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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1995
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 NO. 1-9369
--------------------------
HORIZON/CMS HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 91-1346899
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6001 INDIAN SCHOOL ROAD, N.E.,
SUITE 530
ALBUQUERQUE, NM 87110
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (505) 881-4951
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- -------------------------------------- --------------------------------------
<S> <C>
Common Stock, par value New York Stock Exchange
$.001 per share
</TABLE>
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. / /
At August 10, 1995, the registrant had 50,480,302 shares of Common Stock
outstanding. The aggregate market value on July 31, 1995 of the registrant's
Common Stock held by nonaffiliates of the registrant was $1,042,815,120 (based
on the closing price of these shares as quoted on such date on the New York
Stock Exchange).
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement for the
Annual Meeting of Stockholders to be held on September 27, 1995 are incorporated
into Part III of this Form 10-K.
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TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business................................................................... 1
General Overview................................................................. 1
Industry Background.............................................................. 3
Business Strategy................................................................ 4
Long-Term Care Facilities........................................................ 6
Specialty Health Care Services................................................... 6
Facilities....................................................................... 9
Operations....................................................................... 10
Sources of Revenues.............................................................. 12
Competition...................................................................... 13
Employees........................................................................ 14
Acquisitions and Expansion....................................................... 14
Medicaid and Medicare............................................................ 16
Regulation....................................................................... 18
Insurance........................................................................ 25
Executive Officers of the Company................................................ 26
Item 2. Properties................................................................. 28
Item 3. Legal Proceedings.......................................................... 33
Item 4. Submissions of Matters to a Vote of Security Holders....................... 33
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... 34
Item 6. Selected Financial Data.................................................... 34
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 36
Item 8. Financial Statements and Supplementary Data................................ 42
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure........................................................................ 68
PART III
Item 10. Directors and Executive Officers of the Registrant........................ 68
Item 11. Executive Compensation.................................................... 68
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 68
Item 13. Certain Relationships and Related Transactions............................ 68
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 68
Signatures......................................................................... 76
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PART I
ITEM 1. BUSINESS
GENERAL OVERVIEW
Horizon/CMS Healthcare Corporation, a Delaware corporation ("Horizon" or the
"Company"), was organized in 1986 and is a leading provider of specialty health
care services and long-term care principally in the midwest, southwest, and
northeast regions of the United States. The Company's strategy is to use its
long-term or geriatric care and subacute care facilities as platforms to provide
a continuum of post-acute care more typically delivered in the acute care
hospital setting. This strategy will position the Company to take advantage of
the increasing number of patients being discharged from hospitals who continue
to require subacute and/or long-term care as a result of cost containment
measures implemented by private insurers through managed care programs and
limitations on government reimbursement of hospital costs. These patients often
cannot be effectively cared for in the home because of the complex monitoring
and specialized medical treatment required. Because long-term or geriatric care
facilities have lower capital and operating costs than acute care hospitals, the
Company is able to offer these complex medical services at a significantly lower
cost than acute care hospitals.
In response to current health care reform and ongoing changes in the health
care marketplace, the Company implemented and continues to implement a strategy
extending the continuum of services beyond traditional subacute care to create a
post-acute health care delivery system in each geographic region served by the
Company. Post-acute care is the provision of a continuum of care to patients for
the twelve month period following discharge from an acute care hospital.
Post-acute care services include subacute care, outpatient and home care,
inpatient and outpatient rehabilitative and pharmacy services. The Company's
integrated post-acute health care system is intended to provide continuity of
care for its patients and enable payors to contract with one provider to provide
virtually all of the patient's needs during the period following discharge from
acute care facilities. To implement this strategy, the Company has focused on
(a) continuing its development of specialty health care facilities such as its
specialty hospitals, (b) developing geographic market concentration for its
post-acute care services, and (c) expanding the range of related services it
offers to patients.
At May 31, 1995, the Company owned, leased or managed 149 long-term care and
specialty health care facilities containing 17,776 beds in 18 states. References
herein to numbers of specialty health care facilities include those located in
discrete areas within the physical structure of the Company's long-term care
facilities.
The Company's long-term or geriatric care facilities provide routine basic
patient services to geriatric and other patients with respect to daily living
activities and general medical needs. Such basic patient services include daily
dietary services, recreational activities, social services, housekeeping and
laundry services, pharmaceutical and medical supplies and 24 hours-a-day access
to registered nurses, licensed practical nurses and related services prescribed
by the patient's physician.
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The specialty health care services provided by the Company include subacute
care, rehabilitation therapies (occupational, speech and physical therapies and
treatment of traumatic head injury and other neurological impairments),
institutional pharmacy services, Alzheimer's care, non-invasive medical
diagnostic testing services, home respiratory care services and supplies, and
clinical laboratory services. The Company's subacute care services include high
acuity, multidisciplinary, complex medical care programs. Subacute care services
also include dedicated programs for rehabilitative ventilator care, wound
management, general rehabilitation, head trauma/coma stimulation and infusion
therapy. Subacute care services are provided through the Company's specialty
hospitals and subacute care units. The Company provides Alzheimer's care through
26 units with 834 beds. The Company provides institutional pharmacy services to
approximately 38,000 beds. The Company provides non-invasive medical diagnostic
testing services such as echocardiography, peripheral venous and arterial
imaging, holter monitoring and doppler scanning by way of mobile units and fixed
location operations (generally in acute care hospitals) through a network of
physicians and surgeons and also provides sleep diagnostic services. The
Company's clinical laboratory provides body fluid testing to assist in
detecting, diagnosing and monitoring diseases in the subacute and long-term care
settings and currently provides services to approximately 9,000 beds. The
Company's specialty health care services typically yield higher per bed charges
and higher profit margins than traditional long-term care services.
Consistent with the Company's strategy of developing one of the nation's
leading providers of post-acute care, the Company acquired Continental Medical
Systems, Inc. ("CMS") on July 10, 1995 by means of a merger of a wholly owned
subsidiary of the Company with and into CMS, with CMS being the surviving
corporation (the "CMS Merger"). Upon consummation of the CMS Merger, CMS became
a wholly owned subsidiary of the Company. CMS is one the nation's largest
providers of comprehensive inpatient and outpatient medical rehabilitative
services. CMS has a significant clinical and market presence in each of the
medical rehabilitation industry's three principal sectors -- inpatient
rehabilitation care, outpatient rehabilitation care and contract rehabilitation
therapies. CMS has developed and provides inpatient and outpatient
rehabilitation programs and services for patients suffering from stroke and
other neurological and cardiac disorders, orthopedic problems, head injuries,
spinal cord injuries, work-related disabilities and multiple trauma. CMS's
inpatient and outpatient rehabilitation programs and services are delivered to
patients through a plan of treatment developed by an interdisciplinary team that
includes physician specialists, therapists and other medical personnel, as
determined by the individual patient's needs.
CMS currently operates 37 free standing comprehensive medical rehabilitation
hospitals with a total, as of June 30, 1995, consisting of 2,016 licensed acute
rehabilitation beds located in 15 states. For the most part, these hospitals
overlap geographically with the Company's long-term or geriatric care or
specialty hospital/subacute care facilities. Many of CMS's rehabilitation
hospitals are operated through joint ventures with local general acute care
hospitals, physicians and other investors. CMS's rehabilitation unit management
group operates inpatient and outpatient rehabilitation programs within acute
care hospitals and currently manages 12 rehabilitation units with more than 272
beds.
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CMS's comprehensive freestanding medical rehabilitation hospitals typically
provide on-site outpatient services. As of June 30, 1995, CMS also provided
outpatient services through 140 outpatient rehabilitation clinics, 102 of which
are operated as satellites of CMS's inpatient rehabilitation hospitals. The
remaining 38 outpatient clinics are operated through CMS's contract therapy
subsidiaries.
Through its contract therapy subsidiaries, CMS provides physical,
occupational, speech and respiratory therapy services on a contract basis to
over 2,300 skilled nursing facilities, general acute care hospitals, schools,
home health agencies, inpatient rehabilitation hospitals and outpatient clinics
in 32 states.
CMS provides physician locum tenens services to institutional providers and
physician practice groups throughout the United States. "Locum Tenens" is a term
used in the health care field to describe one physician covering for another.
CMS also offers management and managed care services to independent physician
associations, physicians, and outpatient rehabilitation providers under various
contractual arrangements.
Management of the Company believes that the CMS Merger has created one of
the nation's major post-acute care companies and one of the nation's largest
specialty health care providers.
INDUSTRY BACKGROUND
The post-acute industry, including subacute care and long-term care,
encompasses a broad range of health care services for patients with medically
complex needs who can be cared for outside of acute care hospitals. The Company
believes that it is well positioned to capitalize on favorable industry trends,
including increasing demand for long-term care and subacute care services,
limited supply of new long-term care beds and consolidation within the industry.
In response to rapidly rising costs, governmental and private pay sources
have adopted cost containment measures that encourage reduced length of stays in
hospitals. These third party payors have implemented strong case management and
utilization review procedures. In addition, traditional private insurers have
begun to limit reimbursement to predetermined "reasonable charges," while
managed care organizations such as health maintenance organizations and
preferred provider organizations are attempting to limit hospitalization costs
by monitoring and reducing hospital utilization and by negotiating discounted
rates for hospital services or fixed charges for procedures regardless of length
of stay. As a result, average hospital stays have been shortened, with many
patients being discharged despite a continuing need for specialty health care
services or nursing care.
This trend will be amplified by the expected increase in the number of
persons who will require long-term care services. According to the U.S. Bureau
of the Census, approximately 1.4% of people 65 - 74 years of age received care
in long-term care facilities in 1990, while 6.1% of people 75 - 84 years of age
and 24.5% of people over age 85 received such care. The U.S. Bureau of the
Census estimates that the U.S. population over age 75 will increase from
approximately 13 million, or 5.2% of the population, in 1990 to approximately 17
million, or 6.1% of the population, by the year 2000. In particular, the segment
of the U.S. population over 85 years of age, which comprises 45 - 50% of
residents at long-
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term care facilities nationwide, is projected to increase by more than 40%, from
approximately 3 million, or 1.2% of the population, in 1990 to more than 4
million, or 1.6% of the population in 2000. The population over age 65 suffers
from a greater incidence of chronic illnesses and disabilities than the rest of
the population and currently accounts for more than two-thirds of total health
care expenditures in the United States. As the number of Americans over age 65
increases, the need for long-term care services is also expected to increase.
Advances in medical technology have increased the life expectancy of a
growing number of patients who require a high degree of care traditionally not
available outside acute care hospitals. For such patients, home health care is
not a viable alternative because of the complexity of medical services and
equipment required. As a result, the Company believes that there is an
increasing need for long-term care facilities that provide 24 hours-a-day
supervision and specialty care at a significantly lower cost than traditional
acute care and rehabilitation hospitals.
Recently, the industry has been subject to competitive pressures that have
resulted in a trend towards consolidation of smaller, local operators into
larger, more established regional or national operators. The increasing
complexity of medical services, growing regulatory and compliance requirements
and increasingly complicated reimbursement systems have resulted in
consolidation of operators who lack the sophisticated management information
systems, operating efficiencies and financial resources to compete effectively.
BUSINESS STRATEGY
The Company's business strategy emphasizes growth of its specialty health
care services and long-term care operations and concentration of its operations
in geographic regions. Specifically, the Company's strategy is to use its
long-term or geriatric care and subacute care facilities as platforms to provide
a continuum of post-acute care more typically delivered in the acute care
hospital setting. This strategy will position the Company to take advantage of
the increasing number of patients being discharged from hospitals who continue
to require subacute and/or long-term care as a result of cost containment
measures implemented by private insurers through managed care programs and
limitations on government reimbursement of hospital costs. These patients often
cannot be effectively cared for in the home because of the complex monitoring
and specialized medical treatment required. Because long-term or geriatric care
facilities have lower capital and operating costs than acute care hospitals, the
Company is able to offer these complex medical services at a significantly lower
cost than acute care hospitals.
In response to current health care reform and ongoing changes in the health
care marketplace, the Company continues to implement a strategy of extending the
continuum of services beyond traditional subacute care to create an integrated
post-acute health care delivery system in each geographic region served by the
Company. The Company's integrated post-acute health care delivery system is
intended to provide continuity of care for its patients and enable payors to
contract with one provider to provide virtually all of the patient's needs
during the year following discharge from acute care facilities and beyond, if
necessary. To implement this strategy, the Company has focused on (a) continuing
its development of specialty health care facilities such as its
4
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specialty hospitals, (b) developing geographic market concentration for its
post-acute care services, and (c) expanding the range of related services it
offers to patients.
EXPANSION THROUGH ACQUISITIONS. The Company intends to continue to expand
its operations through the acquisition in select geographic areas of long-term
care facilities and providers of specialty health care services. The acquisition
of long-term care facilities provides further opportunities for expansion of the
Company's higher margin specialty programs. See "Acquisitions and Expansion."
Consistent with the Company's strategy of developing one of the nation's
leading providers of post-acute care, on July 10, 1995, the CMS Merger was
consummated. CMS is one of the nation's largest providers of comprehensive
inpatient and outpatient medical rehabilitative services. CMS has a significant
clinical and market presence in each of the medical rehabilitation industry's
three principal sectors -- inpatient rehabilitation care, outpatient
rehabilitation care and contract rehabilitation therapies. CMS has developed and
provides inpatient and outpatient rehabilitation programs and services for
patients suffering from stroke and other neurological and cardiac disorders,
orthopedic problems, head injuries, spinal cord injuries, work-related
disabilities and multiple trauma. CMS's inpatient and outpatient rehabilitation
programs and services are delivered to patients through a plan of treatment
developed by an interdisciplinary team that includes physician specialists,
therapists and other medical personnel, as determined by the individual
patient's needs.
Management of the Company believes that the CMS Merger has created one of
the nation's major post-acute care companies and one of the nation's largest
specialty health care providers. The combined company has a substantial
capability in a large array of post-acute care services; acute medical
rehabilitation; outpatient rehabilitation; subacute care; long-term care;
contract rehabilitation therapy; institutional pharmacy services; clinical
laboratory services; medical diagnostic services; and home care services.
Management of the Company has begun implementation of its consolidation plan
with CMS and believes that there are significant synergies to be realized,
particularly through (a) revenue enhancement and cost savings from consolidation
of contract therapy operations; (b) margin improvements from enhanced
utilization of contract therapists; (c) the expansion of the Company's
institutional pharmacy services into CMS facilities and new markets; (d) the
consolidation of corporate overhead; (e) the potential to increase business
through the ability to provide a full range of care to managed care providers
who desire "one stop shopping"; (f) the ability to increase capacity and margins
in rehabilitation hospitals by transferring patients to Company owned or
operated subacute and long-term care facilities; (g) the potential to increase
patient volume by expanding the continuum of care of each company on a
stand-alone basis; and (h) the potential for improved buying power with respect
to suppliers.
REVENUE ENHANCEMENT THROUGH EXPANDED SPECIALTY SERVICES. The Company
intends to continue to expand its specialty health care services at its
facilities in order to improve profit margins, occupancy levels and payor mix
achieved through these services.
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CONCENTRATION IN TARGETED GEOGRAPHIC AREAS. The Company concentrates its
operations in clusters of operating units in selected geographic areas. The
Company believes that concentrating its rehabilitation hospitals and long-term
care facilities within selected geographic areas provides a platform to expand
its specialty health care services. It also provides operating efficiencies,
economies of scale and growth opportunities. These operating efficiencies enable
the Company to reduce corporate overhead and to establish effective working
relationships with the regulatory and legislative authorities in the states in
which it operates. In addition, concentration of facilities enhances the
development of stronger local referral sources through concentrated marketing
efforts.
LONG-TERM CARE FACILITIES
The Company's long-term care facilities provide routine basic patient
services to geriatric and other patients with respect to daily living activities
and general medical needs. Such basic patient services include daily dietary
services, recreational activities, social services, housekeeping and laundry
services, pharmaceutical and medical supplies and 24 hours-a-day access to
registered nurses, licensed practical nurses and related services prescribed by
the patient's physician. At May 31, 1995, the Company operated 133 long-term
care facilities in 18 states.
Subsequent to year end, on June 19, 1995 the Company announced plans to
dispose of eight long-term care facilities. The decision to sell the facilities
was based on both financial, regulatory and operational factors. The facilities
to be sold are comprised of four neuro-behavioral centers, two chronic
ventilator care facilities, one mild mental facility and one personal care
center. The Company expects that each of the eight facilities will be disposed
of during fiscal 1996.
SPECIALTY HEALTH CARE SERVICES
The Company provides a variety of specialty health care services as
described in more detail below. The Company believes that providing a broad
range of specialty health care services and programs enables the Company to
attract patients with more complex health care needs. These services typically
generate higher profit margins to the Company than basic patient services.
SUBACUTE CARE. The number of subacute and specialty hospital beds the
Company operates has increased from 168 beds at the end of fiscal year 1993 to
1,331 at the end of fiscal 1994 and to 1,413 at the end of fiscal 1995. The
Company provides subacute care to high acuity patients with medically complex
conditions who require ongoing, multidisciplinary nursing and medical
supervision and access to specialized equipment and services but who do not
require many of the other services provided by an acute care hospital. Subacute
care services are generally provided in a discrete area within the physical
structure of a specialty hospital and are supervised by a separate medical staff
employed by the Company. The Company operates one stand-alone specialty
hospital. Such units also provide rehabilitative ventilator care, intravenous
therapy and various forms of coma, pain and wound management. The Company
believes that private insurance companies and other third party payors,
including certain state Medicaid programs, recognize that treating patients
requiring subacute care in specialty units such as those operated by the Company
is a cost effective
6
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alternative to treatment in acute care hospitals. The Company believes that it
can continue to offer subacute care at rates substantially below those typically
charged by acute care hospitals for comparable services.
Although subacute care units can be operated by the Company under its
existing licenses, the Company may choose to operate them under specialty
hospital licenses due to the higher reimbursement rates for services rendered
under these licenses and the Company's belief that such licenses may enhance its
marketing efforts to referral sources such as physicians, surgeons, managed care
providers and hospital discharge planners. Ten of the Company's subacute care
units are operated under specialty hospital licenses. Once a specialty hospital
license has been obtained, the beds so licensed generally can no longer be used
for patients who require only basic patient care.
The Company maintains a significant presence in the subacute care market.
Specifically, the Company is a party to a number of contracts with commercial
insurers and managed care providers and out-of-state special rate Medicaid
provider agreements. The Company believes that these relationships will enable
the Company to receive higher reimbursement rates and profit margins in the
future. The CMS Merger further expands the Company's presence in the sub-acute
segment of the post-acute care industry. CMS's 37 medical rehabilitation
hospitals expand significantly the array of post-acute care services the Company
can provide patients and third party payors.
CONTRACT REHABILITATION THERAPIES. The Company provides a comprehensive
range of rehabilitation therapies, including physical, occupational, respiratory
and speech therapies in most of its long-term care facilities and through
contracts with third parties. In addition, the Company has 14 facilities that
provide comprehensive inpatient rehabilitation and skilled and intermediate
nursing services to patients who have sustained traumatic head injuries or other
neurological impairments. As of May 31, 1995, the Company provided comprehensive
physical, occupational and speech therapy services through 498 contracts in 19
states, 120 of which are with Company-operated long-term care facilities and
specialty hospitals, and 378 of which are with third party long-term care
facilities, home health agencies, hospitals, outpatient clinics or school
systems. The CMS Merger expands the Company's presence in the contract
rehabilitation therapy marketplace, making the Company one of the nation's
leading providers of these services.
INSTITUTIONAL PHARMACY SERVICES. The Company has established a network of
22 regionally located pharmacies through which it provides a full range of
prescription drugs and infusion therapy services, such as antibiotic therapy,
pain management and chemotherapy, to facilities operated by the Company and by
third parties. These pharmacy operations (certain of which are managed by third
parties) enable the Company to generate revenues from services previously
provided to the Company by third-party pharmacy vendors. The Company provides
institutional pharmacy services in 17 states. The Company currently offers its
pharmacy services to 96% of its facilities. Of the approximate 38,000 beds
serviced by the Company's institutional pharmacies, 21,000 are located in
facilities not operated by the Company.
ALZHEIMER'S LIVING CENTERS. The Company offers a specialized program for
persons with Alzheimer's disease through its Alzheimer's Living Centers. At
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May 31, 1995, this program had been instituted at 26 of the Company's long-term
care facilities, with a total of 834 beds. Each Alzheimer's Living Center is
located in a designated wing of a long-term care facility and is designed to
address the problems of disorientation experienced by Alzheimer's patients and
to help reduce stress and agitation resulting from a short attention span and
hyperactivity. Each Alzheimer's Living Center employs a specially trained
nursing staff and an activities director and engages a medical director with
expertise in the treatment of Alzheimer's disease. The program also provides
education and support to the patient's family.
NON-INVASIVE MEDICAL DIAGNOSTICS. During fiscal 1994, the Company began
providing noninvasive, portable and static diagnostic testing services for
physicians and acute care hospitals. These services include cardiovascular (both
cardiac imaging and vascular imaging), pelvic and abdominal testing services and
sleep diagnostic services. The Company has recently expanded its diagnostic
expertise and the diagnostic markets it serves through acquisitions. The Company
now provides these diagnostic services in 12 states.
CLINICAL LABORATORY. During fiscal 1993, the Company established a
comprehensive clinical laboratory, which is centrally located in Dallas, Texas,
to serve the long-term care industry. This laboratory has received a
registration number in accordance with the Clinical Laboratory Improvement Act
("CLIA"), and has all necessary state regulatory approvals to conduct business
in the states in which the Company currently operates. A CLIA registration
number is required for clinical laboratories to receive reimbursement for
charges to patients covered by Medicare and Medicaid. At May 31, 1995, the
laboratory provided services to approximately 9,000 beds.
The clinical laboratory provides bodily fluid testing services to assist in
detecting, diagnosing and monitoring diseases. These tests, performed as ordered
by each patient's attending physician, include testing for complete blood count,
blood chemistry testing, coagulation studies, urinalysis, microbiology tests and
therapeutic drug level tests. Upon completion of these tests, the laboratory
electronically communicates the results of such testing back to the applicable
facility for inclusion on each patient's medical chart for review by the
attending physician.
The following table sets forth the revenues for each of the Company's
specialty health care services for the periods indicated:
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YEAR ENDED MAY 31,
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1995 1994 1993
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(DOLLARS IN MILLIONS)
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Subacute Care.............................................. $ 139.0 $ 54.5 $ 6.4
Rehabilitation Therapies................................... 71.6 40.2 31.6
Institutional Pharmacy Services............................ 38.7 27.3 11.1
Alzheimer's Living Centers................................. 21.2 17.7 13.8
Medical Diagnostics and Clinical Laboratories.............. 13.9 2.0 --
--------- --------- ---------
Total.................................................. $ 284.4 $ 141.7 $ 62.9
--------- --------- ---------
--------- --------- ---------
</TABLE>
On July 10, 1995, the Company consummated the CMS Merger, which is to be
accounted for as a pooling of interests. CMS is one of the largest providers of
comprehensive medical rehabilitation programs and services in the country with
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a significant presence in each of the rehabilitation industry's three principal
sectors -- inpatient rehabilitation care, outpatient rehabilitation care and
contract therapy. CMS operates 37 freestanding rehablitation hospitals, provides
outpatient rehabilitation services at more than 130 locations and manages 13
inpatient rehabilitation units for general acute care hospitals. These services
are provided in 20 states. CMS also provides physician staffing services.
Through its contract therapy operations, CMS provides physical, occupational,
speech and respiratory therapy services on a contract basis to over 2,300
skilled nursing facilities, general acute care hospitals, schools, home health
agencies, inpatient rehabilitation hospitals or outpatient clinics in 32 states.
FACILITIES
At May 31, 1995, the Company operated 149 long-term care and specialty
health care facilities in 18 states. Approximately 60% of the Company's
facilities are subject to long-term operating leases, ranging from five to 15
years, that require the Company to pay all taxes, insurance and maintenance
costs. Many of the leases contain at least one renewal option to extend the term
for five to 15 years. The Company owns 48 of its facilities. The Company
considers its properties to be in generally good operating condition and
suitable for the purposes for which they are being used.
The following table summarizes by state certain information regarding the
facilities operated and managed by the Company:
<TABLE>
<CAPTION>
AS OF MAY 31, 1995
--------------------------------------------------
AVERAGE PATIENT SERVICES/OPERATING UNITS
OCCUPANCY --------------------------------------------------
AS OF MAY 31, 1995 FOR MAY (3)
------------------------- SPECIALTY
LICENSED LICENSED ----------- HOSPITALS SUBACUTE PHARMACY THERAPY
STATE FACILITIES (1) BEDS (2) 1994 1995 UNITS BEDS UNITS BEDS UNITS CONTRACTS
- ------------------------------------- -------------- -------- ---- ---- ----- ---- ----- ----- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Texas................................ 35 5,012 82% 84% 5 189 -- -- 9 120
New Mexico........................... 24 2,116 93 88 1 25 -- -- 3 25
Ohio................................. 22 2,492 89 89 -- -- 3 32 2 81
Nevada............................... 12 1,545 94 93 1 27 1 12 3 33
Florida.............................. 12 1,088 67 95 -- -- 3 74 -- 18
Massachusetts........................ 8 1,112 97 94 -- -- 6 631 1 7
Michigan............................. 7 988 91 88 -- -- 3 66 1 44
Kansas............................... 7 568 80 76 2 54 -- -- -- 17
Montana.............................. 5 684 91 91 -- -- -- -- 1 10
Oklahoma............................. 4 317 89 88 1 43 1 4 -- 52
Connecticut.......................... 3 585 84 97 -- -- -- -- 1 3
Wisconsin............................ 3 375 80 82 -- -- -- -- -- 10
Colorado............................. 2 303 99 97 -- -- -- -- -- 7
Maryland............................. 1 160 97 98 -- -- -- -- -- --
North Carolina....................... 1 125 94 95 -- -- 1 72 -- --
Pennsylvania......................... 1 120 97 96 -- -- 1 32 -- 1
Louisiana............................ 1 118 87 85 -- -- 1 118 -- 6
California........................... 1 68 73 68 -- -- 1 34 -- 3
Rhode Island......................... -- -- -- -- -- -- -- -- 1 --
Indiana.............................. -- -- -- -- -- -- -- -- -- 1
Illinois............................. -- -- -- -- -- -- -- -- -- 3
Missouri............................. -- -- -- -- -- -- -- -- -- 57
--- -------- ---- ---- ----- ---- ----- ----- --- ---
Total............................ 149 17,776 89% 88% 10 338 21 1,075 22 498
--- -------- ---- ---- ----- ---- ----- ----- --- ---
--- -------- ---- ---- ----- ---- ----- ----- --- ---
<FN>
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(1) Includes the Company's owned, leased and managed long-term care facilities
and specialty hospitals, in the latter case including those located within
discrete areas of long-term care facilities.
</TABLE>
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<TABLE>
<S> <C>
(2) Includes the Company's owned, leased and managed licensed beds. "Licensed
beds" refers to the number of beds for which a license has been issued,
which may vary in some instances from beds available for use.
(3) Average occupancy is computed by dividing the total bed days occupied by
the total licensed bed days available for the month indicated.
</TABLE>
OPERATIONS
REGIONAL OPERATIONS. The Company's long-term care facilities are organized
into four regions, each of which is supervised by a Vice President of
Operations. For every six to twelve centers within each region, a District
Director, Quality Assurance Nurse and Dietary Consultant are responsible for
monitoring operations. Each facility operated by the Company is supervised by a
licensed administrator and employs a Director of Nursing Services, who
supervises a staff of registered nurses, licensed practical nurses and nurses'
aides. A Medical Director supervises the medical management of all patients.
Other personnel include dietary staff, housekeeping, laundry and maintenance
staff, activities and social services staff and a business office staff. In
addition, the Company's corporate and regional staffs provide services such as
marketing assistance, training, quality assurance oversight, human resource
management, reimbursement expertise, accounting, cash management, legal services
and management support. Financial control is maintained through financial and
accounting policies that are established at the corporate level for use at each
facility. The Company has standardized operating procedures and monitors its
centers to assure consistency of operations. The Company's financial reporting
system enables it to monitor certain key financial data at each facility, such
as payor mix, admissions and discharges, cash collections, net patient care
revenues and staffing.
The Company's specialty health care operations are organized as follows.
SUBACUTE CARE AND SPECIALTY HOSPITALS. The Company's subacute care and
specialty hospital operations are divided into two geographic regions, each of
which is supervised by a Director of Operations. Each of the subacute care
facilities and/or specialty hospitals is supervised by a licensed administrator
and a governing board. Each of the subacute care facilities and specialty
hospitals employs a Director of Nursing Services, who supervises a staff of
registered nurses, licensed practical nurses and nurses' aides. A Medical
Director and a staff of resident medical professionals supervise the medical
management of all patients. As in the case of the Company's long-term care
facilities, the Company's corporate and regional staffs provide services such as
marketing assistance, training, quality assurance oversight, human resources
management, legal services, and management support. The Company has standardized
operating procedures and monitors its subacute care facilities and specialty
hospitals to assure consistency and quality of operations.
CONTRACT REHABILITATION THERAPIES. The Company's contract rehabilitation
therapy operations are divided into six regional operational divisions, each of
which is supervised by a Director of Operations. These regional divisions each
recruit, hire, train and supervise the physical, occuptional and speech
pathology therapists that provide the "hands on" therapy services to the
Company's facilities and, to a greater extent, third parties. Each of the
Directors of Operations is responsible not only for the productivity of the
therapists employed by the
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Company but also for the compliance with the Company's policies and procedures
in billing for services rendered. As in the case of the Company's long-term care
facilities, the Company's corporate and regional staffs provide a wide-array of
support services to the Company's contract rehabilitation therapy subsidiaries.
The Company believes its billing rates for contract rehabilitation therapies are
both competitive and represent the price a "prudent buyer" would pay for such
services.
INSTITUTIONAL PHARMACY SERVICES. The Company's institutional pharmacy
business is organized into geographic pharmacy distribution centers in each of
the states where the Company provides these services. In each of the pharmacy
distribution centers, the Company employs pharmacists to fill prescriptions
ordered in each of the facilities with which the Company has contracted. Each of
these pharmacy distribution centers also mix out and supply enteral and
parenteral supplies as ordered in addition to all legally required
pharmaceutical consulting services. These operations are supervised by a Vice
President of Pharmacy Services. In addition, the regional managers recruit,
hire, train and supervise the pharmacists employed by the Company. As in the
case of the Company's other subsidiary operations, the Company's corporate staff
provides a wide array of support services to the pharmacy subsidiaries.
NON-INVASIVE MEDICAL DIAGNOSTICS. The Company's non-invasive medical
diagnostic business is headquartered in Albuquerque, New Mexico and is divided
into several geographic regions. Each of these regions is supervised by a
regional supervisor, who recruits, hires, trains and supervises ultrasound
technicians who work either in the Company's hospital-based operations or in the
Company's mobile units. The Company also operates one of the largest physician
training programs in the medical diagnostic industry. The Company has
standardized operating procedures and monitors its technicians and staff to
assure consistency and quality of operations.
CLINICAL LABORATORY SERVICES. The Company's clinical laboratory operation
is based in Dallas, Texas, which is operated by the Vice President of Operations
for the clinical laboratory. A Medical Director supervises the testing of
samples at the laboratory. When a facility physician orders lab testing for a
patient, the necessary samples are drawn at the facility and shipped by
overnight delivery service to the Company's clinical laboratory. The ordered
tests are completed and the results are transmitted electronically back to the
facility. As is the case for the Company's other services, the Company's
corporate offices provide a wide array of support services to the Company's
clinical laboratory.
QUALITY ASSURANCE. The Company has developed a comprehensive quality
assurance program intended to maintain a high standard of care with respect to
all of the services it provides to patients. Under the Company's long-term and
subacute care quality assurance program, the care and services provided at each
facility are evaluated quarterly by a quality assurance team that reports
directly to the Company's management and to the administrator of each facility.
The Company's long-term and subacute quality assurance program is comprised
of a quality assurance checklist and a patient satisfaction survey and
evaluation. The checklist, completed quarterly by the regional quality assurance
nurses employed by the Company, provides for ongoing evaluation. Patient
satisfaction is evaluated through patient satisfaction surveys. Patients and
their
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families are encouraged to recognize employees who demonstrate outstanding
performance. Bonuses paid to facility administrators are dependent in part upon
the rankings of their facility in such surveys. In order to assist patients and
their families in resolving any concerns they may have, the Company has also
established a resident advocacy program. The Company has also developed a
specialized quality assurance program for its Alzheimer's living centers.
Each of the Company's specialty health care subsidiaries has developed a
comprehensive quality assurance program and system intended to maintain a high
quality of care and/or services to the Company's patients or customers.
SOURCES OF REVENUES
The Company derives net patient care revenues principally from public
funding through the Medicaid and Medicare programs and also from private pay
patients and non-affiliated long-term care facilities.
Under the Medicare program and some state Medicaid programs, the Company's
long-term care facilities are periodically paid in amounts designed to
approximate the facilities' reimbursable costs or the applicable payment rate.
Actual costs incurred are reported by each facility annually. Such cost reports
are subject to audit, which may result in upward or downward adjustment for
Medicare payments received. Most of the Company's Medicaid payments are
prospective payments intended to approximate costs, and normally no retroactive
adjustment is made to such payments. See " -- Medicaid and Medicare" and
"Regulation."
The Company's charges for private pay patients are established by the
Company from time to time and the level of such charges is generally not subject
to regulatory control. The Company classifies payments from individuals who pay
directly for services without government assistance as private pay revenues. The
private pay classification includes revenues from sources such as commercial
insurers and health maintenance organizations. The Company bills private pay
patients and rehabilitation therapy customers (or their insurer or health
maintenance organization) on a monthly basis for services rendered. Such
billings are due and payable upon receipt. The Company typically receives
payments on a current basis from individuals and within 60 to 90 days of billing
from commercial insurers and health maintenance organizations.
Other revenue sources include revenues derived from institutional pharmacy
services, rehabilitation therapy services provided to non-affiliates and
Veterans Administration and Bureau of Indian Affairs contracts. The Company
generally receives payments from such other sources within 60 to 90 days of
billing.
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The following table identifies the Company's revenues attributable to each
of its revenue sources for the periods indicated below:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------------------------------------------------------
1995 1994 1993
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Medicaid............... $ 262,019 41% $ 173,077 46% $ 131,002 56%
Private pay and other
(1)................... 248,163 39 129,058 35 66,753 29
Medicare............... 128,898 20 72,960 19 34,444 15
----------- --- ----------- --- ----------- ---
Total.............. $ 639,080 100% $ 375,095 100% $ 232,199 100%
----------- --- ----------- --- ----------- ---
----------- --- ----------- --- ----------- ---
<FN>
- ------------------------
(1) Includes out-of-state Medicaid revenues.
</TABLE>
Changes in the mix of the Company's patients among Medicaid, Medicare and
private pay sources and with respect to different types of private pay sources
can significantly affect the revenues and profitability of the Company's
operations. There can be no assurance that payments under governmental and third
party payor programs will remain at current levels or that the Company will
continue to attract and retain private pay patients or maintain its current
payor or revenue mix. In an attempt to reduce the federal budget deficit, there
have been, and the Company expects there will continue to be, a number of
proposals to limit Medicare and Medicaid reimbursement for long-term care
services. The Company cannot at this time predict whether any of these pending
proposals will be adopted or, if adopted and implemented, what effect such
proposals would have on the Company.
COMPETITION
The Company's long-term care facilities principally compete for patients
with other long-term care facilities and, to a lesser extent, with home health
care providers and acute care hospitals. Construction of new long-term care
facilities near the Company's facilities could adversely affect the Company's
business. Many states require a Certificate of Need or impose similar
restrictions before a new long-term care facility can be constructed or
additional beds can be added to existing facilities.
In competing for patients, a facility's local reputation is of paramount
importance. Referrals typically come from acute care hospitals, physicians,
religious groups, other community organizations, health maintenance
organizations and patients' families and friends. Members of a patient's family
generally actively participate in selecting a long-term care facility. Other
factors that affect a facility's ability to attract patients include the
physical plant condition, the ability to identify and meet particular health
care needs in the community, the rates charged for services, and the
availability of personnel to provide the requisite care.
Competition for subacute care patients is increasing by virtue of market
entry by numerous other care providers. These market entrants include acute care
hospitals, rehabilitation hospitals and other specialty service providers. The
Company believes that its subacute care facilities are characterized by a high
level of acuity in patient care provided, which is one of the competitive
factors that distinguish subacute care providers. Other important competitive
factors
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include the reputation of the facility in the community, the services offered,
the availability of qualified nurses, local physicians and hospital support,
physical therapists and other personnel, the appearance of the facility and the
cost of services.
The Company also faces competition in its other specialty health care lines
of business (rehabilitation therapies, institutional pharmacy services,
Alzheimer's care, noninvasive medical diagnostic services and clinical
laboratory services), and the degree of competition varies depending on local
market conditions. Competitive factors include nature and quality of the
services offered, timeliness of delivery of services and availability of
qualified personnel.
A key element of the Company's strategy is to expand through the acquisition
of long-term care facilities and related businesses. In making such
acquisitions, the Company competes with other providers, some of which may have
greater financial resources than the Company. Certain of these providers are
operated by not-for-profit organizations and similar businesses that can finance
capital expenditures on a tax-exempt basis or receive charitable contributions
unavailable to the Company. There can be no assurance that suitable facilities
can be located, that acquisitions can be consummated or that acquired facilities
can be integrated successfully into the Company's operations.
EMPLOYEES
As of May 31, 1995, the Company employed approximately 15,500 persons, and
approximately 1,100 or 7.1% of the Company's employees in Ohio, Michigan,
Wisconsin and Montana were covered by collective bargaining contracts. Of the 24
collective bargaining contracts covering the Company's employees, five will
expire in calendar year 1995, five will expire in calendar year 1996, eight will
expire in calendar year 1997, and six will expire in calendar year 1998. The
Company believes it has had good relationships with the unions which represent
its employees, but it cannot predict the effect of continued union
representation or organizational activities on its future activities. The
Company also believes that it has good relationships with its non-union
employees.
Although the Company believes it is able to employ sufficient personnel to
staff its facilities adequately, a shortage of nurses in key geographic areas
could affect the ability of the Company to attract and retain qualified
professional health care personnel or could increase the Company's labor costs.
The Company competes with other health care providers for both professional and
non-professional employees and with non-health care providers for
non-professional employees.
ACQUISITIONS AND EXPANSION
Since its inception in mid-1986, the Company has expanded its operations
through the acquisition of long-term care facilities as well as through the
development of specialty hospitals and subacute care units. Factors considered
by the Company in targeting long-term care facilities that are acquisition
candidates include community demographics, the state's Medicaid program, the
local referral base of physicians and hospitals, local labor costs, the
availability of nursing personnel and the historical occupancy rates,
reimbursement mix and physical condition of the particular facility.
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<PAGE>
Growth through acquisition entails certain risks in that acquired facilities
could be subject to unanticipated business uncertainties or legal liabilities.
The Company seeks to minimize these risks through investigation and evaluation
of the facilities proposed to be acquired and through transaction structure and
indemnification. The various risks associated with the implementation of the
Company's growth strategies and uncertainties regarding the profitability of
such strategies may adversely affect the Company's performance. The ability of
the Company to acquire additional facilities depends upon its ability to obtain
appropriate financing and personnel.
Many of the Company's acquisitions have involved the leasing of facilities
in order to reduce the amount of capital expenditures. The Company typically
accomplishes this either through a direct lease of the facility from the owner
or the purchase of the facility from the owner followed by a sale/leaseback
transaction in which the Company becomes the lessee.
RECENT ACQUISITIONS
PEOPLECARE HERITAGE GROUP. On July 29, 1994, the Company acquired the
assets of peopleCARE Heritage Group ("peopleCARE"), a 13 facility long-term care
company located in Texas. Consideration given for the acquisition included the
issuance of 449,438 shares of the Company's common stock, valued at
approximately $10.0 million, assumption of capital lease obligations of
approximately $48.6 million for six facilities, and a cash payment of
approximately $56.0 million for fee simple title to seven facilities.
THE FACILITIES. On January 1, 1995, the Company acquired in two separate
transactions, 7 long-term care facilities located in Texas from Texas Health
Enterprises, Inc. The Company paid $24.0 million in cash for fee simple title to
two facilities and the transfer of operating leases for the five remaining
facilities.
DOCTORS HOSPITAL. On March 1, 1995, the Company acquired a 325 bed
long-term care facility located in Texas. In connection with this acquisition,
the Company issued 507,813 shares of the Company's common stock, valued at
approximately $13.0 million.
OTHER ACQUISITIONS. In addition to the recent acquisitions referred to
above, the Company has completed various other acquisitions since June 1, 1994
involving the purchase of an aggregate of 881 long-term care beds, two
rehabilitation providers, two sleep diagnostic clinics, two home respiratory
providers, two medical diagnostic services companies and the management of 1,020
long-term care beds. In connection therewith, the Company paid $17.8 million in
cash, issued 627,614 shares of the Company's common stock, valued at
approximately $16.5 million, guaranteed approximately $6.7 million of lease
obligations and became obligated to provide approximately $2.2 million of
working capital with respect to certain managed facilities.
Subsequent to fiscal year end, on June 19, 1995, the Company announced plans
to dispose of eight long-term care facilities. Six of the facilities to be
disposed of were among the 17 acquired in the merger with Greenery
Rehabilitation Group, Inc. ("Greenery") during fiscal 1994. The decision to sell
the facilities was based upon financial, regulatory and operational
considerations.
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<PAGE>
CMS MERGER
As previously discussed, the Company acquired CMS on July 10, 1995 by means
of a merger of a wholly owned subsidiary of the Company with and into CMS, with
CMS being the surviving corporation. Upon consummation of the CMS Merger, CMS
became a wholly owned subsidiary of the Company. The CMS Merger will be
accounted for as a pooling of interests. Under the terms of the merger
agreement, each outstanding share of CMS's common stock was converted into .5397
of one share of the Company's common stock, resulting in the Company issuing
approximately 20.9 million shares, valued at approximately $393.9 million, based
on the closing price of the Company's common stock on July 10, 1995.
Approximately 50.3 million shares of the Company's common stock were outstanding
following the merger. Additionally, outstanding options to acquire shares of
CMS's common stock were converted into options to acquire approximately 3.8
million shares of the Company's common stock.
MEDICAID AND MEDICARE
The Medicaid program is a joint federal/state medical assistance program for
individuals who meet certain income and resource standards. Participating states
administer their own Medicaid programs pursuant to state plans approved by the
United States Department of Health and Human Services (the "DHHS"). Facilities
participating in the Medicaid program are required to meet state licensing
requirements, to be certified in accordance with state and federal regulations
and to enter into contracts with the state to provide services at the rates
established by the state. All long-term care facilities operated by the Company
(other than its subacute care units and retirement housing facilities) are
certified under the appropriate state Medicaid programs.
Although all state Medicaid programs are subject to federal approval, the
reimbursement methodologies and rates vary significantly from state to state.
Reimbursement rates are typically determined by the state from "cost reports"
filed annually by each facility, on a prospective or retrospective basis. Under
a prospective system, per diem rates are established (generally on an annual
basis) based upon certain historical costs of providing services, adjusted to
reflect factors such as inflation and any additional services required to be
performed. Retroactive adjustments, if any, are based on a recomputation of the
applicable reimbursement rate following an audit of cost reports generally
submitted at the end of each year. Reimbursable costs normally include the costs
of providing health care services to patients, administrative and general costs,
and the costs of property and equipment. Not all costs incurred are reimbursed,
however, because of cost ceilings applicable to both operating and fixed costs.
However, many state Medicaid programs include an incentive allowance for
providers whose costs are less than the ceilings and who meet other
requirements. A provider may not bill a Medicaid recipient for the portion of
its costs for Medicaid-covered services that are not reimbursed by Medicaid. A
provider may bill a Medicaid recipient for requested goods or services that are
not covered by Medicaid. There can be no assurance that Medicaid reimbursement
will be sufficient to cover actual costs incurred by the Company with respect to
Medicaid services rendered.
Medicare is a federal insurance program under the Social Security Act
("SSA") primarily for individuals age 65 and over and is supervised by the
Health Care Financing Administration ("HCFA"), a division of DHHS. The Medicare
program reimburses for skilled nursing services and rehabilitative care on the
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<PAGE>
basis of the reasonable cost of providing care and for covered specialty
services on the basis of established charges. Like the various state Medicaid
programs, the federal Medicare program is regulated and subject to change. With
certain exceptions, Medicare is a retrospective cost-based reimbursement system
for long-term and subacute care and acute long-term care hospital providers in
which each facility receives an interim payment during the year, which is later
adjusted upward or downward to reflect actual allowable direct and indirect
costs of services (subject to certain cost ceilings) based on the submission of
a cost report at the end of each year. Medicare reimbursement for services
rendered to Medicare patients will generally cover the costs incurred by the
Company in delivering such services. There can be no assurance, however, that
Medicare reimbursement will be sufficient to cover actual costs incurred by the
Company with respect to Medicare services rendered.
Special regulations apply to Medicare reimbursement for rehabilitation
therapy and institutional pharmacy services provided by the Company at Company
operated facilities. In order for the Company to obtain reimbursement for more
than merely its cost of services these Medicare regulations generally require,
among other things, that (i) the Company's rehabilitation therapy and
institutional pharmacy subsidiaries must each be a bona fide separate
organization; (ii) a substantial part of the rehabilitation therapy services or
institutional pharmacy services, as the case may be, of the relevant subsidiary
must be transacted with non-affiliated entities, and there must be an open,
competitive market for the relevant services; (iii) rehabilitation therapy
services and institutional pharmacy services, as the case may be, must be
commonly obtained by long-term and/or subacute care facilities and/or acute
long-term care hospitals from other organizations and must not be a basic
element of patient care ordinarily furnished directly to patients by such
facilities and/or hospitals; and (iv) the prices charged to the Company's
long-term care facilities by the Company's rehabilitation therapy and
institutional pharmacy subsidiaries must be in line with the charges for such
services in the open market and no more than the prices charged by the Company's
rehabilitation therapy and institutional pharmacy subsidiaries under comparable
circumstances to non-affiliated long-term or subacute care facilities and/ or
acute long-term care hospitals. The Company believes that each of the foregoing
requirements is satisfied with respect to its rehabilitation therapy and
institutional pharmacy subsidiaries, and therefore the Company believes it
satisfies the requirements of those regulations.
In April 1995, the HCFA issued a memorandum to its Medicare fiscal
intermediaries (the "Fiscal Intermediaries") providing guidelines for assessing
costs incurred by impatient providers ("Care Providers") relating to payment of
occupational and speech language pathology services furnished under arrangements
that include contracts between therapy providers and Care Providers. While not
binding on the Fiscal Intermediaries, the HCFA memorandum suggested certain
rates to the Fiscal Intermediaries to assist them in making annual "prudent
buyer" assessments of speech and occupational therapy rates paid by Care
Providers during the Fiscal Intermediary's reviews of the Care Providers' cost
reports. The HCFA memorandum acknowledges that the rates noted in the memorandum
are not absolute limits and should only be used by the Fiscal Intermediaries for
comparative purposes. Following the issuance of the HCFA memorandum, meetings
between industry representatives and the HCFA have been held concerning the
merits of the HCFA memorandum. The HCFA has
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<PAGE>
asked industry associations and groups to provide recommendations for inclusion
in clarifying instructions to the Fiscal Intermediaries. In light of the fluid
nature of the HCFA memorandum, the Company cannot predict what effect, if any,
the HCFA memorandum will have on the Company or if the rates suggested in the
HCFA memorandum will continue to be recommended by the HCFA. Additionally, the
Company cannot determine at this time whether the rates suggested in the HCFA
memorandum would be used by the HCFA as a basis for developing possible future
regulations creating a salary equivalency based reimbursement system for speech
and occupational therapy services. Although management of the Company has
developed strategies to deal with potential future changes, there can be no
assurance that future changes in the administration or interpretation of
governmental health care programs will not have an adverse effect on the results
of operations of the Company.
REGULATION
The federal government and all states in which the Company operates regulate
various aspects of the Company's business. The Company's long-term care,
specialty hospital and subacute care facilities are subject to certain federal
certification statutes and regulations and to state statutory and regulatory
licensing requirements. In addition, long-term care facilities are subject to
various local building codes and other ordinances, with which the Company
believes it is in compliance.
All of the Company's long-term care facilities (other than its specialty
hospitals and retirement housing facilities) are licensed under applicable state
law and are certified or approved as providers under one or more of the
Medicaid, Medicare or Veterans Administration programs. Each of the Company's
specialty hospitals and certain of the Company's subacute care facilities are
either accredited by, or are in the process of obtaining accreditation by, the
Joint Commission on Accreditation of Healthcare Organizations. Each of the
Company's specialty hospitals is licensed as such under applicable state law and
is certified by Medicare as an acute long-term care hospital. Both initial and
continuing qualification of a long-term and/or subacute care facility to
participate in such programs depend upon many factors, including accommodations,
equipment, services, patient care, safety, personnel, physical environment and
adequate policies, procedures and controls. Licensing, certification and other
applicable standards vary from jurisdiction to jurisdiction and are revised
periodically. To be certified as an acute long-term care hospital, the Company's
specialty hospitals must satisfy certain conditions. These include an average
length of stay for patients of greater than 25 days and, when the specialty
hospital is located within another health care facility such as the Company's
long-term care facilities, a separate governing body, a separate medical
director, a separate medical staff, a separate administrator and separate
self-sustained operating functions must be maintained.
Effective October 1, 1990, the Omnibus Budget Reconciliation Act of 1987
("OBRA") eliminated the different certification standards for "skilled" and
"intermediate care" nursing facilities under the Medicaid program in favor of a
single "nursing facility" standard. This standard requires, among other things,
that the Company have at least one registered nurse on each day shift and one
licensed nurse on each other shift and increases training requirements for
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<PAGE>
nurses aides by requiring a minimum number of training hours and a certification
test before a nurse's aide can commence work. States continue to be required to
certify that nursing facilities provide "skilled care" in order to obtain
Medicare reimbursement.
In late 1994, DHHS published the final new OBRA enforcement regulations in
response to certain adverse judicial determinations concerning its previously
issued state operations manual pertaining to survey procedures. Certain aspects
of the new enforcement regulations became effective on July 1, 1995. The new
enforcement regulations dictate to each state what such state's OBRA compliance
plan must provide. Specifically, each state plan must contain the following
remedies to be enforced against facilities that provide substandard care: (a)
termination of the Medicaid provider agreement for the facility, (b) temporary
management of the facility, (c) denial of payment for new admissions, (d) civil
money penalties, (e) closure of the facility in emergency situations and
transfer of the residents, and (f) state monitoring of the facility. In
addition, each state is allowed to provide for certain alternative remedies
provided the state can demonstrate to the satisfaction of the HCFA that these
alternatives are effective in deterring non-compliance and in correcting
deficiencies. These alternative remedies include directed plans of correction to
bring the facility back into compliance and directed in-service training of
facility employees. While many of these remedies for substandard care have
existed in the past under prior regulations and procedures in each state, the
new enforcement regulations substantially curtail a facility's ability to
challenge the factual and/or legal propriety of a survey or the deficiencies
cited therein.
The Company believes that its facilities are in substantial compliance with
the various Medicare and Medicaid regulatory requirements applicable to them. In
the ordinary course of its business, however, the Company from time to time
receives notices of deficiencies for failure to comply with various regulatory
requirements. The Company reviews such notices to examine them for factual
correctness and, based on such examination, either takes appropriate corrective
action or challenges the propriety of the survey results and the deficiencies
cited therein.
In most cases, the Company and the reviewing agency will agree upon the
measure to be taken to bring the facility into compliance. In some cases or upon
repeat violations, the reviewing agency has the authority to take various
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 actions would
adversely affect a facility's ability to continue to operate, the ability of the
Company to provide certain services, and eligibility to participate in the
Medicare, Medicaid or Veterans Administration programs. Additionally, conviction
of abusive or fraudulent behavior with respect to one facility could subject
other facilities under common control or ownership to disqualification from
participation in the Medicare and Medicaid programs. Certain of the Company's
facilities have received notices in the past from state agencies that, as a
result of certain alleged deficiencies, the agency was assessing a fine and/or
taking steps to decertify the facility from participation in the Medicare and
Medicaid programs. In all cases during fiscal 1995, such cited deficiencies were
remedied before any facilities were decertified,
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the Company successfully appealed the appropriateness of the cited deficiency
and such cited deficiencies were rescinded or the Company successfully
negotiated an amicable resolution of any such decertification action and the
facility remained certified for participation in the Medicare and/or Medicaid
programs. In addition, to date none of the Company's facilities has had its
license revoked.
The SSA and DHHS regulations provide for exclusion of providers and related
persons from participation in the Medicare and Medicaid programs if
they have been convicted of a criminal offense related to the delivery of an
item or service under either of these programs or if they have been convicted,
under state or federal law, of a criminal offense relating to neglect or abuse
of residents in connection with the delivery of a health care item or service.
Further, individuals or entities and their affiliates may be excluded from the
Medicaid and Medicare programs under certain circumstances including, but not
limited to, conviction relating to fraud, license revocation or suspension, or
filing claims for excessive charges or unnecessary services or failure to
furnish services of adequate quality. Penalties for violation include
imprisonment for up to five years, a fine of up to $25,000, or both. Further,
the provider could also be excluded from the Medicaid and Medicare programs. In
addition, Executive Order 12549 prohibits any corporation or facility from
participating in federal contracts if it or its principals have been disbarred,
suspended or are ineligible, or have been voluntarily excluded, from
participating in federal contracts.
Additionally, the federal Medicare/Medicaid Anti-Fraud and Abuse Amendments
to the Social Security Act (the "Anti-Kickback Law") make it a criminal felony
offense to knowingly and willfully offer, pay, solicit or receive remuneration
in order to induce business for which reimbursement is provided under the
Medicare or Medicaid programs. In addition to criminal penalties, including
fines up to $25,000 and five years imprisonment per offense, violations of the
Anti-Kickback Law or related federal laws can lead to civil monetary penalties
and exclusion from the Medicare and Medicaid programs from which the Company
receives substantial revenues. The Anti-Kickback Law has been broadly
interpreted to make remuneration of any kind, including many types of business
and financial arrangements among providers, such as joint ventures, space and
equipment rentals, management and personal services contracts, and certain
investment arrangements, illegal if any purpose of the remuneration or financial
arrangement is to induce a referral.
DHHS has promulgated regulations which describe certain arrangements that
will be deemed to not constitute violations of the Anti-Kickback Law (the "Safe
Harbors"). The Safe Harbors described in the regulations are narrow and do not
cover a wide range of economic relationships that many hospitals, physicians and
other health care providers consider to be legitimate business arrangements not
prohibited by the statute. Because the regulations do not purport to
comprehensively describe all lawful or unlawful economic arrangements or other
relationships between health care providers and referral sources, hospitals and
other health care providers having these arrangements or relationships may not
be required to alter them in order to ensure compliance with the Anti-Kickback
law. Failure to qualify for a Safe Harbor may, however, subject a particular
arrangement or relationship to increased regulatory scrutiny. On September 21,
1993, DHHS published proposed regulations for comment in the Federal Register
establishing additional Safe Harbors. As of August 16, 1995,
20
<PAGE>
such additional regulations have not been adopted. The Company cannot predict
the final form these regulations will take or their effect, if any, on the
Company's business. Since the passage of the Safe Harbors in July 1991, a number
of "Fraud Alerts" have been distributed by DHHS setting forth certain practices
that DHHS considers suspect under the Anti-Kickback Law. Additionally, on July
21, 1995, DHHS published a proposed rule aimed at clarifying the existing Safe
Harbors. As of August 16, 1995, such rule has not been adopted. The Company
cannot predict the final form such rule will take or its effect, if any, on the
Company's business.
In August 1993, President Clinton signed the Omnibus Budget Reconciliation
Act of 1993, which included certain amendments to Section 1877 of the SSA
dealing with "Physician Ownership of, and Referral to, Healthcare Entities,"
commonly known as the "Stark Bill." The amendments, referred to as "Stark II,"
significantly broadened the scope of prohibited physician self-referrals
contained in the original Stark Bill, now commonly referred to as "Stark I," to
include, among others, referrals by physicians to entities with which the
physician has a financial relationship and that provide physical and
occupational therapy services that are reimbursable by Medicare or Medicaid.
Specifically, Stark II expanded the original Stark I anti-referral prohibition
from clinical laboratory services to a wide range of Medicare or Medicaid
covered services referred to as "designated services" including, but not limited
to, physical therapy, occupational therapy, radiology services, and inpatient
and outpatient hospital services, subject to certain statutory exceptions to
such referral prohibition. The type of financial relationships that can trigger
the referral prohibition are broad and include ownership or investment
interests, as well as compensation arrangements. Penalties for violating the law
are severe, including denial of payment for services furnished pursuant to
prohibited referrals, civil monetary penalties, and exclusion from the Medicare
and Medicaid programs. Stark II prohibits referrals by physicians and also
applies to financial relationships between family members of a physician and the
entities to which the physician refers.
Stark II became effective on December 31, 1994 and contemplated the
promulgation of regulations implementing the new provisions. As of August 16,
1995, no Stark II regulations have been published. In January 1995, the American
Hospital Association and eleven other healthcare organizations wrote to the HCFA
requesting a moratorium on Stark II sanctions until the date final regulations
are promulgated. In January 1995, the HCFA denied such moratorium request while
acknowledging the need for further advice and guidance regarding the Stark II
statute and distributing a Program Memorandum to intermediaries and carriers
setting forth general information and DHHS' enforcement plans for Stark II. Such
memorandum stated the HCFA's intention, pending final Stark II regulations, to
rely, for enforcement purposes, on the language of the Stark II statute.
Additionally, the HCFA set forth its intentions to publish a final rule for
comment in early 1995 covering Stark I and its plan to utilize such regulations,
once final, in enforcing Stark II in those cases where interpretations of the
law in the context of referrals for clinical lab services apply equally to
situations involving referrals for designated services in Stark II. On August
14, 1995, Stark I final regulations were published for comment. The Company
cannot predict the final form that such Stark I and/or Stark II regulations will
take or the effect that such regulations, and the interpretations thereof, will
have on the Company.
21
<PAGE>
The Company believes that its business practices and contractual
arrangements generally satisfy the Anti-Kickback Law, Stark I, and Stark II
requirements and proscriptions. See "Item 3. Legal Proceedings." Both the Anti-
Kickback Law and Stark II are broadly drafted, however, and their application is
often uncertain. Since the inquiry under both laws is highly factual, it is not
possible to predict how they may be applied to certain arrangements between the
Company and other health care providers. Although the Company believes that its
operations and practices are in compliance with the Anti-Kickback and Stark II
laws, there can be no assurance that enforcement authorities will not assert
that the Company, or one of its facilities, or certain transactions into which
they have entered, has violated or is violating such Anti-Kickback or Stark II
law, or that if any such assertions were made, that the Company would prevail,
or whether any sanction imposed would have a material adverse effect on the
operations of the Company. The Company intends to monitor regulations under, and
interpretations of, the Stark II bill to determine whether any modifications to
its operations will be necessary as a result of such final regulations or
statute interpretations. Even the assertion of a violation of the Anti-Kickback
Law, Stark II or similar laws could have a material adverse effect upon the
Company.
In addition, from time to time, legislation is introduced or regulations are
proposed at the federal and state levels that would further affect or restrict
relationships and compensation or financial arrangements among health care
providers. The Company cannot predict whether any proposed legislation or other
legislation or regulations applicable to the Company will be adopted, the final
form that any such legislation or regulations might take, or the effect that any
such legislation or regulations might have on the Company.
The Company is also subject to various antitrust regulations. On September
17, 1994 the Department of Justice (the "DOJ") and the Federal Trade Commission
(the "FTC") issued updated and expanded enforcement Policy Statements that
provide insight into how the agencies enforce the antitrust laws with regard to
joint ventures, networks and other joint activities in the health care industry.
The 1994 Policy Statements provide insight to the DOJ's and FTC's analytical
process regarding antitrust issues applicable to the health care industry and
provide new guidelines applicable to transactions resulting from changes the
health care industry is experiencing as hospitals explore new ways to cooperate
with each other to provide quality, cost-effective services.
On May 3, 1995 President Clinton announced the creation of "Operation
Restore Trust." A joint federal/state initiative, Operation Restore Trust as
initially developed was to apply to nursing homes, home health agencies, and
suppliers of medical equipment to these providers in the five states of New
York, Florida, California, Illinois and Texas. On June 14, 1995, the Office of
Inspector General ("OIG") of DHHS announced that the program has been expanded
to hospices in those states as well.
The program is designed to focus audit and law enforcement efforts on
geographic areas and provider types receiving large concentrations of Medicare
and Medicaid dollars. According to DHHS statistics, the targeted states account
for nearly 40% of all Medicare and Medicaid beneficiaries. Under Operation
Restore Trust, the OIG and HCFA, along with the Administration on Aging, intend
to undertake a variety of activities to address fraud and abuse by nursing
22
<PAGE>
homes and home health providers. These activities will include financial audits,
creation of a Fraud and Waste Report Hotline, and increased investigations and
enforcement activity.
On June 12, 1995 the OIG of DHHS announced implementation of the Voluntary
Disclosure Program (the "VDP") as part of Operation Restore Trust. Patterned
after the disclosure program in place at the Department of Defense, the program
is being implemented in pilot form in the five targeted states under Operation
Restore Trust. It is intended to provide incentives for specified, qualifying
providers and suppliers to come forward and voluntarily disclose instances of
corporate wrongdoing affecting the Medicare and Medicaid programs. DHHS intends
eventually to expand the program although there is some dispute as to whether
the program will prove sufficient to elicit the desired disclosure.
The Company believes its operations and practices comply with these illegal
remuneration and fraud and abuse provisions. If any of the Company's financial
practices failed to comply with the fraud and antiremuneration or fraud and
abuse laws, the Company could be materially adversely affected. The Company,
however, is unable to predict the effect of future administrative or judicial
interpretations of these laws, 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 assurance that such laws will ultimately be interpreted in a manner
consistent with the Company's practices.
As of May 31, 1995, 135 of the Company's long-term care facilities were
certified to receive benefits provided under Medicare as skilled nursing
facilities. As stated previously, to participate in the Medicare program, a
facility must be licensed and certified as a provider of skilled nursing
services. In areas where the demand for skilled nursing services is low or where
the availability of the requisite registered nursing personnel is limited, the
Company has opted not to seek such skilled licensure and certification. As of
August 1, 1995, each of the Company's ten licensed specialty hospitals is
certified to participate in the Medicare program as acute long-term care
hospitals and complies with the certification standards enunciated previously.
All states in which the Company operates, other than California, Colorado,
Texas, New Mexico and Kansas, have adopted Certificate of Need or similar laws
that generally require that a state agency approve certain acquisitions and
determine that a need exists prior to the addition of beds or services, the
implementation of other changes, or the incurrence of certain capital
expenditures. State approvals are generally issued for a specified maximum
expenditure and require implementation of the proposal within a specified period
of time. Failure to obtain the necessary state approval can result in the
inability to provide the service, to operate the facility, to complete the
acquisition, addition or other change, and can also result in the imposition of
sanctions or adverse action on the facility's license and adverse reimbursement
action.
In connection with Horizon's acquisition of Greenery in February 1994, the
Massachusetts Department of Public Health (the "Department") deemed the Company
to be neither suitable nor responsible in connection with its initial
application to the Department for a license to acquire and operate the
Massachusetts facilities then operated by Greenery, due in part to certain of
Horizon's
23
<PAGE>
historical certification and decertification experiences in other states.
