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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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)
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)
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
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 22, 1999 (based on the closing sale price for such
shares as reported by the New York Stock Exchange): $345,275,857.50
Common Stock outstanding as of March 22, 1999: 52,613,464 shares.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 1999
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 and products include (i)
inpatient services, including subacute care, skilled nursing facility care,
contract rehabilitation and hospice services, (ii) home respiratory care,
infusion and durable medical equipment, (iii) lithotripsy services and (iv)
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 and enable payors to contract with one provider to provide
all of a patient's needs following discharge from acute care hospitals. IHS'
post-acute care network currently consists of over 1,700 service locations in 47
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, 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 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 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.
IHS presently operates 370 geriatric care facilities (285 owned or leased
and 85 managed) and 17 specialty hospitals. The Company provides a wide range of
basic medical and subacute care services as well as a comprehensive array of
respiratory, physical, speech, occupational and physiatric therapy in all its
geriatric care facilities. The Company has over 10,000 contracts to provide
services, primarily physical, occupational, speech and respiratory therapies, to
skilled nursing facilities, subacute care centers, assisted living facilities,
hospitals and other locations. IHS also provides mobile diagnostics such as
portable x-ray and EKG to patients in geriatric care facilities and other
settings, lithotripsy services on an outpatient basis, as well as diversified
home respiratory care, home infusion therapy and other pharmacy-related services
and products and durable medical equipment products from approximately 800
primarily non-urban locations in 44 states and the District of Columbia.
In implementing its post-acute care network strategy, IHS focused in 1996,
1997 and 1998 on expanding its services provided to take advantage of healthcare
payors' increasing focus on having healthcare provided in the lowest-cost
setting possible and recent advances in medical technology which have
facilitated the delivery of medical services in alternative sites. Consistent
with the Company's strategy, 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. Following these acquisitions, the Company continued
to acquire smaller companies providing home respiratory care and mobile
diagnostic services. The Company is currently exploring the sale of its home
respiratory, infusion and durable medical equipment business.
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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 developed and operated skilled
nursing facilities in medically underserved rural communities (the "CCA
Acquisition"). CCA broadened IHS' post-acute care network to include more rural
markets, which IHS believed would complement RoTech's business, which has also
focused on non-urban locations. In addition, in December 1997, IHS acquired from
HEALTHSOUTH Corporation ("HEALTHSOUTH") 139 owned, leased or managed long-term
care facilities (13 of which were subsequently sold) 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").
In 1996 and 1997 the company also focused on providing home health nursing
in order to meet patients' desires to be treated at home. Consistent with this
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. Following the acquisition the company
continued to acquire smaller companies providing home health nursing services.
Prior to implementation of an interim payment system for home health nursing,
IHS intended 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.
However, the delay in the implementation of a prospective payment system
("PPS") for Medicare home health nursing until after October 1, 2000 at the
earliest and a reduction in current cost reimbursement for Medicare home health
nursing pending implementation of a prospective payment system mandated in the
Balanced Budget Act of 1997 ("BBA"), enacted in August 1997, adversely impacted
the Company's financial performance. Accordingly, in the third quarter of 1998
the Company determined to exit the home health nursing business, and sold
substantially all of this business in the first quarter of 1999.
In 1999, the Company intends to focus primarily on ensuring that its core
business is operating efficiently and profitably under PPS. The Company also
intends to take advantage of attractive acquisition opportunities which it
believes will occur as smaller companies have difficulty in operating
successfully under PPS.
INDUSTRY BACKGROUND
The healthcare industry has undergone several significant changes over the
past 15 years, primarily in response to governmental and private payor efforts
to control the cost of providing healthcare services.
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. As a result of the early discharge from hospitals of patients who are
not fully recovered and still require medical care and rehabilitative therapy,
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 BBA, enacted in August 1997, made numerous changes to the Medicare and
Medicaid programs that are significantly affecting 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 (subsequently extended to October 1, 2000), 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. As a result, like hospitals, skilled
nursing facilities and providers of subacute care and home healthcare now bear
the cost risk of providing care inasmuch as they receive specified reimbursement
for each treatment regardless of actual cost. With respect to Medicaid, the BBA
repealed 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 and the Company believes many states are moving toward a
prospective payment type system for skilled nursing facilities.
COMPANY STRATEGY
The Company's post-acute care network strategy is to provide cost-effective
continuity of care for its patients, using geriatric care facilities as
platforms to provide a wide variety of subacute medical and rehabilitative,
lithotripsy, diagnostic, respiratory and infusion services more typically
delivered in the acute care hospital setting. 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:
Offer Broad Range of Post-acute Care Services. IHS offers a broad range of
inpatient, diagnostic, lithotripsy and home respiratory, infusion and durable
medical equipment services to its patients directly in order to serve the full
spectrum of patient needs following acute hospitalization. In addition to
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subacute care, the Company is now able to offer directly to its patients, rather
than through third-party providers, home respiratory 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 is critical in
operating successfully under Medicare's new prospective payment system and in
dealing with other third-party payors.
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. 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. IHS offers specialized
subacute care programs at its facilities, including complex care programs,
ventilator programs, wound management programs and cardiac care programs; other
programs offered include subacute rehabilitation, oncology and HIV. 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 inpatient facilities be a lower
cost alternative to acute care or rehabilitation hospitalization of subacute or
medically complex patients.
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 1,700 service locations in 47 states and the District of Columbia,
including 370 geriatric care facilities in 35 states (85 of which IHS manages),
with 45 service locations, including 10 geriatric care facilities (eight of
which IHS manages), in California, 44 service locations, including 12 geriatric
care facilities (one of which IHS manages), in Colorado, 127 service locations,
including 44 geriatric care facilities (16 of which IHS manages), in Florida, 38
service locations, including 10 geriatric care facilities, in Kansas, 51 service
locations, including 19 geriatric care facilities (two of which IHS manages) in
Louisiana, 21 service locations, including 16 geriatric care facilities in
Nebraska, 36 service locations, including 14 geriatric care facilities (one of
which IHS manages), in Nevada, 67 service locations, including 27 geriatric care
facilities (one of which IHS manages), in New Mexico, 84 service locations,
including 35 geriatric care facilities (17 of which IHS manages), in Ohio, 101
service locations, including 15 geriatric care facilities (five of which IHS
manages), in Pennsylvania, and 266 service locations, including 53 geriatric
care facilities (17 of which IHS manages), in Texas.
Expansion Through Acquisition. IHS has grown substantially through the
acquisition of geriatric care facilities 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 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 285 and has increased the number of facilities it manages from
18 to 85. In addition, the Company now offers certain related services, such as
home respiratory, infusion and durable medical equipment, rehabilitation,
lithotripsy, x-ray and electrocardiogram, directly to its patients rather than
relying on third-party providers. Although expansion through acquisitions is
part of the Company's long-term strategy, during 1999 the Company's primary
focus will be making sure its existing operations are operating efficiently and
profitably under PPS before once again focusing on acquiring additional
facilities and service companies. See "-- Cautionary Statements -- Risks
Associated with Growth Through Acquisitions and Internal Development."
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INPATIENT SERVICES
Inpatient services is the largest source of revenue for the Company. IHS
operates 370 geriatric care facilities (285 owned or leased and 85 managed) and
17 specialty hospitals. Inpatient services also include a wide array of
rehabilitative therapies.
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.
IHS offers specialized subacute care programs at its facilities, including
complex care programs, ventilator programs, wound management programs and
cardiac care programs; other programs offered include subacute rehabilitation,
oncology and HIV. IHS initially focused on the provision of subacute care
through Medical Specialty Units ("MSUs"), which were typically 20 to 75 bed
specialty units with physical identities, specialized medical technology and
staffs separate from the geriatric care facilities in which they were located.
Because of the high level of specialized care provided, the Company's MSUs
generated substantially higher net revenue and operating profit per patient day
than traditional geriatric care facilities. While IHS continues to focus on the
provision of subacute care, it is no longer focusing on providing such care
through its MSUs.
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 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.
Rehabilitation
IHS provides a comprehensive array of rehabilitative services for patients
at all of its geriatric care facilities in order to enable those persons to
return home. These services include respiratory therapy
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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. Rehabilitation services are instrumental in lowering the
overall cost of care by reducing the length of a patient's stay and improving a
patient's quality of life. 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 as well as subacute care
centers, assisted living facilities and other locations. 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.
With the implementation of PPS, with its fee schedule and beneficiary
therapy caps for rehabilitation services, the Company has experienced reduced
demand for, and reduced operating margins from, the rehabilitation services it
provides to third parties because such providers are admitting fewer Medicare
patients and are reducing utilization of rehabilitative services. Beginning in
the fourth quarter of 1998, the Company has focused on reducing its cost of
providing rehabilitation services by reducing staff and changing the method of
compensating its remaining therapists.
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 85
geriatric care facilities with 11,264 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
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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 March 2000 and January 2012 although
all can be terminated earlier 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.
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 11 lithotripsy partnerships as
well as five wholly-owned lithotripsy partnerships and a wholly-owned
lithotripter maintenance company. The Company's lithotripsy businesses currently
consist of an aggregate of 44 lithotripsy machines that provide services in 166
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. Twenty of the 44 lithotripsy machines are stationary and located at
hospitals or ambulatory surgery centers, while the other 24 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 not be material to IHS.
In 1993, the Health Care Financing Administration ("HCFA") 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.
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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 9,100 facilities. In providing its
services the Company utilizes sophisticated computer equipment to transmit
digitized x-ray images from the field directly to the radiologist. The
technology allows a facility requesting a x-ray to receive written results of
the diagnostic test within one hour of the patient test. The predominant market
of the Company's diagnostic services include patients in long term care
facilities, including subacute and board and care type facilities. In addition,
services are provided in home health settings, correctional institutions and
agencies, psychiatric hospitals, industrial sites, dialysis centers and public
tuberculosis screening programs.
HOME RESPIRATORY, INFUSION AND DURABLE MEDICAL EQUIPMENT
IHS currently provides home respiratory, infusion and durable medical
equipment services from 808 locations in 44 states and the District of Columbia,
primarily in the respiratory and infusion therapy segments of the home
healthcare market.
Respiratory Therapy
Respiratory therapy, which is the largest segment of the Company's homecare
services, 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 Company's home respiratory care product line
includes oxygen concentrators, portable liquid oxygen systems, nebulizers and
ventilator care. Oxygen concentrators extract oxygen from room air and generally
provide the least expensive supply of oxygen for patients who require a
continuous supply of oxygen, are not ambulatory and who do not require excessive
flow rates. Liquid oxygen systems store oxygen under pressure in a liquid form.
The liquid oxygen is stored in a stationary unit that can be easily refilled at
the patient's home and can be used to fill a portable device that permits
greatly enhanced patient mobility. Nebulizers are devices which aerosolize
medications, allowing them to be inhaled directly into the patient's lungs.
Ventilator therapy is used for the individual that suffers from respiratory
failure by mechanically assisting the individual to breathe. The Company
provides technicians who deliver and/or install the respiratory care equipment,
instruct the patient in its use, refill the high pressure and liquid oxygen
systems as necessary and provide continuing maintenance of the equipment.
Respiratory therapy is monitored by licensed respiratory therapists and other
clinical staff under the direction of physicians.
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. The Company focuses on
providing home infusion therapy to patients prior to or in lieu of
hospitalization, which generally offers significant cost savings and preferable
logistics for patients, their families and caregivers over hospital-based
treatments. Home infusion therapy is more skilled-labor-intensive than other
home healthcare segments.
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.
DISCONTINUED OPERATIONS
Home nursing, is the largest, the most labor-intensive and generally the
least profitable segment of the home healthcare market. IHS exited this business
in late 1998. Home nursing services provided by IHS ranged from skilled care
provided by registered and other nurses, typically for those recently dis-
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charged from hospitals, to unskilled services delivered by home health aides for
those needing help with the activities of daily living. Home nursing also
included physical, occupational and speech therapy, as well as social worker
services. Although IHS substantially expanded its home nursing services through
acquisitions in 1996 and 1997, the delay in implementation of a prospective
payment system for Medicare home nursing until after October 1, 2000 and a
reduction in current cost reimbursement adversely affected the Company's
financial performance and resulted in the Company's decision in the third
quarter of 1998 to exit the home health nursing business. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Acquisition and Divestiture History."
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, 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
subacute care 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, 1999, 112 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 respiratory, infusion and durable medical equipment
businesses are conducted through approximately 800 branches which are managed
through two 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.
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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 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.
Historically, the Company derived higher revenue from providing specialized
medical services than routine inpatient care. Generally, private pay patients
are the most profitable and Medicaid patients are the least profitable. IHS also
contracts with private payors, including health maintenance organizations and
other managed care organizations, to provide certain healthcare services to
patients for a set per diem payment for each patient. There can be no assurance
that the rates paid to IHS by these payors will be adequate to cover the cost of
providing services to covered beneficiaries. The BBA makes numerous changes to
the Medicare and Medicaid programs which will significantly impact the Company.
During the years ended December 31, 1996, 1997 and 1998, IHS derived
approximately $442.70 million, $735.89 million and $1.60 billion, respectively,
or 38%, 54% and 54%, respectively, of its patient revenues from private pay
sources and approximately $719.76 million, $629.02 million and $1.34 billion,
respectively, or 62%, 46% and 46%, respectively, of its patient revenues from
government reimbursement programs, after giving effect to the discontinuance of
its home health nursing business, which was primarily covered by government
reimbursement programs. Patient revenues from government reimbursement programs
during these periods consisted of approximately $466.20 million, $331.46 million
and $616.52 million, or 40%, 24% and 21% of total patient revenues,
respectively, from Medicare and approximately $253.55 million, $297.56 million
and $723.42 million, respectively, or 22%, 22% and 25% of total patient
revenues, respectively, from Medicaid, after giving effect to the discontinuance
of its home health nursing business. The increase in the percentage of revenue
from government reimbursement programs is due to the higher level of Medicare
and Medicaid patients in the facilities acquired in the Facility Acquisition in
December 1997 and the higher level of such patients serviced by the respiratory
therapy, rehabilitative therapy, home healthcare and mobile diagnostic companies
acquired beginning in 1994.
Until the implementation of the prospective payment system, which will be
complete for IHS' facilities on June 1, 1999, Medicare reimburses the skilled
nursing facility based on a reasonable cost standard. With certain exceptions,
payment for skilled nursing facility services is made prospectively, with each
facility receiving an interim payment during the year for its expected
reimbursable costs. The interim payment is later adjusted to reflect actual
allowable direct and indirect costs of services based on the submission of an
annual cost report. Each facility is also subject to limits on reimbursement for
routine costs. Exceptions to these limits are available for, among other things,
the provision of atypical services. The Company's cost of care for its subacute
care patients generally exceeds regional reimbursement limits established under
Medicare, and IHS submits waiver requests to recover these excess costs. The
Company's final rates approved by HCFA represent approximately 94% 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 are relating to periods prior to the implementation of PPS.
The BBA mandates the establishment of a prospective payment system ("PPS")
for Medicare skilled nursing facility services, under which facilities will be
paid a fixed fee for virtually all covered services. PPS will be phased in over
a four-year period, effective January 1, 1999 for IHS' owned and leased skilled
nursing facilities other than the facilities acquired in the Facility
Acquisition, which facilities will become subject to PPS on June 1, 1999.
Prospective payment for facilities managed by IHS will be effective for each
facility at the beginning of its first cost reporting period on or after July 1,
1998. During the first three years, payments will be based on a blend of the
facility's historical costs and federal costs. Thereafter, the per diem rates
will be based 100% on federal costs. Under PPS, each patient's clinical status
is evaluated and placed into a payment category. The patient's payment category
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dictates the amount that the provider will receive to care for the patient on a
daily basis. The per diem rate will cover (i) all routine inpatient costs
currently paid under Medicare Part A, (ii) certain ancillary and other items and
services currently covered separately under Medicare Part B on a "pass-through"
basis, and (iii) certain capital costs. The Company's ability to offer the
ancillary services required by higher acuity patients, such as those in its
subacute care programs, in a cost-effective manner will be critical to the
Company's success and will affect the profitability of the Company's Medicare
patients. There can be no assurance that PPS will not have a material adverse
impact on IHS' results of operations or financial condition.
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 also contains changes to the Medicaid program, the most
significant of which is the repeal of the Boren Amendment. The Boren Amendment
required state Medicaid programs to pay rates that are reasonable and adequate
to meet the costs that must be incurred by a nursing facility in order to
provide care and services in compliance with applicable 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. Texas has now
adopted a case-mix prospective payment system similar to the Medicare PPS, and
the Company expects additional states will move in this direction. IHS is unable
to predict what effect such changes will have on the Company. There can be no
assurance that any changes to the Medicaid program will not have a material
adverse impact on the Company.
Medicare covers and pays for rehabilitation therapy services furnished in
facilities in various ways. For rehabilitation services provided directly,
specific guide lines exist for evaluating the reasonable cost of physical
therapy, occupational therapy and speech language pathology services. Medicare
applies salary equivalency guidelines in determining the reasonable cost of
physical therapy and respiratory services, which is the cost that would be
incurred if the therapist were employed by a nursing facility, plus an amount
designed to compensate the provider for certain general and administrative
overhead costs. Until April 1, 1998, Medicare paid for occupational therapy and
speech language pathology services on a reasonable cost basis, subject to the
so-called "prudent buyer" rule for evaluating the reasonableness of the costs.
IHS' gross margins for services reimbursed under the salary equivalency
guidelines are significantly less than services reimbursed under the "prudent
buyer" rule.
In January 1998, HCFA issued rules applying salary equivalency limits to
certain speech and occupational therapy services and revised existing physical
and respiratory therapy limits. The new limits are effective for services
provided on or after April 1, 1998. The revised guidelines will be in effect
until nursing facilities transition to PPS. Under PPS, the reimbursement for
these services provided to nursing facility patients will be a component of the
total reimbursement to the nursing facility allowed per patient and the salary
equivalency guidelines will no longer be applicable. Medicare will pay the
skilled nursing facility directly for all rehabilitation services and the
outside suppliers of such services to residents of the skilled nursing facility
must collect payment from the skilled nursing facility. Effective January 1,
1999 a per provider limit of $1,500 applies to all rehabilitation therapy
services provided under Medicare Part B ($1,500 for physical and speech-language
pathology services, and a separate $1,500 for occupational therapy services).
Additionally, effective January 1, 1999, Medicare Part B therapy services are no
longer being reimbursed on a cost basis; rather, payment for each service
provided is based on fee screen schedules published in November 1998. As a
result of the implementation of PPS, the Company has to date experienced a
substantial reduction in demand for, and reduced operating margins from, therapy
services it provides to third parties, because such providers are admitting
fewer Medicare patients and are reducing utilization of rehabilitative services.
There can be no assurance that these fee schedules or caps will not have a
material adverse effect on the Company.
The Medicare program reimburses IHS' home respiratory care, infusion and
durable medical equipment services under a charge-based system, pursuant to
which the Company receives either a fixed fee for a specific service or product
or a fixed per diem amount for providing certain services. The BBA
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reduced Medicare payment amounts for oxygen and oxygen equipment furnished after
January 1, 1998 to 75 percent of the fee schedule amounts in effect during 1997.
Payment amounts for oxygen and oxygen equipment furnished after January 1, 1999
and each subsequent year thereafter are reduced to 70 percent of the fee
schedule amounts in effect during 1997. The BBA freezes the Consumer Price Index
(U.S. urban average) update for covered items of durable medical equipment for
each of the years 1998 through 2002 while limiting fees for parenteral and
enteral nutrients, supplies and equipment to 1995 reasonable charge levels over
the same period. The BBA reduces payment amounts for covered drugs and
biologicals to 95 percent of the average wholesale price of such covered items
for each of the years 1998 through 2002. The BBA authorizes the Department of
Health and Human Services ("HHS") to conduct up to five competitive bidding
demonstration projects for the acquisition of durable medical equipment and
requires that one such project be established for oxygen and oxygen equipment.
Each demonstration project is to be operated over a three-year period and is to
be conducted in not more than three competitive acquisition areas. The BBA also
includes provisions designed to reduce healthcare fraud and abuse, including a
surety bond requirement for durable medical equipment providers.
The Medicare program reimbursed the Company's home nursing services on a
cost-based system, under which IHS was reimbursed at the lowest of IHS'
reimbursable costs (based on Medicare regulations), cost limits established by
HCFA or IHS' charges. The BBA reduced current cost reimbursement for home
nursing care pending implementation of a prospective payment system, which the
BBA mandated be implemented for cost reporting periods beginning on or after
October 1, 1999 (which date was subsequently extended to October 1, 2000). This
postponement of implementation of a prospective payment system for home nursing
and the reduction in cost reimbursement resulted in IHS' decision to exit the
home nursing business. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company expects that both private third party and governmental payors
will continue to undertake 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
operating and fixed 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
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determination that a need exists for such new or additional beds, new services
or capital expenditures. The CON process is intended to promote quality
healthcare at the lowest possible cost and to avoid the unnecessary duplication
of services, equipment and facilities. 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, Connecticut, Delaware, Florida, Georgia, Illinois, Iowa, Kentucky,
Massachusetts, Michigan, Mississippi, Missouri, Nebraska, Nevada, New Hampshire,
New Jersey, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Virginia,
Washington, West Virginia and Wisconsin.
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.
IHS' geriatric care facilities must comply with certain requirements to
participate either as a skilled nursing facility under Medicare or a nursing
facility under Medicaid. Regulations promulgated pursuant to the Omnibus Budget
Reconciliation Act of 1987 obligate facilities to demonstrate compliance with
requirements relating to resident rights, resident assessment, quality of care,
quality of life, physician services, nursing services, pharmacy services,
dietary services, rehabilitation services, infection control, physical
environment and administration. 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. Regulations adopted by
HCFA effective July 1, 1995 require that surveys focus on residents' outcomes of
care and state that all deviations from participation requirements will be
considered deficiencies, but a facility may have deficiencies and be in
substantial compliance with the regulations. The regulations identify
alternative remedies (meaning remedies other than termination of a facility from
the Medicare or Medicaid programs) against facilities and specify the categories
of deficiencies for which they will be applied. The alternative remedies
include, but are not limited to: civil money penalties of up to $10,000 per day;
facility closure and/or transfer of residents in emergencies; denial of payment
for new or all admissions; directed plans of correction; and directed in-service
training.
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. There can be no
assurance that the Company will be able to maintain compliance with all
regulatory requirements or that it will not be required to expend significant
amounts to do so.
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, renew or maintain any of the
required regulatory approvals or licenses could adversely affect the Company's
home healthcare business and could prevent the branch involved
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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.
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. 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.
The Health Insurance Portability and Accountability Act of 1996 granted
expanded enforcement authority to HHS and the U.S. Department of Justice
("DOJ"), and provided enhanced resources to support the activities and
responsibilities of the Office of Inspector General ("OIG") and DOJ by
authorizing large increases in funding for investigating fraud and abuse
violations relating to healthcare delivery and payment. The BBA also includes
numerous health fraud provisions, including new civil money penalties for
contracting with an excluded provider, and new surety bond and information
disclosure requirements for certain providers and suppliers including home
health agencies.
In 1995, a major anti-fraud demonstration project, "Operation Restore
Trust," was announced by the OIG. A primary purpose for the project was to
scrutinize the activities of healthcare providers which are reimbursed under the
Medicare and Medicaid programs. Investigative efforts focused on skilled nursing
facilities, home health and hospice agencies and durable medical equipment
suppliers, as well as several other types of healthcare services. Operation
Restore Trust originally focused on California, Florida, Illinois, New York and
Texas, but has now been expanded to all states. This effort is focused on
problems with claims for services not rendered or not provided as claimed and
claims falsified to circumvent coverage limitations on medical supplies. IHS
expects these types of efforts to continue.
False claims are prohibited pursuant to criminal and civil statutes.
Criminal provisions prohibit filing false claims or making false statements to
receive payment or certification under Medicare or Medicaid, or failing to
refund overpayments or improper payments; offenses for violation are felonies
punishable by up to five years imprisonment and/or $25,000 fines. Civil
provisions prohibit the knowing filing of a false claim or the knowing use of
false statements to obtain payment; penalties for violations are fines of not
less than $5,000 nor more than $10,000, plus treble damages, for each claim
filed. Suits alleging false claims can be brought by individuals, including
employees and competitors. In addition to qui tam actions brought by private
parties, the Company believes that governmental enforcement activities have
increased at both the federal and state levels. If it were found that any of the
Company's practices failed to comply with any of the anti-fraud provisions
discussed in the paragraphs above, the Company could be materially adversely
affected.
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Management is unable to predict the effect of future administrative or
judicial interpretations of the laws discussed above, or whether other
legislation or regulations on the federal or state level in any of these areas
will be adopted, what form such legislation or regulations may take, or their
impact on the Company. There can be no assurances that such laws will ultimately
be interpreted in a manner consistent with the Company's practices.
President Clinton has announced initiatives designed to improve the quality
of care in nursing homes and to reduce fraud in the Medicare program. On July
21, 1998, the President directed HCFA to ensure that states take tougher
enforcement measures in surveying skilled nursing facilities, including the
onsite imposition of fines without grace periods, the imposition of fines per
violation rather than per day of noncompliance, and increased review of
facilities' systems to prevent resident neglect and abuse. On December 7, 1998,
the President announced that the Administration would continue its crackdown on
providers who commit Medicare program fraud by empowering specialized
contractors to track down Medicare scams and program waste, and by requiring
providers to report evidence of fraud so patterns of fraud can be identified
early and stopped. HCFA is to develop a comprehensive plan to fight waste, fraud
and abuse in the Medicare program, and to report to the President in early 1999.
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.
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
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
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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 inpatient facilities operated and managed by IHS primarily compete on a
local and regional basis with other skilled care providers. The Company's
inpatient facilities 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 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 respiratory care, infusion and durable medical equipment 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.
EMPLOYEES
As of March 15, 1999, IHS had approximately 84,000 full-time and regular
part-time employees. Full-time and regular part-time service and maintenance
employees at 60 facilities, totaling approximately 4,230 employees, are covered
by collective bargaining agreements. IHS' corporate staff consisted of
approximately 1,500 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 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.
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CAUTIONARY STATEMENTS
This Annual Report on Form 10-K contains, and from time to time the Company
may disseminate materials and make statements which may contain, 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:
Risks Related to Substantial Indebtedness. The Company's indebtedness is
substantial in relation to its stockholders' equity. At December 31, 1998, IHS'
total long-term debt, including current portion, accounted for 71.7% of its
total capitalization. IHS also has significant lease obligations with respect to
the facilities operated pursuant to long-term leases, which aggregated
approximately $878.0 million at December 31, 1998. For the year ended December
31, 1998 the Company's rent expense was $126.2 million. In addition, IHS is
obligated to pay an additional $155 million in respect of the acquisition of
First American Health Care of Georgia, Inc., a provider of home health services,
principally home nursing, during 2000 to 2004, of which $122.1 million
(representing the present value thereof) has been recorded at December 31, 1998.
The Company sold its home health nursing business in February 1999. The
Company's strategy of 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 March 1999, Standard & Poors ("S&P") lowered the Company's corporate
credit and bank loan ratings from B+ to B- and subordinated debt rating from B-
to CCC. S&P stated that it took this action in light of the Company's high debt
leverage and the impact of PPS. IHS' debt remains on CreditWatch with negative
implications.
Risks Related to Prospective Payment System. The BBA, enacted in August
1997, made numerous changes to the Medicare and Medicaid programs that are
significantly affecting the Company's operations. The BBA provides for the
phase-in of a PPS for skilled nursing facilities over a four year period
effective January 1, 1999 for IHS owned and leased facilities other than the
facilities acquired in the Facility Acquisition, which facilities will become
subject to PPS on June 1, 1999. Under PPS, Medicare
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will pay skilled nursing facilities a fixed fee per patient day based on the
acuity level of the patient to cover all post-hospital extended care routine
service costs, as well as substantially all items and services, such as
rehabilitation therapy, furnished during a covered stay for which reimbursement
was formerly made separately under Medicare. During the first three years of the
phase-in, reimbursement will be based on a blend of the facility's historical
costs and federal costs. Thereafter, the per diem rates will be based 100% on
federal costs. It is unclear what the impact of PPS will be on IHS. There can be
no assurance that the imposition of PPS will not have a material adverse effect
on the results of operations and financial condition of IHS. To date, the
implementation of PPS has resulted in reduced demand for, and reduced operating
margins from, the rehabilitation services it provides to third parties because
such providers are admitting fewer Medicare patients and are reducing
utilization of rehabilitative services.
The profitability of IHS inpatient services segment will be significantly
affected by the federally established per diem rate and IHS' cost of providing
care. There can be no assurance that the per diem rate will cover IHS' cost of
providing care, particularly with respect to higher acuity patients. As a
result, there can be no assurance that IHS' financial condition and results of
operations will not be materially and adversely affected.
The BBA also reduced significantly Medicare payment amounts for oxygen and
oxygen equipment, and froze fees for durable medical equipment and certain
infusion levels. There can be no assurance that these fees will cover IHS' cost
of providing such services. As a result, there can be no assurance that IHS'
financial condition and results of operations will not be materially and
adversely affected.
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 various risks associated with
this growth strategy. The Company's planned expansion and growth require that
the Company expand its home respiratory, infusion and durable medical equipment
services through the acquisition of additional 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 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 "--
Competition."
The successful integration of acquired businesses is important to the
Company's future financial performance. The anticipated benefits from any
acquisition may not be achieved unless the operations of the acquired business
are successfully combined with those of the Company in a timely manner. The
integration of the Company's 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. 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. 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.
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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 Capital Requirements. IHS' growth strategy requires
substantial capital for the acquisition of additional 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."
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 inpatient 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. The BBA makes
numerous changes to the Medicare and Medicaid programs which will significantly
impact 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, 1996, 1997 and 1998, the Company derived
approximately 62%, 46% and 46%, respectively, of its patient revenues from
Medicare and Medicaid.
The sources and amounts of the Company's patient revenues derived from the
operation of its geriatric care facilities 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. IHS also contracts with private
payors, including health maintenance organizations and other managed care
organizations, to pro-
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vide certain healthcare services to patient's for a set per diem payment for
each patient. There can be no assurance that the rates paid to IHS by those
payors will be adequate to cover the cost of providing services to covered
beneficiaries.
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. In addition, private payors, including managed
care payors, increasingly are demanding discounted fee structures or the
assumption by healthcare providers of all or a portion of the financial costs
through prepaid capitation.
Risk of Adverse Effect of Healthcare Reform. In addition to extensive
existing government healthcare regulation, in recent years a number of laws have
been enacted which have effected major changes in the healthcare system, both
nationally and at the state level. The BBA makes numerous changes to the
Medicare and Medicaid programs which will significantly impact 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
(subsequently delayed to October 1, 2000), 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 inpatient services and/or home respiratory,
infusion and durable medical equipment 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 "-- 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 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. 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 began January 1, 1999 for IHS' owned and
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leased skilled nursing facilities other than the facilities acquired from
HEALTHSOUTH, which facilities will become subject to prospective payment on June
1, 1999. Prospective payment for skilled nursing facilities managed by IHS
becomes 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.
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, and the Company believes
many states will move towards a prospective payment type system similar to PPS.
While the Company has prepared certain estimates of the impact of PPS, it
is not possible to fully quantify the effect of the recent legislation, the
interpretation or administration of such legislation or any other governmental
initiatives on the Company's business. Accordingly, there can be no assurance
that the impact of PPS will not be greater than estimated or that these
legislative changes or any future healthcare legislation will not adversely
effect the business of the Company.
The Company anticipates that federal and state governments will continue to
review and assess alternative healthcare delivery systems and payment
methodologies. There can be no assurance that future healthcare legislation or
other changes in the administration or interpretation of government healthcare
programs will not have an adverse effect on the operations of IHS.
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 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. There can be no assurance that the Company will be
able to maintain compliance with all regulatory requirements or that it will not
be required to expend significant amounts to do so.
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,
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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.
In 1995, a major anti-fraud demonstration project, "Operation Restore
Trust," was announced by the OIG. A primary purpose for the project was to
scrutinize the activities of healthcare providers which are reimbursed under the
Medicare and Medicaid programs. Investigative efforts focused on skilled nursing
facilities, home health and hospice agencies and durable medical equipment
suppliers, as well as several other types of healthcare services. Operation
Restore Trust originally focused on California, Florida, Illinois, New York and
Texas, but has now been expanded to all states. This effort is focused on
problems with claims for services not rendered or not provided as claimed and
claims falsified to circumvent coverage limitations on medical supplies. IHS
expects these types of efforts to continue.
False claims are prohibited pursuant to criminal and civil statutes.
Criminal provisions prohibit filing false claims or making false statements to
receive payment or certification under Medicare or Medicaid, or failing to
refund overpayments or improper payments; offenses for violation are felonies
punishable by up to five years imprisonment and/or $25,000 fines. Civil
provisions prohibit the knowing filing of a false claim or the knowing use of
false statements to obtain payment; penalties for violations are fines of not
less than $5,000 nor more than $10,000, plus treble damages, for each claim
filed. Suits alleging false claims can be brought by individuals, including
employees and competitors. In addition to qui tam actions brought by private
parties, the Company believes that governmental enforcement activities have
increased at both the federal and state levels. If it were found that any of the
Company's practices failed to comply with any of the anti-fraud provisions
discussed in the paragraphs above, the Company could be materially adversely
affected.
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.
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
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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 other home respiratory care, infusion and
durable medical equipment 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 has been significant volatility
in the market price of the Common Stock, and it is likely that the price of the
Common Stock will fluctuate in the future. 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.
23
<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. .......... 55 Chairman of the Board,
Chief Executive Officer and President
W. Bradley Bennett .............. 33 Executive Vice President -- Chief Accounting Officer
Stephen P. Griggs ............... 41 President of RoTech Medical Corporation
John Heller ..................... 40 Executive Vice President and President of Long-Term Care
Division
C. Taylor Pickett ............... 37 Executive Vice President -- Chief Financial
Officer
Sally Weisberg .................. 51 Executive Vice President and President of Symphony Health
Services Division
</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.
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.
John F. Heller has been Executive Vice President and President of the
Long-Term Care Division of the Company since September 1998. From May 1997 to
September 1998, he served as Executive Vice President of Facility Operations, as
Senior Vice President -- Facility Operations from November 1996 to May 1997 and
as Senior Vice President -- Medical Specialty Operations from May 1994 to May
1997. From February 1991, when he joined IHS, to May 1994 he served as Vice
President of Medical Specialty Finance. For seven years prior to joining IHS,
Mr. Heller was with the Management Consulting Services group of Ernst & Young,
in Columbus, Ohio. Mr. Heller has a Master in Healthcare Administration and a
Master in Public Policy, both from the Ohio State University. Mr. Heller
received a BA in Economics from Denison 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.
24
<PAGE>
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.
Sally Weisberg has been Executive Vice President and President of Symphony
Health Services Division since August 1997. From November 1994, when Mrs.
Weisberg's rehabilitation company, the Rehab People, Inc., was purchased by
IHS, to August 1997, Mrs. Weisberg served as President of IHS' Rehabilitation
Division. Mrs. Weisberg served as President of The Rehab People, Inc. from 1989
to November 1994. Prior to founding The Rehab People, Inc., Mrs. Weisberg
founded Occupational Therapy Associates, a rehabilitation contracting
organization. Mrs. Weisberg is a magna cum laude occupational therapy graduate
of Temple University.
ITEM 2. PROPERTIES
The Company owns 76 geriatric care facilities with 8,721 licensed beds,
leases 209 geriatric care facilities with 24,433 licensed beds and manages 85
geriatric care facilities with 11,264 licensed beds. The leases for the leased
facilities have terms of four to 20 years, expiring on various dates between
1999 and 2024. 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.
25
<PAGE>
The following table presents certain information regarding the Company's
owned, leased and managed service locations as of March 15, 1999.
<TABLE>
<CAPTION>
OWNED LEASED MANAGED
---------------------- ----------------------- ----------------------- OTHER
LICENSED LICENSED LICENSED SERVICE
STATE FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS LOCATIONS(1)
- ------------------------------ ------------ --------- ------------ ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Alabama ...................... 5 562 36
Arizona ...................... 37
Arkansas ..................... 22
California ................... 2 249 8 1,044 35
Colorado ..................... 1 50 10 1,480 1 155 32
Connecticut .................. 3 585 1
Delaware ..................... 1 153 1
District of Columbia ......... 4
Florida ...................... 15 2,025 13 1,656 16 1,900 83
Georgia ...................... 2 304 25 3,080 2 222 52
Idaho ........................ 1 218 8
Illinois ..................... 1 140 1 55 1 150 49
Indiana ...................... 1 145 24
Iowa ......................... 2 221 5 352 24
Kansas ....................... 4 328 6 654 28
Kentucky ..................... 1 100 32
Louisiana .................... 2 307 15 1,653 2 200 32
Maine ........................ 3
Maryland ..................... 7
Massachusetts ................ 6 900 1 122 2
Michigan ..................... 3 449 4 559 1 99 40
Minnesota .................... 19
Mississippi .................. 5 651 26
Missouri ..................... 1 180 4 552 1 176 29
Montana ...................... 18
Nebraska ..................... 14 864 2 130 5
Nevada ....................... 1 103 11 1,486 1 266 23
New Hampshire ................ 1 112 2 136 3
New Jersey ................... 1 58 14
New Mexico ................... 2 185 24 2,356 1 85 40
New York ..................... 14
North Carolina ............... 2 275 9 1,092 58
North Dakota ................. 3
Ohio ......................... 1 100 17 1,648 17 1,729 49
Oklahoma ..................... 2 164 1 174 33
Oregon ....................... 2
Pennsylvania ................. 2 371 8 1,094 5 900 86
Rhode Island ................. 1
South Carolina ............... 3 172 11 1,250 26
South Dakota ................. 7
Tennessee .................... 1 124 19
Texas ........................ 18 2,424 18 1,993 17 2,670 213
Utah ......................... 8
Virginia ..................... 1 114 13
Washington ................... 1 210 20
West Virginia ................ 1 126 9
Wisconsin .................... 1 111 16
Wyoming ...................... 2 220 19
</TABLE>
- ----------
(1) Represents locations within the state from which the Company offers home
respiratory services (808 service locations), hospice services (17 service
locations), contract rehabilitation and respiratory services (385 service
locations), mobile diagnostic services (71 service locations, including 13
fixed lithotripsy service locations) and medical products services (27
service locations). In addition, other service locations includes 17
specialty hospitals. The majority of these facilities are leased.
Substantially all of these service locations are small agencies which are
administrative in function, with substantially all healthcare services being
provided at the patient's home or in a geriatric care facility, rather than
the service location. The only exceptions are the 13 fixed lithotripsy
centers, 17 specialty hospitals and 17 hospice facilities, where services
are provided at the locations.
26
<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
None
27
<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.
HIGH LOW
---------- -----------
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
HIGH LOW
---------- -----------
CALENDAR YEAR 1998
First Quarter ............... $39 5/16 $28 1/4
Second Quarter .............. 39 3/8 35
Third Quarter ............... 37 3/8 16 13/16
Fourth Quarter .............. 17 9 1/2
As of March 19, 1999, there were approximately 1,600 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.
SALES OF UNREGISTERED SECURITIES
On September 25, 1998, the Company purchased all the assets of Accucare
Medical Corporation, a home respiratory care and durable medical equipment
business. The purchase price was $2.9 million which was paid through the
issuance of 128,972 shares of the Company's Common Stock.
On November 11, 1998 the Company purchased all the assets of Indiana
Respiratory Care, Inc., a home respiratory care and durable medical equipment
business. The purchase price was $1.2 million of which $1.0 million was paid
through the issuance of 67,395 shares of the Company's Common Stock.
On November 17, 1998, the Company issued 31,251 shares of Common Stock to
the stockholders of First Community Care, Inc., which was purchased in May 1998,
because the average price of the 59,376 shares of Common Stock issued to the
First Community shareholders at the time of closing of the acquisition (the
"Original Shares") was higher than the average price of the Common Stock at the
time such shares were registered for resale under the Securities Act. The number
of additional shares is equal to the difference between (i) the number of shares
determined by dividing the merger consideration of $2.3 million by the average
closing price of the Common Stock on the New York Stock Exchange ("NYSE") for
the 30 trading days ending on the date immediately preceding the date of the
registration statement covering the cost of the Original Shares was declared
effective and (ii) the number of shares determined by dividing the merger
consideration of $2.3 million by the average closing price of the Common Stock
on the NYSE for the 30 trading day period immediately preceding the date which
was two trading days prior to the closing date of the acquisition.
28
<PAGE>
The Common Stock issued by the Company in these transactions was not
registered under the Securities Act of 1933, as amended, in reliance upon
exemptions contained in Section 4(2) thereof. Each of the persons acquiring
shares of Common Stock made representations to the effect that (i) the shares
being acquired for its own account and not with a view to, or for sale in
connection with, any distributions; (ii) acknowledging that the shares were
restricted securities under Rule 144; (iii) that is had knowledge and experience
in business matters, was capable of evaluating the merits and risks of the
investment, and was able to bear the risk of loss; and (iv) had the opportunity
to make inquiries of and obtain information from IHS. The Company is obligated
to register the Common Stock for resale under the Securities Act of 1993, as
amended.
29
<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, 1998 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 LLP, independent certified public
accountants. The consolidated financial statements as of December 31, 1997 and
1998 and for each of the years in the three year period ended December 31, 1998,
and the independent auditors' report thereon, are included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1994 1995
------------- -------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA(1)(2):
Total revenues ..................................................... $ 709,049 $1,099,203
Cost and expenses:
Operating, general and administrative expenses .................... 562,389 868,662
Depreciation and amortization ..................................... 26,315 38,963
Rent .............................................................. 42,083 64,541
Interest, net ..................................................... 20,599 38,942
Loss from impairment of long-lived assets and other non-
recurring charges (income)(3) .................................... -- 132,960
--------- ----------
Earnings (loss) from continuing operations before equity in
earnings of affiliates, income taxes, extraordinary items
and cumulative effect of accounting change ...................... 57,663 (44,865)
Equity in earnings of affiliates ................................... 1,176 1,443
--------- ----------
Earnings (loss) from continuing operations before income taxes,
extraordinary items and cumulative effect of ac-
counting change ................................................. 58,839 (43,422)
Income tax provision (benefit) ..................................... 22,065 (16,717)
--------- ----------
Earnings (loss) from continuing operations before extraordi-
nary items and cumulative effect of accounting change ........... 36,774 (26,705)
Earnings (loss) from discontinued operations (net of tax)(4) ....... 88 716
--------- ----------
Earnings (loss) before extraordinary items and cumulative
effect of accounting change ..................................... 36,862 (25,989)
Extraordinary items(5) ............................................. 4,274 1,013
--------- ----------
Earnings (loss) before cumulative effect of accounting change..... 32,588 (27,002)
Cumulative effect of accounting change(6) .......................... -- --
--------- ----------
Net earnings (loss) .............................................. $ 32,588 $ (27,002)
========= ==========
Per Common Share(7):
Basic:
Earnings (loss) from continuing operations before extraordi-
nary items and cumulative effect of accounting change ........... $ 2.17 $ (1.24)
Earnings (loss) before extraordinary items and cumulative
effect of accounting change ..................................... 2.18 (1.21)
Earnings (loss) from continuing operations before cumula-
tive effect of accounting change ................................ 1.93 (1.26)
Net earnings (loss) .............................................. $ 1.93 $ (1.26)
Diluted:
Earnings (loss) from continuing operations before extraordi-
nary items and cumulative effect of accounting change ........... $ 1.76 $ (1.24)
Earnings (loss) before extraordinary items and cumulative
effect of accounting change ..................................... 1.77 (1.21)
Earnings (loss) before cumulative effect of accounting change .... 1.61 (1.26)
Net earnings (loss) .............................................. $ 1.61 $ (1.26)
Weighted average number of common shares outstanding(7) ............
Basic ............................................................ 16,910 21,463
Diluted .......................................................... 26,558 21,463
========= ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
------------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1)(2):
Total revenues ..................................................... $1,203,626 $1,402,628 $2,972,186
Cost and expenses:
Operating, general and administrative expenses .................... 942,192 1,018,117 2,218,937
Depreciation and amortization ..................................... 37,223 56,162 156,719
Rent .............................................................. 70,949 74,355 126,247
Interest, net ..................................................... 59,826 94,880 238,647
Loss from impairment of long-lived assets and other non-
recurring charges (income)(3) .................................... (17,976) 123,456 --
---------- ---------- ----------
Earnings (loss) from continuing operations before equity in
earnings of affiliates, income taxes, extraordinary items
and cumulative effect of accounting change ...................... 111,412 35,658 231,636
Equity in earnings of affiliates ................................... 828 88 384
---------- ---------- ----------
Earnings (loss) from continuing operations before income taxes,
extraordinary items and cumulative effect of ac-
counting change ................................................. 112,240 35,746 232,020
Income tax provision (benefit) ..................................... 64,008 33,238 95,128
---------- ---------- ----------
Earnings (loss) from continuing operations before extraordi-
nary items and cumulative effect of accounting change ........... 48,232 2,508 136,892
Earnings (loss) from discontinued operations (net of tax)(4) ....... (467) (13,631) (204,870)
---------- ---------- ----------
Earnings (loss) before extraordinary items and cumulative
effect of accounting change ..................................... 47,765 (11,123) (67,978)
Extraordinary items(5) ............................................. 1,431 20,552 --
---------- ---------- ----------
Earnings (loss) before cumulative effect of accounting change .... 46,334 (31,675) (67,978)
Cumulative effect of accounting change(6) .......................... -- 1,830 --
---------- ---------- ----------
Net earnings (loss) .............................................. $ 46,334 $ (33,505) $ (67,978)
========== ========== ==========
Per Common Share(7):
Basic:
Earnings (loss) from continuing operations before extraordi-
nary items and cumulative effect of accounting change ........... $ 2.14 $ 0.09 $ 2.83
Earnings (loss) before extraordinary items and cumulative
effect of accounting change ..................................... 2.12 (0.39) (1.40)
Earnings (loss) from continuing operations before cumula-
tive effect of accounting change ................................ 2.06 (1.12) (1.40)
Net earnings (loss) .............................................. $ 2.06 $ (1.19) $ (1.40)
Diluted:
Earnings (loss) from continuing operations before extraordi-
nary items and cumulative effect of accounting change ........... $ 1.84 $ 0.33 $ 2.56
Earnings (loss) before extraordinary items and cumulative
effect of accounting change ..................................... 1.83 (0.02) (1.08)
Earnings (loss) before cumulative effect of accounting change..... 1.78 (0.55) (1.08)
Net earnings (loss) .............................................. $ 1.78 $ (0.60) $ (1.08)
Weighted average number of common shares outstanding(7) ............
Basic ............................................................ 22,529 28,253 48,446
Diluted .......................................................... 31,564 38,899 $ 56,257
========== ========== ==========
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(4):
Cash and temporary investments .................... $ 63,181 $ 38,499 $ 37,530 $ 68,375 $ 44,219
Working capital ................................... 77,708 127,214 97,129 43,357 341,200
Total assets ...................................... 1,250,972 1,423,749 1,792,677 5,002,152 5,393,128
Long-term debt, including current portion ......... 549,954 769,948 1,032,529 3,219,481 3,382,937
Stockholders' equity .............................. 453,811 431,528 534,865 1,088,161 1,331,965
</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.
(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, and (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. 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 $102,645,000 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(l) and 20 of Notes to
Consolidated Financial Statements.
(4) In October 1998, the Company's Board of Directors adopted a plan to
discontinue its home health nursing business segment. Accordingly, the
operating results of the home health nursing business of approximately
$35,903,000 (net of tax), as well as the loss on disposal of $168,967,000
including provisions for estimated lease termination costs, employee
benefits and losses during the phase-out period (net of tax) have been
segregated from continuing operations and reported as a separate line item
on the statement of operations. The Company has reclassified its prior
financial statements to present the operating results of the home health
nursing business as a discontinued operation. The assets and liabilities of
such operations at December 31, 1997 have been reflected as a net
non-current asset based substantially on the original classification of such
assets and liabilities. See Note 8 of Notes to Consolidated Financial
Statements.
(5) 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.
(6) 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 21 of Notes to Consolidated Financial
Statements.
(7) The share and per share information for the years ended December 31, 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(n) and 13 of Notes to Consolidated Financial Statements.
The diluted weighted average number of common shares outstanding for the
years ended December 31, 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 $10,048,000, $9,888,000,
$10,216,000 and $7,396,000 for the years ended December 31, 1994, 1996, 1997
and 1998, respectively. The diluted weighted average number of common shares
outstanding for the year ended December 31, 1995 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.
31
<PAGE>
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 subacute care
programs within its geriatric care facilities. 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, skilled nursing
facility care, home respiratory care and contract rehabilitation, hospice,
lithotripsy and diagnostic services.
IHS presently operates 370 geriatric care facilities (285 owned or leased
and 85 managed) and 17 specialty hospitals. The Company provides a wide range of
basic medical and subacute care services as well as a comprehensive array of
respiratory, physical, speech, occupational and physiatric therapy in all its
geriatric care facilities. The Company has over 10,000 contracts to provide
services, primarily physical, occupational, speech and respiratory therapies, to
skilled nursing facilities, subacute care centers, assisted living facilities,
hospitals and other locations. IHS also provides mobile diagnostics such as
portable x-ray and EKG to patients in geriatric care facilities and other
settings, lithotripsy services on an outpatient basis, as well as diversified
home respiratory care, home infusion therapy and other pharmacy-related services
and durable medical equipment products from approximately 800 primarily
non-urban locations in 44 states and the District of Columbia.
IHS initially focused on the provision of subacute care through Medical
Specialty Units ("MSUs"), which were typically 20 to 75 bed specialty units with
physical identities, specialized medical technology and staffs separate from the
geriatric care facilities in which they were located. Because of the high level
of specialized care provided, the Company's MSUs generated substantially higher
net revenue and operating profit per patient day than traditional geriatric care
facilities. While IHS continues to focus on the provision of subacute care, it
is no longer focusing on providing such care through its MSUs.
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 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.
Historically, the Company derived higher revenue from providing specialized
medical services than routine inpatient care. Generally, private pay patients
are the most profitable and Medicaid patients are the least profitable. IHS also
contracts with private payors, including health maintenance organizations and
other managed care organizations, to provide certain healthcare services to
patients
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for a set per diem payment for each patient. There can be no assurance that the
rates paid to IHS by these payors will be adequate to cover the cost of
providing services to covered beneficiaries. The BBA makes numerous changes to
the Medicare and Medicaid programs which will significantly impact the Company.
Until the implementation of the prospective payment system, which will be
complete for IHS' facilities on June 1, 1999, Medicare reimburses the skilled
nursing facility based on a reasonable cost standard. With certain exceptions,
payment for skilled nursing facility services is made prospectively, with each
facility receiving an interim payment during the year for its expected
reimbursable costs. The interim payment is later adjusted to reflect actual
allowable direct and indirect costs of services based on the submission of an
annual cost report. Each facility is also subject to limits on reimbursement for
routine costs. Exceptions to these limits are available for, among other things,
the provision of atypical services. The Company's cost of care for its subacute
care patients generally exceeds regional reimbursement limits established under
Medicare, and IHS submits waiver requests to recover these excess costs. To
date, the Company's final rates as approved by HCFA represent approximately 94%
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.
The BBA mandates the establishment of a prospective payment system ("PPS")
for Medicare skilled nursing facility services, under which facilities will be
paid a fixed fee for virtually all covered services. PPS will be phased in over
a four-year period, effective January 1, 1999 for IHS' owned and leased skilled
nursing facilities other than the facilities acquired in the Facility
Acquisition, which facilities will become subject to PPS on June 1, 1999.
Prospective payment for facilities managed by IHS will be effective for each
facility at the beginning of its first cost reporting period on or after July 1,
1998. During the first three years, payments will be based on a blend of the
facility's historical costs and federal costs. Thereafter, the per diem rates
will be based 100% on federal costs. Under PPS, each patient's clinical status
is evaluated and placed into a payment category. The patient's payment category
dictates the amount that the provider will receive to care for the patient on a
daily basis. The per diem rate will cover (i) all routine inpatient costs
currently paid under Medicare Part A, (ii) certain ancillary and other items and
services currently covered separately under Medicare Part B on a "pass-through"
basis, and (iii) certain capital costs. The Company's ability to offer the
ancillary services required by higher acuity patients, such as those in its
subacute care programs, in a cost-effective manner will be critical to the
Company's success and will affect the profitability of the Company's Medicare
patients. There can be no assurance that PPS will not have a material adverse
impact on IHS' results of operations or financial condition.
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 also contains changes to the Medicaid program, the most
significant of which is the repeal of the Boren Amendment. The Boren Amendment
required state Medicaid programs to pay rates that are reasonable and adequate
to meet the costs that must be incurred by a nursing facility in order to
provide care and services in compliance with applicable 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. Texas has now
adopted a case-mix prospective payment system similar to the Medicare PPS, and
the Company expects additional states will move in this direction. IHS is unable
to predict what effect such changes will have on the Company. There can be no
assurance that any changes to the Medicaid program will not have a material
adverse impact on the Company.
Medicare covers and pays for rehabilitation therapy services furnished in
facilities in various ways. For rehabilitation services provided directly,
specific guide lines exist for evaluating the reasonable cost of physical
therapy, occupational therapy and speech language pathology services. Medicare
applies salary equivalency guidelines in determining the reasonable cost of
physical therapy and respiratory services, which is the cost that would be
incurred if the therapist were employed by a nursing facility, plus an amount
designed to compensate the provider for certain general and administrative
overhead costs. Until April 1, 1998, Medicare paid for occupational therapy and
speech language pathology ser-
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vices on a reasonable cost basis, subject to the so-called "prudent buyer" rule
for evaluating the reasonableness of the costs. IHS' gross margins for services
reimbursed under the salary equivalency guidelines are significantly less than
services reimbursed under the "prudent buyer" rule.
In January 1998, HCFA issued rules applying salary equivalency limits to
certain speech and occupational therapy services and revised existing physical
and respiratory therapy limits. The new limits are effective for services
provided on or after April 1, 1998. The revised guidelines will be in effect
until nursing facilities transition to PPS. Under PPS, the reimbursement for
these services provided to nursing facility patients will be a component of the
total reimbursement to the nursing facility allowed per patient and the salary
equivalency guidelines will no longer be applicable. Medicare will pay the
skilled nursing facility directly for all rehabilitation services and the
outside suppliers of such services to residents of the skilled nursing facility
must collect payment from the skilled nursing facility. Effective January 1,
1999 a per provider limit of $1,500 applies to all rehabilitation therapy
services provided under Medicare Part B ($1,500 for physical and speech-language
pathology services, and a separate $1,500 for occupational therapy services).
Additionally, effective January 1, 1999, Medicare Part B therapy services are no
longer being reimbursed on a cost basis; rather, payment for each service
provided is based on fee screen schedules published in November 1998. As a
result of the implementation of PPS, the Company has to date experienced a
substantial reduction in demand for and reduced operating margins from, therapy
services it provides to third parties, because such providers are admitting
fewer Medicare patients and are reducing utilization of rehabilitative services.
There can be no assurance that these fee schedules or caps will not have a
material adverse effect on the Company.
The Medicare program reimburses IHS' home respiratory care, infusion and
durable medical equipment services under a charge-based system, pursuant to
which the Company receives either a fixed fee for a specific service or product
or a fixed per diem amount for providing certain services. The BBA reduced
Medicare payment amounts for oxygen and oxygen equipment furnished after January
1, 1998 to 75 percent of the fee schedule amounts in effect during 1997. Payment
amounts for oxygen and oxygen equipment furnished after January 1, 1999 and each
subsequent year thereafter are reduced to 70 percent of the fee schedule amounts
in effect during 1997. The BBA freezes the Consumer Price Index (U.S. urban
average) update for covered items of durable medical equipment for each of the
years 1998 through 2002 while limiting fees for parenteral and enteral
nutrients, supplies and equipment to 1995 reasonable charge levels over the same
period. The BBA reduces payment amounts for covered drugs and biologicals to 95
percent of the average wholesale price of such covered items for each of the
years 1998 through 2002. The BBA authorizes the Department of Health and Human
Services ("HHS") to conduct up to five competitive bidding demonstration
projects for the acquisition of durable medical equipment and requires that one
such project be established for oxygen and oxygen equipment. Each demonstration
project is to be operated over a three-year period and is to be conducted in not
more than three competitive acquisition areas. The BBA also includes provisions
designed to reduce healthcare fraud and abuse, including a surety bond
requirement for durable medical equipment providers.
The Medicare program reimbursed the Company's home nursing services on a
cost-based system, under which IHS was reimbursed at the lowest of IHS'
reimbursable costs (based on Medicare regulations), cost limits established by
HCFA or IHS' charges. The BBA reduced current cost reimbursement for home
nursing care pending implementation of a prospective payment system, which the
BBA mandated be implemented for cost reporting periods beginning on or after
October 1, 1999 (which date was subsequently extended to October 1, 2000). This
postponement of implementation of a prospective payment system for home nursing
and the reduction in cost reimbursement resulted in IHS' decision to exit the
home nursing business.
The Company expects that both private third party and governmental payors
will continue to undertake 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
operating and fixed costs allocable to patients
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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
"Item 1. Business -- Government Regulation" and "-- Cautionary Statements --
Risk of Adverse Effect of Healthcare Reform."
ACQUISITION AND DIVESTITURE HISTORY
Facility Acquisitions
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 Corporation ("HEALTHSOUTH"), 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, 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.
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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 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 owned 19 of the
23 Crestwood Facilities. 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.
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 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
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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 $37.4 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.
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
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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 20 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 operated 53 licensed long-term care facilities with 4,390 licensed beds (of
which nine facilities were subsequently sold), one rural healthcare clinic, two
outpa-
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tient rehabilitation centers (one of which was subsequently sold), one child day
care center and 124 assisted living units within seven of the facilities which
CCA operates. CCA operated in Alabama, Colorado, Florida, Georgia, Iowa, Kansas,
Louisiana, Maine, Missouri, Nebraska, Texas and Wyoming.
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. In addition, the Company purchased a leasehold
interest in Shadow Mountain, a skilled nursing facility, for $4.0 million.
On December 31, 1997, IHS acquired from HEALTHSOUTH 139 owned, leased or
managed long-term care facilities (of which 12 facilities were subsequently
sold), 12 specialty hospitals, a contract therapy business having over 1,000
contracts and an institutional pharmacy business serving approximately 38,000
beds (the "Facility Acquisition"). IHS paid approximately $1.16 billion in cash
and assumed approximately $91 million in debt. IHS disposed of the institutional
pharmacy business in August 1998.
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, a limited liability
company ("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 an incentive fee equal to 70% of Lyric's excess
cash flow (which is generally defined as Lyric's gross revenues less operating
expenses (including the base management fee and debt service)). In a related
transaction Lyric in February 1998 sold a 50% membership interest to TFN
Healthcare Investors, Inc. ("TFN Healthcare"), an entity controlled by Timothy
Nicholson, a director of the Company, for $1.0 million. 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.
In April 1998, the Company sold five additional long-term care facilities
to Omega for $50.5 million, which facilities were leased back by Lyric. The
Company is managing these facilities for Lyric pursuant to the above-described
agreements.
In April 1998, the Company acquired the stock of Magnolia Group, Inc., an
operator of 12 skilled nursing facilities in South Carolina. The merger
consideration was $15.1 million, which was paid through the issuance of 447,419
shares of the Company's Common Stock.
In June 1998, the Company merged with Premiere Associates, an operator of
27 leased and one owned skilled nursing facilities in Georgia and Florida and a
manager of 18 skilled nursing facilities in South Carolina, Georgia and Florida.
The merger consideration was $50.8 million, which was paid through the issuance
of 800,561 shares of the Company's Common Stock, a note payable for $15.0
million and a cash payment of $6.5 million.
In October 1998, the Company leased a 114 bed skilled nursing facility, and
in November 1998, the Company purchased the assets of Oakwood Manor Nursing
Center, Inc., a skilled nursing facility, for $5.8 million.
Effective January 1, 1999, the Company and various wholly owned
subsidiaries of the Company (the "Lyric Subsidiaries") sold 32 long-term care
facilities to Monarch Properties, LP ("Monarch LP"), a newly formed private
company, for approximately $132.3 million in net cash proceeds plus contingent
earn-out payments of up to a maximum of $67.6 million. The contingent earn-out
payments will be paid to the Company by Monarch LP upon a sale, transfer or
refinancing of any or all of the facilities or upon a sale, consolidation or
merger of Monarch LP, with the amount of the earn-out payments determined in
accor-
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dance with a formula described in the Facilities Purchase Agreement among the
Company, the Lyric Subsidiaries and Monarch LP. Dr. Robert N. Elkins, Chairman
of the Board, Chief Executive Officer and President of the Company, beneficially
owns 30% of Monarch LP and is the Chairman of the Board of Managers of Monarch
Properties, LLP, the parent company of Monarch LP. After the sale of the
facilities to Monarch LP, the Company transferred the stock of each of the Lyric
Subsidiaries to Lyric. Monarch LP then leased all of the facilities back to the
Lyric Subsidiaries under a long-term master lease. The Company is managing these
facilities for Lyric pursuant to the above-described agreements. The Company
expects to record an immaterial gain on the transaction.
In January 1999, the Company acquired SunCoast of Manatee, Inc., a skilled
nursing facility in Florida. The total purchase price was approximately $11.9
million.
In addition, at March 22, 1999, IHS has reached agreements in principal to
enter into 2 separate leases of 28 skilled nursing facilities. There can be no
assurance that any of these pending acquisitions will be consummated on the
proposed terms, on different terms or at all.
In March 1999, the Company sold three facilities to Monarch L.P for $33
million, which purchase price was paid by a 10% Note due March 2000. Monarch LP
leased the facilities to Lyric. The Company is managing these facilities for
Lyric pursuant to the above-described agreements.
Service Provider Acquisitions
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 respiratory care, 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 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
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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. See "-- Divestitures."
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.
See "-- Divestitures."
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.
See "-- Divestitures."
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.
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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.
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 subsequently disposed 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.
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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 were to become payable if (i) legislation was enacted that
changed 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") was less than 8% or, even if the Medical CPI was
greater than 8% in such year, in any subsequent year prior to 2004 the
percentage increase in the Medical CPI was less than 8%. As a result of the
enactment of the BBA in August 1997, which required the implementation of a
prospective payment system for home nursing services starting with cost
reporting periods beginning after October 1, 1999 (subsequently delayed to
October 1, 2000), the contingent payments became payable and 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. IHS discontinued its home nursing business in 1998 and
subsequently disposed of this business in 1999. See "-- Divestitures."
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
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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 Medical Corporation ("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; $2.026 million principal amount of RoTech debentures,
convertible into approximately 44,813 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. 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 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.
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In January 1998, the Company acquired all the outstanding capital stock of
Paragon Rehabilitative Service, 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 February 1998, the Company acquired the assets of Health Star, Inc. for
$2.9 million, the stock of Medicare Convalescent Aids of Pinellas for $4.5
million, the stock of Michigan Medical Supply for $1.9 million, and the assets
of Nutmeg Respiratory Homecare for $2.3 million, which are all home respiratory
providers. The Company issued 122,376 shares of the Company's Common Stock in
connection with the Medicare Convalescent acquisition.
In March 1998, the Company acquired the asset of Chancy Healthcare
Services, Inc., a provider of home respiratory services, for $5.3 million.
In May 1998, the Company acquired the assets of American Mobile Health
Systems, Inc., a provider of diagnostic services. The merger consideration was
$2.8 million, which was paid through the issuance of 89,634 shares of the
Company's Common Stock. The Company also acquired the assets of Eastern Home
Care and Oxygen, Inc. for $3.8 million and the assets of First Community Care,
Inc. ("FCCI"), for $7.9 million, both of which are providers of home respiratory
services. The purchase price for FCCI was paid through the issuance of 90,627
shares of the Company's Common Stock.
In June 1998, the Company acquired the assets of certain entities which
provided office facilities, equipment and management services to Metropolitan
Lithotripter Associates, which is a professional corporation composed of
approximately 200 urologists that provides renal lithotripsy and other services
in the Greater New York metropolitan area. The consideration was $10.9 million,
which was paid through the issuance of 348,974 shares of the Company's Common
Stock and a cash payment of $3.1 million.
In June 1998, the Company acquired the assets of Apex Home Care, Inc. for
$2.7 million and the assets of Osborne Medical, Inc. for $2.0 million, both of
which are providers of home respiratory services.
In July 1998, the Company acquired the stock of Collins Rentals, Inc., a
provider of home respiratory services, for $2.5 million.
In August 1998, the Company acquired the assets of American Oxygen Services
of Tennessee, a provider of home respiratory services. The merger consideration
was $2.0 million, which was paid through the issuance of 61,061 shares of the
Company's Common Stock. The Company also acquired the stock of Home Care Oxygen
Services, Inc. for $3.7 million and the assets of Tri-County Medical Oxygen,
Inc. for $2.1 million, both of which are home respiratory service providers.
In September 1998, the Company acquired the assets of Accucare Medical
Corporation, a provider of home respiratory services. The merger consideration
was $2.9 million, which was paid through the issuance of 128,972 shares of the
Company's Common Stock. The Company also purchased the assets of Valley Oxygen
and Medical Equipment Inc., a provider of home respiratory services, for $2.5
million.
In October 1998, the Company purchased the assets of Arrowhealth Medical
Supply for $7.9 million, the assets of Professional Respiratory Care, Inc. for
$2.2 million and the stock of Acadia Home Care for $2.2 million, which are all
providers of home respiratory services.
In November 1998, the Company acquired the assets of Norcare Home Medical,
Inc. for $2.5 million, the stock of RespaCare, Inc. for $3.8 million and the
assets of Caremor Health Services, Inc. for $2.2 million, which are all
providers of home respiratory services.
During 1998, the Company acquired 71 additional companies providing
primarily home respiratory and diagnostic services. The total purchase price for
these companies was $57.0 million, and no single acquisition had total costs in
excess of $2.0 million. The Company issued 302,718 shares in connection with
these acquisitions.
In January 1999, the Company acquired seven home respiratory service
companies. The total purchase price was approximately $8.2 million.
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In addition, the Company has reached agreements in principle to purchase
nine home respiratory service companies for approximately $35.5 million. There
can be no assurance that any of these pending acquisitions will be consummated
on the proposed terms, 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 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.
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 year ended December 31,
1996 included revenue generated by the pharmacy division of approximately $63.6
million (of which $11.3 million was revenue from services to IHS facilities).
The Company's earnings before income taxes for the year ended December 31, 1996
included earnings before income taxes generated by the pharmacy division of
approximately $6.4 million.
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
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Sale in 1997. IHS' revenues for the year ended December 31, 1996 included
revenue generated by ILC of approximately $17.1 million. The Company's earnings
(loss) before income taxes for the year ended December 31, 1996 included
earnings before income taxes generated by ILC of approximately $1.7 million.
In February 1998, the Company sold its outpatient clinics to Continucare
Rehabilitation Services, Inc. for $10.0 million. During the fourth quarter of
1997, the Company wrote down its basis in its outpatient clinics to net
realizable value. Accordingly, no gain or loss was recognized by the Company
during the first quarter of 1998.
In the first half of 1998 the Company sold ten facilities to Omega, which
leased such facilities to Lyric, which is 50% owned by IHS. The Company manages
these facilities for Lyric. See "-- Acquisitions -- Facility Expansion."
In June 1998, the Company sold 11 long-term care facilities for
approximately $56.7 million, which approximated the Company's basis. The Company
recognized no gain or loss on the transaction.
In July 1998, the Company sold four of its facilities held for sale for
approximately $1.0 million. The Company recognized no gain or loss on the
transaction.
In August 1998, the Company sold portions of its institutional pharmacy
division, which was acquired by IHS as part of the Horizon/CMS assets acquired
from HEALTHSOUTH Corporation in December 1997. The Company recorded no gain or
loss on the transaction.
Effective January 1, 1999, the Company sold 32 facilities to Monarch, which
leased such facilities to Lyric. In March 1999 the Company sold an additional
three facilities to Monarch, which then leased the facilities to Lyric. The
Company manages these facilities for Lyric. See "-- Acquisitions -- Facility
Expansion."
In February 1999, the Company sold a portion of its Home Health Nursing
segment to Medshares/ IHS Acquisition, Inc., an affiliate of Medshares, Inc. for
$12.7 million. The Company had previously adopted a plan of disposition for this
business segment and recorded a $204.9 million loss (net of tax benefit) from
discontinued operations in 1998. In March 1999, the Company signed a definitive
agreement to sell the Company's remaining portion of this business, for $13.6
million. The results of such transaction are included in the $204.9 million Loss
from Discontinued Operations.
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, assisted living services and home nursing divisions, and
may divest additional divisions or assets in the future.
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<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, 1997 31, 1998
COMPARED COMPARED
YEARS ENDED DECEMBER 31, TO 1996 TO 1997
----------------------------------- ---------- -----------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues ........................................ 100.0% 100.0% 100.0% 16.5% 111.9%
----- ----- ----- ------- -------
Costs and Expenses:
Operating, general and administrative expenses ....... 78.3 72.6 74.7 8.1 117.9
Depreciation and amortization ........................ 3.1 4.0 5.3 50.9 179.0
Rent ................................................. 5.9 5.3 4.2 4.8 69.8
Interest, net ........................................ 5.0 6.8 8.0 58.6 151.5
Non-recurring charges (income) ....................... ( 1.5) 8.8 -- * ( 100.0)
----- ----- ----- ------- -------
Earnings from continuing operations before equity in
earnings of affiliates, income taxes, extraordinary
items and cumulative effect of accounting change.... 9.2 2.5 7.8 ( 68.0) 549.6
Equity in earnings of affiliates ...................... 0.1 0.0 0.0 ( 89.4) 336.4
----- ----- ----- ------- -------
Earnings from continuing operations before income
taxes, extraordinary items and cumulative effect of
accounting change .................................. 9.3 2.5 7.8 ( 68.2) 549.1
Federal and state income taxes ........................ 5.3 2.3 3.2 ( 48.1) 186.2
----- ----- ----- ------- -------
Earnings from continuing operations before extraor-
dinary items and cumulative effect of accounting
change ............................................. 4.0 0.2 4.6 ( 94.8) 5,358.2
Loss from discontinued operations ..................... 0.0 1.0 6.9 2,818.8 1,403.0
Earnings before extraordinary items and cumulative
effect of accounting change ........................ 4.0 ( 0.8) ( 2.3) * ( 511.1)
Extraordinary items ................................... 0.1 1.5 -- 1,336.2 *
----- ----- ----- ------- -------
Earnings (loss) before cumulative effect of account-
ing change ......................................... 3.9 ( 2.3) ( 2.3) * ( 114.6)
Cumulative effect of accounting change ................ -- 0.1 -- * *
----- ----- ----- ------- -------
Net earnings (loss) ................................. 3.9 ( 2.4) ( 2.3) * ( 102.9)
===== ===== ===== ======= =======
</TABLE>
- ----------
* Not meaningful.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The Company's 1998 results of operations were substantially affected by the
acquisition of 126 owned, leased or managed facilities (excluding facilities
subsequently sold), 12 specialty hospitals and a contract therapy business
having over 1,000 contracts acquired from HEALTHSOUTH Corporation on December
31, 1997 (the "Facility Acquisition") the acquisition of RoTech in October 1997,
a home respiratory, home medical equipment and infusion therapy company, and the
Company's discontinuance of its home health nursing business in the third
quarter of 1998.
Net revenues for the year ended December 31, 1998 increased $1,569.56
million, or 111.9% to $2,972.19 million from the comparable period in 1997. Such
increase was attributable to (i) $985.72 million from inpatient services, which
includes inpatient facilities, contract services and management and other, which
were in operations in both periods, as well as, inpatient services acquired
during 1997, including certain business from HEALTHSOUTH which were acquired on
December 31, 1997, (ii) $467.86 million from home respiratory/infusion/DME
companies operating in both periods and home respiratory/infusion/DME companies
acquired during 1997, including RoTech, which was acquired in October 1997,
(iii) $4.81 million from diagnostic services in operation during 1997 and 1998,
as well as, diagnostic services, acquired in 1997, and (iv) $34.04 million from
lithotripsy services businesses acquired in 1997, which includes the Coram
Lithotripsy Acquisition. Increases in recent business segments resulting from
1998 acquisitions are as follows: (i) $28.78 million from inpatient services,
(ii) $40.45 million from home respiratory/infusion/DME, and (iii) $7.90 million
from lithotripsy services.
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<PAGE>
Operating, general and administrative expense (including rent) increased
$1,252.71 or 114.7%, from the year ended December 31, 1997. Such increase was
attributable to (i) $833.40 million from inpatient services, which includes
inpatient facilities, contract services and management and other, which were in
operations in both periods, as well as inpatient services business acquired
during 1997, including certain business from HEALTHSOUTH which was acquired on
December 31, 1997 (ii) $357.54 million from home respiratory/infusion/DME
companies acquired during 1997, including RoTech acquired in October 1997, and
(iii) 18.32 million from lithotripsy services business acquired in 1997, which
includes the Coram Lithotripsy Acquisition. Increases in business segment
expenses resulting from 1998 acquisitions are as follows: (i) $12.89 million
from inpatient services, (ii) $29.06 million from home respiratory/ infusion/DME
and (iii) $5.02 million from lithotripsy services.
Depreciation and amortization increased to $156.72 million during the year
ended December 31, 1998, a 179.1% increase as compared to $56.16 million in
1997. Of the $100.56 million increase, $4.59 million, or 4.6%, was attributable
to depreciation and amortization of businesses acquired in 1998. The remaining
increase was primarily due to depreciation and amortization related to increased
routine and capital expenditures at existing facilities, increased debt issue
costs and depreciation and amortization of inpatient services and home
respiratory companies acquired during 1997.
Net interest expense increased $143.77 million, or 151.5%, during the year
ended December 31, 1998 to $238.65 million. The increase was primarily the
result of the full year effect of the $750 million term loan borrowed in
September 1997, the $400 million term loan borrowed in December 1997, increased
borrowings under the revolving credit facility and the 9 1/4% Senior
Subordinated Notes due 2008 issued in September 1997.
During 1997, the Company recorded non-recurring charges of $123.46 million,
consisting primarily of; a $27.55 million non-recurring charge resulting from
the termination of its proposed merger with Coram; a $7.58 million gain on the
sale of shares received on the sale of the pharmacy division; a $3.91 million
gain on the sale of its remaining interest in ILC; and 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, the Company chose
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 $103.41 million.
Earnings from continuing operations before income taxes and extraordinary
items increased by 549.1% to $232.02 million for the year ended December 31,
1998 from $35.75 million for the comparable period in 1997. The increase was
primarily due to certain non-recurring charges discussed above. Excluding the
non-recurring charges, earnings before income taxes and extraordinary items in
1998 increased $72.82 million, or 45.7%, over 1997. Of this increase, $24.06
million, or 33.0%, resulted from acquisitions consummated subsequent to December
31, 1997. The remaining increase was due to acquisitions consummated during 1997
(principally the Facility Acquisition) and improved operations from inpatient
services and home respiratory companies in operation during both periods. The
provision for state and federal income taxes increased from $33.24 million in
1997 to $95.13 million in 1998. This increase was primarily the result of the
non-recurring charge in 1997.
In October 1998, the Company's Board of Directors adopted a plan to
discontinue operations of the home health nursing segment. Accordingly, the
operating results of the home nursing segment have been segregated from
continuing operations and reported as a separate line item on the statement of
operations. The operating loss through September 30, 1998 (the measurement date)
was $35.90 million, net of the income tax benefit of $26.0 million. The loss on
the disposal of assets, including estimated loss from measurement date through
the expected disposal date (June 30, 1999) is $168.97 million, net of the income
tax benefit of $57.3 million. The Company has reclassified its prior financial
statements to present the operating results of the home health nursing segment
as a discontinued operation.
