilities may not be sold, assigned or transferred,
in whole or in part, by Litchfield, any of the Principal Members of Litchfield
or any other person or entity and furthermore, any such sale or assignment shall
be void ab initio, except as follows:
(a) From the Effective Date and until the end of the eleventh
month of the fourth Lease Year, no more than forty-nine percent (49%)
of the total ownership interest in Litchfield may be sold, assigned or
transferred, in whole or in part, to any other person or entity other
than the Principal Members of Litchfield so that from the Effective
Date and until the end of the eleventh month of the fourth Lease Year,
the Principal Members of Litchfield shall at all times retain a
fifty-one percent (51%) ownership interest in Litchfield; provided,
however, that any such sale, assignment or transfer pursuant to this
subsection (a) shall be subject to the written approval of IHS, which
approval may not be unreasonably withheld and subject to the
limitations set forth in subsection (f) hereof.
(b) From the first day of the twelth month of the fourth Lease
Year and until the expiration of the Term (as defined in the Leases),
all or any part of the ownership interest in Litchfield may be sold,
assigned or transferred, to any person or entity other than the
Principal Members of Litchfield, subject to IHS's rights under the
Leases, the Purchase Option Agreements and the Participation Agreement;
provided, however, that any such sale, assignment or transfer pursuant
to this subsection (b) shall be subject to the written approval of IHS,
which approval may not be unreasonably withheld and subject to the
limitations set forth in subsection (f) hereof.
(c) From the Effective Date and until the end of the eleventh
month of the third Lease Year, no form of ownership interest
(including, but not limited to, the Leases) in any one or more of the
Facilities may be sold, assigned or transferred, in whole or in part,
except pursuant to the Purchase Option Agreements.
(d) From the date commencing with the first day of the twelth
month of the third Lease Year and until the expiration of the Term, all
or part of the ownership interest (including, but not limited to, the
Leases) in any one or more of the Facilities may be sold, assigned or
transferred to any person or entity, subject to IHS's rights under the
Leases, the Purchase Option Agreements and the Participation Agreement;
provided, however, that any such sale, assignment or transfer pursuant
to this subsection (d) shall be subject to the written approval of IHS,
which approval may not be unreasonably withheld and subject to the
limitations set forth in subsections (f) and (h) hereof.
8
<PAGE>
(e) Except as set forth on the leasehold policies of title
provided to IHS by Fidelity National Title as of September 30, 1997,
the loan described in the First Amendment and subsequent first lien
secured indebtedness on the Facilities, from the Effective Date and
until the expiration of the Term, no ownership interest in any one or
more of the Facilities and no ownership interest in Litchfield may be
mortgaged, pledged, subjected to a security interest, or otherwise
voluntarily encumbered, in whole or in part, without the written
approval of IHS, which written approval shall not be unreasonably
withheld.
(f) Any sale, assignment or transfer of interest in Litchfield
or an ownership interest (including, but not limited to, the Leases) in
any one or more of the Facilities, as permitted under subsections (a),
(b) and (d) hereof, shall subject to the following condition precedents
(except as waived by IHS in writing), such that the buyer, assignee or
transferee must: (i) have a net worth calculated in accordance with
GAAP of not less than $5,000,000 immediately prior to the sale,
assignment or transfer and (ii) not be a Direct Competitor of IHS,
Integrated or any of its Affiliates. For purposes of this subsection
(f), a "Direct Competitor" shall be deemed to mean, any person or
entity in the business, through itself or one or more Affiliates
thereof, of providing health care services then being provided by IHS,
Integrated or its or their Affiliates, including, but not limited to,
nursing home care, assisted living services, residential geriatric
services, hospital-based nursing care, subacute and postacute health
care services (including, but not limited to complex care, ventilator
care and wound management services), nursing services, rehabilitation
services, home health care services, pharmaceutical services,
diagnostic services and specialized treatment for Alzheimer's disease.
(g) For purposes of this Section 15.9, the merger or
consolidation of Litchfield with or into another person or entity or
the transfer of any of the securities of Litchfield or the interests of
the Principal Members of Litchfield shall be deemed to be a transfer of
Litchfield's ownership interest that shall be subject to the terms and
conditions of this Section 15.9; provided, however, that Litchfield
shall have the right to merge with or consolidate into any corporation,
limited partnership, limited liability company or other entity
controlled by the Principal Members of Litchfield.
(h) In the event that Litchfield desires to sell, assign or
transfer its ownership interest (including, but not limited to, the
Leases) in any or all of the Facilities to a third party, as permitted
under subsection (d) hereof, Litchfield shall, as a condition precedent
to its right to do so, by notice in writing, offer to sell Litchfield's
ownership interest in the respective Facility or Facilities to IHS upon
the same terms and conditions specified in such third party offer. IHS
shall have ten (10) business days after its receipt of Litchfield's
notice to accept such offer by delivering written notice of its
acceptance to Litchfield. If IHS does not accept Litchfield's offer,
Litchfield shall be free to dispose of its ownership interest in the
respective Facility or Facilities on terms substantially similar to
those contained in Litchfield's offer. If Litchfield does not
consummate a sale, assignment or transfer of its ownership interests in
or ownership of the respective Facility or Facilities with respect to
such notice and offer, then the sale, assignment or transfer of its
ownership interest the respective Facility or Facilities shall again be
subject in all respects to the terms, conditions and restrictions
provided in this subsection (h).
(i) Notwithstanding the foregoing to the contrary, nothing
herein shall restrict any (a) sale, transfer or conveyance of any
interest in Litchfield among the Principal Members of Litchfield or (b)
the
9
<PAGE>
sale, transfer or conveyance of the interest of any of the Principal
Members of Litchfield by gift, devise, bequest or inheritance,
provided, however, that any such donee, devisee or other recipient
shall be bound by the terms and conditions of this Section 15.9, except
clause (i) of subsection (f) thereof.
14. Litchfield hereby represents and warrants as of the date hereof to
each of the other parties to this First Amendment that:
(a) Corporate Organization; Good Standing; Corporate
Information. Litchfield is a limited liability company, duly organized, validly
existing and in good standing under the laws of the State of Connecticut, and
has the corporate power and authority to own and lease all of the Facilities, to
carry on its businesses as and in the places where such businesses are now
conducted and where such properties are now owned and leased, and to enter into
the transactions and perform their obligations under the Facilities Agreement,
the First Amendment, the other Transaction Documents and any other documents and
instruments required to be delivered to which it is or is to become a party and
Litchfield is duly qualified as a foreign corporation to do business in all
jurisdictions in which any of the Facilities are located or in which failure so
to qualify would impair its ability to perform its obligations under the
Facilities Agreement, the First Amendment, or any other Transaction Document.
(b) Authorization; Enforceability. The execution, delivery and
performance by Litchfield of the First Amendment, the other Transaction
Documents and of all of the documents and instruments contemplated to be
executed and delivered by Litchfield are within the legal and corporate power
and authority of Litchfield and have been duly authorized by all necessary legal
and corporate action of Litchfield. The Facilities Agreement, the First
Amendment, the other Transaction Documents, and the other documents and
instruments required to be delivered by Litchfield will be, when executed and
delivered, the valid and binding obligations of Litchfield, enforceable against
Litchfield in accordance with their respective terms.
(c) No Violation or Conflict. To the best of its Knowledge,
after reasonable inquiry, the execution, delivery and performance of the
Facilities Agreement, the First Amendment, the Transaction Documents and all of
the other documents and instruments contemplated to be executed and delivered by
Litchfield do not and will not conflict with or violate any material Law,
judgment, or any order or decree binding on Litchfield or the Operating
Agreement of Litchfield.
(d) No Litigation. To the best of its Knowledge, there is no
material litigation, arbitration proceeding, governmental investigation,
citation, suit, action, proceeding or claim of any kind pending or threatened,
against Litchfield that would relate to the Facilities or any portion thereof or
the ability of Litchfield to perform its obligations under the Transaction
Documents.
15. IHS hereby represents and warrants as of the date hereof to each of
the other parties to this First Amendment that:
(a) Organization. IHS is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, and has
full corporate power and authority to enter into and perform its obligations
under the Facilities Agreement, the First Amendment, the other Transaction
Documents and any other documents and instruments required to be delivered to
which it is or is to become a party and IHS is duly qualified as
10
<PAGE>
a foreign corporation to do business in all jurisdictions in which any of the
Facilities are located or in which failure to so qualify would impair its
ability to perform its obligations under the Facilities Agreement, the First
Agreement, or any other Transaction Document.
(b) Authorization; Enforceability. The execution, delivery and
performance by IHS of the Facilities Agreement, the First Amendment, the other
Transaction Documents and all of the documents and instruments contemplated to
be executed and delivered by IHS are within the corporate power of IHS and have
been duly authorized by all necessary corporate action of IHS. The Facilities
Agreement, the First Amendment, the other Transaction Documents, and the other
documents and instruments required hereby to be delivered by IHS will be, when
executed and delivered, the valid and binding obligations of IHS, enforceable
against IHS in accordance with their respective terms.
(c) No Violation or Conflict. To the best of IHS's Knowledge,
after reasonable inquiry, the execution, delivery and performance of the
Facilities Agreement, the First Amendment, the other Transaction Documents and
all of the documents and instruments contemplated to be executed and delivered
by IHS does not and will not conflict with or violate the Certificate of
Incorporation or By-Laws of IHS or any material Law, judgment, order or decree
binding on IHS.
(d) No Litigation. To the best of its Knowledge, there is no
material litigation, arbitration proceeding, governmental investigation,
citation, suit, action, proceeding or claim of any kind pending or threatened,
against IHS that would relate to the Facilities or any portion thereof or the
ability of IHS to perform its obligations under the Transaction Documents.
16. This First Amendment shall be construed and interpreted according
to the laws of the State of New York, without regard to provisions governing
conflicts of law.
17. All communications, notices and disclosures required or permitted
by the Facilities Agreement shall be in writing and shall be deemed to have been
given at the earlier of the date when actually delivered to an officer of the
other party or when deposited in the United States mail, certified or registered
mail, postage prepaid, return receipt requested, by personal delivery or by
overnight courier service with signed receipt, and addressed as follows, unless
and until either of such parties notifies the other in accordance with this
Section of a change of address:
To Litchfield: Litchfield Investment Company, L.L.C.
128 Litchfield Road
P.O. Box 3039
New Milford, Connecticut 06776
Attention: Eugene H. Rosen
Copy to: Owens, Clary & Aiken, L.L.P.
Suite 2400
1717 Main Street
Dallas, Texas 75201
Attention: Leighton Aiken, Esq.
11
<PAGE>
To Integrated or IHS: Integrated Health Services, Inc.
or Integrated Health Services of Lester, Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attention: Daniel J. Booth
Copy to: LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019
Attention: John R. Fallon, Jr., Esq.
18. This First Amendment may be executed in several counterparts, each
of which shall be deemed an original, but such counterparts shall together
constitute but one and the same First Amendment.
19. Unless otherwise expressly amended or deleted by this First
Amendment, the provisions of the Facilities Agreement shall remain the same and
are in full force and effect as of the date hereof; provided, however, all
representations, covenants and warranties contained in the Facilities Agreement
were made on and as of the Closing Date and are not re-certified or updated by
the parties to this First Amendment as of the date hereof; and, provided,
further, all representations, covenants, warranties and indemnities of the
parties to the Facilities Agreement and this First Amendment shall not terminate
by this First Amendment and shall survive the execution and delivery of this
First Amendment in accordance with Section 16.12 of the Facilities Agreement.
SIGNATURE PAGE FOLLOWS
12
<PAGE>
IN WITNESS WHEREOF, the parties have caused this First Amendment to
Facilities Agreement to be duly executed and delivered as a sealed instrument as
of September 30, 1997.
LITCHFIELD INVESTMENT COMPANY, L.L.C.
By: /s/ Eugene H. Rosen
---------------------------------------------
Name: Eugene H. Rosen
Title: President and Member
(Seal)
INTEGRATED HEALTH SERVICES OF LESTER, INC.
By: /s/ Daniel J. Booth
---------------------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
(Seal)
INTEGRATED HEALTH SERVICES, INC.
By: /s/ Daniel J. Booth
---------------------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
(Seal)
13
1996 STOCK INCENTIVE PLAN
of
INTEGRATED HEALTH SERVICES, INC.
1. PURPOSES OF THE PLAN. This stock incentive plan (the "Plan") is designed
to provide an incentive to employees, consultants and directors of INTEGRATED
HEALTH SERVICES, INC., a Delaware corporation (the "Company"), or any of its
Subsidiaries (as defined in Paragraph 19), and to offer an additional inducement
in obtaining the services of such persons. Options granted under the Plan shall
be non-qualified stock options which do not meet the requirements of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code").
2. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Paragraph 12,
the aggregate number of shares of Common Stock, $.001 par value per share, of
the Company ("Common Stock") for which options may be granted under the Plan
shall not exceed 5,300,000. Such shares of Common Stock may, in the discretion
of the Board of Directors of the Company (the "Board of Directors"), consist
either in whole or in part of authorized but unissued shares of Common Stock or
shares of Common Stock held in the treasury of the Company. Subject to the
provisions of Paragraph 13, any shares of Common Stock subject to an option
which for any reason expires, is canceled or is terminated unexercised or which
ceases for any reason to be exercisable, shall again become available for the
granting of options under the Plan. The Company shall at all times during the
term of the Plan reserve and keep available such number of shares of Common
Stock as will be sufficient to satisfy the requirements of the Plan.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Board
of Directors or a committee (the "Committee") of the Board of Directors
consisting of not less than two directors (those administering the Plan are the
"Administrators") each of whom meets the requirements of Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended (as the same may be in
effect and interpreted from time to time, "Rule 16b-3"). Unless otherwise
provided in the By-laws of the Company or resolution of the Board of Directors,
a majority of the members of the Committee shall constitute a quorum, and the
acts of a majority of the members present at any meeting at which a quorum is
present, and any acts approved in writing by all of the members of the Committee
without a meeting, shall be the acts of the Committee.
Subject to the express provisions of the Plan, the Administrators shall
have the authority, in their sole discretion, to determine: the employees,
consultants and directors who shall be granted options; the times when an option
shall be granted; the number of shares of
<PAGE>
Common Stock to be subject to each option; the term of each option; the date
each option shall become exercisable; whether an option shall be exercisable in
whole, in part or in installments and, if in installments, the number of shares
of Common Stock to be subject to each installment, whether the installments
shall be cumulative, the date each installment shall become exercisable and the
term of each installment; whether to accelerate the date of exercise of any
option or installment; whether shares of Common Stock may be issued upon the
exercise of an option as partly paid and, if so, the dates when future
installments of the exercise price shall become due and the amounts of such
installments; the exercise price of each option; the form of payment of the
exercise price; whether to restrict the sale or other disposition of the shares
of Common Stock acquired upon the exercise of an option and, if so, whether and
under what conditions to waive any such restriction; whether and under what
conditions to subject all or a portion of the grant or exercise of an option or
the shares acquired pursuant to the exercise of an option to the fulfillment of
certain restrictions or contingencies as specified in the contract referred to
in Paragraph 11 hereof (the "Contract"), including without limitation,
restrictions or contingencies relating to entering into a covenant not to
compete with the Company, any of its Subsidiaries or a Parent (as defined in
Paragraph 19), to financial objectives for the Company, any of its Subsidiaries
or a Parent, a division of any of the foregoing, a product line or other
category, and/or to the period of continued employment of the optionee with the
Company, any of its Subsidiaries or a Parent, and to determine whether such
restrictions or contingencies have been met; whether an optionee is Disabled (as
defined in Paragraph 19); the amount necessary to satisfy the obligation of the
Company, a Subsidiary or Parent to withhold taxes or other amounts; the fair
market value of a share of Common Stock; to construe the respective Contracts
and the Plan; with the consent of the optionee, to cancel or modify an option,
provided, that the modified provision is permitted to be included in an option
granted under the Plan on the date of the modification; to prescribe, amend and
rescind rules and regulations relating to the Plan; to approve any provision of
the Plan or any option granted under the Plan, or any amendment to either, which
under Rule 16b-3 requires the approval of the Board of Directors, a committee of
non-employee directors or the stockholders to be exempt (unless otherwise
specifically provided herein); and to make all other determinations necessary or
advisable for administering the Plan. Any controversy or claim arising out of or
relating to the Plan, any option granted under the Plan or any Contract shall be
determined unilaterally by the Administrators in their sole discretion. The
determinations of the Administrators on the matters referred to in this
Paragraph 3 shall be conclusive and binding on the parties. No Administrator or
former Administrator shall be liable for any action, failure to act or
determination made in good faith with respect to the Plan or any option
hereunder.
4. ELIGIBILITY. The Administrators may from time to time, in their sole
discretion, consistent with the purposes of the Plan, grant options to (a)
employees (including officers and directors who are employees) of the Company or
any of its Subsidiaries, (b) consultants to the Company or any of its
Subsidiaries and (c) Non-Employee Directors (as defined in Paragraph 19). Such
options granted shall cover such number of shares of Common Stock as the
Administrators may determine, in their sole discretion, as set forth in the
applicable Contract;.
-2-
<PAGE>
5. EXERCISE PRICE. The exercise price of the shares of Common Stock under
each option shall be determined by the Administrators, in their sole discretion,
as set forth in the applicable Contract; provided, however, that the exercise
price of an option shall not be less than the fair market value of the Common
Stock subject to such option on the date of grant.
The fair market value of a share of Common Stock on any day shall be (a) if
the principal market for the Common Stock is a national securities exchange, the
average of the highest and lowest sales prices per share of Common Stock on such
day as reported by such exchange or on a composite tape reflecting transactions
on such exchange, (b) if the principal market for the Common Stock is not a
national securities exchange and the Common Stock is quoted on The Nasdaq Stock
Market ("Nasdaq"), and (i) if actual sales price information is available with
respect to the Common Stock, the average of the highest and lowest sales prices
per share of Common Stock on such day on Nasdaq, or (ii) if such information is
not available, the average of the highest bid and lowest asked prices per share
of Common Stock on such day on Nasdaq, or (c) if the principal market for the
Common Stock is not a national securities exchange and the Common Stock is not
quoted on Nasdaq, the average of the highest bid and lowest asked prices per
share of Common Stock on such day as reported on the OTC Bulletin Board Service
or by National Quotation Bureau, Incorporated or a comparable service; provided,
however, that if clauses (a), (b) and (c) of this Paragraph are all
inapplicable, or if no trades have been made or no quotes are available for such
day, the fair market value of the Common Stock shall be determined by the Board
of Directors by any method consistent with applicable regulations adopted by the
Treasury Department relating to stock options.
6. TERM. Except as may otherwise be expressly provided in the applicable
Contract, each option shall be for a term of 10 years from the date of grant and
shall not be exercisable until the first anniversary of the date of grant, at
which time it shall become exercisable as to 10% of the total number of shares
subject thereto, an additional 10% of the total number of shares subject thereto
on the second anniversary of the date of grant, an additional 15% of the total
number of shares subject thereto on each of the third and fourth anniversaries
of the date of grant, an additional 20% of the total number of shares subject
thereto on the fifth anniversary of the date of grant and an additional 30% of
the total number of shares subject thereto on the sixth anniversary of the date
of grant. Except as may otherwise be expressly provided in the applicable
Contract, the right to purchase shares under an option shall be cumulative, so
that if the full number of shares purchasable in any period shall not be
purchased, the balance may be purchased at any time or from time to time
thereafter, but not after the expiration of the option.
Options shall be subject to earlier termination as hereinafter provided.
7. EXERCISE. An option (or any part or installment thereof), to the extent
then exercisable, shall be exercised by giving written notice to the Company at
its principal office stating which option is being exercised, specifying the
number of shares of Common Stock as to
-3-
<PAGE>
which such option is being exercised and accompanied by payment in full of the
aggregate exercise price therefor (or the amount due on exercise if the
applicable Contract permits installment payments) (a) in cash or by certified
check or (b) if the applicable Contract permits, with previously acquired shares
of Common Stock having an aggregate fair market value on the date of exercise
(determined in accordance with Paragraph 5) equal to the aggregate exercise
price of all options being exercised, or with any combination of cash, certified
check or shares of Common Stock having such value. The Company shall not be
required to issue any shares of Common Stock pursuant to any such option until
all required payments, including any required withholding, have been made.
The Administrators may, in their sole discretion, permit payment of the
exercise price of an option by delivery by the optionee of a properly executed
notice, together with a copy of his irrevocable instructions to a broker
acceptable to the Administrators to deliver promptly to the Company the amount
of sale or loan proceeds sufficient to pay such exercise price. In connection
therewith, the Company may enter into agreements for coordinated procedures with
one or more brokerage firms.
A person entitled to receive Common Stock upon the exercise of an option
shall not have the rights of a stockholder with respect to such shares of Common
Stock until the date of issuance of a stock certificate for such shares or in
the case of uncertificated shares, an entry is made on the books of the
Company's transfer agent representing such shares; provided, however, that until
such stock certificate is issued or book entry is made, any optionee using
previously acquired shares of Common Stock in payment of an option exercise
price shall continue to have the rights of a stockholder with respect to such
previously acquired shares.
In no case may a fraction of a share of Common Stock be purchased or issued
under the Plan.
8. TERMINATION OF RELATIONSHIP. Except as may otherwise be expressly
provided in the applicable Contract, an optionee whose relationship with the
Company, its Parent and Subsidiaries as an employee or a consultant has
terminated for any reason (other than as a result of the death or Disability of
the optionee) may exercise the options granted to him as an employee or
consultant, to the extent exercisable on the date of such termination, at any
time within three months after the date of termination, but not thereafter and
in no event after the date the option would otherwise have expired; provided,
however, that if such relationship is terminated either (a) for Cause (as
defined in Paragraph 19), or (b) without the consent of the Company, such option
shall terminate immediately. Except as may otherwise be expressly provided in
the applicable Contract, options granted under the Plan to an employee or
consultant shall not be affected by any change in the status of the optionee so
long as the optionee continues to be an employee of, or a consultant to, the
Company, or any of the Subsidiaries or a Parent (regardless of having changed
from one to the other or having been transferred from one corporation to
another).
-4-
<PAGE>
For the purposes of the Plan, an employment relationship shall be deemed to
exist between an individual and the Company, any of its Subsidiaries or a Parent
if, at the time of the determination, the individual was an employee of such
corporation for purposes of Section 422(a) of the Code. As a result, an
individual on military, sick leave or other bona fide leave of absence shall
continue to be considered an employee for purposes of the Plan during such leave
if the period of the leave does not exceed 90 days, or, if longer, so long as
the individual's right to reemployment with the Company, any of its Subsidiaries
or a Parent is guaranteed either by statute or by contract. If the period of
leave exceeds 90 days and the individual's right to reemployment is not
guaranteed by statute or by contract, the employment relationship shall be
deemed to have terminated on the 91st day of such leave.
Except as may otherwise be expressly provided in the applicable Contract,
an optionee whose relationship with the Company as a Non-Employee Director
ceases for any reason (other than as a result of his death or Disability) may
exercise the options granted to him as a Non-Employee Director, to the extent
exercisable on the date of such termination, at any time within three months
after the date of termination, but not thereafter and in no event after the date
the option would otherwise have expired; provided, however, that if such
relationship is terminated for Cause, such option shall terminate immediately.
Except as may otherwise be expressly provided in the applicable Contract,
options granted to a Non-Employee Director shall not be affected by the optionee
becoming an employee of the Company, any of its Subsidiaries or a Parent.
Nothing in the Plan or in any option granted under the Plan shall confer on
any optionee any right to continue in the employ of, or as a consultant to, the
Company, any of its Subsidiaries or a Parent, or as a director of the Company,
or interfere in any way with any right of the Company, any of its Subsidiaries
or a Parent to terminate the optionee's relationship at any time for any reason
whatsoever without liability to the Company, any of its Subsidiaries or a
Parent.
9. DEATH OR DISABILITY OF AN OPTIONEE. Except as may otherwise be expressly
provided in the applicable Contract, if an optionee dies (a) while he is an
employee of, or consultant to, the Company, any of its Subsidiaries or a Parent,
(b) within three months after the termination of such relationship (unless such
termination was for Cause or without the consent of the Company) or (c) within
one year following the termination of such relationship by reason of his
Disability, the options that were granted to him as an employee or consultant
may be exercised, to the extent exercisable on the date of his death, by his
Legal Representative (as defined in Paragraph 19) at any time within one year
after death, but not thereafter and in no event after the date the option would
otherwise have expired.
Except as may otherwise be expressly provided in the applicable Contract,
any optionee whose relationship as an employee of, or consultant to, the
Company, its Parent and Subsidiaries has terminated by reason of such optionee's
Disability may exercise the options that
-5-
<PAGE>
were granted to him as an employee or consultant, to the extent exercisable upon
the effective date of such termination, at any time within one year after such
date, but not thereafter and in no event after the date the option would
otherwise have expired.
Except as may otherwise be expressly provided in the applicable Contract,
any optionee whose relationship as a Non-Employee Director ceases as a result of
his death or Disability may exercise the options that were granted to him as a
Non-Employee Director, to the extent exercisable on the date of such
termination, at any time within one year after the date of termination, but not
thereafter and in no event after the date the option would otherwise have
expired. In the case of the death of the Non-Employee Director, the option may
be exercised by his Legal Representative.
10. COMPLIANCE WITH SECURITIES LAWS. It is a condition to the exercise of
any option that either (a) a Registration Statement under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the shares of Common
Stock to be issued upon such exercise shall be effective and current at the time
of exercise, or (b) there is an exemption from registration under the Securities
Act for the issuance of the shares of Common Stock upon such exercise. Nothing
herein shall be construed as requiring the Company to register shares subject to
any option under the Securities Act or to keep any Registration Statement
effective or current.
The Administrators may require, in their sole discretion, as a condition to
the receipt of an option or the exercise of any option that the optionee execute
and deliver to the Company his representations and warranties, in form,
substance and scope satisfactory to the Administrators, which the Administrators
determines are necessary or convenient to facilitate the perfection of an
exemption from the registration requirements of the Securities Act, applicable
state securities laws or other legal requirement, including without limitation
that (a) the shares of Common Stock to be issued upon the exercise of the option
are being acquired by the optionee for his own account, for investment only and
not with a view to the resale or distribution thereof, and (b) any subsequent
resale or distribution of shares of Common Stock by such optionee will be made
only pursuant to (i) a Registration Statement under the Securities Act which is
effective and current with respect to the shares of Common Stock being sold, or
(ii) a specific exemption from the registration requirements of the Securities
Act, but in claiming such exemption, the optionee shall prior to any offer of
sale or sale of such shares of Common Stock provide the Company with a favorable
written opinion of counsel satisfactory to the Company, in form, substance and
scope satisfactory to the Company, as to the applicability of such exemption to
the proposed sale or distribution.
In addition, if at any time the Administrators shall determine, in their
sole discretion, that the listing or qualification of the shares of Common Stock
subject to any option on any securities exchange, Nasdaq or under any applicable
law, or the consent or approval of any governmental agency or regulatory body,
is necessary or desirable as a condition to, or in
-6-
<PAGE>
connection with, the granting of an option or the issuing of shares of Common
Stock thereunder, such option may not be granted and such option may not be
exercised in whole or in part unless such listing, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Company.
11. CONTRACTS. Each option shall be evidenced by an appropriate Contract
which shall be duly executed by the Company and the optionee, and shall contain
such terms, provisions and conditions not inconsistent herewith as may be
determined by the Administrators. The terms of each option and Contract need not
be identical.
12. ADJUSTMENTS UPON CHANGES IN COMMON STOCK. Notwithstanding any other
provision of the Plan, in the event of a stock dividend, recapitalization,
merger in which the Company is the surviving corporation, spin-off, split-up,
combination or exchange of shares or the like which results in a change in the
number or kind of shares of Common Stock which is outstanding immediately prior
to such event, the aggregate number and kind of shares subject to the Plan, the
aggregate number and kind of shares subject to each outstanding option and the
exercise price thereof shall be appropriately adjusted by the Board of
Directors, whose determination shall be conclusive and binding on all parties.
Such adjustment may provide for the elimination of fractional shares which might
otherwise be subject to options without payment therefor.
If there is a change of control of the Company (as defined below), then (i)
all outstanding options shall become fully exercisable whether or not the
vesting conditions, if any, set forth in the related option agreements have been
satisfied, and each optionee shall have the right to exercise his or her options
prior to such change of control and for as long thereafter as the option shall
remain in effect in accordance with its terms and the provisions hereof, and
(ii) all restricted stock Awards shall become fully-vested, and all restrictions
on transferability and all rights of the Company to repurchase shares of
restricted stock shall terminate at the effective time of such change in
control.
If the shareholders of the Company receive capital stock of another
corporation ("Exchange Stock") in exchange for their shares of Common Stock in
any transaction involving a merger (other than a merger of the Company in which
the holders of Common Stock immediately prior to the merger have the same
proportionate ownership of Common Stock in the surviving corporation immediately
after the merger), consolidation, acquisition of property or stock, separation
or reorganization (other than a mere reincorporation or the creation of a
holding company), all options granted hereunder shall be converted into options
to purchase shares of Exchange Stock unless the Company and the corporation
issuing the Exchange Stock, in their sole discretion, determine that any or all
such options granted hereunder shall not be converted into options to purchase
shares of Exchange Stock but instead shall terminate, subject to the provisions
of subparagraph (b) above and the optionees' prior exercise rights thereunder.
The amount and price of converted options shall be determined by adjusting the
amount and price of the options
-7-
<PAGE>
granted hereunder in the same proportion as used for determining the number of
shares of Exchange Stock the holders of the Common Stock receive in such merger,
consolidation, acquisition of property or stock, separation or reorganization.
In accordance with subparagraph (b) above, the converted options shall be fully
vested whether or not the vesting requirements set forth in the option agreement
have been satisfied.
All adjustments under this paragraph 12 shall be made by the Board, and its
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive.
For purposes hereof, a change in control of the Company is deemed to occur
if (1) there occurs (a) any consolidation or merger in which the Company is not
the continuing or surviving entity or pursuant to which shares of the Common
Stock would be converted into cash, securities or other property, other than a
merger of the Company in which the holders of the Common Stock immediately prior
to the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, or (b) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all or substantially all the Company's assets; (2) the
Company's stockholders approve any plan or proposal for the liquidation or
dissolution of the Company; (3) any person (as such term is used in Sections
13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), shall become the beneficial owner (within the meaning of Rule
13d-3 under the Exchange Act) of 30% or more of the Common Stock other than
pursuant to a plan or arrangement entered into by such person and the Company;
or (4) during any period of two consecutive years, individuals who at the
beginning of such period constitute the entire Board of Directors shall cease
for any reason to constitute a majority of the Board unless the election, or
nomination for election by the Company's stockholders, of each new director was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of the period.
13. AMENDMENTS AND TERMINATION OF THE PLAN. The Plan was adopted by the
Board of Directors on September 9, 1996. No option may be granted under the Plan
after September 9, 2006. The Board of Directors may at any time suspend or
terminate the Plan, in whole or in part, or amend it from time to time in such
respects as it may deem advisable, including, without limitation, to comply with
the provisions of Rule 16b-3 or any change in applicable law, regulations,
rulings or interpretations of administrative agencies. No termination,
suspension or amendment of the Plan shall, without the consent of the optionee,
adversely affect his rights under any option granted under the Plan. The power
of the Administrators to construe and administer any option granted under the
Plan prior to the termination or suspension of the Plan nevertheless shall
continue after such termination or during such suspension.
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<PAGE>
14. NON-TRANSFERABILITY. No option granted under the Plan shall be
transferable otherwise than by will or the laws of descent and distribution, and
options may be exercised, during the lifetime of the optionee, only by the
optionee or his Legal Representatives. Except to the extent provided above,
options may not be assigned, transferred, pledged, hypothecated or disposed of
in any way (whether by operation of law or otherwise) and shall not be subject
to execution, attachment or similar process, and any such attempted assignment,
transfer, pledge, hypothecation or disposition shall be null and void ab initio
and of no force or effect.
15. WITHHOLDING TAXES. The Company, a Subsidiary or Parent may withhold (a)
cash or (b) with the consent of the Administrators (in the Contract or
otherwise), shares of Common Stock to be issued upon exercise of an option
having an aggregate fair market value on the relevant date (determined in
accordance with Paragraph 5) or a combination of cash and shares, in an amount
equal to the amount which the Company, a Subsidiary or Parent determines is
necessary to satisfy its obligation to withhold Federal, state and local income
taxes or other amounts incurred by reason of the grant, vesting, exercise or
disposition of an option, or the disposition of the underlying shares of Common
Stock. Alternatively, the Company, a Subsidiary or Parent may require the holder
to pay to it such amount, in cash, promptly upon demand.
16. LEGENDS; PAYMENT OF EXPENSES. The Company may endorse such legend or
legends upon the certificates for shares of Common Stock issued upon exercise of
an option under the Plan and may issue such "stop transfer" instructions to its
transfer agent in respect of such shares as it determines, in its discretion, to
be necessary or appropriate to (a) prevent a violation of, or to perfect an
exemption from, the registration requirements of the Securities Act and any
applicable state securities laws, or (b) implement the provisions of the Plan or
any agreement between the Company and the optionee with respect to such shares
of Common Stock.
The Company shall pay all issuance taxes with respect to the issuance of
shares of Common Stock upon the exercise of an option granted under the Plan, as
well as all fees and expenses incurred by the Company in connection with such
issuance.
17. USE OF PROCEEDS. The cash proceeds received upon the exercise of an
option under the Plan shall be added to the general funds of the Company and
used for such corporate purposes as the Board of Directors may determine.
18. SUBSTITUTIONS AND ASSUMPTIONS OF OPTIONS OF CERTAIN CONSTITUENT
CORPORATIONS. Anything in this Plan to the contrary notwithstanding, the Board
of Directors may substitute new options for prior options of a Constituent
Corporation (as defined in Paragraph 19) or assume the prior options of such
Constituent Corporation.
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<PAGE>
19. DEFINITIONS. For purposes of the Plan, the following terms shall be
defined as set forth below:
(a) "Cause" shall mean (i) in the case of an employee or consultant,
if there is a written employment or consulting agreement between the
optionee and the Company, any of its Subsidiaries or a Parent which defines
termination of such relationship for cause, cause as defined in such
agreement, and (ii) in all other cases, cause as defined by applicable
state law.
(b) "Constituent Corporation" shall mean any corporation which engages
with the Company, any of its Subsidiaries or a Parent in a transaction to
which Section 424(a) of the Code would apply if the option assumed or
substituted were an incentive stock option, or any Parent or any Subsidiary
of such corporation.
(c) "Disability" shall mean a permanent and total disability within
the meaning of Section 22(e)(3) of the Code.
(d) "Legal Representative" shall mean the executor, administrator or
other person who at the time is entitled by law to exercise the rights of a
deceased or incapacitated optionee with respect to an option granted under
the Plan.
(e) "Non-Employee Director" shall mean a person who is a director of
the Company, but is not an employee of the Company, any of its Subsidiaries
or a Parent.
(f) "Parent" shall have the same definition as "parent corporation" in
Section 424(e) of the Code.
(g) "Subsidiary" shall have the same definition as "subsidiary
corporation" in Section 424(f) of the Code.
20. GOVERNING LAW; CONSTRUCTION. The Plan, the options and Contracts
hereunder and all related matters shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without regard to conflict
of law provisions.
Neither the Plan nor any Contract shall be construed or interpreted with
any presumption against the Company by reason of the Company causing the Plan or
Contract to be drafted. Whenever from the context it appears appropriate, any
term stated in either the singular or plural shall include the singular and
plural, and any term stated in the masculine, feminine or neuter gender shall
include the masculine, feminine and neuter.
21. PARTIAL INVALIDITY. The invalidity, illegality or unenforceability of
any provision in the Plan, any option or Contract shall not affect the validity,
legality or
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<PAGE>
enforceability of any other provision, all of which shall be valid, legal and
enforceable to the fullest extent permitted by applicable law.
-11-
INTEGRATED HEALTH SERVICES, INC.
1998 STOCK COMPENSATION PLAN
1. PURPOSE OF THE PLAN
This 1998 Stock Compensation Plan (the "Plan") is intended as a means
whereby Integrated Health Services, Inc., a Delaware corporation
(hereinafter "IHS"), may provide for awards of stock options and stock
grants to certain employees and Consultants (as defined below) of IHS and
its subsidiaries and affiliates, thereby helping to encourage the judgment,
initiative and efforts of such employees and Consultants by further
aligning their interests with those of the stockholders of IHS. Stock
options granted pursuant to the Plan are not incentive stock options, as
defined in Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code").
2. DEFINITIONS
(a) "Award" means an award of a stock option or a stock grant.
(b) "Board of Directors" means the Board of Directors of IHS.
(c) "Committee" shall have the meaning set forth in Section 4(a).
(d) "Common Stock" means the common stock of IHS, par value $.001 per
share, as presently constituted, subject to adjustment, and including other
securities, as provided in Section 7.
(e) "Consultant" means any person designated by the Corporation as an
independent contractor.
(f) "Corporation" means IHS and its Subsidiaries and affiliates, unless the
context otherwise requires.
(g) "Eligible Participants" means employees of the Corporation, directors
of a Subsidiary or Consultants of the Corporation as described in Section
5.
(h) "Fair Market Value" means, as of any date, and unless the Committee
shall specify otherwise, the mean between the high and the low market
prices for the Common Stock reported for that date on the composite tape
for securities listed on the New York Stock Exchange or, if the Common
Stock did not trade on the New York Stock Exchange on the date in question,
then for the next preceding date for which the Common Stock traded on the
New York Stock Exchange.
(i) "Subsidiary" means any corporation of which IHS owns, directly or
indirectly, fifty percent (50%) or more of the voting or capital stock, or
any partnership of which IHS
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owns, directly or indirectly, a fifty percent (50%) or more participating
interest or the general partner of which is a Subsidiary.
3. COMMON STOCK SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 7, the maximum number of
shares of Common Stock which may be issued pursuant to the Plan shall not
exceed 500,000. Shares issued under the Plan may be authorized and unissued
shares of Common Stock or shares of Common Stock reacquired by IHS. All or
any shares of Common Stock subject to a stock option or stock grant which
for any reason are not issued or are reacquired under the stock option or
stock grant may again be made subject to a stock option or stock grant
under the Plan.
4. ADMINISTRATION OF THE PLAN
(a) Composition of the Committee or Subcommittee. The Plan shall be
administered by the Board of Directors and/or by a committee (a
"Committee") or a subcommittee (a "Subcommittee") of the Board of
Directors, as appointed from time to time by the Board of Directors. Any
such Subcommittee shall be composed of one or more directors of IHS (who
may but need not be members of the Committee). Any action by the
Subcommittee shall be deemed for all purposes to have been taken by the
Committee and all references in this Plan or in an Award to the Committee
shall include any Subcommittee acting within the scope of its delegation
(with any references to the Subcommittee in this Section 4 being for
purposes of clarification and not so as to limit the authority of any
Subcommittee under other Sections of the Plan). The Board of Directors
shall fill vacancies on and from time to time may remove or add members to
the Committee or Subcommittee. The Committee or Subcommittee shall have the
authority to make Awards under the Plan to Eligible Participants, to
determine all terms of such Awards, and/or to administer the Plan or any
aspect of it. The Committee or Subcommittee shall act pursuant to a
majority vote or unanimous written consent. The Committee or Subcommittee
may designate the Secretary of IHS or other IHS employees to assist it in
the administration of the Plan, and may grant authority to such persons to
execute agreements evidencing Awards or other documents entered into under
the Plan on behalf of the Committee or Subcommittee or on behalf of the
Corporation. However, the Committee or Subcommittee may not delegate to
such designee the authority to determine which persons are Eligible
Participants or which Eligible Participants will receive Awards.
(b) Powers of the Committee or Subcommittee. Subject to the express
provisions of the Plan, the Committee or Subcommittee shall be authorized
and empowered to do all things necessary or desirable in connection with
the administration of the Plan, including, without limitation: (a) to
prescribe, amend and rescind rules relating to the Plan and to define terms
not otherwise defined herein; (b) to prescribe the form of documentation
used to evidence any stock option or stock grant awarded hereunder,
including provision for such terms as it considers necessary or desirable;
(c) to establish and verify the extent of satisfaction of any conditions to
exercisability applicable to stock options or to receipt or vesting of
stock grants; (d) to determine whether, and the extent to which,
adjustments are required pursuant to Section 7 hereof; and (e) to interpret
and construe the Plan, any rules and regulations under the Plan and the
terms and conditions of any stock option or stock grant
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<PAGE>
awarded hereunder, and to make exceptions to any procedural provisions in
good faith and for the benefit of IHS. Notwithstanding any provision of the
Plan, the Board of Directors may at any time limit the authority of the
Committee or Subcommittee to administer the Plan.
(c) Determinations of the Committee or Subcommittee. All decisions,
determinations and interpretations by the Committee or Subcommittee
regarding the Plan, any rules and regulations under the Plan and the terms
and conditions of any stock option or stock grant awarded hereunder, shall
be final and binding on all Eligible Participants and holders of stock
options and stock grants. The Committee or Subcommittee may consider such
factors as it deems relevant, in its sole and absolute discretion, in
making such decisions, determinations and interpretations including,
without limitation, the recommendations or advice of any officer or other
employee of the Corporation and such attorneys, consultants and accountants
as it may select.
5. ELIGIBLE PARTICIPANTS
Any person who is an employee of the Corporation, a director of a
Subsidiary or a Consultant of the Corporation shall be eligible (together,
"Eligible Participants") for the award of stock options and/or stock grants
hereunder unless the grant of an Award to such person would require the
Plan to be approved by the stockholders of IHS under Rule 312.03(a) of the
rules of the New York Stock Exchange.
6. GRANT, TERMS AND CONDITIONS OF AWARDS
(a) General Terms and Conditions. Stock options and stock grants awarded
pursuant to the Plan need not be identical but each stock option and stock
grant shall be subject to the following general terms and conditions:
(1) Terms and Restrictions Upon Shares. The Committee may (but need
not) provide that the shares of Common Stock issued upon exercise of a
stock option or receipt of a stock grant shall be subject to such
further conditions, restrictions or agreements as the Committee in its
discretion may specify prior to the exercise of such stock option or
receipt of such stock grant, including without limitation, deferrals
on issuance, conditions on vesting or transferability, and forfeiture
or repurchase provisions. The Committee may establish rules for the
deferred delivery of Common Stock upon exercise of a stock option or
receipt of a stock grant with the deferral evidenced by use of "Stock
Units" equal in number to the number of shares of Common Stock whose
delivery is so deferred. A "Stock Unit" is a bookkeeping entry
representing an amount equivalent to the Fair Market Value of one
share of Common Stock. Stock Units represent an unfunded and unsecured
obligation of the Corporation except as otherwise provided by the
Board of Directors. Settlement of Stock Units upon expiration of the
deferral period shall be made in Common Stock or otherwise as
determined by the Committee. The amount of Common Stock, or other
settlement medium, to be so distributed may be increased by an
interest factor or by dividend equivalents. Until a Stock Unit is
settled, the number of shares of Common Stock represented by a
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<PAGE>
Stock Unit shall be subject to adjustment pursuant to Section 7.
(2) Adequate Consideration. To the extent prohibited by Section 152 of
the Delaware General Corporation Law, stock options and stock grants
may not be awarded in consideration of future services. In addition,
the consideration for any stock grant shall not be less than the par
value of the Common Stock to be awarded.
(3) Other Terms and Conditions. No holder of a stock option or stock
grant shall have any rights as a stockholder with respect to any
shares of Common Stock subject to a stock option or stock grant
hereunder until said shares have been issued. Stock options and stock
grants may also contain such other provisions, which shall not be
inconsistent with any of the foregoing terms, as the Committee shall
deem appropriate. The Committee may waive conditions to and/or
accelerate exercisability of a stock option or receipt or vesting of a
stock grant, either automatically upon the occurrence of specified
events (including in connection with a change of control of the
Corporation as described in Section 7) or otherwise in its discretion.
(a) Stock Option Price. The exercise price for each stock option shall be
established by the Committee. The exercise price shall not be less than the
Fair Market Value of the stock on the date of grant. The exercise price
shall be paid in full at the time of exercise. The exercise price shall be
payable in cash, by payment under an arrangement with a broker where
payment is made pursuant to an irrevocable direction to the broker to
deliver all or part of the proceeds from the sale of the option shares to
the Corporation, by the surrender of shares of Common Stock owned by the
optionholder exercising the option and having a Fair Market Value on the
date of exercise equal to the exercise price but only if such will not
result in an accounting charge to the Corporation, or by any combination of
the foregoing.
(b) Transferability of Option. Unless otherwise provided by the Committee,
each stock option shall be transferable only by will or the laws of descent
and distribution.
(c) Stock Grant Terms. Subject to Section 6(a)(2), stock grants under the
Plan may, in the sole discretion of the Committee, but need not, be
conditioned upon the Eligible Participant paying cash or cash-equivalent
consideration or agreeing to forego other compensation for the shares of
Common Stock covered by the stock grant. Stock grants under the Plan may be
subject to such conditions, restrictions or other vesting terms as are
established in the sole discretion of the Committee. The conditions,
restrictions or vesting terms may be contingent upon the passage of time,
continued service or achievement of Corporation or individual performance
goals, as specified by the Committee.
4
<PAGE>
7. ADJUSTMENT OF AND CHANGES IN SECURITIES
(a) If the outstanding securities of the class(es) then subject to the Plan
are increased, decreased or exchanged for or converted into cash, property
or a different number or kind of shares or other securities, or if cash,
property or shares or other securities are distributed in respect of such
outstanding securities, in either case as a result of a reorganization,
reclassification, dividend (other than a regular, quarterly cash dividend)
or other distribution, stock split, reverse stock split, spin-off or the
like, or if substantially all of the property and assets of the Corporation
are sold, then, unless the terms of such transaction shall provide
otherwise, the maximum number and type of shares or other securities that
may be subject to Awards under the Plan shall be appropriately adjusted.
The Committee shall determine in its sole discretion the appropriate
adjustment to be effected pursuant to the immediately preceding sentence.
In addition, in connection with any such change in the class(es) of
securities then subject to the Plan, the Committee may make appropriate and
proportionate adjustments in the number and type of shares or other
securities or cash or other property that may be acquired pursuant to stock
options and stock grants theretofore awarded under the Plan and the
exercise price of such options or price of such stock grants.
(b) No right to purchase fractional shares or fractions of other securities
shall result from any adjustment in stock options or stock grants pursuant
to this Section. In case of any such adjustment, the shares or other
securities subject to the stock option or stock grant shall be rounded down
to the nearest whole share of Common Stock or equivalent other security, as
the case may be.
8. COMPLIANCE WITH OTHER LAWS AND REGULATIONS
The Plan, the grant and exercise of Awards thereunder, and the obligation
of IHS to sell, issue or deliver shares of Common Stock under such Awards,
shall be subject to all applicable federal, state and foreign laws, rules
and regulations and to such approvals by any governmental or regulatory
agency as may be required. IHS shall not be required to register in the
name of the holder of the Award or deliver any shares of Common Stock if in
the opinion of the Committee such action would violate any applicable
federal, state or foreign laws, rules or regulations of requires as a
condition any approvals by any governmental or regulatory agency which have
not theretofore been obtained. IHS shall not be required to register in the
name of the holder of the Award or deliver any shares of Common Stock under
the Plan or any Award prior to the completion of any registration or
qualification of such shares under any federal, state or foreign law or any
ruling or regulation of any government body which the Committee shall, in
its sole discretion, determine to be necessary or advisable.
Without limiting the foregoing, IHS shall not be required to register in
the name of the holder of the Award or deliver any shares of Common Stock
under the Plan or any Award unless (i) the Eligible Participant or other
person in whose name such shares are to be registered or to whom such
shares are to be delivered is an "employee" or other person as to whom
offers and sales of securities can be registered under the Securities Act
of 1933 on a Form S-8, (ii) the Company at the time qualifies for use of
Form S-8, and (iii) a Form S-8 covering such offer and/or sales has
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<PAGE>
been filed and is effective. The Corporation shall be under no obligation
to file a registration statement covering offers and sales under the Plan
other than as described in the preceding sentence. In the absence of
registration on Form S-8, IHS may in its discretion rely on the
availability of an exemption from registration under the Securities Act of
1933 and any other applicable federal, state and foreign law for the offer,
sale and delivery of shares of Common Stock under the Plan or any Award,
provided that in any such case IHS may condition the offer, sale or
delivery of shares of Common Stock upon the Eligible Participant or other
person in whose name such shares are to be registered or to whom such
shares are to be delivered upon (i) such person providing IHS in writing
representations and warranties and requested by the Committee, including
but not limited to a representation that such person is acquiring such
shares for his or her own account for investment and not with a view to, or
for sale in connection with, the distribution of any part thereof, that
such person is a sophisticated investor and that such person has had the
opportunity to review relevant financial and other information regarding
the Corporation, (ii) the certificates representing such shares bearing
such legends as the Committee may deem necessary or appropriate, and (iii)
the Company receiving a legal opinion from such person as to the
availability of any such exemption.
9. TAX WITHHOLDING
To the extent required by applicable federal, state, local or foreign law,
an Eligible Participant or holder of an Award shall make arrangements
satisfactory to the Committee for the satisfaction of any withholding tax
obligations that arise by reason of any issuance of shares under the Plan.
The Corporation shall not be required to issue shares of Common Stock or to
recognize the disposition of such shares until such obligations are
satisfied. The Committee may permit these obligations to be satisfied by
any means permitted under Section 6(b) for the payment of the exercise
price of a stock option.
10. AWARDS BY SUBSIDIARIES
In the case of an Award to any Eligible Participant of a Subsidiary, such
Award may, if the Committee so directs, be implemented by IHS issuing any
subject shares to the Subsidiary, for such lawful consideration as the
Committee may determine, upon the condition or understanding that the
Subsidiary will transfer the shares to the holder of the Award in
accordance with the terms of the Award specified by the Committee pursuant
to the provisions of the Plan. Notwithstanding any other provision hereof,
such Award may be issued by and in the name of the Subsidiary and shall be
deemed granted on such date as the Committee shall determine.
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11. EFFECTIVE DATE, AMENDMENT AND TERMINATION OF PLAN
This Plan shall become effective upon its approval by the Board of
Directors. Unless earlier suspended or terminated by the Board of
Directors, or extended as provided below, no stock options or stock grants
may be awarded after the tenth anniversary of the effective date of the
Plan. The Board of Directors or the Committee may from time to time extend
the effective term of the Plan and otherwise amend the Plan as determined
appropriate, without action by IHS's stockholders except to the extent
required by applicable law. References in the Plan and in writings
evidencing and setting the terms of Awards which refer to the Code or other
applicable law shall also be deemed to refer to any applicable successor
provisions thereof unless otherwise determined by the Committee. The Plan
may be earlier terminated at such earlier time as the Board of Directors
may determine.
12. APPLICABLE LAW AND FORUM
This Plan and any rights hereunder shall be interpreted and construed in
accordance with the laws of the State of Delaware and applicable federal
law. Any claim, dispute or other matter in question of any kind relating to
the Plan or any Award shall be brought only in the appropriate federal or
state court located within or with closest geographic proximity to the
principal executive offices of IHS.
7
Integrated Health Services, Inc.
Amended and Restated
Key Employee Supplemental
Executive Retirement Plan
("Plan A")
<PAGE>
AMENDED AND RESTATED
INTEGRATED HEALTH SERVICES, INC. KEY EMPLOYEE
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
("PLAN A")
TABLE OF CONTENTS Page
PREAMBLE ............................................................1
ARTICLE I - GENERAL.....................................................2
ARTICLE II - DEFINITIONS AND USAGE.......................................3
ARTICLE III - ELIGIBILITY AND PARTICIPATION...............................9
ARTICLE IV - RETIREMENT BENEFIT.........................................10
ARTICLE V - PARTICIPANT ACCOUNT........................................12
ARTICLE VI - PAYMENT OF BENEFITS .......................................14
ARTICLE VII - PAYMENT OF BENEFIT ON OR AFTER DEATH ......................15
ARTICLE VIII - ADMINISTRATION.............................................16
ARTICLE IX - CLAIMS PROCEDURE...........................................18
ARTICLE X - MISCELLANEOUS PROVISIONS...................................20
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AMENDED AND RESTATED
INTEGRATED HEALTH SERVICES, INC. KEY EMPLOYEE
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
PREAMBLE
WHEREAS, the Company established the Integrated Health Services, Inc. Key
Employee Supplemental Executive Retirement Plan ("Plan A") effective as of March
1, 1996;
WHEREAS, the Company desires to amend and restate such Plan;
NOW THEREFORE, the Company amends and restates such Plan, effective November 18,
1997, as hereinafter provided:
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ARTICLE I
GENERAL
Section 1.1 Effective Date. The Plan became effective as of March 1, 1996.
Section 1.2 Intent. The Plan is intended to be an unfunded plan primarily for
the purpose of providing deferred compensation to a select group of management
or highly compensated employees, as such group is described under Sections
201(2), 301(a)(3), and 401(a)(1) of ERISA.
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ARTICLE II
DEFINITIONS AND USAGE
Section 2.1 Definitions. Wherever used in the Plan, the following words and
phrases shall have the meaning set forth below unless the context plainly
requires a different meaning:
"Actuarial Equivalent" means a benefit of equivalent value, computed on the
basis of (i) the 1983 Group Annuity Mortality Table for males and (ii) an
interest rate equal to the average yield on 30-year United States Treasury
securities for the month preceding the month in which the Participant's
employment with the Employer terminates.
"Average Annual Compensation" means a Participant's highest Compensation
for any calendar year during his ten most recent calendar years of
employment.
"Beneficiary" means any individual or trust designated by the Participant
as a beneficiary with respect to his Retirement Benefit or any benefit
under Article V in his most recent written designation filed with the
Committee before his death; provided, however, that if the Participant
fails to make a designation or if no individual so designated is alive, and
no trust so designated is in existence, the term "Beneficiary" shall mean
in order of priority (a) the spouse of the deceased Participant, or (b) if
no spouse is alive, the surviving children of the deceased Participant, or
(c) if no children are alive, the parent or parents of the deceased
Participant, or (d) if no parent is alive, the legal representative of the
deceased Participant's estate.
"Board" means the Board of Directors of the Company.
"Change of Control" means, with respect to any particular Participant, the
occurrence of one or more of the following: (i) any "person," as such term
is used in Section 13(d) of the Securities Exchange Act of 1934 (the "1934
Act"), other than the Participant and any "group" (as such term is used in
Section 13(d)(3) of the 1934 Act) of which the Participant is a member,
becomes a "beneficial owner," as such term is used in Rule 13d-3
promulgated under the 1934 Act, of 20% or more of the "Voting Stock" (as
defined below) of the Company; (ii) the majority of the Board consists of
individuals other than Incumbent Directors, which term
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means the members of the Board on the effective date of the Plan; provided
that any person becoming a director subsequent to such date whose election
or nomination for election was supported by two-thirds of the directors who
then comprised the Incumbent Directors shall be considered to be an
Incumbent Director, unless such election or nomination was the result of
any actual or threatened election contest of a type contemplated by
Regulation 14a-11 under the 1934 Act; (iii) the Company adopts any plan of
liquidation providing for the distribution of all or substantially all of
its assets; (iv) there is consummated any consolidation, reorganization or
merger of the Company in which the Company is not a continuing or surviving
corporation or pursuant to which all or substantially all of the Company's
Voting Stock is converted into cash, securities or other property, (unless
the shareholders of the Company immediately prior to such consolidation,
reorganization or merger beneficially own, directly or indirectly, in
substantially the same proportion as they owned the voting stock of the
Company, all of the Voting Stock or other ownership interests of the entity
or entities, if any, that succeed to the business of the Company); (v) in
any transaction not described in preceeding clause (iv), all or
substantially all of the assets or business of the Company is disposed of
pursuant to a merger, consolidation or other transaction (unless the
shareholders of the Company immediately prior to such merger, consolidation
or other transaction beneficially own, directly or indirectly, in
substantially the same proportion as they owned the voting stock of the
Company, all of the Voting Stock or other ownership interests of the entity
or entities, if any, that succeed to the business of the Company); or (vi)
the Company combines with another company and is the surviving corporation
but, immediately after the combination, the shareholders of the Company
immediately prior to the combination hold, directly or indirectly, 50% or
less of the shares of Voting Stock of the combined company (there being
excluded from the number of such shares held by such shareholders, but not
from the Voting Stock of the combined company, any such shares received by
"affiliates", as such term is defined in the rules of the United States
Securities and Exchange Commission, of such other company in exchange for
stock of such other company). For purposes of the preceding sentence,
"Voting Stock" shall mean capital stock of any class or classes having
general voting power under ordinary circumstances, in the absence of
contingencies, to elect the directors of a corporation.
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"Code" means the Internal Revenue Code of 1986, as amended from time to
time. Any reference to a particular Code section shall include any
provision which modifies, replaces, or supersedes it.
"Committee" means the individual or individuals appointed by the Board to
perform the functions described in Article IX.
"Company" means Integrated Health Services, Inc., a corporation organized
under the laws of the state of Delaware, and any successor thereto.
"Compensation" means the total compensation paid to a Participant by all
Employers during the period in question, as reported on IRS Form W-2,
including bonuses but excluding stock option gains and, unless otherwise
determined by the Committee, excluding other deferred compensation.
"Disability" means, except as otherwise provided in a Participant's
Employment Agreement, an illness or injury of a potentially permanent
nature, expected to last for a continuous period of not less than 12
months, which prevents the Employee from engaging in any occupation for
wage or profit for which the Employee is reasonably fitted by training,
education or experience. Such Disability shall be determined by the
Committee, in its sole discretion, based upon appropriate medical advice
and examination and certification by a physician selected by the Employer,
except to the extent that procedures for determining Disability are set
forth in a Participant's Employment Agreement.
"Eligible Employee" means, for any Plan Year (or portion thereof), a person
employed by an Employer who is a member of a select group of management or
highly compensated employees of the Employer as such group is described in
Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA.
"Employee" means any common law employee of an Employer.
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"Employee Deferral Contribution" means an amount of compensation that a
Participant elects to defer pursuant to Section 5.2. Such amounts shall
always be fully vested under the Plan.
"Employer" means the Company and any of its wholly owned subsidiaries that
adopts the Plan with the written consent of the Company. For purposes of
determining a Participant's eligibility for a Retirement Benefit,
termination of employment with "the Employer" means that none of the
companies qualifying as an Employer continues to employ the Participant as
an Employee.
"Employment Agreement" means the written employment agreement, if any,
between a Participant and the Company that is in effect as of a particular
date. In the event that one or more written employment agreements were
previously in effect as to a Participant but none is in effect as of a
particular date, "Employment Agreement" shall mean the written employment
agreement, if any, between the Participant and the Company most recently in
effect, determined as of the particular date.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time. Any reference to a particular ERISA section
shall include any provision which modifies, replaces, or supersedes it.
"Funding" means any contribution to Trust A, Trust B or Trust C, as the
case may be. "Funding" shall be in the form of cash.
"Normal Retirement Date" means the first day of the month coincident with
or next following the Participant's attainment of Normal Retirement Age.
Normal Retirement Age shall be (1) in the case of Robert N. Elkins, his
62nd birthday and (2) in the case of any other Participant, the
Participant's 58th birthday, assuming such Participant has at least five
(5) Years of Service.
"Participant" means an Eligible Employee whose name appears in Appendix II,
attached hereto.
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"Participant Account" and "Account" mean the bookkeeping entry established
for each Participant under Section 5.1.
"Plan" means the Integrated Health Services, Inc. Key Employee Supplemental
Executive Retirement Plan ("Plan A"), as it is amended from time to time.
"Plan Year" means the Plan's accounting year of twelve (12) months
commencing January 1st of each year and ending the following December 31st,
except that the first Plan Year shall commence January 31st, 1996.
"Retirement Benefit" means the benefit determined under Article IV of this
Plan.
"Termination for Cause" means, except as otherwise provided in a
Participant's Employment Agreement, the termination of a Participant's
employment as a result of any of the following events: (i) serious, willful
misconduct in respect of his duties for the Employer, (ii) conviction of a
felony or perpetration of a common law fraud, (iii) willful failure to
comply with applicable laws with respect to the execution of the Employer's
business operations, (iv) theft, fraud, embezzlement, dishonesty or other
conduct which has resulted or is likely to result in material economic
damage to the Company, any Employer, or any of their affiliates or
subsidiaries, or (v) failure to comply with requirements of the Employer's
drug and alcohol abuse policies, if any. Whether Cause for termination
exists shall be determined in accordance with procedures established by the
Committee, except to the extent that such procedures are set forth in a
Participant's Employment Agreement.
"Trust A" means the Integrated Health Services, Inc. Key Employee
Supplemental Executive Retirement Plan Trust (Trust A), which became
effective in 1996 and of which The Charles Schwab Trust Company was the
initial trustee.
"Trust B" means the Integrated Health Services, Inc. Key Employee
Supplemental Executive Retirement Plan Trust (Trust B), established for the
benefit of Robert N. Elkins.
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"Trust B Trust Agreement" means the trust agreement that establishes Trust
B, as it may be amended from time to time.
"Trust C" means the Integrated Health Services, Inc. Key Employee
Supplemental Executive Retirement Plan Trust (Trust C), if any, established
for the benefit of Lawrence P. Cirka.
"Trust C Trust Agreement" means the trust agreement, if any, that
establishes Trust C, as it may be amended from time to time.
"Years of Service" means the number of full and partial years (in
increments of one-twelfth (1/12th) years) during which a Participant
renders substantial services to an Employer as an Employee, commencing on
the date that the Participant is first employed by an Employer and ending
on the earlier of (i) the date on which his employment with the Employer
terminates and (ii) the date on which, in the case of Robert N. Elkins,
such Participant attains age 62 and, in the case of any other Participant,
such Participant attains age 58. At the discretion of the Committee, or by
duly authorized written agreement between the Company and the Participant,
any Participant may be granted additional Years of Service for purposes of
determining benefits under this Plan. Years of Service shall also include
any and all past service as an active employee of any company that is a
predecessor to Integrated Health Services, Inc.
Section 2.2 Usage. Except as otherwise indicated by the context, any masculine
terminology used herein shall also include the feminine and vice versa, and the
definition of any term herein in the singular shall also include the plural and
vice versa.
8
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ARTICLE III
ELIGIBILITY AND PARTICIPATION
Section 3.1 Eligibility. An Employee of an Employer shall be eligible to
participate in the Plan subject to being designated a Participant by the
Committee.
Section 3.2 Participation. An Eligible Employee shall commence participation in
the Plan at such time as the Committee may designate and, subject to the terms
of the Plan, shall remain a Participant so long as he is an Eligible Employee.
9
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ARTICLE IV
RETIREMENT BENEFIT
Section 4.1 Retirement Benefit. The Retirement Benefit for a Participant whose
employment with the Employer terminates on or after his Normal Retirement Date
shall be an annual benefit that is (i) equal to 70% of his Average Annual
Compensation, (ii) payable for the life of the Participant and (iii) commences
as of the date that his employment with the Employer terminates. In the event
that a Participant has less than 15 Years of Service, his annual benefit shall
be the percentage of his Average Annual Compensation set forth in Appendix I.
For payment of the benefit in the event of death, see Article VII below.
Section 4.2 Early Retirement Benefit. The Retirement Benefit for a Participant
whose employment with the Employer terminates before his Normal Retirement Date
shall be an annual benefit, commencing as of the date that his employment with
the Employer terminates, that is the Actuarial Equivalent of the annual benefit
computed under Section 4.1, but based on Years of Service and Average Annual
Compensation as of the date on which his employment with the Employer
terminates. Notwithstanding the preceding sentence, Robert N. Elkins shall be
entitled, on any termination of his employment with the Employer that occurs
after he attains age 58 but before he attains age 62, to a Retirement Benefit,
commencing as of the date that his employment with the Employer terminates, that
is equal to (x) the Retirement Benefit he would have received pursuant to
Section 4.1 had he attained age 62 on the date of such termination reduced by
(y) two-twelfths of one percent for each full calendar month by which the date
of such termination precedes the month of his 62nd birthday.
Section 4.3 Vesting.
(a) Except as provided below, a Participant shall have a vested right to
his Retirement Benefit upon the earliest occurrence of any of the
following:
(i) termination of his employment with the Employer after five (5)
Years of Service;
(ii) the attainment of his Normal Retirement Date;
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(iii) the occurrence of a Change of Control; or
(iv) his death or Disability.
(b) Notwithstanding the preceding, a Participant's Retirement Benefit
shall be forfeited, and no Retirement Benefit shall be payable to him
or his Beneficiaries, in the event that his employment with the
Employer terminates before his right to his Retirement Benefit shall
have vested under Section 4.3(a).
Section 4.4 Change of Control. Upon any Change of Control with respect to a
particular Participant, the Company shall, as soon as possible but in no event
more than 30 days following the Change of Control, make an irrevocable cash
contribution to Trust A (in the case of any Participant other than Robert N.
Elkins and Lawrence P. Cirka), Trust B (in the case of Robert N. Elkins,
provided that if no Trust B then exists, the contribution shall be made to Trust
A) or Trust C (in the case of Lawrence P. Cirka, provided that if no such Trust
C then exists, the contribution shall be made to Trust A) in an amount that is
sufficient to provide the Funding that remains necessary to pay such Participant
(or his Beneficiaries) his full previously unpaid Retirement Benefit. Unless a
Participant's employment with the Employer has terminated prior to the Change of
Control, his Retirement Benefit shall be determined, for purposes of this
Section 4.4, as if (i) his employment with the Employer had terminated at the
time of the Change of Control and (ii) he had 15 Years of Service at the time of
the Change of Control. Each Participant's previously unpaid Retirement Benefit
shall (i) be paid in the form of a lump sum that is the Actuarial Equivalent of
such unpaid benefit and (ii) be paid to such Participant (or his Beneficiaries)
as soon as possible but in no event more than 60 days following the Change of
Control.
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ARTICLE V
PARTICIPANT ACCOUNT
Section 5.1 Establishment of Participant Account. The provisions of Article V
herein shall apply solely to Participants' Employee Deferral Contributions and
to any income, gains or losses thereon. The Committee or its agents shall
establish and maintain a Participant Account as a bookkeeping entry in the name
of each Participant to which shall be credited all of such Participant's
Employee Deferral Contributions, together with any income, gains or losses
thereon.
Section 5.2 Employee Deferral Contributions. Each Plan Year, each Participant
may authorize any Employer to reduce the compensation that would otherwise be
paid directly to him by such Employer with respect to the Plan Year by any
specific amount or percentage as specified in the Participant's written election
pursuant to this Section 5.2 in effect for that year, and to have such amount
credited to the Participant's Account as an Employee Deferral Contribution,
provided that for the 1996 Plan Year elective deferrals shall commence
prospectively on or after January 31, 1996, in accordance with the Participant's
election. An amount equal to any such Employee Deferral Contribution shall be
paid by the Employer in cash to Trust A (in the case of any Participant other
than Robert N. Elkins and Lawrence P. Cirka), Trust B (in the case of Robert N.
Elkins, provided that if no Trust B then exists, the contribution shall be made
to Trust A) or Trust C (in the case of Lawrence P. Cirka, provided that if no
such Trust C then exists, the contribution shall be made to Trust A). Each
Participant has the option of changing or terminating his written Employee
Deferral Contribution election prospectively, effective the first day of the
next Plan Year. A written election to defer a percentage or dollar amount of
compensation for any Plan Year shall apply for subsequent Plan Years unless
changed or revoked in writing prior to the commencement of the Plan Year for
which it is to be effective. Written modification must be given by the
Participant at least 30 days prior to the next Plan Year affected by the
modification. The minimum Employee Deferral Contribution under this Plan shall
be $1,000 per year.
Section 5.3 Investment Authority. Except as otherwise provided in an applicable
trust agreement, all Employee Deferral Contributions, together with any income,
gains or losses thereon, shall be invested in such investments as the Company or
its designee shall determine. Any Participant may file a non-binding written
election with the Committee, which the Committee may then forward to
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<PAGE>
the trustee(s) of the appropriate trust(s), suggesting that amounts attributable
to his Employee Deferral Contributions be invested in a specified manner. The
nonbinding election of the Participant shall remain in effect until a new
written election is filed with the Committee. In no event may any Employee
Deferral Contribution, or any income or gains thereon, be invested in capital
stock of the Company.
Section 5.4 Distributions in the Case of Unforeseeable Emergency. A distribution
from amounts attributable to a Participant's Employee Deferral Contributions may
be made to a Participant, at his election, in the event of an unforeseeable
emergency. An unforeseeable emergency is defined as a severe financial hardship
to the Participant resulting from (i) a sudden and unexpected illness or
accident of the Participant or of a dependent, (ii) loss of the Participant's
property due to casualty, or (iii) other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control of the
Participant. This determination shall be made by the Committee, and such
distributions shall be limited to the amount necessary to satisfy the emergency.
The circumstances that constitute an unforeseeable emergency will depend upon
the facts of each case. In no event may any distribution be made pursuant to
this Section 5.4 to the extent that the severe financial hardship referred to in
the second sentence of this Section 5.4 is or may be relieved:
(i) through reimbursement or compensation by insurance or otherwise;
(ii) by liquidation of the Participant's assets, other than hardship
withdrawals from the Company's 401(k) Plan, to the extent the
liquidation of such assets would not itself cause severe financial
hardship; or
(iii) by cessation of deferrals under the Plan.
Section 5.5 Valuation of Account. The value of each Participant's Account shall
be determined from time to time (but at least annually) by the Committee or its
designee based on the fair market value of the assets and amounts attributable
to the Participant's Employee Deferral Contributions. The Committee or its
designee shall maintain separate bookkeeping accounts on a fair market value
basis as set forth in Section 5.1.
13
<PAGE>
ARTICLE VI
PAYMENT OF BENEFITS
Section 6.1 Payment of Benefits. A Participant whose employment with the
Employer terminates shall then be entitled to, and shall receive, a Retirement
Benefit determined in accordance with Article IV. The lump-sum Actuarial
Equivalent of the Retirement Benefit, together with the Participant's Employee
Deferral Contributions (adjusted for any income, gains or losses thereon), shall
be distributed pursuant to the payment and form of benefit provisions of this
Plan. A Participant whose employment with the Employer terminates before his
Retirement Benefit vests pursuant to Section 4.3 shall receive only his Employee
Deferral Contributions, adjusted for income, gains and losses thereon.
Section 6.2 Form of Benefits. The benefits payable to a Participant under
Section 6.1 shall be paid in the normal form of a lump-sum distribution.
Notwithstanding the preceding sentence, at the written election of the
Participant made at least one year prior to the termination of his employment
with the Employer, the Actuarial Equivalent of the Retirement Benefit portion of
the benefits referred to in the preceding sentence shall be paid in the form of
(i) annual installments over a period not to exceed ten (10) years, (ii) a joint
and fifty percent (50%) survivor annuity or (iii) an annuity for the life of the
Participant. All benefits shall be paid in cash unless the recipient consents in
writing to payment in another form.
14
<PAGE>
ARTICLE VII
PAYMENT OF BENEFIT ON OR AFTER DEATH
Section 7.1 Benefits on Termination of Employment by Death. If a Participant
dies while employed by the Employer, his benefits under Section 6.1 shall be
paid in the form of a lump-sum distribution that is equal to the lump-sum
distribution that he would have received had his employment with the Employer
terminated on the day before the Participant's death without the Participant
having elected any optional form of payment pursuant to Section 6.2.
Section 7.2 Post-Retirement Death Benefit. In the event of the death of a
Participant whose employment with the Employer has terminated and who has
elected to receive his Retirement Benefit in the form of annual installments
over a period not to exceed ten (10) years under Section 6.2, such Participant's
Beneficiary (or Beneficiaries) shall receive any remaining annual installments.
15
<PAGE>
ARTICLE VIII
ADMINISTRATION
Section 8.1 General. The Committee shall be the plan administrator for the Plan
and shall administer and maintain the operations as specifically provided in the
Plan; provided that in the event that any Participant is a member of the
Committee, the Committee shall exercise no investment authority with respect to
any trust established in connection with the Plan of which such Participant is a
beneficiary.
Section 8.2 Administrative Rules. The Committee may adopt such rules of
procedure as it deems desirable for the conduct of its affairs, except to the
extent that such rules conflict with the provisions of the Plan.
Section 8.3 Duties. The Committee shall have the following rights, powers and
duties:
(a) Except as otherwise provided in a Participant's Employment Agreement,
the decision of the Committee in matters within its jurisdiction shall
be final, binding and conclusive upon any Employer and upon any other
person affected by such decision, subject to the claims procedure
hereinafter set forth.
(b) Except as otherwise provided in a Participant's Employment Agreement,
the Committee shall have the duty and authority to interpret and
construe the provisions of the Plan in its sole and absolute
discretion, to determine eligibility for benefits and the appropriate
amount of any benefits, to decide any question which may arise
regarding the rights of Employees, Participants and Beneficiaries, and
the amounts of their respective interests, to adopt such rules and to
exercise such powers as the Committee may deem necessary for the
administration of the Plan, and to exercise any other rights, powers
or privileges granted to the Committee by the terms of the Plan.
(c) The Committee shall maintain full and complete records of its
decisions. Its records shall contain all relevant data pertaining to
each Participant and his rights and duties under the Plan. The
Committee shall have the duty to maintain Participant Account records
for all Participants.
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<PAGE>
(d) The Committee shall cause the principal provisions of the Plan to be
communicated to the Participants, and a copy of the Plan and other
documents shall be available at the principal office of the Company
for inspection by the Participants at reasonable times determined by
the Committee.
(e) The Committee shall periodically report to the Board with respect to
the status of the Plan.
(f) The Company shall be responsible for the payment of (i) expenses and
income taxes for the Plan and (ii) benefits payable under the Plan.
Section 8.4 Fees. No fee or compensation shall be paid to any person for service
on the Committee.
17
<PAGE>
ARTICLE IX
CLAIMS PROCEDURE
Section 9.1 General. Any claim for benefits under the Plan shall be filed by a
Participant or Beneficiary ("claimant") on the form prescribed for such purpose
with the Committee;
Section 9.2 Denials. If a claim for benefits under the Plan is wholly or
partially denied, notice of the decision shall be furnished to the claimant by
the Committee within 30 days after receipt of the claim by the Committee.
Section 9.3 Notice. Any claimant who is denied a claim for benefits under the
Plan shall be furnished written notice setting forth:
(a) the specific reason or reasons for the denial;
(b) specific reference to the pertinent provisions of the Plan upon which
the denial is based;
(c) a description of any additional material or information necessary for
the claimant to perfect the claim; and
(d) an explanation of the claim review procedure under the Plan.
Section 9.4 Appeals Procedure. In order that a claimant may appeal a denial of a
claim, the claimant or the claimant's duly authorized representative may:
(a) request a review by written application to the Committee, or its
designate, no later than 30 days after receipt by the claimant of
written notification of denial of a claim;
(b) review pertinent documents; and
(c) submit issues and comments in writing.
18
<PAGE>
Section 9.5 Review. A decision on review of a denied claim shall be made not
later than 45 days after receipt of a request for review, unless special
circumstances require an extension of time for processing, in which case a
decision shall be rendered within a reasonable period of time, but not later
than 60 days after receipt of a request for review. The decision on review shall
be in writing and shall include the specific reason(s) for the decision and the
specific reference(s) to the pertinent provisions of the Plan on which the
decision is based.
19
<PAGE>
ARTICLE X
MISCELLANEOUS PROVISIONS
Section 10.1 Amendment and Termination. The Company reserves the right to amend
or terminate the Plan in any manner that it deems advisable, by a resolution of
the Company's Board. Notwithstanding the preceding, no amendment or termination
of the Plan shall reduce the Retirement Benefit of any Participant determined as
of the day immediately preceding the effective date of such amendment or
termination.
Section 10.2 Spendthrift Provision. No Participant shall have the power to
pledge, transfer, assign, anticipate, mortgage or otherwise encumber or dispose
of in advance any interest in amounts payable hereunder or any of the payments
provided for herein, nor shall any interest in amounts payable hereunder or in
any payments be subject to seizure for payments of any debts, judgments, alimony
or separate maintenance, or be reached or transferred by operation of law in the
event of bankruptcy, insolvency or otherwise. However, any Employer and any
trustee of Trust A, Trust B or Trust C may follow any order or direction from
any court of competent jurisdiction, including, but not limited to, a United
States Bankruptcy Court.
Section 10.3 Interpretation. If any provision or provisions of the Plan shall
for any reason be invalid or unenforceable, the remaining provisions of the Plan
shall be carried into effect unless the effect thereof would be to materially
alter or defeat the purpose of the Plan.
Section 10.4 Successors and Assigns. The provisions of the Plan are binding upon
and inure to the benefit of each Employer, its successors and assigns, and of
each Participant, his beneficiaries, heirs, legal representatives and assigns.
Section 10.5 Governing Law. The Plan shall be subject to and construed in
accordance with the laws of the state of Maryland, to the extent not preempted
by the provisions of ERISA.
Section 10.6 No Guarantee of Employment. Nothing contained in the Plan shall be
construed as a contract of employment or deemed to give any Participant the
right to be retained in the employ of an Employer or any equity or other
interest in the assets, business or affairs of an Employer.
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<PAGE>
Section 10.7 Notices. All notices, elections, designations and other
communications required or permitted in connection with the Plan shall be in
writing. Each Participant and each Beneficiary shall file with the Committee,
from time to time, in writing, the post office address of the Participant, the
post office address of each Beneficiary, and each change of post office address.
Any notice or communication addressed to the last post office address filed with
the Committee (or if no address was filed, then to the last post office address
of the Participant or Beneficiary as shown on the Employer's records) shall be
binding on the Participant and each Beneficiary for all purposes of the Plan and
neither the Committee nor any Employer shall be obligated to search for or
ascertain the whereabouts of any Participant or Beneficiary.
Section 10.8 Bonding. Neither the Committee, nor its members, agents or
advisors, shall be required to be bonded, except as otherwise required by ERISA.
Section 10.9 No Funding. The Plan constitutes a mere promise by the Employer to
make payments in accordance with the terms of the Plan and Participants and
beneficiaries shall have the status of general unsecured creditors of the
Employer. Nothing in the Plan will be construed to give any Employee, or any
other person, rights to any specific assets of the Employer or of any other
person. In all events, it is the intent of the Employer that the Plan be treated
as unfunded for tax purposes and for purposes of Title I of ERISA.
Section 10.10 Consistency with Participants' Employment Agreements. In the event
of any inconsistency between the Plan (including, without limitation, Sections
2.1, 4.1 through 10.1, and 10.7) and any Participant's Employment Agreement, the
terms of the Employment Agreement shall control as to the Participant.
Section 10.11 Consistency with Trust B and Trust C. In the event of any
inconsistency between the Plan (including, without limitation, Sections 2.1, 4.1
through 10.1, and 10.7) and the Trust B Trust Agreement or the Trust C Trust
Agreement, the terms of the Trust Agreements shall control as to Robert N.
Elkins and Lawrence P. Cirka, respectively.
21
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Appendix I
Retirement Benefit: Annuity percentage based on completed Years of Service.
Years of Annuity
Service Percentage
------- ----------
0 0.0%
1 1.0%
2 2.0%
3 3.0%
4 4.0%
5 5.0%
6 7.0%
7 9.0%
8 11.0%
9 13.0%
10 16.0%
11 23.0%
12 33.0%
13 43.0%
14 55.0%
15 or more 70.0%
22
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Appendix II
Key executives participating in this Plan shall be:
Robert N. Elkins, M.D.
Lawrence P. Cirka
23
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
This AMENDMENT No. 2 is made effective as of November 18, 1997 (the "Effective
Date"), by and between INTEGRATED HEALTH SERVICES, INC., a Delaware corporation
(hereinafter referred to as the "Company"), and ROBERT N. ELKINS (hereinafter
referred to as the "Executive").
W I T N E S S E T H:
WHEREAS, effective January 1, 1994, the Executive entered into an
employment agreement with the Company (the "Original Agreement");
WHEREAS, effective January 1, 1995, the Executive and the Company entered
into Amendment No. 1 to Employment Agreement ("Amendment No. 1"), which amended
the Original Agreement; and
WHEREAS, the parties desire to further amend the Original Agreement as
amended by Amendment No.1 (such amended agreement being referred to hereinafter
as the "Agreement").
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
agreements herein contained, the parties, intending to be legally bound, hereby
agree to amend the Agreement as follows:
1. The second sentence of Section 2.1 of the Agreement is amended to read
in its entirety as follows:
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"On each Anniversary Date, the Salary shall be increased by a percentage
that is equal to the percentage increase in the "Consumer Price Index for
All Urban Consumers" published by the United States Department of Labor's
Bureau of Labor Statistics for the then most recently ended 12-month period
as of the date of such adjustment, and increased by such additional amounts
as may be determined by the Board in its discretion."
2. Section 2.1 of the Agreement is further amended to add the following
sentence at the end of such Section:
"The Salary may not be decreased at any time, or for any purpose
(including, without limitation, for the purpose of determining severance
benefits pursuant to Section 3)."
3. The last sentence of Section 2.2 (b) of the Agreement is amended to add
the following phrase before the phrase "with interest at the prime rate of
Citibank, N.A.":
", net of all taxes paid or payable (except to the extent that the
Executive receives tax benefits, through deductions, for the repayments),"
4. Section 2.3(f) is amended to add the following sentence at the end of
such Section:
"Additionally, the Executive shall have the right, but not the obligation,
at any time during the Term and for one year thereafter, to purchase from
the Company the Gulfstream II aircraft currently owned by the Company (or
any comparable successor aircraft then owned by the Company), at a price
equal to the then book value of such aircraft, and to lease or purchase
from the
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Company at a fair market rental, or purchase from the Company at book
value, the hangar space for such aircraft at the Naples, Florida, airport;
provided that such aircraft or such hanger, as the case may be, are still
owned by the Company at such time; and provided further that the Company
shall give the Executive no less than 30 days advance written notice before
selling, or otherwise transferring, such aircraft or such hangar, as the
case may be, to any third party."
5. Section 2.3(g) of the Agreement is amended to read in its entirety as
follows:
"(g) The Executive shall participate in the Integrated Health Services,
Inc. Key Employee Supplemental Executive Retirement Plan (Plan A), which
became effective March 1, 1996 (hereinafter, "SERP A"). No amendment of
SERP A that is adverse to the Executive shall be effective as to the
Executive without his prior written consent (or, if he is no longer living,
the consent of his beneficiary (or beneficiaries) designated in accordance
with Section 2.1 of the Trust B Agreement (as hereinafter defined) or any
successor to such Section). Any interpretation, construction,
determination, act or failure to act of the Company or the "Committee" ( as
defined in SERP A) that relates to SERP A and is adverse to the Executive
shall be subject to de novo review in accordance with Section 6.9 of this
Agreement."
6. Article II of the Agreement is amended to add the following new Section
2.5:
"2.5. Trust Agreement."
"(a) The Company shall promptly establish a trust ("Trust B"), with a
banking or other financial institution acceptable to the Executive as
trustee, under a trust agreement (the "Trust B Agreement") substantially in
the form of Exhibit A. The Company shall make irrevocable contributions to
Trust B at
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the times, and in the amounts, specified in Schedule A to Exhibit A. The
Executive's retirement benefits under SERP A and this Agreement shall be
paid at the times, in the amounts, and in the forms set forth in Schedule B
to Exhibit A.
(b) No amendment of the Trust B Agreement that is adverse to the Executive
shall be effective without his prior written consent (or, if he is no
longer living, the consent of his beneficiary (or beneficiaries) designated
in accordance with Section 2.1 of the Trust B Agreement or any successor to
such Section). No trustee of Trust B shall be removed by the Company, and
no successor trustee of Trust B shall be appointed by the Company, without
the consent of the Executive (or, if he is no longer living, the consent of
his beneficiary (or beneficiaries) designated in accordance with Section
2.1 of the Trust B Agreement or any successor to such Section), which
consent may not be unreasonably withheld."
"(c) Notwithstanding anything to the contrary in this Section 2.5, in the
Trust B Agreement, or in any other plan, trust or agreement of the Company,
the Company shall at all times remain obligated to make all payments in
respect of retirement or deferred compensation benefits to which the
Executive (or his beneficiaries) is entitled under SERP A or this Agreement
(including, without limitation, Sections 3.4(a), 3.9(b) and 3.10(b) of this
Agreement), subject to offset for any such payment made from Trust B or
other sources."
"(d) The Company shall use reasonable efforts to acquire, from an insurance
company, bank or other institution reasonably acceptable to the Executive
(the "Institution"), an insurance policy, letter of credit or comparable
form of financial guarantee (the "Financial Guarantee"), approved by the
Executive as to form and substance (which approval shall not be
unreasonably withheld), to guarantee the Company's obligations, under SERP
A, Schedule A to the Trust
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B Agreement, and this Agreement (including, without limitation, Sections
2.5(a), 3.9(c) and 3.10(c)), to make contributions to Trust B. The
Financial Guarantee shall have the following properties: (1) the
beneficiary of the Financial Guarantee shall be Trust B; (2) within 60 days
of the Company's failure to timely make a required contribution to Trust B,
the Institution shall make the contribution; and (3) contributions made by
the Institution shall have the same status as contributions made by the
Company and shall be available to creditors of the Company in the event of
the bankruptcy or insolvency of the Company."
7. The first sentence of Section 3.2(a) of the Agreement, and the first
sentence of Section 3.3(a) of the Agreement, are each amended to replace the
words "this Agreement" with the words "the Executive's employment with the
Company".
8. The second sentence of Section 3.2(a) of the Agreement is amended to
read in its entirety as follows:
"For purposes of this Agreement and of all other plans, programs,
agreements and arrangements of the Company (or any of its subsidiaries) to
which the Executive is a party or in which the Executive participates or is
eligible to participate, Cause shall mean, with respect to the Executive:
(i) the Executive is convicted of a felony involving moral
turpitude; or
(ii) in carrying out his duties under this Agreement, the
Executive engages in conduct that constitutes willful gross neglect or
willful gross misconduct resulting, in either case, in material
economic harm to the Company, unless the Executive believed in good
faith that
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such conduct was in or not opposed to the best interests of the
Company."
9. The first sentence of Section 3.2(b) of the Agreement is amended to
replace the phrase "Notwithstanding anything in Section 3.2(a) to the contrary,
a termination shall not be for Cause unless" with the following phrase:
"No termination of the Executive's employment for Cause shall be effective
as a termination for Cause for purposes of this Agreement, or as a
termination for cause for purposes of any other plan, program, agreement or
arrangement of the Company (or any of its subsidiaries) to which the
Executive is a party or in which the Executive participates or is eligible
to participate, unless"
10. Section 3.2(b)(i) is amended to replace the phrase "the determination
that Cause exists is made by the Board" with the following phrase:
"the determination that Cause exists is made by resolution approved by at
least three-quarters of the members of the Board"
11. Section 3.3(a)(1)(iv) is amended to delete the phrase "(other than a
reduction in salary permitted by Section 2.1)".
12. Section 3.3(a)(2) of the Agreement shall be amended to read in its
entirety as follows:
"any termination of the Executive's employment within one (1) year
following a "Change of Control" as defined in Section 3.3(b), provided that
in the case of any such termination, regardless of whether by the Company
or the Executive and regardless of the reason therefor (including, without
limitation, death or Disability), then, notwithstanding any other provision
of this
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Agreement, such termination shall be deemed to be by the Executive for Good
Reason, with the result, among other things, that the Executive shall be
entitled to all of the payments and benefits provided under Section 3.4
(and, without duplication, any benefits to which he would be entitled to
upon death or Disability, if applicable)."
13. Section 3.3(b) of the Agreement is amended to read in its entirety as
follows:
"(b) For purposes of this Agreement and, to the extent of the Executive's
entitlements or participation therein, any other plan, program, agreement
or arrangement of the Company (or any of its subsidiaries), a "Change of
Control" shall be deemed to occur, with respect to the Executive, if (i)
any "person," as such term is used in Section 13(d) of the Securities
Exchange Act of 1934 (the "1934 Act"), other than the Executive and any
"group" (as such term is used in Section 13(d)(3) of the 1934 Act) of which
he is a member, becomes a "beneficial owner," as such term is used in Rule
13d-3 promulgated under the 1934 Act, of 20% or more of the "Voting Stock"
(as defined below) of the Company; (ii) the majority of the Board consists
of individuals other than Incumbent Directors, which term means the members
of the Board on the effective date of Amendment No. 2 to this Agreement;
provided that any person becoming a director subsequent to such date whose
election or nomination for election was supported by two-thirds of the
directors who then comprised the Incumbent Directors shall be considered to
be an Incumbent Director, unless such election or nomination was the result
of any actual or threatened election contest of a type contemplated by
Regulation 14a-11 under the 1934 Act; (iii) the Company adopts any plan of
liquidation providing for the distribution of all or substantially all of
its assets; (iv) there is consummated any consolidation, reorganization or
merger of the Company in which the Company is not a continuing or surviving
corporation or pursuant to which all or substantially all of the Company's
Voting Stock is converted into
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cash, securities or other property (unless the shareholders of the Company
immediately prior to such merger, consolidation or reorganization
beneficially own, directly or indirectly, in substantially the same
proportion as they owned the Voting Stock of the Company, all of the Voting
Stock or other ownership interests of the entity or entities, if any, that
succeed to the business of the Company); (v) in any transaction not
described in preceeding clause (iv), all or substantially all of the assets
or business of the Company is disposed of pursuant to a merger,
consolidation or other transaction (unless the shareholders of the Company
immediately prior to such merger, consolidation or other transaction
beneficially own, directly or indirectly, in substantially the same
proportion as they owned the voting stock of the Company, all of the Voting
Stock or other ownership interests of the entity or entities, if any, that
succeed to the business of the Company); or (vi) the Company combines with
another company and is the surviving corporation but, immediately after the
combination, the shareholders of the Company immediately prior to the
combination hold, directly or indirectly, 50% or less of the shares of
Voting Stock of the combined company (there being excluded from the number
of such shares held by such shareholders, but not from the Voting Stock of
the combined company, any such shares received by "affiliates", as such
term is defined in the rules of the United States Securities and Exchange
Commission, of such other company in exchange for stock of such other
company). "Voting Stock" shall mean capital stock of any class or classes
having general voting power under ordinary circumstances, in the absence of
contingencies, to elect the directors of a corporation."
14. The first sentence of Section 3.4(a) of the Agreement is amended to
replace the term "Article II" with the term "Section 1.3" and to replace the
phrase "the Company's Supplemental Executive Retirement Plan" with the phrase
"SERP A".
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15. The second sentence of Section 3.4(a) of the Agreement is amended to
delete the period that appears at the end of the second sentence and to add the
following material at the end of the second sentence:
"and (3) a 'Pro Rata Bonus Amount,' which shall equal (A) the product
obtained by multiplying (x) the Bonus Amount times (y) a fraction, the
numerator of which is the number of days that shall have elapsed, through
the effective date of such termination, in the fiscal year of the Company
in which the termination occurs and the denominator of which is 365 minus
(B) any payments in respect of a Bonus for the fiscal year in which the
termination occurs that have been received by the Executive and are not
required to be repaid by him pursuant to Section 2.2(b)."
16. The third sentence of Section 3.4(a) of the Agreement is replaced in
its entirety with the following sentence:
"The Severance Amount, Bonus Amount, and Pro Rata Bonus Amount shall all be
paid in one lump-sum cash payment on the effective date of the termination
of the Executive's employment (or, if payment in full on such effective
date is not practicable, as promptly as practicable thereafter, but in no
event more than ten (10) days after such effective date)."
17. Section 3.4 is amended to delete clause (v) in its entirety and to
redesignate clause (vi) as clause (v).
18. Section 3.4(b) of the Agreement is redesignated as "Section 3.13
Gross-Up.". Thus redesignated, such section is moved to the end of Article III.
Such section is further amended to add the words "in connection with one or more
events or conditions involving the Company (whether or not on account of
payments or benefits arising hereunder)" after
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<PAGE>
the words "Section 280G of the Code" and to add the following five sentences at
the end of the section:
"Any payment otherwise required under the preceding sentence shall be made
whether or not a Change of Control shall have occurred and whether or not
the Executive's employment with the Company shall have been terminated. An
independent auditor (the "Auditor"), jointly selected by the Company and
the Executive and paid by the Company, shall determine whether any payment
or payments are due from the Company to the Executive pursuant to this
Section 3.13 and, if so, the amount and the time of any payment(s) to be
made. The Auditor shall be a nationally recognized United States public
accounting firm which has not, during the three years preceding the date of
its selection, acted in any way on behalf of the Company or any affiliate
thereof. If the Executive and the Company cannot agree on the firm to serve
as the Auditor, then the Executive and the Company shall each select one
nationally recognized United States public accounting firm and those two
firms (both of which shall be paid by the Company) shall jointly select the
accounting firm to serve as the Auditor. In making its determinations, the
Auditor shall assume that the Executive is subject to tax at the highest
applicable marginal Federal, state and local income tax rates."
19. The first sentence of Section 3.5(a) of the Agreement is amended to
replace the phrase "The Company may terminate the Executive following a
determination by the Board that" with the following phrase:
"Either party may terminate the Executive's employment with the Company
following a determination that"
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<PAGE>
20. The second sentence of Section 3.5(a) is amended to replace the word
"vote" with the word "termination".
21. Section 3.5(b)(i) of the Agreement is amended to replace the phrase
"for a period of thirty (30) months following the effective date of such
termination" with the following phrase:
"for the period beginning on the effective date of such termination and
ending at the later of (x) the end of the thirtieth month following such
date and (y) the end of the month in which the Executive attains age 62"
22. Article III of the Agreement is amended to add the following new
Sections 3.7 through 3.12 after the end of Section 3.6:
"3.7 Pro Rata Bonus. On termination of the Executive's employment either
(x) for Permanent Disability in accordance with Section 3.5 or (y) by
death, the Executive shall be entitled to receive a Pro Rata Bonus Amount,
determined and paid in accordance with Section 3.4(a) as if the Executive
had resigned for Good Reason on the effective date of such termination."
"3.8 Stock Option Exercisability on a Termination that is Neither by the
Company for Cause, Nor by the Executive without Good Reason Before His 55th
Birthday. Except as set forth in the immediately succeeding sentence, upon
any termination of the Executive's employment with the Company, he shall be
entitled to exercise any outstanding stock option that is exercisable on
the effective date of such termination, or that becomes exercisable in
connection with such termination, at any time until the earlier of (w) the
fifth anniversary of the effective date of such termination and (x) the
expiration of the maximum stated term of the option. The immediately
preceding sentence shall not apply to (y) any termination by the Company
for Cause or (z) any
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<PAGE>
termination by the Executive that occurs before he attains age 55 and that
is not for death, Permanent Disability or Good Reason."
"3.9 Change of Control. Upon any Change of Control that occurs while the
Executive is employed with the Company, he shall be entitled to the
following benefits (in addition to any other payments and benefits
otherwise available hereunder or under any other plan, program or agreement
of the Company):
(a) the continued right to exercise any outstanding stock option until the
later of (i) the fifth anniversary of any termination of the Executive's
employment with the Company and (ii) the fifth anniversary of the
occurrence of the Change of Control, any such stock option to become fully
exercisable and nonforfeitable on the date of the Change of Control,
provided that no stock option shall in any event be exercisable after the
expiration of its maximum stated term;
(b) a vested, nonforfeitable right to retirement benefits determined and
paid in a lump sum in accordance with SERP A (but without any reduction for
retirement prior to attaining age 62) as if he had retired from employment
with the Company with 15 Years of Service on the date that the Change of
Control occurs; and
(c) a prompt, irrevocable contribution by the Company to Trust B, made no
later than 30 days following the date of the Change of Control, in an
amount sufficient to fully and irrevocably fund the benefit accruing under
Section 3.9(b)."
"3.10 Termination Followed By a Change of Control. Upon any Change of
Control that occurs within 12 months following the effective date of any
termination of the Executive's employment with the Company, other than a
termination by the Company for Cause or a termination by the Executive that
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<PAGE>
is not for death, Permanent Disability or Good Reason, he shall be entitled
to the following benefits (in addition to any other payments and benefits
otherwise available hereunder or under any other plan, program or agreement
of the Company):
(a) the continued, or renewed, right to exercise any stock option that was
outstanding on the date of such termination and that has not yet been
exercised when the Change of Control occurs, until the fifth anniversary of
the occurrence of the Change of Control, any such stock option to become
fully exercisable and nonforfeitable on the date of the Change of Control,
provided that no stock option shall in any event be exercisable after the
expiration of its maximum stated term;
(b) a vested, nonforfeitable right to a lump-sum retirement benefit that is
equal to (i) the lump-sum actuarial equivalent of the retirement benefit to
which he would have been entitled under SERP A on the date of the
termination of his employment if (A) he had had 15 Years of Service on that
date and (B) no reduction for retirement prior to age 62 had been applied
minus (ii) the sum of all payments in respect of his retirement benefits
under SERP A that he or his beneficiaries have previously received; and
(c) a prompt, irrevocable contribution by the Company to Trust B, made no
later than 30 days following the date of the Change of Control, in an
amount sufficient to fully and irrevocably fund the benefit accruing under
Section 3.10(b)."
"3.11 Purchase of Automobile. Upon any Change of Control or any termination
of the Executive's employment with the Company (other than a termination by
the Company for Cause or a termination by the Executive that is not for
Permanent Disability or Good Reason), the Executive shall have the
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right to purchase his current 1998 Mercedes S-600 four-door sedan, or any
successor automobile furnished to him by the Company, at a price equal to
the automobile's then book value."
"3.12 Conforming Amendments. In the event of any inconsistency between the
terms of this Agreement (including, without limitation, the provisions of
Section 2.5, Section 3.2 (a), Section 3.2 (b), Section 3.3(b), Section 3.8,
Section 3.9 or Section 3.10) and any other plan, program, agreement or
arrangement of the Company (or any of its subsidiaries) to which the
Executive is a party or in which the Executive participates or is eligible
to participate, the terms of this Agreement shall prevail."
23. The first sentence of Section 4.2 of the Agreement is amended to insert
the phrase "(which consent shall not be unreasonably withheld)" after the phrase
"without the express written consent of the Company".
24. The first sentence of Section 4.2 of the Agreement is further amended
to delete clauses (i), (ii) and (iii) in their entirety and to replace them with
the following:
", and other than in connection with performing his duties under this
Agreement, (i) solicit for employment, or recommend that any subsequent
employer of the Executive seek to employ, any person who at the time of
such solicitation or recommendation is known by the Executive to be
employed by the Company or any of its affiliates; (ii) solicit, divert, or
endeavor to entice away any customer of the Company or of any of its
affiliates who at the time of such solicitation, diversion or enticement is
known by the Executive to be a customer of the Company or of any of its
affiliates at the time of such solicitation, diversion or enticement; or
(iii) be employed by, be a director, officer or manager of, act as a
consultant for, be a partner in, have a material proprietary interest in,
or otherwise render material assistance to any person,
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enterprise, partnership, association, corporation, joint venture or other
business entity that then derives 5% or more of its consolidated gross
revenues from owning, operating or managing subacute healthcare facilities
in markets in which it is known by the Executive to compete directly with
subacute healthcare facilities owned, operated or managed by the Company or
its subsidiaries and from which the Company then derives 5% or more of its
consolidated gross revenues (any such person or entity being hereinafter
referred to as a 'Competitor')"
25. Section 4.2 of the Agreement is further amended to insert the following
clause before the period at the end of the second sentence:
"or (iv) being employed by, or rendering services to, any subsidiary or
division of a Competitor so long as (A) such subsidiary or division does
not itself compete directly with the Company or any of its subsidiaries in
any subacute healthcare market and (B) the Executive has no duties or
responsibilities in respect of any portion of the business of the
Competitor that does compete directly with the Company or any of its
subsidiaries in any subacute healthcare market ."
26. Section 6.3 of the Agreement is amended to replace the period that
appears at the end thereof with the following:
"or which are contrary to the provisions incorporated herein through
Amendment No. 2 hereto."
27. Section 6.8(b) of the Agreement is amended to read in its entirety as
follows:
"(b) in connection with (i) any dispute brought by the Executive arising
under or relating to this Agreement unless there is a determination that
the Executive
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has no reasonable basis for his claim and (ii) any dispute brought by the
Company arising under or relating to this Agreement."
28. The first sentence of Section 6.9 is amended to replace the phrase
"shall be settled exclusively by arbitration" with the following phrase:
"(or, unless expressly required otherwise by an applicable plan, program or
arrangement of the Company, under or in connection with such plan, program
or agreement) shall, at the Executive's election, be settled exclusively by
arbitration"
29. All of the remaining terms and provisions of the Agreement shall remain
in full force and effect, without amendment or modification.
IN WITNESS WHEREOF, the parties have executed this Amendment No. 2 as of
the day and year first above written.
COMPANY EXECUTIVE
INTEGRATED HEALTH SERVICES,
INC., a Delaware corporation
By: ____________________________ /s/_________________________
Robert N. Elkins
Name: ____________________________
Title: ___________________________
---------------------------
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EXHIBIT A
FORM OF TRUST B AGREEMENT
17
<PAGE>
EXHIBIT A
Integrated Health Services, Inc.
Key Employee Supplemental
Executive Retirement Plan A
Trust
("Trust B")
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
KEY EMPLOYEE SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN A
TRUST AGREEMENT
("TRUST B")
TABLE OF CONTENTS
PREAMBLE ......................................................................1
ARTICLE I - TRUST B FUND...............................................3
ARTICLE II - DEFINITIONS AND USAGE......................................4
ARTICLE III - TRUSTEE POWERS............................................10
ARTICLE IV - TRUSTEE RESPONSIBILITY IN THE EVENT OF
INSOLVENCY OF THE EMPLOYER................................12
ARTICLE V - BENEFIT DISTRIBUTIONS ....................................15
ARTICLE VI - APPOINTMENT OF SUCCESSOR TRUSTEE..........................18
ARTICLE VII - MISCELLANEOUS ............................................21
SIGNATURE.....................................................................25
SCHEDULE A - CONTRIBUTION SCHEDULE.....................................26
SCHEDULE B - PAYMENT SCHEDULE..........................................31
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN A TRUST AGREEMENT
("TRUST B")
PREAMBLE
WHEREAS, Robert N. Elkins (the "Participant") is employed by Integrated Health
Services, Inc. (the "Company") pursuant to the Employment Agreement (as defined
in Section 2.1);
WHEREAS, the Employment Agreement provides for the participation of the
Participant in a nonqualified deferred compensation plan established by the
Company ("Plan A", as defined in Section 2.1);
WHEREAS, the Employment Agreement provides for certain deferred compensation
benefits determined with reference to this Trust B Agreement, the Employment
Agreement and Plan A;
WHEREAS, the Company has incurred and expects to incur liability with respect to
such benefits;
WHEREAS, the Company established in 1996 Trust A (as defined in Section 2.1) to
provide funds to pay participants in Plan A certain deferred compensation
benefits under Plan A;
WHEREAS, the Employment Agreement provides for the establishment and funding of
an additional trust ("Trust B") to provide funds to pay the Participant certain
deferred compensation benefits under Plan A and the Employment Agreement;
WHEREAS, the Participant is a participant in a second non-qualified deferred
compensation plan established by the Company ("Plan Z", as defined in Section
2.1);
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WHEREAS, the Company established in 1995 a trust ("Trust Z", as defined in
Section 2.1) to provide funds to pay participants in Plan Z certain deferred
compensation benefits under Plan Z;
WHEREAS, the Company intends that the assets in Trust Z attributable to the
Participant's Plan Z Benefits (as defined in Section 2.1) be transferred to
Trust B;
WHEREAS, the Company wishes to establish Trust B and to contribute to Trust B
assets that shall be held therein, subject to the claims of the Company's
creditors in the event of the Company's Insolvency (as defined in Section 2.1),
until paid to the Participant or his Beneficiaries (as defined in Section 2.1);
WHEREAS, it is the intention of the Company and the Trustee that Trust B shall
constitute an unfunded arrangement and shall not affect the status of any plan
maintained by the Company for the purpose of providing deferred compensation for
a select group of management or highly compensated employees as an unfunded plan
for purposes of Title I of ERISA;
WHEREAS, it is the intention of the Company to make contributions to Trust B to
provide itself with a source of funds to assist it in meeting deferred
compensation benefit liabilities with respect to the Participant; and
WHEREAS, the Company and the Trustee desire to enter into this Trust B
Agreement.
NOW, THEREFORE, the Company and the Trustee do hereby establish Trust B and
agree that Trust B shall be comprised, held and disposed of as follows:
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ARTICLE I
TRUST B FUND
Section 1.1 Establishment of Trust B.
(a) The Company hereby deposits with the Trustee in trust the amounts that
are to be deposited on this date as provided on Schedule A attached
hereto (the "Contribution Schedule"), and shall deposit additional
amounts as provided in the Contribution Schedule, which amounts shall
become the principal of Trust B to be held, administered and disposed
of by the Trustee as provided in this Trust B Agreement.
(b) Trust B hereby established shall be irrevocable.
(c) Trust B is intended to be a grantor trust, of which the Company is the
grantor, within the meaning of subpart E, part I, subchapter J,
chapter 1, subtitle A of the Code, and this Trust B Agreement shall be
construed accordingly.
(d) The principal of Trust B, and any earnings thereon, shall be held
separate and apart from other funds of the Company and shall be used
exclusively for the uses and purposes of the Participant and of
general creditors of the Company as herein set forth. The Participant
and his Beneficiaries shall have no preferred claim on, or any
beneficial ownership interest in, any assets of Trust B. Any rights
created under Plan A , Plan Z, the Employment Agreement Pension
Provisions (as defined in Section 2.1) and this Trust B Agreement
shall be mere unsecured contractual rights of the Participant and his
Beneficiaries against the Company. Any assets held in Trust B shall be
subject to the claims of the Company's general creditors under federal
and state law in the event of the Company's Insolvency (as defined in
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Section 2.1).
ARTICLE II
DEFINITIONS AND USAGE
Section 2.1 Definitions. Wherever used in this Trust B Agreement, the following
words and phrases shall have the meaning set forth below unless the context
plainly requires a different meaning:
"Actuarial Equivalent" shall mean a benefit of equivalent value, computed
on the basis of (i) the 1983 Group Annuity Mortality Table for males and
(ii) the Applicable Discount Rate.
"Allocable Amount", when used with reference to Trust A, shall mean the
amount, if any, of the realizable value of the corpus of Trust A that is
then irrevocably allocated to the payment of the Participant's Retirement
Benefits.
"Applicable Discount Rate" shall mean (except as otherwise expressly
provided) an interest rate equal to the average yield on 30-year United
States Treasury securities for the calendar month preceding the calendar
month in which the Termination Date occurs.
"Average Annual Compensation" shall have the meaning provided under Plan A.
"Beneficiary" shall mean any individual or trust designated by the
Participant as a beneficiary with respect to any Retirement Benefit,
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any benefit attributable to his Employee Deferral Contributions or any Plan
Z Benefit in his most recent written designation with respect to such
benefit filed with the Company before his death; provided, however, that if
the Participant fails to make a designation with respect to a benefit or if
no individual so designated is alive, and no trust so designated is in
existence, the term "Beneficiary" shall mean in order of priority (a), with
respect to any Retirement Benefit or any benefit attributable to his
Employee Deferral Contributions, (i) the spouse of the deceased
Participant, or (ii) if no spouse is alive, the surviving children of the
deceased Participant, or (iii) if no children are alive, the parent or
parents of the deceased Participant, or (iv) if no parent is alive, the
legal representative of the deceased Participant's estate and (b), with
respect to any Plan Z Benefit, (i) the spouse of the deceased Participant,
or (ii) if no spouse is alive, the Participant's then living descendants,
if any, per stirpes, or (iii) if no descendant is alive, the Participant's
estate.