Horizon appealed that determination. To resolve the matter, Horizon entered into
an agreement with the Department under which the Department agreed, subject to
compliance by Horizon with the terms of the agreement, to issue three successive
six-month probationary licenses to Horizon for the acquisition and operation of
those facilities and, during the 18-month duration of the agreement, Horizon
agreed to commit the management of the patient care at the Massachusetts
facilities to a management company owned and operated by a Horizon regional vice
president. During the pendency of the agreement, Horizon derives substantially
all of the financial benefits from the operation of these facilities. In
addition, Horizon agreed not to file any application seeking to acquire or
manage any other long-term care or assisted living facility in Massachusetts for
the duration of the agreement.
The first of the probationary licenses contemplated under the agreement was
issued on May 24, 1994 and the second was issued effective as of November 26,
1994. In May 1995, the Company filed its applications for renewal probationary
licenses with the Department. In June 1995, the Department determined to issue
renewal probationary licenses for four of the Massachusetts facilities and full
licensure for three of the Massachusetts facilities. Horizon believes that its
relationship with the Department has improved since the Company began operating
in Massachusetts in February 1994. There is no assurance that the Company will
be able, however, to obtain full licensure for the four Massachusetts facilities
that remain subject to the probationary licenses and the agreement. Based in
part on these regulatory concerns as well as financial and operational
considerations, on June 19, 1995, the Company announced its intention to dispose
of these four facilities in connection with the sales of a total of eight
long-term care facilities. The sale of all eight facilities is expected to occur
during fiscal 1996.
Both Houses of Congress have adopted a budget resolution or "blueprint" that
is intended to control health care costs, improve access to medical services for
uninsured individuals and balance the federal budget by the year 2002. At
present, no budgetary reconciliation or appropriations have been approved by
either House of Congress. However, certain members of Congress have introduced
budget reconciliation proposals. These proposals have not yet been reported out
of committee. These proposals include reduced rates of growth in the Medicare
and Medicaid programs and proposals to block grant funds to the states to
administer the Medicaid program. While these proposals do not, at this time,
appear to affect the Company adversely, significant changes in reimbursement
levels under Medicare or Medicaid and changes in applicable governmental
regulations could affect the future results of operations of the Company. There
can be no assurance that future legislation, health care or budgetary, will not
have an adverse effect on the future results of operations of the Company.
The Company's contract rehabilitation therapy, institutional pharmacy and
clinical laboratory businesses provide Medicare and Medicaid covered services
and supplies to long-term and subacute care facilities and acute long-term care
hospitals under arrangements with both facilities and/or hospitals of the
Company and non-affiliated facilities and/or hospitals. Under these
arrangements, the Company's rehabilitation therapy and institutional pharmacy
subsidiaries bill and are paid by the facility and/or hospitals for the services
actually rendered
24
<PAGE>
and the details of billing the Medicare and Medicaid programs are handled
directly by the facility and/or hospitals. As a result, the Company's contract
rehabilitation therapy business is not Medicare and Medicaid certified and does
not enter into provider agreements with the Medicare and Medicaid programs.
However, the Company's institutional pharmacy business is authorized to bill the
Medicare program directly for parenteral and enteral services, which encompasses
a narrow range of supplies, equipment and nutrients. The institutional pharmacy
business is also authorized to bill the Medicaid program directly for
prescription services related to Medicaid patients. In addition, the Company's
home respiratory therapy, non-invasive medical diagnostic and sleep diagnostic
business maintain Medicare and, in certain instances, Medicaid billing numbers
and directly bill Medicare and/or Medicaid for services rendered.
INSURANCE
The Company maintains malpractice and public liability insurance in the
amount of $1.8 million per occurrence with umbrella coverage in the amount of
$20 million per occurrence. This policy, which is renewable by the carrier at
the beginning of each policy period, was most recently renewed on June 1, 1995
for the policy period terminating on June 1, 1996. The Company believes that the
insurance coverage that it maintains is adequate and customary in the long-term
care industry. There can be no assurance, however, that such insurance will be
adequate to cover the Company's liabilities or that the Company will be able to
continue its present insurance coverage on satisfactory terms, if at all. To
date, the Company has not been subject to a judgment or entered into a
settlement agreement with respect to an insured liability claim that required
out-of-pocket expenditures by the Company. The Company is self-insured with
respect to the health insurance benefits made available to its employees. The
Company is also self-insured with respect to its workers' compensation coverage
in Nevada, New Mexico, Ohio, Oklahoma, Kansas and Montana. In Texas, the Company
is a non-subscriber to the State's workers' compensation pool. The Company
believes that it has adequate resources to cover any self-insured claims, and
the Company maintains excess liability coverage to protect it against unusual
claims in these areas. However, there can be no assurance that the Company will
continue to have such resources available to it or that substantial claims will
not be made against the Company.
25
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --- ----------------------------------------------------------
<S> <C> <C>
Neal M. Elliott 55 President, Chief Executive Officer and Chairman of the
Board
Klemett L. Belt, Jr. 51 Executive Vice President and a Director
Robert A. Ortenzio 38 Executive Vice President and a Director
Michael A. Jeffries 45 Senior Vice President -- Operations and a Director
Charles H. Gonzales 39 Senior Vice President -- Subsidiary Operations and a
Director
Ernest A. Schofield 37 Senior Vice President, Treasurer and Chief Financial
Officer
Scot Sauder 39 Vice President of Legal Affairs, Secretary and General
Counsel
</TABLE>
Neal M. Elliott, the Company's President, Chief Executive Officer and
Chairman of the Board, has served in those capacities since July 1986. Mr.
Elliott, a certified public accountant, worked for Price Waterhouse & Co. prior
to joining The Hillhaven Corporation ("Hillhaven") as Controller in 1969. In
1970, Mr. Elliott became Vice President of Finance for Hillhaven and served as
such until 1983. From 1983 to 1986, Mr. Elliott served as President of the
long-term care group of National Medical Enterprises, Inc., a health care
company then affiliated with Hillhaven. Mr. Elliott is a director of LTC
Properties, Inc., a real estate investment trust which invests in health care
related real estate.
Klemett L. Belt, Jr., has served as Executive Vice President and a Director
of the Company since July 1986. Mr. Belt also served as Chief Financial Officer
and Treasurer of the Company from 1986 to September 1994. A certified public
accountant, Mr. Belt served five years as an Assistant Regional Audit Director
for the Department of Health, Education and Welfare. He was a Senior Manager for
KPMG Peat Marwick from 1978 to 1983, when he joined Hillhaven as Vice President
of Finance, a position he held from 1983 to July 1986.
Robert A. Ortenzio has been an Executive Vice President and a Director of
the Company since July 1995. He is also President and Chief Operating Officer of
CMS, and has served in those capacities since May 1989 and April 1988,
respectively. He joined CMS as a Senior Vice President in February 1986. Prior
thereto, he was a Vice President of Rehab Hospital Services Corporation. Mr.
Ortenzio is also a director of American Oncology Resources, Inc. and
OccuSystems, Inc. Mr. Ortenzio is the son of Rocco A. Ortenzio, Vice-Chairman of
the Board.
Charles H. Gonzales, the Company's Senior Vice President -- Subsidiary
Operations has served in such position since January 1992. He became a Director
of the Company in January 1992. From September 1986 to January 1992,
26
<PAGE>
Mr. Gonzales, a certified public accountant, served as Senior Vice President of
Government Programs for the Company. From June 1984 to September 1986, Mr.
Gonzales was National Director of Reimbursement for Hillhaven.
Michael A. Jeffries, the Company's Senior Vice President of Operations, has
served the Company in such position since June 1989. He became a Director of the
Company in January 1992. Mr. Jeffries has 15 years of experience in the
long-term health care industry. From 1984 to 1989, he served as Senior Vice
President of Operations for the Central Division of Beverly Enterprises, Inc.,
an operator of long-term health care facilities. From 1983 to 1984 Mr. Jeffries,
a certified public accountant, held the positions of Vice President of
Operations and Assistant to the President of Beverly Enterprises, Inc.
Ernest A. Schofield, the Company's Senior Vice President, Treasurer, and
Chief Financial Officer, has been with the Company since July 1987. From July
1987 to April 1988, he served as a reimbursement analyst for the Company, from
April 1988 to May 1989, he served as Assistant Controller, from May 1989 to
November 1990, he served as Vice President and Controller of the Company, and
from November 1990 to August 1994 he served as Vice President -- Finance. He
assumed his present position in September 1994. Prior to joining the Company,
Mr. Schofield, a certified public accountant, held various positions in public
accounting with Fox & Company and as a partner with Olivas & Company (certified
public accounting firms).
Scot Sauder, the Company's Vice President of Legal Affairs, Secretary and
General Counsel, has been with the Company since September 1993. From September
1993 to September 1994, he served as General Counsel to the Company. From
September 1994 through July 1995, he served as Secretary and General Counsel to
the Company. Prior to joining the Company, Mr. Sauder, an attorney licensed to
practice in Texas and certain federal courts, was associated with Palmer &
Palmer, P.C., and was a director of Geary, Glast & Middleton, P.C., and Smith &
Underwood, P.C. (law firms).
27
<PAGE>
ITEM 2. PROPERTIES
Set forth below is certain information with respect to the Company's
facilities at May 31, 1995:
<TABLE>
<CAPTION>
AVERAGE OCCUPANCY (1)
LEASED/ -------------------------------- ACQ.
NAME LOCATION BEDS OWNED 1995 1994 1993 1992 1991 DATE
------------------------- ----------------- ---- ---------- ---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Colonial Manor Youngstown, OH 100 Leased 87% 89% 94% 84% 81% 6/1/87
Boardman Community Care Center Youngstown, OH 221 Leased 91% 87% 94% 85% 73% 6/1/87
Imperial Skilled Care Center Warren, OH 121 Leased 84% 81% 89% 90% 86% 6/1/87
Horizon Village Nursing & Rehabilitation Center Warren, OH 222 Leased 88% 84% 90% 86% 73% 6/1/87
Horizon Meadows Alliance, OH 78 Leased 84% 85% 93% 74% 86% 6/1/87
Wyant Woods Care Center Akron, OH 200 Leased 89% 90% 85% 90% 93% 6/1/87
Rosewood Manor Galion, OH 90 Leased 83% 85% 85% 92% 96% 6/1/87
Edison Health Care Center Milan, OH 96 Leased 67% 80% 92% 85% 85% 6/1/87
Village Care Center Galion, OH 58 Leased 100% 98% 88% 99% 99% 6/1/87
Heritage Care Center Shelby, OH 50 Leased 92% 91% 92% 88% 84% 6/1/87
Meadowview Care Center Seville, OH 100 Owned 90% 90% 93% 97% 99% 6/1/87
Village Square Nursing Center East Orwell, OH 50 Leased 97% 95% 94% 96% 95% 6/1/87
Washington Square Nursing Center Warren, OH 100 Owned 95% 91% 99% 96% 85% 6/1/87
Canterbury Villa of Alliance Alliance, OH 100 Leased 99% 95% 94% 98% 99% 6/1/87
Ridge Crest Care Center Warren, OH 100 Leased 79% 86% 87% 92% 83% 6/1/87
Baltic Country Manor Baltic, OH 100 Owned 86% 87% 95% 86% 86% 6/1/87
Brookhaven Convalescent Center Toledo, OH 174 Leased 91% 91% 95% 78% 91% 4/5/91
Glanzman-Colonial Nursing Center Toledo, OH 94 Leased 87% 85% 93% 94% 92% 4/5/91
Auburn Manor Washington CH, OH 100 Leased 92% 92% 98% 97% -- 10/1/91
Hudson Elms Nursing Home Hudson, OH 50 Leased 96% 98% 94% 100% 98% 4/1/91
Crestwood Care Center Shelby, OH 159 Owned 88% 90% 91% -- -- 9/1/92
Park Avenue Villa Mansfield, OH 30 Owned 93% 90% 79% -- -- 9/1/92
Autumnwood of Sylvania Toledo, OH 99 Leased 95% 97% 95% -- -- 10/1/92
Horizon Healthcare & Specialty Center Daytona Beach, FL 158 Owned 97% 86% 92% 75% 88% 6/1/87
Horizon Specialty & Rehabilitation Center of
Kissimmee Kissimmee, FL 120 Owned 88% 51% -- -- -- 1/1/94
Bay Breeze Nursing & Retirement Center Gulf Breeze, FL 180 Managed 97% -- -- -- -- 7/1/94
Bluffs Nursing Home Pensacola, FL 120 Managed 93% -- -- -- -- 7/1/94
Horizon Specialty Center of Pensacola Pensacola, FL 120 Managed 96% -- -- -- -- 7/1/94
Lake Eustis Care Center Eustis, FL 90 Managed 95% -- -- -- -- 7/1/94
Silvercrest Manor Crestview, FL 60 Managed 96% -- -- -- -- 7/1/94
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
AVERAGE OCCUPANCY (1)
LEASED/ -------------------------------- ACQ.
NAME LOCATION BEDS OWNED 1995 1994 1993 1992 1991 DATE
------------------------- ----------------- ---- ---------- ---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Southern Oaks Health Care Center St. Cloud, FL 120 Managed 94% -- -- -- -- 9/1/94
Windsor Manor Starke, FL 120 Managed 95% -- -- -- -- 7/1/94
Bryant Nursing Center Edmond, OK 60 Leased 87% 94% 89% 87% 73% 11/1/86
East Moore Nursing Center Moore, OK 104 Leased 94% 84% 98% 95% 93% 11/1/86
Horizon Specialty Hospital Edmond, OK 43 Leased 83% 80% 71% 36% -- 6/7/91
Quail Creek Nursing and Retirement Center Oklahoma City, OK 110 Managed 85% 94% 87% -- -- 6/24/92
Desert Lane Care Center Las Vegas, NV 172 Leased 93% 97% 96% 95% 86% 8/1/88
Boulder City Care Center Boulder City, NV 87 Leased 97% 96% 97% 95% 94% 8/1/88
Sierra Convalescent Center Carson City, NV 146 Leased 94% 96% 90% 92% 83% 8/1/88
North Las Vegas Care Center N. Las Vegas, NV 182 Leased 94% 94% 97% 96% 90% 8/1/88
Fallon Convalescent Center Fallon, NV 144 Leased 86% 93% 82% 90% -- 8/27/91
Washoe Care Center Sparks, NV 122 Leased 93% 90% 92% 90% -- 8/27/91
Hearthstone of Northern Nevada Sparks, NV 125 Leased 90% 98% 95% 91% -- 10/1/91
Horizon Specialty Hospital - Las Vegas Las Vegas, NV 27 Leased 84% 62% 21% 11% -- 4/1/92
Physicians Hospital for Extended Care Reno, NV 99 Leased 90% 93% 97% 97% -- 5/1/92
Carson Convalescent Center Carson City, NV 73 Leased 94% 90% 98% -- -- 4/1/93
VegasValley Convalescent Center Las Vegas, NV 102 Owned 97% 94% 94% -- -- 5/1/93
Henderson Convalescent Hospital Henderson, NV 266 Leased 95% -- -- -- -- 6/1/94
Golden Plains Health Care Center Hutchinson, KS 119 Leased 89% 78% 88% 93% 95% 11/1/86
Cherry Creek Village Nursing Center Wichita, KS 86 Leased 92% 98% 98% 86% 78% 11/1/86
Cherry Creek Village Retirement Center Wichita, KS 110 Leased 75% 91% 97% 82% 79% 11/1/86
Horizon Specialty Hospital - Wichita Wichita, KS 26 Leased 70% 83% 37% -- -- 2/26/93
Indian Creek Nursing Center Overland Park, KS 120 Owned 47% 54% 69% -- -- 8/1/92
Indian Meadows Nursing Center Overland Park, KS 79 Owned 96% 94% 93% -- -- 8/1/92
Horizon Specialty Hospital - Kansas City Overland Park, KS 28 Owned 52% 68% 23% -- -- 3/3/93
Casa Arena Blanca Nursing Center Alamogordo, NM 117 Leased 94% 93% 89% 82% 89% 3/22/91
Casa Del Sol Senior Care Center Las Cruces, NM 62 Leased 100% 99% 90% 99% 98% 3/22/91
Casa Real Healthcare Center Santa Fe, NM 118 Leased 96% 93% 91% 91% 92% 3/22/91
Las Cruces Nursing Center Las Cruces, NM 120 Leased 96% 96% 86% 88% 93% 4/5/91
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
AVERAGE OCCUPANCY (1)
LEASED/ -------------------------------- ACQ.
NAME LOCATION BEDS OWNED 1995 1994 1993 1992 1991 DATE
------------------------- ----------------- ---- ---------- ---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Southwest Senior Care Center Las Vegas, NM 102 Leased 92% 98% 96% 96% 95% 12/1/86
San Juan Manor Farmington, NM 94 Leased 97% 98% 90% 100% 98% 12/1/86
McKinley Manor Gallup, NM 62 Leased 98% 96% 95% 97% 90% 12/1/86
Red Rocks Care Center Gallup, NM 102 Leased 92% 97% 94% 98% 94% 1/1/87
Pecos Valley Care Center Fort Sumner, NM 44 Leased 77% 73% 96% 82% 86% 1/1/87
Van Ark Care Center Tucumcari, NM 54 Leased 95% 98% 99% 98% 100% 1/1/87
Ruidoso Care Center Ruidoso, NM 85 Owned 95% 96% 87% 95% 98% 1/1/87
Sunset Villa Nursing Home Roswell, NM 52 Leased 98% 92% 94% 99% 100% 8/1/87
La Siesta Retirement Center Hobbs, NM 55 Leased 73% 76% 77% 91% 97% 9/1/87
Hobbs Health Care Center Hobbs, NM 118 Leased 89% 90% 94% 90% 95% 10/1/87
Horizon Healthcare Nursing Center Santa Fe, NM 120 Leased 87% 88% 91% 88% 87% 9/1/88
Horizon Healthcare Nursing Center Albuquerque, NM 58 Leased 98% 98% 92% 95% 95% 8/1/89
Casa Maria Health Care Center Roswell, NM 118 Leased 95% 96% 86% -- -- 11/1/92
Valle Norte Caring Center Albuquerque, NM 113 Owned 96% 86% -- -- -- 9/11/92
Hacienda de Salud - Bloomfield Bloomfield, NM 90 Leased 83% -- -- -- -- 3/1/95
Hacienda de Salud - Espanola Espanola, NM 120 Leased 66% -- -- -- -- 3/1/95
Hacienda de Salud - Silver City Silver City, NM 100 Leased 72% -- -- -- -- 3/1/95
Sunshine Haven Lordsburg, NM 67 Leased 62% -- -- -- -- 3/1/95
Roswell Nursing Center Roswell, NM 120 Managed 86% -- -- -- -- 6/1/94
Horizon Specialty Hospital - Albuquerque Albuquerque, NM 25 Leased 57% -- -- -- -- 6/6/94
Butte Convalescent Center Butte, MT 100 Leased 94% 93% 97% 85% 89% 3/1/87
Butte Park Royal Butte, MT 186 Leased 83% 83% 91% 84% 82% 4/1/87
Colonial Manor of Deer Lodge Deer Lodge, MT 60 Owned 96% 94% 97% 95% -- 1/1/92
Colonial Manor of Whitefish Whitefish, MT 60 Owned 99% 98% 99% 98% -- 1/1/92
Missouri River Manor Great Falls, MT 278 Leased 94% 94% 95% -- -- 1/1/93
Elms Haven Care Center Thornton, CO 183 Owned 99% 99% 100% -- -- 8/1/92
Sable Care Center Aurora, CO 120 Owned 93% -- -- -- -- 1/1/95
Birchwood Care Center Marne, MI 239 Leased 86% 85% 87% -- -- 12/1/92
Lynwood Manor Adrian, MI 99 Owned 96% 99% 97% -- -- 12/1/92
Silverbrook Manor Niles, MI 100 Leased(2) 90% 91% 90% -- -- 12/1/92
Willowbrook Manor Flint, MI 101 Leased(2) 95% 98% 96% -- -- 12/1/92
Greenery Extended Care Center at Farmington Farmington, MI 153 Owned 73% 94% -- -- -- 2/11/94
Neurologic Center at Michigan Howell, MI 176 Owned 91% 87% -- -- -- 2/11/94
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
AVERAGE OCCUPANCY (1)
LEASED/ -------------------------------- ACQ.
NAME LOCATION BEDS OWNED 1995 1994 1993 1992 1991 DATE
------------------------- ----------------- ---- ---------- ---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Greenery Healthcare Center at Clarkston Clarkston, MI 120 Owned 95% 95% -- -- -- 2/11/94
Hartford Care Center Hartford, WI 115 Owned 89% 87% 90% -- -- 12/1/92
Janesville Healthcare Center Janesville, WI 104 Leased 70% 75% 80% -- -- 12/1/92
Family Heritage Care Center BlackRiver Falls, 156 Leased 88% 77% 45% -- -- 12/1/92
WI
Harbor View Care Center Corpus Christi, 116 Owned 87% 93% 93% -- -- 10/1/92
TX
Mountain View Place El Paso, TX 193 Leased 88% 93% 94% -- -- 10/1/92
Medical Center Nursing Facility San Antonio, TX 138 Leased 96% 95% 86% -- -- 12/1/92
Horizon Healthcare El Paso El Paso, TX 182 Owned 69% 70% 74% -- -- 10/1/92
San Jacinto Manor Deer Park, TX 96 Leased 85% 87% 89% -- -- 4/1/93
Horizon Specialty Hospital -- Corpus Christi Corpus Christi, 31 Owned 72% 82% -- -- -- 7/19/93
TX
Horizon Specialty Hospital -- San Antonio San Antonio, TX 30 Leased 48% 59% -- -- -- 12/3/93
Horizon Specialty Hospital -- El Paso El Paso, TX 32 Owned 39% 33% -- -- -- 8/24/93
Horizon Specialty Hospital -- Dallas Dallas, TX 66 Owned 44% 48% -- -- -- 2/11/94
Horizon Specialty Hospital -- Lubbock Lubbock, TX 30 Owned 47% -- -- -- -- 10/10/94
Horizon Nursing Center & Assisted Living Mt. Pleasant, TX 139 Owned 82% 77% -- -- -- 5/1/94
Parkwood Place Lufkin, TX 157 Owned 69% 92% -- -- -- 5/1/94
Blanco Vista Nursing & Rehabilitation Center San Antonio, TX 143 Leased 67% -- -- -- -- 1/1/95
Doctors Healthcare Center Dallas, TX 325 Owned 67% -- -- -- -- 3/1/95
Heritage Country Manor Sherman, TX 120 Owned 90% -- -- -- -- 8/1/94
Heritage Estates Ft. Worth, TX 152 Owned 93% -- -- -- -- 8/1/94
Heritage Forest Lane Dallas, TX 120 Leased 98% -- -- -- -- 8/1/94
Heritage Gardens Carrollton, TX 152 Owned 96% -- -- -- -- 8/1/94
Heritage Manor Canton Canton, TX 110 Leased 99% -- -- -- -- 8/1/94
Heritage Manor Longview Longview, TX 150 Owned 95% -- -- -- -- 8/1/94
Heritage Manor Plano Plano, TX 196 Owned 75% -- -- -- -- 8/1/94
Heritage Oaks Arlington, TX 204 Leased 96% -- -- -- -- 8/1/94
Heritage Park Plano, TX 120 Owned 98% -- -- -- -- 8/1/94
Heritage Place Mesquite, TX 152 Leased 97% -- -- -- -- 8/1/94
Heritage Place of Grand Prairie Grand Prairie, TX 166 Owned 56% -- -- -- -- 1/1/95
Heritage Village Richardson, TX 280 Leased 95% -- -- -- -- 8/1/94
Heritage Western Hills Ft. Worth, TX 270 Owned 88% -- -- -- -- 8/1/94
Longmeadow Care Center Justin, TX 120 Owned 92% -- -- -- -- 1/1/95
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
AVERAGE OCCUPANCY (1)
LEASED/ -------------------------------- ACQ.
NAME LOCATION BEDS OWNED 1995 1994 1993 1992 1991 DATE
------------------------- ----------------- ---- ---------- ---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
North Shores Healthcare Center Houston, TX 150 Owned 84% -- -- -- -- 1/1/95
Seven Oaks Care Center Bonham, TX 108 Leased 90% -- -- -- -- 1/1/95
Spanish Meadows Nursing Center Brownsville, TX 120 Leased 79% -- -- -- -- 11/1/94
Sun Valley Health Care Center Harlinger, TX 120 Leased 91% -- -- -- -- 11/1/94
Valley Grande Manor Brownsville, TX 180 Leased 76% -- -- -- -- 1/1/95
Winterhaven Nursing Home Houston, TX 160 Leased 99% -- -- -- -- 8/1/94
Meadows Retirement Village Brownsville, TX 94 Leased 41% -- -- -- -- 11/1/94
Golden Plains Care Center Canyon Canyon, TX 90 Managed 88% -- -- -- -- 1/1/95
Greenery Extended Care Center of Beverly Beverly, MA 172 Owned 93% 98% -- -- -- 2/11/94
Center of Neurobehavioral Rehabilitation at
Waltham Waltham, MA 16 Leased 100% 100% -- -- -- 2/11/94
Greenery Rehabilitation Center Brighton, MA 201 Leased 94% 95% -- -- -- 2/11/94
Greenery Rehabilitation & Skilled Nursing Center
of Hyannis Hyannis, MA 142 Leased 85% 96% -- -- -- 2/11/94
Greenery Rehabilitation & Skilled Nursing Center
of Middleboro Middleboro, MA 124 Leased 96% 94% -- -- -- 2/11/94
Greenry Extended Care Center of North Andover North Andover, MA 122 Leased 96% 97% -- -- -- 2/11/94
Greenery Extended Care Center Worcester, MA 173 Leased 96% 99% -- -- -- 2/11/94
Greenery Extended Care Center at Danvers Danvers, MA 162 Owned 96% 99% -- -- -- 2/11/94
Greenery Rehabilitation Center at Pacifica Pacifica, CA 68 Owned 68% 73% -- -- -- 2/11/94
Neurologic Rehabilitation Center of the Gulf
Coast Slidell, LA 118 Owned 85% 87% -- -- -- 2/11/94
Greenery Rehabilitation & Skilled Nursing Center
at Meadowlands Canonburg, PA 120 Leased 96% 97% -- -- -- 2/11/94
Horizon Rehabilitation Center Durham, NC 125 Owned 95% 94% -- -- -- 2/11/94
Horizon Specialty Center at Canton Harbor Baltimore, MD 160 Owned 98% 97% -- -- -- 2/11/94
Clifton House Rehabilitation Center New Haven, CT 195 Managed 67% 59% -- -- -- 2/11/94
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
AVERAGE OCCUPANCY (1)
LEASED/ -------------------------------- ACQ.
NAME LOCATION BEDS OWNED 1995 1994 1993 1992 1991 DATE
------------------------- ----------------- ---- ---------- ---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Greenery Extended Care Center at Cheshire Cheshire, CT 210 Managed 99% 99% -- -- -- 2/11/94
Greenery Rehabilitation Center at Waterbury Waterbury, CT 180 Managed 98% 94% -- -- -- 2/11/94
---- ---- ---- ---- ---- ----
Aggregate Occupancy 17,776 88% 89% 90% 89% 88%
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
<FN>
- ----------------------------------
(1) Average occupancy is computed by dividing the total bed days occupied by
the total licensed bed days available for the last month of the period
indicated.
(2) Each of these facilities is managed by the Company pursuant to management
agreements. However, because the management fee earned by the Company is a
net income management fee, the Company treats these facilities as leased
facilities.
</TABLE>
See also the information included under the heading "Facilities" in Item 1
of Part I of this Annual Report on Form 10-K, which is incorporated by reference
herein.
ITEM 3. LEGAL PROCEEDINGS
As previously disclosed by CMS, in late fall 1994, CMS learned of the DOJ
investigations being handled by the United States Attorney's offices in
Harrisburg, Pennsylvania and Sacramento, California. In this connection,
representatives of the DOJ visited or contacted operating facilities and office
locations of CMS for the purpose of interviewing certain of CMS's employees and
reviewing certain documents. CMS has been cooperating in the investigation. The
Company's management is not aware, however, of any company-wide practices of the
type covered by the DOJ's inquiries or that are not in compliance with the rules
and regulations applicable to CMS's operations. The Company cannot predict what
effect, if any, these inquiries will have on the Company's business.
The Company is a party to litigation arising in the ordinary course of its
business. Management does not believe the results of any such litigation, even
if the outcome were to be unfavorable, would have a material adverse effect on
the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
33
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's common stock is listed on the New York Stock Exchange (the
"NYSE") under the symbol "HHC." The following table sets forth, for the periods
indicated, the high and low sale price per share for the Company's common stock,
as reported on the NYSE Composite Tape.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal year ended May 31, 1995:
First Quarter................................... $26 $20 3/4
Second Quarter.................................. 30 24 1/2
Third Quarter................................... 29 1/8 23 3/4
Fourth Quarter.................................. 27 1/4 16 5/8
Fiscal year ended May 31, 1994:
First Quarter................................... $16 5/8 $12 1/8
Second Quarter.................................. 17 11 3/8
Third Quarter................................... 26 1/2 16 3/8
Fourth Quarter.................................. 26 1/8 19 7/8
</TABLE>
There were approximately 2,620 holders of record of the Company's common
stock as of August 10, 1995.
The Company has not paid or declared any dividends on its common stock since
its inception and anticipates that future earnings will be retained to finance
the continuing development of its business. 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, the success of the Company's business
activities, regulatory and capital requirements, the general financial condition
of the Company and general business conditions. The Company's credit facility
restricts the payment of dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" included in Item 7 of Part II of this Annual Report on Form 10-K,
which is incorporated by reference herein.
ITEM 6. SELECTED FINANCIAL DATA
The following selected income statement and balance sheet data for the
periods ended May 31, 1991 through May 31, 1995 have been derived from the
34
<PAGE>
Company's Consolidated Financial Statements. The information set forth below is
qualified by reference to and should be read in conjunction with the
Consolidated Financial Statements and related notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Earnings
Data:
Total operating revenues........... $ 639,080 $ 375,095 $ 232,199 $ 158,979 $ 110,672
--------- --------- --------- --------- ---------
Operating expenses:
Routine and other expenses....... 447,618 266,164 165,716 112,915 77,274
Administrative and general....... 63,960 40,165 25,489 17,076 12,941
Facility leases.................. 39,360 27,699 20,992 17,969 13,885
Depreciation and amortization.... 18,511 8,081 4,008 2,157 1,873
--------- --------- --------- --------- ---------
Total operating expenses..... 569,449 342,109 216,205 150,117 105,973
--------- --------- --------- --------- ---------
Earnings from operations......... 69,631 32,986 15,994 8,862 4,699
Interest........................... 18,456 6,240 4,252 2,207 2,569
--------- --------- --------- --------- ---------
Earnings before income taxes and
extraordinary item................ 51,175 26,746 11,742 6,655 2,130
Income taxes....................... 19,954 10,140 4,026 1,628 388
--------- --------- --------- --------- ---------
Net earnings before extraordinary
item.............................. 31,221 16,606 7,716 5,027 1,742
Extraordinary item (1)............. -- -- -- -- 88
--------- --------- --------- --------- ---------
Net earnings....................... $ 31,221 $ 16,606 $ 7,716 $ 5,027 $ 1,830
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings Per Common and Common
Equivalent Share:
Earnings before extraordinary
item............................ $ 1.16 $ 0.99 $ 0.66 $ 0.44 $ 0.24
Extraordinary item (1)........... -- -- -- -- 0.01
--------- --------- --------- --------- ---------
Net earnings per share....... $ 1.16 $ 0.99 $ 0.66 $ 0.44 $ 0.25
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings Per Common Share --
Assuming Full Dilution:
Earnings before extraordinary
item............................ $ 1.16 $ 0.91 $ 0.62 $ 0.44 $ 0.23
Extraordinary item (1)........... -- -- -- -- 0.01
--------- --------- --------- --------- ---------
Net earnings per share....... $ 1.16 $ 0.91 $ 0.62 $ 0.44 $ 0.24
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
MAY 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital.................. $ 152,993 $ 65,130 $ 18,898 $ 31,658 $ 4,479
Total assets..................... 723,756 406,451 153,170 103,619 55,740
Long-term debt and capital lease
obligations, excluding current
portion......................... 205,290 76,673 22,876 502 23,790
Convertible subordinated notes... 26,080 30,906 52,584 47,985 --
Total stockholders' equity....... 420,130 229,326 48,196 39,780 19,999
<FN>
- ------------------------------
(1) Extraordinary item consists of the utilization of net operating loss
carryforwards.
</TABLE>
35
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company adopted a strategic business plan in 1990 to increase its
specialty health care services as a percent of operating revenues. The Company
has pursued this strategy by acquiring long-term care facilities and integrating
its specialty health care services into those facilities, by acquiring providers
of specialty health care services, and by offering the Company's broad range of
specialty health care services to third parties. As a result, the Company's
operating revenues have grown from $105.7 million in fiscal 1990 to $639.1
million in fiscal 1995. Moreover, specialty health care services have grown from
$17.4 million, or 16.5% of operating revenues in fiscal 1990 to $284.4 million,
or 44.5% of operating revenues in fiscal 1995. The Company now provides a broad
range of specialty health care services including subacute care, rehabilitation
therapies, Alzheimer's care, institutional pharmacy services, non-invasive
medical diagnostic and sleep diagnostic testing services and clinical laboratory
services.
As previously discussed, the Company acquired CMS on July 10, 1995 by means
of a merger of a wholly owned subsidiary of the Company with and into CMS, with
CMS being the surviving corporation. Upon consummation of the CMS Merger, CMS
became a wholly owned subsidiary of the Company. The CMS Merger will be
accounted for as a pooling of interests. Under the terms of the merger
agreement, each outstanding share of CMS's common stock was converted into .5397
of one share of the Company's common stock, resulting in the Company issuing
approximately 20.9 million shares, valued at approximately $393.9 million based
on the closing price of the Company's common stock on July 10, 1995.
Approximately 50.3 million shares of the Company's common stock were outstanding
following the CMS Merger. Additionally, outstanding options to acquire shares of
CMS's common stock were converted into options to acquire approximately 3.8
million shares of the Company's common stock.
The Company's strategic business plan emphasizes operating and expanding its
long-term care and specialty programs and services in regionally concentrated
areas, including the midwest, southwest and northeast regions of the United
States. The Company is expanding its specialty health care programs and services
through the development of institutional pharmacies, acquisition and development
of therapy companies and medical diagnostic companies and the conversion and
renovation or acquisition of specialty hospitals. In turn, the acquisition of
long-term care facilities in certain geographic areas has enhanced the Company's
expansion of its specialty programs. Specifically, in certain geographic areas,
the Company's long-term care presence is a platform from which it can vertically
integrate its specialty health care programs and services.
CMS is one of the nation's largest providers of comprehensive inpatient and
outpatient medical rehabilitative services. CMS has a significant clinical and
market presence in each of the medical rehabilitation industry's three principal
sectors -- inpatient rehabilitation care, outpatient rehabilitation care and
contract rehabilitation therapies. CMS operates 37 freestanding rehabilitation
hospitals, provides outpatient rehabilitation services at more than 130
locations and manages 13 inpatient rehabilitation units for general acute care
hospitals. These services are provided in 20 states. CMS also provides physician
staffing services.
36
<PAGE>
The CMS Merger will be accounted for as a pooling of interests and will require
the restatement of all historical financial statements to combine the operations
of the two companies. On a pro forma basis reflecting the CMS pooling
combination and the disposal of the eight facilities previously discussed for
the year ended May 31, 1995, total operating revenues would be $1.6 billion or
approximately 2.4 times the Company's 1995 total operating revenues.
These growth objectives have been, and will continue to be, the basis of a
strategic business plan that has resulted in net earnings of $31.2 million,
$16.6 million and $7.7 million for the fiscal years ended May 31, 1995, 1994 and
1993, respectively, and $31.0 million for the year ended May 31, 1995, on a pro
forma basis giving effect to the CMS Merger and the planned disposition of the
eight facilities previously discussed.
See Note 13 of Notes to Consolidated Financial Statements included elsewhere
herein for further discussion of the CMS Merger, the planned disposition of the
eight long-term care facilities and pro forma combined financial information.
RESULTS OF OPERATIONS
The following table sets forth certain statement of earnings data expressed
as a percentage of total operating revenues:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Total operating revenues............................. 100.0% 100.0% 100.0%
----------- ----------- -----------
Total routine expenses (1)........................... 78.8 80.3 80.8
Total property expenses (2).......................... 13.2 12.6 14.1
----------- ----------- -----------
Total operating expenses......................... 92.0 92.9 94.9
----------- ----------- -----------
Earnings from operations............................. 8.0 7.1 5.1
Income taxes......................................... 3.1 2.7 1.7
----------- ----------- -----------
Net earnings..................................... 4.9% 4.4% 3.4%
----------- ----------- -----------
----------- ----------- -----------
<FN>
- ------------------------
(1) Includes the cost of nursing services, all other direct service costs and
general and administrative costs.
(2) Includes facility leases, interest, depreciation and amortization and other
property related costs.
</TABLE>
37
<PAGE>
The following table sets forth a summary of the Company's total operating
revenues by type of service and the percentage of total operating revenues that
each such service represented for each period indicated:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------ ------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Long-term care
services.............. $ 342,183 53% $ 226,187 60% $ 165,802 71%
Specialty health care
services (1).......... 284,452 45 141,733 38 62,854 27
Other operating
revenues (2).......... 12,445 2 7,175 2 3,543 2
----------- --- ----------- --- ----------- ---
Total operating
revenues.............. $ 639,080 100% $ 375,095 100% $ 232,199 100%
----------- --- ----------- --- ----------- ---
----------- --- ----------- --- ----------- ---
<FN>
- ------------------------
(1) Includes revenues derived from subacute care, rehabilitation and other
therapies, institutional pharmacy operations, Alzheimer's care, noninva-
sive medical diagnostic testing services and clinical laboratory services.
(2) Includes revenues derived from management fees, interest income, rental
income and other miscellaneous services.
</TABLE>
The following table sets forth the number of facilities operated by the
Company at the end of each period indicated, the aggregate number of licensed
beds contained in such facilities and average occupancy of such beds during the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Number of facilities (end of period) (1).................... 149 109 81
Number of licensed beds (end of period) (2)................. 17,776 12,251 8,962
Average occupancy (3)....................................... 88% 89% 90%
<FN>
- ------------------------
(1) Includes the Company's long-term care facilities and specialty hospitals,
in the latter case including those located within discrete areas of
long-term care facilities.
(2) "Licensed beds" refers to the number of beds for which a license has been
issued, which may vary in some instances from beds available for use.
(3) Average occupancy is computed by dividing the total bed days occupied by
the total licensed bed days available for the last month of the period
indicated.
</TABLE>
YEAR ENDED MAY 31, 1995 COMPARED TO YEAR ENDED MAY 31, 1994
Total operating revenues increased approximately $264.0 million or 70.4% for
fiscal 1995 as compared with fiscal 1994. The majority of such increase is the
result of the Company's expansion, both internally and through acquisition,
since May 31, 1994. Greenery, which was acquired in February 1994, contributed
$130.7 million of operating revenues in fiscal 1995 as compared to $46.2 million
contributed during the three and one-half months Greenery was owned by the
38
<PAGE>
Company in fiscal 1994. peopleCARE, which was acquired in July 1994, contributed
$78.3 million of operating revenues in fiscal 1995. The Company added the
operations of 13 long-term care facilities in such transaction. During fiscal
1995, the Company also completed other acquisitions resulting in the addition of
approximately 4,000 long-term care beds, a skilled nursing center, two
rehabilitation providers, two sleep diagnostic clinics, two home respiratory
providers, and two medical diagnostic services companies. The Company also
entered into managment contracts involving approximately 1,020 long-term care
beds. An additional cause of the increase in revenues is increases in Medicare,
Medicaid and private pay rates and increased utilization of higher margin
specialty health care services. Revenues attributable to specialty health care
services as a percentage of total operating revenues increased to 45% in fiscal
1995 from 38% in fiscal 1994. The average increase in rates per patient day
across all pay types was approximately 8.8%. The increase in operating revenues
attributable to such rate increases was approximately $37.2 million. The average
occupancy of the Company's facilities remained essentially flat at 88% and as a
consequence had little or no effect on operating revenues.
Routine expenses increased approximately $202.6 million or 67.3% in fiscal
1995 from $301.2 million in fiscal 1994. This increase is due primarily to the
increase in the number of long-term care facilities, specialty hospitals and
subacute care units operated by the Company, as well as the costs associated
with the expansion of specialty health care services and programs.
Facility lease expense, depreciation and amortization and other property
expense increased approximately 60.5% for the same period. This increase is
directly related to the increased number of facilities operated.
Interest expense nearly tripled during this period. This increase is due
primarily to the following factors: (i) an increase in the Company's average
investment in owned facilities due in large part to the Greenery merger late in
fiscal 1994 and the peopleCARE acquisition early in fiscal 1995, (ii) capital
lease interest associated with the six peopleCARE leased facilities, (iii)
assumption of $54.8 million of Greenery bonds late in fiscal 1994 and (iv)
increased borrowings under the Company's then existing credit facility in
connection with other facility acquisitions during fiscal 1995.
As a result of the foregoing factors, net earnings increased to $31.2
million or $1.16 per share for the year ended May 31, 1995. This compares to net
earnings of $16.6 million or $.91 per share for fiscal 1994.
YEAR ENDED MAY 31, 1994 COMPARED TO YEAR ENDED MAY 31, 1993
Total operating revenues increased approximately $142.9 million or 61.5% for
fiscal 1994 as compared with fiscal 1993. The largest portion of such increase
is the result of the Company's expansion, both internally and through
acquisition, since May 31, 1993. Greenery, which was acquired in February 1994,
contributed $46.2 million of operating revenues in fiscal 1994. At May 31, 1994
(without giving effect to the Greenery merger), the Company operated three more
long-term care facilities, three more specialty hospitals and three more
subacute care units than it did at May 31, 1993. As a result of the consummation
of the Greenery merger in February 1994, the Company added the operations of 17
rehabilitation and skilled nursing facilities and three managed facilities.
39
<PAGE>
During fiscal 1994, the Company also expanded its institutional pharmacy
services, its rehabilitation services in Ohio, Nevada and Texas, and its
clinical laboratory services in Texas. An additional cause of the increase in
revenues is increases in Medicare, Medicaid and private pay rates and increased
utilization of higher margin specialty health care services. Revenues
attributable to specialty health care services as a percentage of total
operating revenues increased to 38% in fiscal 1994 from 27% in fiscal 1993. The
average increase in rates per patient day across all pay types was approximately
9.7%. The increase in operating revenues attributable to such rate increases was
approximately $18.8 million. The average occupancy of the Company's facilities
remained essentially flat at 89%.
Routine expenses increased approximately $113.7 million or 60.6% in fiscal
1994 from $187.6 million in fiscal 1993. This increase is due primarily to the
increase in the number of long-term care facilities, specialty hospitals and
subacute care units operated by the Company, as well as the costs associated
with the expansion of specialty health care services and programs. Greenery
accounted for $37.9 million of such increase.
Facility lease expense, depreciation and amortization and other property
expense increased approximately 42.7% for the same period. This increase is
directly related to the increased number of facilities operated. Of the total
increase, Greenery accounted for approximately 20%.
Interest expense increased approximately 46.8% during this period. This
increase is related to draws under the Company's then-existing credit facility,
and assumption of certain bonds and secured real property indebtedness in
connection with facility acquisitions during fiscal 1994. Of the total increase,
interest expense related to Greenery accounted for approximately 10%.
As a result of the foregoing factors, net earnings increased to $16.6
million or $.91 per share for the year ended May 31, 1994. This compares to net
earnings of $7.7 million or $.62 per share for fiscal 1993. The Greenery merger,
which was accounted for as a purchase, had no significant effect on the
Company's results of operations for the year ended May 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
OPERATIONS. At May 31, 1995, the Company's working capital was $153.0
million and included cash and cash equivalents of $20.4 million as compared with
$65.1 million in working capital and $6.5 million in cash and cash equivalents
at May 31, 1994. During the two years ended May 31, 1995 and 1994, the Company's
operating activities used $27.7 million and $21.7 million of net cash,
respectively, primarily as a result of increases in patient care and estimated
Medicare and Medicaid settlements accounts receivable in each period. Patient
care accounts receivable, net of allowances for doubtful accounts, increased
$42.8 and $46.2 million during the fiscal years ended May 31, 1995 and 1994,
respectively. Of the 1995 amount, $5.8 million was generated by the acquisition
of peopleCARE. Of the 1994 amount, $16.2 million was acquired in the Greenery
merger.
EXPANSION PROGRAM. The net cash used by the Company's investing activities
increased from $47.4 million in fiscal 1993 to $49.5 million in fiscal 1994 and
40
<PAGE>
to $138.4 million in fiscal 1995. The primary uses of cash from investing
activities have been capital expenditures including, specifically, in fiscal
1994, the Greenery merger, and in fiscal 1995, the peopleCARE acquisition and
other acquisitions. Capital expenditures were $53.4 million in fiscal 1993,
$40.6 million in fiscal 1994, and $38.0 million in fiscal 1995. The principal
purpose of the capital expenditures during each of these periods has been to
fund the Company's internal and external expansion program. While capital
expenditures during the three years ended May 31, 1995 aggregated $132.0
million, only $18.4 million was expended for maintenance of existing facilities.
In addition, the Greenery merger consumed $7.8 million in cash in fiscal 1994.
In fiscal 1995, the peopleCARE acquisition consumed $61.3 million in cash and
other individually insignificant acquisitions consumed $37.1 million in cash.
The Company's expansion program requires funds: (i) to acquire assets and to
expand and improve existing and newly acquired facilities; (ii) to discharge
funded indebtedness assumed or otherwise acquired in connection with the
acquisitions of facilities and properties; and (iii) to finance the increase in
patient care and other accounts receivable resulting from acquisitions. The
funds necessary to meet these requirements have been provided principally by the
Company's financing activities and, to a lesser extent, from the sale of
marketable securities and the sale of land, buildings and equipment. During the
three years ended May 31, 1995, proceeds from the issuance of Company debt, net
of debt repayments and repurchases, amounted to $91.2 million. In addition, the
proceeds from the issuance of Common Stock totaled $184.0 million.
SOURCES. At May 31, 1995, the available credit under the Company's then-
existing credit facility was $133.4 million. To the extent that the Company's
operations and expansion program require cash expenditures in excess of the
amounts available to it under the Credit Facility (as defined below), management
of the Company believes that the Company can obtain the necessary funds through
other financing activities, including the issuance and sale of debt and equity
securities in public and private markets. In addition, the Company anticipates
that the previously discussed disposal of eight facilities will result in net
cash proceeds of approximately $9.6 million.
CREDIT FACILITY
The Company is the Borrower under a Credit Agreement dated July 6, 1995 (the
"Credit Facility") with NationsBank of Texas, N.A., as Agent, and the lenders
party thereto. The aggregate revolving credit commitment under the Credit
Facility is $250 million, of which the Company had borrowed $105.1 million at
July 31, 1995. Borrowings under the Credit Facility bear interest, payable
monthly, at a rate equal to either, as selected by the Company, the Alternate
Base Rate (as therein defined) of the Agent in effect from time to time, or the
Adjusted London Inter-Bank Offer Rate plus 0.625% to 1.25% per annum, depending
on the maintenance of specified financial ratios. The applicable interest rate
at July 31, 1995 was 8.75% and 6.875% on the Alternate Base Rate and Adjusted
London InterBank Offer Rate advances, respectively. In addition, borrowings
thereunder mature in June 2000 and are secured by a pledge of the capital stock
of all subsidiaries of the Company, other than subsidiaries of CMS. Under the
terms of the Credit Facility, the Company is required to maintain certain
financial ratios and is restricted in the payment of dividends to an amount
which shall not exceed 25% of the Company's net income for the prior fiscal
year.
41
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Financial Statements of the Company:
Report of Independent Public Accountants......................................... 43
Consolidated Balance Sheets...................................................... 44
Consolidated Statements of Earnings.............................................. 46
Consolidated Statements of Stockholders' Equity.................................. 47
Consolidated Statements of Cash Flows............................................ 48
Notes to Consolidated Financial Statements....................................... 49
Schedule II -- Valuation and Qualifying Accounts................................... 78
</TABLE>
42
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Horizon/CMS Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of Horizon/ CMS
Healthcare Corporation (formerly, Horizon Healthcare Corporation) (a Delaware
corporation) and subsidiaries as of May 31, 1995 and 1994, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended May 31, 1995. These financial
statements and financial statement schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement 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 financial statements referred to above present fairly,
in all material respects, the financial position of Horizon/CMS Healthcare
Corporation and subsidiaries as of May 31, 1995 and 1994, and the results of
their operations and their cash flows for the three years in the period ended
May 31, 1995, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
July 21, 1995
43
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
MAY 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents..................................... $ 20,443 $ 6,522
Patient care accounts receivable, net of allowances for
doubtful accounts of $7,648 in 1995 and $8,158 in 1994....... 119,685 76,862
Estimated Medicare and Medicaid settlements................... 20,432 6,702
Current portion of notes receivable........................... 1,013 535
Prepaid and other assets...................................... 32,668 17,071
Deferred income taxes......................................... 6,200 6,490
----------- -----------
Total current assets........................................ 200,441 114,182
----------- -----------
NOTES RECEIVABLE, EXCLUDING CURRENT PORTION..................... 19,883 22,436
LAND, BUILDINGS AND EQUIPMENT, net.............................. 376,232 193,426
LEASE PURCHASE COSTS, net of accumulated amortization of $4,368
in 1995 and $3,344 in 1994..................................... 8,841 6,507
LEASE, UTILITY AND OTHER DEPOSITS............................... 14,166 11,870
DEFERRED INCOME TAXES........................................... -- 781
GOODWILL, net of accumulated amortization of $1,948 in 1995 and
$234 in 1994................................................... 79,606 41,673
OTHER INTANGIBLE ASSETS, at cost, net of accumulated
amortization of $3,910 in 1995 and $1,808 in 1994.............. 8,502 7,609
OTHER ASSETS, at cost........................................... 16,085 7,967
----------- -----------
Total assets................................................ $ 723,756 $ 406,451
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
44
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
MAY 31, 1995 AND 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt............................. $ 1,785 $ 1,698
Current portion of capital lease obligations.................. 597 --
Accounts payable.............................................. 14,045 14,200
Accrued payroll............................................... 13,376 10,680
Accrued property and payroll taxes............................ 8,819 14,318
Other accrued liabilities..................................... 8,826 8,156
----------- -----------
Total current liabilities................................... 47,448 49,052
----------- -----------
LONG-TERM DEBT, EXCLUDING CURRENT PORTION....................... 157,733 76,673
OBLIGATIONS UNDER CAPITAL LEASES, EXCLUDING CURRENT PORTION..... 47,557 --
DEFERRED LEASE CREDIT........................................... 14,824 20,494
DEFERRED INCOME TAXES........................................... 9,984 --
CONVERTIBLE SUBORDINATED NOTES.................................. 26,080 30,906
----------- -----------
Total liabilities........................................... 303,626 177,125
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 12)
STOCKHOLDERS' EQUITY
Common stock of $.001 par value. Authorized 150,000,000 shares
in 1995 and 30,000,000 in 1994; 29,814,185 shares issued with
29,309,296 shares outstanding in 1995 and 22,738,073 shares
issued with 22,409,927 shares outstanding in 1994............ 30 23
Additional paid-in capital.................................... 363,986 200,272
Retained earnings............................................. 61,701 29,771
Treasury stock................................................ (5,587) (740)
----------- -----------
Total stockholders' equity.................................. 420,130 229,326
----------- -----------
Total liabilities and stockholders' equity.................. $ 723,756 $ 406,451
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
45
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
NET PATIENT CARE REVENUES.......................... $ 626,634 $ 367,920 $ 228,656
OTHER OPERATING REVENUES........................... 12,446 7,175 3,543
----------- ----------- -----------
Total operating revenues....................... 639,080 375,095 232,199
----------- ----------- -----------
ROUTINE EXPENSES
Nursing services................................. 191,111 117,709 79,012
Ancillary services............................... 144,724 76,448 37,552
Dietary services................................. 39,760 25,471 18,148
Facility operations and maintenance.............. 24,063 14,865 9,895
Housekeeping services............................ 14,095 8,857 6,148
Laundry services................................. 7,520 4,924 3,386
Administrative and general....................... 63,960 40,165 25,489
Other services................................... 18,589 12,785 7,924
----------- ----------- -----------
Total routine expenses......................... 503,822 301,224 187,554
----------- ----------- -----------
PROPERTY EXPENSES
Facility leases.................................. 39,360 27,699 20,992
Interest......................................... 18,456 6,240 4,252
Depreciation and amortization.................... 18,511 8,081 4,008
Other............................................ 7,756 5,105 3,651
----------- ----------- -----------
Total property expenses........................ 84,083 47,125 32,903
----------- ----------- -----------
Total operating expenses....................... 587,905 348,349 220,457
----------- ----------- -----------
Earnings before income taxes................... 51,175 26,746 11,742
INCOME TAXES....................................... 19,954 10,140 4,026
----------- ----------- -----------
Net earnings..................................... $ 31,221 $ 16,606 $ 7,716
----------- ----------- -----------
----------- ----------- -----------
Net earnings per common and common equivalent
share........................................... $1.16 $0.99 $0.66
----------- ----------- -----------
----------- ----------- -----------
Net earnings per share -- assuming full
dilution........................................ $1.16 $0.91 $0.62
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
46
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
------------ ----------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1992..................... 11,392,382 $ 11 $ 35,060 $ 5,449 $ (740) $ 39,780
Exercise of stock purchase warrants, options
and issuance of shares under the employee
stock purchase plan........................ 246,944 -- 700 -- -- 700
Net earnings................................ -- -- -- 7,716 -- 7,716
------------ --- ---------- --------- --------- ----------
Balance at May 31, 1993..................... 11,639,326 11 35,760 13,165 (740) 48,196
Common stock offering, net of $1,365 of
issue costs................................ 4,025,000 4 58,215 -- -- 58,219
Common stock issued in connection with
acquisitions............................... 2,213,976 2 51,586 -- -- 51,588
Conversion of 6.75% convertible subordinated
notes, net of $1,897 previously capitalized
financing costs and $507 conversion
costs...................................... 4,522,500 5 51,861 -- -- 51,866
Exercise of stock options, warrants and
issuance of shares under the employee stock
purchase plan.............................. 337,271 1 2,850 -- -- 2,851
Net earnings................................ -- -- -- 16,606 -- 16,606
------------ --- ---------- --------- --------- ----------
Balance at May 31, 1994..................... 22,738,073 23 200,272 29,771 (740) 229,326
Common stock offering, net of $6,487 of
issue costs................................ 4,915,457 5 119,608 -- -- 119,613
Common stock issued in connection with
acquisitions............................... 1,776,924 2 38,181 759 -- 38,942
Exercise of stock options, warrants and
issuance of shares under the employee stock
purchase plan.............................. 383,731 -- 5,925 -- -- 5,925
Treasury stock acquired in payment for
stockholder's note......................... -- -- -- -- (4,847) (4,847)
Distribution to subsidiary shareholder...... -- -- -- (50) -- (50)
Net earnings................................ -- -- -- 31,221 -- 31,221
------------ --- ---------- --------- --------- ----------
Balance at May 31, 1995..................... 29,814,185 $ 30 $ 363,986 $ 61,701 $ (5,587) $ 420,130
------------ --- ---------- --------- --------- ----------
------------ --- ---------- --------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
47
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings........................................... $ 31,221 $ 16,606 $ 7,716
Adjustments to reconcile net earnings to net cash
provided by (used for) operating activities:
Depreciation and amortization........................ 18,511 8,081 4,008
Gain on sale of assets and redemption of convertible
subordinated notes.................................. (2,053) (2,142) --
Amortization of deferred lease credit................ (1,779) (523) --
Provision for losses on patient care receivables..... 2,201 1,593 1,163
Changes in assets and liabilities:
Patient care and settlements receivables........... (51,961) (30,039) (18,755)
Prepaid and other current assets................... (13,865) (8,006) (3,637)
Lease, utility and other deposits.................. (861) (5,564) (3,962)
Accounts payable................................... (2,396) (1,720) 2,998
Accrued payroll.................................... (2,099) (299) 2,536
Other current liabilities.......................... (5,318) 751 4,049
Deferred income taxes.............................. 654 (417) 4,453
--------- --------- ---------
Net cash provided by (used for) operating activities... (27,745) (21,679) 569
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable investment securities........... -- -- (9,192)
Proceeds from sale of marketable investment
securities............................................ -- -- 15,193
Payments received on notes receivable.................. 447 7,065 137
Issuance of notes receivable........................... (1,000) -- --
Capital expenditures................................... (38,023) (40,610) (53,378)
Proceeds from sale of land, building and equipment..... 6,983 1,036 9,363
Lease purchase costs expenditures...................... (66) (28) (3,385)
Cash used for acquisition of peopleCARE Heritage
Group................................................. (61,319) -- --
Cash used for merger of Greenery Rehabilitation Group,
Inc................................................... -- (7,763) --
Cash used for other acquisitions....................... (37,069) (2,965) --
Additions to other intangible assets................... (2,918) (2,887) (6,105)
Change in other assets................................. (5,439) (3,389) (7)
--------- --------- ---------
Net cash used by investing activities.................. (138,404) (49,541) (47,374)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt, net.................... 65,052 34,550 22,715
Repayment of debt, net................................. (4,300) (2,898) (152)
Repurchase of convertible subordinated notes........... (3,812) (19,999) --
Proceeds from issuance of common stock................. 123,180 60,161 700
Distribution to subsidiary stockholder................. (50) -- --
--------- --------- ---------
Net cash provided by financing activities.............. 180,070 71,814 23,263
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... 13,921 594 (23,542)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........... 6,522 5,928 29,470
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR................. $ 20,443 $ 6,522 $ 5,928
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
48
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Horizon/CMS Healthcare Corporation (formerly, Horizon Healthcare
Corporation) and its subsidiaries (collectively, the Company) is a leading
provider of long-term care and specialty health care services. The Company's
long-term care facilities provide skilled nursing care and basic patient
services with respect to daily living and general medical needs. The Company
also provides specialty health care services to its long-term care facilities
and outside parties. Such specialty health care services include licensed
specialty hospital services and subacute units, rehabilitation and other
therapies, institutional pharmacy services, Alzheimer's care, non-invasive
medical diagnostic testing services, home respiratory care services and clinical
laboratory services. Substantially all of these services are within the
long-term care market and, accordingly, the Company operates within a single
industry segment.
Subsequent to year end, in connection with the merger of a wholly owned
subsidiary of the Company with Continental Medical Systems, Inc. (CMS), the
Company changed its name to Horizon/CMS Healthcare Corporation (Note 13).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
NET PATIENT CARE REVENUES
Net patient care revenues are recorded at established billing rates or at
the amount realizable under agreements with third-party payors, primarily
Medicaid and Medicare. Revenues under third-party payor agreements in certain
states are subject to examination and retroactive adjustments, and amounts
realizable may change due to periodic changes in the regulatory environment.
Provisions for estimated third-party payor settlements are provided in the
period the related services are rendered. Differences between the amounts
accrued and subsequent settlements are recorded in operations in the year of
settlement.
A significant portion of the Company's revenue is derived from patients
under the Medicaid and Medicare programs. There have been and the Company
expects that there will continue to be a number of proposals to limit Medicare
and Medicaid reimbursement for long-term and rehabilitative care services. The
Company cannot predict at this time whether any of these proposals will be
adopted or, if adopted and implemented, what effect such proposals would have on
the Company.
CASH EQUIVALENTS
For purposes of the accompanying consolidated statements of cash flows, the
Company considers its highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents.
49
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION
Buildings and equipment are depreciated using the straight-line method over
the estimated useful lives of the assets (buildings -- 40 years; equipment -- 3
to 10 years). Maintenance and repairs are charged to expense as incurred. Major
renewals or improvements are capitalized.
LEASE PURCHASE COSTS
Lease purchase costs represent amounts paid by the Company to obtain lease
rights to long-term care facilities and are amortized over the initial and
renewal terms of the leases expected to be renewed.
GOODWILL
Goodwill has resulted from various acquisitions made by the Company. All
acquisitions were accounted for as purchases and the excess of the total
acquisition cost over the fair value of the net assets acquired was recorded as
goodwill. Goodwill is amortized on the straight-line basis over 40 years.
The Company maintains separate financial records for each of its acquired
entities and performs periodic strategic and long-range planning for each
entity. The Company evaluates its goodwill quarterly to determine potential
impairment by comparing the carrying value to the undiscounted future cash flows
of the related assets. The Company modifies the life or adjusts the value of its
goodwill if any impairment is identified.
OTHER INTANGIBLE ASSETS
Costs incurred in obtaining long-term financing are amortized over the term
of the related indebtedness using the effective interest method. Costs to
initiate and implement therapy operations and new nursing or specialty units are
amortized on a straight-line basis for periods up to five years.
DEFERRED LEASE CREDIT
The deferred lease credit represents obligations for above market rate lease
terms on operating leases recorded under purchase accounting. This credit is
amortized over the terms of the related leases to yield level lease payments,
net of discount accretion. In the event such facilities are converted from
operating lease to ownership status, the related remaining deferred lease
credit, if any, is eliminated in the recording of the related facility purchase.
INCOME TAXES
The Company and certain of its subsidiaries file a consolidated Federal
income tax return. On June 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes." The
adoption of FAS 109 changes the Company's method of accounting for income taxes
from the deferred method (APB Opinion No. 11) to an asset and liability
approach. Previously, the Company deferred the past tax effects of
50
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
temporary differences between financial reporting and taxable income. The asset
and liability approach requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences between
the carrying amounts and the tax bases of assets and liabilities.
MARKET VALUE DISCLOSURES
The market value of all financial instruments approximates their carrying
value unless indicated otherwise in the applicable notes to the consolidated
financial statements.
WORKERS' COMPENSATION
Workers' compensation coverage is effected through deductible insurance
policies and qualified self insurance plans which vary by the states in which
the Company operates. Provisions for estimated settlements are provided in the
period of the related coverage and are determined on a case by case basis plus
some amount for incurred but not reported claims. Differences between the
amounts accrued and subsequent settlements are recorded in operations in the
period of settlement.
EARNINGS PER SHARE
Earnings per share is calculated based upon the weighted-average number of
common shares and common equivalent shares outstanding during each period.
Common equivalent shares include stock purchase warrants and options. Earnings
per common and common equivalent share is based upon 27,016,565 shares in 1995,
16,751,078 shares in 1994, and 11,711,911 shares in 1993. Earnings per common
share-assuming full dilution is based upon 27,023,971 shares in 1995, 19,724,461
shares in 1994 and 16,275,875 shares in 1993, including the effect of the
convertible subordinated notes.
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been
reclassified to conform to the 1995 presentation.
