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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED MAY 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM -------- TO --------
COMMISSION FILE NO. 1-9369
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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.,
ALBUQUERQUE, NM
(Address of principal 87110
executive office) (Zip Code)
Registrant's telephone number, including area code: (505) 878-6100
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value New York Stock Exchange
$.001 per share
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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 SK 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 2, 1996, the registrant had 52,126,842 shares of Common Stock
outstanding. The aggregate market value on July 31, 1996 of the registrant's
Common Stock held by nonaffiliates of the registrant was $495,195,587 (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 10, 1996 are incorporated
into Part III of this Form 10-K.
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TABLE OF CONTENTS
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PART I
Item 1. Business................................................................... 1
General Overview................................................................. 1
Industry Background.............................................................. 1
Strategy......................................................................... 2
Services......................................................................... 5
Organization..................................................................... 8
Facilities....................................................................... 14
Sources of Revenues.............................................................. 15
Competition...................................................................... 16
Employees........................................................................ 17
Acquisitions and Expansion....................................................... 18
Reimbursement by Third Party Payors.............................................. 18
Medicaid and Medicare............................................................ 19
Regulation....................................................................... 21
Insurance........................................................................ 27
Directors and Executive Officers................................................. 29
Item 2. Properties................................................................. 31
Item 3. Legal Proceedings.......................................................... 31
Item 4. Submission of Matters to a Vote of Security Holders........................ 36
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... 36
Item 6. Selected Financial Data.................................................... 37
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 39
Item 8. Financial Statements and Supplementary Data................................ 48
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure........................................................................ 94
PART III
Item 10. Directors and Executive Officers of the Registrant........................ 94
Item 11. Executive Compensation.................................................... 94
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 94
Item 13. Certain Relationships and Related Transactions............................ 94
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 94
Signatures......................................................................... 103
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PART I
ITEM 1. BUSINESS
GENERAL OVERVIEW
The Company is a leading provider of post-acute health care services,
including specialty health care services and long-term care services,
principally in the Midwest, Southwest, Northeast and Southeast regions of the
United States. At May 31, 1996, Horizon provided specialty health care services
through 37 acute rehabilitation hospitals in 16 states (2,065 beds), 58
specialty hospitals and subacute care units in 17 states (1,925 beds), 186
outpatient rehabilitation clinics in 22 states and 1,942 rehabilitation therapy
contracts in 36 states. At that date, Horizon provided long-term care services
through 120 owned or leased facilities (14,957 beds) and 142 managed facilities
(15,894 beds) in a total of 18 states. Other medical services offered by the
Company include pharmacy, laboratory, physician placement services, Alzheimer's
care, physician management, non-invasive medical diagnostic, home respiratory,
home infusion therapy and hospice care. For the year ended May 31, 1996, the
Company derived 49% of its revenues from private sources, 33% from Medicare and
18% from Medicaid.
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 that the Company provides include: (a) inpatient and outpatient
rehabilitative services; (b) subacute care; (c) long-term care; (d) contract
rehabilitation therapy services; (e) home health care services; (f) pharmacy and
related services; (g) clinical laboratory services; (h) physician placement
services, (i) non-invasive medical diagnostic services; (j) home respiratory
supplies and services; (k) home infusion supplies and services; (l) hospice care
and (m) assisted living care. Horizon'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 for virtually all of the patient's needs
during the period following discharge from an acute care facility. In addition,
as corollaries to, and complements of, this integrated post-acute care delivery
system are the Company's owned physician practice and its physician practice
management services.
INDUSTRY BACKGROUND
The post-acute care industry 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
create a post-acute health care delivery system in each geographic region it
serves by capitalizing on favorable industry trends, which include:
COST CONTAINMENT INITIATIVES
In response to rapidly rising costs, governmental and private pay sources
have adopted cost containment measures that encourage reduced length of stays in
acute care 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
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of length of stay. As a result, average acute care hospital stays have been
shortened, and many patients are discharged despite a continuing need for
specialty health care services or nursing care.
AGING POPULATION
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 84 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-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
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
often 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 care facilities that provide 24 hours-a-day supervision and
specialty care at a significantly lower cost than traditional acute care and
rehabilitation hospitals. In addition, the Company believes that there is an
increased need for home health care services for those individuals who can
receive care in the home and that do not require institutional care.
INDUSTRY CONSOLIDATION
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 small operators who lack the sophisticated management
information systems, geographic diversity, operating efficiencies and financial
resources to compete effectively.
STRATEGY
In response to current health care reform and ongoing changes in the health
care marketplace, Horizon has implemented and continues to implement a strategy
of extending the continuum of services offered by the Company beyond
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traditional long-term and subacute care to create a post-acute health care
delivery system in each geographic region that it serves. The Company's strategy
is designed to improve its profit margins, occupancy levels and payor mix.
Continued implementation of this strategy will require the following:
LEVERAGING EXISTING FACILITIES
Horizon intends to continue to use its rehabilitation, long-term care and
subacute care facilities as platforms to provide a cost-effective continuum of
post-acute care to managed care, private and government payors. This allows
Horizon to provide its services to the increasing number of patients who
continue to require rehabilitation, subacute care, long-term care or home
healthcare after being discharged from hospitals. Many of these patients often
cannot receive proper care in the home because of the complex monitoring and
specialized medical treatment required. For those patients who can receive
proper care in the home, Horizon's integrated post-acute care delivery system
now also includes the provision of a wide array of home health care services.
Horizon is able to offer these complex medical services at a significantly lower
cost than acute care hospitals because its facilities have lower capital and
operating costs than acute care hospitals.
EXPANDING SPECIALTY HEALTH CARE SERVICES OFFERED
The Company believes that by providing a broad range of cost effective
services it meets the needs of managed care and other payors. As a result, the
Company has experienced and expects to continue to experience increased patient
volumes in, and revenues derived from, its various business lines. The Company
intends to diversify further the specialty services it offers. Specifically,
during fiscal 1996, the Company began acquiring physician practices in Florida
to complement the services offered by the Company's contract therapy and
outpatient rehabilitation clinic businesses. In addition, the Company further
diversified the specialty services it offers with its acquisition in July 1996
of Medical Innovations, Inc., a home health care company providing home health
care services in Texas, Nevada, Florida and Virginia. In addition, at the end of
fiscal 1996, Horizon announced the creation of its assisted living initiative as
a part of its long-term care division. At the same time, the Company continues
to assess the roles these various services can play in the rapidly changing
health care industry and in the Company's integrated post-acute care delivery
system.
CROSS-SELLING BROAD SERVICE OFFERING
In response to payors' demands for a broad range of services, the Company
intends to cross-sell the variety of services provided by its business units.
The Company has begun to market aggressively its pharmacy services, various
therapies and other medical services to its existing and newly acquired
operations. As a result of these efforts, the Company has achieved significant
market positions in large markets, such as Texas and Nevada, where it offers a
full continuum of post-acute care through the integration of rehabilitation,
subacute, long-term care, home health care and other medical services.
CONCENTRATING OPERATIONS IN TARGETED GEOGRAPHIC AREAS
To realize operating efficiencies, economies of scale and growth
opportunities, Horizon intends to continue to concentrate its operations in
clusters of operating units in selected geographic areas. In effecting this
concentration of operations, the Company continues to assess and identify those
assets, services
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and revenue that the Company believes are integral to the continued growth of
the Company. Thus, this concentration effort may involve the disposition of
selected operations in selected geographic markets. The Company believes that
concentration of its rehabilitation hospitals and long-term care facilities
within selected geographic regions (a) provides Horizon with a platform from
which it can expand its specialty health care services, (b) enhances the
development of stronger local referral sources through concentrated marketing
efforts and (c) facilitates the establishment of effective working relationships
with the regulatory and legislative authorities in the states in which the
Company operates.
DEVELOPING REHABILITATION NETWORKS
Horizon intends to develop rehabilitation networks by concentrating its
outpatient rehabilitation clinics in geographic locations where regional
coverage, combined with the ability to provide multiple services in concert with
existing acute rehabilitation, subacute and long-term care facilities, will
strengthen its position with managed care payors. The Company believes that
these networks better enable it to provide a more complete continuum of care and
also establish the Company as a provider of choice for the region or locality.
By concentrating its rehabilitation facilities, the Company expects to be better
able to negotiate comprehensive rehabilitation contracts and leverage the
clinical expertise in an individual market.
EXPANDING THROUGH ACQUISITIONS
Horizon 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. Management believes that such acquisitions
provide opportunities to realize operating efficiencies, particularly through
(a) margin improvements from enhanced utilization of rehabilitation therapies
and other specialty medical services; (b) the expansion of Horizon's
institutional pharmacy services into new facilities and new markets; (c) the
consolidation of corporate overhead; (d) the potential to increase business by
providing a full range of care to managed care providers who desire "one stop
shopping;" (e) the ability to increase capacity and margins by offering higher
margin and higher acuity services to patients in Company owned or operated
subacute and long-term care facilities; (f) the potential to increase patient
volume by expanding the continuum of care of each acquired entity on a
stand-alone basis; and (g) the potential for improved buying power with respect
to suppliers.
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SERVICES
The following table summarizes revenues for each of the Company's business
units for the periods indicated:
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FISCAL YEARS ENDED MAY 31,
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1996 1995 1994
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(DOLLARS IN MILLIONS)
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Acute Rehabilitation..... $ 449 25.6% $ 404 24.9% $ 434 31.4%
Subacute Care............ 216 12.3 195 12.0 84 6.1
Long-Term Care........... 380 21.7 342 21.1 226 16.3
Contract
Rehabilitation.......... 392 22.4 395 24.3 384 27.8
Outpatient
Rehabilitation.......... 97 5.5 93 5.7 88 6.4
Institutional Pharmacy
Services................ 45 2.6 39 2.4 27 2.0
Alzheimer's Care......... 25 1.4 21 1.3 18 1.3
Other Services........... 119 6.8 121 7.4 111 8.0
Other Operating
Revenue................. 30 1.7 15 0.9 10 0.7
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Total.................. $ 1,753 100% $ 1,625 100.0% $ 1,382 100.0%
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SPECIALTY HEALTH CARE
Horizon provides a variety of specialty health care services, including
acute rehabilitation, subacute care, rehabilitation therapies (occupational,
speech and physical therapies in both inpatient and outpatient settings) and
treatment of traumatic head injury and other neurological impairments,
institutional pharmacy services, home health care services, physician placement
services, Alzheimer's care, ownership of physician practices and practice
management services, non-invasive medical diagnostic testing services, home
respiratory care services and supplies, and clinical laboratory services.
Horizon 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. In addition, these services typically generate higher profit margins
than long-term care patient services.
ACUTE REHABILITATION. At May 31, 1996, Horizon operated 37 freestanding
comprehensive acute rehabilitation hospitals with a total of 2,065 licensed
acute rehabilitation beds located in 16 states. Generally, these hospitals are
located in the same geographic area as Horizon's long-term care or subacute care
facilities (including specialty hospitals) and therefore benefit from referrals
from such facilities. Many of Horizon's rehabilitation hospitals are operated
through joint ventures with local general acute care hospitals, physicians and
other investors. Horizon's rehabilitation unit management group operates
inpatient and outpatient rehabilitation programs within acute care hospitals. At
May 31, 1996, the Company managed 12 rehabilitation units with more than 252
beds in such acute care hospitals. In addition, the Company's freestanding
rehabilitation hospitals typically provide on-site outpatient services.
SUBACUTE CARE. Horizon provides subacute care to high acuity patients with
medically complex conditions who require ongoing, multi-disciplinary
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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. Horizon's subacute care services include dedicated programs for
rehabilitative ventilator care, wound management, general rehabilitation, head
trauma/coma stimulation and infusion therapy. The Company's subacute care
services are provided through both its specialty hospitals and its subacute care
units. Generally, these specialty hospitals and subacute care units are located
in separate areas within the physical structures of the Company's long-term care
facilities and are supervised by separate nursing staffs employed by the
Company. As of May 31, 1996, the Company operated 58 specialty hospitals and
subacute care units, including one standalone specialty hospital, with 1,925
beds in 17 states. Horizon 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 Horizon is a cost effective alternative to treatment in acute care
hospitals. Horizon believes that it can continue to offer subacute care at rates
substantially below those typically charged by acute care hospitals for
comparable services.
The Company's specialty hospitals are operated under specialty hospital
licenses that permit the Company to provide higher acuity services and, as a
consequence, to receive higher reimbursement rates than subacute care units
which are operated under long-term care facility licenses. It is Horizon's
belief that such specialty hospital licenses enhance its marketing efforts to
referral sources such as physicians, managed care providers and hospital
discharge planners. 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.
Horizon is a party to a number of contracts with commercial insurers and
managed care providers and out-of-state enhanced rate Medicaid provider
agreements. Horizon believes that these relationships will enable it to improve
its reimbursement rates and profit margins.
CONTRACT REHABILITATION THERAPIES. Horizon provides a comprehensive range
of rehabilitation therapies, including physical, occupational, respiratory
(including inpatient and outreach services) and speech therapy services to
skilled nursing facilities, general acute care hospitals, schools, home health
agencies, inpatient rehabilitation hospitals and outpatient clinics. As of May
31, 1996, Horizon provided these services through approximately 1,942 contracts
in 36 states, 181 of which are with Company-operated long-term care facilities,
specialty hospitals and subacute facilities, and 1,761 of which are with third
party long-term care facilities, home health agencies, hospitals, outpatient
clinics or school systems. Horizon is currently one of the nation's leading
providers of these services.
OUTPATIENT REHABILITATION. The Company provides rehabilitation therapies to
ambulatory patients recovering from industrial injuries, sports-related injuries
and other general orthopedic conditions. Horizon's outpatient clinics provide
rehabilitation programs dedicated to industrial reconditioning, sports medicine,
aquatic therapy, back stabilization, arthritis, osteoporosis, pain management,
total joint replacement and general rehabilitation. These services are provided
in freestanding outpatient facilities and ambulatory outpatient clinics within
institutional settings, as well as by a staff of fully-trained professionals
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who rehabilitate patients in their own homes. As of May 31, 1996, Horizon
provided outpatient services through 186 outpatient rehabilitation clinics in 22
states.
INSTITUTIONAL PHARMACY. Horizon has established a network of 35 regionally
located pharmacies in 14 states through which it provides a full range of
prescription drugs and infusion therapy services, such as antibiotic therapy,
pain management and chemotherapy, to approximately 43,000 beds in facilities
operated by Horizon and by third parties. These pharmacy operations (certain of
which are managed by third parties) enable Horizon to generate revenues from
services previously provided to Horizon by third-party pharmacy vendors. Of the
total beds serviced by Horizon's institutional pharmacies, 23,750 are located in
facilities not operated by Horizon.
ALZHEIMER'S CARE. Horizon offers a specialized program for persons with
Alzheimer's disease through its Alzheimer's centers. At May 31, 1996, this
program had been instituted at 25 of Horizon's long-term care facilities, with a
total of 816 beds. Each Alzheimer's 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 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.
LONG-TERM CARE
Horizon'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, 1996, Horizon operated 262 long-term care
facilities (30,851 beds), of which 44 were owned (5,271 beds) and 76 were leased
(9,686 beds), and also managed 142 long-term care facilities (15,894 beds),
located in a total of 18 states.
OTHER SPECIALTY HEALTH CARE
PHYSICIAN PLACEMENT SERVICES. Horizon provides physician placement services
("locum tenens") to institutional providers and physician practice groups
throughout the United States. The Company recruits, credentials and places
health care providers in appropriate short-term, long-term or permanent
positions in most physician and allied health care specialties. The Company also
provides credentialing assistance, recruitment outsourcing, staff planning
services and educational programs for physicians and health care executives.
HOME HEALTH CARE. During fiscal 1996, the Company began providing home
health care services. In July 1996, the Company acquired Medical Innovations,
Inc., a provider of home health care services in Nevada, Texas, Florida and
Virginia. As a result of this acquisition, the Company has substantially
expanded its presence in the home health care industry. Thus, the home health
services the Company now provides include specialized home nursing services,
outpatient
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health care services, home medical equipment, intravenous therapy and management
and consulting services for hospital-home care departments, skilled nursing
facilities and rural health clinics.
NON-INVASIVE MEDICAL DIAGNOSTICS AND PORTABLE X-RAY SERVICES. Horizon
provides non-invasive medical diagnostic testing services by way of mobile units
and fixed location operations (generally in acute care hospitals) through a
network of physicians and surgeons. These services include cardiovascular (both
cardiac imaging and vascular imaging), pelvic and abdominal testing services and
sleep diagnostic services. Horizon continues to expand its diagnostic expertise
and the diagnostic markets it serves through acquisitions. During fiscal 1996,
Horizon began providing portable x-ray services to patients in both the hospital
and the skilled nursing facility settings. Horizon provides these services in
Nevada, Texas, New Mexico and Oklahoma.
PHYSICIAN PRACTICES AND PHYSICIAN PRACTICE MANAGEMENT. During fiscal 1994,
Horizon began providing physician practice management services through CMS'
acquisition of Medical Management Associates, in California. In fiscal 1996, as
a complement to its outpatient rehabilitative services in Florida, Horizon
acquired two orthopedic physician practices in Florida and developed a
Florida-based physician practice management company.
CLINICAL LABORATORY SERVICES. Horizon operates a comprehensive clinical
laboratory, located in Dallas, Texas, to serve the long-term care industry. The
clinical laboratory provides bodily fluid testing services to assist in
detecting, diagnosing and monitoring diseases. This laboratory has all necessary
state regulatory approvals to conduct business in the states in which Horizon
currently operates and is certified to receive reimbursement for charges to
patients covered by Medicare and Medicaid. At May 31, 1996, the laboratory
provided services to approximately 10,700 beds.
HOME RESPIRATORY; HOME INFUSION. The Company provides home respiratory care
services and supplies to home care patients in Texas, Oklahoma, Arkansas,
Louisiana, Tennessee and Kentucky through a physician referral base. The Company
employs a fully-trained nursing staff to perform these services, which include
the provision of home infusion and intravenous therapies. Supplies provided by
the Company include gas and liquid oxygen cylinders, oxygen concentrators and
aerosol nebulizers.
HOSPICE CARE. Commencing in fiscal 1996, the Company began providing
hospice care in Texas to home-bound and institutionalized, terminally ill
patients. Hospice care includes the provision of all durable medical equipment,
intravenous therapies and pharmaceuticals incident to such care.
ORGANIZATION
The Company's operations are organized principally according to the services
provided. It is an objective of the Company to delegate operational
responsibility to operational managers located within local communities to the
extent practicable. Regional managers in each business unit report to business
unit managers who, in turn, report to senior management. These managers are
supported by a broad range of support services supplied by the Company's
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corporate and regional staffs. These support services include marketing
assistance, training, quality assurance oversight, human resource management,
reimbursement expertise, accounting, risk management, cash management, legal
services and management support. The Company has established standardized
operating procedures for its units and monitors the units to assure consistency
of operations.
SPECIALTY HEALTH CARE OPERATIONS
The Company's specialty health care operations are organized as follows:
ACUTE REHABILITATION. The Company's acute rehabilitation business is
supervised by a divisional president and is organized into three regions each
supervised by a regional president. Acute rehabilitation services are provided
in freestanding comprehensive rehabilitation hospitals and provide care in the
form of physical, psychological, social and vocational rehabilitative services.
Each rehabilitation hospital is supervised by a chief executive officer.
Services are provided by a number of different types of health care
professionals, predominately physicians specializing in rehabilitation medicine,
nurses and physical, speech, occupational, recreation and respiratory
therapists, aides and assistants.
SUBACUTE CARE. The Company's subacute care operations are organized 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.
CONTRACT REHABILITATION THERAPIES. The Company's contract rehabilitation
therapy operations are organized into nine regional operational divisions, each
of which is supervised by a director of operations. These regional divisions
each recruit, hire, train and supervise the physical, occupational 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 Company but also for the compliance with the
Company's policies and procedures in billing for services rendered.
OUTPATIENT REHABILITATION. Certain of the Company's outpatient
rehabilitation clinics are operated through the acute rehabilitation hospitals
as ambulatory clinics within a hospital setting (while not necessarily part of
the physical structure of the hospital). Other clinics are operated through the
contract therapy division as freestanding clinics. In fiscal 1996, the Company
created a new outpatient rehabilitation division, which directly operates
several freestanding outpatient clinics. Throughout fiscal 1996, the Company has
acquired freestanding outpatient clinics. In addition, certain of the
freestanding clinics previously operated through the Company's contract therapy
division are now operated by this new division. In each of these cases, the day
to day operations of the clinic are supervised by a therapy manager with general
oversight provided by either a hospital administrator or contract therapy
regional manager. These individuals
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recruit, hire, train and supervise the physical, occupational and speech
pathology therapists, as well as the administrative and marketing personnel who
operate the outpatient clinics.
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 prepare and provide 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.
LONG-TERM CARE OPERATIONS
The Company's long-term care facilities (including its Alzheimer's centers)
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. To supervise and enhance the care provided in the Company's long-term
care facilities, the director of nursing services works with a district director
of clinical services who acts as a resource in the areas of management of
resident care, education and clinical performance. In turn, these district
directors of clinical services report to the long-term care division's director
of clinicial services. 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.
OTHER SPECIALTY HEALTH CARE OPERATIONS
PHYSICIAN PLACEMENT SERVICES. The Company's locum tenens business is
organized into two divisions, physicians and allied health care professionals,
each supervised by a division leader. These divisions each recruit, hire,
credential, market and provide risk management assistance for the physicians and
other health care professionals provided to hospitals, physician practices and
managed care payors on a temporary basis.
HOME HEALTH CARE In its home health care operations, the Company provides
services through teams of clinicians, including homemakers, home health aides,
licensed practical nurses, licensed registered nurses, registered pharmacists,
physical therapists, occupational therapists, speech pathologists, and medical
social workers. Each of these clinicians are supervised by a regional manager
who oversees seven to eight home health agencies. These regional managers report
to a clincial director who, in turn, reports to the director of operations. The
director of operations reports to the Company's vice president of medical
specialty services.
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
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supervisor, who recruits, hires, trains and supervises diagnostic 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.
CLINICAL LABORATORY SERVICES. The Company's clinical laboratory operation
is based in Dallas, Texas, and 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.
HOME RESPIRATORY; HOME INFUSION. The Company's home respiratory service
businesses are organized into four geographic regions, each of which is
supervised by a director of operations. These regional directors report to the
Company's vice president of specialty medical services. Each regional office
recruits, hires, trains, and supervises the nursing staff employed by the
Company.
HOSPICE CARE. The Company's hospice care business is currently organized
into two regional operational offices. Each regional office recruits, hires,
trains and supervises the nursing and clergy staff who provide the hospice care.
These regional offices are supervised by a director of operations located at the
Company's headquarters in Albuquerque, New Mexico.
MARKETING
The Company believes that the selection of a post-acute care provider is
strongly influenced by advice rendered by physicians, managed care providers and
hospital discharge planners. As a result, the Company has focused its marketing
efforts at the community level and attempts to identify, develop and maintain
relationships with these primary referral sources. These efforts have been
supplemented by corporate management which emphasizes the diverse array of
services offered by the Company and the significant opportunities for
cross-selling these services. Where appropriate, the Company consolidates its
marketing efforts to benefit all the facilities in a regional cluster.
FINANCIAL AND MANAGERIAL CONTROLS
The Company has implemented a comprehensive program of financial and
managerial controls to ensure adequate monitoring of its diverse business units.
Financial control is maintained through financial and accounting policies that
are established at the corporate level for use at, and with respect to, each
facility. 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. Managerial
control is maintained through standard operating procedures which establish and
promote consistency of operations. All support and development functions are
centralized at the Company's headquarters in Albuquerque, New Mexico. This
system allows corporate management access to information from any acute
rehabilitation hospital, subacute care or long-term care facility in its network
on a daily basis and provides for monthly review of results of operations by
corporate and regional personnel as well as periodic site visits for more
detailed reviews. In addition, payroll information is routinely examined
biweekly.
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Each business unit develops monthly budgets that are then reviewed by
corporate management and compared to the prior year's budget and actual results
prior to approval. Once approved, the actual results are compared to budgeted
performance on a monthly basis.
QUALITY ASSURANCE AND CONTINUOUS QUALITY IMPROVEMENT
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 acute rehabilitation hospital quality assurance program,
the quality of the care and services provided at the hospitals is supervised and
evaluated on a continuous basis by a full time quality manager in each hospital.
Quality and risk management measures are captured in a hospital-based program
throughout the month and summarized results are routinely evaluated against
company-wide measures and national benchmarks. The corporate office has access
to the hospital-based data enabling a coordinated quality assurance effort.
Patient surveys are also collected at time of discharge to evaluate patient
satisfaction. Patient outcomes are similarly evaluated by corporate management.
Under the Company's long-term and subacute care quality assurance program,
the care and services provided at each facility are evaluated semi-annually by a
quality assurance team that reports directly to the Company's management and to
the administrator of each facility. The long-term and subacute program is
comprised of a quality assurance checklist and a patient satisfaction survey and
evaluation. The checklist, completed semi-annually by the regional quality
assurance nurses employed by the Company, provides for ongoing evaluation. To
assist patients and their families in resolving any concerns they may have, the
Company has also established a resident advocacy program. In addition to the
foregoing, the Company is enhancing its current quality assurance program by
establishing an improved assessment system that will focus on clinical outcomes
and resident satisfaction. This system will be driven by the same clinical data
base utilized within each facility to reflect resident conditions and health
status. This system will also allow the Company to compare benchmarking,
facility by facility, against comparable facilities statewide and nationwide as
well as against the Company's corporate standards. By utilizing the data from
this assessment system, the Company is endeavoring to constantly enhance the
services it provides to its customers by applying the principles of total
quality management and continuous quality improvement ("TQM/CQI"). Finally, the
Company has a clincial training department to work with facility personnel to
assist them in applying clinical outcomes and resident satisfaction information
within the TQM/CQI process. The training department will also keep facility and
divisional personnel up-to-date on changes in state and federal legislation and
regulations as well as the health care environment within which the facilities
operate.
Under the Company's institutional pharmacy services program, the services
provided by the pharmacy are evaluated semi-annually by a survey instrument
completed by the director of nursing of each client facility. These survey
instruments are summarized and tabulated in such a manner that comparison
between pharmacies as well as a comparison to the standard is possible. Each
pharmacy manager is required to develop an action plan to effectively deal with
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<PAGE>
any negative variances to the standard which are indicated by the survey
instrument. These action plans and the individual survey instruments are
reviewed by corporate pharmacy management for issues dealing with specific
clients, pharmacies, and/or services.
Under the Company's contract therapy programs, the Company maintains a
comprehensive quality assurance program developed to ensure high quality patient
care and monitor clinical staff care practices. Like many of the Company's other
divisions, the contract therapy division employs the principles of continuous
quality improvement. Among other things, the quality improvement and infection
control departments each educate therapists as to proper documentation of
skilled intervention, infection control issues and OSHA guidelines. Finally, the
Company has developed a comprehensive outcome and rehabilitation management
software program which measures the effectiveness and efficiency of the
Company's rehabilitation therapies.
The Company's physician practice services division also maintains a
comprehensive quality improvement program. Quality improvement personnel create
procedures for and participate in the monitoring of provider credentialling;
client screening; incident reporting and follow-up; specific monitoring of
physician care; and educational programs for employees. Medical consultants in
the areas of OB/GYN, anesthesia, family practice, orthopedic surgery, radiology,
radiation oncology, general surgery and pathology have assisted quality
improvement personnel in developing credentialling policies and procedures for
each medical specialty on an ongoing basis, training personnel, and supporting
practitioners in the field.
Under the Company's home health care programs, the Company has established
written policies and procedures prescribing standards for patient care and has
established an internal quality assurance program including chart audits,
pharmacy surveys, patient interviews and customer questionaires. The Company
conducts clinical and operational audits of each branch office on a periodic
basis to assure compliance with these standards. The clinical staff actively
participate with the corporate staff in the quality assurance program. To assist
in maintaining high standards for quality care, the Company has established
medical advisory boards comprised of prominent physicians that provide advice on
specific medical issues. The Company also consults from time to time with
medical specialists on clinical procedures and new therapies. The Company's
health care specialists and home nursing staff must meet experience and training
criteria. In accordance with state and federal regulations, each member of such
staff is tested and evaluated at the time of employment, prior to providing
patient care.
Under the Company's other specialty health care programs, the Company has
established comprehensive programs designed to maintain quality at all levels.
The Company believes that its quality assurance and continuous quality
improvement programs are adequate and customary for its businesses. There can be
no assurance, however, that these quality assurance and continuous quality
improvement programs will prevent deviations from the Company's standards for
quality of care and quality service.
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<PAGE>
FACILITIES
At May 31, 1996, the Company operated (a) 37 acute rehabilitation hospitals,
of which 18 were owned (either directly or through joint venture arrangements)
and the balance were leased; (b) 11 specialty hospitals; (c) 47 subacute care
units; (d) 262 long-term care facilities including 142 which were operated by
the Company under management contracts and 120 which were owned or leased; (e)
186 outpatient rehabilitation units; and (f) 35 pharmacy units. Certain
information regarding the these facilities is provided in the following tables:
<TABLE>
<CAPTION>
ACUTE
REHABILITATION SPECIALTY LONG-TERM CARE OUTPATIENT
HOSPITALS HOSPITALS SUBACUTE REHABILITATION
------------- ------------ ------------- -------------- CLINICS PHARMACY
STATE UNITS BEDS UNITS BEDS UNITS BEDS UNITS BEDS UNITS UNITS
- ---------------------------------- ----- ----- ----- ---- ----- ----- ----- ------ -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona........................... 1 45 -- -- 1 15 -- -- 4 2
Arkansas.......................... 3 162 -- -- 2 18 -- -- 8 --
California........................ 5 226 -- -- 6 217 1 34 9 1
Colorado.......................... 1 38 -- -- 1 26 2 304 11 --
Connecticut(1).................... -- -- -- -- -- -- 3 585 -- 1
Florida(2)........................ 1 60 -- -- 3 74 9 1,014 20 --
Idaho............................. -- -- -- -- -- -- 2 224 -- --
Illinois.......................... -- -- -- -- -- -- -- -- 1 --
Indiana........................... 3 137 -- -- 3 39 -- -- 4 1
Kansas............................ 3 177 2 54 3 47 5 514 8 --
Kentucky.......................... 1 40 -- -- -- -- -- -- 1 --
Louisiana......................... 4 234 -- -- 4 151 -- -- 11 --
Maryland.......................... 1 20 -- -- -- -- 1 160 2 --
Massachusetts..................... 1 187 -- -- 6 631 4 481 34 1
Michigan(3)....................... -- -- -- -- 3 66 15 1,868 13 1
Missouri.......................... -- -- -- -- -- -- -- -- 1 --
Montana........................... -- -- -- -- -- -- 5 684 1 1
Nevada............................ 2 124 1 27 1 12 11 1,506 3 4
New Mexico(4)..................... -- -- 1 25 -- -- 26 2,451 -- 3
North Carolina.................... -- -- -- -- 1 72 1 53 -- --
Ohio.............................. -- -- -- -- 3 32 18 1,997 -- 1
Oklahoma(5)....................... 1 46 1 43 2 18 16 1,685 1 2
Pennsylvania...................... -- -- -- -- 1 52 1 88 1 --
Rhode Island...................... 1 82 -- -- -- -- -- -- -- 1
Tennessee......................... 2 128 -- -- -- -- -- -- 3 1
Texas(6).......................... 7 359 6 219 7 87 139 16,828 22 15
Virginia.......................... -- -- -- -- -- -- -- -- 1 --
Washington........................ -- -- -- -- -- -- -- -- 27 --
Wisconsin......................... -- -- -- -- -- -- 3 375 -- --
--
----- ----- ----- ---- ----- ----- ----- ------ ---
Totals.......................... 37 2,065 11 368 47 1,557 262 30,851 186 35
--
--
----- ----- ----- ---- ----- ----- ----- ------ ---
----- ----- ----- ---- ----- ----- ----- ------ ---
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
LONG-TERM CARE/ LONG-TERM CARE/
ACUTE REHABILITATION
SPECIALTY HOSPITALS SUBACUTE OCCUPANCY(7) SUBACUTE OCCUPANCY(7)
HOSPITALS OCCUPANCY(7) OCCUPANCY(7) LEASED/OWNED MANAGED
---------------------- ---------------------- ---------------------- ----------------------
STATE 1996 1995 1996 1995 1996 1995 1996 1995
- ----------------------------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona...................... 43% 49% -- % -- % -- % -- % -- % -- %
Arkansas..................... 89 87 -- -- -- -- -- --
California................... 50 54 -- -- 61 68 -- --
Colorado..................... 71 65 -- -- 96 97 -- --
Connecticut(1)............... -- -- -- -- -- -- 92 97
Florida(2)................... 87 90 -- -- 91 93 91 95
Idaho........................ -- -- -- -- 88 -- -- --
Illinois..................... -- -- -- -- -- -- -- --
Indiana...................... 54 49 -- -- -- -- -- --
Kansas....................... 59 57 53 61 91 78 -- --
Kentucky..................... 74 71 -- -- -- -- -- --
Louisiana.................... 74 77 -- -- 85 85 -- --
Maryland..................... 82 73 -- -- 85 98 -- --
Massachusetts................ 92 94 -- -- 95 94 -- --
Michigan(3).................. -- -- -- -- 89 88 76 --
Missouri..................... -- -- -- -- -- -- -- --
Montana...................... -- -- -- -- 93 91 -- --
Nevada....................... 82 80 61 84 94 93 -- --
New Mexico(4)................ -- -- 46 57 91 88 76 86
North Carolina............... -- -- -- -- 96 95 -- --
Ohio......................... -- -- -- -- 87 89 -- --
Oklahoma(5).................. 60 51 85 83 95 91 56 85
Pennsylvania................. -- -- -- -- 89 96 -- --
Rhode Island................. -- -- -- -- -- -- -- --
Tennessee.................... 58 54 -- -- -- -- -- --
Texas(6)..................... 79 75 48 49 88 84 57 88
Virginia..................... -- -- -- -- -- -- -- --
Wisconsin.................... -- -- -- -- 81 82 -- --
-- -- -- -- -- -- -- --
Totals..................... 72% 70% 54% 59% 90% 88% 62%(8) 94%
-- -- -- -- -- -- -- --
-- -- -- -- -- -- -- --
</TABLE>
- ----------------------------------
(1) Consists of three long-term care facilities operating 585 beds managed by
the Company.
(2) Includes seven long-term care facilities and one subacute care unit
operating 786 beds and 24 beds, respectively, managed by the Company.
(3) Includes eight long-term care facilities operating 946 beds managed by the
Company.
(4) Includes one long-term care facility operating 120 beds managed by the
Company.
(5) Includes 13 long-term care facilities operating 1,351 beds managed by the
Company.
(6) Includes 110 long-term care facilities operating 12,106 beds managed by the
Company.
(7) Weighted average occupancy is computed be dividing the total bed days
occupied by the total licensed bed days available for the month ended May
31, 1996 or 1995, as appropriate.
(8) In January 1996, the Company began managing 134 facilities leased and
operated by the HEA Group. At that time, the weighted average occupancy of
the HEA Group facilities was approximately 61%.
SOURCES OF REVENUES
The Company derives substantially all of its revenues from private pay
patients, non-affiliated long-term care facilities and public funding through
the Medicare, Medicaid, Veterans' Administration and other governmental benefit
programs.
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 insurers or health
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<PAGE>
maintenance organizations) for services rendered on a periodic basis no less
frequently than monthly. These 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.
Under the Medicare program and some state Medicaid programs, the Company's
acute rehabilitation hospitals, subacute care facilities, specialty hospitals
and 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 of
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. However, under certain of the Company's
specialty health care businesses, the Company's Medicare reimbursement is either
on a fee screen or fee for service basis. The Company is generally paid for
these services within 60 to 90 days.
The following table identifies the Company's revenues attributable to each
of its revenue sources for the periods indicated below:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MAY 31,
----------------------------------------------------------------------------------
1996 1995 1994
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Private pay...... $ 862,458 49% $ 881,453 55% $ 714,093 52%
Medicare......... 579,449 33 460,799 28 474,895 34
Medicaid......... 311,177 18 283,074 17 193,174 14
------------- --- ------------- --- ------------- ---
Total........ $ 1,753,084 100% $ 1,625,326 100% $ 1,382,162 100%
------------- --- ------------- --- ------------- ---
------------- --- ------------- --- ------------- ---
</TABLE>
COMPETITION
The primary competitive factors in the rehabilitation services business are
quality outcomes and cost efficiency. As managed care companies increase their
influence within the markets the Company serves, the Company's competitive
position in such markets will increasingly depend on its ability to negotiate
provider contracts with organized purchasers of health care services, including
health maintenance and preferred provider organizations, medical groups and
other third party payors.
Competition for acute rehabilitation services includes other inpatient
rehabilitation hospitals as well as local acute care hospitals. The Company
believes recent cost containment efforts of federal and state governments,
health maintenance and preferred provider organizations and other third party
payors are designed to encourage more efficient utilization of health care
services and have resulted in lower acute care hospital occupancy, motivating
some of these acute care hospitals to convert to, or add, specialized post-acute
facilities in an attempt to meet patient care needs in a more cost efficient
manner.
Competition for subacute care patients is increasing by virtue of market
entry by other care providers. These market entrants include acute care
hospitals, rehabilitation hospitals and other specialty service providers.
Important competitive factors include the reputation of the facility in the
community, the
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<PAGE>
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.
Competition for contract rehabilitation therapy services comes, primarily,
from small locally-based firms. Increasingly, the Company faces competition from
inpatient health care providers seeking to insource rehabilitation therapy
services. The Company believes it will be able to compete successfully with
local firms by maintaining its strong reputation in the local communities and by
establishing new relationships through internal expansion and strategic
acquisitions. The Company also believes its variety of service delivery settings
will allow it to compete successfully for therapists with providers seeking to
insource such services.
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. In competing for patients, a facility's
local reputation is a critical factor. 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.
The Company also faces competition in its other specialty health care lines
of business: institutional pharmacy services, home health care services,
Alzheimer's care, noninvasive medical diagnostic services, physician placement
services, physician practice and physician practice management and clinical
laboratory services. 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 specialty medical 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. See "-- Acquisitions and Expansion."
EMPLOYEES
As of May 31, 1996, the Company employed approximately 38,500 persons, and
approximately 2,400 or 6.2% of the Company's employees were covered by
collective bargaining contracts. Of the 35 collective bargaining contracts
covering the Company's employees, ten will expire in calendar year 1997, nine
will expire in calendar year 1998 and 16 will expire in calendar year 1999. The
Company believes it has had good relationships with the unions which represent
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<PAGE>
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 therapists or 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 1986, Horizon has rapidly expanded both the size and
the diversity of its operations through (i) strategic mergers and acquisitions
such as the acquisition of Continental Medical Systems, Inc. ("CMS") and the
acquisition of Medical Innovations, Inc., (ii) the acquisition of or agreements
to manage long-term care facilities including Greenery Rehabilitation Group,
Inc. ("Greenery"), the peopleCARE Heritage Group ("peopleCARE") and the HEA
Group, (iii) the development of specialty hospitals and subacute care units and
(iv) the acquisition and development of other specialty health care businesses.
Growth through acquisition entails certain risks in that acquired operations
could be subject to unanticipated business uncertainties or legal liabilities.
Horizon seeks to minimize these risks through investigation and evaluation of
the operations proposed to be acquired and through transaction structure and
indemnification. In addition, each such business combination presents the risk
that currently unanticipated difficulties may arise in integrating the
operations of the combined entities. Moreover, such business combinations
present the risk that the synergies expected from the combined operations may
not be realized. The various risks associated with the integration of recent and
future acquisitions and the subsequent performance of such acquired operations
may adversely affect Horizon's results of operations. In addition, the ability
of Horizon to acquire additional operations depends upon its ability to identify
appropriate acquisition candidates and to obtain appropriate financing and
personnel.
REIMBURSEMENT BY THIRD PARTY PAYORS
For fiscal years 1996, 1995 and 1994, Horizon derived approximately 33%, 28%
and 34%, respectively, of its revenues from Medicare, and 18%, 17% and 14%,
respectively, of its revenues from Medicaid (excluding certain out-of-state
Medicaid revenues). Changes in the mix of patients among different types of
private pay sources and among private pay sources, Medicare and Medicaid can
significantly affect the revenues and profitability of Horizon's operations.
Moreover, there are increasing pressures from many payor sources to control
health-care costs and to limit increases in reimbursement rates for medical
services. There can be no assurance that payments under governmental and third
party payor programs will remain at levels comparable to present levels or that
Horizon will continue to attract and retain private pay patients or maintain its
current payor or revenue mixes. In attempts to limit the federal budget deficit,
there have been, and Horizon expects that there will continue to be, a number of
proposals to limit Medicaid reimbursement for certain services. Horizon cannot
now predict whether any of these pending proposals will be adopted or, if
adopted and implemented, what effect such proposals would have on Horizon.
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<PAGE>
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 assisted living 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
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.
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<PAGE>
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 in-
termediaries (the "Fiscal Intermediaries") providing guidelines for assessing
costs incurred by inpatient 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. 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.
20
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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 assisted living 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. Each of the Company's
acute rehabilitation hospitals is licensed as such under applicable state law
and is certified by Medicare as an acute rehabilitation hospital. To be
certified as an acute rehabilitation hospital, the Company's acute
rehabilitation hospitals must satisfy certain conditions. These include a
requirement that at least 75% of the patients must be able to sustain four or
more hours of rehabilitation therapy each day.
Effective October 1, 1990, the Omnibus Budget Reconciliation Act of 1987
("OBRA") eliminated the different certification standards or "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
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" 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
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<PAGE>
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 1996, such cited deficiencies were
remedied before any facilities were decertified, 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. Unfortunately, however,
subsequent to the end of fiscal 1996, one of the Company's specialty hospitals
was decertified for participation in the Medicare program. The Company has
appealed this determination but cannot now predict the outcome of such appeal.
In addition, to date none of the Company's facilities has had its license
revoked.
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<PAGE>
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 13, 1996, 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
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<PAGE>
Safe Harbors. As of August 13, 1996, 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 13,
1996, 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.
The Company believes that its business practices and contractual
arrangements generally satisfy the Anti-Kickback Law, Stark I, and Stark II
requirements and proscriptions. 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
24
<PAGE>
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 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.
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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 that 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. See
"Item 3. Legal Proceedings -- OIG/DOJ Investigation Involving Certain Medicare
Part B and Related Co-Insurance Billings." 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, 1996, 127 of the Company's leased, owned and managed 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, 1996, virtually all of the Company's licensed
specialty hospitals are certified to participate in the Medicare program as
acute long-term care hospitals. Each of the Company's acute rehabilitation
hospitals is certified to participate in the Medicare program as acute
rehabilitation hospitals. The Company's specialty hospitals and acute
rehabilitation hospitals endeavor to comply with the certification standards
enunciated previously.
All states in which the Company operates, other than California, Colorado,
Texas, New Mexico, Ohio 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.
During fiscal 1996, various Congressional legislators introduced reform
proposals that are intended to control health care costs, improve access to
medical services for uninsured individuals and balance the federal budget by the
year 2002. Certain of these budgetary proposals have been passed by both Houses
of Congress, including passage of resultant committee bills. These proposals
include reduced rates of growth in the Medicare and Medicaid programs
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<PAGE>
and proposals to block grant funds to the states to administer the Medicaid
program. These proposals were included in the 1995 budget reconciliation act,
which the President of the United States has vetoed. In January 1996, the
President presented his own plan to balance the federal budget by 2002. From
time to time discussions have occurred between members of the House of
Representatives, members of the Senate and the President to devise a balanced
budget plan. 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 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 Medicaid 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 a variety of insurance coverages including, without
limitation, malpractice, public liability, fire and property damage and
destruction and directors' and officers' liability insurance. Each of these
coverages has differing levels of self-insurance retention (deductible)
limitations. Specifically, the Company maintains malpractice and public
liability insurance coverage. In this regard, the Company's self-insured
retention is $1.0 million and $.25 million per occurrence per policy year,
respectively, and $3.0 million and $1.95 million in the aggregate, respectively.
In addition, the Company maintains umbrella malpractice and public liability
insurance coverage of $30.0 million per occurrence and in the aggregate.
The Company further maintains, in respect of its physician placement
services division, separate malpractice insurance coverage. In this case, the
Company's self-insured retention is $1.0 million per occurrence per policy year
and $6.0 million in the aggregate. In addition, the Company maintains umbrella
malpractice insurance coverage of $40.0 million per occurrence and in the
aggregate.
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These policies, which are renewable by the carrier at the beginning of each
policy period, were most recently renewed on November 1, 1995 for the policy
period terminating on November 1, 1996. The Company believes that the insurance
coverage it maintains in this regard is adequate and customary in the industries
in which the Company does business. 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 terms
satisfactory to it, if at all.
The Company maintains property damage and destruction insurance coverage
with no material self-insured retention in respect of these policies. The
Company believes that the insurance coverage it maintains in this regard is
adequate and customary in respect of the properties owned and/or operated by the
Company and are in substantial compliance with property insurance requirements
imposed by landlords or mortgagees. 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 terms
satisfactory to it, if at all.
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.
Effective as of April 3, 1996, the Company maintains director's and
officer's liability insurance coverage in the aggregate amount of $25.0 million,
consisting of three successive layers of $10.0 million, $10.0 million and $5.0
million, respectively. The initial layer of coverage has a $0.5 million
self-insured retention on all matters, excluding those arising out of actions of
regulatory entities, which has a $2.0 million self-insured retention. These
policies specifically exclude all acts, events or occurrences arising or
occurring prior to April 3, 1996. In addition, the Company maintains director's
and officer's liability coverage specific to CMS and its subsidiaries in the
amount of $10.0 million for claims resulting from wrongful acts occurring from
December 31, 1993 to July 10, 1995 and reported during the policy period of July
10, 1995 to July 10, 2001. In connection with certain of the litigation matters
described in "Item 3. Legal Proceedings -- Stockholder Litigation" and "--
Stockholder Derivative Litigation," the Company has notified the carrier of the
pendency of these matters and is seeking coverage for its advancement of defense
costs on behalf of certain of the former CMS directors. The Company believes
that the insurance coverage it maintains in this regard is adequate and
customary. There can be no assurance, however, that such insurance will be
adequate to cover the Company's potential future liabilities in this regard or
that it will be able to continue its present coverage on terms satisfactory to
it, if at all.
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DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --- ----------------------------------------------------------
<S> <C> <C>
Neal M. Elliott 56 President, Chief Executive Officer and Chairman of the
Board
Michael A. Jeffries 46 Senior Vice President of Operations and Director
Charles H. Gonzales 40 Senior Vice President of Subsidiary Operations and
Director
Ernest A. Schofield 38 Senior Vice President, Treasurer, Chief Financial Officer
and Director
Scot Sauder 40 Vice President of Legal Affairs, Secretary and General
Counsel
Frank M. McCord 66 Director
Raymond N. Noveck 53 Director
Charles K. Bradford 62 Director
Maria Pappas 47 Director
Ronald N. Riner, M.D. 47 Director
</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.
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.
Charles H. Gonzales, the Company's Senior Vice President of 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, 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.
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<PAGE>
Ernest A. Schofield, the Company's Senior Vice President, Treasurer, and
Chief Financial Officer, has been with the Company since July 1987. He became a
Director of the Company in July 1996. 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 of 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 a director of Geary, Glast &
Middleton, P.C., and Smith & Underwood, P.C. (law firms).
Frank M. McCord is the Chairman and Chief Executive Officer of Cascade
Savings Bank in Everett, Washington, a position he has held since March 1990.
From 1987 until that date, Mr. McCord served such bank as a member of the Board
of Directors and the Executive, Loan and Audit committees. From 1956 to 1986,
Mr. McCord, a certified public accountant, held various positions with KPMG Peat
Marwick. Mr. McCord became a partner with KPMG Peat Marwick in 1965 and served
as the managing partner of its Seattle, Washington office until 1986. He became
a Director of the Company in October 1986.
Raymond N. Noveck, a certified public accountant, has served as the
President of Strategic Systems, Inc., a provider of audiotex health and medical
information since January 1990. He became a Director of the Company in July
1987. From July 1989 through December 1989, Mr. Noveck was Senior Vice President
of Kimberly Quality Care, a provider of home health care, temporary nursing
personnel and related medical services. Prior to that, he was Executive Vice
President of Lifetime Corporation, a home health care company, from June 1987
through July 1989.
Charles K. Bradford, a certified public accountant, has served since 1993 as
the Vice President and Regional Manager for Cain Brothers, a private investment
banking and financial advisory firm that serves the health care industry. He
became a Director of the Company in July 1996. Prior to joining Cain Brothers,
he served as National, and then, International Director of the health care
practice of Arthur Andersen LLP. Mr. Bradford is a member of several health care
associations and has served on the Health Care Committee of the American
Institute of Certified Public Accountants, the American Hospital Association
Council on Finance and the Hospital Financial Management Association Principles
and Practices Board. Mr. Bradford is the co-author of a book published by the
American Hospital Association entitled MONITORING THE HOSPITAL'S FINANCIAL
HEALTH.
Maria Pappas, a Ph.D. in Counseling and Psychology and an attorney, serves
as a Cook County Commissioner in the State of Illinois. Ms. Pappas is currently
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<PAGE>
the chair of the Law Enforcement Committee of the Cook County Commissioners. She
became a Director of the Company in July 1996. Prior to becoming a Commissioner
in November 1990, Ms. Pappas held teaching positions as a professor of
Counseling and Psychology at Loyola and DePaul Universities, respectively, and
at educational centers in Israel, Holland, Greece, Switzerland, England and
Austria. She has also served as a member of the Illinois Supreme Court Special
Committee on the Administration of Justice.
Ronald N. Riner, M.D., a physician specializing in cardio vascular disease,
serves as the President of The Riner Group, Inc. in St. Louis, a professional
advisory and consulting company providing services to the medical, business,
investment and scientific communities on issues concerning health care
management, clinical practice management, risk management, strategic planning,
clinical trials and medical device development. He has served in this capacity
since 1981. He became a Director of the Company in July 1996. Dr. Riner has
served as Vice President of Medical Affairs at the Daughters of Charity National
Health System in St. Louis, Missouri.
ITEM 2. PROPERTIES
The physical properties owned, leased, or managed by the Company are
described in Item 1. Business -- of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
DOJ INVESTIGATION IN RESPECT OF CONTINENTAL MEDICAL SYSTEMS, INC. ("CMS")
As previously disclosed by both CMS and the Company, 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.
The Company has been informed that both the civil and criminal divisions of
the United States Attorney's office in Sacramento, California are closing their
investigation in this regard and they will not commence any civil or criminal
action or proceeding against the Company in respect of this investigation. The
Company has also been informed that both the criminal and civil divisions of the
United States Attorney's office in Harrisburg, Pennsylvania are closing their
investigation in this regard and they will not commence any civil or criminal
action or proceeding against the Company in respect of this investigation.
LITIGATION AGAINST TENET HEALTHCARE CORPORATION
The Company filed a lawsuit on March 7, 1996 against Tenet Healthcare
Corporation ("Tenet") in the United States District Court for the District of
Nevada. The lawsuit arose out of an agreement entered into between the Company
and Tenet in connection with the Company's attempted acquisition of Hillhaven in
January 1995. In the lawsuit, the Company alleges that Tenet has failed to honor
its commitment to pay Horizon approximately $14.5 million pursuant to the
agreement. Tenet has contended that the amount owing to the Company under the
agreement is approximately $5.1 million. In the quarter ended November 30, 1995,
the Company recognized as a receivable approximately $13.0 million of the
approximately $14.5 million the Company contends
31
<PAGE>
it is owed under the agreement. While the Company intends to vigorously
prosecute this lawsuit, no assurance can be given that the Company will prevail
or that the Company will not be required at a future date to record a charge for
a portion of the receivable previously recorded.
OIG/DOJ INVESTIGATION INVOLVING CERTAIN MEDICARE PART B AND RELATED
CO-INSURANCE BILLINGS
The Company announced on March 15, 1996 that certain Medicare Part B and
related co-insurance billings previously submitted by the Company are being
investigated by the OIG and the DOJ. These billings, totaling approximately $3.4
million, sought recovery for the costs of certain Medicare Part B covered
medical supplies used in treating Medicare patients in certain facilities at a
time when those facilities were operated by Greenery before the Company acquired
Greenery. These costs were not billed at the time incurred but were billed on a
retroactive basis, as permitted under applicable Medicare Part B rules, after
the Greenery acquisition. Of the $3.4 million billed, approximately $1.3 million
has been remitted to the Company.
The Company has advised the OIG that it appears that a significant portion
of the billings may not have been supportable under applicable Medicare Part B
rules. The Company advised the OIG and the DOJ that it was cooperating, and will
continue to cooperate, in the investigation and was prepared to remit any
overpayment to the appropriate governmental authority. On April 2, 1996, the
Company and DOJ entered into a letter agreement pursuant to which the Company
voluntarily agreed to refund such overpayment to the DOJ. On April 3, 1996, the
Company refunded approximately $1 million to the DOJ. In addition, the Company
voluntarily refunded co-insurance payments to the applicable parties. The
Company believes the errors in these billings were an exception and do not
represent a regular pattern or practice at the Company. Due to the preliminary
nature of the OIG/DOJ investigation, the Company cannot now predict when the
OIG/DOJ investigation will be completed; the ultimate outcome of the OIG/DOJ
investigation; or the effect thereof on the Company's financial condition or
results of operations. If as a result of the OIG/DOJ investigation, civil or
criminal proceedings against the Company are initiated and adversely determined,
civil and/or criminal fines or sanctions could be imposed against the Company,
which could have a material adverse impact on the Company's financial condition
and/or its results of operations.
SECURITIES AND EXCHANGE COMMISSION AND NEW YORK STOCK EXCHANGE
INVESTIGATIONS
The Company has been advised that the staff of the Division of Enforcement
of the Commission has commenced a private investigation with respect to trading
in the securities of the Company and CMS. In connection with that investigation,
the Company has voluntarily produced certain documents and Neal M. Elliott,
Chairman of the Board, President and Chief Executive Officer of the Company, has
voluntarily given testimony to the Commission. The Company has also been
informed that certain of its employees, executive officers and an individual,
affiliates of whom have limited business relationships with the Company, have
responded to subpoenas from the Commission. Mr. Elliott has also produced
certain documents in response to a subpoena from the Commission. In addition,
the Company and Mr. Elliott have responded to separate subpoenas from the
Commission pertaining to trading in the Company's common stock and
32
<PAGE>
the Company's March 1, 1996 press release announcing a revision in the Company's
third quarter earnings estimate, the Company's March 7, 1996, press release
announcing the filing of a lawsuit against Tenet, the March 12, 1996 press
release announcing that the merger with Pacific Rehabilitation and Sports
Medicine, Inc. could not be effected by April 1, 1996 and the Company's March
15, 1996 press release announcing the existence of a federal investigation into
certain of the Company's Medicare Part B billings. The investigation is ongoing,
and neither the Company nor Mr. Elliott possesses all the facts with respect to
the matters under investigation. Although neither the Company nor Mr. Elliott
has been advised by the Commission that the Commission has concluded that any of
the Company, Mr. Elliott or any other current or former officer or director of
the Company has been involved in any violation of the federal securities laws,
there can be no assurance as to the outcome of the investigation or the time of
its conclusion. Both the Company and Mr. Elliott intend to continue cooperating
fully with the Commission in connection with the investigation.
In March 1995, the New York Stock Exchange, Inc. (the "NYSE") informed the
Company that it had initiated a review of trading in Hillhaven common stock
prior to the announcement of the Company's proposed acquisition of Hillhaven.
The NYSE extended in April 1995 the review of trading to include all dealings
with CMS. On April 3, 1996, the NYSE notified the Company that it had initiated
a review of trading in the Company's Common Stock preceding the Company's March
1, 1996 press release described above. The Company is cooperating with the NYSE
in its reviews and, to the Company's knowledge, the reviews are ongoing.
STOCKHOLDER LITIGATION
On March 28, 1996, the Company was served with a lawsuit filed on March 21,
1996, in New Mexico state district court in Albuquerque, New Mexico by a former
stockholder of CMS, RONALD GOTTESMAN VS. HORIZON/CMS HEALTHCARE CORPORATION, NO.
CV-96-02894, SECOND JUDICIAL DISTRICT COURT, COUNTY OF BERNALILLO, STATE OF NEW
MEXICO. This lawsuit, which among other things seeks class certification,
alleges violations of federal and New Mexico state securities laws arising from
what the plaintiff contends are materially misleading statements by the Company
in its June 6, 1995 joint proxy statement/prospectus (the "CMS Prospectus"). The
plaintiff alleges that the Company failed to disclose in the CMS Prospectus
those problems in the Company's Medicare Part B billings the Company described
in its related March 15, 1996 announcement. In this action, the plaintiff seeks
damages in an unspecified amount, plus costs and attorneys' fees. The Company
disputes the factual and legal premises upon which the plaintiff's lawsuit is
based and denies that the plaintiff is entitled to any recovery on his claim. To
that end, the Company intends to contest this litigation vigorously. Subsequent
to the end of fiscal 1996, the Company filed its motion seeking to dismiss this
lawsuit because, among other things, the Company believes the lawsuit fails to
state a claim upon which the plaintiffs are entitled to redress. Because the
lawsuit just began, the Company cannot now predict the outcome of this
litigation; the length of time it will take to resolve this litigation; or the
effect of any such outcome on the Company's financial condition or results of
operations.
33
<PAGE>
Since April 5, 1996, the Company has been served with the below listed
complaints by current or former stockholders of the Company on behalf of all
persons who purchased common stock of the Company between June 6, 1995 and March
15, 1996. Each of these lawsuits was filed in the United States District Court
for the District of New Mexico, in Albuquerque, New Mexico. In these lawsuits,
the plaintiffs have alleged in substantially similar complaints violations of
federal and New Mexico state securities laws. In this connection, the plaintiffs
allege that during the class period, the named defendants disseminated
materially misleading statements or omitted disclosing matieral facts about the
Company, its business, its Greenery and CMS acquisitions, Greenery's improved
operations after the acquisition, the successful integration of CMS's operations
into those of the Company and the cost savings and operating efficiencies
obtained thereby, the Company's earnings growth and financial statements, the
Company's ability to continue to achieve profitable growth and the status and
magnitude of regulatory investigations into and audits of the Company. The
plaintiffs seek damages in an unspecified amount and extraordinary, equitable or
injunctive relief, including attachment, impoundment, or imposition of a
constructive trust against the individual defendants, plus costs and attorneys'
fees. The Company disputes the factual and legal bases upon which the
plaintiffs' lawsuits are based and denies that the plaintiffs are entitled to
any recovery on their claims. To that end, the Company intends to contest these
litigation matters vigorously. The following actions are currently pending:
ROSENBAUM V. HORIZON/CMS HEALTHCARE CORPORATION, NEAL M. ELLIOTT, ROBERT
A. ORTENZIO, KLEMETT L. BELT, JR., ROCCO A. ORTENZIO, ERNEST A.
SCHOFIELD AND RUSSELL L. CARSON, No. CIV 96-0447-JC.
DONNARUMMA ET AL., V. HORIZON/CMS HEALTHCARE CORPORATION, ROCCO A.
ORTENZIO, NEAL M. ELLIOTT, ROBERT A. ORTENZIO, RUSSELL L. CARSON,
KLEMETT L. BELT, JR., AND ERNEST A. SCHOFIELD, No. CIV 96-0442-BB.
BOWLES V. ROCCO A. ORTENZIO, NEAL M. ELLIOTT, ROBERT A. ORTENZIO,
RUSSELL L. CARSON, KLEMETT L. BELT, JR., ERNEST A. SCHOFIELD AND
HORIZON/CMS HEALTHCARE CORPORATION, No. CIV 96-0555-SC.
MARSCHKE V. ROCCO A. ORTENZIO, NEAL M. ELLIOTT, ROBERT A. ORTENZIO,
RUSSELL L. CARSON, KLEMETT L. BELT, JR., ERNEST A. SCHOFIELD AND
HORIZON/CMS HEALTHCARE CORPORATION, No. CIV 96-0560-MV.
WEINGARTEN V. HORIZON/CMS HEALTHCARE CORPORATION, HORIZON HEALTHCARE
CORPORATION, NEAL ELLIOTT, KLEMETT L. BELT, JR., ROCCO ORTENZIO, LEROY
S. ZIMMERMAN, BRIAN C. CRESSEY, RUSSELL L. CARSON, ROBERT A. ORTENZIO
AND ERNEST A. SCHOFIELD, No. CIV 96-0610-MV.
THEOPHANO V. NEAL M. ELLIOTT, ROCCO ORTENZIO, ROBERT A. ORTENZIO,
RUSSELL L. CARSON, KLEMETT L. BELT, JR., ERNEST A. SCHOFIELD AND
HORIZON/CMS HEALTHCARE CORPORATION, No. CIV 96-0626-MV.
BERENDA V. ROCCO A. ORTENZIO, NEAL M. ELLIOTT, ROBERT A. ORTENZIO,
RUSSELL L. CARSON, KLEMETT L. BELT, JR., ERNEST A. SCHOFIELD AND
HORIZON/CMS HEALTHCARE CORPORATION, No. CIV 96-0634-BB.
WIESEL V. HORIZON/CMS HEALTHCARE CORPORATION, NEAL M. ELLIOTT AND ROBERT
A. ORTENZIO, No. 96-0614-MV.
34
<PAGE>
GOLDFARB V. HORIZON/CMS HEALTHCARE CORPORATION, ROCCO A. ORTENZIO, NEAL
M. ELLIOTT, ROBERT A. ORTENZIO, RUSSELL L. CARSON, KLEMETT L. BELT, JR.,
AND ERNEST A. SCHOFIELD, No. CIV 96-0752-LH.
Subsequent to fiscal year end, the Court entered its order consolidating these
lawsuits into a single action styled IN RE HORIZON/CMS HEALTHCARE CORPORATION
SECURITIES LITIGATION, Case No. CIV 96-0442-BB.
Because these lawsuits are in their initial stages, the Company cannot now
predict the outcome of this litigation; the length of time it will take to
resolve this litigation; or the effect of any such outcome on the Company's
financial condition or results of operations.
STOCKHOLDER DERIVATIVE ACTIONS
Commencing in April and continuing into May 1996, the Company was served
with six complaints alleging a class action derivative action brought by
stockholders of the Company for and on behalf of the Company in the Court of
Chancery of New Castle County, Delaware, against Neal M. Elliott, Klemett L.
Belt, Jr., Rocco A. Ortenzio, Robert A. Ortenzio, Russell L. Carson, Bryan C.
Cressey, Charles H. Gonzales, Michael A. Jeffries, Gerard M. Martin, Frank M.
McCord, Raymond N. Noveck, Barry M. Portnoy, and LeRoy S. Zimmerman. The six
lawsuits have been consolidated into one action styled IN RE HORIZON/CMS
HEALTHCARE CORPORATION SHAREHOLDERS LITIGATION. The plaintiffs allege, among
other things, that the Company's current and former directors breached their
fiduciary duties to the Company and the stockholders as a result of (i) the
purported failure to supervise adequately and the purported knowing
mismanagement of the operations of the Company, and the (ii) purported misuse of
inside information in connection with the sale of Horizon common stock by
certain of the current and former directors in January and February 1996. To
that end, the plaintiffs seek an accounting from the directors for profits to
themselves and damages suffered by Horizon as a result of the transaction
complained of in the complaint and attorneys' fees and costs. The Company cannot
now predict the outcome or the effect of this litigation or the length of time
it will take to resolve this litigation. On June 21, 1996, the individual
defendants filed a motion with the Chancery Court seeking to dismiss this matter
because, among other things, the plaintiffs failed to make a demand on the Board
of Directors prior to commencing this litigation.
In April 1996, the Company was served with a complaint in a stockholders
derivative lawsuit styled LIND V. ROCCO A. ORTENZIO, NEAL M. ELLIOTT, KLEMETT L.
BELT, JR., ROBERT A. ORTENZIO, RUSSELL L. CARSON, BRYAN C. CRESSEY, CHARLES H.
GONZALES, MICHAEL A. JEFFRIES, GERARD M. MARTIN, FRANK M. MCCORD, RAYMOND N.
NOVECK, BARRY M. PORTNOY, LEROY S. ZIMMERMAN AND HORIZON/CMS HEALTHCARE
CORPORATION, No. CIV 96-0538-BB, pending in the United States District Court for
the District of New Mexico. The plaintiff alleges, among other things, that the
Company's current and former directors breached their fiduciary duties to the
Company and the stockholders as a result of (i) the purported failure to
supervise adequately and the purported knowing mismanagement of the operations
of the Company, and the (ii) purported misuse of inside information in
connection with the sale of Horizon common stock by certain of the current and
former directors in January and February 1996. To that end, the plaintiff seeks
an accounting from the directors for profits to themselves and damages suffered
35
<PAGE>
by Horizon as a result of the transaction complained of in the complaint and
attorneys' fees and costs. The Company filed a motion seeking a stay of this
case pending the outcome of the motion to dismiss in the Delaware derivative
lawsuits or, in the alternative, to dismiss this case for those same reasons.
The Company cannot now predict the outcome or the effect of this litigation or
the length of time it will take or resolve this litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 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, 1996:
First Quarter......................................................... $ 23 3/4 $ 17 1/8
Second Quarter........................................................ 24 17 3/4
Third Quarter......................................................... 28 21 5/8
Fourth Quarter........................................................ 19 1/2 12 1/8
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
</TABLE>
There were approximately 3,015 holders of record of the Company's common
stock as of August 2, 1996.
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 Form 10-K, which is
incorporated by reference herein.
36
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected income statement and balance sheet data for the
periods ended May 31, 1992 through May 31, 1996 have been derived from the
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,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA (1):
Total operating revenues (2)...... $1,753,084 $1,625,326 $1,382,162 $1,136,358 $ 843,740
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of services................ 1,438,985 1,343,533 1,159,270 935,186 699,420
Facility leases................. 84,234 81,590 68,832 64,461 56,277
Depreciation and amortization... 57,883 56,618 48,249 33,915 19,923
Interest expense................ 47,318 53,045 44,396 26,999 8,423
Special charge (3).............. 80,540 36,922 74,834 17,154 4,319
---------- ---------- ---------- ---------- ----------
Total costs and expenses...... 1,708,960 1,571,708 1,395,581 1,077,715 788,362
---------- ---------- ---------- ---------- ----------
Earnings (loss) before minority
interests, income taxes,
cumulative effect of accounting
change and extraordinary item.... 44,124 53,618 (13,419) 58,643 55,378
Minority interests................ (7,228) (5,245) (4,664) (6,787) (6,771)
---------- ---------- ---------- ---------- ----------
Earnings (loss) before income
taxes, cumulative effect of
accounting change and
extraordinary item............... 36,896 48,373 (18,083) 51,856 48,607
Income taxes...................... 30,344 23,375 1,731 21,520 16,489
---------- ---------- ---------- ---------- ----------
Earnings (loss) before cumulative
effect of accounting change and
extraordinary item............... 6,552 24,998 (19,814) 30,336 32,118
Cumulative effect of accounting
change, net of tax............... -- -- -- (3,204) --
---------- ---------- ---------- ---------- ----------
Earnings (loss) before
extraordinary item............... 6,552 24,998 (19,814) 27,132 32,118
Extraordinary item, net of tax
(4).............................. (31,328) 2,571 734 -- --
---------- ---------- ---------- ---------- ----------
Net earnings (loss)............... $ (24,776) $ 27,569 $ (19,080) $ 27,132 $ 32,118
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE:
Earnings (loss) before
cumulative effect of accounting
change and extraordinary
item........................... $ 0.12 $ 0.52 $ (0.54) $ 0.94 $ 1.02
Cumulative effect of accounting
change, net of tax............. -- -- -- (0.10) --
---------- ---------- ---------- ---------- ----------
Earnings (loss) before
extraordinary item............. $ 0.12 $ 0.52 $ (0.54) $ 0.84 $ 1.02
Extraordinary item, net of tax
(4)............................ (0.60) 0.06 0.02 -- --
---------- ---------- ---------- ---------- ----------
Net earnings (loss)........... $ (0.48) $ 0.58 $ (0.52) 0.84 $ 1.02
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
EARNINGS (LOSS) PER COMMON SHARE
-- ASSUMING FULL DILUTION:
Earnings (loss) before cumulative
effect of accounting change and
extraordinary item............... $ 0.12 $ 0.52 $ (0.54) $ 0.89 $ 1.00
Cumulative effect of accounting
change, net of tax............... -- -- -- (0.09) --
---------- ---------- ---------- ---------- ----------
Earnings (loss) before
extraordinary item............... $ 0.12 $ 0.52 $ (0.54) $ 0.80 $ 1.00
Extraordinary item, net of tax
(4).............................. (0.60) 0.06 0.02 -- --
---------- ---------- ---------- ---------- ----------
Net earnings (loss) per share..... $ (0.48) $ 0.58 $ (0.52) $ 0.80 $ 1.00
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average shares
outstanding (in thousands):
Primary........................... 52,048 47,850 37,078 32,248 31,462
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Fully diluted..................... 52,200 47,857 40,051 36,941 32,964
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
<CAPTION>
MAY 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................. $ 394,954 $ 284,343 $ 232,639 $ 227,199 $ 151,090
Total assets.................... 1,512,751 1,401,485 1,151,394 926,398 580,149
Long-term debt, excluding
current portion................ 637,884 525,096 453,489 455,408 184,622
Total stockholders' equity...... 651,348 653,014 463,616 305,892 263,767
</TABLE>
- ------------------------------
(1) The Company completed the following material business acquisitions using the
purchase method of accounting:
In July 1994, the Company acquired peopleCARE. Consideration given for the
acquisition included 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 and cash payment of
approximately $56,000.
In February 1994, the Company acquired Greenery through a merger of Greenery
into the Company. Consideration given for the acquisition included the
issuance of approximately 2.0 million shares of the Company's common stock,
valued at approximately $48,000 and the assumption of approximately $58,000
in debt.
(2) Includes $18.2 million of revenues related to the estimated reimbursement
benefit of debt retirement costs, net of a $7.0 million pre-tax charge to
increase third-party settlement receivable reserves.
(3) Special charges represent the following items by period: (i) fiscal 1996 --
$62,640 related to costs incurred in completing the merger with CMS and the
approval by management of restructuring measures related to efforts to
combine the previously separate companies, $11,900 related to a decision by
management prior to the CMS merger to dispose of selected long-term care
facilities and a $6,000 accrual for costs related to pending litigation and
investigations; (ii) fiscal 1995 -- reflects the effect of a revision in the
Company's estimate of contract therapy receivables from third party payors
of $18,377, costs of $13,500 incurred in connection with the settlement of
pending litigation and related contract terminations and costs of $5,045
related to restructuring actions taken at contract therapy companies; (iii)
fiscal 1994 -- related to the impairment of selected rehabilitation hospital
division assets of $50,244, the costs associated with the consolidation of
contract therapy companies and losses related to the termination of certain
relationships in the contract therapy business of approximately $22,842 and
the costs related to the reduction of corporate office work force and other
restructuring costs of $1,748; (iv) fiscal 1993 -- reflects the writedown of
certain rehabilitation facility development costs and merger expenses
incurred in connection with an acquisition accounted for as a pooling of
interests and expenses of subsequently integrating the acquired companies'
operations; and (v) fiscal 1992 -- reflects $1,000 of merger expenses
incurred in connection with an acquisition accounted for as a pooling of
interests and $3,319 related to a terminated merger agreement.
(4) Extraordinary items represent the following items by period: (i) fiscal 1996
-- reflects a $22,075, net of tax, loss recorded in connection with the
tender of the Company's senior subordinated notes and a $9,253, net of tax,
charge related to a decision by management subsequent to the CMS merger to
revise and expand the group of facilities previously identified as held for
sale
38
<PAGE>
prior to the CMS merger; (ii) fiscal 1995 -- reflects gains recognized
related to open market purchases of the Company's subordinated debt and
convertible subordinated notes at a discount; and (iii) fiscal 1994 --
reflects gains recognized related to open market purchases of the Company's
convertible subordinated notes at a discount.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
GENERAL OVERVIEW
The Company is a leading provider of post-acute health care services,
including specialty health care services and long-term care services,
principally in the Midwest, Southwest, Northeast and Southeast regions of the
United States. At May 31, 1996, Horizon provided specialty health care services
through 37 acute rehabilitation hospitals in 16 states (2,065 beds), 58
specialty hospitals and subacute care units in 17 states (1,925 beds), 186
outpatient rehabilitation clinics in 22 states and 1,942 rehabilitation therapy
contracts in 36 states. At that date, Horizon provided long-term care services
through 120 owned or leased facilities (14,957 beds) and 142 managed facilities
(15,894 beds) in a total of 18 states. Other medical services offered by the
Company include pharmacy, laboratory, physician placement services, Alzheimer's
care, physician management, non-invasive medical diagnostic, home respiratory,
home infusion therapy and hospice care. For the year ended May 31, 1996, the
Company derived 49% of its revenues from private sources, 33% from Medicare and
18% from Medicaid.
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 that the Company provides include: (a) inpatient and outpatient
rehabilitative services; (b) subacute care; (c) long-term care; (d) contract
rehabilitation therapy services; (e) home health care services; (f) pharmacy and
related services; (g) clinical laboratory services; (h) physician placement
services, (i) non-invasive medical diagnostic services; (j) home respiratory
supplies and services; (k) home infusion supplies and services; and (l) hospice
care and (m) assisted living care. Horizon'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 for virtually all of the
patient's needs during the period following discharge from an acute care
facility. In addition, as corollaries to, and complements of, this integrated
post-acute care delivery system are the Company's owned physician practice and
its physician practice management services.
39
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data
expressed as a percentage of total operating revenues:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Total operating revenues....................... 100.0% 100.0% 100.0%
Cost of services............................... 82.1 82.7 83.9
Facility leases................................ 4.8 5.0 5.0
Depreciation and amortization.................. 3.3 3.5 3.5
Interest expense............................... 2.7 3.3 3.2
Special charge................................. 4.6 2.3 5.4
----- ----- -----
Earnings (loss) before minority interests,
income taxes and extraordinary item........... 2.5 3.2 (1.0)
Minority interests............................. (0.4) (0.3) (0.4)
----- ----- -----
Earnings (loss) before income taxes and
extraordinary item............................ 2.1 2.9 (1.4)
Income taxes................................... 1.7 1.4 0.1
----- ----- -----
Earnings (loss) before extraordinary item...... 0.4 1.5 (1.5)
Extraordinary item, net of tax................. (1.8) 0.2 0.1
----- ----- -----
Net earnings (loss)............................ (1.4)% 1.7% (1.4)%
----- ----- -----
----- ----- -----
</TABLE>
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,
-------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Long-term care services............ $ 380 21.7% $ 342 21.1% $ 226 16.3%
Specialty health care services:
Acute and outpatient
rehabilitation.................. 546 31.1 497 30.6 522 37.8
Contract rehabilitation
therapy......................... 392 22.4 395 24.3 384 27.8
Other (1)........................ 405 23.1 376 23.1 240 17.4
Other operating revenues (2)....... 30 1.7 15 0.9 10 0.7
--------- ----- --------- ----- --------- -----
Total operating revenues....... $ 1,753 100.0% $ 1,625 100.0% $ 1,382 100.0%
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
</TABLE>
- ------------------------
(1) Includes revenues derived from subacute care, institutional pharmacy
operations, Alzheimer's care, noninvasive medical diagnostic testing
services, home health care services, physicians services, home respiratory,
and infusion supplies and services, hospice care, assisted living care and
clinical laboratory services.
(2) Includes revenues derived from management fees, interest income, rental
income and other miscellaneous revenues, including $9.3 million, net of
direct expenses, resulting from arrangements related to an unsuccessful
merger effort recorded during the second quarter of fiscal 1996. With
respect to the latter, see "Item 3. Litigation -- Litigation against Tenet
Healthcare Corporation" in Part I of this Form 10-K.
40
<PAGE>
YEAR ENDED MAY 31, 1996 COMPARED TO YEAR ENDED MAY 31, 1995
REVENUES
Total operating revenues increased approximately $127.8 million, or 7.9% for
the year ended May 31, 1996, compared to the prior fiscal year. The increase in
total operating revenues for the period is due in large part to (i) numerous
acquisitions in the long-term care, outpatient rehabilitation and other
specialty health care areas, (ii) increases in the rates realized in the
long-term and subacute care operations, and (iii) increases in occupancy at both
the rehabilitation hospital operations and the long-term care operations. The
increase is also attributable, in part, to non-recurring revenue recorded by the
Company of approximately $18.2 million during the third quarter of fiscal 1996
representing the estimated reimbursement benefit for costs associated with the
bond tender offer expensed during the period. See note 5 of the Notes to
Consolidated Financial Statements. The Company also recorded in total operating
revenues $9.3 million, net of direct expenses, during the second quarter of
fiscal 1996 resulting from arrangements related to an unsuccessful merger effort
which is the subject of pending litigation. See "Litigation Against Tenet
Healthcare Corporation" in Item 3. of Part 1 of this Form 10-K. These increases
were offset, in part, by a $7.0 million charge to increase third party
settlement receivable reserves and a $3.8 million charge related to previously
accrued Medicare Part B revenues associated with the OIG/DOJ investigation
during the third quarter of fiscal 1996. See "OIG/DOJ Investigation Involving
Certain Medicare Part B and Related Co-Insurance Billings" in Item 3. of Part I
of this Form 10-K.
During the year ended May 31, 1996, the Company completed numerous
acquisitions with a cumulative total fair value of approximately $62.0 million.
Almost 50% of this total was expended in connection with the acquisitions of
outpatient rehabilitation clinic operations. Long-term and subacute care
acquisitions comprised approximately 30% of the total. The balance of the
acquisitions was comprised of various specialty medical services operations.
Total operating revenues recorded during fiscal 1996 subsequent to these
acquisitions totaled approximately $25.0 million. Average rates realized in
long-term and subacute operations during fiscal 1996 increased by approximately
3.6% as compared with the prior year. This increase was caused by a general
increase in rates among all payor types and was offset somewhat by a shift
towards a less favorable payor mix. Average occupancy in the rehabilitation
hospital operations increased by 2% to 72% in fiscal 1996 from 70% in fiscal
1995. Average occupancy in the long-term and subacute care operations also
increased by 2% to 90% from 88%. See "Medicaid and Medicare" and "Regulation" in
Item 1 of Part I of this Form 10-K.
COSTS AND EXPENSES
Cost of services increased approximately $95.5 million, or 7.1% for fiscal
year 1996 as compared with fiscal 1995. The increase in cost of services is
primarily attributable to the growth in long-term care and specialty health care
operations. As a percentage of total operating revenues, cost of services
declined to 82.1% from 82.7% for the year ended May 31, 1996, compared to the
corresponding period in 1995, due largely to increased revenues from higher
margin businesses and the achievement of certain operating efficiencies
following the CMS merger.
41
<PAGE>
Facility lease expense increased $2.6 million, or 3.2% for fiscal year 1996
as compared with fiscal 1995. The increase in facility lease expense is
attributable to the increase in the number of leased facilities operated in
fiscal 1996 as well as the effects of routine lease escalators currently in
place. As a percentage of total operating revenues, facility lease expense
declined to 4.8% from 5.0% for the year ended May 31, 1996, compared to the
corresponding period in fiscal 1995.
Depreciation and amortization increased $1.3 million, or 2.2% for the year
ended May 31, 1996, compared to the corresponding period in fiscal 1995. As a
percentage of total operating revenues, depreciation and amortization declined
to 3.3% from 3.5% for fiscal year 1996, compared to fiscal 1995. The increase in
depreciation and amortization is attributable to the growth in the number of
facilities owned in fiscal 1996 as well as the impact of capital expenditures
made.
Interest expense declined $5.7 million, or 10.8% for the year ended May 31,
1996, compared to the corresponding period in fiscal 1995. The decline in
interest expense is primarily attributable to the retirement of substantially
all of the Senior Subordinated Notes (as hereinafter defined) of CMS, utilizing
proceeds from the Company's credit facility which bears interest at a
substantially lower rate. The decrease in interest expense due to interest rates
was offset somewhat by an increase in the average amount of debt outstanding.
The Company recorded special charges totaling $63.5 million and $17,000
million during the first and fourth quarters of fiscal 1996, respectively. The
first quarter charge resulted primarily from costs incurred in completing the
merger with CMS, the approval by management of restructuring measures related to
efforts to combine the previously separate companies and a decision by
management prior to the CMS merger to dispose of selected long-term care
facilities. The fourth quarter charge reflected the accrual of estimated legal
and other costs related to monitoring and responding to the various legal and
investigative matters affecting the Company and the impairment of selected
long-lived assets to fair market value. See note 7 of the Notes to Consolidated
Financial Statements for a more complete discussion of these charges.
As discussed above, several components of the fiscal 1996 charges were
related to the Company's expansion through acquisition. The Company intends to
continue to expand its operations through acquisitions in selected geographic
areas and will rely on cash as a currency to effect future acquisitions. Growth
through acquisition entails certain risks in that acquired operations could be
subject to unanticipated business uncertainties or legal liabilities. The
Company seeks to minimize these risks through investigation and evaluation of
the operations proposed to be acquired and through transaction structure and
indemnification. In addition, each such business combination presents the risk
that currently unanticipated difficulties may arise in integrating the
operations of the combined entities. Moreover, such business combinations
present the risk that the synergies expected from the combined operations may
not be realized. The various risks associated with the integration of recent and
future acquisitions and the subsequent performance of such acquired operations
may adversely affect the Company's results of operations. Following each
acquisition, management will consider opportunities to eliminate excess or
duplicative operations, processes or personnel or other measures to maximize the
potential of the combined operations. As a result of these considerations,
management may commit to undertake restructuring measures which would result in
a current
42
<PAGE>
charge against earnings. Depending upon the relative significance of an
acquisition and the extent of the restructuring program undertaken, such charge
could be material to the Company.
EXTRAORDINARY ITEM
The extraordinary item recorded during fiscal 1996 results from the
extinguishment of debt and management's decision to dispose of certain assets
following the CMS merger.
On September 26, 1995, the Company completed a tender offer and consent
solicitation for two issues of publicly held indebtedness of CMS (together, the
"Senior Subordinated Notes"). The Company purchased $118.7 million in principal
amount of 10 3/8% Senior Subordinated Notes due 2003 at 109.25% plus a consent
fee of 1.05% and $137.5 million in principal amount of 10 7/8% Senior
Subordinated Notes due 2002 at 109.0% plus a consent fee of 0.75%. The Company
paid $289.5 million to retire the Senior Subordinated Notes, including
principal, premiums, accrued interest, consent fees and other related costs. As
a result of the tender, the Company recorded an extraordinary charge related to
the loss on the retirement of the Senior Subordinated Notes, including the
write-off of related deferred discount, swap cancellation and financing costs,
of approximately $22.1 million, net of tax, in the second quarter of fiscal
1996.
As a result of discussions occurring during the fourth quarter of fiscal
1996, management significantly revised and expanded the group of facilities
originally identified for disposal in the first quarter of fiscal 1996.
Management also obtained board of director approval to pursue such a sale.
Subsequent to year end, the Company reached agreement regarding the sales price
of these assets. The difference between the proposed sales price or estimated
fair value of the properties and the recorded basis of the assets to be sold is
approximately $21.3 million. As a result, a $9.4 million charge was recorded in
the fourth quarter to increase the $11.9 million first quarter asset disposal
reserve to $21.3 million. In accordance with the provisions of Accounting
Principles Board Opinion No. 16 ("APB 16"), "Business Combinations," the fourth
quarter charge was classified as an extraordinary item. Management's decision
with respect to the fourth quarter revision and expansion of the group of
facilities to be disposed of occurred subsequent to the merger with CMS, in July
1995, which was accounted for as a pooling of interests. APB 16 requires that
profit or loss resulting from the disposal of assets within two years after a
pooling of interests should be classified as an extraordinary item, net of tax.
Because the $11.9 million first quarter asset disposal charge occurred prior to
the CMS merger, that charge was appropriately classified within operations.
The operations currently proposed for disposition include 21 leased long-
term care facilities, ten owned long-term care facilities, three managed long-
term care facilities and three pharmacy operations. The assets to be disposed of
comprise substantially all of the Company's long-term care and pharmacy
operations in the states of Massachusetts, Connecticut, Ohio and Wisconsin.
Certain other of the targeted assets are located in Michigan and Colorado. The
fiscal 1996 revenues and pre-tax loss of the operations held for sale were
$180.2 million and $(4.9) million, respectively.
43
<PAGE>
The proposed disposition, though subject to final approval of the purchaser
and the approval of various regulatory authorities, is expected to be completed
in the second or third third quarter of fiscal 1997.
YEAR ENDED MAY 31, 1995 COMPARED TO YEAR ENDED MAY 31, 1994
REVENUES
Total operating revenues increased approximately $243.2 million or 17.6% for
the year ended May 31, 1995, compared to the year ended May 31, 1994. The
increase in total operating revenues for the period is due in large part to (i)
significant acquisitions of long-term and subacute care operations, (ii)
increases in the average rates realized in the long-term and specialty health
care operations and (iii) an increase in occupancy in the rehabilitation
hospital operations. These increases were offset somewhat due to the divestiture
of two rehabilitation hospitals in the fourth quarter of fiscal 1994 and due to
lower physician filled days in the Company's physician placement operations.
As a result of the Company's external expansion efforts, significant
increases in operating revenues were noted from fiscal 1994 to fiscal 1995. The
operations included in the Greenery acquisition, which was completed 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 Company in fiscal 1994. The peopleCARE acquisition,
which as completed in July 1994, contributed $78.3 million of operating revenues
in fiscal 1995. During fiscal 1995, the Company also completed other
acquisitions resulting in the addition of approximately 4,000 long-term care
beds and various other specialty health care operations.
The Company also experienced an approximate 12.5% increase in the average
rates realized in long-term and subacute care operations. This increase was
achieved as a result of a much more favorable payor mix in operations outside
the rehabilitation hospitals. Rates by payor type in both the long-term care and
specialty health care operations remained relatively constant.
COSTS AND EXPENSES
Cost of services increased approximately $184.3 million, or 15.9% for the
year ended May 31, 1995, compared to the corresponding period in fiscal 1994.
The increases in cost of services is primarily attributable to the significant
expansion through acquisitions of the long-term and subacute care operations. As
a percentage of total operating revenues, cost of services declined to 82.7%
from 83.9% for the year ended May 31, 1995, compared to the corresponding period
in 1994, due largely to the effect of increased revenues from higher margin
operations and increased overhead efficiencies.
Facility lease expense increased $12.8 million, or 18.5% for the year ended
May 31, 1995, compared to the corresponding period in fiscal 1994. The increase
in facility lease expense is attributable to the significant increase in the
number of leased facilities operated in 1995 following the various acquisitions.
As a percentage of total operating revenues, facility lease expense remained
constant at 5.0% for the year ended May 31, 1995, compared to the corresponding
period in fiscal 1994.
44
<PAGE>
Depreciation and amortization increased $8.4 million, or 17.4% for the year
ended May 31, 1995, compared to the corresponding period in fiscal 1994,
primarily as a result of acquisitions during the period. As a percentage of
total operating revenues, depreciation and amortization remained constant at
3.5% for the year ended May 31, 1995, compared to the corresponding period in
fiscal 1994.
Interest expense increased $8.6 million, or 19.5% for the year ended May 31,
1995, compared to the corresponding period in 1994. As a percentage of total
operating revenues, interest expense increased slightly from 3.2% to 3.3% for
fiscal year 1995 as compared with fiscal 1994. This increase is primarily
attributable to higher rate fixed rate debt assumed in connection with the
Greenery acquisition and the fluctuations in interest on the floating rate
credit facility.
During fiscal 1995, the Company recorded special charges of $36.9 million.
Approximately $18.4 million of the fiscal 1995 special charge was recorded to
reflect the revision in the Company's estimate of settlements receivable from
third party payors in the contract rehabilitation therapy division.
Approximately $5.0 million reflects the costs of eliminating management and
staff positions, office lease terminations and certain other costs of the
changes implemented at the Company's contract rehabilitation therapy division.
The $13.5 million dollar balance of the fiscal 1995 special charge resulted from
the settlement of litigation and termination of related contracts. See note 7 of
the Notes to Consolidated Financial Statements for a more complete discussion of
these charges.
During fiscal 1994, the Company recorded special charges of $74.8 million.
Approximately $50.2 million of the fiscal 1994 special charge related to the
impairment of selected rehabilitation hospital division assets. Approximately
$22.8 million resulted from costs associated with the consolidation of contract
therapy companies and losses related to the termination of certain relationships
in the contract therapy business. The remaining $1.8 million balance of the
fiscal 1994 special charge resulted from costs related to the reduction of
corporate office work force and other restructuring costs. See note 7 of the
Notes to Consolidated Financial Statements for a more complete discussion of
these charges.
EXTRAORDINARY ITEM
During fiscal 1995, the Company recognized a gain of $2.6 million, net of
tax, relating to open market purchases at a discount of its subordinated debt
and its 8 3/4% and 6 1/2% convertible subordinated notes. During fiscal 1994,
the Company recognized a gain of $734,000, net of tax, relating to open market
purchases at a discount of its 8 3/4% and 6 1/2% convertible subordinated notes.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1996, the Company's working capital was $395.0 million and
included cash and cash equivalents of $31.3 million as compared with $284.3
million in working capital and $40.1 million in cash and cash equivalents at May
31, 1995. During the year ended May 31, 1996, the Company's operating activities
provided $32.6 million of net cash. During the years ended May 31, 1995 and
1994, the Company's operating activities provided $10.0 million and $29.0
million of net cash, respectively.
45
<PAGE>
In connection with the special charges recorded by the Company during
fiscals 1996, 1995 and 1994, the Company made cash payments totaling $34.0
million, $13.4 million and $0, during each of those years, respectively. There
were no significant asset dispositions related to the restructuring during the
year ended May 31, 1996.
EXPANSION PROGRAM
The net cash used in the Company's investing activities decreased from
$158.6 million for the year ended May 31, 1995 to $133.7 million for the year
ended May 31, 1996. The primary uses of cash in investing activities have been
cash acquisitions and internal construction and capital expenditures for
property and equipment. The Company has used its common stock rather than cash
to effect a portion of the acquisitions during the year ended May 31, 1996. In
addition, cash paid in connection with acquisitions during fiscal 1996 has
decreased as compared to 1995. However, under existing circumstances, the
Company will rely on cash as a currency to effect future acquisitions. Cash
required for internal construction and capital expenditures for property and
equipment has remained relatively stable during the year ended May 31, 1996 as
compared with the corresponding period of fiscal 1995. As of May 31, 1996, the
Company has future plans or commitments to fund construction totaling
approximately $49.3 million. The majority of this total is comprised of amounts
necessary to complete construction on an office building to house corporate
operations.
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 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 operating and
investing activities. During the years ended May 31, 1996 and May 31, 1995,
proceeds from the issuance of Company debt, net of debt repayments and
repurchases, amounted to $112.0 million and $14.6 million, respectively, and
proceeds from the issuance of common stock totaled $18.4 million and $124.2
million, respectively.
SOURCES
At May 31, 1996, the available credit under the Company's Credit Facility
(as defined below) was $203.5 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, 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, to a lesser extent,
through the sale of property and equipment.
CREDIT FACILITY
The Company is the borrower under a credit agreement dated as of September
26, 1995 (the "Credit Facility") with NationsBank of Texas, N.A., as Agent, and
the lenders named therein. The aggregate revolving credit commitment under the
Credit Facility is $750 million, of which the Company had borrowed $508.6
million and had outstanding letters of credit of $37.9 million at May 31, 1996.
Borrowings under the Credit Facility bear interest, payable monthly, at a
46
<PAGE>
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 rates at May
31, 1996 were 8.25% and 6.44% - 6.50% on the Alternate Base Rate and Adjusted
London Inter-Bank Offer Rate advances, respectively. In addition, borrowings
thereunder mature in September 2000 and are secured by a pledge of the capital
stock of substantially all subsidiaries of the Company. 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 20% of the Company's net earnings for the prior fiscal year.
The lenders' obligations to make additional loans pursuant to the Credit
Facility are subject to the satisfaction of certain conditions, including that
(i) the Company is not in violation of any law, rule or regulation of any
governmental authority where such violation could be reasonably expected to
result in a Material Adverse Effect (as defined in the Credit Agreement, which
definition includes a material adverse effect on the financial condition or
results of operations of the Company) and (ii) that there are no suits pending
as to which there is a reasonable possibility of an adverse determination and
which, if adversely determined, could be reasonably expected to result in a
Material Adverse Effect. After discussions between the Company and
representatives of the Agent, the Company does not believe the existence of, or
the occurrence of the events giving rise to, the OIG/DOJ investigation into
certain Medicare Part B and related co-insurance billings, the pending SEC
investigation or the pending stockholder litigation (see "Item 3. Legal
Proceedings" in Part I of this report) will prevent satisfaction of these
conditions at this time. In addition, pursuant to an amendment to the credit
agreement underlying the NationsBank Facility, the Company, the Agent and each
of the participating lenders agreed that the Company's knowledge of the
existence of these matters will not prevent satisfaction of these conditions at
this time or in the future. No assurance can be given, however, that future
adverse developments or determinations with respect to these matters will not
prevent satisfaction of such conditions.
FORWARD-LOOKING STATEMENTS
The matters discussed in this Form 10-K contain forward-looking statements
that involve risks and uncertainties. Although the Company believes that its
expectations are based on reasonable assumptions, it can give no assurance that
the anticipated results will occur. Important factors that could cause actual
results to differ materially from those in the forward-looking statements
include conditions in the capital markets, including the interest rate
environment and stock market levels and activity, the regulatory environment in
which the Company operates and the enactment by Congress of health care reform
measures.
47
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Consolidated Financial Statements of the Company:
(i) Report of Independent Public Accountants -- Arthur Andersen LLP
Report of Independent Auditors -- Ernst & Young LLP
(ii) Consolidated Balance Sheets
(iii) Consolidated Statements of Operations
(iv) Consolidated Statements of Stockholders' Equity
(v) Consolidated Statements of Cash Flows
(vi) Notes to Consolidated Financial Statements
48
<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, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended May 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements and schedule of
Continental Medical Systems, Inc. and subsidiaries ("CMS"), a company acquired
during fiscal 1996 in a transaction accounted for as a pooling-of-interests, as
discussed in Notes 1 and 15. Such statements are included in the consolidated
financial statements of Horizon/CMS Healthcare Corporation and reflect total
operating revenues of 73.0 percent in 1994, and total assets and total operating
revenues of 49.3 and 60.7 percent in 1995, respectively, of the related
consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to
amounts included for CMS, is based solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
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, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
1996, in conformity with generally accepted accounting principles.
Our audit was 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 Commissions 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.