"Board" shall mean the board of directors of the Company.
"Change of Control" shall have the meaning set forth in the Employment
Agreement.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time. Any reference to a particular Code section shall include any
provision that modifies, replaces or supersedes it.
"Company" shall mean Integrated Health Services, Inc., a corporation
organized under the laws of the state of Delaware, and any successor
thereto.
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"Contribution Schedule" shall have the meaning set forth in Section 1.1(a).
"Election" shall mean a written election by the Participant to receive his
Retirement Benefits in a form other than a lump-sum distribution, which
election is in effect on the Termination Date in accordance with to Section
6.2 of Plan A.
"Employee Deferral Contribution" shall have the meaning provided under Plan
A.
"Employment Agreement" shall mean the written employment agreement between
the Participant and the Company, effective as of January 1, 1994, as it is
amended from time to time.
"Employment Agreement or Supplemental Agreement Pension Provision" shall
mean any provision in the Employment Agreement or Supplemental Agreement
relating to retirement benefits (including, without limitation, Sections
2.3(g), 2.5, 3.4, 3.9 and 3.10 of the Employment Agreement, and Section 2
of the Supplemental Agreement, as each agreement is amended through the
date of this Trust B Agreement).
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time. Any reference to a particular ERISA section
shall include any provision that modifies, replaces or supersedes it.
"Insolvent" shall mean that (i) the Company is unable to pay its debts as
they become due, or (ii) the Company is subject to a pending proceeding as
a debtor under the United States Bankruptcy Code.
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"Participant" shall mean Robert N. Elkins.
"Party" shall mean either the Company or the Trustee.
"Payment Schedule" shall have the meaning set forth in Section 5.1(a).
"Plan A" shall mean the Integrated Health Services, Inc. Key Employee
Supplemental Executive Retirement Plan ("Plan A"), established effective
March 1, 1996, as it is amended from time to time.
"Plan Z" shall mean the Integrated Health Services, Inc. Supplemental
Deferred Compensation Plan, effective as of January 1, 1995.
"Plan Z Benefit" shall mean any benefit to which the Participant (or any
Beneficiary) is entitled under Plan Z.
"Plan Z Contribution" shall mean any contribution by the Company to Trust B
in respect of Plan Z Benefits.
"Retirement Benefit" shall mean any Retirement Benefit as that term is
defined in Plan A and any additional or different retirement benefit
provided under the Employment Agreement Pension Provisions (other than Plan
Z Benefits, benefits attributable to Employee Deferral Contributions, and
benefits that are determined without reference to Plan A or Plan Z).
"Scheduled Amount" shall mean the 1998 Scheduled Amount, 1999 Scheduled
Amount, 2000 Scheduled Amount or 2001 Scheduled Amount, as such terms are
defined in Section 2 of Schedule A.
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"Supplemental Agreement" shall mean the Supplemental Agreement, effective
as of November 18, 1997, between the Company and the Participant, as that
agreement may be from time to time amended.
"Termination Date" shall mean the date on which the Participant's
employment with the Company terminates.
"Trust A" shall mean the Integrated Health Services, Inc. Key Employee
Supplemental Executive Retirement Plan Trust (Trust A), which was
established in connection with Plan A in 1996 and of which The Charles
Schwab Trust Company is the initial trustee.
"Trust B" shall mean the trust established by this Trust B Agreement.
"Trust B Agreement" shall mean this trust agreement, as it may be amended
from time to time, and includes for all purposes the Contribution Schedule
and the Payment Schedule.
"Trust Z" shall mean the Integrated Health Services, Inc. Supplemental
Deferred Compensation Plan Trust Agreement, which was established in
connection with Plan Z in 1995 and of which The Charles Schwab Trust
Company is the initial trustee.
"Trust Z Transfer" means any amount or property transferred from Trust Z to
Trust B.
"Trustee" shall mean Smith Barney, Inc. or any successor appointed in
accordance
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with Article VI.
Section 2.2 Usage. Except where otherwise indicated by the context, any
masculine terminology used herein shall also include the feminine and vice
versa, and the definition of any term herein in the singular shall also include
the plural and vice versa.
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ARTICLE III
TRUSTEE POWERS
Section 3.1 Trustee Powers.
(a) The Trustee shall act with the care, skill, prudence and diligence
under the circumstances then prevailing that a prudent person acting in
like capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims.
(b) If the Trustee undertakes or defends any arbitration, proceeding or
litigation arising in connection with Trust B, the Company agrees to
indemnify the Trustee against the Trustee's costs, expenses and liabilities
(including, without limitation, reasonable attorneys' fees and expenses)
relating thereto and to be primarily liable for such payments.
(c) The Trustee may consult with legal counsel (who, prior to any Change of
Control, may also be counsel for the Company generally) with respect to any
of its duties or obligations hereunder.
(d) The Trustee may hire agents, accountants, actuaries, investment
advisors, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder. The expense of such
professionals shall be paid by the Company.
(e) The Trustee shall have, without exclusion, all powers conferred on
trustees by applicable law, unless expressly provided otherwise herein;
provided, however, that if an insurance policy is held as an asset of Trust
B, the Trustee shall have no power to name a beneficiary of the policy
other than Trust B, to assign the policy (as distinct from conversion of
the policy to a different form) other than to a successor Trustee, or to
loan
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to any person the proceeds of any borrowing against such policy.
(f) Notwithstanding any powers granted to the Trustee pursuant to this
Trust B Agreement or to applicable law, the Trustee shall not have any
power that could give Trust B the objective of carrying on a business and
dividing the gains therefrom, within the meaning of section 301.7701-2 of
the Procedure and Administrative Regulations promulgated pursuant to the
Code.
Section 3.2 Investment Powers. In no event may the Trustee invest in obligations
issued by the Company, other than a de minimis amount held in common investment
vehicles in which the Trustee invests. All rights associated with assets of
Trust B shall be exercised by the Trustee or a person designated by the Trustee,
and shall in no event be exercisable by, or rest with, the Participant.
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ARTICLE IV
TRUSTEE RESPONSIBILITY IN THE EVENT OF
INSOLVENCY OF THE EMPLOYER
Section 4.1 Trustee Responsibility Regarding Payments To The Trust Beneficiary
When The Company Is Insolvent.
(a) The Trustee shall cease payment of benefits to the Participant and his
Beneficiaries if the Company is Insolvent.
(b) At all times during the continuance of Trust B, the principal and
income of Trust B shall be subject to claims of general creditors of the
Company under federal and state law as set forth below.
(i) The Board and the Chief Executive Officer of the Company shall
have the duty to inform the Trustee in writing of the Company's
Insolvency. If a person claiming to be a creditor of the Company
alleges in writing to the Trustee that the Company has become
Insolvent, the Trustee shall determine whether the Company is
Insolvent and, pending such determination, the Trustee shall
discontinue payment of benefits to the Participant and his
Beneficiaries.
(ii) Unless the Trustee has actual knowledge of the Company's
Insolvency, or has received notice from the Company or a person
claiming to be a creditor alleging that the Company is Insolvent, the
Trustee shall have no duty to inquire whether the Company is
Insolvent. The Trustee may in all events rely on such evidence
concerning the Company's solvency as may be furnished to the Trustee
and that provides the Trustee with a reasonable basis for making a
determination concerning the Company's solvency.
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(iii) If at any time the Trustee has determined that the Company is
Insolvent, the Trustee shall discontinue payments to the Participant
and his Beneficiaries and shall hold the assets of Trust B for the
benefit of the Company's general creditors. Nothing in this Trust B
Agreement shall in any way diminish any rights of the Participant or
his Beneficiaries to pursue their rights as general creditors of the
Company with respect to benefits due under Plan A, the Employment
Agreement Pension Provisions, or otherwise.
(iv) The Trustee shall resume payments to the Participant (or his
Beneficiaries) in accordance with Section 5 of this Trust B Agreement
only after the Trustee has determined that the Company is not
Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets in Trust B, if the Trustee
discontinues payments from Trust B to the Participant (or his
Beneficiaries) pursuant to Section 4.1(b) hereof and subsequently resumes
such payments, the first payment following such discontinuance shall
include the aggregate amount of all payments due to the Participant and his
Beneficiaries under the terms of the Payment Schedule for the period of
such discontinuance, less the aggregate amount of any payments in respect
of amounts that would otherwise remain due under the terms of the Payment
Schedule that were made to the Participant or his Beneficiaries by the
Company, the trustee of Trust A, the trustee of Trust Z, or any other
person in lieu of such payments during any such period of discontinuance.
(d) Whenever the Trustee must determine the insolvency or solvency of the
Company under the provisions of this section, the Trustee is authorized to
request and obtain an opinion as to the Company's insolvency or solvency
from the external financial auditors of the Company. If the Company's
external financial auditors are unable to or decline to
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render such an opinion to the Trustee, the Trustee shall obtain such
opinion from an auditing firm of Trustee's choice and the Company shall
cooperate with such auditing firm to enable such auditing firm to render
such an opinion. The expenses and fees of an auditing firm in providing
such service and opinion shall be an administrative expense of the Trust
and unless paid by the Company shall be paid from the Trust. The Trustee
may rely on such opinion in taking appropriate action under the terms of
this Trust.
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ARTICLE V
BENEFITS DISTRIBUTIONS
Section 5.1 Payment Schedule.
(a) Simultaneously with the execution and delivery of this Trust B
Agreement, the Company is delivering to the Trustee a schedule (the
"Payment Schedule") in the form attached hereto as Schedule B that
indicates (i) the amounts payable in respect of Retirement Benefits,
Employee Deferral Contributions and Plan Z Benefits to the Participant (and
his Beneficiaries) or a formula or other instructions acceptable to the
Trustee for determining the amounts so payable, (ii) the form in which such
amounts are to be paid and (iii) the time of payment, or of commencement of
payment, of such amounts. Except as otherwise provided herein, the Trustee
shall make payments to the Participant (and his Beneficiaries) in
accordance with such Payment Schedule. The Trustee shall make provision for
the reporting and withholding of any federal, state or local taxes that may
be required to be withheld with respect to such payments and shall pay
amounts withheld to the appropriate taxing authorities or determine that
such amounts have been reported, withheld and paid by the Company. The
Company shall certify to the Trustee the types and amount of taxes to be
withheld from each payment hereunder. The Trustee shall forward a check for
taxes withheld from each such payment to the Company. Company shall deposit
such withheld taxes with the appropriate taxing authorities and report such
deposits to the taxing authorities and to the participants and/or
beneficiaries.
(b) The entitlement of the Participant and his Beneficiaries to payments in
respect of Retirement Benefits, Employee Deferral Contributions and Plan Z
Benefits shall be determined as provided in the Payment Schedule, the
Employment Agreement, the Supplemental Agreement, Plan Z (in the case of
payments in respect of Plan Z Benefits) and Plan A (in the case of all
other payments). Any claims for such benefits shall be
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<PAGE>
considered and reviewed under the procedures provided in this Trust B
Agreement, the Employment Agreement, the Supplemental Agreement, Plan A and
Plan Z.
(c) The Company may make payments in respect of Retirement Benefits,
Employee Deferral Contributions and Plan Z Benefits directly to the
Participant or his Beneficiaries as they become due. The Company shall
notify the Trustee of its decision to make such direct payments prior to
the time such payments become due. No payment by the Company shall be
treated as made in respect of Retirement Benefits, Employee Deferral
Contributions or Plan Z Benefits unless the Participant (or the recipient
Beneficiary) consents in writing to such characterization, which consent
shall not be unreasonably withheld.
(d) If the assets of Trust B are not sufficient to make all payments in
respect of Retirement Benefits, Employee Deferral Contributions and Plan Z
Benefits when due under the Payment Schedule, the Company shall make the
balance of each such payment as it falls due. The Trustee shall promptly
notify the Company if the assets of Trust B are not sufficient to make such
payments.
Section 5.2 Payments to the Company. Except as provided in Section 4.1(b)
hereof, the Company shall have no right or power to direct the Trustee to return
to the Company, or to divert to others, any of the assets of Trust B before all
payments that are, or may become, due in respect of Retirement Benefits,
Employee Deferral Contributions, and Plan Z Benefits have been made to the
Participant and his Beneficiaries.
Section 5.3 Disposition of Income. During the term of Trust B, all income and
earnings received by Trust B, net of expenses and taxes, shall be accumulated
and reinvested.
Section 5.4 Accounting by the Trustee. The Trustee shall keep accurate and
detailed records
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of all investments, receipts, disbursements, and all other transactions made in
respect of Trust B, including such specific records as shall be agreed upon in
writing between the Company and the Trustee. The Trustee shall establish and
maintain three separate bookkeeping accounts for Trust B. One account shall
reflect all Trust B income, earnings and assets attributable to Employee
Deferral Contributions. A second account shall reflect all Trust B income,
earnings and assets attributable to Trust Z Transfers or Plan Z Contributions. A
third account shall reflect all other Trust B income, earnings and assets.
Within forty-five (45) days following the close of each calendar year and within
thirty (30) days after the removal or resignation of the Trustee, the Trustee
shall deliver to the Company a written account of its administration of Trust B
during such year or during the period from the close of the last preceding year
to the date of such removal or resignation, setting forth all investments,
receipts, disbursements and other transactions effected by it, including a
description of all securities and investments purchased and sold with the cost
or net proceeds of such purchases or sales (accrued interest paid or receivable
being shown separately), and showing all cash, securities and other property
held in Trust B at the end of such year or as of the date of such removal or
resignation, as the case may be.
Section 5.5 Compensation and Expenses of the Trustee. The Company shall pay all
administrative and Trustee's fees and expenses. The amount of the Trustee's fees
shall be as agreed upon by the Company and the Trustee.
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ARTICLE VI
APPOINTMENT OF SUCCESSOR TRUSTEE
Section 6.1 Resignation and Removal of the Trustee.
(a) The Trustee may resign at any time by written notice to the Company,
which shall be effective thirty (30) days after receipt of such notice
unless the Company and the Trustee agree otherwise.
(b) The Trustee may, with the written consent of the Participant (or, if he
is no longer living, his Beneficiaries), which consent may not be
unreasonably withheld, be removed by the Board on thirty (30) days notice
or upon shorter notice accepted by the Trustee.
(c) Upon resignation or removal of the Trustee and appointment of a
successor Trustee, all assets of Trust B shall subsequently be transferred
to the successor Trustee. The transfer shall be completed within thirty
(30) days after receipt of notice of the resignation, removal or transfer,
unless the Board extends the time limit.
(d) If the Trustee resigns or is removed, a successor shall be appointed in
accordance with Section 6.2 no later than the effective date of such
resignation or removal. If no such appointment has been made by such
effective date, the Trustee may apply to a court of competent jurisdiction
for appointment of a successor or for instructions. All expenses of the
Trustee in connection with such a proceeding shall be allowed as
administrative expenses of Trust B.
Section 6.2 Appointment of Successor Trustee.
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(a) If the Trustee resigns (or is removed) in accordance with Section
6.1(a) or (b) hereof, the Board may, with the written consent of the
Participant (or, if he is no longer living, his Beneficiaries), which
consent may not be unreasonably withheld, appoint any bank trust department
or other party that may be granted corporate trustee powers under state law
as a successor to replace the Trustee upon resignation or removal. The
appointment shall be effective when accepted in writing by the successor
Trustee, who shall have all of the rights and powers of the former Trustee,
including ownership rights in the assets of Trust B. The former Trustee
shall execute any instrument necessary or reasonably requested by the
Company or the successor Trustee to evidence the transfer.
(b) The successor Trustee need not examine the records and acts of any
prior Trustee and may retain or dispose of existing assets of Trust B,
subject to Sections 3 and 5.4 hereof. The successor Trustee shall not be
responsible for, and the Company shall indemnify and defend the successor
Trustee from, any claim or liability resulting from any action or inaction
of any prior Trustee or from any other past event, or any condition
existing at the time it becomes successor Trustee.
(c) Upon settlement of the account and transfer of the assets of Trust B to
a successor Trustee, all rights and privileges of the Trustee under this
Trust B Agreement shall vest in the successor Trustee and all
responsibility and liability of the Trustee with respect to Trust B and
assets thereof shall terminate subject only to the requirements that the
Trustee execute all necessary documents to transfer the assets of Trust B
to the successor Trustee, and that the Trustee deliver a final accounting
of Trust B to the Company.
Section 6.3 Amendment or Termination.
(a) This Trust B Agreement may, with the written consent of the Participant
(or, after his death, his Beneficiaries), be amended by a written
instrument executed by the Trustee
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<PAGE>
and the Company. Notwithstanding the foregoing, no such amendment shall (i)
conflict with the terms of the Employment Agreement or (ii) make Trust B
revocable, unless the Participant (or, after his death, his Beneficiaries)
consents in writing to such conflict or revocability, as applicable.
(b) Trust B shall not terminate until (i) the Participant and his
Beneficiaries have received all payments that are, or may become, due to
them with respect to Retirement Benefits, Employee Deferral Contributions
and Plan Z Benefits and (ii) the Trustee's final accounting report has been
accepted and approved.
(c) Upon termination of Trust B, the Trustee shall distribute any assets
remaining in Trust B to the Company or to such designee as selected by the
Company.
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ARTICLE VII
MISCELLANEOUS
Section 7.1 Indemnification. In addition to and not in derogation of any other
indemnification and hold harmless provisions in this Trust agreement, the
Company agrees to indemnify and hold the Trustee harmless from and against any
liability, loss or claim that the Trustee may incur or which may be assessed or
made against the Trustee in the administration of the Trust, including, without
limitation, liability for legal and other professional fees ("liabilities"),
unless arising from the Trustee's own gross negligence or willful misconduct, or
except as such indemnification may be prohibited by applicable law. With respect
to such aforementioned liabilities or the Trustee's own fees from the Trust,
should the Trust prove insufficient or it is held by a court of competent
jurisdiction that such liabilities and/or fees are not properly payable from the
Trust, the Company shall remain liable to indemnify the Trustee against such
liabilities and/or to pay the Trustee such fees. This indemnification and hold
harmless provision as well as all other such indemnification and hold harmless
provisions in this Trust agreement shall survive the term of the Trustee acting
as such under this Trust agreement and shall survive the term of this Trust
agreement.
Section 7.2 Spendthrift Trust. Benefits payable to the Participant or his
Beneficiaries under this Trust B Agreement may not be anticipated, assigned
(either at law or in equity), alienated, pledged, encumbered or subjected to
attachment, garnishment, levy, execution or other legal or equitable process.
Section 7.3 Severability. If any provision or provisions of this Trust B
Agreement shall for any reason be invalid or unenforceable, the remaining
provisions of this Trust B Agreement shall be carried into effect unless the
effect thereof would be to materially alter or defeat the purpose of this Trust
B Agreement.
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Section 7.4 Governing Law. This Trust B Agreement shall be subject to and
construed in accordance with the laws of the state of Maryland, without
reference to principles of conflict of laws, to the extent not preempted by the
provisions of ERISA.
Section 7.5 Waiver. No waiver by either Party of any breach by the other Party
of any condition or provision contained in this Trust B Agreement to be
performed by such other Party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same or any prior or subsequent time.
Any waiver must be in writing and signed by an authorized officer of the Company
or the Trustee, as the case may be.
Section 7.6 Arbitration. Any dispute that arises between the Parties, or between
either Party and the Participant or any of his Beneficiaries, and that relates
to this Trust B Agreement (including, without limitation, the Contribution
Schedule and the Payment Schedule) shall, at the election of the Trustee, the
Participant or, after the Participant's death, any Beneficiary (provided that
such electing person is a party to the dispute), be resolved exclusively by
confidential arbitration in Baltimore, Maryland, in accordance with the
Commercial Arbitration Rules of the American Arbitration Association. Judgement
upon the award rendered by the arbitrators may be entered in any court having
jurisdiction thereof. The Company shall pay all fees and costs of the American
Arbitration Association and the arbitrators in connection with any such
arbitration, and all reasonable costs and expenses (including reasonable
attorneys fees) incurred by the Participant or any of his Beneficiaries in
connection with any such arbitration.
Section 7.7 Resolution of Inconsistencies. In the event of an inconsistency
between (i) Plan A or Plan Z and (ii) the Employment Agreement, the Supplemental
Agreement or this Trust B Agreement, the terms of the Employment Agreement, the
Supplemental Agreement and this Trust B Agreement shall prevail.
Section 7.8 Notices.
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<PAGE>
(a) Any notice, consent, demand, request, or other communication given to a
Party or the Participant in connection with this Trust B Agreement shall be
in writing and shall be deemed to have been given (a) when delivered
personally to the person specified or (b), provided that a written
acknowledgment of receipt is obtained, two days after delivery by certified
or registered mail, or by a nationally recognized overnight courier, to the
address set forth below for the person specified (or to such other address
for such person as shall be specified by ten days advance notice given
pursuant to this Section 7.7).
If to the Company: Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attn: Marc B. Levin
With a copy to: Marshall A. Elkins
Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
If to the Participant: Dr. Robert N. Elkins
8231 Bay Colony Drive #P2101
Naples, Florida 34108
With a copy to: Andrew L. Oringer
Rogers & Wells
200 Park Avenue
New York, New York 10166-0153
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If to the Trustee: Smith Barney, Inc.
1 Liberty Place
1650 Market Street
Philadelphia, Pennsylvania 19103
Attn: John Hoch
With a copy to:
(b) any notice or other communication given by a Party to a Beneficiary in
connection with this Trust B Agreement shall be in writing and shall be
deemed to have been given (a) when delivered personally to the person
specified or (b), provided that a written acknowledgment of receipt is
obtained, two days after delivery by certified or registered mail, or by a
nationally recognized overnight courier, to the address for such
Beneficiary first provided to the Party by the Participant (or to such
other address for such Beneficiary as shall be specified by the Participant
or the Beneficiary by ten days advance notice given pursuant to this
Section 7.7).
Section 7.9 Headings. The headings of the sections contained in this Trust B
Agreement are for convenience only and shall not be deemed to control or affect
the meaning or construction of any of its provisions.
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<PAGE>
IN WITNESS WHEREOF, this Trust B Agreement has been executed this 25th day of
November, 1997 by the Company, as the Grantor, and Smith Barney, Inc. as the
Trustee to evidence their adoption of this Trust B Agreement.
Signed and delivered in the presence of:
Integrated Health Services, Inc.
________________________________ By ____________________________
- -------------------------------- -------------------------------
Witness as to the Company Print Name/Title
Attest ________________________
- -------------------------------- -------------------------------
Trustee
- -------------------------------- -------------------------------
Witness as to the Trustee Print Name/Title
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SCHEDULE A
CONTRIBUTION SCHEDULE
1. The Company shall irrevocably deposit the following amounts in trust
with the Trustee on or before the following dates:
- --------------------------------------------------------------------------------
Date of Contribution Amount of Contribution
- --------------------------------------------------------------------------------
On the date that Trust B is established $1,000
- --------------------------------------------------------------------------------
No later than ten days after Trust B is
established An additional $3,573,000
- --------------------------------------------------------------------------------
No later than the later of (i) ten days after
Trust B is established and (ii) January 2, 1998 1998 Scheduled Amount
- --------------------------------------------------------------------------------
No later than January 4, 1999 The 1999 Scheduled Amount
- --------------------------------------------------------------------------------
No later than January 2, 2000 The 2000 Scheduled Amount
- --------------------------------------------------------------------------------
No later than January 2, 2001 The 2001 Scheduled Amount
- --------------------------------------------------------------------------------
2. For purposes of this Schedule A,
a. "1998 Scheduled Amount" shall mean an amount such that:
(i) such Scheduled Amount, compounded at 8% annually from January
1, 1998, through July 1, 2001, plus three additional equal
amounts, compounded at 8% annually (x) from January 1, 1999
through July 1, 2001; (y) from January 1, 2000 through July 1,
2001; and (z) from January 1, 2001 through July 1, 2001,
respectively, would equal
(ii) the excess (if any) of (x) $23.9 million over (y) an amount
equal to the
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value of the corpus of Trust B as of January 1, 1998 (excluding
the value of any contribution in respect of the 1998 Scheduled
Amount), compounded at 8% annually from January 1, 1998 through
July 1, 2001.
b. "1999 Scheduled Amount" shall mean an amount such that:
(i) such Scheduled Amount, compounded at 8% annually from January
1, 1999, through July 1, 2001, plus two additional equal amounts,
compounded at 8% annually (x) from January 1, 2000 through July
1, 2001 and (y) from January 1, 2001 through July 1, 2001,
respectively, would equal
(ii) the excess (if any) of (x) $23.9 million over (y) an amount
equal to the value of the corpus of Trust B as of January 1, 1999
(excluding the value of any contribution in respect of the 1999
Scheduled Amount), compounded at 8% annually from January 1, 1999
through July 1, 2001.
c. "2000 Scheduled Amount" shall mean an amount such that:
(i) such Scheduled Amount, compounded at 8% annually from January
1, 2000, through July 1, 2001, plus an additional equal amount,
compounded at 8% annually from January 1, 2001 through July 1,
2001, would equal
(ii) the excess (if any) of (x) $23.9 million over (y) an amount
equal to the value of the corpus of Trust B as of January 1, 2000
(excluding the value of any contribution in respect of the 2000
Scheduled Amount), compounded at 8% annually from January 1, 2000
through July 1, 2001.
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d. "2001 Scheduled Amount" shall mean an amount such that
(i) such Scheduled Amount, compounded at 8% annually from January
1, 2001, through July 1, 2001, shall equal
(ii) the excess (if any) of (x) $23.9 million over (y) an amount
equal to the value of the corpus of Trust B as of January 1, 2001
(excluding the value of any contribution in respect of the 2001
Scheduled Amount), compounded at 8% annually from January 1, 2001
through July 1, 2001.
3. To illustrate the operation of Sections 1 and 2 of this Schedule A with
an example, suppose that the value of the corpus of Trust B on January 1, 1999
is $10,000,000. The 1999 Scheduled Amount would then be $3,491,186 , since
$3,491,186 compounded at 8% annually for 2.5 years plus $3,491,186 compounded at
8% annually for 1.5 years plus $3,491,186 compounded at 8% annually for 0.5
years equals $11,778,416, which is the excess of $23.9 million over $10 million
compounded at 8% annually for 2.5 years.
4. No later than the first business day in each calendar year after 2001,
the Company shall irrevocably contribute to Trust B any additional amount (an
"Additional Contribution") as may be required to assure that the sum of (i) the
realizable value of the corpus of Trust B (excluding assets attributable to
Employee Deferral Contributions, Trust Z Transfers or Plan Z Contributions),
plus (ii) the Allocable Amount of Trust A, is equal to or greater than:
a. if the Termination Date has already occurred, the lump-sum
Actuarial Equivalent (determined as of the first business day of
such year and using an Applicable Discount Rate equal to the
average yield on 30-year United States Treasury securities for
the last month of the preceding year) of all unpaid Retirement
Benefits; and
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b if the Termination Date has not yet occurred, the lump-sum
payment with respect to Retirement Benefits to which the
Participant would have been entitled had the Termination Date
occurred on the first business day of such year without his
having made an Election.
5 Upon any Change of Control, the Company shall, as soon as practicable but
in no event later than 30 days following the Change of Control, irrevocably
contribute to Trust B any additional amount (a "Change of Control Contribution")
as may be required to assure that the sum of (i) the realizable value of the
corpus of Trust B (excluding assets attributable to Employee Deferral
Contributions, Trust Z Transfers or Plan Z Contributions), plus (ii) the
Allocable Amount of Trust A, is equal to or greater than:
a if the Termination Date has already occurred, the lump-sum
Actuarial Equivalent (determined as of the date of the Change of
Control and using an Applicable Discount Rate equal to the
average yield on 30-year United States Treasury securities for
the month preceding the month in which the Change of Control
occurs) of all unpaid Retirement Benefits; and
b if the Termination Date has not yet occurred, the lump-sum
payment with respect to Retirement Benefits to which the
Participant would have been entitled had the Termination Date
occurred on the date of the Change of Control without his having
made an Election.
6 Unless the Participant (or, after his death, his Beneficiaries) consents
in writing to an alternative procedure, the amount of any Scheduled
Contribution, Additional Contribution, and Change of Control Contribution shall
be determined by a Big Six accounting firm that (a) has not provided services to
the Company or any of its affiliates during the three years preceding the date
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<PAGE>
on which the determination is made, (b) is selected and paid for by the Company,
and (c) is reasonably acceptable to the Participant (or, after his death, his
Beneficiaries).
7 The Company shall irrevocably contribute to Trust B amounts equal to any
amounts the Participant may designate as Employee Deferral Contributions
pursuant to Article V of Plan A. Each such contribution shall be due from the
Company to Trust B no later than 30 days after the date on which the
corresponding deferred amount would have been due to the Participant had he not
elected to defer it.
8 All deposits and contributions made by the Company to Trust B pursuant to
Sections 1 through 5 of this Contribution Schedule shall be made in cash.
9 The Company shall use reasonable efforts to secure the prompt transfer to
Trust B of (a) the assets in Trust A that are attributable to contributions made
by the Company in respect of the Executive's Retirement Benefits under Plan A
and (b) the assets in Trust Z that are attributable to contributions by the
Company in respect of the Executive's Plan Z Benefits.
10 The Company, in its sole discretion, may at any time, or from time to
time, make additional irrevocable contributions of cash or other property to
Trust B, beyond the contributions referred to in Sections 1 through 9 of this
Contribution Schedule.
11 This Contribution Schedule forms part of the Trust B Agreement, and all
capitalized terms in it shall have the meanings set forth in the Trust B
Agreement.
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SCHEDULE B
PAYMENT SCHEDULE
1 On any termination of the Participant's employment with the Company that
occurs on or after July 1, 2005 and that is not on account of death, the Trustee
shall make the following payments from Trust B in respect of the Participant's
Retirement Benefits.
(a) In the event that the Participant has made an Election,
(i) if the Participant has elected to receive his Retirement
Benefits as a single life annuity, he shall be paid an annual annuity
for his life, with each annual payment equaling seventy percent (70%)
of his Average Annual Compensation;
(ii) if the Participant has elected to receive his Retirement
Benefits as a joint and fifty percent (50%) survivor annuity,
(A) he shall be paid an annual annuity for his life that is
the Actuarial Equivalent, when his right to payments under
Section 1(a)(ii)(B) is taken into account, of the annual annuity
determined in accordance with Section 1(a)(i), and
(B) upon the death of the Participant, his Beneficiary (if
then living) shall be paid an annual annuity for his or her life,
with each annual payment equaling 50% of the Participant's annual
annuity payment determined in accordance with Section
1(a)(ii)(A); and
(iii) if the Participant has elected to receive his Retirement
Benefits in the form of a number of substantially equal annual
payments,
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<PAGE>
(A) each such annual payment shall equal the amount that is
required to make the present value of all such payments,
determined as of the Termination Date and using the Applicable
Discount Rate, equal to the lump-sum Actuarial Equivalent of the
annual annuity determined in accordance with Section 1(a)(i); and
(B) if the Participant dies before all payments provided for
under Section 1(a)(iii)(A) are due, his Beneficiary (or
Beneficiaries) shall receive any remaining payments not yet due.
(b) In the event that the Participant has not made an Election, the
Participant shall be paid a lump-sum distribution in respect of
his Retirement Benefits that is the Actuarial Equivalent of the
annual annuity determined in accordance with Section 1(a)(i).
2 On any termination of the Participant's employment with the Company that
occurs after July 1, 2001 but before July 1, 2005 and that is not on account of
death, the Trustee shall make the following payments from Trust B in respect of
the Participant's Retirement Benefits.
(a) In the event that the Participant has made an Election,
(i) if the Participant has elected to receive his Retirement
Benefits as a single life annuity, he shall be paid an annual annuity
for his life, with each annual payment equaling seventy percent (70%)
of his Average Annual Compensation, except that each such payment
shall be reduced by two-twelfths of one percent for each full calendar
month by which his Termination Date precedes July 1, 2005;
(ii) if the Participant has elected to receive his Retirement
Benefits as a joint and fifty percent (50%) survivor annuity,
32
<PAGE>
(A) he shall be paid an annual annuity for his life that is
the Actuarial Equivalent, when his right to payments under
Section 2(a)(ii)(B) is taken into account, of the annual annuity
determined in accordance with Section 2(a)(i); and
(B) upon the death of the Participant, his Beneficiary (if
then living) shall be paid an annual annuity for his or her life,
with each annual payment equaling 50% of the Participant's annual
annuity payment determined in accordance with Section
2(a)(ii)(A); and
(iii) if the Participant has elected to receive his Retirement
Benefits in the form of a number of substantially equal annual
payments,
(A) each such annual payment shall equal the amount that is
required to make the present value of all such payments,
determined as of the Termination Date and using the Applicable
Discount Rate, equal to the lump-sum Actuarial Equivalent of the
annual annuity determined in accordance with Section 2(a)(i); and
(B) if the Participant dies before all payments provided for
under Section 2(b)(iii)(A) are due, his Beneficiary (or
Beneficiaries) shall receive any remaining payments not yet due.
(b) In the event that the Participant has not made an Election, the
Participant shall be paid a lump-sum distribution in respect of his
Retirement Benefits that is the Actuarial Equivalent of the annual annuity
determined in accordance with Section 2(a)(i).
3 On any termination of the Participant's employment with the Company that
occurs prior July 1, 2001 and that is not on account of death, the Trustee shall
make the following payments from Trust B in respect of the Participant's
Retirement Benefits.
33
<PAGE>
(a) In the event that the Participant has made an Election,
(i) if the Participant has elected to receive his Retirement
Benefits as a single life annuity, he shall be paid an annual annuity
for his life that is the Actuarial Equivalent of the following
annuity: an annual annuity for his life, commencing on July 1, 2005,
with each annual payment equaling the percentage of his Average Annual
Compensation that is determined in accordance with Appendix I to Plan
A.
(ii) if the Participant has elected to receive his Retirement
Benefits as a joint and fifty percent (50%) survivor annuity,
(A) he shall be paid an annual annuity for his life that is
the Actuarial Equivalent, when his right to payments under
Section 3(a)(ii)(B) is taken into account, of the annual annuity
determined in accordance with Section 3(a)(i); and
(B) upon the death of the Participant, his Beneficiary (if
then living) shall be paid an annual annuity for his or her life,
with each annual payment equaling 50% of the Participant's annual
annuity payment determined in accordance with Section
3(a)(ii)(A); and
(iii) if the Participant has elected to receive his Retirement
Benefits in the form of a number of equal annual payments,
(A) each such annual payment shall equal the amount that is
required to make the present value of all such payments,
determined as of the Termination Date and using the Applicable
Discount Rate, equal to the lump-sum Actuarial Equivalent of the
annual annuity determined in accordance with Section 3(a)(i); and
34
<PAGE>
(B) if the Participant dies before receiving all payments
provided for under Section 3(b)(iii)(A), his Beneficiary (or
Beneficiaries) shall receive any remaining payments not yet due.
(b) In the event that the Participant has not made an Election, the
Participant shall be paid a lump-sum distribution in respect of his
Retirement Benefits that is the Actuarial Equivalent of the annual annuity
determined in accordance with Section 3(a)(i).
4 The first annual payment due pursuant to Sections 1(a), 2(a) and 3(a)
shall be due on the Termination Date and shall be paid as soon as practicable
thereafter, but in no event more than 30 days after the Termination Date. Each
subsequent annual payment due pursuant to such Sections shall be due on
anniversaries of the Termination Date. Payments due pursuant to Sections 1(b),
2(b) and 3(b) shall be due on the Termination Date and shall be paid as soon as
practicable thereafter, but in no event more than 30 days after the Termination
Date.
5 Upon any termination of the Participant's employment with the Company on
account of death, the Trustee shall make from Trust B to the Participant's
Beneficiary (or Beneficiaries), as soon as practicable but in no event more than
30 days after the Participant's death, a lump-sum payment that is equal to the
lump-sum payment that the Participant would have received had his employment
with the Company terminated on the day before his death without his having made
any Election.
6 Upon any Change of Control occurring while the Participant is employed
with the Company, the Trustee shall make from Trust B to the Participant (or his
Beneficiaries), as soon as practicable but in no event more than 60 days after
the Change of Control occurs, a lump-sum payment in respect of the Participant's
Retirement Benefits equaling (a) the lump-sum Actuarial Equivalent of the
following annuity: an annual annuity for his life, commencing as of the date of
the
35
<PAGE>
Change of Control and determined as if the Termination Date had occurred on the
date of the Change of Control, under which each annual payment equals seventy
percent (70%) of his Average Annual Compensation minus (b) the sum of any
payments in respect of Retirement Benefits previously received by the
Participant (or his Beneficiaries) in respect of Retirement Benefits. Any such
lump-sum payment, if made timely and in full, shall extinguish any right to
payments from Trust B under Sections 1 through 5.
7 Upon any Change of Control occurring within 12 months following any
termination of the Participant's employment with the Company, the Trustee shall
make from Trust B to the Participant (or his Beneficiaries), as soon as
practicable but in no event more than 60 days after the Change of Control
occurs, a lump-sum payment in respect of the Participant's Retirement Benefits
equaling (a) the lump-sum Actuarial Equivalent of the following annuity: an
annual annuity for his life, determined and commencing as of the Termination
Date, under which each annual payment equals seventy percent (70%) of his
Average Annual Compensation minus (b) the sum of any payments in respect of
Retirement Benefits previously received by the Participant (or his
Beneficiaries) in respect of Retirement Benefits. Any such lump-sum payment, if
made timely and in full, shall extinguish any right to further payments from
Trust B under Sections 1 through 5.
8 Subject to the provisions of Section 5.1(c) of the Trust B Agreement,
payments due to the Participant (or his Beneficiaries) under Sections 1 through
7 of this Payment Schedule shall be offset by payments in respect of Retirement
Benefits that the Participant (or his Beneficiaries) have already received from
Trust A, the Company or other sources.
9 This Section 9 addresses payments made from assets of Trust B that are
attributable to Employee Deferral Contributions (if any). The Trustee shall pay
to the Participant, from such assets, any payment authorized to be made prior to
the Termination Date pursuant to Section 5.4 of Plan A (or any successor to such
Section). Any such payment shall be made as soon as practicable (but in no event
more than 30 days) after the payment has been authorized
36
<PAGE>
pursuant to Section 5.4 of the Plan (or any successor to such Section). No later
than 30 days after the Termination Date, the Trustee shall pay to the
Participant (or his Beneficiaries) the proceeds of all assets attributable to
Employee Deferral Contributions that then remain in Trust B. Subject to the
provisions of Section 5.1(c) of the Trust B Agreement, payments due to the
Participant (or his Beneficiaries) under this Section 9 shall be offset by
payments in respect of Employee Deferral Contributions that the Participant (or
his Beneficiaries) have already received from the Company or other sources.
10 This Section 10 addresses payments from the assets of Trust B that are
attributable to Trust Z Transfers or Plan Z Contributions. No later than 30 days
after the Termination Date, the Trustee shall pay to the Participant (or his
Beneficiaries) in respect of his (or their) Plan Z Benefits the proceeds of all
assets attributable to Trust Z Transfers or Plan Z Contributions that then
remain in Trust B. Subject to the provisions of Section 5.1(c) of the Trust B
Agreement, payments due to the Participant (or his Beneficiaries) under this
Section 10 shall be offset by payments in respect of Plan Z Benefits that the
Participant (or his Beneficiaries) have already received from Trust A, the
Company or other sources.
11 Each payment made pursuant to Section 1 through 10 shall be made in
cash, unless the Participant (or the Beneficiary who is to receive the payment)
requests in writing a different form of payment.
12 This Payment Schedule forms part of the Trust B Agreement, and all
capitalized terms in it shall have the meanings set forth in the Trust B
Agreement.
37
SUPPLEMENTAL AGREEMENT
This AGREEMENT is made effective as of November 18, 1997, by and between
INTEGRATED HEALTH SERVICES, INC., a Delaware corporation (hereinafter referred
to as the "Company"), and ROBERT N. ELKINS (hereinafter referred to as the
"Executive").
W I T N E S S E T H:
WHEREAS, the Executive is employed as Chairman and Chief Executive Officer
of the Company;
WHEREAS, the Company and the Executive are parties to an Employment
Agreement, effective as of January 1, 1994 (such agreement, as from time to time
amended, being hereafter referred to as the "Employment Agreement");
WHEREAS, the Employment Agreement provides certain pension benefits to the
Executive;
WHEREAS, the Executive is a participant in a supplemental executive
retirement plan of the Company known as SERP A;
WHEREAS, the Company expects to establish a trust ("Trust B") in connection
with the Executive's pension benefits under the Employment Agreement and SERP A;
WHEREAS, the Executive has agreed to deliver to the Company a Note, dated
September 29, 1997 and executed by him, in the principal amount of $13,447,000
("Note A");
1
<PAGE>
WHEREAS, the Executive has delivered to the Company a Note, dated December
19, 1996 and executed by him, in the principal amount of $4,690,527 ("Note B");
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
agreements herein contained, the parties, intending to be legally bound, hereby
agree as follows:
1. For purposes of this Agreement,
(a) the terms "Change of Control", "Permanent Disability", "Good Reason",
"Cause", "SERP A", "Trust B", "Trust B Agreement", "Board", "Salary" and
"Bonus" shall have the meanings ascribed to them in the Employment
Agreement;
(b) the term "Qualified Medical Termination" shall mean any termination by
the Executive of his employment with the Company pursuant to the
reasonable, good faith, medical advice of a qualified independent physician
selected by him (or, if he is unable to make such selection, by an adult
member of his immediate family) and reasonably acceptable to the Board,
provided that such advice is set forth in a written medical opinion that
(i) is delivered to the Board; (ii) states that, in the physician's
professional opinion, failure by the Executive to terminate his employment
with the Company would pose a significant risk of substantial adverse
effects on the Executive's long-term health and well-being and (iii) sets
forth the specific grounds for the physician's opinion;
(c) the term "Schedule A" shall mean the schedule attached to this
Agreement, which schedule forms a part of this Agreement for all purposes;
(d) the term "Loan Bonus" shall mean any of the five amounts specified in
Schedule A;
(e) the term "Compensation" shall have the meaning ascribed to it in SERP A
and the term "Average Annual Compensation" shall have the meaning ascribed
to it in SERP A and the Trust B Agreement; and
2
<PAGE>
(f) any determination that the Executive's employment has been terminated
for "Permanent Disability", by the Executive for "Good Reason", or by the
Company for "Cause" shall be made in accordance with the procedures set
forth in the Employment Agreement.
2. Upon any termination of the Executive's employment with the Company by
death, for Permanent Disability, by a Qualified Medical Termination, by the
Executive for Good Reason, or by the Company without Cause, the Executive shall
be deemed to have completed 15 "Years of Service", as that term is defined in
SERP A, for purposes of determining any pension or retirement benefit under the
Employment Agreement, SERP A or Trust B.
3. Upon any Change of Control or any termination of the Executive's
employment with the Company by death, for Permanent Disability, by the Executive
for Good Reason, or by the Company without Cause, all principal, interest and
other amounts and obligations of the Executive under Note B that are not then
due shall be automatically and immediately discharged and forgiven.
4. Subject to the provisions of this Section 4 and of Section 5, the
Executive shall be the beneficiary of Loan Bonuses as of the dates, and in the
amounts, set forth in Schedule A. Each Loan Bonus shall be applied first to
discharge any interest due and payable on Note A and thereafter to pay down any
principal amount that remains outstanding under Note A. No amount shall be due
as a Loan Bonus (a) except for the purpose of paying interest or outstanding
principal under Note A or (b) after the Executive's obligations to make payments
of interest and principal under Note A have been fully discharged.
5. No Loan Bonus shall be due to the Executive if his employment with the
Company terminates on or before the date such Loan Bonus is due unless the
following three requirements are satisfied as of such date:
(a) the termination of his employment was a Qualified Medical Termination;
3
<PAGE>
(b) he has made himself reasonably available to perform such consulting
services as the Company may have from time to time reasonably requested,
provided that such services were requested to be performed at times, at
places, and in amounts that were not inconsistent with the reasonable, good
faith medical advice of a physician selected in the manner described in
Section 1(b) and were reasonably consistent with the Executive's other
commitments; and
(c) he has not violated any of the restrictions set forth in Section 4.1 or
4.2 of the Employment Agreement (or any successor to such Sections relating
to confidentiality or non-competition covenants), provided that, for
purposes of this Section 5(c), the restrictions set forth in Section 4.2
(or in any successor to such Section) shall be deemed to continue so long
as Note A is not fully discharged.
6. No Loan Bonus, loan forgiveness, severance or termination of employment
benefit, change in control benefit, or income imputed to the Executive on any
purchase of any airplane or hanger referred to in Section 2.3(f) of the
Employment Agreement (or any successor to such Section) shall be treated as
Compensation for the purpose of determining the Executive's Average Annual
Compensation or retirement benefits under SERP A, the Trust B Agreement, or the
Employment Agreement.
7. No amendment, modification or waiver of any provision of this Agreement
shall be valid unless in writing and signed by the party to be charged. This
Agreement shall be governed, interpreted and enforced in accordance with the
laws of the State of Delaware, without regard to principles of conflict of laws.
Any dispute arising under or relating to this Agreement shall, at the election
of the Executive, be resolved in accordance with Section 6.9 of the Employment
Agreement (or any successor to such Section). This Agreement shall be binding
upon and inure to the benefit of the Company and the Executive and their
respective heirs, legal representatives, executors, administrators, successors
and permitted assigns. This Agreement may be executed in counterparts.
4
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by
its duly authorized officers and its corporate seal to be hereunto affixed, and
the Executive has hereunto set the Executive's hand on the day and year first
above written.
COMPANY EXECUTIVE
- ------- ---------
Integrated Health Services,
Inc., a Delaware corporation
By: /s/ /s/
---------------------------------- -------------------------------
Robert N. Elkins
Name: ___________________________
Title: ___________________________
---------------------------
5
<PAGE>
SCHEDULE A
- --------------------------------------------------------------------------------
DATE OF LOAN BONUS AMOUNT OF LOAN BONUS
- --------------------------------------------------------------------------------
October 1, 1998 (a) $3,618,000 minus (b) the excess of (i)
the sum of the Salary and Bonus to which the
Executive was entitled under the Employment
Agreement in respect of calendar year 1997
over (ii) $500,000.
- --------------------------------------------------------------------------------
October 1, 1999 (a) $2,700,000 plus (b) the interest accrued
on the Note after September 30, 1998 minus
(c) the excess of (i) the sum of the Salary
and Bonus to which the Executive was entitled
under the Employment Agreement in respect of
calendar year 1998 over (ii) $500,000.
- --------------------------------------------------------------------------------
October 1, 2000 (a) $2,700,000 plus (b) the interest accrued
on the Note after September 30, 1999 minus
(c) the excess of (i) the sum of the Salary
and Bonus to which the Executive was entitled
under the Employment Agreement in respect of
calendar year 1999 over (ii) $500,000.
- --------------------------------------------------------------------------------
October 1, 2001 (a) $2,700,000 plus (b) the interest accrued
on the Note after September 30, 2000 minus
(c) the excess of (i) the sum of the Salary
and Bonus to which the Executive was entitled
under the Employment Agreement in respect of
calendar year 2000 over (ii) $500,000.
- --------------------------------------------------------------------------------
October 1, 2002 (a) $2,700,000 plus (b) the interest accrued
on the Note after September 30, 2001 minus
(c) the excess of (i) the sum of the Salary
and Bonus to which the Executive was entitled
under the Employment Agreement in respect of
calendar year 2001 over (ii) $500,000.
- --------------------------------------------------------------------------------
6
PROMISSORY NOTE
Dated: September 29, 1997 $13,447,000.00
FOR VALUE RECEIVED, the undersigned, ROBERT N. ELKINS ("Maker") promises to pay
to the order of INTEGRATED HEALTH SERVICES, INC., a Delaware corporation
("IHS"), in lawful money of the United States of America, on October 1, 2002
(the "Maturity Date"), the principal sum of THIRTEEN MILLION FOUR HUNDRED FORTY
SEVEN THOUSAND AND 00/100 DOLLARS ($13,447,000.00) (the "Debt"), or such lesser
amount of the Debt as shall then be outstanding and unpaid, plus all accrued and
unpaid interest on the Debt. Maker also promises to pay interest on the unpaid
principal amount of the Debt from time to time outstanding, and on any interest
that has from time to time become due but has not yet been paid, at the rate of
Six and Eight-tenths Percent (6.8%) per annum, compounded annually and payable
annually in arrears on October 1 of each year, commencing on October 1, 1998,
from the date hereof until all such unpaid principal and unpaid interest shall
have been paid in full or forgiven.
In the event of any sale by Maker of any shares of the common stock of IHS ("IHS
Stock"), whether now owned or hereafter acquired beneficially or of record by
Maker, this Note shall become subject to mandatory prepayment by Maker on that
date which is five (5) business days following the date of such sale, but only
to the extent of the gross proceeds, less broker's commissions and taxes payable
by Maker in respect of such proceeds, resulting from the first 650,000 shares
sold (such number and kind of shares to be appropriately adjusted by the Company
to take into account any stock dividend, recapitalization, merger,
consolidation, spin-off, split-up, combination, exchange of shares, or the like
that results in a change in the number or kind of shares of IHS Stock
outstanding).
1
<PAGE>
All payments on this Note shall be applied first to accrued and unpaid interest
and costs of collection and then to any unpaid principal. At his option, Maker
may at any time and from time to time pre-pay all or part of the principal
amount of this Note, without premium, penalty or notice.
By its acceptance of this Note, IHS acknowledges and agrees that: (i) Maker is
authorized at any time and from time to time to set off and apply any and all
indebtedness at any time owing by Maker under this Note against any and all
indebtedness or other obligations of IHS then due and owing to Maker and (ii)
any and all payments in respect of indebtedness or other obligations from time
to time due and owing from IHS to Maker shall be made without deduction or
set-off for any indebtedness at any time owing by Maker under this Note.
By accepting this Note, IHS agrees that, upon the occurrence of any Change of
Control or any termination of Maker's employment with IHS by death, for
Permanent Disability, by Maker for Good Reason, or by IHS without Cause, (a) the
Debt and all other amounts and obligations of Maker under this Note that are not
then due shall be automatically and immediately discharged and forgiven and (b)
this Note shall be marked "canceled" and promptly returned to Maker. For
purposes of this Note, (x) the term "Employment Agreement" shall mean the
Employment Agreement between IHS and Maker effective as of January 1, 1994, as
from time to time amended, (y) the terms "Change of Control", "Permanent
Disability", "Good Reason" and "Cause" shall have the meanings set forth in the
Employment Agreement and (z) whether Maker's employment has been terminated for
Permanent Disability, by Maker for Good Reason, or by IHS for Cause shall be
determined in accordance with the procedures set forth in the Employment
Agreement.
In the event that IHS purports to terminate Maker's employment for Cause
pursuant to the provisions of Section 3.4 of the Employment Agreement (or any
successor provisions), and Maker disputes that he was properly terminated for
Cause pursuant to such provisions, neither the Debt nor any other amount or
obligation of the Maker under this Note that is not then due shall be due or
payable until a final, unappealable judgement has been entered by a
2
<PAGE>
court of competent jurisdiction affirming that Maker was properly terminated for
Cause in accordance with such provisions.
Maker waives presentment for payment, demand, notice of non-payment, notice of
protest, and protest of this Note, and all other notices in connection with the
delivery, acceptance, performance, default, dishonor or enforcement of the
payment of this Note. Maker shall pay all costs of collection of this Note,
including reasonable attorneys' fees. All rights and remedies given by this Note
are cumulative and not exclusive of any thereof or of any other rights or
remedies available to IHS, and no course of dealing between Maker and IHS, or
any delay or omission in exercising any right or remedy shall operate as a
waiver of any right or remedy, and every right and remedy may be exercised from
time to time and as often as shall be deemed appropriate by IHS.
Neither this Note, nor the Debt or any other amounts evidenced hereby, nor any
other rights or obligations of Maker or IHS under or in connection with this
Note, may be sold, assigned, pledged or otherwise transferred or encumbered, and
any attempt to do so shall be null and void. This Note, and the rights and
obligations of Maker and IHS hereunder, shall inure to the benefit of and be
binding upon Maker, IHS and their respective successors, permitted assigns,
heirs, executors and personal representatives.
This Note shall be governed, interpreted, and enforced in accordance with the
laws of the State of Delaware, without regard to principles of conflict of laws.
IN WITNESS WHEREOF, the undersigned has executed this Note on the date first
above written.
/s/___________________________[SEAL]
Robert N. Elkins
3
EXHIBIT 10.51
RELOCATION AGREEMENT
This RELOCATION AGREEMENT, dated as of August 5, 1997, is entered into by
and between INTEGRATED HEALTH SERVICES, INC., a Delaware Corporation (the
"Company"), and LAWRENCE P. CIRKA (the "Executive").
WITNESSETH:
----------
WHEREAS, Executive is party to an employment agreement with the Company (as
amended, the "Employment Agreement") pursuant to which Executive currently
serves as President of the Company;
WHEREAS, Executive currently performs a majority of his services for the
Company at the Company's satellite headquarters in Naples, Florida (the "Florida
Headquarters");
WHEREAS, the Company has determined that it is in the Company's best
interests for Executive to commence performing the majority of his services for
the Company at the Company's corporate headquarters located in Owings Mills,
Maryland (the "Maryland Headquarters") on or about April 30, 1998 and to begin
to transition from the Florida Headquarters to the Maryland Headquarters during
the fall of 1997;
WHEREAS, in order to induce Executive to relocate himself and his family to
the Maryland area, the Company has agreed to reimburse Executive for the costs
incurred by him in connection with such relocation, including the costs of
maintaining a temporary residence in the Florida area during the Transition
Period (as defined below) and the costs of selling Executive's current residence
in the Florida area; and
WHEREAS, Executive is willing to relocate himself and his family to the
Maryland area, on the terms and conditions set forth herein.
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties, intending to be legally bound, hereby agree as
follows:
1. PERFORMANCE OF EXECUTIVE'S DUTIES DURING AND FOLLOWING TRANSITION
PERIOD. During the period beginning on the date hereof and ending on the date
that Executive has completed the relocation of himself, his wife and his family
to the Maryland area, but not later than April 30, 1998 (the "Transition
Period"), Executive Agrees to perform a portion, not to exceed 50%, of his
duties for the Company at the Maryland Headquarters and to continue to perform
the balance of such duties at the Florida Headquarters. Beginning May 1, 1998
and during the remainder of the Term under the Employment Agreement, xecutive
agrees to perform substantially all of his duties for the Company at the
Maryland Headquarters.
1
<PAGE>
2. REIMBURSEMENT FOR MOVING EXPENSES. The Company will directly pay or,
upon presentation of appropriate vouchers or other expense statements, reimburse
Executive for all moving, house search, travel, lodging and similar expenses
incurred by him and his family in relocating Executive, his wife and family and
household effects from his current principal residence located in Bonita
Springs, Florida (the "Current Resident") to the Baltimore, Maryland area,
including the cost of renting temporary storage space sufficient to permit
Executive to retain his and his family's personal effectsuntil Executive and his
family are established in their new permanent residence in Maryland.
3. CURRENT RESIDENCE. (a) PURCHASE. On or about August 25, 1997 (the
"Closing Date"), the Company shall purchase the Current Residence from Executive
for a purchase price (the "Purchase Price") equal to Executive's basis in the
Current Residence. In addition, the Company shall directly pay or, upon
presentation of appropriate vouchers or other expense statements, reimburse
Executive for all costs associated with the Company's purchase and the
Executive's sale of the Current Residence as contemplated by this Section 3,
including any transfer or other taxes associated with such sale and/or purchase,
the costs of the Appraiser and any other closing costs. The Company hereby
acknowledges receipt of satisfactory evidence of the Basis.
(b) LEASE DURING TRANSITION PERIOD. From and after the Closing Date during
the Transition Period, Executive shall have the right to lease the Current
Residence from the Company on a month to month basis, for a monthly rental
amount equal to the average monthly rental of comparable residences located
within the neighborhood, and otherwise on commercially reasonable lease
terms. Notwithstanding the foregoing, Executive agrees that, during the
final 30 days of the Transition Period, if Executive is then leasing the
Current Residence, Executive shall allow the Company to authorize a
reputable Realtor, reasonably acceptable to Executive, to inspect and show
the Current Residence at reasonable times during daytime hours, on at lease
one day's advance notice.
4. Sale of options in Integrated Health Services, Inc. ("IHS") in agreement
with Robert N. Elkins overall plan.
INTERGRATED HEALTH SERVICES, INC. LAWRENCE P. CIRKA
By: /s/ Robert N. Elkins By: /s/ Lawernce P. Cirka
------------------------------ -------------------------------
Robert N. Elkins
Chief Executive Officer
2
EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of the 21st day of October, 1997,
by and between ROTECH MEDICAL CORPORATION, a Florida corporation (the "Company")
and wholly owned subsidiary of INTEGRATED HEALTH SERVICES, INC., a Delaware
corporation ("IHS"), and STEPHEN P. GRIGGS (hereinafter referred to as the
"Employee").
W I T N E S S E T H:
WHEREAS, pursuant to an Agreement and Plan of Merger, dated as of July 6,
1997, among the Company, IHS, and IHS Acquisition XXIV, Inc. (the "Merger
Agreement"), the Company and IHS have agreed to a merger; and
WHEREAS, as a condition to the Merger Agreement, IHS requires that the
Employee terminate his existing employment arrangement and enter into this
Employment Agreement with the Company; and
WHEREAS, through his past association with the Company and in the course of
his employment by the Company, and as a necessary consequence thereof, Employee
has received and will receive information and has acquired and will acquire
knowledge of special procedures, processes, business conduct, and knowledge that
is private, proprietary, and secret to the Company and IHS in their respective
businesses; and
WHEREAS, the business, as well as the success and profits of the Company
and IHS, depend in large part upon the maintenance of secrecy as to such
information, processes, procedures and knowledge as to the conduct of the
Company's and IHS's businesses generally.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
agreements herein contained, as well as the agreement to employ the Employee or
to continue to employ the
- 1 -
<PAGE>
Employee under the terms and conditions contained herein, and intending to be
legally bound hereby, it is agreed between the parties hereto as follows:
ARTICLE I
EMPLOYMENT RELATIONSHIP
1.1 Termination of Prior Employment Arrangement. The existing employment
arrangement between the Company and Employee (whether written, verbal, or
otherwise), is hereby terminated in all respects (including with respect to any
provisions which otherwise by their terms would survive any termination of such
agreement), effective as of the date hereof.
1.2 Employment. The Company hereby employs the Employee in the position of
President of the Company, with such responsibilities, consistent with his
position as President, as may be assigned to Employee from time to time by the
President or Chief Operating Officer of IHS. Employee shall report to and be
responsible to said President or Chief Operating Officer for the period
hereinafter set forth, and the Employee hereby accepts such employment.
1.3 Exclusive Employment. During the continuation of the Employee's
employment by the Company hereunder, the Employee will faithfully and diligently
carry out his duties, and will, unless the Employee has first received the prior
written consent of the Company, devote the Employee's reasonable full time, and
his best efforts, energy, attention, and skill to the services of the Company
and to the promotion of its interests, and, without limiting the foregoing,
Employee covenants that during such time the Employee will neither: (a) engage
in, be employed by, be a director of or be otherwise directly or indirectly
interested in (i) any business or activity competing with or of a nature similar
to any of the businesses of the Company or IHS, or (ii) any
- 2 -
<PAGE>
business or activity engaged in the owning, operation or management of any
business or activity competing with or of a nature similar to any of the
businesses of the Company or IHS, nor (b) take any part in any activities
detrimental to the best interests of the Company or IHS. Notwithstanding the
foregoing, Employee has represented to the Company, and the Company
acknowledges, that Employee is the principal owner of the companies listed on
Exhibit A to this Agreement and that Employee presently devotes an insubstantial
portion of his business time and energy to these businesses. Company agrees that
Employee may continue to serve the companies listed on Exhibit A in the same
capacity as he has in the past, provided that said companies, and the Employee's
rendition of services in connection therewith, are not competitive with or of a
similar nature to any of the businesses of the Company or IHS and otherwise do
not interfere with the performance by Employee of his obligations under this
Agreement.
ARTICLE II
PERIOD OF EMPLOYMENT
2.1 Term. The term of employment under this Agreement (the "Term") shall
begin as of the date hereof, and shall end five (5) years following the date
hereof, unless sooner terminated pursuant to the terms of this Agreement.
2.2 Termination For Cause By Company. Company may terminate Employee's
employment under this Agreement with cause and without any obligation to pay
Employee further compensation (except through the date of any such termination)
upon the occurrence of any one or more of the following events:
- 3 -
<PAGE>
(a) Employee fails to perform any of his duties of employment in any
material respect or ceases to perform his professional responsibilities or
assignments in any material respect or breaches any material term of this
Agreement, which failure, non-performance or breach is not corrected
within thirty (30) days after notice is delivered by the Company to the
Employee specifying said failure, non-performance or breach, or Employee
breaches any of his representations or warranties under this Agreement in
any material respect;
(b) Employee dies;
(c) Employee becomes disabled or is unable to perform his normal
duties, which condition persists for a period of ninety (90) days or more,
and Company has provided Employee with disability insurance which shall
begin to pay after said ninety (90) day period expires;
(d) Employee is convicted of a felony, or commits an act of theft,
embezzlement, obtaining funds or property under false pretenses, or
similar act of material misconduct with respect to the property of the
Company, IHS or their subsidiaries or any of their respective employees;
or
(e) Employee commits a material act of malfeasance, dishonesty or
breach of trust with respect to the Company, IHS or any of their
subsidiaries. Upon any such termination as set forth in this Subsection,
the Company shall have no obligation to pay Employee further compensation
or to provide further benefits to Employee (except through the date of
such termination), and the Company shall be entitled to pursue any
remedies that it may have against Employee.
2.3 Termination Without Cause by Company. If this Agreement is terminated
by Company without cause, the balance of Employee's unpaid base salary and the
pro-rated portion of the performance- based bonus, if any, earned under Section
3.2(b) will become payable in a lump sum and all unvested stock options will
become fully vested upon Employee's termination.
2.4. Termination for Cause by Employee. This Agreement may be terminated by
Employee if (i) Company fails to perform any of its duties set forth in this
Agreement in any material respect, (ii) Company fails to provide Employee with a
work environment (i.e., office space, secretarial support, etc.) that is
reasonably similar to Employee's past work environment with the Company, or
(iii) Company substantially changes Employee's job responsibilities, and, with
respect to each of the foregoing, such failure or action is not corrected by
Company within
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<PAGE>
fifteen (15) days after notice is delivered to Company by Employee specifying
said failure or action. In the event of a termination for cause under this
Section 2.4, the balance of Employee's unpaid base salary and the pro-rated
portion of the performance-based bonus, if any, earned under Section 3.2(b) will
become payable in a lump sum and all unvested options will become fully vested
upon such termination.
ARTICLE III
COMPENSATION
3.1 Base Salary. For all services rendered by Employee under this
Agreement, during the Term, the Employee shall receive a base salary at an
annual rate of $500,000 per year, payable in accordance with the pay period
policy established by the Company from time to time.
3.2 Bonuses.
(a) Employee shall receive a one-time cash sign-on bonus of
$3,500,000, payable upon execution of this Agreement; and
(b) Within ninety (90) days of the close of each calendar year
during which this Agreement is or was in effect, the Company shall pay to
Employee a cash bonus in the amount of $500,000, provided that the Company
shall have achieved the performance goals specified on Exhibit B hereto
with respect to such year, and provided further that said bonus will be
reduced pro rata for any year during which this Agreement was in effect
for less than the entire year.
3.3 Stock Options. Employee will be granted warrants to purchase 750,000
shares of IHS common stock at an exercise price equal to the average closing
sales price per share of IHS Common Stock quoted on the NYSE for the fifteen
(15) business days immediately preceding the effective date of the Merger of a
wholly-owned subsidiary of IHS with and into the Company, which warrants will
become vested at a rate of 20% annually (subject to acceleration in the sole
discretion of Employer) commencing on the first anniversary of the closing of
the Merger. The agreement
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<PAGE>
pursuant to which such warrants are granted shall provide that the warrants will
become fully vested if Employee shall die during the Term or upon a change of
control of the Company (as defined in said warrant agreement). IHS shall cause
the offering of the warrants to Employee to be included in the registration
statement to be filed pursuant to Section 7.14 of the Merger Agreement or to be
registered pursuant to an S-3 registration statement.
3.4 Additional Benefits. Separate and apart from the Employee's cash
compensation as set forth above, during the Term the Company shall provide for:
(a) Employee's coverage under the Company's standard life, health
and long-term disability insurance package;
(b) an automobile allowance, at the rate of $800 per month;
(c) participation in the Company's standard HR (Human Resources)
package;
(d) four (4) weeks of non-cumulative paid vacation (in addition to
normal paid holidays and sick leave); and
(e) participation in any other employee benefits made available
generally from and after the date hereof to executives of the Company and
IHS, on the same basis as shall be available to such other executives.
ARTICLE IV
COVENANTS OF THE EMPLOYEE
4.1 Ownership and Return of Documents. The Employee agrees that all
memoranda, notes, records, papers or other documents and all copies thereof
relating to the Company's operations or businesses, regardless of whether
prepared by the Employee, and all objects associated therewith in any way
obtained by the Employee shall be the Company's property. Except as required to
satisfy his obligations under this Agreement, the Employee shall not copy
- 6 -
<PAGE>
or duplicate any of the aforementioned documents or objects, nor remove them
from the Company's facilities nor use any information concerning them either
during the Employee's employment or thereafter. The Employee agrees that the
Employee will deliver all of the aforementioned documents and objects that may
be in his possession to the Company on termination of the Employee's employment,
or at any other time on the Company's request, together with the Employee's
written certification of compliance with the provision of this paragraph.
4.2 Confidential Information. In connection with his association with the
Company and in connection with his employment at the Company, Employee has had,
and will have, access to confidential information ("Trade Secrets"), including,
without limitation, with respect to some or all of the following categories of
information:
(a) Financial Information, including but not limited to information
relating to the Company's earnings, assets, debts, prices, pricing
structure, reimbursement matters, volume of purchases or sales or other
financial data whether related to the Company generally, or to particular
products, services, geographic areas, or time periods;
(b) Supply and Service Information, including but not limited to
information relating to goods and services, suppliers' names or addresses,
terms of supply or service contracts or of particular transactions, or
related information about potential suppliers to the extent that such
information is not generally known to the public, and to the extent that
the combination of suppliers or use of a particular supplier, though
generally known or available, yields advantages to the Company details of
which are not generally known;
(c) Marketing Information, including but not limited to information
relating to details about ongoing or proposed marketing programs or
agreements by or on behalf of the Company, sales forecasts, advertising
formats and methods or results of marketing efforts or information about
impending transactions;
(d) Personnel Information, including but not limited to information
relating to employees' personal or medical histories, compensation or
other terms of employment, actual or proposed promotions, hirings,
resignations, disciplinary actions, terminations or reasons therefor,
training methods, performance, or other employee information;
- 7 -
<PAGE>
(e) Customer and Patient Information, including but not limited to
information relating to past, existing or prospective customers' or
patients' names, addresses or backgrounds, patients' medical histories,
records of agreements and prices, proposals or agreements between
customers and the Company, status of customers' accounts or credit, or
related information about actual or prospective customers as well as
customer lists; and
(f) Inventions and Technological Information, including but not
limited to information related to proprietary technology, trade secrets,
research and development data, processes, formulae, data and know-how,
improvements, inventions, techniques, and information that has been
created, discovered or developed, or has otherwise become known to the
Company (including, without limitation, any information created,
discovered, developed or made known by or to the Employee during the
period of or arising out of Employee's employment by the Company), and/or
in which property rights have been assigned or otherwise conveyed to the
Company, which information has commercial value in the business in which
the Company is engaged.
Company and Employee consider their relation one of confidence with respect
to Trade Secrets. During and after Employee's employment by the Company,
regardless of the reasons that such employment ends, Employee agrees:
(aa) To hold all Trade Secrets in confidence and to not discuss,
communicate or transmit to others, or make any unauthorized copy of or use
the Trade Secrets in any capacity, position or business except as it
directly relates to Employee's employment by the Company;
(bb) To use the Trade Secrets only in furtherance of proper
employment related reasons of the Company to further the interests of the
Company;
(cc) To take all actions that Company reasonably requests to prevent
unauthorized use or disclosure of or to protect the Company's interest in
the Trade Secrets; and
(dd) That any of the Trade Secrets, whether or not prepared by
Employee and whether or not coming into Employee's possession during
Employee's employment hereunder or by reason of his prior association with
the Company, are and shall remain the property of the Company, and all
such Trade Secrets, including copies thereof, together with all other
property belonging to the Company, or used in any of its businesses, shall
be delivered to or left with the Company upon termination of Employee's
employment with the Company.
- 8 -
<PAGE>
This Agreement does not apply to information that (i) becomes generally
known to the public other than as a result of a disclosure by Employee, (ii) was
known to Employee on a non-confidential basis prior to the disclosure of such
information to Employee by the Company, provided that the source of such
information was not believed by Employee to be bound by a confidentiality
agreement with or other contractual, legal or fiduciary obligation of
confidentiality to the Company with respect to such material, (iii) becomes
known to Employee on a non-confidential basis from a source other than the
Company or its agents, advisors or representatives provided that the source of
such information was not believed by Employee to be bound by a confidentiality
agreement with or other contractual, legal or fiduciary obligation of
confidentiality to the Company with respect to such material, or (iv) is
required to be disclosed by judicial or administrative proceedings after
Employee notifies the Company of any such required disclosure so as to afford
the Company the opportunity to obtain assurance that compelled disclosures will
receive confidential treatment.
To the maximum extent permitted by applicable law, the Employee
specifically waives any rights to customer names, customer lists, customer files
or parts thereof as well as test results or information Employee might otherwise
be entitled to by virtue of any applicable state or federal law or regulation.
4.3 Non-Solicitation and Non-Pirating. Employee hereby agrees that, without
the express written consent of the Company, the Employee will not, at any time
during the Term, or for a period of three (3) years following the termination or
natural expiration of this Agreement, directly or indirectly, for the Employee
or on behalf of any other person, firm, entity or other enterprise:
- 9 -
<PAGE>
(a) solicit any client or customer of the Company with the intent of
diverting such client or customer away from Company or in any way divert
or take away any client or customer of the Company who was a client or
customer of the Company while the Employee was an employee of the Company
under this Agreement (such period being hereinafter referred to as the
"Employment Period"); and
(b) hire, entice away or in any other manner persuade any employee
of the Company who was an employee of the Company during the Employment
Period, to alter, modify or terminate its relationship with the Company as
an employee as the case may be.
4.4 Non-Competition. In consideration of the Employee's employment
hereunder, and as an inducement to the execution and performance of the Merger
Agreement by IHS, the Employee hereby agrees that, for a period of three (3)
years following the termination or the natural expiration of this Agreement the
Employee will not, without the express written consent of the Company, directly
or indirectly, for the Employee or on behalf of any other person, firm, entity
or other enterprise, own, be employed by, be a director or manager of, act as a
consultant for, be a partner in, have a proprietary interest in, give advice to,
loan money to or otherwise associate with, any person, enterprise, sole
proprietorship partnership, association, corporation, joint venture or other
entity which is directly or indirectly in the business of owning, operating or
managing any entity of any type, licensed or unlicensed, which is engaged in or
provides home health services or home medical equipment, or in any way competes
with Company or its subsidiaries anywhere within the Continental United States.
This provision shall not be construed to prohibit the Employee (i) from owning
up to 2% of the issued shares of any company whose common stock is listed for
trading on any national securities exchange or on the NASDAQ National Market
System, or (ii) from engaging in conduct which would, as the result of
Employee's association with a particular company, otherwise violate this Section
4.4, if (x) such company's competitive activity represents only an incidental
and immaterial part of such company's overall business enterprise (but in any
event does not account for more than
- 10 -
<PAGE>
$2,000,000 in aggregate gross revenues), and (y) Employee's association with
such company does not relate to such company's competitive business segment.
4.5 Necessary Restrictions. The parties acknowledge that the restrictions
contained in this Article IV are reasonable and necessary to protect the
legitimate business interests of the Company and that any violation thereof by
Employee could result in irreparable harm to the Company; and further, the
Employee represents and warrants that the restrictions set forth in this Article
IV are enforceable against him in accordance with their terms. Accordingly, the
Employee agrees that upon the violation by him of any of the restrictions
contained in Paragraphs 4.3 and 4.4, the Company shall be entitled to apply to
any court of competent jurisdiction for a preliminary and permanent injunction
as well as any other relief provided at law, equity, under this Agreement or
otherwise, without the necessity of posting any bond or providing any security.
In the event any of the foregoing restrictions are adjudged unreasonable in any
proceeding, then the parties agree that the period of time or the scope of such
restrictions (or both) shall be adjusted to such a manner or for such a time (or
both) as is adjudged to be reasonable.
4.6 Prior Companies. The Employee agrees to indemnify and hold harmless the
Company, its officers, directors, and employees from and against any liabilities
and expenses, including attorney's fees and amounts paid in settlement, incurred
by any of them in connection with any claim that the termination of his
employment with any prior employer, his employment with the Company, or that the
use of any skills or knowledge by the Company is a violation of contract or law.
Employee shall be entitled to participate in the defense of any claim pursuant
to which indemnity is sought under this Section 4.6. If at any time Employee
acknowledges in writing that the claim is fully indemnifiable under this
Agreement, Employee shall have the right to assume total control of such claim
at his own expense. Employee hereby represents, warrants,
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<PAGE>
and covenants to the Company that (a) he is not bound by any agreement with any
prior employer or other party to refrain from using or disclosing any
confidential information or from competing with the business of such employer or
other party, (b) his performance under this Agreement will not breach any other
agreement by which he is bound, and (c) he has not brought with him to the
Company, nor will he bring or use in the performance of his responsibilities at
the Company, any materials or documents of a former employer which are not
generally available to the public.
4.7 Remedies For Breach. The Employee acknowledges that the covenants
contained in Article IV of this Agreement are independent covenants and that any
failure by the Company to perform its obligations under this Agreement (other
than the act of nonpayment which is not cured by the Company within thirty (30)
days of the receipt of written notice of said condition from the Employee) shall
not be a defense to enforcement of the covenants contained in Article IV,
including but not limited to a temporary or permanent injunction. Employee
agrees to reimburse Company for all costs and expenses, including reasonable
attorney's fees, incurred by Company because of any breach of this Article.
4.8 Affiliates. For purposes of this Article IV, the term "Company" shall
be deemed to include IHS and all of the Company's and IHS's subsidiaries and
affiliates now existing or hereafter becoming subsidiaries or affiliates.
- 12 -
<PAGE>
ARTICLE V
ASSIGNMENT
5.1 Prohibition of Employee Assignment. The Employee agrees on behalf of
the Employee and the Employee's heirs and executors, personal representatives,
and any other person or persons claiming any benefit under the Employee by
virtue of this Agreement, that this Agreement and the rights, interests, and
benefits hereunder shall not be assigned, transferred, pledged or hypothecated
in any way by the Employee or the Employee's heirs, executors and personal
representatives. Any attempt to assign, transfer, pledge, hypothecate or
otherwise dispose of this Agreement or any such rights, interests and benefits
thereunder contrary to the foregoing provision, shall be null and void and
without effect and shall relieve the Company of any and all liability hereunder,
except for Company's obligation to pay earned salary and bonus.
5.2 Right of Company to Assign. This Agreement shall be assignable and
transferable by the Company to Company's transferee, assignee or any
successor-in-interest, parent, subsidiary or affiliate of Company (provided that
no such assignment shall relieve Company of its obligations to Employee
hereunder absent a written release signed by Employee), and shall inure to the
benefit of and be binding upon the Employee, the Employee's heirs and personal
representatives, and the Company and its successors and assigns. Employee agrees
to execute all documents necessary to ratify and effectuate such assignment.
5.3 Binding Effect If Transferred. In the event this Agreement is
transferred by Company, the term "Company" used herein shall refer to and be
binding upon the Company's transferee or assignee.
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<PAGE>
ARTICLE VI
GENERAL
6.1 Prior Employment Agreements. Employee represents and warrants that any
employment agreement or arrangement with the Company or any other party has been
terminated as of the date hereof.
6.2 Governing Law. This Agreement shall be subject to and governed by the
laws of the State of Maryland.
6.3 Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the Company and the Employee and their respective heirs, legal
representatives, executors, administrators, successors and permitted assigns.
6.4 Entire Agreement. This Agreement constitutes the entire Agreement
between the parties and contains all of the agreements between the parties with
respect to the subject matter hereof, and this Agreement supersedes any and all
other agreements, either oral or in writing, between the parties hereto with
respect to the subject hereof. No change or modification of this Agreement shall
be valid unless the same be in writing and signed by both parties hereto. No
waiver of any provisions of this Agreement shall be valid unless in writing and
signed by the person or party to be charged.
6.5 Severability. If any portion of this Agreement shall be for any reason,
invalid or unenforceable, the remaining portion or portions shall nevertheless
be valid, enforceable and carried into effect, unless to do so would clearly
violate the present legal and valid intention of the parties hereto.
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<PAGE>
6.6 Notices. All notices, demands, requests, consents, approvals or other
communications required or permitted hereunder shall be in writing and shall be
delivered by hand, registered or certified mail with return receipt requested or
by a nationally recognized overnight delivery service, in each case with all
postage or other delivery charges prepaid, and to the address of the party to
whom it is directed as indicated below, or to such other address as such party
may specify by giving notice to the other in accordance with the terms hereof.
Any such notice shall be deemed to be received (i) when delivered, if by hand,
(ii) on the next business day following timely deposit with a nationally
recognized overnight delivery service, or (iii) on the date shown on the return
receipt as received or refused or on the date the postal authorities state that
delivery cannot be accomplished, if sent by registered or certified mail, return
receipt requested.
If to the Company: Rotech Medical Corporation
c/o Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, MD 21117
Attention: General Counsel
If to the Employee: Stephen P. Griggs
------------------------------------
------------------------------------
------------------------------------
6.7 Independent Legal Counsel. Employee represents and warrants that he has
had the opportunity to seek the advice of independent legal counsel prior to
signing this Agreement, and that the Company has recommended to him that he
obtain such counsel.
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<PAGE>
6.8 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, and all of which shall together
constitute one and the same instrument.
- 16 -
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by
its duly authorized officers, and the Employee has hereunto set Employee's hand
on the day and year first above written.
ROTECH MEDICAL CORPORATION EMPLOYEE
By: /s/ William P. Kennedy /s/ Stephen P. Griggs
------------------------------- -------------------------------
William P. Kennedy, Stephen P. Griggs
Chief Executive Officer
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<PAGE>
EXHIBIT A
Permitted Businesses
- 18 -
<PAGE>
EXHIBIT B
Bonus: $500,000 or a pro rata portion thereof for partial
years. Bonus to be paid if the net income target
(indicated below) is achieved or exceeded.
Target: Rotech and its subsidiaries shall be deemed to generate
a net income contribution to IHS equal to 15,800,000
(the "Share Factor") multiplied by IHS's budgeted GAAP
earnings per share ("EPS") for the bonus period. IHS's
budgeted EPS shall be as follows:
Fiscal period ending:
December 31, 1997: 0.68
December 31, 1998: 3.00
December 31, 1999: 3.51
December 31, 2000: 4.11
December 31, 2001: 4.81
December 31, 2002: 5.63
The Share Factor will be subject to increase if
additional shares of IHS common stock are issued in
connection with post-merger acquisitions by Rotech.
Example: IHS 1998 budgeted EPS is $3.00 per share;
therefore, Rotech's net income target for 1998 is
$47,400,000 (i.e., 15,800,000 x $3.00). Net income is
calculated in accordance with GAAP based on IHS lives
for goodwill amortization and depreciation. Rotech
goodwill includes all purchase accounting goodwill.
Income taxes will be calculated on the income generated
by Rotech and its subsidiaries.
Additional Bonus: An additional bonus, to be determined by IHS, will be
paid if Rotech exceeds the net income target.
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AIRCRAFT LEASE AGREEMENT
between
RNE SKYVIEW, LLC
and
INTEGRATED HEALTH SERVICES, INC.
<PAGE>
AIRCRAFT LEASE AGREEMENT
This AIRCRAFT LEASE AGREEMENT (this "Lease") is made and entered into as of the
12th day of December, 1997, between RNE SKYVIEW, LLC, a Delaware limited
liability company ("Skyview"), with an address at 10065 Red Run Boulevard,
Owings Mills, Maryland 21117, and INTEGRATED HEALTH SERVICES, INC., a Delaware
corporation ("IHS"), with an address at 10065 Red Run Boulevard, Owings Mills,
Maryland 21117.
In consideration of the mutual promises set forth herein and subject to all of
the terms and conditions of this Lease, Skyview and IHS agree as follows:
ARTICLE 1 SCOPE OF LEASE
A. Skyview is the owner of a 1992 British Aerospace BAe 125 Series 800A type
aircraft, bearing Manufacturer's Serial Number NA0474 and Federal Aviation
Administration ("FAA") Registration Number N622AD, and a total of two (2)
Garrett engines, bearing Manufacturer's Serial Numbers P91560 and P91561,
installed thereon, with the accessories and in the configuration as
described in Annex A hereto. The aircraft, engines and accessories are
hereinafter referred to, collectively, as the "Aircraft." Skyview hereby
leases to IHS and IHS hereby leases from Skyview the Aircraft during the
term and in accordance with the provisions of this Lease.
B. Any terms used in this Lease which are not defined herein to describe
services or materials shall have the meanings established by common usage
in the airline industry and in the course of dealing between Skyview and
IHS.
ARTICLE 2 LEASE REQUIREMENTS
A. The Aircraft will be leased by IHS for a minimum amount of five hundred
(500) block hours utilization each year during the term of this Lease. IHS
agrees to pay for a minimum amount of five hundred (500) block hours
utilization of the Aircraft each year during the term of this Lease,
whether or not IHS actually uses such minimum amount of hours each year.
The use of the Aircraft during any portion of an hour shall be deemed use
thereof for such entire hour. The hourly charges shall be calculated at the
time of takeoff from the departure of each leg of each trip and to landing
at the destination airport of each leg each trip. Both Skyview and IHS
shall have the right to confirm the flight hours by examination of
pertinent pilot and aircraft log books.
<PAGE>
B. DELIVERY OF THE AIRCRAFT
1. The Aircraft will be delivered by Skyview and accepted by IHS in
Baltimore, Maryland with all maintenance and inspections up to date,
duly certified as an airworthy aircraft by the FAA repair facility,
which includes an unexpired airworthiness certificate, and shall have
all systems, equipment, radios, and appliances in working order.
2. Skyview shall permit IHS to make a ground inspection of the Aircraft
prior to acceptance of the Aircraft by IHS. Delivery and acceptance of
the Aircraft shall be evidenced by delivering to Skyview a signed
delivery receipt of IHS acknowledging delivery and acceptance of the
Aircraft.
C. RETURN OF THE AIRCRAFT
1. IHS shall return the Aircraft to Skyview at a location within the
Continental United States designated by Skyview on the date of
termination of this Lease and provide insured storage at such location
for a period not to exceed ninety (90) days. IHS agrees that it will
return the Aircraft to Skyview in the same and as good a condition as
when accepted by IHS, normal wear and tear excepted. In the event IHS
does not return the Aircraft in such condition, Skyview will provide
prompt written notice to IHS of reasonable repairs necessary to
restore the Aircraft to such condition, at IHS's sole cost and
expense, in accordance with Article 4 hereof.
2. The Aircraft's airframe shall have remaining to the next airframe
block overhaul, a hard time minimum of fifty percent (50%) time to the
next scheduled overhaul, as defined by the manufacturer or applicable
maintenance program. The Aircraft's landing gear components shall have
remaining to the next scheduled overhaul, a hard time minimum of fifty
percent (50%) time remaining to the next scheduled overhaul, as
defined by the manufacturer or applicable maintenance program.
3. IHS shall have all other hard-time limited components shall have the
equivalent of fifty percent (50%) time of operation remaining, as
defined by the manufacturer or applicable maintenance program.
4. Any shortfall in the MSP (as defined hereinafter) reserve balance that
is required to maintain the Aircraft's engines as required by the MSP,
shall be paid by IHS upon the expiration of the term of this Lease.
D. Title to the Aircraft shall remain with Skyview and the Aircraft shall
continue to be registered with the United States Registry of Aircraft
during the entire term of this Lease.
E. The Aircraft and any other equipment used hereunder shall be operated only
by FAA licensed and fully qualified pilots and be maintained in accordance
with applicable
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<PAGE>
specifications and directives of the FAA, approved manufacturer's operating
standards and manuals, and Skyview's continuous maintenance program.
F. IHS will not use, operate, maintain, or store the Aircraft in violation of
this Lease, or any applicable FAA, federal or state law or regulation, or
any instructions furnished to IHS by Skyview. Furthermore, IHS shall not
operate the Aircraft in any manner which would contravene the uses and
purposes stipulated in the insurance policies described in Article 7
hereof.
G. Notwithstanding any other provision of this Lease, Robert N. Elkins, M.D.,
Chairman of IHS, shall have the exclusive first use of the Aircraft at any
time throughout the term of this Lease. The right of exclusive first use of
the Aircraft by Dr. Elkins shall also continue throughout the term of this
Lease if Dr. Elkins is terminated as an employee of IHS for any reason,
including, but not limited to, as a result of a "Change of Control" at IHS,
as defined in IHS's senior secured credit facility. Nothing in this
paragraph G shall result in a reduction or termination of IHS's Base Rent
obligations or IHS's obligations to pay for all Aircraft use, operation and
maintenance expenses throughout the term of this Lease. However, if at any
time during the term of this Lease Dr. Elkins uses the Aircraft for his own
personal use, then Dr. Elkins shall be obligated to reimburse IHS for IHS's
out of pocket costs associated with such use of the Aircraft.
ARTICLE 3 TERM
A. The term of this Lease shall commence on December 12, 1997 (the
"Commencement Date") and shall continue until December 12, 2004 (the
"Initial Expiration Date"), and shall thereafter be extended without any
action by the parties hereto for additional one-year periods unless one of
the parties hereto shall notify the other in writing of its intention to
terminate this Lease at least six (6) months prior to the Initial
Expiration Date or any subsequent anniversary thereof. If the term hereof
is extended, the word "term" shall be deemed to refer to any extended term,
and all provisions of this Lease shall apply during any extended term,
except as may be otherwise specifically provided in writing.
B. Skyview shall have the right, but not the obligation, to terminate this
Lease at any time during the term hereof, after ninety (90) days prior
written notice to IHS, if the Aircraft is sold by Skyview. IHS shall not
have the right to terminate this Lease at any time during the term hereof,
except after the Initial Expiration Date as provided in paragraph A above.
ARTICLE 4 MAINTENANCE
A. IHS shall, at its sole cost and expense, maintain the Aircraft in good
operating order, repair, condition and appearance in accordance with
manufacturer's recommendations, normal wear and tear excepted. Any
alterations or modifications to the Aircraft that may, at any time during
the term of this Lease, be required to comply with any applicable law, rule
or regulation shall be made at the sole cost and expense of IHS. IHS agrees
that it has the obligation to maintain and repair the Aircraft and all of
its component parts
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throughout the term of this Lease. IHS agrees that it will provide line
maintenance services at Naples, Florida, at IHS's sole cost and expense.
IHS agrees that the maintenance personnel performing hereunder shall have
currently effective licenses and ratings and shall be qualified to perform
maintenance and repairs on the Aircraft and all such services shall be
consistent with IHS's current maintenance practices and approved
maintenance program. In this connection, IHS shall pay to Skyview (or its
designee) a monthly maintenance reserve of $250 per hour of usage
hereunder.
B. IHS shall, at its sole cost and expense, be responsible for all Aircraft
maintenance and operation expenses, including, but not limited to, the
following:
1. Fuel, oil and associated taxes;
2. Cockpit crew salaries, training, expenses and employee benefits;
3. Landing fees, customs, etc.;
4. Hanger rent at the Aircraft's home base and, whenever necessary,
on the road;
5. Any applicable excise, sales, use or property taxes levied on the
Aircraft as a result of IHS's use; and
6. Ferry flights necessary to perform routine maintenance.
C. IHS shall give Skyview notice as soon as possible of repairs which may be
required and should be performed on the Aircraft. IHS agrees at all times
to operate the Aircraft in a mechanical condition adequate to comply with
regulations as set forth by the FAA and any other regulations as set forth
by any federal, state or local governing body, domestic or foreign, having
power to regulate or supervise the Aircraft or the maintenance, use or
operation thereof. Skyview shall have the right at all reasonable times to
inspect the Aircraft for purposes of ascertaining compliance with this
Article 4.
D. The Aircraft at all times during the term of this Lease, shall be deemed
airworthy and eligible for an FAA airworthiness certificate.
E. The engines on the Aircraft shall, at all times during the term of this
Lease, be maintained by the Allied Signal/Garrett (or any successor to the
engine manufacturer thereof) Maintenance Service Plan ("MSP") or any
equivalent successor program thereof. The reserve account for the
maintenance program shall at all times during the term of this Lease, be
current and up to date, as required by the engine maintenance program.
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ARTICLE 5 FLIGHT OPERATIONS
A. IHS shall, at its sole cost and expense, provide a sufficient number of
cockpit crews necessary to operate the Aircraft throughout the term of this
Lease. Each cockpit crew shall consist of two (2) members, including a
captain and a co-pilot.
B. Subject to all applicable laws and regulations, consistent with the IHS's
use of the Aircraft as described in Article 2 hereof, the Aircraft shall at
all times be under the technical and operational control of IHS. IHS shall
have complete discretion concerning the load carried, its distribution, the
route to be flown, the time of departure from the original point and the
intermediate point(s), when and if the flight shall be undertaken, and
where landings shall be made.
C. At all times during the term of this Lease, the members of the cockpit crew
assigned by IHS shall be employees of IHS; provided, however, that
immediately upon any termination of Dr. Elkins' employment by IHS,
including, but not limited to, as a result of a Change of Control at IHS,
the members of the cockpit crew shall become employees of Skyview; and,
provided, further, if they become employees of Skyview, the salaries,
expenses and employee benefits of the cockpit crew members shall be a cost
and expense obligation of IHS throughout the term of this Lease.
D. IHS shall not use or permit the Aircraft to be used in any manner or for
any purpose excepted from any insurance policy or policies it is required
to carry and to maintain as set forth in this Lease or for any purpose or
for the carriage of any goods of any description excepted or exempted from
such policies or do any other act or permit to be done anything which could
reasonably be expected to invalidate or limit any such insurance policy or
violate this Lease.
ARTICLE 6 RENT AND EXPENSES
A. During the term of this Lease, IHS shall pay to Skyview each month:
1. For the first twelve (12) months hereof, a commercially reasonable
base rent (the "Base Rent") for the Aircraft, but at a minimum amount
of $89,675.81 per month and $1,076,109.72 per year. Commencing one
year from the Commencement Date and during each year throughout the
remaining term of this Lease, IHS shall pay to Skyview, for each
month, a then current commercially reasonable Base Rent, but at a
minimum amount of $89,675.81 per month and $1,076,109.72 per year. IHS
will pay the Base Rent due to Skyview in monthly installments thirty
(30) days in advance of the first day of each month, with the first
such installment due on the Commencement Date.
2. In the event the number of block hours flown in any month is more than
forty-two (42) hours, the rent payable for each block hour flown in
excess of the minimum number of block hours shall be $2,150 per hour.
IHS shall pay Skyview the
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additional rent due for such additional block hours used by it by the
tenth day after the end of the month in which the additional number of
block hours was flown.
B. The amounts quoted in paragraph A above do not include (i) operating
expenses, including, but not limited to, take-off and landing fees, parking
and hangar fees, ground services and handling fees for the Aircraft,
airport taxes and excise taxes, if any, which amounts shall be at the sole
cost and expense of IHS and (ii) maintenance expenses, including, but not
limited to, the items described in Article 4 hereof which amounts shall be
the sole cost and expense of IHS.
C. IHS's obligation to pay Base Rent and any other amounts due hereunder shall
be absolute and unconditional. IHS shall not be entitled to any abatement
or reduction of, or set-offs against, any Base Rent or any other amounts
due to Skyview hereunder, including, without limitation, those arising or
allegedly arising out of claims (present or future, alleged or actual, and
including claims arising out of strict tort or negligence of Skyview) by
IHS against Skyview under this Lease or otherwise or unavailability of the
Aircraft. This Lease shall not terminate nor the obligations of IHS be
affected by reason or any defect in or damage to, or loss of possession,
use or destruction of, the Aircraft from whatsoever cause. It is the
intention of the parties that the Base Rent and any other amounts due to
Skyview hereunder shall continue to be payable in all events in the manner
and at the times set forth herein unless the obligation to do so shall have
been terminated in writing by the parties hereto.
D. Payment of the Base Rent and any other payments due Skyview under this
Lease shall be made by transfer of immediately available funds to Skyview
or its designee to such account or at such address as Skyview may specify
in writing; provided, however, that Skyview hereby directs IHS to pay the
monthly loan amount due from Skyview to BTM Capital Corporation ("BTM")
(except the final balloon payment or any pre-payment penalty due
thereunder) in accordance with the monthly invoices to be received by IHS
from BTM; and, provided, further, that any Base Rent in excess of the
amounts to be paid by IHS to BTM shall be transferred by IHS to Skyview.
Payment shall be made on the due date or the date prior thereto if the due
date is not a business day in the State of Delaware. If any amount due
hereunder is not paid within five (5) days of its due date, IHS agrees to
pay Skyview an additional late charge equivalent to the late charge due BTM
by Skyview, in addition to the amount due, but such late charge may not
exceed the maximum amount permitted by applicable law.
ARTICLE 7 INSURANCE
A. IHS shall, at its sole cost and expense, insure the Aircraft throughout the
term of this Lease for damage to or loss of the Aircraft and liability
coverage for personal injury, death or property damage, as follows:
1. Aircraft all-risk hull insurance in an amount not less than the then
current Casualty Loss Value (as described on Annex B hereto) of the
Aircraft (which all-risk hull
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insurance shall also include additional coverage for engines and all
other equipment while removed from the Aircraft in such amount as
shall be satisfactory to Skyview and any lender to Skyview) as well as
fire and extended coverage insurance on engines, parts and other
equipment while removed from the Aircraft and, when available from the
United States Government or an agency thereof, war risk insurance, in
such amount and of such type as shall be satisfactory to Skyview and
any lender to Skyview; and
2. Aircraft liability insurance, including contractual liability, public
liability, passenger legal liability, premises damage liability,
personal property liability, personal injury, death and property
damage liability, and covering any other risks which Skyview, IHS or
any lender to Skyview might incur by reason of the use or operation of
the Aircraft in or over any area, in an amount not less than
$100,000,000 per occurrence.
3. IHS agrees to include Skyview and any lender to Skyview as additional
insured as respects liability coverage and waiver of subrogation on
hull coverage.
B. Such insurance policy or policies will (i) so long as any lien on the
Aircraft shall be in effect, name any such lender to Skyview as sole loss
payee with respect to proceeds up to the amount of Casualty Loss Value of
the Aircraft, and following the discharge of such lien, name Skyview as
sole loss payee, on all insurance policies referred to in clause 1. above,
(ii) name Skyview and any lender to Skyview as additional insureds on all
insurance policies referred to in clause 2. above, (iii) provide that (A)
none of their respective interests in such policies shall be invalidated by
any act or omission of, or breach of warranty or condition contained in,
such policies by IHS; (B) no cancellation or lapse of coverage for
nonpayment of premium or otherwise, no reduction in coverage and no other
change of coverage which adversely affects the interest of any such
additional insured or loss payee, shall be effective as to any such
additional insured or loss payee until thirty (30) days (or such lesser
period as may be permitted in the case of any war risk coverage) after
receipt by such additional insured or loss payee of written notice from the
insurers of such cancellation, lapse, reduction or change; (C) they shall
have no liability for premiums, commissions, calls, assessments or advances
with respect to such policies; (D) the insurers waive any rights of
set-off, counterclaim, recoupment, deduction or subrogation against such
additional insureds or loss payee; (E) such policies will be primary
without any right of contribution from any other insurance carried by such
additional insureds or loss payee; and (F) in the case of war risk, a
standard 50/50 clause shall be in effect.
C. The policies of insurance required under this Article 7 shall be valid and
enforceable policies issued by insurers of recognized responsibility
acceptable to Skyview and any lender to Skyview. In the event that any of
such policies referred to in clause A.2. above shall now or hereafter
provide coverage on a "claims made" basis, IHS shall continue to maintain
such policies in effect for a period of not less than three (3) years after
the expiration of the term of this Lease. Upon the execution of this Lease
and thereafter not
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less than thirty (30) days prior to the expiration dates of any expiring
policies theretofore furnished under this Article 7, originals of the
policies of insurance and all endorsements required by this Article 7, as
certified by the insurer(s), shall be delivered by IHS to Skyview and any
lender to Skyview; provided, however, that Skyview and any lender to
Skyview may accept copies of the policies, certificates of insurance or
other satisfactory evidence in lieu of original policies. Not later than
the Commencement Date, and thereafter at intervals of not more than twelve
(12) months, IHS will furnish or cause to be furnished to Skyview and any
lender to Skyview a certificate or other evidence satisfactory to Skyview
and any lender to Skyview, signed by independent aircraft insurance
brokers, showing the insurance then carried and maintained on the Aircraft
and stating in the opinion of such firm that the insurance then maintained
complies with the terms of this Article 7. If IHS shall fail to cause the
insurance required under this Article 7 to be carried and maintained,
Skyview or any lender to Skyview may provide such insurance and IHS shall
reimburse Skyview or any lender to Skyview, as the case may be, upon demand
for the cost thereof as a supplemental payment hereunder.
ARTICLE 8 INDEMNITY
A. IHS agrees to defend, indemnify and hold harmless Skyview and any lender to
Skyview, their officers, agents, servants and employees from and against
all liability and losses, including, but not limited to, all reasonable
costs and expenses of defense and other costs and expenses, by reason of
claims and all recourse rights for loss of or damage to any cargo or
baggage, including, but not limited to, any claims for consequential
damages, arising out of or in any manner connected with the possession,
maintenance, use or operation of the Aircraft by IHS, including, but not
limited to, operation thereof by IHS's flight crews, occurring during the
term of this Lease, whether or not such loss or damage shall have occurred
during the carriage by air and whether or not caused by, or alleged to have
been caused by, the negligence (except willful misconduct or gross
negligence) of Skyview, its officers, agents, servants, or employees. IHS
hereby waives and renounces all claims and recourse rights against Skyview,
its officers, agents, servants and employees, and agrees not to claim
against or sue Skyview and any lender to Skyview, their officers, agents,
servants, or employees, by reason of any claims, demands or causes of
action on the part of IHS or asserted against IHS by others for or arising
out of any such injury, death or damages. Notwithstanding the foregoing,
IHS agrees to defend, indemnify and hold harmless Skyview and any lender to
Skyview for injury to or death of any passengers caused by the negligence
of IHS's personnel, including its pilot and cabin attendants, and assuming
no negligence on the part of Skyview.
B. Skyview agrees to defend, indemnify and hold harmless IHS, its officers,
agents, servants and employees from and against all liability and losses,
including, but not limited to, all reasonable costs and expenses of defense
and other costs and expenses, by reason of claims and all recourse rights
for injury to or death of any person other than passengers and for loss of
or damage to any property other than cargo and baggage, arising out of or
in any manner connected with the willful misconduct or gross negligence of
Skyview, its officers, agents, servants, or employees. Skyview hereby
waives and renounces all claims
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and recourse rights against IHS, its officers, agents, servants and
employees, and agrees not to claim against or sue IHS, its officers,
agents, servants or employees, by reason of any claims, demands or causes
of action on the part of Skyview or asserted against Skyview by others for
or arising out of any such injury, death or damages.
C. The parties hereby agree that the provisions contained in paragraphs A and
B above shall survive the termination of this Lease.
ARTICLE 9 DEFAULT
A. The occurrence of any of the following shall constitute a default under
this Lease:
1. The failure of IHS to make a payment of any Base Rent or any other
amount due by IHS hereunder in the manner provided herein within five
(5) business days of the date provided herein;
2. If any representation or warranty of IHS herein or in any document or
certificate furnished by IHS in connection with this Lease shall be
false or misleading in any material respect;
3. If IHS suspends or discontinues business or sells or otherwise
disposes of all or substantially all of its assets;
4. If IHS shall consent to the appointment of a receiver, trustee or
liquidator of itself or of a substantial part of its assets or
property, or shall admit in writing its insolvency, or bankruptcy or
its inability to pay its debts generally as they come due, or shall
make a general assignment for the benefit of creditors, or shall file
a petition in bankruptcy, or a petition or an answer seeking
reorganization in a proceeding under any bankruptcy law (as now or
hereafter in effect), or an answer admitting the material allegations
of a petition filed against it in any such proceedings, or shall by
petition, answer or consent, seek relief under the provisions of any
other now existing or future bankruptcy or other similar law providing
for the reorganization or winding up of a corporation, or an
agreement, composition, extension or adjustment with its creditors;
5. If an order, judgment or decree shall be entered by a court of
competent jurisdiction appointing, without the consent of IHS, a
receiver, trustee or liquidator of IHS or of any substantial part of
its property, or any substantial part of the property of IHS shall be
sequestered, and any such order, judgment or decree of appointment or
sequestration shall not have been dismissed, stayed or vacated within
sixty (60) days after the date of entry thereof;
6. If a petition against IHS in a proceeding under the bankruptcy laws or
other insolvency laws (as now or hereafter in effect) shall be filed,
and any decree or order adjudicating IHS as bankrupt or insolvent in
such proceeding shall not have been dismissed, stayed or vacated
within sixty (60) days after such adjudication or in case such
petition as filed or amended shall be approved by such court as
properly filed and shall not have been relinquished, stayed or
terminated for a period of sixty (60) days;
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7. If any indebtedness of IHS for an outstanding principal amount in
excess of $500,000 shall become due prior to the specified maturity
thereof by reason of default, acceleration or otherwise;
8. If any insurance required to be maintained hereunder is not in full
force and effect; or
9. If IHS fails to perform or observe any other material covenant,
condition or agreement to be performed or observed by it hereunder or
breaches any of its other obligations to Skyview hereunder or under
any instrument, document or agreement between Skyview and IHS and such
failure or breach is not cured within thirty (30) days after written
notice thereof.
B. IN THE EVENT OF ANY SUCH DEFAULT, and while a default continues, Skyview,
at its option, may terminate this Lease. In addition, Skyview (in addition
to such other rights and remedies which it may have), may return the
Aircraft to its own sole use and quiet enjoyment. As may be necessary,
Skyview is hereby authorized by IHS to enter, with or without legal
process, on any premises where the Aircraft may be located and to retake
possession and to remove the Aircraft from such premises without liability
of any kind on the part of Skyview. Termination and repossession shall not
relieve the party in default from its obligations under this Lease which
are then unsatisfied, and the additional Base Rent and other amounts and
damages thereafter due for the unexpired portion of the term of this Lease.
C. IN THE EVENT OF ANY SUCH DEFAULT, and while a default continues, IHS shall,
without further demand, forthwith pay to Skyview (i) as liquidated damages
for loss of a bargain and not as a penalty, the present worth of the amount
of all Base Rent due for the remainder of the term under this Lease
(calculated as of the rental next preceding the declaration of default),
and (ii) all other sums then due hereunder, Skyview may, but shall not be
required to, sell the Aircraft at private or public sale, with or without
notice, and without having the Aircraft present at the place of sale; or
Skyview may, but shall not be required to, lease, otherwise dispose of or
keep idle the Aircraft. The proceeds of sale, lease or other disposition,
if any, shall be applied in the following order of priorities: (i) to pay
all of Skyview's costs, charges and expenses incurred in taking, removing,
holding, repairing and selling, leasing or otherwise disposing of the
Aircraft; then (ii) to the extent not previously paid by IHS, to pay
Skyview all sums due from IHS hereunder; then (iii) to reimburse to IHS any
sums previously paid by IHS as liquidated damages; and (iv) any surplus
shall be retained by Skyview, IHS shall pay any deficiency in clauses (i)
and (ii) forthwith. The foregoing remedies are cumulative, and any or all
thereof may be exercised in lieu of or in addition to each other or any
remedies at law, in equity, or under statute. IHS waives notice of sale or
other disposition (and the time and place thereof), and the manner and
place of any advertising. IHS shall pay as reasonable attorney's fees
twenty percent (20%) of the sum of the Base Rent then remaining unpaid and
due upon default, or if prohibited by law, such lesser sum as may be
permitted. Waiver of any default shall not be waiver of any other or
subsequent default.
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D. Skyview may at its election waive any default and its consequences and
rescind and annul notice to IHS in writing to that effect and thereupon the
respective rights of the parties shall be as they would have been if no
default had occurred and no such notice had been given. Notwithstanding the
provisions of this Article, it is expressly understood and agreed that time
is of the essence with regard to all obligations to make payments under
this Lease and that no waiver, rescission or annulment shall extend to or
affect any other subsequent default or impair any rights or remedies
consequent thereon.
ARTICLE 10 REPRESENTATIONS AND WARRANTIES
A. Skyview represents and warrants as follows:
1. Skyview is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of Delaware
and is duly qualified to do business and is in good standing in each
location where the nature of the properties used or business conducted
by it makes such qualification necessary.
2. Skyview has the full power, authority and legal right to execute,
deliver and perform its obligations under this Lease and all documents
executed and delivered in connection with the Lease. This Lease and
all documents executed and delivered in connection with the Lease have
been duly authorized by all necessary actions on its part and
constitutes a legal, valid and binding obligation of Skyview,
enforceable against Skyview in accordance with its terms.
3. The execution and delivery of this Lease and all documents executed
and delivered in connection with the Lease, the performance by Skyview
of its obligations hereunder and thereunder and compliance by it with
its covenants and warranties hereunder and thereunder will not
contravene nor violate any provision of any law, governmental rule or
regulation nor contravene the provisions of, constitute a default
under, or result in the creation of any lien, mortgage, charge or
encumbrance under its charter or by-laws or any contract, Lease,
indenture, or other document or instrument to which it or its
properties may be subject.
4. Skyview owns the Aircraft and has good and marketable title thereto.
5. Skyview will keep the Aircraft registered in accordance with all
applicable governmental rules and regulations.
B. IHS represents and warrants as follows:
1. It is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and is duly qualified
to do business and is in good standing in each location where the
nature of the properties used or business conducted by it makes such
qualification necessary.
2. It has the full power, authority and legal right to execute, deliver
and perform its obligations under this Lease and all documents
executed and delivered in connection with the Lease and this Lease and
all documents executed and delivered in connection with the Lease have
been duly authorized by all necessary
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actions on its part and constitutes its legal, valid and binding
obligation, enforceable against it in accordance with the terms
thereof;
3. The execution and delivery of this Lease and all documents executed
and delivered in connection with the Lease, the performance by it of
its obligations hereunder and thereunder and the compliance by it with
its covenants and warranties hereunder and thereunder will not
contravene nor violate any provision of any law, governmental rule or
regulation nor will it contravene the provisions of, constitute a
default under, or result in the creation of any lien, mortgage, charge
or encumbrance under its charter or by-laws or any contract, Lease,
indenture, or other document or instrument to which it or its
properties may be subject.
4. There are no suits or proceedings, pending or threatened in any court
or before any commission, board or other administrative agency against
or affecting it which will have a material adverse effect on its
ability to fulfill its obligations under this Lease.
5. It is and will be at all times validly existing and in good standing
under the laws of the State of Delaware.