51
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) NOTES RECEIVABLE
Notes receivable consists of the following:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Variable rate note receivable (8.0% at May 31, 1995) from
a related party, full recourse; interest payable
semi-annually; principal payable December 2008;
unsecured............................................... $ 10,653 $ 13,000
Variable rate note receivable (7.0% at May 31, 1995);
interest payable monthly; principal payable $3,000 in
August 2002 and $3,000 in August 2004; secured by real
property................................................ 6,000 6,000
12% notes receivable; payable in monthly installments of
$22, including interest; final payment of approximately
$2,033 due July 2002; secured by real property.......... 2,126 2,136
Other notes receivable bearing interest at 8.0% to 11%;
unsecured............................................... 2,117 1,835
--------- ---------
Notes receivable....................................... 20,896 22,971
Less current portion..................................... 1,013 535
--------- ---------
Notes receivable, excluding current portion............ $ 19,883 $ 22,436
--------- ---------
--------- ---------
</TABLE>
(3) LAND, BUILDINGS AND EQUIPMENT
Land, buildings and equipment owned and held under capital lease is stated
at cost and consists of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Land.................................................. $ 43,937 $ 21,605
Buildings............................................. 292,378 144,213
Equipment............................................. 65,688 39,377
----------- -----------
402,003 205,195
Less accumulated depreciation and amortization........ 25,771 11,769
----------- -----------
Land, buildings, and equipment, net................... $ 376,232 $ 193,426
----------- -----------
----------- -----------
</TABLE>
52
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1994
----------- ---------
<S> <C> <C>
Revolving credit drawn on credit agreement; interest
due monthly; principal due June 2000; secured as
discussed below....................................... $ 104,750 $ 44,250
Other long-term debt bearing interest ranging from
6.75% to 12.0%; secured by related land, buildings and
equipment............................................. 54,768 34,121
----------- ---------
Long-term debt....................................... 159,518 78,371
Less current portion................................... 1,785 1,698
----------- ---------
Long-term debt, excluding current portion............ $ 157,733 $ 76,673
----------- ---------
----------- ---------
</TABLE>
On March 16, 1995, the Company completed a $250,000 revolving credit loan
agreement which replaced the revolving loan agreement outstanding at May 31,
1994. This credit agreement bears interest at either the Adjusted Corporate Base
Rate plus up to .25% (9.0% at May 31, 1995) or at the Adjusted LIBOR rate plus
0.5 to 1.25% (7.0 to 7.0625% at May 31, 1995). The average interest rate on
amounts outstanding under the credit agreement was 7.68% at May 31, 1995. The
credit agreement: (a) requires the Company to maintain certain financial ratios,
(b) restricts the Company's ability to enter into capital leases beyond certain
specified amounts, (c) prohibits transactions with affiliates not at arm's
length, (d) allows the Company to make only permitted investments, (e) restricts
certain indebtedness, liens, dispositions of property and issuances of
securities and (f) prohibits a change in control or a fundamental change in the
business of the Company except under certain limited circumstances. The credit
facility also restricts the payment of dividends by the Company to an amount
which shall not exceed 25% of the Company's net income for the prior fiscal
year, and any such payment is subject to continued compliance by the Company
with the financial ratio covenants contained in the credit agreement. The credit
agreement further provides that any event or occurrence that would have a
material adverse effect on the Company's ability to repay the loans or to
perform its obligations under the loan documents will constitute an event of
default under the credit agreement. Certain subsidiaries of the Company have
guaranteed the obligations of the Company under the credit agreement. The credit
agreement expires on March 31, 1998 and is secured by a pledge of the stock of
all subsidiaries of the Company and certain accounts receivable of the Company.
The amount of such accounts receivable collateral was approximately $102.2
million at May 31, 1995.
In July 1995, in connection with the merger with CMS, the Company and CMS
entered into a new facility that increased the amount available for borrowing to
$485,000. The aggregate principal amount is divided between the Company and CMS
in the amounts of $250,000 and $235,000, respectively. The terms
53
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
of the new facility are substantially consistent with those of the old facility
except that accounts receivable are no longer required as collateral and the
interest component has been revised. Under the new facility, interest is
computed at a rate equal to either, as selected by the Company, the Alternate
Base Rate or the Adjusted LIBOR Rate plus 0.625% to 1.25% per annum, depending
on the maintenance of specified financial ratios. The Alternate Base Rate is
equal to the greater of the prime rate or the federal funds effective rate plus
.5%. The agreement expires in June 2000.
The approximate aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31,
- ---------------------------------------------------------
<S> <C>
1996..................................................... $ 1,785
1997..................................................... 4,076
1998..................................................... 2,491
1999..................................................... 1,178
2000..................................................... 1,293
Thereafter............................................... 148,695
-----------
$ 159,518
-----------
-----------
</TABLE>
(5) CONVERTIBLE SUBORDINATED NOTES
On February 14, 1992, the Company issued $57,500 of 6.75% convertible
subordinated notes (the Notes) due February 1, 2002. The Notes were convertible
at any time prior to maturity into shares of common stock of the Company at a
conversion price of $12.00 per share, subject to adjustment in certain events.
Interest on the Notes was payable semi-annually on each February 1 and August 1,
commencing August 1, 1992. During the year ended May 31, 1992, the Company
redeemed $3,230 of Notes at approximately 80% of par value, resulting in a gain
of $475, net of allocable deferred financing costs of approximately $140. During
the third quarter of 1994, the remaining $54,270 of Notes were converted into
the Company's common stock at the conversion price stated above. In connection
therewith, approximately $1,900 of deferred financing costs and $500 of
conversion costs were offset against additional paid-in capital at the time of
conversion.
In connection with the merger of Greenery Rehabilitation Group, Inc.
(Greenery) into the Company (discussed in Note 7), the Company assumed the
obligations under Greenery's 6.5% convertible subordinated notes and 8.75%
convertible senior subordinated notes, par value of $26,631 and $28,150,
respectively, at February 11, 1994. These obligations were recorded at their
fair market value under purchase accounting, resulting in a discount on the 6.5%
convertible subordinated notes of $2,663.
The 6.5% convertible subordinated notes are due June 2011 and are
convertible into common stock of the Company at a price of $69.32 per share.
These
54
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) CONVERTIBLE SUBORDINATED NOTES (CONTINUED)
notes may be redeemed in whole or in part at 103.25% of par, plus accrued
interest, declining annually to par on June 15, 1996. Commencing June 15, 1996,
the Company is obligated to retire 5% of the issue amount annually to maturity.
The 8.75% convertible senior subordinated notes are due 2015 and are
convertible into common stock of the Company at a price of $54.00 per share. The
Company may redeem the notes, in whole or in part at 106.125% of par, plus
accrued interest, declining annually to par on April 1, 2000. Commencing April
1, 2000, the Company is required to retire 5% of the original issue amount
annually to maturity. The notes are senior to the 6.5% debentures, but will be
subordinated to any future senior indebtedness.
During the fourth quarter of fiscal 1994, the Company redeemed $15,520 of
the 6.5% convertible subordinated notes and $7,244 of the 8.75% convertible
senior subordinated notes. The Company recorded a gain of approximately $734,
net of the write-off of $1,552 debt discount recorded under purchase accounting
and income taxes of approximately $480.
During 1995, the Company repurchased $4,800 of the 6.5% convertible
subordinated notes and $506 of the 8.75% convertible senior subordinated notes.
The Company recorded a gain of approximately $613, net of the write-off of $480
debt discount recorded under purchase accounting and income taxes of
approximately $401.
The market value of the outstanding convertible subordinated notes at May
31, 1995 and 1994 was approximately $23,344 and $27,500, respectively. The
market value is a function of both the conversion feature and the underlying
debt instrument. It is impracticable to allocate the market value between these
two components, however, the market value is not representative of the amounts
that would be currently required to retire the debt obligation.
(6) LEASE COMMITMENTS
In connection with the acquisition of peopleCARE Heritage Group (peopleCARE)
discussed in Note 7, the Company entered into a capital lease for six
facilities. The lease expires October 2003. At May 31, 1995, the amount of land,
buildings and equipment and related accumulated amortization recorded under this
capital lease was as follows:
<TABLE>
<S> <C>
Land........................................... $ 8,436
Buildings...................................... 45,892
Equipment...................................... 2,406
---------
56,734
Less accumulated amortization.................. 1,141
---------
$ 55,593
---------
---------
</TABLE>
55
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) LEASE COMMITMENTS (CONTINUED)
Amortization of assets held under this capital lease is included in
depreciation and amortization expense. The present value of future minimum
capital lease payments as of May 31, 1995 is as follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31:
- -----------------------------------------------------------
<S> <C>
1996....................................................... $ 5,023
1997....................................................... 5,023
1998....................................................... 5,023
1999....................................................... 5,023
2000....................................................... 5,023
Thereafter................................................. 57,979
---------
Total minimum lease payments............................... 83,094
Less amounts representing interest (at 9.09%).............. 34,940
---------
Present value of net minimum capital lease payments........ 48,154
Less current portion of obligations under capital leases... 597
---------
Obligations under capital leases, excluding current
portion................................................... $ 47,557
---------
---------
</TABLE>
The Company also has noncancelable operating leases primarily for facilities
and equipment. Certain leases provide for purchase and renewal options of 5 to
15 years, contingent rentals primarily based on operating revenues, and the
escalation of lease payments coincident with increases in certain economic
indexes. Contingent rent expense for the years ended May 31, 1995, 1994 and 1993
was approximately $1,433, $1,060 and $680, respectively.
Future minimum payments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31,
- ---------------------------------------------------------
<S> <C>
1996..................................................... $ 40,204
1997..................................................... 38,791
1998..................................................... 35,198
1999..................................................... 29,901
2000..................................................... 27,294
Thereafter............................................... 125,075
-----------
Total minimum lease payments............................. $ 296,463
-----------
-----------
</TABLE>
The Company is contingently liable for annual lease payments of
approximately $2,570 for leases on facilities sold. In addition, the Company is
contingently liable for annual lease payments of $6,200 for leases on managed
facilities.
56
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) LEASE COMMITMENTS (CONTINUED)
The Company leases seven facilities from an affiliate of two directors of
the Company. During fiscal 1995 a previously leased facility was purchased by
the Company. The aggregate lease expense for these facilities for the years
ended May 31, 1995, 1994 and 1993 was approximately $15,900, $5,501, and $903,
respectively. Future minimum lease commitments related to these facilities are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31:
- ---------------------------------------------------------
<S> <C>
1996..................................................... $ 12,851
1997..................................................... 12,851
1998..................................................... 12,028
1999..................................................... 12,028
2000..................................................... 12,028
Thereafter............................................... 61,149
-----------
Total.................................................... $ 122,935
-----------
-----------
</TABLE>
In addition, the Company leases its corporate office space from certain
officers and directors. The lease is classified as an operating lease and
provides for minimum annual rents of $535. The lease expires on July 31, 2001.
(7) FACILITY ACQUISITIONS
During 1994 and 1995, the Company implemented its strategic business plan by
leasing or acquiring long-term care facilities and related specialty services
businesses in targeted geographic areas. The acquisitions have been recorded
using the purchase method of accounting. The results of operations of the
acquired companies are included in the Company's statements of earnings for the
periods in which they were owned by the Company.
In February 1994, the Company completed its merger of Greenery into the
Company. Pursuant to the merger, the Company issued approximately 2,050,000
shares of its common stock, valued at approximately $48,000, and assumed
approximately $58,000 in debt for all of the outstanding shares of Greenery
common stock. This merger added the operations of 17 rehabilitation and skilled
nursing facilities and 3 managed facilities to the Company's operations.
Subsequent to fiscal year end, on June 19, 1995, the Company announced plans to
dispose of eight long-term care facilities. Six of the facilities to be disposed
of were among the 17 acquired in the Greenery merger during fiscal 1994. The
decision to sell the facilities was based upon financial, regulatory and
operational considerations.
The Company had other acquisitions during fiscal 1994 that in the aggregate
were insignificant.
In July 1994, the Company acquired peopleCARE, a 13 facility long-term care
company located in Texas. Consideration given for the acquisition included
57
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) FACILITY ACQUISITIONS (CONTINUED)
the issuance of approximately 449,000 shares of the Company's common stock,
valued at approximately $10,000, assumption of capital lease obligations of
approximately $48,600 for six facilities, and cash payment of approximately
$56,000 for fee simple title to seven facilities. In addition, the Company had
other individually insignificant acquisitions during fiscal 1995.
The following unaudited pro forma financial information reflects the
combined results of operations for the years ended May 31, 1995 and 1994 as if
the Greenery, peopleCARE and certain other individually insignificant
acquisitions during fiscal 1995 and 1994 had been consummated on June 1, 1993:
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Total operating revenues.............................. $ 690,147 $ 611,087
Total operating expenses.............................. 638,662 597,707
----------- -----------
Operating income.................................... 51,485 13,380
Income taxes.......................................... 20,337 5,285
----------- -----------
Net earnings........................................ $ 31,148 $ 8,095
----------- -----------
----------- -----------
Net earnings per common and common equivalent
share.............................................. $1.12 $0.41
----------- -----------
----------- -----------
Net earnings per common share -- assuming full
dilution........................................... $1.12 $0.41
----------- -----------
----------- -----------
</TABLE>
The unaudited pro forma information is not necessarily indicative either of
the results of operations that would have occurred had the acquisitions taken
place at the beginning of fiscal 1994 or of future results of operations of the
combined companies.
58
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) INCOME TAXES
On June 1, 1993, the Company adopted FAS109 through retroactive restatement
of its financial statements from June 1, 1990. The restatement decreased 1993
net earnings by $67. FAS 109 requires an asset and liability approach for
financial accounting and reporting of income taxes.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal..................................... $ 10,947 $ 7,388 $ 2,593
State....................................... 2,190 1,273 721
--------- --------- ---------
13,137 8,661 3,314
--------- --------- ---------
Deferred:
Federal..................................... 5,823 1,270 854
State....................................... 994 209 (142)
--------- --------- ---------
6,817 1,479 712
--------- --------- ---------
Total..................................... $ 19,954 $ 10,140 $ 4,026
--------- --------- ---------
--------- --------- ---------
</TABLE>
The differences between the total tax expense from operations and the income
tax expense using the Federal income tax rate (35 percent) were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Computed tax expense at statutory rate........ $ 17,911 $ 9,361 $ 4,110
Net effect of targeted jobs credits........... (78) (80) (358)
State income tax expense, net of federal
income tax benefit........................... 2,420 955 457
Change in valuation allowance on deferred tax
assets....................................... -- -- (257)
Other......................................... (299) (96) 74
--------- --------- ---------
Total income tax expense.................. $ 19,954 $ 10,140 $ 4,026
--------- --------- ---------
--------- --------- ---------
</TABLE>
59
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) INCOME TAXES (CONTINUED)
The components of the net deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Components of the deferred tax asset:
Self-insured reserves.................................. $ 2,830 $ 3,002
Allowance for doubtful accounts........................ 3,116 3,650
Accrued payroll and related benefits................... 355 592
Net operating loss..................................... 3,453 5,739
Deferred lease credit.................................. 7,630 10,137
Other.................................................. 1,340 1,336
--------- ---------
18,724 24,456
--------- ---------
Components of the deferred tax liability:
Buildings and equipment, related basis differences,
deferred gain and depreciation........................ (15,804) (9,706)
Third party retrospective settlements.................. -- (1,254)
Difference between reporting income/loss from
partnership investments for financial and income tax
reporting............................................. (1,870) (955)
IRC Section 481 adjustment for change in method of
accounting from cash to accrual....................... (319) (637)
Greenery 6.5% convertible subordinated note discount... (257) (1,086)
Other.................................................. (1,207) (496)
--------- ---------
(19,457) (14,134)
Valuation allowance on deferred tax assets............. (3,051) (3,051)
--------- ---------
Total................................................ $ (3,784) $ 7,271
--------- ---------
--------- ---------
</TABLE>
As the result of business combinations during the years ended May 31, 1995
and 1994, net deferred income tax assets of $4,238 and $14,724, respectively,
and related valuation allowances of $0 and $3,051, respectively, were recorded.
The Company has regular tax net operating loss carry forwards of
approximately $7,466 which are currently subject to separate return year
limitations and expire in the years 2007 through 2008. In addition, the Company
also has an alternative minimum tax credit carryforward of $205 which is
available for utilization indefinitely.
(9) CAPITAL STOCK
COMMON STOCK
In October 1993, the Company completed a common stock offering of 4,025,000
shares. Net proceeds of approximately $58,200 were used to repay outstanding
debt under the revolving credit loan agreement and to fund acquisitions.
60
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) CAPITAL STOCK (CONTINUED)
As discussed in Note 5, the Company converted $54,270 of its 6.75%
convertible subordinated notes into 4,522,500 shares of the Company's common
stock during the third quarter of 1994 . The conversion price was $12 per share.
As discussed in Note 7, the Company issued 2,050,000 new shares of common
stock during February 1994 in connection with the Greenery merger.
In addition, the Company acquired Advanced Cardiovascular Technology, Inc.
(ACT), a non-invasive medical diagnostic company, in April 1994. In connection
with this acquisition, the Company issued 163,976 new shares of common stock at
$25 per share. The terms of the acquisition provide for the issuance of up to
204,985 additional shares of common stock if certain earning levels are achieved
by March 31, 1997. Of these contingent shares, 160,000 were issued into escrow
at closing and remained in escrow at May 31, 1995. This contingent consideration
has not been recorded as of May 31, 1995.
In November and December 1994, the Company completed the sale of 5,558,790
shares of its common stock, including the sale of 643,333 shares held by certain
stockholders. Net proceeds of approximately $119,600 were used to repay
outstanding debt under the revolving credit loan agreement and to fund
acquisitions.
Finally, during 1995 the Company issued 1,776,924 shares of common stock in
connection with certain acquisitions.
PREFERRED STOCK
There are 500,000 shares of authorized but unissued shares of $.001
preferred stock. On September 12, 1994, the Board of Directors of the Company
declared a dividend of one preferred share purchase right (a "Right") for each
outstanding share of the Company's common stock held of record on September 22,
1994 and approved the further issuance of Rights with respect to all shares of
the Company's common stock that are subsequently issued. Each Right entitles the
registered holder to purchase from the Company one one-thousandth of a share of
Series A Junior Participating Preferred Stock, par value $.001 per share of the
Company, at a price of $110 per one one-thousandth of a share, subject to
adjustment. Until the occurrence of certain events, the Rights are not
exercisable, will be evidenced by the certificates for the Company's common
stock and will not be transferable apart from the Company's common stock.
STOCK PURCHASE WARRANTS
The Company had 100,000 stock purchase warrants outstanding at May 31, 1995
for the purchase of common shares. These warrants, priced at $2.50, were
exercised subsequent to year end.
61
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) CAPITAL STOCK (CONTINUED)
STOCK BENEFIT PLANS
The Company has a nonqualified employee stock option plan and a directors'
stock option plan that provide the Company the ability to grant to employees and
outside directors the option to purchase shares of common stock of the Company
at the market value of the stock at the option grant date. Accordingly, no
compensation is recorded in the accompanying consolidated financial statements
for the options granted.
All options granted under the employee plan and directors' plan expire ten
years after grant, are non-transferable and are exercisable only during or
immediately following the period the individual is employed by the Company or is
a current member of the Board of Directors, subject to certain exceptions for
death or disability. One-third of each option is exercisable on each of the
first, second and third anniversary dates following the date of grant.
The following information is a summary of the stock option activity under
the employee and directors' plans:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------------------------------
1995 1994 1993
----------------- ------------------ -----------------
<S> <C> <C> <C>
Options outstanding at
beginning of year......... 1,674,711 1,015,109 808,553
Granted.................... 1,156,250 905,750 450,400
Exercised.................. (310,490) (208,751) (128,745)
Canceled and other
adjustments............... (87,764) (37,397) (115,099)
----------------- ------------------ -----------------
Options outstanding at end
of year................... 2,432,707 1,674,711 1,015,109
----------------- ------------------ -----------------
----------------- ------------------ -----------------
Options exercisable at end
of year................... 768,920 467,371 279,226
----------------- ------------------ -----------------
----------------- ------------------ -----------------
Option price range......... $ 1.38 - $28.75 $ 1.38 - $26.125 $ 1.38 - $14.63
----------------- ------------------ -----------------
----------------- ------------------ -----------------
</TABLE>
The Company also has an employee stock purchase plan (Plan). The Plan allows
substantially all full-time employees to contribute up to five percent of their
compensation for the purchase of the Company's common stock at 85 percent of
market value at the date of purchase. For the year ended May 31, 1995, 16,352
shares of the Company's stock had been purchased under the Plan.
In addition and in connection with the Greenery merger, the Company issued
to one of the Company's directors a five year option to purchase 125,000 shares
of the Company's common stock at $17 per share. This option was exercised during
1995 and the shares, along with approximately 50,000 shares of additional common
stock, were converted to treasury stock in consideration for reduction of
amounts due to the Company under the terms of a note receivable.
62
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) CAPITAL STOCK (CONTINUED)
The total number of shares allocated, granted and outstanding pursuant to
the Company's employee and directors' stock option plans and employee stock
purchase plan together with other shares issued or allocated for issuance to
employees and directors pursuant to option, incentive or similar plans, may not
exceed 10 percent of the total number of shares authorized for issuance at the
time of the allocation or grant.
(10) EMPLOYEE BENEFITS
In 1993, the Company established a deferred compensation plan for selected
employees that work full-time and have been employed by the Company for more
than one year. This plan, which is not required to be funded by the Company,
allows eligible employees to defer portions of their current compensation up to
10%. The Company then matches up to 4% of the employee's deferred compensation.
Employee contributions are vested immediately. Employer contributions vest on a
graduated basis, with full vesting achieved at the end of six years. The Company
contributed approximately $179, $124 and $39 to this plan for the years ended
May 31, 1995, 1994 and 1993, respectively.
The Company also has a 401(k) savings plan available to substantially all
employees who have been with the Company for more than six months. Employees may
defer up to 20% of their salary, subject to the maximum permitted by law. The
Company may, at its discretion, match a portion of the employee's contribution.
Employee contributions are vested immediately. Employer contributions vest on a
graduated basis, with full vesting achieved at the end of five years. The
Company contributed approximately $306, $136 and $15 to this plan for the years
ended May 31, 1995, 1994 and 1993, respectively.
In addition, the Company also has a profit-sharing plan to which it may make
contributions at its discretion. The Company has not made any contributions to
this plan. The Company may terminate any of the above plans at any time.
(11) SUPPLEMENTARY INFORMATION RELATING TO CONSOLIDATED STATEMENTS OF CASH FLOWS
For the purposes of the consolidated statements of cash flows, the following
are considered non-cash items:
<TABLE>
<CAPTION>
1995
- ---------
<S> <C>
a) The issuance of 1,776,924 shares of common stock in
connection with acquisitions in which net assets of
approximately $22,030 were acquired,
b) The acceptance of 175,041 shares of treasury stock for
payment of a note,
c) The assumption of long-term debt of $19,900 in connection
with acquisitions, and
</TABLE>
63
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(11) SUPPLEMENTARY INFORMATION RELATING TO CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<S> <C>
d) The assumption of obligations under capital lease of
$48,600 in connection with acquisitions.
</TABLE>
<TABLE>
<CAPTION>
1994
- ---------
<S> <C>
a) The conversion of $54,270 of 6.75% convertible subordinated
notes into the Company's common stock,
b) The issuance of 2,213,976 shares of common stock in
connection with acquisitions in which net assets of
approximately $16,573 were acquired, and
c) The assumption of long-term debt of $19,300 in connection
with acquisitions.
<CAPTION>
1993
- ---------
<S> <C>
Net assets of approximately $17,500 were sold for cash proceeds of
approximately $9,360 and notes receivable of $8,150.
</TABLE>
Cash paid for interest for the years ended May 31, 1995, 1994 and 1993 was
approximately $16,867, $5,650 and $4,387, respectively.
Cash paid for income taxes for the years ended May 31, 1995, 1994 and 1993
was approximately $17,562, $7,893 and $4,187, respectively.
(12) COMMITMENTS
LETTERS OF CREDIT
The Company was contingently liable for letters of credit aggregating
$11,810 and $8,551 at May 31, 1995 and 1994, respectively. The letters of
credit, which reduce the availability under the credit agreement, were used in
lieu of lease deposits for facilities operated by the Company and for deposits
under various workers' compensation programs.
EMPLOYMENT AND CONSULTING AGREEMENTS
Under annual employment agreements with two of the officers/stockholders,
the Company is committed to pay minimum annual salaries totaling $775, subject
to certain covenants. In addition, the employment agreements provide for annual
retirement benefits and disability benefits equal to a maximum of 50 percent of
each officer's base salary. The retirement benefits vest in equivalent
increments over 10 years and the disability benefits terminate upon retirement
or age 65. Further, an annual death benefit is payable to the surviving spouse
or minor children equal to one-half of the vested retirement benefit at the time
of the officer's death. Amounts recorded for the annual retirement and
disability benefits have been included in other accrued liabilities in the
accompanying consolidated financial statements.
64
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(12) COMMITMENTS (CONTINUED)
In addition and in connection with the Greenery merger, the Company has
entered into a seven year consulting agreement with one of the Company's
directors for which the Company has agreed to pay annual consulting fees of
$175.
LIFE INSURANCE PREMIUMS
In fiscal 1994, the Company agreed to fund life insurance premiums for two
of its officers. As of May 31, 1995, such advances totaled approximately $1,162
and are reflected in other assets in the accompanying consolidated financial
statements. These advances will be repaid to the Company by the officers'
estates upon the earlier of cancellation of the policies or death of the
officers.
MANAGEMENT AGREEMENT
In connection with the Greenery merger, the Company has committed to manage
three Connecticut facilities for an affiliate of two directors of the Company.
The Company is committed to manage these facilities for up to five years,
subject to the affiliate's right to terminate sooner at any time with 90 days
notice.
PURCHASE COMMITMENTS
Under the terms of one of the Company's facility lease agreements, the
Company has the option to purchase the facility and the lessor has the option to
require the Company to purchase the facility should the Company fail to exercise
the purchase option for $5,500 at the end of the lease term (August 1, 1998).
The Company has purchased usage of a Cessna/Citation III aircraft from AMI
Aviation II, L.L.C., a Delaware limited liability company ("AMI II"). The
Company's chief executive officer owns 99% of the membership interests of AMI
II. Under the aircraft usage agreement, the Company will purchase a minimum of
20 hours usage per month for $45 per month for a five year period, and will pay
certain amounts per hour for usage over 20 hours in a month plus a monthly
maintenance reserve. The Company believes that the amounts payable under this
agreement are comparable to those it would pay to other third party vendors of
similar aircraft services.
(13) SUBSEQUENT EVENTS
CONTINENTAL MEDICAL MERGER
On July 6, 1995, the stockholders of the Company and CMS approved the merger
of one of the Company's wholly-owned subsidiaries with CMS. Under the terms of
the merger agreement, CMS stockholders received .5397 ("The Exchange Rate") of a
share of the Company's common stock for each outstanding share of CMS's common
stock. Accordingly, the Company issued approximately 20.9 million shares of its'
common stock, valued at approximately $393.9 million based on the closing price
of the Company's common stock on July 10, 1995, for all the outstanding shares
of CMS's common stock. Additionally, outstanding
65
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(13) SUBSEQUENT EVENTS (CONTINUED)
options to acquire CMS's common stock were converted at the Exchange Rate to
options to acquire 3.8 million shares of the Company's common stock. CMS is one
of the largest providers of comprehensive medical rehabilitation programs and
services in the country with a significant presence in each of the
rehabilitation industry's three principal sectors -- inpatient rehabilitation
care, outpatient rehabilitation care and contract therapy. The merger qualifies
as a tax-free reorganization and will be accounted for as a pooling of
interests. Accordingly, historical financial data in future reports will be
restated to include CMS. Supplemental unaudited pro forma data summarizing the
combined results of operations of the Company and CMS as though the merger had
occurred at the beginning of fiscal 1993 is as follows:
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA
-------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Total operating revenues $ 1,626,340 $ 1,383,376 $ 1,136,358
Net earnings (loss) from continuing
operations $ 35,847 $ (17,939) $ 30,439
Net earnings (loss) $ 37,805 $ (17,939) $ 27,235
Net earnings (loss) per common and common
equivalent share $ 0.79 $ (0.48) $ 0.85
Net earnings (loss) per common share --
assuming full dilution $ 0.78 $ (0.48) $ 0.80
</TABLE>
The above unaudited pro forma earnings statement information includes CMS
information for the twelve months ended June 30, 1995, 1994 and 1993.
RESTRUCTURING
On June 19, 1995, the Company announced that it plans to sell the assets and
leasehold improvements at eight of its facilities. The Company anticipates that
the intended dispositions will occur during fiscal 1996. The Company expects
that it will record a $11,900 pre-tax charge during the first quarter of fiscal
1996 related to the disposal of the eight facilities. Among management's
financial, regulatory and operational considerations in electing to dispose of
these facilities was the fact that permanent licensure had not been obtained by
the Company with respect to four of the facilities. Through these eight
facilities, the Company provides services for neuro-behaviorally impaired
patients, long-term chronic ventilator care patients, personal care patients and
patients with mild mental disorders. These services are deemed by management of
the Company to be inconsistent with the Company's emphasis on long-term
rehabilitation services and its concentration on high acuity patient services.
The properties that are the subject of the planned dispositions, in the
aggregate, incurred pre-tax net losses in fiscal years 1995, 1994 and 1993 of
approximately $11,300, $1,200 and $0, respectively. Revenues for fiscal years
1995, 1994 and 1993 approximated $71,900, $29,200 and $5,300, respectively.
66
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's unaudited quarterly financial information follows:
<TABLE>
<CAPTION>
TOTAL EARNINGS PER EARNINGS PER COMMON
OPERATING NET COMMON AND COMMON SHARE -- ASSUMING
REVENUES EARNINGS EQUIVALENT SHARE FULL DILUTION
----------- --------- ----------------- -------------------
<S> <C> <C> <C> <C>
Quarter ended:
August 31, 1994 $ 137,704 $ 6,582 $ 0.28 $ 0.28
November 30, 1994 155,230 7,105 0.29 0.29
February 28, 1995 166,523 9,146 0.31 0.31
May 31, 1995 179,623 8,388 0.28 0.28
----------- --------- ----- -----
$ 639,080 $ 31,221 $ 1.16 $ 1.16
----------- --------- ----- -----
----------- --------- ----- -----
Quarter ended:
August 31, 1993 $ 74,968 $ 2,816 $ 0.24 $ 0.21
November 30, 1993 78,931 3,500 0.26 0.22
February 28, 1994 88,602 4,484 0.24 0.23
May 31, 1994 132,594 5,806 0.25 0.25
----------- --------- ----- -----
$ 375,095 $ 16,606 $ 0.99 $ 0.91
----------- --------- ----- -----
----------- --------- ----- -----
</TABLE>
67
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
For information concerning Item 10 -- Directors and Executive Officers of
the Registrant, Item 11 -- Executive Compensation, Item 12 -- Security Ownership
of Certain Beneficial Owners and Management and Item 13 -- Certain Relationships
and Related Transactions, see the Proxy Statement of the Company for the Annual
Meeting of Stockholders to be held on September 27, 1995, which will be filed
with the Securities and Exchange Commission and is incorporated herein by
reference, and "Business -- Executive Officers of the Company" included in Item
1 of Part I of this Annual Report on Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
See Index to Consolidated Financial Statements in Item 8 of this report.
2. Financial Statement Schedule:
The following Schedule is filed herewith on the page indicated:
<TABLE>
<CAPTION>
SCHEDULE PAGE
---------------------------------------- ----
<S> <C> <C> <C>
II -- Valuation and Qualifying Accounts 78
</TABLE>
3. Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- ----------------------------------------------------------------------
<C> <S>
**2.1 Agreement and Plan of Merger dated as of August 2, 1993 by and between
the Company and Greenery Rehabilitation Group, Inc. ("Greenery").
**2.2 First Amendment to Agreement and Plan of Merger dated September 30,
1993 between the Company and Greenery.
**2.3 Agreement dated July 30, 1993 between the Company, Health and
Rehabilitation Properties Trust ("HRPT") and Greenery.
**2.4 Letter Agreement between the Company, Greenery and HRPT (amending
Exhibit 2.3 above).
**2.5 Purchase Agreement dated as of July 30, 1993 between M&P Partners
Limited Partnership, Greenery and 99111 Chestnut Hill Avenue Corp.
**2.6 First Amendment to Purchase Agreement (amending Exhibit 2.4 above)
dated October 29, 1993.
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- ----------------------------------------------------------------------
<C> <S>
**2.7 Agreement and Plan of Reorganization dated as of June 9, 1994, by and
among the Company, peopleCARE Heritage Manor Plano, Inc., peopleCARE
Heritage Manor Canton, Inc., peopleCARE Heritage Park, Inc.,
peopleCARE Heritage Village, Inc., peopleCARE Winterhaven, Inc.,
peopleCARE Heritage Place, Inc., peopleCARE Heritage Forest Lane,
Inc., peopleCARE Heritage Oaks, Inc., peopleCARE Heritage Manor
Longview, Inc., peopleCARE Heritage Gardens Carrollton, Inc.,
peopleCARE Heritage Estates, Inc., peopleCARE Heritage Country Manor,
Inc., and peopleCARE Heritage Western Hills, Inc., as amended by
Amendment No. 1 to Agreement and Plan of Reorganization dated June
30, 1994.
2.8 Amended and Restated Agreement and Plan of Merger, dated as of May 23,
1995, by and among the Company, CMS Merger Corporation and CMS
(incorporated by reference to Exhibit 2.3 of Amendment No. 1 to the
Company's Registration Statement on Form S-4 (Registration No.
33-59561)).
**3.1 Restated Certificate of Incorporation of the Company dated March 6,
1987, together with Certificate of Amendment of Certificate of
Incorporation dated January 6, 1992.
3.2 Certificate of Amendment of Restated Certificate of Incorporation
dated September 12, 1994 (incorporated by reference to Exhibit 4.2 to
the Company's Registration Statement on Form S-8 (Registration No.
33-84502)).
3.3 Certificate of Amendment of Restated Certificate of Incorporation
dated July 6, 1995 (incorporated by reference to the Company's
Registration Statement on Form S-8 (Registration No. 33-61697)).
3.4 Amended and Restated Bylaws dated as of February 28, 1987, together
with Amendment to Bylaws Section 9.1.1 dated August 30, 1993
(incorporated by reference to Exhibit 3.2 to the Company's 1994 Form
10-K.
3.5 Certificate of Designation of Series A Junior Participating Preferred
Stock of Horizon Healthcare Corporation dated September 16, 1994
(incorporated by reference to Exhibit 4.3 to Horizon's Registration
Statement on Form S-8 (Registration No. 33-84502)).
3.6 Rights Agreement, dated as of September 15, 1994, between Horizon
Healthcare Corporation and Chemical Trust Company of California, as
Rights Agent, specifying the terms of the rights to purchase
Horizon's Series A Junior Participating Preferred Stock, and the
exhibits thereto (incorporated by reference to Exhibit 1 to Horizon's
Registration Statement on Form 8-A dated September 16, 1994).
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- ----------------------------------------------------------------------
<C> <S>
4.1 Restated Certificate of Incorporation of the Company dated March 6,
1987, together with Certificate of Amendment of Certificate of
Incorporation dated January 6, 1992 (incorporated by reference to
Exhibit 3.1).
4.2 Certificate of Amendment of Restated Certificate of Incorporation
dated September 12, 1994 (incorporated by reference to Exhibit 3.2).
4.3 Certificate of Amendment of Restated Certificate of Incorporation
dated July 6, 1995 (incorporated by reference to Exhibit 3.3).
4.4 Amended and Restated Bylaws dated as of February 28, 1987, together
with Amendment to Bylaws Section 9.1.1 dated August 30, 1993
(incorporated by reference to Exhibit 3.4).
4.5 Certificate of Designation of Series A Junior Participating Preferred
Stock of Horizon Healthcare Corporation dated September 16, 1994
(incorported by reference to Exhibit 3.5).
4.6 Rights Agreement, dated as of September 15, 1994, between Horizon
Healthcare Corporation and Chemical Trust Company of California, as
Rights Agent, specifying the terms of the rights to purchase
Horizon's Series A Junior Participating Preferred Stock, and the
exhibits thereto (incorporated by reference to Exhibit 3.6).
4.7 Indenture dated as of February 6, 1992, between the Company and
Security Pacific National Bank, Trustee, with respect to 6 3/4%
Convertible Subordinated Notes due 2002 (incorporated by reference to
Exhibit 4.3 to the Company's 1994 Form 10-K).
4.8 Form of 6 3/4% Convertible Subordinated Note due 2002 (included in
Exhibit 4.6) (incorporated by reference to Exhibit 4.4 to the
Company's 1994 Form 10-K).
4.9 Indenture dated as of June 16, 1986, between Greenery and Shawmut Bank
of Boston, N.A., Trustee, with respect to 6 1/2% Convertible
Subordinated Debentures due 2011 (incorporated by reference to
Exhibit 4.5 to the Company's 1994 Form 10-K).
4.10 Form of 6 1/2% Convertible Subordinated Debenture due 2011 (included
in Exhibit 4.9).
4.11 First Supplemental Indenture dated as of December 1, 1993
(supplementing Exhibit 4.9), between the Company and Shawmut Bank
N.A., Trustee (incorporated by reference to Exhibit 4.7 to the
Company's 1994 Form 10-K).
4.12 Indenture dated as of April 1, 1990, between Greenery and The
Connecticut National Bank, Trustee, with respect to 8 3/4%
Convertible Senior Subordinated Notes Due 2015 (incorporated by
reference to Exhibit 4.8 to the Company's 1994 Form 10-K).
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- ----------------------------------------------------------------------
<C> <S>
4.13 Form of 8 3/4% Convertible Senior Subordinated Note (included in
Exhibit 4.12).
4.14 First Supplemental Indenture dated as of December 1, 1993
(supplementing Exhibit 4.12), between the Company and Shawmut Bank
Connecticut, N.A., Trustee (incorporated by reference to Exhibit 4.10
to the Company's 1994 Form 10-K).
4.15 Indenture, dated as of August 17, 1992, between CMS and NationsBank of
Virginia, N.A., as Trustee, with respect to 10 7/8% Senior
Subordinated Notes due 2002 (incorporated by reference to CMS's 1992
Form 10-K).
4.16 Form of 10 7/8% Senior Subordinated Notes due 2002 (included in
Exhibit 4.15).
*4.17 First Supplemental Indenture dated as of June 22, 1994 (supplementing
Exhibit 4.15 above), between CMS and NationsBank of Virginia, N.A.,
as Trustee.
4.18 Indenture, dated as of March 15, 1993, between CMS and NationsBank of
Virginia, N.A., as Trustee, with respect to 10 3/8% Senior
Subordinated Notes due 2003 (incorporated by reference to Continental
Medical's Registration Statement on Form S-4 (Registration No.
33-60004).
4.19 Form of 10 3/8% Senior Subordinated Notes due 2003 (included in
Exhibit 4.17).
*4.20 First Supplemental Indenture dated as of June 27, 1994 (supplementing
Exhibit 4.18 above), between CMS and NationsBank of Virginia, N.A.,
as Trustee.
4.21 Credit Agreement dated as of July 6, 1995 among the Company, CMS, the
lenders named therein and NationsBank of Texas, N.A., as Agent and
Issuing Bank (incorporated by reference to Exhibit 99 of the
Company's Form 8-K dated July 10, 1995).
+**10.1 Employment Agreement dated as of August 19, 1993 between the Company
and Neal M. Elliott.
+**10.2 Employment Agreement dated as of August 19, 1993 between the Company
and Klemett L. Belt, Jr.
+*10.3 Employment Agreement dated as of July 10, 1995 between the Company and
Robert A. Ortenzio.
*10.4 Subscription and Lending Agreement between CMS and Rocco A. Ortenzio
and 7 3/4% Convertible Subordinated Debentures due 2012 and
$2,000,000 Note relating thereto.
+*10.5 Consulting Agreement dated August 10, 1995 between the Company and
Rocco A. Ortenzio.
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- ----------------------------------------------------------------------
<C> <S>
+*10.6 Letter Agreement dated July 10, 1995 between the Company and Rocco A.
Ortenzio relating to his termination of employment with CMS.
+10.7 Merrill Lynch 401(k) Services Adoption Agreement and related Merrill
Lynch Special Prototype Defined Contribution Plan (incorporated by
reference to Exhibit 10.48 to the Company's 1994 Form 10-K).
+10.8 Consulting Agreement dated February 11, 1994 between the Company and
Gerard M. Martin (incorporated by reference to Exhibit 10.27 to the
Company's 1994 Form 10-K).
+10.9 Employee Stock Option Plan of the Company (incorporated by reference
to Exhibit 10.5 to the Company's 1994 Form 10-K).
+10.10 First Amendment to Stock Option Plan of the Company (amending Exhibit
10.8) (incorporated by reference to Exhibit 10.6 to the Company's
1994 Form 10-K).
+10.11 Corrected Second Amendment to Stock Option Plan (amending Exhibit
10.9) (incorporated by reference to Exhibit 10.7 to the Company's
1994 Form 10-K).
+*10.12 Amendment No. 3 to Horizon Healthcare Corporation Employee Stock
Option Plan.
+10.13 Stock Option Plan for Non-Employee Directors of the Company
(incorporated by reference to Exhibit 10.6 to the Company's 1994 Form
10-K).
+10.14 Employee Stock Purchase Plan of the Company (incorporated by reference
to Exhibit 10.9 to the Company's 1994 Form 10-K).
+10.15 Continental Medical Systems, Inc. 1986 Stock Option Plan (as amended
and restated effective December 1, 1991), Amendment No. 1 to
Continental Medical Systems, Inc. 1986 Stock Option Plan, Amendment
No. 2 to Continental Medical Systems Inc. 1986 Stock Option Plan and
form of option agreement (incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-8 (Registration No.
33-61697)).
+10.16 Continental Medical Systems, Inc. 1989 Non-Employee Directors' Stock
Option Plan (as amended and restated effective December 1, 1991) and
form of option agreement (incorporated by reference to Exhibit 4.2 to
the Company's Registration Statement on Form S-8 (Registration No.
33-61697)).
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- ----------------------------------------------------------------------
<C> <S>
+10.17 Continental Medical Systems, Inc. 1992 CEO Stock Option Plan,
Amendment No. 1 to Continental Medical Systems, Inc. 1992 CEO Stock
Option Plan and form of option agreement (incorporated by reference
to Exhibit 4.3 to the Company's Registration Statement on Form S-8
(Registration No. 33-61697)).
+10.18 Continental Medical Systems, Inc. 1993 Nonqualified Stock Option Plan,
Amendment No. 1 to Continental Medical Systems, Inc. 1993
Nonqualified Stock Option Plan, Amendment No. 2 to Continental
Medical Systems, Inc. 1993 Nonqualified Stock Option Plan and form of
option agreement (incorporated by reference to Exhibit 4.4 to the
Company's Registration Statement on Form S-8 (Registration No.
33-61697)).
+10.19 Continental Medical Systems, Inc. 1994 Stock Option Plan and form of
opton agreement (incorporated by reference to Exhibit 4.5 to the
Company's Registration Statement on Form S-8 (Registration No.
33-61697)).
+10.20 Assignment and Assumption of Lease dated August 10, 1989 between the
Company and Elliott-Belt Partners (Horizon Healthcare Nursing Center
Albuquerque) (incorporated by reference to Exhibit 10.13 to the
Company's 1994 Form 10-K).
+10.21 Registration Rights and Stock Restriction Agreement dated as of
February 11, 1994 between the Company and Gerard M. Martin and
Kathleen R. Martin (incorporated by reference to Exhibit 10.28 to the
Company's 1994 Form 10-K).
+10.22 Stock Option Agreement dated February 11, 1994, between the Company
and Barry M. Portnoy (incorporated by reference to Exhibit 10.29 to
the Company's 1994 Form 10-K).
+10.23 Promissory Note together with Mortgage and Security Agreement made by
the Company for the benefit of HRPT (Howell, Michigan) (incorporated
by reference to Exhibit 10.30 to the Company's 1994 Form 10-K).
+10.24 Promissory Note together with Mortgage and Security Agreement made by
the Company for the benefit of HRPT (Farmington, Michigan)
(incorporated by reference to Exhibit 10.31 to the Company's 1994
Form 10-K).
+10.25 Guaranty of Lease dated as of February 11, 1994 made by the Company
for benefit of HRPT (Connecticut facilities) (incorporated by
reference to Exhibit 10.34 to the Company's 1994 Form 10-K).
+10.26 Form of Management Agreements between the Company and Connecticut
Subacute Corporation II (form used for each of the Connecticut
facilities) (incorporated by reference to Exhibit 10.40 to the
Company's 1994 Form 10-K).
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- ----------------------------------------------------------------------
<C> <S>
+10.27 Promissory Note dated December 10, 1993 made by B&G Partners Limited
Partnership to the order of the Company in the original principal
amount of $20,000,000 (incorporated by reference to Exhibit 10.41 to
the Company's 1994 Form 10-K).
+10.28 Unconditional and Continuing Guaranty dated February 11, 1994 made by
Barry M. Portnoy for the benefit of the Company, as successor to
Greenery (incorporated by reference to Exhibit 10.42 to the Company's
1994 Form 10-K).
+10.29 Unconditional and Continuing Guaranty dated February 11, 1994 made by
Gerard M. Martin for the benefit of the Company as successor to
Greenery (incorporated by reference to Exhibit 10.43 to the Company's
1994 Form 10-K).
+10.30 Purchase Option Agreement dated February 11, 1994 between the Company
and HRPT (incorporated by reference to Exhibit 10.44 to the Company's
1994 Form 10-K).
10.31 Real Estate Contract of Sale dated as of June 9, 1994 by and among the
White Oaks Investments, L.P., Four-K Investments, L.P., Sellers, and
the Company, Purchaser, as amended by Amendment No. 1 to Real Estate
Contract of Sale dated June 30, 1994 (incorporated by reference to
Exhibit 10.45 to the Company's 1994 Form 10-K).
10.32 Real Estate Contract of Sale and Master Lease Agreement between White
Oaks Investment, L.P., Robert J. Schlegel and the Company dated as of
June 9, 1994, as amended by Amendment No. 1 to Real Estate Contract
of Sale and Master Lease Agreement dated June 30, 1994 (incorporated
by reference to Exhibit 10.46 to the Company's 1994 Form 10-K).
10.33 Master Lease Agreement between White Oaks Investment, L.P. and the
Company dated July 31, 1994 (incorporated by reference to Exhibit
10.47 to the Company's 1994 Form 10-K).
*10.34 Office Lease Agreement between CMS (as tenant) and LeRoy S. Zimmerman
(as landlord) dated December 29, 1994 relating to Liberty Plaza I.
*10.35 Office Lease Agreement between CMS (as tenant) and Liberty Plaza
Associates II (as landlord) dated February 1, 1995 relating to
Liberty Plaza II.
*10.36 Office Lease Agreement between CMS (as tenant) and Liberty Plaza
Associates III (as landlord) dated February 1, 1995.
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- ----------------------------------------------------------------------
<C> <S>
+*10.37 Office Building Lease dated June 1, 1994 between Albuquerque Centre
Ltd. Co., a New Mexico limited liability company, and the Company
(principal corporate offices) and Office Lease Addendum dated June 1,
1995.
*11.1 Statement re: Computation of Per Share Earnings.
*22 List of subsidiaries of the Company.
*23.1 Consent of Arthur Andersen LLP
*27 Financial Data Schedule.
<FN>
- ------------------------
+ Identifies management contracts and compensatory plans or arrangements.
* Filed herewith.
** Incorporated by reference to the same-numbered exhibit to the Company's
1994 Form 10-K.
</TABLE>
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on April 10, 1995 under "Item 5.
Other Events" reporting that the Company entered into: (i) an Agreement and
Plan of Merger, dated as of March 31, 1995, by and among the Company, CMS
Merger Corporation, a wholly owned subsidiary of the Company, and CMS; (ii)
a Stock Option Agreement, dated as of March 31, 1995, by and among the
Company and CMS; and (iii) a Voting Agreement, dated as of March 31, 1995,
between the Company and certain stockholders of CMS named therein.
75
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 28th day of
August, 1995.
HORIZON/CMS HEALTHCARE CORPORATION
By /s/ NEAL M. ELLIOTT
-----------------------------------------------------------------------
Neal M. Elliott
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Each person whose
individual signature appears below hereby authorizes Scot Sauder and Ernest A.
Schofield or either of them, as attorneys-in-fact with full power of
substitution, to execute in the name and on behalf of each person, individual,
and in each capacity stated below, and to file, any and all amendments to this
report.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------- --------------------------- -------------------
<C> <S> <C>
/s/ NEAL M. ELLIOTT President, Chief Executive August 28, 1995
------------------------------- Officer and Chairman of
Neal M. Elliott the Board of Directors
(Principal Executive
Officer)
/s/ KLEMETT L. BELT, JR. Director August 28, 1995
-------------------------------
Klemett L. Belt, Jr.
/s/ RUSSELL L. CARSON Director August 28, 1995
-------------------------------
Russell L. Carson
/s/ BRYAN C. CRESSEY Director August 28, 1995
-------------------------------
Bryan C. Cressey
/s/ CHARLES H. GONZALES Director August 28, 1995
-------------------------------
Charles H. Gonzales
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------- --------------------------- -------------------
<C> <S> <C>
/s/ MICHAEL A. JEFFRIES Director August 28, 1995
-------------------------------
Michael A. Jeffries
/s/ GERARD M. MARTIN Director August 28, 1995
-------------------------------
Gerard M. Martin
/s/ FRANK M. MCCORD Director August 28, 1995
-------------------------------
Frank M. McCord
/s/ RAYMOND N. NOVECK Director August 28, 1995
-------------------------------
Raymond N. Noveck
/s/ ROCCO A. ORTENZIO Director August 28, 1995
-------------------------------
Rocco A. Ortenzio
/s/ ROBERT A. ORTENZIO Director August 28, 1995
-------------------------------
Robert A. Ortenzio
/s/ BARRY M. PORTNOY Director August 28, 1995
-------------------------------
Barry M. Portnoy
/s/ LEROY S. ZIMMERMAN Director August 28, 1995
-------------------------------
LeRoy S. Zimmerman
/s/ ERNEST A. SCHOFIELD Senior Vice President, August 28, 1995
------------------------------- Chief Financial Officer
Ernest A. Schofield and Chief Accounting
Officer (Principal
Financial and Accounting
Officer)
</TABLE>
77
<PAGE>
SCHEDULE II
HORIZON/CMS HEALTHCARE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
------------------
BALANCE AT CHARGED TO BALANCE AT
MAY 31, COSTS AND MAY 31,
DESCRIPTION 1994 EXPENSES OTHER DEDUCTIONS 1995
- ---------------------------------------- ---------- ---------- ----- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts......... $ 8,158 $ 2,201 -- $ (2,711 ) $ 7,648
Valuation allowance on deferred tax
asset.................................. $ 3,051 -- -- $ 3,051
</TABLE>
78
<PAGE>
FIRST SUPPLEMENTAL INDENTURE
Dated as of June 22, 1994
------------------
FIRST SUPPLEMENTAL INDENTURE, dated as of June 22, 1994 (the "First
Supplemental Indenture"), between CONTINENTAL MEDICAL SYSTEMS, INC., a Delaware
corporation (hereinafter called the "Company"), and NATIONSBANK OF VIRGINIA,
N.A., a national banking corporation, as trustee under the Indenture referred to
below (hereinafter called the "Trustee").
WHEREAS, the Company and the Trustee are parties to an Indenture, dated as
of August 17, 1992 (hereinafter called the "Existing Indenture", all capitalized
terms used in this First Supplemental Indenture and not otherwise defined being
used as defined in the Existing Indenture), pursuant to which the Company issued
its 10-7/8% Senior Subordinated Notes due 2002 (hereinafter called the
"Securities");
WHEREAS, on June 7, 1994, the Company solicited (the "Solicitation")
consents to amend certain provisions of the Existing Indenture;
WHEREAS, the Existing Indenture provides that, when authorized by a Board
Resolution, indentures supplemental thereto may be executed and delivered by the
Company and the Trustee with the consent of the Holders of not less than a
majority in principal amount of the Outstanding Securities (or in certain cases
the consent of the Holder of each Outstanding Security affected thereby), such
consent to be by Act of said Holders delivered to the Company and the Trustee;
WHEREAS, pursuant to the Solicitation, the Holders of at least a majority
in principal amount of the Outstanding Securities have so consented to the
execution and delivery of this First Supplemental Indenture; and
WHEREAS, all things necessary have been done to make this First
Supplemental Indenture, when executed and delivered by the Company, the legal,
valid and binding agreement of the Company, in accordance with its terms.
<PAGE>
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
The parties hereto mutually covenant and agree as follows:
PART ONE
Section 1009 of the Existing Indenture is hereby supplemented, modified and
restated to read as set forth in Exhibit A to this First Supplemental Indenture.
PART TWO
Section 1. This First Supplemental Indenture shall be construed as
supplemental to the Indenture and shall form a part thereof, and the Existing
Indenture is hereby incorporated by reference herein and, as supplemented,
modified and restated hereby, is hereby ratified, approved and confirmed.
Section 2. This First Supplemental Indenture shall be governed by and
construed in accordance with the laws of the State of New York.
Section 3. This First Supplemental Indenture may be signed in any number
of counterparts with the same effect as if the signatures to each counterpart
were upon a single instrument, and all such counterparts together shall be
deemed an original of this First Supplemental Indenture.
Section 4. This First Supplemental Indenture shall be effective and
operative on the date and time hereof.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
CONTINENTAL MEDICAL SYSTEMS, INC.
By: /s/ Dennis Lehman
-------------------------
Name: Dennis Lehman
Title: Senior V.P.
Attest: /s/ David Nation
------------------------
Name: David Nation
Title: Secretary
NATIONSBANK OF VIRGINIA, N.A.,
as Trustee
By: /s/ Franklin S. Wood
-------------------------
Name: Franklin S. Wood
Title: Assistant Vice President
Attest: /s/ Bob Richardson
------------------------
Name: Bob Richardson
Title: Vice President
3
<PAGE>
STATE OF VIRGINIA )
) ss.:
CITY OF RICHMOND )
On the 10 day of June, 1994, before me personally came Franklin S. Wood and
Bob Richardson respectively, to me known, who, being by me duly sworn, did
acknowledge before me that they reside at Richmond, VA and Midlothian, VA,
respectively; that they are Assistant VP and VP, respectively, of NationsBank of
Virginia, N.A., one of the corporations described in and which executed the
above instrument; that they know the corporate seal of such corporation; that
the seal affixed to said instrument is such corporate seal; that it was so
affixed pursuant to authority of the Board of Directors of such corporation;
and that they signed their names thereto pursuant to like authority.
(NOTARIAL SEAL)
/s/ Sheliah B. Berryman
-----------------------
My Commission Expires 8/31, 1996
----------
4
<PAGE>
STATE OF PENNSYLVANIA )
) ss.:
COUNTY OF CUMBERLAND )
On the 1st day of July, 1994, before me personally came Dennis L. Lehman
and David G. Nation, respectively, to me known, who, being by me duly sworn,
did acknowledge before me that they reside at Mechanicsburg, PA and
Mechanicsburg, PA, respectively; that they are Chief Financial Officer and
Secretary, respectively, of Continental Medical Systems, Inc., one of the
corporations described in and which executed the above instrument; that they
know the corporate seal of such corporation; that the seal affixed to said
instrument is such corporate seal; that it was so affixed pursuant to authority
of the Board of Directors of such corporation; and that they signed their names
thereto pursuant to like authority.
(NOTARIAL SEAL)
/s/ Susan J. Crabb
-----------------------
-------------------------------------
Notarial Seal
Susan J. Crabb, Notary Public
Upper Allan Twp., Cumberland County
My Commission Expires Nov. 13, 1995
-------------------------------------
5
<PAGE>
EXHIBIT A
SECTION 1009. LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and
will not permit any Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to holders
of, any Capital Stock of the Company (other than dividends or distributions
payable solely in shares of Qualified Capital Stock of the Company or in
options, warrants or other rights to acquire Qualified Capital Stock of the
Company);
(ii) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or any Affiliate thereof (other than any Wholly
Owned Subsidiary of the Company) or any option, warrant or other right to
acquire such Capital Stock of the Company or any Affiliate thereof;
(iii) make any principal payment on, or redeem, repurchase, defease or
otherwise acquire or retire for value, prior to any scheduled repayment, or
maturity, any Subordinated Indebtedness;
(iv) incur, create or assume any guarantee of Indebtedness of any
Affiliate (other than with respect to (a) guarantees of Indebtedness of any
Wholly Owned Subsidiary by the Company or by any Subsidiary or (b) guarantees of
Indebtedness of the Company by any Subsidiary of the Company, in each case in
accordance with the terms of this Indenture); or
(v) make any Investment in any Person (other than any Permitted
Investment)
(such payments described in (i) through (v) collectively, "Restricted Payments")
unless at the time of and after giving effect to the proposed Restricted Payment
(the amount of any such Restricted Payment, if other than cash, as determined by
the Board of Directors, whose determination shall be conclusive and evidenced by
a Board Resolution), (1) no Default or Event of Default shall have occurred and
be continuing; (2) immediately before and immediately after giving effect to
such transaction on a PRO FORMA basis, the Company could incur $1.00 of
additional Indebtedness under the provisions of Section 1008 (other than
Permitted Indebtedness); and (3) the aggregate amount of all Restricted Payments
(plus, without duplication, dividends and distributions paid to any Person other
than the Company, a Wholly Owned Subsidiary or a Permitted Joint Venture as
permitted by paragraph (b) of Section 1010) and any Restricted Payments made
pursuant to clauses (i), (iv), (v), (vii) and (viii) of the succeeding
paragraph) declared or made after the date of this Indenture shall not exceed
the sum of
A-1
<PAGE>
(A) 50% of the Consolidated Net Income of the Company accrued on a
cumulative basis during the period beginning on the date of this Indenture and
ending on the last day of the Company's last fiscal quarter ending prior to the
date of such proposed Restricted Payment (or, if such aggregate cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss);
(B) the aggregate Net Cash Proceeds, received after the date of this
Indenture by the Company as capital contributions to the Company;
(C) the aggregate Net Cash Proceeds received after the date of this
Indenture by the Company from the issuance or sale (other than to any of its
Subsidiaries) of shares of Capital Stock (other than Redeemable Capital Stock)
of the Company or any options or warrants to purchase such shares (other than
issuances in respect of clause (ii) of the subsequent paragraph) of Capital
Stock (other than Redeemable Capital Stock) of the Company;
(D) the aggregate Net Cash Proceeds received after the date of this
Indenture by the Company (other than from any of its Subsidiaries) upon the
exercise of any options or warrants to purchase shares of Capital Stock of the
Company; and
(E) the aggregate Net Cash Proceeds received after the date of this
Indenture by the Company for debt securities that have been converted into or
exchanged for Qualified Capital Stock of the Company to the extent such debt
securities are originally sold for cash plus the aggregate cash received by the
Company at the time of such conversion or exchange.
None of the foregoing provisions shall be deemed to prohibit the
following Restricted Payments so long as in the case of clauses (ii), (iii),
(v), (vi) and (viii) there is no Default or Event of Default continuing:
(i) dividends paid within 60 days after the date of declaration
if at the date of declaration, such payment would be permitted by the provisions
of the preceding paragraph and such payment shall be deemed to have been paid on
such date of declaration for purposes of the calculation required by the
provisions of the foregoing paragraph;
(ii) the redemption, repurchase or other acquisition or retirement
of any shares of any class of Capital Stock of the Company or Subordinated
Indebtedness in exchange for, or out of the net proceeds of, a substantially
concurrent issue and sale (other than to a Subsidiary) of shares of Qualified
Capital Stock of the Company; PROVIDED that any net proceeds from the issue and
sale of such Qualified Capital Stock are excluded from clause 3(C) of the
foregoing paragraph;
A-2
<PAGE>
(iii) the redemption, repurchase, or other acquisition or
retirement of Subordinated Indebtedness of the Company (other than Redeemable
Capital Stock) made by exchange for, or out of the proceeds of the substantially
concurrent sale of, new Indebtedness of the Company so long as (A) the principal
amount of such new Indebtedness does not exceed the principal amount of the
Indebtedness being so redeemed, repurchased, acquired or retired for value (plus
the amount of any premium required to be paid under the terms of the instrument
governing the Indebtedness being so redeemed, repurchased, acquired or retired),
(B) such Indebtedness is subordinated to Senior Indebtedness and the Securities
at least to the same extent as such Subordinated Indebtedness so purchased,
exchanged, redeemed, repurchased, acquired or retired for value, (C) such
Indebtedness has a Stated Maturity for its final scheduled principal payment
later than the Stated Maturity for the final scheduled principal payment of the
Securities and (D) such Indebtedness has an Average Life to Stated Maturity
equal to or greater than the remaining Average Life to Stated Maturity of the
Securities;
(iv) any purchase, redemption or other acquisition of Capital
Stock of a Permitted Joint Venture from a physician or other health care
provider which is required to be purchased, redeemed or otherwise acquired by
applicable law;
(v) in addition to the transactions covered by clause (iv) of
this paragraph, any purchase, redemption or other acquisition of Capital Stock
of a Permitted Joint Venture;
(vi) the incurrence, creation or assumption of any guarantee of
Indebtedness of a Permitted Joint Venture;
(vii) the making of any payment pursuant to any guarantee of
Indebtedness of a Permitted Joint Venture; or
(viii) the incurrence, creation or assumption of any Physician
Support Obligations and any payments made in respect thereof in an amount not to
exceed $5,000,000 in any given Fiscal Year.
A-3
<PAGE>
FIRST SUPPLEMENTAL INDENTURE
Dated as of June 22, 1994
-----------------------
FIRST SUPPLEMENTAL INDENTURE, dated as of June 22, 1994 (the "First
Supplemental Indenture"), between CONTINENTAL MEDICAL SYSTEMS, INC., a Delaware
corporation (hereinafter called the "Company"), and NATIONSBANK OF VIRGINIA,
N.A., a national banking corporation, as trustee under the Indenture referred to
below (hereinafter called the "Trustee").
WHEREAS, the Company and the Trustee are parties to an Indenture, dated as
of March 15, 1993 (hereinafter called the "Existing Indenture", all capitalized
terms used in this First Supplemental Indenture and not otherwise defined being
used as defined in the Existing Indenture), pursuant to which the Company issued
its 10-3/8% Senior Subordinated Notes due 2003, Series B (hereinafter called the
"Securities");
WHEREAS, on June 7, 1994, the Company solicited (the "Solicitation")
consents to amend certain provisions of the Existing Indenture;
WHEREAS, the Existing Indenture provides that, when authorized by a Board
Resolution, indentures supplemental thereto may be executed and delivered by the
Company and the Trustee with the consent of the Holders of not less than a
majority in principal amount of the Outstanding Securities (or in certain cases
the consent of the Holder of each Outstanding Security affected thereby), such
consent to be by Act of said Holders delivered to the Company and the Trustee;
WHEREAS, pursuant to the Solicitation, the Holders of at least a majority
in principal amount of the Outstanding Securities have so consented to the
execution and delivery of this First Supplemental Indenture; and
WHEREAS, all things necessary have been done to make this First
Supplemental Indenture, when executed and delivered by the Company, the legal,
valid and binding agreement of the Company, in accordance with its terms.
<PAGE>
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
The parties hereto mutually covenant and agree as follows:
PART ONE
Section 1009 of the Existing Indenture is hereby supplemented, modified and
restated to read as set forth in Exhibit A to this First Supplemental Indenture.
PART TWO
Section 1. This First Supplemental Indenture shall be construed as
supplemental to the Indenture and shall form a part thereof, and the Existing
Indenture is hereby incorporated by reference herein and, as supplemented,
modified and restated hereby, is hereby ratified, approved and confirmed.
Section 2. This First Supplemental Indenture shall be governed by and
construed in accordance with the laws of the State of New York.
Section 3. This First Supplemental Indenture may be signed in any number
of counterparts with the same effect as if the signatures to each counterpart
were upon a single instrument, and all such counterparts together shall be
deemed an original of this First Supplemental Indenture.
Section 4. This First Supplemental Indenture shall be effective and
operative on the date and time hereof.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
CONTINENTAL MEDICAL SYSTEMS, INC.
By: /s/ Dennis Lehman
-----------------------------
Name: Dennis Lehman
Title: Senior V.P.
Attest: /s/ David Nation
--------------------------
Name: David Nation
Title: Secretary
NATIONSBANK OF VIRGINIA, N.A.,
as Trustee
By: /s/ Franklin S. Wood
-----------------------------
Name: Franklin S. Wood
Title: Assistant Vice President
Attest: /s/ Bob Richardson
--------------------------
Name: Bob Richardson
Title: Vice President
3
<PAGE>
STATE OF VIRGINIA )
) ss.:
CITY OF RICHMOND )
On the 10 day of June, 1994, before me personally came Franklin S. Wood and
Bob Richardson respectively, to me known, who, being by me duly sworn, did
acknowledge before me that they reside at Richmond, VA and Midlothian, VA,
respectively; that they are Assistant VP and VP, respectively, of NationsBank of
Virginia, N.A., one of the corporations described in and which executed the
above instrument; that they know the corporate seal of such corporation; that
the seal affixed to said instrument is such corporate seal; that it was so
affixed pursuant to authority of the Board of Directors of such corporation;
and that they signed their names thereto pursuant to like authority.