Net loss and diluted loss per share for 1998 were $67.98 million and $1.08
per share, respectively, compared to net loss and diluted loss per share for
1997 of $33.5 million and $0.60 per share. During
49
<PAGE>
1998 the Company incurred a $204.87 million loss from discontinued operations,
compared to $13.63 million in 1997. During the year ended December 31, 1997, the
Company incurred a $20.55 million (net of tax benefit), or 53 cents per share
(diluted), extraordinary loss on the extinguishment of debt and incurred a $1.83
million (net of tax benefit), or 5 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. There were
no extraordinary items or cummulative effect of accounting change in 1998.
Weighted average shares increased from 38,899,000 (diluted) in 1997 to
56,257,000 (diluted) in 1998. The weighted average shares increased because the
approximately $15.6 million shares issued in the RoTech Acquisition in October
1997 were outstanding for all of 1998 and in June 1998 $114.80 million aggregate
principal amount of the Company's 6% Convertible Subordinated Debentures due
2003 were converted into approximately 3.57 million shares.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net revenues for the year ended December 31, 1997 increased $199.00
million, or 16.5%, to $1,402.63 million from the comparable period in 1996. Such
increase was attributable to (i) $52.93 million from inpatient services, which
includes inpatient facilities, contract services and management and other, which
were in operation in both periods, as well as inpatient services acquired during
1996, partially offset by the sale of its pharmacy division, which had $63.6
million in revenues in 1996, (ii) $10.74 million from home
respiratory/infusion/DME companies operating in both periods, (iii) $24.71
million from diagnostic services operations during 1996 and 1997 and (iv) and
revenues from the Company's new, Lithotripsy business segment, entered into
through the acquisition of Coram Lithotripsy in 1997. Increases in business
segment revenue resulting from 1997 acquisitions are as follows: (i) $52.17
million from inpatient services, (ii) $102.54 million from home
respiratory/infusion/DME, (iii) $5.43 million from diagnostic services and (iv)
$14.08 million from lithotripsy services.
Operating, general and administrative expenses (including rent) increased
$79.3 million or 7.83% from the year ended December 31, 1997. Such increase was
attributable to (i) $47.15 million from inpatient services, which includes
inpatient facilities, contract services and management and other, which were in
operation in both periods, as well as, inpatient services acquired during 1996,
partially offset by the sale of its pharmacy division (ii) $6.99 million from
home respiratory/infusion/DME companies operating in both periods, and (iii)
$25.99 million from diagnostic services in operation during 1996 and 1997.
Increases in business segment operating, general, and administrative expenses
(including rent) resulting from 1997 acquisitions are as follows; (i) $40.45
million from inpatient services, (ii) $67.17 million from home
respiratory/infusion/DME, (iii) $4.43 million from diagnostic services and (iv)
$6.81 million from lithotripsy services.
Depreciation and amortization increased to $56.16 million during the year
ended December 31, 1997, a 50.9% increase as compared to $37.22 million in 1996.
Of the $18.94 million increase, $10.71 million, or 56.5%, was attributable to
depreciation and amortization from 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 relating to companies
acquired during 1996. Net interest expense increased $35.05 million, or 58.6%,
during the year ended December 31, 1997 to $94.88 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 $123.46 million,
consisting primarily of; a $27.55 million non-recurring charge resulting from
the termination of its proposed merger with Coram; a $7.58 million gain on the
sale of shares received on the sale of the pharmacy division; a $3.91 million
gain on the sale of its remaining interest in ILC; and a $4.75 million charge
resulting from
50
<PAGE>
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, the Company chose 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 $103.41
million. In 1996, IHS had non-recurring income of $17.98 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 and,
a $7.82 million loss related to the termination of a management contract .
Earnings from continuing operations before income taxes, extraordinary
items and cumulative effect of accounting changes decreased by 68.2% to $35.75
million for the year ended December 31, 1997 from $112.24 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 from continuing operations before income taxes and
extraordinary items in 1997 increased $64.94 million, or 68.9%, over 1996. Of
this increase, $34.0 million, or 52.4%, resulted from acquisitions consummated
subsequent to December 31, 1996. The remaining increase was due to acquisitions
consummated during 1996 and improved operations from inpatient services and home
respiratory and lithotripsy companies in operation during both periods. The
provision for state and federal income taxes decreased from $64.01 million in
1996 to $33.24 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 60 cents 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 53 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 5 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 in increased from 31,564,000
(diluted) in 1996 to 38,899,000 (diluted) in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had net working capital of $341.2
million, as compared with $43.4 million at December 31, 1997. 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 $119.27 million to $649.11 million at December 31, 1998, as compared
to $529.84 million at December 31, 1997. Of the $119.27 million increase, $31.90
million relates primarily to acquisitions of inpatient services businesses in
1998 and $87.37 million relates to activities in operation during both years.
Gross patient accounts receivable were $735.17 million at December 31, 1998 as
compared with $610.22 million at December 31, 1997. Third-party payor
settlements receivable from federal and state governments (i.e., Medicare and
Medicaid cost reports) were $103.76 million at December 31, 1998 as compared to
$88.40 million at December 31, 1997.
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.
The Company recorded deferred tax assets in connection with business
acquisitions of $32.09 million in 1997, which, net of a valuation allowance of
$24.40 million related thereto, has been applied as a reduction in goodwill. The
valuation allowance is necessary because it relates to net operating loss
carryforwards of acquired companies and therefore realization is subject to
various limitations under the Internal Revenue Code. In 1998, the Company
recorded deferred tax liabilities in connection with business acquisitions of
$25.88 million which has been applied as an increase in goodwill. In addition,
the
51
<PAGE>
Company is still in the process of reviewing the acquired companies' operations
in connection with its integration plans and will be re-evaluating its
assessment of recoverability in 1998 in accordance with Accounting Principles
Board (APB) Opinion No. 16, Business Combinations, and SFAS No. 38, Accounting
for Preacquisition Contingencies of Purchased Enterprises. Any reduction in the
valuation allowance will be recorded as a reduction of goodwill recorded on such
1997 acquisitions. The pre-acquisition separate company net operating loss
carryforwards expire in years 1998 through 2009.
The Company has outstanding $500 million aggregate principal amount of 9
1/4% Senior Subordinated Notes due 2008 (the "9 1/4% Senior Notes"), $450
million aggregate principal amount of 9 1/2% Senior Subordinated Notes due 2007
(the "9 1/2% Senior Notes"), $150 million aggregate principal amount of 10 1/4%
Senior Subordinated Notes due 2006 (the "10 1/4% Senior Subordinated Notes"),
$132,000 aggregate principal amount of other senior subordinated notes and
$145.78 million aggregate principal amount of subordinated convertible
debentures. The indentures under which 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 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.
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.
As of December 31, 1998, $742.5 million was outstanding and will be amortized as
follows: 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) between two and three-quarters
percent and three and one quarter 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 between one and one-half and two 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, matures on December 31, 2005. As of December 31, 1998, $396
million was oustanding and will be amortized as follows: 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) between three percent and three 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
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<PAGE>
of between one and three quarters percent and two 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 January 1, 2001, $600
million on Janaury 1, 2002, $500 million on September 30, 2002 and $400 million
on January 1, 2003, with a final maturity on September 15, 2003; 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 two percent
and two 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 three quarters of one percent and one and one-half percent
(depending on the Debt/EBITDAR Ratio). Amounts repaid under the Revolving
Facility may be reborrowed prior to the maturity date. At December 31, 1998 $766
million was outstanding under the Revolving Facility.
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, and to merge or
consolidate with any other person and prohibits the repurchase of Common Stock.
In addition, the New Credit Facility requires that IHS meet certain financial
ratios, and provides the banks 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 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 $80.40 million for the year
ended December 31, 1998 as compared to $73.4 million provided by operating
activities for the comparable period in 1997. Cash provided by operating
activities for the year ended December 31, 1998 increased from the comparable
period in 1997 primarily as a result of an increase in net earnings from
continuing operations, 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 $249.57 million for the year
ended December 31, 1998 as compared to $1,688.83 million for the comparable
period in 1997. In both periods, the Company received proceeds from long-term
borrowings. In 1997 the Company repurchased 548,500 shares of its Common Stock
for approximately $19.81 million. In addition, in 1998 the Company reissued in
connection with an acquisition 347,700 shares of its Common Stock in treasury,
which shares had been repurchased during 1997. IHS also reissued 658,824 shares
of its Common Stock in treasury to fund its Key Employee Supplemental Executive
Retirement Plans, which shares were repurchased in 1998. In 1998 IHS repurchased
1,060,500 shares of Common Stock for approximately $18.47 million.
Net cash used by investing activities was $259.64 million for the year
ended December 31, 1998 as compared to $1,721.04 million for the year ended
December 31, 1997. Cash used for the purchase of property, plant and equipment
was $222.27 million for the year ended December 31, 1998 and $126.86 million in
the comparable period in fiscal 1997. Cash used for business acquisitions was
$206.93 million for 1998 as compared to $1,560.40 million for 1997. On December
31, 1997, the Company consummated the Facility Acquisition for approximately
$1.16 billion in cash.
IHS' contingent liabilities (other than liabilities in respect of
litigation and the contingent payments in respect of the First American
acquisition) aggregated approximately $122.60 million as of December 31, 1998.
IHS is required, upon certain defaults under the lease, to purchase its Orange
Hills facility at a pur-
53
<PAGE>
chase price equal to the greater of $7.13 million or the facility's fair market
value. IHS has established several irrevocable standby letters of credit with
the Bank of Nova Scotia totaling $28.90 million at December 31, 1998 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 $86.57 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 to make contingent payments of $155 million in respect
of IHS' acquisition of First American, of which $122.05 million (representing
its present value) was recorded on the balance sheet at December 31, 1998. 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 $878.04 million at December 31, 1998.
The liquidity of the Company will depend in large part on the timing of
payments by private third-party and governmental payors.
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
1999. 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. As part of the Company's Year 2000 Project, the Company has
completed its initial evaluation of current computer systems, software and
embedded technologies. IHS began implementation of its Year 2000 plan in January
1997 and all business segments have been examined. An inventory of all equipment
and systems supported by IHS' Information Technology department has been
compiled and compliance has been verified. The Year 2000 Project is
approximately 55% complete and it is anticipated that the project will be
substantially implemented by June 1999. Periodic meetings are being held with
the Board of Directors and senior management to ensure that the project stays on
schedule.
During the year ended December 31, 1998, expenditures related to the Year
2000 issue totaled approximately $5.8 million. The Company currently estimates
that an additional $5.2 million will be spent to complete the project, although
additional amounts may be required. The costs will be funded through cash from
operations and borrowings under the Revolving Facility and are being expensed as
incurred.
One of the biggest risks to the Company is that regulatory payors (i.e.,
Medicare and Medicaid), suppliers and other entities with which the Company has
a material relationship will not be compliant by Year 2000 and therefore unable
to pay claims. The Company has initiated a program to determine whether the
computer programs of its significant payors and suppliers will be upgraded in a
timely manner. The Company has not completed this review; however initial
responses indicate that no significant issues are expected to arise.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. The Company has not established a formal contingency plan to put
into effect in the event of a failure to correct a material Year 2000 problem.
Due to the general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of third party payors and
suppliers, there can be no assurance that the Company's assessment is correct or
that the assessment of materiality of any failure is correct. Completion of the
54
<PAGE>
Year 2000 Project is expected to significantly reduce the Company's level of
uncertainty over the Year 2000 issue and the Company believes that upon
completion of the Project, the possibility of significant interruptions of
normal operations should be minimal.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998 the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposures. This Statement is effective for all fiscal quarters of 2000.
The adoption of this statement is not expected to have a material impact on the
Company's financial statements.
In March 1998 the Accounting Standards Executive Committee ("ASEC") of the
American Institute of Certified Public Accountants issued Statement of Position
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use ("SOP 98-1"). SOP 98-1 provides guidance as to whether certain
costs for internal use software should be capitalized or expensed when incurred.
In addition, in June 1998 the ASEC issued Statement of Position 98-5, Reporting
on the Costs of Start-up Activities ("SOP 98-5"). SOP 98-5 provides guidance on
the financial reporting of start-up costs. It requires costs of start-up
activities to be expensed as incurred. SOP 98-1 and 98-5 are effective for 1999.
The Company does not expect the adoption of SOP 98-1 and 98-5 to have a material
impact on the financial statements.
55
<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
------------------------------------------------
1997
------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
------------ ----------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues .............................. $314,042 323,385 323,159 442,042
Cost and expenses:
Operating, general and administrative ex-
penses .................................... 233,854 227,591 231,847 324,825
Depreciation and amortization .............. 10,892 11,808 12,597 20,865
Rent ....................................... 17,350 18,587 18,592 19,826
Interest (loss), net ....................... 16,727 18,195 22,695 37,263
Non-recurring charges (income)(1) .......... (1,025) 21,072 -- 103,409
-------- ------- ------- -------
Earnings (loss) from continuing operations
before equity in earnings of affiliates,
income taxes, extraordinary items and
cumulative effect of accounting change..... 36,244 26,132 37,428 (64,146)
Equity (loss) in earnings of affiliates ..... 181 (83) (811) 801
-------- ------- ------- -------
Earnings (loss) from continuing operations
before income taxes, extraordinary
items and cumulative effect of account-
ing change ................................ 36,425 26,049 36,617 (63,345)
Federal and state income taxes .............. 14,388 10,289 14,464 (5,903)
Earnings (loss) from continuing operations
before extraordinary items and cumula-
tive effect of accounting change .......... 22,037 15,760 22,153 (57,442)
Loss from discontinued operations(2) ........ (3,124) (6,609) (1,658) (2,240)
Earnings (loss) before extraordinary items
and cumulative effect of accounting
change .................................... 18,913 9,151 20,495 (59,682)
Extraordinary items(3) ...................... -- 18,168 2,384 --
-------- ------- ------- -------
Earnings (loss) before cumulative effect of
accounting change ......................... 18,913 (9,017) 18,111 (59,682)
Cumulative effect of accounting change(4).... -- -- -- 1,830
-------- ------- ------- -------
Net earnings (loss) ........................ $ 18,913 (9,017) 18,111 (61,512)
======== ======= ======= =======
Per Common Share-basic(5):
Earnings (loss) from continuing operations
before extraordinary items and cumula-
tive effect of accounting change .......... $ 0.93 0.63 0.87 (1.48)
Earnings (loss) before extraordinary items
and cumulative effect of accounting
change .................................... 0.80 0.37 0.80 (1.54)
Earnings (loss) before cumulative effect in
accounting change ......................... 0.80 (0.36) 0.71 (1.54)
Net earnings (loss) ........................ $ 0.80 (0.36) 0.71 (1.58)
======== ======== ======== =======
Per Common Share-Diluted(5):
Earnings (loss) from continuing operations
before extraordinary items and cumula-
tive effect of accounting change .......... $ 0.72 0.51 0.67 (1.48)
Earnings (loss) before extraordinary items
and cumulative effect of accounting
change .................................... 0.63 0.32 0.63 (1.54)
Earnings (loss) before cumulative effect in
accounting change ......................... 0.63 0.18 0.56 (1.54)
Net earnings (loss) ........................ $ 0.63 0.18 0.56 (1.58)
======== ======== ======== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
1998
-----------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ----------- ------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues .............................. 761,687 740,754 750,852 718,893
Cost and expenses:
Operating, general and administrative ex-
penses .................................... 569,501 541,755 547,603 560,078
Depreciation and amortization .............. 35,601 36,595 39,456 45,067
Rent ....................................... 29,510 30,308 31,173 35,256
Interest (loss), net ....................... 60,658 58,187 59,820 59,982
Non-recurring charges (income)(1) .......... -- -- -- --
------- ------- ------- -------
Earnings (loss) from continuing operations
before equity in earnings of affiliates,
income taxes, extraordinary items and
cumulative effect of accounting change..... 66,417 73,909 72,800 18,510
Equity (loss) in earnings of affiliates ..... 270 184 161 (231)
------- ------- ------- -------
Earnings (loss) from continuing operations
before income taxes, extraordinary
items and cumulative effect of account-
ing change ................................ 66,687 74,093 72,961 18,279
Federal and state income taxes .............. 27,342 30,378 29,914 7,494
Earnings (loss) from continuing operations
before extraordinary items and cumula-
tive effect of accounting change .......... 39,345 43,715 43,047 10,785
Loss from discontinued operations(2) ........ (1,764) (2,217) (200,889) --
Earnings (loss) before extraordinary items
and cumulative effect of accounting
change .................................... 37,581 41,498 (157,842) 10,785
Extraordinary items(3) ...................... -- -- -- --
------- ------- -------- -------
Earnings (loss) before cumulative effect of
accounting change ......................... 37,581 41,498 (157,842) 10,785
Cumulative effect of accounting change(4).... -- -- -- --
------- ------- -------- -------
Net earnings (loss) ........................ 37,581 41,498 (157,842) 10,785
======= ======= ======== =======
Per Common Share-basic(5):
Earnings (loss) from continuing operations
before extraordinary items and cumula-
tive effect of accounting change .......... 0.91 .95 0.82 0.21
Earnings (loss) before extraordinary items
and cumulative effect of accounting
change .................................... 0.87 0.90 (3.02) 0.21
Earnings (loss) before cumulative effect in
accounting change ......................... 0.87 0.90 (3.02) 0.21
Net earnings (loss) ........................ 0.87 0.90 (3.02) 0.21
======== ======== ========= ========
Per Common Share-Diluted(5):
Earnings (loss) from continuing operations
before extraordinary items and cumula-
tive effect of accounting change .......... 0.77 0.80 0.77 0.21
Earnings (loss) before extraordinary items
and cumulative effect of accounting
change .................................... 0.73 0.76 (2.72) 0.21
Earnings (loss) before cumulative effect in
accounting change ......................... 0.73 0.76 (2.72) 0.21
Net earnings (loss) ........................ 0.73 0.76 (2.72) 0.21
======== ======== ========= ========
</TABLE>
- ----------
(1) 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 $103,409,000 resulting from its plan to dispose of certain
non-strategic assets to allow the Company to focus on its core operations.
See Note 20 of Notes to Consolidated Financial Statements.
(2) Represents loss from operations in all periods and loss on disposition in
the third quarter of 1998 of its home health nursing segment which was
discontinued in the third quarter of 1998. See note 8 of Notes to
Consolidated Financial Statements.
(3) Extraordinary items relate to extinguishment of debt. See Note 17 of
Consolidated Financial Statements.
56
<PAGE>
(4) 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 21 of Notes to Consolidated Financial Statements.
(5) 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(n) and 13 of Notes to Consolidated Financial
Statements. The diluted weighted average number of common shares outstanding
for each quarter 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.
From January 1, 1997 through December 31, 1998, the Company acquired 97
geriatric care facilities (including 2 facilities which it had previously
managed and 9 facilities which it has previously leased), leased 147 geriatric
care facilities and entered into management agreements to manage 26 geriatric
care facilities. During this period, the Company sold its interest in 31
geriatric care facilities (including 10 geriatric care facilities that it
currently manages) and agreements to manage 26 facilities were terminated.
During this period, the Company's sold its remaining 37% interest in its
assisted living division and discontinued its home health nursing division. See
"-- Acquisition and Divestiture History -- Divestitures."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 derivatives financial instruments for trading or speculative purposes. At
December 31, 1998, 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 (5.066% at
December 31, 1998). The weighted average fixed interest rate under these
agreements was 5.98% at December 31, 1998.
The following table provides information as of December 31, 1998, about the
Company's floating rate debt and derivative financial instruments that are
sensitive to changes in interest rates, including interest rate swaps and the
Company's Term and Revolving Credit Facilities. For debt obligations, the table
presents principal cash flows and related interest rates by contractual maturity
dates. For interest rate swaps, the table presents notional principal amounts
and weighted average fixed and floating interest rates by contractual maturity
dates. Notional amounts are used to calculate the contractual payments to be
exchanged under the interest rate swaps. All debt and swaps are denominated in
US dollars.
PRINCIPAL PAYMENTS AND INTEREST RATE DETAIL BY CONTRACTUAL MATURITY
<TABLE>
<CAPTION>
1999 2000 2001 2002
(IN THOUSANDS) --------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Floating Rate Debt:
Revolving Credit Facility .............. $ -- $ -- $ -- $ 266,000
Floating Interest Rate(a)
Term Loan Facility ..................... 7,500 7,500 7,500 7,500
Floating Interest Rate(b)
Additional Term Loan Facility .......... 4,000 4,000 4,000 4,000
Floating Interest Rate(c)
Floating to Fixed Interest Rate Swaps
Notional Amounts ....................... -- 250,000 150,000 350,000
Weighted Average Fixed Rate Payment..... -- 5.89% 5.94% 5.88%
Floating Rate Payment(d)
</TABLE>
<TABLE>
<CAPTION>
FAIR VALUE
AS OF
2003 THEREAFTER TOTAL 12/31/98
(IN THOUSANDS) ----------- ------------ -------------- ------------------
<S> <C> <C> <C> <C>
Floating Rate Debt:
Revolving Credit Facility .............. $ -- $ 500,000 $ 766,000 $ 766,000
Floating Interest Rate(a)
Term Loan Facility ..................... 337,500 375,000 742,500 742,500
Floating Interest Rate(b)
Additional Term Loan Facility .......... 4,000 376,000 396,000 396,000
Floating Interest Rate(c)
Floating to Fixed Interest Rate Swaps
Notional Amounts ....................... -- 300,000 1,050,000 (40,185)(e)
Weighted Average Fixed Rate Payment..... -- 6.20% 5.98%
Floating Rate Payment(d)
</TABLE>
- ----------
(a) Floating rates based on 90-day USD LIBOR plus Revolving Credit Facility
Borrowing Rate Margin. Margin was .50% at December 31, 1998
57
<PAGE>
(b) Floating rates based on 90-day USD LIBOR plus Term Loan Facility Borrowing
Rate Margin. Margin was 1.75% at December 31, 1998.
(c) Floating rates based on 90-day USD LIBOR plus Additional Term Loan Facility
Borrowing Rate Margin. Margin was 2.25% at December 31, 1998.
(d) Based on 90-day USD LIBOR plus 1.50%.
(e) Due to increases in interest rates during the 1st quarter of 1999, the
negative fair value of the existing swap portfolio has decreased
substantially.
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, 1997 and 1998 .................... 60
Consolidated Statements of Operations for the years ended December 31, 1996,
1997 and 1998 .............................................................. 61
Consolidated Statements of Comprehensive Income (Loss) for the years ended
December 31, 1996, 1997 and 1998 ........................................... 62
Consolidated Statements of Stockholders' Equity for the years ended Decem-
ber 31, 1996, 1997 and 1998 ................................................ 63
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1997 and 1998 .............................................................. 64
Notes to Consolidated Financial Statements ................................... 65
Schedule II -- Valuation and Qualifying Accounts ............................. 105
</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, 1997 and 1998 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, 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.
KPMG LLP
Baltimore, Maryland
March 30, 1999
59
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................................... $ 60,333 $ 31,391
Temporary investments ....................................................... 8,042 12,828
Patient accounts and third-party payor settlements receivable, net (note
3) ........................................................................ 529,837 649,106
Inventories, prepaid expenses and other current assets ...................... 45,831 75,945
Income tax receivable ....................................................... -- 39,320
Net assets of discontinued operations (note 8) .............................. -- 12,500
---------- ----------
Total current assets ...................................................... 644,043 821,090
Property, plant and equipment, net (note 5) .................................. 1,280,960 1,469,122
Assets held for sale (note 2) ................................................ 111,629 7,500
Intangible assets (notes 2 and 6) ............................................ 2,687,107 2,970,163
Investments in and advances to affiliates (note 4) ........................... 19,527 16,343
Other assets ................................................................. 77,173 108,910
Net assets of discontinued operations (note 8) ............................... 181,713 --
---------- ----------
Total assets .............................................................. $5,002,152 $5,393,128
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt (note 9) ............................... $ 34,533 $ 16,760
Accounts payable and accrued expenses (note 7) .............................. 563,727 463,130
Income tax payable .......................................................... 2,426 --
---------- ----------
Total current liabilities ................................................. 600,686 479,890
---------- ----------
Long-term debt (note 9):
Revolving credit and term loan facility less current maturities ............. 1,673,500 1,893,000
Mortgages and other long-term debt less current maturities .................. 150,402 227,269
Subordinated debt ........................................................... 1,361,046 1,245,908
---------- ----------
Total long-term debt ...................................................... 3,184,948 3,366,177
---------- ----------
Other long-term liabilities (note 10) ........................................ 123,042 169,099
Deferred income taxes (note 14) .............................................. -- 41,355
Deferred gain on sale-leaseback transactions ................................. 5,315 4,642
Commitments and contingencies (notes 11, 12, 15 and 22)
Stockholders' equity (note 12): ..............................................
Preferred stock, authorized 15,000,000 shares; no shares issued and out-
standing in 1997 and 1998 ................................................. -- --
Common stock, $0.001 par value. Authorized 150,000,000 shares; issued
43,098,373 shares in 1997 and 52,416,527 shares in 1998 (including
548,500 treasury shares in 1997 and 602,476 treasury shares in 1998) . 43 53
Additional paid-in capital .................................................. 1,062,436 1,370,049
Retained earnings (deficit) ................................................. 45,495 (22,483)
Treasury stock, at cost (548,500 shares in 1997 and 602,476 shares in
1998) ..................................................................... (19,813) (15,654)
---------- ----------
Net stockholders' equity .................................................. 1,088,161 1,331,965
---------- ----------
Total liabilities and stockholders' equity ................................ $5,002,152 $5,393,128
========== ==========
</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,
---------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Total revenues ............................................................... $1,203,626 $1,402,628 $2,972,186
---------- ---------- ----------
Costs and expenses:
Operating, general and administrative expenses .............................. 942,192 1,018,117 2,218,937
Depreciation and amortization ............................................... 37,223 56,162 156,719
Rent (note 11) .............................................................. 70,949 74,355 126,247
Interest (net of investment income of $2,233 in 1996, $7,629 in 1997
and $1,183 in 1998) (note 9) .............................................. 59,826 94,880 238,647
Non-recurring charges (income), net (note 20) ............................... (17,976) 123,456 --
---------- ---------- ----------
Total costs and expenses .................................................. 1,092,214 1,366,970 2,740,550
---------- ---------- ----------
Earnings from continuing operations before equity in earnings of
affiliates, income taxes, extraordinary items and cumulative effect
of accounting change ..................................................... 111,412 35,658 231,636
Equity in earnings of affiliates (note 4) .................................... 828 88 384
---------- ---------- ----------
Earnings from continuing operations before income taxes, extraordi-
nary items and cumulative effect of accounting change .................... 112,240 35,746 232,020
Federal and state income taxes (note 14) ..................................... 64,008 33,238 95,128
---------- ---------- ----------
Earnings from continuing operations before extraordinary items and
cumulative effect of accounting change ................................... 48,232 2,508 136,892
Loss from discontinued operations (net of tax) (note 8) ...................... 467 13,631 204,870
---------- ---------- ----------
Earnings (loss) before extraordinary items and cumulative effect of ac-
counting change ........................................................... 47,765 (11,123) (67,978)
Extraordinary items (note 17) ................................................ 1,431 20,552 --
---------- ---------- ----------
Earnings (loss) before cumulative effect of accounting change ............. 46,334 (31,675) (67,978)
Cumulative effect of accounting change (note 21) ............................. -- 1,830 --
---------- ---------- ----------
Net earnings (loss) ....................................................... $ 46,334 $ (33,505) $ (67,978)
========== ========== ==========
Per Common Share -- basic:
Earnings from continuing operations before extraordinary items and cu-
mulative effect of accounting change ...................................... $ 2.14 $ 0.09 $ 2.83
Earnings (loss) before extraordinary items and cumulative effect of ac-
counting change ........................................................... 2.12 ( 0.39) (1.40)
Earnings (loss) before cumulative effect of accounting change ............... 2.06 ( 1.12) (1.40)
Net earnings (loss) ......................................................... $ 2.06 $ (1.19) $ (1.40)
========== ========== ==========
Per Common Share -- diluted:
Earnings from continuing operations before extraordinary items and cu-
mulative effect of accounting change ...................................... $ 1.84 $ 0.33 $ 2.56
Earnings (loss) before extraordinary items and cumulative effect of ac-
counting change ........................................................... 1.83 ( 0.02) (1.08)
Earnings (loss) before cumulative effect of accounting change ............... 1.78 ( 0.55) (1.08)
Net earnings (loss) ......................................................... $ 1.78 $ (0.60) $ (1.08)
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
61
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
---------- ------------- -------------
<S> <C> <C> <C>
Net earnings (loss) .............................................. $46,334 $ (33,505) $ (67,978)
Other comprehensive earnings (loss), net of tax:
Unrealized gain (loss) on available for sale securities ......... 5,756 (5,756) --
------- --------- ---------
Comprehensive earnings (loss) .................................... $52,090 $ (39,261) $ (67,978)
======= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
62
<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, 1995 ..................................... $-- $22 $ 410,345
Issuance of 1,632,873 common shares in connection with
acquisitions and management agreements (note 2) ................ -- 2 35,435
Re-issuance of 400,600 common shares of treasury stock
in payment of earn-out in connection with prior ac-
quisitions ..................................................... -- -- (3,592)
Issuance of 68,661 common shares in connection 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 securities ................ -- -- --
Declaration of cash dividend, $0.02 per common share ............ -- -- --
Net earnings .................................................... -- -- --
--- --- ----------
Balance at December 31, 1996 ..................................... -- 24 445,667
-- --- ----------
Issuance of 976,504 common shares in payment of earn-
out in connection with prior acquisition (note 2) .............. -- 1 26,438
Issuance of 16,993,217 common shares in connection with
acquisitions (note 2) .......................................... -- 17 553,385
Issuance of 81,434 common shares in connection with em-
ployee 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 employee stock op-
tions .......................................................... -- -- 7,020
Reversal of unrealized gain on available for sale securities -- -- --
Acquisition of 548,500 common shares of treasury stock
(at cost) ...................................................... -- -- --
Declaration of cash dividend, $0.02 per common share............. -- -- --
Net loss ........................................................ -- -- --
--- --- ----------
Balance at December 31, 1997 ..................................... -- 43 1,062,436
--- --- ----------
Exercise of employee stock options for 3,511,717 common shares,
less 498,407 shares tendered therefor at a value
of $16,286...................................................... -- 3 56,683
Issuance of 51,186 common shares in connection with em-
ployee stock purchase plan ..................................... -- -- 1,079
Issuance of 2,456,746 common shares in connection with
acquisitions (note 2) .......................................... -- 3 80,764
Re-issuance of 347,700 common shares of treasury stock
in connection with acquisitions ................................ -- -- (351)
Re-issuance of 658,824 common shares of treasury stock
to fund Key Employee Supplemental Executive Retire-
ment Plan ...................................................... -- -- (2,569)
Acquisition of 1,060,500 common shares of treasury stock
(at cost) ...................................................... -- -- --
Issuance of 223,466 common shares in connection with
debt payments .................................................. -- -- 8,554
Value of 1,841,700 options issued in connection with ac-
quisition of Rotech Medical Corporation ........................ -- -- 32,743
Tax benefit arising from exercise of employee stock op-
tions .......................................................... -- -- 21,332
Issuance of 3,573,446 common shares in connection with
the conversion of the Company's 6% convertible subor-
dinated debentures, less issuance costs of $5,417............... -- 4 109,378
Net loss ........................................................ -- -- --
--- --- ----------
Balance at December 31, 1998 .................................... $-- $53 $1,370,049
=== === ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
RETAINED AVAILABLE FOR
EARNINGS SALE TREASURY
(DEFICIT) SECURITIES STOCK TOTAL
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 ..................................... $ 33,951 $ -- $ (12,790) $ 431,528
Issuance of 1,632,873 common shares in connection with
acquisitions and management agreements (note 2) ................ -- -- -- 35,437
Re-issuance of 400,600 common shares of treasury stock
in payment of earn-out in connection with prior ac-
quisitions ..................................................... -- -- 12,790 9,198
Issuance of 68,661 common shares in connection 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 securities ................ -- 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 common shares in payment of earn-
out in connection with prior acquisition (note 2) .............. -- -- -- 26,439
Issuance of 16,993,217 common shares in connection with
acquisitions (note 2) .......................................... -- -- -- 553,402
Issuance of 81,434 common shares in connection with em-
ployee stock purchase plan ..................................... -- -- -- 1,757
Exercise of employee stock options for 1,418,968 common
shares ......................................................... -- -- -- 28,170
Tax benefit arising from exercise of employee stock op-
tions .......................................................... -- -- - 7,020
Reversal of unrealized gain on available for sale securities -- (9,360) -- (9,360)
Acquisition of 548,500 common shares of treasury stock
(at cost) ...................................................... -- -- (19,813) (19,813)
Declaration of cash dividend, $0.02 per common share............. (814) -- -- (814)
Net loss ........................................................ (33,505) -- -- (33,505)
--------- --------- --------- ----------
Balance at December 31, 1997 ..................................... 45,495 -- (19,813) 1,088,161
--------- --------- --------- ----------
Exercise of employee stock options for 3,511,717 common shares,
less 498,407 shares tendered therefor at a value
of $16,286...................................................... -- -- -- 56,686
Issuance of 51,186 common shares in connection with em-
ployee stock purchase plan ..................................... -- -- -- 1,079
Issuance of 2,456,746 common shares in connection with
acquisitions (note 2) .......................................... -- -- -- 80,767
Re-issuance of 347,700 common shares of treasury stock
in connection with acquisitions ................................ -- -- 13,059 12,708
Re-issuance of 658,824 common shares of treasury stock
to fund Key Employee Supplemental Executive Retire-
ment Plan ...................................................... -- -- 9,569 7,000
Acquisition of 1,060,500 common shares of treasury stock
(at cost) ...................................................... -- -- (18,469) (18,469)
Issuance of 223,466 common shares in connection with
debt payments .................................................. -- -- -- 8,554
Value of 1,841,700 options issued in connection with ac-
quisition of Rotech Medical Corporation ........................ -- -- -- 32,743
Tax benefit arising from exercise of employee stock op-
tions .......................................................... -- -- -- 21,332
Issuance of 3,573,446 common shares in connection with
the conversion of the Company's 6% convertible subor-
dinated debentures, less issuance costs of $5,417............... -- -- -- 109,382
Net loss ........................................................ (67,978) -- -- (67,978)
--------- --------- --------- ----------
Balance at December 31, 1998 .................................... $ (22,483) $ -- $ (15,654) $1,331,965
========= ========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
63
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1997 1998
------------- --------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ................................................... $ 46,334 $ (33,505) $ (67,978)
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities: ............................................
Extraordinary items ................................................. 2,327 33,690 --
Non-recurring charges (income) ...................................... (17,976) 123,456 --
Cumulative effect of accounting change .............................. -- 3,000 --
Loss from discontinued operations ................................... 467 13,631 204,870
Undistributed results of affiliates ................................. 2 157 33
Depreciation and amortization ....................................... 37,223 56,162 156,719
Deferred income taxes and other non-cash items ...................... 3,325 (31,411) 42,630
Amortization of deferred gain on sale-leaseback ..................... (982) (1,046) (673)
Increase in patient accounts and third-party payor settlements
receivable ......................................................... (24,504) (62,296) (142,897)
(Increase) decrease in supplies, inventories, prepaid expenses
and other current assets ........................................... 6,327 (19,095) (19,848)
Decrease in accounts payable and accrued expenses ................... (12,157) (41,553) (147,973)
(Increase) decrease in income taxes receivable ...................... (4,182) 29,781 57,941
(Decrease) increase in income taxes payable ......................... -- 2,426 (2,426)
---------- ------------ ----------
Net cash provided by operating activities .......................... 36,204 73,397 80,398
---------- ------------ ----------
Net cash used by discontinued operations ........................... (3,113) (16,342) (99,272)
Cash flows from financing activities:
Proceeds from issuance of capital stock, net .......................... 3,479 29,927 57,765
Proceeds from long-term borrowings .................................... 1,087,175 3,280,565 1,097,341
Repayment of long-term borrowings ..................................... (830,434) (1,532,276) (884,897)
Deferred financing costs .............................................. (10,251) (45,500) (1,355)
Payment of prepayment premiums and fees on debt extinguish-
ment ................................................................ -- (23,598) --
Purchase of treasury stock ............................................ -- (19,813) (18,469)
Dividends paid ........................................................ (435) (471) (814)
---------- ------------ ----------
Net cash provided by financing activities .......................... 249,534 1,688,834 249,571
---------- ------------ ----------
Cash flows from investing activities:
Purchases of temporary investments .................................... (5,645) (828,505) (74,525)
Sales of temporary investments ........................................ 5,988 822,507 69,739
Business acquisitions ................................................. (242,819) (1,560,396) (206,926)
Purchases of property, plant, and equipment ........................... (145,902) (126,860) (222,265)
Disposition of assets ................................................. 136,709 54,137 175,807
Payment of termination fees and other costs of terminated merger -- (27,555) --
Payments of severance fees related to acquisition and other costs. -- (10,492) --
Investment in affiliates and other assets ............................. (31,582) (43,878) (1,469)
---------- ------------ ----------
Net cash used by investing activities ................................. (283,251) (1,721,042) (259,639)
---------- ------------ ----------
Increase (decrease) in cash and cash equivalents ...................... (626) 24,847 (28,942)
Cash and cash equivalents, beginning of period ......................... 36,112 35,486 60,333
---------- ------------ ----------
Cash and cash equivalents, end of period ............................... $ 35,486 $ 60,333 $ 31,391
========== ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
64
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(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). As discussed in note (1)(r) and in note 8, the
Company's home health nursing segment is presented as a discontinued operation.
(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. Revenues represent routine service (room and board) charges of
geriatric and assisted living facilities, ancillary service charges of geriatric
and assisted living facilities, revenues generated by medical specialty units
and revenues of pharmacy, rehabilitation, diagnostic, respiratory therapy,
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.
65
<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 using the debt
outstanding (interest) method.
(g) Deferred Pre-opening Costs
Effective January 1, 1996, all pre-opening costs of medical specialty units
have been expensed when incurred.
(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) Investments in and advances to affiliates
Investments in which the Company has significant influence and has a 20% -
50% ownership interest are accounted for using the equity method of accounting.
The investments are carried at the cost of the investment plus the Company's
equity in undistributed earnings (losses). Investments in which the Company does
not exercise significant influence (generally less than a 20% ownership
interest) are accounted for using the cost method of accounting for investments.
(j) 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.
(k) 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 and warrants issued to employees. Additional information
required by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," ("SFAS No. 123") is discussed in note 12.
(l) 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
busi-
66
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(l) Impairment of Long-Lived Assets -- (Continued)
ness 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.
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.
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 groups 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
respiratory/infusion/DME, rehabilitation therapy, respiratory therapy,
lithotripsy and mobile diagnostics divisions.
(m) 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.
(n) 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 13.
(o) Business and Credit Concentrations
The Company's revenues are generated through approximately 1,700 service
locations in 47 states and the District of Columbia, including 374 owned, leased
and managed geriatric care facilities. 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).
(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,
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
67
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(p) Management Agreements -- (Continued)
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
In 1997, assets held for sale represent the assets of 19 geriatric care
facilities and one outpatient clinic 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 26 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) Discontinued operations
In October 1998, the Company's Board of Directors adopted a plan to
discontinue its home health nursing segment. Accordingly, the Company has
reclassified its prior financial statements to present the operating results of
the home health nursing segment as a discontinued operation. The operating
results of home health nursing include interest expense (allocated based on debt
specifically identified with acquisition financing) of $4,284, $20,321 and
$25,678 in 1996, 1997 and 1998, respectively.
(s) 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.
(t) Reclassifications
Certain amounts presented in 1996 and 1997 have been reclassified to
conform with the presentation for 1998.
68
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(2) BUSINESS ACQUISITIONS
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 1998
Acquisitions in 1998 and the manner of payment are summarized as follows:
<TABLE>
<CAPTION>
MONTH TRANSACTION DESCRIPTION
- ----------- -------------------------------------------------------------------
<S> <C>
January Stock of Paragon Rehabilitative Service, Inc.
February Assets of Health Star, Inc.
February Stock of Medicare Convalescent Aids of Pinellas d/b/a
Medaids, RxStat, Prime Medical Services
February Stock of Michigan Medical Supply
February Assets of Nutmeg Respiratory Homecare March Assets of
Chancy Healthcare Serice, Inc.
Chancy Oxygen Services, CHS Home Infusion Company,
Inc., Chancy Healthcare Services of Waynesboro
April Stock of Magnolia Group, Inc.
May Assets of American Mobile Health Systems, Inc.
May Assets of Eastern Home Care & Oxygen, Inc., Mira Associates,
Altoona Medox Enterprises, Professional Home Care, Keystone Home
Oxygen Services
May Assets of First Community Care, Inc.
June Assets of Metropolitan Lithotripter Associates
June Stock of Premiere Associates, Inc.
June Assets of Apex Home Care, Inc.
June Assets of Osborne Medical, Inc.
July Stock of Collins Rentals, Inc.
August Stock of Home Care Oxygen Services, Inc.
August Assets of Tri-County Medical Oxygen, Inc.
August Assets of American Oxygen Services of Tennessee
September Assets of Accucare Medical Corporation
September Assets of Valley Oxygen & Medical Equipment, Inc.
October Assets of Mark-Daniel Enterprises, Inc. d/b/a Arrowhealth Medical
Supply
October Assets of Professional Respiratory Care, Inc.
October Stock of Acadia Home Care
November Assets of Oakwood Manor Nursing Center, Inc.
November Assets of Norcare Home Medical, Inc.
November Stock of RespaCare, Inc.
November Assets of Caremor Health Services, Inc.
Various 71 acquisitions, each with total costs of less than $2,000 Various
Cash payments of acquisition costs accrued in 1997 and 1998
<PAGE>
<CAPTION>
NOTES PAYABLE
COMMON AND OTHER
CASH STOCK ACCRUED TOTAL
MONTH PAID ISSUED(1) LIABILITIES(2) COSTS
- ----------- ----------- ----------- ---------------- ----------
<S> <C> <C> <C> <C>
January $ -- $10,758 $ 425 $ 11,183
February 2,855 -- 310 3,165
February 830 3,654 216 4,700
February 1,900 -- 265 2,165
February 2,340 -- 217 2,557
March 5,335 -- 355 5,690
April -- 15,118 1,000 16,118
May -- 2,800 -- 2,800
May 3,820 -- 405 4,225
May 5,630 2,282 988 8,900
June 3,099 7,802 281 11,182
June 6,500 29,264 20,127 55,891
June 2,666 -- 270 2,936
June 1,960 -- 135 2,095
July 2,484 -- 411 2,895
August 3,650 -- 267 3,917
August 2,075 -- 161 2,236
August -- 1,981 137 2,118
September -- 2,854 84 2,938
September 2,464 -- 386 2,850
October 7,915 -- 765 8,680
October 2,180 -- 177 2,357
October 2,180 -- 198 2,378
November 5,818 -- -- 5,818
November 2,486 -- 203 2,689
November 3,783 -- 302 4,085
November 2,219 -- 69 2,288
Various 40,038 16,962 5,031 62,031
Various 92,699 -- (92,699) --
--------- --------- ------------ ---------
$206,926 $93,475 $ (59,514) $240,887
========= ========= ============ =========
</TABLE>
- ----------
(1) Represents shares of IHS Common Stock as follows: 361,851 shares for Paragon
Rehabilitive; 122,376 shares for Medicare Convalescence Aids of Pinellas;
447,419 shares for Magnolia Group; 89,634 shares for American Mobile Health
Systems; 90,627 shares for First Community Care; 348,974 shares for
Metropolitan Lithotriper Associates; 800,561 shares for Premiere Associates;
61,061 shares for American Oxygen Services of Tennessee; 128,972 shares for
Accucare Medical Corporation; and 302,718 shares for other acquisitions each
with total cost less than $2,000. During 1998, the Company issued an
additional 50,253 shares to shareholders of Arcadia Services.
(2) Amounts include note payable of $15.0 million to the shareholders of
Premiere Associates.
69
<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 1998 acquisitions to the assets
acquired and liabilities assumed is summarized as follows:
<TABLE>
<CAPTION>
CURRENT PROPERTY, PLANT OTHER INTANGIBLE CURRENT LONG-TERM TOTAL
TRANSACTION ASSETS AND EQUIPMENT ASSETS ASSETS LIABILITIES LIABILITIES COSTS
- --------------------------------------- --------- ----------------- -------- ------------ ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Paragon Rehabilitative Service, Inc. $ 1,505 $ 85 $ 4 $ 13,036 ($ 3,427) ($ 20) $ 11,183
Health Star, Inc. 323 110 -- 2,732 -- -- 3,165
Medicare Convalescent Aids of Pinellas
d/b/a Medaids, RxStat, Prime Medi-
cal Services 913 366 -- 3,698 (277) -- 4,700
Michigan Medical Supply 215 295 -- 1,801 (131) (15) 2,165
Nutmeg Respiratory Homecare 469 146 -- 1,942 -- -- 2,557
Chancy Healthcare Serice, Inc. Chancy
Oxygen Services, CHS Home Infu-
sion Company, Inc., Chancy Health-
care Services of Waynesboro 575 40 -- 5,075 -- -- 5,690
Magnolia Group, Inc. 4,962 29,101 734 -- (8,989) (9,690) 16,118
American Mobile Health Systems, Inc. 1,112 -- 1 2,575 (888) -- 2,800
Eastern Home Care & Oxygen, Inc.,
Mira Associates, Altoona Medox
Enterprises, Professional Home
Care, Keystone Home Oxygen Serv. 483 859 -- 2,883 -- -- 4,225
First Community Care, Inc. 1,998 639 661 7,102 -- (1,500) 8,900
Metropolitan Lithotripter Associates 2,485 1,860 431 18,846 (11,500) (940) 11,182
Premiere Associates, Inc. 2,986 91,990 -- 39,030 (35,819) (42,296) 55,891
Apex Home Care, Inc. 360 393 -- 2,483 -- (300) 2,936
Osborne Medical, Inc. 6 142 -- 1,947 -- -- 2,095
Collins Rentals, Inc. 234 400 -- 2,261 -- -- 2,895
Home Care Oxygen Services, Inc. 266 369 -- 3,282 -- -- 3,917
Tri-County Medical Oxygen, Inc. 206 47 -- 1,983 -- -- 2,236
American Oxygen Services of Tennes-
see 303 19 -- 1,915 (119) -- 2,118
Accucare Medical Corporation 423 195 -- 2,966 (646) -- 2,938
Valley Oxygen & Medical Equipment,
Inc. 500 46 -- 2,304 -- -- 2,850
Mark-Daniel Enterprises, Inc. d/b/a
Arrowhealth Medical Supply 1,578 1,299 -- 7,043 (1,240) -- 8,680
Professional Respiratory Care, Inc. 178 216 -- 1,963 -- -- 2,357
Acadia Home Care 199 49 -- 2,130 -- -- 2,378
Oakwood Manor Nursing Center, Inc. -- 9,720 -- -- -- (3,902) 5,818
Norcare Home Medical, Inc. 144 141 -- 2,404 -- -- 2,689
RespaCare, Inc. 622 207 -- 4,506 -- (1,250) 4,085
Caremor Health Services, Inc. 286 245 -- 1,757 -- -- 2,288
Other acquisitions 3,664 5,140 5,258 50,090 (1,164) (957) 62,031
------- -------- ------ -------- -------- -------- --------
$26,995 $144,119 $7,089 $187,754 $(64,200) $(60,870) $240,887
======= ======== ====== ======== ======== ======== ========
</TABLE>
70
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(2) BUSINESS ACQUISITIONS --(Continued)
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
provider
February Assets of Portable X-Ray Labs, Inc., a mobile x-ray services pro-
vider
March Payment of earnout in connection with Achievement Rehab acqui-
sition 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.,
contract rehabilitation companies(2)
August Stock of Ambulatory Pharmaceutical Services, Inc. and APS Amer-
ican, Inc., home healthcare services providers
August Stock of Arcadia Services, Inc., a home healthcare services provid-
er
September Stock and assets of Barton Creek Healthcare, Inc., a home
healthcare 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 com-
pany
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
company
November Assets of Central Medical Supply Company, Inc., a respiratory ther-
apy company
November Assets of Hallmark Respiratory Care, a respiratory therapy com-
pany
November Leasehold interest in Shadow Mountain, a skilled nursing facility
December Assets of certain businesses owned by HEALTHSOUTH Corpora-
tion
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 in 1996 and 1997
<PAGE>
<CAPTION>
NOTES PAYABLE
COMMON AND OTHER
CASH STOCK ACCRUED
MONTH PAID ISSUED(1) LIABILITIES TOTAL COST
- ----------- ------------ ----------- -------------- -------------
<S> <C> <C> <C> <C>
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
========== ======== ========== ==========
</TABLE>
- ----------
(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.
(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.
71
<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 Part-
nership .......................... 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)
======== ======== ======== ==========
<PAGE>
<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 Part-
nership .......................... -- (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>
72
<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
<PAGE>
<CAPTION>
NOTES PAYABLE
COMMON AND OTHER
CASH STOCK ACCRUED
MONTH PAID ISSUED(1) LIABILITIES TOTAL COST
- ----------- ---------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
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
======== ======== ========== ========
</TABLE>
- ----------
(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.
73
<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
======== ======== ========
<PAGE>
<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>
Unaudited pro forma combined results of operations of the Company giving
effect to the foregoing acquisitions for the years ended December 31, 1997 and
1998 are presented below. Such pro forma presentation has been prepared assuming
that the acquisitions had been made as of January 1, 1997.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------
1997 1998
------------- -------------
<S> <C> <C>
Revenues ................................................................ $3,217,782 $3,122,565
Earnings from continuing operations before extraordinary items and
cumulative effect of accounting change ................................. 32,839 141,281
Earnings (loss) before extraordinary items and cumulative effect of ac-
counting change ........................................................ 19,208 (63,589)
Loss before cumulative effect of accounting change ...................... (1,344) (63,589)
Net Loss ................................................................ (3,174) (63,589)
Per Common Share--basic:
Earnings from continuing operations before extraordinary items and
cumulative effect of accounting change ............................... $ 0.69 $ 2.85
Earnings (loss) before extraordinary items and cumulative effect of
accounting change .................................................... 0.40 (1.28)
Loss before cumulative effect of accounting change ..................... (0.03) (1.28)
Net Loss ............................................................... (0.07) (1.28)
Per Common Share--diluted:
Earnings from continuing operations before extraordinary items and
cumulative effect of accounting change ............................... 0.74 2.59
Earnings (loss) before extraordinary items and cumulative effect of
accounting change .................................................... 0.51 (0.98)
Earnings (loss) before cumulative effect of accounting change .......... 0.15 (0.98)
Net earnings (loss) .................................................... $ 0.12 $ (0.98)
</TABLE>
74
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(2) BUSINESS ACQUISITIONS --(Continued)
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 $16,299 in 1996, $66,440 in 1997 and $13,442 in 1998, as well as exit
costs and employee termination and relocation costs of $20,091 in 1996, $33,220
in 1997 and $4,743 in 1998. 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,
1996, 1997 and 1998:
<TABLE>
<CAPTION>
EMPLOYEE
TERMINATION AND
EXIT RELOCATION
COSTS COSTS TOTAL
----------- ---------------- ------------
<S> <C> <C> <C>
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
Acquired companies -- 1998 ................. -- 4,743 4,743
Payments charged against liability ......... (13,032) (31,159) (44,191)
Adjustments recorded to:
Cost of acquisitions ...................... 2,827 11,180 14,007
Operations ................................ -- -- --
--------- --------- ---------
Balance at December 31, 1998 ............... $ -- $ 1,755 $ 1,755
========= ========= =========
</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 1998. Unresolved issues relate primarily to the finalization of
severance and termination arrangements. Accordingly, unresolved issues could
result in additional liabilities for salaries, benefits and related 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 termi-
75
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(2) BUSINESS ACQUISITIONS --(Continued)
nation fees and other exit costs as defined in EITF 95-3. Significant exit
activities relating to the 1997 acquisitions were 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, 1998 relate primarily to the
following employee groups with the indicated anticipated dates of completion of
termination/relocation: Paragon Rehabilitative Service by January 1999;
Arrowhealth Medical Supply by October 1999; Eastern Home Care and Oxygen by May
1999, First Community Care by May 1999 and Valley Oxygen and Medical Equipment
by September 1999.
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 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
contingencies and valuation estimates 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 such matters 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, 1998, 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. In 1998, the Company completed the final
measurement of the fair value of assets acquired and liabilities assumed,
including pre-acquisition contingencies, and recorded adjustments to the
December 31, 1997 preliminary estimated amounts. Such adjustments related
primarily to the businesses acquired from HEALTHSOUTH on December 31, 1997. Such
final measurement resulted in adjustments to increase the obligation for
unfavorable leases and contracts by approximately $65,380, related primarily to
certain neuro-rehabilitative facilities in Massachusetts, to increase accrued
liabilities for certain litigation matters by approximately $23,785 and to
increase valuation allowances on certain receivables by approximately $10,345.
In addition, the Company recorded additional liabilities of approximately
$30,920 related to commitments to certain HMO businesses which were sold by
RoTech concurrent with its acquisition by IHS. Such commitments were finalized
in 1998. Management is aware of certain adjustments that might be required with
respect to acquisitions recorded at December 31, 1998; accordingly, the original
allocation could be adjusted to the extent that finalized amounts differ from
the estimates.
Certain facilities acquired in 1997 as part of the Rotech, CCA and
HEALTHSOUTH acquisitions, were held for sale rather than used in operations
subsequent to the acquisitions. Such facilities were recorded at fair value less
the estimated cost of disposition in accordance with the provisions of EITF
Issue No. 87-11. Accordingly, the sale of these facilities in 1998 resulted in
no gain or loss.
76
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(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, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Patient accounts receivable ......................................... $610,217 $735,169
Allowance for doubtful accounts ..................................... 148,957 165,260
-------- --------
461,260 569,909
Third party payor settlements, less allowance for contractual adjust-
ments of $19,827 and $24,565........................................ 68,577 79,197
-------- --------
$529,837 649,106
======== ========
</TABLE>
Gross patient accounts receivable and third-party payor settlements
receivable from the Federal government (Medicare) were $212,051 and $215,590 at
December 31, 1997 and 1998, respectively. Amounts receivable from various states
(Medicaid) were $123,182 and $175,414, respectively, at such dates, which relate
primarily to the states of Colorado, Florida, Massachusetts, Michigan, Nebraska,
New Mexico, Texas and Pennsylvania.
(4) INVESTMENTS IN AND ADVANCES TO AFFILIATES
The Company's investments in and advances to affiliates at December 31,
1997 and 1998 are summarized as follows:
1997 1998
--------- ----------
Investments accounted for by the equity method:
Tutera ....................................... $ 7,737 $ --
Speciality ................................... 6,059 --
Lyric ........................................ -- 3,283
------- -------
13,796 3,283
Other investments:
Craegmoor Healthcare ......................... -- 6,716
Other ........................................ 5,731 6,344
------- -------
$19,527 $16,343
======= =======
Investments in significant unconsolidated affiliates are summarized below.
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 was conducted by its general
partner. In November 1998, the Company sold its 49% interest in Tutera to the
general partner of the Partnership. In addition, the Company purchased one of
the Tutera facilities, using its purchase option.
SPECIALITY CARE PLC AND CRAEGMOOR HEALTHCARE
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,
which had preferences as
77
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(4) INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (Continued)
to liquidation. As a result of the Company's additional investment, the Company
had 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 would have owned approximately 31.38% of Speciality (assuming no
further issuances).
In February 1998 Speciality was acquired by Craegmoor Healthcare Company
Limited, ("Craegmoor") an owner and operator of residential nursing homes in the
United Kingdom, through an exchange of capital stock. As a result of the
exchange, IHS owns less than 10% of the outstanding ordinary shares of
Craegmoor.
LYRIC HEALTH CARE LLC ("LYRIC")
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 ("Lyric"), a newly formed subsidiary of IHS, at an annual
rent of approximately $4,500. In a related transaction, TFN Healthcare
Investors, LLC ("TFN"), an entity in which Timothy F. Nicholson, a director of
IHS, is the principal member, purchased a 50% interest in Lyric for $1,000 and
IHS' interest in Lyric was reduced to 50%. IHS also entered into management and
franchise agreements with Lyric. 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 $350,000. 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 Lyric the authority to use the Company's trade names and proprietary
materials.
Lyric will dissolve on December 31, 2047 unless extended for an additional
12 months. On February 1, 1998 Lyric 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 Lyric's operating agreement, Mr. Nicholson
will serve as Managing Director of Lyric and will have the day-to-day authority
for the management and operation of Lyric 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 accounts for its investment in
Lyric using the equity method of accounting since IHS no longer controls Lyric.
Under the equity method of accounting for Lyric, IHS records 50% of Lyric's
earnings and losses pursuant to the amended operating agreement. The equity
method is applied to the Company's investment in Lyric, including outstanding
loans and management and franchise fees. The Company recorded a $2.5 million
loss on the sale of these facilities in 1997 in anticipation of the sale of
these facilities.
Cash flow deficiencies, if any, of Lyric may be satisfied by (1) available
working capital loans under a $10,000 revolving credit facility from
Copelco/American Healthfund, Inc., (2) obtaining additional borrowings under new
debt arrangements, (3) obtaining additional capital contributions from IHS and
TFN, the existing members of Lyric, although such contributions are not
required, and (4) admission of new members to Lyric.
In March 1998, the Company sold an additional five long-term care
facilities to Omega Healthcare Investors, Inc. for approximately $50,000, which
facilities were leased back to Lyric at an annual rent of approximately $4,900.
IHS also entered into management and franchise agreements with Lyric with terms
similar to those described above. The Company recorded no gain or loss on this
transaction.
78
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(4) INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (Continued)
The net proceeds from the sale of these facilities of approximately $89,900
was used to repay outstanding indebtedness.
The Company's equity in earnings (loss) of affiliates for the years ended
December 31, 1996, 1997 and 1998 is summarized as follows:
1996 1997 1998
--------- --------- ---------
Tutera .............. $ 883 $ 486 $ 892
Lyric ............... -- -- (508)
Speciality .......... 104 (211) --
Others .............. (159) (187) --
------ ------ ------
$ 828 $ 88 $ 384
====== ====== ======
The Company received cash distributions of equity from its affiliates of
$830 in 1996, $245 in 1997 and $843 in 1998.
Selected financial information for the combined affiliates accounted for
under the equity method is as follows:
DECEMBER 31, DECEMBER 31,
1997 1998
-------------- -------------
Working capital ......... $ 4,870 $1,674
Total assets ............ 46,880 8,524
Long-term debt .......... 14,366 1,559
Equity .................. $24,367 $1,074
======= ======
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
----------- ---------- ----------
Revenues .................... $118,995 $ 38,621 $77,143
Net earnings (loss) ......... 1,550 (2,133) 869
======== ======== =======
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1997 and 1998 are summarized
as follows:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Land .................................................... $ 43,359 $ 62,247
Buildings and improvements .............................. 621,063 572,265
Leasehold improvements and leasehold interests .......... 243,886 434,461
Equipment ............................................... 402,889 515,188
Construction in progress ................................ 84,263 59,452
Pre-construction and pre-acquisition costs .............. 5,388 8,043
---------- ----------
1,400,848 1,651,656
Less accumulated depreciation and amortization .......... 119,888 182,534
---------- ----------
Net property, plant and equipment ...................... $1,280,960 $1,469,122
========== ==========
</TABLE>
Included in leasehold improvements and leasehold interests are purchase
option deposits on 89 facilities of $78,149 at December 31, 1997, of which
$33,393 is refundable, and on 86 facilities of $71,415 at December 31, 1998, of
which $37,411 is refundable.
79
<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, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Intangible assets of businesses acquired, primarily goodwill .......... $2,671,660 $3,033,290
Deferred financing costs .............................................. 62,250 57,487
---------- ----------
2,733,910 3,090,777
Less accumulated amortization ......................................... 46,803 120,614
---------- ----------
Net intangible assets ................................................ $2,687,107 $2,970,163
========== ==========
</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 accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", 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. The Company performs the
impairment analysis at the individual facility and business unit basis.
(7) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1997 and 1998 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Accounts payable ................................................ $225,170 $218,718
Accrued salaries and wages ...................................... 54,297 69,114
Accrued workers' compensation and other claims .................. 12,490 13,226
Accrued interest ................................................ 33,530 69,347
Accrued acquisition liabilities (exit costs and employee termina-
tion and relocation costs) .................................... 27,196 1,755
Accrued transaction costs ....................................... 40,489 720
Other accrued expenses .......................................... 170,555 90,250
-------- --------
$563,727 $463,130
======== ========
</TABLE>
(8) DISCONTINUED OPERATIONS
In October 1998, the Company's Board of Directors adopted a plan to
discontinue operations of the home health nursing segment. Accordingly, the
operating results of the home health nursing segment have been segregated from
continuing operations and reported as a separate line item on the statement of
operations.
80
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(8) DISCONTINUED OPERATIONS -- (Continued)
The loss from the discontinued operations is summarized as follows:
Operating loss through September 30, 1998 (the mea-
surement date) of $61,902 less income tax benefit of
$25,999................................................ $ 35,903
Loss on disposal of assets, including estimated losses
from measurement date through the expected dis-
posal date (June 30, 1999) of $68,556, less income
tax benefit of $57,292................................. 168,967
--------
$204,870
========
The Company has reclassified its prior financial statements to present the
operating results of the home health nursing segment as a discontinued
operation. The assets and liabilities of such operations at December 31, 1997
have been reflected as a net non-current asset based substantially on the
original classification of such assets and liabilities which are summarized as
follows: .
DECEMBER 31,
---------------------------
1997 1998
------------ ------------
Current assets ............................ $ 73,548 $ 64,916
Property, plant and equipment ............. 37,673 10,337
Intangible and other assets ............... 131,484 --
Current liabilities ....................... (53,788) (59,826)
Non-current liabilities ................... (7,204) (2,927)
--------- ---------
Net assets of discontinued operations ..... $ 181,713 $ 12,500
========= =========
Amounts at December 31, 1998 reflect the allowance for loss on disposition.
Operating results including the effects of interest expense incurred in
connection with acquisition financing are as follows:
<TABLE>
<CAPTION>
1996 1997 1998(1)
----------- ------------- -------------
<S> <C> <C> <C>
Net revenue ........................................ $231,069 $ 590,569 $ 230,104
Operating, general and administrative expenses...... 212,732 537,713 242,702
Depreciation and amortization ...................... 4,458 14,588 12,627
Rent ............................................... 6,836 30,781 18,186
Interest ........................................... 4,284 20,321 18,491
Non-recurring charges(2) ........................... 3,519 9,586 --
-------- --------- ---------
Loss before income taxes ........................... (760) (22,420) (61,902)
Income tax benefit ................................. 293 8,789 25,999
-------- --------- ---------
Loss from operations ............................... $ (467) $ (13,631) $ (35,903)
======== ========= =========
</TABLE>
- ----------
(1) Represents results for the nine months ended September 30, 1998 (the
measurement date).
(2) Non-recurring charge represents the following: in 1996 the Company recorded
a $3,519 non-recurring charge resulting from the closure of certain
redundant home care agencies; in 1997; the Company also recorded an $8,199
charge to exit a home health management contract, and a $1,387 non-recurring
charge resulting from the closure of certain redundant operations.
In February 1999, the Company sold certain assets of the home health
nursing segment for cash of $12,700 and, in March 1999, the Company executed a
definitive agreement to sell the remaining operations. The estimated loss on
disposal gives effect to the terms of these contracts.
81
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(8) DISCONTINUED OPERATIONS -- (Continued)
The loss from operations of the home health nursing segment for the period
from the measurement date through December 31, 1998 was $31,063. Such loss
reflects the effects of provisions for estimated lease termination costs and
other costs incurred to close home health agencies during this period.
(9) LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
1997 1998
------------ -------------
<S> <C> <C>
Revolving credit and term loan facility notes:
Revolving credit loans .................................................................. $ 535,000 $ 766,000
Term loans .............................................................................. 1,150,000 1,138,500
---------- ----------
1,685,000 1,904,500
Less current portion .................................................................... 11,500 11,500
---------- ----------
Total revolving credit and term loan facility notes, less current portion ............... $1,673,500 $1,893,000
========== ==========
Mortgages and other long-term debt:
8.094% note payable, due December 2001 .................................................. $ 9,205 $ 9,037
Prime plus 1.25% note payable (9% at December 31, 1998), due December 2000 .............. 7,954 7,788
Mortgages payable in monthly installments of $62, including interest at rates ranging
from 9% to 14% ........................................................................ 7,264 3,143
9.75% mortgage note payable in monthly installments of $107, including interest, with
final payment of $13,087 in October 1998............................................... 13,198 --
Prime plus 1% (8.75% at December 31, 1998) note payable in monthly installments of
$89, including interest, with final payment in January 2020............................ 9,671 9,535
Seller notes, interest rates ranging from 10% to 14%, with final payment of $1,489 in
July 2000 ............................................................................. 3,495 1,489
LIBOR plus 1.75% (6.85% at December 31, 1998) mortgage note payable in monthly
installments of $51, including interest, with final payment due December 2000.......... 6,274 6,142
Mortgages payable in monthly installments of $89, including interest at rates ranging
from 10.09% to 10.64% ................................................................. 8,800 8,762
10.89% mortgage note payable in monthly installments of $41, including interest, due
April 2015 .......................................................................... 3,850 3,827
11.5% mortgage note payable in monthly installments of $65, including interest, due
January 2006 ......................................................................... 4,981 4,966
11% mortgage note payable in monthly installments of $216, including interest, due Decem-
ber 2010 .............................................................................. 19,185 19,123
11.5% mortgage note payable in monthly installments of $55, including interest, due
January 2006 ......................................................................... 4,197 4,184
10.95% mortgage note payable in monthly installments of $74, including interest, due
January 2004 .......................................................................... 5,240 --
9.09% obligations under capital leases .................................................. 46,185 --
11% mortgage note payable in monthly installments of $41, including interest, due Decem-
ber 2006 .............................................................................. 2,821 2,808
8.6% mortgage note payable in monthly installments of $30, including interest, due
July 2034............................................................................. 4,032 4,015
7.89% mortgage payable in monthly installments of $409 including interest, due July 2023. -- 52,674
9.95% mortgage payable due December 2003, interest payable monthly ...................... -- 37,500
9.5% mortgage notes payable due March 2008, interest payable monthly .................... -- 12,000
8% mortgages payable in annual installments of $880 including interest, due January 2003. -- 3,000
8.69% mortgages payable in monthly installments of $35 including interest due September
2004 .................................................................................. -- 3,902
11.25% mortgages payable in monthly installments of $47 including interest due November
2006 .................................................................................. -- 4,925
</TABLE>
82
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(9) LONG-TERM DEBT -- (Continued)
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
7.75% notes payable due September 2024 .................................................. -- 13,159
3% to 6% seller notes with final payment due June 2001 .................................. -- 3,373
Other ................................................................................... 17,083 17,177
------ ------
Total mortgages and other debt .......................................................... 173,435 232,529
Less current portion: ................................................................... 23,033 5,260
------- -------
Total mortgages and other long-term debt, less current portion .......................... $ 150,402 $ 227,269
========== ==========
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 --
5 1/4% Convertible Subordinated Debentures due June 1, 2003 of RoTech Medical Cor-
poration, with interest payable semi-annually on June 1 and December 1 ................ 2,164 2,026
9 5/8% and 10 3/4% Senior Subordinated Notes due May 31, 2002, and July 15, 2004 with
interest payable semi-annually ........................................................ 132 132
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 ................................................. 450,000 450,000
9 1/4% Senior Subordinated Notes due January 15, 2008, with interest payable semi-
annually on January 15 and July 15 .................................................... 500,000 500,000
---------- ----------
Total subordinated debt ................................................................. $1,361,046 $1,245,908
========== ==========
</TABLE>
REVOLVING CREDIT AND TERM LOAN FACILITY
The Company has a $2,150,000 revolving credit and term long facility
consisting of a $1,150,000 term loan facility and a $1,000,000 revolving credit
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 prior $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. As of December
31, 1998, $742,500 was outstanding, and will be amortized as follows (all
payable in equal quarterly installments): each of 1999, 2000, 2001 and 2002 --
$7,500; 2003 -- $337,500 and 2004 -- $375,000. 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).
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
83
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(9) LONG-TERM DEBT -- (Continued)
consummation of the acquisition. The Additional Term Facility, which was
borrowed at the closing of the acquisition, matures on December 31, 2005. As of
December 31, 1998, $396,000 was outstanding and will be amortized as follows
(all payable in equal quarterly installments): each of 1999, 2000, 2001, 2002
and 2003 -- $4,000; 2004 -- $176,000; and 2005 -- $200,000. 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 Term Facility and 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, 2003;
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 17.
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 17.
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
84
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(9) LONG-TERM DEBT -- (Continued)
hedge against existing floating rate debt. The Company does not hold derivative
financial instruments for trading or speculative purposes. At December 31, 1998,
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 (5.07% at December 31,
1998). The weighted average fixed interest rate under these agreements was 5.98%
at December 31, 1998.
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.
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 17.
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
85
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(9) LONG-TERM DEBT -- (Continued)
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"). 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 discussed
above. 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").
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 discussed above. As
a condition of the Company's obligation to repurchase tendered notes, tendering
holders consented to amendments to the related indentures under which the notes
were issued which eliminated or modified most of the restrictive covenants
previously contained in such indentures.
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 $2,026 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 and the 5 1/4% Debentures are convertible into approximately
4,409,509 shares and 44,813 shares, respectively, of Common Stock of the Company
at $32.60 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 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 and June 4, 1999,
respectively, at initial redemption prices expressed as a percentage of
principal of 103.29% and 103.0%, respectively.
On May 29, 1998, the Company called for redemption on June 29, 1998 all of
its outstanding 6% Convertible Subordinated Debentures due 2003 (the "6%
Debentures"). Of the $115,000,000 principal amount of 6% Debentures outstanding,
holders of $114,799,000 principal amount of the 6% Debentures converted their 6%
Debentures into an aggregate of 3,573,446 shares of Common Stock. Holders of the
remaining $201,000 principal amount of 6% Debentures received a cash redemption
aggregating $213,026 ($1,059.83 per $1,000 principal amount of the 6%
Debentures), equal to approximately $34.05 per underlying share of Common Stock
in lieu of conversion.
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 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.
At December 31, 1998, the aggregate maturities of long-term debt for the
five years ending December 31, 2003 and thereafter are as follows:
86
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(9) LONG-TERM DEBT -- (Continued)
1999 ............... $ 16,760
2000 ............... 43,732
2001 ............... 221,787
2002 ............... 286,441
2003 ............... 401,820
Thereafter ......... 2,412,397
----------
$3,382,937
==========
Interest capitalized to construction in progress was $3,800 in 1996, $3,600
in 1997 and $5,000 in 1998.
(10) OTHER LONG-TERM LIABILITIES
CONTINGENT PAYMENTS 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 which have been determined to be probable,
and the present value thereof is recorded as other long-term liabilities.
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%. With the
enactment of the Balanced Budget Act of 1997, which mandated the implementation
of a prospective payment system for Medicare home health nursing for cost
reporting periods beginning October 1, 1999 (subsequently extended to October 1,
2000) the contingent payments are payable on February 14 of each year 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 are 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 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 contingent payments
payable to HCFA and the former shareholders of First American. The present value
of these payments of $113,042 at December 31, 1997 and $122,054 at December 31,
1998 was determined using a discount rate of 8% per annum from the dates of
payment.
87
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(10) OTHER LONG-TERM LIABILITIES -- (Continued)
UNFAVORABLE LEASES AND CONTRACTS
In connection with certain business acquisitions, the Company assumed
certain unfavorable lease and other contract obligations. Accordingly, the
Company recorded approximately $75,380 in other long-term liabilities in
accordance with Accounting Principles Board Opinion No. 16 concerning business
combinations accounted for by the purchase method. Such obligations relate
primarily to certain neuro-rehabilitation facilities in Massachusettes acquired
from HEALTHSOUTH Corporation on December 31, 1997. The value of the obligations
was determined based on the present value of amounts to be paid, using a 10%
discount rate. With respect to the leases of real estate, the Company's
valuation is based on estimates of fair market rentals provided by an
independent appraiser. The obligation for unfavorable leases is payable
primarily through 2005, and other contract obligations expire on December 31,
2000. The balance payable at December 31, 1997 and 1998 was $10,000 and $47,045
respectively.
(11) LEASES
The Company has entered into operating leases as lessee of 215 health care
facilities and certain office facilities expiring at various dates through
February 2024. Minimum rent payments due under operating leases in effect at
December 31, 1998 are summarized as follows:
1999 ....................... $103,697
2000 ....................... 101,889
2001 ....................... 91,924
2002 ....................... 80,868
2003 ....................... 80,705
Subsequent to 2003 ......... 418,958
--------
Total ........................... $878,041
========
The Company also leases equipment under short-term operating leases having
rentals of approximately $32,265 per year.
The leases of health care facilities generally provide renewal options for
various terms at fair market rentals at the expiration of the initial term. 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 default conditions, the Company may be
required to exercise the options to buy certain facilities. In connection with
52 leases the Company has paid purchase option deposits aggregating $50,515 at
December 31, 1998, of which $37,411 is refundable.
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
$3,565 in 1996, $2,744 in 1997 and 2,778 in 1998.
(12) 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
88
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(12) CAPITAL STOCK -- (Continued)
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, 1997 and 1998, there were
no shares of preferred stock outstanding.
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 1996 and 1997;
none in 1998.
At December 31, 1997 and 1998 the Company had outstanding stock options as
follows:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Stock options outstanding pursuant to:
1990 Employee Stock Option Plan ................................... 486,478 161,559
1992 Employee Stock Option Plan ................................... 740,170 369,631
Stock Option Plan for Non-Employee Directors ...................... 50,000 --
1994 Stock Incentive Plan ......................................... 1,669,594 837,879
Senior Executives' Stock Option Plan .............................. 1,800,000 620,000
Stock Option Compensation Plan for Non-Employee Directors ......... 128,082 73,082
1995 Board of Director's Plan ..................................... 300,000 200,000
1996 Employee Stock Option Plan ................................... 2,987,475 5,129,104
RoTech converted options .......................................... 1,737,476 951,971
Other options ..................................................... 262,133 89,118
--------- ---------
Total stock options outstanding ................................. 10,161,408 8,432,344
========== =========
</TABLE>
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
89
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(12) CAPITAL STOCK -- (Continued)
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 16,528,571
shares of Common Stock under all 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 is 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>
1996 1997 1998
------------------------ -------------------------- ---------------------------
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 6,377,554 $ 20.19 8,750,099 $ 20.94 10,161,408 $ 22.24
Granted .................................... 3,096,500 22.14 2,975,272 25.15 6,898,701 18.66
Exercised .................................. (141,382) 14.55 (1,418,968) 19.81 (3,511,717) 19.46
Cancelled .................................. (582,573) 20.66 (144,995) 21.67 (5,116,048) 26.94
--------- -------- ---------- -------- ---------- --------
Options outstanding--end of period ......... 8,750,099 20.94 10,161,408 22.24 8,432,344 17.62
--------- -------- ---------- -------- ---------- --------
Options exercisable--end of period ......... 3,914,843 $ 20.18 7,515,449 $ 21.70 4,770,058 $ 19.61
========= ======== ========== ======== ========== ========
</TABLE>
The following summarizes information about stock options outstanding as of
December 31, 1998.