C. All representations and warranties contained herein and made by either
party to the other shall survive the execution of this Lease.
ARTICLE 11 REPORTS
IHS shall notify Skyview in writing, within ten (10) days after it learns of any
tax or other lien attaching to the Aircraft, of the full particulars thereof.
IHS shall within one hundred twenty (120) days of the close of each fiscal year
deliver to Skyview a balance sheet as of the end of such fiscal year and profit
and loss statement for the one-year period then ended, certified by a recognized
firm of independent certified public accountants. Upon request of Skyview, IHS
shall deliver to Skyview quarterly, within ninety (90) days of the close of each
fiscal quarter, in reasonable detail, copies of quarterly financial statements
certified by the chief financial officer of IHS. Within ten (10) days after any
reasonable request by Skyview, IHS will furnish a certificate of an authorized
officer stating that such officer has reviewed the activities of IHS and that
there exists no default (as described in Article 9 hereof) or event which with
notice or lapse of time or both would constitute such a default.
ARTICLE 12 GOVERNING LAW
This Lease shall be governed by and construed in accordance with the laws of the
State of Delaware, without giving effect to its conflicts of laws principles.
ARTICLE 13 NOTICES
Any notice required or permissible under this Lease shall be in writing and
shall be sent by telex, cable, facsimile transmission, by certified mail return
receipt requested, or by express courier (Fed Ex, etc.). If sent by telex, cable
or facsimile transmission, it will be confirmed by certified mail
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return receipt requested or express courier, addressed to the parties at the
following addresses and shall be deemed received upon actual receipt of the
earliest notice thereof:
To Skyview:
RNE Skyview, LLC
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attention: Robert N. Elkins
Copy to: Marshall A. Elkins
Fax: (410) 998-8500
To IHS:
Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attention: Daniel J. Booth
Fax: (410) 998-8695
To Lender:
BTM Capital Corporation
125 Summer Street
Boston, Massachusetts 02110
Attention: Senior Vice President
Administration
Fax: (617) 345-5625
ARTICLE 14 ASSIGNMENT
Skyview, in exercising its rights or performing any obligations under this
Lease, may utilize, wholly or partially, the services of third parties;
provided, however, such assignment of obligations will not relieve Skyview of
any liability to IHS under this Lease. Without the prior written consent of
Skyview, which consent may be unreasonably withheld or denied, IHS may not
assign this Lease or its interest or rights hereunder or enter into any lease or
sublease with respect to the Aircraft covered hereby. Skyview may, without the
consent of IHS, assign this Lease or its interests or rights hereunder. IHS
agrees that if it receives written notice of an assignment from Skyview, it will
pay all Base Rent and other amounts payable hereunder to such assignee under any
assignment or as instructed by Skyview. IHS further agrees to confirm in writing
receipt of a notice of assignment as may be reasonably requested by Skyview and
to execute and deliver any documents reasonably requested in furtherance of such
assignment. IHS hereby waives and agrees in the same manner and to the extent
provided in Article 6, paragraph C, not to assert against any such assignee any
defense, set-off, recoupment claim or counterclaim which IHS has or may at any
time have against Skyview for any reason whatsoever. This Lease shall inure to
the benefit of and be binding upon each of the parties hereto and their
respective successors and permitted assigns. Notwithstanding the foregoing, any
further lease or charter of the Aircraft by
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Skyview during the term of this Lease shall be made subordinate to this Lease
and shall not limit the responsibilities of IHS for all payment and performance
obligations required in this Lease.
ARTICLE 15 WAIVER OF JURY TRIAL
IHS HEREBY UNCONDITIONALLY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS
LEASE, ANY DEALINGS BETWEEN IHS AND SKYVIEW RELATING TO THE SUBJECT MATTER
HEREOF OR ANY RELATED TRANSACTIONS. THE SCOPE OF THIS WAIVER IS INTENDED TO BE
ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT
(INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, BREACH OF DUTY CLAIMS AND ALL
OTHER COMMON LAW AND STATUTORY CLAIMS). THIS WAIVER IS IRREVOCABLE, MEANING THAT
IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY
TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS RELATING TO
THIS LEASE OR ANY OTHER DOCUMENTS OR LEASES RELATING TO THE TRANSACTIONS
CONTEMPLATED HEREBY.
ARTICLE 16 FORCE MAJEURE
None of the parties shall be liable for any delay or failure in the performance
of any obligation under this Lease due to any cause beyond its control,
including, without limitation, acts of God, act of government, fires, floods,
strikes, lock-outs or other labor disputes, embargoes, riots, insurrection, war
or acts of the public enemy.
ARTICLE 17 TAXES
During the term of this Lease, IHS shall be responsible for all taxes (except
those measured by the income of Skyview), excise taxes, fines, fees or penalties
arising out of this Lease or IHS's operation of the Aircraft. In the case of
personal property taxes, IHS will be responsible for taxes and assessments
levied against, and constituting a lien against, the Aircraft which arise during
the term of this Lease.
ARTICLE 18 ENTIRE AGREEMENT; AMENDMENT
This Lease contains the entire understanding of the parties regarding the
subject matter hereof and may not be amended, modified or waived except in
writing and signed by an authorized officer or representative of each party.
ARTICLE 19 RISK OF LOSS
A. Risk of Loss, Damage or Destruction. IHS hereby assumes all risk of loss,
damage, theft, taking, destruction, confiscation, requisition or
commandeering, partial or complete, of or to the Aircraft, ever caused or
occasioned, such risk to be borne by IHS from the
-14-
<PAGE>
Commencement Date of this Lease, and continuing until the Aircraft has been
returned to Skyview in accordance with the terms of this Lease.
B. Event of Loss with Respect to the Aircraft. Upon the occurrence of an Event
of Loss (as hereinafter defined) with respect to the Aircraft, IHS shall,
within fifteen (15) days after such occurrence, give Skyview notice of such
Event of Loss. IHS shall pay, or cause to be paid , to Skyview in
immediately available funds on a date (which date shall be a Casualty Loss
Value Payment Date) not later than the Casualty Loss Value Payment Date
first occurring after one hundred eighty (180) days after the occurrence of
the Event of Loss, an amount equal to (1) all unpaid Base Rent due before
such Casualty Loss Value Payment Date and all unpaid supplemental payments
(other than Casualty Loss Value) due under this Lease on or before such
Casualty Loss Value Payment Date, plus (2) the Casualty Loss Value (as
described on Annex B hereto) for the Aircraft determined as of such
Casualty Loss Value Payment Date or, if such Casualty Loss Value Payment
Date is beyond the end of the term of this Lease, the Casualty Loss Value
as of the last Casualty Loss Value Payment Date during the term of this
Lease.
C. Effect of Casualty Loss Value Payment. Following the payment in full of the
Casualty Loss Value for the Aircraft and other amounts as provided in this
Article 19, (1) this Lease and the obligations of IHS to pay Base Rent
shall terminate and this Lease shall terminate, and (2) any remaining
insurance proceeds (other than those reserved to others), shall be promptly
paid over to or at the direction of IHS.
D. Substitution and Event of Loss with Respect to An Engine. IHS shall have
the right at its option at any time, on at least ten (10) days prior notice
to Skyview and any lender of Skyview, to substitute a replacement engine
for an Aircraft engine. If an Event of Loss shall have occurred with
respect to an Aircraft engine but not the Aircraft's airframe, within sixty
(60) days of the occurrence of such Event of Loss, IHS shall substitute a
replacement engine for the Aircraft's engine. Any such replacement engine
shall be free and clear of all liens. In connection with the substitution
of a replacement engine, the following conditions shall be satisfied in a
timely manner:
1. The following documents shall be duly authorized, executed and
delivered by the respective party or parties thereto, and an executed
counterpart of each shall be delivered to Skyview and any lender to
Skyview:
(A) a lease supplement covering the replacement engine, which shall
have been duly filed for recordation with the FAA;
(B) so long as any security agreement shall not have been satisfied
and discharged, a security agreement supplement covering the
replacement engine, which shall have been duly filed for
recordation with the FAA;
-15-
<PAGE>
(C) an officer's certificate of IHS certifying that the replacement
engine is in as good operating condition and repair as the engine
it replaces assuming such engine had been maintained in the
operating condition and repair required hereunder; and
(D) such other documentation as Skyview or any lender of Skyview
shall reasonably request.
E. Application of Other Payments Upon Event of Loss. Any payments (including,
without limitation, insurance proceeds) received at any time by Skyview or
IHS from any insurer, governmental authority or other party or insurer
(except IHS) as a result of the occurrence of an Event of Loss will be
applied as follows: (1) any such payments received at any time by IHS or
Skyview shall be promptly paid to Skyview for application pursuant to the
following provisions: (2) so much of such payments as shall not exceed the
amount of the Casualty Loss Value required to be paid by IHS shall be
applied in reduction of IHS's obligation to pay such amount, if not already
paid by IHS, or, if already paid by IHS, shall be applied to reimburse IHS
for its payment of such amount, unless an Event of Default shall have
occurred and be continuing; (3) so much of such payments as shall not
exceed the cost of any replacement engine to be purchased pursuant hereto
shall be applied for payment of (or to reimburse IHS for its payment of)
such replacement engine, unless an Event of Default shall have occurred and
be continuing; and (4) the balance, if any, of such payments remaining
thereafter shall be retained by Skyview.
F. Application of Payments Not Relating to an Event of Loss. Any payments
(including, without limitation, insurance proceeds) received at any time by
IHS or Skyview from any insurer or other party with respect to any
condemnation, confiscation, theft or seizure of or loss or damage to, the
Aircraft or the Aircraft's airframe or any Aircraft engine not constituting
an Event of Loss, will be applied directly in payment of repairs or for
replacement of property in accordance with the provisions of this Lease, if
not already paid by IHS, or if already paid by IHS and no Event of Default
shall have occurred and be continuing, shall be applied to reimburse IHS
for such payment, and any balance remaining after compliance with the terms
hereof with respect to such loss or damage shall be retained by Skyview.
G. Definition of Event of Loss. As used in this Lease, the term Event of Loss
shall mean:
1. Destruction or damage which renders the Aircraft permanently unfit for
normal use by IHS;
2. Damage which results in an insurance settlement on the basis of a
total loss, or a constructive or compromised total loss;
3. Theft or disappearance for a period of thirty (30) days unless the
location of such property is known and IHS is diligently pursuing
recovery of such property but in any event for a period in excess of
ninety (90) days from such theft or
-16-
<PAGE>
disappearance or for a period beyond the end of the term of this
Lease, whichever is shorter; and
4. With respect to the Aircraft's airframe or any engine, the requisition
or taking or use by any governmental authority for more than sixty
(60) days or for any period extending beyond the end of the term of
this Lease or by the United States or any agency thereof for a period
extending beyond the end of the term of this Lease.
An Event of Loss with respect to the Aircraft shall be deemed to have
occurred if an Event of Loss has occurred with respect to the
Aircraft's airframe.
ARTICLE 20 TRUTH IN LEASING
SKYVIEW CERTIFIES THAT THE VENDOR OF THIS AIRCRAFT HAS REPRESENTED TO SKYVIEW
THAT THE AIRCRAFT HAS BEEN MAINTAINED AND EFFECTED UNDER FAR 91 FROM THE DATE OF
MANUFACTURE, TO THE DATE HEREOF, AND THAT THE AIRCRAFT WILL BE MAINTAINED BY IHS
UNDER FAR 91 FOR THE OPERATIONS TO BE CONSTRUED UNDER THIS LEASE. IHS IS
CONSIDERED RESPONSIBLE FOR OPERATIONAL CONTROL OF THE AIRCRAFT UNDER THIS LEASE.
FOR AN EXPLANATION OF THE FACTORS BEARING ON OPERATIONAL CONTROL, PERTINENT
FEDERAL AVIATION REGULATIONS CAN BE OBTAINED FROM THE NEAREST FEDERAL AVIATION
ADMINISTRATION FLIGHT STANDARD DISTRICT OFFICE, GENERAL AVIATION DISTRICT OFFICE
OR AIR CARRIER DISTRICT OFFICE.
IHS CERTIFIES THAT IT IS RESPONSIBLE FOR OPERATIONAL CONTROL OF THE AIRCRAFT
DURING THE TERM OF THIS LEASE AND THAT IT UNDERSTANDS ITS RESPONSIBILITIES FOR
COMPLIANCE WITH APPLICABLE FEDERAL AVIATION ADMINISTRATION REGULATIONS.
SIGNATURE PAGE FOLLOWS
-17-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Aircraft Lease Agreement as
of the day and year first set forth above.
RNE SKYVIEW, LLC
By: /s/ John R. Fallon, Jr.
-----------------------------------
Name: John R. Fallon, Jr.
Title: Managing Director
INTEGRATED HEALTH SERVICES, INC.
By: /s/ Daniel J. Booth
-----------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
-18-
<PAGE>
ANNEX A
Aircraft Manufacturer and Model: 1992 British Aerospace BAe 125 Series 800A
Manufacturer's Serial Number: NA0474
FAA Registration Number: N622AD
Engine Manufacturer and Model: Garrett Air Research TFE 731-5R-1H
Manufacturer's Serial Numbers: P91560; P91561
AVIONICS:
HONEYWELL EDZ-817 5-TUBE EFIS W/MFD HONEYWELL EDZ-817 5-TUBE EFIS FLT. DIRECTOR
HONEYWELL DFZ-800 DIGITAL AUTOPILOT PRIMUS 870 RADAR W/DUAL CONTROLLERS DUAL
HONEYWELL PRIMUS II 850 COMMS DUAL HONEYWELL AHZ-600 AHRS COMPASS DUAL HONEYWELL
PRIMUS II 850 NAVS WULFSBERG FLIGHTPHONE VI HONEYWELL PRIMUS II DME DUAL KING
KHF-950 HF'S WITH SELCAL HONEYWELL PRIMUS II ADF TCAS-II DUAL ASZ-810 AIR DATA
SYSTEMS RADAR WITH LZ-850 LIGHTING DETECTOR GLOBL AFIS ELECTRONIC CHECKLIST
SUNDSTRAND MARK VII GPWS WITH WINDSHEAR DUAL HONEYWELL FMZ-2000 FMS WITH
VOR/DME/VNAV/TACAN & DUAL GPS
ADDITIONAL EQUIPMENT:
THRUST REVERSERS BFGOODRICH WHEELS & BRAKES
LONG-RANGE OXYGEN AIRSHOW
TV/VCR LIGHTS: DEVORE TEL-TAIL, PULSE, RS ICE
CD PLAYER W/INDIVIDUAL HEADSETS & CHANNEL SELECTORS
EXTERIOR:
OVERALL WHITE W/GRAY & PLUMB STRIPES
INTERIOR:
EIGHT PASSENGER, EXTERNAL SERVICE LAV. AIR-CONDITIONING, TAUPE LEATHER SEATS,
HARMONIZING FABRIC DIVAN, ADDITIONAL OBSERVER JUMPSEAT, IPECO CREW SEATS, TAUPE
& LIGHT GRAY CABINETRY, FORWARD GALLEY WITH MICROWAVE, OVEN, COFFEEMAKER &
ABUNDANT
STORAGE
<PAGE>
ANNEX B
================================================================================
Print Casualty
Number Loss Values*
================================================================================
101.570000
1 101.220126
2 101.868091
3 100.513883
4 100.157486
5 99.798889
6 99.438076
7 99.075036
8 98.709753
9 98.342215
10 97.972406
11 97.600314
12 97.225923
13 96.849221
14 96.470192
15 96.088822
16 95.705096
17 95.319001
18 94.930522
19 94.539643
20 94.146350
21 93.750628
22 93.352462
23 92.951837
24 92.548738
25 92.143150
26 91.735056
27 91.324442
28 90.911293
29 90.495591
30 90.077323
31 89.656471
32 89.233020
33 88.806953
34 88.378256
35 87.946911
36 87.512902
37 87.076212
38 86.636825
39 86.194725
40 85.749895
41 85.302317
42 84.851975
43 84.398852
44 83.942930
45 83.484193
46 83.022622
Page 1
<PAGE>
ANNEX B
================================================================================
Print Casualty
Number Loss Values*
================================================================================
47 82.558201
48 82.090911
49 81.620736
50 81.147657
51 80.671656
52 80.192715
53 79.710817
45 79.225942
55 78.738073
56 78.247191
57 77.753277
58 77.256312
59 76.756279
60 76.253157
61 75.746928
62 75.237573
63 74.725072
64 74.209405
65 73.690554
66 73.168499
67 72.643219
68 72.114696
69 71.582908
70 71.047836
71 70.509459
72 69.967758
73 69.422711
74 68.874297
75 68.322497
76 67.767289
77 67.208652
78 66.646565
79 66.081006
80 65.511955
81 64.939389
82 64.363287
83 63.783627
84 0.000000
* As a percentage of Acquisition Cost
Page 2
EXHIBIT 10.67
PURCHASE AGREEMENT
BETWEEN
OMEGA HEALTHCARE INVESTORS, INC.
AND
GAINESVILLE HEALTH CARE CENTER, INC.
REST HAVEN NURSING CENTER (CHESTNUT HILL), INC.
CLAREMONT INTEGRATED HEALTH, INC.
RIKAD PROPERTIES, INC.
INTEGRATED MANAGEMENT-GOVERNOR'S PARK, INC.
AND
LYRIC HEALTH CARE LLC
AND
LYRIC HEALTH CARE HOLDINGS, INC.
DATED: AS OF JANUARY 13, 1998
<PAGE>
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (the "Agreement") is executed and delivered as
of this 13th day of January, 1998 (the "Effective Date") by and between the
entities described on attached EXHIBIT A (each a "Seller" and collectively,
"Sellers"), LYRIC HEALTH CARE LLC, a Delaware limited liability company
("Lyric"), LYRIC HEALTH CARE HOLDINGS, INC., a Delaware corporation ("Lyric
Holdings") and OMEGA HEALTHCARE INVESTORS, INC., a Maryland corporation
("Purchaser").
The circumstances underlying the execution and delivery of this
Agreement are as follows:
A. Capitalized terms used but not otherwise defined herein have the
respective meanings given them in Article I below.
B. Lyric Holdings is a wholly owned subsidiary of Lyric.
C. Sellers are corporations that are wholly owned by Lyric Holdings.
IHS is the sole member of Lyric. Sellers also are the respective owners of
Sellers' Assets. Sellers desire to sell, and Purchaser desires to acquire,
Sellers' Assets on the terms and conditions set forth in this Agreement.
NOW, THEREFORE, Sellers and Purchaser agree as follows:
ARTICLE I
DEFINITIONS
The following terms shall have the respective meanings given them
below:
"Admission Agreements" means the admission agreements entered into by
the respective Sellers with the current residents/patients of the respective
Facilities.
"Charter Documents" means the articles of incorporation, certificate of
formation, operating agreement, bylaws, resolutions, minutes and other material
documents that govern the organization of the applicable Seller, Lyric, Lyric
Holdings or Purchaser, as the case may be.
"Claim" means a claim for indemnification pursuant to Section 16.01 or
Section 16.02 of this Agreement.
<PAGE>
"Closing" means the consummation of the transactions contemplated by
this Agreement.
"Closing Date" means the Effective Date.
"Consent and Subordination Agreement" means the agreement to be
executed between Manager, Franchisor, Lyric Holdings, the Subsidiaries of Lyric
Holdings to which the Facilities are to be subleased and Purchaser pursuant to
which certain management and franchise fees payable under the Facility
Management Agreement are subordinated to Purchaser's rights under the Master
Lease upon an Event of Default under the Master Lease.
"Consumables" means the food and other consumable inventories located
at the Facilities on the Closing Date.
"Controversy" means a controversy between any Seller and Purchaser that
(a) arises following the Closing Date, (b) relates to this Agreement, any other
agreement between any Seller and Purchaser, any instrument or document delivered
pursuant to or in connection with this Agreement or the transactions
contemplated by this Agreement and (c) the applicable Seller and Purchaser are
unable to settle between themselves.
"Deferred Maintenance Adjustment" means, with respect to each Facility,
the amount set forth opposite such Facility's name on attached SCHEDULE 1(A) to
cover the potential costs to be incurred after the Closing in making the repairs
or modifications required at such Facility and described on attached SCHEDULE
1(A).
"Effective Date" means the date set forth in the Preamble of this
Agreement.
"Environmental Remediation" means, with respect to each Facility, the
work described opposite such Facility's name on attached SCHEDULE 1(B) to be
performed after the Closing for the investigation and/or remediation of the
environmental conditions at such Facility described on attached SCHEDULE 1(B).
"Environmental Laws" means any and all applicable local, state and
federal governmental laws, rules, regulations, ordinances, administrative orders
and requirements relating to environmental and/or occupational health and safety
matters.
"Escrow Agent" means Fidelity National Title Insurance Company of New
York.
"Escrow Agreement" means the agreement between Sellers, Lyric Holdings,
Purchaser and Escrow Agent pursuant to which the Deferred Maintenance Adjustment
is to be held and disbursed.
3
<PAGE>
"Facilities" means the Real Property and Personal Property constituting
the skilled nursing facilities listed on attached SCHEDULE 1(C).
"Facility" means any of the Facilities.
"Facility Franchise Agreement" means a franchise agreement, in form and
substance satisfactory to Purchaser and Lyric, to be executed by a Seller and
Franchisor, pursuant to which Franchisor grants to such Seller the right to use
Franchisor's names, marks, systems and proprietary information.
"Facility Management Agreement" means a management agreement, in form
and substance satisfactory to Purchaser and Lyric, to be executed by a Seller
and Manager, pursuant to which Manager agrees to manage the Facility leased by
such Seller pursuant to the Master Lease.
"Franchisor" means Integrated Health Services Franchising Co., Inc., a
Delaware corporation, which is a Subsidiary of IHS.
"GAAP" means generally accepted accounting principles.
"Guaranty" means a Guaranty, in form and substance satisfactory to
Purchaser and Lyric, executed and delivered by Lyric to Purchaser concurrently
with the execution and delivery of the Master Lease, pursuant to which Lyric
guarantees to Purchaser the payment and performance by the respective Sellers of
their respective obligations under the Master Lease.
"Hazardous Substances" means any materials, substances or wastes deemed
to be hazardous or toxic under any applicable Environmental Laws.
"IHS" means Integrated Health Services, Inc., a Delaware corporation.
"IHS Indemnity" means an indemnity agreement to be executed by IHS in
the form of attached SCHEDULE 1(D).
"Indemnified Person" means a person entitled to indemnification
pursuant to Article XVI of this Agreement.
"Indemnitor" means a person responsible for indemnifying an Indemnified
Person pursuant to Article XVI of this Agreement.
"Intangible Property" means (a) all transferable consents,
authorizations, variances or waivers, licenses, permits and approvals given or
issued by any governmental or quasi-governmental agency, department, board,
commission, bureau or other entity or
4
<PAGE>
instrumentality having jurisdiction over the respective Facilities; and (b) all
rights to use the names of the Facilities set forth on attached SCHEDULE 1(E),
but excluding any right to use the name "Integrated" or the name "Integrated
Health Services".
"MAI Appraisal" means, with respect to each Facility, an appraisal, in
form and substance satisfactory to Purchaser, prepared by an appraiser who is a
Member of the Appraisal Institute and is experienced in appraising properties of
the same nature, and in the same geographical vicinity, as the Facility.
"Manager" means IHS Facility Management, Inc., a Delaware corporation,
which is a Subsidiary of IHS.
"Master Franchise Agreement" means a Franchise Agreement, in form and
substance satisfactory to Purchaser and Lyric, to be executed by Franchisor and
Lyric, pursuant to which Franchisor grants to Lyric the right to use
Franchisor's names, marks, systems and proprietary information.
"Master Lease" means a Master Lease, in form and substance satisfactory
to Purchaser and Lyric, executed and delivered by Purchaser and Lyric Holdings,
concurrently with the Closing, pursuant to which Purchaser leases to Lyric
Holdings, and Lyric Holdings leases from Purchaser, the respective Facilities.
"Master Management Agreement" means a management agreement, in form and
substance satisfactory to Purchaser and Lyric, to be executed by Lyric and
Manager, pursuant to which Manager agrees to manage the Facilities.
"Permitted Encumbrances" means, with respect to each Facility, the
matters set forth beneath such Facility's name on attached SCHEDULE 1(F) and
those undischarged mortgages on the Facilities that the Title Company has
expressly insured over in the Title Insurance Policy .
"Personal Property" means all equipment, furniture, fixtures, inventory
(including linens, dietary supplies and housekeeping supplies, but specifically
excluding food and other consumable inventories) and other tangible personal
property owned (but not leased) by a Seller and located on the Real Property and
Facility owned by it, including, but not limited to, patient records, patient
care plans, motor vehicles, entitlements, telephone numbers and those items of
personal property listed on attached SCHEDULE 1(G), but excluding (a) cash, cash
equivalents or accounts receivable and (b) those items of personal property
identified on attached SCHEDULE 1(H).
"Property Documents" means the following, if existing and currently in
the possession or under the reasonable control of Sellers or Lyric: all
Admission
5
<PAGE>
Agreements; environmental reports; structural reports and geological reports;
governmental licenses, permits and approvals; service and maintenance contracts;
existing surveys of the Real Property, including any as-built surveys for the
improvements; wetland reports; soils reports; architectural drawings, plans and
specifications; and engineering tests and reports.
"Purchase Price" means the sum of Forty Four Million Nine Hundred
Thousand ($44,900,000.00) Dollars.
"Real Property" means the real property described on attached SCHEDULE
1(I), together with (a) any buildings and other improvements located thereon;
(b) all rights of Sellers in and to all air, mineral and riparian rights and all
tenements, hereditaments, privileges and appurtenances belonging or in any way
appertaining thereto; (c) any land lying in the bed of any street, road or
avenue adjoining the real property described on attached SCHEDULE 1(I) to the
center line thereof, but only to the extent of the respective Sellers' interest,
if any, therein; and (d) all easements, whether or not recorded, strips and
rights-of-way abutting, adjacent to, contiguous with or adjoining the real
property described on attached SCHEDULE 1(I), but only to the extent of the
respective Sellers' interest, if any, therein.
"Security Agreement" means a Security Agreement, in form and substance
satisfactory to Purchaser and Lyric, pursuant to which Sellers and Lyric
Holdings grant to Purchaser a security interest in the Personal Property and
Intangible Property in order to secure the obligations of Lyric Holdings under
the Master Lease.
"Seller Financial Statements" means the financial statements for
Sellers and the respective Facilities requested by Purchaser and relating to the
operations of the Facilities and of Seller for the fiscal years 1994, 1995 and
1996 and for the first three fiscal quarters of 1997.
"Seller Licenses" means if and as applicable all material licenses,
permits and authorizations necessary for the lawful operation of the respective
Facilities, as the Facilities currently are operated, including all licenses,
permits and authorizations necessary to (a) lawfully operate all beds contained
in the Facilities as nursing home beds; (b) provide licensed nursing services
and any other services currently provided at the respective Facilities; and (c)
receive payment under the Medicare and applicable state Medicaid programs.
"Sellers' Assets" means the Real Property, the Facilities, the Personal
Property and the Intangible Property.
"Subsidiary" means a corporation that is directly or indirectly wholly
owned by IHS.
6
<PAGE>
"Survey" means, with respect to a Facility, a survey that (a) is
certified to Purchaser, the applicable Seller, Lyric and the Title Company; (b)
is prepared in accordance with the minimum standard detail requirements and
classifications for ALTA/ASCM land title surveys, as adopted in 1992 by
ALTA/ASCM, including Table A responsibilities and specifications 1-4, 6-11 and
13; and (c) otherwise is in form satisfactory to Purchaser.
"Title Commitment" means, with respect to a Facility, a title insurance
commitment, issued by the Title Company, dated after the date of this Agreement
and committing the Title Company to insure Purchaser's fee simple title to the
applicable Facility, without the so-called "standard exceptions", in the amount
of the portion of the Purchase Price allocated to such Facility pursuant to
Section 17.02 of this Agreement, together with legible copies of all recorded
documents referred to therein.
"Title Company" means Fidelity National Title Insurance Company of New
York.
"Title Insurance Policy" means, with respect to a Facility, a title
insurance policy, issued pursuant to the applicable Title Commitment by the
Title Company concurrently with the Closing, that insures Purchaser's fee simple
title to the applicable Facility, without the so-called "standard exceptions",
and subject only to the Permitted Encumbrances. Each Title Insurance Policy
shall include the following endorsements, to the extent available under the law
of the state in which the applicable Facility is located: (a) Form 3.1 completed
zoning endorsement; (b) comprehensive endorsement; (c) access endorsement; (d)
survey endorsement; (e) separate tax parcel endorsement; (e) contiguity
endorsement (if the Real Property on which the applicable Facility is located
consists of more than one parcel); and (f) such other endorsements as Purchaser
reasonably may require. The Title Insurance Policies as accepted by Purchaser at
the Closing shall be deemed satisfactory to Purchaser.
"UCC Search Report" means a UCC search report in the name of the
applicable Seller and Facility conducted at the state and county level in the
state in which the applicable Facility is located and, if different, in the
state in which the applicable Seller is organized and in the state in which the
applicable Seller's chief executive office is located.
ARTICLE II
PURCHASE AND SALE
2.01 Agreement to Sell and Buy. On the terms and subject to the
conditions set forth herein, Sellers agree to sell to Purchaser, and Purchaser
agrees to acquire from Sellers, Seller's Assets.
7
<PAGE>
2.02 No Assumption of Liabilities. Except as specifically set forth in
this Agreement, Purchaser is not acquiring or assuming any liabilities
whatsoever, including, without limitation, those of Sellers with respect to
Sellers' Assets.
2.03 "As Is" Purchase. Purchaser is acquiring Sellers' Assets without
any express or implied warranties other than those specifically set forth in
this Agreement.
ARTICLE III
PURCHASE PRICE
The Purchase Price shall be payable at the Closing by wire transfer in
accordance with wire transfer instructions to be provided by Lyric and Sellers.
The Purchase Price shall be allocated among the Facilities as set forth in
Paragraph 17.02. Sellers and Purchaser agree that, for purposes of this
Agreement, no portion of the Purchase Price shall be allocated to the Personal
Property or the Intangible Property.
ARTICLE IV
CLOSING
The purchase and sale of Sellers' Assets shall occur on the Closing
Date at the offices of LeBoeuf, Lamb, Greene & MacRae, L.L.P., 125 West 55th
Street, New York, New York 10019.
ARTICLE V
COSTS AND PRORATIONS
The costs of the transaction and the expenses related to the ownership
and operation of the Sellers' Assets shall be allocated among Sellers and
Purchaser as follows:
5.01. Transfer Taxes; Sales Taxes. Sellers shall pay all State and
County transfer or excise taxes due on the transfer to Purchaser of title to the
Real Property and the respective Facilities and all assessments and taxes
related to the recording of the corresponding deeds. Sellers shall pay any sales
tax due on the transfer to Purchaser of title to the Personal Property, although
the parties believe no such tax is due.
5.02 MAI Appraisals. Sellers shall pay the cost of the MAI Appraisals
delivered by Sellers to Purchaser.
8
<PAGE>
5.03. Title Insurance. Sellers shall pay the cost of the Title
Commitments and the premium for the Title Insurance Policies (and any leasehold
policies desired by Sellers and Lyric Holdings) for the respective Facilities.
5.04. Surveys/ UCC Search Reports. Sellers shall pay the cost of the
Surveys and the UCC Search Reports for the respective Facilities.
5.05. Environmental Reports/Remediation. Sellers shall pay for the cost
of Phase I environmental assessments for the respective Facilities, for any
additional assessments recommended in the original Phase I environmental
assessments, and for the cost of the remediation agreed upon by the parties as
set forth on Schedule 1(b). Sellers shall cause the Phase I environmental
assessments and any additional assessments or reports provided by Sellers to be
certified to Purchaser for reliance by Purchaser thereon.
5.06. Attorneys' Fees. Sellers shall pay its attorneys' fees and the
reasonable and documented attorneys' fees of Purchaser.
5.07. Recording Costs. Sellers shall pay all recording fees related to
the recording of the deeds.
5.08. Releases. Sellers shall pay the cost of obtaining and recording
any releases necessary to deliver title to Sellers' Assets in accordance with
the terms of this Agreement.
5.09. Deferred Maintenance Adjustment. At the Closing, each Seller
shall deposit into escrow with the Escrow Agent the Deferred Maintenance
Adjustment attributable to the Facility currently owned by it.
5.10. Inspection Fee; Commitment Fee. At the Closing, Sellers shall pay
to Purchaser a commitment fee equal to an aggregate of Two Hundred Twenty Four
Thousand Five Hundred ($224,500.00) Dollars; provided, however, that Sellers
shall be entitled to a credit for an inspection fee equal to Sixty Thousand
($60,000.00) Dollars previously paid to Purchaser.
5.11. Other Items. Purchaser has no duty to operate any Facility from
and after the Closing Date, such operations to be accomplished solely by the
applicable Seller, as sublessee of Lyric Holdings under a Facility Sublease,
subject to the provisions of the Master Lease, or by Manager pursuant to the
Facility Management Agreement. Accordingly, each Seller shall be responsible for
(a) all revenues and expenses attributable to the Facility owned by it, whether
attributable to the period before or after the Closing; (b) real and personal
property taxes, assessments and similar charges that are levied against the
Facility currently owned by it, whether attributable to the period before or
after the Closing Date; (c) all utilities provided to the Facility currently
owned by it, whether before or after the Closing Date; and (d) any amounts that
have been prepaid, or
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that remain to be paid, under any of the Admissions Agreements or any other
contracts affecting Sellers' Assets.
ARTICLE VI
POSSESSION
At Closing, Purchaser shall be entitled to possession of Sellers'
Assets, subject only to (a) the rights of the patients and residents of the
respective Facilities, (b) any possessory rights granted to any person under the
Permitted Encumbrances and (c) the rights of Lyric Holdings under the Master
Lease.
ARTICLE VII
SELLERS' REPRESENTATIONS AND WARRANTIES
Each Seller represents and warrants to Purchaser, as of the Closing
Date, that:
7.01. Status of Seller. It is a corporation duly organized, validly
existing and in good standing under the laws of the state set forth opposite its
name on EXHIBIT A. If the Facility owned by it is located in a state other than
the state in which it is organized, it is duly qualified to do business as a
foreign corporation in the state in which the Facility owned by it is located.
7.02. Validity and Conflicts. This Agreement is, and all documents to
be executed by it pursuant to this Agreement will be, its valid and binding
obligations, enforceable against it in accordance with their respective terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to the enforcement of
creditors' rights generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
The execution of this Agreement and the consummation of the transactions
contemplated in this Agreement in accordance with its terms have been approved
by all necessary action of such Seller under its Charter Documents and do not
and will not result in a breach of the terms and conditions of, nor constitute a
default under or violation of, such Seller's Charter Documents or any law,
regulation, court order, mortgage, note, bond, indenture, agreement, license or
other instrument or obligation to which such Seller is now a party or by which
any of Sellers' Assets owned by it may be bound or affected.
7.03. Authority. It has full power and authority to execute and to
deliver this Agreement and all related documents and to carry out the
transactions contemplated herein and therein. It has full power and authority
(a) to own and operate the Facility
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owned by it as the same currently is owned and operated by it and (b) to conduct
its business as the same currently is being conducted.
7.04. Seller Financial Statements. It has delivered to Purchaser true
and correct copies of the Seller Financial Statements applicable to it and the
Facility owned by it. Except as otherwise noted in such Seller Financial
Statements or on attached SCHEDULE 7.04, the Seller Financial Statements
delivered by it to Purchaser have been prepared in accordance with GAAP,
consistently applied, and fairly represent the financial condition, and
accurately set forth in all material respects, as and to the extent required by
GAAP, the results of the operations, of the applicable Seller and the Facility
owned by it for the periods covered thereby, subject to customary year end
adjustments. Seller has delivered to Purchaser any financial statements prepared
by such Seller subsequent to the date of the Seller Financial Statements
delivered by it to Purchaser, and such financial statements represent fairly the
financial condition, and set forth accurately in all material respects the
results of the operations, of the Facility owned by it for the periods covered
thereby.
7.05. Absence of Adverse Change. Since the date of the Seller Financial
Statements delivered by it to Purchaser, there has not been any material adverse
change in the financial condition, business, assets, liabilities, results of
operations or prospects of such Seller or of the Facility owned by it, whether
in the ordinary course of business or otherwise.
7.06. The Licenses. It has all Seller Licenses applicable to the
Facility owned by it. Attached as SCHEDULE 7.06 are true and correct copies of
the licenses issued most recently by the applicable health care authorities with
respect to the operation of the Facility owned by it. To Seller's knowledge, it
has not received written or verbal notice (a) that any action or proceeding has
been initiated or is proposed to be initiated by the appropriate state or
federal agency having jurisdiction thereof, to revoke, withdraw or suspend any
of the Seller Licenses applicable to the Facility owned by it or to terminate
the participation of the Facility owned by it in either the Medicare or Medicaid
Programs or (b) of any judicial or administrative agency judgment or decision
not to renew any of the Seller Licenses applicable to the Facility owned by it
or (c) of any licensure or certification action of any other type applicable to
the Facility owned by it.
7.07. Compliance with Law.
(a) SCHEDULE 7.07(A) sets forth the most recent licensure or
certification survey for the Facility owned by such Seller. A copy of
each such licensure or certification survey has been delivered to
Purchaser. To Seller's knowledge, the Facility owned by such Seller and
its current operation and use comply with all applicable municipal,
county, state and federal laws, regulations, ordinances and orders and
with all applicable municipal health and building laws and regulations
(including, without limitation, the building and life safety codes),
except to the extent
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that the failure to comply therewith would not have a material adverse
effect on the business, property, condition (financial or otherwise) or
operation thereof;
(b) To Seller's knowledge, no governmental authority having
jurisdiction over any Facility owned by it has issued any citations
with respect to any deficiencies or other matters that fail to conform
to any applicable statute, regulation, ordinance or bylaw and that have
not been corrected as of the date hereof or that shall not have been
corrected on or prior to the Closing, except to the extent that either
(i) a waiver has been issued by the appropriate authority, in which
case a copy of such waiver is included in SCHEDULE 7.07(B), or (ii) the
deficiency or non-conformity will not have a material and adverse
effect on the financial condition or results of the operations of the
affected Facility;
(c) To Seller's knowledge, such Seller has not received
written or oral notice from any licensing or certifying agency
supervising or having authority over the Facility owned by it,
requiring it to be reworked or redesigned or additional furniture,
fixtures, equipment or inventory to be provided at the Facility so as
to conform to or comply with any existing and applicable law, code or
standard, except where the requirement either (i) has been fully
satisfied prior to the Closing Date, (ii) will, as of the Closing Date,
be in the process of being satisfied in the ordinary course of such
Seller's business pursuant to the terms of a Plan of Correction or
other documentation submitted to and approved by the appropriate
authority or (iii) will, as of the Closing Date, be the subject of a
valid written waiver issued by the applicable licensing or certifying
agency; and
(d) It has no knowledge that the Facility owned by it and
participating in the Medicare or Medicaid Programs is not in
substantial compliance with all Conditions and Standards of
Participation in those Programs, except as set forth in SCHEDULE
7.07(D).
7.08. Residents. Except for notice provisions that are required by law
or that are contained in the Admissions Agreements provided to Purchaser by such
Seller with respect to the Facility owned by such Seller, there are no
agreements with residents or patients of any of the Facility owned by such
Seller that are not terminable by such Seller at will and that require such
Seller to provide the care routinely provided at the Facility for the duration
of the resident's stay at the Facility for no consideration.
7.09. Books and Records. All of the books and records of the Facility
owned by such Seller, including resident records, patient trust fund records and
records concerning all resident prepaid accounts, are true and correct in all
material respects.
7.10. Taxes and Tax Returns. All tax returns, reports and filings of
any kind or nature that such Seller is required to file, prior to the Effective
Date of this Agreement, with
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respect to or affecting the Facility owned by it have been properly completed
and timely filed, or extensions for the filing thereof have been timely secured,
with all such filings being in material compliance with all applicable
requirements and all taxes due with respect to such Seller have been timely
paid.
7.11. Environmental Issues. To Seller's knowledge, it has not released
into the environment or discharged, placed or disposed of any Hazardous
Substances or caused the same to be so released into the environment or
discharged, placed or disposed of at, on or under the Facility owned by it,
except (a) to the extent the same will not have a material and adverse affect on
the condition, financial or otherwise, of the Facility and (b) in accordance,
and in compliance, with any and all applicable Environmental Laws. To Seller's
knowledge, (a) no Hazardous Substances are located on or at the Facility owned
by such Seller or have been released into the environment or discharged, placed
or disposed of in, on or under the Facility owned by such Seller, except to the
extent permitted by applicable Environmental Laws, (b) no underground storage
tanks are or have been located at the Facility owned by such Seller except for
those that have been closed in accordance with applicable Environmental Laws, or
currently are being maintained, in accordance with applicable Environmental
Laws, (c) none of the Facilities owned by it is located on property that has
been used as a dump for waste material and (d) each of the Facilities owned by
it complies with, and at all times during the period of its operation by such
Seller has complied with, all Environmental Laws in all material respects. To
Seller's knowledge, such Seller has not received from any governmental authority
or third party written notice or a written complaint alleging the failure of the
Facility owned by such Seller to comply with, or the potential liability of such
Seller as a result of the noncompliance of the Facility owned by such Seller
with, any Environmental Laws or, if such Seller has received such a written
notice or written complaint from any governmental authority or third party, the
alleged noncompliance of the affected Facility and/or liability of such Seller
with respect thereto has been resolved as of the Closing Date. Such Seller has
made available to Purchaser all written assessments that have been prepared by
or on behalf of such Seller and that are in such Seller's possession or under
such Seller's reasonable control with respect to the hazardous waste conditions
at the Facilities. Notwithstanding the foregoing, the foregoing representations
and warranties are subject to any environmental condition existing at any of the
Facilities of which Purchaser receives notice pursuant to the information
provided to it in any environmental assessment prepared in connection with the
purchase of the Facilities or in the Phase I environmental assessment reports
identified on attached SCHEDULE 7.11, which Seller previously has delivered to
Purchaser.
7.12. Necessary Action. Such Seller has duly and properly taken or
obtained or caused to be taken or obtained all action necessary for such Seller
(a) to enter into and to deliver this Agreement and any and all documents and
agreements executed by such Seller in connection herewith and (b) to carry out
the terms of this Agreement and the transaction contemplated by it. No other
action by or on behalf of such Seller is or will be
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necessary to authorize the execution, delivery and performance of this Agreement
and any documents and agreements executed or to be executed by such Seller in
connection herewith or to authorize the transactions contemplated by this
Agreement. No consent of any third party is or will be necessary in connection
with the execution, delivery and performance of this Agreement and any documents
and agreements executed or to be executed by such Seller in connection herewith
or in connection with the consummation of the transactions contemplated by this
Agreement.
7.13. Litigation. Except as set forth in SCHEDULE 7.13, to Seller's
knowledge, such Seller has received no written notice or demand of any
litigation, administrative investigation or other proceeding that is pending or
threatened with respect to or affecting the Facility owned by such Seller,
except where the amount claimed is covered by insurance or, if not covered by
insurance, is less than $50,000 in any single action or $100,000 in the
aggregate. Such Seller is not a party to, nor is such Seller or the Facility
owned by it bound by, any orders, judgments, injunctions, decrees or settlement
agreements under which it or they may have continuing obligations as of the date
hereof or as of the Closing Date and that are likely to materially restrict or
affect the present business operations of the Facility owned by such Seller. To
Seller's knowledge, the right or ability of such Seller to consummate the
transaction contemplated herein has not been challenged by any governmental
agency or any other person.
7.14. Sensitive Payments. To Seller's knowledge, such Seller has not
(a) made any contributions, payments or gifts to or for the private use of any
governmental official, employee or agent where either the payment or the purpose
of such contribution, payment or gift is illegal under the laws of the United
States or the jurisdiction in which made, (b) established or maintained any
unrecorded fund or asset for any purpose or made any false or artificial entries
on its books, (c) given or received any payments or other forms of remuneration
in connection with the referral of patients that would violate the
Medicare/Medicaid Anti-kickback Law, Section 1128(b) of the Social Security Act,
42 USC Section 1320a-7b(b), or any analogous state statute, or (d) made any
payments to any person with the intention or understanding that any part of such
payment was to be used for any purpose other than that described in the
documents supporting the payment.
7.15. Title. Such Seller has good title to the Facility identified
opposite such Seller's name on attached SCHEDULE 1(C), free and clear of all
liens, charges and encumbrances other than the Permitted Encumbrances and any
other items reflected in the Title Commitment, Survey and UCC Search Report
relating to the Facility. Such Seller has good title to the remainder of
Sellers' Assets relating to the Facility identified opposite such Seller's name
on attached SCHEDULE 1(C), free and clear of all liens, charges and encumbrances
other than equipment leases or other purchase money financing to acquire the
same. Purchaser agrees that prior to asserting any claim against a Seller or
Guarantor for damages suffered (including, without limitation, costs and
expenses incurred) as a result of an alleged breach of the foregoing warranty
and representation with respect to
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title to the Real Property, Purchaser shall diligently and in good faith seek to
recover such damages from the Title Company, and the liability of Sellers and
Guarantor as to such damages shall be limited to the amount thereof that
Purchaser is unable to recover from the Title Company.
7.16. The Facilities. The Facility owned by such Seller is duly
licensed to operate the number of beds set forth opposite its name on SCHEDULE
1(C) and is duly certified to participate in Medicare and Medicaid. The Personal
Property relating to the Facility owned by such Seller is all of the property
necessary for the lawful operation of the Facility owned by such Seller at its
current occupancy levels and for the provision of services provided at the
Facility owned by such Seller. To Seller's knowledge, the building and
improvements constituting the Facility owned by such Seller have been
constructed in compliance with the requirements of all laws at the time of
construction and all ordinances, rules, regulations and restrictions of record
applicable thereto, and all bills for labor and materials in connection with the
construction thereof have been paid in full or reserves have been established to
pay them. Except as disclosed in SCHEDULE 7.16 or the Escrow Agreement, such
Seller has no knowledge of any latent or patent material defect or deficiency
with regard to the structures, roofs, soils, furniture, fixtures or equipment of
the Facility owned by it that would materially impair the use or value of such
Facility, and the structures, roofs, soils, furniture, fixtures and equipment of
the Facility owned by such Seller are in good working order and condition. Such
Seller has no knowledge of any latent or patent material defect or deficiency
with regard to the plumbing, mechanical, electrical or other systems of the
Facility owned by it that would materially impair the use or value of such
Facility, and the plumbing, mechanical, electrical and other systems of the
Facility owned by such Seller are in good working order and condition.
Notwithstanding the foregoing, Seller shall not have any liability to Purchaser
for breach of any of the foregoing warranties and representations regarding
latent or patent material defects, deficiencies and construction in compliance
with the requirements of all laws if and to the extent Lyric Holdings or the
applicable Seller as a Facility Sublessee timely complies with the requirements
of the Master Lease with respect to the repair and correction of any such
defects, deficiencies and non-compliance with legal requirements.
7.17 Inventories. At Closing, the Facility owned by such Seller shall
have an inventory of perishable and non-perishable food, central supplies,
linens, housekeeping supplies, kitchen supplies and nursing supplies sufficient
in condition and quantity as may be required under all applicable laws and, to
the extent there exists no applicable laws that specifically identify the
condition and/or required quantity for any such supplies or inventory, then such
inventory and supplies shall be in such condition and quantity as customarily
are maintained by such Seller.
7.18. The Facility Agreements. Attached as SCHEDULE 7.18 is a true and
complete copy of the form of Admission Agreement currently utilized by such
Seller at the Facilities owned by it.
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7.19. Patient Census. Attached as SCHEDULE 7.19 is a true and complete
census of the residents and patients of the Facility owned by such Seller, and
the daily rate paid by such patients and residents.
7.20. Disclosure. No representation or warranty by or on behalf of such
Seller contained in this Agreement, and no statement contained in any
certificate, list, exhibit or other instrument furnished or to be furnished to
Purchaser pursuant hereto, contains or will contain any untrue statement of a
material fact, or omits or will omit to state any material facts that are
necessary in order to make the statements contained herein or therein, in light
of the circumstances under which they were made, not misleading.
7.21 Insurance. Such Seller has maintained insurance policies that
insure the Facility owned by such Seller and the other Seller's Assets relating
thereto continuously since January 1, 1994. Such insurance policies are written
on an occurrence basis, against physical damage, general liability, professional
liability and workers' compensation. Attached as SCHEDULE 7.21 are certificates
of insurance for each Facility evidencing such coverage.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES OF LYRIC
Lyric and Lyric Holdings represent and warrant to Purchaser that:
8.01. Status of Lyric. Lyric is a limited liability company that is
duly organized, validly existing and in good standing under the laws of the
State of Delaware. IHS is the sole member of Lyric. Lyric is the sole
shareholder of Lyric Holdings, which in turn is the sole shareholder of each of
the Sellers. Lyric Holdings is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware.
8.02. Validity and Conflicts. This Agreement is, and all documents to
be executed by Lyric and Lyric Holdings pursuant hereto will be, the valid
obligations of Lyric and Lyric Holdings, enforceable in accordance with their
respective terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to the enforcement of creditors' rights generally and by general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law). The execution of this Agreement, the
Guaranty, the Master Management Agreement and the Master Franchise Agreement
have been approved by all required action on the part of the sole member of
Lyric and by the Board of Directors of Lyric as the sole shareholder of Lyric
Holdings and do not and will not result in a breach of the terms and conditions
of, nor constitute a default under or
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violation of, the Charter Documents of Lyric and Lyric Holdings or any law,
regulation, court order, mortgage, note, bond, indenture, agreement, license or
other instrument or obligation to which Lyric or Lyric Holdings is now a party
or by which any of its assets may be bound or affected.
8.03. Authority. Lyric has full power and authority to execute and
deliver this Agreement, the Guaranty, the Master Management Agreement and the
Master Franchise Agreement. Lyric Holdings has full corporate power and
authority to execute and deliver the Master Lease.
8.04. Truth of Representations. The representations and warranty of
each Seller pursuant to Article VII are true and complete in all material
respects.
ARTICLE IX
PURCHASER REPRESENTATIONS AND WARRANTIES
Purchaser represents and warrants to Sellers, Lyric and Lyric Holdings
as of the Closing Date, that:
9.01. Status of Purchaser. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of Maryland
and, to the extent required by applicable law, is authorized to transact
business in each of the states in which a Facility is located.
9.02. Validity and Conflicts. This Agreement is, and all documents to
be executed by Purchaser pursuant hereto will be, the valid and binding
obligations of Purchaser, enforceable in accordance with their respective terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to the enforcement of
creditors' rights generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
The execution of this Agreement and the consummation of the transactions
contemplated herein have been approved by the Board of Directors of Purchaser
and do not and will not result in a breach of the terms and conditions of, nor
constitute a default under or violation of, the Charter Documents of Purchaser
or any law, regulation, court order, mortgage, note, bond, indenture, agreement,
license or other instrument or obligation to which Purchaser is now a party or
by which its assets may be bound or affected.
9.03. Authority. Purchaser has full corporate power and authority to
execute and to deliver this Agreement and all related documents and to carry out
the transactions contemplated herein and therein.
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9.04. Necessary Action. Purchaser has duly and properly taken or
obtained or caused to be taken or obtained all action necessary for Purchaser
(a) to enter into and deliver this Agreement and any and all documents and
agreements executed and to be executed by Purchaser in connection herewith and
(b) to carry out the terms of this Agreement and the transactions contemplated
by it. No consent of any third party is or will be necessary, and no other
action by or on behalf of Purchaser is or will be necessary, to authorize the
execution, delivery and performance of this Agreement and any documents and
agreements executed and to be executed by Purchaser in connection herewith or to
authorize the consummation of the transactions contemplated herein.
ARTICLE X
BROKER; INVESTMENT BANKER
Each party represents, covenants and warrants to the other that it has
employed no broker, finder or investment banker in connection with the
transaction contemplated in this Agreement. Each party agrees to pay any
commission, finder's fee or investment banker's fee that may be due on account
of the transaction contemplated in this Agreement to any broker, finder or
investment banker employed by it, and to indemnify the other party hereto
against any claim for any commission, finder's fee or investment banker's fee
made by any broker, finder or investment banker allegedly employed by it and
from and against any and all costs and expenses incurred in connection
therewith, including, but not limited to, reasonable attorneys' fees and costs.
ARTICLE XI
SELLER COVENANTS
11.01. Closing Date. On the Closing Date, each Seller will pay the
closing costs that such Seller is obligated to pay pursuant to this Agreement
and deliver to Purchaser the following:
(a) Articles of Incorporation, Certificates of Good Standing
and Certificates of Authority to Transact Business issued within the 30
days prior to the Closing Date by the Secretary of State (or other
authorized official) in the state in which the Facility owned by such
Seller is located and, if different, in the state of such Seller's
incorporation;
(b) Certificate Of Formation, Operating Agreement, Certificate
of Good Standing and Certificate of Authority to Transact Business
issued within the 30 days prior to the Closing Date for Lyric by the
Secretary of State (or other authorized official) in the state of
Lyric's formation and, if required by applicable law, in the respective
states in which the Facilities are located and Articles of
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Incorporation, Certificates of Good Standing and Certificates of
Authority to Transact Business issued within thirty (30) days prior to
the Closing Date for Lyric Holdings by the Secretary of State (or other
authorized official) in the State of Lyric Holdings incorporation;
(c) Resolutions of such Seller's Board of Directors, certified
by the Secretary of such Seller and authorizing and approving the
transactions contemplated by this Agreement and resolutions of Lyric
authorizing and approving the execution, delivery and performance by
Lyric of its obligations under the Agreement, the Guaranty, the Master
Franchise Agreement and the Master Management Agreement and resolutions
of Lyric Holdings authorizing and approving the execution, delivery and
performance by Lyric Holdings of its obligations under the Agreement
and the Master Lease;
(d) An opinion or opinions of counsel to such Seller, Lyric,
Lyric Holdings and IHS dated as of the Closing Date in the form
acceptable to Purchaser;
(e) A general warranty deed (or such other form of deed
applicable in the State where the Facility is located as approved by
Purchaser) in recordable form, executed by such Seller and conveying to
Purchaser fee simple title to the Real Property owned by such Seller,
free and clear of all liens and encumbrances other than the Permitted
Encumbrances:
(f) A Bill of Sale, in the form of attached SCHEDULE 11.01(F),
executed by such Seller and conveying to Purchaser all of the Personal
Property for each of the Facilities owned by such Seller;
(g) The Master Lease executed by Lyric Holdings and a Facility
Sublease (as defined in the Master Lease) executed by such Seller and a
Security Agreement executed by such Seller with respect to each of the
Facility currently owned by such Seller, together with the security
deposit required by such Master Lease;
(h) A Guaranty, executed by Lyric;
(i) The Indemnity Agreement, executed by IHS;
(j) The Master Management Agreement, executed by Lyric and
Manager;
(k) The Facility Management Agreement, executed by such Seller
and Manager;
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(l) A Consent and Subordination Agreement, executed by
Manager, Franchisor, Lyric Holdings, the Subsidiaries
of Lyric Holdings to which the Facilities are to be
subleased and Purchaser;
(m) The Master Franchise Agreement, executed by Lyric and
Franchisor;
(n) A Facility Franchise Agreement, executed by such
Seller and Franchisor;
(o) Such other documents or instruments as reasonably may
be necessary to convey to Purchaser title to the
Facility owned by such Seller and the other related
Sellers' Assets in accordance with the terms hereof.
11.02. Post Closing. Such Seller covenants and agrees that, after the
Closing Date, it will:
(a) At no cost to such Seller, reasonably cooperate with
Purchaser if Purchaser is required to include audited financial
statements with respect to the Facility currently owned by such Seller
in Purchaser's filings with the Securities and Exchange Commission,
provided, however, that Purchaser shall protect, indemnify, save
harmless and defend Sellers, their principals, officers, directors and
agents and employees from and against all liabilities, claims, damages,
penalties, causes of action, costs and expenses (including, without
limitation, reasonable attorneys' fees and expenses), to the extent
permitted by law, imposed upon or incurred by or asserted against them
by a third party or parties as a result of the publication of any such
audited financial statements by or at the direction of Purchaser, but
not against any such liabilities, claims, damages, penalties, causes of
action, costs or expenses as may be suffered by Sellers, their
principals, officers, directors and agents and employees in or as a
result of any action or proceeding with respect to any such audited
financial statement (i) in which a judgment is entered against any IHS,
Lyric, Lyric Holdings, any Seller or any principal, officer, director,
agent or employee thereof, or (ii) is settled in whole or in part on
the basis of a payment of Ten Thousand ($10,000.00) Dollars or more to
the claimant or moving party in such proceeding by IHS, Lyric, Lyric
Holdings, any Seller or any principal, officer, director, agent or
employee thereof alone or in combination with any payment made by IHS,
Lyric, Lyric Holdings, any Seller or any principal, officer, director,
agent or employee thereof (and as to expenses previously paid by
Purchaser pursuant to the foregoing indemnity prior to an event
described in (i) or (ii), above, Seller shall repay such expenses
promptly after the event specified);
(b) Take such actions and properly execute and deliver to
Purchaser such further instruments of assignment, conveyance and
transfer as, in the
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reasonable opinion of counsel for Purchaser and such Seller, reasonably
may be necessary to assure, complete and evidence the transfer and
conveyance of Sellers' Assets as contemplated by this Agreement so long
as no additional liability or material additional expense is incurred
by such Seller by its execution of such instruments; and
(c) File the annual cost reports for the Facility currently
owned by such Seller within the periods required by Medicare, Medicaid
and any other third party payor and provide any additional
documentation to support the amounts claimed under such cost reports
within such time periods.
ARTICLE XII
PURCHASER COVENANTS
12.01. Closing Date. On the Closing Date, Purchaser will pay the
closing costs, if any, and any other expenses for which Purchaser is responsible
under this Agreement and deliver or cause to be delivered the following:
(a) The Purchase Price;
(b) Articles of Incorporation, Certificates of Good Standing
and Certificates of Authority to Transact Business issued within the 30
days prior to the Closing Date by the Secretary of State (or other
authorized official) in the states in which the Facilities to be
acquired by Purchaser is located and, if different, in the state of
Purchaser's incorporation;
(c) Resolutions of Purchaser's Board of Directors, certified
by the Secretary of Purchaser and authorizing and approving the
transactions contemplated herein;
(d) An opinion or opinions of counsel to Purchaser dated as of
the Closing Date in the form approved by Seller; and
(e) The Master Lease; and
(f) The Consent and Subordination Agreement and such other
documents as reasonably may be necessary to give effect to the
transaction contemplated by this Agreement.
12.02. Post Closing. After the Closing Date, Purchaser will take such
actions and properly execute and deliver such further instruments as Sellers
reasonably may request to assure, complete and evidence the transaction provided
for in this Agreement.
21
<PAGE>
ARTICLE XIII
INTENTIONALLY OMITTED
ARTICLE XIV
CONDITIONS
14.01. Purchaser Conditions. The obligations of Purchaser under this
Agreement are subject to the fulfillment, prior to or as of the Closing Date, of
each of the following conditions:
(a) The representations and warranties of the respective
Sellers, Lyric, Lyric Holdings and IHS contained in this Agreement or
in any certificate or document delivered in connection with this
Agreement shall be true and correct in all material respects at and as
of the Closing Date.
(b) Sellers shall have paid all costs that Sellers are
required to pay pursuant to this Agreement, and Sellers, Lyric and
Lyric Holdings shall have performed all of their respective obligations
under this Agreement that are to be performed by them prior to or as of
the Closing Date.
(c) Purchaser and the respective Sellers shall have received
all governmental licenses, approvals and permits as are necessary to
enable Purchaser to lawfully own and the applicable Seller to lawfully
operate the Facility currently owned by it from and after the Closing
Date and shall have satisfied any and all conditions to the
effectiveness thereof.
(d) Purchaser shall have received and shall be satisfied with
(i) the Phase I environmental assessments with respect to the Real
Property and the Facilities and (ii) the MAI Appraisals.
(e) Each Seller shall not be in default, where said default
cannot be cured by the Closing Date, under any mortgage, contract,
lease or other agreement to which such Seller is a party or by which
such Seller is bound and that materially affects or relates to the Real
Property, the Personal Property or the Facilit(y)(ies) owned by such
Seller.
(f) A Title Insurance Policy shall have been issued to
Purchaser with respect to each of the Facilities.
22
<PAGE>
14.02. Seller Conditions. All obligations of Sellers, Lyric and Lyric
Holdings under this Agreement are subject to the fulfillment, prior to or as of
the Closing Date, of each of the following conditions:
(a) The representations and warranties of Purchaser contained
in this Agreement or in any certificate or document delivered in
connection with this Agreement shall be true and correct in all
material respects at and as of the Closing Date.
(b) Purchaser shall have paid the Purchase Price and shall
have performed all of its other obligations under this Agreement that
are to be performed by it prior to or as of the Closing Date.
ARTICLE XV
INTENTIONALLY OMITTED
ARTICLE XVI
INDEMNIFICATION
16.01. Sellers' Indemnification. Subject to the limitations contained
herein and in Section 16.02, Sellers, jointly and severally, shall indemnify and
hold Purchaser harmless from and against any and all damages, losses,
liabilities, costs, actions, suits, proceedings, demands, assessments, and
judgements, including, but not limited to, reasonable and documented attorneys'
fees and reasonable costs and expenses of litigation, arising out of or in any
manner related to any of the following:
(a) Except as otherwise provided in this Agreement, any and
all obligations relating to the ownership of Sellers' Assets and the
operation of the Facilities that exist immediately prior to the Closing
Date;
(b) Any misrepresentation of a material fact, breach of
warranty or material breach of any agreement on the part of any Seller
under this Agreement or from any material misrepresentations in any
certificate furnished or to be furnished to Purchaser hereunder;
(c) Any failure by any Seller in connection with the
transaction contemplated herein to comply with the requirements of any
laws or regulations relating to bulk sales or transfers; and
23
<PAGE>
(d) Any sums due by any Seller for Medicare and Medicaid
adjustments arising from the operation of any of the Facilities
conveyed pursuant to this Agreement prior to Closing; and
(e) Any action or proceeding by an appropriate state or
federal agency having jursidiction thereof, to revoke, withdraw or
suspend any of the Seller Licenses applicable to the Facility owned by
it or to terminate the participation of the Facility owned by it in
either the Medicare or Medicaid Programs, as a result of or caused by
the transactions contemplated by this Agreement, including the
execution and delivery of the Master Lease by Lyric Holdings and each
of the Facility Subleases by the respective Sellers.
For purposes of Section 16.01(a), an obligation shall be deemed to "exist"
immediately prior to the Closing Date if it relates to events that occurred
prior to the Closing Date even if it is not asserted until after the Closing
Date.
16.02 Purchaser's Indemnification. Purchaser shall indemnify and hold
Seller harmless from and against any and all damages, losses, liabilities,
costs, actions, suits, proceedings, demands, assessments, and judgements,
including, but not limited to, reasonable and documented attorneys' fees and
reasonable costs and expenses of litigation, arising out of or in any manner
related to any misrepresentation of a material fact, breach of a representation
or warranty, or material breach of any agreement on the part of Purchaser under
this Agreement.
16.03. Procedure. If an Indemnified Party asserts that an Indemnitor is
subject to a Claim for indemnification pursuant to Section 16.01 or Section
16.02, as the case may be, the Indemnified Party shall describe the Claim in
sufficient detail in order to permit the Indemnitor to evaluate the nature and
cause of the Claim. If the asserted Claim arises or is in connection with a
claim, suit, or demand filed by a third party, the Indemnitor shall be entitled
to defend against such Claim with counsel reasonably satisfactory to the
Indemnified Party. The Indemnified Party may continue to employ counsel of its
own, but such costs shall be borne by the Indemnified Party as long as the
Indemnitor continues to so defend. If the Indemnitor fails to respond or does
not admit responsibility for indemnification, the Indemnified Party may take
such necessary steps to defend itself and any reasonable costs associated
therewith may be included as part of the asserted Claim for indemnification. For
all Claims that are not Claims arising from a third party, Indemnitor shall
notify Purchaser as to its assertion of whether such Claim is covered by this
Article, including specific reasons for non-coverage, within 30 days of receipt
of written notice from the Indemnified Party describing the Claim in reasonable
detail. With respect to Claims arising from third parties, (a) if the
Indemnified Party declines to accept a bona fide offer of settlement that is
recommended by the Indemnitor, the maximum liability of the Indemnitor shall not
exceed that amount for which it would have been liable had such settlement been
accepted, and (b) if the Indemnitor declines to accept a bona fide offer of
24
<PAGE>
settlement recommended by the Indemnified Party, the Indemnitor shall be liable
for whatever outcome results from such third party claim, provided, however,
that the Indemnitor shall not settle any Claim without either the written
consent of the Indemnitee or a full and complete release of the Indemnitee.
ARTICLE XVII
MISCELLANEOUS
17.01. Notices. Any notice, request or other communication to be given
by any party hereunder shall be in writing and shall be sent by registered or
certified mail, postage prepaid, by overnight delivery, hand delivery or
facsimile transmission to the following address:
To any Seller: Lyric Health Care, LLC
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attn: Daniel J. Booth and
Marshall A. Elkins, Esq.
Telephone No.: 410/998-8768
Facsimile No.: 410/998-8695
And Lyric Health Care, LLC
8889 Pelican Bay Boulevard, Suite 500
Naples, Florida 34103
With copy to LeBoeuf, Lamb, Greene & MacRae, L.L.P.
(which shall not 125 West 55th Street
constitute notice): New York, New York 10019-5389
Attn: John R. Fallon, Jr.
Telephone No.: 212/424-8279
Facsimile No.: 212/424-8500
To Purchaser: Omega Healthcare Investors, Inc.
901 West Eisenhower, Suite 110
Ann Arbor, Michigan 48103
Attn: F. Scott Kellman
Telephone No.: 313/747-9790
25
<PAGE>
With copy to Dykema Gossett PLLC
(which shall not 1577 North Woodward Avenue, Suite 300
constitute notice): Bloomfield Hills, MI 48304-2820
Attn: Fred J. Fechheimer
Telephone No.: 248/203-0743
Facsimile No.: 248/203-0763
Notices shall be deemed given upon actual receipt.
17.02. Allocation of Purchase Price. The Purchase Price shall be
allocated among the five (5) Facilities as set forth on attached SCHEDULE 17.02.
The parties agree that the Personal Property has nominal value and therefore no
amount of the Purchase Price is being allocated to it. Each party agrees to
timely file tax form 8594 in accordance with the allocations to which the
parties have so agreed.
17.03. Assignment. No party may assign, directly or indirectly, its
rights or obligations hereunder without the prior written consent of the other
parties.
17.04 Sole Agreement. This Agreement may not be amended or modified in
any respect whatsoever except by an instrument in writing signed by the parties
hereto. This Agreement, the disclosure schedules for each of the parties and the
documents executed and delivered pursuant hereto constitute the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersede all prior negotiations, discussions, writings and agreements between
them.
17.05. Captions. The captions of this Agreement are for convenience of
reference only and shall not define or limit any of the terms or provisions
hereof.
17.06. Severability. Should any one or more of the provisions of this
Agreement be determined to be invalid, unlawful or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions hereof
shall not in any way be affected or impaired thereby.
17.07. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original; but such counterparts shall
together constitute but one and the same instrument.
17.08. Knowledge Defined. To the extent that any of the representations
and warranties contained in this Agreement is limited by the phrases "to the
best knowledge of" or "Purchaser has no knowledge of" or "to Seller's knowledge"
or "Seller has no knowledge of" or words or phrases of similar import, the same
shall mean to the actual knowledge of any of the corporate officers or directors
of the party or its subsidiaries making said representation or warranty, and, in
the case of any Seller, to the actual
26
<PAGE>
knowledge of the administrator of the Facility owned by such Seller. To the
extent that any of the representations and warranties contained in this
Agreement refers to verbal notice to a party, such notice shall be deemed to
have been received if delivered to any officer of such party or to an officer of
one of its subsidiaries, and, in the case of any Seller, to the administrator or
any department head of the Facility owned by such Seller.
17.09. Third Party Beneficiary. Nothing in this Agreement is intended
to or shall not be construed to confer upon or create in any person (other than
the parties hereto) any rights or remedies under or by reason of this Agreement,
including without limitation, any right to enforce this Agreement.
17.10. Attorneys' Fees. In the event of a dispute between the parties
hereto with respect to the interpretation or enforcement of the terms hereof,
the prevailing party in any action resulting therefrom shall be entitled to
collect from the other its reasonable and documented costs and attorneys' fees,
including its costs and fees on appeal.
17.11. Construction. The parties have participated jointly in the
negotiation and drafting of this Agreement. If an ambiguity or question of
intent or interpretation arises, this Agreement shall be construed as if drafted
jointly by the parties, and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state or local
statute or law shall be deemed also to refer to all rules and regulations
promulgated thereunder, unless the context requires otherwise. The word
"including" shall mean "including without limitation."
17.12. Survival. The representations, warranties, covenants or
conditions set forth herein shall survive the Closing for a period of one (1)
year after the Closing; provided, however, that if, at anytime during that one
(1) year period, any claim is made for a breach thereof, the same shall survive
until a final, non-appealable resolution thereof.
17.13 Governing Law. THIS AGREEMENT AND THE TRANSACTION DOCUMENTS SHALL
BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MICHIGAN.
SELLERS CONSENT TO IN PERSONAM JURISDICTION BEFORE THE STATE AND FEDERAL COURTS
OF THE STATE OF MICHIGAN, AND AGREES THAT ALL DISPUTES CONCERNING THIS AGREEMENT
MAY BE HEARD, AT PURCHASER'S OPTION, IN THE STATE AND FEDERAL COURTS LOCATED IN
THE STATE OF MICHIGAN. SELLERS AGREE THAT SERVICE OF PROCESS MAY BE EFFECTED
UPON SELLERS UNDER ANY METHOD PERMISSIBLE UNDER THE LAWS OF THE STATE OF
MICHIGAN AND IRREVOCABLY WAIVES ANY OBJECTION TO VENUE IN THE STATE AND FEDERAL
COURTS OF THE STATE OF MICHIGAN.
SIGNATURE PAGES FOLLOW
27
<PAGE>
IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the
day and year first set forth therein.
SELLERS:
GAINESVILLE HEALTH CARE CENTER, INC.
By:
-----------------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
REST HAVEN NURSING CENTER (CHESTNUT
HILL), INC.
By:
-----------------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
CLAREMONT INTEGRATED HEALTH, INC.
By:
-----------------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
RIKAD PROPERTIES, INC.
By:
-----------------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
INTEGRATED MANAGEMENT-GOVERNOR'S
PARK, INC.
By:
-----------------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
28
<PAGE>
LYRIC:
LYRIC HEALTH CARE LLC
By: Integrated Health Services, Inc.
Its: Managing Director
By:
-----------------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
LYRIC HOLDINGS:
LYRIC HEALTH CARE HOLDINGS, INC.
By:
-----------------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
PURCHASER:
OMEGA HEALTHCARE INVESTORS, INC.
By:
-----------------------------------------
Name: F. Scott Kellman
Title: Executive Vice President
29
<PAGE>
SCHEDULES:
EXHIBIT A List of Sellers
SCHEDULE 1(a) Schedule of Deferred Maintenance Adjustments
SCHEDULE 1(b) Schedule of Environmental Remediation
SCHEDULE 1(c) Description of Facilities
SCHEDULE 1(d) IHS Indemnity Agreement
SCHEDULE 1(e) Names of Facilities
SCHEDULE 1(f) Permitted Encumbrances
SCHEDULE 1(g) Personal Property
SCHEDULE 1(h) Excluded Personal Property
SCHEDULE 1(i) Legal Descriptions of Real Property
SCHEDULE 7.04 Seller Financial Statement Variances
SCHEDULE 7.06 Permits and Licenses
SCHEDULE 7.07(a) Licensure Surveys
SCHEDULE 7.07(b) Waivers of Citations
SCHEDULE 7.07(d) Violations of Medicare or Medicaid
SCHEDULE 7.11 Environmental Assessment Reports
SCHEDULE 7.13 Litigation
SCHEDULE 7.16 Latent Defects
SCHEDULE 7.18 Admission Agreement
SCHEDULE 7.19 Patient Census
SCHEDULE 7.21 Insurance Policies
30
<PAGE>
SCHEDULE 11.01(f) Bill of Sale
SCHEDULE 17.02 Allocation of Purchase Price
31
<PAGE>
EXHIBIT A
LIST OF SELLERS
---------------
================================================================================
NAME OF SELLER STATE OF INCORPORATION
================================================================================
Gainesville Health Care Center, Inc. Florida
Rest Haven Nursing Center (Chestnut Pennsylvania
Hill), Inc.
- --------------------------------------------------------------------------------
Claremont Integrated Health, Inc. Pennsylvania
- --------------------------------------------------------------------------------
Rikad Properties, Inc. Florida
- --------------------------------------------------------------------------------
Integrated Management-Governor's Delaware
Park, Inc.
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE 1(A)
SCHEDULE OF DEFERRED MAINTENANCE ADJUSTMENTS
--------------------------------------------
INTEGRATED HEALTH SERVICES OF CHESTNUT HILL, PA
Flooring $ 25,000.00
Walls/Trim/Decorating $30,000.00
Laundry Machines $15,000.00
Electrical Repair $10,000.00
Parking Lot $5,000.00
O & M Plan $1,000.00
Contingency $10,000.00
----------
TOTAL $96,000.00
INTEGRATED HEALTH SERVICES OF ST. PETERSBURG, FL
Roof $75,000.00
Hotel Clean-up/furnishings $24,000.00
Kitchen Appliances $20,000.00
Parking Lot $5,000.00
Common Baths/New Tile $20,000.00
Termites Hotel/Tenting $10,000.00
Windows/Hotel $15,000.00
O & M Plan $1,000.00
Contingency $10,000.00
----------
TOTAL $180,000.00
INTEGRATED HEALTH SERVICES AT GAINESVILLE, FL
Maintenance Building $15,000.00
Roof $110,000.00
HVAC Units/Roof $70,000.00
Flooring $30,000.00
Landscaping/Drainage $15,000.00
Electrical, Old Wing $20,000.00
Kitchen Floor/Appliances $40,000.00
Hand Rails/Cove/Wallpaper $45,000.00
Furnishings $50,000.00
O & M Plan $1,000.00
<PAGE>
Landscaping/Remove Trailers $10,000.00
Laundry Equipment $20,000.00
Contingency $10,000.00
----------
TOTAL $436,000.00
INTEGRATED HEALTH SERVICES OF NEW HAMPSHIRE AT CLAREMONT, NH
O & M Plan $1,000.00
TOTAL $1,000.00
GOVERNOR'S PARK NURSING AND REHABILITATION CENTER, IL
Structural Repairs $10,000.00
Roof Repair over Boiler Room $2,000.00
TOTAL $12,000.00
TOTAL ALL FACILITIES $725,000.00
<PAGE>
SCHEDULE 1(B)
SCHEDULE OF ENVIRONMENTAL REMEDIATION
-------------------------------------
INTEGRATED HEALTH SERVICES OF NEW HAMPSHIRE AT CLAREMONT
Remove asbestos floor tile and asbestos elbows (and, if present,
asbestos pipe insulation) from processed water piping prior to expiration or
earlier termination of Master Lease.
INTEGRATED HEALTH SERVICES OF ST. PETERSBURG, FL
Remove underground storage tank (hotel building) within one hundred
eighty (180) days after date of Closing.
INTEGRATED HEALTH SERVICES OF GAINESVILLE, FL
Remove approximately 8,000 square feet of asbestos popcorn ceiling
prior to expiration or sooner termination of Master Lease.
INTEGRATED HEALTH SERVICES OF CHESTNUT HILL, PA
Remove approximately 6,000 square feet of asbestos linoleum prior to
expiration or sooner termination of Master Lease.
With respect to each of the Facilities (including the Governor's Park Facility),
present an O&M Plan to Purchaser for its approval, which shall not be
unreasonably withheld or delayed, within ninety (90) days after the date of
Closing.
<PAGE>
SCHEDULE 1(C)
DESCRIPTION OF FACILITIES
-------------------------
<TABLE>
<CAPTION>
==============================================================================================================
SELLER'S NAME NAME OF FACILITY ADDRESS NUMBER OF
LICENSED BEDS
==============================================================================================================
<S> <C> <C> <C>
Gainesville Health Care Integrated Health 4000 S.W. 20th Ave. 120
Center, Inc. Services at Gainesville Gainesville, FL 32607
- --------------------------------------------------------------------------------------------------------------
Rest Haven Nursing Integrated Health 8833 Stenton Ave. 200
Center (Chestnut Hill), Services of Chestnut Wyndmoor, PA 19038
Inc. Hill
- --------------------------------------------------------------------------------------------------------------
Claremont Integrated Integrated Health RFD 3 Box 47, Hanover St. 68
Health, Inc. Services of New Ext.
Hampshire at Claremont, NH 03743
Claremont
- --------------------------------------------------------------------------------------------------------------
Rikad Properties, Inc. Integrated Health 811 Jackson St. N. 92
Services of St. St. Petersburg, FL 33705
Petersburg
- --------------------------------------------------------------------------------------------------------------
Integrated Management Governor's Park 1420 South Barrington 150
Governor's Park, Inc. Nursing and Road
Rehabilitation Center Barrington, Illinois 60010
Governor's Park Vacant
Land
==============================================================================================================
</TABLE>
<PAGE>
SCHEDULE 1(E)
NAMES OF FACILITIES
-------------------
Integrated Health Services at Gainesville
Integrated Health Services of Chestnut Hill
Integrated Health Services of New Hampshire at Claremont
Integrated Health Services of St. Petersburg
Governor's Park Nursing and Rehabilitation Center
<PAGE>
SCHEDULE 1(F)
PERMITTED ENCUMBRANCES
----------------------
INTEGRATED HEALTH SERVICES AT GAINESVILLE
- -----------------------------------------
INTEGRATED HEALTH SERVICES OF CHESTNUT HILL
- -------------------------------------------
INTEGRATED HEALTH SERVICES OF NEW HAMPSHIRE AT CLAREMONT
- --------------------------------------------------------
INTEGRATED HEALTH SERVICES OF ST. PETERSBURG
- --------------------------------------------
GOVERNOR'S PARK NURSING AND REHABILITATION CENTER
- -------------------------------------------------
<PAGE>
SCHEDULE 7.04
SELLER FINANCIAL STATEMENTS - VARIANCES FROM GAAP
-------------------------------------------------
NONE
<PAGE>
SCHEDULE 7.07(A)
LIST OF MOST RECENT LICENSURE OR CERTIFICATION SURVEYS
------------------------------------------------------
None
<PAGE>
SCHEDULE 7.07(D)
VIOLATIONS OF MEDICARE OR MEDICAID
----------------------------------
None
<PAGE>
SCHEDULE 11.01(F)
BILL OF SALE
In consideration of Ten Dollars ($10.00) and other good and valuable
consideration, the receipt and sufficiency of which hereby are
acknowledged,______________, a ________ corporation ("Seller"), does hereby
grant, bargain, sell, convey and transfer to Omega Healthcare Investors, Inc., a
Maryland corporation ("Buyer"), all of its right, title and interest in and to,
all and singular, the furniture, fixtures, equipment, inventory (including
linens, dietary supplies and housekeeping supplies, but excluding food and other
consumable inventories) and other tangible personal property located on or used
by Seller in connection with the -bed skilled nursing home facility located at
the following ---- address (the "Property"), but excluding those items of
personal property identified on attached EXHIBIT A.
TO HAVE AND TO HOLD, all and singular, the Property hereby sold,
assigned, transferred and conveyed to Buyer, its successors and assigns, to and
for its own use and benefit.
Seller hereby represents and warrants to Buyer that Seller is the owner
of the Property, that Seller has full right, power and authority to sell the
Property and to make this Bill of Sale, and that the Property is free and clear
of all liens and encumbrances.
Dated effective as of the 13th day of January, 1998.
SELLERS:
GAINESVILLE HEALTH CARE CENTER, INC.
By:
-----------------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
REST HAVEN NURSING CENTER (CHESTNUT
HILL), INC.
By:
-----------------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
<PAGE>
CLAREMONT INTEGRATED HEALTH, INC.
By:
-----------------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
RIKAD PROPERTIES, INC.
By:
-----------------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
INTEGRATED MANAGEMENT-GOVERNOR'S
PARK, INC.
By:
-----------------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
LYRIC:
LYRIC HEALTH CARE LLC
By: Integrated Health Services, Inc;
Its: Member
By:
-----------------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
LYRIC HOLDINGS:
LYRIC HEALTH CARE HOLDINGS, INC.
By:
-----------------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
PURCHASER:
OMEGA HEALTHCARE INVESTORS, INC.
By:
-----------------------------------------
Name: F. Scott Kellman
Title: Executive Vice President
<PAGE>
SCHEDULE 17.02
ALLOCATION OF PURCHASE PRICE
----------------------------
================================================================================
FACILITY PURCHASE PRICE
================================================================================
Integrated Health Services at Gainesville $5,700,000.00
- --------------------------------------------------------------------------------
Integrated Health Services of Chestnut Hill $14,400,000.00
- --------------------------------------------------------------------------------
Integrated Health Services of New Hampshire at Claremont $5,800,000.00
- --------------------------------------------------------------------------------
Integrated Health Services of St. Petersburg $4,300,000.00
- --------------------------------------------------------------------------------
Governor's Park Nursing and Rehabilitation Center $14,300,000.00
- --------------------------------------------------------------------------------
Governor's Park Vacant Land $400,000.00
- --------------------------------------------------------------------------------
TOTAL PURCHASE PRICE $44,900,000.00
================================================================================
EXHIBIT 10.68
MASTER FRANCHISE AGREEMENT
BETWEEN
INTEGRATED HEALTH SERVICES FRANCHISING CO., INC.
AND
LYRIC HEALTH CARE LLC
--------------------
DATED AS OF JANUARY 13, 1998
--------------------
<PAGE>
TABLE OF CONTENTS
ARTICLES
- --------
ARTICLE 1. Definitions
ARTICLE 2. Grant and Acceptance of Franchise
ARTICLE 3. [omitted]
ARTICLE 4. Term
ARTICLE 5. Annual Continuing Fees
ARTICLE 6. Proprietary Materials; Trade Names; IHS Systems
ARTICLE 7. Preferred Provider Status
ARTICLE 8. "800" Telephone Number
ARTICLE 9. Enhancement of the IHS Systems
ARTICLE 10. Other Business
ARTICLE 11. [omitted]
ARTICLE 12. Statements, Records and Fee Payments
ARTICLE 13. Additional Covenants of Lyric
ARTICLE 14. Franchisor Not to Compete
ARTICLE 15. Negative Covenants of Lyric
ARTICLE 16. Transfer and Assignment
ARTICLE 17. Rights of Aggrieved Party upon Default
ARTICLE 18. [omitted]
ARTICLE 19. Indemnification and Independent Contractor
ARTICLE 20. Written Approvals, Waivers and Amendment
ARTICLE 21. Enforcement
ARTICLE 22. Entire Agreement
ARTICLE 23. Notices
ARTICLE 24. Governing Law and Dispute Resolution
ARTICLE 25. Severability, Construction and Other Matters
ARTICLE 26. Post Term Obligations
ARTICLE 27. Taxes, Permits and Indebtedness
ARTICLE 28. Acknowledgments
ARTICLE 29. Guaranty of Franchisee Obligations
EXHIBITS
- --------
EXHIBIT 1 - Franchise Agreement
EXHIBIT 2 - List of Facilities
EXHIBIT 3 - [omitted]
EXHIBIT 4 - List of Individual Franchisee Names, Names of Businesses,
and Territories
EXHIBIT 5 - Guidelines for Determining Territories
-i-
<PAGE>
MASTER FRANCHISE AGREEMENT
MASTER FRANCHISE AGREEMENT, dated as of January 13, 1998, by
and between INTEGRATED HEALTH SERVICES FRANCHISING CO., INC. ("Franchisor"), a
Delaware corporation with its principal office at 10065 Red Run Boulevard,
Owings Mills, MD 21117, and LYRIC HEALTH CARE LLC, a Delaware limited liability
company ("Lyric"), with its principal office at 8889 Pelican Bay Boulevard,
Suite 500, Naples, Florida 34103.
INTRODUCTORY STATEMENT
Integrated Health Services, Inc. ("IHS") developed valuable
"Trade Names" and "Proprietary Materials" (including the "IHS Systems"), all as
defined below, relating to businesses which IHS operates and services which IHS
provides. These have substantial value and materially enhance and facilitate
IHS's business and operations. IHS formed Lyric for the purpose of engaging in
the same or similar enterprises and, to launch Lyric's business, contributed to
Lyric the shares of five corporations operating health-care facilities under the
Trade Names. Lyric and its subsidiaries desire to obtain the benefit of the
Proprietary Materials and the Trade Names, and Franchisor, on behalf of IHS, is
willing to grant a franchise for such purpose, subject to the terms and
conditions set forth below. Neither IHS nor Franchisor has previously franchised
to others the use of such Trade Names and Proprietary Materials.
An affiliate of Franchisor (the "Manager") has entered into
agreements (the "Management Agreements") to manage the health care facilities
which the Franchisees (defined below) lease or own. The Manager will be
responsible, to the extent specified in the Management Agreements, for assisting
the respective Franchisees to comply with their obligations under this
Agreement.
ARTICLE 1. DEFINITIONS
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1.1 The following words and phrases have the following
meanings in this Agreement:
"Affiliate" means any person, corporation or other entity,
which, directly or indirectly, controls, is controlled by, or is under common
control with, another person, corporation, or other entity.
"Business Day" means any day other than Saturday, Sunday or
any other day on which banking institutions in the State of Maryland are
authorized by law or executive action to close.
"Control" means the power, directly or indirectly, to direct
or cause the direction of the management and policies of a corporation or other
entity.
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"EBITDA" means earnings before interest, taxes, depreciation,
and amortization of Lyric on a consolidated basis as shown on Lyric's monthly
financial statements regularly prepared by Lyric.
"Facility" means a facility owned or leased by Lyric or a
Franchisee in which any Health Care Business is conducted.
"Facility Franchise Agreement" means an agreement between
Franchisor and a Franchisee in the form of the agreement attached hereto as
Exhibit 1.
"Franchisee" means, as of any particular date, any entity
designated as such pursuant to a Facility Franchise Agreement.
"GAAP" means United States generally accepted accounting
principles consistently applied.
"Gross Revenues" means, for any period, all revenues and
income of any kind derived directly or indirectly by the entity specified during
such period (including rental or other payment from concessionaires, licensees,
tenants, and other users of such entity's facilities and from the sale of
products and/or the furnishing of services, including all revenues or receipts
derived from or associated with the Proprietary Materials (but excluding
therefrom all bequests, gifts, or similar donations), whether on a cash basis or
on credit, paid or unpaid, collected or uncollected, as determined in accordance
with GAAP, excluding, however:
(a) federal, state, and municipal excise, sales, and
use taxes collected directly from patients as a part of the sales
prices of any goods or services;
(b) proceeds of any life insurance policies;
(c) gains or losses arising from the sale or other
disposition of capital assets;
(d) any reversal or accrual of any contingency or tax
reserve;
(e) interest earned on sinking funds, Special
Security Accounts, bonds funds, etc. originally and specifically formed
as a requirement of any bond issue (if any) utilized to finance the
Facility; and
(f) bad debt expense.
The proceeds of business interruption insurance or proceeds as a result of
Medicare and Medicaid audits shall be included in Gross Revenues. However, funds
required to be repaid as a result of Medicare and Medicaid audits shall be
deducted from Gross Revenues.
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"Health Care Business" means any business now or in the future
operated by IHS, Franchisor, Lyric, or any Franchisee involving the provision of
health care services of any and every kind.
"IHS Systems" means the systems, protocols, procedures,
software, contracts and contract forms and documentation, manuals, guides,
instructions, forms, employee benefit plans and programs, used and developed by
IHS previously, now, and in the future for the treatment, servicing, and
processing of patients, customers, and/or clients for the financial,
administrative, human resources, procurement, management, and other operations
of IHS's businesses and activities.
"Lease" means any net lease of a Facility from Lessor or any
other lessor.
"Lessor" means each lessor or lessors from time to time under
a Lease.
"Lyric's Business" means and includes the business of Lyric
and all Lyric Franchisees on a consolidated basis.
"Operating Agreement" means the Operating Agreement of Lyric.
"Proprietary Materials" means Trade Names; trademarks; service
marks; copyrighted materials and copyrightable materials; software, manuals,
protocols, procedures, systems, documentation, methods, contracts and contract
forms and documents; trade dress; uniforms; and other materials for treatment,
servicing, and processing of patients, customers, and/or clients and for the
financial, administrative, procurement, human resources, quality control,
management, and operations of the Health Care Business (including the IHS
Systems).
"Territory" means each territory within which Lyric and the
Franchisees may operate a Health Care Business. The Territories of the
Franchisees are described in the Facility Franchise Agreements. Lyric's
Territory is the aggregate of the Territories of the Franchisees (as such
Territories change from time to time) as such Territories are defined in the
respective Facility Franchise Agreements.
"Trade Names" means "Integrated Health Services," "IHS" and
every other name or description previously, now, or in the future used in, or
associated with the Health Care Business, including any and all
"doing-business-as" names or trade names.
1.2 Wherever used in this Agreement:
(a) the words "include" or "including" shall be
construed as incorporating, also, "but not limited to" or
"without limitation";
(b) the word "day" means a calendar day unless
otherwise specified;
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(c) the word "party" means each and every person or
entity whose signature is set forth at the end of this
Agreement;
(d) the word "law" (or "laws") means any law, rule,
regulation, order, statute, ordinary, resolution, regulation,
order, statute, ordinance, resolution, regulation, code,
decree, judgment, injunction, mandate or other legally binding
requirement of a government entity;
(e) each reference to a Facility (or any part or
component thereof) shall be deemed to include "and/or any
portion thereof";
(f) the word "notice" shall mean notice in writing
(whether or not specifically so stated);
(g) "month" means a calendar month unless otherwise
specified; and
(h) the word "amended" means "amended, modified,
extended, renewed, changed, or otherwise revised"; and the
word "amendment" means "amendment, modification, extension,
change, renewal, or other revision".
1.3 Certain other words and phrases are defined elsewhere in
this Agreement, including the Exhibits and Schedules hereto. Words and phrases
defined in any part of this Agreement shall have the same meaning in all parts
of this Agreement.
ARTICLE 2. GRANT AND ACCEPTANCE OF FRANCHISE
2.1 Existing and New Facilities and Businesses. Subject to
Section 2.2 and the other terms and conditions of this Agreement, Franchisor
grants to Lyric and to each Franchisee the right and franchise to use and employ
the Proprietary Materials in accordance with this Agreement. Franchisor shall
enter into a Franchise Agreement:
(a) for each facility listed on Exhibit 2 with the
Franchisee specified in such Exhibit; and
(b) with Lyric or any of its subsidiaries which
develop, acquire, or lease any additional Health Care Business,
provided that such additional business meets Franchisor's standards and
requirements (which shall be consistent with those set forth in the
Confidential Operating Manual and otherwise required of Lyric and the
Franchisees hereunder) and provided further that such additional
business is not located (i) in the Territory of any other Franchisee
(or other franchisee of Franchisor) or (ii) in a geographic area in
which Franchisor is prohibited by law or contract from granting a
franchise to operate a Health Care Business.
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2.2 Condition. The grant of each franchise pursuant to Section
2.1, and Franchisor's obligation to enter into any Franchise Agreement, shall be
subject to: (a) execution and delivery of the particular Franchise Agreement to
Franchisor by the particular Franchisee; and (b) compliance by Franchisor and
the respective Franchisee with laws, rules and regulations applicable to the
creation of such Franchise Agreement (and Franchisor and Lyric agree to use
commercially reasonable best efforts to comply with such laws, rules and
regulations).
ARTICLE 3. [OMITTED]
ARTICLE 4. TERM
4.1 Initial Term. Unless sooner terminated pursuant to Article
16, this Agreement shall extend for an initial term (the "Initial Term") ending
on January 31, 2011.
4.2 Extended Terms. This Agreement shall automatically renew
for two consecutive thirteen year renewal terms (collectively, the "Extended
Terms"). Each Extended Term shall commence on the day succeeding the end of the
Initial Term or the preceding Extended Term, as applicable. All terms,
covenants, conditions, and provisions of this Agreement shall apply to each
Extended Term (except that Lyric may not extend the Term beyond the expiration
of the Extended Term). Notwithstanding the foregoing, Franchisor may decide not
to renew in any such case by giving notice to Lyric not less than six (6) months
prior to the last day of the Term or Extended Term.
4.3 Effect on Franchisees. Any extension of the Term by Lyric
under this Article shall automatically extend the Term for the same period, and
upon the same terms and conditions, of each Franchise Agreement between
Franchisor and a Franchisee.
ARTICLE 5. ANNUAL CONTINUING FEES
5.1 Annual Continuing Fee. For each "Contract Year" (as
hereinafter defined) during the Initial Term, Lyric shall pay Franchisor an
annual continuing fee (the "Annual Continuing Fee") in the amount of one percent
(1%) of the Lyric Gross Revenues (as defined below).
5.2 Definition of "Contract Year". In this Agreement,
"Contract Year" means any period which begins on January 1st and ends on the
earlier of the following December 31st or the effective date of expiration or
termination of this Agreement (except that the first Contract Year may be a
partial year which commences on the date hereof and ends on December 31st and
the last Contract Year may end on a date earlier than December 31st).
5.3 Monthly Installments. During each Contract Year, Lyric
shall make monthly installments on account of the Annual Continuing Fee for such
Contract Year. The installment for each month shall be equal to 1% of the Lyric
Gross Revenues for each month, and shall be paid on or before the 25th day of
the following calendar month, subject to Section 5.5.
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5.4 Annual Continuing Fee for Short Contract Year. If the Term
includes any Contract Year of less than 365 days, the Annual Continuing Fee for
such Contract Year shall be equal to the product of the Annual Continuing Fee
for such Contract Year multiplied by a fraction, the numerator of which is the
number of days this Agreement was in effect during such Contract Year and the
denominator of which is 365.
5.5 Credit for Payments by Lyric Franchisees. Amounts paid
directly by Franchisees to Franchisor (if any) pursuant to the Franchise
Agreements shall reduce dollar for dollar Lyric's obligation under Sections 5.1,
5.3 and 5.4. If and to the extent that Lyric and its Franchisees experience bad
debts or poor collections exceeding the amounts reserved for such items in their
respective current revenue budgets, and as a result Lyric is unable to pay all
or any part of the monthly installment of the Annual Continuing Fee for a
particular month, the unpaid portion of such installment shall accrue and be
payable as soon as cash flow permits but in no event later than at the end of
the current Contract Year. The foregoing sentence shall not apply for more than
one Contract Year.
5.6 Payment Following Contract Year End. If the aggregate
dollar amount of payments delivered by Lyric to Franchisor in payment of the
Annual Continuing Fee for any Contract Year under Section 5.3 differs from the
Annual Continuing Fee for such Contract Year, the appropriate party shall pay to
the other the amount of such overpayment or underpayment within one hundred five
(105) days after the end of such Contract Year.
5.7 Taxes. Lyric 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 Lyric and Lyric Franchisees by Franchisor, whether such goods or
services are furnished by sale, lease or otherwise.
5.8 Lyric Gross Revenues. "Lyric Gross Revenues" means the sum
of:
(a) the Gross Revenues of all Franchisees; plus
(b) the Business Gross Revenues of all the businesses
which are the subject of joint ventures to which Lyric and/or any
Franchisee is a party (the "Joint Venture Businesses") and the
businesses which are the subject of management agreements and other
agreements and arrangements of Lyric or any Franchisee pursuant to
which Lyric or any Franchisee provides management, consulting or other
services for so long as any such agreements or arrangements are in
effect (the "Managed Businesses"); plus
(c) all other Gross Revenues of Lyric.
5.9 Additional Remedies for Past Due Annual Continuing Fees.
In addition to all other rights and remedies under this Agreement and at law or
in equity, if any Annual Continuing Fees are past due from Lyric to Franchisor
(subject to Section 5.5) for more than 120 days after notice from Franchisor),
Franchisor shall have the right, in addition to Franchisor's
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other rights and remedies under this Agreement, to require reconsideration and
revision of Lyric's current annual and capital budgets and to require Lyric to
comply with the negative covenants of Lyric under Article 15 as if Franchisor
had sold its interest in Lyric. The foregoing rights are cumulative. Lyric
agrees that, upon the exercise of any such right by Franchisor, Lyric 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 Interest. Lyric shall pay Franchisor interest on any
amounts past due at the lower of (i) the maximum rate permitted by law or (ii)
the prime rate of Citibank, N.A. plus two percent (2%) per annum (the "Prime
Rate"); but interest shall not accrue on past due amounts to the extent Lyric
(or a particular Franchisee) fails to achieve EBITDA sufficient to pay such
amounts as long as Lyric or the applicable Franchisee is operating within its
then-current budget).
5.11 Negotiation of Fees. Each party agrees that: (a) the
Annual Continuing Fee payable under this Article 5 was established by extensive,
good faith, arms-length negotiations between the parties in which each party was
represented by counsel and advised by accountants familiar with the health care
industry and franchising, and (b) each party is 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.
5.12 Advances by Franchisor. Lyric 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 Lyric or any Lyric
Franchisees.
ARTICLE 6. PROPRIETARY MATERIALS; TRADE NAMES; IHS SYSTEMS
6.1 Proprietary Materials. Franchisor hereby grants Lyric the
right to use the Proprietary Materials in connection with the businesses
franchised by Franchisor pursuant to Article 2, the management and
administration of existing Joint Venture Businesses, the existing Managed
Businesses, and any Other Business pursuant to Article 10. To enhance the public
image and reputation of businesses operating under the IHS Systems, to protect
the goodwill associated with the Proprietary Materials, and to increase the
demand for services and products provided by Franchisor and all Franchisees, the
parties agree to the further provisions set forth below.
6.2 Ownership. Franchisor represents and warrants that IHS
owns the Proprietary Materials and the IHS Systems and that Franchisor is duly
authorized to grant Lyric and the Franchisees the rights in the Proprietary
Materials and the IHS Systems described in the Franchise Agreements on behalf of
IHS. Lyric expressly acknowledges IHS' and Franchisor's rights in and to the
Proprietary Materials and agrees not to represent or claim in any manner that
Lyric has acquired any ownership rights in the Proprietary Materials. Lyric
agrees further that any and all goodwill associated with the IHS System and
identified by the Proprietary Materials shall inure directly and exclusively to
the benefit of Franchisor and IHS.
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6.3 Authorized Use. Lyric agrees that any use of the
Proprietary Materials except as expressly authorized by this Agreement may
constitute an infringement of Franchisor's and/or IHS' rights and that any right
to use the Proprietary Materials granted under this Agreement shall not extend
beyond the termination or expiration of this Agreement. Lyric agrees that,
during the term of this Agreement and thereafter, Lyric shall not, directly or
indirectly, commit any act of infringement or contest or aid others in
contesting the validity or registration of Franchisor's and/or IHS' right to use
the Proprietary Materials or take any other action in derogation thereof.
6.4 Infringement. Lyric shall notify Franchisor promptly 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
Proprietary Materials, any colorable variation thereof, or any other mark, name
or indicia in which Franchisor or IHS has or claims a proprietary interest (an
"Unauthorized Third Party Use"). Lyric shall assist Franchisor, upon request and
at Franchisor's expense, in taking such action (if any) as Franchisor deems
appropriate to halt such Unauthorized Third Party Use, but shall take no action
nor incur any expense on Franchisor's behalf without Franchisor's prior written
approval. If Franchisor undertakes the defense or prosecution of any litigation
relating to the Proprietary Materials, Lyric 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,
Lyric at its expense may take action as it deems appropriate to halt such
Unauthorized Third Party Use.
6.5 Operation With Proprietary Materials. Lyric and the
Franchisees further agree to operate and advertise only under the names or marks
from time to time designated by Franchisor for use as part of the Proprietary
Materials; to adopt and use the Proprietary Materials solely in the manner
prescribed by Franchisor; to refrain from using the Proprietary Materials to
perform any activity or to incur any obligation or indebtedness in such a manner
as may, in any way, subject Franchisor or IHS 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
Lyric's use of the Proprietary Materials is limited by the terms of this
Agreement; 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 any portions of the Proprietary Materials in any and all uses
thereof as requested by Franchisor; and to utilize such other appropriate notice
of ownership, registration and copyright as Franchisor may require.
6.6 Modification/Replacement of Proprietary Materials.
Franchisor reserves the right, in its sole discretion, to designate one or more
new, modified or replacement Proprietary Materials for use by Lyric and/or any
Franchisee and to require the use by Lyric and/or any Franchisee of any such
new, modified or replacement Proprietary Materials in addition to or in lieu of
any previously designated Proprietary Materials. Any expenses or costs
associated with the use by Lyric and/or any Franchisee of any such new, modified
or replacement Proprietary Materials shall be the sole responsibility of Lyric
and/or the respective Franchisees.
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6.7 Use of IHS Systems. Franchisor hereby grants to Lyric the
right and license to utilize the IHS Systems in connection with the management
and administration of the businesses franchised by Franchisor pursuant to
Article 2, the management and administration of existing Joint Venture
Businesses, the existing Managed Businesses and all Other Business pursuant to
Article 10. Franchisor shall establish and Lyric shall maintain standards of
quality, appearance and operation for Lyric's Business.
6.8 Compliance with IHS Systems. Lyric agrees in connection
with Lyric's business, and each Franchisee agrees for itself, to use 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 IHS Systems, and to comply with the rules, regulations, policies
and standards of the IHS Systems, including all such contained in the
"Confidential Operating Manual" (as hereinafter defined).
6.9 Compliance With Law. Lyric and each Franchisee agree at
all times to operate its business, and to keep all premises at which it and each
Franchisee operates, in compliance with all applicable federal, state and local
laws, rules and regulations.
6.10 Joint Commission on Accreditation of Health Care
Organizations (JCAHO). Lyric agrees to cause any applicable Franchisee to
maintain throughout the term of this Agreement any accreditation by the Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO") previously
issued to the particular Franchisee (and Lyric shall cause the Franchisees to
use commercially reasonable best efforts to seek and obtain such accreditation
if and as necessary or appropriate). Lyric agrees also to endeavor to obtain and
maintain accreditation by other organizations which may be necessary or
desirable in a particular case. Lyric (or the applicable Franchisee) shall pay
all costs of obtaining and maintaining any such accreditation(s).
6.11 Maintenance of Standards. Lyric and each Franchisee agree
to maintain all premises from or at which its 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, Lyric and each Franchisee agree:
(a) to keep all such premises at all times in a high
degree of sanitation, repair, order and condition, including such
periodic repainting of the exterior and interior of the premises, and
such maintenance and repairs to all fixtures, furnishings, signs and
equipment, as Franchisor may from time to time reasonably direct; and
(b) to meet and maintain at all times governmental
standards, certifications and ratings applicable to the operation of
the premises and such business or such higher minimum standards,
certifications and ratings as reasonably set forth by Franchisor from
time to time in its Confidential Operating Manual or otherwise in
writing.
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6.12 Operation in Conformity with Prescribed Methods,
Standards and Specifications. Lyric and each Franchisee agree to operate its
business in conformity with such methods, standards and specifications as
Franchisor may prescribe from time to time 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 or otherwise operating in
any manner which adversely reflects on Franchisor's or IHS' name and goodwill,
or on the Proprietary Materials.
6.13 Printed Materials; Marketing. Lyric and each Franchisee
shall use only marketing and advertising materials which have been approved in
advance by Franchisor; and Lyric and each Franchisee shall use business
stationery, business cards, and similar materials which are consistent with the
Proprietary Materials and their obligations under this Agreement. Lyric and each
Franchisee shall not employ any person to act as a representative of Lyric or
such Franchisee in connection with local promotion of their business in any
public media without the prior written approval of Franchisor. Supplies or
materials purchased, leased or licensed by Lyric or any Franchisee shall meet
the standards reasonably specified by Franchisor from time to time.
6.14 Ownership Identification. In all advertising displays and
materials and at all premises from or at which their respective business is
conducted, Lyric and each Franchisee shall, in such form and manner as may be
specified by Franchisor in the Confidential Operating Manual, notify the public
that Lyric or the respective Franchisee 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.
6.15 Patient Relations. Lyric and each Franchisee shall
respond promptly to patient complaints and shall take such other steps as may be
required to insure positive patient relations.
6.16 Right to Inspect. Lyric and each Franchisee hereby grant
to Franchisor and its agents the right to enter upon any premises from which
they conduct their business, without notice, at any reasonable time for the
purpose of conducting inspections of the premises and their books and records;
and each 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.
6.17 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 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 particular business. Neither
Lyric nor any Franchisee shall have recourse against Franchisor on account of
any variation from standard specifications and practices granted to Lyric or any
Franchisee and shall not be entitled to require Franchisor to grant others a
like or similar variation hereunder.
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6.18 Accounting Equipment and Software. Lyric and each
Franchisee agree to maintain, develop, update and replace any equipment and
software as reasonably necessary for the purpose of recording, collecting or
otherwise supporting revenues.
6.19 Discoveries and Ideas. Lyric and each Franchisee agree to
disclose promptly to Franchisor all discoveries made or ideas conceived by Lyric
or such Franchisee, their Affiliates, or their employees, pertaining to the IHS
Systems (including any enhancements and updates). To the fullest extent
permitted by law, Lyric and each Franchisee hereby grant to Franchisor all
right, title and interest to such discoveries and ideas, and agree 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 Lyric or any Franchisee for any
such discoveries or ideas.
6.20 Compliance with Confidential Operating Manual. In order
to protect the reputation and goodwill of the businesses operating under the IHS
Systems and to maintain standards of operation under the Proprietary Materials,
Lyric and each Franchisee shall conduct its business operated under the IHS
Systems 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 Lyric and each Franchisee acknowledge 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 Lyric or a Franchisee 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.
6.21 Revisions to Confidential Operating Manual. Lyric and
each Franchisee understand and acknowledge 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 their business, and Lyric and
each Franchisee expressly agree to comply at their expense with all such
reasonable 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 IHS Systems by other
Franchisees.
6.22 Operating Assistance. Franchisor reserves the right to
require Lyric and each Franchisee to maintain standards of quality, appearance
and service at all their Facilities, thereby maintaining the public image and
reputation of the IHS System and the demand for the services and products
provided thereunder, and to that end Franchisor shall provide Lyric and each
Franchisee 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;
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(b) risk management services, including risk
financing planning, loss control and claims management;
(c) outcomes monitoring; and
(d) consultation by telephone or at Franchisor's
offices with respect to matters relating to their business in which
Franchisor has expertise, including matters relating to reimbursement,
government relations, clinical strategies, regulatory matters,
strategic planning and business development.
ARTICLE 7. PREFERRED PROVIDER STATUS
Franchisor shall use commercially reasonable best efforts,
subject to applicable law, to cause the Franchisees to have "preferred provider"
status in connection with Franchisor's managed behavioral Health Care Business
on a basis substantially consistent with existing covenants, terms and
conditions, unless the customer directs otherwise.
ARTICLE 8. "800" TELEPHONE NUMBER
Franchisor agrees to continue to operate or will provide a
toll free "800" telephone number and related service facility (the "800 Call
Center"), to provide a telephone "Help" line and also a telephone "Fraud and
Abuse" line to the Franchisees substantially the same as those now provided by
IHS' 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 Lyric
and Franchisor shall agree. Each party agrees to use commercially reasonable
best efforts to negotiate any such restructuring to comply with applicable law.