(NOTARIAL SEAL)
/s/ Sheliah B. Berryman
-----------------------
My Commission Expires 8/31, 1996
----------
4
<PAGE>
STATE OF PENNSYLVANIA )
) ss.:
COUNTY OF CUMBERLAND )
On the 1st day of July, 1994, before me personally came Dennis L. Lehman
and David G. Nation, respectively, to me known, who, being by me duly sworn,
did acknowledge before me that they reside at Mechanicsburg, PA and
Mechanicsburg, PA, respectively; that they are Chief Financial Officer and
Secretary, respectively, of Continental Medical Systems, Inc., one of the
corporations described in and which executed the above instrument; that they
know the corporate seal of such corporation; that the seal affixed to said
instrument is such corporate seal; that it was so affixed pursuant to authority
of the Board of Directors of such corporation; and that they signed their names
thereto pursuant to like authority.
(NOTARIAL SEAL)
Susan J. Crabb
-----------------------
-------------------------------------
Notarial Seal
Susan J. Crabb, Notary Public
Upper Allan Twp., Cumberland County
My Commission Expires Nov. 13, 1995
-------------------------------------
5
<PAGE>
EXHIBIT A
SECTION 1009. LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and
will not permit any Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to holders
of, any Capital Stock of the Company (other than dividends or distributions
payable solely in shares of Qualified Capital Stock of the Company or in
options, warrants or other rights to acquire Qualified Capital Stock of the
Company);
(ii) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or any Affiliate thereof (other than any Wholly
Owned Subsidiary of the Company) or any option, warrant or other right to
acquire such Capital Stock of the Company or any Affiliate thereof;
(iii) make any principal payment on, or redeem, repurchase, defease or
otherwise acquire or retire for value, prior to any scheduled repayment, or
maturity, any Subordinated Indebtedness;
(iv) incur, create or assume any guarantee of Indebtedness of any
Affiliate (other than with respect to (a) guarantees of Indebtedness of any
Wholly Owned Subsidiary by the Company or by any Subsidiary or (b) guarantees of
Indebtedness of the Company by any Subsidiary of the Company, in each case in
accordance with the terms of this Indenture); or
(v) make any Investment in any Person (other than any Permitted
Investment)
(such payments described in (i) through (v) collectively, "Restricted Payments")
unless at the time of and after giving effect to the proposed Restricted Payment
(the amount of any such Restricted Payment, if other than cash, as determined by
the Board of Directors, whose determination shall be conclusive and evidenced by
a Board Resolution), (1) no Default or Event of Default shall have occurred and
be continuing; (2) immediately before and immediately after giving effect to
such transaction on a PRO FORMA basis, the Company could incur $1.00 of
additional Indebtedness under the provisions of Section 1008 (other than
Permitted Indebtedness); and (3) the aggregate amount of all Restricted Payments
(plus, without duplication, dividends and distributions paid to any Person other
than the Company, a Wholly Owned Subsidiary or a Permitted Joint Venture as
permitted by paragraph (b) of Section 1010) and any Restricted Payments made
pursuant to clauses (i), (iv), (v), (vii) and (viii) of the succeeding
paragraph) declared or made after the date of this Indenture shall not exceed
the sum of
A-1
<PAGE>
(A) 50% of the Consolidated Net Income of the Company accrued on a
cumulative basis during the period beginning on the date of this Indenture and
ending on the last day of the Company's last fiscal quarter ending prior to the
date of such proposed Restricted Payment (or, if such aggregate cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss);
(B) the aggregate Net Cash Proceeds, received after the date of this
Indenture by the Company as capital contributions to the Company;
(C) the aggregate Net Cash Proceeds received after the date of this
Indenture by the Company from the issuance or sale (other than to any of its
Subsidiaries) of shares of Capital Stock (other than Redeemable Capital Stock)
of the Company or any options or warrants to purchase such shares (other than
issuances in respect of clause (ii) of the subsequent paragraph) of Capital
Stock (other than Redeemable Capital Stock) of the Company;
(D) the aggregate Net Cash Proceeds received after the date of this
Indenture by the Company (other than from any of its Subsidiaries) upon the
exercise of any options or warrants to purchase shares of Capital Stock of the
Company; and
(E) the aggregate Net Cash Proceeds received after the date of this
Indenture by the Company for debt securities that have been converted into or
exchanged for Qualified Capital Stock of the Company to the extent such debt
securities are originally sold for cash plus the aggregate cash received by the
Company at the time of such conversion or exchange.
None of the foregoing provisions shall be deemed to prohibit the
following Restricted Payments so long as in the case of clauses (ii), (iii),
(v), (vi) and (viii) there is no Default or Event of Default continuing:
(i) dividends paid within 60 days after the date of declaration
if at the date of declaration, such payment would be permitted by the provisions
of the preceding paragraph and such payment shall be deemed to have been paid on
such date of declaration for purposes of the calculation required by the
provisions of the foregoing paragraph;
(ii) the redemption, repurchase or other acquisition or retirement
of any shares of any class of Capital Stock of the Company or Subordinated
Indebtedness in exchange for, or out of the net proceeds of, a substantially
concurrent issue and sale (other than to a Subsidiary) of shares of Qualified
Capital Stock of the Company; PROVIDED that any net proceeds from the issue and
sale of such Qualified Capital Stock are excluded from clause 3(C) of the
foregoing paragraph;
A-2
<PAGE>
(iii) the redemption, repurchase, or other acquisition or
retirement of Subordinated Indebtedness of the Company (other than Redeemable
Capital Stock) made by exchange for, or out of the proceeds of the substantially
concurrent sale of, new Indebtedness of the Company so long as (A) the principal
amount of such new Indebtedness does not exceed the principal amount of the
Indebtedness being so redeemed, repurchased, acquired or retired for value (plus
the amount of any premium required to be paid under the terms of the instrument
governing the Indebtedness being so redeemed, repurchased, acquired or retired),
(B) such Indebtedness is subordinated to Senior Indebtedness and the Securities
at least to the same extent as such Subordinated Indebtedness so purchased,
exchanged, redeemed, repurchased, acquired or retired for value, (C) such
Indebtedness has a Stated Maturity for its final scheduled principal payment
later than the Stated Maturity for the final scheduled principal payment of the
Securities and (D) such Indebtedness has an Average Life to Stated Maturity
equal to or greater than the remaining Average Life to Stated Maturity of the
Securities;
(iv) any purchase, redemption or other acquisition of Capital
Stock of a Permitted Joint Venture from a physician or other healthcare
provider which is required to be purchased, redeemed or otherwise acquired by
applicable law;
(v) in addition to the transactions covered by clause (iv) of
this paragraph, any purchase, redemption or other acquisition of Capital Stock
of a Permitted Joint Venture;
(vi) the incurrence, creation or assumption of any guarantee of
Indebtedness of a Permitted Joint Venture;
(vii) the making of any payment pursuant to any guarantee of
Indebtedness of a Permitted Joint Venture; or
(viii) the incurrence, creation or assumption of any Physician
Support Obligations and any payments made in respect thereof in an amount not to
exceed $5,000,000 in any given Fiscal Year.
A-3
<PAGE>
EMPLOYMENT AGREEMENT
Agreement made as of the 10th day of July 1995, by and between ROBERT A.
ORTENZIO (the "Employee") and HORIZON/CMS HEALTHCARE CORPORATION (the
"Employer").
W I T N E S S E T H:
WHEREAS, the parties hereto wish to enter into an Employment Agreement;
NOW THEREFORE, in consideration of the mutual agreements contained herein
and intending to be legally bound, the parties hereto hereby agree as follows:
Article 1. CAPACITY AND DUTIES
1.01. EMPLOYMENT; ACCEPTANCE OF EMPLOYMENT. The Employer hereby employs
Employee, and Employee hereby accepts employment by the Employer, subject to all
the terms and conditions hereafter set forth.
1.02. CAPACITY. Employee shall serve as an Executive Vice President of
Employer, reporting directly to its Chief Executive Officer, and as the
President and Chief Executive Officer of Continental Medical Systems, Inc.
("CMS"). In addition, the Employer has caused Employee to be elected to its
Board of Directors (the "Board of Directors") to serve until the 1995 annual
meeting of the Employer's stockholders and will nominate and use its best
efforts to cause Employee to be elected to serve
<PAGE>
as a member of the Board of Directors during the term of his employment
hereunder.
1.03. DUTIES. During the term of this Agreement, Employee shall devote
his full attention and his best efforts to the performance of the customary
duties of those offices of the Employer to which he is appointed pursuant to
Section 1.02; further provided that nothing herein shall be deemed to prevent
Employee from serving as a director of other companies; provided that, in the
case of companies, other than Transitional Health Services, Inc. and Renaissance
Healthcare Corporation, which compete with Employer, Employee shall obtain
Employer's consent to serving as a director, which consent shall not be
unreasonably withheld.
Article 2. TERM OF EMPLOYMENT; TERMINATION
2.01. TERM. Unless earlier terminated as hereafter provided, this
Agreement shall commence on the date hereof and shall expire on the second
anniversary of the date hereof; provided, however, that upon expiration of such
term, this Agreement shall be extended from year to year without further action
on the part of the parties hereto, unless either party hereto gives written
notice of termination to the other party at least thirty (30) days prior to the
expiration of the then current term.
-2-
<PAGE>
2.02. TERMINATION.
(a) DEATH. The employment of Employee under this Agreement shall
immediately terminate upon the death of Employee.
(b) DISABILITY. In the event that Employee, in the reasonable
written opinion of a qualified physician appointed by the Board of Directors, is
for any reason unable to perform the duties to be performed by Employee
hereunder for a period of 120 consecutive days by reason of Employee's
disability, the Board of Directors shall have the option to terminate the
employment of Employee under this Agreement effective upon its giving written
notice to Employee at any time following the expiration of such 120-day period,
but any such termination shall not affect Employer's obligations under Section
3.05. The term "disability" as used in this Section 2.02(b) means the inability
because of injury or sickness to perform the substantial and material duties of
the Employee's offices with Employer.
(c) DISCHARGE FOR CAUSE. The employment of Employee under this
Agreement shall terminate immediately if the Board of Directors discharges
Employee for cause. For purposes of this Agreement, "cause" shall mean: (i) the
willful and continued failure by Employee to substantially perform his duties
hereunder (other than any such failure resulting from Employee's incapacity due
to physical or mental illness), (ii) the engaging by Employee in willful or
reckless misconduct which is demonstrably and materially injurious to Employer,
monetarily or otherwise, or (iii) the conviction of Employee of a felony
involving moral
-3-
<PAGE>
turpitude. For purposes of this Section 2.02(c), an act, or failure to act, on
the Employee's part shall be considered "willful" or "reckless" only if done, or
omitted to be done, by him not in good faith and without a reasonable belief
that his action or omission was in the best interest of Employer. Employee's
employment shall not be deemed to have been terminated for cause unless Employer
shall have given or delivered to Employee (i) reasonable notice setting forth
the reasons for Employer's intention to terminate Employee's employment for
cause, (ii) an opportunity for Employee to cure any such breach during the 60-
day period after Employee's receipt of such notice, (iii) a reasonable
opportunity, at any time during the 60-day period after the Employee's receipt
of such notice, for Employee, together with his counsel, to be heard before the
Board of Directors, and (iv) a Notice of Termination (as defined in Section
2.02(e)) stating that, in the good faith opinion of not less than a majority of
the entire membership of the Board of Directors, Employee was guilty of the
conduct set forth in any of clauses (i), (ii) or (iii) of the second sentence of
this Section 2.02(c).
(d) GOOD REASON. Employee's employment may be terminated by
Employee for good reason. For purposes of this Agreement, "good reason" shall
mean:
(i) The assignment to Employee of any duties inconsistent
with and inferior in any material respect to the Employee's position (including
status, offices, titles and reporting requirements), authority, duties or
responsibilities as
-4-
<PAGE>
an Executive Vice President reporting directly to the Chief Executive Officer
and a member of the Board of Directors of Employer, or any other action by
Employer which results in a material diminution or material adverse change in
such position, status, authority, duties or responsibilities, excluding for this
purpose, an isolated, insubstantial and inadvertent action not taken in bad
faith and which is remedied promptly after receipt of notice thereof given by
Employee;
(ii) any failure by the Company to comply with any of the
provisions of Article 3 of this Agreement, other than an isolated, insubstantial
and inadvertent failure not occurring in bad faith and which is remedied by
Employer promptly after receipt of notice thereof given by the Employee;
(iii) Employer's requiring Employee to be based at any office
or location other than Mechanicsburg, Pennsylvania;
(iv) any purported termination by Employer of Employee's
employment otherwise than as expressly permitted by this Agreement or removal
from or failure to reelect Employee to the Board of Directors; or
(v) any failure by Employer to comply with and satisfy
Section 5.01 of this Agreement.
For purposes of this Section 2.02(d), any good faith determination of "good
reason" made by Employee shall be conclusive.
-5-
<PAGE>
(a) NOTICE OF TERMINATION. Any termination of Employee's
employment, other than a termination by reason of death, shall be communicated
by Notice of Termination to the other party hereto. For purposes of this
Agreement, a "Notice of Termination" means a written notice which (i) indicates
the specific termination provisions of this Agreement relied upon, (ii) if
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of Employee's employment under the provision
so indicated, and (iii) specifies the termination date (which date shall, except
as otherwise expressly provided in this Article 2, be not more than 15 days
after the giving of such Notice). The failure by Employee to set forth in the
Notice of Termination any fact or circumstances which contribute to a showing of
good reason shall not waive any right of Employee hereunder or preclude the
Employee from asserting such facts or circumstances in enforcing Employee's
rights hereunder. In the event of a termination by Employer for cause, the
Notice of Termination shall not be effective unless preceded by satisfaction of
the procedural requirements set forth in Section 2.02(c) hereof.
(f) CERTAIN TERMINATIONS. If (a) Employee's services should be
terminated by Employer for any reason other than for cause as defined in Section
2.02(c) hereof or (b) Employee terminates his employment for good reason as
defined in Section 2.02(d) hereof or (c) Employee terminates his employment
(whether or not for good reason) after the first day of the first
-6-
<PAGE>
month ending at least 18 months from the date hereof: (i) any stock options with
respect to Employer's stock, including the stock options granted pursuant to
Section 3.03 hereof, shall become fully exercisable as of the date of such
termination; (ii) any stock or convertible debentures of Employer held by
Employee subject to vesting requirements shall become fully vested as of such
date; and (iii) Employer shall, within 10 days thereafter, pay to Employee as
severance an amount equal to one dollar less than three times his average total
annual cash compensation from Employer for the five taxable years of Employee
preceding Employee's taxable year in which the termination occurs (including
compensation paid to Employee by CMS if this Agreement has been in effect less
than three years or five years, respectively). Employer agrees that (i)
termination under this Section 2.02(f) would not be voluntary or a termination
for cause as defined in 2.02(c) hereof or in the relevant sections of any of
Employer's stock option plans now or hereafter in effect (collectively the
"Plans") and the stock option agreements entered into by Employer and Employee
in connection with options granted pursuant to any of the Plans (including
option agreements that may be entered into in the future in connection with
additional options granted pursuant to any of the Plans), and (ii) Employee
would have the right, as set forth in the Plans, to exercise, at any time prior
to the earlier of three months after the date of such termination or the
expiration of such option (or such later date as may be permitted by such
Plans), all options to purchase Employer's stock that have
-7-
<PAGE>
previously been granted or that may be granted after the date hereof pursuant to
the Plans.
Article 3. COMPENSATION
3.01. CASH COMPENSATION. During the term of this Agreement or any
extension thereof, as compensation for services to the Employer pursuant to this
Agreement, the Employer shall pay to Employee a base salary of $431,000 per year
in equal bi-weekly installments. The Board of Directors, by and through its
Compensation Committee, may, in its sole discretion from time to time, increase
the base compensation to be paid to Employee as provided in this Article 3, or
provide additional compensation to Employee, including but not limited to an
annual bonus, whether permanently or for a limited period of time, based upon
the earnings or performance of the Employer or otherwise in order to recognize
and fairly compensate Employee for the value of his services to the Employer. In
addition, Employee shall be entitled to receive all fringe benefits provided to
its senior executive and officers, including insurance benefits (as the same may
be amended or modified from time to time).
3.02. SPLIT-DOLLAR INSURANCE. In addition to any insurance benefits
referred to in Section 3.01 hereof, the Employer shall provide up to $32,000 per
year to pay the premiums on a policy insuring the life of Employee or the lives
of Employee and his spouse owned by Employee or members of his family or a trust
for his benefit or the benefit of his family under a "split-
-8-
<PAGE>
dollar" arrangement; I.E., whereunder the proceeds of the policy are
collaterally assigned to Employer so that upon the death of Employee, the
Employer will be repaid out of the proceeds an amount equal to the premiums it
has advanced.
3.03. STOCK OPTION. The Employer shall cause the Stock Option Committee
of the Board of Directors to grant to Employee such stock options as are
appropriate for a senior executive officer of the Employer.
3.04. VACATION. Employee shall receive four (4) weeks paid vacation per
year, such vacation to be taken when and as desired by Employee. Any time spent
by Employee as a director of another company or at professional meetings,
instructional courses and other meetings of like nature so as to better enable
the Employee to perform professional services in the employ of the Employer
shall not be considered vacation time.
3.05. DISABILITY PAYMENTS. Employer shall pay to Employee a salary
continuation in the annual amount of fifty percent (50%) of Employee's annual
base salary at the time of any disability if the Employee shall become disabled
as defined herein and this Agreement is terminated pursuant to Section 2.02(b)
hereof, such payments to commence from the date of such termination and to
continue until the earlier of the date Employee shall reach age sixty-five (65)
or the date Employee recovers from the disability.
3.06. RETIREMENT BENEFITS. Employer shall provide to Employee an annual
retirement benefit equal to five percent (5%)
-9-
<PAGE>
of Employee's highest annual base salary during his employment with Employer
(including, for the avoidance of doubt, CMS), multiplied by his number of years
of service with Employer, including full credit for service with CMS retroactive
to March 1986; PROVIDED, THAT such amount shall be reduced by the amount of any
benefits paid to Employee from federal social security or from any retirement
plan of Employer, AND FURTHER PROVIDED that such annual retirement benefit shall
not exceed fifty percent (50%) of Employee's highest annual base salary during
his employment with Employer. Employee shall be eligible for payment of
retirement benefits under this Section 3.06 commencing upon his retirement from
Employer regardless of Employee's age.
3.07. DEATH BENEFITS. Upon the death of Employee, whether before or
after retirement, Employer shall pay Employee's surviving spouse (during her
lifetime) or, upon the death of Employee's spouse, to the legal guardian of his
children 21 years of age or younger (until such children reach the age of 21),
to be used solely for the benefit and support of such children, an amount equal
to one-half the retirement benefit payable to Employee on the date of his death
pursuant to Section 3.06 hereof.
3.08. OTHER COMPENSATION. From time to time, Employer may provide such
pension and profit sharing benefits as the Board of Directors, by and through
its Compensation Committee, shall authorize.
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<PAGE>
Article 4. CERTAIN COVENANTS
4.01. NONCOMPETITION; CONFIDENTIAL INFORMATION. During the term of
employment hereunder, Employee shall not accept employment with any employer in
competition with, nor engage in any activities in competition with, the business
of Employer, or any of its affiliates, if such employment or activities are
carried on within a twenty (20) mile radius of any hospitals, nursing homes or
other health care facilities now or hereafter managed by the Employer or any of
its affiliates or owned by the Employer or any of its affiliates to the extent
of more than 5% of the equity thereof. This Section 4.01 shall not prevent
Employee from acquiring, as a passive investor, up to 5% of the equity of a
competing enterprise.
Article 5. MISCELLANEOUS
5.01. ASSIGNMENT. This Agreement shall not be assignable by Employee;
and shall be assignable by Employer only to a person, firm or corporation which
may become a successor in interest to the Employer with respect to the business
or a portion of the business presently operated by it. Employer will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Employer to assume expressly and agree to perform this Agreement in the same
manner and to the same extent that the Employer would be required to perform if
no such succession had taken place.
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<PAGE>
5.02. ENTIRE AGREEMENT. This writing represents the entire agreement and
understanding of the parties with respect to the subject matter hereof, it
supersedes in its entirety any other prior employment agreements between
Employer (including, for the avoidance of doubt, CMS) and Employee, whether
written or oral, and it may not be altered or amended except by an agreement in
writing.
5.03. BINDING EFFECT. Subject to Section 5.01, this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors, assigns, heirs, executors and administrators. If any provision of
this Agreement shall be or become illegal or unenforceable in whole or in part
for any reason whatsoever, the remaining provisions shall nevertheless be deemed
valid, binding and subsisting.
5.04. GOVERNING LAW. This Agreement is made pursuant to, and shall be
construed and enforced in accordance with, the laws of the State of New Mexico
(and United States federal law, to the extent applicable), irrespective of the
principal place of business, residence or domicile of the parties hereto, and
without giving effect to otherwise applicable principles of conflicts of law.
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<PAGE>
5.05 HEADINGS. The headings of paragraphs in this Agreement are for
convenience only; they form no part of this Agreement and shall not affect its
interpretation.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
HORIZON/CMS HEALTHCARE CORPORATION
Attest:
/s/ Everett Schofield by /s/ Scot Saunder
- --------------------------------- ------------------------------------
(Corporate Seal)
Witness /s/ J. L. Blumenstein /s/ Robert A. Ortenzio (SEAL)
- --------------------------------- --------------------------------------
Robert A. Ortenzio
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<PAGE>
SUBSCRIPTION AND LENDING AGREEMENT
BETWEEN CONTINENTAL MEDICAL SYSTEMS, INC.
AND ROCCO A. ORTENZIO
Rocco A. Ortenzio ("Purchaser") hereby subscribes for and agrees to
purchase $2 million principal amount of a 7 3/4% Convertible Subordinated Note,
due May 1, 2012, to be issued by Continental Medical Systems, Inc. (the
"Company") in the form attached hereto as "Exhibit A" (hereinafter the
"Convertible Note"). The purchase price shall be $2 million, payable in cash or
by check.
The Company agrees to lend $2 million to Purchaser against the delivery to
the Company of Purchaser's 7 3/4% promissory note due May 1, 2012, in the
principal amount of $2 million in the form attached hereto as "Exhibit B"
(hereinafter the "Promissory Note".)
Purchaser acknowledges that the Convertible Note has not been registered
under the Securities Act of 1933, as amended, (the "Act"), and represents that
the Convertible Note is being acquired by him solely for his own account, for
investment, and not with a view to, or for resale in connection with, a public
distribution of the Convertible Note or the common stock of the Company issuable
on conversion thereof, within the meaning of the Act and the rules and
regulations promulgated thereunder.
Purchaser represents that his present and anticipated financial position
permits him to purchase the Convertible
<PAGE>
Note and to hold such Convertible Note indefinitely for investment purposes. He
acknowledges that he is thoroughly familiar with the business of the Company and
has done all investigations he deems necessary and desirable in connection with
his purchase. Purchaser has been advised that the availability of the exemption
from registration under the Act is dependent, in part, on the truth of the
foregoing representations and that the Company is relying on them in issuing the
Convertible Note.
Purchaser shall have no right to transfer or convert the Convertible Note
notwithstanding its terms except to the extent of the principal amount permitted
as of each date set forth below:
Cumulative Aggregate
Amount Transferable
Date: On or After or Convertible
----------------- --------------------
November 1, 1988 $ 400,000.00
November 1, 1989 $ 800,000.00
November 1, 1990 $ 1200,000.00
November 1, 1991 $ 1600,000.00
November 1, 1992 $2,000,000.00
If Purchaser is terminated as an employee of the Company without "cause",
as defined in the Employment Agreement between Purchaser and the Company dated
July 1, 1986, (the "Employment Agreement"), the restrictions on transfer and
conversion reflected in the schedule above shall terminate; and in addition, in
such event the Company hereby grants to the Purchaser the option, for ninety
days after such termination, to sell all or any remaining portion of the
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<PAGE>
Convertible Note then held by Purchaser to the Company for cash equal to the
principal amount thereof.
If Purchaser dies, becomes disabled, or voluntarily terminates his
employment with or is terminated for cause by the Company, the Company agrees to
repurchase and Purchaser agrees to sell to the Company on a date to be agreed
upon which is not more than ninety days after the date of his death, disability
or termination, the portion (if any) of the Convertible Note which is not
transferable or convertible by reason of the operation of the above schedule,
for cash equal to the principal amount of the Convertible Note to be purchased.
If Purchaser is terminated by the Company for "cause", as defined in the
Employment Agreement, Purchaser hereby grants to the Company the option, for
ninety days following such termination, to repurchase that portion of the
Convertible Note then transferable by Purchaser, for cash equal to the principal
amount thereof. Purchaser shall not sell or convert any portion of the
Convertible Note during such option period.
If the Company purchases any portion of the Convertible Note from the
Purchaser, Purchaser authorizes the Company to set off against the purchase
price any and all obligations of the Purchaser to the Company for borrowed money
(whether or not then due and payable by their terms), including the Promissory
Note.
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<PAGE>
Upon notification from Purchaser that all or a portion of the Convertible
Note has been sold or converted, the Company will release to Purchaser for the
purpose of delivery in connection with such sale or conversion a new convertible
note in the form of Exhibit A but in the principal amount sold, or a certificate
for the common shares issuable, as appropriate, and retain the remaining
principal amount as security for payment of the Promissory Note, as provided
herein.
This Subscription Agreement shall be binding on the personal
representatives and successors of the Purchaser, but is not assignable by the
Purchaser to any person, including any transferee of the Convertible Note.
Dated as of this 1st day of November 1987.
/s/ Rocco A. Ortenzio
- ----------------------------------
Rocco A. Ortenzio (Purchaser)
Continental Medical Services, Inc.
by Robert A. Ortez, Ex.V.P.
- ----------------------------------
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<PAGE>
This Note and the Common Shares issuable on
conversion hereof have not been registered under
the Securities Exchange Act of 1933,
and are restricted as to transfer by
conditions contained herein.
CONTINENTAL MEDICAL SYSTEMS, INC.
7 3/4% Convertible Subordinated Debenture Due
May 1, 2012
ARTICLE ONE
OBLIGATION TO PAY PRINCIPAL AND INTEREST
1.01. Continental Medical Systems, Inc. (hereinafter "the Company")
promises to pay Rocco A. Ortenzio (hereinafter the "Holder") or registered
assigns the principal sum of $2,000,000 on May 1, 2012, and to pay interest
thereon from the date hereof at the rate of seven and three quarters percent
(7 3/4%) per annum semi-annually on November 1 and May 1 of each year, after
the date hereof until payment of the principal sum. Interest will be computed
on the basis of a 360-day year of twelve 30-day months.
The Company will pay principal and interest in money of the United States
that at the time of payment is legal tender for payment of public and private
debts. The Company may, however, pay principal and interest by its check payable
in such money mailed to the address of the Holder registered on its books.
ARTICLE TWO
DEFAULTS AND REMEDIES
2.01. An "Event of Default" occurs if:
(1) the Company defaults in the payment of interest on this Note when the
same becomes due and payable and the default continues for a period of
30 days whether or not such payment shall be prohibited by the
provisions on subordination.
(2) the Company defaults in the payment of principal of the Note when the
same becomes due and payable at maturity or otherwise, whether or not
such payment shall be prohibited by the provisions on subordination.
(3) the Company fails to comply with any of its other agreements in this
Note and such failure
<PAGE>
continues for a period of 30 days after notice of such failure has
been given to the Company by the Holder.
(4) the Company pursuant to or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against it in an
involuntary case,
(C) consents to the appointment of a Custodian of it or for all or
substantially all of its property, or
(D) makes a general assignment for the benefit of its creditors; or
(5) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that:
(A) is for relief against the Company in an involuntary case,
(B) appoints a Custodian of the Company or for all or substantially
all of its property, or
(C) orders the liquidation of the Company, and the order or decree
remains unstayed and in effect for 90 days.
The term "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal
or State law for the relief of debtors. The term "Custodian" means any receiver,
trustee, assignee, liquidator or similar official under any Bankruptcy Law.
ARTICLE THREE
CONVERSION
3.01. CONVERSION PRIVILEGE. The Holder of this Note has the right,
exercisable at any time up to the close of business on May 1, 2012, to convert
the Note at the principal amount thereof (or any portion thereof that is an
integral multiple of $1000) into Common Shares of the Company at the initial
conversion price of $12.84 per share, subject to adjustment as described below.
In case this Note is called for redemption, conversion rights with respect to
the principal amount being redeemed will expire at the close of the business day
next preceding the redemption day. The number of Commmon Shares issuable upon
conversion of the Note
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<PAGE>
is determined as follows: Divide the principal amount converted by the
conversion price in effect on the conversion date and round the result to the
nearest 1/100th of a share.
3.02. CONVERSION PROCEDURE. To convert this Note the Holder must (1)
complete and sign the conversion notice attached to this Note, (2) surrender the
Note to the Company, (3) furnish appropriate endorsements or transfer documents
if required by the Company and (4) pay any transfer or similar tax if required.
As soon as practicable after the conversion date, the Company shall
deliver to the Holder a certificate for the number of Common Shares issuable
upon the conversion and a check for any fractional share. The Holder becomes a
stockholder of record on the conversion date. No payment or adjustment will be
made for accrued interest on the portion of this Note which is converted.
Upon surrender of this Note in the event of a partial conversion the
Company shall deliver to the Holder a new Note equal in principal amount to the
unconverted portion of this Note and in all other respects identical to this
Note.
If the last day on which the Note may be converted is a Legal Holiday in a
place where the Company is located, the Note may be surrendered to the Company
on the next succeeding day that is not a Legal Holiday.
3.03. FRACTIONAL SHARES. The Company will not issue a fractional Common
Share upon conversion of the Note. Instead, the Company will deliver its check
for the current market value of a fractional share. If the conversion results in
a fractional interest, an amount will be paid in cash equal to the value of such
fractional interest based on the market price of the Company's Common Shares.
The market price of a Common Share for the purpose of Section 3.03 is the
last sales price as reported by the National Market System of the National
Association of Securities Dealers Automated Quotation System, or if the Common
Shares are listed on an other exchange, the last reported sale price on the
principal exchange on which the Common Shares are listed, on the last trading
day prior to the conversion date. In the absence of one or more such quotations,
the Board of Directors shall determine the current market price on the basis of
such quotation as it considers appropriate.
3.04. TAXES ON CONVERSION. If the Holder of this Note converts it, the
Company may require the Holder to pay any documentary, stamp or similar issue or
transfer tax due on the issue of Common Shares upon the conversion. The Holder,
however, shall pay any such tax which is due because the shares are issued in a
name other than his.
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<PAGE>
3.05. COMPANY TO PROVIDE STOCK. The Company shall reserve out of its
authorized but unissued Common Shares or its Common Shares held in Treasury
enough Common Shares to permit the conversion of the Note.
3.06. ADJUSTMENT FOR CHANGE IN CAPITAL STOCK. If the Company:
(1) pays a dividend in Common Shares to Holders of such Shares;
(2) subdivides its outstanding Common Shares into a greater number
of Shares;
(3) combines its outstanding Common Shares into a smaller number of
Shares;
(4) makes a distribution on its Common Shares in shares of its
capital stock other than Common Shares; or
(5) issues by reclassification of its Common Shares any shares of
its capital stock,
then the conversion privilege and the conversion price in effect immediately
prior to such action shall be adjusted so that the Holder of the Note shall
receive the number of shares of capital stock of the Company which such Holder
would have received immediately following such action if such Holder had
converted the Note immediately prior to such action.
For a dividend or distribution, the adjustment shall become effective
immediately after the record date for the dividend or distribution. For a
subdivision, combination or reclassification, the adjustment shall become
effective immediately after the effective date of the subdivision, combination
or reclassification.
If after an adjustment the Holder of the Note upon conversion may receive
shares of two or more classes of capital stock of the Company, the Board of
Directors shall determine the allolation of the adjusted conversion price
between or among the classes of capital stock. After such allocation, the
conversion prices of the classes of capital stock shall thereafter be subject to
adjustment on terms comparable to those applicable to Common Shares in this
Note.
3.07. ADJUSTMENT FOR RIGHTS ISSUE. If the Company issues any rights or
warrants to all holders of its Common Shares entitling them for a period
expiring within 45 days after the record date mentioned below to purchase Common
Shares (or securities convertible into Common Shares) at a price per share (or
having a conversion price per share) less
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<PAGE>
than the current market price per share on that record date, the conversion
price shall be adjusted in accordance with the formula:
O + (N x P)
-----
M
C' = C x ------------
O + N
where
C' = the adjusted conversion price.
C = the then current conversion price.
O = the number of Common Shares outstanding on the record date.
N = the number of additional Common Shares offered.
P = the ofering or conversion price per share of the additional shares.
M = the current market price per Common Share on the record date.
The adjustment shall be made successively whenever any such rights or
warrants are issued, and shall become effective immediately after the record
date for the determination of stockholders entitled to receive the rights or
warrants. If all of the Common Shares or securities convertible into Common
Shares subject to such rights or warrants have not been issued when such rights
or warrants expire, then the conversion price shall promptly be readjusted to
the conversion price which would then be in effect had the adjustment upon
the issuance of such rights or warrants been made on the basis of the actual
number of Common Shares (or securities convertible into Common Shares) issued
upon the exercise of such rights or warrants.
3.08. ADJUSTMENT FOR OTHER DISTRIBUTIONS. If the Company distributes to
all holders of its Common Shares any assets or debt securities or any rights or
warrants to purchase securities, the conversion price shall be adjusted in
accordance with the formula:
C' = C x (O x M) - F
-----------
O x M
where
C' = the adjusted conversion price.
C = the then current conversion price.
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<PAGE>
O = the number of Common Shares outstanding on the record date mentioned
below.
M = the current market price per Common Share on the record date mentioned
below.
F = the fair market value on the record date of the assets, securities, right
or warrants distributed. The Board of Directors shall determine the fair
market value.
The adjustment shall be made successively whenever any such distribution
is made, and shall become effective immediately after the record date for the
determination of stockholders entitled to receive the distribution.
3.09. VOLUNTARY ADJUSTMENT. The Company at any time may reduce the
conversion price by any amount but in no event shall such conversion price be
less than the par value of the Common Shares at the time such reduction is made.
3.10. CURRENT MARKET PRICE. The current market price per Common Share for
purposes of Sections 3.07 and 3.08 on any date is the average of the daily
closing prices as reported by the National Market System of the National
Association of Securities Dealers Automated Quotation System, or if the Common
Shares are listed on an exchange, the closing sale prices, on the principal
exchange on which the Common Shares are listed, for 30 consecutive trading days
commencing 45 business days before the date in question. In the absence of one
or more such quotations, the Board of Directors shall determine the current
market price on the basis of such quotation as it considers appropriate.
3.11. WHEN ADJUSTMENT TO THE CONVERSION PRICE MAY BE DEFERRED. No
adjustment in the conversion price need be made unless the adjustment would
require an increase or decrease of at least one percent (1%) in the conversion
price. Any adjustments which are not made shall be carried forward and taken
into account in any subsequent adjustment.
All calculations under this Section shall be made to the nearest cent or to
the nearest 1/100th of a share, as the case may be.
3.12. WHEN ADJUSTMENT TO THE CONVERSION PRICE IS NOT REQUIRED. Unless
this Article provides otherwise, no adjustment in the conversion price shall be
made because the Company issues, in exchange for cash, property or services,
Common Shares, or any securities convertible into or exchangeable for Common
Shares, or securities carrying the rights to purchase shares of Common Shares
or such convertible or exchangeable securities.
-6-
<PAGE>
Furthermore, no adjustment in the conversion price need be made under this
Section for sale of Common Shares pursuant to a Company plan providing for
reinvestment of dividends or interest or in the event the par value of the
Common Shares is changed.
If the Company is a party to a sale of assets, consolidation, or merger
which reclassifies or changes its outstanding Common Shares, the successor
corporation (or corporation controlling the successor corporation or the
Company, as the case may be) shall enter into a supplemental agreement. The
supplemental agreement shall provide that the Holder of this Note may convert it
into the kind and amount of securities or cash or other assets which he would
transfer if he had converted the Note immediately before the effective date of
such transaction. The supplemental agreement shall provide for adjustments which
shall be as nearly equivalent as may be practical to the adjustments provided
for in this Note.
ARTICLE FOUR
SUBORDINATION
4.01. NOTE SUBORDINATED TO SENIOR INDEBTEDNESS. The Company agrees, and
the Holder of this Note agrees, that the payment of the principal of and
interest on this Note is subordinated, to the extent and in the manner provided
in this Note, to the prior payment in full of all Senior Indebtedness.
4.02. "SENIOR INDEBTEDNESS" means the principal of and interest on all
indebtedness of the Company outstanding at any time (other than indebtedness of
the Company to a Subsidiary for money borrowed or advanced from any Subsidiary)
except indebtedness which by its terms is not superior in right of payment to
this Note.
4.03. "INDEBTEDNESS" MEANS:
(1) any debt of the Company (i) for borrowed money, capitalized
lease obligations or purchase money obligations or (ii)
evidenced by a note, debenture or similar instrument given in
connection with the acquisition, other than in the ordinary
course of business, of any property or assets;
(2) any debt of others described in the preceding clause which the
Company has guaranteed or for which it is otherwise liable; and
(3) any amendment, renewal, extension or refunding of any such
debt.
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<PAGE>
Article Four shall constitute a continuing offer to all persons who, in
reliance upon such provisions, become holders of, or continue to hold, Senior
Indebtedness, and such provisions are made for the benefit of the holder of
Senior Indebtedness, and such holders are made obligees hereunder and they
and/or each of them may enforce such provisions.
4.04. COMPANY NOT TO MAKE PAYMENTS WITH RESPECT TO THIS NOTE IN CERTAIN
CIRCUMSTANCES.
(a) Upon the maturity of any Senior Indebtedness by lapse of time,
acceleration or otherwise, all principal thereof and interest thereon shall
first be paid in full, or such payment duly provided for in cash or in a
manner satisfactory to the holders of such Senior Indebtedness, before any
payment is made on account of the principal of or interest on this Note.
(b) Upon the happening of any default in payment of the principal
of or interest on any Senior Indebtedness, then, unless and until such
default shall have been cured or waived or shall have ceased to exist, no
payment shall be made by the Company with respect to the principal of or
interest on this Note, nor shall any payment be made by the Company to
acquire the Note. Nothing in this section, however, shall relieve the
holders of such Senior Indebtedness or their representative from any notice
requirements set forth in the instrument evidencing such Senior
Indebtedness.
(c) In the event that the Company shall make any payment on account
of the principal of or interest on this Note, after the happening of a
default in payment of the principal of or interest on Senior Indebtedness,
then, unless and until such default shall have been cured or waived or
shall have ceased to exist, such payment shall be received and held in
trust for and shall be paid forthwith over and delivered to, the holders of
Senior Indebtedness (pro rata as to each of such holders on the basis of
the respective amounts of Senior Indebtedness held by them) or their
representative or the trustee under the indenture or other agreement (if
any) pursuant to which Senior Indebtedness may have been issued, as their
respective interests may appear, for application to the payment of all
Senior Indebtedness remaining unpaid to the extent necessary to pay all
Senior Indebtedness in full in accordance with its terms, after giving
effect to any concurrent payment or distribution to or for the holders of
Senior Indebtedness.
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<PAGE>
4.05. NOTE SUBORDINATED TO PRIOR PAYMENT OF ALL SENIOR INDEBTEDNESS ON
DISSOLUTION, LIQUIDATION OR REOARGANIZATION OF THE COMPANY. Upon any
distribution of assets of the Company in any dissolution, winding up,
liquidation or reorganization of the Company (whether in bankruptcy, insolvency
or receivership proceedings or upon an assignment for the benefit of creditors
or otherwise):
(a) the holders of all Senior Indebtedness shall first be entitled
to receive payments in full of the principal thereof, premium, if any, and
interest due thereon before the Holder of this Note is entitled to receive
any payment on account of the principal of or interest on this Note;
(b) any payment or distribution of assets of the Company of any
kind or character, whether in cash, property or securities, to which the
Holder of this Note would be entitled except for the provisions of this
section, including any such payment or distribution which may be payable or
deliverable by reason of the payment of any other indebtedness of the
Company being subordinated to the payment of this Note, shall be paid by
the liquidating trustee or agent or other person making such payment or
distribution directly to the holders of the Senior Indebtedness or their
representative, or to the trustee under any indenture under which Senior
Indebtedness may have been issued (pro rata as to each such holder,
representative or trustee on the basis of the respective amounts of unpaid
Senior Indebtedness held or represented by each), to the extent necessary
to make payment in full of all Senior Indebtedness remaining unpaid, after
giving effect to any concurrent payment or distribution or provision
therefor to the holders of such Senior Indebtedness, except that the Holder
of this Note would be entitled to receive securities that are subordinated
to Senior Indebtedness to at least the same extent as this Note; and
(c) in the event that notwithstanding the foregoing provisions of
Article Five any payment or distribution of assets of the Company of any
kind or character, whether in cash, property or securities, including any
such payment or distribution which may be payable or deliverable by reason
of the payment of any other indebtedness of the Company being subordinated
to the payment of this Note, shall be received by the Holder of this Note
on account of principal of or interest on this Note before all Senior
Indebtedness is paid in full, or effective provision made for its payment,
such payment or distribution shall be received and held in trust for and
shall be paid over to the holders of the Senior Indebtedness remaining
-9-
<PAGE>
unpaid or unprovided for or their representative, or to the trustee under
any indenture under which such Senior Indebtedness may have been issued
(pro rata as provided in subsection (b) above), for application to the
payment of such senior Indebtedness until all such Senior Indebtedness
shall have been paid in full, after giving effect to any concurrent payment
or distribution or provision therefor to the holders of such Senior
Indebtedness, except that Holder of this Note would be entitled to receive
securities that are subordinated to Senior Indebtedness to at least the
same extent as this Note.
4.06. NOTEHOLDER TO BE SUBROGATED TO RIGHTS OF HOLDERS OF SENIOR
INDEBTEDNESS. Subject to the payment in full of all Senior Indebtedness, the
Holder of this Note shall be subrogated equally and ratably to the rights of the
holders of the Senior Indebtedness to receive payments or distributions of
assets of the Company applicable to the Senior Indebtedness until all amounts
owing on this Note shall be paid in full, and for the purpose of such
subrogation no payments or distributions to the holders of the Senior
Indebtedness by or on behalf of the Company or by the Holder of this Note by
virtue of Article Five which otherwise would have been made to the Holder of
this Note shall, as between the Company, its creditors other than holders of the
Senior Indebtedness and the Holder of this Note, be deemed to be payment by the
Company to or on account of the Senior Indebtedness, it being understood that
the provisions of Article Five are intended solely for the purpose of defining
the relative rights of the Holder of this Note, on the one hand, and the
holders of the Senior Indebtedness, on the other hand.
4.07. OBLIGATION OF THE COMPANY UNCONDITIONAL. Nothing contained in this
section or elsewhere is intended to or shall impair, as between the Company, its
creditors other than holders of Senior Indebtedness and the Holder of this Note,
the obligation of the Company, which is absolute and unconditional, to pay to
the Holder of this Note the principal of and interest on this Note as and when
the same shall become due and payable in accordance with their terms, or is
intended to or shall affect the relative rights of the Holder of this Note and
the creditors of the Company other than the holders of the Senior Indebtedness,
nor shall anything herein prevent the Holder of this Note from exercising all
remedies otherwise permitted by applicable law upon default, subject to the
rights, if any, of the holders of Senior Indebtedness in respect to cash,
property or securities of the Company received upon the exercise of any such
remedy. Upon any distribution of assets of the Company referred to in this
section, the Holder of this Note shall be entitled to rely upon any order or
decree made by any court of competent jurisdiction in which such dissolution,
winding up, liquidation or reorganization proceedings are pending, or a
certificate of
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<PAGE>
the liquidating trustee or agent or other person making any distribution to the
Holder of this Note, for the purpose of ascertaining the persons entitled to
participate in such distribution, the holders of the Senior Indebtedness and
other indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this section.
ARTICLE FIVE
RESTRICTION ON TRANSFER
5.01. The Holder by acceptance of this Note acknowledges that this Note
(and the common shares issuable on conversion of the Note) have not been
registered under the Securities Act of 1933, as amended, (the "Act"), and
represents that this Note is being acquired by him for his own account, for
investment, and not with a view to, or for resale in connection with, a public
distribution of the Note or the shares issuable on conversion thereof within the
meaning of the Act and the rules and regulations promulgated thereunder.
5.02. Neither this Note nor any interest in this Note, or any common
shares or interest in such shares issuable upon the conversion of this Note,
maybe sold or otherwise transferred except pursuant to an effective
registration under the Act, unless the Holder delivers to the Company an opinion
of Counsel, whch opinion and counsel shall be reasonably acceptable to the
Company, that the proposed sale or transfer will not, under the circumstances,
result in a violation of the Act.
ARTICLE SIX
MISCELLANEOUS
6.01. DENOMINATIONS, TRANSFER, EXCHANGE. This Note is in registered form
without coupons, and may be transferred or converted in denominations of $1000
and integral multiples of $1,000. Upon the transfer or conversion hereof a new
Note will be issued to the Holder and the Transferee, as appropriate, dated the
date to which interest hereon has last been paid.
6.02. PERSONS DEEMED OWNERS. The registered holder of this Note shall be
treated as the owner of it for all purposes.
6.03. SUCCESSOR CORPORATION. When a successor corporation assumes all the
obligations of its predecessor under this Note and immediately thereafter no
default exists, the predecessor will be released from its obligations under this
Note.
-11-
<PAGE>
6.04. LEGAL HOLIDAYS. A "Legal Holiday" is a Saturday, or Sunday, or a
day on which banking institutions are not required to be open in Mechanicsburg,
Pennsylvania the borough in which the Company is located. If a payment date is a
legal Holiday, payment maybe made on the next succeeding day that is not a
legal Holiday, and no interest shall accrue for the intervening period.
Dated: November 1, 1987
Continental Medical Systems, Inc.
Attest: By /s/ Robert A. Ortez
---------------------------------
Exec. Vice President
/s/ William M. Goldstein
- -----------------------------
Secretary
-12-
<PAGE>
ASSIGNMENT FORM
If you the holder want to assign this Note, fill in the form below and have your
signature guaranteed:
I assign and transfer this Note to
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Insert assignee's social security or tax ID number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint
- --------------------------------------------------------------------------------
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for him.
- --------------------------------------------------------------------------------
Date: Your Signature:
------------------- ----------------------------------------
(Sign exactly as your name
appears on the other side
of this Note)
Signature Guarantee:
------------------------------------------------------------
-13-
<PAGE>
CONVERSION NOTICE
If you the holder want to convert this Note into Common Shares of the Company,
check the box: / /
If you want to convert only part of this Note, state the amount: $
--------------
If you want the stock certificate made out in another person's name, fill in the
form below:
- --------------------------------------------------------------------------------
(Insert other person's social security or tax ID number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type other person's name, address and zip code)
Date: Your signature:
------------- ---------------------------------------------
Second signature if required:
---------------------------------------------------
(Sign exactly as your name
appears on the other side of
this Note)
Signature Guarantee:
------------------------------------------------------------
-14-
<PAGE>
NOTE
Date: November 1, 1987 Amount: $2,000,000
Rocco A. Ortenzio (hereinafter the "Maker") for value received, promises to
pay to the order of Continental Medical Systems, Inc. (hereinafter the
"Company") Two Million Dollars ($2,000,000) on May 1, 2012, with interest on any
unpaid balance of the principal at the rate of seven and three quarters percent
(7 3/4%) per annum, compounded semiannually, from the date hereof until
payment of the principal sum.
Maker shall pay such interest semi-annually on May 1 and November 1 of each
year, beginning May 1, 1988. Interest shall be computed on the basis of a 360-
day year of twelve 30-day months.
This Note is secured by a 7 3/4% Subordinated Convertible Note due May 1,
2012 in the principal amount of $2,000,000, issued to Maker by the Company,
which Note the Maker hereby transfers, pledges, gives a security interest in,
and delivers to the Company as security for Maker's obligations hereunder. The
Company shall have all rights in such collateral given by the Uniform Commercial
Code as in force in the Commonwealth of Pennsylvania.
Principal on this Note shall be paid in full on May 1, 2012, in money of
the United States that at the time of
<PAGE>
payment is legal tender for payment of public and private debts.
In the event of non-payment, when due, of any principal or interest payable
under the terms of this Note, this Note may, at the option of the Company, be
declared, and thereupon immediately shall become, due and payable in full. Upon
any such default the Company shall have the right to set off against the unpaid
principal an equal principal amount of the 7 3/4% Convertible Note held as
security for this Note, and against the unpaid accrued interest on the 7 3/4%
convertible Note. Upon any such setoff, the obligation of the Company and of the
Maker shall be discharged to the extent specified.
If Maker (or a holder in due course thereof) sells or converts any portion
of the Convertible Notes, Maker or such holder shall, within five business days
after the date of such sale or conversion or redemption, prepay a portion of the
principal of the Promissory Note equal to the principal of the Convertible Note
sold, converted, or redeemed.
The Maker shall have the right at any time to prepay this Note in whole or
in part.
Signature: Address:
/s/ Rocco A. Ortenzio
- -------------------------------
Rocco A. Ortenzio ---------------------------------------
Date: Nov. 1, 1987 ---------------------------------------
-------------
-2-
<PAGE>
CONSULTING AGREEMENT
AGREEMENT made this 10th day of July, 1995 (the "Agreement") by and between
HORIZON/CMS HEALTHCARE CORPORATION, a Delaware corporation (the "Corporation"),
and ROCCO A. ORTENZIO (the "Consultant").
W I T N E S S E T H :
WHEREAS, Consultant had founded and was the Chairman and Chief Executive
Officer of CONTINENTAL MEDICAL SYSTEMS, INC., a Delaware corporation ("CMS");
WHEREAS, CMS has become a subsidiary of the Corporation and as a
consequence thereof Consultant's employment with CMS has been terminated;
WHEREAS, the Corporation desires to retain Consultant in an advisory
capacity as a consultant in order to obtain the benefit of his expertise and
experience upon the terms and conditions hereinafter set forth; and
WHEREAS, Consultant is willing to render consulting and advisory services
to the Corporation upon the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and the mutual promises
herein contained, the parties hereto agree as follows:
1. SERVICES. The Corporation agrees to retain Consultant as, and
Consultant agrees to render consulting and advisory
<PAGE>
services to the Corporation as, an independent contractor and not as an
employee, upon the terms and conditions hereinafter set forth.
2. TERM OF AGREEMENT. The term of Consultant's services under this
Agreement shall be for two years commencing on the date hereof; PROVIDED,
HOWEVER, that this Agreement shall be automatically extended for additional
one-year periods unless, at least three months prior to the end of the then
current term, either party hereto shall give the other party notice that it
does not wish to extend this Agreement.
3. EXTENT OF SERVICES. The Consultant shall render such consulting
services as may reasonably be requested by the Corporation's Chief Executive
Officer from time to time, giving due regard to the Consultant's expertise
and former positions with CMS. The Consultant shall devote such time and
effort as he deems reasonably necessary to perform the requested services;
PROVIDED, HOWEVER, that, unless otherwise agreed to by Consultant, the
Consultant (i) shall not be required to devote more than 166 hours per year
or 40 hours in any one month to such services and (ii) shall not be required
to devote his full time and effort on such services.
Unless otherwise agreed by Consultant and the Corporation, Consultant
may render all services hereunder from his principal place of business or
residence, provided that if requested by the Chief Executive Officer of the
Corporation, Consultant shall use reasonable efforts to provide services at a
location reasonably designated by the Chief Executive Officer.
4. COMPENSATION. As compensation for the consulting and advisory
services to be rendered by Consultant hereunder and for Consultant's
covenants contained in Section 7 hereof, the
-2-
<PAGE>
Corporation shall pay Consultant, a consulting fee at the rate of $300.00 per
hour for time spent, including travel time, in providing consulting services
hereunder. The Corporation shall pay Consultant a retainer of $50,000 per
annum, payable monthly in advance, and consulting fees earned by Consultant
in each calendar year of this Agreement shall be credited against the
retainer payments made during such year. The Corporation shall also reimburse
Consultant for his reasonable costs and expenses incurred in providing such
services, including travel and entertainment expenses, and the cost of
medical and dental insurance coverage provided such expenses are properly
documented. The Corporation shall also provide Consultant with access, where
appropriate, subject to normal usage and approval guidelines in place from
time to time, to corporate aircraft, if any, then used by the Corporation and
to corporate transportation, as necessary or appropriate, to perform services
under this Agreement. Consultant shall each month submit to the Corporation
an invoice for any costs and expenses incurred by Consultant during the
preceding month hereunder, and on a monthly basis shall invoice the
Corporation for any consulting fees earned during the prior month which are
in excess of the amount of the retainer paid with respect to such month. The
Corporation shall pay to Consultant the amount of such fees and expenses
within ten days of receipt of any such invoice.
5. INDEPENDENT CONTRACTOR; NO DEDUCTIONS AND WITHHOLDING. Consultant is
and shall, at all times, be an inde-
-3-
<PAGE>
pendent-contractor and the Corporation shall have no liability whatsoever for
withholding, collection or payment of income taxes or for taxes of any other
nature on behalf of Consultant. Consultant is not entitled to the benefits
provided by the Corporation to its employees including, but not limited to,
group insurance and participation in the Corporation's employee benefit and
retirement plans. Further, Consultant is not an agent, partner, or joint
venturer of the Corporation. Under no circumstances shall Consultant have or
claim to have power of decision in any activity on behalf of the Corporation
nor supervise, hire or fire employees of the Corporation except in his
capacity as a member and vice-Chairman of the Corporation's Board of
Directors. It is specifically understood that the Corporation shall not, with
respect to the consulting and advisory services to be rendered by Consultant,
exercise such control over Consultant as is contrary to its relationship with
Consultant as a independent contractor.
6. SUPPORT SERVICES. During the term of this Agreement, if Consultant
shall require secretarial and clerical assistance in connection with the
performance of his consulting and advisory services to the Corporation, the
Consultant may request such such secretarial and clerical assistance from the
Corporation. However, in the event of a failure by the Corporation to fulfill
such request, all reasonable expenses incurred by Consultant in respect of
secretarial and clerical assistance in connection with the performance of his
consulting and advisory
-4-
<PAGE>
services to the Corporation shall be reimbursed by
the Corporation, pursuant to Section 4 hereof.
7. NONCOMPETITION; CONFIDENTIAL INFORMATION. As consideration for
payment of $6.5 million (the "Cash Payment") to the Consultant and the
payments to be paid to and other benefits to be received by the Consultant
hereunder and under Section 8 of the letter agreement between us of even date
herewith (the "Letter Agreement"), and as an additional incentive for the
Corporation to enter into this Agreement, the Consultant hereby agrees that:
(a) During the term of this Agreement, Consultant shall not, within
twenty (20) miles of any health care facility which is controlled and
majority-owned by the Corporation or any of its consolidated subsidiaries,
engage in any activities in competition with the Corporation if such
activities are carried on in the same specific type of health care facility
(for example, a nursing home or rehabilitation hospital); provided, however,
that Consultant's ownership or less than 5% of the issued and outstanding
equity of any publicly held corporation or partnership, or 10% of any
privately held corporation or partnership, so engaged shall not in itself be
deemed to constitute such engagement by Consultant.
(b) Consultant shall not use in furtherance of any of his business
affairs or disclose to any third party any trade secret, customer list,
supplier list, financial data, pricing or marketing policy or plan or any other
proprietary or confidential
-5-
<PAGE>
information relating to the business of the Corporation or any of its
subsidiaries, provided, however, that the foregoing restriction shall not
apply to information that is (i) generally available to or known in the
industry; (ii) disclosed in published literature; or (iii) obtained by
Consultant from a third party provided that such third party was not bound by
a duty of confidentiality to the Corporation or another party with respect to
such information.
(c) The Consultant understands that the foregoing restrictions may
limit his ability to engage in a business similar to the Corporation's
business anywhere in the United States during the period provided in paragraph
(a) above, but acknowledges that he will receive sufficiently high
remuneration and other benefits from the Corporation hereunder and pursuant
to Section 8 of the Letter Agreement to justify such restrictions and the
remedies provided below. In addition to any remedies provided under
applicable law, the Corporation's remedy for a breach of the provisions of
this Section 7 shall include, but not be limited to, the termination of all
compensation and all benefits to the Consultant otherwise provided under this
Agreement and, if such breach was material and has resulted in material
damages to the Corporation, and the Consultant shall have failed to cure such
breach by ceasing to engage in such prohibited competitive activity within 60
days of receiving written notice of the existence and nature of such breach,
the right to require the Consultant to immediately repay to the Corporation
all or a portion of the Cash Payment as follows: (i) 100% of the Cash
Payment if such breach occurs before July 10, 1996; and (ii) 50% of the Cash
Payment if such breach occurs on or after July 10, 1996 but before July 10,
1997.
(d) It is expressly understood and agreed that the Corporation and the
Consultant consider the restrictions and remedies contained in this Section 7
to be reasonable and necessary for the purposes of preserving and protecting
the good will and proprietary information of the Corporation. Nevertheless,
if any of the aforesaid restrictions or remedies are found by a court having
jurisdiction to be unreasonable, or over broad as to geographic area or time,
or otherwise unenforceable, the parties intend for the restrictions and
remedies herein set forth to be modified by such court so as to be reasonable
and enforceable, and, as so modified by the court, to be fully enforced.
(e) The provisions of this Section 7 shall survive any termination of
this Agreement.
8. GENERAL.
(a) Corporation has caused Consultant to be elected to its Board of
Directors to serve until the 1995 annual meeting of the Corporation's
stockholders and will nominate and use best efforts to cause Consultant to be
elected at such meeting as a director of the Corporation to serve until the
1996 annual meeting of the Corporation's stockholders. For so long as
Consultant is a director of the Corporation, the Corporation shall cause him
to be elected as Vice-Chairman of the Board of Directors and as a member of
the Executive Committee of such Board. Consultant's attendance at meetings
and other activities as a director of the Corporation shall not be included
as services provided pursuant to this Agreement.
(b) Except as provided in Section 7 of this Agreement, Consultant may
accept employment with or render advice and consultation to others, may
travel freely on the business of others, or for pleasure, in the continental
United States or elsewhere, and Consultant shall not be obligated to keep the
-6-
<PAGE>
Corporation advised of his current location, availability or unavailability,
and shall not be expected to subordinate his other activities, whether
business or personal, to those of the Corporation.
(c) Neither the Corporation nor the Consultant may delegate any
obligations hereunder and may not assign, transfer, pledge, encumber,
hypothecate or otherwise dispose of this Agreement, or any of their
respective rights hereunder, and any attempted delegation or disposition shall
be null and void and without effect.
(d) This Agreement constitutes the complete understanding of the
parties with respect to the matter contemplated hereby and may not be
altered, modified, amended or rescinded except in writing signed by the
parties hereto. This Agreement shall supersede all prior agreements and
understandings between the parties hereto respecting the services of
Consultant to the Corporation or the subject matter hereof; provided that the
obligations of CMS to Consultant entered into in connection with his
termination from employment by CMS shall survive and the Corporation shall
procure that CMS satisfy all such obligations in full.
(e) This Agreement is made pursuant to, and shall be construed and
enforced in accordance with, the laws of the State of New Mexico, (and United
States federal law, to the extent applicable), irrespective of the principal
place of business,
-7-
<PAGE>
residence or domicile of the parties hereto, and without giving effect to
otherwise applicable principles of conflicts of law.
(f) The headings set forth in this Agreement are for convenience only
and shall not be considered as part of this Agreement in any respect nor shall
they in any way affect the substance of the provisions contained in this
Agreement.
(g) All notices and other communications which are required or which
may be given under the provisions of this Agreement shall be delivered
personally or sent by certified mail, postage prepaid, return receipt requested
to each of the parties hereto at such address as either party may designate
in writing as his or its address for this purpose in the manner herein
provided for giving notice unless otherwise provided in the Agreement.
(h) Consultant shall not have any liability to the Corporation or any
of its subsidiaries with respect to, or arising out of, any of the services
provided by Consultant hereunder, other than as a result of the willful
misconduct or gross negligence of Consultant. The Corporation hereby agrees
to indemnify and hold harmless Consultant against any and all losses, claims,
damages, liabilities and expenses (including attorney fees and expenses
reasonably incurred in connection therewith and amounts paid in settlement of
any claim), which Consultant may incur or become subject to arising out of,
or based upon services rendered pursuant to, this Agreement, other than any
such arising out of his willful misconduct or gross negligence. Consultant
hereby agrees to indemnify and hold harmless the Corporation against any
-8-
<PAGE>
and all losses, claims, damages, liabilities and expenses (including
attorneys fees and expenses reasonably incurred in connection therewith and
amounts paid in settlement of any claim), which the Corporation may incur or
become subject to arising out of, or based upon, Consultant's willful
misconduct or gross negligence in providing services pursuant to this
Agreement. Each party agrees to furnish prompt written notice to the other of
any claim, suit or proceeding which might entitle a party to indemnification
hereunder, provided that the failure of a party to provide such notice shall
not affect the rights of such party hereunder. The provisions of this
paragraph 8(h) shall survive any termination of this Agreement.
IN WITNESS WHEREOF, the parties have executed this agreement on the day
and year first above written.
HORIZON/CMS HEALTHCARE CORPORATION
By: /s/ NEAL M. ELLIOTT
----------------------------------
Title: Chairman, President and CEO
/s/ ROCCO A. ORTENZIO
--------------------------------------
ROCCO A. ORTENZIO
-9-
<PAGE>
July 10, 1995
Mr. Rocco A. Ortenzio
CONTINENTAL MEDICAL SYSTEMS
600 Wilson Lane
Mechanicsburg, PA 17055
Dear Rocco:
As a consequence of the merger (the "Merger") of Continental Medical
Systems, Inc. ("CMS") and CMS Merger Corporation, CMS has become a
subsidiary of Horizon/CMS Healthcare Corporation ("Horizon/CMS") and a
"Change of Control", as defined in the Employment Agreement, dated May 26,
1992, between CMS and you, as amended November 3, 1994 (the "Employment
Agreement") has occurred.
1. Please be advised that, effective at the time of the completion of
the Merger, your employment with CMS ended and you are no longer an officer
or director of CMS or any of its subsidiaries or affiliates. This termination
is not for "cause" within the meaning of the Employment Agreement.
2. Pursuant to the Employment Agreement, you are entitled to receive
from CMS $3,700,000 as a termination payment following a change of control of
CMS, receipt of which you hereby acknowledge.
3. In satisfaction of your right pursuant to the Employment Agreement
to receive an annual bonus equal to a percentage of certain pretax profits of
CMS, CMS hereby pays you $5,100,000, receipt of which you hereby acknowledge,
and agrees to convert the existing keyman term life insurance policy into a
whole life policy pursuant to a "split dollar" arrangement reasonably
satisfactory to you.
4. Pursuant to the Consulting Agreement of even date herewith,
Horizon/CMS is obligated to pay to you $6,500,000 as consideration for your
covenant not to compete contained in Section 7 of such Consulting Agreement,
receipt of which you hereby acknowledge.
5. Pursuant to Section 2.02(f) of the Employment Agreement, all of your
outstanding stock options with respect to CMS's common stock became fully
exercisable as of the date of the Merger and any convertible debentures of
CMS held by you subject to vesting are fully vested as of such date (which
<PAGE>
by virtue of the Merger have become, respectively, options to purchase and
convertible into, shares of Horizon/CMS Common Stock.