<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 12/31/98 LIFE PRICE AT 12/31/98 PRICE
- ------------------- ------------- ------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
under $10.......... 1,042,160 9.96 $ 9.49 -- $ --
$10 to $15......... 3,264,545 7.66 10.33 1,881,903 10.32
$15 to $20......... 177,619 3.29 18.07 141,900 17.91
$20 to $25......... 2,170,442 6.40 21.45 1,608,777 21.35
over $25........... 1,777,578 8.68 31.06 1,137,478 32.73
--------- ---- ------- --------- ------
Totals ........... 8,432,344 7.74 $ 17.62 4,770,058 $ 19.61
========= ==== ======= ========= =======
</TABLE>
90
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(12) CAPITAL STOCK -- (Continued)
The Company applies APB No. 25 and related interpretations in accounting
for its employee stock options and warrants. Accordingly, no compensation
expense has been recognized in connection with its employee stock options and
warrants. Had compensation expense for the Company's employee stock options and
warrants 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>
1996 1997 1998
------------------------- --------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net earnings (loss) ................... $ 46,334 $ 43,082 $ (33,505) $ (48,994) $ (67,978) $ (81,574)
Basic earnings (loss) per share ....... 2.06 1.91 (1.19) (1.73) (1.40) (1.68)
Diluted earnings (loss) per share ..... 1.78 1.68 (0.60) (1.00) (1.08) (1.32)
========= ========= ========= ========= ========= =========
</TABLE>
The fair value of the employee options and warrants (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 1996, 5.80% in 1997, and 4.65% in 1998; 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 1996, 30.1% in 1997 and
79.45% in 1998. 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 December 1998, the
Board of Directors authorized a modification to the options outstanding under
certain of the Company's option plans for certain employees which resulted in
the change of the exercise price to $10.25, the market price on the date of the
modification, for option holders who chose to participate in the option
modification. In order to participate, certain option holders were required to
surrender two existing options for each modified option. 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
1996 PRICE 1997 PRICE 1998 PRICE
------------ ---------- ------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Warrants outstanding--beginning of year ..... 518,000 $ 31.30 498,000 $ 31.03 1,275,000 $ 32.34
Granted ..................................... -- -- 780,000 33.12 750,000 10.63
Exercised ................................... -- -- (3,000) 20.00 -- --
Cancelled ................................... (20,000) 38.02 -- -- (750,000) 33.16
------- -------- --------- -------- --------- --------
Warrants outstanding--end of year ........... 498,000 $ 31.03 1,275,000 $ 32.34 1,275,000 $ 19.09
======= ======== ========= ======== ========= ========
</TABLE>
The warrants granted in 1997 consist primarily of warrants granted to
Stephen P. Griggs, the President of RoTech. In connection with the acquisition
of RoTech and as a condition of his five-year employment agreement, Mr. Griggs
was issued warrants to purchase 750,000 shares of IHS Common Stock at a per
share exercise price equal to the average closing sales price of IHS Common
Stock for the 15 business days prior to the acquisition closing date. Such
warrants vest at a rate of 20% per year beginning one year from the acquisition
closing date. The warrants were granted in consideration of future services to
be rendered by Mr. Griggs. As such, the Company applied the guidance provided in
APB Opinion No. 25. Since the exercise price of the warrants was equal, on the
date of grant, to the market value of the stock, no compensation expense was
recognized or deferred.
91
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(12) 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. In 1998, the
Company's Board of Directors authorized the repurchase in the open market of up
to an additional $25,000 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. In 1998, the Company
repurchased 1,060,500 shares of common stock for an aggregate purchase price of
approximately $18,469, and reissued 658,824 shares and 347,700 shares in
connection with funding the Company's Key Employee Supplemental Executive
Retirement Plans and an acquisition, respectively.
(13) EARNINGS PER SHARE
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>
EARNINGS* SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- ----------
<S> <C> <C> <C>
For the Year ended December 31, 1996
Basic EPS ................................................ $ 48,232 22,529,000 $ 2.14
Adjustment for interest on and incremental shares from
assumed conversion of the convertible subordinated de-
bentures ............................................... 9,888 7,989,275 --
Incremental shares from assumed exercise of dilutive op-
tions and warrants (net of tax benefits related thereto)
and issuance of contingent shares ...................... -- 1,045,310 --
-------- ---------- ------
Diluted EPS .............................................. $ 58,120 31,563,585 $ 1.84
======== ========== ======
For the Year ended December 31, 1997
Basic EPS ................................................ $ 2,508 28,253,217 $ 0.09
Adjustment for interest on and incremental shares from
assumed conversion of the convertible subordinated de-
bentures ............................................... 10,216 8,292,655 --
Incremental shares from assumed exercise of dilutive op-
tions and warrants (net of tax benefits related thereto)
and issuance of contingent shares ...................... -- 2,352,966 --
-------- ---------- ------
Diluted EPS .............................................. $ 12,724 38,898,838 $ 0.33
======== ========== ======
For the Year ended December 31, 1998
Basic EPS ................................................ $136,892 48,445,979 $ 2.83
Adjustment for interest on and incremental shares from
assumed conversion of the convertible subordinated de-
bentures ............................................... 7,396 6,232,546 --
Incremental shares from assumed exercise of dilutive op-
tions and warrants (net of tax benefits related thereto)
and issuance of contingent shares ...................... -- 1,578,520 --
-------- ---------- ------
Diluted EPS .............................................. $144,288 56,257,045 $ 2.56
======== ========== ======
</TABLE>
- ------------------
* Represents earnings from continuing operations before extraordinary items and
cumulative effect of accounting change.
92
<PAGE>
(14) INCOME TAXES
The provision for income taxes on earnings before income taxes and
extraordinary items is summarized as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
------------ ------------ ------------
Continuing operations ..... $ 64,008 $ 33,238 $ 95,128
Discontinued operations ... (293) (8,789) (83,291)
-------- --------- ---------
$ 63,715 $ 24,449 $ 11,837
======== ========= =========
Federal ................... $ 55,577 $ 20,783 $ 10,393
State ..................... 8,138 3,666 1,444
-------- --------- ---------
63,715 $ 24,449 $ 11,837
======== ========= =========
Current ................... $ 21,515 $ 39,042 $ (29,518)
Deferred .................. 42,200 (14,593) 41,355
-------- --------- ---------
$ 63,715 $ 24,449 $ 11,837
======== ========= =========
The amount computed by applying the Federal corporate tax rate of 35% in
1996, 1997 and 1998 to earnings from continuing operations before income taxes,
extraordinary items and cumulative effect of accounting change is summarized as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Income tax computed at statutory rates....... $ 39,284 $12,511 $ 81,207
State income taxes, net of Federal tax
benefit .................................... 5,315 3,325 6,033
Amortization of intangibles ................. 2,293 5,568 8,601
Basis difference on assets sold ............. 16,136 5,784 --
Merger costs and other special charges ...... -- 6,362 1,112
Valuation allowance adjustment .............. (1,353) -- --
Other ....................................... 2,333 (312) (1,825)
-------- ------- --------
$ 64,008 $33,238 $ 95,128
======== ======= ========
</TABLE>
Deferred income tax (assets) liabilities at December 31, 1997 and 1998 are
as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Excess of book over tax basis of assets ......................... $ 166,520 $ 211,283
Insurance reserves .............................................. (7,209) (7,344)
Deferred gain on sale-leaseback ................................. (2,040) (1,782)
Allowance for doubtful accounts ................................. (69,787) (72,246)
Accrued Medicare settlement ..................................... (41,330) (46,991)
Accrued litigation .............................................. (5,402) (5,889)
Accrued vacation ................................................ (3,810) (1,244)
Other accrued expenses not yet deductible for tax ............... (37,754) 1,998
Pre-acquisition separate company net operating loss carryforwards (23,868) (25,827)
Loss on discontinued operations ................................. -- (5,775)
Net operating loss carryforwards ................................ -- (29,231)
--------- ---------
Other ........................................................... 277 --
--------- ---------
(24,403) $ 16,952
Valuation allowance ............................................. 24,403 24,403
--------- ---------
$ -- $ 41,355
========= =========
</TABLE>
93
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(14) INCOME TAXES -- (Continued)
The decrease in the valuation allowance for deferred tax assets in 1996 is
attributable to the utilization of pre-acquisition separate company net
operating loss carryforwards. In 1997, the Company recorded deferred tax assets
in connection with business acquisitions of $32,093, which, net of a valuation
allowance of $24,403 related thereto, has been applied as a reduction to
goodwill.
At December 31, 1998, certain subsidiaries of the Company had
pre-acquisition net operating loss carryforwards available for Federal and state
income tax purposes of approximately $67,082 which expire in the years 1999
through 2009. The annual utilization of these net operating loss carryforwards
is subject to certain limitations under the Internal Revenue Code. Also, at
December 31, 1998, the Company has consolidated net operating loss carryforwards
for federal and state income tax purposes of approximately $75,926 which expire
in the year 2012.
(15) OTHER COMMITMENTS AND CONTINGENCIES
IHS' contingent liabilities (other than liabilities in respect of
litigation and the First American acquisition) aggregated approximately $122,603
as of December 31, 1998. 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 established several
irrevocable standby letters of credit with the Bank of Nova Scotia and other
financial institutions to secure certain of IHS' self-insured workers'
compensation obligations, health benefits and other obligations. The maximum
obligation was $28,897 at December 31, 1998. In addition, IHS has several surety
bonds in the amount of $86,576 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. In addition, IHS has obligations under operating leases aggregating
approximately $878,041 at December 31, 1998. (See note 11).
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 leased facility 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 ("SERP") plans for certain of
its senior officers. The SERP plans consist of two defined contribution plans
and one defined benefit plan. Expenses recognized for these plans were $3,254
and $2,898 in 1997 and 1998, respectively. Net prepaid pension expense related
to the SERP Plans were $12,945 and $21,819 as of December 31, 1997 and 1998,
respectively.
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(15) OTHER COMMITMENTS AND CONTINGENCIES -- (Continued)
The Company is 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.
(16) SUPPLEMENTAL CASH FLOW INFORMATION
See note 2 for information concerning significant non-cash investing and
financing activities related to business acquisitions and note 20 for such
information related to non-recurring charges for the years ended December 31,
1996, 1997, and 1998. 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 $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.
o The sale of certain non-strategic assets (including assets held for sale)
in 1998 resulted in an increase in notes receivable of approximately $7,000
which is classified in other assets at December 31, 1998.
o An increase in additional paid-in capital of $7,020 and $21,332, 1997 and
1998, respectively, resulted from the exercise of stock options under the
Company's various plans, which increased the Company's current taxes
receivable by such amounts.
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 10).
o An increase in goodwill and additional paid in capital of $32,743 in 1998
resulted from the Company's recording of the value of 1,841,700 options
issued in connection with the Rotech Medical Corporation acquisition.
Cash payments for interest were $56,883 in 1996, $104,747 in 1997 and
$209,013 in 1998. Cash payments for income taxes were $38,193 in 1996, $24,971
in 1997 and $15,809 in 1998.
(17) 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 9). 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.
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(17) EXTRAORDINARY ITEMS -- (Continued)
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 9). 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.
(18) 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 $15,524 and $28,477 at December 31,
1997 and 1998, respectively. Also, the Company has purchase option deposits of
$78,149 and $71,415 on 89 and 86 leased and managed facilities of which $33,393
and $37,411 is refundable at December 31, 1997 and 1998, 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.
(19) RELATED PARTY TRANSACTIONS
In January 1999, IHS sold 32 long-term care facilities to Monarch
Properties, LP ("Monarch LP"), a newly formed private company. Dr. Robert N.
Elkins, chairman of the board, chief executive officer and president of the
Company, beneficially owns 30% of Monarch LP and is the Chairman of Managers of
Monarch Properties, LLP, the parent company of Monarch LP. The Company expects
to record an immaterial gain on this transaction. (See note 25)
In 1998, IHS began to manage ten facilities leased from a real estate
investment trust by Lyric, an entity equally owned by IHS and an entity
controlled by Timothy Nicholson, a director of the Company. Five facilities were
sold to the real estate investment trust by IHS in each of January and March
1998.
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. During 1998, Mr. Cirka repurchased the residence from the Company. No
gain or loss resulted from this transaction.
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(19) RELATED PARTY TRANSACTIONS -- (Continued)
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 1996, 1997 and 1998, the Company loaned Dr. Robert N. Elkins, IHS'
chairman, chief executive officer and president, approximately $4,700, $13,500
and $8,750, respectively. Dr. Elkins used the cash proceeds from the 1996 and
1998 loans to purchase stock and to pay taxes associated with option exercises.
Dr. Elkins used the cash proceeds from the 1997 loan to exercise options to
purchase 650,000 shares of Common Stock. 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. Such loans aggregated
approximately $4,070 and $1,550 in 1997 and 1998, respectively.
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' 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, Integrated Living
Communities, Inc. ("ILC"), the Company's assisted living subsidiary (see note
20); ILC repaid the loan 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. 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. Robert N. Elkins,
chairman of the board, chief executive officer and president of the Company, was
a director of Speciality Care PLC, and Timothy Nicholson, a director of the
Company, was chairman and managing director of Speciality Care PLC. In
connection with the sale and as discussed in note 4, shareholders of Speciality
Care PLC received outstanding ordinary shares of Craegmoor. IHS now owns less
than 10% of the outstanding ordinary shares of Craegmoor. The Company's
investment in Craegmoor at December 31, 1998 was $6,716 (See note 4). The
Company's equity in Speciality Care PLC was $6,059 at December 31, 1997 (see
note 4).
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(20) NON-RECURRING CHARGES
<TABLE>
<CAPTION>
1996 1997
------------ -----------
<S> <C> <C>
Loss from nursing facilities management contract terminations ........... 7,825 3,700
Gain on sale of pharmacy division ....................................... (34,298) (7,580)
Loss (gain) on sale of Integrated Living Communities, Inc. (ILC) ........ 8,497 (3,914)
Loss on closure of redundant rehabilitation operations .................. -- 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
------- ------
$ (17,976) $123,456
========= ========
</TABLE>
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 14). 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 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 changes to the reimbursement environment
within the state of Washington, the 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 in 1996. 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
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(20) NON-RECURRING CHARGES -- (Continued)
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.
In the fourth quarter of 1997, IHS recorded a $3,700 charge to exit eleven
California nursing facilities under management. The components of this charge
were to write-off the following assets: a $602 management fee receivable, a
$2,250 purchase option deposit, a $550 cash advance for capital improvements and
other working capital requirements of the owner, and $298 in deferred
acquisition costs.
In the fourth quarter of 1997, the Company incurred other costs of $12,604,
which included: (i) $1,300 in termination and severance costs associated with
the sale of outpatient and physician practices, (ii) $1,100 in lease termination
costs associated with the sale of outpatient and physician practices, (iii)
$3,800 in investments and loans related to other start-up joint ventures, (iv)
$3,500 in obsolete information systems for acquisitions completed prior to 1997,
(v) $975 prior owner litigation settlements subsequent to one year after the
acquisition date, (vi) $970 in lease termination costs associated with the
closing of six mobile diagnostic locations in non-strategic markets, and (vii)
$959 in other miscellaneous charges.
(21) 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 was 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.
(22) 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."
99
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(22) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES -- (Continued)
The Company and others in the healthcare 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 which have been drastically
cut in recent years;
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 located under Medicaid. Revenue derived
from Medicare and various state Medicaid reimbursement programs represented
21.0% and 25.0%, respectively, of the Company's total revenue for the year ended
December 31, 1998. The Company's operations are subject to a variety of Federal,
state and local legal and regulatory risks, including without limitation the
federal Anti-Kickback statute and the federal Ethics in Patient Referral Act
(so-called "Stark Law"), many of which apply to virtually all companies engaged
in the health care services industry. The Anti-Kickback statute 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
Stark Law prohibits, with limited exceptions, financial relationships between
ancillary service providers and referring physicians. Other regulatory risks
assumed by the Company and other companies engaged in the health care industry
are as follows:
o False Claims -- "Operation Restore Trust" is a major anti-fraud
demonstration project of the Office of the Inspector General. The primary
purpose for the project is to scrutinize the activities of healthcare
providers which are reimbursed under the Medicare and Medicaid programs.
False claims are prohibited pursuant to criminal and civil statutes and
are punishable by imprisonment and monetary penalties.
o Regulatory Requirement Deficiencies -- In the ordinary course of business
health care facilities receive notices of deficiencies for failure to
comply with various regulatory requirements. In some cases, the reviewing
agency may take adverse actions against a facility, including the
imposition of fines, temporary suspension of admission of new patients,
suspension or decertification from participation in the Medicare and
Medicaid programs and, in extreme cases, revocation of a facility's
license.
o Changes in laws and regulations -- Changes in laws and regulations could
have a material adverse effect on licensure, eligibility for participation
in government programs, permissable activities, operating costs and the
levels of reimbursement from governmental and other sources.
In response to the aforementioned regulatory risks, the Company formed a
Corporate Compliance Department in 1996 to help identify, prevent and deter
instances of Medicare and Medicaid noncompliance. Although the Company strives
to manage these regulatory risks, there can be no assurance that federal and/or
state regulatory agencies that currently have jurisdiction over matters
including, without limitation, Medicare, Medicaid and other government
reimbursement programs, will take the position that the Company's business and
operations are in compliance with applicable law or with the standards of such
regulatory agencies.
In some cases, violation of such applicable law or regulatory standards by
the Company can carry significant civil and criminal penalties and can give rise
to qui tam litigation. In this connection, the Company is a defendant in certain
actions or the subject of investigations concerning alleged violations
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(22) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES -- (Continued)
of the False Claims Act or of Medicare regulations. Such cases are in
preliminary stages and the Company intends to vigorously defend them. The
Company believes the resolution of these matters will have no material adverse
effect on the Company's financial position or results of operations.
The Balanced Budget Act of 1997 (BBA), enacted in August 1997, made
numerous changes to the Medicare and Medicaid programs that are significantly
affecting the Company. With respect to Medicare, the BBA provides, among other
things, for a prospective payment system for skilled nursing facilities and
reductions in reimbursement for oxygen and oxygen equipment for home respiratory
therapy. As a result, in 1999 the Company will bear the cost risk of providing
care inasmuch as it receives specified reimbursement for each treatment
regardless of actual cost. 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 and the Company believes many states are moving toward a prospective
payment type system for skilled nursing facilities.
The BBA mandates the establishment of a prospective payment system ("PPS")
for Medicare skilled nursing facility services, under which facilities will be
paid a fixed fee for virtually all covered services. PPS will be phased in over
a four-year period, effective January 1, 1999 for IHS' owned and leased skilled
nursing facilities other than the facilities acquired in the HEALTHSOUTH
acquisition, which will become subject to PPS on June 1, 1999. Prospective
payment for facilities managed by IHS will be effective for each facility at the
beginning of its first cost reporting period on or after July 1, 1998. During
the first three years, payments will be based on a blend of the facility's
historical costs and federal costs. Thereafter, the per diem rates will be based
100% on federal costs. Under PPS, each patient's clinical status is evaluated
and placed into a payment category. The patient's payment category dictates the
amount that the provider will receive to care for the patient on a daily basis.
The per diem rate will cover (i) all routine inpatient costs currently paid
under Medicare Part A, (ii) certain ancillary and other items and services
currently covered separately under Medicare Part B on a "pass-through" basis,
and (iii) certain capital costs. The Company's ability to offer the ancillary
services required by higher acuity patients, such as those in its subacute care
programs, in a cost-effective manner will be critical to the Company's success
and will affect the profitability of the Company's Medicare patients. There can
be no assurance that PPS will not have a material adverse impact on IHS' results
of operations or financial condition.
The Company is also 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 certain inherent risks related to the
acquisition of businesses. 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.
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.
(23) 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
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INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(23) SEGMENT REPORTING -- (Continued)
establishes standards for the way public business enterprises are to report
information about operating segments in annual and interm financial statements
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers.
After giving effect to the discontinuance of its home health nursing
segment, IHS has four primary reportable segments: Inpatient Services, Home
Respiratory/Infusion/DME, Diagnostic Services and Lithotripsy Services.
Inpatient services include: (A) inpatient facilities which provide basic medical
services primarily on an inpatient basis at skilled nursing facilities, as well
as hospice services, (B) contract services which provides specialty medical
services (e.g., rehabilitation and respiratory services), primarily on an
inpatient basis at skilled nursing facilities, (C) contracted services which
provides specialty medical services under contract to other healthcare
providers, and (D) management of skilled nursing facilities owned by third
parties. Home respiratory/Infusion/DME provides respiratory and infusion
therapy, as well as the sale and/or rental of home medical equipment. Diagnostic
Services provide mobile x-ray and electrocardiogram services on an inpatient
basis at skilled nursing facilities. Lithotripsy Services is a non-invasive
technique that uses shock waves to disintegrate kidney stones primarily on an
outpatient basis. Certain services with similar economic characteristics have
been aggregated pursuant to SFAS No. 131. No other individual business segment
exceeds the 10% quantitative thresholds of SFAS No. 131.
IHS management evaluates the performance of its operating segments on the
basis of earnings before interest, income taxes, depreciation and amortization
and non-recurring charges.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------------------------
HOME RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY
IMPATIENT SERVICES INFUSION/DME SERVICES SERVICES CONSOLIDATED
-------------------- ------------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues ................................ $1,160,095 $ 116,013 $112,441 $ 14,079 $1,402,628
Operating, general and administrative
expenses (including rent) .............. 914,317 76,350 94,992 6,813 1,092,472
---------- ---------- -------- -------- ----------
Earnings from continuing operations before
non-recurring charges, equity in
earnings of affiliates, interest, taxes,
depreciation and amortization .......... $ 245,778 $ 39,663 $ 17,449 $ 7,266 $ 310,156
========== ========== ======== ======== ==========
Total assets ............................ $3,256,836 $1,389,554 $172,382 $183,380 $5,002,152
========== ========== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------------
HOME RESPIRATORY/ DIAGNOSTIC LITHOTRIPSY
INPATIENT SERVICES INFUSION/DME SERVICES SERVICES CONSOLIDATED
-------------------- ------------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues ................................ $2,174,592 $ 624,325 $117,248 $ 56,021 $2,972,186
Operating, general and administrative
expenses (including rent) .............. 1,760,603 462,950 91,477 30,154 2,345,184
---------- ---------- -------- -------- ----------
Earnings from continuing operations before
non-recurring charges, equity in
earnings of affiliates, interest, taxes,
depreciation and amortization .......... $ 413,989 $ 161,375 $ 25,771 $ 25,867 $ 627,002
========== ========== ======== ======== ==========
Total assets ............................ $3,330,250 $1,638,545 $215,658 $208,675 $5,393,128
========== ========== ======== ======== ==========
</TABLE>
There are no material inter-segment revenues or receivables. Revenues
derived from Medicare and various state Medicaid reimbursement programs
represented 24% and 22%, respectively, for the year ended December 31, 1997 and
21% and 25%, respectively, for the year ended December 31, 1998. The Company
does not evaluate its operations on a geographic basis.
102
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(24) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of foreign
currency exposures. This Statement is effective for all fiscal quarters of 2000.
The adoption of this statement is not expected to have a material impact on the
Company's financial statements.
In March 1998 the Accounting Standards Executive Committee ("ASEC") of the
American Institute of Certified Public Accountants issued Statement of Position
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use ("SOP 98-1"). SOP 98-1 provides guidance as to whether certain
costs for internal use software should be capitalized or expensed when incurred.
In addition, in June 1998 the ASEC issued Statement of Position 98-5, Reporting
on the Costs of Start-up Activities ("SOP 98-5"). SOP 98-5 provides guidance on
the financial reporting of start-up costs. It requires costs of start-up
activities to be expensed as incurred. SOP 98-1 and 98-5 are effective in 1999.
The Company does not expect the adoption of SOP 98-1 and 98-5 to have a material
impact on the financial statements.
(25) SUBSEQUENT EVENTS
Effective January 1, 1999, the Company and various wholly owned
subsidiaries of the Company (the "Lyric Subsidiaries") sold 32 long-term care
facilities to Monarch LP, for approximately $132 million in net cash proceeds
plus contingent earn-out payments of up to a maximum of $67.6 million. The
contingent earn-out payments will be paid to the Company by Monarch LP upon a
sale, transfer or refinancing of any or all of the facilities or upon a sale,
consolidation or merger of Monarch LP, with the amount of the earn-out payments
determined in accordance with a formula described in the Facilities Purchase
Agreement among the Company, the Lyric Subsidiaries and Monarch LP. After the
sale of the facilities to Monarch LP, the Company transferred the stock of each
of the Lyric Subsidiaries to Lyric. Monarch LP then leased all of the facilities
back to the Lyric Subsidiaries under the long-term master lease. The Company is
managing these facilities for Lyric. The Company expects to record an immaterial
gain on this transaction.
In January 1999, the Company acquired Suncoast of Manatee, Inc, a skilled
nursing facility in Florida. The total purchase price was approximately $11,920.
Also, in January 1999, the Company acquired seven respiratory companies. The
total purchase price was approximately $8,206.
The Company has reached definitive agreements to purchase nine respiratory
companies for approximately $35,536, as well as definitive agreements to enter
into two separate leases of 28 skilled nursing facilities. There can be no
assurance that any of these pending acquisitions will be consummated on the
proposed terms, different terms or at all.
During March 1999, the Company repurchased 3,607,000 shares of its Common
Stock at an aggregate price of approximately $24,041.
In March 1999, the Company sold three facilities to Monarch L.P for $33
million, which purchase price was paid by a 10% Note due March 2000. Monarch LP
leased the facilities to Lyric. The Company is managing these facilities for
Lyric pursuant to the agreements described in note 4 above.
103
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(25) SUBSEQUENT EVENTS -- (Continued)
In March 1999, the Company amended the New Credit Facility, which
amendments loosened the financial covenants, increased interest rates and
accelerated the reduction in the availability under the New Credit Facility. As
amended:
o 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) between
two and three quarters percent and three and one quarter 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 borrowings 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 one and one half
percent and two percent (depending on the Debt/EBITDAR Ratio).
o 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) between three percent and three 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 between one and three quarters percent and two and one
quarter percent (depending on the Debt/EBITDAR Ratio). The Term
Facility and the Additional Term Facility can be prepaid at any time in
whole or in part without penalty.
o The Revolving Facility will reduce to $800,000 on January 1, 2001,
$600,000 on January 1, 2002, $500,000 on September 30, 2002 and
$400,000 on January 1, 2003, with a final maturity on September 15,
2003; 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 Credit 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 two percent and two
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 three
quarters of one percent and one an one-half percent (depending on the
Debt/EBITDAR Ratio).
o The New Credit Facility prohibits IHS from purchasing or redeeming IHS
stock.
104
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
-------------- -------------- -------------
<S> <C> <C> <C>
Allowance for doubtful accounts:
Balance at beginning of period .............................. $ 14,731 $ 31,439 $ 148,957
Provisions for bad debts .................................... 26,510 38,509 53,123
Acquired companies .......................................... 5,128 105,198 39,304
Accounts receivable written-off (net of recoveries) ......... (14,930) (26,189) (76,124)
--------- --------- ---------
$ 31,439 $ 148,957 $ 165,260
========= ========= =========
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable
105
<PAGE>
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 sections 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.
106
<PAGE>
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, 10.43, 10.44,
10.45, 10.46, 10.47, 10.48, 10.49, 10.50, 10.51, 10.52, 10.53, 10.74, 10.76
10.80, 10.81, 10.82. 10.83. 10.84, 10.85, 10.86 and 10.87 are management
contracts, compensatory plans or arrangements):
2.1 -- Agreement and Plan of Merger, dated as of July 6, 1997, among
Integrated Health Services, 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)
2.4 -- Facilities Purchase Agreement, dated as of December 31, 1998, among
Monarch Properties, LP, Integrated Health Services, Inc. and the
entities listed on Schedule A thereto.
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. (7)
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 Subordinated Debentures. (8)
4.2 -- Form of 6% Debenture (included in 4.1). (8)
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.
(9)
4.4 -- Form of 5 3/4% Debenture (included in 4.3) (9)
4.5 -- Registration Rights Agreement, dated as of December 17, 1993,
between Integrated Health Ser- vices, Inc. and Smith Barney Shearson
Inc. relating to the Company's 5 3/4% Convertible Senior Subordinated
Debentures due 2001. (9)
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 Virginia N.A. (10)
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. (11)
4.8 -- Form of Note (included in 4.7). (11)
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. (11)
4.10 -- Form of 9 5/8% Senior Subordinated Notes (included in 4.9). (11)
4.11 -- Indenture, dated as of May 15, 1996 between the Company and Signet
Trust Company, as Trustee. (12)
4.12 -- Form of 10 1/4% Senior Subordinated Notes (included in 4.11). (12)
107
<PAGE>
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.
(11)
4.14 -- Form of 9 1/2% Senior Subordinated Note (included in 4.13). (11)
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.
(13)
4.16 -- Form of 9 1/4% Senior Subordinated Note (included in 4.15). (13)
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. (14)
4.18 -- Form of 5 1/4% Convertible Subordinated Debentures (included in
4.17). (14)
10.1 -- Letter dated March 28, 1991 from Integrated Health Services of
Brentwood, Inc., Integrated 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. (15)
10.2 -- Loan and Security Agreement dated as of May 1, 1990 by and between
Sovran Bank/Central South and Integrated of Amarillo, Inc. (15)
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. (15)
10.4 -- Construction Loan Agreement dated November, 1990 by and between
First National Bank of Vicksburg and River City Limited Partnership.
(15)
10.5 -- Guaranty and Suretyship Agreement, dated as of January 1, 1992,
between Integrated Health Services, Inc. and Nationsbank of Tennessee.
(15)
10.6 -- Deed of Trust Note from Integrated Health Services at Alexandria,
Inc. to Oakwood Living Centers of Virginia, Inc., dated June 4, 1993.
(16)
10.7 -- Loan Agreement dated as of December 30, 1993, by and among
Integrated Health Services at Colorado Springs, Inc. as Borrower,
Integrated Health Services, Inc., as Guarantor, and Bell Atlantic
Tricon Leasing Corp. (9)
10.8 -- Promissory Note, dated December 30, 1993 made by Integrated Health
Services at Colorado Springs, Inc. in favor of Bell Atlantic Tricon
Leasing Corp. (9)
10.9 -- Guaranty Agreement, dated as of December 30, 1993, made by
Integrated Health Services, Inc. in favor of Bell Atlantic Tricon
Leasing Corp. (9)
10.10 -- Intentionally Omitted
10.11 -- Intentionally Omitted
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. (8)
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. (9)
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. (18)
10.15 -- Guaranty Agreement, dated December 20, 1993, by Integrated Health
Services, Inc. in favor of Southtrust Bank of Alabama, National
Association. (18)
10.16 -- Assignment and Pledge of Deposit Account, dated December 20, 1993,
from Integrated Health Ser- vices at Central Florida, Inc. in favor of
Southtrust Bank of Alabama, National Association. (18)
10.17 -- Intentionally Omitted
10.18 -- Intentionally Omitted
108
<PAGE>
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. (8)
10.20 -- Letter dated February 18, 1994, to IFIDA Health Care Group, Ltd.
from Integrated Health Services, Inc. (18)
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. (19)
10.22 -- First Amendment to Facilities Agreement, dated as of September 30,
1997, among Litchfield Invest- ment Company, L.L.C., Integrated Health
Services of Lester, Inc. and Integrated Health Services, Inc. (7)
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. (19)
10.24 -- Guaranty dated as of August 31, 1994 by Integrated Health Services,
Inc. for the benefit of Litchfield Asset Management Corp. (19)
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. (19)
10.26 -- Participation Agreement dated as of August 31, 1994 between
Litchfield Asset Management Corp. and Integrated Health Services of
Lester, Inc. (19)
10.27 -- Form of Indemnity Agreement. (15)
10.28 -- Integrated Health Services, Inc. Equity Incentive Plan, as amended.
(20)
10.29 -- Integrated Health Services, Inc. 1990 Employee Stock Option Plan, as
amended. (20)
10.30 -- Integrated Health Services, Inc. 1992 Stock Option Plan (20)
10.31 -- Integrated Health Services, Inc. Employee Stock Purchase Plan (20)
10.32 -- Senior Executives' Stock Option Plan. (21)
10.33 -- Cash Bonus Replacement Plan (22)
10.34 -- Integrated Health Services, Inc. Stock Option Plan for New
Non-Employee Directors, as amended. (23)
10.35 -- Integrated Health Services, Inc. Stock Option Compensation Plan for
Non-Employee Directors, as amended. (23)
10.36 -- Integrated Health Services, Inc. 1995 Stock Option Plan for
Non-Employee Directors. (23)
10.37 -- Stock Option Agreement, dated as of November 27, 1995, by and
between Integrated Health Ser- vices, Inc. and John Silverman. (23)
10.38 -- Integrated Health Services, Inc. 1994 Stock Incentive Plan, as
amended. (23)
10.39 -- 1996 Stock Incentive Plan of Integrated Health Services, Inc., as
amended. (7)
10.40 -- 1998 Stock Compensation Plan. (7)
10.41 -- Integrated Health Services, Inc. Amended and Restated Key Employee
Supplemental Executive Retirement Plan ("Plan A"). (7)
10.42 -- Intentionally Omitted
10.43 -- Integrated Health Services, Inc. Supplemental Deferred Compensation
Plan ("Plan Z") (24)
10.44 -- Employment Agreement dated January 1, 1994 between Integrated Health
Services, Inc. and Robert N. Elkins. (25)
10.45 -- Amendment No. 1 to Employment Agreement dated as of January 1, 1995
between Integrated Health Services, Inc. and Robert N. Elkins. (25)
10.46 -- Amendment No. 2 to Employment Agreement, effective as of November
18, 1997, between Inte- grated Health Services, Inc. and Robert N.
Elkins. (7)
10.47 -- Supplemental Agreement, effective as of November 18, 1997, by and
between Integrated Health Services, Inc. and Robert N. Elkins. (7)
109
<PAGE>
10.48 -- Promissory Note, dated September 29, 1997, made by Robert N. Elkins
in favor of Integrated Health Services, Inc. (7)
10.49 -- Employment Agreement dated as of January 1, 1994 between Integrated
Health Services, Inc. and Lawrence P. Cirka. (25)
10.50 -- Amendment to Employment Agreement dated as of January 1, 1995
between Integrated Health Services, Inc. and Lawrence P. Cirka. (25)
10.51 -- Relocation Agreement, dated as of August 5, 1997, between Integrated
Health Services, Inc. and Lawrence P. Cirka. (7)
10.52 -- Employment Agreement dated as of October 1, 1996 between Integrated
Health Services, Inc. and C. Christian Winkle.(26)
10.53 -- Employment Agreement, dated as of October 21, 1997, between RoTech
Medical Corporation and Stephen Griggs. (7)
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. (27)
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. (27)
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. (27)
10.57 -- Revolving Credit and Security Agreement dated January 20, 1993,
between Integrated Health Ser- vices of Missouri, Inc. and Cenill, Inc.
(27)
10.58 -- Guaranty dated July 1, 1992 made by Integrated Health Services, Inc.
(27)
10.59 -- Guaranty dated September 15, 1992 made by Integrated Health
Services, Inc. (27)
10.60 -- Aircraft Lease Agreement between RNE Skyview LLC and Integrated
Health Services, Inc., dated as of December 12, 1997. (7)
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. (16)
10.62 -- Assignment dated June 1, 1993 among Integrated Health Services,
Inc., Rouse-Teachers Proper- ties, Inc., Rouse Office Management, Inc.
and Square D Company. (16)
10.63 -- Investment Agreement for Speciality Care PLC dated July 26, 1995.
(24)
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. (28)
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. (29)
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.(17)
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. (7)
10.68 -- Amended and Restated Master Franchise Agreement, dated as of
December 31, 1998, between Integrated Health Services Franchising Co.,
Inc. and Lyric Health Care LLC.
10.69 -- Amended and Restated Master Management Agreement, dated as of
December 31, 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.
(7)
10.71 -- Master Lease, dated as of January 13, 1998, between Omega Healthcare
Investors, Inc. and Lyric Health Care Holdings, Inc. (7)
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. (7)
10.73 -- Employment Agreement, effective as of February 1, 1998, by and
between Lyric Health Care LLC and Timothy F. Nicholson. (7)
110
<PAGE>
10.74 -- Warrant to purchase shares issued to Shephen Griggs. (7)
10.75 -- Share Acquisition Agreement relating to Speciality Care Limited. (7)
10.76 -- Employment Agreement dated as of June 1, 1994 between Integrated
Health Services, Inc. and Anthony Masso. (26)
10.77 -- Master Lease, dated as of December 31, 1998, between Monarch
Properties, LP and Lyric Health Care Holdings, III, Inc.
10.78 -- Indemnity Agreement, dated as of December 31, 1998, between
Integrated Health Services, Inc. and Monarch Properties, LP
(Environmental)
10.79 -- Indemnity Agreement, dated as of December 31, 1998, among Integrated
Health Services, Inc., Lyric Health Care LLC, Lyric Health Care
Holdings III, Inc. and the entities listed on the attached Exhibit A
(Litigation)
10.80 -- Integrated Health Services, Inc. Supplemental Executive Retirement
Plan ("Plan B")
10.81 -- Integrated Health Services, Inc., Deferred Compensation Plan for
Senior Vice Presidents and Highly Compensated Employees (30)
10.82 -- Employment Agreement, dated as of July 1, 1997 between Integrated
Health Services, Inc. and C. Taylor Pickett.
10.83 -- Employment Agreement, dated as of July , 1998, between Integrated
Health Services, Inc. and John F. Heller.
10.84 -- Integrated Health Services, Inc. Non-Employee Director Stock Unit
and Deferred Compensation Plan.
10.85 -- Employment Agreement, dated as of July 1, 1998, between Integrated
Health Services, Inc. and Sally Weisberg.
10.86 -- Amendment No. 1 to Amended and Restated Integrated Health Services,
Inc. Key Employee Supplemental Executive Retirement Plan ("Plan A").
10.87 -- Amendment No. 1 to Supplemental Agreement, effective November 18,
1997, by and between Integrated Health Services, Inc. and Robert N.
Elkins.
21 -- Subsidiaries of Registrant.
23.1 -- Consent of KPMG LLP.
27.1 -- Financial Data Schedule -- Year Ended December 31, 1998
27.2 -- Restated Financial Data Schedule -- Year Ended December 31, 1997
27.3 -- Restated Financial Data Schedule -- Year Ended December 31, 1996
- ----------
(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) Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
(8) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-54458, effective December 9, 1992.
(9) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-76322, effective June 29, 1994.
(10) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-81378, effective September 21, 1994.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1997.
(12) Incorporated by reference to the Company's Quarterly Report on From 10-Q
for the period ended June 30, 1994.
(13) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997.
(14) Incorporated by reference to RoTech Medical Corporation's Registration
Statement on Form S-3, No. 333-10915, effective September 10, 1996.
(15) Incorporated by reference to the Company's Registration Statement on Form
S-1, No. 33-39339, effective April 25, 1991.
111
<PAGE>
(16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1993.
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1997.
(18) Incorporated by reference the Company's Annual Report on Form 10-K for
the year ended December 31, 1993.
(19) Incorporated by reference to the Company's Current Report on Form 8-K
dated August 31, 1994.
(20) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1992.
(21) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1994.
(22) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1995.
(23) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1996.
(24) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(25) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1996.
(26) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(27) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
(28) Incorporated by reference from the Company's Current Report on 8-K dated
September 15, as amended.
(29) Incorporated by reference to the Company's Current Report on Form 8-K,
dated December 31, 1993.
(30) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1998.
(b) Reports on Form 8-K
None
(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.
112
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(c) 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
------------------------------------
Robert N. Elkins
Chairman of the Board, President
and Chief Financial Officer
March 31, 1999
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------- ---------------------------------- --------------
<S> <C> <C>
/s/ Robert N. Elkins Chairman of the Board, President March 31, 1999
- --------------------------- and Chief Executive Officer
Robert N. Elkins (Principal Executive Officer)
/s/ Edwin M. Crawford Director March 31, 1999
- ---------------------------
Edwin M. Crawford
/s/ Kenneth M. Mazik Director March 31, 1999
- ---------------------------
Kenneth M. Mazik
/s/ Robert A. Mitchell Director March 31, 1999
- ---------------------------
Robert A. Mitchell
/s/ Charles W. Newhall III Director March 31, 1999
- ---------------------------
Charles W. Newhall III
/s/ Timothy F. Nicholson Director March 31, 1999
- ---------------------------
Timothy F. Nicholson
/s/ John L. Silverman Director March 31, 1999
- ---------------------------
John L. Silverman
/s/ George H. Strong Director March 31, 1999
- ---------------------------
George H. Strong
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------- --------------------------------- --------------
<S> <C> <C>
/s/ C. Taylor Pickett Executive Vice President--Chief March 31, 1999
- --------------------------- Financial Officer (Principal
C. Taylor Pickett Financial Officer)
/s/ W. Bradley Bennett Executive Vice President--Chief March 31, 1999
- --------------------------- Accounting Officer (Principal
W. Bradley Bennett Accounting Officer)
</TABLE>
EXHIBIT 2.4
FACILITIES PURCHASE AGREEMENT
AMONG
MONARCH PROPERTIES, LP,
INTEGRATED HEALTH SERVICES, INC.
AND
THE ENTITIES LISTED ON ATTACHED EXHIBIT A
DATED AS OF DECEMBER 31, 1998
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
ARTICLE I DEFINITIONS......................................................2
1.1 Agreement........................................................2
1.2 Bills of Sale....................................................2
1.3 Closing..........................................................2
1.4 Closing Date.....................................................2
1.5 Consent and Subordination Agreement. ...........................2
1.6 Contracts........................................................2
1.7 Deeds............................................................3
1.8 Deferred Maintenance Adjustment..................................3
1.9 Effective Date...................................................3
1.10 Environmental Laws...............................................3
1.11 Environmental Remediation........................................3
1.12 Escrow Agent.....................................................3
1.13 Escrow Agreement.................................................3
1.14 Facilities.......................................................4
1.15 Facility Franchise Agreement.....................................4
1.16 Facility Management Agreement....................................4
1.17 Facility Sublease................................................4
1.18 Final Financial Statements; Final Balance Sheet..................4
1.19 Financial Statements of the Facilities...........................4
1.20 Franchisor.......................................................4
1.21 Guaranty.........................................................4
1.22 IHS..............................................................5
1.23 IHS Indemnity....................................................5
1.24 Improvements.....................................................5
1.25 Intangible Property..............................................5
1.26 Knowledge........................................................5
1.27 Law..............................................................5
1.28 Loan Facility....................................................5
1.29 MAI Appraisal....................................................5
1.30 Manager..........................................................5
1.31 Master Franchise Agreement.......................................6
1.32 Master Lease.....................................................6
1.33 Master Management Agreement......................................6
1.34 Monarch..........................................................6
1.35 Permits..........................................................6
1.36 Permitted Liens..................................................6
1.37 Personal Property................................................6
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
1.38 Pledge Agreements................................................6
1.39 Purchase Price...................................................7
1.40 Real Property....................................................7
1.41 Release..........................................................7
1.42 Security Agreement...............................................7
1.43 Sellers' Liabilities.............................................7
1.44 Sellers' Assets..................................................7
1.45 Seller Licenses..................................................7
1.46 Survey...........................................................7
1.47 Title Commitment.................................................8
1.48 Title Company....................................................8
1.49 Title Insurance Policy...........................................8
1.50 Transaction Documents............................................8
1.51 UCC Search Report................................................8
ARTICLE II PURCHASE AND SALE................................................8
2.1 Agreement to Sell and Buy........................................8
2.2 No Assumption of Liabilities.....................................9
2.3 "As Is" Purchase.................................................9
ARTICLE III PURCHASE PRICE...................................................9
3.1 Payment of Purchase Price........................................9
3.2 Earn-out Payments .........................................9
ARTICLE IV CLOSING.........................................................14
ARTICLE V TRANSACTION COSTS AND EXPENSES..................................15
5.1 Transfer Taxes; Sales Taxes.....................................15
5.2 MAI Appraisals..................................................15
5.3 Title Insurance.................................................15
5.4 Surveys/UCC Search Reports......................................15
5.5 Environmental Reports/Remediation...............................15
5.6 Attorneys' Fees.................................................15
5.7 Recording Costs.................................................15
5.8 Releases........................................................15
5.9 Deferred Maintenance Adjustment.................................15
5.10 Fee; Commitment Fee.............................................16
5.11 Other Items.....................................................16
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
ARTICLE VI POSSESSION......................................................16
ARTICLE VII REPRESENTATIONS AND WARRANTIES OF SELLERS.......................16
7.1 Corporate Organization; Good Standing; Corporate Information....16
7.2 Authorization; Enforceability...................................17
7.3 No Violation or Conflict........................................17
7.4 Assets..........................................................17
7.5 No Litigation...................................................18
7.6 Personal Property and Improvements..............................18
7.7 Real Property and Improvements..................................18
7.8 Zoning..........................................................18
7.9 Leases..........................................................19
7.10 Liabilities.....................................................19
7.11 Taxes...........................................................19
7.12 Contracts.......................................................19
7.13 Contracts and Leases............................................19
7.14 Financial Statements of the Facilities..........................19
7.15 No Adverse Change...............................................19
7.16 Employment Agreements and Benefits..............................20
7.17 Insurance.......................................................20
7.18 Compliance with the Law.........................................20
7.19 Transactions with Affiliates....................................21
7.20 Obligations.....................................................21
7.21 No Broker.......................................................22
7.22 Environmental Compliance........................................22
7.23 No Attachments..................................................22
7.24 No Options......................................................23
7.25 Seller Licenses.................................................23
7.26 Disclosure......................................................23
ARTICLE VIII REPRESENTATIONS AND WARRANTIES OF IHS...........................23
8.1 Status of IHS...................................................23
8.2 Validity or Conflicts...........................................23
8.3 Authority.......................................................24
8.4 Truth of Representations........................................24
ARTICLE IX REPRESENTATIONS AND WARRANTIES OF PURCHASER.....................24
9.1 Organization....................................................24
9.2 Authorization; Enforceability...................................24
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
9.3 No Violation or Conflict........................................24
9.4 No Broker.......................................................24
ARTICLE X CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
PURCHASER.......................................................25
10.1 Compliance with this Agreement..................................25
10.2 Proceedings and Instruments Satisfactory........................25
10.3 No Litigation...................................................26
10.4 Representations and Warranties..................................26
10.5 Deliveries at the Closing.......................................26
10.6 Regulatory Approvals............................................27
10.7 Default.........................................................27
10.8 Approvals.......................................................28
10.9 Loan Facility...................................................28
ARTICLE XI CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLERS..............28
11.1 Compliance with this Agreement..................................28
11.2 Proceedings and Instruments Satisfactory........................28
11.3 No Litigation...................................................28
11.4 Representations and Warranties..................................28
11.5 Deliveries at the Closing.......................................29
11.6 Restraints......................................................29
11.7 Regulatory Approvals............................................29
11.8 Approvals.......................................................29
ARTICLE XII ADDITIONAL COVENANTS AND INDEMNIFICATIONS.......................29
12.1 Transfer Taxes and Fees.........................................29
12.2 Cooperation.....................................................30
12.3 Additional Instruments..........................................30
12.4 Publicity.......................................................30
12.5 Confidentiality.................................................30
ARTICLE XIII MISCELLANEOUS...................................................35
13.1 Entire Agreement; Amendment.....................................35
13.2 Governing Law...................................................35
13.3 Assignment......................................................35
13.4 Notices.........................................................35
13.5 Counterparts; Headings..........................................36
13.6 Interpretation..................................................36
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
13.7 Severability....................................................36
13.8 No Reliance.....................................................37
13.9 Binding.........................................................37
13.10 Survival........................................................37
13.11 Allocation of Purchase Price....................................37
13.12 Dispute Attorneys' Fees and Expenses............................37
<PAGE>
FACILITIES PURCHASE AGREEMENT
THIS FACILITIES PURCHASE AGREEMENT (this "Agreement"), is made and entered
into as of the 31st day of December, 1998, among Monarch Properties, LP, a
Delaware limited partnership, with principal offices at 8889 Pelican Bay
Boulevard, Naples, Florida 34108 ("Purchaser"), Integrated Health Services,
Inc., a Delaware corporation, with principal offices at 10065 Red Run Boulevard,
Owings Mills, Maryland 21117 ("IHS") and each of the entities described on
attached Exhibit A (each, a "Seller" and, collectively, "Sellers").
W I T N E S S E T H:
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 herein.
B. Sellers are corporations that are each wholly owned by IHS. 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, in consideration of the mutual promises and covenants
herein contained in this Agreement 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
<PAGE>
ARTICLE I
DEFINITIONS
When used in this Agreement, the following terms shall have the meanings
specified herein. The meanings specified in this Article and elsewhere in this
Agreement are for purposes of this Agreement only and do not purport to have any
significance for any other purpose, including, but not limited to, any
applicable reporting requirements under tax or securities laws, except as the
terms may be used by reference in other agreements between the parties to this
Agreement. Words of any gender used in this Agreement shall be held and
construed to include any other gender, and words in the singular shall be held
to include the plural and vice versa, unless this Agreement requires otherwise.
1.1 Agreement. "Agreement" shall mean this Facilities Purchase Agreement,
together with the Exhibits and Schedules attached hereto, as the same may be
amended from time to time in accordance with the terms hereof.
1.2 Bills of Sale. "Bills of Sale" shall mean, collectively, the bill of
sale to be executed by each Seller and conveying to Purchaser all of the
Personal Property for each Facility owned by such Seller.
1.3 Closing. "Closing" shall mean the closing held on the Closing Date, at
the offices of LeBoeuf, Lamb, Greene & MacRae, L.L.P., 125 West 55th Street, New
York, New York. All transactions occurring at the Closing shall be deemed to
have occurred simultaneously, and no one transaction shall be deemed to be
complete until all transactions are completed.
1.4 Closing Date. "Closing Date" shall mean December 31, 1998.
1.5 Consent and Subordination Agreement. "Consent and Subordination
Agreement" shall mean the consent and subordination agreement to be executed
among 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 and Facility Franchise Agreement are subordinated to Purchaser's
rights under the Master Lease upon an Event of Default under the Master Lease.
1.6 Contracts. "Contracts" shall mean those contracts, agreements, leases,
rights of renewal thereto and commitments with respect to each of the Facilities
or with respect to the operation of any of the Facilities (a) to which Sellers
or any of the Facilities is a party or (b) by which Sellers or any of the
Facilities is bound and that are listed on Schedule 1.6 hereto.
1.7 Deeds. "Deeds" shall mean, collectively, the general warranty deed (or
such other form of deed applicable to the state in which the Facility is
located) in recordable form, executed
2
<PAGE>
by each 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 Liens.
1.8 Deferred Maintenance Adjustment. "Deferred Maintenance Adjustment"
shall mean, with respect to each Facility, the amount set forth opposite such
Facility's name on Schedule 1.8 hereto to cover the potential costs to be
incurred after the Effective Date in making the repairs or modifications
required at such Facility and described on Schedule 1.8 hereto.
1.9 Effective Date. "Effective Date" shall mean January 1, 1999.
1.10 Environmental Laws. "Environmental Laws" shall mean all federal,
state, and local laws, statutes, ordinances, regulations, policies, rules,
directives, guidelines, Permits, licenses, criteria and rules of common law now
or hereafter in effect, and in each case as amended, and any judicial or
administrative interpretation thereof, including any judicial or administrative
order, consent decree or judgment, relating to the regulation and protection of
human health, safety, the environment and natural resources (including, without
limitation, ambient air, surface water, groundwater, wetlands, land surface or
subsurface strata, and wildlife, aquatic species and vegetation), including,
without limitation, relating to emissions, discharges, releases or threatened
releases of Hazardous Materials (as defined in Section 7.22 hereof) or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials. Environmental Laws
include, but are not limited to, the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, the Federal Insecticide, Fungicide, and
Rodenticide Act, the Resource Conservation and Recovery Act, the Toxic
Substances Control Act, the Clean Air Act, the Clean Water Act, the Occupational
Safety and Health Act, and the Safe Drinking Water Act, and as the same may be
amended, modified or supplemented, the regulations promulgated pursuant thereto,
and their state and local counterparts or equivalents.
1.11 Environmental Remediation. "Environmental Remediation" shall mean,
with respect to each Facility, the work described opposite such Facility's name
on Schedule 1.8 hereto to be performed after the Closing for the investigation
and/or remediation of the environmental conditions at such Facility described on
Schedule 1.8 hereto.
1.12 Escrow Agent. "Escrow Agent" shall mean Fidelity National Title
Insurance Company of New York.
1.13 Escrow Agreement. "Escrow Agreement" shall mean the escrow agreement
among Sellers, Lyric Holdings, Purchaser and Escrow Agent pursuant to which the
Deferred Maintenance Adjustment is to be held and disbursed.
3
<PAGE>
1.14 Facilities. "Facilities" shall mean the Real Property, Improvements
and Personal Property constituting the health care facilities described on
Exhibit B hereto. Reference to any one of the Facilities individually and not
specifically shall be referred to herein as a "Facility".
1.15 Facility Franchise Agreement. "Facility Franchise Agreement" shall
mean the facility franchise agreement, in form and substance satisfactory to
Purchaser, to be executed by each Seller and Franchisor, pursuant to which
Franchisor grants to such Seller the right to use Franchisor's names, marks,
systems and proprietary information.
1.16 Facility Management Agreement. "Facility Management Agreement" shall
mean the facility management agreement, in form and substance satisfactory to
Purchaser, to be executed by each Seller and Manager, pursuant to which Manager
agrees to manage the Facility leased by such Seller pursuant to the Facility
Sublease.
1.17 Facility Sublease. "Facility Sublease" shall mean the facility
sublease, in form and substance satisfactory to Purchaser, executed and
delivered by Lyric III and each Seller, concurrently with the Closing, pursuant
to which Lyric III subleases to each Seller, and each Seller subleases from
Lyric III, the respective Facilities.
1.18 Final Financial Statements; Final Balance Sheet. "Final Financial
Statements" shall mean the unaudited Financial Statements of the Facilities as
of December 31, 1998, including a balance sheet for each of the Facilities as of
such date, together with the related unaudited statement of income and statement
of cash flows for the period from January 1, 1998 through the Effective Date,
and the notes thereto, all of which Seller agrees to deliver to Purchaser on or
before April 15, 1999. "Final Balance Sheet" shall mean the balance sheet
included in the Final Financial Statements.
1.19 Financial Statements of the Facilities. "Financial Statements of the
Facilities" shall mean the unaudited Financial Statements for each of the
Facilities as of September 30, 1998, previously delived to Purchaser.
1.20 Franchisor. "Franchisor" shall mean Integrated Health Services
Franchising Co., Inc., a Delaware corporation, with principal offices at 10065
Red Run Boulevard, Owings Mills, Maryland 21117, which is a Subsidiary of IHS.
1.21 Guaranty. "Guaranty" shall mean the guaranty, in form and substance
satisfactory to Purchaser, executed and delivered by Lyric to Purchaser
concurrently with the execution and delivery of the Master Lease and the
Facility Subleases, pursuant to which Lyric guarantees to Purchaser the payment
and performance by Lyric III and the respective Sellers of their respective
obligations under the Master Lease and the Facility Subleases.
4
<PAGE>
1.22 IHS. "IHS" shall mean Integrated Health Services, Inc., a Delaware
corporation, with principal offices at 10065 Red Run Boulevard, Owings Mills,
Maryland 21117.
1.23 IHS Indemnity. "IHS Indemnity" shall mean the indemnity agreement, in
form and substance satisfactory to Purchaser, to be executed by IHS and
Purchaser, pursuant to which IHS agrees to indemnify Purchaser with respect to
certain environmental matters in respect of the Facilities.
1.24 Improvements. "Improvements" shall mean, collectively, the buildings
and all attached fixtures constituting the nursing home/adult care facilities
and related improvements, related rights and fixtures, constructed on each of
the Real Properties.
1.25 Intangible Property. "Intangible Property" shall mean (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 instrumentality having
jurisdiction over the respective Facilities and (b) all rights to use the names
of the Facilities set forth on Schedule 1.25 hereto, but excluding any right to
use the name "Integrated" or the name "Integrated Health Services".
1.26 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, (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.
1.27 Law. "Law" shall mean any federal, state, local or other law,
ordinance, code, or governmental agency requirement of any kind, and the rules,
regulations and orders promulgated thereunder including, without limitation, the
Environmental Laws.
1.28 Loan Facility. "Loan Facility" shall mean the loan evidenced by the
Loan Agreement, dated as of December 30, 1998, between Purchaser and GMAC
Commercial Mortgage Corporation.
1.29 MAI Appraisal. "MAI Appraisal" shall mean 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 each Facility.
1.30 Manager. "Manager" shall mean IHS Facility Management, Inc., a
Delaware corporation, with principal offices at 10065 Red Run Boulevard, Owings
Mills, Maryland 21117, which is a Subsidiary of IHS.
5
<PAGE>
1.31 Master Franchise Agreement. "Master Franchise Agreement" shall mean
the amended and restated master franchise agreement, in form and substance
satisfactory to Purchaser, 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.
1.32 Master Lease. "Master Lease" shall mean the master lease, in form and
substance satisfactory to Purchaser, executed and delivered by Purchaser and
Lyric III, concurrently with the Closing, pursuant to which Purchaser leases to
Lyric III, and Lyric III leases from Purchaser, the respective Facilities.
1.33 Master Management Agreement. "Master Management Agreement" shall mean
the amended and restated master management agreement, in form and substance
satisfactory to Purchaser, to be executed by Lyric and Manager, pursuant to
which Manager agrees to manage the Facilities.
1.34 Monarch. "Monarch" shall mean Monarch Properties, LLC, a Delaware,
limited liability company, with principal offices at 8889 Pelican Bay Boulevard,
Naples, Florida 34108.
1.35 Permits. "Permits" shall mean all permits, consents, waivers,
exemptions, orders, certificates of need, licenses and governmental and agency
authorizations, registrations and approvals with respect to each of the
Facilities, as listed on Schedule 1.35 hereto. For purposes of this definition,
the term "license" shall mean the permit to own a nursing home and to operate a
nursing home issued to any operator of a nursing home upon application to, and
approval by, the health care facilities branch, pursuant to the relevant state
nursing home licensure act, as in effect on the Effective Date.
1.36 Permitted Liens. "Permitted Liens" shall mean those liens,
encumbrances, mortgages, charges, claims, restrictions, pledges, security
interests, impositions and other matters affecting any of the Facilities, as
listed on Schedule 1.36 hereto.
1.37 Personal Property. "Personal Property" shall mean, collectively, the
vehicles, equipment, machinery, furniture, fixtures, furnishings, moveable walls
or partitions, computers or trade fixtures, office equipment, operating supplies
and other tangible real or personal property owned or leased by Sellers on the
Closing Date.
1.38 Pledge Agreements. "Pledge Agreements" shall mean, collectively, (a)
the pledge agreement, executed and delivered from Lyric Health Care LLC
("Lyric") to Monarch LP, pursuant to which Lyric pledged to Purchaser the stock
of Lyric Health Care Holdings III, Inc. ("Lyric III") and (b) the pledge
agreement, executed and delivered from Lyric III to Monarch LP, pursuant to
which Lyric III pledged to Monarch LP the stock or partnership interests of
Sellers.
1.39 Purchase Price. "Purchase Price" shall mean the sum of $184,300,000.
6
<PAGE>
1.40 Real Property. "Real Property" shall mean, collectively, all of the
land and Improvements located thereon, situated at the addresses as listed on
Exhibit B hereto, that is currently owned by Sellers.
1.41 Release. "Release" shall mean the release, deposit, disposal or
leakage of any Hazardous Material into, upon or under any land or water or air,
or otherwise into the environment, including, without limitation, by means of
burial, disposal, discharge, emission, injection, spillage, leakage, seepage,
leaching, dumping, pumping, pouring, escaping, emptying, placement and the like.
1.42 Security Agreement. "Security Agreement" shall mean the security
agreement, in form and substance satisfactory to Monarch LP, pursuant to which
Sellers and Lyric III grant to Purchaser a security interest in the Personal
Property and Intangible Property in order to secure the obligations of Lyric III
under the Master Lease and each Seller under the Facility Subleases.
1.43 Sellers' Liabilities. "Sellers' Liabilities" shall mean any and all
liabilities of Sellers or any of the Facilities, whether actual or contingent,
relating to each of the Facilities that are (a) reflected on the Financial
Statements of the Facilities or on Schedule 1.43 hereto or (b) except for
liabilities arising from operation of the Facilities on or prior to the Closing
Date, arising under the Contracts.
1.44 Sellers' Assets. "Sellers' Assets" shall mean, collectively, the
Facilities and the Intangible Property.
1.45 Seller Licenses. "Seller Licenses" shall mean, 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.
1.46 Survey. "Survey" shall mean, with respect to a Facility, a survey that
is (a) certified to Purchaser, the applicable Seller, Lyric III and the Title
Company, (b) 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 in form satisfactory to Purchaser.
1.47 Title Commitment. "Title Commitment" shall mean, 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, subject only to the
Permitted Liens, in the amount of the portion of the Purchase Price
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allocated to such Facility pursuant to Section 13.12 hereof, together with
legible copies of all recorded documents referred to therein.
1.48 Title Company. "Title Company" shall mean Fidelity National Title
Insurance Company of New York.
1.49 Title Insurance Policy. "Title Insurance Policy" shall mean, 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, subject
only to the Permitted Liens. Each Title Insurance Policy shall include the
following endorsements (unless waived by the Purchaser), 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, (f)
contiguity endorsement (if the Real Property on which the applicable Facility is
located consists of more than one parcel), and (g) such other endorsements as
Purchaser reasonably may require.
1.50 Transaction Documents. "Transaction Documents" shall mean this
Agreement, the Master Lease, the Facility Subleases, the Memorandum of Lease,
the Memoranda of Sublease, the Guaranty, the Security Agreement, the Escrow
Agreement, the IHS Indemnity, the Pledge Agreements and all other agreements
related thereto executed and delivered by the parties to this Agreement.
1.51 UCC Search Report. "UCC Search Report" shall mean 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
2.1 Agreement to Sell and Buy. On the terms and subject to the conditions
set forth in this Agreement, Sellers agree to sell to Purchaser, and Purchaser
agrees to acquire from Sellers, Sellers' Assets.
2.2 No Assumption of Liabilities. Except as specifically set forth in this
Agreement, Purchaser is not acquiring or assuming any liabilities of Sellers,
IHS, or the Facilities whatsoever, including, without limitation, those of
Sellers with respect to Sellers' Assets.
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2.3 "As Is" Purchase. Purchaser is acquiring Sellers' Assets without any
express or implied warranties other that those specifically set forth in this
Agreement.
ARTICLE III
PURCHASE PRICE
3.1 Payment of Purchase Price. A portion of the Purchase Price in an amount
as set forth on Schedule 3.1 hereto shall be payable on the Closing Date by wire
transfer in accordance with wire transfer instructions to be provided by IHS and
Sellers. The Purchase Price shall be allocated among the Facilities as set forth
in Section 13.11 hereof. 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.
3.2 Earn-out Payments.
(a) In addition to the amount of the Purchase Price payable under
Section 3.1, above, the Purchaser shall make an earn-out payment to IHS in
accordance with this Section 3.2 upon a Transfer (as defined in Section 3.2(i),
below) of any Facility.
(b) The parties have established a designated value (the "Designated
Value") for each Facility, and have listed same on Schedule 3.2 hereto. The
Designated Value established for each Facility is based upon such Facility's
allocated portion of a presupposed base resale price of $138,000,000 for all of
the Facilities in the aggregate.
(c) If at any time, or from time to time, after the Closing there is a
Transfer of any one or more of the Facilities, then Purchaser shall pay to IHS,
in the manner as provided in subsection (f) below, an earn-out fee in respect of
each Facility so Transferred, calculated as follows:
(i) if the Net Proceeds (as defined in Section 3.2(i), below) in
respect of the Transfer of such Facility are more than the Designated
Value for such Facility but not more than one hundred thirty-three and
one-third (133 1/3%) percent of the Designated Value for such
Facility, then the Purchaser shall pay an earn-out fee to IHS in an
amount equal to (x) $93,750 (the "Facility Fee"), plus (y) ninety
(90%) percent of the portion of such Net Proceeds that is in excess of
the Designated Value for such Facility; and
(ii) if the Net Proceeds in respect of the Transfer of such
Facility exceed one hundred thirty-three and one-third (133 1/3%)
percent of the Designated Value for such Facility, then the Purchaser
shall pay an earn-out fee to IHS in an amount equal to (x) the
Facility Fee, plus (y) ninety (90%) percent of
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the portion of such Net Proceeds that is more than the Designated
Value for such Facility but is not more than one hundred thirty-three
and one-third (133 1/3%) percent of the Designated Value for such
Facility, plus (z) twenty (20%) percent of the portion of such Net
Proceeds that is more than one hundred thirty-three and one-third (133
1/3%) percent of the Designated Value for such Facility.
(d) The maximum cumulative earn-out payments required to be made under
this Section 3.2 shall not exceed, in the aggregate, $67,600,000 (the "Maximum
Earn-Out Payment").
(e) If more than one Facility is Transferred in a single transaction
(or if the Transfer occurs by reason of a transaction described in Sections
3.2(i)(vi)(3) or 3.2(i)(vi)(4), or Section 3.2(j), below) then the earn-out
payment required to be made under this Section 3.2 shall be calculated on an
aggregate basis with respect to all of the Facilities Transferred in such single
transaction. In this regard, the earn-out payment required to be made upon the
closing of such transaction shall be determined by reference to the sum of the
Designated Values for all of the Facilities Transferred, and shall be calculated
based upon the aggregate Net Proceeds realized on the Transfer of all such
Facilities. A Facility Fee shall be paid with respect to each Facility
Transferred. Any Transfer pursuant to subsections (i)(vi)(3) or (i)(vi)(4),
below, shall be deemed to be a Transfer of all of the Facilities.
(f) Until the Maximum Earn-Out Payment shall have been paid, the
Purchaser shall give IHS not less than fifteen (15) days prior written notice of
the scheduled closing date of any Transfer. Such notice (a "Transfer Notice")
shall include a calculation of the earn-out fee to be paid to IHS hereunder.
Payment of the earn-out fee in respect of the Transfer of any Facility shall be
made at the closing of the transaction pursuant to which such Transfer is made,
notwithstanding that any portion of the Net Proceeds in respect of such Transfer
may be required to be paid over time in accordance with the agreements governing
such Transfer. If payment of any portion of the Net Proceeds in respect of a
Transfer is contingent upon future events or conditions, the earn-out payment
required to be made hereunder shall be calculated and paid based upon the
maximum possible contingent payment allowable under the agreements governing
such Transfer. Any payments required to be made under this Section 3.2 shall be
made in cash, by wire transfer of immediately available funds, to an account
specified by IHS in writing.
(g) In the event that any earn-out becomes payable to IHS under this
Section 3.2, and another Transfer occurs thereafter, the earn-out (if any)
becoming payable to IHS in respect to such subsequent Transfer shall be in an
amount equal to the difference between (i) the earn-out that would have been
payable pursuant to subsection (e), above, on an aggregate basis, as if such
subsequent Transfer was part of a single transaction that included all prior
Transfers, and (ii) all earn-out payments theretofore made.
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(h) Notwithstanding anything herein to the contrary, in the event
that, at the time of any Transfer of a Facility, there shall have occurred an
Event of Default as defined in the Master Lease, then, and in such event, any
earn-out becoming payable to IHS with respect to such Transfer shall be reduced
by the sum of the following:
(i) Damages, as set forth in Section 16.5 of the Master Lease;
(ii) all interest costs incurred by Purchaser in respect of any
debt financing undertaken by Purchaser in order to cure the Event of
Default under the Maser Lease; and
(iii) two (2x) times the dollar amount of any equity securities
issued by Purchaser in order to cure the Event of Default under the
Master Lease.
(i) For purposes of this Section 3.2, the following capitalized terms
have the following meanings:
(i) "Allocable Loan Amount" means, with respect to any Facility,
that portion of the original principal amount of the Loan Facility (as
defined in Section 1.28) that has been allocated to such Facility as
indicated on Schedule 3.2 hereto.
(ii) "Consideration" means the total consideration paid or
delivered upon the consummation of a Transfer, including cash, the
face value of all debt securities, the fair market value of all equity
securities, the fair market value of any other property, and the value
of long-term liabilities and short-term liabilities assumed or
guaranteed as part of the Transfer. The fair market value of any
equity securities included in the Consideration shall be determined as
follows:
(1) if the securities are traded on a national exchange, by
the average closing sales price of such securities for the thirty
(30) trading day period immediately before the date payment is
made to IHS (but if there were not reported transactions on any
trading day during such period, then the mean of the closing bid
and asked prices on such trading day shall be used), and
(2) if such securities are traded over-the-counter and
quoted through the National Association of Securities Dealers
Automated Quotation System (NASDAQ) by the mean of the closing
bid prices of such securities for the thirty (30) trading day
period immediately before the date payment is made to IHS, as
quoted in the National Quotation Bureau pink sheets;
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provided, however, that in the event that the agreements
governing such Transfer provide for a method of valuing any
securities paid or delivered as Consideration, then that basis of
valuation shall be used in computing the fair market value of
such securities. In the event that a Transfer is conducted by
means of a Long-Term Lease, "Consideration" shall mean the total
consideration (as described above) to be paid for entire term of
such Long-Term Lease (including the amount of any non-refundable
purchase option deposit), discounted to present value at a rate
of 12.521% per annum, giving effect to monthly compounding. In
the event that a Transfer is conducted by means of a mortgage,
loan or other borrowing, as described in subsection (i)(vi)(2)
above, "Consideration" shall mean the sum of the Net Proceeds of
such loan plus the then outstanding principal balance of the
Allocable Loan Amount for the Facility subject of such loan.
(iii) "Long-Term Lease" means, with respect to any Facility, a
lease of such Facility for a term of 30 years or more, or any other
lease, irrespective of stated duration, which contains an option to
purchase the subject Facility for less than the fair market value of
such Facility, determined as of the commencement date of the lease.
(iv) "Net Proceeds" means, with respect to any Transfer, the
total amount of Consideration paid or delivered in connection with
such Transfer (or deemed to have been paid or delivered pursuant to
Section 3.2(j), below), after the payment (or setting aside for
payment) of all debts and liabilities of the Facility(ies) Transferred
(including, without limitation, the portion of any obligations for
money borrowed which is allocable to such Facility(ies)), and the
costs and expenses incurred in connection with the Transfer and which
are properly allocable to such Facility(ies). However, in the case of
any Transfer of the type as described in Section 3.2(i)(vi)(3) or
Section 3.2(i)(vi)(4), "Net Proceeds" shall mean the amount as
determined pursuant to the preceding sentence, multiplied by a
fraction, the numerator of which is an amount equal to 133 1/3% of the
Designated Value for the Facilities, and the denominator of which is
an amount equal to the sum of the said numerator amount plus the total
of all purchase prices paid for all other facilities (if any) then
owned directly or indirectly by the entity which in the case of a
Transfer described in Section 3.2(i)(vi)(3), is the issuer of the
stock being issued or transferred, or in the case of a Transfer as
described in Section 3.2(i)(ii)(4), is the entity (either the
Purchaser or any Purchaser Parent) which merged or consolidated with
another entity.
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(v) "Purchaser Parent" means Monarch Properties, LLC, or any
other entity which owns directly, or indirectly through one or more
subsidiaries, at least 40% of the issued equity interests of
Purchaser.
(vi) "Transfer" means any of the following events:
(1) any sale, transfer, or Long-Term Lease (defined below)
by Purchaser of all or substantially all of the assets of any
Facility;
(2) any mortgage, loan, refinancing or other borrowing
secured by the assets of any Facility, the Net Proceeds of which,
when added to the then outstanding principal balance of the
Allocable Loan Amount for such Facility, exceed the Designated
Value for such Facility;
(3) any sale of shares of stock, share exchange or similar
transaction or event, or series of sales of shares of stock,
share exchanges or similar transactions or events, pursuant to
which the Purchaser is, or any stockholders of Purchaser are,
entitled to receive Consideration (defined below); or
(4) any consolidation or merger of Purchaser or any
Purchaser Parent with or into another entity or any merger of
another entity into Purchaser or any Purchaser Parent (in which
consolidation or merger the shareholders of Purchaser or the
Purchaser Parent receive Consideration).
(j) Notwithstanding any other provision of this Section 3.2, in the
event that Purchaser or any Purchaser Parent (the "Issuer") completes an initial
public offering of its securities pursuant to an effective registration
statement under the Securities Act of 1933, as amended (an "IPO"), the following
shall apply:
(i) such offering shall be deemed to be a Transfer of the type as
described in Section 3.2(i)(vi)(3) for which Purchaser has received
Consideration in an amount equal to the sum of (A) the offering price
per share (net of any underwriter's commissions and discounts, and net
of any underwriter's reimbursable expenses) of the securities included
in such IPO (the "IPO Price"), multiplied by the total issued and
outstanding shares of the Issuer's securities immediately after such
IPO, and (B) the IPO Price multiplied by the number of all such shares
that are issuable pursuant to any warrants, options or other rights
for the purchase of the Issuer's securities that are exercisable at
the time of the closing of the IPO for a price which is less than the
IPO price, less the exercise price in respect of such warrants,
options and other purchase rights; and
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(ii) Upon payment in full of the earn-out (if any) becoming due
in respect of the Net Proceeds deemed to be received by Purchaser in
connection with the IPO or a transaction described in Section
3.2(i)(vi)(4), no further earn-out amounts shall become payable by
Purchaser under this Agreement.
(k) If any controversy should arise between the parties hereto in
connection with the performance, interpretation or application of Section 3.2 of
this Agreement, including, but not limited to the amount of Net Proceeds
attributable to any one or more Transfers, or the fair market value of any
securities delivered as part of the Consideration in connection with any
Transfer, IHS and/or the Purchaser may serve upon the other a written notice
stating that such party desires to have the controversy reviewed by an
arbitrator. If the parties cannot agree within fifteen (15) days from the
service of such notice upon the selection of such arbitrator, an arbitrator
shall be designated by the American Arbitration Association upon written request
of either party hereto. Arbitration of any such controversy shall be conducted
in accordance with the Commercial Arbitration Rules then in force of the
American Arbitration Association and the decision and award of the arbitrator so
selected shall be binding upon IHS and the Purchaser. The arbitration will be
held in New York City. As a condition precedent to the appointment of any
arbitrator both parties shall be required to make a good faith effort to resolve
the controversy which effort shall continue for a period of thirty (30) days
prior to any demand for arbitration. The cost of any such arbitration shall be
shared equally by the parties. Each party shall pay its own costs incurred as a
result of its participation in any such arbitration.
ARTICLE IV
CLOSING
On the Closing Date, at the offices of LeBoeuf, Lamb, Greene & MacRae,
L.L.P., 125 West 55th Street, New York, New York 10019, Sellers, Purchaser, IHS,
Lyric and Lyric III shall deliver the documents pursuant to Sections 10.5 and
11.5 hereof.
ARTICLE V
TRANSACTION COSTS AND EXPENSES
The costs of the transaction and the expenses related to the ownership and
operation of the Sellers' Assets shall be paid as follows:
5.1 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.
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5.2 MAI Appraisals. Sellers shall pay the cost of the MAI Appraisals
delivered by Sellers to Purchaser.
5.3 Title Insurance. Sellers shall pay the cost of the Title Commitments
and the premium for the Title Insurance Policies (including any leasehold
policies desired by Sellers) for the respective Facilities.
5.4 Surveys/UCC Search Reports. Sellers shall pay the cost of the Surveys
and the UCC Search Reports for the respective Facilities.