/s/ ARTHUR ANDERSEN LLP
------------------------------------------------------------------------
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
July 23, 1996
49
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Horizon/CMS Healthcare Corporation
We have audited the consolidated balance sheet of Continental Medical
Systems, Inc. and subsidiaries (the Company) as of June 30, 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended June 30, 1995 (not presented
separately herein). Our audits also included Schedule II of Continental Medical
Systems, Inc. (not presented separately herein). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1995 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Continental Medical Systems, Inc. and subsidiaries at June 30, 1995, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended June 30, 1995, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
------------------------------------------------------------------------
ERNST & YOUNG LLP
Harrisburg, Pennsylvania
August 3, 1995, except for Note 6
and Note 19 for which the date is
September 26, 1995; Note 14 for
which the date is September 12, 1995;
and Note 20 for which the date is
September 27, 1995
50
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
MAY 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $ 31,307 $ 40,057
Patient care accounts receivable, net of allowance for
doubtful accounts of $41,347 in 1996 and $28,120 in 1995... 309,216 305,210
Estimated third party settlements........................... 47,630 --
Prepaid and other assets (Note 17).......................... 183,108 87,370
Deferred income taxes....................................... 21,287 21,806
------------ ------------
Total current assets...................................... 592,548 454,443
PROPERTY AND EQUIPMENT, net................................... 594,373 553,797
GOODWILL, net................................................. 164,269 147,675
OTHER INTANGIBLE ASSETS, net.................................. 38,269 42,164
NOTES RECEIVABLE, excluding current portion................... 73,017 47,981
DEFERRED INCOME TAXES......................................... 3,166 --
OTHER ASSETS (Note 17)........................................ 47,109 155,425
------------ ------------
Total assets.............................................. $ 1,512,751 $ 1,401,485
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt........................... $ 6,522 $ 4,782
Accounts payable............................................ 19,910 27,904
Accrued expenses and other liabilities (Note 17)............ 171,162 134,130
Estimated third party settlements........................... -- 3,284
------------ ------------
Total current liabilities................................. 197,594 170,100
LONG-TERM DEBT, excluding current portion..................... 637,884 525,096
OTHER LIABILITIES (Note 17)................................... 9,753 32,945
DEFERRED INCOME TAXES......................................... -- 6,141
------------ ------------
Total liabilities......................................... 845,231 734,282
MINORITY INTERESTS............................................ 16,172 14,189
COMMITMENTS AND CONTINGENCIES
(Note 14)....................................................
STOCKHOLDERS' EQUITY:
Common stock of $.001 par value, authorized 150,000,000
shares, 52,581,762 and 50,679,107 shares issued with
51,941,751 and 50,174,218 shares outstanding at May 31,
1996 and 1995, respectively................................ 53 51
Additional paid-in capital.................................. 589,516 559,168
Retained earnings........................................... 70,484 99,382
Treasury stock.............................................. (8,705) (5,587)
------------ ------------
Total stockholders' equity................................ 651,348 653,014
------------ ------------
Total liabilities and stockholders' equity................ $ 1,512,751 $ 1,401,485
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
51
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
TOTAL OPERATING REVENUES..................... $ 1,753,084 $ 1,625,326 $ 1,382,162
------------- ------------- -------------
COSTS AND EXPENSES:
Cost of services........................... 1,438,985 1,343,533 1,159,270
Facility leases............................ 84,234 81,590 68,832
Depreciation and amortization.............. 57,883 56,618 48,249
Interest expense........................... 47,318 53,045 44,396
Special charge............................. 80,540 36,922 74,834
------------- ------------- -------------
Total costs and expenses................. 1,708,960 1,571,708 1,395,581
------------- ------------- -------------
Earnings (loss) before minority interests,
income taxes and extraordinary item....... 44,124 53,618 (13,419)
Minority interests........................... (7,228) (5,245) (4,664)
------------- ------------- -------------
Earnings (loss) before income taxes and
extraordinary item........................ 36,896 48,373 (18,083)
Income taxes................................. 30,344 23,375 1,731
------------- ------------- -------------
Earnings (loss) before extraordinary item.... 6,552 24,998 (19,814)
Extraordinary item, net of tax............... (31,328) 2,571 734
------------- ------------- -------------
Net earnings (loss).......................... $ (24,776) $ 27,569 $ (19,080)
------------- ------------- -------------
------------- ------------- -------------
Earnings (loss) per common and common
equivalent share:
Earnings (loss) before extraordinary
item...................................... $ 0.12 $ 0.52 $ (0.54)
Extraordinary item, net of tax............. (0.60) 0.06 0.02
------------- ------------- -------------
Net earnings (loss)........................ $ (0.48) $ 0.58 $ (0.52)
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of shares
outstanding................................. 52,048 47,850 37,078
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
52
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(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, 1993................... 31,572,900 $ 32 $ 216,295 $ 90,184 $ (740) $ 305,771
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............................. 2,828,968 3 62,141 -- -- 62,144
Conversion of 6.75% convertible
subordinated notes, net of $1,897 of
previously capitalized financing costs
and $507 of conversion costs............. 4,522,500 4 51,861 -- -- 51,865
Exercise of stock purchase warrants,
options and issuance of shares under the
employee stock purchase plan............. 491,190 -- 4,697 -- -- 4,697
Net loss.................................. -- -- -- (19,080) -- (19,080)
----------- --- ----------- --------- ----------- ---------
Balance at May 31, 1994................... 43,440,558 43 393,209 71,104 (740) 463,616
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............................. 1,847,899 2 39,334 759 -- 40,095
Exercise of stock purchase warrants,
options and issuance of shares under the
employee stock purchase plan............. 475,193 1 7,017 -- -- 7,018
Treasury stock acquired in payment for
stockholder's note....................... -- -- -- -- (4,847) (4,847)
Distribution to subsidiary stockholder.... -- -- -- (50) -- (50)
Net earnings.............................. -- -- -- 27,569 -- 27,569
----------- --- ----------- --------- ----------- ---------
Balance at May 31, 1995................... 50,679,107 51 559,168 99,382 (5,587) 653,014
Excercise of stock purchase warrants,
options and issuance of shares under the
employee stock purchase plan............. 1,476,637 1 21,182 -- (3,118) 18,066
Effect of pooling of interests restatement
(Note 15)................................ -- -- -- (4,122) -- (4,122)
Common stock issued in connection with
acquisitions............................. 426,018 1 9,166 -- -- 9,166
Net loss.................................. -- -- -- (24,776) -- (24,776)
----------- --- ----------- --------- ----------- ---------
Balance at May 31, 1996................... 52,581,762 $ 53 $ 589,516 $ 70,484 $ (8,705) $ 651,348
----------- --- ----------- --------- ----------- ---------
----------- --- ----------- --------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
53
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).............................. $ (24,776) $ 27,569 $ (19,080)
Adjustments:
Depreciation and amortization.................. 57,883 56,618 48,249
Other.......................................... 15,070 (2,437) 690
Special charge................................. 80,540 36,922 74,834
Extraordinary item............................. 47,462 (4,172) (1,214)
Increase (decrease) in cash from changes in
assets and liabilities, excluding effects of
acquisitions and dispositions:
Patient care accounts receivable and
estimated third party settlements........... (74,609) (33,159) (49,533)
Prepaid and other assets..................... (18,694) (22,800) (23,067)
Deferred income taxes........................ (9,288) 168 (1,178)
Accounts payable and accrued expenses........ (43,346) (23,035) (391)
Other liabilities............................ 2,388 (25,666) (281)
----------- ----------- -----------
Total adjustments................................ 57,406 (17,561) 48,109
----------- ----------- -----------
Net cash provided by operating activities........ 32,630 10,008 29,029
----------- ----------- -----------
Cash flows from investing activities:
Payments pursuant to acquisition agreements, net
of cash acquired................................ (50,080) (117,359) (27,091)
Cash proceeds from sale of property and
equipment....................................... -- 22,718 24,096
Other intangible assets.......................... (14,072) (863) (5,010)
Acquisition of property and equipment............ (48,506) (52,622) (67,026)
Notes receivable................................. (22,509) 2,215 5,072
Other investing activities....................... 1,469 (12,688) (9,950)
----------- ----------- -----------
Net cash used in investing activities............ (133,698) (158,599) (79,909)
----------- ----------- -----------
Cash flows from financing activities:
Long-term debt borrowings........................ 925,343 211,484 122,604
Long-term debt repayments........................ (813,296) (196,906) (120,959)
Deferred financing costs......................... (1,700) (3,104) (893)
Repurchase of convertible subordinated notes..... -- (3,812) (19,999)
Issuance of common stock......................... 18,394 124,217 61,894
Distributions to minority interests.............. (2,476) (4,975) (3,143)
Other financing activities....................... (30,636) 360 2,388
----------- ----------- -----------
Net cash provided by financing activities........ 95,629 127,264 41,892
----------- ----------- -----------
Net decrease in cash and cash equivalents.......... (5,439) (21,327) (8,988)
Cash and cash equivalents, beginning of year....... 40,057 61,384 70,372
Effect of pooling of interests restatement (Note
15)............................................... (3,311) -- --
----------- ----------- -----------
Cash and cash equivalents, end of year............. $ 31,307 $ 40,057 $ 61,384
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
54
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest....................................... $ 56,260 $ 54,351 $ 44,852
----------- ----------- -----------
----------- ----------- -----------
Income taxes, net.............................. $ (4,953) $ 19,236 $ 12,848
----------- ----------- -----------
----------- ----------- -----------
Noncash investing and financing activities:
Net assets acquired in exchange for common
stock......................................... $ 1,444 $ 22,030 $ 16,573
----------- ----------- -----------
----------- ----------- -----------
Assumption of long-term debt in connection with
acquisitions.................................. $ 2,232 $ 19,900 $ 19,300
----------- ----------- -----------
----------- ----------- -----------
Assumption of obligations under capital lease
in connection with acquisitions............... $ -- $ 48,600 $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
55
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Horizon/CMS Healthcare Corporation (formerly known as Horizon Healthcare
Corporation) and its subsidiaries (collectively, the "Company") is a leading
provider of post-acute 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
comprehensive medical rehabilitation programs and services in each of the
rehabilitation industry's three principal sectors -- inpatient rehabilitation
care, outpatient rehabilitation care and contract therapy. The Company also
provides other specialty health care services to its long-term care, subacute,
specialty hospital and rehabilitation facilities and outside parties. Such
specialty health care services include licensed specialty hospital services and
subacute units, institutional pharmacy services, physician placement services,
Alzheimer's care, non-invasive medical diagnostic testing services, home
respiratory care services, clinical laboratory services, home health care and
management and managed care services to physicians and other providers.
Substantially all of these services are within the post-acute health care market
and, accordingly, the Company operates within a single industry segment.
In connection with the merger of a wholly owned subsidiary of the Company
with Continental Medical Systems, Inc. ("CMS") in July 1995, the Company changed
its name to Horizon/CMS Healthcare Corporation. As discussed in Note 15, the
accompanying financial statements have been restated to include the accounts and
operations of CMS for all periods prior to the merger. These restated financial
statements include the assets, liabilities and stockholders equity of CMS as of
June 30, 1995 and the results of operations of CMS for each of the two years in
the period ended June 30, 1995.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its 50% or greater owned subsidiaries which the Company controls. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Investments in affiliates, which are included in other assets in the
accompanying consolidated balance sheets, in which the Company owns 20% or more
and limited partnerships are carried on the equity basis which approximates the
Company's equity in underlying net book value. Other investments are stated at
cost.
OPERATING REVENUES
The Company derives net patient care revenues principally from public
funding through the Medicaid and Medicare programs, private pay patients and
non-affiliated long-term care facilities. For fiscal years 1996, 1995 and 1994,
the Company derived 33%, 28% and 34% of its revenues from Medicare. For fiscal
56
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
years 1996, 1995 and 1994, the Company derived 18%, 17% and 14% of its revenues
from Medicaid. Under the Medicare program and some state Medicaid programs, the
Company's long-term care facilities are paid interim amounts designed to
approximate the facilities' reimbursable costs. Such interim amounts due from
third party payors and amounts due from other payor sources are recorded as
patient care accounts receivable. With respect to these programs for which
interim payments are subject to retroactive cost adjustment, actual costs
incurred are reported through cost reports by each facility annually. Throughout
the annual cost reporting period, the Company records, for each of several
hundred Medicare and Medicaid certified providers operated by the Company, the
estimated difference between interim payments received and the expected actual
costs as estimated third party settlements. The cost reports are subject to
examinations and retroactive adjustments, which may result in upward or downward
adjustment from initially submitted reimburseable costs. The Company generally
expects final settlement on annual cost reports to occur approximately 24 months
following the end of an annual cost reporting period. Tentative partial
settlement may occur as soon as six months following the cost reporting period.
Differences between amounts accrued as estimated third-party settlements and the
amounts ultimately received or paid are recorded in operations in the year of
final settlement. Most of the Company's Medicaid payments are prospective and no
retroactive adjustment is made to such payments.
While settlement adjustments are common upon third-party intermediary cost
report examination, the Company is currently unaware of any matters that may
result in a retroactive cost report adjustment which would be material to the
Company's financial condition or results of operations.
There have been and the Company expects that there will continue to be a
number of proposals to limit Medicare and Medicaid reimbursement. 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.
The Company has also entered into payment agreements with certain commercial
insurance carriers, health maintenance organizations, and other payor sources.
The basis for payment under these arrangements include prospectively determined
amounts for each unit of service.
CASH EQUIVALENTS
For purposes of the accompanying consolidated statements of cash flows, the
Company considers its highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
57
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION
Property and equipment is stated at the lower of cost or net realizable
value. Depreciation is recorded using the straight-line method over the
estimated useful lives of the assets (buildings -- 30 to 40 years; equipment --
3 to 20 years). Maintenance and repairs are charged to expense as incurred.
Major renewals or improvements are capitalized.
GOODWILL AND OTHER INTANGIBLE ASSETS RESULTING FROM BUSINESS
COMBINATIONS
In connection with acquisitions accounted for using the purchase method, the
purchase price is allocated to the estimated fair value of the tangible and
identifiable intangible net assets as of the effective date of the acquisition,
with any excess cost allocated to goodwill.
Identifiable intangible assets are identified and measured under the
provisions of Accounting Principles Board Opinion No. 16, "Business
Combinations." Historically, the nature and circumstances surrounding the
Company's acquisitions have resulted in the identification and recognition of
certain identifiable intangible assets including: favorable lease purchase
costs, noncompetition agreements, contract rights, sign-on bonuses and trade
name costs. These intangible assets are amortized over the respective estimated
useful lives (one to ten years).
The Company believes that the excess cost over net assets of acquired
companies (goodwill) generally has an unlimited useful life and, therefore, an
amortization period of 15 to 40 years has been assigned. In determining that the
life of goodwill is unlimited, the Company considered the following factors: (i)
the concentrations that exist in the Company's selected markets and the fact
that acquisitions frequently serve as a platform for the integration of other
services provided by the Company; (ii) the long-term and specialty health care
industry, which is positively impacted by aging trends and the continued
pressure to transfer patients from high cost, acute care settings to long-term
and specialty health care settings; (iii) the increasing acceptance by the
medical establishment of long-term and specialty health care as a better
alternative to acute care hospital based treatment; and (iv) the nature of the
services provided by the Company, which will be continuously needed in the
future and are not subject to obsolescence.
The Company reviews the realizability of the carrying amount of goodwill
whenever events or circumstances occur that indicate the recorded costs may not
be recoverable. Principal factors considered by the Company in this review
include changes in market share and competitive conditions, technological and
regulatory changes (including reimbursement), demand trends and earnings trends
of the acquired companies. If such a review, which is performed no less
frequently than quarterly, indicates that the undiscounted future cash flows
58
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
from operations of the acquired business are less than the recorded asset, its
carrying amount will be reduced to its estimated fair value. In the absence of
an active market for the asset, fair value will be estimated using accepted
valuation techniques, including discounted cash flow analysis.
INCOME TAXES
The Company files a consolidated federal income tax return for all 80% or
more owned subsidiaries. Separate returns are filed for all subsidiaries owned
less than 80%. On June 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." SFAS
109 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 basis of assets and liabilities.
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
an amount for incurred but not reported claims. Differences between the amounts
accrued and subsequent settlements are recorded in operations in the period of
settlement.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
59
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Variable rate note receivable (7.3% at May 31, 1996)
payable in variable monthly installments including
interest; due December 2005; secured by accounts
receivable and other assets............................. $ 21,650 $ --
Variable rate note receivable based on lesser of 8% or
LIBOR + 2.25% (8.0% at May 31, 1996), full recourse;
interest payable semi-annually; principal payable
December 2008; unsecured................................ 10,653 10,653
7% notes receivable; payable in monthly installments of
$60 including interest; due April 2004; secured by real
property................................................ 9,567 9,571
Variable rate note receivable (7.0% at May 31, 1996);
interest payable monthly; principal payable $3,000 in
August 2002 and $3,000 in August 2004; secured by real
property................................................ 6,000 6,000
7% notes receivable, payable in monthly installments of
$27 including interest; due January 2016; secured by
real property........................................... 3,496 3,569
Other notes receivable bearing interest at 6% to 12%; due
at varying dates through fiscal 2036.................... 25,851 20,011
--------- ---------
Notes receivable..................................... 77,217 49,804
Less current portion, included in prepaid and other
assets.................................................. 4,200 1,823
--------- ---------
Notes receivable, excluding current portion.............. $ 73,017 $ 47,981
--------- ---------
--------- ---------
</TABLE>
In November 1987, the Company loaned a former executive officer $2,000 to
purchase a 7 3/4% convertible subordinated debenture (see note 5 for description
of the debenture). The loan is evidenced by a promissory note bearing interest
at 7 3/4%, payable on the maturity date of the debenture or earlier to the
extent that the debenture is converted. At May 31, 1996 and 1995, $1,000 was
oustanding on the note, which is included within notes receivable in the
accompanying balance sheets.
During fiscal year 1993, the Company loaned former executive officers $5,078
for the exercise of stock options and the payment of the resulting income taxes.
The tax loans were authorized under the Company's stock compensation plans, and
the remaining loan was authorized by the board of directors. The loans are
repayable upon demand with interest payable monthly at the IRS'
60
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) NOTES RECEIVABLE (CONTINUED)
applicable federal rate, adjusted semi-annually on January 1 and July 1. At May
31, 1996 and 1995, $2,362 was outstanding on the note, which is included within
notes receivable in the accompanying balance sheets.
(3) PROPERTY AND EQUIPMENT
Property and equipment owned and held under capital lease is stated at cost
and consists of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Land.................................................. $ 63,250 $ 59,907
Buildings............................................. 474,830 431,820
Equipment............................................. 175,329 149,208
----------- -----------
713,409 640,935
Less accumulated depreciation and amortization........ 119,036 87,138
----------- -----------
Property and equipment, net........................... $ 594,373 $ 553,797
----------- -----------
----------- -----------
</TABLE>
(4) ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities are comprised of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Salaries, wages and benefits.......................... $ 46,872 $ 53,696
Accrued insurance..................................... 23,957 18,297
Accruals for special charges (Note 7)................. 17,453 23,541
Interest.............................................. 6,896 11,058
Other (Note 7)........................................ 75,984 27,538
----------- -----------
$ 171,162 $ 134,130
----------- -----------
----------- -----------
</TABLE>
61
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revolving credit drawn on credit agreement; interest
due monthly; principal due in fiscal 2001............ $ 508,622 $ 138,750
10 7/8% senior subordinated notes; due in fiscal
2002................................................. 8,562 145,125
10 3/8% senior subordinated notes; due in fiscal
2003................................................. 65 117,991
Convertible subordinated debenture; interest at
8 3/4%; due in fiscal 2015........................... 20,400 20,400
Convertible subordinated debenture; interest at
6 1/2%; due in fiscal 2012........................... 5,680 5,680
Convertible subordinated debenture; interest at
7 3/4%; due in fiscal 2012........................... 2,000 2,000
Obligations under capital leases and other long-term
debt bearing interest ranging from 5.0% to 14.0%; due
at varying dates through fiscal 2017; secured by
related land, buildings and equipment................ 99,077 99,932
----------- -----------
Long-term debt...................................... 644,406 529,878
Less current portion.................................. 6,522 4,782
----------- -----------
Long-term debt, excluding current portion........... $ 637,884 $ 525,096
----------- -----------
----------- -----------
</TABLE>
At May 31, 1995, the Company was party to a $250,000 revolving credit loan
agreement with the Boatmen's National Bank of St. Louis, as agent for a group of
banks (the "Boatmen's Facility"). The Boatmen's Facility, which replaced the
revolving loan agreement outstanding at May 31, 1994, was drawn in the amount of
$104,750 at May 31, 1995. This facility bore interest at either the Adjusted
Corporate Base Rate plus up to .25% or at the Adjusted London Interbank Offered
Rate ("LIBOR") rate plus 0.5 to 1.25% both as defined in the credit agreement.
Prior to the CMS merger, at May 31, 1995, the Company was also party to a
credit facility with Citibank, N.A., as agent for a group of several banks (the
"Citibank Facility"). At May 31, 1995, $34,000 had been drawn on this facility.
The Citibank Facility provided up to $235,000 in a revolving line of credit for
a revolving loan period through December 31, 1996 and the subsequent conversion
of the revolving loan into a term loan. At the Company's option, the interest
rate on any loan under the Citibank Facility was based on the LIBOR rate or a
base rate as specified in the agreement as adjusted for a margin.
In July 1995, in connection with the merger with CMS, the Company and CMS
entered into a new facility with NationsBank of Texas, N.A., as agent for a
62
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) LONG-TERM DEBT (CONTINUED)
group of banks, (the "NationsBank Facility") that replaced the Boatmen's and
Citibank Facilities and combined the amount available for borrowing at $485,000.
The aggregate principal amount was divided between the Company and CMS in the
amounts of $250,000 and $235,000, respectively.
Under the NationsBank 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 weighted
average interest rate on amounts outstanding under NationsBank Facility was
6.65% at May 31, 1996. The NationsBank Facility matures in September 2000. The
credit agreement underlying the NationsBank Facility contains certain covenants
and restrictions including, without limitation, the following: (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 NationsBank Facility also restricts the
payment of dividends by the Company to an amount which shall not exceed 20% 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. Substantially all of the
subsidiaries of the Company have guaranteed the obligations of the Company under
the NationsBank Facility. This facility further provides that certain limited
events or occurrences that would or could reasonably be expected to 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 this facility. After discussions between the Company and
representatives of the agent, the Company does not believe the existence of, or
the occurrence of the events giving rise to, the Office of Inspector General of
the Department of Health and Human Services (the "OIG") and the Department of
Justice (the "DOJ") investigation into certain Medicare Part B and related
co-insurance billings, the pending SEC investigation or the pending stockholder
litigation (see note 16) will prevent satisfaction of these conditions at this
time. In addition, pursuant to an amendment to the credit agreement underlying
the NationsBank Facility, the Company, the agent and each of the participating
lenders agreed that the Company's knowledge of the existence of these matters
will not prevent satisfaction of these conditions at this time or in the future.
No assurance can be given, however, that future adverse developments or
determinations with respect to these matters will not prevent satisfaction of
such conditions.
63
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) LONG-TERM DEBT (CONTINUED)
Simultaneous with the tender offer for the 10 3/8% and 10 7/8% Senior
Subordinated Notes discussed below, in September 1995 the NationsBank Facility
was amended and restated to increase the facility from $485,000 to $750,000, of
which $70,000 is available in the form of letters of credit, and to remove the
division between the Company and CMS. At May 31, 1996, $203,500 was available to
be drawn under this facility.
The Company utilizes an interest rate collar agreement, consisting of the
combination of an interest rate cap and an interest rate floor in a single
transaction, to reduce the impact of increases in interest rates on its floating
rate debt without any initial investment by the Company. The Company entered
into this $200 million notional amount collar agreement following the expansion
of the NationsBank Facility in October 1995. The Company utilizes the collar as
an interest rate hedge on its floating rate, LIBOR based credit facility and
does not intend the instrument to be speculative in nature. The agreement has a
term of two years and expires in October 1997. The collar agreement entitles the
Company to receive from the counterparty the amount, if any, by which average
LIBOR interest payments on the notional amount exceed 8.0% per annum. The collar
agreement requires that the Company pay to the counterparty the amount, if any,
by which average LIBOR interest payments on the notional amount is less than
4.57% per annum. The fair value of the collar agreement is estimated based on
quotes from market makers of these instruments and represents the estimated
amount that the Company would expect to receive or pay if the agreement was
terminated. The fair value of the collar on May 31, 1996 would require that a
$106 payment be made by the Company to terminate the agreement.
On August 17, 1992, the Company issued 10 7/8% Senior Subordinated Notes due
2002 ("10 7/8% Notes") in the amount of $200,000 in a public offering in which
the Company received net proceeds of $192,500. The 10 7/8% Notes were priced at
99.25%, to yield 11% annually to maturity. On March 16, 1993 the Company issued
its 10 3/8% Senior Subordinated Notes due 2003 ("10 3/8% Notes") in the amount
of $150,000 in a private placement in which the Company received net proceeds of
$144,586. The 10 3/8% Notes were priced at 99.22% to yield 10 1/2% annually to
maturity.
In order to reduce the impact of changes in interest rates on its long-term
debt, the Company, during fiscal 1994 and 1993, entered into four, seven year,
interest rate swap agreements with notional amounts of $25,000 each which mature
in 1999 and 2000 and which provided for receipt of yields of between 5.16% and
6.65% and payment of six month LIBOR yield. On September 12, 1995, these
interest rate swap agreements were terminated at a cost of $3,540, in connection
with the tender offer for the Senior Subordinated Notes discussed above.
64
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) LONG-TERM DEBT (CONTINUED)
On February 14, 1992, the Company issued $57,500 of 6.75% convertible
subordinated notes (the "6.75% Notes") due February 1, 2002. The 6.75% 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 6.75% 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 6.75% 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 fiscal 1994, the remaining
$54,270 of 6.75% 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 (Note 12), the Company assumed the obligations
under Greenery's 6 1/2% convertible subordinated notes and 8 3/4% 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 1/2% convertible
subordinated notes of $2,663.
The 6 1/2% 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 notes may be redeemed in whole or in part at 103 1/4% 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 3/4% 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 1/2% debentures, but will be
subordinated to any future senior indebtedness.
During fiscal 1995, the Company repurchased $4,800 of its 6 1/2% convertible
subordinated notes and $506 of its 8 3/4% convertible senior subordinated notes.
Also during fiscal 1995, the Company purchased $85,206 principal amount of its
10 7/8% and 10 3/8% Notes, (collectively its "Senior Subordinated Notes" or
"Subordinated Debt"), at a discount in a series of open market transactions.
On September 26, 1995, the Company completed a tender offer and consent
solicitation for $256,167 principal amount of its Senior Subordinated Notes.
65
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) LONG-TERM DEBT (CONTINUED)
During the fourth quarter of fiscal 1994, the Company redeemed $15,520 of
the 6 1/2% convertible subordinated notes and $7,244 of the 8 3/4% convertible
senior subordinated notes.
In November 1987, a 7 3/4% convertible subordinated debenture was sold to
the Company's former vice chairman. This $2,000 debenture is convertible into
shares of common stock at a conversion price of $8.56 per share.
The approximate aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31,
- ---------------------------------------------------------
<S> <C>
1997..................................................... $ 6,522
1998..................................................... 7,036
1999..................................................... 2,569
2000..................................................... 2,756
2001..................................................... 520,442
Thereafter............................................... 105,081
-----------
$ 644,406
-----------
-----------
</TABLE>
(6) LEASE COMMITMENTS
The Company 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, 1996, 1995 and 1994
was approximately $6,501, $6,346 and $6,198, respectively.
Future minimum payments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31,
- ---------------------------------------------------------
<S> <C>
1997..................................................... $ 88,899
1998..................................................... 79,033
1999..................................................... 64,395
2000..................................................... 49,673
2001..................................................... 43,767
Thereafter............................................... 142,142
-----------
$ 467,909
-----------
-----------
</TABLE>
The Company is contingently liable for annual lease payments of
approximately $2,655 for leases on facilities sold. The leases expire at varying
dates through fiscal 1999. In addition, the Company is contingently liable for
annual lease payments of $6,484 for leases on managed facilities. The leases
expire at varying dates through fiscal 2007.
66
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) LEASE COMMITMENTS (CONTINUED)
The Company has been party to various contracts with Commercial Construction
Company, Inc. ("CCI") for the construction of new rehabilitation hospitals to be
owned and operated by the Company. CCI has represented to the Company that it is
wholly owned by the brother of a former divisional president of the Company. In
addition, the Company purchases other development and maintenance services,
equipment, furniture and supplies for its rehabilitation hospitals through CCI
and its affiliates. The Company also leases certain clinic and office space in
the greater Harrisburg, PA area under leases with various partnerships, of which
a former divisional president is a partner. In fiscal 1996, 1995, and 1994, the
Company made payments to these related parties aggregating approximately $4,501,
$7,401 and $16,950, respectively. Of these payments, $2,292 and $7,189, were
recorded in property and equipment for fiscal 1995, and 1994, respectively, and
$4,501, $5,109 and $9,761 were charged to cost of services for fiscal 1996,
1995, and 1994, respectively. As of May 31, 1996, future commitments under
outstanding contracts with an affiliate of CCI were $1,826 plus reimbursement of
certain personnel costs.
The Company leases its corporate office space located in Albuquerque, NM
from a limited liability company, of which certain of the Company officers,
directors and family members are members. The lease is classified as an
operating lease. The Company made lease payments of $782, $589 and $328 under
this lease during fiscal 1996, 1995 and 1994, respectively. The lease expires on
July 31, 2001.
The Company leases seven facilities, under operating leases, from various
limited partnerships and/or limited liability companies of which a director of
the Company is a passive investor. The Company made lease payments of $3,326
under these leases during fiscal 1996.
(7) SPECIAL CHARGE
The Company has recorded as special charges during the past three fiscal
years the effects of various non-routine items. Following is a discussion of the
amounts, material components and activities related to these charges.
FISCAL YEAR 1996
The Company recorded special charges totaling $63,540 and $17,000 during the
first and fourth quarters of fiscal 1996, respectively. The first quarter fiscal
1996 charge resulted primarily from costs incurred in completing the merger with
CMS, the approval by management of restructuring measures related to efforts to
combine the previously separate companies and a decision by management to
dispose of selected facilities. Specifically, the first quarter charge was
comprised of the following components:
(i) Approximately $11,900 of the charge related to an impairment
adjustment resulting from the planned disposition of assets and leasehold
67
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) SPECIAL CHARGE (CONTINUED)
improvements at eight long-term care facilities. The charge represented the
amount by which the carrying amount of the properties intended for sale at
that time exceeded the estimated fair value of the properties. As discussed
in Note 17, the charge was later revised upward based upon management's
decision in the fourth quarter of fiscal 1996 to revise and significantly
expand the group of facilities to be disposed of.
(ii) The Company recorded an approximate $14,200 impairment of assets as
a result of the planned elimination or consolidation of operations in the
effort to combine the Company and CMS. In connection therewith, contract
respiratory therapy, corporate and physician placement operations were
consolidated and restructured. The consolidation and elimination of certain
contract respiratory company operations resulted in a $5,700 charge,
comprised of a $4,900 fair value adjustment to the carrying cost of related
long-lived assets and an $800 adjustment to receivables and inventory which
were negatively impacted by the Company's decision to restructure the
operations. The consolidation of corporate operations resulted in the
retirement of existing credit facilities and the negotiation of an expanded
consolidated credit agreement, which resulted in the write-off of $2,600 of
existing credit facility deferred financing costs. Consolidation of
corporate operations also resulted in a write-off of excess or duplicative
computer system development investment of approximately $950. In evaluating
the existing operations of the combined companies, the Company also
determined to cease operations and/or dispose of assets at a rehabilitation
clinic in California and a long-term care property in Ohio. The adjustment
to fair value of the carrying cost of the related long-lived assets was
approximately $3,400. Various other restructuring measures resulted in the
$1,500 balance of the $14,200 total. Substantially all of the actions which
comprise this total were completed during fiscal 1996. Any remaining actions
are expected to occur prior to the end of the first quarter of fiscal 1997.
(iii) Approximately $20,600 of the charge resulted from involuntary
termination benefits paid and payable to an estimated 340 employees impacted
by the merger with CMS. Affected personnel were employed primarily within
the Company's corporate offices and contract therapy businesses. The
completion of these terminations is expected to occur prior to August 1996.
Management had approved and committed the Company to the employee
terminations and, during the first quarter of fiscal 1996, communicated the
termination benefits payable to the employees. The Company does not
anticipate any significant changes to the plan to occur through the expected
completion date. Of the $20,600 total, approximately $9,250 was
68
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) SPECIAL CHARGE (CONTINUED)
paid to the former chairman and chief executive officer of CMS pursuant to
agreements in place prior to discussions with the Company related to the
merger with CMS.
(iv) Other costs related to the CMS merger or costs associated with
activities that were not continued by the combined company totaled
approximately $16,840. Included in this total are $7,000 of transaction
costs incurred in consummating the CMS merger, $2,200 of lease exit costs
and $7,640 resulting from other merger related activities.
The $17,000 fourth quarter charge is comprised of two components as follows:
(i) The Company recorded an approximate $6,000 charge for the estimated
costs related to monitoring of, responding to and defense costs associated
with the OIG/DOJ, SEC and NYSE investigations, shareholder and Tenet
litigation, and various other litigation and investigations currently in
process. This charge does not reflect any estimate for settlement of the
OIG/ DOJ, shareholder or any of the other matters discussed. See Note 16 for
a detailed discussion of pending or threatened litigation.
(ii) An approximate $11,000 charge was recorded to reduce the carrying
value of selected long-lived assets to estimated fair value. The assets
written down are comprised largely of three operations experiencing poor
financial performance and for which management has become concerned with
respect to future prospects. The subsidiary companies affected include a
medical software operation, a stand-alone outpatient rehabilitation therapy
clinic and sleep diagnostic operations. Fair value was based on estimated
future cash flows to be generated by the operations discounted at a market
rate.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). The provisions
of SFAS 121 must be implemented by the Company in the first quarter of fiscal
1997. The Company believes that its current impairment policy is substantially
similar to SFAS 121 and, accordingly, the adoption of SFAS 121 is not expected
to have a significant effect on the Company's financial position or results of
operations.
FISCAL YEAR 1995
The Company recorded a $36,922 special charge during the fiscal year ended
May 31, 1995. The special charge was comprised of the following:
(i) Approximately $18,377 reflects the effect of a revision in the
Company's estimate of receivables from a third party at its contract therapy
division.
69
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) SPECIAL CHARGE (CONTINUED)
(ii) A charge of approximately $5,045 was recorded for estimated costs
of eliminating management and staff positions, office lease terminations and
certain other costs of the changes implemented during fiscal 1995 in the
contract therapy division.
(iii) An approximate $13,500 charge was recorded as a result of the
settlement of certain pending litigation and termination of a number of
contracts with the other party to the litigation. As consideration for the
settlement, contract terminations and related releases, the Company paid
cash and delivered a warrant to purchase the Company's common stock. As a
result, the Company accrued in fiscal 1995 $12,800 of expenses and wrote
down $700 of receivables to record the effects of the arrangement.
FISCAL YEAR 1994
The Company recorded a $74,834 special charge during the fiscal year ended
May 31, 1994. The special charge resulted from several measures to streamline
operations and improve productivity. This charge was comprised of several items
including the following:
(i) Approximately $50,244 of the charge was associated with the
impairment of assets at eight rehabilitation hospitals, divestiture of two
rehabilitation hospitals, closure of a select group of outpatient locations
and miscellaneous other charges.
(ii) Approximately $12,042 of the charge was related to the
consolidation of certain contract therapy companies and the exit from
certain markets and businesses. This consolidation process involved the
closure of offices, relocation and severance of personnel and the
elimination of duplicative processes.
(iii) Approximately $10,800 of the charge is related to the write-down
of uncollectible receivables resulting from the termination of certain
business relationships at its contract therapy division. During fiscal 1994,
the Company exited business arrangements in which it provided therapists to
unrelated Medicare certified agencies which in turn supplied those
therapists to non-Medicare certified skilled nursing facilities. For a
variety of business reasons the Company exited those relationships and, in
many instances, began to provide the same services directly to Medicare
patients upon termination of the contracts with the agencies. Following
termination of the contracts, the Company continued to assess the
collectability of the agency receivables and, due to deteriorating business
relations and declining financial condition of the agencies, it was
determined a write-down of these receivables was required as of May 31,
1994.
(iv) The remainder of the charge, $1,748, was to reduce the work force
at a divisional corporate office and provide for transaction costs to
execute the plan.
70
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended May 31, 1996, 1995 and 1994
(dollars in thousands, except per share amounts)
(7) SPECIAL CHARGE (CONTINUED)
All restructuring measures committed to during fiscal 1994 have been
completed and the costs accrued and write-downs anticipated in connection with
these charges have been recorded during fiscal 1994 and paid during and
subsequent to fiscal 1994 substantially as planned.
At May 31, 1996, the remaining balance in the special charge accruals is
approximately $17,400. The impairment of property and equipment and other asset
balances are reflected as reductions of the related asset accounts while the
remaining amounts are included in accrued expenses. The components of the
special charge accruals are as follows:
<TABLE>
<CAPTION>
BALANCE 1996 FISCAL BALANCE
MAY 31, SPECIAL YEAR 1996 MAY 31,
1995 CHARGES ACTIVITY 1996
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Impairment of assets and future
noncancellable commitments $ 6,275 $ 37,144 $ (38,524) $ 4,895
Legal -- 6,000 -- 6,000
Termination benefits 1,245 20,566 (20,087) 1,724
Transaction costs 200 6,697 (6,880) 27
Lease exit and other 2,225 10,133 (7,962) 4,396
Employee and other costs 796 -- (375) 421
--------- --------- ---------- ---------
$ 10,741 $ 80,540 $ (73,828) $ 17,453
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
(8) INCOME TAXES
On June 1, 1993, the Company adopted SFAS 109 through retroactive
restatement of its financial statements from June 1, 1990. The adoption did not
have a material effect on the Company's financial condition or results of
operations.
The provision for income taxes on earnings (loss) before extraordinary items
consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current
Federal.................................... $ 31,656 $ 6,674 $ 11,653
State...................................... 8,115 3,840 2,507
--------- --------- ---------
39,771 10,514 14,160
Deferred:
Federal.................................... (8,646) 10,594 (11,475)
State...................................... (781) 2,267 (954)
--------- --------- ---------
(9,427) 12,861 (12,429)
--------- --------- ---------
Total...................................... $ 30,344 $ 23,375 $ 1,731
--------- --------- ---------
--------- --------- ---------
</TABLE>
71
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) INCOME TAXES (CONTINUED)
The differences between the total tax expense recorded on earnings (loss)
before extraordinary item and the income tax expense using the statutory federal
income tax rate (35 percent) were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Computed tax expense at statutory rate....... $ 12,914 $ 16,931 ($ 6,329)
State income tax expense, net of federal
income tax benefit.......................... 5,508 4,690 913
Amortization of goodwill..................... 1,295 1,245 640
Assessments.................................. -- 83 2,983
Change in valuation allowance................ (579) (800) 970
Goodwill, write-offs, merger costs and other
special charges............................. 10,234 850 1,730
Other........................................ 972 376 824
--------- --------- ---------
Total income tax expense................. $ 30,344 $ 23,375 $ 1,731
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of the net deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Components of the deferred tax asset:
Reserves for special charges................................... $ 25,216 $ 19,023
Allowance for doubtful accounts................................ 13,902 11,148
Accrued payroll and related benefits........................... 6,197 3,867
Other accrued liabilities...................................... 13,020 7,879
Tax carryforward items......................................... 4,702 5,283
Deferred lease credit.......................................... 2,065 7,630
Other.......................................................... 3,163 3,885
---------- ----------
Total deferred tax asset......................................... 68,265 58,715
---------- ----------
Valuation allowance.............................................. (2,250) (4,051)
---------- ----------
Net deferred tax asset........................................... 66,015 54,664
---------- ----------
Components of the deferred tax liability:
Buildings and equipment, related basis differences, deferred
gain and depreciation......................................... (34,704) (31,114)
Difference between reporting income/loss from partnership
investments for financial and income tax reporting............ (1,971) (2,172)
Other.......................................................... (4,887) (5,713)
---------- ----------
Total deferred tax liability..................................... (41,562) (38,999)
---------- ----------
Excess deferred assets over liabilities...................... $ 24,453 $ 15,665
---------- ----------
---------- ----------
</TABLE>
72
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) INCOME TAXES (CONTINUED)
As a result of business combinations during the years ended May 31, 1996 and
1995, net deferred income tax assets of $567 and $4,238, respectively, and
related valuation allowances of $1,179 and $0 respectively, were recorded.
The valuation allowance is the result of: (i) separate return loss
carryforward limitations; (ii) states with no or limited loss carryover
provisions; and (iii) limitations on the Company's ability to absorb capital
losses in the five year carryforward period. The valuation allowance decreased
by $2,980 during fiscal 1996, of which $2,401 resulted from the recognition of
certain federal and state loss carryover benefits from a prior business
combination. This recognized tax benefit has been recorded as a reduction in
goodwill. The balance of the reduction is primarily due to recognized state tax
benefits and is reflected in the tax provision.
The Company has regular tax net operating loss carryforwards of
approximately $6,000 which are subject to separate return year limitations and
expire in years 2007 through 2010. In addition, the Company also has an
estimated alternative minimum tax credit carryforward of $1,300 which is
available for utilization indefinitely and has an estimated $1,400 separate
return limitation year capital loss carryforward. The capital loss is only
available to offset future capital gain income and will expire in fiscal 1998.
(9) CAPITAL STOCK
COMMON STOCK
During fiscal 1996, former executive officers tendered approximately 137,000
shares of the Company's common stock to the Company in payment of the exercise
price and related withholding taxes on the exercise of approximately 209,000
shares. This transaction was accounted for as a stock for stock exercise and the
resulting tender of shares of common stock have been recorded as treasury stock
in the accompanying balance sheet.
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.
As discussed in note 5, the Company converted $54,270 of its 6 3/4%
convertible subordinated notes into 4,522,500 shares of the Company's common
stock during the third quarter of fiscal 1994. The conversion price was $12 per
share.
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.
73
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) CAPITAL STOCK (CONTINUED)
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 500,000 stock purchase warrants outstanding at May 31, 1996,
for the purchase of common shares. These warrants are priced at $26.00 per
share.
STOCK BENEFIT PLANS
In August 1995, the Board approved the 1995 Stock Incentive Plan (the "1995
Plan"). The 1995 Plan provides for discretionary granting of (i) "incentive
stock options" as defined in Section 422 of the Internal Revenue Code of 1986,
as amended, (ii) stock options that do not constitute incentive stock options
("non-statutory stock options"), and (iii) shares of the Company's common stock,
which are subject to forfeiture under the circumstances specified by the
administrative committee of the 1995 Plan at the time of award of such shares
("restricted stock"). All of the employees of the Company (including an employee
who may also be a director of the Company) are eligible to participate in the
1995 Plan.
All options granted under the 1995 Plan carry a term as specified by the
administrative committee at the date of the grant (but no more than 10 years in
the case of incentive stock options). The effect of an employee's termination of
employment by reason of death, retirement, disability or otherwise will be
specified in the option contract which evidences each option grant. The option
price will be determined by the administrative committee and (i) in the case of
the incentive stock options, will be no less than the fair market value of the
shares on the date that the option is granted, and (ii) in the case of
non-statutory stock options, will be no less than 50% of the fair market value
of the shares on the date the option is granted. All options granted may be
exercised in accordance with the option contract as provided for by the
administrative committee.
74
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) CAPITAL STOCK (CONTINUED)
In connection with the administrative committee's approval of the 1995 Plan,
the board of directors also approved the termination of the existing employee
stock option plan which provides for issuance of stock options to employees. No
additional awards will be made thereunder on or after the date of approval of
the 1995 Plan.
During fiscal 1995, the Company had a nonqualified employee stock option
plan and a directors' stock option plan that provided 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.
No compensation has been recorded in the accompanying consolidated financial
statements for the options granted.
All options granted under the previous 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 Company, through CMS, also had the following stock compensation plans at
May 31, 1996: the 1986 stock option plan (1986 Plan), the 1989 non-qualified
stock option agreement, the 1989 non-employee directors' stock option plan, the
1992 CEO stock option plan (1992 Plan), the 1993 non-qualified stock option plan
(1993 Plan), and the 1994 stock option plan (1994 Plan). Options outstanding at
May 31, 1996, are at prices ranging from $9.73 to $40.47 per share, as adjusted
for the Exchange Rate (as defined below). As options are granted at exercise
prices which represent the fair market value of the stock at the date of grant,
no compensation expense has been recorded for these awards. Options become
exercisable in four to seven annual installments commencing on the first
anniversary of the date of grant, and expire between October 1995 and August
2003, five to ten years from the date of grant.
The 1994 plan was adopted in August 1993, which authorized options of
809,550 shares, as adjusted for the Exchange Rate. In May 1993, the 1993 Plan
was adopted which authorized options on 539,700 shares, as adjusted for the
Exchange Rate. Officers and directors were not eligible to receive options under
the 1993 Stock Option Plan.
In May 1993, options, exercisable at the market price on the date of grant
($20.38 per share, as adjusted for the Exchange Rate), were granted to
substantially all CMS employees holding outstanding options with exercise prices
higher than such current market price. The number of shares subject to the
options granted to each employee was equal in number to the shares covered by
options previously granted to such employee at higher exercise prices. The new
options were granted subject to each employee's agreement to cancel their
previously
75
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) CAPITAL STOCK (CONTINUED)
granted options for an equal number of shares at the higher exercise prices. The
term, vesting rate and other provisions of the new options were otherwise
identical to the options canceled. As a result, options on 1,802,159 shares with
exercise prices per share ranging from $24.09 to $42.39 per share, as adjusted
for the Exchange Rate, were canceled and the same number of new options were
granted at an exercise price of $20.38 per share, as adjusted for the Exchange
Rate.
The following information is a summary of the stock option activity under
the plans as adjusted for a three-for-two stock split paid November 15, 1991 on
CMS common stock and the exchange of .5397 shares (the "Exchange Rate") of CMS
common stock for each share of the Company's common stock in connection with the
CMS merger:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Options outstanding at beginning
of year......................... 6,221,774 4,916,079 3,951,921
Granted.......................... 2,198,265 1,934,116 1,518,311
Options exercised:
1996 ($1.38 to $25.50)......... (1,366,557)
1995 ($1.38 to $20.75)......... (338,881)
1994 ($1.38 to $14.63)......... (319,997)
Canceled and other adjustments... (2,106,239) (289,540) (234,156)
----------------- ----------------- -----------------
Options outstanding at end of
year............................ 4,947,243 6,221,774 4,916,079
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Options exercisable at end of
year............................ 1,885,420 2,596,947 1,576,011
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Option price range............... $1.38 - $40.47 $1.38 - $28.75 $1.38 - $26.13
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
The Company had an employee stock purchase plan (the "ESP Plan") until June
30, 1996. The ESP Plan allowed substantially all full-time employees to
contribute up to five percent of their compensation for the quarterly purchase
of the Company's common stock at 85 percent of market value at the date of
purchase. For the year ended May 31, 1996, 25,307 shares of the Company's stock
had been purchased under the ESP Plan. The board of directors of the Company
terminated the ESP Plan effective as of June 30, 1996. In its place, the board
of directors adopted the Horizon/CMS Healthcare Corporation 1996 Employee Stock
Purchase Plan (the "1996 ESP Plan"). The 1996 ESP Plan, which provides for
issuance of up to 250,000 shares of common stock, allows substantially all
full-time employees to contribute up to five percent of their compensation, on a
payroll withholding basis, for the semi-annual purchase of the
76
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) CAPITAL STOCK (CONTINUED)
Company's common stock at 85 percent of the lower of (i) the closing trading
price at the beginning of the semi-annual period, or (ii) the closing trading
price at the end of the semi-annual period. The board of directors has submitted
the 1996 ESP Plan for approval by the stockholders at the Company's 1996 Annual
Meeting of Stockholders.
In connection with the Greenery acquisition, the Company issued to one of
the Company's former 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.
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
The Company has a deferred compensation plan for a select group of
management and/or highly compensated employees. This plan allows eligible
employees to defer portions of their current compensation up to 10%. The Company
then matches up to 4% of the employee's compensation. 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
$238, $261 and $254 to these plans for the years ended May 31, 1996, 1995 and
1994, respectively.
The Company also has 401(k) savings plans available to substantially all
employees who have been with the Company for more than six months. Employees may
defer up to 15% of their salary subject to the maximum permitted by law. The
Company matches a portion of the employee's contribution, which may be
discretionary, depending upon the plan. Employee contributions are vested
immediately. Employer contributions vest on a graduated basis, with full vesting
achieved at the end of five or seven years, depending upon the plan. The Company
contributed approximately $2,286, $1,890 and $1,377 to these plans for the years
ended May 31, 1996, 1995 and 1994, respectively.
In addition, the Company 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.
77
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at May 31,
are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Notes receivable...................... $ 77,217 $ 77,717 $ 49,804 $ 47,769
Investments in marketable equity
securities and other short-term
investments.......................... 1,425 1,425 3,287 8,500
Long-term debt........................ 591,601 593,593 478,955 492,392
Interest rate hedges.................. -- (106) -- (3,572)
</TABLE>
The fair value of notes receivable was estimated by discounting the future
cash flows using current rates available to similar borrowers under similar
circumstances. The fair value of marketable equity securities and other short-
term investments is based on quoted market prices. It is not practicable to
estimate the fair value of the Company's other investments, which comprise
certain equity investments because of the lack of a quoted market price, and the
inability to estimate fair value without incurring excessive costs. The fair
value of the Company's long-term debt, excluding capital leases, was estimated
based on the quoted market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same remaining maturities.
The fair value of interest rate collars are the estimated amounts that the
Company would pay to terminate the swap agreements, taking into account current
interest rates.
The market value of the outstanding convertible subordinated notes at May
31, 1996 of $21,835 included in the long-term debt amount above 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.
(12) ACQUISITIONS
During fiscal 1996, 1995 and 1994, the Company implemented its strategy of
expanding its operations through the acquisition in select geographic areas of
long-term care facilities and providers of specialty health care services. The
acquisitions, with exception of the CMS merger, have been accounted for under
the purchase method of accounting.
In July 1995, the Company completed the CMS merger (see Note 15 for expanded
disclosure regarding this merger). In connection with this acquisition the
Company issued approximately 20.9 million shares of common stock, valued at
approximately $393,900. The merger was accounted for as a pooling of interests.
78
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(12) ACQUISITIONS (CONTINUED)
In July 1994, the Company acquired peopleCARE Heritage Group, a 13 facility
long-term care company located in Texas. Consideration given for the acquisition
included 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 February 1994, the Company completed its merger of Greenery
Rehabilitation Group, Inc. ("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. The Company has announced plans to
dispose of certain of the acquired facilities in the Greenery merger. The
decision to sell the facilities was based upon financial, regulatory and
operational considerations.
During fiscal 1996, 1995 and 1994, the Company made various other
acquisitions which individually and in the aggregate were insignificant.
Subsequent to year end, on July 11, 1996, the Company completed the merger
of a wholly owned subsidiary of the Company and Medical Innovations, Inc. Under
the merger agreement, the Company paid $1.85 for each share of Medical
Innovations, Inc. common stock. The total purchase price, including transaction
costs, of this acquisition, which has been accounted for under the purchase
method of accounting, was approximately $31,800 in cash. In addition, the
Company assumed approximately $10,700 in debt. Medical Innovations, Inc.
provides specialized home care services, home medical equipment, home medical
services, and intravenous therapies, as well as comprehensive home healthcare
management services under contractual arrangements with hospitals and other
providers. Total revenues of Medical Innovations, Inc. for its fiscal year ended
December 31, 1995 was $69.4 million.
(13) MANAGEMENT AGREEMENT
In December 1995, the Company announced that it had finalized a contract to
manage the operations of 134 long-term care facilities in Texas, Michigan and
Oklahoma which are operated under long-term leases by Texas Health Enterprises,
Inc., HEA of Michigan, Inc. and HEA of Oklahoma, Inc. (Collectively, the "HEA
Group"). The Company began managing these facilities on January 1, 1996 under a
management contract between a subsidiary of the Company and the HEA Group, which
has an initial term of ten years. The Company will receive a management fee
equal to 6.5% of the annual gross revenues generated from the operation of the
HEA Group facilities which revenues, in the aggregate, for the year ended
December 31, 1995 approximated $220,000. The Company has made available a
$30,000 credit line for, among other things, the working capital and capital
improvement requirements of the facilities covered by the
79
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(13) MANAGEMENT AGREEMENT (CONTINUED)
management contract. Amounts outstanding under the credit line and the related
management agreement of May 31, 1996 totaled approximately $21,600 and $5,100,
respectively, and were secured by accounts receivable and other assets of the
HEA Group facilities. The Company believes the terms of this contract are
representative of the market rates for such services.
(14) COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT
The Company was contingently liable for letters of credit aggregating
$37,900 and $40,900 at May 31, 1996 and 1995, respectively. The letters of
credit, which reduce the availability under the Company's 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 executive officers, the Company
is committed to pay minimum annual salaries totaling $816, 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.
In connection with the retirement of an executive officer in December 1995,
the Company entered into a two year consulting arrangement that provides for
payments totaling $350 each year. In accordance with the terms of a preexisting
employment agreement, the Company will begin making annual retirement benefit
payments totaling approximately $175 each year.
In connection with the CMS merger, the Company has entered into a two year
consulting agreement with a former executive officer of CMS commencing on July
10, 1995 for which the Company has agreed to pay an annual retainer fee of $50
annually. This agreement will be automatically extended for additional one year
periods unless notice is given by either the Company or the former executive
officer.
In addition and in connection with the Greenery merger, the Company has
entered into a seven year consulting agreement with a former officer of Greenery
for which the Company has agreed to pay annual consulting fees of $175.
80
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) COMMITMENTS AND CONTINGENCIES (CONTINUED)
LIFE INSURANCE PREMIUMS
The Company funds life insurance premiums for certain current and former
executive officers. As of May 31, 1996, such advances totaled approximately
$2,193 and are reflected in other assets in the accompanying consolidated
financial statements. The Company is neither the beneficiary nor the owner of
the policies. 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.
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
30 hours usage per month for $45 per month for a five year period, and will pay
certain amounts per hour for usage over 30 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.
OTHER
In connection with the Greenery merger, the Company committed to manage
three Connecticut facilities for an affiliate of two former 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.
The Company guarantees payment throughout the term of a bond issue to an
economic development authority of amounts due and payable by the owner of a
long-term care facility previously managed by the Company. The outstanding bonds
total approximately $5,920 at May 31, 1996.
As of May 31, 1996, the Company has future commitments to fund construction
totaling approximately $49,298. The substantial majority of this total is
comprised of amounts necessary to complete construction on an office building to
house corporate operations.
(15) CMS MERGER
In July 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 of a share of the Company's
common stock for each outstanding share of CMS's common
81
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(15) CMS MERGER (CONTINUED)
stock. Accordingly, the Company issued approximately 20.9 million shares of
common stock, valued at approximately $393,900 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 options to acquire CMS's common stock
were converted to options to acquire 3.8 million shares of the Company's common
stock. The merger qualifies as a tax-free reorganization and was accounted for
as a pooling of interests. Accordingly, the accompanying financial statements
have been restated to include the accounts and operations of CMS for all periods
prior to the merger.
The accompanying consolidated balance sheet as of May 31, 1995, gives effect
to the combination of the historical cost basis of the Company's assets,
liabilities and stockholders' equity as of May 31, 1995, with the historical
cost basis of the assets, liabilities and stockholders' equity of CMS as of June
30, 1995, the fiscal year end of CMS prior to the CMS Merger. The accompanying
consolidated statements of operations for the years ended May 31, 1995 and 1994,
include the results of operations of the Company for the years ended May 31,
1995 and 1994, and the results of operations of CMS for the years ended June 30,
1995 and 1994, respectively. The duplication of reporting CMS's June 1995
operating results of $4.1 million in fiscal year 1995 and in the fiscal year
ended May 31, 1996, has been accounted for with a charge to retained earnings. A
similar adjustment has also been made in the accompanying statement of cash
flows for the fiscal year ended May 31, 1996.
82
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(15) CMS MERGER (CONTINUED)
Separate results of the Company and CMS for the three years in the period
ended May 31, 1996 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Total operating revenues:
The Company................................ $ 59,065 $ 638,066 $ 373,881
CMS........................................ 83,684 987,260 1,008,281
The Company, subsequent to the CMS
merger.................................... 1,610,335 -- --
------------- ------------- -------------
$ 1,753,084 $ 1,625,326 $ 1,382,162
------------- ------------- -------------
------------- ------------- -------------
Earnings (loss) before extraordinary item:
The Company................................ $ 2,280 $ 29,879 $ 14,731
CMS........................................ 4,122 (4,881) (34,545)
The Company, subsequent to the CMS
merger.................................... (9,103) -- --
------------- ------------- -------------
$ (2,701) $ 24,998 $ (19,814)
------------- ------------- -------------
------------- ------------- -------------
Net earnings (loss):
The Company................................ $ 2,280 $ 30,492 $ 15,465
CMS........................................ 4,122 (2,923) (34,545)
The Company, subsequent to the CMS
merger.................................... (31,178) -- --
------------- ------------- -------------
$ (24,776) $ 27,569 $ (19,080)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
As a result of the combination with CMS, the Company revised the accounting
policies and financial presentation of each of the previously separate
companies. These changes did not have a material effect on the operating results
or financial position of the Company. A reconciliation of total operating
revenues and net earnings of the Company as previously reported prior to the CMS
merger to the amounts presented above and included in the accompanying financial
statements is as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Total operating revenues:
As previously reported........................................ $ 639,080 $ 375,095
Adjustments................................................... (1,014) (1,214)
----------- -----------
$ 638,066 $ 373,881
----------- -----------
----------- -----------
Net earnings:
As previously reported........................................ $ 31,221 $ 16,606
Adjustments................................................... (729) (1,141)
----------- -----------
$ 30,492 $ 15,465
----------- -----------
----------- -----------
</TABLE>
83
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(16) LEGAL PROCEEDINGS
DOJ INVESTIGATION IN RESPECT OF CONTINENTAL MEDICAL SYSTEMS, INC.
As previously disclosed by both CMS and the Company, 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.
The Company has been informed that both the civil and criminal divisions of
the United States Attorney's office in Sacramento, California are closing their
investigation in this regard and they will not commence any civil or criminal
action or proceeding against the Company in respect of this investigation. The
Company has also been informed that both the criminal and civil divisions of the
United States Attorney's office in Harrisburg, Pennsylvania are closing their
investigation in this regard and they will not commence any civil or criminal
action or proceeding against the Company in respect of this investigation.
LITIGATION AGAINST TENET HEALTHCARE CORPORATION
The Company filed a lawsuit on March 7, 1996 against Tenet Healthcare
Corporation ("Tenet") in the United States District Court for the District of
Nevada. The lawsuit arose out of an agreement entered into between the Company
and Tenet in connection with the Company's attempted acquisition of The
Hillhaven Corporation ("Hillhaven") in January 1995. In the lawsuit, the Company
alleges that Tenet has failed to honor its commitment to pay Horizon
approximately $14.5 million pursuant to the agreement. Tenet has contended that
the amount owing to the Company under the agreement is approximately $5.1
million. In the quarter ended November 30, 1995, the Company recognized as a
receivable approximately $13.0 million of the approximately $14.5 million the
Company contends it is owed under the agreement. While the Company intends to
vigorously prosecute this lawsuit, no assurance can be given that the Company
will prevail or that the Company will not be required at a future date to record
a charge for a portion of the receivable previously recorded.
OIG/DOJ INVESTIGATION INVOLVING CERTAIN MEDICARE PART B
AND RELATED CO-INSURANCE BILLINGS
The Company announced on March 15, 1996 that certain Medicare Part B and
related co-insurance billings previously submitted by the Company are being
investigated by the OIG and the DOJ. These billings, totaling approximately $3.4
million, sought recovery for the costs of certain Medicare Part B covered
medical supplies used in treating Medicare patients in certain facilities at a
time when those facilities were operated by Greenery before the Company acquired
Greenery. These costs were not billed at the time incurred but were billed on a
retroactive basis, as permitted under applicable Medicare Part B rules, after
the Greenery acquisition. Of the $3.4 million billed, approximately $1.3 million
has been remitted to the Company.
84
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(16) LEGAL PROCEEDINGS (CONTINUED)
The Company has advised the OIG that it appears that a significant portion
of the billings may not have been in accordance with applicable Medicare Part B
rules. The Company advised the OIG and the DOJ that it was cooperating, and will
continue to cooperate, in the investigation and was prepared to remit any
overpayment to the appropriate governmental authority. On April 2, 1996, the
Company and DOJ entered into a letter agreement pursuant to which the Company
voluntarily agreed to refund such overpayment to the DOJ. On April 3, 1996, the
Company refunded approximately $1 million to the DOJ. In addition, the Company
voluntarily refunded co-insurance payments to the applicable parties. The
Company believes the errors in these billings were an exception and do not
represent a regular pattern or practice at the Company. Due to the preliminary
nature of the OIG/DOJ investigation, the Company cannot now predict when the
OIG/DOJ investigation will be completed; the ultimate outcome of the OIG/DOJ
investigation; or the effect thereof on the Company's financial condition or
results of operations. If as a result of the OIG/DOJ investigation, civil or
criminal proceedings against the Company are initiated and adversely determined,
civil and/or criminal fines or sanctions could be imposed against the Company,
which could have a material adverse impact on the Company's financial condition
and/or its results of operations.
The Company recorded a charge in the year ended May 31, 1996 of
approximately $5.1 million, pre-tax, to write off all revenue associated with
these Medicare Part B retroactive billings (including all of the $3.4 million in
retroactive Medicare Part B and related co-insurance billings discussed
previously), as well as the related costs of both the Company's internal
investigations and the OIG/ DOJ investigation.
SECURITIES AND EXCHANGE COMMISSION AND NEW YORK STOCK EXCHANGE
INVESTIGATIONS
The Company has been advised that the staff of the Division of Enforcement
of the Commission has commenced a private investigation with respect to trading
in the securities of the Company and CMS. In connection with that investigation,
the Company has voluntarily produced certain documents and Neal M. Elliott,
Chairman of the Board, President and Chief Executive Officer of the Company, has
voluntarily given testimony to the Commission. The Company has also been
informed that certain of its employees, executive officers and an individual,
affiliates of whom have limited business relationships with the Company, have
responded to subpoenas from the Commission. Mr. Elliott has also produced
certain documents in response to a subpoena from the Commission. In addition,
the Company and Mr. Elliott have responded to separate subpoenas from the
Commission pertaining to trading in the Company's common stock and the Company's
March 1, 1996 press release announcing a revision in the Company's third quarter
earnings estimate, the Company's March 7, 1996, press release announcing the
filing of a lawsuit against Tenet, the March 12, 1996 press release announcing
that the merger with Pacific Rehabilitation & Sports
85
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(16) LEGAL PROCEEDINGS (CONTINUED)
Medicine, Inc. could not be effected by April 1, 1996 and the Company's March
15, 1996 press release announcing the existence of a federal investigation into
certain of the Company's Medicare Part B billings. The investigation is ongoing,
and neither the Company nor Mr. Elliott possesses all the facts with respect to
the matters under investigation. Although neither the Company nor Mr. Elliott
has been advised by the Commission that the Commission has concluded that any of
the Company, Mr. Elliott or any other current or former officer or director of
the Company has been involved in any violation of the federal securities laws,
there can be no assurance as to the outcome of the investigation or the time of
its conclusion. Both the Company and Mr. Elliott intend to continue cooperating
fully with the Commission in connection with the investigation.
In March 1995, the New York Stock Exchange, Inc. (the "NYSE") informed the
Company that it had initiated a review of trading in Hillhaven common stock
prior to the announcement of the Company's proposed acquisition of Hillhaven.
The NYSE extended in April 1995 the review of trading to include all dealings
with CMS. On April 3, 1996, the NYSE notified the Company that it had initiated
a review of trading in the Company's common stock preceding the Company's March
1, 1996 press release described above. The Company is cooperating with the NYSE
in its review and, to the Company's knowledge, the reviews are ongoing.
STOCKHOLDER LITIGATION
On March 28, 1996, the Company was served with a lawsuit filed on March 21,
1996, in New Mexico state district court in Albuquerque, New Mexico by a former
stockholder of CMS, RONALD GOTTESMAN VS. HORIZON/CMS HEALTHCARE CORPORATION, NO.
CV-96-02894, SECOND JUDICIAL DISTRICT COURT, COUNTY OF BERNALILLO, STATE OF NEW
MEXICO. This lawsuit, which among other things seeks class certification,
alleges violations of federal and New Mexico state securities laws arising from
what the plaintiff contends are materially misleading statements by the Company
in its June 6, 1995 joint proxy statement/prospectus (the "CMS Prospectus"). The
plaintiff alleges that the Company failed to disclose in the CMS Prospectus
those problems in the Company's Medicare Part B billings the Company described
in its related March 15, 1996 announcement. In this action, the plaintiff seeks
damages in an unspecified amount, plus costs and attorneys' fees. The Company
disputes the factual and legal premises upon which the plaintiff's lawsuit is
based and denies that the plaintiff is entitled to any recovery on his claim. To
that end, the Company intends to contest this litigation vigorously. Subsequent
to the end of fiscal 1996, the Company filed its motion seeking to dismiss this
lawsuit because, among other things, the Company believes the lawsuit fails to
state a claim upon which the plaintiffs are entitled to redress. Because the
lawsuit just began, the Company cannot now predict the outcome of
86
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(16) LEGAL PROCEEDINGS (CONTINUED)
this litigation; the length of time it will take to resolve this litigation; or
the effect of any such outcome on the Company's financial condition or results
of operations.
Since April 5, 1996, the Company has been served with the below listed
complaints by current or former stockholders of the Company on behalf of all
persons who purchased common stock of the Company between June 6, 1995 and March
15, 1996. Each of these lawsuits was filed in the United States District Court
for the District of New Mexico, in Albuquerque, New Mexico. In these lawsuits,
the plaintiffs have alleged in substantially similar complaints violations of
federal and New Mexico state securities laws. In this connection, the plaintiffs
allege that during the class period, the named defendants disseminated
materially misleading statements or omitted disclosing material facts about the
Company, its business, its Greenery and CMS acquisitions, Greenery's improved
operations after the acquisition, the successful integration of CMS's operations
into those of the Company and the cost savings and operating efficiencies
obtained thereby, the Company's earnings growth and financial statements, the
Company's ability to continue to achieve profitable growth and the status and
magnitude of regulatory investigations into and audits of the Company. The
plaintiffs seek damages in an unspecified amount and extraordinary, equitable or
injunctive relief, including attachment, impoundment, or imposition of a
constructive trust against the individual defendants, plus costs and attorneys'
fees. The Company disputes the factual and legal bases upon which the
plaintiffs' lawsuits are based and denies that the plaintiffs are entitled to
any recovery on their claims. To that end, the Company intends to contest these
litigation matters vigorously. The following actions are currently pending:
ROSENBAUM V. HORIZON/CMS HEALTHCARE CORPORATION, NEAL M. ELLIOTT, ROBERT
A. ORTENZIO, KLEMETT L. BELT, JR., ROCCO A. ORTENZIO, ERNEST A.
SCHOFIELD AND RUSSELL L. CARSON, No. CIV 96-0447-JC.
DONNARUMMA ET AL., V. HORIZON/CMS HEALTHCARE CORPORATION, ROCCO A.
ORTENZIO, NEAL M. ELLIOTT, ROBERT A. ORTENZIO, RUSSELL L. CARSON,
KLEMETT L. BELT, JR., AND ERNEST A. SCHOFIELD, No. CIV 96-0442-BB.
BOWLES V. ROCCO A. ORTENZIO, NEAL M. ELLIOTT, ROBERT A. ORTENZIO,
RUSSELL L. CARSON, KLEMETT L. BELT, JR., ERNEST A. SCHOFIELD AND
HORIZON/CMS HEALTHCARE CORPORATION, No. CIV 96-0555-SC.
MARSCHKE V. ROCCO A. ORTENZIO, NEAL M. ELLIOTT, ROBERT A. ORTENZIO,
RUSSELL L. CARSON, KLEMETT L. BELT, JR., ERNEST A. SCHOFIELD AND
HORIZON/CMS HEALTHCARE CORPORATION, No. CIV 96-0560-MV.
WEINGARTEN V. HORIZON/CMS HEALTHCARE CORPORATION, HORIZON HEALTHCARE
CORPORATION, NEAL ELLIOTT, KLEMETT L. BELT, JR., ROCCO ORTENZIO, LEROY
S. ZIMMERMAN, BRIAN C. CRESSEY, RUSSELL L. CARSON, ROBERT A. ORTENZIO
AND ERNEST A. SCHOFIELD, No. CIV 96-0610-MV.
87
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(16) LEGAL PROCEEDINGS (CONTINUED)
THEOPHANO V. NEAL M. ELLIOTT, ROCCO ORTENZIO, ROBERT A. ORTENZIO,
RUSSELL L. CARSON, KLEMETT L. BELT, JR., ERNEST A. SCHOFIELD AND
HORIZON/CMS HEALTHCARE CORPORATION, No. CIV 96-0626-MV.
BERENDA V. ROCCO A. ORTENZIO, NEAL M. ELLIOTT, ROBERT A. ORTENZIO,
RUSSELL L. CARSON, KLEMETT L. BELT, JR., ERNEST A. SCHOFIELD AND
HORIZON/CMS HEALTHCARE CORPORATION, No. CIV 96-0634-BB.
WIESEL V. HORIZON/CMS HEALTHCARE CORPORATION, NEAL M. ELLIOTT AND ROBERT
A. ORTENZIO, No. 96-0614-MV.
GOLDFARB V. HORIZON/CMS HEALTHCARE CORPORATION, ROCCO A. ORTENZIO, NEAL
M. ELLIOTT, ROBERT A. ORTENZIO, RUSSELL L. CARSON, KLEMETT L. BELT, JR.,
AND ERNEST A. SCHOFIELD, No. CIV 96-0752-LH.
Subsequent to fiscal 1996, the Court entered its order consolidating these
lawsuits into a single action styled IN RE HORIZON/CMS HEALTHCARE CORPORATION
SECURITIES LITIGATION, Case No. CIV 96-0442-BB.
Because these lawsuits are in their initial stages, the Company cannot now
predict the outcome of this litigation; the length of time it will take to
resolve this litigation; or the effect of any such outcome on the Company's
financial condition or results of operations.
STOCKHOLDER DERIVATIVE ACTIONS
Commencing in April and continuing into May 1996, the Company was served
with six complaints alleging a class action derivative action brought by
stockholders of the Company for and on behalf of the Company in the Court of
Chancery of New Castle County, Delaware, against Neal M. Elliott, Klemett L.
Belt, Jr., Rocco A. Ortenzio, Robert A. Ortenzio, Russell L. Carson, Bryan C.
Cressey, Charles H. Gonzales, Michael A. Jeffries, Gerard M. Martin, Frank M.
McCord, Raymond N. Noveck, Barry M. Portnoy, and LeRoy S. Zimmerman. The six
lawsuits have been consolidated into one action styled IN RE HORIZON/CMS
HEALTHCARE CORPORATION SHAREHOLDERS LITIGATION. The plaintiffs allege, among
other things, that the Company's current and former directors breached their
fiduciary duties to the Company and the stockholders as a result of (i) the
purported failure to supervise adequately and the purported knowing
mismanagement of the operations of the Company, and the (ii) purported misuse of
inside information in connection with the sale of the Company's common stock by
certain of the current and former directors in January and February 1996. To
that end, the plaintiffs seek an accounting from the directors for profits to
themselves and damages suffered by the Company as a result of the transaction
complained of in the complaint and attorneys' fees and costs. The Company cannot
now predict the outcome or the effect of this litigation or the length of time
it will take to resolve this litigation. On June 21, 1996, the individual
88
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(16) LEGAL PROCEEDINGS (CONTINUED)
defendants filed a motion with the Chancery Court seeking to dismiss this matter
because, among other things, the plaintiffs failed to make a demand on the board
of directors prior to commencing this litigation.
In April 1996, the Company was served with a complaint in a stockholders
derivative lawsuit styled LIND V. ROCCO A. ORTENZIO, NEAL M. ELLIOTT, KLEMETT L.
BELT, JR., ROBERT A. ORTENZIO, RUSSELL L. CARSON, BRYAN C. CRESSEY, CHARLES H.
GONZALES, MICHAEL A. JEFFRIES, GERARD M. MARTIN, FRANK M. MCCORD, RAYMOND N.
NOVECK, BARRY M. PORTNOY, LEROY S. ZIMMERMAN AND HORIZON/CMS HEALTHCARE
CORPORATION, No. CIV 96-0538-BB, pending in the United States District Court for
the District of New Mexico. The plaintiff alleges, among other things, that the
Company's current and former directors breached their fiduciary duties to the
Company and the stockholders as a result of (i) the purported failure to
supervise adequately and the purported knowing mismanagement of the operations
of the Company, and the (ii) purported misuse of inside information in
connection with the sale of the Company's common stock by certain of the current
and former directors in January and February 1996. To that end, the plaintiff
seeks an accounting from the directors for profits to themselves and damages
suffered by the Company as a result of the transaction complained of in the
complaint and attorneys' fees and costs. The Company filed a motion seeking a
stay of this case pending the outcome of the motion to dismiss in the Delaware
derivative lawsuits or, in the alternative, to dismiss this case for those same
reasons. The Company cannot now predict the outcome or the effect of this
litigation or the length of time it will take or resolve this litigation.
(17) EXTRAORDINARY ITEM
FISCAL YEAR 1996
During fiscal 1996, the Company recorded extraordinary charges resulting
from the extinguishment of debt and the decision to dispose of assets following
the CMS merger.
On September 26, 1995, the Company completed a tender offer and consent
solicitation for $256,167 principal amount of its Senior Subordinated Notes. The
10 3/8% Notes were redeemed at 109.25% plus a consent fee of 1.05% and the
10 7/8% Notes were redeemed at 109.0% plus a consent fee of .75%. As a result of
the tender, the Company recorded an extraordinary charge related to the loss on
the retirement of the Senior Subordinared Notes, including the write-off of
related deferred discount, swap cancellation and financing costs, of
approximately $22,075, net of income taxes of approximately $15,987, in the
second quarter of fiscal 1996. The Senior Subordinated Notes were retired with
funds drawn on the NationsBank Facility.
As a result of discussions occurring during the fourth quarter of fiscal
1996, management significantly revised and expanded the group of facilities
originally
89
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(17) EXTRAORDINARY ITEM (CONTINUED)
identified for disposal in the first quarter of fiscal 1996. Management also
obtained board of director approval to pursue such a sale. Subsequent to year
end, the Company reached agreement regarding the sales price of these assets.
The difference between the proposed sales price or estimated fair value of the
properties and the recorded basis of the assets to be sold is approximately
$21.3 million. As a result, a $9.4 million charge was recorded in the fourth
quarter to increase the $11.9 million first quarter asset disposal reserve to
$21.3 million. In accordance with the provisions of Accounting Principles Board
Opinion No. 16 ("APB 16"), "Business Combinations," the fourth quarter charge
was classified as an extraordinary item. Management's decision with respect to
the fourth quarter revision and expansion of the group of facilities to be
disposed of occurred subsequent to the merger with CMS, in July 1995, which was
accounted for as a pooling of interests. APB 16 requires that profit or loss
resulting from the disposal of assets within two years after a pooling of
interests should be classified as an extraordinary item, net of tax. Because the
$11.9 million first quarter asset disposal charge occurred prior to the CMS
merger, that charge was appropriately classified within operations.
The operations currently proposed for disposition include 21 leased long-
term care facilities, ten owned long-term care facilities, three managed long-
term care facilities, one pharmacy operation, the Company's rights in respect of
one pharmacy operation, and the Company's investment interest in a pharmacy
operation. The assets to be disposed of comprise substantially all of the
Company's operations in the states of Massachusetts, Connecticut, Ohio and
Wisconsin. Certain other of the targeted assets are located in Michigan and
Colorado.
The results of operations of the properties held for sale as of May 31, are
as follows (unaudited):
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues.............................. $ 180,212 $ 171,874 $ 111,602
Expenses.............................. (176,033) (165,365) (101,877)
Pre-tax income (loss)................. (4,850) (3,480) 4,081
</TABLE>
Total assets, net of the impairment reserve discussed above, or
approximately $118,697 related to the operations to be disposed of have been
reclassified and are included within prepaid and other assets in the May 31,
1996 balance sheet. Total liabilities of $27,932 related to these operations
have been reclassified to accrued expenses and other liabilities in the May 31,
1996 balance sheet. In the May 31, 1995 balance sheet, the related assets and
liabilities held for sale have been aggregated and reclassified as follows: (i)
$34,608 of current assets is recorded as prepaid and other assets, (ii) $90,522
of non-current assets is recorded as other assets, (iii) $13,678 of current
liabilities is recorded as accrued expenses and other, and (iv) $20,846 of
non-current liabilities is recorded as other liabilities.
90
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(17) EXTRAORDINARY ITEM (CONTINUED)
The proposed disposition, though subject to final approval of the purchaser,
the consent of the Company's landlords, the consent and release of liability by
one of the Company's landlords, and the approval of various regulatory
authorities, is expected to be completed in the second or third quarter of
fiscal 1997.
FISCAL YEAR 1995
During fiscal 1995, the Company recognized a gain of $2,571 ($4,172 less
related tax effect of $1,601) relating to open market purchases of its Senior
Subordinated Notes and its 8 3/4% and 6 1/2% convertible subordinated notes at a
discount.
FISCAL YEAR 1994
During fiscal 1994, the Company recognized a gain of $734 ($1,214 less
related tax effect of $480) relating to open market purchases of its 8 3/4% and
6 1/2% convertible subordinated notes at a discount.
91
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(18) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations:
<TABLE>
<CAPTION>
FISCAL YEAR 1996
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER(A) QUARTER(B)(C) QUARTER(D)(E) QUARTER(F)(G)
----------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Total operating revenues.................................... $431,407 $440,752 $ 438,199 $442,726
Earnings (loss) before income taxes and extraordinary
item....................................................... (31,445) 33,726 27,325 7,290
Earnings (loss) before extraordinary item................... (28,925) 19,543 15,845 89
Net earnings (loss)......................................... (28,925) (2,532) 15,845 (9,164)
Earnings (loss) per common and common equivalent share:
Earnings (loss) before extraordinary item................... $ (0.56) $ 0.38 $ 0.30 $ --
Extraordinary item.......................................... -- (0.43) -- (0.18)
----------- --------------- ----------------- ---------------
Net earnings (loss)......................................... $ (0.56) $ (0.05) $ 0.30 $ (0.18)
----------- --------------- ----------------- ---------------
----------- --------------- ----------------- ---------------
<CAPTION>
FISCAL YEAR 1995
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER(H) QUARTER(I)(J) QUARTER(K)(L)
----------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Total operating revenues.................................... $381,840 $401,572 $ 415,878 $426,036
Earnings before income taxes and extraordinary item......... 20,771 4,021 17,996 5,585
Earnings before extraordinary item.......................... 12,160 1,253 10,228 1,357
Net earnings................................................ 12,160 1,253 1,431
Earnings per common and common equivalent share:
Earnings before extraordinary item.......................... $ 0.27 $ 0.03 $ 0.20 $ 0.02
Extraordinary item.......................................... -- -- 0.05 0.01
----------- --------------- ----------------- ---------------
Net earnings................................................ $ 0.27 $ 0.03 $ 0.25 $ 0.03
----------- --------------- ----------------- ---------------
----------- --------------- ----------------- ---------------
</TABLE>
- ----------------------------------
(a) Includes a $63.5 million pre-tax special charge resulting primarily from
costs incurred in completing the merger with CMS, the approval by management
of restructuring measures related to efforts to combine the previously
separate companies and a decision by management prior to the CMS merger to
dispose of selected facilities.
(b) Includes $9.3 million of revenue resulting from arrangements related to an
unsuccessful merger effort.
(c) Includes a $22.1 million extraordinary loss (net of tax) relating to the
extinguishment of senior subordinated debt.
(d) Includes $18.2 million of revenue related to the estimated reimbursement
benefit of debt retirement costs, net of $7.0 million pre-tax charge to
increase third-party settlement receivable reserves.
(e) Includes $5.1 million pre-tax charge related to the Company's OIG/DOJ
Medicare Part B billings investigation.
(f) Includes a $17.0 million pre-tax special charge resulting from the
impairment of certain long-lived assets and the accrual for estimated costs
of litigation and investigations.
(g) Includes a $9.3 million extraordinary loss (net of tax) related to a
decision by management subsequent to the CMS merger to revise and expand the
group of facilities held for sale prior to the CMS merger.
(h) Includes $13.4 million pre-tax special charge related to a revision in the
Company's estimate of receivables from third party payors at its CMS
Therapies, Inc. subsidiary.
92
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(18) QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
(i) Includes $5,045 pre-tax special charge related to eliminations of
management and staff positions, office lease terminations and certain other
costs of changes implemented during the third quarter at CMS Therapies, Inc.
(j) Includes a $2,497 extraordinary gain (net of tax) relating to open market
purchases of its subordinated debt and its 8 3/4% and 6 1/2% convertible
subordinated notes at a discount.
(k) Includes a $4,979 pre-tax special charge related to a revision in the
Company's estimate of receivables from third party payors at its CMS
Therapies, Inc. subsidiary and $13,500 pre-tax settlement charge related to
a contract dispute.
(l) Includes a $74 extraordinary gain (net of tax) related to open market
purchases of its subordinated debt and its 8 3/4% and 6 1/2% convertible
subordinated notes at a discount.
93
<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 10, 1996, which will be filed
with the Securities and Exchange Commission and is incorporated herein by
reference, and "Business -- Directors and Executive Officers" 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
---------------------------------------------------
<S> <C> <C> <C>
II -- Valuation and Qualifying Accounts 105
</TABLE>
3. Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------ ----------------------------------------------------------------------------
<C> <S>
**2.1 First Amendment to Agreement and Plan of Merger dated September 30, 1993
between the Company and Greenery.
**2.2 Agreement dated July 30, 1993 between the Company, Health and Rehabilitation
Properties Trust ("HRPT") and Greenery.
**2.3 Letter Agreement between the Company, Greenery and HRPT (amending Exhibit
2.3 above).
**2.4 Purchase Agreement dated as of July 30, 1993 between M&P Partners Limited
Partnership, Greenery and 99111 Chestnut Hill Avenue Corp.
**2.5 First Amendment to Purchase Agreement (amending Exhibit 2.4 above) dated
October 29, 1993.
**2.6 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
</TABLE>
94
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------ ----------------------------------------------------------------------------
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.
<C> <S>
**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 Annual Report on Form 10-K
(the "1994 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).
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 (incorporated by
reference to Exhibit 3.5).
</TABLE>
95
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------ ----------------------------------------------------------------------------
<C> <S>
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).
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 (incorporated by reference to Exhibit 4.17 to the Company's Annual
Report on Form 10-K (the "1995 Form 10-K")).
*4.17.1 Supplemental Indenture dated as of September 12, 1995 (supplementing
Exhibits 4.15 and 4.17 above), between CMS and NationsBank of Virginia,
N.A., as Trustee.
</TABLE>
96
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------ ----------------------------------------------------------------------------
<C> <S>
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 (incorporated by reference to Exhibit 4.20 to the Company's 1995
Form 10-K).
*4.20.1 Supplemental Indenture dated as of September 12, 1995, (supplementing
Exhibits 4.18 and 4.20 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).
4.22 Amended and Restated Credit Agreement dated as of September 26, 1995 by and
among the Company, CMS, the Lenders named therein and NationsBank of Texas,
N.A., as Agent and Issuing Bank (incorporated by reference to Exhibit 10.1
of the Company's August 31, 1995 Form 10-Q dated October 16, 1995).
*4.23 First Amendment dated as of April 15, 1996 to the Amended and Restated
Credit Agreement dated as of September 26, 1995 by and among the Company,
CMS, the Lenders named therein and NationsBank of Texas, N.A., as Agent and
Issuing Bank.
*4.24 Second Amendment dated as of July 16, 1996 to the Amended and Restated
Credit Agreement dated as of September 26, 1995 by and among the Company,
CMS, the Lenders named therein and NationsBank of Texas, N.A., as Agent and
Issuing Bank.
*4.25 Letter Agreement dated as of October 18, 1995 confirming interest rate
collar agreement.
+**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.
+*10.2.1 Severance and Retirement Agreement dated as of December 19, 1995, 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 (incorporated by reference to Exhibit 10.3 to the
Company's 1995 Form 10-K).
10.4 Subscription and Lending Agreement between CMS and Rocco A. Ortenzio and
7 3/4% Convertible Subordinated
</TABLE>
97
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------ ----------------------------------------------------------------------------
Debentures due 2012 and $2,000,000 Note relating thereto (incorporated by
reference to Exhibit 10.4 to the Company's 1995 Form 10-K).
<C> <S>
+*10.5 Consulting Agreement dated August 10, 1995 between the Company and Rocco A.
Ortenzio.
+*10.6 Letter Agreement dated July 17, 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
(incorporated by reference to Exhibit 10.12 to the Company's 1995 Form
10-K).
+10.13 Horizon Healthcare Corporation 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 Amendment No. 1 to Horizon Healthcare Corporation Stock Option Plan for
Non-Employee Directors.
+10.15 Horizon/CMS Healthcare Corporation 1995 Incentive Plan (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on Form
S-8 (Registration No. 33-63199)).
+10.16 Horizon/CMS Healthcare Corporation 1995 Non-Employee Directors' Stock Option
Plan (incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-8 (Registration No. 33-63199)).
+10.17 Employee Stock Purchase Plan of the Company (incorporated by reference to
Exhibit 10.9 to the Company's 1994 Form 10-K).
+*10.18 First Amendment to Horizon Healthcare Corporation Employee Stock Purchase
Plan.
+*10.19 Horizon/CMS Healthcare Corporation 1996 Employee Stock Purchase Plan.
</TABLE>
98
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------ ----------------------------------------------------------------------------
<C> <S>
+10.20 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)).
+10.21 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)).
+10.22 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)).
+10.23 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)).
+10.24 Continental Medical Systems, Inc. 1994 Stock Option Plan and form of option
agreement (incorporated by reference to Exhibit 4.5 to the Company's
Registration Statement on Form S-8 (Registration No. 33-61697)).
+10.25 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).
+10.26 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).
+10.27 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).
+10.28 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).
</TABLE>
99
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------ ----------------------------------------------------------------------------
<C> <S>
+10.29 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).
+10.30 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).
+10.31 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).
+10.32 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).
+10.33 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).
+10.34 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).
10.35 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).
10.36 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).
10.37 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).
10.38 Office Lease Agreement between CMS (as tenant) and LeRoy S. Zimmerman (as
landlord) dated December 29, 1994 relating to Liberty Plaza I (incorporated
by reference to Exhibit 10.34 to the Company's 1995 Form 10-K).
10.39 Office Lease Agreement between CMS (as tenant) and Liberty Plaza Associates
II (as landlord) dated February 1, 1995 relating to Liberty Plaza II
(incorporated by reference to Exhibit 10.35 to the Company's 1995 Form
10-K).
</TABLE>
100
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------ ----------------------------------------------------------------------------
<C> <S>
10.40 Office Lease Agreement between CMS (as tenant) and Liberty Plaza Associates
III (as landlord) dated February 1, 1995 (incorporated by reference to
Exhibit 10.36 to the Company's 1995 Form 10-K).
+10.41 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
(incorporated by reference to Exhibit 10.37 to the Company's 1995 Form
10-K).
+*10.42 IDS Financial Services Inc. Defined Contribution Prototype Plan and Trust
Agreement.
+*10.42.1 Amendment No. 1 to the CMS 401(k) Profit Sharing Plan (amending Exhibit
10.42 above).
*10.43 Master Management Agreement dated as of January 1, 1996, by and among the
Company, Texas Health Enterprises, Inc., Health Enterprises of Oklahoma,
Inc., Health Enterprises of Michigan, Inc., HEA Management Group, Inc., and
PCK-TEX, Ltd.
*10.44 Loan Agreement dated as of January 1, 1996, by and among the Company, Texas
Health Enterprises Inc., Health Enterprises of Oklahoma, Inc., Health
Enterprises of Michigan, Inc., HEA Management Group, Inc. and PCK-TEX, Ltd.
*11.1 Statement re: Computation of Per Share Earnings.
*21 List of subsidiaries of the Company.
*23.1 Consent of Arthur Andersen LLP
*23.2 Consent of Ernst & Young LLP
*27 Financial Data Schedule.
</TABLE>
- ------------------------
+ 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.
(b) Reports on Form 8-K:
101
<PAGE>
<TABLE>
<CAPTION>
DATE OF REPORT ITEMS REPORTED
- ------------------ ----------------------------------------------------------------------
<S> <C>
March 6, 1996 Filed on March 21, 1996, reporting under "Item 5. Other Events" the
(i) existence of OIG/DOJ investigation involving certain of the
Company's Medicare Part B and related co-insurance billings, and (ii)
commencement of litigation against Tenet Healthcare Corporation.
April 1, 1996 Filed on April 8, 1996, reporting under "Item 5. Other Events" the
commencement of class action litigation against the Company and
certain of its current and former officers and directors alleging
violations of the Federal and State securities laws.
July 10, 1995 Filed on April 23, 1996, amending that certain Current Report on Form
8-K filed with the Commission on November 21, 1995, which was filed
under "Item 7. Financial Statements and Exhibits" which provided
audited restated financial statements for the years ended May 31,
1995, and 1994, respectively, and for each of the three years in the
period ended May 31, 1995, to reflect the merger with CMS pursuant to
Rule 11-01(b) of Regulation S-X.
April 22, 1996 Filed on May 3, 1996, reporting under "Item 5. Other Events" the
commencement of (i) class action litigation against the Company and
certain of its current and former officers and directors alleging
violations of the Federal and State securities laws, and (ii)
stockholders' derivative lawsuits against the Company (as a nominal
defendant) and the Company's current and former directors.
May 9, 1996 Filed on May 20, 1996, reporting under "Item 5. Other Events" the
commencement of (i) additional class action litigation against the
Company and certain of its current and former officers and directors
alleging violations of the Federal and State securities laws
substantially identical to that previously reported by the Company,
and (ii) additional stockholders' derivative lawsuits against the
Company (as a nominal defendant) and the Company's current and former
directors substantially identical to that previously reported by the
Company.
</TABLE>
102
<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 16th day of
August, 1996.
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 16, 1996
------------------------------- Officer and Chairman of the
Neal M. Elliott Board of Directors
(Principal Executive
Officer)
/s/ CHARLES H. GONZALES Director August 16, 1996
-------------------------------
Charles H. Gonzales
/s/ MICHAEL A. JEFFRIES Director August 16, 1996
-------------------------------
Michael A. Jeffries
/s/ FRANK M. MCCORD Director August 16, 1996
-------------------------------
Frank M. McCord
/s/ RAYMOND N. NOVECK Director August 16, 1996
-------------------------------
Raymond N. Noveck
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------- ---------------------------- -------------------
/s/ CHARLES K. BRADFORD Director August 16, 1996
-------------------------------
Charles K. Bradford
<C> <S> <C>
/s/ MARIA PAPPAS Director August 16, 1996
-------------------------------
Maria Pappas
/s/ RONALD N. RINER, MD Director August 16, 1996
-------------------------------
Ronald N. Riner, MD
/s/ ERNEST A. SCHOFIELD Senior Vice President, Chief August 16, 1996
------------------------------- Financial Officer, Chief
Ernest A. Schofield Accounting Officer and
Director (Principal
Financial and Accounting
Officer)
</TABLE>
104
<PAGE>
SCHEDULE II
HORIZON/CMS HEALTHCARE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MAY 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS PERIOD
- ---------------------------------------- ---------- ---------- ----- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:........
1996................................ $ 28,120 $ 27,163 $-- $ (13,936 )(1) $ 41,347
---------- ---------- ----- ---------- ----------
---------- ---------- ----- ---------- ----------
1995................................ $ 20,192 $ 23,158 $-- $ (15,230 )(1) $ 28,120
---------- ---------- ----- ---------- ----------
---------- ---------- ----- ---------- ----------
1994................................ $ 18,494 $ 20,694 $5,586(2) $ (24,582 )(1) $ 20,192
---------- ---------- ----- ---------- ----------
---------- ---------- ----- ---------- ----------
Valuation allowance on deferred tax
assets:................................
1996................................ $ 4,051 $ -- $1,179(3) $ (2,980 )(4) $ 2,250
---------- ---------- ----- ---------- ----------
---------- ---------- ----- ---------- ----------
1995................................ $ 4,851 $ -- $-- $ (800 )(5) $ 4,051
---------- ---------- ----- ---------- ----------
---------- ---------- ----- ---------- ----------
1994................................ $ -- $ -- $4,851(2) $ -- $ 4,851
---------- ---------- ----- ---------- ----------
---------- ---------- ----- ---------- ----------
</TABLE>
- --------------------------
(1) Represents write-offs against the allowance.
(2) In fiscal 1994, the Company purchased Greenery Rehabilitation Group, Inc.
and had other acquisitions which in the aggregate were insignificant.
Additions in the amounts of $5,586 and $3,051 in the allowance for doubtful
accounts and valuation on deferred tax assets, respectively, were recorded
in connection with these acquisitions. The remaining addition of $1,800 in
the valuation on deferred tax assets resulted from uncertain state tax
benefits resulting from states requiring separate return filings and capital
loss carryforward limitations.
(3) Resulted from business combinations during fiscal 1996.
(4) Resulted from the recognition of certain federal and state loss carryover
benefits from a prior business combination.
(5) Resulted primarily from the utilization of capital loss carryforwards.
105
<PAGE>
EXHIBIT 4.17.1
SUPPLEMENTAL INDENTURE
dated as of September 12, 1995
to the Indenture
dated as of August 17, 1992
by and between
CONTINENTAL MEDICAL SYSTEMS, INC.
and
NATIONSBANK OF VIRGINIA, N.A.,
as Trustee
<PAGE>
SUPPLEMENTAL INDENTURE, dated as of September 12, 1995 (the
"Supplemental Indenture"), between CONTINENTAL MEDICAL SYSTEMS, INC. (the
"Company"), a Delaware corporation and wholly-owned subsidiary of Horizon/CMS
Healthcare Corporation ("Horizon"), and NATIONSBANK OF VIRGINIA, N.A., a
national banking association, as trustee (the "Trustee"), to the Indenture
dated as of August 17, 1992 (as amended to the date hereof, the "Original
Indenture") between the Company and the Trustee.
RECITALS
The Company duly authorized the creation of an issue of 10-7/8% Senior
Subordinated Notes due 2002 (the "Securities"), of substantially the tenor
and amount set forth in the Original Indenture, and to provide therefor the
Company duly authorized the execution and delivery of the Original Indenture;
All acts and things necessary were done to make the Securities, when
executed by the Company and authenticated and delivered under the Original
Indenture and duly issued by the Company, the valid obligations of the
Company and to make the Original Indenture a valid agreement of the Company
in accordance with the terms of the Original Indenture;
Horizon acquired the Company on July 10, 1995 by means of a merger of
CMS Merger Corporation, a wholly-owned subsidiary of Horizon, with and into
the Company, with the Company being the surviving corporation (the "Merger").
Upon the consummation of the Merger, the Company became a wholly-owned
subsidiary of Horizon;
Horizon has offered to purchase for cash (the "Tender Offer") all of
the outstanding Securities. In conjunction with the Tender Offer, Horizon has
solicited consents (the "Consents") from Holders to certain proposed
amendments to the Original Indenture (the "Consent Solicitation");
The Holders of at least a majority in aggregate principal amount of the
outstanding Securities have tendered Securities in the Tender Offer and
delivered Consents in the Consent Solicitation (the "Requisite Consents");
This Supplemental Indenture incorporates the amendments to which such
Holders have consented; and
All acts and things necessary have been done to make this Supplemental
Indenture a valid agreement of the Company in accordance with the terms of
the Original Indenture.
-2-
<PAGE>
NOW THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH:
The parties hereto mutually covenant and agree and do hereby amend the
Original Indenture as follows:
ARTICLE I. DELETED DEFINITIONS. The following definitions are hereby
deleted in their entirety:
(a) Acquired Indebtedness;
(b) Average Life to Stated Maturity;
(c) Code;
(d) Consolidated Net Income;
(e) Consolidated Net Worth;
(f) Consolidated Rental Payments;
(g) Fixed Charge Coverage Ratio;
(h) Permitted Indebtedness;
(i) Permitted Investment;
(j) Physician Support Obligation;
(k) Predecessor Security;
(l) Qualified Capital Stock;
(m) Restricted Payment;
(n) Acquisition Survivor;
(o) Leased Facility;
(p) Permitted Preferred Stock;
(q) Security Amount; and
(r) Surviving Entity.