Lyric and the Franchisees shall have the right (and Lyric agrees to cause all
Franchisees) to advertise such "800" telephone number and otherwise cooperate
with Franchisor to use the 800 Call Center for the intended purposes. Lyric and
the Franchisees shall each pay, from time to time promptly following receipt of
an invoice from Franchisor, a proportionate share of the costs of operating the
800 Call Center.
ARTICLE 9. ENHANCEMENT OF THE IHS SYSTEMS
Franchisor, Lyric, and all Franchisees 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 IHS
Systems. Such manuals and other materials (together, the "IHS Systems
Materials") shall be prepared in a manner suitable for use by Franchisor in
franchising others to use the IHS Systems. No changes shall be made by Lyric or
any Franchisee to the IHS Systems or the IHS Systems Materials without the
Franchisor's express written consent which shall not be unreasonably withheld.
All protocols, programs, procedures, standards and methods, all IHS Systems
Materials, and all upgrades, enhancements, and modifications to same (whether
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developed by Franchisor, Lyric or any Franchisee), shall be owned by Franchisor
and may be used by Lyric and the Franchisees only under and pursuant to this
Agreement and the Franchise Agreements.
ARTICLE 10. OTHER BUSINESS
Lyric and each Franchisee agree not to enter into any new
Joint Venture Businesses, Managed Businesses or consulting or other agreements
or arrangements relating to a Health Care Business (collectively, "Other
Business") during the Term of this Agreement except and unless (i) Franchisor
and Lyric or the respective Franchisee enter into a Franchise Agreement with
respect to such Other Business, or (ii) with Franchisor's written consent in
each instance, and in each instance in which Franchisor has given such written
consent, Franchisor and Lyric (or the applicable Franchisee) have previously
agreed (A) to pay Franchisor, in addition to all other amounts payable pursuant
to this Agreement, a percentage of the gross receipts from such Other Business
agreeable to Franchisor or (B) to the inclusion in Gross Revenues of any such
Other Business.
ARTICLE 11. [OMITTED]
ARTICLE 12. STATEMENTS, RECORDS AND FEE PAYMENTS
12.1 Maintenance of Records; Audit Rights. Lyric and each
Franchisee shall maintain, in a manner reasonably satisfactory to Franchisor,
original, full and complete records, accounts, books, data, licenses, contracts
and invoices which accurately reflect all particulars relating to their business
and such statistical and other information or records as Franchisor may require
(and shall keep such information for not less than three years even after
termination of this Agreement). Lyric and each Franchisee shall compile and
provide to Franchisor any statistical or financial information regarding the
operation of their business, services, and products, or data of a similar
nature. Franchisor (and its agents) may examine and audit such records,
accounts, books and data at all reasonable times to monitor compliance with this
Agreement. In connection with any such examination or audit, Franchisor shall
not be entitled to any adjustment to the extent that Gross Revenues for Lyric or
the applicable Franchisee have been computed in accordance with Section 5.8. If
such inspection discloses that Gross Revenues during any scheduled reporting
period exceeded the amount reported by Lyric by two percent (2%) or more of the
amount originally reported to Franchisor, Lyric shall bear the cost of such
inspection and audit and shall pay, on demand, any such deficiency (with
interest from the date due at the lesser of the highest rate permitted by
applicable law, or the Prime Rate plus two percent (2%) per annum).
12.2 Financial Statements. Lyric and the Franchisees shall
prepare and deliver (or cause to be prepared and delivered) to Franchisor, with
respect to each Facility and Other Business, all monthly, quarterly, and annual
financial statements and compliance reports and other reports, in the same form,
and within the same periods, as Lyric prepares or receives under Article 12 of
Lyric's Operating Agreement.
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12.3 Tax Reports. Upon Franchisor's request, Lyric shall
furnish Franchisor with a copy of each of Lyric's and any or all Franchisees'
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 businesses
of Lyric and all Franchisees.
12.4 Reports. Upon Franchisor's request, Lyric shall furnish
Franchisor with a copy of each of reports filed by Lyric and/or any Franchisees
under applicable federal and state laws, rules and regulations (including but
not limited to reports required under "Medicare" and "Medicaid" laws, rules and
regulations).
ARTICLE 13. ADDITIONAL COVENANTS OF LYRIC
13.1 Covenant During Term. During the Term of this Agreement,
Lyric and each Franchisee covenant not to engage directly or indirectly as an
owner, operator, in any managerial capacity, or otherwise in any business other
than (i) as a franchisee of the Proprietary Materials pursuant to a Franchise
Agreement; (ii) Other Business (but only as permitted by Franchisor pursuant to
Article 10); or (iii) through management and administration of the businesses
franchised by Franchisor pursuant to Article 2.
13.2 Covenant Not to Compete Post-Term. For a period expiring
three (3) years after the expiration, termination or assignment of this
Agreement, Lyric and each Franchisee covenant not to engage (directly or
indirectly) as an owner, operator, franchisee, or consultant in any business
which was conducted at any of the Facilities or any Other Business on the date
of expiration, termination or assignment of this Agreement or during the two (2)
years prior thereto. The geographic area of the restrictions under this Section
13.2 shall be limited to (i) the Territories of Lyric and all Franchisees at the
date of the termination, expiration or assignment of this Agreement and during
the two years prior thereto (which shall from time to time be included by
addendum in Exhibit 3 hereto); and (ii) the geographic areas within a ten (10)
mile radius of any Other Business in existence at the date of the expiration,
termination or assignment of this Agreement or during the two (2) years prior
thereto.
13.3 Acknowledgment of Reasonableness. The parties agree that
Sections 13.1 and 13.2 have been negotiated fully and fairly by the parties,
each being represented and advised by counsel. Lyric and each Franchisee
acknowledge that Lyric and such Franchisee willingly and freely accept 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. Lyric and
each Franchisee acknowledge further 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 for Lyric and every Franchisee to be subject to such covenants.
13.4 Confidential Information. During the Term of this
Agreement and following the expiration, termination or assignment of the
Agreement, Lyric and each Franchisee covenant 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 included in the Proprietary Materials
or which
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are otherwise proprietary to Franchisor or IHS or any information, knowledge or
know-how otherwise deemed confidential by Franchisor except as permitted by
Franchisor (all such, "Confidential Information"). Notwithstanding the
foregoing, "Confidential Information" shall not include 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; or (d) which is disclosed to others in accordance with the terms
of a prior written authorization between the parties to this Agreement. In event
of any termination, expiration, assignment, or non-renewal of this Agreement,
Lyric and each Franchisee agree that Lyric and such Franchisee will never use
the Proprietary Materials or any other confidential information, trade secrets,
methods of operation or any proprietary components of Franchisor in the design,
development or operation of any Health Care 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, Lyric and each Franchisee agree to maintain and cause
new employees of Lyric to execute employee non- disclosure agreements, in the
form used by IHS 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 Confidential Information. Franchisor shall
be a third party beneficiary of each such agreement; and Lyric or the respective
Franchisee 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. If any part of one or more of these restrictions is
deemed unenforceable by virtue of its scope in terms of area, business activity
prohibited or length of time, and if such part is capable of enforcement by
reduction of any or all thereof, Lyric and Franchisor agree that the same shall
be enforced to the fullest extent permissible under the law. Also, Franchisor
may at any time, in its sole discretion, revise any of the covenants in this
Article 13 so as to reduce the obligations of Lyric or any one or more
Franchisees hereunder. The running of any period of time specified in this
Article 13 shall be tolled and suspended for any period of time in which Lyric
is found by a court of competent jurisdiction to have been in violation of any
covenant under this Agreement. Lyric agrees further that the existence of any
claim Lyric may have against Franchisor (whether or not arising under this
Agreement) shall not be a defense to enforcement by Franchisor of the covenants
in this Article 13.
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ARTICLE 14. FRANCHISOR NOT TO COMPETE
Franchisor agrees not to compete with Lyric or the applicable
Franchisee in any business which is covered by a Franchise Agreement in the
Territory covered by such Franchise Agreement.
ARTICLE 15. NEGATIVE COVENANTS OF LYRIC
If Integrated Health Services, Inc. sells its entire
membership interest in Lyric pursuant to Article 16 of the Operating Agreement,
Lyric shall not do any of the following, without the prior written consent of
Franchisor, if Lyric is in default in paying any monthly installment of the
Annual Continuing Fee for 30 days after written notice from 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 Lyric to Franchisor
and its Affiliates 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 Lyric.
15.3 Dividends and Redemptions. Make any distribution to
Lyric's members, or redeem, purchase or otherwise acquire directly or
indirectly, any membership interest of Lyric's members, except that Lyric shall
have the right to make cash distributions to its members so long as no default
has occurred and is continuing in the payment of any amount due from Lyric to
Franchisor pursuant to this Agreement and so long as, after giving effect to the
payment of the distribution sufficient working capital is available to pay
Annual Continuing Fees and budgeted operating expenses for the three full
calendar months following the 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 merge 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).
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15.6 Increases in Salaries. Increase any salaries, bonuses,
profit-sharing payments, or other compensation of any kind (including severance
agreements) for any employees receiving (or likely to receive) more than
$100,000 in total annual compensation.
15.7 Affiliates. Amend any Lease to increase the amount or
accelerate the payment of the rent under such Lease or any installment thereof
or engage in any material transaction with (i) any Affiliate, (ii) Lessor or
(iii) an Affiliate of Lessor, other than pursuant to contracts or ongoing
arrangements existing at the time Integrated Health Services, Inc. sells its
membership interest in Lyric, including amending in any material respect any
such contracts or other ongoing arrangements existing at the time of such sale.
15.8 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 consenting to reorganization or relief under
any applicable federal or state law relating to bankruptcy, (iv) consenting to
the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or
other similar official) of Lyric or a substantial part of its property, (v) make
a general assignment for the benefit of creditors, (vi) admit in writing its
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.
ARTICLE 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 Lyric's prior written consent (which shall not be unreasonably withheld,
conditioned or delayed); or (ii) to an entity which simultaneously acquires all
or substantially all of Franchisor's business and assets, provided that such
transferee/assignee assumes each and every obligation of Franchisor under this
Agreement. Franchisor may grant a security interest for collateral purposes in
Franchisor's rights and interest (but not its obligations) under this Agreement
to any of Franchisor's (or its Affiliates') lenders.
16.2 Assignment by Lyric. This Agreement and all rights and
duties hereunder may not be assigned or transferred by Lyric except (i) with the
written consent of Franchisor, or (ii) to an entity which simultaneously
acquires all or substantially all of Lyric's business and assets (including
ownership of all Franchisees), provided that such transferee/assignee assumes
each and every obligation of Lyric under this Agreement (and executes an
assumption agreement to such effect in form and substance satisfactory to
Franchisor). At the time of assignment of Lyric's rights pursuant to the
preceding sentence, Lyric may transfer simultaneously the Franchisees' interests
in all of the Facility Franchise Agreements to the same person or entity to whom
Lyric's interest in this Agreement is assigned.
16.3 Consent Not a Waiver. Franchisor's consent (if granted)
to an assignment by Lyric shall not constitute a waiver of any claims of
Franchisor against the transferring party,
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nor a waiver of Franchisor's right to demand exact compliance with all terms of
this Agreement by the transferee.
16.4 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.
ARTICLE 17. RIGHTS OF AGGRIEVED PARTY UPON DEFAULT
17.1 Franchisor's Right to Terminate. Franchisor may terminate
this Agreement prior to the expiration of its term for "good cause", which shall
exist, at Franchisor's election, if:
(a) Lyric or any Franchisee violates any prohibition
against transfer and assignment in Article 16;
(b) Lyric or any Franchisee violates any covenant of
confidentiality or non-disclosure contained in Section 13.4 or Section
13.5;
(c) Lyric fails to keep, observe, or perform any
covenant, agreement, term or provision (other than payments covered by
(d) below) and such failure continues for sixty (60) days after notice
from Franchisor, provided that if such failure can be cured but such
cure cannot be completed with due diligence within such period and if
Lyric commences to cure such failure promptly after notice thereof and
thereafter prosecutes such cure with due diligence, such period shall
be extended as necessary to cure such failure with due diligence;
(d) Lyric shall apply for or consent to the
appointment of a receiver, trustee, or liquidator of Lyric or of all or
a substantial part of its assets, file a voluntary petition in
bankruptcy or admit in writing its inability to pay its debts as they
become due, make a general assignment for the benefit of creditors,
file a petition or any answer seeking reorganization or arrangement
with creditors or take advantage of any insolvency law, or if an order,
judgment or decree shall be entered by a court of competent
jurisdiction, on the application of a creditor, adjudicating Lyric
bankrupt or appointing a receiver, trustee, or liquidator of Lyric with
respect to all or a substantial part of the assets of Lyric, and such
order, judgment or decree shall continue unstayed and in effect for any
period of ninety (90) consecutive days;
(e) Lyric or any Franchisee defaults under any Lease
or mortgage of any Facility, and the respective Lessor or mortgagee
commences legal proceedings to enforce its rights thereunder;
(f) subject to Section 5.5 Lyric fails to pay the
Annual Continuing Fee owed to Franchisor under this Agreement when due
or within sixty (60) days thereafter,
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or fails to pay any other amounts owed to Franchisor under this
Agreement within sixty (60) days after notice from Franchisor of such
obligation.
Upon the happening of any of the foregoing events, Franchisor may terminate the
rights of Lyric and all Franchisees hereunder by notice to Lyric; and the rights
of Lyric and all Franchisees hereunder shall terminate automatically effective
thirty (30) days after the giving of such notice. If in any jurisdiction a
franchisee is entitled by law to notice and/or cure periods longer than those
set forth above, then with respect to any Franchise Agreement (to which Lyric or
a Franchisee is a party) governed by the law of such jurisdiction, the notice
and/or cure periods, as applicable, shall be deemed to be extended automatically
to the minimum notice and/or cure periods required in such jurisdiction.
17.2 Lyric's Right to Terminate. Lyric 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.
17.3 Defaults Caused by Manager. Notwithstanding anything in
this Agreement to the contrary, during any period while an Affiliate of
Franchisor is acting is the Manager of any Facility of a Franchisee pursuant to
a Management Agreement, if and to the extent that such Manager, through its
action or failure to act, shall have caused Lyric or the respective Franchisee
to be in default of their obligations under this Agreement, then such default
shall not be the basis for Franchisor to exercise any rights under this Article
or under Section 5.9; provided, however, the foregoing sentence shall not apply
if the respective Manager is unable to act (or prevented from acting) by reason
of the failure of Lyric or the respective Franchisee to comply with its own
obligation under the particular Management Agreement (including the payment of
funds to Manager to cover necessary expenditures, the giving of required
approvals or directions, etc.).
ARTICLE 18. [OMITTED]
ARTICLE 19. INDEMNIFICATION AND INDEPENDENT CONTRACTOR
19.1 Indemnification and Hold Harmless. Lyric agrees to
protect, defend, indemnify, and hold Franchisor, IHS and their respective
directors, officers, agents, attorneys and shareholders, 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 Lyric's Business, except those
directly resulting from Franchisor's or IHS' willful misconduct or fraud.
Franchisor agrees to protect, defend, indemnify and hold Lyric and each
Franchisee, and their respective directors, officers, agents, attorneys and
members, 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 Lyric's Business arising directly from
Franchisor's willful misconduct or fraud.
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19.2 Independent Contractor. In all dealings with third
parties including employees, suppliers and patients, Lyric shall disclose in an
appropriate manner reasonably acceptable to Franchisor that it is an independent
entity. Nothing in this Agreement is intended to create a fiduciary relationship
between the parties hereto nor to constitute Lyric an agent, legal
representative, subsidiary, joint venturer, partner, employee or servant of
Franchisor for any purpose. It is agreed that Lyric is an independent contractor
and is not authorized to make any contract, warranty or representation or to
create any obligation on behalf of Franchisor.
ARTICLE 20. WRITTEN APPROVALS, WAIVERS AND AMENDMENT
20.1 Prior Approvals. Whenever this Agreement requires
Franchisor's prior approval, Lyric 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 Lyric, 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 Lyric 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 Lyric except by mutual written
agreement.
ARTICLE 21. ENFORCEMENT
21.1 Inspections. In order to ensure compliance with this
Agreement and to enable Franchisor to carry out its obligations under this
Agreement, Lyric 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 Lyric's Business is conducted and all
records thereof, including, but not limited to, records relating to Lyric's and
Lyric's Franchisees' patients, suppliers, employees and agents. Lyric shall
cooperate fully with Franchisor and its designated agents requesting such
access.
21.2 No Right to Offset. Lyric 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 or any of its Affiliates. Lyric shall
not have the right to "offset" any liquidated or unliquidated amounts, damages
or other funds allegedly due to Lyric from the Franchisor against any monthly
payment,
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fee or any other fees or payments due to the Franchisor or any of its Affiliates
under this Agreement or otherwise.
ARTICLE 22. ENTIRE AGREEMENT
This Agreement 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.
ARTICLE 23. NOTICES
All notices, consents or other communications under this
Agreement (any such, a "notice") must be in writing and addressed to each party
at its respective addresses set forth above (or at any other address which the
respective party may designate by notice given to the other party). Any notice
required by this Agreement to be given or made within a specified period of
time, on or before a date certain, shall be deemed given or made if sent by
hand, by fax with confirmed answerback received, or by registered or certified
mail (return receipt requested and postage and registry fees prepaid). Delivery
"by hand" shall include delivery by commercial express or courier service. A
notice sent by registered or certified mail shall be deemed given on the date of
receipt (or attempted delivery if refused) indicated on the return receipt. All
other notices shall be deemed given when actually received.
ARTICLE 24. GOVERNING LAW AND DISPUTE RESOLUTION
24.1 Governing Law. This Agreement shall be interpreted,
construed, applied and enforced in accordance with the laws of the State of
Maryland (without giving effect to principles of conflicts of laws). Subject to
Sections 24.2 and 24.3, 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 Maryland, and the
parties consent to the jurisdiction of said court or courts.
24.2 In the event of any dispute or controversy arising under
or in connection with this Agreement, the parties shall attempt to resolve such
dispute or controversy by mediation as provided in this Section prior to
exercising any rights under the remaining provisions of Article 24. Either party
may commence mediation by notice to the other party (the "Mediation Notice"),
which notice shall name a proposed Mediator (as defined below) to resolve the
dispute. The party receiving the Mediation Notice, within seven days after
receipt, shall send the other party notice accepting the proposed Mediator (the
"Acceptance Notice") or proposing an alternate Mediator (the "Alternate
Notice"). Within seven (7) days after receipt of an Alternate Notice, the
receiving party shall deliver notice accepting or rejecting the alternate
Mediator. Within five (5) days after the Mediator has been selected the dispute
shall be submitted to him or her by both parties, and the Mediator shall decide
the dispute within fourteen (14) days thereafter. The decision of the Mediator
shall not be binding upon the parties, and after the Mediator issues a
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decision either party may submit the dispute to arbitration, as provided in
Section 24.3 and 24.4. If the parties fail to agree upon a Mediator within
twenty (20) days after receipt of the Mediation Notice, the dispute may be
resolved as provided in Section 24.3. "Mediator" means an individual with
experience relevant to the matter in dispute who is not employed by or
affiliated with either party and who does not have (and is not an officer,
employee or director of an entity which has) significant business contacts with
either party. Franchisor and Lyric shall share equally all costs of the
Mediator.
24.3 (a) Subject to Section 24.2, any dispute between Lyric
and Franchisor regarding a financial, tax, or accounting issue shall be resolved
exclusively through arbitration conducted by a principal of KPMG Peat Marwick
(the "Financial Arbitrator"). Either party may commence arbitration hereunder by
notice to the other party and to the Financial Arbitrator, who shall decide the
dispute. Franchisor and Lyric shall share equally all costs of the Financial
Arbitrator. The Financial Arbitrator shall conduct the arbitration in any manner
he or she elects; however, the Financial Arbitrator shall issue a final decision
with respect to such dispute within thirty (30) days after the dispute is
referred to him or her. The decision of such Financial Arbitrator shall be final
and binding upon the parties and shall not be subject to appeal. Judgment upon
the award rendered by the Financial Arbitrator may be entered in any court
having in personam and subject matter jurisdiction over the parties.
(b) Subject to Sections 24.2 and 24.3(a), any dispute or
controversy arising under or in connection with this Agreement shall be settled
exclusively by arbitration, conducted before a panel of three arbitrators in
Baltimore, Maryland, in accordance with the rules of the American Arbitration
Association then in effect, and judgement may be entered on the arbitrators'
award in any court having in personam and subject matter jurisdiction over the
parties. Franchisor and Lyric shall share equally the costs of the American
Arbitration Association and the arbitrators. Each party shall select one
arbitrator, and the two so designated shall select a third arbitrator. If either
party shall fail to designate an arbitrator within seven (7) days after
arbitration is requested, or if the two arbitrators shall fail to select a third
arbitrator within fourteen (14) days after arbitration is requested, then an
arbitrator shall be selected by the American Arbitration Association upon
application of either party. In considering any issue under this Agreement, the
arbitrators shall construe and interpret this Agreement strictly in accordance
with the specific terms and provisions hereof and in accordance with the
judicial decisions, statutes, and other indicia of Maryland law.
ARTICLE 25. SEVERABILITY, CONSTRUCTION AND OTHER MATTERS
25.1 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
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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 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. Lyric 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 Lyric, or any portion hereof, without Lyric's consent,
effective immediately upon receipt by Lyric of written notice thereof, and Lyric
agrees that it will comply forthwith with any covenant as so modified, which
shall be fully enforceable.
25.2 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.
25.3 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.
25.4 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.
ARTICLE 26. POST TERM OBLIGATIONS
Upon the expiration, termination or assignment of this
Agreement, Lyric and every Franchisee shall immediately:
26.1 Cease Operations. Cease to be a Franchisee of Franchisor
under this Agreement and cease to operate its business under the IHS Systems.
Lyric and each Franchisee shall not thereafter, directly or indirectly,
represent to the public that their business is or was operated or in any way
connected with the IHS Systems 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 its business operated.
26.2 Pay All Sums Outstanding. Pay all sums owing to
Franchisor.
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<PAGE>
26.3 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 Lyric or
any Franchisee with Franchisor's prior consent pursuant to this Agreement. Lyric
and the Franchisees shall retain no copy or record of any of the foregoing.
26.4 Cease Use of IHS Systems. Cease to use in advertising, or
in any manner whatsoever, any methods, procedures, protocols, programs,
procedures or techniques associated with the IHS Systems in which Franchisor or
IHS has a proprietary right, title or interest; cease to use the Proprietary
Materials and any other marks and indicia of operation associated with the IHS
Systems and remove all trade dress, physical characteristics, color combinations
and other indications of operation under the IHS Systems from any premises from
or at which Lyric or any Franchisee operated. Without limiting the foregoing,
Lyric and each Franchisee agree that in the event of any termination or
expiration of this Agreement, it will remove all signage bearing the Proprietary
Materials, and will remove from their respective premises any items which are
characteristic of the IHS Systems "trade dress".
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<PAGE>
ARTICLE 27. TAXES, PERMITS AND INDEBTEDNESS
27.1 Payment. Lyric and each Franchisee shall promptly pay
when due any and all federal, state and local taxes (including 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 Lyric and each Franchisee in the
operation of their business.
27.2 Compliance with all Laws and Regulations. Lyric and each
Franchisee shall comply with all federal, state and local laws, rules and
regulations and timely obtain any and all permits, certificates and licenses
required for the full and proper conduct of their business.
27.3 Full Responsibility. Lyric and each Franchisee hereby
expressly covenant and agree to accept full and sole responsibility for any and
all debts and obligations incurred in the operation of their business.
ARTICLE 28. ACKNOWLEDGMENTS
28.1 LYRIC AND EACH FRANCHISEE ACKNOWLEDGE THAT FRANCHISOR OR
ITS AGENT HAS PROVIDED LYRIC AND EACH FRANCHISEE 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. LYRIC AND EACH FRANCHISEE FURTHER ACKNOWLEDGE THAT LYRIC AND EACH
FRANCHISEE HAVE READ SUCH FRANCHISE OFFERING CIRCULAR AND UNDERSTAND ITS
CONTENTS.
28.2 LYRIC ACKNOWLEDGES THAT FRANCHISOR HAS PROVIDED LYRIC
WITH A COPY OF THIS AGREEMENT AND ALL RELATED DOCUMENTS, FULLY COMPLETED, AT
LEAST FIVE (5) BUSINESS DAYS PRIOR TO LYRIC'S EXECUTION HEREOF OR SUCH
FRANCHISEE'S EXECUTION OF ITS FRANCHISE AGREEMENT.
28.3 LYRIC AND EACH FRANCHISEE ARE 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 FRANCHISE OWNERS MAY DIFFER MATERIALLY IN
CERTAIN CIRCUMSTANCES.
28.4 LYRIC AND EACH FRANCHISEE ACKNOWLEDGE THAT THIS
INSTRUMENT CONSTITUTES THE ENTIRE AGREEMENT OF THE PARTIES RELATING
TO THE SUBJECT MATTER HEREOF. EXCEPT AS SET FORTH IN THE TRANSACTION
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<PAGE>
DOCUMENTS, THIS AGREEMENT TERMINATES AND SUPERSEDES ANY PRIOR AGREEMENT BETWEEN
THE PARTIES CONCERNING THE SAME SUBJECT MATTER.
28.5 LYRIC AND EACH FRANCHISEE ACKNOWLEDGE THAT COMPUTER
SOFTWARE LICENSED HEREUNDER IS FURNISHED "AS IS". FRANCHISOR MAKES NO
WARRANTIES, WHETHER EXPRESS OR IMPLIED WITH RESPECT TO SUCH 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 LYRIC.
28.6 LYRIC AND EACH FRANCHISEE ACKNOWLEDGE THAT THIS
FRANCHISE OFFER WAS MADE TO LYRIC AND THE FRANCHISEES IN THE STATE
OF FLORIDA.
ARTICLE 29. GUARANTY OF FRANCHISEE OBLIGATIONS
29.1 Definition of "Obligations". In this Article 29
"Obligations" means any and all debts, obligations, and liabilities of every
Franchisee to Franchisor arising out of or relating to the Franchisees'
respective Franchise Agreements with Franchisor, whether such Franchise
Agreements and/or such debts, obligations and liabilities are previously, now,
or subsequently made, incurred, or created, whether voluntary or involuntary,
liquidated or unliquidated, secured or unsecured, and whether or not any or all
such debts, obligations and liabilities are or become unenforceable by operation
of bankruptcy or insolvency laws.
29.2 Guaranty. Lyric 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 payment, and not of collection.
Franchisor shall not be obligated to: (i) take any steps to collect from, or to
file any claim of any kind against, any Franchisee, any guarantor, or any other
person or entity liable for payment or performance of the Obligations, or (ii)
take any steps to protect, accept, obtain, enforce, take possession of, perfect
its interest in, foreclose or realize on collateral or security (if any) for
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 in collecting
or attempting to collect any of the Obligations.
29.3 Liability Absolute. Lyric shall have the right to assert
any defenses to enforcement of the Obligations that would be available to
Franchisees, other than defenses based on bankruptcy or insolvency laws.
However, except for the preceding sentence, Lyric's liability
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<PAGE>
for payment and performance of the Obligations shall be absolute and
unconditional; and Lyric unconditionally and irrevocably waives each and every
defense which, under principles of guaranty or suretyship law, would otherwise
operate to impair or diminish such liability; and nothing except actual full
payment and performance to Franchisor of the Obligations shall operate to
discharge Lyric's liability under this Article 29. Without limiting the
foregoing, Franchisor shall have the right, from time to time and without
notice, to: (a) extend any credit to any 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 be done with respect to any
collateral or security, (e) subordinate, sell, transfer, surrender, release or
otherwise dispose of any 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 any of the Obligations.
29.4 Additional Waivers. Lyric waives (a) presentment, notice
of dishonor, protest, demand for payment and all notices of any kind, including
notice of acceptance hereof, notice of the creation of any of the Obligations,
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, (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 Lyric or any Franchisee
hereunder.
29.5 Continuing Effect. This is a continuing guarantee which
shall continue in effect as to those of the Obligations arising out of or
relating to each Franchise Agreement until the particular Franchise Agreement
has terminated in accordance with its terms.
SIGNATURE PAGE FOLLOWS
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Master Franchise Agreement under seal as of the date first written above.
FRANCHISOR:
INTEGRATED HEALTH SERVICES
FRANCHISING CO., INC.
By:
---------------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
LYRIC:
LYRIC HEALTH CARE LLC
By: Integrated Health Services, Inc.
Its: Managing Director
By:
--------------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
S-1
<PAGE>
EXHIBIT 1
FRANCHISE AGREEMENT
Exh. 1-1
<PAGE>
EXHIBIT 2
LIST OF FACILITIES
1. Integrated Health Services at Gainesville
4000 S.W. 20th Avenue
Gainesville, Florida 32607
352-377-1981
352-377-7340 (fax)
2. Integrated Health Services of Chestnut Hill
8833 Stenton Avenue
Wyndmoor, Pennsylvania 19038
215-836-2100
215-233-3551 (fax)
3. Integrated Health Services of New Hampshire at Claremont
RFD 3 Box 47, Hanover Street Ext.
Claremont, New Hampshire 03743
603-452-2606
603-453-0479 (fax)
4. Integrated Health Services of St. Petersburg
811 Jackson Street N.
St. Petersburg, Florida 33705
813-896-3651
813-821-2453 (fax)
5. Governor's Park
1420 South Barrington Rd.
Barrington, IL 60010
847-382-6664
847-382-6693 (fax)
(including 2.5 acres of unimproved land)
Exh. 2-1
<PAGE>
EXHIBIT 3
[OMITTED]
Exh. 3-1
<PAGE>
EXHIBIT 4
LIST OF INDIVIDUAL FRANCHISEE NAMES,
NAMES OF BUSINESSES,
AND TERRITORIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
FRANCHISEE NAME NAME OF BUSINESS TERRITORY
--------------- ---------------- ---------
Gainesville Health Care Integrated Health Services at The area within a fifteen-
Center, Inc. Gainesville mile radius of Integrated
Health Services at
Gainesville
- ----------------------------------------------------------------------------------------------------------
Rest Haven Nursing Center Integrated Health Services at The area within a fifteen-
(Chestnut Hill), Inc. Chestnut Hill mile radius of Integrated
Health Services at Chestnut
Hill
- ----------------------------------------------------------------------------------------------------------
Claremont Integrated Health, Integrated Health Services of The area within a fifteen-
Inc. New Hampshire at mile radius of Integrated
Claremont Health Services of New
Hampshire at Claremont
- ----------------------------------------------------------------------------------------------------------
Rikad Properties, Inc. Integrated Health Services of The area within a fifteen-
St. Petersburg mile radius of Integrated
Health Services of St.
Petersburg
- ----------------------------------------------------------------------------------------------------------
Integrated Management - Governor's Park Nursing The area within a fifteen-
Governor's Park, Inc. and Rehabilitation Center mile radius of Governor's
Park Nursing and
Rehabilitation Center
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Exh. 4-1
<PAGE>
EXHIBIT 5
GUIDELINES FOR DETERMINING TERRITORIES
The "Territory" for each "Health Care Business" shall be determined on a
case-by-case basis (with the specific "Territory" for each business listed in
Exhibit 3 to the Franchise Agreement for such business) based on the following
guidelines:
o The location of a majority of the main facility's patients (based on Zip
Codes);
o The drive time to the main facility for a majority of its patients;
o The population of the relevant metropolitan area where the main facility is
located;
o The location of all competitors in the relevant market area;
o The location of ancillary services offered by the business; and
o The territorial restrictions agreed to by IHS or competitors in previous
sales of facilities in comparable geographical areas.
Based on the foregoing factors, a "Territory" will be determined for each
facility measured in miles from a radius originating at the facility's main
operation (Hospital or RTC).
Exh. 5-1
EXHIBIT 10.69
MASTER MANAGEMENT AGREEMENT
BETWEEN
LYRIC HEALTH CARE LLC
AND
IHS FACILITY MANAGEMENT, INC.
AS OF JANUARY 13, 1998
<PAGE>
TABLE OF CONTENTS
PART I
MANAGEMENT TERMS AND CONDITIONS
ARTICLE I RETENTION OF MANAGER
ARTICLE II TERM
ARTICLE III RIGHTS AND DUTIES OF MANAGER
ARTICLE IV RIGHTS AND DUTIES OF OWNER
ARTICLE V COMPENSATION AND DISTRIBUTIONS
ARTICLE VI INTENTIONALLY OMITTED
ARTICLE VII INTENTIONALLY OMITTED
ARTICLE VIII TERMINATION RIGHTS
ARTICLE IX INDEMNIFICATION
ARTICLE X CONFIDENTIALITY; NON-SOLICITATION
ARTICLE XI CONDEMNATION
ARTICLE XII SUCCESSORS AND ASSIGNS
ARTICLE XIII MISCELLANEOUS PROVISIONS
PART II
OTHER TERMS AND CONDITIONS
ARTICLE I TERM
ARTICLE II REPRESENTATIONS AND WARRANTIES
ARTICLE III TERMINATION RIGHTS
ARTICLE IV INSURANCE
ARTICLE V MISCELLANEOUS PROVISIONS
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<PAGE>
MASTER MANAGEMENT AGREEMENT
THIS MASTER MANAGEMENT AGREEMENT (this "Agreement") is made and entered
into as of January 13, 1998, by and between LYRIC HEALTH CARE LLC, a Delaware
limited liability company, with offices at 8889 Pelican Bay Boulevard, Suite
500, Naples, Florida 34103 ("Lyric") and IHS FACILITY MANAGEMENT, INC., a
Delaware corporation, with offices at 10065 Red Run Boulevard, Owings Mills, MD
21117 ("Manager").
INTRODUCTORY STATEMENT
Lyric owns, indirectly, all of the shares of each of the corporations
listed on Schedule "1" attached hereto (each, an "Owner" and collectively, the
"Owners"). Each Owner operates the health care facility set forth opposite its
name on Schedule "1". (Each facility and the equipment, furnishings, and other
tangible personal property to be used in connection therewith shall be referred
to as a "Facility", and they shall be referred to collectively as the
"Facilities").
The Owners sublease their Facilities pursuant to Facility Subleases,
dated as of the date hereof, from Lyric Health Care Holdings, Inc., which in
turn leases all of the facilities from Omega Healthcare Investors, Inc.
("Lessor") under Master Lease, dated as of the date hereof (the "Master Lease").
Each of the subleases contains substantially the same provisions as the Master
Lease except for provisions concerning rent and other matters specific to the
Facility. In this Agreement "Lease" means the Master Lease and the sublease as
applicable to each Facility.
Each Owner has entered into a Facility Franchise Agreement with
Integrated Health Services Franchising Co., Inc. (each, a "Franchise Agreement")
for the use of certain "Proprietary Information" and the "IHS Systems" (as
defined therein) and the provision of certain services in order to facilitate
the operation of its Facility.
Manager is engaged in the operation of facilities similar to the
Facilities, and is experienced in various phases of the management, operation
and ownership thereof.
Lyric and Manager are entering into this agreement to set forth the
general terms by which all of the Facilities shall be managed. This agreement
also sets forth the responsibilities of Manager with respect to the Franchise
Agreements.
Simultaneously herewith, Manager shall enter into a Facility Management
Agreement with the Owner of each Facility. By entering into a Facility
Management Agreement, each Owner and Manager shall adopt the terms of Part I of
this agreement by reference (except as expressly provided therein) and agree
upon certain additional terms and conditions for the management of each
Facility.
NOW, THEREFORE, in consideration of the promises and covenants herein
contained and intending to be legally bound hereby, the parties agree as
follows:
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<PAGE>
PART I
MANAGEMENT TERMS AND CONDITIONS
Lyric and Manager hereby agree to the following terms and conditions
for the management of each Facility:
ARTICLE I
RETENTION OF MANAGER
1.1 RETENTION. For and during the term of this Agreement, Owner hereby
grants to Manager the sole and exclusive right, and employs Manager to
supervise, manage, and operate the Facility in the name and for the account of
Owner upon the terms and conditions hereinafter set forth.
1.2 ACCEPTANCE. Manager accepts such appointment and agrees that it
will (a) perform its duties and responsibilities hereunder in accordance with
this Agreement, (b) use commercially reasonable efforts to supervise and direct
the management and operation of the Facility in an efficient manner, and (c)
consult with Owner and keep Owner advised of all major policy matters relating
to the Facility. Subject to the foregoing and to the other provisions of this
Agreement, Manager, without the approval of Owner (unless such approval is
herein specifically required as to policies and manner of operation), shall have
the unrestricted control and sole discretion with regard to the operation and
management of the Facility for all customary purposes (including the exercise of
its rights and performance of its duties provided for in Article III hereof),
and the right to determine all policies affecting the appearance, maintenance,
standards of operation, quality of service, and any other matter affecting the
Facility or the operation thereof.
1.3 INDEPENDENT CONTRACTOR. It is expressly agreed by Owner and Manager
that Manager is at all times acting and performing under this Agreement as an
independent contractor, and that no act, commission or omission by either Owner
or Manager shall be construed to make or constitute the other its partner,
member, principal, agent, joint venturer or associate, except to the extent
specified herein.
1.4 OWNERSHIP. Owner shall be the owner and/or holder of all licenses,
permits and contracts obtained with respect to the Facility (subject to Section
3.7 hereof), and shall be the "provider" within the meaning of all third-party
contracts for the Facility. Specifically, and without limitation, Owner shall
own (a) the Medicare provider number, (b) the Medicare provider agreement with
Health Care Financing Administration (HCFA), and (c) the Medicare certification.
ARTICLE II
TERM
The initial term of this Agreement shall immediately commence upon the
date hereof (the "Commencement Date") and shall be for a period from the date
hereof to January 31, 2011 (the
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<PAGE>
"Term"), which is the same period as the Lease Term, as defined in the Lease.
This Agreement shall automatically renew for each extension or renewal term of
the Lease (the "Renewal Terms"), should Owner renew the Lease for one or more
such terms under the Lease; provided, however, Manager may decide not to renew
in any such case by giving notice to Owner not less than six (6) months prior to
the expiration of the initial term or any renewal term.
ARTICLE III
RIGHTS AND DUTIES OF MANAGER
During the Term of this Agreement, and in the course of its management
and operation of the Facility:
3.1 EMPLOYEES. Manager, on Owner's behalf, shall hire, promote,
discharge, and supervise the work of the Facility's Administrator, Assistant
Administrator, Department Heads, and all operating and service employees
performing services in and about the Facility. All of such employees shall be
employees of Owner, except for the Administrator and the Director of Nursing,
who shall be employees of Manager, and the aggregate compensation, including
fringe benefits, with respect to such employees, including the Administrator and
the Director of Nursing, shall be charged to Owner as an expense of the
operation of the Facility. The term "fringe benefits" as used herein shall
include, but not be limited to, the employer's contribution of FICA,
unemployment compensation, and other employment taxes, retirement plan
contributions, workman's compensation, group life, accident, and health
insurance premium, profit sharing contributions, disability, and other similar
benefits paid or payable by Manager with respect to other facilities which may
be managed by Manager. All such employees of Manager shall be covered by
appropriate malpractice and/or errors and omissions insurance as approved by
Manager and Owner. The cost of same shall be charged to Owner as an expense of
the operation of said Facility. Manager shall be responsible, also, for
coordinating health insurance coverages, benefits, and permits (including COBRA
matters) for the employees of each Facility.
3.2 LABOR CONTRACTS. Manager, if requested by Owner, will negotiate, on
Owner's behalf and at Owner's expense, with any labor union lawfully entitled to
represent the employees at the Facility, but any collective bargaining agreement
or labor contract resulting therefrom must first be approved by Owner who shall
be the only person authorized to execute the same. Owner agrees that all fees
and costs of outside professionals in conducting and concluding such
negotiations shall be paid by Owner out of Facility Funds.
3.3 CONCESSIONAIRES, ETC. Manager shall negotiate and consummate in the
name and at the expense of Owner, contracts or arrangements with
concessionaires, licensees, tenants, and other intended users of the Facility.
Any fees and expenses incurred in connection therewith shall be charged to Owner
as an expense of the operation of the Facility.
3.4 ANCILLARY SERVICES, UTILITIES ETC. Manager shall enter into such
contracts in the name of and at the expense of Owner as may be deemed necessary
or advisable for the furnishing of all ancillary services, utilities,
concessions, supplies and other services as may be needed from
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<PAGE>
time to time for the maintenance and operation of the Facility. Manager is
authorized to contract for or provide ancillary services, including, but not
limited to, pharmacy (drug and I.V.), rehabilitation and respiratory therapy
services, and mobile diagnostic services, through providers which are affiliates
of Manager, provided that such services are rendered at levels of quality and
pricing that are competitive with those available in the community.
3.5 PURCHASES. Manager shall supervise the purchasing by Facility staff
of food, beverages, operating supplies, and other materials and supplies, in the
name of and for the account and at the expense of Owner, as may be needed from
time to time for the maintenance and operation of the Facility. However, Manager
shall participate in any master purchasing program specified by Owner.
3.6 REPAIRS. Manager shall make or install or cause to be installed at
Owner's expense and in the name of Owner any proper repairs, replacements,
additions, and improvements in and to the Facility and the furnishings and
equipment in order to keep and maintain the same in good repair, working order
and condition, and outfitted and equipped for the proper operation thereof in
accordance with (a) industry standards comparable to those prevailing in other
similar facilities, (b) all applicable state or local rules, regulations, or
ordinances, and (c) the terms and conditions of the Lease.
3.7 LICENSES AND PERMITS. Manager shall apply for and use commercially
reasonable efforts to obtain and maintain in the name and at the expense of
Owner, all licenses and permits required in connection with the management and
operation of the Facility. If Manager is required by law to obtain any license
or permit in its name, Manager agrees to use commercially reasonable efforts to
obtain and maintain such license or permit in its name, at Owner's expense.
Owner agrees to cooperate with Manager in applying for, obtaining, and
maintaining such licenses and permits.
3.8 GOVERNMENTAL REGULATION.
(A) Manager shall use commercially reasonable efforts to take
such action as shall be reasonably necessary to insure that the
Facility and the management thereof by Manager complies with all
federal, state and local laws, regulations and ordinances applicable to
the Facility or the management thereof by Manager, including the
particular laws and regulations applicable to health care facilities.
(B) Manager shall promptly provide to Owner as and when
received by Manager, all notices, reports or correspondence from
governmental agencies that assert deficiencies or charges against the
Facility or that otherwise relate to the suspension, revocation, or any
other action adverse to any approval, authorization, certificate,
determination, license or permit required or necessary to own or
operate the Facility. Manager may appeal any action taken by any
governmental agency against the Facility; provided, however, that Owner
shall adequately secure and protect Manager from loss, cost, damage or
expense by bond or other means satisfactory to Manager in order to
contest by proper legal proceedings the validity of any such statute,
ordinance, law,
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<PAGE>
regulation or order, provided that such contest shall not result in the
suspension of operations of the Facility; and provided, further, that
Owner shall have no obligation to secure and protect Manager from any
loss, cost, damage or expense that arises directly out of Manager's
material breach of any of its covenants under this Agreement.
3.9 TAXES. Manager shall cause all taxes, assessments, and charges of
every kind imposed upon the Facility by any governmental authority, including
interest and penalties thereon (collectively, "Taxes"), to be paid when due from
Facility Funds (as defined in Section 3.10 below), subject to the terms of the
Lease, and in accordance with the Budget (as defined in Section 3.17 hereof) and
in the order of priority set forth in Section 3.10 below. Manager shall not
cause such Taxes to be paid if (a) such Taxes are in good faith being contested
by Owner at its sole expense and without cost to Manager, (b) enforcement for
nonpayment of such Taxes is stayed, and (c) Owner shall have given Manager
written notice of such contest and stay and authorized the non-payment thereof,
not less than ten (10) days prior to the date on which such Taxes are due and
payable. Interest or penalty payments shall be reimbursed by Manager to Owner if
imposed upon Owner by reason of the gross negligence on the part of Manager in
making the payment if funds are available therefor. Manager shall notify Owner
of all Taxes assessed against the Facility other than in the normal course of
business.
3.10 DEPOSIT AND DISBURSEMENT OF FUNDS. Manager shall deposit in a
banking institution which is a member of the FDIC in accounts in Manager's name,
as agent for Owner, all monies arising from the operation of the Facility or
otherwise received by Manager for and on behalf of Owner (the "Facility Funds"),
and shall disburse and pay the same from said accounts on behalf and in the name
of Owner pursuant to the Budget, in the following order of priority, as and when
required to be made in connection with:
(A) Payment of all costs and expenses arising out of the
administration, maintenance and operation of the Facility, including,
without limitation, Taxes, reimbursable expenses of Manager, and all
accrued and unpaid interest on any unpaid balances thereon, as set
forth in Section 3.16;
(B) Payment of the Facility Rent or debt service on a first
mortgage (if any) on the Facility;
(C) Payment of the monthly installment to the capital expense
reserve for the Facility described in the Budget;
(D) Payment of interest due on the working capital line of
credit for the Facility;
(E) Payment of the letter of credit fee (for the security
deposit under the Lease), if required;
(F) Payment of all administrative and operating costs of
Lyric;
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<PAGE>
(G) Payment of the "Annual Continuing Fee" due under the
Franchise Agreement;
(H) Payment of Manager's Base Management Fee provided for in
Article V hereof (including any accrued and unpaid Base Management
Fees, plus all accrued and unpaid interest thereon, for prior periods);
(I) Payment of subordinated mortgage debt (if any) with
respect to the Facility;
(J) Payment of the monthly installments to any supplemental
capital expense and working capital escrows and reserves described in
the Budget;
(K) Payment of Manager's Incentive Management Fee provided for
in Article V hereof (including any accrued and unpaid Incentive
Management Fees, plus all accrued and unpaid interest thereon, for
prior periods); and
(L) The balance of such funds shall be distributed to Owner at
Owner's request.
To the extent practicable and available, Manager shall distribute to Owner an
amount sufficient to pay the income tax liability of Owner's members from time
to time. In this Agreement, the term "Facility Rent" means the scheduled
payments of Rent, as defined in the Lease, and all other applicable costs for
the maintenance or operation of the Facility and other payments required of
Owner under the Lease.
3.11 STATEMENTS. Manager shall prepare and deliver (or cause to be
prepared and delivered) to Lyric's Managing Director all monthly, quarterly and
annual financial statements and Compliance Reports (as defined in Lyric's
Operating Agreement) and other reports, in the same form, and within the same
periods, as Lyric prepares or receives under Article 12 of Lyric's Operating
Agreement.
3.12 LEGAL ACTIONS. Manager shall institute, in its own name or in the
name of Owner, but in any event at the expense of Owner, any and all legal
actions or proceedings to collect charges, rent, or other sums due the Facility
or to lawfully oust or dispossess tenants or other persons in possession under,
or lawfully cancel, modify, or terminate any lease, license, or concession
agreement for the breach thereof or default thereunder by the tenant, licensee,
or concessionaire. Unless otherwise directed by Owner, Manager may take, at
Owner's expense, appropriate steps to protect and/or litigate to final judgment
in any appropriate court any violation or order affecting the Facility. Any
counsel to be engaged under this or the next preceding paragraph of this Section
shall be approved by Owner, which approval shall not be unreasonably withheld.
Manager shall promptly notify Owner and Lessor of all legal actions.
3.13 MANAGEMENT SERVICES. Without limitation, Manager shall provide the
Facility with all of the customary management services and techniques which it
employs in operating other facilities which it manages which may be applicable
to and beneficial to the Facility.
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3.14 DATA PROCESSING. Manager shall, directly or through an affiliate,
provide the data processing required to maintain the financial, payroll, and
accounting records of the Facility; except that Manager agrees that the Facility
payroll will not be moved to Manager's central payroll administration until same
can be accomplished without a material disruption to Facility cash flow.
3.15 BOOKS AND RECORDS. Manager on behalf of Owner shall supervise and
direct the keeping of full and accurate books of account and such other records
reflecting the results of operation of the Facility as required by law.
3.16 PAYMENT OF EXPENSES.
(A) OWNER EXPENDITURES. All expenditures and advances of every
kind required or permitted of Manager under this Agreement are for Owner's
account ("Owner Expenditures"), except for Manager's Staff Services (described
below). Manager is authorized to pay all Owner Expenditures from Facility Funds.
Owner shall pay directly (or reimburse Manager promptly if Manager advances
funds for) any Owner Expenditures not paid from Facility Funds. Manager's "Staff
Services" -- not reimbursable by Owner -- means only salaries and benefits of
Manager's officers and home office staff, as well as Manager's home office
overhead not specifically allocable to the Facility.
(B) REIMBURSEMENT OF ADVANCES. Manager may from time to time
(but shall not be obligated to) advance or incur expenses in respect of the
operation or maintenance of the Facility, including, without limitation, the
items listed on Exhibit A hereto. Such expenses shall be immediately
reimbursable to Manager out of Facility Funds in the priority set forth in
Section 3.10 hereof. Any such expenses advanced from Manager and not reimbursed
within thirty (30) days shall bear interest from the date advanced until paid in
full at a rate per annum equal to the prime rate of Citibank, N.A., as then in
effect, plus two percent (2%).
3.17 BUDGETS. Manager shall be responsible for the following budgetary
items:
(A) PREPARING BUDGETS. Manager at its sole cost shall prepare
and submit to Owner for Owner's review and approval a yearly operating budget
and a yearly capital budget in a form reasonably acceptable to Owner. Manager
shall present such budgets on a cash basis also. Manager shall submit the
proposed budgets to Owner no later than November 15 of the preceding year. Owner
will consider the proposed budgets and then consult with Manager in order to
finalize an approved budget on or before December 15 of the preceding year. (The
budgets for 1998 shall be presented within 60 days after the date of this
Agreement unless Owner and Manager agree otherwise.) Such budgets shall:
(i) set forth on a month to month basis all
anticipated income, operating expenses, working capital and other
necessary reserves and capital expenditures for such calendar year in
connection with the operation of the Facility;
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(ii) contain all of the items referenced in the
approved budget for 1998; and
(iii) include all supporting schedules requested by
Owner.
The operating budget and the capital budget, as approved by
Owner, shall be referred to herein as the "Operating Budget" and the "Capital
Budget," respectively, and shall be referred to collectively as the "Budget."
(B) REVISED BUDGET/UNFORESEEN INCREASES. If Owner or Manager
believes that it is necessary to revise the Budget after it has been approved,
Manager shall prepare and deliver to Owner a revised budget. Any proposed
changes to the Budget shall be addressed in the revised budget and Manager shall
explain such changes. Manager shall not implement the revised budget without
Owner's approval, which may be granted or withheld in Owner's sole discretion.
If Owner approves the revised budget, the terms of such revised budget, as
approved, shall amend the Budget accordingly. During each calendar year, Manager
shall promptly inform Owner of any major increases in costs and expenses that
were not foreseen during the Budget preparation period and thus were not
reflected in the Budget.
(C) OWNER'S APPROVAL REQUIRED. If Owner shall not have
approved any proposed budgets, the Operating Budget then in effect shall
continue until an Operating Budget is agreed upon; provided, however, that
during any interim period Manager may reasonably exceed the Operating Budget for
the previous fiscal year for taxes, utility charges, costs under existing
agreements which (by the terms of such agreements) automatically increase at the
beginning of the new year, and other items not within Manager's reasonable
control. There will be no Capital Budget for any year until a Capital Budget for
such year is approved by Owner.
3.18 COMPLIANCE WITH FRANCHISE AGREEMENT. Manager shall use
commercially reasonable best efforts to cause Owner to comply with Owner's
obligations as the "Franchisee" under the Franchise Agreement to the extent that
such obligations are capable of (and appropriate for) performance by Manager on
Owner's behalf, subject to the terms and conditions of this Agreement, and are
not personal to Owner.
3.19 COMPLIANCE PROGRAM. Manager shall implement and monitor a
compliance program designed to identify and eradicate fraud and abuse relating
to the Facility and its operation. Such program will include, among other
things, advertising the toll free "fraud and abuse" telephone line operated by
Integrated Health Services Franchising Co., Inc.
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ARTICLE IV
RIGHTS AND DUTIES OF OWNER
During the term of this Agreement:
4.1 RIGHT OF INSPECTION. Owner (and Lessor, subject to and in
accordance with the Lease) shall have the right to enter upon any part of the
Facility upon reasonable advance notice to Manager for the purpose of examining
or inspecting same or examining or making extracts of books and records of the
Facility, but the same shall be done with as little disruption to the business
of the Facility as possible. However, the books and records of the Facility
shall not be removed from the Facility without the express written consent of
Manager. Owner acknowledges that some books and records will be maintained at
Manager's principal place of business.
Owner shall direct all inquiries regarding operations, procedures,
policies, employee relations, patient care, and all other matters concerning the
Facility to the Senior Vice President of Manager's Managed Division or other
officer of Manager as it may from time to time designate in a written notice to
Owner.
4.2 COOPERATION WITH MANAGER. Owner will fully cooperate with Manager
in operating and supervising the operations of the Facility and will reimburse
Manager for all funds expended or costs and expenses incurred to which Manager
is entitled to reimbursement hereunder.
4.3 OPERATING CAPITAL. Owner shall provide Manager with such amount of
working capital as may be required from time to time for the operation of the
Facility on a sound financial basis (including the payment of management fees
and reimbursable expenses owed to Manager). If additional working capital is
required, Manager shall notify Owner thereof in writing and Owner shall provide
Manager with such increase in working capital within fifteen (15) days
thereafter. If Owner fails to provide such additional working capital, Manager
may, but is not obligated to, provide the same as a loan to Owner in accordance
with Section 3.16.
4.4 CAPITAL IMPROVEMENTS. Owner shall provide Manager with such amount
of funds as may be required from time to time to make all necessary capital
improvements to the Facility in order to maintain and continue standards of
operation of the Facility as a nursing home. If additional capital improvement
funds are required, Manager shall notify Owner thereof in writing and Owner
shall provide Manager with such additional capital improvement funds within
fifteen (15) days thereafter. If Owner fails to provide such additional capital
improvement funds, Manager may, but is not obligated to, provide the same as a
loan to Owner in accordance with Section 3.16.
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ARTICLE V
COMPENSATION AND DISTRIBUTIONS
5.1 As full and exclusive compensation for all of the services to be
rendered by Manager during the Term of this Agreement, Owner shall pay to
Manager at its principal office, or at such other place as Manager may from time
to time designate in writing, and at the times hereinafter specified:
(A) A monthly fee (the "Base Management Fee") equal to (i)
three percent (3%) of Gross Revenues derived for each calendar year of
the Term, or (ii) if Gross Revenues for any calendar year exceed $350
million, then four percent (4%) of Gross Revenues for such calendar
year of the Term. The Base Management Fee shall be payable five (5)
days after delivery to Owner of the monthly financial statements
referred to in Section 3.11 (each such date being hereinafter referred
to as a "Payment Date") and shall be calculated based upon the
Facility's Gross Revenues during the preceding month as set forth in
such financial statements; and
(B) An annual fee (the "Incentive Management Fee") equal to
seventy percent (70%) of the Net Cash Flow for each calendar year
during the Term of this Agreement. The Incentive Management Fee shall
be: (1) calculated and earned on an annual basis; and (2) paid to
Manager on an estimated basis in advance in equal monthly installments
on each Payment Date. The estimated Incentive Management Fee for each
year (other than the first year) shall be equal to the actual Incentive
Management Fee paid to Manager for the previous year. For the first
year, the estimated Incentive Management Fee shall be determined
promptly after the date hereof by Manager and Owner. Promptly after the
annual audited financial statements have been delivered to Owner's
Managing Director, Manager shall give notice to Owner stating whether
the installments of the Incentive Management Fee paid to Manager for
such year were greater or less than the actual Incentive Management Fee
earned. If there is a deficiency, Owner shall pay such amount to
Manager within 15 days after such notice; and if there is an
overpayment, the amount of such overpayment shall be offset against
installments of the Incentive Management Fee next becoming due to
Manager. Manager shall be entitled to a pro-rata portion of the
Incentive Management Fee for any partial calendar year during the Term.
If and to the extent that Owner experiences bad debts or poor
collections exceeding the amounts reserved for in its Budget, and as a
result Owner is unable to pay all or any part of the monthly
installment of the Incentive Management Fee for a particular month, the
unpaid portion of such installment shall accrue and be payable (with
interest as calculated pursuant to Section 5.3) as soon as cash flow
permits but in no event later than at the end of the current year. The
foregoing sentence shall not apply for more than one year.
The formula for calculating the Net Cash Flow for the Facility
shall be as follows:
From: Gross Revenues for the Facility (calculated according to
GAAP)
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Subtract: All amounts described in Sections 3.10(a), (b), (c),
(d), (e), (f), (g), (h), (i), and (j) hereof
5.2 For the purposes of determining such management fees, "Gross
Revenues" means, for any period, all revenues and income of any kind derived
directly or indirectly by Owner during such period, including rental or other
payment from concessionaires, licensees, tenants, and other users of all
Facilities covered by this Agreement, and from the sale of products and/or the
furnishing of services (including all revenues or receipts derived from or
associated with the Proprietary Materials (as defined in the Franchise
Agreement)), but excluding therefrom all bequests, gifts, or similar donations,
whether on a cash basis or on credit, paid or unpaid, collected or uncollected,
as determined in accordance with GAAP, excluding, however:
(A) federal, state, and municipal excise, sales, and use
taxes collected directly from patients as a part of
the sales prices of any goods or services;
(B) proceeds of any life insurance policies;
(C) gains or losses arising from the sale or other
disposition of capital assets;
(D) any reversal or accrual of any contingency or tax
reserve;
(E) interest earned on sinking funds, Special Security
Accounts, bonds funds, etc. originally and
specifically formed as a requirement of any bond
issue (if any) utilized to finance the Facility; and
(F) bad debt expense.
The proceeds of business interruption insurance or proceeds as a result
of Medicare and Medicaid audits shall be included in Gross Revenues. However,
funds required to be repaid as a result of Medicare and Medicaid audits shall be
deducted from Gross Revenues.
5.3 Notwithstanding the foregoing, the Base Management Fee and the
Incentive Management Fee (including any amount carried over pursuant to the
succeeding sentence hereof) shall be payable on each Payment Date only to the
extent that the Facility Funds (as defined in Section 3.10) shall be sufficient
as of such date. In the event that any portion of the Base Management Fee and
the Incentive Management Fee is not paid due to the insufficiency of Facility
Funds, interest shall accrue on such unpaid amount at a rate per annum equal to
the prime rate of Citibank, N.A. then in effect, plus two percent (2%), and such
total amount shall be carried over and be payable on the immediately succeeding
Payment Date. When Facility Funds become available to pay past due Base
Management Fees and Incentive Management Fees, the fees shall be deemed to be
paid in the order in which they were earned. Any and all accrued and unpaid Base
Management Fees and Incentive Management Fees shall become immediately and fully
payable by Owner upon the expiration or any termination of this Agreement,
regardless of the availability of Facility Funds.
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5.4 (A) In order to secure performance and payment of all obligations
and liabilities of Owner to Manager under this Agreement, whether now existing
or hereafter arising, including, without limiting the generality of the
foregoing, the payment of all Base Management Fees, Incentive Management Fees,
and reimbursable expenses of Manager (collectively, the "Obligations"), Owner
hereby grants to Manager a security interest in all of the assets of the
Facility, including, but not limited to, the following described property
(collectively, the "Collateral"):
(I) Owner's leasehold interest in the Facility and
any and all rights that Owner now has or may hereafter acquire to
purchase the Facility;
(II) all accounts receivable now owned or hereafter
acquired by Owner in connection with the Facility;
(III) all equipment, furniture, and fixtures now
owned or hereafter acquired by Owner and located at or used in
connection with the Facility;
(IV) all contract rights now owned or hereafter
acquired by Owner in connection with the operation of the Facility;
(V) all inventory, supplies, goods, merchandise, work
in progress, finished goods, and other personal property other than
accounts receivable now owned or hereafter acquired by Owner and
located at or used in connection with the Facility;
(VI) all licenses, permits and other intangible
assets; and
(VII) any and all proceeds of any of the foregoing.
(B) Manager shall have, in any jurisdiction where enforcement
of this Agreement is sought, in addition to any and all other rights
and remedies it may have under this Agreement, or at law, in equity, by
statute or otherwise, all the rights and remedies of a secured creditor
under the Uniform Commercial Code, including, but not limited to, the
right to any deficiency remaining after disposition of the Collateral.
(C) This security interest is (and shall at all times be)
subordinate to: (i) any security interests granted (or to be granted)
in connection with the working capital line of credit for the Facility,
(ii) any security interests granted (or to be granted) to Lessor under
the Lease, and (iii) any mortgages of the Facility.
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ARTICLE VI
INTENTIONALLY OMITTED
ARTICLE VII
INTENTIONALLY OMITTED
ARTICLE VIII
TERMINATION RIGHTS
This Agreement may be terminated and, except as to liabilities or
claims of either party hereto which shall have theretofore accrued or arisen,
the obligations of the parties hereto with respect to this Agreement may be
terminated, upon the happening of any of the following events:
8.1 TERMINATION BY OWNER. If at any time or from time to time during
the Term any of the following events shall occur and not be remedied within the
applicable period of time herein specified, namely:
(A) Manager shall apply for or consent to the appointment of a
receiver, trustee, or liquidator of Manager of all or a substantial
part of its assets, file a voluntary petition in bankruptcy, make a
general assignment for the benefit of creditors, file a petition or an
answer seeking reorganization or arrangement with creditors or take
advantage of any insolvency law, or if an order, judgment or decree
shall be entered by any court of competent jurisdiction, on the
application of a creditor, adjudicating Manager as bankrupt or
insolvent or approving a petition seeking reorganization of Manager or
appointing a receiver, trustee, or liquidator of Manager or of all or
substantial part of its assets, and such order, judgment or decree
shall continue unstayed and in effect for any period of ninety (90)
consecutive days; or
(B) Manager shall materially fail to keep, observe, or perform
any covenant, agreement, term or provision of this Agreement to be
kept, observed, or performed by Manager, and such default shall
continue for a period of sixty (60) days after written notice thereof
by Owner to Manager; or
(C) Manager shall, in the performance of its services
hereunder, engage in self-dealing, commit fraud, or act (or fail to
act) in a manner which constitutes willful misconduct or gross
negligence and shall not cure or correct such matter within sixty (60)
days after written notice thereof by Owner to Manager;
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then in case of any such event and upon the expiration of the period of grace
(if any) applicable thereto, the Term of this Agreement shall expire, at Owner's
option and upon ten (10) days written notice to Manager.
8.2 TERMINATION BY MANAGER. If at any time or from time to time during
the Term any of the following events shall occur and not be remedied within the
applicable period of time herein specified, namely:
(A) Owner shall fail to keep, observe, or perform any
covenant, agreement, term or provision of this Agreement to be kept,
observed, or performed by Owner (except for a payment default described
in Section 8.2(b) below) and such default shall continue for a period
of sixty (60) days after written notice thereof by Owner to Manager;
(B) Owner shall fail to make any payment required hereunder
and such default shall continue for a period of sixty (60) days after
written notice from Owner to Manager;
(C) The Facility or any portion thereof shall be damaged or
destroyed by fire or other casualty and (i) Owner shall fail to
undertake to repair, restore, rebuild, or replace any such damage or
destruction within forty-five (45) days after such fire or other
casualty, or shall fail to complete such work diligently, and (ii)
Owner shall fail to permit Manager to undertake to repair, restore,
rebuild, or replace, at Owner's expense, any such damage or destruction
within forty-five (45) days after such fire or other casualty;
(D) Owner shall apply for or consent to the appointment of a
receiver, trustee, or liquidator of Owner or of all or a substantial
part of its assets, file a voluntary petition in bankruptcy or admit in
writing its inability to pay its debts as they become due, make a
general assignment for the benefit of creditors, file a petition or any
answer seeking reorganization or arrangement with creditors or take
advantage of any insolvency law, or if an order, judgment or decree
shall be entered by a court of competent jurisdiction, on the
application of a creditor, adjudicating Owner bankrupt or appointing a
receiver, trustee, or liquidator of Owner with respect to all or
substantial part of the assets of Owner, and such order, judgment or
decree shall continue unstayed and in effect for any period of ninety
(90) consecutive days;
(E) Any license for the Facility or the Lease is at any time
suspended, terminated, or revoked and such suspension, termination, or
revocation shall continue unstayed and in effect for a period of thirty
(30) consecutive days; or
(F) Facility Funds shall be insufficient for the payment of
the Base Management Fees to Manager pursuant to Article V hereof for a
period of at least two consecutive fiscal quarters (other than as a
result of the mismanagement or other act or omission of Manager);
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then in case of any such event and upon the expiration of the period of grace
(if any) applicable thereto, the term of this Agreement shall expire, at
Manager's option and upon ten (10) days written notice to Owner and Lessor.
8.3 MATERIAL ADVERSE CHANGE. Manager shall be entitled to terminate
this Agreement in the event that any material adverse change occurs in the
financial or operating condition of the Facility, its business or prospects.
Such termination shall become effective three (3) months after Manager delivers
a termination notice to Owner and Lessor; however, if Owner and Manager agree
that Owner should sell the Facility, Manager shall continue to manage the
Facility for a period not to exceed six (6) months after delivery of the
termination notice to facilitate the sale of the Facility. Notwithstanding the
preceding sentence, Manager shall have no right to terminate this Agreement
pursuant to this Section 8.3 if the material adverse change in the Facility is
due to the mismanagement or other act or omission of Manager.
8.4 SURVIVING RIGHTS UPON TERMINATION. If either party exercises its
option to terminate pursuant to this Article VIII, each party shall account for
and pay to the other all sums due and owing pursuant to the terms of this
Agreement within thirty (30) days after the effective date of termination.
Without limiting the generality of the foregoing, within thirty (30) days after
the effective date of termination of this Agreement, Owner shall be obligated to
pay to Manager all accrued and unpaid Base Management Fees, a pro-rata portion
of the Incentive Management Fees, and reimbursable expenses of Manager, together
with all accrued and unpaid interest thereon, notwithstanding that available
Facility Funds may not be sufficient for such purposes. All other rights and
obligations of the parties under this Agreement shall terminate (except as set
forth in Article IX hereof), except that Manager's security interest in the
Collateral shall not terminate until Manager has been paid in full.
8.5 DISPUTE RESOLUTION.
(A) In the event of any dispute or controversy arising under
or in connection with this Agreement, the parties shall attempt to
resolve such dispute or controversy by mediation as provided in this
Section 8.5(a) prior to exercising any rights under the remaining
provisions of Section 8.5. Either party may commence mediation by
notice to the other party (the "Mediation Notice"), which notice shall
name a proposed Mediator (as defined below) to resolve the dispute. The
party receiving the Mediation Notice, within seven days after receipt,
shall send the other party notice accepting the proposed Mediator (the
"Acceptance Notice") or proposing an alternate Mediator (the "Alternate
Notice"). Within seven (7) days after receipt of an Alternate Notice,
the receiving party shall deliver notice accepting or rejecting the
alternate Mediator. Within five (5) days after the Mediator has been
selected the dispute shall be submitted to him or her by both parties,
and the Mediator shall decide the dispute within fourteen (14) days
thereafter. The decision of the Mediator shall not be binding upon the
parties, and after the Mediator issues a decision either party may
submit the dispute to arbitration, as provided in Sections 8.5(b) and
(c). If the parties fail to agree upon a Mediator within twenty (20)
days after receipt of the Mediation Notice, the dispute may be resolved
as provided in Sections 8.5(b) and (c). "Mediator" means an individual
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with experience relevant to the matter in dispute who is not employed
by or affiliated with either party and who does not have (and is not an
officer, employee or director of an entity which has) significant
business contacts with either party. Each party shall pay fifty percent
of the costs of the Mediator.
(B) Subject to Section 8.5(a), any dispute between Owner and
Manager regarding a financial, tax, or accounting issue shall be
resolved exclusively through arbitration conducted by a principal of
KPMG Peat Marwick (the "Financial Arbitrator"). Either party may
commence arbitration hereunder by notice to the other party and to the
Financial Arbitrator, who shall decide the dispute. Each party shall
pay fifty percent of the costs of the Financial Arbitrator. The
Financial Arbitrator shall conduct the arbitration in any manner he or
she elects; however, the Financial Arbitrator shall issue a final
decision with respect to such dispute within thirty (30) days after the
dispute is referred to him or her. The decision of such Financial
Arbitrator shall be final and binding upon the parties and shall not be
subject to appeal. Judgment upon the award rendered by the Financial
Arbitrator may be entered in any court having in personam and subject
matter jurisdiction over the parties.
(C) Subject to Sections 8.5(a) and (b), any dispute or
controversy arising under or in connection with this Agreement shall be
settled exclusively by arbitration, conducted before a panel of three
arbitrators, in accordance with the rules of the American Arbitration
Association ("AAA") then in effect, and judgment may be entered on the
arbitrators' award in any court having in personam and subject matter
jurisdiction over the parties. Each party shall pay fifty percent of
the costs of the AAA and the arbitrators. Each party shall select one
arbitrator, and the two so designated shall select a third arbitrator.
If either party shall fail to designate an arbitrator within seven (7)
days after arbitration is requested, or if the two arbitrators shall
fail to select a third arbitrator within fourteen (14) days after
arbitration is requested, then an arbitrator shall be selected by the
AAA upon application of either party. In considering any issue under
this Agreement, the arbitrators shall construe and interpret this
Agreement strictly in accordance with the specific terms and provisions
hereof and in accordance with the judicial decisions, statutes, and
other indicia of the law of the state of Maryland.
ARTICLE IX
INDEMNIFICATION
9.1 INDEMNIFICATION OF OWNER BY MANAGER. Manager shall indemnify and
hold Owner and its members, officers, directors, shareholders, employees and
affiliates harmless from any and all claims, losses, judgments, damages,
expenses and liabilities whatsoever, (including reasonable attorneys' fees),
incurred by any of them, arising out of Manager's material breach of this
Agreement or any third party claims which are caused in whole or in part by any
grossly negligent act, willful omission, fraud or self-dealing of Manager in
connection with the
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performance of its duties under this Agreement. However, Manager's obligation to
indemnify Owner shall not extend to any Medicare cost disallowances, or any
Medicare, Medicaid, or other governmental fines or penalties. Manager's
obligations under this Section 9.1 shall survive termination of this Agreement.
9.2 INDEMNIFICATION OF MANAGER BY OWNER. Owner shall indemnify and hold
Manager and Manager's officers, directors, shareholders, employees and
affiliates harmless from any and all claims, losses, judgments, damages,
expenses and liabilities whatsoever (including reasonable attorneys' fees)
incurred by any of them in connection with, by reason of, or arising out of: (i)
Manager's performance of services, or undertaking of responsibilities under this
Agreement; (ii) Manager's status as manager of the Facility; (iii) any default
by Owner in keeping Owner's obligations under this Agreement; (iv) any damage to
property, or injury or death to persons, occurring in or with respect to the
Facility; and/or (v) any other claim asserted against any of them in connection
with the Facility or any matter relating thereto, excluding, however, any
matters covered by Manager's indemnity under Section 9.1.
9.3 CONTROL OF DEFENSE OF INDEMNIFIABLE CLAIMS. A party seeking
indemnification under this Article IX shall give the other party prompt written
notice of the claim for which it seeks indemnification. Failure of the party
seeking indemnification to give such prompt notice shall not relieve the other
party of its indemnification obligation, provided that such indemnification
obligation shall be reduced by any damages suffered by such other party
resulting from a failure to give prompt notice hereunder. The party receiving
the aforementioned notice shall provide the defense of such claim, including,
without limitation, retention and payment of attorneys.
9.4 LIMITATION OF EXPENDITURE OBLIGATION. Notwithstanding anything to
the contrary in this Agreement, Manager shall have no obligation whatsoever to
make any advance to or for the account of Owner, or to pay any amount
contemplated for, or required of, Manager under this Agreement, or to incur any
expenditure obligation--whether ordinary or capital--except to the extent that
funds are available for such purpose (in Manager's reasonable judgment), either
from working capital or capital funds provided by Owner or otherwise from the
Facility Funds. Moreover, if Manager so requests, from time to time, Owner shall
sign, as principal, any contract or agreement which Manager is authorized or
required to execute pursuant to this Agreement to evidence that Manager is
acting solely as Owner's agent and not as principal.
ARTICLE X
CONFIDENTIALITY; NON-SOLICITATION
10.1 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. Owner acknowledges
that Manager's business involves the development and use of Confidential
Information (defined below) and that Manager will make available such
Confidential Information to Owner and the Facility in connection with Manager's
duties under this Agreement. Manager acknowledges that Owner and the Facility's
business involves the development and use of Confidential Information and that
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Owner and the Facility will make available such Confidential Information to
Manager in connection with Manager's duties under this Agreement (subject to
Owner's obligations as Franchisee under the Franchise Agreement). Except as
Owner and Manager may disclose in fulfillment of their duties and
responsibilities under this Agreement (subject to Owner's obligations as
Franchisee under the Franchise Agreement) or as may be required to be disclosed
by Owner, the Facility and Manager by law, the parties and their respective
officers, directors, employees or agents shall not, at any time during or after
the term of this Agreement, divulge, furnish or make accessible Confidential
Information to any person or entity for any purpose whatsoever. "Confidential
Information" means any confidential or proprietary information, including,
without limitation, manuals, forms, policies and procedures, computer programs,
system documentation and related software, patient records and patient
information, and any other information of any kind with respect to the finances,
business plans or business operations of the parties.
10.2 NON-USE AND RETURN OF MATERIALS. Effective upon a termination of
this Agreement for any reason whatsoever, the parties and their respective
officers, directors, employees or agents shall not use any Confidential
Information for any purpose whatsoever, including, but not limited to, use in
connection with the operation and management of Facility.
10.3 NON-SOLICITATION. Owner and Manager agree that, for the entire
term of this Agreement and for twelve (12) months after the date that this
Agreement is terminated, (a) Owner shall not entice or induce, directly or
indirectly, any employee to leave the employ of Manager to work with or for
Owner, or to work with any person or entity with whom Owner becomes affiliated
to provide health care services, and (b) Manager shall not entice or induce,
directly or indirectly, any employee to leave the employ of Owner to work with
or for Manager, or to work with any other person or entity with whom Manager is
or becomes affiliated.
10.4 REMEDIES. The parties agree that an aggrieved party who is the
beneficiary of any restriction contained herein may not be adequately
compensated for damages for a breach of the covenants contained in this Article
X, and such aggrieved party shall be entitled to injunctive relief and specific
performance in addition to all other remedies. If a court of competent
jurisdiction shall finally determine that the restraints provided for in this
Article X are too broad as to the activity, geographic area or time covered,
said activity, geographic area or time covered will be reduced to whatever
extent the court deems necessary, and such covenant shall be enforced as to such
reduced activity, geographic area or time period.
ARTICLE XI
CONDEMNATION
If the whole of the Facility shall be taken or condemned in any eminent
domain, condemnation, compulsory acquisition, or like proceeding by a competent
authority for any public or quasi-public use or purpose or if such portion
thereof shall be taken or condemned as to make it unsuitable for its primary
intended use, then the Term shall cease and terminate on the date on which Owner
shall be required to surrender possession of the Facility. Manager shall
continue to
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supervise and direct the management of the Facility until such time as Owner
shall be required to surrender possession of the Facility as a consequence of
such taking or condemnation.
If only a part of the Facility shall be taken or condemned and the
taking or condemnation of such part does not make it unsuitable for its primary
intended use, this Agreement shall not terminate.
ARTICLE XII
SUCCESSORS AND ASSIGNS
12.1 ASSIGNMENTS BY MANAGER. Manager, without the consent of Owner or
Lessor, shall have the right to assign this Agreement to a wholly or majority
owned subsidiary of Manager or Integrated Health Services, Inc., provided, that
Manager shall not thereby be released from its obligations hereunder. In the
event that all or substantially all the assets of Manager or its capital stock
shall during the term of this Agreement be acquired by another corporation
(hereinafter referred to as the "Acquiring Corporation") as a result of a
merger, consolidation, reorganization, or other transaction, the Acquiring
Corporation assumes all of the obligations of Manager then accrued hereunder, if
any, and Manager shall be relieved of all such obligations (and such Acquiring
Corporation shall be relieved of liability hereunder if it subsequently is
involved in such an acquisition). Except as otherwise permitted herein, Manager
shall have no right to assign this Agreement.
12.2 SALE, ASSIGNMENT OR SUBLEASE BY OWNER; RELATED MATTERS. Any sale,
sublease, or assignment with respect to the Facility, other than to Manager,
shall be expressly subject to the terms and provisions of this Agreement and
shall not relieve Owner of its liability or obligations hereunder, and Owner
shall cause any purchaser, assignee, or sublessee to deliver to Manager written
acknowledgment of its agreement to perform hereunder including the payment of
the management fees described herein. Owner shall not sublease all or any
portion of the Facility without the prior written consent of Manager, which may
be granted or withheld in Manager's sole and absolute discretion. Except with
respect to matters involving the Lease and Lessor, Owner may not at any time,
without the prior written consent of Manager, incur any additional debt or
subject its interest in the Facility or any part thereof to the lien of one or
more deeds of trust, mortgages, or other security instruments. In the event that
such consent is given, such additional debt or security interest shall be
subordinate to Manager's rights and security interest granted pursuant to this
Agreement.
ARTICLE XIII
MISCELLANEOUS PROVISIONS
13.1 NO PARTNERSHIP OR JOINT VENTURE. Nothing contained in the
Agreement shall constitute or be construed to be or create a partnership or
joint venture between Owner, its
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successors, or assigns on the one part and Manager, its successors, or assigns
on the other part. Notwithstanding the foregoing, the parties hereby agree that
they shall each have a duty to act in good faith and to deal fairly with the
other party hereto.
13.2 MODIFICATIONS AND CHANGES. This Agreement cannot be changed or
modified except by another agreement in writing signed by Owner and Manager.
13.3 UNDERSTANDING AND AGREEMENTS. This Agreement and the Facilities
Management Agreements constitute the entire understanding and agreement of
whatsoever nature or kind existing between the parties with respect to Manager's
management of the Facility.
13.4 HEADINGS, ETC. The article and paragraph headings contained herein
are for convenience of reference only and are not intended to define, limit, or
describe the scope of intent of any provision of this Agreement. The Exhibits
and Schedules attached hereto form part of this Agreement.
13.5 APPROVAL OR CONSENT. Whenever under any provisions of this
Agreement, the approval or consent of either party is required, the decision
thereon shall be promptly given and such approval or consent shall not be
unreasonably withheld, unless this Agreement expressly provides that a decision
shall be made in a party's sole discretion. It is further understood and agreed
that whenever under any provisions of this Agreement the approval or consent of
Owner is required, such approval or consent is given by the person or any one of
the persons, as the case may be, designated in a notification signed by or on
behalf of Owner. For all purposes under this Agreement, Manager shall determine
solely from the latest such notification received by it the person or persons
authorized to give such approval or consent. Manager shall rely exclusively and
conclusively on the designation set forth in such notification, notwithstanding
any notice of knowledge to the contrary.
13.6 GOVERNING LAW. This Agreement shall be deemed to have been made
and shall be construed and interpreted in accordance with the laws of the State
of Maryland.
13.7 ENFORCEABILITY. Should any provision of this Agreement be
unenforceable as between the parties, such unenforceability shall not affect the
enforceability of the other provisions of this Agreement.
13.8 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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PART II
OTHER TERMS AND CONDITIONS
ARTICLE I
TERM
The initial term of this Agreement shall immediately commence upon the
date hereof and shall terminate on the date of expiration or termination of the
last Lease to terminate or expire. This Agreement shall automatically renew for
each extension or renewal term of any Lease, should any Owner renew its Lease.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 ORGANIZATION AND STANDING OF LYRIC. Lyric represents and warrants
to Manager that Lyric is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of Delaware. Copies of
the Certificate of Formation and Operating Agreement of Lyric, and all
amendments thereof to date, have been, if requested, delivered to Manager and
are complete and correct in all material respects. Lyric has the power and
authority to own the property and assets now owned by it and to conduct the
business presently being conducted by it.
2.2 ABSENCE OF CONFLICTING AGREEMENTS. Lyric represents and warrants to
Manager that neither the execution or delivery of this Agreement, including all
Exhibits and Schedules hereto, or any of the other instruments and documents
required or contemplated hereby and thereby (the "Transaction Documents") by
Lyric, nor the performance by Lyric of the transactions contemplated hereby and
thereby, conflicts with, or constitutes a breach of or a default or requires the
consent of any third party under (i) the Certificate of Formation or the
Operating Agreement of Lyric; or (ii) to the best of its knowledge after due
inquiry, any applicable law, rule, judgment, order, writ, injunction, or decree
of any court, currently in effect; or (iii) to the best of its knowledge after
due inquiry, any applicable rule or regulation of any administrative agency or
other governmental authority currently in effect; or (iv) any agreement,
indenture, contract or instrument to which Lyric is now a party or by which the
assets of Lyric are bound.
2.3 ORGANIZATION AND STANDING OF MANAGER. Manager represents and
warrants to Lyric that Manager is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Copies of the
Articles of Incorporation and By-Laws of Manager, and all amendments thereof to
date, have been, if requested, delivered to Lyric and are complete and correct
in all material respects. Manager has the power and authority to own the
property and assets now owned by it and to conduct the business presently being
conducted by it.
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2.4 ABSENCE OF CONFLICTING AGREEMENTS. Manager represents and warrants
to Lyric that neither the execution or delivery of this Agreement, including all
Exhibits and Schedules hereto, or any of the Transaction Documents by Manager,
nor the performance by Manager of the transactions contemplated hereby and
thereby, conflicts with, or constitutes a breach of or a default or requires the
consent of any third party under (i) the Articles of Incorporation or ByLaws of
Manager, or (ii) to the best of its knowledge after due inquiry, any applicable
law, rule, judgment, order, writ, injunction, or decree of any court, currently
in effect; or (iii) to the best of its knowledge after due inquiry, any
applicable rule or regulation of any administrative agency or other governmental
authority currently in effect; or (iv) any agreement, indenture, contract or
instrument to which Manager is now a party or by which the assets of Manager are
bound.
ARTICLE III
TERMINATION RIGHTS
This Agreement may be terminated and, except as to liabilities
or claims of either party hereto which shall have theretofore accrued or arisen,
the obligations of the parties hereto with respect to this Agreement may be
terminated, upon the happening of any of the following events:
3.1 TERMINATION BY LYRIC. If at any time or from time to time during
the term of this Agreement any of the following events shall occur and not be
remedied within the applicable period of time herein specified, namely:
(A) Manager shall apply for or consent to the appointment of a
receiver, trustee, or liquidator of Manager of all or a substantial
part of its assets, file a voluntary petition in bankruptcy, make a
general assignment for the benefit of creditors, file a petition or an
answer seeking reorganization or arrangement with creditors or take
advantage of any insolvency law, or if an order, judgment or decree
shall be entered by any court of competent jurisdiction, on the
application of a creditor, adjudicating Manager as bankrupt or
insolvent or approving a petition seeking reorganization of Manager or
appointing a receiver, trustee, or liquidator of Manager or of all or
substantial part of its assets, and such order, judgment or decree
shall continue unstayed and in effect for any period of ninety (90)
consecutive days; or
(B) all of the Facility Management Agreements are terminated;
then in case of any such event and upon the expiration of the period of grace
(if any) applicable thereto, the term of this Agreement shall expire, at Lyric's
option and upon ten (10) days written notice to Manager.
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3.2 TERMINATION BY MANAGER. If at any time or from time to time during
the term of this Agreement any of the following events shall occur and not be
remedied within the applicable period of time herein specified, namely:
(A) Lyric shall apply for or consent to the appointment of a
receiver, trustee, or liquidator of Lyric or of all or a substantial
part of its assets, file a voluntary petition in bankruptcy or admit in
writing its inability to pay its debts as they become due, make a
general assignment for the benefit of creditors, file a petition or any
answer seeking reorganization or arrangement with creditors or take
advantage of any insolvency law, or if an order, judgment or decree
shall be entered by a court of competent jurisdiction, on the
application of a creditor, adjudicating Lyric bankrupt or appointing a
receiver, trustee, or liquidator of Lyric with respect to all or
substantial part of the assets of Lyric, and such order, judgment or
decree shall continue unstayed and in effect for any period of ninety
(90) consecutive days; or
(B) all of the Facility Management Agreements are terminated;
then in case of any such event and upon the expiration of the period of grace
(if any) applicable thereto, the term of this Agreement shall expire, at
Manager's option and upon ten (10) days written notice to Lyric.
3.3 NO SURVIVING RIGHTS UPON TERMINATION. Upon termination of this
Agreement all rights and obligations of Lyric and Manager in this Agreement
shall terminate.
ARTICLE IV
INSURANCE
4.1 POLICIES. Subject to Section 4.4 of this Part II, Lyric shall apply
for, obtain and maintain on behalf of the Owners and at its own expense at all
times during the Term, all insurance required to be maintained by the Owners
under the Leases, or if the Leases are not in effect, such insurance as Owners
shall direct Lyric to maintain.
4.2 INSURANCE COMPANIES. All insurance provided for under the foregoing
provisions of this Section shall be effected by policies issued by insurance
companies with at least an "A-VI" rating from A.M. Best and Company of good
reputation, of sound adequate financial responsibility, and properly licensed
and qualified to do business.
4.3 INSURED PARTIES. Each of the polices of insurance required by Part
II, Section 4.1 shall insure each Owner and their respective members, officers,
partners, directors, shareholders, managers and employees, as well as each
Lessor and mortgage lender. Manager, its officers, partners, directors,
shareholders, managers and employees shall, to the extent permissible, be named
as additional insured under all such policies of insurance.
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4.4 MASTER POLICY. Notwithstanding the other provisions of Part II,
Article 4, Manager is authorized and directed to obtain a master policy of
insurance naming the parties described in Part II, Section 4.3 as additional or
named insureds (as specified therein), in the amounts and for the coverages
required by Part II, Section 4.1, which policy may be obtained by Integrated
Health Services, Inc. or its affiliates and which may be a policy of a so-called
"captive" insurance company.
ARTICLE V
MISCELLANEOUS PROVISIONS
5.1 NOTICES. Any notice or other communication by either party to the
other shall be in writing and shall be given and be deemed to have been duly
given, upon the date delivered if delivered personally (including by commercial
express service) or upon the date received if mailed postage pre-paid,
registered, express, or certified mail, addressed as follows:
To Lyric: LYRIC HEALTH CARE LLC
8889 Pelican Bay Boulevard
Suite 500
Naples, Florida 34103
Attention: Eleanor C. Harding
Marshall A. Elkins, Esq.
To Manager: IHS FACILITY MANAGEMENT, INC.
10065 Red Run Boulevard
Owings Mills, MD 21117
Attention: Eleanor C. Harding
Marshall A. Elkins, Esq.
With a copy to: INTEGRATED HEALTH SERVICES, INC.
10065 Red Run Boulevard
Owings Mills, MD 21117
Attention: Eleanor C. Harding
Marshall A. Elkins, Esq.
or to such other address, and to the attention of such other person or officer
as either party may designate in writing by notice.
5.2 NO PARTNERSHIP OR JOINT VENTURE. Nothing contained in the Agreement
shall constitute or be construed to be or create a partnership or joint venture
between Lyric, its successors, or assigns on the one part and Manager, its
successors, or assigns on the other part. Notwithstanding the foregoing, the
parties hereby agree that they shall each have a duty to act in good faith and
to deal fairly with the other party hereto.
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5.3 MODIFICATIONS AND CHANGES. This Agreement cannot be changed or
modified except by another agreement in writing signed by Lyric and Manager.
5.4 UNDERSTANDING AND AGREEMENTS. This Agreement and the Master
Management Agreement constitute the entire understanding and agreement of
whatsoever nature or kind existing between the parties with respect to Manager's
management of the Facility.
5.5 HEADINGS, ETC. The article and paragraph headings contained herein
are for convenience of reference only and are not intended to define, limit, or
describe the scope of intent of any provision of this Agreement. The Exhibits
and Schedules attached hereto form part of this Agreement.
5.6 APPROVAL OR CONSENT. Whenever under any provisions of this
Agreement, the approval or consent of either party is required, the decision
thereon shall be promptly given and such approval or consent shall not be
unreasonably withheld, unless this Agreement expressly provides that a decision
shall be made in a party's sole discretion. It is further understood and agreed
that whenever under any provisions of this Agreement the approval or consent of
Lyric is required, such approval or consent is given by the person or any one of
the persons, as the case may be, designated in a notification signed by or on
behalf of Lyric. For all purposes under this Agreement, Manager shall determine
solely from the latest such notification received by it the person or persons
authorized to give such approval or consent. Manager shall rely exclusively and
conclusively on the designation set forth in such notification, notwithstanding
any notice of knowledge to the contrary.
5.7 GOVERNING LAW. This Agreement shall be deemed to have been made and
shall be construed and interpreted in accordance with the laws of the State of
Maryland.
5.8 ENFORCEABILITY. Should any provision of this Agreement be
unenforceable as between the parties, such unenforceability shall not affect the
enforceability of the other provisions of this Agreement.
5.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SIGNATURE PAGE FOLLOWS
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Master Management Agreement as of the day and year first above written.
LYRIC: MANAGER:
LYRIC HEALTH CARE LLC IHS FACILITY MANAGEMENT, INC.
By: Integrated Health Services, Inc.
Its: Managing Director
By: By:
---------------------------- --------------------------
Name: Daniel J. Booth Name: Daniel J. Booth
---------------------------- ------------------------
Title: Senior Vice President Title: Senior Vice President
---------------------------- -----------------------
S-1
<PAGE>
EXHIBIT A
EXAMPLES OF REIMBURSABLE EXPENSES
The following is a list of expenses not included in the Base Management Fee or
Incentive Management Fee. These Facility-specific expenses are passed directly
to the Facility in connection with which the expense was incurred.
o Administrator wages, benefits and related travel expenses. (This
includes an annual administrator conference).
o Computer hardware and software purchased for the Facility.
o Facility-specific legal and accounting fees.
o Facility-specific fees associated with union organization attempts,
elections, etc.
o Payroll processing fee.
o Outside consultants used for Medicare or Medicaid cost reports and
Medicare exception requests.
o Travel costs for Facility personnel training.
o Other travel costs of Manager specifically allocable to the Facility.
Ex. A-1
<PAGE>
SCHEDULE 1
CURRENT OWNERS AND FACILITIES
OWNER FACILITY
Gainesville Health Care Center, Inc. Integrated Health Services at Gainesville
Rest Haven Nursing Center (Chestnut Integrated Health Services of Chestnut
Hill), Inc. Hill
Claremont Integrated Health, Inc. Integrated Health Services of New
Hampshire at Claremont
Rikad Properties, Inc. Integrated Health Services of St.
Petersburg
Integrated Management - Governor's Governor's Park Nursing and
Park, Inc. Rehabilitation Center
Sch. 1-1
EXHIBIT 10.70
INDEMNITY AGREEMENT
THIS AGREEMENT ("Indemnity Agreement") is executed and delivered as of this
13th day of January, 1998 (the "Effective Date") by and between INTEGRATED
HEALTH SERVICES, INC., a Delaware corporation ("IHS") and OMEGA HEALTHCARE
INVESTORS, INC., a Maryland corporation ("Omega").
The circumstances underlying the execution and delivery of this Agreement
are as follows:
A. Capitalized terms used but not otherwise defined herein have the
respective meanings given them in the Purchase Agreement between the entities
described on attached EXHIBIT A (each a "Seller" and collectively, "Sellers"),
LYRIC HEALTH CARE LLC, a Delaware limited liability company ("Lyric"), LYRIC
HEALTH CARE HOLDINGS, INC., a Delaware corporation ("Lyric Holdings") and OMEGA
("Purchase Agreement"), or, if not defined in the Purchase Agreement, then the
respective meanings given them in the Master Lease between Lyric Holdings and
Omega.
B. Lyric Holdings is a wholly owned subsidiary of Lyric. Sellers are
corporations that are wholly owned by Lyric Holdings. IHS is the sole member of
Lyric. Sellers also are the respective owners of Sellers' Assets. Sellers desire
to sell, and Purchaser desires to acquire and lease to Lyric Holdings, Sellers'
Assets. The purchase and lease of Seller's Assets will benefit IHS.
C. As a condition precedent to its agreement to purchase Sellers' Assets,
Omega has required that IHS indemnify Omega on the terms and conditions
hereinafter set forth with respect to certain environmental matters.
NOW, THEREFORE, IHS and Omega agree as follows:
1. INDEMNIFICATION. IHS shall indemnify and hold Omega harmless from and
against any and all damages, losses, liabilities, costs, actions, suits,
proceedings, demands, assessments, and judgments, including, but not limited to,
reasonable and documented attorneys' fees and reasonable costs and expenses of
litigation, arising out of or in any manner related to the claims of third
parties resulting from:
(a) Any failure of Sellers, Lyric Holdings and Lyric to complete as
and when required to do so by the terms of the Purchase Agreement the
environmental remediation described on Schedule1(b) thereof;
(b) Any failure of Sellers, Lyric Holdings and Lyric to complete if,
as and when required to do so by the terms of the Master Lease such
environmental remediation as may be required by Section 7.3(g) thereof.
<PAGE>
2. Procedure. If Omega asserts that IHS is subject to a claim for
indemnification hereunder, Omega shall describe the claim in sufficient detail
in order to permit IHS to evaluate the nature and cause of the claim. If the
asserted claim arises or is in connection with a claim, suit, or demand filed by
a third party, IHS shall be entitled to defend against such claim with counsel
reasonably satisfactory to Omega. Omega may also employ counsel of its own, but
the costs of Omega's separate counsel shall be borne by Omega as long as IHS
continues to so defend. If IHS fails to respond or does not admit responsibility
for indemnification, the Omega may take such necessary steps to defend itself
and any reasonable costs associated therewith may be included as part of the
asserted claim for indemnification. If the claims do not arise from a third
party, within 30 days of receipt of written notice from Omega describing the
claim in reasonable detail, IHS shall notify Omega as to whether or not it
believes such claim is covered by this Indemnity Agreement, and if IHS believes
such claim is not covered, including the specific reasons for its position. With
respect to claims by third parties, (a) if Omega declines to accept a bona fide
offer of settlement that is recommended by the IHS, which settlement without
cost to Omega releases Omega from all liability, the maximum liability of IHS
shall not exceed that amount for which it would have been liable had such
settlement been accepted, and (b) if IHS declines to accept a bona fide offer of
settlement recommended by Omega, IHS shall be liable for whatever outcome
results from such third party claim, provided, however, that IHS shall not
settle any claim covered by this Indemnity Agreement without either the written
consent of Omega or a full and complete release of Omega.
3. Notices. Any notice, request or other communication to be given by any
party hereunder shall be in writing and shall be sent by registered or certified
mail, postage prepaid, by overnight delivery, hand delivery or facsimile
transmission to the following address:
To IHS: Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attn: Eleanor C. Harding
Telephone No.: 410/998-8400
Facsimile No.: 410/998-8700
<PAGE>
With copy to Peter S. Britell and John R. Fallon, Jr.
(which shall not LeBoeuf, Lamb, Greene & MacRae, L.L.P.
constitute notice): 125 West 55th Street
New York, New York 10019-5389
Telephone No.: 212/424-8000
Facsimile No.: 212/424-8500
To Omega: Omega Healthcare Investors, Inc.
901 West Eisenhower, Suite 110
Ann Arbor, Michigan 48103
Attn: F. Scott Kellman
Telephone No.: 313/747-9790
Facsimile No.: 313/996-0020
With copy to Dykema Gossett PLLC
(which shall not 1577 North Woodward Avenue, Suite 300
constitute notice): Bloomfield Hills, MI 48304-2820
Attn: Fred J. Fechheimer
Telephone No.: 248/203-0743
Facsimile No.: 248/203-0763
Notices shall be deemed given upon actual receipt.
4. Choice of law. This Indemnity Agreement shall be governed by and
construed in accordance with the laws of Michigan, except as to matters which
under the laws of the State, or under applicable procedural conflicts of laws
rules, require the application of laws of the State.
IHS CONSENTS TO IN PERSONAM JURISDICTION BEFORE THE STATE AND FEDERAL
COURTS OF THE STATES OF MICHIGAN AND THE STATES IN WHICH THE LEASED PROPERTY IS
LOCATED, AND AGREES THAT ALL DISPUTES CONCERNING THIS INDEMNITY AGREEMENT BE
HEARD IN THE STATE AND FEDERAL COURTS LOCATED IN THE STATES OF MICHIGAN OR THE
STATES IN WHICH THE LEASED PROPERTY IS LOCATED. IHS AGREES THAT SERVICE OF
PROCESS MAY BE EFFECTED UPON IT UNDER ANY METHOD PERMISSIBLE UNDER THE LAWS OF
THE STATES OF MICHIGAN OR THE STATES IN WHICH THE LEASED PROPERTY IS LOCATED AND
IRREVOCABLY WAIVES ANY OBJECTION TO VENUE IN THE STATE AND FEDERAL COURTS OF THE
STATES OF MICHIGAN OR THE STATES IN WHICH THE LEASED PROPERTY IS LOCATED.
<PAGE>
IN WITNESS WHEREOF, the parties hereby execute this Indemnity Agreement as
of the day and year first set forth therein.
INTEGRATED HEALTH SERVICES, INC.
By:
-------------------------------
Name: Daniel J. Booth
Title: Senior Vice President
OMEGA HEALTHCARE INVESTORS, INC., a
Maryland corporation
By:
-------------------------------
Name: F. Scott Kellman
Title: Executive Vice President
<PAGE>
EXHIBIT "A"
NAME OF SELLER STATE OF INCORPORATION
Gainesville Health Care Center, Inc. Florida
Rest Haven Nursing Center (Chestnut Pennsylvania
Hill), Inc.
Claremont Integrated Health, Inc. Pennsylvania
Rikad Properties, Inc. Florida
Integrated Management-Governor's Delaware
Park, Inc.
EXHIBIT 10.71
MASTER LEASE
BETWEEN
OMEGA HEALTHCARE INVESTORS, INC.
AND
LYRIC HEALTH CARE HOLDINGS, INC.
DATED: AS OF JANUARY 13, 1998
<PAGE>
TABLE OF CONTENTS
Name Page
ARTICLE I......................................................................1
1.01 LEASE......................................................1
1.02. TERM.......................................................1
1.03. ALLOCATION OF BASE RENT....................................2
ARTICLE II.....................................................................2
2.1 DEFINITIONS................................................2
ARTICLE III...................................................................19
3.1 RENT......................................................19
3.2 ADDITIONAL CHARGES........................................19
3.3 LATE CHARGE; INTEREST.....................................19
3.4 METHOD OF PAYMENT OF RENT.................................20
3.5 NET LEASE.................................................20
ARTICLE IV....................................................................20
4.1 PAYMENT OF IMPOSITIONS....................................20
4.2 NOTICE OF IMPOSITIONS.....................................21
4.3 ADJUSTMENT OF IMPOSITIONS.................................21
4.4 UTILITY CHARGES...........................................21
4.5 INSURANCE PREMIUMS........................................21
ARTICLE V.....................................................................22
5.1 NO TERMINATION, ABATEMENT, ETC............................22
ARTICLE VI....................................................................22
6.1 OWNERSHIP OF THE LEASED PROPERTY..........................22
6.2 LESSOR'S PERSONAL PROPERTY................................23
6.3 LESSEE'S PERSONAL PROPERTY................................23
6.4 GRANT OF SECURITY INTEREST IN LESSEE'S PERSONAL PROPERTY..24
ARTICLE VII...................................................................24
7.1 CONDITION OF THE LEASED PROPERTIES........................24
7.2 USE OF THE LEASED PROPERTY................................24
7.3 CERTAIN ENVIRONMENTAL MATTERS.............................25
ARTICLE VIII..................................................................31
8.1 COMPLIANCE WITH LEGAL AND INSURANCE REQUIREMENTS..........31
i
<PAGE>
8.2 LEGAL REQUIREMENT COVENANTS...............................32
8.3 CERTAIN COVENANTS.........................................32
8.4 OTHER BUSINESSES. .......................................33
ARTICLE IX....................................................................33
9.1 MAINTENANCE AND REPAIR....................................33
9.2 ENCROACHMENTS, RESTRICTIONS, ETC..........................36
ARTICLE X.....................................................................36
10.1 CONSTRUCTION OF ALTERATIONS AND ADDITIONS TO LEASED
PROPERTY..................................................36
ARTICLE XI....................................................................38
11.1 LIENS.....................................................38
ARTICLE XII...................................................................38
12.1 PERMITTED CONTESTS........................................38
12.2 LESSOR'S REQUIREMENT FOR DEPOSITS.........................39
ARTICLE XIII..................................................................39
13.1 GENERAL INSURANCE REQUIREMENTS............................39
13.2 REPLACEMENT COST..........................................41
13.3 WORKER'S COMPENSATION INSURANCE...........................41
13.4 WAIVER OF LIABILITY; WAIVER OF SUBROGATION................42
13.5 OTHER REQUIREMENTS........................................42
13.6 INCREASE IN LIMITS........................................42
13.7 BLANKET POLICY............................................43
13.8 NO SEPARATE INSURANCE.....................................43
ARTICLE XIV...................................................................43
14.1 INSURANCE PROCEEDS........................................43
14.2 RESTORATION IN THE EVENT OF DAMAGE OR DESTRUCTION.........44
14.3 INTENTIONALLY OMITTED. ...................................45
14.4 LESSEE'S PERSONAL PROPERTY................................45
14.5 RESTORATION OF LESSEE'S PROPERTY..........................45
14.6 NO ABATEMENT OF RENT......................................45
14.7 CONSEQUENCES OF PURCHASE OF DAMAGED LEASED PROPERTY.......45
14.9 WAIVER....................................................45
14.10 PROCEDURE FOR DISBURSEMENT OF INSURANCE PROCEEDS GREATER
THAN THE APPROVAL THRESHOLD...............................46
ARTICLE XV....................................................................47
15.1 TOTAL TAKING..............................................47
ii
<PAGE>
15.2 ALLOCATION OF PORTION OF AWARD............................47
15.3 PARTIAL TAKING............................................48
15.4 TEMPORARY TAKING..........................................48
ARTICLE XVI...................................................................49
16.1 EVENTS OF DEFAULT.........................................49
16.4 CERTAIN REMEDIES..........................................49
16.5 DAMAGES...................................................49
16.6 WAIVER....................................................50
16.7 APPLICATION OF FUNDS......................................50
ARTICLE XVII..................................................................50
17.1 LESSOR'S RIGHT TO CURE LESSEE'S DEFAULT...................50
18.1 FIRST OPTION TO RENEW.....................................51
18.2 SECOND OPTION TO RENEW. .................................51
ARTICLE XIX...................................................................51
19.1 HOLDING OVER..............................................52
19.2 INDEMNITY.................................................52
ARTICLE XX....................................................................52
20.1 SUBORDINATION.............................................52
20.2 ATTORNMENT................................................53
20.3 ESTOPPEL CERTIFICATE......................................53
ARTICLE XXI...................................................................53
21.1 RISK OF LOSS..............................................53
ARTICLE XXII..................................................................53
22.1 INDEMNIFICATION...........................................53
ARTICLE XXIII.................................................................54
23.1 GENERAL PROHIBITION AGAINST TRANSFER......................54
23.2 CORPORATE OR PARTNERSHIP TRANSACTIONS.....................55
23.5 SUBORDINATION AND ATTORNMENT..............................55
23.6 SUBLEASE LIMITATION.......................................56
ARTICLE XXIV..................................................................56
24.1 OFFICER'S CERTIFICATES AND FINANCIAL STATEMENTS...........56
24.2 PUBLIC OFFERING INFORMATION...............................58
ARTICLE XXV...................................................................59
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25.1 LESSOR'S RIGHT TO INSPECT.................................59
ARTICLE XXVI..................................................................59
26.1 NO WAIVER.................................................59
ARTICLE XXVII.................................................................59
27.1 REMEDIES CUMULATIVE.......................................59
ARTICLE XXVIII................................................................59
28.1 ACCEPTANCE OF SURRENDER...................................60
ARTICLE XXIX..................................................................60
29.1 NO MERGER OF TITLE........................................60
29.2 NO PARTNERSHIP............................................60
ARTICLE XXXI..................................................................61
31.1 QUIET ENJOYMENT...........................................61
ARTICLE XXXII.................................................................61
32.1 NOTICES...................................................61
ARTICLE XXXIII................................................................62
33.1 APPRAISERS................................................62
ARTICLE XXXIV.................................................................63
34.1 BREACH BY LESSOR..........................................63
ARTICLE XXXV..................................................................64
35.1 LESSOR'S OPTION TO PURCHASE LESSEE'S PERSONAL PROPERTY....64
35.2 FACILITY TRADE NAMES......................................64
35.3 TRANSFER OF OPERATIONAL CONTROL OF THE FACILITIES.........64
35.4 INTANGIBLES AND PERSONAL PROPERTY.........................66
ARTICLE XXXVI.................................................................66
36.1 ARBITRATION...............................................66
ARTICLE XXXVII................................................................67
37.1 MISCELLANEOUS.............................................67
ARTICLE XXXVIII...............................................................69
INTENTIONALLY OMITTED
.........................................................69
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ARTICLE XXXIX.................................................................69
39.1 MEMORANDUM OF LEASE.......................................69
ARTICLE XL....................................................................69
40.1 SECURITY DEPOSIT..........................................69
40.2 APPLICATION OF SECURITY DEPOSIT...........................70
40.3 TRANSFER OF SECURITY DEPOSIT..............................70
v
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MASTER LEASE
BETWEEN
OMEGA HEALTHCARE INVESTORS, INC.
AND
LYRIC HEALTH CARE HOLDINGS, INC.
THIS MASTER LEASE ("Lease") is dated as of January 13, 1998, and is entered
into by and between OMEGA HEALTHCARE INVESTORS, INC., a Maryland corporation,
the address of which is 905 West Eisenhower Circle, Suite 110, Ann Arbor,
Michigan 48103("Lessor"), and LYRIC HEALTH CARE HOLDINGS, INC., the address of
which is 10065 Red Run Boulevard, Owings Mills, Maryland 21117 ("Lessee").
RECITALS
This Lease is made and entered into with reference to the following
recitals:
A. Capitalized terms used and not otherwise defined herein have the
respective meanings given them in Article II below.
B. Omega has purchased the Leased Properties, on which licensed health care
facilities now are being operated, from subsidiaries of Lessee.
C. Omega now wishes to lease to Lessee, and Lessee wishes to lease from
Omega, the Leased Properties on the following terms and conditions:
ARTICLE I
1.01 LEASE. Upon and subject to the terms and conditions hereinafter set
forth, Lessor leases to Lessee the Leased Properties described on attached
EXHIBITS A-1 through A-5, respectively, on the terms and conditions set forth
herein.
1.02. TERM. The Term shall commence on the Commencement Date and end on the
Expiration Date, subject to renewal as provided in Article XVIII hereof.
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1.03. ALLOCATION OF BASE RENT. At the Commencement Date, the allocation of
Base Rent among the Leased Properties, as agreed by Lessor and Lessee solely for
purposes of this Lease, is set forth on attached EXHIBIT B.
ARTICLE II
2.1 DEFINITIONS. For all purposes of this Lease, except as otherwise
expressly provided or unless the context otherwise requires, (a) all accounting
terms not otherwise defined herein have the meanings assigned to them in
accordance with GAAP, (b) all references to designated "Articles," "Sections"
and other subdivisions are to the designated Articles, Sections and other
subdivisions of this Lease, and (c) the words "herein," "hereof" and "hereunder"
and other words of similar import refer to this Lease as a whole and not to any
particular Article, Section or other subdivision. In addition, the following
terms shall have the following meanings:
Accounts: With respect to each Facility Sublessee, and to Lessee in
the event it should at any time operate the health care business on a
Leased Property, all accounts, accounts receivable, deposits, prepaid
items, documents, chattel paper, instruments, contract rights, general
intangibles, choses in action and rights to any refund of taxes previously
or subsequently paid to any governmental authority, in each case arising
from or in connection with such Facility Sublessee's (or Lessee's)
operation and use of the Leased Property.