6. CMS shall make available to you the group health plan coverage as
required pursuant to Part 6 of Subtitle B of Title I of the Employee
Retirement Income Security Act of 1974, as amended (commonly known as "COBRA
benefits").
7. Except as provided in this letter agreement or in the documents and
instruments relating to the Merger, CMS and you both agree that neither CMS
nor you has any claim against the other, and any claim or potential claim,
obligation or liability that one party does or may have against the other is
hereby irrevocably released, including, without limitation, any claim arising
under the Employment Agreement or which you may have arising under the Age
Discrimination in Employment Act of 1967, Title VII of the Civil Rights Act
of 1964 or the Employee Retirement Income Security Act of 1974, all as
amended, and any other state or federal statute, regulation or law relating
to your employment or termination of employment (including any such arising
pursuant to the Employment Agreement); provided, that the obligation of CMS
contained in Section 3.02 of the Employment Agreement to register certain
shares of CMS Common Stock pursuant to the Securities Act of 1933 shall
survive and has been assumed by Horizon/CMS as an obligation to register the
shares of Horizon/CMS Common Stock into which such shares of CMS common stock
have been converted by reason of the Merger.
8. It is our understanding that no payments by CMS or Horizon/CMS to
you under this letter agreement or otherwise will constitute an "excess
parachute payment" for purposes of section 280G and section 4999 of the
Internal Revenue Code. However, in the event that it is ultimately determined
by the Internal Revenue Service or a court, or through a settlement with the
Internal Revenue Service, that any such payments constitute an excess
parachute payment, CMS shall pay you such additional amount that, when
reduced by all federal, state and local income taxes, and any excise tax
under Internal Revenue Code section 4999, incurred by you by reason of the
receipt of such additional amount, equals the amount payable by you under
such final determination or settlement with respect to excise tax under
section 4999 and any interest and penalties incurred with respect thereto.
Any payment of such additional amount shall be made within fifteen (15) days
after any such final determination or settlement.
You acknowledge that you have carefully read this Agreement, have had
the opportunity to review it with your attorney, that you fully understand
the provisions and their final and binding effect, and that you are
voluntarily entering into this Agreement.
<PAGE>
Please sign and return a copy of this letter, upon which both
Horizon/CMS and you shall be legally bound hereby.
Very truly yours,
HORIZON/CMS HEALTHCARE CORPORATION
By: /s/ Neal M. Elliott
----------------------------------
Title: Chairman, President and CEO
AGREED AND ACCEPTED:
/s/ Rocco A. Ortenzio
- ---------------------------------
Rocco A. Ortenzio
<PAGE>
AMENDMENT NO. 3 TO
HORIZON HEALTHCARE CORPORATION
EMPLOYEE STOCK OPTION PLAN
WHEREAS, HORIZON/CMS HEALTHCARE CORPORATION (the "Company") has heretofore
adopted the HORIZON HEALTHCARE CORPORATION EMPLOYEE STOCK OPTION PLAN (the
"Plan"); and
WHEREAS, the Company desires to amend the Plan in certain respects;
NOW, THEREFORE, the Plan shall be amended as follows:
1. The first sentence of Section 9(b) of the Plan is hereby deleted and
replaced with the following two sentences:
"An Option issued pursuant to the Plan shall be exercisable in
accordance with the following schedule: the option is exercisable with
respect to one-third of the aggregate number of Shares covered by the
option one year after the date of grant, an additional one-third two
years after the date of grant, and the final one-third three years after
the date of grant; provided, that in the event of death of an optionee,
all outstanding options of such optionee shall immediately vest in their
entirety and shall be and become immediately exercisable. The foregoing
proviso shall be effective (i) as of September 12, 1994, as to optionees
other than optionees who are subject to Section 16 of the Securities
Exchange Act of 1934, as amended, and (ii) as of the date of approval by
the stockholders of Employer of the amendment to the Plan which includes
such proviso, as to optionees who are subject to Section 16 of the
Securities Exchange Act of 1934, as amended."
2. As amended hereby, the Plan is specifically ratified and reaffirmed.
A-1
<PAGE>
OFFICE LEASE AGREEMENT
BASIC LEASE INFORMATION
1. Date: December 29, 1994
--------------------------------------------------------------------
2. Landlord: LeRoy S. Zimmerman
----------------------------------------------------------------
3. Tenant: Continental Medical Systems, Inc.
------------------------------------------------------------------
4. Guarantor(s): None
------------------------------------------------------------
5. Building: Liberty Plaza 1, 650 Wilson Lane, Mechanicsburg, PA 17055
----------------------------------------------------------------
6. Premises: Entire Building
----------------------------------------------------------------
7. Commencement Date: 1/1/95
-------------------------------------------------------
8. Expiration Date: 12/31/01 (a seven-year term)
--------------------------------------------------------
9. Rentable Area of the Building: 14,160 Rentable square feet
-------------
10. Rentable Area of the Premises: 14,160 Rentable square feet
-------------
11. Intentionally Omitted
12. Initial Annual Base Rental: $151,795.20
-----------
13. Initial Annual Base Rental Rate $10.72 per Rentable square foot
------
14. Annual Base Rental Rate Increase (cumulative) 0%
--------
15. Intentionally Omitted
16. Tenant shall pay the Operating Expense Cost Payment as provided for in
Article 6B.
17. Fiscal Year: Twelve months ending December 31
---------------------------------------
18. Security Deposit: $-0-, payable at the time the Lease is signed.
----
(Article #25)
19. First Rent Check of $12,649.60, payable at the time the Lease is signed.
-----------
(Article #25)
20. Landlord's Broker: None
-------------------------------------------------------
-------------------------------------------------------
21. Tenant's Broker: None
-------------------------------------------------------
-------------------------------------------------------
22. Landlord's Address for Notices: LeRoy S. Zimmerman, Esq., Eckert Seamans
------------------------------------------
Cherin & Mellott, One South Market Square Building, 213 Market Street,
P.O. Box 1248, Harrisburg, PA 17108
23. Tenant's Address for Notices: Continental Medical Systems, Inc.,
-------------------------------------------
PO Box 715, Mechanicsburg, PA 17055 Attention: Legal Department
------------------
<PAGE>
Exhibits A-D are part of this Lease, identified as follows:
-------
Exhibit A Floor Plans
--------------------------------------------------------------------
Exhibit B Description of Land
--------------------------------------------------------------------
Exhibit C Rules and Regulations
--------------------------------------------------------------------
Exhibit D Initial Operating Expense Cost Estimate
--------------------------------------------------------------------
The foregoing Basic Lease Information is hereby incorporated into and made a
part of the office Lease Agreement which is described herein and attached. Each
reference in the Lease to any information and definitions contained in the Basic
Lease Information shall mean and refer to the information and definitions
hereinabove set forth. In the event of any conflict between any Basic Lease
Information and the Lease, the Lease shall control.
Landlord:
WITNESS: /s/ Robin L. Barber /s/ LeRoy S. Zimmerman Date: 12/29/94
------------------------- -----------------------
LeRoy S. Zimmerman
Tenant:
CONTINENTAL MEDICAL SYSTEMS, INC.
a Delaware corporation
ATTEST: /s/ Deborah Myers Welsh By: /s/ David G. Nation Date: 12/29/94
-------------------------- --------------------
David G. Nation,
Senior Vice President
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 - PREMISES.............................................. 1
ARTICLE 2 - TERM.................................................. 1
ARTICLE 3 - DELIVERY OF THE PREMISES TO TENANT.................... 2
ARTICLE 4 - ACCEPTANCE OF THE PREMISES AND BUILDING BY TENANT..... 2
ARTICLE 5 - RENTAL................................................ 3
ARTICLE 6 - OPERATING EXPENSE COSTS............................... 3
ARTICLE 7 - UTILITIES............................................. 5
ARTICLE 8 - USE................................................... 5
ARTICLE 9 - LAWS, ORDINANCES, AND REQUIREMENTS OF PUBLIC
AUTHORITIES.......................................... 5
ARTICLE 10 - OBSERVANCE OF RULES AND REGULATIONS................... 6
ARTICLE 11 - ALTERATIONS........................................... 6
ARTICLE 12 - LIENS................................................. 7
ARTICLE 13 - ORDINARY REPAIRS...................................... 7
ARTICLE 14 - INSURANCE............................................. 8
ARTICLE 15 - DAMAGE BY FIRE OR OTHER CAUSE......................... 9
ARTICLE 16 - CONDEMNATION.......................................... 10
ARTICLE 17 - ASSIGNMENT AND SUBLETTING............................. 10
ARTICLE 18 - WAIVER AND INDEMNIFICATION............................ 11
ARTICLE 19 - SURRENDER OF THE PREMISES............................. 11
ARTICLE 20 - ESTOPPEL CERTIFICATES................................. 12
ARTICLE 21 - SUBORDINATION......................................... 12
ARTICLE 22 - PARKING............................................... 13
ARTICLE 23 - DEFAULT AND REMEDIES.................................. 13
ARTICLE 24 - WAIVER BY TENANT...................................... 15
ARTICLE 25 - SECURITY DEPOSIT...................................... 16
ARTICLE 26 - ATTORNEYS' FEES AND LEGAL EXPENSES.................... 16
ARTICLE 27 - NOTICES............................................... 16
ARTICLE 28 - MISCELLANEOUS......................................... 16
EXHIBIT A - FLOOR PLANS
EXHIBIT B - DESCRIPTION OF LAND
EXHIBIT C - RULES AND REGULATIONS
EXHIBIT D - INITIAL OPERATING EXPENSE COST ESTIMATE
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OFFICE LEASE AGREEMENT
THIS Lease, dated as of the date specified in the Basic Lease Information
which is attached hereto and incorporated herein for all purposes, is made
between Landlord and Tenant.
ARTICLE 1
PREMISES
Landlord leases to Tenant, and Tenant leases from Landlord, for the Term (as
defined below), and subject to the provisions hereof, to each of which
Landlord and Tenant mutually agree, the Premises, which Premises consists of
the entire Building known as Liberty Plaza I as more particularly described
in the floor plans in Exhibit A hereto, together with its appurtenances,
including the right to use the lobbies, entrances, stairs, elevators,
off-street parking and loading areas (for loading and unloading of materials
and supplies), and other portions of the Building, and together with the real
property described in Exhibit B attached hereto. For purposes of this Lease,
the Rentable Area of the Building and the Rentable Area of the Premises are
as provided in the foregoing Basic Lease Information.
ARTICLE 2
TERM
SECTION 2.01. The term of this Lease (the "Term") shall begin on the
Commencement Date, as specified in the Basic Lease Information.
Unless sooner terminated, the Term shall end at midnight on the Expiration
Date specified in the Basic Lease Information.
SECTION 2.02. Landlord hereby grants to Tenant an option to extend the term
of this Lease for three (3) additional five-year renewal terms (each, an
"Extended Term"). Each Extended Term shall be upon the same terms and
conditions as those set forth for the initial Term except that the Annual
Base Rental shall be the then current fair market rental value which, unless
otherwise mutually agreed to by Landlord and Tenant, shall be determined by
appraisal pursuant to the provisions of Sections 2.03 and 2.04 below. Each
option may only be exercised by Tenant if, at the time such option may be
exercised, an event of default is not continuing under this Lease, and shall
be exercised by Tenant by delivery of notice to that effect to Landlord not
less than 180 days but not more than 360 days prior to the date upon which
this Lease otherwise would terminate.
SECTION 2.03. If at any time it becomes necessary to determine the fair
market rental value of the Premises and the parties are unable to agree
thereupon, either party shall be permitted to give notice of its election to
have the fair market value of the Premises determined by appraisal and such
notice 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 the other either agree to the
appointment of the appraiser identified in such initial notice, in which
case such appraiser shall be the sole appraiser for purposes of determining
the fair market rental value, or shall appoint a second person as an
appraiser on its behalf. Any appraiser appointed pursuant to this Section
must be a member of the American Institute of Real Estate Appraisers (or any
successor organization thereto) with at least five (5) years' experience in
appraising commercial real estate in the Harrisburg, Pennsylvania vicinity. The
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appraiser(s) thus appointed shall, within thirty (30) days after the date of
the notice appointing the first appraiser, proceed to appraise the Premises
to determine the fair market rental value thereof (taking into account the
5-year length of the renewal term) as of the first day of the applicable
renewal term. In the case of two appraisers, except as provided in Section
2.04, the two appraisals shall be averaged to determine the fair market
rental value. In any event, the appraised value determined in accordance with
this Section shall be final and binding on Landlord and Tenant.
SECTION 2.04. Any appraisal required or permitted by the terms of this Lease
shall be conducted in a manner consistent with sound appraisal practice.
Notwithstanding the provisions of Section 2.03, if the difference between the
appraisal amounts determined by the appraisers appointed pursuant to Section
2.03 exceeds ten percent (10%) of the lesser of such appraisal amounts, then
the two appraisers shall have twenty (20) days to appoint a third appraiser.
If no such appraiser is appointed within such twenty (20) days or within
ninety (90) days of the original request for a determination of fair market
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 market rental value within forty-five (45)
days after the appointment of such appraiser. The determination of the three
appraisers which differs most in the terms of dollar amount from the
determinations of the other two appraisers shall be excluded, and 50% of the
sum of the remaining two determinations shall be the appraised value, which
appraised value shall be final and binding upon Landlord and Tenant as the
fair market rental value of the Premises. If the lowest and highest appraised
values are equidistant in amount from the middle appraised value, then such
middle appraised value shall be the fair market rental value. The provisions
of this Article 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 except as otherwise provided by applicable
law. Landlord and Tenant each shall 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.
SECTION 2.05. Provided Tenant performs all of Tenant's obligations under this
Lease, including Tenant's covenant for the payment of Rental as defined
below, Tenant shall, during the Term, peaceably and quietly enjoy the
Premises without disturbance from Landlord; subject, however, to the terms of
this Lease and any deeds of trust, restrictive covenants, easements and other
encumbrances to which this Lease is now subject and subordinate.
ARTICLE 3
DELIVERY OF THE PREMISES TO TENANT
Tenant is presently in possession of the Premises. Landlord shall have no
obligation to construct additional Leasehold Improvements prior to the
commencement of the Term nor during the Term.
ARTICLE 4
ACCEPTANCE OF THE PREMISES AND BUILDING BY TENANT
Tenant accepts the Premises as suitable for the purposes for which they are
leased. Landlord shall not be liable, except for gross negligence or willful
misconduct, to Tenant, or any of its agents, employees, licensees, or
invitees, for any injury or damage to person or property due to the condition
of, design of, or any defect in, the Building or its mechanical systems and
equipment which may exist or occur.
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ARTICLE 5
RENTAL
SECTION 5.01. Tenant covenants and agrees to pay to Landlord, in lawful money
of the United States, 1/12 of the Annual Base Rental specified in the Basic
Lease Information, monthly in advance, without notice or demand, on the first
day of each calendar month. In the event any Rental payment is made four (4)
or more business days after the due date thereof, Tenant agrees to pay
interest on such overdue amount beginning on the fifth business day following
its due date until it is paid at the annual rate of one percent (1%) in
excess of the prime rate of interest announced from time to time by Citibank,
N.A. (New York, New York). Rental shall be paid to Landlord, without
deduction or offset, at the address of Landlord specified in the Basic Lease
Information or such other place as Landlord may designate. The first monthly
installment of Annual Base Rental shall be paid on the Commencement Date,
except that if the Commencement Date is a date other than the first day of a
calendar month, then the monthly Annual Base Rental for the first and last
fractional months of the Term shall be appropriately prorated. The term
"Rental" as used herein means Annual Base Rental, Operating Expense Costs (as
defined in Section 6.01), and all other sums, whether or not expressly
denominated as rent payable by Tenant to Landlord hereunder and all such
amounts shall be deemed rent payments for the purposes of Section 502(b)(7)
of the Bankruptcy Code U.S.C. 502(b)(7). A service charge of $50 for each
check returned stamped "NSF" will be due and payable to Landlord to cover
Landlord's extra cost and expense in handling and processing the late
payments. No payment by Tenant or receipt by Landlord of a lesser amount than
the monthly installment due under this Lease shall be deemed to be other than
on account of the earliest Rental due hereunder, nor shall any endorsement or
statement on any check or payment as Rental be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice
to Landlord's right to recover the balance of such Rental or pursue any other
remedy provided in this Lease or by law.
ARTICLE 6
OPERATING EXPENSE COSTS
SECTION 6.01. From the Commencement Date until the Expiration Date, Tenant
shall, within fifteen (15) days following written demand from Landlord to
Tenant, reimburse Landlord in full for (or, if Landlord so directs, make
direct payment to third parties for) any and all Operating Expense Costs (as
defined in this Article 6) incurred or paid by Landlord in connection with
the Premises. An initial estimate of Operating Expense Costs is attached
hereto as Exhibit "D" and made a part hereof. The estimate of Operating
Expense Costs was not prepared by Landlord and shall not be construed as
being a representation by Landlord as to the amount of past or future
Operating Expense Costs, not shall Landlord be bound by Exhibit "D".
SECTION 6.02. As used herein, "Operating Expense Costs" means all expenses,
costs, and disbursements of every kind which Landlord shall be required to
pay, incur, or become obligated to pay, in connection with the ownership,
operation, and maintenance of the Premises, the Building, Parking Areas,
and exterior areas contained within the boundaries described in Exhibit B
upon which the Building is situated. All Operating Expense Costs shall be
determined according to generally accepted accounting principles which shall
be consistently applied. Operating Expense Costs shall include, but are not
limited to, the following (in each case to the extent not contracted for or
incurred and paid directly by Tenant):
(a) Wages, salaries, and fees of all personnel or entities (exclusive of
Landlord's executive personnel) directly engaged in the operation,
maintenance or repair of the Building, including taxes,
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insurance, and benefits relating thereto. As to personnel not
involved exclusively with the administration and operation of the
Building, only those portions of such expenses reasonably allocable
to the Building shall be included as "Operating Expense Costs." In
light of Tenant's responsibilities with respect to repairs and
maintenance hereunder, Landlord does not anticipate the need to
retain a property manager or to hire personnel to perform
maintenance services.
(b) All supplies and materials used in the operation and maintenance of the
Building.
(c) Expenses of all maintenance, security, and service agreements
for the Building and the equipment therein, including, without
limitation, alarm service, janitorial services, exterior window
cleaning, landscaping, irrigation, parking facility repair and
maintenance, roadway and utility repair and maintenance, elevator
repair and maintenance and cleaning, etc.
(d) Expenses of all insurance relating to the Building for which
Landlord is responsible hereunder, or which Landlord considers
reasonably necessary for the operation of the Building, including,
without limitation, the cost of property, casualty and liability
insurance applicable to the Building and Landlord's personal property
used in connection therewith, and the cost of business or rental
interruption insurance.
(e) All taxes, assessments, and other governmental charges, now or
hereafter applicable to the Building, or any portion thereof, or to
Landlord's personal property used in connection therewith, and dues
(including those levied by any Association managing all common areas
and easements) attributable to the Building or its operation,
exclusive of any inheritance, gift, franchise, income, corporate, or
profit taxes which may be assessed against Landlord.
(f) Expenses of repairs and general maintenance (excluding repairs
and general maintenance paid by proceeds of insurance or by Tenant or
other third parties).
(g) Landlord's costs related to fees paid to individuals or
companies engaged in rendering legal, accounting or technical
services, but only to the extent incurred to reduce Operating Expense
Costs (such as efforts to reduce the Building's ad valorem tax
expenses).
(h) All utility costs to Landlord of the Building, including,
without limitation, electric, gas, water, sewer and telephone.
The foregoing definition of "Operating Expenses" is not intended to indicate
or imply that Landlord has an obligation to perform or provide any of the
items listed to or for the benefit of Tenant. To the extent any such
obligations on the part of Landlord exist, they are set forth elsewhere in
this Lease.
The term "Operating Expense Costs" shall not include depreciation on the
Building or equipment therein, interest, net income, franchise or capital
stock taxes payable by Landlord, costs reimbursed by insurance, interest and
principal on any financing relating to the Building, real estate brokers'
commissions, expenses which should be capitalized under generally accepted
accounting principles consistently applied, or the cost of any capital
improvements which may be required by governmental authorities under any laws
or regulations that were not applicable to the Building at the time it was
constructed (unless necessitated by Tenant's particular use of the Premises).
SECTION 6.03. Tenant shall be liable for all taxes levied or assessed against
personal property, furniture, fixtures, or Tenant finish placed by Tenant in
the Premises. If any such taxes for which Tenant is liable are levied or
assessed against Landlord or Landlord's property, and Landlord elects to pay
the taxes based on such increase. Tenant shall pay to Landlord upon demand
that part of such taxes for which Tenant is liable hereunder; provided that
Tenant shall have the right to contest such taxes. Notwithstanding any
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of the provisions of this Section 6.03 to the contrary, Tenant shall not be
responsible for, nor required to pay, any levies or assessments (except for
levies or assessments with respect to property owned by Tenant) which relate
or apply to periods prior to the Commencement Date or subsequent to the
Termination Date of this Lease.
ARTICLE 7
UTILITIES
SECTION 7.01. While Tenant is occupying the Premises, the following services
shall be contracted and paid for directly by Tenant (and separately metered
by public utility companies where appropriate): public water and sewer
services; natural gas service; electric service; trash/recycling removal
service; janitorial supplies and service; HVAC repairs and maintenance;
elevator repairs, maintenance and licenses; general repairs and maintenance;
landscaping and snow removal. In connection with its obligations under this
Section, Tenant shall obtain and maintain during the Term an HVAC repair and
maintenance contract and an elevator repair and maintenance contract, each in
form and with a contractor approved in advance by Landlord.
SECTION 7.02. While Tenant is occupying the Premises and is not in default
under this Lease, Landlord will furnish sufficient power for lighting and for
typewriters, dictaphones, calculating machines, and other normal office
machines of similar low electrical consumption, all of which power shall be
paid for by Tenant.
SECTION 7.03. Failure to furnish, or any stoppage of, utility services
provided in this Article 7 resulting from any cause other than Landlord's
gross negligence or willful misconduct shall not make Landlord liable in any
respect for damages to either person, property, or business, nor be construed
as an eviction of Tenant, nor entitle Tenant to any abatement of Rental, nor
relieve Tenant from its obligations under this Lease. To the extent that
Landlord has responsibility therefor hereunder, Landlord will, with
reasonable diligence, repair any malfunction of the Building improvements or
facilities, but Tenant will have no claim for rebate, abatement of Rental, or
damages because of any malfunctions or interruptions in service other than
Landlord's gross negligence or willful misconduct.
ARTICLE 8
USE
The Premises shall be used for general office and other lawful purposes, and
Tenant agrees to use and maintain the Premises in a safe, lawful, and proper
manner.
ARTICLE 9
LAWS, ORDINANCES AND REQUIREMENTS OF PUBLIC AUTHORITIES
SECTION 9.01. Tenant shall, at its sole expense:
(i) comply with all laws, orders, ordinances, and regulations of
federal, state, county, and municipal authorities having jurisdiction
over the Premises, but only to the extent directly relating to
Tenant's use and occupancy of the Premises;
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(ii) comply with any direction made pursuant to law of any public officer
or officers requiring abatement of any nuisance, or imposing any
obligation, order, or duty upon Landlord or Tenant arising from
Tenant's use of the Premises or from conditions which have been
created by or at the insistence of Tenant or required by reason of
a breach of any of Tenant's obligations hereunder; and
(iii) indemnify Landlord and hold Landlord harmless from any loss, cost,
claim, or expense which Landlord may incur or suffer by reason of
Tenant's failure to comply with its obligations under clauses (i) or
(ii) above. If Tenant receives written notice of violation of any
such law, order, ordinance, or regulation, it shall promptly notify
Landlord thereof.
SECTION 9.02. Tenant shall have the right to contest or review the amount or
validity of all taxes and other impositions and any repairs and improvements
required by any law, rule, regulation or requirement of any public authority
or the fire insurance rating association having jurisdiction over the Premises
or Tenant's use thereof or any laws, rules, regulations and requirements of
any public authority or the fire insurance rating association, by legal
proceedings or in such other manner as Tenant may deem suitable (which, if
instituted, Tenant shall conduct, if necessary or appropriate, in the name of
and with the cooperation of Landlord). Landlord shall execute all documents
necessary or appropriate to comply with the foregoing. Pending any such
proceeding, Landlord shall not pay or discharge any of the same in excess of
the amount required by law while such proceeding is pending without Tenant's
prior consent. Notwithstanding the foregoing, however, Tenant shall promptly
pay all taxes or other impositions if at any time the Premises or any part
thereof shall then be subject to forfeiture, or if Landlord shall be subject
to (or shall be claimed or alleged to be subject to) any criminal liability
arising out of the nonpayment thereof. Tenant shall not discontinue any
proceeding for abatement of any taxes or other impositions without first
giving thirty (30) days prior notice to Landlord of its intention to do so,
during which thirty (30) day period Landlord may assume prosecution of such
abatement proceeding.
ARTICLE 10
OBSERVANCE OF RULES AND REGULATIONS
Tenant and its employees, agents, visitors, and licenses shall observe
faithfully and comply strictly with all Rules and Regulations attached to
this Lease (Exhibit C). Landlord shall be entitled to make reasonable changes
and/or additions to the Rules and Regulations to the extent necessary or
advisable to comply with any newly enacted or modified statute, rule,
regulation or other law applicable to the Premises or this Lease. Any failure
by Landlord to enforce any of the Rules and Regulations now or hereafter in
effect, against Tenant shall not constitute a waiver of any such Rules and
Regulations. Tenant shall, following written notice from Landlord, promptly
comply with Landlord's reasonable demands relating to this Article 10.
ARTICLE 11
ALTERATIONS
SECTION 11.01. Tenant may not, at any time during the Term, without
Landlord's prior written consent (which shall not be unreasonably withheld or
delayed), make any alterations to the Premises costing in excess of $50,000 a
year; provided, however, that such alterations do not affect structural
components or mechanical systems of the Building, and, provided further, that
Tenant will notify Landlord in writing of the nature and extent of planned
alterations, and Landlord will, within thirty (30) days following
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Landlord's receipt of such notice, notify Tenant of any objections to such
alterations which Landlord may have to the extent that such objections are based
on Landlord's anticipation of having to make additional expenditures as a result
of such planned alterations. Tenant shall not be allowed to construct any
alterations which will require Landlord to make other alterations to the
Premises or to incur additional expense until such objections made by Landlord
are resolved in a manner satisfactory to both Landlord and Tenant. All
alterations shall be made at Tenant's expense, either by Tenant's contractors
which have been approved in writing by Landlord, or at Landlord's option, by
Landlord's contractors on terms reasonably satisfactory to Tenant.
SECTION 11.02. Unless otherwise agreed to in writing between Landlord and
Tenant, all Leasehold Improvements, alterations, and other physical additions
made or installed by or for Tenant in or to the Premises with the prior approval
of Landlord shall be and remain Landlord's property (except Tenant's furniture,
furnishings, personal property, and moveable trade fixtures, all of which,
together with alterations made by Tenant without Landlord's consent, shall be
removed from the Premises upon termination of this Lease at Tenant's sole
expense), and shall not be removed without Landlord's written consent which
shall not be unreasonably withheld. Tenant also agrees to make all necessary
repairs of damage to the Premises caused by the removal of Tenant's furniture,
furnishings, personal property, moveable trade fixtures and alterations made by
Tenant without Landlord's consent.
ARTICLE 12
LIENS
Tenant shall keep the Premises, the Building, and the property on which the
Building is located, free from any liens arising from any work performed,
materials furnished, or obligations incurred by or at the request of Tenant.
Nothing shall be construed as Landlord's consent to any performance of labor or
furnishing of any materials for any specific improvements, alteration, or repair
of, or to, the Premises, that would result in any liens against the Premises or
liability of the Landlord. If, based upon acts of Tenant, any lien is filed
against the Premises, the Building, the Property on which the Building is
located, or Tenant's Leasehold interests therein, Tenant shall discharge or bond
over same within thirty (30) days after its filing. If Tenant fails to
discharge or bond over such lien within such period, then, in addition to any
other right or remedy of Landlord, Landlord may, at its election, discharge the
lien by either paying the amount claimed to be due, obtaining the discharge by
deposit with a court or a title company, or by bonding. Tenant shall pay on
demand any amount actually paid by Landlord for reasonable attorneys' fees and
other reasonable and necessary legal expenses of Landlord incurred in defending
any such action or in obtaining the discharge of such lien after Tenant's
failure to do so, together with all necessary disbursements in connection
therewith, to double the amount of the lien claim plus a sufficient amount to
cover any penalties, interest, attorneys' fees, court costs, and other legal
expenses resulting from such contest. The bond shall name Landlord and such
other parties as Landlord may direct as beneficiaries thereunder.
ARTICLE 13
ORDINARY REPAIRS
Tenant shall, at all times during the Term hereof and at Tenant's sole cost and
expense, keep the Premises and every part thereof in good condition and repair,
ordinary wear and tear, fire and other casualty excepted. Subject to Article
19, section 19.02 herein, Tenant shall, at the end of the term hereof, surrender
the Premises, as repaired, to Landlord in the same condition as when received,
ordinary wear and tear, fire and other casualty excepted. If Tenant fails to
make such repairs promptly, Landlord
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may, at its option, make such repairs, and Tenant shall pay Landlord on demand
Landlord's actual costs in making such repairs.
ARTICLE 14
INSURANCE
SECTION 14.01. Tenant shall, during the Term, at its sole expense, keep in
force, with Tenant, Landlord, and the mortgagees of Landlord named as additional
insured thereunder (except with respect to Worker's Compensation coverage) all
as their respective interests may appear, the following insurance:
(a) All Risk Insurance (including fire, extended coverage, vandalism,
malicious mischief, extended perils, and debris removal) upon property
of every description and kind owned by Tenant and located in the
Building or for which Tenant is legally liable or installed by or on
behalf of Tenant including, without limitation, equipment, furniture,
furnishings, fittings, installations, removable trade fixtures, and
alterations, in an amount not less than the full replacement cost
thereof. If there is a dispute as to the amount which comprises full
replacement cost, the decision of Landlord or the mortgagees of
Landlord shall be conclusive and binding.
(b) Commercial liability insurance coverage to include death, personal
injury, bodily injury, broad form property damage, operations hazard,
owner's protective coverage, contractual liability, and products and
completed operations liability, with combined single liability limits
not less than $5,000,000. Such coverage shall insure against all
liability of Tenant and its authorized representatives and visitors
arising out of, and in connection with, Tenant's use or occupancy of
the Premises.
(c) Worker's Compensation and Employer's Liability Insurance, with a
waiver of subrogation endorsement, in form and amount satisfactory to
Landlord.
(d) Any other form or forms of insurance as Tenant or Landlord or the
mortgagees of Landlord may reasonably require from time to time in
form, in amounts, and for insurance risks against which a prudent
Tenant of a comparable size and in a comparable business would protect
itself.
All policies shall be issued by insurers with a Best's Insurance Reports rating
of A or better and shall be in form satisfactory to Landlord. Tenant agrees
that certificates of insurance on the Landlord's standard form, or certified
copies of each such insurance policy, naming Landlord and its mortgagees as
additional insured, will be delivered to Landlord not later than 5 days prior
to the date that Tenant takes possession of any part of the Premises. All
policies shall contain an undertaking by the insurers to notify Landlord and the
mortgagees of Landlord in writing, by Registered U.S. Mail, not less than 30
days before any cancellation or other termination thereof.
SECTION 14.02 During the Term, Landlord shall insure the Building (but
excluding any property which Tenant is obligated to insure under Section 14.01
hereof) against damage by fire and standard extended coverage perils in an
amount equal to the full replacement cost thereof, and shall provide public
liability insurance in such amounts and with such deductions as Landlord
considers appropriate. Landlord may, but shall not be obligated to, take out
and carry any other form or forms of insurance as it or Landlord's mortgagees
may reasonably determine available. Notwithstanding any contribution by Tenant
to the cost of insurance premiums, as provided herein, Tenant acknowledges that
it has no right to receive any proceeds from any insurance policies carried by
Landlord. Landlord will not be required to carry
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insurance of any kind on Tenant's furniture or furnishings, or on any of
Tenant's fixtures, equipment, improvements, or appurtenances under this
Lease; and Landlord shall not be obligated to repair or replace same.
SECTION 14.03. Tenant shall not keep in the Premises any article which may be
prohibited by any reasonable insurance policy periodically in force covering the
Building. If Tenant's occupancy results in any increase in premiums for the
insurance carried by Landlord, Tenant shall pay any such increase in premiums as
additional Rental within 20 days after being billed therefor. Tenant shall
promptly comply with all reasonable requirements of the insurance authority or
any present or future insurer relating to the Premises and the Building.
SECTION 14.04. If any of Landlord's insurance policies shall be cancelled or
cancellation shall be threatened or the coverage thereunder reduced or
threatened to be reduced, or if the premiums on any of Landlord's insurance
policies are increased or threatened to be increased, in any way because of the
Tenants use of the Premises in violation of the terms of this Lease and, if
Tenant fails to remedy the cause thereof within 48 hours after notice, Landlord
may, at its option, either terminate this Lease or enter upon the Premises and
attempt to remedy such condition, and Tenant shall promptly pay the cost thereof
to Landlord as additional Rental. Landlord shall not be liable for any damage
or injury caused to any property of Tenant or of others located on the Premises
resulting from such entry. If Landlord is unable to remedy such condition, then
Landlord shall have all of the remedies provided for in this Lease in the event
of a default by Tenant.
SECTION 14.05. All policies covering real or personal property which either
party obtains affecting the Premises shall include a clause or endorsement
denying the insurer any rights of subrogation against the other party to the
extent rights have been waived by the insured before the occurrence of injury or
loss. Landlord and Tenant hereby mutually waive any rights of recovery against
the other for injury or loss due to hazards covered by insurance containing such
a waiver of subrogation clause or endorsement to the extent of the injury or
loss covered thereby.
ARTICLE 15
DAMAGE BY FIRE OR OTHER CAUSE
SECTION 15.01. Subject to Sections 15.02 and 15.03 hereof, if the Building
is damaged by fire or other casualty so as to affect the Premises, Tenant
shall immediately notify Landlord, who shall have the damage repaired with
reasonable speed at the expense of Landlord (but only if the proceeds from
Landlord's insurance are sufficient for such purpose and are made available
to Landlord by Landlord's mortgagee, and, if applicable, the Dauphin County
Industrial Development Authority), subject to delays which may arise by
reason of adjustment of loss under insurance policies and to other delays
beyond Landlord's reasonable control. Provided such damage was not the
result of the gross negligence or willful misconduct of Tenant, or Tenant's
employees or invitees, an abatement in the Rental hereunder shall be allowed
as to that portion of the Premises rendered untenantable by such damage from
the date of such damage until such time as Landlord reasonably determines
that such damaged portion of the Premises has been made tenantable for
Tenant's use.
SECTION 15.02. If the Premises are damaged or destroyed by any cause
whatsoever, and if, in Landlord's reasonable opinion, the Premises cannot be (or
in fact are not) rebuilt or made fit for Tenant's purposes within one hundred
fifty (150) days of the damage or destruction, or if the proceeds from insurance
remaining after payment of any such proceeds to Landlord's mortgagee, ground, or
primary lessor, are insufficient to repair or restore the damage by destruction,
Landlord or Tenant may, at its option, terminate this Lease by giving the other
party notice of termination, and thereupon Rental and any other
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payments for which Tenant is liable under this Lease shall be apportioned and
paid to the date of such damage, and Tenant shall immediately vacate the
Premises, provided, however, that those provisions of this Lease which are
designated to cover matters of termination and the period thereafter shall
survive the termination hereof. Tenants option to terminate this Lease is only
available if Landlord indicates in writing to Tenant that the Premises cannot be
rebuilt within one hundred fifty (150) days or if the Premises are not in fact
rebuilt within such time frame.
SECTION 15.03. If the Building is damaged or destroyed to the extent that, in
Landlord's reasonable opinion in the exercise of good faith using commercially
reasonable standards, it would not be economically feasible to repair or restore
such damage or destruction, Landlord may, at its option, terminate this Lease by
giving Tenant, within 60 days after such damage, notice of such termination
requiring Tenant to vacate the Premises 60 days after delivery of the notice of
termination, and thereupon Rental and any other payments shall be apportioned
and paid to the date of such damage, and Tenant shall immediately vacate the
Premises according to such notice of termination, provided, however, that those
provisions of this Lease which are designed to cover matters of termination and
the period thereafter shall survive the termination hereof.
SECTION 15.04. Except as otherwise provided in this Lease, no damages shall be
payable by Landlord for inconvenience, loss of business, or annoyance arising
from any repair or restoration of any portion of the Premises, or the Building.
Landlord shall use its best efforts to have such repairs made promptly so as not
to unnecessarily interfere with Tenant's occupancy.
SECTION 15.05. The provisions of this Article shall be considered an express
agreement governing any case of damage or destruction of the Building, the
alterations, or the Premises by fire or other casualty.
ARTICLE 16
CONDEMNATION
If the Premises shall be taken or condemned, in whole or in part, for any public
purpose to such an extent as to render said Premises untenantable, this Lease
shall, at the option of Landlord or Tenant, forthwith terminate. All proceeds
from any taking or condemnation shall belong to and be paid to Landlord, except
to the extent of any proceeds awarded to Tenant on account of moving and
relocation expenses and depreciation to and removal of Tenant's physical
property.
ARTICLE 17
ASSIGNMENT AND SUBLETTING
SECTION 17.01. If Tenant should desire to assign this Lease or sublet the
Premises (or any part thereof), Tenant shall give Landlord written notice
thereof specifying the identity of the proposed subtenant or asssignee. So long
as Tenant shall remain liable to perform all of its obligations under this Lease
following such subletting or assignment, Landlord's consent thereto shall not be
required. No assignment or subletting by Tenant shall relieve Tenant of
Tenant's obligations under this Lease unless Landlord shall have consented in
writing to the assignment or sublease and shall have expressly agreed in writing
to release Tenant from its obligations hereunder.
SECTION 17.02. Landlord may sell, transfer, assign, and convey all or any part
of the Building and any and all of its rights under this Lease, provided
Landlord's successor in interest assumes Landlord's obligations hereunder, and
provided further that Tenant's consent shall be required if the proposed
10
<PAGE>
transferee, assignee or purchaser would be deemed to be a "related party" of
Tenant in accordance with the rules and regulations established by the Health
Care Financing Administration ("HCFA") or other federal agency which regulates
or administers the Medicare program. In the event Landlord assigns its rights
under this Lease, Landlord shall be released from any further obligations
hereunder, and Tenant agrees to look solely to Landlord's successor in interest
for performance of such obligations.
ARTICLE 18
WAIVER AND INDEMNIFICATION
SECTION 18.01. Tenant waives all claims against Landlord for damage to any
property or injury to, or death of, any person in, upon, or about the Building,
the Premises or parking facilities arising at any time and from any and all
causes whatsoever other than solely by reason of the gross negligence or willful
misconduct of Landlord, its agents, employees, representatives, or contractors,
and Tenant agrees that it will defend, indemnify, save, and hold harmless,
Landlord from and against all claims, demands, actions, damages, loss, cost,
liabilities, expenses, and judgments suffered by, recovered from, or asserted
against Landlord on account of any damage to any property or injury to, or death
of, any person arising from the use of the Building, the Premises, or the
parking facilities by Tenant or its employees or invitees, except such as is
caused solely by the gross negligence or willful misconduct of Landlord, its
agents, employees, representatives, or contractors. Tenant's foregoing
indemnity obligation shall include reasonable attorneys' fees and all other
reasonable costs and expenses incurred by Landlord. The provisions of this
Article 18 shall survive the termination of this Lease with respect to any
damage, injury, or death occurring before such termination. If Landlord is made
a party to any litigation commenced by or against Tenant or relating to this
Lease or to the Premises, and provided that in any such litigation, Landlord is
not finally adjudicated to be at fault, then Tenant shall pay all costs and
expenses, including attorneys' fees and court costs, incurred by or imposed upon
Landlord because of any such litigation, and the amount of all such costs and
expenses, including attorneys' fees and court costs, shall be a demand
obligation owing by Tenant to Landlord, and shall be considered as additional
Rental.
SECTION 18.02. Landlord agrees that it will defend, indemnify, save, and hold
harmless, Tenant from and against all claims, demands, actions, damages, loss,
cost, liabilities, expenses, and judgments suffered by, recovered from, or
asserted against Tenant by reason of Landlord's gross negligence or willful
misconduct. Landlord's foregoing indemnity obligation shall include reasonable
attorneys' fees and other reasonable costs and expenses incurred by Tenant. The
provisions of this Article 18 shall survive the termination of this Lease with
respect to any damage, injury, or death occurring before such termination.
ARTICLE 19
SURRENDER OF THE PREMISES
SECTION 19.01. Upon the expiration or other termination of this Lease for any
cause whatsoever, Tenant shall peacefully vacate the Premises in as good order
and condition as the same were at the beginning of the Term or may thereafter
have been improved by Landlord or Tenant, subject only to reasonable use and
wear thereof, fire and other casualty, and repairs which are Landlord's
obligation hereunder.
SECTION 19.02. Should Tenant continue to hold the Premises after the
termination of this Lease, whether the termination occurs by lapse of time or
otherwise, such holding over shall, unless otherwise agreed to by Landlord in
writing, constitute and be construed as a tenancy at will at a daily Rental
equal to 1/30th of an amount equal to 1.75 times the monthly Rental Rate for the
Premises as of the date of
11
<PAGE>
termination, and subject to all of the other terms set forth herein except any
right to renew or expand this Lease. Tenant shall be liable to Landlord for all
damage which Landlord actually suffers because of any holding over by Tenant,
and Tenant shall indemnify Landlord against all claims made by any other Tenant
or prospective Tenant against Landlord resulting from delay by Landlord in
delivering possession of the Premises to such other Tenant or prospective
Tenant.
ARTICLE 20
ESTOPPEL CERTIFICATES
Tenant agrees to furnish, when requested by Landlord or the holder of any deed
of trust covering the Building, the Land, or any interest of Landlord therein, a
certificate signed by Tenant certifying to such parties as Landlord may
designate to the extent true matters with respect to the terms and status of
this Lease and the Premises, stating that Tenant, as of the date of such
certificates, has no charge, lien, or claim of offset under this Lease or
otherwise against Rentals or other charges due or to become due hereunder; and
such other matters as may be requested by Landlord or the holder of any such
deed of trust. To the extent any such statements requested are not true, Tenant
shall explain such facts in writing, Landlord agrees periodically to furnish,
when reasonably requested in writing by Tenant, certificates signed by Landlord
containing substantially the same information as described above.
ARTICLE 21
SUBORDINATION
SECTION 21.01. This Lease is subject and subordinate to any deeds of trust,
mortgages, or other security instruments, and any other supplements or
amendments thereto, which presently cover the Building and the Land or any
interest of Landlord therein, and to any increases, renewals, modifications,
consolidations, replacements and extensions of any of such deeds of trust,
mortgages, or security instruments. This provision is declared by Landlord and
Tenant to be self-operative and no further instrument shall be required to
effect such subordination of this Lease. Tenant shall, however, upon demand,
execute, acknowledge, and deliver to Landlord any further instruments and
certificates evidencing such subordination as Landlord may require. Landlord
agrees to obtain for Tenant a "non-disturbance" agreement from the holder or
beneficiary of any deeds of trust, mortgages or other security instruments that
now may cover the Premises, the Building or the Land or any interest of Landlord
therein. This Lease shall not be subject and subordinate to deeds of trust,
mortgages or other security instruments that in the future may cover the
Premises, the Building or the Land or any interest of Landlord therein unless
and until the holder of such instrument shall execute, acknowledge and deliver
to Tenant a "subordination/non-disturbance" agreement relating to this Lease
which shall contain such provisions as such holder may reasonably request. This
Lease is further subject and subordinate to:
(a) all ground or primary Leases which may exist at the date hereof and to
any supplements, modifications, and extensions thereof heretofore or
hereafter made, and
(b) utility easements and agreements, covenants, restrictions, and other
encumbrances, both existing and future.
SECTION 21.02. Notwithstanding the generality of the foregoing provisions of
Section 22.01 hereof, any such mortgagee or ground or primary lessor shall have
the right at any time to subordinate any such ground or primary Leases, deeds of
trust, mortgages, or other security instruments to this Lease on such terms and
subject to such conditions as such mortgagee or ground or primary lessor may
consider
12
<PAGE>
appropriate in its discretion. At any time, before or after the institution of
any proceedings for the foreclosure of any such deeds of trust, mortgages, or
other security instruments or termination of any ground or primary Lease, or
sale of the Building under any such deeds of trust, mortgages, or other security
instruments or termination of any ground or primary Lease, Tenant shall attorn
to such ground or primary lessor or such purchaser upon any such sale or the
grantee under any deed in lieu of such foreclosure and shall recognize such
ground or primary lessor or such purchaser or grantee as Landlord under this
Lease. The agreement of Tenant to attorn contained in the immediately preceding
sentence shall survive any such termination of any ground or primary Lease,
foreclosure sale, trustee's sale, or conveyance in lieu thereof. Tenant shall
upon demanded at any time, before or after any such termination, execute,
acknowledge, and deliver to Landlord's mortgagee or ground or primary lessor any
written instruments and certificates evidencing such attornment as Landlord's
mortgagee or ground or primary lessor may reasonably require.
ARTICLE 22
PARKING
Landlord will permit Tenant to use the areas designated by Landlord ("Parking
Facilities") for parking of vehicles on the Premises during the Term.
ARTICLE 23
DEFAULT AND REMEDIES
SECTION 23.01. The occurrence of any one or more of the following events shall,
at Landlord's option, constitute an event of default of this Lease:
(a) if Tenant shall fail to pay any Rental or other sums payable by Tenant
hereunder within 10 days of written notice thereof from Landlord
(provided, however, if such event of default shall occur more than
once in every 6 months period, Landlord shall not be required to
provide any written notice of default and an event of default shall
occur 10 days after such Rental or other sums becomes due and
payable);
(b) if Tenant shall fail to perform or observe any other term hereof or
any of the Rules and Regulations and such failure shall continue for
more than 30 days after notice thereof from Landlord, provided,
however, that if such cause is not reasonably capable of being
remedied within said 30 day period, then, Tenant shall be deemed in
default hereunder if Tenant does not commence such cure within said 30
day period and thereafter diligently prosecutes same to completion
within ninety (90) days following notice of such default from Landlord
to Tenant;
(c) if Tenant abandons the Premises or vacates all or a material portion
of the Premises without Landlord's prior written consent (which
consent shall not unreasonably be withheld, conditioned or delayed);
(d) if any petition is filed by or against Tenant under any section or
chapter of the present or any future Federal Bankruptcy Code or under
any similar law or statute of the United States or any state thereof
and such petition is not withdrawn or dismissed within one hundred
(100) days after its filing;
13
<PAGE>
(e) if Tenant becomes insolvent and such insolvency continues for a period
of one hundred (100) days or a court determines that Tenant has made a
transfer in fraud of creditors;
(f) if Tenant makes an assignment of substantially all of its assets for
the benefit of creditors; or
(g) if a receiver, custodian, or trustee is appointed for Tenant or for
any of the assets of Tenant which appointment is not vacated within
one hundred (100) days of the date of such appointment.
SECTION 23.02. If an event of default occurs, at any time thereafter Landlord
may do one or more of the following without any additional notice or demand:
(a) Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord. If Tenant fails to do so,
Landlord may, without notice and without prejudice to any other remedy
Landlord may have, and to the extent permitted by applicable law,
enter upon and take possession of the Premises and expel or remove
Tenant and its effects without being liable to prosecution or any
claim for damages therefor; and Tenant shall be liable to Landlord for
all loss and damage which Landlord may reasonably and actually suffer
by proximately reason of such termination, whether through inability
to relet the Premises or otherwise, including any loss of Rental for
the remainder of the Term. Any such loss of Rental shall be offset by
any Rental received by Landlord as a result of reletting the Premises
during the remainder of the Term.
(b) Terminate this Lease, in which event Tenant's event of default shall
be considered a total breach of Tenant's obligations under this Lease
and Tenant immediately shall become liable for such damages for such
breach amount, equal to the total of:
(1) the reasonable and necessary costs of recovering the Premises;
(2) the unpaid Rental earned as of the date of termination, plus
interest thereon at a rate per annum from the due date equal to
5% over the Prime Rate; provided, however, that such interest
shall never exceed the Highest Lawful Rate;
(3) the amount of the excess of
(i) the total Rental and other benefits which Landlord would
have received under the Lease for the remainder of the Term,
at the rates then in effect, together with all other
expenses occurred by Landlord in connection with Tenant's
default, over
(ii) the Fair Market Rate of the balance of the Term as of the
time of such breach,
which excess shall be discounted at the rate of 8% per annum to
the then present value; and
(4) all other sums of money and damages owing by Tenant and Landlord.
(c) Enter upon and take possession of the Premises as Tenant's agent
without terminating this Lease and without being liable to prosecution
or any claim for damages therefor, and
14
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Landlord may relet the Premises as Tenant's agent and receive the
Rental therefor, in which event Tenant shall pay to Landlord on demand
the reasonable and necessary cost of renovating, repairing, and
altering the Premises for a new Tenant or Tenants and any deficiency
that may arise by reason of such reletting; provided, however, that
Landlord shall have no duty to relet the Premises and Landlord's
failure to relet the Premises shall not release or affect Tenant's
liability for Rental or for damages.
(d) Do whatever Tenant is obligated to do under this Lease and may enter
the Premises without being liable to prosecution or any claim for
damages therefor, to accomplish this purpose. Tenant shall reimburse
Landlord immediately upon demand for any expenses which Landlord
incurs in thus effecting compliance with this Lease on Tenant's
behalf, and Landlord shall not be liable for any damages suffered by
Tenant from such action, whether caused by the negligence of Landlord
or otherwise.
SECTION 23.03. No act or thing done by Landlord or its agents during the Term
shall constitute an acceptance of an attempted surrender of the Premises, and no
agreement to accept a surrender of the Premises or to terminate this Lease shall
be valid unless made in writing and signed by Landlord. No re-entry or taking
possession of the Premises by Landlord shall constitute an election by Landlord
to terminate this Lease, unless a written notice of such intention is given to
Tenant. Notwithstanding any such reletting or re-entry or taking possession,
Landlord may at any time thereafter terminate this Lease for a previous event of
default. Landlord's acceptance of Rental following an event of default
hereunder shall not be construed as a waiver of such event of default. No
waiver by Landlord of any breach of this Lease shall constitute a waiver of any
other violation or breach of any time of the terms hereof. Forbearance by
Landlord to enforce one or more of the remedies herein provided upon a breach
hereof shall not constitute a waiver of any other breach of the Lease.
SECTION 23.04. No provision of this Lease shall be deemed to have been waived
by Landlord unless such waiver is in writing and signed by Landlord. Nor shall
any custom or practice which may evolve between the parties in the
administration of the terms of this Lease be construed to waive or lessen
Landlord's right to insist upon strict performance of the terms of this Lease.
The rights granted to Landlord in this Lease shall be cumulative of every other
right or remedy which Landlord may otherwise have at law or in equity or by
statute, and the exercise of one or more rights or remedies shall not prejudice
or impair the concurrent or subsequent exercise of other rights or remedies.
ARTICLE 24
WAIVER BY TENANT
To the extent permitted by applicable law, Tenant waives (to the extent waivable
under applicable law) for itself and all claiming by, through, and under it,
including creditors of all kinds
(a) any right and privilege which it or any of them may have under any
present or future constitution, statute, or rule of law to redeem the
Premises or to have a continuance of this Lease for the Term after
termination of Tenant's right of occupancy by order or judgment of any
court or by any legal process or writ, under the terms of this Lease,
or after the termination of the Term as herein provided,
(b) the benefits of any present or future constitution, statute, or rule
of law which exempts property from liability for debt or for distress
for rent, and
15
<PAGE>
(c) the provisions of law relating to notice and/or delay in levy of
execution in case of eviction of a Tenant for non-payment of rent,
including, but not limited to, the provisions of the Pennsylvania
Landlord and Tenant Act of 1951, as amended, relating to notices to
quit from Landlords to tenants.
ARTICLE 25
SECURITY DEPOSIT
Intentionally Omitted
ARTICLE 26
ATTORNEY'S FEES AND LEGAL EXPENSES
In any action or proceeding brought by either party against the other with
respect to this Lease, the prevailing party shall be entitled to recover from
the other party attorneys' fees, investigation costs, and other legal expenses
and court costs incurred by such party in such action or proceeding as the court
may find to be reasonable. The prevailing party shall be the one who receives
the net judgment in its behalf at the end of any action.
ARTICLE 27
NOTICES
Any notice or document required to be delivered hereunder shall be considered
delivered, whether actually received or not, when hand delivered to the address
of the other party, one business day following transmittal by Federal Express or
other reputable overnight delivery service, or three business days after being
deposited in the United States Mail, postage prepaid, registered or certified
mail, return receipt requested, addressed to the parties hereto at the
respective addresses specified in the Basic Lease Information, or at such other
address as they have subsequently specified by written notice.
ARTICLE 28
MISCELLANEOUS
SECTION 28.01. Where this Lease requires Tenant to reimburse Landlord the cost
of any item, if no such cost has been stipulated, such cost will be the
reasonable and customary charge therefor periodically established by Landlord.
Failure to pay any such cost shall be considered as a failure to pay Rental.
SECTION 28.02. Tenant and Landlord each represent and warrant to the other that
it has had no dealings with any broker or agent in connection with the
negotiation or execution of this Lease, except such brokers or agents as may be
identified in Items 20 or 21 of the Basic Lease Information. Each party shall
indemnify and hold the other harmless from any costs, expenses, or liability for
commission or other compensation or charges claimed by any person, broker or
agent (other than those identified in the Basic Lease Information) following or
resulting from its misrepresentations herein contained.
16
<PAGE>
SECTION 28.03. As used herein, the terms "business days" means Monday through
Friday (except for holidays); "normal business hours" means 7:00 a.m. to 6:00
p.m. on business days; and "holidays" means those holidays designated by
Landlord, which holidays shall be consistent with those holidays designated by
Landlords of comparable office Buildings in the immediate area and town.
SECTION 28.04. Every agreement contained in this Lease is, and shall be
construed as, a separate and independent agreement. If any term of this Lease
or the application thereof to any person or circumstances shall be invalid and
unenforceable, the remainder of this Lease, or the application of such term to
persons or circumstances other than those as to which it is invalid or
unenforceable, shall not be affected.
SECTION 28.05. There shall be no merger of this Lease or of the Leasehold
estate hereby created with the fee estate in the Premises or any part thereof by
reason of the fact that the same person may acquire or hold, directly or
indirectly, this Lease or the Leasehold state hereby created or any interest in
this Lease or in any interest in such fee estate. In the event of a voluntary
or other surrender of this Lease, or a mutual cancellation hereof, Landlord may,
at its option, terminate all subleases, or treat such surrender or cancellation
as an assignment of such subLeases.
SECTION 28.06. Any liability of Landlord to Tenant under the terms of this
Lease shall be limited to Landlord's interest in the Building and the Land, and
Landlord shall not be personally liable for any deficiency.
SECTION 28.07. Whenever a period of time is herein prescribed for action, other
than the payment of money, to be taken by either party hereto, such party shall
not be liable or responsible for, and there shall be excluded from the
computation for any such period of time, any delays due to strikes, riots, acts
of God, shortages of labor or materials, war, governmental laws, regulations, or
restrictions, or any other cause of any kind whatsoever which is beyond the
control of such party.
SECTION 28.08. The article headings contained in this Lease are for convenience
only and shall not enlarge or limit the scope or meaning of the various and
several articles hereof. Words of any gender used in this Lease shall include
any other gender, and words in the singular number shall be held to include the
plural, unless the context otherwise requires.
SECTION 28.09. If there be more than one Tenant, the obligations hereunder
imposed Tenant shall be joint and several, and all agreements and covenants
herein contained shall be binding upon the respective heirs, personal
representatives, successors, and to the extent permitted under this Lease,
assigns of the parties hereto. If there is a guarantor of Tenant's obligations
hereunder, Tenant's obligations shall be joint and several obligations of Tenant
and such guarantor, and Landlord need not first proceed against Tenant hereunder
before proceeding against such guarantor, nor shall any such guarantor be
released from its guarantee for any reason, including, without limitation, any
amendment, renewal, expansion or diminution of this Lease, any forbearance by
Landlord or waiver of any of Landlord's rights, the failure to give Tenant or
such guarantor any notices, or the release of any party liable for the payment
of Tenant's obligations hereunder.
SECTION 28.10. Neither Landlord nor Landlord's agents or brokers have made any
representations or promises with respect to the Premises or the Building except
as herein expressly set forth and all reliance with respect to any
representations or promises is based solely on those contained herein.
SECTION 28.11. This Lease sets forth the entire agreement between the parties
and cancels all prior negotiations, arrangements, brochures, agreements, and
understandings, if any, between Landlord and Tenant regarding the subject matter
of this Lease. No amendment or modification of this Lease shall be binding or
valid unless expressed in a writing executed by both parties hereto.
17
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SECTION 28.12. The submission of this Lease to Tenant shall not be construed
as an offer, nor shall Tenant have any rights with respect thereto unless
Landlord executes a copy of this Lease and delivers the same to Tenant.
SECTION 28.13. If Tenant signs as a corporation, each of the persons
executing this Lease on behalf of Tenant represents and warrants that Tenant
is a duly organized and existing corporation, the Tenant has and is qualified
to do business in the Commonwealth of Pennsylvania, that the corporation has
full right and authority to enter into this Lease, and that all persons
signing on behalf of the corporation were authorized to do so by appropriate
corporation actions. If Tenant signs as a partnership, trust, or other legal
entity, each of the persons executing this Lease on behalf of Tenant
represents and warrants that Tenant has complied with all applicable laws,
rules, and governmental regulations relative to its right to do business in
the Commonwealth of Pennsylvania, that such entity has the full right and
authority to enter into this Lease, and that all persons signing on behalf of
the Tenant were authorized to do so by any and all necessary or appropriate
partnership, trust, or other actions.
SECTION 28.14 This Lease shall be governed by and construed under the laws of
the Commonwealth of Pennsylvania. Any action brought to enforce or interpret
this Lease shall be brought in the court of appropriate jurisdiction in
Cumberland County, Pennsylvania. Should any provision of this Lease require
judicial interpretation, it is agreed that the Court interpreting or
considering same shall not apply the presumption that the terms hereof shall
be more strictly construed against a party by reason of the rule or
conclusion that a document should be construed more strictly against the party
who itself or through its agent prepared the same, it being agreed that all
parties hereto have participated in the preparation of this Lease and that
legal counsel was consulted by each party before the execution of this Lease.
SECTION 28.15 Any elimination or shutting off of light, air, or view by any
structure which may be erected on lands adjacent to the Building,
modification of the amenities to the Building shall in no way affect this
Lease or impose any liability on Landlord.
SECTION 28.16 Landlord may, upon reasonable notice (except in the case of
emergencies) enter upon the Premises at reasonable hours to inspect same or
clean or make repairs or alterations (but without any obligation to do so,
except as expressly provided for herein) and to show the Premises to
prospective lenders or purchasers, and, during the last nine (9) months of
the Term of the Lease, to show them to prospective Tenants at reasonable
hours and, if they are vacated, to prepare them for re-occupancy. Landlord
shall cause its officers, agents and representatives to exercise care with
any such entry not to
18
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unreasonably interfere with the operation and normal office routine of Tenant
(except in the case of emergency).
SECTION 29.17. The exhibits and numbered riders attached to this Lease are by
this reference incorporated fully herein. The term "this Lease" shall be
considered to include all such exhibits and riders.
IN WITNESS WHEREOF, Landlord and Tenant have set their hands and seals
to this Lease Agreement the day and year first above written.
Landlord:
WITNESS: /s/ Robin Barber /s/ LeRoy S. Zimmerman Date: 12/29/94
-------------------------- ----------------------
LeRoy S. Zimmerman
Tenant:
CONTINENTAL MEDICAL SYSTEMS, INC.
a Delaware corporation
ATTEST: /s/ Deborah Meyers Welsh By: /s/ David G. Nation Date: 12/29/94
------------------------ --------------------
David G. Nation,
Senior Vice President
19
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Dated: 2/1/95
OFFICE LEASE AGREEMENT
BASIC LEASE INFORMATION
<TABLE>
<S> <C>
1. Date: February 1, 1995
--------------------------------------------------------------------------------------
2. Landlord: Liberty Plaza Associates II, a Pennsylvania general partnership
----------------------------------------------------------------------------------
3. Tenant: Continental Medical Systems, Inc., a Delaware corporation
------------------------------------------------------------------------------------
4. Guarantor(s): None
------------------------------------------------------------------------------
5. Building: Liberty Plaza II, 600 Wilson Lane, Mechanicsburg, PA 17055
-----------------------------------------------------------------------------------
6. Premises: Entire Building
----------------------------------------------------------------------------------
7. Commencement Date: 2/1/95
--------------------------------------------------------------------------
8. Expiration Date: 1/31/00 (a five-year term)
---------------------------------------------------------------------------
9. Rentable Area of the Building: 20,595 Rentable square feet
----------------
10. Rentable Area of the Premises: 20,595 Rentable square feet
----------------
11. Intentionally Omitted
12. Initial Annual Base Rental: $ 206,567.85
--------------
13. Initial Annual Base Rental Rate $ 10.03 per Rentable square foot
----------
14. Annual Base Rental Rate Increase (cumulative) 0 %
------------
15. Intentionally Omitted
16. Tenant shall pay the Operating Expense Costs as provided for in Article 6.
17. Fiscal Year: Twelve months ending December 31
---------------------------------------
18. Security Deposit: $ -0- , payable at the time the Lease is signed. (Article #25)
------------
19. First Rent Check of $ 17,213.99 , payable at the time the Lease is signed. (Article #25)
-------------
20. Landlord's Broker: None
-------------------------------------------------------------------------
21. Tenant's Broker: None
---------------------------------------------------------------------------
22. Landlord's Address for Notices: Liberty Plaza Associates II, c/o MDI Group, Executive Park
------------------------------------------------------------
West, 4720 Old Gettysburg Road, Suite #307, Mechanicsburg, PA 17055
--------------------------------------------------------------------
23. Tenant's Address for Notices: Continental Medical Systems, Inc., P.O. Box 715,
--------------------------------------------------------------
Mechanicsburg, PA 17055, Attention: Legal Department
--------------------------------------------------------------
</TABLE>
<PAGE>
Exhibits "A" - "C" are part of this Lease, identified as follows:
-----------
<TABLE>
<S> <C>
Exhibit "A" Floor Plans
------------------------------------------------------------------------------------
Exhibit "B" Description of Land
------------------------------------------------------------------------------------
Exhibit "C" Rules and Regulations
------------------------------------------------------------------------------------
</TABLE>
The foregoing Basic Lease Information is hereby incorporated into and made a
part of the Office Lease Agreement which is described herein and attached.
Each reference in the Lease to any information and definitions contained in
the Basic Lease Information shall mean and refer to the information and
definitions hereinabove set forth. In the event of any conflict between any
Basic Lease Information and the Lease, the Lease shall control.