-3-
<PAGE>
ARTICLE II. DELETED COVENANTS. The following covenants are hereby
deleted in their entirety:
(a) Section 801 (Company or Guarantor May Consolidate,
Amalgamate, etc., Only on Certain Terms);
(b) Section 802 (Successor Substituted);
(c) Section 1006 (Maintenance of Properties);
(d) Section 1007 (Insurance);
(e) Section 1008 (Limitation on Indebtedness);
(f) Section 1009 (Limitation on Restricted Payments);
(g) Section 1010 (Restrictions on Preferred Stock of Subsidiaries
and Subsidiary Distributions);
(h) Section 1011 (Limitation on Dividends and Other Payment
Restrictions Affecting Subsidiaries);
(i) Section 1012 (Limitation on Liens Securing Subordinated
Indebtedness);
(j) Section 1013 (Provision of Financial Statements);
(k) Section 1014 (Limitation on Transactions with Affiliates);
(l) Section 1016 (Limitation on Issuance of Guarantees of
Subordinated Indebtedness); and
(m) Section 1017 (Limitation on Other Senior Subordinated
Indebtedness).
ARTICLE III. SECTIONS DELETED AND REPLACED. The text of Sections 501
and 502 of the Original Indenture is hereby deleted in its entirety and
replaced with the following:
"Section 501. EVENTS OF DEFAULT. "Event of Default", wherever used
herein, means any one of the following events (whatever the reason for such
Event of Default and whether it shall be occasioned by the provisions of
Article Twelve or be voluntary or involuntary or be effected by operation of
law or pursuant to any judgment, decree or order of any court or any order,
rule or regulation of any administrative or governmental body):
(a) there shall be a default in the payment of any interest on any
Security when its becomes due and payable, and such default shall continue
for a period of 30 days;
-4-
<PAGE>
(b) there shall be a default in the payment of the principal of
(or premium, if any, on) any Security at its Stated Maturity;
(c) (i) there shall be a default in the performance, or breach, of
any covenant or agreement of the Company or of any Guarantor under this
Indenture (other than a default in the performance or breach of a covenant or
agreement which is specifically dealt with elsewhere in this Indenture) and
such default or breach shall continue for a period of 30 days after written
notice has been given, by certified mail, (x) to the Company by the Trustee
or (y) to the Company and the Trustee by the holders of at least 25% in
aggregate principal amount of the outstanding Securities; (ii) there shall be
a default in the performance or breach of the provisions of Article Eight;
(iii) the Company shall have failed to make or consummate an Offer in
accordance with the provisions of Section 1015; or (iv) the Company shall
have failed to make or consummate a Change in Control Offer in accordance
with the provisions of Section 1018;
(d) the entry of a decree or order by a court having jurisdiction
in the premises (i) for relief in respect of the Company or any Subsidiary in
an involuntary case or proceeding under any Bankruptcy Law or (ii) adjudging
the Company or any Subsidiary a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment or composition of or in respect of
the Company or any Subsidiary under any Bankruptcy Law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Company or any Subsidiary or of any substantial part
of any of their properties, or ordering the winding up or liquidation of any
of their affairs, and the continuance of any such decree or order unstayed
and in effect for a period of 60 consecutive days; or
(e) the institution by the Company or any Subsidiary of a
voluntary case or proceeding under any Bankruptcy Law or any other case or
proceedings to be adjudicated a bankrupt or insolvent, or the consent by the
Company or any Subsidiary to the entry of a decree or order for relief in
respect of the Company or any Subsidiary in any involuntary case or
proceedings under any Bankruptcy Law or to the institution of bankruptcy or
any insolvency proceedings against the Company or any Subsidiary, or the
filing by the Company or any Subsidiary of a petition or answer or consent
seeking reorganization or relief under any Bankruptcy Law, or the consent by
it to the filing of any such petition or to the appointment or taking
possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of any of the Company or any
Subsidiary or of any substantial part of its property, or the making by it of
an assignment for the benefit of creditors, or the admission by it in writing
of its inability to pay its debts generally as they become due or taking of
corporate action by the Company or any Subsidiary in furtherance of any such
action.
The Company shall deliver to the Trustee within five days after the
occurrence thereof, written notice, in the form of an Officers' Certificate,
of any Default, its status and what action the Company is taking or proposes
to take with respect thereto.
-5-
<PAGE>
Section 502. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.
If an Event of Default (other than an Event of Default specified in
Sections 501(d) and (e)) occurs and is continuing, the Trustee or the Holders
of not less than 25% in aggregate principal amount of the Securities
Outstanding may, and the Trustee upon the request of the Holders of not less
than 25% in aggregate principal amount of the Securities Outstanding shall,
declare the principal of all the Securities to be due and payable immediately
in an amount equal to the principal amount of the Securities, together with
accrued and unpaid interest to the date the Securities become due and
payable, by a notice in writing to the Company (and to the Trustee, if given
by the Holders), and upon any such declaration such principal shall become
immediately due and payable. If an Event of Default specified in Sections
501(d) and (e) occurs and is continuing, then the principal of all the
Securities shall IPSO FACTO become and be immediately due and payable without
any declaration or other act on the part of the Trustee or any Holder.
At any time after such declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter in this Article provided, the Holders of a
majority in aggregate principal amount of the Securities Outstanding, by
written notice to the Company and the Trustee, may rescind and annul such
declaration and its consequences if:
(a) the Company has paid or deposited with the Trustee a sum sufficient
to pay
(i) all sums paid or advanced by the Trustee under Section 606 and
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel,
(ii) all overdue interest on all Securities,
(iii) the principal of and premium, if any, on any Securities which
have become due otherwise than by such declaration of acceleration and
interest thereon at the rate borne by the Securities, and
(iv) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate borne by the Securities; and
(b) all Events of Default, other than the non-payment of principal of
Securities which have become due solely by such declaration of acceleration,
have been cured or waived as provided in Section 513.
No such rescission shall affect any subsequent default or impair any right
consequent thereon provided in Section 513."
ARTICLE IV. EFFECTIVENESS. The parties hereto have entered into this
Supplemental Indenture upon receipt of the Requisite Consents. However, this
Supplemental Indenture will not become effective until Horizon has accepted
all Securities validly tendered for purchase
-6-
<PAGE>
pursuant to the Tender Offer (the "Acceptance Date"). The Acceptance Date
will occur promptly after the later of (a) the expiration date of the Tender
Offer and (b) the satisfaction or waiver of the conditions specified in the
Tender Offer.
ARTICLE V. MISCELLANEOUS.
(a) This Supplemental Indenture shall be construed as supplemental to
the Original Indenture and shall form a part thereof, and the Original
Indenture is hereby incorporated by reference herein and, as supplemented,
modified and restated hereby, is hereby ratified, approved and confirmed.
(b) This Supplemental Indenture shall be governed by and construed in
accordance with the laws of the State of New York.
(c) This Supplemental Indenture may be executed in two or more
counterparts, each of which constitute an original but all of which when
taken together shall constitute but one contract.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed by their respective authorized officers as of
the day and year first above written.
CONTINENTAL MEDICAL SYSTEMS, INC.
By: /s/ ERNEST A. SCHOFIELD
----------------------------------
Name: Ernest A. Schofield
Title: Senior Vice President
NATIONSBANK OF VIRGINIA, N.A.,
as Trustee
By: /s/ FRANKLIN S. WARD
----------------------------------
Name: Franklin S. Ward
Title: Vice President
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<PAGE>
SUPPLEMENTAL INDENTURE
dated as of September 12, 1995
to the Indenture
dated as of March 15, 1993
by and between
CONTINENTAL MEDICAL SYSTEMS, INC.
and
NATIONSBANK OF VIRGINIA, N.A.,
as Trustee
<PAGE>
SUPPLEMENTAL INDENTURE, dated as of September 12, 1995 (the "Supplemental
Indenture"), between CONTINENTAL MEDICAL SYSTEMS, INC. (the "Company"), a
Delaware corporation and wholly-owned subsidiary of Horizon/CMS Healthcare
Corporation ("Horizon"), and NATIONSBANK OF VIRGINIA, N.A., a national
banking association, as trustee (the "Trustee"), to the Indenture dated as of
March 15, 1993 (as amended to the date hereof, the "Original Indenture")
between the Company and the Trustee.
RECITALS
The Company duly authorized the creation of an issue of 10-3/8% Senior
Subordinated Notes due 2003, Series A and Series B (the "Securities"), of
substantially the tenor and amount set forth in the Original Indenture, and
to provide therefor the Company duly authorized the execution and delivery
of the Original Indenture;
All acts and things necessary were done to make the Securities, when
executed by the Company and authenticated and delivered under the Original
Indenture and duly issued by the Company, the valid obligations of the
Company and to make the Original Indenture a valid agreement of the Company
in accordance with the terms of the Original Indenture;
Horizon acquired the Company on July 10, 1995 by means of a merger of CMS
Merger Corporation, a wholly-owned subsidiary of Horizon, with and into the
Company, with the Company being the surviving corporation (the "Merger").
Upon consummation of the Merger, the Company because a wholly-owned
subsidiary of Horizon;
Horizon has offered to purchase for cash (the "Tender Offer") all of the
outstanding Securities. In conjunction with the Tender Offer, Horizon has
solicited consents (the "Consents") from Holders to certain proposed
amendments to the Original Indenture (the "Consent Solicitation");
The Holders of at least a majority in aggregate principal amount of the
outstanding Securities have tendered Securities in the Tender Offer and
delivered Consents in the Consent Solicitation (the "Requisite Consents");
This Supplemental Indenture incorporates the amendments to which such
Holders have consented; and
All acts and things necessary have been done to make this Supplemental
Indenture a valid agreement of the Company in accordance with the terms of
the Original Indenture.
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<PAGE>
NOW THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH:
The parties hereto mutually covenant and agree and do hereby amend the
Original Indenture as follows:
ARTICLE I. DELETED DEFINITIONS. The following definitions are hereby
deleted in their entirety:
(a) Acquired Indebtedness;
(b) Average Life to Stated Maturity;
(c) Code;
(d) Consolidated Net Income;
(e) Consolidated Net Worth;
(f) Consolidated Rental Payments;
(g) Fixed Charge Coverage Ratio;
(h) Permitted Indebtedness;
(i) Permitted Investment;
(j) Physician Support Obligation;
(k) Qualified Capital Stock;
(l) Restricted Payment;
(m) Acquisition Survivor;
(n) Leased Facility;
(o) Permitted Preferred Stock;
(p) Security Amount; and
(q) Surviving Entity.
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<PAGE>
ARTICLE II. DELETED COVENANTS. The following covenants are hereby
deleted in their entirety:
(a) Section 801 (Company or Guarantor May Consolidate, Amalgamate,
etc., Only on Certain Terms);
(b) Section 802 (Successor Substituted);
(c) Section 1006 (Maintenance of Properties);
(d) Section 1007 (Insurance);
(e) Section 1008 (Limitation on Indebtedness);
(f) Section 1009 (Limitation on Restricted Payments);
(g) Section 1010 (Restrictions on Preferred Stock of Subsidiaries and
Subsidiary Distributions);
(h) Section 1011 (Limitation on Dividends and Other Payment
Restrictions Affecting Subsidiaries);
(i) Section 1012 (Limitation on Liens Securing Subordinated
Indebtedness);
(j) Section 1013 (Provision of Financial Statements);
(k) Section 1014 (Limitation on Transactions with Affiliates);
(l) Section 1016 (Limitation on Issuance of Guarantees of Subordinated
Indebtedness); and
(m) Section 1017 (Limitation on Other Senior Subordinated
Indebtedness).
ARTICLE III. SECTIONS DELETED AND REPLACED. The text of Sections 501 and
502 of the Original Indenture is hereby deleted in its entirety and replaced
with the following:
"Section 501. EVENTS OF DEFAULT. "Event of Default", wherever used
herein, means any one of the following events (whatever the reason for such
Event of Default and whether it shall be occasioned by the provisions of
Article Twelve or be voluntary or involuntary or be effected by operation of
law or pursuant to any judgment, decree or order of any court or any order,
rule or regulation of any administrative or governmental body):
(a) there shall be a default in the payment of any interest on any
Security when it becomes due and payable, and such default shall continue for
a period of 30 days;
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<PAGE>
(b) there shall be a default in the payment of the principal of (or
premium, if any, on) any Security at its Stated Maturity;
(c) (i) there shall be a default in the performance, or breach, of any
covenant or agreement of the Company or of any Guarantor under this Indenture
(other than a default in the performance or breach of a covenant or agreement
which is specifically dealt with elsewhere in this Indenture) and such
default or breach shall continue for a period of 30 days after written notice
has been given, by certified mail, (x) to the Company by the Trustee or (y)
to the Company and the Trustee by the holders of at least 25% in aggregate
principal amount of the outstanding Securities; (ii) there shall be a default
in the performance or breach of the provisions of Article Eight; (iii) the
Company shall have failed to make or consummate an Offer in accordance with
the provisions of Section 1015; or (iv) the Company shall have failed to make
or consummate a Change in Control Offer in accordance with the provisions of
Section 1018;
(d) the entry of a decree or order by a court having jurisdiction in the
premises (i) for relief in respect of the Company or any Subsidiary in an
involuntary case or proceeding under any Bankruptcy Law or (ii) adjudging the
Company or any Subsidiary a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company or any
Subsidiary under any Bankruptcy Law, or appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of
the Company or any Subsidiary or of any substantial part of any of their
properties, or ordering the winding up or liquidation of any of their
affairs, and the continuance of any such decree or order unstayed and in
effect for a period of 60 consecutive days; or
(e) the institution by the Company or any Subsidiary of a voluntary case or
proceeding under any Bankruptcy Law or any other case or proceedings to be
adjudicated a bankrupt or insolvent, or the consent by the Company or any
Subsidiary to the entry of a decree or order for relief in respect of the
Company or any Subsidiary in any involuntary case or proceeding under any
Bankruptcy Law or to the institution of bankruptcy or any insolvency
proceedings against the Company or any Subsidiary, or the filing by the
Company or any Subsidiary of a petition or answer or consent seeking
reorganization or relief under any Bankruptcy Law, or the consent by it to
the filing of any such petition or to the appointment or taking possession by
a custodian, receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of any of the Company or any Subsidiary or of any
substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the admission by it in writing of its inability
to pay its debts generally as they become due or taking of corporate action
by the Company or any Subsidiary in furtherance of any such action.
The Company shall deliver to the Trustee within five days after the
occurrence thereof, written notice, in the form of an Officers' Certificate,
of any Default, its status and what action the Company is taking or proposes
to take with respect thereto.
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<PAGE>
Section 502. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.
If an Event of Default (other than an Event of Default specified in
Sections 501(d) and (e)) occurs and is continuing, the Trustee or the Holders
of not less than 25% in aggregate principal amount of the Securities
Outstanding may, and the Trustee upon the request of the Holders of not less
than 25% in aggregate principal amount of the Securities Outstanding shall,
declare the principal of all the Securities to be due and payable immediately
in an amount equal to the principal amount of the Securities, together with
accrued and unpaid interest to the date the Securities become due and
payable, by a notice in writing to the Company (and to the Trustee, if given
by the Holders), and upon any such declaration such principal shall become
immediately due and payable. If an Event of Default specified in Sections
501(d) and (e) occurs and is continuing, then the principal of all the
Securities shall IPSO FACTO become and be immediately due and
payable without any declaration or other act on the part of the Trustee or
any Holders.
At any time after such declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter in this Article provided, the Holders of a
majority in aggregate principal amount of the Securities Outstanding, by
written notice to the Company and the Trustee, may rescind and annul such
declaration and its consequences if:
(a) the Company has paid or deposited with the Trustee a sum sufficient to
pay
(i) all sums paid or advanced by the Trustee under Section 606 and
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel,
(ii) all overdue interest on all Securities,
(iii) the principal of and premium, if any, on any Securities
which have become due otherwise than by such declaration of acceleration
and interest thereon at the rate borne by the Securities, and
(iv) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate borne by the Securities; and
(b) all Events of Default, other than the non-payment of principal of
Securities which have become due solely by such declaration of
acceleration, have been cured or waived as provided in Section 513.
No such recession shall affect any subsequent default or impair any right
consequent thereon provided in Section 513."
ARTICLE IV. EFFECTIVENESS. The parties hereto have entered into this
Supplemental Indenture upon receipt of the Requisite Consents. However,
this Supplemental Indenture will not become effective until Horizon has
accepted all Securities validly tendered for purchase
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<PAGE>
pursuant to the Tender Offer (the "Acceptance Date"). The Acceptance Date
will occur promptly after the later of (a) the expiration date of the
Tender Offer and (b) the satisfaction or waiver of the conditions
specified in the Tender Offer.
ARTICLE V. MISCELLANEOUS.
(a) This Supplemental Indenture shall be construed as supplemental to the
Original Indenture and shall form a part thereof, and the Original Indenture
is hereby incorporated by reference herein and, as supplemented, modified and
restated hereby, is hereby ratified, approved and confirmed.
(b) This Supplemental Indenture shall be governed by and construed in
accordance with the laws of the State of New York.
(c) This Supplemental Indenture may be executed in two or more
counterparts, each of which shall constitute an original but all of which
when taken together shall constitute but one contract.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed by their respective authorized officers as
of the day and year first above written.
CONTINENTAL MEDICAL SYSTEMS, INC.
By: /s/ ERNEST A. SCHOFIELD
----------------------------------
Name: Ernest A. Schofield
Title: Senior Vice President
NATIONSBANK OF VIRGINIA, N.A.
as Trustee
By: /s/ FRANKLIN S. WARD
-----------------------------------
Name: Franklin S. Ward
Title: Vice President
-8-
<PAGE>
EXHIBIT 4.23
FIRST AMENDMENT dated as of April 15, 1996 (this
"FIRST AMENDMENT"), to the Amended and Restated Credit
Agreement dated as of September 26, 1995 (as amended to
the date hereof, the "AMENDED CREDIT AGREEMENT"), among
Horizon/CMS Healthcare Corporation, a Delaware
corporation ("HORIZON"), Continental Medical Systems,
Inc., a Delaware corporation ("CONTINENTAL", and
together with Horizon, the "BORROWERS"), the lenders
listed on the signature pages thereto (the "LENDERS")
and NationsBank of Texas, N.A., as agent for the
Lenders (in such capacity, the "AGENT") and as issuing
bank (in such capacity, the "ISSUING BANK").
The parties hereto have agreed, subject to the terms and conditions
hereof, to amend the Amended Credit Agreement as provided herein.
Capitalized terms used and not otherwise defined herein shall have the
meanings assigned to such terms in the Amended Credit Agreement (the Amended
Credit Agreement, as amended and waived by, and together with, this First
Amendment, and as hereinafter amended, modified, extended or restated from
time to time, being called the "AMENDED AGREEMENT").
Accordingly, the parties hereto hereby agree as follows:
SECTION 1.01. AMENDMENT TO SECTION 1.01. The following parenthetical
phrase is hereby added to the definition of "subsidiary" in Section 1.01 of
the Amended Agreement after the word "Controlled" in the second to the last
line of such definition:
"(other than Control arising solely from a management contract
entered into in good faith and on an arms-length basis with an
independent, unrelated third party),"
SECTION 1.02. AMENDMENTS TO SECTION 2.20. (a) The following sentence
is hereby added at the end of Section 2.20(a) of the Amended Agreement:
"For purposes hereof, the "issuance of a Letter of Credit"
includes the amendment, renewal or extension of a Letter of Credit."
(b) The following phrase is hereby added in clause (i) of Section 2.20(b)
of the Amended Agreement immediately following the "(i)":
"subject to extension (including pursuant to any automatic
renewal provision in customary form),"
<PAGE>
SECTION 1.03. AMENDMENT TO SECTION 6.01. Section 6.01 of the Amended
Agreement is hereby amended by deleting the period at the end of paragraph
(i) thereof and adding "; and" and by adding the following paragraph
immediately after paragraph (i) thereof:
"(j) Guarantees permitted by Section 6.04(e)(ii)."
SECTION 1.04. AMENDMENT TO SECTION 6.04. Paragraph (e) of Section 6.04
of the Amended Agreement is hereby amended as follows:
(a) a "(i)" is hereby added immediately following the "(e)"
which begins paragraph (e) thereof;
(b) the following language is hereby added after the word
"parties" and before the ";" on the fifth line of paragraph (e)
thereof:
"and (ii) loans and advances to, and guarantees in favor of,
any person which Horizon or any of its Subsidiaries has an option
or other right to acquire, whether such option is exercisable
immediately, upon the passage of time or upon the occurrence of
specified events";
(c) the word "investment" after "PROVIDED in the case of each
such" in the fifth line of paragraph (e) thereof is hereby deleted and
the following language is hereby added after "PROVIDED that in the
case of each such" and before the ", that:":
"equity investment, loan, advance or guarantee (each of the
foregoing being referred to herein as an "INVESTMENT")";
(d) clauses (i), (ii) and (iii) of the proviso to paragraph (e)
are hereby redesignated as clauses (A), (B) and (C), respectively;
(e) the following language is hereby added after the word
"Subsidiary" and before the ")" on the fifth line of clause (B) of the
proviso to paragraph (e):
", and in the case of investments in connection with an
option or other right to acquire any person, including the
maximum aggregate potential liability of Horizon and the
Subsidiaries related to such option or other right and any loan,
advance or guarantee associated therewith";
(f) a "," is hereby added after the ")" following the language
added pursuant to the preceding paragraph (e) hereof;
(g) the following language is hereby added to the beginning of
clause (C) of the proviso to paragraph (e):
<PAGE>
"in the case of investments referred to in clause (i) above,
such person (I)";
(h) a "(II)" is hereby added to clause (C) of the proviso to
paragraph (e) after "as applicable, or" and before "shall have
executed", and an "and" is hereby added to the end of clause (C) of
the proviso to paragraph (e); and
(i) the following language is hereby added immediately following
clause (C) of the proviso to paragraph (e):
"(D) in the case of investments referred to in clause (ii)
above, (I) any such loan or advance shall be repaid, retired or
refinanced as otherwise permitted hereunder, and any such
guarantee shall be released, upon consummation of the acquisition
of such person or upon termination of such option or other right
and (II) in the case of any loan or other advance, Horizon or the
applicable Subsidiary shall have (1) pledged and delivered to the
Agent for the benefit of the Secured Parties a promissory note of
such person evidencing its obligation to repay such loan or
advance and (2) assigned to the Agent for the benefit of the
Secured Parties any collateral for such promissory note received
by Horizon or such Subsidiary in connection therewith;"
SECTION 1.05. WAIVER. On and as of (but not before) the First
Amendment Effective Date (as defined in Section 1.07), the failure of the
Borrower to comply with Section 6.04 of the Amended Credit Agreement prior to
(but not after) the First Amendment Effective Date as a result of its
investments in Texas Health Enterprises, Inc. shall be permanently waived.
The preceding sentence shall be limited precisely as written.
SECTION 1.06. REPRESENTATIONS AND WARRANTIES. The Borrowers hereby
represent and warrant to the Agent and the Lenders, as follows:
(a) The representations and warranties set forth in Article III
of the Amended Agreement, and in each other Loan Document, are true
and correct in all material respects on and as of the date hereof and
on and as of the First Amendment Effective Date with the same effect
as if made on and as of the date hereof or the First Amendment
Effective Date, as the case may be, except to the extent such
representations and warranties expressly relate solely to an earlier
date.
(b) Each of the Borrowers, the Subsidiary Pledgors and the
Subsidiary Guarantors is in compliance with all the terms and
conditions of the Amended Agreement and the other Loan Documents on
its part to be observed or performed and no Default or Event of
Default has occurred or is continuing under the Amended Agreement.
<PAGE>
(c) The execution, delivery and performance by each of the
Borrowers of this First Amendment have been duly authorized by such
party.
(d) This First Amendment constitutes the legal, valid and
binding obligation of each of the Borrowers, enforceable against it in
accordance with its terms.
(e) The execution, delivery and performance by each of the
Borrowers of this First Amendment (i) do not conflict with or violate
(A) any provision of law, statute, rule or regulation, or of the
certificate of incorporation or by-laws of either of the Borrowers,
(B) any order of any Governmental Authority or (C) any provision of
any indenture, agreement or other instrument to which either of the
Borrowers is a party or by which it or any of its property may be
bound and (ii) do not require any consents under, result in a breach
of or constitute (with notice or lapse of time or both) a default
under any such indenture, agreement or instrument.
SECTION 1.07. EFFECTIVENESS. This First Amendment shall become
effective only upon satisfaction of the following conditions precedent (the
first date upon which each such condition has been satisfied being herein
called the "FIRST AMENDMENT EFFECTIVE DATE"):
(a) The Agent shall have received duly executed counterparts of
this First Amendment which, when taken together, bear the authorized
signatures of the Borrowers and the Required Lenders.
(b) The Required Lenders shall be satisfied that the
representations and warranties set forth in Section 1.06 are true and
correct on and as of the First Amendment Effective Date and that no
Default or Event of Default has occurred or is continuing.
(c) There shall not be any action pending or any judgment, order
or decree in effect which, in the judgment of the Required Lenders or
their counsel, is likely to restrain, prevent or impose materially
adverse conditions upon performance by any of the Borrowers, the
Subsidiary Pledgors or the Subsidiary Guarantors of its obligations
under the Loan Documents.
(d) Horizon Facilities Management, Inc. ("HORIZON FM") shall
have pledged and delivered to the Agent for the benefit of the Secured
Parties a promissory note of Texas Health Enterprises, Inc. in the
principal amount of $30,000,000 payable to Horizon FM.
(e) The Required Lenders shall have received such other
documents, legal opinions, instruments and certificates as they shall
reasonably request and such other documents, legal opinions,
instruments and certificates shall be satisfactory in form and
substance to the Required Lenders and their counsel. All
<PAGE>
corporate and other proceedings taken or to be taken in connection with
this First Amendment and all documents incidental thereto, whether or not
referred to herein, shall be satisfactory in form and substance to the
Required Lenders and their counsel.
SECTION 1.08. APPLICABLE LAW. THIS FIRST AMENDMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK,
EXCEPT TO THE EXTENT THAT THE FEDERAL LAWS OF THE UNITED STATES OF AMERICA
MAY APPLY.
SECTION 1.09. EXPENSES. The Borrowers shall pay all reasonable
out-of-pocket expenses incurred by the Agent and the Required Lenders in
connection with the preparation, negotiation, execution, delivery and
enforcement of this First Amendment, including, but not limited to, the
reasonable fees and disbursements of counsel. The agreement set forth in
this Section 1.09 shall survive the termination of this First Amendment and
the Amended Agreement.
SECTION 1.10. COUNTERPARTS. This First Amendment may be executed in
any number of counterparts, each of which shall constitute an original but
all of which when taken together shall constitute but one agreement.
SECTION 1.11. CREDIT AGREEMENT. Except as expressly set forth herein,
the amendments and waiver provided herein shall not by implication or
otherwise limit, constitute a waiver of, or otherwise affect the rights and
remedies of the Lenders, the Agent or the other Secured Parties under the
Amended Agreement or any other Loan Document, nor shall they constitute a
waiver of any Default or Event of Default, nor shall they alter, modify,
amend or in any way affect any of the terms, conditions, obligations,
covenants or agreements contained in the Amended Agreement or any other Loan
Document. Each of the amendments and waiver provided herein shall apply and
be effective only with respect to the provisions of the Amended Agreement
specifically referred to by such amendment or waiver, as the case may be.
Except as expressly amended herein, the Amended Agreement shall continue in
full force and effect in accordance with the provisions thereof. As used in
the Amended Agreement, the terms "Agreement", "herein", "hereinafter",
"hereunder", "hereto" and words of similar import shall mean, from and after
the date hereof, the Amended Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be duly executed by their duly authorized officers, all as of the date
first above written.
HORIZON/CMS HEALTHCARE CORPORATION,
as a Borrower
By
-------------------------------------------------
Name:
Title:
CONTINENTAL MEDICAL SYSTEMS, INC.,
as a Borrower
By
-------------------------------------------------
Name:
Title:
NATIONSBANK OF TEXAS, N.A., as Agent, as Issuing
Bank and as a Lender
By
-------------------------------------------------
Name:
Title:
BANK OF AMERICA NT & SA, as Managing
Agent and as a Lender
By
-------------------------------------------------
Name:
Title:
MORGAN GUARANTY TRUST COMPANY OF NEW
YORK, as a Lender
By
-------------------------------------------------
Name:
Title:
CREDIT LYONNAIS CAYMAN ISLAND BRANCH,
as Co-Agent and as a Lender
By
-------------------------------------------------
Name:
Title:
<PAGE>
LONG TERM CREDIT BANK OF JAPAN, LTD., LA
AGENCY, as Co-Agent and as a Lender
By
-------------------------------------------------
Name:
Title:
PNC BANK, NATIONAL ASSOCIATION, as Co-Agent
and as a Lender
By
-------------------------------------------------
Name:
Title:
CHEMICAL BANK, as a Lender
By
-------------------------------------------------
Name:
Title:
FIRST INTERSTATE BANK OF TEXAS, N.A.,
as a Lender
By
-------------------------------------------------
Name:
Title:
TORONTO DOMINION (TEXAS) INC., as a Lender
By
-------------------------------------------------
Name:
Title:
BANKERS TRUST COMPANY, as a Lender
By
-------------------------------------------------
Name:
Title:
<PAGE>
BANQUE PARIBAS, as a Lender
By
-------------------------------------------------
Name:
Title:
By
-------------------------------------------------
Name:
Title:
BANQUE NATIONALE de PARIS, as a Lender
By
-------------------------------------------------
Name:
Title:
By
-------------------------------------------------
Name:
Title:
DEUTSCHE BANK AG, LOS ANGELES AND/OR
CAYMAN ISLANDS BRANCHES, as a Lender
By
-------------------------------------------------
Name:
Title:
By
-------------------------------------------------
Name:
Title:
MELLON BANK, N.A., as a Lender
By
-------------------------------------------------
Name:
Title:
FLEET BANK OF MASSACHUSETTS, as a Lender
By
-------------------------------------------------
Name:
Title:
<PAGE>
SOCIETY NATIONAL BANK, as a Lender
By
-------------------------------------------------
Name:
Title:
SUNWEST BANK OF ALBUQUERQUE, N.A., as a
Lender and as Issuing Bank
By
-------------------------------------------------
Name:
Title:
THE BANK OF TOKYO TRUST COMPANY, as a Lender
By
-------------------------------------------------
Name:
Title:
THE BOATMEN'S NATIONAL BANK OF ST. LOUIS,
as a Lender
By
-------------------------------------------------
Name:
Title:
THE NIPPON CREDIT BANK, LTD., LOS ANGELES
AGENCY, as a Lender
By
-------------------------------------------------
Name:
Title:
THE SUMITOMO BANK, LIMITED, as a Lender
By
-------------------------------------------------
Name:
Title:
THE SUMITOMO TRUST & BANKING CO., LTD., NEW
YORK BRANCH, as a Lender
By
-------------------------------------------------
Name:
Title:
<PAGE>
THE SUMITOMO BANK, LIMITED, CHICAGO
BRANCH, as a Lender
By
-------------------------------------------------
Name:
Title:
THE MITSUBISHI BANK, LTD., LOS ANGELES
BRANCH, as a Lender
By
-------------------------------------------------
Name:
Title:
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
LOS ANGELES AGENCY, as a Lender
By
-------------------------------------------------
Name:
Title:
<PAGE>
EXECUTION COPY
SECOND AMENDMENT dated as of July 16, 1996 (this "SECOND
AMENDMENT"), to the Amended and Restated Credit Agreement
dated as of September 26, 1995 (as amended to the date hereof,
the "AMENDED CREDIT AGREEMENT"), among Horizon/CMS Healthcare
Corporation, a Delaware corporation ("HORIZON"), Continental
Medical Systems, Inc., a Delaware corporation ("CONTINENTAL",
and together with Horizon, the "BORROWERS"), the lenders listed
on the signature pages thereto (the "LENDERS") and NationsBank
of Texas, N.A., as agent for the Lenders (in such capacity, the
"AGENT") and as issuing bank (in such capacity, the "ISSUING
BANK").
The parties hereto have agreed, subject to the terms and conditions
hereof, to amend the Amended Credit Agreement as provided herein.
Capitalized terms used and not otherwise defined herein shall have the
meanings assigned to such terms in the Amended Credit Agreement (the Amended
Credit Agreement, as amended and waived by, and together with, this Second
Amendment, and as hereinafter amended, modified, extended or restated from
time to time, being called the "AMENDED AGREEMENT").
Accordingly, the parties hereto hereby agree as follows:
SECTION 1.01. AMENDMENT TO SECTION 2.10. Section 2.10(b) of the
Amended Agreement is hereby deleted in its entirety and the following is
hereby substituted in lieu thereof:
(b) Horizon shall have the option to request the extension of the
Maturity Date by one year, on an annual basis in accordance with this
Section 2.10(b), so that a five-year Availability Period would be
maintained; PROVIDED that, in the case of any such request in 1997, Horizon
may request an extension of the Maturity Date by two years so long as no
one-year extension was requested and granted in 1996 (a "1997 SPECIAL
EXTENSION"). In the event that Horizon desires to extend the maturity of
the Facility, Horizon shall give notice of such request to the Agent not
less than 30 days, and not more than 120 days, before the date (the
"PROPOSED EXTENSION DATE") which is four years (or three years in the case
of a 1997 Special Extension) prior to the existing Maturity Date. The Agent
shall give the other Lenders prompt notice of the receipt of any such
request. Such request shall be deemed granted if, and only if, the Agent
shall have received written notice of the approval of such proposed
extension, by September 30 immediately following the Proposed Extension
Date, from each Lender, except for any Lender which is replaced by Horizon
as provided in this Section 2.10(b); otherwise, the existing Maturity Date
shall not be extended. Any such Lender which shall have failed to give
such notice of approval by such September 30 is referred to herein as a
"DISSENTING LENDER". Horizon shall have the right to
<PAGE>
replace any Dissenting Lender by causing such Lender to transfer and assign
all its interests, rights and obligations under this Amended Agreement to
another financial institution pursuant to Section 2.19 (a "REPLACEMENT
LENDER") by October 15 immediately following such Proposed Extension Date;
PROVIDED that the Consenting Lenders shall have given written notice to the
Agent of the approval of the proposed extension by such September 30.
Horizon may request an extension of the Maturity Date pursuant to this
Section 2.10(b) in each year, commencing in 1996; PROVIDED that, except in
the case of any such request in 1996 or pursuant to a 1997 Special
Extension, it shall have requested and received an extension of the
Maturity Date pursuant to this Section 2.10(b) in the previous year. The
Agent shall give Horizon and each Lender prompt written notice of whether
any proposed extension has been granted or denied. Any request for an
extension of the Maturity Date that has been granted in accordance with the
procedure set forth in this Section 2.10(b) is referred to herein as an
"APPROVED EXTENSION" and the Proposed Extension Date relating to such
Approved Extension is referred to herein as an "EXTENSION DATE".
SECTION 1.02. AMENDMENT TO SECTION 3.09. Section 3.09(b) of the
Amended Agreement is hereby amended by adding the following language after
the word "decree" and before the period at the end of the second sentence
thereof:
", except any such communication relating to matters that could not
reasonably be expected to result, individually or in the aggregate, in
a Material Adverse Effect"
SECTION 1.03. AMENDMENT TO SECTION 6.05 AND RELATED SCHEDULE. (a) The
following proviso is hereby added at the end of paragraph (C) of Section
6.05(a):
"PROVIDED that the dispositions described on Schedule 6.05(a) hereto shall
not be subject to such $20,000,000 aggregate book value and $5,000,000 for
any single asset book value limitations, so long as 100% of the Net
Proceeds thereof remaining after the repayment of existing debt (in an
aggregate amount not to exceed $9,500,000) relating to the assets being
disposed of in such described dispositions shall be promptly applied to the
prepayment of outstanding Loans, but shall not be applied to reduce the
Commitments;"
(b) Schedule 6.05(a) attached to this Second Amendment is hereby adopted
as Schedule 6.05(a) for purposes of the Amended Agreement.
SECTION 1.04. AMENDMENT OF EBITDAR DEFINITION. The following clause is
hereby added at the end of the proviso to the definition of EBITDAR in Section
1.01 of the Amended Agreement:
", (D) up to $11,000,000 of non-cash charges incurred during the fourth
quarter of fiscal year 1996 as a result of the implementation of Financial
Accounting Standards Board Statement No. 121 and (E) up to $9,000,000 of
restructuring charges incurred during the fourth quarter of fiscal year
1996 as a result of the dispositions described on Schedule 6.05(a) hereto".
-2-
<PAGE>
SECTION 1.05. WAIVER. On and as of (but not before) the Second
Amendment Effective Date (as defined in Section 1.07), any inaccuracies in
the representations made after September 26, 1995 and prior to (but not
after) the Second Amendment Effective Date pursuant to the second sentence of
Section 3.09(b) of the Amended Agreement (but only to the extent such
inaccuracies would have been averted if the amendment set forth in Section
1.02 of this Second Amendment had been effective prior to the making of the
such representations) shall be permanently waived. The preceding sentence
shall be limited precisely as written.
SECTION 1.06. REPRESENTATIONS AND WARRANTIES. The Borrowers hereby
represent and warrant to the Agent and the Lenders, as follows:
(a) The representations and warranties set forth in Article III of
the Amended Agreement, and in each other Loan Document, are true and
correct in all material respects on and as of the date hereof and on and as
of the Second Amendment Effective Date with the same effect as if made on
and as of the date hereof or the Second Amendment Effective Date, as the
case may be, except to the extent such representations and warranties
expressly relate solely to an earlier date.
(b) Each of the Borrowers, the Subsidiary Pledgors and the Subsidiary
Guarantors is in compliance in all material respects with all the terms and
conditions of the Amended Agreement and the other Loan Documents on its
part to be observed or performed and no Default or Event of Default has
occurred or is continuing under the Amended Agreement.
(c) The execution, delivery and performance by each of the Borrowers
of this Second Amendment have been duly authorized by such party.
(d) This Second Amendment constitutes the legal, valid and binding
obligation of each of the Borrowers, enforceable against it in accordance
with its terms.
(e) The execution, delivery and performance by each of the Borrowers
of this Second Amendment (i) do not conflict with or violate (A) any
provision of law, statute, rule or regulation, or of the certificate of
incorporation or by-laws of either of the Borrowers, (B) any order of any
Governmental Authority or (C) any provision of any indenture, agreement or
other instrument to which either of the Borrowers is a party or by which it
or any of its property may be bound and (ii) do not require any consents
under, result in a breach of or constitute (with notice or lapse of time or
both) a default under any such indenture, agreement or instrument.
SECTION 1.07. EFFECTIVENESS. This Second Amendment shall become
effective only upon satisfaction of the following conditions precedent (the
first date upon which each such condition has been satisfied being herein
called the "SECOND AMENDMENT EFFECTIVE DATE"):
-3-
<PAGE>
(a) The Agent shall have received duly executed counterparts of this
Second Amendment which, when taken together, bear the authorized signatures
of the Borrowers and the Required Lenders.
(b) The Required Lenders shall be satisfied that the representations
and warranties set forth in Section 1.06 are true and correct on and as of
the Second Amendment Effective Date and that no Default or Event of Default
has occurred or is continuing.
(c) There shall not be any action pending or any judgment, order or
decree in effect which, in the judgment of the Required Lenders or their
counsel, is likely to restrain, prevent or impose materially adverse
conditions upon performance by any of the Borrowers, the Subsidiary
Pledgors or the Subsidiary Guarantors of its obligations under the Loan
Documents.
(d) The Required Lenders shall have received such other documents,
legal opinions, instruments and certificates as they shall reasonably
request and such other documents, legal opinions, instruments and
certificates shall be satisfactory in form and substance to the Required
Lenders and their counsel. All corporate and other proceedings taken or
to be taken in connection with this First Amendment and all documents
incidental thereto, whether or not referred to herein, shall be
satisfactory in form and substance to the Required Lenders and their
counsel.
(e) The Borrowers shall have paid in full all amounts due and payable
as of the Second Amendment Effective Date under the Credit Agreement and
shall have paid a total amendment fee of $87,500 (of which $3,500 shall be
distributed to each Lender).
SECTION 1.08. APPLICABLE LAW. THIS SECOND AMENDMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK,
EXCEPT TO THE EXTENT THAT THE FEDERAL LAWS OF THE UNITED STATES OF AMERICA
MAY APPLY.
SECTION 1.09. EXPENSES. The Borrowers shall pay all reasonable
out-of-pocket expenses incurred by the Agent and the Required Lenders in
connection with the preparation, negotiation, execution, delivery and
enforcement of this Second Amendment, including, but not limited to, the
reasonable fees and disbursements of counsel. The agreement set forth in
this Section 1.09 shall survive the termination of this Second Amendment and
the Amended Agreement.
SECTION 1.10. COUNTERPARTS. This Second Amendment may be executed in
any number of counterparts, each of which shall constitute an original but
all of which when taken together shall constitute but one agreement.
SECTION 1.11. CREDIT AGREEMENT. Except as expressly set forth herein,
the amendments and waiver provided herein shall not by implication or
otherwise limit, constitute
-4-
<PAGE>
a waiver of, or otherwise affect the rights and remedies of the Lenders, the
Agent or the other Secured Parties under the Amended Agreement or any other
Loan Document, nor shall they constitute a waiver of any Default or Event of
Default, nor shall they alter, modify, amend or in any way affect any of the
terms, conditions, obligations, covenants or agreements contained in the
Amended Agreement or any other Loan Document. Each of the amendments and
waiver provided herein shall apply and be effective only with respect to the
provisions of the Amended Agreement specifically referred to by such
amendment or waiver, as the case may be. Except as expressly amended herein,
the Amended Agreement shall continue in full force and effect in accordance
with the provisions thereof. As used in the Amended Agreement, the terms
"Agreement", "herein", "hereinafter", "hereunder", "hereto" and words of
similar import shall mean, from and after the date hereof, the Amended
Agreement.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment
to be duly executed by their duly authorized officers, all as of the date
first above written.
HORIZON/CMS HEALTHCARE CORPORATION,
as a Borrower
By /s/ ERNEST A. SCHOFIELD
-------------------------------------------------
Name: Ernest A. Schofield
Title: Senior Vice President
CONTINENTAL MEDICAL SYSTEMS, INC.,
as a Borrower
By /s/ ERNEST A. SCHOFIELD
-------------------------------------------------
Name: Ernest A. Schofield
Title: Senior Vice President
NATIONSBANK OF TEXAS, N.A., as Agent, as Issuing
Bank and as a Lender
By /s/ GUILLERMO BORDA
-------------------------------------------------
Name: Guillermo Borda
Title: Vice President
BANK OF AMERICA NT & SA, as Managing
Agent and as a Lender
By /s/ WYATT R. RITCHIE
-------------------------------------------------
Name: Wyatt R. Ritchie
Title: Managing Director
MORGAN GUARANTY TRUST COMPANY OF NEW
YORK, as a Lender
By /s/ ROBERT M. OSIESKI
-------------------------------------------------
Name: Robert M. Osieski
Title: Vice President
CREDIT LYONNAIS CAYMAN ISLAND BRANCH,
as Co-Agent and as a Lender
By /s/ FARBOUD TAVANGAR
-------------------------------------------------
Name: Farboud Tavangar
Title: Authorized Signature
-6-
<PAGE>
LONG TERM CREDIT BANK OF JAPAN, LTD., LA
AGENCY, as Co-Agent and as a Lender
By /s/ T. MORGAN EDWARDS II
-------------------------------------------------
Name: T. Morgan Edwards II
Title: Deputy General Manager
PNC BANK, NATIONAL ASSOCIATION, as Co-Agent
and as a Lender
By /s/ KAREN GEORGE
-------------------------------------------------
Name: Karen George
Title: Assistant Vice President
THE CHASE MANHATTAN BANK, as successor to
CHEMICAL BANK, as a Lender
By /s/ DAWN LEE LUM
-------------------------------------------------
Name: Dawn Lee Lum
Title: Vice President
WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION,
formerly FIRST INTERSTATE BANK OF TEXAS, N.A.,
as a Lender
By /s/ KIMBERLY K. WELCH
-------------------------------------------------
Name: Kimberly K. Welch
Title: Assistant Vice President
TORONTO DOMINION (TEXAS) INC., as a Lender
By /s/ NEVA NESBITT
-------------------------------------------------
Name: Neva Nesbitt
Title: Vice President
BANKERS TRUST COMPANY, as a Lender
By /s/ PATRICIA HOGAN
-------------------------------------------------
Name: Patricia Hogan
Title: Vice President
-7-
<PAGE>
BANQUE PARIBAS, as a Lender
By /s/ PIERRE-JEAN DE FILIPPIS
-------------------------------------------------
Name: Pierre-Jean de Filippis
Title: General Manager
By /s/ KENNETH E. MOORE, JR.
-------------------------------------------------
Name: Kenneth E. Moore, Jr.
Title: Vice President
BANQUE NATIONALE de PARIS, as a Lender
By /s/ C. BETTLES
-------------------------------------------------
Name: C. Bettles
Title: Senior Vice President and Manager
By /s/ MARGARET MUDD
-------------------------------------------------
Name: Margaret Mudd
Title: VP
DEUTSCHE BANK AG, LOS ANGELES AND/OR
CAYMAN ISLANDS BRANCHES, as a Lender
By /s/ J. SCOTT JESSUP
-------------------------------------------------
Name: J. Scott Jessup
Title: Vice President
By /s/ ROSS A. HOWARD
-------------------------------------------------
Name: Ross A. Howard
Title: Director
MELLON BANK, N.A., as a Lender
By /s/ RICHARD A. LOPAIT
-------------------------------------------------
Name: Richard A. Lopait
Title: Vice President
FIRST NATIONAL BANK, FORMERLY KNOWN AS
FLEET BANK OF MASSACHUSETTS, as a Lender
By /s/ GINGER STOLRENTHALER
-------------------------------------------------
Name: Ginger Stolrenthaler
Title: Vice President
-8-
<PAGE>
KEYBANK NATIONAL ASSOCIATION, as a Lender
By /s/ ANGELA G. MAGO
-------------------------------------------------
Name: Angela G. Mago
Title: Vice President
SUNWEST BANK OF ALBUQUERQUE, N.A., as a
Lender and as Issuing Bank
By /s/ NANCY MADIGAN
-------------------------------------------------
Name: Nancy Madigan
Title: Vice President
BANK OF TOKYO-MITSUBISHI TRUST COMPANY,
successor by merger to THE BANK OF TOKYO TRUST
COMPANY
By /s/ AUGUSTINE OKWU
-------------------------------------------------
Name: Augustine Okwu
Title: Vice President
THE BOATMEN'S NATIONAL BANK OF ST. LOUIS,
as a Lender
By /s/ JUAN A. CAZORLA
-------------------------------------------------
Name: Juan A. Cazorla
Title: Assistant Vice President
THE NIPPON CREDIT BANK, LTD., LOS ANGELES
AGENCY, as a Lender
By /s/ BERNARDO E. CORREA-HENSCHKE
-------------------------------------------------
Name: Bernardo E. Correa-Henschke
Title: Vice President & Senior Manager
THE SUMITOMO BANK, LIMITED, as a Lender
By /s/ REIJI SATO
-------------------------------------------------
Name: Reiji Sato
Title: Joint General Manager
THE SUMITOMO TRUST & BANKING CO., LTD., NEW
YORK BRANCH, as a Lender
By /s/ JOSEPH M. KELLEY
-------------------------------------------------
Name: Joseph M. Kelley
Title: Senior Vice President
-9-
<PAGE>
THE SUMITOMO BANK, LIMITED, CHICAGO
BRANCH, as a Lender
By /s/ JAMES T. WANG
-------------------------------------------------
Name: James T. Wang
Title: Vice President & Manager
THE MITSUBISHI BANK, LTD., LOS ANGELES
BRANCH, as a Lender
By /s/ ALBERT W. KELLEY
-------------------------------------------------
Name: Albert W. Kelley
Title: Vice President
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
NEW YORK BRANCH, as a Lender
By /s/ AKIJIRO YOSHINO
-------------------------------------------------
Name: Akijiro Yoshino
Title: Executive Vice President
NATIONSBANK, N.A., as a Lender
By /s/ CHRIS BARTON
-------------------------------------------------
Name: Chris Barton
Title: VP
-10-
<PAGE>
[Bank of America Letterhead]
TO: Horizon/CMS Healthcare Corporation ("Counterparty")
Attn: Ernest Schofield
Rapidfax: (505) 881-5097
FROM: Bank of America National Trust and Savings Association ("BofA")
185 Berry Street
San Francisco, CA 94107
Derivative Products Operations
Phone No.: (415) 624-1111
Rapidfax No.: (415) 624-1101
DATE: October 18, 1995
RE: USD 200,000,000.00 Swap Transaction
Dear Sir/Madam:
The purpose of this letter agreement is to confirm the terms and
conditions of the Transaction entered into between us on the Trade Date
specified below (the "Swap Transaction"). This letter agreement constitutes
a "Confirmation" under the ISDA Agreement defined below.
The definitions and provisions contained in the 1991 ISDA Definitions
(as published by the International Swaps and Derivative Association, Inc.
("ISDA")) are incorporated into this Confirmation. In the event of any
inconsistency between those definitions and provisions and this Confirmation,
this Confirmation will govern.
1. The parties agree that the Swap Transaction described in this
Confirmation constitutes their binding obligations. Except as set forth in
this Confirmation, the Swap Transaction shall be subject to all the terms and
conditions of the form of the master agreement entitled "Master Agreement"
("Multicurrency-Cross Border" version) as published in 1992 by the
International Swaps and Derivative Association, Inc., (and herein called the
"ISDA Agreement"), excluding the "Schedule" thereto, Counterparty and BofA
shall negotiate a Schedule and upon agreement shall sign the ISDA Agreement
including the Schedule so negotiated and agreed upon (hereinafter called the
"Agreement"), whereupon this Confirmation shall be deemed automatically,
without further action of any party, to be a Confirmation under the
Agreement; provided, however, that, unless and until Counterparty and BofA
agree upon and sign the Agreement, the preceding sentence shall have full
force and effect.
THIS FACSIMILE TRANSMISSION WILL BE THE ONLY WRITTEN COMMUNICATION
REGARDING THIS SWAP TRANSACTION. Pursuant to ISDA guidelines, this facsimile
transmission will be sufficient for all purposes to evidence a binding
supplement to
<PAGE>
the Agreement. However, should you have an internal requirement for
confirmations with an original signature, we request that you sign and return
this Confirmation by facsimile, whereupon, we will add an original signature
to the fully executed Conformation, and forward it to you by mail.
2. The terms of the particular Swap Transaction to which this
Confirmation relates are as follows:
Notional Amount: USD 200,000,000.00
Trade Date: October 16, 1995
Effective Date: October 18, 1995
Termination Date: October 20, 1997, subject to
adjustment in accordance with
the Modified Following
Business Day Convention
First Floating Amounts:
Floating Rate Payer: BofA
Cap Rate: 8.0000%
Floating Rate Payer
Payment Dates: The 18th of every January, April,
July and October, beginning with
January 18, 1996 and ending on and
including the Termination Date
Floating Rate Option: USD-LIBOR-BBA
Designated Maturity: Three (3) Months
Floating Rate Day Count Fraction: Actual/360
Reset Dates: First day of each Calculation
Period
Compounding: Inapplicable
Second Floating Amounts:
Floating Rate Payer: Counterparty
Floor Rate: 4.57000%
Floating Rate Payer
Payment Dates: The 18th of every January, April,
July and October, beginning with
January 18, 1996 and ending on and
including the Termination Date
<PAGE>
Floating Rate Option: USD-LIBOR-BBA
Designated Maturity: Three (3) Months
Floating Rate Day Count Fraction: Actual/360
Reset Dates: First day of each Calculation
Period
Compounding: Inapplicable
Business Day: New York and London
Business Day Convention: Modified Following
Calculation Agent: BofA
3. Account Details
Payments to BofA: Fed Funds to Bank of America NT and
SA San Francisco ABA NO. 1210-0035-8
BISD Acct. No. 33006-83980 Attn:
IRS Operations
Payments to Counterparty: Fed Funds to Sunwest Bank of
Albuquerque N.A. ABA No. 1070-0032-7
A/C Horizon Healthcare Corporation
Acct. No. 0162340897
4. Offices:
Office of BofA: The San Francisco Head Office
Office of Counterparty: Albuquerque, New Mexico
OTHER PROVISIONS APPLICABLE TO BOFA
Specified Entities of BofA: None
Credit Support Document(s)
Relating to BofA: None
Credit Support Provider Relating
to BofA: None
Agreements of BofA: As per Section 4 of the ISDA
Agreement.
Representations of BofA: As per Section 3 of the ISDA
Agreement.
<PAGE>
OTHER PROVISIONS APPLICABLE TO COUNTERPARTY
Specified Entities of Counterparty: As may be indicated in the
Agreement, if at all.
Credit Support Documents(s)
Relating to Counterparty: As may be indicated in the
Agreement, if at all.
Credit Support Provider Relating to
Counterparty: As may be indicated in the
Agreement, if at all.
Agreements of Counterparty: As per Section 4 of the ISDA
Agreement.
Representations of Counterparty: As per Section 3 of the ISDA
Agreement.
OTHER PROVISIONS (GENERAL)
(A) Other Agreements: Corporate Resolution, Specimen
Signature Certificate and other
documentation as indicated in
the Agreement, if at all.
(B) Events of Default: As per Section 5 of the ISDA
Agreement and Cross Default as
indicated in the Agreement, if at
all.
(C) Termination Events: All the Termination Events
specified in Section 5(b) of the
ISDA Agreement will apply
(including Credit Event Upon
Merger).
(D) Early Termination: As per Section 6 of the ISDA
Agreement, it being the parties'
intent that Section 6 apply to all
outstanding Swap Transactions
before (as well as after) execution
of the Agreement.
(E) Tax Representations: Counterparty and BofA make the
Payer Representations contained
in Part 2 of the Schedule to the
ISDA Agreement. Payee
Representations may be indicated
in Part 2 of the Schedule to the
Agreement, if applicable.
(F) Tax Agreements of BofA
and Counterparty: As may be indicated in the
Agreement if at all.
<PAGE>
(G) Variations to the ISDA
Agreement: BofA has made certain amendments to
the ISDA Agreement which it
believes are of a noncontentious
nature. These amendments will
be specified in the draft Agreement
to be sent by BofA to Counterparty.
(H) Documentation: This Confirmation will constitute a
binding agreement with respect to
the Swap Transaction described
herein. Without prejudice to the
preceding sentence, Counterparty
and BofA will Negotiate in good
faith to enter into the Agreement
as soon as practicable after the
date of this Confirmation.
Please confirm your agreement to be bound by the terms stated herein by
executing the copy of this Confirmation enclosed for that purpose and
returning it to us or by sending to us a telex or letter, within 24 hours of
receipt of this Confirmation to Bank of America NT & SA San Francisco Telex
No. 249839 Answer Bank OPRST UR or Rapidfax No. 415-624-1101 Attention:
Derivative Products Operations, substantially in the form below:
Quote
We acknowledge receipt of your rapidfax dated October 18, 1995 with respect
to the Swap Transaction entered into on October 16, 1995 between Horizon/CMS
Healthcare Corporation and Bank of America National Trust and Savings
Association with a Notional Amount of USD 200,000,000.00 and a Termination Date
of October 20, 1997, and confirm our agreement to be bound by the terms
specified in such rapidfax. We also confirm that the Basic Representations
provided in Section 3(a) of the ISDA Agreement are true with respect to the Swap
Transaction.
Unquote
This Confirmation shall be conclusively deemed accurate and complete by
Counterparty if not objected to within two (2) Business Days from the date of
receipt.
Yours sincerely,
For and on behalf of:
Bank of America National
Trust and Savings Association
By: /s/ Scott K. Rosebrook
----------------------------------
Name: Scott K. Rosebrook
----------------------------------
Title: Vice President
----------------------------------
<PAGE>
Confirmed as of the
date first above written:
Horizon/CMS Healthcare Corporation
By: By: /s/ Ernest A. Schofield
-------------------------- -----------------------------------
Name: Name: Ernest A. Schofield
-------------------------- -----------------------------------
Title: Title: Senior Vice President and CFO
-------------------------- ----------------------------------
<PAGE>
EXHIBIT 10.2.1
SEVERANCE AND RETIREMENT AGREEMENT
THIS SEVERANCE AND RETIREMENT AGREEMENT is made this 19th day of
December, 1995, by and between Horizon/CMS Healthcare Corporation, a Delaware
corporation ("Horizon"), and Klemett L. Belt, Jr. ("Belt").
WHEREAS, Belt has served Horizon as Senior Vice President and Chief
Financial Officer from September 1, 1986, through September 1994, as
Secretary and Treasurer from September 1, 1986, through July 1994, and as
Executive Vice President from June 1989 until present;
WHEREAS, Belt left his previous employment to join Horizon and gave up
substantial benefits with his previous employer in reliance on the
expectation of receiving certain benefits in his employment with Horizon;
WHEREAS, the Employment Agreement dated August 19, 1993, by and between
Belt and Horizon ("Employment Agreement") sets forth the terms and conditions
of their employment arrangement;
WHEREAS, Belt currently participates in various Horizon compensation and
benefit programs and stock options including, but not limited to, Deferred
Compensation Plan, various Stock Option Agreements, AD&D and LTD benefits,
and UNUM insurance.
WHEREAS, certain conditions have affected Horizon's needs;
WHEREAS the parties have determined that it is in their mutual best
interest that Belt withdraw from the offices and directorships which he holds
in Horizon and that Horizon provide Belt compensation and benefits consistent
with and in furtherance of the Employment Agreement as described in this
Agreement.
<PAGE>
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
1. TERMINATION OF EMPLOYMENT AGREEMENT. The Employment Agreement is
terminated as of January 1, 1996. The parties waive Employment Agreement
notice provisions, if any. Termination of the Employment Agreement on January
1, 1996, shall not affect any of the rights or obligations of either party to
the Employment Agreement accruing prior to January 1, 1996.
2. RESIGNATION. On January 1, 1996, Belt will resign all offices and
directorships which he now holds in Horizon.
3. COMPENSATION.
a. SEVERANCE PAY. Commencing on January 1, 1996, and ending on
December 31, 1997, Horizon shall pay Belt severance compensation of $350,000
cash per year ("Severance Compensation"). Horizon shall pay the Severance
Compensation biweekly in 26 equal installments per year. If Belt dies before
December 31, 1997, Horizon's obligation to pay Severance Compensation shall
survive Belt's death, and Horizon shall pay Severance Compensation to Belt's
estate in the same manner as if Belt were living.
b. VESTED STOCK OPTIONS. Belt's options to purchase Horizon Common
Stock, par value $.001 per share, granted by Horizon from time to time to
Belt under and pursuant to the Horizon/CMS Healthcare Corporation Employee
Stock Option Plan (the "Stock Option Plan") that have vested on or before
December 31, 1995, in
2
<PAGE>
accordance with the terms and conditions of the Stock Option Plan, shall be
exercisable in accordance with the Stock Option Plan and respective Stock
Option Agreements governing the options.
c. BONUS PAYMENT. In recognition of Belt's services rendered to
Horizon during that portion of its current fiscal year prior to January 1,
1996, Horizon shall pay Belt bonus compensation in the amount of $180,000.00
on or before January 31, 1996.
d. RETIREMENT BENEFITS. Effective January 1, 1998, and continuing
until Belt's death, Horizon shall pay Belt retirement benefits of $175,000
cash per year less any benefits paid to Belt by Federal Social Security.
After Belt's death, Horizon shall pay his surviving spouse retirement
benefits of $87,500 cash per year. Horizon shall begin paying Belt's
surviving spouse such retirement benefits upon Belt's death and shall
continue paying them until her death. (Retirement benefits paid to Belt or
to Belt's surviving spouse are referred to collectively herein as "Retirement
Benefits.") Horizon shall pay the Retirement Benefits to Belt or Belt's
spouse, whichever applies, biweekly in 26 equal installments per year.
e. HEALTH INSURANCE. From January 1, 1996, through December 31,
1998, Horizon shall continue health care insurance coverage for Belt, his
spouse and all his children on a basis consistent with and providing benefits
(including selection of health care providers and facilities) not less
extensive than those afforded under its current one hundred percent (100%)
indemnity health insurance plan with no employee contribution, no employee
3
<PAGE>
co-pay, and no deductible. Horizon shall pay all premiums for such coverage.
If Belt dies before December 31, 1998, Horizon's obligation to pay premiums
for health care coverage for Belt's spouse and all his children shall survive
Belt's death, and Horizon shall continue to pay all premiums for such
coverage for the benefit of Belt's surviving spouse and children in the
manner described in this Subparagraph.
f. LIFE INSURANCE. From and after January 1, 1996, and until such time
as all such policies are fully paid-up insurance policies, Horizon will
continue paying the total amount due for the annual premiums for the life
insurance policies listed on Schedule A, which is attached hereto and
incorporated by reference (the "Policy"), after taking into consideration all
dividends attributable to the Policy, to Gail Hullibarger as Trustee of the
Belt Children's Trust under Agreement dated December 22, 1986, ("Trustee")
and/or to the life insurance company issuing the Policy. Upon making all such
payments, Horizon shall be considered to have complied with its obligations
contained in that certain Split Dollar Agreement dated July 10, 1993, by and
between Horizon and Trustee.
g. WITHHOLDING. Horizon shall withhold from any payments to Belt all
federal, state, municipal or other taxes as are required to be withheld by
any applicable law, regulation or ruling.
h. OTHER BENEFITS AND PAYMENTS UNDER OTHER AGREEMENTS. Severance
Compensation, Retirement Benefits, severance compensation
4
<PAGE>
in lieu of stock options, life insurance and health insurance described in
this Agreement shall be in addition to and not in limitation of any other
benefits or payments for which Belt qualifies under other agreements,
including, but not limited to, the Deferred Compensation Plan, Stock Option
Agreements, any agreement between Horizon and Belt relating to Advanced
Cardiovascular Technology, Inc. ("ACT") and insurance plans. Nothing
contained herein affects the rights and duties of the parties regarding the
acquisition of ACT by Horizon.
This Agreement does not supersede or replace any other agreement except
the Employment Agreement.
4. DEFAULT. In the event that any of the payments required to be paid
hereunder by Horizon to or for the benefit of Belt or Belt's spouse are not
paid when due or Horizon fails to punctually and fully perform any other
obligation provided herein to be performed by Horizon other than the payment
of money, within thirty (30) days after written notice is given by Belt or
Belt's surviving spouse, if Belt is then deceased, to Horizon of such
failure, specifying its nature and demanding cure thereof, and in the event
that Belt or his surviving spouse, as applicable, elects the liquidated
damages remedy described in Subparagraph (c) below of this Paragraph 4,
giving notice of such election, Belt, at his option (or in the event Belt is
then deceased, his surviving spouse), shall be entitled:
(a) to maintain an action for all damages arising from such default;
5
<PAGE>
(b) to pursue any an all other legal or equitable rights and
remedies available pursuant to applicable law; or
(c) to immediately receive without further notice or demand, as
liquidated damages and not as a penalty, and as his or her sole and exclusive
remedy, a lump sum cash payment in lieu of any Severance Compensation and
Retirement Benefits under this Agreement which have not accrued (collectively
referred to as "Remaining Contract Payments"), and to have all health and
life insurance by fully paid up. The lump sum cash payment described above
shall be equal to the value of the Remaining Contract Payments discounted to
then-present value utilizing a six percent (6%) discount rate. For purposes
of determining then-present value of Retirement Benefits, if Belt is then
married, the joint life expectancy of Belt and his spouse shall be determined
based upon the actuarial tables published by the Internal Revenue Service
known as "1986 Internal Revenue Code Table, Ordinary Joint Life and Last
Survivor Annuities, Two Lives -- Expected Return Multiples." If Belt is not
married or is deceased and is survived by his spouse, the life expectancy of
Belt or his surviving spouse, as applicable, shall be determined based upon
the actuarial tables published by the Internal Revenue Service known as "1986
Internal Revenue Code Table, Ordinary Life Annuities -- One Life -- Expected
Return Multiples". Such health and life insurance shall be fully paid up by
Horizon paying to the Trustee and/or to the insurers such amount as shall be
required to cause the Schedule A life insurance policies to be fully paid-up
policies, and by paying to
6
<PAGE>
the insurers such amount as shall be required to cause all premiums for the
health care coverage described in Paragraph 3.d. of this Agreement to be
fully paid.
Belt and Horizon agree and recognize that any breach of this Severance
And Retirement Agreement by Horizon will cause serious and substantial damage
to Belt (or to Belt's spouse, in the event that Belt is then deceased) and
that it will be difficult to prove the amount of such damage, and it is
agreed by the parties hereto that such sum shall, without proof, be deemed to
represent damages actually sustained by Belt (or by Belt's spouse, in the
event that Belt is then deceased) by reason of such breach. With the sole
exception of the liquidated damage remedy in the event of election of such
remedy, the rights and remedies provided for herein are intended to be and
shall be cumulative and in addition to every other right and remedy now or
hereafter existing at law or in equity.
Failure by Belt or his surviving spouse, as applicable, to exercise any
right or remedy herein granted or otherwise available pursuant to applicable
law in the event of occurrence of an event of default shall not impair or
constitute a waiver or lapse of Belt's or her right to do so in the event of
occurrence of another event of default or in the event of a reoccurrence of
the same event of default.
5. CONSULTING SERVICES. From January 1, 1996, through December 31,
1997, Belt shall provide such consulting services to Horizon as shall be
mutually agreed upon by the parties. The
7
<PAGE>
parties contemplate that Belt will not be requested to perform more than Five
Hundred (500) hours of consulting services per calendar year. The consulting
services contemplated herein shall be substantially similar in level of
responsibility as those which were performed by Belt as an officer of Horizon
immediately prior to his retirement. Horizon shall reimburse Belt for all
reasonable expenses incurred by him in connection with any such consulting,
upon Horizon's receipt of vouchers therefor in accordance with such
procedures as Horizon has heretofore or may hereafter establish. The parties
agree that Belt will perform up to Five Hundred (500) hours of mutually
agreed upon consulting services per calendar year during 1996 and 1997 without
receiving compensation in addition to that provided in this Agreement. If
Belt provides more than Five Hundred (500) hours of consulting services in a
calendar year ("Excess Consulting Services"), Horizon shall pay him Three
Hundred Dollars ($300) per hour plus applicable New Mexico gross receipts
taxes, if applicable, upon receipt of Belt's billing statement for such
Excess Consulting Services.
6. NONCOMPETITION. Unless Horizon consents thereto in writing, from
January 1, 1996, through December 31, 2005, Belt will not compete with
Horizon or any affiliate of Horizon, solicit the business of any patient or
customer of Horizon or any affiliate thereof, or directly or indirectly
solicit for employment any of the employees of Horizon or its affiliates;
PROVIDED, however, that the foregoing agreement not to compete shall be
unenforceable by Horizon in the event that Horizon shall default in the
performance
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<PAGE>
of any of its obligations contained in this Agreement and such default
remains uncured for a period of thirty (30) days after the giving of notice
thereof by Belt to Horizon as provided in Paragraph 4 above of this
Agreement, and shall terminate and become null and void upon expiration of
such default cure period. For purposes of this Agreement, "compete" means
engaging in the business of long term care, acute rehabilitation, contract
physical, occupational and speech therapy, outpatient rehabilitation clinics,
pharmacy, non-invasive diagnostics, home health care, or physician placement,
within a radius of fifteen (15) miles from any then-operating office, branch
or other facility of Horizon or any of its affiliates. The term "affiliate"
means any legal entity that directly or indirectly through one or more
intermediaries, is controlled by Horizon including, without limitation, any
wholly or majority owned subsidiaries of Horizon in existence as of the date
of this Agreement. The term "patient or customer" means all persons to whom
Horizon or any of its affiliates has sold or provided any product or service
whether or not for compensation from January 1, 1995, through December 31,
1995.
If Belt shall violate any of his covenants or agreements under this
Paragraph 6, Horizon shall be entitled to pursue injunctive relief before a
court of competent jurisdiction or other rights or remedies to which Horizon
is or may be entitled at law, in equity or under this Agreement.
9
<PAGE>
7. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of New Mexico.
8. SEVERABILITY. If any provisions of this Agreement shall be held or
deemed to be, or shall in fact be, invalid, inoperative, or unenforceable as
applied to any particular case in any jurisdiction or jurisdictions, or in
all jurisdictions, or in all cases, because of the conflicting of any
provision with any constitution or statute or rule of public policy or for
any other reason, such circumstance shall not have the effect of rendering
the provision or provisions in question, invalid, inoperative, or
unenforceable in any other jurisdiction or in any other case or circumstance
or of rendering any other provision or provisions herein contained invalid,
inoperative, or unenforceable to the extent that such other provisions are
not themselves actually in conflict with such constitution, statute, or rule
of public policy, but this Agreement shall be reformed and construed in any
such jurisdiction or case as if such invalid, inoperative, or unenforceable
provision had never been contained herein and such provision reformed so that
it would be valid, operative, and enforceable to the maximum extent permitted
in such jurisdiction or in such case. Specifically, in the event that any of
the provisions of Section 6 hereof should ever be adjudicated to exceed the
time, geographic, product, service, or other limitations permitted by
applicable law in any jurisdiction, then such provisions shall be deemed
reformed in such jurisdiction to the
10
<PAGE>
maximum time, geographic, product, service, or other limitations permitted by
applicable law.
9. NOTICES. Except for any notice required by applicable law to be
given in another manner, any notices or consents required or permitted by
this Agreement shall be in writing and shall be either delivered personally,
by overnight express mail, or by express air shipment delivery, or by
certified or registered mail, postage prepaid, return receipt requested,
addressed as shown below to such other address as such party may from time to
time designate in writing. Such notices or consents shall be deemed given on
the date delivered in person, within twenty-four (24) hours after sending if
sent by overnight express mail or express air shipment delivery, or
forty-eight (48) hours after mailing if sent by certified or registered mail,
postage prepaid, return receipt requested.
TO BELT:
Klemett L. Belt, Jr.
P.O. Box 356
Glenbrook, NV 89413
TO HORIZON:
Scot Sauder, Esq., General Counsel
Horizon/CMS Healthcare Corporation
6001 Indian School Road NE
Albuquerque, NM 87110
10. TIME OF ESSENCE. Time is of the essence of this Agreement.
11. BINDING EFFECT AND ASSIGNMENT. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their
respective heirs, personal representatives, successors and assigns. To the
extent this Agreement provides benefits which
11
<PAGE>
inure to Belt's spouse, she is an intended third-party beneficiary hereof.
Neither party may assign any of their rights and benefits contained herein
without the prior written consent of the other party hereto.
12. REFERENCES. Whenever in this Agreement the context requires,
references to the masculine shall be deemed to include the feminine and
neuter and references to the singular or the plural shall be deemed to
include the other.
13. NO WAIVER. No waiver of any default by any party in the
performance of this Agreement by the other party shall constitute a waiver of
any subsequent or other breach or default.
14. ENTIRE AGREEMENT. This Agreement contains the entire agreement and
understanding by and between Horizon and Belt with respect to the subject
matter hereof, and no representations, promises, agreements, or understandings
regarding these matters, written or oral, not contained herein shall be of any
force or effect. No change or modification of this Agreement shall be valid or
binding unless it is in writing and signed by the party intended to be bound.
No waiver of any provision of this Agreement shall be valid unless it is in
writing and signed by the party against whom the waiver is sought to be
enforced. No valid waiver of any provision of this Agreement at any time shall
be deemed a waiver of any other provisions of this Agreement at such time or at
any other time.
15. ATTORNEY FEES. If any party hereto commences a suit, arbitration or
other proceeding to enforce its right under this
12
<PAGE>
Agreement, or to enforce a remedy for breach hereof, the prevailing party or
parties shall be entitled to recover from the other party or parties against
whom enforcement was sought, their costs and expenses incurred, including
reasonable attorney fees.
16. FURTHER ASSURANCES. The parties to this Agreement shall execute
and deliver any documents or instruments in addition to those described in
this Agreement which are necessary or appropriate to carry out the
transactions contemplated hereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first above written.
/s/ KLEMETT L. BELT, JR.
--------------------------------------
KLEMETT L. BELT, JR.
HORIZON/CMS HEALTHCARE CORPORATION
a Delaware corporation
By Neal Elliott
----------------------------------
Its President
----------------------------------
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<PAGE>
SCHEDULE A
LIFE INSURANCE COMPANY POLICY NUMBER FACE AMOUNT
- ---------------------- ------------- -----------
THE NEW ENGLAND MUTUAL 08779585 $5,350,000
THE NEW ENGLAND MUTUAL 1UO50197 765,899
THE NEW ENGLAND MUTUAL 08803997 2,500,000
THE NEW ENGLAND MUTUAL 1U050871 488,525
<PAGE>
EXHIBIT 10.5
CONSULTING AGREEMENT
AGREEMENT made this 17th day of July, 1995 (the "Agreement") by and
between HORIZON/CMS HEALTHCARE CORPORATION, INC., 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 200 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
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<PAGE>
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 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
-3-
<PAGE>
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 independent 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 secretarial and clerical assistance from the
Corporation. However, in the event of a failure by the Corporation
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<PAGE>
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 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, the
conversion of the existing keyman term life insurance policy into a whole
life policy pursuant to a "split dollar" arrangement reasonably satisfactory
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 of 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
-5-
<PAGE>
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 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
-6-
<PAGE>
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.
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<PAGE>
(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 service 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
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
-8-
<PAGE>
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, 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,
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<PAGE>
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.
(b) 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 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 indemni-
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<PAGE>
fication 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 as of the
day and year first above written.
HORIZON/CMS HEALTHCARE CORPORATION
By: /s/ NEAL M. ELLIOTT
-------------------------------
Neal M. Elliott
Title: President
/s/ ROCCO A. ORTENZIO
-------------------------------
Rocco A. Ortenzio
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<PAGE>
July 17, 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 facilities. 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.
4. Pursuant to the Consulting Agreement of even date herewith,
Horizon/CMS is obligated to pay you $6,500,000, 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 as consideration for your covenant not to
compete contained in Section 7 of such Consulting Agreement. Any and all
value assigned to the conversion of the keyman life
<PAGE>
insurance policy into a whole life policy shall be specifically assigned as
consideration for your covenant not to compete.
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
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
<PAGE>
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.
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: Neal Elliott
-----------------------------------
Title: Chairman, President and CEO
AGREED AND ACCEPTED:
/s/ Rocco A. Ortenzio
- -----------------------
Rocco A. Ortenzio
<PAGE>
EXHIBIT 10.18
FIRST AMENDMENT TO
HORIZON HEALTHCARE CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan (the "Plan") adopted by the Board of
Directors of Horizon Healthcare Corporation and attached hereto is hereby
amended as follows:
A. Section 5.3 is amended to read in its entirety as follows:
5.3 PURCHASE OF SHARES. Shares shall be purchased from either unissued
shares or treasury shares of the Company effective on the last day of each
calendar quarter at a purchase price (the "Purchase Price") equal to the
average of the high and low prices on the New York Stock Exchange on the
last business day on which Common Stock of the Company was traded in the
calendar quarter. The Shares to be purchased each quarter on behalf of
each Participant shall be the number of whole shares of Common Stock of the
Company that can be purchased at the applicable Purchase Price from funds
contributed by the Participant at a price per share equal to 85% of the
Purchase Price. Any remaining amounts credited to the Participant will be
used to purchase stock in the following quarter and will be deemed to be
the amounts first used for such purchase. Each Participant will receive a
quarterly statement setting forth the number of Shares purchased for such
Participant during the quarter, the Purchase Price for the Shares, the
total number of Shares held for the Participant pursuant to the Plan and
the amount remaining credited to such Participant for the purchase of
Shares in the following quarter. All Shares issued pursuant to the Plan
shall be validly issued, fully paid and nonassessable.
B. Section 5.4 is amended to read in its entirety as follows:
5.4 ISSUANCE OF STOCK CERTIFICATES AND WITHDRAWAL OF SHARES. Any
Participant may elect to withdraw all, but not a portion, of the Shares
from his or her account effective on March 31 or September 30 of any
calendar year and be issued a stock certificate for such Shares promptly
following the effective date of such election, such election to be made by
accurately completing the prescribed election form and filing it with the
Administrator by March 15 or September 15, respectively, or such year;
provided, however, that each Participant may make only one such withdrawal
election in any twelve-month period. If the number of Shares in a
Participant's account at the time the Participant elects to withdraw the
Shares is fewer than 25 Shares, such Participant shall be precluded from
participating in the Plan for a period of one year from the date of such
withdrawal. Following each withdrawal of Shares, the Participant will
receive a statement setting forth the cost basis for all Shares withdrawn.
<PAGE>
C. Except as specifically set forth herein, the Plan shall remain in full
force and effect as originally approved by the Board.
<PAGE>
EXHIBIT 10.19
HORIZON/CMS HEALTHCARE CORPORATION
1996 EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE. The purpose of the HORIZON/CMS HEALTHCARE CORPORATION 1996
EMPLOYEE STOCK PURCHASE PLAN (the "Plan") is to furnish to eligible employees an
incentive to advance the best interests of HORIZON/ CMS HEALTHCARE CORPORATION
(the "Company") by providing a method whereby they voluntarily may purchase
stock of the Company at a favorable price and upon favorable terms.
2. ADMINISTRATION OF THE PLAN. The Plan shall be administered by a
committee (the "Committee") of, and appointed by, the Board of Directors of the
Company (the "Board"), and the Committee shall be constituted so as to permit
the Plan to comply with Rule 16b-3, as currently in effect or as hereinafter
modified or amended ("Rule 16b-3"), promulgated under the Securities Exchange
Act of 1934, as amended (the "1934 Act"). Subject to the provisions of the Plan,
the Committee shall interpret the Plan and all options granted under the Plan,
shall make such rules as it deems necessary for the proper administration of the
Plan, shall make all other determinations necessary or advisable for the
administration of the Plan and shall correct any defect or supply any omission
or reconcile any inconsistency in the Plan or in any option granted under the
Plan in the manner and to the extent that the Committee deems desirable to carry
the Plan or any option into effect. The Committee shall, in its sole discretion
exercised in good faith, make such decisions or determinations and take such
actions, and all such decisions, determinations and actions taken or made by the
Committee pursuant to this and the other paragraphs of the Plan shall be
conclusive on all parties. The Committee shall not be liable for any decision,
determination or action taken in good faith in connection with the
administration of the Plan.
Notwithstanding any provision in the Plan to the contrary, no options may be
granted under the Plan to any member of the Committee during the term of his
membership on the Committee. No person shall be eligible to serve on the
Committee unless he is then a "disinterested person" within the meaning of Rule
16b-3.
3. PARTICIPATING COMPANIES. Each present and future parent or subsidiary
corporation of the Company (within the meaning of Sections 424(e) and (f) of the
Internal Revenue Code of 1986, as amended (the "Code")) that is eligible by law
to participate in the Plan shall be a "Participating Company" during the period
that such corporation is such a parent or subsidiary corporation; provided,
however, that the Committee may at any time and from time to time, in its sole
discretion, terminate a Participating Company's Plan participation. Any
Participating Company may, by appropriate action of its Board of Directors,
terminate its participation in the Plan. Transfer of employment among the
Company and Participating Companies (and among any other parent or subsidiary
corporation of the Company) shall not be considered a termination of employment
hereunder.
4. ELIGIBILITY. All employees of the Company and the Participating
Companies who have been employed by the Company or any Participating Company for
at least 12 months (including any authorized leave of absence meeting the
requirements of Treasury Regulation 1.421-7(h)(2)) as of the applicable date of
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<PAGE>
grant (defined below) shall be eligible to participate in the Plan; provided,
however, that the 12-month period referred to in the preceeding provisions of
this sentence shall be reduced to six months with respect to each date of grant
that occurs on or after January 1, 1997; and provided, further, that no option
shall be granted to an employee if such employee, immediately after the option
is granted, owns stock possessing five percent or more of the total combined
voting power or value of all classes of stock of the Company or of its parent or
subsidiary corporation (within the meaning of Sections 423(b)(3) and 424(d) of
the Code). In addition, no option shall be granted prior to January 1, 1997, to
an employee who, as of the applicable date of grant, is both a highly
compensated employee (within the meaning of Section 414(q) of the Code) and an
officer or employee of the Company or a Participating Company who is subject to
Section 16 of the 1934 Act.
5. STOCK SUBJECT TO THE PLAN. Subject to the provisions of paragraph 12
(relating to adjustment upon changes in stock), the aggregate number of shares
which may be sold pursuant to options granted under the Plan shall not exceed
250,000 shares of the authorized $.001 par value common stock of the Company
("Stock"), which shares may be unissued shares or reacquired shares or shares
bought on the market for purposes of the Plan. Should any option granted under
the Plan expire or terminate prior to its exercise in full, the shares
theretofore subject to such option may again be subject to an option granted
under the Plan. Any shares which are not subject to outstanding options upon the
termination of the Plan shall cease to be subject to the Plan.
6. GRANT OF OPTIONS.
(a) GENERAL STATEMENT; "DATE OF GRANT"; "OPTION PERIOD"; "DATE OF
EXERCISE". Following the effective date of the Plan and continuing while the
Plan remains in force, the Company shall offer options under the Plan to all
eligible employees to purchase shares of Stock. Except as otherwise determined
by the Committee, these options shall be granted on July 1, 1996, October 1,
1996, and, thereafter, on the first day of each January and July (each of which
dates is herein referred to as a "date of grant"). The term of each option
granted on July 1, 1996, and on October 1, 1996, shall be for three months, and
the term of each option granted thereafter shall be for six months (each of such
three-month and six-month periods is herein referred to as an "option period"),
which shall begin on a date of grant (the last day of each option period is
herein referred to as a "date of exercise"). The number of shares subject to
each option shall be the quotient of the payroll deductions withheld on behalf
of each participant in accordance with subparagraph 6(b) and the payments made
by such participant pursuant to subparagraph 6(f) extended for the option period
divided by the "option price" (defined below) of the Stock, as defined by
subparagraph 7(b), excluding all fractions; provided, however, that the maximum
number of shares that may be subject to any option may not exceed 10,000
(subject to adjustment as provided in paragraph 12).
(b) ELECTION TO PARTICIPATE; PAYROLL DEDUCTION AUTHORIZATION. Except as
provided in subparagraph 6(f), an eligible employee may participate in the Plan
only by means of payroll deduction. Except as provided in subparagraph 6(g),
each eligible employee who elects to participate in the Plan shall deliver to
the Company, within the time period prescribed by the Company, a written payroll
deduction authorization in a form prepared by the Company whereby he gives
notice of his election to participate in the Plan as of the next following date
of
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<PAGE>
grant, and whereby he designates an integral percentage or specific amount of
his "eligible compensation" (as defined in subparagraph 6(d)) to be deducted
from his compensation for each pay period and paid into the Plan for his
account. The designated percentage or specific amount may not be expected to
result in the payment into the Plan during any payroll period of an amount less
than $5. The designated percentage or specific amount may not exceed either of
the following: (i) 5% of the amount of eligible compensation from which the
deduction is made; or (ii) an amount which will result in noncompliance with the
$25,000 limitation stated in subparagraph 6(e).
(c) CHANGES IN PAYROLL AUTHORIZATION. Except as provided in subparagraph
8(a), the payroll deduction authorization referred to in subparagraph 6(b) may
not be changed during the option period.
(d) "ELIGIBLE COMPENSATION" DEFINED. The term "eligible compensation"
means the gross (before taxes are withheld) total of all wages, salaries,
commissions, and bonuses received during the option period, except that such
term shall include elective contributions made on an employee's behalf by the
Company or a Participating Company that are not includable in income under
Section 125 or Section 402(e)(3) of the Code. Notwithstanding the foregoing,
"eligible compensation" shall not include (i) employer contributions to or
payments from any deferred compensation program, whether such program is
qualified under Section 401(a) of the Code or nonqualified, (ii) amounts
realized from the receipt or exercise of a stock option that is not an incentive
stock option within the meaning of Section 422 of the Code, (iii) amounts
realized at the time property described in Section 83 of the Code is freely
transferable or no longer subject to a substantial risk of forfeiture, (iv)
amounts realized as a result of an election described in Section 83(b) of the
Code, and (v) any amount realized as a result of a disqualifying disposition
within the meaning of Section 421(a) of the Code.
(e) $25,000 LIMITATION. No employee shall be granted an option under the
Plan to the extent the grant of an option under the Plan would permit his rights
to purchase Stock under the Plan and under all other employee stock purchase
plans of the Company and its parent and subsidiary corporations (as such terms
are defined in Section 424(e) and (f) of the Code) to accrue at a rate which
exceeds $25,000 of fair market value of Stock (determined at the time the option
is granted) for each calendar year in which any such option granted to such
employee is outstanding at any time (within the meaning of Section 423(b)(8) of
the Code).
(f) LEAVES OF ABSENCE. During a paid leave of absence approved by the
Company and meeting the requirements of Treasury Regulation 1.421-7(h)(2), a
participant's elected payroll deductions shall continue. If a participant takes
an unpaid leave of absence that is approved by the Company and meets the
requirements of Treasury Regulation 1.421-7(h)(2), then such participant may
continue participation in the Plan by cash payments to the Company on his normal
pay days equal to the reduction in his payroll deductions caused by his leave.
If a participant on such leave fails to make such payments, or if a participant
takes a leave of absence that is not described in the preceding provisions of
this subparagraph 6(f), then he shall be considered to have withdrawn from the
Plan pursuant to the provisions of paragraph 8 hereof.
(g) CONTINUING ELECTION. A participant (i) who has elected to participate
in the Plan pursuant to subparagraph 6(b) as of a date of grant and (ii) who
takes
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<PAGE>
no action to change or revoke such election as of the next following date of
grant and/or as of any subsequent date of grant prior to any such respective
date of grant shall be deemed to have made the same election, including the same
attendant payroll deduction authorization, for such next following and/or
subsequent date(s) of grant as was in effect for the date of grant for which he
made such election to participate.
7. EXERCISE OF OPTIONS.
(a) GENERAL STATEMENT. Each eligible employee who is a participant in the
Plan automatically and without any act on his part shall be deemed to have
exercised his option on each date of exercise to the extent that the cash
balance then in his account under the Plan is sufficient to purchase at the
"option price" (as defined in subparagraph 7(b)) whole shares of Stock. Any
balance remaining in his account after payment of the purchase price of those
whole shares shall be carried forward and used towards the purchase of whole
shares in the next following option period.
(b) "OPTION PRICE" DEFINED. The option price per share of Stock to be paid
by each optionee on each exercise of his option shall be a sum equal to 85% of
the fair market value of the Stock on the date of exercise or on the date of
grant, whichever amount is lesser. For all purposes under the Plan, the fair
market value of a share of Stock on a particular date shall be equal to the
closing sales price of the Stock (i) reported by the NASDAQ-National Market
System on that date or (ii) if the Stock is listed on a national stock exchange,
reported on the stock exchange composite tape on that date; or, in either case,
if no prices are reported on that date, on the last preceding date on which such
prices of the Stock are so reported. If the Stock is traded over the counter at
the time a determination of its fair market value is required to be made
hereunder, its fair market value shall be deemed to be equal to the average
between the reported high and low or closing bid and asked prices of Stock on
the most recent date on which Stock was publicly traded. In the event Stock is
not publicly traded at the time a determination of its value is required to be
made hereunder, the determination of its fair market value shall be made by the
Committee in such manner as it deems appropriate.
(c) DELIVERY OF SHARE CERTIFICATES. As soon as practicable after each date
of exercise, the Company shall issue one or more certificates representing the
total number of whole shares of Stock respecting exercised options in the
aggregate of all of the eligible employees hereunder. Any such certificate shall
be held by the Company, and, if the Company issues a certificate representing
the shares of more than one eligible employee, the Company shall keep accurate
records of the beneficial interests of each eligible employee in each such
certificate by means of a Company stock account. Each eligible employee shall be
provided with such periodic statements as may be directed by the Committee
reflecting all activity in any such Company stock account. In the event the
Company is required to obtain from any commission or agency authority to issue
any such certificate, the Company shall seek to obtain such authority. Inability
of the Company to obtain from any such commission or agency authority which
counsel for the Company deems necessary for the lawful issuance of any such
certificate shall relieve the Company from liability to any participant in the
Plan except to return to him the amount of the balance in his account. On or
before March 15 and September 15 of each year, an employee may, on the form
prescribed by the Committee, request the Company to deliver to such employee as
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<PAGE>
soon as possible after the next following March 31 or September 30,
respectively, a certificate issued in his name representing the aggregate whole
number of shares of Stock then held by the Company on his behalf under the Plan.
Further, upon the termination of an employee's employment with the Company and
its parent or subsidiary corporations for any reason whatsoever, the Company
shall deliver to such employee a certificate issued in his name representing the
aggregate whole number of shares of Stock then held by the Company on his behalf
under the Plan. While shares of Stock are held by the Company, such shares may
not be sold, assigned, pledged, exchanged, hypothecated or otherwise
transferred, encumbered or disposed of by the employee who has purchased such
shares; provided, however, that such restriction shall not apply to the transfer
of such shares of Stock pursuant to (i) a plan of reorganization of the Company,
but the stock, securities or other property received in exchange therefor shall
be held by the Company pursuant to the provisions hereof or (ii) a divorce. The
Committee may cause the Stock certificates issued in connection with the
exercise of options under the Plan to bear such legend or legends, and the
Committee may take such other actions, as it deems appropriate in order to
reflect the provisions of this subparagraph 7(c) and to assure compliance with
applicable securities laws. Neither the Company nor the Committee shall have any
liability with respect to a delay in the delivery of a Stock certificate
pursuant to this subparagraph 7(c).
8. WITHDRAWAL FROM THE PLAN.
(a) GENERAL STATEMENT. Any participant may withdraw in whole from the Plan
at any time prior to the exercise date relating to a particular option period.
Partial withdrawals shall not be permitted. A participant who wishes to withdraw
from the Plan must timely deliver to the Company a notice of withdrawal in a
form prepared by the Company. The Company, promptly following the time when the
notice of withdrawal is delivered, shall refund to the participant the amount of
the cash balance in his account under the Plan; and thereupon, automatically and
without any further act on his part, his payroll deduction authorization and his
interest in unexercised options under the Plan shall terminate.
(b) ELIGIBILITY FOLLOWING WITHDRAWAL. A participant who withdraws from the
Plan shall be eligible to participate again in the Plan upon expiration of the
option period during which he withdrew (provided that he is otherwise eligible
to participate in the Plan at such time).
9. TERMINATION OF EMPLOYMENT. If the employment of a participant
terminates for any reason whatsoever, his participation in the Plan
automatically and without any act on his part shall terminate as of the date of
the termination of his employment. The Company shall refund to him the amount of
the cash balance in his account under the Plan, and thereupon his interest in
unexercised options under the Plan shall terminate.
10. RESTRICTION UPON ASSIGNMENT OF OPTION. An option granted under the
Plan shall not be transferable otherwise than by will or the laws of descent and
distribution. Each option shall be exercisable, during his lifetime, only by the
employee to whom granted. The Company shall not recognize and shall be under no
duty to recognize any assignment or purported assignment by an employee of his
option or of any rights under his option.
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<PAGE>
11. NO RIGHTS OF STOCKHOLDER UNTIL CERTIFICATE ISSUES. With respect to
shares of Stock subject to an option, an optionee shall not be deemed to be a
stockholder, and he shall not have any of the rights or privileges of a
stockholder. An optionee shall have the rights and privileges of a stockholder
upon, but not until, a certificate for shares has been issued on his behalf
following exercise of his option. With respect to an optionee's Stock held by
the Company pursuant to subparagraph 7(c), the Company shall, as soon as
practicable, pay the optionee any cash dividends attributable thereto and
facilitate the optionee's voting rights attributable thereto.
12. CHANGES IN STOCK; ADJUSTMENTS. Whenever any change is made in the
Stock, by reason of a stock dividend or by reason of subdivision, stock split,
reverse stock split, recapitalization, reorganization, combinations,
reclassification of shares, or other similar change, appropriate action will be
taken by the Committee to adjust accordingly the number of shares subject to the
Plan, the maximum number of shares that may be subject to any option, and the
number and option price of shares subject to options outstanding under the Plan.
If the Company shall not be the surviving corporation in any merger or
consolidation (or survives only as a subsidiary of another entity), or if the
Company is to be dissolved or liquidated, then unless a surviving corporation
assumes or substitutes new options (within the meaning of Section 424(a) of the
Code) for all options then outstanding, (i) the date of exercise for all options
then outstanding shall be accelerated to a date fixed by the Committee prior to
the effective date of such merger or consolidation or such dissolution or
liquidation and (ii) upon such effective date any unexercised options shall
expire.
13. USE OF FUNDS; NO INTEREST PAID. All funds received or held by the
Company under the Plan shall be included in the general funds of the Company
free of any trust or other restriction, and may be used for any corporate
purpose. No interest shall be paid to any participant or credited to his account
under the Plan.
14. TERM OF THE PLAN. The Plan shall be effective as of July 1, 1996,
provided the Plan is approved by the stockholders of the Company within 12
months thereafter. Notwithstanding any provision in the Plan, no option granted
under the Plan shall be exercisable prior to such stockholder approval, and, if
the stockholders of the Company do not approve the Plan within 12 months after
its adoption by the Board, then the Plan shall automatically terminate. Except
with respect to options then outstanding, if not sooner terminated under the
provisions of paragraph 15, the Plan shall terminate upon and no further options
shall be granted after June 30, 2006.
15. AMENDMENT OR TERMINATION OF THE PLAN. The Board in its discretion may
terminate the Plan at any time with respect to any shares for which options have
not theretofore been granted. The Board shall have the right to alter or amend
the Plan or any part thereof from time to time; provided, that no change in any
option theretofore granted may be made which would impair the rights of the
optionee without the consent of such optionee; and provided, further, that the
Board may not make any alteration or amendment which would materially increase
the benefits accruing to participants under the Plan, increase the aggregate
number of shares which may be issued pursuant to the provisions of the Plan
(other than as a result of the anti-dilution provisions of the Plan), change the
class of individuals eligible to receive options under the Plan, extend the
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<PAGE>
term of the Plan, cause options issued under the Plan to fail to meet the
requirements of employee stock purchase options as defined in Section 423 of the
Code, or otherwise modify the requirements as to eligibility for participation
in the Plan without the approval of the stockholders of the Company.
16. SECURITIES LAWS. The Company shall not be obligated to issue any Stock
pursuant to any option granted under the Plan at any time when the shares
covered by such option have not been registered under the Securities Act of
1933, as amended, and such other state and federal laws, rules or regulations as
the Company or the Committee deems applicable and, in the opinion of legal
counsel for the Company, there is no exemption from the registration
requirements of such laws, rules or regulations available for the issuance and
sale of such shares. Further, all Stock acquired pursuant to the Plan shall be
subject to the Company's policy or policies, if any, concerning compliance with
securities laws and regulations, as the same may be amended from time to time.
17. NO RESTRICTION ON CORPORATE ACTION. Nothing contained in the Plan
shall be construed to prevent the Company or any subsidiary from taking any
corporate action which is deemed by the Company or such subsidiary to be
appropriate or in its best interest, whether or not such action would have an
adverse effect on the Plan or any award made under the Plan. No employee,
beneficiary or other person shall have any claim against the Company or any
subsidiary as a result of any such action.
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<PAGE>
[LOGO] BUSINESS PLANNING
- ------------------------------------------------------------------------------
BASIC PLAN DOCUMENT 01
IDS FINANCIAL SERVICES, INC.