Additional Charges: All Impositions and all other amounts, liabilities
and obligations that Lessee assumes and agrees to pay under this Lease.
Affiliate: Any Person who, directly or indirectly, Controls or is
Controlled by or is under Common Control with another Person.
Approval Threshold: Five Hundred Thousand Dollars ($500,000.00).
Assessment: With respect to any Leased Property, any assessment for
public improvements or benefits commenced or completed after the date
hereof and whether or not to be completed within the Term.
Award: All compensation, sums or anything of value awarded, paid or
received in connection with a Taking or Partial Taking.
Base Rent: (a) For the first Lease Year, the sum of Four Million Four
Hundred Ninety Thousand Dollars ($4,490,000.00), and (b) for each Lease
Year thereafter, the sum of (i) the Base Rent for the preceding Lease Year
plus (ii) the product of the Base Rent for the preceding Lease Year and the
lower of (i) twice the
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<PAGE>
percentage increase in the Cost of Living Index from the first month of the
preceding Lease Year to the first month of the Lease Year in question or
(ii) three (3%) percent.
Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which national banks in the City of New York, New
York are authorized, or obligated, by law or executive order, to close.
Capital Lease: Any lease (a) pursuant to which Lessee leases any
property (whether real, personal or mixed) and (b) that Lessee is required,
under GAAP, to account for on its balance sheet as a capital lease.
Capitalized Lease Obligation: Any obligation of Lessee, as lessee or
guarantor, under a Capital Lease.
Cash Flow from the Facilities: The sum of (a) Net Income for the
applicable period; (b) the amount actually deducted by Lessee in computing
Net Income for the applicable period, for (i) depreciation on any leasehold
improvements to the Facilities constructed by Lessee, (ii) amortization and
(iii) Rent; (c) interest (other than interest imputed, pursuant to GAAP, on
any Capitalized Lease Obligations and interest on any Purchase Money
Financing); and (d) Fees.
Cash Flow to Debt Service Requirement: As of the relevant fiscal
period, a ratio of Lessee's Cash Flow from all the Facilities to its Debt
Service (in each case determined on a consolidated or combined basis with
all the Facility Sublessees) equal to or greater than the ratio applicable
to such period as set forth on the schedule attached hereto as EXHIBIT C.
Claims: Any liens, attachments, levies, encumbrances, charges or
claims, or any encroachments or restrictions burdening any Leased Property.
Clean-Up: The investigation, removal, restoration, remediation and/or
elimination of, or other response to, Contamination, in each case to the
satisfaction of all governmental agencies having jurisdiction over the
applicable Leased Property and in compliance with or as may be required by
Environmental Laws.
Code: The Internal Revenue Code of 1986, as amended from time to time.
Commencement Date: January 13, 1998.
Condemnor: Any public or quasi-public authority, or private
corporation or individual, having the power of condemnation.
3
<PAGE>
Construction Funds: The Net Proceeds available for restoration or
repair work pursuant to Article XIV of this Lease.
Contamination: The presence, Release or threatened Release of any
Hazardous Substance at a Leased Property in violation of any Environmental
Law, or in a quantity that would give rise to any affirmative Clean-Up
obligation under an Environmental Law, including, but not limited to, the
existence of any injury or potential injury to public health, safety,
natural resources or the environment associated therewith.
Control (and its corollaries Controlled by and under Common Control
with): possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of a Person, through the
ownership of voting securities, partnership interests or other equity
interests.
Cost of Living Index: The United States Department of Labor, Bureau of
Labor Statistics Revised Consumer Price Index for All Urban Consumers
(1982-84=100), U.S. City Average, All Items, or, if such Index is not
available for the United States, an index available for the geographical
area in the United States which most closely corresponds to the entire
United States, published by such bureau or its successor, or, if none, by
any other instrumentality of the United States.
Date of Taking: The date on which the Condemnor has the right to
possession of the Leased Property that is the subject of the Taking or
Partial Taking.
Debt: As of any date, all (a) obligations of a Person, whether current
or long-term, that in accordance with GAAP would be included as liabilities
on such Person's balance sheet; (b) Capitalized Lease Obligations of such
Person; (c) obligations of others for which that Person is liable directly
or indirectly, by way of guaranty (whether by direct guaranty, suretyship,
discount, endorsement, take-or-pay agreement, agreement to purchase or
advance or keep in funds or other agreement having the effect of a
guaranty) or otherwise; (d) liabilities and obligations secured by liens on
any assets of that Person, whether or not those liabilities or obligations
are recourse to that Person; (e) liabilities and obligations of that
Person, direct or contingent, with respect to letters of credit issued for
the account of that Person or others or with respect to bankers acceptances
created for that Person; and (f) obligations resulting from a draw under
any letter of credit which may be provided pursuant to the Letter of Credit
Agreement. However, Additional Charges shall not be deemed to be Debt.
4
<PAGE>
Debt Service: With respect to any fiscal period of a Person, the sum
of (a) all interest due on Debt during the period (other than interest
imputed, pursuant to GAAP, on any Capitalized Lease Obligations and
interest on Debt that comprises Purchase Money Financing), (b) all payments
of principal of Debt required to be made during the period and (c) all Base
Rent due during the period.
Encumbrance: With respect to a Leased Property, any mortgage, deed of
trust, lien, encumbrance or other matter affecting title to the Leased
Property, or any portion thereof or interest therein.
Environmental Audit: A written certificate, in form and substance
satisfactory to Lessor, from an environmental firm acceptable to Lessor,
which states that there is no evidence of Contamination on the applicable
Leased Property and that the applicable Leased Property is otherwise in
compliance with Environmental Laws.
Environmental Documents: Documents received by Lessee or any Affiliate
from, or submitted by Lessee or any Affiliate to, the United States
Environmental Protection Agency and/or any other federal, state, county or
municipal agency responsible for enforcing or implementing Environmental
Laws with respect to the condition of the Leased Property leased by Lessee
or Lessee's operations at the Leased Property; and (b) written reviews,
audits, reports or other documents pertaining to environmental conditions,
including, but not limited to, the presence or absence of Contamination,
at, in or under or with respect to the Leased Property leased by Lessee
that have been prepared by, for or on behalf of Lessee.
Environmental Laws: All federal, state and local laws (including,
without limitation, common law), statutes, codes, ordinances, regulations,
rules, orders, permits or decrees from time to time in effect and relating
to (a) the introduction, emission, discharge or release of Hazardous
Substances into the indoor or outdoor environment (including, without
limitation, air, surface water, groundwater, land or soil); or (b) the
manufacture, processing, distribution, use, treatment, storage,
transportation or disposal of Hazardous Substances; or (c) the Cleanup of
Contamination.
Escrow Agreement: The Escrow Agreement of even date herewith between
Lessor and Lessee.
Estoppel Certificate: A statement in writing in substantially the same
form as attached EXHIBIT D, with such changes thereto as reasonably may be
requested by the person relying on such certificate.
5
<PAGE>
Event of Default: The occurrence of any of the following:
(a) If Lessee fails to make or cause to be made payment of Base
Rent under this Lease when the same becomes due and payable, or to
restore the Security Deposit if and as required by Section 40.2
hereof, and such failure is not cured within a period of five (5)
Business Days after Notice thereof, or Lessee fails to make or cause
to be made payment of any Additional Rent within a period of ten (10)
Business Days after Notice thereof;
(b) If Lessee (i) admits in writing its inability to pay its
debts generally as they become due, (ii) files a petition in
bankruptcy or a petition to take advantage of any insolvency law,
(iii) makes a general assignment for the benefit of its creditors,
(iv) consents to the appointment of a receiver of itself or of the
whole or any substantial part of its property, or (v) files a petition
or answer seeking reorganization or arrangement under the Federal
Bankruptcy Laws or any other applicable law or statute of the United
States of America or any state thereof; or
(c) If Lessee, on a petition in bankruptcy filed against it, is
adjudicated a bankrupt or has an order for relief thereunder entered
against it, or a court of competent jurisdiction enters an order or
decree appointing a receiver of such Lessee or of the whole or
substantially all of Lessee's property, or approving a petition filed
against Lessee seeking reorganization or arrangement of Lessee under
the Federal Bankruptcy Laws or any other applicable law or statute of
the United States of America or any state thereof, and such judgment,
order or decree is not vacated or set aside or stayed within ninety
(90) days from the date of the entry thereof; or
(d) If Lessee is liquidated or dissolved, or begins proceedings
toward liquidation or dissolution, or has filed against it a petition
or other proceeding to cause it to be liquidated or dissolved, and the
proceeding is not dismissed within sixty (60) days thereafter, or in
any manner permits the sale or divestiture of substantially all of its
assets except in connection with a dissolution or liquidation
following or related to a merger or transfer of all or substantially
all of the assets and liabilities of Lessee with or to an Affiliate;
or
(e) If the estate or interest of Lessee in the Leased Property or
any part thereof is levied upon or attached in any proceeding and the
same is not vacated or discharged within sixty (60) days after
commencement thereof (unless Lessee is in the process of contesting
such lien or attachment in good faith in accordance with Section 12.1
hereof); or
6
<PAGE>
(f) If Lessee ceases operation of a Facility for a period in
excess of five (5) Business Days except upon prior written Notice to,
and the express prior written consent of Lessor (which consent Lessor
may withhold in its absolute discretion), or as the unavoidable
consequence of damage or destruction as a result of a casualty, or a
Taking or Partial Taking, or as a result of an event described in
subparagraph (g) below (as to which the provisions of subparagraph (g)
shall govern); or
(g) If the license to operate any Facility as a provider of
health care services in accordance with its Primary Intended Use is
revoked, or allowed to lapse, or, without Lessor's prior written
consent, transferred to a facility that is not one of the Leased
Properties, or an order is imposed with respect to a Facility
suspending the right to operate or accept patients, and Lessee does
not promptly take reasonable steps to cure the condition or conditions
leading to such revocation or order and cause such license and right
to operate and accept patients to be reinstated within sixty (60)
days; or
(h) If any obligation of Lessee or of Guarantor to repay borrowed
money in excess of One Million Dollars ($1,000,000) is accelerated by
the creditor after default, unless (i) Notice of a dispute between
Lessee or Guarantor and such creditor is given to Lessor prior to such
acceleration, (ii) Lessee or Guarantor have provided Lessor with
assurance, satisfactory to Lessor in its sole discretion, that such
acceleration will not materially affect Lessee, any of the Leased
Properties or the ability of Lessee and Guarantor to perform their
obligations under this Lease and the applicable Guaranty, and (c)
Lessor has given Notice of such satisfaction to Lessee or Guarantor;
or
(i) If Lessee fails to observe or perform or cause to be observed
or performed any other term, covenant or condition of this Lease and
such failure is not cured within a period of thirty (30) days after
Notice thereof from Lessor, unless the failure cannot with due
diligence be cured within a period of thirty (30) days, in which case
the failure shall not be deemed to continue if (i) Lessee proceeds
promptly (subject to Unavoidable Delay) and with due diligence to cure
the failure, (ii) Lessee diligently completes the cure thereof and
(iii) such failure is cured prior to the time that the same results in
civil or criminal penalties to Lessor, Lessee or any Affiliates of
either; or
(j) If any representation or warranty made by Lessee in the
Purchase Agreement or in the certificates delivered in connection
therewith proves to be untrue when made in any material respect, and
Lessor is materially and adversely affected thereby, and Lessee fails,
within twenty
7
<PAGE>
(20) days after Notice from Lessor thereof, to cure such condition by
terminating such adverse effect and making Lessor whole for any damage
suffered therefrom, or if with due diligence such cure cannot be
effected within twenty (20) days, if Lessee has failed to commence to
cure the same within the twenty (20) days or failed thereafter to
proceed promptly and with due diligence to cure such conditions and
prior to the time that the same results in civil or criminal penalties
to Lessor, Lessee, any Affiliates of either, or any of the Leased
Properties; or
(k) If a default occurs under any Guaranty of this Lease given to
Lessor to secure performance of any term or provision of this Lease
and is not cured within any applicable grace or cure period set forth
therein; or
(l) Subject to Article XXIII, if Lessee or any Facility Sublessee
transfers the operational control or management of the Facility
currently being operated by it without the prior written consent of
Lessor; or
(m) If (i) a default occurs under the Master Management
Agreement, the Master Franchise Agreement, the Facility Management
Agreement or the Facility Franchise Agreement and is not cured within
any applicable grace or cure period set forth therein, or (ii) a
default occurs under any other material contract affecting any of the
Leased Properties, any of the Facilities, Lessee or any Affiliate of
Lessee, and the default is not cured within any applicable grace or
cure period contained therein, provided, as to any such default under
such other contract, such default materially and adversely affects, or
has the reasonable potential of materially and adversely affecting,
the operation or value of the applicable Facilit(y)(ies); or
(n) If a default occurs under the Letter of Credit Agreement or
under the Security Agreement and is not cured within any applicable
grace or cure period set forth therein; or
(o) If Lessee breaches the financial covenants set forth in
Section 8.3 of this Lease, or Guarantor breaches the financial
covenants set forth in its Guaranty, and such failure is not cured
within thirty (30) days of the earlier of (i) the date on which Lessee
or Guarantor has actual knowledge of such breach or (ii) Notice.
Executive Officer: The Chairman of the Board of Directors, the
President, any Vice President and the Secretary of a corporation.
Expiration Date: January 31, 2011.
8
<PAGE>
Facilities: The licensed nursing homes or other health care facilities
being operated on the Leased Property.
Facility: Any of the Facilities.
Facility Franchise Agreement: The agreement designated as such between
Franchisor, Lessee and a Facility Sublessee relating to such Facility
Sublessee's operations at its Facility.
Facility Management Agreement: The agreement designated as such
between Manager, Lessee and a Facility Sublessee relating to the management
of such Facility Sublessee's operations at its Facility.
Facility Sublease: The sublease of a Facility designated as such
between Lessee and the Initial Facility Sublessee of such Facility.
Facility Sublessee: The sublessee of a Facility pursuant to a Facility
Sublease.
Facility Trade Names: The names under which the Facilities have done
business during the Term.
Fair Rental Value: The amount determined to be the Fair Rental Value
of the applicable Leased Property pursuant to the appraisal procedure set
forth in Section 33.1 of this Lease.
Fees: The fees payable by Lessee or a Facility Sublessee to Manager or
Franchisor pursuant to the Management Agreement or the Franchise Agreement,
as the case may be.
Financial Statement: For a fiscal year or other accounting period,
statements of earnings and retained earnings and of changes in financial
position and profit and loss for such period and for the period from the
beginning of the respective fiscal year to the end of such period and the
related balance sheet as at the end of such period, together with the notes
thereto, 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 and reported on by (a) a "Big
Six" certified public accounting firm or (b) another certified public
accounting firm approved by Lessor, which approval will not be unreasonably
withheld or delayed.
First Renewal Term: A period commencing on February 1, 2011 and ending
on January 31, 2024.
9
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Fiscal Year: The calendar year.
Fixtures: All permanently affixed equipment, machinery, fixtures, and
other items of real and/or personal property, including all components
thereof, now and hereafter located in, on or used in connection with, and
permanently affixed to or incorporated into the Leased Improvements,
including, without limitation, any and 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 (other
than individual units), sprinkler systems and fire and theft protection
equipment, and built-in oxygen and vacuum systems, all of which to the
greatest 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 all items
included within the definition of the term "Personal Property".
Franchise Agreement: Collectively, the Master Franchise Agreement and
each Facility Franchise Agreement.
Franchisor: Integrated Health Services Franchising Co., Inc., a
Delaware corporation.
GAAP: Generally accepted accounting principles in effect from time to
time.
Guarantor: Lyric.
Guaranty: The Lyric Guaranty.
Hazardous Substances: Any and all toxic or hazardous material,
substance, pollutant, contaminant, chemical, waste (including medical
waste) or substance, including petroleum products, asbestos and PCB's,
regulated, restricted or prohibited under any Environmental Law.
IHS: Integrated Health Services, Inc.
IHS Indemnity: The Indemnity Agreement executed by IHS in favor of
Lessor.
Impartial Appraiser: An appraiser selected by Lessor and reasonably
acceptable to Lessee.
Impositions: Collectively, all taxes (including, without limitation,
all ad valorem, sales and use, single business, gross receipts, transaction
privilege, rent
10
<PAGE>
or similar taxes), assessments, 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
any Leased Property or the business conducted thereon by Lessee and/or the
Rent (including all interest and penalties thereon due to any failure of
payment by Lessee) applicable to periods of time within the Term hereof
which at any time during or in respect of the Term hereof may be assessed
or imposed on or in respect of or be a lien upon (a) the Leased Property or
any part thereof or any rent therefrom or any estate, right, title or
interest therein, or (b) any occupancy, operation, use or possession of, or
sales from, or activity conducted on, the applicable Leased Property or the
leasing or use of the Leased Property or any part thereof or (c) the Rent.
So long as the Leased Property includes a Facility in New Hampshire, the
term "Imposition" shall include any "enterprise tax" imposed upon Lessor by
the State of New Hampshire, provided, however, that if and when Lessor owns
property in New Hampshire in addition to the Facility leased hereunder,
such tax shall be fairly allocated among such properties. The term
"Imposition" shall not include: (a) any federal, state or local tax based
on gross or net income (whether denominated as an income, capital stock or
other tax) imposed on Lessor generally and not exclusively in connection
with any Leased Property, or (b) any net revenue tax of Lessor or any other
person, or (c) any tax imposed with respect to the sale, financing,
exchange or other disposition by Lessor of any Leased Property or the
proceeds thereof, or (d) any principal or interest on any indebtedness of
Lessor or (e) on any ground rent or other rent payable by Lessor.
Indemnitees: Those Persons entitled to indemnification pursuant to
Section 7.3 of this Lease.
Initial Facility Sublease:A Facility Sublease between Lessee and a
subsidiary of Lessee entered into concurrently with the Lease, as shown on
Exhibit E, attached hereto.
Initial Facility Sublessee: The subsidiary of Lessee subleasing a
Facility pursuant to an Initial Facility Sublease.
Initial Term: The period between, and inclusive of, the Commencement
Date and the earlier of the Expiration Date and the date upon which this
Lease terminates as provided herein.
Insurance Requirements: All terms of any insurance policy required by
this Lease and all requirements of the issuer of any such policy.
11
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Investigations: Soil and chemical tests or any other environmental
investigations, examinations or analyses.
Land: The real property described on attached EXHIBITS A-1 through
A-5, respectively.
Lease Year: The period commencing on the first day of the calendar
month following the month in which the Commencement Date occurs and ending
on the last day of the twelfth (12th) full calendar month thereafter
(unless the Commencement Date is the first day of a month, in which event
the first Lease Year shall commence on such day). The period, if any,
between the Commencement Date and the first day of the following month
shall be deemed to be part of the first Lease Year. Thereafter, each Lease
Year will be February 1 through January 31. If this Lease is terminated
before the end of any Lease Year, the final Lease Year will be January 1
through the date of termination thereof.
Leased Improvements: all buildings, structures, Fixtures and other
improvements of every kind currently situated on the Land, 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.
Leased Properties: Collectively, the Land, Leased Improvements,
Related Rights and Lessor's Personal Property owned by a subsidiary of
Lessee and conveyed by such subsidiary to Lessor immediately prior to
giving effect to this Lease.
Leased Property: The Land, Leased Improvements, Related Rights and
Lessor's Personal Property owned by a subsidiary of Lessee and conveyed by
such subsidiary to Lessor immediately prior to giving effect to this
Lease.
Legal Requirements: As to any Leased Property, all federal, state,
county, municipal and other governmental statutes, laws, rules, orders,
regulations, ordinances, judgments, decrees and injunctions affecting the
Leased Property or the construction, use or alteration thereof, whether now
or hereafter enacted and in force, including any which may (a) require
repairs, modifications or alterations in or to the Leased Property or (b)
in any way adversely affect the use and enjoyment thereof, and all permits,
licenses and authorizations and regulations relating thereto, including,
but not limited to, those relating to existing health care licenses, those
authorizing the current number of licensed beds and the level of services
delivered from the Leased Property, and all covenants, agreements,
restrictions and encumbrances contained in any instruments, either of
record or known to Lessee at any time in force affecting the Leased
Property, other than covenants,
12
<PAGE>
agreements, restrictions and encumbrances created by Lessor without the
consent of Lessee.
Lessee's Personal Property: All Personal Property that Lessee or a
Facility Sublessee owns and uses, as of the date of this Lease, in
connection with the operation of the Leased Property being leased pursuant
to this Lease, but that has not been conveyed to Lessor pursuant to the
Purchase Agreement, and all Personal Property that Lessee or a Facility
Sublessee acquires after the Commencement Date for use by it in connection
with the Leased Property being leased pursuant to this Lease.
Lessor's Personal Property: All Personal Property, except Lessee's
Personal Property, that at the Commencement Date or thereafter during the
term of this Lease is located, or, but for a temporary relocation off-site
on the Commencement Date is normally located, on the Land or in the Leased
Improvements.
Letter of Credit Agreement: The agreement of even date herewith
designated as such between Lessor and Lessee.
Lyric: Lyric Health Care LLC, a Delaware limited liability company.
Lyric Guaranty: A Guaranty executed by Lyric in favor of Lessor.
Manager: IHS Facility Management, Inc.
Management Agreement: Collectively, the Master Management Agreement
and each Facility Management Agreement.
Master Franchise Agreement: The agreement designated as such between
Lyric and Franchisor setting forth common terms and conditions for the
franchising of certain trade names, systems and other proprietary materials
for the Facilities.
Master Management Agreement: The agreement designated as such between
Lyric and Manager setting forth common terms and conditions for management
of the Facilities.
Mechanics Liens: Liens of mechanics, laborers, materialmen, suppliers
or vendors.
Net Income: The aggregate net income of the Facility Sublessees from
the operation of the Facilities, determined on an accrual basis in
accordance with GAAP, before federal, state and local income taxes, but
excluding extraordinary items.
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Net Proceeds: All proceeds, net of any costs incurred by Lessor in
obtaining such proceeds, payable under any risk policy of insurance
required by Article XIII of this Lease (including the proceeds with respect
to the Personal Property that Lessee elects to restore or replace pursuant
to Section 14.2).
Notice: A notice given pursuant to Article XXXII hereof.
Officer's Certificate: A certificate signed by any one or more of the
Executive Officers.
Overdue Rate: On any date, a rate equal to three (3) percentage points
above the Prime Rate, but in no event greater than the maximum rate then
permitted under applicable law.
Parcel: A Facility and all of the Land upon which such Facility is
located, including the Leased Improvements, Related Rights, Fixtures and
Lessor's Personal Property related thereto.
Parcel Rental Value: The Base Rent (determined at the time in
question) allocable to a Parcel.
Parcel Purchase Price: The Purchase Price allocated to the Parcel on
the Commencement Date, as set forth on attached EXHIBIT F, increased by
three (3%) percent per Lease Year, compounded annually, from the
Commencement Date to the date in question and prorated for any portion of
such period that is less than a full Lease Year.
Partial Taking: A Taking of a portion of a Parcel or of less than the
whole fee title to a Parcel.
Payment Date: The due date for the payment of the installments of Base
Rent, Additional Charges or any other sums payable under this Lease.
Permitted Debt: Debt (other than Debt as to which an Affiliate of
Lessee is the creditor) incurred by Lessee and/or the Facility Sublessees
solely to provide working capital to the respective Facilities.
Permitted Encumbrances: With respect to each of the Leased Properties,
matters constituting Permitted Encumbrances under the Purchase Agreement,
including those set forth on attached EXHIBIT G.
Person: Any natural person, trust, partnership, limited liability
company, corporation, joint venture or other legal entity.
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Personal Property: All equipment, furniture, fixtures, inventory
(including linens, dietary supplies and housekeeping supplies, and
including food and other consumable inventories), furnishings, movable
walls or partitions, trade fixtures, computers, software and data
pertaining to the business of a Facility (whether such data is stored in
computers or peripheral equipment that is included within the definition of
the term "Personal Property" or is otherwise in the possession of a Lessee
or a Facility Sublessee, or in computers and equipment that is not included
within the definition of the term "Personal Property" but is either owned
by Lessee or a Facility Sublessee or as to which Lessee or a Facility
Sublessee has a right of retrieval) and other tangible personal property
used in connection with the business of a Facility, together with all
replacements, modifications, alterations and additions thereto, except (a)
items, if any, included within the definition of Fixtures or Leased
Improvements, (b) personal property leased from third parties, (c)
computers owned or leased by a Lessee or a Facility Sublessee that
customarily are not located on any of the Leased Properties, and (d)
proprietary software owned by parties other than a Lessee or a Facility
Sublessee.
Primary Intended Use: With respect to any Facility, the operation of
the Facility as a licensed health care facility.
Prime Rate: On any date, a rate equal to the annual rate on such date
publicly announced by Citibank, N.A. to be its prime rate for 90-day
unsecured loans to its corporate borrowers of the highest credit standing,
but in no event greater than the maximum rate then permitted under
applicable law.
Proceeding: Any action, proposal or investigation by any agency or
entity, or any complaint to such agency or entity.
Purchase Agreement: That certain Purchase Agreement dated as of
January 13, 1998 between Lessor, as purchaser, and subsidiaries of Lessee,
as sellers.
Purchase Money Financing: Any financing provided by a Person to Lessee
or a Facility Sublessee in connection with the acquisition of Personal
Property (including equipment) used in connection with the operation of a
Facility, whether by way of installment sale or otherwise.
Purchase Price: The Purchase Price set forth in the Purchase
Agreement.
Qualified Capital Expenditures: Expenditures capitalized on the books
of the Lessee or a Facility Sublessee for any of the following:
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Replacement of furniture, fixtures and equipment, including
refrigerators, ranges, major appliances, bathroom fixtures, doors
(exterior and interior), central air conditioning and heating
systems (including cooling towers, water chilling units,
furnaces, boilers and fuel storage tanks) and major replacement
of siding; major roof replacements, including major replacements
of gutters, downspouts, eaves and soffits; major repairs and
replacements of plumbing and sanitary systems; overhaul of
elevator systems; major repaving, resurfacing and sealcoating of
sidewalks, parking lots and driveways; repainting of entire
building exterior; but excluding major alterations, renovations
and additions.
Reconstruction Period: A period of three hundred sixty-five (365) days
following the date of any damage or destruction or the Date of Taking, as
applicable, subject to extension to the extent required by Unavoidable
Delay.
Regulatory Actions: With respect to any Leased Property, any claim,
demand, notice, action or proceeding brought or initiated by any
governmental authority in connection with any Environmental Law, including,
without limitation, civil, criminal and/or administrative proceedings, and
whether or not seeking costs, damages, equitable remedies, penalties or
expenses.
Related Rights: All easements, rights and appurtenances relating to
the Land and the Leased Improvements.
Release: The intentional or unintentional spilling, leaking, dumping,
pouring, emptying, seeping, disposing, discharging, emitting, depositing,
injecting, leaching, escaping, abandoning or other release or threatened
release, however defined, of any Hazardous Substance.
Rent: Collectively, the Base Rent and Additional Charges.
Rental Value: (a) With respect to any Leased Property that has been
relet during the period in question, the Rent actually received by Lessor
for the period in question from the reletting, net of all reasonable
expenses, including brokerage commissions, fees of attorneys and
consultants and the cost of any repairs and alterations required to obtain
such reletting and (b) with respect to any Leased Property that has not
been relet during the period in question, the Worth at the Time of the
Award of the Rent obtainable for the applicable Leased Property for the
period in question, under a lease of the applicable Leased Property on the
same terms and conditions as are set forth in this Lease, from a lessee
that is unrelated to Lessor and has experience and a reputation in the
health care industry and a credit standing reasonably equivalent to that of
Lessee and Guarantors.
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Replaced Property: Any Fixtures or Personal Property that from time to
time are replaced, pursuant to Section 9.1.5, after the date of this Lease.
Replacement Property: Any Fixtures or Personal Property acquired by
Lessee or a Facility Sublessee, in accordance with Section 9.1.5, after the
date of this Lease for use in connection with any Facility in replacement
of any Replaced Property.
SEC: Securities and Exchange Commission.
Second Renewal Term: A period commencing on February 1, 2024 and
ending on January 31, 2037.
Security Agreement: That certain Security Agreement dated January 13,
1998 between Lessor, as secured party, and Lessee and the Facility
Sublessees, as debtors.
Security Deposit: One Million One Hundred Twenty Two Thousand Five
Hundred Dollars ($1,122,500.00).
Special Default: Any Event of Default the definition of which includes
a grace or cure period of thirty (30) days or more.
State: With respect to each Parcel, the state in which it is located.
Taking: The exercise by a Condemnor of any governmental power, whether
by legal proceedings or otherwise, to acquire an interest in any Leased
Property, or a voluntary sale or transfer by Lessor to any Condemnor,
either under threat of condemnation or while legal proceedings for
condemnation are pending.
Term: The Initial Term and, if renewed as provided in Article XVIII,
the First Renewal Term and/or the Second Renewal Term.
Third Party Claims: Any legal actions or proceedings (other than
Regulatory Actions but including without limitation those based on
negligence, trespass, strict liability, nuisance or toxic tort) due to
Contamination, and whether or not seeking costs, damages, penalties or
expenses, brought by any person or entity other than a governmental agency.
Transfer: The (a) assignment, mortgaging or other encumbering of all
or any part of Lessee's interest in this Lease, an Initial Facility
Sublessee's interest in a Facility Sublease or Lessee's or an Initial
Facility Sublessee's interest in the Leased Property, (b) the subletting of
the whole or any part of the Leased Property
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to any Person other than an Initial Facility Sublessee or (c) the entering
into of any management agreement (other than the Management Agreement) or
other arrangement under which any Facility is operated by or licensed to be
operated by an entity other than Lessee, an Initial Facility Sublessee or
the Manager.
Transferee: Any assignee, subtenant or other occupant of any Leased
Property pursuant to any Transfer.
Umbrella Policies: Policies of insurance that cover risks in excess of
the liability limits of policies required to be carried under this Lease.
Unavoidable Delays: Delays due to strikes, lock-outs, inability to
procure materials, power failure, acts of God, governmental restrictions,
enemy action, civil commotion, fire, unavoidable casualty or other causes
beyond the reasonable control of the party responsible for performing an
obligation hereunder, provided that lack of funds shall not be deemed a
cause beyond the control of a party.
Unsuitable for Its Primary Intended Use: A state or condition of a
Facility such that, by reason of damage or destruction or a Partial Taking,
such Facility cannot reasonably be expected to be repaired and restored
within the Reconstruction Period to a condition in which it may be operated
on a commercially practicable basis for its Primary Intended Use, taking
into account, among other relevant factors, the number of useable beds, the
amount of square footage and the estimated revenue affected by such damage
or destruction or Partial Taking.
Worth at the Time of the Award: The present value of the applicable
amount, determined at the time required in Section 16.5, by discounting the
applicable amount by the Prime Rate.
ARTICLE III
3.1 RENT. Lessee shall pay the Rent in lawful money of the United States of
America and legal tender for the payment of public and private debts. The first
payment of Base Rent shall be payable on the Commencement Date, prorated for the
period from the Commencement Date until the last day of the first full calendar
month of the Term. After the first payment, the Base Rent is payable in advance
in equal, consecutive monthly installments on the first (1st) day of each
calendar month of the Term. Unless otherwise agreed by the parties, Rent shall
be prorated as to any partial month at the end of the Term.
3.2 ADDITIONAL CHARGES. In addition to the Base Rent, Lessee will also pay
and discharge as and when due and payable all Impositions as provided in Section
4.1 and all
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Additional Charges. In the event of any failure on the part of Lessee to pay any
Additional Charges as and when due, Lessee will also promptly pay and discharge
as Additional Charges every fine, penalty, interest and cost which may be added
for non-payment or late payment.
3.3 LATE CHARGE; INTEREST. If any installment of Base Rent, or any
Additional Rent payable by Lessee to Lessor hereunder on account of money
expended by Lessor, is not paid by the due date, Lessee shall pay Lessor on
demand, as an Additional Charge, (a) a late charge of five percent (5%) of the
amount due and unpaid and (b) if such payment is not made within thirty (30)
days of the date due, interest thereon at the Overdue Rate from such thirtieth
(30th) day until the date on which such payment plus such late charge and
interest is paid in full.
3.4 METHOD OF PAYMENT OF RENT. All Rent to be paid to Lessor shall be paid
by electronic funds transfer debit transactions through wire transfer of
immediately available funds to Lessor per the wiring instructions set forth on
EXHIBIT J attached hereto (as the same may from time to time be changed by
Lessor by Notice to Lessee) and shall be initiated by Lessee for settlement on
or before the due date each calendar month; provided, however, if the due date
is not a Business Day, then settlement shall be made on the next succeeding day
which is a Business Day. Lessor shall provide Lessee with appropriate wire
transfer information in a Notice from Lessor to Lessee. Lessee shall inform
Lessor of each payment by sending a facsimile transmission of Lessee' wire
transfer confirmation not later than noon, eastern standard or daylight time, on
each payment date.
3.5 NET LEASE.
3.5.1 The Rent shall be paid absolutely net to Lessor, so that this
Lease shall yield to Lessor the full amount of the installments of Base Rent and
Additional Charges payable hereunder throughout the Term, subject to the terms
and conditions hereof. This Lease is and shall be a "pure-net" or "triple-net"
lease, as such terms are commonly used in the real estate industry, it being
intended that Lessee shall pay all costs, expenses and charges arising out of
the use, occupancy and operation of the Leased Properties.
3.5.2 Except as may be provided in any other agreement between Lessor
and Lessee, (a) Lessor shall not be required to furnish any services whatsoever
to any Leased Property or make any payment of any kind whatsoever, and (b)
Lessor shall not be responsible for any loss or damage to any property of
Lessee, a Facility Sublessee or any sub-tenant, concessionaire or other user or
occupant of any part of any Leased Property, absent the gross negligence or
willful misconduct of Lessor, its employees or agents.
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ARTICLE IV
4.1 PAYMENT OF IMPOSITIONS. Lessee will pay or cause to be paid all
Impositions before any fine, penalty, interest or cost may be added for
non-payment, and Lessee will promptly, upon request, furnish to Lessor 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), Lessee 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, Lessee shall pay such installments during the Term hereof as the same
respectively become due and before any fine, penalty, premium, further interest
or cost may be added thereto. Refunds of Impositions paid by Lessee shall be
paid to or retained by Lessee. Lessor shall remit promptly to Lessee any refunds
of Impositions received by Lessor. Lessor and Lessee shall, upon request of the
other, provide such data as is maintained by the party to whom the request is
made with respect to each Leased Property as may be necessary to prepare any
required returns and reports. Lessor and Lessee will each provide the other,
upon request, with cost and depreciation records in its possession that are
reasonably necessary for filing returns for any property classified as personal
property. Lessee may, at Lessee's sole cost and expense, protest, appeal or
institute such other proceedings as Lessee may deem appropriate to effect a
reduction of Impositions, and Lessor shall cooperate with Lessee in such
protest, appeal or other action. Lessee shall reimburse Lessor for Lessor's
direct costs of cooperating with Lessee with respect to such protest, appeal or
other action and shall indemnify, defend and hold Lessor harmless against any
expense or loss as a result thereof. The foregoing shall not be construed as
indemnifying Lessor against its own grossly negligent acts or omissions or
willful misconduct.
4.2 NOTICE OF IMPOSITIONS. Lessor shall give prompt Notice to Lessee of all
Impositions payable by Lessee hereunder of which Lessor at any time has
knowledge, and in the event of Lessor's failure to give such Notice as to any
Imposition, unless Lessee has actual knowledge of such Imposition, such failure
shall extend the time for payment thereof by Lessee until a reasonable time
after Lessee has actual knowledge of such Imposition. Lessor shall reimburse
Lessee for any late charges or penalties wholly caused by Lessor's negligent
delay in giving any such Notice to Lessee.
4.3 ADJUSTMENT OF IMPOSITIONS. Impositions imposed in respect of the
tax-fiscal period during which the Term ends shall be adjusted and prorated
between Lessor and Lessee, whether or not such Imposition is imposed before or
after termination or expiration, and Lessee' obligation to pay their prorated
share thereof, if the same becomes due after such termination or expiration,
shall survive such termination or expiration.
4.4 UTILITY CHARGES. Lessee will pay or cause to be paid when due all
charges
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for electricity, power, gas, oil, water and other utilities used in the
respective Leased Properties during the Term.
4.5 INSURANCE PREMIUMS. Lessee will pay or cause to be paid when due all
premiums for the insurance coverage required to be maintained pursuant to
Article XIII during the Term.
ARTICLE V
5.1 NO TERMINATION, ABATEMENT, ETC. Except as otherwise specifically
provided in this Lease, Lessee shall remain bound by this Lease in accordance
with its terms and shall not take any action without the consent of Lessor to
modify, surrender or terminate the same, and shall not seek or be entitled to
any abatement, deduction, deferment or reduction of Rent, or set off against the
Rent. The respective obligations of Lessor and Lessee shall not be affected by
reason of (i) any damage to, or destruction of, any Leased Property or any
portion thereof from whatever cause or any Taking of any Leased Property or any
portion thereof, except as expressly set forth herein; (ii) the lawful or
unlawful prohibition of, or restriction upon, Lessee's use of any Leased
Property, or any portion thereof, or the interference with such use by any
Person (other than Lessor or its employees or agents) or by reason of eviction
by paramount title; (iii) any claim which Lessee has or might have against
Lessor or by reason of any default or breach of any warranty by Lessor under
this Lease or any other agreement between Lessor and Lessee, or to which Lessor
and Lessee are parties, (iv) any bankruptcy, insolvency, reorganization,
composition, readjustment, liquidation, dissolution, winding up or other
proceedings affecting Lessor or any assignee or transferee of Lessor, or (v) any
other cause whether similar or dissimilar to any of the foregoing other than a
discharge of Lessee from any such obligations as a matter of law. Lessee hereby
specifically 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 Lease or quit or surrender any Leased Property or any portion
thereof, or (ii) except as otherwise specifically provided in this Lease,
entitle Lessee to any abatement, reduction, suspension or deferment of the Rent
or other sums payable by Lessee hereunder except as otherwise specifically
provided in this Lease.
ARTICLE VI
6.1 OWNERSHIP OF THE LEASED PROPERTY. Lessee acknowledges that the Leased
Properties are the property of Lessor and that Lessee has only the right to the
possession and use of the Leased Property leased by it upon the terms and
conditions of this Lease. Lessee will not (i) file any income tax return or
other associated documents; (ii) file any other document with or submit any
document to any governmental body or authority; (iii) enter into any written
contractual arrangement with any Person; or (iv) release any
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financial statements of Lessee, in each case that takes any position other than
that, throughout the Term, Lessor is the owner of the Leased Properties for
federal, state and local income tax purposes and that this Lease is a "true
lease".
6.2 LESSOR'S PERSONAL PROPERTY. Lessee shall, during the entire Term,
maintain all of Lessor's Personal Property in good order, condition and repair
as shall be necessary in order to operate the Facilities for the Primary
Intended Use in compliance with applicable licensure and certification
requirements, applicable Legal Requirements and Insurance Requirements, and
customary industry practice for the Primary Intended Use. If any of Lessor's
Personal Property requires replacement in order to comply with the foregoing,
Lessee shall replace it with other similar property of the same or better
quality at Lessee's sole cost and expense, the Replaced Property shall no longer
be Lessor's Personal Property, and the Replacement Property shall become part of
Lessor's Personal Property. Lessee shall not permit or suffer Lessor's Personal
Property to be subject to any lien, charge, encumbrance, financing statement or
contract of sale or the like, except for any purchase money security interest or
equipment-lessor's interest expressly approved in advance, in writing, by
Lessor. At the expiration or earlier termination of this Lease, all of Lessor's
Personal Property shall be surrendered to Lessor with the Leased Property in the
condition required by Section 9.1.7.
6.2.1 Motor Vehicles. Lessee acknowledges that the motor vehicles
described in the Bill of Sale were purchased by Lessor pursuant to the
Purchase Agreement, are the property of Lessor, and are leased to
Lessee hereunder, notwithstanding the fact that for the convenience of
the parties record title to such vehicles has not changed and the
interest of Lessor is not reflected on the certificates of title of
such vehicles. Upon demand of Lessor, Lessee shall deliver to Lessor,
and cause the Facility Sublessees to deliver to Lessor, the
certificates of title to any such vehicles.
6.3 LESSEE'S PERSONAL PROPERTY. Lessee shall provide and maintain, during
the entire Term, such Personal Property, in addition to Lessor's Personal
Property, as shall be necessary and appropriate in order to operate each
Facility for its Primary Intended Use in compliance with all licensure and
certification requirements, in compliance with all applicable Legal Requirements
and Insurance Requirements and otherwise in accordance with customary practice
in the industry for the Primary Intended Use. Upon the expiration or earlier
termination of this Lease, without the payment of any additional consideration
by Lessor, Lessee shall be deemed to have sold, assigned, transferred and
conveyed to Lessor all of Lessee's right, title and interest in and to any of
the respective Lessee's Personal Property that is integral to the use of the
respective Facilities for their Primary Intended Use, and shall, upon Lessor's
request, execute and deliver to Lessor a bill of sale with respect thereto, and
without Lessor's prior written consent Lessee shall not remove the same from the
respective Leased Properties. Any of Lessee's Personal Property that is not
integral to the use of the respective Facilities at such time may be removed by
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Lessee, and, if not removed within thirty (30) days following the expiration or
earlier termination of this Lease, shall be considered abandoned by Lessee and
may be appropriated, sold, destroyed or otherwise disposed of by Lessor without
giving notice thereof to Lessee and without any payment to Lessee or any
obligation to account therefor. Lessee will, at their expense, repair all damage
to the Leased Properties that is caused by the removal of any of Lessee's
Personal Property, whether effected by Lessee or Lessor.
6.4 GRANT OF SECURITY INTEREST IN LESSEE'S PERSONAL PROPERTY; RESTRICTION
ON OTHER LIENS. Lessee and each Facility Sublessee have concurrently granted to
Lessor a security interest in Lessee's Personal Property as more particularly
defined herein and defined and set forth in the Security Agreement. Without the
prior written consent of Lessor, Lessee shall not permit or suffer Lessee's
Personal Property or Lessee's or a Facility Sublessee's Accounts to be subject
to any lien, charge, encumbrance, financing statement or contract of sale or the
like other than any lien to secure Permitted Debt.
ARTICLE VII
7.1 CONDITION OF THE LEASED PROPERTIES. Lessee acknowledges that it has
examined and otherwise has knowledge of the condition of the Leased Property
leased by it prior to the execution and delivery of this Lease and has found the
same to be in good order and repair and satisfactory for its purposes hereunder.
Lessee is leasing the applicable Leased Property "as is" in its condition on the
Commencement Date. Lessee waives any claim or action against Lessor in respect
of the condition of the Leased Property being leased by it. LESSOR MAKES NO
WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF ANY LEASED
PROPERTY OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR
CONDITION FOR ANY PARTICULAR USE OR PURPOSE, OR OTHERWISE 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 LESSEE. LESSEE ACKNOWLEDGES THAT THE LEASED
PROPERTY LEASED BY IT HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO
LESSEE. Lessee further acknowledges that, on and after the Commencement Date and
throughout the Term, Lessee is solely responsible for the condition of the
Leased Property leased by it. To the extent permitted by law, Lessor hereby
assigns to Lessee all of Lessor's rights, if any, to proceed against any
predecessor in title to Lessor for breaches of warranties or representations or
for latent defects in the respective Leased Properties, and Lessee agree to
fully prosecute any and all such claims. Lessor shall cooperate with Lessee in
the prosecution of any such claims, in Lessor's or Lessee's name, all at Lessee'
sole cost and expense.
7.2 USE OF THE LEASED PROPERTY.
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7.2.1 Subject to the exceptions in clause (f) of the definition of
"Event of Default" above, throughout the Term, Lessee shall continuously use the
Leased Property leased by it for the Primary Intended Use and for such other
uses as may be necessary or incidental thereto, and no Lessee shall use any
Leased Property or any portion thereof for any other use without the prior
written consent of Lessor. No use shall be made or permitted to be made of, or
allowed in, any Leased Property, and no acts shall be done, which will cause the
cancellation of, or be prohibited by, any insurance policy covering any Leased
Property or any part thereof.
7.2.2 Lessee covenants and agrees that the Leased Property leased by
it and Lessee's Personal Property shall not be used for any unlawful purpose,
nor shall Lessee commit or suffer to be committed any waste on the Leased
Property leased by it or cause or permit any nuisance thereon.
7.2.3 Lessee shall not suffer or permit the Leased Property, or any
portion thereof, or Lessee's Personal Property to be used in such a manner as
(i) might reasonably tend to impair Lessor's (or Lessee's, as the case may be)
title thereto or to any portion thereof, or (ii) may reasonably make possible a
claim or claims of adverse usage or adverse possession by the public or of
implied dedication of the applicable Leased Property or any portion thereof.
7.3 CERTAIN ENVIRONMENTAL MATTERS.
(a) Prohibition Against Use of Hazardous Substances. Lessee shall not
permit, conduct or allow on any of the Leased Properties the generation,
introduction, presence, maintenance, use, receipt, acceptance, treatment,
manufacture, production, installation, management, storage, disposal or
release of any Hazardous Substance, except for those types and quantities
of Hazardous Substances ordinarily associated with the operation of the
Leased Property as it is being conducted on the date of this Lease and
except in compliance with Environmental Laws; provided, however, that the
asbestos-containing materials, the underground storage tanks and the other
Hazardous Substances that currently are located in, on, under or about the
respective Leased Properties, in each case as disclosed in the
Environmental Audits delivered by Lessee to Lessor prior to the date of
this Lease, shall be permitted to remain in place, except as required by
the Purchase Agreement (Schedule 1(b)) and 7.3(g) below.
(b) Notice of Environmental Claims, Actions or Contaminations. Lessee
will notify Lessor, in writing, promptly upon learning of any existing,
pending or threatened: (i) Regulatory Actions, (ii) Contamination of any
Leased Property, (iii) Third Party Claims or (iv) violation of
Environmental Law.
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(c) Costs of Remedial Actions with Respect to Environmental Matters.
If any investigation and/or Clean-Up of any Hazardous Substance or other
environmental condition on, under, about or with respect to any Leased
Property is required by any Environmental Law and by the terms of this
Lease is within the scope of Lessee's responsibility, then Lessee shall
complete, at its own expense, such investigation and/or Clean-Up or cause
each person responsible for any of the foregoing to conduct such
investigation and/or Clean-Up.
(d) Delivery of Environmental Documents. If and to the extent not
delivered to Lessor prior to the date of this Lease, Lessee shall deliver
to Lessor complete copies of any and all Environmental Documents that may
now be in, or at any time hereafter come into, the possession of Lessee.
(e) Environmental Audit. At Lessor's expense, Lessee shall from time
to time, but in no case more often than annually, after Lessor's request
therefor, provide to Lessor an Environmental Audit with respect to each of
the Leased Properties. All tests and samplings in connection with an
Environmental Audit shall be conducted using generally accepted and
scientifically valid technology and methodologies. Lessee shall give the
engineer or environmental consultant conducting the Environmental Audit
reasonable access to the applicable Leased Property and to all records in
the possession of Lessee that may indicate the presence (whether current or
past) or a Release or threatened Release of any Hazardous Substances on,
in, under or about the applicable Leased Property. Lessee shall also
provide the engineer or environmental consultant an opportunity to
interview such persons employed in connection with the applicable Leased
Property as the engineer or consultant deems appropriate. However, Lessor
shall not be entitled to request such Environmental Audit from Lessee
unless (i) there have been any material changes, modifications or additions
to any Environmental Laws as applied to or affecting the applicable Leased
Property; (ii) a significant change in the condition of the applicable
Leased Property has occurred; or (iii) Lessor has another reasonable basis
for requesting such certificate or certificates. If an Environmental Audit
discloses the presence of Contamination at, or any noncompliance with
Environmental Laws by, any Leased Property, Lessee shall immediately
perform all of Lessee's obligations hereunder with respect to such
Hazardous Substances or noncompliance.
(f) Entry onto Leased Property for Environmental Matters. If Lessee
fails to provide to Lessor an Environmental Audit as contemplated by
Subparagraph (e) hereof, Lessee shall permit Lessor from time to time, by
its employees, agents, contractors or representatives, to enter upon the
applicable Leased Property for the purposes of conducting such
Investigations as Lessor may desire. Lessor and its employees, agents,
contractors, consultants and/or representatives shall conduct any such
Investigation in a manner which does not unreasonably interfere with
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Lessee's use of and operations on the applicable Leased Property (however,
reasonable temporary interference with such use and operations is
permissible if the Investigation cannot otherwise be reasonably and
inexpensively conducted). Other than in an emergency, Lessor shall provide
Lessee with prior notice before entering the applicable Leased Property to
conduct such Investigation, and shall provide copies of any reports or
results to Lessee, and Lessee shall cooperate fully in such Investigation.
(g) Environmental Matters Upon Termination or Expiration of Term of
This Lease. Upon the termination or expiration of the Term of this Lease,
Lessee shall cause the Leased Properties to be delivered to Lessor free of
all Contamination the removal of which is recommended by the Phase I
Environmental Survey (or the equivalent at the time) completed by the
engineering firm chosen by the parties or otherwise selected as provided
below, and in compliance with all Environmental Laws with respect thereto.
At any time during (a) the three hundred sixty-five (365) days prior
to, or the sixty (60) days subsequent to, the expiration of the original
Term hereof, if Lessee has not given the notice required by Section 18.1 in
order to renew the Term or by the terms hereof is not entitled to renew the
Term, or, if the original Term has been renewed, at any time during (b) the
three hundred sixty-five (365) days prior to, or the sixty (60) days
subsequent to, the expiration of the first renewal of the Term hereof, if
Lessee has not given the notice required by Section 18.2 in order to renew
the Term or by the terms hereof is not entitled to renew the Term, or, if
this Lease is terminated upon the occurrence of an Event of Default, during
(c) the sixty (60) days after the effective date of such termination,
Lessor may by written notice to Lessee specify a Cleanup to be undertaken
by Lessee, and upon receipt of such notice Lessee shall forthwith begin and
with reasonable diligence complete such Cleanup, provided, however, that if
Lessee in good faith disputes the need for such Cleanup on the grounds that
it is not required by any then applicable Environmental Laws, Lessee may by
written notice to Lessor demand an Environmental Audit of the Leased
Property. The Environmental Audit demanded by Lessee shall be performed by
one of the engineering firms listed on EXHIBIT H attached hereto or, if no
such firms exist at the time, by an engineering firm succeeding to the
practice of one of such firms, and if no such firms exist at the time, by
an engineering firm with a nationally recognized reputation in the field of
environmental property evaluation selected by a single arbitrator appointed
in accordance with Section 36. The question of whether or not a Cleanup is
required by an applicable Environmental Law, and, if so, the extent of such
required Cleanup, shall be determined by the conclusions reached in the
Environmental Audit conducted by the engineering firm so selected, and such
determination shall be binding upon the parties. The cost of such
Environmental Audit (and of the arbitration proceeding, if such proceeding
is necessary) shall be borne by Lessor if the determination is that
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no Cleanup is required, or by Lessee if the determination is that a Cleanup
is required. Lessee shall promptly at its expense complete any Cleanup
determined by such process to be necessary.
(h) Compliance with Environmental Laws. Lessee shall comply with, and
cause its agents, servants and employees to comply with Environmental Laws
applicable to the respective Leased Properties. Specifically, but without
limitation:
(i) Maintenance of Licenses and Permits. Lessee shall obtain and
maintain all permits, certificates, licenses and other consents and
approvals required by any applicable Environmental Law from time to
time with respect to Lessee and the Leased Property leased by it;
(ii) Contamination. No Lessee shall cause, suffer or permit any
Contamination in, on, under or about any Leased Property;
(iii) Clean-Up. If Contamination occurs in, on, under or about
any Leased Property during the Term, Lessee promptly shall cause the
Clean-Up and the removal of any Hazardous Substance, and in any such
case such Clean-Up and removal of the Hazardous Substance shall be
effected in strict compliance with and in accordance with the
provisions of the applicable Environmental Laws;
(iv) Discharge of Lien. Within forty-five (45) days of the date
on which Lessee becomes aware of any lien imposed against any Leased
Property or any part thereof under any Environmental Law (or, in the
event that under the applicable Environmental Law, Lessee is unable,
acting diligently, to do so within forty-five (45) days, then within
such period as is required for Lessee, acting diligently, to do so),
Lessee shall cause such lien to be discharged by payment, bond or
otherwise;
(v) Notification of Lessor. Lessee shall notify Lessor in writing
promptly upon receipt by Lessee of notice of any breach or violation
of any environmental covenant or agreement; and
(vi) Requests, Orders and Notices. Promptly upon receipt of any
written request, order or other notice relating to any Declaratory
Action, Contamination, Third Party Claims or Leased Property under any
Environmental Law concerning the Leased Property, Lessee shall forward
a copy thereof to Lessor.
(i) Environmental Related Remedies. If, subject to Lessee's right of
contest as set forth in Section 12.1 of this Lease, Lessee fails to perform
any of its
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covenants with respect to environmental matters and if such breach is not
cured within any applicable notice and/or grace period or within an
additional thirty (30) days after Lessor gives Notice to Lessee, Lessor may
do any one or more of the following (the exercise of one right or remedy
hereunder not precluding the simultaneous or subsequent taking of any other
right hereunder):
(i) Cause a Clean-Up. Cause the Clean-Up of any Contamination on
or under the applicable Leased Property, or both, at Lessee's cost and
expense; or
(ii) Payment of Regulatory Damages. Pay, on behalf of Lessee, any
damages, costs, fines or penalties imposed on Lessee as a result of
any Regulatory Actions; or
(iii) Payments to Discharge Liens. Make any payment on behalf of
Lessee or perform any other act or cause any act to be performed which
will prevent a lien in favor of any federal, state or local
governmental authority from attaching to the applicable Leased
Property or which will cause the discharge of any lien then attached
to the applicable Leased Property; or
(iv) Payment of Third Party Damages. Pay, on behalf of Lessee,
any damages, cost, fines or penalties imposed on Lessee as a result of
any Third Party Claims; or
(v) Demand of Payment. Demand that Lessee make immediate payment
of all of the costs of such Clean-Up and/or exercise of the remedies
set forth in this Section 7.3 incurred by Lessor and not theretofore
paid by Lessee as of the date of such demand, whether or not such
costs exceed the amount of Rent and Additional Charges that are
otherwise to be paid pursuant to this Lease, and whether or not any
court has ordered the Clean-Up, and payment of said costs shall become
immediately due, without notice.
(j) Environmental Indemnification. Lessee shall and do hereby agree to
indemnify, defend and hold harmless Lessor, its principals, officers,
directors, agents and employees from and against each and every incurred
and potential claim, cause of action, demand or proceeding, obligation,
fine, laboratory fee, liability, loss, penalty, imposition, settlement,
levy, lien removal, litigation, judgment, disbursement, expense and/or cost
(including without limitation the cost of each and every Clean-Up and
including, but not limited to, reasonable attorneys' fees, consultants'
fees, experts' fees and related expenses, capital, operating and
maintenance costs, incurred in connection with (i) any investigation or
monitoring
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of site conditions at any Leased Property, (ii) the presence of any
asbestos- containing materials in, on, under or about any Leased Property
and (iii) any Clean Up required or performed by any federal, state or local
governmental entity or performed by any other entity or person because of
the presence of any Hazardous Substance, Release, threatened Release or any
Contamination on, in, under or about any Leased Property) which may be
asserted against, imposed on, or suffered or incurred by each and every
Indemnitee arising out of or in any way related to, or allegedly arising
out of or due to any environmental matter, including, but not limited to,
any one or more of the following:
(i) Release Damage or Liability. The presence of Contamination
in, on, at, under or near any Leased Property or migrating to any
Leased Property from another location;
(ii) Injuries. All injuries to health or safety (including
wrongful death), or to the environment, by reason of environmental
matters relating to the condition of or activities past or present on,
at, in or under any Leased Property;
(iii) Violations of Law. All violations, and alleged violations,
of any Environmental Law by Lessee relating to any Leased Property or
any activity on, in, at, under or near any Leased Property;
(iv) Misrepresentation. All material misrepresentations relating
to environmental matters in any documents or materials furnished by
Lessee to Lessor and/or its representatives in connection with this
Lease;
(v) Event of Default. Each and every Event of Default hereunder
relating to environmental matters;
(vi) Lawsuits. Any and all lawsuits brought or threatened against
any one or more of the Indemnitees, settlements reached and
governmental orders relating to any Hazardous Substances at, on, in,
under or near any Leased Property, and all demands or requirements of
governmental authorities, in each case based upon or in any way
related to any Hazardous Substances at, on, in or under any Leased
Property; and
(vii) Presence of Liens. All liens imposed upon any Leased
Property and charges imposed on any Indemnitee in favor of any
governmental entity or any person as a result of the presence,
disposal, release or threat of release of Hazardous Substances at, on,
in, from or under any Leased Property.
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If the matter that is the subject of a claim for indemnification by any
Indemnitee pursuant to this Section 7.3(j) arises or is in connection with
a claim, suit or demand filed by a third party, Lessee shall be entitled to
defend against such Claim with counsel reasonably satisfactory to the
applicable Indemnitee(s). The Indemnitee(s) may continue to employ counsel
of its own, but such costs shall be borne by the Indemnitee(s) as long as
Lessee continues to so defend. With respect to such Claims arising from
third parties (A) if an Indemnitee declines to accept a bona fide offer of
settlement that is recommended by Lessee, which settlement includes a full
and complete release of such Indemnitee from the subject Claim, the maximum
liability of Lessee arising from such claim shall not exceed that amount
for which it would have been liable had such settlement been accepted, and
(B) if an Indemnitee settles the subject Claim without the consent of
Lessee, the maximum liability of Lessee under this Section arising from
such Claim shall not exceed the fair and reasonable settlement value of
such Claim, which value, if not agreed upon, shall be determined by
arbitration in accordance with Section 36.1 hereof.
(k) Rights Cumulative and Survival. The rights granted Lessor under
this Section are in addition to and not in limitation of any other rights
or remedies available to Lessor hereunder or allowed at law or in equity.
The obligations of Lessee to defend, indemnify and hold the Indemnitees
harmless, as set forth in this Section 7.3, arising as a result of an act,
omission, condition or other matter occurring or existing during the Term,
whether or not the act, omission, condition or matter as to which such
obligations relate is discovered during the Term, shall survive the
expiration or earlier termination of the Term of this Lease.
ARTICLE VIII
8.1 COMPLIANCE WITH LEGAL AND INSURANCE REQUIREMENTS. Subject to Article
XII, Lessee, at its expense, will promptly (i) comply with all applicable Legal
Requirements and Insurance Requirements in respect of the use, operation,
maintenance, repair and restoration of the Leased Property and Lessee's Personal
Property, whether or not compliance therewith requires structural changes in any
of the Leased Improvements (which structural changes shall be subject to
Lessor's prior written approval, which approval shall not be unreasonably
withheld or delayed) or interferes with or prevents the use and enjoyment of the
Leased Property, and (ii) procure, maintain and comply with all licenses,
certificates of need, provider agreements and other authorizations required for
the use of the Leased Property and Lessee's Personal Property then being made,
and for the proper erection, installation, operation and maintenance of the
Leased Property or any part thereof.
8.2 LEGAL REQUIREMENT COVENANTS. Lessee's use, maintenance, operation and
any alteration of the Leased Property shall at all times conform to all
applicable local,
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state, and federal laws, ordinances, rules, and regulations (including but not
limited to the Americans with Disabilities Act). The judgment of any court or
administrative body of competent jurisdiction, or the decision of any arbitrator
(final beyond any appeal) that Lessee has violated any such Legal Requirements
or Insurance Requirements, shall be conclusive of that fact as between Lessor
and Lessee.
8.3 CERTAIN COVENANTS.
8.3.1 Certain Financial Covenants.
8.3.1.1 Minimum Capital Expenditures. During the second Lease
Year, Lessee shall make at least Three Hundred Dollars ($300.00)
per-licensed-bed of Qualified Capital Expenditures, and thereafter throughout
the Term, Lessee shall in each Lease Year make Qualified Capital Expenditures in
such amount increased annually in proportion to increases in the Cost of Living
Index.
8.3.1.2 Permitted Debt. Except for Permitted Debt, Lessee shall
not incur or permit any Facility Sublessee to incur any Debt without the prior
written consent of Lessor, which Lessor may withhold in its discretion,
provided, however, that Lessor expressly agrees that for a period of one hundred
and twenty (120) days from the date hereof, Permitted Debt shall include the
obligations of Lessee and the Initial Facility Sublessees arising out of that
certain Guaranty and Pledge and Security Agreement pursuant to which Lyric has
guaranteed the obligations of IHS under that certain Revolving Credit and Term
Loan Agreement, provided further, however, that upon the expiration of such one
hundred and twenty (120) day period, such obligations shall no longer be deemed
Permitted Debt and the existence of such obligations thereafter shall constitute
an Event of Default hereunder.
8.3.1.3 Cash Flow to Debt Service Requirement. At all times
during the Term, Lessee shall maintain a ratio of Cash Flow from the Facilities
to Debt Service from the Facilities at least equal to the Cash Flow to Debt
Service Requirement.
8.3.2 Management; Franchise.
8.3.2.1 Management Agreements. Lessee shall not enter into, or
permit any Facility Sublessee to enter into, any management agreement other than
the Management Agreement without the prior written consent of Lessor, which
consent Lessor may withhold or condition in its sole discretion, and in no event
without a satisfactory subordination by the manager of its right to receive any
management fees (other than regular monthly fees) to the obligation of Lessee to
pay the Base Rent and Additional Charges to Lessor. As long as Manager is owned
or controlled by IHS, in the ordinary course of business Lessee shall have the
right to amend, modify or otherwise change the terms of the Management Agreement
without the prior written consent of Lessor; provided,
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however, that any such amendments, modifications or other changes that are
material shall require the prior written consent of Lessor, which consent shall
not unreasonably be withheld.
8.3.2.2 Franchise Agreements. With the approval of Lessor, Lessee
has entered into the Franchise Agreement. As long as Franchisor is owned or
controlled by IHS, in the ordinary course of business Lessee shall have the
right to amend, modify or otherwise change the terms of the Franchise Agreement
without the prior written consent of Lessor; provided, however, that any such
amendments, modifications or other changes that are material shall require the
prior written consent of Lessor, which consent shall not unreasonably be
withheld.
8.4 OTHER BUSINESSES. During the Term of this Lease, Lessee shall not,
directly or indirectly, own, operate or manage any businesses other than health
care businesses.
ARTICLE IX
9.1 MAINTENANCE AND REPAIR.
9.1.1 Lessee, at its expense, shall keep the Leased Property leased by
it and all fixtures thereon and all landscaping, private roadways, sidewalks and
curbs appurtenant thereto and which are under Lessee's control and Lessee's
Personal Property in good order and repair (whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of the applicable Leased Property or any portion thereof, or any cause
whatever except the failure of Lessor to make any payment or to perform any act
expressly required under the Lease or the negligence or willful misconduct of
Lessor), and, except as may be provided to the contrary in Article XIV, with
reasonable promptness, make all necessary and appropriate repairs thereto of
every kind and nature, whether interior or exterior, structural or
non-structural, ordinary or extraordinary, foreseen or unforeseen or arising by
reason of a condition existing prior to the commencement of the Term of this
Lease (concealed or otherwise).
9.1.2 Lessee shall do or cause others to do all shoring of the Leased
Property leased by it or adjoining property (whether or not owned by Lessor) or
of the foundations and walls of the Leased Improvements, and every other act
necessary or appropriate for the preservation and safety thereof, by reason of
or in connection with any subsidence, settling or excavation or other building
operation upon the Leased Property leased by it or adjoining property, whether
or not Lessee or Lessor shall, by any Legal Requirements, be required to take
such action or be liable for the failure to do so, provided, however, that such
shoring and any other material acts shall be subject to the prior written
consent of Lessor, which shall not unreasonably be withheld or delayed. All
repairs shall, to the extent reasonably achievable, be at least equivalent in
quality to the
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original work, and, subject to the provisions of paragraph 9.1.6, where, by
reason of age or condition, such repairs cannot be made to the quality of the
original work, the property to be repaired shall be replaced.
9.1.3 Lessor shall not under any circumstances be required to build or
rebuild any improvements on any Leased Property or on any property appurtenant
thereto, or to make any repairs, replacements, alterations, restorations or
renewals of any nature or description to any Leased Property, whether ordinary
or extraordinary, structural or non-structural, foreseen or unforeseen, or upon
any adjoining property, whether to provide lateral or other support for any
Leased Property or abate a nuisance affecting any Leased Property, or otherwise,
or to make any expenditure whatsoever with respect thereto, in connection with
the Lease, or to maintain any Leased Property in any way. Lessee hereby waives,
to the extent permitted by law, any right provided by law, but not provided by
the terms of this Lease, to make repairs at the expense of Lessor.
9.1.4 Nothing contained in this Lease shall be construed as (a)
constituting the consent or request of Lessor, expressed or implied, to any
contractor, subcontractor, laborer, materialmen or vendor to or for the
performance of any labor or services or the furnishing of any materials or other
property for the construction, alteration, addition, repair or demolition of or
to any Leased Property or any part thereof, or (b) giving Lessee any right,
power or permission to contract for or permit the performance of any labor or
services or the furnishing of any materials or other property in such fashion as
would permit the making of any claim against Lessor in respect thereof or to
make any agreement that may create, or in any way be the basis for any right,
title, interest, lien, claim or other encumbrance upon the estate of Lessor in
any Leased Property or any portion thereof. Lessor shall have the right to give,
record and post, as appropriate, notices of non-responsibility under any
mechanics' and construction lien laws now or hereafter existing.
9.1.5 Lessee shall, from time to time as and when needed, replace with
Replacement Property any of the Fixtures or Personal Property which shall have
(a) become worn out, obsolete or unusable for the purpose for which it is
intended (if such Fixtures or Personal Property continues to be necessary), (b)
been the subject of a Taking (in which event Lessee shall be entitled to that
portion of any Award made therefor), or (c) been lost, stolen or damaged or
destroyed; provided, however, that the Replacement Property shall (1) be in good
operating condition, (2) have a useful life at least equal to the estimated
useful life of the Replaced Property as of (i) the date hereof for Replaced
Property specified in Subparagraph 9.1.5, or (ii) immediately prior to the time
that the Replaced Property specified in Subparagraphs 9.1.5(b) and 9.1.5(c) was
taken or so lost, stolen, damaged or destroyed, (3) be of a quality reasonably
equivalent to that of the Replaced Property and (4) be suitable for a use which
is the same or similar to that of the Replaced Property. Lessee shall repair at
its sole cost and expense all damage to the applicable Leased Property caused by
the removal of Replaced Property or other personal
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property of Lessee or the installation of Replacement Property. All Replacement
Property shall become the property of Lessor and shall become Fixtures or
Lessor's Personal Property, as the case may be, to the same extent as the
Replaced Property had been. Lessee shall promptly advise Lessor of any such
Replacement Property (i) the cost of which exceeds Twenty Five Thousand Dollars
($25,000.00) and (ii) the acquisition of which is not in the ordinary course of
business. Upon Lessor's written request Lessee shall with reasonable promptness
cause to be executed and delivered to Lessor an invoice, bill of sale or other
appropriate instrument evidencing the transfer or assignment to Lessor of all
estate, right, title and interest (other than the leasehold estate created
hereby) of Lessee or any other Person in and to any Replacement Property the
cost of which exceeds Twenty Five Thousand Dollars ($25,000.00), free from all
liens and other exceptions to title, and Lessee shall pay all taxes, fees, costs
and other expenses that may become payable as a result thereof.
9.1.6 Upon the expiration or earlier termination of the Term, Lessee
shall vacate and surrender the Leased Property leased by it to Lessor as a fully
equipped, licensed health care facility, with all equipment required by the laws
of the State to maintain its then current license, and shall assign and transfer
to Lessor the Facility Trade Names (excluding the words "Integrated," "IHS" and
any variants thereof from such trade names), local telephone numbers, local
electronic mail and "Internet" addresses, if any, under which the Facilities are
then conducting business, and all Facility-specific licenses, permits and rights
to do business of every kind (subject to such governmental approvals as may be
required), patient admission agreements and records, supplier and operator
contracts, a copy of all then-current data maintained by Lessee in writing or
recorded on computer media with respect to the business of the applicable
Facility and all computer software necessary to access and manipulate such data.
Lessee shall not be required to transfer proprietary software to Lessor, but
shall cause the data it is to transfer to Lessor to be transferred to Lessor,
without charge. At the expiration of the Term or the sooner termination of this
Lease, the Leased Properties, including all Leased Improvements, Fixtures and
Lessor's Personal Property, shall be returned to Lessor in good operating
condition, ordinary wear and tear, Taking and casualty damage that Lessee is not
required by this Lease to repair or restore, excepted, and except as repaired,
rebuilt, restored, altered or added to as permitted or required by the
provisions of this Lease. Notwithstanding anything to the contrary in this
Lease, not more than fifty (50%) percent of the value of the Personal Property
returned to Lessor as required herein may at the time of such return be subject
to Purchase Money Financing, and at the time of such return Lessee shall assign
to Lessor all of its right, title and interest in and to such any and all
documents evidencing such Purchase Money Financing.
9.2 ENCROACHMENTS, RESTRICTIONS, ETC. Except in the case of Permitted
Encumbrances, if any of the Leased Improvements (other than as existing on the
Commencement Date), at any time encroaches in a material adverse manner upon any
property, street or right-of-way adjacent to any Leased Property, or materially
violates the
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agreements or conditions contained in any lawful restrictive covenant or other
agreement affecting any Leased Property or any part thereof, or materially
impairs the rights of others under any easement or right-of-way to which any
Leased Property is subject, then promptly upon the request of Lessor or at the
behest of any person legitimately affected by any such encroachment, violation
or impairment, Lessee shall, at its expense, either (i) obtain valid and
effective waivers or settlements of all claims, liabilities and damages
resulting from each such encroachment, violation or impairment, or (ii) make
such changes to 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 applicable
Leased Improvements, and in any event take all such actions as may be necessary
in order to be able to continue the operation of the applicable Leased Property
for the Primary Intended Use substantially in the manner and to the extent the
applicable Leased Property was operated prior to the assertion of such
violation, impairment or encroachment.
ARTICLE X
10.1 CONSTRUCTION OF ALTERATIONS AND ADDITIONS TO LEASED PROPERTY. Lessee
shall not make or permit to be made any alterations, improvements or additions
of or to the Leased Property leased by it or any part thereof, other than
non-structural alterations having no material effect on the roof, foundation,
utility systems or structure, unless and until Lessee has caused plans and
specifications therefor to have been prepared, at Lessee's expense, by a
licensed architect and submitted to Lessor at least thirty (30) days (ninety
(90) days, if such alterations, improvements or additions are reasonably
estimated to cost more than the Approval Threshold) in advance of the
commencement of construction, and has obtained Lessor's written approval
thereof. Lessor shall have the right to require that, prior to the commencement
of construction of any alterations, improvements or additions as to which its
approval is required hereunder, Lessee also provide Lessor with reasonable
assurance of the payment of the cost thereof and, if the cost thereof is in
excess of the Approval Threshold, Lessee shall comply with Lessor's requirements
with respect to the periodic delivery of lien waivers and evidence of payment
for such cost. If such approval is granted, Lessee shall cause the work
described in such approved plans and specifications to be performed, at its
expense, promptly, and in a good, workmanlike, manner by licensed contractors
and in compliance with applicable governmental and Insurance Requirements and
Legal Requirements and the standards set forth in this Lease, which improvements
shall in any event constitute a complete architectural unit (if applicable) in
keeping with the character of the applicable Leased Property and the area in
which the applicable Leased Property is located and which will not diminish the
value of the applicable Leased Property or change the Primary Intended Use of
the applicable Leased Property. Lessee shall be responsible for the completion
of such improvements in accordance with the plans and specifications approved by
Lessor, and shall promptly correct any failure with respect thereto. Each and
every such
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improvement, alteration or addition shall immediately become a part of the
applicable Leased Property and shall belong to Lessor subject to the terms and
conditions of this Lease. Lessee shall not have any claim against Lessor at any
time in respect of the cost or value of any such improvement, alteration or
addition. There shall be no adjustment in the Base Rent by reason of any such
improvement, alteration or addition. With Lessor's consent, expenditures made by
a Lessee pursuant to this Article X may be included as capital expenditures for
purposes of inclusion in the capital expenditures budget for the applicable
Facility and for measuring compliance with the obligations of Lessee set forth
in Section 8.3.1.1 of this Lease.
In connection with any alteration other than removal pursuant to the Escrow
Agreement which involves the removal, demolition or disturbance of any asbestos-
containing material, Lessee shall cause to be prepared at its expense a full
asbestos assessment applicable to such alteration, and shall carry out such
asbestos monitoring and maintenance program as shall reasonably be required
thereafter in light of the results of such assessment.
ARTICLE XI
11.1 LIENS. Without the consent of Lessor, and except as expressly provided
elsewhere herein, Lessee shall not directly or indirectly create or allow to
remain, and within thirty (30) business days after notice thereof shall promptly
discharge at its expense, any lien, encumbrance, attachment, title retention
agreement or claim upon the Leased Property, and any attachment, levy, claim or
encumbrance in respect of the Rent, excluding (i) Permitted Encumbrances, (ii)
Mechanics Liens for sums not yet due, (iii) liens created by the acts or
omissions of Lessor, and (iv) Mechanics Liens which Lessee is contesting
(provided that the aggregate amount of such contested liens shall not exceed one
(1) months' Base Rent allocable to the Facility in question).
ARTICLE XII
12.1 PERMITTED CONTESTS. Lessee, on its own or on Lessor's behalf (or in
Lessor's) name, but at Lessee's sole cost and expense, may contest, by
appropriate legal proceedings conducted in good faith and with due diligence,
the amount or validity of any Imposition, Legal Requirement, Insurance
Requirement or Claim not otherwise permitted by Article XI, but this shall not
be deemed or construed in any way as relieving, modifying or extending Lessee's
covenants to pay or to cause to be paid any such charges at the time and in the
manner as in this Lease provided, nor shall any such legal proceedings operate
to relieve Lessee from its obligations hereunder and or cause the sale of any
Leased Property, or any part thereof, to satisfy the same or cause Lessor or
Lessee to be in default under any Encumbrance or in violation of any Legal
Requirements or Insurance
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Requirements upon any Leased Property or any interest therein. Upon request of
Lessor, if the claim exceeds the Approval Threshold, Lessee shall either (i)
provide a bond, letter of credit or other assurance reasonably satisfactory to
Lessor that all Claims, together with interest and penalties, if any, thereon,
will be paid, or (ii) deposit within the time otherwise required for payment
with a bank or trust company selected by Lessor as trustee, as security for the
payment of such Claims, money in 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 the applicable Leased Property, or any
part thereof, in said legal proceedings. Lessee shall furnish Lessor and any
lender to Lessor and any other party entitled to assert or enforce any Legal
Requirements or Insurance Requirements with evidence of such deposit within five
(5) days of the same. Lessor agrees to join in any such proceedings if the same
be required to legally prosecute such contest of the validity of such Claims;
provided, however, that Lessor shall not thereby be subjected to any liability
for the payment of any costs or expenses in connection with any such
proceedings; and Lessee covenants to indemnify and save harmless Lessor from any
such costs or expenses, including but not limited to attorney's fees incurred in
any arbitration proceeding, trial, appeal and post-judgment enforcement
proceedings. Lessee shall be entitled to any refund of any Claims and such
charges and penalties or interest thereon which have been paid by Lessee or paid
by Lessor and for which Lessor has been fully reimbursed. If Lessee fails to pay
or satisfy the requirements or conditions of any Claims when finally determined
to be due or to provide the security therefor as provided in this paragraph and
to diligently prosecute any contest of the same, Lessor may, upon thirty (30)
days advance written Notice to Lessee, pay such charges or satisfy such claims
together with any interest and penalties and the same (or the cost thereof)
shall be repayable by Lessee to Lessor forthwith as Additional Charges. If
Lessor reasonably determines that a shorter period is necessary in order to
prevent loss to the applicable Leased Property or avoid damage to Lessor, then
Lessor shall give such written Notice as is practical under the circumstances.
12.2 LESSOR'S REQUIREMENT FOR DEPOSITS. Upon and at any time after the
second occurrence within any eighteen (18) month period of (i) a Special Default
or (ii) any other Event of Default, and regardless of whether or not Lessee
subsequently cures such Special Default or Event of Default, Lessor, in its sole
discretion, shall be entitled to require Lessee to pay monthly a prorata portion
of the amounts required to comply with the Insurance Requirements, any
Imposition and any Legal Requirements, and when such obligations become due,
Lessor shall pay them (to the extent of the deposit) upon Notice from Lessee
requesting such payment. If sufficient funds have not been deposited to cover
the amount of the obligations due at least thirty (30) days in advance of the
due date, Lessee shall forthwith deposit the same with Lessor upon written
request from Lessor. Lessor shall not commingle such deposited funds with its
other funds, and Lessee shall be entitled to any interest paid on any deposit so
held by Lessor unless and except to the extent that Lessor, having the right to
do so by the terms of this Lease, applies such interest to Lessee's obligations
hereunder. Upon an Event of Default under this Lease,
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any of the funds remaining on deposit may be applied under this Lease, in any
manner and on such priority as is determined by Lessor and after five (5) days
Notice to Lessee.
ARTICLE XIII
13.1 GENERAL INSURANCE REQUIREMENTS. During the Term, Lessee shall at all
times keep the Leased Property leased by it, and all property located in or on
the applicable Leased Property, including all Personal Property, insured with
the kinds and amounts of insurance described below. This insurance shall be
written by companies authorized to do insurance business in the State. All such
policies provided and maintained during the Term shall be written by companies
having a rating classification of not less than "A-" and a financial size
category of "Class X," according to the then most recent issue of Best's Key
Rating Guide. The policies (other than Workers' Compensation policies) shall
name Lessor as an additional insured. Losses shall be payable to Lessor and
Lessee and disbursed as provided in Article XIV. Lessee shall pay when due all
of the premiums for the insurance required hereunder, and deliver certificates
thereof (in form and substance reasonably satisfactory to Lessor) to Lessor
prior to their effective date, or, with respect to any renewal policy, prior to
the expiration of the existing policy. In the event of the failure of Lessee
either to effect such insurance as herein called for or to pay the premiums
therefor, or to deliver such certificates thereof to Lessor at the times
required, Lessor shall be entitled, but shall have no obligation, to effect such
insurance and pay the premiums therefor when due, which premiums shall be
repayable to Lessor upon written demand therefor as Rent, and failure to repay
the same within thirty (30) days after Notice shall constitute an Event of
Default. The policies on each Leased Property, including the Leased Improvements
and Fixtures, and on the Personal Property, shall insure against the following
risks:
13.1.1 Loss or damage by fire, vandalism and malicious mischief,
earthquake (if available at commercially reasonable rates) and extended coverage
perils commonly known as "Special Risk," and all physical loss perils normally
included in such Special Risk insurance, including but not limited to sprinkler
leakage, in an amount not less than ninety percent (90%) of the then full
replacement cost thereof (as defined below in Section 13.2);
13.1.2 Loss or damage by explosion of steam boilers, pressure vessels
or similar apparatus, now or hereafter installed in the applicable Facility;
13.1.3 Loss of rental included in a business income or rental value
insurance policy covering risk of loss during reconstruction necessitated by the
occurrence of any of the hazards described in Sections 13.1.1 or 13.1.2 (but in
no event for a period of less than twelve (12) months) in an amount sufficient
to prevent either Lessor or Lessee from becoming a co-insurer;
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13.1.4 Claims for personal injury or property damage under a policy of
commercial general public liability insurance with a combined single limit per
occurrence in respect of bodily injury and death and property damage of One
Million Dollars ($1,000,000), and an aggregate limitation of Three Million
Dollars ($3,000,000), which insurance shall include contractual liability
insurance;
13.1.5 Claims arising out of professional malpractice in an amount not
less than One Million Dollars ($1,000,000) for each person and for each
occurrence and an aggregate limit of Three Million Dollars ($3,000,000);
13.1.6. Flood (when the applicable Leased Property is located in whole
or in part within a designated flood plain area) and such other hazards and in
such amounts as may be customary for comparable properties in the area;
13.1.7. During such time as Lessee is constructing any improvements,
Lessee, at its sole cost and expense, shall carry or cause to be carried (i)
workers' compensation insurance and employers' liability insurance covering all
persons employed in connection with the improvements in statutory limits, (ii) a
completed operations endorsement to the commercial general liability insurance
policy referred to above, and (iii) builder's risk insurance, completed value
form, covering all physical loss, in an amount and subject to policy conditions
reasonably satisfactory to Lessor;
13.1.8. Lessee shall procure, and at all times during the Term of this
Lease shall maintain, a policy of primary automobile liability insurance with
limits of One Million Dollars ($1,000,000) per occurrence for owned and
non-owned and hired vehicles; and
13.1.9. If Lessee chooses to carry umbrella liability coverage to
obtain the limits of liability required hereunder, all such policies must cover
in the same manner as the primary commercial general liability policy and must
contain no additional exclusions or limitations materially different from those
of the primary policy.
13.2 REPLACEMENT COST. The term "full replacement cost" as used herein,
shall mean as the actual replacement cost of the applicable Leased Improvements,
Fixtures and Lessor's Personal Property, including an increased cost of
construction endorsement, less exclusions provided in the standard form of fire
insurance policy. In all events, full replacement cost shall be an amount
sufficient that neither Lessor nor Lessee is deemed to be a co-insurer of the
applicable Leased Property. If Lessor in good faith believes that full
replacement cost (the then replacement cost less such exclusions) of any Leased
Property has increased at any time during the Term, it shall have the right,
upon Notice to Lessee, to have such full replacement cost reasonably
redetermined by an Impartial Appraiser. The determination of the Impartial
Appraiser shall be final and binding on
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Lessor and Lessee, and Lessee shall forthwith adjust the amount of the insurance
carried pursuant to this Section, as the case may be, to the amount so
determined by the Impartial Appraiser. Lessor and Lessee shall each pay one-half
(1/2) of the fee, if any, of the Impartial Appraiser.
13.3 WORKER'S COMPENSATION INSURANCE. Lessee shall at all times maintain
workers' compensation insurance coverage for all persons employed by Lessee on
the applicable Leased Property to the extent required under and in accordance
with applicable law.
13.4 WAIVER OF LIABILITY; WAIVER OF SUBROGATION. Lessor shall have no
liability to Lessee, and, provided Lessee carry the insurance required of them
by this Lease, no Lessee shall have any liability to Lessor, regardless of the
cause, for any loss or expense resulting from or in connection with damage to or
the destruction or other loss of any Leased Property or Lessee's Personal
Property, and no party will have any right or claim against the other for any
such loss or expense by way of subrogation. Each insurance policy carried by
Lessor or Lessee covering any Leased Property and Lessee's Personal Property,
including without limitation, contents, fire and casualty insurance, shall
expressly waive any right of subrogation on the part of the insurer, if such a
waiver is commercially available. Lessee shall pay any additional costs or
charges for obtaining such waivers.
13.5 OTHER REQUIREMENTS. The form of all of the policies of insurance
referred to in this Article shall be the standard forms issued by the respective
insurers meeting the specific requirements of this Lease. The property loss
insurance policy shall contain a Replacement Cost Endorsement. If Lessee obtains
and maintains the professional malpractice insurance described in Section 13.1.5
above on a "claims-made" basis, Lessee shall provide continuous liability
coverage for claims arising during the Term either by obtaining an endorsement
providing for an extended reporting period reasonably acceptable to Lessor in
the event such policy is canceled or not renewed for any reason whatsoever, or
by obtaining "tail" insurance coverage converting the policies to "occurrence"
basis policies providing coverage for a period of at least three (3) years
beyond the expiration of the Term. Lessee shall cause each insurer mentioned in
this Article XIII to agree, by endorsement on the policy or policies issued by
it, or by independent instrument furnished to Lessor, that it will give to
Lessor at least thirty (30) days' written notice before the policy or policies
in question shall be materially altered or canceled. If requested by Lessor, and
if available at a commercially reasonable cost, all public liability and
property damage insurance shall contain a provision that Lessor, although named
as an insured, shall nevertheless be entitled to recovery under said policies
for any loss, damage, or injury to Lessor, its servants, agents and employees by
reason of the negligence of Lessee or Lessor.
13.6 INCREASE IN LIMITS. If, from time to time after the Commencement Date,
Lessor determines in the exercise of its reasonable business judgment that the
limits of the
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personal injury or property damage - public liability insurance then carried are
insufficient, Lessor may give Lessee Notice of acceptable limits for the
insurance to be carried, which limits shall be reasonable in light of the limits
required by Lessor of other of its borrowers and Lessee with respect to similar
portfolios at such time; and the insurance shall thereafter be carried with
limits as prescribed by Lessor until further increase pursuant to the provisions
of this Section.
13.7 BLANKET POLICY. Notwithstanding anything to the contrary contained in
this Article XIII, Lessee's obligations to carry the insurance provided for
herein may be brought within the coverage of a so-called blanket policy or
policies of insurance carried and maintained by Lessee; provided, however, that
the coverage afforded Lessor will not be reduced or diminished or otherwise be
materially different from that which would exist under a separate policy meeting
all other requirements hereof by reason of the use of the blanket policy, and
provided further that the requirements of this Article XIII are otherwise
satisfied, and provided further that Lessee maintain specific allocations
acceptable to Lessor.
13.8 NO SEPARATE INSURANCE.
13.8.1 Lessee shall not, on its own initiative or pursuant to the
request or requirement of any third party, take out separate insurance
concurrent in form or contributing in the event of loss with that required in
this Article, to be furnished by, or which may reasonably be required to be
furnished by, Lessee, or increase the amount of any then existing insurance by
securing an additional policy or additional policies, unless all parties having
an insurable interest in the subject matter of the insurance, including in all
cases Lessor, are included therein as additional insureds, and the loss is
payable under said insurance in the same manner as losses are payable under this
Lease.
13.8.2 Nothing herein shall prohibit Lessee from (i) securing
insurance required to be carried hereby with higher limits of liability than
required in this Lease, (ii) securing umbrella policies or (iii) insuring
against risks not required to be insured pursuant to this Lease, and as to such
insurance, Lessor need not be included therein as an additional insured, nor
must the loss thereunder be payable in the same manner as losses are payable
under this Lease. Lessee shall immediately notify Lessor of the taking out of
any such separate insurance or of the increasing of any of the amounts of the
then existing insurance.
ARTICLE XIV
14.1 INSURANCE PROCEEDS. All Net Proceeds payable under any risk policy
of insurance required by Article XIII of this Lease, whether or not paid
directly to Lessor and/or Lessee, shall promptly be deposited with or paid over
to an insurance company,
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title insurance company or other financial institution reasonably selected by
Lessor and disbursed as provided in this Lease,. If the Net Proceeds are equal
to or less than the Approval Threshold, and if no Event of Default has occurred
and is continuing, the Net Proceeds shall be paid to Lessee promptly upon
Lessee's completion of any restoration or repair, as the case may be, of any
damage to or destruction of the Leased Property or any portion thereof. If the
Net Proceeds exceed the Approval Threshold, and if no Event of Default has
occurred and is continuing, the Net Proceeds shall be made available for
restoration or repair, as the case may be, of any damage to or destruction of
the applicable Leased Property or any portion thereof as provided in Section
14.10; provided, however, that, within fifteen (15) days of the receipt of the
Net Proceeds, Lessor and Lessee shall agree as to the portion thereof
attributable to the Personal Property (and failing such shall submit the matter
to arbitration pursuant to the provisions of this Lease) and those Net Proceeds
which the parties agree are payable by reason of any loss or damage to any of
Lessee's Personal Property shall be disbursed to Lessee.
14.2 RESTORATION IN THE EVENT OF DAMAGE OR DESTRUCTION.
14.2.1 If any Leased Improvements are totally or partially damaged or
destroyed and the Facility thereon is thereby rendered Unsuitable for its
Primary Intended Use, Lessee shall give Lessor Notice of such damage or
destruction within fifteen (15) Business Days of the occurrence thereof. Within
ninety (90) days of such occurrence, Lessee shall commence and thereafter
diligently proceed to complete the restoration of the damaged or destroyed
Leased Improvements to substantially the same (or better) condition as that
which existed immediately prior to such damage or destruction.
14.2.2 If any Leased Improvements are totally or partially damaged or
destroyed, but the Facility thereon is not thereby rendered Unsuitable for its
Primary Intended Use, Lessee shall give Lessor Notice of such damage or
destruction within fifteen (15) Business Days of the occurrence thereof, and,
within ninety (90) days of the occurrence, Lessee shall commence and thereafter
diligently proceed to restore the Leased Improvements within the Reconstruction
Period to substantially the same (or better) condition as that which existed
immediately prior to such damage or destruction.
14.2.3 No such damage or destruction shall terminate this Lease as to
the affected Parcel; provided, however, that if Lessee, after diligent effort,
cannot within a reasonable time obtain all necessary government approvals,
including building permits, licenses, conditional use permits and any
certificates of need, in order to be able to perform all required repair and
restoration work and thereafter to operate the Leased Improvements for the
Primary Intended Use thereof in substantially the same manner as that existing
immediately prior to such damage or destruction, Lessee shall purchase the
Parcel of Leased Property on which the damaged or destroyed Leased Improvements
are
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located for the Parcel Purchase Price, which shall be determined as of the day
of the damage or destruction.
14.3 INTENTIONALLY OMITTED.
14.4 LESSEE'S PERSONAL PROPERTY. All insurance proceeds payable by reason
of any loss of or damage to any of Lessee's Personal Property shall be paid to
Lessee.
14.5 RESTORATION OF LESSEE'S PROPERTY. If Lessee is required to restore the
Leased Property as provided in Section 14.2, Lessee shall also restore or
replace all alterations and improvements made by Lessee and all of the Personal
Property, to the extent required to maintain the then current license of the
applicable Leased Property.
14.6 NO ABATEMENT OF RENT. Except as to any Parcel of Leased Property
purchased by Lessee pursuant to this Article XIV, as to which this Lease shall
terminate upon the closing of such purchase, this Lease shall remain in full
force and effect and Lessee's obligation to pay Rent shall continue without
abatement during any period required for repair and restoration.
14.7 CONSEQUENCES OF PURCHASE OF DAMAGED LEASED PROPERTY. If Lessee
purchases a damaged Parcel of Leased Property pursuant to the provisions of this
Article XIV, this Lease shall terminate as to such Parcel upon payment of the
price set forth herein, Lessor shall remit to Lessee any and all Net Proceeds
pertaining to the purchased Parcel of Leased Property being held by Lessor, and
the Base Rent shall be reduced by the Parcel Rental Value of the purchased
Parcel of Leased Property, determined as of the day prior to the date of the
damage or destruction to such Parcel.
14.8 DAMAGE NEAR END OF TERM. Notwithstanding any provisions of Section
14.2, if damage to or destruction of any Leased Improvements occurs during the
last twelve (12) months of the Term of this Lease, and if, as reasonably
estimated by a qualified construction consultant selected by Lessee and approved
by Lessor (which approval shall not unreasonably be withheld), such damage or
destruction cannot be fully repaired and restored within six (6) months
immediately following the date of loss, then Lessee shall have the option, which
Lessee shall exercise by written notice to Lessor within thirty (30) days of
such damage or destruction, to (i) restore the damaged Parcel of Leased Property
within such six (6) month period, or (ii) to purchase the Parcel of Leased
Property on which the damaged or destroyed Leased Improvements are located from
Lessor, within sixty (60) days following the date of the damage or destruction,
for the Parcel Purchase Price, which shall be determined as of the day prior to
the date of the damage or destruction.
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14.9 WAIVER. Except as specifically provided elsewhere herein, Lessee
hereby waives any statutory or common law rights of termination which may arise
by reason of any damage to or destruction of any Facility.
14.10 PROCEDURE FOR DISBURSEMENT OF INSURANCE PROCEEDS GREATER THAN THE
APPROVAL THRESHOLD. If Lessee restores or repairs the damaged Parcel of Leased
Property pursuant to any Subsection of this Article XIV and if the Net Proceeds
exceed the Approval Threshold, the restoration or repair shall be performed in
accordance with the following procedures:
(i) The restoration or repair work shall be done pursuant to plans and
specifications approved by Lessor (not to be unreasonably withheld or
delayed), and Lessee shall cause to be prepared and presented to Lessor a
certified construction statement, reasonably acceptable to Lessor, showing
the total estimated cost of the restoration or repair.
(ii)The Construction Funds shall be made available to Lessee as the
restoration and repair work progresses pursuant to certificates of an
architect selected by Lessee that in the reasonable judgment of Lessor is
qualified in the design and construction of health care facilities, or of
the type of property for which the repair work is being done.
(iii) There shall be delivered to Lessor, with such certificates,
sworn statements and lien waivers from the general contractor and major
subcontractors (i.e., those having contracts of One Hundred Thousand
Dollars ($100,000.00) or more), in the form customary for the applicable
State, in an amount at least equal to the amount of Construction Funds to
be paid out to Lessee pursuant to each architect's certificate and dated as
of the date of the disbursement to which they relate.
(iv) There shall be delivered to Lessor such other evidence as Lessor
may reasonably request, from time to time, during the restoration and
repair, as to the progress of the work, compliance with the approved plans
and specifications, the cost of restoration and repair and the total amount
needed to complete the restoration and repair.
(v) There shall be delivered to Lessor such other evidence as Lessor
may reasonably request, from time to time, showing that there are no liens
against the applicable Leased Property arising in connection with the
restoration and repair and that the cost of the restoration and repair at
least equals the total amount of Construction Funds then disbursed to
Lessee hereunder.
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(vi) If the Construction Funds are at any time determined by Lessor
not to be adequate for completion of the restoration and repair, Lessee
shall demonstrate to Lessor, upon request, that Lessee has sufficient funds
available to cover the difference, and shall disburse such funds pari passu
with the Construction Funds.
(vii) The Construction Funds may be disbursed by the depository
thereof to Lessee or, at Lessee's direction, to the persons entitled to
receive payment thereof from Lessee, and such disbursement in either case
may, at Lessor's discretion, reasonably exercised, be made directly or
through a third party escrow agent, such as, but not limited to, a title
insurance company, or its agent. Provided no Event of Default has occurred
and is continuing, any excess Construction Funds shall be paid to Lessee
upon completion of the restoration or repair.
(viii) If Lessee at any time fails to promptly and fully perform the
conditions and covenants set out in subparagraphs (1) through (6) above,
and the failure is not corrected within thirty (30) days of written Notice
thereof, or if during the restoration or repair an Event of Default occurs
hereunder, Lessor may, at its option, immediately cease making any further
payments to Lessee for the restoration and repair.
(ix) Lessor may reimburse itself out of the Construction Fund for its
reasonable and documented expenses of consultants, attorneys and its
employee- inspectors incurred in administering the Construction Funds as
hereinbefore provided.
ARTICLE XV
15.1 TOTAL TAKING. If title to the fee of the whole of any Parcel of Leased
Property shall be acquired by any Condemnor as the result of a Taking, this
Lease shall cease and terminate as to such Parcel of Leased Property as of the
Date of Taking by said Condemnor, and the Base Rent payable by Lessee hereunder
shall be reduced, as of the date the Lease shall have been so terminated as to
such Parcel of Leased Property, by the Parcel Rental Value of the Parcel taken.
15.2 ALLOCATION OF PORTION OF AWARD. The Award made with respect to the
Taking of all or any portion of any Leased Property or for loss of rent shall be
the property of and payable to Lessor up to the sum of (a) all costs and
expenses reasonably incurred and documented by Lessor in connection with the
Taking, (b) any loss of Rent suffered by Lessor as a result of the Taking
(except for any Rent accruing after the completion of a purchase by Lessee of
the affected Parcel upon a Partial Taking as hereinafter provided) and (c) in
the case of a Taking of the entire Parcel, the Parcel Purchase Price as of the
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time possession is delivered to the Condemnor. To the extent that the laws of
the State in which the applicable Parcel is located permit Lessee to make a
claim for Lessee's leasehold interest, moving expenses, loss of goodwill or
business, and Lessee's claim does not have the effect, directly or indirectly,
of reducing Lessor's claim, Lessee shall have the right to pursue such claim in
the Taking proceeding and shall be entitled to the Award therefor. In any Taking
proceedings, Lessor and Lessee shall each seek its own Award, at its own
expense.
15.3 PARTIAL TAKING. In the event of a Partial Taking of a Parcel, Lessee
shall commence and diligently proceed to restore the untaken portion of the
Leased Improvements on the applicable Leased Property so that such Leased
Improvements shall constitute a complete architectural unit (if applicable) 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
Partial Taking; provided, however, that if a Partial Taking renders a Parcel
Unsuitable for Its Primary Intended Use, Lessee shall have the right,
exercisable by written notice to Lessor within thirty (30) days after such
Partial Taking is final without appeal permitted, and before the Condemnor takes
possession, to purchase the affected Parcel for the Parcel Purchase Price, which
purchase shall be completed within sixty (60) days of such notice. Lessor shall
contribute to the cost of restoration, or if Lessee elects to purchase the
affected Parcel, Lessor shall pay over to Lessee, any Award payable to Lessor
for such Partial Taking; provided, however, that the amount of such contribution
shall not exceed the cost of restoration. If (a) Lessee elects to restore the
Parcel, (b) no Event of Default is then continuing and (c) the Award is equal to
or less than the Approval Threshold, then Lessor's contribution shall be made to
Lessee prior to the commencement of the restoration. If (a) Lessee elects to
restore the Parcel, (b) no Event of Default is then continuing and (c) the Award
is more than the Approval Threshold, then Lessor shall make the Award available
to Lessee in the manner provided in Section 14.10 for insurance proceeds in
excess of the Approval Threshold. The Base Rent shall be reduced by reason of
such Partial Taking to an amount agreed upon by Lessor and Lessee, and if Lessor
and Lessee cannot agree upon a new Base Rent, the new Base Rent amount shall be
equal to the Base Rent prior to the Partial Taking, reduced in proportion to the
reduction in the Fair Rental Value of the affected Parcel of Leased Property
resulting from the Partial Taking.
15.4 TEMPORARY TAKING. In the event of a temporary Taking of the Leased
Property or any part thereof that is for a period of less than six (6) months,
this Lease shall not terminate with respect to the affected Leased Property, and
the entire amount of any Award therefor shall be paid to Lessee. Upon the
cessation of any such Taking of less than six (6) months, Lessee shall restore
the Leased Property as nearly as may be reasonably possible to the condition
existing immediately prior to such Taking. If any such Taking continues for six
(6) months or more, such Taking shall be considered a Taking governed by Section
15.2, and the parties shall have the rights provided thereunder.
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ARTICLE XVI
16.1 EVENTS OF DEFAULT. Upon the occurrence of an Event of Default, Lessor
shall have the rights and remedies hereinafter provided (provided, however, that
if an Event of Default is cured prior to the exercise of any remedies by Lessor,
it shall cease to be such for purposes of this Lease).
16.2 LESSOR'S RIGHTS UPON LESSEE'S DEFAULT. If an Event of Default occurs
with respect to this Lease, Lessor may terminate this Lease by giving Lessee
Notice, whereupon as provided herein, the Term of this Lease shall terminate and
all rights of Lessee hereunder shall cease. The Notice provided for herein shall
be in lieu of, and not in addition to, any notice required by the laws of the
respective States in which the Leased Properties are located as a condition to
bringing an action for possession of any of the Leased Properties or to recover
damages under this Lease. In addition thereto, Lessor shall have all rights at
law and in equity available as a result of Lessee's breach.
16.3 LIABILITY FOR COSTS AND EXPENSES. Lessee will, to the extent permitted
by law, be liable for the payment, as Additional Charges, of reasonable and
documented costs of and expenses incurred by or on behalf of Lessor as a
consequence of an Event of Default, including, without limitation, reasonable
attorneys' fees (whether or not litigation is commenced, and if litigation is
commenced, including fees and expenses incurred in appeals and post-judgment
proceedings).
16.4 CERTAIN REMEDIES. If an Event of Default has occurred, and whether or
not this Lease has been terminated, Lessee shall, to the extent permitted by
law, if required by Lessor so to do, immediately surrender to Lessor the Leased
Properties and quit the same, and Lessor may enter upon and repossess the
respective Leased Properties by legal process, and may remove Lessee and all
other persons and any and all Personal Property from the respective Leased
Properties, subject to rights of any residents or patients and to any
requirement of law.
16.5 DAMAGES. None of (i) the termination of this Lease pursuant to Section
16.1, (ii) the repossession of any Leased Property, (iii) the failure of Lessor
to relet any Leased Property, (iv) the reletting of all or any portion thereof
or (v) the failure of Lessor to collect or receive any rentals due upon any
reletting shall relieve Lessee of its liability and obligations hereunder, all
of which shall survive such termination, repossession or reletting. In the event
of any termination, Lessee shall forthwith pay to Lessor all Rent due and
payable with respect to the Leased Properties to and including the date of the
termination. At Lessor's option, as and for liquidated and agreed current
damages for Lessee's default, Lessee shall also forthwith pay to Lessor:
(A) the sum of:
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(i) the Worth at the Time of the Award of the amount by which the
unpaid Rent which would have been earned after termination until the time
of the award exceeds the aggregate Rental Value of the Leased Properties
for such period, and
(ii) the Worth at the Time of the Award of the amount by which the
unpaid Rent for the balance of the Term after the time of the award exceeds
the aggregate Rental Value of the Leased Properties for such period, and
(iii) any other amount necessary to compensate Lessor for all the
damage proximately caused by Lessee's failure to perform its obligations
under this Lease or which in the ordinary course would be likely to result
therefrom; or
(B) without termination of Lessee's right to possession of the respective
Leased Properties, each installment of the Rent and other sums payable
by Lessee to Lessor under this Lease as the same becomes due and
payable, which Rent and other sums shall bear interest at the Overdue
Rate from the date when due until paid, and Lessor may enforce, by
action or otherwise, any other term or covenant of this Lease.
16.6 WAIVER. If this Lease is terminated pursuant to Section 16.2, Lessee
waives the benefit of any laws now or hereafter in force exempting property from
liability for rent or for debt.
16.7 APPLICATION OF FUNDS. Any payments received by Lessor during the
existence or continuance of any Event of Default (and any payment made to Lessor
rather than Lessee due to the existence of an Event of Default) shall be applied
to Lessee's obligations in the order which Lessor may determine or as may be
prescribed by the laws of the respective States in which the Leased Properties
are located.
ARTICLE XVII
17.1 LESSOR'S RIGHT TO CURE LESSEE'S DEFAULT. If Lessee fails to make any
payment or to perform any act required to be made or performed under this Lease,
and fails to cure the same within the relevant time periods provided in Section
16.1 or elsewhere in this Lease, Lessor may (but shall not be obligated to),
after five (5) days' prior Notice to Lessee (except in an emergency), and
without waiving or releasing any obligation of Lessee or any Event of Default,
at any time thereafter make such payment or perform such act for the account and
at the expense of Lessee, and may, to the extent permitted by law, enter upon
the respective Facilities for such purpose and take all such action thereon as,
in Lessor's sole opinion, may be necessary or appropriate therefor. However, if
Lessor reasonably determines that the giving of such Notice as is provided for
in Section 16.1 or elsewhere in this Lease would risk loss to any Leased
Property or cause damage to Lessor, then Lessor will give such Notice as is
practical under the
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circumstances. No such entry shall be deemed an eviction of Lessee. All sums so
paid by Lessor and all reasonable costs and expenses (including, without
limitation, reasonable attorneys' fees and expenses) so incurred, together with
the late charge and interest provided for in Section 3.3 thereon from the date
on which such sums or expenses are paid or incurred by Lessor, shall be paid by
Lessee to Lessor on demand. The obligations of Lessee and rights of Lessor
contained in this Article shall survive the expiration or earlier termination of
this Lease.
ARTICLE XVIII
18.1 FIRST OPTION TO RENEW. Lessee is hereby granted the option to renew
this Lease for the First Renewal Term, which option is exercisable by written
Notice to Lessor at least one hundred eighty (180) days, but not more than three
hundred sixty (360) days, prior to the Expiration Date; provided, however, that
no Event of Default exists either on the date on which Lessee gives such Notice
to Lessor or on the Expiration Date. During the First Renewal Term, all of the
terms and conditions of this Lease shall remain in full force and effect.
18.2 SECOND OPTION TO RENEW. If the Term of this Lease has been renewed as
provided in Section 18.1 above, Lessee is hereby granted the option to renew
this Lease for the Second Renewal Term, which option is exercisable by written
Notice to Lessor at least one hundred eighty (180) days, but not more than three
hundred sixty (360) days, prior to the expiration of the First Renewal Term;
provided, however, that no Event of Default exists either on the date on which
Lessee gives such Notice to Lessor or on the date on which the First Renewal
Term expires. During the Second Renewal Term, all of the terms and conditions of
this Lease shall remain in full force and effect.
18.3 RENEWAL AS TO ALL FACILITIES ONLY. Notwithstanding anything herein to
the contrary, the options to renew granted pursuant to Sections 18.1 and 18.2
may be exercised only with respect to all of the Leased Properties then subject
to this Lease and not with respect to fewer than all of the Leased Properties
then subject to this Lease.
ARTICLE XIX
19.1 HOLDING OVER. If Lessee remains in possession of a Leased Property
after the expiration of the Term or earlier termination of this Lease, such
possession shall be as a month-to-month tenant during which time Lessee shall
pay as rental each month one and one-half (1 1/2) times the aggregate of (i)
one-twelfth (1/12th) of the aggregate Base Rent payable with respect to the
applicable Leased Property during the last Lease Year of the preceding Term, and
(ii) all Additional Charges accruing during the month with respect to the
applicable Leased Property. Any interest, however, will be payable only at
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the rate provided in this Lease and shall not exceed the maximum rate allowed by
law. During such period of month-to-month tenancy, Lessee shall be obligated to
perform and observe all of the terms, covenants and conditions of this Lease,
but shall have no rights hereunder other than the right, to the extent given by
law to month-to-month tenancies, to continue its occupancy and use of the
applicable Leased Property until the month-to-month tenancy is terminated.
Nothing contained herein shall constitute the consent, express or implied, of
Lessor to the holding over by Lessee after the expiration or earlier termination
of this Lease.
19.2 INDEMNITY. If Lessee fails to surrender a Leased Property in a timely
manner and in accordance with the provisions of Section 9.1.6 upon the
expiration or termination of this Lease, in addition to any other liabilities to
Lessor accruing therefrom, Lessee shall indemnify and hold Lessor, its
principals, officers, directors, agents and employees harmless from loss or
liability resulting from such failure, including, without limiting the
generality of the foregoing, loss of rental with respect to any new lease in
which the rental payable thereunder exceeds any rental paid by Lessee pursuant
to this Lease and any claims by any proposed new tenant founded on such failure.
The provisions of this Section 19.2 shall survive the expiration or termination
of this Lease.