Landlord:
LIBERTY PLAZA ASSOCIATES II, a
Pennsylvania general partnership,
acting by and through its managing
general partner, as follows:
By: /s/ Martin J. Ortenzio
-----------------------------
Martin J. Ortenzio,
managing general
partner
Tenant:
CONTINENTAL MEDICAL SYSTEMS, INC.,
a Delaware corporation
By: /s/ David G. Nation
-----------------------------
David G. Nation,
Senior Vice President
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE 1 - PREMISES ................................................. 1
ARTICLE 2 - TERM ..................................................... 1
ARTICLE 3 - DELIVERY OF THE PREMISES TO TENANT ....................... 2
ARTICLE 4 - ACCEPTANCE OF THE PREMISES AND BUILDING BY TENANT ........ 2
ARTICLE 5 - RENTAL ................................................... 3
ARTICLE 6 - OPERATING EXPENSE COSTS .................................. 3
ARTICLE 7 - UTILITIES ................................................ 4
ARTICLE 8 - USE ...................................................... 5
ARTICLE 9 - LAWS, ORDINANCES, AND REQUIREMENTS OF PUBLIC AUTHORITIES . 5
ARTICLE 10 - OBSERVANCE OF RULES AND REGULATIONS ...................... 6
ARTICLE 11 - ALTERATIONS .............................................. 6
ARTICLE 12 - LIENS .................................................... 7
ARTICLE 13 - ORDINARY REPAIRS ......................................... 7
ARTICLE 14 - INSURANCE ................................................ 7
ARTICLE 15 - DAMAGE BY FIRE OR OTHER CAUSE ............................ 9
ARTICLE 16 - CONDEMNATION ............................................. 10
ARTICLE 17 - ASSIGNMENT AND SUBLETTING ................................ 10
ARTICLE 18 - WAIVER AND INDEMNIFICATION ............................... 10
ARTICLE 19 - SURRENDER OF THE PREMISES ................................ 11
ARTICLE 20 - ESTOPPEL CERTIFICATES .................................... 11
ARTICLE 21 - SUBORDINATION ............................................ 12
ARTICLE 22 - PARKING .................................................. 12
ARTICLE 23 - DEFAULT AND REMEDIES ..................................... 13
ARTICLE 24 - WAIVER BY TENANT ......................................... 15
ARTICLE 25 - SECURITY DEPOSIT ......................................... 15
ARTICLE 26 - ATTORNEYS' FEES AND LEGAL EXPENSES ....................... 15
ARTICLE 27 - NOTICES .................................................. 16
ARTICLE 28 - MISCELLANEOUS ............................................ 16
ARTICLE 29 - CONDITION SUBSEQUENT ..................................... 18
EXHIBIT "A" - FLOOR PLANS
EXHIBIT "B" - DESCRIPTION OF LAND
EXHIBIT "C" - RULES AND REGULATIONS
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OFFICE LEASE AGREEMENT
THIS LEASE, dated as of the date specified in the Basic Lease Information
which is attached hereto and incorporated herein for all purposes, is hereby
made between Landlord and Tenant.
ARTICLE 1
PREMISES
Landlord leases to Tenant, and Tenant leases from Landlord, for the Term (as
defined below), and subject to the provisions hereof, to each of which
Landlord and Tenant mutually agree, the Premises, which Premises consists of
the entire Building known as Liberty Plaza II as more particularly described
in the floor plans in Exhibit "A" attached hereto, together with its
appurtenances, including the right to use the lobbies, entrances, stairs,
elevators, off-street parking and loading areas (for loading and unloading of
materials and supplies), and other portions of the Building, and together with
the real property described in Exhibit "B" attached hereto. For purposes of
this Lease, the Rentable Area of the Building and the Rentable Area of the
Premises are as provided in the foregoing Basic Lease Information.
ARTICLE 2
TERM
SECTION 2.01. The term of this Lease (the "Term") shall begin on the
Commencement Date, as specified in the Basic Lease Information. Unless sooner
terminated, the Term shall end at midnight on the Expiration Date specified
in the Basic Lease Information.
SECTION 2.02. Landlord hereby grants to Tenant an option to extend the term
of this Lease for three (3) additional five-year renewal terms (each, an
"Extended Term"). Each Extended Term shall be upon the same terms and
conditions as those set forth for the initial Term except that the Annual
Base Rental shall be the then current fair market rental value which, unless
otherwise mutually agreed to by Landlord and Tenant, shall be determined by
appraisal pursuant to the provisions of Sections 2.03 and 2.04 below. Each
option may only be exercised by Tenant if, at the time such option may be
exercised, an event of default is not continuing under this Lease, and shall
be exercised by Tenant by delivery of notice to that effect to Landlord not
less than 360 days but not more than 540 days prior to the date upon which
this Lease otherwise would terminate.
SECTION 2.03. If at any time it becomes necessary to determine the fair
market rental value of the Premises and the parties are unable to agree
thereupon , either party shall be permitted to give notice of its election to
have the fair market value of the Premises determined by appraisal and such
notice 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 the other either agree to the
appointment of the appraiser identified in such initial notice, in which case
such appraiser shall be the sole appraiser for purposes of determining the
fair market rental value, or shall appoint a second person as an appraiser on
its behalf. Any appraiser appointed pursuant to this Section must be a member
of the American Institute of Real Estate Appraisers (or any successor
organization thereto) with at least five (5) years' experience in appraising
commercial real estate in the Harrisburg, Pennsylvania vicinity. The
appraiser(s) thus appointed shall, within thirty (30) days after the date of
the notice appointing the first appraiser, proceed to appraise the Premises
to determine the fair market rental value thereof as of the first day of the
applicable renewal term. In the case of two appraisers, except as provided in
Section 2.04,
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the two appraisals shall be averaged to determine the fair market rental
value. In any event, the appraised value determined in accordance with this
Section shall be final and binding on Landlord and Tenant.
SECTION 2.04. Any appraisal required or permitted by the terms of this Lease
shall be conducted in a manner consistent with sound appraisal practice.
Notwithstanding the provisions of Section 2.03, if the difference between the
appraisal amounts determined by the appraisers appointed pursuant to Section
2.03 exceeds ten percent (10%) of the lesser of such appraisal amounts, then
the two appraisers shall have twenty (20) days to appoint a third appraiser.
If no such appraiser is appointed within such twenty (20) days or within
ninety (90) days of the original request for a determination of fair market
rental value, which ever 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 market rental value within forty-five (45)
days after the appointment of such appraiser. The determination of the three
appraisers which differs most in the terms of dollar amount from the
determinations of the other two appraisers shall be excluded, and fifty
percent (50%) of the sum of the remaining two determinations shall be the
appraised value, which appraised value shall be final and binding upon
Landlord and Tenant as the fair market value of the Premises. If the lowest
and highest appraised values are equidistant in amount from the middle
appraised value, then such middle appraised value shall be the fair market
rental value. The provisions of this Article 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
except as otherwise provided by applicable law. Landlord and Tenant each
shall 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.
SECTION 2.05. Provided Tenant performs all of Tenant's obligations under this
Lease, including Tenant's covenant for the payment of Rental as defined
below, Tenant shall, during the Term, peacably and quietly enjoy the Premises
without disturbance from Landlord; subject, however, to the terms of this
Lease and any deeds of trust, restrictive covenants, easements and other
encumbrances to which this Lease is now subject and subordinate.
ARTICLE 3
DELIVERY OF THE PREMISES TO TENANT
Tenant is presently in possession of the Premises. Landlord shall have no
obligation to construct additional Leasehold Improvements prior to the
commencement of the Term nor during the Term.
ARTICLE 4
ACCEPTANCE OF THE PREMISES AND BUILDING BY TENANT
Tenant accepts the Premises as suitable for the purposes for which they are
leased. Landlord shall not be liable, except for gross negligence or willful
misconduct, to Tenant, or any of its agents, employees, licensees, or
invitees, for any injury or damage to person or property due to the condition
of, design of, or any defect in, the Building or its mechanical systems and
equipment which may exist or occur.
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ARTICLE 5
RENTAL
SECTION 5.01. Tenant covenants and agrees to pay to Landlord, in lawful money
of the United States, 1/12 of the Annual Base Rental specified in the Basic
Lease Information, monthly in advance, without notice or demand, on the first
day of each calendar month. In the event any Rental payment is made six (6)
or more business days after the due date thereof, Tenant agrees to pay
interest on such overdue amount beginning on the fifth business day following
its due date until it is paid at the annual rate of one percent (1%) in
excess of the prime rate of interest announced from time to time by Citibank,
N.A. (New York, New York). Rental shall be paid to Landlord, without
deduction or offset, at the address of Landlord specified in the Basic Lease
Information or such other place as Landlord may designate. The first monthly
installment of Annual Base Rental shall be paid on the Commencement Date,
except that if the Commencement Date is a date other than the first day of a
calendar month, then the monthly Annual Base Rental for the first and last
fractional months of the Term shall be appropriately prorated. The term
"Rental" as used herein means Annual Base Rental, Operating Expense Costs
(as defined in Section 6.01), and all other sums, whether or not expressly
denominated as rent payable by Tenant to Landlord hereunder and all such
amounts shall be deemed rent payments for the purposes of Section 502(b)(7)
of the Bankruptcy Code U.S.C. 502(b)(7). A service charge of $50 for each
check returned stamped "NSF" will be due and payable to Landlord to cover
Landlord's extra cost and expense in handling and processing the late
payments. No payment by Tenant or receipt by Landlord of a lesser amount than
the monthly installment due under this Lease shall be deemed to be other than
on account of the earliest Rental due hereunder, nor shall any endorsement or
statement on any check or payment as Rental be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice
to Landlord's right to recover the balance of such Rental or pursue any
other remedy provided in this Lease or by law.
ARTICLE 6
OPERATING EXPENSE COSTS
SECTION 6.01. From the Commencement Date until the Expiration Date, Tenant
shall directly pay any and all Operating Expense Costs (as defined in this
Article 6) and, if Tenant shall fail to timely make direct payment for any
item of Operating Expense Cost and Landlord shall incur or pay for such
item, then Tenant shall, within fifteen (15) days after written demand from
Landlord, reimburse Landlord in full therefor. Notwithstanding the foregoing,
real estate taxes and premiums for property casualty insurance shall be paid
directly by Landlord and Tenant shall, within fifteen (15) days after written
demand from Landlord, reimburse Landlord in full therefor.
SECTION 6.02. As used herein, "Operating Expense Costs" means all expenses,
costs, and disbursements of every kind which are required to be paid in
connection with the operation and maintenance of the Premises, the Building,
Parking Areas, and exterior areas contained on the land descrbied in Exhibit
"B" upon which the Building is situated. All Operating Expense Costs shall be
determined according to generally accepted accounting principles which shall
be consistently applied. Operating Expense Costs shall include, but are not
limited to, the following:
(a) Wages, salaries, and fees of all personnel or entities directly engaged
in the operation, maintenance or repair of the Building, including
taxes, insurance, and benefits relating thereto.
(b) All supplies and materials used in the operation and maintenance of the
Building.
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(c) Expenses of all maintenance, security, and service agreements for the
Building and the equipment therein, including, without limitation, alarm
service, janitorial services, exterior window cleaning, landscaping,
irrigation, repair and maintenance of the Parking Areas, roadway and
utility repair and maintenance, elevator repair and maintenance and
cleaning.
(d) Expenses of all insurance relating to the Building which is reasonably
necessary for the operation of the Building, including, without
limitation, the cost of property, casualty and liability insurance
applicable to the Building and the personal property used in
connection therewith, and the cost of business or rental interruption
insurance with total benefits not in excess of one half (1/2) of the
Annual Base Rental.
(e) All taxes, assessments, and other governmental charges, now or
hereafter applicable to the Building, or any portion thereof, or to
the personal property used in connection therewith, and dues
(including those levied by any Association managing all common areas
and easements) attributable to the Building or its operation,
exclusive of any inheritance, gift, franchise, income, corporate, or
profit taxes which may be assessed against Landlord.
(f) Expenses of repairs and general maintenance (excluding repairs
and general maintenance paid by proceeds of insurance or by Tenant or
other third parties).
(g) All utility costs relating to the Building, including, without
limitation, electric, gas, water, sewer and telephone.
The term "Operating Expense Costs" shall not include depreciation on the
Building or equipment therein, interest, net income, franchise or capital
stock taxes payable by Landlord, costs reimbursed by insurance, interest and
principal on any financing relating to the Building, real estate brokers'
commissions, expenses which should be capitalized under generally accepted
accounting principles consistently applied, or the cost of any capital
improvements which may be required by governmental authorities under any laws
or regulations that were not applicable to the Building at the time it was
constructed (unless necessitated by Tenant's particular use of the Premises).
SECTION 6.03. Tenant shall be liable for all taxes levied or assessed against
personal property, furniture, fixtures, or leasehold improvements placed by
Tenant in the Premises; provided that Tenant shall have the right to contest
such taxes. Notwithstanding any of the provisions of this Section 6.03 to the
contrary, Tenant shall not be responsible for, nor required to pay, any
levies or assessments (except for levies or assessments with respect to
property owned by Tenant) which relate or apply to periods prior to the
Commencement Date or subsequent to the Termination Date of this Lease.
ARTICLE 7
UTILITIES
SECTION 7.01. While Tenant is occupying the Premises, the following services
shall be contracted and paid for directly by Tenant: public water and sewer
services; natural gas service (if applicable); electric service;
trash/recycling removal service; janitorial supplies and service; HVAC
repairs and maintenance; elevator repairs, maintenance and licenses; general
repairs and maintenance; landscaping and snow removal. In connection with its
obligations under this Section, Tenant shall obtain and maintain during the
Term an HVAC repair and maintenance contract and an elevator repair and
maintenance contract.
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SECTION 7.02. While Tenant is occupying the Premises and is not in default
under this Lease, Landlord will furnish sufficient power for lighting and for
typewriters, dictaphones, calculating machines, and other normal office
machines of similar low electrical consumption, all of which power shall be
paid for by Tenant.
SECTION 7.03. Failure to furnish, or any stoppage of, utility services
provided in this Article 7 resulting from any cause other than Landlord's
gross negligence or willful misconduct shall not make Landlord liable in any
respect for damages to either person, property, or business, nor be construed
as an eviction of Tenant, nor entitle Tenant to any abatement of Rental, nor
relieve Tenant from its obligations under this Lease. To the extent that
Landlord has responsibility therefor hereunder, Landlord will, with
reasonable diligence, repair any malfunction of the Building improvements or
facilities, but Tenant will have no claim for rebate, abatement of Rental,
or damages because of any malfunctions or interruptions in service other than
Landlord's gross negligence or willful misconduct.
ARTICLE 8
USE
The Premises shall be used for general office and other lawful purposes, and
Tenant agrees to use and maintain the Premises in a safe, lawful and proper
manner.
ARTICLE 9
LAWS, ORDINANCES AND REQUIREMENTS OF PUBLIC AUTHORITIES
SECTION 9.01. Tenant shall, at its sole expense:
(i) comply with all laws, orders, ordinances, and regulations of
federal, state, county, and municipal authorities having jurisdiction
over the Premises, but only to the extent directly relating to
Tenant's use and occupancy of the Premises;
(ii) comply with any direction made pursuant to law of any public officer
or officers requiring abatement of any nuisance, or imposing any
obligation, order, or duty upon Landlord or Tenant arising from
Tenant's use of the Premises or from conditions which have been
created by or at the insistence of Tenant or required by reason
of a breach of any of Tenant's obligations hereunder; and
(iii) indemnify Landlord and hold Landlord harmless from any loss, cost,
claim, or expense which Landlord may incur or suffer by reason of
Tenant's failure to comply with its obligations under clauses (i)
or (ii) above. If Tenant receives written notice of violation of
any such law, order, ordinance, or regulation, it shall promptly
notify Landlord thereof.
SECTION 9.02. Tenant shall have the right to contest or review the amount or
validity of all taxes and other impositions and any repairs and improvements
required by any law, rule, regulation or requirement of any public authority
or the fire insurance rating association having jurisdiction over the
Premises or Tenant's use thereof or any laws, rules, regulations and
requirements of any public authority or the fire insurance rating
association, by legal proceedings or in such other manner as Tenant may deem
suitable (which, if instituted, Tenant shall conduct, if necessary or
appropriate, in the name of and with the cooperation of Landlord). Landlord
shall execute all documents necessary or appropriate to comply with
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the foregoing. Pending any such proceeding, Landlord shall not pay or
discharge any of the same in excess of the amount required by law while such
proceeding is pending without Tenant's prior consent. Notwithstanding the
foregoing, however, Tenant shall promptly pay all taxes or other impositions
if at any time the Premises or any part thereof shall then be subject to
forfeiture, or if Landlord shall be subject to (or shall be claimed or
alleged to be subject to) any criminal liability arising out of the
nonpayment thereof. Tenant shall not discontinue any proceeding for abatement
of any taxes or other impositions without first giving thirty (30) days prior
notice to Landlord of its intention to do so, during which thirty (30) day
period Landlord may assume prosecution of such abatement proceeding.
ARTICLE 10
OBSERVANCE OF RULES AND REGULATIONS
Tenant and its employees, agents, visitors, and licensees shall observe
faithfully and comply strictly with all Rules and Regulations attached to
this Lease (Exhibit "C"). Landlord shall be entitled to make reasonable
changes and/or additions to the Rules and Regulations to the extent necessary
or advisable to comply with any newly enacted or modified statute, rule,
regulation or other law applicable to the Premises or this Lease. Any failure
by Landlord to enforce any of the Rules and Regulations now or hereafter in
effect, against Tenant shall not constitute a waiver of any such Rules and
Regulations. Tenant shall, following written notice from Landlord, promptly
comply with Landlord's reasonable demands relating to this Article 10.
ARTICLE 11
ALTERATIONS
SECTION 11.01. Tenant may not, at any time during the Term, without
Landlord's prior written consent (which shall not be unreasonably withheld or
delayed), make any alterations to the Premises costing in excess of $100,000
in any single year; provided, however, that Tenant will notify Landlord in
writing of the nature and extent of planned alterations, and Landlord will,
within thirty (30) days following Landlord's receipt of such notice, notify
Tenant of any objections to such alterations which Landlord may have to the
extent that such objections are based on Landlord's anticipation of having to
make additional expenditures as a result of such planned alterations. Tenant
shall not be allowed to construct any alterations which will require Landlord
to make other alterations to the Premises or to incur additional expense
until such objections made by Landlord are resolved in a manner satisfactory
to both Landlord and Tenant. All alterations desired by Tenant shall be made
at Tenant's expense by Tenant's contractors which have been approved in
writing by Landlord.
SECTION 11.02. Unless otherwise agreed to in writing between Landlord and
Tenant, all Leasehold Improvements, alterations, and other physical additions
made or installed by or for Tenant in or to the Premises with the prior
approval of Landlord shall be and remain Landlord's property (except Tenant's
furniture, furnishings, personal property, and moveable trade fixtures, all of
which, together with alterations made by Tenant without Landlord's consent,
shall be removed from the Premises upon termination of this Lease at Tenant's
sole expense), and shall not be removed without Landlord's written consent
which shall not be unreasonably withheld. Tenant also agrees to make all
necessary repairs of damage to the Premises caused by the removal of Tenant's
furniture, furnishings, personal property, moveable trade fixtures and
alterations made by Tenant without Landlord's consent.
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ARTICLE 12
LIENS
Tenant shall keep the Premises, the Building, and the land on which the
Building is located, free from any liens arising from any work performed,
materials furnished, or obligations incurred by or at the request of Tenant.
Nothing shall be construed as Landlord's consent to any performance of labor
or furnishing of any materials for any specific improvements, alteration, or
repair of, or to, the Premises, that would result in any liens against the
Premises or liability of the Landlord. If, based upon acts of Tenant, any
lien is filed against the Premises, the Building, the Property on which the
Building is located, or Tenant's Leasehold interests therein, Tenant shall
discharge or bond over same within forty-five (45) days after its filing. If
Tenant fails to discharge or bond over such lien within such period, then,
in addition to any other right or remedy of Landlord, Landlord may, at its
election, discharge the lien by either paying the amount claimed to be due,
obtaining the discharge by deposit with a court or a title company, or by
bonding. Tenant shall pay on demand any amount actually paid by Landlord for
reasonable attorneys' fees and other reasonable and necessary legal expenses
of Landlord incurred in defending any such action or in obtaining the
discharge of such lien after Tenant's failure to do so, together with all
necessary disbursements in connection therewith, to double the amount of the
lien claim plus a sufficient amount to cover any penalties, interest,
attorneys' fees, court costs, and other legal expenses resulting from such
contest. The bond shall name Landlord and such other parties as Landlord may
direct as beneficiaries thereunder.
ARTICLE 13
ORDINARY REPAIRS
Tenant shall, at all times during the Term hereof and at Tenant's sole cost
and expense, keep the Premises and every part thereof in good condition and
repair, ordinary wear and tear, fire and other casualty excepted. Subject to
Section 19.02 hereof, Tenant shall, at the end of the Term hereof, surrender
the Premises to Landlord in the same condition as when received, ordinary
wear and tear, fire and other casualty excepted. If Tenant fails to make
ordinary repairs promptly, Landlord may, at its option, make such repairs,
and Tenant shall pay Landlord on demand Landlord's actual costs in making
such repairs.
ARTICLE 14
INSURANCE
SECTION 14.01. Tenant shall, during the Term, at its sole expense, keep in
force, with Tenant, Landlord, and the mortgagees of Landlord named as
additional insured thereunder (except with respect to worker's compensation
coverage) all as their respective interests may appear, the following
insurance:
(a) All Risk Insurance (including fire, extended coverage, vandalism,
malicious mischief, extended perils, and debris removal) upon
property of every description and kind owned by Tenant and located in
the Building or for which Tenant is legally liable or installed by or
on behalf of Tenant including, without limitation, equipment,
furniture, furnishings, fittings, installations, removable trade
fixtures, and alterations, in an amount not less than the full
replacement cost thereof. If there is a dispute as to the amount
which comprises full replacement cost, the decision of Landlord or
the mortgagees of Landlord shall be conclusive and binding.
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(b) Commercial liability insurance coverage to include death, personal
injury, bodily injury, broad form property damage, operations hazard,
owner's protective coverage, contractual liability, and products and
completed operations liability, with combined single liability limits
not less than $1,000,000. Such coverage shall insure against all
liability of Tenant and its authorized representatives and visitors
arising out of, and in connection with, Tenant's use or occupancy of
the Premises.
(c) Worker's Compensation and Employer's Liability Insurance, with a
waiver of subrogation endorsement, in form and amount satisfactory
to Landlord.
(d) Any other form or forms of insurance as the mortgagees of Landlord
may reasonably require from time to time in form, in amounts, and
for insurance risks against which a prudent Tenant of a comparable
size and in a comparable business would protect itself; provided,
however, that Tenant shall not be required to purchase, maintain or
pay for business or rental interruption insurance with greater
benefits than are specified in Section 6.02 hereof.
All policies shall be issued by insurers with a Best's Insurance Reports rating
of A or better and shall be in form satisfactory to Landlord. Tenant agrees that
certificates of insurance or certified copies of each such insurance policy,
naming Landlord and its mortgagees as additional insured, will be delivered to
Landlord not later than ten (10) business days after the execution and delivery
of this Lease. All policies shall contain an undertaking by the insurers to
notify Landlord and the mortgagees of Landlord in writing, by Registered U.S.
Mail, not less than twenty (20) days before any cancellation thereof.
SECTION 14.02. During the Term, Landlord shall insure the Building (but
excluding any property which Tenant is obligated to insure under Section 14.01
hereof) against damage by fire and standard extended coverage perils in an
amount equal to the full replacement cost thereof, and shall provide public
liability insurance in such amounts and with such deductions as Landlord
considers appropriate. Notwithstanding any contribution by Tenant to the cost
of insurance premiums, as provided herein, Tenant acknowledges that it has no
right to receive any proceeds from any insurance policies carried by Landlord.
Landlord will not be required to carry insurance of any kind on Tenant's
furniture or furnishings, or on any of Tenant's fixtures, equipment,
improvements, or appurtenances under this Lease; and Landlord shall not be
obligated to repair or replace same.
SECTION 14.03. Tenant shall not keep in the Premises any article which may be
prohibited by any reasonable insurance policy periodically in force covering
the Building. If Tenant's occupancy results in any increase in premiums for the
insurance carried by Landlord, Tenant shall pay any such increase in premiums
as additional Rental within fifteen (15) days after being billed therefor.
Tenant shall promptly comply with all reasonable requirements of the insurance
authority or any present or future insurer relating to the Premises and the
Building.
SECTION 14.04. If any of Landlord's insurance policies shall be cancelled or
cancellation shall be threatened or the coverage thereunder reduced or
threatened to be reduced, or if the premiums on any of Landlord's insurance
policies are increased or threatened to be increased, in any way because of
Tenant's use of the Premises in violation of the terms of this Lease and, if
Tenant fails to remedy the cause thereof within forty-eight (48) hours after
notice, Landlord may enter upon the Premises and attempt to remedy such
condition, and Tenant shall promptly pay the cost thereof to Landlord as
additional Rental. Landlord shall not be liable for any damage or injury
caused to any property of Tenant or of others located on the Premises
resulting from such entry. If Landlord is unable to remedy such condition,
then Landlord shall have all of the remedies provided for in this Lease in the
event of a default by Tenant.
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SECTION 14.05. All policies covering real or personal property which either
party obtains affecting the Premises shall include a clause or endorsement
denying the insurer any rights of subrogation against the other party to the
extent rights have been waived by the insured before the occurrence of injury
or loss. Landlord and Tenant hereby mutually waive any rights of recovery
against the other for injury or loss due to hazards covered by insurance
containing such a waiver of subrogation clause or endorsement to the extent
of the injury or loss covered thereby.
ARTICLE 15
DAMAGE BY FIRE OR OTHER CAUSE
SECTION 15.01. Subject to Sections 15.02 and 15.03 hereof, if the Building
is damaged by fire or other casualty so as to affect the Premises, Tenant
shall immediately notify Landlord, who shall have the damage repaired with
reasonable speed at the expense of Landlord (but only if the proceeds from
Landlord's insurance are sufficient for such purpose and are made available
to Landlord by Landlord's mortgagee), subject to delays which may arise by
reason of adjustment of loss under insurance policies and to other delays
beyond Landlord's reasonable control. An abatement in the Rental hereunder
shall be allowed as to that portion of the Premises rendered untenantable by
such damage from the date of such damage until such time as the damaged
portion of the Premises has been made tenantable for Tenant's use.
SECTION 15.02. If the Premises are damaged or destroyed by any cause
whatsoever, and if, in Landlord's reasonable opinion, the Premises cannot be
(or in fact are not) rebuilt or made fit for Tenant's purposes within one
hundred twenty (120) days of the damage or destruction, or if the proceeds
from insurance remaining after payment of any such proceeds to Landlord's
mortgagee, ground, or primary lessor, are insufficient to repair or restore
the damage by destruction, Landlord or Tenant may, at its option, terminate
this Lease by giving the other party notice of termination, and thereupon
Rental and any other payments for which Tenant is liable under this Lease
shall be apportioned and paid to the date of such damage, and Tenant shall
immediately vacate the Premises; provided, however, that those provisions of
this Lease which are designated to cover matters of termination and the
period thereafter shall survive the termination hereof. Tenants option to
terminate this Lease is only available if Landlord indicates in writing to
Tenant that the Premises cannot be rebuilt within one hundred twenty (120)
days or if the Premises are not in fact rebuilt within such time frame.
SECTION 15.03. If the Building is damaged or destroyed to the extent that,
in Landlord's reasonable opinion in the exercise of good faith using
commercially reasonable standards, it would not be economically feasible to
repair or restore such damage or destruction, Landlord may, at its option,
terminate this Lease by giving Tenant, within sixty (60) days after such
damage, notice of such termination requiring Tenant to vacate the Premises
sixty (60) days after delivery of the notice of termination, and thereupon
Rental and any other payments shall be apportioned and paid to the date of
such damage, and Tenant shall immediately vacate the Premises according to
such notice of termination; provided, however, that those provisions of this
Lease which are designed to cover matters of termination and the period
thereafter shall survive the termination hereof.
SECTION 15.04. Except as otherwise provided in this Lease, no damages shall
be payable by Landlord for inconvenience, loss of business, or annoyance
arising from any repair or restoration of any portion of the Premises, or the
Building. Landlord shall use its best efforts to have such repairs made
promptly so as not to unnecessarily interfere with Tenant's occupancy.
SECTION 15.05. The provisions of this Article shall be considered an express
agreement governing any case of damage or destruction of the Building, the
alterations, or the Premises by fire or other casualty.
9
<PAGE>
ARTICLE 16
CONDEMNATION
If the Premises shall be taken or condemned, in whole or in part, for any
public purpose to such an extent as to render said Premises untenantable,
this Lease shall, at the option of Landlord or Tenant, forthwith terminate.
Prior to any termination of this Lease, an abatement in the Rental hereunder
shall be allowed as to that portion of the Premises rendered untenantable by
such condemnation. All proceeds from any taking or condemnation shall belong
to and be paid to Landlord, except to the extent of any proceeds awarded to
Tenant on account of moving and relocation expenses and depreciation to and
removal of Tenant's physical property.
ARTICLE 17
ASSIGNMENT AND SUBLETTING
SECTION 17.01. If Tenant should desire to assign this Lease or sublet the
Premises (or any part thereof), Tenant shall give Landlord written notice
thereof specifying the identity of the proposed subtenant or assignee. So
long as Tenant shall remain liable to perform all of its obligations under
this Lease following such subletting or assignment, Landlord's consent thereto
shall not be required. No assignment or subletting by Tenant shall relieve
Tenant of Tenant's obligations under this Lease unless Landlord shall have
consented in writing to the assignment or sublease and shall have expressly
agreed in writing to release Tenant from its obligations hereunder.
SECTION 17.02. Landlord may sell, transfer, assign, and convey all or any
part of the Building and any and all of its rights under this Lease, provided
Landlord's successor in interest assumes Landlord's obligations hereunder,
and provided further that Tenant's consent shall be required if the proposed
transferee, assignee or purchaser would be deemed to be a "related party" of
Tenant in accordance with the rules and regulations established by the Health
Care Financing Administration ("HCFA") or other federal agency which
regulates or administers the Medicare program. In the event Landlord assigns
its rights under this Lease, Landlord shall be released from any further
obligations hereunder, and Tenant agrees to look solely to Landlord's
successor in interest for performance of such obligations.
ARTICLE 18
WAIVER AND INDEMNIFICATION
SECTION 18.01. Tenant waives all claims against Landlord for damage to any
property or injury to, or death of, any person in, upon, or about the
Building, the Premises or Parking Areas arising at any time and from any and
all causes whatsoever other than solely by reason of the gross negligence or
willful misconduct of Landlord, its agents, employees, representatives or
contractors, and Tenant agrees that it will defend, indemnify, save and hold
harmless Landlord from and against all claims, demands, actions, damages,
loss, cost, liabilities, expenses, and judgments suffered by, recovered from,
or asserted against Landlord on account of any damage to any property or
injury to, or death of, any person arising from the use of the Building, the
Premises, or the Parking Areas by Tenant or its employees or invitees, except
such as is caused solely by the gross negligence or willful misconduct of
Landlord, its agents, employees, representatives, or contractors. Tenant's
foregoing indemnity obligation shall include reasonable attorneys' fees and
all other reasonable costs and expenses incurred by Landlord. The provisions
of this Article 18 shall survive the termination of this Lease with respect
to any damage, injury, or death
10
<PAGE>
occurring before such termination. If Landlord is made a party to any
litigation commenced by or against Tenant or relating to this Lease or to the
Premises, and provided that in any such litigation, Landlord is not finally
adjudicated to be at fault, then Tenant shall pay all costs and expenses,
including attorneys' fees and court costs, incurred by or imposed upon
Landlord because of any such litigation, and the amount of all such costs and
expenses, including attorneys' fees and court costs, shall be a demand
obligation owing by Tenant to Landlord, and shall be considered as additional
Rental.
SECTION 18.02. Landlord agrees that it will defend, indemnify, save, and hold
harmless, Tenant from and against all claims, demands, actions, damages,
loss, cost, liabilities, expenses, and judgments suffered by, recovered from,
or asserted against Tenant by reason of Landlord's gross negligence or
willful misconduct. Landlord's foregoing indemnity obligation shall include
reasonable attorneys' fees and other reasonable costs and expenses incurred
by Tenant. The provisions of this Article 18 shall survive the termination of
this Lease with respect to any damage, injury, or death occurring before such
termination.
ARTICLE 19
SURRENDER OF THE PREMISES
SECTION 19.01. Upon the expiration or other termination of this Lease for any
cause whatsoever, Tenant shall peacefully vacate the Premises in as good
order and condition as the same were at the beginning of the Term or may
thereafter have been improved by Landlord or Tenant, subject only to
reasonable use and wear thereof, fire and other casualty, and repairs which
are Landlord's obligation hereunder.
SECTION 19.02. Should Tenant continue to hold the Premises after the
termination of this Lease, whether the termination occurs by lapse of time or
otherwise, such holding over shall, unless otherwise agreed to by Landlord in
writing, constitute and be construed as a tenancy at will at a daily Rental
equal to 1/30th of an amount equal to 1.25 times the monthly Rental Rate for
the Premises as of the date of termination, and subject to all of the other
terms set forth herein except any right to renew or expand this Lease. Tenant
shall be liable to Landlord for all damage which Landlord actually suffers
because of any holding over by Tenant, and Tenant shall indemnify Landlord
against all claims made by any other Tenant or prospective Tenant against
Landlord resulting from delay by Landlord in delivering possession of the
Premises to such other Tenant or prospective Tenant.
ARTICLE 20
ESTOPPEL CERTIFICATES
Tenant agrees to furnish, when requested by Landlord or the holder of any
deed of trust covering the Building, the Land, or any interest of Landlord
therein, a certificate signed by Tenant certifying to such parties as
Landlord may designate to the extent true matters with respect to the terms
and status of this Lease and the Premises, stating that Tenant, as of the
date of such certificate, has no charge, lien, or claim of offset under this
Lease or otherwise against Rentals or other charges due or to become due
hereunder; and such other matters as may be requested by Landlord or the
holder of any such deed of trust. To the extent any such statements requested
are not true, Tenant shall explain such facts in writing. Landlord agrees
periodically to furnish, when reasonably requested in writing by Tenant,
certificates signed by Landlord containing substantially the same information
as described above.
11
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ARTICLE 21
SUBORDINATION
SECTION 21.01. This Lease is subject and subordinate to any deeds of trust,
mortgages, or other security instruments, and any other supplements or
amendments thereto, which presently cover the Building and the Land or any
interest of Landlord therein, and to any increases, renewals, modifications,
consolidations, replacements and extensions of any of such deeds of trust,
mortgages, or security instruments. This provision is declared by Landlord
and Tenant to be self-operative and no further instrument shall be required
to effect such subordination of this Lease. Tenant shall, however, upon
demand, execute, acknowledge, and deliver to Landlord any further instruments
and certificates evidencing such subordination as Landlord may require.
Landlord agrees to obtain for Tenant a "non-disturbance" agreement from the
holder or beneficiary of any deeds of trust, mortgages or other security
instruments that now may cover the Premises, the Building or the Land or any
interest of Landlord therein. This Lease shall not be subject and subordinate
to deeds of trust, mortgages or other security instruments that in the future
may cover the Premises, the Building or the Land or any interest of Landlord
therein. This Lease shall not be subject and subordinate to deeds of trust,
mortgages or other security instruments that in the future may cover the
Premises, the Building or the Land or any interest of Landlord therein unless
and until the holder of such instrument shall execute, acknowledge and
deliver to Tenant a "subordination/non-disturbance" agreement relating to
this Lease which shall contain such provisions as such holder may reasonably
request. This Lease is further subject and subordinate to:
(a) all ground or primary Leases which may exist at the date hereof and
to any supplements, modifications, and extensions thereof heretofore
or hereafter made, and
(b) utility easements and agreements, covenants, restrictions, and other
encumbrances, both existing and future.
SECTION 21.02. Notwithstanding the generality of the foregoing provisions of
Section 22.01 hereof, any such mortgagee or ground or primary lessor shall
have the right at any time to subordinate any such ground or primary leases,
deeds of trust, mortgages, or other security instruments to this Lease on
such terms and subject to such conditions as such mortgages or ground or
primary lessor may consider appropriate in its discretion. At any time,
before or after the institution of any proceedings for the foreclosure of any
such deeds of trust, mortgages, or other security instruments or termination
of any ground or primary lease, or sale of the Building under any such deeds
of trust, mortgages, or other security instruments or termination of any
ground or primary lease, Tenant shall attorn to such ground or primary
lessor or such purchaser upon any such sale or the grantee under any deed in
lieu of such foreclosure and shall recognize such ground or primary lessor or
such purchaser or grantee as Landlord under this Lease. The agreement of
Tenant to attorn contained in the immediately preceding sentence shall
survive any such termination of any ground or primary lease, foreclosure
sale, trustee's sale, or conveyance in lieu thereof. Tenant shall upon
demanded at any time, before or after any such termination, execute,
acknowledge,and deliver to Landlord's mortgagee or ground or primary lessor
any written instruments and certificates evidencing such attornment as
Landlord's mortgagee or ground or primary lessor may reasonably require.
ARTICLE 22
PARKING
Landlord will permit Tenant to use the areas situate on the land described in
Exhibit "B" attached hereto (the "Parking Areas") for parking of vehicles on
the Premises during the Term.
12
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ARTICLE 23
DEFAULT AND REMEDIES
SECTION 23.01. The occurrence of any one or more of the following events
shall, at Landlord's option, constitute an event of default of this Lease:
(a) if Tenant shall fail to pay any Rental or other sum payable by
Tenant to Landlord hereunder within ten (10) days of written notice
thereof from Landlord (provided, however, if such event of default
shall occur more than once in any 6-month period, then Landlord shall
not be required to provide any written notice of default and an
event of default shall occur ten (10) days after such Rental or
other sum becomes due and payable);
(b) if Tenant shall fail to perform or observe any other term of this
Lease or any of the Rules and Regulations and such failure shall
continue for more than thirty (30) days after notice thereof from
Landlord; provided, however, that if such cause is not reasonably
capable of being remedied within such thirty (30) day period, then
an event of default shall occur if Tenant does not commence such cure
within such thirty (30) day period and thereafter diligently
prosecutes same to completion within ninety (90) days following
notice of such default from Landlord to Tenant;
(c) if Tenant abandons the Premises or vacates all or a material portion
of the Premises for a period in excess of one hundred eighty (180)
consecutive days without Landlord's prior written consent (which
consent shall not unreasonably be withheld, conditioned or delayed);
(d) if any petition is filed by or against Tenant under any section or
chapter of the present or any future Federal Bankruptcy Code or
under any similar law or statute of the United States or any state
thereof and such petition is not withdrawn or dismissed within one
hundred twenty (120) days after its filing;
(e) if Tenant becomes insolvent and such insolvency continues for a
period of one hundred twenty (120) days or a court determines that
Tenant has made a transfer in fraud of creditors;
(f) if Tenant makes an assignment of substantially all of its assets for
the benefit of creditors; or
(g) if a receiver, custodian, or trustee is appointed for Tenant or for
any of the assets of Tenant which appointment is not vacated within
one hundred twenty (120) days of the date of such appointment.
SECTION 23.02. If an event of default occurs, at any time thereafter
Landlord may do one or more of the following without any additional notice or
demand:
(a) Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord. If Tenant fails to do so,
Landlord may, without notice and without prejudice to any other
remedy Landlord may have, and to the extent permitted by applicable
law, enter upon and take possession of the Premises and expel or
remove Tenant and its effects without being liable to prosecution or
any claim for damages
13
<PAGE>
therefor; and Tenant shall be liable to Landlord for all loss and
damage which Landlord may reasonably and actually suffer by
proximately reason of such termination, whether through inability to
relet the Premises or otherwise, including any loss of Rental for the
remainder of the Term. Any such loss of Rental shall be offset by any
Rental received by Landlord as a result of reletting the Premises
during the remainder of the Term.
(b) Terminate this Lease, in which event Tenant's event of default shall
be considered a total breach of Tenant's obligations under this Lease,
and Tenant immediately shall become liable for such damages for such
breach amount, equal to the total of:
(1) the reasonable and necessary costs of recovering possession of
the Premises;
(2) the unpaid Rental earned as the date of termination, plus
interest thereon at a rate PER ANNUM from the due date equal to
three (3%) over the Prime Rate; provided, however, that such
interest shall never exceed the Highest Lawful Rate;
(3) the amount of the excess of:
(i) the total Rental and other benefits which Landlord would
have received under the Lease for the remainder of the Term,
at the rates then in effect, together with all other expenses
occurred by Landlord in connection with Tenant's default, over
(ii) The Fair Market Rate of the balance of the Term as of the
time of such breach,
which excess shall be discounted at the rate of eight percent (8%)
PER ANNUM to the then present value; and
(4) all other sums of money and damages owing by Tenant and Landlord.
(c) Enter upon and take possession of the Premises as Tenant's agent
without terminating this Lease and without being liable to prosecution
or any claim for damages therefor, and Landlord may relet the
Premises as Tenant's agent and receive the Rental therefor, in which
event Tenant shall pay to Landlord on demand the reasonable and
necessary cost of renovating, repairing, and altering the Premises
for a new tenant or tenants and any deficiency that may arise by
reason of such reletting.
(d) Do whatever Tenant is obligated to do under this Lease and may enter
the Premises without being liable to prosecution or any claim for
damages therefor, to accomplish this purpose. Tenant shall reimburse
Landlord immediately upon demand for any expenses which Landlord
incurs in thus effecting compliance with this Lease on Tenant's behalf,
and Landlord shall not be liable for any damages suffered by Tenant
from such action, whether caused by the gross negligence of Landlord
or otherwise.
SECTION 23.03 No act or thing done by Landlord or its agents during the Term
shall constitute an acceptance of an attempted surrender of the Premises, and
no agreement to accept a surrender of the Premises or to terminate this Lease
shall be valid unless made in writing and signed by Landlord. No re-entry or
taking possession of the Premises by Landlord shall constitute an election by
Landlord to terminate this Lease, unless a written notice of such intention
is given to Tenant. Notwithstanding any such reletting or re-entry or taking
possession, Landlord may at any time thereafter terminate this Lease
14
<PAGE>
for a previous event of default. Landlord's acceptance of Rental following an
event of default hereunder shall not be construed as a waiver of such event
of default. No waiver by Landlord of any breach of this Lease shall
constitute a waiver of any other violation or breach of any time of the
terms hereof. Forbearance by landlord to enforce one or more of the remedies
herein provided upon a breach hereof shall not constitute a waiver of any
other breach of the Lease.
SECTION 23.04. No provision of this Lease shall be deemed to have been
waived by Landlord unless such waiver is in writing and signed by Landlord.
Nor shall any custom or practice which may evolve between the parties in the
administration of the terms of this Lease be construed to waive or lessen
Landlord's right to insist upon strict performance of the terms of this
Lease. The rights granted to Landlord in this Lease shall be cumulative of
every other right or remedy which Landlord may otherwise have at law or in
equity or by statute, and the exercise of one or more rights or remedies
shall not prejudice or impair the concurrent or subsequent exercise of other
rights or remedies.
ARTICLE 24
WAIVER BY TENANT
To the extent permitted by applicable law, Tenant waives (to the extent
waivable under applicable law) for itself and all claiming by, through, and
under it, including creditors of all kinds:
(a) any right and privilege which it or any of them may have under any
present or future constitution, statute, or rule of law to redeem the
Premises or to have a continuance of this Lease for the Term after
termination of tenant's right of occupancy by order or judgment of
any court or by any legal process or writ, under the terms of this
Lease, or after the termination of the Term as herein provided,
(b) the benefits of any present or future constitution, statute, or rule
of law which exempts property form liability for debt or for distress
or rent, and
(c) the provisions of law relating to notice and/or delay in levy of
execution in case of eviction of a tenant for non-payment of rent
including, but not limited to, the provisions of the Pennsylvania
Landlord and Tenant Act of 1951, as amended, relating to notices to
quit from landlords to tenants.
ARTICLE 25
SECURITY DEPOSIT
Intentionally Omitted
ARTICLE 26
ATTORNEY'S FEES AND LEGAL EXPENSES
In any action or proceeding brought by either party against the other with
respect to this Lease, the prevailing party shall be entitled to recover from
the other party attorneys' fees, investigation costs, and other legal
expenses and court costs incurred by such party in such action or proceeding
as the court may
15
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find to be reasonable. The prevailing party shall be the one who receives the
net judgment in its behalf at the end of any action.
ARTICLE 27
NOTICES
Any notice or document required to be delivered hereunder shall be considered
delivered, whether actually received or not, when hand delivered to the
address of the other party, one business day following transmittal by Federal
Express or other reputable overnight delivery service, or three business days
after being deposited in the United States Mail, postage prepaid, registered
or certified mail, return receipt requested, addressed to the parties hereto
at the respective addresses specified in the Basic Lease Information, or at
such other address as they have subsequently specified by written notice.
ARTICLE 28
MISCELLANEOUS
SECTION 28.01. Where this Lease requires Tenant to reimburse Landlord the
cost of any item, if no such cost has been stipulated, such cost will be the
reasonable and customary charge therefor. Failure to pay any such cost shall
be considered as a failure to pay Rental.
SECTION 28.02. Tenant and Landlord each represent and warrant to the other
that it has had no dealings with any broker or agent in connection with the
negotiation or execution of this lease, except such brokers or agents as may
be identified in Items 20 or 21 of the Basic Lease Information. Each party
shall indemnify and hold the other harmless from any costs, expenses, or
liability for commission or other compensation or charges claimed by any
person, broker or agent (other than those identified in the Basic Lease
Information) following or resulting from its misrepresentations herein
contained.
SECTION 28.03. As used herein, the terms "business days" means Monday through
Friday (except for holidays); "normal business hours" means 7:00 a.m. to 6:00
p.m. on business days; and "holidays" means those holidays designated by
Landlord, which holidays shall be consistent with those holidays designated
by Landlords of comparable office Buildings in the immediate area and town.
SECTION 28.04. Every agreement contained in this Lease is, and shall be
construed as, a separate and independent agreement. If any term of this Lease
or the application thereof to any person or circumstances shall be invalid
and unenforceable, the remainder of this Lease, or the application of such
terms to persons or circumstances other than those as to which it is invalid
or unenforceable, shall not be affected.
SECTION 28.05. There shall be no merger of this Lease or of the leasehold
estate hereby created with the fee estate in the Premises or any part thereof
by reason of the fact that the same person may acquire or hold, directly or
indirectly, this Lease or the leasehold state hereby created or any interest in
this Lease or in any interest in such fee estate. In the event of a voluntary
or other surrender of this Lease, or a mutual cancellation hereof, Landlord
may, at its option, terminate all subleases, or treat such surrender or
cancellation as an assignment of such subLeases.
SECTION 28.06. Whenever a period of time is herein prescribed for action,
other than the payment of money, to be taken by either party hereto, such
party shall not be liable or responsible for, and there shall be excluded from
the computation for any such period of time, any delays due to strikes,
riots, acts of
16
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God, shortages of labor or materials, war, governmental laws, regulations or
restrictions, or any other cause of any kind whatsoever which is beyond the
control of such party.
SECTION 28.07. The article headings contained in this Lease are for
convenience only and shall not enlarge or limit the scope or meaning of the
various and several articles hereof. Words of any gender used in this Lease
shall include any other gender, and words in the singular number shall be
held to include the plural, unless the context otherwise requires.
SECTION 28.08. If there be more than on Tenant, the obligations hereunder
imposed Tenant shall be joint and several, and all agreements and covenants
herein contained shall be binding upon the respective heirs, personal
representatives, successors, and to the extent permitted under this Lease,
assigns of the parties hereto. If there is a guarantor of Tenant's
obligations hereunder, Tenant's obligations shall be joint and several
obligations of Tenant and such guarantor, and Landlord need not first proceed
against Tenant hereunder before proceeding against such guarantor, nor shall
any such guarantor be released from its guarantee for any reason, including
without limitation, any amendment, renewal, expansion or diminuation of this
Lease, any forbearance by Landlord or waiver of any of Landlord's rights, the
failure to give Tenant or such guarantor any notices, or the release of any
party liable for the payment of Tenant's obligations hereunder.
SECTION 28.09 Neither the Landlord nor Landlord's agents or brokers have made
any representations or promises with respect to the Premises or the Building
except as herein expressly set forth and all reliance with respect to any
representations or promises is based solely on those contained herein.
SECTION 28.10. This Lease sets forth the entire agreement between the parties
and cancels all prior negotiations, arrangements, brochures, agreements, and
understandings, if any, between Landlord and Tenant regarding the subject
matter of this Lease. No amendment or modification of this Lease shall be
binding or valid unless expressed in a writing executed by both parties
hereto.
SECTION 28.11. The submission of this Lease to Tenant shall not be construed
as an offer, nor shall Tenant have any rights with respect thereto unless
Landlord executes a copy of this Lease and delivers the same to Tenant.
SECTION 28.12. It Tenant signs as a corporation, each of the persons
executing this Lease on behalf of Tenant represents and warrants that Tenant
as a duly organized and existing corporation, that Tenant has and is
qualified to do business in the Commonwealth of Pennsylvania, that the
corporation has full right and authority to enter into this Lease, and that
all persons signing on behalf of the corporation were authorized to do so by
appropriate corporation actions. If Tenant signs as a partnership, trust, or
other legal entity, each of the persons executing this Lease on behalf of
Tenant represents and warrants that Tenant has complied with all applicable
laws, rules, and governmental regulations relative to its right to do
business in the Commonwealth of Pennsylvania, that such entity has the full
right and authority to enter into this Lease, and that all persons signing on
behalf of the Tenant were authorized to do so by any and all necessary or
appropriate partnership, trust, or other actions.
SECTION 28.13. This Lease shall be governed by and construed under the laws
of the Commonwealth of Pennsylvania. Any action brought to enforce or
interpret this Lease shall be brought in the court of appropriate
jurisdiction in Cumberland County, Pennsylvania. Should any provision of this
Lease require judicial interpretation, it is agreed that the Court
interpreting or considering same shall not apply the presumption that the
terms hereof shall be more strictly construed against a party by reason of
the rule or conclusion that a document should be construed more strictly
against the party who itself or through its agent prepared the same, it being
agreed that all parties hereto have participated in the preparation of this
Lease and that legal counsel was consulted by each party before the execution
of this Lease.
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SECTION 28.14. Any eliminatiaon or shutting off of light, air, or view by
any structure which may be erected on lands adjacent to the Building,
modification of the amenities to the Building shall in no way affect this
Lease or impose any liability on Landlord.
SECTION 28.15. Landlord may, up on reasonable notice (except in the case of
emergencies) enter upon the Premises at reasonable hours to inspect same or
clean or make repairs or alterations (but without any obligation to do so,
except as expressly provided for herein) and to show the Premises to
prospective lenders or purchasers, and, during the last twelve (12) months of
the Term of the Lease, to show them to prospective Tenants at reasonable
hours and, if they are vacated, to prepare them for re-occupancy. Landlord
shall cause its officers, agents and representatives to exercise care with
any such entry not to unreasonably interfere with the opration and normal
office routine of Tenant (except in the case of emergency).
SECTION 28.16. The exhibits and numbered riders attached to this Lease are
by this reference incorporated fully herein. The term "this Lease" shall be
considered to include all such exhibits and riders.
ARTICLE 19
CONDITION SUBSEQUENT
Approval of the terms, provisions and conditions of this Lease by Tenant's
Board of Directors shall be a condition subsequent to the effectiveness of
this Lease. If Tenant's Board of Directors has not approved this Lease prior
to April 1, 1995, then this Lease shall automatically become void, and the
terms, provisions and conditions of the lease between Landlord and Tenant
dated July 19, 1994 (which expires on May 31, 1997) shall remain in full
force and effect and govern Tenant's occupancy of the Premises until such
expiration date.
IN WITNESS WHEREOF, Landlord and Tenant have set their respective hands
and seals to this Lease the day and year first above written.
Landlord:
LIBERTY PLAZA ASSOCIATES II, a Pennsylvania
general partnership, acting by and through
its managing general partner, as follows:
By: /s/ Martin J. Ortenzio
--------------------------------------
Martin J. Ortenzio,
managing general partner
Tenant:
CONTINENTAL MEDICAL SYSTEMS, INC.
a Delaware corporation
By: /s/ David G. Nation
--------------------------------------
David G. Nation,
Senior Vice President
<PAGE>
OFFICE LEASE AGREEMENT Dated: 2/1/95
BASIC LEASE INFORMATION
1. Date: February 1, 1995
----------------------------------------------------------------
2. Landlord: Liberty Plaza Associates III, a Pennsylvania
general partnership
----------------------------------------------------------------
3. Tenant: Continental Medical Systems, Inc., a Delaware corporation
----------------------------------------------------------------
4. Guarantor(s): None
------------------------------------------------------------
5. Building: Liberty Plaza III, 1150 Lancaster Boulevard,
Mechanicsburg, PA 17055
----------------------------------------------------------------
6. Premises: Entire Building
----------------------------------------------------------------
7. Commencement Date: 2/1/95
-------------------------------------------------------
8. Expiration Date: 1/31/00 (a five-year term)
-------------------------------------------------------
9. Rentable Area of this Building: 13,144 Rentable square feet
-----------------
10. Rentable Area of the Premises: 13,144 Rentable square feet
-----------------
11. Intentionally Omitted
12. Initial Annual Base Rental: $140,903.68
-------------------
13. Initial Annual Base Rental Rate: $10.72 per Rentable square foot
-------------
14. Annual Base Rental Rate Increase (cumulative) 0 %
--------
15. Intentionally Omitted
16. Tenant shall pay the Operating Expense Costs as provided for in Article 6.
17. Fiscal Year: Twelve months ending December 31
----------------------------------------
18. Security Deposit: $ -0- , payable at the time the Lease is signed.
------- (Article #25)
19. First Rent Check of $11,741.97, payable at the time the Lease is signed.
--------- (Article #25)
20. Landlord's Broker: None
-------------------------------------------------------
21. Tenant's Broker: None
-------------------------------------------------------
22. Landlord's Addresss for Notices: Liberty Plaza Associates III,
-----------------------------------------
c/o MDI Group, Executive Park West,
-----------------------------------------
4720 Old Gettysburg Road, Suite #307,
-----------------------------------------
Mechanicsburg, PA 17055
-----------------------------------------
23. Tenant's Address for Notices: Continental Medical Systems, Inc.,
-----------------------------------------
P.O. Box 715, Mechanicsburg, Pa 17055,
-----------------------------------------
Attention: Legal Department
-----------------------------------------
<PAGE>
Exhibits "A" - "C" are part of this Lease, identified as follows:
---------
Exhibit "A" Floor Plans
------------------------------------------------------------------
Exhibit "B" Description of Land
------------------------------------------------------------------
Exhibit "C" Rules and Regulations
------------------------------------------------------------------
The foregoing Basic Lease Information is hereby incorporated into and made a
part of the Office Lease Agreement which is described herein and attached.
Each reference in the Lease to any information and definitions contained in
the Basic Lease Information shall mean and refer to the information and
definitions hereinabove set forth. In the event of any conflict between any
Basic Lease Information and the Lease, the Lease shall control.
Landlord:
LIBERTY PLAZA ASSOCIATES III, a
Pennsylvania general partnership,
acting by and through its managing
general partner, as follows:
By: /s/ Martin J. Ortenzio
-------------------------
Martin J. Ortenzio,
managing general partner
Tenant:
CONTINENTAL MEDICAL SYSTEMS, INC.
a Delaware corporation
By: /s/ David G. Nation
-------------------------
David G. Nation,
Senior Vice President
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 - PREMISES .................................................. 1
ARTICLE 2 - TERM ...................................................... 1
ARTICLE 3 - DELIVERY OF THE PREMISES TO TENANT ........................ 2
ARTICLE 4 - ACCEPTANCE OF THE PREMISES AND BUILDING BY TENANT ......... 2
ARTICLE 5 - RENTAL .................................................... 3
ARTICLE 6 - OPERATING EXPENSES COSTS .................................. 3
ARTICLE 7 - UTILITIES ................................................. 4
ARTICLE 8 - USE ....................................................... 5
ARTICLE 9 - LAWS, ORDINANCES, AND REQUIREMENTS OF PUBLIC AUTHORITIES .. 5
ARTICLE 10 - OBSERVANCE OF RULES AND REGULATIONS ....................... 6
ARTICLE 11 - ALTERATIONS ............................................... 6
ARTICLE 12 - LIENS ..................................................... 7
ARTICLE 13 - ORDINARY REPAIRS .......................................... 7
ARTICLE 14 - INSURANCE ................................................. 7
ARTICLE 15 - DAMAGE BY FIRE OR OTHER CAUSE ............................. 9
ARTICLE 16 - CONDEMNATION .............................................. 10
ARTICLE 17 - ASSIGNMENT AND SUBLETTING ................................. 10
ARTICLE 18 - WAIVER AND INDEMNIFICATION ................................ 10
ARTICLE 19 - SURRENDER OF THE PREMISES ................................. 11
ARTICLE 20 - ESTOPPEL CERTIFICATES ..................................... 11
ARTICLE 21 - SUBORDINATION ............................................. 12
ARTICLE 22 - PARKING ................................................... 12
ARTICLE 23 - DEFAULT AND REMEDIES ...................................... 13
ARTICLE 24 - WAIVER BY TENANT .......................................... 15
ARTICLE 25 - SECURITY DEPOSIT .......................................... 15
ARTICLE 26 - ATTORNEYS' FEES AND LEGAL EXPENSES ........................ 15
ARTICLE 27 - NOTICES ................................................... 16
ARTICLE 28 - MISCELLANEOUS ............................................. 16
ARTICLE 29 - CONDITION SUBSEQUENT ...................................... 18
EXHIBIT "A" - FLOOR PLANS
EXHIBIT "B" - DESCRIPTION OF LAND
EXHIBIT "C" - RULES AND REGULATIONS
<PAGE>
OFFICE LEASE AGREEMENT
THIS LEASE, dated as of the date specified in the Basic Lease Information
which is attached hereto and incorporated herein for all purposes, is hereby
made between Landlord and Tenant.
ARTICLE 1
PREMISES
Landlord leases to Tenant, and Tenant leases from Landlord, for the Term (as
defined below), and subject to the provisions hereof, to each of which
Landlord and Tenant mutually agree, the Premises, which Premises consists of
the entire Building known as Liberty Plaza III as more particularly described
in the floor plans in Exhibit "A" attached hereto, together with its
appurtenances, including the right to use the lobbies, entrances, stairs,
elevators, off-street parking and loading areas (for loading and unloading of
materials and supplies), and other portions of the Building, and together
with the real property described in Exhibit "B" attached hereto. For purposes
of this Lease, the Rentable Area of the Building and the Rentable Area of the
Premises are as provided in the foregoing Basic Lease Information.
ARTICLE 2
TERM
SECTION 2.01. The term of this Lease (the "Term") shall begin on the
Commencement Date, as specified in the Basic Lease Information. Unless sooner
terminated, the Term shall end at midnight on the Expiration Date specified
in the Basic Lease Information.
SECTION 2.02. Landlord hereby grants to Tenant an option to extend the term
of this Lease for three (3) additional five-year renewal terms (each, an
"Extended Term"). Each Extended Term shall be upon the same terms and
conditions as those set forth for the initial Term except that the Annual
Base Rental shall be the then current fair market rental value which, unless
otherwise mutually agreed to by Landlord and Tenant, shall be determined by
appraisal pursuant to the provisions of Sections 2.03 and 2.04 below. Each
option may only be exercised by Tenant if, at the time such option may be
exercised, an event of default is not continuing under this Lease, and shall
be exercised by Tenant by delivery of notice to that effect to Landlord not
less than 360 days but not more than 540 days prior to the date upon which
this Lease otherwise would terminate.
SECTION 2.03. If at any time it becomes necessary to determine the fair
market rental value of the Premises and the parties are unable to agree
thereupon, either party shall be permitted to give notice of its election to
have the fair market value of the Premises determined by appraisal and such
notice 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 the other either agree to the
appointment of the appraiser identified in such initial notice, in which case
such appraiser shall be the sole appraiser for purposes of determining the
fair market rental value, or shall appoint a second person as an appraiser on
its behalf. Any appraiser appointed pursuant to this Section must be a member
of the American Institute of Real Estate Appraisers (or any successor
organization thereto) with at least five (5) years' experience in appraising
commercial real estate in the Harrisburg, Pennsylvania vicinity. The
appraiser(s) thus appointed shall, within thirty (30) days after the date of
the notice appointing the first appraiser, proceed to appraise the Premises
to determine the fair market rental value thereof as of the first day of the
applicable renewal term. In the case of two appraisers, except as provided in
Section 2.04,
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the two appraisals shall be averaged to determine the fair market rental
value. In any event, the appraised value determined in accordance with this
Section shall be final and binding on Landlord and Tenant.
SECTION 2.04. Any appraisal required or permitted by the terms of this Lease
shall be conducted in a manner consistent with sound appraisal practice.
Notwithstanding the provisions of Section 2.03, if the difference between the
appraisal amounts determined by the appraisers appointed pursuant to
Section 2.03 exceeds ten percent (10%) of the lesser of such appraisal
amounts, then the two appraisers shall have twenty (20) days to appoint a
third appraiser. If no such appraiser is appointed within such twenty (20)
days or within ninety (90) days of the original request for a determination
of fair market 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 market rental value within
forty-five (45) days after the appointment of such appraiser. The
determination of the three appraisers which differs most in the terms of
dollar amount from the determinations of the other two appraisers shall be
excluded, and fifty percent (50%) of the sum of the remaining two
determinations shall be the appraised value, which appraised value shall be
final and binding upon Landlord and Tenant as the fair market rental value of
the Premises. If the lowest and highest appraised values are equidistant in
amount from the middle appraised value, then such middle appraised value
shall be the final market rental value. The provisions of this Article 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 except as otherwise provided by applicable law. Landlord and
Tenant each shall 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.
SECTION 2.05. Provided Tenant performs all of Tenant's obligations under this
Lease, including Tenant's covenant for the payment of Rental as defined
below, Tenant shall, during the Term, peaceably and quietly enjoy the
Premises without disturbance from Landlord; subject, however, to the terms of
this Lease and any deeds of trust, restrictive covenants, easements and other
encumbrances to which this Lease is now subject and subordinate.
ARTICLE 3
DELIVERY OF THE PREMISES TO TENANT
Tenant is presently in possession of the Premises. Landlord shall have no
obligation to construct additional Leasehold Improvements prior to the
commencement of the Term nor during the Term.
ARTICLE 4
ACCEPTANCE OF THE PREMISES AND BUILDING BY TENANT
Tenant accepts the Premises as suitable for the purposes for which they are
leased. Landlord shall not be liable, except for gross negligence or willful
misconduct, to Tenant, or any of its agents, employees, licensees, or
invitees, for any injury or damage to person or property due to the condition
of, design of, or any defect in, the Building or its mechanical systems and
equipment which may exist or occur.
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ARTICLE 5
RENTAL
SECTION 5.01. Tenant covenants and agrees to pay to Landlord, in lawful money
of the United States, 1/12 of the Annual Base Rental specified in the Basic
Lease Information, monthly in advance, without notice or demand, on the first
day of each calendar month. In the event any Rental payment is made six (6)
or more business days after the due date thereof, Tenant agrees to pay
interest on such overdue amount beginning on the fifth business day following
its due date until it is paid at the annual rate of one percent (1%) in
excess of the prime rate of interest announced from time to time by Citibank,
N.A. (New York, New York). Rental shall be paid to Landlord, without
deduction or offset, at the address of Landlord specified in the Basic Lease
Information or such other place as Landlord may designate. The first monthly
installment of Annual Base Rental shall be paid on the Commencement Date,
except that if the Commencement Date is a date other than the first day of a
calendar month, then the monthly Annual Base Rental for the first and last
fractional months of the Term shall be appropriately prorated. The term
"Rental" as used herein means Annual Base Rental, Operating Expense Costs (as
defined in Section 6.01), and all other sums, whether or not expressly
denominated as rent payable by Tenant to Landlord hereunder and all such
amounts shall be deemed rent payments for the purposes of Section 502(b)(7)
of the Bankruptcy Code U.S.C. 502(b)(7). A service charge of $50 for each
check returned stamped "NSF" will be due and payable to Landlord to cover
Landlord's extra cost and expense in handling and processing the late
payments. No payment by Tenant or receipt by Landlord of a lesser amount
than the monthly installment due under this Lease shall be deemed to be other
than on account of the earliest Rental due hereunder, nor shall any
endorsement or statement on any check or payment as Rental be deemed an
accord and satisfaction, and Landlord may accept such check or payment
without prejudice to Landlord's right to recover the balance of such Rental
or pursue any other remedy provided in this Lease or by law.