5.5 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 Environmental Remediation agreed upon by
the parties and as described on Schedule 1.12 hereto. Sellers shall cause the
Phase I environmental assessments and any additional assessments or reports
provided by Sellers to be certified to the Purchaser for reliance by Purchaser
thereon.
5.6 Attorneys' Fees. Sellers shall pay its own attorneys' fees and the
reasonable and documented attorneys' fees, costs and disbursements of Purchaser
and Sellers.
5.7 Recording Costs. Sellers shall pay all recording fees relating to the
recording of the deeds.
5.8 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.
5.9 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 Fee; Commitment Fee. At the Closing, Sellers shall pay to Purchaser a
commitment fee equal to an aggregate of $1,380,000..
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 III 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, where
attributable to the period before or after the Effective Date, (b) the 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 Effective Date, (c) all utilities provided to the Facility currently
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owned by it, whether before or after the Effective Date, and (d) any amounts
that have been prepaid, or that remain to be paid, under any of the Contracts
affecting Sellers' Assets.
ARTICLE VI
POSSESSION
At the Effective Date, 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 Liens and (c) the rights of Lyric III under the Master Lease and
each Seller under the applicable Facility Sublease.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF SELLERS
Each Seller hereby represents and warrants to Purchaser that:
7.1 Corporate Organization; Good Standing; Corporate Information. Such
Seller is a corporation, duly organized, validly existing and in good standing
under the laws of the state set forth opposite its name on Exhibit B hereto, and
it has the corporate power and authority to develop, own, operate and lease the
Facility owned by it, to carry on its businesses as and in the places where such
businesses are now conducted and where such properties are now developed, owned,
leased or operated, and to enter into the transactions and perform its
obligations under this Agreement, 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 it is duly qualified as a foreign corporation to do business
in the jurisdiction in which the Facility owned by it is located or in which
failure so to qualify would impair its ability to perform its obligations under
this Agreement or any other Transaction Document.
7.2 Authorization; Enforceability. The execution, delivery and performance
by such Seller of this Agreement, the other Transaction Documents and of all of
the documents and instruments contemplated hereby to be executed and delivered
by it are within the legal and corporate power and authority of such Seller and
have been duly authorized by all necessary legal and corporate action of such
Seller. This Agreement is, the other Transaction Documents are, and the other
documents and instruments required hereby to be delivered by it will be, when
executed and delivered, the valid and binding obligations of such Seller,
enforceable against it in accordance with their respective terms.
7.3 No Violation or Conflict. The execution, delivery and performance of
this Agreement, the Transaction Documents and all of the other documents and
instruments contemplated hereby to be executed and delivered by such Seller does
not and will not conflict
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with or violate any material Law, judgment, or any order or decree binding on it
or the Articles of Incorporation or By-Laws of such Seller. Except as indicated
on Schedule 7.3(a) hereto, no notice to, filing or registration with, or
authorization, consent or approval of, any person, entity or governmental or
regulatory agency is necessary or required by such Seller in connection with the
execution and delivery of this Agreement, the Transaction Documents and all of
the other documents and instruments contemplated hereby to be executed and
delivered by such Seller or the consummation by such Seller of the transactions
contemplated hereby or the performance by such Seller of its obligations
hereunder. Except as indicated on Schedule 7.3(b) hereto, since January 1, 1998,
such Seller has received no written notice from any governmental or regulatory
agency having jurisdiction over such Seller's Facility (a) claiming any
violation of any Law (which violation has not been cured or otherwise remedied),
or (b) requiring or calling attention to the need for any work, repairs,
construction, alterations or installation in connection with the Facility owned
by it which is or may be required in order to comply with any Law (which work,
repairs, construction, alterations or installation has not been completed).
7.4 Assets. The Personal Property, the Real Property and the Intangible
Property constitute all of the assets used in the operation of the Facility
owned by it. Such Seller owns good, valid and clear title to all of the Personal
Property owned by it and to all the other assets, if any, owned by it and used
in the operation of the Facility owned by it, and also including, but not
limited to, all assets owned by such Seller that are reflected in the Financial
Statements of the Facilities related to the Facility owned by it and all assets
acquired by it since the date thereof related to the Facility owned by it
(except for assets that have been sold or otherwise disposed of in the ordinary
course of business), free and clear of any and all mortgages, liens,
encumbrances, charges, claims, restrictions, pledges, security interests or
impositions except Permitted Liens. Schedule 7.4 hereto contains an accurate and
complete list of the material Personal Property owned or leased by such Seller
on the Closing Date used in the operation of the Facility owned by it.
7.5 No Litigation. Except as listed on Schedule 7.5 hereto, and the matters
set forth on Schedule 7.3(b) hereto and on the Phase I environmental site
assessment reports and Phase I update reports obtained by Sellers for the
benefit of Buyer from ATC Associates, Inc. ("ATC") (collectively, the "ATC
Reports"), there is no material litigation, arbitration proceeding, govern
mental investigation, citation, suit, action, proceeding or claim of any kind
pending or threatened, against it or the Facility owned by it that relates to
such Facility or any portion thereof or the ability of such Seller to perform
its obligations under this Agreement or under any other Transaction Documents.
The matters described on Schedule 7.5 hereto, if adversely determined,
considered in the aggregate, would not have a material adverse effect on the
business or financial condition of such Seller or the Facility or on any
material portion of the assets of such Seller or the Facility owned by it and
would not preclude such Seller from performing its obligations under this
Agreement and under any other Transaction Documents.
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7.6 Personal Property and Improvements. Except as provided on Schedule 7.6
hereto, the Personal Property and Improvements used in the operation of the
Facility owned by such Seller, as of the Effective Date, are (a) in good
operating condition and in a state of good maintenance and repair, normal wear
and tear excepted, and (b) the Improvements have no structural defects or
material defects to any of their major systems and are adequate and suitable for
the purpose for which they are presently being used.
7.7 Real Property and Improvements. Such Seller owns good, indefeasible and
insurable title to the Real Property owned by it, free and clear of any and all
mortgages, liens, encumbrances, charges, claims, restrictions, pledges, security
interest or impositions except the Permitted Liens. There are no existing or
impending Improvement liens or special assessments to be made, or which have
been made, against the Real Property or Improvements owned by it by any
governmental authority. Neither the Improvements owned by it, nor the use
thereof, any Personal Property therein, nor the operation or maintenance
thereof, violate any restrictive covenant or encroach on any property owned by
others in any material respect. No condemnation or similar proceeding is
pending, nor has such Seller or the Facility owned by it, received any written
notice of any condemnation or similar proceeding, threatened or contemplated
that would preclude or impair the use of the Real Property, the Improvements or
Personal Property owned by it or any portion thereof by Purchaser for the
purposes for which it is currently used.
7.8 Zoning. There exists no judicial, quasi-judicial, administrative or
other proceeding which might adversely affect the validity of the current zoning
of the Real Property and Improvements owned by it, nor is there any threatened
action or proceeding which could result in the modification and termination of
any such zoning. There exists no current action or proceeding relating to any
alleged non-compliance with zoning Laws involving the Real Property or
Improvements owned by it.
7.9 Leases. Schedule 1.6 hereto contains an accurate and complete list of
each lease of Personal Property to which such Seller or the Facility owned by it
is a party or by which such Seller or any Facility owned by it is bound.
7.10 Liabilities. (a) The Sellers' Liabilities include all liabilities of
such Seller in connection with the Facility owned by it for money borrowed or
credit purchases, other than obligations that will be discharged prior to
Closing, (b) such Seller is not in material default under any obligation
included in the Sellers' Liabilities, and no event has occurred or is
contemplated by it, that would constitute a material default, or an event that
with the giving of notice or passage of time or both would constitute a default
thereunder, and (c) such Seller has paid, and through the Effective Date shall
pay, all amounts due and payable to the Effective Date under the terms of each
obligation included in the Sellers Liabilities.
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7.11 Taxes. All tax returns required under applicable Law relating to the
Facility owned by such Seller, to have been filed by or on behalf of it have
been filed. All taxes of such Seller and taxes with respect to the Facility
owned by it for all periods covered by such returns have been paid or adequately
provided for. No unpaid deficiencies for any such taxes have been officially
asserted or assessed against such Seller or any Facility owned by it.
7.12 Contracts. Schedule 1.6 hereto constitutes a true and complete list of
all Contracts to which such Seller or the Facility owned by it is a party or by
which such Seller or the Facility owned by it is bound.
7.13 Contracts and Leases. With respect to those Contracts and leases
listed on Schedule 1.7 hereto, such Seller shall continue such Contracts and
leases, as provided for in the Master Lease, and such Seller shall defend,
indemnity and hold harmless Purchaser from and against any and all covenants,
duties and obligations under such Contracts and leases, including, without
limitation, any and all costs and expenses arising out of or in connection with
any such covenants, duties and obligations.
7.14 Financial Statements of the Facilities. (a) The Financial Statements
of the Facilities, taken as a whole, fairly present the financial position and,
if applicable, the results of operations of the Facility owned by such Seller as
of the dates thereof and the periods then ended and were prepared in accordance
with generally accepted accounting principles consistently applied and (b) the
Final Financial Statements when delivered will present fairly the financial
position and the results of operations of the Facility owned by such Seller as
of the Closing Date and the period then ended and will be prepared in accordance
with generally accepted accounting principles consistently applied.
7.15 No Adverse Change. Except as set forth in Schedule 7.15 hereto, since
January 1, 1998 there has not been: (a) any material adverse change in the
financial condition or business of the Facility owned by such Seller, or any
material adverse change in the net operating income of the Facility owned by it,
(b) any material loss, damage, condemnation or destruction to the Facility owned
by such Seller, (c) any labor dispute or disturbance, litigation or any event or
condition that could materially adversely affect the operation of the Facility
owned by such Seller, (d) any borrowings by such Seller secured by the Facility
owned by it, or (e) any sale, transfer or other disposition of assets of the
Facility owned by such Seller other than in the ordinary course of business.
7.16 Employment Agreements and Benefits. (a) Schedule 7.16 hereto is a true
and complete list of all agreements or contracts relating to the compensation
and other benefits of present and former employees, salesmen, individual
consultants, individuals and other individual agents of such Seller relating to
the Facility owned by it, including all collective bargaining agreements and all
pension, retirement, bonus, stock option, profit sharing, health, disability,
life insurance, hospitalization, education or other similar plans or
arrangements (whether or not
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subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), true and complete copies of which, including any trust, insurance or
other funding agreements (or true and complete descriptions of which, in the
case of oral agreements) have been delivered to Purchaser, (b) such Seller has
not contributed to or maintained any "multiemployer plan", as defined in Section
3(37) of ERISA, in respect of present or former employees at the Facility owned
by it, and (c) except as set forth in Schedule 7.16 hereto, no such agreements
require Purchaser to assume or make payments with respect to any employment,
compensation, fringe benefit, pension, profit sharing or deferred compensation
plan in respect of any employee or former employee or the dependent or
beneficiary of any employee or former employee of such Seller although such
Seller will have such liabilities in accordance with the terms of such
arrangements to the extent such liabilities exist.
7.17 Insurance. (a) Schedule 7.17 hereto (i) contains an accurate and
complete list of all material policies of property, fire and casualty, product
liability, workers' compensation and other forms of insurance owned or held by
such Seller in connection with the Facility owned by it and (ii) includes for
each such policy its type, term, limits and retentions, deductibles, name of
insurer, and (b) all such policies are in full force and effect with all
premiums billed or otherwise due having been paid in full.
7.18 Compliance with the Law.
(a) Except as set forth on Schedule 7.3(b) hereto and on the ATC
Reports, the use, maintenance and operation of the Facility owned by such Seller
does not violate or conflict in any material respect with any Law.
(b) The Permits constitute all permits, consents, waivers, exemptions,
orders, certificates of need, licenses and governmental agency authorizations,
registrations and approvals necessary for the development, construction,
ownership, licensure, use, maintenance and operation of the Facility owned by
such Seller in compliance with all applicable Laws (as such Facility is being
operated on the Effective Date). Except as shown on Schedule 1.36 hereto, all
such Permits are in full force and effect, have been duly obtained, made, given
or taken and are being complied with in all material respects, subject to
approvals required in connection with the transactions contemplated by this
Agreement and the other Transaction Documents.
(c) No governmental authority having jurisdiction over the Facility
owned by such Seller 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 Effective Date, 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 on Schedule 7.18(c)
hereto, 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
Facility owned by such Seller.
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(d) 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 such Facility to be reworked or redesigned or additional
furniture, fixtures, equipment or inventory to be provided at such 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 Effective Date, be in the process of
being satisfied 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.
(e) The Facility owned by it and participating in the Medicare or
Medicaid Programs is in material compliance with all Conditions and Standards of
Participation in those Programs, except as set forth on Schedule 7.18(e) hereto.
7.19 Transactions with Affiliates. Except as set forth on Schedule 7.19
hereto, as of the Effective Date, the Facility owned by such Seller shall not be
bound by and will not owe any amount or have any contractual obligation or
commitment to any Affiliate (other than compensation for current services and
reimbursement of expenses arising in the ordinary course of business).
"Affiliate" shall mean any employee of such Seller, any person, firm or
corporation that directly or indirectly controls, is controlled by or is under
common control with such Seller.
7.20 Obligations. Except as set forth on Schedule 7.20 hereto, none of the
patients at the Facility owned by it have been given any concession, rebate or
consideration for the rental of any room, which concession, rebate or other
consideration shall not have been paid or delivered prior to the Effective Date.
7.21 No Broker. Except as set forth on Schedule 7.21 hereto, such Seller
has not incurred any liability for broker's or finder's fees or commissions to
any broker, financial advisor or other intermediary in connection with the
transactions contemplated by this Agreement. Such Seller agrees to pay and to
hold Purchaser harmless from and against any amounts due and payable to any such
adviser not scheduled with respect to the transactions contemplated herein.
7.22 Environmental Compliance. "Hazardous Materials", as used herein, shall
mean, collectively, (a) any petroleum or petroleum product, explosive,
radioactive material, radon gas, asbestos, urea formaldehyde foam insulation,
and PCBs and (b) materials which are now or hereafter become defined as
"hazardous substances", "hazardous wastes", "extremely hazardous substances",
"hazardous materials", "restricted hazardous wastes", "toxic chemicals",
"pollutants", "toxic pollutants", "hazardous air pollutants", "air
contaminants", "hazardous chemicals", or words of similar import under any
applicable Environmental Laws. "Reasonable Inquiry", as used herein, shall mean
review of (i) the ATC Reports, (ii) the asbestos survey reports included in the
ATC Reports, and (iii) any Phase II environmental reports included in the ATC
Reports. Except as set forth in the ATC Reports, in connection with the Facility
owned by
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such Seller, to the best of its Knowledge, after Reasonable Inquiry, such Seller
has complied and is in compliance with all applicable Environmental Laws, and
such Seller has no Knowledge, and has not received notice, (i) that the Facility
owned by it or any property contiguous to the Facility owned by it is in
violation of any Environmental Law and (ii) of any pending or threatened claims
involving the Facility owned by it. Except as set forth on Schedule 7.5 or in
the ATC Reports, neither such Seller nor the Facility owned by it is the subject
of any administrative or judicial action or proceeding pursuant to any
Environmental Laws at the Effective Date in connection with the Facility owned
by it. Promptly upon learning thereof, at or following the Effective Date, such
Seller shall provide written notice to Purchaser of any written notification of
(i) the assertion of any claim or any threatened claim relating to the Facility
owned by it under any Environmental Law or (ii) the assertion of any claim of
non-compliance with or violation of any Environmental Law. Except as set forth
in the ATC Reports, to the best of such Seller's Knowledge, after Reasonable
Inquiry, no Hazardous Materials have at any time been generated, used, treated
or stored at; transported to or from; or disposed of, released, emitted,
discharged or deposited at or in connection with, the Facility owned by it in
any way contrary to that which is allowed or permitted under any Environmental
Laws.
7.23 No Attachments. There are no attachments, executions, assignments for
the benefit of creditors, receiverships, conservatorship or voluntary or
involuntary proceedings in bankruptcy or pursuant to any debtor relief laws
contemplated being filed by such Seller or pending against such Seller or the
Real Property or Improvements owned by it.
7.24 No Options. As of the Effective Date, there are no options, contracts
or other obligations outstanding for the sale, exchange or transfer of any of
the Real Property, Personal Property or Improvements owned by such Seller or any
portion thereof or business operated therein.
7.25 Seller Licenses. Except as set forth on Schedule 1.35 hereto, such
Seller has all Seller Licenses applicable to the Facility owned by it. Schedule
7.25 hereto contains 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 such Seller. Except as disclosed on Schedule 7.3 (b)
hereto, such Seller 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 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.
7.26 Disclosure. Such Seller has provided to Purchaser access to all
relevant documents, materials and information in its possession or control
relative to the Facility owned by it and has not withheld any documents or
information that are material to the condition, assets,
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liabilities, businesses, operations and prospects of such Seller or the Facility
owned by it. No representation or warranty of such Seller contained in this
Agreement (which shall include any Exhibit or Schedule hereto) and no
certificate or document furnished to Purchaser pursuant to the provisions
hereof, contains any untrue statement of a material fact which is untrue in any
material respect or omits to state a material fact necessary in order to make
the statements contained therein not misleading.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES OF IHS
IHS represents and warrants to Purchaser that:
8.1 Status of IHS. IHS is a corporation that is duly organized, validly
existing and in good standing under the laws of the State of Delaware.
8.2 Validity or Conflicts. This Agreement is, and all of the Transaction
Documents to be executed by IHS pursuant hereto will be, the valid obligations
of IHS, 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 applicable Transaction Documents have been approved by
all required corporate action on the part of IHS and does not and will not
result in a breach of the terms and conditions of, nor constitute a default
under or violation of, the Certificate of Incorporation and By-Laws of IHS or
any Law, regulation, court order, mortgage, note, bond, indenture, agreement,
license or other instrument or obligation to which IHS is now a party or by
which any of its assets may be bound or affected.
8.3 Authority. IHS has full power and authority to execute and deliver this
Agreement and the applicable Transaction Documents to which it is a party.
8.4 Truth of Representations. The representations and warranties of each
Seller pursuant to Article VII hereof are true and complete in all material
respects.
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ARTICLE IX
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to each of the other parties
hereto that:
9.1 Organization. Purchaser is a limited partnership duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has full power and authority to enter into and perform its obligations under
this Agreement, the other Transaction Documents and any other documents and
instruments required hereby to be delivered to which it is or is to become a
party.
9.2 Authorization; Enforceability. The execution, delivery and performance
by Purchaser of this Agreement, the other Transaction Documents and all of the
documents and instruments contemplated hereby are within the power of Purchaser
and have been duly authorized by all necessary action of Purchaser. This
Agreement is, the other Transaction Documents are, and the other documents and
instruments required hereby to be delivered by Purchaser will be, when executed
and delivered, the valid and binding obligations of Purchaser, enforceable
against Purchaser in accordance with their respective terms.
9.3 No Violation or Conflict. The execution, delivery and performance of
this Agreement, the other Transaction Documents and all of the documents and
instruments contemplated hereby to be executed and delivered by Purchaser does
not and will not conflict with or violate the Limited Partnership Agreement of
Purchaser or any material Law, judgment, order or decree binding on Purchaser.
9.4 No Broker. Except as set forth on Schedule 9.4 hereto, Purchaser has
incurred no liability for broker's or finder's fees or commissions to any broker
or other intermediary in connection with the transactions contemplated by this
Agreement. Purchaser agrees to pay and to hold Sellers, and IHS harmless from
and against any amounts due and payable to any such adviser not scheduled with
respect to the transactions contemplated herein.
ARTICLE X
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PURCHASER
Each and every obligation of Purchaser to be performed on the Effective
Date shall be subject to the satisfaction as of both the Closing Date and the
Effective Date of the following express conditions precedent (it being the
understanding of the parties that any of such conditions may be waived by
Purchaser):
10.1 Compliance with this Agreement. Sellers shall have performed and
complied in all material respects with all of their obligations under this
Agreement that are to be performed or
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complied with by them prior to or on the Closing Date, including, but not
limited to, the payment of all costs, fees and expenses that Sellers are
required to pay pursuant to this Agreement.
10.2 Proceedings and Instruments Satisfactory. All proceedings, corporate
or other, to be taken by Sellers in connection with the transactions
contemplated by this Agreement, the other Transaction Documents and any other
documents incident thereto, shall be reasonably satisfac tory in form and
substance to Purchaser and Purchaser's counsel, and Sellers shall have made
available to Purchaser and Purchaser's counsel (or Purchaser shall have obtained
itself prior to the Closing Date or waived the necessity for receipt thereof
prior to the Closing Date) for examination the originals or true and correct
copies of all documents that Purchaser and Purchaser's counsel may reasonably
request in connection with the transactions contemplated by this Agreement and
the other Transaction Documents, including, but not limited to:
(a) an MAI Appraisal for each of the Facilities;
(b) a Title Commitment for each of the Facilities;
(c) acceptable engineering, architectural and Phase I environmental site
assessments for each of the Facilities;
(d) a Survey for each of the Facilities;
(e) a UCC Search Report for each of the Facilities;
(f) the Sellers' Licenses for each of the Facilities;
(g) valid permanent Certificates of Occupancy, if reasonably available and
required under the Law, for each of the Facilities as well as any
other licenses or Permits reasonably available and required to be
obtained from applicable governmental authorities with respect to the
use and occupancy of each of the Facilities;
(h) for each Seller, Articles of Incorporation, Certificates of Good
Standing and Certificates of Authority to Transact Business in the
state in which each Facility owned by such Seller is located;
(i) for IHS, Articles of Incorporation and Certificate of Good Standing;
(j) certified resolutions of the Board of Directors of each Seller and
certified resolutions of the Board of Directors of IHS, in each case
authorizing and approving the execution, delivery and performance of
Sellers and IHS's obligations under this Agreement and the other
Transaction Documents;
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(k) the opinions of IHS's and Sellers' local healthcare counsel in each
state where a Facility is located, as special healthcare counsels to
IHS and Sellers, in a form reasonably acceptable to Purchaser; and
(l) the opinion of counsel to IHS and the Sellers, in a form reasonably
acceptable to Purchaser.
10.3 No Litigation. Except as provided on Schedule 10.3 hereto, no
investigation, suit, action or other proceeding shall be instituted, threatened
or pending before any court or governmental agency or body that seeks restraint,
prohibition, damages or other relief in connection with this Agreement, the
other Transaction Documents or the consummation of the transactions contemplated
by this Agreement and the other Transaction Documents.
10.4 Representations and Warranties. The representations and warranties
made by Sellers and IHS in this Agreement and the other Transaction Documents
shall be true and correct in all material respects at and as of the Closing Date
and the Effective Date.
10.5 Deliveries at the Closing. Sellers and IHS shall have, or shall cause
to have, delivered to Purchaser the following documents, each properly executed
and dated as of the Closing Date:
(a) this Facilities Purchase Agreement;
(b) the Deeds;
(c) the Bills of Sale;
(d) the Master Lease;
(e) a memorandum of lease in recordable form with respect to the Master
Lease;
(f) the Facility Subleases;
(g) memoranda of sublease in recordable form with respect to each of the
Facility Subleases;
(h) the Consent and Subordination Agreement;
(i) the Escrow Agreement;
(j) the Facility Franchise Agreement;
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(k) the Facility Management Agreement;
(l) the IHS Indemnity;
(m) the Guaranty;
(n) the Security Agreement;
(o) the Master Franchise Agreement;
(p) the Master Management Agreement; and
(q) any such other documents or instruments as Purchaser and Purchaser's
counsel shall reasonably request in connection with the transactions
contemplated by this Agreement and the other Transaction Documents.
10.6 Regulatory Approvals. All required licenses, authorizations,
registrations, Permits and approvals from federal and state regulatory agencies
with jurisdiction over each of the Facilities to permit the transactions
contemplated by this Agreement and the other Transaction Documents shall have
been obtained or completed to the reasonable satisfaction of Purchaser and any
and all conditions to the effectiveness thereof shall have been satisfied.
10.7 Default. Each Seller and IHS 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 and IHS is a party or by which such
Seller and IHS is bound and that materially affects or relates to the Real
Property, the Personal Property or any of the Facilities.
10.8 Approvals. The Management Committee of Monarch shall have approved the
transactions contemplated by this Agreement and the Transaction Documents.
10.9 Loan Facility. Purchaser shall have obtained the Loan Facility.
ARTICLE XI
CONDITIONS PRECEDENT TO
THE OBLIGATIONS OF SELLERS
Each and every obligation of Sellers to be performed on the Effective Date
shall be subject to the satisfaction as of both the Closing Date and the
Effective Date of the following express conditions precedent (it being the
understanding of the parties that any of such conditions may be waived by
Sellers):
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11.1 Compliance with this Agreement. Purchaser shall have performed and
complied in all material respects with all of its obligations under this
Agreement and the other Transaction Documents that are to be performed or
complied with by it prior to or on the Closing Date, including, but not limited
to, the payment of the Purchase Price by Purchaser.
11.2 Proceedings and Instruments Satisfactory. All proceedings, corporate
or other, to be taken by Purchaser in connection with the transactions
contemplated by this Agreement, the other Transaction Documents and any other
documents incident thereto, shall be reasonably satisfactory in form and
substance to Sellers and Sellers' counsel, and Purchaser shall have made
available to Sellers and Sellers' counsel (or Sellers shall have obtained
themselves prior to the Closing Date or waived the necessity for receipt thereof
prior to the Closing Date) for examination the originals or true and correct
copies of all documents that Sellers and Sellers' counsel may reasonably request
in connection with the transactions contemplated by this Agreement and the other
Transaction Documents.
11.3 No Litigation. Except as provided on Schedule 11.3 hereto, no
investigation, suit, action or other proceeding shall be threatened or pending
before any court or governmental agency that seeks restraint, prohibition,
damages or other relief in connection with this Agreement, the other Transaction
Documents or the consummation of the transactions contemplated by this Agreement
and the other Transaction Documents.
11.4 Representations and Warranties. The representations and warranties
made by Purchaser in this Agreement and the other Transaction Documents shall be
true and correct in all material respects at and as of the Closing Date and the
Effective Date.
11.5 Deliveries at the Closing. Purchaser shall have, or shall cause to
have, delivered to Sellers and IHS the following documents, each properly
executed and dated as of the Closing Date:
(a) the agreements identified in subparagraphs (a) through (q) of Section
10.5 hereof;
(b) Certificate of Formation, Certificate of Good Standing and Certificate
of Authority to Transact Business of Purchaser;
(c) certified resolutions of Monarch and Purchaser, authorizing and
approving the execution, delivery and performance of Purchaser's
obligations under this Agreement and the other Transaction Documents;
and
(d) any such other documents or instruments as Sellers and Sellers'
counsel shall reasonably request in connection with the transactions
contemplated by this Agreement and the other Transaction Documents.
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11.6 Restraints. No action or proceeding before a court or any other
governmental agency or body of or in the United States shall have been
instituted or threatened to restrain or prohibit the consummation of the
transactions contemplated by this Agreement or the other Transaction Documents.
11.7 Regulatory Approvals. All required authorizations, registrations,
Permits and approvals from federal and state regulatory agencies with
jurisdiction over each of the Facilities to permit the transactions contemplated
by this Agreement and the other Transaction Documents shall have been obtained
or completed to the reasonable satisfaction of Sellers.
11.8 Approvals. The Board of Directors of each of the Sellers and IHS and
the requisite lenders under IHS's Revolving Credit and Term Loan Agreement shall
have approved the transactions contemplated by this Agreement and the
Transaction Documents.
ARTICLE XII
ADDITIONAL COVENANTS AND INDEMNIFICATIONS
12.1 Transfer Taxes and Fees. Sellers shall pay all fees, transfer taxes or
assessments, if any, charged to grantors, lessors, sub-lessors, transferors or
assignors under applicable Law in connection with the transactions contemplated
by this Agreement and the other Transaction Documents.
12.2 Cooperation. The parties hereto shall cooperate in all respects in
connection with the giving of any notices to any governmental authority or
self-regulatory organization or securing the permission, approval,
determination, consent or waiver of any governmental authority or other party
required in connection with the consummation of the transactions contemplated by
this Agreement and the other Transaction Documents.
12.3 Additional Instruments. At any time and from time to time after the
Closing, at Purchaser's reasonable request and without further consideration,
Sellers shall execute and deliver such other instruments of sale, transfer,
conveyance, assignment and confirmation and take such other action as Purchaser
may reasonably deem necessary to consummate the transactions contemplated by
this Agreement and the other Transaction Documents. At any time and from time to
time after the Closing, at the reasonable request of Sellers and without further
consideration, Purchaser shall execute and deliver such other instruments and
take such other action as Sellers may reasonably deem necessary to consummate
the transactions contemplated by this Agreement and the other Transaction
Documents.
12.4 Publicity. All general notices, releases, statements and
communications to employees and patients of Purchaser, Sellers and each of the
Facilities relating to the transactions contemplated by this Agreement shall be
made only at such times and in such manner as may be
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mutually agreed upon by Purchaser and Sellers. All general notices, releases,
statements and communications to the general public and the press relating to
the transactions contemplated by this Agreement shall be made only with such
content and at such times and in such manner as may be mutually agreed upon by
Purchaser and Sellers; provided, however, that each party shall be entitled to
make a public announcement of the transaction if, in the opinion of its counsel,
such announcement is required to comply with the Law.
12.5 Confidentiality. Purchaser shall not disclose to any person or company
or use for its own benefit any material information related to the ownership or
operation of the Facilities by Sellers, including customer or patient-related
information, without Sellers' express prior written permission except for
disclosure by Purchaser to its counsel, its lenders and their counsel and
appropriate regulatory agencies, except any such information that is now or
hereafter becomes available to the public without breach of any confidentiality
agreement.
12.6 Indemnifications.
(a) Sellers and IHS, jointly and severally, shall indemnify and hold
harmless Purchaser and its partners, members, officers, directors, shareholders,
employees, agents, and assigns (collectively, the "Purchaser 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 ownership, use, operation, possession, or management of
each of the Facilities prior to the Effective Date;
(ii) the breach or failure of any representation, warranty or
covenant made by Sellers or IHS that is contained in this Agreement or
contained in any other certificates, agreements or Transaction
Documents to which Sellers or IHS is a party;
(iii) any and all Claims relating to any current or former
employee, consultant or independent contractor of the Sellers 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 Sellers or any of the Facilities, (B) Claims
under federal, state, or local laws, rules or regulations, 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
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statute, (C) matters arising from any severance policy, claim,
agreement or contract or (D) any and all Claims with respect to the
matters provided for in Section 7.16 herein;
(iv) any and all Claims that relate to information provided by or
on behalf of any of the Sellers or IHS concerning the Facilities,
Sellers' Assets, Sellers or IHS and their respective affiliates, to
third parties which was used or relied upon to effect the transactions
contemplated in this Agreement and by the other Transaction Documents;
(v) other than for the liens, claims or encumbrances necessary to
effect the transactions contemplated in this Agreement and the other
Transaction Documents, any mortgage, pledge, lien, or encumbrance made
before the Effective Date on any of the Sellers' Assets or the
Facilities and any claims asserted therefrom, other than and except
for the Permitted Liens;
(vi) any and all Claims with respect to any qualified or
non-qualified retirement or benefit plans or arrangements involving
any current or former employee, consultant or independent contractor
of the Sellers or any of the Facilities;
(vii) any and all Claims with respect to admission agreements,
patient contracts, or agreements entered into prior to the Effective
Date with patients or others at any of the Facilities;
(viii) any deficiencies or inaccuracies occurring prior to the
Effective Date with respect to patient funds and accounts associated
therewith at any of the Facilities;
(ix) any Claims arising out of Sellers' failure to have kept or
maintained patient records and other related records at any of the
Facilities in accordance with applicable Law;
(x) 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;
(xi) any action or proceeding by an appropriate state or federal
agency having jurisdiction thereof, to revoke, withdraw or suspend any
of the Sellers Licenses or Permits of a Seller applicable to the
Facility owned by such Seller or to terminate the participation of the
Facility owned by any Seller in either the Medicare or Medicaid
Programs, as a result of or caused by the transactions
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contemplated by this Agreement and the other Transaction Documents,
including, but not limited to, the execution and delivery of the
Master Lease and each of the Facility Subleases;
(xii) the violation of any Environmental Law or the existence,
presence or Release of any Hazardous Material based on an event or
condition at or relating to any Facility that commenced or existed
prior to the Effective Date;
(xiii) any and all Claims that relate to any condition existing
on or prior to the Effective Date involving any Real Property or
Improvements which does not comply with applicable zoning Laws, other
than conditions permitted under duly issued variances and conditions
which were permitted under prior versions of applicable zoning Laws;
(xiv) any and all Claims that relate to the failure of Sellers or
Manager to pay, during the term of any applicable Facility Management
Agreement, any amounts due under any Equipment Lease Facility, as
defined in Article 7 of the Facility Management Agreement, related to
Personal Property located at any of the Facilities; and
(xv) any and all Claims that relate to any litigation,
arbitration proceeding, governmental investigation, citation, suit,
action, proceeding or claim of any kind relating to matters occurring
prior to the Effective Date, including, but not limited to, the
matters disclosed on Schedule 7.5 hereto, involving IHS, any of the
Sellers or any of the Facilities.
Sellers and IHS further covenant and agree to defend the Purchaser
Indemnified Parties on account of said Claims and to pay any judgment against
the Purchaser Indemnified Parties, or any other amount as indicated in this
Section 12.6(a), along with all reasonable costs and expenses relative to any
such Claims, including reasonable and documented attorneys' fees and expenses.
Sellers and IHS shall have the right to assume and control the defense (but not
the settlement) of all Claims under this Section 12.6(a), including the
employment of counsel of their choosing; provided, however, that if, under
applicable codes of professional responsibility, any counsel proposed by Sellers
and IHS might reasonably be expected to have a conflict of interest in
representing Sellers and IHS, as well as the Purchaser Indemnified Parties, then
the selection of such counsel shall be subject to the approval of the Purchaser
Indemnified Parties, which approval may not be unreasonably withheld or delayed.
Sellers and IHS shall pay all costs and expenses relative to the conduct of such
defense, including attorneys' fees and expenses, and the Purchaser Indemnified
Parties shall cooperate fully with Sellers and IHS in connection with the
conduct of such defense. If Sellers and IHS fail to respond or do not admit
responsibility for any Claims under this Section 12.6(a), then the Purchaser
Indemnified Parties may take such necessary steps to defend themselves and all
reasonable and documented costs and expenses
32
<PAGE>
therewith, including reasonable and documented attorneys' fees and expenses, may
be included as part of any asserted Claims under this Section 12.6(a). The
Purchaser Indemnified Parties shall, nevertheless, have the right, if they so
elect, to participate (with counsel of their choosing and at their cost and
expense, which counsel must be approved by Sellers and IHS, which approval may
not be unreasonably withheld or delayed) in the defense of any such Claim in
which they may be a party without relieving Sellers and IHS of their obligation
to defend the same. With respect to the settlement or compromise of Claims under
this Section 12.6(a): (A) if the Purchaser Indemnified Parties decline to accept
a bona fide offer of settlement or compromise that is recommended by Sellers and
IHS, then the maximum liability of Sellers and IHS for such Claim shall not
exceed that amount for which Sellers and IHS would have been liable had such
settlement or compromise been accepted and (B) if Sellers and IHS decline to
accept a bona fide offer of settlement or compromise that is recommended by the
Purchaser Indemnified Parties, then Sellers and IHS shall be liable for whatever
outcome results from such Claims; provided, however, that Sellers and IHS may
not settle or compromise any Claims under this Section 12.6(a) without either
the prior written consent of the Purchaser Indemnified Parties or a full and
complete release of the Purchaser Indemnified Parties.
(b) Purchaser shall indemnify and hold harmless Sellers and IHS, and
their officers, directors, shareholders, employees, agents, and assigns (the
"Seller 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 breach or failure of any representation, warranty or
covenant made by Purchaser that is contained in this Agreement or contained in
any other certificates, agreements or Transaction Documents to which Purchaser
is a party.
Purchaser further covenants and agrees to defend the Seller
Indemnified Parties on account of said Claims and to pay any judgment against
the Seller Indemnified Parties, or any other amount as indicated in this Section
12.6(b), along with all reasonable costs and expenses relative to any such
Claims, including reasonable and documented attorneys' fees and expenses.
Purchaser shall have the right to assume and control the defense (but not the
settlement) of all Claims under this Section 12.6(b), including the employment
of counsel of their choosing; provided, however, that if, under applicable codes
of professional responsibility, any counsel proposed by Purchaser might
reasonably be expected to have a conflict of interest in representing Purchaser,
as well as the Seller Indemnified Parties, then the selection of such counsel
shall be subject to the approval of the Seller Indemnified Parties, which
approval may not be unreasonably withheld or delayed. Purchaser shall pay all
costs and expenses relative to the conduct of such defense, including attorneys'
fees and expenses, and the Seller Indemnified Parties shall cooperate fully with
Purchaser in connection with the conduct of such defense. If Purchaser fails to
respond or does not admit responsibility for any Claims under this
33
<PAGE>
Section 12.6(b), then the Seller Indemnified Parties may take such necessary
steps to defend themselves and all reasonable and documented costs and expenses
therewith, including reasonable and documented attorneys' fees and expenses, may
be included as part of any asserted Claims under this Section 12.6(b). The
Seller Indemnified Parties shall, nevertheless, have the right, if they so
elect, to participate (with counsel of their choosing and at their own cost and
expense, which counsel must be approved by Purchaser, which approval may not be
unreasonably withheld or delayed) in the defense of any such Claim in which they
may be a party without relieving Purchaser of its obligation to defend the same.
With respect to the settlement or compromise of Claims under this Section
12.6(b): (A) if the Seller Indemnified Parties decline to accept a bona fide
offer of settlement or compromise that is recommended by Purchaser, then the
maximum liability of Purchaser for such Claim shall not exceed that amount for
which Purchaser would have been liable had such settlement or compromise been
accepted and (B) if Purchaser declines to accept a bona fide offer of settlement
or compromise that is recommended by the Seller Indemnified Parties, then
Purchaser shall be liable for whatever outcome results from such Claims;
provided, however, that Purchaser may not settle or compromise any Claims under
this Section 12.6(b) without either the prior written consent of the Seller
Indemnified Parties or a full and complete release of the Seller Indemnified
Parties.
(c) The indemnities set forth in this Section 12.6 shall remain
operative and in full force and shall survive the execution and performance
hereof and the execution and delivery of this Agreement and the other
Transaction Documents.
ARTICLE XIII
MISCELLANEOUS
13.1 Entire Agreement; Amendment. This Agreement and the Transaction
Documents constitute the entire agreement among the parties pertaining to the
subject matter hereof, and supersede all prior and contemporaneous agreements,
understandings, negotiations and discussions of the parties, whether oral or
written, and there are no warranties, representations or other agreements
between the parties in connection with the subject matter hereof, except as
specifically set forth herein or therein. No amendment, supplement,
modification, waiver or termination of this Agreement shall be binding unless
executed in writing by the party to be bound thereby. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provision of this Agreement, whether or not similar, nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.
13.2 Governing Law. THIS AGREEMENT AND THE TRANSACTION DOCUMENTS SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH LAWS OF THE STATE OF NEW YORK. SELLERS
AND IHS CONSENT TO IN PERSONAM JURISDICTION BEFORE THE STATE AND FEDERAL COURTS
OF THE STATE OF NEW YORK, AND AGREE THAT ALL DISPUTES CONCERNING
34
<PAGE>
THIS AGREEMENT MAY BE HEARD, AT PURCHASER'S OPTION, IN THE STATE AND FEDERAL
COURTS LOCATED IN THE STATE OF NEW YORK. SELLERS AND IHS AGREE THAT SERVICE OF
PROCESS MAY BE EFFECTED UPON SELLERS AND IHS UNDER ANY METHOD PERMISSIBLE UNDER
THE LAWS OF THE STATE OF NEW YORK AND IRREVOCABLY WAIVE ANY OBJECTION TO VENUE
IN THE STATE AND FEDERAL COURTS OF THE STATE OF NEW YORK.
13.3 Assignment. This Agreement and each party's respective rights
hereunder may not be assigned at any time without the prior written consent of
the other parties hereto.
13.4 Notices. All communications, notices and disclosures required or
permitted by this 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 IHS and any Seller: Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attention: Daniel J. Booth
Telephone No.: 410-998-8768
Fax No.: 410-998-8695
Copy to: Blass & Driggs
461 Fifth Avenue
New York, New York 10017
Attention: Michael S. Blass, Esq.
Telephone No.: 212-447-1100
Fax No.: 212-447-5428
To Purchaser: Monarch Properties, LP
8889 Pelican Bay Boulevard - Suite 501
Naples, Florida 34108
Attention: John B. Poole
Telephone No.: 941-596-3259
Fax No.: 941-596-3266
35
<PAGE>
Copy to: LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019
Attention: John R. Fallon, Jr., Esq.
Telephone No.: 212-424-8279
Fax No.: 212-424-8500
13.5 Counterparts; Headings. This Agreement 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 Agreement. The Table of Contents
and Article and Section headings in this Agreement are inserted for convenience
of reference only and shall not constitute a part hereof or be used as
interpreting the meaning of this Agreement.
13.6 Interpretation. To the extent any conflict exists between the terms
and conditions of this Agreement and the terms and conditions of any other
Transaction Documents, the terms and conditions of such other Transaction
Documents shall govern and control.
13.7 Severability. If any provision, clause or part of this Agreement, or
the application thereof under certain circumstances, is held invalid, the
remainder of this Agreement, or the application of such provision, clause or
part under other circumstances, shall not be affected thereby.
13.8 No Reliance. No third party, other than a successor by operation of
law or an assignee permitted by this Agreement, is entitled to rely on any of
the representations, warranties and agreements contained in this Agreement and
no party to this Agreement assumes any liability to any third party, other than
an assignee permitted by this Agreement, because of any reliance on the
representations, warranties and agreements contained in this Agreement.
13.9 Binding. This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective heirs, legal representatives,
successors and assigns.
13.10 Survival. All covenants and agreements of the parties to be performed
in this Agreement and all representations, warranties, covenants and indemnities
of the parties in this Agreement shall survive the Closing Date.
13.11 Allocation of Purchase Price. The Purchase Price shall be allocated
among the Facilities as set forth on Schedule 13.11 hereto. 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.
36
<PAGE>
13.12 Dispute Attorneys' Fees and Expenses. In the event of a dispute
between the parties to this Agreement with respect to the interpretation of
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 attorneys' fees and expenses, including its attorneys' fees and
expenses on appeal.
SIGNATURE PAGES FOLLOW
37
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Facilities Purchase
Agreement to be duly executed and delivered as a sealed instrument as of the day
and year first above written.
MONARCH PROPERTIES, LP
By: MP Operating, LLC, its General Partner
By: MP Operating, Inc., its Manager
By: (Seal)
-----------------------------
Name: Douglas Listman
---------------------------
Title: Chief Financial Officer
--------------------------
INTEGRATED HEALTH SERVICES, INC.
By: (Seal)
---------------------------------
Name: Daniel J. Booth
-------------------------------
Title: Senior Vice President
------------------------------
SELLERS:
BETHAMY LIVING CENTER
MANAGEMENT COMPANY, THE GENERAL
PARTNER OF BETHAMY LIVING CENTER
LIMITED PARTNERSHIP
BRIAR HILL, INC.
CEDARCROFT HEALTH SERVICES, INC.
IHS ACQUISITION NO. 103, INC.
IHS ACQUISITION NO. 114, INC.
IHS ACQUISITION NO. 121, INC.
IHS ACQUISITION NO. 124, INC.
IHS ACQUISITION NO. 125, INC.
IHS ACQUISITION NO. 127, INC.
IHS ACQUISITION NO. 128, INC.
IHS ACQUISITION NO. 129, INC.
IHS ACQUISITION NO. 131, INC.
IHS ACQUISITION NO. 132, INC.
IHS ACQUISITION NO. 133, INC.
S-1
<PAGE>
IHS ACQUISITION NO. 134, INC.
IHS ACQUISITION NO. 136, INC.
IHS ACQUISITION NO. 138, INC.
IHS ACQUISITION NO. 139, INC.
IHS ACQUISITION NO. 140, INC.
IHS ACQUISITION NO. 168, INC.
IHS ACQUISITION NO. 170, INC.
IHS ACQUISITION NO. 171, INC.
IHS ACQUISITION NO. 174, INC.
INTEGRATED OF AMARILLO, INC.
INTEGRATED HEALTH SERVICES AT
BRIARCLIFF HAVEN, INC.
INTEGRATED HEALTH SERVICES AT
CENTRAL FLORIDA, INC.
INTEGRATED HEALTH SERVICES AT
COLORADO SPRINGS, INC.
INTEGRATED HEALTH SERVICES AT
HANOVER HOUSE, INC.
MANCHESTER INTEGRATED HEALTH,
INC.
REST HAVEN NURSING CENTER
(WHITEMARSH), INC.
By: (Seal)
---------------------------------
Name: Daniel J. Booth
-------------------------------
Title: Senior Vice President
------------------------------
S-2
<PAGE>
EXHIBIT A
SELLERS
-------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
SELLER NAME STATE OF INCORPORATION FACILITY D/B/A/
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Integrated Health Services at Delaware Integrated Health Services of
Colorado Springs, Inc. Colorado Springs
- -------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 103, Inc. Delaware Horizon Healthcare & Specialty
Center
- -------------------------------------------------------------------------------------------------------------------
Integrated Health Services at Delaware Integrated Health Services of Vero
Central Florida, Inc. Beach
- -------------------------------------------------------------------------------------------------------------------
Briar Hill, Inc. Florida Integrated Health Services of Florida
at Auburndale
- -------------------------------------------------------------------------------------------------------------------
Bethamy Living Center Limited Florida Integrated Health Services of Florida
Partnership at Clearwater
- -------------------------------------------------------------------------------------------------------------------
Integrated Health Services at Delaware Integrated Health Services of Florida
Central Florida, Inc. at Fort Pierce
- -------------------------------------------------------------------------------------------------------------------
Integrated Health Services at Georgia Integrated Health Services of Atlanta
Briarcliff Haven, Inc. at Briarcliff Haven
- -------------------------------------------------------------------------------------------------------------------
Cedarcroft Health Services, Inc. Pennsylvania Integrated Health Services of St.
Louis at Big Bend Woods
- -------------------------------------------------------------------------------------------------------------------
Manchester Integrated Health, Inc. Pennsylvania Integrated Health Services of New
Hampshire at Manchester
- -------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 121, Inc. Delaware Ruidoso Care Center
- -------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 125, Inc. Delaware Meadowview Care Center
- -------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 124, Inc. Delaware Washington Square
- -------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 168, Inc. Delaware HSH - Midwest City
- -------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 127, Inc. Delaware Midwest City Nursing
- -------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 114, Inc. Delaware Lynwood Manor
- -------------------------------------------------------------------------------------------------------------------
Rest Haven Nursing Center Pennsylvania Integrated Health Services at
(Whitemarsh), Inc. Whitemarsh
- -------------------------------------------------------------------------------------------------------------------
Integrated of Amarillo, Inc. Texas Amarillo Specialty Hospital
- -------------------------------------------------------------------------------------------------------------------
Integrated of Amarillo, Inc. Texas Integrated Health Services of
Amarillo
- -------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 128, Inc. Delaware Doctors Healthcare Center
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
SELLER NAME State of Incorporation Facility d/b/a/
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
IHS Acquisition No. 140, Inc. Delaware Harbor View Care Center
- -------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 134, Inc. Delaware Heritage Estates
- -------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 132, Inc. Delaware Heritage Gardens
- -------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 138, Inc. Delaware Heritage Manor Longview
- -------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 129, Inc. Delaware Heritage Manor Plano
- -------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 133, Inc. Delaware Heritage Place of Grand Prairie
- -------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 131, Inc. Delaware Horizon Healthcare - El Paso
- -------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 170, Inc. Delaware HSH- Corpus Christi
- -------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 171, Inc. Delaware HSH- El Paso
- -------------------------------------------------------------------------------------------------------------------
Integrated Health Services at Delaware Mountain View Place
Hanover House, Inc.
- -------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 139, Inc. Delaware Parkwood Place
- -------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 174, Inc. Delaware Plano Specialty Hospital
- -------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 136, Inc. Delaware Silver Springs Nursing and
Rehabilitation Center
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT B
DESCRIPTION OF FACILITIES
-------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACILITY NAME ADDRESS BEDS SUBTENANT NAME STATE OF
INCORPORATION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Integrated Health Services 3625 Parkmoor Village 155 Integrated Health Delaware
of Colorado Springs Colorado Springs, Colorado Services at Colorado
80917 Springs, Inc.
719-550-0200
719-637-0756 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Horizon Healthcare & 1350 S. Nova Road 158 IHS Acquisition No. Delaware
Specialty Center Daytona Beach, Florida 32114 103, Inc.
(HHC- Daytona) 904-258-5544
904-255-5623 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Integrated Health Services 3663 15th Avenue 110 Integrated Health Delaware
of Vero Beach Vero Beach, Florida 32960 Services at Central
561-567-2552 Florida, Inc.
561-567-8929 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Integrated Health Services 919 Old Winter Haven Road 120 Briar Hill, Inc. Florida
of Florida at Auburndale Auburndale, Florida 33823
941-967-4125
941-551-9407 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Integrated Health Services 2055 Palmetto Street 150 Bethamy Living Center, Florida
of Florida at Clearwater Clearwater, Florida 34625 Limited Partnership
813-461-6613
813-442-2839 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Integrated Health Services 703 South 29th Street 107 Integrated Health Delaware
of Florida at Fort Pierce Fort Pierce, Florida 34947 Services at Central
561-466-3322 Florida, Inc.
561-466-8057 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Integrated Health Services 1000 Briarcliff Road 128 Integrated Health Georgia
of Atlanta at Briarcliff Atlanta, Georgia 30306 Services at Briarcliff
Haven 404-875-6456 Haven, Inc.
404-874-4604 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Lynwood Manor 730 Kimole Lane 99 IHS Acquisition No. Delaware
Adrian, Michigan 49221 114, Inc.
517-263-6771
517-265-8599 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACILITY NAME ADDRESS BEDS SUBTENANT NAME STATE OF
INCORPORATION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Integrated Health Services 110 Highland Ave. 176 Cedarcroft Health Pennsylvania
of St. Louis at Big Bend Valley Park, Missouri 63088 Services, Inc.
Woods 314-225-5144
314-225-8427 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Integrated Health Services 191 Hackett Hill Road 68 Manchester Integrated Pennsylvania
of New Hampshire at Manchester, New Hampshire Health, Inc.
Manchester 03102
603-668-8161
603-622-2584 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Ruidoso Care Center 5th & D Street 73 IHS Acquisition No. Delaware
Ruidoso, New Mexico 121, Inc.
505-257-9071
505-257-3101 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Meadowview Care Center 76 High Street 100 IHS Acquisition No. Delaware
Seville, Ohio 44273 125, Inc.
330-769-2015
330-769-3790 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Washington Square 202 Washington St. NW 96 IHS Acquisition No. Delaware
Warren, Ohio 44483 124, Inc.
330-399-8997
330-393-5889 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
HSH - Midwest City 8200 National Avenue 31 IHS Acquisition No. Delaware
Midwest City, Oklahoma 73110 168, Inc.
405-739-0800
405-739-6480 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Midwest City Nursing 8200 National Avenue 106 IHS Acquisition No. Delaware
Midwest City, Oklahoma 73110 127, Inc.
405-737-8200
405-736-1227 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Integrated Health Services 9209 Ridge Pike 244 Rest Haven Nursing Pennsylvania
at Whitemarsh Whitemarsh, Pennsylvania 19128 Center (Whitemarsh),
610-825-6560 Inc.
610-941-9524 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Amarillo Specialty 5601 Plum Creek Drive 30 Integrated of Amarillo, Texas
Hospital Amarillo, Texas 79124 Inc.
806-351-1000
806-355-9650 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACILITY NAME ADDRESS BEDS SUBTENANT NAME STATE OF
INCORPORATION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Doctors Healthcare Center 9009 White Rock Trail 325 IHS Acquisition No. Delaware
Dallas, Texas 128, Inc.
214-348-8100
214-343-3865 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Harbor View Care Center 1314 Third Street 116 IHS Acquisition No. Delaware
Corpus Christi, Texas 78401 140, Inc.
(Nueces County)
512-888-5511
512-888-6267 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Heritage Estates 201 Sycamore School Road 152 IHS Acquisition No. Delaware
Ft. Worth, Texas 76134 134, Inc.
(Tarrant County)
817-293-7610
817-293-5766 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Heritage Gardens 2135 North Denton Drive 150 IHS Acquisition No. Delaware
Carrollton, Texas 75006 132, Inc.
214-242-0666
214-323-9279 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Heritage Manor Longview 112 Ruthlynn Drive 150 IHS Acquisition No. Delaware
Longview, Texas 75601 138, Inc.
(Gregg County)
903-753-8611
903-758-4026 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Heritage Manor Plano 1621 Coit Rd. 186 IHS Acquisition No. Delaware
Plano, Texas 75075 129, Inc.
214-596-7930
214-867-6798 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Heritage Place of Grand 820 Small Street 166 IHS Acquisition No. Delaware
Prairie Grand Prairie, Texas 75050 133, Inc.
214-262-1351
214-642-8056 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Horizon Healthcare -El 2301 N. Oregon Street. 182 IHS Acquisition No. Delaware
Paso El Paso, Texas 79902 131, Inc.
915-532-8941
915-545-5050 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACILITY NAME ADDRESS BEDS SUBTENANT NAME STATE OF
INCORPORATION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HSH- Corpus Christi 1310 Third Street 31 IHS Acquisition No. Delaware
Corpus Christi, Texas 78401 170, Inc.
(Nueces County)
512-888-5511
512-888-6267 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
HSH- El Paso 2311 N. Oregon Street 31 IHS Acquisition No. Delaware
El Paso, Texas 79902 171, Inc.
915-545-1823
915-545-6378 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Integrated Health Services 5601 Plum Creek Drive 120 Integrated of Amarillo, Texas
of Amarillo Amarillo, Texas 79124 Inc.
806-351-1000
806-355-9650 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Mountain View Place 1600 Murchison Road 187 Integrated Health Delaware
El Paso, Texas 79902 Services at Hanover
915-544-2002 House, Inc.
915-544-0696 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Parkwood Place 300 N. Bynum 157 IHS Acquisition No. Delaware
Lufkin, Texas 75904 139, Inc.
409-637-7215
409-637-2368 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Plano Specialty Hospital 1621 Coit Road 30 IHS Acquisition No. Delaware
(HSH- Plano) Plano, Texas 75075 174, Inc.
214-596-7930
214-867-6788 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Silver Springs Nursing and 12350 Wood Bayou Drive 150 IHS Acquisition No. Delaware
Rehabilitation Center Houston, Texas 77013 136, Inc.
(Harris County)
713-453-0446
713-450-3037 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
EXHIBIT 10.68
AMENDED AND RESTATED
MASTER FRANCHISE AGREEMENT
BETWEEN
INTEGRATED HEALTH SERVICES FRANCHISING CO., INC.
AND
LYRIC HEALTH CARE LLC
----------
DATED AS OF DECEMBER 31, 1998
----------
<PAGE>
TABLE OF CONTENTS
ARTICLES
- --------
ARTICLE 1. Definitions
ARTICLE 2. Grant and Acceptance of Franchise
ARTICLE 3. [Intentionally 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. [Intentionally 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. [Intentionally 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 - Facility Franchise Agreement
EXHIBIT 2 - List of Facilities
EXHIBIT 3 - [Intentionally Omitted]
EXHIBIT 4 - List of Individual Franchisee Names, Names of Businesses, and
Territories
EXHIBIT 5 - Guidelines for Determining Territories
<PAGE>
AMENDED AND RESTATED
MASTER FRANCHISE AGREEMENT
THIS AMENDED AND RESTATED MASTER FRANCHISE AGREEMENT (this "Agreement") is
made and entered into as of December 31, 1998, between INTEGRATED HEALTH
SERVICES FRANCHISING CO., INC. ("Franchisor"), a Delaware corporation, with its
principal office at 10065 Red Run Boulevard, Owings Mills, Maryland 21117 and
LYRIC HEALTH CARE LLC ("Lyric"), a Delaware limited liability company, 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. 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, except to Lyric
pursuant to a Master Franchise Agreement, dated as of January 13, 1998, as
amended by the First Amendment to Master Franchise Agreement, dated as of March
31, 1998 and by the Second Amendment to Master Franchise Agreement, dated as of
December 3, 1998 (the "Prior Franchise Agreement"), between Franchisor and
Lyric.
Franchisor and Lyric now wish to amend and restate the Prior Master
Franchise Agreement pursuant to the terms and conditions of this Agreement.
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
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.
1
<PAGE>
"Control" means the power, directly or indirectly, to direct or cause the
direction of the management and policies of a corporation or other entity.
"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 the facility franchise agreement
between Franchisor and a Franchisee in the form attached as Exhibit 1 hereto.
"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.
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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.
"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.
"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 Amended and Restated Operating Agreement of
Lyric, as amended or restated from time to time.
"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";
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(b) the word "day" means a calendar day unless otherwise specified;
(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 hereto with the Franchisee
specified in such Exhibit for the Territory listed on Exhibit 4 hereto; 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. The Territories of
such future franchises shall be determined in accordance with Exhibit 5
hereto.
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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 Facility 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 Facility Franchise Agreement (and Franchisor and Lyric agree to
use commercially reasonable best efforts to comply with such laws, rules and
regulations).
ARTICLE 3. [INTENTIONALLY 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") commencing on
the date hereof and continuing for the same period as the Lease Term, as defined
in the Lease.
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 annual 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 one percent (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 three hundred and sixty-five (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 three hundred and sixty-five
(365).
5.5 Credit for Payments by Lyric Franchisees. Amounts paid directly by
Franchisees to Franchisor (if any) pursuant to the Facility 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 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 other rights and remedies
under this Agreement, to require reconsideration and revision of Lyric's current
annual and
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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 this Agreement 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 Systems and identified by the Proprietary
Materials shall inure directly and exclusively to the benefit of Franchisor and
IHS.
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
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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.
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
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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.
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
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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.
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
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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 Systems 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;
(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
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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 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 Facility
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)
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Franchisor and Lyric or the respective Franchisee enter into a Facility
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. [INTENTIONALLY 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.
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).
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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 Facility
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; 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 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
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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.
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 Facility Franchise Agreement in the Territory
covered by such Facility 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) thirty 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.
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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).
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 One Hundred Thousand
Dollars ($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) consent 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.
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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, 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 of this Agreement (other than payments covered by (f)
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
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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, 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 Facility 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 as
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
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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. [INTENTIONALLY 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.
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.
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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, 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 Facility Franchise Agreements 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 Facility Franchise Agreements.
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, or 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
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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 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
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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 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.
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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.
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".
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.
23
<PAGE>
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 TEN (10) BUSINESS DAYS BEFORE THE EXECUTION OF THIS
AGREEMENT, OR TEN (10) BUSINESS DAYS BEFORE ANY PAYMENT BY LYRIC OR A FRANCHISEE
OF ANY CONSIDERATION IN CONNECTION WITH THIS AGREEMENT. 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 FACILITY 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 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
24
<PAGE>
the Franchisees' respective Facility Franchise Agreements with Franchisor,
whether such Facility 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 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
25
<PAGE>
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
Facility Franchise Agreement until the particular Facility Franchise Agreement
has terminated in accordance with its terms.
SIGNATURE PAGE FOLLOWS
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Amended and Restated Master Franchise Agreement as of the date first
written above.
FRANCHISOR:
INTEGRATED HEALTH SERVICES
FRANCHISING CO., INC.
By: (Seal)
-----------------------------------
Name: Daniel J. Booth
---------------------------------
Title: Senior Vice President
--------------------------------
LYRIC:
LYRIC HEALTH CARE LLC
By: Integrated Health Services, Inc., its Member
By: (Seal)
-----------------------------------
Name: Daniel J. Booth
---------------------------------
Title: Senior Vice President
--------------------------------
S-1
<PAGE>
EXHIBIT 1
---------
FACILITY FRANCHISE AGREEMENT
----------------------------
FACILITY FRANCHISE AGREEMENT
AMONG
LYRIC HEALTH CARE LLC,
[INSERT SUBSIDIARY]
AND
INTEGRATED HEALTH SERVICES FRANCHISING CO., INC.
----------
DATED AS OF DECEMBER ___, 1998
----------
Exh. 1-1
<PAGE>
FACILITY FRANCHISE AGREEMENT
THIS FACILITY FRANCHISE AGREEMENT (this "Agreement") is made as of December
__, 1998, among LYRIC HEALTH CARE LLC, having an office at 8889 Pelican Bay
Boulevard, Suite 500, Naples, Florida 34103 ("Lyric"); [INSERT SUBSIDIARY],
having an office at [Insert Address] ("Franchisee"); and INTEGRATED HEALTH
SERVICES FRANCHISING CO., INC., having an office at 10065 Red Run Boulevard,
Owings Mills, Maryland 21117 ("Franchisor").
INTRODUCTORY STATEMENT
Pursuant to a Master Lease, dated as of the date hereof, between Monarch
Properties, LP, as lessor, and Lyric Health Care Holdings III, Inc.
("Holdings"), as lessee, and a Facility Sublease, dated as of the date hereof,
between Holdings, as sublessor, and Franchisee, as sublessee, Franchisee is the
sublessee and operator of a health care facility named [Insert Facility Name]
located at [Insert Facility Address], together with the equipment, furnishings,
and other tangible personal property to be used in connection therewith (the
"Facility"). Franchisee is wholly owned, directly or indirectly, by Lyric.
Lyric and Franchisor have entered into an Amended and Restated Master
Franchise Agreement, dated as of the date hereof (the "Master Franchise
Agreement") franchising the use of the "Trade Names" and the "Proprietary
Materials" (including the "IHS Systems") as defined therein. Franchisee desires
to obtain all the rights and benefits which are granted to "Franchisees" under
the Master Franchise Agreement; and Franchisor and Lyric are willing to accord
such rights and benefits to Franchisee, upon the terms and conditions set forth
below.
NOW, THEREFORE, in consideration of their mutual promises, and intending to
be legally bound hereby, the parties agree as follows:
ARTICLE 1. DEFINITIONS
1.1 Words and phrases defined in the Master Franchise Agreement shall have
the same meanings in this Agreement, unless otherwise defined herein.
1.2 In this Agreement:
(a) "Included Provisions" means all provisions of the Master Franchise
Agreement except the Excluded Provisions.
(b) "Excluded Provisions" means the following Sections and/or Articles
of the Master Franchise Agreement: Section 2.1(b); Section 5.1; Section
12.2; Section 12.3; Section 12.4; Article 15; Section 16.2; Article 23; and
Article 29.
Exh. 1-1
<PAGE>
(c) "Territory" means the area within a fifteen-mile radius of the
Facility.
1.3 Other words and phrases are defined in this Agreement.
ARTICLE 2. GRANT OF FRANCHISE
2.1 Franchisor hereby grants to Franchisee, but only with respect to the
Facility described in the Introductory Statement and the Territory described in
Section 1.2(c) above, all rights and benefits granted to Lyric or a "Franchisee"
under the Master Franchise Agreement, except for any rights of Lyric under the
Excluded Provisions.
2.2 Franchisee accepts the foregoing grant and hereby assumes and agrees to
keep, observe, and perform, but only with respect to the Facility described in
the Introductory Statement and the Territory described in Section 1.2(c) above,
all obligations and responsibilities of a "Franchisee" and/or Lyric under the
Master Franchise Agreement, except for any obligations of Lyric under the
Excluded Provisions.
2.3 In furtherance (and not in limitation) of the foregoing, the Included
Provisions are incorporated by reference in this Agreement. References to
"Lyric" in the Included Provisions shall be deemed to include "Franchisee."
ARTICLE 3. ANNUAL FEE
3.1 Franchisee shall pay to Lyric an"Annual Fee" equal to one percent (1%)
of Franchisee's annual Gross Revenues. Franchisee's Annual Fee shall be paid in
installments, and otherwise upon the same terms and conditions, as Lyric's
Annual Continuing Fee under the Master Franchise Agreement; and references to
the "Annual Continuing Fee" in the Included Provisions shall be deemed to mean
the Annual Fee under this Agreement.
ARTICLE 4. TERMINATION
4.1 This Agreement may be terminated by Franchisor--even if the Master
Franchise Agreement does not terminate--upon the occurrence of a default or
other failure by Franchisee under Article 17 of the Included Provisions.
Termination of this Agreement shall not per se terminate the Master Franchise
Agreement (although such termination may otherwise result from, or allow,
termination of the Master Franchise Agreement according to its terms).
Franchisee 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.
ARTICLE 5. REPRESENTATIONS AND WARRANTIES
5.1 Representations and Warranties of Franchisee. Franchisee represents and
warrants to Franchisor that:
Exh. 1-2
<PAGE>
(a) Franchisee is a corporation duly organized, validly existing and
in good standing under the laws of the State of [Insert];
(b) Franchisee's execution and delivery of this Agreement, and
Franchisee's performance of its obligations under this Agreement, have been
duly authorized by all necessary corporate action;
(c) this Agreement is the legal, valid, and binding obligation of
Franchisee, enforceable in accordance with its terms; and
(d) Franchisee has reviewed carefully and acknowledges and accepts
Article 28 of the Included Provisions.
ARTICLE 6. NOTICES
6.1 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 Franchisee: [Insert Subsidiary]
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attention: Daniel J. Booth
Copy to: Marshall A. Elkins, Esq.
To Lyric: Lyric Health Care LLC
8889 Pelican Bay Boulevard, Suite 500
Naples, Florida 34103
Attention: Daniel J. Booth
Copy to: Marshall A. Elkins, Esq.
Exh. 1-3
<PAGE>
To Franchisor: Integrated Health Services Franchising Co., Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attention: Daniel J. Booth
Copy to: Marshall A. Elkins, Esq.
ARTICLE 7. ASSIGNMENT
7.1 Assignment by Franchisee. Franchisee shall have no right to assign this
Agreement. Franchisee's interest in this Agreement may be assigned only as part
of an assignment of the interest of Lyric and all Franchisees in the Master
Franchise Agreement and all Facility Franchise Agreements pursuant to Section
16.2 of the Master Franchise Agreement.
7.2 Assignment by Franchisor. Franchisor shall have the same assignment
rights with respect to this Agreement as it does with respect to the Master
Franchise Agreement.
ARTICLE 8. WAIVER OF COVENANT NOT TO COMPETE POST-TERM
8.1 In the event that Franchisor fails to extend the term of this
Agreement, Franchisor shall be deemed to have waived section 13.2 of the Master
Franchise Agreement concerning the covenant of Lyric and Franchisee not to
compete post-term unless Franchisor provides notice to Franchisee at least six
(6) months prior to the expiration date of this Agreement that section 13.2 of
the Master Franchise Agreement is not waived.
SIGNATURE PAGE FOLLOWS
Exh. 1-4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Facility Franchise Agreement as of the day and year first above written.
FRANCHISEE: FRANCHISOR:
[INSERT SUBSIDIARY] INTEGRATED HEALTH
SERVICES FRANCHISING CO., INC.
By: By:
------------------------------ ------------------------------
Name: Daniel J. Booth Name: Daniel J. Booth
---------------------------- ----------------------------
Title: Senior Vice President 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
---------------------------
CONSENTED TO BY:
LYRIC HEALTH CARE HOLDINGS III, INC.
By:
------------------------------
Name: Daniel J. Booth
----------------------------
Title: Senior Vice President
---------------------------
Exh. 1-5
<PAGE>
EXHIBIT 2
---------
LIST OF FACILITIES
------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
<S> <C>
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 RFD 3 Box 47, Hanover Street Ext.
at Claremont Claremont, New Hampshire 03743
603-452-2606
603-453-0479 (fax)
- -----------------------------------------------------------------------------------------
4. Crestwood Care Center 225 West Main Street
Shelby, Ohio 44875
419-347-1266
419-342-7035 (fax)
- -----------------------------------------------------------------------------------------
5. Governor's Park 1420 South Barrington Road
Barrington, Illinois 60010
847-382-6664
847-382-6693 (fax)
- -----------------------------------------------------------------------------------------
6. Integrated Health Services of Florida at 2600 Courtland Street
Sarasota Nursing Pavilion Sarasota, Florida 34237
941-957-0310
941-365-7324 (fax)
- -----------------------------------------------------------------------------------------
7. Integrated Health Services of Pinellas Park 8701 49th Street N.
Pinellas Park, Florida 34666
813-546-4661
813-545-8783 (fax)
- -----------------------------------------------------------------------------------------
8. Integrated Health Services of Tarpon Springs 900 Beckett Way
Tarpon Springs, Florida 34699
813-934-0876
813-942-6790 (fax)
- -----------------------------------------------------------------------------------------
9. Integrated Health Services at Waterford 955 Garden Lake Pkwy
Commons Toledo, Ohio 43614
419-382-2200
419-381-0188 (fax)
- -----------------------------------------------------------------------------------------
10. Integrated Health Services of Hershey at 820 Rhue Haus Lane
Woodlands Hummelstown, Pennsylvania 17036
717-533-3351
717-533-3967 (fax)
- -----------------------------------------------------------------------------------------
</TABLE>
Exh. 2-1
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
<S> <C>
11. Integrated Health Services of Colorado 3625 Parkmoor Village
Springs Colorado Springs, Colorado 80917
719-550-0200
719-637-0756 (fax)
- -----------------------------------------------------------------------------------------
12. Horizon Healthcare & Specialty Center 1350 S. Nova Road
(HHC- Daytona) Daytona Beach, Florida 32114
904-258-5544
904-255-5623 (fax)
- -----------------------------------------------------------------------------------------
13. Integrated Health Services of Vero Beach 3663 15th Ave.
Vero Beach, Florida 32960
561-567-2552
561-567-8929 (fax)
- -----------------------------------------------------------------------------------------
14. Integrated Health Services of Florida at 919 Old Winter Haven Rd.
Auburndale Auburndale, Florida 33823
941-967-4125
941-551-9407 (fax)
- -----------------------------------------------------------------------------------------
15. Integrated Health Services of Florida at 2055 Palmetto Street
Clearwater Clearwater, Florida 34625
813-461-6613
813-442-2839 (fax)
- -----------------------------------------------------------------------------------------
16. Integrated Health Services of Florida at Fort 703 South 29th St.
Pierce Fort Pierce, Florida 34947
561-466-3322
561-466-8057 (fax)
- -----------------------------------------------------------------------------------------
17. Integrated Health Services of Atlanta at 1000 Briarcliff Rd.
Briarcliff Haven Atlanta, Georgia 30306
404-875-6456
404-874-4604 (fax)
- -----------------------------------------------------------------------------------------
18. Lynwood Manor 730 Kimole Lane
Adrian, Michigan 49221
517-263-6771
517-265-8599 (fax)
- -----------------------------------------------------------------------------------------
19. Integrated Health Services of St. Louis at Big 110 Highland Ave.
Bend Woods Valley Park, Missouri 63088
314-225-5144
314-225-8427 (fax)
- -----------------------------------------------------------------------------------------
20. Integrated Health Services of New Hampshire 191 Hackett Hill Rd.
at Manchester Manchester, New Hampshire 03102
603-668-8161
603-622-2584 (fax)
- -----------------------------------------------------------------------------------------
21. Ruidoso Care Center 5th & D Street
Ruidoso, New Mexico
505-257-9071
505-257-3101 (fax)
- -----------------------------------------------------------------------------------------
</TABLE>
Exh. 2-2
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
<S> <C>
22. Meadowview Care Center 76 High Street
Seville, Ohio 44273
330-769-2015
330-769-3790 (fax)
- -----------------------------------------------------------------------------------------
23. Washington Square 202 Washington St. NW
Warren, Ohio 44483
330-399-8997
330-393-5889 (fax)
- -----------------------------------------------------------------------------------------
24. HSH Midwest City 8200 National Avenue
Midwest City, Oklahoma 73110
405-739-0800
405-739-6480 (fax)
- -----------------------------------------------------------------------------------------
25. Midwest City Nursing 8200 National Avenue
Midwest City, Oklahoma 73110
405-737-8200
405-736-1227 (fax)
- -----------------------------------------------------------------------------------------
26. Integrated Health Services at Whitemarsh 9209 Ridge Pike
Whitemarsh, Pennsylvania 19128
610-825-6560
610-941-9524 (fax)
- -----------------------------------------------------------------------------------------
27. Amarillo Specialty Hospital 5601 Plum Creek Drive
Amarillo, Texas 74124
806-351-1000
806-355-9650 (fax)
- -----------------------------------------------------------------------------------------
28. Doctors Healthcare Center 9009 White Rock Trail
Dallas, Texas
214-348-8100
214-343-3865 (fax)
- -----------------------------------------------------------------------------------------
29. Harbor View Care Center 1314 Third Street
Corpus Christi, Texas 78401
(Nueces County)
512-888-5511
512-888-6267 (fax)
- -----------------------------------------------------------------------------------------
30. Heritage Estates 201 Sycamore School Rd.
Ft. Worth, Texas 76134
(Tarrant County)
817-293-7610
817-293-5766 (fax)
- -----------------------------------------------------------------------------------------
31. Heritage Gardens 2135 North Denton Drive
Carrollton, Texas 75006
214-242-0666
214-323-9279 (fax)
- -----------------------------------------------------------------------------------------
</TABLE>
Exh. 2-3
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
<S> <C>
32. Heritage Manor Longview 112 Ruth Lynn Drive
Longview, Texas 75601
(Gregg County)
903-753-8611
903-758-4026 (fax)
- -----------------------------------------------------------------------------------------
33. Heritage Manor Plano 1621 Coit Rd.
Plano, Texas 75075
214-596-7930
214-867-6798 (fax)
- -----------------------------------------------------------------------------------------
34. Heritage Place Grand Prairie 820 Small Street
Grand Prairie, Texas 75050
214-262-1351
214-642-8056 (fax)
- -----------------------------------------------------------------------------------------
35. Horizon Healthcare - El Paso 2301 N. Oregon St.
El Paso, Texas 79902
915-532-8941
915-545-5050 (fax)
- -----------------------------------------------------------------------------------------
36. HSH- Corpus Christi 1310 Third Street
Corpus Christi, Texas 78401
(Nueces County)
512-888-5511
512-888-6267 (fax)
- -----------------------------------------------------------------------------------------
37. HSH- El Paso 2311 N. Oregon St.
El Paso, Texas 79902
915-545-1823
915-545-6378 (fax)
- -----------------------------------------------------------------------------------------
38. Integrated Health Services of Amarillo 5601 Plum Creek Drive
Amarillo, Texas 74124
806-351-1000
806-355-9650 (fax)
- -----------------------------------------------------------------------------------------
39. Mountain View Place 1600 Murchison Road
El Paso, Texas 79902
915-544-2002
915-544-0696 (fax)
- -----------------------------------------------------------------------------------------
40. Parkwood Place 300 N. Bynum
Lufkin, Texas 75904
409-637-7215
409-637-2368 (fax)
- -----------------------------------------------------------------------------------------
41. Plano Specialty Hospital (HSH- Plano) 1621 Colt Road
Plano, Texas 75075
214-596-7930
214-867-6788 (fax)
- -----------------------------------------------------------------------------------------
42. Silver Springs Nursing and Rehabilitation 12350 Wood Bayou Drive
Center Houston, Texas 77013
214-596-7930
214-867-6788 (fax)
- -----------------------------------------------------------------------------------------
</TABLE>
Exh. 2-4
<PAGE>
EXHIBIT 3
---------
INTENTIONALLY OMITTED
Exh. 3-1
<PAGE>
EXHIBIT 4
---------
LIST OF INDIVIDUAL FRANCHISEE NAMES,
------------------------------------
NAMES OF BUSINESSES,
--------------------
AND TERRITORIES
---------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
OWNER FACILITY TERRITORY
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bethamy Living Center Limited Partnership Integrated Health The area within a
Services of Florida fifteen-mile radius of
at Clearwater Integrated Health
Services of Florida
at Clearwater
- -----------------------------------------------------------------------------------------------------------------
Briar Hill, Inc. Integrated Health The area within a
Services of Florida fifteen-mile radius of
at Auburndale Integrated Health
Services of Florida
at Auburndale
- -----------------------------------------------------------------------------------------------------------------
Cambridge Group of Pennsylvania, Inc. Integrated Health The area within a
Services of Hershey fifteen-mile radius of
at Woodlands Integrated Health
Services of Hershey
at Woodlands
- -----------------------------------------------------------------------------------------------------------------
Cedarcroft Health Services, Inc. Integrated Health The area within a
Services of St. Louis fifteen-mile radius of
at Big Bend Woods Integrated Health
Services of St. Louis
at Big Bend Woods
- -----------------------------------------------------------------------------------------------------------------
Central Park Lodges (Tarpon Springs), Inc. Integrated Health The area within a
Services of Tarpon fifteen-mile radius of
Springs Integrated Health
Services of Tarpon
Springs
- -----------------------------------------------------------------------------------------------------------------
Claremont Integrated Health, Inc. Integrated Health The area within a
Services of New fifteen-mile radius of
Hampshire at Integrated Health
Claremont Services of New
Hampshire at
Claremont
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Exh. 4-1
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
OWNER FACILITY TERRITORY
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
F. L. C. Sarasota Nursing Pavilion, Inc. Integrated Health The area within a
Services of Florida fifteen-mile radius of
at Sarasota Nursing Integrated Health
Pavilion Services of Florida
at Sarasota Nursing
Pavilion
- -----------------------------------------------------------------------------------------------------------------
Gainesville Health Care Center, Inc. Integrated Health The area within a
Services at fifteen-mile radius of
Gainesville Integrated Health
Services at
Gainesville
- -----------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 103, Inc. Horizon Healthcare The area within a
& Specialty Center fifteen-mile radius of
(HHC - Daytona) Horizon Healthcare
& Specialty Center
(HHC - Daytona)
- -----------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 114, Inc. Lynwood Manor The area within a
fifteen-mile radius of
Lynwood Manor
- -----------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 121, Inc. Ruidoso Care Center The area within a
fifteen-mile radius of
Ruidoso Care Center
- -----------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 123, Inc. Crestwood Care The area within a
Center fifteen-mile radius of
Crestwood Care
Center
- -----------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 124, Inc. Washington Square The area within a
fifteen-mile radius of
Washington Square
- -----------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 125, Inc. Meadowview Care The area within a
Center fifteen-mile radius of
Meadowview Care
Center
- -----------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 127, Inc. Midwest City The area within a
Nursing fifteen-mile radius of
Midwest City
Nursing
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Exh. 4-2
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
OWNER FACILITY TERRITORY
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
IHS Acquisition No. 128, Inc. Doctors Healthcare The area within a
Center fifteen-mile radius of
Doctor Healthcare
Center
- -----------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 129, Inc. Heritage Manor The area within a
Plano fifteen-mile radius of
Heritage Manor
Plano
- -----------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 131, Inc. Horizon Healthcare - The area within a
El Paso fifteen-mile radius of
Horizon Healthcare -
El Paso
- -----------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 132, Inc. Heritage Gardens The area within a
fifteen-mile radius of
Heritage Gardens
- -----------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 133, Inc. Heritage Place of The area within a
Grand Prairie fifteen-mile radius of
Heritage Place of
Grand Prairie
- -----------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 134, Inc. Heritage Estates The area within a
fifteen-mile radius of
Heritage Estates
- -----------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 136, Inc. Silver Springs The area within a
Nursing and fifteen-mile radius of
Rehabilitation Center Silver Springs
Nursing and
Rehabilitation Center
- -----------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 138, Inc. Heritage Manor The area within a
Longview fifteen-mile radius of
Heritage Manor
Longview
- -----------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 139, Inc. Parkwood Place The area within a
fifteen-mile radius of
Parkwood Place
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Exh. 4-3
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
OWNER FACILITY TERRITORY
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
IHS Acquisition No. 140, Inc. Harbor View Care The area within a
Center fifteen-mile radius of
Harbor View Care
Center
- -----------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 168, Inc. HSH Midwest City The area within a
fifteen-mile radius of
HSH Midwest City
- -----------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 170, Inc. HSH - Corpus The area within a
Christi fifteen-mile radius of
HSH - Corpus
Christi
- -----------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 171, Inc. HSH - El Paso The area within a
fifteen-mile radius of
HSH - El Paso
- -----------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 174, Inc. Plano Specialty The area within a
Hospital fifteen-mile radius of
Plano Specialty
Hospital
- -----------------------------------------------------------------------------------------------------------------
Integrated Health Services at Briarcliff Integrated Health The area within a
Haven, Inc. Services at Briarcliff fifteen-mile radius of
Haven Integrated Health
Services at Briarcliff
Haven
- -----------------------------------------------------------------------------------------------------------------
Integrated Health Services at Central Integrated Health The area within a
Florida, Inc. Services of Florida fifteen-mile radius of
at Fort Pierce Integrated Health
Services of Florida
at Fort Pierce
- -----------------------------------------------------------------------------------------------------------------
Integrated Health Services at Central Integrated Health The area within a
Florida, Inc. Services at Vero fifteen-mile radius of
Beach Integrated Health
Services at Vero
Beach
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Exh. 4-4
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
OWNER FACILITY TERRITORY
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Integrated Health Services at Hanover Mountain View The area within a
House, Inc. Place fifteen mile radius of
Integrated Health
Services at Mountain
View Place
- -----------------------------------------------------------------------------------------------------------------
Integrated Health Services of Colorado Integrated Health The area within a
Springs, Inc. Services of Colorado fifteen-mile radius of
Springs Integrated Health
Services of Colorado
Springs
- -----------------------------------------------------------------------------------------------------------------
Integrated Health of Waterford Commons, Integrated Health The area within a
Inc. Services at fifteen-mile radius of
Waterford Commons Integrated Health
Services at
Waterford Commons
- -----------------------------------------------------------------------------------------------------------------
Integrated of Amarillo, Inc. Integrated Health The area within a
Services of Amarillo fifteen-mile radius of
Integrated Health
Services of Amarillo
- -----------------------------------------------------------------------------------------------------------------
Integrated of Amarillo, Inc. Amarillo Specialty The area within a
Hospital fifteen-mile radius of
Amarillo Specialty
Hospital
- -----------------------------------------------------------------------------------------------------------------
Integrated Management - Governor's Park, Governor's Park The area within a
Inc. Nursing and fifteen-mile radius of
Rehabilitation Center Governor's Park
Nursing and
Rehabilitation Center
- -----------------------------------------------------------------------------------------------------------------
Manchester Integrated Health, Inc. Integrated Health The area within a
Services of New fifteen-mile radius of
Hampshire at Integrated Health
Manchester Services of New
Hampshire at
Manchester
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Exh. 4-5
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
OWNER FACILITY TERRITORY
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Pinellas Park Nursing Home, Inc. Integrated Health The area within a
Services of Pinellas fifteen-mile radius of
Park Integrated Health
Services of Pinellas
Park
Rest Haven Nursing Center (Chestnut Hill), Integrated Health The area within a
Inc. Services of Chestnut fifteen-mile radius of
Hill Integrated Health
Services of Chestnut
Hill
- -----------------------------------------------------------------------------------------------------------------
Rest Haven Nursing Center (Whitemarsh), Integrated Health The area within a
Inc. Services at fifteen-mile radius of
Whitemarsh Integrated Health
Services at
Whitemarsh
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Exh. 4-6
<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 2 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
AMENDED AND RESTATED
MASTER MANAGEMENT AGREEMENT
BETWEEN
LYRIC HEALTH CARE LLC
AND
IHS FACILITY MANAGEMENT, INC.