ARTICLE XX
20.1 SUBORDINATION. Upon written request of Lessor, Lessee will subordinate
its rights pursuant to this Lease in writing (i) to the lien of any mortgage,
deed of trust or the interest of any lease in which Lessor is the lessee and to
all modifications, extensions, substitutions thereof (or, at Lessor's option,
cause the lien of said mortgage, deed of trust or the interest of any lease in
which Lessor is the lessee to be subordinated to this Lease), and (ii) to all
advances made or hereafter to be made thereunder. As a condition to each such
subordination, Lessor shall deliver to Lessee a non-disturbance agreement
providing inter alia that, if such mortgagee, beneficiary or lessor acquires any
of the Leased Properties by way of foreclosure or deed in lieu, such mortgagee,
beneficiary or lessor will not disturb Lessee's possession under this Lease and
will recognize Lessee's rights hereunder provided this Lease has not been
terminated under Section 16.2.
20.2 ATTORNMENT. If any proceedings are brought for foreclosure, or if the
power of sale is exercised under any mortgage or deed of trust made by Lessor
encumbering any Leased Property, or if a lease in which Lessor is the lessee is
terminated, Lessee shall attorn to the purchaser or lessor under such lease upon
any foreclosure or deed in lieu thereof, sale or lease termination and recognize
the purchaser or lessor as Lessor under this Lease, provided that the purchaser
or lessor acquires and accepts the applicable Leased Property subject to, and
upon the terms and conditions set forth in, this Lease.
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20.3 ESTOPPEL CERTIFICATE. Each of Lessor and Lessee agrees, upon not less
than ten (10) days prior Notice from the other, to execute, acknowledge and
deliver to the other an Estoppel Certificate. It is intended that any Estoppel
Certificate delivered pursuant hereto may be relied upon by Lessor, Lessee, any
prospective tenant, subtenant, assignee or purchaser of the applicable Leased
Property, any mortgagee or prospective mortgagee, or by any other party who may
reasonably rely on such statement.
ARTICLE XXI
21.1 RISK OF LOSS. During the Term of this Lease, the risk of loss or of
decrease in the enjoyment and beneficial use of any of the Leased Properties in
consequence of the damage or destruction thereof by fire, the elements,
casualties, thefts, riots, wars or otherwise, or in consequence of foreclosures,
attachments, levies or executions (other than those caused by Lessor and those
claiming from, through or under Lessor) is assumed by Lessee, and, in the
absence of gross negligence, willful misconduct or material breach of this Lease
by Lessor, Lessor shall in no event be answerable or accountable therefor nor
shall any of the events mentioned in this Section entitle Lessee to any
abatement of Rent under this Lease.
ARTICLE XXII
22.1 INDEMNIFICATION. Subject to Section 13.4, notwithstanding the
existence of any insurance or self-insurance provided for in Article XIII, and
without regard to the policy limits of any such insurance or self-insurance,
Lessee will, subject to Section 13.4 above, protect, indemnify, save harmless
and defend Lessor, its principals, officers, directors and agents and employees
from and against all liabilities, obligations, claims, damages, penalties,
causes of action, costs and expenses (including, without limitation, reasonable
attorneys' fees and expenses), to the extent permitted by law, imposed upon or
incurred by or asserted against Lessor by reason of: (i) any accident, injury to
or death of persons or loss of or damage to property occurring on or about the
Leased Property or adjoining sidewalks, including without limitation any claims
of malpractice, (ii) any use, misuse, non-use, condition, maintenance or repair
by Lessee of any Leased Property, (iii) the failure to pay any Impositions which
are the obligations of Lessee to pay pursuant to the applicable provisions of
this Lease, (iv) any material failure on the part of Lessee to perform or comply
with any of the terms of this Lease, and (v) the material nonperformance of any
contractual obligation, express or implied, assumed or undertaken by Lessee or
any party in privity with Lessee with respect to any Leased Property or any
business or other activity carried on with respect to any Leased Property during
the Term or thereafter during any time in which Lessee or any such other party
is in possession of any Leased Property or thereafter to the extent that any
conduct by Lessee or any such person (or failure of such conduct thereby if the
same should have been undertaken during such time of
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possession and leads to such damage or loss) causes such loss or claim. Any
amounts which become payable by Lessee under this Section shall be paid within
thirty (30) days after liability therefor on the part of Lessee is finally
determined by litigation or otherwise, and if not timely paid, shall bear
interest (to the extent permitted by law) at the Overdue Rate from the date of
such determination to the date of payment. Nothing herein shall be construed as
indemnifying Lessor against its own grossly negligent acts or omissions or
willful misconduct.
Lessee's liability for a breach of the provisions of this Article arising
during the Term shall survive any termination of this Lease. Lessee shall have
the right (at Lessee's expense) to defend Lessor against any such claim by
counsel reasonably acceptable to Lessor (who may also act as Lessee's counsel in
the particular matter, provided Lessor's and Lessee's interests are coincident
and not adverse to one another). Lessee shall apprise Lessor regularly as to the
status of the particular matter. This Section 22.1 shall not be construed to
cover unforeseeable damages from whatever cause.
ARTICLE XXIII
23.1 GENERAL PROHIBITION AGAINST TRANSFER. Lessee shall not Transfer its
interest in this Lease or any Leased Property, except as specifically permitted
by this Lease or consented to in advance by Lessor in writing. Except as
otherwise specified herein, the parties agree that Lessor may arbitrarily and
unreasonably withhold its consent to any such request and no court shall imply
any agreement by Lessor to act in a reasonable fashion. Any such attempted
Transfer which is not specifically permitted by this Lease or otherwise approved
shall be null and void and of no force and effect whatsoever. In the event of
any such Transfer, Lessor may collect rent and other charges from the Transferee
and apply the amounts collected to the rent and other charges herein reserved,
but no Transfer or collection of rent and other charges shall be deemed to be a
waiver of Lessor's rights to enforce Lessee's covenants or the acceptance of the
Transferee as lessee, or a release of Lessee from the performance of any
covenants on the part of Lessee to be performed. Notwithstanding any Transfer,
Lessee and any Guarantor shall remain fully liable for the performance of all
terms, covenants and provisions of this Lease. Any violation of this Lease by
any Transferee shall be deemed to be a violation of this Lease by Lessee.
23.2 CORPORATE OR PARTNERSHIP TRANSACTIONS. If Lessee, Guarantor or the
Manager is a corporation, then the merger, consolidation or reorganization of
such corporation and/or the sale, issuance or transfer, cumulatively or in one
transaction, of any voting stock by Lessee, Guarantor or the Manager or the
stockholders of record of any of them as of the date of this Lease which results
in a change in the voting control of Lessee, Guarantor or the Manager shall
constitute a Transfer. If Lessee, Guarantor or the Manager is a joint venture,
partnership or other association, then the transfer of or change
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in, cumulatively or in one transaction, voting control of or a twenty percent
(20%) or greater interest in such Lessor, Guarantor or Manager within any
five-year period, or the termination of such joint venture, partnership or other
association, shall constitute a Transfer.
23.3 PERMITTED SUBLEASES. Notwithstanding anything to the contrary
elsewhere herein, but subject to Section 23.4 below, Lessee shall have the right
to sublease up to ten (10%) percent of the floor area of a Facility in the
ordinary course of the health care business being conducted in such Facility
without the prior consent of Lessor, and with the prior written consent of
Lessor, which shall not unreasonably be withheld or delayed (and which consent
shall be conclusively presumed if Lessor does not object in writing to any such
sublease within thirty (30) days after Notice from Lessee) an additional ten
(10%) of the floor area of such Facility.
23.4 TRANSFERS TO A CONTROLLED ENTITY. Notwithstanding anything to the
contrary herein contained, Lessee may without the prior consent of Lessor
Transfer its interest herein to an entity Controlled by either Lyric or IHS upon
the condition that (a) such entity expressly and in writing assumes all of the
obligations and liability of the Lessee hereunder, (b) such Transfer has no
effect on the Lyric Guaranty or the IHS Indemnity, (c) the stock of such entity
(if a corporation) is at the time of the Transfer pledged to Lessor to secure
performance of its obligations under this Lease, (d) all obligations of such
entity to Lyric, IHS or any Affiliate of either, and all Debt of such entity to
any third party, are subordinated to its liability and obligations as Lessee
hereunder and (e) without the express written consent of Lessor, no such
Transfer shall release the Lessee named herein from liability hereunder.
23.5 SUBORDINATION AND ATTORNMENT. Lessee shall insert in any sublease
permitted by Lessor provisions to the effect that (i) such sublease is subject
and subordinate to all of the terms and provisions of this Lease and to the
rights of Lessor hereunder, (ii) if this Lease terminates before the expiration
of such sublease, the sublessee thereunder will, at Lessor's option, attorn to
Lessor and waive any right the sublessee may have to terminate the sublease or
to surrender possession thereunder as a result of the termination of this Lease,
and (iii) if the sublessee receives a written Notice from Lessor or Lessor's
assignee, if any, stating that an Event of Default has occurred under this
Lease, the sublessee shall thereafter be obligated to pay all rentals accruing
under said sublease directly to the party giving such Notice or as such party
may direct. All rentals received from the sublessee by Lessor or Lessor's
assignees, if any, as the case may be, shall be credited against the amounts
owing by Lessee under this Lease.
23.6 SUBLEASE LIMITATION. Anything contained in this Lease to the contrary
notwithstanding, even if a sublease of a Leased Property is permitted, Lessee
shall not sublet the applicable Leased Property on any basis such that the
rental to be paid by the sublessee thereunder would be based, in whole or in
part, on either (i) the income or
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profits derived by the business activities of the sublessee, or (ii) any other
formula such that any portion of the sublease rental received by Lessor would
fail to qualify as "rents from real property" within the meaning of Section
856(d) of the Code, or any similar or successor provision thereto. The parties
agree that this Section shall not be deemed waived or modified by implication,
but may be waived or modified only by an instrument in writing explicitly
referring to this Section by number.
23.7 INITIAL FACILITY SUBLEASES PERMITTED. Lessor expressly consents to the
Initial Facility Subleases, provided, however, that any material modification or
amendment of the terms thereof shall require the prior written approval of
Lessor.
ARTICLE XXIV
24.1 OFFICER'S CERTIFICATES AND FINANCIAL STATEMENTS. Lessee shall furnish
to Lessor:
(i) Quarterly Financials. As soon as available and in any event within
fifty-five (55) days after the end of each calendar quarter, an unaudited
operating statement for each of the Facilities for the period commencing at
the end of the previous quarter and ending with the end of such quarter,
together with an Officer's Certificate of Lessee stating that Lessee is not
in default of any covenant set forth in Article 8 of this Lease, or if
Lessee is in default, specifying all such defaults, the nature thereof and
the steps being taken to remedy the same.
(ii) Annual Financials. As soon as available and in any event within one
hundred twenty (120) days after the end of each Fiscal Year, a consolidated
balance sheet of the Facility Sublessees and Lessee as at the end of such
Fiscal Year and a consolidated operating statement for the Facilities for
such Fiscal Year, in each case accompanied by (i) an opinion acceptable to
Lessor of KPMG Peat Marwick or other independent public accountants of
recognized standing reasonably acceptable to Lessor, (ii) an Officer's
Certificate of Lessee stating that Lessee is not in default in the
performance or observance of any of the terms of this Lease, or if Lessee
is in default, specifying all such defaults, the nature thereof and the
steps being taken to remedy the same.
(iii) Cost Reports. Upon the request of Lessor and no more than once in
each calendar year, Lessee shall furnish to Lessor complete and accurate
copies of the most recent annual Medicaid and Medicare cost reports for the
Facilities and any and all amendments filed with respect to such reports
and all responses, audit reports or inquiries with respect to each such
report.
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(iv) Licensing Agency Reports. Upon the reasonable request of Lessor and no
more than once during any calendar year, Lessee shall furnish to Lessor a
copy of the most recent federal and state agency surveys or report and any
statement of deficiencies with respect to the Facilities, and within the
time period required by the particular agency for furnishing a plan of
correction, and without the need of any request from Lessor, Lessee shall
also furnish to Lessor a copy of the plan of correction generated from such
survey or report for the Facilities, and correct or cause to be corrected
an deficiency, the curing of which is a condition of continued licensure or
for full participation in Medicare and Medicaid for existing patients or
for new patients to be admitted with Medicare or Medicaid coverage, by the
date required for cure by such agency (plus extensions granted by such
agency.)
(v) Notices. Lessee shall require that each Facility Sublessee furnish to
Lessor within ten (10) days from its receipt, and Lessee shall furnish to
Lessor within ten (10) days from its receipt, any and all notices
(regardless of form) from any licensing and/or certifying agency that a
Facility's license or Medicare or Medicaid certification of a Facility is
being revoked or suspended.
(vi) Patient Data. Within fifty-five (55) days of the end of each fiscal
quarter and to the extent not included in the operating statements
delivered pursuant to subsection (i), above, a statement of the actual
patient days incurred for the quarter, together with quarterly census
information for the Facilities as of the end of such quarter by patient-mix
(i.e., private, Medicare, Medicaid and V.A.) of the Facilities.
(vii) Capital Budget. As soon as it is prepared in each Lease Year, a
capital budget for the Facilities for that and the following Lease Year,
for Lessor's information and not for approval;
(viii) Other Information. With reasonable promptness, such other
information respecting the financial condition and affairs of Lessee, the
Facility Sublessees and the Facilities as Lessor may reasonably request
from time to time, including, without limitation, any such other
information as may be available to the administration of the Facilities;
(ix) At times reasonably required by Lessor, and upon request as
appropriate, audited year-end information and unaudited quarterly financial
information concerning the Leased Properties, Lessee and the Facility
Sublessees as Lessor may require for its on-going filings with the SEC,
under both the Securities Act of 1933, as amended and the Securities
Exchange Act of 1934, as amended, including, but not limited to 10-Q
Quarterly Reports, 10-K Annual Reports, 8- and registration statements to
be filed by Lessor during the Term of this Lease; and
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24.2 PUBLIC OFFERING INFORMATION. Lessee specifically agrees that Lessor
may include financial information and such information concerning the operation
of the Facilities which does not violate the confidentiality of the
facility-patient relationship and the physician-patient privilege under
applicable laws, in offering memoranda or prospectuses, or similar publications
in connection with syndications or public offerings of Lessor's securities or
interests, and any other reporting requirements under applicable federal and
State laws, including those of any successor to Lessor. Lessee agrees to provide
such other reasonable information necessary with respect to Lessee and the
applicable Leased Property to facilitate a public offering or to satisfy SEC or
regulatory disclosure requirements. Lessor shall provide to Lessee a copy of any
information prepared by Lessor to be so published, and Lessee shall have a
reasonable period of time (not to exceed three (3) days) after receipt of such
information to notify Lessor of any corrections. Lessor shall protect,
indemnify, save harmless and defend Lessee, its principals, officers, directors
and agents and employees from and against all liabilities, claims, damages,
penalties, causes of action, costs and expenses (including, without limitation,
reasonable attorneys' fees and expenses), to the extent permitted by law,
imposed upon or incurred by or asserted against them by a third party or parties
as a result of the publication of any such audited financial statements by or at
the direction of Lessor, but not against any such liabilities, claims, damages,
penalties, causes of action, costs or expenses as may be suffered by Lessee, its
principals, officers, directors and agents and employees in or as a result of
any action or proceeding with respect to any such audited financial statement
(i) in which a judgment is entered against IHS, Lyric, Lessee, any Seller ( as
defined in the Purchase Agreement) or any principal, officer, director, agent or
employee thereof, or (ii) is settled in whole or in part on the basis of a
payment of Ten Thousand Dollars ($10,000.00) or more to the claimant or moving
party in such proceeding by IHS, Lyric, Lessee, any Seller or any principal,
officer, director, agent or employee thereof alone or in combination with any
payment made by IHS, Lyric, Lessee, any Seller or any principal, officer,
director, agent or employee thereof (and as to expenses previously paid by
Lessor pursuant to the foregoing indemnity prior to an event described in (i) or
(ii), above, Lessee shall repay such expenses promptly after the event
specified).
ARTICLE XXV
25.1 LESSOR'S RIGHT TO INSPECT. Lessee shall permit Lessor and its
authorized representatives to inspect, during normal business hours, (i) the
respective Leased Properties and, (ii) upon one Business Day's prior Notice,
which Notice shall set forth a reasonable cause for such inspection, Lessee's
books and records pertaining thereto (provided, however, that upon either (a) a
Special Default or (b) any other Event of Default, such Notice need not set
forth any cause for such inspection).
ARTICLE XXVI
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26.1 NO WAIVER. No failure by Lessor or Lessee 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 by Lessor during the continuance of any such breach, shall constitute a
waiver of any such breach or of any such term. No waiver of any breach shall
affect or alter this Lease, which shall continue in full force and effect with
respect to any other then existing or subsequent breach.
ARTICLE XXVII
27.1 REMEDIES CUMULATIVE. To the extent permitted by law, each legal,
equitable or contractual right, power and remedy of Lessor now or hereafter
provided either in this Lease 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 Lessor of any one or more of such
rights, powers and remedies shall not preclude the simultaneous or subsequent
exercise by Lessor of any or all of such other rights, powers and remedies.
ARTICLE XXVIII
28.1 ACCEPTANCE OF SURRENDER. No surrender to Lessor of this Lease or of
any Leased Property or any part thereof, or of any interest therein, shall be
valid or effective unless agreed to and accepted in writing by Lessor, and no
act by Lessor or any represen tative or agent of Lessor, other than such a
written acceptance by Lessor, shall constitute an acceptance of any such
surrender.
ARTICLE XXIX
29.1 NO MERGER OF TITLE. There shall be no merger of this Lease or of the
leasehold estate created thereby by reason of the fact that the same person,
firm, corporation or other entity may acquire, own or hold, directly or
indirectly, (i) the Lease or the leasehold estate created hereby or any interest
in the Lease or such leasehold estate, and (ii) the fee estate in any Leased
Property.
29.2 NO PARTNERSHIP. Nothing contained in this Lease shall be deemed or
construed to create a partnership or joint venture between Lessor and Lessee or
to cause either party to be responsible in any way for the debts or obligations
of the other or any other party, it being the intention of the parties that the
only relationship hereunder is that of lessor and lessee.
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ARTICLE XXX
30.1 CONVEYANCE BY LESSOR. If Lessor or any successor owner of any Leased
Property conveys any Leased Property in accordance with the terms hereof other
than as security for a debt, Lessor or such successor owner, as the case may be,
shall thereupon be released from all future liabilities and obligations of
Lessor under this Lease arising or accruing from and after the date of such
conveyance, and all such future liabilities and obligations shall thereupon be
binding upon the new owner, provided that the transferee gives Notice to Lessee
that such transferee has assumed all such future liabilities and obligations and
acknowledges that such transferee has received (i) the Security Deposit and (ii)
any funds in the hands of Lessor or the then grantor at the time of the
transfer, in which Lessee has an interest.
ARTICLE XXXI
31.1 QUIET ENJOYMENT. So long as Lessee pay all Rent as it becomes due and
complies with all of the terms of the Lease and performs its obligations
thereunder, Lessee shall peaceably and quietly have, hold and enjoy the
respective Leased Properties hereby leased for the Term.
ARTICLE XXXII
32.1 NOTICES. Except as requested by law for the posting of notices, all
notices, requests, demands and other communications hereunder must be in writing
and shall be personally served or mailed (by registered or certified mail,
return receipt requested and postage prepaid), or delivered by a national
overnight delivery service such as Federal Express or D.H.L., or by facsimile
transmission addressed to the respective parties, as follows:
(a) If to Lessor:
Omega Healthcare Investors, Inc.
905 W. Eisenhower Circle, Suite 110
Ann Arbor, Michigan 48103
ATTN: Essel W. Bailey, Jr.
Telephone No.: (313) 747-9790
Fax No.: (313) 996-0020
with a copy of any Notice of a default by Lessor and any Notice
subsequent thereto to:
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Dykema Gossett PLLC
400 Renaissance Center
Detroit, Michigan 48243
ATTN: Fred J. Fechheimer
Telephone No.: (248) 203-0700
Fax No.: (248) 203-0763
(b) if to Lessee:
Lyric Health Care Holdings, Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
ATTN: Daniel J. Booth and Marshall A. Elkins, Esq.
Telephone No.: (410) 998-8768
Facsimile No.: (410) 998-8695
with a with a copy of any Notice of a default by Lessor and any
Notice subsequent thereto to:
Leboeuf, Lamb, Greene & MacRae L.L.P.
125 West 55th Street
New York, N.Y. 10019-5389
ATTN: John R. Fallon, Jr.
Telephone No.: (212) 424-8279
Fax No.: (212) 424-8500
Any such mailing, delivery or other permitted service shall be deemed to be
complete on the day of the confirmed receipt or refusal thereof.
ARTICLE XXXIII
33.1 APPRAISERS. If it becomes necessary to determine the Fair Rental Value
of any of the Leased Properties for any purpose of this Lease, Lessor and Lessee
shall attempt to agree upon a single appraiser to make such determination. If
Lessor and Lessee are unable to agree upon a single arbitrator within thirty
(30) days thereafter, then the party required or permitted to give Notice of
such required determination shall include in the Notice the name of a person
selected to act as appraiser on its behalf. Within ten (10) days after such
Notice, Lessor (or Lessee, as the case may be) shall by Notice to Lessee (or
Lessor, as the case may be) appoint a second person as appraiser on its behalf.
The appraisers thus appointed, each of whom must be a member of the American
Institute of Real Estate Appraisers (or any successor organization thereto) and
experienced in appraising nursing home properties, shall, within forty-five (45)
days after
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the date of the Notice appointing the first appraiser, proceed to appraise the
applicable Leased Property to determine the Fair Rental Value of it as of the
relevant date (giving effect to the impact, if any, of inflation from the date
of their decision to the relevant date); provided, however, that if only one
appraiser has been so appointed, or if two appraisers have been so appointed but
only one such appraiser has made such determination within fifty (50) days after
the making of Lessee's or Lessor's request, then the determination of such
appraiser shall be final and binding upon the parties. If two appraisers have
been appointed and have made their determinations within the respective
requisite periods set forth above and if the difference between the amounts so
determined does not exceed ten percent (10%) of the lesser of such amounts, then
the Fair Rental Value shall be an amount equal to fifty percent (50%) of the sum
of the amounts so determined. If the difference between the amounts so
determined exceeds ten percent (10%) of the lesser of such amounts, then such
two appraisers shall have twenty (20) days to appoint a third appraiser. If no
such appraiser has been appointed within such twenty (20) day period or within
ninety (90) days of the original request for a determination of Fair Rental
Value, whichever is earlier, either Lessor or Lessee may apply to any court
having jurisdiction to have such appointment made by such court. Any appraiser
appointed by the original appraisers or by such court shall be instructed to
determine the Fair Rental Value within forty-five (45) days after appointment of
such appraiser. The determination of the appraiser which differs most in terms
of dollar amount from the determinations of the other two appraisers shall be
excluded, and the average of the sum of the remaining two determinations shall
be final and binding upon Lessor and Lessee as the Fair Rental Value of the
applicable Leased Property. Any such appraisal shall conform to FDIC or
equivalent requirements and format.
This provision for determining the Fair Rental Value by appraisal shall be
specifically enforceable to the extent such remedy is available under applicable
law, and any determination hereunder shall be final and binding upon the parties
and judgment may be entered upon such determination in any court having
jurisdiction of the matter. Lessor and Lessee shall each pay the fees and
expenses of the appraiser appointed by it, and each shall pay one-half (1/2) of
the fees and expenses of the third appraiser and one-half (1/2) of all other
costs and expenses incurred in connection with each appraisal.
ARTICLE XXXIV
34.1 BREACH BY LESSOR. Lessor shall not be in breach of this Lease unless
Lessor fails to observe or perform any term, covenant or condition of this Lease
on its part to be performed and such failure continues for a period of thirty
(30) days after written Notice specifying such failure and the necessary
curative action is received by Lessor from Lessee. If the failure cannot with
due diligence be cured within a period of thirty (30) days, the failure shall
not be deemed to continue if Lessor, within said thirty (30) day period,
proceeds promptly and with due diligence to cure the failure and diligently
completes the
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curing thereof. The time within which Lessor shall be obligated to cure any such
failure shall also be subject to extension of time due to the occurrence of any
Unavoidable Delay.
ARTICLE XXXV
35.1 LESSOR'S OPTION TO PURCHASE LESSEE'S PERSONAL PROPERTY. Lessor shall
have the option on the terms hereinafter set forth to purchase Lessee's Personal
Property at the expiration or termination of this Lease for an amount equal to
the then book value thereof (acquisition cost less accumulated depreciation on
the books of Lessee pertaining thereto), subject to, and with appropriate
credits for any obligations owing from Lessee to Lessor and for all equipment
leases, conditional sale contracts and any other encumbrances to which Lessee's
Personal Property is subject. Lessor's option shall be exercised by Notice to
Lessee no more than one hundred eighty (180) days, nor less than ninety (90)
days, before the expiration of the Initial Term or, if the Term is renewed as
provided herein, before the expiration of the First Renewal Term or the Second
Renewal Term, as the case may be, unless this Lease is terminated prior to its
expiration date (i) by reason of an Event of Default, in which event Lessor's
option shall be exercised within ninety (90) days following the date of
termination, or (ii) by reason of the exercise by a Lessee of a right to
terminate provided for herein in the event of a Taking, in which event Lessor's
option shall be exercised within forty-five (45) days following Lessee's
exercise of such right. Lessor's option shall terminate upon Lessee's purchase
of the applicable Leased Property. If Lessor exercises its option, Lessee shall,
in exchange for Lessor's payment of the purchase price, deliver Lessee's
Personal Property to Lessor, together with a bill of sale and such other
documents as Lessor may reasonably request in order to carry out the purchase of
Lessee's Personal Property, and such purchase shall be closed by such delivery
and such payment on the date set by Lessor in its Notice of exercise.
35.2 FACILITY TRADE NAMES. If this Lease is terminated by reason of an
Event of Default, or if Lessor purchases the Lessee's Personal Property with
respect to any Leased Property pursuant to Section 35.1, Lessor shall be
permitted to use the Facility Trade Names (except for the names "Integrated,"
"IHS" and variants thereof) under which the applicable Leased Property conducts
business in the market in which the applicable Facility is located, and Lessee
shall not after any termination use the Facility Trade Names under which the
applicable Leased Property conducts business in any business that competes with
the applicable Leased Property.
35.3 TRANSFER OF OPERATIONAL CONTROL OF THE FACILITIES. Lessee shall
cooperate in transferring operational control of the Facilities to Lessor or
Lessor's nominee if the term of the Lease expires without extension or renewal
or the purchase of any Parcel or Parcels by Lessee, or if this Lease is
terminated upon the occurrence of an Event of Default or for any other reason,
and shall use its best efforts, without incurring material cost or liability
(except that such limitation shall not apply in the event of termination upon
the occurrence
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of an Event of Default), to accomplish such transfer with minimal disruption of
the business conducted at each Facility. To that end, pending completion of the
transfer of the operational control of the Facilities to Lessor or its nominee,
Lessee covenants as follows:
(i) Lessee will not terminate the employment of any employees without
just cause, or change any salaries (other than normal merit raises and the
pre-announced wage increases of which Lessor has knowledge) or employment
agreements without the advance written consent of Lessor other than
customary raises to non-officers at regular review dates, and will not hire
any additional employees except in good faith in the ordinary course of
business.
(ii)Lessee will provide all necessary information requested by Lessor
or its nominee for the preparation and filing of any and all necessary
applications or notifications of any federal or state governmental
authority having jurisdiction over a change in the operational control of
the applicable Facility, and Lessee will use its best efforts, without
incurring material cost or liability (except that such limitation shall not
apply in the event of termination upon the occurrence of an Event of
Default), to cause the operating health care license to be transferred to
Lessor or to Lessor's nominee.
(iii) Lessee shall continue to operate the business in accordance with
reasonable and standard industry practices to keep the business and
organization of the applicable Facility intact and to preserve for Lessor
or its nominee the goodwill of the suppliers, distributors, residents and
others having business relations with Lessee with respect to the applicable
Facility.
(iv) Lessee shall engage only in transactions or other activities with
respect to the applicable Facility which are in the ordinary course of its
business and shall perform all maintenance and repairs reasonably necessary
to keep the applicable Facility in satisfactory operating condition and
repair, and shall maintain the supplies and foodstuffs at levels which are
consistent and in compliance with all health care regulations, and shall
not sell or remove any personal property except in the ordinary course of
business.
(v) Lessee agrees to fully cooperate with Lessor or its nominee in
supplying any and all information that may be reasonably required to effect
an orderly transfer of the applicable Facility.
(vi) Lessee shall provide Lessor or its nominee with full and complete
information regarding the employees of the applicable Facility and shall
reimburse Lessor or its nominee for all outstanding accrued employee
benefits, including accrued vacation, sick and holiday pay calculated on a
true accrual basis, including all earned and a prorated portion of all
unearned benefits.
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(vii) Lessee shall use its best efforts, without incurring material
cost or liability (except that such limitation shall not apply in the event
of termination upon the occurrence of an Event of Default), to obtain the
acknowledgment and the consent of any creditor, lessor or sublessor,
mortgagee, beneficiary of a deed of trust or security agreement affecting
the real and personal properties of Lessee or any other party whose
acknowledgment and/or consent would be required because of a change in the
operational control of the applicable Facility and transfer of personal
property.
35.4 INTANGIBLES AND PERSONAL PROPERTY. Notwithstanding any other provision
of this Lease, but subject to Section 6.4 relating to the security interest in
favor of Lessor, Lessor's Personal Property shall not include goodwill, nor
shall it include any other intangible personal property that is severable from
Lessor's "interests in real property" within the meaning of Section 856(d) of
the Code, or any similar or successor provision thereto. All of Lessor's
Personal Property is leased to Lessee pursuant to the terms hereof.
ARTICLE XXXVI
36.1 ARBITRATION. Except with respect to (i) the payment of Rent, or (ii)
any proceedings for possession of any Leased Property, or (iii) valuation
questions that are to be resolved by appraisal as set forth in Section 33
hereof, in case any controversy arises between the parties hereto as to any of
the requirements of this Lease or the performance thereof, and the parties are
unable to settle the controversy by agreement or as otherwise provided herein,
the controversy shall be resolved by arbitration. The arbitration shall be
conducted by three arbitrators selected in accordance with the procedures of the
American Arbitration Association and in accordance with its rules and
procedures. The decision of the arbitrators shall be final, binding and
enforceable and judgment may be entered thereon in any court of competent
jurisdiction. The decision shall set forth in writing the basis for the
decision. In rendering the decision and award, the arbitrators shall not add to,
subtract from, or otherwise modify the provisions of the Lease. The expense of
the arbitration shall be divided between Lessor and Lessee unless otherwise
specified in the award. Each party in interest shall pay the fees and expenses
of its own counsel. Lessor and Lessee shall attempt to agree on a location for
the arbitrations, and if they are unable to agree within a reasonable period of
time, then the arbitration shall be conducted in Chicago, Illinois. In any
arbitration, the parties shall be entitled to conduct discovery in the same
manner as permitted under Federal Rules of Civil Procedure 26 through 37. No
provision in this Article shall limit the right of any party to this Lease to
obtain provisional or ancillary remedies from a court of competent jurisdiction
before, after, or during the pendency of any arbitration, and the exercise of
any such
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remedy does not waive the right of either party to arbitration.
ARTICLE XXXVII
37.1 MISCELLANEOUS.
37.1.1 Survival, Choice of law. Anything contained in this Lease to
the contrary notwithstanding, all claims against, and liabilities of, Lessee or
Lessor arising prior to any date of termination of this Lease shall survive such
termination. If any late charges provided for in any provision of this Lease are
based upon a rate in excess of the maximum rate permitted by applicable law, the
parties agree that such charges shall be fixed at the maximum permissible rate.
All the terms and provisions of this Lease shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns.
The headings in this Lease are for convenience of reference only and shall not
limit or otherwise affect the meaning hereof. This Lease shall be governed by
and construed in accordance with the laws of Michigan, except as to matters
which under the laws of a State, or under applicable procedural conflicts of
laws rules, require the application of laws of the State.
LESSEE CONSENTS TO IN PERSONAM JURISDICTION BEFORE THE STATE AND FEDERAL
COURTS OF THE STATES OF MICHIGAN AND THE STATE IN WHICH THE LEASED PROPERTY
LEASED BY IT IS LOCATED, AND AGREES THAT ALL DISPUTES CONCERNING THIS AGREEMENT
BE HEARD IN THE STATE AND FEDERAL COURTS LOCATED IN THE STATES OF MICHIGAN OR
THE STATE IN WHICH THE LEASED PROPERTY LEASED BY IT IS LOCATED. LESSEE AGREES
THAT SERVICE OF PROCESS MAY BE EFFECTED UPON IT UNDER ANY METHOD PERMISSIBLE
UNDER THE LAWS OF THE STATES OF MICHIGAN OR THE STATE IN WHICH THE LEASED
PROPERTY LEASED BY IT IS LOCATED AND IRREVOCABLY WAIVES ANY OBJECTION TO VENUE
IN THE STATE AND FEDERAL COURTS OF THE STATES OF MICHIGAN OR THE STATE IN WHICH
THE LEASED PROPERTY LEASED BY IT IS LOCATED.
37.1.2 Limitation on Recovery. Lessee specifically agrees to look
solely to Lessor's interest in the Leased Property leased by it, the net
proceeds received by Lessor from the sale or any financing or refinancing of the
Leased Property leased by it, the Security Deposit, any funds deposited by
Lessee pursuant to Section 12.2 and any Net Proceeds for recovery of any
judgment against Lessor, it being specifically agreed that no shareholder,
officer or director of Lessor shall ever be personally liable for any such
judgment or for the payment of any monetary obligation to Lessee. Furthermore,
Lessor (original or successor) shall not ever be liable to Lessee for any
indirect or consequential damages suffered by Lessee from whatever cause.
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37.1.3 Waivers. Lessee waives any defense by reason of any disability
of Lessee and waives any other defense based on the termination of Lessee's
(including Lessee's successor's) liability from any cause. Lessee waives all
presentments, demands for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor, and notices of acceptance, and waives
all notices of the existence, creation, or incurring of new or additional
obligations.
37.1.4 Consents. Whenever the consent or approval of Lessor is
required hereunder, Lessor may in its sole discretion and without reason
withhold that consent or approval unless a provision of this Lease expressly
requires that Lessor be reasonable in not withholding or delaying consent or
otherwise provides to the contrary.
37.1.5 Counterparts. This Lease may be executed in separate
counterparts, each of which shall be considered as original when each party has
executed and delivered to the other one or more copies of this Lease.
37.1.6 Options Follow Lease. The renewal options and any purchase
options granted to Lessee in this Lease are not assignable or transferrable
except in connection with a transfer or assignment of this Lease as permitted in
Article XXIV. Any attempt to assign or transfer such options otherwise shall be
void and of no force and effect.
37.1.7 Rights Cumulative. Except as provided herein to the contrary,
the respective rights and remedies of the parties specified in this Lease shall
be cumulative and in addition to any rights and remedies not specified in this
Lease.
37.1.8 Entire Agreement. There are no oral or written agreements or
representations between the parties hereto affecting this Lease. This Lease
supersedes and cancels any and all previous negotiations, arrangements,
representations, brochures, agreements and understandings, if any, between
Lessor and Lessee.
37.1.9 Amendments in Writing. Neither this Lease nor any provision
hereof may be changed, waived, discharged or terminated except by an instrument
in writing signed by Lessor and Lessee
37.1.10 Severability. If any provision of this Lease or the
application of such provision to any person, entity or circumstance is found
invalid or unenforceable by a court of competent jurisdiction, such
determination shall not affect the other provisions of this Lease and all other
provisions of this Lease shall be deemed valid and enforceable.
37.1.11 Successors. The term "Lessor" shall mean only the owner or
owners at the time in question of fee title in the respective Leased Properties.
All rights and obligations of Lessor and Lessee under this Lease shall extend to
and bind the
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respective heirs, executors, administrators and the permitted concessionaires,
successors, subtenants and assignees of the parties.
37.1.12 Time of the Essence. Except for the delivery of possession of
the Facilities to Lessee, time is of the essence of all provisions of this Lease
of which time is an element.
ARTICLE XXXVIII
INTENTIONALLY OMITTED
ARTICLE XXXIX
39.1 MEMORANDUM OF LEASE. Lessor and Lessee shall, promptly upon the
request of either, enter into a short form Memorandum of Lease, in form suitable
for recording under the laws of the State, in which reference to the Lease, and
all options contained therein, shall be made. Lessee shall pay all costs and
expenses of recording such memorandum. The form of Memorandum of Lease is
attached as EXHIBIT I.
ARTICLE XL
40.1 SECURITY DEPOSIT. Concurrent with Lessee's execution of this Lease,
Lessee shall deliver the Security Deposit to Lessor, to be held by Lessor as
security for the full and faithful performance by Lessee of each and every term,
provision, covenant and condition of this Lease. Lessee shall satisfy the
Security Deposit obligation by providing a letter of credit pursuant to the
Letter of Credit Agreement. The Security Deposit (if at any time not a letter of
credit) shall be deposited by Lessor into an interest-bearing account in
Lessee's name, separate and apart from Lessor's general and/or other funds, with
First Chicago-NBD (or its successor), which cash and interest shall remain on
deposit as security hereunder and be available to Lessor as provided in this
Article. Such bank shall be instructed to pay to Lessee quarterly any interest
earned on the Security Deposit. The Security Deposit shall not be considered an
advance payment of Rent (or of any other sum payable to Lessee under this Lease)
or a measure of Lessor's damages in case of a default by Lessee. The Security
Deposit shall not be considered as a trust fund, and Lessee expressly
acknowledge and agree that Lessor is not acting as a trustee or in any fiduciary
capacity in controlling or using the Security Deposit. The account or accounts
into which the Security Deposit shall be deposited may be selected by Lessee
with Lessor's consent, which shall not unreasonably be withheld, or, if not so
selected by Lessee, shall be selected by Lessor; provided, however, that Lessor
shall have no responsibility for the
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interest earned, or the failure of such funds to earn interest. Lessor shall
have a security interest in the funds so deposited.
40.2 APPLICATION OF SECURITY DEPOSIT. Upon the occurrence and continuation
of an Event of Default, or the occurrence and continuation of a second Special
Default within any period of eighteen (18) successive months, Lessor may, but
shall not be required to, in addition to and not in lieu of any other rights and
remedies available to Lessor, use, apply or retain the whole or any part of the
Security Deposit to the payment of any sum in default, or any other sum,
including but not limited to, any damages or deficiency in reletting the
applicable Leased Property, which Lessor may expend or be required to expend by
reason of Lessee's default. Whenever, and as often as, Lessor has used the
Security Deposit to cure Lessee's default hereunder, Lessee shall, within ten
(10) days after Notice from Lessor, deliver a new letter of credit to Lessor
(or, at Lessor's option, deposit additional money with Lessor) sufficient to
restore the Security Deposit to the full amount originally provided or paid.
40.3 TRANSFER OF SECURITY DEPOSIT. If Lessor transfers its interest under
this Lease, Lessor shall assign the Security Deposit to the new lessor, and,
provided that the transferee gives Notice to Lessee that such transferee has
assumed all future liabilities and obligations of Lessor under this Lease and
acknowledges that such transferee has received the Security Deposit, thereafter
Lessor shall have no further liability for the return of the Security Deposit,
and Lessee agrees to look solely to the new lessor for the return of the
Security Deposit. The provisions of the preceding sentence shall apply to every
transfer or assignment of Lessor's interest under this Lease. Lessee agrees that
it will not assign or encumber or attempt to assign or encumber the monies
deposited as security and that Lessor, its successors and assigns may return the
Security Deposit to the last Lessee in possession at the last address for Notice
given by Lessee and that Lessor shall thereafter be relieved of any liability
therefor, regardless of one or more assignments of this Lease or any such actual
or attempted assignment or encumbrances of the monies held as the Security
Deposit.
40.4 REDUCTION OF SECURITY DEPOSIT. If Lessee purchases a Parcel of Leased
Property, the required Security Deposit shall be reduced by an amount equal to
twenty-five (25%) percent of the annual Base Rent allocated to such Parcel at
the Commencement Date, as set forth on attached EXHIBIT B.
IN WITNESS WHEREOF, the parties have executed this Master Lease by their
duly authorized officers as of the date first above written.
SIGNATURE PAGE FOLLOWS
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WITNESSES LESSOR:
OMEGA HEALTHCARE INVESTORS, INC.
____________________________
____________________________ By:_________________________[SEAL]
Name: F. Scott Kellman
Title: Executive Vice President
LESSEE:
LYRIC HEALTH CARE HOLDINGS, INC.
____________________________
____________________________ By:_________________________[SEAL]
Name: Daniel J. Booth
Title: Senior Vice President
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LIST OF EXHIBITS TO LEASE
Exhibits A-1 through Exhibit A-5 Legal Descriptions of Leased Properties
Exhibit B Allocation of Base Rent
Exhibit C Cash Flow to Debt Service Requirement
Exhibit D Form of Estoppel Certificate
Exhibit E Initial Facility Subleases
Exhibit F Parcel Purchase Prices
Exhibit G Permitted Encumbrances
Exhibit H List of Engineering Firms
Exhibit I Memorandum of Lease
Exhibit J Wiring Instructions
EXHIBIT 10.72
- --------------------------------------------------------------------------------
AMENDED AND RESTATED
OPERATING AGREEMENT
of
LYRIC HEALTH CARE LLC
by and between
INTEGRATED HEALTH SERVICES, INC.
and
TFN HEALTHCARE INVESTORS, LLC
- --------------------------------------------------------------------------------
Dated as of February 1, 1998
<PAGE>
TABLE OF CONTENTS
ARTICLE 1 - Organization; Name; Office
ARTICLE 2 - Purpose
ARTICLE 3 - Term
ARTICLE 4 - Members
ARTICLE 5 - Percentages
ARTICLE 6 - Profits and Losses; Tax Allocations
ARTICLE 7 - Capital
ARTICLE 8 - Management, Duties and Restrictions
ARTICLE 9 - Limited Liability
ARTICLE 10 - Voting; Meetings
ARTICLE 11 - Distributions
ARTICLE 12 - Books; Accounting; Fiscal Year
ARTICLE 13 - Bank Accounts
ARTICLE 14 - Indemnification
ARTICLE 15 - Assignments Limited
ARTICLE 16 - Rights of First Offer or First Refusal
ARTICLE 17 - Dissolution
ARTICLE 18 - Notices
ARTICLE 19 - Dispute Resolution
ARTICLE 20 - Miscellaneous
ARTICLE 21 - Buy-Sell
ARTICLE 22 - Closing Protocols
ARTICLE 23 - Admission of New Members
ARTICLE 24 - Certain Representations and Warranties
Schedule "1" - Original Subsidiaries; Original Facilities
Schedule "2" - Distributions of Sale/Leaseback Transaction
Appendix "A" - Calculation of Capital Accounts, Profits, and Losses;
Income Tax Matters
-i-
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AMENDED AND RESTATED OPERATING AGREEMENT of LYRIC HEALTH CARE LLC, a
Delaware limited liability company (the "Company"), dated as of February 1, 1998
by and between INTEGRATED HEALTH SERVICES, INC. ("IHS"), a Delaware corporation,
and TFN HEALTHCARE INVESTORS, LLC ("N-Co "), a Delaware limited liability
company.
Introductory Statement
The Company was formed May 28, 1997 to acquire from IHS, directly or
indirectly, the shares of the corporations listed on Schedule "1" hereto which
own and operate healthcare facilities under the IHS name and using IHS systems
(the "Original Subsidiaries"). The facilities are also listed on Schedule "1"
and are referred to in this Agreement as the "Original Facilities". IHS
contributed all the shares of the Original Subsidiaries to the Company as IHS's
initial capital contribution to the Company.
On January 13, 1998 the Original Subsidiaries (the "Lessees") sold their
Facilities to Omega Healthcare Investors, Inc. (the "Lessor"). Lyric Health Care
Holdings, Inc., a subsidiary of the Company, then leased those Facilities back
from Lessor and simultaneously subleased them back to the Lessees (the
"Leases"). The proceeds from the sale of the Facilities were distributed from
the Original Subsidiaries to the Company as set forth on Schedule "2" hereto.
The proceeds received by the Company were then distributed to IHS.
N-Co now desires to invest in, and become a Member of, the Company; and
Timothy F. Nicholson ("TFN") desires to become the Managing Director of the
Company. IHS also wishes N-Co to invest in, and become a Member of, the Company,
and TFN to become the Managing Director, upon the terms and conditions set forth
below. Accordingly, IHS and N-Co are entering into this instrument to amend and
restate in its entirety the Operating Agreement of the Company and to set forth
the terms and conditions under which the Company will operate after the date of
this instrument.
It is the intention of IHS and N-Co that the Company will build upon the
base of the Original Facilities and, under TFN's direction, will acquire new
facilities (whether by purchase or lease) and also enter new businesses which
complement, or relate to, health care services.
NOW, THEREFORE, in consideration of their respective promises and
contributions, and intending to be legally bound hereby, IHS and N-Co agree as
follows:
<PAGE>
ARTICLE 1. Organization; Name; Office.
1.1 The Company was formed and organized as a limited liability company
pursuant to the Delaware Limited Liability Company Act, Del. Code Ann. tit. 6,
ss.ss. 18-101 et seq. (the "DLLCL"), by the filing of the Articles of
Organization of the Company pursuant to the DLLCL effective May 28, 1997. The
Operating Agreement of the Company (the "Original Operating Agreement") was
executed by IHS as of May 28, 1997. This instrument amends and restates in its
entirety the Original Operating Agreement. All references in this instrument to
"this Agreement" or the "Operating Agreement" mean this instrument, which shall
now constitute the operating agreement of the Company.
1.2 The name of the Company is "Lyric Health Care LLC".
1.3 The principal office of the Company shall be located at 8889 Pelican
Bay Boulevard, Suite 500, Naples, Florida 34103 or at such other location as the
Managing Director shall determine from time to time.
ARTICLE 2. Purpose.
2.1 The purposes of the Company are:
(a) to acquire, own, operate, manage, finance, sell or otherwise
dispose of health care facilities and other real and/or personal property
of any kind, including the Original Facilities and the shares of the
Original Subsidiaries;
(b) to engage, directly or indirectly, and whether through
subsidiaries or otherwise, in all aspects of the health care business;
(c) to engage in all other businesses and activities of every kind
permitted of a limited liability company under the DLLCL;
(d) to enter into, make, execute, deliver, and perform any and all
such contracts, agreements, and other undertakings, and to engage in any
and all such other activities or businesses, as may in the judgment of the
Members and/or the Managing Director (subject to the terms of this
Agreement), be necessary, advisable, or incident to the carrying out or
effectuation of the foregoing purposes; and
(e) to enter into one or more management agreements (an "IHS
Management Agreement") and franchise agreements (an "IHS Franchise
Agreement") with IHS (or an affiliate of IHS) covering the Original
Facilities and any other facilities or businesses acquired by the Company
which are within areas of IHS expertise; and to enter into agreements with
other managers for any additional businesses or facilities to be operated
by the Company outside the areas of IHS expertise.
-2-
<PAGE>
ARTICLE 3. Term.
3.1 The Company shall continue until the Company is dissolved or wound up
pursuant to Article 17, but in no event later than December 31, 2047.
ARTICLE 4. Members.
4.1 The name and mailing address of each of the Members are as follows:
Name Address
Integrated Health Services, Inc. 10065 Red Run Boulevard
Owings Mills, MD 21117
Attn: Ms. Eleanor C. Harding
Marshall A. Elkins, Esq.
TFN Healthcare Investors, LLC 304 Gilbert Road
Dillsburg, PA 17019
Attn: Mr. Timothy F. Nicholson
4.2 Subject to the terms, covenants, conditions and provisions of this
Agreement, the rights and duties of the Members shall be as set forth in the
DLLCL.
ARTICLE 5. Percentages.
5.1 The respective percentages (the "Percentages") of the Members in and of
the capital, profits and losses, and distributions of the Company, and of all
other rights, and obligations in and of the Company, are as follows:
Member Percentage
IHS 50%
N-Co 50%
5.2 In this Agreement: (a) "a majority-in-interest of the Members" means
Members whose respective Percentages at the time in question constitute more
than 50% of the total of all such Percentages; and (b) "Membership Interest"
means the entire right, title, and interest of a Member in and to this Company.
5.3 Unless this Agreement provides otherwise, all actions requiring
approval or consent of the Members shall be deemed to require approval of a
majority-in-interest of the Members.
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ARTICLE 6. Profits and Losses; Tax Allocations.
6.1 The Profits and Losses of the Company shall be allocated among the
Members in proportion to their respective Percentages.
6.2 The Company shall maintain a Capital Account for each Member.
6.3 In this Agreement:
(a) "Profits" means "Net Profits" as defined and determined in
accordance with Appendix "A";
(b) "Losses" means "Net Losses" as defined and determined in
accordance with Appendix "A"; and
(c) "Capital Account" means an account for each Member determined and
maintained throughout the full term of this Agreement in accordance with
Appendix "A".
ARTICLE 7. Capital
7.1 The initial capital (the "Initial Capital") of the Company shall
consist of $2,000,000, as follows:
(a) $500,000 from IHS, representing the agreed value of the shares of
the Original Subsidiaries;
(b) $500,000 in cash from N-Co, to match the agreed value of the
shares of the Original Subsidiaries contributed by IHS;
(c) $500,000 in cash from IHS, representing working capital; and
(d) $500,000 in cash from N-Co, representing working capital.
7.2 No interest shall be paid on the Initial Capital or on any subsequent
contributions to the capital of the Company.
7.3 Except for the Initial Capital contributions specified in Section 7.1,
no Member shall have any obligation of any kind to contribute any other or
additional capital or funds whatsoever to the Company.
7.4 The Members shall look solely to the assets of the Company for any
distributions of Profits or of capital.
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7.5 N-Co. will receive a credit to its Capital Account in an amount equal
to the brokerage commission that would otherwise have been earned for each
acquisition by the Company of healthcare facilities (or the corporations or
other legal entities owing the same) arranged by TFN.
ARTICLE 8. Management, Duties and Restrictions.
8.1 The business and affairs of the Company shall be managed by one
manager, who shall have the title "Managing Director". Subject to Sections 8.3
and 8.7, the Managing Director shall be appointed and compensated, and shall
serve, pursuant and subject to the terms and conditions of a contract between
the Company and such Managing Director (the "M/D Contract"). (The M/D Contract
shall also set forth the compensation (if any) to be paid to the Managing
Director for finding new acquisitions and businesses on behalf of the Company.)
Simultaneously herewith, the Members have approved the M/D Contract appointing
TFN the Managing Director of the Company.
8.2 Subject to Section 8.3, the Managing Director shall have general
authority for the management, conduct, and operation of the Company and its
business and affairs and also shall initiate policy proposals and/or strategic
proposals for the growth, enhancement, and profitability of the Company's
business, including: (a) acquisition of new facilities and businesses (and
negotiation of proposed agreements for the same); (b) business plans and other
proposals to grow the Company's business; (c) setting Company's employment
policy, oversight of Facility employees, and supervision of all human resources
matters; (d) financing strategy and sources; (e) ancillary service usage; (f)
diversification of investments; (g) additional service offerings; (h)
acquisition, financing, licensing, leasing, or dispositions of facilities or
other material assets, whether owned directly or through subsidiaries; (i)
change in material terms of any lease, financing agreement, or other material
agreements affecting a facility or any of the Company's subsidiaries; (j)
approval of annual and capital budgets; (k) engagement of accountants, counsel,
and other professionals; (l) adoption and amendment of employee health, benefit,
and compensation plans and employment contracts (except that the Company shall
participate, if (but only so long as) IHS requests, in multi-employer employee
health, benefit, and compensation plans and employment contracts in which IHS
(or any of its subsidiaries) participates from time to time); and (m) adoption
of insurance programs for the Company (although the Managing Director is
authorized and directed, if and so long as IHS requests, to have the Company
participate in any insurance programs in which IHS (or any of its subsidiaries)
participates, including any so-called "captive" insurance program).
8.3 The following matters and actions shall require approval of all
Members:
(a) sale, encumbrance or other disposition of shares of Company
subsidiaries;
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(b) actions specifically requiring consent of a majority-in-interest
of Members (or, if applicable, a greater percentage) under the DLLCL;
(c) admission of new Members;
(d) any change in the terms of the IHS Management Agreement or the IHS
Franchise Agreement;
(e) appointment of the Managing Director, signing of the M/D Contract,
or any change in the terms of the M/D Contract (other than a termination of
the M/D Contract by sole action of IHS where permitted under the M/D
Contract), subject to Section 8.7;
(f) public sale of the Company and all terms relating to any public
offering of interests in the Company;
(g) other matters for which approval is expressly reserved to Members
under this Agreement;
(h) related party transactions (including, but not limited to, master
preferred referral agreements);
(i) signing of any contract, agreement, engagement letter, or other
undertaking of any kind with any person or entity under which the Company
incurs (or is reasonably likely to incur) an obligation exceeding $100,000
per annum (except for master purchasing or procurement contracts in which
the Company shall participate with IHS and/or any of its subsidiaries if
and so long as IHS requests that the Company so participate); and
(j) incurring or guaranteeing debt on behalf of the Company in excess
of $50,000 in any one case or $500,000 in the aggregate;
(k) commencement, defense, and settlement of litigation where the
total amount in controversy exceeds $500,000; and
(l) the matters described in subparagraphs (a), (d), (e), (f), (g),
(h), (i), (j), (k), and (l) of Section 8.2.
8.4 Except for consideration of matters for which their approval or
consultation is required under Section 8.3 or other provisions of this
Agreement, the Members shall take no part in the management of the Company and
need devote no time to management of the Company.
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8.5 Actions of the Managing Director must be evidenced in writing, signed
by a duly authorized representative of the Managing Director. Any person dealing
with the Company may rely on an instrument thus signed by the Managing Director.
8.6 The Managing Director shall report to the Members on a regular basis
regarding the status of budgets, proposed new acquisitions and businesses,
governmental and regulatory affairs, human resources issues and policies,
expense and capital budgets, litigations, the Leases, material dealings with
Lessees and Lessor, financing matters, material dealings with lenders, and other
material issues and matters relating to the Company and its facilities and
businesses.
8.7 If the M/D Contract is terminated or if the Managing Director resigns
for any reason, IHS (by its sole action) shall have the right to appoint an
interim Managing Director of the Company (who may be either an individual or a
legal entity but shall not be IHS itself), subject to Article 21, to serve until
the appointment of a new permanent Managing Director. If the Managing Director
resigns or is terminated when N-Co has a Percentage of 40% or more, the
appointment of a new permanent Managing Director may be made by IHS subject to
N-Co's approval not to be unreasonably withheld or delayed. However, if at such
time N-Co has a Percentage of less than 40%, IHS shall not need N-Co's approval
to appoint a new permanent Managing Director.
ARTICLE 9. Limited Liability.
9.1 Neither the Managing Director, nor any Member, nor any agent, of the
Company shall be liable for any debts, obligations, or liabilities whatsoever of
the Company or of each other, whether arising in tort, contract, or otherwise,
solely by reason of being such Member, Managing Director, or an agent, or acting
(or omitting to act) in such capacities or participating (as an employee,
consultant, contractor or otherwise) in the conduct of the business of the
Company.
ARTICLE 10. Voting; Meetings
10.1 The Members may vote at a meeting of Members or by written consent in
lieu of a meeting.
10.2 The Members shall meet at least semi-annually and at such other times
as the Managing Director, or any Member, may request from time to time. The
procedure for calling and voting at such meetings shall be as specified in the
DLLCL (unless otherwise required under other provisions of this Agreement).
10.3 There shall be no prior notice or other procedural requirements for
voting by Members by written consent in lieu of a meeting. The execution of the
applicable written consent by a Member shall evidence the vote of such Member
concerning the subject of such written consent.
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ARTICLE 11. Distributions.
11.1 There shall be no distributions to the Members prior to December 31,
1998. Thereafter, subject to ss. 18-607(a) of the DLLCL and Section 11.3,
Available Cash shall be distributed in amounts and at times determined by the
Members. Distributions shall be paid in the following order (unless the Members
agree otherwise in a particular case):
(a) first, to N-Co. until N-Co has received a 15% Return on its
Initial Capital;
(b) next, to IHS until IHS has received a 15% Return on its Initial
Capital;
(c) then to the Members in proportion to their respective Percentages.
Subject to the foregoing, distributions shall be timed, where possible, to cover
the current income liabilities of the Members attributable to the Company's
Profits.
11.2 In this Agreement:
(a) "Available Cash" means all cash and cash items (from whatever
source received) held by the Company, and all unused availability under any
credit lines of the Company, on the date in question to the extent such
cash is not reasonably necessary (in the judgment of the Members) to cover
obligations or expenses of the Company at such time or (taking into account
expected revenues) within a reasonable period thereafter, after setting
aside reserves (or retaining availability under credit lines), in amounts
approved by the Members in their discretion, for (i) working capital and
(ii) capital expenditures;
(b) "15% Return" means a simple return of 15% per annum, computed (i)
first from the date of the Members' contribution of Initial Capital and
(ii) after the first distribution to a Member, from the date of the
preceding distribution to such Member; and
(c) "Initial Capital" means, in Articles 11 and 17, the portion of a
Member's Initial Capital which has not previously been distributed or
repaid to such Member.
ARTICLE 12. Books; Accounting; Fiscal Year.
12.1 The Company shall keep complete and accurate books of account. The
Managing Director shall cause to be entered in such books all transactions of or
relating to the Company and its business. Each Member shall have access to (and
the right to inspect and copy) such books and other Company records at the
principal office of the Company during business hours and upon reasonable
notice.
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12.2 The books of the Company shall be kept in accordance with United
States accounting principles consistently applied ("GAAP").
12.3 The fiscal year of the Company shall be the calendar year (except that
the first fiscal year shall commence on the date of this Agreement and end on
December 31, 1998).
12.4 On or before the ninetieth (90th) day after the end of each fiscal
year of the Company (subject to delays beyond the Managing Director's control),
the Managing Director shall cause to be prepared by the Company's accountants
and sent to each Member: (a) a statement of the Company's financial position as
of the end of such fiscal year and a statement of profits or losses during such
fiscal year, each prepared in accordance with GAAP; and (b) such income tax
information as shall be necessary or desirable for each Member to prepare such
Member's income tax returns for such fiscal year.
12.5 On or before the twenty-fifth (25th) day of each calendar month the
Managing Director shall cause to be prepared and furnished to each Member, with
respect to the preceding month, a statement of profits or losses, a balance
sheet and a statement of cash flow, each prepared in accordance with GAAP,
together with reports ("Compliance Reports") on compliance by the Company and
its subsidiaries with financial and/or performance covenants under the Leases
and other relevant agreements by which the Company and its subsidiaries are
bound or to which they are parties.
12.6 On or before the thirtieth (30th) day after each calendar quarter, the
Managing Director shall cause to be prepared and furnished to each Member, a
statement of the Company's financial position as of the end of such quarter and
a statement of profits or losses during such quarter, each prepared in
accordance with GAAP, together with Compliance Reports for such quarter.
12.7 IHS shall be the Company's "tax matters partner" and for such purpose
shall have the powers and duties specified for a tax matters partner under
Section 6621 et seq of the Internal Revenue Code of 1986 as amended from time to
time.
12.8 The Managing Director shall cause to be prepared and filed, on a
timely basis, all governmental and regulatory reports applicable to, or required
for, the Company, its subsidiaries, and their operations.
12.9 With all statements of profit or loss, and the balance sheets
furnished to the Members, the Managing Director shall include comparisons to the
monthly, quarterly, or annual expense and capital budgets for the applicable
periods.
12.10 Some of the duties of the Managing Director under this Agreement may
be delegated by the Managing Director to the Manager under the IHS Management
Agreement or to the Franchisor under the IHS Franchise Agreement. The Managing
Director shall not be
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responsible for inadequate performance or default by the Manager with respect to
any duties so delegated, provided however, that the Managing Director gives
notice to IHS and the Manager promptly after the Managing Director receives
written notice (other otherwise obtains actual knowledge) of such inadequate
performance or default.
ARTICLE 13. Bank Accounts.
13.1 All funds of the Company shall be deposited in a bank account or
accounts in the Company's name. The Members shall determine the banking
institution in which such accounts shall be opened.
13.2 All checks and drafts on, or other withdrawals from, any of the
Company's bank accounts shall be signed by an authorized signatory of the
Managing Director. Two signatories shall be required for any check or draft in
excess of $10,000.
ARTICLE 14. Indemnification.
14.1 The Managing Director shall not be liable or responsible in damages or
otherwise to any Member or to the Company for acts performed by the Managing
Director except for gross negligence, bad faith, or actions which are materially
beyond the scope of such person's authority.
14.2 The Company shall indemnify and hold harmless the Managing Director,
each Member, and the Company's agents from and against (and none of them shall
be liable for) any and all claims and demands asserted against them (and/or any
of them) by reason of being the Managing Director, a Member, or an agent of the
Company, or acting or omitting to act in any such capacity, or participating in
the conduct of the business of the Company. However, no indemnification may be
made to or on behalf of a Member, the Managing Director, or another person for
gross negligence, bad faith, or actions which are materially beyond the scope of
such person's authority.
14.3 Sections 14.1 and 14.2 are intended (and shall be interpreted) to
protect the Managing Director, the Members, and the agents of the Company to the
fullest extent permitted by law.
ARTICLE 15. Assignments Limited.
15.1 Subject to Articles 16, 21 and 23 no Member shall sell, assign,
transfer, encumber, or otherwise dispose of such Member's Membership Interest
(or any part thereof) without the consent of the other Member. No new Members
shall be admitted to the Company unless the Members agree otherwise, subject to
Article 23.
15.2 Subject to Articles 16, 21, 23 , and 24 no Member shall withdraw from
the Company, except after dissolution of the Company pursuant to Article 17.
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ARTICLE 16. Rights of First Offer or First Refusal
16.1 This Article shall be effective from and after the date hereof.
16.2 In this Article "Escrow Agent" means a law firm or bank designated by
the Offeror in its Sale Notice (defined below) which has agreed to act in such
capacity.
16.3 If either Member desires to sell all or any part of its Membership
Interest at any time after the Initial Period, before entering into an agreement
with a purchaser, such Member (the "Offeror") shall give notice (the "Sale
Notice") to the other Member (the "Offeree") setting forth a price (the "Offer
Price") for such Membership Interest, free and clear of encumbrances.
16.4 The Sale Notice shall constitute a binding offer of the Offeror to
sell its Membership Interest at the Offer Price. The Offeree shall have 60 days
after the giving of the Sale Notice within which to give notice (the "Acceptance
Notice") accepting the Offeror's offer. If the Offeror does not receive the
Acceptance Notice within that 60 days, time being of the essence, the Offeror
shall be authorized to sell the Membership Interest, subject to Section 16.8.
16.5 If the Offeree gives the Acceptance Notice, simultaneously the Offeree
shall wire to the Escrow Agent immediately available funds equal to ten percent
(10%) of the Offer Price (the "Deposit"). Upon the Closing (defined below) of
the transaction, Escrow Agent shall pay the Deposit to the Offeror with all
interest and other income accrued thereon. If the Offeree defaults in paying the
balance of the Offer Price (the "Balance"), the Members agree that Escrow Agent
shall pay the Deposit (with all interest and other income accrued thereon) to
the Offeror as liquidated damages, since the Members agree that actual damages
would be difficult or impossible to ascertain.
16.6 The closing of the purchase and sale of the Membership Interest
pursuant to this Article (the "Closing") shall occur no later than 90 days after
the giving of the Acceptance Notice.
16.7 The Closing Protocols of Article 22 shall apply to this Article.
16.8 If the Offeror gives a Sale Notice under Section 16.3 and the Offeree
does not give the Acceptance Notice within the time specified in Section 16.4,
the Offeree shall have the right to sell its Membership Interest for a purchase
price no lower than the Offer Price and upon other terms and conditions no more
favorable to the buyer than those set forth in the Sale Notice. However, subject
to Section 18.11, if the Offeror fails (for whatever reason) to complete the
closing of a sale of such Membership Interest within 180 days after the giving
of the Sale Notice (the "First Sale Period"), or if the terms of the proposed
sale are more favorable to the buyer than those set forth in the Sale Notice,
the Offeror must again comply with all requirements of this Article (i.e., as if
the Offeror had never given the original Sale Notice), and the Offeree shall
again have all rights under this Article, before the Offeror may sell its
Membership Interest to any person or entity other than the Offeree.
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16.9 If the Offeror has already negotiated - but not signed - an agreement
with a prospective purchaser, the Offeror may use that agreement as the Sale
Notice for purposes of this Article (or may set forth the purchase price and
other terms and conditions of such negotiated agreement in and as the Sale
Notice). In such event the Offeror shall also include in the Sale Notice the
name and address of the prospective purchaser; a list of the prospective
purchaser's officers, directors, partners, managers, and controlling
shareholders, partners, and/or members (as applicable); and the prospective
purchaser's audited financial statements for its most recently- ended complete
fiscal year and also most recent shorter fiscal period.
16.10 For the avoidance of doubt, this Article shall apply to sales of all
or any part of a Membership Interest.
16.11 If the Offeror has been unable to sell to a third party within the
First Sale Period, the Offeror may attempt to sell its interest by a private
placement through an investment bank or other financial institution reasonably
acceptable to the other Member. The Offeror shall have 120 days after the end of
the First Sale Period for this purpose; and the non-selling Member shall
cooperate reasonably in the proposed private placement. (However, the offeror
shall bear the expenses of the proposed private placement.) If such a private
placement is unsuccessful, the Offeror must again comply with all requirements
of this Article (i.e., as if the Offeror had never given the original Sale
Notice), and the Offeree shall again have all rights under this Article, before
the Offeror may sell its Membership Interest (or any part thereof) to any person
or entity other than the Offeree.
16.12 If N-Co. gives a Sale Notice during January, 2003, or if N-Co. has
been diluted to a Percentage of less than 33-1/3%, and if N-Co. has been
unsuccessful in selling under the procedures set forth above, IHS or the Company
will acquire the Membership Interest of N-Co. for fair market value, determined
as a valuation equal to N-Co.'s then Percentage of 8-1/2 times the Company's
earnings before interest, taxes, depreciation, and amortization plus positive
working capital MINUS the sum of:
(a) the principal and unpaid accrued interest of all indebtedness of
the Company (whether secured or unsecured, and of whatever priority) on the
closing date of such transaction (after applying current cash and working
capital balances as of such date); and
(b) the full amount of preferred or other senior capital of the
Company (if any) and all accrued bur unpaid dividends or distributions thereon;
and
(c) all accrued but unpaid distributions under Section 17.2; and
(d) negative working capital.
All the foregoing computations shall be based on financial statements for the
Company's most recent 12 months (including pro forma acquisitions of the
Company).
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16.13 If either Member sells its Membership Interest (or any part thereof)
pursuant to this Article, admission of the buyer as a new Member of the Company
shall be subject to the approval of the non-selling Member(s) which shall not be
unreasonably withheld or delayed.
16.14 This Article shall not apply to any transaction between Affiliates of
IHS. An "Affiliate" is a corporation, limited liability company, or other legal
entity in which IHS owns, directly or indirectly, more than 50% of the common
shares or other equity interests.
ARTICLE 17. Dissolution.
17.1 The Company shall be dissolved and its affairs wound up upon the
earliest to occur of the following: (a) the last day specified for expiration of
the term of the Company under Section 3.1; (b) the written agreement of the
Members to dissolve the Company; (c) the bankruptcy, insolvency, dissolution,
liquidation, expulsion, death, incapacity, or withdrawal of any Member, or the
occurrence of any other event which terminates, as a matter of law or otherwise,
the continued membership of any Member, unless (in any such case) the other
Member specifies that the Company shall continue notwithstanding the foregoing
by notice given within 30 days after the action or event in question; or (d) the
entry of a decree of judicial dissolution of the Company under the DLLCL. For
purposes of this Article, "bankruptcy" shall mean any of the following: (i) the
filing of an application by a Member for, or a consent to, the appointment of a
trustee of its assets, (ii) the filing by a Member of a voluntary petition for
relief as a debtor under the United States Bankruptcy Code or the filing of a
pleading in any court of record admitting in writing the Member's inability to
pay its debts as they come due, (iii) the making by a Member of a general
assignment for the benefit of creditors, (iv) the filing by a Member of an
answer admitting the material allegations of, or its consenting to, or
defaulting in answering, a bankruptcy petition filed against it in any
bankruptcy proceeding or (v) the expiration of 60 days following the entry of an
order, judgment or decree by any court of competent jurisdiction adjudicating a
Member a bankrupt or appointing a trustee of its assets.
17.2 Upon a dissolution of the Company under Section 17.1, the Managing
Director, or such other person(s) as the Members shall designate as liquidators
for such purpose (the "Liquidators"), shall wind up the affairs of the Company,
sell such assets of the Company as the Liquidators deem necessary or
appropriate, and pay (or otherwise provide for) all debts and liabilities of the
Company to the extent possible from proceeds of such sale or otherwise from
liquidation of assets of the Company. The Liquidators shall make such payment or
provision in accordance with the priority of the respective debt or liability
(and a Member who is a creditor shall receive payment of the applicable debt
pari passu with other creditors in such Member's class). To the extent that cash
or assets remain after payment or provision for all debts and liabilities of the
Company, the Liquidators shall distribute any such remaining cash or other
assets to the Members, in cash or in kind, as follows:
(a) first to N-Co until N-Co has received a 15% Return on its Initial
Capital;
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(b) next to IHS until IHS has received a 15% Return on its Initial
Capital;
(c) next to the Members in accordance with their respective Capital
Accounts.
17.3 Each Member agrees to take no actions which would dissolve (or cause
the dissolution of) the Company in violation of this Article.
ARTICLE 18. Notices.
18.1 All notices, consents or other communications under this Agreement
(any such, a "notice") must be in writing and addressed to each party at its
respective addresses set forth above (or at any other address which the
respective party may designate by notice given to the other party). Any notice
required by this Agreement to be given or made within a specified period of
time, on or before a date certain, shall be deemed given or made if sent by
hand, by fax with confirmed answerback received, or by registered or certified
mail (return receipt requested and postage and registry fees prepaid). Delivery
"by hand" shall include delivery by commercial express or courier service. A
notice sent by registered or certified mail shall be deemed given on the date of
receipt (or attempted delivery if refused) indicated on the return receipt. All
other notices shall be deemed given when actually received. Any written consent
of the Manager or a Member signed and sent by facsimile or other electronic
transmission shall be valid and deemed an original for purposes of this
Agreement.
ARTICLE 19. Dispute Resolution
19.1 In the event of any dispute or controversy arising under or in
connection with this Agreement, the parties shall attempt to resolve such
dispute or controversy by mediation as provided in this Section 19.1 prior to
exercising any rights under the remaining provisions of Article 19. Either party
may commence mediation by notice to the other party (the "Mediation Notice"),
which notice shall name a proposed Mediator (as defined below) to resolve the
dispute. The party receiving the Mediation Notice, within seven days after
receipt, shall send the other party notice accepting the proposed Mediator (the
"Acceptance Notice") or proposing an alternate Mediator (the "Alternate
Notice"). Within seven (7) days after receipt of an Alternate Notice, the
receiving party shall deliver notice accepting or rejecting the alternate
Mediator. Within five (5) days after the Mediator has been selected the dispute
shall be submitted to him or her by both parties, and the Mediator shall decide
the dispute within fourteen (14) days thereafter. The decision of the Mediator
shall not be binding upon the parties, and after the Mediator issues a decision
either party may submit the dispute to arbitration or litigation, as provided in
Sections 19.2 and 19.3. If the parties fail to agree upon a Mediator within
twenty (20) days after receipt of the Mediation Notice, the dispute may be
resolved as provided in Sections 19.2 and 19.3. "Mediator" means an individual
with experience relevant to the matter in dispute who is not
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employed by or affiliated with either party and who does not have (and is not an
officer, employee or director of an entity which has) significant business
contacts with either party. The Company shall pay all costs of the Mediator.
19.2 (a) Subject to Sections 19.1 and 19.3, any dispute between Owner and
Manager regarding a financial, tax, or accounting issue shall be resolved
exclusively through arbitration conducted by a principal of KPMG Peat Marwick
(the "Financial Arbitrator"). Either party may commence arbitration hereunder by
notice to the other party and to the Financial Arbitrator, who shall decide the
dispute. The Company shall pay all costs of the Financial Arbitrator. The
Financial Arbitrator shall conduct the arbitration in any manner he or she
elects; however, the Financial Arbitrator shall issue a final decision with
respect to such dispute within thirty (30) days after the dispute is referred to
him or her. The decision of such Financial Arbitrator shall be final and binding
upon the parties and shall not be subject to appeal. Judgment upon the award
rendered by the Financial Arbitrator may be entered in any court having
jurisdiction over the parties.
(b) Subject to Sections 19.1, 19.2(a) and 19.3, any dispute or controversy
arising under or in connection with this Agreement shall be settled exclusively
by arbitration, conducted before a panel of three arbitrators in Baltimore,
Maryland, in accordance with the rules of the American Arbitration Association
then in effect, and judgement may be entered on the arbitrators' award in any
court having jurisdiction over the parties. The Company shall pay all costs of
the American Arbitration Association and the arbitrators. Each party shall
select one arbitrator, and the two so designated shall select a third
arbitrator. If either party shall fail to designate an arbitrator within seven
(7) days after arbitration is requested, or if the two arbitrators shall fail to
select a third arbitrator within fourteen (14) days after arbitration is
requested, then an arbitrator shall be selected by the American Arbitration
Association upon application of either party. In considering any issue under
this Agreement, the arbitrators shall construe and interpret this Agreement
strictly in accordance with the specific terms and provisions hereof and in
accordance with the judicial decisions, statutes, and other indicia of Delaware
law.
19.3 This Article shall not apply to Articles 16, 21, or 22.
ARTICLE 20. Miscellaneous.
20.1 This Agreement shall be governed and construed in accordance with the
laws of the State of Delaware (without giving effect to principles of conflicts
of laws). This Agreement shall not be modified or amended without written
consent of all Members. This Agreement constitutes the entire agreement of the
Members with respect to the subject matter hereof and supersedes all prior
agreements and understandings of the parties relating thereto. This Agreement
may be executed (a) in counterparts, a complete set of which shall constitute an
original and (b) in duplicates, each of which shall constitute an original.
Copies of this Agreement showing the signatures of the respective parties,
whether produced by photographic, digital, computer, or other reproduction, may
be used for all purposes as originals. This Agreement shall be binding upon
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the respective permitted successors, assigns, and legal representatives of the
parties and shall inure to the benefit of and be enforceable by the parties and
their respective permitted successors, assigns, and legal representatives. The
headings of this Agreement are for reference only and shall not limit or
otherwise affect the meaning thereof. If any term, covenant, condition, or
provision of this Agreement is determined by a final judgment to be invalid or
unenforceable, at the option of Members with a majority-in-interest the
remaining terms, covenants, conditions, and provisions of this Agreement shall
not be affected thereby.
20.2 Nothing in this Agreement, express or implied, is intended: (a) to
confer on any person other than the Members and the Managing Director any rights
or remedies; (b) to constitute the Members as partners or co-venturers; or (c)
to waive any claim or right of any of the Members against any person who is not
a party to this Agreement.
ARTICLE 21. Buy-Sell.
21.1 This Article shall apply only upon the occurrence of a "Buy-Sell"
Event--which means a termination by IHS of the M/D Contract and a failure of IHS
and N-Co to agree on a new Managing Director within nine months after the
effective date of such termination.
21.2 In this Article: (a) "Closing" means the closing of the sale of the
Seller's Membership Interest pursuant to this Article; (b) "Closing Date" means
the date of the Closing under Buy/Sell pursuant to this Article; (c) "Escrow
Agent" means a law firm or a bank designated by the Initiator in its Buy/Sell
notice; (d) "Initiator" means the Member who gives a Buy/Sell Notice under
Section 21.3; (e) "Purchaser" means the Member electing (or deemed to have
elected) to purchase the Membership Interest of the other Member under Section
21.4; (f) "Recipient" means the Member to whom a Buy/Sell Notice is given under
Section 21.3; and (g) "Seller" means the Member electing (or deemed to have
elected) to sell its Membership Interest under Section 21.4.
21.3 Upon the occurrence of a Buy/Sell Event, either Member may give notice
to the other (the "Buy/Sell Notice") specifying a price (the "Purchase Price"),
which shall constitute a binding offer of the Initiator either: (a) to buy the
entire Membership Interest of the Recipient for the Purchase Price; or (b) to
sell the Initiator's entire Membership Interest to the Recipient for the
Purchase Price. The Purchase Price may be determined by the Initiator in its
sole discretion.
21.4 The Recipient shall have 60 days after the giving of the Buy/Sell
Notice within which to give notice to the Initiator of the Recipient's election
to buy or sell its entire Membership Interest for the Purchase Price (the
"Recipient Notice"); and, if the Recipient fails to give the Recipient Notice
within such 60 days (time being of the essence), the Recipient shall be deemed
to have agreed to sell its entire Membership Interest to the Initiator for the
Purchase Price.
21.5 The Closing of the purchase of the Seller's Membership Interest by the
Purchaser pursuant to this Article shall occur no later than 90 days after the
giving of the Recipient Notice
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(or, if applicable, the date when the Recipient is deemed to have elected to
sell under Section 21.4), time being of the essence.
21.6 With the Buy/Sell Notice, the Initiator shall wire to Escrow Agent
immediately available funds equal to ten percent (10%) of the Purchase Price
(the "Initiator's Deposit"). If the Recipient elects to become the Purchaser
under Section 21.4, simultaneously with the giving of the Recipient Notice, the
Recipient/Purchaser shall wire to Escrow Agent immediately available funds equal
to ten percent (10%) of the Purchase Price (the "Recipient's Deposit"); and,
within five days after receiving the Recipient's Deposit, Escrow Agent shall
return (by wire transfer) the Initiator's Deposit to the Initiator, with any
accrued interest. At the Closing, Escrow Agent shall pay the Initiator's Deposit
to the Recipient if the Recipient is the Seller or the Recipient's Deposit to
the Initiator if the Initiator is the Seller, in either case (with any accrued
interest) as part of the Purchase Price.
21.7 If the Initiator becomes the Purchaser and defaults in paying the
purchase price and/or otherwise completing the Closing, Escrow Agent shall pay
the Initiator's Deposit to the Recipient (with any accrued interest). If the
Recipient becomes the Purchaser and defaults in paying the Purchase Price and/or
otherwise in completing the Closing, Escrow Agent shall pay the Recipient's
Deposit to the Initiator with any accrued interest. In either such case, since
the Members agree that actual damages would be difficult or impossible to
ascertain, the Members agree that the applicable Deposit (plus any legal fees
and expenses to enforce the applicable Member's rights), shall constitute
liquidated damages.
21.8 The Closing Protocols of Article 22 shall apply to this Article.
ARTICLE 22. Closing Protocols.
22.1 This Article shall apply to purchase and sales of Membership Interests
between the Members under Articles 16 and 21.
22.2 At any closing under Articles 16 or 21, the purchasing Member shall
pay the amounts due to the selling Member by wire transfer of immediately
available funds to a bank account to be specified by the seller by notice given
at least one day prior to the closing (or, if such notice is not given, by an
unendorsed official bank check drawn on a New York City branch of a bank which
is a member of The New York Clearing House Association). At the closing the
seller shall execute and deliver to the purchaser an instrument of assignment
and other documents as are necessary and appropriate (and which shall include
representations and warranties customary for such transactions) to convey,
transfer, and assign the Membership Interest to the purchaser free and clear of
encumbrances.
22.3 Fees to finders, brokers, consultants, or others engaged by either
Member in connection with any transaction covered by this Article shall be borne
solely by the Member who engaged or consulted the particular person or firm.
Sales, transfer, and other taxes applicable to
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the particular transaction shall be borne by the Member who is (or would be)
responsible under applicable law to pay the particular tax.
22.4 If the selling Member defaults in its obligation to sell its
Membership Interest in any transaction covered by this Article, the purchaser
shall be entitled to specific performance of the seller's obligation; and if the
purchaser prevails in an action for specific performance, the seller shall
reimburse the purchaser, on demand, for the purchaser's reasonable attorneys'
fees and expenses in connection with such action. If the purchaser defaults, the
seller shall be entitled to damages, plus the seller's reasonable attorneys'
fees and expenses to enforce the seller's rights in such matter.
22.5 At any closing covered by this Article the purchaser shall have the
right to designate another person to acquire the Membership Interest to be
conveyed and assigned by the seller. However, no such person shall acquire any
rights whatsoever against the seller if the closing of the applicable
transaction does not occur.
ARTICLE 23. Admission of New Members
23.1 A new Member or Members may be admitted to the Company either upon the
written consent of all existing Members or otherwise upon the terms and
conditions of this Article.
23.2 If either Member believes that new capital is required, based on the
Company's approved budget or financial plan, such Member may propose that the
Members contribute additional capital or bring in new Member(s) for the Company.
In such event, each Member will first have the right to contribute new capital
in such amount as each Member agrees. If more capital is still needed, either
Member may propose new Member(s) to contribute the difference. If too many new
Members are proposed, the original Member contributing the largest amount of new
capital may choose which prospective Members to sponsor as new Members, subject
to the reasonable approval of the other Member. A Member proposing new Members
under this Section shall furnish the following information: the proposed terms
for the new Member's admission to the Company; information on the financial
strength, business, and officers, directors, managers, and controlling
shareholders or equity owners of the proposed new Member; and the respective
Percentages of all Members after such new Member's admission. If neither Member
is able to introduce prospective new Members and/or to provide for the needed
new capital, the Members shall attempt to raise such new capital by private
placement through an investment bank or other financial institution reasonably
acceptable to the Members.
ARTICLE 24. Certain Representations and Warranties
24.1 IHS represents and warrants to N-Co as of the date of this Agreement:
(a) IHS is a corporation duly organized and validly existing under the
laws of the State of Delaware.
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(b) IHS has all necessary power and lawful authority to execute,
deliver, and perform its obligations under, this Agreement.
(c) The execution and delivery by IHS of this Agreement, and the
consummation by IHS of the transactions contemplated thereby, have been duly
authorized by all necessary action of IHS; and, assuming due execution and
delivery of this Agreement by N-Co this Agreement will constitute the legal,
valid, and binding obligations of IHS, enforceable in accordance with the
respective terms thereof.
(d) The execution and delivery of this Agreement by IHS and the
consummation of the transactions contemplated hereby, will not:
(1) violate any provision of the organizational documents or
by-laws of IHS;
(2) violate any judgement, order, or decree of any government
entity against or binding upon IHS or its property or business; and/or
(3) result in the acceleration of any indebtedness of IHS.
(e) To IHS's knowledge, there are no outstanding judgments, orders,
writs, injunctions or decrees of any government entity, and no pending legal
proceedings against IHS which would have a material adverse effect on IHS's
performance of its obligations under this Agreement.
24.2 N-Co represents and warrants to IHS as of the date of this Agreement:
(a) N-Co is a limited liability company duly organized and validly
existing under the laws of the State of Delaware.
(b) N-Co has all necessary power and lawful authority to execute,
deliver and perform its obligations under, this Agreement.
(c) The execution and delivery by N-Co of this Agreement, and the
consummation by N-Co of the transactions contemplated thereby, have been duly
authorized by all necessary action of N-Co; and assuming due execution and
delivery of this Agreement by IHS this Agreement will constitute the legal,
valid, and binding obligations of N-Co, enforceable in accordance with the terms
thereof.
(d) The execution and delivery of this Agreement by N-Co, and the
consummation of the transactions contemplated hereby, will not:
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(1) violate any provision of the organizational documents or
by-laws of N-Co;
(2) require the consent of any Person;
(3) violate any judgment, order, or decree of any government
entity against or binding upon N-Co or its property or
business; and/or
(4) result in the acceleration of any indebtedness of N-Co.
(e) To N-Co's knowledge, there are no outstanding judgments, orders,
writs, injunctions or decrees of any government entity, and no pending legal
proceeding against N-Co, which would have a material adverse effect on N-Co's
performance of its obligations under this Agreement.
24.3 IHS represents and warrants to N-Co as of the date of this Agreement:
(a) The Company is a limited liability company duly organized and
validly existing under the laws of the State of Delaware.
(b) The Company has all necessary power and lawful authority to
execute, deliver, and perform its obligations under, this Agreement.
(c) The consummation of the transactions contemplated hereby by the
Company, will not:
(1) violate any provision of the organizational documents of the
Company;
(2) violate any judgement, order, or decree of any government
entity against or binding upon the Company or its property
or business; and/or
(3) result in the acceleration of any indebtedness of the
Company.
(d) To IHS's knowledge, there are no outstanding judgments, orders,
writs, injunctions or decrees of any government entity, and no pending legal
proceedings against the Company which would have a material adverse effect on
the Company's performance of its obligations under this Agreement.
IN WITNESS WHEREOF, THE PARTIES HAVE EXECUTED THIS AGREEMENT AS OF THE DATE
FIRST ABOVE WRITTEN.
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<PAGE>
INTEGRATED HEALTH SERVICES, INC.
By: /s/ Daniel J. Booth
--------------------------
Name: Daniel J. Booth
Title: Senior Vice President
TFN HEALTHCARE INVESTORS, LLC
By: /s/ Timothy F. Nickelson
--------------------------
Name: Timothy F. Nickelson
Title: President
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<PAGE>
SCHEDULE "1"
Original Subsidiaries; Original Facilities
LIST OF ORIGINAL SUBSIDIARIES
1. Gainesville Health Care Center, Inc.
2. Rest Haven Nursing Center (Chestnut Hill), Inc.
3. Claremont Integrated Health, Inc.
4. Rikad Properties, Inc.
5. Integrated Management - Governor's Park, Inc.
LIST OF ORIGINAL FACILITIES
1. Integrated Health Services at Gainesville
4000 S.W. 20th Avenue
Gainesville, Florida 32607
352-377-1981
352-377-7340 (fax)
2. Integrated Health Services of Chestnut Hill
8833 Stenton Avenue
Wyndmoor, Pennsylvania 19038
215-836-2100
215-233-3551 (fax)
3. Integrated Health Services of New Hampshire at Claremont
RFD 3 Box 47, Hanover Street Ext.
Claremont, New Hampshire 03743
603-452-2606
603-453-0479 (fax)
4. Integrated Health Services of St. Petersburg
811 Jackson Street N.
St. Petersburg, Florida 33705
813-896-3651
813-821-2453 (fax)
Sch. 1-1
<PAGE>
5. Governor's Park
1420 South Barrington Rd.
Barrington, IL 60010
(including 2.5 acres of unimproved land)
Sch. 1-1
<PAGE>
SCHEDULE "2"
Distributions of Sale/Leaseback Transaction
Before Admission of N-Co As a Member
1. That gross proceeds received from the sale/leaseback transaction involving
the original facilities was $44,900,000 in the aggregate. Of that amount,
the net proceeds after payment of expenses were distributed by the Company
to IHS, then the sole member of the Company.
Sch. 2-1
<PAGE>
APPENDIX "A"
ACCOUNTING ANNEX
TO
AMENDED AND RESTATED OPERATING AGREEMENT
OF
LYRIC HEALTH CARE LLC
A.1 Introduction.
This Accounting Annex sets forth principles under which items of income,
gain, loss, deduction and credit shall be allocated among the Members. This
Accounting Annex also provides for the determination and maintenance of Capital
Accounts, generally in accordance with Treasury Regulations promulgated under
Section 704(b) of the Code, for purposes of determining such allocations.
A.2 Definitions.
For purposes of this Accounting Annex, the following terms have the
meanings set forth below. If a capitalized term is used herein but not defined
in this Section A.2, it shall have the meaning ascribed thereto in the Agreement
or elsewhere in this Accounting Annex, unless the context otherwise indicates.
"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 Fiscal Year, after giving effect to the following adjustments:
(a) Credit to such Capital Account any amounts which such Member is
obligated to restore pursuant to any provision of the Agreement or is
deemed to be obligated to restore pursuant to the penultimate sentences of
Treasury Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and
(b) Debit to such Capital Account the items described in Treasury
Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and
1.704-1(b)(2)(ii)(d)(6).
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The foregoing definition of Adjusted Capital Account Balance is intended to
comply with the provisions of Treasury Regulations Section 1.704-1(b)(2)(ii)(d)
and shall be interpreted consistently therewith.
"Book Value" means the fair market value of any property contributed to the
Company as agreed by the Members and the cost of any other property. References
to "book purposes" shall be similarly interpreted.
"Capital Account" shall have the meaning set forth in Section A.3 hereof.
"Code" means the United States Internal Revenue Code of 1986, as amended
(or any successor thereto).
"Net Profits" and "Net Loss" means, for each Fiscal Year or other period,
an amount equal to the Company's taxable income or loss for such year or period,
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:
(a) Any income of the Company that is exempt from federal income tax
and not otherwise taken into account in computing Net Profits or Net Loss
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 Treasury Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise
taken into account in computing Net Profits or Net Loss, shall be
subtracted from such taxable income or loss;
(c) Gain or loss resulting from any disposition of Company property
with respect to which gain or loss is recognized for federal income tax
purposes shall be computed by reference to the Book Value of the property
disposed of (unreduced by any liabilities attributable thereto),
notwithstanding that the adjusted tax basis of such property differs from
its Book Value;
(d) Notwithstanding any other provisions of this definition, any items
which are specially allocated pursuant to Sections A.4.2 and A.4.3 hereof
shall not be taken into account in computing Net Profits or Net Loss; and
(e) The amounts of the items of Company income, gain, loss or
deduction available to be specially allocated pursuant to Sections A.4.2
and A.4.3 hereof shall be determined by applying rules analogous to those
set forth above.
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A.3 Capital Accounts.
A.3.1 The Company shall determine and maintain Capital Accounts. "Capital
Account" shall mean an account of each Member determined and maintained
throughout the full term of the Company in accordance with the partnership
capital accounting rules of Treasury Regulations Section 1.704-1(b)(2)(iv).
Without limiting the generality of the foregoing, the following rules shall
apply:
(a) The Capital Account of each Member shall be credited with (i) an
amount equal to such Member's Capital Contributions and the fair market
value of property contributed to the Company by such Member (net of
liabilities that the Company is considered to assume or to which it is
considered to take subject to Code Section 752) and (ii) such Member's
share of the Company's Net Profits (or items thereof, including Gross
Income), together with items of income or gain specially allocated to such
Member pursuant to Sections A.4.2 and A.4.3 hereof. The Members' Capital
Account balances as of the date hereof are set forth in Schedule "2" to
this Agreement.
(b) The Capital Account of each Member shall be debited by (i) the
amount of cash and the fair market value of property distributed to such
Member (net of liabilities assumed by such Member and liabilities to which
such distributed property is subject) and (ii) such Member's share of the
Company's Net Loss (or items thereof), together with items of loss or
deduction specially allocated to such Member pursuant to Sections A.4.2 and
A.4.3 hereof.
(c) As permitted by such capital accounting rules (in the sole
discretion of the "Tax Matters Partner") or as may be required by such
rules, the Capital Accounts of the Members shall be increased or decreased
to reflect any adjustment to the Book Value of property of the Company on
the Company's books.
(d) Upon the transfer by a Member of all or part of an interest in the
Company after the date hereof, the Capital Account of the transferor that
is attributable to the transferred interest shall carry over to the
transferee and the Capital Accounts of the Members shall be adjusted to the
extent provided in Treasury Regulations Section 1.704- 1(b)(2)(iv)(m).
(e) In the event that the Company distributes property (other than
money) to the Members, the Capital Account balances of the Members shall be
adjusted, in accordance with Treasury Regulations Section
1.704-1(b)(2)(iv)(e), to reflect the manner in which any unrealized income,
gain, loss and deduction inherent in such property (that has not been
reflected in the Capital Accounts previously) would be allocated among the
Members if such property were sold at its fair market value (which value in
no event shall be less than the amount of any nonrecourse indebtedness to
which such property is subject).
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(f) Adjustment to such Capital Accounts in respect of Company income,
gain, loss, deduction, and Code Section 705(a)(2)(B) expenditures (or items
thereof) shall be made with reference to the Federal tax treatment of such
items (and, in the case of book items, with reference to the Federal tax
treatment of the corresponding tax items) at the Company level, without
regard to any requisite or elective tax treatment of such items at the
Member level.
(g) In the event the "Tax Matters Partner" shall determine 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 contributions or distributed
property or which are assumed by the Company or the Members), are computed
in order to comply with such Treasury Regulations, the Tax Matters Partner
may make such modification, provided that it is not likely to have a
material effect on the amounts distributed to any Member upon the
dissolution of the Company. The Tax Matters Partner 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 Company capital
reflected on the Company's balance sheet, as computed for book purposes, in
accordance with Treasury Regulations Section 1.704-1(b)(2)(iv)(g), and (ii)
make any appropriate modifications in the event unanticipated events might
otherwise cause this Agreement not to comply with Treasury Regulations
Section 1.704-1(b).
A.4 Allocations of Net Profits and Net Loss.
A.4.1 In General.
(a) Net Profits. After giving effect to the special allocations
set forth in Sections A.4.2 and A.4.3 hereof, Net Profits for any
Fiscal Year shall be allocated to and among the Members in accordance
with their Percentages.
(b) Net Loss. After giving effect to the special allocations set
forth in Sections A.4.2 and A.4.3 hereof, Net Loss for any Fiscal Year
shall be allocated to and among the Members in accordance with their
Percentages.
A.4.2 Special Allocations.
The following special allocations shall be made in the following
order:
(a) Qualified Income Offset. If any Member unexpectedly receives
any adjustment, allocation or distribution described in Treasury
Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of
Company income and gain (consisting of a pro rata portion of each item
of Company income, including gross income, and gain for such year)
shall be specially allocated to such Member in an amount and manner
sufficient to eliminate, to the extent required by
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<PAGE>
the Treasury Regulations, the Adjusted Capital Account Deficit of such
Member as quickly as possible. An allocation pursuant to the foregoing
sentence shall be made only if and to the extent that such Member
would have an Adjusted Capital Account Deficit after all other
allocations provided for in Article A.4 have been tentatively made as
if this Section A.4.2 were not in this Accounting Annex. This
allocation is intended to constitute a "qualified income offset"
within the meaning of Treasury Regulations Section
1.704-1(b)(2)(ii)(d)(3) and shall be construed in accordance with the
requirements thereof.
(b) Basis 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 under Treasury Regulations
Section 1.704-1(b)(2)(iv)(m) to be taken into account in determining
Capital Accounts, the amount of such adjustment to the 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 a manner consistent with the manner in which their Capital
Accounts are required to be adjusted pursuant to such Section of the
Treasury Regulations; provided, in the event that an adjustment to the
Book Value of Company property is made as a result of an adjustment
pursuant to Section 734(b) of the Code, items of income, gain, loss or
deduction, as computed for book and tax purposes, shall be specially
allocated among the Members so that the effect of any such adjustment
shall benefit (or be borne by) the Member(s) receiving the
distribution which caused such adjustment.
A.4.3 Curative Allocations.
(a) Any allocations made under Section A.4.2(a) shall be taken
into account in allocating other items of income, gain, loss and
deduction among the Members so that, to the extent possible, the net
amount of such allocations of other items and the allocations under
Section A.4.2(a) to each Member shall be equal to the net amount that
would have been allocated to each such Member if the allocations under
Section A.4.2(a) had not occurred.
A.4.4 Other Allocation Rules.
(a) References in this Article A.4 to the "then current" Fiscal
Year shall mean the Fiscal Year for which allocations are then being
made. For purposes of this Annex, the first Fiscal Year of the Company
shall commence on the effective date of this Agreement.
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<PAGE>
A.5 Tax Allocations.
(a) Income, gain, loss, and deduction with respect to any
property contributed to the capital of the Company or revalued
pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(f), 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 Book Value in
accordance with the principles of Code Section 704(c) and the Treasury
Regulations thereunder and Treasury Regulations Section
1.704-1(b)(4)(i) using any reasonable method required or permitted
thereunder and selected by the "Tax Matters Partner".
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EXHIBIT 10.73
EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of February 1, 1998 (the "Effective
Date"), by and between LYRIC HEALTH CARE LLC, a Delaware limited liability
company (hereinafter referred to as the "Company" or "Lyric"), and TIMOTHY F.
NICHOLSON (hereinafter referred to as the "Executive").
W I T N E S S E T H:
WHEREAS, the Company wishes to employ the Executive as the Managing
Director of the Company and to ensure the continued services of the Executive
for the Term (as hereinafter defined), and the Executive desires to be employed
by the Company for such Term, upon the terms and conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the foregoing premise and the mutual
agreements herein contained, the parties, intending to be legally bound, hereby
agree as follows:
ARTICLE I
EMPLOYMENT RELATIONSHIP
1.1. Employment. The Company hereby employs the Executive in the position
of Managing Director of the Company. The responsibilities and duties of the
Executive shall be those specified for the Managing Director of the Company
under Article 8 (and other relevant provisions) of the Amended and Restated
Operating Agreement of the Company dated as of the date hereof (the "Operating
Agreement"). The Executive shall report to and be responsible to the Members of
the Company, and the Executive hereby accepts such employment.
As of the date of this Agreement, the Company has two Members--TFN
Healthcare Investors, LLC, a Delaware limited liability company ("N-Co"), which
is controlled by the Executive, and Integrated Health Services, Inc., a Delaware
corporation ("IHS").
During the Term, the Executive agrees to devote such working time as is
reasonably required for the discharge of his duties hereunder and to perform
such services faithfully and to the best of his ability. Notwithstanding the
foregoing, nothing in this Agreement shall preclude the Executive from (a)
engaging in charitable and community affairs, and (b) managing his personal
investments or conducting other business activities, subject to section 4.2.
1.2. Term. Unless sooner terminated pursuant to Article III below, the term
of this Agreement (the "Term") shall commence on the Effective Date, and be in
effect for approximately five (5) years expiring December 31, 2002; provided,
however, that on January 1, 2003, and on each January 1st thereafter, the then
current term of this Agreement automatically shall be extended by an additional
period of twelve (12) months if not terminated as set forth below.
<PAGE>
Notwithstanding the foregoing, either the Executive (or IHS on behalf of the
Company) may elect not to so extend this Agreement by giving written notice of
such election to the other on or before the July 1st immediately preceding the
expiration of the then current term.
ARTICLE II
COMPENSATION
2.1. Salary. (a) The Executive shall receive a base salary at an initial
rate of Two Hundred Fifty Thousand Dollars ($250,000) per year (the "Salary"),
payable in substantially equal installments in accordance with the pay policy
established by the Company from time to time, but not less frequently than
monthly. The Salary shall be reviewed by IHS for possible increase, based upon
the performance of the Executive, promptly after January 1, 1998 and annually as
of each January 1st thereafter. Any increases following such review shall
require the approval of IHS.
(b) The Executive shall receive Revenue Salary Adjustments in
accordance with Appendix "2" if, as, and when, the Company achieves the revenue
targets specified in Appendix "2" hereto.
2.2. Bonuses. If the Company meets its goals of profitability, revenue
growth and business expansion, as set forth in business plans approved by the
Members from time to time (the "Target"), the Company shall pay the Executive an
annual discretionary bonus up to, but not exceeding one-third (33 1/3%) of the
Executive's Salary ("Bonus"), based on the Executive's performance, benefit to
the Company at large, and the extent to which the Company equals or exceeds the
Target. In addition, the Members may, but shall not be obligated to, award the
Executive a bonus for extraordinary service to the Company, as determined by the
Members in their discretion.
2.3. Executive Benefits and Perquisites. During the Term, the Company shall
provide and/or pay for employee medical and health care benefits as follows:
(a) comprehensive individual health insurance, including dependent
coverage;
(b) life insurance coverage in the amount of two times the Executives'
Salary not to exceed $500,000; any proceeds of which shall be payable to
the Executive's designated beneficiary or his estate; and
(c) accidental death and dismemberment insurance in the amount of two
times the Executives' Salary not to exceed $500,000; and
(d) disability insurance coverage in a monthly benefit amount equal to
the sum of 66 2/3% of the Executive's monthly Salary.
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<PAGE>
Once increased, the level of benefits shall not be decreased without the
Executive's consent. The Company represents and agrees that the employee
benefits provided to the Executive under clauses (a) through (d) above are --
and during the Term shall continue to be -- similar to those provided to an
employee of IHS in a similar capacity as the Executive, except that the
Executive will not participate in IHS' Senior Executive Retirement Program.
2.4. Business Expense Reimbursement. The Company will reimburse the
Executive for reasonable business-related expenditures (including travel, meals,
lodging and other appropriate items). Business-related travel will be deemed to
include up to four round-trips to London, England business class prior to June
30, 1998.
ARTICLE III
TERMINATION AND SEVERANCE
3.1. Termination; Nonrenewal. The Company shall have the right to terminate
the Executive's employment, at any time during the Term, for "Cause" (as defined
below). Upon the Executive's termination or resignation for "Cause" or upon the
expiration of the Term following the Company's election not to renew this
Agreement, the Executive shall be entitled to no severance. If the Executive's
employment is terminated because of a Permanent Disability (as defined in
Section 3.5), the Executive shall receive the benefits and payments described in
Section 3.5. The Executive shall have the right to terminate the Executive's
employment for "Good Reason" as set forth below.
3.2. Termination For Cause.
(a) The Company (by sole vote of IHS) may terminate this Agreement for
Cause following a determination by IHS that Cause exists. For purposes of this
Agreement, Cause means any or all of the following:
(i) the Executive materially fails to perform his duties
hereunder;
(ii) a material breach by the Executive of his covenants under
Sections 4.1 or 4.2;
(iii) the Executive is convicted of any felony or any misdemeanor
involving moral turpitude, or commits larceny, embezzlement, or theft
of the Company's tangible or intangible property; or
(iv) N-Co disposes of more than 50% of its interest in the
Company (whether to IHS or any other person or entity), otherwise
ceases to be a Member of the Company, or defaults in any obligation
under the Operating Agreement.
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(b) Notwithstanding anything in Section 3.2(a) to the contrary, a
termination shall not be for Cause unless (i) IHS notifies the Executive, in
writing, of intention to terminate the Executive for Cause (which notice shall
set forth the conduct alleged to constitute Cause) (the "Cause Notice"); and
(ii) the Executive does not cure his conduct (to the reasonable satisfaction of
IHS), within sixty (60) days after the receipt of the Cause Notice. (This
Section 3.2(b) shall not apply to a termination under (a) (iii) or (iv) above).
3.3. Termination for Good Reason. The Executive may terminate this
Agreement for Good Reason, provided he gives both the Company and IHS prior
written notice that Good Reason exists (the "Good Reason Notice"). For purposes
of this Agreement, Good Reason shall mean one or both of the following:
(a) a material breach of the Agreement by the Company (including,
without the Executive's prior written consent, the failure of the Company
to pay the Executive amounts when due under this Agreement),
(b) the resignation by the Executive within one (1) year after: (i) a
"Change of Control" (as defined in Appendix "2" hereto) occurs with respect
to IHS; or (ii) IHS and N-Co together no longer have a majority of the
Membership Percentages of the Company; or (iii) if N-Co is diluted to a
Membership Percentage in the Company of less than 33-1/3% and N-Co has sold
its interest in the Company pursuant to under Article 16 of the Company's
Operating Agreement.
Notwithstanding the foregoing, a termination on account of a reason described in
paragraph (a), shall be deemed not to be for Good Reason unless the Executive
(i) gives the Company the opportunity to cure the condition that purports to be
Good Reason, and (ii) the Company fails to cure that condition within sixty (60)
days after the receipt of the Good Reason Notice (or, with respect to the
failure to make any payment when due to the Executive within ten (10) days after
the receipt of such notice).
3.4. Severance. (a) If the Executive resigns for Good Reason, or is
terminated without Cause, the Company shall pay the Executive an amount (the
"Severance Amount") equal to his annual Salary in effect on the date of
resignation or termination, as applicable, plus a bonus amount equal to the
average of the Executive's last two annual bonuses. Such Severance Amount shall
be payable in cash as follows:
(x) no later than 10 days after the effective date of Executive's
termination, the Company shall pay the Executive one-half (1/2) of the
Severance Amount in a lump sum;
(y) commencing on the first day of the month following the effective
date of Executive's termination and on the first day of the next eleven
months the Company shall pay to the Executive, in equal monthly
installments, the remaining one-half (1/2) of the Severance Amount;
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provided, however, that if the Executive's employment terminates other than for
Cause within one (1) year following an event described in Section 3.3(b)(i) or
(ii), the Company shall, in lieu of the making the payments described in (x) and
(y), pay the Executive the Severance Amount in one lump sum cash payment within
ten (10) days after the effective date of the Executive's termination.
In addition, for a period of one (1) year following the effective date of
the Executive's termination other than for Cause, the Company shall provide
continued employee benefits and coverage for the Executive and his dependents of
the type and at a level of coverage comparable to the coverage in effect at the
time of his termination ("Continued Benefits") including, but not limited to
those benefits and perquisites set forth in Section 2.3 hereof.
(b) If the Executive resigns under 3.3(b)(iii) above within 30 days
after both the dilution of N. Co. to less than 33-1/3% and the sale of its
interest in the Company by N. Co., the Severance Amount under 3.4(a) shall be:
(x) three times (3x) the Executive's annual salary in effect on the date of
resignation if and provided that such resignation occurs more than 18 complete
calendar months after the date of this Agreement; or (y) if such resignation
occurs earlier, an amount equal to 18 months' annual salary at the rate in
effect on the date of such resignation.
A Severance Payment due under (x) above shall be paid one-third (1/3) as a
lump sum within ten (10) days after the date of the Executive's termination and
two-thirds (2/3) in equal monthly installments over the 24 months from such
date. A Severance Payment due under (y) above shall be payable one-half (1/2) as
a lump sum within ten (10) days after the effective date of termination and
one-half (1/2) in equal monthly installments over the 18 months from such date.
3.5. Termination for Disability. The Company may terminate the Executive
following a reasonable determination by IHS that the Executive has a Permanent
Disability; provided, however, that (except for death) no such termination shall
be effective (i) prior to the expiration of the six (6) month period following
the date the Executive first incurred the condition which is the basis for the
Permanent Disability or (ii) if the Executive begins to substantially perform
the significant aspects of his regular duties prior to the proposed effective
date of such termination. For purposes of this Agreement, "Permanent Disability"
shall mean the Executive's inability, by reason of any physical or mental
impairment to substantially perform the significant aspects of his regular
duties, as contemplated by this Agreement, which inability is reasonably
contemplated to continue for at least one (1) year from its incurrence and at
least ninety (90) days from the effective date of the Executive's termination.
"Permanent Disability" shall also mean death. Any question as to the existence,
extent, or potentiality of the Executive's Permanent Disability shall be
determined by a qualified independent physician selected by the Executive (or,
if the Executive is unable to make such selection, by an adult member of the
Executive's immediate family) and reasonably acceptable to IHS.
3.6. Death or Disability After Termination. Should the Executive die or
become disabled before receipt of any or all payments to which the Executive is
entitled under Section 3.4, then the balance of the payments and Continued
Benefits to which the Executive and his
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dependents, if any, is entitled under Section 3.4 shall continue to be paid to
the Executive (in the case of his disability) or to the executors or
administrators of the Executive's estate (in the event of the Executive's
death), and the Executive (in the case of his disability) and his dependents, if
any, shall continue to receive the Continued Benefits for the balance of the one
year period; provided, however, that the Company may, at any time within its
discretion, accelerate any payments and pay the Executive or his estate the
present value of such payments in a lump sum cash payment. For purposes of
determining the present value under this Section 3.6, the interest rate shall be
the prime rate of Citibank, N.A.
3.7. Termination for Cause. If the Executive is terminated for Cause at any
time, the Company shall pay the Executive no severance amount.