ARTICLE 6
OPERATING EXPENSE COSTS
SECTION 6.01. From the Commencement Date until the Expiration Date, Tenant
shall directly pay any and all Operating Expense Costs (as defined in this
Article 6) and, if Tenant shall fail to timely make direct payment for any
item of Operating Expense Cost and Landlord shall incur or pay for such item,
then Tenant shall, within fifteen (15) days after written demand from
Landlord, reimburse Landlord in full therefor. Notwithstanding the foregoing,
real estate taxes and premiums for property casualty insurance shall be paid
directly by Landlord and Tenant shall, within fifteen (15) days after written
demand from Landlord, reimburse Landlord in full therefor.
SECTION 6.02. As used herein, "Operating Expense Costs" means all expenses,
costs, and disbursements of every kind which are required to be paid in
connection with the operation and maintenance of the Premises, the Building,
Parking Areas, and exterior areas contained on the land described in
Exhibit "B" upon which the Building is situated. All Operating Expense Costs
shall be determined according to generally accepted accounting principles
which shall be consistently applied. Operating Expense Costs shall include,
but are not limited to, the following:
(a) Wages, salaries, and fees of all personnel or entities directly
engaged in the operation, maintenance or repair of the Building,
including taxes, insurance, and benefits relating thereto.
(b) All supplies and materials used in the operation and maintenance of
the Building.
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(c) Expenses of all maintenance, security, and service agreements for the
Building and the equipment therein, including, without limitation, alarm
service, janitorial services, exterior window cleaning, landscaping,
irrigation, repair and maintenance of the Parking Areas, roadway and utility
repair and maintenance, elevator repair and maintenance and cleaning.
(d) Expenses of all insurance relating to the Building which is reasonably
necessary for the operation of the Building, including, without limitation,
the cost of property, casualty and liability insurance applicable to the
Building and the personal property used in connection therewith, and the
cost of business or rental interruption insurance with total benefits not
in excess of one half (1/2) of the Annual Base Rental.
(e) All taxes, assessments, and other governmental charges, now or hereafter
applicable to the Building, or any portion thereof, or to the personal
property used in connection therewith, and dues (including those levied by
any Association managing all common areas and easements) attributable to the
Building or its operation, exclusive of any inheritance, gift, franchise,
income, corporate, or profit taxes which may be assessed against Landlord.
(f) Expenses of repairs and general maintenance (excluding repairs and
general maintenance paid by proceeds of insurance or by Tenant or other
third parties).
(g) All utility costs relating to the Building, including, without
limitation, electric, gas, water, sewer and telephone.
The term "Operating Expense Costs" shall not include depreciation on the
Building or equipment therin, interest, net income, franchise or capital
stock taxes payable by Landlord, costs reimbursed by insurance, interest and
principal on any financing relating to the Building, real estate brokers'
commissions, expenses which should be capitalized under generally accepted
accounting principles consistently applied, or the cost of any capital
improvements which may be required by governmental authorities under any laws
or regulations that were not applicable to the Building at the time it was
constructed (unless necessitated by Tenant's particular use of the Premises).
SECTION 6.03. Tenant shall be liable for all taxes levied or assessed against
personal property, furniture, fixtures, or leasehold improvements placed by
Tenant in the Premises; provided that Tenant shall have the right to contest
such taxes. Notwithstanding any of the provisions of this Section 6.03 to the
contrary, Tenant shall not be responsible for, nor required to pay, any
levies or assessments (except for levies or assessments with respect to
property owned by Tenant) which relate or apply to periods prior to the
Commencement Date or subsequent to the Termination Date of this Lease.
ARTICLE 7
UTILITIES
SECTION 7.01. While Tenant is occupying the Premises, the following services
shall be contracted and paid for directly by Tenant: public water and sewer
services; natural gas service (if applicable); electric service;
trash/recycling removal service; janitorial supplies and service; HVAC
repairs and maintenance; elevator repairs, maintenance and licenses; general
repairs and maintenance; landscaping and snow removal. In connection with its
obligations under this Section, Tenant shall obtain and maintain during the
Term an HVAC repair and maintenance contract and an elevator repair and
maintenance contract.
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SECTION 7.02. While Tenant is occupying the Premises and is not in default
under this Lease, Landlord will furnish sufficient power for lighting and for
typewriters, dictaphones, calculating machines, and other normal office
machines of similar low electrical consumption, all of which power shall be
paid for by Tenant.
SECTION 7.03. Failure to furnish, or any stoppage of, utility services
provided in this Article 7 resulting from any cause other than Landlord's
gross negligence or willful misconduct shall not make Landlord liable in any
respect for damages to either person, property, or business, nor be construed
as an eviction of Tenant, nor entitle Tenant to any abatement of Rental, nor
relieve Tenant from its obligations under this Lease. To the extent that
Landlord has responsibility therefor hereunder, Landlord will, with
reasonable diligence, repair any malfunction of the Building improvements or
facilities, but Tenant will have no claim for rebate, abatement of Rental, or
damages because of any malfunctions or interruptions in service other than
Landlord's gross negligence or willful misconduct.
ARTICLE 8
USE
The Premises shall be used for general office and other lawful purposes, and
Tenant agrees to use and maintain the Premises in a safe, lawful and proper
manner.
ARTICLE 9
LAWS, ORDINANCES AND REQUIREMENTS OF PUBLIC AUTHORITIES
SECTION 9.01. Tenant shall, at its sole expense:
(i) comply with all laws, orders, ordinances, and regulations of
federal, state, county, and municipal authorities having
jurisdiction over the Premises, but only to the extent directly
relating to Tenant's use and occupancy of the Premises;
(ii) comply with any direction made pursuant to law of any public
officer or officers requiring abatement of any nuisance, or
imposing any obligation, order, or duty upon Landlord or Tenant
arising from Tenant's use of the Premises or from conditions which
have been created by or at the insistence of Tenant or required by
reason of a breach of any of Tenant's obligations hereunder; and
(iii) indemnify Landlord and hold Landlord harmless from any loss,
cost, claim, or expense which Landlord may incur or suffer by
reason of Tenant's failure to comply with its obligations under
clauses (i) or (ii) above. If Tenant receives written notice of
violation of any such law, order, ordinance, or regulation, it
shall promptly notify Landlord thereof.
SECTION 9.02. Tenant shall have the right to contest or review the amount or
validity of all taxes and other impositions and any repairs and improvements
required by any law, rule, regulation or requirement of any public authority
or the fire insurance rating association having jurisdiction over the Premises
or Tenant's use thereof or any laws, rules, regulations and requirements of any
public authority or the fire insurance rating association, by legal
proceedings or in such other manner as Tenant may deem suitable (which, if
instituted, Tenant shall conduct, if necessary or appropriate, in the name of
and with the cooperation of Landlord). Landlord shall execute all documents
necessary or appropriate to comply with
5
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the foregoing. Pending any such proceeding, Landlord shall not pay or
discharge any of the same in excess of the amount required by law while such
proceeding is pending without Tenant's prior consent. Notwithstanding the
foregoing, however, Tenant shall promptly pay all taxes or other impositions
if at any time the Premises or any part thereof shall then be subject to
forfeiture, or if Landlord shall be subject to (or shall be claimed or
alleged to be subject to) any criminal liability arising out of the
nonpayment thereof. Tenant shall not discontinue any proceeding for abatement
of any taxes or other impositions without first giving thirty (30) days prior
notice to Landlord of its intention to do so, during which thirty (30) day
period Landlord may assume prosecution of such abatement proceeding.
ARTICLE 10
OBSERVANCE OF RULES AND REGULATIONS
Tenant and its employees, agents, visitors, and licensees shall observe
faithfully and comply strictly with all Rules and Regulations attached to
this Lease (Exhibit "C"). Landlord shall be entitled to make reasonable
changes and/or additions to the Rules and Regulations to the extent necessary
or advisable to comply with any newly enacted or modified statute, rule,
regulation or other law applicable to the Premises or this Lease. Any failure
by Landlord to enforce any of the Rules and Regulations now or hereafter in
effect, against Tenant shall not constitute a waiver of any such Rules and
Regulations. Tenant shall, following written notice from Landlord, promptly
comply with Landlord's reasonable demands relating to this Article 10.
ARTICLE 11
ALTERATIONS
SECTION 11.01. Tenant may not, at any time during the Term, without
Landlord's prior written consent (which shall not be unreasonably withheld or
delayed), make any alterations to the Premises costing in excess of $100,000
in any single year; provided, however, that Tenant will notify Landlord in
writing of the nature and extent of planned alterations, and Landlord will,
within thirty (30) days following Landlord's receipt of such notice, notify
Tenant of any objections to such alterations which Landlord may have to the
extent that such objections are based on Landlord's anticipation of having to
make additional expenditures as a result of such planned alterations. Tenant
shall not be allowed to construct any alterations which will require Landlord
to make other alterations to the Premises or to incur additional expense
until such objections made by Landlord are resolved in a manner satisfactory
to both Landlord and Tenant. All alterations desired by Tenant shall be made
at Tenant's expense by Tenant's contractors which have been approved in
writing by Landlord.
SECTION 11.02. Unless otherwise agreed to in writing between Landlord and
Tenant, all Leasehold Improvements, alterations, and other physical additions
made or installed by or for Tenant in or to the Premises with the prior
approval of Landlord shall be and remain Landlord's property (except Tenant's
furniture, furnishings, personal property, and moveable trade fixtures, all
of which, together with alterations made by Tenant without Landlord's
consent, shall be removed from the Premises upon termination of this Lease at
Tenant's sole expense), and shall not be removed without Landlord's written
consent which shall not be unreasonably withheld. Tenant also agrees to make
all necessary repairs of damage to the Premises caused by the removal of
Tenant's furniture, furnishings, personal property, moveable trade fixtures
and alterations made by Tenant without Landlord's consent.
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ARTICLE 12
LIENS
Tenant shall keep the Premises, the Building, and the land on which the
Building is located, free from any liens arising from any work performed,
materials furnished, or obligations incurred by or at the request of Tenant.
Nothing shall be construed as Landlord's consent to any performance of labor
or furnishing of any materials for any specific improvements, alteration, or
repair of, or to, the Premises, that would result in any liens against the
Premises or liability of the Landlord. If, based upon acts of Tenant, any
lien is filed against the Premises, the Building, the Property on which the
Building is located, or Tenant's Leasehold interests therein, Tenant shall
discharge or bond over same within forty-five (45) days after its filing. If
Tenant fails to discharge or bond over such lien within such period, then, in
addition to any other right or remedy of Landlord, Landlord may, at its
election, discharge the lien by either paying the amount claimed to be due,
obtaining the discharge by deposit with a court or a title company, or by
bonding. Tenant shall pay on demand any amount actually paid by Landlord for
reasonable attorneys' fees and other reasonable and necessary legal expenses
of Landlord incurred in defending any such action or in obtaining the
discharge of such lien after Tenant's failure to do so, together with all
necessary disbursements in connection therewith, to double the amount of the
lien claim plus a sufficient amount to cover any penalties, interest,
attorneys' fees, court costs, and other legal expenses resulting from such
contest. The bond shall name Landlord and such other parties as Landlord may
direct as beneficiaries thereunder.
ARTICLE 13
ORDINARY REPAIRS
Tenant shall, at all times during the Term hereof and at Tenant's sole cost
and expense, keep the Premises and every part thereof in good condition and
repair, ordinary wear and tear, fire and other casualty excepted. Subject to
Section 19.02 hereof, Tenant shall, at the end of the Term hereof, surrender
the Premises to Landlord in the same condition as when received, ordinary
wear and tear, fire and other casualty excepted. If Tenant fails to make
ordinary repairs promptly, Landlord may, at its option, make such repairs,
and Tenant shall pay Landlord on demand Landlord's actual costs in making
such repairs.
ARTICLE 14
INSURANCE
SECTION 14.01. Tenant shall, during the Term, at its sole expense, keep in
force, with Tenant, Landlord, and the mortgagees of Landlord named as
additional insured thereunder (except with respect to worker's compensation
coverage) all as their respective interests may appear, the following
insurance:
(a) All Risk Insurance (including fire, extended coverage,
vandalism, malicious mischief, extended perils, and debris
removal) upon property of every description and kind owned by
Tenant and located in the Building or for which Tenant is
legally liable or installed by or on behalf of Tenant
including, without limitation, equipment, furniture,
furnishings, fittings, installations, removable trade fixtures,
and alterations, in an amount not less than the full replacement
cost thereof. If there is a dispute as to the amount which
comprises full replacement cost, the decision of Landlord or the
mortgagees of Landlord shall be conclusive and binding.
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(b) Commercial liability insurance coverage to include death, personal
injury, bodily injury, broad form property damage, operations hazard,
owner's protective coverage, contractual liability, and products and
completed operations liability, with combined single liability limits
not less than $1,000,000. Such coverage shall insure against all
liability of Tenant and its authorized representatives and visitors
arising out of, and in connection with, Tenant's use or occupancy of
the Premises.
(c) Worker's Compensation and Employer's Liability Insurance, with a
waiver of subrogation endorsement, in form and amount satisfactory
to Landlord.
(d) Any other form or forms of insurance as the mortgagees of Landlord
may reasonably require from time to time in form, in amounts, and
for insurance risks against which a prudent Tenant of a comparable
size and in a comparable business would protect itself; provided,
however, that Tenant shall not be required to purchase, maintain or
pay for business or rental interruption insurance with greater
benefits than are specified in Section 6.02 hereof.
All policies shall be issued by insurers with a Best's Insurance Reports rating
of A or better and shall be in form satisfactory to Landlord. Tenant agrees that
certificates of insurance or certified copies of each such insurance policy,
naming Landlord and its mortgagees as additional insured, will be delivered to
Landlord not later than ten (10) business days after the execution and delivery
of this Lease. All policies shall contain an undertaking by the insurers to
notify Landlord and the mortgagees of Landlord in writing, by Registered U.S.
Mail, not less than twenty (20) days before any cancellation thereof.
SECTION 14.02. During the Term, Landlord shall insure the Building (but
excluding any property which Tenant is obligated to insure under Section 14.01
hereof) against damage by fire and standard extended coverage perils in an
amount equal to the full replacement cost thereof, and shall provide public
liability insurance in such amounts and with such deductions as Landlord
considers appropriate. Notwithstanding any contribution by Tenant to the cost
of insurance premiums, as provided herein, Tenant acknowledges that it has no
right to receive any proceeds from any insurance policies carried by Landlord.
Landlord will not be required to carry insurance of any kind on Tenant's
furniture or furnishings, or on any of Tenant's fixtures, equipment,
improvements, or appurtenances under this Lease; and Landlord shall not be
obligated to repair or replace same.
SECTION 14.03. Tenant shall not keep in the Premises any article which may be
prohibited by any reasonable insurance policy periodically in force covering
the Building. If Tenant's occupancy results in any increase in premiums for the
insurance carried by Landlord, Tenant shall pay any such increase in premiums
as additional Rental within fifteen (15) days after being billed therefor.
Tenant shall promptly comply with all reasonable requirements of the insurance
authority or any present or future insurer relating to the Premises and the
Building.
SECTION 14.04. If any of Landlord's insurance policies shall be cancelled or
cancellation shall be threatened or the coverage thereunder reduced or
threatened to be reduced, or if the premiums on any of Landlord's insurance
policies are increased or threatened to be increased, in any way because of
Tenant's use of the Premises in violation of the terms of this Lease and, if
Tenant fails to remedy the cause thereof within forty-eight (48) hours after
notice, Landlord may enter upon the Premises and attempt to remedy such
condition, and Tenant shall promptly pay the cost thereof to Landlord as
additional Rental. Landlord shall not be liable for any damage or injury
caused to any property of Tenant or of others located on the Premises
resulting from such entry. If Landlord is unable to remedy such condition,
then Landlord shall have all of the remedies provided for in this Lease in the
event of a default by Tenant.
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SECTION 14.05. All policies covering real or personal property which either
party obtains affecting the Premises shall include a clause or endorsement
denying the insurer any rights of subrogation against the other party to the
extent rights have been waived by the insured before the occurrence of injury
or loss. Landlord and Tenant hereby mutually waive any rights of recovery
against the other for injury or loss due to hazards covered by insurance
containing such a waiver of subrogation clause or endorsement to the extent
of the injury or loss covered thereby.
ARTICLE 15
DAMAGE BY FIRE OR OTHER CAUSE
SECTION 15.01. Subject to Sections 15.02 and 15.03 hereof, if the Building
is damaged by fire or other casualty so as to affect the Premises, Tenant
shall immediately notify Landlord, who shall have the damage repaired with
reasonable speed at the expense of Landlord (but only if the proceeds from
Landlord's insurance are sufficient for such purpose and are made available
to Landlord by Landlord's mortgagee), subject to delays which may arise by
reason of adjustment of loss under insurance policies and to other delays
beyond Landlord's reasonable control. An abatement in the Rental hereunder
shall be allowed as to that portion of the Premises rendered untenantable by
such damage from the date of such damage until such time as the damaged
portion of the Premises has been made tenantable for Tenant's use.
SECTION 15.02. If the Premises are damaged or destroyed by any cause
whatsoever, and if, in Landlord's reasonable opinion, the Premises cannot be
(or in fact are not) rebuilt or made fit for Tenant's purposes within one
hundred twenty (120) days of the damage or destruction, or if the proceeds
from insurance remaining after payment of any such proceeds to Landlord's
mortgagee, ground, or primary lessor, are insufficient to repair or restore
the damage by destruction, Landlord or Tenant may, at its option, terminate
this Lease by giving the other party notice of termination, and thereupon
Rental and any other payments for which Tenant is liable under this Lease
shall be apportioned and paid to the date of such damage, and Tenant shall
immediately vacate the Premises; provided, however, that those provisions of
this Lease which are designated to cover matters of termination and the
period thereafter shall survive the termination hereof. Tenants option to
terminate this Lease is only available if Landlord indicates in writing to
Tenant that the Premises cannot be rebuilt within one hundred twenty (120)
days or if the Premises are not in fact rebuilt within such time frame.
SECTION 15.03. If the Building is damaged or destroyed to the extent that,
in Landlord's reasonable opinion in the exercise of good faith using
commercially reasonable standards, it would not be economically feasible to
repair or restore such damage or destruction, Landlord may, at its option,
terminate this Lease by giving Tenant, within sixty (60) days after such
damage, notice of such termination requiring Tenant to vacate the Premises
sixty (60) days after delivery of the notice of termination, and thereupon
Rental and any other payments shall be apportioned and paid to the date of
such damage, and Tenant shall immediately vacate the Premises according to
such notice of termination; provided, however, that those provisions of this
Lease which are designed to cover matters of termination and the period
thereafter shall survive the termination hereof.
SECTION 15.04. Except as otherwise provided in this Lease, no damages shall
be payable by Landlord for inconvenience, loss of business, or annoyance
arising from any repair or restoration of any portion of the Premises, or the
Building. Landlord shall use its best efforts to have such repairs made
promptly so as not to unnecessarily interfere with Tenant's occupancy.
SECTION 15.05. The provisions of this Article shall be considered an express
agreement governing any case of damage or destruction of the Building, the
alterations, or the Premises by fire or other casualty.
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ARTICLE 16
CONDEMNATION
If the Premises shall be taken or condemned, in whole or in part, for any
public purpose to such an extent as to render said Premises untenantable,
this Lease shall, at the option of Landlord or Tenant, forthwith terminate.
Prior to any termination of this Lease, an abatement in the Rental hereunder
shall be allowed as to that portion of the Premises rendered untenantable by
such condemnation. All proceeds from any taking or condemnation shall belong
to and be paid to Landlord, except to the extent of any proceeds awarded to
Tenant on account of moving and relocation expenses and depreciation to and
removal of Tenant's physical property.
ARTICLE 17
ASSIGNMENT AND SUBLETTING
SECTION 17.01. If Tenant should desire to assign this Lease or sublet the
Premises (or any part thereof), Tenant shall give Landlord written notice
thereof specifying the identity of the proposed subtenant or assignee. So
long as tenant shall remain liable to perform all of its obligations under
this Lease following such subletting or assignment, Landlord's consent thereto
shall not be required. No assignment or subletting by Tenant shall relieve
Tenant of Tenant's obligations under this Lease unless Landlord shall have
consented in writing to the assignment or sublease and shall have expressly
agreed in writing to release Tenant from its obligations hereunder.
SECTION 17.02. Landlord may sell, transfer, assign, and convey all or any
part of the Building and any and all of its rights under this Lease, provided
Landlord's successor in interest assumes Landlord's obligations hereunder,
and provided further that Tenant's consent shall be required if the proposed
transferee, assignee or purchaser would be deemed to be a "related party" of
Tenant in accordance with the rules and regulations established by the Health
Care Financing Administration ("HCFA") or other federal agency which
regulates or administers the Medicare program. In the event Landlord assigns
its rights under this Lease, Landlord shall be released from any further
obligations hereunder, and Tenant agrees to look solely to Landlord's
successor in interest for performance of such obligations.
ARTICLE 18
WAIVER AND INDEMNIFICATION
SECTION 18.01. Tenant waives all claims against Landlord for damage to any
property or injury to, or death of, any person in, upon, or about the
Building, the Premises or Parking Areas arising at any time and from any and
all causes whatsoever other than solely by reason of the gross negligence or
willful misconduct of Landlord, its agents, employees, representatives or
contractors, and Tenant agrees that it will defend, indemnify, save and hold
harmless Landlord from and against all claims, demands, actions, damages,
loss, cost, liabilities, expenses, and judgments suffered by, recovered from,
or asserted against Landlord on account of any damage to any property or
injury to, or death of, any person arising from the use of the Building, the
Premises, or the Parking Areas by Tenant or its employees or invitees, except
such as is caused solely by the gross negligence or willful misconduct of
Landlord, its agents, employees, representatives, or contractors. Tenant's
foregoing indemnity obligation shall include reasonable attorneys' fees and
all other reasonable costs and expenses incurred by Landlord. The provisions
of this Article 18 shall survive the termination of this Lease with respect
to any damage, injury, or death
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occurring before such termination. If Landlord is made a party to any
litigation commenced by or against Tenant or relating to this Lease or to the
Premises, and provided that in any such litigation, Landlord is not finally
adjudicated to be at fault, then Tenant shall pay all costs and expenses,
including attorneys' fees and court costs, incurred by or imposed upon
Landlord because of any such litigation, and the amount of all such costs and
expenses, including attorneys' fees and court costs, shall be a demand
obligation owing by Tenant to Landlord, and shall be considered as additional
Rental.
SECTION 18.02. Landlord agrees that it will defend, indemnify, save, and hold
harmless, Tenant from and against all claims, demands, actions, damages,
loss, cost, liabilities, expenses, and judgments suffered by, recovered from,
or asserted against Tenant by reason of Landlord's gross negligence or
willful misconduct. Landlord's foregoing indemnity obligation shall include
reasonable attorneys' fees and other reasonable costs and expenses incurred
by Tenant. The provisions of this Article 18 shall survive the termination of
this Lease with respect to any damage, injury, or death occurring before such
termination.
ARTICLE 19
SURRENDER OF THE PREMISES
SECTION 19.01. Upon the expiration or other termination of this Lease for any
cause whatsoever, Tenant shall peacefully vacate the Premises in as good
order and condition as the same were at the beginning of the Term or may
thereafter have been improved by Landlord or Tenant, subject only to
reasonable use and wear thereof, fire and other casualty, and repairs which
are Landlord's obligation hereunder.
SECTION 19.02. Should Tenant continue to hold the Premises after the
termination of this Lease, whether the termination occurs by lapse of time or
otherwise, such holding over shall, unless otherwise agreed to by Landlord in
writing, constitute and be construed as a tenancy at will at a daily Rental
equal to 1/30th of an amount equal to 1.25 times the monthly Rental Rate for
the Premises as of the date of termination, and subject to all of the other
terms set forth herein except any right to renew or expand this Lease. Tenant
shall be liable to Landlord for all damage which Landlord actually suffers
because of any holding over by Tenant, and Tenant shall indemnify Landlord
against all claims made by any other Tenant or prospective Tenant against
Landlord resulting from delay by Landlord in delivering possession of the
Premises to such other Tenant or prospective Tenant.
ARTICLE 20
ESTOPPEL CERTIFICATES
Tenant agrees to furnish, when requested by Landlord or the holder of any
deed of trust covering the Building, the Land, or any interest of Landlord
therein, a certificate signed by Tenant certifying to such parties as
Landlord may designate to the extent true matters with respect to the terms
and status of this Lease and the Premises, stating that Tenant, as of the
date of such certificate, has no charge, lien, or claim of offset under this
Lease or otherwise against Rentals or other charges due or to become due
hereunder; and such other matters as may be requested by Landlord or the
holder of any such deed of trust. To the extent any such statements requested
are not true, Tenant shall explain such facts in writing. Landlord agrees
periodically to furnish, when reasonably requested in writing by Tenant,
certificates signed by Landlord containing substantially the same information
as described above.
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ARTICLE 21
SUBORDINATION
SECTION 21.01. This Lease is subject and subordinate to any deeds of trust,
mortgages, or other security instruments, and any other supplements or
amendments thereto, which presently cover the Building and the Land or any
interest of Landlord therein, and to any increases, renewals, modifications,
consolidations, replacements and extensions of any of such deeds of trust,
mortgages, or security instruments. This provision is declared by Landlord
and Tenant to be self-operative and no further instrument shall be required
to effect such subordination of this Lease. Tenant shall, however, upon
demand, execute, acknowledge, and deliver to Landlord any further instruments
and certificates evidencing such subordination as Landlord may require.
Landlord agrees to obtain for Tenant a "non-disturbance" agreement from the
holder or beneficiary of any deeds of trust, mortgages or other security
instruments that now may cover the Premises, the Building or the Land or any
interest of Landlord therein. This Lease shall not be subject and subordinate
to deeds of trust, mortgages or other security instruments that in the
future may cover the Premises, the Building or the Land or any interest of
Landlord therein unless and until the holder of such instrument shall execute,
acknowledge and deliver to Tenant a "subordination/non-disturbance" agreement
relating to this Lease which shall contain such provisions as such holder may
reasonably request. This Lease is further subject and subordinate to:
(a) all ground or primary Leases which may exist at the date hereof
and to any supplements, modifications, and extensions thereof
heretofore or hereafter made, and
(b) utility easements and agreements, covenants, restrictions, and
other encumbrances, both existing and future.
SECTION 21.02. Notwithstanding the generality of the foregoing provisions
of Section 22.01 hereof, any such mortgagee or ground or primary lessor shall
have the right at any time to subordinate any such ground or primary leases,
deeds of trust, mortgages, or other security instruments to this Lease on
such terms and subject to such conditions as such mortgagee or ground or
primary lessor may consider appropriate in its discretion. At any time, before
or after the institution of any proceedings for the foreclosure of any such
deeds of trust, mortgages, or other security instruments or termination of
any ground or primary lease, or sale of the Building under any such deeds of
trust, mortgages, or other security instruments or termination of any ground
or primary lease, Tenant shall attorn to such ground or primary lessor or
such purchaser upon any such sale or the grantee under any deed in lieu of
such foreclosure and shall recognize such ground or primary lessor or such
purchaser or grantee as Landlord under this Lease. The agreement of Tenant to
attorn contained in the immediately preceding sentence shall survive any such
termination of any ground or primary lease, foreclosure sale, trustee's sale,
or conveyance in lieu thereof. Tenant shall upon demanded at any time, before
or after any such termination, execute, acknowledge, and deliver to
Landlord's mortgagee or ground or primary lessor any written instruments and
certificates evidencing such attornment as Landlord's mortgagee or ground or
primary lessor may reasonably require.
ARTICLE 22
PARKING
Landlord will permit Tenant to use the areas situate on the land described in
Exhibit "B" attached hereto (the "Parking Areas") for parking of vehicles on
the Premises during the Term.
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ARTICLE 23
DEFAULT AND REMEDIES
SECTION 23.01. The occurrence of any one or more of the following events
shall, at Landlord's option, constitute an event of default of this Lease:
(a) if Tenant shall fail to pay any Rental or other sum payable by
Tenant to Landlord hereunder within ten (10) days of written
notice thereof from Landlord (provided, however, if such event
of default shall occur more than once in any 6-month period,
then Landlord shall not be required to provide any written
notice of default and an event of default shall occur ten (10)
days after such Rental or other sum becomes due and payable);
(b) if Tenant shall fail to perform or observe any other term of
this Lease or any of the Rules and Regulations and such failure
shall continue for more than thirty (30) days after notice
thereof from Landlord; provided, however, that if such cause is
not reasonably capable of being remedied within such thirty (30)
day period, then an event of default shall occur if Tenant
does not commence such cure within such thirty (30) day period
and thereafter diligently prosecutes same to completion within
ninety (90) days following notice of such default from Landlord
to Tenant;
(c) if Tenant abandons the Premises or vacates all or a material
portion of the Premises for a period in excess of one hundred
eighty (180) consecutive days without Landlord's prior written
consent (which consent shall not unreasonably be withheld,
conditioned or delayed);
(d) if any petition is filed by or against Tenant under any
section or chapter of the present or any future Federal
Bankruptcy Code or under any similar law or statute of the
United States or any state thereof and such petition is not
withdrawn or dismissed within one hundred twenty (120) days
after its filing;
(e) if Tenant becomes insolvent and such insolvency continues for
a period of one hundred twenty (120) days or a court
determines that Tenant has made a transfer in fraud of
creditors;
(f) if Tenant makes an assignment of substantially all of its
assets for the benefit of creditors; or,
(g) if a receiver, custodian, or trustee is appointed for Tenant
or for any of the assets of Tenant which appointment is not
vacated within one hundred twenty (120) days of the date of
such appointment.
SECTION 23.02. If an event of default occurs, at any time thereafter
Landlord may do one or more of the following without any additional notice
or demand;
(a) Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord. If Tenant fails to do so,
Landlord may, without notice and without prejudice to any other
remedy Landlord may have, and to the extent permitted by
applicable law, enter upon and take possession of the Premises
and expel or remove Tenant and its effects without being liable
to prosecution or any claim for damages
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therefor; and Tenant shall be liable to Landlord for all loss and
damage which Landlord may reasonably and actually suffer by
proximately reason of such termination, whether through inability to
relet the Premises or otherwise, including any loss of Rental for the
remainder of the Term. Any such loss of Rental shall be offset by any
Rental received by Landlord as a result of reletting the Premises
during the remainder of the Term.
(b) Terminate this Lease, in which event Tenant's event of default shall
be considered a total breach of Tenant's obligations under this Lease,
and Tenant immediately shall become liable for such damages for such
breach amount, equal to the total of:
(1) the reasonable and necessary costs of recovering possession of
the Premises;
(2) the unpaid Rental earned as of the date of termination, plus
interest thereon at a rate PER ANNUM from the due date equal to
three percent (3%) over the Prime Rate; provided, however, that
such interest shall never exceed the Highest Lawful Rate;
(3) the amount of the excess of:
(i) the total Rental and other benefits which Landlord would
have received under the Lease for the remainder of the
Term, at the rates then in effect, together with all
other expenses occurred by Landlord in connection with
Tenant's default, over
(ii) the Fair Market Rate of the balance of the Term as of
the time of such breach,
which excess shall be discounted at the rate of eight percent
(8%) PER ANNUM to the then present value; and
(4) all other sums of money and damages owing by Tenant and
Landlord.
(c) Enter upon and take possession of the Premises as Tenant's agent
without terminating this Lease and without being liable to
prosecution or any claim for damages therefor, and Landlord may
relet the Premises as Tenant's agent and receive the Rental
therefor, in which event Tenant shall pay to Landlord on demand the
reasonable and necessary cost of renovating, repairing, and
altering the Premises for a new tenant or tenants and any
deficiency that may arise by reason of such reletting.
(d) Do whatever Tenant is obligated to do under this Lease and may
enter the Premises without being liable to prosecution or any claim
for damages therefor, to accomplish this purpose. Tenant shall
reimburse Landlord immediately upon demand for any expenses which
Landlord incurs in thus effecting compliance with this Lease on
Tenant's behalf, and Landlord shall not be liable for any damages
suffered by Tenant for such action, whether caused by the gross
negligence of Landlord or otherwise.
SECTION 23.03. No act or thing done by Landlord or its agents during the
Term shall constitute an acceptance of an attempted surrender of the
Premises, and no agreement to accept a surrender of the Premises or to
terminate this Lease shall be valid unless made in writing and signed by
Landlord. No re-entry or taking possession of the Premises by Landlord shall
constitute an election by Landlord to terminate this Lease, unless a written
notice of such intention is given to Tenant. Notwithstanding any such
reletting or re-entry or taking possession, Landlord may at any time
thereafter terminate this Lease
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for a previous event of default. Landlord's acceptance of Rental following an
event of default hereunder shall not be construed as a waiver of such event
of default. No waiver by Landlord of any breach of this Lease shall
constitute a waiver of any other violation or breach of any time of the terms
hereof. Forbearance by Landlord to enforce one or more of the remedies herein
provided upon a breach hereof shall not constitute a waiver of any other
breach of the Lease.
SECTION 23.04. No provision of this Lease shall be deemed to have been
waived by Landlord unless such waiver is in writing and signed by Landlord.
Nor shall any custom or practice which may evolve between the parties in the
administration of the terms of this Lease be construed to waive or lessen
Landlord's right to insist upon strict performance of the terms of this
Lease. The rights granted to Landlord in this Lease shall be cumulative of
every other right or remedy which Landlord may otherwise have at law or in
equity or by statue, and the exercise of one or more rights or remedies shall
not prejudice or impair the concurrent or subsequent exercise of other rights
or remedies.
ARTICLE 24
WAIVER BY TENANT
To the extent permitted by applicable law, Tenant waives (to the extent
waivable under applicable law) for itself and all claiming by, through, and
under it, including creditors of all kinds:
(a) any right and privilege which it or any of them may have under any
present or future constitution, statute, or rule of law to redeem
the Premises or to have a continuance of this Lease for the Term
after termination of Tenant's right of occupancy by order or
judgment of any court or by any legal process or writ, under the
terms of this Lease, or after the termination of the Term as herein
provided,
(b) the benefits of any present or future constitution, statute, or rule
of law which exempts property form liability for debt or for
distress for rent, and
(c) the provisions of law relating to notice and/or delay in levy of
execution in case of eviction of a tenant for non-payment of rent,
including, but not limited to, the provisions of the Pennsylvania
Landlord and Tenant Act of 1951, as amended, relating to notices to
quit from landlords to tenants.
ARTICLE 25
SECURITY DEPOSIT
Intentionally Omitted
ARTICLE 26
ATTORNEY'S FEES AND LEGAL EXPENSES
In any action or proceeding brought by either party against the other with
respect to this Lease, the prevailing party shall be entitled to recover from
the other party attorney's fees, investigation costs, and other legal
expenses and court costs incurred by such party in such action or proceeding
as the court may
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find to be reasonable. The prevailing party shall be the one who receives the
net judgment in its behalf at the end of any action.
ARTICLE 27
NOTICES
Any notice or document required to be delivered hereunder shall be considered
delivered, whether actually received or not, when hand delivered to the
address of the other party, one business day following transmittal by Federal
Express or other reputable overnight delivery service, or three business days
after being deposited in the United States Mail, postage prepaid, registered
or certified mail, return receipt requested, addressed to the parties hereto
at the respective addresses specified in the Basic Lease Information, or at
such other address as they have subsequently specified by written notice.
ARTICLE 24
MISCELLANEOUS
SECTION 28.01. Where this Lease requires Tenant to reimburse Landlord the
cost of any item, if no such cost has been stipulated, such cost will be the
reasonable and customary charge therefor. Failure to pay any such cost shall
be considered as a failure to pay Rental.
SECTION 28.02. Tenant and Landlord each represent and warrant to the other
that it has had no dealings with any broker or agent in connection with the
negotiation or execution of this Lease, except such brokers or agents as may
be identified in Items 20 or 21 of the Basic Lease Information. Each party
shall indemnify and hold the other harmless from any costs, expenses, or
liability for commission or other compensation or charges claimed by any
person, broker or agent (other than those identified in the Basic Lease
Information) following or resulting from its misrepresentations herein
contained.
SECTION 28.03. As used herein, the terms "business days" means Monday through
Friday (except for holidays); "normal business hours" means 7:00 a.m. to 6:00
p.m. on business days; and "holidays" means those holidays designated by
Landlord, which holidays shall be consistent with those holidays designated
by Landlords of comparable office Buildings in the immediate area and town.
SECTION 28.04. Every agreement contained in this Lease is, and shall be
construed as, a separate and independent agreement. If any term of this Lease
or the application thereof to any person or circumstances shall be invalid
and unenforceable, the remainder of this Lease, or the application of such
term to persons or circumstances other than those as to which it is invalid or
unenforceable, shall not be affected.
SECTION 28.05. There shall be no merger of this Lease or of the leasehold
estate hereby created with the fee estate in the Premises or any part thereof
by reason of the fact that the same person may acquire or hold, directly or
indirectly, this Lease or the leasehold estate hereby created or any interest
in this Lease or in any interest in such fee estate. In the event of a
voluntary or other surrender of this Lease, or a mutual cancellation hereof,
Landlord may, at its option, terminate all subleases, or treat such
surrender or cancellation as an assignment of such subleases.
SECTION 28.06. Whenever a period of time is herein prescribed for action, other
than the payment of money, to be taken by either party hereto, such party
shall not be liable or responsible for, and there shall be excluded from the
computation for any such period of time, any delays due to strikes, riots,
acts of
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God, shortages of labor or materials, war, governmental laws, regulations, or
restrictions, or any other cause of any kind whatsoever which is beyond the
control of such party.
SECTION 28.07. The article headings contained in this Lease are for
convenience only and shall not enlarge or limit the scope or meaning of the
various and several articles hereof. Words of any gender used in this Lease
shall include any other gender, and words in the singular number shall be
held to include the plural, unless the context otherwise requires.
SECTION 28.08. If there be more than one Tenant, the obligations hereunder
imposed Tenant shall be joint and several, and all agreements and covenants
herein contained shall be binding upon the respective heirs, personal
representatives, successors, and to the extent permitted under this Lease,
assigns of the parties hereto. If there is a guarantor of Tenant's
obligations hereunder, Tenant's obligations shall be joint and several
obligations of Tenant and such guarantor, and Landlord need not first proceed
against Tenant hereunder before proceeding against such guarantor, nor shall
any such guarantor be released from its guarantee for any reason, including,
without limitation, any amendment, renewal, expansion or diminution of this
Lease, any forbearance by Landlord or waiver of any of Landlord's rights, the
failure to give Tenant or such guarantor any notices, or the release of any
party liable for the payment of Tenant's obligations hereunder.
SECTION 28.09. Neither Landlord nor Landlord's agents or brokers have made
any representations or promises with respect to the Premises or the Building
except as herein expressly set forth and all reliance with respect to any
representations or promises is based solely on those contained herein.
SECTION 28.10. This Lease sets forth the entire agreement between the parties
and cancels all prior negotiations, arrangements, brochures, agreements, and
understandings, if any, between Landlord and Tenant regarding the subject
matter of this Lease. No amendment or modification of this Lease shall be
binding or valid unless expressed in a writing executed by both parties
hereto.
SECTION 28.11. The submission of this Lease to Tenant shall not be construed
as an offer, nor shall Tenant have any rights with respect thereto unless
Landlord executes a copy of this Lease and delivers the same to Tenant.
SECTION 28.12. If Tenant signs as a corporation, each of the persons executing
this Lease on behalf of Tenant represents and warrants that Tenant is a duly
organized and existing corporation, that Tenant has and is qualified to do
business in the Commonwealth of Pennsylvania, that the corporation has full
right and authority to enter into this Lease, and that all persons signing on
behalf of the corporation were authorized to do so by appropriate corporation
actions. If Tenant signs as a partnership, trust, or other legal entity, each
of the persons executing this Lease on behalf of Tenant represents and
warrants that Tenant has complied with all applicable laws, rules, and
governmental regulations relative to its right to do business in the
Commonweath of Pennsylvania, that such equity has the full right and
authority to enter into this Lease, and that all persons signing on behalf of
the Tenant were authorized to do so by any and all necessary or appropriate
partnership, trust, or other actions.
SECTION 28.13. This Lease shall be governed by and construed under the laws
of the Commonwealth of Pennsylvania. Any action brought to enforce or
interpret this Lease shall be brought in the court of appropriate
jurisdiction in Cumberland County, Pennsylvania. Should any provision of this
Lease require judicial interpretation, it is agreed that the Court
interpreting or considering same shall not apply the presumption that the
terms hereof shall be more strictly construed against a party by reason of
the rule or conclusion that a document should be construed more strictly
against the party who itself or through its agent prepared the same, it being
agreed that all parties hereto have participated in the preparation of this
Lease and that legal counsel was consulted by each party before the execution
of this Lease.
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SECTION 28.14. Any elimination or shutting off of light, air, or view by any
structure which may be erected on lands adjacent to the Building,
modification of the amenities to the Building shall in no way affect this
Lease or impose any liability on Landlord.
SECTION 28.15. Landlord may, upon reasonable notice (except in the case of
emergencies) enter upon the Premises at reasonable hours to inspect same or
clean or make repairs or alterations (but without any obligation to do so,
except as expressly provided for herein) and to show the Premises to
prospective lenders or purchasers, and, during the last twelve (12) months of
the Term of the Lease, to show them to prospective Tenants at reasonable
hours and, if they are vacated, to prepare them for re-occupancy. Landlord
shall cause its officers, agents and representatives to exercise care with any
such entry not to unreasonably interfere with the operation and normal office
routine of Tenant (except in the case of emergency).
SECTION 29.16. The exhibits and numbered riders attached to this Lease are by
this reference incorporated fully herein. The term "this Lease" shall be
considered to include all such exhibits and riders.
ARTICLE 29
CONDITION SUBSEQUENT
Approval of the terms, provisions and conditions of this Lease by Tenant's
Board of Directors shall be a condition subsequent to the effectiveness of
this Lease. If Tenant's Board of Directors has not approved this Lease prior
to April 1, 1995, then this Lease shall automatically become void, and the
terms, provisions and conditions of the lease between Landlord and Tenant
dated July 19, 1994 (which expires on May 31, 1997) shall remain in full
force and effect and govern Tenant's occupancy of the Premises until such
expiration date.
IN WITNESS WHEREOF, Landlord and Tenant have set their respective hands
and seals to this Lease the day and year first above written.
Landlord:
LIBERTY PLAZA ASSOCIATES III, a Pennsylvania
general partnership, acting by and through
its managing general partner, as follows:
By: /s/ Martin J. Ortenzio
---------------------------------------
Martin J. Ortenzio,
managing general partner
Tenant:
CONTINENTAL MEDICAL SYSTEMS, INC.,
a Delaware corporation
By: /s/ David G. Nation
---------------------------------------
David G. Nation,
Senior Vice President
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CAUWELS & ASSOCIATES
OFFICE BUILDING LEASE
ALBUQUERQUE CENTER
6001 INDIAN SCHOOL ROAD, N.E.
ALBUQUERQUE, NM 87110
This Lease between ALBUQUERQUE CENTRE, LTD., a limited liability company,
("Landlord"), and HORIZON HEALTHCARE CORPORATION, a Delaware corporation,
(Tenant), is dated June 1, 1994.
1. LEASE OF PREMISES.
In consideration of the Rent (as defined at Section 5.4) and the provisions
of this Lease, Landlord leases to Tenant and Tenant leases from Landlord the
Premises shown by diagonal lines on the floor plan attached hereto as Exhibit
"A," and further described at Section 21. The Premises are located within the
Building and Project described in Section 21. Tenant shall have the
non-exclusive right (unless otherwise provided herein) in common with
Landlord, other tenants, subtenants and invitees to use of the Common Areas
(as defined at Section 2c).
2. DEFINITIONS.
As used in this Lease, the following terms shall have the following meanings:
a. Base Rent: SEE SECTION 3, Addenda c
b. Base Year: The calendar year of 1994 for the first five years. New base
year after the end of fifth year of lease in 1999 for the remainder of
lease.
c. Broker(s)
Landlord's: N/A
Tenant's: N/A
In the event that Cauwels & Associates represents both Landlord and Tenant,
Landlord and Tenant hereby confirm that they were timely advised of the dual
representation and that they consent to the same, and that they do not expect
said broker to disclose to either of them the confidential information of the
other party.
d. Commencement Date: August 1, 1994
e. Common Areas: the building lobbies, common corridors and hallways,
restrooms, garage and parking areas, stairways, elevators and other generally
understood public or common areas. Landlord shall have the right to regulate
or restrict the use of the Common Areas.
f. Expense Stop: N/A
g. Expiration Date: July 31, 2001, unless otherwise sooner terminated in
accordance with the provisions of this Lease.
i. Landlord's Mailing Address: Cauwels & Associates, 1116 Pennsylvania,
N.E., Albuquerque, NM 87110
Tenant's Mailing Address: Horizon Healthcare Corporation, 6001 Indian
School Rd., N.E., Suite 520, Albuquerque, NM 87110
j. Monthly installments of Base Rent (initial): $43,766.00 per month on
occupied space, plus $850 per month on inventory space until occupied, then
space will be added to net rentable area.
k. Parking: Tenant shall be permitted, to park 115 cars on a non-exclusive
basis in the area(s) designated by Landlord for parking. Tenant shall abide
by any and all parking regulations and rules established from time to time by
Landlord or Landlord's parking operator. Landlord reserves the right to
separately charge Tenant's guests and visitors for parking.
l. Premises: that portion of the Building containing approximately 39,269
square feet of Rentable Area, shown by diagonal lines on Exhibit "A" located
on the Second, Fourth and Fifth floors of the Building. One thousand seven
hundred one (1,701) square feet of the above rentable area is Inventory Space.
m. Project: the building of which the Premises are a part (the "Building,")
and any other buildings or improvements on the real property (the "Property")
located at 6001 Indian School Road, N.E., Albuquerque, New Mexico 87110 and
further described at Exhibit "B." The Project is known as ALBUQUERQUE CENTRE.
n. Rentable Area: as to both the Premises and the Project, the respective
measurements of floor area as may from time to time be subject to lease by
Tenant and all tenants of the Project, respectively, as determined by
Landlord and applied on a consistent basis throughout the Project.
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o. Security Deposit (Section 7): N/A
p. State: the State of New Mexico
q. Tenant's First Adjustment Date (Section 5.2): the first day of the
calendar month following the Commencement Date plus twelve (12) months.
r. Tenant's Proportionate Share: 50.67% Such share is a fraction, the
numerator of which is the Rentable Area of the Premises, and the denominator
of which is the Rentable Area of the Project, as determined by Landlord from
time to time. The Project consists of one building containing a total
Rentable Area of 77,500 square feet.
s. Tenant's Use Clause (Article 8): General office use
t. Term: The period commencing on the Commencement Date and expiring at
midnight on the Expiration Date.
3. EXHIBITS AND ADDENDA.
The exhibits and addenda listed below (unless lined out) are incorporated by
reference in this Lease:
a. Exhibit "A" -- Floor Plan showing the Premises.
b. Exhibit "B" -- Site Plan of Project.
c. Exhibit "C" -- Building Standard Tenant Improvements.
d. Exhibit "D" -- Rules and Regulations.
e. Addenda: RENT SCHEDULE AS FOLLOWS:
Year 1: $13.98 per square foot
Year 2: 15.50 per square foot
Year 3: 15.90 per square foot
Year 4: 16.30 per square foot
Year 5: 16.70 per square foot*
Year 6: 17.10 per square foot
Year 7: 17.50 per square foot.
* at the end of year 5, tenant is allowed $5.00 PSF rehibilitation allowance,
or may be credited towards rent, either in a lump sum or prorated over
remaining term. Base year expenses will be 1999 expenses for the remaining
lease term.
4. DELIVERY OF POSSESSION
If for any reason Landlord does not deliver possession of the Premises to
Tenant on the Commencement Date, Landlord shall not be subject to any
liability for such failure, the Expiration Date shall not change and the
validity of this Lease shall not be impaired, but Rent shall be abated until
delivery of possession. "Delivery of possession" shall be deemed to occur on
the date Landlord completes Landlord's Work as defined in Exhibit "C". If
Landlord permits Tenant to enter into possession of the Premises before the
Commencement Date, such possession shall be subject to the provisions of this
Lease, including, without limitation, the payment of Rent.
5. RENT.
5.1 PAYMENT OF BASE RENT. Tenant agrees to pay the Base Rent for the
Premises. Monthly installments of Base Rent shall be payable in advance on
the first day of each calendar month of the Term. If the Term begins (or
ends) on other than the first (or last) day of a calendar month, the Base
Rent for the partial month shall be prorated on a per diem basis. Tenant
shall pay Landlord the first Monthly Installment of Base Rent when Tenant
executes the Lease.
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5.3 PROJECT OPERATING COSTS
a. In order that the Rent payable
during the Term reflect any increase in Project Operating Costs, Tenant
agrees to pay to Landlord as Rent, Tenant's Proportionate Share of all
increases in costs, expenses and obligations attributable to the Project and
its operation, all as provided below.
b. If, during any calendar year during the Term, Project Operating
Costs exceed the Project Operating Costs for the Base Year, Tenant shall pay
to Landlord, in addition to the Base Rent and all other payments due under
this Lease, an amount equal to Tenant's Proportionate Share of such excess
Project Operating Costs in accordance with the provisions of this Section
5.3b.
(1) The term "Project Operating Costs" shall include all those items
described in the following subparagraphs (a) and (b).
(a) All taxes, assessments, water and sewer charges and other similar
governmental charges levied on or attributable to the Building or Project or
their operation, including without limitation, (i) real property taxes or
assessments levied or assessed against the Building or Project, (ii)
assessments or charges levied or assessed against the Building or Project by
any redevelopment agency, (iii) any tax measured by gross rentals received
from the leasing of the Premises, Building or Project, excluding any net
income, franchise, capital stock, estate or inheritance taxes imposed by the
State or federal government or their agencies, branches or departments;
provided that if at any time during the Term any governmental entity levies,
assesses or imposes on Landlord any (1) general or special, ad valorem or
specific, excise, capital levy or other tax, assessment, levy or charge
directly on the Rent received under this Lease or on the rent received under
any other leases of space in the Building or Project, or (2) any license fee,
excise or franchise tax, assessment, levy or charge measured by or based, in
whole or in part, upon such rent, or (3) any transfer, transaction, or
similar tax, assessment, levy or charge based directly or indirectly upon the
transaction represented by this Lease or such other leases, or (4) any
occupancy, use, per capita or other tax, assessment, levy or charge based
directly or indirectly upon the use of occupancy of the Premises within the
Building or Project, then any such taxes, assessments, levies and charges
shall be deemed to be included in the term Project Operating Costs.
(b) Operating costs incurred by Landlord in maintaining and operating the
Building and Project, including without limitation, the following: costs of
(1) utilities; (2) supplies; (3) insurance (including public liability,
property damage, earthquake, and fire and extended coverage insurance for the
full replacement cost of the Building and Project as required by Landlord or
its lenders for the Project; (4) services of independent contractors; (5)
compensation (including employment taxes and fringe benefits) of all persons
who perform duties connected with the operation, maintenance, repair or
overhaul of the Building or Project, and equipment, improvements and
facilities located within the Project, including without limitation
engineers, janitors, painters, floor waxers, window washers, security and
parking personnel and gardeners (but excluding persons performing services
not uniformly available to or performed for substantially all Building or
Project tenants); (8) rental expenses for (or a reasonable depreciation
allowance on) personal property used in the maintenance, operation or repair
of the Building or Project; (9) costs, expenditures or charges (whether
capitalized or not) required by any governmental or quasi-governmental
authority; (10) amortization of capital expenses (including financing costs)
(i) required by a governmental entity for energy conservation or life safety
purposes, or (ii) made by Landlord to reduce Project Operating Costs and (11)
any other costs or expenses incurred by Landlord under this Lease and not
otherwise reimbursed by tenants of the Project. If at any time during the
Term, less than ninety-five percent (95%) of the Rentable Area of the Project
is occupied, the "operating costs" component of Project Operating Costs shall
be adjusted by Landlord to reasonably approximate the operating costs which
would have been incurred if the Project had been at least ninety percent (90%)
occupied.
(2) Tenant's Proportionate Share of Project Operating Costs shall be payable
by Tenant to Landlord as follows:
(a) Beginning with the calendar year following the Base Year and for each
calendar year thereafter ("Comparison Year"), Tenant shall pay Landlord an
amount equal to Tenant's Proportionate Share of the Project Operating Costs
incurred by Landlord in the Comparison Year which exceeds the total amount of
Project Operating Costs payable by Landlord for the Base Year. This excess is
referred to as the "Excess Expenses."
(b) To provide for current payments of Excess Expenses, Tenant shall, at
Landlord's request, pay as additional rent during each Comparison Year, an
amount equal to Tenant's Proportionate Share of the Excess Expenses payable
during such Comparison Year, as estimated by Landlord from time to time. Such
payments shall be made in monthly installments, commencing on the first day of
the month following the month in which Landlord notifies tenant of the amount
it is to pay hereunder and continuing until the first day of the month
following the month in which Landlord gives Tenant a new notice of estimated
Excess Expenses. It is the intention hereunder to estimate from time to time
the amount of the Excess Expenses for each Comparison Year and Tenant's
Proportionate Share thereof, and then to make an adjustment in the following
year based on the actual Excess Expenses incurred for that Comparison Year.
Operating costs shall be limited to those building standard costs recognized
as operating expenses for the project in accordance with generally accepted
accounting principles consistently applied.
(c) On or before April 1 of each Comparison Year after the first Comparison
Year (or as soon thereafter as is practical), Landlord shall deliver to
Tenant a statement setting forth Tenant's Proportionate Share of the Excess
Expenses for the preceding Comparison Year. If Tenant's Proportionate Share
of the actual Excess Expenses for the previous Comparison Year exceeds the
total of the estimated monthly payments made by Tenant for such year, Tenant
shall pay Landlord the amount of the deficiency within ten (10) days of the
receipt of the statement. If such total exceeds Tenant's Proportionate Share
of the actual Excess Expenses for such
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Comparison Year, then Landlord shall credit against Tenant's next ensuing
monthly installment(s) of additional rent an amount equal to the difference
until the credit is exhausted. If a credit is due from Landlord on the
Expiration Date, Landlord shall pay Tenant the amount of the credit. The
obligations of Tenant and Landlord to make payments required under this
Section 5.3 shall survive the Expiration Date.
(d) Tenant's Proportionate Share of Excess Expenses in any Comparison Year
having less than 365 days shall be appropriately prorated.
(e) If any dispute arises as to the amount of any additional rent due
hereunder. Tenant shall have the right after reasonable notice and at
reasonable times to inspect Landlord's accounting records at Landlord's
accounting office and, if after such inspection Tenant still disputes the
amount of additional rent owed, a certification as to the proper amount shall
be made by Landlord's certified public accountant, which certification shall
be final and conclusive. Tenant agrees to pay the cost of such certification
unless it is determined that Landlord's original statement overstated Project
Operating Costs by more than five percent (5%).
5.4 DEFINITION OF RENT. All costs and expenses which Tenant assumes or
agrees to pay to Landlord under this Lease shall be deemed additional rent
(which, together with the Base Rent is sometimes referred to as the "Rent."
The Rent shall be paid to the Building manager (or other person) and at such
place, as Landlord may from time to time designate in writing, without any
prior demand therefor and without deduction or offset, in lawful money of the
United States of America.
5.5 RENT CONTROL. If the amount of Rent or any other payment due under this
Lease violates the terms of any governmental restrictions on such Rent or
payment, then the Rent or payment due during the period of such restrictions
shall be the maximum amount allowable under those restrictions. Upon
termination of the restrictions, Landlord shall, to the extent it is legally
permitted, recover from Tenant the difference between the amounts received
during the period of the restrictions and the amounts Landlord would have
received had there been no restrictions.
5.6 TAXES PAYABLE BY TENANT. In addition to the Rent and any other charges
to be paid by Tenant hereunder, Tenant shall reimburse Landlord upon demand
for any and all taxes payable by Landlord (other than net income taxes)
which are not otherwise reimbursable under this Lease, whether or not now
customary or within the contemplation of the parties, where such taxes are
upon, measured by or reasonably attributable to (a) the cost or value of
Tenant's equipment, furniture, fixtures and other personal property located
in the Premises, or the cost or value of any leasehold improvements made in
or to the Premises by or for Tenant, other than Building Standard Work made
by Landlord, regardless of whether title to such improvements is held by
Tenant or Landlord; (b) the gross or net Rent payable under this Lease,
including, without limitation, any rental or gross receipts tax levied by any
taxing authority with respect to the receipt of the Rent hereunder; (c) the
possession, leasing, operation, management, maintenance, alteration, repair,
use or occupancy by Tenant of the Premises or any portion thereof; or (d)
this transaction or any document to which Tenant is a party creating or
transferring an interest or an estate in the Premises if it becomes unlawful
for Tenant to reimburse Landlord for any costs as required under this Lease,
the Base Rent shall be revised to net Landlord the same net Rent after
imposition of any tax or other charge upon Landlord as would have been
payable to Landlord but for the reimbursement being unlawful.
6. INTEREST AND LATE CHARGES.
If Tenant fails to pay when due any Rent or other amounts or charges which
Tenant is obligated to pay under the terms of this Lease, the unpaid amounts
shall bear interest at the maximum rate then allowed by law. Tenant
acknowledges that the late payment of any Monthly Installment of Base Rent
will cause Landlord to lose the use of that money and incur costs and
expenses not contemplated under this Lease, including without limitation,
administrative and collection costs and processing and accounting expenses,
the exact amount of which is extremely difficult to ascertain. Therefore, in
addition to interest, if any such installment is not received by Landlord
within ten (10) days from the date it is due, Tenant shall pay Landlord a
late charge equal to ten percent (10%) of such installment. Landlord and
Tenant agree that this late charge represents a reasonable estimate of such
costs and expenses and is fair compensation to Landlord for the loss suffered
from such nonpaymet by Tenant. Acceptance of any interest or late charge shall
not constitute a waiver of Tenant's default with respect to such nonpayment by
Tenant nor prevent Landlord from exercising any other rights or remedies
available to Landlord under this Lease.
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8. TENANTS USE OF THE PREMISES.
Tenant shall use the Premises solely for the purposes set forth in Tenant's
Use Clause. Tenant shall not use or occupy the Premises in violation of law or
any covenant, condition or restriction affecting the Building or Project or
the certificate of occupancy issued for the Building or Project, and shall,
upon notice from Landlord, immediately discontinue any use of the Premises
which is declared by any governmental authority having jurisdiction to be a
violation of law or the certificate of occupancy. Tenant, at Tenant's own
cost and expense, shall comply with all laws, ordinances, regulations, rules
and/or any directions of any governmental agencies or authorities having
jurisdiction which shall, by reason of the nature of Tenant's use or
occupancy of the Premises, impose any duty upon Tenant or Landlord with
respect to the Premises or its use or occupation. A judgement of any court of
competent jurisdiction or the admission by Tenant in any action or proceeding
against Tenant that Tenant has violated any such laws, ordinances,
regulations, rules and/or directions in the use of the Premises shall be
deemed to be a conclusive determination of that fact as between Landlord and
Tenant. Tenant shall not do or permit to be done anything which will
invalidate or increase the cost of any fire, extended coverage or other
insurance policy covering the Building or Project and/or property located
therein, and shall comply with all rules, orders, regulations, requirements
and recommendations of the Insurance Services Office or any other
organization performing a similar function. Tenant shall promptly upon demand
reimburse Landlord for any additional premium charged for such policy by
reason of Tenant's failure to comply with the provisions of this Article.
Tenant shall not do or permit anything to be done in or about the Premises
which will in any way obstruct or interfere with the rights of other tenants
or occupants of the Building or Project, or injure or annoy them, or use or
allow the Premises to be used for any improper, immoral, unlawful or
objectionable purpose, nor shall Tenant cause, maintain or permit any
nuisance in, on or about the Premises. Tenant shall not commit or suffer to
be committed any waste in or upon the Premises.
9. SERVICES AND UTILITIES.
Provided that Tenant is not in default hereunder, Landlord agrees to furnish
to the Premises during generally recognized business days, and during hours
determined by Landlord in its sole discretion, and subject to the Rules and
Regulations of the Building or Project, electricity for normal desk top
office equipment and normal copying equipment, and heating, ventilation and
air conditioning ("HVAC") as required in Landlord's judgment for the
comfortable use and occupancy of the Premises. If Tenant desires HVAC at any
other time, Landlord shall use reasonable efforts to furnish such service
upon reasonable notice from Tenant and Tenant shall pay Landlord's charges of
$38.00 per hour, (subject to change) in utility costs on demand. Landlord
shall also maintain and keep lighted the common stairs, common entries, and
restrooms in the Building. Landlord shall not be in default hereunder or be
liable for any damages directly or indirectly resulting from, nor shall the Rent
be abated by reason of (i) the installation, use or interruption of use of
any equipment in connection with the furnishing of any of the foregoing
services, (ii) failure to furnish or delay in furnishing any such services
where such failure or delay is caused by accident or any condition or event
beyond the reasonable control of Landlord, or by the making of necessary
repairs or improvements to the premises, Building or Project, or (iii) the
limitation, curtailment or rationing of, or restrictions on, use of water,
electricity, gas or any other form of energy serving the Premises, Building
or Project. Landlord shall not be liable under any circumstances for a loss
of or injury to property or business, however occurring, through or in
connection with or incidental to failure to furnish any such services. If
Tenant uses heat generating machines or equipment in the Premises which
affect the temperature otherwise maintained by the HVAC system, Landlord
reserves the right to install supplementary air conditioning units in the
Premises and the cost thereof, including the cost of installation, operation
and maintenance thereof, shall be paid by Tenant to Landlord upon demand by
Landlord. Computer room and mail room on second floor shall be submetered.
All utility costs for the submetered area will be paid by tenant.
Tenant shall not, without the written consent of Landlord, use any apparatus
or device in the Premises, including without limitation, electronic data
processing machines, punch card machines or machines using in excess of 120
volts, which consumes more electricity than is usually furnished or supplied
for the use of premises as general office space, as determined by Landlord.
Tenant shall not connect any apparatus with electric current except through
existing electrical outlets in the Premises. Tenant shall not consume water
or electric current in excess of that usually furnished or supplied for the
use of premises as general office space as determined by Landlord, without
first procuring the written consent of Landlord, which Landlord may refuse,
and in the event of consent, Landlord may have installed a water meter or
electrical current meter in the Premises to measure the amount of water or
electric current consumed. The cost of any such meter and of its
installation, maintenance and repair shall be paid for by the Tenant and
Tenant agrees to pay Landlord promptly upon demand for all such water and
electric current consumed as shown by said meters, at the rates charged for
such services by the local public utility plus any additional expense
incurred in keeping account of the water and electric current so consumed. If
a separate meter is not installed, the excess cost for such water and
electric current shall be established by an estimate made by a utility
company or electrical engineer hired by Landlord at Tenant's expense.
Nothing contained in this Article shall restrict Landlord's right to require
at any time separate metering of utilities furnished to the Premises. In the
event utilities are separately metered, Tenant shall pay promptly upon demand
for all utilities consumed at utility rates charged by the local public
utility plus any additional expense incurred by Landlord in keeping account
of the utilities so consumed. Tenant shall be responsible for the maintenance
and repair of any such meters at its sole cost.
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Landlord shall furnish elevator service, lighting replacement for building
standard light, restroom supplies, window washing and janitor services in a
manner that such services are customarily furnished to comparable office
buildings in the area.