----------
DATED AS OF DECEMBER 31, 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 INTENTIONALLY OMITTED
ARTICLE II REPRESENTATIONS AND WARRANTIES
ARTICLE III TERMINATION RIGHTS
ARTICLE IV INSURANCE
ARTICLE V MISCELLANEOUS PROVISIONS
i
<PAGE>
AMENDED AND RESTATED
MASTER MANAGEMENT AGREEMENT
THIS AMENDED AND RESTATED MASTER MANAGEMENT AGREEMENT (this "Agreement") is
made and entered into as of December 31, 1998, between LYRIC HEALTH CARE LLC, a
Delaware limited liability company, with offices at 10065 Red Run Boulevard,
Owings Mills, Maryland 21117 ("Lyric") and IHS FACILITY MANAGEMENT, INC., a
Delaware corporation, with offices at 10065 Red Run Boulevard, Owings Mills,
Maryland 21117 ("Manager").
INTRODUCTORY STATEMENT
Pursuant to a Master Management Agreement, dated as of January 13, 1998, as
amended by the First Amendment to Master Management Agreement, dated as of March
31, 1998 and by the Second Amendment to Master Management Agreement, dated as of
December 3, 1998 (the "Prior Master Management Agreement"), between Lyric and
Manager, Lyric and Manager entered into an agreement whereby Lyric granted to
Manager the sole and exclusive right to supervise, manage, and operate the
Facilities listed on Schedule 1 thereto.
Lyric and Manager now wish to amend and restate the Prior Master Management
Agreement pursuant to the terms and conditions of this Agreement.
Lyric owns, indirectly, all of the shares of each of the corporations
listed on Schedule 1 hereto (each, an "Owner" and collectively, the "Owners").
Each Owner operates the health care facility set forth opposite its name on
Schedule 1 hereto (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 from
the wholly owned subsidiary of Lyric described on Schedule 2 hereto ("Lessor"),
which Lessor in turn leases its Facilities from the owner of the Facilities
under the specified Master Lease (the "Master Lease") described on Schedule 2
hereto. Each of the Facility Subleases contains substantially the same
provisions as the associated Master Lease except for provisions concerning rent
and other matters specific to the Facility. In this Agreement "Lease" means the
Master Lease and the Facility 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.
1
<PAGE>
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:
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
2
<PAGE>
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 began on the Commencement Date, as
defined in the Prior Master Management Agreement (the "Commencement Date") and
shall continue for the same period as the 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 each 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
3
<PAGE>
of said Facility. Manager shall be responsible, also, for coordinating health
insurance coverages (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 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.
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.
4
<PAGE>
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, 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
5
<PAGE>
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;
(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, subject to the retention of an appropriate operating reserve,
as determined in Manager's reasonable judgment. In this Agreement, the term
"Facility Rent" means Rent, as defined in 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.
6
<PAGE>
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 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.
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%).
7
<PAGE>
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 each year's
proposed budgets to Owner no later than December 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 30 of the preceding year. 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;
(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 until such agreement is
reached, 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
8
<PAGE>
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.
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
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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.
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 three percent
(3%) of Gross Revenues derived for each calendar month of the Term; provided
that if Gross Revenues for any calendar year exceed $350 million, then the Base
Management Fee for such year shall be four percent (4%) of Gross Revenues for
such calendar year and the resulting increase shall be paid in one installment
with the last monthly payment of Base Management Fee for such year. 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 Gross Revenues of the Facilities during the preceding month as set forth in
such financial statements. Notwithstanding the foregoing, if Gross Revenues for
any three (3) consecutive month period in any calendar year beginning as of
January 1, 1998, represent annualized Gross Revenues for such calendar year in
excess of $350 million, then the monthly Base Management Fee thenceforth payable
to Manager during such calendar year shall be an amount equal to four percent
(4%) of Gross Revenues derived for each calendar month of the Term; provided,
however, that if the actual Gross Revenues for any calendar year did not exceed
$350 million, then the one percent (1%) overpayment of the Base Management Fee
shall be offset against installments of the Base Management Fee next becoming
due to Manager; and, provided, further, that if an Event of Default exists for
failure to pay Rent under any Facility Sublease, then the amount of any
overpayment of the Base Management Fee shall instead be paid by Manager for and
on behalf of Owner to the owner of the Facility under the specified Facility
Sublease to remedy the Event of Default, with the remainder of such overpayment
(if any) used to offset against installments of the Base Management Fee next
becoming due to Manager. For purposes of determining whether the actual Gross
Revenues for the calendar year ending December 31, 1998 exceeded $350 million,
Gross Revenues for the Facilities shall be calculated using both (i) revenues
and income received by the Owners during the period of such calendar year that
Manager manages the Facilities pursuant to this Agreement and (ii) revenues and
income received by the Owners (or any predecessor in interest to an Owner)
during the prior period of such calendar year.
(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
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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 fifteen (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; provided, however,
that if an Event of Default exists for failure to pay Rent under any Facility
Sublease, then the amount of any overpayment of Incentive Management Fees shall
instead be paid by Manager for and on behalf of Owner to the owner of the
Facility under the specified Facility Sublease to remedy the Event of Default,
with the remainder of such overpayment (if any) used to 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 Facilities shall
be as follows:
From: Gross Revenues for the Facilities (calculated according to
GAAP)
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 the Owners 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;
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(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 for the period
in which they are received. However, funds required to be repaid as a result of
Medicare and Medicaid audits shall be deducted from Gross Revenues for the
period in which they are paid.
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.
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;
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(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.
ARTICLE VI
INTENTIONALLY OMITTED
ARTICLE VII
INTENTIONALLY OMITTED
ARTICLE VIII
TERMINATION RIGHTS
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:
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(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;
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; provided, however, that
in the case of a default as described in subsection (b) above, this Agreement
may be terminated only as to the Facility with respect to which such default has
occurred.
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;
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(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 sixty (60)
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 wrongful act or omission of Manager);
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;
provided, however, that in the case of a default as described in subsection (b)
above, this Agreement may be terminated only as to the Facility with respect to
which such default has occurred.
8.3 MATERIAL ADVERSE CHANGE. Manager shall be entitled to terminate this
Agreement as to any Facility in the event that any material adverse change
occurs in the financial or operating condition of such 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 its interest in 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 its interest in 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
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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 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
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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 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
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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 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 and 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, 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.
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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 any 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 as to such Facility on the
date on which Owner shall be required to surrender possession of the Facility.
Manager shall continue to 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 a 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, and the Acquiring
Corporation assumes all of the obligations of Manager then accrued hereunder, if
any, then 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.
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12.2 SALE, ASSIGNMENT OR SUBLEASE BY OWNER; RELATED MATTERS. Any sale,
sublease, or assignment with respect to any 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 any 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 any 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 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 may be given by Timothy F. Nicholson or such
other person 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
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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
INTENTIONALLY OMITTED
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.
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,
22
<PAGE>
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.
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
23
<PAGE>
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-XI" 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.
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.
24
<PAGE>
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
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attention: Daniel J. Booth
Copy to: Marshall A. Elkins, Esq.
To Manager: IHS FACILITY MANAGEMENT, INC.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attention: Daniel J. Booth
Copy to: Marshall A. Elkins, Esq.
With a copy to: INTEGRATED HEALTH SERVICES, INC.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attention: Daniel J. Booth
Copy to: 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.
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
25
<PAGE>
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
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amended and Restated Master Management Agreement as of the date first above
written.
MANAGER:
IHS FACILITY MANAGEMENT, INC.
By: (Seal)
----------------------------
Name: Daniel J. Booth
--------------------------
Title: Senior Vice President
-------------------------
LYRIC:
LYRIC HEALTH CARE LLC
By: Integrated Health Services, Inc., its
Member
By: (Seal)
----------------------------
Name: Daniel J. Booth
--------------------------
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
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
OWNER NAME OF FACILITY
- --------------------------------------------------------------------------------------------------------
<S> <C>
F. L. C. Sarasota Nursing Pavilion, Inc. Integrated Health Services of Florida at Sarasota
Nursing Pavilion
- --------------------------------------------------------------------------------------------------------
Pinellas Park Nursing Home, Inc. Integrated Health Services of Pinellas Park
- --------------------------------------------------------------------------------------------------------
Central Park Lodges (Tarpon Springs), Inc. Integrated Health Services of Tarpon Springs
- --------------------------------------------------------------------------------------------------------
Integrated Health Services at Waterford Integrated Health of Waterford Commons, Inc.
Commons
- --------------------------------------------------------------------------------------------------------
Cambridge Group of Pennsylvania, Inc. Integrated Health Services of Hershey at
Woodlands
- --------------------------------------------------------------------------------------------------------
Gainesville Health Care Center, Inc. Integrated Health Services at Gainesville
- --------------------------------------------------------------------------------------------------------
Rest Haven Nursing Center (Chestnut Hill), Inc. Integrated Health Services of Chestnut Hill
- --------------------------------------------------------------------------------------------------------
Claremont Integrated Health, Inc. Integrated Health Services of New Hampshire at
Claremont
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 123, Inc. Crestwood Care Center
- --------------------------------------------------------------------------------------------------------
Integrated Management - Governor's Park, Inc. Governor's Park Nursing and Rehabilitation
Center
- --------------------------------------------------------------------------------------------------------
Integrated Health Services of Colorado Springs, Integrated Health Services of Colorado Springs
Inc.
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 103, Inc. Horizon Healthcare & Specialty Center
(HHC- Daytona)
- --------------------------------------------------------------------------------------------------------
Integrated Health Services at Central Florida, Integrated Health Services of Vero Beach
Inc.
- --------------------------------------------------------------------------------------------------------
Briar Hill, Inc. Integrated Health Services of Florida at
Auburndale
- --------------------------------------------------------------------------------------------------------
Bethamy Living Center Limited Partnership Integrated Health Services of Florida at
Clearwater
- --------------------------------------------------------------------------------------------------------
Integrated Health Services at Central Florida, Integrated Health Services of Florida at Fort
Inc. Pierce
- --------------------------------------------------------------------------------------------------------
</TABLE>
Sch. 1-1
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
OWNER NAME OF FACILITY
- --------------------------------------------------------------------------------------------------------
<S> <C>
Integrated Health Services at Briarcliff Haven, Integrated Health Services of Atlanta at
Inc. Briarcliff Haven
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 114, Inc. Lynwood Manor
- --------------------------------------------------------------------------------------------------------
Cedarcroft Health Services, Inc. Integrated Health Services of St. Louis at Big
Bend Woods
- --------------------------------------------------------------------------------------------------------
Manchester Integrated Health, Inc. Integrated Health Services of New Hampshire at
Manchester
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 121, Inc. Ruidoso Care Center
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 125, Inc. Meadowview Care Center
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 124, Inc. Washington Square
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 168, Inc. HSH Midwest City
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 127, Inc. Midwest City Nursing
- --------------------------------------------------------------------------------------------------------
Rest Haven Nursing Center (Whitemarsh), Inc. Integrated Health Services at Whitemarsh
- --------------------------------------------------------------------------------------------------------
Integrated of Amarillo, Inc. Amarillo Specialty Hospital
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 128, Inc. Doctors Healthcare Center
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 140, Inc. Harbor View Care Center
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 134, Inc. Heritage Estates
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 132, Inc. Heritage Gardens
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 138, Inc. Heritage Manor Longview
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 129, Inc. Heritage Manor Plano
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 133, Inc. Heritage Place of Grand Prairie
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 131, Inc. Horizon Healthcare -El Paso
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 170, Inc. HSH- Corpus Christi
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 171, Inc. HSH- El Paso
- --------------------------------------------------------------------------------------------------------
Integrated of Amarillo, Inc. Integrated Health Services of Amarillo
- --------------------------------------------------------------------------------------------------------
Integrated Health Services at Hanover House, Mountain View Place
Inc.
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 139, Inc. Parkwood Place
- --------------------------------------------------------------------------------------------------------
IHS Acquisition No. 174, Inc. Plano Specialty Hospital (HSH- Plano)
- --------------------------------------------------------------------------------------------------------
</TABLE>
Sch. 1-2
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
OWNER NAME OF FACILITY
- --------------------------------------------------------------------------------------------------------
<S> <C>
IHS Acquisition No. 136, Inc. Silver Springs Nursing and Rehabilitation Center
- --------------------------------------------------------------------------------------------------------
</TABLE>
Sch. 1-3
<PAGE>
SCHEDULE 2
MASTER LEASES/FACILITY SUBLEASES
A. Master Lease, dated as of January 13, 1998, between Lyric Health Care
Holdings, Inc. and Omega Healthcare Investors, Inc.:
1. Facility Sublease, dated as of January 13, 1998, between Rest Haven
Nursing Center (Chestnut Hill), Inc. and Lyric Health Care Holdings,
Inc.
2. Facility Sublease, dated as of January 13, 1998, between Claremont
Integrated Health, Inc. and Lyric Health Care Holdings, Inc.
3. Facility Sublease, dated as of January 13, 1998, between Gainesville
Healthcare Center, Inc. and Lyric Health Care Holdings, Inc.
4. Facility Sublease, dated as of December __, 1998, between IHS
Acquisition No. 123, Inc. and Lyric Health Care Holdings, Inc.
5. Facility Sublease, dated as of January 13, 1998, between Integrated
Management- Governor's Park, Inc., and Lyric Health Care Holdings,
Inc.
B. Master Lease, dated as of March 31, 1998, between Lyric Health Care
Holdings II, Inc. and Omega Healthcare Investors, Inc.:
1. Facility Sublease, dated as of March 31, 1998, between F. L. C.
Sarasota Nursing Pavilion, Inc. and Lyric Health Care Holdings II,
Inc..
2. Facility Sublease, dated as of March 31, 1998, between Pinellas Park
Nursing Home, Inc. and Lyric Health Care Holdings II, Inc.
3. Facility Sublease, dated as of March 31, 1998, between Central Park
Lodges (Tarpon Springs), Inc. and Lyric Health Care Holdings II, Inc.
4. Facility Sublease, dated as of March 31, 1998, between Integrated
Health of Waterford Commons, Inc. and Lyric Health Care Holdings II,
Inc.
5. Facility Sublease, dated as of March 31, 1998, between Cambridge Group
of Pennsylvania, Inc. and Lyric Health Care Holdings II, Inc.
Sch. 2-1
<PAGE>
C. Master Lease, dated as of December 31, 1998, between Lyric Health Care
Holdings III, Inc. and Monarch Properties, LP:
1. Facility Sublease, dated as of December 31, 1998, between Integrated
Health Services at Colorado Springs, Inc. and Lyric Health Care
Holdings III, Inc.
2. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 103, Inc. and Lyric Health Care Holdings III, Inc.
3. Facility Sublease, dated as of December 31, 1998, between Integrated
Health Services at Central Florida, Inc. and Lyric Health Care
Holdings III, Inc.
4. Facility Sublease, dated as of December 31, 1998, between Briar Hill,
Inc. and Lyric Health Care Holdings III, Inc.
5. Facility Sublease, dated as of December 31, 1998, between Bethamy
Living Center Limited Partnership and Lyric Health Care Holdings III,
Inc.
6. Facility Sublease, dated as of December 31, 1998, between Integrated
Health Services at Central Florida, Inc. and Lyric Health Care
Holdings III, Inc.
7. Facility Sublease, dated as of December 31, 1998, between Integrated
Health Services at Briarcliff Haven, Inc. and Lyric Health Care
Holdings III, Inc.
8. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 114, Inc. and Lyric Health Care Holdings III, Inc.
9. Facility Sublease, dated as of December 31, 1998, between Cedarcroft
Health Services, Inc. and Lyric Health Care Holdings III, Inc.
10. Facility Sublease, dated as of December 31, 1998, between Manchester
Integrated Health, Inc. and Lyric Health Care Holdings III, Inc.
11. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 121, Inc. and Lyric Health Care Holdings III, Inc.
12. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 125, Inc. and Lyric Health Care Holdings III, Inc.
13. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 124, Inc. and Lyric Health Care Holdings III, Inc.
14. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 168, Inc. and Lyric Health Care Holdings III, Inc.
Sch. 2-2
<PAGE>
15. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 127, Inc. and Lyric Health Care Holdings III, Inc.
16. Facility Sublease, dated as of December 31, 1998, between Rest Haven
Nursing Center (Whitemarsh), Inc. and Lyric Health Care Holdings III,
Inc.
17. Facility Sublease, dated as of December 31, 1998, between Integrated
of Amarillo, Inc. and Lyric Health Care Holdings III, Inc.
18. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 128, Inc. and Lyric Health Care Holdings III, Inc.
19. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 140, Inc. and Lyric Health Care Holdings III, Inc.
20. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 134, Inc. and Lyric Health Care Holdings III, Inc.
21. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 132, Inc. and Lyric Health Care Holdings III, Inc.
22. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 138, Inc. and Lyric Health Care Holdings III, Inc.
23. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 129, Inc. and Lyric Health Care Holdings III, Inc.
24. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 133, Inc. and Lyric Health Care Holdings III, Inc.
25. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 131, Inc. and Lyric Health Care Holdings III, Inc.
26. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 170, Inc. and Lyric Health Care Holdings III, Inc.
27. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 171, Inc. and Lyric Health Care Holdings III, Inc.
28. Facility Sublease, dated as of December 31, 1998, between Integrated
of Amarillo, Inc. and Lyric Health Care Holdings III, Inc.
29. Facility Sublease, dated as of December 31, 1998, between Integrated
Health Services at Hanover House, Inc. and Lyric Health Care Holdings
III, Inc.
Sch. 2-3
<PAGE>
30. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 139, Inc. and Lyric Health Care Holdings III, Inc.
31. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 174, Inc. and Lyric Health Care Holdings III, Inc.
32. Facility Sublease, dated as of December 31, 1998, between IHS
Acquisition No. 136, Inc. and Lyric Health Care Holdings III, Inc.
Sch. 2-4
EXHIBIT 10.77
MASTER LEASE
BETWEEN
MONARCH PROPERTIES, LP
AND
LYRIC HEALTH CARE HOLDINGS III, INC.
DATED AS OF DECEMBER 31, 1998
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 LEASE; TERM; RENEWALS...............................................1
1.1 Lease...............................................................1
1.2 Term................................................................2
1.3 Allocation of Base Rent.............................................2
1.4 First Option to Renew...............................................2
1.5 Second Option to Renew. ...........................................2
1.6 Third Option to Renew. ............................................2
1.7 Other Conditions of Renewal.........................................2
ARTICLE 2 DEFINITIONS.........................................................3
2.1 Certain Definitions.................................................3
2.2 Other Definitions..................................................21
ARTICLE 3 RENT; RELATED MATTERS..............................................21
3.1 Rent...............................................................21
3.2 Additional Charges.................................................21
3.3 Earn Out Rent......................................................21
3.4 Late Charge; Interest..............................................22
3.5 Method of Payment of Rent..........................................22
3.6 Net Lease; No Offset...............................................22
ARTICLE 4 IMPOSITIONS; RELATED MATTERS.......................................22
4.1 Payment of Impositions.............................................22
4.2 Adjustment of Impositions..........................................23
4.3 Utility Charges....................................................23
4.4 Insurance Premiums.................................................23
ARTICLE 5 NO TERMINATION, ABATEMENT, ETC.....................................24
ARTICLE 6 OWNERSHIP OF LEASED PROPERTY; PERSONAL
PROPERTY...........................................................24
6.1 Ownership of the Leased Property...................................24
6.2 Landlord's Personal Property.......................................25
6.3 Tenant's Personal Property.........................................25
6.4 Grant of Security Interest in Tenant's Personal Property;
Restriction on Other Liens.........................................26
i
<PAGE>
ARTICLE 7 CONDITION AND USE OF LEASED PROPERTIES.............................26
7.1 Condition of the Leased Properties.................................26
7.2 Use of the Leased Property.........................................27
ARTICLE 8 LEGAL AND INSURANCE REQUIREMENTS...................................27
8.1 Compliance with Legal and Insurance Requirements...................27
8.2 Legal Requirement Covenants........................................28
8.3 Certain Financial and Other Covenants..............................28
8.4 Other Businesses. ................................................29
ARTICLE 9 MAINTENANCE AND REPAIR; ENCROACHMENTS..............................29
9.1 Maintenance and Repair.............................................29
9.2 Encroachments, Restrictions, etc...................................32
ARTICLE 10 ALTERATIONS AND ADDITIONS..........................................32
10.1 Construction of Alterations and Additions to Leased Property.......32
10.2 Asbestos Removal for Alterations and Additions.....................33
ARTICLE 11 REMOVAL OF LIENS...................................................33
ARTICLE 12 CONTEST OF LEGAL REQUIREMENTS, ETC.................................33
12.1 Permitted Contests.................................................34
12.2 Landlord's Requirement for Deposits................................34
ARTICLE 13 INSURANCE..........................................................35
13.1 General Insurance Requirements.....................................35
13.2 Replacement Cost...................................................37
13.3 Worker's Compensation Insurance....................................37
13.4 Waiver of Liability; Waiver of Subrogation.........................37
13.5 Other Requirements.................................................37
13.6 Intentionally Omitted..............................................38
13.7 Blanket Policy.....................................................38
13.8 No Separate Insurance..............................................38
ARTICLE 14 CASUALTY LOSS......................................................39
14.1 Insurance Proceeds.................................................39
14.2 Restoration in the Event of Damage or Destruction..................39
14.3 Intentionally Omitted..............................................40
14.4 Tenant's Personal Property.........................................40
14.5 Restoration of Tenant's Property...................................40
14.6 No Abatement of Rent...............................................40
14.7 Consequences of Purchase of Damaged Leased Property................40
ii
<PAGE>
14.8 Damage Near End of Term............................................40
14.9 Waiver.............................................................41
14.10 Procedure for Disbursement of Insurance Proceeds...................41
ARTICLE 15 TAKINGS............................................................42
15.1 Total Taking.......................................................42
15.2 Allocation of Portion of Award.....................................42
15.3 Partial Taking.....................................................43
15.4 Temporary Taking...................................................43
ARTICLE 16 CONSEQUENCES OF EVENTS OF DEFAULT..................................44
16.1 Events of Default..................................................44
16.2 Landlord's Rights Upon Tenant's Default............................44
16.3 Liability for Costs and Expenses...................................44
16.4 Certain Remedies...................................................44
16.5 Damages............................................................44
16.6 Waiver.............................................................45
16.7 Application of Funds...............................................45
ARTICLE 17 LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT..........................45
ARTICLE 18 CERTAIN ENVIRONMENTAL MATTERS ....................................46
18.1 Prohibition Against Use of Hazardous Substances....................46
18.2 Notice of Environmental Claims, Actions or Contaminations..........46
18.3 Costs of Remedial Actions with Respect to Environmental Matters....46
18.4 Delivery of Environmental Documents................................46
18.5 Environmental Audit................................................47
18.6 Entry onto Leased Property for Environmental Matters...............47
18.7 Environmental Matters Upon Termination or Expiration of Term of
This Lease.........................................................47
18.8 Compliance with Environmental Laws.................................48
18.9 Environmental Related Remedies.....................................49
18.10 Environmental Indemnification......................................50
18.11 Rights Cumulative and Survival.....................................51
ARTICLE 19 HOLDOVER MATTERS...................................................52
19.1 Holding Over.......................................................52
19.2 Indemnity..........................................................52
ARTICLE 20 SUBORDINATION; ATTORNMENT; ESTOPPELS...............................52
20.1 Subordination......................................................52
20.2 Attornment.........................................................53
20.3 Estoppel Certificate...............................................53
iii
<PAGE>
ARTICLE 21 RISK OF LOSS.......................................................53
ARTICLE 22 INDEMNIFICATION....................................................53
22.1 Indemnification....................................................53
22.2 Survival of Indemnification; Tenant Right to Defend Landlord.......55
ARTICLE 23 LIMITATIONS ON TRANSFERS...........................................55
23.1 General Prohibition against Transfer...............................55
23.2 Corporate or Partnership Transactions..............................56
23.3 Permitted Subleases................................................56
23.4 Transfers to a Controlled Entity...................................57
23.5 Subordination and Attornment.......................................57
23.6 Sublease Limitation................................................57
23.7 Facility Subleases Permitted.......................................57
ARTICLE 24 CERTAIN FINANCIAL MATTERS..........................................58
24.1 Officer's Certificates and Financial Statements....................58
24.2 Public Offering Information........................................59
ARTICLE 25 LANDLORD INSPECTION................................................60
ARTICLE 26 [INTENTIONALLY OMITTED]............................................61
ARTICLE 27 [INTENTIONALLY OMITTED]............................................61
ARTICLE 28 ACCEPTANCE OF SURRENDER............................................61
ARTICLE 29 MERGER OF TITLE; PARTNERSHIP.......................................61
29.1 No Merger of Title.................................................61
29.2 No Partnership.....................................................61
ARTICLE 30 CONVEYANCE BY LANDLORD.............................................62
ARTICLE 31 QUIET ENJOYMENT....................................................62
ARTICLE 32 [INTENTIONALLY OMITTED]............................................62
ARTICLE 33 APPRAISERS.........................................................62
ARTICLE 34 BREACH OF LEASE BY LANDLORD........................................63
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ARTICLE 35 PERSONAL PROPERTY OPTION; TRANSFER OF FACILITY CONTROL.............64
35.1 Landlord's Option to Purchase Tenant's Personal Property...........64
35.2 Facility Trade Names...............................................64
35.3 Transfer of Operational Control of the Facilities..................65
35.4 Intangibles and Personal Property..................................66
ARTICLE 36 [INTENTIONALLY OMITTED]............................................66
ARTICLE 37 MISCELLANEOUS......................................................66
37.1 Notices............................................................66
37.2 Survival, Choice of Law............................................67
37.3 Limitation on Recovery.............................................67
37.4 Waivers............................................................68
37.5 Consents...........................................................68
37.6 Counterparts.......................................................68
37.7 Options Follow Lease...............................................68
37.8 Rights Cumulative..................................................68
37.9 Entire Agreement...................................................68
37.10 Amendments in Writing..............................................68
37.11 Severability.......................................................69
37.12 Successors.........................................................69
37.13 Late Charges.......................................................69
37.14 Binding Effect.....................................................69
37.15 Exhibits and Schedules.............................................69
37.16 Waiver of Jury Trial...............................................69
37.17 Memorandum of Lease................................................69
37.18 Additional Tenant Obligations......................................69
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MASTER LEASE
THIS MASTER LEASE (this "Lease") is made and entered into as of the 31st
day of December, 1998 between MONARCH PROPERTIES, LP, a Delaware limited
partnership, with principal offices at 8889 Pelican Bay Boulevard, Naples,
Florida 34108 ("Landlord") and LYRIC HEALTH CARE HOLDINGS III, INC., a Delaware
corporation, with principal offices at 10065 Red Run Boulevard, Owings Mills,
Maryland 21117 ("Tenant").
W I T N E S S E T H:
WHEREAS, pursuant to the Facilities Purchase Agreement, dated as of
December 31, 1998 (the "Facilities Purchase Agreement") among Landlord,
Integrated Health Services, Inc. ("IHS") and the various wholly owned
subsidiaries of Tenant described on Exhibit A hereto (individually, a "Facility
Subtenant" and, collectively, the "Facility Subtenants") Landlord acquired and
is the present owner of the real property, improvements fixtures, and personal
property constituting the health care facilities described on Exhibit A hereto
(each a "Facility" or a "Leased Property"); and
WHEREAS, Landlord wishes to lease to Tenant, and Tenant wishes to lease
from Landlord, all of the Facilities;
WHEREAS, immediately prior hereto, the Facilities were operated by the
Facility Subtenants and, contemporaneously with the execution and delivery of
this Lease, Tenant and each of the Facility Subtenants will execute a Facility
Sublease (as defined below) with respect to their respective Facilities;
NOW, THEREFORE, in consideration of the rents, mutual covenants, and
agreements set forth in this Lease, the parties agree that the use and occupancy
of the Facility demised herein shall be subject to, and be in accordance with,
the terms, conditions and provisions of this Lease, as follows:
ARTICLE 1
LEASE; TERM; RENEWALS
1.1 LEASE. Upon and subject to the terms and conditions set forth in this
Lease, Landlord leases to Tenant, and Tenant hires and takes from Landlord, all
the Leased Properties.
1.2 TERM. The Term shall commence for all Facilities on the Commencement
Date and end for each Facility on the Expiration Date indicated for such
Facility on Exhibit B hereto, subject to the renewals described in Sections 1.4
through 1.7 hereof.
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1.3 ALLOCATION OF BASE RENT. The allocation of Base Rent among the Leased
Properties (as of the Commencement Date as agreed by Landlord and Tenant solely
for purposes of this Lease), is set forth on Exhibit B hereto. Notwithstanding
the foregoing, within one hundred twenty (120) days after the earlier of (a) the
end of the third Lease Year or (b) any refinancing of the Loan Facility,
Landlord may, in its sole discretion, amend Exhibit B hereto to reallocate the
then current total Base Rent among the Leased Properties based upon each of the
Leased Properties' allocable percentage of the actual Cash Flow from the
Facilities for the prior Lease Year or based upon any other reasonable method of
reallocation mutually acceptable to Landlord and Tenant.
1.4 FIRST OPTION TO RENEW. Tenant is hereby granted the option to renew
this Lease for a First Renewal Term for each Facility, which option shall be
exercised by Notice to Landlord at least one hundred eighty (180) days, but not
more than three hundred sixty (360) days, before the Expiration Date for such
Facility specified in Exhibit B hereto; provided, however, that no Event of
Default exists either on the date on which Tenant gives such Notice to Landlord
or on the applicable Expiration Date. During the First Renewal Term, all of the
terms and conditions of this Lease shall remain in full force and effect.
1.5 SECOND OPTION TO RENEW. If the Term of this Lease has been renewed as
provided above, Tenant is hereby granted the option to renew this Lease for the
Second Renewal Term for each Facility, which option shall be exercised by Notice
to Landlord 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 for
such Facility; provided, however, that no Event of Default exists either on the
date on which Tenant gives such Notice to Landlord 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.
1.6 THIRD OPTION TO RENEW. If the Term of this Lease has been renewed as
provided above, Tenant is hereby granted the option to renew this Lease for the
Third Renewal Term for each Facility, which option shall be exercised by Notice
to Landlord at least one hundred eighty (180) days, but not more than three
hundred sixty (360) days, prior to the expiration of the Second Renewal Term;
provided, however, that no Event of Default exists either on the date on which
Tenant gives such Notice to Landlord or on the date on which the Second Renewal
Term expires. During the Third Renewal Term, all of the terms and conditions of
this Lease shall remain in full force and effect.
1.7 OTHER CONDITIONS OF RENEWAL. The options to renew granted pursuant to
Sections 1.4, 1.5 and 1.6 hereof may be exercised only with respect to all of
the Leased Properties specified in Exhibit A hereto for the exercise of such
options and the Base Rent and Earn Out Rent (if any) will be computed as if the
respective Renewal Term were merely an automatic extension of the preceding Term
(as specified in the definitions of Base Rent and Earn Out Rent).
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ARTICLE 2
DEFINITIONS
2.1 CERTAIN 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 Subtenant, and to Tenant 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 Subtenant's (or Tenant's)
operation and use of the Leased Property.
Additional Charges: All Impositions and all amounts, liabilities and
obligations other than Base Rent and Earn Out Rent that Tenant 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: One Million Dollars ($1,000,000).
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 Thirteen Million
Nine Hundred Seventy-Two Thousand Five Hundred Dollars ($13,972,500), and
(b) for each Lease Year thereafter (including each Lease Year in any
Renewal Term), the sum of (i) the Base Rent for the preceding Lease Year
plus (ii) the product of the Base Rent for the
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preceding Lease Year and the lower of (x) two (2) times the percentage
increase in the Cost of Living Index during the period commencing as of the
beginning of the preceding Lease Year and ending as of the expiration of
the preceding Lease Year or (y) three percent (3%) (except that for the
first Lease Year, the Cost of Living Index shall be measured from the end
of the month preceding the Commencement Date); provided, however, that in
no event shall the annual Base Rent increase be less than one percent (1%).
Notwithstanding the forgoing, for each Lease Year after the first Lease
Year (including each Lease Year in any Renewal Term) the annual Base Rent
increase described in clause (ii) hereof shall not apply to increase Base
Rent for such Lease Year if the average occupancy level of the total beds
in service at all the Facilities covered by this Lease throughout the prior
Lease Year was less than seventy percent (70%).
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 (other then this Lease) for which Tenant is
required, under GAAP, to account on its balance sheet as a capital lease.
Capitalized Lease Obligation: Any obligation of Tenant, as tenant or
guarantor, under a Capital Lease.
Cash Flow from the Facilities: The sum of (a) Net Income for the
applicable period; (b) the amount deducted by Tenant in computing Net
Income for the applicable period for (i) depreciation on any leasehold
improvements to the Facilities constructed by Tenant, (ii) amortization,
(iii) Base Rent and (iv) Earn Out Rent (if any); (c) interest; and (d)
Fees.
Cash Flow to Debt Service Requirement: For any fiscal period, the
ratio of Cash Flow from the Facilities to Debt Service (in each case
determined on a consolidated or combined basis with all the Facility
Subtenants) set forth with respect to such period on the schedule attached
as Exhibit C hereto.
Claim(s): Any lien, attachment, levy, encumbrance, charge or claim, or
any encroachment or restriction 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.
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Commencement Date: January 1, 1999.
Condemnor: Any public or quasi-public authority, or private
corporation or individual, having the power of condemnation.
Construction Funds: The Net Proceeds available for restoration or
repair work pursuant to Article 14 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 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, whether current or
long-term, that in accordance with GAAP would be included as liabilities on
a 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; and(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. However, Additional Charges shall not be deemed
Debt.
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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, (c) all Base
Rent due during the period and (d) all Earn Out Rent (if any) due during
the period.
Earn Out Rent: (a) For any Lease Year, the amount of any earn out
payments (if any) made by Landlord to IHS in accordance with Section 3.2 of
the Facilities Purchase Agreement times a rate equal to (i) the Base Rent
for the Lease Year in which the subject earn out payment is made divided by
(ii) $138,000,000, and (b) for each Lease Year thereafter (including each
Lease Year in any Renewal Term), the sum of (i) the full Earn Out Rent for
the preceding Lease Year as if all earn out payments and the related Earn
Out Rent were made effective the first day of the preceding Lease Year plus
(ii) the product of the Earn Out Rent for the preceding Lease Year and the
lower of (x) two (2) times the percentage increase in the Cost of Living
Index during the period commencing as of the beginning of the preceding
Lease Year and ending as of the expiration of the preceding Lease Year or
(y) three percent (3%) (except that for the first Lease Year, the Cost of
Living Index shall be measured from the end of the month preceding the
Commencement Date); provided, however, that in no event shall the annual
Earn Out Rent increase be less than one percent (1%). Notwithstanding the
forgoing, for each Lease Year after the first Lease Year (including each
Lease Year in any Renewal Term) the annual Earn Out Rent increase described
in clause (ii) hereof shall not apply to increase Earn Out Rent for such
Lease Year if the average occupancy level of the total beds in services at
all the Facilities covered by this Lease throughout the prior Lease Year
was less than seventy percent (70%). Notwithstanding further, no Earn Out
Rent shall be due in respect of earn out payments made by Landlord to IHS
involving any Leased Property that after such payments will no longer be
subject to this Lease.
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 Landlord, from an environmental firm acceptable to
Landlord, 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 Tenant or any Affiliate
from, or submitted by Tenant 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
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Leased Property leased by Tenant or Tenant's operations at the Leased
Property; and 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 Tenant that have been prepared by, for or on
behalf of Tenant.
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 the
manufacture, processing, distribution, use, treatment, storage,
transportation or disposal of Hazardous Substances; or (c) the Cleanup of
Contamination.
Equipment Lease Facility: Any equipment lease financing facility in
connection with Personal Property of a Facility designated as an Equipment
Lease Facility in Article 7 of any applicable Facility Management
Agreement.
Escrow Agreement: The Escrow Agreement of even date herewith between
Landlord and Tenant.
Estoppel Certificate: A statement in writing in substantially the same
form as Exhibit D hereto, with such changes thereto as reasonably may be
requested by the person relying on such certificate.
Event of Default: The occurrence of any of the following:
(a) If Tenant fails to pay Base Rent and Earn Out Rent (if any)
under this Lease when the same becomes due and payable within the earlier
of (i) five (5) Business Days after Notice or (ii) ten (10) Business Days
after the same becomes due and payable; or if Tenant fails to pay any
Additional Charges within ten (10) Business Days after Notice;
(b) If Tenant (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
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(c) If Tenant, 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 Tenant or of the whole or substantially all
of Tenant's property, or approving a petition filed against Tenant seeking
reorganization or arrangement of Tenant 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 Tenant 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 Tenant with or to an Affiliate; or
(e) If the estate or interest of Tenant 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 Tenant is in the process of contesting such lien or
attachment in good faith in accordance with Section 12.1 hereof); or
(f) If Tenant ceases operation of a Facility for a period in
excess of five (5) Business Days except upon prior written Notice to, and
with the express prior written consent of Landlord (which consent Landlord
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 Landlord'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 Tenant 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 Tenant or of Guarantor to repay borrowed
money in excess of Three Million Dollars ($3,000,000) or, in the aggregate,
obligations in excess of Seven Million Dollars ($7,000,000) is accelerated
by a creditor after default, unless (i) Notice of a dispute between Tenant
or Guarantor and such creditor is given to
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Landlord prior to such acceleration, (ii) Tenant or Guarantor have provided
Landlord with assurance, satisfactory to Landlord in its sole discretion,
that such acceleration will not materially affect Tenant, any of the Leased
Properties or the ability of Tenant and Guarantor to perform their
obligations under this Lease and the applicable Guaranty, and (iii)
Landlord has given Notice of such satisfaction to Tenant or Guarantor; or
(i) If Tenant fails to observe or perform 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 Landlord, 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)
Tenant proceeds promptly and with due diligence to cure the failure, (ii)
Tenant diligently and continuously completes the cure thereof and (iii)
such failure is cured prior to the time that the same results in civil or
criminal penalties to Landlord, Tenant or any Affiliates of either; or
(j) If any representation or warranty made by Tenant in the
Facilities Purchase Agreement or in the certificates delivered in
connection therewith proves to be untrue when made in any material respect,
and Landlord is materially and adversely affected thereby, and Tenant
fails, within twenty (20) days after Notice from Landlord thereof, to cure
such condition by terminating such adverse effect and making Landlord whole
for any damage suffered therefrom, or if with due diligence such cure
cannot be effected within twenty (20) days, if Tenant 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
Landlord, Tenant, any Affiliates of either, or any of the Leased
Properties; or
(k) If a default occurs under any Guaranty of this Lease given to
Landlord 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 23, if Tenant or any Facility Subtenant
transfers the operational control or management of the Facility currently
being operated by it without Landlord's prior written consent; or
(m) If (i) a default occurs on the part of Tenant or a Facility
Subtenant under the Master Management Agreement, the Master Franchise
Agreement, a Facility Management Agreement, a Facility Franchise Agreement,
the Escrow Agreement and any Facility Sublease and is not cured within any
applicable grace or cure period set forth therein, or (ii) a default occurs
on the part of Tenant or a Facility Subtenant under any other material
contract affecting any of the Facilities, Tenant or any Affiliate of
Tenant, or any Facility Subtenant, and the default is not cured within any
applicable grace or cure
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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 Facility; or
(n) If a default occurs under the Security Agreement and is not
cured within any applicable grace or cure period set forth therein; or
(o) If Tenant breaches the financial covenants set forth in
Section 8.3 hereof, 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 Tenant or Guarantor has actual
knowledge of such breach or (ii) Notice from Landlord; or
(p) If a default occurs under any Equipment Lease Facility and is
not cured within any applicable grace or cure period set forth therein; or
(q) If Tenant or any Facility Subtenant breaches any
representation or warranty or fails to observe or perform any of the
covenants, duties and obligations set forth on Exhibit G hereto as required
to be made or performed under Section 37.18 hereof, which activity results
in a default or event of default under the Loan Facility.
Executive Officer: The Chairman of the Board of Directors, the
President, any Vice President and the Secretary of a corporation.
Expiration Date: The "Expiration Date" for each particular Facility
specified on Exhibit B hereto.
Facilities: The Leased Properties.
Facility: Any one of the Leased Properties.
Facility Franchise Agreement: The facility franchise agreement among
Franchisor, Tenant and a Facility Subtenant relating to such Facility
Subtenant's operations at its Facility.
Facility Management Agreement: The facility management agreement among
Manager, Tenant and a Facility Subtenant relating to the management of such
Facility Subtenant's operations at its Facility.
Facility Purchase Price: The Purchase Price allocated to the Facility
on the Commencement Date, as set forth on Exhibit F hereto, increased by
three percent (3%) 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.
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Facility Rental Value: The Base Rent and Earn Out Rent (if any) (each
determined at the time in question) allocable to a Facility.
Facility Sublease: The facility sublease between Tenant and the
Facility Subtenant of such Facility.
Facility Subtenant: The subtenant of a Facility pursuant to a Facility
Sublease.
Facility Trade Names: The names under which the Facilities do or 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 Article 33.
Fees: The fees payable by Tenant or a Facility Subtenant 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 (for an interim 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 "Big Six" certified public accounting firm or another certified public
accounting firm approved by Landlord, which approval will not be
unreasonably withheld or delayed; provided, however, the "Big Six" or
approved Accounting Firm requirements will not apply to statements prepared
for an interim period.
First Renewal Term: The period described as such for a particular
Facility as specified in Exhibit B hereto.
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
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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 to constitute real estate, together with all replacements,
modifications, alterations and additions thereto but specifically excluding
all items included within the definition of the "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, consistently applied.
Guarantor: Lyric Health Care LLC, a Delaware limited liability
company.
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 PCBs,
regulated, restricted or prohibited under any Environmental Law.
IHS: Integrated Health Services, Inc., a Delaware corporation.
IHS Indemnity: The Indemnity Agreement executed by IHS in favor of
Landlord.
Impartial Appraiser: An appraiser selected by Landlord and reasonably
acceptable to Tenant.
Impositions: Collectively, all taxes (including, without limitation,
all real property taxes, ad valorem, sales and use, single business, gross
receipts, transaction privilege, rent 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 Tenant and/or the Rent
(including all interest and penalties thereon due to any failure of payment
by Tenant) applicable to periods of time within the Term hereof which at
any time may be assessed or imposed on or in respect of or be a lien upon
(a) the Facilities or any part thereof or (b) any rent therefrom or (c) any
estate, right, title or interest therein, or (d) any occupancy, operation,
use or possession of, or sales from, or activity conducted
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on, the applicable Leased Property or (e) the leasing or use of the
Facilities or any part thereof or (f) the Rent. So long as the Facilities
include a Facility in New Hampshire, the term "Imposition" shall include
any "enterprise tax" imposed upon Landlord by the State of New Hampshire;
provided, however, that if and when Landlord owns property in New Hampshire
in addition to the Facility leased hereunder, such tax shall be fairly
allocated among such properties. "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 Landlord
generally and not exclusively in connection with any Leased Property, or
(b) any net revenue tax of Landlord or any other person, or (c) any tax
imposed with respect to the sale, financing, exchange or other disposition
by Landlord of any Leased Property or the proceeds thereof, or (d) any
principal or interest on any indebtedness of Landlord or (e) on any ground
rent or other rent payable by Landlord.
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: The terms, conditions and requirements of any
insurance policy required by this Lease.
Investigations: Soil and chemical tests or any other environmental
investigations, examinations or analyses.
Land: The real property described on attached Exhibit A hereto.
Landlord's Personal Property: All Personal Property, except Tenant's
Personal Property, that at the Commencement Date or thereafter during the
Term 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.
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 January 1 through December 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
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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 (also "Facilities"): Collectively, the Land, Leased
Improvements, Related Rights and Landlord's Personal Property, and the
licensed nursing homes and/or other healthcare facilities being operated
thereon and therein, as identified on Exhibit A hereto.
Leased Property: Any one of the Leased Properties.
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 Tenant at any time in force affecting the Leased
Property, other than covenants, agreements, restrictions and encumbrances
created by Landlord without the consent of Tenant.
Lender: GMAC Commercial Mortgage Corporation, a California
corporation.
Loan Facility: The loan evidenced by the Loan Agreement, dated as of
December 30, 1998, between Landlord and Lender and the Loan Documents (as
defined therein), together with any and all other agreements or documents
executed by Landlord or others evidencing, securing or otherwise relating
to the Loan Facility.
Lyric: Lyric Health Care LLC, a Delaware limited liability company.
Lyric Guaranty: The Guaranty, dated as of the date hereof, executed by
Lyric in favor of Landlord.
Manager: IHS Facility Management, Inc., a Delaware corporation.
Management Agreement: Collectively, the Master Management Agreement
and each Facility Management Agreement.
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Master Franchise Agreement: The Amended and Restated Master Franchise
Agreement, dated as of December 31, 1998, between Lyric and Franchisor, as
amended from time to time, 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 Amended and Restated Master
Management Agreement, dated as of December 31, 1998, between Lyric and
Manager, as amended from time to time, setting forth common terms and
conditions for management of the Facilities.
Mechanics Liens: Liens of mechanics, laborers, materialmen, suppliers
or vendors.
Monarch: Monarch Properties, LLC, a Delaware limited liability
corporation.
Net Income: The aggregate net income of the Facility Subtenants 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.
Net Proceeds: All proceeds, net of any costs incurred by Landlord in
obtaining such proceeds, payable under any risk policy of insurance
required by Article 13 of this Lease (including proceeds with respect to
the Personal Property that Tenant elects to restore or replace pursuant to
Section 14.2 hereof).
Notice: A written notice given pursuant to Section 37.1 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.
Partial Taking: A Taking of a portion of a Facility or of less than
the whole fee title to a Facility.
Payment Date: The due date for the payment of the installments of Base
Rent, Earn Out Rent (if any), Additional Charges or any other sums payable
under this Lease.
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Permitted Debt: Any of the following:
(a) Debt (other than Debt as to which an Affiliate of Tenant is
the creditor) incurred by Tenant and/or the Facility Subtenants solely to
provide working capital to the respective Facilities;
(b) Debt of Tenant to Landlord;
(c) unsecured Debt of Tenant, other than for money borrowed,
incurred solely for trade payables in the ordinary course of business;
(d) Debt of Tenant to taxing or other governmental authorities
for taxes, assessments, governmental charges or levies, to the extent that
payment thereof shall not at the time be required to be made in accordance
with the provisions of Article 4 or Article 12 hereof;
(e) Debt of Tenant in respect of judgments or awards (i) which
have been in force for less than the applicable appeal period and in
respect of which execution thereof shall have been stayed pending such
appeal or review, or (ii) which are fully covered by insurance payable to
Tenant, or (iii) which are for an amount not in excess of Three Million
Dollars ($3,000,000) in the aggregate at any one time outstanding, and (A)
which have been in force for not longer than the applicable appeal period,
so long as execution is not levied thereunder, or (B) in respect of which
an appeal or proceedings for review shall at the time be prosecuted in good
faith in accordance with the provisions of Article 12 hereof, and in
respect of which execution thereof shall have been stayed pending such
appeal or review.
(f) unsecured borrowings of Tenant from its Affiliates which are
by their terms expressly subordinate to the payment and performance of
Tenant's obligations under this Lease; or
(g) Debt incurred solely for the purchase or lease of Tenant's
Personal Property.
Permitted Encumbrances: With respect to each of the Leased Properties,
matters constituting Permitted Encumbrances under the Facilities Purchase
Agreement, including any such matters arising after the Commencement Date
which, had they existed on the Commencement Date, would have been
considered Permitted Encumbrances under the Facilities Purchase Agreement.
Permitted Environmental Conditions: The asbestos-containing materials,
underground storage tanks, and other Hazardous Substances that currently
are located in,
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on, under or about the Leased Properties, in each case as disclosed in the
Environmental Audits delivered by Tenant to Landlord prior to the date of
this Lease, except to the extent that any such conditions are required to
be remedied by Tenant under the Facilities Purchase Agreement and the
Escrow Agreement.
Person: Any natural person, trust, partnership, limited liability
company, corporation, joint venture or other legal entity.
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 Tenant
or a Facility Subtenant, or in computers and equipment that is not included
within the definition of the term "Personal Property" but is either owned
by Tenant or a Facility Subtenant or as to which Tenant or a Facility
Subtenant 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 Tenant or a Facility Subtenant that
customarily are not located on any of the Leased Properties, and (d)
proprietary software owned by parties other than a Tenant or a Facility
Subtenant.
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.
Purchase Money Financing: Any financing (whether by lease, chattel
mortgage, installment sale, or otherwise) provided by a Person to Tenant or
a Facility Subtenant in connection with the acquisition of Personal
Property 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 Facilities
Purchase Agreement.
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Qualified Capital Expenditures: Expenditures capitalized on the books
of the Tenant or a Facility Subtenant for any of the following: 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, the Earn Out Rent (if any) and the
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 Landlord
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; provided, however, that Landlord shall use its reasonable
efforts to negotiate and obtain terms and conditions for any reletting of
the Leased Property that are commercially reasonable terms and conditions
under the circumstances, including, but not limited to, Rent from the
reletting that is reasonable for the Leased Property, and Landlord shall
abide by the real property laws applicable to the Leased Property in
respect of reletting the Leased Property and mitigating the liability and
obligations of Tenant and
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(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 Tenant that is unrelated
to Landlord and has experience and a reputation in the health care industry
and a credit standing reasonably equivalent to that of Tenant and
Guarantors.
Replaced Property: Any Fixtures or Personal Property that from time to
time are replaced, pursuant to Section 9.1.5 hereof, after the date of this
Lease.
Replacement Property: Any Fixtures or Personal Property acquired by
Tenant or a Facility Subtenant, in accordance with Section 9.1.5 hereof,
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: The period described as such for a particular
Facility as specified in Exhibit B hereto.
Security Agreement: The security agreement of even date herewith among
Landlord, Tenant and the Facility Subtenants.
State: With respect to each Facility, 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 Landlord to any Condemnor,
either under threat of condemnation or while legal proceedings for
condemnation are pending.
Tenant's Personal Property: All Personal Property (a) which Tenant or
a Facility Subtenant owns and uses, as of the date of this Lease, in
connection with the operation of the Leased Property, but that has not been
conveyed to Landlord pursuant to the Facilities Purchase Agreement or (b)
which Tenant or a Facility Subtenant acquires after the Commencement Date
for use by it in connection with any Facility.
Term: The Initial Term and, if renewed as provided in Article 1, the
First Renewal Term, the Second Renewal Term and the Third Renewal Term, as
applicable.
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,
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damages, penalties or expenses, brought by any person or entity other than
a governmental agency.
Third Renewal Term: The period described as such for a particular
Facility as specified in Exhibit B hereto.
Transfer: The (a) assignment, mortgaging or other encumbering of all
or any part of Tenant's interest in this Lease, a Facility Subtenant's
interest in a Facility Sublease or Tenant's or a Facility Subtenant's
interest in the Leased Property, (b) the subletting of the whole or any
part of the Leased Property to any Person other than a Facility Subtenant
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 Tenant, a
Facility Subtenant 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 hereof, by
discounting the applicable amount by the Prime Rate.
2.2 OTHER DEFINITIONS. Other words and phrases are defined elsewhere in
this Lease and in the Exhibits and Schedules hereto.
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ARTICLE 3
RENT; RELATED MATTERS
3.1 RENT. Tenant 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 due 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, Tenant shall pay the Base Rent in
equal, consecutive monthly installments in advance on the first 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, Tenant will also pay
and discharge as and when due and payable all Additional Charges. If Tenant
fails to pay any Additional Charges as and when due, Tenant 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 EARN OUT RENT. The first payment of Earn Out Rent shall be due on the
first day of the month following the date Landlord makes an earn out payment to
IHS in accordance with Section 3.2 of the Facilities Purchase Agreement;
provided, however, that the amount of Earn Out Rent due Landlord shall be
prorated for the period from the date Landlord makes the earn out payment to IHS
until the last day of the Lease Year, with the full amount of Earn Out Rent due
in the following Lease Year and throughout the remainder of the Term. Tenant
shall pay the Earn Out Rent in equal, consecutive monthly installments in
advance on the first day of each calendar month of the remaining Term.
3.4 LATE CHARGE; INTEREST. If any installment of Base Rent, Earn Out Rent
(if any) or any Additional Charges payable by Tenant to Landlord hereunder is
not paid within five (5) Business Days of the due date, Tenant shall pay
Landlord 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.
3.5 METHOD OF PAYMENT OF RENT. All Rent to be paid to Landlord shall be
paid by electronic funds transfer debit transactions through wire transfer of
immediately available funds to Landlord per the wiring instructions set forth on
Exhibit I hereto (as from time to time be changed by Landlord by Notice to
Tenant) and shall be initiated by Tenant 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. Tenant shall inform Landlord of each payment by sending a
facsimile transmission of Tenant's wire
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transfer confirmation not later than noon, eastern standard or daylight time, on
the Business Day immediately following the applicable payment date.
3.6 NET LEASE; NO OFFSET. The Rent shall be paid absolutely net to
Landlord, so that this Lease shall yield to Landlord the full amount of the
installments of Base Rent, Earn Out Rent (if any) 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 Tenant shall
pay all costs, expenses and charges arising out of the use, occupancy and
operation of the Leased Properties, without any offset, deduction, abatement, or
counterclaim whatsoever. Landlord shall not be required to furnish any services
whatsoever to any Facilities or to make any payment of any kind whatsoever; and
Landlord shall not be responsible for any loss or damage to any property of
Tenant, or a Facility Subtenant or any other user or occupant of any part of any
Facility, absent the gross negligence or willful misconduct of Landlord, its
employees or agents.
ARTICLE 4
IMPOSITIONS; RELATED MATTERS
4.1 PAYMENT OF IMPOSITIONS. Subject to the provisions of Article 12, Tenant
will pay or cause to be paid all Impositions before any fine, penalty, interest
or cost may be added for non-payment, and Tenant will promptly, upon request,
furnish to Landlord copies of official receipts or other satisfactory proof
evidencing such payments. If any such Imposition may, at the option of the
taxpayer, lawfully be paid in installments (whether or not interest shall accrue
on the unpaid balance of such Imposition), Tenant may exercise the option to pay
the same (and any accrued interest on the unpaid balance of such Imposition) in
installments and, in such event, Tenant 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 Tenant shall be paid to or retained by Tenant. Landlord shall remit
promptly to Tenant any refunds of Impositions received by Landlord. Landlord and
Tenant shall, upon request of the other, provide such data as is maintained by
the party to whom the request is made with respect to each Leased Property as
may be necessary to prepare any required returns and reports. Tenant will
provide Landlord, upon request, with cost and depreciation records in its
possession that are reasonably necessary for filing returns for any property
classified as personal property. Tenant may, at Tenant's sole cost and expense,
protest, appeal or institute such other proceedings as Tenant may deem
appropriate to effect a reduction of Impositions, and Landlord shall cooperate
with Tenant in such protest, appeal or other action. Tenant shall reimburse
Landlord for Landlord's direct costs of cooperating with Tenant with respect to
such protest, appeal or other action and shall indemnify, defend and hold
Landlord harmless against any expense or loss as a result thereof. The foregoing
shall not be construed as indemnifying Landlord against its own grossly
negligent acts or omissions or willful misconduct.
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4.2 ADJUSTMENT OF IMPOSITIONS. Impositions imposed in respect of the
tax-fiscal period during which the Term ends shall be adjusted and prorated
between Landlord and Tenant, whether or not such Imposition is imposed before or
after termination or expiration, and Tenant's obligation to pay their prorated
share thereof, if the same becomes due after such termination or expiration,
shall survive such termination or expiration.
4.3 UTILITY CHARGES. Tenant will pay or cause to be paid when due all
charges for electricity, power, gas, oil, water and other utilities used in the
respective Leased Properties during the Term.
4.4 INSURANCE PREMIUMS. Tenant will pay or cause to be paid when due all
premiums for the insurance coverage required to be maintained pursuant to
Article 13 during the Term.
ARTICLE 5
NO TERMINATION, ABATEMENT, ETC.
Except as otherwise specifically provided in this Lease, Tenant shall
remain bound by this Lease in accordance with its terms and shall not take any
action without the consent of Landlord to modify, surrender or terminate the
same, and shall not seek or be entitled to any offset, deduction abatement, or
counterclaim, or any deferral or reduction of Rent . The respective obligations
of Landlord and Tenant shall not be affected by reason of (a) 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; (b) the lawful or unlawful prohibition of, or restriction
upon, Tenant's use of any Leased Property, or any portion thereof, or the
interference with such use by any Person (other than Landlord or its employees
or agents) or by reason of eviction by paramount title; (c) any claim which
Tenant has or might have against Landlord or by reason of any default or breach
of any warranty by Landlord under this Lease or any other agreement between
Landlord and Tenant, or to which Landlord and Tenant are parties, (d) any
bankruptcy, insolvency, reorganization, composition, readjustment, liquidation,
dissolution, winding up or other proceedings affecting Landlord or any assignee
or transferee of Landlord, or (e) any other cause whether similar or dissimilar
to any of the foregoing other than a discharge of Tenant from any such
obligations as a matter of law. Tenant 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 Tenant to any reduction,
suspension or deferral of the Rent or other sums payable by Tenant hereunder
except and unless as otherwise specifically provided in this Lease.
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ARTICLE 6
OWNERSHIP OF LEASED PROPERTY; PERSONAL PROPERTY
6.1 OWNERSHIP OF THE LEASED PROPERTY. Tenant acknowledges that the Leased
Properties are the property of Landlord and that Tenant has only the right to
the possession and use of the Leased Property leased by it upon the terms and
conditions of this Lease. Tenant will not (a) file any income tax return or
other associated documents; (b) file any other document with or submit any
document to any governmental body or authority; (c) enter into any written
contractual arrangement with any Person; or (d) release any financial statements
of Tenant, in each case that takes any position other than that, throughout the
Term, Landlord 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 LANDLORD'S PERSONAL PROPERTY. Tenant shall, during the entire Term,
maintain all of Landlord'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 Landlord's
Personal Property requires replacement in order to comply with the foregoing,
Tenant shall replace it with other similar property of the same or better
quality at Tenant's sole cost and expense; the Replaced Property shall no longer
be Landlord's Personal Property; and the Replacement Property shall become part
of Landlord's Personal Property. Tenant shall not permit or suffer Landlord's
Personal Property to be subject to any lien, charge, encumbrance, financing
statement or agreement or contract of sale or the like, except for any purchase
money security interest on equipment or Landlord's interest therein, expressly
approved in advance, in writing, by Landlord. At the expiration or earlier
termination of this Lease, all of Landlord's Personal Property shall be
surrendered to Landlord with the Leased Property in the condition required by
Section 9.1.6 hereof.
6.2.1 Motor Vehicles. Tenant acknowledges that the motor vehicles
described in the Bill of Sale were purchased by Landlord pursuant to
the Facilities Purchase Agreement, are the property of Landlord, and
are leased to Tenant hereunder, notwithstanding the fact that for the
convenience of the parties record title to such vehicles has not
changed and the interest of Landlord is not reflected on the
certificates of title of such vehicles. Upon demand of Landlord,
Tenant shall deliver to Landlord, and cause the Facility Subtenants to
deliver to Landlord, the certificates of title to any such vehicles.
6.3 TENANT'S PERSONAL PROPERTY. Tenant shall provide and maintain, during
the entire Term, such Personal Property, in addition to Landlord's Personal
Property, as shall be necessary and appropriate in order to operate each
Facility for its Primary Intended Use in
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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 Landlord, Tenant shall be deemed to have sold,
assigned, transferred and conveyed to Landlord all of Tenant's right, title and
interest in and to any of the respective Tenant's Personal Property that is
integral to the use of the respective Facilities for their Primary Intended Use,
and shall, upon Landlord's request, execute and deliver to Landlord a bill of
sale with respect thereto, and without Landlord's prior written consent Tenant
shall not remove the same from the respective Leased Properties. Any of Tenant's
Personal Property that is not integral to the use of the respective Facilities
at such time may be removed by Tenant, and, if not removed within thirty (30)
days following the expiration or earlier termination of this Lease, shall be
considered abandoned by Tenant and may be appropriated, sold, destroyed or
otherwise disposed of by Landlord without giving notice thereof to Tenant and
without any payment to Tenant or any obligation to account therefor. Tenant
will, at its expense, repair all damage to the Leased Properties that is caused
by the removal of any of Tenant's Personal Property, whether effected by Tenant
or Landlord.
6.4 GRANT OF SECURITY INTEREST IN TENANT'S PERSONAL PROPERTY; RESTRICTION
ON OTHER LIENS. Tenant and each Facility Subtenant have concurrently granted to
Landlord a security interest in Tenant's Personal Property upon the terms set
forth in the Security Agreement. Without Landlord's consent, Tenant shall not
permit or suffer Tenant's Personal Property to be subject to any lien, charge,
encumbrance, financing statement or contract of sale other than to secure
Permitted Debt.
ARTICLE 7
CONDITION AND USE OF LEASED PROPERTIES
7.1 CONDITION OF THE LEASED PROPERTIES. Tenant acknowledges that Tenant 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.
Tenant is leasing the applicable Leased Property "as is" in its condition on the
Commencement Date. Tenant waives any claim or action against Landlord in respect
of the condition of the Leased Property being leased by it. LANDLORD 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 TENANT. TENANT ACKNOWLEDGES THAT THE LEASED
PROPERTY LEASED BY IT HAS BEEN INSPECTED BY TENANT AND IS SATISFACTORY TO
TENANT.
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TENANT FURTHER ACKNOWLEDGES THAT, ON AND AFTER THE COMMENCEMENT DATE AND
THROUGHOUT THE TERM, TENANT IS SOLELY RESPONSIBLE FOR THE CONDITION OF THE
LEASED PROPERTY LEASED BY IT. TO THE EXTENT PERMITTED BY LAW, HOWEVER, LANDLORD
HEREBY ASSIGNS TO TENANT ALL OF LANDLORD'S RIGHTS TO PROCEED AGAINST ANY
PREDECESSOR IN TITLE FOR BREACHES OF WARRANTIES OR REPRESENTATIONS OR FOR LATENT
DEFECTS IN THE APPLICABLE LEASED PROPERTY. LANDLORD SHALL FULLY COOPERATE WITH
TENANT IN THE PROSECUTION OF ANY SUCH CLAIMS, IN LANDLORD'S OR TENANT'S NAME,
ALL AT TENANT'S SOLE COST AND EXPENSE. TENANT SHALL INDEMNIFY, DEFEND, AND HOLD
HARMLESS LANDLORD FROM AND AGAINST ANY LOSS, COST, DAMAGE OR LIABILITY
(INCLUDING REASONABLE ATTORNEYS' FEES, COSTS AND DISBURSEMENTS) INCURRED BY
LANDLORD IN CONNECTION WITH SUCH COOPERATION.
7.2 USE OF THE LEASED PROPERTY.
7.2.1 Subject to the exceptions in clause (f) of the definition of
"Event of Default" in Article 2 hereof, throughout the Term, Tenant 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 Tenant
shall use any Leased Property or any portion thereof for any other use without
the prior written consent of Landlord. No use shall be made or permitted to be
made of, 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 Tenant agrees that the Leased Property and Tenant's Personal
Property shall not be used for any unlawful purpose, nor shall Tenant commit or
suffer any waste on the Leased Property or cause or permit any nuisance thereon.
7.2.3 Tenant shall not suffer or permit the Leased Property, or any
portion thereof, or Tenant's Personal Property to be used in such a manner as
(i) might reasonably tend to impair Landlord's (or Tenant's, as the case may be)
title thereto or to any portion thereof, or (ii) may reasonably make possible a
claim or claims of adverse usage or adverse possession by the public or of
implied dedication of the applicable Leased Property or any portion thereof.
ARTICLE 8
LEGAL AND INSURANCE REQUIREMENTS
8.1 COMPLIANCE WITH LEGAL AND INSURANCE REQUIREMENTS. Subject to Article
12, Tenant, at its expense, will promptly (i) comply with all applicable Legal
Requirements and
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Insurance Requirements in respect of the use, operation, maintenance, repair and
restoration of the Leased Property and Tenant's Personal Property, whether or
not compliance therewith requires structural changes in any of the Leased
Improvements (which structural changes shall be subject to Landlord'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 Tenant'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. Tenant's use, maintenance, operation and
any alteration of the Leased Property shall at all times conform to all
applicable local, 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 Tenant has violated any such
Legal Requirements or Insurance Requirements, shall be conclusive of that fact
as between Landlord and Tenant.
8.3 CERTAIN FINANCIAL AND OTHER COVENANTS.
8.3.1 Certain Financial Covenants.
8.3.1.1 Minimum Capital Expenditures. During the second Lease
Year, Tenant shall make at least Three Hundred Dollars ($300) per-licensed-bed
of Qualified Capital Expenditures, and thereafter throughout the Term, Tenant
shall in each Lease Year make Qualified Capital Expenditures in an amount equal
to the amount of such expenditures required for the immediately preceding Lease
Year, multiplied by the percentage increase in the Cost of Living Index from the
first day of the prior Lease Year to the first day of the current Lease Year.
The amount of Qualified Capital Expenditures per-licensed-bed may never be less
in any Lease Year than the amount established in the prior Lease Year.
8.3.1.2 Permitted Debt. Except for Permitted Debt, Tenant shall
not incur or permit any Facility Subtenant to incur any Debt without the prior
written consent of Landlord, which Landlord may withhold in its discretion;
provided, however, that Landlord agrees that for a period of ninety (90) days
from the date hereof, Permitted Debt shall include the obligations of Tenant and
the Facility Subtenants arising out of the Guaranty and the Pledge and Security
Agreement pursuant to which obligations of IHS are guaranteed under IHS's
Revolving Credit and Term Loan Agreement, dated as of September 15, 1997, as
amended, provided further, however, that upon the expiration of such ninety (90)
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.
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8.3.1.3 Cash Flow to Debt Service Requirement. At all times
during the Term, Tenant shall maintain a ratio of Cash Flow from the Facilities
to Debt Service at least equal to the Cash Flow to Debt Service Requirement.
8.3.2 Management; Franchise.
8.3.2.1 Management Agreements. With respect to any of the Leased
Properties, Tenant shall not enter into, or permit any Facility Subtenant to
enter into, any management agreement other than the Management Agreement without
Landlord's consent, which consent Landlord 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 to the obligation of Tenant to pay
the Base Rent, the Earn Out Rent (if any) and Additional Charges to Landlord. As
long as Manager is owned or controlled by IHS, in the ordinary course of
business Tenant shall have the right to amend, modify or otherwise change the
terms of the Management Agreement without the prior written consent of Landlord;
provided, however, that any such amendments, modifications or other changes that
are material shall require the prior written consent of Landlord, which consent
shall not unreasonably be withheld.
8.3.2.2 Franchise Agreements. With the approval of Landlord,
Tenant has entered into the Franchise Agreement. As long as Franchisor is owned
or controlled by IHS, in the ordinary course of business Tenant shall have the
right to amend, modify or otherwise change the terms of the Franchise Agreement
without the prior written consent of Landlord; provided, however, that any such
amendments, modifications or other changes that are material shall require the
prior written consent of Landlord, which consent shall not unreasonably be
withheld.
8.4 OTHER BUSINESSES. During the Term of this Lease, Tenant shall not,
directly or indirectly, own, operate or manage any businesses other than health
care businesses.
ARTICLE 9
MAINTENANCE AND REPAIR; ENCROACHMENTS
9.1 MAINTENANCE AND REPAIR.
9.1.1 Tenant, at its expense, shall keep the Leased Property and all
fixtures thereon and all landscaping, private roadways, sidewalks and curbs
appurtenant thereto and which are under Tenant's control and Tenant's Personal
Property that is integral to the use of the respective Facilities for their
Primary Intended Use, in good order and repair (whether or not the need for such
repairs occurs as a result of Tenant's use, any prior use, the elements or the
age of the applicable Leased Property or any portion thereof, or any cause
whatever except the failure of Landlord to make any payment or to perform any
act expressly required under the Lease or the
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negligence or willful misconduct of Landlord), and, except as may be provided to
the contrary in Article 14, 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 Tenant shall do or cause others to do all shoring of the Leased
Property leased by it or adjoining property (whether or not owned by Landlord)
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 Tenant or Landlord 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 Landlord, which shall not unreasonably be withheld or delayed. All
repairs shall, to the extent reasonably achievable, be at least equivalent in
quality to the 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 Landlord 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. Tenant 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 Landlord.