3.8. Transition Period. If the Executive's employment terminates under any
of Sections 3.1, 3.2, or 3.3 [excluding 3.2(a)(iii) or 3.3(a)] and if IHS so
requests in writing, the Executive will continue to perform his duties as if
this Agreement remained in effect during the transition period while the Company
seeks a successor Managing Director. In such event the Executive's date of
termination or resignation shall be deemed to be the actual date when such
transition period ends; provided, however, that such transition period shall not
continue for more than six months unless IHS and the Executive agree otherwise.
ARTICLE IV
COVENANTS OF THE EXECUTIVE
4.1. Confidential Information. In connection with his employment at the
Company, the Executive will have access to confidential information consisting
of some or all of the following categories of information:
(a) Financial Information, including but not limited to information
relating to the Company's earnings, assets, debts, prices, pricing
structure, volume of purchases or sales or other financial data whether
related to the Company or generally, or to particular products, services,
geographic areas, or time periods;
(b) Supply and Service Information, including but not limited to
information relating to goods and services, suppliers' names or addresses,
terms of supply or service contracts or of particular transactions, or
related information about potential suppliers to the extent that such
information is not generally known to the public, and the extent that the
combination of suppliers or use of a particular supplier, though generally
known or available, yields advantages to the Company details of which are
not generally known;
(c) Marketing Information, including but not limited to information
relating to details about ongoing or proposed marketing programs or
agreements by or on behalf of the Company, sales forecasts, advertising
formats and methods or results of marketing efforts or information about
impending transactions;
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(d) Personnel Information, including but not limited to information
relating to employees' personnel or medical histories, compensation or
other terms of employment, actual or proposed promotions, hirings,
resignation, disciplinary actions, terminations or reasons therefor,
training methods, performance, or other employee information;
(e) Customer Information, including but not limited to information
relating to past, existing or prospective customers' names, addresses or
backgrounds, records of agreements and prices, proposals or agreements
between customers and the Company, status of customers' accounts or credit,
or related information about actual or prospective customers as well as
customer lists;
(f) Acquisition Information, including but not limited to information
relating to past, present or prospective acquisitions of businesses,
facilities or personnel; and
(g) The Proprietary Materials (as defined in the Master Franchise
Agreement, between Integrated Health Services Franchising Co., Inc. and the
Company, dated as of January 13, 1998) or other information of any kind
received by the Executive in connection with such Master Franchise
Agreement and/or the Master Management Agreement between the Company and
IHS Facility Management, Inc., dated as of January 13, 1998 and any and all
matters or activities covered by either or both of those Agreements.
All of the foregoing are hereinafter referred to as "Trade Secrets." (For
the avoidance of doubt, "Trade Secrets" shall not be construed to include
materials which represent "industry standard" information which is generally
available.) The Company and the Executive consider their relation one of
confidence with respect to Trade Secrets. Therefore, during and after the
employment by the Company, regardless of the reasons that such employment ends,
the Executive agrees:
(aa) To hold all Trade Secrets in confidence and not discuss,
communicate or transmit to others, or make any unauthorized copy of or
use the Trade Secrets in any capacity, position or business except as
it directly relates to the Executive's employment by Company;
(bb) To use the Trade Secrets only in furtherance of proper
employment related reasons of the Company to further the interests of
the Company;
(cc) To take all reasonable actions that the Company deems
necessary or appropriate, to prevent unauthorized use or disclosure of
or to protect the Company's interest in the Trade Secrets; and
(dd) That any of the Trade Secrets, whether prepared by the
Executive or which may come into the Executive's possession during the
Executive's employment hereunder, are and remain the property of the
Company and its affiliates, and all such Trade Secrets, including
copies thereof, together with all
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other property belonging to the Company or its affiliates, or used in
their respective businesses, shall be delivered to or left with the
Company.
This Agreement does not apply to (i) information that by means other then
the Executive's deliberate or inadvertent disclosure becomes known to the
public; (ii) disclosure compelled by judicial or administrative proceedings
provided the Executive affords the Company the opportunity to obtain assurance
that compelled disclosures will receive confidential treatment; and (iii)
information independently developed by the Executive, the development of which
was not a breach of this Agreement.
4.2. Non-Competition. A. During the Term, the Executive agrees that he will
not, without the express written consent of Lyric, for the Executive or on
behalf of any other person, firm, entity or other enterprise (i) directly or
indirectly solicit for employment or recommend to any subsequent employer of the
Executive the solicitation for employment of any person who, at the time of such
solicitation is employed by Lyric or any affiliate thereof, (ii) directly
solicit, divert, or endeavor to entice away any customer of Lyric or any
affiliate thereof, or otherwise engage in any activity intended to terminate,
disrupt, or interfere with Lyric's or any affiliate's relationship with a
customer, supplier, lessor or other person, or (iii) be employed by, be a
director, officer or manager of, act as a consultant for, be a partner or member
in, have a proprietary interest in, give advice to (all the foregoing
activities, collectively, "Competing Activities") any person, enterprise,
partnership, association, corporation, limited liability company, joint venture
or other entity which is directly in the business of owning, operating or
managing, any healthcare facility of any kind, including but not limited to, any
subacute healthcare facility, rehabilitation hospital, nursing home, assisted
living facility, or home healthcare business of a type which Lyric is conducting
at the time in question (all such enterprises, collectively the "Healthcare
Businesses"); and, in the case of any facility or business described, in either
case, which competes with any such type of facility or business then operated by
Lyric or any of its subsidiaries, provided however, that this Section shall not
prohibit the Executive from:
(a) engaging in any of the activities or businesses disclosed on
Appendix "1" hereto;
(b) performing Competing Activities for assisted living facilities,
and assisted living facilities operated in conjunction with Healthcare
Businesses provided that the primary activity of any such enterprise is not
attributable to the Healthcare Businesses;
(c) performing Competing Activities for Healthcare Businesses located
in Canada unless and until Lyric opens its/their first Healthcare
Businesses in Canada, provided that the Executive may continue any
Competing Activities in which he is engaged at the time such first
Healthcare Businesses are opened;
(d) performing Competing Activities for Healthcare Businesses located
in The United Kingdom unless and until Lyric opens its/their first
Healthcare Businesses in The
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United Kingdom, provided that the Executive may continue any Competing
Activities in which he is engaged at the time such first Healthcare
Businesses are opened;
(e) performing Competing Activities for Healthcare Businesses located
in New York State unless and until New York State removes the restrictions
that now prevent enterprises like Lyric and any of its Members from owning,
operating or managing Healthcare Businesses in New York State and Lyric
commences activities in New York State, provided that the Executive may
continue any Competing Activities in which he is engaged at the time such
restrictions are removed; and
(f) owning up to 10% of the outstanding voting shares of the equity
securities of any company that directly or indirectly owns, operates or
manages Healthcare Businesses, whose common stock is or could be listed for
trading on any national securities exchange or on the NASDAQ System.
B. During the period of one year after the termination for any reason
of the Executive's employment with Lyric, the Executive will continue to be
bound by, and agrees to comply with, the limitations in (i) and (ii) of 4.2A but
the limitations of (iii) of such 4.2 A will apply only for six months after such
termination and only to the Executive's service as an officer or manager of a
direct competitor of Lyric.
4.3. Third Party Beneficiary. For purposes of this Article (excluding,
however, Section 4.2), the term "Company" shall be deemed to include IHS in its
individual capacity, as distinct from its interest as a Member in the Company.
IHS shall be deemed to be a third party beneficiary entitled to enforce the
provisions of this Article IV independently of Lyric Health Care LLC.
4.4. Remedies For Breach of Article IV. If the Executive materially
violates the covenants contained in this Article IV, after his termination of
employment under circumstances which entitle him to payments or benefits under
Section 3.4, the Company may, at its election, upon ten (10) days' prior notice,
terminate the Severance Period and cease providing the Executive with such
payments and benefits. In addition, the Executive agrees that the amount of
damages in the event of the Executive's breach of this Article IV will be
difficult, if not impossible, to ascertain. The Executive therefore agrees that
the Company, in addition to, and without limiting any other remedy or right it
may have, shall have the right to an injunction enjoining any breach of the
covenants made by the Executive in this Article IV (although this Section shall
not be construed to limit the right of the Company to claim damages).
4.5. Disclosure of Existing and Pending Activities. Attached as Appendix
"1" hereto is a list of corporations and other entities engaged in Healthcare
Businesses (i) of which the Executive is presently an officer, director,
manager, or general partner, or (ii) in which the Executive presently, through
ownership of shares, limited partnership interests, or other interests, owns
more than 10% of the equity. (Appendix "1" includes, also, any such matters
which are now pending but not complete). Appendix "1" sets forth, also,
transactions as to which the
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Executive is acting as a broker as of the date of this Agreement, which the
Executive is deemed to have offered to the Company and IHS.
4.6. Disclosure of Future Activities. On the first day of January and July
of each calendar year after the date of this Agreement the Executive will give
IHS a list of the Executive's positions and activities in the categories
described in Section 4.5, updated as of the applicable date. Upon request of
IHS, also, the Executive will furnish a brief but reasonable explanation of the
nature of the Executive's role in any such matter and the nature of the business
involved.
4.7. Brokerage. This Article 4 shall not be construed to prohibit the
Executive from acting as a broker for the acquisition, sale, lease, or financing
of Healthcare Businesses in which Lyric is presently operating, provided that
the Executive shall first offer to Lyric and IHS each opportunity of such type
which he proposes to broker, and that IHS declines for itself and Lyric to
pursue such opportunity. IHS shall be deemed to have declined an opportunity for
itself and Lyric if IHS does not give written notice to the Executive expressing
active interest within 14 days after IHS receives a written presentation from
the Executive (which should include the proposed business terms, prior three
years' financial statements, and other information as customarily required by
sophisticated investors in similar transactions at such time). If IHS Company
concludes a transaction presented by the Executive, he will be entitled to a
market-rate commission. If Lyric concludes a transaction presented by the
Executive, the Executive will receive no commission, but N-Co. will receive a
credit to its capital account under Lyric's Operating Agreement in an amount
equal to the commission which would otherwise have been earned, provided,
however, that if and to the extent that the Executive would incur an income tax
liability by reason of such credit, the Executive shall receive a cash payment
in an amount estimated at the Employee's highest marginal tax bracket on the
amount of such credit, and the capital account credit shall be reduced by the
amount of such cash payment.
ARTICLE V
AMENDMENT AND ASSIGNMENT
5.1. Right of the Executive to Assign. The Executive may not assign,
transfer, pledge or hypothecate or otherwise transfer his rights, obligations,
interest and benefits under this Agreement and any attempt to do so shall be
null and void.
5.2. Right of Company to Assign. This Agreement shall not be assignable and
transferable by the Company. This Agreement shall inure to the benefit of and be
binding upon the Executive and the Executive's heirs and personal
representatives, and the Company and its successors.
5.3. Amendment/Waiver. No change or modification of this Agreement shall be
valid unless it is in writing and signed by both parties hereto. No waiver of
any provisions of this Agreement shall be valid unless in writing and signed by
the person or party to be charged.
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ARTICLE VI
GENERAL
6.1. Governing Law. This Agreement shall be subject to and governed by the
laws of the State of Maryland.
6.2. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the Company and the Executive and their respective heirs, legal
representatives, executors, administrators, successors and permitted assigns.
6.3. Entire Agreement. This Agreement constitutes the entire agreement
between the parties and supersedes all other prior agreements, either oral or
written, between the parties hereto.
6.4. Mitigation. The Executive shall not be required to mitigate damages or
the amount of any payment provided for under this Agreement by seeking other
employment or otherwise nor may any payments provided for under this Section be
reduced by any amounts earned by the Executive, except as provided in Article
IV.
6.5. Survivorship. The respective rights and obligations of the parties
hereunder shall survive the termination of this Agreement to the extent
necessary to preserve the rights and obligations of the parties under this
Agreement.
6.6. Notices. All notices, demands, requests, consents, approvals or other
communications required or permitted hereunder shall be in writing and shall be
delivered by hand, registered or certified mail with return receipt requested or
by a nationally recognized overnight delivery service, in each case with all
postage or other delivery charges prepaid, and to the address of the party to
whom it is directed as indicated below, or to such other address as such party
may specify by giving notice to the other in accordance with the terms hereof.
Any such notice shall be deemed to be received (i) when delivered, if by hand,
(ii) on the next business day following timely deposit with a nationally
recognized overnight delivery service or (iii) on the date shown on the return
receipt as received or refused or on the date the postal authorities state that
delivery cannot be accomplished, if sent by registered or certified mail, return
receipt requested.
If to the Company: 8889 Pelican Bay Boulevard, Suite 500
Naples, Florida 34103
If to the Executive: 304 Gilbert Road
Dillsburg, PA 17019
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If to IHS: 8889 Pelican Bay Boulevard, Suite 500
Naples, Florida 34103
with a copy to:
10065 Red Run Boulevard
Owings Mills, MD 21117
Attention: Eleanor C. Harding
Marshall A. Elkins, Esq.
6.7. Indemnification. The Company agrees to maintain Director's and
Officer's liability insurance in such amounts as the Members determine to be
commercially reasonable. To the extent not covered by such liability insurance,
the Company shall indemnify and hold the Executive harmless as set forth in
Section 14.6 of the Operating Agreement.
6.8. Attorneys' Fees. Upon presentation of an invoice, the Company shall
pay directly or reimburse the Executive for all reasonable attorneys' fees and
costs incurred by the Executive in connection with any dispute brought by the
Executive over the terms of this Agreement unless there is a determination that
the Executive had no reasonable basis for his claim.
6.9. Arbitration. Except as otherwise provided in Section 4.3, any dispute
or controversy arising under or in connection with this Agreement shall be
settled exclusively by arbitration, conducted before a panel of three
arbitrators in Baltimore, Maryland, in accordance with the rules of the American
Arbitration Association then in effect, and judgement may be entered on the
arbitrators' award in any court having jurisdiction. The Company shall pay all
costs of the American Arbitration Association and the arbitrator. Each party
shall select one arbitrator, and the two so designated shall select a third
arbitrator. If either party shall fail to designate an arbitrator within seven
(7) days after arbitration is requested, or if the two arbitrators shall fail to
select a third arbitrator within fourteen (14) days after arbitration is
requested, then an arbitrator shall be selected by the American Arbitration
Association upon application of either party. Notwithstanding the foregoing, the
Executive shall be entitled to seek specific performance from a court of the
Executive's right to be paid until the date of termination during the pendency
of any dispute or controversy arising under or in connection with this Agreement
and the Company shall have the right to obtain injunctive relief from a court.
6.10. Severability. No provision in this Agreement if held unenforceable
shall in any way invalidate any other provisions of this Agreement, all of which
shall remain in full force and effect.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by
its duly authorized officers and its corporate seal to be hereunto affixed, and
the Executive has hereunto set the Executive's hand on the day and year first
above written.
COMPANY EXECUTIVE
LYRIC HEALTH CARE LLC
By: Integrated Health Services, Inc.
By: /s/ Daniel J. Booth /s/ Timothy F. Nicholson
---------------------------- ----------------------------
Name: Daniel J. Booth Timothy F. Nicholson
----------------------------
Title: Senior Vice President
----------------------------
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Appendix "1"
APPENDIX:
A) Trans Health Network Inc.
Director, and less than 10% shareholder (Principal shareholder is Anthony
Misitano)
B) To be formed. New York State company engage in management and ownership of
assisted living and retirement facilities and possibly nursing homes in New
York State. May be in conjunction with Paz Inc and/or Azzie Reckiss
C) Building, leasing and/or operating assisted living facilities in
conjunction with Balanced Care Corp and/or other assisted living companies
D) Specialty Care Plc - England - Integrated Health Services is a shareholder
in this company
E) Ancillary Services Company to be formed in conjunction with Reg Petersen,
in Canada
Appendix 1-1
<PAGE>
Appendix "2"
"Change of Control"; Revenue Salary Adjustments
A. Change of Control.
For purposes of this Agreement, a "Change of Control" shall be deemed
to occur if (i) there shall be consummated (x) any consolidation, reorganization
or merger of IHS in which IHS is not the continuing or surviving corporation or
pursuant to which shares of IHS's common stock would be converted into cash,
securities or other property, other than a merger of IHS in which the holders of
IHS's common stock immediately prior to the merger have the same proportionate
ownership of common stock of the surviving corporation immediately after the
merger, or (y) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially all, of the assets
of IHS, or (ii) the stockholders of IHS shall approve any plan or proposal for
liquidation or dissolution of IHS, or (iii) any person (as such term is used in
Sections 13(d) and 14(d)(2) of the Securities Exchange Act, including any
"group" ( as defined in Section 13(d)(3) of such Act) (other than the Employee
or any group controlled by the Employee)) shall become the beneficial owner
(within the meaning of Rule 13d-3 under such Act) of twenty percent (20%) or
more of IHS's outstanding common stock (other than pursuant to a plan or
arrangement entered into by such person and IHS) and such person discloses its
intent to effect a change in the control or ownership of IHS in any filing with
the Securities and Exchange Commission, or (iv) within any twenty-four (24)
month period beginning on or after the Effective Date, the persons who were
directors of IHS immediately before the beginning of such period (the "Incumbent
Directors") shall cease (for any reason other than death, disability or
retirement) to constitute at least a majority of the Board or the board of
directors of any successor to IHS, provided that, any director who was not a
director as of the Effective Date shall be deemed to be an Incumbent Director if
such director was elected to the Board by, or on the recommendation of or with
the approval of, at least two-thirds of the directors who then qualified as
Incumbent Directors either actually or by prior operation of this Section
3.3(b)(iv) unless such election, recommendation or approval was the result of
any actual or threatened election contest of the type contemplated by Regulation
14a-11 promulgated under the Exchange Act or any successor provision.
B. Revenue Salary Adjustment
If for any fiscal year the Company achieves the following revenue
targets (excluding operations of merged or acquired facilities or subsidiaries
for periods before the applicable merger or acquisition) then, for any fiscal
year* and ensuing years [subject to later increases under this paragraph or
increases under Section 2.1(a)] the Executive's Salary under Section 2.1(a)
shall be as follows:
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* Any adjustments for the current fiscal year shall be retroactive to
January 1st of such year if and after applicable revenue target is
achieved during such year.
Appendix 2-1
<PAGE>
IF REVENUES EXCEEDED
IN THE LAST FISCAL YEAR SALARY
$150 million 275,000
$250 million 300,000
$450+ million 350,000
Appendix 2-2
THE SECURITIES ISSUABLE UPON EXERCISE HEREOF (THE "SECURITIES") WILL BE ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY OTHER SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD, PLEDGED OR HYPOTHECATED
UNTIL SUCH SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND
OTHER APPLICABLE SECURITIES LAWS, OR IN THE OPINION OF COUNSEL TO THE COMPANY IN
FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, SUCH OFFER, SALE OR
TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
WARRANT AGREEMENT
WARRANT AGREEMENT dated as of October 21, 1997, executed by INTEGRATED
HEALTH SERVICES, INC., a Delaware corporation (the "Company"), for the benefit
of Stephen P. Griggs (the "Holder").
The Company and the Holder wish to set forth the terms and conditions
whereby the Holder will have the option to purchase shares of the $.001 par
value common stock of the Company (the "Stock"). Accordingly, in consideration
of the mutual covenants and agreements contained herein and in that certain
Employment Agreement (the "Employment Agreement") dated as of the date hereof
between RoTech Medical Corporation, a subsidiary of the Company, and the Holder,
and intending to be legally bound hereby, the Company and the Holder hereby
agree as follows:
1. Grant of the Warrant. Subject to the terms and conditions set forth in
this Agreement and any adjustment required by Section 6 below, the Company
grants to Holder the warrant (the "Warrant") to purchase all or any part of
750,000 shares of the Stock (the "Warrant Shares") for the purchase price of
$33.16 per Warrant Share. The Company shall cause the Warrant Shares to be
registered pursuant to an S-3 registration statement.
2. Term of the Warrant. The Warrant granted hereunder shall expire at 5:00
p.m., Eastern Standard Time on the date which is on the tenth anniversary of the
date hereof (the "Expiration Time").
3. Restrictions on Exercisability. Unless accelerated, in the sole
discretion of the Company, or except as specifically provided otherwise herein,
the Warrant will become exercisable in accordance with the following vesting
schedule: the Warrant shall become exercisable with respect to twenty percent
(20%) of the Warrant Shares on October 22 of each year, commencing in 1998,
until the Warrant has become exercisable with respect to all of the Warrant
Shares; provided, however, that if Holder shall die during the term of his
employment with the Company, or if a Change of Control (as hereinafter defined)
shall occur, the Warrant shall become fully exercisable. For purposes hereof, a
"Change of Control" of the Company shall mean the occurrence of any of the
following events: (a) any party or two or more parties acting in concert shall
have acquired beneficial ownership, directly or indirectly, of, or shall have
acquired by contract or otherwise, or shall have entered into a contract or
arrangement that, upon consummation, will result in its or their acquisition of,
control over, Stock of the Company representing 25% or more of the combined
voting power of all Stock of the Company, or (b) during any period of up to 24
consecutive months, commencing after the date hereof, individuals who at the
beginning of such 24-month period were directors of the Company (together with
any new director whose election by the Company's Board of Directors or whose
nomination for election by the Company's shareholders was approved by a vote of
at least fifty-one percent (51%) of the directors then still in office who
either were directors at the beginning
<PAGE>
of such period or whose election or nomination for election was previously so
approved) cease to constitute a majority of the directors of the Company then in
office. As used herein, "beneficial ownership" shall have the meaning provided
in Rule 13d-3 promulgated pursuant to the Securities Exchange Act of 1934, as
amended.
4. Exercise of the Warrant. Subject to the restrictions set forth in
Section 3 above, the Holder may exercise the Warrant with respect to all or any
portion of the Warrant Shares at any time or from time to time prior to the
Expiration Time by tendering to the Company payment in full of the purchase
price for the Warrant Shares then being purchased together with written notice
to the Company of such exercise that sets forth the following, as applicable:
(a) if not yet registered as set forth in paragraph 1 above, an
acknowledgment that the Warrant Shares are being purchased for investment and
not for distribution or resale (other than a distribution or resale which, in
the opinion of counsel reasonably satisfactory to the Company, may be made
without violating the provisions of the Securities Act of 1933, as amended (the
"Act"), or any other applicable federal or state securities laws); and
(b) if not yet registered as at forth in paragraph 1 above, an
acknowledgment that Holder understands that the Warrant Shares are "restricted
securities" within the meaning of Rule 144 promulgated by the Securities and
Exchange Commission, that the Warrant Shares have not been registered under the
Act or any other applicable federal or state securities laws and must be held
indefinitely unless they are subsequently registered under such Act and all
applicable laws or an exemption from registration is available therefrom, and
that the Company is under no obligation to register the Warrant Shares under the
Act or any other applicable securities laws or to take any action which would
make available to the Holder any exemption from such registration.
The Company shall issue a stock certificate bearing an appropriate legend,
if applicable, representing the Warrant Shares then being purchased upon the
actual receipt by the Company of any such written notice and payment; provided,
however, that if the listing, registration or qualification of the Warrant
Shares then being purchased upon any securities exchange or under any federal or
state law or the consent and approval of any governmental regulatory body shall
be required in connection with the purchase of Warrant Shares then being
purchased by such Holder, the Company shall not be obligated to issue or deliver
a certificate representing such Warrant Shares unless and until such listing,
registration, qualification, consent or approval shall have been effected or
obtained. Holder shall have no rights as a stockholder of the Company with
respect to his Warrant Shares then being purchased until the date on which a
stock certificate representing such Warrant Shares has been issued to the
Holder. The Warrant granted hereunder shall expire with respect to any Warrant
Shares as to which Holder has not exercised the Warrant on or before the
Expiration Time.
5. Transfer of the Warrant. The Warrant may be exercised only by the Holder
or by the Holder's heirs, personal representatives and executors in the event of
such Holder's death, and neither the Warrant nor any interest or right therein
shall be subject to or liable for any debts, contracts or engagements of the
Holder or be subject to disposition by transfer, alienation, pledge,
encumbrance, assignment or any other means, whether such disposition be
voluntary or involuntary or by operation of law by judgment, levy, attachment,
garnishment or any other legal or equitable proceedings (including bankruptcy).
- 2 -
<PAGE>
6. Adjustment.
(a) If the number of shares of issued and outstanding Stock changes at any
time on or before the Expiration Time as a result of any recapitalization, stock
split, stock dividend or other change in the capital structure of the Company,
the number of Warrant Shares covered by the Warrant shall be increased or
decreased in direct proportion to such change in the number of shares of issued
and outstanding Stock and the per share purchase price of such Warrant Shares
shall be adjusted accordingly so that it is the substantial equivalent of the
purchase price prior to such change.
(b) If the Company is merged into, or consolidated with, another company,
or another company is merged into the Company, or in the case of a sale or
conveyance to another company of the property of the Company as an entirety on
or before the Expiration Time, the Company shall provide in the agreement for
such merger, consolidation or sale that the Warrant is fully vested as of the
date that the merger, consolidation or sale is consummated, and the surviving or
new company shall grant to the Holder under substantially the same terms and
conditions as are contained in this Agreement the option to acquire for a
purchase price adjusted as provided in Section 6(a) above that number and class
of shares in the surviving or new company into which the shares of the Stock
then subject to this Warrant would have been converted or exchanged if the
Warrant had been exercised prior to the effective date of the merger or
consolidation.
7. Taxes. All amounts which, under federal, state or local law, are
required to be withheld from the amount reportable as taxable income with
respect to the exercise of this Warrant shall be so withheld by the Company.
Whenever the Company proposes or is required to issue or transfer shares of the
Stock hereunder, the Company shall have the right to require Holder to remit to
the Company an amount sufficient to satisfy any federal, state or local
withholding tax requirements prior to the delivery of any certificate or
certificates for such shares of the Stock.
8. Miscellaneous.
(a) Notices. All notices to the Company provided for in this Agreement
shall be in writing and shall either be hand-delivered, sent by registered or
certified mail, or delivered by a nationally recognized overnight delivery
service to the following address (or such other address as may be designated by
notice duly given in the manner provided herein):
Marc B. Levin
Integrated Health Services, Inc.
Owings Mills Corporate Campus
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Any such notice, including but not limited to notices and tenders under Section
4 hereof, shall be deemed delivered (i) when hand delivered, or (ii) three (3)
business days after the date deposited in the U.S. registered or certified mail,
addressed as provided above.
- 3 -
<PAGE>
(b) Integration; Modification. This Agreement between the Company and
Holder constitute the entire understanding and agreement between the Company and
the Holder regarding the subject matter hereof and supersede all prior
negotiations and agreements, whether oral or written, between the Company and
Holder with respect to the subject matter of this Agreement. This Agreement may
not be modified except by a written agreement signed by the Holder and a duly
authorized officer of the Company.
(c) Severability. In the event of the invalidity or unenforceability of any
part or provision of this Agreement, such invalidity or unenforceability shall
not affect the validity or enforceability of any other part or provision of this
Agreement, and the remainder of this Agreement shall continue in full force and
effect in accordance with its terms.
(d) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF
THE STATE OF MARYLAND.
(e) Arbitration. Any controversy arising out of, or relating to, this
Agreement, or any breach hereof, shall be settled by binding arbitration before
a single arbitrator in accordance with the Commercial Arbitration Rules of the
American Arbitration Association In Baltimore, Maryland, or in any other place
the parties shall mutually agree, and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof.
(f) Headings. The headings and paragraphs have been included herein for
convenience only and shall not be considered in interpreting this Agreement.
(g) Binding Effect. This Agreement shall be binding upon the Company and
shall inure to the benefit of the Company and Holder and their respective heirs,
legal representatives, successors and permitted assigns.
IN WITNESS WHEREOF, the Company, by its duly authorized officer, has
executed this Agreement as of the date first above written.
Attest: INTEGRATED HEALTH SERVICES, INC.
By: /s/ [ILLEGIBLE]
- ------------------------- ------------------------------
Its: Executive Vice President
- 4 -
<PAGE>
DATE: ____________________
Marc B. Levin
Executive Vice President
Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, MD 21117
Re: Notice of Exercise
Dear Mr. Levin:
With respect to the exercise of an option to purchase ___________ shares of
common stock of Integrated Health Services, Inc. (the "Warrant Shares") at a
purchase price of $33.16 per share, the notice of which is hereby given and the
payment of which is hereby enclosed, I hereby make the following acknowledgments
and representations:
(a) the Warrant Shares are being purchased for investment and not for
distribution or resale (other than a distribution or resale which, in the
opinion of counsel reasonably satisfactory to the Company, may be made without
violating the provisions of the Securities Act of 1933, as amended (the "Act"),
or any other applicable securities laws); and
(b) the undersigned understands that the Warrant Shares are "restricted
securities" within the meaning of Rule 144 promulgated by the Securities and
Exchange Commission, that the Warrant Shares have not been registered under the
Act or any other applicable securities laws and must be held indefinitely unless
they are subsequently registered under such Act and applicable laws or an
exemption from registration is available and that the Company is under no
obligation to register the Warrant Shares under the Act or any other applicable
securities laws or to take any action which would make available to the Holder
any exemption from such registration.
-------------------------------
Stephen P. Griggs
(Holder)
- 5 -
Dated 1998
STONEYRUN INC AND OTHERS (1)
CRAEGMOOR HEALTHCARE COMPANY LIMITED (2)
---------------------------
SHARE ACQUISITION AGREEMENT
relating to
SPECIALITY CARE LIMITED
---------------------------
BARLOW LYDE & GILBERT
Beaufort House
15 St Botolph Street
London EC3A 7NJ
Tel: 0171 247 2277
Fax: 0171 782 8504
<PAGE>
CONTENTS
CLAUSE OF AGREEMENT
- -------------------
1. Definitions and interpretation
2. Sale of Shares and Consideration
3. Conditions
4. Warranties
5. Announcements and confidentiality
6. Completion
7. Covenants by certain Vendors
8. Costs
9. Warranties and undertakings by the Purchaser
10. Restrictive Trade Practices Act 1976
11. Indemnity
12. General
13. Notices
14. Applicable law and jurisdiction
SCHEDULES
- ---------
1. Particulars of the Vendors, the Shares and the Consideration, and the
Purchaser
2. Particulars of the Company and the Subsidiary Undertakings
3. Completion obligations
4. General warranties
5. Warranties relating to Taxation
6. Details of the Properties and Warranties relating to the Properties
7. Warranties relating to environmental matters
DOCUMENTS IN THE APPROVED TERMS
- -------------------------------
1. Tax Deed
2. Letter(s) of resignation
3. Board minutes of the Group Companies
<PAGE>
4. Resolutions of the shareholders of the Purchaser
5. Powers of attorney
6. Deed of Waiver
7. Information warranted pursuant to paragraph 1.1 of Schedule 4
8. Deed of Covenant
ANNEXURE
1. Accounts
<PAGE>
THIS AGREEMENT is made on 1998
BETWEEN:
(1) STONEYRUN INC. AND OTHERS particulars of whom are set out in Part I of
Schedule 1 (together "the Vendors"); and
(2) CRAEGMOOR HEALTHCARE COMPANY LIMITED particulars of which are set out in
Part II of Schedule 1 ("the Purchaser").
WHEREBY IT IS AGREED as follows:
1. DEFINITIONS AND INTERPRETATION
1.1 The following words and expressions where used in this Agreement have the
meanings given to them below.
Accounts the audited consolidated accounts of the
Group as at the Accounts Date and the
audited accounts of each Subsidiary
Undertaking as at the Accounts Date, true
copies of which comprise Annexure 1;
Accounts Date 30 June 1997;
Business Day a weekday, other than a Saturday, on
which clearing banks are ordinarily open
for business in the City of London;
Companies Act the Companies Act 1985;
Company Speciality Care Limited, details of which
are set out in Part I of Schedule 2;
Completion the performance of the obligations to
complete the sale and purchase of the
Shares in accordance with Schedule 3;
<PAGE>
Completion Date the date on which Completion occurs;
Conditions the conditions set out in clause 3.1;
Consideration the consideration for the sale and
purchase of the Shares as stated in
clause 2.6;
Consideration Shares the B Convertible Shares of
(pound)1 each in the capital of the
Purchaser to be created on the passing of
the Resolution and to be allotted to the
Vendors pursuant to clause 2.6;
Copyright the copyright and design right in all the
works and designs (as defined in the
Copyright, Designs and Patents Act 1988)
in the possession or control of or used
by the Group;
Deed of Covenant the deed in the approved terms to be
entered into by Mr Timothy Nicholson;
Deed of Waiver the deed in the approved terms
under which a holder of options under the
Company's Employee Share Option Scheme
adopted on 26 July 1995 irrevocably
waives his or her right to exercise such
options;
Disclosure Letter the letter of the same date as
this Agreement (including its annexures)
from the Vendors' Solicitors to the
Purchaser containing the disclosures to
the Warranties;
Due Proportion in respect of each Vendor, the
proportion set out against that Vendor's
name in column (5) of Part I of Schedule
1;
<PAGE>
EEC Treaty the Treaty establishing the European
Economic Community;
Group the Company and the Subsidiary
Undertakings and "Group Company" means
any of such companies;
ICTA 1988 the Income and Corporation Taxes Act
1988;
Intellectual Property patents, trade marks, registered
designs, applications for any of the
foregoing, copyright, design rights and
analogous rights, trade and business
names, rights in confidential information
howsoever arising and any right or
interest in any of the foregoing;
Know-How inventions, discoveries, improvements,
processes, techniques, designs,
specifications, drawings, technical
information, methods, manuals,
instructions, catalogues and information
relating to customers and suppliers,
insofar as any of the foregoing relates
to the business of the Group and whether
or not it is written or unwritten;
London Stock The London Stock Exchange Limited;
Exchange
Management Accounts the management accounts for the
Group as at and for the period from 30
June 1997 to 8 February 1998 in the form
initialled by or on behalf of the parties
hereto;
<PAGE>
Ordinary Shares the 1,818,182 Ordinary Shares of 10p each
in the capital of the Company;
Pension Scheme Speciality Care (EMI) plc Pension
and Life Assurance Scheme and the pension
schemes relating to Lindeth College
referred to in the Disclosure Letter;
Preference Shares the (pound)7,500,000 cumulative
redeemable convertible preference shares
of (pound)1 each in the capital of the
Company;
Properties the properties, details of which are set
out in Part I of Schedule 6;
Purchaser Group the Purchaser and the subsidiary
undertakings of the Purchaser;
Purchaser Group Accounts has the meaning ascribed to it in clause
9.1.1;
Purchaser's Property Solicitors Simon Bishop & Partners of "Hillcairnie",
St Andrew's Road, Droitwich,
Worcestershire WR9 8DJ;
Purchaser's Solicitors Barlow Lyde & Gilbert of Beaufort House,
15 St Botolph Street, London EC3A 7NJ;
Purchaser's Warranties the warranties set out in clause 9.1;
Relevant Claim a claim for breach of a Warranty, a claim
pursuant to the Tax Deed or a claim
pursuant to clause 11;
Resolution the written resolutions in the approved
terms to be passed by the shareholders of
the Purchaser;
6
<PAGE>
Shares the Ordinary Shares and Preference Shares
of the Company to be acquired by the
Purchaser in accordance with this
Agreement;
Subsidiary Undertakings the subsidiary undertakings of the
Company, details of which are set out in
Part II of Schedule 2;
Tamaris Tamaris Plc;
Tamaris Claim has the meaning given to it in the letter
of even date herewith from the
Purchasers' Solicitors to the Vendors'
Solicitors;
Tax Deed the deed in the approved terms relating
to taxation to be executed at Completion;
Vendors' Property Solicitors Ellis Jones of 4 Monmouth Court,
Southampton Road, Ringwood, Hampshire
BH24 1HE;
Vendors' Solicitors Gouldens of 22 Tudor Street, London EC4Y
0JJ;
Warranties the warranties and undertakings set out
in clause 4 and Schedules 4, 5, 6 and 7.
1.2 Where used in this Agreement the terms "subsidiary", "subsidiary
undertaking", "holding company", "financial year", "director" and "shadow
director" shall have the meanings respectively attributed to them by the
Companies Act at the date of this Agreement; the term "recognised
investment exchange" shall have the meaning attributed to it by Part V of
the Financial Services Act 1986 at the date of this Agreement; the term
"connected person" shall have the meaning attributed to it by section 839
ICTA 1988 at the date of this Agreement and the words "connected with"
shall be construed accordingly; the term "taxation" shall have the meaning
attributed to "Taxation" in the Tax Deed; and the
<PAGE>
expression "for taxation purposes" shall have the meaning attributed to it
in the Tax Deed.
1.3 A reference to any statutory provision in this Agreement:
1.3.1 includes any order, instrument, plan, regulation, permission and
direction made or issued under such statutory provision or deriving
validity from it; and
1.3.2 shall be construed as a reference to such statutory provision as in
force at the date of this Agreement (including, for the avoidance of
doubt, any amendments made to such statutory provision that are in
force at the date of this Agreement); and
1.3.3 shall also be construed as a reference to any statutory provision in
force at the date of this Agreement of which such statutory
provision is a re-enactment or consolidation.
1.4 The headings in this Agreement are for convenience only and shall not
affect its meaning.
1.5 References to a clause, Schedule or paragraph are (unless otherwise
stated) to a clause of and Schedule to this Agreement and to a paragraph
of the relevant Schedule.
1.6 A document expressed to be "in the approved terms" means a document, the
terms, conditions and form of which have been agreed by the parties to
this Agreement and a copy of which has been identified as such and
initialled by or on behalf of each of the parties.
1.7 A document expressed to be an "Annexure" means a document a copy of which
has been identified as such and initialled by or on behalf of each of the
parties.
<PAGE>
1.8 Words importing one gender shall (where appropriate) include any other
gender and words importing the singular shall (where appropriate) include
the plural and vice versa.
2. SALE OF SHARES AND CONSIDERATION
2.1 Each of the Vendors shall, with full title guarantee, sell or procure to
be sold and the Purchaser shall purchase the Shares set opposite his name
in Columns (2) and (3) of Part 1 of Schedule I upon and subject to the
terms and conditions of this Agreement.
2.2 Each Vendor warrants and undertakes to the Purchaser that the Shares set
opposite his name in Columns (2) and (3) of Part 1 of Schedule I are
registered in his name in the Company's register of members, are and will
at Completion be, owned by him beneficially and legally and are, and will
at Completion be, free from all liens, charges and encumbrances or
interests in favour of or claims made by any other person.
2.3 The Purchaser shall not be obliged or entitled to complete the purchase of
any of the Shares unless the purchase of all of the Shares is completed
simultaneously.
2.4 Each of the Vendors shall procure that the Purchaser acquires good title
to the Shares respectively sold by him free from all liens, charges,
encumbrances, equities and claims whatsoever and together with all rights
now or hereafter attaching to them.
2.5 Each of the Vendors hereby waives and undertakes to procure that any other
person having such rights shall waive any pre-emption rights that he or
such other person may have relating to the Shares whether conferred by the
articles of association of the Company or otherwise.
2.6 The consideration for the sale of the Shares specified against each
Vendor's name in Columns (2) and (3) of Part 1 of Schedule I shall be:-
<PAGE>
2.6.1 the allotment to such Vendor of the number of the Consideration
Shares set against that Vendor's name in Column (4) of Part 1 of
Schedule 1; and
2.6.2 the payment to such Vendor (or as such Vendor may direct) of the
cash consideration set against that Vendor's name in Column (6) of
Part I of Schedule 1.
2.7 The Consideration Shares shall be allotted credited as fully paid and
shall rank pari passu in all respects with the shares of the same class in
the Purchaser.
3. CONDITIONS
3.1 Completion is conditional upon:
3.1.1 the passing of the Resolution by all the shareholders of the
Purchaser;
3.1.2 the execution by Mr Nicholson of the Deed of Covenant;
3.1.3 the execution of a Deed of Waiver by each person who holds an option
under the Company's Employee Share Option Scheme adopted on 26 July
1995; and
3.1.4 receipt by Speciality Care (REIT Homes) Limited of not less than the
sum of (pound)258,616, being rent deposits to be released to it by
Principal Healthcare Finance Limited relating to Weald Hall Nursing
Home and Catchpole Court.
4. WARRANTIES
4.1 The Vendors, upon the execution of this Agreement, severally warrant to
the Purchaser in the terms of the Warranties.
4.2 The Warranties are given subject only to matters fairly disclosed in the
Disclosure Letter, but no other information of which the Purchaser has
knowledge (actual or constructive) shall prejudice any claim made by the
Purchaser under the Warranties or operate to reduce any amount
recoverable.
<PAGE>
The Purchaser confirms that, at the time of execution of this Agreement,
neither Mr John McAllister nor Mr Michael Stratford is actually aware of
any circumstances which he also appreciates at such time will constitute a
breach of a Warranty or give rise to a claim under the Tax Deed.
4.3 The Vendors agree that, if there is a breach of any of the Warranties,
then, without prejudice to the right of the Purchaser to claim damages on
any other basis, the Vendors shall pay to the Purchaser together in each
case with all costs and expenses reasonably incurred or sustained by the
Purchaser and/or the relevant Group Company as a result of the breach or of
the fact, matter, event or circumstance resulting in the breach a sum equal
to the aggregate of each liability and excess liability of each Group
Company which has been or will be incurred and which would not have been
incurred had matters been as warranted at the date the Warranties were
given. Notwithstanding clause 12.10, and without prejudice to any other
evidence that may be produced, in calculating the amount of the Vendors'
liability for any breach of the Warranties, regard shall be had to
correspondence between the parties (including correspondence between the
Purchaser and Mr Timothy Nicholson and/or Mr Derek Cormack) concerning the
manner in which the Consideration has been calculated.
4.4 The Warranties shall continue in full force and effect notwithstanding
Completion.
4.5 Where any statement in the Warranties is qualified by the expression "to
the best of the knowledge, information and belief of the Vendors" or "so
far as the Vendors are aware" or any similar expression, each Vendor shall
be deemed to have knowledge of:
4.5.1 anything of which the other Vendors have actual knowledge;
4.5.2 anything of which he ought reasonably to have knowledge given his
particular position in and responsibilities to the Company; and
<PAGE>
4.5.3 anything of which he would have had knowledge had he made due and
careful enquiry of Mr Timothy Nicholson or Mr Derek Cormack
immediately before giving the Warranties.
4.6 Each of the Warranties shall be separate and independent and, save as
expressly provided, shall not be limited by reference to any other
Warranty or any other provision in this Agreement.
4.7 Each Warranty which is expressed to be given in relation to the Company
shall also be deemed to be given in relation to each of the Subsidiary
Undertakings as if it had been repeated with respect to each Subsidiary
Undertaking naming it in place of the Company throughout. The Warranties in
paragraph 4 of Schedule 4 shall, in addition, apply to the Group as if they
had been expressly repeated with respect to the Group naming it in place of
the Company throughout.
4.8 The liability of each Vendor for any breach of the Warranties or pursuant
to this clause and/or the terms of the Tax Deed shall be limited to that
Vendor's Due Proportion of the total liability concerned.
4.9 The Vendors undertake not to exercise any right of counterclaim or set-off
or any other claim or right of recovery against any Group Company or any
of its officers, employees, auditors or advisers in relation to any claim
which may be made in respect of the Warranties or under the Tax Deed.
4.10 Save in the event of fraud or wilful non-disclosure on the part of any of
them, the Vendors shall be under no liability:
4.10.1 for breach of any of the Warranties in Schedule 4 (other than those
in paragraphs 4.2.4 and 4.2.5) or Schedule 6 unless written notice
of the claim has been given to the Vendors by or on behalf of the
Purchaser on or before 30 June 2000; or
4.10.2 for breach of any of the Warranties in Schedule 5 or in paragraphs
4.2.4 and 4.2.5 of Schedule 4 or in respect of any claim under the
Tax Deed
<PAGE>
unless written notice of the claim has been given to the Vendors by
or on behalf of the Purchaser on or before 26 February 2004
and any claim in respect of which such written notice is given shall
(unless previously agreed or withdrawn) be deemed to have been irrevocably
and unconditionally withdrawn if no proceedings shall have been issued and
served upon the Vendors in respect of such claim within 12 months of the
later of (a) delivery of such written notice and (b) all consultations and
actions taken or required to be taken by the Purchaser pursuant to clause
4.15 of this Agreement or clauses 7.3 or 8 of the Tax Deed (as
appropriate) having been completed or terminated.
4.11 The Vendors shall not be liable in respect of any claim for breach of
the Warranties or pursuant to the terms of the Tax Deed unless the
aggregate amount payable in respect of the claim together with all
amounts payable in respect of other claims (each such amount being an
amount in excess of (pound)20,000, in accordance with clause 4.13)
exceeds (pound)75,000 but once such aggregate amount has been exceeded
the Vendors shall be liable for the whole of such aggregate amount and
not just the excess.
4.12 Without in any way derogating from the provisions of clause 4.19
should all the Consideration Shares allotted to such Vendor hereunder
("its Consideration Shares") be converted into Deferred Shares
pursuant to the articles of association of the Purchaser, the
aggregate liability of each Vendor for Relevant Claims shall not
exceed whichever is applicable of the following, viewed as of the date
on which the Relevant Claim concerned is due to be satisfied:-
4.12.1 prior to a Sale or Listing, that Vendor's Due Proportion of
(pound)20,000,000;
4.12.2 on or after a Sale or Listing, the Realised and Realisable Sale
Proceeds of its Consideration Shares, subject to a maximum
aggregate liability of that Vendor's Due Proportion of
(pound)20,000,000.
<PAGE>
"Realised Sale Proceeds" for this purpose means the total proceeds
of sale of the Consideration Shares concerned received by the Vendor
concerned on a sale of such Consideration Shares to a bona fide
third party purchaser on an arm's length basis. "Realisable Sale
Proceeds" for this purpose means the price at which the Vendor
concerned is or was (as the case may be) able to sell the
Consideration Shares concerned to a bona fide third party purchaser
on an arm's length basis (and irrespective of whether or not such
shares are or were actually so sold), at the earliest permissible
time without infringing any contractual or other legal restriction
on or after a Sale or Listing, as evidenced by a written offer to
such Vendor from such an offeror with the necessary financial
resources to satisfy the relevant payment obligations in full or (as
appropriate) by an opportunity offered by the sponsor to the Listing
for the Consideration Shares to be sold or placed as part of the
Listing process.
Where a Vendor's Consideration Shares are sold to a bona fide third
party purchaser on an arm's length basis and the proceeds of sale of
such Consideration Shares comprise listed shares, the Realised
and/or Realisable Sale Proceeds of such Consideration Shares shall
be determined by reference only to a sale or (as appropriate) an
ability to sell the listed shares so acquired. Accordingly, in such
a case, references in the definitions above of "Realised Sale
Proceeds" and "Realisable Sale Proceeds" to the Consideration Shares
shall be construed as references to the listed shares acquired on
the sale of the Consideration Shares concerned.
In this clause 4.12, "Sale" means the unconditional completion of the sale
of at least ninety per cent of the issued Ordinary Share capital of the
Purchaser to a single purchaser or to one or more purchasers as part of a
single transaction, and "Listing" has the meaning given to it in the
articles of association of the Purchaser in force at the date hereof.
<PAGE>
If some only of the Vendor's Consideration Shares are sold, or able to be
sold, or referred to in clause 4.12.2, then clause 4.12.2 shall operate on
a pro-rata basis (so that if, for example, half of such Consideration
Shares are sold as referred to in Clause 4.12.2, that Vendor's aggregate
liability for Relevant Claims would consist at such time of a sum equal to
the aggregate of (i) 50 per cent. of that Vendor's Due Proportion of
(pound)20,000,000 and (ii) the total proceeds of sale of the Consideration
Shares concerned).
4.13 The Vendors shall not be liable in respect of any breach of the Warranties
or pursuant to the terms of the Tax Deed unless the amount payable in
respect of the liability of the Vendors in respect of that individual
breach or claim exceeds (pound)20,000.
4.14 The Vendors shall not be liable for any Relevant Claim to the extent that
the loss concerned has been recovered by the Purchaser pursuant to another
Relevant Claim.
4.15 The Purchaser shall, as soon as practicable and in any event within 25
Business Days after the same comes to its notice, inform the Vendors in
writing of any fact, matter, event or circumstance ("claim against the
Group") which comes to its notice whereby it appears that the Vendors are
or may become liable in respect of a breach of any of the Warranties and
shall in relation thereto:-
4.15.1 consult with the Vendors as to the way in which the claim against
the Group might be avoided, resolved, minimised or compromised and
afford to the Vendors a reasonable opportunity to propose to the
Purchaser a method of resolving or compromising the same; and
4.15.2 at the written request of the Vendors and on being indemnified to
the reasonable satisfaction of the Purchaser in respect of all
losses, claims, demands, costs and expenses which may thereby be
incurred (including legal costs) take or procure that the Company
or the Subsidiary Undertaking concerned shall take such action (and
not take any action inconsistent therewith) as the Vendors may
reasonably require to avoid, dispute, resist, compromise or defend
the said claim against the Group.
<PAGE>
4.16 No liability shall attach to the Vendors in respect of a breach of any of
the Warranties to the extent that:
4.16.1 a specific provision or specific reserve in respect of such breach
has been made in the Accounts or in the Management Accounts;
4.16.2 such claim arises as a consequence of a change in the law
(including a published Inland Revenue statement of practice or
extra-statutory concession, not being a statement of practice or
extra-statutory concession announced, expected or in general
contemplation prior to Completion) enacted or effected after the
date of this Agreement;
4.16.3 such claim arises as a result of any specific provision or specific
reserve made in respect thereof in the Accounts or the Management
Accounts being insufficient by reason of any increase in rates of
taxation made after the date of this Agreement or as a result of
the retrospective imposition of taxation as a consequence of a
change in the law enacted after the date of this Agreement;
4.16.4 the breach or the events giving rise to such breach would not have
arisen but for a voluntary act, omission or transaction of the
Purchaser or any member of the Purchaser Group (including the
Company and Subsidiary Undertakings or any of them) effected after
Completion otherwise than in the ordinary course of business as
presently carried on;
4.16.5 the Purchaser or any relevant member of the Purchaser Group
(including the Company and Subsidiary Undertakings or any of them)
has previously received full indemnity against any loss or damage
suffered by it arising out of the breach under the terms of any
insurance policy of such company in force at the date hereof (or to
the extent that the Purchaser or relevant member of the Purchaser
Group could have recovered had it maintained such cover or at least
equivalent cover at the time of the claim concerned);
<PAGE>
4.16.6 the matter giving rise to the same is attributable to or consequent
upon any change to the accounting policy or the financial year end
date of the Company or any Subsidiary Undertaking on or after
Completion;
4.16.7 the same arises or is increased by reason of the failure or
omission on the part of the Purchaser or any member of the
Purchaser Group (including the Company and any Subsidiary
Undertakings) after Completion to make any claim, action, surrender
or disclaimer or to give any notice or consent to do any other
thing the making or giving or doing of which was specifically taken
into account in computing the provisions or reserve for taxation in
the Accounts or Management Accounts;
4.16.8 the same arises or is increased by reason of the waiver or
surrender after Completion by the Purchaser or any member of the
Purchaser Group (including the Company and any Subsidiary
Undertakings) of any exemption, relief, allowance, credit,
deduction or set-off available to it which arose on or before the
Accounts Date and relevant to the computation of a liability to
taxation or any credit against taxation; or
4.16.9 the liability to which the breach gives rise is a contingent
liability unless or until such liability becomes actual.
4.17 No Vendor shall in relation to the sale hereunder of the Shares be liable
in respect of any representations or warranties or similar assurances which
are not contained and expressly given or assumed by it in this Agreement or
the Disclosure Letter.
4.18 In the event of the Vendors having paid to the Purchaser an amount in
respect of a claim for breach of any of the Warranties or a claim under the
Tax Deed and subsequent to the date of making such payment the Purchaser or
any other member of the Purchaser Group (including the Company and the
Subsidiary Undertakings or any of them) recovers from a third party a sum
which is referable to that payment then the Purchaser shall forthwith repay
or procure the repayment by such member to the Vendors (or those of them
making the
<PAGE>
original payment) of so much of the amount paid by the third party as does
not exceed the sum paid by the Vendors to the Purchaser or other such
member. The Purchaser hereby undertakes to use and to procure that each
other such member uses all reasonable endeavours to enforce any right to
recover any such sum.
4.19 The Purchaser acknowledges and agrees that any Relevant Claim that is
agreed to or accepted by the Vendors or is otherwise determined shall be
regarded as settled (and the Vendors as having made a payment to the
Purchaser in respect of such claim for the purposes of this Agreement) to
the extent that the Consideration Shares are converted, in accordance with
the Articles of Association of the Purchaser (as amended following the
passing of the Resolution), into Deferred Shares. Any payment made by the
Vendors in respect of a Relevant Claim (whether in cash or by means of
conversion of Consideration Shares as referred to in this clause) shall be
regarded as a reduction in the price paid by the Purchaser for the Shares.
Conversion of all of the Consideration Shares allotted to a particular
Vendor as referred to in this clause shall extinguish all further liability
of that Vendor in respect of any Relevant Claim.
5. ANNOUNCEMENTS AND CONFIDENTIALITY
5.1 No announcement relating to the subject matter of this Agreement or any
matter ancillary to this Agreement shall be made by or on behalf of any of
the Vendors or the Purchaser without the prior written approval of the
other parties provided that nothing shall prevent any of the parties making
(even in the absence of the approval of the other parties) any announcement
or disclosure required by law or by any regulatory authority.
5.2 Each of the Vendors severally covenants and undertakes to keep confidential
and not at any time after the date of this Agreement to disclose or make
known in any way to anyone (other than the Purchaser) or use for its own or
any other person's benefit any Know-How or confidential information
relating to any of the customers, suppliers or affairs of the businesses
(including any prospective
<PAGE>
businesses) of the Group or otherwise relating to the business of the
Group, provided that:-
5.2.1 this obligation shall not extend to any Know-How or confidential
information which shall have come into the public domain through no
default of any Vendor;
5.2.2 such covenant and undertaking shall not prevent any disclosure of
information required by law or regulation or competent governmental
authority;
5.2.3 disclosure or use by any Vendor who continues as a director or
employee of the Company in the ordinary and proper course of his
duties shall not constitute a breach of such covenant or
undertaking; and
5.2.4 Nash, Sells & Partners Limited may disclose to investors in funds
managed by it (in accordance with its previous practice) information
concerning the Group:-
(a) obtained prior to Completion; and/or
(b) obtained thereafter and relating to the rights and obligations
of Nash, Sells & Partners Limited and/or Nash, Sells, LP 1A
and/or Nash, Sells LP 1C under this Agreement the Tax Deed and
any other documents entered into pursuant hereto and/or as a
holder of shares in the Purchaser;
5.2.5 this obligation shall not prevent disclosure of any information by
any Vendor to another Vendor in connection with this Agreement or
the Tax Deed or any agreement entered into pursuant hereto in the
proper enjoyment by that Vendor of its rights under this Agreement
or any agreement aforesaid or performance of its obligations
thereunder.
<PAGE>
5.3 All records, papers and documents in the possession, custody or control of
or kept or made by or on behalf of the Vendors relating exclusively to the
business or affairs of any Group Company or belonging to any Group Company
shall be deemed to be the property of that Group Company and all such
items shall be delivered to the Purchaser or as the Purchaser may direct
at Completion.
6. COMPLETION
6.1 Completion shall take place at the offices of the Purchaser's Solicitors
immediately after satisfaction of the Conditions. On such date the Vendors
and the Purchaser shall perform their respective obligations in relation
to the sale and purchase of the Shares in accordance with and as set out
in Schedule 3.
7. COVENANTS BY CERTAIN VENDORS
7.1 Each of Stoneyrun Inc and Eagleview III Associates LP covenants with the
Purchaser that it will not either on its own account or in conjunction
with or on behalf of any other person or persons, whether directly or
indirectly, for the period of:
7.1.1 two years from the Completion Date, solicit or entice away or
endeavour to solicit or entice away from the Purchaser Group or any
Group Company any person who was at the Completion Date, or who
during the period of six months prior to the Completion Date had
been, employed by any Group Company as a Home Manager or in any
other equivalent or more senior position, whether or not such person
would commit a breach of his or her contract of employment by reason
of leaving service;
7.1.2 two years from the Completion Date, employ or offer to employ,
whether as an employee, director, consultant or otherwise, any
person who was at the Completion Date, or who during the period of
six months prior to the Completion Date had been, employed by any
Group Company as a Home Manager or in any other equivalent or more
senior
<PAGE>
position, whether or not such person would commit a breach of his or
her contract of employment by reason of leaving service; and
7.1.3 two years from the Completion Date, carry on or be engaged,
concerned or interested in any business in the United Kingdom which
competes with the business of any member of the Group as the same
was carried on at the Completion Date (other than as a holder of
securities listed or dealt in on a recognised investment exchange
provided that such holding shall not exceed five per cent of the
class of securities of which the said holding forms part).
7.2 Each of the undertakings contained in clause 7.1 is a separate undertaking
by each of Stoneyrun Inc and Eagleview III Associates LP in relation to
itself and its interests and shall be enforceable by the Purchaser
separately and independently of its right to enforce any one or more of the
other covenants contained in clause 7.1 and in the event that any such
undertaking shall be found to be void but would be valid if some part were
deleted or the period or area of application were reduced, then such
undertaking shall apply with such modification as may be necessary to make
it valid and effective.
8. COSTS
8.1 Each party shall pay its own costs and expenses incurred in the
negotiation, preparation and execution of this Agreement and the Vendors
represent and undertake that none of such costs and expenses have been nor
will prior to Completion be borne by any Group Company.
8.2 Each Vendor severally agrees to pay to the Purchaser forthwith on demand
that Vendor's Due Proportion of an amount equal to all professional costs
and expenses (including legal, accountancy, surveyor's and valuer's costs
and expenses) invoiced to or incurred by the Company or any other member of
the Group as a result of or in connection with (a) the negotiation,
preparation and execution of this Agreement and/or the agreements relating
to the acquisition by Parkcare Homes Limited of the freehold property at
Weald Hall, Weald Hall Lane, North Weald, Epping Forest, (b) the
negotiations prior to Completion
<PAGE>
with Principal Healthcare Finance Limited for the sale of the share
capital of Irvine Care Limited and the Leasehold Properties described in
paragraphs 24-27 (inclusive) of Part I of Schedule 6 together with certain
assets pertaining to the businesses carried on there and (c) the
negotiations prior to Completion with Eton Hall Nursing Homes Limited for
the sale of the Leasehold Properties described in paragraphs 20, 21 and 22
of Part I of Schedule 6 together with certain assets pertaining to the
businesses carried on there. The Vendors shall have sole conduct of
negotiations leading to the agreement or settlement of any such costs and
expenses, subject always to the approval of the Purchaser (such approval
not to be unreasonably withheld or delayed).
9. WARRANTIES AND UNDERTAKINGS BY THE PURCHASER
9.1 The Purchaser warrants and undertakes to and with each of the Vendors that:
9.1.1 the audited consolidated accounts of the Purchaser Group as at and
for the period ended on 31 December 1996 ("the Purchaser Group
Accounts") give a true and fair view of the state of affairs of the
Purchaser Group at such date and of its profits for the year ended
on that date and were prepared in accordance with generally accepted
accounting principles consistently applied and comply with the
Companies Act;
9.1.2 since 31 December 1996 the businesses of the Purchaser and its
subsidiary undertakings have been carried on in the ordinary and
usual course, no material contracts or commitments of an onerous
nature have been entered into and there has been no significant
adverse change in the financial or trading position of the Purchaser
and its subsidiary undertakings taken as a whole;
9.1.3 neither the Purchaser nor any of its subsidiary undertakings is
engaged in any legal or arbitration proceedings which individually
or collectively may have, or have had during the immediately
preceding twelve months, a significant effect on the financial
position of the Purchaser and its subsidiary undertakings taken as a
whole and no such
<PAGE>
proceedings are pending or (to the best of the information,
knowledge and belief of the Purchaser) are threatened, nor is the
Purchaser aware of any circumstances which are likely to give rise
to any such legal or arbitration proceedings;
9.1.4 no material outstanding indebtedness of the Purchaser or any of its
subsidiary undertakings has become payable before its due date for
repayment by reason of any event including any default by the
Purchaser or any of its subsidiary undertakings and there are no
circumstances known to the Purchaser which are likely to lead to
such occurrence and neither the Purchaser nor any of its subsidiary
undertakings is in material breach of the terms of any agreements
relating to any of its or their indebtedness;
9.1.5 no member of the Purchaser Group has taken any action nor have any
other steps been taken or legal proceedings started against the
Purchaser Group for its or their winding-up or dissolution or for it
or any of them to enter into any arrangement or composition for the
benefit of creditors, nor so far as the Purchaser is aware have any
steps been taken for the appointment of a receiver, administrator,
administrative receiver, trustee or similar officer of any of them
or any of their respective properties or other assets;
9.1.6 the copy of the Memorandum and Articles of Association of the
Purchaser delivered to the Vendors' Solicitors is a true and
complete copy of the Memorandum and Articles of Association of the
Purchaser and incorporates or contains a copy of every such
resolution or agreement as is referred to in section 380 of the
Companies Act;
9.1.7 with the exception of options to subscribe for a total of 110,250
Ordinary Shares of (pound)1 each in the capital of the Purchaser, as
at the date of this Agreement no person has the right (whether now
or later and whether absolutely or contingently) to call for the
issue of any share
<PAGE>
in the capital of the Purchaser or of any security carrying rights
of conversion into any such share;
9.1.8 subject to the passing of the Resolution, the Purchaser has obtained
all necessary authorities, powers and consents and has taken all
necessary steps to enable it lawfully to issue the Consideration
Shares in accordance with the requirements of this Agreement;
9.1.9 the authorised share capital of the Purchaser at the date of this
Agreement is (pound)24,650,000 divided into 2,203,000 Ordinary
Shares of (pound)1 each and 224,470 Cumulative Redeemable Preferred
Shares of (pound)100 each;
9.1.10 the share capital of the Purchaser in issue at the date of this
Agreement is (pound)24,539,852, divided into 2,092,752 Ordinary
Shares of (pound)1 each and 224,471 Cumulative Redeemable Preferred
Shares of (pound)100 each, all of which are fully paid up.
9.2 Save in the event of fraud or wilful non-disclosure, the Purchaser shall be
under no liability for breach of any of the Purchaser's Warranties, unless
written notice of the claim has been given to the Purchaser by or on behalf
of the Vendors on or before 30 June 2000 and any claim in respect of which
such written notice is given shall (unless previously agreed or withdrawn)
be deemed to have been irrevocably and unconditionally withdrawn if no
proceedings shall have been issued and served upon the Purchaser in respect
of such claim within 12 months of delivery of such written notice.
9.3 The Purchaser shall not be liable in respect of any claim for breach of the
Purchaser's Warranties unless the aggregate amount payable in respect of
the claim together with all amounts payable in respect of other claims
exceeds (pound)75,000 but once such aggregate amount has been exceeded the
Purchaser shall be liable for the whole of such aggregate amount and not
just the excess.
9.4 The aggregate liability of the Purchaser for breach of the Purchaser's
Warranties shall not exceed (pound) 20,000,000.
<PAGE>
9.5 The Purchaser shall not be liable in respect of any breach of the
Purchaser's Warranties unless the amount payable in respect of the
liability of the Purchaser in respect of that individual breach or claim
exceeds (pound)20,000.
9.6 The Vendors shall as soon as practicable and in any event within 25
Business Days inform the Purchaser in writing of any fact, matter, event or
circumstance ("claim against the Purchaser's Group") which comes to its
notice whereby it appears that the Purchaser is or may become liable in
respect of a breach of any of the Purchaser's Warranties and shall in
relation thereto consult with the Purchaser as to the way in which the
claim against the Purchaser's Group might be avoided, resolved, minimised
or compromised and afford to the Purchaser a reasonable opportunity to
propose to the Vendors a method of resolving or compromising the same.
9.7 No liability shall attach to the Purchaser in respect of a breach of any of
the Purchaser's Warranties to the extent that:
9.7.1 a specific provision or specific reserve in respect of such breach
has been made in the Purchaser Group Accounts;
9.7.2 such claim arises as a consequence of a change in the law enacted
after the date of this Agreement;
9.7.3 such claim arises as a result of any specific provision or specific
reserve made in respect thereof in the Purchaser Group Accounts
being insufficient by reason of any increase in rates of taxation
made after the date of this Agreement or as result of the
retrospective imposition of taxation as a consequence of a change in
the law enacted after the date of this Agreement; or
9.7.4 the Vendors or any or them have previously received full indemnity
against any loss or damage suffered by it or them arising out of the
breach under the terms of any insurance policy in force at the date
hereof (or to the extent that the Vendors or any of them could have
<PAGE>
recovered had they or it maintained such cover or at least
equivalent cover at the time of the claim concerned).
9.8 The Purchaser agrees that, if there is a breach of any of the Purchaser's
Warranties then, without prejudice to the right of the Vendors to claim
damages on any other basis, the Purchaser shall pay to the Vendors
together in each case with all costs and expenses reasonably incurred or
sustained by the Vendors as a result of the breach or of the fact, matter,
event or circumstance resulting in the breach a sum equal to the aggregate
of each liability and excess liability of each Purchaser Group Company
(including the Company and Subsidiary Undertakings) which has been or will
be incurred and which would not have been incurred had matters been as
warranted in Clause 9.1 at the date such Purchaser's Warranties were
given. Notwithstanding clause 12.10, and without prejudice to any other
evidence that may be produced, in calculating the amount of the
Purchaser's liability for any breach of the Purchaser's Warranties, regard
shall be had to correspondence between the parties (including
correspondence between the Purchaser and Mr Timothy Nicholson and/or Mr
Derek Cormack) concerning the manner in which the Consideration has been
calculated.
9.9 The Purchaser's Warranties shall continue in full force and effect
notwithstanding Completion.
9.10 The Purchaser's Warranties shall be separate and independent and, save as
expressly provided, shall not be limited by reference to any other
warranty in Clause 9.1 or any other provision in this Agreement.
10. RESTRICTIVE TRADE PRACTICES ACT 1976
Where this Agreement is or forms part of an agreement which is subject to
registration under the Restrictive Trade Practices Act 1976 ("RTPA"), no
restriction accepted or information provision made under that agreement
shall come into effect until the day after particulars of the agreement
have been furnished to the Director General of Fair Trading under section
24 RTPA. If any party shall wish to furnish such particulars, the other
parties will at the
<PAGE>
expense of the Purchaser render such co-operation and undertake such
action as may reasonably be required of them for such purpose so that
particulars may be furnished as soon as practicable following the
signature of this Agreement and each of the parties consents to the
disclosure of all information so furnished. In this clause the words and
terms "agreement" and "subject to registration" shall have the meanings
respectively given to them by the RTPA and the reference to "restrictions
accepted" or "information provisions made" under the agreement shall be to
restrictions accepted or information provisions made by virtue of which
the agreement is subject to registration.
11. INDEMNITY
11.1 Each Vendor hereby severally undertakes to pay to the Purchaser forthwith
on demand that Vendor's Due Proportion of an amount equal to all and any
liabilities, costs, charges and expenses suffered or incurred by the
Company or any other member of the Group or the Purchaser Group as a
result of or in connection with the Tamaris Claim (including any amounts
paid to Tamaris on settlement of the Tamaris Claim). For the avoidance of
any doubt, such costs and expenses include legal costs and expenses and
other costs and expenses referred to in the following provisions of this
clause 11, which costs and expenses shall be paid by each Vendor (as to
his Due Proportion of the same) as and when such costs and expenses fall
due for payment by the member of the Purchaser Group concerned.
11.2 Subject always to the Purchaser being satisfied that all steps to be taken
by the Vendors in connection with the Tamaris Claim are reasonable and
proper:
11.2.1 the Vendors shall have sole conduct of all negotiations with
Tamaris in respect of the Tamaris Claim; and
11.2.2 the Vendors shall have the sole right to resist, avoid, dispute,
appeal against, compromise or defend or agree or settle proceedings
served on the Company by Tamaris (and to enforce the Company's
rights if any
<PAGE>
arising out of the Tamaris Claim) in the name of the Company but at
the sole expense of the Vendors.
11.3 The Vendors shall keep the Purchaser fully informed of all steps taken by
them or Tamaris in connection with the Tamaris Claim.
11.4 The Purchaser undertakes to give, or to procure that the Purchaser Group
following Completion gives, the Vendors all reasonable co-operation,
access and assistance, technical or otherwise, for the purpose of
resisting the Tamaris Claim, subject always to the Vendors meeting all
expenses incurred as a result of such co-operation.
12. GENERAL
12.1 Except where otherwise stated, any obligation imposed by or resulting from
the execution of this Agreement which is undertaken by two or more persons
shall constitute a several obligation of such persons.
12.2 This Agreement (including the Disclosure Letter, the documents in the
approved terms, the Annexure and the various letters relating to this
Agreement executed on the date of this Agreement) constitutes the entire
and only legally binding agreement between the parties relating to the
sale and purchase of the Shares and no variation of this Agreement shall
be effective unless made in writing signed by or on behalf of all the
parties and expressed to be such a variation.
12.3 Any remedy or right conferred by this Agreement on the Purchaser or the
Vendors for breach of this Agreement shall be in addition to and without
prejudice to any other right or remedy available to it or them.
12.4 No failure or delay by the Purchaser or the Vendors or time or indulgence
given by it or them in or before exercising any remedy or right under or
in relation to this Agreement shall operate as a waiver of the same nor
shall any single or partial exercise of any remedy or right preclude any
further exercise of the same or the exercise of any other remedy or right.
<PAGE>
12.5 No waiver by any party of any requirement of this Agreement or of any
remedy or right under this Agreement shall have effect unless given by
notice in writing signed by such party. No waiver of any particular breach
of the provisions of this Agreement shall operate as a waiver of any
repetition of such breach.
12.6 Any release, waiver or compromise or any other arrangement which either
the Purchaser gives or enters into with any Vendor or which any one Vendor
gives or enters into with the Purchaser in connection with this Agreement
shall not either affect any right or remedy of the Purchaser as regards
any other Vendor's liabilities under or in relation to this Agreement or
affect any right or remedy of any other Vendor against the Purchaser under
or in relation to this Agreement.
12.7 This Agreement may be executed in two or more counterparts and execution
by each of the parties of any one of such counterparts will constitute due
execution of this Agreement.
12.8 Each Vendor shall and shall procure that any third party shall, do,
execute and perform all such further deeds, documents, assurances, acts
and things as may be necessary to transfer his Shares to the Purchaser.
12.9 The provisions of this Agreement shall remain in full force and effect
after Completion so far as they then remain to be observed and performed.
12.10 Each of the parties acknowledges that he is entering into this Agreement
without reliance on any warranty, representation, undertaking or statement
of fact or opinion made to him by or on behalf of any other party in
relation to the subject matter of this Agreement other than as expressly
contained in this Agreement and in the documents in the approved terms
provided that nothing herein shall exclude any party from liability for
fraudulent misrepresentation.
12.11 None of the parties hereto shall assign in whole or in part the benefit of
this Agreement or the Tax Deed.
13. NOTICES
<PAGE>
13.1 Any notice shall be in writing and signed by or on behalf of the person
giving it and shall be irrevocable without the written consent of the
party on whom it is served.
13.2 Each Vendor hereby irrevocably authorises Mr K. Alessandro of Hamilton
House, 1 Temple Avenue, London EC4Y 0HA and Mr Marshall Elkins of 2500
West 4th Street, PO Box 25330, Wilmington, Delaware 19899, USA acting
jointly (or such other representative(s) (not exceeding two persons in
total) as Vendors holding between them or allotted in the majority of the
Consideration Shares shall nominate in writing to the Purchaser) ("the
Vendors' Representatives") on its behalf to:-
13.2.1 give and receive any notice, document or other information under or
pursuant to this Agreement (provided always that a copy of any such
notice, document or other information given by the Purchaser is also
provided by the Purchaser to Nash, Sells & Partners Limited and
Tiverton Holdings Limited);
13.2.2 negotiate, compromise and agree any matters in connection with all
or any of the provisions of this Agreement, including any claim
under the Warranties or any matters arising under clause 11; and
13.2.3 execute and/or agree any other matter, document or thing, and take
any other action, as shall in the Vendors' Representatives'
discretion appear necessary or desirable for the purposes of, or in
connection with, this Agreement (including for the avoidance of
doubt any of the documents in the approved terms).
The Purchaser shall be entitled to assume that the Vendors'
Representatives have full authority, on behalf of each Vendor, for all the
purposes referred to in this clause.
13.3 Service of a notice must be effected by one of the following methods:
<PAGE>
13.3.1 personally by giving it to any partner of a partnership that is a
party or to any director or the secretary of any company that is a
party;
13.3.2 by leaving it at or sending it by prepaid first class post (or by
airmail if from one country to another) to the address of such party
set out in Schedule 1 or to such other address in England as that
party shall have notified from time to time to all the other parties
for the purposes of this clause by notice given in accordance with
this clause for which purpose the last substituted address shall
supersede all persons substitutions.
13.4 Notices shall be deemed served as follows:
(a) in the case of personal service at the time of such service;
(b) in the case of leaving the notice at the relevant address, at the
time of so leaving it;
(c) in the case of service by post, on the second (or if by airmail the
fourth) Business Day following the day on which it was posted and in
proving such service it shall be sufficient to prove that the notice
was properly addressed, stamped and posted.
13.5 Each of the following Vendors, namely, Stoneyrun Inc, New Southwood
Associates Inc, Tiverton Holdings Limited, Lowton Holdings Limited, Sergus
Investments S.A. and Eagleview III Associates LP, irrevocably and
unconditionally nominates and instructs the Vendors' Solicitors (reference
ACG/PLN) to be its agent to receive and accept service of proceedings for
the purposes of this Agreement on its behalf, and acknowledges that
service upon the Vendors' Solicitors shall constitute good service for all
purposes and waives all rights to raise any defence in this respect.
<PAGE>
14. APPLICABLE LAW
14.1 This Agreement shall be governed by and construed in accordance with the
laws of England.
14.2 The parties irrevocably submit to the exclusive jurisdiction of the Courts
of England and Wales in respect of any claim, dispute or difference
arising out of or in connection with this Agreement.
AS WITNESS this Agreement has been executed by or on behalf of the parties the
day and year first before written.
<PAGE>
SCHEDULE 1
Part I
Particulars of the Vendors, the Shares and the Consideration
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5) (6)
VENDORS ORDINARY PREFERENCE CONSIDERATION DUE CASH
SHARES SOLD SHARES SOLD SHARES PROPORTION CONSIDERATION
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stoneyrun Inc
c/o Andrew Panaccione
2500 West 4th Street
Suite 11
Wilmington
Delaware 19805 1,027,624 -- 28,149 11.5% (pound)29,511
USA
- ------------------------------------------------------------------------------------------------------------------------------------
New Southwood Associates Inc.
2500 West 4th Street
P O Box 25330
Wilmington
Delaware 19899
USA 387,187 4,773,846 129,732 53% (pound)136,006
- ------------------------------------------------------------------------------------------------------------------------------------
Nash, Sells & Partners Limited
25 Buckingham Gate
London SW1E 6LD 403 624 25 0.01% (pound)26
- ------------------------------------------------------------------------------------------------------------------------------------
Nash, Sells LPIA
25 Buckingham Gate 296,545 459,585 21,369 8.73%
London SW1E 6LD (pound)22,403
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5) (6)
VENDORS ORDINARY PREFERENCE CONSIDERATION DUE CASH
SHARES SOLD SHARES SOLD SHARES PROPORTION CONSIDERATION
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nash, Sells LPIC
25 Buckingham Gate 25,675 39,791 1,860 0.76% (pound)1,950
London SW1E 6LD
- ------------------------------------------------------------------------------------------------------------------------------------
Tiverton Holdings Limited
P O Box 761
Ordnance House
31 Pier Road
St Helier
Jersey 27,624 2,127,113 57,033 23.3% (pound)59,792
Channel Islands
- ------------------------------------------------------------------------------------------------------------------------------------
Eagleview III Associates LP
c/o Wilsbach Distributors, Inc.,
P.O. Box 6148
Harrisburg PA 17112 21,780 99,041 2,448 1% (pound)2,566
USA
- ------------------------------------------------------------------------------------------------------------------------------------
Lowton Holdings Limited
P.O. Box 186
1 Le Marchant Street 10,448 - 490 0.2% (pound)513
St Peter Port
Guernsey
Channel Islands
- ------------------------------------------------------------------------------------------------------------------------------------
Sergus Investments S.A.
Calle 50
Edif. Universal No. 102
Apartado 6978
Panama 5
Republic of Panama 20,896 - 3,672 1.5% (pound)3,849
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
Part II
Particulars of the Purchaser
Craegmoor Healthcare Company Limited
(Registered in England with number 2825572)
"Hillcairnie"
St Andrew's Road
Droitwich
Worcestershire
WR9 8DJ
<PAGE>
SCHEDULE 2
Part I
Particulars of the Company
NAME: Speciality Care Limited
REGISTERED IN ENGLAND UNDER NO: 2787609
REGISTERED OFFICE: Hamilton House, 1 Temple Avenue, London
EC4Y 0HA
AUTHORISED CAPITAL: (pound)7,850,000 divided into 3,058,782
Ordinary Shares of 10p each, 7,500,000
Convertible Preference shares of (pound)1
each and 441,218 Deferred Shares of 10p
each
ISSUED AND FULLY PAID UP CAPITAL: (pound)7,725,940, divided into 1,818,182
Ordinary Shares of 10p each, 7,500,000
Convertible Preference Shares of (pound)1
each and 441,218 Deferred Shares of 10p
each
DIRECTORS: Kent Thomas Alessandro, Lawrence Paul
Cirka, Robert Elkins, John Alfred Stoddard
Nash and Timothy Frantz Nicholson
SECRETARY: Nigel Schofield
ACCOUNTING REFERENCE DATE: 30 June
Part II
Particulars of the Subsidiary Undertakings
NAME: Speciality Care (EMI) plc
REGISTERED IN ENGLAND UNDER NO: 2192205
REGISTERED OFFICE: Hamilton House, 1 Temple Avenue, London
EC4Y 0HA
AUTHORISED CAPITAL: (pound)610,000
DESCRIPTION: Ordinary Shares of 10p each
<PAGE>
1,100,000 Convertible Preference Shares of
10p each
ISSUED AND FULLY PAID UP CAPITAL: (pound)236,128
DESCRIPTION: 1,294,610 Ordinary Shares of 10p each
1,066,670 Convertible Preference shares of
10p each
REGISTERED IN THE NAME OF: Speciality Care Limited
Hamilton House, 1 Temple Avenue,
London EC4Y 0HA
BENEFICIALLY OWNED BY: Speciality Care Limited
DIRECTORS: Timothy Frantz Nicholson;
Anthony Leake Robinson;
SECRETARY: Nigel Schofield
ACCOUNTING REFERENCE DATE: 30 June
NAME: Speciality Care (Care Homes) Limited
REGISTERED IN ENGLAND UNDER NO: 3257732
REGISTERED OFFICE: Hamilton House, 1 Temple Avenue, London
EC4Y 0HA
AUTHORISED CAPITAL: (pound)1000
DESCRIPTION: 1000 Ordinary Shares of (pound)1 each
ISSUED AND FULLY PAID UP CAPITAL: (pound)2
DESCRIPTION: 2 Ordinary Shares of (pound)1 each
REGISTERED IN THE NAME OF: Speciality Care Limited
Hamilton House, 1 Temple Avenue,
London EC4Y 0HA
BENEFICIALLY OWNED BY: Speciality Care Limited
DIRECTORS: Anthony Leake Robinson
Timothy Frantz Nicholson
SECRETARY: Nigel Schofield
ACCOUNTING REFERENCE DATE: 30 June
<PAGE>
NAME: Speciality Care (Rest Care) Limited
REGISTERED IN ENGLAND UNDER NO: 3257061
EC4Y 0HA
REGISTERED OFFICE: Hamilton House 1 Temple Avenue,
London EC4Y0HA
AUTHORISED CAPITAL: (pound)1,000
DESCRIPTION: 1,000 Ordinary Shares of (pound)1 each
ISSUED AND FULLY PAID UP CAPITAL: (pound)2
DESCRIPTION: 2 Ordinary Shares of (pound)1 each
REGISTERED IN THE NAME OF: Speciality Care Limited
Hamilton House, 1 Temple Avenue,
London EC4Y 0HA
BENEFICIALLY OWNED BY: Speciality Care Limited
DIRECTORS: Anthony Leake Robinson
Timothy Frantz Nicholson
SECRETARY: Nigel Schofield
ACCOUNTING REFERENCE DATE: 30 June
NAME: Speciality Healthcare Limited
REGISTERED IN ENGLAND UNDER NO: 2904221
REGISTERED OFFICE: Hamilton House, 1 Temple Avenue, London
EC4Y 0HA
AUTHORISED CAPITAL: (pound)1,000
DESCRIPTION: 1,000 Ordinary Shares of(pound)1 each
ISSUED AND FULLY PAID UP CAPITAL: (pound)2
DESCRIPTION: 2 Ordinary Shares of(pound)1 each
REGISTERED IN THE NAME OF: Speciality Care Limited
Hamilton House, 1 Temple Avenue, London
EC4Y 0HA
BENEFICIALLY OWNED BY: Speciality Care Limited
<PAGE>
DIRECTORS: Timothy Frantz Nicholson
Anthony Leake Robinson
SECRETARY: Nigel Schofield
ACCOUNTING REFERENCE DATE: 30 June
NAME: Irvine Care Limited
REGISTERED IN ENGLAND UNDER NO: 2647877
REGISTERED OFFICE: Hamilton House, 1 Temple Avenue, London
EC4Y 0HA
AUTHORISED CAPITAL: (pound)1,000
DESCRIPTION: 1,000 Ordinary Shares of(pound)1 each
ISSUED AND FULLY PAID UP CAPITAL: (pound)1,000
DESCRIPTION: 1,000 Ordinary Shares of(pound)1 each
REGISTERED IN THE NAME OF: Speciality Care Limited
Hamilton House,
1 Temple Avenue,
London EC4Y 0HA
BENEFICIALLY OWNED BY: Speciality Care Limited
DIRECTORS: Timothy Frantz Nicholson
Anthony Leake Robinson
Carol Artis
SECRETARY: Nigel Schofield
ACCOUNTING REFERENCE DATE: 30 June
NAME: Speciality Care (Learning Disabilities)
Limited
REGISTERED IN ENGLAND UNDER NO: 2953416
REGISTERED OFFICE: Hamilton House, 1 Temple Avenue, London
EC4Y 0HA
AUTHORISED CAPITAL: (pound)1,000
<PAGE>
DESCRIPTION: 2 Ordinary Shares of(pound)1 each
ISSUED AND FULLY PAID UP CAPITAL: (pound)2
DESCRIPTION: 1,000 Ordinary Shares of(pound)1 each
REGISTERED IN THE NAME OF: Speciality Care Limited
Hamilton House,
1 Temple Avenue,
London EC4Y 0HA
BENEFICIALLY OWNED BY: Speciality Care Limited
DIRECTORS: Timothy Frantz Nicholson
Anthony Leake Robinson
SECRETARY: Nigel Schofield
ACCOUNTING REFERENCE DATE: 30 June
NAME: Speciality Care (Cedar Grove) Limited
REGISTERED IN ENGLAND UNDER NO: 2965110
REGISTERED OFFICE: Hamilton House, 1 Temple Avenue, London
EC4Y 0HA
AUTHORISED CAPITAL: (pound)1,000
DESCRIPTION: 1,000 Ordinary Shares of (pound)1 each
ISSUED AND FULLY PAID UP CAPITAL: (pound)2
DESCRIPTION: 2 Ordinary Shares of (pound)1 each
REGISTERED IN THE NAME OF: Speciality Care Limited
Hamilton House,
1 Temple Avenue,
London EC4Y 0HA
BENEFICIALLY OWNED BY: Speciality Care Limited
DIRECTORS: Timothy Frantz Nicholson
Anthony Leake Robinson
SECRETARY: Nigel Schofield
ACCOUNTING REFERENCE DATE: 30 June
<PAGE>
NAME: Speciality Care (Rehab) Limited
REGISTERED IN ENGLAND UNDER NO: 2965073
REGISTERED OFFICE: Hamilton House, 1 Temple Avenue, London
EC4Y 0HA
AUTHORISED CAPITAL: (pound)1,000
DESCRIPTION: 1,000 Ordinary Shares of(pound)1 each
ISSUED AND FULLY PAID UP CAPITAL: (pound)2
DESCRIPTION: 2 Ordinary Shares of(pound)1 each
REGISTERED IN THE NAME OF: Speciality Care Limited
Hamilton House,
1 Temple Avenue,
London EC4Y 0HA
BENEFICIALLY OWNED BY: Speciality Care Limited
DIRECTORS: Timothy Frantz Nicholson
Anthony Leake Robinson
SECRETARY: Nigel Schofield
ACCOUNTING REFERENCE DATE: 30 June
NAME: Speciality Equestrian Centre Limited
REGISTERED IN ENGLAND UNDER NO: 3156702
REGISTERED OFFICE: Hamilton House, 1 Temple Avenue, London
EC4Y 0HA
AUTHORISED CAPITAL: (pound)1,000
DESCRIPTION: 1,000 Ordinary Shares of(pound)1 each
ISSUED AND FULLY PAID UP CAPITAL: (pound)2
DESCRIPTION: 2 Ordinary Shares of(pound)1 each
REGISTERED IN THE NAME OF: Speciality Care Limited
Hamilton House,
1 Temple Avenue,
<PAGE>
London EC4Y 0HA
BENEFICIALLY OWNED BY: Speciality Care Limited
DIRECTORS: Timothy Frantz Nicholson
SECRETARY: Nigel Schofield
ACCOUNTING REFERENCE DATE: 30 June
NAME: Speciality Care (Medicare) Limited
REGISTERED IN ENGLAND UNDER NO: 2970714
REGISTERED OFFICE: Hamilton House, 1 Temple Avenue, London
EC4Y 0HA
AUTHORISED CAPITAL: (pound)1,000
DESCRIPTION: 1,000 Ordinary Shares of(pound)1 each
ISSUED AND FULLY PAID UP CAPITAL: (pound)2
DESCRIPTION: 2 Ordinary Shares of(pound)1 each
REGISTERED IN THE NAME OF: Speciality Care Limited
Hamilton House,
1 Temple Avenue,
London EC4Y 0HA
BENEFICIALLY OWNED BY: Speciality Care Limited
DIRECTORS: Timothy Frantz Nicholson
Anthony Leake Robinson
SECRETARY: Nigel Schofield
ACCOUNTING REFERENCE DATE: 30 June
NAME: Speciality Care (Addison Court) Limited
REGISTERED IN ENGLAND UNDER NO: 3011310
REGISTERED OFFICE: Hamilton House, 1 Temple Avenue, London
EC4Y 0HA
AUTHORISED CAPITAL: (pound)1,000
<PAGE>
DESCRIPTION: 1,000 Ordinary Shares of(pound)1 each
ISSUED AND FULLY PAID UP CAPITAL: (pound)2
DESCRIPTION: 2 Ordinary Shares of (pound)1 each
REGISTERED IN THE NAME OF: Speciality Care Limited
Hamilton House,
1 Temple Avenue,
London EC4Y 0HA
BENEFICIALLY OWNED BY: Speciality Care Limited
DIRECTORS: Timothy Frantz Nicholson
Anthony Leake Robinson
SECRETARY: Nigel Schofield
ACCOUNTING REFERENCE DATE: 30 June
NAME: Innova Health Care Limited
REGISTERED IN ENGLAND UNDER NO: 2806297
REGISTERED OFFICE: 1 Temple Avenue, Victoria Embankment
London EC4Y 0HA
AUTHORISED CAPITAL: (pound)1,000,000
DESCRIPTION: 1,000,000 Ordinary Shares of (pound)1 each
ISSUED AND FULLY PAID UP CAPITAL: (pound)60,000
DESCRIPTION: 60,000 Ordinary Shares of (pound)1 each
REGISTERED IN THE NAME OF: Speciality Care Limited
1 Temple Avenue,
Victoria Embankment
London EC4Y 0HA
BENEFICIALLY OWNED BY: Speciality Care Limited
DIRECTORS: Timothy Frantz Nicholson
Anthony Leake Robinson
SECRETARY: Nigel Schofield
ACCOUNTING REFERENCE DATE: 30 June
<PAGE>
NAME: Speciality Care (Reit Homes) Limited
REGISTERED IN ENGLAND UNDER NO: 3071279
REGISTERED OFFICE: Hamilton House, 1 Temple Avenue, London
EC4Y 0HA
AUTHORISED CAPITAL: (pound)1,000
DESCRIPTION: 1,000 Ordinary Shares of (pound)1 each
ISSUED AND FULLY PAID UP CAPITAL: (pound)2
DESCRIPTION: 2 Ordinary Shares of (pound)1 each
REGISTERED IN THE NAME OF: Speciality Care Limited
1 Temple Avenue,
London EC4Y 0HA
BENEFICIALLY OWNED BY: Speciality Care Limited
DIRECTORS: Timothy Frantz Nicholson
Anthony Elliott Stapleton
SECRETARY: Nigel Schofield
ACCOUNTING REFERENCE DATE: 30 June
NAME: Speciality Care (Rest Homes) Limited
REGISTERED IN ENGLAND UNDER NO: 3010116
REGISTERED OFFICE: Hamilton House, 1 Temple Avenue, London
EC4Y 0HA
AUTHORISED CAPITAL: (pound)1,000
DESCRIPTION: 1,000 Ordinary Shares of(pound)1 each
ISSUED AND FULLY PAID UP CAPITAL: (pound)2
DESCRIPTION: 2 Ordinary Shares of (pound)1 each
REGISTERED IN THE NAME OF: Speciality Care Limited
1 Temple Avenue,
Victoria Embankment
London EC4Y 0HA
<PAGE>
BENEFICIALLY OWNED BY: Speciality Care Limited
DIRECTORS: Timothy Frantz Nicholson
Anthony Leake Robinson
SECRETARY: Nigel Schofield
ACCOUNTING REFERENCE DATE: 30 June
NAME: Speciality Care (UK Lease Homes) Limited
REGISTERED IN ENGLAND UNDER NO: 3071277
REGISTERED OFFICE: Hamilton House, 1 Temple Avenue, London
EC4Y 0HA
AUTHORISED CAPITAL: (pound)1,000
DESCRIPTION: 1,000 Ordinary Shares of (pound)1 each
ISSUED AND FULLY PAID UP CAPITAL: (pound)2
DESCRIPTION: 2 Ordinary Shares of (pound)1 each
REGISTERED IN THE NAME OF: Speciality Care Limited
Hamilton House
1 Temple Avenue,
London EC4Y 0HA
BENEFICIALLY OWNED BY: Speciality Care Limited
DIRECTORS: Timothy Frantz Nicholson
Anthony Leake Robinson
SECRETARY: Nigel Schofield
ACCOUNTING REFERENCE DATE: 30 June
NAME: Specialised Courses Offering Purposeful
Education Limited
REGISTERED IN ENGLAND UNDER NO: 2485984
<PAGE>
REGISTERED OFFICE: Hamilton House, 1 Temple Avenue, London
EC4Y 0HA
AUTHORISED CAPITAL: (pound)50,000
DESCRIPTION: 50,000 Ordinary Shares of (pound)1 each
ISSUED AND FULLY PAID UP CAPITAL: (pound)2,000
DESCRIPTION: 2,000 Ordinary Shares of (pound)1 each
REGISTERED IN THE NAME OF: Speciality Care (Medicare) Limited
Hamilton House
1 Temple Avenue,
London EC4Y 0HA
BENEFICIALLY OWNED BY: Speciality Care (Medicare) Limited
DIRECTORS: Timothy Frantz Nicholson
Anthony Leake Robinson
Anthony Elliott Stapleton
SECRETARY: Nigel Schofield
ACCOUNTING REFERENCE DATE: 30 June
<PAGE>
SCHEDULE 3
Completion obligations
Part I
Obligations of the Vendors
1. The Vendors shall deliver to the Purchaser:
1.1 duly executed transfers of the Shares by the registered holders in favour
of the Purchaser or persons nominated by the Purchaser, the share
certificates and any additional documentation necessary to establish the
transferor's title to the Shares, to authorise the executions of such
transfers and to allow the transferees (subject to due stamping) to be
registered in the register of members of the Company as holders of the
Shares;
1.2 an engrossment of the Tax Deed executed by the Vendors;
1.3 the common seal, statutory books and other record books of each Group
Company written up to Completion;
1.4 the certificates in respect of all issued shares in the Subsidiary
Undertakings and duly executed transfers in respect of such shares not
registered in the name of the Company or a Subsidiary Undertaking in
favour of the Purchaser or a person nominated by the Purchaser,
1.5 letters of consent and confirmation in a form satisfactory to the
Purchaser from Principal Healthcare Limited and Nursing Home Properties
Limited relating to certain Leasehold Properties;
1.6 statements of balances at a date not more than seven days prior to
Completion with reconciliations to the Business Day preceding the
Completion Date on all bank accounts of each Group Company;
1.7 letters of consent and non-crystallisation in a form satisfactory to the
Purchaser from Bank of Scotland and Royal Bank of Scotland;
<PAGE>
1.8 letters in a form satisfactory to the Purchaser from the providers of
professional services referred to in clause 8.2 confirming that they will
not seek recovery of their costs and expenses as referred to in clause 8.2
from any member of the Group;
1.9 resignation letters in the approved terms from all of the directors and
the Secretary of the Company and its Subsidiary Undertakings (other than
Carol Artis in respect of Irvine Care Limited);
1.10 evidence reasonably satisfactory to the Purchaser that:
1.10.1 all sums owed by the Company or the Subsidiary Undertakings
to any of the Vendors (other than (a) the (pound)125,000 loan
from Stoneyrun Inc. to the Company as set out in an agreement
dated 31 January 1997 and (b) the (pound)813,278 loan from
Tiverton Holdings Limited to the Company as set out in an
agreement dated 18 February 1998 or by any of the Vendors to
the Company or the Subsidiary Undertakings have been repaid;
1.10.2 any guarantees granted or security or indemnities given by
the Company or the Subsidiary Undertakings in respect of
obligations of the Vendors have been released or discharged;
1.11 Deeds of Waiver duly executed by all the persons referred to in clause
3.1.3;
1.12 powers of attorney in the approved terms in respect of the rights
attaching to the Shares;
1.13 the Deed of Covenant duly executed by Mr Nicholson; and
1.14 waiver in a form satisfactory to the Purchaser of the covenant contained
in clause 8.1.3 of the Principal Healthcare Lease (as referred to in
paragraph 17.1.5 of the Disclosure Letter).
2. Each of the Vendors shall procure the holding of a meeting of the board of
directors of each Group Company, at which board resolutions in the
approved
<PAGE>
terms shall be passed ,inter alia, to appoint Mr Michael Stratford and Mr
George Blackoe as new directors and Mr Simon Bishop as the new Secretary
of the Company and its Subsidiary Undertakings.
Part II
Obligations of the Purchaser
The Purchaser shall, conditionally upon the implementation of the matters set
out in Part I of this Schedule:
1. deliver to the Vendors a copy of the Resolution duly executed by or on
behalf of all the shareholders of the Purchaser;
2. allot the Consideration Shares and deliver share certificates in respect
thereof to the Vendors;
3. pay to the Vendors the total cash consideration due to all the Vendors
referred to in clause 2.6.2; the Vendors hereby direct payment of such
cash consideration to be made to Principal Healthcare Finance Limited or
to Messrs Simmons & Simmons, Solicitors to Principal Healthcare Finance
Limited;
4. deliver to the Vendors an engrossment of the Tax Deed executed by the
Purchaser.
<PAGE>
SCHEDULE 4
General warranties
Accuracy of information
1.1 All written information relating to the business, activities, affairs,
assets or liabilities of the Group as listed in the document entitled
"Information warranted pursuant to paragraph 1.1 of Schedule 4" in the
approved terms was when given and is now true and accurate in all material
respects.
1.2 There is no information relating to the Company which is known to the
Vendors which renders any of the information referred to in paragraph 1.1
above misleading.
1.3 The information contained in Part I of Schedule 1, Schedule 2 and Part I
of Schedule 6 is true and accurate in all respects and is not misleading.
Constitution of the Company
2.1 The statutory books and minute books of the Company have been properly
kept and contain an accurate and complete record of the matters which
should be dealt with in those books, and no notice or allegation that any
of them is incorrect or should be rectified has been received.
2.2 The copy of the memorandum and articles of association of the Company
annexed to the Disclosure Letter is true and complete and has embodied in
it or annexed to it a copy of every such resolution or agreement as is
referred to in section 380(1) Companies Act and sets out in full the
rights and restrictions attaching to each class of the share capital of
the Company.
2.3 No person has the right (whether exercisable now or in the future and
whether contingent or not) to call for the issue or transfer of any share
or loan capital of the Company under any option or other agreement or
otherwise howsoever.
<PAGE>
2.4 The Company has properly and punctually made all returns which it is
required to make to the Registrar of Companies, to any other governmental
or regulatory body and to any local authority.
2.5 Due compliance has been made with all the provisions of the Companies Act
and other legal requirements, in connection with the formation of the
Company, the allotment, issue, purchase and redemption of shares,
debentures and other securities in the Company, the reduction of the
authorised and issued share capital of the Company, any amendment to the
memorandum or articles of association of the Company and the passing of
resolutions and the payment of dividends by the Company.
2.6 The Company has at all times conducted its business intra vires, has not
entered into any transaction ultra vires the Company or outside of the
authority or powers of the directors of the Company and is not in breach
of the provisions of the Articles.
Capacity and interests of Vendors
3.1 Each Vendor has the requisite power and authority to enter into and
perform this Agreement and each Vendor has the requisite power and
authority to enter into and perform the Tax Deed.
3.2 Each Vendor warrants that the execution and delivery of and the
performance by it of its respective obligations under this Agreement and
the Tax Deed will not:
3.2.1 result in a breach of, or constitute a default under, any agreement,
instrument or arrangement to which that Vendor or the Company is a
party or by which that Vendor or the Company is bound; or
3.2.2 result in a breach of any order, judgment or decree of any court or
governmental agency to which that Vendor or the Company is a party
or by which that Vendor or the Company is bound; or
<PAGE>
3.2.3 result in a breach of the rules or requirements of any professional
body, trade association or self-regulating organisation (as defined
in the Financial Services Act 1986) of which that Vendor is a member
or by which that Vendor is bound.
3.3 Each Vendor warrants that no indebtedness (actual or contingent) is
outstanding and no contract or arrangement exists between the Company and
that Vendor or director of the Company or any person connected with that
Vendor or such director.
3.4 Each Vendor (other than Nash, Sells & Partners Limited, Nash, Sells LPIA
and Nash, Sells LPIC) warrants that neither it nor any person connected
with it has any interest, direct or indirect, in any business which
competes or has competed or is in the future likely to compete with any
business now carried on by the Company or intends to acquire any such
interest.
3.5 Each Vendor warrants that it is not entitled to any claim of any nature
against the Company, any of the Company's officers, employees, principal
customers or suppliers and that it has not assigned to any third party the
benefit of any such claim to which it was previously entitled.
Accounts and Management Accounts
4.1 The Accounts have been prepared in accordance with generally accepted
accounting practice in the United Kingdom, comply with the requirements of
the Companies Act and of all relevant statements of standard accounting
practice and with all pronouncements issued or adopted by the Accounting
Standards Board Limited and show a true and fair view of the state of
affairs and the financial position of the Company as at and for the
financial year ended on the Accounts Date and of the profits or losses of
the Company for the financial year ended on the Accounts Date.
4.2 Without prejudice to the generality of the foregoing, in the Accounts:
4.2.1 depreciation of the fixed assets of the Company has been made at a
rate sufficient to write down the value of such assets to nil not
later than the
<PAGE>
end of their useful working lives and no fixed asset has attributed
to it a value exceeding its current market value at the Accounts
Date;
4.2.2 the value attributed to stock and work-in-progress does not exceed
the lower of cost and net realisable value at the Accounts Date;
4.2.3 to the extent required by the Companies Act and the applicable
statements of standard accounting practice and financial reporting
standards, proper provision or reserve (as appropriate) has been
made for all bad and doubtful debts, all liabilities and obligations
(actual, contingent or disputed) and all capital commitments;
4.2.4 to the extent required by the Companies Act and the applicable
statements of standard accounting practice and financial reporting
standards, proper provision or reserve (as appropriate) has been
made for all taxation liable to be assessed on the Company or for
which the Company is accountable (whether primarily or otherwise) in
respect of income, profits or gains earned, accrued or received on
or before the Accounts Date or deemed to have been or treated as
earned, accrued or received for taxation purposes and/or for any
event on or before the Accounts Date, including distributions made
down to the Accounts Date or provided for in the Accounts; and
4.2.5 to the extent required by the Companies Act and the applicable
statements of standard accounting practice and financial reporting
standards, proper provision or reserve (as appropriate) has been
made in the Accounts for all deferred taxation of the Company.
4.3 The bases and policies of accounting of the Company adopted for the
purpose of preparing the Accounts are the same as those adopted for the
purpose of preparing the audited accounts of the Company for the three
preceding accounting periods and none of the audited accounts of the
Company for the three preceding accounting periods were qualified by the
auditors.
<PAGE>
4.4 The profits and losses of the Company shown by the Accounts and by the
audited accounts of the Company for the three preceding accounting periods
and the trend of profits and losses thereby shown have not (except as
therein disclosed) been affected to a material extent by, any
non-recurring, exceptional, extraordinary or short term item (including,
but not limited to, any pension contribution holiday or any rental or
other outgoing at below market rates) or by any other matter which has
rendered such profits or losses unusually high or low.
4.5 All books of account and other accounting records of the Company have been
kept on a consistent basis, are in its possession, made up to date and
contain the information required by law and generally accepted accounting
principles.
4.6 The Management Accounts accurately reflect in all material respects the
current trading, performance and liabilities of the Company as at and for
the period ended on the date to which they have been prepared.
Business since the Accounts Date
5.1 Since the Accounts Date:
5.1.1 the Company has carried on its business in the ordinary and usual
course without any interruption or alteration in the nature, scope
or manner of its business;
5.1.2 there has been no material adverse change in the financial or
trading position or prospects of the Company;
5.1.3 the Company has not acquired or agreed to acquire any asset for a
consideration which is higher than market value at the time of
acquisition and has not disposed of or agreed to dispose of any
asset for a consideration which is lower than market value or book
value, whichever is the higher, at the time of disposal;
<PAGE>
5.1.4 the Company has not assumed or incurred any material liabilities
(including contingent liabilities) otherwise than in the ordinary
and usual course of business, and
5.1.5 no distribution of capital or income has been declared, made or paid
in respect of any share in the capital of the Company.
5.2 The Company has paid in full the following outgoings when due or within
any period normally allowed for payment of the same: all wages, salary and
emoluments due to be paid to employees of the Company, all lease rentals
and bank interest payments and capital repayments, and all gas, water and
electricity bills.
Borrowings and Bank Facilities
6.1 The Company has not exceeded the amount of its overdraft facility with its
bankers and is not in breach of the material terms of any other loan
facilities and the total amount borrowed by the Group from whatsoever
source does not exceed any limitation on its borrowings contained in the
Company's articles of association or in any debenture or loan stock deed
or any other instrument or agreement to which the Company is a party.
6.2 Full and accurate details of all overdrafts, loans or other financial
facilities outstanding or available to the Company are contained in the
Disclosure Letter and none of the Vendors or the Company has done or
omitted to do anything whereby the continuance of any such facilities in
full force and effect might be affected or prejudiced.
6.3 A statement of all the bank accounts of the Company and of the credit or
debit balances on such accounts as at a date not more than seven days
before the date of this Agreement is annexed to the Disclosure Letter.
Since such statement there have been no payments out of any such accounts
except for routine payments in the ordinary course of business and the
balances on current account are not now substantially different from the
balances shown on such statements.
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Guarantees and indemnities
7. There is not outstanding any guarantee, indemnity or security given by or
for the benefit of the Company.
Debtors
8.1 Each debt now owed to the Company (less the amount of any specific
provision or reserve disclosed in the Disclosure Letter or made in the
Management Accounts and determined on the same basis as that applied in
the Accounts) will realise its full face value and be good and collectable
in the ordinary course of business and, so far as the Vendors are aware,
is not subject to any counterclaim or set-off, except to the extent of any
such provision or reserve and (except as clearly reflected in the
Management Accounts) no amount included in the Accounts as owing to the
Company at the Accounts Date has been realised for an amount less than the
value at which it was included in the Accounts or has been released (in
whole or in part) or is, so far as the Vendors are aware, irrecoverable in
whole or in part.
Customers and suppliers
9.1 No material customer or supplier of or to the Company has during the last
twelve months ceased or indicated to the Company an intention to cease (or
to reduce the volume of) trading with the Company nor, so far as the
Vendors are aware, is likely so to do whether as a result of this
Agreement or otherwise.
Ownership and condition of assets
10.1 Except for assets disposed of by the Company in the ordinary course of
trading, and except for the assets the subject of the Warranties comprised
in Schedule 6, the Company is the owner of and has good and marketable
title to all assets included in the Accounts and all assets which have
been acquired by the Company since the Accounts Date, all of which assets
are in the Company's possession and under its control and there is not now
outstanding any charge, option, lien, pledge or encumbrance (or agreement
to grant any such) over the
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whole or any part of the undertaking, property or assets of the Company
nor any right to acquire such.
10.2 All plant and machinery (including fixed plant and machinery), vehicles
and office equipment used by the Company in connection with its business
are in good repair and condition having regard in each case to its age and
the use to which it is put, have been regularly maintained and are capable
of being efficiently and properly used in connection with the business of
the Company and none is dangerous, inefficient, obsolete or in need of
renewal or replacement.
10.3 The Company has not agreed to acquire any asset on terms that the property
in such asset does not pass to it until full payment is made.
Insurance
11.1 All the assets of the Company which are of an insurable nature have at all
times been and are at the date of this Agreement insured in amounts
reasonably regarded as adequate against fire and other risks normally
insured against by companies carrying on similar businesses or owning
property of a similar nature and the Company has at all times been and is
now adequately covered against accident, third party liability, injury,
damage and other risks normally covered by insurance by such companies. In
respect of all such insurances:
11.1.1 all premiums have been duly paid to date;
11.1.2 all the policies are in force and are not voidable; and
11.1.3 no claim is outstanding and, so far as the Vendors are aware, no
circumstances exist which may give rise to any claim.
Grants
12. The Company has not applied for any investment grant, employment subsidy
or other similar payment and no such grant, subsidy or payment paid or due
to be paid to the Company is liable to be refunded or withheld in whole or
in part in
<PAGE>
consequence of any action or omission of the Company.
Compliance with laws
13. Neither the Company nor its officers or employees in the course of their
respective duties to the Company have done or omitted to do anything in
breach of the law of the United Kingdom. The Company does not conduct, and
has not conducted, any business in any country other than the United
Kingdom.
Licences and consents
14. Save in relation to the Properties (to which Schedule 6 relates), all
licences, consents, approvals, permissions, permits and authorities
(public and private) necessary for the carrying on of the business of the
Company effectively in the places and in the manner in which such business
is now carried on have been obtained and all such licences, consents,
approvals, permissions, permits and authorities are valid and subsisting
and, so far as the Vendors are aware, there is no reason why and no facts
or circumstances which would be likely to give rise to any reason why any
of them should be suspended, cancelled or revoked or not renewed.
Litigation
15.1 Except for the Tamaris Claim, the Company is not engaged in any litigation
or arbitration proceedings and no litigation or arbitration proceedings
are, so far as the Vendors are aware, pending or threatened by or against
the Company, nor, so far as the Vendors are aware, are there any facts or
circumstances which may give rise to any litigation or arbitration
proceedings being commenced by or against the Company.