DEFINED CONTRIBUTION PROTOTYPE PLAN
AND TRUST AGREEMENT
- ------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
ARTICLE I, DEFINITIONS (Page Number)
1.01 Employer............................................. 1
1.02 Custodian/Trustee.................................... 1
1.021 Custodian............................................ 1
1.022 Trustee.............................................. 1
1.023 Auxiliary Trustee.................................... 1
1.03 Plan................................................. 1
1.04 Adoption Agreement................................... 1
1.05 Plan Administrator................................... 1
1.06 Advisory Committee................................... 1
1.07 Employee............................................. 1
1.08 Self-Employed Individual/Owner-Employee.............. 1
1.09 Highly Compensated Employee.......................... 1
1.10 Participant.......................................... 2
1.11 Beneficiary.......................................... 2
1.12 Compensation......................................... 2
1.13 Earned Income........................................ 2
1.14 Account.............................................. 2
1.15 Accrued Benefit...................................... 2
1.16 Nonforfeitable....................................... 2
1.17 Plan Year/Limitation Year............................ 2
1.175 Fiscal Year.......................................... 2
1.18 Effective Date....................................... 2
1.19 Plan Entry Date...................................... 2
1.20 Accounting Date...................................... 2
1.21 Trust................................................ 2
1.211 Auxiliary Trust...................................... 2
1.22 Trust Fund........................................... 2
1.221 Auxiliary Trust Fund................................. 2
1.23 Nontransferable Annuity.............................. 2
1.24 ERISA................................................ 2
1.25 Code................................................. 2
1.26 Service.............................................. 2
1.27 Hour of Service...................................... 2
1.28 Disability........................................... 3
1.29 Service for Predecessor Employer..................... 3
1.30 Related Employers.................................... 3
1.31 Leased Employees..................................... 3
1.32 Special Rules for Owner-Employers.................... 4
1.33 Determination of Top Heavy Status.................... 4
1.34 Paired Plans......................................... 5
1.35 Participating Employers.............................. 5
ARTICLE II, EMPLOYEE PARTICIPANTS
2.01 Eligibility.......................................... 5
2.02 Year of Service - Participation...................... 5
2.03 Break in Service - Participation..................... 5
2.04 Participation upon Re-employment..................... 5
2.05 Change in Employee Status............................ 5
2.06 Election Not to Participate.......................... 5
ARTICLE III, EMPLOYER CONTRIBUTIONS AND FORFEITURES
3.01 Amount............................................... 6
3.02 Determination of Contribution........................ 6
3.03 Time of Payment of Contribution...................... 6
3.04 Contribution Allocation.............................. 6
3.05 Forfeiture Allocation................................ 7
3.06 Accrual of Benefit................................... 7
3.07
3.16 Limitations on Allocations........................... 8
3.17 Special Allocation Limitation........................ 8
3.18 Defined Benefit Plan Limitation...................... 8
3.19 Definitions - Article III............................ 8
3.20 Participating Employer Contributions and Forfeitures. 10
ARTICLE IV, PARTICIPANT CONTRIBUTIONS
4.01 Participant Nondeductible Contributions.............. 10
4.02 Participant Deductible Contributions................. 10
4.03 Participant Rollover Contributions................... 10
4.04 Participant Contribution - Forfeitability............ 11
4.05 Participant Contribution - Withdrawal/Distribution... 11
4.06 Participant Contribution - Accrued Benefit........... 11
ARTICLE V, TERMINATION OF SERVICE - PARTICIPANT VESTING
5.01 Normal Retirement Age................................ 11
5.02 Participant Disability or Death...................... 11
5.03 Vesting Schedule..................................... 11
5.04 Cash-Out Distributions to Partially-Vested
Participants/Restoration of Forfeited
Accrued Benefit...................................... 11
5.05 Segregated Account for Repaid Amount................. 11
5.06 Year of Service - Vesting............................ 12
5.07 Break in Service - Vesting........................... 12
5.08 Included Years of Service - Vesting.................. 12
5.09 Forfeiture Occurs.................................... 12
ARTICLE VI, TIME AND METHOD OF PAYMENT OF BENEFITS
6.01 Time of Payment of Accrued Benefit................... 12
6.02 Method of Payment of Accrued Benefit................. 13
6.03 Benefit Payment Elections............................ 14
6.04 Annuity Distributions to Participants and
Surviving Spouses.................................... 14
6.05 Waiver Election - Qualified Joint and
Survivor Annuity..................................... 15
6.06 Waiver Election - Preretirement Survivor Annuity..... 16
6.07 Distributions Under Domestic Relations Orders........ 16
6.08 Joint and Survivor Annuity-Transitional Rules........ 16
ARTICLE VII, EMPLOYER ADMINISTRATIVE PROVISIONS
7.01 Information to Committee............................. 17
7.02 No Liability......................................... 17
7.03 Indemnity of Plan Administrator and Committee........ 17
7.04 Employer Direction of Investment..................... 17
7.05 Amendment to Vesting Schedule........................ 17
ARTICLE VIII, PARTICIPANT ADMINISTRATIVE PROVISIONS
8.01 Beneficiary Designation.............................. 17
8.02 No Beneficiary Designation........................... 18
8.03 Personal Data to Committee........................... 18
8.04 Address for Notification............................. 18
8.05 Assignment or Alienation............................. 18
8.06 Notice of Change in Terms............................ 18
8.07 Litigation Against the Trust......................... 18
8.08 Information Available................................ 18
8.09 Appeal Procedure for Denial of Benefits.............. 18
8.10 Participant Direction of Investment.................. 19
<PAGE>
TABLE OF CONTENTS (Continued)
ARTICLE IX, ADVISORY COMMITTEE --
DUTIES WITH RESPECT TO PARTICIPANTS'
ACCOUNTS (Page Number)
9.01 Members' Compensation, Expenses ............................... 19
9.02 Term .......................................................... 19
9.03 Powers ........................................................ 19
9.04 General ....................................................... 19
9.05 Funding Policy ................................................ 19
9.06 Manner of Action .............................................. 19
9.07 Authorized Representative ..................................... 19
9.08 Interested Member ............................................. 19
9.09 Individual Accounts ........................................... 19
9.10 Value of Participant's Accrued Benefit ........................ 19
9.11 Allocation and Distribution of Net Income Gain or
Loss .......................................................... 20
9.12 Individual Statement .......................................... 20
9.13 Account Charged ............................................... 20
9.14 Unclaimed Account Procedure ................................... 20
ARTICLE X, CUSTODIAN/TRUSTEE, POWERS
AND DUTIES
10.01 Acceptance .................................................... 20
10.012 Auxiliary Trust ............................................... 20
10.02 Receipt of Contributions ...................................... 20
10.03 Investment Powers ............................................. 21
10.04 Records and Statements ........................................ 24
10.05 Fees and Expenses from Fund ................................... 24
10.06 Parties to Litigation ......................................... 24
10.07 Professional Agents ........................................... 24
10.08 Distribution of Cash or Property .............................. 24
10.09 Distribution Directions ....................................... 24
10.10 Third Party ................................................... 24
10.11 Resignation ................................................... 24
10.12 Removal ....................................................... 24
10.13 Interim Duties and Successor Custodian/Trustee ................ 25
10.14 Valuation of Trust ............................................ 25
10.15 Limitation on Liability - If Investment Manager
Appointed ..................................................... 25
10.16 Investment in Group Trust Fund ................................ 25
ARTICLE XI, PROVISIONS RELATING TO
INSURANCE AND INSURANCE COMPANY
11.01 Insurance Benefit ............................................. 25
11.02 Limitation on Life Insurance Protection ....................... 25
11.03 Definitions ................................................... 26
11.04 Dividend Plan ................................................. 26
11.05 Insurance Company Not a Party to Agreement .................... 26
11.06 Insurance Company Not Responsible for Custodian/
Trustee's Actions ............................................. 26
11.07 Insurance Company Reliance on Custodian/Trustee's
Signature ..................................................... 26
11.08 Acquittance ................................................... 26
11.09 Duties of Insurance Company ................................... 26
ARTICLE XII, MISCELLANEOUS
12.01 Evidence ...................................................... 26
12.02 No Responsibility for Employer Action ......................... 26
12.03 Fiduciaries Not Insurers ...................................... 26
12.04 Waiver of Notice .............................................. 26
12.05 Successors .................................................... 26
12.06 Word Usage .................................................... 27
12.07 State Law ..................................................... 27
12.08 Employer's Right to Participate ............................... 27
12.09 Employment Not Guaranteed ..................................... 27
ARTICLE XIII, EXCLUSIVE BENEFIT,
AMENDMENT, TERMINATION
13.01 Exclusive Benefit ............................................. 27
13.02 Amendment By Employer ......................................... 27
13.03 Amendment By Prototype Plan Sponsor ........................... 27
13.04 Discontinuance ................................................ 27
13.05 Full Vesting on Termination ................................... 27
13.06 Merger/Direct Transfer ........................................ 27
13.07 Termination ................................................... 28
ARTICLE XIV, CODE SECTION 401(k) ARRANGEMENTS
14.01 Application ................................................... 28
14.02 Code SECTION 401(k) Arrangement ............................... 28
14.03 Definitions ................................................... 29
14.04 Matching Contributions/Employee Contributions ................. 29
14.05 Time of Payment of Contributions .............................. 30
14.06 Special Allocation Provisions - Deferral Contributions,
Matching Contributions and Qualified Nonelective
Contributions ................................................. 30
14.07 Annual Elective Deferral Limitation ........................... 30
14.08 Actual Deferral Percentage ("ADP") Test ....................... 31
14.09 Nondiscrimination Rules for Employer Matching
Contributions and Participant Nondeductible
Contributions ................................................. 32
14.10 Multiple Use Limitation ....................................... 33
14.11 Distribution Restrictions ..................................... 33
14.12 Special Allocation Rules ...................................... 33
<PAGE>
ALPHABETICAL LISTING OF DEFINITIONS
<TABLE>
Plan Definition Section Reference Page No.
- --------------- ----------------- --------
<S> <C> <C>
100% Limitation............................................... 3.19(l) 8
Account....................................................... 1.14 2
Accounting Date............................................... 1.20 2
Accrued Benefit............................................... 1.15 2
Actual Deferral Percentage ("ADP") Test....................... 14.08 31
Adoption Agreement............................................ 1.04 1
Advisory Committee............................................ 1.06 1
Annual Addition............................................... 3.19(a) 8
Auxiliary Trust............................................... 1.211 1
Auxiliary Trustee............................................. 1.023 1
Auxiliary Trust Fund.......................................... 1.221 1
Beneficiary................................................... 1.11 2
Break in Service for Eligibility Purposes..................... 2.03 5
Break in Service for Vesting Purposes......................... 5.07 12
Cash-out Distribution......................................... 5.04 11
Code.......................................................... 1.25 2
Code Section 411(d)(6) Protected Benefits...................... 13.02 27
Compensation.................................................. 1.12 2
Compensation for Code Section 401(k) Purposes................. 14.03(f) 29
Compensation for Code Section 415 Purposes.................... 3.19(b) 8
Compensation for Top Heavy Purposes........................... 1.33(c) 4
Contract(s)................................................... 11.03(c) 26
Custodian..................................................... 1.021 1
Custodian Designation......................................... 10.03(B) 21
Custodian/Trustee............................................. 1.02 1
Deemed Cash-out Rule.......................................... 5.04(c) 11
Deferral Contributions........................................ 14.03(g) 29
Deferral Contributions Account................................ 14.06 30
Defined Contribution Plan Fraction............................ 3.19(k) 8
Defined Contribution Plan..................................... 3.19(h) 8
Defined Benefit Plan Fraction................................. 3.19(j) 8
Defined Benefit Plan.......................................... 3.19(i) 8
Determination Date............................................ 1.33(g) 4
Disability.................................................... 1.28 3
Distribution Date............................................. 6.01 12
Distribution Restrictions..................................... 14.03(m) 29
Earned Income................................................. 1.13 2
Effective Date................................................ 1.18 2
Elective Deferrals............................................ 14.03(h) 29
Elective Transfer............................................. 13.06 27
Eligible Employee............................................. 14.03(c) 29
Employee...................................................... 1.07 1
Employee Contributions........................................ 14.03(n) 29
Employer...................................................... 1.01 1
Employer Contribution Account................................. 14.06 30
Employer for Code Section 415 Purposes........................ 3.19(c) 8
Employer for Top Heavy Purposes............................... 1.33(f) 4
Employment Commencement Date.................................. 2.02 5
ERISA......................................................... 1.24 2
Excess Aggregate Contributions................................ 14.09 32
Excess Amount................................................. 3.19(d) 8
Excess Contributions.......................................... 14.08 31
Fiscal Year................................................... 1.175 2
Forfeiture Break in Service................................... 5.08 12
Group Trust Fund.............................................. 10.16 25
Hardship...................................................... 6.01(A)(4) 12
Hardship for Code Section 401(k) Purposes..................... 14.11 33
Highly Compensated Employee................................... 1.09 1
Highly Compensated Group...................................... 14.03(d) 29
Hour of Service............................................... 1.27 2
Incidental Insurance Benefits................................. 11.01 25
Insurable Participant......................................... 11.03(d) 26
Investment Manager............................................ 9.04(i) 19
Issuing Insurance Company..................................... 11.03(b) 26
Joint and Survivor Annuity.................................... 6.04(A) 14
Key Employee.................................................. 1.33(a) 4
Leased Employees.............................................. 1.31 3
Limitation Year............................................... 1.17 and 3.19(e) 2 and 8
Loan Policy................................................... 9.04 19
Mandatory Contributions....................................... 14.04 29
Mandatory Contributions Account............................... 14.04 29
Matching Contributions........................................ 14.03(i) 29
Maximum Permissible Amount.................................... 3.19(g) 8
Minimum Distribution Incidental Benefit (MDIB)............... 6.02(A) 13
Multiple Use Limitation....................................... 14.10 33
Named Fiduciary............................................... 10.03[D] 21
Nonelective Contributions..................................... 14.03(j) 29
Nonforfeiture................................................. 1.16 2
Nonhighly Compensated Employee................................ 14.03(b) 29
Nonhighly Compensated Group................................... 14.03(e) 29
Non-Key Employee.............................................. 1.33(b) 4
Nontransferable Annuity....................................... 1.23 2
Normal Retirement Age......................................... 5.01 11
Owner-Employee................................................ 1.08 1
Paired Plans.................................................. 1.34 5
Participant Deductible Contributions.......................... 4.02 10
Participant Nondeductible Contributions....................... 4.01 10
Participant Forfeiture........................................ 3.05 7
Participant................................................... 1.10 2
Participant Loans............................................. 10.03[E] 21
Permissive Aggregation Group.................................. 1.33(e) 4
Plan.......................................................... 1.03 1
Plan Entry Date............................................... 1.19 2
Plan Administrator............................................ 1.05 1
Plan Year..................................................... 1.17 2
Policy........................................................ 11.03(a) 26
Predecessor Employer.......................................... 1.29 3
Preretirement Survivor Annuity................................ 6.04(B) 14
Qualified Domestic Relations Order............................ 6.07 16
Qualified Matching Contributions.............................. 14.03(k) 29
Qualified Nonelective Contributions........................... 14.03(l) 29
Qualifying Employer Real Property............................. 10.03(F) 21
Qualifying Employer Securities................................ 10.03[F] 21
Related Employers............................................. 1.30 3
Required Aggregation Group.................................... 1.33(d) 4
Required Beginning Date....................................... 6.01(B) 12
Rollover Contributions........................................ 4.03 10
Self-Employed Individual...................................... 1.08 1
Service....................................................... 1.26 2
Term Life Insurance Contract.................................. 11.03(e) 26
Top Heavy Minimum Allocation.................................. 3.04(A) 6
Top Heavy Ratio............................................... 1.33 4
Trust Fund.................................................... 1.22 2
Trust......................................................... 1.21 2
Trustee....................................................... 1.022 2
Trustee Designation........................................... 10.03[A] 21
Weighted Average Allocation Method............................ 14.12 33
Year of Service for Eligibility Purposes...................... 2.02 5
Year of Service for Vesting Purposes.......................... 5.06 12
</TABLE>
<PAGE>
ARTICLE I DEFINITIONS
1.01 "EMPLOYER" means each employer who adopts this Plan by executing an
Adoption Agreement.
1.02 "CUSTODIAN/TRUSTEE" means the person or persons who as Custodian/Trustee
execute the Employer's Adoption Agreement, or any successor in office who in
writing accepts the position of Custodian/Trustee. The Employer must
designate in its Adoption Agreement whether the Custodian/Trustee will
administer the Trust as Trustee or as Custodian. See Article X.
1.021 "CUSTODIAN" means any Custodian/Trustee designated by the Employer, in
Adoption Agreement Section 1.02, to act as a Custodian, as generally
described in Section 10.03, with respect to the Trust.
1.022 "TRUSTEE" means any Custodian/Trustee designated by the Employer, in
Adoption Agreement Section 1.02, to administer the Trust as Trustee.
1.023 "AUXILIARY TRUSTEE" means the trustee(s) appointed by the Employer to
hold and assume total authority over and responsibility for the assets,
liabilities and operation of the Auxiliary Trust. In the performance of his
duties, the Auxiliary Trustee shall be subject to the provisions stated in
the Auxiliary Trust document. The Auxiliary Trustee may be appointed or
removed by a resolution or directive adopted by the Employer, and proper
notification as called for by the Trust.
1.03 "PLAN" means the retirement plan established or continued by the
Employer in the form of this Agreement, including the Adoption Agreement
under which the Employer has elected to participate in this Prototype Plan.
The Employer must designate the name of the Plan in its Adoption Agreement.
An Employer may execute more than one Adoption Agreement offered under this
Prototype Plan, each of which will constitute a separate Plan and Trust
established or continued by that Employer. The Plan and the Trust created by
each adopting Employer is a separate Plan and a separate Trust, independent
from the plan and the trust of any other employer adopting this Prototype
Plan. All section references within the Plan are Plan section references
unless the context clearly indicates otherwise.
1.04 "ADOPTION AGREEMENT" means the document executed by each Employer
adopting this Prototype Plan. The terms of this Prototype Plan as modified by
the terms of an adopting Employer's Adoption Agreement constitutes a separate
Plan and Trust to be construed as a single Agreement. Each elective provision
of the Adoption Agreement corresponds by section reference to the section of
the Plan which grants the election. Each Adoption Agreement offered under
this Prototype Plan is either a Nonstandardized Plan or a Standardized Plan,
as identified in the preamble to that Adoption Agreement. The provisions of
this Prototype Plan apply equally to Nonstandardized Plans and to
Standardized Plans unless otherwise specified.
1.05 "PLAN ADMINISTRATOR" is the Employer unless the Employer designates
another person to hold the position of Plan Administrator. In addition to his
other duties, the Plan Administrator has full responibility for compliance
with the reporting and disclosure rules under ERISA as respects this
Agreement.
1.06 "ADVISORY COMMITTEE" means the Employer's Advisory Committee as from
time to time constituted.
1.07 "EMPLOYEE" means any employee (including a Self-Employed Individual) of
the Employer. The Employer must specify in its Adoption Agreement any
Employee, or class of Employees, not eligible to participate in the Plan. If
the Employer elects to exclude collective bargaining employees, the exclusion
applies to any employee of the Employer who is included in a unit of
employees covered by an agreement which the Secretary of Labor finds to be a
collective bargaining agreement between employee representatives and one or
more employers unless the collective bargaining agreement requires the
employee to be included within the Plan. The term "employee representatives"
does not include any organization more than half the members of which are
owners, officers, or executives of the Employer.
1.08 "SELF-EMPLOYED INDIVIDUAL/OWNER-EMPLOYEE" "SELF-EMPLOYED INDIVIDUAL"
means an individual who has Earned Income (or who would have had Earned
Income but for the fact that the trade or business did not have net earnings)
for the taxable year from the trade or business for which the Plan is
established. "OWNER-EMPLOYEE" means a Self-Employed Individual who is the
sole proprietor in the case of a sole proprietorship. If the Employer is a
partnership. "OWNER-EMPLOYEE" means a Self-Employed Individual who is a
partner and owns more than 10% of either the capital or profits interest of
the partnership.
1.09 "HIGHLY COMPENSATED EMPLOYEE" means an Employee who, during the Plan
Year or during the preceding 12-month period:
A. is a more than 5% owner of the Employer (applying the constructive ownership
rules of Code Section 318, for and applying the principles of Code Section
318, for an unincorporated entity);
B. has Compensation in excess of $75,000 (as adjusted by the Commissioner of
Internal Revenue for the relevant year);
C. has Compensation in excess of $50,000 (as adjusted by the Commissioner of
Internal Revenue for the relevant year) and is part of the top-paid 20%
group of employees (based on Compensation for the relevant year); or
D. has Compensation in excess of 50% of the dollar amount prescribed in Code
Section 415(b)(1)(A) (relating to defined benefit plans) and is an officer
of the Employer.
If the Employee satisfies the definition in clause (b), (c) or (d) in the
Plan Year but not during the preceding 12-month period and does not satisfy
clause (a) in either period, the Employee is a Highly Compensated Employee
only if he is one of the 100 most highly compensated Employees for the Plan
Year. The number of officers taken into account under clause (d) will not
exceed the greater of 3 or 10% of the total number (after application of the
Code Section 414(g) exclusions) of Employees, but no more than 50 officers. If
no Employee satisfies the Compensation requirement in clause (d) for the
relevant year, the Advisory Committee will treat the highest paid officer as
satisfying clause (d) for that year.
For purposes of this Section 1.09, "COMPENSATION" means Compensation as
defined in Section 1.12, except any exclusions form Compensation elected in
the Employer's Adoption Agreement Section 1.12 do not apply, and Compensation
must include: (i) elective deferrals under a Code Section 401(k) arrangement
or under a Simplified Employee Pension maintained by the Employer; and (ii)
amounts paid by the Employer which are not currently includible in the
Employee's gross income because of Code Sections 125 (cafeteria plans) or
403(b) (tax-sheltered annuities). The Advisory Committee must make the
determination of who is a Highly Compensated Employee, including the
determinations of the number and identity of the top paid 20% group, the top
100 paid Employees, the number of officers includible in clause (d) and the
relevant Compensation, consistent with Code Section 414(q) and regulations
issued under that Code section. The Employer may make a calendar year
election to determine the Highly Compensated Employees for the Plan Year, as
prescribed by Treasury regulations. A calendar year election must apply to
all plans and arrangements of the Employer. For purposes of applying any
nondiscrimination test required under the Plan or under the Code, in a manner
consistent with applicable Treasury regulations, the Advisory Committee will
not treat as a separate Employee a family member (a spouse, a lineal
ascendant or descendant, or a spouse of a lineal ascendant or descendant) of
a Highly Compensated Employee described in clause (a) of this Section, or a
family member of one of the ten Highly Compensated Employees with the
greatest Compensation for the Plan Year, but will treat the Highly
Compensated Employee and all family members as a single Highly Compensated
Employee. This aggregation rule applies to a family member even if that
family member is a Highly Compensated Employee without family aggregation.
The term "HIGHLY COMPENSATED EMPLOYEE" also includes any former Employee who
separated from Service (or has a deemed Separation from Service, as
determined under Treasury regulations) prior to the Plan Year, performs no
Service for the Employer during the Plan Year, and was a Highly Compensated
Employee either for the separation year or any Plan Year ending on or after
his 55th birthday. If the former Employee's Separation from Service occurred
prior to January 1, 1987, he is a Highly Compensated Employee only if he
satisfied clause (a) of this Section 1.09 or received Compensation in excess
of $50,000 during: (1) the year of his Separation from Service (or the prior
year); or (2) any year ending after his 54th birthday.
1
<PAGE>
1.10 "PARTICIPANT" is an Employee who is eligible to be and becomes a
Participant in accordance with the provisions of Section 2.01.
1.11 "BENEFICIARY" is an individual designated by a Participant who is or may
become entitled to a benefit under the Plan. A Beneficiary who becomes
entitled to a benefit under the Plan remains a Beneficiary under the Plan
until the Custodian/Trustee has fully distributed his benefit to him. A
Beneficiary's right to (and the Plan Administrator's, the Advisory
Committee's or a Custodian/Trustee's duty to provide to the Beneficiary)
information or data concerning the Plan does not arise until he first becomes
entitled to receive a benefit under the Plan.
1.12 "COMPENSATION" means compensation as that term is defined in Section
3.19(b). For any self-employed individual covered under the Plan,
compensation means the Participant's Earned Income. That notwithstanding, if
an election is provided, the Employer must elect in its Adoption Agreement
whether to include elective contributions in the definition of Compensation.
"Elective contributions" are amounts excludible from the Employee's gross
income under Code Section 402(a)(8) (relating to a Code Section 401(k)
arrangement), Code Section 402(h) (relating to a Simplified Employee Pension),
Code Section 125 (relating to a cafeteria plan) or Code Section 403(b)
(relating to a tax-sheltered annuity) and contributed at the Employee's
election.
Any reference in this Plan to Compensation is a reference to the definition
in this Section 1.12, unless the Plan reference specifies a modification to
this definition. The Advisory Committee will take into account only
Compensation actually paid for the relevant period. Except as provided
elsewhere in this Plan, the relevant period shall be the period elected by
the Employer in Section 3.00 of Employer's Adoption Agreement. If the
Employer makes no election, the relevant period shall be the Plan Year.
For any Plan Year beginning after December 31, 1988, the Advisory Committee
must take into account only the first $200,000 (or beginning January 1, 1990,
such larger amount as the Commissioner of Internal Revenue may prescribe) of
any Participant's Compensation. The dollar increase in effect on January 1 of
any calendar year is effective for Plan Years beginning in such calendar
year. If a Plan determines Compensation on a period of time that contains
fewer than 12 calendar months, then the annual Compensation limitation is an
amount equal to the annual Compensation limitation for the calendar year in
which the Compensation period begins multiplied by the ratio obtained by
dividing the number of full months in the period by 12. The $200,000
Compensation limitation applies to the combined Compensation of the Employee
and of any family member aggregated with the Employee under Section 1.09 and
who is either (i) the Employee's spouse; or (ii) the Employee's lineal
descendant under the age of 19. If the $200,000 (or adjusted) Compensation
limitation applies to the combined Compensation of the Employee and one or
more family members, the Advisory Committee will apply the contribution and
allocation provisions of Article III by prorating the $200,000 (or adjusted)
limitation among the affected individuals in proportion to each such
individuals' Compensation determined prior to application of this limitation.
For any Plan Year beginning prior to January 1, 1989, this $200,000
limitation (but not the family aggregation requirement) applies: (1) for all
such Plan Years, if the Employer's Plan is a Standardized Plan; or (2) only
if the Plan is top heavy (as determined under Section 1.33) for such Plan
Year, if the Employer's Plan is a Nonstandardized Plan.
NONDISCRIMINATION. For purposes of determining whether the Plan
discriminates in favor of Highly Compensated Employees: Compensation means
Compensation as defined in this Section 1.12, without regard to any
exceptions (whether inclusions or exclusions), elected in the Employer's
Adoption Agreement. For purposes of this nondiscrimination definition, the
Employer may elect to include all elective contributions made by the Employer
on behalf of the Employees. The Employer's election to include elective
contributions must be consistent and uniform with respect to Employees and
all plans of the Employer for any particular Plan Year. The Employer may make
this election to include elective contributions for nondiscrimination testing
purposes, irrespective of whether the Employer has elected in its Adoption
Agreement to include elective contributions in the general Compensation
definition applicable to the Plan.
1.13 "EARNED INCOME" means net earnings from self-employment in the trade or
business with respect to which the Employer has established the Plan,
provided personal services of the individual are a material income producing
factor. The Advisory Committee will determine net earnings without regard to
items excluded from gross income and the deductions allocable to those items.
The Advisory Committee will determine net earnings after the deduction
allowed to the Self-Employed Individual for all contributions made by the
Employer to a qualified plan and, for Plan Years beginning after December 31,
1989, the deduction allowed to the Self-Employed under Code Section 164(f) for
self-employment taxes.
1.14 "ACCOUNT" means the separate account(s) which the Advisory Committee or
the Custodian/Trustee maintains for a Participant under the Employer's Plan.
1.15 "ACCRUED BENEFIT" means the amount standing in a Participant's
Account(s) as of any date derived from both Employer contributions and
Employee contributions, if any.
1.16 "NONFORFEITABLE" means a Participant's or Beneficiary's unconditional
claim, legally enforceable against the Plan, to the Participant's Accrued
Benefit.
1.17 "PLAN YEAR" means the 12 consecutive month period specified in the
Employer's Adoption Agreement. The "Limitation Year" applicable to the
limitations on allocations described in Article III is the Plan Year. If the
Employer maintains Paired Plans, each Plan must have the same Plan Year.
1.175 "FISCAL YEAR" means fiscal year of the Employer, as specified in the
Employer's Adoption Agreement.
1.18 "EFFECTIVE DATE" of this Plan is the date specified in the Employer's
Adoption Agreement.
1.19 "PLAN ENTRY DATE" means the date(s) specified in the Employer's Adoption
Agreement.
1.20 "ACCOUNTING DATE" is the last day of an Employer's Plan Year or any
other dates established by the Advisory Committee.
1.21 "TRUST" means the separate Trust created under the Employer's Plan as
amended by Section 10.012.
1.211 "AUXILIARY TRUST" means a subsidiary trust established within the Trust
to hold assets specified by the Advisory Committee or the Employer which are
the specific charge of the Auxiliary Trustee.
1.22 "TRUST FUND" means all property of every kind held or acquired by the
Custodian/Trustee under the Employer's Plan, other than incidental benefit
insurance contracts and that amount held in the Auxiliary Trust.
1.221 "AUXILIARY TRUST FUND" means all property of every kind held or
acquired by the Auxiliary Trustee.
1.23 "NONTRANSFERABLE ANNUITY" means an annuity which by its terms provides
that it may not be sold, assigned, discounted, pledged as collateral for a
loan or security for the performance of an obligation or for any purpose to
any person other than the insurance company. If the Custodian/Trustee
distributes an annuity contract, the contract must be a Nontransferable
Annuity.
1.24 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
1.25 "CODE" means the Internal Revenue Code of 1986, as amended.
1.26 "SERVICE" means any period of time the Employee is in the employ of the
Employer, including any period the Employee is on an unpaid leave of absence
authorized by the Employer under a uniform, nondiscriminatory policy
applicable to all Employees. "Separation from Service" means a separation
from Service with the Employer maintaining this Plan.
1.27 "HOUR OF SERVICE" means:
A. Each Hour of Service for which the Employer, either directly or indirectly,
pays an Employee, or for which the Employee is entitled to payment, for the
performance of duties. The Advisory Committee
2
<PAGE>
credits Hours of Service under this paragraph (a) to the Employee for the
computation period in which the Employee performs the duties, irrespective
of when paid;
B. Each Hour of Service for back pay, irrespective of mitigation of damages, to
which the Employer has agreed or for which the Employee has received an
award. The Advisory Committee credits Hours of Service under this paragraph
(b) to the Employee for the computation period(s) to which the award or the
agreement pertains rather than for the computation period in which the award,
agreement or payment is made; and
C. Each Hour of Service for which the Employer, either directly or indirectly,
pays an Employee, or for which the Employee is entitled to payment
(irrespective of whether the employment relationship is terminated), for
reasons other than for the performance of duties during a computation period,
such as leave of absence, vacation, holiday, sick leave, illness, incapacity
(including disability), layoff, jury duty or military duty. The Advisory
Committee will credit no more than 501 Hours of Service under this paragraph
(c) to an Employee on account of any single continuous period during which
the Employee does not perform any duties (whether or not such period occurs
during a single computation period). The Advisory Committee credits Hours of
Service under this paragraph (c) in accordance with the rules of paragraphs
(b) and (c) of Labor Reg. Section 2530.200b-2, which the Plan, by this
reference, specifically incorporates in full within this paragraph (c).
The Advisory Committee will not credit an Hour of Service under more than one
of the above paragraphs. A computation period for purposes of this Section
1.27 is the Plan Year, Year of Service period, Break in Service period or
other period, as determined under the Plan provision for which the Advisory
Committee is measuring an Employee's Hours of Service. The Advisory Committee
will resolve any ambiguity with respect to the crediting of an Hour of
Service in favor of the Employee.
If an election is offered, the Employer must elect in its Adoption Agreement
the method the Advisory Committee will use in crediting an Employee with
Hours of Service. For purposes of the Plan, "actual" method means the
determination of Hours of Service from records of hours worked and hours for
which the Employer makes payment or for which payment is due from the
Employer. If the Employer is offered an election and elects to apply an
"equivalency" method, for each equivalency period for which the Advisory
Committee would credit the Employee with at least one Hour of Service, the
Advisory Committee will credit the Employee with: (i) 10 Hours of Service for
a daily equivalency; (ii) 45 Hours of Service for a weekly equivalency; (iii)
95 Hours of Service for a semimonthly payroll period equivalency; and (iv)
190 Hours of Service for a monthly equivalency.
Solely for purposes of determining whether the Employee incurs a Break in
Service under any provision of this Plan, the Advisory Committee must credit
Hours of Service during an Employee's unpaid absence period due to maternity
or paternity leave. The Advisory Committee considers an Employee on maternity
or paternity leave if the Employee's absence is due to the Employee's
pregnancy, the birth of the Employee's child, the placement with the Employee
of an adopted child, or the care of the Employee's child immediately
following the child's birth or placement. The Advisory Committee credits
Hours of Service under this paragraph on the basis of the number of Hours of
Service the Employee would receive if he were paid during the absence period
or, if the Advisory Committee cannot determine the number of Hours of Service
the Employee would receive, on the basis of 8 hours per day during the
absence period. The Advisory Committee will credit only the number (not
exceeding 501) of Hours of Service necessary to prevent an Employee's Break
in Service. The Advisory Committee credits all Hours of Service described in
this paragraph to the computation period in which the absence period begins
or, if the Employee does not need these Hours of Service to prevent a Break
in Service in the computation period in which his absence period begins, the
Advisory Committee credits these Hours of Service to the immediately
following computation period.
1.28 "DISABILITY" means the Participant, because of a physical or mental
disability, will be unable to perform the duties of his customary position of
employment (or is unable to engage in any substantial gainful activity) for
an indefinite period which the Advisory Committee considers will be of long
continued duration. A Participant also is disabled if he incurs the permanent
loss or loss of use of a member or function of the body, or is permanently
disfigured, and incurs a Separation from Service. The Plan considers a
Participant disabled on the date the Advisory Committee determines the
Participant satisfies the definition of disability. The Advisory Committee
may require a Participant to submit to a physical examination in order to
confirm disability. The Advisory Committee will apply the provisions of this
Section 1.28 in a nondiscriminatory, consistent and uniform manner.
1.29 SERVICE FOR PREDECESSOR EMPLOYER.
If the Employer maintains the plan of a predecessor employer, the Plan treats
service of the Employee with the predecessor employer as service with the
Employer. If the Employer does not maintain the plan of a predecessor
employer, the Plan does not credit service with the predecessor employer,
unless the Employer's Plan is a Nonstandardized Plan and the Employer
identifies the predecessor in its Adoption Agreement and specifies the
purposes for which the Plan will credit service with that predecessor
employer.
1.30 RELATED EMPLOYERS.
A related group is a controlled group of corporations (as defined in Code
Section 414(b)), trades or businesses (whether or not incorporated) which are
under common control (as defined in Code Section 414(c)) or an affiliated
service group (as defined in Code Section 414(m) or in Code Section 414(o)).
If the Employer is a member of a related group, the term "EMPLOYER" includes
the related group members for purposes of crediting Hours of Service,
determining Years of Service and Breaks in Service under Articles II and V,
applying the limitations on allocations in Part 2 of Article III, applying
the top heavy rules and the minimum allocation requirements of Article III,
the definitions of Employee, Highly Compensated Employee, Compensation and
Leased Employee, and for any other purpose required by the applicable Code
section or by a Plan provision.
If the Employer's Plan is a Standardized Plan, all Employees of the Employer
or of any member of the Employer's related group, are eligible to participate
in the Plan, irrespective of whether the related group member directly
employing the Employee is a Participating Employer. If the Employer's Plan is
a Nonstandardized Plan, the Employer must specify in Section 1.07 of its
Adoption Agreement, whether the Employees of related group members that are
not Participating Employers are eligible to participate in the Plan. Under a
Nonstandardized Plan, the Employer may elect to exclude from the definition
of "Compensation" for allocation purposes any Compensation received from a
related employer that has not executed a Participation Agreement and whose
Employees are not eligible to participate in the Plan.
1.31 LEASED EMPLOYEES.
The Plan treats a Leased Employee as an Employee of the Employer. A Leased
Employee is an individual (who otherwise is not an Employee of the Employer)
who, pursuant to a leasing agreement between the Employer and any other
person, has performed services for the Employer (or for the Employer and any
persons related to the Employer within the meaning of Code Section 144(a)(3))
on a substantially full time basis for at least one year and who performs
services historically performed by employees in the Employer's business
field. If a Leased Employee is treated as an Employee by reason of this
Section 1.31 of the Plan, "Compensation" includes Compensation from the
leasing organization which is attributable to services performed for the
Employer.
SAFE HARBOR PLAN EXCEPTION. The Plan does not treat a Leased Employee as an
Employee if the leasing organization covers the employee in a safe harbor
plan and, prior to application of this safe harbor plan exception, 20% or
less of the Employer's Employees (other than Highly Compensated Employees)
are Leased Employees. A safe harbor plan is a money purchase plan providing
immediate participation, full and immediate vesting, and a nonintegrated
contribution formula equal to at least 10% of the employee's compensation
without regard to employment by the leasing organization on a specified date.
The safe harbor plan must determine the 10% contribution on the basis of
compensation as defined in Code Section 415(c)(3) plus elective contributions
(as defined in Section 1.12).
OTHER REQUIREMENTS. The Advisory Committee must apply this Section 1.31 in a
manner consistent with Code Sections 414(n) and 414(o) and the regulations
issued under those Code sections. The Employer must specify in the Adoption
Agreement the manner in which the Plan will determine the allocation of
Employer contributions and Participant
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forfeitures on behalf of a Participant if the Participant is a Leased
Employee covered by a plan maintained by the leasing organization.
Contributions or benefits which are attributable to services performed for
the Employer shall be treated as provided by the Employer.
1.32 SPECIAL RULES FOR OWNER-EMPLOYEES.
The following special provisions and restrictions apply to Owner-Employees:
A. If the Plan provides contributions or benefits for an Owner-Employee or for a
group of Owner-Employees who controls the trade or business with respect to
which this Plan is established and the Owner-Employee or Owner-Employees also
control as Owner-Employees one or more other trades or businesses, plans must
exist or be established with respect to all the controlled trades or
businesses so that when the plans are combined they form a single plan which
satisfies the requirements of Code Section 401(a) and Code Section 401(d)
with respect to the employees of the controlled trades or businesses.
B. The Plan excludes an Owner-Employee or group of Owner-Employees if the
Owner-Employee or group of Owner-Employees controls any other trade or
business, unless the employees of the other controlled trade or business,
participate in a plan which satisfies the requirements of Code Section 401(a)
and Code Section 401(d). The other qualified plan must provide contributions
and benefits which are not less favorable than the contributions and
benefits provided for the Owner-Employee or group of Owner-Employees under
this Plan, or if an Owner-Employee is covered under another qualified plan
as an Owner-Employee, then the plan established with respect to the trade
or business he does control must provide contributions or benefits as
favorable as those provided under the most favorable plan of the trade or
business he does not control. If the exclusion of this paragraph (b)
applies and the Employer's Plan is a Standardized Plan, the Employer may
not participate or continue to participate in this Prototype Plan and the
Employer's Plan becomes an individually-designed plan for purposes of
qualification reliance.
C. For purposes of paragraphs (a) and (b) of this Section 1.32, an
Owner-Employee or group of Owner-Employees controls a trade or business if
the Owner-Employee or Owner-Employees together (1) own the entire
interest in an unincorporated trade or business, or (2) in the case of
a partnership, own more than 50% of either the capital interest or the
profits interest in the partnership.
1.33 DETERMINATION OF TOP HEAVY STATUS.
If this Plan is the only qualified plan maintained by the Employer, the Plan
is top heavy for a Plan Year if the top heavy ratio as of the Determination
Date exceeds 60%. The top heavy ratio is a fraction, the numerator of
which is the sum of the present value of Accrued Benefits of all Key
Employees as of the Determination Date and the denominator of which is a
similar sum determined for all Employees. The Advisory Committee must include
in the top heavy ratio, as part of the present value of Accrued Benefits,
any contribution not made as of the Determination Date but includible
under Code Section 416 and the applicable Treasury regulations, and
distributions made within the Determination Period. The Advisory Committee
must calculate the top heavy ratio by disregarding the Accrued Benefit
(and distributions, if any, of the Accrued Benefit) of any Non-Key
Employee who was formerly a Key Employee, and by disregarding the Accrued
Benefit (including distributions, if any, of the Accrued Benefit) of an
individual who has not received credit for at least one Hour of Service
with the Employer during the Determination Period. The Advisory Committee
must calculate the top heavy ratio, including the extent to which it must
take into account distributions, rollovers and transfers, in accordance
with Code Section 416 and the regulations under that Code section.
If the Employer maintains other qualified plans (including a simplified
employee pension plan), or maintained another such plan which now is
terminated, this Plan is top heavy only if it is part of the Required
Aggregation Group, and the top heavy ratio for the Required Aggregation Group
and for the Permissive Aggregation Group, if any, each exceeds 60%. The
Advisory Committee will calculate the top heavy ratio in the same manner as
required by the first paragraph of this Section 1.33, taking into account all
plans within the Aggregation Group. To the extent the Advisory Committee must
take into account distributions to a Participant, the Advisory Committee must
include distributions from a terminated plan which would have been part of
the Required Aggregation Group if it were in existence on the Determination
Date. The Advisory Committee will calculate the present value of accrued
benefits under defined benefit plans or simplified employee pension plans
included within the group in accordance with the terms of those plans, Code
Section 416 and the regulations under that Code section. If a Participant in
a defined benefit plan is a Non-Key Employee, the Advisor Committee will
determine his accrued benefit under the accrual method, if any, which is
applicable uniformly to all defined benefit plans maintained by the Employer
or, if there is no uniform method, in accordance with the slowest accrual
rate permitted under the fractional rule accrual method described in Code
Section 411(b)(1)(C). If the Employer maintains a defined benefit plan, the
Employer must specify in Adoption Agreement Section 3.18 the actuarial
assumptions (interest and mortality only) the Advisory Committee will use to
calculate the present value of benefits from a defined benefit plan If an
aggregated plan does not have a valuation date coinciding with the
Determination Date, the Advisory Committee must value the Accrued Benefits in
the aggregated plan as of the most recent valuation date falling within the
twelve-month period ending on the Determination Date, except as Code Section
416 and applicable Treasury regulations require for the first and second plan
year of a defined benefit plan. The Advisory Committee will calculate the top
heavy ratio with reference to the Determination Dates that fall within the
same calendar year.
STANDARDIZED PLAN. If the Employer's Plan is a Standardized Plan, the Plan
operates as a top heavy plan in all Plan Years and the Advisory Committee
need not determine whether the Plan actually is top heavy. However, if the
Employer, in Adoption Agreement Section 3.18, elects to override the 100%
limitation, the Advisory Committee will need to determine whether the Plan's
top heavy ratio for a Plan Year exceeds 90%.
DEFINITIONS. For purposes of applying the provisions of this Section 1.33;
A. "KEY EMPLOYEE" means, as of any Determination Date, any Employee or former
Employee (or Beneficiary of such Employee) who, for any Plan Year in the
Determination Period: (i) has Compensation in excess of 50% of the
dollar amount prescribed in Code Section 415(b)(1)(A) (relating to
defined benefit plans)and is an officer of the Employer; (ii) has
Compensation in excess of the dollar amount prescribed in Code
Section 415(c)(1)(A) (relating to defined contribution plans) and is one
of the Employees owning the ten largest interests in the Employer;
(iii) is a more than 5% owner of the Employer; or (iv) is a more than
1% owner of the Employer and has Compensation of more than $150,000.
The constructive ownership rules of Code Section 318 (or the principles
of that section, in the case of an unincorporated Employer,) will apply
to determine ownership in the Employer. The number of officers taken
into account under clause (i) will not exceed the greater of 3 or 10%
of the total number (after application of the Code Section 414(q)(8)
exclusions) of Employees, but no more than 50 officers. The Advisory
Committee will make the determination of who is a Key Employee in
accordance with Code Section 416(i)(1) and the regulations under that
Code section.
B. "NON-KEY EMPLOYEE" is an employee who does not meet the definition of Key
Employee.
C. "COMPENSATION" means Compensation as determined under Section 1.09
(relating to the High Compensated Employee definition).
D. "REQUIRED AGGREGATION GROUP" means: (1) each qualified plan of the
Employer in which at least one Key Employee participates at any time
during the Determination Period; and (2) any other qualified plan of the
Employer which enables a plan described in clause (1) to meet the
requirements of Code Section 401(a)(4) or Code Section 410.
E. "PERMISSIVE AGGREGATION GROUP" is the Required Aggregation Group plus any
other qualified plans maintained by the Employer, but only if such group
would satisfy in the aggregate the requirements of Code Section 401(a)(4)
and Code Section 410. The Advisory Committee will determine the Permissive
Aggregation Group.
F. "EMPLOYER" means the Employer that adopts this Plan and any related
employers described in Section 1.30.
G. "DETERMINATION DATE" for any Plan Year is the Accounting Date of the
preceding Plan Year or, in the case of the first Plan Year of the Plan,
the Accounting Date of that Plan Year. The "Determination Period" is the
5-year period ending on the Determination Date.
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1.34 "PAIRED PLANS" means the Employer has adopted two Standardized Plan
Adoption Agreements offered with this Prototype Plan, one Adoption Agreement
being a Paired Profit Sharing Plan and one Adoption Agreement being a Paired
Pension Plan. A Paired Profit Sharing Plan may include a Code Section 401(k)
arrangement. A Paired Pension Plan must be a money purchase pension plan or a
target benefit pension plan. Adoption Agreement #01-001 may be paired with
Adoption Agreement #01-002, #01-003 or #01-005. Adoption Agreement #01-002
may be paired with Adoption Agreement #01-001 or #01-004. Adoption Agreement
#01-003 may be paired with Adoption Agreement #01-001 or Adoption Agreement
#01-004. Adoption Agreement #01-004 may be paired with Adoption Agreement
#01-002, #01-003 or #01-005. Adoption Agreement #01-005 may be paired with
Adoption Agreement #01-001 or #01-004. Only two Adoption Agreements may be
paired. Paired Plans must be the subject of a favorable opinion letter issued
by the Internal Revenue Service. This Prototype Plan does not pair any of its
Standardized Plan Adoption Agreements with Standardized Plan Adoption
Agreements under a defined benefit prototype plan.
1.35 PARTICIPATING EMPLOYERS.
Notwithstanding anything herein to the contrary, with the consent of the
Employer and the Custodian/Trustee, any other corporation or entity, whether
a member of the Employer's related group (as defined in Section 1.30) or not,
may adopt this Plan and all of the provisions hereof, and participate herein
and be known as a Participating Employer.
Each such Participating Employer must select the same Adoption Agreement
provisions as those selected by the Employer, and will indicate their intent
and will and consent to the provisions of the Adoption Agreement and Plan by
executing a Participation Agreement to the Employer's Adoption Agreement. A
Participating Employer will be deemed the Employer on behalf of the Employees
employed by the Participating Employer. The term "Plan Administrator" means
the Employer that is the signatory to the Execution Page of the Adoption
Agreement.
ARTICLE II EMPLOYEE PARTICIPANTS
2.01 ELIGIBILITY.
Each Employee becomes a Participant in the Plan in accordance with the
participation option selected by the Employer in its Adoption Agreement. If
this Plan is a restated Plan, each Employee who was a Participant in the Plan
on the day before the Effective Date continues as a Participant in the Plan.
2.02 YEAR OF SERVICE -- PARTICIPATION.
For purposes of an Employee's participation the Plan under Adoption Agreement
Section 2.01, the Plan takes into account all of his Years of Service with
the Employer, except as provided in Section 2.03. "Year of Service" means a
12 consecutive month period during which the Employee completes not less than
1,000 Hours of Service, measuring the beginning of the first 12 month period
from the Employment Commencement Date and measuring succeeding 12 consecutive
month periods in accordance with the option selected by the Employer in its
Adoption Agreement. "Employment Commencement Date" means the date on which
the Employee first performs an Hour of Service for the Employer. If the
Employer elects a service condition under Adoption Agreement Section 2.01
based on months, the Plan does not apply any Hour of Service requirement
after the completion of the first Hour of Service.
2.03 BREAK IN SERVICE -- PARTICIPATION
An Employee incurs a "Break in Service" if during any 12 consecutive month
period he does not complete more than 500 Hours of Service with the Employer.
The "12 consecutive month period" under this Section 2.03 is the same 12
consecutive month period for which the Plan measures "Years of Service" under
Section 2.02.
A. 2-year Eligibility. If an election for a 2 years of service condition for
eligibility purposes is offered under Adoption Agreement Section 2.01 and
the Employer elects it, the Plan treats an Employee who incurs a one year
Break in Service and who has never become a Participant as a new Employee
for eligibility purposes on the date he first performs an Hour of Service
for the Employer after the Break in Service.
B. Suspension of Years of Service. If an election is offered, the Employer
must elect in its Adoption Agreement whether a Participant will incur a
suspension of Years of Service after incurring a one year Break in
Service. If this rule applies under the Employer's Plan, the Plan
disregards a Participant's Years of Service (as defined in Section 2.02)
earned prior to a Break in Service until the Participant completes another
Year of Service and the Plan suspends the Participant's participation in the
Plan. If the Participant completes a Year of Service following his Break in
Service, the Plan restores that Participant's pre-Break Years of Service
(and the Participant resumes active participation in the Plan) retroactively
to the first day of the computation period in which the Participant earns
the first post-Break Year of Service. The initial computation period under
this Section 2.03(B) is the 12 consecutive month period measured from the
date the Participant first receives credit for an Hour of Service following
the one year Break in Service period. The Plan measures any subsequent
periods, if necessary, in a manner consistent with the computation period
selection in Adoption Agreement Section 2.02. This Section 2.03(B) does not
affect a Participant's vesting credit under Article V and, during a
suspension period, the Participant's Account continues to share fully in
Trust Fund allocations under Section 9.11. Furthermore, this Section
2.03(B) will not result in the restoration of any Year of Service
disregarded under the Break in Service rule of Section 2.03(A).
2.04 PARTICIPATION UPON RE-EMPLOYMENT.
A Participant whose employment terminated re-enters the Plan as a Participant
on the date of his re-employment, subject to the Break in Service rule, if
applicable, under Section 2.03(B). An Employee who satisfies the Plan's
eligibility conditions but who terminates employment prior to becoming a
Participant becomes a Participant on the later of the Plan Entry Date on
which he would have entered the Plan had he not terminated employment or the
date of his re-employment. Any Employee who terminates employment prior to
satisfying the Plan's eligibility conditions becomes a Participant in
accordance with Adoption Agreement Section 2.01.
2.05 CHANGE IN EMPLOYEE STATUS.
If a Participant has not incurred a Separation from Service but ceases to be
eligible to participate in the Plan, by reason of employment within an
employment classification excluded by the Employer under Adoption Agreement
Section 1.07, the Advisory Committee must treat the Participant as an
Excluded Employee during the period such a Participant is subject to the
Adoption Agreement exclusion. The Advisory Committee determines a
Participant's sharing in the allocation of Employer contributions and
Participant forfeitures, if applicable, by disregarding his Compensation paid
by the Employer for services rendered in his capacity as an Excluded
Employee. However, during such period of exclusion, the Participant, without
regard to employment classification, continues to receive credit for vesting
under Article V for each included Year of Service and the Participant's
Account continues to share fully in Trust Fund allocations under Section 9.11.
If an Excluded Employee who is not a Participant becomes eligible to
participate in the Plan by reason of a change in employment classification, he
will participate in the Plan immediately if he has satisfied the eligibility
conditions of Section 2.01 and would have been a Participant had he not been
an Excluded Employee during his period of Service. Furthermore, the Plan
takes into account all of the Participant's included Years of Service with
the Employer as an Excluded Employee for purposes of vesting credit under
Article V.
2.06 ELECTION NOT TO PARTICIPATE.
If the Employer's Plan is a Standardized Plan, the Plan does not permit an
otherwise eligible Employee nor any Participant to elect not to participate in
the Plan. If the Employer's Plan is a Nonstandardized Plan, an Employee
eligible to participate, or any present Participant, may elect not to
participate in the Plan. For an election to be effective for a particular
Plan Year, the Employee or Participant must file the election in writing with
the Plan Administrator not later than 30 days prior to the first day of that
Plan Year. The Employer may not make a contribution under the Plan for the
Employee or for the Participant for the Plan Year for which the election is
effective, nor for any succeeding Plan Year unless the Employee or
Participant re-elects to participate in the Plan. After an Employee's or
Participant's election to participate has been effective for at least two
Plan Years, the Employee or Participant may re-elect to participate in the
Plan for any Plan Year
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and subsequent Plan Years. An Employee or Participant may re-elect to
participate in the Plan by filing his election in writing with the Plan
Administrator not later than 30 days prior to the first day of the Plan Year
for which his election is to be effective. An Employee or Participant who
re-elects to participate may not again elect not to participate. If an
Employee is a Self-Employed Individual, the Employee's election must be
effective no later than the date the Employee first would become a
Participant in the Plan and the election is irrevocable (except as permitted
by Treasury regulations without creating a Code Section 401(k) arrangement
with respect to that Self-Employed Individual). The Plan Administrator must
furnish an Employee or a Participant any form required for purposes of an
election under this Section 2.06. An election timely filed is effective for
the entire Plan Year.
A Participant who elects not to participate may not receive a distribution of
his Accrued Benefit attributable either to Employer or to Participant
contributions except as provided under Article IV or under Article VI.
However, for each Plan Year for which a Participant's election not to
participate is effective, the Participant's Account, if any, continues to
share in Trust Fund allocations under Article IX. Furthermore, the Employee
or the Participant receives vesting credit under Article V for each included
Year of Service during the period the election not to participate is
effective.
ARTICLE III EMPLOYER CONTRIBUTIONS AND FORFEITURES
PART 1. AMOUNT OF EMPLOYER CONTRIBUTIONS AND PLAN ALLOCATIONS: SECTIONS 3.01
THROUGH 3.06
3.01 AMOUNT.
For each Plan Year, the Employer contributes to the Trust the amount
determined by application of the contribution option selected by the Employer
in its Adoption Agreement or the contribution option stated therein if no
choice is offered. The Employer may not make a contribution to the Trust for
any Plan Year to the extent the contribution would exceed the Participants'
Maximum Permissible Amounts. Further, the Employer's annual contribution to a
profit sharing plan may not exceed 15% of the Compensation of all
Participants under the Plan, determined for the Employer's taxable year for
which it makes the contribution.
The Custodian/Trustee, upon written request from the Employer, must return to
the Employer the amount of the Employer's contribution made by the Employer
by mistake of fact or the amount of the Employer's contribution disallowed as
a deduction under Code Section 404. The Custodian/Trustee will not return any
portion of the Employer's contribution under the provisions of this paragraph
more than one year after:
A. The Employer made the contribution by mistake of fact; or
B. The disallowance of the contribution as a deduction, and then, only to the
extent of the disallowance.
The Custodian/Trustee will not increase the amount of the Employer
contribution returnable under this Section 3.01 for any earnings attributable
to the contribution, but the Custodian/Trustee will decrease the Employer
contribution returnable for any losses attributable to it. The
Custodian/Trustee shall require the Employer to furnish it whatever evidence
the Custodian/Trustee deems necessary to enable the Custodian/Trustee to
confirm the amount the Employer has requested he returned is properly
returnable under ERISA.
3.02 DETERMINATION OF CONTRIBUTION.
The Employer, from its records, determines the amount of any contributions to
be made by it to the Trust under the terms of the Plan.
3.03 TIME OF PAYMENT OF CONTRIBUTION.
The Employer may pay its contribution for each Plan Year in one or more
installments without interest. The Employer must make its contribution to the
Custodian/Trustee within the time prescribed by the Code or applicable
Treasury regulations.
3.04 CONTRIBUTION ALLOCATION.
The Employer must specify in its Adoption Agreement the manner of allocating
each annual Employer contribution to this Trust.
A. TOP HEAVY MINIMUM ALLOCATION. The Plan must comply with the provisions of
this Section 3.04(A), subject to the elections in the Employer's Adoption
Agreement.
1. TOP HEAVY MINIMUM ALLOCATION UNDER STANDARDIZED PLAN. The top heavy
minimum allocation requirement applies to a Standardized Plan for each
Plan Year, irrespective of whether the Plan is top heavy (as defined
in Section 1.33).
(a) Except as provided in Section 3.04 of the Employer's Adoption
Agreement, each Non-Key Employee (as defined in Section 1.33) who
is a Participant and is employed by the Employer on the last day
of the Plan Year will receive a top heavy minimum allocation for
that Plan Year, as defined in paragraph (b) below, irrespective of
whether he satisfies the Hours of Service condition under Section
3.06 of the Employer's Adoption Agreement; and
(b) Subject to any overriding elections in Section 3.18 of the
Employer's Adoption Agreement, the top heavy minimum allocation is
the lesser of 3% of the Participant's Compensation for the Plan
Year or the highest contribution rate for the Plan Year made on
behalf of any Participant for the Plan Year. However, if the
Employee participates in Paired Plans, the top heavy minimum
allocation is 3%.
2. TOP HEAVY MINIMUM ALLOCATION UNDER NONSTANDARDIZED PLAN. The top heavy
minimum allocation requirement applies to a Nonstandardized Plan only in
Plan Years for which the Plan is top heavy (as determined under Section
1.33). Except as provided in the Employer's Adoption Agreement, if the
Plan is top heavy in any Plan Year:
(a) Each Non-Key Employee (as defined in Section 1.33) who is a
Participant and is employed by the Employer on the last day of the
Plan Year will receive a top heavy minimum allocation for that Plan
Year, irrespective of whether he satisfies the Hours of Service
condition under Section 3.06 of the Employer's Adoption Agreement;
and
(b) The top heavy minimum allocation is the lesser of 3% of the Non-Key
Employee's Compensation for the Plan Year or the highest
contribution rate for the Plan Year made on behalf of any Key
Employee (as defined in Section 1.33). However, if a defined
benefit plan maintained by the Employer which benefits a Key
Employee depends on this Plan to satisfy the antidiscrimination
rules of Code Section 401(a)(4) or the coverage rules of Code
Section 410 (or another plan benefiting the Key Employee so depends
on such defined benefit plan), the top heavy minimum allocation is
3% of the Non-Key Employee's Compensation regardless of the
contribution rate for the Key Employees.
For purposes of this Section 3.04(A), the term "Participant" includes any
Employee otherwise eligible to participate in the Plan but who is not a
Participant because of his Compensation level or because of his failure to
make elective deferrals under a Code Section 401(k) arrangement or because of
his failure to make mandatory contributions. For purposes of allocating the
designated qualified nonelective contribution, "Participant" means either all
Participants or Participants who are Nonhighly Compensated Employees as
determined by the Employer. For purposes of clause (1)(b) or (2)(b),
"Compensation" means Compensation as defined in Section 1.12, disregarding
any exceptions (whether exclusions or inclusions) elected in Adoption
Agreement Section 1.12, and disregarding the requirements of Section 3.06.
For purposes of this Section 3.04(A), a Participant's contribution rate is
the sum of all Employer contributions (not including Employer contributions
to Social Security) and forfeitures allocated to the Participant's Account
for the Plan Year divided by his Compensation for the entire Plan Year.
However, to determine whether a Standardized Plan satisfies the top heavy
minimum allocation for a Participant described in paragraph (1)(a) or whether
a Nonstandardized Plan satisfies the top heavy minimum allocation for a
Non-Key Employee described in paragraph (2)(a), the contribution rate, for
Plan Years beginning after December 31, 1988, does not include any elective
contributions under a Code Section 401(k) arrangement nor any Employer
matching contributions allocated on the basis of those elective contributions
or on the basis of employee contributions,
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except to the extent allowed by law, a Plan may include in the
contribution rate any matching contributions not necessary to satisfy
the nondiscrimination requirements of Code Section 401(k) or of Code
Section 401(m).
If the Employee is a Participant in Paired Plans, the Advisory
Committee will consider the Paired Plans as a single Plan to determine
a Participant's contribution rate and to determine whether the Plans
satisfy this top heavy minimum allocation requirement. To determine a
Participant's contribution rate under a Nonstandardized Plan, the
Advisory Committee must treat all qualified top heavy defined
contribution plans maintained by the Employer (or by any related
Employers described in Section 1.30) as a single plan.
3. ELECTION OF METHOD. The Employer must specify in its Adoption
Agreement the manner in which the Plan will satisfy the top heavy
minimum allocation requirement.
(a) If the Employer elects to make any necessary additional
contribution, the Advisory Committee first will allocate the
Employer contributions (and Participant forfeitures, if any) for
the Plan Year in accordance with the provisions of Adoption
Agreement Section 3.04. The Employer then will contribute an
additional amount for the Account of any Participant who is
entitled under this Section 3.04(A) to a top heavy minimum
allocation and whose contribution rate for the Plan Year is less
than the top heavy minimum allocation. The additional amount is the
amount necessary to increase the Participant's contribution rate to
the top heavy minimum allocation. The Advisory Committee will
allocate the additional contribution to the Account of the
Participant on whose behalf the Employer makes the contribution.
(b) If the Employer elects to guarantee the top heavy minimum
allocation under another plan, this Plan does not provide the top
heavy minimum allocation and the Advisory Committee will allocate
the annual Employer contributions (and Participant forfeitures)
under the Plan solely in accordance with the method selected under
Adoption Agreement Section 3.04.
3.05 FORFEITURE ALLOCATION.
The amount of a Participant's Accrued Benefit forfeited under the Plan is a
Participant forfeiture. The Advisory Committee will allocate Participant
forfeitures in the manner specified by the Employer in its Adoption
Agreement. The Advisory Committee will continue to hold the undistributed,
non-vested portion of a terminated Participant's Accrued Benefit in his
Account solely for his benefit until a forfeiture occurs at the time
specified in Section 5.09 or if applicable, until the time specified in
Section 9.14. Except as provided under Section 5.04, a Participant will not
share in the allocation of a forfeiture of any portion of his Accrued Benefit.
3.06 ACCRUAL OF BENEFIT.
The Advisory Committee will determine the accrual of benefit (Employer
contributions and Participant forfeitures) on the basis of the Plan Year in
accordance with the Employer's elections in its Adoption Agreement.
COMPENSATION TAKEN INTO ACCOUNT. The Employer must specify in its Adoption
Agreement the Compensation the Advisory Committee is to take into account in
allocating an Employer contribution to a Participant's Account for the Plan
Year in which the Employee first becomes a Participant. For all other Plan
Years, the Advisory Committee will take into account only the Compensation
determined for the portion of the Plan Year in which the Employee actually is
a Participant. The Advisory Committee must take into account the Employee's
entire Compensation for the Plan Year to determine whether the Plan satisfies
the top heavy minimum allocation requirement of Section 3.04(A).
HOURS OF SERVICE REQUIREMENT. Subject to the applicable minimum allocation
requirement of Section 3.04 and subject to the other requirements of this
Section, the Advisory Committee will not allocate any portion of an Employer
contribution for a Plan Year to any Participant's Account if the Participant
does not complete the applicable minimum Hours of Service requirement
specified in the Employer's Adoption Agreement.
SUSPENSION OF HOURS OF SERVICE REQUIREMENT UNDER STANDARDIZED PLAN. If the
Employer's Plan is a Standardized Plan, the Advisory Committee must suspend
any Hours of Service requirement elected under Adoption Agreement Section
3.06 for any Plan Year beginning after December 31, 1988, in which the Plan
fails to satisfy the Participation Test. A Plan satisfies the Participation
Test if, on each day of the Plan Year, the number of Employees who benefit
under the Plan is at least equal to the lesser of 50 or 40% of the total
number of Includible Employees as of such day. "Includible Employees" are all
Employees other than those Employees who are excluded from participating in
the Plan for the entire Plan Year by reason of Adoption Agreement Section
1.07 or by reason of Article II.
The Advisory Committee must determine whether the Plan satisfies the
Participation Test for a Plan Year no later than the last day of that Plan
Year. For purposes of the Participation Test, an Employee is benefiting under
the Plan on a particular date if, under Adoption Agreement Section 3.04, he
is entitled to an allocation for the Plan Year. When determining whether an
Employee is entitled to an allocation under Adoption Agreement Section 3.04,
the Advisory Committee will disregard any allocation required solely by
reason of the top heavy minimum allocation, unless the top heavy minimum
allocation is the only allocation made under the Plan for the Plan Year. If
the Advisory Committee must suspend the Hours of Service requirement for a
Plan Year, an Includible Employee will share in the allocation of Employer
contributions and Participant forfeitures, if any, without regard to the
number of Hours of Service he has earned for the Plan Year. The Advisory
Committee need not apply the Participation Test if the Employer's Plan
requires a Participant to complete only one Hour of Service during a Plan
Year for allocation purposes. If the Employer's Plan includes a Code Section
401(k) arrangement, this suspension requirement will not apply to the
allocation of Employer matching contributions.
EMPLOYMENT REQUIREMENT. If the Employer's Plan is a Standardized Plan, a
Participant who, during a particular Plan Year, completes the Hours of
Service requirement selected under Adoption Agreement Section 3.06 will share
in the allocation of Employer contributions for that Plan Year without regard
to whether he is employed by the Employer on the Accounting Date of that Plan
Year. If the Employer's Plan is a Nonstandardized Plan, the Employer must
specify in its Adoption Agreement whether the Participant will accrue a
benefit if he is not employed by the Employer on the Accounting Date of the
Plan Year.
OTHER REQUIREMENTS. If the Employer's Adoption Agreement includes options for
other requirements affecting the Participant's accrual of benefits under the
Plan, the Advisory Committee will apply this Section 3.06 in accordance with
the Employer's Adoption Agreement selections. Notwithstanding any other
provision of the Plan, a Participant who has either over 500 Hours of Service
during a Plan Year or is employed on the last day of the Plan Year must
receive an allocation.
PART 2. LIMITATIONS ON ALLOCATIONS: SECTIONS 3.07 THROUGH 3.19
[NOTE: SECTIONS 3.07 THROUGH 3.10 APPLY ONLY TO PARTICIPANTS IN THIS PLAN WHO
DO NOT PARTICIPATE, AND WHO HAVE NEVER PARTICIPATED, IN ANOTHER QUALIFIED PLAN
OR IN A WELFARE BENEFIT FUND (AS DEFINED IN CODE SECTION 419(e)) MAINTAINED BY
THE EMPLOYER.]
3.07 The amount of Annual Additions which the Advisory Committee may allocate
under this Plan on a Participant's behalf for a Limitation Year may not
exceed the Maximum Permissible Amount. If the amount the Employer otherwise
would contribute to the Participant's Account would cause the Annual
Additions for the Limitation Year to exceed the Maximum Permissible Amount,
the Employer will reduce the amount of its contribution so the Annual
Additions for the Limitation Year will equal the Maximum Permissible Amount.
If any allocation of Employer contributions, pursuant to Section 3.04, would
result in an Excess Amount (other than an Excess Amount resulting from the
circumstances described in Section 3.10) to the Participant's Account, the
Advisory Committee will reallocate the Excess Amount to the remaining
Participants who are eligible for an allocation of Employer contributions for
the Plan Year in which the Limitation Year ends. The Advisory Committee will
make this reallocation on the basis of the allocation method under the Plan
as if the Participant whose Account otherwise would receive the Excess Amount
is not eligible for an allocation of Employer contributions.
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3.08 Prior to the determination of the Participant's actual Compensation for
a Limitation Year, the Advisory Committee may determine the Maximum
Permissible Amount on the basis of the Participant's estimated annual
Compensation for such Limitation Year. The Advisory Committee must make this
determination on a reasonable and uniform basis for all Participants
similarly situated. The Advisory Committee must reduce any Employer
contributions (including any allocation of forfeitures) based on estimated
annual Compensation by any Excess Amounts carried over from prior years.
3.09 As soon as is administratively feasible after the end of the Limitation
Year, the Advisory Committee will determine the Maximum Permissable Amount
for such Limitation Year on the basis of the Participant's actual
Compensation for such Limitation Year.
3.10 If, pursuant to Section 3.09, or because of the allocation of
forfeitures, there is an Excess Amount with respect to a Participant for a
Limitation Year, the Advisory Committee will dispose of such Excess Amount as
follows:
A. The Advisory Committee will return any nondeductible voluntary Employee
contributions to the Participant to the extent the return would reduce the
Excess Amount.
B. If, after the application of paragraph (a), an Excess Amount still exists,
the Advisory Committee will reduce such Excess Amount as follows: (1) First,
Employer contributions, other than matching contributions, if any, will be
reduced to the extent necessary to reduce the Excess Amount to zero. (2)
Second, matching contributions, if any, will be reduced to the extent
necessary to reduce the Excess Amount to zero. (3) Third, if the Employer's
Plan is a Code Section 401(k) profit sharing plan, deferral contributions
will be reduced to the extent necessary to reduce the Excess Amount to zero.
If the Plan covers the Participant at the end of the Limitation Year, then
the Advisory Committee will use the Excess Amount(s) to reduce future
Employer contributions (including any allocation of forfeitures) under the
Plan for the next Limitation Year and for each succeeding Limitation Year, as
is necessary for the Participant. If the Employer's Plan is a profit sharing
plan, the Participant may elect to limit his Compensation for allocation
purposes to the extent necessary to reduce his allocation for the Limitation
Year to the Maximum Permissible Amount and eliminate the Excess Amount.
C. If, after the application of paragraph (a), an Excess Amount still exists,
and the Plan does not cover the Participant at the end of the Limitation
Year, then the Advisory Committee will hold the Excess Amount unallocated in
a suspense account. The Advisory Committee will apply the suspense account to
reduce Employer Contributions (including allocation of forfeitures) for all
remaining Participants in the next Limitation Year, and in each succeeding
Limitation Year if necessary.
D. The Advisory Committee will not distribute any Excess Amount(s) to
Participants or to former Participants.
[NOTE: SECTIONS 3.11 THROUGH 3.16 APPLY ONLY TO PARTICIPANTS WHO, IN ADDITION TO
THIS PLAN, PARTICIPATE IN ONE OR MORE PLANS (INCLUDING PAIRED PLANS), ALL OF
WHICH ARE QUALIFIED PROTOTYPE OR PROTOTYPE DEFINED CONTRIBUTION PLANS OR WELFARE
BENEFIT FUNDS (AS DEFINED IN CODE SECTION 419(e)) MAINTAINED BY THE EMPLOYER
DURING THE LIMITATION YEAR.]
3.11 The amount of Annual Additions which the Advisory Committee may allocate
under this Plan on a Participant's behalf for a Limitation Year may not
exceed the Maximum Permissible Amount, reduced by the sum of any Annual
Additions allocated to the Participant's Accounts for the same Limitation
Year under this Plan and such other defined contribution plan. If the amount
the Employer otherwise would contribute to the Participant's Account under
this Plan would cause the Annual Additions for the Limitation Year to exceed
this limitation, the Employer will reduce the amount of its contribution so
the Annual Additions under all such plans for the Limitation Year will equal
the Maximum Permissible Amount. If an allocation of Employer contributions,
pursuant to Section 3.04, would result in an Excess Amount (other than an
Excess Amount resulting from the circumstances described in Section 3.10) to
the Participant's Account, the Advisory Committee will reallocate the Excess
Amount to the remaining Participants who are eligible for an allocation of
Employer contributions for the Plan Year in which the Limitation Year ends.
The Advisory Committee will make this reallocation on the basis of the
allocation method under the Plan as if the Participant whose Account
otherwise would receive the Excess Amount is not eligible for an allocation
of Employer contrbutions.
3.12 Prior to the determinatin of the Participant's actual Compensation for
the Limitation Year, the Advisory Committee may determine the amounts
referred to in 3.11 above on the basis of the Participant's estimated annual
Compensation for such Limitation Year. The Advisory Committee will make this
determination on a reasonable and uniform basis for all Participants
similarly situated. The Advisory Committee must reduce any Employer
contribution (including allocation of forfeitures) based on estimated annual
Compensation by any Excess Amounts carried over from prior years.
3.13 As soon as is administratively feasible after the end of the Limitation
Year, the Advisory Committee will determine the amounts referred to in 3.11
on the basis of the Participant's actual Compensation for such Limitation
Year.
3.14 If pursuant to Section 3.13, or because of the allocation of
forfeitures, a Participant's Annual Additions under this Plan and all such
other plans result in an Excess Amount, such Excess Amount will consist of
the Amounts last allocated. The Advisory Committee will determine the Amounts
last allocated by treating the Annual Additions attributable to a welfare
benefit fund as allocated first, irrespective of the actual allocation date
under the welfare benefit fund.
3.15 The Employer must specify in its Adoption Agreement the Excess Amount
attributed to this Plan, if the Advisory Committee allocates an Excess Amount
to a Participant on an allocation date of this Plan which coincides with an
allocation date of another plan.
3.16 The Advisory Committee will dispose of any Excess Amounts attributed to
this Plan as provided in Section 3.10.
[NOTE: SECTION 3.17 APPLIES ONLY TO PARTICIPANTS WHO, IN ADDITION TO THIS PLAN,
PARTICIPATE IN ONE OR MORE QUALIFIED PLANS WHICH ARE QUALIFIED DEFINED
CONTRIBUTION PLANS OTHER THAN A PROTOTYPE OR PROTOTYPE PLAN MAINTAINED BY THE
EMPLOYER DURING THE LIMITATION YEAR.]
3.17 SPECIAL ALLOCATION LIMITATION.
The amount of Annual Additions which the Advisory Committee may allocate
under this Plan on behalf of any Participant are limited in accordance with
the provision of Section 3.11 through 3.16, as though the other plan were a
Prototype or Prototype plan, unless the Employer provides other limitations
in Adoption Agreement Section 3.17.
3.18 DEFINED BENEFIT PLAN LIMITATION.
If the Employer maintains a defined benefit plan, or has ever maintained a
defined benefit plan which the Employer has terminated, then the sum of the
defined benefit plan fraction and the defined contribution plan fraction for
any Participant for any Limitation Year must not exceed 1.0. The Employer
must provide in Adoption Agreement Section 3.18 the manner in which the Plan
will satisfy this limitation. The Employer also must provide in its Adoption
Agreement Section 3.18 the manner in which the Plan will satisfy the top
heavy requirements of Code Section 416 after taking into account the
existence (or prior maintenance) of the defined benefit plan.
3.19 DEFINITIONS -- ARTICLE III.
For purposes of Article III, the following terms mean:
A. "Annual Addition" -- The sum of the following amounts allocated on
behalf of a Participant for a Limitatin Year, of (i) all Employer
contributions; (ii) all forfeitures; and (iii) all Employee
contributions. Except to the extent provided in Treasury regulations,
Annual Additions include excess contributions described in Code
Section 401(k), excess aggregate contributions described in Code
Section 401(m) and excess deferrals described in Code Section 402(g),
irrespective of whether the plan distributes or forfeits such excess
amounts. Annual Additions also include Excess Amounts reapplied to
reduce Employer contributions under Section 3.10. Amounts allocated
after March 31, 1984, to an individual medical account (as defined in
Code Section 415(1)(2)) included as part of a defined benefit plan
maintained by the Employer are Annual Additions. Furthermore, Annual
Additions include contributions paid or accrued after December 31,
1985, for taxable years ending after December 31, 1985, attributable
to post-retirement medical benefits allocated to the separate account
of a key employee (as
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defined in Code Section 419A(d)(3)) under a welfare benefit fund (as defined
in Code Section 419(e)) maintained by the Employer.
B. "Compensation" -- As elected by the Employer in the Adoption Agreement, for
purposes of applying the limitations of Part 2 of this Article III,
"Compensation" means all of a Participant's:
(1) SECTION 3121 WAGES. Wages as defined in section 3121(a), for purposes
of calculating social security taxes, but determined without regard
to the wage base limitation in section 3121(a)(1), the limitations
on the exclusions from wages in section 3121(a)(5)(C) and (D) for
elective contributions and payments by reasons of salary reduction
agreements, the special rules in section 3121(v), any rules that
limit covered employment based on the type or location of an
employee's employer, and any rules that limit the remuneration
included in wages based on familial relationship or based on the
nature or location of the employment or the services performed
(such as the exceptions to the definition of employment in section
3121(b)(1) through (20)).
(2) SECTION 3401(a) WAGES. Wages as defined in section 3401(a) for the
purposes of income tax withholding at the source but determined
without regard to any rules that limit the remuneration included in
wages based on the nature or location of the employment or the
services performed (such as the exception for agricultural labor in
section 3401(a)(2)).
(3) 415 SAFE-HARBOR COMPENSATION. Wages, salaries, fees for professional
service and other amounts received for personal services actually
rendered in the course of employment with the Employer maintaining
the plan (including, but not limited to, commissions paid salesmen,
compensation for services on the basis of a percentage of profits,
commissions on insurance premiums, tips, bonuses, fringe benefits,
reimbursements, and expense allowances), and excluding the following:
(i) Employer contributions (other than "elective contributions," if
elected in the Employer's Adoption Agreement) to a plan of
deferred compensation to the extent the contributions are not
included in the gross income of the Employee for the taxable
year in which contributed, on behalf of an Employee to a
Simplified Employee Pension Plan to the extent such contributions
are excludible from the Employee's gross income, and any
distributions from a plan of deferred compensation, regardless
of whether such amounts are includible in the gross income of
the Employee when distributed.
(ii) Amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by an
Employee either becomes freely transferable or is no longer
subject to a substantial risk of forfeiture.
(iii) Amounts realized from the sale, exchange or other disposition of
stock acquired under a qualified stock option.
(iv) Other amounts which receive special tax benefits, such as
premiums for group term life insurance (but only to the extent
that the premiums are not includible in the gross income of the
Employee), or contributions made by an Employer (whether or not
under a salary reduction agreement) towards the purchase of an
annuity contract described in Code Section 403(b) (whether or not
the contributions are excludible from the gross income of the
Employee), other than "elective contributions," if elected in the
Employer's Adoption Agreement.
C. "Employer" -- The Employer that adopts this Plan and any related employers
described in Section 1.30. Solely for purposes of applying the limitations
of Part 2 of this Article III, the Advisory Committee will determine
related employers described in Section 1.30 by modifying Code
Sections 414(b) and (c) in accordance with Code Section 415(h).
D. "Excess Amount" -- The excess of the Participant's Annual Additions for the
Limitation Year over the Maximum Permissible Amount.
E. "Limitation Year" -- The period selected by the Employer under Adoption
Agreement Section 1.17. All qualified plans of the Employer must use the
same Limitation Year. If the Employer amends the Limitation Year to a
different 12 consecutive month period, the new Limitation Year must begin
on a date within the Limitation Year for which the Employer makes the
amendment, creating a short Limitation Year.
F. "Prototype or Prototype Plan" -- A plan the form of which is the subject
of a favorable notification letter or a favorable opinion letter from the
Internal Revenue Service.
G. "Maximum Permissible Amount" -- The lesser of (i) $30,000 (or, if greater,
one-fourth of the defined benefit dollar limitation under Code Section
415(b)(1)(A)), or (ii) 25% of the Participant's Compensation for the
Limitation Year. If there is a short Limitation Year because of a change in
Limitation Year, the Advisory Committee will multiply the $30,000 (or
adjusted) limitation by the following fraction:
Number of months in the short Limitation Year
---------------------------------------------
12
H. "Defined contribution plan" -- A retirement plan which provides for an
individual account for each participant and for benefits based solely on
the amount contributed to the participant's account, and any income,
expenses, gains and losses, and any forfeitures of accounts of other
participants which the plan may allocate to such participant's account.
The Advisory Committee must treat all defined contribution plans (whether
or not terminated) maintained by the Employer as a single plan. Solely
for purposes of the limitations of Part 2 of this Article III, the Advisory
Committee will treat employee contributions made to a defined benefit plan
maintained by the Employer as a separate defined contribution plan. The
Advisory Committee also will treat as a defined contribution plan an
individual medical account (as defined in Code Section 415(1)(2)) included
as part of a defined benefit plan maintained by the Employer and, for
taxable years ending after December 31, 1985, a welfare benefit fund under
Code Section 419(e) maintained by the Employer to the extent there are
post-retirement medical benefits allocated to the separate account of a key
employee (as defined in Code Section 419A(d)(3)).
I. "Defined benefit plan" -- A retirement plan which does not provide for
individual accounts for Employer contributions. The Advisory Committee must
treat all defined benefit plans (whether or not terminated) maintained by
the Employer as a single plan.
[NOTE: THE DEFINITIONS IN PARAGRAPHS (J), (K) AND (L) APPLY ONLY IF THE
LIMITATION DESCRIBED IN SECTION 3.18 APPLIES TO THE EMPLOYER'S PLAN.]
J. "Defined benefit plan fraction" -- Projected annual benefit of the
Participant under the defined benefit plan(s).
The lesser of (i) 125% (subject to the "100% limitation" in paragraph (l))
of the dollar limitation in effect under Code Section 415(b)(1)(A) for the
Limitation Year, or (ii) 140% of the Participant's average Compensation for
his high three (3) consecutive Years of Service.
To determine the denominator of this fraction, the Advisory Committee
will make any adjustment required under Code Section 415(b) and will
determine a Year of Service, unless otherwise provided in an addendum to
Adoption Agreement Section 3.18, as a Plan Year in which the Employee
completed at least 1,000 Hours of Service. The "projected annual benefit"
is the annual retirement benefit (adjusted to an actuarially equivalent
straight life annuity if the plan expresses such benefit in a form other
than a straight life annuity or qualified joint and survivor annuity) of
the Participant under the terms of the defined benefit plan on the
assumptions he continues employment until his normal retirement age (or
current age, if later) as stated in the defined benefit plan, his
compensation continues at the same rate as in effect in the Limitation
Year under consideration until the date of his normal retirement age and
all other relevant factors used to determine benefits under the defined
benefit plan remain constant as of the current Limitation Year for all
future Limitation Years.
CURRENT ACCRUED BENEFIT. If the Participant accrued benefits in one or
more defined benefit plans maintained by the Employer which were in
existence on May 5, 1986, the dollar limitation used in the denominator of
this fraction will not be less than the Participant's Current Accrued
Benefit. A Participant's Current Accrued Benefit is the sum of the annual
benefits under such defined benefit plans which the Participant had accrued
as of the end of the 1986 Limitation Year (the last Limitation Year
beginning before January 1, 1987), determined without regard to any change
in the terms or conditions of the Plan made after May 5, 1986, and without
regard to any cost of living adjustment occurring after May 5, 1986. This
Current Accrued Benefit rule applies only if the defined plans individually
and in the
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aggregate satisfied the requirements of Code Section 415 in effect at the end
of the 1986 Limitation Year.
K. "Defined contribution plan fraction" -- The sum, as of the close of the
Limitation Year, of the Annual Addition to the Participant's Account under
the defined contribution plan(s)
The sum of the lesser of the following amounts determined for the Limitation
year and for each prior Year of Service with the Employer, (i) 125% (subject
to the "100% limitation" in paragraph (1)) of the dollar limitation in
effect under Code Section 415(c)(1)(A) for the Limitation Year (determined
without regard to the special dollar limitations for employee stock
ownership plans), or (ii) 35% of the Participant's Compensation for the
Limitation Year.
For purposes of determining the defined contribution plan fraction, the
Advisory Committee will not recompute Annual Additions in Limitation Years
beginning prior to January 1, 1987, to treat all Employee contributions as
Annual Additions. If the Plan satisfied Code Section 415 for Limitation
Years beginning prior to January 1, 1987, the Advisory Committee will
redetermine the defined contribution plan fraction and the defined benefit
plan fraction as of the end of the 1986 Limitation Year, in accordance with
this Section 3.19. If the sum of the redetermined fractions exceeds 1.0,
the Advisory Committee will subtract permanently from the numerator of the
defined contribution plan fraction an amount equal to the product of (1)
the excess of the sum of the fractions over 1.0, times (2) the denominator
of the defined contribution plan fraction. In making the adjustment, the
Advisory Committee must disregard any accrued benefit under the defined
benefit plan which is in excess of the Current Accrued Benefit. This Plan
continues any transitional rules applicable to the determination of the
defined contribution plan fraction under the Employer's Plan as of the end
of the 1986 Limitation Year.
L. "100% limitation." If the 100% limitation applies, the Advisory Committee
must determine the denominator of the defined benefit plan fraction and the
denominator of the defined contribution plan fraction by substituting 100%
for 125%. If the Employer's Plan is a Standardized Plan, the 100% limitation
applies in all Limitation Years, subject to any override provisions under
Section 3.18 of the Employer's Adoption Agreement. If the Employer overrides
the 100% limitation under a Standardized Plan, the Employer must specify in
its Adoption Agreement the manner in which the Plan satisfies the extra
minimum benefit requirement of Code Section 416(h) and the 100% limitation
must continue to apply if the Plan's top heavy ratio exceeds 90%. If the
Employer's Plan is a Nonstandardized Plan, the 100% limitation applies only
if: (i) the Plan's top heavy ratio exceeds 90%; or (ii) the Plan's top heavy
ratio is greater than 60%, and the Employer does not elect in its Adoption
Agreement Section 3.18 to provide extra minimum benefits which satisfy Code
Section 416(h)(2).
3.20 PARTICIPATING EMPLOYER CONTRIBUTIONS AND FORFEITURES. All contributions
made by a Participating Employer who is not a member of the Employer's
related group (as defined in Section 1.30), as provided for in this Plan,
will be determined separately on the basis of its total Compensation paid
and, if applicable, its net profits, and will be paid to and held by the
Custodian/Trustee for the exclusive benefit of the Employees of such
Participating Employer and the Beneficiaries of such Employees, subject to
all the terms and conditions of the Plan. In the case of a Participating
Employer who is not a member of the Employer's related group, a Participant
forfeiture will inure to the benefit of the Employee Participants of the
Participating Employer by whom the forfeiting Participant was employed. The
Custodian/Trustee and Plan Administrator will keep separate books and records
concerning the affairs of each Participating Employer hereunder and as to the
accounts and credits of the Employees of each Participating Employer. The
Custodian/Trustee may, but need not, register insurance company Contracts so
as to evidence that a particular Participating Employer is the interested
Employer hereunder, but in the event of an Employee transfer from one
Participating Employer to another, the employing Employer will immediately
notify the Plan Administrator and the Custodian/Trustee thereof.
ARTICLE IV PARTICIPANT CONTRIBUTIONS
4.01 PARTICIPANT NONDEDUCTIBLE CONTRIBUTIONS. This Plan does not permit
Participant nondeductible contributions unless the Employer's Plan includes a
Code Section 401(k) arrangement. If the Employer's Plan does not include a
Code Section 401(k) arrangement and, prior to the adoption of this Prototype
Plan, the Plan accepted Participant nondeductible contributions for a Plan
Year beginning after December 31, 1986, those contributions must satisfy the
requirements of Code Section 401(m). This Section 4.01 does not prohibit the
Plan's acceptance of Participant nondeductible contributions prior to the
first Plan Year commencing after the Plan Year in which the Employer adopts
this Prototype Plan.
4.02 PARTICIPANT DEDUCTIBLE CONTRIBUTIONS.
A qualified Plan may not accept Participant deductible contributions after
April 15, 1987. If the Employer's Plan includes Participant deductible
contributions ("DECs") made prior to April 15, 1987, the Advisory Committee
must maintain a separate accounting for the Participant's Accrued Benefit
attributable to DECs, including DECs which are part of a rollover
contribution described in Section 4.03. The Advisory Committee will treat the
accumulated DECs as part of the Participant's Accrued Benefit for all
purposes of the Plan, except for purposes of determining the top heavy ratio
under Section 1.33. The Advisory Committee may not use DECs to purchase life
insurance on the Participant's behalf.
4.03 PARTICIPANT ROLLOVER CONTRIBUTIONS.
Any Participant, with the Employer's written consent and after filing with
the Custodian/Trustee the form prescribed by the Advisory Committee, may
contribute cash or other property to the Trust other than as a voluntary
contribution if the contribution is a "rollover contribution" which the Code
permits an employee to transfer either directly or indirectly from one
qualified plan to another qualified plan. Before accepting a rollover
contribution, the Advisory Committee shall require an Employee to furnish
satisfactory evidence that the proposed transfer is in fact a "rollover
contribution" which the Code permits an employee to make to a qualified plan.
A rollover contribution is not an Annual Addition under Part 2 of Article III.
Pursuant to the direction of the Advisory Committee, the Custodian/Trustee
will invest the rollover contribution in a segregated investment Account for
the Participant's sole benefit unless the Trustee (or the Named Fiduciary, in
the case of a Custodian designation), in its sole discretion, agrees to
invest the rollover contribution as part of the Trust fund. The
Custodian/Trustee will not have any investment responsibility with respect to
a Participant's segregated rollover Account. If the Employer designates the
Custodian/Trustee to administer the Trust as Trustee, the Participant from
time to time, may direct the Custodian/Trustee in writing as to the
investment of his segregated rollover Account in property, or property
interests, of any kind, real, personal or mixed; provided however, the
Participant may not direct the Custodian/Trustee to make loans to his
Employer. If the Employer designates the Custodian/Trustee to act as
Custodian with respect to the Trust, the Participant may direct investment of
his segregated rollover Account only in the Custodial Accounts "A" and "B"
pursuant to Section 10.03[B][H]. A Participant's segregated rollover Account
alone will bear any extraordinary expenses resulting from investments made at
the direction of the Participant. As of the Accounting Date (or other
valuation date) for each Plan Year, the Advisory Committee will allocate and
credit the net income (or net loss) from a Participant's segregated rollover
Account and the increase or decrease in the fair market value of the assets
of a segregated rollover Account solely to that Account. The
Custodian/Trustee is not liable nor responsible for any loss resulting to any
Beneficiary, nor to any Participant, by reason of any sale or investment made
or other action taken pursuant to and in accordance with the direction of the
Participant. In all other respects, the Custodian/Trustee will hold,
administer and distribute a rollover contribution in the same manner as any
Employer contribution made to the Trust.
An Employee, prior to satisfying the Plan's eligibility conditions, may make
a rollover contribution to the Trust to the same extent and in the same
manner as a Participant. If an Employee makes a rollover contribution to the
Trust prior to satisfying the Plan's eligibility conditions, the Advisory
Committee and Custodian/Trustee must treat the Employee as a Participant for
all purposes of the Plan except the Employee is not a Participant for
purposes of sharing in Employer contributions or Participant forfeitures
under the Plan until he actually becomes a Participant in the Plan. If the
Employee has a Separation from Service prior to becoming a Participant, the
Custodian/Trustee, as directed by the Advisory Committee, will distribute his
rollover contribution Account to him as if it were an Employer contribution
Account.
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4.04 PARTICIPANT CONTRIBUTION -- FORFEITABILITY.
A Participant's Accrued Benefit is, at all times, 100% Nonforfeitable to the
extent the value of his Accrued Benefit is derived from his Participant
contributions described in this Article IV.
4.05 PARTICIPANT CONTRIBUTION -- WITHDRAWAL/DISTRIBUTION.
A Participant, by giving prior written notice to the Advisory Committee or
Plan Administrator, may withdraw all or any part of the value of his Accrued
Benefit derived from his Participant contributions described in this Article
IV. A distribution of Participant contributions must comply with the joint
and survivor requirements described in Article VI, if those requirements
apply to the Participant. A Participant may not exercise his right to
withdraw the value of his Accrued Benefit derived from his Participant
contributions more than once during any Plan Year. The Custodian/Trustee, in
accordance with the direction of the Advisory Committee, will distribute a
Participant's unwithdrawn Accrued Benefit attributable to his Participant
contributions in accordance with the provisions of Article VI applicable to
the distribution of the Participant's Nonforfeitable Accrued Benefit.
4.06 PARTICIPANT CONTRIBUTION -- ACCRUED BENEFIT.
The Advisory Committee must maintain, or must direct the Custodian/Trustee to
maintain, a separate Account(s) in the name of each Participant to reflect
the Participant's Accrued Benefit under the Plan derived from his Participant
contributions. A Participant's Accrued Benefit derived from his Participant
contributions as of any applicable date is the balance of his separate
Participant contribution Account(s).
ARTICLE V TERMINATION OF SERVICE -- PARTICIPANT VESTING
5.01 NORMAL RETIREMENT AGE.
The Employer must define Normal Retirement Age and may define Early
Retirement Age in its Adoption Agreement. If the Employer requires an
Employee to retire upon attaining a certain age, the Normal Retirement Age
must not exceed that mandatory retirement age. A Participant's Accrued
Benefit derived from Employer contributions is 100% Nonforfeitable upon and
after his attaining Normal Retirement Age or Early Retirement Age (if
employed by the Employer on or after that Date).
5.02 PARTICIPANT DISABILITY OR DEATH.
If a Participant's employment with the Employer terminates as a result of
death or disability, the Participant's Accrued Benefit derived from Employer
contributions will be 100% Nonforfeitable.
5.03 VESTING SCHEDULE.
Except as provided in Sections 5.01 and 5.02, for each Year of Service, a
Participant's Nonforfeitable percentage of his Accrued Benefit derived from
Employer contributions equals the percentage in the vesting schedule
specified by the Employer in its Adoption Agreement.
5.04 CASH-OUT DISTRIBUTIONS TO PARTIALLY-VESTED PARTICIPANTS/RESTORATION OF
FORFEITED ACCRUED BENEFIT.
If, pursuant to Article VI, a partially-vested Participant receives a
cash-out distribution before he incurs a Forfeiture Break in Service (as
defined in Section 5.08), the cash-out distribution will result in an
immediate forfeiture of the nonvested portion of the Participant's Accrued
Benefit derived from Employer contributions. See Section 5.09. A
partially-vested Participant is a Participant whose Nonforfeitable Percentage
determined under Section 5.03 is less than 100%. A cash-out distribution is a
distribution of the entire present value of the Participant's Nonforfeitable
Accrued Benefit.
A. RESTORATION AND CONDITIONS UPON RESTORATION. A partially-vested Participant
who is re-employed by the Employer after receiving a cash-out distribution
of the Nonforfeitable percentage of his Accrued Benefit may repay the
Custodian/Trustee the amount of the cash-out distribution attributable to
Employer contributions, unless the Participant no longer has a right to
restoration under the requirements of this Section 5.04. If a partially-
vested Participant makes the cash-out distribution repayment, the Advisory
Committee, subject to the conditions of this Paragraph (A), must restore his
Accrued Benefit attributable to Employer contributions to the same dollar
amount as the dollar amount of his Accrued Benefit on the Accounting Date, or
other valuation date, immediately preceding the date of the cash-out
distribution, unadjusted for any gains or losses occurring subsequent to that
Accounting Date, or other valuation date. Restoration of the Participant's
Accrued Benefit includes restoration of all Code Section 411(d)(6) protected
benefits with respect to that restored Accrued Benefit, in accordance with
applicable Treasury regulations. The Advisory Committee will not restore a
re-employed Participant's Accrued Benefit under this paragraph if:
1. 5 years have elapsed since the Participant's first re-employment date
with the Employer following the cash-out distribution; or
2. The Participant incurred a Forfeiture Break in Service (as defined in
Section 5.08). This condition also applies if the Participant makes
repayment within the Plan Year in which he incurs the Forfeiture Break
in Service and that Forfeiture Break in Service would result in a
complete forfeiture of the amount the advisory Committee otherwise would
restore.
B. TIME AND METHOD OF RESTORATION. If neither of the two conditions preventing
restoration of the Participant's Accrued Benefit applies, the Advisory
Committee will restore the Participant's Accrued Benefit as of the Plan Year
Accounting Date coincident with or immediately following the repayment. To
restore the Participant's Accrued Benefit, the Advisory Committee, to the
extent necessary, will allocate to the Participant's Account:
1. First, the amount, if any, of Participant forfeitures the Advisory
Committee would otherwise allocate under Section 3.05;
2. Second, the amount, if any, of the Trust Fund net income or gain for
the Plan Year; and
3. Third, the Employer contribution for the Plan Year to the extent made
under a discretionary formula.