9.1.4 Nothing contained in this Lease shall be construed as (a)
constituting the consent or request of Landlord, 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 Tenant 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 Landlord 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 Landlord in
any Leased Property or any portion thereof. Landlord 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.
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9.1.5 Tenant shall, from time to time as and when needed, replace with
Replacement Property any of the Fixtures or Personal Property (except Tenant's
Personal Property that is not integral to the use of the respective Facilities
for their Primary Intended Use) 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 Tenant 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 (i) be in good operating condition, (ii) be
of a quality reasonably equivalent to that of the Replaced Property and (iii) be
suitable for a use which is the same or similar to that of the Replaced
Property. Tenant 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 property of Tenant or the installation of Replacement Property. All
Replacement Property shall become the property of Landlord and shall become
Fixtures or Landlord's Personal Property, as the case may be, to the same extent
as the Replaced Property had been. Upon Landlord's written request Tenant shall
with reasonable promptness cause to be executed and delivered to Landlord an
invoice, bill of sale or other appropriate instrument evidencing the transfer or
assignment to Landlord of all estate, right, title and interest (other than the
leasehold estate created hereby) of Tenant or any other Person in and to any
Replacement Property which, by operation of this Section 9.1.5, constitutes
Fixtures or Landlord's Personal Property, and the cost of which exceeds Twenty
Five Thousand Dollars ($25,000), free from all liens and other exceptions to
title, and Tenant 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, Tenant
shall vacate and surrender the Leased Property leased by it to Landlord 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 Landlord (or to another Person designated by Landlord) 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 Tenant 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. Tenant shall not
be required to transfer proprietary software to Landlord, but shall cause the
data it is to transfer to Landlord to be transferred to Landlord, without
charge. At the expiration of the Term or the sooner termination of this Lease,
the Leased Properties, including all Leased Improvements, Fixtures and
Landlord's Personal Property, shall be returned to Landlord in good operating
condition, ordinary wear and tear, Taking and casualty damage that Tenant 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 percent (50%)
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of the value of the Personal Property returned to Landlord as required herein
may at the time of such return be subject to Purchase Money Financing, and at
the time of such return Tenant shall assign to Landlord 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 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 Landlord
or at the behest of any person legitimately affected by any such encroachment,
violation or impairment, Tenant shall, at its expense, either (a) obtain valid
and effective waivers or settlements of all claims, liabilities and damages
resulting from each such encroachment, violation or impairment, or (b) 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 10
ALTERATIONS AND ADDITIONS
10.1 CONSTRUCTION OF ALTERATIONS AND ADDITIONS TO LEASED PROPERTY. Tenant
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 Tenant has caused plans and
specifications therefor to have been prepared, at Tenant's expense, by a
licensed architect and submitted to Landlord 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 Landlord's written approval
thereof. Landlord 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, Tenant also provide Landlord with
reasonable assurance of the payment of the cost thereof and, if the cost thereof
is in excess of the Approval Threshold, Tenant shall comply with Landlord's
requirements with respect to the periodic delivery of lien waivers and evidence
of payment for such cost. If such approval is granted, Tenant shall cause the
work described in such approved
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plans and specifications to be performed, at its expense, promptly, and in a
good, workerlike 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. Tenant shall be responsible for the completion of such
improvements in accordance with the plans and specifications approved by
Landlord, and shall promptly correct any failure with respect thereto. Each and
every such improvement, alteration or addition shall immediately become a part
of the applicable Leased Property and shall belong to Landlord subject to the
terms and conditions of this Lease. Tenant shall not have any claim against
Landlord 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 and Earn
Out Rent (if any) by reason of any such improvement, alteration or addition,
unless such improvement, alteration or addition is financed by Landlord. With
Landlord's consent, expenditures made by a Tenant pursuant to this Article 10
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 Tenant set forth in Section 8.3.1.1 hereof.
10.2 ASBESTOS REMOVAL FOR ALTERATIONS AND ADDITIONS. 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,
Tenant 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 11
REMOVAL OF LIENS
Without the consent of Landlord, and except as expressly provided elsewhere
herein, Tenant 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 (a) Permitted Encumbrances, (b) Mechanics
Liens for sums not yet due, (c) liens created by the acts or omissions of
Landlord, and (d) Mechanics Liens which Tenant is contesting (provided that the
aggregate amount of such contested liens shall not exceed one months' Base Rent
allocable to the Facility in question).
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ARTICLE 12
CONTEST OF LEGAL REQUIREMENTS, ETC.
12.1 PERMITTED CONTESTS. Tenant, on its own or on Landlord's behalf (or in
Landlord's name), but at Tenant'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 11, but this shall not
be deemed or construed in any way as relieving, modifying or extending Tenant'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 Tenant from its obligations hereunder and or cause the sale of any
Leased Property, or any part thereof, to satisfy the same or cause Landlord or
Tenant to be in default under any Encumbrance or in violation of any Legal
Requirements or Insurance Requirements upon any Leased Property or any interest
therein. Upon request of Landlord, if the claim exceeds the Approval Threshold,
Tenant shall either (a) provide a bond, letter of credit or other assurance
reasonably satisfactory to Landlord that all Claims, together with interest and
penalties, if any, thereon, will be paid, or (b) deposit within the time
otherwise required for payment with a bank or trust company selected by Landlord
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.
Tenant shall furnish Landlord and any lender to Landlord 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. Landlord 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 Landlord
shall not thereby be subjected to any liability for the payment of any costs or
expenses in connection with any such proceedings; and Tenant covenants to
indemnify and save harmless Landlord 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. Tenant shall be
entitled to any refund of any Claims and such charges and penalties or interest
thereon which have been paid by Tenant or paid by Landlord and for which
Landlord has been fully reimbursed. If Tenant 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, Landlord may, upon thirty (30) days advance
written Notice to Tenant, pay such charges or satisfy such claims together with
any interest and penalties and the same (or the cost thereof) shall be repayable
by Tenant to Landlord forthwith as Additional Charges. If Landlord reasonably
determines that a shorter period is necessary in order to prevent loss to the
applicable Leased Property or avoid damage to Landlord, then Landlord shall give
such written Notice as is practical under the circumstances.
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12.2 LANDLORD'S REQUIREMENT FOR DEPOSITS. Upon and at any time after an
Event of Default, and regardless of whether or not Tenant subsequently cures
such Event of Default, Landlord, in its sole discretion, shall be entitled to
require Tenant to pay monthly a pro rata portion of the amounts required to
comply with the Insurance Requirements, any Imposition and any Legal
Requirements, and when such obligations become due, Landlord shall pay them (to
the extent of the deposit). 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, Tenant shall forthwith deposit the same with Landlord upon written
request from Landlord. Landlord shall deposit such funds in a separate
interest-bearing account and shall not commingle such deposited funds with its
other funds, and Tenant shall be entitled to all interest paid on any deposit so
held by Landlord unless and except to the extent that Landlord, having the right
to do so by the terms of this Lease, applies such interest to Tenant's
obligations hereunder. Upon an Event of Default under this Lease, any of the
funds remaining on deposit may be applied under this Lease, in any manner and on
such priority as is determined by Landlord and after five (5) days Notice to
Tenant.
ARTICLE 13
INSURANCE
13.1 GENERAL INSURANCE REQUIREMENTS. During the Term, Tenant shall at all
times keep the Leased Property, 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-VI" 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 Landlord as
an additional insured. Losses shall be payable to Landlord and Tenant and
disbursed as provided in Article 14. Tenant shall pay when due all of the
premiums for the insurance required hereunder, and deliver certificates thereof
(in form and substance reasonably satisfactory to Landlord) to Landlord 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 Tenant either
to effect such insurance as herein called for or to pay the premiums therefor,
or to deliver such certificates thereof to Landlord at the times required,
Landlord 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 Landlord 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
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"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 in Section 13.2 hereof);
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 hereof
(but in no event for a period of less than twelve (12) months) in an amount
sufficient to prevent either Landlord or Tenant from becoming a co-insurer;
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 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 Tenant is constructing any improvements,
Tenant, at its sole cost and expense, shall carry or cause to be carried (a)
workers' compensation insurance and employers' liability insurance covering all
persons employed in connection with the improvements in statutory limits, (b) a
completed operations endorsement to the commercial general liability insurance
policy referred to above, and (c) builder's risk insurance, completed value
form, covering all physical loss, in an amount and subject to policy conditions
reasonably satisfactory to Landlord;
13.1.8 Tenant 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 Tenant 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
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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" means the actual
replacement cost of the applicable Leased Improvements, Fixtures and Landlord'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
Landlord nor Tenant is deemed to be a co-insurer of the applicable Leased
Property. If Landlord 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 Tenant, to
have such full replacement cost reasonably redetermined by an Impartial
Appraiser. The determination of the Impartial Appraiser shall be final and
binding on Landlord and Tenant, and Tenant 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. Landlord and Tenant shall each
pay one-half of the fee, if any, of the Impartial Appraiser.
13.3 WORKER'S COMPENSATION INSURANCE. Tenant shall at all times maintain
workers' compensation insurance coverage for all persons employed by Tenant on
the applicable Leased Property to the extent required under and in accordance
with applicable law.
13.4 WAIVER OF LIABILITY; WAIVER OF SUBROGATION. Landlord shall have no
liability to Tenant, and, provided Tenant carries the insurance required by this
Lease, Tenant shall have no liability to Landlord, 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 Tenant'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 Landlord or
Tenant covering any Leased Property and Tenant'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. Tenant 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 Tenant obtains
and maintains the professional malpractice insurance described in Section 13.1.5
hereof on a "claims-made" basis, Tenant 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 Landlord 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. Tenant shall cause each insurer mentioned in
this
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Article 13 to agree, by endorsement on the policy or policies issued by it, or
by independent instrument furnished to Landlord, that it will give to Landlord
at least thirty (30) days' written notice before the policy or policies in
question shall be materially altered or canceled. If requested by Landlord, and
if available at a commercially reasonable cost, all public liability and
property damage insurance shall contain a provision that Landlord, although
named as an insured, shall nevertheless be entitled to recovery under said
policies for any loss, damage, or injury to Landlord, its servants, agents and
employees by reason of the negligence of Tenant or Landlord.
13.6 INTENTIONALLY OMITTED.
13.7 BLANKET POLICY. Notwithstanding anything to the contrary contained in
this Article 13, Tenant'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 Tenant; provided, however, that the coverage
afforded Landlord 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 13 are otherwise satisfied, and
provided further that Tenant maintain specific allocations acceptable to
Landlord.
13.8 NO SEPARATE INSURANCE.
13.8.1 Tenant 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, Tenant, 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 Landlord, 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 Tenant from (a) securing
insurance required to be carried hereby with higher limits of liability than
required in this Lease, (b) securing umbrella policies or (c) insuring against
risks not required to be insured pursuant to this Lease, and as to such
insurance, Landlord 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. Tenant shall immediately notify Landlord of the taking out of
any such separate insurance or of the increasing of any of the amounts of the
then existing insurance.
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ARTICLE 14
CASUALTY LOSS
14.1 INSURANCE PROCEEDS. All Net Proceeds payable under any risk policy of
insurance required by Article 13 of this Lease, whether or not paid directly to
Landlord and/or Tenant, shall promptly be deposited with or paid over to an
insurance company, title insurance company or other financial institution
reasonably selected by Landlord and disbursed as provided in this Lease. 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 hereof; provided, however, that, within fifteen (15) days of
the receipt of the Net Proceeds, Landlord and Tenant shall agree as to the
portion thereof attributable to the Tenant's 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 Tenant's Personal Property shall be disbursed to Tenant.
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, Tenant shall give Landlord Notice of such damage or
destruction within fifteen (15) Business Days of the occurrence thereof. Within
ninety (90) days of such occurrence, Tenant 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, Tenant shall give Landlord Notice of such damage or
destruction within fifteen (15) Business Days of the occurrence thereof, and,
within ninety (90) days of the occurrence, Tenant 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 Facility; provided, however, that if Tenant, 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, Tenant shall purchase the
Facility of Leased Property on which the damaged or
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destroyed Leased Improvements are located for the Facility Purchase Price, which
shall be determined as of the day of the damage or destruction.
14.3 INTENTIONALLY OMITTED.
14.4 TENANT'S PERSONAL PROPERTY. All insurance proceeds payable by reason
of any loss of or damage to any of Tenant's Personal Property shall be paid to
Tenant.
14.5 RESTORATION OF TENANT'S PROPERTY. If Tenant is required to restore the
Leased Property as provided in Section 14.2 hereof, Tenant shall also restore or
replace all alterations and improvements made by Tenant 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 Facility or Leased Property
purchased by Tenant pursuant to this Article 14, as to which this Lease shall
terminate upon the closing of such purchase, this Lease shall remain in full
force and effect and Tenant's obligation to pay Rent shall continue without
abatement during any period required for repair and restoration (except to the
extent that any insurance proceeds for loss of rental shall have been paid
directly to Landlord).
14.7 CONSEQUENCES OF PURCHASE OF DAMAGED LEASED PROPERTY. If Tenant
purchases a damaged Facility or Leased Property pursuant to the provisions of
this Article 14, this Lease shall terminate as to such Facility upon payment of
the price set forth herein, Landlord shall remit to Tenant any and all Net
Proceeds pertaining to the purchased Facility or Leased Property, and the Base
Rent shall be reduced by the Facility Rental Value of the purchased Facility or
Leased Property, determined as of the day prior to the date of the damage or
destruction to such Facility.
14.8 DAMAGE NEAR END OF TERM. Notwithstanding any provisions of Section
14.2 hereof, 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 Tenant
and approved by Landlord (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 Tenant shall have the
option, which Tenant shall exercise by written notice to Landlord within thirty
(30) days of such damage or destruction, to (a) restore the damaged Facility or
Leased Property within the remaining twelve (12) months of the Term of this
Lease, or (b) to purchase the Facility or Leased Property on which the damaged
or destroyed Leased Improvements are located from Landlord, within sixty (60)
days following the date of the damage or destruction, for the Facility 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, Tenant
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. If Tenant restores
or repairs the damaged Facility or Leased Property pursuant to any Subsection of
this Article 14, the restoration or repair shall be performed in accordance with
the following procedures:
(a) If the Net Proceeds exceed the Approval Threshold, the restoration
or repair work shall be done pursuant to plans and specifications approved
by Landlord (not to be unreasonably withheld or delayed), and Tenant shall
cause to be prepared and presented to Landlord a certified construction
statement, reasonably acceptable to Landlord, showing the total estimated
cost of the restoration or repair.
(b) The Construction Funds shall be made available to Tenant as the
restoration and repair work progresses. If the Net Proceeds exceed the
Approved Threshold, such funds shall be made available pursuant to
certificates of an architect selected by Tenant that in the reasonable
judgment of Landlord 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.
(c) If the Net Proceeds exceed the Approval Threshold, there shall be
delivered to Landlord, 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) 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 Tenant pursuant to each
architect's certificate and dated as of the date of the disbursement to
which they relate.
(d) There shall be delivered to Landlord such other evidence as
Landlord 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.
(e) There shall be delivered to Landlord such other evidence as
Landlord 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
Tenant hereunder.
(f) If the Construction Funds are at any time determined by Landlord
not to be adequate for completion of the restoration and repair, Tenant
shall demonstrate to
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Landlord, upon request, that Tenant has sufficient funds available to cover
the difference, and shall disburse such funds pari passu with the
Construction Funds.
(g) The Construction Funds may be disbursed by the depository thereof
to Tenant or, at Tenant's direction, to the persons entitled to receive
payment thereof from Tenant, and such disbursement in either case may, at
Landlord'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 Tenant upon
completion of the restoration or repair.
(h) If Tenant at any time fails to promptly and fully perform the
conditions and covenants set out in subparagraphs (a) through (f) hereof,
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, Landlord may, at its option, immediately cease making any
further payments to Tenant for the restoration and repair.
(i) Landlord 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 15
TAKINGS
15.1 TOTAL TAKING. If title to the fee of the whole of any Facility or
Leased Property shall be acquired by any Condemnor as the result of a Taking,
this Lease shall cease and terminate as to such Facility or Leased Property as
of the Date of Taking by said Condemnor, and the Base Rent payable by Tenant
hereunder shall be reduced, as of the date the Lease shall have been so
terminated as to such Facility or Leased Property, by the Facility Rental Value
of the Facility 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 Landlord up to the sum of (a) all costs and
expenses reasonably incurred and documented by Landlord in connection with the
Taking, (b) any loss of Rent suffered by Landlord as a result of the Taking
(except for any Rent accruing after the completion of a purchase by Tenant of
the affected Facility upon a Partial Taking as hereinafter provided) and (c) in
the case of a Taking of the entire Facility, the Facility Purchase Price as of
the time possession is delivered to the Condemnor. To the extent that the laws
of the State in which the applicable Facility is located permit Tenant to make a
claim for Tenant's leasehold interest, moving expenses, loss of goodwill
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or business, and Tenant's claim does not have the effect, directly or
indirectly, of reducing Landlord's claim, Tenant shall have the right to pursue
such claim in the Taking proceeding and shall be entitled to the Award therefor.
In any Taking proceedings, Landlord and Tenant shall each seek its own Award, at
its own expense.
15.3 PARTIAL TAKING. In the event of a Partial Taking of a Facility, Tenant
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 Facility
Unsuitable for Its Primary Intended Use, Tenant shall have the right,
exercisable by written notice to Landlord within thirty (30) days after such
Partial Taking is final without appeal permitted, and before the Condemnor takes
possession, to purchase the affected Facility for the Facility Purchase Price,
which purchase shall be completed within sixty (60) days of such notice.
Landlord shall contribute to the cost of restoration, or if Tenant elects to
purchase the affected Facility, Landlord shall pay over to Tenant, any Award
payable to Landlord for such Partial Taking; provided, however, that the amount
of such contribution shall not exceed the cost of restoration. If (a) Tenant
elects to restore the Facility and (b) no Event of Default is then continuing,
then Landlord shall make the Award available to Tenant in the manner provided in
Section 14.10 hereof. The Base Rent shall be reduced by reason of such Partial
Taking to an amount agreed upon by Landlord and Tenant, and if Landlord and
Tenant 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 Facility 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 Tenant. Upon the
cessation of any such Taking of less than six (6) months, Tenant 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
Sections 15.1 through 15.3 hereof, and the parties shall have the rights
provided thereunder.
ARTICLE 16
CONSEQUENCES OF EVENTS OF DEFAULT
16.1 EVENTS OF DEFAULT. Upon the occurrence of an Event of Default,
Landlord shall have the rights and remedies hereinafter provided (provided,
however, that if an Event of Default
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is cured prior to the exercise of any remedies by Landlord, it shall cease to be
such for purposes of this Lease).
16.2 LANDLORD'S RIGHTS UPON TENANT'S DEFAULT. If an Event of Default occurs
with respect to this Lease, Landlord may terminate this Lease by giving Tenant
Notice, whereupon as provided herein, the Term of this Lease shall terminate and
all rights of Tenant 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, Landlord shall have all rights at
law and in equity available as a result of Tenant's breach.
16.3 LIABILITY FOR COSTS AND EXPENSES. Tenant 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 Landlord 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, Tenant shall, to the extent permitted by
law, if required by Landlord so to do, immediately surrender to Landlord the
Leased Properties and quit the same, and Landlord may enter upon and repossess
the respective Leased Properties by legal process, and may remove Tenant 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 (a) the termination of this Lease pursuant to Section
16.1 hereof, (b) the repossession of any Leased Property, (c) the failure of
Landlord to relet any Leased Property, (d) the reletting of all or any portion
thereof or (e) the failure of Landlord to collect or receive any rentals due
upon any reletting shall relieve Tenant of its liability and obligations
hereunder, all of which shall survive such termination, repossession or
reletting. In the event of any termination, Tenant shall forthwith pay to
Landlord all Rent due and payable with respect to the Leased Properties to and
including the date of the termination. At Landlord's option, as and for
liquidated and agreed current damages for Tenant's default, Tenant shall also
forthwith pay to Landlord:
(i) the sum of:
(A) 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
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(B) 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
(C) any other amount necessary to compensate Landlord for all the
damage proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course would be likely to result
therefrom; or
(ii) without termination of Tenant's right to possession of the respective
Leased Properties, each installment of the Rent and other sums payable
by Tenant to Landlord 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 Landlord 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 hereof,
Tenant 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 Landlord during the
existence or continuance of any Event of Default (and any payment made to
Landlord rather than Tenant due to the existence of an Event of Default),
including rentals received upon any reletting, shall be applied to Tenant's
obligations in the order which Landlord may determine or as may be prescribed by
the laws of the respective States in which the Leased Properties are located.
ARTICLE 17
LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT
If Tenant 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 the definition of Event of Default in Section
2.1 hereof or elsewhere in this Lease, Landlord may (but shall not be obligated
to), after five (5) days' prior Notice to Tenant (except in an emergency), and
without waiving or releasing any obligation of Tenant or any Event of Default,
at any time thereafter make such payment or perform such act for the account and
at the expense of Tenant, and may, to the extent permitted by law, enter upon
the respective Facilities for such purpose and take all such action thereon as,
in Landlord's sole opinion, may be necessary or appropriate therefor. However,
if Landlord reasonably determines that the giving of such Notice as is provided
for in this Article or elsewhere in this Lease would risk loss to any Leased
Property or cause damage to Landlord, then Landlord will give such Notice as is
practical under the circumstances. No such entry shall be deemed an eviction of
Tenant. All sums so paid by
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Landlord and all reasonable costs and expenses (including, without limitation,
reasonable attorneys' fees and expenses) so incurred, together with the interest
provided for in Section 3.3 thereon from the date on which such sums or expenses
are paid or incurred by Landlord, shall be paid by Tenant to Landlord on demand
and shall constitute Additional Charges. The obligations of Tenant and rights of
Landlord contained in this Article shall survive the expiration or earlier
termination of this Lease.
ARTICLE 18
CERTAIN ENVIRONMENTAL MATTERS
18.1 PROHIBITION AGAINST USE OF HAZARDOUS SUBSTANCES. Tenant 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 Permitted Environmental
Conditions shall be permitted to remain in place.
18.2 NOTICE OF ENVIRONMENTAL CLAIMS, ACTIONS OR CONTAMINATIONS. Tenant will
notify Landlord, in writing, promptly upon learning of any existing, pending or
threatened: (a) Regulatory Actions, (b) Contamination of any Leased Property,
(c) Third Party Claims or (d) violation of Environmental Law.
18.3 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 Tenant's responsibility, then Tenant 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.
18.4 DELIVERY OF ENVIRONMENTAL DOCUMENTS. If and to the extent not
delivered to Landlord prior to the date of this Lease, Tenant shall deliver to
Landlord complete copies of any and all Environmental Documents that may now be
in, or at any time hereafter come into, the possession of Tenant.
18.5 ENVIRONMENTAL AUDIT. At Landlord's expense, Tenant shall from time to
time, but in no case more often than annually, after Landlord's request
therefor, provide to Landlord 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
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scientifically valid technology and methodologies. Tenant 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 Tenant 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. Tenant 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, Landlord shall not be entitled to request such
Environmental Audit from Tenant unless (a) there have been any material changes,
modifications or additions to any Environmental Laws as applied to or affecting
the applicable Leased Property; (b) a significant change in the condition of the
applicable Leased Property has occurred; or (c) Landlord 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, Tenant shall immediately perform all
of Tenant's obligations hereunder with respect to such Hazardous Substances or
noncompliance.
18.6 ENTRY ONTO LEASED PROPERTY FOR ENVIRONMENTAL MATTERS. If Tenant fails
to provide to Landlord an Environmental Audit as contemplated by Section 18.5
hereof, Tenant shall permit Landlord 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 Landlord may
desire. Landlord and its employees, agents, contractors, consultants and/or
representatives shall conduct any such Investigation in a manner which does not
unreasonably interfere with Tenant'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, Landlord shall provide
Tenant with prior notice before entering the applicable Leased Property to
conduct such Investigation, and shall provide copies of any reports or results
to Tenant, and Tenant shall cooperate fully in such Investigation.
18.7 ENVIRONMENTAL MATTERS UPON TERMINATION OR EXPIRATION OF TERM OF THIS
LEASE. Upon the termination or expiration of the Term of this Lease, Tenant
shall cause the Leased Properties to be delivered to Landlord 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, except for those Permitted
Environmental Conditions that are in compliance with all Environmental Laws in
effect at the time of the termination of expiration of the Term of this Lease.
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
Tenant has not
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given the notice required by Section 1.4 hereof 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 Term hereof, if Tenant has not given the notice required by Section 1.5
hereof 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, Landlord may by written notice to Tenant specify a Cleanup to be
undertaken by Tenant (but not with respect to any Permitted Environmental
Condition that is in compliance with all Environmental Laws in effect at the
time of such notice), and upon receipt of such notice Tenant shall forthwith
begin and with reasonable diligence complete such Cleanup; provided, however,
that if Tenant in good faith disputes the need for such Cleanup on the grounds
that it is not required by any then applicable Environmental Laws, Tenant may by
written notice to Landlord demand an Environmental Audit of the Leased Property.
The Environmental Audit demanded by Tenant shall be performed by one of the
engineering firms listed on Exhibit H hereto or, if no such firms exist at the
time, by an engineering firm succeeding to the practice of one of such firms.
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 shall be borne by Landlord if
the determination is that no Cleanup is required, or by Tenant if the
determination is that a Cleanup is required. Tenant shall promptly at its
expense complete any Cleanup determined by such process to be necessary.
18.8 COMPLIANCE WITH ENVIRONMENTAL LAWS. Tenant 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:
(a) Maintenance of Licenses and Permits. Tenant 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 Tenant and the Leased Property leased by it;
(b) Contamination. No Tenant shall cause, suffer or permit any
Contamination in, on, under or about any Leased Property;
(c) Clean-Up. If Contamination occurs in, on, under or about any
Leased Property during the Term, Tenant 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;
(d) Discharge of Lien. Within forty-five (45) days of the date on
which Tenant 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, Tenant is unable, acting
diligently, to do so within forty-five (45) days, then within such
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period as is required for Tenant, acting diligently, to do so), Tenant
shall cause such lien to be discharged by payment, bond or otherwise;
(e) Notification of Landlord. Tenant shall notify Landlord in writing
promptly upon receipt by Tenant of notice of any breach or violation of any
environmental covenant or agreement; and
(f) 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, Tenant shall forward a
copy thereof to Landlord.
18.9 ENVIRONMENTAL RELATED REMEDIES. If, subject to Tenant's right of
contest as set forth in Section 12.1 hereof, Tenant fails to perform any of its
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 Landlord gives Notice to Tenant, Landlord 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):
(a) Cause a Clean-Up. Cause the Clean-Up of any Contamination on or
under the applicable Leased Property, or both, at Tenant's cost and
expense; or
(b) Payment of Regulatory Damages. Pay, on behalf of Tenant, any
damages, costs, fines or penalties imposed on Tenant as a result of any
Regulatory Actions; or
(c) Payments to Discharge Liens. Make any payment on behalf of Tenant
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
(d) Payment of Third Party Damages. Pay, on behalf of Tenant, any
damages, cost, fines or penalties imposed on Tenant as a result of any
Third Party Claims; or
(e) Demand of Payment. Demand that Tenant make immediate payment of
all of the costs of such Clean-Up and/or exercise of the remedies set forth
in this Section 18.9 incurred by Landlord and not theretofore paid by
Tenant 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.
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18.10 ENVIRONMENTAL INDEMNIFICATION. Tenant shall and does hereby agree to
indemnify, defend and hold harmless Landlord, 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 and documented attorneys' fees, consultants' fees,
experts' fees and related expenses, capital, operating and maintenance costs,
incurred in connection with (a) any investigation or monitoring of site
conditions at any Leased Property, (b) the presence of any asbestos-containing
materials in, on, under or about any Leased Property and (c) 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 Tenant 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 Tenant to
Landlord 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
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(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.
If the matter that is the subject of a claim for indemnification by any
Indemnitee pursuant to this Section 18.10 arises or is in connection with a
claim, suit or demand filed by a third party, Tenant 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
Tenant 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 Tenant, which settlement includes a full
and complete release of such Indemnitee from the subject Claim, the maximum
liability of Tenant 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
Tenant, the maximum liability of Tenant under this Section arising from
such Claim shall not exceed the fair and reasonable settlement value of
such Claim.
18.11 RIGHTS CUMULATIVE AND SURVIVAL. The rights granted Landlord under
this Article are in addition to and not in limitation of any other rights or
remedies available to Landlord hereunder or allowed at law or in equity. The
obligations of Tenant to defend, indemnify and hold the Indemnitees harmless, as
set forth in this Article, 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 19
HOLDOVER MATTERS
19.1 HOLDING OVER. If Tenant 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 Tenant shall
pay as rental each month one and one-half times the aggregate of (a) one-twelfth
of the aggregate Base Rent and Earn Out Rent (if any) payable with respect to
the applicable Leased Property during the last Lease Year of the preceding Term,
and (b) all Additional Charges accruing during the month with respect to the
applicable Leased Property. Any interest, however, will be payable only at the
rate provided in this Lease and shall not exceed the maximum rate allowed by
law. During such period of month-to-month tenancy, Tenant 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
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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 Landlord to the holding over by Tenant after the expiration or
earlier termination of this Lease.
19.2 INDEMNITY. If Tenant fails to surrender a Leased Property in a timely
manner and in accordance with the provisions of Section 9.1.6 hereof upon the
expiration or termination of this Lease, in addition to any other liabilities to
Landlord accruing therefrom, Tenant shall indemnify and hold Landlord, 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 Tenant 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 20
SUBORDINATION; ATTORNMENT; ESTOPPELS
20.1 SUBORDINATION. Upon written request of Landlord, Tenant will
subordinate its rights pursuant to this Lease in writing (a) to the lien of any
mortgage, deed of trust, security deed or the interest of any lease in which
Landlord is the Tenant and to all modifications, extensions, substitutions
thereof (or, at Landlord's option, cause the lien of said mortgage, deed of
trust, security deed or the interest of any lease in which Landlord is the
Tenant to be subordinated to this Lease), and (b) to all advances made or
hereafter to be made thereunder. As a condition to each such subordination,
Landlord shall deliver to Tenant a non-disturbance agreement providing inter
alia that, if such mortgagee, beneficiary, security deed grantee or Landlord
acquires any of the Leased Properties by way of foreclosure or deed in lieu,
such mortgagee, beneficiary, security deed grantee or Landlord will not disturb
Tenant's possession under this Lease and will recognize Tenant's rights
hereunder provided this Lease has not been terminated under Section 16.2 hereof.
20.2 ATTORNMENT. If any proceedings are brought for foreclosure, or if the
power of sale is exercised under any mortgage, deed of trust or security deed
made by Landlord encumbering any Leased Property, or if a lease in which
Landlord is the Tenant is terminated, Tenant shall attorn to the purchaser or
Landlord under such lease upon any foreclosure or deed in lieu thereof, sale or
lease termination and recognize the purchaser or Landlord as Landlord under this
Lease, provided that the purchaser or Landlord acquires and accepts the
applicable Leased Property subject to, and upon the terms and conditions set
forth in, this Lease.
20.3 ESTOPPEL CERTIFICATE. Each of Landlord and Tenant agrees, upon not
less than ten (10) days prior Notice from the other, to execute, acknowledge and
deliver to the other an
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Estoppel Certificate. It is intended that any Estoppel Certificate delivered
pursuant hereto may be relied upon by Landlord, Tenant, 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 21
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 Landlord and those claiming from,
through or under Landlord) is assumed by Tenant, and, in the absence of gross
negligence, willful misconduct or material breach of this Lease by Landlord,
Landlord shall in no event be answerable or accountable therefor nor shall any
of the events mentioned in this Section entitle Tenant to any abatement of Rent
under this Lease.
ARTICLE 22
INDEMNIFICATION
22.1 INDEMNIFICATION. Subject to Section 13.4 hereof, notwithstanding the
existence of any insurance or self-insurance provided for in Article 13 hereof,
and without regard to the policy limits of such insurance or self-insurance,
Tenant will, subject to Section 13.4 hereof, protect, indemnify, save harmless
and defend Landlord, its principals, partners, officers, directors,
shareholders, agents, and employees from and against all liabilities,
obligations, claims, damages, penalties, causes of action, costs and expenses
(including, without limitation, reasonable and documented attorneys' fees and
expenses), to the maximum extent permitted by law, whenever asserted, or
incurred by or asserted against Landlord by reason of:
(a) any accident, injury to or death of persons or loss of or damage
to property occurring on or about the Leased Property or adjoining
sidewalks, including without limitation any claims of malpractice;
(b) any use, misuse, non-use, condition, maintenance or repair by
Tenant of any Leased Property;
(c) the failure to pay Impositions which are the obligations of Tenant
under this Lease;
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(d) any failure by Tenant to perform or comply with any of the terms
of this Lease;
(e) the nonperformance of any contractual obligation, express or
implied, assumed or undertaken by Tenant or any party in privity with
Tenant 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 Tenant or any such other party is in
possession of any Leased Property or thereafter to the extent that any
conduct by Tenant or any such person (or failure of such conduct thereby if
the same should have been undertaken during such time of possession and
leads to such damage or loss) causes such loss or claim;
(f) the use, operation, possession, or management of each of the
Facilities by Tenant before or after the Commencement Date and during the
Term of this Lease until the Lease Termination Date;
(g) the breach by Tenant of any representation or warranty in this
Lease;
(h) any and all Claims accruing before or after the Commencement Date
relating to any current or former employee, consultant or independent
contractor of Tenant or any of the Facilities, including, but not limited
to, the termination or discharge of any current or former employee,
consultant, or independent contractor of Tenant or any of the Facilities
before or after the Commencement Date, Claims under federal, state, or
local laws, rules or regulations, accruing before or after the Commencement
Date, 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, or matters arising from any severance policy,
claim, agreement or contract;
(i) any and all Claims with respect to any qualified or non-qualified
retirement or benefit plans or arrangements established before or after the
Commencement Date involving any employee, consultant or independent
contractor of Tenant or any of the Facilities;
(j) Facilities which were decertified by Tenant during the Term of
this Lease;
(k) the removal of Tenant's Personal Property from any of the
Facilities; and
(l) the breach or failure by Tenant or any Facility Subtenant of any
representation or warranty or the failure by Tenant or any Facility
Subtenant to observe or perform any of the covenants, duties and
obligations set forth on Exhibit G hereto and as required to be made or
performed under Section 37.18 hereof.
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Any amounts which become payable by Tenant under this Section shall be paid
within thirty (30) days after liability therefor on the part of Tenant 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 Landlord against its own grossly negligent acts or omissions or
willful misconduct.
22.2 SURVIVAL OF INDEMNIFICATION; TENANT RIGHT TO DEFEND LANDLORD. Tenant's
liability under this Article shall survive any termination of this Lease. Tenant
shall have the right (at Tenant's expense) to defend Landlord against any such
claim by counsel reasonably acceptable to Landlord (who may also act as Tenant's
counsel in the particular matter, provided Landlord's and Tenant's interests are
coincident and not adverse to one another). Tenant shall apprise Landlord
regularly as to the status of the particular matter.
ARTICLE 23
LIMITATIONS ON TRANSFERS
23.1 GENERAL PROHIBITION AGAINST TRANSFER. Tenant 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 Landlord in writing. Except to the
extent otherwise specified herein, the parties agree that Landlord may
arbitrarily and unreasonably withhold its consent to any such request and no
court shall imply any agreement by Landlord to act in a reasonable fashion. Any
such attempted Transfer not specifically permitted by this Lease or otherwise
approved by Landlord shall be null and void and of no force and effect; but in
the event of any such Transfer, Landlord 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 Landlord's rights to enforce Tenant's covenants or
the acceptance of the Transferee as Tenant, or a release of Tenant from the
performance of any covenants on the part of Tenant to be performed.
Notwithstanding any Transfer, Tenant and any Guarantor shall remain fully liable
for the performance of all terms, covenants and provisions of this Lease, both
before and after any such Transfer. Any violation of this Lease by any
Transferee shall be deemed to be a violation of this Lease by Tenant.
23.2 CORPORATE OR PARTNERSHIP TRANSACTIONS. If Tenant, 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 Tenant, 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 Tenant, Guarantor or the Manager or the
stockholders of record of any of them shall constitute a Transfer. If Tenant,
Guarantor or the Manager is a joint venture, partnership or other association,
then the transfer of or change in, cumulatively or in one transaction, voting
control of or a twenty percent (20%) or greater interest
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in such Tenant, Guarantor or Manager within any five-year period, or the
termination of such joint venture, partnership or other association, shall
constitute a Transfer. Notwithstanding the foregoing, if there occurs a "change
of control" with respect to Monarch, then the provisions of this Section shall
only apply to matters involving Tenant and not Guarantor or the Manager. For
purposes of this Section, a "change of control" shall mean a transaction or
series of transactions whereby any Person or group within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934 and the rules and regulations
promulgated thereunder acquires beneficial ownership, directly or indirectly, of
membership interests of Monarch (or other interests convertible into such
membership interests) representing over fifty percent (50%) of the combined
voting power of all membership interests of Monarch entitled to vote in the
election of members of the Management Committee; provided, however, a "change of
control" with respect to Monarch shall not include an initial public offering
and sale of interests in Monarch pursuant to an effective registration statement
under the Securities Act of 1933, as amended, if Robert N. Elkins continues
thereafter as the Chairman of the Management Committee of Monarch or Chairman of
the Board of Directors or Chairman of the Management Committee of any successor
in interest of Monarch.
23.3 PERMITTED SUBLEASES. Subject to Section 23.4 hereof, Tenant shall have
the right to sublease up to ten percent (10%) of the floor area of a Facility in
the ordinary course of the health care business being conducted in such Facility
without Landlord's consent, and subject to Landlord's consent, which shall not
unreasonably be withheld or delayed an additional ten percent (10%) of the floor
area of such Facility.
23.4 TRANSFERS TO A CONTROLLED ENTITY. Notwithstanding anything to the
contrary herein contained, Tenant may without the prior consent of Landlord
Transfer its interest herein to an entity Controlled by Lyric upon the condition
that (a) such entity expressly and in writing assumes all of the obligations and
liability of the Tenant hereunder, (b) such Transfer has no effect on the Lyric
Guaranty and Lyric confirms in writing that the Lyric Guaranty remains unchanged
and in full force and effect, (c) the stock of such entity (if a corporation) is
at the time of the Transfer pledged to Landlord to secure performance of its
obligations under this Lease, (d) all obligations of such entity to Lyric or any
Affiliate of Lyric, and all Debt of such entity to any third party, are
subordinated to its liability and obligations as Tenant hereunder and (e)
without the consent of Landlord, no such Transfer shall release the Tenant named
herein from liability hereunder.
23.5 SUBORDINATION AND ATTORNMENT. Tenant shall insert in any sublease
permitted by Landlord provisions to the effect that (a) such sublease is subject
and subordinate to all of the terms and provisions of this Lease and to the
rights of Landlord hereunder, (b) if this Lease terminates before the expiration
of such sublease, the subtenant thereunder will, at Landlord's option, attorn to
Landlord and waive any right the subtenant may have to terminate the sublease or
to surrender possession thereunder as a result of the termination of this Lease,
and (c) if the subtenant receives a written Notice from Landlord or Landlord's
assignee, if any, stating that an
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Event of Default has occurred under this Lease, the subtenant 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 subtenant by Landlord or Landlord's assignees, if any, as the case may be,
shall be credited against the amounts owing by Tenant 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, Tenant
shall not sublet the applicable Leased Property on any basis such that the
rental to be paid by the subtenant thereunder would be based, in whole or in
part, on either (a) the income or profits derived by the business activities of
the subtenant, or (b) any other formula such that any portion of the sublease
rental received by Landlord 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 FACILITY SUBLEASES PERMITTED. Landlord expressly consents to the
Facility Subleases to the Facility Subtenants identified in Exhibit A hereto;
provided, however, that any material modification or amendment of the terms
thereof shall require the prior written approval of Landlord.
ARTICLE 24
CERTAIN FINANCIAL MATTERS
24.1 OFFICER'S CERTIFICATES AND FINANCIAL STATEMENTS. Tenant shall furnish
to Landlord:
(a) 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 Tenant stating that Tenant is not
in default of any covenant set forth in Article 8 hereof, or if Tenant is
in default, specifying all such defaults, the nature thereof and the steps
being taken to remedy the same.
(b) 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 Subtenants and Tenant 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 Landlord of KPMG Peat Marwick or other independent public
accountants of recognized standing reasonably acceptable to Landlord and
(ii) an
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Officer's Certificate of Tenant stating that Tenant is not in default in
the performance or observance of any of the terms of this Lease, or if
Tenant is in default, specifying all such defaults, the nature thereof and
the steps being taken to remedy the same.
(c) Cost Reports. Upon the request of Landlord and no more than once
in each calendar year, Tenant shall furnish to Landlord 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.
(d) Licensing Agency Reports. Upon the reasonable request of Landlord
and no more than once during any calendar year, Tenant shall furnish to
Landlord 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 Landlord,
Tenant shall also furnish to Landlord a copy of the plan of correction
generated from such survey or report for the Facilities, and correct or
cause to be corrected a 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.)
(e) Notices. Tenant shall require that each Facility Subtenant furnish
to Landlord within ten (10) days from its receipt, and Tenant shall furnish
to Landlord 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.
(f) 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.
(g) 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 Landlord's information and not for approval;
(h) Other Information. With reasonable promptness, such other
information respecting the financial condition and affairs of Tenant, the
Facility Subtenants and the Facilities as Landlord may reasonably request
from time to time, including, without
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limitation, any such other information as may be available to the
administration of the Facilities; and
(i) At times reasonably required by Landlord, and upon request as
appropriate, audited year-end information and unaudited quarterly financial
information concerning the Leased Properties, Tenant and the Facility
Subtenants as Landlord may require for applicable 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
which may be filed by Landlord during the Term of this Lease.
24.2 PUBLIC OFFERING INFORMATION. Tenant specifically agrees that Landlord
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 Landlord's securities or
interests, and any other reporting requirements under applicable federal and
State laws, including those of any successor to Landlord. Tenant agrees to
provide such other reasonable information necessary with respect to Tenant and
the applicable Leased Property to facilitate a public offering or to satisfy SEC
or regulatory disclosure requirements. Landlord shall provide to Tenant a copy
of any information prepared by Landlord to be so published, and Tenant shall
have a reasonable period of time (not to exceed three (3) Business Days) after
receipt of such information to notify Landlord of any corrections. Landlord
shall protect, indemnify, save harmless and defend Tenant, 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 Landlord, but not against any
such liabilities, claims, damages, penalties, causes of action, costs or
expenses as may be suffered by Tenant, 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 (a) in which a judgment is entered
against IHS, Lyric, Tenant, any Seller ( as defined in the Facilities Purchase
Agreement) or any principal, officer, director, agent or employee thereof, or
(b) is settled in whole or in part on the basis of a payment of Ten Thousand
Dollars ($10,000) or more to the claimant or moving party in such proceeding by
IHS, Lyric, Tenant, any Seller or any principal, officer, director, agent or
employee thereof alone or in combination with any payment made by IHS, Lyric,
Tenant, any Seller or any principal, officer, director, agent or employee
thereof (and as to expenses previously paid by Landlord pursuant to the
foregoing indemnity prior to an event described in (a) or (b), hereof, Tenant
shall repay such expenses promptly after the event specified).
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ARTICLE 25
LANDLORD INSPECTION
Tenant shall permit Landlord and its authorized representatives to inspect,
during normal business hours, at least once per quarter per Lease Year (a) the
respective Leased Properties and, (b) upon one Business Day's prior Notice,
which Notice shall set forth a reasonable cause for such inspection, Tenant's
books and records pertaining thereto (provided, however, that upon any Event of
Default, such Notice need not set forth any cause for such inspection).
Notwithstanding the foregoing, Landlord shall have the unlimited right to
inspect any Leased Property, upon twenty-four (24) hours prior Notice, if any
Leased Property is determined after a second inspection or review by an
applicable governmental regulatory authority not to be in substantial compliance
with applicable laws, rules and regulations which could result in a loss of the
Leased Property's operating healthcare license, payment of a material monetary
fine, penalty or judgment, termination of a provider agreement, restriction on
new patient admissions or other material decertification; provided, however,
Landlord may not inspect any Leased Property during the period that a
governmental regulatory authority inspection or survey is being conducted at the
Leased Property.
ARTICLE 26
[INTENTIONALLY OMITTED]
ARTICLE 27
[INTENTIONALLY OMITTED]
ARTICLE 28
ACCEPTANCE OF SURRENDER
No surrender to Landlord of this Lease or of the Leased Property or any
part thereof, or of any interest therein, shall be valid or effective unless
specifically agreed to and accepted in writing by Landlord, and no act by
Landlord or any representative or agent of Landlord, other than such a specific
written acceptance by Landlord, shall constitute an acceptance of any such
surrender.
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ARTICLE 29
MERGER OF TITLE; PARTNERSHIP
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, (a) the Lease or the leasehold estate created hereby or any interest
in the Lease or such leasehold estate, and (b) 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 Landlord and Tenant
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 Landlord and Tenant.
ARTICLE 30
CONVEYANCE BY LANDLORD
If Landlord 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, Landlord or such successor owner, as the case may be, shall thereupon be
released from all future liabilities and obligations of Landlord 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 Tenant that such transferee
has received any funds in the hands of Landlord or the then grantor at the time
of the transfer in which Tenant has an interest.
ARTICLE 31
QUIET ENJOYMENT
So long as Tenant pays all Rent as it becomes due and complies with all of
the terms of the Lease and performs its obligations thereunder, Tenant shall
peaceably and quietly have, hold and enjoy the respective Leased Properties
hereby leased for the Term, free of any claim or action by Landlord or anyone
claiming by, through or under Landlord.
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ARTICLE 32
[INTENTIONALLY OMITTED]
ARTICLE 33
APPRAISERS
If it becomes necessary to determine the Fair Rental Value of any of the
Leased Properties for any purpose of this Lease, Landlord and Tenant shall
attempt to agree upon a single appraiser to make such determination. If Landlord
and Tenant are unable to agree upon a single appraiser 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, Landlord (or
Tenant, as the case may be) shall by Notice to Tenant (or Landlord, 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 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 deter mination within fifty (50) days
after the making of Tenant's or Landlord'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 Landlord or Tenant 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 Landlord and Tenant as the Fair Rental Value of the
applicable Leased Property. Any such appraisal shall conform to FDIC or
equivalent requirements and format.
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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. Landlord and Tenant shall each pay the fees
and expenses of the appraiser appointed by it, and each shall pay one-half of
the fees and expenses of the third appraiser and one-half of all other costs and
expenses incurred in connection with each appraisal.
ARTICLE 34
BREACH OF LEASE BY LANDLORD
Landlord shall not be in breach of this Lease unless Landlord 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 Landlord from Tenant. 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 Landlord, within said thirty (30) day period, proceeds promptly and
with due diligence to cure the failure and diligently completes the curing
thereof. The time within which Landlord 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 35
PERSONAL PROPERTY OPTION; TRANSFER OF FACILITY CONTROL
35.1 LANDLORD'S OPTION TO PURCHASE TENANT'S PERSONAL PROPERTY. Landlord may
purchase Tenant's Personal Property (other than proprietary software and data)
at the expiration or termination of this Lease for an amount equal to the then
fair market value thereof (determined in accordance with the appraisal
procedures set forth in Article 33 hereof), subject to, and with appropriate
credits for, any obligations owing from Tenant to Landlord and for all equipment
leases, conditional sale contracts and any other encumbrances to which Tenant's
Personal Property is subject. Landlord's option shall be exercised by Notice to
Tenant no more than one hundred eighty (180) days, nor less than ninety (90)
days, before the expiration of the Initial Term (or, 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 (a) by reason of an Event
of Default, in which event Landlord's option shall be exercised within
forty-five (45) days following the date of termination, or (b) by reason of the
exercise by a Tenant of a right to terminate provided for herein in the event of
a Taking, in which event Landlord's option shall be exercised within forty-five
(45) days following Tenant's exercise of such right. Landlord's option
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shall terminate upon Tenant's purchase of the applicable Leased Property. If
Landlord exercises its option, Tenant shall, in exchange for Landlord's payment
of the purchase price, deliver Tenant's Personal Property to Landlord, together
with a bill of sale and such other documents as Landlord may reasonably request
in order to carry out the purchase of Tenant's Personal Property, and such
purchase shall be closed by such delivery and such payment on the date set by
Landlord in its Notice of exercise.
35.2 FACILITY TRADE NAMES. If this Lease is terminated by reason of an
Event of Default, or if Landlord purchases the Tenant's Personal Property with
respect to any Leased Property pursuant to Section 35.1 hereof, Landlord 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 Tenant
shall not after any such 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. Tenant shall
cooperate in transferring operational control of the Facilities to Landlord or
Landlord's nominee if the Term expires without extension or renewal by Tenant,
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 after 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 operational control of the Facilities to
Landlord or its nominee, Tenant agrees that during the period beginning ninety
(90) days prior to the expiration of the Term of this Lease (or at any time upon
the occurrence of an Event of Default):
(a) Tenant 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 Landlord has knowledge) or employment
agreements without Landlord's consent other than customary raises to
non-officers at regular review dates, and will not hire additional
employees except in good faith in the ordinary course of business.
(b) Tenant will use its best efforts to provide all necessary
information requested by Landlord 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 Tenant will
cooperate (without incurring material cost or liability except after an
Event of Default), to cause the operating health care license to be
transferred to Landlord or Landlord's nominee and will also cooperate with
any healthcare certification procedures required of Landlord or Landlord's
nominee by applicable law.
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(c) Tenant 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 Landlord
or its nominee the goodwill of the suppliers, distributors, residents and
others having business relations with Tenant with respect to the applicable
Facility.
(d) Tenant 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.
(e) Tenant shall cooperate fully with Landlord or its nominee in
supplying any information that may be reasonably required to effect an
orderly transfer of the applicable Facility.
(f) Tenant shall provide Landlord or its nominee with full and
complete information regarding the employees of the applicable Facility and
shall reimburse Landlord 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.
(g) Tenant shall use its best efforts, (without incurring material
cost or liability except after Event of Default), to obtain the
acknowledgment and the consent of any creditor, Landlord or sublandlord,
mortgagee, beneficiary of a deed of trust or security agreement affecting
the real and personal properties of Tenant 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 hereof (relating to Landlord's
security interest), Landlord's Personal Property shall not include goodwill, or
other intangible personal property severable from Landlord's "interests in real
property" within the meaning of Section 856(d) of the Code. All of Landlord's
Personal Property is leased to Tenant pursuant to the terms hereof.
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ARTICLE 36
[INTENTIONALLY OMITTED]
ARTICLE 37
MISCELLANEOUS
37.1 NOTICES. All notices, consents or other communications under this
Lease must be in writing and addressed to each party at its respective Notice
Addresses (or at any other address which the respective parties may designate by
notice given to the other party from time to time). Any notice required by this
Lease 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, 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. A
notice may be given by a party or by its legal counsel. The Notice Addresses of
the parties are as follows:
If to Landlord: Monarch Properties, LP
8889 Pelican Bay Boulevard - Suite 501
Naples, Florida 34108
Attention: John B. Poole
Telephone No.: (941) 596-3259
Fax No.: (941) 596-3266
With a copy to: LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019-5389
Attention: John R. Fallon, Jr., Esq.
Telephone No.: (212) 424-8279
Fax No.: (212) 424-8500
If to Tenant: Lyric Health Care Holdings III, Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attention: Daniel J. Booth
Copy to: Marshall A. Elkins, Esq.
Telephone No.: (410) 998-8768
Fax No.: (410) 998-8695
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37.2 SURVIVAL, CHOICE OF LAW. TENANT'S OBLIGATIONS UNDER THIS LEASE SHALL
SURVIVE THE EXPIRATION OR EARLIER TERMINATION OF THE TERM. AT LANDLORD'S OPTION,
THIS LEASE SHALL BE CONSTRUED AND ENFORCED EITHER (A) UNDER THE LAW OF THE STATE
OF NEW YORK OR, (B) IN ANY PARTICULAR CASE, THE LAW OF THE STATE IN WHICH ANY OF
THE FACILITIES IS LOCATED, IN ANY SUCH CASE WITHOUT GIVING EFFECT TO PRINCIPLES
OF CONFLICTS OF LAWS. TENANT IRREVOCABLY SUBMITS TO JURISDICTION IN ANY STATE IN
WHICH ANY FACILITY IS LOCATED (AND AGREES THAT SERVICE OF PROCESS MAY BE
EFFECTED UPON TENANT UNDER ANY METHOD PERMISSIBLE UNDER THE LAWS OF THE
RESPECTIVE STATE IN WHICH LANDLORD COMMENCES A PROCEEDING AND IRREVOCABLY WAIVES
ANY OBJECTION TO VENUE IN THE STATE AND FEDERAL COURTS OF ANY SUCH STATE).
37.3 LIMITATION ON RECOVERY. Tenant specifically agrees to look solely to
Landlord's interest in the Leased Property leased by it, the net proceeds
received by Landlord from the sale or any financing or refinancing of the Leased
Property leased by it, any funds deposited by Tenant pursuant to Section 12.2
hereof and any Net Proceeds for recovery of any judgment against Landlord, it
being specifically agreed that no partner, manager, shareholder, officer,
director, or employee of Landlord shall ever be personally liable for any such
judgment or for the payment of any monetary obligation to Tenant. Furthermore,
Landlord (original or successor) shall not ever be liable to Tenant for any
indirect or consequential damages suffered by Tenant from whatever cause.
37.4 WAIVERS. Tenant 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.
37.5 CONSENTS. Whenever the consent or approval of Landlord is required
hereunder, Landlord may in its sole discretion and without reason withhold that
consent or approval unless a provision of this Lease expressly requires that
Landlord be reasonable in not withholding or delaying consent or otherwise
provides to the contrary.
37.6 COUNTERPARTS. This Lease may be executed (a) in counterparts, a
complete set of which together shall constitute an original and (b) in
duplicates, each of which shall constitute an original. Copies of this Lease
showing the signatures of the respective parties, whether produced by
photographic, digital, computer, or other reproduction, may be used for all
purposes as originals.
37.7 OPTIONS FOLLOW LEASE. The renewal options and any other options
granted to Tenant in this Lease are not assignable or transferrable except in
connection with a permitted transfer or assignment of this Lease. Any attempt to
assign or transfer such options otherwise shall be void and of no force and
effect.
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37.8 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.
37.9 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
Landlord and Tenant.
37.10 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 Landlord and Tenant
37.11 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.
37.12 SUCCESSORS. The term "Landlord" 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 Landlord and Tenant under this Lease shall extend to
and bind the respective heirs, executors, administrators and the permitted
concessionaires, successors, subtenants and assignees of the parties.
37.13 LATE CHARGES. 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.
37.14 BINDING EFFECT. This Lease (and all terms thereof, whether so
expressed or not), shall be binding upon 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.
37.15 EXHIBITS AND SCHEDULES. The Exhibits and Schedules attached hereto
are (and shall be deemed) parts of this Lease.
37.16 WAIVER OF JURY TRIAL. IN ANY ACTION OR PROCEEDING IN CONNECTION WITH
THIS LEASE, EACH OF LANDLORD AND TENANT HEREBY WAIVES THE RIGHT TO TRIAL BY
JURY.
37.17 MEMORANDUM OF LEASE. Landlord and Tenant shall, promptly upon the
request of either, enter into a short form Memorandum of Lease, in form suitable
for recording under the
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laws of the applicable State in which reference to this Lease, and all options
contained therein, shall be made. Tenant shall pay all costs and expenses of
recording such Memorandum of Lease.
37.18 ADDITIONAL TENANT OBLIGATIONS. Tenant and the Facility Subtenants (a)
hereby make the representations and warranties and shall take all reasonable
measures to assure that such representations and warranties remain true and
correct at all times during the term of the Loan Facility, (b) shall pay the
charges, fees, costs and expenses during the term of the Loan Facility and (c)
shall perform the covenants, duties and obligations during the term of the Loan
Facility, all as set forth on Exhibit G hereto and as required therein, unless
Landlord otherwise consents in writing; provided, however, that in the event of
a refinance, amendment, modification or supplement of the Loan Facility (a "Loan
Facility Refinance") evidenced by a note, Tenant and the Facility Subtenants
shall (i) make such representations and warranties, (ii) pay such charges, fees,
costs and expenses and (iii) perform and observe such covenants, duties and
obligations which are required by the instruments evidencing the security or
pertaining to such Loan Facility Refinance, providing they are no more
burdensome than those relating to the Loan Facility.
SIGNATURE PAGE FOLLOWS
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IN WITNESS WHEREOF, the parties have executed this Master Lease by their
duly authorized officers as of the date first above written.
MONARCH PROPERTIES, LP
By: MP Operating, LLC, its General Partner
By: MP Operating, Inc., its Manager
By: (Seal)
----------------------------
Name: Douglas Listman
--------------------------
Title: Chief Financial Officer
-------------------------
LYRIC HEALTH CARE HOLDINGS III, INC.
By: (Seal)
----------------------------
Name: Daniel J. Booth
--------------------------
Title: Senior Vice President
-------------------------
S-1
<PAGE>
LIST OF EXHIBITS TO MASTER LEASE
EXHIBIT A Facilities (Leased Properties); Facility Subtenants;
Land
EXHIBIT B Facility Lease Expiration Dates; Facility Renewal
Terms; 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 Facility Purchase Prices
EXHIBIT G Additional Tenant Obligations
EXHIBIT H List of Engineering Firms
EXHIBIT I Landlord Wiring Instructions
<PAGE>
EXHIBIT A
FACILITIES (LEASED PROPERTIES); FACILITY SUBTENANTS; LAND
---------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACILITY NAME ADDRESS BEDS SUBTENANT NAME STATE OF
INCORPORATION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Integrated Health Services 3625 Parkmoor Village 155 Integrated Health Delaware
of Colorado Springs Colorado Springs, Colorado 80917 Services at Colorado
719-550-0200 Springs, Inc.
719-637-0756 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Horizon Healthcare & 1350 S. Nova Road 158 IHS Acquisition No. Delaware
Specialty Center Daytona Beach, Florida 32114 103, Inc.
(HHC- Daytona) 904-258-5544
904-255-5623 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Integrated Health Services 3663 15th Avenue 110 Integrated Health Delaware
of Vero Beach Vero Beach, Florida 32960 Services at Central
561-567-2552 Florida, Inc.
561-567-8929 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Integrated Health Services 919 Old Winter Haven Road 120 Briar Hill, Inc. Florida
of Florida at Auburndale Auburndale, Florida 33823
941-967-4125
941-551-9407 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Integrated Health Services 2055 Palmetto Street 150 Bethamy Living Center, Florida
of Florida at Clearwater Clearwater, Florida 34625 Limited Partnership
813-461-6613
813-442-2839 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Integrated Health Services 703 South 29th Street 107 Integrated Health Delaware
of Florida at Fort Pierce Fort Pierce, Florida 34947 Services at Central
561-466-3322 Florida, Inc.
561-466-8057 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Integrated Health Services 1000 Briarcliff Road 128 Integrated Health Georgia
of Atlanta at Briarcliff Atlanta, Georgia 30306 Services at Briarcliff
Haven 404-875-6456 Haven, Inc.
404-874-4604 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Lynwood Manor 730 Kimole Lane 99 IHS Acquisition No. Delaware
Adrian, Michigan 49221 114, Inc.
517-263-6771
517-265-8599 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACILITY NAME ADDRESS BEDS SUBTENANT NAME STATE OF
INCORPORATION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Integrated Health Services 110 Highland Ave. 176 Cedarcroft Health Pennsylvania
of St. Louis at Big Bend Valley Park, Missouri 63088 Services, Inc.
Woods 314-225-5144
314-225-8427 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Integrated Health Services 191 Hackett Hill Road 68 Manchester Integrated Pennsylvania
of New Hampshire at Manchester, New Hampshire Health, Inc.
Manchester 03102
603-668-8161
603-622-2584 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Ruidoso Care Center 5th & D Street 73 IHS Acquisition No. Delaware
Ruidoso, New Mexico 121, Inc.
505-257-9071
505-257-3101 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Meadowview Care Center 76 High Street 100 IHS Acquisition No. Delaware
Seville, Ohio 44273 125, Inc.
330-769-2015
330-769-3790 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Washington Square 202 Washington St. NW 96 IHS Acquisition No. Delaware
Warren, Ohio 44483 124, Inc.
330-399-8997
330-393-5889 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
HSH - Midwest City 8200 National Avenue 31 IHS Acquisition No. Delaware
Midwest City, Oklahoma 73110 168, Inc.
405-739-0800
405-739-6480 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Midwest City Nursing 8200 National Avenue 106 IHS Acquisition No. Delaware
Midwest City, Oklahoma 73110 127, Inc.
405-737-8200
405-736-1227 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Integrated Health Services 9209 Ridge Pike 244 Rest Haven Nursing Pennsylvania
at Whitemarsh Whitemarsh, Pennsylvania 19128 Center (Whitemarsh),
610-825-6560 Inc.
610-941-9524 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Amarillo Specialty Hospital 5601 Plum Creek Drive 30 Integrated of Amarillo, Texas
Amarillo, Texas 79124 Inc.
806-351-1000
806-355-9650 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACILITY NAME ADDRESS BEDS SUBTENANT NAME STATE OF
INCORPORATION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Doctors Healthcare Center 9009 White Rock Trail 325 IHS Acquisition No. Delaware
Dallas, Texas 128, Inc.
214-348-8100
214-343-3865 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Harbor View Care Center 1314 Third Street 116 IHS Acquisition No. Delaware
Corpus Christi, Texas 78401 140, Inc.
(Nueces County)
512-888-5511
512-888-6267 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Heritage Estates 201 Sycamore School Road 152 IHS Acquisition No. Delaware
Ft. Worth, Texas 76134 134, Inc.
(Tarrant County)
817-293-7610
817-293-5766 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Heritage Gardens 2135 North Denton Drive 150 IHS Acquisition No. Delaware
Carrollton, Texas 75006 132, Inc.
214-242-0666
214-323-9279 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Heritage Manor Longview 112 Ruthlynn Drive 150 IHS Acquisition No. Delaware
Longview, Texas 75601 138, Inc.
(Gregg County)
903-753-8611
903-758-4026 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Heritage Manor Plano 1621 Coit Rd. 186 IHS Acquisition No. Delaware
Plano, Texas 75075 129, Inc.
214-596-7930
214-867-6798 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Heritage Place of Grand 820 Small Street 166 IHS Acquisition No. Delaware
Prairie Grand Prairie, Texas 75050 133, Inc.
214-262-1351
214-642-8056 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Horizon Healthcare -El 2301 N. Oregon Street. 182 IHS Acquisition No. Delaware
Paso El Paso, Texas 79902 131, Inc.
915-532-8941
915-545-5050 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACILITY NAME ADDRESS BEDS SUBTENANT NAME STATE OF
INCORPORATION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HSH- Corpus Christi 1310 Third Street 31 IHS Acquisition No. Delaware
Corpus Christi, Texas 78401 170, Inc.
(Nueces County)
512-888-5511
512-888-6267 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
HSH- El Paso 2311 N. Oregon Street 31 IHS Acquisition No. Delaware
El Paso, Texas 79902 171, Inc.
915-545-1823
915-545-6378 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Integrated Health Services 5601 Plum Creek Drive 120 Integrated of Amarillo, Texas
of Amarillo Amarillo, Texas 79124 Inc.
806-351-1000
806-355-9650 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Mountain View Place 1600 Murchison Road 187 Integrated Health Delaware
El Paso, Texas 79902 Services at Hanover
915-544-2002 House, Inc.
915-544-0696 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Parkwood Place 300 N. Bynum 157 IHS Acquisition No. Delaware
Lufkin, Texas 75904 139, Inc.
409-637-7215
409-637-2368 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Plano Specialty Hospital 1621 Coit Road 30 IHS Acquisition No. Delaware
(HSH- Plano) Plano, Texas 75075 174, Inc.
214-596-7930
214-867-6788 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
Silver Springs Nursing and 12350 Wood Bayou Drive 150 IHS Acquisition No. Delaware
Rehabilitation Center Houston, Texas 77013 136, Inc.
(Harris County)
713-453-0446
713-450-3037 (fax)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-4
<PAGE>
EXHIBIT B
FACILITY LEASE EXPIRATION DATES;
FACILITY RENEWAL TERMS; ALLOCATION OF BASE RENT
-----------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACILITY NAME BASE RENT COMMENCEMENT EXPIRATION LEASE TERM NUMBER LENGTH
DATE DATE OF OF
RENEWAL RENEWALS
TERMS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Integrated Health Services of $622,688 January 1, 1999 December 31, 2008 10 3 5
Colorado Springs
Horizon Healthcare & Specialty $501,188 January 1, 1999 December 31, 2008 10 3 5
Center
Integrated Health Services of $372,094 January 1, 1999 December 31, 2008 10 3 5
Vero Beach
Integrated Health Services of $561,938 January 1, 1999 December 31, 2008 10 3 5
Florida at Auburndale
Integrated Health Services of $782,156 January 1, 1999 December 31, 2008 10 3 5
Florida at Clearwater
Integrated Health Services of $280,968 January 1, 1999 December 31, 2008 10 3 5
Florida at Fort Pierce
Integrated Health Services of $539,136 January 1, 1999 December 31, 2008 10 3 5
Atlanta at Briarcliff Haven
Lynwood Manor $349,312 January 1, 1999 December 31, 2008 10 3 5
Integrated Health Services of St. $379,687 January 1, 1999 December 31, 2008 10 3 5
Louis at Big Bend Woods
- ------------------------------------- ------------------ ---------------------------- ------------------------- -------------------
</TABLE>
B-1
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACILITY NAME BASE RENT COMMENCEMENT EXPIRATION LEASE TERM NUMBER LENGTH
DATE DATE OF OF
RENEWAL RENEWALS
TERMS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Integrated Health Services of New $243,000 January 1, 1999 December 31, 2008 10 3 5
Hampshire at Manchester
Ruidoso Care Center $159,468 January 1, 1999 December 31, 2008 10 3 5
Meadowview Care Center $410,063 January 1, 1999 December 31, 2008 10 3 5
Washington Square $243,000 January 1, 1999 December 31, 2008 10 3 5
HSH - Midwest City $136,688 January 1, 1999 December 31, 2008 10 3 5
Midwest City Nursing $303,750 January 1, 1999 December 31, 2008 10 3 5
Integrated Health Services at $934,031 January 1, 1999 December 31, 2008 10 3 5
Whitemarsh
Amarillo Specialty Hospital $174,656 January 1, 1999 December 31, 2008 10 3 5
Doctors Healthcare Center $1,215,000 January 1, 1999 December 31, 2008 10 3 5
Harbor View Care Center $303,750 January 1, 1999 December 31, 2008 10 3 5
Heritage Estates $561,938 January 1, 1999 December 31, 2008 10 3 5
Heritage Gardens $455,625 January 1, 1999 December 31, 2008 10 3 5
Heritage Manor Longview $273,375 January 1, 1999 December 31, 2008 10 3 5
Heritage Manor Plano $1,063,125 January 1, 1999 December 31, 2008 10 3 5
Heritage Place of Grand Prarie $463,219 January 1, 1999 December 31, 2008 10 3 5
Horizon Healthcare - El Paso $265,781 January 1, 1999 December 31, 2008 10 3 5
</TABLE>
B-2
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACILITY NAME BASE RENT COMMENCEMENT EXPIRATION LEASE TERM NUMBER LENGTH
DATE DATE OF OF
RENEWAL RENEWALS
TERMS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HSH - Corpus Christi $235,406 January 1, 1999 December 31, 2008 10 3 5
HSH - El Paso $303,750 January 1, 1999 December 31, 2008 10 3 5
Integrated Health Services of $311,344 January 1, 1999 December 31, 2008 10 3 5
Amarillo
Mountain View Place $546,750 January 1, 1999 December 31, 2008 10 3 5
Parkwood Place $296,156 January 1, 1999 December 31, 2008 10 3 5
Plano Specialty Hospital $288,563 January 1, 1999 December 31, 2008 10 3 5
Silver Springs Nursing and $394,875 January 1, 1999 December 31, 2008 10 3 5
Rehabilitation Center
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL $13,972,500
- -------------------------------------------------
</TABLE>
B-3
<PAGE>
EXHIBIT C
CASH FLOW TO DEBT SERVICE REQUIREMENT
-------------------------------------
TEST COVERAGE
DATE RATIO
---- --------
31-Mar-99 1.25
30-Jun-99 1.30
30-Sep-99 1.30
31-Dec-99 1.35
31-Mar-00 1.35
30-Jun-00 1.40
30-Sep-00 1.40
31-Dec-00 1.45
31-Mar-01 1.45
30-Jun-01 1.50
30-Sep-01 1.50
Thru Term 1.50
C-1
<PAGE>
EXHIBIT D
FORM OF ESTOPPEL CERTIFICATE
----------------------------
The undersigned, Lyric Health Care Holdings III, Inc., a Delaware
corporation ("Tenant") under that certain Master Lease (the "Lease"), dated as
of December 31, 1998, and made with Monarch Properties, LP ("Landlord"), hereby
certifies:
1. That it is the Tenant under the Lease; that attached hereto as Exhibit A
is a true and correct copy of the Lease; that said Lease is now in full force
and effect and has not been amended, modified or assigned except as disclosed or
included in Exhibit A; and that said Lease constitutes the entire agreement
between Landlord and Tenant.
2. That to the undersigned's knowledge there exist no defenses or offsets
to enforcement of the Lease; that to the undersigned's knowledge there are, as
of the date hereof, no breaches or uncured defaults on the part of the
undersigned or, to the undersigned's knowledge, on the part of the other party
to the Lease; and that the undersigned has no notice or knowledge of any prior
assignment, hypothecation, subletting or other transfer of the other party's
interest in the Lease, except .
3. That the Base Rent for the current Lease Year under the Lease is
$_______. [That the Earn Out Rent for the current Lease Year under the Lease is
$_____.] All Rent which is due prior to the date hereof has been paid, and there
are no unpaid Additional Charges owing to or by the undersigned under the Lease
as of the date hereof. No Base Rent [, Earn Out Rent] or other items (including
without limitation any impound account or funds) have been paid by the
undersigned in advance under the Lease and the monthly installment of Base Rent
[and Earn Out Rent] that became due on ___________, 19__.
4. That the undersigned has no claim against the other party to the Lease
for any impound account or prepaid Rent except as provided in paragraph 3 of
this Certificate.
5. That there are no actions, whether voluntary or otherwise, pending
against the undersigned under the bankruptcy laws of the United States or any
State thereof, nor has the undersigned nor, to the best of the undersigned's
knowledge has the other party to the Lease begun any action, or given or
received any notice for the purpose of termination of the Lease.
6. That to the undersigned's knowledge, there are, as of the date hereof,
no breaches or uncured defaults on the part of the undersigned under any other
agreement executed in connection with the Lease.
D-1
<PAGE>
7. This Estoppel Certificate has been requested for the benefit of (the
"Relying Party"). The Relying Party is entitled to rely on the statements of the
undersigned contained in this Certificate.
8, All capitalized terms used herein and not defined herein shall have the
meanings for such terms set forth in the Lease.
Dated: _____________, 19__ LYRIC HEALTH CARE HOLDINGS III, INC.
By: (Seal)
---------------------------
Name:
-------------------------
Title:
------------------------
D-2
<PAGE>
EXHIBIT E
INITIAL FACILITY SUBLEASES
--------------------------
1. Facility Sublease, dated as of December 31, 1998, between Integrated Health
Services at Colorado Springs, Inc. and Lyric Health Care Holdings III, Inc.
2. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 103, Inc. and Lyric Health Care Holdings III, Inc.
3. Facility Sublease, dated as of December 31, 1998, between Integrated Health
Services at Central Florida, Inc. and Lyric Health Care Holdings III, Inc.
4. Facility Sublease, dated as of December 31, 1998, between Briar Hill, Inc.
and Lyric Health Care Holdings III, Inc.
5. Facility Sublease, dated as of December 31, 1998, between Bethamy Living
Center Limited Partnership and Lyric Health Care Holdings III, Inc.
6. Facility Sublease, dated as of December 31, 1998, between Integrated Health
Services at Central Florida, Inc. and Lyric Health Care Holdings III, Inc.
7. Facility Sublease, dated as of December 31, 1998, between Integrated Health
Services at Briarcliff Haven, Inc. and Lyric Health Care Holdings III, Inc.
8. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 114, Inc. and Lyric Health Care Holdings III, Inc.
9. Facility Sublease, dated as of December 31, 1998, between Cedarcroft Health
Services, Inc. and Lyric Health Care Holdings III, Inc.
10. Facility Sublease, dated as of December 31, 1998, between Manchester
Integrated Health, Inc. and Lyric Health Care Holdings III, Inc.
11. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 121, Inc. and Lyric Health Care Holdings III, Inc.
12. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 125, Inc. and Lyric Health Care Holdings III, Inc.
E-1
<PAGE>
13. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 124, Inc. and Lyric Health Care Holdings III, Inc.
14. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 168, Inc. and Lyric Health Care Holdings III, Inc.
15. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 127, Inc. and Lyric Health Care Holdings III, Inc.
16. Facility Sublease, dated as of December 31, 1998, between Rest Haven
Nursing Center (Whitemarsh), Inc. and Lyric Health Care Holdings III, Inc.
17. Facility Sublease, dated as of December 31, 1998, between Integrated of
Amarillo, Inc. and Lyric Health Care Holdings III, Inc.
18. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 128, Inc. and Lyric Health Care Holdings III, Inc.
19. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 140, Inc. and Lyric Health Care Holdings III, Inc.
20. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 134, Inc. and Lyric Health Care Holdings III, Inc.
21. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 132, Inc. and Lyric Health Care Holdings III, Inc.
22. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 138, Inc. and Lyric Health Care Holdings III, Inc.
23. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 129, Inc. and Lyric Health Care Holdings III, Inc.
24. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 133, Inc. and Lyric Health Care Holdings III, Inc.
25. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 131, Inc. and Lyric Health Care Holdings III, Inc.
26. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 170, Inc. and Lyric Health Care Holdings III, Inc.
E-2
<PAGE>
27. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 171, Inc. and Lyric Health Care Holdings III, Inc.
28. Facility Sublease, dated as of December 31, 1998, between Integrated of
Amarillo, Inc. and Lyric Health Care Holdings III, Inc.
29. Facility Sublease, dated as of December 31, 1998, between Integrated Health
Services at Hanover House, Inc. and Lyric Health Care Holdings III, Inc.
30. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 139, Inc. and Lyric Health Care Holdings III, Inc.
31. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 174, Inc. and Lyric Health Care Holdings III, Inc.
32. Facility Sublease, dated as of December 31, 1998, between IHS Acquisition
No. 136, Inc. and Lyric Health Care Holdings III, Inc.