10. CONDITIONS OF THE PREMISES.
Tenant's taking possession of the Premises shall be deemed conclusive
evidence that as of the date of taking possession the Premises are in good
order and satisfactory condition, except for such matters as to which Tenant
gave Landlord notice on or before the Commencement Date. No promise of
Landlord to alter, remodel, repair or improve the Premises, the Building or
the Project and no representation, express or implied, respecting any matter
or thing relating to the Premises, Building, Project or this Lease
(including, without limitation, the condition of the Premises, the Building
or the Project) have been made to Tenant by Landlord or its Broker or Sales
Agent, other than as may be contained herein or in a separate exhibit or
addendum signed by Landlord and Tenant.
As soon as practicable after Tenant takes possession of the Premises,
representatives of Landlord and Tenant will jointly inspect the Premises and
will prepare and sign a list ("Punch List") of any defects in the Leasehold
Improvement. Despite the provisions set forth in Section 10 to the contrary,
Landlord will (i) promptly complete or repair all Punch List items, and (ii)
will cure any latent defects in the Premises within a reasonable time after
Tenant provides notice to Landlord of any such defects.
11. CONSTRUCTION, REPAIRS AND MAINTENANCE.
a. LANDLORD'S OBLIGATION. Landlord shall perform Landlord's Work to the
Premises as described in Exhibit "C" Landlord shall maintain in good order,
condition and repair the Building and all other portions of the Premises not
the obligation of Tenant or of any other tenant in the Building.
b. TENANT'S OBLIGATIONS.
(1) Tenant shall perform Tenant's Work to the Premises as described in
Exhibit "C"
(2) Tenant at Tenant's sole expense shall, except for services furnished by
Landlord pursuant to Article 9 hereof, maintain the Premises in good order,
condition and repair, including the interior surfaces of the ceilings, walls
and floors, all doors, all interior windows, all plumbing, pipes and
fixtures, electrical wiring, switches and fixtures, Building Standard
furnishings and special items and equipment installed by or at the expense of
Tenant.
(3) Tenant shall be responsible for all repairs and alterations in and to the
Premises, Building and Project and the facilities and systems thereof, the
need for which arises out of (i) Tenant's use or occupancy of the Premises,
(ii) the installation, removal, use or operation of Tenant's Property (as
defined in Article 13) in the Premises, (iii) the moving of Tenant's Property
into or out of the Building, or (iv) the act, omission, misuse or negligence
of Tenant, its agents, contractors, employees or invitees.
(4) If Tenant fails to maintain the Premise in good order, condition and
repair, Landlord shall give Tenant notice to do such acts as are reasonably
required to so maintain the Premises. If Tenant fails to promptly commence
such work and diligently prosecute it to completion, then Landlord shall
have the right to do such acts and expend such funds at the expense of Tenant
as are reasonably required to perform such work. Any amount so expended by
Landlord shall be paid by Tenant promptly after demand with interest at the
prime commercial rate then being charged by Bank of America NT & SA plus two
percent (2%) per annum, from the date of such work, but not to exceed the
maximum rate then allowed by State and Federal law. Landlord shall have no
liability to Tenant for any damage, inconvenience, or interference with the
use of the Premises by Tenant as a result of performing any such work. If
Landlord fails to maintain the building and its common area, tenant may give
notice to Landlord to perform such acts as are reasonably required to
maintain the Premises. If Landlord fails to perform repairs/acts after
notice has been rendered, then tenant may act to commence work. Any
reasonable amount so expensed can be used to offset rent payable under this
Lease.
c. COMPLIANCE WITH LAW. Landlord and tenant shall each do all acts required
to comply with all applicable laws, ordinances, and rules of any public
authority relating to their respective maintenance obligations as set forth
herein.
e. LOAD AND EQUIPMENT LIMITS. Tenant shall not place a load upon any floor of
the Premises which exceeds the load per square foot which such floor was
designed to carry, as determined by Landlord or Landlord's structural
engineer. The cost of any such determination made by Landlord's structural
engineer shall be paid for by Tenant upon demand. Tenant shall not install
business machines or mechanical equipment which cause noise or vibration to
such a degree as to be objectionable to Landlord or other Building tenants.
f. Except as otherwise expressly provided in this Lease, Landlord shall have
no liability to Tenant, unless due to Landlord negligence nor shall Tenant's
obligations under this Lease be reduced or abated in any manner whatsoever by
reason of any inconvenience, annoyance, interruption or injury to business
arising from Landlord's making any repairs or changes which Landlord is
required or permitted by this Lease or by any other tenant's lease or
required by law to make in or to any portion of the Project, Building or the
Premises. Landlord shall nevertheless use reasonable efforts to minimize any
interference with Tenant's business in the Premises.
g. Tenant shall give Landlord prompt notice of any damage to or defective
condition in any part or appurtenance of the Building's mechanical,
electrical, plumbing, HVAC or other systems serving, located in, or passing
through the Premises.
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h. Upon the expiration or earlier termination of this Lease, Tenant shall
return the Premises to Landlord clean and in the same condition as on the
date Tenant took possession, except for normal wear and tear. Any damage to
the Premises, including any structural damage, resulting from Tenant's use or
from the removal of Tenant's fixtures, furnishings and equipment pursuant to
Section 13b shall be repaired by Tenant at Tenant's expense.
12. ALTERATIONS AND ADDITIONS
a. Tenant shall not make any additions, alterations or improvements to the
Premises without obtaining the prior written consent of Landlord. Landlord's
consent may be conditioned on Tenant's removing any such additions,
alterations or improvements upon the expiration of the Term and restoring the
Premises to the same condition as on the date Tenant took possession. All
work with respect to any addition, alteration or improvement shall be done in
a good and workmanlike manner by properly qualified and licensed personnel
approved by Landlord, and such work shall be diligently prosecuted to
completion. Landlord may, at Landlord's option, require that any such work be
performed by Landlord's contractor, in which case the cost of such work shall
be paid for before commencement of the work. Tenant shall pay to Landlord
upon completion of any such work by Landlord's contractor, an administrative
fee of fifteen (15%) of the cost of the work.
b. Tenant shall pay the costs of any work done on the Premises pursuant to
Section 12a, and shall keep the Premises, Building and Project free and
clear of liens of any kind. Tenant shall indemnify, defend against and keep
Landlord free and harmless from all liability, loss, damage, costs,
attorneys' fees and any other expense incurred on account of claims by any
person performing work or furnishing materials or supplies for Tenant or any
person claiming under Tenant.
Tenant shall keep Tenant's leasehold interest, and any additions or
improvements which are or become the property of Landlord under this Lease,
free and clear of all attachment or judgment liens. Before the actual
commencement of any work for which a claim or lien may be filed, Tenant shall
give Landlord notice of the intended commencement date a sufficient time
before that date to enable Landlord to post notices of non-responsibility or
any other notices which Landlord deems necessary for the proper protection of
Landlord's interest in the Premises, Building or the Project, and Landlord
shall have the right to enter the Premises and post such notices at any
reasonable time.
c. Landlord may require, at Landlord's sole option, that Tenant provide to
Landlord, at Tenant's expense, a lien and completion bond in an amount equal
to at least one and one-half (1 1/2) times the total estimated cost of any
additions, alterations or improvements to be made in or to the Premises, to
protect Landlord against any liability for mechanic's and materialmen's
liens and to insure timely completion of the work. Nothing contained in this
Section 12c shall relieve Tenant of its obligation under Section 12b to keep
the Premises, Building and Project free of all liens.
d. Unless their removal is required by Landlord as provided in Section 12a,
all additions, alterations and improvements made to the Premises shall become
the property of Landlord and be surrendered with the Premises upon the
expiration of the Term; provided; however, Tenant's equipment, machinery and
trade fixtures, and other personal property which can be removed without
damage to the Premises shall remain the property of Tenant and may be
removed, subject to the provisions of Section 13b.
Effective with the Commencement Date, Landlord, with respect to the Common
Areas, and Tenant, with respect to the Premises, each covenant and agree to
complete any and all alterations, modifications or improvements, including,
but not limited to, remodeling, renovation, rehabilitation, reconstruction,
changes or rearrangements in structure, and changes or rearrangements in wall
configuration or full-height partitions which are or become necessary, in order
to comply with all Public Accommodation Laws, regardless or whether such
improvements or modifications are the legal responsibility of Landlord,
Tenant or a third party.
Landlord and Tenant covenant and agree to use their reasonable efforts to
insure that any and all alterations, modifications or improvements undertaken
pursuant hereto are accomplished in a manner which will not substantially
interfere with the others' use or possession of space in the Building. In the
event modifications or improvements undertaken by Landlord pursuant hereto
substantially interfere with Tenant's use or possession of the Premises or
any portion thereof, rent shall partially abate in the proportion that the
unusable area of the Premises bears to the entire area of the Premises.
Landlord agrees to permit Tenant, at Tenant's cost, to make any improvements
or modifications to the Premises which are required by Public Accommodation
Laws, and to approve such improvements or modifications, provided that all
such improvements or modifications are made in compliance with applicable
Public Accommodation Laws.
For the purposes of this Lease, "Public Accommodation Laws" shall mean all
applicable federal, state and local laws, regulations, and building codes, in
effect during the term of this Lease, governing non-discrimination in
employment, public accommodations and commercial facilities, including
without limitation, the requirements of the Americans with Disabilities Act
42 USC 12101.
13. LEASEHOLD IMPROVEMENTS; TENANTS PROPERTY.
a. All fixtures, equipment, improvements and appurtenance is attached to or
built into the Premises at the commencement of or during the Term, whether or
not by or at the expense of Tenant ("Leasehold Improvements"), shall be and
remain a part of the Premises, shall be the property of Landlord and shall not
be removed by Tenant, except as expressly provided in Section 13b.
b. All movable partitions, business and trade fixtures, machinery and
equipment, communications equipment and office equipment located in the
Premises and acquired by or for the account of Tenant, without expense to
Landlord, which can be removed without structural damage to the Building, and
all furniture, furnishings and other articles of movable personal property
owned by Tenant and located in the Premises (collectively "Tenant's
Property") shall be and shall remain the property of Tenant and may be
removed
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by Tenant at any time during the Term; provided that if any of Tenant's
Property is removed, Tenant shall promptly repair any damage to the Premises
or to the Building resulting from such removal.
14. RULES AND REGULATIONS.
Tenant agrees to comply with (and cause its agents, contractors, employees
and invitees to comply with) the rules and regulations attached hereto as
Exhibit "D" and with such reasonable modifications thereof and additions
thereto as Landlord may from time to time make. Landlord shall not be
responsible for any violation of said rules and regulations by other tenants
or occupants of the Building or Project, but shall make best effort to
enforce uniformly.
15. CERTAIN RIGHTS RESERVED BY LANDLORD.
Landlord reserves the following rights, exercisable without liability to
Tenant for (a) damage or injury to property, person or business, (b) causing
an actual or constructive eviction from the Premises, or (c) disturbing
Tenant's use or possession of the Premises:
a. To name the Building and Project and to change the name or street
address of the Building or Project;
b. To install and maintain all signs on the exterior and interior of
the Building and Project;
c. To have pass keys to the Premises and all doors within the Premises,
excluding Tenant's vaults and safes;
d. At any time during the Term, and on reasonable prior notice to
Tenant, to inspect the Premises, and to show the Premises to any
prospective purchaser or mortgagee of the Project, or to any assignee
of any mortgage on the Project, or to others having an interest in the
Project or Landlord, and during the last six months of the Term, to show
the Premises to prospective tenants thereof; and
e. To enter the Premises for the purpose of making inspections,
repairs, alterations, additions or improvements to the Premises or the
Building (including, without limitation, checking, calibrating, adjusting
or balancing controls and other parts of the HVAC system), and to take all
steps as may be necessary or desirable for the safety, protection,
maintenance or preservation of the Premises or the Building or Landlord's
interest therein, or as may be necessary or desirable for the operation
or improvement of the Building or in order to comply with laws, orders or
requirements of governmental or other authority. Landlord agrees to use
its best efforts (except in an emergency) to minimize interference with
Tenent's business in the Premises in the course of any such entry.
16. ASSIGNMENT AND SUBLETTING.
No assignment of this Lease or sublease of all or any part of the Premises
shall be permitted, except as provided in this Article 16.
a. Tenant shall not, without the prior written consent of Landlord,
which consent shall not be unreasonably withheld, assign or hypothecate
this Lease or any interest herein or sublet the Premises or any part
thereof, or permit the use of the Premises by any party other than Tenant.
Any of the foregoing acts without such consent shall be void and shall,
at the option of Landlord, terminate this Lease. This Lease shall not,
nor shall any interest of Tenant herein, be assignable by operation of
law without the written consent of Landlord.
b. If at any time or from time to time during the Term, Tenant desires
to assign this Lease or sublet all or any part of the Premises, Tenant
shall give notice to Landlord setting forth the terms and provisions of
the proposed assignment or sublease, and the identity of the proposed
assignee or subtenant. Tenant shall promptly supply Landlord with such
information concerning the business background and financial condition
of such proposed assignee or subtenant as Landlord may reasonably request.
Landlord shall have the option, exercisable by notice given to Tenant
within ten (10) days after Tenant's notice is given, either to sublet
such space from Tenant at the rental and on the other terms set forth in
this Lease for the term set forth in Tenant's notice, or, in the case of
an assignment, to terminate this Lease. If Landlord does not exercise
such option, Tenant may assign the Lease or sublet such space to such
proposed assignee or subtenant on the following further conditions:
(1) Landlord shall have the right to approve such proposed assignee or
subtenant, which approval shall not be unreasonably withheld;
(2) The assignment or sublease shall be on the same terms set forth in the
notice given to Landlord;
(3) No assignment or sublease shall be valid and no assignee or sublesee
shall take possession of the Premises until an executed counterpart of such
assignment or sublease has been delivered to Landlord;
(4) No assignee or sublease shall have a further right to assign or sublet
except on the terms herein contained; and
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c. Notwithstanding the provisions of paragraphs a. and b. above,
Tenant may assign this Lease or sublet the Premises or any portion
thereof, without Landlord's consent and without extending any recapture
or termination option to Landlord, to any corporation which controls, is
controlled by or is under common control with Tenant, or to any
corporation resulting from a merger or consolidation with Tenant, or to
any person or entity which acquires all the assets of Tenant's business
as a going concern, provided that (i) the assignee assumes, in full, the
obligations of Tenant under this Lease, (ii) Tenant remains fully liable
under this Lease, and (iii) the use of the Premises under Article 8
remains unchanged.
d. No subletting or assignment shall release Tenant of Tenant's
obligations under this Lease or alter the primary liability of Tenant to
pay the Rent and to perform all other obligation to be performed by
Tenant hereunder. The acceptance of Rent by Landlord from any other
person shall not be deemed to be a waiver by Landlord of any provision
hereof Consent to one assignment or subletting shall not be deemed
consent to any subsequent assignment or subletting. In the event of
default by an assignee or subtenant of Tenant or any successor of Tenant
in the performance of any of the terms hereof, Landlord may proceed
directly against Tenant without the necessity of exhausting remedies
against such assignee, subtenant or successor. Landlord may consent to
subsequent assignments of the lease or sublettings or amendments or
modifications to the Lease with assignees of Tenant, without notifying
Tenant, or any successor of Tenant, and without obtaining its or their
consent thereto and any such actions shall not relieve Tenant of
liability under this Lease.
e. If Tenant assigns the Lease or sublets the Premises or requests
the consent of Landlord to any assignment or subletting or if Tenant
requests the consent of Landlord for any act that Tenant proposes to do,
then Tenant shall, upon demand, pay Landlord an administrative fee of One
Hundred Fifty and No/100ths Dollars ($150.00).
17. HOLDING OVER.
If after expiration of the Term, Tenant remains in possession of the Premises
with Landlord's permission (express or implied), Tenant shall become a tenant
from month to month only, upon all the provisions of this Lease (except as to
term and Base Rent), but the "Monthly Installments of Base Rent" payable by
Tenant shall be increased to one hundred fifty percent (150%) of the Monthly
Installments of Base Rent payable by Tenant at the expiration of the Term.
Such monthly rent shall be payable in advance on or before the first day of
each month. If either party desires to terminate such month to month tenancy,
it shall give the other party not less than thirty (30) days advance written
notice of the date of termination.
18. SURRENDER OF PREMISES.
a. Tenant shall peaceably surrender the Premises to Landlord on the
Expiration Date, in broom-clean condition and in as good condition as when
Tenant took possession, except for (i) reasonable wear and tear, (ii) loss by
fire or other casualty, and (iii) loss by condemnation. Tenant shall, on
Landlord's request, remove Tenant's Property on or before the Expiration Date
and promptly repair all damage to the Premises or Building caused by such
removal.
b. If Tenant abandons or surrenders the Premises, or is dispossessed by
process of law or otherwise, any of Tenant's Property left on the Premises
shall be deemed to be abandoned, and, at Landlord's option, title shall pass
to Landlord under this Lease as by a bill of sale If Landlord elects to
remove all or any part of such Tenant's Property, the cost of removal,
including repairing any damage to the Premises or Building caused by such
removal, shall be paid by Tenant. On the Expiration Date Tenant shall
surrender all keys to the Premises.
Landlord may store or dispose of Tenant's property in such manner as Landlord
deems appropriate without notice to and without liability whatsoever to
Tenant, or to any lienholders or lessors having an interest in same, and
Tenant hereby indemnifies landlord against any and all claims, losses,
damages, costs and expenses of any kind or nature arising out of Landlord's
removal of and/or disposition of such. Notwithstanding the foregoing,
however, Landlord will use its best efforts to provide Tenant with
forty-eight (48) hours notice prior to disposing of any such property.
19. DESTRUCTION OR DAMAGE.
a. If the Premises or the portion of the Building necessary for Tenant's
occupancy is damaged by fire, earthquake, act of God, the elements of other
casualty Landlord shall, subject to the provisions of this Article, promptly
repair the damage, if such repairs can, in Landlord's opinion, be completed
within (90) ninety days. If Landlord determines that repairs can be completed
within (90) ninety days, this Lease shall remain in full force and effect,
except that if such damage is not the result of the negligence or willful
misconduct of Tenant or Tenant's agents, employees, contractors, licensees or
invitees, the Base Rent shall be abated to the extent Tenant's use of the
Premises is impaired, commencing with the date of damage and continuing until
completion of the repairs required of Landlord under Section 19d.
b. If in Landlord's opinion, such repairs to the premises or portion of the
Building necessary for Tenant's occupancy cannot be completed within ninety
(90) days, Landlord may elect, upon notice to Tenant given within thirty
(30) days after the date of such fire or other casualty, to repair such
damage, in which event this lease shall continue in full force and effect,
but the Base Rent shall be partially abated as provided in Section 19a. If
Landlord does not so elect to make such repairs this Lease shall terminate as
of the date of such fire or other casualty.
c. If any other portion of the Building or Project is totally destroyed or
damaged to the extent that in Landlord's opinion repair thereof cannot be
completed within ninety (90) days, Landlord may elect upon notice to Tenant
given within thirty (30) days after the date of such fire or other casualty,
to repair such damage, in which event this Lease shall continue in full force
and effect, but the Base
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Rent shall be partially abated as provided in Section 19a. If Landlord does
not elect to make such repairs, this Lease shall terminate as of the date of
such fire or other casualty.
d. If the Premises are to be repaired under this Article, Landlord shall
repair at its cost any injury or damage to the Building and Building Standard
Work, and Leasehold improvements in the Premises. Tenant shall be responsible
at its sole cost and expense for the repair, restoration and replacement of
any other Leasehold Improvements and Tenant's Property. Landlord shall not be
liable for any loss of business inconvenience or annoyance arising from any
repair or restoration of any portion of the Premises, Building or Project as
a result of any damage from fire or other casualty.
e. This Lease shall be considered an express agreement governing any case of
damage to or destruction of the Premises, Building or Project by fire or
other casualty, and any present or future law which purports to govern the
rights of Landlord and Tenant in such circumstances in the absence of express
agreement, shall have no application.
20. EMINENT DOMAIN.
a. If the whole of the Building or Premises is lawfully taken by condemnation
or in any other manner for any public or quasi-public purpose, this Lease
shall terminate as of the date of such taking, and Rent shall be prorated to
such date. If less than the whole of the Building or Premises is so taken,
this Lease shall be unaffected by such taking, provided that (i) Tenant shall
have the right to terminate this Lease by notice to Landlord given within
ninety (90) days after the date of such taking if twenty percent (20%) or
more of the Premises is taken and the remaining area of the Premises is not
reasonably sufficient for Tenant to continue operation of its business, and
(ii) Landlord shall have the right to terminate this Lease by notice to
Tenant given within ninety (90) days after the date of such taking. If
either Landlord or Tenant so elects to terminate this Lease, the Lease shall
terminate on the thirtieth (30th) day after either such notice. The Rent
shall be prorated to the date of termination. If this Lease continues in
force upon such partial taking, the Base Rent and Tenant's Proportionate
Share shall be equitably adjusted according to the remaining Rentable Area of
the Premises and Project.
b. In the event of any taking, partial or whole, all of the proceeds of any
award, judgement or settlement payable by the condemning authority shall be
the exclusive property of Landlord, and Tenant hereby assigns to Landlord all
of its right, title and interest in any award, judgment or settlement from
the condemning authority. Tenant, however, shall have the right, to the
extent that Landlord's award is not reduced or prejudiced, to claim from the
condemning authority (but not from Landlord) such compensation as may be
recoverable by Tenant in its own right for relocation expenses and damage to
Tenant's personal property.
c. In the event of a partial taking of the Premises which does not result in
a termination of this Lease, Landlord shall restore the remaining portion of
the Premises as nearly as practicable to its condition prior to the
condemnation or taking, but only to the extent of Building Standard Work.
Tenant shall be responsible at its sole cost and expense for the repair,
restoration and replacement of any other Leasehold Improvements and Tenant's
Property.
21. INDEMNIFICATION.
a. Tenant shall indemnify and hold Landlord harmless against and from
liability and claims of any kind for loss or damage to property of Tenant or
any other person, or for any injury to or death of any person, arising out
of: (1) Tenant's use and occupancy of the Premises, or any work, activity or
other things allowed or suffered by Tenant to be done in, on or about
the Premises; (2) any breach or default by Tenant of any of Tenant's
obligations under this Lease; or (3) any negligent or otherwise tortious act
or omission of Tenant, its agents, employees, invitees or contractors. Tenant
shall at Tenant's expense, and by counsel satisfactory to Landlord, defend
Landlord in any action or proceeding arising from any such claim and shall
indemnify Landlord against all costs, attorneys' fees, expert witness fees
and any other expenses incurred in such action or proceeding. As a material
part of the consideration for Landlord's execution of this Lease, Tenant
hereby assumes all risk of damage or injury to any person or property in, on
or about the Premises from any cause unless due to Landlord negligence.
b. Landlord shall not be liable for injury or damage which may be sustained
by the person or property of Tenant, its employees, invitees or customers, or
any other person in or about the Premises, caused by or resulting from fire,
steam, electricity, gas, water or rain which may leak or flow from or into
any part of the Premises, or from the breakage, leakage, obstruction or other
defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning
or lighting fixtures, whether such damage or injury results from conditions
arising upon the Premises or upon other portions of the Building or Project
or from other sources unless due to Landlord negligence. Landlord shall not
be liable for any damages arising from any act or omission of any other tenant
of the Building or Project.
Landlord shall indemnify and hold Tenant harmless against and from liability
and claims of any kind for loss or damage to property of Landlord or any
other person, or for any injury to or death of any person, arising out of:
(1) Landlord's use and occupancy of the project, or any work, activity or
other things allowed or suffered by Landlord to be done in, on or about the
project; (2) any breach, or default by Landlord of any of Landlord's
obligations under this Lease; or (3) any negligent or otherwise tortious act
or omission of Landlord, its agents, employees, invitees or contractors.
Landlord shall, at Landlord's expense, and by counsel satisfactory to Tenant,
defend Tenant in any action or proceeding arising from any such claim and
shall indemnify Tenant against all costs, attorney's fees, expert witness
fees and any other expenses incurred in such action or proceeding.
Despite the above provisions (i.e. Sections 21(a.) and 21(b.)), however, to
the extent, if at all, that Section 56-7-1 NMSA 1978 is applicable to this
Lease, the agreement to indemnify as provided in this Section shall not
extend to liability, claims, damages, losses or expenses, including attorney
fees, arising out of: (i) the preparation or approval of maps, drawings,
opinions, reports, surveys, change order, designs or specifications by
indemnitee, or the agents or employees of indemnitee, or (ii) the giving of
or the failure
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to give directions or instructions by indemnitee, or the agents or employees
of indemnitee, where the giving or failure to give directions or instructions
is the primary cause of bodily injury to persons or damage to property.
22. TENANT'S INSURANCE.
a. All insurance required to be carried by Tenant hereunder shall be issued
by responsible insurance companies acceptable to Landlord and Landlord's
lender and qualified to do business in the State. Each policy shall name
Landlord, and at Landlord's request any mortgagee of Landlord, as an
additional insured, as their respective interests may appear. Each policy
shall contain (i) a cross-liability endorsement, (ii) a provision that such
policy and the coverage evidenced thereby shall be primary and
non-contributing with respect to any policies carried by Landlord and that
any coverage carried by Landlord shall be excess insurance, and (iii) a
waiver by the insurer of any right of subrogation against Landlord, its
agents, employees and representatives, which arises or might arise by reason
of any payment under such policy or by reason of any act or omission of
Landlord, its agents, employees or representatives. A copy of each paid up
policy (authenticated by the insurer) or certificate of the insurer
evidencing the existence and amount of each insurance policy required
hereunder shall be delivered to Landlord before the date Tenant is first
given the right of possession of the Premises, and thereafter within thirty
(30) days after any demand by Landlord therefor. Landlord may, at any time
and from time to time, inspect and/or copy any insurance policies required to
be maintained by Tenant hereunder. No such policy shall be cancelable except
after twenty (20) days written notice to Landlord and Landlord's lender. Tenant
shall furnish Landlord with renewals or "binders" of any such policy at
least ten (10) days prior to the expiration thereof. Tenant agrees that if
Tenant does not take out and maintain such insurance, Landlord may (but
shall not be required to) procure said insurance on Tenant's behalf and
charge the Tenant the premiums together with a twenty-five percent (25%)
handling charge, payable upon demand. Tenant shall have the right to provide
such insurance coverage pursuant to blanket policies obtained by the Tenant,
provided such blanket policies expressly afford coverage to the Premises,
Landlord, Landlord's mortgagee and Tenant as required by this Lease.
b. Beginning on the date Tenant is given access to the Premises for any
purpose and continuing until expiration of the Term, Tenant shall procure,
pay for and maintain in effect policies of casualty insurance covering (i)
all Leasehold Improvements (including any alterations, additions or
improvements as may be made by Tenant pursuant to the provisions of Article
12 hereof, and (ii) trade fixtures, merchandise and other personal property
from time to time in, on or about the Premises, in an amount not less than
one hundred percent (100%) of their actual replacement cost from time to
time, providing protection against any peril included within the
classification "Fire and Extended Coverage" together with insurance against
sprinkler damage, vandalism and malicious mischief. The proceeds of such
insurance shall be used for the repair or replacement of the property so
insured. Upon termination of this Lease following a casualty as set forth
herein, the proceeds under (i) shall be paid to Landlord, and the proceeds
under (ii) above shall be paid to Tenant.
c. Beginning on the date Tenant is given access to the Premises for any
purpose and continuing until expiration of the Term, Tenant shall procure,
pay for and maintain in effect workers' compensation insurance as required by
law and comprehensive public liability and property damage insurance with
respect to the construction of improvements on the Premises, the use,
operation or condition of the Premises and the operations of Tenant in, on or
about the Premises, providing personal injury and broad form property damage
coverage for not less than One Million Dollars ($1,000,000.00) combined
single limit for bodily injury, death and property damage liability.
d. Not less than every three (3) years during the Term, Landlord and Tenant
shall mutually agree to increases in all of Tenant's insurance policy limits
for all insurance to be carried by Tenant as set forth in this Article. In
the event Landlord and Tenant cannot mutually agree upon the amounts of said
increases, then Tenant agrees that all insurance policy limits as set forth
in this Article shall be adjusted for increases in the cost of living in the
same manner as is set forth in Section 5.2 hereof for the adjustment of the
Base Rent.
23. WAIVER OF SUBROGATION.
Landlord and Tenant each hereby waive all rights of recovery against the
other and against the officers, employees, agents and representatives of the
other, on account of loss by or damage to the waiving party of its property
or the property of others under its control, to the extent that such loss or
damage is insured against under any fire and extended coverage insurance
policy which either may have in force at the time of the loss or damage.
Tenant shall, upon obtaining the policies of insurance required under this
Lease, give notice to its insurance carrier or carriers that the foregoing
mutual waiver of subrogation is contained in this Lease.
24. SUBORDINATION AND ATTORNMENT.
Upon written request of Landlord, or any first mortgagee or first deed of
trust beneficiary of Landlord, or ground lessor of Landlord, Tenant shall, in
writing, subordinate its rights under this Lease to the lien of any first
mortgage or first deed of trust, or to the interest of any lease in which
Landlord is lessee, and to all advances made or hereafter to be made
thereunder. However, before signing any subordination agreement, Tenant shall
have the right to obtain from any lender or lessor or Landlord requesting
such subordination, an agreement in writing providing that, as long as Tenant
is not in default hereunder, this Lease shall remain in effect for the full
Term. The holder of any security interest may, upon written notice to Tenant,
elect to have this Lease prior to its security interest regardless of the
time of the granting or recording of such security interest.
In the event of any foreclosure sale, transfer in lieu of foreclosure or
termination of the lease in which Landlord is lessee, Tenant shall attorn to
the purchaser, transferee or lessor as the case may be and recognize that
party as Landlord under this Lease, provided such party acquires and accepts
the Premises subject to this Lease.
Tenant's obligation to subordinate its rights under this Lease or to attorn
to any purchaser, transferee or lessor, as provided in Section 24 of this
Lease, is contingent on and subject to Tenant receiving a written
non-disturbance agreement, duly executed and delivered
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by the party requesting the subordination or attornment agreement from
Tenant, which provides that so long as Tenant is not in default under the
terms of this Lease or cures any such default within the time permitted by
this Lease, then Tenant's rights of possession to the Premises will not be
affected or disturbed by any such mortgagee, beneficiary or ground lessor of
Landlord in exercise of its rights or remedies with respect to the Premises,
and any sale or transfer of the Premises pursuant to the exercise of any such
rights or remedies will be made subject to Tenant's right of possession under
this Lease.
25. TENANT ESTOPPEL CERTIFICATES.
Within ten (10) days after written request from Landlord, Tenant shall
execute and deliver to Landlord or Landlord's designee, a written statement
certifying (a) that this Lease is unmodified and in full force and effect, or
is in full force and effect as modified and stating the modifications; (b)
the amount of Base Rent and the date to which Base Rent and additional rent
have been paid in advance; (c) the amount of any security deposited with
Landlord; and (d) that Landlord is not in default thereunder or, if Landlord
is claimed to be in default, stating the nature of any claimed default. Any
such statement may be relied upon by a purchaser, assignee or lender.
Tenant's failure to execute and deliver such statement within the time
required shall at Landlord's election be a default under this Lease and shall
also be conclusive upon Tenant that: (1) this Lease is in full force and
effect and has not been modified except as represented by Landlord; (2) there
are no uncured defaults in Landlord's performance and that Tenant has no
right of offset, counter-claim or deduction against Rent; and (3) not more
than one month's Rent has been paid in advance.
26. TRANSFER OF LANDLORD'S INTEREST.
In the event of any sale or transfer by Landlord of the
Premises, Building or Project, and assignment of this Lease by Landlord,
Landlord shall be and is hereby entirely freed and relieved of any and all
liability and obligations contained in or derived from this Lease arising out
of any act, occurrence or omission relating to the Premises, Building,
Project or Lease occurring after the consummation of such sale or transfer,
providing the purchaser shall expressly assume all of the covenants and
obligations of Landlord under this Lease. If any security deposit or prepaid
Rent has been paid by Tenant, Landlord may transfer the security deposit or
prepaid Rent to Landlord's successor and upon such transfer, Landlord shall
be relieved of any and all further liability with respect thereto.
27. DEFAULT.
27.1. TENANT'S DEFAULT. The occurrence of any one or more of the following
events shall constitute a default and breach of this Lease by tenant:
a. If Tenant abandons or vacates the Premises; or
b. If Tenant fails to pay any Rent or any other charges required to be paid
by Tenant under this Lease and such failure continues for thirty (30) days
after such payment is due and payable; or
c. If Tenant fails to promptly and fully perform any other covenant,
condition or agreement contained in this Lease and such failure continues for
thirty (30) days after written notice thereof from Landlord to Tenant; or
d. If a writ of attachment or execution is levied on this Lease or on any of
Tenant's Property; or
e. If Tenant makes a general assignment for the benefit of creditors, or
provides for an arrangement, composition, extension or adjustment with its
creditors; or
f. If Tenant files a voluntary petition for relief or if a petition against
Tenant in a proceeding under the federal bankruptcy laws or other insolvency
laws is filed and and not withdrawn or dismissed within forty-five (45) days
thereafter, of if under the provisions of any law providing for
reorganization or winding up of corporations, any court of competent
jurisdiction assumes jurisdiction, custody or control of Tenant or any
substantial part of its property and such jurisdiction, custody or control
remains in force unrelinquished, unstayed or unterminated for a period of
forty-five (45) days; or
g. If in any proceeding or action in which Tenant is a party, a trustee,
receiver, agent or custodian is appointed to take charge of the Premises or
Tenant's Property (or has the authority to do so) for the purpose of
enforcing a lien against the Premises or Tenant's Property; or
h. If Tenant is a partnership or consists of more than one (1) person or
entity, if any partner of the partnership or other person or entity is
involved in any of the acts or events described in subparagraphs d. through
g. above.
27.2. REMEDIES. In the event of Tenant's default hereunder, then in addition
to any other rights or remedies Landlord may have under any law, Landlord
shall have the right, at Landlord's option, without further notice or demand
of any kind to do the following: a. Terminate this Lease and Tenant's right
to possession of the Premises and reenter the Premises and take possession
thereof, and Tenant shall have no further claim to the Premises or under this
Lease; or
b. Continue this Lease in effect, reenter and occupy the Premises for the
account of Tenant, and collect any unpaid Rent or other charges which have or
thereafter become due and payable; or
c. Reenter the Premises under the provisions of subparagraph b., and
thereafter elect to terminate this Lease and Tenant's right to possession of the
Premises.
If Landlord reenters the Premises under the provisions of subparagraphs b or
c above, Landlord shall not be deemed to have terminated this Lease or the
obligation of Tenant to pay any Rent or other charges thereafter accruing,
unless Landlord notifies Tenant in writing of Landlord's election to
terminate this Lease. In the event of any reentry or retaking of possession
by Landlord, Landlord shall have the right, but not the obligation, to remove
all or any part of Tenant's Property in the Premises and to place such
property in storage at a public warehouse at the expense and risk of Tenant.
If Landlord elects to relet the Premises for the account of Tenant, the rent
received by Landlord from such reletting shall be applied as follows: first,
to the payment of any indebtedness other than Rent due hereunder from Tenant
to Landlord; second, to the payment of any costs of such reletting; third, to
the payment of the cost of any alterations or repairs to the Premises; fourth
to the payment of Rent due and unpaid hereunder; and the balance, if any,
shall be held by Landlord and applied in payment of future Rent as it becomes
due. If that portion of rent received from the reletting which is applied
against the Rent due hereunder is less than the amount of the Rent due,
Tenant shall pay the deficiency to Landlord
13
<PAGE>
promptly upon demand by Landlord. Such deficiency shall be calculated and paid
monthly. Tenant shall also pay to Landlord, as soon as determined, any costs
and expenses incurred by Landlord in connection with such reletting or in
making alterations and repairs to the Premises, which are not covered by the
rent received from the reletting.
Should Landlord elect to terminate this Lease under the provisions of
subparagraph a or c above. Landlord may recover as damages from Tenant the
following:
1. PAST RENT. The worth at the time of the award of any unpaid Rent which had
been earned at the time of termination; plus
The waiver by Landlord of any breach of any term, covenant or condition of
this Lease shall not be deemed a waiver of such term, covenant or condition
or of any subsequent breach of the same or any other term, covenant or
condition. Acceptance of Rent by Landlord subsequent to any breach hereof
shall not be deemed a waiver of any preceding breach other than the failure
to pay the particular Rent so accepted, regardless of Landlord's knowledge of
any breach at the time of such acceptances of Rent. Landlord shall not be
deemed to have waived any term, covenant or condition unless Landlord gives
Tenant written notice of such waiver.
27.3 LANDLORD'S DEFAULT. If Landlord fails to perform any covenant, condition
or agreement contained in this Lease within thirty (30) days after receipt of
written notice from Tenant specifying such default, or if such default cannot
reasonably be cured within thirty (30) days, if Landlord fails to commence to
cure within that thirty (30) day period, then Landlord shall be liable to
Tenant for any damages sustained by Tenant as a result of Landlord's breach;
provided, however, it is expressly understood and agreed that if Tenant
obtains a money judgment against Landlord resulting from any default or other
claim arising under this Lease, that judgment shall be satisfied only out of
the rents, issues, profits, and other income actually received on account of
Landlord's right, title and interest in the Premises, Building or Project,
and no other real, personal or mixed property of Landlord (or of any of the
partners which comprise Landlord, if any) wherever situated, shall be subject
to levy to satisfy such Judgment. If, after notice to Landlord of default,
Landlord (or any first mortgagee or first deed of trust beneficiary of
Landlord) fails to cure the default as provided herein, then Tenant shall
have the right to cure that default at Landlord's expense. Tenant shall not
have the right to terminate this Lease or to withhold, reduce or offset any
amount against any payments of Rent or any other charges due and payable
under this Lease except as otherwise specifically provided herein.
28. BROKERAGE FEES.
Tenant warrants and represents that it has not dealt with any real estate
broker or agent in connection with this Lease or its negotiation except those
noted in Section 2.c. Tenant shall indemnify and hold Landlord harmless from
any cost, expense or liability (including costs of suit and reasonable
attorneys' fees) for any compensation, commission or fees claimed by any
other real estate broker or agent in connection with this Lease or its
negotiation by reason of any act of Tenant.
29. NOTICES.
All notices, approvals and demands permitted or required to be given under
this Lease shall be in writing and deemed duly served or given if personally
delivered or sent by certified or registered U.S. mail, postage prepaid, and
addressed as follows: (a) if to Landlord, to Landlord's Mailing Address and to
the Building manager, and (b) if to Tenant, to Tenant's Mailing Address;
provided, however, notices to Tenant shall be deemed duly served or given if
delivered or mailed to Tenant at the Premises. Landlord and Tenant may from
time to time by notice to the other designate another place for receipt of
future notices.
14
<PAGE>
32. QUIET ENJOYMENT.
Tenant, upon paying the Rent and performing all of its obligations under
this lease, shall peaceably and quietly enjoy the Premises, subject to the
terms of this Lease and to any mortgage, lease, or other agreement to which
this Lease may be subordinate.
33. OBSERVANCE OF LAW.
Tenant shall not use the Premises or permit anything to be done in or about
the Premises which will in any way conflict with any law, statute, ordinance
or governmental rule or regulation now in force or which may hereafter be
enacted or promulgated. Tenant shall, at its sole cost and expense, promptly
comply with all laws, statutes, ordinances and governmental rules,
regulations or requirements now in force or which may hereafter be in force,
and with the requirements of any board of fire insurance underwriters or
other similar bodies now or hereafter constituted, relating to, or affecting
the condition, use or occupancy of the Premises, excluding structural changes
not related to or affected by Tenant's improvements or acts. The judgement of
any court of competent jurisdiction or the admission of Tenant in any action
against Tenant, whether Landlord is a party thereto or not, that Tenant has
violated any law, ordinance or governmental rule, regulation or requirement,
shall be conclusive of that fact as between Landlord and Tenant.
34. FORCE MAJEURE.
Any prevention, delay or stoppage of work to be performed by Landlord or
Tenant which is due to strikes, labor disputes, inability to obtain labor,
materials, equipment or reasonable substitutes therefor, acts of God,
governmental restrictions or regulations or controls, judicial orders, enemy
of hostile government actions, civil commotion, fire or other casualty, or
other causes beyond the reasonable control of the party obligated to perform
hereunder, shall excuse performance of the work by that party for a period
equal to the duration of that prevention, delay or stoppage. Nothing in this
Article 34 shall excuse of delay Tenant's obligation to pay Rent or other
charges under this Lease.
35. CURING TENANT'S DEFAULTS.
If Tenant defaults in the performance of any of its obligations under this
Lease, Landlord may (but shall not be obligated to) without waiving such
default, perform the same for the account at the expense of Tenant. Tenant
shall pay Landlord all costs of such performance promptly upon receipt of a
bill therefor.
36. SIGN CONTROL.
Tenant shall not affix, paint, erect or inscribe any sign, projections,
awning, signal or advertisement of any kind to any part of the Premises,
Building or Project, including without limitation, the inside or outside or
windows or doors, without the written consent of Landlord. Landlord shall
have the right to remove any signs or other matter, installed without
Landlord's permission, without being liable to Tenant by reason of such
removal, and to charge the cost of removal to Tenant as additional rent
hereunder, payable within ten (10) days of written demand by Landlord.
37. ENVIRONMENTAL PROVISIONS:
a. Covenants and Agreements: Tenant covenants and agrees from the date hereof
and so long as this Lease shall remain in effect not to cause or permit the
presence, use, generation, release, discharge, storage, disposal, or
transportation of any Hazardous Materials (as hereinafter defined) on, under,
in, about, to, or from the Premises, the Building or the Project by Tenant,
Tenant's agents, representatives, employees, contractors, guests, licensees
or invitees.
15
<PAGE>
Notwithstanding the foregoing, Tenant hereby covenants and agrees to promptly
remove from the Project, the Building and/or the Premises, any Hazardous
Materials discovered thereon which have been used, discharged, disposed of or
stored thereon by Tenant or Tenant's agents, representatives, employees,
contractors, guests, licensees or invitees, and to comply in all respects
with any and all federal, state, and local governmental laws, codes,
ordinances and regulations governing such removal and disposal, whether now
in effect or hereafter enacted, with title to all such Hazardous Materials to
remain, and be stored or disposed of, in Tenant's name.
As used herein, the term "Hazardous Materials" shall include without
limitation, asbestos or any substance containing asbestos and deemed
hazardous under any Hazardous Material Law (defined below), the group of
organic compounds known as polychlorinated biphenyl, flammable explosives,
radioactive materials, chemicals known to cause cancer or reproductive
toxicity, pollutants, effluents, contaminants, emissions or related materials
and any items included in the definition of hazardous or toxic waste,
materials or substances under any law relating to environmental conditions
and industrial hygiene, whether now in effect or hereafter enacted, including
without limitation, the Resource Conservation and Recovery Act of 1976
("RCRA"), 42 U.S.C. Section 6901 et esq., the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), 42 U.S.C.
Sections 9601-9657, as amended by the Superfund Amendments and
Reauthorization Act of 1986 ("SARA"), the Hazardous Materials Transportation
Act, 49 U.S.C. Section 6901, et seq., the Federal Water Pollution Act, 33
U.S.C. Section 7401, et seq., the Toxic Substance Control Act, 15 U.S.C.
Sections 2601-2629, the Safe Drinking Water Act, 42 U.S.C. Sections 300f-300j,
and all similar federal, state and local environmental statutes, ordinances,
and the regulations, orders, decrees now or hereafter promulgated thereunder
(collectively the "Hazardous Material Law").
b. Environmental Indemnification: Tenant agrees to exonerate, indemnify, pay
and protect, defend (with counsel approved by Landlord), and hold harmless
Landlord and its trustees, officers, policyholders, employees, agents, assigns
and mortgagee(s) from and against any claims (including, without limitation,
third party claims for personal injury or real or personal property damage or
damage to the environment), actions, administrative proceedings (including
informal proceedings), judgments, damages (including, without limitation, a
decrease in value of the Project, the Building and/or the Premises, damages
caused by loss or restriction of reusable or usable space, or any damages
caused by adverse impact on marketing of the Premises or the building),
punitive damages, penalties, fines, costs, liabilities (including sums paid in
settlement of claims), interest, or leases, including reasonable attorneys'
fees and expenses (including, without limitation, any such fees and expenses
consultant fees, and expert fees, together with all other costs and expenses
of any kind of nature (collectively, the "Costs") incurred during or after
the Term that arise directly or indirectly from or in connection with the
presence, suspected presence, release, or suspected release of any Hazardous
Material in or into the air, soil, groundwater, or surface water at, on, about,
under, or within the project, the Building and/or the Premises, or any
portion thereof, or elsewhere, by Tenant or Tenant's agents, representatives,
employees, contractors, guests, licensees or invitees. The indemnification
provided in this Subparagraph shall specifically apply to and include claims
or actions brought by or on behalf of employees, guests, contractors, agents,
licensees and/or invitees of Tenant. In the event Landlord shall suffer or
incur any such Costs, Tenant shall pay to Landlord the total of all such
Costs suffered or incurred by Landlord upon demand by Landlord. Without
limiting the generality of the foregoing, the indemnification provided in this
Subparagraph shall specifically cover Costs, including capital, operating,
and maintenance costs, incurred in connection with any investigation or
monitoring of site conditions, any clean-up, containment, remedial, removal,
or restoration work required or performed by any federal, state, or local
governmental agency or political subdivision or performed by any
nongovernmental entity or person because of the presence, suspected presence,
release, or suspected release of any Hazardous Material in or into the air,
soil, groundwater, or surface water at, on, about under, or within the
Building and/or Premises (or any portion thereof), by Tenant or Tenant's
agents, representatives, employees, guests, contractors, licensees or
invitees and any claims of third parties for loss or damage due to such
Hazardous Material.
c. Remedial Work: In the event any investigation or monitoring of site
conditions or any clean-up, containment, restoration, removal, or other
remedial work (collectively the "Remedial Work") is required under any
applicable federal, state, or local law or regulation, by any judicial order,
or by any governmental entity, or in order to comply with any agreements
affecting the Building and/or Premises because of, or in connection with, any
occurrence or event described above. Tenant shall perform or cause to be
performed the Remedial Work in compliance with such law, regulation, order,
or agreement. All Remedial Work shall be performed by one or more contractors
selected by Landlord, promulgated in accordance with the remediation plan
promulgated by an environmental consulting firm selected by Landlord. All
costs and expenses of such Remedial Work shall be paid by Tenant including,
without limitation, the charges of such contractor(s), the consulting
engineer, the environmental consulting firm and Landlord's reasonable
attorney's fees and costs incurred in connection with monitoring or review of
such Remedial Work. In the event Tenant shall fail to timely commence, or
cause to be commenced, or fail to diligently prosecute to completion, such
Remedial Work, Landlord may, but shall not be required to, cause such
Remedial Work to be performed, and all costs and expenses thereof, or
incurred in connection therewith shall be Costs within the meaning of
Subparagraph above. All such Costs shall be due and payable upon demand by
Landlord.
d. Notice of Claims: Tenant shall give notice to Landlord of any claim,
action, administrative proceeding (including, without limitation, informal
proceedings), or other demand by any governmental agency or other third party
involving Hazardous materials, Costs and/or Remedial Work at the time such
claim or other demand first becomes known to Tenant. Receipt of any such
notice shall not be deemed to create any obligation on Landlord to defend or
otherwise respond to any claim or demand.
d. Survival: The provisions of this section shall be in addition to any other
obligations and liabilities Tenant may have to landlord at law or equity and
shall expressly survive the expiration of the Term or other termination of
this Lease.
38. MISCELLANEOUS.
a. Accord and Satisfaction; Allocation of Payments. No payment by Tenant or
receipt by Landlord of a lesser amount than the Rent provided for in this
Lease shall be deemed to be other than on account of the earliest due Rent,
nor shall any endorsement or statement on any check or letter accompanying
any check or payment as Rent be deemed an accord and satisfaction, and
Landlord may accept such check or payment without prejudice to Landlord's
right to recover the balance of the Rent or pursue any other
16
<PAGE>
remedy provided for in this Lease. In connection with the foregoing, Landlord
shall have the absolute right in its sole discretion to apply any payment
received from Tenant to any account or other payment of Tenant then not
current and due or delinquent.
b. Addenda. If any provision contained in an addendum to this Leases is
inconsistent with any other provision herein, the provision contained in the
addendum shall control, unless otherwise provided in the addendum.
c. Attorney's Fees. If any action or proceeding is brought by either party
against the other pertaining to or arising out of this Lease, the finally
prevailing party shall be entitled to recover all costs and expenses,
including reasonable attorneys' fees, incurred on account of such action or
proceeding.
d. Captions, Articles and Section Numbers. The captions appearing within the
body of this Lease have been inserted as a matter of convenience and for
reference only and in no way define, limit or enlarge the scope or meaning of
this Lease. All references to Article and Section numbers refer to Articles
and Sections in this Lease.
e. Changes Requested by Lender. Neither Landlord or Tenant shall unreasonably
withhold its consent to changes or amendments to this Lease requested by the
lender in Landlord's interest, so long as these changes do not alter the
basic business terms of this Lease or otherwise materially diminish any
rights or increase any obligations of the party from whom consent to such
charge or amendment is requested.
f. Choice of Law. This Lease shall be construed and enforced in accordance
with the laws of the State of New Mexico.
g. Consent. Notwithstanding anything contained in this Lease to the contrary,
Tenant shall have no claim, and hereby waives the right to any claim against
Landlord for money damages by reason of any refusal with holding or delaying
by Landlord of any consent, approval or statement of satisfaction, and in
such event, Tenant's only remedies therefor shall be an action for specific
performance, injunction or declaratory judgment to enforce any right to such
consent, etc.
h. Corporate Authority. If Tenant is a corporation, each individual signing
this Lease on behalf of Tenant represents and warrants that he is duly
authorized to execute and deliver this Lease on behalf of the corporation,
and that this Lease is binding on Tenant in accordance with its terms. Tenant
shall, at Landlord's request, deliver a certified copy of a resolution of its
board of directors authorizing such execution.
i. Counterparts. This Lease may be executed in multiple counterparts, all of
which shall constitute one and the same Lease.
j. Execution of Lease; No Option. The submission of this Lease to Tenant
shall be for examination purposes only, and does not and shall not constitute
a reservation of or option for Tenant to lease, or otherwise create any
interest of Tenant in the Premises or any other premises within the Building
or Project. Execution of this Lease by Tenant and its return to Landlord
shall not be binding on Landlord notwithstanding any time interval, until
Landlord has in fact signed and delivered this Lease to Tenant.
k. Furnishing of Financial Statements; Tenant's Representations. In order to
induce Landlord to enter into this Lease Tenant agrees that it shall promptly
furnish Landlord, from time to time upon Landlord's written request, with
financial statements reflecting Tenant's current financial condition. Tenant
represents and warrants that all financial statements, records and
information furnished by Tenant to Landlord in connection with this Lease are
true, correct and complete in all respects. Landlord will keep such
information confidential.
l. Further Assurances. The parties agree to promptly sigh all documents
reasonably requested to give effect to the provisions of this Lease.
m. Mortgagee Protection. Tenant agrees to send by certified or registered mail
to any first mortgagee or first deed of trust beneficiary of Landlord whose
address has been furnished to Tenant, a copy of any notice of default served
by Tenant on Landlord. If Landlord fails to cure such default within the time
provided for in this Lease, such mortgagee of beneficiary shall have an
additional thirty (30) days to cure such default; provided that if such
default cannot reasonably be cured within that thirty (30) day period, then
such mortgagee or beneficiary shall have such additional time to cure the
default as is reasonably necessary under the circumstances.
n. Prior Agreements; Amendments. This Lease contains all of the agreements of
the parties with respect to any matter covered or mentioned in this Lease,
and no prior agreement or understanding pertaining to any such matter shall
be effective for any purpose. No provisions of this Lease may be amended or
added to except by an agreement in writing signed by the parties or their
respective successors in interest.
o. Recording. Tenant shall not record this Lease without the prior written
consent of the Landlord. Tenant, upon the request of Landlord, shall execute
and acknowledge a "short form" memorandum of this Lease for recording
purposes.
p. Severability. A final determination by a court of competent jurisdiction
that any provision of this Lease is invalid shall not affect the validity of
any other provision, and any provision so determined to be invalid shall, to
the extent possible, be construed to accomplish its intended effect.
q. Successors and Assigns. This Lease shall apply to and bind the heirs,
personal representatives, and permitted successors and assigns of the parties.
r. Time of the Essence. Time is of the essence of this Lease.
17
<PAGE>
a. Waiver. No delay or omission in the exercise of any right or remedy of
Landlord upon any default by Tenant shall impair such right or remedy or be
construed as a waiver of such default.
The receipt and acceptance by Landlord of delinquent Rent shall not constitute
a waiver of any other default; it shall constitute only a waiver of timely
payment for the particular Rent payment involved.
No act or conduct of Landlord, including, without limitation, the acceptance
of keys to the Premises, shall constitute an acceptance of the surrender of
the Premises by Tenant before the expiration of the Term. Only a written
notice from Landlord to Tenant shall constitute acceptance of the surrender
of the Premises and accomplish a termination of the Lease.
Landlord's consent to or approval of any act by Tenant requiring Landlord's
consent or approval shall not be deemed to waive or render unnecessary
Landlord's consent to or approval of any subsequent act by Tenant.
Any waiver by Landlord of any default must be in writing and shall not be a
waiver of any other default concerning the same of any other provision of the
Lease.
The individual signing this Lease on behalf of Landlord warrants and
represents to Tenant that:
a. Landlord is a corporation organized and validly existing under the laws of
the State of New Mexico, with full authority to execute, deliver and perform
the obligations of Landlord under this Lease.
b. The individual signing this Lease is duly authorized to execute and
deliver this Lease on behalf of Landlord, and this Lease is binding on
Landlord in accordance with its terms.
c. Landlord is the owner of the fee simple title to the premises, and as of
the date of this Lease, no third party has any right, title or interest
adverse to Tenant's right, title and interest in the Premises under this Lease
and no mortgage, deed of trust or other restrictions encumber the Premises.
The parties hereto have executed this Lease as of the dates set forth below.
Date: 9/20/94 Date:
----------------------------- ------------------------------
Landlord: ALBUQUERQUE CENTRE LIMITED LIABILITY COMPANY
By: /s/ P.S.C. By:
----------------------------- ------------------------------
Title: Manager ABG Centre, Ltd Co. Title:
----------------------------- ------------------------------
Date: 9-20-94 Date:
----------------------------- ------------------------------
Tenant: HORIZON HEALTHCARE CORPORATION
By: /s/ Klem Belt By:
----------------------------- ------------------------------
Title: Executive V.P. Title:
----------------------------- ------------------------------
18
<PAGE>
ADDENDUM TO OFFICE BUILDING LEASE
This Addendum to Office Building Lease ("Addendum") is entered into this
1st day of June, 1995, by and between Albuquerque Centre Ltd. Co., a limited
liability company ("Landlord") and Horizon Healthcare Corporation, a Delaware
corporation ("Tenant"). Landlord and Tenant entered into a Lease dated June
1, 1994 with respect to the premises located at 6001 Indian School Rd., N.E.,
Albuquerque, New Mexico ("Lease"). The parties are now desirous of including
certain additional space within the "Premises" as defined under the Lease. In
order to document the agreements of the parties with respect to such
additional space, it is hereby agreed as follows:
1. EFFECT OF ADDENDUM. To the extent that any part of this Addendum
contradicts or is in conflict with the original Lease, this Addendum shall
control, otherwise, the Lease shall remain in full force and effect.
2. PREMISES. The definition of the Premises under the Lease is hereby
amended to include the following:
a. Suite 100 - 3,307 rentable square feet
b. Suite 190 - 5,540 rentable square feet
c. Suite 250 - 1,701 rentable square feet
3. COMMENCEMENT DATE. The Commencement Date for Suite 100 and Suite 190
shall be June 12, 1995. The Commencement Date for Suite 250 shall be August
1, 1995.
4. RENTAL RATES. The Rental Rates for Suite 100 and Suite 190 shall be
Fifteen Dollars and 90/100 ($15.90) per square foot commencing on June 12,
1995. The rental rate on Suite 250 shall be Fifteen Dollars and 90/100
($15.90) per square foot commencing on August 1, 1995. Rental rates for such
suites shall escalate in accordance with the rental schedule under the Lease.
5. TENANT ALLOWANCE. Landlord agrees to construct in accordance with
the Plans and Specifications agreed upon between Landlord and Tenant, Tenant
Improvements within the space up to a maximum of Fifteen Dollars and 00/100
($15.00) per square foot. The $15.00 per square foot is a non-cash allowance,
and Tenant shall not be entitled to any credit if expenditures for Tenant
Improvements is less than $15.00 per square foot. However, in the event
Tenant Improvements exceed a cost of $15.00 per square foot, Landlord
shall cause the same to be constructed in accordance with the Plans and
Specification, and Tenant agrees to reimburse Landlord, upon demand, for all
amounts over and above $15.00 per square foot.
<PAGE>
Notwithstanding the terms of the Lease, the Five Dollars and 00/100
($5.00) per square foot rehabilitation allowance due in year five under the
Lease shall not apply to Suites 100, 190 and 250.
6. TENANTS PROPORTIONAL SHARE. From and after June 12, 1995, Tenant's
proportional share be 64.28%
7. DELIVERY OF POSSESSION. Possession of the new space shall be
delivered on the Commencement Date for each suite.
LANDLORD: ALBUQUERQUE CENTRE LTD. CO.,
a limited liability company
By /s/ Paul Steven Cauwels
-----------------------------
Its Manager
-----------------------------
TENANT: HORIZON HEALTHCARE COMPANY
a Delaware corporation
By /s/ Ernest A. Schofield
-----------------------------
Its Senior Vice President
-----------------------------
2
<PAGE>
EXHIBIT 11.1
HORIZON/CMS HEALTHCARE CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMMON AND COMMON EQUIVALENTS:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Net Earnings..................................... $31,221 $16,606 $ 7,716
------- ------- -------
------- ------- -------
Applicable Common Shares:
Weighted average outstanding shares during the
period........................................ 26,374 16,144 11,153
Weighted average shares issuable upon exercise
of common stock equivalents outstanding
(principally stock options and warrants using
the treasury stock method).................... 643 607 559
------- ------- -------
Total.......................................... 27,017 16,751 11,712
------- ------- -------
------- ------- -------
Net Earnings Per Share........................... $ 1.16 $ 0.99 $ 0.66
------- ------- -------
------- ------- -------
ASSUMING FULL DILUTION:
<CAPTION>
YEAR ENDED MAY 31,
---------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Net Earnings..................................... $31,221 $16,606 $ 7,716
Interest on subordinated convertible notes, net
of income taxes................................. -- 1,429 2,396
------- ------- -------
Earnings used for computation of per share
earnings........................................ $31,221 $18,035 $10,112
------- ------- -------
------- ------- -------
Applicable Common Shares:
Weighted average outstanding shares during the
period........................................ 26,374 16,824 11,153
Weighted average shares issuable upon exercise
of common stock equivalents outstanding
(principally stock options and warrants using
the treasury stock method and subordinated
convertible notes in 1994 and 1993)........... 650 2,901 5,123
------- ------- -------
Total.......................................... 27,024 19,725 16,276
------- ------- -------
------- ------- -------
Net Earnings Per Share........................... $ 1.16 $ 0.91 $ 0.62
------- ------- -------
------- ------- -------
</TABLE>
<PAGE>
HORIZON HEALTHCARE CORPORATION
LIST OF SUBSIDIARIES AT MAY 31, 1995
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OF TRADE NAMES
INCORPORATION
OR ORGANIZATION
<S> <C> <C>
LTC Medical Laboratories, Inc. Delaware None.
- ---------------------------------------------------------------------------------------------
Horizon MDS Corporation Delaware Medical Diagnostic Services
- ---------------------------------------------------------------------------------------------
Advanced Cardiovascular Arizona ACT
Technology, Inc. Lifescan (Georgia only)
- ---------------------------------------------------------------------------------------------
Horizon CMS Corporation Delaware a. Comprehensive Medical Systems
b. Tri-State Home Respiratory Care
c. Milestone Health Services
d. Tennessee Physicians Fluid
e. Physicians Mobile Medical
Services
- ---------------------------------------------------------------------------------------------
National Institutional Pharmacy Delaware None.
Services, Inc.
- ---------------------------------------------------------------------------------------------
Greenery Securities Corp. Delaware None.
- ---------------------------------------------------------------------------------------------
HHC Acquisition Corp. Delaware None.
- ---------------------------------------------------------------------------------------------
Advisors Insurance Limited Bermuda None.
- ---------------------------------------------------------------------------------------------
Royal Oaks Partnership Florida a. Horizon Healthcare Center-
Kissimee
b. Horizon Specialty Center-
Kissimee
- ---------------------------------------------------------------------------------------------
Horizon Hospice Care, Inc. Delaware None.
- ---------------------------------------------------------------------------------------------
Community Rehabilitation Centers, Delaware a. CRC
Inc. b. Total Rehabilitation (Michigan
only)
c. Rehabilitation Network (Michigan
only)
d. Professional Rehabilitation
Centers (Missouri and Illinois only)
e. Active Rehabilitation
Management (Missouri and Illinois
only)
- ---------------------------------------------------------------------------------------------
Nevada Rehabilitation Services, Corp. Delaware Community Rehabilitation Centers
(California and Montana only)
- ---------------------------------------------------------------------------------------------
Horizon Sleep Diagnostics Delaware Horizon Sleep Diagnostic Centers
Corporation
- ---------------------------------------------------------------------------------------------
Horizon Holding, Inc. Delaware None.
- ---------------------------------------------------------------------------------------------
Horizon Health Systems, L.P. Delaware a. Pecos Valley Care Center
b. Van Ark Care Center
c. Bryant Nursing Center
d. East Moore Nursing Center
e. Horizon Specialty Hospital-
Edmond
f. Cherry Creek Village Nursing
Center
g. Cherry Creek Village Retirement
Center
h. Golden Plains Health Care Center
j. Horizon Specialty Hospital-
Wichita, Kansas
- ---------------------------------------------------------------------------------------------
Midwest Regional Rehabilitation Delaware None.
Center, Inc.
- ---------------------------------------------------------------------------------------------
Physicians Hospital For Extend Care Nevada None.
- ---------------------------------------------------------------------------------------------
Intra-City Enterprises, Inc. Ohio Crestwood Care Center
- ---------------------------------------------------------------------------------------------
San Jacinto Management Company Texas San Jacinto Manor
- ---------------------------------------------------------------------------------------------
Inter Care Group, Inc. Delaware InterCare Group
- ---------------------------------------------------------------------------------------------
Vegas Valley Convalescent Center, Nevada None.
Inc.
- ---------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statements File #33-61697, File #33-80660, File #33-84502 and File
#33-84682.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
August 28, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MAY 31, 1995 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> JUN-01-1994
<PERIOD-END> MAY-31-1995
<EXCHANGE-RATE> 1
<CASH> 20,443
<SECURITIES> 0
<RECEIVABLES> 147,765
<ALLOWANCES> 7,648
<INVENTORY> 0
<CURRENT-ASSETS> 200,441
<PP&E> 402,003
<DEPRECIATION> 25,771
<TOTAL-ASSETS> 723,756
<CURRENT-LIABILITIES> 47,448
<BONDS> 231,370
<COMMON> 30
0
0
<OTHER-SE> 420,100
<TOTAL-LIABILITY-AND-EQUITY> 723,756
<SALES> 0
<TOTAL-REVENUES> 639,080
<CGS> 0
<TOTAL-COSTS> 587,905
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,201
<INTEREST-EXPENSE> 18,456
<INCOME-PRETAX> 51,175
<INCOME-TAX> 19,954
<INCOME-CONTINUING> 31,221
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,221
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.16
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