To the extent the amounts described in clauses (1), (2) and (3) are
insufficient to enable the Advisory Committee to make the required
restoration, the Employer must contribute, without regard to any requirement
or condition of Section 3.01, the additional amount necessary to enable the
Advisory Committee to make the required restoration. If, for a particular
Plan Year, the Advisory Committee must restore the Accrued Benefit of more
than one re-employed Participant, then the Advisory Committee will make the
restoration allocations to each such Participant's Account in the same
proportion that a Participant's restored amount for the Plan Year bears to
the restored amount for the Plan Year of all re-employed Participants. The
Advisory Committee will not take into account any allocation under this
Section 5.04 in applying the limitation on allocations under Part 2 of
Article III.
C. 0% VESTED PARTICIPANT. If an election is provided, the Employer must elect in
its Adoption Agreement whether the deemed cash-out rule applies to a 0%
vested Participant. A 0% vested Participant is a Participant whose Accrued
Benefit derived from Employer contributions is entirely forfeitable at the
time of his Separation from Service. Under the deemed cash-out rule, the
Advisory Committee will treat the 0% vested Participant as having received a
cash-out distribution on the date of the Participant's Separation from
Service or, if the Participant's Account is entitled to an allocation of
Employer contributions for the Plan Year in which he separates from Service,
on the last day of that Plan Year. For purposes of applying the restoration
provisions of this Section 5.04, the Advisory Committee will treat the 0%
vested Participant as repaying his cash-out "distribution" on the first date
of his re-employment with the Employer. If the deemed cash-out rule does not
apply to the Employer's Plan, a 0% vested Paticipant will not incur a
forfeiture until he incurs a Forfeiture Break in Service.
5.05 SEGREGATED ACCOUNT FOR REPAID AMOUNT.
Until the Advisory Committee restores the Participant's Accrued Benefit, as
described in Section 5.04, the Advisory Committee shall direct the
Custodian/Trustee to invest the cash-out amount the Participant has repaid in
a segregated Account mainained solely for that Participant. The
Custodian/Trustee shall be futher directed to invest the amount in the
Participant's segregated Account in Federally insured interest bearing
savings account(s) or time deposit(s) (or a combination of both), or in other
fixed income investments. Until commingled with the balance of the Trust Fund
on the date the Advisory Committee restores the Participant's Accrued
Benefit, the
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Participant's segregated Account remains a part of the Trust, but it alone
shares in any income it earns and it alone bears any expense or loss it
incurs. Unless the repayment qualifies as a rollover contribution, the
Advisory Committee will direct the Custodian/Trustee to repay to the
Participant as soon as administratively practicable the full amount of the
Participant's segregated Account if the Advisory Committee determines either
of the conditions of Section 5.04(A) prevents restoration as of the
applicable Accounting Date, notwithstanding the Participant's repayment.
5.06 YEAR OF SERVICE -- VESTING.
For purposes of vesting under Section 5.03, Year of Service means any Plan
Year during which an Employee completes not less than 1.000 Hours of Service,
including Plan Years prior to the Effective Date of the Plan, except as
provided in Section 5.08.
5.07 BREAK IN SERVICE -- VESTING.
For purposes of this Article V, a Participant incurs a "Break in Service" if
during any Plan Year he does not complete more than 500 Hours of Service.
5.08 INCLUDING YEARS OF SERVICE -- VESTING.
For purposes of the determining "Years of Service" under Section 5.06, the
Plan takes into account all Years of Service an Employee completes with the
Employer except:
A. For the sole purpose of determining a Participant's Nonforfeitable
percentage of his Accrued Benefit derived from Employer contributions
which accrued for his benefit prior to a Forfeiture Break in
Service, the Plan disregards any Year of Service after the Participant
first incurs a Forfeiture Break in Service. The Participant incurs a
Forfeiture Break in Service when he incurs 5 consecutive Breaks in Service.
B. The Plan disregards any Year of Service excluded under the Employer's
Adoption Agreement.
The Plan does not apply the Break in Service rule under Code Section
411(a)(6)(B). Therefore, an Employee need not complete a Year of Service
after a Break in Service before the Plan takes into account the Employee's
otherwise includible Years of Service under this Article V.
5.09 FORFEITURE OCCURS.
A Participant's forfeiture, if any, of his Accrued Benefit derived from
Employer contributions occurs under the Plan on the earlier of:
A. The last day of the Plan Year in which the Participant first incurs a
Forfeiture Break in Service; or
B. The date the Participant receives a cash-out distribution.
The Advisory Committee determines the percentage of a Participant's Accrued
Benefit forfeiture, if any, under this Section 5.09 solely by reference to
the vesting schedule of Section 5.03. A Participant does not forfeit any
portion of his Accrued Benefit for any other reason or cause except as
expressly provided by this Section 5.09 or as provided under Section 9.14.
ARTICLE VI TIME AND METHOD OF PAYMENT OF BENEFITS
6.01 TIME OF PAYMENT OF ACCRUED BENEFIT.
Unless, pursuant to Section 6.03, the Participant or the Beneficiary elects
in writing to a different time or method of payment, the Advisory Committee
will direct the Custodian/Trustee to commence distribution of a Participant's
Nonforfeitable Accrued Benefit in accordance with this Section 6.01. A
Participant must consent, in writing, to any distribution required under this
Section 6.01 if the present value of the Participant's Nonforfeitable Accrued
Benefit, at the time of the distribution to the Participant, exceeds $3,500
and the Participant has not attained the later of Normal Retirement Age or
age 62. Furthermore, the Participant's spouse also must consent, in writing,
to any distribution, for which Section 6.04 requires the spouse's consent.
For all purposes of this Article VI, the term "annuity starting date" means
the first day of the first period for which the Plan pays an amount as an
annuity or in any other form. A distribution date shall be the next
Accounting Date selected by the Participant. Actual distribution will occur
on such date or as soon as administratively feasible thereafter. For purposes
of the consent requirements under this Article VI, if the present value of
the Participant's Nonforfeitable Accrued Benefit, at the time of any
distribution, exceeds $3,500, the Advisory Committee must treat that present
value as exceeding $3,500 for purposes of all subsequent Plan distributions
to the Participant.
A. TERMINATION OF EMPLOYMENT FOR A REASON OTHER THAN DEATH. For a
Participant who terminates employment with the Employer for a reason other
than death, the Advisory Committee will direct the Custodian/Trustee to
commence distribution of the Participant's Accrued Benefit, as follows:
1. PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT NOT EXCEEDING $3,500. In a
lump sum, on the distribution date the Employer specifies in the Adoption
Agreement, but in no event later than the 60th day following the close of
the Plan Year in which the Participant attains Normal Retirement Age when
he separates from Service, the distribution under this paragraph will
occur no later than the 60th day following the close of the Plan Year in
which the Participant's Separation from Service occurs.
2. PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT EXCEEDS $3,500. In
a form and at the time elected by the Participant, pursuant to Section
6.03. In the absence of an election by the Participant, the Advisory
Committee will direct the Custodian/Trustee to distribute the
Participant's Nonforfeitable Accrued Benefit in a lump sum (or, if
applicable, the normal annuity form of distribution required under
Section 6.04) on the 60th day following the close of the Plan Year in
which the latest of the following events occurs: (a) the Participant
attains the Normal Retirement Age; (b) the Participant attains age 62;
or (c) the Participant separates from Service.
3. DISABILITY. If the Participant terminates employment because of
disability, in lump sum, on the distribution date the Employer specifies
in the Adoption Agreement, subject to the requirements of Section 6.04
if applicable, subject to the notice and consent requirements of this
Article VI and subject to the applicable mandatory commencement dates
described in Paragraphs (1) and (2).
4. HARDSHIP. Prior to the time at which the Participant may receive
distribution under Paragraphs (1), (2) or (3), but not before the
Participant's termination of employment, the Participant may request a
distribution from his Nonforfeitable Accrued Benefit in an amount
necessary to satisfy a hardship, if the Employer elects in the Adoption
Agreement to permit hardship distributions. Unless the Employer elects
otherwise in the Adoption Agreement, a hardship distribution must be on
account of any of the following: (a) medical expenses; (b) the purchase
(excluding mortgage payments) of the Participant's principal residence;
(c) post-secondary education tuition, for the next semester or quarter,
for the Participant or for the Participant's spouse, children or
dependents; (d) to prevent the eviction of the Participant from his
principal residence or the foreclosure on the mortgage of the
Participant's principal residence; (e) funeral expenses of the
Participant's family member; or (f) the Participant's disability. A
partially-vested Participant may not receive a hardship distribution
described in this Paragraph (A)(4) prior to incurring a Forfeiture Break
in Service, unless the hardship distribution is a cash-out distribution
(as defined in Article V). The Advisory Committee will direct the
Custodian/Trustee to make the hardship distribution as soon as
administratively practicable after the Participant makes, as defined by
the Advisory Committee, a valid request for the hardship distribution.
B. REQUIRED BEGINNING DATE. If any distribution commencement date
described under Paragraph (A) of this Section 6.01, either by Plan
provision or by Participant election (or nonelection), is later than the
Participant's Required Beginning Date, the Advisory Committee instead must
direct the Custodian/Trustee to make distribution under this Section 6.01
on the Participant's Required Beginning Date. A Participant's Required
Beginning Date is the April 1 following the close of the calendar year in
which the Participant attains age 70+. However, if the Participant, prior
to incurring a Separation from Service, attained age 70+ by January 1,
1988, and, for the five Plan Year period ending in the calendar year in
which he attained age 70+ and for all subsequent years, the Participant
was not a more than 5% owner (as defined in Section 1.09(a)), the Required
Beginning Date is the April 1
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following the close of the calendar year in which the Participant separates
from Service or, if earlier, the April 1 following the close of the calendar
year in which the Participant becomes a more than 5% owner. Furthermore, if a
Participant attained age 70+ during 1988 and did not incur a Separation from
Service prior to January 1, 1989, his Required Beginning Date is April 1,
1990. A mandatory distribution at the Participant's Required Beginning Date
will be in lump sum (or, if applicable, the normal annuity form of
distribution required under Section 6.04) unless the Participant, pursuant to
the provisions of this Article VI, makes a valid election to receive an
alternative form of payment.
C. DEATH OF THE PARTICIPANT. The Advisory Committee will direct the
Custodian/Trustee, in accordance with this Section 6.01(C), to
distribute to the Participant's Beneficiary the Participant's
Nonforfeitable Accrued Benefit remaining in the Trust at the time
of the Participant's death. Subject to the requirements of Section
6.04, the Advisory Committee will determine the death benefit by
reducing the Participant's Nonforfeitable Accrued Benefit by any
security interest the Plan has against that Nonforfeitable Accrued
Benefit by reason of an outstanding Participant loan.
1. Decreased Participant's Nonforfeitable Accrued Benefit Does Not
Exceed $3,500. The Advisory Committee, subject to the
requirements of Section 6.04 must direct the Custodian/Trustee
to pay the deceased Participant's Nonforfeitable Accrued
Benefit in a single cash sum, as soon as administratively
practicable following the Participant's death or, if later, the
date on which the Advisory Committee receives notification of
or otherwise confirms the Participant's death.
2. Deceased Participant's Nonforfeitable Accrued Benefit Exceeds
$3,500. The Advisory Committee will direct the
Custodian/Trustee to pay the deceased Participant's
Nonforfeitable Accrued Benefit at the time and in the
form elected by the Participant or, if applicable by the
Beneficiary, as permitted under this Article VI. In the absence
of an election, subject to the requirements of Section 6.04,
the Advisory Committee will direct the Custodian/Trustee to
distribute the Participant's undistributed Nonforfeitable
Accrued Benefit in a lump sum on the first distribution date
following the close of the Plan Year in which the Participant's
death occurs or, if later, the first distribution date
following the date the Advisory Committee receives notification
of or otherwise confirms the Participant's death.
If the death benefit is payable to the Participant's surviving
spouse in full, the surviving spouse in addition to the
distribution options provided in this Section 6.01(C), may
elect distribution at any time or in any form (other than a
joint and survivor annuity) this Article VI would permit for a
Participant.
6.02 METHOD OF PAYMENT OF ACCRUED BENEFIT.
Subject to the annuity distribution requirements, if any, prescribed by
Section 6.04, and any restrictions prescribed by Section 6.03, a Participant
or Beneficiary may elect distribution under one, or any combination, of the
following methods: (a) by payment in a lump sum; or (b) by payment in
monthly, quarterly or annual installments over a fixed reasonable period of
time, not exceeding the life expectancy of the Participant, or the joint life
and last survivor expectancy of the Participant and an individual the
Participant designates as his Beneficiary (his "designated Beneficiary"). If
the Employer's Plan is a Nonstandardized Plan, it may elect in its Adoption
Agreement to modify the methods of payment available under this Section 6.02.
This distribution options permitted under this Section 6.02 are available
only if the present value of the Participant Nonforfeitable Accrued Benefit,
at the time of the distribution to the Participant, exceeds $3,500. To
facilitate installment payments under this Article VI, the Advisory Committee
may direct the Custodian/Trustee to segregate all or any part of the
Participant's Accrued Benefit in a separate Account. The Custodian/Trustee
shall be further directed to invest the Participant's segregated Account in
Federally insured interest bearing savings account(s) or time deposit(s) (or
a combination of both), or in other fixed income investments. A segregated
Account remains a part of the Trust, but it alone shares in any income it
earns, and it alone bears any expense or loss it incurs. A Participant or
Beneficiary may elect to receive an installment distribution in the form of a
Nontransferable Annuity Contract. Under an installment distribution, the
Participant or Beneficiary, at any time, may elect to accelerate the payment
of all, or any portion, of the Participant's unpaid Nonforfeitable Accrued
Benefit, subject to the requirements of Section 6.04.
A. MINIMUM DISTRIBUTION REQUIREMENTS FOR PARTICIPANTS. The Advisory
Committee may not direct the Custodian/Trustee to distribute the
Participant's Nonforfeitable Accrued Benefit, nor may the Participant
elect to have the Custodian/Trustee distribute his Nonforfeitable
Accrued Benefit, under a method of payment which, as of the Required
Beginning Date, does not satisfy the minimum distribution
requirements under Code Section 401(a)(9) and the applicable
Treasury regulations. The minimum distribution for a calendar year
equals the Participant's Nonforfeitable Accrued Benefit as of the
latest valuation date preceding the beginning of the calendar year
divided by the Participant's life expectancy or, if applicable, the
joint and last survivor expectancy of the Participant and his
designated Beneficiary (as determined under Article VIII, subject
to the requirements of the Code Section 401(a)(9) regulations).
The Advisory Committee will increase the Participant's
Nonforfeitable Accrued Benefit, as determined on the relevant
valuation date, for contributions or forfeitures allocated after
the valuation date and by December 31 of the valuation calendar
year, and will decrease the valuation by distributions made after
the valuation date and by December 31 of the valuation calendar
year. For purposes of this valuation, the Advisory Committee will
treat any portion of the minimum distribution for the first
distribution calendar year made after the close of that year as
a distribution occurring in that first distribution calendar year.
In computing a minimum distribution, the Advisory Committee must
use the unisex life expectancy multiples under Treas. Reg.
Section 1.72.9. The Advisory Committee, only upon the Participant's
written request, may compute the minimum distribution for a calendar
year subsequent to the first calendar year for which the Plan requires
a minimum distribution by redetermining the applicable life
expectancy. However, the Advisory Committee may not redetermine
the joint life and last survivor expectancy of the Participant and
a nonspouse designated Beneficiary in a manner which takes into
account any adjustment to a life expectancy other than the
Participant's life expectancy.
If the Participant's spouse is not his designated Beneficiary, a
method of payment to the Participant (whether by Participant
election or by Advisory Committee direction) may not provide
more than incidental benefits to the Beneficiary. For Plan Years
beginning after December 31, 1988, the Plan must satisfy the
minimum distribution incidental benefit ("MDIB") requirement in the
Treasury regulations issued under Code Section 401(a)(9) for
distributions made on or after the Participant's Required Beginning
Date and before the Participant's death. To satisfy the MDIB
requirement, the Advisory Committee will compute the minimum
distribution required by this Section 6.02(A) by substituting the
applicable MDIB divisor for the applicable life expectancy factor,
if the MDIB divisor is a lesser number. Following the Participant's
death, the Advisory Committee will compute the minimum distribution
required by this Section 6.02(A) solely on the basis of the
applicable life expectancy factor and will disregard the MDIB
factor. For Plan Years beginning prior to January 1, 1989, the Plan
satisfies the incidental benefits requirement if the distributions
to the Participant satisfied the MDIB requirement or if the present
value of the retirement benefits payable solely to the Participant
is greater than 50% of the present value of the total benefits
payable to the Participant and his Beneficiaries. The Advisory
Committee must determine whether benefits to the Beneficiary are
incidental as of the date the Custodian/Trustee is to commence
payment of the retirement benefits to the Participant, or as of
any date the Custodian/Trustee redetermines the payment period to
the Participant.
The minimum distribution for the first distribution calendar year
is due by the Participant's Required Beginning Date. The minimum
distribution for each subsequent distribution calendar year,
including the calendar year in which the Participant's Required
Beginning Date falls, is due by December 31 of that year. If the
Participant receives distribution in the form of a Nontransferable
Annuity Contract, the distribution satisfies this Section 6.02(A)
if the contract complies with the requirements of Code Section 401(a)(9)
and the applicable Treasury regulations.
B. MINIMUM DISTRIBUTION REQUIREMENTS FOR BENEFICIARIES. The method of
distribution to the Participant's Beneficiary must satisfy Code
Section 401(a)(9) and the applicable Treasury regulations. If the
Participant's death occurs after his Required Beginning Date or if
earlier, the date the Participant commences an irrevocable annuity
pursuant to Section 6.04, the method of payment to the Beneficiary
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must provide for completion of payments over a period which does not exceed
the payment period which had commenced for the Participant. If the
Participant's death occurs prior to his Required Beginning Date, and the
Participant had not commenced an irrevocable annuity pursuant to Section
6.04, the method of payment to the Beneficiary, subject to Section 6.04,
must provide for completion of payment to the Beneficiary over a period
not exceeding; (i) 5 years after the date of the Participant's death; or
(ii) if the Beneficiary is a designated Beneficiary, the designated
Beneficiary's life expectancy. The Advisory Committee may not direct
payment of the Participant's Nonforfeitable Accrued Benefit over a period
described in clause (ii) unless the Custodian/Trustee will commence payment
to the designated Beneficiary no later than the December 31 following the
close of the calendar year in which the Participant's death occurred or, if
later, and the designated Beneficiary is the Participant's surviving spouse,
December 31 of the calendar year in which the Participant would have
attained age 70+. If the Custodian/Trustee will make distribution in
accordance with clause (ii), the minimum distribution for a calendar year
equals the Participant's Nonforfeitable Accrued Benefit as of the latest
valuation date preceding the beginning of the calendar year divided by the
designated Beneficiary's life expectancy. The Advisory Committee must use
the unisex life expectancy multiples under Treas. Reg. Section 1.72.9 for
purposes of applying this paragraph. The Advisory Committee, only upon
the written request of the Participant or of the Participant's surviving
spouse, may recalculate the life expectancy of the Participant's surviving
spouse not more frequently than annually, but may not recalculate the life
expectancy of a nonspouse designated Beneficiary after the
Custodian/Trustee commences payment to the designated Beneficiary. The
Advisory Committee will apply this paragraph by treating any amount paid
to the Participant's child, which becomes payable to the Participant's
surviving spouse upon the child's attaining the age of majority, as paid
to the Participant's surviving spouse. Upon the Beneficiary's written
request, the Advisory Committee must direct the Custodian/Trustee to
accelerate payment of all, or any portion, of the Participant's unpaid
Accrued Benefit, as soon as administratively practicable following the
effective date of that request.
6.03 BENEFIT PAYMENT ELECTIONS
Not earlier than 90 days before nor later than 30 days before the
Participant's annuity starting date, the Plan Administrator must provide a
benefit notice to a Participant who is eligible to make an election under
this Section 6.03. The benefit notice must explain the optional forms of
benefit in the Plan, including the material features and relative values of
those options, and the Participant's right to defer distribution until he
attains the later of Normal Retirement Age or age 62.
If a Participant of Beneficiary makes an election prescribed by this Section
6.03, the Advisory Committee will direct the Custodian/Trustee to distribute
the Participant's Nonforfeitable Accrued Benefit in accordance with that
election. Any election under this Section 6.03 is subject to the requirements
of Section 6.02 and of Section 6.04. The Participant or Beneficiary must make
an election under this Section 6.03 by filing his election with the Advisory
Committee at any time before the Custodian/Trustee otherwise would commence
to pay a Participant's Accrued Benefit in accordance with the requirements of
Article VI.
A. PARTICIPANT ELECTIONS AFTER TERMINATION OF EMPLOYMENT. If the present
value of a Participant's Nonforfeitable Accrued Benefit exceeds $3,500 and
an election is offered, he may elect to have the Custodian/Trustee
commence distribution as of any distribution date permitted under the
Employer's Adoption Agreement Section 6.03. The Participant may reconsider
an election at any time prior to the annuity starting date and elect to
commence distribution as of any other distribution date permitted under
the Employer's Adoption Agreement Section 6.03. If the Participant is
partially-vested in his Accrued Benefit, an election under this Paragraph
(A) to distribute prior to the Participant's incurring a Forfeiture Break
in Service (as defined in Section 5.08), must be in the form of a cash-out
distribution (as defined in Article V). A Participant may not receive a
cash-out distribution if, prior to the time the Custodian/Trustee actually
makes the cash-out distribution, the Participant returns to employment
with the Employer.
A Participant who has separated from Service may elect distribution as of any
distribution date following his attainment of Normal Retirement Age,
irrespective of any elections under Adoption Agreement Section 6.03
B. PARTICIPANT ELECTIONS PRIOR TO TERMINATION OF EMPLOYMENT. The Employer must
specify in its Adoption Agreement the distribution election rights, if any,
a Participant has prior to his Separation from Service. A Participant must
make an election under this Section 6.03(B) on a form prescribed by the
Advisory Committee at any time during the Plan Year for which his election
is to be effective. In his written election, the Participant must specify
the percentage or dollar amount he wishes the Custodian/Trustee to
distribute to him. The Participant's election relates solely to the
percentage or dollar amount specified in this election form and his right to
elect to receive an amount, if any, for a particular Plan Year greater than
the dollar amount or percentage specified in his election form terminates on
the Accounting Date. Advisory Committee must direct the Custodian/Trustee to
make a distribution to a Participant in accordance with his election under
this Section 6.03(B) as soon as administratively practicable after the
Participant files his written election with the Advisory Committee. The
Advisory Committee will distribute the balance of the Participant's Accrued
Benefit not distributed pursuant to his election(s) in accordance with the
other distribution provisions of this Plan.
C. DEATH BENEFIT ELECTIONS. If the present value of the deceased Participant's
Nonforfeitable Accrued Benefit exceeds $3,500, the Participant's Beneficiary
may elect to have the Advisory Committee distribute the Participant's
Nonforfeitable Accrued Benefit in a form and within a period permitted under
Section 6.02. The Beneficiary's election is subject to any restrictions
designated in writing by the Participant and not revoked as of his date of
death.
D. TRANSITIONAL ELECTIONS. Notwithstanding the provisions of Sections 6.01
and 6.02, if the Participant (or Beneficiary) signed a written
distribution designation prior to January 1, 1984, the Advisory Committee
must distribute the Participant's Nonforfeitable Accrued Benefit in
accordance with that designation, subject however, to the requirements, if
applicable of Sections 6.04, 6.05 and 6.06. This Section 6.03(D) does not
apply to a pre-1984 distribution designation, and the Advisory Committee
will not comply with that designation, if any of the following applies:
(1) the method of distribution would have disqualified the Plan under
Code Section 401(a)(9) as in effect on December 31, 1983; (2) the
Participant did not have an Accrued Benefit as of December 31, 1983;
(3) the distribution designation does not specify the timing and form of
the distribution and the death Beneficiaries (in order of priority);
(4) the substitution of a Beneficiary modifies the payment period of the
distribution; or, (5) the Participant (or Beneficiary) modifies or revokes
the distribution designation. In the event of a revocation, the Plan must
distribute, no later than December 31 of the calendar year following the
year of revocation, the amount which the Participant would have received
under Section 6.02(A) if the election had not been in effect or, if the
Beneficiary revokes the election, the amount which the Beneficiary would
have received under Section 6.02(B) if the election had not been in
effect. The Advisory Committee will apply this Section 6.03(D) to
rollovers and transfers in accordance with Part J of the Code
Section 401(a)(9) regulations.
6.04 ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVIVING SPOUSES. The
provisions of this Section 6.04 applies to any Participant who has completed
at least one Hour of Service with the Employer after August 22, 1984, and
such other Participants as provided in Section 6.08.
A. JOINT AND SURVIVOR ANNUITY. The Advisory Committee must direct the
Custodian/Trustee to distribute a married or unmarried Participant's
Nonforfeitable Accrued Benefit in the form of a qualified joint and
survivor annuity, unless the Participant makes a valid waiver election
(described in Section 6.05) within the 90 day period ending on the annuity
starting date. If, as of the annuity starting date, the Participant is
married, a qualified joint and survivor annuity is an immediate annuity
which is purchasable with the Participant's Nonforfeitable Accrued Benefit
and which provides a life annuity for the Participant and a survivor
annuity payable for the remaining life of the Participant's surviving
spouse equal to 50% of the amount of the annuity payable during the life
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of the Participant. If, as of the annuity starting date, the Participant
is not married, a qualified joint and survivor annuity is an immediate
life annuity for the Participant which is purchasable with the
Participant's Nonforfeitable Accrued Benefit. On or before the annuity
starting date, the Advisory Committee, without Participant or spousal
consent, must direct the Custodian/Trustee to pay the Participant's
Nonforfeitable Accrued Benefit in a lump sum, in lieu of a qualified
joint and survivor annuity, in accordance with Section 6.01, if the
Participant's Nonforfeitable Accrued Benefit is not greater than $3,500.
This Section 6.04(A) applies only to a Participant who has completed at
least one Hour of Service with the Employer after August 22, 1984.
B. PRERETIREMENT SURVIVOR ANNUITY. If a married Participant dies prior
to his annuity starting date, the Advisory Committee will direct the
Custodian/Trustee to distribute a portion of the Participant's
Nonforfeitable Accrued Benefit to the Participant's surviving spouse in
the form of a preretirement survivor annuity, unless the Participant has
a valid waiver election (as described in Section 6.06) in effect, or
unless the Participant and his spouse were not married throughout the
one year period ending on the date of his death. However, if a
Participant marries within one year before his annuity starting date,
and the Participant and his spouse have been married for at least a one
year period ending on or before the date of his death, then the Participant
and his spouse will be treated as having been married throughout the one
year period ending on his annuity starting date. A preretirement
survivor annuity is an annuity which is purchasable with 50% of the
Participant's Nonforfeitable Accrued Benefit (determined as of the date
of the Participant's death) and which is payable for the life of the
Participant's surviving spouse. The value of the preretirement survivor
annuity is attributable to Employer contributions and to Employee
contributions in the same proportion as the Participant's Nonforfeitable
Accrued Benefit is attributable to those contributions. The portion of
the Participant's Nonforfeitable Accrued Benefit not payable under this
paragraph is payable to the Participant's Beneficiary, in accordance
with the other provisions of this Article VI. If the present value of
the preretirement survivor annuity does not exceed $3,500, the Advisory
Committee, on or before the annuity starting date (as determined under
Setion 6.01(C)), must direct the Custodian/Trustee to make a lump sum
distribution to the Participant's surviving spouse, in lieu of a
preretirement survivor annuity. This Section 6.04(B) applies only to a
Participant who dies after August 22, 1984, and either (i) completes at
least one Hour of Service with the Employer after August 22, 1984, or
(ii) separated from Service with at least 10 Years of Service (as
defined in Section 5.06) and completed at least one Hour of Service with
the Employer in a Plan Year beginning after December 31, 1975.
C. SURVIVING SPOUSE ELECTIONS. If the present value of the preretirement
survivor annuity exceeds $3,500, the Participant's surviving spouse may
elect to have the Custodian/Trustee commence payment of the
preretirement survivor annuity at any time following the date of the
Participant's death, but not later than the mandatory distribution
periods described in Section 6.02, and may elect either or any
combination of the two forms of payment described in Section 6.02, in
lieu of the preretirement survivor annuity. In the absence of an
election by the surviving spouse, the Advisory Committee must direct the
Custodian/Trustee to distribute the preretirement survivor annuity on
the first distribution date following the close of the Plan Year in which
the latest of the following events occurs: (i) the Participant's death;
(ii) the date the Advisory Committee receives notification of or
otherwise confirms the Participant's death; (iii) the date the
Participant would have attained Normal Retirement Age; or (iv) the date
the Participant would have attained age 62.
D. SPECIAL RULES. If the Participant has in effect a valid waiver
election regarding the qualified joint and surivor annuity or the
preretirement survivor annuity, the Advisory Committee must direct the
Custodian/Trustee to distribute the Participant's Nonforfeitable Accrued
Benefit in accordance with Sections 6.01, 6.02 and 6.03. The Advisory
Committee will reduce the Participant's Nonforfeitable Accrued Benefit
by any security interest (pursuant to any offset rights authorized by
Section 10.03[E]) held by the Plan by reason of a Participant loan to
determine the value of the Participant's Nonforfeitable Accrued Benefit
distributable in the form of a qualified joint and survivor annuity or
preretirement survivor annuity, provided any post-August 18, 1985, loan
satisfied the spousal consent requirement described in Section 10.03[E]
of the Plan. For purposes of applying this Article VI, the Advisory
Committee treats a former spouse as the Participant's spouse or
surviving spouse to the extent provided under a qualified domestic
relations order described in Section 6.07. The provisions of this
Section 6.04, and of Sections 6.05 and 6.06, apply separately to the
portion of the Participant's Nonforfeitable Accrued Benefit subject to
the qualified domestic relations order and to the portion of the
Participant's Nonforfeitable Accrued Benefit not subject to that order.
E. PROFIT SHARING PLAN EXCEPTION. If this Plan is a profit saring plan,
the Employer's Adoption Agreement must indicate the extent to which the
preceding provisions of Section 6.04 apply. If the Employer's Adoption
Agreement applies to this Section 6.04 only to a Participant described
in this Section 6.04(E), the preceding provisions of this Section 6.04
do not apply to any Participant in the Plan except: (1) a Participant as
respects whom the Plan is a direct or indirect transferee from a plan
subject to the Code Section 417 requirements and the Plan received the
transfer after December 31, 1984, unless the transfer is an elective
transfer described in Section 13.06; (2) a Participant who elects a life
annuity distribution (if Section 13.02 of the Plan requires the Plan to
provide a life annuity distribution option); and (3) a Participant whose
benefits under a defined benefit plan maintained by the Employer are
offset by benefits provided under this Plan. If the Employer elects to
apply this Section 6.04 to all Participants, the preceding provisions of
this Section 6.04 apply to all Participants described in the first two
paragraphs of this Section 6.04, without regard to the limitations of
this Section 6.04(E). Sections 6.05 and 6.06 only apply to Participants
to whom the precedcing provisions of this Section 6.04 apply.
6.05 WAIVER ELECTION -- QUALIFIED JOINT AND SURVIVOR ANNUITY.
Not earlier than 90 days before nor later than 30 days before the
Participant's annuity starting date, the Plan Administrator must provide the
Participant a written explanation of the terms and conditions of the
qualified joint and survivor annuity, the Participant's right to make, and
the effect of, an election to waive the joint and survivor form of benefit,
the rights of the Paticipant's spouse regarding the waiver election and the
Participant's right to make and the effect of, a revocation of a waiver
election. The Plan does not limit the number of times the Participant may
revoke a waiver of the qualified joint and survivor annuity or make a new
waiver during the election period.
A married Participant's waiver election is not valid unless (a) the
Participant's spouse (to whom the survivor annuity is payable under the
qualified joint and surivor annuity) has consented in writing to the waiver
election, the spouse's consent acknowledges the effect of the election, and a
notary public or the Plan Administrator (or his representative) witnesses the
spouses's consent, (b) the spouse consents to the alternate form of payment
designated by the Participant or to any change in that designated form of
payment, and (c) unless the spouse is the Participant's sole primary
Beneficiary, the spouse consents to the Participant's Beneficiary designation
or to any change in the Participant's Beneficiary designation. The spouse's
consent to a waiver of the qualified joint and survivor annuity is
irrevocable, unless the Participant revokes the waiver election. The spouse
may execute a blanket consent to any form of payment designation or to any
Beneficiary designation made by the Participant, if the spouse acknowledges
the right to limit that consent to a specific designation but, in writing,
waives that right. The consent requirements of this Section 6.05 to apply to
a former spouse of the Participant, to the extent required under a qualified
domestic relations order described in Section 6.07.
The Plan Administrator will accept as valid a waiver election which does not
satisfy the spousal consent requirements if the Plan Administrator
establishes the Participant does not have a spouse, the Plan Administrator is
not able to locate the Participant's spouse, the Participant is legally
separated or has been abandoned (within the meaning of State law) and the
Participant has a court order to that effect, or other circumstances exist
under which the Secretary of the Treasury will excuse the consent
requirement. If the Participant's spouse is legally incompetent to give
consent, the spouse's legal guardian (even if the guardian is the
Participant) may give consent.
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6.06 WAIVER ELECTION -- PRERETIREMENT SURVIVOR ANNUITY.
The Plan Administrator must provide a written explanation of the
preretirement survivor annuity to each married Participant, within the
following period which ends last: (1) the period beginning on the first day
of the Plan Year in which the Participant attains age 32 and ending on the
last day of the Plan Year in which the Participant attains age 34; (2) a
reasonable period after an Employee becomes a Participant; (3) a reasonable
period after the joint and survivor rules become applicable to the
Participant; or (4) a reasonable period after a fully subsidized
preretirement survivor annuity no longer satisfies the requirements for a
fully subsidized benefit. A reasonable period described in clauses (2), (3)
and (4) is the period beginning one year before and ending one year after the
applicable event. If the Participant separates from Service before attaining
age 35, clauses (1), (2), (3) and (4) do not apply and the Plan Administrator
must provide the written explanation within the period beginning one year
before and ending one year after the Separation from Service. The written
explanation must describe, in a manner consistent with Treasury regulations,
the terms and conditions of the preretirement survivor annuity comparable to
the explanation of the qualified joint and survivor annuity required under
Section 6.05. The Plan does not limit the number of times the Participant may
revoke a waiver of the preretirement survivor annuity or make a new waiver
during the election period.
A Participant's waiver election of the preretirement survivor annuity is not
valid unless (a) the Participant makes the waiver election no earlier than
the first day of the Plan Year in which he attains age 35 and (b) the
Participant's spouse (to whom the preretirement survivor annuity is payable)
satisfies the consent requirements described in Section 6.05, except the
spouse need not consent to the form of benefit payable to the designated
Beneficiary. The spouse's consent to the waiver of the preretirement survivor
annuity is irrevocable, unless the Participant revokes the waiver election.
Irrespective of the time of election requirement described in clause (a), if
the Participant separates from Service prior to the first day of the Plan
Year in which he attains age 35, the Plan Administrator will accept a waiver
election as respects the Participant's Accrued Benefit attributable to his
Service prior to his Separation from Service. Furthermore, if a Participant
who has not separated from Service makes a valid waiver election, except for
the timing requirement of clause (a), the Plan Administrator will accept that
election as valid, but only until the first day of the Plan Year in which the
Participant attains age 35.
6.07 DISTRIBUTIONS UNDER DOMESTIC RELATIONS ORDERS.
Nothing contained in this Plan prevents the Custodian/Trustee, in accordance
with the direction of the Advisory Committee, from complying with the
provisions of a qualified domestic relations order (as defined in Code
Section 414(p)). This Plan specifically permit distribution to an alternate
payee under a qualified domestic relations order at any time, irrespective of
whether the Participant has attained his earliest retirement age (as defined
under Code Section 414(p)) under the Plan. A distribution to an alternate
payee prior to the Participant's attainment of earliest retirement age is
available only if: (1) the order specifies distribution at that time or
permits an agreement between the Plan and the alternate payee to authorize an
earlier distribution; and (2) if the present value of the alternate payee's
benefits under the Plan exceeds $3,500, and the order requires, the alternate
payee consents to any distribution occurring prior to the Participant's
attainment of earliest retirement age. Nothing in this Section 6.07 permits a
Participant a right to receive distribution at a time otherwise not permitted
under the Plan nor does it permit the alternate payee to receive a form of
payment not permitted under the Plan.
The Plan Administrator must establish reasonable procedures to determine the
qualified status of a domestic relations order. Upon receiving a domestic
relations order, the Plan Administrator promptly will notify the Participant
and any alternate payee named in the order, in writing, of the receipt of the
order and the Plan's procedures for determining the qualified status of the
order. Within a reasonable period of time after receiving the domestic
relations order, the Plan Administrator must determine the qualified status
of the order and must notify the Participant and each alternate payee, in
writing, of its determination. The Plan Administrator must provide notice
under this paragraph by mailing to the individual's address specified in the
domestic relations order, or in a manner consistent with Department of Labor
regulations.
If any portion of the Participant's Nonforfeitable Accrued Benefit is payable
during the period the Plan Administrator is making its determination of the
qualified status of the domestic relations order, the Advisory Committee must
make a separate accounting of the amounts payable. If the Plan Administrator
determines the order is a qualified domestic relations order within 18 months
of the date amounts first are payable following receipt of the order, the
Advisory Committee will direct the Custodian/Trustee to distribute the
payable amounts in accordance with the order. If the Plan Administrator does
not make its determination of the qualified status of the order within the
18-month determination period, the Advisory Committee will direct the
Custodian/Trustee to distribute the payable amounts in the manner the Plan
would distribute if the order did not exist and will apply the order
prospectively if the Plan Administrator later determines the order is a
qualified domestic relations order.
To the extent it is not inconsistent with the provisions of the qualified
domestic relations order, the Advisory Committee may direct the
Custodian/Trustee to invest any partitioned amount in a segregated subaccount
or separate account and to invest the account in Federally insured,
interest-bearing savings account(s) or time deposit(s) (or a combination of
both), or in other fixed income investments. A segregated subaccount remains
a part of the Trust, but it alone shares in any income it earns, and it alone
bears any expense or loss it incurs. The Custodian/Trustee will make any
payments or distributions required under this Section 6.07 by separate
benefit checks or other separate distribution to the alternate payee(s).
6.08 JOINT AND SURVIVOR ANNUITY -- TRANSITIONAL RULES.
(A) Any living Participant not receiving benefits on August 23, 1984, who
would otherwise not receive the benefits prescribed by Section 6.04 must
be given the opportunity to elect to have Section 6.04 apply if such
Participant is credited with at least one Hour of Service under this Plan
or a predecessor plan in a Plan Year beginning on or after January 1,
1976, and such Participant had at least 10 years of vesting service when
he or she separated from service.
(B) Any living Participant not receiving benefits on August 23, 1984, who
was credited with at least one Hour of Service under this Plan or a
predecessor plan on or after September 2, 1974, and who is not otherwise
credited with any service in a Plan Year beginning on or after
January 1, 1976, must be given the opportunity to have his benefits paid
in accordance with Section 6.08(D).
(C) The respective opportunities to elect (as described in Sections 6.08(A)
and 6.08(B)) must be afforded to the appropriate Participants
during the period commencing on August 23, 1984, and ending on the date
benefits would otherwise commence.
(D) Any Participant who has elected pursuant to Section 6.08(B) and any
Participant who does not elect under Section 6.08(A) or who meets the
requirements of Section 6.08(A) expect that such Participant does not
have at least 10 years of vesting service when he separates from service,
shall have his benefits distributed in accordance with all of the
following requirements if benefits would have been payable in the form of
a life annuity:
(a) If benefits in the form of a life annuity become payable to a married
Participant who:
(1) begins to receive payments under the Plan on or after Normal
Retirement Age; or
(2) dies on or after Normal Retirement Age while still working for
the Employer; or
(3) begins to receive payments on or after the qualified early
retirement age; or
(4) separates from service on or after attaining Normal Retirement
Age (or qualified early retirement age) and after satisfying the
eligibility requirements for the payment of benefits under the
Plan and thereafter dies before beginning to receive such
benefits;
then such benefits will be received under this Plan in the form of a
qualified joint and survivor annuity, unless the Participant has
elected otherwise during the election period. The election period
must begin at least 6 months before the Participant attains qualified
early retirement age and end not more than 90 days before the
commencement of benefits. Any election hereunder will be in writing
and may be changed by the Participant at any time.
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(b) A Participant who is employed after attaining the qualified early
retirement age will be given the opportunity to elect, during the
election period, to have a survivor annuity payable on death. If the
Participant elects the survivor annuity, payments under such annuity
must not be less than the payments which would have been made to the
spouse under the qualified joint and survivor annuity if the Participant
had retired on the day before his death. Any election under this
provision will be in writing and may be changed by the Participant at
any time. The election period begins on the later of (1) the 90th day
before the Participant attains the qualified early retirement age, or
(2) the date on which participation begins, and ends on the date the
Participant terminates employment.
(c) For purposes of this Section 6.08(D):
(1) Qualified early retirement age is the latest of:
(i) the earliest date, under the Plan, on which the
Participant may elect to receive retirement benefits:
(ii) the first day of the 120th month beginning before the
Participant reaches Normal Retirement Age; or
(iii) the date of the Participant begins participation.
(2) Qualified joint and survivor annuity is an annuity for the life
of the Participant with a survivor annuity for the remaining
life of the Participant's surviving spouse as described in
Section 6.04(A).
(E) Notwithstanding any other provision of the Plan to the contrary, if the
Participant's Nonforfeitable Accrued Benefit does not exceed $3,500, the
Advisory Committee will direct the Custodian/Trustee to distribute the
Participant's Nonforfeitable Accrued Benefit in a lump sum.
ARTICLE VII EMPLOYER ADMINISTRATIVE PROVISIONS
7.01 INFORMATION TO COMMITTEE.
The Employer must supply current information to the Advisory Committee as to
the name, date of birth, date of employment, annual compensation, leaves of
absence, Years of Service and date of termination of employment of each
Employee who is, or who will be eligible to become, a Participant under the
Plan, together with any other information which the Advisory Committee
considers necessary. The Employer's records as to the current information the
Employer furnishes to the Advisory Committee are conclusive as to all persons.
7.02 NO LIABILITY.
The Employer assumes no obligation or responsibility to any of its Employees,
Participants or Beneficiaries for any act of, or failure to act, on the part
of its Advisory Committee (unless the Employer is the Advisory Committee),
the Custodian/Trustee or the Plan Administrator (unless the Employer is the
Plan Administrator).
7.03 INDEMNITY OF PLAN ADMINISTRATOR AND COMMITTEE.
The Employer indemnifies and saves harmless the Plan Administrator and the
members of the Advisory Committee, and each of them, from and against any and
all loss resulting from liability to which the Plan Administrator and the
Advisory Committee, or the members of the Advisory Committee, may be
subjected by reason of any act or conduct (except willful misconduct or gross
negligence) in their official capacities in the administration of this Trust
or Plan or both, including all expenses reasonably incurred in their defense,
in case the Employer fails to provide such defense. The indemnification
provisions of this Section 7.03 do not relieve the Plan Administrator or any
Advisory Committee member from any liability he may have under ERISA for
breach of a fiduciary duty. Furthermore, the Plan Administrator and the
Advisory Committee members and the Employer may execute a letter agreement
further delineating the indemnification agreement of this Section 7.03,
provided the letter agreement must be consistent with and does not violate
ERISA.
The Employer indemnifies and saves harmless the Custodian/Trustee from and
against all liabilities, penalties and claims (including reasonable
attorney's fees and expenses in defending against such liabilities and
claims) against the Custodian/Trustee arising from any action taken or
omitted by the Custodian/Trustee on the direction of a fiduciary other than
the Custodian/Trustee. In addition, such indemnity shall include any claims,
penalties and liabilities arising from any breach of fiduciary responsibility
by a fiduciary other than the Custodian/Trustee unless the Custodian/Trustee
knowingly participates in such breach knowing that such act or omission is a
breach, knowingly undertakes to conceal a breach or has actual knowledge of a
breach and fails to take reasonable steps to remedy such breach. Furthermore,
the Custodian/Trustee and the Employer may execute a letter agreement further
delineating the indemnification agreement of the Section 7.03, provided the
letter agreement must be consistent with and does not violate ERISA.
7.04 EMPLOYER DIRECTION OF INVESTMENT.
If the Custodian/Trustee is acting as Trustee, the Employer has the right to
direct the Trustee with respect to the investment and re-investment of assets
comprising the Trust Fund only if the Trustee consents in writing to permit
such direction. If the Trustee consents to Employer direction of investment,
the Trustee and the Employer must execute a letter agreement as a part of
this Plan containing such conditions, limitations and other provisions they
deem appropriate before the Trustee will follow any Employer direction as
respects the investment or re-investment of any part of the Trust Fund.
7.05 AMENDMENT TO VESTING SCHEDULE.
Though the Employer reserves the right to amend the vesting schedule at any
time, the Advisory Committee will not apply the amended vesting schedule to
reduce the Nonforfeitable percentage of any Participant's Accrued Benefit
derived from Employer contributions (determined as of the later of the date
the Employer adopts the amendment, or the date the amendment becomes
effective) to a percentage less than the Nonforfeitable percentage computed
under the Plan without regard to the amendment.
If the Employer makes a permissible amendment to the vesting schedule, each
Participant having at least 3 Years of Service with the Employer may elect to
have the percentage of his Nonforfeitable Accrued Benefit computed under the
Plan without regard to the amendment. For Plan Years beginning prior to
January 1, 1989, the election described in the preceding sentence applies
only to Participants having at least 5 Years of Service with the Employer.
The Participant must file his election with the Plan Administrator within 60
days of the latest of (a) the Employer's adoption of the amendment; (b) the
effective date of the amendment; or (c) his receipt of a copy of the
amendment. The Plan Administrator, as soon as practicable, must forward a
true copy of any amendment to the vesting schedule to each affected
Participant, together with an explanation of the effect of the amendment, the
appropriate form upon which the Participant may make an election to remain
under the vesting schedule provided under the Plan prior to the amendment and
notice of the time within which the Participant must make an election to
remain under the prior vesting schedule. For purposes of this Section 7.05,
an amendment to the vesting schedule includes any Plan amendment which
directly or indirectly affects the computation of the Nonforfeitable
percentage of an Employee's rights to his Employer derived Accrued Benefit.
Furthermore, if the Employer's Plan is a Nonstandardized Plan, the Advisory
Committee must treat any shift in the vesting schedule, due to a change in
the Plan's top heavy status, as an amendment to the vesting schedule for
purposes of this Section 7.05. However, a top heavy vesting schedule will
apply to a Participant only if the Participant receives credit for at least
one Hour of Service after the top heavy vesting schedule becomes effective.
ARTICLE VIII PARTICIPANT ADMINISTRATIVE PROVISIONS
8.01 BENEFICIARY DESIGNATION.
Any Participant may from time to time designate, in writing, any
individual(s), contingently or successively, to whom the Custodian/Trustee
will pay his Accrued Benefit (including any life insurance proceeds payable
to the Participant's Account) on event of his death and the Participant may
designate the form and method of payment. The Advisory Committee will
prescribe the form for the written designation of Beneficiary and, upon the
Participant's filing the form with the Advisory Committee, the form
effectively revokes all designations filed prior to that date by the same
Participant.
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COORDINATION WITH SURVIVOR REQUIREMENTS. If the joint and survivor
requirements of Article VI apply to the Participant, this Section 8.01 does
not impose any special spousal consent requirements on the Participant's
Beneficiary designation. However, in the absence of spousal consent (as
required by Article VI) to the Beneficiary designation: (1) any waiver of the
joint and survivor annuity or of the preretirement survivor annuity is not
valid; and (2) if the Participant dies prior to his annuity starting date,
the Beneficiary designation will apply only to the portion of the death
benefit which is not payable as a preretirement survivor annuity.
PROFIT SHARING PLAN EXCEPTION. If the Plan is a profit sharing plan, and the
Employer elects to apply the joint and survivor requirements only to
Participants described in Section 6.04(E), the Beneficiary designation of a
married Participant who is not described in Section 6.04(E) is not valid
unless the Participant's spouse consents (in a manner described in Section
6.05) to the Beneficiary designation. The spousal consent requirement in this
paragraph does not apply if the Participant and his spouse are not married
throughout the one year period ending on the date of the Participant's death,
or if the Participant's spouse is the Participant's sole primary Beneficiary.
However, if a Participant marries within one year before his annuity starting
date, and the Participant and his spouse have been married for at least a one
year period ending on or before the date of his death, then the Participant
and his spouse will be treated as having been married throughout the one year
period ending on his annuity starting date.
8.02 NO BENEFICIARY DESIGNATION.
If a Participant fails to name a Beneficiary in accordance with Section 8.01,
or if the Beneficiary named by a Participant predeceases him or dies before
complete distribution of the Participant's Accrued Benefit as prescribed by
the Participant's Beneficiary form, then the Custodian/Trustee will pay the
Participant's Accrued Benefit in accordance with Section 6.02 in the
following order of priority, unless the Employer specifies a different order
of priority in the Adoption Agreement, to:
A. The Participant's surviving spouse;
B. The Participant's surviving children, including adopted children, in
equal shares;
C. The Participant's surviving parents, in equal shares; or
D. The legal representative of the estate of the last to die of the
Participant and his Beneficiary.
If the Plan is a profit sharing plan, and the Employer elects to apply the
joint and survivor requirements only to Participants described in Section
6.04(E), the Employer may not specify a different order of priority in the
Adoption Agreement unless the Participant's surviving spouse will be first in
the different order of priority. The Advisory Committee will direct the
Custodian/Trustee as to the method and to whom the Custodian/Trustee will
make payment under this Section 8.02.
8.03 PERSONAL DATA TO COMMITTEE.
Each Participant and each Beneficiary of a deceased Participant must furnish
to the Advisory Committee such evidence, data or information as the Advisory
Committee considers necessary or desirable for the purpose of administering
the Plan. The provisions of this Plan are effective for the benefit of each
Participant upon the condition precedent that each Participant will furnish
promptly full, true and complete evidence, data and information when
requested by the Advisory Committee, provided the Advisory Committee advises
each Participant of the effect of his failure to comply with its request. If
a Participant fails to supply the information, the Employer will supply it
from the best available records.
8.04 ADDRESS FOR NOTIFICATION.
Each Participant and each Beneficiary of a deceased Participant must file
with the Advisory Committee from time to time, in writing, his post office
address and any change of post office address. Any communication, statement
or notice addressed to a Participant, or Beneficiary, at his last post office
address filed with the Advisory Committee, or as shown on the records of the
Employer, binds the Participant, or Beneficiary, for all purposes of this
Plan. If a Participant or Beneficiary fails to supply the information, the
Employer will supply it from the best available records.
8.05 ASSIGNMENT OR ALIENATION.
Subject to Code Section 414(p) relating to qualified domestic relations
orders, neither a Participant nor a Beneficiary may anticipate, assign or
alienate (either at law or in equity) any benefit provided under the Plan,
and the Custodian/Trustee will not recognize any such anticipation,
assignment or alienation. Furthermore, a benefit under the Plan is not
subject to attachment, garnishment, levy, execution or other legal or
equitable process.
8.06 NOTICE OF CHANGE IN TERMS.
The Plan Administrator, within the time prescribed by ERISA and the
applicable regulations, must furnish all Participants and Beneficiaries a
summary description of any material amendment to the Plan or notice of
discontinuance of the Plan and all other information required by ERISA to be
furnished without charge.
8.07 LITIGATION AGAINST THE TRUST.
A court of competent jurisdiction may authorize any appropriate equitable
relief to redress violations of ERISA or to enforce any provisions of ERISA
or the terms of the Plan. A fiduciary may receive reimbursement of expenses
properly and actually incurred in the performance of his duties with the Plan.
8.08 INFORMATION AVAILABLE.
Any Participant in the Plan or any Beneficiary may examine copies of the Plan
description, latest annual report, any bargaining agreement, this Plan and
Trust, contract or any other instrument under which the Plan was established
or is operated. The Plan Administrator will maintain all of the items listed
in this Section 8.08 in his office, or in such other place or places as he
may designate from time to time in order to comply with the regulations
issued under ERISA, for examination during reasonable business hours. Upon
the written request of a Participant or Beneficiary the Plan Administrator
must furnish him with a copy of any item listed in this Section 8.08. The
Plan Administrator may make a reasonable charge to the requesting person for
the copy so furnished.
8.09 APPEAL PROCEDURE FOR DENIAL OF BENEFITS.
The Plan Administrator must provide adequate notice in writing to any
Participant or to any Beneficiary ("Claimant") whose claim for benefits under
the Plan the Advisory Committee has denied. The Plan Administrator's notice
to the Claimant must set forth:
A. The specific reason for the denial;
B. Specific references to pertinent Plan provisions on which the Advisory
Committee based its denial;
C. A description of any additional material and information needed for the
Claimant to perfect his claim and an explanation of why the material or
information is needed; and
D. That any appeal the Claimant wishes to make of the adverse determination must
be in writing to the Advisory Committee within 75 days after receipt of the
Plan Administrator's notice of denial of benefits. The Plan Administrator's
notice must further advise the Claimant that his failure to appeal the action
to the Advisory Committee in writing within the 75-day period will render the
Advisory Committee's determination final, binding and conclusive.
If the Claimant should appeal to the Advisory Committee, he, or his duly
authorized representative, may submit, in writing, whatever issues and
comments he, or his duly authorized representative, feels are pertinent. The
Claimant, or his duly authorized representative, may review pertinent Plan
documents. The Advisory Committee will re-examine all facts related to the
appeal and make a final determination as to whether the denial of benefits is
justified under the circumstances. The Advisory Committee must advise the
Claimant of its decision within 60 days of the Claimant's written request for
review, unless special circumstances (such as a hearing) would make the
rendering of a decision within the 60-day limit unfeasible, but in no event
may the Advisory Committee render a decision respecting a denial for a claim
for benefits later than 120 days after its receipt of a request for review.
The Plan Administrator's notice of denial of benefits must identify the name
of each member of the Advisory Committee and the name and address of the
Advisory Committee member to whom the Claimant may forward his appeal.
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8.10 PARTICIPANT DIRECTION OF INVESTMENT.
A Participant has the right to direct the Custodian/Trustee with respect to
the investment or re-investment of the assets comprising the Participant's
individual Account only if the Advisory Committee consents in writing to
permit such direction. If the Advisory Committee consents to Participant
direction of investment, the Advisory Committee and each Participant must
execute a letter agreement as a part of this Plan containing such conditions,
limitations and other provisions they deem appropriate before the
Custodian/Trustee will follow any Participant direction as respects the
investment or re-investment of any part of the Participant's individual
Account. The Custodian/Trustee is not liable for any loss, nor is liable for
any breach, resulting from a Participant's direction of the investment of any
part of his individual Account.
If the Employer designates the Custodian/Trustee to act as Custodian with
respect to the Trust, the Participant shall only have the right to direct
investment of assets comprising the Participant's individual Custodial
Accounts A & B described in Section 10.03.
ARTICLE IX ADVISORY COMMITTEE -- DUTIES WITH RESPECT TO PARTICIPANTS' ACCOUNTS
9.01 MEMBERS' COMPENSATION, EXPENSES.
The Employer must appoint an Advisory Committee to administer the Plan, the
members of which may or may not be Participants in the Plan, or which may be
the Plan Administrator acting alone. The members of the Advisory Committee
will serve without compensation for services as such, but the Employer will
pay all expenses of the Advisory Committee, including the expense for any
bond required under ERISA.
9.02 TERM.
Each member of the Advisory Committee serves until the appointment of his
successor.
9.03 POWERS.
In case of a vacancy in the membership of the Advisory Committee, the
remaining members of the Advisory Committee may exercise any and all of the
powers, authority, duties and discretion conferred upon the Advisory
Committee pending the filling of the vacancy.
9.04 GENERAL.
The Advisory Committee has the following powers and duties:
A. To select a Secretary, who need not be a member of the Advisory Committee;
B. To determine the rights of eligibility of an Employee to participate in the
Plan, the value of a Participant's Accrued Benefit and the Nonforfeitable
percentage of each Participant's Accrued Benefit;
C. To adopt rules of procedure and regulations necessary for the proper and
efficient administration of the Plan provided the rules are not inconsistent
with the terms of this Agreement;
D. To enforce the terms of the Plan and the rules and regulations it adopts;
E. To direct the Custodian/Trustee as respects the crediting and distribution
of the Trust;
F. To review and render decisions respecting a claim for (or denial of a claim
for) a benefit under the Plan;
G. To furnish the Employer with information which the Employer may require for
tax or other purposes;
H. To engage the service of agents whom it may deem advisable to assist it with
the performance of its duties;
I. To engage the services of an Investment Manager or Managers (as defined in
Section 10.03[H](d)(3)), each of whom will have full power and authority
to manage, acquire or dispose (or direct the Custodian/Trustee with respect
to acquisition or disposition) of any Plan asset under its control;
J. To establish a nondiscriminatory policy in making loans, if any, to
Participants; and
K. To establish and maintain a funding standard account and to make credits and
charges to the account to the extent required by and in accordance with the
provisions of the Code.
The Advisory Committee must exercise all of its powers, duties and discretion
under the Plan in a uniform and nondiscriminatory manner.
LOAN POLICY. A loan policy described in paragraph (j) must be a written
document and must include: (1) the identity of the person or positions
authorized to administer the participant loan program; (2) a procedure for
applying for the loan; (3) the criteria for approving or denying a loan; (4)
the limitations, if any, on the types and amounts of loans available; (5) the
procedure for determining a reasonable rate of interest; (6) the types of
collateral which may secure the loan; and (7) the events constituting default
and the steps the Plan will take to preserve plan assets in the event of
default.
9.05 FUNDING POLICY.
The Advisory Committee will review, not less often than annually, all
pertinent Employee information and Plan data in order to establish the
funding policy of the Plan and to determine the appropriate methods of
carrying out the Plan's objectives. The Advisory Committee must communicate
periodically, as it deems appropriate, to the Custodian/Trustee and to any
Plan Investment Manager the Plan's short-term and long-term financial needs
so investment policy can be coordinated with Plan financial requirements.
9.06 MANNER OF ACTION.
The decision of a majority of the members appointed and qualified controls.
9.07 AUTHORIZED REPRESENTATIVE.
The Advisory Committee may authorize any one of its members, or its Secretary,
to sign on its behalf any notices, directions, applications, certificates,
consents, approvals, waivers, letters or other documents. The Advisory Committee
must evidence this authority by an instrument signed by all members and filed
with the Custodian/Trustee.
9.08 INTERESTED MEMBER.
No member of the Advisory Committee may decide or determine any matter
concerning the distribution, nature or method of settlement of his own
benefits under the Plan, except in exercising an election available to that
member in his capacity as a Participant, unless the Plan Administrator is
acting alone in the capacity of the Advisory Committee.
9.09 INDIVIDUAL ACCOUNTS.
The Advisory Committee will maintain, or direct the Custodian/Trustee to
maintain, a separate Account, or multiple Accounts in the name of each
Participant to reflect the Participant's Accrued Benefit under the Plan. If a
Participant re-enters the Plan subsequent to his having a Forfeiture Break in
Service, the Advisory Committee, or the Custodian/Trustee, must maintain a
separate Account for the Participant's pre-Forfeiture Break in Service
Accrued Benefit and a separate Account for his post-Forfeiture Break in
Service Accrued Benefit, unless the Participant's entire Accrued Benefit
under the Plan is 100% Nonforfeitable.
The Advisory Committee will make its allocations, or request the
Custodian/Trustee to make its allocations, to the Accounts of the
Participants in accordance with the provisions of Section 9.11. The Advisory
Committee may direct the Custodian/Trustee to maintain a temporary segregated
investment Account in the name of a Participant to prevent a distortion of
income, gain or loss allocations under Section 9.11. The Advisory Committee
must maintain records of its activities.
9.10 VALUE OF PARTICIPANT'S ACCRUED BENEFIT.
The value of each Participant's Accrued Benefit consists of that proportion
of the net worth (at fair market value) of the Employer's Trust Fund which
the net credit balance in his Account (exclusive of the cash value of
incidental benefit insurance contracts) bears to the total net credit balance
in the Accounts (exclusive of the cash value of the incidental benefit
insurance contracts) of all Participants plus the cash surrender value of any
incidental benefit insurance contracts held by the Custodian/Trustee on the
Participant's life.
For purposes of a distribution under the Plan, the value of a Participant's
Accrued Benefit is its value as of the valuation date immediately preceding
the date of the distribution.
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9.11 ALLOCATION AND DISTRIBUTION OF NET INCOME GAIN OR LOSS.
A "valuation date" under this Plan is each Accounting Date and each interim
valuation date determined under Section 10.14. As of each valuation date the
Advisory Committee must adjust Accounts to reflect net income, gain or loss
since the last valuation date. The valuation period is the period beginning
the day after the last valuation date and ending on the current valuation
date.
TRUST FUND ACCOUNTS. The allocation provisions of this paragraph apply to all
Participant Accounts other than segregated investment Accounts. The Advisory
Committee first will adjust the Participant Accounts, as those Accounts stood
at the beginning of the current valuation period by reducing the Accounts for
any forfeitures arising under Section 5.09 or under Section 9.14, for amounts
charged during the valuation period to the Accounts in accordance with
Section 9.13 (relating to distributions) and Section 11.01 (relating to
insurance premiums), for the cash value of incidental benefit insurance
contracts and for the amount of any Account which the Custodian/Trustee has
fully distributed since the immediately preceding valuation date. The
Advisory Committee then, subject to the restoration allocation requirements
of Section 5.04 or of Section 9.14, will allocate the net income, gain or
loss pro rata to the adjusted Participant Accounts. The allocable net income
gain or loss is the net income (or net loss), including the increase or
decrease in the fair market value of assets, since the last valuation date.
SEGREGATED INVESTMENT ACCOUNTS. A segregated investment Account receives all
income it earns and bears all expense or loss it incurs. As of the valuation
date, the Advisory Committee must reduce a segregated Account for any
forfeiture arising under Section 5.09 after the Advisory Committee has made
all other allocations, changes or adjustments to the Account for the Plan
Year.
ADDITIONAL RULES. An Excess Amount or suspense account described in Part 2 of
Article III does not share in the allocation of net income, gain or loss
described in this Section 9.11. This Section 9.11 applies solely to the
allocation of net income, gain or loss of the Trust. The Advisory Committee
will allocate the Employer contributions and Participant forfeitures, if any,
in accordance with Article III.
9.12 INDIVIDUAL STATEMENT.
As soon as practicable after the Accounting Date of each Plan Year, but
within the time prescribed by ERISA and the regulations under ERISA, the Plan
Administrator will deliver to each Participant (and to each Beneficiary) a
statement reflecting the condition of his Accrued Benefit in the Trust as of
that date and such other information ERISA requires be furnished the
Participant or Beneficiary. No Participant, except a member of the Advisory
Committee, has the right to inspect the records reflecting the Account of any
other Participant.
9.13 ACCOUNT CHARGED.
The Advisory Committee will charge all distributions made to a Participant or
to his Beneficiary from his Account against the Account of the Participant
when made.
9.14 UNCLAIMED ACCOUNT PROCEDURE.
The Plan does not require either the Custodian/Trustee or the Advisory
Committee to search for, or ascertain the whereabouts of, any Participant or
Beneficiary. At the time the Participant's or Beneficiary's benefit becomes
distributable under Article VI, the Advisory Committee, by certified or
registered mail addressed to his last known address of record with the
Advisory Committee or the Employer, must notify any Participant, or
Beneficiary, that he is entitled to a distribution under this Plan. The
notice must quote the provisions of this Section 9.14 and otherwise must
comply with the notice requirements of Article VI. If the Participant, or
Beneficiary, fails to claim his distributive share or make his whereabouts
known in writing to the Advisory Committee within 6 months from the date of
mailing of the notice, the Advisory Committee will treat the Participant's or
Beneficiary's unclaimed payable Accrued Benefit as forfeited and will
reallocate the unclaimed payable Accrued Benefit in accordance with Section
3.05. Where the benefit is distributable to the Participant, the forfeiture
under this paragraph occurs as of the last day of the notice period, if the
Participant's Nonforfeitable Accrued Benefit does not exceed $3,500, or as of
the first day the benefit is distributable without the Participant's consent,
if the present value of the Participant's Nonforfeitable Accrued Benefit
exceeds $3,500. Where the benefit is distributable to a Beneficiary, the
forfeiture occurs on the date the notice period ends except, if the
Beneficiary is the Participant's spouse and the Nonforfeitable Accrued
Benefit payable to the spouse exceeds $3,500, the forfeiture occurs as of the
first day the benefit is distributable without the spouse's consent. Pending
forfeiture, the Advisory Committee, following the expiration of the notice
period, may direct the Custodian/Trustee to segregate the Nonforfeitable
Accrued Benefit in a segregated Account and to invest that segregated Account
in Federally insured interest bearing savings accounts or time deposits (or
in a combination of both), or in other fixed income investments.
If a Participant or Beneficiary who has incurred a forfeiture of his Accrued
Benefit under the provisions of the first paragraph of this Section 9.14
makes a claim, at any time, for his forfeited Accrued Benefit, the Advisory
Committee must restore the Participant's or Beneficiary's forfeited Accrued
Benefit to the same dollar amount as the dollar amount of the Accrued Benefit
forfeited, unadjusted for any gains or losses occurring subsequent to the
date of the forfeiture. The Advisory Committee will make the restoration
during the Plan Year in which the Participant or Beneficiary makes the claim,
first from the amount, if any, of Participant forfeitures the Advisory
Committee otherwise would allocate for the Plan Year, then from the amount,
if any, of the Trust Fund net income or gain for the Plan Year and then from
the amount, or additional amount, the Employer contributes to enable the
Advisory Committee to make the required restoration. The Advisory Committee
must direct the Custodian/Trustee to distribute the Participant's or
Beneficiary's restored Accrued Benefit to him not later than 60 days after
the close of the Plan Year in which the Advisory Committee restores the
forfeited Accrued Benefit. The forfeiture provisions of this Section 9.14
apply solely to the Participant's or to the Beneficiary's Accrued Benefit
derived from Employer contributions.
ARTICLE X CUSTODIAN/TRUSTEE, POWERS AND DUTIES
10.01 ACCEPTANCE.
The Custodian/Trustee accepts the Trust created under the Plan and agrees to
perform the obligations imposed. The Custodian/Trustee must provide bond for
the faithful performance of its duties under the Trust to the extent required
by ERISA.
10.012 AUXILIARY TRUST.
If elected by the Employer, the Advisory Committee shall establish a
subsidiary trust within the Trust, herein referred to as the Auxiliary Trust.
After establishment of the Auxiliary Trust, "Trust," as used herein
throughout, shall not refer to the Auxiliary Trust unless otherwise indicated.
The Employer shall appoint Auxiliary Trustee(s) to assume total authority
over and responsibility for the assets, liabilities and operation of the
Auxiliary Trust. All duties, powers, obligations, and liabilities of the
Trustee pursuant to the Trust shall thereafter apply solely to assets other
than those held in the Auxiliary Trust.
Any provision of the Plan or Trust which specifies duties or responsibilities
of the Auxiliary Trustee shall supersede any other provisions of the Plan or
Trust that may conflict with such provision.
In form, the Auxiliary Trust is a liquidating trust with an obligation to pay
the proceeds of any Plan asset thereunder to the Trustee promptly upon its
liquidation. Nevertheless, the Trustee shall have no fiduciary, investment or
management responsibilities over assets of the Plan while held in the
Auxiliary Trust and the Employer shall hold harmless and indemnify the
Trustee against any claims or actions against the Trustee arising out of the
investment or management of such Plan assets; provided, however, that the
Employer reserves the right to provide any such defense to the trustee
through the use of legal counsel selected and compensated by the Employer.
10.02 RECEIPT OF CONTRIBUTIONS.
The Custodian/Trustee is accountable to the Employer for the funds
contributed to it by the Employer, but does not have any duty to see that the
contributions received comply with the provisions of the Plan. The
Custodian/Trustee is not obliged to collect any contributions from the
Employer, nor is obliged to see that funds deposited with it are deposited
according to the provisions of the Plan.
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10.03 INVESTMENT POWERS.
[A] TRUSTEE. If the Employer designates the Custodian/Trustee to administer
the Trust as Trustee pursuant to Section 1.022, then the Trustee has full
discretion and authority with regard to the investment of the Trust Fund,
except with respect to a Plan asset under the control or direction of a
properly appointed Investment Manager or with respect to a Plan asset subject
to Employer, Participant or Advisory Committee direction of investment. The
Trustee must coordinate its investment policy with Plan financial needs as
communicated to it by the Advisory Committee. The Trustee is authorized and
empowered, but not by way of limitation, with the following powers, rights
and duties:
(a) To invest any part or all of the Trust Fund in any common or preferred
stocks, open-end or closed-end mutual funds, put and call options traded
on a national exchange, United States retirement plan bonds, corporate
bonds, debentures, convertible debentures, commercial paper, U.S. Treasury
bills, U.S. Treasury notes and other direct or indirect obligations of the
United States Government or its agencies, improved or unimproved real
estate, face-amount certificates, group or collective trust funds as
described in Section 10.16, limited partnerships, insurance contracts of
any type, unit investment trusts, and endowment, annuity and life
insurance contracts and deposit administration annuity contracts
(including securities, annuities and insurance contracts distributed
by IDS Financial Corporation and its affiliated companies), mortgages,
notes or other property of any kind, real or personal, foreign or
domestic, to buy or sell options on common stock on a nationally
recognized exchange with or without holding the underlying common stock,
and to make any other investments the Trustee deems appropriate as a
prudent man would do under like circumstances with due regard for the
purposes of this Plan and without being limited to the class or classes of
securities in which Trustees are authorized by law or any rule of court to
invest trust funds. Any investment made or retained by the Trustee in good
faith is proper but must be of a kind constituting a diversification
considered by law suitable for trust investments.
(b) To retain in cash so much of the Trust Fund as it may deem advisable
to satisfy liquidity needs of the Plan and to deposit any cash held in the
Trust Fund in a bank account at reasonable interest. If the Trustee is a
bank or similar financial institution supervised by the United States or
by a State, this paragraph (b) includes specific authority to invest in
any type of deposit of the Trustee (or of a bank related to the Trustee
within the meaning of Code Section 414(b)) at a reasonable rate of
interest or in a common trust fund (the provisions of which govern the
investment of such assets and which the Plan incorporates by this
reference) as described in Code Section 584 which the Trustee (or its
affiliate, as defined in Code Section 1504) maintains exclusively for the
collective investment of money contributed by the bank (or the affiliate)
in its capacity as trustee and which conforms to the rules of the
Comptroller of the Currency. The Trustee may employ a bank or trust company
pursuant to the terms of its usual and customary bank agency agreement,
under which the duties of such bank or trust company shall be of a
custodial, clerical and recordkeeping nature.
(c) To manage, sell, contract to sell, grant options to purchase, convey,
exchange, transfer, abandon, improve, repair, insure, lease for any term
even though commencing in the future or extending beyond the term of the
Trust, and otherwise deal with all property, real or personal, in such
manner, for such considerations and on such terms and conditions as the
Trustee decides.
(d) To credit and distribute the Trust as directed by the Advisory Committee.
The Trustee is not obliged to inquire as to whether any payee or
distributee is entitled to any payment or whether the distribution is
proper or within the terms of the Plan, or as to the manner of making any
payment or distribution. The Trustee is accountable only to the Advisory
Committee for any payment or distribution made by it in good faith on the
order or direction of the Advisory Committee.
(e) To borrow money, to assume indebtedness, extend mortgages and encumber by
mortgage or pledge.
(f) To compromise, contest, arbitrate or abandon claims and demands, in its
discretion.
(g) To have with respect to the Trust all of the rights, subject to Sections
10.3[D] and 10.3[I], of an individual owner, including the power to give
proxies, to participate in any voting trusts, mergers, tender offers,
consolidations or liquidations, and to exercise or sell stock
subscriptions or conversion rights.
(h) To lease for oil, gas and other mineral purposes and to create mineral
severances by grant or reservation; to pool or unitize interests in oil,
gas and other minerals; and to enter into operating agreements and to
execute division and transfer orders.
(i) To hold any securities or other property in the name of the Trustee or
its nominee, with depositories or agent depositories or in another form as
it may deem best, with or without disclosing the trust relationship.
(j) To perform any and all other acts in its judgment necessary or appropriate
for the proper and advantageous management, investment and distribution of
the Trust.
(k) To retain any funds or property subject to any dispute without liability
for the payment of interest, and to decline to make payment or delivery of
the funds or property until final adjudication is made by a court of
competent jurisdiction.
(l) To file all tax returns required of the Trustee.
(m) To furnish to the Employer, the Plan Administrator and the Advisory
Committee an annual statement of account showing the condition of the
Trust Fund and all investments, receipts, disbursements and other
transactions effected by the Trustee during the Plan Year covered by the
statement and also stating the assets of the Trust held at the end of the
Plan Year, which accounts are conclusive on all persons, including the
Employer, the Plan Administrator and the Advisory Committee, except as to
any act or transaction concerning which the Employer, the Plan
Administrator or the Advisory Committee files with the Trustee written
exceptions or objections within 90 days after the receipt of the accounts
or for which ERISA authorizes a longer period within which to object.
(n) To begin, maintain or defend any litigation necessary in connection with
the administration of the Plan, except that the Trustee is not obliged or
required to do so unless indemnified to its satisfaction.
(o) At the direction of the Advisory Committee, to ratably apply for, own,
and pay premiums on contracts on the lives of the Participants. Any
initial or additional contract purchased on behalf of a Participant shall
have a face amount of not less than $1,000. Any such life insurance policy
shall be subject to the provisions of Subsection 10.03[c](a).
[B] CUSTODIAN. If the Employer designates the Custodian/Trustee to act as
Custodian with respect to the Plan, this subsection 10.03[B] shall apply.
A. (1) All contributions under the Plan shall be paid to the Custodian and
the Custodian shall credit such contributions to a separate account
established and maintained by it for each Participant. All
contributions shall be invested by the Custodian in accordance with
the written (or verbal to the extent permitted) directions received
from the Advisory Committee or Participant as provided in subsection
(2) below.
(2) The Advisory Committee, and not the Custodian, shall have the exclusive
management and control over the investment of the Trust Fund; except
where the Participant has the power to direct investments under
Sections 8.10 and 4.03. To the extent so directed, the Advisory
Committee and all other fiduciaries are relieved of the fiduciary
responsibilities as provided in Section 404 ERISA. Any Account for
which a Participant has the power to direct the investments held
thereunder shall be considered a Directed Investment Account. The
Advisory Committee shall have the exclusive management and control
over the investment of unallocated contributions until they have been
allocated in accordance with Article III and over the investment of
amounts allocated to a suspense account under Section 3.10(c).
(3) If a Participant fails to designate an investment for any of his
Directed Investment Accounts, such Accounts shall be invested in IDS
Cash Management Fund, Inc.
(4) Notwithstanding the previous paragraph, the Participant or the Plan
Administrator, or both, may elect an Investment Manager pursuant to
Section [G]. The Custodian shall not make any investments or dispose
of any investment held in the Custodial Account, except upon the
written (or verbal to the extent permitted) direction of the Plan
Administrator, Participant, or
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Investment Manager (if any has been appointed pursuant to Section [G].
(5) Subject to the provisions of Section 10.03[C](a) and Section [G],
all amounts held under the Plan shall be invested in accordance with any
one of the following mutually exclusive options:
(i) 100% under Custodial "A," or
(ii) 100% under Custodial "B," or
(iii) 100% allocated between Custodial Account "A" and Custodial
Account "B" in any dollar amount or any percentage selected
by the Participant.
A participant may, from time to time, change, prospectively, the
investment option elected. Such changes shall be made in
accordance with uniform and nondiscriminatory rules as established
by the Plan Administrator.
B. An account hereunder shall be charged or credited as appropriate with
the net earnings, gains, losses and expenses as well as appreciations or
depreciations in market value during each Plan Year attributable to such
account.
C. The Custodian shall have no discretion as to the investment of any
accounts under the Plan. Neither IDS Financial Corporation ("IDS") nor
its affiliates, nor the Custodian, shall be liable for any tax or any
loss of any kind which may result by reason of any action taken in
accordance with directions of the Participant Plan Administrator, or
Advisory Committee or by reason of any failure to act because of the
absence of any such directions. Further, Custodian and IDS or its
affiliates shall be fully protected in operating upon an instrument,
certificate, or paper believed by them to be genuine and to be signed or
presented by the proper person or persons, and the Custodian shall be
under not duty to make any investigation or inquiry as to any statement
contained in any such writing but may accept the same as conclusive
evidence of the truth and accuracy of the statements therein contained.
The Employer shall at all times fully indemnify and save harmless the
Custodian from any liability which may arise hereunder except liability
arising from the willful misconduct of the Custodian.
D. The Plan Administrator shall provide rules and regulations setting
forth guidelines for the types of investments that the Participants may
direct pursuant to this Article X.
E. If the Participant has elected to have contributions allocted between
Custodial Account "A" and Custodial Account "B", the Advisory Committee
or Participant shall be responsible for directing the Custodian as to
the allocation of contributions between the two Accounts. The Custodian
shall have no responsibility to see that payments are made to prevent
Contracts or Policies held in Custodial Account "B" from lapsing.
F. (1) The Custodian, as custodian of the funds held by it under the Employee's
plan, is authorized and empowered, by way of limitation, with the
following powers, rights and duties, each of which the Custodian
exercises solely as custodian in accordance with the written direction of
the Named Fiduciary (except to the extent a Plan asset is subject to the
control and management of a properly appointed Investment Manager or
subject to Advisory Committee or Participant direction of investment);
(2) To maintain records in which there will be designated (i) the amounts and
dates of contributions paid to Custodial Account "A" or "B" for each
Participant, (ii) the earnings, if any, realized from all such
contributions for each Participant, (iii) the amount credited to each
Participant hereunder, and (iv) such other data as Custodian determines
is useful in carrying out its Custodian functions hereunder;
(3) in conjunction with the Plan Administrator to maintain such other records
as may be necessary;
(4) to transmit annually, or as of the termination of this Agreement, to the
Plan Administrator such reports as will accurately (i) describe the
transactions undertaken with respect to its Custodian function hereunder,
and (ii) reflect, to the extent practicable when consideration is given
to the use to which the contributions hereunder are put, the financial
status of the Plan insofar as it relates the Trust Fund and each
Participant's Aggregate Account hereunder;
(5) to file with the Internal Revenue Service and/or any other appropriate
governmental agency such returns, forms, and other information only as
may be imposed by law upon Custodian acting in such capacity; and
(6) to retain the indicia of ownership of all assets held under this
Custodial Account within the United States.
[C] ALL PLANS.
A. If a life insurance Policy or Contract is to be purchased for a Participant,
the aggregate premium for ordinary life insurance for each Participant must
be less than 50% of the aggregate Employer contributions allocated to a
Participant's Account at any particular time. If term insurance (including
universal life insurance) is purchased with such contributions, the aggregate
premium must be less than 25% of the aggregate Employer contributions
allocated to a Participant's Account. If both ordinary life insurance and
other forms of life insurance are purchased with such contributions, one-half
of the premium amount expended for ordinary life insurance plus the amount
expended for all other forms of life insurance may not in the aggregate
exceed 25% of the aggregate Employer contributions allocated to a
Participant's Account. If retirement income (or endowment) Contracts are
purchased on behalf of any Participant, the death benefit under the Contract
shall not be greater than 100 times the anticipated monthly annuity provided
under such Contract. Any dividends or refund payable under insurance
Contracts for a Participant, if any, shall be applied to such Participant's
Account in the taxable year in which received or in the next succeeding
taxable year. For purposes of these incidental insurance provisions, ordinary
life insurance contracts are contracts with both nondecreasing death benefits
and nonincreasing premiums. Custodian/Trustee shall have no responsibility to
see that amounts are allocated in accordance with the limitations described
above.
B. Subject to Section 6.04 "Annuity Distributions to Participants and Surviving
Spouses," the Contracts on a Participant's life will be converted to cash or
an annuity or distributed to the Participant upon commencement of benefits.
C. The Custodian/Trustee shall apply for and will be the owner of any annuity,
contract, or Policy purchased under the terms of this Plan. Any such annuity,
contract or Policy must provide that proceeds will be payable to the
Custodian/Trustee. In the event of any conflict between the terms of this
Plan and the terms of any Contract or Policy purchased hereunder, the Plan
provisions shall control.
D. Notwithstanding anything hereinabove to the contrary, amounts credited to a
Participant's Qualified deductible contributions ("DECs") described in
Section 4.02 shall not be applied to the purchase of life insurance
contracts.
[D] NAMED FIDUCIARY, PLAN ADMINISTRATOR, ADVISORY COMMITTEE. Unless the Employer
designates in writing another person or persons to serve as Named Fiduciary,
Plan Administrator or Advisory Committee, the Employer is the Named
Fiduciary, Plan Administrator and Advisory Committee under its Plan. If the
Employer designates IDS Financial Services Inc. or its affiliate to act as
Custodian/Trustee with respect to the Trust, then the Employer, in adopting
this Plan acknowledges the Custodian/Trustee has no discretion with respect
to the investment or re-investment of the Trust Fund and that the Custodian/
Trustee is acting solely as custodian with respect to the assets comprising
the Trust Fund. In this respect, the Named Fiduciary, under the Employer's
Plan has the sole responsibility subject to Section 10.03[I], for the
management and control, including the exercise of any right of ownership
described in Section 10.03[A](g) (or not so described) of the Employer's
Trust Fund, IDS Financial Services Inc. or its affiliate, in its capacity as
Custodian/Trustee:
(a) Will not take any action with respect to investment absent written
direction of the Named Fiduciary. Notwithstanding any other provision
herein, the Participant shall be the Named Fiduciary with respect to
assets or investments allocated to his or her account to the extent
Section 10.03[I] applies;
(b) Has no duty to review or to make recommendations regarding investments
made at the written discretion of the Named Fiduciary;
(c) Must retain any investment obtained at the written direction of the
Named Fiduciary until further directed in writing by the Named Fiduciary
to dispose of such investment;
(d) Is not liable in any manner or for any reason for making, retaining
or disposing of any investment pursuant to the written direction of the
Named Fiduciary. Furthermore, the Employer agrees to indemnify and to
hold IDS Financial Services Inc. or its affiliate harmless from any
damages, costs or expenses, including reasonable counsel fees, which it
may incur as a result of any claim
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asserted against it as Custodian/Trustee or the Trust arising out of
compliance with any written direction of the Named Fiduciary.
[E] PARTICIPANT LOANS. If elected in Section 9.04 of the Employer's Adoption
Agreement, this Section 10.03[E] specifically authorizes the
Custodian/Trustee to make loans on a nondiscriminatory basis to a Participant
in accordance with the loan policy established by the Advisory Committee,
provided: (1) the loan policy satisfies the requirements of Section 9.04; (2)
loans are available to all Participants and Beneficiaries on a reasonably
equivalent basis and are not available in a greater amount for Highly
Compensated Employees than for other Employees; (3) any loan is adequately
secured and bears a reasonable rate of interest; (4) the loan provides for
repayment within a specified time; (5) the default provisions of the note
prohibit offset of the Participant's Nonforfeitable Accrued Benefit prior to
the time the Trustee otherwise would distribute the Participant's
Nonforfeitable Accrued Benefit; (6) the amount of the loan does not exceed
(at the time the Plan extends the loan) the present value of the
Participant's Nonforfeitable Accrued Benefit; and (7) the loan otherwise
conforms to the exemption provided by Code Section 4975(d)(1). The Advisory
Committee is solely responsible for determining whether a loan should be
made. The Custodian/Trustee will make a loan only upon direction of the
Advisory Committee. If the joint and survivor requirements of Article VI
apply to the Participant, the Participant may not pledge any portion of his
Accrued Benefit as security for a loan made after August 18, 1985, unless,
within the 90 day period ending on the date the pledge becomes effective, the
Participant's spouse, if any, consents (in a manner described in Section 6.05
other than the requirement relating to the consent of a subsequent spouse) to
the security or, by separate consent, to an increase in the amount of
security. If the Employer is an unincorporated trade or business, a
Participant who is an Owner-Employee many not receive a loan from the Plan,
unless he has obtained a prohibited transaction exemption from the Department
of Labor. If the Employer is an "S Corporation," a Participant who is a
shareholder-employee (an employee or an officer) who, at any time during the
Employer's taxable year, owns more than 5%, either directly or by attribution
under Code Section 318(a)(1), of the Employer's outstanding stock may not
receive a loan from the Plan, unless he has obtained a prohibited transaction
exemption from the Department of Labor. If the Employer is not an
unincorporated trade or business nor an "S Corporation," this Section 10.03[E]
does not impose any restrictions on the class of Participants eligible for a
loan from the Plan.
[F] INVESTMENT IN QUALIFYING EMPLOYER SECURITIES AND QUALIFYING EMPLOYER REAL
PROPERTY. The investment options in this Section 10.03[F] include the ability
to invest in qualifying Employer securities or qualifying Employer real
property, as defined in and as limited by ERISA. If the Employer's Plan is a
Nonstandardized profit sharing plan, it may elect in its Adoption Agreement
to permit the aggregate investments in qualifying Employer securities and in
qualifying Employer real property to exceed 10% of the value of Plan assets.
[G] CUSTODIAL ACCOUNT "A".
A. (1) The amounts credited to the Participants' separate accounts created under
Custodial Account "A," including all income thereon, shall be used, in
accordance with the directions received from Plan Administrator or
Participant, for the purchase of investments which are accessible through
IDS Financial Corporation ("IDS") or its affiliates in the regular course
of business. The Custodian may accept investment instructions transmitted
through Securities Services of IDS.
(2) Investments available through IDS or its affiliates include, but are not
limited to face amount certificates, as defined in the Investment Company
Act of 1940, full or fractional shares of stock in one or more regulated
investment companies, as defined in the Internal Revenue Code, or any
other securities or investments distributed by IDS or its affiliates or
through brokerage accounts established through Securities Services of
IDS, property of any character, real or personal, foreign or domestic,
including, but without limitation on the generality of the foregoing,
stocks including shares of open-end investment companies (mutual funds),
bonds, notes, debentures, face amount certificates, common or collective
trust funds (including common or collective trust funds maintained by
affiliates of IDS Financial Corporation), limited partnership interests,
mortgages, real estate or any interests therein, unit investment trusts.
(3) No amount shall be invested in shares of stock of the Employer or its
affiliates, if any, or in shares of American Express Company to the
extent such investment would constitute a "prohibited transaction" under
Section 406 of ERISA or Code Section 4975.
(4) No amounts shall be invested in "collectibles" (that is, any work of art,
rug or antique, metal or gem, stamp or coin, alcoholic beverage or any
similar tangible personal property which has been designated as an
impermissible investment by the Secretary of the Treasury).
(5) No amounts may be invested in margins, options or futures.
B. (1) Cash balances, including dividends received in cash, held in a brokerage
account maintained by Securities Services of IDS for the benefit of the
Participant will be credited with the 90-day Treasury Bill rate while
held in the brokerage account. Any cash balances in the brokerage account
exceeding $100 will be transferred monthly into an account invested in
shares of IDS Cash Management Fund, Inc. established by Custodian on the
Participant's behalf.
(2) Amounts credited hereunder on behalf of Participants for whom no
brokerage accounts are maintained, or any portion thereof, plus income
thereon, may be deposited by Custodian in a bank, in either a checking or
savings account, while accumulating sufficient funds to make additional
investments or to pay or provide for the payment of expenses incurred by
or on behalf of the Plan or the Custodial Accounts created hereunder.
Custodian shall not, however, be required to hold at interest any cash
balances maintained in any account established under the Plan.
(3) For purposes of this Section 10.03[G], income on amounts credited shall
include, but is not limited to, interest on cash balances, capital gains
realized, on sale of stock, ordinary dividends, capital gain dividends
received in connection with stock, and refunds allowed for tax deemed
paid on undistributed capital gains of a regulated investment company.
C. The record ownership of all shares of stock, certificates, securities or
other investments shall be registered in the name of Custodian, or in the
name of its nominee. The beneficial owner of each such investment shall be
the Participant on whose behalf such investment was purchased. Shares of
stock shall be voted in accordance with the written instructions of the
Advisory Committee or Investment Manager (if any). For this purpose,
Custodian or its agent will transmit all notices and proxy material to the
Named Fiduciary without indicating the manner in which such shares shall be
voted.
D. (1) Whenever a common or collective trust fund is made available as an
investment option pursuant to Section 10.03[A], the Advisory Committee
shall, prior to allowing the actual transfer of Plan assets to such fund,
appoint as an Investment Manager of the Plan assets to be so transferred,
the bank or corporate trust company which maintains the common or
collective trust fund. The Investment Manager shall have exclusive
control over the investment of the Plan assets with respect to which such
Manager has been appointed.
(2) The Advisory Committee may terminate the services of an Investment
Manager upon no more than sixty (60) days' written notice.
(3) An Investment Manager is any person, firm, or corporation who is a
registered investment adviser under the Investment Advisers Act of 1940,
a bank or insurance company, and (i) who has power to manage, acquire, or
dispose of Plan assets, and (ii) who acknowledges in writing his
fiduciary responsibility to the Plan.
[H] CUSTODIAL ACCOUNT "B".
A. The amounts credited to the Participants' separate Accounts created under
Custodial Account "B", including all income thereon if any, shall be used
solely for the purchase of fixed, variable or combination annuities,
endowment contracts or life insurance contracts or deposit administration
annuity contracts (including annuities and insurance Policies or Contracts
issued by affiliates of IDS Financial Corporation) except that such amounts
or any portion thereof, plus income thereon, may be deposited by Custodian in
a bank, in either a checking or savings account, while
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accumulating sufficient funds to make additional purchases or payments.
Custodian shall not, however, be required to hold at interest any cash
balances maintained in any account established under the Plan. If at any
time there is an amount held under Custodial Account "B" which is in excess
of that necessary to purchase annuity, endowment or life insurance Contracts
or Policies, the Custodian may, in its discretion, allocate such amount to
Custodial Account "A" and invest such amount as directed by the Advisory
Committee. No insurance Contract or Policy may be purchased which conflicts
with the terms of this Plan.
B. If the Participant or Advisory Committee elects, as provided in the Plan, to
have all or a portion of the contributions to be made under the Plan paid to
Custodial Account "B", and if in any year the amount provided for under
Section 10.03[B] is not adequate, or the Employer fails, for whatever reason
to make a contribution that is adequate to provide funds to make the
payments required by the endowment and insurance Contracts or Policies held
under Custodial Account "B", then upon written directions from the Advisory
Committee the Custodian shall redeem or liquidate a sufficient amount of the
assets held under Custodial Account "A" and/or of the annuities or Contracts
held under Custodial Account "B" to provide the necessary funds. It shall be
the responsibility of the Advisory Committee to assure that such redemption
or liquidation does not cause a violation of Section 10.03[C](a). Custodian
shall use the necessary funds to make the payments required under Custodial
Account "B."
[I] PROXIES AND OTHER INCIDENTS OF OWNERSHIP.
(1) The Custodian/Trustee shall deliver or cause to be executed and delivered,
to the Named Fiduciary, all notices, prospectuses, finance statements,
proxies and proxy soliciting materials relating to investments held
hereunder. The Custodian/Trustee shall not vote any proxy or tender offer
election, participate in any voting trust, exercise any options or
subscription right or join in, dissent from or oppose any merger,
reorganization, consolidation, liquidation or sale with respect to any asset
held hereunder except in accordance with the timely written instructions of
the Named Fiduciary. If no such written instructions are received, such
proxies, elections and voting trust votes shall not be voted; such options
or subscription rights shall not be exercised; and such mergers,
reorganizations, consolidations, liquidations or sales shall not be joined,
dissented from or opposed.
(2) The Named Fiduciary may assign to the Participants the right to vote proxies
or exercise other rights of ownership with respect to any asset held
hereunder. To the extent the right to vote or other incidents of ownership
are vested in whole or in part in the Participants; the Custodian/Trustee
shall act in this regard only in accordance to the timely written
instructions received from the Participants. Solely for this purpose each
Participant shall act as the Named Fiduciary in providing direction to the
Custodian/Trustee. To the extent practicable, all unallocated assets or
investments held hereunder, and all assets or investments for which the
Custodian/Trustee has not received instructions, shall, solely for the
purposes of this Section 10.03[I], be allocated to the account of each
Participant who has issued instructions to the Custodian/Trustee, in the
same proportion as such Participant's allocated proportion of assets or
investments bear to the aggregate of all like assets or investments for
which instructions have been issued by the Participant as Named Fiduciary
to the Custodian/Trustee.
10.04 RECORDS AND STATEMENTS.
The records of the Custodian/Trustee pertaining to the Plan must be open to
the inspection of the Plan Administrator, the Advisory Committee and the
Employer at all reasonable times and may be audited from time to time by any
person or persons as the Employer, Plan Administrator or Advisory Committee
may specify in writing. The Custodian/Trustee must furnish the Plan
Administrator or Advisory Committee with whatever information relating to the
Trust Fund the Plan Administrator or Advisory Committee considers necessary.
10.05 FEES AND EXPENSES FROM FUND.
The Custodian/Trustee will receive reasonable annual compensation as may be
agreed upon from time to time between the Employer and the Custodian/Trustee.
The Custodian/Trustee will pay all fees and expenses reasonably incurred by
it in its administration of the Plan from the Trust Fund, unless the Employer
pays the fees and expenses. The Advisory Committee will not treat any fee or
expense paid, directly or indirectly, by the Employer as an Employer
contribution, provided the fee or expense relates to the ordinary and
necessary administration of the Fund. No person who is receiving full pay
from the Employer may receive compensation for services as Custodian/Trustee.
10.06 PARTIES TO LITIGATION.
Except as otherwise provided by ERISA, only the Employer, the Plan
Administrator, the Advisory Committee, and the Custodian/Trustee are
necessary parties to any court proceeding involving the Custodian/Trustee or
the Trust Fund. No Participant, or Beneficiary, is entitled to any notice of
process unless required by ERISA. Any final judgment entered in any
proceeding will be conclusive upon the Employer, the Plan Administrator, the
Advisory Committee, the Custodian/Trustee, Participants and Beneficiaries.
10.07 PROFESSIONAL AGENTS.
The Custodian/Trustee may employ and pay from the Trust Fund reasonable
compensation to agents, attorneys, accountants and other persons to advise
the Custodian/Trustee as in its opinion may be necessary. The
Custodian/Trustee may delegate to any agent, attorney, accountant or other
person selected by it any non-Custodian/non-Trustee power or duty vested in
it by the Plan, and the Custodian/Trustee may act or refrain from acting on
the advice or opinion of any agent, attorney, accountant or other person so
selected.
10.08 DISTRIBUTION OF CASH OR PROPERTY.
The Custodian/Trustee may make distribution under the Plan in cash or
property, or partly in each, at its fair market value as determined by the
Custodian/Trustee. For purposes of a distribution to a Participant or to a
Participant's designated Beneficiary or surviving spouse, "property" includes
a Nontransferable Annuity Contract, provided the contract satisfies the
requirements of this Plan.
10.09 DISTRIBUTION DIRECTIONS.
If no one claims a payment or distribution made from the Trust, the
Custodian/Trustee must promptly notify the Advisory Committee and then
dispose of the payment in accordance with the subsequent direction of the
Advisory Committee.
10.10 THIRD PARTY.
No person dealing with the Custodian/Trustee is obligated to see to the
proper application of any money paid or property delivered to the
Custodian/Trustee, or to inquire whether the Custodian/Trustee has acted
pursuant to any of the terms of the Plan. Each person dealing with the
Custodian/Trustee may act upon any notice, request or representation in
writing by the Custodian/Trustee, or by the Custodian/Trustee's duly
authorized agent, and is not liable to any person in so acting. The
certificate of the Custodian/Trustee that it is acting in accordance with the
Plan will be conclusive in favor of any person relying on the certificate. If
more than two persons act as Trustee, a decision of the majority of such
persons controls with respect to any decision regarding the administration or
investment of the Trust Fund.