E-3
<PAGE>
EXHIBIT F
FACILITY PURCHASE PRICES
------------------------
1. Seller: Integrated Health Services at Colorado Springs, Inc.
Facility: Integrated Health Services of Colorado Springs -- Colorado
Springs, Colorado
Purchase Price: $8,200,000
2. Seller: IHS Acquisition No. 103, Inc.
Facility: Horizon Healthcare & Specialty Center -- Daytona Beach, Florida
Purchase Price: $6,600,000
3. Seller: Integrated Health Services at Central Florida, Inc.
Facility: Integrated Health Services of Vero Beach -- Vero Beach, Florida
Purchase Price: $4,900,000
Facility: Integrated Health Services of Florida at Fort Pierce -- Fort
Pierce, Florida
Purchase Price: $3,700,000
4. Seller: Briar Hill, Inc.
Facility: Integrated Health Services of Florida at Auburndale --
Auburndale, Florida
Purchase Price: $7,400,000
5. Seller: Bethamy Living Center Limited Partnership
Facility: Integrated Health Services of Florida at Clearwater --
Clearwater, Florida
Purchase Price: $10,300,000
6. Seller: Integrated Health Services at Briarcliff Haven, Inc.
Facility: Integrated Health Services of Atlanta at Briarcliff Haven --
Atlanta, Georgia
Purchase Price: $7,100,000
7. Seller: IHS Acquisition No. 114, Inc.
Facility: Lynwood Manor -- Adrian, Michigan
Purchase Price: $4,600,000
8. Seller: Cedarcroft Health Services, Inc.
Facility: Integrated Health Services of St. Louis at Big Bend Woods --
Valley Park, Missouri
Purchase Price: $5,000,000
F-1
<PAGE>
9. Seller: Manchester Integrated Health, Inc.
Facility: Integrated Health Services of New Hampshire at Manchester --
Manchester, New Hampshire
Purchase Price: $3,200,000
10. Seller: IHS Acquisition No. 121, Inc.
Facility: Ruidoso Care Center -- Ruidoso, New Mexico
Purchase Price: $2,100,000
11. Seller: IHS Acquisition No. 125, Inc.
Facility: Meadowview Care Center -- Seville, Ohio
Purchase Price: $5,400,000
12. Seller: IHS Acquisition No. 124, Inc.
Facility: Washington Square -- Warren, Ohio
Purchase Price: $3,200,000
13. Seller: IHS Acquisition No. 168, Inc.
Facility: HSH - Midwest City -- Midwest City, Oklahoma
Purchase Price: $1,800,000
14. Seller: IHS Acquisition No. 127, Inc.
Facility: Midwest City Nursing -- Midwest City, Oklahoma
Purchase Price: $4,000,000
15. Seller: Rest Haven Nursing Center (Whitemarsh), Inc.
Facility: Integrated Health Services at Whitemarsh -- Whitemarsh,
Pennsylvania
Purchase Price: $12,300,000
16. Seller: Integrated of Amarillo, Inc.
Facility: Amarillo Specialty Hospital -- Amarillo, Texas
Purchase Price: $2,300,000
Facility: Integrated Health Services of Amarillo -- Amarillo, Texas
Purchase Price: $4,400,000
17. Seller: IHS Acquisition No. 128, Inc.
Facility: Doctors Healthcare Center -- Dallas, Texas
Purchase Price: $16,000,000
F-2
<PAGE>
18. Seller: IHS Acquisition No. 140, Inc.
Facility: Harbor View Care Center -- Corpus Christi, Texas
Purchase Price: $4,000,000
19. Seller: IHS Acquisition No. 134, Inc.
Facility: Heritage Estates -- Ft. Worth, Texas
Purchase Price: $7,400,000
20. Seller: IHS Acquisition No. 132, Inc.
Facility: Heritage Gardens -- Carrollton, Texas
Purchase Price: $6,000,000
21. Seller: IHS Acquisition No. 138, Inc.
Facility: Heritage Manor Longview -- Longview, Texas
Purchase Price: $3,600,000
22. Seller: IHS Acquisition No. 129, Inc.
Facility: Heritage Manor Plano -- Plano, Texas
Purchase Price: $14,000,000
23. Seller: IHS Acquisition No. 133, Inc.
Facility: Heritage Place of Grand Prairie -- Grand Prairie, Texas
Purchase Price: $6,100,000
24. Seller: IHS Acquisition No. 131, Inc.
Facility: Horizon Health Care - El Paso -- El Paso, Texas
Purchase Price: $3,500,000
25. Seller: IHS Acquisition No. 170, Inc.
Facility: HSH - Corpus Christi
Purchase Price: $3,100,000
26. Seller: IHS Acquisition No. 171, Inc.
Facility: HSH - El Paso
Purchase Price: $4,000,000
27. Seller: Integrated Health Services at Hanover House, Inc.
Facility: Mountain View Place
Purchase Price: $7,200,000
F-3
<PAGE>
28. Seller: IHS Acquisition No. 139, Inc.
Facility: Parkwood Place -- Justin, Texas
Purchase Price: $3,900,000
29. Seller: IHS Acquisition No. 174, Inc.
Facility: Plano Specialty Hospital (HSH - Plano) -- Plano, Texas
Purchase Price: $3,800,000
30. Seller: IHS Acquisition No. 136, Inc.
Facility: Silver Springs Nursing and Rehabilitation Center -- Houston,
Texas
Purchase Price: $5,200,000
SUMMARY:
Facilities = 32
Beds = 4084
Purchase Price = $184,300,000
F-4
<PAGE>
EXHIBIT G
ADDITIONAL TENANT OBLIGATIONS
-----------------------------
All terms appearing herein having their first letter capitalized and not
otherwise defined shall have the respective meanings set forth in the Loan
Agreement, dated as of December 30, 1998, between Landlord and Lender (the "Loan
Agreement") and/or this Lease. All references herein to Sections shall be deemed
to be references to such Sections in the Loan Agreement.
1. In addition to the representations and warranties made by Tenant and the
Facility Subtenants under this Lease, Tenant and the Facility Subtenants also
make the following representations and warranties:
(a) The representations and warranties contained in Sections 3.6
through 3.17 of the Loan Agreement;
(b) The representations and warranties contained in Sections 3.19 and
3.20 of the Loan Agreement;
(c) The representations and warranties contained in Section 3.23 of
the Loan Agreement; and
(d) The representations and warranties contained in Sections 3.25 and
3.26 of the Loan Agreement.
2. In addition to the covenants, duties and obligations of Tenant and the
Facility Subtenants under this Lease, Tenant and the Facility Subtenants shall
have the following covenants, duties and obligations:
(a) The covenants, duties and obligations under Sections 4.4 through
4.9 of the Loan Agreement;
(b) The covenants, duties and obligations under Sections 4.11 through
4.25 of the Loan Agreement;
(c) The covenants, duties and obligations under Sections 5.1 and 5.2
of the Loan Agreement;
(d) The covenants, duties and obligations under Sections 5.5 and 5.6
of the Loan Agreement;
G-1
<PAGE>
(e) The covenants, duties and obligations under Sections 5.10 through
5.12 of the Loan Agreement;
(f) The covenants, duties and obligations under Section 5.14 of the
Loan Agreement;
(g) The covenants, duties and obligations under Article VI of the Loan
Agreement;
(h) The covenants, duties and obligations under Sections 8.2 through
8.4 of the Loan Agreement;
(i) The covenants, duties and obligations under Section 8.7 of the
Loan Agreement; and
(j) The covenants, duties and obligations under Section 8.9 of the
Loan Agreement.
3. In addition to the covenants, duties and obligations of Tenant and the
Facility Subtenants under this Lease, Tenant and the Facility Subtenants shall
fully comply with the following provisions of each of the Mortgages:
(a) The covenants, duties and obligations under Sections 2 through 4
of each of the Mortgages;
(b) The covenants, duties and obligations under Sections 6 through 13
of each of the Mortgages; and
(c) The covenants, duties and obligations under Section 15 of each of
the Mortgages.
(d) The covenants, duties and obligations under Section 21 of each of
the Mortgages.
(e) The covenants, duties and obligations under Section 24 of each of
the Mortgages.
4. In addition to the representations and warranties made by Tenant and the
Facility Subtenants under this Lease, Tenant and the Facility Subtenants hereby
make the representations and warranties contained in Sections 4 through 21 of
the Loan Closing Certification, dated as of December 30, 1998, from Landlord to
Lender and shall take all reasonable measures to assure
G-2
<PAGE>
that such representations and warranties remain true and correct at all times
during the Loan Facility.
5. In addition to the covenants, duties and obligation of Tenant and the
Facility Subtenants under this Lease, Tenant and the Facility Subtenants shall
be obligated to reimburse Landlord or pay directly on behalf of Landlord to
Lender the following charges, fees, costs and expenses caused by the failure to
pay timely Rent or other payment obligations in respect of the Loan Facility:
(a) Any Default Rate interest under section 1.3 of the Promissory
Note;
(b) Any Late Fees under Section 8.3 of the Promissory Note; and
(c) Any other charges, fee, cost or expense obligations of Landlord
provided for under the Promissory Note.
6. Tenant and the Facility Subtenants shall fully comply with the
covenants, duties and obligations of Tenant and the Facility Subtenants under
each of the following agreements in respect of the Loan Facility:
(a) Subordination and Attornment Agreement, dated as of December 30,
1998, among Lender, Landlord, Tenant and the Facility Subtenants.
(b) Capital Improvements Fund Escrow and Security Agreement, dated as
of December 30, 1998, among Lender, Landlord, Tenant and the Facility
Subtenants.
(c) Lessee Security Agreements, each dated as of December 30, 1998,
from Tenant and each of the Facility Subtenants in favor of Lender.
(d) Exceptions to Nonrecourse Guaranty, dated as of December 30, 1998,
from Tenant, Guarantor and the Facility Subtenants in favor of Lender.
(e) Subordination of Franchise Agreements, dated as of December 30,
1998, among Tenant, the Facility Subtenants, Lyric, Franchisor and Lender.
(f) Subordination of Management Agreements, dated as of December 30,
1998, among Tenant, the Facility Subtenants, Lyric, Manager and Lender.
(g) Stock Pledge Agreement, dated as of December 30, 1998, from Tenant
to Lender.
G-3
<PAGE>
(h) Master Operations and Maintenance Agreement, dated as of December
30, 1998, between Lender and Landlord.
(i) Lessee Environmental Indemnity Agreement, dated as of December 30,
1998, among Lender, Tenant and the Facility Subtenants.
(j) Assignment of Leases and Rents, dated as of December 30, 1998,
among Lender, Tenant and Landlord.
(k) Post Closing Agreement, dated as of December 30, 1998, between
Landlord and Lender.
G-4
<PAGE>
EXHIBIT H
LIST OF ENGINEERING FIRMS
-------------------------
ATC Associates Inc.
600 West Cummings Park
Suite 6500
Woburn, Massachusetts 01801
781-932-9400
H-1
<PAGE>
EXHIBIT I
LANDLORD WIRING INSTRUCTIONS
----------------------------
Bank: SouthTrust Bank, National Association
- ----- Birmingham, Alabama
Account Name: Monarch Properties, LP
- -------------
Account #: 65-990-754
- ----------
ABA #: 063 10 9430
- -----
I-1
EXHIBIT 10.78
INDEMNITY AGREEMENT
BETWEEN
INTEGRATED HEALTH SERVICES, INC.
AND
MONARCH PROPERTIES, LP
DATED AS OF DECEMBER 31, 1998
<PAGE>
INDEMNITY AGREEMENT
THIS INDEMNITY AGREEMENT (this "Indemnity Agreement") is executed and
delivered as of the 31st day of December, 1998 (the "Effective Date") between
INTEGRATED HEALTH SERVICES, INC., a Delaware corporation ("IHS") and MONARCH
PROPERTIES, LP, a Delaware limited partnership ("Monarch").
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 Facilities Purchase Agreement, dated as of
the date hereof, among the entities described on EXHIBIT A hereto (each a
"Seller" and, collectively, "Sellers"), IHS and Monarch (the "Purchase
Agreement"), or, if not defined in the Purchase Agreement, then the respective
meanings given them in the Master Lease, dated as of the date hereof, between
Lyric Health Care Holdings III, Inc. ("Lyric Holdings") and Monarch.
B. Lyric Holdings is a wholly owned subsidiary of Lyric Health Care LLC.
Sellers are corporations that are wholly owned by Lyric Holdings. IHS is a 50%
member of Lyric Health Care LLC. 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,
Monarch has required that IHS indemnify Monarch on the terms and conditions
hereinafter set forth with respect to certain environmental matters.
NOW, THEREFORE, IHS and Monarch agree as follows:
1. INDEMNIFICATION. IHS shall indemnify and hold Monarch 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 and Lyric Holdings to complete as and when
required to do so by the terms of the Escrow Agreement the environmental
remediation described on Exhibit B thereof; and
(b) Any failure of Sellers and Lyric Holdings 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 Article 18 thereof.
1
<PAGE>
2. PROCEDURE. If Monarch asserts that IHS is subject to a claim for
indemnification hereunder, Monarch 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 Monarch. Monarch may also employ counsel of its own,
but the costs of Monarch's separate counsel shall be borne by Monarch as long as
IHS continues to so defend. If IHS fails to respond or does not admit
responsibility for indemnification, Monarch 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 thirty (30) days of receipt of written notice from Monarch
describing the claim in reasonable detail, IHS shall notify Monarch 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 Monarch
declines to accept a bona fide offer of settlement that is recommended by the
IHS, which settlement without cost to Monarch releases Monarch 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 Monarch, 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 Monarch or a full and complete
release of Monarch.
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 or hand delivery to the following
address:
To IHS: Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attention: Daniel J. Booth
Copy to: Marshall A. Elkins, Esq.
Telephone No.: 410/998-8768
Facsimile No.: 410/998-8695
To Monarch: Monarch Properties, LP
8889 Pelican Bay Boulevard - Suite 501
Naples, Florida 34108
Attention: John B. Poole
Telephone No.: 941/596-3259
Facsimile No.: 941/596-3266
2
<PAGE>
With copy to John R. Fallon, Jr., Esq.
(which shall not LeBoeuf, Lamb, Greene & MacRae, L.L.P.
constitute notice): 125 West 55th Street
New York, New York 10019-5389
Telephone No.: 212/424-8279
Facsimile No.: 212/424-8500
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 New York, 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 States in which the Leased
Property is located.
IHS CONSENTS TO IN PERSONAM JURISDICTION BEFORE THE STATE AND FEDERAL
COURTS OF THE STATES OF NEW YORK 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 STATE OF NEW YORK 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 STATE OF NEW YORK 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
STATE OF NEW YORK OR THE STATES IN WHICH THE LEASED PROPERTY IS LOCATED.
SIGNATURE PAGE FOLLOWS
3
<PAGE>
IN WITNESS WHEREOF, the parties hereby execute this Indemnity Agreement as
of the day and year first set forth above.
INTEGRATED HEALTH SERVICES, INC.
By: (Seal)
---------------------------
Name: Daniel J. Booth
-------------------------
Title: Senior Vice President
------------------------
MONARCH PROPERTIES, LP
By: MP Operating, LLC, its General Partner
By: MP Operating, Inc., its Manager
By: (Seal)
---------------------------
Name: Douglas Listman
-------------------------
Title: Chief Financial Officer
------------------------
S-1
<PAGE>
EXHIBIT A
SELLERS
-------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
SELLER NAME STATE OF INCORPORATION FACILITY D/B/A/
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Integrated Health Services at Delaware Integrated Health Services of Colorado
Colorado Springs, Inc. Springs
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 103, Inc. Delaware Horizon Healthcare & Specialty Center
- -----------------------------------------------------------------------------------------------------------------------
Integrated Health Services at Central Delaware Integrated Health Services of Vero
Florida, Inc. Beach
- -----------------------------------------------------------------------------------------------------------------------
Briar Hill, Inc. Florida Integrated Health Services of Florida at
Auburndale
- -----------------------------------------------------------------------------------------------------------------------
Bethamy Living Center Limited Florida Integrated Health Services of Florida at
Partnership Clearwater
- -----------------------------------------------------------------------------------------------------------------------
Integrated Health Services at Central Delaware Integrated Health Services of Florida at
Florida, Inc. Fort Pierce
- -----------------------------------------------------------------------------------------------------------------------
Integrated Health Services at Georgia Integrated Health Services of Atlanta at
- -----------------------------------------------------------------------------------------------------------------------
Briarcliff Haven, Inc. Briarcliff Haven
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 114, Inc. Delaware Lynwood Manor
- -----------------------------------------------------------------------------------------------------------------------
Cedarcroft Health Services, Inc. Pennsylvania Integrated Health Services of St. Louis
at Big Bend Woods
- -----------------------------------------------------------------------------------------------------------------------
Manchester Integrated Health, Inc. Pennsylvania Integrated Health Services of New
Hampshire at Manchester
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 121, Inc. Delaware Ruidoso Care Center
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 125, Inc. Delaware Meadowview Care Center
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 124, Inc. Delaware Washington Square
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 168, Inc. Delaware HSH - Midwest City
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 127, Inc. Delaware Midwest City Nursing
- -----------------------------------------------------------------------------------------------------------------------
Rest Haven Nursing Center Pennsylvania Integrated Health Services at
(Whitemarsh), Inc. Whitemarsh
- -----------------------------------------------------------------------------------------------------------------------
Integrated of Amarillo, Inc. Texas Amarillo Specialty Hospital
- -----------------------------------------------------------------------------------------------------------------------
Integrated of Amarillo, Inc. Texas Integrated Health Services of Amarillo
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 128, Inc. Delaware Doctors Healthcare Center
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 140, Inc. Delaware Harbor View Care Center
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 134, Inc. Delaware Heritage Estates
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
SELLER NAME STATE OF INCORPORATION FACILITY D/B/A/
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
IHS Acquisition No. 132, Inc. Delaware Heritage Gardens
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 138, Inc. Delaware Heritage Manor Longview
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 129, Inc. Delaware Heritage Manor Plano
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 133, Inc. Delaware Heritage Place of Grand Prairie
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 131, Inc. Delaware Horizon Healthcare - El Paso
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 170, Inc. Delaware HSH- Corpus Christi
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 171, Inc. Delaware HSH- El Paso
- -----------------------------------------------------------------------------------------------------------------------
Integrated Health Services at Delaware Mountain View Place
Hanover House, Inc.
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 139, Inc. Delaware Parkwood Place
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 174, Inc. Delaware Plano Specialty Hospital
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 136, Inc. Delaware Silver Springs Nursing and
Rehabilitation Center
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
EXHIBIT 10.79
INDEMNITY AGREEMENT
AMONG
INTEGRATED HEALTH SERVICES, INC.,
LYRIC HEALTH CARE LLC,
LYRIC HEALTH CARE HOLDINGS III, INC.
AND
THE ENTITIES LISTED ON ATTACHED EXHIBIT A
DATED AS OF DECEMBER 31, 1998
<PAGE>
INDEMNITY AGREEMENT
THIS INDEMNITY AGREEMENT (this "Indemnity Agreement") is executed and
delivered as of the 31st day of December, 1998 (the "Effective Date") among
INTEGRATED HEALTH SERVICES, INC., a Delaware corporation ("IHS"), LYRIC HEALTH
CARE LLC, a Delaware limited liability company ("Lyric LLC"), LYRIC HEALTH CARE
HOLDINGS III, INC., a Delaware corporation ("Lyric III") and each of the
entities described on attached Exhibit A (collectively, the "Lyric Entities,"
together with Lyric LLC and Lyric III, collectively, the "Lyric Indemnified
Parties").
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 Facilities Purchase Agreement, dated as of
the date hereof, among the Lyric Entities, IHS and Monarch Properties, LP, a
Delaware limited partnership ("Monarch") (the "Purchase Agreement"), or, if not
defined in the Purchase Agreement, then the respective meanings given them in
the Master Lease, dated as of the date hereof, between Lyric III and Monarch.
B. Lyric III is a wholly owned subsidiary of Lyric LLC. The Lyric Entities
are corporations and a partnership that are wholly owned by Lyric III. IHS is a
50% member of Lyric LLC. The Lyric Entities also are the respective owners of
Sellers' Assets. Sellers sold and Monarch acquired and leased to Lyric III,
Sellers' Assets. The sale and lease of Seller's Assets will benefit IHS.
C. As a condition precedent to its agreement to sell the Sellers' Assets,
the Lyric Indemnified Parties have required that IHS indemnify the Lyric
Indemnified parties on the terms and conditions hereinafter set forth with
respect to litigation matters.
NOW, THEREFORE, IHS and the Lyric Indemnified Parties agree as follows:
1. INDEMNIFICATION. IHS shall indemnify and hold the Lyric Indemnified
Parties 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 ("Claims"), arising out of or in any
manner related to any and all Claims that relate to any litigation, arbitration
proceeding, governmental investigation, citation, suit, action, proceeding or
claim of any kind relating to matters occurring prior to the Effective Date,
including, but not limited to, the matters disclosed on Schedule 7.5 to the
Purchase Agreement, involving IHS, any of the Lyric Indemnified Parties or any
of the Facilities.
2. PROCEDURE. If the Lyric Indemnified Parties assert that IHS is subject
to a claim for indemnification hereunder, the Lyric Indemnified Parties shall
describe the claim in sufficient
1
<PAGE>
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 the Lyric Indemnified Parties. The Lyric
Indemnified Parties may also employ counsel of their own, but the costs of the
Lyric Indemnified Parties' separate counsel shall be borne by the Lyric
Indemnified Parties as long as IHS continues to so defend. If IHS fails to
respond or does not admit responsibility for indemnification, the Lyric
Indemnified Parties may take such necessary steps to defend themselves 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
thirty (30) days of receipt of written notice from the Lyric Indemnified Parties
describing the claim in reasonable detail, IHS shall notify the Lyric
Indemnified Parties 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 the Lyric Indemnified Parties decline to accept a bona fide
offer of settlement that is recommended by the IHS, which settlement without
cost to the Lyric Indemnified Parties releases the Lyric Indemnified Parties
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 the
Lyric Indemnified Parties, 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 the
Lyric Indemnified Parties or a full and complete release of the Lyric
Indemnified Parties.
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 or hand delivery to the following
address:
To IHS: Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attention: Daniel J. Booth
Telephone No.: 410/998-8768
Facsimile No.: 410/998-8695
To the Lyric Lyric Health Care LLC
Indemnified Parties: 10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attention: Daniel J. Booth
Telephone No.: 410/998-8768
Facsimile No.: 410/998-8695
2
<PAGE>
With copy to John R. Fallon, Jr., Esq.
(which shall not LeBoeuf, Lamb, Greene & MacRae, L.L.P.
constitute notice): 125 West 55th Street
New York, New York 10019-5389
Telephone No.: 212/424-8279
Facsimile No.: 212/424-8500
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 New York, 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 States in which the Leased
Property is located.
IHS CONSENTS TO IN PERSONAM JURISDICTION BEFORE THE STATE AND FEDERAL
COURTS OF THE STATES OF NEW YORK 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 STATE OF NEW YORK 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 STATE OF NEW YORK 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
STATE OF NEW YORK OR THE STATES IN WHICH THE LEASED PROPERTY IS LOCATED.
SIGNATURE PAGE FOLLOWS
3
<PAGE>
IN WITNESS WHEREOF, the parties hereby execute this Indemnity Agreement as
of the day and year first set forth above.
INTEGRATED HEALTH SERVICES, INC.
By: (Seal)
-----------------------------
Name: Daniel J. Booth
---------------------------
Title: Senior Vice President
--------------------------
LYRIC HEALTH CARE LLC
By: Integrated Health Services, Inc., its Member
By: (Seal)
-----------------------------
Name: Daniel J. Booth
---------------------------
Title: Senior Vice President
--------------------------
LYRIC HEALTH CARE HOLDINGS, III, INC.
By: (Seal)
-----------------------------
Name: Daniel J. Booth
---------------------------
Title: Senior Vice President
--------------------------
BETHAMY LIVING CENTER
MANAGEMENT COMPANY, THE GENERAL
PARTNER OF BETHAMY LIVING CENTER
LIMITED PARTNERSHIP
BRIAR HILL, INC.
CEDARCROFT HEALTH SERVICES, INC.
IHS ACQUISITION NO. 103, INC.
IHS ACQUISITION NO. 114, INC.
IHS ACQUISITION NO. 121, INC.
IHS ACQUISITION NO. 124, INC.
IHS ACQUISITION NO. 125, INC.
S-1
<PAGE>
IHS ACQUISITION NO. 127, INC.
IHS ACQUISITION NO. 128, INC.
IHS ACQUISITION NO. 129, INC.
IHS ACQUISITION NO. 131, INC.
IHS ACQUISITION NO. 132, INC.
IHS ACQUISITION NO. 133, INC.
IHS ACQUISITION NO. 134, INC.
IHS ACQUISITION NO. 136, INC.
IHS ACQUISITION NO. 138, INC.
IHS ACQUISITION NO. 139, INC.
IHS ACQUISITION NO. 140, INC.
IHS ACQUISITION NO. 168, INC.
IHS ACQUISITION NO. 170, INC.
IHS ACQUISITION NO. 171, INC.
IHS ACQUISITION NO. 174, INC.
INTEGRATED OF AMARILLO, INC.
INTEGRATED HEALTH SERVICES AT
BRIARCLIFF HAVEN, INC.
INTEGRATED HEALTH SERVICES AT
CENTRAL FLORIDA, INC.
INTEGRATED HEALTH SERVICES AT
COLORADO SPRINGS, INC.
INTEGRATED HEALTH SERVICES AT
HANOVER HOUSE, INC.
MANCHESTER INTEGRATED HEALTH,
INC.
REST HAVEN NURSING CENTER
(WHITEMARSH), INC.
By: (Seal)
-----------------------------
Name: Daniel J. Booth
---------------------------
Title: Senior Vice President
--------------------------
S-2
<PAGE>
EXHIBIT A
LYRIC ENTITIES
--------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
LYRIC ENTITY STATE OF INCORPORATION FACILITY D/B/A/
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Integrated Health Services at Delaware Integrated Health Services of Colorado
Colorado Springs, Inc. Springs
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 103, Inc. Delaware Horizon Healthcare & Specialty Center
- -----------------------------------------------------------------------------------------------------------------------
Integrated Health Services at Central Delaware Integrated Health Services of Vero
Florida, Inc. Beach
- -----------------------------------------------------------------------------------------------------------------------
Briar Hill, Inc. Florida Integrated Health Services of Florida at
Auburndale
- -----------------------------------------------------------------------------------------------------------------------
Bethamy Living Center Limited Florida Integrated Health Services of Florida at
Partnership Clearwater
- -----------------------------------------------------------------------------------------------------------------------
Integrated Health Services at Central Delaware Integrated Health Services of Florida at
Florida, Inc. Fort Pierce
- -----------------------------------------------------------------------------------------------------------------------
Integrated Health Services at Georgia Integrated Health Services of Atlanta at
Briarcliff Haven, Inc. Briarcliff Haven
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 114, Inc. Delaware Lynwood Manor
- -----------------------------------------------------------------------------------------------------------------------
Cedarcroft Health Services, Inc. Pennsylvania Integrated Health Services of St. Louis
at Big Bend Woods
- -----------------------------------------------------------------------------------------------------------------------
Manchester Integrated Health, Inc. Pennsylvania Integrated Health Services of New
Hampshire at Manchester
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 121, Inc. Delaware Ruidoso Care Center
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 125, Inc. Delaware Meadowview Care Center
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 124, Inc. Delaware Washington Square
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 168, Inc. Delaware HSH - Midwest City
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 127, Inc. Delaware Midwest City Nursing
- -----------------------------------------------------------------------------------------------------------------------
Rest Haven Nursing Center Pennsylvania Integrated Health Services at
(Whitemarsh), Inc. Whitemarsh
- -----------------------------------------------------------------------------------------------------------------------
Integrated of Amarillo, Inc. Texas Amarillo Specialty Hospital
- -----------------------------------------------------------------------------------------------------------------------
Integrated of Amarillo, Inc. Texas Integrated Health Services of Amarillo
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 128, Inc. Delaware Doctors Healthcare Center
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 140, Inc. Delaware Harbor View Care Center
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 134, Inc. Delaware Heritage Estates
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
LYRIC ENTITY STATE OF INCORPORATION FACILITY D/B/A/
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
IHS Acquisition No. 132, Inc. Delaware Heritage Gardens
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 138, Inc. Delaware Heritage Manor Longview
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 129, Inc. Delaware Heritage Manor Plano
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 133, Inc. Delaware Heritage Place of Grand Prairie
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 131, Inc. Delaware Horizon Healthcare - El Paso
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 170, Inc. Delaware HSH- Corpus Christi
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 171, Inc. Delaware HSH- El Paso
- -----------------------------------------------------------------------------------------------------------------------
Integrated Health Services at Delaware Mountain View Place
Hanover House, Inc.
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 139, Inc. Delaware Parkwood Place
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 174, Inc. Delaware Plano Specialty Hospital
- -----------------------------------------------------------------------------------------------------------------------
IHS Acquisition No. 136, Inc. Delaware Silver Springs Nursing and
Rehabilitation Center
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
EXHIBIT 10.80
INTEGRATED HEALTH SERVICES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
("PLAN B")
Amended and Restated
Effective as of November 19, 1998
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
("PLAN B")
Amended and Restated
Effective as of November 19, 1998
TABLE OF CONTENTS
ARTICLE 1 DEFINITIONS
1.1 ACCOUNT..................................................................1
1.2 BENEFICIARY..............................................................1
1.3 CHANGE IN CONTROL........................................................1
1.4 CODE.....................................................................2
1.5 COMPENSATION.............................................................2
1.6 COMPENSATION DEFERRAL ACCOUNT............................................2
1.7 COMPENSATION DEFERRALS...................................................2
1.8 EFFECTIVE DATE...........................................................2
1.9 ELIGIBLE EMPLOYEE........................................................2
1.10 EMPLOYER.................................................................2
1.11 EMPLOYER CONTRIBUTION CREDIT ACCOUNT.....................................2
1.12 EMPLOYER CONTRIBUTION CREDITS............................................2
1.13 ENTRY DATE...............................................................2
1.14 NORMAL RETIREMENT AGE....................................................2
1.15 PARTICIPANT..............................................................2
1.16 PARTICIPANT ENROLLMENT AND ELECTION FORM.................................3
1.17 PLAN OR PLAN B...........................................................3
1.18 PLAN YEAR................................................................3
1.19 TRUST....................................................................3
1.20 TRUSTEE..................................................................3
1.21 VALUATION DATE...........................................................3
ARTICLE 2 ELIGIBILITY AND PARTICIPATION
2.1 REQUIREMENTS.............................................................3
2.2 RE-EMPLOYMENT............................................................3
2.3 CHANGE OF EMPLOYMENT CATEGORY............................................3
ARTICLE 3 CONTRIBUTIONS AND CREDITS
3.1 EMPLOYER CONTRIBUTION CREDITS............................................4
3.2 PARTICIPANT COMPENSATION DEFERRALS.......................................4
3.3 CONTRIBUTIONS TO THE TRUST...............................................5
i
<PAGE>
ARTICLE 4 ALLOCATION OF FUNDS
4.1 ALLOCATION OF DEEMED EARNINGS OR LOSSES ON ACCOUNTS......................5
4.2 ACCOUNTING FOR DISTRIBUTIONS.............................................6
4.3 SEPARATE ACCOUNTS........................................................6
4.4 INTERIM VALUATIONS.......................................................6
4.5 EXPENSES.................................................................6
4.6 TAXES....................................................................6
ARTICLE 5 ENTITLEMENT TO BENEFITS
5.1 FIXED PAYMENT DATES: TERMINATION OF EMPLOYMENT...........................6
5.2 HARDSHIP DISTRIBUTIONS...................................................7
5.3 VESTING..................................................................7
5.4 RE-EMPLOYMENT OF RECIPIENT...............................................8
5.5 CHANGE IN CONTROL BENEFITS...............................................8
ARTICLE 6 DISTRIBUTION OF BENEFITS
6.1 AMOUNT...................................................................9
6.2 METHOD OF PAYMENT........................................................9
6.3 DEATH BENEFITS...........................................................9
ARTICLE 7 BENEFICIARIES: PARTICIPANT DATA
7.1 DESIGNATION OF BENEFICIARIES............................................10
7.2 INFORMATION TO BE FURNISHED BY PARTICIPANTS AND BENEFICIARIES:
INABILITY TO LOCATE PARTICIPANTS OR BENEFICIARIES.......................10
ARTICLE 8 ADMINISTRATION
8.1 ADMINISTRATIVE AUTHORITY................................................11
8.2 UNIFORMITY OF DISCRETIONARY ACTS........................................11
8.3 LITIGATION..............................................................12
8.4 CLAIMS PROCEDURE........................................................12
ARTICLE 9 AMENDMENT
9.1 RIGHT TO AMEND..........................................................13
9.2 AMENDMENTS TO ENSURE PROPER CHARACTERIZATION OF PLAN....................13
ARTICLE 10 TERMINATION
10.1 EMPLOYER'S RIGHT TO TERMINATE OR SUSPEND PLAN...........................13
10.2 AUTOMATIC TERMINATION OF PLAN...........................................13
10.3 SUSPENSION OF DEFERRALS.................................................13
10.4 ALLOCATION AND DISTRIBUTION.............................................13
10.5 SUCCESSOR TO EMPLOYER...................................................14
ii
<PAGE>
ARTICLE 11 THE TRUST
11.1 ESTABLISHMENT OF TRUST..................................................14
ARTICLE 12 MISCELLANEOUS
12.1 LIMITATIONS ON LIABILITY OF EMPLOYER....................................14
12.2 CONSTRUCTION............................................................14
12.3 UNFUNDED CONTRACTUAL OBLIGATION.........................................15
12.4 SPENDTHRIFT PROVISION...................................................15
iii
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
("PLAN B")
Amended and Restated
Effective as of November 19, 1998
RECITALS
This amended and restated Integrated Health Services, Inc. Supplemental
Executive Retirement Plan (the "Plan", or "Plan B") is adopted by Integrated
Health Services, Inc. (the "Employer") for certain of its executive and/or
highly compensated employees. The purpose of the Plan is to offer those
employees an opportunity to elect to defer the receipt of compensation in order
to provide termination of employment and related benefits taxable pursuant to
section 451 of the Internal Revenue code of 1986, as amended (the "Code"). The
Plan is intended to be a "top-hat" plan (i.e., an unfunded deferred compensation
plan maintained for a select group of management or highly-compensated
employees) under sections 201(2), 301(a)(3) and 401(a)(1) of the Employee
Retirement Security Act of 1974 ("ERISA").
Accordingly, the following amendment and restatement of the Plan is
adopted.
ARTICLE 1
DEFINITIONS
1.1 ACCOUNT means the balance credited to a Participant's or Beneficiary's
Plan account, including contribution credits and deemed income, gains and losses
(as determined by the Employer, in its discretion) credited thereto. A
Participant's or Beneficiary's Account shall be determined as of the date of
reference.
1.2 BENEFICIARY means any person or person so designated in accordance with
the provisions of Article 7.
1.3 CHANGE IN CONTROL means (a) the purchase or other acquisition by any
person, entity or group of persons, within the meaning of section 13(d) or 14(d)
of the Securities Exchange Act of 1934 (the "Act"), or any comparable successor
provisions, of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Act) of thirty percent (30%) or more of either the
outstanding shares of common stock or the combined voting power of the
Employer's then outstanding voting securities entitled to vote generally, or (b)
the approval by the stockholders of the Employer of a reorganization, merger, or
consolidation, in each case with respect to which persons who were stockholders
of the Employer immediately prior to such reorganization, merger or
consolidation do not, immediately thereafter, own more than fifty percent (50%)
of the combined voting power entitled to vote generally in the election of
directors of the reorganized, merged, or consolidated entity's then outstanding
securities, or (c) a liquidation or dissolution of the Employer, or (d) the sale
of all or substantially all of the Employer's assets. In the case of a Change in
Control event affecting an Employer that is not the common law Employer of the
Participant, such event shall be deemed to constitute a Change in
<PAGE>
Control only if the Change in Control event affects an Employer that owns,
directly or through one or more controlled entities, the stock or other equity
interests of the Participant's common law Employer.
1.4 CODE means the Internal Revenue Code of 1986 and the regulations
thereunder, as amended from time to time.
1.5 COMPENSATION means the total current cash remuneration paid by the
Employer to an Eligible Employee with respect to his or her service for the
Employer (as determined by the Employer at its discretion).
1.6 COMPENSATION DEFERRAL ACCOUNT is defined in Section 3.2.
1.7 COMPENSATION DEFERRALS is defined in Section 3.2.
1.8 EFFECTIVE DATE means the effective date of this amendment and
restatement of the Plan, which shall be November 19, 1998.
1.9 ELIGIBLE EMPLOYEE means, for any Plan Year (or applicable portion
thereof), a person employed by the Employer who is determined by the Employer to
be a member of a select group of management or highly compensated employees of
the Employer and whose name appears on Schedule I or II, attached hereto.
1.10 EMPLOYER means Integrated Health Services, Inc. and its successors and
assigns unless otherwise herein provided, or any other corporation or business
organization which, with the consent of Integrated Health Services, Inc., or its
successors or assigns, assumes the Employer's obligations hereunder, or any
other corporation or business organization which agrees, with the consent of
Integrated Health Services, Inc., to become a party to the Plan.
1.11 EMPLOYER CONTRIBUTION CREDIT ACCOUNT is defined in Section 3.1.
1.12 EMPLOYER CONTRIBUTION CREDITS is defined in Section 3.1.
1.13 ENTRY DATE with respect to an individual means the first day of the
pay period following the date on which the individual first is given notice that
he or she is an Eligible Employee.
1.14 NORMAL RETIREMENT AGE means the later of a Participant's sixty-fifth
(65th) birthday or the date on which the Participant has completed five (5)
years of service with the Employer (as determined by the Employer).
1.15 PARTICIPANT means any person so designated in accordance with the
provisions of Article 2, including, where appropriate according to the context
of the Plan, any former employee who is or may become (or whose Beneficiaries
may become) eligible to receive a benefit under the Plan.
2
<PAGE>
1.16 PARTICIPANT ENROLLMENT AND ELECTION FORM means the form or forms on
which a Participant elects to defer Compensation hereunder and on which the
Participant makes certain other designations as required thereon.
1.17 PLAN or PLAN B means this Integrated Health Services, Inc.
Supplemental Executive Retirement Plan, as amended from time to time.
1.18 PLAN YEAR means the twelve (12) month period ending on the December 31
of each year during which the Plan is in effect.
1.19 TRUST means the Trust established pursuant to Article 11.
1.20 TRUSTEE means the trustee of the Trust established pursuant to Article
11.
1.21 VALUATION DATE means the last day of each Plan Year and any other date
that the Employer, in its sole discretion, designates as a Valuation Date.
ARTICLE 2
ELIGIBILITY AND PARTICIPATION
2.1 REQUIREMENTS. Every Eligible Employee as of the Effective Date shall be
eligible to become a Participant on the Effective Date. Every other Eligible
Employee shall be eligible to become a Participant on the first Entry Date
occurring on or after the date on which he or she is notified by the Employer
that he or she is an Eligible Employee. No individual shall become a
Participant, however, if he or she is not an Eligible Employee on the date his
or her participation is to begin.
Participation in the Participant Compensation Deferral feature of the
Plan is voluntary. In order to participate in the Participant Compensation
Deferral feature of the Plan, an otherwise Eligible Employee must make written
application in such manner as may be required by Section 3.2 and by the Employer
and must agree to make Compensation Deferrals as provided in Article 3.
Participation in the Employer Contribution Credit Account portion of
the Plan is automatic for all Participants.
2.2 RE-EMPLOYMENT. If a Participant whose employment with the Employer is
terminated is subsequently re-employed, he or she shall become a Participant in
accordance with the provisions of Section 2.1.
2.3 CHANGE OF EMPLOYMENT CATEGORY. During any period in which a Participant
remains in the employ of the Employer, but ceases to be an Eligible Employee, he
or she shall not be eligible to make Compensation Deferrals hereunder.
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ARTICLE 3
CONTRIBUTIONS AND CREDITS
3.1 EMPLOYER CONTRIBUTION CREDITS. There shall be established and
maintained a separate Employer Contribution Credit Account in the name of each
Participant. The Participant's Employer Contribution Credit Account shall be
credited or debited, as applicable, with (a) amounts equal to the Employer's
Contribution Credits credited to that Account; and (b) any deemed earnings and
losses (to the extent realized, based upon deemed fair market value of the
Account's deemed assets as determined by the Employer, in its discretion)
allocated to that Account.
For purposes of this Section, the Employer's Contribution Credits for
a particular Plan Year credited to the Employer Contribution Credit Accounts of
Participants listed on Schedules I or II, attached hereto, shall be such amounts
(if any) determined by the Employer, in its discretion, by the last day of the
third month of the year following such Plan Year. With respect to a given
Participant, the amount allocated to the Employer Contribution Credit Account of
that Participant each year that the Employer makes an Employer Contribution
Credit to the Employer Contribution Credit Accounts of Participants listed on
the Schedule on which that Participant's name appears shall equal the total
Employer Contribution Credits for the Plan Year with respect to that Schedule's
Participants multiplied by a fraction, the numerator of which is that
Participant's highest base salary (as determined by the Employer) for the
calendar year prior to the Plan Year for which the Employer Contribution Credit
is made and the denominator of which is the total of the highest base salaries
for such prior calendar year (as determined by the Employer) of all Participants
listed on that Schedule.
The Participant's Employer Contribution Credit Account shall be
credited or debited, as applicable, as of each Valuation Date, with deemed
earnings or losses, as applicable. The amount of deemed earnings or losses shall
be as determined by the Employer. The Employer shall have the discretion to
allocate such deemed earnings or losses among Participants' Employer
Contribution Credit Accounts pursuant to such allocation rules as the Employer
deems to be reasonable and administratively practicable. This Section is subject
to the provisions set forth in Section 4.1 of the Plan.
A Participant shall be vested in amounts credited to his or her
Employer Contribution Credit Account as provided in Section 5.3.
3.2 PARTICIPANT COMPENSATION DEFERRALS. In accordance with rules
established by the Employer, a Participant may elect to defer Compensation which
is due to be earned and which would otherwise be paid to the Participant, in a
lump sum or in any fixed periodic dollar amounts designated by the Participant.
Amounts so deferred will be considered a Participant's "Compensation Deferrals."
Ordinarily, a Participant shall make such an election with respect to a coming
twelve (12) month Plan Year during the period beginning on the December 1 and
ending on the December 31 of the prior Plan Year, or during such other period as
is established by the Employer.
Compensation Deferrals shall be made through regular payroll
deductions or through an election by the Participant to defer the payment of a
bonus not yet payable to him or her at the
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time of the election. The Participant may change his or her regular payroll
deduction Compensation Deferral amount as of, and by written notice delivered to
the Employer at least seven (7) days prior to, the beginning of any regular
payroll period, with such reduction being first effective for Compensation to be
earned in that payroll period. In the case of a bonus deferral, the Participant
may reduce his or her bonuses due to be paid by the Employer by giving notice to
the Employer of the bonus Compensation Deferral amount prior to the date the
applicable bonus is first due to be paid.
Once made, a Compensation Deferral regular payroll deduction election
shall continue in force indefinitely, until changed as provided above. A
Compensation Deferral bonus payment election shall continue in force only for
the Plan Year for which the election is first effective. Compensation Deferrals
shall be deducted by the Employer from the pay of a deferring Participant and
shall be credited to the Account of the deferring Participant.
There shall be established and maintained by the Employer a separate
Compensation Deferral Account in the name of each Participant to which shall be
credited or debited: (a) amounts equal to the Participant's Compensation
Deferrals; and (b) amounts equal to any deemed earnings or losses (to the extent
realized, based upon deemed fair market value of the Account's deemed assets, as
determined by the Employer, in its discretion) attributable or allocable
thereto.
A Participant shall at all times be 100% vested in amounts credited to
his or her Participant Compensation Deferral Account.
3.3 CONTRIBUTIONS TO THE TRUST. An amount shall be contributed by the
Employer to the Trust maintained under Section 11.1 equal the amount(s) required
to be credited to the Participants' Accounts under Sections 3.1 and 3.2. Amounts
equal to a Participant's Compensation Deferrals will be contributed to the Trust
with reasonable promptness after the total of such Compensation Deferrals during
any period has been determined. Amounts (if any) equal to a Participant's
Employer Contribution Credits for a particular Plan Year will be contributed to
the Trust by the last day of the third month of the year following such Plan
Year.
ARTICLE 4
ALLOCATION OF FUNDS
4.1 ALLOCATION OF DEEMED EARNINGS OR LOSSES ON ACCOUNTS. The assets of the
Trust shall be invested in such investments as the Employer shall determine. The
Employer shall direct the Trustee to invest the accounts maintained in the Trust
on behalf of the Participants pursuant to the Employer's investment directions.
The value of the Participant's Account shall be equal to the value of
the account maintained under the Trust on behalf of the Participant. As of each
valuation date of the Trust, the Participant's Account will be credited or
debited to reflect the Participant's deemed investments of the Trust. The
Participant's Plan Account will be credited or debited with the increase or
decrease in the realizable net asset value or credited interest, as applicable,
of the designated deemed investments, as follows. As of each Valuation Date, the
earnings and losses
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of the Trust fund will be allocated to each Participant's Plan Account in the
ratio that such Account balance bears to all Participant Account balances.
4.2 ACCOUNTING FOR DISTRIBUTIONS. As of the date of any distribution
hereunder, the distribution made hereunder to the Participant or his or her
Beneficiary or Beneficiaries shall be charged to such Participant's Account.
4.3 SEPARATE ACCOUNTS. A separate account under the Plan shall be
established and maintained by the Employer to reflect the Account for each
Participant, although there shall not be made or maintained an actual physical
division of the assets of the Trust until the time shall arrive for a
distribution hereunder to a Participant or a Beneficiary.
4.4 INTERIM VALUATIONS. If it is determined by the Employer that the value
of a Participant's Account as of any date on which distributions are to be made
differs materially from the value of the Participant's Account on the prior
Valuation Date upon which the distribution is to be based, the Employer, in its
discretion, shall have the right to designate any date in the interim as a
Valuation Date for the purpose of revaluing the Participant's Account so that
the Account will, prior to the distribution, reflect its share of such material
difference in value.
4.5 EXPENSES. Expenses, including Trustee fees, allocable to the
administration or operation of an Account maintained under the Plan shall be
paid by the Employer.
4.6 TAXES. Any taxes payable by the Employer allocable to an Account (or
portion thereof) maintained under the Plan which are payable prior to the
distribution of the Account (or portion thereof) shall be paid by the Employer
and shall not be charged against that Account, as an expense of the Account or
otherwise.
ARTICLE 5
ENTITLEMENT TO BENEFITS
5.1 FIXED PAYMENT DATES: TERMINATION OF EMPLOYMENT. On his or her
Participant Enrollment and Election Form, a Participant may select a fixed
payment date for the payment or commencement of payment of his or her vested
Account (or elect to treat his or her vested Account as three (3) or more
sub-accounts and select fixed payment dates for the payment or commencement of
payment of each sub-account), which will be valued and payable according to the
provisions of Article 6. Such payment dates may be extended to later dates so
long as elections to so extend the dates are made by the Participant at least
six (6) months prior to the date on which the distribution is to be made or
commence. Such payment dates may not be accelerated.
Alternatively, on his or her Participant Enrollment and Election Form,
a Participant may select payment or commencement of payment of his or her vested
Account (or a sub-account thereof) at his or her termination of employment with
the Employer, or at the earlier of a fixed payment date or dates or his or her
termination of employment with the Employer. In this case, the extension and
non-acceleration rules discussed above shall apply to such fixed payment date or
dates and/or termination of employment date, as applicable.
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Any fixed payment date elected by a Participant as provided above must
be a date no earlier than the January 1 of the second calendar year after the
calendar year in which the election is made.
If a Participant does not make an election as provided above for any
particular amounts hereunder, and the Participant terminates employment with the
Employer for any reason, the Participant's vested Account at the date of such
termination shall be valued and payable at or commencing at such termination
according to the provisions of Article 6.
5.2 HARDSHIP DISTRIBUTIONS. In the event of financial hardship of the
Participant, as hereinafter defined, the Participant may apply to the Employer
for the distribution of all or any part of his or her vested Account. The
Employer shall consider the circumstances of each such case, and the best
interests of the Participant and his or her family, and shall have the right, in
its sole discretion, if applicable, to allow such distribution, or, if
applicable, to direct a distribution of part of the amount requested, or to
refuse to allow any distribution. Upon a finding of financial hardship, the
Employer shall make the appropriate distribution to the Participant from amounts
held by the Employer in respect of the Participant's vested Account. In no event
shall the aggregate amount of the distribution exceed either the full value of
the Participant's vested Account or the amount determined by the Employer to be
necessary to alleviate the Participant's financial hardship (which financial
hardship may be considered to include any taxes due because of the distribution
occurring because of this Section), and which is not reasonably available from
other resources of the Participant. For purposes of this Section, the value of
the Participant's vested Account shall be determined as of the date of the
distribution. "Financial hardship" means (a) a severe financial hardship to the
Participant resulting from a sudden and unexpected illness or accident of the
Participant or of a dependent (as defined in Code section 152(a)) of the
Participant, (b) loss of the Participant's property due to casualty, or (c)
other similar extraordinary and unforeseeable circumstances arising as a result
of events beyond the control of the Participant, each as determined to exist by
the Employer. A distribution may be made under this Section only with the
consent of the Employer.
5.3. VESTING. A Participant shall at all times be one hundred percent
(100%) vested in amounts credited to his or her Compensation Deferral Account.
Amounts credited to a Participant's Employer Contribution Credit Account shall
vest according to the following schedule:
Years of Plan Participation Vested Percentage
--------------------------- -----------------
Less than 1 20%
1 but less than 2 40%
2 but less than 3 60%
3 but less than 4 80%
4 or more 100%
For purposes of this Section, a Participant's years of Plan
participation shall equal the Participant's total number of completed twelve
(12) month periods of employment with the Employer, whether continuous or
noncontinuous, commencing as of the date he or she first becomes a Participant
and ending as of the date of reference.
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If a Participant terminates employment because of death, total and
permanent disability (as determined by the Employer in its discretion),
involuntary termination by the Employer other than for cause (as hereinafter
defined), or, except as provided in the following paragraph, for any reason
following attainment of Normal Retirement Age, the Participant shall become one
hundred percent (100%) vested in his or her Employer Contribution Credit
Account. Except as provided in the following paragraph, if a Participant
terminates employment under any other circumstance, he or she shall become
vested in his or her Employer Contribution Credit Account, if at all, under the
vesting schedule set forth above.
If a Participant's employment is terminated by the Employer for cause
prior to a Change in Control, he or she shall forfeit all credits to his or her
Employer Contribution Credit Account not yet received hereunder. For purposes of
this Section, with respect to any particular Participant termination for cause
shall have the same meaning as is used in that Participant's individual
agreement of employment.
In the event Participant does not have an employment agreement
defining termination for cause, cause shall mean (1) the Participant materially
fails to perform any duty of his/her employment; (2) a material breach by the
Participant of his/her obligations regarding confidentiality, or any other duty,
whether by law or contract, he/she has to the Company; (3) Participant is
convicted of or pleads guilty or confesses to a felony involving moral
turpitude; (4) Participant is convicted of or pleads guilty or confesses to
theft, larceny or embezzlement of Employer's tangible or intangible property;
(5) notwithstanding anything set forth above to the contrary, a termination
shall not be for cause unless (i) the party to whom the Participant reports
notifies the Participant, in writing, of his/her intention to terminate the
Participant for cause (which notice shall set forth the conduct alleged to
constitute cause); and (ii) the Participant does not cure his/her conduct within
sixty days after the receipt of the cause notice.
5.4 RE-EMPLOYMENT OF RECIPIENT. If a Participant receiving installment
distributions pursuant to Section 6.2 is re-employed by the Employer, the
remaining distributions due to the Participant shall be suspended until such
time as the Participant (or his or her Beneficiary) once again becomes eligible
for benefits under Section 5.1, at which time such distribution shall commence,
subject to the limitations and conditions contained in this Plan.
5.5 CHANGE IN CONTROL BENEFITS. Notwithstanding anything herein to the
contrary, in the event of a Change in Control of the Employer, each Participant
shall become fully vested in all amounts credited to his or her Employer
Contribution Credit Account, and each Participant shall receive payment of his
or her entire Account immediately following such Change of Control, in a cash
lump sum. In addition, there shall be paid by the Employer to each Participant
whose name appears on Schedule I, attached hereto, immediately following such
Change in Control, an amount equal to that Participant's CIC Factor, as
hereinafter defined, as of the date of the Change in Control, multiplied by five
million dollars ($5,500,000). For purposes of this Section, a Participant's CIC
Factor is a fraction, the numerator of which is the number of whole months in
which he or she has held the position of Executive Vice President or its
equivalent of the Employer and the denominator of which is the total of all
Schedule I Participants' number of whole months as Executive Vice President or
its equivalent of the Employer.
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ARTICLE 6
DISTRIBUTION OF BENEFITS
6.1 AMOUNT. A Participant (or his or her Beneficiary) shall become entitled
to receive on or about the date or dates selected by the Participant on his or
her Participant Enrollment and Election Form or, if none, on or about the date
of the Participant's termination of employment with the Employer (or earlier as
provided in Article 5), a distribution in an aggregate amount equal to the
Participant's vested Account. Any payment due hereunder from the Trust which is
not paid by the Trust for any reason will be paid by the Employer from its
general assets.
6.2. MEHOD OF PAYMENT.
(a) Cash Payments. All payments under the Plan shall be made in cash.
(b) Timing and Manner of Payment. In the case of distributions to a
Participant or his or her Beneficiary by virtue of an entitlement pursuant to
Section 5.1, an aggregate amount equal to the Participant's vested Account will
be paid by the Trust or the Employer as provided by Section 6.1, in a lump sum
or in up to ten (10 substantially equal annual installments (adjusted for gains
and losses), as selected by the Participant as provided in Article 5. If a
Participant fails to designate properly the manner of payment of the
Participant's benefit under the Plan, such payment will be made in a lump sum.
If the whole or any part of a payment hereunder is to be in
installments, the total to be so paid shall continue to be deemed to be invested
pursuant to Section 4.1 under such procedures as the Employer may establish, in
which case any deemed income, gain or loss attributable thereto (as determined
by the Employer, in its discretion) shall be reflected in the installment
payments, in such equitable manner as the Employer shall determine. Except in
the case of a Change in Control (including a Change in Control occurring after
the Participant's receipt of benefits hereunder begin), continued receipt of
installments may be made contingent upon the Participant's compliance with any
contractual obligations he or she may have to the Employer, including, but not
limited to, an obligation that the Participant may not enter into competitive
employment with the Employer or disclose confidential information following his
or her termination of employment.
6.3 DEATH BENEFITS. If a Participant dies before terminating his or her
employment with the Employer and before the commencement of payments to the
Participant hereunder, the entire value of the Participant's Account shall be
paid, as provided in Section 6.2, to the person or persons designated in
accordance with Section 7.1.
Upon the death of a Participant after payments hereunder have begun
but before he or she has received all payments to which he or she is entitled
under the Plan, the remaining benefit payments shall be paid to the person or
persons designated in accordance with Section 7.1, in the manner in which such
benefits were payable to the Participant, unless the Employer elects a more
rapid form of distribution.
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ARTICLE 7
BENEFICIARIES; PARTICIPAANT DATA
7.1 DESIGNATION OF BENEFICIARIES. Each Participant from time to time may
designate any person or persons (who may be named contingently or successively)
to receive such benefits as may be payable under the Plan upon or after the
Participant's death, and such designation may be changed from time to time by
the Participant by filing a new designation. Each designation will revoke all
prior designations by the same Participant, shall be in a form prescribed by the
Employer, and will be effective only when filed in writing with the Employer
during the Participant's lifetime.
In the absence of a valid Beneficiary designation, or if, at the time
any benefit payment is due to a Beneficiary, there is no living Beneficiary
validly named by the Participant, the Employer shall pay any such benefit
payment to the Participant's spouse, if then living, but otherwise to the
Participant's then living descendants, if any, per stirpes, but, if none, to the
Participant's estate. In determining the existence or identity of anyone
entitled to a benefit payment, the Employer may rely conclusively upon
information supplied by the Participant's personal representative, executor or
administrator. If a question arises as to the existence or identity of anyone
entitled to receive a benefit payment as aforesaid, or if a dispute arises with
respect to any such payment, then, notwithstanding the foregoing, the Employer,
in its sole discretion, may distribute such payment to the Participant's estate
without liability for any tax or other consequences which might flow therefrom,
or may take such other action as the Employer deems to be appropriate.
7.2 INFORMATION TO BE FURNISHED BY PARTICIPANTS AND BENEFICIARIES:
INABILITY TO LOCATE PARTICIPANTS OR BENEFICIARIES. Any communication, statement
or notice addressed to a Participant or to a Beneficiary at his or her last post
office address as shown on the Employer's records shall be binding on the
Participant or Beneficiary for all purposes of the Plan. The Employer shall not
be obliged to search for any Participant or Beneficiary beyond the sending of a
registered letter to such last known address. If the Employer notifies any
Participant or Beneficiary that he or she is entitled to an amount under the
Plan and the Participant or Beneficiary fails to claim such amount or make his
or her location known to the Employer within three (3) years thereafter, then,
except as otherwise required by law, if the location of one or more of the next
of kin of the Participant is known to the Employer, the Employer may direct
distribution of such amount to any one or more or all of such next of kin, and
in such proportions as the Employer determines. If the location of none of the
foregoing persons can be determined, the Employer shall have the right to direct
that the amount payable shall be deemed to be a forfeiture, except that the
dollar amount of the forfeiture, unadjusted for deemed gains or losses in the
interim, shall be paid by the Employer if a claim for the benefit subsequently
is made by the Participant or the Beneficiary to whom it was payable. If a
benefit payable to an unlocated Participant or Beneficiary is subject to escheat
pursuant to applicable state law, the Employer shall not be liable to any person
for any payment made in accordance with such law.
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ARTICLE 8
ADMINISTRATION
8.1 ADMINISTRATIVE AUTHORITY. Except as otherwise specifically provided
herein, the Employer shall have the sole responsibility for and the sole control
of the operation and administration of the Plan, and shall have the power and
authority to take all action and to make all decisions and interpretations which
may be necessary or appropriate in order to administer and operate the Plan,
including, without limiting the generality of the foregoing, the power, duty and
responsibility to:
(a) Resolve and determine all disputes or questions arising under the
Plan, and to remedy any ambiguities, inconsistencies or omissions in the Plan.
(b) Adopt such rules of procedure and regulations as in its opinion
may be necessary for the proper and efficient administration of the Plan and as
are consistent with the Plan.
(c) Implement the Plan in accordance with its terms and the rules and
regulations adopted as above.
(d) Make determinations with respect to the eligibility of any
Eligible Employee as a Participant and make determinations concerning the
crediting of Plan Accounts.
(e) Appoint any persons or firms, or otherwise act to secure
specialized advice or assistance, as it deems necessary or desirable in
connection with the administration and operation of the Plan, and the Employer
shall be entitled to rely conclusively upon, and shall be fully protected in any
action or omission taken by it in good faith reliance upon, the advice or
opinion of such firms or persons. The Employer shall have the power and
authority to delegate from time to time by written instrument all or any part of
its duties, powers or responsibilities under the Plan, both ministerial and
discretionary, as it deems appropriate, to any person or committee, and in the
same manner to revoke any such delegation of duties, powers or responsibilities.
Any action of such person or committee in the exercise of such delegated duties,
powers or responsibilities shall have the same force and effect for all purposes
hereunder as if such action had been taken by the Employer. Further, the
Employer may authorize one or more persons to execute any certificate or
document on behalf of the Employer, in which event any person notified by the
Employer of such authorization shall be entitled to accept and conclusively rely
upon any such certificate or document executed by such person as representing
action by the Employer until such notified person shall have been notified of
the revocation of such authority.
8.2 UNIFORMITY OF DISCRETIONARY ACTS. Whenever in the administration or
operation of the Plan discretionary actions by the Employer are required or
permitted, such actions shall be consistently and uniformly applied to all
persons similarly situated, and no such action shall be taken which shall
discriminate in favor of any particular person or group of persons.
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8.3 LITIGATION. Except as may be otherwise required by law, in any action
or judicial proceeding affecting the Plan, no Participant or Beneficiary shall
be entitled to any notice or service of process, and any final judgment entered
in such action shall be binding on all persons interested in, or claiming under,
the Plan.
8.4 CLAIMS PROCEDURE. Any person claiming a benefit under the Plan (a
"Claimant") shall present the claim, in writing, to the Employer, and the
Employer shall respond in writing. If the claim is denied, the written notice of
denial shall state, in a manner calculated to be understood by the Claimant:
(a) The specific reason or reasons for the denial, with specific
references to the Plan provisions on which the denial is based;
(b) A description of any additional material or information necessary
for the Claimant to perfect his or her claim and an explanation of why such
material or information is necessary; and
(c) An explanation of the Plan's claims review procedure.
The written notice denying or granting the Claimant's claim shall be
provided to the Claimant within ninety (90) days after the Employer's receipt of
the claim, unless special circumstances require an extension of time for
processing the claim. If such an extension is required, written notice of the
extension shall be furnished by the Employer to the Claimant within the initial
ninety (90) day period and in no event shall such an extension exceed a period
of ninety (90) days from the end of the initial ninety (90) day period. Any
extension notice shall indicate the special circumstances requiring the
extension and the date on which the Employer expects to render a decision on the
claim. Any claim not granted or denied within the period noted above shall be
deemed to have been denied.
Any Claimant whose claim is denied, or deemed to have been denied
under the preceding sentence (or such Claimant's authorized representative),
may, within sixty (60) days after the Claimant's receipt of notice of the
denial, or after the date of the deemed denial, request a review of the denial
by notice given, in writing, to the Employer. Upon such a request for review,
the claim shall be reviewed by the Employer (or its designated representative)
which may, but shall not be required to, grant the Claimant a hearing. In
connection with the review, the Claimant may have representation, may examine
pertinent documents, and may submit issues and comments in writing.
The decision on review normally shall be made within sixty (60) days
of the Employer's receipt of the request for review. If an extension of time is
required due to special circumstances, the Claimant shall be notified, in
writing, by the Employer, and the time limit for the decision on review shall be
extended to one hundred twenty (120) days. The decision on review shall be in
writing and shall state, in a manner calculated to be understood by the
Claimant, the specific reasons for the decision and shall include references to
the relevant Plan provisions on which the decision is based. The written
decision on review shall be given to the Claimant within the sixty (60) day (or,
if applicable, the one hundred twenty (120) day) time limit discussed above. If
the decision on review is not communicated to the Claimant within the sixty (60)
day (or, if applicable, the one hundred twenty (120) day) period discussed
above, the
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claim shall be deemed to have been denied upon review. All decisions on review
shall be final and binding with respect to all concerned parties.
ARTICLE 9
AMENDMENT
9.1 RIGHT TO AMEND. The Board may amend the Plan at any time, without the
consent of any Participant or Beneficiary, provided, however, that no amendment
shall divest any Participant or Beneficiary of the vested credits to his Account
and provided further that no amendment shall be effective with respect to a
Participant whose employment agreement prevents an amendment without his or her
written consent.
9.2 AMENDMENTS TO ENSURE PROPER CHARACTERIZATION OF PLAN. Notwithstanding
the provisions of Section 9.1, the Plan may be amended by the Employer at any
time, retroactively if required, if found necessary, in the opinion of the
Employer, in order to ensure that the Plan is characterized as "top-hat" plan of
deferred compensation maintained for a select group of management or highly
compensated employees as described under ERISA sections 201(2), 301(a)(3), and
401(a)(1), and to conform the Plan to the provisions and requirements of any
applicable law (including ERISA and the Code). No such amendment shall be
considered prejudicial to any interest of a Participant or a Beneficiary
hereunder.
ARTICLE 10
TERMINATION
10.1 EMPLOYER'S RIGHT TO TERMINATE OR SUSPEND PLAN. The Employer reserves
the right to terminate the Plan and/or its obligation to make further credits to
Plan Accounts, by action of its Board of Directors. The Employer also reserves
the right to suspend the operation of the Plan for a fixed or indeterminate
period of time, by action of its Board of Directors.
10.2 AUTOMATIC TERMINATION OF PLAN. The Plan automatically shall terminate
upon the dissolution of the Employer, or upon its merger into or consolidation
with any other corporation or business organization if there is a failure by the
surviving corporation or business organization to adopt specifically and agree
to continue the Plan.
10.3 SUSPENSION OF DEFERRALS. In the event of a suspension of the Plan, the
Employer shall continue all aspects of the Plan, other than Compensation
Deferrals and Employer Contribution Credits, during the period of the
suspension, in which event payments hereunder will continue to be made during
the period of the suspension in accordance with Articles 5 and 6.
10.4 ALLOCATION AND DISTRIBUTION. This Section shall become operative on a
complete termination of the Plan. The provisions of this Section also shall
become operative in the event of a partial termination of the Plan, as
determined by the Employer, but only with respect to that portion of the Plan
attributable to the Participants to whom the partial termination is applicable.
Upon the effective date of any such event, notwithstanding any other provisions
of
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the Plan, no persons who were not theretofore Participants shall be eligible to
become Participants and the value of the interest of all Participants and
Beneficiaries shall be fully vested and determined and, after paying Plan
benefits, paid to them as soon as is practicable after such termination.
10.5 SUCCESSOR TO EMPLOYER. Any corporation or other business organization
which is a successor to the Employer by reason of a consolidation, merger or
purchase of substantially all of the assets of the Employer shall have the right
to become a party to the Plan by adopting the same by resolution of the entity's
board of directors or other appropriate governing body. If, within ninety (90)
days from the effective date of such consolidation, merger or sale of assets,
such new entity does not become a party hereto, as above provided, the Plan
automatically shall be terminated, and the provisions of Section 10.4 shall
become operative.
ARTICLE 11
THE TRUST
11.1 ESTABLISHMENT OF TRUST. The Employer shall establish the Trust with
the Trustee pursuant to such terms and conditions as are set forth in the Trust
agreement to be entered into between the Employer and the Trustee. The Trust is
intended to be treated as a "grantor" trust under the Code and the establishment
of the Trust is not intended to cause the Participant to realize current income
on amounts contributed thereto, and the Trust shall be so interpreted.
ARTICLE 12
MISCELLANEOUS
12.1 LIMITATIONS ON LIABILITY OF EMPLOYER. Neither the establishment of the
Plan nor any modification thereof, nor the creation of any account under the
Plan, nor the payment of any benefits under the Plan shall be construed as
giving to any Participant or other person any legal or equitable right against
the Employer, or any officer or employer thereof except as provided by law or by
any Plan provision. The Employer does not in any way guarantee any Participant's
Account from loss or depreciation, whether caused by poor investment performance
of a deemed investment or the inability to realize upon an investment due to an
insolvency affecting an investment vehicle or any other reason. In no event
shall the Employer, or any successor, employee, officer, director or stockholder
of the Employer, be liable to any person on account of any claim arising by
reason of the provisions of the Plan or of any instrument or instruments
implementing its provisions, or for the failure of any Participant, Beneficiary
or other person to be entitled to any particular tax consequences with respect
to the Plan, or any credit or distribution hereunder.
12.2 CONSTRUCTION. If any provision of the Plan is held to be illegal or
void, such illegality or invalidity shall not affect the remaining provisions of
the Plan. but shall be fully severable, and the Plan shall be construed and
enforced as if said illegal or invalid provision had never been inserted herein.
For all purposes of the Plan, where the context admits, the singular shall
include the plural, and the plural shall include the singular. Headings of
Articles and Sections herein are inserted only for convenience of reference and
are not to be considered in the
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construction of the Plan. The laws of the State of Maryland shall govern,
control and determine all questions of law arising with respect to the Plan and
the interpretation and validity of its respective provisions, except where those
laws are preempted by the laws of the United States. Participation under the
Plan will not give any Participant the right to be retained in the service of
the Employer nor any right or claim to any benefit under the Plan unless such
right or claim has specifically accrued hereunder.
12.3 UNFUNDED CONTRACTUAL OBLIGATION. 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
Participant, Beneficiary or any 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. The Plan also is intended to be and at all times shall be
interpreted, operated and administered so as to qualify as a plan meeting the
requirements of Rule 16b-3 for exemption from liability under Section 16(b) of
the Securities Exchange Act of 1934 (including Rule 16b-3's plan administration
requirements).
12.4 SPENDTHRIFT PROVISION. No amount payable to a Participant or a
Beneficiary under the Plan will, except as otherwise specifically provided by
law, be subject in any manner to anticipation, alienation, attachment,
garnishment, sale, transfer, assignment (either at law or in equity), levy,
execution, pledge, encumbrance, charge or any other legal or equitable process,
and any attempt to do so will be void; nor will any benefit be in any manner
liable for or subject to the debts, contracts, liabilities, engagements or torts
of the person entitled thereto. Further, (i) the withholding of taxes from Plan
benefit payments, (ii) the recovery under the Plan of overpayments of benefits
previously made to a Participant or Beneficiary, (iii) if applicable, the
transfer of benefit rights from the Plan to another plan, or (iv) the direct
deposit of benefit payments to an account in a banking institution (if not
actually part of an arrangement constituting an assignment or alienation) shall
not be construed as an assignment or alienation.
In the event that any Participant's or Beneficiary's benefits
hereunder are garnished or attached by order of any court, the Employer or
Trustee may bring an action or a declaratory judgment in a court of competent
jurisdiction to determine the proper recipient of the benefits to be paid under
the Plan. During the pendency of said action, any benefits that become payable
shall be held as credits to the Participant's or Beneficiary's Account or, if
the Employer or Trustee prefers, paid into the court as they become payable, to
be distributed by the court to the recipient as the court deems proper at the
close of said action.
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IN WITNESS WHEREOF, the Employer has caused the Plan to be executed and its
seal to be affixed hereto, effective as of the 19th day of November, 1998.
ATTEST/WITNESS INTEGRATED HEALTH SERVICES, INC.
__________________________________ By: ________________________________(SEAL)
Print: ___________________________ Print Name: ______________________________
Date: ____________________________________
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SCHEDULE I
(Effective November 19, 1998)
William B. Bennett
Marshall A. Elkins
John F. Heller, III
Marc B. Levin
C. Taylor Pickett
Scott W. Robertson*
Sally Weisberg
- ----------
* No further Compensation Deferrals or Employer Contribution Credits will be
credited to Mr. Robertson's Account after March 13, 1998. Upon Mr. Robertson's
termination of employment, he became vested in his Employer Contribution Credit
Account under the vesting schedule set forth in Section 5.3, using years of
participation as of such date of termination plus one additional, deemed year of
participation. The Change in Control Benefit described in Section 5.5 will be
applicable to Mr. Robertson solely with respect to a Change in Control occurring
after March 13, 1998 and on or before December 31, 1998, provided, however, that
in calculating the Change in Control Benefit of Mr. Robertson, any such Change
in Control will be deemed to have occurred on March 13, 1998.
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SCHEDULE II
(Effective November 1, 1998)
Elizabeth Kelly
Anthony R. Masso
Murry J. Mercier
Ruth Ann Skaggs
C. Christian Winkle
EXHIBIT 10.82
EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of July 1, 1997 (the "Effective
Date"), by and between INTEGRATED HEALTH SERVICES, INC., a Delaware corporation
(hereinafter referred to as the "Company"), and C. TAYLOR PICKETT (hereinafter
referred to as the "Executive").
W I T N E S S E T H:
WHEREAS, the Company wishes to employ Executive and to ensure the
continued services of Executive for the Term (as hereinafter defined), and
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
EMPLOYMENT RELATIONSHIP
1.1 Employment. The Company hereby employs Executive in the position of
Executive Vice President of the Company, and for all of its wholly owned
subsidiaries and those subsidiaries over which the Company or its subsidiaries
exert management control, with such responsibilities as may be assigned to
Executive from time to time by the Company's Chief Executive Officer and/or
President. Executive shall report to and be responsible to the Chief Executive
Officer and/or President of the Company as of the Effective Date of this
Agreement for the period hereinafter set forth, and the Executive hereby accepts
such employment.
During the Term, the Executive agrees to devote all 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 Executive from (a)
engaging in charitable and community affairs, so long as they are consistent
with his duties and responsibilities under this Agreement, (b) managing his
personal investments, and (c) serving on or advising the boards of directors of
other companies.
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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 three (3) years; provided, however, that on each January 1st after
the date of this Agreement (an "Anniversary Date"), the then current term of
this Agreement automatically shall be extended by an additional period of twelve
(12) months, so that, as of each Anniversary Date, this Agreement shall have an
unexpired Term of three (3) years. Notwithstanding the foregoing, either party
hereto may elect not to so extend this Agreement by giving written notice of his
or its election to the other party hereto at least one hundred twenty (120) days
prior to any Anniversary Date. In the event the Company elects not to renew this
Agreement with appropriate notice as provided herein, the Company may buy out
the remaining term of the Agreement through the payment of severance to
Executive as provided in Section 3.4.
ARTICLE
COMPENSATION
2.1 Salary. The Executive shall receive a base salary at an initial rate
of Three Hundred Ten Thousand Dollars ($310,000) 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. On each Anniversary Date, the Salary shall be increased or decreased
(but not below Three Hundred Ten Thousand Dollars ($310,000)) by a percentage
which is equal to the percentage increase or decrease, as applicable, 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 twelve (12) month period as of the date of such adjustment, and increased
by such additional amounts as may be determined at the discretion of the Chief
Executive Officer or President. Once adjusted, such adjusted amount shall
constitute Salary for purposes of this Agreement.
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<PAGE>
2.2 Bonuses. If the Company's earnings per share equal or exceed the
earnings goals set by the Board (the "Target"), then no more than ten (10) days
following the date the Company publicly announces its earnings, the Company
shall pay Executive a discretionary bonus ("Bonus") based on Executive's
performance, benefit to the Company at large, and the extent to which the
Company equals or exceeds the Target. Such Bonus shall be discretionary except
that if the Company's earnings per share equal or exceed the Target then
Executive shall receive a bonus of not less than fifty percent (50%) of his
Salary.
2.3 Executive Benefits and Perquisites. During the Term, the Company
shall provide and/or pay for employee benefits and perquisites that are, in the
aggregate, no less favorable than the employee benefits and perquisites that
Executive enjoys as of the Effective Date, as increased from time to time,
including, without limitation:
(a) comprehensive individual health insurance, including dependent
coverage;
(b) life insurance coverage in the amount of One Million Dollars
($1,000,000) any proceeds of which shall be payable to Executive's designated
beneficiary or his estate;
(c) four (4) weeks paid vacation annually;
(d) disability insurance coverage in a monthly benefit amount equal to
the sum of 100% of Executive's Salary plus "Bonus Amount" (as defined in Section
3.4(a));
(e) one-time initiation fee(s) not to exceed $15,000 (if not used within
the first 2 years of this Agreement, Executive may apply the $15,000 towards
dues at a country club(s)), and the cost of dues, assessments and other charges
for a full membership in one or more country club(s) of Executive's choice, in
an amount not to exceed $15,000 per year;
(f) an automobile allowance and automobile insurance coverage or, in the
alternative a leased automobile, at least equal to the greater of (i) the
largest down payment and monthly lease payment made by the Company within the
previous three (3) years or (ii) the allowance and coverage that Executive
receives as of the Effective Date, and as increased from time to time; and
(g) participation in the Company's SERP(s).
Once increased, the level of benefits and perquisites shall
not be decreased without Executive's consent. No amendment of any SERP that is
adverse to Executive shall be effective as
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to Executive without his prior written consent (or, if he is no longer living,
the consent of his beneficiary (or beneficiaries) designated in accordance with
the Trust Agreement(s) (as defined in the SERP(s)). Any interpretation,
construction, determination, act or failure to act of the Company or the
"Committee" (as defined in the SERP(s)) that relates to the SERP(s) and is
adverse to Executive shall be subject to de novo review in accordance with
Section 6.9 of this Agreement.