15.2 Neither the Company nor any of its officers is being prosecuted for any
criminal offence and, so far as the Vendors are aware, there are no such
prosecutions pending or threatened and, so far as the Vendors are aware,
there are no facts or circumstances which may give rise to any such
prosecution.
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15.3 The Company is not subject to any order or judgement given by any court,
governmental agency or other regulatory body and is not a party to any
undertaking or assurance given to any court, governmental agency or other
regulatory body which is still in force nor, so far as the Vendors are
aware, are there any facts or circumstances which may result in the
Company, becoming subject to any such order or judgement or being required
to be a party to any such undertaking or assurance.
15.4 There have been no investigations of or disciplinary proceedings made
against, the Company or any of its officers or employees, no such
investigations or disciplinary proceedings are currently pending or
threatened and, so far as the Vendors are aware, there are no facts or
circumstances which may give rise to such investigations or proceedings.
Competition law matters
16.1 The Company is not and has not been a party to any agreement (as defined
in the Restrictive Trade Practices Act 1976 ("the RTPA") which has been
furnished to the Director General of Fair Trading as provided for in the
RTPA or which is or was subject to registration pursuant to the RTPA and
which has not been so furnished.
16.2 To the best of the knowledge and belief of the Vendors, the Company has
not been and is not a party to any agreement or concerted practice which
infringes Article 85 of the EEC Treaty and is not in contravention of any
regulation or other enactment made under Article 87 of the EEC Treaty.
16.3 No action, practice or course of conduct now or previously done or carried
on by the Company and no agreement to which the Company is or was a party
or any part of any such agreement:
16.3.1 is or has been the subject of any investigation or reference under
the Competition Act 1980; or
16.3.2 is or was unlawful by virtue of the Resale Prices Act 1976; or
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16.3.3 is or was an abuse of a dominant position under Article 86 of the
EEC Treaty.
16.4 None of the Vendors nor the Company has at any time received, nor have any
of the Vendors or the Company any grounds for believing that any of the
Vendors has received or that the Vendors or the Company may receive, any
process, notice, communication or any formal or informal request for
information with reference to any actual or proposed agreement,
arrangement, concerted practice, trading policy or practice, course of
conduct or activity of the Company from the Director General of Fair
Trading, the Monopolies and Mergers Commission, the Secretary of State for
Trade and Industry, the Commission of the European Communities, the
Restrictive Practices Court or from any other person or body (wherever
situated) whose task it is to investigate, report or decide upon matters
relating to monopolies, mergers or anti-competitive agreements or
practices nor has the Company or anything done or to be done or proposed
to be done by the Company been the subject of any report, decision, order,
judgement or injunction made, taken or obtained by any of such persons or
bodies, nor has the Company given or been the subject of any undertakings
or assurances given (directly or indirectly) to any such persons or
bodies.
16.5 The Company has not been party to any agreement, practice or arrangement
which, in whole or in part, contravenes the provisions of the Trade
Descriptions Acts 1968 to 1972 or the Consumer Credit Act 1974.
Trading and contractual arrangements
17.1 The Company is not a party to:
17.1.1 any partnership, joint venture, European Economic Interest Grouping
or consortium arrangement or agreement or any agreement for sharing
commissions or other income;
17.1.2 any agreement or arrangement which is liable to be terminated by
another party or under which rights of any person are liable to
arise or
<PAGE>
be affected as a result of any change in the control, management or
shareholders of the Company;
17.1.3 any contract of a long-term nature that is to say, unlikely to have
been fully performed, in accordance with its terms, more than twelve
months after the date on which it was entered into;
17.1.4 any agreement or arrangement of a loss making nature (that is to
say, now known by the Company to be likely to result in a loss on
completion of performance);
17.1.5 any agreement containing covenants limiting or excluding its right
to do business and/or to compete in any area or in any field or with
any person, firm or company;
17.1.6 any agreement or arrangement of an unusual or abnormal nature or
entered into otherwise than on an arm's length basis in the ordinary
and usual course of the Company's business;
17.1.7 any agreement or arrangement which cannot readily be fulfilled or
performed by the Company in accordance with its terms without undue
or unusual expenditure or effort;
17.1.8 so far as the Vendors are aware, any agreement or arrangement
suffering from any invalidity or in respect of which there are
grounds for determination, rescission, avoidance or repudiation by
any other party; or
17.1.9 any agreement or arrangement which involves payment by reference to
fluctuations in the index of retail prices or any other index, or in
the rate of exchange for any currency.
17.2 No offer, tender or the like given or made by the Company on or before the
date of this Agreement and still outstanding is capable of giving rise to
a contract merely by a unilateral act of another person.
<PAGE>
Title deeds
18. All documents which in any way affect the right, title or interest of the
Company in or to any of its property, undertakings or assets and all
agreements to which the Company is a party are in the possession of the
Company and are properly stamped.
Powers of attorney
19. The Company has not given a power of attorney and, so far as the Vendors
are aware, no person has any authority (express, implied or ostensible)
which is still outstanding or effective to enter into any contract or
commitment or to do anything on its behalf other than any authority to
employees to enter into routine trading contracts in the normal course of
their duties and to executive directors.
Insolvency
20.1 No receiver or administrative receiver has been appointed of the whole or
any part of the assets or undertaking of the Company.
20.2 No administration order has been made in relation to the Company and no
petition for such an order has been presented to court or to the Company.
20.3 No proposal for a voluntary arrangement between the Company and its
creditors (or any class of them) has been made to or is in the
contemplation of the Company.
20.4 No petition has been presented, no order has been made and no resolution
has been passed for the winding-up of the Company.
20.5 The Company has not stopped payment to its creditors nor is it insolvent
or unable to pay its debts as and when they fall due.
20.6 No unsatisfied judgement is outstanding against the Company. Officers and
employees
<PAGE>
21.1 Those persons named as such in Schedule 2 are the only directors of the
Company and the secretary of the Company respectively and the particulars
set out in Schedule 2 are true and complete.
21.2 No person is or has been a shadow director of the Company.
21.3 The particulars provided to the Purchaser or any of its employees,
officers, agents or advisors shown in the schedule of employees annexed to
the Disclosure Letter list all the employees of the Company, are true and
accurate and show in relation to each employee and officer:
21.3.1 all cash remuneration payable (including accrued holiday pay);
21.3.2 details of all benefits receivable otherwise than in cash; and
21.3.3 details of any profit sharing, incentive and bonus arrangements in
which he participates (whether or not such arrangements are legally
binding on the Company).
21.4 No change in the remuneration, benefits and arrangements shown in the
schedule of employees is due or expected within six months from the date
of this Agreement and no request for any such change has been received.
21.5 There is not outstanding any contract of service between the Company and
any of its directors, officers or employees which is not terminable by the
Company without damages or compensation (other than any compensation
payable by statute) on one month's notice given at any time.
21.6 No employee of the Company has given notice terminating his contract of
employment or is under notice of dismissal and no amount due to or in
respect of any employee or former employee of the Company is in arrears
and unpaid other than his salary for the month current at the date of this
Agreement.
21.7 There is no dispute between the Company and any trade union or other
organisation formed for a similar purpose existing, pending or threatened
and
<PAGE>
there is no collective bargaining agreement or other arrangement (whether
binding or not) to which the Company is a party.
21.8 The Company has at all relevant times complied with all its obligations
under statute and otherwise concerning the health and safety at work of
its employees and, so far as the Vendors are aware, there are no claims
capable of arising or threatened or pending by any employee or third party
in respect of any accident or injury which are not fully covered by
insurance.
Pensions
21.9 The Pension Scheme is the only retirement benefit scheme (as defined in
Section 611 of ICTA) in which the Company participates for the purpose of
providing relevant benefits (as defined in Section 612(1) of ICTA) to or
in respect of the directors, officers or employees of the Company. There
is no legal or moral obligations to pay any pension, gratuity,
superannuation allowance, death benefit, retirement gratuity or like
benefit or make any other payment after disability, retirement or death or
contribute to any life assurance, to which the Company maintains or
contributes or has agreed to contribute in respect of any director,
officer or employee employed in the United Kingdom by the Company.
21.10 The Pension Scheme is approved as an exempt approved scheme (within the
meaning of Chapter I of Part XIV of ICTA) and neither the Vendors nor the
Company are aware of any reason why the Inland Revenue might withdraw or
vary such approval.
21.11 True and complete copies of all documents establishing and comprising the
Pension Scheme have been disclosed including (without limitation) copies
of trust deeds and rules, booklets, announcements, actuarial statements
(if any), trustees' reports and accounts for each scheme year and full
particulars of the benefit entitlements under the Pension Scheme has been
delivered to the Purchaser as well as a list of the directors, officers
and employees of the Company who participate in the Pension Scheme and
there is no obligation to provide benefits under the Pension Scheme other
than is revealed in such
<PAGE>
documents and particulars.
21.12 There are no claims against the trustees or administrators of the Pension
Scheme or the Company arising out of or in connection with the Company's
participation in the Pensions Scheme save for the routine payment of
benefits.
21.13 The Company has paid to the trustees of the Pension Scheme all
contributions due and payable by it at in respect of the members under the
Pension Scheme at the full rate required.
21.14 All benefits payable under the Pension Scheme are fully insured with
insurers of good repute. The liability to pay lump sum benefits on death
are insured at normal rates on the assumption that all the lives enjoy
good health.
21.15 The Pension Scheme provides only money purchase benefits as defined in
Section 181(1) of the Pension Schemes Act 1993.
Intellectual Property Rights
22.1 The Company does not own any material Intellectual Property and is the
sole and absolute beneficial and legal owner of the Copyright free and
clear from any liens, charges, restrictions and encumbrances.
22.2 No licence, permission or other right has been granted to the Company by
any third party in respect of any Intellectual Property, including for the
avoidance of doubt any Intellectual Property in computer software.
22.3 Other than as referred to in paragraph 22.4, no rights in Intellectual
Property are necessary to enable the business of the Company fully and
effectively to be carried on as it has been carried on up to the date of
this Agreement.
22.4 The Company owns absolutely such copyrights, design rights and analogous
rights as are necessary or desirable to enable the business of the Company
fully and effectively to be carried on as it has been carried on up to the
date of this Agreement.
<PAGE>
22.5 The Know-How is confidential and has not been disclosed to any person in
whole or in part (other than to employees of the Company in circumstances
where the confidentiality of the Know How has been drawn to their
attention and steps taken to preserve such confidentiality) and, so far as
the Vendors are aware, there is no claim that can be or has been made by
any person alleging that the Know-How has been disclosed to the Company in
circumstances amounting to a breach of confidence.
22.6 The Company has not granted and is not obliged to grant any licences of,
nor are there any subsisting agreements under which the Company has
granted to any person, any right or interest under or in connection with
any Intellectual Property, the Copyright or the Know-How.
22.7 So far as the Vendors are aware, none of the Copyright or the Know-How is
the subject of any claim, opposition, assertion, infringement, attack,
right, action or other restriction or arrangement of whatsoever nature
which does or may impinge upon the validity, enforceability or ownership
of the same by the Company or the use of the same (or any part of the
same) howsoever by the Company and there are no grounds facts or
circumstances that may give rise to such.
22.8 So far as the Vendors are aware, none of the processes, products or
activities of the business of the Company infringes any right of any other
person relating to Intellectual Property or involves the unlicensed use of
information confidential to any person or gives rise to a liability for
any royalty or similar payment.
22.9 The Company does not trade under any name other than its full corporate
name.
The Subsidiary Undertakings
23. The particulars of the Subsidiary Undertakings set out in Part II of
Schedule 2 are true and complete and the shares of the Subsidiary
Undertakings are held and owned as shown in that Schedule free from all
liens, charges and
<PAGE>
encumbrances and with all rights now or hereafter attaching to them and
the Company has no other subsidiary undertakings and does not hold or own
other shares in any other companies and has never held or owned or agreed
to acquire any such shares.
<PAGE>
SCHEDULE 5
Warranties relating to Taxation
1. General
1.1 There has not been any transaction, arrangement, event or omission
occurring after the Accounts Date:
1.1.1 which has caused or will cause any expenditure (including any
payment of taxation) but excluding any entertainment expenses
incurred in the ordinary course of business incurred or deemed to
have been incurred for taxation purposes by the Company not to
qualify for all or part of any relief, allowance, credit or
deduction for taxation purposes; or
1.1.2 which has given rise or will give rise: (a) to income or gains being
deemed to arise to, or supplies being deemed to be made by, the
Company for taxation purposes, or (b) to any taxation otherwise
being assessable or chargeable on the Company when the relevant
income or gains do not in fact accrue to or the relevant supplies
are not in fact made by, the Company; or
1.1.3 the taxation treatment of which is or is likely to become the
subject of any dispute with any taxation authority.
1.2 No charge to taxation will arise on the Company merely as a result of
entering into or Completion of this Agreement.
1.3 Since the Accounts Date, the Company has not carried out or been engaged
in any transaction or arrangement such that the law provides that there
may be substituted for the amount or value or the actual consideration
given or received (or to be given or received) by the Company any
different amount or value for taxation purposes.
<PAGE>
1.4 No clearances have been obtained by or relating to the Company pursuant to
any statutory provision or statement of practice relating to taxation, or
any press release issued by any taxation authority.
2. Compliance
2.1 The Company has made all returns it is required by law to make. All
returns, claims for reliefs, applications and computations have been
properly and punctually submitted by the Company to all relevant taxation
authorities (whether of the United Kingdom or elsewhere) and such returns,
claims, applications and computations are complete, true and accurate,
give full disclosure of all material facts and circumstances and are not
the subject of any question or dispute nor are likely to become the
subject of any question or dispute with any taxation authority.
2.2 There is set out in the Disclosure Letter full details of all matters
relating to taxation in respect of which the Company (whether alone or
jointly with any other person) has or at Completion will have an
outstanding entitlement or obligation:
2.2.1 to make any claim (including a supplementary claim) for relief from
taxation;
2.2.2 to make any election for one type of relief, or one basis, system or
method of taxation as opposed to another;
2.2.3 to make any appeal (including a further appeal) against an
assessment to taxation;
2.2.4 to make any application for the postponement of payment of taxation;
or
2.2.5 to submit any return or provide particulars or information to any
taxation authority.
2.3 All payments by the Company to any person which ought to have been made
under deduction of taxation have been so made and the Company has (if
<PAGE>
required by law to do so) accounted to the relevant taxation authority for
the taxation so deducted.
2.4 The Company is not liable as agent or lessee for any taxation liability of
another person.
2.5 No taxation authority has agreed to operate any special arrangement (being
an arrangement which is not based on a strict and detailed application of
the relevant legislation, generally published statements of practice or
generally published extra statutory concessions) in relation to the
Company's affairs.
2.6 The Company has complied with all notices served on it by any taxation
authority and no such notice remains outstanding.
2.7 The Company has duly and punctually paid all taxation which it has become
liable to pay and it has not within the last six years paid or become
liable to pay any penalty, fine or surcharge in connection with taxation.
2.8 All income tax under the P.A.Y.E. system and payments due in respect of
employees' contributions to National Insurance have been duly paid by the
Group to the Inland Revenue in the appropriate manner and the Group has
complied with all its reporting obligations in connection with the
benefits provided for its employees and directors.
3. Distributions
3.1 The Company has not since the Accounts Date made or agreed to make any
distributions within the meaning of section 209 ICTA, 1988 (meaning of
"distribution").
3.2 The Company has not been concerned in any exempt distribution within
sections 213 to 218 ICTA 1988 (demergers) within the period of five years
preceding Completion.
3.3 The Company has not issued any security (as defined in section 254(1) ICTA
1988) which will be outstanding at Completion in circumstances such that
any
<PAGE>
interest or other payment payable in respect of it constitutes a
distribution under section 209 ICTA 1988 (meaning of "distribution").
3.4 The Company has not made any repayment of share capital to which section
210(1) ICTA 1988 (bonus issue following repayment of share capital) might
apply.
3.5 The Company has not issued any share capital or securities as paid up
other than by receipt of new consideration within the meaning of section
254 ICTA 1988.
4. Capital Allowances
4.1 The aggregate book value of each of the assets of the Company, on which an
entitlement to industrial building allowances or other allowances in
respect of capital expenditure has arisen under the Capital Allowances Act
1968 or the Capital Allowances Act 1990, in or adopted for the purposes of
the Accounts does not exceed the aggregate residue of expenditure or
written down value attributable to such assets for the purposes of those
Acts and the aggregate book value of plant and machinery allocated to a
pool of plant and machinery on which an entitlement to capital allowances
has arisen under Part II Capital Allowances Act 1990 (machinery and plant)
does not exceed the written down value of the qualifying expenditure in
respect of each such pool under that Act.
4.2 All expenditure incurred by the Company or which it may incur under any
subsisting commitment for the provision of machinery or plant has
qualified or will qualify (if not deductible as a trading expense of a
trade carried on by the Company) for writing down allowances under Part II
Capital Allowances Act 1990 (machinery and plant).
4.3 Since the Accounts Date nothing has happened as a result of which: there
may be made against the Company a balancing charge under the Capital
Allowances Act 1968 or under the Capital Allowances Act 1990; or any
disposal value may be brought into account under section 24 Capital
Allowances Act 1990 (writing down allowances and balancing adjustments);
or there may be any recovery of
<PAGE>
excess relief within sections 46 or 47 Capital Allowances Act 1990
(recovery of excess relief); or a relevant event may occur within the
meaning of section 138 Capital Allowances Act 1990 (scientific research).
4.4 There is not, and there are no circumstances which could give rise to, any
dispute between the Company and any other person as to the entitlement to
capital allowances under sections 51 to 59 Capital Allowances Act 1990
(fixtures).
4.5 The Company has not made any election under section 37 Capital Allowances
Act 1990 (short life assets) nor has been taken to have made an election
under sub-section (8)(c) of that section.
5. Capital Gains
5.1 The book value in or adopted for the purposes of the Accounts as the value
of each of the assets of the Company on the disposal of which a chargeable
gain or allowable loss could arise does not exceed the amount deductible
under section 38 Taxation of Chargeable Gains Act 1992 (acquisition and
disposal costs etc.) in respect of each such asset.
5.2 No debt owed to the Company would on its disposal give rise to a
chargeable gain by reason of section 251 Taxation of Chargeable Gains Act
1992 (debts - general provisions).
5.3 The Company does not have any interest in any qualifying corporate bond to
which section 116 Taxation of Chargeable Gains Act 1992 (reorganisations,
conversions and reconstructions) applies.
5.4 No benefit under any policy of assurance or contract for a deferred
annuity has been acquired by the Company which would on its disposal give
rise to a chargeable gain by reason of section 210 Taxation of Chargeable
Gains Act 1992 (life assurance and deferred annuities).
<PAGE>
5.5 The Company does not have an interest in any assets which are wasting
assets within the meaning of section 44 Taxation of Chargeable Gains Act
1992 (meaning of "wasting asset") and which do not qualify for capital
allowances.
5.6 The Company has not made nor is it entitled to make any claim or election
under either of section 24 Taxation of Chargeable Gains Act 1992
(disposals where assets lost or destroyed, or become of negligible value)
or section 161(3) Taxation of Chargeable Gains Act 1992 (appropriations to
and from stock). The Company has not since the Accounts Date appropriated
any asset forming part of its trading stock for any other purpose.
5.7 The Company has not since the Accounts Date been a party to any
deprecatory transaction for the purpose of section 176 Taxation of
Chargeable Gains Act 1992 (depreciatory transactions in a group) or which
could be treated as a depreciatory transaction under section 177 Taxation
of chargeable Gains Act 1992 (dividend stripping).
5.8 The Company has not made nor is entitled to make any claim under section
280 Taxation of Chargeable Gains Act 1992 (consideration payable by
instalments) to pay by instalments taxation on chargeable gains.
5.9 No election has been made under section 35(5) Taxation of Chargeable Gains
Tax 1992 (assets held on 31 March 1982) in respect of any of the assets of
the Company.
5.10 The Group has not been assessed nor will it be assessed for taxation under
sections 190 and 191 Taxation of Chargeable Gains Act 1992 (tax
recoverable from other group members).
6. Groups of Companies
6.1 The Company is not and has never been treated for the purposes of section
43 Value Added Tax Act 1994 (groups of companies) as a member of a group.
6.2 There is set out in the Disclosure Letter with express reference to this
warranty full details of all surrenders, claims and agreements for
surrenders or claims for:
<PAGE>
6.2.1 any amounts by way of group relief under the provisions of sections
402 to 413 ICTA 1988 (group relief); and
6.2.2 any amounts of advance corporation tax under the provisions of
section 240 ICTA 1988 (surplus ACT);
in each case where:
6.2.3 any payment for group relief (within the meaning of section 402(6)
ICTA 1988) or for surrender of amounts of advance corporation tax
(within the meaning of section 240(8) ICTA 1988) remains outstanding
or could be reduced or increased; or
6.2.4 the claim or surrender has yet to be agreed by the Inland Revenue
for a specific amount.
6.3 The Disclosure Letter sets out details of all elections made under section
247 ICTA 1988 (group income) which are in force at the date hereof. All
dividends and other payments referred to in section 247 ICTA 1988 which
have been paid by the Company have been paid under an election made under
that section. The Company has not since the Accounts Date made and will
not up to Completion make or receive any payment of any dividend in
respect of which a notice under section 247(3) ICTA 1988 has effect.
6.4 Since the Accounts Date the Company has not ceased to be a member of a
group of companies such that section 178 or section 179 Taxation of
Chargeable Gains Act 1992 (company ceasing to be member of group) has
effect in relation to any asset or property of the Company. Neither
section 178 nor section 179 Taxation of Chargeable Gains Act 1992 will
have effect in relation to any asset or property of the Company as a
result only of this Agreement.
6.5 None of the assets of the Company have been acquired from another company
which, at the time of acquisition, was a member of the same group as
defined in section 170 Taxation of Chargeable Gains Act 1992 (groups of
companies interpretation).
<PAGE>
6.6 No tax-free benefit has ever been conferred either upon the Company or
upon any person connected with the Company within the meaning of section
30 Taxation of Chargeable Gains Act 1992 (tax-free benefits). No scheme or
arrangement has been effected under which such a tax-free benefit could be
so conferred.
6.7 None of the Company's assets and no relevant asset has been materially
reduced in value within the meaning of section 30 Taxation of Chargeable
Gains Act 1992 (tax-free benefits). No scheme or arrangement has been
effected under which there could be such a reduction in value.
7. Value Added Tax
7.1 The Company is not nor has it ever been a registered and taxable person
for the purposes of the Value Added Tax Act 1994. The Company has complied
with and observed in all respects the terms of all statutory provisions,
directions, conditions, notices and agreements with H.M. Customs and
Excise relating to value added tax. The Company has maintained and
obtained accounts, records, invoices and other documents (as the case may
be) appropriate or requisite for the purposes of value added tax which are
complete, correct and up-to-date.
7.2 The Company:
7.2.1 is not, nor in the two years prior to Completion has been, in
arrears with any payments or returns or notifications under any
statutory provisions, directions, conditions or notices relating to
value added tax, or liable to any forfeiture or penalty or interest
or surcharge or to the operation of any penalty, interest or
surcharge provision;
7.2.2 has not been required by H.M. Customs and Excise to give security;
7.2.3 is not, and has not agreed to become, an agent, manager or factor
for the purposes of section 47 Value Added Tax Act 1994 (agents
etc.) of any person who is not resident in the United Kingdom;
<PAGE>
7.2.4 has not made, and will not make prior to Completion, any supplies
that are exempt supplies; and
7.2.5 has not received a notice under paragraph 3 of Schedule 6 Value
Added Tax Act 1994 (valuation special cases) directing that the
value of goods supplied by the Company be taken to be their open
market value.
7.3 The Company has not since the Accounts Date been, and will not prior to
Completion be, treated as having made any supply of goods or services for
the purposes of value added tax where no supply has in fact been made by
the Company.
7.4 The Company does not use any schemes made under any of the Value Added Tax
Regulations 1995.
7.5 The Company has never received a surcharge liability notice under section
59 Value Added Tax Act 1994 (default surcharge) or a penalty liability
notice under section 64 Value Added Tax Act 1994 (persistent
misdeclarations).
7.6 The Company is not for the purposes of paragraph 5(5) of Schedule 10,
Value Added Tax Act 1994 (developers of certain non-residential buildings
etc.) the developer of any building or work in respect of which no
election has been made under paragraph 2(1) of that Schedule by the
Company.
7.7 There is set out in the Disclosure Letter with express reference to this
warranty full details of each of the assets of the Company to which Part
XV of the Value Added Tax Regulations 1995 (adjustments to the deductions
of input tax on capital items) applies or will apply, including in
particular:
7.7.1 a description (including in the case of land or a building or part
of a building, the nature of the tenure and the time it has to run),
the date the first interval commenced and the input tax on the
capital item; and
7.7.2 the proportion of input tax for which credit has been claimed
(whether provisionally or finally in a tax year and stating which).
<PAGE>
7.8 There is set out in the Disclosure Letter with express reference to this
warranty a list of all land, buildings and civil engineering works in
which the Company has an interest, stating in respect of each, and each
part of each, such land, building or work:
7.8.1 whether an election to waive exemption under paragraph 2(1) of
Schedule 10, Value Added Tax Act 1994 has been made;
7.8.2 whether it is intended for use of a dwelling, for a relevant
residential purpose or a relevant charitable purpose;
7.8.3 whether it is a freehold building or freehold civil engineering work
that was completed for value added tax purposes less than three
years prior to the date of this Agreement, and if so, when;
7.8.4 whether it is a building or work subject to a developmental tenancy,
development lease or developmental licence; and
7.8.5 whether it is a freehold building or freehold civil engineering work
that has not been completed for value added tax purposes.
7.9 The Company is not required to pay amounts on account of value added tax
under any order made under section 28 Value Added Tax Act 1994 (payments
on accounts).
8. Close Companies
8.1 The Company is not and has never been a close company within the meaning
of section 414 ICTA 1988 (close companies) or a close investment holding
company within the meaning of section 13A ICTA 1988 (close investment
holding companies).
8.2 The Company is not, nor has in the last six years been, liable to taxation
under the provisions of sections 418 to 422 or paragraph 10 of Schedule 19
ICTA 1988 (close companies).
<PAGE>
8.3 The Company has never made any transfer of value within the meaning of the
Inheritance Tax Act 1984.
8.4 Neither the assets owned by nor the shares of the Company are subject to
an outstanding Inland Revenue charge as defined in section 237 Inheritance
Tax Act 1984.
8.5 No circumstances exist, or but for section 204(6) Inheritance Tax Act 1984
would exist, such that a power of sale could be exercised in relation to
any assets or shares of the Company pursuant to section 212 Inheritance
Tax Act 1984 (contingent liability of transferee for unpaid capital
transfer tax or inheritance tax).
9. Employees
9.1 The Company has received no notifications or notices under section 166
ICTA 1988 (benefits in kind: notices of nil liability).
9.2 The Company does not operate any scheme approved under section 202 ICTA
1988 (charities: payroll deduction scheme) or registered under Chapter III
of Part V ICTA 1988 (profit related pay).
9.3 No officer or employee of the Company participates in any scheme approved
under Schedule 9 ICTA 1988 (approved share option and profit sharing
schemes) or is a beneficiary or potential beneficiary of a qualifying
employee share ownership trust as defined in Schedule 5 Finance Act 1989
(employee share ownership trusts).
9.4 Since the Accounts Date the Company has not received any payment to which
section 601 to 603 ICTA 1988 apply (pension scheme surpluses: payments to
employers).
9.5 All sums payable under the existing arrangements for remunerating officers
and employees and rewarding persons rendering services to the Company are
deductible for the purposes of section 74 or 75 ICTA 1988 (deductions).
<PAGE>
10. Stamp Duties
10.1 There is no instrument which is necessary to establish the Company's title
to any right or asset which is liable to stamp duty but which has not been
duly stamped or which would attract stamp duty if brought within the
relevant jurisdiction.
10.2 The Company has complied in all respects with the provisions of Part IV,
Finance Act 1986 (stamp duty reserve tax) and with any regulations made
under the same and the Company is not and will not become liable to pay
stamp duty reserve tax by reference to any agreement which falls within
the terms of section 87(1) of that Act and is entered into prior to
Completion.
11. International
11.1 The Company is and always has been resident only in the United Kingdom for
taxation purposes. The Company is not liable to taxation in any
jurisdiction other than the United Kingdom.
11.2 The Company has not, without the prior consent of the Treasury, entered
into any of the transactions specified in section 765 ICTA 1988 (migration
etc. of companies).
11.3 No income has arisen in a territory outside the United Kingdom in respect
of which any claim under section 584 ICTA 1988 (unremittable overseas
income) has been or could be made by the Company.
11.4 The Company has not disposed of any asset or of any interest in any asset
in a territory outside the United Kingdom in respect of which any claim
under section 279 Taxation of Chargeable Gains Act 1992 (foreign assets:
delayed remittances) has been or could be made.
11.5 The Company does not have any interest in any controlled foreign company
or in any offshore fund as defined respectively in Chapters IV and V of
Part XVII of ICTA 1988.
<PAGE>
11.6 The Company does not have any interest in any company which is not
resident in the United Kingdom which would be a close company if it were
resident in the United Kingdom (section 13 Taxation of Chargeable Gains
Act 1992 - attribution of gains to members of non-resident companies).
12. Miscellaneous
The Company has no outstanding liability to pay instalments of development
land tax.
<PAGE>
SCHEDULE 6
Properties
Part I
Details of the Properties
Freehold Properties
1. Hill House Sand Lane
Osgodby
Market Raisen
Lincs LN8 3TE
2. Ogilvie Court America Road
Earls Colne
Essex
CO6 2LB
3. Rose Hill Lower Warberry Road
Torquay
Devon
TQ1 0QY
4. Rose Hill Outreach 30 Rougement Avenue
Cadewell
Torquay
Devon
5. Dove Clinic Rolleston-on-Dove
Burton on Trent
Staffs DE13 9BD
6. Suttons Manor London Road
Stapleford Tawney
Romford
Essex RM4 1SR
7. The Willows 2 Burley Court
Steeton
Keighley
8. Kilncroft 25/29 Ashburnham Road
Hastings
East Sussex
<PAGE>
9. Land on South East side of A706, Springfield
10. Land at Hyvot Loan
11. Land on east side of Mill Road, Bury St Edmunds,
Suffolk
Leasehold Properties
12. Orwell Redgate House
Vicarage Lane
Wherstead
Ipswich
13. Combs Court 36 Combs Lane
Stowmarket
Suffolk
IP14 2DB
14. The Dell (and Plot 4) Cats Lane
Sudbury
Suffolk CO10 6SF
15. The Firs Kings Hill
Great Cornard
Sudbury CO10 0EH
Suffolk
16. Lindeth College Lindeth
Bowness-on-Windermere
Cumbria LA23 3NH
17. The Oaks 904 Sidcup Road
New Eltham
London SE9 3PW
18. Riverside Court The Croft
Knottingley
West Yorkshire
WF11 9BL
19. Weald Hall Weald Hall
Weald Hall Lane
North Weald
<PAGE>
Epping Forest
20. Unit 1A Station Court
Station Road
Guiseley
Leeds
Yorks
21. Office at Annexe Suite Gable House
40 High Street
Rickmansworth
Hertfordshire
22. Office at 203/204, 205 & 206 Hamilton
House,
Temple Avenue
Victoria Embankment
London EC4Y 0HA
23. Addison Court Addison Street
Accrington
Lancashire
24. Eden Court Ghyllroyd Drive
Birkenshaw
Bradford
West Yorkshire
25. Richmond Heights Woodhouse Road
Intake
Sheffield
South Yorkshire
26. Cumbrae Lodge Castle Road
Irvine
Ayrshire
Scotland
27. Catchpole Court Walnut Tree Lane
Sudbury
28. Houndswood Nursing Home Harper Lane
Radlett
Hertfordshire
29. Tall Oaks Charles Street
Biddulph
<PAGE>
Stoke on Trent
30. Woodlands Sands Lane
Mirfield
West Yorkshire
<PAGE>
Part II
Warranties relating to the Properties
1. The Properties comprise all the freehold properties owned by the Company
or occupied by it under licence or in which the Company has any other
interest.
2. The Company has vacant possession of each of the Properties subject to the
agreement rights of the residents.
3. The Company is the legal and beneficial owner of each of the Properties.
4. The information contained in Part I of this Schedule 6 as to the tenure of
each of the Properties is true and accurate in all material respects.
5. Each of the Properties and their title deeds to the Company's interest
therein are free from any mortgage, charge, rentcharge, lien, incumbrance
or other third party right whether in the nature of security or otherwise
except as specified in the Disclosure Letter.
6. There is no option or agreement for sale, mortgage, charge (whether
specific or floating), lien, lease, agreement for lease, condition,
restrictive covenant or any other incumbrance in respect of the Properties
or any part of them and the Properties are not subject to the payment of
any outgoings (except the usual rents, rates and taxes) nor are there any
persons in unlawful possession or occupation of or who have or claim any
rights or easements of any kind in respect of the Properties or any part
of them adverse to the estate, interest, right or title of the Company
save as already disclosed to the Purchaser.
7. There are not in respect of the Properties or any part of them:
7.1 any outstanding notices or orders issued by or agreement with any
local or other authority;
<PAGE>
7.2 any proceedings in respect of any infringement of the building
bye-laws or any monetary claim or liability (contingent or
otherwise) under Town & Country Planning legislation or regulations
or otherwise;
7.3 any enforcement or stop notice under the Town and Country Planning
legislation or relevant regulations; or
7.4 any order or resolution for the compulsory acquisition of the
Properties or any part of them by any authority or any notice for
closing, demolition clearance or requisition of the Properties and
the Vendors are not aware of any proposals in relation to any of the
matters referred to in this paragraph or any other circumstances
known which might result in any such order notice or proceedings
being made or served or which may otherwise affect any of the
Properties.
8. The Properties are occupied for purposes permitted under the provisions of
the Town and Country Planning legislation orders and regulations
applicable to them and the Vendors are not aware of any breaches or
non-compliance with the requirements of the relevant local or other
interested authorities which the Vendors believe have been fully complied
with and the user or intended user of them is as of right and/or the
permitted user of them for the purposes of such legislation orders and
regulations.
9. The Vendors in whom title is vested have performed and observed all
covenants, conditions, agreements, statutory requirements, planning
consents, by-laws, orders and regulations affecting the Properties and
requiring observance or performance by them and no notice of any breach of
any such matters has been received to the Vendors' knowledge.
10. In respect of all buildings comprised in the Properties to which any
enactment, regulation or order relating to protection against or means of
escape from fire applies, all requirements of such enactment, regulation
or order and of any notice or order have been complied with to the
satisfaction of the district surveyor and/or other appropriate officer and
no order prohibiting the occupation of a building or part of it has been
made under such enactment,
<PAGE>
regulations or order and no issue of such notices or orders has been
intimated to the Company to the Vendors' knowledge.
11. Since the Accounts Date the Company has not acquired or disposed of any
land or building or any estate, interest, right or title in any land or
building.
12. The Company has where relevant at all times complied with the Registered
Homes Act 1984 and no notice of any breach has been received.
13. All capital allowances, rating reliefs and other benefits received by the
Company in respect of the Properties were granted pursuant to a proper and
valid claim and there has been no demand for recovery from the Company.
<PAGE>
SCHEDULE 7
Warranties relating to environmental matters
In this Schedule 7:
Consents means all consents, licences,
authorisations, registrations and permits
required under Environmental Laws to be
obtained in connection with the use of any
of the Properties or the conduct of the
business of the Company;
Environmental Law means all European Community, national,
regional or local statutes or regulations
concerning Environmental Matters in force at
the date hereof;
Environmental Matters means all matters relating to
pollution of the environment or harm to
human health, including but not limited to
those relating to waste, discharges,
emissions and releases to land, air and
water, nuisance, health and safety and the
manufacture, use, treatment, storage,
transport or disposal of Hazardous
Substances;
Hazardous Substances means chemicals, wastes, forms of
energy, radioactive substances, or other
polluting, dangerous, hazardous or toxic
substances; and
Relevant Date Means 31st May 1993.
1. Land Use
The Company occupies and uses the Properties solely for the purpose of
conducting its business.
<PAGE>
2. Land Contamination
2.1 There has been no spill, leakage, emission, discharge, escape or deposit
into, on, or from the Properties of any Hazardous Substances since the
Relevant Date (nor to the best of the knowledge, information and belief of
the Vendors prior to the Relevant Date) to land, air or water (including
ground water) in such quantities which may cause material harm to health
or to the environment.
2.2 Since the Relevant Date and, to the best of the Vendors' knowledge,
information and belief, prior thereto, no public authority or other
regulatory body has exercised or given written notice to the Company to
exercise any powers to carry out works to clean up contamination on the
Properties, or required the Company to carry out such works on the
Properties.
2.3 No environmental survey, inspection, report or audit has been carried out
for or on behalf of the Company or the Vendors in respect of the
Properties since the Relevant Date (or, to the best of the Vendors'
knowledge, information and belief, prior thereto).
3. Consents
3.1 The Company has all Consents, on account of any of its activities on the
Properties and any substances kept or used on the Properties.
3.2 Since the Relevant Date and, to the best of the Vendors' knowledge,
information and belief, prior thereto, the Company is and has been in full
compliance with the terms and conditions of the Consents issued to it.
3.3 All the Consents are in full force and effect and, so far as the Vendors
are aware, no circumstances exist which are likely to lead to suspension,
variation or revocation of any or all of the Consents.
3.4 Since the Relevant Date and, to the best of the knowledge, information and
belief of the Vendors, prior thereto, no written notification has been
received by the Company and, so far as the Vendors are aware, no action
has been taken
<PAGE>
by the regulatory authorities in respect of breaches or alleged breaches
of conditions of the Consents.
4. Waste Management
4.1 Since the Relevant Date (and, to the best of the Vendors' knowledge
information and belief, prior thereto) no written notice has been received
by the Company in respect of breaches or alleged breaches of its duty of
care in relation to waste under section 34 of the Environmental Protection
Act 1990.
4.2 Since the Relevant Date (and, to the best of the Vendors' knowledge
information and belief, prior thereto) the Company has not deposited,
treated, kept or disposed of any waste on the Properties otherwise than in
accordance with any Environmental Law.
5. Criminal Liability
5.1 Since the Relevant Date (and, to the best of the Vendors' knowledge
information and belief, prior thereto) no written notice has been received
by the Company in respect of breaches or alleged breaches of Environmental
Laws.
5.2 Since the Relevant Date (and, to the best of the Vendors' knowledge,
information and belief, prior thereto) the Company has not been involved
in any criminal litigation or other legal proceedings relating to a breach
or alleged breach of any Environmental Laws.
5.3 No criminal litigation is pending or, so far as the Vendors are aware,
threatened against the Company or any of its directors, officers or
employees.
6. Statutory and Common Law Nuisance
6.1 Since the Relevant Date (and, to the best of the Vendors' knowledge,
information and belief, prior thereto) no public or local authority or
member of the public has given written notice complaining to the Company
alleging, and so far as the Vendors are aware, no member of the public has
complained to a local authority of, a nuisance arising on or from the
Properties. No litigation in
<PAGE>
this respect is pending or, so far as the Vendors are aware, threatened
against the Company.
6.2 So far as the Vendors are aware, the Properties are not affected by any
actionable nuisance at law adversely affecting the Company's use and
enjoyment or other rights in respect thereof.
7. Other Tortious Liability
7.1 So far as the Vendors are aware, the Company has not received any written
complaint made by any public or regulatory authority or member of the
public alleging a claim in tort other than a claim in nuisance, as
warranted above.
8. Health and Safety
8.1 Since the Relevant Date (and, to the best of the Vendors' knowledge
information and belief, prior thereto) no written notification has been
received by the Company alleging breach of regulations made under the
Health and Safety at Work etc. Act 1974 or otherwise regarding health and
safety relating to the operation of the Company.
8.2 There is no outstanding claim from employees of the Company regarding the
Company's duty to ensure their health, safety and welfare at work under
the Health and Safety at Work etc. Act 1974.
<PAGE>
SIGNED by )
for and on behalf of STONEYRUN )
INC in the presence of: )
SIGNED by )
for and on behalf of NEW SOUTHWOOD )
ASSOCIATES INC in the presence of: )
SIGNED by )
for and on behalf of NASH, SELLS & )
PARTNERS LIMITED in the presence of: )
SIGNED by )
for and on behalf of NASH, SELLS LPIA )
in the presence of: )
SIGNED by )
for and on behalf of NASH, SELLS LPIC )
in the presence of: )
<PAGE>
SIGNED by )
for and on behalf of TIVERTON )
HOLDINGS LIMITED in the presence of: )
SIGNED by )
for and on behalf of EAGLEVIEW III )
ASSOCIATES LP in the presence of: )
SIGNED by )
for and on behalf of LOWTON )
HOLDINGS LIMITED in the presence of: )
SIGNED by )
for and on behalf of SERGUS )
INVESTMENTS S.A. )
in the presence of: )
SIGNED by )
for and on behalf of CRAEGMOOR )
HEALTHCARE COMPANY LIMITED )
in the presence of: )
EXHIBIT 21
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES
--------------------------
(CONTINUED)
-----------
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
A-1 Medical Equipment, Inc. Florida A-1 Healthcare
Abba Medical Equipment, Inc. Florida
ABC GP, Inc. Georgia
ABC Home Health and Hospice of Georgia
Albany, Inc.
ABC Home Health and Hospice of Georgia
Athens, Inc.
ABC Home Health and Hospice of Georgia
Brunswick, Inc.
ABC Home Health and Hospice of Georgia
Dublin, Inc.
ABC Home Health and Hospice of Georgia
Macon, Inc.
ABC Home Health and Hospice of Georgia
Savannah, Inc.
ABC Home Health and Hospice of Georgia
Tifton, Inc.
ABC Home Health and Hospice of Georgia
Vidalia, Inc.
ABC Home Health and Hospice of Georgia
Waycross, Inc.
ABC Home Nursing, Inc. Georgia
ABC Newco, Inc. Georgia
</TABLE>
- ---------------
1 Inactive Subsidiary
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
ABC Pharmaceuticals, Inc. Georgia IHS Infusion Services
Adaptive Medical, Inc. South Carolina
Advanced Clinical Technology, Inc. Arizona
Advanced Imaging Center, Inc. Florida
Alabama Senior Life Care, Inc.1 Alabama
Allied Medical, Inc. Michigan Guardian Medical
Allied Medical Supply, Inc. Arizona Allied Medical
Alpine Manor, Inc. Pennsylvania Integrated Health Service of Erie at
Bayside
Always Medical Equipment, Inc. Florida
Ambassador Medical Equipment, Inc. Florida
Ambulatory Pharmaceutical Services, New Jersey Ambulatory Pharmaceutical Services,
Inc. Inc.
Amcare Health Services, Inc. Pennsylvania Symphony Pharmacy Services
Amcare, Inc. California Symphony Pharmacy Services
Amcare Santa Barbara, Inc.1 California Symphony Pharmacy Services
American Medical Rental, Inc. Arkansas
American Oxygen Services, Inc. Florida
Ancillary Management, Inc.1 Utah
Anniston Health & Sickroom Alabama Lenlock Health
Supplies, Inc.
Oxford Health
</TABLE>
- ---------------
1 Inactive Subsidiary
2
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
APS America, Inc.
APS Midwest, Inc. Kansas APS Midwest, Inc.
Arbor Living Centers Management Texas
Company1
Arbor Living Centers of Florida, Inc. Florida Integrated Health Services of Florida
at Lake Worth
Arbor Living Centers of Texas, Inc. Texas Integrated Health Services of
Benbrook at Trinity Hills
Integrated Health Services at Theron
Grainger
Integrated Health Services of Keller at
Mimosa
Integrated Health Services of Texoma
at Sherman
Arcadia Health Care, Inc. Michigan Arcadia Health Care
Arcadia Health Services, Inc. Michigan Arcadia Health Care
Temporary Health Care
Arcadia Health Services of Michigan, Michigan Arcadia Health Care
Inc.
Arcadia Services, Inc. Michigan Arcadia Health Care
Arlington Memorial Home Healthcare Texas IHS Home Care
</TABLE>
- ---------------
1 Inactive Subsidiary
3
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Arlington Memorial Home Healthcare Texas IHS Home Care
Services
IHS Infusion Services
Asia Care, Inc. Delaware
Barton Creek Health Care, Inc. Texas Barton Creek Health Care
Barton Creek Investments, Inc. Texas Barton Creek Home Care
Barton Creek Pharmacy, LC Texas Barton Creek Pharmacy
Baumann Pharmaceutical Services, Alabama Baumann Southside Pharmacy
Inc.
Berkeley Medical Equipment, Inc. Florida Anderson Healthcare
Home Health Care Center
Tri-County Medical Supply
Beta Medical Equipment, Inc. Florida Advantage Healthcare
Bethamy Living Center Management Florida
Company
Bethamy Living Centers Limited Florida Integrated Health Services of Florida
Partnership at Clearwater
BioCare Medical, Inc. Florida
Briar Hill, Inc. Florida Integrated Health Services of Florida
at Auburndale
Briarcliff Nursing Home, Inc. Pennsylvania Integrated Health Services at Briarcliff
Brister's Medical Associates, Inc. Mississippi
</TABLE>
- ---------------
1 Inactive Subsidiary
4
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Brister Pharmacy, Inc. Mississippi
Brooksville Primary Care Clinic, Inc. Florida
Cambria Medical Supply, Inc. Florida
(formerly known as National Medical
Center-Groveland, Inc.)
Cambridge Care Centers, Inc. Delaware
Cambridge Group of Indiana, Inc. Indiana Integrated Health Services of
Indianapolis at Cambridge
Cambridge Group of Pennsylvania, Pennsylvania Integrated Health Services of Hershey
Inc. at Woodlands
Cambridge Group of Texas, Inc. Texas Integrated Health Services of Texas at
Treemont
Cambridge Health Services of Texas, Texas
Inc.1
Cambridge Treemont Apartments, Texas
Inc.1
Camden Medical Supply, Inc. Florida American Medi-Serve
American Medical Rentals & Sales
American Medical Services & Supply
Baxter Medical Equipment
Duracare
Health-Way of Searcy
</TABLE>
- ---------------
1 Inactive Subsidiary
5
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Home Care Medical Services
Camden Medical Supply, Inc.
(continued) Home Medical Services
Home Medical Supply, Inc.
Homecare Medical Services
Idabel Medical Rental
Marshall's Home Medical Equipment
Medical Supplies & Oxygen Services
Morrison's Clinic Pharmacy
North Arkansas Nome Care
Patient Rental Needs
Southern Medical Equipment
Taylor Home Health Supply
Village Home Medical
Canyon State Medical Supply, Inc. Arizona
Care Centers Holding, Inc. Delaware
Care Medical Supplies, Inc. Illinois
Carriage-By-The-Lake of IHS, Inc. Pennsylvania Integrated Health Services of
Carriage-By-The Lake
CCA Acquisition I, Inc. Delaware Countryside Healthcare Center
CCA of Maine, Inc. Delaware
</TABLE>
- ---------------
1 Inactive Subsidiary
6
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
CCA of Midwest, Inc. Delaware CCA at Palmer
IHS at Palmer
CCA of Texas, Inc. Delaware Sycamore Care Center
Cedarcroft Health Services, Inc. Pennsylvania Integrated Health Services of St. Louis
at Big Bend
Central Home Care, Inc. Kentucky
Central Park Lodges of Jacksonville, Florida
Inc.1
Central Park Lodges, Inc. Delaware IHS Home Care
Integrated Health Services at Brandon
Integrated Health Services of Florida
at Clearwater
Integrated Health Services of Florida
at Jacksonville
Integrated Health Services of
Lakeland at Oakbridge
Integrated Health Services of Florida
at West Palm Beach
Integrated Health Services of Central
Park Village
</TABLE>
- ---------------
1 Inactive Subsidiary
7
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Central Park Lodges of West Palm Florida
Beach, Inc.1
Central Park Lodges (Tarpon Florida Integrated Health Services of Tarpon
Springs), Inc. Springs
Central Park Lodges (The Barclay), Florida
Inc.1
Charlotte Medical Supply, Inc. Florida
Cherokee Home Medical, Inc. Georgia
CHI Medical Equipment, Inc. Florida Respiratory Home Care Consultants
Church Street Clinic, Inc. Mississippi
Clara Burke Nursing Home, Inc. Pennsylvania The Clara Burke Community
Clinical Laboratory, Inc. Mississippi
CMS Therapies, Inc. North Carolina RehabWorks, Inc.
CMS Therapy Services, Inc. Delaware
COA Therapy Technologies Corp. Delaware
Coastal Surgical, Inc. Florida Associated Oxygen & Respiratory
Cardiopulmonary Care
Cobb Regional Lithotripsy Partners Georgia
College Park/SCC, Inc. Georgia CCA at College Park
College Park Health Care Center
Community Care of America, Inc. Delaware
</TABLE>
- ---------------
1 Inactive Subsidiary
8
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Community Care of America of Delaware Greensboro Health Care Center
Alabama, Inc.
IHS at Greensboro Health Care Center
Livingston Nursing Home
Southgate Village
Community Care of Georgia, Inc.1 Delaware
Community Care of Nebraska, Inc. Delaware CCA at Ainsworth
Ainsworth Care Center
CCA at Ashland
IHS at Ashland
CCA at Blue Hill
Blue Hill Care Center
CCA at Central City
CCA at Edgar
IHS at Edgar
CCA at Exeter
Exeter Care Center
CCA at Gretna
IHS at Gretna
CCA at Sutherland
IHS at Sutherland
CCA at Utica
Utica Community Care Center
CCA of Waverly
IHS of Waverly Inc.
</TABLE>
- ---------------
9
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Community Home Oxygen, Inc. Montana Vital Air Medical
Evergreen Pharmacy
Community Therapy Services, Inc.1 Delaware
Comprehensive Postacute Services, Michigan COMPASS
Contour Medical Supply, Inc. Florida
(formerly known as Cabot Medical
Equipment, Inc.)
CPO2, Inc. Pennsylvania Oxygen Plus Medical Supply
Cynthiana Home Medical Equipment, Florida
Inc.
Daniel Medical Systems, Inc. Oklahoma American Respiratory &
Rehabilitation Center
Derry Integrated Health, Inc. Pennsylvania Integrated Health Services at Derry
Distinct Home Health Care, Inc. Florida CareMed
Longview Home Medical Equipment
Marshall's Home Medical Equipment
Samaritan Home Medical Equipment
Doctors Management Group, Inc. Louisiana
Don Paul Respiratory Services, Inc Colorado
</TABLE>
- ---------------
1 Inactive Subsidiary
10
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Dublin/SCC, Inc. Georgia CCA at Dublin
IHS of Dublin
DuMed, Inc. Iowa
East Tennessee Infusion & Florida Fox Home Medical
Respiratory
</TABLE>
- ---------------
1 Inactive Subsidiary
11
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
ECA Holdings, Inc. Delaware CCA at Arma
IHS of Arma
CCA at Brighton Place
IHS Brighton Place
CCA at Canon City
IHS at Canon City
CCA at Clarinda
IHS at Clarinda
CCA at Council Bluffs North
Loess Hills Nursing & Rehabilitation
CCA at Council Bluffs South
IHS at Council Bluffs South
CCA at Delta
IHS at Delta
CCA at Ellinwood
IHS of Woodhaven
CCA at Glenwood
IHS at Park Place
CCA at Grand Island
IHS at Grand Island
CCA at Grand Junction
IHS at Mantey Heights
CCA at Highland Park
IHS at Highland Park
CCA at Laramie
IHS at Laramie
</TABLE>
- ---------------
1 Inactive Subsidiary
12
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
ECA Holdings, Inc. (continued) CCA at Muscatine
Mulberry Oaks
CCA at Oak Grove
Oak Grove Nursing Center
CCA at Pacific Junction
IHS at Pacific Place
CCA at Paonia
IHS at Paonia
CCA at Prospect Lake
IHS at Prospect Lake
CCA at Saratoga
IHS at Saratoga
CCA at Smith Center
IHS of Smith Center
CCA at Tarkio
IHS at Tarkio
CCA at Toledo
Grandview Acres at Toledo
CCA at Winterset
IHS at Winterset
CCA at Worland
IHS at Worland
LaVilla Grande
Springs Village Care Center
IHS at Springs Village
ECA Properties, Inc. Delaware Grandview Manor
</TABLE>
- ---------------
1 Inactive Subsidiary
13
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Elizabell Co., Inc. Delaware
Elm Creek of IHS, Inc. Pennsylvania Integrated Health Services of West
Carrollton at Elm Creek
Encompus, Inc.1 Delaware
Encore Home Health Care, Inc. Florida Heartland Home Care
Epsilon Home Health Care, Inc. Florida Ho-Med Services
Essential Home Health Care, Inc. F0lorida Suwanee Valley Home Health Care
Eta Home Health Care, Inc. Florida
Excel Medical of Ames, Inc. Iowa
Excel Medical of Fort Dodge, Inc. Iowa
Excel Medical of Marshaltown, Inc. Iowa
F.L.C. Beneva Nursing Pavilion, Inc. Florida Integrated Health Services of Sarasota
at Beneva
F.L.C. College Park Congregate Florida
Living, Inc.1
F.L.C. Sarasota Nursing Pavilion, Inc. Florida Integrated Health Services of Florida
at Sarasota Nursing Pavilion
Family Care Specialists, Inc. Florida
Ferrigan Mobile X-Ray, Inc.1 California
Firelands of IHS, Inc. Pennsylvania Integrated Health Services of New
London at Firelands
First American International, Inc. Georgia
Firstcare, Inc. Kansas
</TABLE>
- ---------------
1 Inactive Subsidiary
14
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Fischer Medical Equipment, Inc. Idaho Homecare Medical Equipment
Florida Life Care, Inc. Florida Integrated Health Services of Venice
North
Four Rivers Home Health Care, Inc. Missouri Mid-Missouri Infusion
G&G Medical, Inc. Colorado A-Med Supply
Gate City Medical Equipment, Inc. Florida Family Medical Equipment
Georgia Medical Resources, Inc. Georgia
Gladwin Area Home Care, Inc. Michigan Midland Oxygen and Medical
Glenwood/SCC, Inc. Georgia CCA at Conner
IHS at Conner
Gravois Health Care, Inc. Pennsylvania Integrated Health Services of St. Louis
at Gravois
Grayrose, Inc. Michigan Arcadia Staff Resources
Greenville Primary Care Clinic, Inc. Mississippi
Greenwood Multi-Specialty Clinic, Mississippi
Inc.
Grenada Doctors Clinic, Inc. Mississippi
Grenada Family Doctors, Inc. Mississippi
Gulf South Lithotripsy Louisiana
Hamilton Medical Equipment Service, Iowa Home Care Helping Hand
Inc.
Waterloo Sickroom Equipment &
Supply
</TABLE>
- ---------------
1 Inactive Subsidiary
15
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Health at Home, Inc. Florida
Health Care Industries, Inc. Florida Health Care Industries
Senior Life Care Services
Health Care Mobile X-Ray, Inc.1 Arizona
Health Care Services of Mississippi, Florida Southern Medical
Inc.
Health Care Systems, Inc. Utah
Health-Med, Inc. Mississippi
Healthcare Business Solutions, Inc. Florida
Healthcare Claims Recovery, Inc. Florida
Healthcare Pharmacy Services of Florida Symphony Pharmacy Services
Florida, Inc.1
Healthcare Pharmacy Services -
Gainesville
Healthcare Pharmacy Services -
Pinellas Park
Health Pharmacy Services - Sarasota
Healthcare Pharmacy Services of Pennsylvania Symphony Pharmacy Services
Pennsylvania, Inc.1
Healthcare Pharmacy Services -
Philadelphia
</TABLE>
- ---------------
1 Inactive Subsidiary
16
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Healthcare Pharmacy Services of Texas Symphony Pharmacy Services
Texas, Inc.1
Healthcare Pharmacy Services -
Dallas/Ft.Worth
Healthcor, Inc.1 Utah
Heartland Home Health Care, Inc. Florida Heartland Home Care
Preferential Home Health Care
Heritage Medical Services of Georgia, Georgia
Inc.
Holland Medical Services, Inc. Florida Holland Medical Equipment
Madisonville Pharmacy
Hollandale Primary Care, Inc. Mississippi
Home Care Medical Equipment, Inc. Missouri
Home Care Solutions of Murray, Inc. Florida
Home Health Integrated Health Florida IHS Home Care
Services of Florida, Inc.
Home Health Services Company Iowa Home Health Services Company
Home Medical Supply, Inc. Florida American Health Services
Barnett Medical Supply
Family Medical Services and Supplies
High Point Medical Supply
</TABLE>
- ---------------
1 Inactive Subsidiary
17
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Island Medical Equipment
Home Medical Supply, Inc.
(continued) Matthews Home Medical
Monroe Home Medical
Savannah Medical Equipment
Sentry Home Infusion
Home Medical Supply, Inc. Timmerman Oxygen & Medical
(continued) Equipment
Volunteer Medical
Wappoo Prescription Lab
Home Medical Systems, Inc. South Carolina
Hospice Integrated Health Services of Florida
District I, Inc.
Hospice Integrated Health Services of Florida
District VII-B, Inc.
Hospice Integrated Health Services of Florida
Florida, Inc.
</TABLE>
- ---------------
1 Inactive Subsidiary
18
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Hospice of Integrated Health Services, Delaware Ohio's Integrated Hospice
Inc.
Samaritan Care Hospice of Illinois
Samaritan Care Hospice of Louisiana
Samaritan Care Hospice of Michigan
Samaritan Care Hospice of Missouri
Samaritan Care Hospice of
Pennsylvania
Samaritan Care Hospice of Texas
IHS Acquisition XIII, Inc. Delaware
IHS Acquisition XV, Inc. Delaware Symphony Rehabilitation Services
IHS Acquisition XVII, Inc. Delaware
IHS Acquisition XVIII, Inc. Delaware IHS Home Care
IHS Infusion Services
IHS Acquisition XIX, Inc. Delaware
IHS Acquisition XX, Inc. California
IHS Acquisition XXII, Inc. Delaware
IHS Acquisition XXV, Inc. (formerly Delaware Holmesdale Nursing & Rehabilitation
known as Integrated Health Services Center
of West Virginia, Inc.)
- ---------------
1 Inactive Subsidiary
</TABLE>
19
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
IHS Acquisition XXVII, Inc. Delaware
(formerly known as IHS Assisted
Living Group-Fairfax, Inc.)1
IHS Acquisition XXX, Inc. Delaware IHS Infusion Services
IHS Acquisition XXXI, Inc. Delaware
IHS Acquisition XXXII, Inc. Delaware
IHS Acquisition XXXIII, Inc. Delaware The Carrolton of Dunn
The Carrolton of Fayettville
The Carrolton of Lumberton
The Carrolton of Nash
The Carrolton of Plymouth
The Carrolton of Williamston
IHS Acquisition XXIV, Inc. Delaware
IHS Acquisition No. 100, Inc. Delaware Elms Haven Care Center
IHS Acquisition No. 101, Inc. Delaware Sable Care Center
IHS Acquisition No. 102, Inc. Delaware Horizon Specialty & Rehabilitation
Center
IHS Acquisition No. 103, Inc. Delaware Horizon Healthcare & Specialty
Center
IHS Acquisition No. 104, Inc. Delaware Idaho Fall care Center
IHS Acquisition No. 105, Inc. Delaware Twin Falls Care Center
</TABLE>
- ---------------
1 Inactive Subsidiary
20
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
IHS Acquisition No. 106, Inc. Delaware Indian Creek Nursing Center
IHS Acquisition No. 107, Inc. Delaware Indian Meadows Nursing Center
IHS Acquisition No. 108, Inc. Delaware Greenery Rehab and Skilled Nursing
Center
IHS Acquisition No. 109, Inc. Delaware Greenery Extended Care Center of
Beverly
IHS Acquisition No. 110, Inc. Delaware Greenery Extended Care Center of
Danvers
IHS Acquisition No. 111, Inc. Delaware Greenery Health Care Center at
Clarkston
IHS Acquisition No. 112, Inc. Delaware Greenery Extended Care Center at
Farmington
IHS Acquisition No. 113, Inc. Delaware Greenery Health Care Center at
Howell
IHS Acquisition No. 114, Inc. Delaware Lynwood Manor
IHS Acquisition No. 115, Inc. Delaware Butte Convalescent Center
IHS Acquisition No. 116, Inc. Delaware Colonial Manor of Deer Lodge
IHS Acquisition No. 117, Inc. Delaware
IHS Acquisition No. 118, Inc. Delaware Colonial Manor of Whitefish
IHS Acquisition No. 119, Inc. Delaware Horizon Rehabilitation Center
IHS Acquisition No. 120, Inc. Delaware Valle Norte Caring Center
IHS Acquisition No. 121, Inc. Delaware Ruidoso Care Center
IHS Acquisition No. 122, Inc. Delaware Vegas Valley Convalescent Cener
</TABLE>
- ---------------
1 Inactive Subsidiary
21
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
IHS Acquisition No. 123, Inc. Delaware Crestwood Care Center
IHS Acquisition No. 124, Inc. Delaware Washington Square Nursing Center
IHS Acquisition No. 125, Inc. Delaware Meadowview Care Center
IHS Acquisition No. 126, Inc. Delaware Baltic Country Manor
IHS Acquisition No. 127, Inc. Delaware Midwest City Nursing Center
IHS Acquisition No. 128, Inc. Delaware Doctors Health Care Center
Doctors Healthcare Center
PC Unit
IHS Acquisition No. 129, Inc. Delaware Heritage Manor Plano
IHS Acquisition No. 130, Inc. Delaware Heritage Western Hills
IHS Acquisition No. 131, Inc. Delaware Horizon Healthcare - El Paso
IHS Acquisition No. 132, Inc. Delaware Heritage Gardens
IHS Acquisition No. 133, Inc. Delaware Heritage Place of Grand Prairie
IHS Acquisition No. 134, Inc. Delaware Heritage Estates
IHS Acquisition No. 135, Inc. Delaware Greenery Rehabilitation and Skilled
Nursing Center at Meadowlands
IHS Acquisition No. 136, Inc. Delaware Silver Springs Nursing and
Rehabilitation Center
IHS Acquisition No. 137, Inc. Delaware Longmeadow Care Center
IHS Acquisition No. 138, Inc. Delaware Heritage Manor Longview
- ---------------
1 Inactive Subsidiary
</TABLE>
22
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
IHS Acquisition No. 139, Inc. Delaware Parkwood Place
Parkwood Place PC Unit
IHS Acquisition No. 140, Inc. Delaware Harbor View Care Center
IHS Acquisition No. 141, Inc. Delaware Heritage Country Manor
IHS Acquisition No. 142, Inc. Delaware Heritage Park
IHS Acquisition No. 143, Inc. Delaware Horizon Nursing Center
IHS Acquisition No. 144, Inc. Delaware Grace Care Center
IHS Acquisition No. 145, Inc. Delaware Hartford Care Center
IHS Acquisition No. 146, Inc. Delaware Golden Plains Health Care Center
IHS Acquisition No. 147, Inc. Delaware Cherry Creek Village Nursing Center
IHS Acquisition No. 148, Inc. Delaware Greenery Extended Care Center of
North Andover
IHS Acquisition No. 149, Inc. Delaware Willowbrook
IHS Acquisition No. 150, Inc. Delaware Silverbrook
</TABLE>
- ---------------
1 Inactive Subsidiary
23
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
IHS Acquisition No. 151, Inc. Delaware Missouri River Manor
Ladera Nursing and Rehabilitation
Center
Las Palomas Nursing and
Rehabilitation Center
Rio Rancho Nursing & Rehabilitation
Center
Las Cruces Nursing Center
Casa Arena Blanca Nursing Center
Casa Real Health Care Center
Horizon Healthcare Nursing Center-
Santa Fe
Roswell Nursing Center
Casa Maria Healthcare Center
Hacienda De Salud - Bloomfield
Red Rocks Care Center
Hobbs Health Care Center
Hacienda de Salud - Espanola
Silver Horizon
</TABLE>
- ---------------
1 Inactive Subsidiary
24
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
IHS Acquisition No. 151, Inc. Southwest Senior Care Center
(continued)
San Juan Manor
Horizon Healthcare Nursing Center -
Albuquerque
Casa Del Sol Senior Care Center
Sunshine Haven - Lordsburg
McKinley Manor .
Sunset Villa Care Center
Van Ark Care Center
Pecos Valley Care Center
Casa De Oro Care Center
Henderson Convalescent Hospital
North Las Vegas Care Center
Sierra Convalescent Center
Hearthstone of Northern Nevada
Fallon Convalescent Center
</TABLE>
- ---------------
1 Inactive Subsidiary
25
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
IHS Acquisition No. 151, Inc. Washoe Care Center
(continued)
Physicians Hospital for Extended Care
Boulder City Care Center
Carson Convalescent Center
Horizon Village Nursing &
Rehabilitation Center
Boardman Community Care Center
Imperial Skilled Nursing Center
Auburn Manor
Ridge Crest Care Center
Canterbury Villa of Alliance
Colonial Manor
Rosewood Manor
Village Care Center
Hudson Elms Nursing Home
Horizon Meadows
Village Square
Heritage Care Center
East Moore Nursing Center
Bryant Nursing Center
Heritage Place
Heritage Village
</TABLE>
- ---------------
1 Inactive Subsidiary
26
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
IHS Acquisition No. 151, Inc. Heritage Oaks
(continued)
Valley Grande Manor
Medical Center Nursing Facility
Heritage Forest Lane
Winterhaven Nursing Home
Blanco Vista Nursing and
Rehabilitation Center
Spanish Meadows Nursing Center
San Jacinto Manor
Sun Valley Health Care Center
Heritage Manor Canton
Seven Oaks Care Center
Golden Plains Care Center - Canyon
IHS Acquisition No. 152, Inc. Delaware Greenery Rehabilitation Center
IHS Acquisition No. 153, Inc. Delaware Greenery Rehabilitation & Skilled
Nursing Center of Hyannis
IHS Acquisition No. 154, Inc. Delaware Greenery Rehabilitation and Skilled
Nursing Center of Middleboro
IHS Acquisition No. 155, Inc. Delaware Greenery Extended Care Center
IHS Acquisition No. 156, Inc. Delaware Birchwood Care Center
IHS Acquisition No. 157, Inc. Delaware Cherry Creek Village Retirement
Center
IHS Acquisition No. 158, Inc. Delaware The Village at Alameda
</TABLE>
- ---------------
1 Inactive Subsidiary
27
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
IHS Acquisition No. 159, Inc. Delaware Park Avenue Villa
IHS Acquisition No. 160, Inc. Delaware Mt. Pleasant Assisted Living
IHS Acquisition No. 161, Inc. Delaware Swan Manor
IHS Acquisition No. 162, Inc. Delaware The Meadows Retirement Village
IHS Acquisition No. 163, Inc. Delaware Horizon Specialty Hospital
IHS Acquisition No. 164, Inc. Delaware Horizon Specialty Hospital of Mid-
America
IHS Acquisition No. 165, Inc. Delaware Horizon Specialty Hospital
IHS Acquisition No. 166, Inc. Delaware Horizon Specialty Hospital - Las
Vegas
IHS Acquisition No. 167, Inc. Delaware Horizon Specialty Hospital
IHS Acquisition No. 168, Inc. Delaware Horizon Specialty Hospital - Midwest
City
IHS Acquisition No. 169, Inc. Delaware Horizon Specialty Hospital - San
Antonio
IHS Acquisition No. 170, Inc. Delaware Horizon Specialty Hospital - Corpus
Christi
IHS Acquisition No. 171, Inc. Delaware Horizon Specialty Hospital - El Paso
IHS Acquisition No. 172, Inc. Delaware Horizon Specialty Hospital - Lubbock
IHS Acquisition No. 173, Inc. Delaware IHS Hospital at Dallas
IHS Acquisition No. 174, Inc. Delaware Plano Specialty Hospital
</TABLE>
- ---------------
1 Inactive Subsidiary
28
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
IHS Acquisition No. 175, Inc. Delaware Southern Oaks Care Center
Greenery Extended Care Center of
Cheshire
IHS Acquisition No. 175, Inc. Clifton House Rehabilitation Center
Greenery Rehabilitation Center at
Waterbury
Bay Breeze Nursing & Retirement
Center
Horizon's Bayside
Lake Eustis Care Center
Silvercrest
Windsor Manor
Horizon Specialty Center of Pensacola
IHS Acquisition No. 176, Inc. Delaware Horizon Hospice Care, Inc.
IHS Hospice of Nevada
Samaritan Care Hospice of Nevada
Samaritan Care Hospice of Texas
Samaritan Care Hospice of Texas -
Houston
Samaritan Care Hospice of Texas -
San Antonio
IHS Acquisition No. 177, Inc. Delaware Horizon Sleep Diagnostic Center
</TABLE>
- ---------------
1 Inactive Subsidiary
29
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
IHS Acquisition No. 178, Inc. Delaware Horizon Specialty Hospital of Wichita
Falls
IHS Chicago Post-Acute Network, Delaware
Inc.
IHS Development - Highlands Park, Delaware
Inc.
IHS Facility Management, Inc.1 Delaware
(formerly known as Criteria 2000,
Inc.)
IHS Home Care, Inc. Delaware
IHS Home Care Services of Alabama, Georgia IHS Home Care
Inc. (formerly known as First
American Home Care of Alabama,
Inc.)
IHS Home Care Services of Arkansas, Arkansas IHS Home Care
Inc. (formerly known as First
American Home Care of Arkansas,
Inc.)
IHS Home Care Services of Georgia IHS Home Care
California, Inc. (formerly known as
First American Home Care of
California, Inc.)
IHS Home Care Services of Colorado, Colorado IHS Home Care - Colorado
Inc. (formerly known as First
American Home Care of Colorado,
Inc.)
IHS Home Care Services of Florida, Florida IHS Home Care
Inc. (formerly known as First
American Home Care of Florida, Inc.)
</TABLE>
- ---------------
1 Inactive Subsidiary
30
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
IHS Home Care Services of Ft. Florida
Lauderdale, Inc. (formerly known as
First American Home Care of Ft.
Lauderdale, Inc.)1
IHS Home Care Services of Georgia, Georgia IHS Home Care
Inc. (formerly known as First
American Home Care of Georgia,
Inc.)
IHS Home Care Services of Illinois, Illinois IHS Home Care
Inc. (formerly known as First
American Home Care of Illinois, Inc.)
IHS Home Care Services of Indiana, Georgia IHS Home Care
Inc. (formerly known as First
American Home Care of Indiana, Inc.)
IHS Home Care Services of Georgia IHS Home Care
Louisiana, Inc. (formerly known as
First American Home Care of
Louisiana, Inc.)
IHS Home Care Services of Michigan, Georgia IHS Home Care
Inc. (formerly known as First
American Home Care of Michigan,
Inc.)
IHS Home Care Services of Georgia IHS Home Care
Mississippi, Inc. (formerly known as
First American Home Care of
Mississippi, Inc.)1
IHS Home Care Services of Missouri, Georgia IHS Home Care - Missouri
Inc. (formerly known as First
American Home Care of Missouri,
Inc.)
IHS Home Care Services of Naples, Florida
Inc. (formerly known as First
American Home Care of Naples, Inc.)1
</TABLE>
- ---------------
1 Inactive Subsidiary
31
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
IHS Home Care Services of Nebraska, Georgia IHS Home Care
Inc. (formerly known as First
American Home Care of Nebraska,
Inc.)1
IHS Home Care Services of New Georgia IHS Home Care
Mexico, Inc. (formerly known as First
American Home Care of New
Mexico, Inc.)
IHS Home Care Services of North Georgia IHS Home Care
Carolina, Inc. (formerly known as
First American Home Care of North
Carolina, Inc.)
IHS Home Care Services of Ohio, Inc. Georgia IHS Home Care
(formerly known as First American
Home Care of Ohio, Inc.)
IHS Home Care Services of Georgia IHS Home Care
Oklahoma, Inc. (formerly known as
First American Home Care of
Oklahoma, Inc.)
IHS Home Care Services of Pennsylvania IHS Home Care
Pennsylvania, Inc. (formerly known as
First American Home Care of
Pennsylvania, Inc.)
IHS Home Care Services of South Georgia IHS Home Care
Carolina, Inc. (formerly known as
First American Home Care of South
Carolina, Inc.)1
IHS Home Care Services of Georgia IHS Home Care
Tennessee, Inc. (formerly known as
First American Home Care of
Tennessee, Inc.)
IHS Home Care Services of Texas, Texas IHS Home Care
Inc. (formerly known as First
American Home Care of Texas, Inc.)
</TABLE>
- ---------------
1 Inactive Subsidiary
32
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
IHS Home Care Services of Valdosta, Georgia IHS Home Care
Inc. (formerly known as First
American Home Care of Valdosta,
Inc.)
IHS Home Care Services of Virginia, Georgia IHS Home Care
Inc. (formerly known as First
American Home Care of Virginia,
Inc.)
IHS Home Care Services of West Georgia IHS Home Care
Virginia, Inc. (formerly known as First
American Home Care of West
Virginia, Inc.)
IHS Land Acquisition - Highlands Delaware
Park, Inc.
IHS Management Group, Inc. Delaware
IHS Network Services, Inc.1 Delaware
IHS of Dana, Inc. Florida
IHS Realty Company, Inc. Delaware
In-Home Health Care, Inc. Utah
Infusion Services, Inc. Alabama
InHouse Rehab Associates2
Integrated-Ballard, Inc. Delaware Integrated Health Services of Seattle
Integrated Health Care Management Delaware
Corp.1
Integrated Health Group Limited Pennsylvania
Partnership
</TABLE>
- ---------------
1 Inactive Subsidiary
33
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Integrated Health of Locust Valley Pennsylvania Integrated Health Services of Greater
Road, Inc. Pittsburgh
Integrated Health of Waterford Pennsylvania Integrated Health Services of
Commons, Inc. Waterford Commons
Integrated Health Services at Delaware Integrated Health Services of Northern
Alexandria, Inc. Virginia
Integrated Health Services at Big Sail, Delaware Canton Manor
Inc.
Community Care Center - Hondo
Country View Manor
Delta Manor
Integrated Health Services at Big Sail, Kirkwood Manor
Inc. (continued)
Lincoln Manor
Pinehaven Care Center
Professional Care Center
Tyrone Medical Inn
West Gables Health Care Center
Integrated Health Services at Blue North Carolina Integrated Health Services of Raleigh
Ridge Manor, Inc. at Crabtree Valley
Integrated Health Services at Briarcliff Georgia Integrated Health Services of Atlanta
Haven, Inc. at Briarcliff Haven
Integrated Health Services at Cadiz, Delaware Carriage Inn of Cadiz
Inc.
</TABLE>
- ---------------
1 Inactive Subsidiary
34
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Integrated Health Services at Carol, Maryland
Inc.1
Integrated Health Services at Central Delaware Integrated Health Services of Florida
Florida, Inc. at Fort Pierce
Integrated Health Services of Florida
at Orlando
Integrated Health Services of Florida
at Vero Beach
Integrated Health Services at Delaware IHS of Cheyenne
Cheyenne, Inc.
Integrated Health Services at Delaware Cheyenne Care Center
Cincinnati, Inc.
Cheyenne Residential & Nursing
Center
Integrated Health Services at Colorado Delaware
Rehabilitation, Inc.1 (formerly known
as Integrated Health Services at North
Miami, Inc.)
Integrated Health Services at Colorado Delaware Integrated Health Services of
Springs, Inc. Colorado Springs
Integrated Health Services at Delaware
Columbus, Inc.
Integrated Health Services at Dayton, Delaware
Inc.
Integrated Health Services at Delaware Integrated Health Services of
Driftwood, Inc. Charleston at Driftwood
Integrated Health Services at Eastern Delaware Integrated Health Services of Greater
Massachusetts, Inc. Boston at Medford
Integrated Health Services of Greater
Worcester at Mill Hill
Hopedale, Inc.
</TABLE>
- ---------------
1 Inactive Subsidiary
35
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Integrated Health Services at Forest North Carolina
Glen, Inc.1
Integrated Health Services at Delaware Integrated Health Services of Iowa at
Grandview Care Center, Inc. Des Moines
Integrated Health Services at Great Delaware Vintage Health Care Center
Bend, Inc.
Integrated Health Services at Hanover Delaware
House, Inc.1
Integrated Health Services at North Carolina
Hawthorne Nursing Center, Inc.1
Integrated Health Services at Delaware
Highlands Park, Inc.
Integrated Health Services at Delaware The Gables Care Center
Integrated Health Services at Houston, Delaware IHS Hospital at Houston
Inc.
Integrated Health Services at Indian Pennsylvania Indian Creek Nursing Center
Creek, Inc.
Integrated Health Services at Jefferson Delaware
Hospital, Inc.1
Integrated Health Services at Juliana, Delaware
Inc.1
Integrated Health Services at Kent, Delaware Integrated Health Services of
Inc. Delaware at Kent
Integrated Health Services at King Delaware
David Center, Inc.
Integrated Health Services at Newark, Delaware
Inc.
</TABLE>
- ---------------
1 Inactive Subsidiary
36
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Integrated Health Services at Ormond Delaware
Beach, Inc.
Integrated Health Services at Park Delaware Integrated Health Services of
Regency, Inc. Southern California at Park Regency
Integrated Health Services at Penn, Delaware Integrated Health Services of
Inc. Pennsylvania at Marple
Integrated Health Services of Bryn
Mawr at the Chateau
Integrated Health Services at Julia
Ribaudo
Integrated Health Services of
Pennsylvania at Plymouth House
The Pediatric Center at Plymouth
House
Integrated Health Services at Delaware Integrated Health Services of Las
Silvercrest, Inc. Vegas
Integrated Health Services at Somerset Delaware Integrated Health Services of New
Valley, Inc. Jersey at Somerset Valley
Integrated Health Services at Southern Delaware Southern Hills Health and
Hills, Inc. Rehabilitation Center
Integrated Health Services at Delaware Carriage Inn of Steubenville
Steubenville, Inc.
Integrated Health Services at Pennsylvania Sycamore Creek Nursing Center
Sycamore Creek, Inc.
</TABLE>
- ---------------
1 Inactive Subsidiary
37
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Integrated Health Services at Three Delaware Carriage House Manor
Rivers, Inc.
Majestic Pines
Parkmont Rehab & Nursing Center
Salinas Rehab & Care Center
Torrance Care Center
Twin Palms Care Center
Valley Manor Rehab Center
West Torrance Care Center
Integrated Health Services at Delaware Treyburn Rehabilitation & Nursing
Treyburn, Inc. Center
Integrated Health Services at Tyler, Texas
Inc.1
Integrated Health Services at Delaware
Whispering Meadows, Inc.1
Integrated Health Services at Wichita, Delaware
Inc.1
Integrated Health Services Pennsylvania
Development, Inc.1
Integrated Health Services Financial Delaware
Holdings, Inc.
Integrated Health Services Franchising Delaware
Co., Inc.1
Integrated Health Services Holdings, Delaware
Inc.
</TABLE>
- ---------------
1 Inactive Subsidiary
38
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Integrated Health Services Home Florida
Infusion, Inc. (formerly known as
Central Park Lodge of Orlando, Inc.)1
Integrated Health Services Network, Delaware
Inc.
Integrated Health Services NPR, Inc. Ohio
Integrated Health Services of Arcadia, Delaware Arcadia Nursing Center
Inc.
Integrated Health Services of Athens, Delaware Hickory Creek of Athens
Inc.
Integrated Health Services of Delaware Integrated Health Services of
Brentwood, Inc. Brentwood
Integrated Health Services of Delaware
Brunswick, Inc.
Integrated Health Services of Delaware
California, Inc.
Integrated Health Services of Cecil, Delaware
Inc.1
Integrated Health Services of Cliff Delaware Integrated Health Services of Kansas
Manor, Inc. City at Alpine North
Integrated Health Services of Delaware Integrated Health Services of
Colorado at Cherry Creek, Inc. Colorado at Cherry Creek
Integrated Health Services of Delaware
Colorado, Inc.1
Integrated Health Services of Eagle Delaware
Creek, Inc.
Integrated Health Services of Florida Delaware
at Hollywood Hills, Inc.1
</TABLE>
- ---------------
1 Inactive Subsidiary
39
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Integrated Health Services of Green Florida Integrated Health Services at Green
Briar, Inc. Briar
Integrated Health Services of Heritage Delaware
Manor, Inc.
Integrated Health Services of Hickory Delaware Hickory Creek Nursing Center
Creek, Inc.
Integrated Health Services of Indian Delaware Indian Hills Nursing Center
Hills, Inc.
Integrated Health Services of Delaware Lanier Manor
Jacksonville, Inc.
Integrated Health Services of Kansas Delaware
City at North Oak, Inc.1
Integrated Health Services of Kurt, Delaware
Inc.
Integrated Health Services of Lester, Delaware Integrated Health Services at
Inc. Cheyenne Mountain
Integrated Health Services of Mesa
Manor
Integrated Health Services of Pueblo
Cheyenne Place
</TABLE>
- ---------------
1 Inactive Subsidiary
40
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Integrated Health Services of Lester, Integrated Health Services at Pikes
Inc. (continued) Peak
Integrated Health Services at Fort
Meyers
Integrated Health Services of
Bradenton
Integrated Health Services of Hanover
Integrated Health Services of
Charlotte at Hawthorne
Integrated Health Services of Port
Charlotte
Integrated Health Services of Sebring
Integrated Health Services of Winter
Park
Integrated Health Services of Orange
Park
Integrated Health Services of Palm
Bay
Integrated Health Services of Atlanta
at Buckhead
Integrated Health Services of Atlanta
at Shoreham
Integrated Health Services at Marietta
Post-Acute Recovery Center
- ---------------
1 Inactive Subsidiary
</TABLE>
41
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Integrated Health Services of Boise
Integrated Health Services
of Lester, Inc. Integrated Health Services of Wichita
(continued)
Integrated Health Services of Great
Bend
Integrated Health Services at Mayfair
Manor
Integrated Health Services of
Alexandria
Integrated Health Services of
Gonzales
Integrated Health Services of Kaplan
The Shores Nursing Center
Integrated Health Services of
Lafayette
Integrated Health Services of Many
Integrated Health Services of Many
South
Integrated Health Services of Marrero
Integrated Health Services at Heritage
North
Integrated Health Services at Heritage
South
Integrated Health Services of
Shreveport
</TABLE>
- ---------------
1 Inactive Subsidiary
42
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Integrated Health Services of Lester, Integrated Health Services of
Inc. (continued) Claiborne
Integrated Health Services of Vivian
Integrated Health Services of
Pierremont
Integrated Health Services of Minden
Integrated Health Services of
Thibadoux
Integrated Health Services of
Nashville
Integrated Health Services of
Plainview
Integrated Health Services of Iowa
Park
Integrated Health Services of Wichita
Falls
Integrated Health Services of Texas at
Terrell Care Center
Integrated Health Services of Terrell
Integrated Health Services of West
Virginia at Charles Town
Integrated Health Services of Long Delaware
Island, Inc.1
Integrated Health Services of Melissa, Delaware Integrated Health Services of West
Inc. Broward
Integrated Health Services of Delaware
Missouri, Inc.
</TABLE>
- ---------------
1 Inactive Subsidiary
43
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Integrated Health Services of Naples, Nevada
Inc.1
Integrated Health Services of Orange Delaware Integrated Health Services at Orange
Park, Inc. Hills
Integrated Health Services of Delaware Integrated Health Services of
Riverbend, Inc. Michigan at Riverbend
Integrated Health Services of Scenic Delaware Scenic Hills Nursing Center
Hills, Inc.
Integrated Health Services of Delaware
Skyview, Inc.
Integrated Health Services of Skyview Delaware
II, Inc.
Integrated Health Services of Sunset, Delaware Exceptional Care Center
Inc.
Integrated Hearing Services, Inc.1 Delaware
Integrated Managed Care, Inc. Delaware
(formerly known as Isabeth Co.,
Inc.)
Integrated Management-Kennington Delaware
Pointe, Inc.1
Integrated Management-Laurel Lake Delaware
Estates, Inc.1
Integrated Management-Westcliff, Delaware
Inc.1
Integrated of Amarillo, Inc. Texas Integrated Health Services of Amarillo
Integrated of Garden Terrace, Inc.1 Delaware Garden Terrace Health Care Center
Integrated of Westcliff Park, Inc.1 Delaware
</TABLE>
- ---------------
1 Inactive Subsidiary
44
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Integrated Physician Group Services, Delaware
Inc.
Intensive Home Care Nurses, Inc. Texas
Intensive Home Care Services, Inc. Texas
International Medical Services and Florida
Supplies, Inc.
International Therapeutic Services, Florida Performance Home Health Care
Inc.
IOTA Medical Equipment, Inc. Florida Medic Rents & Sells
KAPPA Medical Equipment, Inc. Florida Rio Grande Medical Supply
La Jolla Cambridge Home Health California
Care, Inc. (formerly known as West
Coast Cambridge Home Health Care,
Inc.)1
LAMBDA Medical Equipment, Inc. Florida RJR Medical
LAMS, Inc. Texas AMCO Medical Services
Lawrence Medical Equipment, Inc. Kansas
Lexington Primary Care, Inc. Mississippi
Liberty Home Health Care, Inc. Florida Oxygen Specialists
LifeWay, Inc. Delaware
Litho Center Southwest, Inc. Texas
LLC of Rehab Ambassadors, Inc.1 Delaware
Lovejoy Medical, Inc. Kentucky Harman Medical
LPC Bethamy Health Corporation, Florida Integrated Health Services of Florida
L.P. at Clearwater
</TABLE>
- ---------------
1 Inactive Subsidiary
45
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
LTC Medical Laboratories, Inc. Delaware
Luling/SCC, Inc. Georgia CCA at Luling
IHS of Luling
Macon Primary Care, Inc. Florida
Macon/SCC, Inc. Georgia CCA at Macon
IHS at Macon
Maine Head Trauma Center, Inc. Maine Maine Head Trauma
Major Medical Supply, Inc. Texas
Manchester Integrated Health, Inc. Pennsylvania Integrated Health Services of New
Hampshire at Manchester
Marietta/SCC, Inc. Georgia CCA at Marietta
Medco Professional Services, Corp. Colorado
MedCorp International, Inc. Arizona CareCore Medical
Medic-Aire Medical Equipment, Inc. Florida Oxycare of Tennessee
Medical Electro-Therapeutics, Inc. Florida Preferred Medical Equipment
Medical Supply of America1 Delaware
Medicare Convalescent Aids of
Pinellas, Inc. Florida
MeritWest, Inc.1 Pennsylvania
Michigan Medical Supply, Inc. Michigan
Midwest Cambridge, Inc.1 Illinois
</TABLE>
- ---------------
1 Inactive Subsidiary
46
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Midwest Urological Stone Unit Delaware
Limited Partnership1
Mobile Lithotripter of Indiana Indiana
Partners1
Mobile Ray of New Orleans, Inc. Louisiana
Mountain View Nursing Center, Inc. Pennsylvania Integrated Health Services at
Mountain View
MTC West, Inc.1 Delaware
N.J. Litho, L.P. New Jersey
National Home Care Services, Inc. Florida
National Institutional Pharmacy Delaware
Services, Inc.
National Medical Equipment Centers, Florida National Medicine Center
Inc.
Neumann's Home Medical Illinois
Equipment, Inc.
New Jersey Medical Corporation New Jersey
New Southwood Associates, Inc. Delaware
Nightingale Home Health Care, Inc. Florida
NIPSI of Houston, Inc. Texas
NIPSI HealthCare of Houston Limited
Partnership Texas
North Central Washington Respiratory Washington Allied Medical
Care Services, Inc.
North Georgia Lithotripsy Partners of Georgia
Atlanta
</TABLE>
- ---------------
1 Inactive Subsidiary
47
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
North Georgia Lithotripsy Partners of Georgia
Augusta
Northeast Indiana Stone Center, Indiana
L.L.C.
Northwest Home Medical, Inc. Idaho Ironwood Medical Supply & Oxygen
Selkirk
N.Y.L.S.A. #4, Inc.1 Delaware
N.Y.L.S.A. #6, Inc.1 Illinois
Omega Medical Equipment, Inc. Florida Mountain Air Services
OMICRON Medical Equipment, Inc. Florida Highland's Home Health Care
Letrent's Medical Supply
Oxygen of Oklahoma, Inc. Oklahoma
Oxygen Plus, Inc. Colorado
Oxygen Plus Medical Equipment, Inc. Florida A-Plus Medical Equipment
Oxygen Therapy Associates, Inc. Texas
Palestine Nursing Center, Inc. Texas Integrated Health Services at
Palestine
Patient Care Pharmacy, Inc.1 California Symphony Pharmacy Services
Patient Care Pharmacy - Colorado Delaware Symphony Pharmacy Services
Springs, Inc.1
PCM Senior Services - Hallmark California
Baker, Inc.1
PCM Senior Services - Hallmark California
Palm Springs, Inc.1
</TABLE>
- ---------------
1 Inactive Subsidiary
48
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Perry/RMC Real Estate, Inc. Florida
Peterson's Home Care, Inc. California
Pharmaceutical Dose Service, Inc.1 Delaware Symphony Pharmacy Services
PHI Medical Equipment, Inc. Florida Kolob Oxygen & Medical Equipment
Physician's Formulary Services, Inc. Florida
Pinellas Park Nursing Home, Inc. Florida Integrated Health Services of Pinellas
Park
Pioneer Medical Services, Inc. West Virginia
Polk City Pharmacy, Inc. Florida
Portable X-Ray Labs., Inc. California
Preferred Home Health Services, Inc.1 Utah
Premier Ancillary Services, Inc.1 Delaware
Primary Home Health Care, Inc. Florida
Prime Medical Services, Inc.
Principal Medical Equipment, Inc. Florida Rancho Respiratory
Professional Breathing Associates, Michigan
Inc.
Professional Management Resources, New York
Inc.
Professional Program Source, Inc.1 Delaware
Professional Respiratory Home Florida AAA Medical/Oxygen Supply
Healthcare, Inc.
Homestead Medical
Professional Review Network, Inc. Florida
</TABLE>
- ---------------
1 Inactive Subsidiary
49
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
PSI Health Care, Inc. South Dakota
Public Options, Inc.1 Delaware
Pulmo-Dose, Inc. Florida
Pulmonary Home Care, Inc. New Jersey
Quality Care of Columbus, Inc. Nebraska CCA at Columbus
Morys Haven
Quality Care of Lyons, Inc. Nebraska CCA at Lyons
IHS at Lyons
Quality Home Health Care, Inc. Florida Respiratory Home Care
R.C.P.S., Inc. California
R N Home Care Medical Equipment Florida
Company, Inc.
RCG Information Services Florida
Corporation
RCL Support Services, Inc. Florida
Regency Medical Equipment, Inc. Florida Lifeline Respiratory
Major Medical Supply
Roadrunner Oxygen & Medical
Supply
Sentry Home Health
Rehab Connection, Inc. Delaware
Rehabilitative Associates, Inc. Florida RehabWorks, Inc.
RehabWorks, Inc. Florida RehabWorks, Inc.
</TABLE>
- ---------------
1 Inactive Subsidiary
50
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Resp-A-Care, Inc. Kentucky
Respiracare Medical Equipment, Inc. Florida
Respiratory Medical Equipment of Florida Respiratory Home Care
Ga., Inc.
Respitech Home Health Care, Inc. Wyoming Arrowhead Pharmacy
M & S Oxygen
Responsive Home Health Care, Inc. Florida Hook's Home Health Care
Long's Oxygen & Medical
Equipment
Oxytec
Stat Oxygen Services
Rest Haven Nursing Centers, Inc. Pennsylvania Integrated Health Services at
Broomall
Rest Haven Nursing Center Pennsylvania Integrated Health Services at
(Whitemarsh), Inc. Whitemarsh
Rhema, Inc. Texas
RHO Medical Equipment, Inc. Florida Wound Management Services
Ritt Medical Group, Inc. Arizona The Oxygen Source
Roswell Home Medical, Inc. Florida
RoTech Employee Benefits Florida
Corporation
RoTech Home Medical Care, Inc. Florida Stat Medical/Laurel Mt. Medical
Stat Medical Equipment
RoTech Medical Corporation Florida
</TABLE>
- ---------------
1 Inactive Subsidiary
51
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
RoTech Oxygen and Medical Florida
Equipment, Inc.
RoTech/Texas, Inc. Florida
Roth Medical, Inc. Colorado Care Stat of Colorado
Rothert's Hospital Equipment, Inc. Kentucky
RWI Therapy Technologies Corp. Delaware
RxStat, Inc.
Samaritan Care, Inc. Illinois
Samaritan Care, Inc. Michigan
Samaritan Management, Inc. Michigan
Select Home Health Care, Inc. Florida American Health Services, Inc.
Kelley's Home Health
Kelley's Pharmacy
Servicetrends, Inc. Delaware
Sherrill & Sherrill, Inc.1 Texas
SHC of Arizona, L.C. Arizona IHS Home Care
SHC Services of Arizona, L.C. Arizona IHS Home Care Services
SIGMA Medical Equipment, Inc. Florida Caremor Medical Equipment
Medical Rentals
Morgantown Medical Supply
Oil Valley Medical
Provide Medical
</TABLE>
- ---------------
1 Inactive Subsidiary
52
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Signature Home Care Acquisition, Texas
Inc.1
Signature Home Care Group, Inc. Delaware
Signature Home Care, Inc. Delaware
Signature Home Care of Arlington, Texas IHS Home Care
Inc.
Signature Home Care of Florida, Inc. Florida IHS Home Care
Signature Home Care of Georgia, Inc. Georgia IHS Home Care
Signature Home Care of Kansas, Inc. Kansas IHS Home Care
Signature Home Care of New Jersey, Delaware IHS Home Care
Inc.
Signature Home Care of New Jersey New Jersey IHS Home Care
General Partnership
Signature Home Care of San Antonio, Texas IHS Home Care
Inc.
Signature Home Care Services of Florida IHS Home Care
Florida, Inc.
Signature Home Care Services of San Texas IHS Home Care
Antonio, Inc.
Signature Management Services, Inc. Delaware
Signature Receivables Corp. Delaware
SLC Community Care, Inc. Texas
Sound Rehabilitation, Inc.1 Delaware
Sound Retail, Inc.1 Delaware
</TABLE>
- ---------------
1 Inactive Subsidiary
53
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
South County Private Duty Agency, Texas IHS Home Care
Inc.
South Florida Physicians Practice No. Florida
1, Inc.1
South Florida Physicians Practice No. Florida
2, Inc.1
South Florida Physicians Practice No. Florida
3, Inc.1
South Florida Physicians Practice No. Florida
4, Inc.1
South Florida Physicians Practice No. Florida
5, Inc.1
South Florida Physicians Practice No. Florida
6, Inc.1
South Florida Physicians Practice No. Florida
7, Inc.1
South Florida Physicians Practice No. Florida
9, Inc.1
Southeastern Home Health, Inc. Florida Walker's Home Health
Southern IV Therapy, Inc. Florida
Southern Medical, Inc. Tennessee International Therapeutic Services
Oxycare of Tennessee
Southwest Lithotripter Partners, Ltd. Texas
Southwood Holdings, Inc. Delaware
Spring Creek of IHS, Inc. Pennsylvania Integrated Health Services of Huber
Heights at Spring Creek
</TABLE>
- ---------------
1 Inactive Subsidiary
54
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Stat Medical Equipment, Inc. Florida Laurel Mountain Medical Equipment
Sun Medical Supply, Inc. North Carolina
Suncoast Pharmacy Services, Inc.1 Florida
Sunshine Home Health Care, Inc. Florida Orthopedic Convalescent Center, Inc.
Sydney House, Inc.1 Pennsylvania
Symphony Ancillary Services, Inc. Colorado Symphony Medical Products
Symphony Consulting Services, Inc. Utah
(formerly known as Symphony Health
Care Consulting, Inc.)
Symphony Diagnostic Services, Inc. Delaware Symphony Mobilex
Symphony Diagnostic Services No. 1, California American Mobile Medical
Inc.
Chesapeake Health Services
Symphony Mobilex
Symphony Mobilex Corrections and
Diagnostic Services
Miller Portable X-Ray Service
Mobile X-Ray Services
Moblile X-Ray
Portable X-Ray Service of Rhode
Island
Triangle Diagnostic Services
Chase Mobilex Diagnostic Services
Home Care X-Ray Services of
Arkansas
</TABLE>
- ---------------
1 Inactive Subsidiary
55
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Symphony Diagnostic Services No.1, Remote Imaging of North Texas
Inc. (continued)
Mobilex Kentucky
Mobilex Rhode Island
Mobilex Ohio
Mobilex Texas
Mobilex Arkansas
Mobilex Nebraska
Mobilex Florida
Mobilex Indiana
Mobilex Georgia
Mobilex South Dakota
Mobilex California
Mobilex USA
Symphony Diagnostic Services No. 2, Delaware Symphony Mobilex
Inc.
Symphony Mobilex Diagnostics
Symphony Health Services, Inc. Delaware
Symphony Home Care Services, Inc. Delaware
Symphony Home Care Services No. 1, Florida IHS Home Care
Inc.
Senior Life Care Services
Symphony Home Care Services No. 2, Pennsylvania IHS Home Care
Inc.
</TABLE>
- ---------------
1 Inactive Subsidiary
56
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Symphony Home Care Services No. 3, Delaware IHS Home Care
Inc.
Symphony Home Care Services No. 4, Texas IHS Home Care
Inc.
IHS Home Care - Tucson
Symphony PediCare
Symphony Care Fusion
Symphony Home Care Services No. 5, Texas IHS Home Care
Inc.1
Symphony Home Care Services No. 6, Texas IHS Home Care
Inc.1
Symphony Home Care Services No. 7, Delaware IHS Home Care
Inc.
Symphony Home Care Services No. 8, Delaware IHS Home Care
Inc.1
Symphony Home Care Services No. 9, Delaware IHS Home Care
Inc.
Symphony Home Care Services No. Delaware IHS Home Care
10, Inc.
Symphony Home Care Services No. Delaware IHS Home Care
11, Inc.
Symphony Home Care Services No. Delaware IHS Home Care
12, Inc.
Symphony Home Care Services No. Texas IHS Home Care
13, Inc.
Symphony Home Care Services No. Texas IHS Home Care
14, Inc.1
</TABLE>
- ---------------
1 Inactive Subsidiary
57
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Symphony Home Care Services No. Delaware IHS Home Care
15, Inc.
Symphony Home Care Services No. Tennessee IHS Home Care
16, Inc.1
Symphony Home Care Services No. Texas IHS Home Care
17, Inc.1
Symphony Home Care Services No. Texas Symphony Life Care
18, Inc. (formerly known as Senior
Life Care, Inc.) Senior Life Care Services
Symphony Home Care Services No. California Symphony Life Care
18 - California, Inc. (formerly known
as Senior Life Care of California, Inc.) Senior Life Care Services
Symphony Home Care Services No. Louisiana Symphony Life Care
18 - Louisiana, Inc. (formerly known
as Senior Life Care of Louisiana, Inc.) Senior Life Care Services
Symphony Home Care Services No. Mississippi Symphony Life Care
18 - Mississippi, Inc. (formerly
known as Senior Life Care of Senior Life Care Services
Mississippi, Inc.)
Symphony Home Care Services No. Oklahoma Symphony Life Care
18 - Oklahoma, Inc. (formerly known
as Senior Life Care of Oklahoma, Senior Life Care Services
Inc.)
Symphony Home Care Services No. Tennessee Symphony Life Care
18 - Tennessee, Inc. (formerly known
as Senior Life Care of Tennessee, Senior Life Care Services
Inc.)1
Symphony Home Care Services No. Texas Symphony Life Care
18 - Texas, Inc. (formerly known as
Senior Life Care of Texas, Inc.) Senior Life Care Services
</TABLE>
- ---------------
1 Inactive Subsidiary
58
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Symphony Home Care Services No. Delaware IHS Home Care
19, Inc.
IHS Home Care - Chicago
IHS Home Care - Louisiana
IHS Home Care of Tennessee
Symphony Home Care Services No. Delaware IHS Home Care
100, Inc.
IHS Home Care of Southwestern
Tennessee
Symphony Home Care Services No. Colorado IHS Home Care
101, Inc.1
Symphony Home Care Services No. Colorado IHS Home Care Services
102, Inc.
Symphony Home Care Services No. Tennessee IHS Home Care
103, Inc.
Symphony Home Care Services No. Illinois IHS Home Care - Illinois
104, Inc.
Symphony Home Care Services No. Illinois IHS Home Care Services
105, Inc.
Symphony Home Care Services No. Indiana IHS Home Care
106, Inc.1
Symphony Home Care Services No. Indiana IHS Home Care
107, Inc.
Symphony Home Care Services No. Indiana IHS Home Care
108, Inc.
Symphony Home Care Services No. Tennessee IHS Home Care
109, Inc.
</TABLE>
- ---------------
1 Inactive Subsidiary
59
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Symphony Home Care Services No. Tennessee IHS Home Care
110, Inc.
Symphony Home Care Services No. Tennessee IHS Home Care
111, Inc.1
Symphony Home Care Services No. Tennessee IHS Home Care
112, Inc.1
Symphony Home Care Services No. Tennessee IHS Home Care
113, Inc.
Symphony Home Care Services No. Tennessee IHS Home Care
114, Inc.
Symphony Home Care Services No. Tennessee IHS Home Care
115, Inc.1
Symphony Home Care Services No. Tennessee IHS Home Care
116, Inc.1
Symphony Home Care Services No. Tennessee IHS Home Care of Northern
117, Inc.1 Tennessee
Symphony Home Care Services No. Tennessee IHS Home Care
118, Inc.1
Symphony Home Care Services No. Tennessee IHS Home Care of Eastern Tennessee
119, Inc.
Symphony Home Care Services No. Tennessee IHS Home Care
120, Inc.1
Symphony Home Care Services No. Tennessee IHS Home Care
121, Inc.1
Symphony Home Care Services No. Tennessee IHS Home Care
122, Inc.1
Symphony Home Care Services No. Tennessee IHS Home Care
123, Inc.1
</TABLE>
- ---------------
1 Inactive Subsidiary
60
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
Symphony Pharmacy Services, Inc. Delaware
Symphony Rehab Dynamics, Inc.1 Delaware Rehab Dynamics
Symphony Rehabilitation Services, Delaware Symphony Rehabilitation Services
Inc.
Symphony Rehabilitation Services Delaware Symphony Rehabilitation Services
No. 1, Inc.
Symphony Rehabilitation Services California Symphony Rehabilitation Services
No. 2, Inc.
Symphony Rehabilitation Services Delaware Symphony Rehabilitation Services
No. 3, Inc.
Symphony Rehabilitation Services Indiana Symphony Rehabilitation Services
No. 4, Inc.
Rehab Temps
Rehab Temps Therapy Staffing
Rehabilitation Temp Services
Achievement Rehab
Symphony Respiratory Services, Inc. Delaware Symphony Respiratory Services
Primedica
Symphony Restorative Therapy Delaware Restorative Therapy Limited
Limited
T2 Lithotripter Investment, Inc. Delaware
T2 Lithotripter Investment of Indiana, Delaware
Inc.
Texas LPC, Inc.1 Texas
The Beston Corporation1 Utah
</TABLE>
- ---------------
1 Inactive Subsidiary
61
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
The Kilroy Company North Carolina National Home Respiratory Care
The Rehab Source, Inc.1 Delaware
The Towne Pharmacy, Inc. West Virginia
Therapy Source, Inc. Delaware
Theta Home Health Care, Inc. Florida Alabama Medical
First Choice Medical
Stat Medical Equipment
Tupelo Home Health, Inc. Florida Health at Home, Inc.
UPSILON Medical Equipment, Inc. Florida Medical Equipment Professionals
Oxycare of Abbeville
Valley Medical Equipment, Inc. Utah
Value Care, Inc. Florida
VitalCare Health Services, Inc. Florida
VitalCare of America, Inc. Texas
VitalCare of Florida, Inc. Florida
VitalCare of Nevada, Inc. Nevada VitalCare Health Services, Inc.
VitalCare of Pennsylvania, Inc. Pennsylvania
VitalCare of Texas, Inc. Texas Taylor Medical Supply
Vitech Medical, Inc. Florida
VTA Management Services, Inc. New York
VTA Therapy Technologies Corp. Delaware
</TABLE>
- ---------------
1 Inactive Subsidiary
62
<PAGE>
SUBSIDIARIES OF
---------------
INTEGRATED HEALTH SERVICES, INC.
--------------------------------
(CONTINUED)
<TABLE>
<CAPTION>
SUBSIDIARIES STATE OF NAME UNDER WHICH
- ------------ INCORPORATION SUBSIDIARY IS DOING BUSINESS
------------- ----------------------------
<S> <C> <C>
W.S.T. Care, Inc. Nebraska
West Coast Cambridge, Inc. California
Western North Carolina Home Florida
Healthcare, Inc.
Westgate Management Company of North Carolina Westgate of Tarboro
Tarboro
Westgate Nursing Center
Westgate Nursing Center of Tarboro
White's Medical Rentals, Inc. South Carolina
Wichita Medical Care, Inc. Kansas
Wofford Pharmaceutical Services, Inc. Alabama
Woodridge Convalescent Center, Inc. Texas Integrated Health Services at
Woodridge
Worker's Health Care Clinic, Inc. Florida
X-Ray and Medical Services of Florida
Florida, Inc.1
Zeta Home Health Care, Inc. Florida
</TABLE>
- ---------------
1 Inactive Subsidiary
63
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to incorporation by reference in the registration statements
(Nos. 33-44648, 33-44649, 33-44650, 33-44651, 33-44653, 33-53914, 33-53912,
33-53916, 33-86684, 33-97190, 333-01432, 333-28289, 333-28293, 333-28317,
333-28321 and 333-47853) on Form S-8 and (Nos. 33-66126, 33-68302, 33-77380,
33-81378, 33-87890, 33-98764, 333-4053, 333-12685, 333-31121, 333-35577,
333-35851, 333-41973 and 333-42169) on Forms S-3 or S-4 of Integrated Health
Services, Inc. of our report dated March 25, 1998, relating to the consolidated
balance sheets of Integrated Health Services, Inc. and subsidiaries as of
December 31, 1996 and 1997 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997 and the related schedule, which report
appears in the December 31, 1997 annual report on Form 10-K of Integrated Health
Services, Inc.
Our report refers to changes in accounting methods, in 1995, to adopt
Statement of Financial Accounting Standards No. 121 relating to impairment of
long-lived assets and, in 1996, from deferring and amortizing pre-opening costs
of medical specialty units to recording them as expenses when incurred.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 52,965
<SECURITIES> 8,042
<RECEIVABLES> 764,870
<ALLOWANCES> 161,438
<INVENTORY> 0
<CURRENT-ASSETS> 717,591
<PP&E> 1,318,633
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,063,144
<CURRENT-LIABILITIES> 654,474
<BONDS> 1,100,132
0
0
<COMMON> 43
<OTHER-SE> 1,088,118
<TOTAL-LIABILITY-AND-EQUITY> 5,063,144
<SALES> 1,993,197
<TOTAL-REVENUES> 1,993,197
<CGS> 0
<TOTAL-COSTS> 1,979,959
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115,201
<INCOME-PRETAX> 13,326
<INCOME-TAX> 24,449
<INCOME-CONTINUING> (11,123)
<DISCONTINUED> 0
<EXTRAORDINARY> 20,552
<CHANGES> 1,830
<NET-INCOME> (33,505)
<EPS-PRIMARY> (1.19)
<EPS-DILUTED> (1.19)
</TABLE>