10.11 RESIGNATION.
The Custodian/Trustee may resign at any time as Custodian/Trustee of the Plan
by giving 30 days' written notice in advance to the Employer and to the
Advisory Committee. If the Employer fails to appoint a successor
Custodian/Trustee within 60 days of its receipt of the Custodian/Trustee's
written notice of resignation, the Custodian/Trustee will treat the Employer
as having appointed itself as Custodian/Trustee and as having filed its
acceptance of appointment with the former Custodian/Trustee.
10.12 REMOVAL.
The Employer, by giving 30 days' written notice in advance to the
Custodian/Trustee, may remove any Custodian/Trustee, in the event of the
resignation or removal of a Custodian/Trustee, the Employer must appoint a
successor Custodian/Trustee if it intends to continue the Plan. See Section
12.08. If two or more persons hold the position of Trustee, in the event of
the removal of one such person, during any period the selection of a
replacement is pending, or during any period such person is unable to serve
for any reason, the remaining person or persons will act as the Trustee.
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10.13 INTERIM DUTIES AND SUCCESSOR CUSTODIAN/TRUSTEE.
Each successor Custodian/Trustee succeeds to the title to the Trust vested in
his predecessor by accepting in writing his appointment as successor.
Custodian/Trustee and by filing the acceptance with the former
Custodian/Trustee and the Advisory Committee without the signing or filing of
any further statement. The resigning or removed Custodian/Trustee, upon
receipt of acceptance in writing of the Trust by the successor
Custodian/Trustee, must execute all documents and do all acts necessary to
vest the title of record in any successor Custodian/Trustee. Each successor
Custodian/Trustee has and enjoys all of the powers, both discretionary and
ministerial, conferred under this Agreement upon his predecessor. A successor
Custodian/Trustee is not personally liable for any act or failure to act of
any predecessor Custodian/Trustee, except as required under ERISA. With the
approval of the Employer and the Advisory Committee, a successor
Custodian/Trustee, with respect to the Plan, may accept the account rendered
and the property delivered to it by a predecessor Custodian/Trustee without
incurring any liability or responsibility for so doing.
10.14 VALUATION OF TRUST.
The Custodian/Trustee must value the Trust Fund as of each Accounting Date to
determine the fair market value of each Participant's Accrued Benefit in the
Trust. The Custodian/Trustee also must value the Trust Fund on such other
dates as directed in writing by the Advisory Committee.
10.15 LIMITATION ON LIABILITY -- IF INVESTMENT MANAGER APPOINTED.
The Custodian/Trustee is not liable for the acts or omissions of any
Investment Manager or Managers the Advisory Committee may appoint, nor is the
Custodian/Trustee under any obligation to invest or otherwise manage any
asset of the Plan which is subject to the management of a properly appointed
Investment Manager. The Advisory Committee, the Custodian/Trustee and any
properly appointed Investment Manager may execute a letter agreement as a
part of this Plan delineating the duties, responsibilities and liabilities of
the Investment Manager with respect to any part of the Trust Fund under the
control of the Investment Manager.
10.16 INVESTMENT IN GROUP TRUST FUND.
The Employer, by adopting this Plan, specifically authorizes the
Custodian/Trustee to invest all or any portion of the assets comprising the
Trust Fund in any group or collective trust fund, including any collateral
investment fund maintained by an affiliate of IDS Financial Services Inc.,
which at time of the investment provides for the pooling of the assets of
plans qualified under Code Section 401(a). This authorization applies solely
to a group trust fund exempt from taxation under Code Section 501(a) and the
trust agreement of which satisfies the requirements of Revenue Ruling 81-100.
The provisions of the group trust fund agreement, as amended from time to
time, are by this reference incorporated within this Plan and Trust. The
provisions of the group trust fund will govern any investment of Plan assets
in that fund. The Employer must specify in an attachment to its adoption
agreement the group trust fund(s) to which this authorization applies. If the
Custodian/Trustee is acting as Custodian, the investment in the group trust
fund is available only in accordance with a proper direction, by the Named
Fiduciary, in accordance with Section 10.03[B]. Pursuant to paragraph (b) of
Section 10.03[A] of the Plan, a Trustee has the authority to invest in
certain common trust funds described in Code Section 584 without the need for
the authorizing addendum described in this Section 10.16.
Furthermore, at the Employer's direction, the Custodian/Trustee, for
collective investment purposes, may combine into one trust fund the Trust
created under this Plan with the Trust created under any other qualified
retirement plan the Employer maintains. However, the Custodian/Trustee must
maintain separate records of account for the assets of each Trust in order to
reflect properly each Participant's Accrued Benefit under the plan(s) in
which he is a Participant.
ARTICLE XI PROVISIONS RELATING TO INSURANCE AND INSURANCE COMPANY
11.01 INSURANCE BENEFIT.
The Employer may elect to provide incidental life insurance benefits for
insurable Participants who consent to life insurance benefits by signing the
appropriate insurance company application form. The Advisory Committee shall
not direct the Custodian/Trustee to purchase any incidental life insurance
benefit for any Participant prior to the Accounting Date as of which the
Advisory Committee first makes an Employer contribution allocation to the
Participant's Account. At an insured Participant's written direction, the
Advisory Committee will use all or any portion of the Participant's
nondeductible voluntary contributions, if any, to pay insurance premiums
covering the Participant's life.
The Employer will direct the Custodian/Trustee as to the insurance company
and insurance agent through which the Custodian/Trustee is to purchase the
insurance contracts, the amount of the coverage and the applicable dividend
plan. Each application for a policy, and the policies themselves, must
designate the Custodian/Trustee as sole owner, with the right reserved to the
Custodian/Trustee to exercise any right or option contained in the policies,
subject to the terms and provisions of this Agreement. The Custodian/Trustee
must be the named beneficiary for the Account of the insured Participant.
Proceeds of insurance contracts paid to the Participant's Account under this
Article XI are subject to the distribution requirements of Article V and of
Article VI. The Custodian/Trustee will not retain any such proceeds for the
benefit of the Trust.
The Custodian/Trustee will charge the premiums on any incidental benefit
insurance contract covering the life of a Participant against the Account of
that Participant. The Custodian/Trustee will hold all incidental benefit
insurance contracts issued under the Plan as assets of the Trustee created
under the Plan.
INCIDENTAL INSURANCE BENEFITS. The aggregate of life insurance premiums paid
for the benefit of a Participant, at all times, may not exceed the following
percentages of the aggregate of the Employer's contributions allocated to any
Participant's Account: (i) 49% in the case of the purchase of ordinary life
insurance contracts; or (ii) 25% in the case of the purchase of term life
insurance contracts. If the Custodian/Trustee purchases a combination of
ordinary life insurance contract(s) and term life insurance contract(s), then
the sum of one-half of the premiums paid for the ordinary life insurance
contract(s) and the premiums paid for the term life insurance contract(s) may
not exceed 25% of the Employer contributions allocated to any Participant's
Account.
EXCEPTION FOR CERTAIN PROFIT SHARING PLANS. If the Employer's Plan is a
profit sharing plan and an election is offered, the Employer may elect in
Adoption Agreement Section 11.01 to exempt the Plan from the incidental
insurance benefits requirement. Under this exemption election, the Plan
permits the purchase of life insurance benefits only from Employer
contributions accumulated in the Participant's Account for at least two years
(measured from the allocation date).
11.02 LIMITATION ON LIFE INSURANCE PROTECTION.
The Custodian/Trustee will not continue any life insurance protection for any
Participant beyond the latest of his termination of employment, his attaining
Normal Retirement Age, or notification from the Advisory Committee of his
termination of employment. If the Custodian/Trustee holds any incidental
benefit insurance contract(s) on the life of a Participant when he terminates
his employment (other than by reason of death), upon direction of the
Advisory Committee the Custodian/Trustee must proceed as follows:
A. If the entire cash value of the contract(s) is vested in the terminating
Participant, or if the contract(s) will have no cash value at the end of the
policy year in which termination of employment occurs, the Custodian/Trustee
will transfer the contract(s) to the Participant endorsed so as to vest in
the transferee all right, title and interest to the contract(s), free and
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clear of the Trust: subject however, to restrictions as to surrender or
payment of benefits as the issuing insurance company may permit and as the
Advisory Committee directs;
B. If only part of the cash value of the contract(s) is vested in the
terminating Participant, the Custodian/Trustee to the extent the
Participant's interest in the cash value of the contract(s) is not vested,
may adjust the Participant's interest in the value of his Account
attributable to Trust assets other than incidental benefit insurance
contracts and proceed as in (a), or the Custodian/Trustee must effect a
loan from the issuing insurance company on the sole security of the
contract(s) for an amount equal to the difference between the cash value
of the contract(s) at the end of the policy year in which termination of
employment occurs and the amount of the cash value that is vested in the
terminating Participant, and the Custodian/Trustee must transfer the
contract(s) endorsed so as to vest in the transferee all right, title and
interest to the contract(s), free and clear of the Trust; subject however,
to the restrictions as to surrender or payment of benefits as the issuing
insurance company may permit and the Advisory Committee directs;
C. If no part of the cash value of the contract(s) is vested in the terminating
Participant, the Custodian/Trustee must surrender the contract(s) for cash
proceeds as may be available.
In accordance with the written direction of the Advisory Committee, the
Custodian/Trustee will make any transfer of contract(s) under this Section
11.02 on the Participant's annuity starting date (or as soon as
administratively practicable after that date). The Custodian/Trustee may not
transfer any contract under this Section 11.02 which contains a method of
payment not specifically authorized by Article VI or which fails to comply
with the joint and survivor annuity requirements, if applicable, of Article
VI. In this regard, the Custodian/Trustee either must convert such a contract
to cash and distribute the cash instead of the contract, or before making the
transfer, require the issuing company to delete the unauthorized method of
payment option from the contract.
11.03 DEFINITIONS.
For purposes of this Article XI:
A. "Policy" means an ordinary life insurance contract or a term life insurance
contract issued by an insurer on the life of a Participant.
B. "Issuing insurance company" is any life insurance company which has issued a
policy upon application by the Custodian/Trustee under the terms of this
Agreement.
C. "Contract" or "Contracts means a policy of insurance. In the event of any
conflict between the provisions of this Plan and the terms of any contract or
policy of insurance issued in accordance with this Article XI, the provisions
of the Plan control.
D. "Insurable Participant" means a Participant to whom an insurance company,
upon an application being submitted in accordance with the Plan, will issue
insurance coverage, either as a standard risk or as a risk in an extra
mortality classification.
E. "Term life insurance contract" includes, in addition to a traditional term
life insurance contract, a universal life insurance contract and any other
life insurance contract which is not an ordinary life insurance contract.
11.04 DIVIDEND PLAN.
The dividend plan is premium reduction unless the Advisory Committee directs
the Custodian/Trustee to the contrary. The Custodian/Trustee must use all
premiums for a contract to purchase insurance benefits or additional
insurance benefits for the Participant on whose life the insurance company
has issued the contract. Furthermore, the Custodian/Trustee must arrange,
where possible, for all policies issued on the lives of Participants under
the Plan to have the same premium due date and all ordinary life insurance
contracts to contain guaranteed cash includes policy dividends, refunds of
premiums and other credits.
11.05 INSURANCE COMPANY NOT A PARTY TO AGREEMENT.
No insurance company, solely in its capacity as an issuing insurance company,
is a party to this Agreement nor is the company responsible for its validity.
11.06 INSURANCE COMPANY NOT RESPONSIBLE FOR CUSTODIAN/TRUSTEE'S ACTIONS.
No insurance company, solely in its capacity as an issuing insurance company,
need examine the terms of this Agreement nor is responsible for any action
taken by the Custodian/Trustee.
11.07 INSURANCE COMPANY RELIANCE ON CUSTODIAN/TRUSTEE'S SIGNATURE.
For the purpose of making application to an insurance company and in the
exercise of any right or option contained in any policy, the insurance
company may rely upon the signature of the Custodian/Trustee and is saved
harmless and completely discharged in acting at the direction and
authorization of the Custodian/Trustee.
11.08 ACQUITTANCE. An insurance company is discharged from all liability for
any amount paid to the Custodian/Trustee or paid in accordance with the
direction of the Custodian/Trustee, and is not obliged to see to the
distribution or further application of any moneys it so pays.
11.09 DUTIES OF INSURANCE COMPANY.
Each insurance company must keep such records, make such identification of
contracts, funds and accounts within funds, and supply such information as
may be necessary for the proper administration of the Plan under which it is
carrying insurance benefits.
[NOTE: THE PROVISIONS OF THSIS ARTICLE XI ARE NOT APPLICABLE, AND THE PLAN MAY
NOT INVEST IN INSURANCE CONTRACTS, IF A CUSTODIAN SIGNATORY TO THE ADOPTION
AGREEMENT IS A BANK WHICH HAS NOT ACQUIRED TRUST POWERS FROM ITS GOVERNING STATE
BANKING AUTHORITY.]
ARTICLE XII MISCELLANEOUS
12.01 EVIDENCE.
Anyone required to give evidence under the terms of the Plan may do so by
certificate, affidavit, document or other information which the person to act
in reliance may consider pertinent, reliable and genuine, and to have been
signed, made or presented by the proper party or parties. Both the Advisory
Committee and the Custodian/Trustee are fully protected in acting and relying
upon any evidence described under the immediately preceding sentence.
12.02 NO RESPONSIBILITY FOR EMPLOYER ACTION.
Neither the Custodian/Trustee nor the Advisory nor the Advisory Committee has
any obligation or responsibility with respect to any action required by the
Plan to be taken by the Employer, any Participant or eligible Employee, or
for the failure of any of the above persons to act or make any payment or
contribution, or to otherwise provide any benefit contemplated under this
Plan. Furthermore, the Plan does not require the Custodian/Trustee or the
Advisory Committee to collect any contribution required under the Plan, or to
determine the correctness of the amount of any Employer contribution. Neither
the Custodian/Trustee nor the Advisory Committee need inquire into or be
responsible for any action or failure to act on the part of the others. Any
action required of a corporate Employer must be by its Board of Directors or
its designate.
12.03 FIDUCIARIES NOT INSURERS.
The Custodian/Trustee, the Advisory Committee, the Plan Administrator and the
Employer in no way guarantee the Trust Fund from loss or depreciation. The
Employer does not guarantee the payment of any money which may be or becomes
due to any person from the Trust Fund. The liability of the Advisory
Committee and the Custodian/Trustee to make any payment from the Trust Fund
at any time and all times is limited to the then available assets of the
Trust.
12.04 WAIVER OF NOTICE.
Any person entitled to notice under the Plan may waive the notice.
12.05 SUCCESSORS.
The Plan is binding upon all persons entitled to benefits under the Plan,
their respective heirs and legal representatives, upon the Employer, its
successors and assigns, and upon the Custodian/Trustee, the Advisory
Committee, the Plan Administrator and their successors.
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12.06 WORD USAGE.
Words used in the masculine also apply to the feminine where applicable, and
wherever the context of the Employer's Plan dictates, the plural includes the
singular and the singular includes the plural.
12.07 STATE LAW.
The law of the state of the Prototype Plan Sponsor's principal place of
business will determine all questions arising with respect to the provisions
of this Agreement except to the extent Federal statute supersedes that State
law.
12.08 EMPLOYER'S RIGHT TO PARTICIPATE.
If the Employer fails to obtain initial qualification of this Plan or fails
to maintain qualification of its Plan or makes any amendment or modification
to a provision of this Plan (other than a proper completion of an elective
provision under the Adoption Agreement), the Employer may no longer
participate under this Prototype Plan. The Employer also may not participate
(or continue to participate) in this Prototype Plan if the Custodian/Trustee
(or a change in the Custodian/Trustee) does not satisfy the requirements of
Section 1.02 of the Plan. If the Employer is not entitled to participate
under this Prototype Plan, the Employer's Plan is an individually-designed
plan and the reliance procedures specified in the Adoption Agreement no
longer will apply.
12.09 EMPLOYMENT NOT GUARANTEED.
Nothing contained in this Plan, or with respect to the establishment of the
Trust, or any modification or amendment to the Plan or Trust, or in the
creation of any Account, or the payment of any benefit, gives any Employee,
Employee-Participant or any Beneficiary any right to continue employment, any
legal or equitable right against the Employer, or Employee of the Employer,
or against the Custodian/Trustee, or its agents or employees, or against the,
except as expressly provided by the Plan, the Trust, ERISA or by a separate
agreement.
ARTICLE XIII EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION
13.01 EXCLUSIVE BENEFIT.
Except as provided under Article III, the Employer has no beneficial interest
in any asset of the Trust and no part of any asset in the Trust may ever
revert to or be repaid to an Employer, either directly or indirectly; nor,
prior to the satisfaction of all liabilities with respect to the Participants
and their Beneficiaries under the Plan, may any part of the corpus or income
of the Trust Fund, or any asset of the Trust, be (at any time) used for, or
diverted to, purposes other than the exclusive benefit of the Participants or
their Beneficiaries. However, if the Commissioner of Internal Revenue, upon
the Employer's request for initial approval of this Plan, determines the
Trust created under the Plan is not a qualified trust exempt from Federal
income tax, then (and only then) the Custodian/Trustee, upon written notice
from the Employer, will return the Employer's contributions (and increment
attributable to the contributions) to the Employer. The Custodian/Trustee
must make the return of the Employer contribution under this Section 13.01
within one year of a final disposition of the Employer's request for initial
approval of the Plan. The Employer's Plan and Trust will terminate upon the
Custodian/Trustee's return of the Employer's contributions.
13.02 AMENDMENT BY EMPLOYER.
The Employer has the right at any time and from time to time:
A. To amend the elective provisions of the Adoption Agreement in any manner it
deems necessary or advisable in order to qualify (or maintain qualification
of) this Plan and the Trust created under it under the provisions of Code
Section 401(a); and
B. To amend this Agreement in any other manner.
No amendment may authorize or permit any of the Trust Fund (other than the
part which is required to pay taxes and administration expenses) to be used
for or diverted to purposes other than for the exclusive benefit of the
Participants or their Beneficiaries or estates. No amendment may cause or
permit any portion of the Trust Fund to revert to or become a property of the
Employer. The Employer also may not make any amendment which affects the
rights, duties or responsibilities of the Custodian/Trustee, the Plan
Administrator or the Advisory Committee without the written consent of the
affected Custodian/Trustee, the Plan Administrator or the affected member of
the Advisory Committee.
CODE SECTION 411(d)(6) PROTECTED BENEFITS. An amendment (including the
adoption of this Plan as a restatement of an existing plan) may not decrease
a Participant's Accrued Benefit, except to the extent permitted under Code
Section 412(c)(8), and may not reduce or eliminate Code Section 411(d)(6)
protected benefits determined immediately prior to the adoption date (or, if
later, the effective date) of the amendment. An amendment reduces or
eliminates Code Section 411(d)(6) protected benefits if the amendment has the
effect of either (1) eliminating or reducing an early retirement benefit or a
retirement-type subsidy (as defined in Treasury regulations), or (2) except
as provided by Treasury regulations, eliminating an optional form of benefit.
The Advisory Committee must disregard an amendment to the extent application
of the amendment would fail to satisfy this paragraph. If the Advisory
Committee must disregard an amendment because the amendment would violate
clause (1) or clause (2), the Advisory Committee must maintain a schedule of
the early retirement option or other optional forms of benefit the Plan must
continue for the affected Participants.
The Employer must make all amendments in writing. Each amendment must state
the date to which it is either retroactively or prospectively effective. See
Section 12.08 for the effect of certain amendments adopted by the Employer.
13.03 AMENDMENT BY PROTOTYPE PLAN SPONSOR.
The Prototype Plan Sponsor without the Employer's consent, may amend the Plan
and Trust, from time to time, in order to conform the Plan and Trust to any
requirement for qualification of the Plan and Trust under the Internal
Revenue Code. The Prototype Plan Sponsor may not amend the Plan in any manner
which would modify any election made by the Employer under the Plan without
the Employer's written consent. Furthermore, the Prototype Plan Sponsor may
not amend the Plan in any manner which would violate the proscription of
Section 13.02(C). A Custodian/Trustee, other than the Prototype Plan Sponsor,
will not have the power to amend the Plan or Trust. For purposes of Prototype
Plan Sponsor amendments, the mass submitter shall be recognized as the agent
of the Prototype Plan Sponsor. If the Prototype Plan Sponsor does not adopt
the amendments made by the mass submitter, it will no longer be identical to
or a minor modifier of the mass submitter plan.
13.04 DISCONTINUANCE.
The Employer has the right, at any time, to suspend or discontinue its
contributions under the Plan, and to terminate, at any time, this Plan and
the Trust created under this Agreement. The Plan will terminate upon the
first to occur of the following:
A. The date terminated by action of the Employer; or
B. The dissolution, merger, consolidation or reorganization of the Employer or
the sale by the Employer of all or substantially all of its assets, unless
the successor or purchaser makes provision to continue the Plan, in which
event the successor or purchaser must substitute itself as the Employer
under this Plan.
13.05 FULL VESTING ON TERMINATION.
Upon either full or partial termination of the Plan, or, if applicable, upon
complete discontinuance of profit sharing plan contributions to the Plan, an
affected Participant's right to his Accrued Benefit is 100% Nonforfeitable,
irrespective of the Nonforfeitable percentage which otherwise would apply
under Article V.
13.06 MERGER/DIRECT TRANSFER.
The Advisory Committee may not consent to, or be a party to, any merger or
consolidation with another plan, or to a transfer of assets or liabilities to
another plan, unless immediately after the merger, consolidation or transfer,
the surviving Plan provides each Participant a benefit equal to or greater
than the benefit each Participant would have received had the Plan terminated
immediately before the merger or consolidation or transfer. The Advisory
Committee possesses the specific authority to enter into merger agreements or
direct transfer of assets agreements with the trustees of other retirement
plans described in Code Section 401(a), including an elective transfer, and
to accept the direct transfer of plan assets, or to transfer plan assets, as
a party to any such agreement.
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The Advisory Committee may accept a direct transfer of plan assets on behalf
of an Employee prior to the date the Employee satisfies the Plan's
eligibility conditions. If the Advisory Committee accepts such a direct
transfer of plan assets, the Advisory Committee and Custodian/Trustee must
treat the Employee as a Participant for all purposes of the Plan except the
Employee is not a Participant for purposes of sharing in Employer
contributions or Participant forfeitures under the Plan until he actually
becomes a Participant in the Plan.
The Advisory Committee, after August 9, 1988, may not consent to, or be a
party to a merger, consolidation or transfer of assets with a defined benefit
plan, except with respect to an elective transfer. The Custodian/Trustee will
hold, administer and distribute the transferred assets as a part of the Trust
Fund and the Custodian/Trustee must maintain a separate Employer contribution
Account for the benefit of the Employee on whose behalf the Advisory
Committee accepted the transfer in order to reflect the value of the
transferred assets. Unless a transfer of assets to this Plan is an elective
transfer, the Plan will preserve all Code Section 411(d)(6) protected
benefits with respect to those transferred assets, in the manner described in
Section 13.02. A transfer is an elective transfer if: (1) the transfer
satisfies the first paragraph of this Section 13.06; (2) the transfer is
voluntary, under a fully informed election by the Participant: (3) the
Participant has an alternative that retains his Code Section 411(d)(6)
protected benefits (including an option to leave his benefit in the
transferor plan, if that plan is not terminating); (4) the transfer satisfies
the applicable spousal consent requirements of the Code; (5) the transferor
plan satisfies the joint and survivor notice requirements of the Code, if the
Participant's transferred benefit is subject to those requirements; (6) the
Participant has a right to immediate distribution from the transferor plan,
in lieu of the elective transfer, (7) the transferred benefit is at least the
greater of the single sum distribution provided by the transferor plan for
which the Participant is eligible or the present value of the Participant's
accrued benefit under the transfer or plan payable at that plan's normal
retirement age; (8) the Participant has a 100% Nonforfeitable interest in the
transferred benefit; and (9) the transfer otherwise satisfies applicable
Treasury regulations. An elective transfer may occur between qualified plans
of any type. any direct transfer of assets from a defined benefit plan after
August 9, 1988, which is not an elective transfer will render the Employer's
Plan individually-designed. See Section 12.08.
DISTRIBUTION RESTRICTIONS UNDER CODE SECTION 401(k). If the Plan receives a
direct transfer (by merger or otherwise) of elective contributions (or
amounts treated as elective contributions) under a Plan with a Code Section
401(k) arrangement, the distribution restrictions of Code Sections 401(k)(2)
and (10) continue to apply to those transferred elective contributions.
13.07 TERMINATION.
PROCEDURE. Upon termination of the Plan, the distribution provisions of
Article VI remain operative, with the following exceptions:
(1) if the present value of the Participant's Nonforfeitable Accrued Benefit
does not exceed $3,500, the Advisory Committee will direct the Custodian/
Trustee to distribute the Participant's Nonforfeitable Accrued Benefit to
him in lump sum as soon as administratively practicable after the Plan
terminates; and
(2) if the present value of the Participant's Nonforfeitable Accrued Benefit
exceeds $3,500, the Participant or the Beneficiary, in addition to the
distribution events permitted under Article VI, may elect to have the
Advisory Committee commence distribution of his Nonforfeitable Accrued
Benefit as soon as administratively practicable after the Plan terminates.
To liquidate the Trust, the Advisory Committee will purchase a deferred annuity
contract for each Participant which protects the Participant's distribution
rights under the Plan, if the Participant's Nonforfeitable Accrued Benefit
exceeds $3,500 and the Participant does not elect an immediate distribution
pursuant to Paragraph(2).
If the Employer's Plan is a profit sharing plan, in lieu of the preceding
provisions of this Section 13.07 and the distribution provisions of Article
VI, the Advisory Committee will direct the Trustee to distribute each
Participant's Nonforfeitable Accrued Benefit, in lump sum, as soon as
administratively practicable after the termination of the Plan, irrespective
of the present value of the Participant's Nonforfeitable Accrued Benefit and
whether the Participant consents to that distribution. This paragraph does
not apply if: (1) the plan provides an annuity option: or (2) as of the
period between the Plan termination date and the final distribution of
assets, the Employer maintains any other defined contribution plan (other
than an ESOP). The Employer, in an addendum to its Adoption Agreement
numbered 13.07, may elect not to have this paragraph apply.
The Trust will continue until the Custodian/Trustee in accordance with the
direction of the Advisory Committee has distributed all of the benefits under
the Plan. On each valuation date, the Advisory Committee will credit any part
of a Participant's Accrued Benefit retained in the Trust with its
proportionate share of the Trust's income, expenses, gains and losses, both
realized and unrealized. Upon termination of the Plan, the amount, if any, in
a suspense account under Article III will revert to the Employer, subject to
the conditions of the Treasury regulations permitting such a reversion. A
resolution or amendment to freeze all future benefit accrual but otherwise to
continue maintenance of this Plan, is not a termination for purposes of this
Section 13.07.
DISTRIBUTION RESTRICTIONS UNDER CODE SECTION 401(k). If the Employer's Plan
includes a Code Section 401(k) arrangement or if transferred assets described
in Section 13.06 are subject to the distribution restrictions of code
Sections 401(k)(2) and (10), the special distribution provisions of this
Section 13.07 are subject to the restrictions of this paragraph. The portion
of the Participant's Nonforfeitable Accrued Benefit attributable to elective
contributions (or to amounts treated under the Code Section 401(k)
arrangement as elective contributions) is not distributable on account of
Plan termination, as described in this Section 13.07, unless: (a) the
Participant otherwise is entitled under the Plan to a distribution of that
portion of his Nonforfeitable Accrued Benefit; or (b) the Plan termination
occurs without the establishment of a successor plan. A successor plan under
clause (b) is a defined contribution plan (other than an ESOP) maintained by
the Employer (or by a related employer) at the time of the termination of the
Plan. A distribution made after March 31, 1988, pursuant to clause (b), must
be part of a lump sum distribution to the Participant of his Nonforfeitable
Accrued Benefit.
ARTICLE XIV CODE 401(k) ARRANGEMENTS
14.01 APPLICATION.
This Article XIV applies to an Employer's Plan only if the Plan includes a
Code Section 401(k) arrangement.
14.02 CODE SECTION 401(k) ARRANGEMENT.
The Employer will elect in Section 3.01 of its Adoption Agreement the terms
of the Code Section 401(k) arrangement under the Plan. Under no circumstances
may a salary reduction agreement or other deferral mechanism be adopted
retroactively. If the Employer's Plan is a Standardized Plan, the Code
Section 401(k) arrangement must be a salary reduction arrangement. If the
Employer's Plan is a Nonstandardized Plan, the Code Section 401(k)
arrangement may be a salary reduction arrangement or a cash or deferred
arrangement.
SALARY REDUCTION ARRANGEMENT. If the Employer elects a salary reduction
arrangement, any Employee eligible to participate in the Plan may file a
salary reduction agreement with the Advisory Committee. The salary reduction
agreement may not be effective earlier than the following date which occurs
last: (i) the Employee's Plan Entry Date (or, in the case of a reemployed
Employee, his reparticipation date under Article II); (ii) the execution date
of the Employee's salary reduction agreement; (iii) the date the Employer
adopts the Code Section 401(k) arrangement by executing the Adoption
Agreement; or (iv) the effective date of the Code Section 401(k) arrangement,
as specified in the Employer's Adoption Agreement. A salary reduction
agreement must specify the amount of Compensation (as defined in Section
1.12) or percentage of Compensation the Employee wishes to defer. The salary
reduction agreement will apply only to Compensation which becomes currently
available to the Employee after the effective date of the salary reduction
agreement. The Employer will apply a reduction election to all Compensation
(and to increases in such Compensation) unless the Employee specifies in his
salary reduction agreement to limit the election to certain Compensation. The
Employer will specify in Adoption Agreement Section 3.01 the rules and
restrictions applicable to the Employee salary reduction agreements.
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CASH OR DEFERRED ARRANGEMENT. If the Employer elects a cash or deferred
arrangement, a participant may elect to make a cash election against his
proportionate share of the Employer's Cash or Deferred Contribution, in
accordance with the Employer's elections in Adoption Agreement Section 3.01.
A Participant's proportionate share of the Employer's Cash or Deferred
Contribution is the percentage of the total Cash or Deferred Contribution
which bears the same ratio that the Participant's Compensation for the Plan
Year bears to the total Compensation of all Participants for the Plan Year.
For purposes of determining each Participant's proportionate share of the
Cash or Deferred Contribution, a Participant's Compensation is his
Compensation as determined under Section 1.12 of the Plan (as modified by
Section 3.05 for allocation purposes), excluding any effect the proportionate
share may have on the Participant's Compensation for the Plan Year. The
Advisory Committee will determine the proportionate share prior to the
Employer's actual contribution to the Trust, to provide the Participants the
opportunity to file cash elections. The Employer will pay directly to the
Participant the portion of his proportionate share the Participant has
elected to receive in cash.
14.03 DEFINITIONS.
For purposes of this Article XIV:
A. "Highly Compensated Employee" means an Eligible Employee who satisfies the
definition in Section 1.09 of the Plan. Family members aggregated as a single
Employee under Section 1.09 constitute a single Highly Compensated Employee,
whether a particular family member is a Highly Compensated Employee or a
Nonhighly Compensated Employee without the application of family aggregation.
B. "Nonhighly Compensated Employee" means an Eligible Employee who is not a
Highly Compensated Employee and who is not a family member treated as a
Highly Compensated Employee.
C. "Eligible Employee" means, for purposes of the ADP test described in Section
14.08, an Employee who is eligible to enter into a salary reduction agreement
for the Plan Year, irrespective of whether he actually enters into such an
agreement, and a Participant who is eligible for an allocation of the
Employer's Cash or Deferred Contribution for the Plan Year. For purposes of
the ACP test described in Section 14.09, an "Eligible Employee" means a
Participant who is eligible to receive an allocation of Employer matching
contributions (or would be eligible if he made the type of contributions
necessary to receive an allocation of matching contributions) and a
Participant who is eligible to make nondeductible contributions, irrespective
of whether he actually makes nondeductible contributions. An Employee
continues to be an Eligible Employee during a period the Plan suspends the
Employee's right to make elective deferrals or nondeductible contributions
following a hardship distribution.
D. "Highly Compensated Group" means the group of Eligible Employees who are
Highly Compensated Employees for the Plan Year.
E. "Nonhighly Compensated Group" means the group of Eligible Employees who are
Nonhighly Compensated Employees for the Plan Year.
F. "Compensation" means, except as specifically provided in this Article XIV,
Compensation as defined for nondiscrimination purposes in the last paragraph
of Section 1.12 of the Plan. For Plan Years beginning after December 31,
1989, Compensation must include Compensation for the entire Plan Year,
irrespective of whether the Code Section 401(k) arrangement was in effect for
the entire Plan Year or whether the Employee begins, resumes or ceases to be
an Eligible Employee during the Plan Year. For Plan Years beginning prior to
January 1, 1990, or such other period as provided by the Secretary of the
Treasury, the Plan may limit Compensation taken into account to Compensation
received only for the portion of the Plan Year in which the Employee was an
Eligible Employee and only for the portion of the Plan Year in which the Code
Section 401(k) arrangement was in effect.
G. "Deferral contributions" are Salary Reduction Contributions and Cash or
Deferred Contributions the Employer contributes to the Trust on behalf of
an Eligible Employee, irrespective of whether, in the case of Cash or
Deferred Contributions, the contribution is at the election of the Employee.
H. "Elective deferrals" are the deferral contributions the Employer contributes
to the Trust at the election of an Eligible Employee. Any portion of a Cash
or Deferred Contribution contributed to the Trust because of the Employee's
failure to make a cash election is an elective deferral. However, any portion
of a Cash or Deferred Contribution over which the Employee does not have a
cash election is not an elective deferral. Elective deferrals do not include
amounts which have become currently available to the Employee prior to the
election nor amounts designated as nondeductible contributions at the time of
deferral or contribution.
I. "Matching contributions" are contributions made by the Employer on account of
elective deferrals under a Code Section 401(k) arrangement or on account of
Employee contributions. Matching contributions also include Participant
forfeitures allocated on account of such elective deferrals or Employee
contributions.
J. "Nonelective contributions" are contributions made by the Employer which are
not subject to a deferral election by an Employee and which are not matching
contributions.
K. "Qualified matching contributions" are matching contributions which are 100%
Nonforfeitable at all times and which are subject to the distribution
restrictions described in paragraph (M). Matching contributions are not 100%
Nonforfeitable at all times if the Employee has a 100% Nonforfeitable
interest because of his Years of Service taken into account under a vesting
schedule. Any matching contributions allocated to a Participant's Deferral
Contributions Account under the Plan automatically satisfy the definition of
qualified matching contributions.
L. "Qualified nonelective contributions" are nonelective contributions which are
100% Nonforfeitable at all times and which are subject to the distribution
restrictions described in paragraph (M). Nonelective contributions are not
100% Nonforfeitable at all times if the Employee has a 100% Nonforfeitable
interest because of his Years of Service taken into account under a vesting
schedule. Any nonelective contributions allocated to a Participant's Deferral
Contributions Account under the Plan automatically satisfy the definition of
qualified nonelective contributions.
M. "Distribution restrictions" means the Employee may not receive a distribution
of the specified contributions (nor earnings on those contributions) except
in the event of (1) the Participant's death, disability, termination of
employment or attainment of age 59+, (2) financial hardship satisfying the
requirements of Code Section 401(k) and the applicable Treasury regulations,
(3) a plan termination, without establishment of a successor defined
contribution plan (other than an ESOP), (4) a sale of substantially all of
the assets (within the meaning of Code Section 409(d)(2)) used in a trade or
business, but only to an employee who continues employment with the
corporation acquiring those assets, or (5) a sale by a corporation of its
interest in a subsidiary (within the meaning of Code Section 409(d)(3)), but
only to an employee who continues employment with the subsidiary. For Plan
Years beginning after December 31, 1988, a distribution on account of
financial hardship, as described in clause (2), may not include earnings on
elective deferrals credited after the last day of the last Plan Year
beginning prior to January 1, 1989, and may not include qualified matching
contributions and qualified nonelective contributions, nor any earnings on
such contributions, irrespective of when credited. A distribution described
in clauses (3), (4) or (5), if made after March 31, 1988, must be a lump sum
distribution, as required under Code Section 401(k)(10).
N. "Employee contributions" are contributions made by a Participant on an after-
tax basis, whether voluntary or mandatory, and designated, at the time of
contribution, as an employee (or nondeductible) contribution. Elective
deferrals and deferral contributions are not employee contributions.
Participant nondeductible contributions, made pursuant to Section 4.01 of the
Plan, are employee contributions.
14.04 MATCHING CONTRIBUTIONS/EMPLOYEE CONTRIBUTIONS.
The Employer may elect in Adoption Agreement Section 3.01 to provide matching
contributions. The Employer also may elect in Adoption Agreement Section 4.01
to permit a Participant to make nondeductible contributions.
RECHARACTERIZATION. A Participant may treat his or her Excess Contributions
as an amount distributed to the Participant and then contributed by the
Participant to the plan. Recharacterized amounts will remain nonforfeitable
and subject to the same distribution requirements as Elective Deferrals.
Amounts may not be recharacterized by a Highly Compensated Employee to the
extent that
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such amount in combination with other Employee Contributions made by that
employee would exceed any stated limit under the plan on Employee
Contributions.
Recharacterization must occur no later than two and one-half months after the
last day of the Plan Year in which such Excess Contributions arose and is
deemed to occur no earlier than the date the last Highly Compensated Employee
is informed in writing of the amount recharacterized and the consequences
thereof. Recharacterized amounts will be taxable to the Participant for the
Participant's tax year in which the Participant would have received them in
cash.
MANDATORY CONTRIBUTIONS. Any Participant nondeductible contributions matched
by the Employer, pursuant to a matching contribution formula, are mandatory
contributions. The Advisory Committee will maintain a separate accounting,
pursuant to Section 4.06 of the Plan, to reflect the Participant's Accrued
Benefit derived from his mandatory contributions. The Employer, under
Adoption Agreement Section 4.05, may prescribe special distribution
restrictions which will apply to the Mandatory Contributions Account prior to
the Participant's Separation from Service. Following his Separation from
Service, the general distribution provisions of Article VI apply to the
distribution of the Participant's Mandatory Contributions Account.
14.05 TIME OF PAYMENT OF CONTRIBUTIONS.
The Employer must make Salary Reduction Contributions to the Trust within an
administratively reasonable period of time after withholding the
corresponding Compensation from the Participant. Furthermore, the Employer
must make Salary Reduction Contributions, Cash or Deferred Contributions,
Employer matching contributions (including qualified Employer matching
contributions) and qualified Employer nonelective contributions no later than
the time prescribed by the Code or by applicable Treasury regulations. Salary
Reduction Contributions are Employer contributions for all purposes under
this Plan, except to the extent the Code or Treasury regulations prohibit the
use of these contributions to satisfy the qualification requirements of the
Code.
14.06 SPECIAL ALLOCATION PROVISIONS -- DEFERRAL CONTRIBUTIONS, MATCHING
CONTRIBUTIONS AND QUALIFIED NONELECTIVE CONTRIBUTIONS.
The Advisory Committee must establish a Deferral Contributions Account and an
Employer Contribution Account for each Participant. Under each Account, the
Advisory Committee also must maintain a subaccounting of the amounts
attributable to Salary Reduction Contributions, Cash or Deferred
Contributions, matching contributions, qualified matching contributions,
nonelective contributions and qualified nonelective contributions.
DEFERRAL CONTRIBUTIONS. The Advisory Committee will allocate to each
Participant's Deferral Contributions Account the amount of Deferral
Contributions the Employer makes to the Trust on behalf of the Participant.
The Advisory Committee will make this allocation as of the last day of each
Plan Year unless, in Adoption Agreement Section 3.04, the Employer elects
more frequent allocation dates for salary reduction contributions.
MATCHING CONTRIBUTIONS. The Employer must specify in its Adoption Agreement
whether the Advisory Committee will allocate matching contributions to the
Deferral Contributions Account or to the Employer Contribution Account of
each Participant. The Advisory Committee will make this allocation as of the
last day of each Plan Year unless, in Adoption Agreement Section 3.04, the
Employer elects more frequent allocation dates for matching contributions.
(1) To the extent the Employer makes matching contributions under a fixed
matching contribution formula, the Advisory Committee will allocate the
matching contribution to the Account of the Participant on whose behalf
the Employer makes that contribution. A fixed matching contribution formula
is a formula under which the Employer contributes a certain percentage or
dollar amount on behalf of a Participant based on that Participant's
deferral contributions or nondeductible contributions eligible for a match,
as specified in Section 3.01 of the Employer's Adoption Agreement. The
Employer may contribute on a Participant's behalf under a specific matching
contribution formula only if the Participant satisfies the accrual
requirements for matching contributions specified in Section 3.06 of the
Employer's Adoption Agreement and only to the extent the matching
contribution does not exceed the Participant's annual additions limitation
in Part 2 of Article III.
(2) To the extent the Employer makes matching contributions under a
discretionary formula, the Advisory Committee will allocate the
discretionary matching contributions to the Account of each Participant who
satisfies the accrual requirements for matching contributions specified in
Section 3.06 of the Employer's Adoption Agreement. The allocation of
discretionary matching contributions to a Participant's Account is in the
same proportion that each Participant's eligible contributions bears to the
total eligible contributions of all Participants. "Eligible contributions"
are the Participant's deferral contributions or nondeductible contributions
eligible for an allocation of matching contributions, as specified in
Section 3.01 of the Employer's Adoption Agreement.
If the matching contribution formula applies both to deferral contributions
and to Participant nondeductible contributions, the matching contributions
apply first to deferral contributions. Furthermore, the matching contribution
formula does not apply to deferral contributions that are excess deferrals
under Section 14.07. For this purpose: (a) excess deferrals relate first to
deferral contributions for the Plan Year not otherwise eligible for a
matching contribution; and (2) if the Plan Year is not a calendar year, the
excess deferrals for a Plan Year are the last elective deferrals made for a
calendar year.
QUALIFIED NONELECTIVE CONTRIBUTIONS. If the Employer, at the time of
contribution, designates a contribution to be a qualified nonelective
contribution for the Plan Year, the Advisory Committee will allocate that
qualified nonelective contribution to the Deferral Contributions Account of
each Participant eligible for an allocation of that designated contribution,
as specified in Section 3.04 of the Employer's Adoption Agreement. The
Advisory Committee will make the allocation to each eligible Participant's
Account in the same ratio that the Participant's Compensation for the Plan
Year bears to the total Compensation of all eligible Participants for the
Plan Year. The Advisory Committee will determine a Participant's Compensation
in accordance with the general definition of Compensation under Section 1.12
of the Plan, as modified by the Employer in Sections 1.12 and 3.06 of its
Adoption Agreement.
NONELECTIVE CONTRIBUTIONS. To the extent the Employer makes nonelective
contributions for the Plan Year which, at the time of contribution, it does
not designate as qualified nonelective contributions, the Advisory Committee
will allocate those contributions in accordance with the elections under
Section 3.04 of the Employer's Adoption Agreement. For purposes of the
special nondiscrimination tests described in Sections 14.08 and 14.09, the
Advisory Committee may treat nonelective contributions allocated under this
paragraph as qualified nonelective contributions, if the contributions
otherwise satisfy the definition of qualified nonelective contributions.
14.07 ANNUAL ELECTIVE DEFERRAL LIMITATION.
ANNUAL ELECTIVE DEFERRAL LIMITATION. An Employee's elective deferrals for a
calendar year beginning after December 31, 1986, may not exceed the 402(g)
limitation. The 402(g) limitation is the greater of $7,000 or the adjusted
amount determined by the Secretary of the Treasury. If, pursuant to a salary
reduction agreement or pursuant to a cash or deferral election, the Employer
determines the Employee's elective deferrals to the Plan for a calendar year
would exceed the 402(g) limitation, the Employer will suspend the Employee's
salary reduction agreement, if any, until the following January 1 and pay in
cash the portion of a cash or deferral election which would result in the
Employee's elective deferrals for the calendar year exceeding the 402(g)
limitation. If the Advisory Committee determines an Employee's elective
deferrals already contributed for a calendar year exceed the 402(g)
limitation, the Advisory Committee will distribute the amount in excess of
the 402(g) limitation (the "excess deferral"), as adjusted for allocable
income, no later than April 15 of the following calendar year. If the
Advisory Committee distributes the excess deferral by the appropriate April
15, it may make the distribution irrespective of any other provision under
this Plan or under the Code. The Advisory Committee will reduce the amount of
excess deferrals for a calendar year distributable to the Employee by the
amount of excess contributions (as defined in Section 14.08), if any,
previously distributed to the Employee for the Plan Year beginning in that
calendar year.
If an Employee participates in another plan under which he makes elective
deferrals pursuant to a Code Section 401(k) arrangement, elective deferrals
under a Simplified Employee Pension, or salary reduction
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contributions to a tax-sheltered annuity, irrespective of whether the
Employer maintains the other plan, he may provide the Advisory Committee a
written claim for excess deferrals made for a calendar year. The Employee
must submit the claim no later than the March 1 following the close of the
particular calendar year and the claim must specify the amount of the
Employee's elective deferrals under this Plan which are excess deferrals. If
the Advisory Committee receives a timely claim, it will distribute the excess
deferral, as adjusted for allocable income, the Employee has assigned to this
Plan in accordance with the distribution procedure described in the
immediately preceding paragraph.
ALLOCABLE INCOME. For purposes of making a distribution of excess deferrals
pursuant to this Section 14.07, allocable income means net income or net loss
allocable to the excess deferrals for the calendar year in which the Employee
made the excess deferral and for the "gap period" measured from the beginning
of the next calendar year to the date of the distribution. If the
distribution of the excess deferral occurs during the calendar year in which
the Employee made the excess deferral, the Advisory Committee will treat as a
"gap period" the period from the first day of that calendar year to the date
of the distribution. The Advisory Committee will determine allocable income
in the same manner as described in Section 14.08 for excess contributions,
except the numerator of the allocation fraction will be the amount of the
Employee's excess deferrals and the denominator of the allocation fraction
will be the Employee's Accrued Benefit attributable to his elective deferrals.
14.08 ACTUAL DEFERRAL PERCENTAGE ("ADP") TEST.
For each Plan Year, the Advisory Committee must determine whether the Plan's
Code Section 401(k) arrangement satisfies one of the following ADP tests:
(i) The average ADP for the Highly Compensated Group does not exceed 1.25
times the average ADP of the Nonhighly Compensated Group; or
(ii) The average ADP for the Highly Compensated Group does not exceed the
average ADP for the Nonhighly Compensated Group by more than two
percentage points (or the lesser percentage permitted by the multiple
use limitation in Section 14.10) and the average ADP for the Highly
Compensated Group is not more than twice the average ADP for the
Nonhighly Compensated Group.
CALCULATION OF ADP. The average ADP for a group is the average of the
separate ADPs calculated for each Eligible Employee who is a member of that
group. An Eligible Employee's ADP for a Plan Year is the ratio of the
Eligible Employee's deferral contributions for the Plan Year to the
Employee's Compensation for the Plan Year. For aggregated family members
treated as a single Highly Compensated Employee, the ADP of the family unit
is the greater of: (i) the ADP determined by combining the deferral
contributions and Compensation of the family members who are Highly
Compensated Employees without family aggregation; or (ii) the ADP determined
by combining the deferral contributions and Compensation of all aggregated
family members. A Nonhighly Compensated Employee's ADP does not include
elective deferrals made to this Plan or to any other Plan maintained by the
Employer, to the extent such elective deferrals exceed the 402(g) limitation
described in Section 14.07.
The Advisory Committee may determine (in a manner consistent with Treasury
regulations) the ADPs of the Eligible Employees by taking into account
qualified nonelective contributions or qualified matching contributions, or
both, made to this Plan or to any other qualified Plan maintained by the
Employer. The Advisory Committee may not include qualified nonelective
contributions in the ADP test unless the allocation of nonelective
contributions is nondiscriminatory when the Advisory Committee takes into
account all nonelective contributions (including the qualified nonelective
contributions) and also when the Advisory Committee takes into account only
the nonelective contributions not used in either the ADP test described in
this Section 14.08 or the ACP test described in Section 14.09. For Plan Years
beginning after December 31, 1989, the Advisory Committee may not include in
the ADP test any qualified nonelective contributions or qualified matching
contributions under another qualified plan unless that plan has the same plan
year as this Plan. The Advisory Committee must maintain records to
demonstrate compliance with the ADP test, including the extent to which the
Plan used qualified nonelective contributions or qualified matching
contributions to satisfy the test.
SPECIAL AGGREGATION RULE FOR HIGHLY COMPENSATED EMPLOYEES. To determine the
ADP of any Highly Compensated Employee, the deferral contributions taken into
account must include any elective deferrals made by the Highly Compensated
Employee under any other Code Section 401(k) arrangement maintained by the
Employer, unless the elective deferrals are to an ESOP. If the plans
containing the Code Section 401(k) arrangements have different plan years,
the Advisory Committee will determine the combined deferral contributions on
the basis of the plan years ending in the same calendar year.
AGGREGATION OF CERTAIN CODE SECTION 401(k) ARRANGEMENTS. If the Employer
treats two plans as a unit for coverage or nondiscrimination purposes, the
Employer must combine the Code Section 401(k) arrangements under such plans
to determine whether either plan satisfies the ADP test. This aggregation
rule applies to the ADP determination for all Eligible Employees,
irrespective of whether an Eligible Employee is a Highly Compensated Employee
or a Nonhighly Compensated Employee. The Advisory Committee also may elect to
aggregate the Code Section 401(k) arrangements under plans which the Employer
does not treat as a unit for coverage or nondiscrimination purposes. For Plan
Years beginning after December 31, 1988, an aggregation of Code Section
401(k) arrangements under this paragraph does not apply to plans which have
different plan years and the Advisory Committee may not aggregate an ESOP (or
the ESOP portion of a plan) with a non-ESOP plan (or non-ESOP portion of a
plan).
CHARACTERIZATION OF EXCESS CONTRIBUTIONS. If, pursuant to this Section 14.08,
the Advisory Committee has elected to include qualified matching
contributions in the average ADP, the Advisory Committee will treat excess
contributions as attributable proportionately to deferral contributions and
to qualified matching contributions allocated on the basis of those deferral
contributions. If the total amount of a Highly Compensated Employee's excess
contributions for the Plan Year exceeds his deferral contributions or
qualified matching contributions for the Plan Year, the Advisory Committee
will treat the remaining portion of his excess contributions as attributable
to qualified nonelective contributions. The Advisory Committee will reduce
the amount of excess contributions for a Plan Year distributable to a Highly
Compensated Employee by the amount of excess deferrals (as defined in Section
14.07), if any, previously distributed to that Employee for the Employee's
taxable year ending in that Plan Year.
DISTRIBUTION OF EXCESS CONTRIBUTIONS. If the Advisory Committee determines
the Plan fails to satisfy the ADP test for a Plan Year, it must distribute
the excess contributions, as adjusted for allocable income, during the next
Plan Year. However, the Employer will incur an excise tax equal to 10% of the
amount of excess contributions for a Plan Year not distributed to the
appropriate Highly Compensated Employees during the first 2+ months of that
next Plan Year. The excess contributions are the amount of deferral
contributions made by the Highly Compensated Employees which causes the Plan
to fail to satisfy the ADP test. The Advisory Committee will distribute to
each Highly Compensated Employee his respective share of the excess
contributions. The Advisory Committee will determine the respective shares of
excess contributions by starting with the Highly Compensated Employee(s) who
has the greatest ADP, reducing his ADP to the next highest ADP, then, if
necessary, reducing the ADP of the Highly Compensated Employee(s) at the next
highest ADP level (including the ADP of the Highly Compensated Employee(s)
whose ADP the Advisory Committee already has reduced), and continuing in this
manner until the average ADP for the Highly Compensated Group satisfies the
ADP test. If the Highly Compensated Employee is part of an aggregated family
group, the Advisory Committee, in accordance with the applicable Treasury
regulations, will determine each aggregated family member's allocable share
of the excess contributions assigned to the family unit.
ALLOCABLE INCOME. To determine the amount of the corrective distribution
required under this Section 14.08, the Advisory Committee must calculate the
allocable income for the Plan Year in which the excess contributions arose
and for the "gap period" measured from the beginning of the next Plan Year to
the date of the distribution. "Allocable income" means net income or net
loss. To calculate allocable income for the Plan Year, the Advisory
Committee: (1) first will determine the net income or net loss for the Plan
Year on the Highly Compensated Employee's Accrued Benefit attributable to
deferral contributions; and (2) then will multiply this net income or net
loss by the following fraction:
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Amount of the Highly Compensated Employee's contributions
---------------------------------------------------------
Accrued Benefit attributable to deferral contributions
The Accrued Benefit attributable to deferral contributions includes the
Accrued Benefit attributable to qualified matching contributions and
qualified nonelective contributions taken into account in the ADP test for
the Plan Year or for any prior Plan Year. For purposes of the denominator of
the fractions, the Advisory Committee will calculate the Accrued Benefit
attributable to deferral contributions as of the last day of the Plan Year
(without regard to the net income or net loss for the Plan Year on that
Accrued Benefit).
To calculate allocable income for the "gap period," the Advisory Committee
will perform the same calculation as described in the preceding paragraph,
except in clause (1) the Advisory Committee will determine, as of the last day
of the month preceding the date of distribution, the net income or net loss
for the "gap period" and in clause (2) will calculate the Accrued Benefit
attributable to deferral contributions as of the day before the distribution.
If the Plan does not perform a valuation on the last day of the month
preceding the date of distribution, the Advisory Committee, in lieu of the
calculation described in this paragraph, will calculate allocable income for
each month in the "gap period" as equal to 10% of the allocable income for
the Plan Year. Under this alternate calculation, the Advisory Committee will
disregard the month in which the distribution occurs, if the Plan makes the
distribution no later than the 15th day of that month.
14.09 NONDISCRIMINATION RULES FOR EMPLOYER MATCHING CONTRIBUTIONS/PARTICIPANT
NONDEDUCTIBLE CONTRIBUTIONS.
For Plan Years beginning after December 31, 1986, the Advisory Committee must
determine whether the annual Employer matching contributions (other than
qualified matching contributions used in the ADP under Section 14.08), if
any, and the Employee contributions, if any, satisfy one of the following
average contribution perentage ("ACP") tests:
(i) The ACP for the Highly Compensated Group does not exceed 1.25 times the
ACP of the Nonhighly Compensated Group; or
(ii) The ACP for the Highly Compensated Group does not exceed the ACP for the
Nonhighly Compensated Group by more than two percentage points (or the
lesser percentage permitted by the multiple use limitation in Section
14.10) and the ACP for the Highly Compensated Group is not more than twice
the ACP for the Nonhighly Compensated Group.
CALCULATION OF ACP. The average contribution percentage for a group is the
average of the separate contribution percentages calculated for each Eligible
Employee who is a member of that group. An Eligible Employee's contribution
percentage for a Plan Year is the ratio of the Eligible Employee's aggregate
contributions for the Plan Year to the Employee's Compensation for the Plan
Year. "Aggregate contributions" are Employer matching contributions (other
than qualified matching contributions used in the ADP test under Section
14.08) and Employee contributions (as defined in Section 14.03). For
aggregate family members treated as a single Highly Compensated Employee, the
contribution percentage of the family unit is the greater of: (i) the
contribution percentage determined by combining the aggregate contributions
and Compensation of the family members who are Highly Compensated Employees
without family aggregation; or (ii) the contribution percentage determined by
combining the aggregate contributions and Compensation of all aggregated
family members.
The Advisory Committee, in a manner consistent with Treasury regulations, may
determine the contribution percentages of the Eligible Employees by taking
into account qualified nonelective contributions (other than qualified
nonelective contributions used in the ADP test under Section 14.08) or
elective deferrals, or both, made to this Plan or to any other qualified Plan
maintained by the Employer. The Advisory Committee may not include qualified
nonelective contributions in the ACP test unless the allocation of
nonelective contributions is nondiscriminatory when the Advisory Committee
takes into account all nonelective contributions (including the qualified
nonelective contributions) and also when the Advisory Committee takes into
account only the nonelective contributions not used in either the ADP test
described in Section 14.08 or the ACP test/ described in this Section 14.09.
The Advisory Committee may not include elective deferrals in the ACP test,
unless the Plan which includes the elective deferrals satisfies the ADP test
both with and without the elective deferrals included in this ACP test. For
Plan Years beginning after December 31, 1989, the Advisory Committee may not
include in the ACP test any qualified nonelective contributions of elective
deferrals under another qualified plan unless that plan has the same plan
year as this Plan. The Advisory Committee must maintain records to
demonstrate compliance with the ACP test, unless the Plan which includes the
elective deferrals satisfies the ADP test both with and without the elective
deferrals included in this ACP test. For Plan Years beginning after December
31, 1989, the Advisory Committee may not include in the ACP test any
qualified nonelective contributions or elective deferrals under another
qualified plan unless that plan has the same plan year as this Plan. The
Advisory Committee must maintain records to demonstrate compliance with the
ACP test, including the extent to which the Plan used qualified nonelective
contributions or elective deferrals to satisfy the test.
SPECIAL AGGREGATION RULE FOR HIGHLY COMPENSATED EMPLOYEES. To determine the
contribution percentage of any Highly Compensated Employee, the aggregate
contributions taken into account must include any matching contributions
(other than qualified matching contributions used in the ADP test) and any
Employee contributions made on his behalf to any other plan maintained by the
Employer, unless the other plan is an ESOP. If the plans have different plan
years, the Advisory Committee will determine the combined aggregate
contributions on the basis of the plan years ending in the same calendar year.
AGGREGATION OF CERTAIN PLANS. If the Employer treats two plans as a unit for
coverage or nondiscrimination purposes, the Employer must combine the plans
to determine whether either plan satisfies the ACP test. This aggregation
rule applies to the contribution percentage determination for all Eligible
Employees, irrespective of whether an Eligible Employee is a Highly
Compensated Employee or a Nonhighly Compensated Employee. The Advisory
Committee also may elect to aggregate plans which the Employer does not treat
as a unit for coverage or nondiscrimination purposes. For Plan Years
beginning after December 31, 1988, an aggregation of plans under this
paragraph does not apply to plans which have different plan years and the
Advisory Committee may not aggregate an ESOP (or the ESOP portion of a plan)
with a non-ESOP plan (or non-ESOP portion of a plan).
DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS. The Advisory Committee will
determine excess aggregate contributions after determining excess deferrals
under Section 14.07 and excess contributions under Section 14.08. If the
Advisory Committee determines the Plan fails to satisfy the ADP test for a
Plan Year, it must distribute the excess aggregate contributions, as adjusted
for allocable income, during the net Plan Year. However, the Employer will
incur an excise tax equal to 10% of the amount of excess aggregate
contributions for a Plan Year not distributed to the appropriate Highly
Compensated Employees during the first 2+ months of that next Plan Year. The
excess aggregate contributions are the amount of aggregate contributions made
by the Highly Compensated Employees which causes the Plan to fail to satisfy
the ACP test. The Advisory Committee will distribute to each Highly
Compensated Employee his respective share of the excess aggregate
contributions. The Advisory Committee will determine the respective shares of
excess aggregate contributions by starting with the Highly Compensated
Employee(s) who has the greatest contribution percentage, reducing his
contribution percentage to the next highest contribution percentage, then, if
necessary, reducing the contribution percentage of the Highly Compensated
Employee(s) at the next highest contribution percentage level (including the
contribution percentage of the Highly Compensated Employee(s) whose
contribution percentage the Advisory Committee already has reduced), and
continuing in this manner until the ACP for the Highly Compensated Group
satisfies the ACP test. If the Highly compensated Employee is part of an
aggregated family group, the Advisory Committee, in accordance with the
applicable Treasury regulations, will determine each aggregated family
member's allocable share of the excess aggregate contributions assigned to
the family unit.
ALLOCABLE INCOME. To determine the amount of the corrective distribution
required under this Sectin 14.09, the Advisory Committee must calculate the
allocable income for the Plan Year in which the excess aggregate contributions
arose and for the "gap period" measured from the beginning of the next Plan
Year to the date of the distribution. "Allocable income" means net income or net
loss. The Advisory Committee will determine allocable income in the same manner
as described in Section 14.08 for excess contributions, except
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the numerator of the allocation fraction will be the Highly Compensated
Employee's excess aggregate contributions and the denominator of the
allocation fraction will be the Employee's Accrued Benefit attributable to
aggregate contributions and, if applicable, to qualified nonelective
contributions and elective deferrals included in the ACP test for the Plan
Year or for the prior Plan Year.
CHARACTERIZATION OF EXCESS AGGREGATE CONTRIBUTIONS. The Advisory Committee
will treat a Highly Compensated Employee's allocable share of excess
aggregate contributions in the following priority: (1) first as attributable
to his Employee contributions which are voluntary contributions, if any; (2)
then as matching contributions allocable with respect to excess contributions
determined under the ADP test described in Section 14.08; (3) then on a pro
rata basis to matching contributions and to the deferral contributions
relating to those matching contributions which the Advisory Committee has
included in the ACP test; (4) then on a pro rata basis to Employee
contributions which are mandatory contributions, if any, and to the matching
contributions allocated on the basis of those mandatory contributions; and
(5) last to qualified nonelective contributions used in the ACP test. To the
extent the Highly Compensated Employee's excess aggregate contributions are
attributable to matching contributions, and he is not 100% vested in his
Accrued Benefit attributable to matching contributions, the Advisory
Committee will distribute only the vested portion and forfeit the nonvested
portion. The vested portion of the Highly Compensated Employee's excess
aggregate contributions attributable to Employer matching contributions is
the total amount of such excess aggregate contributions (as adjusted for
allocable income) multiplied by his vested percentage (determined as of the
last day of the Plan Year for which the Employer made the matching
contribution). The Employer will specify in Adoption Agreement Section 3.05
the manner in which the Plan will allocate forfeited excess aggregate
contributions.
14.10 MULTIPLE USE LIMITATION.
For Plan Years beginning after December 31, 1988, if at least one Highly
Compensated Employee is includible in the ADP test under Section 14.08 and in
the ACP test under Section 14.09, the sum of the Highly Compensated Group's
ADP and ACP may not exceed the multiple use limitation.
The multiple use limitation is the sum of (i) and (ii):
(i) 125% of the greater of: (a) the ADP of the Nonhighly Compensated Group under
the Code Section 401(k) arrangement; or (b) the ACP of the Nonhighly
Compensated Group for the Plan Year beginning with or within the Plan Year
of the Code Section 401(k) arrangement.
(ii) 2% plus the lesser of (i)(a) or (i)(b), but no more than twice the lesser
of (i)(a) or (i)(b).
The Advisory Committee will determine whether the Plan satisfies the multiple
use limitation after applying the ADP test under Section 14.08 and the ACP
test under Section 14.09 and after making any corrective distributions
required by those Sections. If, after applying this Section 14.10, the
Advisory Committee determines the Plan has failed to satisfy the multiple use
limitation, the Advisory Committee will correct the failure by treating the
excess amount as excess aggregate contributions under Section 14.09. This
Section 14.10 does not apply unless, prior to application of the multiple use
limitation, the ADP and the ACP of the Highly Compensated Group each exceeds
125% of the respective percentages for the Nonhighly Compensated Group.
14.11 DISTRIBUTION RESTRICTIONS.
The Employer must elect in Section 6.03 the Adoption Agreement the
distribution events permitted under the Plan. The distribution events
applicable to the Participant's Deferral Contributions Account must satisfy
the distribution restrictions described in paragraph (m) of Section 14.03.
HARDSHIP DISTRIBUTIONS FROM DEFERRAL CONTRIBUTIONS ACCOUNT. The Employer must
elect in Adoption Agreement Section 6.03 whether a Participant may receive
hardship distributions from his Deferral Contributions Account prior to the
Participant's Separation from Service Hardship distributions from the
Deferral Contributions Account must satisfy the requirements of this Section
14.11.
A hardship distribution under this Section 14.11 must be on account of one of
the following immediate and heavy financial needs: (1) medical expenses
described in Code Section 213(d) incurred by the Participant, by the
Participant's spouse, or by any of the Participant's dependents; (2) the
purchase (excluding mortgage payments) of a principal residence for the
Participant; (3) the payment of post-secondary education tuition, for the
next semester or for the next quarter, for the Participant, for the
Participant's spouse, or for any of the Participant's dependents; (4) to
prevent the eviction of the Participant from his principal residence or the
foreclosure on the mortgage of the Participant's principal residence; or (5)
such other events deemed by the Secretary of the Treasury to constitute an
immediate and heavy financial need.
If the Participant receives a hardship distribution, he may not make elective
deferrals or Employee contributions (voluntary and mandatory) to the Plan for
the 12 month period following the date of his hardship distribution.
A hardship distribution is available only if: (a) the distribution is not in
excess of the amount of the immediate and heavy financial need; (b) the
Participant has obtained all distributions, other than hardship
distributions, and all nontaxable loans currently available under this Plan
and all other qualified plans maintained by the Employer; (c) all qualified
plans of the Employer provide a minimum 12 months suspension of elective
deferrals and of Employee contributions; and (d) the Participant agrees to
limit elective deferrals under this Plan and under any other qualified Plan
maintained by the Employer, for the Participant's taxable year immediately
following the taxable year of the hardship distribution, to the maximum limit
permitted under Code Section 402(g), reduced by the amount of the
Participant's elective deferrals made in the taxable year of the hardship
distribution.
For Plan years beginning after December 31, 1988, a hardship distribution
under this Section 14.11 may not include earnings on an Employee's elective
deferrals credited after the last day of the last Plan Year beginning prior
to January 1, 1989, and may not include qualified matching contributions and
qualified nonelective contributions, nor any earnings on such contributions,
irrespective of when credited.
DISTRIBUTIONS AFTER SEPARATION FROM SERVICE. Following the Participant's
Separation from Service, the distribution events applicable to the
Participant apply equally to the Participant's Deferral Contributions Account
and Employer Contribution Account, except as elected in Section 6.03 of the
Employer's Adoption Agreement.
14.12 SPECIAL ALLOCATION RULES.
If the Code Section 401(k) aggrangement provides for salary reduction
contributions or if the Plan accepts Employee contributions, pursuant to
Adoption Agreement Section 4.01, the Employer must elect in Adoption Agreement
9.11 whether any special allocation provisions will apply under Section 9.11 of
the Plan. For purposes of the elections:
A. A "segregated Account" direction means the Advisory Committee will establish
a segregated Account for the applicable contributions made on the
Participant's behalf during the Plan Year. The Trustee must invest the
segregated Account in Federally insured interest bearing savings account(s)
or time deposits, or a combination of both, or in any other fixed income
investments. As of the last day of each valuation period, the Advisory
Committee will reallocate the segregated Account to the Participant's
appropriate Account, in accordance with Section 3.04 or Section 4.06,
whichever applies to the contributions.
B. A "weighted average allocation" method will treat a weighted portion of the
applicable contributions as if includible in the Participant's Account as
of the beginning of the valuation period. The weighted portion is a
fraction, the numerator of which is the number of months or days in the
valuation period, excluding each month or day in the valuation period which
begins prior to the contribution date of the applicable contributions, and
the denominator of which is the number of months or days in the valuation
period.
The methods described in (a) and (b) are available only to the allocation of
net income, gain or loss to salary reduction contributions or to Employee
contributions described in Section 4.01.
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AMENDMENT NO. 1
TO THE
CMS 401(k) PROFIT SHARING PLAN
(AS AMENDED AND RESTATED EFFECTIVE JULY 1, 1990)
WHEREAS, Continental Medical Systems, Inc. (the "Company") maintains the
CMS 401(k) Profit Sharing Plan (the "Plan");
WHEREAS, the Company desires to amend the Plan in order to comply with the
Unemployment Compensation Amendments of 1992 and the Omnibus Budget
Reconciliation Act of 1993;
NOW, THEREFORE, the Plan is hereby amended as follows:
1. Effective January 1, 1994, four new paragraphs are added to the end of
Section 1.12 ("COMPENSATION") to read as follows:
In addition to other applicable limitations set forth in the Plan, and
notwithstanding any other provision of the Plan to the contrary, for Plan
Years beginning on or after January 1, 1994, the annual Compensation of each
Employee taken into account under the Plan shall not exceed the OBRA '93
annual compensation limit. The OBRA '93 annual compensation limit is
$150,000, as adjusted by the Commissioner for increases in the cost of living
in accordance with section 401(a)(17)(B) of the Internal Revenue Code. The
cost-of-living adjustment in effect for a calendar
<PAGE>
year applies to any period, not exceeding 12 months, over which Compensation
is determined (determination period) beginning in such calendar year. If a
determination period consists of fewer than 12 months, the OBRA '93 annual
compensation limit will be multiplied by a fraction, the numerator of which
is the number of months in the determination period, and the denominator of
which is 12.
For Plan Years beginning on or after January 1, 1994, any reference in
this Plan to the limitation under section 401(a)(17) of the Code shall mean
the OBRA '93 annual compensation limit set forth in this provision.
If Compensation for any prior determination period is taken into account
in determining an Employee's benefits accruing in the current Plan Year, the
Compensation for that prior determination period is subject to the OBRA '93
annual compensation limit in effect for that prior determination period. For
this purpose, for determination periods beginning before the first day of
the first Plan Year beginning on or after January 1, 1994, the OBRA '93
annual compensation limit is $150,000.
In determining the Compensation of a Participant for purposes of the OBRA
'93 annual compensation limits set forth above, the rules of section
414(q)(6) of the Code shall apply, except that in applying such rules, the
term "family" shall
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<PAGE>
include only the spouse of the Participant and any lineal descendants of the
Participant who have not attained age 19 before the close of the Plan Year.
2. Effective January 1, 1993, a new Section 6.09 is added to Article VI
(TIME AND METHOD OF PAYMENT OF BENEFITS) to read as follows:
6.09 DIRECT ROLLOVER OF ELIGIBLE ROLLOVER DISTRIBUTION.
(a) IN GENERAL. This Section applies to distributions made on or after
January 1, 1993. Notwithstanding any provision of the Plan to the contrary
that would otherwise limit a distributee's election under this Section, a
distributee may elect, at the time and in the manner prescribed by the
Advisory Committee, to have any portion of any eligible rollover distribution
paid directly to an eligible retirement plan specified by the distributee in
a direct rollover.
(b) DEFINITIONS.
(i) ELIGIBLE ROLLOVER DISTRIBUTION: An eligible rollover distribution
is any distribution of all or any portion of the balance to the credit of the
distributee, except that an eligible rollover distribution does not
-3-
<PAGE>
include: any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the life
(or life expectancy) of the distributee or the joint lives (or joint life
expectancies) of the distributee and the distributee's designated
beneficiary, or for a specified period of ten years or more; any
distribution to the extent such distribution is required under
section 401(a)(9) of the Code; and the portion of any distribution that
is not includable in gross income (determined without regard to the
exclusion for net unrealized appreciation with respect to employer
securities).
(ii) ELIGIBLE RETIREMENT PLAN: An eligible retirement plan is an
individual retirement account described in section 408(a) of the Code, an
individual retirement annuity described in section 408(b) of the Code, an
annuity plan described in section 403(a) of the Code, or a qualified trust
described in section 401(a) of the Code, that accepts the distributee's
eligible rollover distribution. However, in the case of an eligible
rollover distribution to the surviving spouse, an eligible retirement plan
is an individual retirement account or individual retirement annuity.
-4-
<PAGE>
(iii) DISTRIBUTEE: A distributee includes an Employee or
former Employee. In addition, the Employee's or former Employee's
surviving spouse and the Employee's or former Employee's spouse or
former spouse who is the alternate payee under a qualified domestic
relations order, as defined in section 414(p) of the Code, are
distributees with regard to the interest of the spouse or former
spouse.
(iv) DIRECT ROLLOVER: A direct rollover is a payment
by the Plan to the eligible retirement plan specified by the
distributee.
3. Effective January 1, 1995, a new section 6.10 is added to Article VI
(TIME AND METHOD OF PAYMENT OF BENEFITS) to read as follows:
6.10 PERMISSIBLE WAIVER OF NOTICE PERIOD. If a distribution is one to
which sections 401(a)(11) and 417 of the Internal Revenue Code do not apply,
such distribution may commence less than 30 days after the notice required
under section 1.411(a)-11(c) of the Income Tax Regulations is given, provided
that:
(1) the Plan Administrator clearly informs the Participant
that the participant has a right to a period of at least 30 days
after receiving the notice
-5-
<PAGE>
to consider the decision of whether or not to elect a distribution
(and, if applicable, a particular distribution option), and
(2) the Participant, after receiving the notice, affirmatively
elects a distribution.
IN WITNESS WHEREOF, the Company has caused this Amendment No. 1 to the
Plan to be executed by its duly authorized officers this 17 day of November,
1994.
[SEAL] CONTINENTAL MEDICAL SYSTEMS, INC.
Attest: By: NAME ILLEGIBLE
----------------------- -------------------------------
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<PAGE>
EXHIBIT 10.43
MASTER MANAGEMENT AGREEMENT
This Master Management Agreement (the "AGREEMENT") is executed to be
effective as of January 1, 1996 between TEXAS HEALTH ENTERPRISES, INC., a
Texas corporation ("THE"), HEALTH ENTERPRISES OF OKLAHOMA, INC., an Oklahoma
corporation ("HEO"), HEALTH ENTERPRISES OF MICHIGAN, INC., a Michigan
corporation ("HEM"), and PCK-TEX, LTD., a Texas limited partnership ("PCK")
(THE, HEO, HEM and PCK shall be sometimes referred to herein collectively as
"OWNER"), and HORIZON FACILITIES MANAGEMENT, INC., a Delaware corporation
("MANAGER").
RECITALS
WHEREAS, Owner is the licensed operator of those certain long-term care
facilities identified on EXHIBIT A attached hereto and incorporated herein by
reference (each, a "FACILITY" and collectively, the "FACILITIES"); and
WHEREAS, in the ordinary course of the long-term care business, owners
and/or operators from time to time engage managers to provide management
services in respect of their long-term care facilities; and
WHEREAS, subject to the terms and provisions set forth hereinbelow,
Manager desires to assume and, in consideration for the receipt of the
consideration provided for herein, Owner is willing to grant Manager,
responsibility for the management of the Facilities.
AGREEMENTS
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants of the parties set forth herein, the receipt and sufficiency
of which is expressly acknowledged by each of the parties hereto, IT IS
HEREBY AGREED AS FOLLOWS:
1. MANAGEMENT AND CONSULTING RESPONSIBILITIES OF MANAGER. Owner
hereby engages Manager and Manager hereby accepts such engagement and agrees
to provide management, consulting and advisory services to Owner in
connection with the operation of the Facilities, upon the terms and
conditions set forth in this Agreement. Notwithstanding any other provision
of this Agreement, by entering into this Agreement, Owner does not delegate
to Manager any powers, duties or responsibilities which it is prohibited by
law from delegating; Owner also retains such other authority as shall not
have been expressly delegated to Manager pursuant to this Agreement. Subject
to the foregoing, Manager shall provide the following services:
(a) ADMINISTRATOR. Manager shall supervise the performance of
each of the Administrators of each of the Facilities, who shall be
responsible for the functional operation of
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their respective Facilities and execution on a day-to-day basis of policies
established by Manager in accordance with this Agreement.
(b) GENERAL DESCRIPTION OF DUTIES. Manager shall, in consultation
with, for and on behalf of, and in the name of Owner, perform and provide all
services necessary to provide and maintain high quality care and management
in respect of the Facilities consistent with the standards of a reasonably
prudent operator/manager, including, without limitation, the following:
(1) Manager shall supervise the performance of all
administrative functions as may be necessary in the management and
operation of the Facilities;
(2) Manager shall recruit, select, employ, train, promote,
direct, discipline, suspend and discharge the personnel of each Facility;
establish salary levels, personnel policies and employee benefits; and
establish employee performance standards, all as needed during the term of
this Agreement to ensure the efficient operation of all departments within
and services offered by each Facility;
(3) To the extent necessary and appropriate, Manager shall
provide accounting, billing, purchasing, and bill payment functions for
each of the Facilities;
(4) Manager shall establish a system of accounts and supervise
the maintenance of ledgers and other primary accounting records by
personnel of each of the Facilities;
(5) Manager shall establish, supervise and administer the
financial controls over the operations and management of the Facilities;
(6) Manager shall develop and establish financial standards and
norms by which income, costs, and operations of the Facilities may be
evaluated;
(7) Manager shall serve as advisor and consultant to Owner in
connection with policy decisions to be made by Owner in respect of the
Facilities; and
(8) Manager shall market the services of the Facilities.
(c) OPERATIONAL POLICIES AND FORMS. Manager shall implement
operational policies and procedures and, consistent with all budgetary and
other applicable operational guidelines, develop such new policies and
procedures as it deems necessary to insure the establishment and maintenance
of operational standards appropriate for the nature of each of the Facilities.
(d) CHARGES. Manager shall establish the schedules of recommended
charges, including any and all special charges for services rendered to the
patients at the Facilities. Owner
2
<PAGE>
shall have the right to review the charge schedules established by Manager
and if not disapproved in writing within ten (10) days of receipt, then such
charges shall be deemed to have been approved.
(e) INFORMATION. Manager shall develop any informational
material, mass media releases, and other related publicity materials, which
it deems necessary for the operation of the Facilities.
(f) REGULATORY COMPLIANCE. Owner understands and agrees that
Owner remains the licensed operator of each Facility and is ultimately
responsible for compliance with all applicable regulatory requirements that
attend the operation of long-term care facilities. Manager, for and on
behalf of Owner and in Owner's name and with the assistance of Owner to the
extent reasonably required, shall maintain all licenses, permits,
qualifications and approvals from any applicable governmental or regulatory
authority for the operation of the Facility and to manage the operations of
the Facility in full compliance with all applicable laws and regulations;
however, in no event shall Manager be liable to Owner or any other person or
entity for events or occurrences arising before the effective date hereof,
including, without limitation, any events or occurrences which may affect any
of the Facility's licenses, permits, certifications, qualifications or
approvals.
(g) EQUIPMENT AND IMPROVEMENTS. Manager shall advise Owner as to
equipment and improvements which are needed to maintain or upgrade the
quality of the Facilities and to replace obsolete or run-down equipment or to
correct any other state or federal survey deficiencies which may be cited
during the term of this Agreement. Owner shall review and act upon Manager's
recommendations as expeditiously as possible. Manager shall not be liable
for any cost or liability which Owner may incur in the event Owner disregards
Manager's recommendations. Manager may, without Owner's prior written
consent, make all repairs, replacements and maintenance required in the
ordinary course of the operation of the Facilities with an individual cost of
$10,000 or less. Manager shall obtain Owner's prior consent, which consent
shall not be unreasonably withheld or delayed, for any repairs, replacements
and maintenance which is required in the ordinary course of the operation of
the Facilities and which has an individual cost per Facility in excess of
$10,000 or $100,000 in the aggregate in any one year. Any repairs,
maintenance or replacement which would be characterized (i) as an ordinary
expense shall be made in accordance with the Facility's operating budget
developed by Manager pursuant to Section 1.(n) and (ii) as a capital
expenditure shall be made in accordance with the annual capital budget
prepared by Manager pursuant to Section 1.(n).
(h) ACCOUNTING. From and after the effective date hereof, Manager
shall provide home office and accounting support to the Facility, which shall
include preparation of each of the Facilities' Medicare and Medicaid cost
reports and tax returns (including payroll-related tax returns) at Manager's
expense. All accounting procedures and systems utilized in providing said
support shall be in accordance with the operating capital and cash programs
developed by Manager, which programs shall conform to generally accepted
accounting principles and shall not materially distort income or loss.
Manager shall cause all local, state and federal
3
<PAGE>
taxes (excluding income taxes due and owing by Owner) to be timely paid or
contested, as appropriate. The taxes and any reimbursement obligations due
to Medicare and/or Medicaid shall be deemed to be operating expenses of the
Facility and shall be paid out of the revenues of the Facility or the working
capital provided by Manager under the terms hereof. Recoupments applicable to
prior periods of time payable from third party payors shall reduce current
revenues for the Facilities for purposes of calculating Manager's fee
hereunder.
(i) REPORTS. Manager shall prepare and provide to Owner any
reasonable operational information which may from time to time be
specifically requested by Owner, including any information needed to assist
Owner in completing its tax returns and in complying with any reporting
obligations imposed by any mortgagee. Manager shall cause all tax returns of
Owner to be prepared in a timely fashion. Manager shall provide weekly
census reports to Owner. In addition, (A) within thirty (30) days after the
end of each calendar month, Manager shall provide Owner with an unaudited
balance sheet with respect to each of the Facilities, dated the last day of
such month, and an unaudited statement of income and expenses for such month
relating to the operation of each of the Facilities and (B) within ninety
(90) days after the end of the fiscal year of each of the Facilities, Manager
shall provide Owner with unaudited financial statements including a balance
sheet, of each of the Facilities, dated the last day of said fiscal year, and
a statement of income and expense for the year then ended relating to the
operation of each of the Facilities. In this connection, all such reports
shall be prepared on forms reasonably acceptable to Owner and Manager; all
statements and reports shall be prepared on an accrual basis in accordance
with generally accepted accounting principles consistently applied. As
additional support to required reporting information under this Agreement,
Manager shall, at Owner's reasonable request, provide Owner with copies of
(i) all bank statements and reconciliations, (ii) detailed cash receipts and
disbursement records, (iii) general ledger listing, (iv) copies of invoices
for development expenditures, (v) summaries of adjusting journal entries,
(vi) copies of all paid bills, (vii) all information required to prepare
state and federal tax returns on a timely basis, and (viii) such other
supporting documentation Owner may request.
(j) BANK ACCOUNTS.
(1) ESTABLISHMENT. Manager shall establish a checking account
in the name of Owner and of each of the Facilities and shall deposit
therein all money received during the term of this Agreement in the course
of the operation of each of the Facilities; provided, however, that during
the term hereof, withdrawals and payments from this account shall be made
only on checks signed by a person or persons designated by Manager with the
approval of Owner. In this connection, Owner shall take such steps and/or
actions as Manager may reasonably determine to be necessary to transfer
Owner's existing control of its bank accounts to the control of Manager.
(2) PAYMENT OF FACILITY EXPENSES. All expenses incurred in the
operation of the Facilities, including, but not limited to, Facility
mortgage or lease payments, payroll and employee benefits and payment of
Manager's management fee, shall be paid by check drawn on this account.
Withdrawals from this account shall be made
4
<PAGE>
to pay the following items in the following order of priority: (i) payroll,
payroll tax and related expenses, (ii) lease and/or mortgage payments to
Owner's landlords and/or lenders, as the case may be, in respect of the
Facilities, (iii) Manager's management fee, (iv) operating expenses
incurred by the Facilities in such order of priority as Manager deems
appropriate to the operation of the Facility, and (v) payment of amounts
due under the Loan Agreement (defined below), and payments due to Owner as
set forth in that certain Letter Agreement by and among, Horizon/CMS
Healthcare Corporation, Horizon Facilities Management, Inc., Texas Health
Enterprises, Inc., and HEA Management Group, Inc. Manager acknowledges and
agrees that Manager shall be responsible (but is not assuming liability)
for the management and payment of all liabilities of Owner, inclusive of
liabilities which may have arisen prior to the date of this Agreement.
Manager shall pay as an expense of Manager and not a charge to Owner or the
Facilities, all real property expenses and costs incurred in connection
with a) the warehouses used by Owner in the business of operating the
Facilities, b) the building in which Owner's headquarters office in Denton,
Texas is located, and c) Owner's corporate residence for out-of-town
employees visiting Owner's headquarters facility known as Savanaah Trail
located at 2148 Savanaah Trail in Denton, Texas, including but not limited
to all principal and interest on any debt which currently encumbers such
facilities, taxes, utilities and insurance.
(3) INSUFFICIENT FUNDS IN FACILITY BANK ACCOUNTS/WORKING
CAPITAL. In the event the revenues generated by the Facilities are at any
time throughout the term of this Agreement insufficient to pay all of the
expenses associated with its operation, including, but not limited to,
Manager's management fee, Manager has made a credit facility available to
Owner and the Facilities pursuant to the Loan Agreement between Manager,
HEA Management Group, Inc., a Texas corporation, HEO, HEM and PCK (the
"LOAN AGREEMENT"). Manager shall make advances of working capital to the
Facilities only under and consistent with the terms, provisions and
conditions set forth in the Loan Agreement.
(4) DEFERRAL OF MANAGEMENT FEES. To the extent that the working
capital needs and capital improvement needs from time to time of the
Facilities, each as determined jointly by Owner and Manager, exceed the
amounts available under the Revolving Credit Advances under the terms of
the Loan Agreement, Manager shall defer its collection of its management
fee until such time as the working capital needs and capital improvements
of the Facilities are less than the maximum amount available to be drawn
under the Revolving Credit Advances. All such deferred fees shall be, in
Manager's sole discretion, capitalized (e.g., added to the principal
balance) on a monthly basis to the Loan (as defined in the Loan Agreement)
or deferred (with interest accruing on such amounts at the Contract Rate
[as defined in the Loan Agreement]) and repaid as soon as sufficient net
cash flow from the Facilities is available.
(k) PERSONNEL. Manager shall recruit, employ, train, promote,
direct, discipline, suspend and discharge the personnel of each Facility;
establish salary levels, personnel
5
<PAGE>
policies and employee benefits; and establish employee performance standards,
all as needed during the term of this Agreement to ensure the efficient
operation of all departments within and services offered by each Facility.
All of the personnel of the Facility, including the Administrator of each
Facility, shall be the employees of Owner subject to the provisions of
Sections 1.(a) and 1.(b) hereinabove.
(l) SUPPLIES AND EQUIPMENT. Manager shall purchase supplies and
non-capital equipment needed to operate each Facility within the budgetary
limits set forth in the annual operating budget prepared by Manager pursuant
to Section 1.(n) Owner understands that Manager has certain national
purchase arrangements with vendors that afford certain economies of scale in
purchasing supplies and non-capital equipment. In purchasing said supplies
and equipment, if possible, Manager shall take advantage of any national or
group purchasing agreements to which Manager may be a party if doing so will
reduce the operating expenses of each Facility. Owner may request that
Manager purchase supplies and/or equipment from Owner's existing vendors and
Manager may, at its discretion, act in accordance with Owner's request.
(m) LEGAL PROCEEDINGS. Manager shall, through its legal counsel,
coordinate all legal matters and proceedings with Owner's counsel. As soon
as practicable after Manager obtains actual knowledge thereof, Manager shall
notify Owner's duly authorized representative of all pending or threatened
legal proceedings affecting the Facilities or Owner.
(n) BUDGETS. Each Facility shall be operated on a fiscal year of
January 1 through December 31. Within thirty (30) days from and after the
date on which this Agreement becomes a final agreement as provided
hereinbelow, Manager shall prepare and submit to Owner for its review and
approval, which approval shall not be unreasonably withheld, an annual
operating budget, an annual capital expenditure budget, and an annual cash
flow projection. In the event a budget has not been agreed upon by the
beginning of the fiscal year, the budget in effect for the prior fiscal year
shall continue in effect until the new budget is agreed upon. Thereafter,
within forty-five (45) days prior to the start of each fiscal year, Manager
shall prepare and submit to Owner for its review and approval, which approval
shall not be unreasonably withheld, an annual operating budget, an annual
capital expenditure budget, and an annual cash flow projection. In the event
a budget has not been agreed upon by the beginning of the fiscal year, the
budget in effect for the prior fiscal year shall continue in effect until the
new budget is agreed upon. Thereafter, any expenditures made during the year
pursuant to said budgets and/or any expenditures exceeding by no more than
7 1/2%, on an aggregate basis, the amounts set forth therein (the "BUDGET
THRESHOLD") may be made without Owner's prior approval. Any unbudgeted
expenditures and/or any expenditures in excess of the Budget Threshold shall
be subject to Owner's prior approval, which approval shall not be
unreasonably withheld.
(o) COLLECTION OF ACCOUNTS. Manager shall issue bills and collect
accounts and monies owed for goods and services furnished by each Facility,
including, but not limited to, enforcing the rights of Owner and each
Facility as creditors under any contract or in connection with the rendering
of any services; provided, however, that any expenses incurred by Manager
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in so doing shall be treated as operating expenses of each Facility, which
shall be payable out of the funds deposited in the bank accounts described in
Section 1.(j) hereof.
(p) QUALITY CONTROLS. Manager shall continuously maintain a
Quality Assurance ("QA") Program that objectively measures the quality of
health care provided at each Facility. Manager shall provide copies of all
QA reports, state surveys and complaint investigation reports to Owner within
ten (10) days of Manager's receipt thereof.
2. INSURANCE. Manager shall maintain, by payment of all necessary
premiums therefor as Facility Expenses, the following insurance with respect
to each Facility and the operation thereof, provided the same shall be
maintained in amounts and coverage consistent with the coverage in effect as
of the date hereof or such other amounts as may be required by law or, to the
extent required by the landlords or mortgagors of the Facilities, the
Facilities' leases and/or mortgages:
(a) PROPERTY INSURANCE. All necessary and proper hazard insurance
covering each Facility, the furniture, fixtures, and equipment situated
thereon in amounts consistent with any underlying Facility lease or mortgage.
(b) OTHER INSURANCE. All employee health and worker's
compensation insurance (if required under applicable law) for its employees
and all necessary and proper malpractice and public liability insurance for
the protection of itself, its officers, agents and employees. Any insurance
provided pursuant to this section shall comply with the requirements of any
underlying Facility lease and/or mortgage.
3. PROPRIETARY INTEREST. The systems, methods, procedures and
controls employed by Manager and any written materials or brochures developed
by Manager to document the same are to remain the property of Manager and are
not, at any time during or after the term of this Agreement, to be utilized,
distributed, copied or otherwise employed or acquired by Owner, except as
authorized by Manager. All systems, methods, procedures, written materials
or brochures developed by Owner shall remain the property of Owner and may be
used by Manager, during the term of this Agreement. Any systems, methods,
procedures, written materials or brochures developed by Manager may be used
by Owner for sixty (60) days after the termination of this Agreement.
Manager shall advise Owner in writing of any such proprietary materials which
may not be utilized by Owner following the expiration of such sixty (60) day
period.
4. TERM OF AGREEMENT. The Initial Term of this Agreement shall
commence on January 1, 1996 (the "COMMENCEMENT DATE") and shall continue for
ten (10) years thereafter. Manager shall have the right to extend the term
of this Agreement for two (2) consecutive five (5) year periods. Manager
shall exercise such extension right by providing Owner with written notice of
such extension not less than one year prior to the expiration of the then
current term hereof.
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5. DEFAULT. Either party may terminate this Agreement, as specified
in this Section 5, in the event of a default ("EVENT OF DEFAULT") by the
other party.
(a) With respect to Manager, subject to the provisions of Section 5
hereof, it shall be an "Event of Default" hereunder:
(1) If Manager shall fail to keep, observe or perform any
material agreement, term or provision of this Agreement, and such default
shall continue for a period of thirty (30) days after notice thereof shall
have been given to Manager by Owner, which notice shall specify the event
or events constituting the default;
(2) If Manager shall apply for or consent to the appointment of
a receiver, trustee or liquidator of Manager of all or a substantial part
of its assets, file a voluntary petition in bankruptcy, or admit in writing
its inability to pay its debts as they become due, make a general
assignment for the benefit of creditors, file a petition or an answer
seeking reorganization or arrangement with creditors or taking advantage of
any insolvency law, or if an order judgment or decree shall be entered by a
court of competent jurisdiction, on the application of a creditor,
adjudicating Manager, a bankrupt or insolvent or approving a petition
seeking reorganization of Manager, or appointing a receiver, trustee or
liquidator of Manager, of all or a substantial part of its assets.
(b) With respect to Owner, it shall be an Event of Default hereunder:
(1) Subject to the possible deferment of management fees
pursuant to the terms of Section 1.(j)(4), if Owner shall fail to make or
cause to be made any payment to Manager required to be made hereunder
(other than the payment of the Total Termination Fee or the Per Facility
Termination Fee (each as defined in Section 10) for which no cure period
shall be provided), and such failure shall continue for a period of twenty
(20) days after notice thereof;
(2) If Owner shall fail to keep, observe or perform any material
agreement, term or provision of this Agreement and such default shall
continue for a period of thirty (30) days after notice, which notice shall
specify an event or events constituting the default thereof by Manager to
Owner;
(3) If Owner shall fail to make payments, or keep any covenants,
owing to any third party which are beyond the control of Manager to make or
keep, and which would cause Owner to lose possession of the Facility or any
personal property which would be required to operate the Facility in the
normal course; or
(4) If Owner shall be dissolved or shall apply for or consent to
the appointment of a receiver, trustee or liquidator of Owner or of all or
a substantial part of its assets.
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6. REMEDIES UPON DEFAULT.
(a) If any Event of Default by Owner shall occur Manager shall be
entitled to any remedy available to it in law or equity on account of such
Event of Default, and Manager may forthwith terminate this Agreement as to
the Facility in question or all Facilities, as Manager may elect, and
thereafter, neither party shall have any further continuing operational
obligations whatsoever under this Agreement in respect of the terminated
Facility(ies), but Manager shall immediately be entitled to receive payment
of all amounts theretofore unpaid but earned to the date of termination,
including, but not limited to, any management fees and repayment of any loans
which may be outstanding. Notwithstanding the foregoing, if, during the term
of each Management Agreement, Owner terminates this Agreement and thereby
terminating all of the underlying Facility Management Agreements for other
than cause (which cause shall be conclusively deemed to exist if an Event of
Default by Manager exists), Manager shall be entitled to a termination fee
equal to $7,500,000 payable in cash within 45 days after the effective date
of the termination (the "TOTAL TERMINATION FEE"). The Total Termination Fee
shall be reduced on a pro-rata basis in accordance with the reduction in the
number of the Facilities which are the subject of this Agreement. By way of
example, assume that the aggregate number of Facilities as of the date hereof
is 135. Further assume that the number of Facilities which are the subject
of this Agreement as of the date of termination is 60. The Total Termination
Fee shall be 60 divided by 135 multiplied by $7,500,000.00 which equals
$3,333,333.00. In lieu of the Total Termination Fee, Manager may elect, in
Manager's sole discretion, if, during the term of each Management Agreement,
Owner terminates any one or more of the underlying Facility Management
Agreements for other than cause (which cause shall be conclusively deemed to
exist if an Event of Default by Manager exists) and for other than the
circumstances set forth in Section 10 hereinbelow, Manager shall be entitled
to a termination fee equal to 24 months management fee (determined according
to Section 9.(a) hereof, as adjusted pursuant to Section 9.(b) hereof) (the
"PER FACILITY TERMINATION FEE") and determined by multiplying (A) the
management fee earned by Manager (determined on an accrual basis) in respect
of the particular Facility for the immediately preceding calendar quarter, by
(B) eight (8); PROVIDED, HOWEVER, if, during the immediately preceding three
(3) month period the respective Facility has no net income (determined in
accordance with generally accepted accounting principles, consistently
applied), then Manager shall be entitled to a termination fee equal to
management fee which would have been payable to Manager during said
immediately preceding three (3) month period. However, in no event shall the
aggregate amount of the Per Facility Termination Fees exceed the Total
Termination Fee. Owner and Manager acknowledge and agree that they have
included the provision for the payment of the Total Termination Fee or the
Per Facility Termination Fee as provided above because, in the event of a
termination of this Agreement or one or more of the underlying Facility
Management Agreements, as applicable, for other than cause, the actual
damages to be incurred by Manager (including, without limitation, unrecovered
start-up expenses, additional overhead costs and capital improvement costs)
can reasonably be expected to approximate the amount of liquidated damages
called for herein and because the actual amount of such damages would be
difficult if not impossible to measure accurately.
9
<PAGE>
(b) If any Event of Default by Manager shall occur, Owner may, in
addition to any other remedy available to it in law or equity on account of
such Event of Default, forthwith terminate this Agreement as to the Facility
in question or all Facilities, as Owner may elect, and thereafter neither
party shall have any further continuing operational obligations whatsoever
under this Agreement in respect of the terminated Facility(ies); provided,
however, that Manager shall immediately be entitled to receive payment of all
amounts theretofore unpaid but earned to date of termination, subject to
Owner's right to receive payment of damages from Manager.