2.4 Equity-based Compensation. During the Term, the Compensation
Committee, in its complete discretion, may select Executive to participate in
programs or enter into agreements which provide for the grant of certain
equity-based compensation or rights to Executive.
ARTICLE
TERMINATION AND SEVERANCE
3.1 Termination; Nonrenewal. The Company shall have the right to
terminate Executive's employment, and Executive shall have the right to resign
his employment with the Company, at any time during the Term, for any reason or
for no stated reason, upon no less than ninety (90) days prior written notice
(or such shorter notice to the extent provided for herein). Upon Executive's
termination without "Cause" (as defined in Section 3.2) or resignation for "Good
Reason" (as defined in Section 3.3) or upon the Expiration of the Term following
the Company's election not to renew this Agreement (in accordance with Section
1.3), Executive shall be entitled to severance as set forth in Section 3.4. Upon
Executive's termination for Cause, Executive shall be entitled to severance as
set forth in Section 3.7. Upon Executive's resignation without Good Reason,
Executive shall not be entitled to severance. Upon the expiry of the term
hereof, Executive shall be entitled to severance as set forth in Section 3.4. If
Executive's employment is terminated because of a Permanent Disability (as
defined in Section 3.5), Executive shall receive the benefits and payments
described in Section 3.5.
4
<PAGE>
3.2 Termination For Cause. The Company may terminate this Agreement for
Cause following a determination by the Chief Executive Officer that Cause
exists. For purposes of this Agreement, Cause shall mean any or all of the
following:
(i) Executive materially fails to perform his duties hereunder;
(ii) a material breach by Executive of his covenants under
Sections 4.1 or 4.2; or
(iii) Executive is convicted of any felony involving moral
turpitude.
(b) Notwithstanding anything in Section 3.2(a) to the contrary, a
termination shall not be for Cause unless (i) the party to whom
Executive reports notifies Executive, in writing, of his
intention to terminate Executive for Cause (which notice shall
set forth the conduct alleged to constitute Cause) (the "Cause
Notice"); and (ii) Executive does not cure his conduct within
sixty (60) days after the receipt of the Cause Notice. (a)ab
Termination for Good Reason. Executive may terminate this
Agreement for Good Reason, provided he gives the Company 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:
(1) a material breach of the Agreement by the Company (including,
without limitation, one or more of the following without Executive's prior
written consent:
(i) a material diminution of Executive's responsibilities, title,
authority or status;
(ii) the failure of the Company to pay Executive amounts when due
under this Agreement;
(iii) Executive's removal or dismissal from the position of
Executive Vice President;
(iv) Executive no longer is assigned responsibilities by and
reports directly to Robert N. Elkins; or
(v) a reduction in Salary or a material reduction in benefits
(other than a reduction in Salary permitted by Section 2.1).
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<PAGE>
(2) the resignation by Executive within one (1) year of one or both of
the following:
(i) a "Change of Control," as defined in Section 3.3(b); and/or
(ii) the date the individual who is Chief Executive Officer and
Chairman of the Board of the Company as of the Effective Date or
the individual who is President of the Company as of the
Effective Date ceases to hold such position.
Notwithstanding the foregoing, a termination on account of a reason described in
paragraph (1), shall be deemed not to be for Good Reason unless 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 Executive within ten (10) days after the receipt of
such notice).
(b) 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 the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of the Company's
common stock would be converted into cash, securities or other property, other
than a merger of the Company in which the holders of the Company'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 the
Company, or (ii) the stockholders of the Company shall approve any plan or
proposal for liquidation or dissolution of the Company, or (iii) any person (as
such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act, including
any "group" (as defined in Section 13(d)(3) of the Exchange Act) (other than
Executive or any group controlled by Executive)) shall become the beneficial
owner (within the meaning of Rule 13d-3 under the Exchange Act) of twenty
percent (20%) or more of the Company's outstanding common stock (other than
pursuant to a plan or arrangement entered into by such person and the Company)
and such person discloses its intent to effect a change in the control or
ownership
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<PAGE>
of the Company 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 the Company 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 the Company,
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. Notwithstanding the foregoing, if the
employment agreement of the Company's CEO or President has a change of control
provision which is triggered by an earlier event not stated herein, then such
event shall also be a Change of Control for purposes of this Agreement.
3.4 Severance. (a) If Executive resigns for Good Reason, or is
terminated without Cause or at the end of the term hereof, or if the Company
gives Executive notice of its intention not to extend the Term, in accordance
with Article II: (1) the Company shall cause the Executive's outstanding options
which are not immediately exercisable to vest and become immediately exercisable
and the restrictions on equity held by Executive which are scheduled to lapse
solely through the passage of time to lapse (such events collectively referred
to as "Acceleration of Equity Rights") and Executive shall have sixty (60)
months from the date of termination to exercise any vested options; (2) all
amounts allocated to Executive's account(s) under the SERP(s) shall vest; and
(3) the Salary amount for purposes of the calculating Salary and Bonus for the
Severance Amount shall be the greater of Executive's current Salary or Four
Hundred Fifty Thousand Dollars
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($450,000). On each Anniversary Date, the adjusted Salary for purposes of this
paragraph shall be increased or decreased (but not below Four Hundred Fifty
Thousand Dollars ($450,000)) by a percentage which is equal to the percentage
increase or decrease, as applicable, 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 twelve (12) month period as of the
date of such adjustment. Once adjusted, such adjusted amount shall constitute
Salary for purposes of this paragraph.
In addition, the Company shall pay the Executive an amount (the
"Severance Amount") equal to three (3) times the sum of (1) his Salary in the
year of Termination or the immediately preceding year, whichever is greater; and
(2) the Bonus Amount which shall be the greater of (i) Executive's Bonus in the
year of termination; (ii) in the immediately preceding calendar year, whichever
is greater; or (iii) 50% of the Salary amount used for severance calculations,
whichever is greater. Such Severance Amount shall be payable in cash as follows:
(x) no later than 10 days after the effective date of the Executive's
termination, the Company shall pay 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 month thereafter for
a period of eighteen (18) months (or in the event that the payout of severance
is a shorter period in the employment agreement of the CEO or President of the
Company, then such shorter period shall replace and supersede the 18-month
period), the Company shall pay the remaining one-half (1/2) of the Severance
Amount to Executive in equal monthly installments;
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<PAGE>
provided, however, that if Executive's employment terminates other than for
Cause within one (1) year following a Change of Control, the Company shall, in
lieu of the making the payments described in (x) and (y), pay Executive the
Severance Amount in one lump sum cash payment within ten (10) days after the
effective date of Executive's termination.
In addition, for a period of three (3) years following the effective
date of Executive's termination, the Company shall provide continued employee
benefits and coverage for Executive and his dependents of the type and at a
level of coverage comparable to the coverage in effect at the time of
termination or the preceding year, whichever is greater ("Continued Benefits")
including, but not limited to those benefits and perquisites set forth in
Section 2.3 hereof. Such allowances, benefits and coverages, etc., to be not
less than those in effect on the Effective Date of Executive's termination or
the preceding year, whichever is greater. Notwithstanding the foregoing, if any
of the Continued Benefits or other benefits to be provided hereunder have been
decreased or otherwise negatively affected within twelve (12) months prior to
the effective date of Executive's termination, the reference for measuring such
benefit shall be the date prior to such reduction rather than the date of such
termination. Furthermore, for a period of five (5) years following the effective
date, Executive shall be entitled to receive the Change of Control benefit
described in the SERP Plan B, or any additional SERP or successor SERP.
(b) If Executive is required, pursuant to Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code") to pay (through withholding or
otherwise) an excise tax on "excess parachute payments" as defined in Section
280G of the Code, as amended, the Company shall pay Executive the full amount or
amounts that are necessary to place Executive in the same after-tax financial
position that he would have been in if he had not incurred any tax liability
under Section 4999 of the Code.
3.5 Termination for Disability. (a) The Company may terminate Executive
following a determination by the Chief Executive Officer or President that
Executive has a Permanent Disability; provided, however, that no such
termination shall be effective (i) prior to the expiration of
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the six (6) month period following the date Executive first incurred the
condition which is the basis for the Permanent Disability or (ii) if 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 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
Executive's termination. 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 the person designated in writing by
Executive prior to his inability to make such selection, and in the absence of
such designation by an adult member of the Executive's immediate family) and
reasonably acceptable to the Company.
(b) If Executive is terminated because of his Permanent
Disability, the Company shall provide for the Acceleration of Equity Rights and,
the Company shall, (i) for a period of thirty-six (36) months following the
effective date of such termination (the "Disability Period") pay Executive one
hundred (100%) percent of his Salary plus Bonus Amount, offset by the amount, if
any, paid to Executive under the salary replacement portion of disability
benefits paid under a disability plan or policy paid for by the Company; and
(ii) provide him with Continued Benefits during the Disability period.
3.6 Death or Disability After Termination. Should Executive die or
become disabled before receipt of any or all payments to which Executive is
entitled to under Section 3.4 (or in the case of Executive's death following his
termination on account of Permanent Disability, before receipt of all payments
under Section 3.5) then the balance of the payments to which Executive is
entitled shall continue to be paid to Executive (in the case of his disability)
or to the executors or
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administrators of Executive's estate (in the event of Executive's death);
provided, however, that the Company may, at any time within its discretion,
accelerate any payments and pay 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 Executive is terminated for Cause during
the Term of this Agreement or within one (1) year of a Change of Control or
thereafter, the Company shall pay Executive a severance amount equal to the sum
of (1) his Salary in the year of Termination or the immediately preceding year,
whichever is greater; and (2) the Bonus Amount which shall be the greater of (i)
Executive's Bonus in the year of termination or (ii) in the immediately
preceding calendar year, whichever is greater, payable in equal monthly
installments for twelve (12) months. Executive shall also receive Continued
Benefits for a period of 12 months.
ARTICLE IV
COVENANTS OF THE EXECUTIVE
4.1 Confidential Information. In connection with his employment at the
Company, 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
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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' 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; and
(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.
All of the foregoing are hereinafter referred to as "Trade Secrets."
The Company and 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, 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 Executive'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 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 Executive or
which may come into Executive's possession during 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 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
than Executive's deliberate or inadvertent disclosure becomes known to the
public; (ii) disclosure compelled by judicial or administrative proceedings
provided Executive affords the Company the opportunity to obtain assurance that
compelled disclosures will receive confidential treatment; and (iii) information
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independently developed by Executive, the development of which was not a breach
of this Agreement.
4.2 Non-Competition. (a) During the Term and for a period of eighteen
(18) months thereafter (or in the event of the termination of Executive's
employment under any provision herein within one (1) year after a Change of
Control or Executive's termination for cause, for a period of one (1) year
thereafter), Executive agrees that he will not, without the express written
consent of the Company, for Executive or on behalf or any other person, firm,
entity or other enterprise (i) directly or indirectly solicit for employment or
recommend to any subsequent employer of Executive the solicitation for
employment of any person who, at the time of such solicitation is employed by
the Company or any affiliate thereof, (ii) directly or indirectly solicit,
divert, or endeavor to entice away any customer of the Company or any affiliate
thereof, or otherwise engage in any activity intended to terminate, disrupt, or
interfere with the Company'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 in, have a
proprietary interest in, give advice to, loan money to or otherwise associate
with,
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any person, enterprise, partnership, association, corporation, joint venture or
other entity which is directly or indirectly in the business of owning,
operating or managing any (1) healthcare facility or business, including but not
limited to, any subacute healthcare facility, rehabilitation hospital,
rehabilitation services provider, nursing home, or home health care business, or
(2) any other business similar to a business which is or was owned, operated or
managed by the Company during the Term or during the period that this Section
4.2 shall apply to Executive, unless such business comprises (and has during the
preceding twelve (12) month period comprised) less than five percent (5%) of the
Company's gross revenues; 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 the Company or any of its subsidiaries.
This provision shall not be construed to prohibit Executive from
owning up to 10% of the outstanding voting shares of the equity securities of
any company whose common stock is listed for trading on any national securities
exchange or on the NASDAQ System or serving as a director or advisor to the
board of directors of any company. The provisions of this Section 4.2 shall only
apply to businesses and operations located in, or otherwise conducted in, the
United States.
4.3 Remedies for Breach of Article IV. In the event that 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
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(10) days' prior notice, terminate the Severance Period and cease providing
Executive with such payments and benefits. In addition, Executive acknowledges
and agrees that the amount of damages in the event of Executive's breach of this
Article IV will be difficult, if not impossible, to ascertain. 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 Executive in this Article IV.
ARTICLE V
AMENDMENT AND ASSIGNMENT
5.1 Right of Executive to Assign. Executive may not assign, transfer,
pledge or hypothecate or otherwise transfer his rights, obligations, interests
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 be assignable and
transferable by the Company and any such assignment or transfer shall inure to
the benefit of and be binding upon Executive, Executive's heirs and personal
representatives, and the Company and its successors and assigns. Executive
agrees to execute all documents necessary to ratify and effectuate such
assignment. An assignment of this Agreement by the Company shall not release the
Company from its monetary obligations under this Agreement.
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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.
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 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 the Prior Agreement and all other prior
agreements, either oral or written, between the parties hereto; provided,
however, that this Agreement does not supersede any agreements pertaining to
stock options which have been granted as of the Effective Date, except to the
extent that any such option agreement contains provisions which are contrary to
the provisions of this Agreement (including provisions regarding the
Acceleration of Equity Rights). In the event of a conflict between the terms of
this Agreement and any other agreement or plan, the terms and definitions of
this Agreement shall prevail.
6.4 Mitigation. 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 Executive, except as provided in Article IV.
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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: Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attn: Lawrence P. Cirka
With a Copy to: Integrated Health Services, Inc
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attn: General Counsel
If to Executive: C. Taylor Pickett
=============================
6.7 Indemnification. The Company agrees to maintain Director's and
Officer's liability insurance at a level not less than the level in effect on
the Effective Date, or to the extent such level is increased during the Term, at
such increased level; provided, however, that the level of insurance may be
decreased with Executive's written consent. To the extent not covered by such
liability insurance, the Company shall indemnify and hold Executive harmless to
the fullest extent permitted by
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Delaware law against any judgments, fines, amounts paid in settlement and
reasonable expenses (including reasonable attorneys' fees), and advance amounts
necessary to pay the foregoing at the earliest time and to the fullest extent
permitted by law, in connection with any claim, action or proceeding (whether
civil or criminal) against Executive as a result of his serving as an officer or
director of the Company or in any capacity at the request of the Company in or
with regard to any other entity, employee benefit plan or enterprise. This
indemnification shall be in effect during the Term and thereafter and shall be
in addition to and not in lieu of any other indemnification rights Executive may
otherwise have.
6.8 Attorney's Fees. Upon presentation of an invoice, the Company
shall pay directly or reimburse Executive for all reasonable attorneys' fees and
costs incurred by Executive:
(a) in connection with the negotiation, preparation and execution
of this Agreement;
(b) in connection with any dispute brought by Executive over the
terms of this Agreement unless there is a determination that Executive
had no reasonable basis for his claim; and
(c) in connection with any other event indemnifiable by the
Company pursuant to insurance coverage or Delaware law in which
Executive engages separate representation.
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 judgment 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
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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, 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.
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:____________________________ ____________________________________
Name:_________________________ C. Taylor Pickett
Title:__________________________
EXHIBIT 10.83.
EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of this ____ day of July, 1998
(the "Effective Date"), by and between INTEGRATED HEALTH SERVICES, INC., a
Delaware corporation (hereinafter referred to as the "Company"), and JOHN F.
HELLER (hereinafter referred to as the "Executive").
W I T N E S S E T H:
WHEREAS, the Company wishes to employ the Executive 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 pursuant to
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 Executive Vice President - Facility Operations, with such
responsibilities as may be assigned to Executive from time to time by the
Company's Chief Operating Officer. Executive shall report to and be responsible
to the Chief Operating Officer during the Term of this Agreement, and Executive
hereby accepts such employment.
During the Term, the Executive agrees to devote all 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, so long as they are consistent
with his duties and
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responsibilities under this Agreement, (b) managing his personal investments,
and (c) serving on or advising the boards of directors of other companies.
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 three (3) years; provided, however, that on each anniversary date
of the Effective Date ("Anniversary Date"), the then current term of this
Agreement automatically shall be extended by an additional period of twelve (12)
months, so that as of each Anniversary Date, this Agreement shall have an
unexpired Term of three (3) years. Notwithstanding the foregoing, either party
hereto may elect not to so extend this Agreement by giving written notice of his
or its election to the other party hereto at least one hundred twenty (120) days
prior to any Anniversary Date. In the event the Company elects not to renew this
Agreement with appropriate notice as provided herein, the Company may buy out
the remaining term of the Agreement through the payment of severance to the
Executive as provided in Section 3.4.
ARTICLE II
COMPENSATION
2.1 SALARY. The Executive shall receive a base salary at an initial
rate of Three Hundred Twenty-Five Thousand Dollars ($325,000) 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. On each Anniversary Date, the Salary shall be increased or
decreased (but not below Three Hundred Twenty-Five Thousand Dollars ($325,000))
by a percentage which is equal to the percentage increase or decrease, as
applicable, 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 twelve (12) month period as of the date of such adjustment,
and increased by
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such additional amounts as may be determined at the discretion of the Chief
Executive Officer or President. Once adjusted, such adjusted amount shall
constitute Salary for purposes of this Agreement.
2.2 BONUS. If the Company's earnings per share equal or exceed the
earnings goals set by the Board (the "Target"), then no more than ten (10) days
following the date the Company publicly announces its earnings, the Company
shall pay the Executive a discretionary bonus ("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. Such Bonus shall be discretionary, except
that if the Company's earnings per share equal or exceed the Target, the
Executive shall receive a bonus of not less than fifty percent (50%) of his
Salary.
2.3 EXECUTIVE BENEFITS AND PERQUISITES. During the Term, the Company
shall provide and/or pay for employee benefits and perquisites that are, in the
aggregate, no less favorable than the employee benefits and perquisites that the
Executive enjoys as of the Effective Date, as may be increased from time to
time, including without limitation:
(a) comprehensive individual health insurance, including dependent
coverage;
(b) life insurance coverage in the amount of One Million Dollars
($1,000,000) any proceeds of which shall be payable to the Executive's
designated beneficiary or his estate;
(c) four (4) weeks paid vacation annually;
(d) disability insurance coverage in a monthly benefit amount equal to
the sum of 100% of Executive's Salary plus "Bonus Amount" (as defined
in Section 3.4(a));
(e) a leased automobile for which the Company shall pay a monthly
lease payment in the amount of Seven Hundred Forty-Five Dollars
($745.00) per month, as may be increased from time to time, or at the
Company's discretion, an automobile allowance of equal value.
(f) participation in the Company's SERP(s); and
(g) reimbursement for a one-time initiation fee(s) not to exceed
$7,500 (if not used within the first two (2) years of this Agreement,
the Executive may apply the $7,500 towards dues at a country club(s)),
and the cost of dues, assessments and other charges for a full
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membership in one or more country club(s) of the Executive's choice, in an
amount not to exceed $7,500 per year.
Once increased, the level of benefits and perquisites shall not be
decreased without the Executive's consent.
2.4 EQUITY-BASED COMPENSATION. During the Term, the Compensation
Committee, in its complete discretion, may select the Executive to participate
in programs or enter into agreements that provide for the grant of certain
equity-based compensation or rights to the Executive.
ARTICLE III
TERMINATION AND SEVERANCE
3.1 TERMINATION; NONRENEWAL. The Company shall have the right to
terminate the Executive's employment, and the Executive shall have the right to
resign his employment with the Company at any time during the Term, for any
reason or for no stated reason, upon no less than ninety (90) days' prior
written notice (or such shorter notice to the extent provided for herein). In
addition, if there is a Change of Control (as defined in Section 3.3(b)) during
the Term of this Agreement, this Agreement automatically shall terminate on the
sixtieth (60th) day following the anniversary date of the Change of Control.
Upon the Executive's termination without "Cause" (as defined in Section
3.2) or resignation for "Good Reason" (as defined in Section 3.3) or upon the
expiration of the Term following the Company's election not to renew this
Agreement (in accordance with Section 1.2), the Executive shall be entitled to
severance as set forth in Section 3.4. Upon the Executive's resignation without
Good Reason, the Executive shall not be entitled to severance; provided,
however, that the Company may be required to pay the Executive non-competition
severance as provided in Section 4.2, below. If the Executive's
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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.
3.2 TERMINATION FOR CAUSE. (a) The Company may terminate this Agreement
for Cause following a determination by the Chief Executive Officer that Cause
exists. For purposes of this Agreement, Cause shall mean 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 4.2;
(iii) Executive is convicted of or pleads guilty or confesses to
a felony involving moral turpitude; or
(iv) Executive is convicted of or pleads guilty or confesses to
theft, larceny or embezzlement of Employer's tangible or intangible
property.
(b) Notwithstanding anything in Section 3.2(a) to the contrary, a
termination shall not be for Cause unless (i) the party to whom the Executive
reports notifies the Executive, in writing, of his 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 within sixty (60) days after the receipt of the Cause Notice.
3.3 TERMINATION FOR GOOD REASON. (a) The Executive may terminate this
Agreement for Good Reason, provided he gives the Company prior written notice
that Good Reason exists (the "Good Reason Notice"). For purposes of this
Agreement, Good Reason shall mean one or more of the following without the
Executive's prior written consent:
(i) a material diminution of the Executive's responsibilities,
title, authority or status;
(ii) the failure of the Company to pay the Executive amounts when
due under this Agreement;
(iii) the Executive's removal or dismissal from the position of
Executive Vice
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President - Facility Operations; or
(iv) a reduction in Salary or a material reduction in
benefits (other than a reduction in Salary permitted by Section
2.1).
Notwithstanding the foregoing, a termination on account of a reason
described in this Section 3.3 (a)(i) - (iv), above, 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). Nor shall
a termination on account of the reason described in this Section 3.3(a)(v) be
deemed to be for Good Reason unless the Executive gives the Company notice of
resignation no less than sixty (60) days in advance of the Executive's effective
resignation date.
(b) 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 the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of the Company's
common stock would be converted into cash, securities or other property, other
than a merger of the Company in which the holders of the Company'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 the
Company, or (ii) the stockholders of the Company shall approve any plan or
proposal for liquidation or dissolution of the Company, or (iii) any person (as
such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act, including
any "group" (as defined in Section 13(d)(3) of the Exchange Act) (other than the
Executive or any group controlled by the Executive)) shall become the beneficial
owner (within the meaning of Rule 13d-3 under the Exchange Act) of twenty
percent (20%) or more of the Company's outstanding
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common stock (other than pursuant to a plan or arrangement entered into by such
person and the Company) and such person discloses its intent to effect a change
in the control or ownership of the Company 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 the Company
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 the Company, 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.
Notwithstanding the foregoing, if the employment agreement of the Company's CEO
or President has a change of control provision which is triggered by an earlier
event not stated herein, then such event shall also be a Change of Control for
purposes of this Agreement.
3.4 SEVERANCE. If the Executive resigns for Good Reason, is terminated
without Cause, there is a Change of Control in the Company, or the Company
elects not to renew this Agreement in accordance with Section 1.2, above:
(a) the Company shall cause the Executive's outstanding
options which are not immediately exercisable to vest and become
immediately exercisable and the restrictions on equity held by
the Executive which are scheduled to lapse solely through the
passage of time to lapse (such events collectively referred to as
"Acceleration of Equity Rights") and Executive shall have
twenty-four (24) months from the date of termination to exercise
any vested options; and
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(b) the Company shall pay the Executive an amount (the
"Severance Amount") equal to three (3) times the sum of his
Salary in the year of termination or the immediately preceding
year, whichever is greater, and the Bonus Amount, which shall be
the greater of (i) the Executive's Bonus in the year of
termination, (ii) his Bonus in the immediately preceding calendar
year, or (iii) 50% of the Salary amount used for severance
calculations. Such Severance Amount shall be payable in cash as
follows:
(x) no later than ten (10) calendar days after the effective
date of Executive's termination or a Change of Control, 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, Executive's
resignation for Good Reason, or the Company's notice to Employee
of its intention not to renew this Agreement, and on the first
day of the month thereafter for a period of eighteen months (18)
months, the Company shall pay the remaining one-half (1/2) of the
Severance Amount to the Executive in equal monthly installments.
Notwithstanding the foregoing, in the event of a Change of
Control, the Company shall pay the remaining one-half (1/2) of
the Severance Amount to Executive in a lump sum if Executive is
terminated without cause before the anniversary date of a Change
of Control, or upon the Agreement's automatic termination as
provided in Section 3.1. Such lump sum shall be paid within ten
(10) calendar days of the Executive's termination or the
Agreement's automatic termination and shall constitute the total
remaining Severance Amount (excluding Continued Benefits) to
which the Executive is entitled hereunder.
(c) the Company shall provide for a period of eighteen (18)
months following the effective date of the Executive's
termination (including a termination resulting from the Company's
election not to renew the Term or renegotiate this Agreement
after its automatic termination following
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a Change of Control), 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 termination or the preceding year, whichever
is greater ("Continued Benefits"), including but not limited to those benefits
and perquisites set forth in Section 2.3. Such allowances, benefits and
coverages, etc., to be not less than those in effect on the effective date of
Executive's termination or the preceding year, whichever is greater.
Notwithstanding the foregoing, if any of the Continued Benefits or other
benefits to be provided hereunder have been decreased or otherwise negatively
affected within twelve (12) months prior to the effective date of the
Executive's termination, the reference for measuring such benefit shall be the
date prior to such reduction rather than the date of such termination.
3.5 TERMINATION FOR DISABILITY. (a) The Company may terminate the
Executive following a determination by the Chief Executive Officer or President
that the Executive has a Permanent Disability; provided, however, that 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. 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 the person designated in writing by
Executive prior to
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his inability to make such selection, and in the absence of such designation by
an adult member of the Executive's immediate family) and reasonably acceptable
to the Company.
(b) If the Executive is terminated because of his
Permanent Disability, the Company shall (i) provide for the
Acceleration of Equity Rights; (ii) pay for a period of
thirty-six (36) months following the effective date of such
termination (the "Disability Period") the Executive one
hundred (100%) percent of his Salary plus Bonus, offset by
the amount, if any, paid to the Executive under the salary
replacement portion of disability benefits paid under a
disability plan or policy paid for by the Company, and (iii)
provide him with Continued Benefits for the first eighteen
(18) months of the Disability Period.
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 to under Section 3.4 (or in the case of the Executive's death following
his termination on account of Permanent Disability, before receipt of all
payments under Section 3.5) then the balance of the payments to which the
Executive is entitled 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); 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.
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
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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;
(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; and
(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.
All of the foregoing are hereinafter referred to as "Trade Secrets."
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 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;
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(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 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
than 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. In consideration of the Executive's employment
hereunder, during the Term and for a period of eighteen (18) months thereafter
(or in the event of the Executive's termination for Cause, for a period of one
(1) year thereafter), subject to the exceptions set forth below in this Section
4.2, the Executive agrees that he will not, without the express written consent
of the Company, 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
Company or any affiliate thereof, (ii) directly or indirectly solicit, divert,
or endeavor to entice away any customer of the Company or any affiliate thereof,
or otherwise engage in any activity intended to terminate, disrupt, or interfere
with the Company'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 in, have a proprietary
interest in, give advice to, loan money to or otherwise associate with,
12
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any person, enterprise, partnership, association, corporation, joint venture or
other entity which is directly or indirectly in the business of owning,
operating or managing any (1) healthcare facility or business, including but not
limited to, any subacute healthcare facility, rehabilitation hospital,
rehabilitation services provider, nursing home, or home health care business, or
(2) any other business similar to a business which is or was owned, operated or
managed by the Company during the Term or during the period that this Section
4.2 shall apply to the Executive, unless such business comprises (and has during
the preceding twelve (12) month period comprised) less than five percent (5%) of
the Company's gross revenues; 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 the Company or any of its subsidiaries; except that
the provisions of this Section 4.2 shall not apply if the Executive is
terminated without cause before the anniversary of a Change of Control, or if
the Executive resigns without Good Reason and the Company does not pay him
non-competition severance pay (not to include Continued Benefits) of one-twelfth
(1/12) of the sum of Executive's salary plus bonus in the previous year for each
month (not to exceed eighteen (18)) the Company elects to bind the Executive to
the non-competition obligation in this Section 4.2.
This provision shall not be construed to prohibit the Executive from
owning up to 10% of the outstanding voting shares of the equity securities of
any company whose common stock is listed for trading on any national securities
exchange or on the NASDAQ System or serving as a director or advisor to the
board of directors of any company. 4.2 shall only apply to businesses and
operations located in, or otherwise conducted in, the United States.
4.3 REMEDIES FOR BREACH OF ARTICLE IV. In the event that the Executive
materially violates he 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
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(10) days' prior notice, terminate the Severance Period and cease providing the
Executive with such payments and benefits. In addition, the Executive
acknowledges and 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. The Executive further agrees that in the event an injunction is
granted in connection with actual or alleged breach of the noncompetition
convenants herein, the eighteen (18) month restrictive period shall begin to run
from the date the injunction is issued (and not from the effective date of the
Executive's termination).
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,
interests 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 be assignable and
transferable by the Company and any such assignment or transfer shall inure to
the benefit of and be binding upon the Executive, the Executive's heirs and
personal representatives, and the Company and its successors and assigns. The
Executive agrees to execute all documents necessary to ratify and effectuate
such assignment. An assignment of this Agreement by the Company shall not
release the Company from its monetary obligations under this Agreement.
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5.3 AMENDMENT AND 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.
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 pertaining to the
subject matter herof, either oral or written, between the parties hereto;
provided, however, that this Agreement does not supersede any agreements
pertaining to stock options which have been granted as of the Effective Date,
except to the extent that any such option agreement contains provisions which
are contrary to the provisions of this Agreement (including provisions regarding
the Acceleration of Equity Rights), or obligation of the Executive regarding the
Company's proprietary and confidential tangible and intangible property.
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.
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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 of certified
mail, return receipt requested.
If to the Company: Integrated Health Services, Inc
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attn: Marshall A. Elkins, Executive Vice President
and General Counsel, or then General Counsel
If to the Executive: John F. Heller
208 Gittings Avenue
Baltimore, Maryland 21212
6.7 INDEMNIFICATION. The Company agrees to maintain Director's and
Officer's liability insurance at a level not less than the level in effect on
the Effective Date, or to the extent such level is increased during the Term, at
such increased level; provided, however, that the level of insurance may be
decreased with the Executive's written consent. To the extent not covered by
such liability insurance, the Company shall indemnify and hold the Executive
harmless to the fullest extent permitted by
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Delaware law against any judgments, fines, amounts paid in settlement and
reasonable expenses (including reasonable attorneys' fees), and advance amounts
necessary to pay the foregoing at the earliest time and to the fullest extent
permitted by law, in connection with any claim, action or proceeding (whether
civil or criminal) against the Executive as a result of his serving as an
officer or director of the Company or in any capacity at the request of the
Company in or with regard to any other entity, employee benefit plan or
enterprise. This indemnification shall be in effect during the Term and
thereafter and shall be in addition to and not in lieu of any other
indemnification rights the Executive otherwise may have.
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:
(a) in connection with any bone fide dispute over the terms of
this Agreement submitted by Executive to arbitration pursuant to Section 6.9 ,
unless there is a determination that the Executive had no objectively reasonable
basis in fact or theory for his claim; or
(b) in connection with any other event indemnifiable by the
Company pursuant to insurance coverage or Delaware law in which the Executive
engages separate representation.
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
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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.
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: ___________________________________ _________________________________
JOHN F. HELLER
Name: _________________________________
Title: ________________________________
18
EXHIBIT 10.84
INTEGRATED HEALTH SERVICES, INC.
NON-EMPLOYEE DIRECTOR
STOCK UNIT AND
DEFERRED COMPENSATION PLAN
(Effective January 1, 1999)
* * * * *
SECTION 1. Purpose. The purpose of the Plan is for the Company to
compensate Non-Employee Directors of the Company and further align their
interests with those of the Company's stockholders by providing such Directors
with an opportunity to receive annual awards that fluctuate in value with the
price of Company Stock (defined belwo as "Deferred Share Units") and to defer
receipt of compensation for services rendered to the Company in the form of
annual retainer and meeting fees. It is intended that the Plan shall aid the
Company in retaining and attracting Non-Employee Directors whose abilities,
experience and judgment can contribute to the continued progress of the Company.
SECTION 2. Definitions.
(a) "Beneficiary" means the person or persons (including legal
entities) who have been designated in accordance with Section 18 hereof to
receive benefits under this Plan following a Director's death.
(b) "Board" means the Board of Directors of the Company.
(c) A "Change in Control" of the Company shall be deemed to occur if:
(1) there shall be consummated (x) any consolidation or merger of
the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Stock would be
converted into cash, securities or other property, other than a merger
of the Company in which the holders of the Company's 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 the Company; or
(2) the stockholders of the Company shall approve any plan or
proposal for liquidation or dissolution of the Company; or
(3) any person (as such term is used in Section 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
Company's outstanding Common Stock other than
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pursuant to a plan or arrangement entered into between 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 1 1 reason to constitute a majority
thereof unless the election, or the 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.
(d) "Company" means Integrated Health Services, Inc.
(e) "Compensation" means a Non-Employee Director's Meeting Fees and
Retainer.
(f) "Date of Crediting" means, with respect to any Compensation
deferred pursuant to Section 6 of the Plan, the first business day of the month
following the date when such Compensation would otherwise be paid to a
Non-Employee Director and, with respect to any annual grant of Deferred Share
Units pursuant to Section 7, the date of grant as set forth in Section 7.
(g) "Deferred Compensation" means all or any part of any Compensation
payable to a director by the Company that is subject to an elective deferral
under Section 8 of the Plan.
(h) "Deferral Account" means the bookkeeping account established in
the name of a Participant under the Plan and to which Deferred Compensation
amounts and annual grants of Deferred Share Units with respect to such
Participant are credited from time to time, as adjusted from time to time as
provided in the Plan. The Deferral Account may be subdivided into a Deferred
Share Unit Account, as defined in Section 5, to be credited with Deferred Share
Units, and, if such option is permitted by the Board at its sole discretion, a
Deferred Cash Account, as defined in Section 6, to be credited with cash and
interest equivalents.
(i) "Deferred Compensation Election Form" means the form pursuant to
which Non-Employee Directors elect to defer Compensation under the Plan, payable
in such form as the Board determines from time to time in its sole discretion.
(j) "Deferred Share Unit" means a bookkeeping entry having a Fair
Market Value equal to one (1) share of Stock as set forth in Section 7 of the
Plan.
(k) "Disability" means the inability of a Participant, as determined
by the Board in its sole discretion, substantially to perform such Participant's
regular duties and responsibilities due to a medically determinable physical or
mental illness which has lasted (or can reasonably be expected to last) for a
period of three (3) consecutive months.
(l) "Distribution Commencement Date" shall mean the earlier of the
Participant's death or retirement from the Board or the date of a Change in
Control.
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(m) "Effective Date" means the date the Plan becomes effective, which
date shall be January 1, 1999.
(n) "Fair Market Value" of the Stock as of any date means the average
closing sales price (or if there is no closing price, the sales price reported
as of 4:00 p.m. New York City time) of the Stock over each of the last ten
business days preceding such day, as reported through the consolidated
transaction reporting system, or if prices for the Stock are not reported
through such system, Fair Market Value shall be as determined by the Board in
good faith.
(o) "Meeting Fees" means Compensation paid by the Company to
Non-Employee Directors for attendance at Board and committee meetings as well as
fees paid for a telephonic Board or committee meeting.
(p) "Non-Employee Director" means any member of the Board of Directors
of the Company who is not an employee of the Company or of any subsidiary (as
defined in Section 424 of the Internal Revenue Code) of the Company.
(q) "Participant" means a Non-Employee Director who has become, is or
was a Participant under the Plan pursuant to the provisions of Section 3.
(r) "Plan" means the Integrated Health Services, Inc. Non-Employee
Director Stock Unit and Deferred Compensation Plan, as set forth herein and as
amended from time to time.
(s) "Plan Year" means the calendar year.
(t) "Retainer" means the annual fixed payment awarded by the Company
to a Non-Employee Director for service on the Board.
(u) "Stock" means the common stock of the Company, par value $.001 per
share.
(v) "Unforeseeable Emergency" means a severe financial hardship to the
Participant resulting from a sudden and unexpected illness or accident of the
Participant, loss of the Participant's property due to casualty, or other
similar extraordinary unforeseeable circumstances arising as a result of events
beyond the control of the Participant. The circumstances that will constitute an
"Unforeseeable Emergency" would depend on the facts of each case, but, in any
case, payment may not be made in the event that such hardship is or may be
relieved:
(1) through reimbursement or compensation by insurance or
otherwise, or
(2) by liquidation of the Participant's assets, to the extent
that liquidation of such assets would not itself cause severe
financial hardship.
SECTION 3. Eligibility. Individuals eligible to participate in the
Plan shall be limited solely to the Non-Employee Directors of the Company. A
Non-Employee Director shall become a Participant in the Plan on the first day of
the first Plan Year which commences on or after the Effective Date and after
such individual becomes a Non-Employee Director. Pursuant to the foregoing, all
persons serving as Non-Employee Directors of the Company as of the Effective
Date shall become Participants in the Plan as of the Effective Date.
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SECTION 4. Administration.
(a) The Plan shall be administered by the Board. The Board has
complete fiduciary discretion and authority to construe and interpret the Plan;
promulgate, amend and rescind rules and regulations relating to the
implementation, administration and maintenance of the Plan; decide all questions
of eligibility and benefits (including underlying factual determinations) under
the Plan; and (subject to Section 21) adjudicate all claims and appeals relating
to the Plan. The Board may designate persons other than members of the Board to
carry out the day-to-day ministerial administration of the Plan under such
conditions and limitations as it may prescribe; provided, however, the Board
shall not delegate its authority to the extent that action of the Board or of a
committee of the Board may be necessary in order to provide Plan transactions an
exemption under Section 16(b) of the Securities Exchange Act of 1934 or other
applicable law. Any action by the Board in connection with the construction,
interpretation, administration, implementation or maintenance of the Plan shall
be final, conclusive and binding upon all Participants and Non-Employee
Directors and any person(s) claiming under or through any Participants or
Non-Employee Directors.
(b) The Company will indemnify and hold harmless the Board and each
member thereof against any cost or expense (including, without limitation,
attorney's fees) or liability (including, without limitation, any sum paid in
settlement of a claim with the approval of the Company) arising out of any act
in connection with administration of the Plan, or omission to so act, except in
the case of willful gross misconduct or gross negligence.
SECTION 5. Deferred Share Unit Account.
(a) "Deferred Share Unit" - A "Deferred Share Unit Account" shall be
established in a Participant's name upon his or her first becoming eligible to
participate in the Plan. Deferred Share Units and fractions thereof shall be
credited to such Deferred Share Unit Account in an amount determined by dividing
the amount to be credited to the Deferred Share Unit Account pursuant to Section
7 or Section 8 by the Fair Market Value on the Date of Crediting. For each
Deferred Share Unit credited to a Participant's Account on account of a
Participant's election to defer Compensation pursuant to Section 8, the Company
shall credit an additional one-fifth (1/5th) of a Deferred Share Unit. Any
transfer of a Deferred Cash Account Balance, or portion thereof, to a Deferred
Share Unit Account, pursuant to Section 6, shall be reflected as a credit to
such Deferred Share Unit Account of an amount of Deferred Share Units and
fractions thereof determined by dividing the balance to be transferred by the
Fair Market Value on the last day of the month in which the transfer is made.
Upon the occurrence of any stock split, stock dividend, combination or
reclassification with respect to any outstanding series or class of stock, or
consolidation, merger or sale of all or substantially all of the assets of the
Company, the number of Deferred Share Units in each Deferred Share Unit Account
shall, to the extent deemed appropriate by the Board, be appropriately and
proportionately adjusted.
(b) "Dividend Equivalents" -- To the extent dividends
are paid on any outstanding Stock, dividend equivalents and fractions thereof
shall be calculated with respect to balances of Deferred Share Units in any
Deferred Share Unit Account and credited to the appropriate Deferred Share Unit
Account as of the Stock dividend payment date. The number of Deferred Share
Units to be credited as of each such date shall be determined by dividing the
amount or
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value (as determined by the Board) of the dividend payable on that number of
shares of Stock equal to the number of Deferred Share Units in the Deferred
Share Unit Account as of the dividend record date, by the Fair Market Value on
the dividend payment date. The Participant's Deferred Share Unit Account shall
continue to earn such dividend equivalents until fully distributed.
SECTION 6. Deferred Cash Account.
(a) "Deferred Cash Account" -- Unless otherwise provided by the Board
in its sole discretion, a Participant may elect to defer Compensation for a Plan
Year pursuant to Section 8 through credits to a "Deferred Cash Account" under
the Plan. The amount of Compensation being deferred under this option will be
credited to this account as of the Date of Crediting. The Board may also, at its
sole discretion, allow the transfer of Deferred Share Unit Account balances, or
a portion thereof, to a Deferred Cash Account with respect to any Participant
who has ceased to serve on the Board, provided that such transfer may occur only
as of the last day of a Plan Year and provided further that such Participant
must elect to make such transfer before December 1 of the Plan Year. Any
transfer of Deferred Share Units from a Deferred Share Unit Account to a
Deferred Cash Account shall be reflected as a deduction from the Deferred Share
Unit Account of a certain number of Deferred Share Units and a credit to the
Deferred Cash Account reflecting the Fair Market Value of that same certain
number of shares of Stock as of the last day of the preceding Plan Year. The
Board may also, at its sole discretion, allow the transfer of a Participant's
Deferred Cash Account balance or a portion thereof to a Deferred Share Unit
Account, provided that such transfer may occur only as of the last day of any
month. Any transfer from a Deferred Cash Account to a Deferred Share Unit
Account shall be reflected as a deduction of an amount from the Deferred Cash
Account and a credit to the Deferred Share Unit Account of Deferred Share Units
having an equivalent Fair Market Value on the date of the transfer.
(b) "Interest Equivalents" -- Interest equivalents shall be credited
as of the last day of any Plan Year on amounts credited to any Deferred Cash
Account. Such equivalents shall be based on the prime rate, as posted by the
Company's primary lending bank, in effect on the first business day of the Plan
Year (and shall be calculated, with respect to amounts credited prior to such
year, for the entire year, or with respect to amounts credited during such year,
for the number of days from the Date of Crediting). At distribution or transfer
of any amounts out of a Deferred Cash Account, interest equivalents shall be
similarly calculated on the amount so distributed or transferred, based on prime
rates from the first day of the Plan Year in which the distribution is made, or
if later from the Date of Crediting of the amount distributed or transferred,
and added to the total so distributed or transferred. The crediting of interest
equivalents to the Participant's Deferred Cash Account shall continue until the
balance in such account is fully distributed. Notwithstanding anything to the
contrary in this Section 6, all distributions will be made in accordance with
Section 9.
SECTION 7. Annual Deferred Share Unit Grants. On the first day of each
of the first four (4) Plan Years in which a Non-Employee Director is a
Participant in the Plan (any such date, a Date of Crediting), provided that on
such date the Participant continues to serve as a Non-Employee Director, the
Deferred Share Unit Account of such Participant shall be credited with a
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<PAGE>
number Deferred Share Units determined by dividing $250,000 by the Fair Market
Value as of the Date of Crediting. For each Non-Employee Director of the Company
as of the Effective Date, the first Date of Crediting shall be the Effective
Date. Notwithstanding the foregoing, if any Participant ceases to serve as a
director of the Company during a Plan Year other than in connection with a
Change of Control, there shall be deducted from his or her Deferred Share Unit
Account a number of Deferred Share Units determined by multiplying the number of
Deferred Share Units credited to his or her Deferred Share Unit Account on the
first day of such Plan Year by a fraction, the numerator of which is the number
of days from the most recent anniversary of the date such individual first
became a Non-Employee Director to the date of such individual's cessation of
service as a director of the Company and the denominator of which is 365. No
Participant shall be awarded more than four grants of Deferred Share Units, such
that no Participant shall be awarded Deferred Share Units equivalent to Stock
with a Fair Market Value exceeding $1,000,000 as of the Dates of Crediting for
such grants.
SECTION 8. Participation: Elective Deferrals.
(a) A Non-Employee Director may elect to defer all of a portion of his
or her Compensation for a particular Plan Year in which he or she is or will be
a Participant, and for such deferrals to be credited to the Participant's
Deferral Accounts, by executing a Deferred Compensation Election Form and
delivering such form to the Company before the commencement of such Plan Year.
To participate in the Plan during the year in which the Plan is first
implemented, the Participant must make an election to defer Compensation for
services to be performed subsequent to the election within 45 days after the
effective date of the Plan. To participate in the Plan during the first year in
which a Participant becomes eligible to participate in the Plan (other than the
year in which the Plan is first implemented), the new Participant must make an
election to defer Compensation for services to be performed subsequent to the
election within 30 days after the date the new Participant becomes eligible.
Such election shall:
(i) contain a statement that the Participant elects to defer a portion
of the Participant's Compensation (up to 100% thereof, in increments of 10%) for
a specified Plan Year that becomes payable to the Participant after the filing
of such election;
(ii) apply only to the Compensation otherwise payable to the
Participant during the Plan Year for which such election is made; and
(iii) be irrevocable with respect to the Plan Year to which it
applies. Unless the Board determines not to allow deferrals to a Deferred Cash
Account pursuant to Section 6, the Participant may elect to have the Deferred
Compensation credited to the Deferred Share Unit Account or the Deferred Cash
Account. Any such deferred amounts shall be credited to the Participant's
Deferral Account as provided in Section 5 and/or Section 6 hereof, as
appropriate. Any such investment election shall be irrevocable for the Deferred
Compensation or other contribution to which it relates. Upon receipt of a
Participant's Deferred Compensation Election Form, the Company shall establish
as an accounting entry an individual Deferral Account for such
Participant.
SECTION 9. Payment of Deferral Accounts. The balance in a
Participant's Deferral Accounts shall be paid as provided in this Section 9 to a
Participant, or, in the case of any
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Participant's death prior to retirement from the Board, to the Participant's
designated Beneficiary(ies), following the Distribution Commencement Date.
Payment shall be made in one of the following forms as determined by the
Company's in its sole discretion: (a) a single lump sum payment made not more
than thirty (30) days following the Distribution Commencement Date, or (b) an
annuity paid over a number of years selected by the Company (but not for more
years than the expected life of the Participant) and commencing not later than
thirty (30) days following the Distribution Commencement Date. At the Company's
election, payments may be made in cash or in the form of Stock that is not
subject to any transfer or sale restrictions under the Securities Act of 1933.
SECTION 10. Distribution in Cases of Hardship. The Board in its sole
discretion may make distributions to a Participant from the balances in such
Participant's Deferral Account upon a showing by such Participant that an
Unforeseeable Emergency has occurred. Such distributions shall be limited to the
amount shown to be necessary to meet the Unforeseeable Emergency.
SECTION 11. Change of Control. Upon the occurrence of a Change of Control,
the Deferred Share Unit Account of each Participant whose Deferred Share Unit
Account as of the date of the Change of Control has not been credited with four
annual grants of Deferred Share Units shall be credited with an amount of
Deferred Share Units determined by subtracting the grant date Fair Market Value
of all previous annual Deferred Share Unit grants to the Participant's Deferred
Share Unit Account from $1,000,000, and dividing such amount by the Fair Market
Value as of the date of the Change of Control.
SECTION 12. Amendment. The Plan may be amended, modified or terminated at
any time, for any reason, without notice, by the Board except that, without the
consent of the Participant (or, if the Participant is deceased, his or her
beneficiary(ies)), no such amendment, modification or termination shall have a
material adverse effect on the accrued balance of any Participant's Deferral
Account as of the effective date of any such amendment, modification or
termination.
SECTION 13. Company's Obligations Unfunded. ALL BENEFITS DUE A PARTICIPANT
OR A BENEFICIARY UNDER THIS PLAN ARE UNFUNDED AND UNSECURED AND ARE PAYABLE
SOLELY OUT OF THE GENERAL FUNDS OF THE COMPANY. The Company, in its sole and
absolute discretion, may establish a "grantor trust" for the payment of benefits
and obligations hereunder, the assets of which shall be at all times subject to
the claims of creditors of the Company as provided for in such trust, provided
that such trust does not alter the characterization of the Plan as an "unfunded
plan" for purposes of the Internal Revenue Code. Such trust shall make
distributions in accordance with the terms of the Plan.
SECTION 14. Stock Subject to the Plan. Pursuant to the payment option
available under the Plan as specified in Section 9, the Company has the right to
reserve the appropriate number of shares as may be necessary to fund
distributions hereunder. The shares to be delivered under the Plan may consist
of authorized but unissued Stock or Stock reacquired by the Company, including
shares purchased in the open market.
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SECTION 15. Restrictions on Alienation. No amount deferred or credited to
any account under the Plan shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, levy or charge. Any
attempt to so anticipate, alienate, sell, transfer, assign, pledge, encumber,
levy or charge the same shall be void; nor shall any amount be in any manner
subject to any claims for the debts, contracts, liabilities, engagements or
torts of the Participant (or the Participant's beneficiary or personal
representative) entitled to such benefit. No Participant shall be entitled to
borrow at any time any portion of the Participant's account balances under the
Plan.
SECTION 16. Withholding. There shall be deducted from all payments under
the Plan the amount of any taxes required to be withheld by any Federal, state
or local taxing authority. The Participants, their beneficiaries and personal
representatives shall bear any and all Federal, foreign, state or local income
or any other tax imposed on amounts paid under the Plan.
SECTION 17. Directors Bound by Terms of the Plan. By consenting to become
and continue to serve as a director, each Non-Employee Director shall be deemed
conclusively to have accepted and consented to all terms of the Plan and all
actions or decisions made by the Company with regard to the Plan. Such terms and
consent shall also apply to and be binding upon the beneficiaries, personal
representatives and other successors in interest of each Non-Employee Director.
Each Non-Employee Director shall receive a copy of the Plan.
SECTION 18. Designation of Beneficiary(ies). Each Participant under the
Plan may designate a beneficiary or beneficiaries to receive any payment which
under the terms of the Plan becomes payable on, after or as a result of the
Participant's death. At any time, and from time to time, any such designation
may be changed or canceled by the Participant without the consent of any such
beneficiary. Any such designation, change or cancellation must be on a form
provided for that purpose by the Board and shall not be effective until received
by the Board. If no beneficiary has been designated by a deceased Participant,
the beneficiary shall be the Participant's estate. If the Participant designates
more than one beneficiary, any payments under the Plan to such beneficiaries
shall be made in equal allocations unless the Participant has expressly
designated otherwise, in which case the payments shall be made in the
allocations designated by the Participant.
SECTION 19. Severability of Provisions. In the event any provision of the
Plan would serve to invalidate the Plan, that provision shall be deemed to be
null and void, and the Plan shall be construed as if it did not contain the
particular provision that would make it invalid. The Plan shall be binding upon
and inure to the benefit of (a) the Company and its respective successors and
assigns, and (b) each Non-Employee Director, his or her designee(s),
beneficiary(ies) and estate. Nothing in the Plan shall preclude the Company from
consolidating or merging into or with, or transferring all or substantially all
of its assets to, another corporation, or engaging in any other corporate
transaction.
SECTION 20. Governing Laws and Interpretation. The Plan shall be construed
and enforced in accordance with, and the rights of the parties hereto shall be
governed by, the laws of the State of Delaware. This Plan shall not be
interpreted as either an employment or trust agreement.
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SECTION 21. Arbitration. Except as otherwise provided in this Plan, any
controversy between the parties arising out of this Plan shall be submitted, at
the initiation of either party, to the American Arbitration Association under
its Commercial Arbitration Rules for confidential and binding arbitration. The
arbitration shall be held in Baltimore, Maryland, or such other location where
the Company may have its corporate headquarters, using a single arbitrator. The
arbitrator shall be selected by the Company, provided that if a Change of
Control has occurred on or before the date such controversy is submitted for
arbitration, the arbitrator shall be selected by the Participant (or his
beneficiary(ies)). The costs of the arbitration, including any American
Arbitration Association administration fee, the arbitrator's fee, and costs for
the use of facilities during the hearings, shall be borne equally by the parties
to the arbitration. Each side shall bear its own attorney fees. The arbitrator
shall not have any power to alter, amend, modify or change any of the terms of
this Plan nor to grant punitive, special, extracontractual or consequential
damages or any other remedy which is either prohibited by the terms of this
Plan, or not available in a court of law. Judgment on the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof.
IN WITNESS WHEREOF, the Plan is hereby adopted by the Company on this ____
day of December 1998.
INTEGRATED HEALTH SERVICES, INC.
By:______________________________________
Title:___________________________________
9
EXHIBIT 10.85
EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of this 1ST day of July, 1998 (the
"Effective Date"), by and between INTEGRATED HEALTH SERVICES, INC., a Delaware
corporation (hereinafter referred to as the "Company"), and SALLY WEISBERG
(hereinafter referred to as the "Executive").
W I T N E S S E T H:
WHEREAS, Employer is engaged in the business of owning and operating
nursing care facilities, rehabilitation service providers and other health
care-related businesses through its subsidiaries and tradenames; and
WHEREAS, Employer wishes to employ Employee, and Employee wishes to accept
such employment, on the terms and conditions set forth herein; and
WHEREAS, in the course of her employment, and as a necessary consequence
thereof, Employee will receive information and acquire knowledge of special
procedures, processes, business conduct, and knowledge that is private,
proprietary, and secret to the Company in its business; and
WHEREAS, the business, as well as the success and profits of the Company,
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 business
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 Employee under the terms and conditions contained
herein, and intending to be legally bound hereby, it is agreed between the
parties hereto as follows:
<PAGE>
ARTICLE I
EMPLOYMENT RELATIONSHIP
1.1 Employment. The Company hereby employs the Executive in the position
of President - Symphony Health Services, Inc. and Executive Vice President, with
such responsibilities as may be assigned to Executive from time to time by the
Company's Chief Executive Office and/or President. Executive shall report to and
be responsible to the Chief Executive Officer and/or President during the Term
of this Agreement, and Executive hereby accepts such employment.
During the Term, the Executive agrees to devote all such working time as
is reasonably required for the discharge of her duties hereunder and to perform
such services faithfully and to the best of her ability. Notwithstanding the
foregoing, nothing in this Agreement shall preclude the Executive from (a)
engaging in charitable and community affairs, so long as they are consistent
with her duties and responsibilities under this Agreement, (b) managing her
personal investments, and (c) serving on or advising the boards of directors of
other companies.
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 three (3) years; provided, however, that on each anniversary date of
the Effective Date ("Anniversary Date"), the then current term of this Agreement
automatically shall be extended by an additional period of twelve (12) months,
so that as of each Anniversary Date, this Agreement shall have an unexpired Term
of three (3) years. Notwithstanding the foregoing, either party hereto may elect
not to so extend this Agreement by giving written notice of her or its election
to the other party hereto at least one hundred twenty (120) days prior to any
Anniversary Date. In the event the Company elects not to renew this Agreement
with appropriate notice as provided herein, the Company may buy out the
remaining term of the Agreement through the payment of severance to the
Executive as provided in Section 3.4.
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ARTICLE II
COMPENSATION
2.1 Salary. The Executive shall receive a base salary at an initial rate
of Three Hundred Forty-Nine Thousand Nine Hundred and Twenty Dollars ($349,920)
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. On each January 1 during the Term of this
Agreement, the Salary shall be increased by a percentage which is equal to the
greater of (i) eight percent (8%) of her Salary; or (ii) 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 twelve (12) month period as of the date of such adjustment, and
increased by such additional amounts as may be determined at the discretion of
the Chief Executive Officer and/or President. Once adjusted, such adjusted
amount shall constitute Salary for purposes of this Agreement.
2.2 Bonus. If the Company's earnings per share equal or exceed the
earnings goals set by the Board (the "Target"), then no more than ten (10) days
following the date the Company publicly announces its earnings, the Company
shall pay Executive a discretionary bonus ("Bonus") based on Executive's
performance, benefit to the Company at large, and the extent to which the
Company equals or exceeds the Target. Such Bonus shall be discretionary except
that if the Company's earnings per share equal or exceed the Target then
Executive shall receive a bonus of not less than fifty percent (50%) of her
Salary.
2.3 Executive Benefits and Perquisites. During the Term, the Company shall
provide and/or pay for employee benefits and perquisites that are, in the
aggregate, no less favorable than the employee benefits and perquisites that the
Executive enjoys as of the Effective Date, as may be increased from time to
time, including without limitation:
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(a) comprehensive individual health insurance, including
dependent coverage;
(b) life insurance coverage in the amount of One Million Dollars
($1,000,000) any proceeds of which shall be payable to the Executive's
designated beneficiary or her estate;
(c) four (4) weeks paid vacation annually;
(d) disability insurance coverage in a monthly benefit amount
equal to the sum of 100% of Executive's Salary plus "Bonus Amount" (as
defined in Section 3.4(a));
(e) a monthly automobile allowance of $1,000 per month;
(f) participation in the Company's SERP(s); and
(g) eligibility to participate in the Company's Employee Stock
Participation Program.
Once increased, the level of benefits and perquisites shall not be decreased
without the Executive's consent. No amendment of any SERP(s) that is adverse to
Executive shall be effective as to Executive without her prior written consent
(or, if she is no longer living, the consent of her beneficiary (or
beneficiaries) designated in accordance with the Trust Agreement(s) (as defined
in the SERP(s)). Any interpretation, construction, determination, act or failure
to act of the Company or the "Committee" (as defined in the SERP(s)) that
relates to the SERP(s) and is adverse to Executive shall be subject to de novo
review in accordance with Section 6.9 of this Agreement.
2.4 Equity-Based Compensation. During the Term, the Compensation
Committee, in its complete discretion, may select the Executive to participate
in programs or enter into agreements that provide for the grant of certain
equity-based compensation or rights to the Executive.
ARTICLE III
TERMINATION AND SEVERANCE
3.1 Termination; Nonrenewal. The Company shall have the right to terminate
the Executive's employment, and the Executive shall have the right to resign her
employment with the Company at any time during the Term, for any reason or for
no stated reason, upon no less than ninety
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(90) days' prior written notice (or such shorter notice to the extent provided
for herein). In addition, if there is a Change of Control (as defined in Section
3.3(b)) during the Term of this Agreement, this Agreement automatically shall
terminate on the one hundredth and eightieth (180th) day following the
anniversary date of the Change of Control.
Upon the Executive's termination without "Cause" (as defined in Section
3.2) or resignation for "Good Reason" (as defined in Section 3.3), or upon the
expiration of the Term following the Company's election not to renew this
Agreement (in accordance with Section 1.2) or this Agreement's automatic
termination following a Change of Control (in accordance with Section 3.1,
above), the Executive shall be entitled to severance as set forth in Section
3.4. Upon the Executive's resignation without Good Reason, the Executive shall
not be entitled to severance; provided, however, that the Company may be
required to pay the Executive non-competition severance as provided in Section
4.2, below. 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.
3.2 Termination For Cause. (a) The Company may terminate this Agreement
for Cause following a determination by the Chief Executive Officer that Cause
exists. For purposes of this Agreement, Cause shall mean any or all of the
following:
(i) the Executive materially fails to perform her duties
hereunder;
(ii) a material breach by the Executive of her covenants under
Sections 4.1 4.2;
(iii) Executive is convicted of or pleads guilty or confesses to
a felony involving moral turpitude; or
(iv) Executive is convicted of or pleads guilty or confesses to
theft, larceny or embezzlement of Employer's tangible or intangible
property.
(b) Notwithstanding anything in Section 3.2(a) to the contrary, a
termination shall not be for Cause unless (i) the party to whom the Executive
reports notifies the Executive, in writing, of their intention to terminate the
Executive for Cause (which notice shall set forth the conduct alleged
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to constitute Cause) (the "Cause Notice"); and (ii) the Executive does not cure
her conduct within sixty (60) days after the receipt of the Cause Notice.
3.3 Termination for Good Reason. (a) The Executive may terminate this
Agreement for Good Reason, provided she gives the Company prior written notice
that Good Reason exists (the "Good Reason Notice"). For purposes of this
Agreement, Good Reason shall mean one or more of the following without the
Executive's prior written consent:
(i) a material diminution of the Executive's responsibilities,
title, authority or status;
(ii) the failure of the Company to pay the Executive amounts when
due under this Agreement;
(iii) the Executive's removal or dismissal from the position of
President - Symphony Health Services, Inc. and/or Executive Vice
President; or
(iv) a reduction in Salary or a material reduction in benefits
(other than a reduction in Salary permitted by Section 2.1).
Notwithstanding the foregoing, a termination on account of a reason
described in this Section 3.3 (a)(i) - (iv), above, 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).
(b) 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 the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's common stock would be
converted into cash, securities or other property, other than a merger of the
Company in which the holders of the Company's common stock immediately prior to
the merger have the same proportionate ownership of common stock of the
surviving corporation
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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 the Company, or (ii) the stockholders of the
Company shall approve any plan or proposal for liquidation or dissolution of the
Company, or (iii) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act, including any "group" (as defined in Section
13(d)(3) of the Exchange Act) (other than the Executive or any group controlled
by the Executive)) shall become the beneficial owner (within the meaning of Rule
13d-3 under the Exchange Act) of twenty percent (20%) or more of the Company's
outstanding common stock (other than pursuant to a plan or arrangement entered
into by such person and the Company) and such person discloses its intent to
effect a change in the control or ownership of the Company 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 the Company 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 the Company, 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.
Notwithstanding the foregoing, if the employment agreement of the Company's CEO
or President has a change of control provision which is triggered by an earlier
event not stated herein, then such event shall also be a Change of Control for
purposes of this Agreement.
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3.4 Severance. If the Executive resigns for Good Reason, is terminated
without Cause, there is a Change of Control in the Company, or the Company
elects not to renew this Agreement in accordance with Section 1.2, above:
(a) the Company shall cause the Executive's outstanding
options which are not immediately exercisable to vest and become immediately
exercisable and the restrictions on equity held by the Executive which are
scheduled to lapse solely through the passage of time to lapse (such events
collectively referred to as "Acceleration of Equity Rights") and Executive shall
have thirty-six (36) months from the date of termination to exercise any vested
options; and
(b) the Company shall pay the Executive an amount (the
"Severance Amount") equal to three (3) times the sum of her Salary in the year
of termination or the immediately preceding year, whichever is greater, and the
Bonus Amount, which shall be the greater of (i) the Executive's Bonus earned in
the year of termination, or (ii) her Bonus earned in the immediately preceding
calendar year. Such Severance Amount shall be payable in cash as follows:
(x) no later than ten (10) calendar days after the
effective date of Executive's termination or a Change of
Control, the Company shall pay the Executive one-half (1/2)
of the Severance Amount in a lump sum; and
(y) except in the event of a Change of Control, the
Company shall pay the remaining one-half (1/2) of the
Severance Amount to the Executive in equal monthly
installments commencing on the first day of the month
following the effective date of Executive's termination
without Cause, the Executive's resignation for Good Reason
or the Company's notice to the Executive of its intention
not to renew this Agreement, and on the first day of the
month thereafter for a period of eighteen months (18)
months; or
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(z) in the event of a Change of Control,
(i) the Company shall pay the remaining
one-half (1/2) of the Severance Amount to the Executive in a
lump sum no later than ten (10) calendar days from the date of
the Executive's termination without Cause, resignation for
Good Reason or this Agreement's expiration following a Change
of Control under Section 3.1; and
(ii) the Company shall pay the Executive her
Salary for the lesser of six (6) additional months or the
amount of Salary due until the expiration of this Agreement
following a Change of Control under Section 3.1 if, within
eighteen (18) months following a Change of Control, she is
terminated without Cause or the Executive terminates the
Agreement for Good Reason.
The Company shall have no obligation to pay the Executive the balance of
the Severance Amount or any other benefit hereunder after a Change of Control if
the Executive terminates this Agreement without Good Reason. The amounts owed to
the Executive under (i) and (ii), above shall constitute the total remaining
Severance Amount (excluding Continued Benefits) to which the Executive is
entitled hereunder after a Change of Control.
(c) the Company shall provide for a period of thirty-six (36) months
following the effective date of the Executive's termination (including a
termination resulting from the Company's election not to renew the Term or
renegotiate this Agreement after its automatic termination following a Change of
Control), 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 termination or the preceding year,
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whichever is greater ("Continued Benefits"), including but not limited to those
benefits and perquisites set forth in Section 2.3. Such allowances, benefits and
coverages, etc., to be not less than those in effect on the effective date of
Executive's termination or the preceding year, whichever is greater.
Notwithstanding the foregoing, if any of the Continued Benefits or other
benefits to be provided hereunder have been decreased or otherwise negatively
affected within twelve (12) months prior to the effective date of the
Executive's termination, the reference for measuring such benefit shall be the
date prior to such reduction rather than the date of such termination.
3.5 Termination for Disability. (a) The Company may terminate the
Executive following a determination by the Chief Executive Officer or President
that the Executive has a Permanent Disability; provided, however, that 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 her 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 her 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. 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 the person designated in writing by
Executive prior to her inability to make such selection, and in the absence of
such designation by an adult member of the Executive's immediate family) and
reasonably acceptable to the Company.
(b) If the Executive is terminated because of his Permanent
Disability, the Company shall (i) provide for the Acceleration of Equity Rights;
(ii) pay for a period of thirty-six (36) months following the effective date of
such termination (the "Disability Period") the Executive one hundred (100%)
percent of her Salary plus Bonus, offset by the amount, if any, paid to the
Executive under the salary replacement portion of disability benefits paid under
a disability plan or policy paid for by the
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Company, and (iii) provide her with Continued Benefits for the first eighteen
(18) months of the Disability Period.
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 to under Section 3.4 (or in the case of the Executive's death following
her termination on account of Permanent Disability, before receipt of all
payments under Section 3.5) then the balance of the payments to which the
Executive is entitled 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); provided, however, that the Company
may, at any time within its discretion, accelerate any payments and pay the
Executive or her 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.
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
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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' 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; and
(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.
All of the foregoing are hereinafter referred to as "Trade Secrets." 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 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 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 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
than 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
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independently developed by the Executive, the development of which was not a
breach of this Agreement.
4.2 Non-Competition. In consideration of the Executive's employment
hereunder, during the Term and for a period of eighteen (18) months thereafter
(or in the event of the Executive's termination for Cause, for a period of one
(1) year thereafter), subject to the exceptions set forth below in this Section
4.2, the Executive agrees that she will not, without the express written consent
of the Company, 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
Company or any affiliate thereof, (ii) directly or indirectly solicit, divert,
or endeavor to entice away any customer of the Company or any affiliate thereof,
or otherwise engage in any activity intended to terminate, disrupt, or interfere
with the Company'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 in, have a proprietary
interest in, give advice to, loan money to or otherwise associate with, any
person, enterprise, partnership, association, corporation, joint venture or
other entity which is directly or indirectly in the business of owning,
operating or managing any (1) healthcare facility or business, including but not
limited to, any subacute healthcare facility, rehabilitation hospital,
rehabilitation services provider, nursing home, or home health care business, or
(2) any other business similar to a business which is or was owned, operated or
managed by the Company during the Term or during the period that this Section
4.2 shall apply to the Executive, unless such business comprises (and has during
the preceding twelve (12) month period comprised) less than five percent (5%) of
the Company's gross revenues; 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 the Company or any of its subsidiaries; except that
the provisions of this Section 4.2 shall not apply if the Executive is
terminated
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without cause before the anniversary of a Change of Control, or if the Executive
resigns without Good Reason and the Company does not pay her non-competition
severance pay (not to include Continued Benefits) of one-twelfth (1/12) of the
sum of Executive's salary plus bonus in the previous year for each month (not to
exceed eighteen (18)) the Company elects to bind the Executive to the
non-competition obligation in this Section 4.2.
This Section 4.2 shall not be construed to prohibit the Executive from
owning up to 10% of the outstanding voting shares of the equity securities of
any company whose common stock is listed for trading on any national securities
exchange or on the NASDAQ System or serving as a director or advisor to the
board of directors of any company. Section 4.2 shall only apply to businesses
and operations located in, or otherwise conducted in, the United States.
Moreover, in the event of a Change of Control of the Company, the restrictions
in Section 4.2 (iii), above, shall be limited to the businesses itemized
therein, if any, which the Company continues to own, operate or manage after the
Change of Control.
4.3 Remedies For Breach of Article IV. In the event that the Executive
materially violates the covenants contained in this Article IV after her
termination of employment under circumstances which entitle her 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
acknowledges and 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. The Executive further agrees that in the event an injunction is
granted in connection with actual or alleged breach of the noncompetition
convenants herein, the
14
<PAGE>
eighteen (18) month restrictive period shall begin to run from the date the
injunction is issued (and not from the effective date of the Executive's
termination).
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 her rights, obligations,
interests 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 be assignable and
transferable by the Company and any such assignment or transfer shall inure to
the benefit of and be binding upon the Executive, the Executive's heirs and
personal representatives, and the Company and its successors and assigns. The
Executive agrees to execute all documents necessary to ratify and effectuate
such assignment. An assignment of this Agreement by the Company shall not
release the Company from its monetary obligations under this Agreement.
5.3 Amendment and 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.
ARTICLE VI
GENERAL
6.1 Governing Law. This Agreement shall be subject to and governed by
the laws of the State of Maryland.
15
<PAGE>
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 pertaining to the
subject matter herof, either oral or written, between the parties hereto;
provided, however, that this Agreement does not supersede any agreements
pertaining to stock options which have been granted as of the Effective Date,
except to the extent that any such option agreement contains provisions which
are contrary to the provisions of this Agreement (including provisions regarding
the Acceleration of Equity Rights), or obligation of the Executive regarding the
Company's proprietary and confidential tangible and intangible property.
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
16
<PAGE>
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 of certified mail, return receipt requested.
If to the Company: Integrated Health Services, Inc
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Attn: Marshall A. Elkins, Executive Vice President
and General Counsel, or then General Counsel
If to the Executive: Sally Weisberg
316 Thompson Mill Road
New Hope, Pennsylvania 18938
6.7 Indemnification. The Company
agrees to maintain Director's and
Officer's liability insurance at a level not less than the level in effect on
the Effective Date, or to the extent such level is increased during the Term, at
such increased level; provided, however, that the level of insurance may be
decreased with the Executive's written consent. To the extent not covered by
such liability insurance, the Company shall indemnify and hold the Executive
harmless to the fullest extent permitted by Delaware law against any judgments,
fines, amounts paid in settlement and reasonable expenses (including reasonable
attorneys' fees), and advance amounts necessary to pay the foregoing at the
earliest time and to the fullest extent permitted by law, in connection with any
claim, action or proceeding (whether civil or criminal) against the Executive as
a result of her serving as an officer or director of the Company or in any
capacity at the request of the Company in or with regard to any other entity,
employee benefit plan or enterprise. This indemnification shall be in effect
during the Term and thereafter and shall be in addition to and not in lieu of
any other indemnification rights the Executive otherwise may have.
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:
17
<PAGE>
(a) in connection with any bone fide dispute over the terms of this
Agreement submitted by Executive to arbitration pursuant to Section 6.9 , unless
there is a determination that the Executive had no objectively reasonable basis
in fact or theory for her claim; or
(b) in connection with any other event indemnifiable by the Company
pursuant to insurance coverage or Delaware law in which the Executive engages
separate representation.
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.
18
<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: ___________________________________ _________________________________
SALLY WEISBERG
Name: _________________________________
Title: __________________________________
19
EXHIBIT 10.86
AMENDMENT NO. 1
TO AMENDED AND RESTATED KEY EMPLOYEE
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
This Amendment No. 1 is made as of this 19th day of November 1988, by and
between Integrated Health Services, Inc., a Delaware corporation (the
"Company"), and Robert N. Elkins (the "Executive").
WITNESSETH:
WHEREAS, the Company established the Integrated Health Services, Inc. Key
Employee Supplemental Executive Retirement Plan effective as of March 1, 1996,
and amended and restated the plan (as amended and restated, the "Plan")
effective November 18, 1997; and
WHEREAS, the Company and the Executive desire to amend the Plan to permit
the Plan to be funded with securities of the Company.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
agreements contained herein, the parties, intending to be legally bound, hereby
agree to amend the Plan as follows:
1. Under Section 2.1 of the Plan, the last sentence of the definition
of "Funding" is amended to read as follows:
"Funding shall be in the form of cash and/or Employer securities."
2. Section 5.3 of the Plan is amended to delete the last sentence
thereof, "In no event may any employee deferral contribution or any
income or gains thereon be invested in capital stock of the
Company."
3. All of the remaining terms and provisions of the Plan shall remain
in full force and effect without amendment or modification.
IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 as of
the day and year first above written.
<PAGE>
COMPANY EXECUTIVE
INTEGRATED HEALTH SERVICES, INC.
By: _________________________________ ____________________________________
Robert N. Elkins
Name: ______________________________
Title: _____________________________
____________________________________ ____________________________________
Witness as to the Company Witness as to the Executive
____________________________________ ____________________________________
Print Name/Title Print Name
EXHIBIT 10.87
AMENDMENT NO. 1 TO
SUPPLEMENTAL AGREEMENT
This AMENDMENT NUMBER 1 TO THE SUPPLEMENTAL AGREEMENT is made effective as
of September 30, 1998, 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, Executive and Company are parties to a Supplemental Agreement,
dated as of November 18, 1997 (the "Supplemental Agreement"), which provides
for, among other things, the payment of certain Loan Bonuses to the Executive as
of the dates and in the amounts set forth on Schedule A to the Supplemental
Agreement, and which further provides that each such Loan Bonus shall be applied
to the discharge of interest and principal outstanding under that certain
Promissory Note, dated September 29, 1997, executed by the Executive in the
principal amount of $13,447,000 (the "1997 Note"); and
WHEREAS, in addition to the 1997 Note, the Executive is obligated to the
Company pursuant to that certain Promissory Note, dated January 28, 1998,
executed by the Executive in the principal amount of $2,088,000 (the "1998
Note"); and
WHEREAS, contemporaneously herewith, a new Promissory Note in the
principal amount of $15,530,000 (the "New Note") has been executed and delivered
by the Executive to the Company in substitution for the 1997 Note and 1998
Note,which prior notes have been canceled; and
WHEREAS, the parties wish to amend the Supplemental Agreement to provide
for the application of Loan Bonuses to the discharge of principal and interest
under the New Note, and to change the installment dates and amounts of the Loan
Bonuses.
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. The sixth "WHEREAS" clause of the Supplemental Agreement, which defines
"Note A" for purposes of the Supplemental Agreement, is hereby amended to read
in its entirety as follows:
<PAGE>
"WHEREAS, the Executive has agreed to deliver to the Company a Note, dated
September 30, 1998, and executed by him, in the principal amount of $15,535,000
("Note A");"
2. Schedule A as attached to the Supplemental Agreement is hereby amended
to read in its entirety as set forth on Schedule A as attached to this Amendment
No. 1. All references in the Supplemental Agreement to "Schedule A" shall mean
the Schedule A attached to this Amendment No. 1.
IN WITNESS WHEREOF, the Company has caused this Amendment No. 1 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: _________________________________ ____________________________________
Robert N. Elkins
Name: ______________________________
Title: _____________________________
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, 333-1432, 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, 333-48947, 333-59891 and 333-42169) on Forms S-3 or S-4 of
Integrated Health Services, Inc. of our report dated March 30, 1999, relating to
the consolidated balance sheets of Integrated Health Services, Inc. and
subsidiaries as of December 31, 1997 and 1998 and the related consolidated
statements of operations, comprehensive income (loss), stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1998 and the related schedule, which report appears in the December 31, 1998
annual report on Form 10-K of Integrated Health Services, Inc.
KPMG LLP
Baltimore, Maryland
March 30, 1999
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