7. OWNER'S INSPECTION AND AUDIT RIGHTS. During the term hereof, Owner
shall have the right, upon reasonable notice and during normal business hours
to inspect each Facility and to inspect and/or audit all books and records
pertaining to the operation thereof (the "FACILITY RECORDS"). In this
connection, Owner shall have the right to conduct, or cause to be conducted,
audits and examinations of each of the Facility Records. Unless and except
to the extent that any such examination or audit discloses material errors,
omissions or misstatements by Manager, the cost of all such audits and
examinations shall be a Facility expense payable out of each Facility bank
accounts. Errors in excess of ten percent (10%) in the aggregate shall be
deemed "material." Manager shall pay the costs of all audits and
examinations which disclose errors in favor of Owner in excess of ten percent
(10%) in the aggregate. The books and records of each Facility shall be
audited by a firm of independent certified public accountants mutually
acceptable to both Owner and Manager annually, which shall be arranged for by
Manager. The expense therefor shall be a Facility expense payable out of
Facility bank accounts. The annual audit shall be completed no more than 120
days after the end of the fiscal year of Owner.
8. FACILITY OPERATIONS.
(a) NO GUARANTEE OF PROFITABILITY. Manager does not guarantee
that operation of each Facility will be profitable, but Manager shall use its
best efforts to operate each Facility in as cost efficient and profitable a
manner as reasonably possible consistent with applicable state, local and
federal laws and regulations.
(b) STANDARD OF PERFORMANCE. In performing its obligations under
this Agreement, Manager shall use its best efforts and act with
professionalism in accordance with acceptable and prevailing standards of
health care as a reasonably prudent operator and the policies adopted by, and
resources available to, each Facility.
(c) FORCE MAJEURE. Manager will not be deemed to be in violation
of this Agreement if it is prevented from performing any of its obligations
hereunder for any reason beyond its control, including, without limitation,
strikes, shortages, war, acts of God, or any statute, regulation or rule of
federal, state or local government or agency thereof.
(d) TRANSACTIONS BETWEEN MANAGER AND ITS AFFILIATES. The parties
hereto understand and acknowledge that, in the interest of benefitting the
overall welfare of the patients/residents of each Facility, Manager may, for
and on behalf of, and in the name of Owner, subcontract with certain of its
affiliates to provide such ancillary services as pharmaceuticals and
10
<PAGE>
pharmaceutical dispensation, enteral, parenteral, and infusion therapies;
pharmacy consultation; speech, occupational and physical therapy services;
respiratory therapies; clinical laboratory services; and other services such
as non-invasive diagnostic testing. Manager agrees that it will cause the
regional offices of its affiliates that provide such ancillary services to
conduct regional market surveys of prevailing market rates for similar
services in the respective Facility's market area ("PREVAILING MARKET RATES")
and that the cost of such services to each Facility and/or the residents of
each Facility shall be reasonably comparable to the Prevailing Market Rates.
Upon completion of any such market survey of the Prevailing Market Rates for
any Facility, each of Manager's affiliates providing ancillary services to
residents in each Facility shall deliver the results of any such market
survey to Owner to enable Owner to exercise its best business judgment that
Manager's use of its affiliates to provide such ancillary services represents
a "reasonable and prudent buyer" decision. Final authority regarding each
such subcontract (and the identity of each subcontractor) shall lie with
Owner; however, so long as Manager's affiliates provide such services at the
Prevailing Market Rates for similar services, Owner shall not unreasonably
withhold or delay its consent to Manager's affiliates performing such
services.
(e) AUDIT RIGHTS. Owner may, after giving Manager 30 days' prior
written notice thereof, inspect or have an independent firm of certified
public accountants audit Manager's records relating to transactions between
Manager and its Affiliates ("AFFILIATE TRANSACTIONS") for the Facility for
the year immediately preceding the audit or inspection; however, no audit or
inspection shall extend to periods of time before the date on which Manager
began actively managing the Facilities. Owner's audit or inspection shall be
conducted only during business hours reasonably designated by Manager. Owner
shall pay the reasonable costs (as determined by Manager) of such audit or
inspection, including Manager's or the facility administrator's employee time
devoted to such audit or inspection to reimburse Manager for its overhead
costs allocable to the inspection or audit, unless the audit or inspection
for the time period in question is determined to be in error by more than
five percent (5%) in the aggregate and, as a result thereof, Owner paid more
than 105% of the actual Prevailing Market Rates for the Affiliate
Transactions due for such time period, in which case Manager shall reimburse
Owner with respect to such audit or inspection the sum of (1) any amounts
billed by Manager and collected from Owner with respect to such audit or
inspection, if any, and (2) the lesser of (i) Owner's out-of-pocket costs in
connection with such audit or (ii) the actual amount of the variance between
the amount billed to Owner for the such Affiliate Transactions and a final
audited figure for the Prevailing Market Rates for such services. Owner may
not conduct an inspection or have an audit performed more than once during
any calendar year. If such inspection or audit reveals that Manager charged
Owner fees for such Affiliate Transactions in excess of 105% of the
Prevailing Market Rates, then Manager shall refund to Owner any overpayment
of any such fees, within 30 days after Manager's and Owner's determination of
the Prevailing Market Rates thereof. Owner shall maintain the results of
such audit and inspection confidential and shall not be permitted to use any
third party to perform such audit and inspection unless such third party is a
certified public accountant and agrees with Manager in writing to maintain
the results of such audit or inspection confidential.
11
<PAGE>
9. MANAGER'S FEE
(a) BASE FEE. During the term of this Agreement, subject to the
adjustments identified in Section 9.(b) of this Agreement, Manager shall be
entitled to a monthly management fee equal to 6.5% of the gross revenues
generated from the operation of each Facility throughout the term hereof.
Such fee shall be payable within 30 days of Manager's invoice therefor. For
purposes hereof, "gross revenues" shall mean all revenues generated by each
Facility, but shall specifically exclude the proceeds from the sale of any
equipment located in and used in connection with the operation of each
Facility, any insurance and condemnation proceeds and/or the proceeds from
the sale or disposition of any of the Facilities.
(b) MANAGEMENT COMPANY INCENTIVES. Notwithstanding the provisions
of Section 9.(a) hereinabove, during the term of each Management Agreement,
every $5,000,000 decrease, excluding decreases resulting from external source
borrowings, in the outstanding principal balance owing by Owner to Manager
under the Loan Agreement shall result in an increase in the management fee by
an amount equal to .5% of the gross revenues generated by the operation of
each Facility; PROVIDED, HOWEVER, notwithstanding the foregoing, at such time
as the outstanding principal balance owing by Owner to Manager under the Loan
Agreement is equal to or less than $10,000,000, then the management fee shall
be equal to 7.5% of the gross revenues generated by the operation of each
Facility; PROVIDED FURTHER, HOWEVER, that in no event shall the management
fee exceed 7.5% of the gross revenues generated by operation of each Facility.
10. MANAGER'S RIGHT OF FIRST REFUSAL. If Owner receives an offer to
purchase any Facility from an unrelated third party during the term or any
renewal term of this Agreement, Manager shall have the first right to
purchase the Facility for the same price (except as set forth below) and on
the same terms as Owner has negotiated with such third party. Owner shall
provide Manager with a notice of its intention to sell the Facility, which
must contain a complete copy of the offer stating all the terms and
conditions of the transaction (the "OFFER NOTICE"). Within ten (10) days of
Manager's receipt of the Offer Notice, Manager shall notify Owner of its
intent to exercise its first right to purchase the Facility and indicate its
willingness to enter into a purchase agreement on the same terms and
conditions as provided in such notice; however, Manager shall be entitled to
a reduction in the purchase price for any brokerage commission which Owner
would have paid in connection with the offered transaction, but does not pay
in connection with the sale of such Facility to Manager. If Manager elects
not to exercise its first right to purchase, Owner may sell the Facility in
question within 120 days thereafter at a third party sale at a price no less
than the stated sales price in the Offer Notice or on terms more favorable
than those contained in the Offer Notice. After such 120 days, Owner must
re-offer the Facility to Manager. The right granted to Manager hereunder
shall be an ongoing right of first refusal and shall continue until the
expiration or termination of this Agreement. Upon the sale of a Facility to
a third party, the provisions of this Agreement shall terminate with regard
to such Facility.
12
<PAGE>
11. REPRESENTATIONS AND WARRANTIES.
(a) MANAGER. To induce the Company to enter into this Agreement,
Manager hereby represents and warrants to Owner as follows:
(1) Manager is a corporation duly organized and validly existing
under the laws of the State of Delaware and has all requisite power and
authority under the laws of each state in which Manager conducts business
and its charter documents to own its property and assets, to enter into and
perform its obligations under this Agreement and to transact the business
in which it is engaged or presently proposes to engage.
(2) Manager has taken all necessary action to authorize the
execution, delivery and performance of this Agreement, and this Agreement
constitutes the valid and binding obligation and agreement of Manager,
enforceable in accordance with its terms.
(3) Neither the execution and delivery of this Agreement, nor
compliance with the terms of provisions hereof, will result in any breach
of the terms, conditions or provisions of, or conflict with or constitute a
default under, or result in the creation of any lien, charge or encumbrance
upon any property or assets of Manager pursuant to the terms of, any
indenture, mortgage, deed of trust, note, evidence of indebtedness,
agreement or other instrument to which Manager may be a party or by which
it or they or any of its properties may be bound, or violate any provision
of law, or any applicable order, writ, injunction, judgment or decree of
any court, or any order or other public regulation of any governmental
commission, bureau or administrative agency.
(4) No order, permission, consent, approval, license,
authorization, registration or validation of, or filing with, or exemption
by, any governmental agency, commission, board or public authority is
required to authorize, or is required in connection with the execution,
delivery and performance by Manager of, this Agreement or the taking of any
action contemplated herein except for the notice and filing requirements of
the Texas Department of Human Services.
(b) OWNER. To induce Manager to enter into this Agreement, Owner
hereby represents and warrants to Manager as follows:
(1) Each Owner is a corporation or limited partnership, as
applicable, duly organized and validly existing under the laws of the state
of its formation and has all requisite power and authority under the laws
of such state and its organizational documents to own its property and
assets, to enter into and perform its obligations under this Agreement and
to transact business in which it is engaged or presently proposes to
engage.
(2) Each Owner has taken all necessary action to authorize the
execution, delivery and performance of this Agreement, and this Agreement
constitutes
13
<PAGE>
the valid and binding obligation and agreement of each of Owner,
enforceable in accordance with its terms.
(3) Each Owner shall use its best efforts to obtain all
necessary consents and agreements from third parties to ensure that this
Agreement does not breach, conflict with or constitute a default under, or
result in the creation of any lien, charge or encumbrance upon, any
property or assets of any Owner pursuant to the terms of any indenture,
mortgage, deed of trust, note, evidence of indebtedness, agreement and
other instrument to which any Owner is a party or by which it may be bound,
or violate any provision of law, or any applicable order, writ, injunction,
judgment or decree of any governmental commission, bureau or administrative
agency. Each Owner and Manager shall cooperate in good faith to execute
any necessary documentation to evidence such consents and any other
documentation reasonably necessary to effectuate the spirit of this
Agreement and the other Loan Documents.
(4) There are no accrued pension plan benefits for any employees
of Owner at each Facility nor, except as set forth on EXHIBIT B, are there
any labor union contracts at any of the Facilities. Except as set forth on
EXHIBIT B, neither Owner nor any operator of any of the Facilities are a
party to a union or other collective bargaining agreement with respect to
any of the Facilities. To Owner's knowledge, none of the employees are
actively seeking the formation of a labor union. To Owner's knowledge,
Owner is not a party to any labor dispute or grievance except as set forth
on EXHIBIT B.
(5) To the best of Owner's knowledge, there are no patient care
agreements or life care contracts with residents of any of the Facilities
or with any other persons or organizations which deviate in any material
respect from the standard form customarily used at any of the Facilities.
To the best of Owner's knowledge, all patient records at any of the
Facilities are true and correct in all material respects.
(6) To the best of Owner's knowledge, all inventories of non-
perishable food and central supplies located at each Facility are in
sufficient condition and quantity to operate each Facility at normal
capacity for one week or at such higher levels as may be required by law.
All inventories of perishable food are at the levels normally maintained by
Owner or at such higher levels as may be required by law.
(7) All prior agreements to provide management services in
respect of any of the Facility have been terminated and are of no further
force and effect other than as set forth on EXHIBIT C.
12. ASSIGNMENT. This Agreement shall not be assigned by either party
without the prior written consent of the other party. Manager may not,
without the prior written consent of Owner, which may be withheld or granted
in Owner's sole discretion, assign its obligations as Manager hereunder or
sublease, assign or submanage any of the Facilities other than to an
affiliate of Manager.
14
<PAGE>
13. SEVERABILITY. In case any one or more of the provisions contained
in this Agreement should be invalid, illegal or unenforceable in any respect,
the validity, legality or enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby, but
this Agreement shall be reformed and construed and enforced to the maximum
extent permitted by applicable law.
14. APPLICABLE LAW. This Agreement shall be interpreted, construed,
applied and enforced in accordance with the laws of the State of Texas
applicable to contracts between residents of Texas which are to be performed
entirely within Texas, regardless of (i) where this Agreement is executed or
delivered; or (ii) where any payment or other performance required by this
Agreement is made or required to be made; or (iii) where any breach of any
provision of this Agreement occurs, or any cause of action otherwise accrues;
or (iv) where any action or other proceeding is instituted or pending; or (v)
the nationality, citizenship, domicile, principle place of business, or
jurisdiction of organization or domestication of any party; or (vi) whether
the laws of the forum jurisdiction otherwise would apply the laws of a
jurisdiction other than the State of Texas; or (vii) any combination of the
foregoing.
15. NOTICES. All notices required or permitted hereunder shall be
given in writing by hand delivery, by registered or certified mail, postage
prepaid, by overnight delivery or by facsimile transmission (with receipt
confirmed with the recipient). Notice shall be delivered or mailed to the
parties at the following addresses or at such other places as either party
shall designate in writing.
To Manager: Horizon Facilities Management, Inc.
Horizon/CMS Healthcare Corporation
6001 Indian School Road, N.E., Suite 530
Albuquerque, New Mexico 87110
Telephone: (505) 881-4961
Facsimile: (505) 881-5097
Attn.: Neal M. Elliott
With a copy to: Scot Sauder, General Counsel
Horizon/CMS Healthcare Corporation
6001 Indian School Road, N.E., Suite 530
Albuquerque, New Mexico 87110
Telephone: (505) 881-4961
Facsimile: (505) 881-5097
15
<PAGE>
To Owner: HEA Management Group, Inc.
Texas Health Enterprises, Inc.
Health Enterprises of Oklahoma, Inc.
Health Enterprises of Michigan, Inc.
PCK-TEX, LTD.,
401 North Elm Street
Denton, Texas 76201
with a copy to: Steven G. Wolff, Esq.
Rosenfeld & Wolff
2049 Century Park East, Suite 600
Los Angeles, CA 90067
Telecopier: 310-556-0401
16. RELATIONSHIP OF THE PARTIES. The relationship of the parties shall
be that of Owner and Independent Contractor and all acts performed by Manager
during the term hereof as Manager of the Facility shall be deemed to be
performed in its capacity as an independent contractor. Nothing contained in
this Agreement is intended to or shall be construed to give rise to or create
a partnership or joint venture or lease between Owner, its successors and
assigns on the one hand, and Manager, its successors and assigns on the other
hand. Manager will not be liable in the performance of its duties for any
loss incurred by or damage to Owner, unless such loss or damage results from
the negligence or willful misconduct of Manager.
17. INDEMNIFICATION. Manager shall indemnify, defend and hold Owner
harmless from any loss, liability or damage resulting from the acts or
omissions of Manager, it's officers, agents (which shall include Owner's
employees while under Manager's supervision pursuant to the terms of this
Agreement) or employees in connection with the operation of the Facility by
Manager. Owner shall indemnify, defend and hold Manager harmless from any
loss, liability or damage resulting from the negligence or willful misconduct
of Owner, its officers, agents or employees not under the direction or
control of Manager in performing their obligations under the Agreement.
18. OBLIGATIONS SECURED. All of Owner's obligations hereunder,
including, without limitation, Manager's management fee, the Total
Termination Fee, the Per Facility Termination Fee, and Manager's right of
first refusal, shall be secured by the Loan Documents (as defined in the Loan
Agreement).
19. ENTIRE AGREEMENT. Except for that certain Letter Agreement dated
as of December 20, 1995 by and among Horizon/CMS Healthcare Corporation,
Manager, Texas Health Enterprises, Inc., and HEA Management Group, Inc., the
Loan Agreement and all documents and/or instruments executed in connection
therewith, this Agreement contains the entire agreement between the parties
and shall be binding upon and inure to the benefit of their successors and
assigns. This Agreement may not be modified or amended except by written
instrument signed by both of the parties hereto.
16
<PAGE>
20. CAPTIONS. The captions used herein are for convenience of
reference only and shall not be construed in any manner to limit or modify
any of the terms hereof.
21. ATTORNEY'S FEES. In the event either party brings an action to
enforce this Agreement, the prevailing party in such action shall be entitled
to recover from the other all costs incurred in connection therewith,
including reasonable attorney's fees.
22. CUMULATIVE; NO WAIVER. A right or remedy herein conferred upon or
reserved to either of the parties hereto is intended to be exclusive of any
other right or remedy, and each and every right and remedy shall be
cumulative and in addition to any other right or remedy given hereunder, or
now or hereafter legally existing upon the occurrence of an Event of Default
hereunder. The failure of either party hereto to insist at any time upon the
strict observance or performance of any of the provisions of this Agreement
or to exercise any right or remedy as provided in this Agreement shall not
impair any such right or remedy or be construed as a waiver or relinquishment
thereof with respect to subsequent defaults. Every right and remedy given by
this Agreement to the parties hereof may be exercised from time to time and
as often as may be deemed expedient by the parties thereto, as the case may
be.
23. DISCLAIMER OF EMPLOYMENT OF FACILITY EMPLOYEES. Each employee that
offices at the HEA Group's home office in Denton, Texas whom Manager, in its
sole discretion, retains, shall be and become Manager's employees and shall
be included in the management fee, and shall not be included as a Facility
expense. No person employed by any of the Facilities will be an employee of
Manager, and Manager shall have no liability for payment of their wages,
payroll taxes, and other expenses of employment, except that Manager shall
have the obligation to exercise reasonable care in its management of the
Facility and to apply available funds to the payment of such wage and payroll
taxes. All such persons will be employees Owner or independent contractors
or the employees of independent contractors, as appropriate under the terms
of this Agreement.
24. RESPONSIBILITY FOR MISCONDUCT OF EMPLOYEES AND OTHERS. Manager
will have no liability whatsoever for damages suffered on account of the
dishonesty, willful misconduct or negligence of any employee of Owner unless
Manager is shown to have been negligent in its supervision of said employees,
in which case Manager shall be liable for its own negligence but not for the
acts of said employee(s).
25. ACCESS OF THE GOVERNMENT TO BOOKS AND RECORDS. In the event the
services provided hereunder have a 12-month cost or value of $10,000 or more
(or such other amount as may hereafter be established by law):
(a) Until the expiration of four years after the furnishing of
services pursuant to this Agreement, Manager shall make available upon
written request to the Secretary of the United States Department of Health
and Human Services, or upon request to the Comptroller General of the United
States, or any of their duly authorized representatives, this Agreement, and
books, documents and records that are necessary to certify the nature and
extent of such costs.
17
<PAGE>
(b) If Manager or its affiliates carries out any of the duties of
this Agreement through a subcontract, with a related organization, such
subcontract shall contain a clause to the effect that until the expiration of
four years after the furnishing of such services pursuant to such
subcontract, the related organization shall make available, upon written
request to the Secretary of the United States Department of Health and Human
Services, or upon request to the Comptroller General of the United States, or
any of their duly authorized representatives, the subcontract, and books,
documents and records of such organization that are necessary to certify the
nature and extent of such costs.
(c) The parties agree that any applicable attorney-client or other
legal privileges shall not be deemed waived by virtue of this Agreement.
26. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, and each such counterpart
shall together constitute but one and the same Agreement.
IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the
day and year first written above.
18
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TEXAS HEALTH ENTERPRISES, INC.,
a Texas corporation
By:
----------------------------------
Peter C. Kern, President
HEALTH ENTERPRISES OF OKLAHOMA, INC.,
an Oklahoma corporation
By:
----------------------------------
Peter C. Kern, President
HEALTH ENTERPRISES OF MICHIGAN, INC.,
a Michigan corporation
By:
----------------------------------
Peter C. Kern, President
PCK-TEX, LTD.,
a Texas limited partnership,
By: Texas Health Enterprises, Inc.,
a Texas corporation, General Partner
By:
----------------------------------
Peter C. Kern, President
<PAGE>
HORIZON FACILITIES MANAGEMENT, INC.,
a Delaware corporation,
By:
------------------------------------
Neal M. Elliott, President,
Chairman and Chief Executive Officer
<PAGE>
EXHIBIT A
[List of Labor Grievances]
A-1
<PAGE>
EXHIBIT B
[List of Existing Management Agreements]
B-1
<PAGE>
EXHIBIT 10.44
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
LOAN AGREEMENT
BETWEEN
TEXAS HEALTH ENTERPRISES, INC.,
HEALTH ENTERPRISES OF OKLAHOMA, INC.,
HEALTH ENTERPRISES OF MICHIGAN, INC.,
HEA MANAGEMENT GROUP, INC. AND PCK-TEX, LTD.
INDIVIDUALLY AND COLLECTIVELY, AS BORROWER
AND
HORIZON FACILITIES MANAGEMENT, INC.
AS LENDER
JANUARY 1, 1996
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE NO.
--------
ARTICLE 1
CERTAIN DEFINITIONS
Section 1.1 CERTAIN DEFINITIONS. . . . . . . . . . . . . . . . . 1
ARTICLE 2
LOAN TERMS
Section 2.1 THE LOAN . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.2 INTEREST RATE; LATE CHARGE . . . . . . . . . . . . . 6
Section 2.3 TERMS OF PAYMENT . . . . . . . . . . . . . . . . . . 6
Section 2.4 SECURITY . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.5 APPLICATION OF OPERATING REVENUES. . . . . . . . . . 7
Section 2.6 RIGHT OF SET-OFF . . . . . . . . . . . . . . . . . . 7
ARTICLE 3
INSURANCE, CONDEMNATION, AND IMPOUNDS
Section 3.1 INSURANCE. . . . . . . . . . . . . . . . . . . . . . 8
Section 3.2 USE AND APPLICATION OF INSURANCE PROCEEDS. . . . . . 9
Section 3.3 CONDEMNATION AWARDS. . . . . . . . . . . . . . . . . 9
Section 3.4 IMPOUNDS . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE 4
ENVIRONMENTAL MATTERS
Section 4.1 CERTAIN DEFINITIONS. . . . . . . . . . . . . . . . . 10
Section 4.2 COVENANTS ON ENVIRONMENTAL MATTERS . . . . . . . . . 10
Section 4.3 ALLOCATION OF RISKS AND INDEMNITY. . . . . . . . . . 11
Section 4.4 NO WAIVER. . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 5
LEASING MATTERS
Section 5.1 REPRESENTATIONS AND WARRANTIES ON LEASES . . . . . . 12
Section 5.2 COVENANTS. . . . . . . . . . . . . . . . . . . . . . 12
Section 5.3 TENANT ESTOPPELS . . . . . . . . . . . . . . . . . . 13
i
<PAGE>
ARTICLE 6
REPRESENTATIONS AND WARRANTIES
Section 6.1 ORGANIZATION AND POWER . . . . . . . . . . . . . . . 13
Section 6.2 VALIDITY OF LOAN DOCUMENTS . . . . . . . . . . . . . 13
Section 6.3 LIABILITIES; LITIGATION. . . . . . . . . . . . . . . 13
Section 6.4 TAXES AND ASSESSMENTS. . . . . . . . . . . . . . . . 13
Section 6.5 OTHER AGREEMENTS; DEFAULTS . . . . . . . . . . . . . 13
Section 6.6 COMPLIANCE WITH LAW. . . . . . . . . . . . . . . . . 14
Section 6.7 LOCATION OF BORROWER . . . . . . . . . . . . . . . . 14
Section 6.8 MARGIN STOCK . . . . . . . . . . . . . . . . . . . . 14
Section 6.9 TAX FILINGS. . . . . . . . . . . . . . . . . . . . . 14
Section 6.10 SOLVENCY . . . . . . . . . . . . . . . . . . . . . . 14
Section 6.11 FULL AND ACCURATE DISCLOSURE . . . . . . . . . . . . 15
Section 6.12 ERISA. . . . . . . . . . . . . . . . . . . . . . . . 15
Section 6.13 INVESTMENT COMPANY ACT . . . . . . . . . . . . . . . 16
Section 6.14 NO FINANCING OF CORPORATE TAKEOVERS. . . . . . . . . 16
Section 6.15 SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . 16
ARTICLE 7
FINANCIAL REPORTING
Section 7.1 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . 16
Section 7.2 ACCOUNTING PRINCIPLES. . . . . . . . . . . . . . . . 17
Section 7.3 OTHER INFORMATION. . . . . . . . . . . . . . . . . . 17
Section 7.4 AUDITS . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE 8
COVENANTS
Section 8.1 DUE ON SALE AND ENCUMBRANCE; TRANSFERS OF INTERESTS. 17
Section 8.2 TAXES; CHARGES . . . . . . . . . . . . . . . . . . . 18
Section 8.3 CONTROL; MANAGEMENT AGREEMENT. . . . . . . . . . . . 19
Section 8.4 OPERATION; MAINTENANCE; INSPECTION . . . . . . . . . 19
Section 8.5 TAXES ON SECURITY. . . . . . . . . . . . . . . . . . 19
Section 8.6 LEGAL EXISTENCE; NAME, ETC.. . . . . . . . . . . . . 19
Section 8.7 AFFILIATE TRANSACTIONS . . . . . . . . . . . . . . . 19
Section 8.8 LIMITATION ON OTHER DEBT . . . . . . . . . . . . . . 19
Section 8.9 FURTHER ASSURANCES . . . . . . . . . . . . . . . . . 20
Section 8.10 ESTOPPEL CERTIFICATES. . . . . . . . . . . . . . . . 20
Section 8.11 NOTICE OF CERTAIN EVENTS . . . . . . . . . . . . . . 20
Section 8.12 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . 20
Section 8.13 RESTRICTION ON DIVIDENDS AND DISTRIBUTIONS . . . . . 20
Section 8.14 ERISA INFORMATION AND COMPLIANCE . . . . . . . . . . 21
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Section 8.15 SALE OR DISCOUNT OF RECEIVABLES. . . . . . . . . . . 22
Section 8.16 SALES AND LEASEBACKS . . . . . . . . . . . . . . . . 22
Section 8.17 MANAGEMENT BY LENDER . . . . . . . . . . . . . . . . 22
Section 8.18 ADDITIONAL COLLATERAL DOCUMENTATION. . . . . . . . . 23
ARTICLE 9
EVENTS OF DEFAULT
Section 9.1 PAYMENTS . . . . . . . . . . . . . . . . . . . . . . 23
Section 9.2 INSURANCE. . . . . . . . . . . . . . . . . . . . . . 23
Section 9.3 SALE, ENCUMBRANCE, ETC.. . . . . . . . . . . . . . . 23
Section 9.4 COVENANTS. . . . . . . . . . . . . . . . . . . . . . 23
Section 9.5 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . 24
Section 9.6 OTHER ENCUMBRANCES . . . . . . . . . . . . . . . . . 24
Section 9.7 BANK ACCOUNT TRANSFER ORDERS . . . . . . . . . . . . 24
Section 9.8 UNAUTHORIZED ACCOUNT WITHDRAWALS . . . . . . . . . . 24
Section 9.9 INVOLUNTARY BANKRUPTCY OR OTHER PROCEEDING . . . . . 24
Section 9.10 VOLUNTARY PETITIONS, ETC.. . . . . . . . . . . . . . 24
ARTICLE 10
REMEDIES
Section 10.1 REMEDIES - INSOLVENCY EVENTS . . . . . . . . . . . . 25
Section 10.2 REMEDIES - OTHER EVENTS. . . . . . . . . . . . . . . 25
Section 10.3 LENDER'S RIGHT TO PERFORM THE OBLIGATIONS. . . . . . 25
ARTICLE 11
MISCELLANEOUS
Section 11.1 EXTENSION. . . . . . . . . . . . . . . . . . . . . . 26
Section 11.2 NOTICES. . . . . . . . . . . . . . . . . . . . . . . 26
Section 11.3 AMENDMENTS AND WAIVERS . . . . . . . . . . . . . . . 27
Section 11.4 LIMITATION ON INTEREST . . . . . . . . . . . . . . . 27
Section 11.5 INVALID PROVISIONS . . . . . . . . . . . . . . . . . 27
Section 11.6 REIMBURSEMENT OF EXPENSES. . . . . . . . . . . . . . 27
Section 11.7 APPROVALS; THIRD PARTIES; CONDITIONS . . . . . . . . 28
Section 11.8 LENDER NOT IN CONTROL; NO PARTNERSHIP. . . . . . . . 28
Section 11.9 TIME OF THE ESSENCE. . . . . . . . . . . . . . . . . 28
Section 11.10 SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . 28
Section 11.11 RENEWAL, EXTENSION OR REARRANGEMENT. . . . . . . . . 29
Section 11.12 WAIVERS - GENERAL. . . . . . . . . . . . . . . . . . 29
Section 11.13 MULTIPLE BORROWER WAIVERS. . . . . . . . . . . . . . 29
Section 11.14 CUMULATIVE RIGHTS. . . . . . . . . . . . . . . . . . 29
Section 11.15 SINGULAR AND PLURAL. . . . . . . . . . . . . . . . . 29
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Section 11.16 PHRASES. . . . . . . . . . . . . . . . . . . . . . . 29
Section 11.17 EXHIBITS AND SCHEDULES . . . . . . . . . . . . . . . 30
Section 11.18 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS . . . . 30
Section 11.19 PROMOTIONAL MATERIAL . . . . . . . . . . . . . . . . 30
Section 11.20 SURVIVAL . . . . . . . . . . . . . . . . . . . . . . 30
Section 11.21 WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . 30
Section 11.22 WAIVER OF PUNITIVE OR CONSEQUENTIAL DAMAGES. . . . . 30
Section 11.23 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . 30
Section 11.24 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . 31
Section 11.25 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . 31
Section 11.26 EXCULPATION PROVISIONS . . . . . . . . . . . . . . . 31
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LIST OF EXHIBITS AND SCHEDULES
EXHIBIT A
DESCRIPTIONS OF FACILITIES
EXHIBIT B
BUDGET
EXHIBIT C
PARTIAL RELEASE OF LIENS
SCHEDULE 2.1
ADVANCE CONDITIONS
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LOAN AGREEMENT
This Loan Agreement (this "AGREEMENT") is entered into as of January 1,
1996, between HORIZON FACILITIES MANAGEMENT, INC., a Delaware corporation
("LENDER"), and TEXAS HEALTH ENTERPRISES, INC., a Texas corporation, HEALTH
ENTERPRISES OF OKLAHOMA, INC., an Oklahoma corporation, HEALTH ENTERPRISES OF
MICHIGAN, INC., a Michigan corporation, HEA MANAGEMENT GROUP, INC., a Texas
corporation, and PCK-TEX, LTD., a Texas limited partnership (individually and
collectively, "BORROWER").
ARTICLE 1
CERTAIN DEFINITIONS
Section 1.1 CERTAIN DEFINITIONS. As used herein, the following terms
have the meanings indicated:
(1) "AFFILIATE" means (a) any corporation in which Borrower or any
partner, shareholder, director, officer, member, or manager of Borrower
directly or indirectly owns or controls more than ten percent (10%) of the
beneficial interest, (b) any partnership, joint venture or limited liability
company in which Borrower or any partner, shareholder, director, officer,
member, or manager of Borrower is a partner, joint venturer or member, (c)
any trust in which Borrower or any partner, shareholder, director, officer,
member or manager of Borrower is a trustee or beneficiary, (d) any entity of
any type which is directly or indirectly owned or controlled by Borrower or
any partner, shareholder, director, officer, member or manager of Borrower,
(e) any partner, shareholder, director, officer, member or manager of
Borrower, or (f) any Person related by birth, adoption or marriage to any
partner, shareholder, director, officer, member, manager, or employee of
Borrower.
(2) "AGREEMENT" means this Loan Agreement, as amended from time to
time.
(3) "ASSIGNMENTS OF RENTS AND LEASES" means the Assignments of
Rents and Leases, executed by Borrower for the benefit of Lender, and
pertaining to leases of space in the Facilities.
(4) "BUDGET" means the budget attached as EXHIBIT B showing total
costs relating to the subject transaction, use of the initial advance of the
Loan, and amounts allocated for future advances.
(5) "BUSINESS DAY" means a day other than a Saturday, a Sunday, or
a legal holiday on which national banks located in the State of New York are
not open for general banking business.
(6) "CODE" shall mean the Internal Revenue Code of 1986, as
amended from time to time and any successor statute.
(7) "CONTRACT RATE" has the meaning assigned in Article 2.
(8) "DEBT" means, for any Person, without duplication: (a) all
indebtedness of such Person for borrowed money, for amounts drawn under a
letter of credit, or for the deferred purchase price
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of property for which such Person or its assets is liable, (b) all unfunded
amounts under a loan agreement, letter of credit, or other credit facility
for which such Person would be liable, if such amounts were advanced under
the credit facility, (c) all amounts required to be paid by such Person as a
guaranteed payment to partners or a preferred or special dividend, including
any mandatory redemption of shares or interests, (d) all indebtedness
guaranteed by such Person, directly or indirectly, and (e) all obligations of
such Person under interest rate swaps, caps, floors, collars and other
interest hedge agreements, in each case whether such Person is liable
contingently or otherwise, as obligor, guarantor or otherwise, or in respect
of which obligations such Person otherwise assures a creditor against loss.
(9) "DEBT SERVICE" means the aggregate interest, fixed principal,
and other payments due under the Loan, and on any other outstanding permitted
Debt relating to the Facilities approved by Lender for the period of time for
which calculated.
(10) "DEFAULT RATE" means the lesser of (a) the maximum rate of
interest allowed by applicable law, and (b) five percent (5%) per annum in
excess of the Contract Rate.
(11) "ELIGIBLE ACCOUNTS" means any accounts receivable of Borrower
that have been approved by Lender as being reasonably collectible in the
ordinary course of business; no account receivable of Borrower shall be
deemed to be an Eligible Account if the account debtor is in default under
its obligation owing to Borrower or if such account is more than 30 days
delinquent calculated from the date due (or, if such receivable is a
Medicare, Medicaid or other government funded receivable, more than 120 days
delinquent calculated from the date of invoice), or if Lender otherwise
believes there is a reasonable doubt that such account may be collected in
the ordinary course of business without resort to litigation or other
extraordinary collection efforts.
(12) "ENVIRONMENTAL LAWS" has the meaning assigned in Article 4.
(13) "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time, and any successor statute.
(14) "ERISA AFFILIATE" shall mean each trade or business (whether
or not incorporated) which together with any Borrower or any Affiliate of any
Borrower would be deemed to be a "single employer" within the meaning of
section 4001(b)(1) of ERISA or subsections (b), (c), (m) or (o) of section
414 of the Code.
(15) "ERISA EVENT" shall mean (a) a "Reportable Event" described in
Section 4043 of ERISA and the regulations issued thereunder, (b) the
withdrawal of any Borrower, any Affiliate of any Borrower or any ERISA
Affiliate from a Plan during a plan year in which it was a "substantial
employer" as defined in Section 4001(a)(2) of ERISA, (c) the filing of a
notice of intent to terminate a Plan or the treatment of a Plan amendment as
a termination under Section 4041 of ERISA, (d) the institution of proceedings
to terminate a Plan by PBGC or (e) any other event or condition which might
constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Plan.
(16) "EVENT OF DEFAULT" has the meaning assigned in Article 9.
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(17) "FACILITIES" means the long-term care facilities more
particularly described in EXHIBIT A hereto.
(18) "GAAP" shall mean generally accepted accounting principles in
the United States of America in effect from time to time.
(19) "HAZARDOUS MATERIALS" has the meaning assigned in Article 4.
(20) "KERN" means Peter C. Kern.
(21) "LETTER AGREEMENT" means the side letter agreement of even
date between Lender and Kern with respect to Kern's obligations regarding
Facility dispositions and Lender's obligations regarding certain vacant
properties.
(22) "LIEN" means any interest, or claim thereof, in any Facility
securing an obligation owed to, or a claim by, any Person other than the
owner of the Facility, whether such interest is based on common law, statute
or contract, including the lien or security interest arising from a deed of
trust, mortgage, assignment, encumbrance, pledge, security agreement,
conditional sale or trust receipt or a lease, consignment or bailment for
security purposes. The term "Lien" shall include reservations, exceptions,
encroachments, easements, rights of way, covenants, conditions, restrictions,
leases and other title exceptions and encumbrances affecting a Facility.
(23) "LOAN" means the loan to be made by Lender to Borrower under
this Agreement and all other amounts secured by the Loan Documents.
(24) "LOAN DOCUMENTS" means: (a) this Agreement, (b) the Note, (c)
the Security Agreement, (d) the Pledge Agreement, (e) the Mortgages, (f) the
Assignments of Rents and Leases, (g) the Option Agreement, (h) the Letter
Agreement, (i) Uniform Commercial Code financing statements, (j) such
assignments of management agreements, contracts and other rights as may be
requested by Lender, (k) all other documents evidencing, securing, governing
or otherwise pertaining to the Loan, and (l) all amendments, modifications,
renewals, substitutions and replacements of any of the foregoing.
(25) "MANAGEMENT AGREEMENT" means the Master Management Agreement
of even date between Borrower, as Owner, and Lender, as Manager.
(26) "MATURITY DATE" means the earliest of (a) December 31, 2005
(to the extent that Lender elects to extend the term of the Management
Agreement, the Maturity Date may be extended in accordance with Section
11.1), (b) any earlier date on which the entire Loan is required to be paid
in full, by acceleration or otherwise, under this Agreement or any of the
other Loan Documents, or (c) the termination or expiration date of Lender's
credit facility.
(27) "MORTGAGES" means the Mortgages, Security Agreements and
Fixture Filings or the Deeds of Trust, Security Agreements and Fixture
Filings executed by Borrower in favor of Lender, covering the Facilities.
(28) "MULTIEMPLOYER PLAN" shall mean a Plan defined as such in
Section 3(37) or 4001(a)(3) of ERISA.
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(29) "NET CASH FLOW" means, for any period, the net cash flow
derived from operation of the Facilities for such period, as determined in
accordance with GAAP consistently applied and as verified and approved by
Lender.
(30) "NOTE" means the Promissory Note of even date, in the stated
principal amount of $35,000,000, executed by Borrower, and payable to the
order of Lender in evidence of the Loan.
(31) "OPERATING EXPENSES" means all reasonable and necessary
expenses of operating the Facilities in the ordinary course of business which
are paid in cash by Borrower and which are directly associated with and
fairly allocable to the Facilities for the applicable period, including ad
valorem real estate taxes and assessments, insurance premiums, regularly
scheduled tax impounds, maintenance costs, management fees and costs,
accounting, legal, and other professional fees, and other expenses incurred
by Lender and reimbursed by Borrower under this Agreement and the other Loan
Documents, wages, salaries, and personnel expenses, but excluding Debt
Service, capital expenditures, any of the foregoing expenses which are paid
from deposits to cash reserves previously included as Operating Expenses, any
payment or expense for which Borrower was or is to be reimbursed from
proceeds of the Loan or insurance or by any third party, and any non-cash
charges such as depreciation and amortization. Operating Expenses shall not
include federal, state or local income taxes or legal and other professional
fees unrelated to the operation of the Facilities or Borrower's business
other than its healthcare business as it relates to the Facilities. If any
conflict exists or arises between the definition of Operating Expenses
contained above and the determination of Operating Expenses in accordance
with GAAP, the determination of Operating Expenses in accordance with GAAP
shall prevail.
(32) "OPERATING REVENUES" means all cash receipts of Borrower from
operation of the Facilities or otherwise arising in respect of the Facilities
after the date hereof which are properly allocable to the Facilities for the
applicable period, including receipts from leases and parking agreements,
concession fees and charges and other miscellaneous operating revenues,
proceeds from rental or business interruption insurance, withdrawals from
cash reserves (except to the extent any operating expenses paid therewith are
excluded from Operating Expenses), but excluding security deposits and
earnest money deposits until they are forfeited by the depositor, advance
rentals until they are earned, and proceeds from a sale or other disposition.
If any conflict exists or arises between the definition of Operating
Revenues contained above and the determination of Operating Revenues in
accordance with GAAP, the determination of Operating Revenues in accordance
with GAAP shall prevail.
(33) "PBGC" shall mean the Pension Benefit Guaranty Corporation or
any entity succeeding to any or all of its functions.
(34) "PERSON" means any individual, corporation, partnership, joint
venture, association, joint stock company, trust, trustee, estate, limited
liability company, unincorporated organization, real estate investment trust,
government or any agency or political subdivision thereof, or any other form
of entity.
(35) "PLAN" shall mean any employee pension benefit plan, as
defined in Section 3(2) of ERISA, which (a) is currently or hereafter
sponsored, maintained or contributed to by any Borrower, any Affiliate of any
Borrower or an ERISA Affiliate or (b) was at any time during the preceding
six calendar years, sponsored, maintained or contributed to, by any Borrower,
any Affiliate of any Borrower or an ERISA Affiliate.
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(36) "PLEDGE AGREEMENT" means the Pledge Agreement of even date
between Borrower and Lender.
(37) "POTENTIAL DEFAULT" means the occurrence of any event or
condition which, with the giving of notice, the passage of time, or both,
would constitute an Event of Default.
(38) "PROPERTY" shall mean any interest in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
(39) "SITE ASSESSMENT" means an environmental engineering report
for any Facility prepared by an engineer engaged by Lender at Borrower's
expense, and in a manner satisfactory to Lender, based upon an investigation
relating to and making appropriate inquiries concerning the existence of
Hazardous Materials on or about any Facility, and the past or present
discharge, disposal, release or escape of any such substances, all consistent
with good customary and commercial practice.
(40) "STATE" means the State of Texas.
ARTICLE 2
LOAN TERMS
Section 2.1 THE LOAN.
(1) AGGREGATE COMMITMENT. The Loan of up to THIRTY FIVE MILLION
AND NO/100 DOLLARS ($35,000,000) shall be funded in one or more advances and
repaid in accordance with this Agreement. All advances of the Loan shall be
made in accordance with the Budget. The initial advance of the Loan, in the
amount of $15,000,000, shall be a Term Advance (defined below) and shall be
made in accordance with the Budget upon Borrower's satisfaction of the
conditions to initial advance described in SCHEDULE 2.1. Subsequent advances
for the items shown on the Budget shall be made upon Borrower's satisfaction
of the conditions for such advances described in SCHEDULE 2.1.
(2) TERM ADVANCES. Up to $20,000,000 of the Loan (the "TERM
ADVANCES") shall be advanced in accordance with this Agreement for repayment
of other debt owing by Borrower and, once repaid in accordance with this
Agreement, may not be re-advanced to Borrower.
(3) REVOLVING CREDIT ADVANCES. Up to $15,000,000 of the Loan (the
"REVOLVING CREDIT ADVANCES") shall be advanced in accordance with this
Agreement and, subject to the terms of this Agreement, Borrower may borrow,
repay and reborrow up to the maximum amount of the Revolving Credit Advances.
It is currently anticipated by Borrower and Lender that $7,000,000 of the
Revolving Credit Advances shall be used for deferred maintenance, capital
improvements, equipment repair and equipment purchases for the Facilities and
$3,000,000 of the Revolving Credit Advances shall be used for Borrower's
working capital needs with respect to the Facilities; however, Lender and
Borrower may mutually agree to such other allocation between working capital
and capital improvements so long as, subject to the provisions of the
following sentence, the total amount does not exceed $10,000,000. If Lender
and Borrower mutually agree that (a) there is a need for additional capital
improvements to the Facilities or (b) Borrower requires working capital with
respect to the Facilities in excess (in the aggregate)
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of $10,000,000, Lender may make available, pursuant to this Agreement, up to
an additional $5,000,000 of the Loan equal to the positive difference
obtained by subtracting the sum of (i) all amounts advanced by Lender to
Borrower for Term Advances and (ii) $10,000,000, from 80% of the Eligible
Accounts then outstanding. In no event, however shall the sum of all
advances made under this Agreement exceed $35,000,000.
Section 2.2 INTEREST RATE; LATE CHARGE. The outstanding principal
balance of the Loan (including any amounts added to principal under the Loan
Documents) shall bear interest at a rate equal to the lesser of (1) 0.75% in
excess the interest rate paid by Lender under Lender's credit facility or (2)
the maximum non-usurious rate allowed by law (such lesser amount is herein
called the "CONTRACT RATE"). Lender currently anticipates that, as of the
date hereof, the Contract Rate will be eight percent (8%) per annum, as the
same may be adjusted from time to time. The Contract Rate shall be adjusted
at the end of each calendar quarter to reflect interest rate changes in
Lender's credit facility. Although the interest rate payable hereunder may
be adjusted less frequently than the interest rate payable by Lender under
Lender's credit facility, in no event shall the Contract Rate ever be less
than 0.75% in excess of the interest rate paid by Lender under its credit
facility, except as the same may be limited by Section 11.4. Lender shall
use good-faith, reasonable efforts to notify Borrower of any changes in the
interest rate payable by it under its credit facility and of the resulting
change in the interest rate hereunder within fifteen days following the
expiration of each calendar quarter; however, any failure to notify Borrower
shall not affect the interest rate payable with respect to the Loan or any
other obligation of Borrower hereunder. Interest shall be computed on the
basis of a fraction, the denominator of which is three hundred sixty (360)
and the numerator of which is the actual number of days elapsed from the date
of the initial advance or the date on which the immediately preceding payment
was due. If Borrower fails to pay any installment of interest or principal
within five (5) days after the date on which the same is due, Borrower shall
pay to Lender a late charge on such past-due amount, as liquidated damages
and not as a penalty, equal to the greater of (a) interest at the Default
Rate on such amount from the date when due until paid, or (b) five percent
(5%) of such amount, but not in excess of the maximum amount of interest
allowed by applicable law. While any Event of Default exists, the Loan shall
bear interest at the Default Rate.
Section 2.3 TERMS OF PAYMENT. The Loan shall be payable as follows:
(1) PAYMENT. So long as the outstanding principal balance of the
Loan equals or exceeds $10,000,000, Borrower shall pay to Lender 75% of the
positive Net Cash Flow from the Facilities, to be applied to payment of the
Loan as set forth below. From and after the time and during such time as the
outstanding balance of the Loan is less than $10,000,000, Borrower shall pay
to Lender 50% of the positive Net Cash Flow from the Facilities, to be
applied to payment of the Loan as set forth below.
(2) TIMING OF PAYMENT. Commencing on February 15, 1996 and
continuing on the fifteenth day of each month until all amounts due under the
Loan Documents are paid in full, Borrower shall pay to Lender the requisite
percentage of Net Cash Flow for the preceding calendar month.
(3) MATURITY. On the Maturity Date, Borrower shall pay to Lender
all outstanding principal, accrued and unpaid interest, and any other amounts
due under the Loan Documents.
(4) PREPAYMENT. Borrower may prepay the Loan at any time without
prepayment premium or penalty.
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(5) APPLICATION OF PAYMENTS. All payments received by Lender
under the Loan Documents shall be applied: FIRST, to any fees and expenses
due to Lender under the Loan Documents; SECOND, to any Default Rate interest
or late charges; THIRD, to accrued and unpaid interest; and FOURTH, to the
principal sum and other amounts due under the Loan Documents.
Section 2.4 SECURITY. The Loan and all amounts payable to Lender
under the Management Agreement shall be secured by the Mortgages, the
Assignments of Rents and Leases, the Security Agreement, the Pledge
Agreement, the Option Agreement, and the other Loan Documents.
Section 2.5 APPLICATION OF OPERATING REVENUES. Borrower shall apply
all Operating Revenues in the following order:
(1) FIRST, to employee wages and salaries, payroll taxes and
related personnel expenses;
(2) SECOND, to lease and/or mortgage payments, as applicable,
payable to third parties with respect to the Facilities;
(3) THIRD, to management fees, costs and other amounts payable to
Lender under the Management Agreement;
(4) FOURTH, to all other Operating Expenses of the Facilities, to
the extent remaining unpaid after the application of Operating Expenses under
Sections 2.5(1) and 2.5(2);
(5) FIFTH, to Debt Service under the Loan in accordance with
Section 2.3(1); and
(6) SIXTH, all remaining amounts, if any, to Borrower to be used
for any purpose consistent with this Agreement and the other Loan Documents.
Section 2.6 RIGHT OF SET-OFF. Each Borrower agrees that, in addition
to (and without limitation of) any right of set-off or right of counter claim
that Lender may otherwise have, Lender shall have the right and be entitled,
at its option, to offset balances held by it or any of its affiliates for
account of any Borrower or its Affiliates against any principal of or
interest on the Loan or any other amount payable to Lender or its affiliates,
which is not paid when due, in which case it shall promptly notify Borrower
thereof, provided that Lender's failure to give such notice shall not affect
the validity thereof. In addition to the foregoing, Lender may offset any
past due amounts owing (the "NIPSI OBLIGATIONS") by any Borrower or any
Affiliate to National Institutional Pharmacy Services, Inc., a Delaware
corporation ("NIPSI"), or any other affiliate of Lender and any amounts
claimed by the Texas Department of Health and Human Services (the "TDHS
OBLIGATIONS") to be owing by any Borrower or any Affiliate (together with
interest thereon at 6% per annum) from (1) amounts owing on January 1, 1996
by Horizon/CMS Healthcare Corporation, as successor by merger to Horizon
Healthcare Corporation ("HORIZON") to Texas Health Enterprises, Inc. ("THE")
in respect of the Assignment and Asset Sale Agreement dated as of November
30, 1994 between Horizon and THE, in respect of the Seven Oaks Care Center
located in Bonham, Texas (the "1996 HORIZON PAYMENT") and (2) amounts owing
on January 1, 1997 by Horizon to THE in respect of the Assignment and Asset
Sale Agreement dated as of November 30, 1994 between Horizon and THE in
respect of the Valley Grande Manor located in Brownsville, Texas (the "1997
HORIZON PAYMENT"). To the extent that the amount ultimately paid by Borrower
and its Affiliates in respect of the NIPSI Obligations and/or the TDHS
Obligations or both is less than the 1996 Horizon
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Payment, the net amount remaining due to THE with respect to the 1996 Horizon
Payment shall be paid to and applied by Lender within 15 days following such
reconciliation to the payment of amounts outstanding under the Loan. To the
extent that the amount due to be paid by Borrower and its Affiliates with
respect to the NIPSI Obligations and/or the TDHS Obligations or both is
greater than the 1996 Horizon Payment, Horizon may accelerate its right to
acquire THE's interest in Valley Grande Manor located in Brownsville, Texas
and to make the 1997 Horizon Payment to THE to satisfy the then outstanding
NIPSI Obligations and/or the TDHS Obligations, with the remaining amounts of
the 1997 Horizon Payment being paid to Lender and applied within 15 days
after the reconciliation thereof to the amounts outstanding under the Loan.
ARTICLE 3
INSURANCE, CONDEMNATION, AND IMPOUNDS
Section 3.1 INSURANCE. Borrower shall maintain insurance as follows:
(1) CASUALTY; BUSINESS INTERRUPTION. Borrower shall keep the
Facilities insured against damage by fire and the other hazards covered by a
standard extended coverage and all-Risk Insurance policy in amounts
consistent with the Management Agreement, and shall maintain such other
casualty insurance as reasonably required by Lender. Borrower shall keep
each Facility located in an area identified by the Federal Emergency
Management Agency as an area having special flood hazards and in which flood
insurance has been made available under the National Flood Insurance Act of
1968 (and any successor act thereto) insured against loss by flood. Borrower
shall maintain use and occupancy insurance covering, as applicable, rental
income or business interruption, with coverage in amounts consistent with the
Management Agreement. Borrower shall not maintain any separate or additional
insurance which is contributing in the event of loss unless it is properly
endorsed and otherwise satisfactory to Lender in all respects. The proceeds
of insurance paid on account of any damage or destruction to the Facilities
shall be paid to Lender to be applied as provided in Section 3.2.
(2) LIABILITY. Borrower shall maintain (a) commercial general
liability insurance with respect to the Facilities providing for limits of
liability of not less than $3,500,000 and otherwise consistent with the terms
of the Management Agreement for both injury to or death of a person and for
property damage per occurrence, and (b) other liability insurance as
reasonably required by Lender.
(3) FORM AND QUALITY. All insurance policies shall be endorsed in
form and substance acceptable to Lender to name Lender as an additional
insured, loss payee or mortgagee thereunder, as its interest may appear, with
loss payable to Lender, without contribution, under a standard New York (or
local equivalent) mortgagee clause. All such insurance policies and
endorsements shall be fully paid for and contain such provisions and
expiration dates and be in such form and issued by such insurance companies
licensed to do business in the State, with a rating of "A-IX" or better as
established by Best's Rating Guide (or an equivalent rating approved in
writing by Lender). Each policy shall provide that such policy may not be
cancelled or materially changed except upon thirty (30) days' prior written
notice of intention of non-renewal, cancellation or material change to Lender
and that no act or thing done by Borrower shall invalidate any policy as
against Lender. If Borrower fails to maintain insurance in compliance with
this Section 3.1, Lender may obtain such insurance and pay the premium
therefor and Borrower shall, on demand, reimburse Lender for all expenses
incurred in connection therewith. Borrower
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shall assign the policies or proofs of insurance to Lender, in such manner
and form that Lender and its successors and assigns shall at all times have
and hold the same as security for the payment of the Loan. Borrower shall
deliver copies of all original policies certified to Lender by the insurance
company or authorized agent as being true copies, together with the
endorsements required hereunder. The proceeds of insurance policies coming
into the possession of Lender shall not be deemed trust funds, and Lender
shall be entitled to apply such proceeds as herein provided.
(4) ADJUSTMENTS. Borrower shall give immediate written notice of
any loss to the insurance carrier and, if such loss exceeds $50,000, to
Lender. Borrower hereby irrevocably authorizes and empowers Lender, as
attorney-in-fact for Borrower coupled with an interest, to make proof of
loss, to adjust and compromise any claim under insurance policies, to appear
in and prosecute any action arising from such insurance policies, to collect
and receive insurance proceeds, and to deduct therefrom Lender's expenses
incurred in the collection of such proceeds. Nothing contained in this
Section 3.1(4), however, shall require Lender to incur any expense or take
any action hereunder.
Section 3.2 USE AND APPLICATION OF INSURANCE PROCEEDS. Lender may
apply any insurance proceeds it may receive to the payment of the Loan or
allow all or a portion of such proceeds to be used for the restoration of the
Facilities. Insurance proceeds applied to restoration will be disbursed on
receipt of satisfactory plans and specifications, contracts and subcontracts,
schedules, budgets, lien waivers and architects' certificates, and otherwise
in accordance with prudent commercial construction lending practices for
construction loan advances, including, as applicable, the advance conditions
under SCHEDULE 2.1.
Section 3.3 CONDEMNATION AWARDS. Borrower shall immediately notify
Lender of the institution of any proceeding for the condemnation or other
taking of any Facility or any portion thereof. Lender may participate in any
such proceeding and Borrower will deliver to Lender all instruments necessary
or required by Lender to permit such participation. Without Lender's prior
consent, Borrower (1) shall not agree to any compensation or award, and (2)
shall not take any action or fail to take any action which would cause the
compensation to be determined. All awards and compensation for the taking or
purchase in lieu of condemnation of any Facility or any part thereof are
hereby assigned to and shall be paid to Lender. Borrower authorizes Lender
to collect and receive such awards and compensation, to give proper receipts
and acquittances therefor, and in Lender's sole discretion to apply the same
toward the payment of the Loan, notwithstanding that the Loan may not then be
due and payable, or to the restoration of the Facility; however, if the award
is less than or equal to $50,000 and Borrower requests that such proceeds be
used for non-structural site improvements (such as landscape, driveway,
walkway and parking area repairs) required to be made as a result of such
condemnation, Lender will apply the award to such restoration in accordance
with disbursement procedures applicable to insurance proceeds provided there
exists no Potential Default or Event of Default. Borrower, upon request by
Lender, shall execute all instruments requested to confirm the assignment of
the awards and compensation to Lender, free and clear of all liens, charges
or encumbrances.
Section 3.4 IMPOUNDS. Following an Event of Default, Borrower shall
deposit with Lender, monthly, one-twelfth (1/12th) of the annual charges for
ground or other rent, if any, and real estate taxes, assessments and similar
charges relating to the Facilities. At or before the initial advance of the
Loan, Borrower shall deposit with Lender a sum of money which together with
the monthly installments will be sufficient to make each of such payments
thirty (30) days prior to the date any delinquency or penalty becomes due
with respect to such payments. Deposits shall be made on the basis of
Lender's estimate from time to time of the charges for the current year
(after giving effect to any reassessment or, at Lender's
9
<PAGE>
election, on the basis of the charges for the prior year, with adjustments
when the charges are fixed for the then current year). All funds so deposited
shall be held by Lender, without interest, and may be commingled with
Lender's general funds. Borrower hereby grants to Lender a security interest
in all funds so deposited with Lender for the purpose of securing the Loan.
While an Event of Default exists, the funds deposited may be applied in
payment of the charges for which such funds have been deposited, or to the
payment of the Loan or any other charges affecting the security of Lender, as
Lender may elect, but no such application shall be deemed to have been made
by operation of law or otherwise until actually made by Lender. Borrower
shall furnish Lender with bills for the charges for which such deposits are
required at least thirty (30) days prior to the date on which the charges
first become payable. If at any time the amount on deposit with Lender,
together with amounts to be deposited by Borrower before such charges are
payable, is insufficient to pay such charges, Borrower shall deposit any
deficiency with Lender immediately upon demand. Lender shall pay such
charges when the amount on deposit with Lender is sufficient to pay such
charges and Lender has received a bill for such charges.
ARTICLE 4
ENVIRONMENTAL MATTERS
Section 4.1 CERTAIN DEFINITIONS. As used herein, the following terms
have the meanings indicated:
(1) "ENVIRONMENTAL LAWS" means any federal, state or local law
(whether imposed by statute, or administrative or judicial order, or common
law), now or hereafter enacted, governing health, safety, industrial hygiene,
the environment or natural resources, or Hazardous Materials, including, such
laws governing or regulating the use, generation, storage, removal, recovery,
treatment, handling, transport, disposal, control, discharge of, or exposure
to, Hazardous Materials.
(2) "HAZARDOUS MATERIALS" means (a) petroleum or chemical
products, whether in liquid, solid, or gaseous form, or any fraction or
by-product thereof, (b) asbestos or asbestos-containing materials, (c)
polychlorinated biphenyls (pcbs), (d) radon gas, (e) underground storage
tanks, (f) any explosive or radioactive substances, (g) lead or lead-based
paint, or (h) any other substance, material, waste or mixture which is or
shall be listed, defined, or otherwise determined by any governmental
authority to be hazardous, toxic, dangerous or otherwise regulated,
controlled or giving rise to liability under any Environmental Laws.
Section 4.2 COVENANTS ON ENVIRONMENTAL MATTERS.
(1) Borrower shall (a) comply strictly and in all respects with
applicable Environmental Laws; (b) notify Lender immediately upon Borrower's
discovery of any spill, discharge, release or presence of any Hazardous
Material at, upon, under, within, contiguous to or otherwise affecting a
Facility; (c) promptly remove such Hazardous Materials and remediate the
Facilities in full compliance with Environmental Laws and in accordance with
the recommendations and specifications of an independent environmental
consultant approved by Lender; and (d) promptly forward to Lender copies of
all orders, notices, permits, applications or other communications and
reports in connection with any spill, discharge, release or the presence of
any Hazardous Material or any other matters relating to the Environmental
Laws or any similar laws or regulations, as they may affect the Facilities or
Borrower.
10
<PAGE>
(2) Borrower shall not cause, shall prohibit any other Person
within the control of Borrower from causing, and shall use prudent,
commercially reasonable efforts to prohibit other Persons (including tenants)
from (a) causing any spill, discharge or release, or the use, storage,
generation, manufacture, installation, or disposal, of any Hazardous
Materials at, upon, under, within or about any Facility or the transportation
of any Hazardous Materials to or from any Facility (except for (i) cleaning
and other products used in connection with routine maintenance or repair of
the Facilities and (ii) biological waste or other materials generated by or
used in connection with the operation of nursing homes, each in full
compliance with Environmental Laws), (b) installing any underground storage
tanks at any Facility, or (c) conducting any activity that requires a permit
or other authorization under Environmental Laws.
(3) Borrower shall provide to Lender, at Borrower's expense
promptly upon the written request of Lender from time to time, a Site
Assessment or, if required by Lender, an update to any existing Site
Assessment, to assess the presence or absence of any Hazardous Materials and
the potential costs in connection with abatement, cleanup or removal of any
Hazardous Materials found on, under, at or within the Facilities. Borrower
shall not be required to pay the cost of such Site Assessments or updates
unless Lender's request for a Site Assessment is based on information
provided under Section 4.2(1), a reasonable suspicion of Hazardous Materials
at or near any Facility, or an Event of Default, in which case any such Site
Assessment or update shall be at Borrower's expense.
Section 4.3 ALLOCATION OF RISKS AND INDEMNITY. As between Borrower
and Lender, all risk of loss associated with non-compliance with
Environmental Laws, or with the presence of any Hazardous Material at, upon,
within, contiguous to or otherwise affecting any Facility, shall lie solely
with Borrower. Accordingly, Borrower shall bear all risks and costs
associated with any loss (including any loss in value attributable to
Hazardous Materials), damage or liability therefrom, including all costs of
removal of Hazardous Materials or other remediation required by Lender or by
law. Borrower shall indemnify, defend and hold Lender harmless from and
against all loss, liabilities, damages, claims, costs and expenses (including
reasonable costs of defense) arising out of or associated, in any way, with
the non-compliance with Environmental Laws, or the existence of Hazardous
Materials in, on, or about the Facilities, or a breach of any representation,
warranty or covenant contained in this Article 4, whether based in contract,
tort, implied or express warranty, strict liability, criminal or civil
statute or common law, INCLUDING THOSE ARISING FROM THE JOINT, CONCURRENT, OR
COMPARATIVE NEGLIGENCE OF LENDER; HOWEVER, BORROWER SHALL NOT BE LIABLE UNDER
SUCH INDEMNIFICATION TO THE EXTENT SUCH LOSS, LIABILITY, DAMAGE, CLAIM, COST
OR EXPENSE RESULTS SOLELY FROM LENDER'S GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT. Borrower's obligations under this Section 4.3 shall arise upon
the discovery of the presence of any Hazardous Material, whether or not any
governmental authority has taken or threatened any action in connection with
the presence of any Hazardous Material, and whether or not the existence of
any such Hazardous Material or potential liability on account thereof is
disclosed in the Site Assessment and shall continue notwithstanding the
repayment of the Loan or any transfer or sale of any right, title and
interest in the Facilities (by foreclosure, deed in lieu of foreclosure or
otherwise).
Section 4.4 NO WAIVER. Notwithstanding any provision in this Article
4 or elsewhere in the Loan Documents, or any rights or remedies granted by
the Loan Documents, Lender does not waive and expressly reserves all rights
and benefits now or hereafter accruing to Lender under the "security
interest" or "secured creditor" exception under applicable Environmental
Laws, as the same may be amended. No action taken by Lender pursuant to the
Loan Documents shall be deemed or construed to be a waiver or relinquishment
of any such rights or benefits under the "security interest exception."
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ARTICLE 5
LEASING MATTERS
Section 5.1 REPRESENTATIONS AND WARRANTIES ON LEASES. Borrower
represents and warrants to Lender with respect to leases of the Facilities
that: (1) to Borrower's knowledge, the rent roll delivered to Lender is true
and correct, and the leases are valid and in and full force and effect; (2)
the leases (including amendments) are in writing, and there are no oral
agreements with respect thereto; (3) the copies of the leases delivered to
Lender are true and complete; (4) to Borrower's knowledge, neither the
landlord nor any tenant is in default under any of the leases; (5) Borrower
has no knowledge of any notice of termination or default with respect to any
lease; (6) except PCK-TEX, Ltd.'s financing of its nine (9) Facilities with
National Health Investors, Inc., Borrower has not assigned or pledged any of
the leases, the rents or any interests therein except to Lender; and (7) no
tenant has prepaid more than one month's rent in advance (except for bona
fide security deposits not in excess of an amount equal to two month's rent).
Section 5.2 COVENANTS. Borrower (1) shall perform the obligations
which Borrower is required to perform under the leases; (2) shall enforce the
obligations to be performed by the tenants; (3) shall promptly furnish to
Lender any notice of default or termination received by Borrower from any
tenant, and any notice of default or termination given by Borrower to any
tenant; (4) shall not collect any rents for more than thirty (30) days in
advance of the time when the same shall become due, except for bona fide
security deposits not in excess of an amount equal to two months rent; (5)
shall not enter into any ground lease or master lease of any part of the
Facilities; (6) shall not further assign or encumber any lease; (7) shall
not, except with Lender's prior written consent, cancel or accept surrender
or termination of any lease; and (8) shall not, except with Lender's prior
written consent, modify or amend any lease (except for minor modifications
and amendments entered into in the ordinary course of business).
Section 5.3 TENANT ESTOPPELS. At Lender's request, Borrower shall
obtain and furnish to Lender, written estoppels in form and substance
satisfactory to Lender, executed by tenants under leases in the Facilities
and confirming the term, rent, and other provisions and matters relating to
the leases.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Lender that:
Section 6.1 ORGANIZATION AND POWER. Each Borrower is duly organized,
validly existing and in good standing under the laws of the state of its
formation or existence, and is in compliance with legal requirements
applicable to doing business in the State. No Borrower is a "foreign person"
within the meaning of Section 1445(f)(3) of the Internal Revenue Code.
Section 6.2 VALIDITY OF LOAN DOCUMENTS. The execution, delivery and
performance by each Borrower of the Loan Documents: (1) are duly authorized
and do not require the consent or approval of any other party or governmental
authority which has not been obtained; and (2) will not violate any law or
result in the imposition of any lien, charge or encumbrance upon the assets
of any such party, except as contemplated by the Loan Documents. The Loan
Documents constitute the legal, valid and binding
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<PAGE>
obligations of each Borrower, enforceable in accordance with their respective
terms, subject to applicable bankruptcy, insolvency, or similar laws
generally affecting the enforcement of creditors' rights.
Section 6.3 LIABILITIES; LITIGATION.
(1) The financial statements delivered by each Borrower are true
and correct with no significant change since the date of preparation. Except
as disclosed in such financial statements, there are no liabilities (fixed or
contingent) affecting the Facilities or any Borrower. Except as disclosed in
such financial statements, there is no litigation, administrative proceeding,
investigation or other legal action (including any proceeding under any state
or federal bankruptcy or insolvency law) pending or, to the knowledge of any
Borrower, threatened, against the Facilities or any Borrower which if
adversely determined could have a material adverse effect on such party, any
Facility or the Loan.
(2) No Borrower is contemplating either the filing of a petition
by it under state or federal bankruptcy or insolvency laws or the liquidation
of all or a major portion of its assets or property, and no Borrower has
knowledge of any Person contemplating the filing of any such petition against
it.
Section 6.4 TAXES AND ASSESSMENTS. There are no pending or, to
Borrower's best knowledge, proposed, special or other assessments for public
improvements or otherwise affecting the Facilities, nor are there any
contemplated improvements to the Facilities that may result in such special
or other assessments.
Section 6.5 OTHER AGREEMENTS; DEFAULTS. No Borrower is a party to
any agreement or instrument or subject to any court order, injunction,
permit, or restriction which might adversely affect any Facility or the
business, operations, or condition (financial or otherwise) of Borrower. No
Borrower is in violation of any agreement which violation would have an
adverse effect on itself, any Facility, or any other Borrower or any
Borrower's business, properties, or assets, operations or condition,
financial or otherwise.
Section 6.6 COMPLIANCE WITH LAW.
(1) Each Borrower has all requisite licenses, permits, franchises,
qualifications, certificates of occupancy or other governmental
authorizations to own, lease and operate the Facilities and carry on its
business;
(2) To each Borrower's knowledge, no condemnation has been
commenced or is contemplated with respect to all or any portion of any
Facility or for the relocation of roadways providing access to the
Facilities; and
(3) To each Borrower's knowledge, each Facility has adequate
rights of access to public ways and is served by adequate water, sewer,
sanitary sewer and storm drain facilities. All public utilities necessary or
convenient to the full use and enjoyment of each Facility are located in the
public right-of-way abutting each such Facility, and all such utilities are
connected so as to serve each such Facility without passing over other
property, except to the extent such other property is subject to a perpetual
easement for such utility benefitting such Facility. All roads necessary for
the full utilization of the Facilities for its current purpose have been
completed and dedicated to public use and accepted by all governmental
authorities.
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Section 6.7 LOCATION OF BORROWER. Borrower's principal place of
business and chief executive offices are located at the address stated in
Section 11.2.
Section 6.8 MARGIN STOCK. No part of proceeds of the Loan will be
used for purchasing or acquiring any "margin stock" within the meaning of
Regulations G, T, U or X of the Board of Governors of the Federal Reserve
System.
Section 6.9 TAX FILINGS. Each Borrower has filed (or has obtained
effective extensions for filing) all federal, state and local tax returns
required to be filed and have paid or made adequate provision for the payment
of all federal, state and local taxes, charges and assessments payable by
Borrower.
Section 6.10 SOLVENCY. Giving effect to the Loan, the fair saleable
value of each Borrower's assets exceeds and will, immediately following the
making of the Loan, exceed each Borrower's total liabilities, including,
without limitation, subordinated, unliquidated, disputed and contingent
liabilities. The fair saleable value of each Borrower's assets is and will,
immediately following the making of the Loan, be greater than each Borrower's
probable liabilities, including the maximum amount of its contingent
liabilities on its Debts as such Debts become absolute and matured, each
Borrower's assets do not and, immediately following the making of the Loan
will not, constitute unreasonably small capital to carry out its business as
conducted or as proposed to be conducted. Each Borrower does not intend to,
and does not believe that it will, incur Debts and liabilities (including
contingent liabilities and other commitments) beyond its ability to pay such
Debts as they mature (taking into account the timing and amounts of cash to
be received by each Borrower and the amounts to be payable on or in respect
of obligations of each Borrower).
Section 6.11 FULL AND ACCURATE DISCLOSURE. No statement of fact made
by or on behalf of any Borrower in this Agreement or in any of the other
Loan Documents contains any untrue statement of a material fact or omits to
state any material fact necessary to make statements contained herein or
therein not misleading. There is no fact presently known to any Borrower
which has not been disclosed to Lender which adversely affects, nor as far as
such Borrower can foresee, might adversely affect, any Facility or the
business, operations or condition (financial or otherwise) of any Borrower.
Section 6.12 ERISA.
(1) Each Borrower and each ERISA Affiliate, if any, have complied
in all material respects with ERISA and, where applicable, the Code regarding
each Plan.
(2) Each Plan is, and has been, maintained in substantial
compliance with ERISA and, where applicable, the Code.
(3) No act, omission or transaction has occurred which could
result in imposition on any Borrower, any Affiliate of any Borrower or any
ERISA Affiliate (whether directly or indirectly) of (a) either a civil
penalty assessed pursuant to section 502(c), (i) or (l) of ERISA or a tax
imposed pursuant to Chapter 43 of Subtitle D of the Code or (b) breach of
fiduciary duty liability damages under section 409 of ERISA.
(4) No Plan (other than a defined contribution plan) or any trust
created under any such Plan has been terminated since September 2, 1974. No
liability to the PBGC (other than for the payment
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of current premiums which are not past due) by any Borrower, any Affiliate of
any Borrower or any ERISA Affiliate has been or is expected by any Borrower,
any Affiliate of any Borrower or any ERISA Affiliate to be incurred with
respect to any Plan. No ERISA Event with respect to any Plan has occurred.
(5) Full payment when due has been made of all amounts which each
Borrower, any Affiliate of any Borrower or any ERISA Affiliate is required
under the terms of each Plan or applicable law to have paid as contributions
to such Plan, and no accumulated funding deficiency (as defined in section
302 of ERISA and section 412 of the Code), whether or not waived, exists with
respect to any Plan.
(6) The actuarial present value of the benefit liabilities under
each Plan which is subject to Title IV of ERISA does not, as of the end of
the Borrower's most recently ended fiscal year, exceed the current value of
the assets (computed on a plan termination basis in accordance with Title IV
of ERISA) of such Plan allocable to such benefit liabilities. The term
"actuarial present value of the benefit liabilities" shall have the meaning
specified in section 4041 of ERISA.
(7) No Borrower, any Affiliate of any Borrower or any ERISA
Affiliate sponsors, maintains, or contributes to an employee welfare benefit
plan, as defined in section 3(1) of ERISA, including, without limitation, any
such plan maintained to provide benefits to former employees of such
entities, that may not be terminated by any Borrower, a Affiliate of any
Borrower or any ERISA Affiliate in its sole discretion at any time without
any material liability.
(8) No Borrower, any Affiliate of any Borrower or any ERISA
Affiliate sponsors, maintains or contributes to, or has at any time in the
preceding six calendar years sponsored, maintained or contributed to, any
Multiemployer Plan.
(9) No Borrower, any Affiliate of any Borrower or any ERISA
Affiliate is required to provide security under section 401(a)(29) of the
Code due to a Plan amendment that results in an increase in current liability
for the Plan.
Section 6.13 INVESTMENT COMPANY ACT. No Borrower is an "investment
company" or a company "controlled" by an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
Section 6.14 NO FINANCING OF CORPORATE TAKEOVERS. No proceeds of any
advance will be used to acquire any security in any transaction which is
subject to Sections 13 or 14 of the Securities Exchange Act of 1934,
including particularly, but without limitation, Sections 13(b) and 14(b)
thereof.
Section 6.15 SUBSIDIARIES. As of the date hereof, no Borrower has any
subsidiaries nor will any Borrower create any subsidiaries without the prior
written consent of Lender.
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ARTICLE 7
FINANCIAL REPORTING
Section 7.1 FINANCIAL STATEMENTS.
(1) MONTHLY REPORTS. Within thirty (30) days after the end of
each calendar month, each Borrower shall furnish to Lender a current (as of
the calendar month just ended) balance sheet, a detailed operating statement
(showing monthly activity and year-to-date) stating Operating Revenues,
Operating Expenses, operating income, Net Cash Flow, and the components
thereof, for the calendar month just ended, a general ledger, an updated rent
roll, and, as requested by Lender, a written statement setting forth any
variance from the annual budget, copies of bank statements and bank
reconciliations and other documentation supporting the information disclosed
in the most recent financial statements.
(2) QUARTERLY REPORTS. Within forty-five (45) days after the end
of each calendar quarter, each Borrower shall furnish to Lender a detailed
operating statement (showing quarterly activity and year-to-date) stating
Operating Revenues, Operating Expenses, operating income, Net Cash Flow, and
the components thereof, for the calendar quarter just ended.
(3) ANNUAL REPORTS. Within one hundred twenty (120) days after
the end of each calendar year of each Borrower, each Borrower shall furnish
to Lender a current (as of the end of such fiscal year) balance sheet, a
detailed operating statement stating Operating Revenues, Operating Expenses,
operating income, Net Cash Flow, and the components thereof, for Borrower and
each Facility, and, if required by Lender, prepared on a review basis and
certified by an independent public accountant satisfactory to Lender.
(4) CERTIFICATION; SUPPORTING DOCUMENTATION. Each such financial
statement shall be in scope and detail satisfactory to Lender and certified
by the chief financial representative of Borrower.
Section 7.2 ACCOUNTING PRINCIPLES. All financial statements shall be
prepared in accordance with GAAP, consistently applied from year to year.
Section 7.3 OTHER INFORMATION. Each Borrower shall deliver to Lender
such additional information regarding such Borrower, its subsidiaries, its
business (including, without limitation, any Plan or Multiemployer Plan and
any reports or other information required to be filed under ERISA), and the
Facilities within 30 days after Lender's request therefor.
Section 7.4 AUDITS. Lender shall have the right to choose and
appoint a certified public accountant to perform financial audits as it deems
necessary, at Borrower's expense. Borrower shall permit Lender to examine
such records, books and papers of Borrower which reflect upon its financial
condition and the income and expense relative to the Facilities.
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ARTICLE 8
COVENANTS
Borrower covenants and agrees with Lender as follows:
Section 8.1 DUE ON SALE AND ENCUMBRANCE; TRANSFERS OF INTERESTS.
Without the prior written consent of Lender,
(1) no Borrower nor any other Person having an ownership or
beneficial interest in Borrower shall (a) directly or indirectly sell,
transfer, convey, mortgage, pledge, or assign any interest in any Facility or
any part thereof (including any ownership interest in Borrower); (b) further
encumber, alienate, grant a Lien or grant any other interest in any Facility
or any part thereof (including any ownership interest in Borrower), whether
voluntarily or involuntarily; or (c) enter into any easement or other
agreement granting rights in or restricting the use or development of any
Facility;
(2) no change in Borrower's organizational documents relating to
control over Borrower and/or the Facilities shall be effected; and
(3) no transfer shall be permitted which would cause Kern to own
less than one hundred percent (100%) of the voting stock and beneficial
ownership interests in each Borrower and each Borrower's interest in the
Facilities other than transfers for estate planning purposes.
Notwithstanding the foregoing, if (a) a Borrower receives a bona fide offer
from a third party which is not an Affiliate of any Borrower to acquire a
Facility in an arms-length transaction, and (b) Borrower has complied in all
respects with the right of first refusal provisions contained in the
Management Agreement related thereto, then Borrower may sell the Facility,
and Lender shall release the Liens securing payment of the Loan as to the
Facility so sold upon consummation of such transaction, provided Borrower (i)
shall have delivered to Lender, at least five business days before the
requested release, a written request therefor and a completed Partial Release
of Lien, substantially in the form of EXHIBIT C, (ii) pays all expenses,
including reasonable attorneys' fees and expenses, incurred by Lender in
connection with such release, and (iii) pays to Lender the following amounts
from such sale to be applied to the Loan:
- --------------------------------------------------------------------------------
Aggregate Amount Applied to
Percentage Payable to Payment of Loan (with
Cumulative Proceeds Lender (with respect to respect to sales within the
(from all sales) the most recent sale) Cumulative Proceeds amount)
- --------------------------------------------------------------------------------
$0 - $5,000,000 50% $2,500,000
- --------------------------------------------------------------------------------
$5,000,001 - $10,000,000 45% $2,250,000
- --------------------------------------------------------------------------------
$10,000,001 - $15,000,000 40% $2,000,000
- --------------------------------------------------------------------------------
$15,000,001 - $20,000,000 35% $1,750,000
- --------------------------------------------------------------------------------
$20,000,001 - $25,000,000 30% $1,500,000
- --------------------------------------------------------------------------------
$25,000,001 - $45,000,000 25% $5,000,000
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
Aggregate Amount Applied to
Percentage Payable to Payment of Loan (with
Cumulative Proceeds Lender (with respect to respect to sales within the
(from all sales) the most recent sale) Cumulative Proceeds amount)
- --------------------------------------------------------------------------------
$45,000,001 - $145,000,000 15% $15,000,000
- --------------------------------------------------------------------------------
For example, if Borrower sells a portfolio of Facilities which generate
cumulative proceeds of $20,000,000 (and no other sales of Facilities had
occurred prior to such date), Borrower shall pay to Lender $8,500,000
(representing the sum of (A) $2,500,000, (B) $2,250,000, (C) $2,000,000 and
(D) $1,750,000). Such amounts shall be payable in cash concurrently with
closing of the sale unless, with Lender's prior written consent, Borrower
provides seller financing with respect to such sale, in which case Borrower
shall execute such collateral pledges (in form satisfactory to Lender) of all
promissory note(s) and mortgage(s) or deed(s) of trust executed in connection
therewith, together with such other documentation reasonably necessary to
grant to Lender a first and prior secured perfected security interest in such
collateral or other deferred consideration, all of which shall be held by
Lender as additional security for repayment of the Loan. As payments are
received in respect of such collateral, the same shall be applied as provided
above.
Section 8.2 TAXES; CHARGES. Borrower shall pay before any fine,
penalty, interest or cost may be added thereto, and shall not enter into any
agreement to defer, any real estate taxes and assessments, franchise taxes
and charges, and other governmental charges that may become a Lien upon any
Facility or become payable during the term of the Loan, and will promptly
furnish Lender with evidence of such payment. Borrower shall pay when due
all claims and demands of mechanics, materialmen, laborers and others which,
if unpaid, might result in a Lien on any Facility; however, Borrower may
contest the validity of such claims and demands so long as (a) Borrower
notifies Lender that it intends to contest such claim or demand, (b) Borrower
provides Lender with an indemnity, bond or other security satisfactory to
Lender (including an endorsement to Lender's title insurance policy insuring
against such claim or demand) assuring the discharge of Borrower's
obligations for such claims and demands, including interest and penalties,
and (c) Borrower is diligently contesting the same by appropriate legal
proceedings in good faith and at its own expense and concludes such contest
prior to the tenth (10th) day preceding the earlier to occur of the Maturity
Date or the date on which the Facility in question is scheduled to be sold
for non-payment.
Section 8.3 CONTROL; MANAGEMENT AGREEMENT. There shall be no change
in the day-to-day control and management of Borrower without the prior
written consent of Lender. Borrower shall fully perform all of its
covenants, agreements and obligations under the Management Agreement.
Section 8.4 OPERATION; MAINTENANCE; INSPECTION. Borrower shall
observe and comply with all legal requirements applicable to the ownership,
use and operation of the Facilities. Borrower shall maintain the Facilities
in good condition and promptly repair any damage or casualty. Borrower shall
permit Lender and its agents, representatives and employees, upon reasonable
prior notice to Borrower, to inspect the Facilities and conduct such
environmental and engineering studies as Lender may require, provided such
inspections and studies do not materially interfere with the use and
operation of the Facilities.
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Section 8.5 TAXES ON SECURITY. Borrower shall pay all taxes,
charges, filing, registration and recording fees, excises and levies payable
with respect to the Note or the Liens created or secured by the Loan
Documents, other than income, franchise and doing business taxes imposed on
Lender. If there shall be enacted any law (1) deducting the Loan from the
value of the Facilities for the purpose of taxation, (2) affecting any Lien
on any Facility, or (3) changing existing laws of taxation of mortgages,
deeds of trust, security deeds, or debts secured by real property, or
changing the manner of collecting any such taxes, Borrower shall promptly pay
to Lender, on demand, all taxes, costs and charges for which Lender is or may
be liable as a result thereof.
Section 8.6 LEGAL EXISTENCE; NAME, ETC. Each Borrower shall preserve
and keep in full force and effect its existence, entity status, franchises,
rights and privileges under the laws of the state of its formation, and all
qualifications, licenses and permits applicable to the ownership, use and
operation of the Facilities. No Borrower shall wind up, liquidate, dissolve,
reorganize, merge, or consolidate with or into, or convey, sell, assign,
transfer, lease, or otherwise dispose of all or substantially all of its
assets, or acquire all or substantially all of the assets of the business of
any Person, or permit any subsidiary or Affiliate of any Borrower to do so.
Each Borrower shall conduct business only in its own name and shall not
change its name, identity, or organizational structure, or the location of
its chief executive office or principal place of business unless it (a) shall
have obtained the prior written consent of Lender to such change, and (b)
shall have taken all actions necessary or requested by Lender to file or
amend any financing statement or continuation statement to assure perfection
and continuation of perfection of security interests under the Loan
Documents. Each Borrower shall maintain its separateness as an entity,
including maintaining separate books, records, and accounts and observing
corporate and partnership formalities independent of any other entity, shall
pay its obligations with its own funds and shall not commingle funds or
assets with those of any other entity.
Section 8.7 AFFILIATE TRANSACTIONS. Without the prior written
consent of Lender, Borrower shall not engage in any transaction affecting the
Facilities with an Affiliate of any Borrower.
Section 8.8 LIMITATION ON OTHER DEBT. No Borrower shall, without the
prior written consent of Lender, incur any Debt other than (1) the Loan, (2)
Debt in existence on the date hereof that is reflected on the financial
statements delivered to Lender (and no Borrower shall increase the amount of
any such existing Debt without Lender's prior approval), and (3) customary
trade payables which are payable, and shall be paid, within thirty (30) days
of when incurred.
Section 8.9 FURTHER ASSURANCES. Borrower shall promptly (1) cure any
defects in the execution and delivery of the Loan Documents, and (2) execute
and deliver, or cause to be executed and delivered, all such other documents,
agreements and instruments as Lender may reasonably request to further
evidence and more fully describe the collateral for the Loan, to correct any
omissions in the Loan Documents, to perfect, protect or preserve any liens
created under any of the Loan Documents, or to make any recordings, file any
notices, or obtain any consents, as may be necessary or appropriate in
connection therewith.
Section 8.10 ESTOPPEL CERTIFICATES. Borrower, within ten (10) days
after request, shall furnish to Lender a written statement, duly
acknowledged, setting forth the amount due on the Loan, the terms of payment
of the Loan, the date to which interest has been paid, whether any offsets or
defenses exist against the Loan and, if any are alleged to exist, the nature
thereof in detail, and such other matters as Lender reasonably may request.
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<PAGE>
Section 8.11 NOTICE OF CERTAIN EVENTS. Borrower shall promptly notify
Lender of (1) any Potential Default or Event of Default, together with a
detailed statement of the steps being taken to cure such Potential Default or
Event of Default; (2) any notice of default received by Borrower under other
obligations relating to a Facility or otherwise material to Borrower's
business; and (3) any threatened or pending legal, judicial or regulatory
proceedings, including any dispute between Borrower and any governmental
authority, affecting Borrower or the Facility.
Section 8.12 INDEMNIFICATION. Borrower shall indemnify, defend and
hold Lender harmless from and against any and all losses, liabilities,
claims, damages, expenses, obligations, penalties, actions, judgments, suits,
costs or disbursements of any kind or nature whatsoever, including the
reasonable fees and actual expenses of Lender's counsel, in connection with
(1) any inspection, review or testing of or with respect to the Facilities,
(2) any investigative, administrative, mediation, arbitration, or judicial
proceeding, whether or not Lender is designated a party thereto, commenced or
threatened at any time (including after the repayment of the Loan) in any way
related to the execution, delivery or performance of any Loan Document or to
the Facilities, (3) any proceeding instituted by any Person claiming a Lien,
(4) any brokerage commissions or finder's fees claimed by any broker or other
party claiming by, through or under Borrower in connection with the Loan, the
Facilities, or any of the transactions contemplated in the Loan Documents and
(5) any undisclosed or unrecorded liabilities of Borrower in the aggregate
for all Borrowers of $50,000 (after netting any unrecorded Eligible
Receivables and unrecorded accounts payable), INCLUDING THOSE ARISING FROM
THE JOINT, CONCURRENT, OR COMPARATIVE NEGLIGENCE OF LENDER, EXCEPT TO THE
EXTENT ANY OF THE FOREGOING IS CAUSED BY LENDER'S GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT.
Section 8.13 RESTRICTION ON DIVIDENDS AND DISTRIBUTIONS. Except as
hereafter provided in this Section 8.13, so long as the outstanding balance
of the Loan equals or exceeds $10,000,000, no Borrower will cause or permit
it or any of its Affiliates to declare or pay, directly or indirectly, any
dividend or other similar distribution nor will any such Person acquire any
of its own beneficial ownership interests whether for cash or by property for
securities or otherwise except that such Persons may make such distributions
to the extent necessary to pay federal income tax liabilities related to the
applicable profit realized in respect of operation of the Facilities.
Notwithstanding the foregoing, each Borrower may distribute the following
amounts without Lender's consent, provided each Borrower is solvent before
and after giving effect to such dividend or distribution and otherwise in
compliance with Section 6.10: (1) amounts received in respect of sale of a
Facility that are not required to be applied to payment of the Loan as
provided in Section 8.1; (2) all Net Cash Flow received in respect of
operation of the Facilities not required to be applied to payment of the
items set forth in Sections 2.3(1) and 2.5, and (3) any Term Advances.
Section 8.14 ERISA INFORMATION AND COMPLIANCE. Each Borrower shall
promptly furnish and will cause any ERISA Affiliate to promptly furnish to
Lender (1) promptly after the filing thereof with the United States Secretary
of Labor, the Internal Revenue Service or the PBGC, copies of each annual and
other report with respect to each Plan or any trust created thereunder, (2)
immediately upon becoming aware of the occurrence of any ERISA Event or of
any "prohibited transaction," as described in section 406 of ERISA or in
section 4975 of the Code, in connection with any Plan or any trust created
thereunder, a written notice signed by Borrower's chief financial officer
specifying the nature thereof, what action each Borrower or the ERISA
Affiliate is taking or proposes to take with respect thereto, and, when
known, any action taken or proposed by the Internal Revenue Service, the
Department of Labor or the PBGC with respect thereto, and (3) immediately
upon receipt thereof, copies of any notice of the PBGC's intention to
terminate or to have a trustee appointed to administer any Plan. With
respect to each Plan (other than a Multiemployer Plan), each Borrower will,
and will cause each ERISA Affiliate to, (a) satisfy in full and
20
<PAGE>
in a timely manner, without incurring any late payment or underpayment charge
or penalty and without giving rise to any lien, all of the contribution and
funding requirements of section 412 of the Code (determined without regard to
subsections (d), (e), (f) and (k) thereof) and of section 302 of ERISA
(determined without regard to sections 303, 304 and 306 of ERISA), and (b)
pay, or cause to be paid, to the PBGC in a timely manner, without incurring
any late payment or underpayment charge or penalty, all premiums required
pursuant to sections 4006 and 4007 of ERISA. No Borrower will at any time:
(i) Engage in, or permit any ERISA Affiliate to engage in, any
transaction in connection with which any Borrower or any ERISA Affiliate
could be subjected to either a civil penalty assessed pursuant to section
502(c), (i) or (l) of ERISA or a tax imposed by Chapter 43 of Subtitle D of
the Code;
(ii) Terminate, or permit any ERISA Affiliate to terminate, any
Plan in a manner, or take any other action with respect to any Plan, which
could result in any liability to any Borrower or any ERISA Affiliate to the
PBGC;
(iii) Fail to make, or permit any ERISA Affiliate to fail to
make, full payment when due of all amounts which, under the provisions of
any Plan, agreement relating thereto or applicable law, any Borrower or any
ERISA Affiliate is required to pay as contributions thereto;
(iv) Permit to exist, or allow any ERISA Affiliate to permit to
exist, any accumulated funding deficiency within the meaning of Section 302
of ERISA or section 412 of the Code, whether or not waived, with respect to
any Plan;
(v) Permit, or allow any ERISA Affiliate to permit, the
actuarial present value of the benefit liabilities under any Plan
maintained by a Borrower or any ERISA Affiliate which is regulated under
Title IV of ERISA to exceed the current value of the assets (computed on a
plan termination basis in accordance with Title IV of ERISA) of such Plan
allocable to such benefit liabilities;
(vi) Contribute to or assume an obligation to contribute to, or
permit any ERISA Affiliate to contribute to or assume an obligation to
contribute to, any Multiemployer Plan;
(vii) Acquire, or permit any ERISA Affiliate to acquire, an
interest in any Person that causes such Person to become an ERISA Affiliate
with respect to any Borrower or any ERISA Affiliate if such Person
sponsors, maintains or contributes to, or at any time in the six-year
period preceding such acquisition has sponsored, maintained, or contributed
to, (A) any Multiemployer Plan, or (B) any other Plan that is subject to
Title IV of ERISA under which the actuarial present value of the benefit
liabilities under such Plan exceeds the current value of the assets
(computed on a plan termination basis in accordance with Title IV of ERISA)
of such Plan allocable to such benefit liabilities;
(viii) Incur, or permit any ERISA Affiliate to incur, a
liability to or on account of a Plan under sections 515, 4062, 4063, 4064,
4201 or 4204 of ERISA;
(ix) Contribute to or assume an obligation to contribute to, or
permit any ERISA Affiliate to contribute to or assume an obligation to
contribute to, any employee welfare
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benefit plan, as defined in section 3(1) of ERISA, including, without
limitation, any such plan maintained to provide benefits to former
employees of such entities, that may not be terminated by such entities in
their sole discretion at any time without any material liability; or
(x) Amend or permit any ERISA Affiliate to amend, a Plan
resulting in an increase in current liability such that Borrower or any
ERISA Affiliate is required to provide security to such Plan under section
401(a)(29) of the Code.
Section 8.15 SALE OR DISCOUNT OF RECEIVABLES. No Borrower shall
discount or sell (without or without recourse) any of its notes receivable or
accounts receivable.
Section 8.16 SALES AND LEASEBACKS. No Borrower will enter into any
arrangement, directly or indirectly, with any Person whereby it shall sell or
transfer any Property, whether now owned or hereafter acquired and whereby it
shall then or thereafter rent or lease as lessee such Property or any part
thereof or other Property which it intends to use for substantially the same
purpose or purposes as the Property sold or transferred.
Section 8.17 MANAGEMENT BY LENDER. Lender and each Borrower
acknowledge that such parties are executing of even date herewith the
Management Agreement under which Lender has agreed, on the terms and
conditions contained therein, to manage the Facilities. Notwithstanding
anything in this Agreement to the contrary, so long as Lender is actively
managing all of each Borrower's Facilities, Borrower shall have no liability
to Lender (and no default by Borrower shall occur because of any such
failure) for (i) any of the affirmative covenants contained herein to be
performed by Borrower and which Borrower has affirmatively delegated to
Lender under the Management Agreement or (ii) any late charges payable under
Section 2.2 hereof if Lender is responsible under the Management Agreement
for paying any such installment of interest or principal. Nothing in the
preceding sentence shall limit Borrower's liability or monetary obligations
hereunder, in the Management Agreement or any other Loan Document.
Section 8.18 ADDITIONAL COLLATERAL DOCUMENTATION. Borrower and Lender
agree that Lender shall, to the greatest extent possible, have perfected
first priority liens and security instruments in all of each Borrower's
Property. To the extent that some of any Borrower's Property may be
currently encumbered by liens and security interests in favor of another
secured party, Borrower shall, upon the release of the other secured party's
liens and security interests, notify Lender thereof and Borrower shall
immediately thereafter execute such security instruments as Lender may
reasonably request or require. To the extent possible, Borrower and Lender
shall use the forms of Loan Documents executed contemporaneously with this
Agreement, with such revisions as necessary to conform such documents to the
then-current circumstances of the collateral. Such additional collateral
shall include (1) a first priority fee mortgage on the nine (9) Facilities
owned by PCK-TEX, Ltd. and currently financed by National Health Investors,
Inc. and Borrower's headquarters building located in Denton, Texas, (2) first
priority fee (if possible and if not, leasehold) mortgages on any other
facilities which may be returned to Borrower by current subtenants, or
otherwise, and (3) partnership pledges of PCK-TEX, Ltd.'s general and limited
partnership interests. Borrower hereby irrevocably appoints Lender and its
successors and assigns, as its attorney-in-fact, which agency is coupled with
an interest, to prepare, execute and file or record such additional
collateral documentation to effectuate the intent of this Section 8.18.
Lender shall not exercise its rights as attorney-in-fact under this Section
8.18 unless Borrower fails to execute or file or record any such additional
collateral documentation within ten (10) days after written request by Lender
or any Event of Default exists.
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ARTICLE 9
EVENTS OF DEFAULT
Each of the following shall constitute an Event of Default under the Loan:
Section 9.1 PAYMENTS. Borrower's failure to pay any regularly
scheduled installment of principal, interest or other amount due under the
Loan Documents within five (5) days after the date when due, or Borrower's
failure to pay the Loan at the Maturity Date, whether by acceleration or
otherwise.
Section 9.2 INSURANCE. Borrower's failure to maintain insurance as
required under Section 3.1 of this Agreement.
Section 9.3 SALE, ENCUMBRANCE, ETC. The sale, transfer, conveyance,
pledge, mortgage or assignment of any part or all of any Facility, or any
interest therein, or of any interest in Borrower, in violation of Section 8.1
of this Agreement.
Section 9.4 COVENANTS. Borrower's failure to perform or observe any
of the agreements and covenants contained in this Agreement or in any of the
other Loan Documents (other than payments under Section 9.1, insurance
requirements under Section 9.2, transfers and encumbrances under Section
9.3), and the continuance of such failure for ten (10) days after notice by
Lender to Borrower; however, subject to any shorter period for curing any
failure by Borrower as specified in any of the other Loan Documents, Borrower
shall have an additional thirty (30) days to cure such failure if (1) such
failure does not involve the failure to make payments on a monetary
obligation; (2) such failure cannot reasonably be cured within ten (10) days;
(3) Borrower is diligently undertaking to cure such default, and (4) Borrower
has provided Lender with security reasonably satisfactory to Lender against
any interruption of payment or impairment of collateral as a result of such
continuing failure. The notice and cure provisions of this Section 9.4 do
not apply to the Events of Default described in Section 9.5, Section 9.6,
Section 9.7, Section 9.8, Section 9.9, and Section 9.10.
Section 9.5 REPRESENTATIONS AND WARRANTIES. Any representation or
warranty made in any Loan Document proves to be untrue in any material
respect when made or deemed made.
Section 9.6 OTHER ENCUMBRANCES. Any default under any document or
instrument, other than the Loan Documents, evidencing or creating a Lien on
any Facility or any part thereof, including any default by the tenant under a
ground lease affecting any Facility, which might have, in Lender's judgment,
a material adverse effect on the Loan or any Borrower's ability to carry out
its business or meet its obligations under the Loan Documents on a timely
basis.
Section 9.7 BANK ACCOUNT TRANSFER ORDERS. Without Lender's prior
written consent, any modification or termination occurs in any bank account
transfer order affecting any Borrower or any Facility which might have, in
Lender's judgment, an adverse effect on the Loan or Lender's security in any
cash collateral.
23
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Section 9.8 UNAUTHORIZED ACCOUNT WITHDRAWALS. Without Lender's prior
written consent, any Borrower or any Affiliate withdraws any funds from any
account subject to the Pledge Agreement or the Management Agreement.
Section 9.9 INVOLUNTARY BANKRUPTCY OR OTHER PROCEEDING. Commencement
of an involuntary case or other proceeding against (1) any Borrower or (2)
any other Person having an ownership or security interest in any Facility
which might have, in Lender's judgment, a material adverse effect on the Loan
or any Borrower's ability to carry out its business or meet its obligations
under the Loan Documents on a timely basis (each, a "BANKRUPTCY PARTY") which
seeks liquidation, reorganization or other relief with respect to it or its
debts or other liabilities under any bankruptcy, insolvency or other similar
law now or hereafter in effect or seeks the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any of its
property, and such involuntary case or other proceeding shall remain
undismissed or unstayed for a period of 60 days; or an order for relief
against a Bankruptcy Party shall be entered in any such case under the
Federal Bankruptcy Code.
Section 9.10 VOLUNTARY PETITIONS, ETC. Commencement by a Bankruptcy
Party of a voluntary case or other proceeding seeking liquidation,
reorganization or other relief with respect to itself or its Debts or other
liabilities under any bankruptcy, insolvency or other similar law or seeking
the appointment of a trustee, receiver, liquidator, custodian or other
similar official for it or any of its property, or consent by a Bankruptcy
Party to any such relief or to the appointment of or taking possession by any
such official in an involuntary case or other proceeding commenced against
it, or the making by a Bankruptcy Party of a general assignment for the
benefit of creditors, or the failure by a Bankruptcy Party, or the admission
by a Bankruptcy Party in writing of its inability, to pay its debts generally
as they become due, or any action by a Bankruptcy Party to authorize or
effect any of the foregoing;
ARTICLE 10
REMEDIES
Section 10.1 REMEDIES - INSOLVENCY EVENTS. Upon the occurrence of any
Event of Default described in Section 9.9 or 9.10, the obligations of Lender
to advance amounts hereunder shall immediately terminate, and all amounts due
under the Loan Documents immediately shall become due and payable, all
without written notice and without presentment, demand, protest, notice of
protest or dishonor, notice of intent to accelerate the maturity thereof,
notice of acceleration of the maturity thereof, or any other notice of
default of any kind, all of which are hereby expressly waived by Borrower;
however, if the Bankruptcy Party under Section 9.9 or 9.10 is other than
Borrower, then all amounts due under the Loan Documents shall become
immediately due and payable at Lender's election, in Lender's sole discretion.
Section 10.2 REMEDIES - OTHER EVENTS. Except as set forth in Section
10.1 above, while any Event of Default exists, Lender may (1) by written
notice to Borrower, declare the entire Loan to be immediately due and payable
without presentment, demand, protest, notice of protest or dishonor, notice
of intent to accelerate the maturity thereof, notice of acceleration of the
maturity thereof, or other notice of default of any kind, all of which are
hereby expressly waived by Borrower, (2) terminate the obligation, if any, of
Lender to advance amounts hereunder, and (3) exercise all rights and remedies
therefor under the Loan Documents and at law or in equity.
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<PAGE>
Section 10.3 LENDER'S RIGHT TO PERFORM THE OBLIGATIONS. If Borrower
shall fail, refuse or neglect to make any payment or perform any act required
by the Loan Documents, then while any Event of Default exists, and without
notice to or demand upon Borrower and without waiving or releasing any other
right, remedy or recourse Lender may have because of such Event of Default,
Lender may (but shall not be obligated to) make such payment or perform such
act for the account of and at the expense of Borrower, and shall have the
right to enter upon the Facilities for such purpose and to take all such
action thereon and with respect to the Facilities as it may deem necessary or
appropriate. If Lender shall elect to pay any sum due with reference to the
Facilities, Lender may do so in reliance on any bill, statement or assessment
procured from the appropriate governmental authority or other issuer thereof
without inquiring into the accuracy or validity thereof. Similarly, in
making any payments to protect the security intended to be created by the
Loan Documents, Lender shall not be bound to inquire into the validity of any
apparent or threatened adverse title, lien, encumbrance, claim or charge
before making an advance for the purpose of preventing or removing the same.
Additionally, if any Hazardous Materials affect or threaten to affect the
Facilities, Lender may (but shall not be obligated to) give such notices and
take such actions as it deems necessary or advisable in order to abate the
discharge of any Hazardous Materials or remove the Hazardous Materials.
Borrower shall indemnify Lender for all losses, expenses, damages, claims and
causes of action, including reasonable attorneys' fees, incurred or accruing
by reason of any acts performed by Lender pursuant to the provisions of this
Section 10.3, INCLUDING THOSE ARISING FROM THE JOINT, CONCURRENT, OR
COMPARATIVE NEGLIGENCE OF LENDER, EXCEPT AS A RESULT OF LENDER'S GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT. All sums paid by Lender pursuant to this
Section 10.3, and all other sums expended by Lender to which it shall be
entitled to be indemnified, together with interest thereon at the Default
Rate from the date of such payment or expenditure until paid, shall
constitute additions to the Loan, shall be secured by the Loan Documents and
shall be paid by Borrower to Lender upon demand.
ARTICLE 11
MISCELLANEOUS
Section 11.1 EXTENSION. If Lender elects to extend the term of the
Management Agreement in accordance with its terms, Lender shall elect to
extend the Maturity Date of the Loan to be coterminous with the term of the
Management Agreement provided (1) no Event of Default or Potential Default
then exists, (2) Borrower executes an agreement in form and substance
satisfactory to Lender renewing and extending the Loan and the liens and
security interests created by the Loan Documents for the extension, and (3)
Borrower pays all costs and expenses of extending the Maturity Date of the
Loan, including the reasonable fees and actual expenses of Lender's counsel,
recording costs, and any endorsements to title insurance policies as may be
customarily required by institutional lenders.
Section 11.2 NOTICES. Any notice required or permitted to be given
under this Agreement shall be in writing and either shall be mailed by
certified mail, postage prepaid, return receipt requested, or sent by
overnight air courier service, or personally delivered to a representative of
the receiving party, or sent by telecopy (provided an identical notice is
also sent simultaneously by mail, overnight courier, or personal delivery as
otherwise provided in this Section 11.2). All such communications shall be
mailed, sent or delivered, addressed to the party for whom it is intended at
its address set forth below.
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If to Borrower: Texas Health Enterprises, Inc.
Health Enterprises of Oklahoma, Inc.
Health Enterprises of Michigan, Inc.
HEA Management Group, Inc.
PCK-TEX, Ltd.
401 North Elm Street
Denton, Texas 76201
Attention: Peter C. Kern
Telecopy: (817) 380-2437
If to Lender: Horizon Facilities Management, Inc.
6001 Indian School Road, N.E., Suite 530
Albuquerque, New Mexico 87110
Attention: General Counsel
Telecopy: (505) 881-5097
Any communication so addressed and mailed shall be deemed to be given on the
earliest of (1) when actually delivered, (2) on the first Business Day after
deposit with an overnight air courier service, or (3) on the third Business
Day after deposit in the United States mail, postage prepaid, in each case to
the address of the intended addressee (except as otherwise provided in the
Mortgage), and any communication so delivered in person shall be deemed to be
given when receipted for by, or actually received by Lender or Borrower, as
the case may be. If given by telecopy, a notice shall be deemed given and
received when the telecopy is transmitted to the party's telecopy number
specified above, and confirmation of complete receipt is received by the
transmitting party during normal business hours or on the next Business Day
if not confirmed during normal business hours, and an identical notice is
also sent simultaneously by mail, overnight courier, or personal delivery as
otherwise provided in this Section 11.2. Either party may designate a change
of address by written notice to the other by giving at least ten (10) days
prior written notice of such change of address.
Section 11.3 AMENDMENTS AND WAIVERS. No amendment or waiver of any
provision of the Loan Documents shall be effective unless in writing and
signed by the party against whom enforcement is sought.
Section 11.4 LIMITATION ON INTEREST. It is the intention of the
parties hereto to conform strictly to applicable usury laws. Accordingly,
all agreements between Borrower and Lender with respect to the Loan are
hereby expressly limited so that in no event, whether by reason of
acceleration of maturity or otherwise, shall the amount paid or agreed to be
paid to Lender or charged by Lender for the use, forbearance or detention of
the money to be lent hereunder or otherwise, exceed the maximum amount
allowed by law. If the Loan would be usurious under applicable law
(including the laws of the State and the laws of the United States of
America), then, notwithstanding anything to the contrary in the Loan
Documents: (1) the aggregate of all consideration which constitutes interest
under applicable law that is contracted for, taken, reserved, charged or
received under the Loan Documents shall under no circumstances exceed the
maximum amount of interest allowed by applicable law, and any excess shall be
credited on the Note by the holder thereof (or, if the Note has been paid in
full, refunded to Borrower); and (2) if maturity is accelerated by reason of
an election by Lender, or in the event of any prepayment, then any
consideration which constitutes interest may never include more than the
maximum amount allowed by applicable law. In such case, excess interest, if
any, provided for in the Loan Documents or
26
<PAGE>
otherwise, to the extent permitted by applicable law, shall be amortized,
prorated, allocated and spread from the date of advance until payment in full
so that the actual rate of interest is uniform through the term hereof. If
such amortization, proration, allocation and spreading is not permitted under
applicable law, then such excess interest shall be cancelled automatically as
of the date of such acceleration or prepayment and, if theretofore paid,
shall be credited on the Note (or, if the Note has been paid in full,
refunded to Borrower). The terms and provisions of this Section 11.4 shall
control and supersede every other provision of the Loan Documents. The Loan
Documents are contracts made under and shall be construed in accordance with
and governed by the laws of the State, except that if at any time the laws of
the United States of America permit Lender to contract for, take, reserve,
charge or receive a higher rate of interest than is allowed by the laws of
the State (whether such federal laws directly so provide or refer to the law
of any state), then such federal laws shall to such extent govern as to the
rate of interest which Lender may contract for, take, reserve, charge or
receive under the Loan Documents.
Section 11.5 INVALID PROVISIONS. If any provision of any Loan
Document is held to be illegal, invalid or unenforceable, such provision
shall be fully severable; the Loan Documents shall be construed and enforced
as if such illegal, invalid or unenforceable provision had never comprised a
part thereof; the remaining provisions thereof shall remain in full effect
and shall not be affected by the illegal, invalid, or unenforceable provision
or by its severance therefrom; and in lieu of such illegal, invalid or
unenforceable provision there shall be added automatically as a part of such
Loan Document a provision as similar in terms to such illegal, invalid or
unenforceable provision as may be possible to be legal, valid and enforceable.
Section 11.6 REIMBURSEMENT OF EXPENSES. Borrower shall pay all
expenses incurred by Lender in connection with the Loan, including fees and
expenses of Lender's attorneys, environmental, engineering and other
consultants, and fees, charges or taxes for the recording or filing of Loan
Documents. Borrower shall pay all expenses of Lender in connection with the
administration of the Loan, including audit costs, inspection fees,
settlement of condemnation and casualty awards, and premiums for title
insurance and endorsements thereto. Borrower shall, upon request, promptly
reimburse Lender for all amounts expended, advanced or incurred by Lender to
collect the Note, or to enforce the rights of Lender under this Agreement or
any other Loan Document, or to defend or assert the rights and claims of
Lender under the Loan Documents or with respect to the Facilities (by
litigation or other proceedings), which amounts will include all court costs,
attorneys' fees and expenses, fees of auditors and accountants, and
investigation expenses as may be incurred by Lender in connection with any
such matters (whether or not litigation is instituted), together with
interest at the Default Rate on each such amount from the date of request
until the date of reimbursement to Lender, all of which shall constitute part
of the Loan and shall be secured by the Loan Documents.
Section 11.7 APPROVALS; THIRD PARTIES; CONDITIONS. All approval
rights retained or exercised by Lender with respect to leases, contracts,
plans, studies and other matters are solely to facilitate Lender's credit
underwriting, and shall not be deemed or construed as a determination that
Lender has passed on the adequacy thereof for any other purpose and may not
be relied upon by Borrower or any other Person. This Agreement is for the
sole and exclusive use of Lender and Borrower and may not be enforced, nor
relied upon, by any Person other than Lender and Borrower. All conditions of
the obligations of Lender hereunder, including the obligation to make
advances, are imposed solely and exclusively for the benefit of Lender, its
successors and assigns, and no other Person shall have standing to require
satisfaction of such conditions or be entitled to assume that Lender will
refuse to make advances in the absence of strict compliance with any or all
of such conditions, and no other Person shall, under any circumstances, be
27
<PAGE>
deemed to be a beneficiary of such conditions, any and all of which may be
freely waived in whole or in part by Lender at any time in Lender's sole
discretion.
Section 11.8 LENDER NOT IN CONTROL; NO PARTNERSHIP. No covenant or
provision of the Loan Documents is intended, nor shall it be deemed or
construed, to create a partnership, joint venture, agency or common interest in
profits or income between Lender and Borrower or to create an equity in the
Facilities in Lender. Except as set forth in the Management Agreement, Lender
neither undertakes nor assumes any responsibility or duty to Borrower or to any
other person with respect to the Facilities or the Loan, except as expressly
provided in the Loan Documents; and notwithstanding any other provision of the
Loan Documents: (1) Lender is not, and shall not be construed as, a partner,
joint venturer, alter ego, manager, controlling person or other business
associate or participant of any kind of Borrower or its stockholders, members,
or partners and Lender does not intend to ever assume such status; (2) Lender
shall in no event be liable for any Debts, expenses or losses incurred or
sustained by Borrower; and (3) Lender shall not be deemed responsible for or a
participant in any acts, omissions or decisions of Borrower or its stockholders,
members, or partners. Lender and Borrower disclaim any intention to create any
partnership, joint venture, agency or common interest in profits or income
between Lender and Borrower, or to create an equity in the Facilities in Lender,
or any sharing of liabilities, losses, costs or expenses.
Section 11.9 TIME OF THE ESSENCE. Time is of the essence with respect
to this Agreement.
Section 11.10 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of Lender and Borrower and their respective
successors and assigns of Lender and Borrower, provided that Borrower shall,
without the prior written consent of Lender, assign any rights, duties or
obligations hereunder.
Section 11.11 RENEWAL, EXTENSION OR REARRANGEMENT. All provisions of
the Loan Documents shall apply with equal effect to each and all promissory
notes and amendments thereof hereinafter executed which in whole or in part
represent a renewal, extension, increase or rearrangement of the Loan. For
portfolio management purposes, Lender may elect to divide the Loan into two
or more separate loans evidenced by separate promissory notes so long as the
payment and other obligations of Borrower are not effectively increased or
otherwise modified. Borrower agrees to cooperate with Lender and to execute
such documents as Lender reasonably may request to effect such division of
the Loan.
Section 11.12 WAIVERS - GENERAL. No course of dealing on the part of
Lender, its officers, employees, consultants or agents, nor any failure or
delay by Lender with respect to exercising any right, power or privilege of
Lender under any of the Loan Documents, shall operate as a waiver thereof.
Section 11.13 MULTIPLE BORROWER WAIVERS. Each Borrower waives any
right to require Lender to (1) join any other Borrower in any suit arising
under this Agreement or any other Loan Document, (2) proceed against or
exhaust any security given to secure such Borrower's obligations under the
Loan Documents, or (3) pursue or exhaust any other remedy in Lender's power.
Lender may, without notice or demand and without affecting any Borrower's
liability or Lender's rights hereunder from time to time, compromise, extend,
or otherwise modify any and all of the terms of the Loan and the Loan
Documents. Each Borrower hereby waives all demands for performance, notices
of performance, and notices of acceptance. The liability of each Borrower's
rights under this Agreement or any other Loan Document will not be affected
by (a) the release or discharge of any other Borrower or any other Person who
may be liable for the Loan from, or impairment, limitation or modification
of, any other Borrower's or such
28
<PAGE>
other Person's obligations under the Loan Documents in any bankruptcy,
receivership, or other debtor-relief proceeding or (b) the cessation from any
cause whatsoever of the liability of any other Borrower or any other Person
who may be liable for the Loan.
Section 11.14 CUMULATIVE RIGHTS. Rights and remedies of Lender under
the Loan Documents shall be cumulative, and the exercise or partial exercise
of any such right or remedy shall not preclude the exercise of any other
right or remedy.
Section 11.15 SINGULAR AND PLURAL. Words used in this Agreement and
the other Loan Documents in the singular, where the context so permits, shall
be deemed to include the plural and vice versa. The definitions of words in
the singular in this Agreement and the other Loan Documents shall apply to
such words when used in the plural where the context so permits and vice
versa.
Section 11.16 PHRASES. When used in this Agreement and the other Loan
Documents, the phrase "including" shall mean "including, but not limited to,"
the phrase "satisfactory to Lender" shall mean "in form and substance
satisfactory to Lender in all respects," the phrase "with Lender's consent"
or "with Lender's approval" shall mean such consent or approval at Lender's
discretion, and the phrase "acceptable to Lender" shall mean "acceptable to
Lender at Lender's sole discretion."
Section 11.17 EXHIBITS AND SCHEDULES. The exhibits and schedules
attached to this Agreement are incorporated herein and shall be considered a
part of this Agreement for the purposes stated herein.
Section 11.18 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS. All titles
or headings to articles, sections, subsections or other divisions of this
Agreement and the other Loan Documents or the exhibits hereto and thereto are
only for the convenience of the parties and shall not be construed to have
any effect or meaning with respect to the other content of such articles,
sections, subsections or other divisions, such other content being
controlling as to the agreement between the parties hereto.
Section 11.19 PROMOTIONAL MATERIAL. Borrower authorizes Lender to
issue press releases, advertisements and other promotional materials in
connection with Lender's own promotional and marketing activities, and
describing the Loan in general terms or in detail and Lender's participation
in the Loan. All references to Lender contained in any press release,
advertisement or promotional material issued by Borrower shall be approved in
writing by Lender in advance of issuance.
Section 11.20 SURVIVAL. All of the representations, warranties,
covenants, and indemnities hereunder (including environmental matters under
Article 4), and under the indemnification provisions of the other Loan
Documents shall survive the repayment in full of the Loan and the release of
the liens evidencing or securing the Loan, and shall survive the transfer (by
sale, foreclosure, conveyance in lieu of foreclosure or otherwise) of any or
all right, title and interest in and to the Facilities to any party, whether
or not an Affiliate of any Borrower.
Section 11.21 WAIVER OF JURY TRIAL. To the maximum extent permitted by
law, Borrower and Lender hereby knowingly, voluntarily and intentionally
waive the right to a trial by jury in respect of any litigation based hereon,
arising out of, under or in connection with this Agreement or any other Loan
Document, or any course of conduct, course of dealing, statement (whether
verbal or written) or action of either party or any exercise by any party of
their respective rights under the Loan Documents or in any way relating to
the Loan or the Facilities (including, without limitation, any action to
rescind or cancel this
29
<PAGE>
Agreement, and any claim or defense asserting that this Agreement was
fraudulently induced or is otherwise void or voidable). This waiver is a
material inducement for Lender to enter this Agreement.
Section 11.22 WAIVER OF PUNITIVE OR CONSEQUENTIAL DAMAGES. Neither
Lender nor Borrower shall be responsible or liable to the other or to any
other Person for any punitive, exemplary or consequential damages which may
be alleged as a result of the Loan or the transaction contemplated hereby,
including any breach or other default by any party hereto.
Section 11.23 GOVERNING LAW. The Loan Documents are being executed and
delivered, and are intended to be performed, in the State and the laws of the
State and of the United States of America shall govern the rights and duties
of the parties hereto and the validity, construction, enforcement and
interpretation of the Loan Documents, except to the extent otherwise
specified in any of the Loan Documents.
Section 11.24 ENTIRE AGREEMENT. This Agreement and the other Loan
Documents embody the entire agreement and understanding between Lender and
Borrower and supersede all prior agreements and understandings between such
parties relating to the subject matter hereof and thereof. Accordingly, the
Loan Documents may not be contradicted by evidence of prior, contemporaneous,
or subsequent oral agreements of the parties. There are no unwritten oral
agreements between the parties. If any conflict or inconsistency exists
between the Commitment and this Agreement or any of the other Loan Documents,
the terms of this Agreement and the other Loan Documents shall control.
Section 11.25 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall constitute an original, but all of which
shall constitute one document.
Section 11.26 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE LOAN
DOCUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE
TERMS OF THIS AGREEMENT AND THE LOAN DOCUMENTS; THAT IT HAS IN FACT READ THIS
AGREEMENT AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF THE
TERMS, CONDITIONS AND EFFECTS OF THIS AGREEMENT; THAT IT HAS BEEN REPRESENTED
BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE NEGOTIATIONS
PRECEDING ITS EXECUTION OF THIS AGREEMENT AND THE LOAN DOCUMENTS; AND HAS
RECEIVED THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS AGREEMENT AND THE
LOAN DOCUMENTS; AND THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS
AGREEMENT AND THE LOAN DOCUMENTS RESULT IN ONE PARTY ASSUMING THE LIABILITY
INHERENT IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER PARTY OF
ITS RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY HERETO AGREES AND
COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY
EXCULPATORY PROVISION OF THIS AGREEMENT AND THE LOAN DOCUMENTS ON THE BASIS
THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE
PROVISION IS NOT "CONSPICUOUS."
30
<PAGE>
EXECUTED as of the date first written above.
LENDER: HORIZON FACILITIES MANAGEMENT, INC.,
a Delaware corporation
By:
---------------------------------------------
Neal M. Elliott, President,
Chairman and Chief Executive Officer
<PAGE>
BORROWER: TEXAS HEALTH ENTERPRISES, INC.,
a Texas corporation
By:
---------------------------------------------
Peter C. Kern, President
HEALTH ENTERPRISES OF OKLAHOMA, INC.,
an Oklahoma corporation
By:
---------------------------------------------
Peter C. Kern, President
HEALTH ENTERPRISES OF MICHIGAN, INC.,
a Michigan corporation
By:
---------------------------------------------
Peter C. Kern, President
HEA MANAGEMENT GROUP, INC.,
a Texas corporation
By:
---------------------------------------------
Peter C. Kern, President
PCK-TEX, LTD., a Texas limited partnership
By: Texas Health Enterprises, Inc., a Texas
corporation, its sole general partner
By:
----------------------------------------
Peter C. Kern, President
<PAGE>
EXHIBIT A
DESCRIPTIONS OF FACILITIES
A-1
<PAGE>
EXHIBIT B
BUDGET
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
TYPE OF SCHEDULED DATE
ADVANCE PURPOSE ADVANCE OF ADVANCE AMOUNT
- ------------------------------------------------------------------------------
1. Initial Term Repayment of Term Advance January 2, 1996 $15,000,000
Advance other debt
- ------------------------------------------------------------------------------
2. Subsequent Repayment of Term Advance July 1, 1996 $1,250,000
Term Advances other debt
-------------------------------------------------------------
Repayment of Term Advance January 1, 1997 $1,250,000
other debt
-------------------------------------------------------------
Repayment of Term Advance July 1, 1997 $1,250,000
other debt
-------------------------------------------------------------
Repayment of Term Advance January 1, 1998 $1,250,000
other debt
- ------------------------------------------------------------------------------
3. Capital Deferred Revolving Up to Up to
Improvement maintenance, Credit December 31, $7,000,000,
Advances capital Advance 2004 subject to
improvements, adjustment
equipment repair as set
and equipment forth in
purchases Section 2.1
(3)
- ------------------------------------------------------------------------------
4. Working Working Capital Revolving Up to Up to
Capital Needs Credit December 31, $3,000,000,
Advances Advance 2004 subject to
adjustment
as set
forth in
Section 2.1
(3)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
B-1
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
5. Subsequent Deferred Revolving Up to Up to
Capital maintenance, Credit December 31, $5,000,000,
Improvement capital Advance 2004 subject to
Advances or improvements, adjustment
Working equipment repair as set
Capital and equipment forth in
Advances purchases or Section 2.1
Working Capital (3)
Needs
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
B-2
<PAGE>
EXHIBIT C
PARTIAL RELEASE OF LIENS
THE STATE OF _____________ )
)
COUNTY OF ______________ )
HORIZON FACILITIES MANAGEMENT, INC., a Delaware corporation ("LENDER"),
is the holder of the promissory note dated as of January 2, 1996, executed by
TEXAS HEALTH ENTERPRISES, INC., a Texas corporation, HEALTH ENTERPRISES OF
OKLAHOMA, INC., an Oklahoma corporation, HEALTH ENTERPRISES OF MICHIGAN,
INC., a Michigan corporation, HEA MANAGEMENT GROUP, INC., a Texas
corporation, and PCK-TEX, LTD., a Texas limited partnership (individually and
collectively, "BORROWER"), payable to the order of Lender. The Note is
secured, in part, by liens against and security interests in the property
described in EXHIBIT A (the "RELEASE TRACT"), which were created by (i) the
[DEED OF TRUST/MORTGAGE], Security Agreement and Fixture Filing recorded in
Volume ____, Page ____ of the Real Property Records of ________ County,
________ (the "MORTGAGE").
For valuable consideration, whose receipt is acknowledged, the
undersigned releases the Release Tract from the liens and security interests
created and evidenced by the Mortgage.
But it is expressly understood and agreed that this is a Partial Release
only, and that this Partial Release covers and relates only to the Release
Tract and shall not in any way or manner affect any other property described
in or covered by the Mortgage or any other instruments securing payment of
the Note, and all rights, titles, liens and interests securing payment of the
Note to the extent they relate to property other than the Release Tract shall
remain in full force and effect.
C-1
<PAGE>
Executed as of _____________________, 199__.
HORIZON FACILITIES MANAGEMENT, INC.,
a Delaware corporation
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
THE STATE OF NEW MEXICO )
)
COUNTY OF BERNILILLO )
This instrument was acknowledged before me on ________________, 199___,
by ______________, _________________ of HORIZON FACILITIES MANAGEMENT, INC.,
a Delaware corporation, on behalf of said corporation.
------------------------------------------------
Notary Public, State of New Mexico
[ATTACH EXHIBIT A - LEGAL DESCRIPTION OF RELEASE TRACT]
C-2
<PAGE>
SCHEDULE 2.1
ADVANCE CONDITIONS
Part A - Initial Advance
Part B - General Conditions
Part C - Improvements Advances
Part D - Working Capital Advances
PART A. CONDITIONS TO INITIAL ADVANCE.
The initial advance of the Loan shall be subject to Lender's receipt,
review, approval and/or confirmation of the following, at Borrower's cost and
expense, each in form and content satisfactory to Lender in its sole
discretion:
1. The Loan Documents (other than the Option Agreement), executed by
Borrower.
2. An ALTA (or equivalent) mortgagee policy of title insurance in the
maximum amount of the Loan, with reinsurance and endorsements as Lender may
require, containing no exceptions to title (printed or otherwise) which are
unacceptable to Lender, and insuring that the Mortgage is a first-priority
Lien on the Facilities and related collateral.
3. All documents evidencing the formation, organization, valid
existence, good standing, and due authorization of and for each Borrower for
the execution, delivery, and performance of the Loan Documents by Borrower.
4. Current Uniform Commercial Code searches for each Borrower.
5. Evidence of insurance as required by this Agreement, and conforming
in all respects to the requirements of Lender.
6. No change shall have occurred in the financial condition of any
Borrower which would have, in Lender's judgment, a material adverse effect on
any Facility or on any Borrower's ability to repay the Loan or otherwise
perform its obligations under the Loan Documents.
7. No condemnation or adverse zoning or usage change proceeding shall
have occurred or shall have been threatened against any Facility; no Facility
shall have suffered any significant damage by fire or other casualty which
has not been repaired; no law, regulation, ordinance, moratorium, injunctive
proceeding, restriction, litigation, action, citation or similar proceeding
or matter shall have been enacted, adopted, or threatened by any governmental
authority, which would have, in Lender's judgment, a material adverse effect
on any Borrower or any Facility.
8. The Budget showing total costs relating to closing of the proposed
transaction, all uses of the initial advance, and amounts allocated for
future advances (if any).
Schedule 2.1 - 1
<PAGE>
9. Payment of Lender's costs and expenses in underwriting,
documenting, and closing the transaction, including fees and expenses of
Lender's inspecting engineers, consultants, and outside counsel.
10. Such other documents or items as Lender or its counsel reasonably
may require.
11. The representations and warranties contained in this Loan Agreement
and in all other Loan Documents are true and correct.
12. No Potential Default or Event of Default shall have occurred or
exist.
PART B. GENERAL CONDITIONS
Each advance of the Loan following the initial advance shall be subject
to Lender's receipt, review, approval and/or confirmation of the following,
each in form and content satisfactory to Lender in its sole discretion:
1. The Option Agreement, executed by Borrower; however, this condition
shall be applicable only to subsequent Term Advances (following the initial
advance).
2. There shall exist no Potential Default or Event of Default
(currently and after giving effect to the requested advance).
3. The representations and warranties contained in this Loan Agreement
and in all other Loan Documents are true and correct.
4. Estoppel certificates and subordination, non-disturbance and
attornment agreements from tenants, ground lessors, and mortgagees of the
Facilities, as requested by Lender.
5. Such advance shall be secured by the Loan Documents, subject only
to those exceptions to title approved by Lender at the time of Loan closing,
as evidenced by, at Lender's election, title insurance endorsements
satisfactory to Lender.
6. Borrower shall have paid Lender's costs and expenses in connection
with such advance (including title charges, and costs and expenses of
Lender's inspecting engineer and attorneys).
7. No change shall have occurred in the financial condition of
Borrower which would have, in Lender's judgment, a material adverse effect on
the Loan, the Facilities, or any Borrower's ability to perform its
obligations under the Loan Documents.
8. No condemnation or adverse, as determined by Lender, zoning or
usage change proceeding shall have occurred or shall have been threatened
against the Facilities; and no law, regulation, ordinance, moratorium,
injunctive proceeding, restriction, litigation, action, citation or similar
proceeding or matter shall have been enacted, adopted, or threatened by any
governmental authority, which would have, in Lender's judgment, a material
adverse effect on any Facility or any Borrower's ability to perform its
obligations under the Loan Documents.
Schedule 2.1 - 2
<PAGE>
9. Lender shall have no obligation to make any additional advance
after December 31, 2004.
10. At the option of Lender (i) each advance request shall be submitted
to Lender at least ten (10) Business Days prior to the date of the requested
advance; and (ii) all advances shall be made at the Albuquerque, New Mexico
office of Lender or at such other place as Lender may designate unless Lender
exercises its option to make an advance directly to the Person to whom
payment is due.
PART C. IMPROVEMENTS ADVANCES
Additional advances shall be made to finance deferred maintenance,
capital improvements, equipment repair, or equipment purchases as
contemplated by the Budget on the following terms and conditions:
1. Each request for such an advance shall specify the amount
requested, shall be on forms satisfactory to Lender, and shall be accompanied
by appropriate invoices, bills paid affidavits, lien waivers, title updates,
endorsements to the title insurance, and other documents as may be required
by Lender. Such advances may be made, at Lender's election, either: (a) in
reimbursement for expenses paid by Borrower, or (b) for payment of expenses
incurred and invoiced but not yet paid by Borrower. Lender, at its option
and without further direction from Borrower, may disburse any improvements
advance to the Person to whom payment is due or through an escrow
satisfactory to Lender. Borrower hereby irrevocably directs and authorizes
Lender to so advance the proceeds of the Loan. All sums so advanced shall
constitute advances of the Loan and shall be secured by the Loan Documents.
Any improvements advance for such purpose shall be part of the Loan and shall
be secured by the Loan Documents. Lender may, at Borrower's expense, conduct
an audit, inspection, or review of the Facilities to confirm the amount of
the requested improvements advance.
2. Borrower shall have submitted and Lender shall have approved (a)
the improvements to be constructed, (b) the plans and specifications for such
improvements, which plans and specifications may not be changed without
Lender's prior written consent, and (c) if requested by Lender, each contract
or subcontract for an amount in excess of $20,000 for the performance of
labor or the furnishing of materials for such improvements.
3. Borrower shall have submitted and Lender shall have approved the
time schedule for completing the capital improvements. After Lender's
approval of a detailed budget, such budget may not be changed without
Lender's prior written consent. If the estimated cost of such improvements
exceeds the unadvanced portion of the amount allocated for such improvements
in the approved budget, then Borrower shall provide such security as Lender
may require to assure the lien-free completion of improvements before the
scheduled completion date.
4. All improvements constructed by Borrower prior to the date an
improvements advance is requested shall be completed to the satisfaction of
Lender and Lender's engineer and in accordance with the plans and budget for
such improvements, as approved by Lender, and all legal requirements.
5. Borrower shall not use any portion of any improvements advance for
payment of any other cost except as specifically set forth in a request for
advance approved by Lender in writing.
Schedule 2.1 - 3
<PAGE>
6. Each improvements advance, except for a final improvements advance,
shall be in the amount of actual costs incurred less ten percent (10%) of
such costs as retainage to be advanced as part of a final improvements
advance.
7. Lender shall not under any circumstances be obligated to make any
improvements advance after December 31, 2004.
8. No funds will be advanced for materials stored at the Facilities
unless Borrower furnishes Lender satisfactory evidence that such materials
are properly stored and secured at the Facilities.
PART D. WORKING CAPITAL ADVANCES
Additional advances shall be made for Borrower's working capital needs
as contemplated by the Budget on the following terms and conditions:
1. Each request for such an advance shall specify the amount requested
and the intended use therefor. After Lender's approval of a detailed budget,
such budget may not be changed without Lender's prior written consent.
2. Borrower shall not use any portion of any working capital advance
for payment of any other cost except as specifically set forth in a request
for advance approved by Lender in writing.
3. Lender shall not, under any circumstances, be obligated to make any
working capital advance after December 31, 2004.
Schedule 2.1 - 4
<PAGE>
LIST OF DEFINED TERMS
Page No.
--------
1996 Horizon Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1997 Horizon Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Assignments of Rents and Leases. . . . . . . . . . . . . . . . . . . . . . . 1
Bankruptcy Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Contract Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Debt Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Default Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Eligible Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ERISA Affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ERISA Event. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Hazardous Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Horizon. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Loan Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Management Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Maturity Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Mortgages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Multiemployer Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Net Cash Flow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
NIPSI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
NIPSI Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
PBGC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Pledge Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Potential Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Revolving Credit Advances. . . . . . . . . . . . . . . . . . . . . . . . . . 5
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Site Assessment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
State. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
TDHS Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Term Advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
THE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
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<PAGE>
EXHIBIT 10.44
MASTER MANAGEMENT AGREEMENT
This Master Management Agreement (the "AGREEMENT") is executed to be
effective as of January 1, 1996 between TEXAS HEALTH ENTERPRISES, INC., a
Texas corporation ("THE"), HEALTH ENTERPRISES OF OKLAHOMA, INC., an Oklahoma
corporation ("HEO"), HEALTH ENTERPRISES OF MICHIGAN, INC., a Michigan
corporation ("HEM"), and PCK-TEX, LTD., a Texas limited partnership ("PCK")
(THE, HEO, HEM and PCK shall be sometimes referred to herein collectively as
"OWNER"), and HORIZON FACILITIES MANAGEMENT, INC., a Delaware corporation
("MANAGER").
RECITALS
WHEREAS, Owner is the licensed operator of those certain long-term care
facilities identified on EXHIBIT A attached hereto and incorporated herein by
reference (each, a "FACILITY" and collectively, the "FACILITIES"); and
WHEREAS, in the ordinary course of the long-term care business, owners
and/or operators from time to time engage managers to provide management
services in respect of their long-term care facilities; and
WHEREAS, subject to the terms and provisions set forth hereinbelow,
Manager desires to assume and, in consideration for the receipt of the
consideration provided for herein, Owner is willing to grant Manager,
responsibility for the management of the Facilities.
AGREEMENTS
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants of the parties set forth herein, the receipt and sufficiency
of which is expressly acknowledged by each of the parties hereto, IT IS
HEREBY AGREED AS FOLLOWS:
5. MANAGEMENT AND CONSULTING RESPONSIBILITIES OF MANAGER. Owner
hereby engages Manager and Manager hereby accepts such engagement and agrees
to provide management, consulting and advisory services to Owner in
connection with the operation of the Facilities, upon the terms and
conditions set forth in this Agreement. Notwithstanding any other provision
of this Agreement, by entering into this Agreement, Owner does not delegate
to Manager any powers, duties or responsibilities which it is prohibited by
law from delegating; Owner also retains such other authority as shall not
have been expressly delegated to Manager pursuant to this Agreement. Subject
to the foregoing, Manager shall provide the following services:
(a) ADMINISTRATOR. Manager shall supervise the performance of
each of the Administrators of each of the Facilities, who shall be
responsible for the functional operation of
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their respective Facilities and execution on a day-to-day basis of policies
established by Manager in accordance with this Agreement.
(b) GENERAL DESCRIPTION OF DUTIES. Manager shall, in consultation
with, for and on behalf of, and in the name of Owner, perform and provide all
services necessary to provide and maintain high quality care and management
in respect of the Facilities consistent with the standards of a reasonably
prudent operator/manager, including, without limitation, the following:
(1) Manager shall supervise the performance of all
administrative functions as may be necessary in the management and
operation of the Facilities;
(2) Manager shall recruit, select, employ, train, promote,
direct, discipline, suspend and discharge the personnel of each Facility;
establish salary levels, personnel policies and employee benefits; and
establish employee performance standards, all as needed during the term of
this Agreement to ensure the efficient operation of all departments within
and services offered by each Facility;
(3) To the extent necessary and appropriate, Manager shall
provide accounting, billing, purchasing, and bill payment functions for
each of the Facilities;
(4) Manager shall establish a system of accounts and supervise
the maintenance of ledgers and other primary accounting records by
personnel of each of the Facilities;
(5) Manager shall establish, supervise and administer the
financial controls over the operations and management of the Facilities;
(6) Manager shall develop and establish financial standards and
norms by which income, costs, and operations of the Facilities may be
evaluated;
(7) Manager shall serve as advisor and consultant to Owner in
connection with policy decisions to be made by Owner in respect of the
Facilities; and
(8) Manager shall market the services of the Facilities.
(c) OPERATIONAL POLICIES AND FORMS. Manager shall implement
operational policies and procedures and, consistent with all budgetary and
other applicable operational guidelines, develop such new policies and
procedures as it deems necessary to insure the establishment and maintenance
of operational standards appropriate for the nature of each of the Facilities.
(d) CHARGES. Manager shall establish the schedules of recommended
charges, including any and all special charges for services rendered to the
patients at the Facilities. Owner
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shall have the right to review the charge schedules established by Manager
and if not disapproved in writing within ten (10) days of receipt, then such
charges shall be deemed to have been approved.
(e) INFORMATION. Manager shall develop any informational
material, mass media releases, and other related publicity materials, which
it deems necessary for the operation of the Facilities.
(f) REGULATORY COMPLIANCE. Owner understands and agrees that
Owner remains the licensed operator of each Facility and is ultimately
responsible for compliance with all applicable regulatory requirements that
attend the operation of long-term care facilities. Manager, for and on
behalf of Owner and in Owner's name and with the assistance of Owner to the
extent reasonably required, shall maintain all licenses, permits,
qualifications and approvals from any applicable governmental or regulatory
authority for the operation of the Facility and to manage the operations of
the Facility in full compliance with all applicable laws and regulations;
however, in no event shall Manager be liable to Owner or any other person or
entity for events or occurrences arising before the effective date hereof,
including, without limitation, any events or occurrences which may affect any
of the Facility's licenses, permits, certifications, qualifications or
approvals.
(g) EQUIPMENT AND IMPROVEMENTS. Manager shall advise Owner as to
equipment and improvements which are needed to maintain or upgrade the
quality of the Facilities and to replace obsolete or run-down equipment or to
correct any other state or federal survey deficiencies which may be cited
during the term of this Agreement. Owner shall review and act upon Manager's
recommendations as expeditiously as possible. Manager shall not be liable
for any cost or liability which Owner may incur in the event Owner disregards
Manager's recommendations. Manager may, without Owner's prior written
consent, make all repairs, replacements and maintenance required in the
ordinary course of the operation of the Facilities with an individual cost of
$10,000 or less. Manager shall obtain Owner's prior consent, which consent
shall not be unreasonably withheld or delayed, for any repairs, replacements
and maintenance which is required in the ordinary course of the operation of
the Facilities and which has an individual cost per Facility in excess of
$10,000 or $100,000 in the aggregate in any one year. Any repairs,
maintenance or replacement which would be characterized (i) as an ordinary
expense shall be made in accordance with the Facility's operating budget
developed by Manager pursuant to Section 1.(n) and (ii) as a capital
expenditure shall be made in accordance with the annual capital budget
prepared by Manager pursuant to Section 1.(n).
(h) ACCOUNTING. From and after the effective date hereof, Manager
shall provide home office and accounting support to the Facility, which shall
include preparation of each of the Facilities' Medicare and Medicaid cost
reports and tax returns (including payroll-related tax returns) at Manager's
expense. All accounting procedures and systems utilized in providing said
support shall be in accordance with the operating capital and cash programs
developed by Manager, which programs shall conform to generally accepted
accounting principles and shall not materially distort income or loss.
Manager shall cause all local, state and federal
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taxes (excluding income taxes due and owing by Owner) to be timely paid or
contested, as appropriate. The taxes and any reimbursement obligations due
to Medicare and/or Medicaid shall be deemed to be operating expenses of the
Facility and shall be paid out of the revenues of the Facility or the working
capital provided by Manager under the terms hereof. Recoupments applicable to
prior periods of time payable from third party payors shall reduce current
revenues for the Facilities for purposes of calculating Manager's fee
hereunder.
(i) REPORTS. Manager shall prepare and provide to Owner any
reasonable operational information which may from time to time be
specifically requested by Owner, including any information needed to assist
Owner in completing its tax returns and in complying with any reporting
obligations imposed by any mortgagee. Manager shall cause all tax returns of
Owner to be prepared in a timely fashion. Manager shall provide weekly
census reports to Owner. In addition, (A) within thirty (30) days after the
end of each calendar month, Manager shall provide Owner with an unaudited
balance sheet with respect to each of the Facilities, dated the last day of
such month, and an unaudited statement of income and expenses for such month
relating to the operation of each of the Facilities and (B) within ninety
(90) days after the end of the fiscal year of each of the Facilities, Manager
shall provide Owner with unaudited financial statements including a balance
sheet, of each of the Facilities, dated the last day of said fiscal year, and
a statement of income and expense for the year then ended relating to the
operation of each of the Facilities. In this connection, all such reports
shall be prepared on forms reasonably acceptable to Owner and Manager; all
statements and reports shall be prepared on an accrual basis in accordance
with generally accepted accounting principles consistently applied. As
additional support to required reporting information under this Agreement,
Manager shall, at Owner's reasonable request, provide Owner with copies of
(i) all bank statements and reconciliations, (ii) detailed cash receipts and
disbursement records, (iii) general ledger listing, (iv) copies of invoices
for development expenditures, (v) summaries of adjusting journal entries,
(vi) copies of all paid bills, (vii) all information required to prepare
state and federal tax returns on a timely basis, and (viii) such other
supporting documentation Owner may request.
(j) BANK ACCOUNTS.
(1) ESTABLISHMENT. Manager shall establish a checking account
in the name of Owner and of each of the Facilities and shall deposit
therein all money received during the term of this Agreement in the course
of the operation of each of the Facilities; provided, however, that during
the term hereof, withdrawals and payments from this account shall be made
only on checks signed by a person or persons designated by Manager with the
approval of Owner. In this connection, Owner shall take such steps and/or
actions as Manager may reasonably determine to be necessary to transfer
Owner's existing control of its bank accounts to the control of Manager.
(2) PAYMENT OF FACILITY EXPENSES. All expenses incurred in the
operation of the Facilities, including, but not limited to, Facility
mortgage or lease payments, payroll and employee benefits and payment of
Manager's management fee, shall be paid by check drawn on this account.
Withdrawals from this account shall be made
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to pay the following items in the following order of priority: (i) payroll,
payroll tax and related expenses, (ii) lease and/or mortgage payments to
Owner's landlords and/or lenders, as the case may be, in respect of the
Facilities, (iii) Manager's management fee, (iv) operating expenses
incurred by the Facilities in such order of priority as Manager deems
appropriate to the operation of the Facility, and (v) payment of amounts
due under the Loan Agreement (defined below), and payments due to Owner as
set forth in that certain Letter Agreement by and among, Horizon/CMS
Healthcare Corporation, Horizon Facilities Management, Inc., Texas Health
Enterprises, Inc., and HEA Management Group, Inc. Manager acknowledges and
agrees that Manager shall be responsible (but is not assuming liability)
for the management and payment of all liabilities of Owner, inclusive of
liabilities which may have arisen prior to the date of this Agreement.
Manager shall pay as an expense of Manager and not a charge to Owner or the
Facilities, all real property expenses and costs incurred in connection
with a) the warehouses used by Owner in the business of operating the
Facilities, b) the building in which Owner's headquarters office in Denton,
Texas is located, and c) Owner's corporate residence for out-of-town
employees visiting Owner's headquarters facility known as Savanaah Trail
located at 2148 Savanaah Trail in Denton, Texas, including but not limited
to all principal and interest on any debt which currently encumbers such
facilities, taxes, utilities and insurance.
(3) INSUFFICIENT FUNDS IN FACILITY BANK ACCOUNTS/WORKING
CAPITAL. In the event the revenues generated by the Facilities are at any
time throughout the term of this Agreement insufficient to pay all of the
expenses associated with its operation, including, but not limited to,
Manager's management fee, Manager has made a credit facility available to
Owner and the Facilities pursuant to the Loan Agreement between Manager,
HEA Management Group, Inc., a Texas corporation, HEO, HEM and PCK (the
"LOAN AGREEMENT"). Manager shall make advances of working capital to the
Facilities only under and consistent with the terms, provisions and
conditions set forth in the Loan Agreement.
(4) DEFERRAL OF MANAGEMENT FEES. To the extent that the working
capital needs and capital improvement needs from time to time of the
Facilities, each as determined jointly by Owner and Manager, exceed the
amounts available under the Revolving Credit Advances under the terms of
the Loan Agreement, Manager shall defer its collection of its management
fee until such time as the working capital needs and capital improvements
of the Facilities are less than the maximum amount available to be drawn
under the Revolving Credit Advances. All such deferred fees shall be, in
Manager's sole discretion, capitalized (e.g., added to the principal
balance) on a monthly basis to the Loan (as defined in the Loan Agreement)
or deferred (with interest accruing on such amounts at the Contract Rate
[as defined in the Loan Agreement]) and repaid as soon as sufficient net
cash flow from the Facilities is available.
(k) PERSONNEL. Manager shall recruit, employ, train, promote,
direct, discipline, suspend and discharge the personnel of each Facility;
establish salary levels, personnel
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policies and employee benefits; and establish employee performance standards,
all as needed during the term of this Agreement to ensure the efficient
operation of all departments within and services offered by each Facility.
All of the personnel of the Facility, including the Administrator of each
Facility, shall be the employees of Owner subject to the provisions of
Sections 1.(a) and 1.(b) hereinabove.
(l) SUPPLIES AND EQUIPMENT. Manager shall purchase supplies and
non-capital equipment needed to operate each Facility within the budgetary
limits set forth in the annual operating budget prepared by Manager pursuant
to Section 1.(n) Owner understands that Manager has certain national
purchase arrangements with vendors that afford certain economies of scale in
purchasing supplies and non-capital equipment. In purchasing said supplies
and equipment, if possible, Manager shall take advantage of any national or
group purchasing agreements to which Manager may be a party if doing so will
reduce the operating expenses of each Facility. Owner may request that
Manager purchase supplies and/or equipment from Owner's existing vendors and
Manager may, at its discretion, act in accordance with Owner's request.
(m) LEGAL PROCEEDINGS. Manager shall, through its legal counsel,
coordinate all legal matters and proceedings with Owner's counsel. As soon
as practicable after Manager obtains actual knowledge thereof, Manager shall
notify Owner's duly authorized representative of all pending or threatened
legal proceedings affecting the Facilities or Owner.
(n) BUDGETS. Each Facility shall be operated on a fiscal year of
January 1 through December 31. Within thirty (30) days from and after the
date on which this Agreement becomes a final agreement as provided
hereinbelow, Manager shall prepare and submit to Owner for its review and
approval, which approval shall not be unreasonably withheld, an annual
operating budget, an annual capital expenditure budget, and an annual cash
flow projection. In the event a budget has not been agreed upon by the
beginning of the fiscal year, the budget in effect for the prior fiscal year
shall continue in effect until the new budget is agreed upon. Thereafter,
within forty-five (45) days prior to the start of each fiscal year, Manager
shall prepare and submit to Owner for its review and approval, which approval
shall not be unreasonably withheld, an annual operating budget, an annual
capital expenditure budget, and an annual cash flow projection. In the event
a budget has not been agreed upon by the beginning of the fiscal year, the
budget in effect for the prior fiscal year shall continue in effect until the
new budget is agreed upon. Thereafter, any expenditures made during the year
pursuant to said budgets and/or any expenditures exceeding by no more than
7 1/2%, on an aggregate basis, the amounts set forth therein (the "BUDGET
THRESHOLD") may be made without Owner's prior approval. Any unbudgeted
expenditures and/or any expenditures in excess of the Budget Threshold shall
be subject to Owner's prior approval, which approval shall not be
unreasonably withheld.
(o) COLLECTION OF ACCOUNTS. Manager shall issue bills and collect
accounts and monies owed for goods and services furnished by each Facility,
including, but not limited to, enforcing the rights of Owner and each
Facility as creditors under any contract or in connection with the rendering
of any services; provided, however, that any expenses incurred by Manager
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in so doing shall be treated as operating expenses of each Facility, which
shall be payable out of the funds deposited in the bank accounts described in
Section 1.(j) hereof.
(p) QUALITY CONTROLS. Manager shall continuously maintain a
Quality Assurance ("QA") Program that objectively measures the quality of
health care provided at each Facility. Manager shall provide copies of all
QA reports, state surveys and complaint investigation reports to Owner within
ten (10) days of Manager's receipt thereof.
6. INSURANCE. Manager shall maintain, by payment of all necessary
premiums therefor as Facility Expenses, the following insurance with respect
to each Facility and the operation thereof, provided the same shall be
maintained in amounts and coverage consistent with the coverage in effect as
of the date hereof or such other amounts as may be required by law or, to the
extent required by the landlords or mortgagors of the Facilities, the
Facilities' leases and/or mortgages:
(a) PROPERTY INSURANCE. All necessary and proper hazard insurance
covering each Facility, the furniture, fixtures, and equipment situated
thereon in amounts consistent with any underlying Facility lease or mortgage.
(b) OTHER INSURANCE. All employee health and worker's
compensation insurance (if required under applicable law) for its employees
and all necessary and proper malpractice and public liability insurance for
the protection of itself, its officers, agents and employees. Any insurance
provided pursuant to this section shall comply with the requirements of any
underlying Facility lease and/or mortgage.
7. PROPRIETARY INTEREST. The systems, methods, procedures and
controls employed by Manager and any written materials or brochures developed
by Manager to document the same are to remain the property of Manager and are
not, at any time during or after the term of this Agreement, to be utilized,
distributed, copied or otherwise employed or acquired by Owner, except as
authorized by Manager. All systems, methods, procedures, written materials
or brochures developed by Owner shall remain the property of Owner and may be
used by Manager, during the term of this Agreement. Any systems, methods,
procedures, written materials or brochures developed by Manager may be used
by Owner for sixty (60) days after the termination of this Agreement.
Manager shall advise Owner in writing of any such proprietary materials which
may not be utilized by Owner following the expiration of such sixty (60) day
period.
8. TERM OF AGREEMENT. The Initial Term of this Agreement shall
commence on January 1, 1996 (the "COMMENCEMENT DATE") and shall continue for
ten (10) years thereafter. Manager shall have the right to extend the term
of this Agreement for two (2) consecutive five (5) year periods. Manager
shall exercise such extension right by providing Owner with written notice of
such extension not less than one year prior to the expiration of the then
current term hereof.
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9. DEFAULT. Either party may terminate this Agreement, as specified
in this Section 5, in the event of a default ("EVENT OF DEFAULT") by the
other party.
(a) With respect to Manager, subject to the provisions of Section 5
hereof, it shall be an "Event of Default" hereunder:
(1) If Manager shall fail to keep, observe or perform any
material agreement, term or provision of this Agreement, and such default
shall continue for a period of thirty (30) days after notice thereof shall
have been given to Manager by Owner, which notice shall specify the event
or events constituting the default;
(2) If Manager shall apply for or consent to the appointment of
a receiver, trustee or liquidator of Manager of all or a substantial part
of its assets, file a voluntary petition in bankruptcy, or admit in writing
its inability to pay its debts as they become due, make a general
assignment for the benefit of creditors, file a petition or an answer
seeking reorganization or arrangement with creditors or taking advantage of
any insolvency law, or if an order judgment or decree shall be entered by a
court of competent jurisdiction, on the application of a creditor,
adjudicating Manager, a bankrupt or insolvent or approving a petition
seeking reorganization of Manager, or appointing a receiver, trustee or
liquidator of Manager, of all or a substantial part of its assets.
(b) With respect to Owner, it shall be an Event of Default hereunder:
(1) Subject to the possible deferment of management fees
pursuant to the terms of Section 1.(j)(4), if Owner shall fail to make or
cause to be made any payment to Manager required to be made hereunder
(other than the payment of the Total Termination Fee or the Per Facility
Termination Fee (each as defined in Section 10) for which no cure period
shall be provided), and such failure shall continue for a period of twenty
(20) days after notice thereof;
(2) If Owner shall fail to keep, observe or perform any material
agreement, term or provision of this Agreement and such default shall
continue for a period of thirty (30) days after notice, which notice shall
specify an event or events constituting the default thereof by Manager to
Owner;
(3) If Owner shall fail to make payments, or keep any covenants,
owing to any third party which are beyond the control of Manager to make or
keep, and which would cause Owner to lose possession of the Facility or any
personal property which would be required to operate the Facility in the
normal course; or
(4) If Owner shall be dissolved or shall apply for or consent to
the appointment of a receiver, trustee or liquidator of Owner or of all or
a substantial part of its assets.
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10. REMEDIES UPON DEFAULT.
(a) If any Event of Default by Owner shall occur Manager shall be
entitled to any remedy available to it in law or equity on account of such
Event of Default, and Manager may forthwith terminate this Agreement as to
the Facility in question or all Facilities, as Manager may elect, and
thereafter, neither party shall have any further continuing operational
obligations whatsoever under this Agreement in respect of the terminated
Facility(ies), but Manager shall immediately be entitled to receive payment
of all amounts theretofore unpaid but earned to the date of termination,
including, but not limited to, any management fees and repayment of any loans
which may be outstanding. Notwithstanding the foregoing, if, during the term
of each Management Agreement, Owner terminates this Agreement and thereby
terminating all of the underlying Facility Management Agreements for other
than cause (which cause shall be conclusively deemed to exist if an Event of
Default by Manager exists), Manager shall be entitled to a termination fee
equal to $7,500,000 payable in cash within 45 days after the effective date
of the termination (the "TOTAL TERMINATION FEE"). The Total Termination Fee
shall be reduced on a pro-rata basis in accordance with the reduction in the
number of the Facilities which are the subject of this Agreement. By way of
example, assume that the aggregate number of Facilities as of the date hereof
is 135. Further assume that the number of Facilities which are the subject
of this Agreement as of the date of termination is 60. The Total Termination
Fee shall be 60 divided by 135 multiplied by $7,500,000.00 which equals
$3,333,333.00. In lieu of the Total Termination Fee, Manager may elect, in
Manager's sole discretion, if, during the term of each Management Agreement,
Owner terminates any one or more of the underlying Facility Management
Agreements for other than cause (which cause shall be conclusively deemed to
exist if an Event of Default by Manager exists) and for other than the
circumstances set forth in Section 10 hereinbelow, Manager shall be entitled
to a termination fee equal to 24 months management fee (determined according
to Section 9.(a) hereof, as adjusted pursuant to Section 9.(b) hereof) (the
"PER FACILITY TERMINATION FEE") and determined by multiplying (A) the
management fee earned by Manager (determined on an accrual basis) in respect
of the particular Facility for the immediately preceding calendar quarter, by
(B) eight (8); PROVIDED, HOWEVER, if, during the immediately preceding three
(3) month period the respective Facility has no net income (determined in
accordance with generally accepted accounting principles, consistently
applied), then Manager shall be entitled to a termination fee equal to
management fee which would have been payable to Manager during said
immediately preceding three (3) month period. However, in no event shall the
aggregate amount of the Per Facility Termination Fees exceed the Total
Termination Fee. Owner and Manager acknowledge and agree that they have
included the provision for the payment of the Total Termination Fee or the
Per Facility Termination Fee as provided above because, in the event of a
termination of this Agreement or one or more of the underlying Facility
Management Agreements, as applicable, for other than cause, the actual
damages to be incurred by Manager (including, without limitation, unrecovered
start-up expenses, additional overhead costs and capital improvement costs)
can reasonably be expected to approximate the amount of liquidated damages
called for herein and because the actual amount of such damages would be
difficult if not impossible to measure accurately.
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(b) If any Event of Default by Manager shall occur, Owner may, in
addition to any other remedy available to it in law or equity on account of
such Event of Default, forthwith terminate this Agreement as to the Facility
in question or all Facilities, as Owner may elect, and thereafter neither
party shall have any further continuing operational obligations whatsoever
under this Agreement in respect of the terminated Facility(ies); provided,
however, that Manager shall immediately be entitled to receive payment of all
amounts theretofore unpaid but earned to date of termination, subject to
Owner's right to receive payment of damages from Manager.
11. OWNER'S INSPECTION AND AUDIT RIGHTS. During the term hereof, Owner
shall have the right, upon reasonable notice and during normal business hours
to inspect each Facility and to inspect and/or audit all books and records
pertaining to the operation thereof (the "FACILITY RECORDS"). In this
connection, Owner shall have the right to conduct, or cause to be conducted,
audits and examinations of each of the Facility Records. Unless and except
to the extent that any such examination or audit discloses material errors,
omissions or misstatements by Manager, the cost of all such audits and
examinations shall be a Facility expense payable out of each Facility bank
accounts. Errors in excess of ten percent (10%) in the aggregate shall be
deemed "material." Manager shall pay the costs of all audits and
examinations which disclose errors in favor of Owner in excess of ten percent
(10%) in the aggregate. The books and records of each Facility shall be
audited by a firm of independent certified public accountants mutually
acceptable to both Owner and Manager annually, which shall be arranged for by
Manager. The expense therefor shall be a Facility expense payable out of
Facility bank accounts. The annual audit shall be completed no more than 120
days after the end of the fiscal year of Owner.
12. FACILITY OPERATIONS.
(a) NO GUARANTEE OF PROFITABILITY. Manager does not guarantee
that operation of each Facility will be profitable, but Manager shall use its
best efforts to operate each Facility in as cost efficient and profitable a
manner as reasonably possible consistent with applicable state, local and
federal laws and regulations.
(b) STANDARD OF PERFORMANCE. In performing its obligations under
this Agreement, Manager shall use its best efforts and act with
professionalism in accordance with acceptable and prevailing standards of
health care as a reasonably prudent operator and the policies adopted by, and
resources available to, each Facility.
(c) FORCE MAJEURE. Manager will not be deemed to be in violation
of this Agreement if it is prevented from performing any of its obligations
hereunder for any reason beyond its control, including, without limitation,
strikes, shortages, war, acts of God, or any statute, regulation or rule of
federal, state or local government or agency thereof.
(d) TRANSACTIONS BETWEEN MANAGER AND ITS AFFILIATES. The parties
hereto understand and acknowledge that, in the interest of benefitting the
overall welfare of the patients/residents of each Facility, Manager may, for
and on behalf of, and in the name of Owner, subcontract with certain of its
affiliates to provide such ancillary services as pharmaceuticals and
List - 12
<PAGE>
pharmaceutical dispensation, enteral, parenteral, and infusion therapies;
pharmacy consultation; speech, occupational and physical therapy services;
respiratory therapies; clinical laboratory services; and other services such
as non-invasive diagnostic testing. Manager agrees that it will cause the
regional offices of its affiliates that provide such ancillary services to
conduct regional market surveys of prevailing market rates for similar
services in the respective Facility's market area ("PREVAILING MARKET RATES")
and that the cost of such services to each Facility and/or the residents of
each Facility shall be reasonably comparable to the Prevailing Market Rates.
Upon completion of any such market survey of the Prevailing Market Rates for
any Facility, each of Manager's affiliates providing ancillary services to
residents in each Facility shall deliver the results of any such market
survey to Owner to enable Owner to exercise its best business judgment that
Manager's use of its affiliates to provide such ancillary services represents
a "reasonable and prudent buyer" decision. Final authority regarding each
such subcontract (and the identity of each subcontractor) shall lie with
Owner; however, so long as Manager's affiliates provide such services at the
Prevailing Market Rates for similar services, Owner shall not unreasonably
withhold or delay its consent to Manager's affiliates performing such
services.
(e) AUDIT RIGHTS. Owner may, after giving Manager 30 days' prior
written notice thereof, inspect or have an independent firm of certified
public accountants audit Manager's records relating to transactions between
Manager and its Affiliates ("AFFILIATE TRANSACTIONS") for the Facility for
the year immediately preceding the audit or inspection; however, no audit or
inspection shall extend to periods of time before the date on which Manager
began actively managing the Facilities. Owner's audit or inspection shall be
conducted only during business hours reasonably designated by Manager. Owner
shall pay the reasonable costs (as determined by Manager) of such audit or
inspection, including Manager's or the facility administrator's employee time
devoted to such audit or inspection to reimburse Manager for its overhead
costs allocable to the inspection or audit, unless the audit or inspection
for the time period in question is determined to be in error by more than
five percent (5%) in the aggregate and, as a result thereof, Owner paid more
than 105% of the actual Prevailing Market Rates for the Affiliate
Transactions due for such time period, in which case Manager shall reimburse
Owner with respect to such audit or inspection the sum of (1) any amounts
billed by Manager and collected from Owner with respect to such audit or
inspection, if any, and (2) the lesser of (i) Owner's out-of-pocket costs in
connection with such audit or (ii) the actual amount of the variance between
the amount billed to Owner for the such Affiliate Transactions and a final
audited figure for the Prevailing Market Rates for such services. Owner may
not conduct an inspection or have an audit performed more than once during
any calendar year. If such inspection or audit reveals that Manager charged
Owner fees for such Affiliate Transactions in excess of 105% of the
Prevailing Market Rates, then Manager shall refund to Owner any overpayment
of any such fees, within 30 days after Manager's and Owner's determination of
the Prevailing Market Rates thereof. Owner shall maintain the results of
such audit and inspection confidential and shall not be permitted to use any
third party to perform such audit and inspection unless such third party is a
certified public accountant and agrees with Manager in writing to maintain
the results of such audit or inspection confidential.
List - 13
<PAGE>
13. MANAGER'S FEE
(a) BASE FEE. During the term of this Agreement, subject to the
adjustments identified in Section 9.(b) of this Agreement, Manager shall be
entitled to a monthly management fee equal to 6.5% of the gross revenues
generated from the operation of each Facility throughout the term hereof.
Such fee shall be payable within 30 days of Manager's invoice therefor. For
purposes hereof, "gross revenues" shall mean all revenues generated by each
Facility, but shall specifically exclude the proceeds from the sale of any
equipment located in and used in connection with the operation of each
Facility, any insurance and condemnation proceeds and/or the proceeds from
the sale or disposition of any of the Facilities.
(b) MANAGEMENT COMPANY INCENTIVES. Notwithstanding the provisions
of Section 9.(a) hereinabove, during the term of each Management Agreement,
every $5,000,000 decrease, excluding decreases resulting from external source
borrowings, in the outstanding principal balance owing by Owner to Manager
under the Loan Agreement shall result in an increase in the management fee by
an amount equal to .5% of the gross revenues generated by the operation of
each Facility; PROVIDED, HOWEVER, notwithstanding the foregoing, at such time
as the outstanding principal balance owing by Owner to Manager under the Loan
Agreement is equal to or less than $10,000,000, then the management fee shall
be equal to 7.5% of the gross revenues generated by the operation of each
Facility; PROVIDED FURTHER, HOWEVER, that in no event shall the management
fee exceed 7.5% of the gross revenues generated by operation of each Facility.
14. MANAGER'S RIGHT OF FIRST REFUSAL. If Owner receives an offer to
purchase any Facility from an unrelated third party during the term or any
renewal term of this Agreement, Manager shall have the first right to
purchase the Facility for the same price (except as set forth below) and on
the same terms as Owner has negotiated with such third party. Owner shall
provide Manager with a notice of its intention to sell the Facility, which
must contain a complete copy of the offer stating all the terms and
conditions of the transaction (the "OFFER NOTICE"). Within ten (10) days of
Manager's receipt of the Offer Notice, Manager shall notify Owner of its
intent to exercise its first right to purchase the Facility and indicate its
willingness to enter into a purchase agreement on the same terms and
conditions as provided in such notice; however, Manager shall be entitled to
a reduction in the purchase price for any brokerage commission which Owner
would have paid in connection with the offered transaction, but does not pay
in connection with the sale of such Facility to Manager. If Manager elects
not to exercise its first right to purchase, Owner may sell the Facility in
question within 120 days thereafter at a third party sale at a price no less
than the stated sales price in the Offer Notice or on terms more favorable
than those contained in the Offer Notice. After such 120 days, Owner must
re-offer the Facility to Manager. The right granted to Manager hereunder
shall be an ongoing right of first refusal and shall continue until the
expiration or termination of this Agreement. Upon the sale of a Facility to
a third party, the provisions of this Agreement shall terminate with regard
to such Facility.
List - 14
<PAGE>
15. REPRESENTATIONS AND WARRANTIES.
(a) MANAGER. To induce the Company to enter into this Agreement,
Manager hereby represents and warrants to Owner as follows:
(1) Manager is a corporation duly organized and validly existing
under the laws of the State of Delaware and has all requisite power and
authority under the laws of each state in which Manager conducts business
and its charter documents to own its property and assets, to enter into and
perform its obligations under this Agreement and to transact the business
in which it is engaged or presently proposes to engage.
(2) Manager has taken all necessary action to authorize the
execution, delivery and performance of this Agreement, and this Agreement
constitutes the valid and binding obligation and agreement of Manager,
enforceable in accordance with its terms.
(3) Neither the execution and delivery of this Agreement, nor
compliance with the terms of provisions hereof, will result in any breach
of the terms, conditions or provisions of, or conflict with or constitute a
default under, or result in the creation of any lien, charge or encumbrance
upon any property or assets of Manager pursuant to the terms of, any
indenture, mortgage, deed of trust, note, evidence of indebtedness,
agreement or other instrument to which Manager may be a party or by which
it or they or any of its properties may be bound, or violate any provision
of law, or any applicable order, writ, injunction, judgment or decree of
any court, or any order or other public regulation of any governmental
commission, bureau or administrative agency.
(4) No order, permission, consent, approval, license,
authorization, registration or validation of, or filing with, or exemption
by, any governmental agency, commission, board or public authority is
required to authorize, or is required in connection with the execution,
delivery and performance by Manager of, this Agreement or the taking of any
action contemplated herein except for the notice and filing requirements of
the Texas Department of Human Services.
(b) OWNER. To induce Manager to enter into this Agreement, Owner
hereby represents and warrants to Manager as follows:
(1) Each Owner is a corporation or limited partnership, as
applicable, duly organized and validly existing under the laws of the state
of its formation and has all requisite power and authority under the laws
of such state and its organizational documents to own its property and
assets, to enter into and perform its obligations under this Agreement and
to transact business in which it is engaged or presently proposes to
engage.
(2) Each Owner has taken all necessary action to authorize the
execution, delivery and performance of this Agreement, and this Agreement
constitutes
List - 15
<PAGE>
the valid and binding obligation and agreement of each of Owner,
enforceable in accordance with its terms.
(3) Each Owner shall use its best efforts to obtain all
necessary consents and agreements from third parties to ensure that this
Agreement does not breach, conflict with or constitute a default under, or
result in the creation of any lien, charge or encumbrance upon, any
property or assets of any Owner pursuant to the terms of any indenture,
mortgage, deed of trust, note, evidence of indebtedness, agreement and
other instrument to which any Owner is a party or by which it may be bound,
or violate any provision of law, or any applicable order, writ, injunction,
judgment or decree of any governmental commission, bureau or administrative
agency. Each Owner and Manager shall cooperate in good faith to execute
any necessary documentation to evidence such consents and any other
documentation reasonably necessary to effectuate the spirit of this
Agreement and the other Loan Documents.
(4) There are no accrued pension plan benefits for any employees
of Owner at each Facility nor, except as set forth on EXHIBIT B, are there
any labor union contracts at any of the Facilities. Except as set forth on
EXHIBIT B, neither Owner nor any operator of any of the Facilities are a
party to a union or other collective bargaining agreement with respect to
any of the Facilities. To Owner's knowledge, none of the employees are
actively seeking the formation of a labor union. To Owner's knowledge,
Owner is not a party to any labor dispute or grievance except as set forth
on EXHIBIT B.
(5) To the best of Owner's knowledge, there are no patient care
agreements or life care contracts with residents of any of the Facilities
or with any other persons or organizations which deviate in any material
respect from the standard form customarily used at any of the Facilities.
To the best of Owner's knowledge, all patient records at any of the
Facilities are true and correct in all material respects.
(6) To the best of Owner's knowledge, all inventories of non-
perishable food and central supplies located at each Facility are in
sufficient condition and quantity to operate each Facility at normal
capacity for one week or at such higher levels as may be required by law.
All inventories of perishable food are at the levels normally maintained by
Owner or at such higher levels as may be required by law.
(7) All prior agreements to provide management services in
respect of any of the Facility have been terminated and are of no further
force and effect other than as set forth on EXHIBIT C.
16. ASSIGNMENT. This Agreement shall not be assigned by either party
without the prior written consent of the other party. Manager may not,
without the prior written consent of Owner, which may be withheld or granted
in Owner's sole discretion, assign its obligations as Manager hereunder or
sublease, assign or submanage any of the Facilities other than to an
affiliate of Manager.
List - 16
<PAGE>
17. SEVERABILITY. In case any one or more of the provisions contained
in this Agreement should be invalid, illegal or unenforceable in any respect,
the validity, legality or enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby, but
this Agreement shall be reformed and construed and enforced to the maximum
extent permitted by applicable law.
18. APPLICABLE LAW. This Agreement shall be interpreted, construed,
applied and enforced in accordance with the laws of the State of Texas
applicable to contracts between residents of Texas which are to be performed
entirely within Texas, regardless of (i) where this Agreement is executed or
delivered; or (ii) where any payment or other performance required by this
Agreement is made or required to be made; or (iii) where any breach of any
provision of this Agreement occurs, or any cause of action otherwise accrues;
or (iv) where any action or other proceeding is instituted or pending; or (v)
the nationality, citizenship, domicile, principle place of business, or
jurisdiction of organization or domestication of any party; or (vi) whether
the laws of the forum jurisdiction otherwise would apply the laws of a
jurisdiction other than the State of Texas; or (vii) any combination of the
foregoing.
19. NOTICES. All notices required or permitted hereunder shall be
given in writing by hand delivery, by registered or certified mail, postage
prepaid, by overnight delivery or by facsimile transmission (with receipt
confirmed with the recipient). Notice shall be delivered or mailed to the
parties at the following addresses or at such other places as either party
shall designate in writing.
To Manager: Horizon Facilities Management, Inc.
Horizon/CMS Healthcare Corporation
6001 Indian School Road, N.E., Suite 530
Albuquerque, New Mexico 87110
Telephone: (505) 881-4961
Facsimile: (505) 881-5097
Attn.: Neal M. Elliott
With a copy to: Scot Sauder, General Counsel
Horizon/CMS Healthcare Corporation
6001 Indian School Road, N.E., Suite 530
Albuquerque, New Mexico 87110
Telephone: (505) 881-4961
Facsimile: (505) 881-5097
List - 17
<PAGE>
To Owner: HEA Management Group, Inc.
Texas Health Enterprises, Inc.
Health Enterprises of Oklahoma, Inc.
Health Enterprises of Michigan, Inc.
PCK-TEX, LTD.,
401 North Elm Street
Denton, Texas 76201
with a copy to: Steven G. Wolff, Esq.
Rosenfeld & Wolff
2049 Century Park East, Suite 600
Los Angeles, CA 90067
Telecopier: 310-556-0401
20. RELATIONSHIP OF THE PARTIES. The relationship of the parties shall
be that of Owner and Independent Contractor and all acts performed by Manager
during the term hereof as Manager of the Facility shall be deemed to be
performed in its capacity as an independent contractor. Nothing contained in
this Agreement is intended to or shall be construed to give rise to or create
a partnership or joint venture or lease between Owner, its successors and
assigns on the one hand, and Manager, its successors and assigns on the other
hand. Manager will not be liable in the performance of its duties for any
loss incurred by or damage to Owner, unless such loss or damage results from
the negligence or willful misconduct of Manager.
21. INDEMNIFICATION. Manager shall indemnify, defend and hold Owner
harmless from any loss, liability or damage resulting from the acts or
omissions of Manager, it's officers, agents (which shall include Owner's
employees while under Manager's supervision pursuant to the terms of this
Agreement) or employees in connection with the operation of the Facility by
Manager. Owner shall indemnify, defend and hold Manager harmless from any
loss, liability or damage resulting from the negligence or willful misconduct
of Owner, its officers, agents or employees not under the direction or
control of Manager in performing their obligations under the Agreement.
22. OBLIGATIONS SECURED. All of Owner's obligations hereunder,
including, without limitation, Manager's management fee, the Total
Termination Fee, the Per Facility Termination Fee, and Manager's right of
first refusal, shall be secured by the Loan Documents (as defined in the Loan
Agreement).
23. ENTIRE AGREEMENT. Except for that certain Letter Agreement dated
as of December 20, 1995 by and among Horizon/CMS Healthcare Corporation,
Manager, Texas Health Enterprises, Inc., and HEA Management Group, Inc., the
Loan Agreement and all documents and/or instruments executed in connection
therewith, this Agreement contains the entire agreement between the parties
and shall be binding upon and inure to the benefit of their successors and
assigns. This Agreement may not be modified or amended except by written
instrument signed by both of the parties hereto.
List - 18
<PAGE>
24. CAPTIONS. The captions used herein are for convenience of
reference only and shall not be construed in any manner to limit or modify
any of the terms hereof.
25. ATTORNEY'S FEES. In the event either party brings an action to
enforce this Agreement, the prevailing party in such action shall be entitled
to recover from the other all costs incurred in connection therewith,
including reasonable attorney's fees.
26. CUMULATIVE; NO WAIVER. A right or remedy herein conferred upon or
reserved to either of the parties hereto is intended to be exclusive of any
other right or remedy, and each and every right and remedy shall be
cumulative and in addition to any other right or remedy given hereunder, or
now or hereafter legally existing upon the occurrence of an Event of Default
hereunder. The failure of either party hereto to insist at any time upon the
strict observance or performance of any of the provisions of this Agreement
or to exercise any right or remedy as provided in this Agreement shall not
impair any such right or remedy or be construed as a waiver or relinquishment
thereof with respect to subsequent defaults. Every right and remedy given by
this Agreement to the parties hereof may be exercised from time to time and
as often as may be deemed expedient by the parties thereto, as the case may
be.
27. DISCLAIMER OF EMPLOYMENT OF FACILITY EMPLOYEES. Each employee that
offices at the HEA Group's home office in Denton, Texas whom Manager, in its
sole discretion, retains, shall be and become Manager's employees and shall
be included in the management fee, and shall not be included as a Facility
expense. No person employed by any of the Facilities will be an employee of
Manager, and Manager shall have no liability for payment of their wages,
payroll taxes, and other expenses of employment, except that Manager shall
have the obligation to exercise reasonable care in its management of the
Facility and to apply available funds to the payment of such wage and payroll
taxes. All such persons will be employees Owner or independent contractors
or the employees of independent contractors, as appropriate under the terms
of this Agreement.
28. RESPONSIBILITY FOR MISCONDUCT OF EMPLOYEES AND OTHERS. Manager
will have no liability whatsoever for damages suffered on account of the
dishonesty, willful misconduct or negligence of any employee of Owner unless
Manager is shown to have been negligent in its supervision of said employees,
in which case Manager shall be liable for its own negligence but not for the
acts of said employee(s).
29. ACCESS OF THE GOVERNMENT TO BOOKS AND RECORDS. In the event the
services provided hereunder have a 12-month cost or value of $10,000 or more
(or such other amount as may hereafter be established by law):
(a) Until the expiration of four years after the furnishing of
services pursuant to this Agreement, Manager shall make available upon
written request to the Secretary of the United States Department of Health
and Human Services, or upon request to the Comptroller General of the United
States, or any of their duly authorized representatives, this Agreement, and
books, documents and records that are necessary to certify the nature and
extent of such costs.
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<PAGE>
(b) If Manager or its affiliates carries out any of the duties of
this Agreement through a subcontract, with a related organization, such
subcontract shall contain a clause to the effect that until the expiration of
four years after the furnishing of such services pursuant to such
subcontract, the related organization shall make available, upon written
request to the Secretary of the United States Department of Health and Human
Services, or upon request to the Comptroller General of the United States, or
any of their duly authorized representatives, the subcontract, and books,
documents and records of such organization that are necessary to certify the
nature and extent of such costs.
(c) The parties agree that any applicable attorney-client or other
legal privileges shall not be deemed waived by virtue of this Agreement.
30. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, and each such counterpart
shall together constitute but one and the same Agreement.
IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the
day and year first written above.
List - 20
<PAGE>
TEXAS HEALTH ENTERPRISES, INC.,
a Texas corporation
By:
----------------------------------
Peter C. Kern, President
HEALTH ENTERPRISES OF OKLAHOMA, INC.,
an Oklahoma corporation
By:
----------------------------------
Peter C. Kern, President
HEALTH ENTERPRISES OF MICHIGAN, INC.,
a Michigan corporation
By:
----------------------------------
Peter C. Kern, President
PCK-TEX, LTD.,
a Texas limited partnership,
By: Texas Health Enterprises, Inc.,
a Texas corporation, General Partner
By:
----------------------------------
Peter C. Kern, President
<PAGE>
HORIZON FACILITIES MANAGEMENT, INC.,
a Delaware corporation,
By:
------------------------------------
Neal M. Elliott, President,
Chairman and Chief Executive Officer
<PAGE>
EXHIBIT A
[List of Labor Grievances]
A-1
<PAGE>
EXHIBIT B
[List of Existing Management Agreements]
B-1
<PAGE>
EXHIBIT 11.1
HORIZON/CMS HEALTHCARE CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------
1996 1995 1994
---------- --------- ----------
<S> <C> <C> <C>
COMMON AND COMMON EQUIVALENTS:
Earnings before extraordinary item................... $ 6,552 $ 24,998 $ (19,814)
Extraordinary item, net of tax....................... (31,328) 2,571 734
---------- --------- ----------
Net earnings (loss).................................. $ (24,776) $ 27,569 $ (19,080)
---------- --------- ----------
---------- --------- ----------
Applicable common shares:
Weighted average outstanding shares during the
period.............................................. 51,406 47,207 36,078
Weighted average shares issuable upon excercise of
common stock equivalents outstanding (principally
stock options and warrants using the treasury stock
method)............................................. 642 643 1,000
---------- --------- ----------
Total................................................ 52,048 47,850 37,078
---------- --------- ----------
---------- --------- ----------
Earnings (loss) per share:
Earnings before extraordinary item................... $ 0.12 $ 0.52 $ (0.54)
Extraordinary item, net of tax....................... (0.60) 0.06 0.02
---------- --------- ----------
Net earnings (loss).................................. $ (0.48) $ 0.58 $ (0.52)
---------- --------- ----------
---------- --------- ----------
ASSUMING FULL DILUTION:
Earnings before extraordinary item................... $ 6,552 $ 24,998 $ (19,814)
Extraordinary item, net of tax....................... (31,328) 2,571 734
---------- --------- ----------
Net earnings (loss).................................. $ (24,776) $ 27,569 $ (19,080)
---------- --------- ----------
---------- --------- ----------
Applicable common shares:
Weighted average outstanding shares during the
period.............................................. 51,406 47,207 37,150
Weighted average shares issuable upon exercise of
common stock equivalents outstanding (principally
stock options and warrants using the treasury stock
method and convertible debentures).................. 794 650 2,901
---------- --------- ----------
Total................................................ 52,200 47,857 40,051
---------- --------- ----------
---------- --------- ----------
Earnings (loss) per share:
Earnings before extraordinary item................... $ 0.12 $ 0.52 $ (0.54)
Extraordinary item, net of tax....................... (0.60) 0.06 0.02
---------- --------- ----------
Net earnings (loss).................................. $ (0.48) $ 0.58 $ (0.52)
---------- --------- ----------
---------- --------- ----------
</TABLE>
<PAGE>
HORIZON/CMS HEALTHCARE CORPORATION
6001 INDIAN SCHOOL ROAD, NE
ALBUQUERQUE, NM 87110
COMPANY NAME ADDRESS
- -----------------------------------------------------------------------------
Eagle Rehab Corporation 6001 Indian School Road, NE
(Delaware) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Horizon Facilities Management, Inc. 6001 Indian School Road, NE
(Delaware) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
LTC Medical Laboratories, Inc. 6001 Indian School Road, NE
(Delaware) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Horizon MDS Corporation 6001 Indian School Road, NE
(Delaware) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Advanced Clinical Technologies, Inc. 6001 Indian School Road, NE
(Arizona) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Horizon Medical Specialties, Inc. 6001 Indian School Road, NE
(Delaware) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
National Institutional Pharmacy 6001 Indian School Road, NE
Services, Inc. Albuquerque, NM 87110
(Delaware)
- -----------------------------------------------------------------------------
Horizon Assisted Living Services, Inc. 6001 Indian School Road, NE
(Delaware) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Horizon Sleep Diagnostic Corporation 6001 Indian School Road, NE
(Delaware) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Horizon Holding, Inc. 6001 Indian School Road, NE
(Delaware) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
HHC Nursing Facilities, Inc. 6001 Indian School Road, NE
(Delaware) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Greenery Securities Corp. 6001 Indian School Road, NE
(Delaware) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
HHC Acquisition Corp. 6001 Indian School Road, NE
(Delaware) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Midwest Regional Rehab Center, Inc. 6001 Indian School Road, NE
(Delaware) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Horizon Hospice Care, Inc. 6001 Indian School Road, NE
(Delaware) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Active Rehab Mgmt of Occupational Therapy 6001 Indian School Road, NE
(Illinois) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
1
<PAGE>
- -----------------------------------------------------------------------------
Physicians Hosp. For Extended Care 6001 Indian School Road, NE
(Nevada) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Vegas Valley Conv. Center, Inc. 6001 Indian School Road, NE
(Nevada) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
San Jacinto Mgmt. Company 6001 Indian School Road, NE
(Texas) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Intra-City Enterprises, Inc. 6001 Indian School Road, NE
(Ohio) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
UROcare of America, Inc. 6001 Indian School Road, NE
(Delaware) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Royal Oaks Partnership 6001 Indian School Road, NE
(Florida) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Horizon Health Systems, L.P. 6001 Indian School Road, NE
(Delaware) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Continental Medical Systems, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Wilson Lane Holdings, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Horizon Therapy Holdings, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Horizon FM L.P. 6001 Indian School Road, NE
Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Horizon Management Holding, Inc. 6001 Indian School Road, NE
Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Horizon Medical Management, Inc. 6001 Indian School Road, NE
(Delaware) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Medical Innovations, Inc. 6001 Indian School Road, NE
Albuquerque, NM 87110
- -----------------------------------------------------------------------------
NIPSI Healthcare of Houston, L.P. 6001 Indian School Road, NE
Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Senior Health Clinics, Inc. 6001 Indian School Road, NE
(Delaware) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
NIPSI of Houston, Inc. 6001 Indian School Road, NE
(Delaware) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
CMS Therapies Provider, Inc. 600 Wilson Lane
(North Carolina) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
2
<PAGE>
CONTINENTAL MEDICAL SYSTEMS, INC.
600 WILSON LANE
MECHANICSBURG, PA 17055
COMPANY NAME ADDRESS
- -----------------------------------------------------------------------------
Central Arizona Rehab Hospital, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Central Ark. Outpatient Centers, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Chandler Rehab Hospital, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Chico Rehab Hospital., Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Clear Lake Rehab Hospital Inc. 600 Wilson Lane
(Texas) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Administrative Services, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Alexandria Rehab, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Baton Rouge Rehab, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Beaumont Rehab, Inc. 600 Wilson Lane
(Texas) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Contra Costa Rehab Clinic, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Denver Rehab, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Develop. And Mgmt. Co. Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Elizabethtown, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Fayetteville Rehab, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Fort Worth Rehab, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Fresno Rehab, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
3
<PAGE>
- -----------------------------------------------------------------------------
CMS Houston Rehab, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Jonesboro Rehab, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Kansas City Rehab, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Outpatient Centers of N. Texas, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Outpatient Centers of S. Texas, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Outpatient Rehab Services, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Pennsylvania, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Physician Services, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS of Ohio, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Rehab Technologies, Inc. 9820 Willow Creek Road, Ste 430
(Delaware) San Diego, CA 92131
- -----------------------------------------------------------------------------
CMS Rehab Center of Hialeah, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Ruston Rehab., Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS San Diego Rehab Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS San Diego Surgical, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Sherwood Rehab Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS South Miami Rehab, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Sportsmed Clinic, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Topeka Rehabilitation, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Tri-Cities Rehab Hospital, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Wichita Rehab, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
4
<PAGE>
- -----------------------------------------------------------------------------
CMS WorkAble, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS WorkAble of Paragould, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Worknet of Baton Rouge, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMSI Systems of Texas, Inc. 600 Wilson Lane
(Texas) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Colorado Outpatient Centers, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Continental Medical of Arizona, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Continental Medical of Colorado, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Continental Medical Systems of Florida, Inc. 600 Wilson Lane
(Florida) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Continental Medical of Kentucky, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Continental Medical of Palm Beach, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Continental Rehab of W.F., Inc. 600 Wilson Lane
(Texas) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Continental Rehab Hospital of Arizona, Inc 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Fairland Nursing and Retirement Home, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Great Plains Rehab Hospital, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
HCA Wesley Rehab Clinic of Liberal, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
HCA Wesley Rehab Hospital, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Hialeah Conv. Centers, Inc. 600 Wilson Lane
(Florida) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Indiana Outpatient Centers, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Innovative Health Alliances, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
K.C. Rehab Hospital, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
5
<PAGE>
- -----------------------------------------------------------------------------
Kansas Outpatient Centers, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Kansas Rehab Hospital, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Kentfield Hospital Corporation 600 Wilson Lane
(California) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Keystone Medical Systems, Inc. 600 Wilson Lane
(Pennsylvania) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Kokomo Rehab Hospital, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Lafayette Rehab Hospital, Inc 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Louisiana Outpatient Centers, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Maryland Rehab Hospital, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Mid-America Outpatient Centers, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
National Physicians Equity Corp 600 Wilson Lane
(California) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Nevada Rehab Hospital, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
North Louisiana Rehab Center, Inc. 600 Wilson Lane
(Louisiana) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Northeast Arkansas Rehab Unit, Inc. 600 Wilson Lane
(Arkansas) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Northeast Oklahoma Rehab Hospital, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Northern Virginia Rehab Hospital, Inc 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Orange Rehab Hospital, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Texas Hospital Partners, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Palm Springs Rehab Hospital, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Park Manor Nursing Home, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Premier Ancillary Services, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
6
<PAGE>
- -----------------------------------------------------------------------------
Professional Management Resources, Inc. 600 Wilson Lane
(New York) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
RCM Management Company, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Rehab Concepts Corp. 9820 Willow Creek Road, Ste 430
(Delaware) San Diego, CA 92131
- -----------------------------------------------------------------------------
Rehab Connection Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Rehab Resources, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Rehab Hospital of Colorado Springs, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Rehab Hospital of Fort Wayne, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Rehab Hospital of Nevada-LV, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Rehab Hospital of Plano, Inc. 600 Wilson Lane
(Texas) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Romano Rehab Hospital, Inc. 600 Wilson Lane
(Texas) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
SD Acquisition Corporation 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
SD Partners, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
San Bernardino Rehab Hospital, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
SelectRehab, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Sherwood Rehab Hospital, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Sierra Pain & Occ. Rehab Center, Inc 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Southeast Texas Rehab Hospital, Inc. 600 Wilson Lane
(Texas) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Tarrant City Rehab Hospital, Inc. 600 Wilson Lane
(Texas) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Terre Haute Rehab Hospital, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
The Nursing Home at Chevy Chase, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
7
<PAGE>
- -----------------------------------------------------------------------------
The Rehab Source, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Therapy Source, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Tulsa Rehab Hospital Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Tyler Rehab Hospital Inc. 600 Wilson Lane
(Texas) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Western Neuro Care, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Western Neuro Residential, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Wichita Falls Rehab Hospital, Inc. 600 Wilson Lane
(Texas) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Capital Ventures, Inc. 9820 Willow Creek Road, Ste 430
(Delaware) San Diego, CA 92131
- -----------------------------------------------------------------------------
Medical Manage Associates, Inc. 600 Wilson Lane
(California) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Western Neur. Res. Centers, Inc. 600 Wilson Lane
(California) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Baton Rouge Rehab, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CMS Therapies, Inc. 600 Wilson Lane
(North Carolina) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
VTA Management Services, Inc. 600 Wilson Lane
(New York) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
VTA Therapy Tech. Corp. 9820 Willow Creek Road, Ste 430
(Delaware) San Diego, CA 92131
- -----------------------------------------------------------------------------
The Kelton Corporation 600 Wilson Lane
(Massachusetts) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Braintree Rehab Ventures, Inc. 600 Wilson Lane
(Massachusetts) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
KBT Corporation 600 Wilson Lane
(Massachusetts) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CompHealth, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
CHS Ther. Tech. Corp 9820 Willow Creek Road, Ste 430
(Delaware) San Diego, CA 92131
- -----------------------------------------------------------------------------
CompHealth Medical Staffing, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
8
<PAGE>
- -----------------------------------------------------------------------------
CMS Therapy Services, Inc. 600 Wilson Lane
Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
RehabWorks, Inc. 600 Wilson Lane
(Florida) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
RWI Therapy Tech, Corp. 9820 Willow Creek Road, Ste 430
(Delaware) San Diego, CA 92131
- -----------------------------------------------------------------------------
Prof. Program Service, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Rehab Associates, Inc. 600 Wilson Lane
(Florida) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Encompus, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
RehabWorks of California, Inc. 600 Wilson Lane
(California) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Mancor Med. Management Company, Inc. 600 Wilson Lane
(California) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Pro Therapy of America, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Apco Med Laboratories, Inc. 600 Wilson Lane
(Michigan) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Physical Therapy Source, Inc. 600 Wilson Lane
(Delaware) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Professional Therapy International, Inc 600 Wilson Lane
(Florida) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
Professional Therapy Staffing, Inc. 600 Wilson Lane
(Michigan) Mechanicsburg, PA 17055
- -----------------------------------------------------------------------------
COA Therapy Thechnologies Corp. 9820 Willow Creek Road, Ste 430
(Delaware) San Diego, CA 92131
- -----------------------------------------------------------------------------
Eagle Rehab Corporation 6001 Indian School Rd NE
(Washington) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Frankhauser Physical Therapy, Orthopedic 6001 Indian School Rd NE
and Sports Rehabilitation, Inc. Albuquerque, NM 87110
(Washington)
- -----------------------------------------------------------------------------
Northwestern Sports Clinic, Inc. 6001 Indian School Rd NE
(Washington) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Physical Therapy & Athletic 6001 Indian School Rd NE
Rehabilitation Associates, Inc. Albuquerque, NM 87110
(Washington)
- -----------------------------------------------------------------------------
Physical Therapy Specialties, Inc. 6001 Indian School Rd NE
(Washington) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Sampson & Delilah, Inc. 6001 Indian School Rd NE
(Washington) Albuquerque, NM 87110
- -----------------------------------------------------------------------------
9
<PAGE>
- -----------------------------------------------------------------------------
South Florida Orthopedics, Inc. 6001 Indian School Rd NE
Albuquerque, NM 87110
- -----------------------------------------------------------------------------
Spokane Associated Physical 6001 Indian School Rd NE
Therapists, Inc. Albuquerque, NM 87110
(Washington)
- -----------------------------------------------------------------------------
Spokane Sports & Orthopedic Therapy, Inc. 6001 Indian School Rd NE
Albuquerque, NM 87110
- -----------------------------------------------------------------------------
10
<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 #33-63199, File #33-80660 and File
#33-84502.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
August 12, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-K for the year ended May 31, 1996 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 31,307
<SECURITIES> 0
<RECEIVABLES> 350,563
<ALLOWANCES> (41,347)
<INVENTORY> 0
<CURRENT-ASSETS> 592,548
<PP&E> 713,409
<DEPRECIATION> (119,036)
<TOTAL-ASSETS> 1,512,751
<CURRENT-LIABILITIES> 197,594
<BONDS> 637,884
0
0
<COMMON> 53
<OTHER-SE> 651,295
<TOTAL-LIABILITY-AND-EQUITY> 1,512,751
<SALES> 0
<TOTAL-REVENUES> 1,753,084
<CGS> 0
<TOTAL-COSTS> 1,708,960
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 27,163
<INTEREST-EXPENSE> 47,318
<INCOME-PRETAX> 36,896
<INCOME-TAX> 30,344
<INCOME-CONTINUING> 6,552
<DISCONTINUED> 0
<EXTRAORDINARY> (31,328)
<CHANGES> 0
<NET-INCOME> (24,776)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
